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HECtdolcE€?E KhaliCah Khatid

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Zulkufly Ramly

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Lau Teck Chai

9H9*R Oxford New York. Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbciurne Mexico City Nairobi New Delhi Shanghai T'aipei Toronto Oxford L-ajar Sdn. Bhd. (008974'T) 2014 First publishcd 20t4

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ISBN 978 983 17 1271

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All righx reserved. No part cyf this publication rnay be reproduced, stored in a retrieval system, or transmitted in any form or by any mean\ electronic, mechanical, : '\otocopying, recording or otherwise,

without the prior .permission oi Axford University Press. Within Malaysia nnd Singapore, exceptions are allo+ued in respect of any lair deahng for the ptn"pose of research or private study, or criticism or re:view, as permitted under the Copyright Act currently in force. Enquiries concerning reproduction outside these ternts and tn other countries should be s,:nt to

Oxford {lni,tersit1,

Press

at the address below.

Vrhile e.very efiort has been mode to trace the originaL sourL:e of copyright materioL t.ontained in this book, there might be omissions" For this v,t: sincerel), tencier our apologies.

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I{halidah Khalid Ali, 19.56Bttsiness Ethics / Khlidah Khalid Ali, ZulkrLfy Raml1,, Ldu Teck Chni. lncludes index ISBN 978-983 47

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Business ethics- -SttLdy and teaching.

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Lilian Yap Senior Lecturer School of Business and Administration \Mawasan Open University Penang, Maia1r5i2

Dr Ho Jo Ann Associate Professor Department of Management and IMarketing Facultr. o1 Economics and Management I lnir,:r'siti I)rrtra Malavsra Selangor, Malaysia

To our dear parents, families and children, the source of inspiration in realizing our

dream. We made it with patience, respect and gratitude. Ivlay the Almighty continue

to grant us wisdom

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It is an honour and a privilege to write the Foreword for this book, aimed at providing business ethics knou,ledge to budding leaders of a grou,ing nation, Malaysia, and the globai workforce at large. As Malaysia doubles its ef-forts to realize Vision 2020 to attain developed nation status, it is synonymous with a civii society, characterized by not only economic progress but a comrnu;rity with strong ethical vaiues. Tbday's giobalized and comperitive environment reminds us of the need to revive the emphasis on moralrty and internaiizalic-rr-r of ethiralvalues, as frar-rd, bribery,, corruption and manipulative practices have beconle corrrnon f'eatures in business deals and transactions, not to mention the public sector. Citing some indicators from Transparenc), International studies, Malaysia, on the international front has been ranked 53rd oirt of 177 nations, a step up frora its ranking rn 2012. Regionally, I!4alaysia is currently ranked as the 3rd leasr con'upted nation among the ten countries in the ASEAN region, after Singapore and Brunei. While the Government unclertakes relentless and significant efforts to tackle the challenges that abound and curb the various abuses at large, indrviduals too har,e to be accountable for therr actions based on the values tl'rey carry in litr. lndeed, it all begins r,vitl'r a strong fundamental knou,ledge of ethrcs ar-id the universalvaiue of clean, moral juclger-nents, inciuding tl-ie rrarior.is religious principles practised in the country.

fhrs publication is rndeed timely tbr

to not onl-v equip themselves vr'ith business ethics knou.,ieilge frorn the conrrentional tir"ciretical framework, but aiso from religious dimensions, which are seen as critical components in the shaping process of an individual frorn Eastern cultures. This book will p;rve the u,ay for the accolnplishn're nt of a vision to revive the importance of ethical values not only fri,n'r r"uriversalistic logical/rational thinking processes but from moral objectivism contexts as well. It nill indeed iv'{alaysian students

add to the lrnrited business ethics books rvith a iocalised ASEANI flavour.

Congratulations on this noble piece---another significant contribution towards nation buildingl

Dato'Hafsah Hoshim Chief Executiv e OfJ'icer SME Corporation Malaysi a

..

:

Ethics is a branch of phiiosophy. Every branch of philosophy is a normative endeavour. Business ethics is no exceptron. As a field of study, it is certainly not an oxymoron but a reality tirat must be internalized by all business people to be sustainable in this chailenging global environment. This study requires one's moral judgements and deep rationalization of business issues. It requires a constructive application of either relative or objective ethical principles, including religious principles. {'

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Although the primary objective of a business is to make profits, it has to meet social interests since any business entity is a cornponent of a civilized community aspiring to sustain economic prosperity and weil-being. Several established business organizations in the global scenario har.e coilapsed at the wake of the 21st century dui: to compronrises on ethics. Business decisions therefore must not only be economically effective br"rt legally and morally sound, complying with man made rules and regulations, what rnore God made principles and commandments. 'Ihis text aims to eqr-rip readers, especiail,v students ln higher iearning institutions, with the fundamentals of br:siness ethics knou4edge. It has brought in iocal flar,our rvithin the Eastern perceptions of ethics in the conduct of business, rvithout cornprornising on the \\/esterir dimensions. This text begins u,ith ethics as a philosopLical concept and relates it n,ith life. Next, it links ethics with leadership and rnanagement to set tht stage for the economic character and organizational set up of a business. Following this, it introduce s readers to ethical theories and principles that are applied in the global lvorld of business rvith discussions on strengths and limitations of each. Along with this, religious ethics rvr1l also be linked ancl discussed. Next, t}-re text dwells upon contemporary ethical issues at the r'r,orkplace such as conflicts of interest, privacy, dismissal and rvornen at the rvorkplace. it deliberates on ethically related business topics such as marketing, social responsibiiity, and go\rernance. The text r,r,iil er-rd w-ith Etl-]ics in the Global Environment to rnake readers realize tire rmportance of the ethical condrict of multinational corporations. It is hoped that this text r,vili impress upon all readers onthe importance of ethics in life; be it in business or non business matters. 'Ib all students, who are potentially going to be organizationaI stakeholders of public or private institutions. business or non-business establishments, may this piece of knor'r,ledge be an added value as you are stepping on the stone to sllccess in your undertakings. As iuthors, lve har.e strived to impart our diverse business knolvledge within our limitatrol)s \4Ir apolosize for any shortcomings, irr due collrse.

as

humans.

Khalidrh Khalid Ali Zulkufly Ramly Lau Teck Chai

We would like to convey our heartfelt appreciation to all the scholars who have been engaged in business ethics

research and publications We have trred our best to cite and acknowledge your relevant contributions in this text, but in case of any missing information, we sincerely hope this general acknowledgement will repay for the shortcomings. We would Iike to thank Dr. Noor Akma Mohd. Salleh from Universiti Malaya for contributing some of the content for chapter 8 (Business Ethics and f'echnology). To Dinis, thank you very much tbr ),our constructive feedback" "fo the Oxford Higher Educatiex Team, Mr. Terence Chierl the commissioning editor,

and Ms. Khor FIui Min, the editor, thank you very much for your endless support at work. Appreciate your kindness and understanding in reahzing this inaugural project. N{r. Tanweer and Puan Azra,we thank you fbr you; noral support. Ma,v the synergy sta1, lvith us to realize future value,added projects togeti"rerl Our heartiest appreciation aiso goes to YBhg. Dato' Hafsah Hashim, CEO, SMECorp Malaysia rvho has kindiy eontributed her meaningful foreword specially for this text. \4,rr- hope that you rvill extend this inaugural piece to the competitive global worlcl as a soft signal that ethics is still relevaitt in business.

Khalidah Khalid Ali Zulkufly Ranil1, Lau Teck Chai

We would like to convey our heartfeit appreciation to all the scholars who have been engaged in business ethics

research and publications We have tried our best to cite and acknowledge your reievant contributions in this text, but in case of any missing information, we sincerely hope this general acknowledgement wiil repay fbr the shortcomings. We would like to thank Dr. Noor Akma Mohd. Sallch from Universiti Malaya for contributing some of the content for chapter 8 (Business Ethics and Technology). To Dinis, thank you very much for your constructive feedback. To the Oxford Higher Education Team, Mr. Terence Chieu,, the commissioning editot

and Ms. Khor Hui Min, the editor, thank you very much for your endless support at u,ork. Apprecrate your kindness and understanding in realiz.ing this inaugural project. Mr. Tanweer and Puan Azra, ne thank you

for you; ,r-Ioral support. May tlre synerglr stay r,vith us to realize future value-added projects togetherl Our heartiest appreciation also goes to YBhg. Dato' Hafsah Fiashim, CEO, SMECorp Malaysia who has kindly r-ontributed her nreaningful forer,r,ord specially for this text. \\'r- hope that yoti tvil1 extend this inaugural piece to thc competitive global norid as a soft signalthat ethics is still relevant in business. Khalidah Khalid Ali ZulkuJly Ramly Lau Teck Chai

Oxford Advisory Board

iii

Dedicatian

v

Foreword

vi

Preface

vii

Acknowledgements

viii ix

Table of Contents

Ethics and Its Conceptualization in Life 10 1 1"2 I3 1.4 1.5 1.6 1.7 ',

1.8 ]9

Introduction FLhics in definitron The contrast between ethics and morality The onqin of ethics Ethics and its importance in life The contrast between ethics and legality Religion and ethics Eastern and western perspectives on ethics: Is there a difference? Universally accepted moral values Fthics arrd its imporlarce rn busi;.ress

1 2 2

)

J

4 5

6 7 14 10 l(J

?2

St.tmrnary

25

Glossary Revrew and discussion Case study References and suggested reading

27 ?B

28 29

Internalizing Ethics in the Conduct of Business 2.A 2.1

introduction Common ethical dilemmas faced by business pecple

32 ')))

.).

aa

JJ

\ x

Table of Contenis

2.2 2.3 2.4 2.5 2.6 2.7 2.8

The three leveis of decision-making Ethical management versus management of ethics Role as an ethical ccncePt Code of ethics for an ethical corporate culture Economic, legal and moral dimensions for effective business decisrons Managing ethical dilemmas The role of religion in resolving ethrcal issues in bustness

Summary Glossary Review and discussion Case study References and suggested readina

Ethical Theories and PrinciPles 3.0 3.1 3.? 3.3 3.4 3.5 3.6 3.7 3.8

lntroduction Understanding the fundamentals of moral philosophy Utrlitarian theory of ethics Kant's ethics of duty theorY Arrstotle's virtue ethics theory Fthrcs oI care Theory cf rights I heory o{ justice Justice and the market systenl

Sumrnary Glossary Revlew and discussion Case study References and suggested reading

Ethical Leadership and Corporate Culture 4.0 4.1 4.2 4.3 4.4 4.5

lntroduction Defining ethical leadership Two pillars of ethical Ieadership Setting the right tone from the too Critical elements of a formal ethic. progr.amme Detining corporate culture and ethical culture

36 3B

40 43 44 45 46 47

50 51

57

53

55 56 56 59

64

b/ 72 -71

82 87

90 93 95 95 96

99 i00 100 101

'10-l

106

1tl

Table of Contents

4.6

Ethical leadership and ethical corporate culture

Summary Glossary Review and discussion Case study References and suggested reading

Corporate Governance 5.0 51 tra J.L 5"-t

54 55 56 57 5B

lntroduction Definrtion of corporate governance Corporate governance and public corporations The concentrated ownership of Malaysian public corporations The development o{ corporate governance in Malaysia The Malaysian code on corporate governance Theories of corporate governance Corporate governance mechanisms Ethical issues in corporate governance

1i3 114 115

116 116 117

119 120 121

121

125 128 129

134 140

1r) IJJ

Sunmary

158

Glossary Review and discussion Case study References and suggested reading

4 /-

Corporate Social Responsibility 6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7

lntroduction Definrtron of stakeholders Types of stakeholders Analysing stakeholders' relative importance Three perspectives of stakeholholder theory The concept and nature of corporate social responsibility The debate of corporate social responsibility Corporatesocialresponsiveness

Summary Glossary Revrew and discussion Case stt,dy References and suggested reading

tol

164 164 165

1,68 169

170 171

172 173

1/5 180

184 186 189 190 191

192

xit

I'able of Contents

Common Issues at the Workplace 7.0 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9

194

lntroduction Whistleblowing Trade secrets Conflict of interest

201

Privacy

201

Discrimrnation and affirmative action Women at work Employees' rights and duties Occupational health and safety Termination of service/unjust dismissal

218

195

196 199

229 238 240 242

S .n:mary

244

Glossary Review and dlscussion Case study References and suggested reading

248 252 253 254

Business Ethics and In form ation Technolo gy 8.0 B.'1 8.2 8.3 8.4

lntrod r-ction Overview of ethical and social concerns in lnformation Technoiogy (lT) Security threats that affect informatron systems Current ethical issues in Information Technology (lT) Managing inforrnation system security

/_>6 arn

LJ'/

.,59 1A,t

266 271

Summary Glossary Reviey,i and dlscussron

'273

Case study References and suggested reading

276

Marketing Ethics and Consumerism 9.0 9.1 9.2 9.3

Introduction Marketing in definition Theories of marketing ethics Ethicai issues in product develol-ment

274 276 277

279 280 280 ,o? LO.) aof LO/

Table of Contents

9.4 95 9.6 9.7 9"8 9.9 9.10

Ethical issues in packaging and labelling Ethical issues in pricing Ethical issues in advertising Ethical issues in retailing Ethical'issues in the use of direct marketing Consumer ethics and customer reseonsibility The company's ethical review

289 2:92 ?aq,

297

300 302 308 308

Glossary Revrew and discusston Case sludy References and suggested reading

311

1aa Jt1

312 111 JIJ

Ethics and the Environment 10.0 lntroduction

10.i 10

2

31s

Fndustrialization, modernism and sustainability in the wake of the 2lst century The concepts of sustainability and susta inable development Renewable and non-renewable resources

10"3 10.4 The history behind sustainability susta rnable

10.5

314

316 323

323

and

development-an oxymoron?

F;ee market arguments on sustainability and pr-eservation of the environment

32s 1?6

10.6

Free market arguments and their rmpact on the environmenl 1A 7 S;sl ainable consumption l0"B Barriers towards sustainable consurnption 149 Steps towards sustainable consumption 10.10 Green jobs 10 'i1 Challenges of Cifferent labour and environmental standards across the globe 10 "12 Environmental ethics 10.13 Environmental ethics-an lslamic dimension

3?7 aao JLO

329 331

333 336 J)O ).11 J+l

Sumrnary

345

Glossary Revrew and drscusslon Case study References anc) suggested readinq

348

3s0 3s0 351

xiii

iv

Table of Contents

Islamic Ethics

354

11.0 lntroductron 11.1 Definition of ethics from the Islamic perspective 11.2 Sources'and oriqin of lslamic ethics 11.3 lslamic worldview and ethical systerir

355

ll.4

Axioms of lslamic ethical philosophy 1'1.5 lslam and stakeholder relationships 11.6 Relationship with stakeholders from the perspective of lslamic ethical system 11.7 Prohibited earnings and business transactions

365

Summary Glossary Review and discussion Case study References and suggested reading

384

355 358 1/4

JOI

JOO

369

3/6 3B/ 3BB

389 389 I

l

Ethics in the Global Environment 12.0

lntroduction 12.l Ethics rn international business 12.2 The ethical conduct of multinational corporations 12.3 Ethical rheories in the context of international business 12.4 Ethics in cross-cultural and internatronal contexts 12.5 An ethical drlemma 12.6 A framework for ethical decision-making 12.7 Current ethical issues in internatlonal business 12.8 The value of ethical behaviour Summary Glossary Revrew and dtscussion Case study References and suggested reading

lndex

392 ?o2

393 395 397

?oo/

J/

4l)2 403

404 412 413 414 415 A1': atJ

415 't11 +t/

CHAPTER

Ethics and Its Conceptuali zatton in Life

q, \

LEARNING OUTCOMES At the end of this chapter, you should be able to: r Define and differentiate between ethics and rnorality. r Understand how ethics is developed in an individual. r List and explain the various factors that influence the ethical values of an individual. n Compare and contrast between ethics and legality. r Compare between Eastern and Western perspectives on ethics. r Relate the role of religion as an important contributing factor in shaping the ethical values of individuals. E ldentify universally accepted moral vaiues. r Recognize ethics and its importance in the global business world.

2

Buiiness Ethics

1:0

INTRODUCTION

This introductory chapter begins with ethics as a concept. It will differentiate between ethics and morality and outline factors that contribute to the shaping of one's ethical values. iustifications will be drawn as to why ethics is important in life, what more in business. It will include a section to compare and rontrast the concept of ethics from Western and Eastern perspectives. it will continue to discuss the role of religion in shaping one's values. Finally, it will introduce readers to the universally accepted moral values ihat must be emulated by ail irrespective of social and cultural drfferences. We often reflect and ask ourselves some basic questions:

r r r r

How should I lead my life? What type of person should I strive to be? What values are critical for me to lead a rewarding iil"e? What standards or principles should I follow to conduct my life?

Our self-reflection and conscience in addressing these personal issues immerses us in the study of right and wrong or moral reasoning. Moral reasoning leads us to the study of morality i.e. ethics. Human beings are special creations of God. Behold, thy l,ord said to the angels: '1 wilt create a vicegerent (i.e. Khatifah or leader) on earth' (Al Qurart, Al Baqorah, l:30). Hr-rrnans differ from non-humans because they are made in a baiancc and are directly informed of their role-to be ieaders in the universe. They are therefore in a unique position to be guardians. Humans are endor,vecl rvith inlelligence and the I-righest degree of free wiil to think sensibly whether their acts are right or u'rong rvhile lultiliing their desires and self-interests. They are good by choice and given inner control but are made accountable for all their actions. '\4& have indeed creoted rnan in the ltest of moulds' iAl-Quran, At Tin 95:4). Humans har.e three responsibilities-to make himseif or herself good; to help others be good and to make the physical world good. \\re cannot preach goodness if we do not embody goodness ourselves. This is .'.r,here the study of ethics becomes relevant as a field of knowledge. Chapter I introduces readers to ethics and its conceptualization in life. Although the follou.ing chapters will focus on ethics in the world of business, this chapter is aimed at providing a clear understanding of the direct link between ethics and the conduct o{ life, be it in business or non-business relaied matters. Aptlr'', each of us takes on diverse roles as leaders at any point of time, be it at home, at work, in br-rsiness or nhiie serving tlle community through a voluntary social activit),. As leaders, we are expecteci to displav ethics in the conduct of 1ife, wherever we are and in all situatioi-ts. We may have acquired knowledge oi-r ethics but this does not ensure good practrce Let us ask ourseives a valid question, 'How can we lead Mother Earth without inter nalizing ethics?' lVe have been using the terminology'ethics', but what is ethics?

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I

1"1

ETHICS IN DEFINITION

principles rhat

contains behavioural codes lo derermine what is righr or wrong.

Ethics can be described as a set of principles that contains irehavioural ccdes to cletermine rvhat is right or wrong (Khaiidah el c1.,2012a). It also outlines the moral duty and obligations that any hurnan being should practise. The term 'ethics' is derived

Ethics and lts Conceptualization irr

from the Cireek word ethos, which means character, spirit and attitudes of a group of people or culture (Rahman, 2013). There are many formal definitions of ethics. To mention a few, Stanwick and Stanwick (2009) define ethics as the values an individuai uses to interpret whether any particular action or behaviour is considered acceptable and appropriate. Velasquez QAn) and Nickels (2008) regard it as a discipline that examines one's moral behaviour or the moral standards of a society. According to Abdullah and ZainolAbidin (2011), ethics concerns itself with what is good or right in human interaction. It revolves around three centrai concepts-'self', 'good' and 'other'. Ethics is also defined as a critical analysis of human acts to determine their rightness or wrongness in terms of tu,o major criteria---truth and justice (Mauro et al., 1999). To conceptualize ethics as a field of study, we are trying to rationalize rvhat actions are right or lvrong and assess r.vhether they are just or fair from different perspectivesindividual, organizational or societal levels" Certainly, we have to consider the rights of others (humans and non-humans) much as we are equally interested to exercise our own individual rights and self-interests. We have just defined etiiLcs ancl its scope. Next, we shail iook at the contrast between ethics and morality.

1.2

THE CONTRAST BETWEEN ETHICS AND MORALITY

One may ask

'ls there a significant

dilfbrence between ethics and morality?' Practically, these two terms are being used interchangeably in everyday life. While many may agree that there is a very thin lire to differentiate these two concepts from a layman's viewpoint, in the study of ethics, however, several scholars have proposed clear dilferences betlveen ethics irnd moralitl,. Tiie objective behind this distinction is to clarify certain arguments (Shaw, 2011). Morality is concerned n'ith tire norms, values and beliefs embedded in social F,l.r,rrr,r,.f.r, ,.., processes r,l'hich define right or 1,,,rrong for an individual or a community. Ethics, in irornrs, r,alues and contrast, is the study of moral standards whose explicit purpose is to determine, as far rg ,ei! er.,rlredde.l - i,-!.rl -.r,.r.e!-qi:r-( as possible, r'r4rether a given moral standard or;udgement based on that standard is more or less correct (\,'elasquez, 2006). This tl-ierefore demands fcr analytlcal thoright ,"'i .'- i,:- -.' ii:lrL .rr \'' Tir:r! i--'i and apolication of reason to define specific rules, principles or ethical irreories that determine right or 1\rrorlg for a grven situation. In addition, these rules and principles ttrclr" dr; :ri ' iy rrrust give an account of the rights or entitlements we have and what is jusl or fair 'omnrun (Boatrigl'rt, 2007). Let us further differentiate these trvo concepts by an example fbr claritl'. We knol:hat all religions and cultures vierv strongly that lying, cheating and manipulation are wrong. These are sub-values of dishonesty. The society's acceptancelrecognition that these values are morally wrong is termed as morality. However, when we apply a specific theory or principie to explain why lying, cheating and manipulation are wrongful acts, this is ethics. Based on Ruie Utilitarian Theory, iying, clreating and rnanipulation are unethicai after assessing the bad consequenccs against the good consequences of such actions. in addition, applying Islamic ethics anC princrples, these three values are irnmoral based on the verses stated inthe Al-Quran andsunna/'t. Emmanual Kant's Ethics of Duty will also share the same view since these values do not promote gor;dwill among fellow humans and they do not follow the universal larv.

Life

3

4

Business Ethics

To quote: 'Act only according to that maxim by which you can at the same time it should becorne a universal law.'

will that

We have so far defined ethics and seen its contrast with moraiity. Next, we shail examine the ongin of ethics and factors contributing to the shaping of one's ethical values. We shall also explain why ethics is important in life'

1.3 E,h"d;;;;;l from one's inner feelings which-

subsequently translate into his or her moral behaviour.

;..*t -ft.*n.rt-l ethical values include upbringing, socialization process, experience and crrrical reflecr'ons

on one's expei-iertces and rhe explicit and. implicit srandards of cultr:re.

THE ORIGIN OF ETHICS

One may ask'Where do ethical values come from and how is good ethics developed i1 an individual?' It comes from our inner feelings which subsequently translate into our moral t,ehaviour (Khalidah et al.,20l2b). Ethics thus begins with each one of us. As hun,ans, we are fuliy responsible for our ethical or unethical behaviour. According tcr Ebert and Griffin (2007), ethical behaviour conforms to ethical beliefs and social norrns about what is right and good. Conversell,, unethical behaviour cottforms to individual beliefs and social norms that are defined as wrong and bad. Many of us rvil1 agree that the degree of one's self-control and will Power have a great intluence on character building and development. However, looking from a rvider perspective, se\reral factors influencc onc's cthical valucs. Thcsc factors includc hislher up bringing, socialization process (i.e. the behaviour of surrounding people), experience and Lrltical reflectior-rs on those experiences and the explicit and implicit standards of culture (Sl-raw, 2008 and 2011). 'l'hey may be referred as social, culturirl and environmental factors. Durirrg our childhood days, our parents nurture us with good discipiine and 'J'hey are morality. They guide us on lvhat is right and what is n,rong in our actions. our 'first' teachers a-rd role models. In fact, they shoulder the responsibility to shape us to be good people. The pertinent role of parents in the upbringing of therr children has also been duly recognized in Islam based on a reievant Quranic vcrse: 'C) ye t+,ho believe! Savc yourselves and your families.fron t l:irt'rr'/to','Jtrc1 is Men ctnd Stones, over u,hich are (appointed) angels stern (ond) seyerc, who

flinch not (from executing) the Commands they rt:ceive .fron'L Allah, ltut do (preci.sely) what they are comntanded.' (Al- Quran, At-T'ahri irtr

66 : 6)

When we go to school and higher learning instrtutions, our teachers and lecturers gir,e us added knowiedge and skills for survival. In adclition, they also impart e'.hics knowledge through moral and religious studies. Much as our teachers ancl lecturers are exemplary role rnodeis in our chrracter buiiding, we are also influenced by pecrs and the surrounding environment. Nowadays, the media and Internet har.e some$,hat contributed to the shaping o1'human character and vaiues; more so with growing chlldren" The knowiedge acquired through the numerous search engines and countiess websites, not to

mention Facebook, Twitter and several other sc'ciai networking websites, have srgnificantly wired the brains and shaped the character of our youngsters. Irt addition, one's myriads of experiences and critical reflections on what l-re or she has gone through, be it good or bad, does to a Lertain extent influence iris or her character and vaiues. We have seen people's values chiinge for the better out of his or her own self-realization and positive attitudr io improve, especially afier having experienced a rnishap or misfortune.

Ethics and lts Conceptualization in

Finally, culture has aiso an influence on one's values. For example, respect and care for the eideriv have ahva,vs been accepted as noble values internalized by Asian or Eastern cuiture until today. It is immorai to abandon parents when they are old. \{re shouid sincerely extend our love and care to them out of gratitude, no matter hou, busy we are in our lives. Their endless 1ove, care, patience and sacrifices made to guide us during our childhood are of intrinsic value.to determine our successful lives. in fact, they have a right to be looked after by their children in their old age. We wouid not have enjoyed the beauty and bounty of this world without our parents' existencel We have so far discussed at length the influence ofsocial, cuitural and em,ironmental factors on one's ethical values. Aptly, they are also developed and internilized from religrous teachings" Aii religions provide its believers with a worldview and strong composition of conduct, values and commitments based on instructions that have to be strictly follou,ed without cornpromise. For example, the fundamentai principles of iman and taclwa in Islan-r require every Muslim to display uprightness, honesty and integrity, irrespective of the state he or she is in, be it an individual, a business person or a figure .i'hese of authority and pow,er. tw'o principles remind Muslims not to act soiely for the fulfilment of self-interests, but to dispiay actions that subsequently benefit others as he or she assurnes the role of a leader or Khalifah (Khaiidah et al.,20l2a).

C

According to Shaw (2008 and 201 1), rationally, we learn and adapt to the ethics and morai principies through our:

- Upbringing - Socialization (i.e. the behaviour

of those around us)

- Experiences and our critical reflections or r those experiences (self reflection) - The explicit and implicit standards of our culture

{q

We also learn ethics from religious teachings. All religions provide their believers with strong composition of conduct, part of which involves moral instructions, values and commitments.

Figure 1 .1: The far:tors

a

inf lr-iencing one's ethical values

Frgure 1.1 summarizes llic factors influencing one's ethical values. \&re sha1l dwell on the role of religion in shaping the etl-rical values of individuals in a separate s(cti.n of this chartelas \{e gii along" l.et ris firstly acknou,iedge the importance of ethics in life.

1.4

ETHICS AND ITS IMPORTANCE IN LI FE

Humans, despite their differences, live in a community and develop a web of relationships in life. Although we value individual privacy, freedom of speech and materiai rucll-being, as individuals, we also value happiness by sharing and

fAil r.[Cl*t

Life

pr*d.

irs believers wirh a

worldview and srrong composirion of conduct, values and commirments based cn insrructions rhat have ro be srrictly followed without compromise.

5

6

Business Ethics

complementing others. We value compassion, respect, fairness and gratitude. Tf these values, among others, become the standards for a society's quality of life and well-being, we shall all arrive at a consensus that ethics is important in life" Imagine ourselves living in a community which compromises on these ethical values. Will we live in peace and harmony? Much as we enjoy material wealth, u.ill we achieve wellbeing in the true sense? In the challenging and competitive global environment that we are ail facing toda,v, individuals pursue their self-interests. However. we are expected to be equally conscious of our roles in the community and the effects of our good deeds and wrongdoings on others. fb reiterate an earlier fact, ethics deals with individual character and moral values that govern and limit one's conduct. It investigates questions of right and wrong, duty, obligation, moral responsibility and social justice (Wiley,1995 cited in Malrro, Natale and Libertella,1999; Shaw, 2008). Every society aspires to be developed and civilized. How can a society call itself civilized if the citizens are not ethicai while the nation is enjoying an abundance of material wealth? From a communitarian perspective, an ethical society is thus an outcome of members lvho internalize and apply ethical values in their lives. The general wellbeing, quality of life and prosperity of a nation therefore largeiy depend on the internalization of good morai values among members of the communitl, (Khalidah et. a\,2010). Only ethical societies will sustain economic growth, prosperlty and r,r,ellbeing. Without doubt, only ethical socreties rvrll sustain civilization and dignity of humans as guardians of the universel Our life nowadays is governed by a myriad of larvs, rules and regulations. Let us pose a question: Do laws assure that ethics is internalized among nrembers of society? Simply put, will iau,s instil ethics in individuals?

1.5

THE CONTRAST BETWEEN ETHICS AND LEGALITY

Some people have the opinion that being ethical means complying with the law or a set of stipulated rules and regulations. This is in line rvith the vieu,s of Aristotle, a

LrsrhiJ;' **-narrower scope of erhrcs. But a person

who foliows rules and regulations need

not necessarily be an ethical person. Ethical behaviour rests upon one's full conscience and accounrability

to do,good deeds as a social

responsibility under all circumstances.

renorvned Greek philosopher and scientist (384-322 B.C.). In atti:mpting to outline universal justice, he viewed that a good person ,s one who obevs the larv. Societies normaliy adopt formai laws that reflect prevailing ethical standards or social nonns (Ebert and Griffin, 2AA7). It is true that obeying lau,s is an important first step to be ethical as laws promote justice and fairness in human aclions. The F.mployment Act 1955 in Malaysia protects the rights of employees. Employers must corr-rply with this act. Nonetheless, rve also hear of irresponsible employers' over-exploitation of labour at work despite the need to comply with the act. We see wrongful acts such as disrespect, greed and selfishness within the pubiic and private sectors while complying rvith stipulated government and business laws. These are all seen rr ithin the so-calied 'rules of the game'. As Ebert and Griffin QAAT) have rightly poiirted out, laws do not make people honest, reliabie or truthfui. I.egality therefore carries a narro\ver scope in ethics. It ret-ers to laws that lve have written to protect ourselves from fraud, theft and violence. Hrrtvgl,sl-, ntan)'immorai and unethicai acts fail well within our iaws (Nickels et a1.,2008). T'hcy need not necessarily drive one's conscience to internaiize good values (Khalidah et al.,20l2a).

Ethics and lts Conceptualization in

The collapse of Enron, 'fyco International and World.Com at the beginning of the millennium fully supports this contention. While nations were actively trying to promote globalization as a call from the World Trade Organization (WTO) to increase the welfare of the rvorld economy through free trade ano competition, the entire globe was alarmed by the coliapse of these giant American corporations. In Malaysia, corporate scandals such as those surrounding Pewaja Steel, Bank Bumiputra and Bank [siam prior to the 1997-98 financial crisis have also charted history in the local manufacturing and banking industries and challenged the integrity of corporate governance. An example of a recent scandal is the RM12 biliion Port Kelang Free Zone project involving civil servants and renowned politicians who are supposed to represent public interests. In an international scenario, the legal suit against San Lu Corporation in 2008 for producing milk tainted with melamine, which killed manybabies in China, is also a classic example that laws, rules and regulations are not foolproof to ensure ethical behaviour among individuals and businesses. These established corporations must have developed a clear code of ethics as a governance mechanism to compel employees to behave ethicaliy, but they do not necessarily result in internalization of good ethical values. The muitinationals and organizations mentioned above would have sustained their multi-billion dollar businesses until today if not for the unethical behaviour of their upper management and employees at work. Seriously. ethical behaviour requires more than having to complv with policies, 1aws, r ules and regulatiols. Ethrcs is above the law. It reflects peoplet relations with others. It requires a sincere reflection on how we should treat others and the impact ol our actior-rs on others. It boils down to a person's commitnrent and responsibility tolr,ards others as he or she fulfiis personal needs and interests, Ethical behaviour therefore rests upon one's full conscience and accountability to do good deeds as a social responsibility under all circumstances (Khalidah el al., 2012a). Nevertheless, how do lve then develop one's full conscience, commitment ancl accountability to do good deeds as a sociai responsibility under all circumstances? \\re shall next address this issue under the role of religion in shaping one's ,:hrca1r.alues. Earlier in this chapter, we have noted that religion is one of the factors i ntluencin g ethical r,alues.

1.6

RELIGION AND ETHICS

Some people do not believe that morality boils down to religion but rather that it is just a function of what a particular society happens to believe (Shaw, 2011). some nrry even view that it is misieading and inappropriate to link morality with

'

.lritualitv and religious bcliefs since it may violate individuai or human rights whicli promote freedom of choice in religion and privacy. After all, one's of 'hoice

religion is a negative right (i.e. free from others'interference) and is clearly stated in :l:e 1948 United Nations Universal Declaration of Human Rights (Boatright, 2009; r..halidah et al., 20l2bj. While we respect these 'westernized'iiberal and universal viervs on the role of i,:ligion ttxvards shaping one's ethical vaiues, the point remains-a belief in religion and internaiization of the principles and teachings will shape one's character and r,alues. Most religions have an ethical component. Quoting the words of Simon F'i;ickburn, in nis book, Ethics: A Very Short Introduction (2001):

Life

fErh"t b rb"* ,l* law. It requires

a

sincere conscience

on how we shoulcl treat others and tlre impact of our actiolrs on others.

7

I

Business Fthics

'For ntany people, ethics is not only tied up u,ith religion, but is t-om.pletely settled by it. Such people do not think too much about ethics, becau.se there is an authoritatiye code of instructions, a handbook o.f hout to live .' Mala1,5l2's Rukun NegaralNational Principles directly states the belief in God as a doctrine to be followed by ail Malaysians irrespective of religious and cultural differences" This implies the importance of religion in Malaysian society despite its

racial and cultural diversity (see Figure 1.2).

Loyalty to King

and Country

Good Behaviour

and Morality

Figure 1.2: Rukun Negara

Let us delve further to justify this statement bv explalning the role of Islam, Christianity, Buddhism and Hindr"rism in shaping the ethical r,alues of ti-rcjr follorvers or believers. These are the four common reiigions embraced br. J\4ala1'sians, living in a multiracial community. Let us begin with Islarn, thc officiai religion of Mala,vsia.

1.6.1 G;;d.'r.d ---l from an Arabic word Salema which means, peace,

purity submission and obedience lslamic erhics takes a

Cod-centred view

and emphasizes on rhe importance of integrating worldly affairs wiih religion.

lslamic Ethics: Ethics of the Soul

Islam is derived from the Arabic root Salema-peace, pLrrit1,, subrnission and obedience. 1n the religious sense, Islam means submission to the lvill of God and obedience to llis [aw. Much as Islam is recognized universally as a religion, it is ir-r fact a u,ay of Irf.e for N4uslims. Prophet Muhammad SAW once said in ahadith narrated b1, X4ushm: 'Religion is advice.'

The foundation of Islamic ethics is the A/ Qurol ancl Sunnah (i.e. the sayings and practices of Prophet Muhammad SAW). Islarnic ethics integratr:s the inner and outer aspects of an individual's life (lbn. Manzur, i990; lv{iqdad Y:ljin, 1973).It concerns individual physical development rvith priority on tl-ie soul's cleveiopment, cnrcial to the individual's behaviour and character devel rpment. The r,;iiues of the soul are universal and consistent without having to separate human, physicai and spiritual values determined by the Creator, Allah SWT. These values shall remain unalfected

Ethics and lts Conceptualization in Li{e

by changes in external conditions and circumstances of life (Al-Maududi, 1978). Therefbre, regardless of their environment, humans, especially Muslims, are believed to have a moral re,sponsibility to submit to Allah's orders and strictly follow Islamic principles without compromise (i.e. as revealed in the Al-Quran and Sunnah). Humans have been granted the faculty or inteiligence to discern God's will and to abide by it as obedient servants. This faculty most crucially involves reflecting over the meaning of existence which uitimately points to the reality of Aiiah or God as the Creator and determinant of everything in life-in this Earth and the hereafter. As believers, Muslims are expected to internalize the fundamental principles of Iman (i"e. a Quranic term for faith) which will lead to Taqwa (i.e. a Quranic term for piety). Figure 1.3,1"4 and 1"5 represent the five principles of Islam, the six principles of Iman and more elaboration on Taqwa to be internahzedby Muslims.

The Five Pillars of lslam a,r'l :;'rn:.

*;,:

rn

i

rs

the

-

f,

Faith or belief in the Oneness of God'and the

finality of the prophet hood of Muhammad

* ) i )

'ar'

Establishmenl of the daily.playeqs (! timesla Concern for a nd -almsgiving:to the

nieay,;$}

fasting

:.

Self-purification through (fasting in the month o{ Ramadhan}

The pilgrimage to Makkah for those who are

(S o

tt

rce'.

http://www.isl a m 1 0 1.co m/d awah/ pi

Figure 1.3: The five pillars o{ lslam

.Eelief in the ,t : rrr

Belief in the

ci:mmissioned Messengers . ipeacq,S€, r:,,

uPql'$Kr$l''

Figure 1.4: The six pillars a{ lman

'ri!

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ngg

i

:,,'

toJtr *ie, ; o,:.r;

l$r

I I

a

rs.htm l)

10

Business Fthics

Taqwa w A

, . , ) .',3:., .{. 't i ' 1.* r':t t,

i.: {.

y4

.-^ t&.:1 , . .

.,1 .;

:..t:1 --. . ":. :'t':')' ' ),i -*i ,:,t ,4-&.

AlOuran that carries 'irlthe .$,

and

.r1..,':.,

...,1-.,,

3

'ely obey the rule-s of Allah and be grateful to

q.1-.,

,il .r'i",u. ri i'l:l:";is{'l

but responsibil

&

the ex

ffi

lVe

&

,

remembrance of Allah

:.:

.-.1

ln'1:

.cibedience; not

{Source: Green. 2.008)

Figure 1.5: Taqwa Ethics in Islam therefore addresses eyery aspect of a Muslim's life-for seif, others and the pirysical wurld. Sirniiar l-u lhc study of ethics, though ciifferent in scope and nature is ilm al-akhlaq in Islam. Al-A:;hlacl is derived frorn the root word khuluq, lr,hich means to create, to shape and to give form. Accordingll,, ilm al-Akhlaq, as a branch of knowiedge, is a science ivhich deals with the ways to maintain virtues at their optimum ievei, i.e. to avoid wrongdoing and to do what is right ancl desirable (McDonough, l9B4). Muslims rnust not only be virtuous, but they must also enjoin virtue. They tttt-tst t-tot only refrain from evil and vice, but they must also forbid them while going thror,igh the challenges of life. Muslims are aiso tarLght to act fairly and uphoid justice in their dealings since every action will give an impact on others; be it humar"rs or nonhumans (Syed Othman and Aidit, 1994). They are always encouraged to emulate the four attributes of Prophet Muhammad SAW the role rnodel of the mukmins--fatanah (i.e. inteiligent and sagacious), amanah (i.e. faithful and trustworthy), siddiq (i.e" truthful and righteous) and tabligh (i.e. informative and conve-ving the truth; never withhoiding what has been revealed to them). To summarize, Isiamic ethics strongly view that it is inrportant to integrate rvorldly affairs with religion. Islam takes a God-centred woridvierv compared to the secular rvorldview which separates worldly and r:cligious affairs. As a Khalifah, Muslims har..e to consistentiy strive and promote the rvell-being of the ummah and the society at iarge. As mukmins (i.e. a believer; Muslims who religioLtsly follow the rules of Al-Quran), they will keep Allah in their hearts and regard the materialistic world as a platform or medium to ultimately gain the rewards in akhirah (the world hereafter) by doing good deeds. Material being is not seen as pride or a nleans to fulfil one's egoism but it becomes a tool to contribute towurds the ummah which wili finally determine one's destiny-heaven or heli in the hereafier. For the muknins, the entire life is one of worship (Ibadah). Life is therefore a jihad or sacrifice. It is not oniy about pleasing oneself and other fellow humans. Ultimateiy, life is to fuifil the expectations of the Creator, Allah SWT through total submissron to Him for a promise mad,: to all mukmins or believers-to enter heaven in the tvorld after.

Ethics and lts Conceptualization in

,: Quoting from the verses of the Al-Quran: 'O My seryants wl'to believe! Surely My earth is vast, therefore Me alone shoulcl you serve. Every scttil is going to face death, and then to Us you shall be brought

back. And

fitr those who believe and do righteous deeds, We will most surely establish them in a lofty place in Gardens beneath which rivers flow, abiding thereirr" Excellent is the reward o-f the ruorkers; those who are patient, and put their trust in their Lord.' (Al-Quran, Surah Al 'Ankabut:

Religious Values Taqwo (God

consciousness), syukur (gratitude; being gratetul), Tawokkol (relying on Allah after making own efforts), Muhasabah (selfevaluatton),.lustice and amar makruf nahi munkor

Professional

Personal

QualitY

Values

Values

Values

Education, skill, honesty,

Accountability,

pu nctual ity,

trustworthy and

Excellence, Patience, Tolerance, Humble,

5yuro (consultation).

Salam.

Moderation,

(promoting good and forbidding evil).

56-559)

Quality, Productivity, /fqon (i.e. the level of quality work), lstiqamah {commitment, being straight and steadfast), Efficiency, creativity, innovation, collectivity, lhsan (benevolence i.e. being kind and helpful).

lAdapted from'The Role of lslomic Ethics in Organizations: An Experience in Moloysia' , L)SM)

[:igure 1.6: Values and ethical components in lslamic management

Figure 1.6 shou,s the reiigious, professional and quaiitl, values and ethic components in Islamic n.)anagement to be internalized by all Muslims in striving for a

rewarding life" \&'e shall look at Budclhisrlr nexf

.

fB,ddt.i'n-.;;n...' from the word

1.6.2

Buddhist Ethics

Brrddhism comes from the word budhl which means 'to awakeri. Buddhist ethics are traditionally based on the enlightened perspective of the Buddha, or his enlightened folloi,r,ers. Siddhartha Gotama (i.e. the Buddha) was born into a royal fanrily in Lumbini, nou/ iocated in Nepal, in 553 BC. At 29,he realized that wealth and iuxur,r' did not guarantee happiness, so he explored the different teachings. religions and phiiosophies of the day, to find the key to human happiness. After sir years of study and meditatiorl, he finally found'the middle path' and rvas enlightened. Aftcr enlightenment, the Buddha spent the rest of his iife teaching the principles oi-

budhr which means to awaken. I

ne rounoatron

of Buddhism is rhe Pancasila.The basic conceprs of Buddhism can be summarized by rhe Four Noble Trurhs

and rhe Noble Eighrfold Parh.

Life

11

12

Business Ethics

BLrddhism-called the Dhamma, or Truth-until his death at the age of 80" He was not a prophet, nor did he claim to be. He was a man who taught a path to enlightenment from his orvn experience. Most scholars of Buddhist ethics rely on the exarnination of Buddhist scriptures, and the use of anthropological evidence from traditional Buddhist societres, to justify claims about the nature of Buddhist ethics (Keown, 2000). According to traditional Buddhism, the foundation of Buddhism ts the Parcasila-no killing, stealing, lying, sexual misconduct or intoxicants i.e. losing one's mindfulness. The initial precept is non-injury or non-violence to all living creatures, be it humans or non-humans. Tb become a Buddhist, a person is encouraged to vow to abstain from induiging in immorai actions. This is referred as vinaya. The Buddha taught many things, but the basic concepts in Buddhism can be summed up by the Four Noble Truths and the Noble Eightfold Path. The First Noble Truth is that life is suffering i.e. life includes pain, getting old, disease, and ultimateiy death. Humans also endure psychoiogical suft-ering like loneli'-ess, frustration, fear, embarrassment, disappointment and anger. Buddhist ethics explain how suffering can be avoided in order to achieve true happiness. The Second Noble Truth is that suffering is caused by craving and aversion. One lvill suffer if he or she expects other people to conform to his/her expectations. instead of constantly struggling to get what we want, we should try to modify our u'anls. The Third Noble Truth is that suffering can be overcome and happiness can be attained; that happiness anr3 confentnrent in the fnre sense are thus possible. \\rherl we give up useless craving and learn to live each day at a time (not dwelling in the past or the imagined future), then we can become huppy and free. We then hal'e more time and energy to help others. This is Nirvana. The Fourth Noble Truths states that the Noble lrightlbld Iratl.r is the path u'hicl.r leacis to the entl of suffering. The threading of the Noble lrightfold Path is essenttal to seif-deliverance. Tn quote the teaching of the Buddha: 'Oease to Co evil,

learn to do good, cleanse yoltr

o1\'tt

hcarl

'

(Humphrevs, n.d.)

ffi ffi ffi ffi ffi ffi ffi ffi

nignt views or Preliminary Understanding

night Aims or Motives ntgh,t speech

ntgnt Rcts

night Livelihood Risht rffort

nignt Concentration or Mind Development nignt Samadhi,leading to full Enlightenment.

;-S:MiA;:s"leryW---

i..,mi ,,, {J

Figure

(Source: Huinphreys, n.d-).,--

.!li.s#fd?ffir

r,

1.7:

Noble Eightfold Path

Ethrcs and lts Conceptr_ralization in

To summarize, from potential to actual enlightenment, there lies the Middle Way-'from desire to peace, a process of self-developrnent between the 'opposites', avoiding ali extremes. The heart and mind must be developed equally. Buddhism ieaches that wisdom should be developed n ith compassion. Compassion includes qualities of sharing, readiness to give comfort, sympathy, concern and caring. In

l,.ife

:

Buddhism, one can really understand others when one is able to understand his or her olvn self, through r,visdom. To many, Buddhism goes beyond reiigion. It is more of a phiiosophy or 'way of life'. It is a philosophy because philosophy means 'love of wisdom' and the Buddhist path can be summed up as follows:

r r r

To lead a rnoral life. To be mindful and aware of thoughts and actions. To develop rlisdom and understanding.

Buddhism is also a belief system which is tolerant of all other beliefs or religions. Buddhism agrees with the moral teachings of other religion-s but Buddhism goes lurther by providing a long-term purpose within our existence, through wisdom and riue understanding (BuddhaNet, n d.). I-et r:s iook at Christianity and the ethical values that are taught to its foilowers.

'1.6.3

Christian Ethics

r-hristianity offers a view of human beings as unique products of a dir.ine intervention that har-e been endou,ed with consciousness and the ability to love (Shar,v,2011). Christian ethics in general has tended to stress the need for love, grace, merc1, 31d iorgivt-ness because of sin. It is not substantially different from |ewish or even Islamic traditions. While Islam and ]udaism are based on the teachings within Al-Quran and Torah respectively, Christian ethical princinles are based on the teachings within thc Riblc" T'hese principles begin with the notion of inherent sinfulness, which requires "rsentjal atonentent. Sin is estrangement from God which is tire result of not doing 1''..1'c r,r,ili" God's will is interpreted by the precept: 'Lovc GocJ n'ilh ail vour heart, soul, mind, strength and yortr neighltotrr

as

),ott,'ttl.l'.

['his precept is commonly called the Great Coinmandment. In sutnmary., thc key principles of Christianity (i.e. the Kingdom of Heavcn where (.hrrst is King according to Scripture) are based on the following: r Humiiity or faith and trust in God. lir C()nrmunication with God tl"rrough prayer and self-deniai. x ()bservance of The Law which is written in Scripture and in the hearts of those who love the truth. ; T'he offering of sacrifice to God and partaking of the sacrificial offering (various animal and bird offerings in the Old Testament, the Lamb ol God in the l{ew Testament, the sacrifice of the Mass in the catholic church).

ijclief in fesus Christ and following Him in a personal relationship is thc central ,irle under rvhich all others come. This personal relationship with God rvhich salvation brought it into being can never be earned by personal devotion or rvorks of i , ' l.arv. Peopie get close to ]esus because His Spirit lives inside of the belicver and ''' , , 'rlu'ays rn'ith them. This feeiing among the Christians very much i t-sembles tl-ie

ICh,t""*y

r"*

humans as unique

products of a divine inrervention thar lrave been endowed

wirh consciousness and rl.re abrliry ro love. Chrisrian erhics stress on the need

for love, grace, mercy and forgiveness because of sin.

13

14

Business Ethics

Muslims'love for Prophet Muhammad SAW as a Messenger of Allah SBT and a role model of the mukmins. Lastly, we examine Hinduism and the ethical values that are embedded in its principles.

1.6.4 Hindu Ethics ;,hd,r-,r"t *lr*d I io reincarnation,

a

way of expressing the need for reciprocity.

Hindu erhics places emphasis

on one's intention, sur-nmarized as the doctrine of karma yoga. Kindness and

hospitality are key Hindu values.

Hinduism is related to reincarnation, which is a way of expressing the need for reciprocity, as one may end up in someone else's shoes in their next incarnation. Hindu ethics places emphasis on one's intention. Therefore, selfless action for the benefit of others without thought for oneself is an important principle in Hinduism. This is known as the doctrine of karma yoga. Kindness and hospitality arr: key Hindu values. AIso, more emphasis is placed on empathy compared rvith other traditions. The Mother is a Divine Figure in Hindu Ethics, as seen in the creative female Hindu ethos of the Devi. Of all the religions, Hinduism is among the most compatible with the vi.,v of approaching truth through various fornrs of art. The basic philosophy of Hinduism is that God is Omnipresent and Omnipotent, God appears in everything, living and non-living. 'fhis is the reason why Hindus seem to worship almost everything. Hindus consider any life frrrm sacred because il is a manifestation of God. Hindus beher.e in many Gods because they resemble the attributes of the Supreme Divine. He is the origirr of ever1.1fiing-ail knowledge, one's cmotions and all actions. The ser.erai Gods in Hinduism resemble the varioits sub'sets of qualities that human beings can imhibe. For example, a Hanun'Lan-bhakt would be interested in maintailting celibacy, honesty and Io,valty to tire rnaster. Hinduism has different strata of spirituality. At the lou.'est level, the Hrndu goes to a temple and worships the idol. The next level is u,hen one praYs to Hin'r with prayers in any language and sings His praise. The highest level is when one renoLlnces all these 'gr-rides' to reachin3 Him and directly meditates thinking of the Supreme Divine or Brahman. Each individual is given the freedonr to choose his modc o[ worship and

connccting to the Divine. r^re have elaborated on the various religior-rs ernbraced by Malaysians in the sprrit of 1 Malaysia with openness and respect for humans as a general rigl-rt. We have aiso seen the ethical values to be emulated b)' the follorvers of e ach religion. You must have noticed the similarities and differences between these religions, mucir as we respect that the choice of religion as a negative right, i.e. free from outside or other people's interference. Next, rve slrall compare and contrast the -Er,stern and Western perspcctives on ethics.

1.7

EASTERN AND WESTERN PERSPECTIVES ON ETHICS: IS THERE A DIFFERENCE?

Is there a reai difference between the Eastern anri \\estern perce'ptions on ethics? Let us begin by revisiting the issues of reiigran and cuiture to spur discussrons. As seen in our earlier elaborations, most religions, despite differences, have a firnr beliet in the

Ethics and lts Conceptualrzation rn

Lite

existence of God. We have also noted in the early part of this chapter that reiigion provides its beiievers with a worldview and strong composition of conduct, part of which involves moral instructions, vaiues and commitments (Shaw, 2011). However, the question remains

whether a community still upholds and internalizes religious principles in their lives. The East has been known to uphold religious principles and cultural values more than the \{est. Ib reiterate, the Rukun Negara or National Principles in Malaysia has stated 'Belief in God' as its main principie; signifying the prominent role of religion in Malaysian society despite its cultural diversity and religious differences. The legal system of the country is verv much intertwined with religious principles. Religion is openly discussed in society and there is high respect and tolerance for people in the community despite the differences. In contrast, in Western societS religion is a privacy issue, much as the East and West share that it is a negative right (i.e. a human right, to be free from outside

interference). Religion does not seem to be openly discussed by the Western community" Although the majority of Westerners are believers of Christianity, according to Bloomsfield, religious words such as 'God', 'devil', 'heaven', 'hell', 'Christ' and '|esus' are availar,lc to people only on religious or solemn occasions. In contrast, Eastern culture does not seem to have serious religious 'taboos'. It is normal for people to use religious words and discuss religion in casual conversations. Most pe'ople are free to talk about any goddess to their hearts' content (Ying Zhan g,2012). This point implies that religion is still part and parcel of life in the East. Therefore, it may h: suggestive that one's ethical vaiues are developed and internaiized through

I. -.t"r" t*I.,x religion is a privacy

ln contrast, Easrern culture does not seem to have issue.

serious religious 'caboos'. Religion is parr and parcel of life in the Easr

rehgrou s conlmrtments.

In contrast, the West has somewhat compromised rehgious principies for liberal unir.ersalism and secr:larism to promote objectivity, rational thinking and freedom of thought. Althougir Western ethics is supposed to be iudeo Christian, secuiarisrn has been rvidely applied in the conduct of everyday life inciuding state affairs. The foundation of secularism is the separation of religion and state. Secularism is about ensuring that the freedonls of tirought and Lonscience apply equaily to all believers and non-bclievers alike. It also promotes fieedom of speech and expression, a framervork for a democratic society and human rights. Quoting from a relevant statement by Barrack Obama, the President of America: '[)entocracy demcLrrds that the religiously motivated mtist translate their conc(rns intt't tlnittcrsttL. rather than religion-specific yalues. Their proposals musl be sultjt'et f,) (lrdttrllr'llL unrL reason, antl sltOuld nctt be occorded any undu c n Ltto nt ol.i r r( s D ect.' (National Secular Socicty, n.d.)

Mucli as we respect these r,,ier,vs and note that religion may piay a role in shaping the ethical vaiues of the West, secular principies are equally strong in contrasi with tire East wl'rich sees reiigion as part and parcel of life, including state r,ffairs. Religion may have a greater infiuence in shaping ethical values of the East compared to the \A/est due to the difference in the God-centred versus secular rvorld views. The West may place more value on the application of universally accepted 'man-made' ethical theories/principles to resolve ethical issues. To mention a f'ew, they may apply Mill's Rule Utilitarian Ethics, Kant's Ethics of Duty or the Golden Rule compared with the Easi, which may ultimately fail back on religious or cultural principles although references may be made to these theories/ principles in the decision-making process. Next, rve shall focus on cuiture and its influence on ethical rralues 1o see whether there are differences between the perceptions of the East and the West. Redding and

fR.lg". *ry h^". greater influence rn shaping the ethical values of rhe East

compared to the Wesr due to rhe difference in the

Cod-cenired versus secular world views.

15

16

Business Ethics

Wong (1986) reviewed a number of empirical studies on holv cultural characteristics contribute to the new economic power of East Asia. One of the cultural characteristics is about ego needs versus social needs. The cross-cultural comparison reflects that, in the East, social needs take a greater significance as part of an individual's psychology composition; in contrast to Westerners, for whom ego-centred needs such as selfactuaiization tend to dominate. Aptly, the East values harrnonious interpersonal relationships and promotes coliectivism more than individualism as promoted by the West in support of privacy as a negative right. Morgan (i986) cited in Bob (2009) explaiirs why the ]apanese economy is successfui from a cultural perspective. He points out that the cultural values of the rrce field (i.e. cooperation and teamwork) combined rvith the samurai tradition of servrce (i.e. of willingness to share) account for its success. T'hese cultural aspects promote conformity and tradition that are favoured over opportunism and individuality, more common in Western society (Bob, 2009). Eastern cuiture is more likely to emphasize the importancc of family, clan, group, organization or society, in which an individual life may represent a tiny thread of the greater fabric. It manifests the view that group benefits are more important than pandering to personal desires (Bob, 2009). From the above explanations, we may conciude that there are differences in hou, the East perceives ethics as compared with the West. The East secms to place emphasis on religion as a dominant factor influencing ethical values tvhereas the \4rest may vier,rotherlvise due to the strong hold of secularisrn as a world.",ierv. In addition, the West is seen to be promoting individualism as a sign of respect for hunian rights and privacy u,hereas the E,ast still values collectir.ism and comnmnity living althor"rgh individual rights are duly recognized. We earlier mentioned that the West has also developed thc Golden R.u1e as an ethical principle to be used in the globalization era. It is also applicable ir-r t1-re conduct of business. The follorving section describes these prrnciples in greater detail as a piece of iiterature in our study of business ethics.

1.7.1

The Golden Rule Ethical Principles

There are six principles:

r r r r r r il,,i. I r 5rrgg.r: j r.iraL in rhL rn.rnNer v/e woLrii i ke oihers tr.r rreai us r,-:

;

...-

i

'oyer

ac

The Golden Rule Immanuei Kant's Categorical hnperative l)escartes' Rule of Change

UtilitarianPrinciple Risk Aversion Principle Ethical 'no free iunch'rule

'fhe Golden Rule suggests that we shouid act in the nlanner we rvouid lrke othr:rs to treat us (i.e. doing unto others as you would have them do unto you). Refer to Figure 1.8 to see an illustration of the unii,ersalityof the Golden Rule in the world religions. Kant's Categorical Imperative suggests that if an action is not right for everyone to take. then it is not right for anyone to take (i.e. the principle of universalizability). Descartes' Rule of Change, also known as the Slippcry Siope Rule, suggests that if .fhe an action cannot be taken repeatedly, then it is not right to be taken at any time. Utilitarian Principle suggests taking the action that achieves the higher or greater value after rvcighing the costs and benefits or Cor-r:€Quences. The Risk Aversion

18

Business Ethics

UN IVERSALLY ACCEPTED MORAL

1.8

VALUES Figure 1.9 lists down several universally accepted basic moral vaiues, among many others, as a reference in our study ofethics.

. . . . . .

Compassion Courage

Honesty

Integrity Respect for human life Self control

. . . . . . .

Cheating Cowardice

Cruelty Deceit Greed Lying Selfishness

Figure 1.9: Universally accepted basic moral values

Let us elaborate on the good n-roral values or virtues. Note that many of these values have been identified from Aristotle's Virtr.re Ethics Tl-reory. They are also promoted by Islam and other religions.

1.8.1

Compassion

Compassion is the virtue of empathy for the suffering olothers. Ivlore often, it is r-rsed interchangeablyrvith empathy, altruism, kindness and love. Othervalues that manifest compassion are caring, concern and friendship. Compassion transcends religious. ideologicai and national differences. In support oi unir.ersalism, compassion is also a virtue identified by the Golden Rule-'Do to others ,,vhat )tot.t would hove thent do to you.' Lack of compassion, by contrast, tnarks a per son as cruci. Quoting from the words of the Buddha: 'Compassion is that which mt.Lkes the heart of' tlte yood nr.t t' LrI lltc parrt oi otl'ters.lt crttshes and destroys the pain o.f otl'ters; thus, ti is tolled compassior: It is called compassion becouse it shelters and enrbrtce s the distresscd.'

1.8.2

i ,

Courage

i

-1 J

3

Courage is doing the right thing despite the cost. It is the ability to face danger, pain and other tests of life without showing fear. According to Aristotle, courage is the virtue of responding to fear with a reasonable amount of darrng (Boatright, 2007)" It is always associated with bravery and doing the right Lhings desp,ils the cost (Khalidah e.t a1.,2010). A courageous person will not hesrrate to uphold justrce and faiiness in all situations. He or she normally has commendable drive and rvill positiveiy face the

I

.j

$ $

a )

l

a

3

c I

I

Ethics and lts Conceptualization in

Life

challenges of life with a hope for a better future. He or she will also take calculated risks and act lvith prudence. Certainly, a courageous person is one who displays high perseverance and will never give up!

1.8.3

Respect for Humans and Non-humans

This is a sub-trait of integrity. Respect, also considered as a synonym for politeness or manners, is basically an attitude that is shown towards any individuai's feelings or interest" It is acknowiedging another's feelings in any kind of relationship. lt may not necessarily be feeiings shared between individual human beings only. It also relates to how we treat non-humans/other creations of the Almighty. Moreover, it also covers one's positivity, tolerance and understanding of the differences between the perceptions, viervs and diversity of the various people of the world. Respect therefore has relevance to a famous pirrase 'treat others the way you want to be treated'. It is also implied by Emrnanuel Kant's second categorical imperative 'act so that you treat humanity, whether in your own person or in that of another always as an end and neyer as a means only' (Boatright, 2009). An individual should respect the different interests and opinions of others sincc human beings are diverse and non-homogellous (Hyman, 1996). In Malaysia, respect for the elderly and hierarchy are central to society (Abdullah, 1992). Oonsistcnt r,r,ith this value, small and young children are taught to obey and listen ic, their eiders and ar-rthority figures. Those ,,r,ho do not respect other people, especiallv the elderl1,, are considered rude. In the business environment, an individual should not reduce the leyel of respect of other employees b'y not giving recognition rthen it is ri'arranted. An indir.idual should also not refuse the input of other employ.ees or displal,rude brehavrour torvard others (Stanrr.ick and Stanu,ick, 2009).

1.8.4

Self-control

Self-control refers to ol)e's ability to control desires thror-rgh strong r,villprou,er. A person rritl-r se11-control rvil1 display patience and caimness, and will alnays strive to control iris or hcr temper as anger is a bad moral value. He or she will consistently display emotional strength and stability when faced with uncertaintv or tests in life. Seli-control also refers to one's ability to avoid wrongdoing and promotes rightness in actions. In Islam, the fbr:ndation of self-control and good behaviour is solaf i.e. praying five tiirres a day. So/af in itself promotes one's commitmenttowards antar makruf nahi rLungkar (t.e . doing good cleeds and forbidding eviiiav.,rding bad b, e1"r

avior,r r).

1.8.5 Honesty ,\onesty is telling the truth, not lying, cheating or stealing. Honesty and truthfulness mean keeping one's commitments and transparency in life. Honesty is a sub-trait of integrity. It is among the most emphasized qualities in Islam (Haneef, 1979). Absolute honesty in al1 personal relationships and interactions, in business dealings and transactions, and in the administration of justice are the most fundamentaj ethical .oircepts arrd principles. The Al-Quran repeatedly stresses the values of honesty and frutlrfulness. For instance, in Surah Al-Maariiverses 32 and 33: 'The virtuous are those *,ho honour their trusts tmd promises and stand Jirm i:t their testimonies.'

tL:LtSe

who

fc""d m-d *r*t

. .

Compassion Courage humans and non-

. . .

humans

Self'control Honesry

lntegrity

'19

20

Business Ethics

Next in Surah Al-Isra'verses 34 and 35, again we read:

'Anrl keep your commitment, verily concerning commil.ments you will be questionicl. Filt the meas'ire when you measure, weight witl't a right balance. 'l'his is good and right in the end'. In addition, the Prophet SAW also most emphatically said: 'There are three characteristics oJ a hypocrite: v,hen he speaks he lie"s, when he ntakes a promise he breacltes it, and when he is trustecl he betrays'.

It is self-training that makes honesty

a

culture and habit ol people at all levels of

society (Sayed Sikandar, 2006).

1.8.6

lntegritY

Integrityis being upright and honest (Khalidah et a\.,2010). A person of integrity will ul*u:ys uphold good ,rulr"r and principles in life. A renorvned Malayslan motivator, Dr. Danial Zainal Abidin, defines Iniegrity as Taqv'a' a Quranic termiirology for 'God consciousness or fear of God'. Donald Zavderer listed thirteen (13) specific behaviourai traits that can help identify the ievel of integrity in individual actions (Stanwick and Stanwick,2009) (see Figure 1.10).

A

They possess humilitY.

l l l. I

They are concerned about the greater good' They are truthful.

fheyfulfi I commitments.

t,.1:.: .i:.-

'They strive for fairness. They take responsibilitY.

ihey respect individuals.

t t' I I

.!tr;1' j i,.i:,.

.r,,t,.

They celebrate the good fortune of others' They deve-lop others. They ieproach unjust acts.

l

They are forgiving. 'Thel extend lhernselves, to others.

!i3*-i.

Figure 1.10: Behaviour o{ people with high integ; tv

Integrity is among the list of values of a virtuous business Persol] as identified by Profe*ssoi Robert Solomon in his book, A Bt'tter Wa,v to Think about Business' (fennings, 2006). It has also been adopteC as a, code of ethics b1' manv trusiness

Ethrcs and lts Conceptualrzation in

Life

organizations including Malaysian muitinational companies like PETRONAS as well as the civil ser\zice sector. The development of the National Integrity Plan (NIP) and establishment of Institut Integriti Malaysia (IIM) have certainly justified the importance of integrity, a value to be internalized among the Malaysian community as the country aspires to be a developed nation by 2020. Following our detailed expianations on the main universally accepted moral values to be internalized by all humans in all situations, let us now focus on other virtues as hsted in Figure 1.11, which may be applied in business or n()n-business situations as we play our diverse roles.

Virtue: Standards and definitions

Getting things done despite

Fostering agreeable social contexts

bureaucracy

Attentiveness

Being admired by others

\

Doing what it takes to do the right

thing

Doing the right thing despite the cost

Giving others their due, creating

Establishiqg a congenial

environment

Doing the right thing desp

Approaching the ideal in behaviour

Fuffi

lling one's responsibilities

the job done'i'ighi;

(Source: Jenninqs, 2009)

Figure

1.1

1: Standarrjs and def initions of vii-.tue

21

22

Business Ethies

1.9

ETHICS AND ITS IMPORTANCE IN BUSI N ESS

This introductory chapter has so far outlined the concepts of ethics in life, the factors contributing to ethical development, role of religion in shaping ethical values and virtues that are universally accepted as good moral vaiues to be intern alizedby ail of us. Before ending this chapter, let us now link the concept of ethics with the business world and briefly discuss its importance in the challenging global environment of today.

1.9.1 The Business Environment in a Global Context

il;'*s,ffi;-] fearure ofa trusiness

organization is irs economic

characcer-to make profits. lndividuals aiso assume

different roles in rhe organizational hierarchy to realize rhe organization's vision and mission. There are also many stakeholders in a busi ness.

'

The term 'business' or business organization refers to an organization whose objeci,ve is to provide goods and services for profit. Business people are those who participate in planning, organizing or directing the work of businesses" One distinguishing feature of a business organization is its economic character. Because of its uniqueness, there is a branch of Islamic knorvledge called Muamalat, which oniy focuses on the art of conducting businesses according to Islarnir principies. Muslim students may want to do their own research on this to enhance their business ethics knowledge. The workplace in itseif may be rega rded as a family or corlmunity. Employees and employers interact rvith one another to achieve the organization's vision, mission and objectives. Although the workplace is a family or colnmunity in itself, we interact u'ith each other not as family members or friends but as buyers and sellers, empioyers and employees, etc. We assurre different roles in the organizational hierarchy to realize the organization's.,ision and mission. There are also many stakeholders in a business.

They include shareholders, competitors, suppliers, custotners, bankers, government agencies, non-governmental organizations and the community where the business is operating. The bigger the business operation and tl"ie more global it becotnes, the more the number of stakeholders and the greater the challenge to baiance their needs, pertinent for business sustainabilitl,. This is where ethics becomes a critical component in the conduct of any business activitv. We have eariier noted the collapse of giant Ar-nerican corporations when ethrcs is compromised in business operations. The lessons learnt frorn the collapse of Enron, Arthur Anderson, etc. and the consequences of unethical behaviour and unethical business institutions such as San Lu Corporation are too serious to be ignored (Desjardins, 2009; Khalidah et al., 2012a). By nol', we should be fuliy convinced that ethics is not only important in private life but also in the world of busines.s. It is important for business people to be ethical as being ethical in business is actualiy no different than being ethical in private life. Aptly, ethics is not an oxymoron but a must in businessl The issue is how do business people conduct themselves ethically. How do we manage businesses effectively without comprornising on ethics? This is the real

Ethics and lts Conceptualization in

Life

challenge because it requires courage, respect for humans and non-humans, honesty, integrity, etc. We all know these values up front but how do we translate them into actions? It definitely requires conscience and altruism because we are conducting businesses not only to maximize profits for the organization's sustainability but for the well-being of the ummah as a social responsibility and as a matter of accountabilityas a

i

khulifah!

Today, business people have many reasons to be concerned with the ethical standards of their organizations. One of the main reasons is that values and societal norms have somewhat undergone a lot of changes in the past few decades (Khalidah e, al.,2Al2a), especially among the younger generation. For example, at the'workplace, Generation Y ernployees who grew up in the information and communication technology era are more likely than others to see unethical behaviour as justifiable in pursuit of their goals. They are more liberal. They typically want instant rewards and gratification. They may believe it is sometimes necessary to cheat, plagiarize or lie in order to succeed (SnapComms, 2010). Realizing this challenge, most established business organizations have formally deveioped either compliance or integrity-based code of ethics as well as business ethics guidelines to remind employees of the importance of ethics at the workplace. For example, PETRONAS has not only developed its Shared Values and Brand Essence as shor,r'n in Figures 1.12 and 1.13, but it has recently published a booklet entitled PETRONAS Code of Conduct and Business Ethics. It is distributed to all employees in an effi;rt to emphasize ethics in the conduct of its global business.

fc"d.

"r.,h.r

,h*

been developed by many organizations

ro remind employees of rhe importance of ethics while performing rheir roies at Llre woikplare. Code of ethics may be compiianct'basccl or inregrity-based.

Loyalty Loyalty to nation and corporation

Prttfessionalism Committed innovative and proactive and always striving for excellence

lntegrity Honest and upright

Cohesiveness United in purpose and fellowship

f ,ri'-rre 1.12: Shared values of PETRONAS

23

L4

tsusiness

tthcs

Petronas Brand Essence

Figure 1.13: Brand esserrce

1.9.2 k

-,;i;,,,.,.,

-,

i

.,

ccrrr(lLt(

l-rus!ie

etirrcailv iir ker:p existiirg cr.rsiontc!

-1

The lmportance of Managinq Businesses Ethieally

While code of ethics remain a con-irnon featurc. orgrniz.rtiorrs of today have realized the importance ol rnstitutionalizing ethics at the workplace and the need to manage businesses ethically for the foliowing reasons:

t

s,

lo avoici iawsuts, io r-ecluce cnrpir.,),ec

t

trrrnover arrd

to pleas0 main

t

stakeholders.

t t

To keep extsting customers-reputable organizations rvill maintarrr customer loy.alty and business sustainability. To attract new customeis-good business or corporat,-'itnage lvill attraci rrerv customers and increase profitability. To avoid lawsuifs-reputable organizations r'r.,iIl not hesitate to comply rvtth laws and regulations to maintain their good irnage and dignit1," To reduce employeeturnover-reputable orsanizations will bc able to maintain employee loyaity, thus reducing employee turnover. 'fhis u,ill subsequentlv iricrease organizational effectiveness. 'lo please customers, employees and society-goocl organizations wiil strive to fulfil the ireeds of main stakeholders, r.e. custorners, employees and the

community they serve. We shall conclude this chapter by re-emphasizing thal ethics is important

ir

1ife,

it in business or non-business organizations. 'lhe cost of compromising ethics tcr fulfil seif-interests in this challenging global environrnent is far too expensive to incur. Truly, the bad consequences will outweigh the good consequences; be it rn the short be

term or the long term. We certainly cannot refel to ourseives as civilized societies

if

we do not internalize ethical values in our livesl

As we move along in our study of business ethics, we n ill take a broader iook at work place issues that iink empioyees and tn-rployers together, as stakeholders in a business. For example, discrimination, rvhrstle-blowinq, unjust dismrssal, occupational health and safety hazards, etc. '.4/e shali look at the impr-rrtance of ethics in the conduct of marketing, an essentral function in any business" We shall

Ethics and lts Conceptualization in

Life

integrate ethics lvith typical business issues such as the need to preserve trade secrets, avoid conflicts and conduct sustainable business with good governance as a social resPonsibil itY. Sureiy, we shall apply ethical principles and moral reasoning in this process. Our next chapter will further examine the issue of internalizing ethics in the conduct of bu siness.

To consolidate your learning, the learning outcomes are summarized beiow:

l.

Define and differentiate between ethics and morality. Morality is concerned rvith the norms, values and beliefs embedded in social processes which define right or wrong for an individual or a community. Ethics, in contrast, is the study of moral standards whose explicit purpose is to determine, as far as possible, whether a given moral standard or judgement based on that standard is more or less correct (Velasquez, 2006). This therefore denands for analyticai thought and appiication of reason to determine specific rules, principles or ethical theories that determine right or wrong for a given situation. in addition, these rules and principles must give an account of the rights or entitlements rve have and u,hat is just or fair (Boatright, 2007)"

2.

Understand hon, ethics is developed in an individual. Ethics comes trom our inner feelings u,hich subsequently translate into our moral behaviour. Ethics thus begins with each one of us. As humans, we are fully responsible for our ethical or unethical behaviour. According to Griffin and Ebert Q0A7), ethical behaviour conforms to ethical beliefs and social norms about what is right and good. Conversely, unethical behar.iour conforms to individual beliefs and social norms that are defined as \vrong and bad.

List and explain the various factors that influence ethical values of an individual. Several social, cultural and environmental factors infiuence one's ethical values. 'fhey include:

. . . . .

4.

Upbringing Socialization process (i.e. the behaviour of surrounding people) Experience and critical reflections on those experiences The explicit and implicit standards of culture Religion

Compare and contrast between ethics and Iegality. Ethics covers a broader scope. It relates to questions of right and wrongdoing, rights and justice. Ethics reflects people's relations with one another-how should people trcat others? What responsibility should they feel for others? Legaiity carries a narrower scope. It refers to iaws that we have written to protect ourselves from fraud, theft and violence. No doubt, an ethical person is someone who obeys the larq. However, obeying the law need not necessarily justifv that a person is ethical. Many irnmoral and unethical acts fall n ell within our laws (Nickels et al., 20AB). They need not necessarily drive one's conscience to internalize good values, reflective of an ethicai person. Ethics therefore rests upon one's colrscience and commitrnent to do gooC deeds as a social responsibility under all circumstances.

25

26

Business Ethics

5.

Compare between Western and Eastern perspectives on ethics. There are apparent differences on how the West and East perceive ethics. . The West has somewhat compromised religion as a factor influencing ethics in support of' secularism and universalism. The East still sees religion as an important contributing factor to shape one's ethical values. . The West has placed emphasis on secularism and universalism as ideologies to shape not only individual ethical values but to construct the state. These form the foundation of human rights, freedom of thought and rational thinking of the West. . In resolving ethical issues, the East has been seen to fall back more on religious and cultural principles, much as the East respects the'liberal/universalistic'views of the West. Man-made ethical theories and principles such as Utilitarian Ethics, Theory of Rights, |ustice, etc. which are practically based on rational thinking and objectivity seem to be applied more by the West compared to the East.

6.

Relate the role of religion as an important contributing factor in shaping ethical values of individuals.

All religions teach their followers good ethics to lead rewarding lives. Refer to the explanations on how ethics is taught and embedded in the foliowers of the various religions as outlined in this chapter-Islam, Christianity, Buddhism and Hinduism. 7.

Identify universally accepted moral values.

. . . . . . 8"

Compassion Courage Respect for humans and non-humans

Self-control Honesty Integrity

Recognize ethics and its importance in the global business world. 'Ihe global business world opens to a lot of challenges. Apart from luifilling the profit maxr rnizatrr ,rr objective which drives aggressive competition in a free market system, businesses have to face another challenge-managing the global workforce. Society is undergoing a dramatic change in values and societal norms. There has been concerns on the decadence of moral values among the younger generation, especially Generation Y, born between tlte year 1982-2000 (Farnsworth and Kliener, 2003; Freestone and Mitchell, 2004; Daily Express, 2004; i{usnah, 2005; VietnamNet Bridge,2008; Srivasta,2010; SnapComms,2010; Khalidah et al.,20lA). Generation Y employees who grew up in the ICT era and represent the bulk of today's workforcc are more likely to see unethicai behaviour as justifiable in pursuit of their goals. While codes of ethics and business ethics guidelines remain as references for employees at the workplace, businesses have realized the importance of upholding ethics lbr the follorving reasons: . To keep existing customers-reputable organizations will maintain customer loyalty and business sustainability. . To attract new customers-good business or corporate image will attract new customers and increase profitability. . To avoid lawsuits-reputable organizations will not hesitate to comply with laws and regulations to maintain their good image and dignity. . To reduce employee turnover-reputable organizations will be abie to maintain employee loyalty, thus reducing employee turnover. This will subsequently increase organizaticnal effectiveness. . To please customers, employees and society-good organizations will strive to fulfil the necds of main stakeholders, i.e. customers, employees and the community they serve. --l I I

i

Ethics and lts Conceptualization in

Life

Compliance-based code of ethics It stresses the prevention of unlawful behaviour by fbrmulating rules and regulations and imposing penalties on wrongdoers.

Ethics A set of principles that contains behavioural codes to determine what is right or wrong.

lman Anlslamic term for'faith', i.e. pious and complete adherence to A Ilah's rules, which is a highly regarded religious ideal in the Al-Quran. An individual who has iman (faith) rs a nru'min (believer)" lntegrity-based code of ethics It defines the organization's guiding values, creates a workplace environment that is supportive of ethical behaviour and focuses on shared responsibility among employees. Kantian Ethics An ethical theorywhich emphasizes that the rightness of human actions depends on one's goodwill or intention out of a sense of duty to fellow humans.

Khalifah A concept by early Muslim scholars which focuses on the status and quality (free will) ofhumankind vis-a-vis other creatures in the universe-leadership, responsibiiity and accountability. Legality Statutory laws, rules and regulations set by the government or local authority.

Morality The norms, values and beliefs embedded in sociai processes u,hich define right or wrong for

an

rndividual or a conrmunity. 1 Malaysia

concept A concept introduccd by thc currcnt goycrnmcnt of Malaysia to harmonizc citizens of

the different races in the spirit of respect, sincerity and trustwc:thincss.

Quality of life The general lveli-being of a society in terms of political freedom, a clean natural enl ironment, education, health care, safet1,, free time and everything else that leads to one's happiness and satisfaction. Rukun Negara The Nationai Philosophy of Malaysia, which u,as officiali). introduced on 31 August t970 with the objective to strengthen nationai unity in Mal:ysia's multicultural society. The five principles are: (1) Belief in God, (2) Loyalty to the King and country, (3) Supremacy of the constitution, (4) Rule of lan, and (5) Mutual respect and

moralitl Secularism An ideology which separates religious issues from worldly aft-airs. The objectir.e is to ensure that freedom of thought and conscience will apply equally to all believers and non-believers alike. Stakeholders All the people or parties that stand to gain or lose by the poiicies and activities of a business. They irtclude shareholders, customers, suppiiers, bankers, employees, government agencies, non.governmental organizations (NGOs) and cornpetitors. Standard of

living The amount of goods and services

people can buy based on their purchasing porver.

Sunnah The practices or tradition of Prophet Muhammad SAW. Taqwa An Islamic term for 'piety', i.e. protection or shield from what is harmful.

Ummah An Arabic word which means 'community' or iration'. In the context of Islam, ummah is used to mean'Community of the Believers' {ummat al-mu'minin), and thus, the entire Muslim world, Universalism A theses or principle of Utilitarian Theory of Ethics. The c.nsequences to be considered are those oIeveryone.

ritilitarian Ethics An ethical theory which emphasizes on our obiigation or dutv in any situation, which perform the action that wiil result in the greatest balance of good over evil.

is to

Virtue A good character trait or value that a person displays in the conduct of life. This value will rnanifested through habitual actions. For example, honesty, sincerity, trustworthiness, etc.

be

27

10 LA

Business Ethics

1.

I)iscuss some ethical issues that you have faced as a student in a higher learning institution.

2.

Provide your own examples to differentiate between ethics and morality.

3.

Several factors influence ethical values. Select one's ethical values.

4"

Explain why ethics is important in life.

5.

Is ethics applicable in the world of business? Provide justifications for your stand.

ANY

one factor and

jristify its intportance in shaping

Time is of the Essence... job in a clorhing store. .jenny is a private college srudenr. She has been working extra hours at her part-time Eid Fitri festival is for rhe coming rush rhe Mega Sale promore because sales The srore needs her help to starting. She also needs rhe money ro pay her tuition fees nexr semester and to fix her car so that she can drive home for rhe long semesrer holidays. The coming holiday season also means rhe end of the semester, and unforrunarely, frnal examinarions. Jenny simp[y does nor have time to study for ali of her examinations as well as work the exira hours she needs. .il.

Something has to be sacrifrced, and she decides to prerend being sick on the day of her Business Managemenr final examination paper so rhat she can take the make-up examinarlon the next week, giving her more rime ro srudy. She knows rhat it will nor be hard ro gei a medical certificate (/,AC) from the busy college health clinic saying ihar she's roo sick ro rake the examination. Her friend, Dennis, works there and pan 'borrow'a page of rheir lerrerhead stationery. "Even if I have ro lie iri fair rhar I ger exrra rime to srudy," Jenny tells herself, "because I have to work, and I can'r study all the time like studenrs who have cheir parents to pay for everyrhing."

Questions:

1. Jenny seems ro see her lie as a simple case of manipulating an unfair system. ls there anyrhing wrong with manipularing ihe sysrem? ls her srraregy fair ro the other students in her business management class? 2. Jenny seems ro jusrify her behaviour with a vague idea that 'unfair' differences between people (such as wealrh) thar have norhing ro do wirh efforr or intelligence should nor be reflecred in rheir grades. Whar do you rhink about her claim rhar she deserves more time ro srudy rhan other-students because they do not have to earn rheir own money?

3.

'

Lying is a universally accepted bad moral value. Jusrify why lying is immoral and unerhical.

@ffiffiiffigismijtr:.--4r.

-'

Ethics and lts Conceptualization in

Abdullah, A. (1992). The influence of Ethnic Values on Managenal Practices Management Review, 27 (1): 3 -lB.

in

Life

Maiaysra. Malaysian

A.G. Abduilah and A. Mohd ZainolAbidin (2011). Business Ethics. Selangor: Oxford University Press.

Al-Quran.King Fahd Complex: Madinah Munawau,arah, K.S.A. For the Prrnting of the Holy Quran" .

Al-Maududi, Abu Ala. (1978). The Meaning of The Quran, VolumeX. Lahore: Isiamic Publishing, p. 36. Blackburn, S. (2001). Ethics: A Very Short Introduction. Oxford: Oxford University Press. p.

9.

Boatright, i.R. (2007). Ethics and the Conduct of Business (5'h Ed.). New |ersey: Prentice Hall. Boatright, J.R. (2009). Ethics anC the Conduct of Business (O'h Ed). New |ersey: Pearson International Edition. Bob,Tammie(2009). ACulturalPerspectiveontheDffirencebetweentheEasternandWesternWaysof Dealing with a Complex Problem. . Accessed on 3 August2A12. BuddLr,'Net (n.d). . Accessed on 28 Augu st2012.

Daily Erpress. (2004). Moral decadence an'Long Malaysians sad4ens Dr M. . Accessed on 5 ]anuar1, 2009.

Dantal Zainal Abidin. Public Lecture at Universiti Teknologj PETRONAS .leljverecl on 29 July 2008 in conjuncricrn rvith the 9'h PETRON AS Tilawsh Al euran asseibty (2g-2g )ul,v 2008). Desjardins, t. QO09). An Introduction to Business Ethics (3"rEd.). Singapore: Mc(]rarv-Hill Higher F.ducation.

Lhert, R.]. and Griffin, R.W" (2007) . BusirLess Essentials (6'h Ed.). New ]ersev: Prenrice llall. Freestone, O. and lv{itchell, v.w. (2004). Generation Y attitudes towards e ethics and internet-related r"nisbehaviovrs. Journal of Business Ethics,5a (2): l2l-128. Greerr,

on

11

K' (2008). Wltat is Taqwa? . Accessed

August 2010.

Haneef, S. (1979). \\rhat Everyone Should Know about Islam ctnd Muslims, i.ahore: Kazi publications.

llumplrreys, C- (n.d.). Twelve Principles of Buddhism. . oir 28 August 2012. lj,vman, D N" (1996). rlconomics (4th Ed). united states of America: Irwin.

lbn Manzur, Abu al-l:adl (1990) Lisan al-'Arab,yol.l3. Beirut: Ilar Sadir. pp.

g6.

islanriCity. Al Quran, Yusuf A1i. . Accessed on -i Augus t )012. Isiam Todav (n d.). . Accessed on 12 ]une 2014.

ienirings, M.l. (2006). Business Ethics 15"'Ed.;. United Srates of Amei'ica: 'fhomson/West.

Accessed

'?,:q

30

Business Ethics

Keown, D. (1992). The Nature of Buddhist Ethics. London: MacmillanKeown, D. (2000). Buddhism-A Very Short Introductioiz. Oxford: Oxford University Press' Harvey, P. (2000). An Introduction to Buddhist Ethics. Cambridge: Cambridge University Press.

Khalidah Khalid Ali, Rohani Salleh and Mashitah Sabdin (2009). A Study on the Level of Ethics of Final Year Engineering and Technology Students at a Malaysian Higher Learnir,g Institution. ln Ptoceedings of the Regional Conference of Humanities 2009 (RCH 2009), Seri Iskandar, 18-19 February 2009. Khalidah Khalid Ali, Rohani Salleh and Mashitah Sabdin (2010). A Study on the Level of Ethics at a Malaysian private Higher Learning Institution: Comparison between Foundation and Undergraduate Technical based Students. lnternational Journal of Basic and Applied Sciences, (10) 35 49.

Khalidah Khalid Ali, Satirenjit Kaur )ohl, Lai Fong Woon, Rohani Salleh, Sofiah Molek l,ope Aman Shah, Rahayu Abd. Rahman and Ilmiah Ibrahim (2012a). Business Management: A Malaysian Peripective (2'd Ed). Shah Alam, Selangor Darul Ehsan, Malaysia: Oxford Fajar. Khalidah Khalid Ali, Rohani Salleh and Mashitah Sabdin (2012b). Ethical Values of Final Year Students at a Malaysian private Higher Learning Institution, 2012 (l).,In Proceedings of International Conference on Applied and Social science (ICASS ZOtZ),Kuaia Lumpur, 1-2 February 2012 (pp. 119-13i)" USA: [nforrnation Engineering Research Institute (IERI). Maisarah, M.S. (2008). Can Ethics Courses Improre Students' Ethical Sensitivitl'and Ethical |udgement? A preliminary Study in Universiti Teknologi Mara. /n Proceedings of the 3rd International Borneo Business Conference (IBBC), Kota Kinabalu, Sabah,lr4alaysia, 15-17 December 2008.

Mauro, N., Natale, S.M. and Libertella, A.F. (i999). Personal \ralues, Business Ethics and Strategic Deveioprnent. lournal of Cross Cultural Management,6 (2):22-28. McDonough, S. (1984). Muslim Ethics and Modernity. Canada: Wiifrid Laurice University Press' Miqdad Yaljin (1973). Al-lttijah al-Akhlaqifi a;-Islaru. Egypt: Maktabah al Khanji. Morgan, G. (1986). lmages of Organization.Beverly Hills: Sage. Munusamy, K., Arumugam K. and Fitria, A.B. (2010). Perceived Differences in Valr-res among Baby Boomers, Gen-X and Gen-Y: A Survey of Academicians. Iru Proceedings of the lrrternational Conference in Business and Economic Research (ICBER), Kuching, Sarawak, Malavsia.

National Secular Society (n.d.). What is secularism? . Accessecl on 3 Augusl2012. Nicki:is, WG., McHugh, I.M. and McHugh, S.M. (200S). 'rJnderstanding Business

(B'h Ed.).

New York: McGraw

HilliIrwin. Nor Azzah Kamri and Khairiah Salwa Hj. Mokhtar (2004). The Role of'Islarnic Ethics in Organizations: An Experience in Malaysia. Paper presented at 6"'ASEAN Inter-{Jniversity Seminar on Social Developrnent, organized by School of Social Sciences Universiti Sains Malaysia (USM) and University of Singapore at Universiti Sains Malaysia, Penang, Malaysia, 14-16 May 2A04. Notes t'rom Khalifalz Method of Parenting Seminar, 11 Apr 2009, Uni.,.ersiti Teknologi Petrr:nas" Organized by PET'RONITA Perak Branch.

Ethics and Its ConceptLralization rn

Life

Onlslam.net. Ethics Between lslam and the West. . Accessed on 3 August 20t2. Rahman, A.R.A. (2003). Ethics in Accounting Educatio'r: Contribution of the Islamic Principle of Maelaiah" ilUM lournal of Economics and Managemen, 11(1): 1-8.

Redding, S.G. & Wong, G.Y.Y. (1986). The psychology of Chinese organizational behaviour. (ed.), The psychology of the Chinese People. Hong Kong: University Press.

In M.H. Bond

M. (2005). Religiosity and Perceptions of Unethical Practices among the Malaysian Muslims: An Exploratory Study. Proceedings of the UM FBA Asian Conference. Kuala Lumpur, Malaysia, April 2005. Rusnah,

Sayed Sikandar, S.H. (2006). Ethics and Fiqh

for Daily Life: An Islamic Outline. Kuala Lumpur;

Research

Centre,IiUM. Shaw, W"H. (2008). Business Ethics (6th Ed.). California: Thompson Wadsworth. Shaw,

WH.

(2011). Business Ethics 1Z'h

SnapComms. Communicating

fd.;. California: Thompson Wadsu,orth.

with Gen Y

Employees.
communicating-with-gen-y.aspx>. Accessed on 8 ]une 2010. Srivasta, R.K. (2010). Effect of Cross Culture on Ethical Behavior ofY Generation lournci af Indian Culture and Business Management,3:323-332.

-

is it changing?

International

Stanrvick, P.A. and Stanwick, S.D. (2009). understanding Busincss Ethics. New lersey: Pearson International

Edition"

Aidit Haji Ghazali (1994). lslamic Values and Managentent. Kuala Lumpur: Islamic Understanding Malaysia (IKIM). Institute of Syed Othman Aihabshi and

TeachingValues.com (2009). The Universrty of the Golden Rule teachingvalues.com/goldenrule.html>" Accssed on 12 iune 2014.

in the \\rorld

Religions.
Velasquez, M.G. (2006). Business Ethics Concepts and Cases (6'L Ed.). New iersey: Pearson.

VietNamNet Bridge (2008). SOS: Student's morals declining. . Accessed on

1B

December 2008.

Ying Zhang (2012). Taboo Differences and Cultural Roots between English and Chinese. Iir Proceedings o{' the Internationai Conference on Applied and Social Science (ICASS 2012) Kuaia Lumpur, 1-2 February 2A12 (pp. 280-285). USA: Information Engineering Research Institute (IERI).

31

CHAPl-ER

Internali zlng Ethics in the Conduct of Business

H

LEARNING OUTCOMES At the end of this chapter, you should be able to: r ldentify and discuss the common ethical dilemmas faced by business people. x ldentify and explain the three levels of decision-making. r Differentiate between ethical managemerrt and management of ethics. r Explain the concept of role in ethics. r Outline the role of leadership to inculcate an ethical cultrrre in a

r n a r r

business orqanization. Discuss the role of managers as economrc actors, company leaders and community leaders. Compare and contrast between compi:ance-based code of ethics and integrity-based code of ethics and recognize their application to inculcate an ethical corporate culture. Discuss the importance of integrating eccnomic, legal and moral dimensions to make effective and fa,r business decisions. iderrtify and explain the three check questions that one has to ask and self-assess when faced with an ethical dilemma. Discuss the role of religion in resolving ethical issues in business.

lnternal;zing Ethics in the Conduct of

INTRODUCTION

x,,' h

$

-

,st

,s: *t -f-

e.

i!:

*\

In Chapter l, we conceptualize ethics as a field of study, differentiate bctween ethics and morality and identify factors that contribute to the shaping of one's moral/ethical values" We also see hon' the West views ethics compared to the East. The chapter continues to discuss the role of religion in shaping one's values. It then introduces readers to the universally accepted moral values that must be internalized by all humans irrespective of social, economic or cultural differences. Justifications are drawn as to why ethics is important in life, what more in the competitive global business environment. At the end of the chapter, we seriously note that the cost of compromising ethics to fulfil self-interests in this challenging global environment is far too expenslve to incur since it will affect the sustainability of the business itself in the short and long run. Chapter 2 rvill further deliberate on internalization of ethics in the conduct of business. It first introduces readers to common ethical problems faced in a corporate environment. It continues to elaborate on the three levels of decisionmaking-individuai, organizational and business systems, Foilowing this, it will differentiate between the concepts of ethical management and management of ethics and eramine the role of leadership to inculcate an ethical culture wrthin an organization. Nert, it looks at the two types of code of ethics that orgairizations deveJup to rernind employees of the importance of demonstrating good conduct and behaviour at the lvorkplace-cornpiiance-based and integritv-based code of ethics" It then rationalizes the importance of considering the three dinrensions ec()n()mic, legai and moral-in any business decision-making as a social responsibrlity. Flnally, this chapter rvill end rt,rth the three check questions that one has to ask and self assess when faced rvith an ethical diiemma while executing his or her job responsibilities at the workplace.

2.1

COMMON ETHICAL DILEMMAS FACED BY BUSINESS PEOPLE

\\Ie note that the business world is unique because of its ecor-romic ch;racter. Sole proprietors, partnerships and corporations by and large strive to maximiz-e plofits in a competitive global free market system. Certainly, this drive is justificd after taking the risks of conducting a business and considering the opportunity costs inlolved tn busitress set ups. However, in the quest to maximize profits, board of directors, managers and empioyees at all levels are bound to face ethical dilemmas or conflicts. They rnclude, arnong others, balancing profit maximization with ethics in tire conduct of business, exercising justice and rights to please stakeholders as well as fulfilling individual aspirations and organizational needs. Let us outline and critically examine five common ethical dilemmas faced by those involved in business, as shown in Figure 2.1.

Business 33

34

Busrness Ethrcs

Balancing the economic charac[er or organizarions with justice and fairness

Conflict of inrerest

Common ethical dilemmas faced by business people

Personaliry traits

Responsibility to stakeholders

Level of openness

Figure

2.1

:

2.1.1

Five common ethical dilemmas faced by people involved in business

Balancing the Economic Character of Organizations with Justice and Fairness

The economic character of organizations, chasing afier profit maximization as a primary objective, may pose ethical conflicts. For example, lo sustain high protit levels, Company A has to cut down on operatins costs. It may even decide to retrench at wili workers who are still ioyai and committed to providing their sen,ices to the organization. Is it ethical to maximize profits for the organization's success.rt the expense of retrenching workers who depend on their survival as emplo,vees? lVhat r,r.ill happen to their families after being retrenched? How much of conrpensation should the organization offer to these peopie befbre retrenching them in the context of industrial harmony, justice and fairness? Should emplol,ees be dismissed or should the organization give them the option to accept the'golden hand shake'or otlierwise? The competitive 'free trade' giobai scenari,; poses more business opportunities as well as ethical challenges to businesses. Organiza.tions reap opportunities by setting up businesses in countries rvith lorv labour costs hut when they find other better places with even lower labour costs, they may ciose cior.vrr their existing operatron to set up another new business, leavrng behind jobless local employees to look for new jobs. Much as organizations may undertake this as a matter of survival or to stay competitive, is it ethically justified for taking sucir decisions, which are detrimental to human survival and well-being? Aren't these actions seen to display greed and selfishness among businesses? Certainly, such actions are conflicting with justice and human rights principles in the conduct of business although it maybe economically justified.

*: ! l

-n

I

lnternalizrng Ethics in the Conduct o[

2.1.2

Conflict of lnterest

This involves morality and economic trade-offs whereby there is constant tension in trying to separate the 'person' from the business decision. This is also referred to as the agency problem in the study of management. In other words, the challenge is how to set aside.personal interests when executing job responsibilities. For example, being the branch manager of a commercial bank, Mr. A has the power within his authority to approve customers' loans. He is also expected to comply with the loan application guidelines as a responsibility within the bank's governance mechanism. However, a personal agenda arises.when Mr. A is obligated to approve Mr. B's loan application that does not meet the bank's guidelines after accepting a kickback or token money from Mr. B. This is certainly a clear case of breach of trust and an abuse of power. Mr. A is already paid a salary by the bank to perform the task effectively. Being an employee, he should be responsible for ensuring that the organization benefits from the loan transaction instead of gaining personal interests by accepting kickbacks. However, he chooses to be opportunistic and use" his position and power to his personal advantage. We shall deliberate in greater detail on conflict of interest cases when we cover workplace issues in Chapter 7 of this text.

2.1.3

PersonalityTraits

This relates to relationships, personal values and characteristics of individuals. In many situations, the personai issues or individual personalities cause the dilemn-ra. To create a scenario, a job vacancy is present in a firm. The human resource Inanager, u.ho has the power to select a suitable candidate for the job, appoints his orvn relative u,ho does not har.e the proper academic qualiflcations and skills to match the job requirements.

His 'caring' attitude or rather nepotism is not displaying justice and fairness to other qualified candidates, what more to the firrn. Aptly, the firm requires qualified and skrlfui ernployees to stay efficient and competitive. Such actions wili consequently lead to poor performance and inefficiency in the organization. f'he human resource manager clearly does not fulfil organizational needs because he puts personal relationships and self-interests above organizational needs.

2.1.4

ResponsibilitytoStakeholders

In the study of business management, vre note that businesses hirr,e many stakeholders.

They range from employees, suppliers and consumers, to the government, non governmentai organizations and many other parties. The bigger tire business organization, the greater the number of stakeholders; certainiy, there rvill be nrore chalienges to please ali of them. However, businesses must be socially responsible and empioyees must effectively play their roles and fulfil their responsibilities. For example, a recruiting executive should not be gender or racialiy biased when recruiting potential employees as it is not fair to treat people differentlywhen there is no good reason to do so. Recrurting should be on the basis of competency to ensure organizational effectiveness and efficiencl In another scenario, businesses must fulfil the needs of consumcrs, being the main stakeholder to secure business survival. However, much as consumcr scivere;.gnty is recognized and consumers are regarded as'king', they are being nanipuiated through deceptive markcting strategies to reap high profit margins. Certainly, businesses need

Btisiness 35

.Jb

tsusrness tthrcs

to incorporate managerial rationalization and emphasis on code of ethics to fulfil the needs ofstakeholders by and large.

2.1.5

Level of Openness

Business people may ask themseives to what extent they should reveal infbrmation about their business since there are also trade secrets to be protected for healthy and fair competition. While the need to protect trade secrets is justified from property rights arguments, they must also be 'transparent' or public about their values and expectations. They must be honest and uphold the value of integrity in their business dealings. For example, as marketers, they should not withhold or manipulate any information which may influence consumers' rational buying decisions. There must be proper labelling so

that consumers will be well-informed on the ingredients or compositilrn of products purchased. Consumers'freedom of choice, well-being and other rights must be protected as a social responsibility over and above business sustainability. Having discussed the five commorr ethical dilemmas faced by business people and realizing the need to apply ethics and imbue virtues, we shall next differentiate the three distinct levels of decision-making-individual, organizational and business system.

2.2

THE THREE LEVELS OF DECISION.MAKING

The follorving figr-rre depicts the three levels of decisrort-making. tdentifying the appropriatc level for a decision is important, because an ethical problem may l-iave no solution on the level it is approached (Boatright, 2009).

+ -l [--!q'.* -I D..r"rt t"d. * an individual level more ofren are meant to fulfil personal needs and i.nterests-

Managers also make organ izational-level decisrons since they are acting on behalf

of the or"ganlzation.

Figure 2.2: The three levels oI decision-making

Organizations are made up of individuals from difft'rent personalities and backgrounds. Businesspeoplehaveto make decisirns at individual Ievel, organizational level and business system level. Decisions made on individual ler.,el more often are meant to fulfil personal needs and interests. For example, Mr. A may decide to come to rvork late since it suits his convenience. Horvever, as a manager, he also has to make decisions to fulfii organizational needs. He is expected to uphold policies, rules and regulations. Considering his role and obligation torvards the organization, Mr. A will decide to come to work on time since he has to uphold organizational rules and

lnternalizing Ethics in the Conduct of

regulations" As a manager, he is also a role model to his subordinates. In this case, Mr. As decision to come to work on time is based on his organizational considerations although he may prefer to come in late if his decision is made on the individual level. Many ethical issues occur at the organizational level since the individual is making decisions on behalf of the organization or placing himself as a responsible and loyal employee. Suppose an employee reports to his manager that a co-norker

is forging signatures for contract documents. Coincidentally, the co,worker is a close friend of the manager. At the individual levei, perhaps, the manager may not take any action at all, but on the organizational level, he has to play his role to investigate the matter and report to the human resource department for a domestic inquiry. He must ensure that such unethical practices may not occur again. Thus, having obligated to make a decision at the organizational level as a matter of job responsibility and loyalty to the organization, he decides to report to the human resource department accordingly, acting in impartiality, all for the benefit of the organization. Of course, this is not an easy decision to make. It takes a lot of courage and a strong conscience to correct wrongdoings, in this case, out of a moral concern to fulfil organizational needs as a matter of responsibility. Having seen the differentiation between decision-making at the individual and organizational levels, we look at decision-making at the business system ievel. Assume Mr. A receives a request from a male subordinate for a salarr. revision. Being a responsible and caring manager, he would like to help his subordinate by recomrtending him fbr a salary revision through the human resource department. Hotvever, such requests will most likely be on hold or possibiy rejected because there ne€d to do a comparative study on salaries and compensatiorr of employees r.r,ithin the same industry for equity and fairness. This decision is made at business system level, considerirrg that there n-ra,v be mauy other people in the organization r,r,ho are in the same boat. Mr. A may then explain iS a

to his subordinate the real situation and perhaps console him by fonvardrng tire i.:tter to human resource department with recommendations to look into the matter. }{e knou's that his sr-rbordinate's case lvill only be considered after a comprehensive , omparative study at business system level, conducted by the human resource ,-epartment. Certainly, he has to be skiifulin maintaining the motivation Ievel oit|e

said subordinate rvho is expecting a salary rise. Perhaps, he can negotiatc rvith the subordinate to set more challenging but realistic key performance indicators to entitle '.im to be considered for better salary increments through the annual performance appraisal exercise. -fhis, in fact, will be a decision made by Mr. A at organizational ,.:ve1l

To srtnlntarize, identifying the appropriate ievel for a decision is pertinent

because an etl-rical problem may have no solution on the ler.el it is approached iBoatright, 2009). For example, the solution to the forgery issue may not be resolved lt the individual or departmental levels. It has to be solved at the organizatronal levei by rcporting to the human resource department. Similarl,v, the salary ret,ision lcquesi cannot be fulfilled at organizational level until a comparative compensation :tudy of the entire industry is conducted at business system level to ensure jr-rstice and fairness, but a salarv increment may be given after assessing individual irerformance at organizational level. Considering the abor.e, managers must be prudent in rnaking decisions. They must have tlle skills to identify the appropriate level of decision-making because an ethical probiem may have no solution on the ievel it is approacheci. Next, rve

shail differentiate between the concepts of ethical management and nranagement cf ethics.

Business 37

rrur*,r''".il-be prudenr in making decisions by identifying rhe appropriare level of decision-making.

ldenrifying the dppropriare level is

importanr for

a

decision because an

ethical problem may have no solution on rhe level ir is approached.

38

Business Ethics

Erhical

manag.*.rul

rherefore relates

to the undertaking of managemenr functions in an erhical manner by

doing the right thing for individual success

,

and organizational effecriveness.

M*-r-.'*;;;i-l echics refers

to

managers acting

effectively in situations rhat have an erhical

aspect borh in rhe inrernal anC external envrronnrent of bu srness.

2.3

ETHICAL MANAG EM ENT VERSUS

MANAGEMENT OF ETHICS In the study of general management, we learnt that management

involves four

inter-related functions-planning, organizing, leading and coordinating Ethical management therefore relates to the undertak;ng of managelnent functions in an ethical manner by doing the right thing for individual success and organizational effectiveness. Certainly, it requires individuals involved in the management function, especially section heads, managers and those in the leading roles to practise ethical management in the conduct of business. It has to begin from the individual's values, displayed through his actions while perlormirlg management duties and responsibilities. High-level managers have a responsibility for creating and maintaining an ethical corporate climate that protects the organization against unethical and illegal conduct. In Chapter 1, we have highlighted real cases of'ethical misconduct that have caused severe harm to many individuals and organizations. You may recall the classic cases of the collapse of Enron Corporation due to the unethicai behaviour of top management and the tarnished image of San Lu Corporation for supplying tainted miik to its Chinese customers. However, the irony is there are managers who belrer.e that rn buslness, ethics is only applicable to a certain extent. Most managers think they are ethicai but it only provides some degree of relevancy to their work" Perhaps, the reasott Lrehiltl LLis view

may be due to the obsession rvith niaximizing profits within the rules of the game since business entities must make profitsl \\rhile we n-)ay agree that the manner in which ethics is applied in br,isiness may be varied from horv it is applied in nornral dail,v life, practically, there is no difference between being ethical in business or in privati:1ife. Organrzations after all are made up rf people with values and characters.'l'he same people are running the organization and ieading their private lives. It is unlikely that their characters will change drastically due to a change in the environment, i.e. the b'"tsiness environment and private life. Core universally. accepted virtues such as honestl', respect and compassion are bound to reflect in similar characters as they play their leadership roles in the organization. We have just conceptualized ethical management. What is then management of ethics? It refers to managers acting effectiveiy in situations that have an etlircal aspect both irr the internai and external environments o{'business. I'hey normally apply the internai policies, rules and regulatrtrns as well as stipulated government laws to manage ethical issues. For example, as a production manager at a MODENAS manufacturing plant in Gururr, Kedah, Mr. A has to follow the organization's human resource policies, quality control standards as u,ell as the guidelines of Occupational Safety and Health Act (OSHA) 1994. He also has to ensure that his suborCrnates comply u,ith the policies, procedures and guidelines as rveI1. Organizations in fact internally bind their member.. through a myriad of policies, rules and regulations. Holtever, they musi be fairly managed. Ilow does an organization er-ISure that employees wiil follow tiie rules and regulatrons? Certainly, the process of management of ethics does not refer solely to developing policies and regulations for employees to be coerced or forced to follow blindlrr Knowledgeable employees look forward to feeciback sessions to justify the introduction

lnternalrzing E-thrcs in tl-re Conduct of Bustness

of specific policies, rules and reguiations developed by the -management. They <1o not like to be forced to comply u,ithout rational grounds. Therefore, policies and regulations must be effectively communicated to employees to gain their acceptance before compliance is expected. Certainiy, employees' acceptance and commitment to comply with these policies, rules and regulations require a perception and assessment that they are just and fair. We have just differentiated between ethicai management and management of ethics. Figure 2.3 summarizes the two concepts.

Difference between Ethical Management and Management of Ethics

llft

hrrchrrmil,,,,,,,,,,,,,

being leaders, are responsible to

o

manage employees

Ethical Management-acting ethic"lly as a Manager by doing the right thing for rndividual success and rrEa rrizational ei [eci ivencss

by ensuring rhat

organizational policies, rules and regularlons comply wirh the management

e

The Management of Ethics-acring effectively in situations that have an erhical aspect

of erhics, they nrust gain rhe acceplance of employees

through consistent engagemenr and effective co mnr

r,rn

icarion

channels.

Figure 2.3: The dif{erence between ethical management and management of ethics

Next, ive sha1l discuss what it takes for managers to practise ethical management and management of ethics at the rvorkplace. Aptly, managers must possess specialized knolvledge to appiy and practise etl-rical management and management of ethics. T'his is where the study of ethics becomes relevant as a field of knorvledge to be studied, applied and internalized by managers. Chapter 3 of this text n,il} dui1, outline the ethicai theories and principles for reference and application ofreaders. IUanagers must aiso have the necessary skills that corne with experience and training to make sound ethical decisions and implement them. The nee,1 for specializ-ed knonledge and skills is especially acute when a business is conducted abroad. Managers must possess knowledge of the legai system, as well as statr:tory rules and regulations of the country rvhere their operations are conducted. Over and above these, they must have knorvledge of the culturai differences and appiy tireir skills to handle a diverse globai r'vorkforce with respect and compassion to maintain an ethical and harmonious working environment, a prerequisite fbr high productivity. Certainly. they have to demonstrate their leadership roles as effective and virtuous decision makers. But what is a role in the first place?

fT" pracil..rh"il

-

management and managemenr of ethics at the workplace, managers must possess specialized

knowledge and skills rlrat come

wirh experience and training.

39

4A

Business Ethics

ROLE AS

2.4 A

rr. **,r*,*.d I

ser

oI relarionships

wrth accompanying rights and obligations

rhat are somerrmes added to rhose of

ordinary moraliry over and above those

of everyday life.

AN ETHICAL CONCEPT

ln ethics, a role is a structured set of reiationships with accompanying rights and obligations that are sometimes added to those of ordinary morality over and above those of er.eryday life. Roles are created in order to serve society better as a whole since everyone is contributing or taking some responsibiiity to accomplish something for the well-being of society. Thus, roles are directly related to social responsibility. Individuals in certain positions have responsibilities to many different groups and must consider a wide range of interests. The higher the position held by an individual in a business or society at large, the greater the role he or she has to play. Business people have a role to play for a nation's economic growth, prosperity and well-being.

2.4.1

The Role of Leadership for an Ethical Culture in a Business Organization

The top and senior management in any business organization play a very important role in ensuring ethics is gii,en priority and institutionalized accordingly at alJ levels. In corporations, the board members are role models in the shaping process of an ethical organization. After all, they themselves developed the code of ethics" ll'herefore, they har.e no choice but to demonstrate good ethical values, being stervards in a corporation. Figure 2.4 iists dor,vn the noble values to be internalized by board members. You may realize that they are not any different from the universally accepted virtr-res that we have learnt in Chapter 1.

Becag;g che board members are sLewards for noi oniy rhe assets of rhe company bur also rhe inteiieits of all stakeholders, Schwartz, OJnfee and kline recommend s,* .ore values ro guide .,qh9'[b9ffiriour.as . :"a " board , ..:. . '{{-+r}1+,&.*& .. r

members: ]. --

'eiii*.Ii*t

riih1,u1ina,fur'rhrighi., :rrre1:deci!io1i..,,ii::, , .:., ,::.-:: ,i:;.,t -.,.,,,;,1 ,..,, 2.. fnt*iitv:act,wjth,honoui: and iletiqio,n,will,,always-coiilcide wirh the,ethrcal vision and ;

standards of the firm

3. Loyalty-avoid all deals rhar fulfrl rheir 'sellri;6erescs.'Mu5r fulfill,rhe interests of stakehoiders. Objective in their decision and hold classifred any confidenrial and/or prop .

'r

j r.i.era ,.' ry. ',.] n fo

rmari o n

4. Responlibiligy-Fulfill all rheir

assrgned respogsib.i]lirgi

and rheir actions,would be

Figure 2.4: The ethical values o{ board members Vien ing leadership from a n,ider perspectir,.e, you may also recall from Chapter 1 that Islamic woridview recognizes humans as special creations of God (S1,ed Othman Aihabshi and Aidit Haji Ghazali,1994). We have been directly rnforrned of our role as

lnternalizing Ethic.s rn the Conduct of

a Khalifah-to be a leader in the universe. Aptly, the role of a Khalifah is not confined to the top management but everyone in the organization. Certainly, the values listed in the above figure should be emulated by employees irrespective of hierarchy being Khalifahs. Of course, the expectation to imbue and internalize ethics among the topr management is highly expected in the manifestation of a role model. Let us next focus on the three specific roles of business managers.

2.4.2

The Three Roles of Business Managers

In this section, we discuss the main roles of business managers-as economic actors, company leaders or trustees and also as community leaders (see Figure 2.5).

.

They must manage assets prudently. They must also fulfil the needs of srakeholders and balance any conflicting interests being trustees.

As community leaders, rhey must exercise powers given upon rhem ihat denronsrrate

rheir corporate leadershrp/cirizenship (.5c u r c e:

B

oa

r

r

t

glt t,

2

0 1 2)

Figure 2.5: The three roles of business managers

Managers as economic actors As economic actors, they are expected io make effectir.,e economic decisions, balancing costs and benefit considerations for the profitability and sustainability of the business. Certain11,, this fulfils the expectations of sharehoiders, be it n-rinor or major. Brri, they are alst, fulfilling the needs of other stakehoiders, for example ernployees, consumels, suppiiers and so forth. A firm's sustainability wili give positive externality effects to societl, at large.

Managers as company leaders/trustees Managers are also expected to play the role of company leaders or trustees. Corporate rnanagerl especially are entrusted to iead the corporation, owned by shareholders lvho have taken the risk to invest in the business. They rnust therefore do their best to

Business

4'1

42

Business Ethics

manage the company's assets with prudence since they are made accountable for their actions, being holders of critical positions of high responsibility" They must also fulfil the needs of other stakeholders who will either gain or lose in the business, depending on how it is being managed. Sustainable businesses will build long-term relationships

with stakeholders which will contribute significantly to organizational

success in the short and long term. More often than not, some of the interests of stakeholders are conflicting with one another- For example, the shareholders' maln objective is to maximize wealth or profits. This would mean that the business may have to charge consumers highly or reduce employees' compensation and benefits which form a major part of operating costs. However, rational consumers look forward to affordable prices of" goods and services. Employees on the other hand look forward to increases in salaries and benefits to cope with the rising costs of living. Yet, for the company's survival and expansion- it must be able to have retained earnings for busincss expansion. No wonder companies resolve to cost cutting measures and offer consumers highly priced products to gain more profits. But such actions may not be favourable in fulfilling the needs of the two main stakeholders i.e. consumers and employees. Managers must therefore strive to balance the needs of all stakeholders for long-terrn sustainability.

Managers as community leaders

C*p,,il;;--_l rhe largest forrn of business in any community. Therefore, corporate managers musi play

bigger roles as the corporations' activiries have great impact on rhe community due

to their high capital investments.

We have just covered the two roles of manag,ers; as economic actors and company leaders /trustees. Managers must also play the role of community leaders. Milton Friedman, an influential economist in the 1960s once advocated that business people should focus on making profits only within rules and reguiations and ieave social issues lor the public civil servants to resolve. By doing so, they are contributing to the society by providing employment for job seekers. While this may be true from a narrow viewpoint of social responsibility, businesses owe their existence to the societies they serve. Furthermore, the success of businesses depends on the provision of labour services and natural resources that every mcmber of the communitr., has a stake in (Khalidah et. al,20l2a). They must therefore be socially responsible as corporate citizens, given power to make strategic decisions in their leadership roles. While sorne projects may generate high profits for the company, if it is going to negativeiy affect the community, managers must be sensitive enough to consider these implications and decide for the best alternative decision to maximize the positive impacts and minimize the negative impacts on society. Corporate managers must be seen to play bigger roles as corporations' activities have great impact on the community due to their high capital investments" Corporations are the largest form of business in any ('ommunity. Whatever they do in the production of goods and services will significantly affect thc community. Pollution, depletion of resources and other sustainahility problems have occurred largely due to the irresponsible activities of corporations. The cost of pollution for example, an outcome of corporations'mega manufacturing activities, creates negative externalities to the community in terms of promoting health-impairing illnesses arising from pollution, safety and health hazards, etc. I'hese corporations must be seen to be offering society some forru of assistance or compensation, such as paying pollution taxes, subsidizirrg medical bills at public hospitals, sponsoring health campaigns to create public awareness on diseases

lnternalizing Ethics in the Conduct of

Business 43

and so forth. At the very least, these corporations should be committed to operate premises alvay from residential areas although they may have to incur extra costs on infrastructural development such as building secondarv roads and employees'living quarters. Corporate managers must therefore piay their role as corporate citizens, much as they are equally required to play their roles as economic actors and company leaders. However, these three roies by and large are appiicable to all managers. Irrespective of business forms, managers must play a balanced role as economic actors, company leaders and community leaders for the well-being of the community.

CODE OF ETHICS FOR AN ETH ICAL CORPORATE CULTURE

I A ,rd" is a

,f rrh*

statement of

principles, policies

or rules that guides

Inthe earlierparts of Chapter 2, whiie expiaining managementofethics as a concept, we recognize that organizations develop policies, rules and regulations to institutionalize ethics at the workplace. One of these initiatives is through the development of code of ethics. A code of ethics is a statement of principles, policies or rules that guides behavicur. It may also be defined as a social, religious or civil code of conduct that is considered right or correct, especially Lhose of a particuiar group, profession or individual. Althoueh code of ethics will vary among organizations, it may be classified into t\vo tvpes-compliance-based and integrity-based code of ethics. A compliancebased code of ethics stresses on the prevention of unlalr.ful behaviour by increasing control through the formulation of rules and reguiations and imposing penalties and punishments on lvrongdoers. integrity-base 'l code of ethics defines the organiz-ation's guiding values, creates an environment that supports ethical behaviour and focuses .ln shared responsibility among emplolees (Khalidah et al., Z}t2a). Related to code of ethics is corporate cuiture. Every business organization has a corporate culture fashioned by a shared pattern of beliefs, expectations and meanings that influence and guide the thinking and values of its members. The ilevelopment of good corporate culture begins with the top management. Good Sovernance and leadership by example shor'r,n by rnanagers rnay positively contribute towards shaping organizational corporate vaiues and culture. Emplovees have the tendency to emulate the character traits of their superiors since t1-rey are rcgarded as roie models. Therefore, it is critical for those in the leadership roles to demonstrate ethicai behaviour and fulfil job responsibiiities through ethical management. Thus, they must uphold and internalize the organization's code of ethics based on their own acc0i.rntabilit1,. Next,lve shall examine the three dimensions tl-rat managers must consider in the process of decision making-economic, legal and moral.

behaviour.

lA

compln,rce-kred

code of ethics stresses on the prevention of

unlawfui behaviour by rncreasrng

control ihrough rl.re formulation of rules and regularions and rmposing penahies and punishments on wrongdoers.

ll,rr"grty-fuKd

r"fu

oferhrcs defines rhe organ ization's guiding values, creates an

environment rhat supports ethical behaviour and focuseS on shared

responsibility among employees.

f c"rwrr"*l-rr,5 a shared

partern of

beliefs, expecrarions

and meanings ihat influence and guide the thinking and

-

values of irs members.

44

Busrness tthrcs

2.6

ECONOMIC, LEGAL AND MORAL DIMENSIONS FOR EFFECTIVE

*i

I

I

BUSINESS DECISIONS It is pertinent for managers to look at three business decisions, as illustrated

in Figure

dimensions while rnaking effective

t I

2.6.

l

The Three Dimensions of Effective Business Decisions

a

Thinking abour what

is

rhe besr rhing ro do so as nor ro

harm others

Figure 2.6: The three dimensions of effective business decisions

Eff..*^

b***t;-l

decision-making involves an integration of economic, legal and moral viewpoinrs.

The economic and legal dimensions have eariier been outlined in Chapter 1" By non, yoll must already be familiar with these two perspectives. It goes lr.'ithout saying that a business is generated to make profits within the rules of the game; it needs to comply with statutory laws and regulations to ensure it is legal in practice. However, effective business decisions will also equaliy consider the importance ol the rnorai dimension. The rnoral dimension requires an individual to be rvilling to seek out and acl on reasons. It also suggests one to think about doing the best for the comrrlon good and weli-being of others. It expects an individual to be impartial and regard the interests of everyone including himself or herseif as equally rvorthy of consideration ivhile deciding what to do. In other words, one has to place himself or herself in the shoes of others before acting. Certainl-r,, one's level of cthical knolr,ledge, consciousness arid internalization of ethics will describe the extent of application of the moral dirnension in business decision-making as a matter of social responsibility. Aptly, effective business decision-making involves an integration of all three dimelsions. Business people must therefore integrate moral viervpoints x'ith economic and legal viervpoints to make effective and ethical decisions

! --i &

1t 1 I

Internalizing Ethics in the Conduct of

Business ethics is the attempt to think clearly and deeply about the ethical in business and to arrive at conclusions that are supported by the strongest possible arguments which r,r,ill benefit all parties involved. Both economics and law are essential to business decision-making. However, it is critical to observe ethical issues

standards in profit-rnaking initiatives.

: 'r::

MANAGING ETHICAL DILEMMAS

"l,l \{e

have duiy recognized the importance of integrating business, legal and moral

dimensions to make effective and ethical business decisions. However, business people, in their quest to make profits, are bound to experience ethicai conflicts or dilemmas. \4re have seen some of the common ones at the beginning of this chapter. Having recognized these di1ernr113S, rrow cio u,e go about resolving them? When business people are in an ethical dilemma, they should prudently self-assess themselves and ask three,check questions before making decisions

(Khalidah et al.,20l2a),

as shown

in Figure 2.7.

Figur"e

If

2.7: The three check questions for assessing ethical dilemmas

these questiolts are answered u,ith a good conscience and clarity, business will act accordingly in good faith. Ethical decisions will then be made for the conlmon good and lr.ell-being of the community.

people

Business 45

4b

BuErness Ethrcs

2.8

THE ROLE OF RELIGION IN RESOLVING ETHICAL ISSUES IN BUSI N ESS

Sr..*;'.1,ffi1 embody rhe idea of

a

Transcendent Realiry

which has some bearing upon the purpose and meaning

of life how one lives on earth and what lies beyond rhe

finite

mortal existence, it also shapes one's perception of erhics and derermines one's acrions in resolving ethical issues in business.

h*rr.fi;""

--_l "f

ethics is a social obligarion ar.rd

commitmenr ro obey Cod's

rr-rles

and laws

above man-made laws.

Obviously, the three check questions, though developed through rationai thinking, are holistically consistent with religious beliefs and principles to resolve ethical dilemmas. All believers of religion have their own principles to uphold such as doing good deeds and avoiding evil acts, to be just and fair, compassionate, shou, respect for others, etc. Since most religions embody the idea of a 'lranscendent Ileality which has some bearing upon the purpose and meaning of iife, how onc lives on earth and what lies beyond this finite, mortal existence, it also shapes one's perception of ethics and determines one's actions in resolving ethical issues in business. Internalization of ethics comes from within, out of one's conscience to be ethicai as a sociai obligation and as a commitment to obey God's rules and larvs above manmade laws. After all, He is watching and He reads what is in our hearts! From an Islamic perspective, it certainly requires one to assess, reflect and relate to the fundamental principles of iman (faith) and taclwa (piety) as Khalifah (leader) on earth. The Prophet's traditions are exemplary to Muslirns. Lile is a jihad (inaking sacrifices) and jannalt (heaven) is the ultimate goal or destinyl Thus, as mukmins (believers), Muslims will strive to please the Creator abor.e all other rvoritlly interests and obligations. For the Hindus, the dharma or righteousness consists of individuals directing their possessions and passions to a spiritual end. Hou,ever, it is a constant battle both internally and externally to practtse dhttrna. Quoting fronr l{ajenciran Nagappan's words: 'The worldly li.fe is full of choices, both good crnd evil.' As stated in the Bhagavad Gita: 'The. deadly sins are three

in number: lust, anger and gre ed, ttntl

tLre1,

Le

ad

n'rart

to hell.'

Other vices that are mentionecl are self-conceit, stubbornness, ostentation, arrogance, excessive pride, harshness, ignorance and force. it is the responsibility of the individual to choose the right path to govern his relationship rvith others and tl"ri' environment (Chandra Muzaf{ar, 2009). At the heait of the Buddhist philosophy is the profound respect for the inherent dignity of all life. It also emphasizes the immense potential energy in life, or lile force, r,vaiting to be tapped. Buddhism has ahvays placed great emphasis on compassron and to give happiness, sharing the suff-ering of another out of hurnanity and creiiting a network of genuine friendship and trust. The basis of such an endeavour is heart to heart dialogue with freedom of expression. The extraordinarv character of Gautarna Buddha who had the strength to overcorre hardship and misfortune is a role model fcr Buddhists to emulate. He was known to have lived the greatest possible life of happiness, courage, compassion, wisdom and huinanism. Last but not least, Christianity, just like other Abrahamic rehgions (Islam and |udaism) beiieve that justice and freedom are possible only if the human being is internally goverired by the norms of God. The human being has to consciousiy fulfil his role as God's steward. To do this, he abide; by the ethical prine iples reve .rled by God to humankind such as the Ten Commandments. The Christian who is faithful to

lnternalizing Ethics

,

rn

the Conduct of Business 47

his religion would demonstrate an abiding commitment to God and to ]esus who had extended his love to all with justice and mercy. We have partly reiterated our earlier discussions on the role of religion in shaping one's ethical values in Chapter 1. To conclude this chapter,let us summarize the salient points. The internalization of ethics in a business environment, amongothers, rationally calls for an appreciation of the common ethical dilemmas, understanding of the three levels of decisionmaking and differentiation between ethical management and managemerlt of ethics. It also transcends the role of leadership to inculcate an ethical culture, integrating the economic, legal and moral dimensions in decision-making and recognizing the three check questions to be asked when resolving ethical dilemmas, Certainly, one's level of knorvledge, conscience and commitment to upholding religious values and principles do influence his or her internalization of ethics although the degree of reiigiosity of an rndrvidual is not for us to assess. As fellow humans with limitations, we humbly leave this cornplicated task to the Greatest-Our Creator! Having said the above, and recognizing the need for iifelong learning, business people must be fully equipped with ethics, knowledge and skills to enable them to assess situations and make effective and ethical business decisions. Thus, Chapter 3 will introduce readers to the various universally accepted ethical principles in this global scenario foliowed by a special emphasis on religious principles as highlighted in Chapter 11 i.e. Islarnic Ethics. It is hoped that the myriad of knowledge in the correroonding chapters will give business peopie an insight to appiy and internalize ;'thrcs as they play therr roles under all circumstances.

To consolidate your iearning, the iearning outcomes are summarized below:

l

ldentify and discuss the common ethical dilemmas faced by business people. Business people will face five (5) common ethical dilemmas or conflicts as follows: . Balancing the economic character of organizations with justice and fairness. . Conflict of interest . This involves morality and economic trade-offs rvhereby there is constant tension in trying to separate the 'person' from the business decision.

. . .

2.

Personality traits

Responsibility to stakeholders Level ofopenness

ldentify and explain the three levels of decision making. There are three levels in the ethicai decision-making process*-individual, organizational and business system. Identifying the appropriate level for a decision is pertinent because an ethical problem mayhave no solution on the }evel it is approached. For example, the solution to the forgery issue in this chapter may not be solved at the individual or departn-,ental levels. It has to be solved at the organizational level by reporting the case to the human resource department. Similarly, the salary revision request cannot be fulfilled at the organizational level until a comparative compensation study of the entire industry is conducted at busincss system lcvel to ensure justice and fairness but a salary increment may be given after assessing individual perforrnance at ihe

organizational level.

48

Br:siness Ethics

J.

Differentiate between ethical management and management of ethics. Ethical management relates to the undertaking of management functions in an ethical manner by doing the right thing for individual success and organizational effectiveness. lt has to begin from the individual's values, displayed through his or her actions while performing management duties and responsibilities. High-level managers have a responsibility for creating and maintaining an ethical corporate climate that protects the organi zalion against unethical and illegal conduct. Management of ethics refers to managers acting effectively in situations that have an ethical aspect both in the internal and external environments of business. They norrnaily apply the internal poiicies, ruies and regulations as well as stipulated laws by the governlnent. For example, as a production manager at a MODENAS manufacturing plant in Gurun, Kedah, Mr. A has to follow the organization's human resource policies as well as Occupational Safety and Health Act (OSHA) i994. He also has to ensure that his subordinates comply rvith the ruies and procedures as well.

4.

Explain the concept of role in ethics. In ethics, a role is a str uctured set of relationships with accompanying rights and obligations that are sometimes added to those of ordinary morality over and above those of eve ryday life. Roles are created in order to serve society better as a whoie since everyone is contributing or taking some responsibility to accomplish sornething for the well-being of society. Thus, roles are directiy related to social respor-rsibility.

5.

Outline the role of leadership to inculcate an ethical culture in a business organization. The top and senior nlanagement in any business organization play a very importarrt role in ensuring ethics is given priority and institutionalized accordingly at ali levels. Ihc,v are the role models. Vielr,ing leadership from the Islamic n'orldvieu,, humans are special creations of God and are directly infomed of his or her our role as a Khalifah-to be a leader in the universe" The role af a Khalfoli is not confined to the top management but everyone in the organization. Certainly, virtues shouid be emuiated by ernployees irrespe ctive of hierarchy as Khalfahs. However, the expectation to irnbue and internalize ethics among the top management is high11' expected in the manifestation of a role model.

6.

Discuss the role of managers as economic actors, company leaders and community leaders.

.

Mana[ers as economic actors They must rnake sound economic decisions, ensuring pr,rfitability fcrr the grorvth of

tl-re

company.

.

Managers as c()mpany leaders

/ trustees

They rnust manage assets prudently. They must also fulfil the needs of stakehoiders and conflicting interests, being trustees. . Managers as cotntnunity leaders / quasi-public servants As community Ieaders, they must exercise po\vers given to them that demonstrate their corporate leadershiplcitizenship. Managers must also be seen to practise ethrcal management and management of ethics at the workplace. They must also be role models for their subordinates and be committed to leadership balance any

by example. 7.

Compare and contrast between the two types of code of ethics adopted by organizations. Code of ethics adopted by organizations can be classified inio two types--complianc.e based or integrity-based. A comphance-based code of ethics stresses on the prevention of unlawful behaviour

lnternalizing Ethics in the Conduct of

Business 49

by increasing control through the fbrmulation of rules and regulations and imposing penalties and punishments on wrongdoers. Integrity-based code of ethics defines the organization's guiding values, creates an environment that supports ethical behaviour and focuses on shared re sponsibility among employees. 8.

Discuss the importance of integrating economic,legal and moral dimensions to make effective and fair business decisions. A business is generated to make profits within the rules of the game; it needs to comply with statutory laws and regulations to ensure it is legal in practice. However, effective business decisions will also equally consider the importance of the moral dimension. The moral dimension requires an individual to be willing to seek out and act on reasons. It also suggests one to think about doing the best for the common good and well-being of others. It expects an individual to be impartial and regard the interests of everyone inciuding himself or herself as equally worthy of consideration while deciding what to do. In other words, one has to place himseif or herself in the shoes of others before acting. Certainly, one's level of ethical knowledge, consciousne .rs and internalization of ethics wiil describe the extent of application of the moral dimension in business decision-making as a matter of social responsibility. Both economics and lar,r, are essential to business decision-making. However, it is critical to observe ethicai standards as a rleans to the end of profit making. Therefore, there needs to be an integration of all the three dirnensions to make ethical business decisions.

9.

Itlentity and explain the l"hree check questions that one has to ask antl self-assess when {hced with an ethical dilemma. One needs to ask three check questions r,r,hen faced lvith an ethical dilemma:

. . .

.l-s

it legal?

Am I r.iolating company poiicies or iaws including the religious beliefs and principles that I uphold in life? .Is it balanced? Am I acting fairi,v in my decisions? Am I taking into consideration the r-reeds of others whiie fulfilling my own needs? Am I causing harm to others or are m;, actions just and thir? IIow will the action make rue feel about myself? Wiil I be happy after taking such actions? Will I have a clear conscience that I have not done anything wrong to others? the role of religion in solving ethical issues in business. believers of religion have their own principles to uphold such as Joing good deeds and avoidrng

10. Discuss A11

ei'il acts, to be just and fair, compassionate, show respect for others, etc. Since most religions embody the idea of a f'ranscendent Reality which has some bearing upon the purpose and meaning of life, how one li'u'es on earth and what lies beyond this finite, mortal existence, it also shapes h.t.ar we perceil'e ethics in business. Internalization of ethics therefore comes from within, out of one's conscience to be ethical as a social obligation and as a commitment to obey God's rules and laws above man-made laws. After all, God is watching and He reads ivhat is in our hearts! From an Islamic perspective, it certainly requires one to assess, reflect and relate to the fundamental principles of iman andtaqwa as Khalifah on earth.

50

Business Ethics

Agency problem shareholders.

It

happens when managers do not act

in the

sole interest of the principals, who are the

At will employees / Employment at will Employees who are willinp to continue their services based on good faith. Employment at will is a moral doctrine related to employrnent. The moral and legal basis for a particular assignment of rights for employees and employers i.e. two parties willingly enter into an agreement and the relation continues as long as both parties will that it do so. Code of ethics A statement of principles, policies or rules that guides behaviour.

Compliance-based code of ethics It stresses the prevention of unlawf'ul behaviour by formulating rules and regulations and imposing penalties on wrongdoers. Consumer sovereignty The recognition that consumers are'kings'in the economy. They have the liberty and right to decide whether to buy or not to buy a product. Economic character The characteristic of business organizations to maximize profits.

Ethical management The undertaking of management functions in an ethical manner bv doing the riglit thing fbr individual success and organizational effectiveness. Ethics A set of principles that contains behavioural codes to determrne

vu,hat is

right or \\rrong.

Governance It refers to the act, process or power of governing and governinent.

lman Anlslamictermfor'faith',i.e.piousandcompleteadherencetoAllah'sruies,nhichisahighlyregarded religious ideal in the Al-Quran. An individual who has iman ({aith) is a mu'min (believer). lntegrity-baseci code of ethics It defines the organization's guiding values, creates a rvorkplace environment that is supportive of ethical behaviour and focuses on shared responsibility among employees

Khalifah AconceptbyearlyMuslimscholarswhichfocusesonthestatusandquality(fieeu,ill)ofhumankrnd vis-d-vis other creatures in the universe-leadership, responsibility and accountability^

Legality Statutory larvs, rules and regulations set by the go\rernment or local authority. Management of ethics It refers to managers acting effectively in situations that har.e an ethical aspect both in tl",e internal and external environment of business. They normaily apply the poiicres, rules and regiilations as weii as stipuiated laws by the government to manage ethical issues internally.

Morality The norms, vaiues and beliefs embedded in social processes which define right or wrong for an individual or a community.

lnternalizing Ethics in the Conduct of Business

Nepotism Favouritism or biased attitude toward a certain person or group which may lead to discriminative action.

Opportunity costs An economic concept to explain the next best alternative that has to be given up after making a decision. Risks The chance an entrepreneur or business person takes of Iosing time and money on a business that may not prove profitable. Role A structured set of relationships with accompanying rights and obligations that are sometimes added to those of ordinary moraiity over and above those of everyday life. Stakeholders All the people or parties that stand to gain or lose by the policies and activities of a business. They include sharehoiders, customers, suppliers, bankers, employees, government agencies, non'governmental or ganizations (NGO s) and competitors.

Stockholders A synonym for sharehoiders Tagwa An Isiamic term for'piety', i.e. protection or shield from what is harmful. Trade secrets A term used to describe the art of conducting a business. Examples of trade secrets include sales data, product formulas, research findings, etc.

Virtue It refers to a character trait that manifests itself in habitual action. For example, honesty <-annot be regarded as telling the trutlr once; it is rather a trait of a person nho consistently tells the truth as a general practice.

1.

Discuss the five common ethical issues faced by business people.

2.

Differentiate between ethical management and management of ethics. Provide examples rn your expl anal ion.

J.

Discuss the role of leadership in the context of a business organization.

4.

Internalization of ethics requires one's conscience to be socially responsible and committed to clhical principles, including religion. Do you agree with this contention? Discuss.

5.

In your view, to what extent does religion play a significant role in shaping one's ethical values? Are religious vaiues and principles applicable in the business environment?

51

tr,)

Business Ethics

Authentic Biscuits from Australia... To Sell or Dispose? Helena is an MBA graduate from a Malaysian higher iearning institution. She had malored in markering and is interested in retailing. One day, while browsing jobstreet com, to her excitemenr, she received a job offer from a large and prestigious department chain store in Kuala Lumpur. Wirh open hands, Helena ac-cepted the job offer. She is all set to face the challenges at the new workplace. At point of entry, she was positioned as a trainee executive, whereby she will be roiat.ed on rhe 1ob to all the departments ro gain exposure and appreciare the nature of rhe business Helena's frrst assrgnmenr rs to assist Madam Marina, a qualified buyer in the Food and Beverages Departmenr. Buyers piay a crttrcal role in rhe management of the department store. They select the goods to be offered, negotiate purchase terms and conditions, set rerail prices, arrange displays, organize promocions, and are generaily responsible for rhe

operations of rhe departments within the store. Helena was extremely happy on the firsr month of her employment. Madam Marina respecred her as an employee. On several occ.rsions she received praise for good discipline. Her views and opinions have been r,veil considered and workload is ;usr right. However, an event occurred thar rhreatened co destroy all her contentment. According to Madam Martna, deparrment store has received a shipment of imported halal brscuits from Ausrtaiia wrrh an ailthentc the chocolate cream filling. They are well packed in attractive foil covered boxes, but somehow sorne of thern had become infested wirh mouids and insecis. Nor all rhe boxes were infested, srnce only a felnr custorners have returnedrhertemafterpurchase.ButrhepointissomepeopledidreturnLlrerrpurclrasctl parks Ol-,vrt-,usy,sarrj Miss Marina, "We cannor continue to sell them at our deparufl€flt stor-€ to uphold out good image Wealso do not have rhe time ro inspect every package and keep the ones thar are not rnl'esred" Madam A4arrna went on to discuss the cosr implications. She utrered, "What about the losses rhat we have r.o incur? We have alreaciy commitred a caprral cost of almost RM50,000 The biscuit manufacturer rvill rror ref und us srnce ir rs doubtlul whether the infestarion had occurred during shipmenr, or even during storage at our own tvarehouse" After a serious discussion, Madan, Marina asked l-lelena ro get rrd cf the biscurr:s, Helena thoughr tharMadam Marina asked her to rhrow them away at the rubbish bns provrded by the Kl munrcipality (DBKt) near rhe srore but Miss Marina further clarified ro Helena, "Absolutely notl Call Mr Maniam He operati, .l

mini market at the ourskirts of the Klang Valiey where the majoriry of the residents are in the low rncome groups. We have got ro get our money backl" Helena prorested openly, but Madam Marina further assured, "Look, rhere rs nothing wrong with our actions. The residents of these areas have. never had high qualrty foodsiuff of rhis nature Ihese rmportecl biscurrs wrll be sold very cheaply, and for most people who buy rhem, ir wrll be an opportunriy to rry sornething really good Cnly a few people will ger rhe infesred roxes. They will nor be very happy, bur ai sucl-r remote areas, ihey expect this especially when they see a lolv price on an expensive produci They make rhe choice. We don'tl" Helena is in a ciilemma... should she follow the instruction:; of her boss?

Questions:

i.

2.

Analyse this case from economic, lggril and moral perspectives. Justify whether Madam N{arina's srrategic views are reasonable or orherwise. Assess whether Madam Marina practises ethical managemen[ and management of ethics. Provide your reasoning.

3.

lf you were Helena, what would you do in this siruation? Will you arrange for the delivery of the biscuits to

Mr. Maniam? Jusrify your acrions.

lnternalizing Ethics in the Conduct of

A.G. Abdullah and A. Mohd Zainol

Abidin

Business 53

(2011). Business Ethics. Selangor: Oxford University Press.

Al-euran; King Fahd Complex: Madinah Munawawarah, K.S.A. For the Printing of the Holy Qurau www. qurancomPlex.org Boatright, ].R. (2007). Ethics and the Conduct of Business (5'h Ed.). New [er"ey: Prentice

]lall.

Boatright, I.R. (2009), Ethics and the Conduct of Business (6'h Ed). New Jersey: Pearson International Edition" Boatright, J.R. (2012). Ethics and the Conduct of Business(7'h Ed). New Jersey: Pearson Education International" Chandra Muzaffar (2009). Religion and Governance. Selangor: Arah Publications.

Chandra Muzaffar (2005). Global Ethic or Global Hegemomy? Reflections on Religion, Human Dignity and Civilizational lnteractioiz. London: ASEAN Academic Press. I)esjardins,

J. (2009).

An Introcluction to Business Ethics (3'dEd.). Singapore: McGrau,-Hill Higher Education"

Ebert, R.]. and Griffin, R.W' (2007) .

ELtsiness Essentials

(6th Ed.). New Jersey: Pearson/Prentice Hall.

Green, t(. (2008). What is Taclu,a? .

on

11

Accessed

.rugust 2010.

Haneef, S" (1979). Vrhat Everyone Should Know about Islam

ani Muslim. Lahore: Kazi Publications.

Hyman, D,N. (1996) . F,conomics (ath Ed). lJnited States of America: Irrvin. IslamiCity. Al Quran, Yusuf A1i. . Accessed on 3 Ar-rgust2012. /ennings, M.l. (2006). Business Ethics iS'h Ect.;. United States of America: T'homson/ West.

Khalidah Khalid Ali, Rohani Salieh and lr{ashitah Sabdin. (2009). A Study on the Level of Ethics of lrrnal Year Engineering and Technolog,v Students at a Malaysian Higher Learning Institution. In Proceedings ol the Regional Conference of Humanities 2009 (RCH 2A09), Seri Iskandar, 18 19 February 2009. Khalidatr Khalid AIi, Rohani Salleh and Mashitah Sabdin (2010). A Study on the Level of Ethics at a Malaysien Private Higher I-earnii-rg Lrstitution: Comparison between Foundation and Undergraduate Technical based Students. International Journal o.f llasic and Applied Sciences (10), 15 October 20i0, 35 ,19. Khaiidah Khalid AIi, Satirenjit Kaur Johl, Lai Fong Woon, Rohani Salleh, Soliah Molek l,ope Aman Shah, llmiah ibrahim (2012a). Business Management: A Malaysian Perspettive (2'" F.d).

Rahayu Abd. Rahman ancl Selangor: Oxford Fajar.

Khaiidah Khalid Ali, Rohani Saileh and Mashitah Sabdin. (2}l2b). Ethical Values of Final Year Students at a Malaysian Private Higher Learning Institution, 2012 (1). In Proceedings of lnternational Conference on Appiied and Social Science (ICASS 2A1D, Kuala Lumpur, 1 - 2 February2Ol2 (pp. 119 13i). USA: Inforn:ation Engineering Research Institute (IERI). McDonough, S. (1984). Muslirn Ethics and Modernity. Canada: Wilfrid Laurice University Press. i'v{organ, G. (1986). lmages of Organization.Beverly Hills: Sage.

54

Business Et hics

Nickels, W.G", McHugh, |.M. and McHugh, S.M. (2008). [Jnderstanding Busine"ss (B'h Ed.). New York: McGraw Hill/lrwin. Shaw,

W.H. (2008). Business Ethics (6'h Ed.). Californra: Thornpson Wadsworth.

Shaw, W.H. (2011) . Business Ethics (Z'h gd.). California: Thompson Wadsworth.

Stanwick, P.A. and Stanrvick S.D. (2009). Understanding Business Ethic,s. Neit,|ersey: Pearson International

Edition. Syed Othman Alhabshi and

Aidit Haji Ghazali.

(1994)" Islamic Values and Managetnent. Ktrala Lumpur:

Institute of Islamic Understanding Malaysia (IKIM). Sayed Sikandar, S,H. (2006). Ethics and Fiqh

for Daily Life: An Islamic

Outline " Kuala Lumpur: Research

Cenrre IIUN/i. Velaquez, M.G. (2006). Business Ethics Concepts and Cases (6th Ed.). New |ersey: Pearson.

*i !

I

*l I I

-t i

l I

l I

J

I i

I 1

I

'

CHAPTER

Ethical Theories and Principles

W"oA

'/Yr LEARNING OUTCOMES At the end of this chapter, you should be able to: r Explain the fundamentals of moral philosophy. r Differentiate between teleological and deontological theories of ethics.

r

Explain influential ethical theories and/or principles applied in today's global era-Utilitarian Theory, Kant's i:thics of Duty, Aristotle's Virtue Ethics, Carol Gilligan's Ethics of Care, Theory of Rights, Theory of Justice and Rawls's Distributive Justice/Egalitarian Theory.

I

Elaborate on the important featur.,s of each ethical theory.

I

List and analyse the strengths and limitations of each theory, where appropriate. Apply the ethical theories to make sound business decisior-is"

56

Business Ethics

3'0

INTRODUCTION

In the last two chapters, lve emphasized on the importance of-ethics in all facets of life, be it business or non-business, and noted that leaders have a role to play to ensure that ethics is institutionalized in any organization for its sustainability. We also recognized that religion, among several other factors, has an influence on ethical acts and practices. From an organizational dimension, although a code of ethics may be developed to promote an ethical culture, employees need to be equipped with ethics knowledge and be exposed to ethical philosophy and principles fbr them to internalize ethics and apply it at work. Chapter 3 will continue to introduce readers to influentiai ethical theories and principies. Along the way, it will highlight the features, strengths and rveaknesses of each theory. Where applicable, it will also spur discussions on the compatibility of th "se theories within Islamic ethics and religious contexts. The aim is to equip readers to be famiiiar with established generic ethical theories and principles applied in the global business world of today and criticaliy see their relevance in resolr,ing moral issues in general. These theories and principles n,ili also be an added knowledge to those r,r.ho are new to the study of ethics. This u,i1l enablc them to apply the useful knou,ledge when making decisions, be it at an individual or organizational ievel, in both business and non-business situations. It will further strengthen the readers ability to effectively integrate economic, legal and moral dimensions rvhen making business decisions. llefbre we go through each ethical theorl,,let us frame our understanding of the ftrndamentals ol moral philosophy for better appree iation.

3.1

Erl"..

-,

*rdy

--l

ofacrion and how man should acr.

lr relates to one's behaviour and in order to act erhically, one is dependent on epistemology of ethics knowledge.

UNDERSTANDING THE FUNDAMENTALS OF MORAL PH ILOSOPHY

In Chapter i, we noted that the term ethics is derived trom the Grel'ii u-ord efho-s, rvhich ineans character, spirit and attitudes of a group of people or cuiture (Rahman, 2003). Ethics is concerned witl-r what rs good or nght ir-r human interaction (Abduilah arrd Mohamad Zainol Abidin, 2C11) and deals with justice ancl rights issues (Boatright, 2012). It is therefore a study of' action and how man should act. It relates to one's behaviour and in order to act ethicaliy, one is dependent on epistemoiogy of ethrcs knowledge. It is impossible to make choices on horv to act rnorally n'ithout knorvledgc of ethics. Ethics is also a branch of philosophl'. Conceptually, the f ive branches of philosophy are metaphysics, epistemology, ethics, politics and aesthetics. Figure 3.1 illustrates a hierarchical relationship between these five branc.hes to see their links with one another.

Ethical Theories and

+

+ +

..>

...>

Ethics

+ .>

Politics

Principles 57

__>

Stndy'ofr

gg.{y,ql.force. Srud;rof

-.>,;

,

Art

"

;

+

What can life be

like?

(Source: lmporrance of Phtit:sophy, n.d-)

Figure 3.1: The five branches of philosophy Ethics, as a field of study, may be further sub-divided into two branches-metaethics and prescriptire or normative ethics (Newall, 2005). Meta-ethics is the study of \{,here ethical concepts came from and what they mean. It is therefore the study of the origin and meaning of moraiity. Meta-ethics classifies morality into two main forms

morai/ethical reiativism and moral/ethical objectivism. Moral relativism considers that what is right or wrong is not absolute. It is rather reiative and variable depending on the person, circumstances and social situation. it is a theory that views the rightness of actions is determined by what a culture or society says is right (Shaw, 2011)" What is right in one place mavbe lvrong in another, because the only criterion for distinguishing rightness of action is t}-re moral system of the society in which the act occurs. A..-sume that an innocent person is desperately looking for shelter to save his lifc f rom someone who wants to krli him. l le approached you and you are convinced that hc is innocent. You provided him r'r,ith your home as shelter. Wher, you are approached b,v the killer, ),ou denied/liecl that you had provided the person shelter for his protection.'f hc act of lr-ing to the killer to save the life of tl're innocent is an example of morai relativisnr Although lying is a universally accepted bad moral act, it is regarded as acceptable under such circumstances sincc the intentron is good-to save the life of an innocent person. The bombing of Hiroshima and Nagasaki in 1945 to end the Second World War mar also bc seen to be a rightful act bv moral relativists to regain rvorld peace and stabiiitl,. 1'1rg ar t of abortion is religiously \,\,rong from the viewpoint of Islam and Christranitl,. but in lal-,an, it is neutrally accepted as a form of birth control. Moral relativism appears to depend significantly on human vien s and judgements to assess rightness of humair actions relative to situations within a society's culture and environment. Utilitarianisnr and theory of rights may well fall under moral reiativism principles. On the contrary, moral objectivism considers certain acts as objectively right or wrong, indepenclent of hrirnan opinion. Many codes/rules of objective rnorality sterr from the r,ielv that moral codes originate fiom a divine eniity, either from God or flom a cosmic force such as Karma in Hinduism. Moral objectivists therefore view tl'rat irrespective of cultural differences and Iluman conditions, some rules are standard and must be religiouslv folloned by humans. islamic ethics, for exampie, is based on divine cornmandrnent rather than perceptions of individuals and community lDusuki and Abdullah.2006). Islamic beiievers are thus moral absoiutists who live by the principle of moral objectivism. Their actions are absoiutely guided by the teachings inthe Al-Quran andthe Sunnah. Believers, as servants of Allah, will foliow these commandments/ruies without question srnce they consciously believe that these rules come from Aliah, the Creator of the Universe. With regard to the need to perforn-i prayers, a Quranic verse reads: 'When my servants question you obout Mc, tcll tlrcm that I am t,ert close to them.

I answer

the

pralter of every humble believer wlten he calls Me therefore

I Mrrr*thki,t rh. srudy of where ethical concepts came from and whar they mean. It is therefore the study

of the origin and meaning of morality. Mera-ethics classifies

morality into two main forms moral/ erhiral relarivism and moral/ethical objecrivism.

lir"h"t*.'r*, considers thar vrhat

right or wrong is nor absoluie. lr is dependent on the moral system of rhe society in which the is

acI occurS.

IM*rl.btrotrtt. considers certain acts as

oblectively right or

wrong, independent

from human opinion.

I ; 58

:

Business Fthics

-$ the1, 576u14 respond to

Me and put their trust in Me, so that tkey be rightly

guided' (Al-Quran, Al Baqarah, 2:186).

t

j

-

B

ff

In another verse explaining God's creation: 'Glorv to Allah, who created all things in pairs: mankind, the plants of the earth and other living things that they do not rno*'

,^r_ouran, Su.rah ya_sin, 36:36). Concerning one's claim on ownership of property, wealth, power, etc., Muslims are reminded that: 'To Allah belongs everything in the earth and heavens. Allah encon?pas,(es euerything' (Al- Quran, Suroh An-Nisa,

4:

1

26). *

While religion-based principles are morally objectivistic, man-made theories

P-;,lpr,*

* ----l

normative ethics provides general guidelines for

deciding whar is morally righr or 'wrong_

a

such as Kant's Ethics of Duty and Aristotle's Virtue Ethics may somewhat fall under this r.a ssification too. We have just elaborated on meta-ethics, the first branch of ethics study'. Next, we shall focus on prescriptive or normative ethics, the second Lrranch of ethics.It rs a set of principles that guide or regulate human conduct (Rahavu, 2AD). It also provides general guidelines for deciding r'r,hat is morally right or wrong. In the stud.v of prescriptir.e ethics, moral philosophers have classified tlvo types of ethrcal theories teleological and deontological. Teleological theories hold that the rightness of actions is determlned solely b). thc antount of good consequences they produce. These are aiso ref-erred to as consequential theories. Deontological theories deny that consequences are relevant to deterrnining lr,hat n,e ought to do. Rightness of an action is because of the natr,ue of these actions or tlre rules from which they frllorv. These wiil include dir.,ine commands from God i.e. religious principles. Deontological theories are also referred to as non conscquential tl'reories. Figure 3.2 summarizes diagrammaticaliy morai philosophl, anci its conlpl;rtnts in conceptuaiizing ethics as a field o1 study.

-t a

-

l

!

i :

r

{F

; (Source: lbrahim, 2000; Rahayu, 2012)

:

tr &

Figure 3.2: Moral philosophy and components E

$ re

E

Ethrcar Theories

ar,l Pnncrples 59

One of the most influential and prominent teleological ethical theories that has

survived through the centuries is Utiiitarian Theory of Ethics or Utilitarianism. It is a theory applied widely by economists to make rational economic decisions for a society's well-being, defined objectively in material contexts, rather than from spiritual perspectives.

UTILITARIAN THEORY OF ETHICS

3.2

This theory was first developed in the l8th Century by Ieremy Bentharn and further refined by his student, lohn Stuart Mill in the 19th Century. Utilitarianism is a theory to provide an answer to a basic practical question-what ought a man do? Its answer is that he ought to act so as to produce the best consequences possihle for the common good i.e. utiiity. Utility mearrs satisfaction or pleasure that people receive fronr consuming a good or service (Tucker, 2005). According to this theory, our obligation or duty in any situation is to perform the action that will result in the greatest possibie balance ofgood over evil.

r

Goodness is human weli-being. Whatever makes human beings generally better off or provides some benefit is good, and whatever makes them worse off or harms them is evil.

r Utilitarian Tl'reory attempts to r :

r

v,,eigh/assess all of the good ancl bad consequences of an action lr,hether the consequences arise after tl-re act has been perlbrmed or during its performance. in tJre process, Utilitarian advocates wil! develop several alternative actions to rveigh the good and bad consequences of each action before decicling on the best action to take.

The more the good conseqliences for the majority, the more ethical rvill he the decision or action. I{owever, if the diffcrcnce in the consequences of alternative acts is ilot great, some utilitarian advocates do not regard the choice between them as a moral issue. This theory seems to support moral relativism. The rightness of actions thus depends on the good and bad consequences of the actions and situatiorrs that prevail in the process. Morirl right is thus defined in terms of an objective; for the material good.

3.2.1

The Roots of Utilitarianism: Bentham and Mills

This theorl, originated from two scholars, jeremy Bentham (1748-1832) and hrs pupil, John Stuart L,1i11 (i806-1873). They rvere followers of Adam Smith, the Father of N'Iodern Economics. T'hese trvo scholars defined the theses /principies ofUtilitarianism although it was Adam smith's tutor at Glasgorv University, Professor Hutcheson, who first coined the phrase 'the greatest happiness af the greatest number',the furrdamental

principle behind Utilitarianism According to iohn Stuart Mill: 'An ttcLiort is right to the extent that the greatest nrtnilter.'

it inclines

to promote thc .qre o.test,Eodd/r)/

for-il€rrb" * dury in any siruation is to perform the acrion rhar will result in the grearest possible balance of good over evil.

60

Business Ethics

Utilitarianism therefore evaluates moral action on the basis of consequences and goal orientation on how far a decision maxinrizes the net utility that everyone affected by the action may exf ect.

3.2.2

i:

,: I

The Four Theses of Utilitarianism

The utilitarian principle involves four distinct theses:

r

Consequentialism-the rightness of actions is determined solely by their consequences.

r Th" f"* ,h"*t of Urilitarianism:

I

conseq uentialism,

hedonism,

pleasure is ultimately good. This principle relates to inclividual happiness and satisfaction in the consumption of goods and services"

r Maximalism-a right action is one that has not merely some good consequences, but it also has tire greatest amount of good consequences r

maximalism and

Hedonism-utility in this statement of the theory is identified with pleasure and the absence of pain. Hedonism is the thesis that pleasure and r:nly

universalism.

possible when the bad consequences are also taken into consideration. Universalism-the consequences to be considered are those of everyone" We have to consider the impacts of our actions on the masses or rnajority"

Figure 3"3: The four theses of Utilitarianism

3.2.3

Forms of Utilitarianism

Tliere are two forms of Utilitarianism:

r r l^ Cl**rl

---l

Uillirarianism, an aciion is judged ro be right by virtue of

the consequences of performing that action. Pleasure is raken ro be ultimately rhe only good and evil, or pain, is rhe

opposire of pleasure.

Classical or Act Utilitarianism developed by Jeremy Bentham Rule Utiiitarianism deveioped by Iohn Stuart Mrli

Classical or Act Utilitarianism In Classical Utilitarianism, an action is judged to be right by virtue of the consequences of performing that action. Pieas'rre is taken to be ultimately the oniy good and evil is the opposite of pieasure or pain. Classicai theory requires consequences to be measured in some r!ay so that the pleasure and paln of different individuals can be added together and the results of different courses of actton

compared. 'An action is right if and onU) if it produces the greatest balonce

pain far everyane'.

oJ

pleosure o1'er

i0 "g

r L

Ethrcai Theories and

Principles

In Ciassical Utilitarian principles, an action is judged to be right by virtue of the consequences of performing that action. It is silent on iompliar,."1o codes and rules. As a result, telling a lie or breaking a promise is right if it has better consequences than any alternative collrse of action (Boatright, 2009). T'his theory appears to support moral relativism rather than moral objectivity. It depends greatiy on human judgement and rational thinking by rveighing the good and bad consequences of an action. lt also seems to set aside estabhshed religious principles that are embedded in society since there is no need to follow established rules or codes in determining the rightness of actions other than the four theses earlier mentioned.

Rule Utilitarianism Bentham's classical theory received controversiai comments duringhis time. Tl-re'overfreedom' and rationalization of moral actions seem to challenge established religious ruies and cultural norms within the conservative English environment at that time. John Stuart Miil, in trying [o save his teacher, refined Bentham's principles after being chalienged by the community. Mill tried to clarify the limitations of Bentham's theory by referring it as Rule Utilitarian Theory: "An action is right rJ and only iJ it corrfonns to a set of rules the general acceptanc( of which w,ill produ.ce the greatest balnnce o.f pleasure aver pain for eyeryone".

Tl,is principie relates to the importance of complying with rules while assessing the rightness of actions. it seems to give firmer ground to the ruies of morality and role obligations. Horvever, it does not specify nhat rules one should conform to. Presumablr', it includes man-made rules as rveli as God-made rules and principles. Again, individuals have to rnake their olr,n moral judgements to determine the rightness of actions, an inclicator of moral relativism. Comparing between Act and RLrie Utilitarianism, both focus on the consequeilces or results to determine the rightness of an action. However, Act Utilitarianism puts emphasis on results only regardless of compliance to rules as iong as the conseqlrence of the action gir.es happiness for everyone.

3.2.4

r

between Acrand Rule Urilirarianism,

both focus on rhe con5equences or results to determine

Bentham's Theory: Calculating Utility

Unlike Rule Utiiitarian Theory, Bentham's Ciassical Theory requires one to be able to determine the amount of utilit1, (r.e. the balance between pleasure and pain) for each inciividual irfiected by an action as rveil as the amount of utiiity for the r.vhoie of societl', measured in monetary terms. Horvever, hon, do we then calculate utility?

r

k"n,.p*-g-

irconomists calculate utility by deveioping the consumer choice theory', profrt maximization theories, cost and benefit analysis, marginal analysis, etc. These theories assist in making objective and rational individual and L,usiness decisions.

You may recall these iheories lvhen you study economics as a course. Holever, there are critics over horv \{e can actually calculate the amount of pleasure each course of action produces as it is impossible to calculate in terms of quantity, what more with quality. Moreover, happiness and satrsfaction are intrinsic human values that arc beyond measurements, They also differ berween individuals.

the rightness of an

action. However, Acr Urilirarianism purs emphasis on results only, regardless of compliance to rules as long as

the consequence

of the acrion gives happiness for everyone.

61

62

Business Ethics

Nevertheless, Utilitarianism has 'scientific' and practical pretensions. [t allows for right and wrong to be based on calculating the elements in a situation. We can calcuLte and choose the actiot-r giving the greatest utility. The decision is rationalized and supposedly clear. To recall, moral right is defined in terms of an objective; for material good. One will use cost/benefit analysis as a method for reconciling empiricai fact against subjective, value judgements. Another issue arises on the application of'cost benefit analysis in the world o{' business, apart from the difficulties of calculating the pleasure and pain"

3.2.5

Cost-benefit Analysis in Business: ls lt for the Majority?

Businesses usually calculate the anticipated costs and benefits only for their interests

i.e. profit seeking. Only legislators, social planners and regulators use cost-benefit analvsis to analyse the positive and negative effects of an actton or decision on everyone affected. The issue is how far cost-benefit analysis is applied by busine.ss organizattons to ensure social justice. Private business organizations usually do cost-benefit analysrs to maximize profits and fulfil economic goals to benefit the organization itself rather than society at large. While *. q.,.itio, the objectivity of calculating utility, a must under Bentham'"c Classical Theory and application of cost-benefit analysrs in business, in summary, there are six points about Utilitarianism:

r r I

r r r

When deciding which action will produce the greatest I'rappiness, rve t't-lt-rst consider unhappiness or pain as weli as happiness. Actions affect people to some degree. However, rve add up the various pleasures and pains, and act on the action that brrngs the greatest net happiness. Because Utilitarians evaluate actions accordrng to therr Cotlse!uelrres, ancl actions produce different results in different circumstances, aimost everything might in principle be moraliy right in somc particular circumstance. This i: true for ClassicallAct Utilitarianism. Utilitarians wish to maximize happiness not sirnply immediately br,rl in the long run as weli. All the direct impLcations of an act har.e to be crrnsiclere
Let us try to apply Utiiitarian Theory of Ethics to resolve the foliowrng short

case"

I

,

I {

l I

Ethical Theories and

principles 63

Million XY Berhad is a small and medium enterprise, based in Langkawi lsland The CEO, Mr. Aminuddin, has been approached by a giant forergn corporation to merge his food processing bLLsiness, wir-h an objective to gain competitive advantage. The rerms offered by the (-ol'porarion are simply Iucrarive to the CEO, who would receive a large sum of severarrce/separarion package. I he shareholders of rhe firm would also benefit, because the offer for their shares is substanrrally above rhe currenL rnarkei price. Mr. Aminuddin realizes thar the merger plans call for a closure of his food processing planr The plant currently provides jobs for rhe majoriry of rhe local residenrs He is now unsure of how ro balance his employees'welfare, who woLrld be thrown our of work and rhe cornmunrry where rhe planr is located against the interesrs of rhe shareholders. He is also in a dilernma abour how much he should rake his own inreresis inLo accounr

Assume you are Mr. Aminuddin. Should you support the merger plan? lustify your position from utilitarian principles. Next, we shall look at the strengths and weaknesses of Utilitarianism.

3.2.6

The Strengths of Utilitarianism

l.tilitarianisi-n is ir-r accordancc with much of our moral reasoning. The fact that an . iion rvould pror-ide some beneflt or cause some harm is generally a moraliy relevant i e ason for or against perfcrrming it. It is result-oriented. It provides a relatively precise and objective method for moral ciecision nraking since r,r,e are trying to evaluate/assess the good and bad consequences helore

ae I iug.

Act Utilitarianism is simple to appiy and provides an easily understoocl decision procedure. Assr-rming that the goodness of consequences can easiiy be measured and compared, a teleological decision-maker needs only to determine the possibie causes ofaction and calculate the consequences ofeach one. Rule Utilitarianism gives a firmer ground to rules of morality and to role obligations, r,,']-)ich are problems to ail teleological theories. It also eliminates the dilficult task of calculating the consequences of each individual act. Utilitarian reasoning has also found.favour among economists, who use the .issurnptiotl that individuals seek to maximize their utiiity or welfare to explain ,,nd predict a wide range of economic phenomena, such as prices and allocition ''f resources. Many of the micro-economic theories have been developed based on IJtilitarian principles. For example, profit maximization, marginal anilysis, T'heory oi Cornparative Advantage, elc.

3.2.7 The Weaknesses

of Utilitarianism

While there are substantiai strengths seen in Utilitarian Theory, it has its weaknesses ioo- The theory does not give an account of the rights we have and what is just and fair ,r'hich an ethical theory is expected to give. More criticisms on Utilitariair Theory of Ethics have been listed by Abdullah and Moham adZainolAbidin (2011) revealing its l;mitations as anv made-made theory.

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Individual happiness and satisfaction cannot rationally be the main objective or sense of purpose in life. Critics list a number of noble people who sacrificed their own happiness in order to do good deeds. The theory is degrading to humans" It degrades human beings to the level of animals because the theory suggests that people's only goal in lif'e is attaining pleasure.

.

Utilitarianism encourages selfishness. It propagates that one should be concerned only with maximizing one's own happiness. Utilitarianism is unattainable. It is almost impossible to act alrvays for the sake ofthe generai happiness ofsociety. Utilitarianism is self-serving" The principle will be abused in order to serve particular interests of the person making the decision. The theory is too time-consuming. It is impossible to calculate the amount of pleasure and pain implied by each alternative course of action, and then come to a conclusion based on the Utilitarian calculus.

'Ihis theory promotes objectivity rather than subjectivitl. it is silent on the spirituality aspects to be objective and scier-rtific. It only emphasizes on humans'physical needs since its emphasis is material well-being. Holvever, humans are unique creations of God with intclligenr-e, feelings and emotions. i-luman needs are not only physical, but splritual. Moralit1, certainly revoives not only within physical contexts but spiritual aspects of a human life as well since human beings consist of the bodl'ancl the soul. Their essence is the soul' Before rve end our discussion on Utilitarian 'i'heory of Ethrcs, let us criticall,v make some inquiries for discussion purposes.

r r r

Is Utilitarianism really workable? Are some actions wrong, er.en if they produce goocl consequences? ls Utilitananism unjust? Is it wrong to fulfil seif-interest and promote utl[ity? Does fulfiiling self-interest create happiness for soctety as a whole?

Next, we shall discuss Immanuel Kant's Ethics of l)r-rty, a deontologtcal theorv rvhich insists that moral action requires conferrnrity to inorerl principles.

3.3

KANT'S ETHICS OF DUTY THEORY

Immanuel Kant (1724 - 1804) was a renowned German philosopher" FIis influential rvork on ethics is entitled Fundamental Principles o-f the Metaphysic of Ethics,iirsi published in l7B5 (Boatrigl-rt, 2009; Abdullah and lvfol-rarnard Zainol Abidin, 2011) before the rise of Utilitarianism in England (Boatright, 2012). T he opening rvorcls of Kant's work reads: 'Nothing can possibly be conceived in the u,orltl whicJl t dn be good v,ithottt qualification, except a Good Will.' Tl*

ffirrg -*dtl

of Kanr's work reads, 'Norhing can possibly be conceived in che

world which can be

good wirhout

q ual

ifi c ation,' exce pt a

Cood Will.'

t

is the uniquely human capacitl,to act from principle. It is the power of the mind to do something and to make things happen. Kant is convinced tl'iat our morai actions cannot be guided by our practical experience. In other \,!,ords, it is impossible to determine what people ought to do by studying r,'hat thc), in fact do (Abdullah and Mohamad ZainoTAbidin, 2011). Human actio,rs must therefore be rationalized based on human intelligence and wiil power. According to Kant, we hr.ve a dutv to play

Will

torvards feliow human beings.

-3

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Ethical Theories and Prrnciples

'An Actiot't rs rnorally right if and onl1,

,

if the actor is motivated

by good

will.'

It is not a matter of the individuai weighing the consequences" Thus, according to Kant, the basis of a moral act rests upon a duty that one has to perform for the purpose ofgood lvill. Irrespective ofthe consequences, an act has to be intentionally good, as a duty to be performed lor fellow human beings. Nothing is good in itself except a good wili. Goodness of the will thus depends on the use of them. For example, some students lvho are smart in using computt:rs hacked through the universitr"s security system to acquire the final examinalion papers in advance. Such acts are intelligent and courageous, but are done for the wrong reason. It is not motivated by good will; it is an act of cheating, so it is a wrongful act. Only an action done for rational principled reasons from a sense of duty has moral worth, according to Kant. In other words, if our act is from a sincere obligation to perform a duty towards others, our act has moral north. For example, FELDA Global. in late November 2013, contributed RM 132000 to support the Fiiipino T1'phoon Hair-an victims. Another example is the continuous contributes of Uiriversiti Teknologi Petronas (UTP) to r''lei:ted orphanages and old folkt homes in Perak as a social responsibilitr-to genuinely heip the needy. An important point has to be emphasized here. The purpose or intent of an act seems to differentiate it betrveen a good and bad action from the perspective of Kant's ethics.If the purpose is ior good will out of a sense of dutyto heip others, it has moral rr-orth. I{ou,ever, if these initiatives are primarily aimed at popularizing the organization in the er-es of the public as a corporate business strategy, its moral worth mav be questionable since the main intent is not to promote good will or help feilorv human beings as a dutr'. Rather, it is to build a corporate image with a purpose of increasirrg profits to fulfil orqiinizational interests. It is interesting to note that according to Kant, if an act is orit of self interest, it has no moral rvorth. lVhile Kant had viewed from an rndivldual perspective, the issue remains whether acting for organizational interests ma1'be perceived as fuifilling self-interests within an organizational context.

lAri;;,

"

m",rtty

righi if and only if rhe acror is morivared by

good will.'

3.3.1 Kant's Categorical lmperatives \\-c have just utrderstooci the basic features of Kantian ethics i.e. acting based on gooci rvi11 out of a sense of duty. There are still grey areas in determining rightness ol'aciions here. \\,'hat then determines one's duty? Hor,v does one determine whether an act is morally right? Utilitarianism states that consequences or results wili determine the moral judgernent but I(ant believed that reasons alone can give us the absolute moral truth and discover our sense of dLrty. He championed the two categoricai inrperatives, the basis of his moral principle, stated as follows:

r r

lst Categorical Imperative-Act only according to that maxim hy which 1,su cqn at the sane tirne will that it should become a universal law. 2nd Categorical Imperative -Act so that you treat humanity, whether in your own person or in that of another, always as an end and neyer as a means only.

An'imperative'is a command or duty whereas'categoricai' means'that is r,r,ithout exception'. In understanding the First Categorical Imperative, maxim is clefined as 'a saying that expresses a general truth' or ;rule of behaviour'. The first categoricai imperative seems to reinforce that our moral actions should not be guided by our own inclinations, but guided by a sense of duty to the universal law. An action is moraily right for a person in a certain situation if and onlv ilthe person's reason fbr carryilg out the action is a reason that he or she would be lvilling to have every pcrson act on in any similar sitrration.

I Fl,t*-rg"t*l imperarives-Act only according ro that maxinr by which you can ar rhe same time

will rhat it should become a universal law.

I

k*rd rr*g*kil imperative-Acr so that you rreat

humanity, wherher in your own person or in thar of another'always as an

end and never as

a means only.

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i

-n

rE r{

--l An acr is morally right if and only if we can will ir to become a universal law of conduct. One's absolure moral trurh must be logically

consistent, free from inrernal conrradicrion.

K*lt Fi"a Categorical

-1

lmperailve simply requires us ro place ourselves in the shoes of rhe receiving party before acting. lf the acrion is going ro brir.rg pain rather than happiness to trs, then ihe action ts nor erhical. \\/e shoLrlci

not commit such an acr on others.

An act is morally right if and only if we can u,ill it to become a unlversal law of conduct. One's absolute moral truth must be logically consistent, free from internal contradiction. For example, the act of Robin Hood, stealing from the rich and giving to the poor is wrong beiause stealing is a universally accepted wrongful act. Also, if Robin Hood were to place himself in the shoes of the rich whose things had been stolen, certainly he would not have committed such an act because he would not like

i I &

T

I

r

his own possessions to be stoien by others" Let us create another simple business scenarit-r for f'urther illustration. Mr. A, the General Manager of GAP Corporation, needs a job to be done by Mr. B within-one week. Mr. B wants to impress his general manager so that he will be considered for

;

H E

t

I

promotion in the short term while competing with his colleagues. H9 delegatcs the (i.e. Mr. C) to complete the task within lob to Mr. C, his subordinate, and forces him and prior commitments. If Mr. obligations one day at the sacrifice of Mr. C's famiiy B places himself in the shoes of Mr. C, he wouid realize that his act is unjust and therefore u,rongful. Human beings do not like to be exploited so an act of labour expl^itation contradicts the universal law of conduct. Mr. B's action also seems to reflect greed. Therefore, according to Kant, we should not act in such u'a]'s since it has

: I i

-

I _! ':

no moral worth. Kant's First Categorical Imperative simply requires us to place oursel-u'es in the shoes of the receiving-purtybefore acting. If the action rs goir-rg to bnng pain rathcr than happiness to the ieceiving party, then the actiotr is not ethical. We should not commit such an act on others. it calls for us to put asidc our sclf-interests. It also requires us to reason out and assess whether orlr act is universally accepted as good To reiterate, an act is morally right if and only rf we can u,r11 it to becolne a ilnivers:r1 1aw of conduct. The action that we are going to take cannot be olclouble standards too. If we commit an action on a certain person or situation, a sinlilar actiori lnust be taken on another person or circumstance. The acts of favouritism, discrimination ancl lying under all circumstances are wror-rgful acts according lo Kant's elllics" We har.e just eiaborated on Kant's First Categorical lrlperative. i'Next. acc-ording to the Second Categorical Imperative, an action is ntoralh'right for a irers()rr if end oniy if in perforn-ring the action, the person do,:s not use otirers nrerel\' AS a 'rleans for'advancing his or her interests, but at the same time respects and dcvelops therr

a

t

capacity to choose freely what they want"

{

'Never treat human beings as a ftteans but as on end.'

'^k;' *; hr;;-l berngs as a nteans but as an end'. Kant's view ls

tlrat people, unlike

rhings/objects, ought never to be mereiy used.

Kant's view is that people, unlike things/objects, ought nn'er to bc merelr- usetl For example, empio,vees may be hired for theii labour, skills, knou'ledge ancl abtlities, but must alr,vays be treated rvith respect as huntans. Relating lci the same business scenario discussed earlier, obviously, Mr" B is treating N{r". C as a means to an end. Mr. B has used Mr. C as a nleans to fulfii his ambition tc., be promoted in the short term. Mr. C is forced by Mr. B to complete a one-week job within orte day, an act of injr-rstice irnd disrespect and therefore unethical according to Kant's Second Categorical Impei ative Kint's theory has survived ihrough the centuries due to the following strengths.

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.

3.3.2 I

The Strengths of Kant's Ethics The First Categorical Imperative provides fir m rules to follow in moral decision-making' No matter lvhat the collsequences ma)/ be lrr rvho docs 'lhis view il, some actions are always wrong e.i:. iying, cheatinq, greed, etc. is certainly congruent with religiorl:i dimensions and supporters of morai objectivism.

$

Ethical Theories and

n

The Second Categorical Imperative emphasizes on the importance of the

r

The theory than principles out of u r""nrJ of duty towards fellow human beings rather fulfilling one's self-interest. of Kant's duty principles are certainly consistent with the Islamic concept Man is directiy informed of their role--to be a leader/ a Khalifuh o,, "urtir. to guardian in the universe. He has specific duties and responsibilities

r

Prrnciples 67

to an humanrstic dimeniion, not using I treatingothers (humans) as a means rights end but as an end themselves. This principle is consistent with human principles. also highlights the importance of motivation and acting on

accomplish as a vicegerent on earth' moral scholars' Despite, the strengths, K"ant's theory had also been critici zedby

3.3.3

The Weaknesses and Criticisms of Kant's Ethics

r what exactly has moral worth? Kant advocated that an act based on self

r

I

It seems interest has no moral rr.-rrlh, which Seems to be too extreme a vietr'' and emotions to suggest that the theor,v requires us to disregard personal feel feeiirgs. Many moral theorists, especially advocates of moral reiativism, to r'vant always wili practically t}-rat Kant is too severe on this point. Humans fuiiil self-interests since they are individuaiistic by nature. Kant said mr ral .is the categorical imperative an adequate test of rightness? not foilorv them may humans rules are ivithout exception when, in reality, and act on the contrary. The categorical imperatives nay not holisticall,v cover all asPects oflife. \\rhat does it mean to treat people as means? It is not clear tn'hen people are at times' irrdi"'iduals re aliv being treated as ends or merely as means. Because

freely choose to do it to fulfil commitmetrts without being forced b,v other are peopie. It is therefore not right to saY that under such situations, they expioited and treated as a means rather than as an end' L)espite the criticisms, Kant's ethics yield two important findings: r It iirtroduces the principle of universalizability and emphasizes on respect for of logic, rve pe rsoils. The universalizability principle states that as a matter be double not must be consistent in the judgements we make. There should standards in our actions for it may lead to bias and disrespect towards others' r Kant's ethics provides a strong foundation for rights. Individual hunan rights must be acknon'ledged and inviolable.

Kant's Ethics certainly complements Islamic ethical values, especially thosc (i'e' justicel' r-elated to iltsan (i.e. benevolence and being kind), respect and adl \Ve shail next look at Aristotle's Virtue Ethics Theorv, another deontoiogical theory.

3.4

ARISTOTLE'S VIRTUE ETH ICS THEORY

Aristotle lived long before the birth of ]esus Christ, what more Prophet Muhammad SA!V. He was a renowned Greek philosopher. His theories are mainil' foulid in a collection of writings called Nicomichean Ethics, compiled by his son, Nichomachus'

I

K-,i.,h"t

)^kl

,-"

unportant findings:

.

lr introduces the principle of universalizabilitY

.

and emphasizes on respect for persons. It provides a strorlg

foundation for righrs.

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in

Arrs.rh3,h.-y---1 focuses on the virrues of humans Lirerally, virrue is a good moral value or characrer rrait rhar manifesrs irself in habirual

action.

Century B.C. Aristotle's theory focuses on the virtues of humans. t,iterall1., virtue is a good moral vaiue or character trait that manifests itself in habitual actiori (tsoatright, ziloz). Virtue Ethics Theory recognizes the need for one to emuiate virtues such as honesty (a sub-trait of integrity), courage, self-controi and respect for humans and non-humans to lead a rewardi4g life (Khalidah et al.,2010). The virtue of honesty, for instance, cannot consist of teiling the truth once; it is rather a trait of a person who consistently teils the truth as a general practice. Aristotle's Virtue Ethics Theory begins with a basic assumption that morality is both necessary and vital for human beings. 4th

'lt

is impossible to live with human dignity u,ithout beu.rg a de,velopecl rnoral Morality is not aluxury that one can choose to Ltut,e or not to haye . It ts a pre-condition Jor a li_fe with human digrLity.. being.

Ar-r"d. r V-r*

|

rheory begins wirh

(Abdullah and Moham ad Zainol Abidin. 201 i)

a basic assumprion

rhat moraliry is both necessary and viial for human beings

A ccording to Aristotle, people who themselves and they have

compromise rnorality are degraclng in life. Aristotle strorigly believed that ethics enable mankind to lead successful, rewarding lives. missed their goal

3.4.1 Ar*"rk

b.l.".d;;;I

everyrhing in life has specrlic goal, in (,reek.

or

a

rcy'()_t

llniy

alsir

peritaps be refr:rr..'ci .ts 'obiec t ir,,e Lrr

pLr r.pc)se'.

t*"d;;t*;l firstly, one has ro live in a sociery which

promores jusrice. li

is

rhe responsibiliry of poliricians and social scientisrs ro develop

just sociery and

ensure social order to

anain eudaimonia,

a

Creek word to signrfy

ukimare happrness or overall well-being.

ForArilb,n.o,.lrl begins wirh oneself lr is

the characrer ofa

person.

Aristotles theory throws back at each ir"rdividual a fundamentai questron, 'lthal kind of person should we be?' The indlridual himself nrust rerlson this oLrt based,rr intelligence. Aristotle believed that everytl.ring in life has a sf_recific goal or felo-s rn Greek. It may also perhaps be referred as 'objective or purpose'. In or-cler to iive as a human rvith dignity, one should strive to achieve the te /os fbr a rern,ardipg iife Accordrng to Aristotie, in order to achieve a rewarcling life, firstl,v, on" h"s to live

in a society n'hich promotes justice. It is the responsrbiliiy of politicraps a1d social

a rewarding life,

a

The Foundation of virtue as a character Trait

k begins wirh

self-love i.e. one's love

for his individual self.

scientists to develop a just society and ensure sociai order to atlain et.rcjairnottLa, a Greek rvord to signify ultirnate happiness or overall wcll being. Secontlil,, inclir,idgals rrcr.ci to engage themselves with good friends to support thenito achieve lheir eyclairTtoTtLa" These tu'o conditions clearly suggest that humans are socrai berngs rvho clepencl on others to develop themselves for a rewardir-rg 1ife. T'hirdly, ArisLtle note
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Ethicai Theories and

3.4.2

Principles 69

Moral Virtues within Aristotle's Definition

Aristotle defined a virtue as 'an activity of the soul', implying a ratiorral principle. Underlying the definition of a virtue is a very specific view of human nature. Aristotle distinguished two dimensions of humans-the rational and the irrational dimensions. The rational dimension should be dominant. it distinguishes humans from nonhumans. Aristotle refers to our natural desires and inclinations such as appetite, breathing and sexual desire as natural dispositions. Tl-rese dispositioirs should be controlled by rational thinking and prudence. Natural desires and inclirrations should not be left uncontrolled. Once these desires are controlled by one's rational thinking and intellect, his or her acts will be virtuous. Aristotle admitted that virtues cannot be developed instantaneously; they should be enhanced and maintained throughout an individual's life. Onc may ask,'What are moral virtues?'According to Aristotle, moral virtues are habits that enable a person to live according to reason. He also introduced the concept of 'mean' or 'moderation' in actions. He does not assume that there is a universal standard that applies to ali pecl Ie (Abdullah and MohamadZainol Abidin, 2011). It is therefore relative in scope and differs between individual persons.

filr.d.d.fr.ra virtue as'an acrivity of ihe soull in-rplying a rational principle. He disringuished

rwo dimensrons of humans, the rarional and the irrational ormenslon_

I ne

rational dimension should be dominant.

'\\'herr a person lcnows and chooses a reasonable middle ground between going too -far or nol enottgh irr his actions, ernotions and desires, "moral t,irtue . .. is a mean betv,eg71 {tyo vice s, one oJ excess and the other o.f deficiency ond .. it aims at !,itting a n'Le(ui in fe eling (desires) and actions.' (Boatright, 2006)

For exatnprle, rvitll respect to ti-re einotion of fear, courage is the virtue of responding to fear ivith a reasonable amount of daring, whereas being con,ardly is a r.ice of not being daring enough in response to fear, and recklessness is the vice for being too daring in response to fear. One may'ask,'f churacter troits are relative, hoy,does one determirte yuhot is reasonable?'According to Aristotle, prudence is the virtue that er-rables one to linou, rvhat is reasonable in a gir.en situation. Prudence literally means'being cirreful and sensible' in ;ndividual actiot-t. In today's life, certainiy, one has to be knorvledgeablc in the fields aitd are as of decision-rnaking to be sensible. Let us recall from Cl-rapter 1 the moral values that are universally accepted as good, u,hich in fact covered many of the virtues identified by Aristotle:

r I

Honesty, sinccritl,, reliabiiity, trustr,vorthiness, dependabiiitl,, patience, prudence, bencvolence (kind and helpfui), compassion, courage, courtes,v-, f riendliness, moderation, self-control, toleration. Interestingly, Aristotle also included pride as u'ell as shame as virtues. !\re should be proud of our accomplishments (not arrogant) and ashamed of our railures.

One may ask, 'l{/ro is the virtuous man?'According to Aristotle, he is the man rvho has taken rational control of his life, cultivated his naturai dispositions int.r moral virtues, and has ahvays throughout his lifetime found happiness/pleasure/satisfaction in his actions based on these developed virtues. This description, though ab::tract and descriptive, has been used to define a rational man in the legal profession. Likervrse, since this definition is legaliv accepted, it is therefore appropriate to use this definition for a virtuolrs person, as a guide in the development and conduct of indiviclual rnoral action.

fPrrd.*. -,h. virtue thar enables one to know whar is reasonable in a grven

situarion.

fA...dr.g a

* Arb.d.,

'vtrtuous man'

rs

rhe

man who has taken rational control of his life, cultivated his

natural drsposirions

into moral virrues, and has always

throughoui

his lifetime found

happiness/pleasure/ sarisfaction in his aciions based on these developed virtues.

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Business Ethics

3.4.3

The Strengths of Virtue Ethics Theory

Virtue Ethics Theory suggests that one is assessed by his or her moral character; not specific actions. An individual who has developed good character traits (virtues) is perceived to be a morally good person, and vice versa. It therefore provides a criterion for evaluating right or wrong actions of individuals based on character traits" It is thus a value-based theory This theory offers harmony between hur.ran intellect and desire, the actual physical make up of human beings. It identifies what is the right course of action to lead a rewarding life" Human desires have to be conlrolled. Virtues have to be developed and enhanced through repetitive training and they will harmoniously foilow by habit in the process. Moral virtues are well explained in an intellectual manner, though not objective but logical to describe the actual human nature which performs right and wrong acts in life" This theory acknowledges that humans commit wrongfui actions due to natural disposition. To develop virtues, one has to control his or her desires through rational thinking and wisdom. He or she must be prudent in action, a practical observation in human behaviour as a way of life. Virtue ethics also provides a useful criterion for evaluating sociai institutions and practices. Besides connecting thevirtues to the conception of a fuller li{e, it reminds one to examine how character traits are formed and conditioned by the environment. (Please read more elaboration under sub-section 3.4.5--Applying \rirtue Ethics 'I heory rn Business). It offers a more holistic understz,nding of iife wrtl-rin business" Apart from simply describing people as good or bad, right or wrong, virtue ethics encourages a fuller and detailed description of an action through human characters. For example, relating tcr a conflict of interest scenario, a person involved in such a situation lacks self-control, honestl, and integrity. He may be greedy as wel1l

3.4.4

The Weaknesses of Virtue Ethics Theory

Virtue ethics does not seem to have room for basic concepts such as rights and obligations, so as a theory of ethics, it seems inadequate in dealing nith big issues" It does not always have a view about what makes an act right or wrong frorn

institutional

dimensions.

Aristotle's 'mean'principle does not easily apply to all r'irtues. Compassion, fot example, at its extreme may become vice. But horv do lr,e determine that it becomes a r.ice at its extreme? It may be seen as a 'selfish' theory by morai scholars since the focus is or-r inclividual development rather than the effect of one's actions on others. Aristotle was writing in the context of the 4th (lentury BC Greek city state, in which inequalities between noblemen and the slaves were the norm. The whole of human life underwent transformation. Today, people have reasonable incomes and open slavery is no longer a common feature. Cultr-rral differences may also influence characters.

Aristotie's virtues such as bravery and honour may be regarded as mascuiine, ignorrng feminist character traits such as humilrty and ernpathy. Aristotle regarded humility as vice during his time, whereas humility today is ;r noble character of people with integrity. It is a virtue to be consciously en-ruiated and internalized fiom religious dimensions.

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EthrcalTheoriesandPri.nciples

virtue ethics is not consistent with the findings of -od"i, Psychology (Harmon, 1999; Doris,2002).In a study invoh'ing students at Princeton University Divinity School, a conclusion was made it .oto[y "p..ror', is determined by his external situation, not by his moral Some philosophers have argued that

that

a

behaviour

character (Velasquez, 2012) As with anytth.. man-made theories, there are weaknesses as wellas strengths. until interestingly, Virtue Ethics has survived for centuries and has been dorninant on argued have scholars today (Ab-duilah and MohamadZainolAbidin,20ll). Some the of the exient of applicability of Virtue Ethics in the world of business because last the in this we discussed (You that recall may peculiarity of it . busineis world are who people by section of Chapter i). However, it is still relevant and applied Aristotle conscious aboui the internalization of virtues for a good life as convinced by in business? Ethics Virtue we apply during his giorious davs. How can

3.4.5

Applying Virtue Ethics Theory in Business

In business, Virtue Ethics Theory couid be applied directlyby holding that the virtues of a good businessperson are the same as those of a good Person' ifter all, we have noted that business is a part of life. Therefore, it goes lr'ithout saying that business people have to emulate virtues as part of thelr character t.rlt, ihut more rvithln a healthy organizational culture context. \Ve note that are businesspeople neecl to engage themselr,es in tjusiness-reiated areas since ti-rey goals organizational basic ,"pr.r"nting their organization. They need to achieve humans r^"ho have the s',.,.1, u, proiit making. Horvever, organizations are made of intelleci to assess rightful and rr,rongfui actions, while baiancing with their own desires a1d interests. So, as humans, they have to consciousl,v ernulate virtues. For exampie, good business managers must care for their employees and customers although they hare to make decisions from various dimensions and ievels. We discussed this in Chapter 2. Business actions must be seen to be fair and just and refiect a high sense of respecr for others as a human right and social accountability. A ristotle's Virtue Etirics

universall,v relevant from business contexts, what more from humanistic dimensions.

is

itill

3.4.6

Virtue Ethics from lslamic Perspectives

Aristotle's principles are certainly relevant from Isiamic ethics dimension, u,hich integrates the inner and outer aspects of an individual's life and promotes rationalization through human inteliect; moderation and balance betu'een physical and soul developrneni (lU" Manzur, 1990; Miqdad Yaldin, 1973; Al Maududi, t978). In lslamic Ethics, there needs to be balance between individual physical devcloprnenl and soul development, although priority is on the soul development; crucial to the indivrdual's behaviour and character development (Norazzah Kamri, 2C10; Ibn, Manzur, 1990). Aristotle has defined a virtue as'an activity of the soul'. Aristotle's Virtue Ethics theory thus emphasizes on soul development, compatible with Islamic ethics, which concerns nkhlaq, i.e. hlman nature, attitude and habit (Ibn Manzur, 1990). Virtue Ethics, as a value-based deontologicai theory, seems to har:monize well wrth ilm al-akhlaq in Islamic ethics; the building of aqidah (i.e. the cotrviclron and beliefs of islamic faith) and one's character as a foundationfor itnan (fanh) and ihsart (bener.olence; being kind and heipful). Ilm al-okhlaq, as a branch of knor'vledge, is a I I

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Business Ethics

science which deals with the ways to maintain virtues at the optimum level, i"e" to avoid wrongdoing and do what is right and desirable (McDonough, l9B4). Aristotle's theorywas no doubt silent on human submission to God but his rational theory gained keen interest among influential Islamic philosophers such as Al Farabi and Ibnu Sina. Al Farabi was known to be an expert on Aristotle's moral philosophy. In addition, Aristotle's theory was also intensely studied by Imam A1-Ghazali, who noted his logical thoughts with epistemology of knowledge. Despite the contrast and different ideologies and viewpoints of both scholars, AI-Ghazali in f'act built

his Sufism principles from Aristotle's logical thoughts on the natural disposition of humans. Al-Ghazali even made full use of the Aristotelian theory of the golden mean to expiain the balance between the human body and soul clevelopment. In fhct, AlGhazaii composed three works on Aristotelian logic i"e. Mi'yar ctl-'ilm (The Standard Measure of Knowledge), Mihakk al-nazar f'l-mantiq (The 'Ibuchstone of Proof in Logic) and al-Qistas al-mustarlim (\'he |ust Balance). Aristotle's Virtue Ethics has been one of the most influential contnbutions rn the study or philosophy. Virtue Ethics has survived for centuries as an ethica] theory for reference despite criticism from moral philosophers. Following the Virtue Ethics T'heory, we shall cover another deontologrcal theory which reiates to the virtue of caring for others-Ethics o1 Care.

3.5

ri

4 ? i{ ---

t

di

s

'4

.l ,}

* *!

*.*

ETHICS OF CARE

Many ethicai tireories assume tha,t one has to be impartral to nrake ethrcal decisjons" We should detach ourselves frorn an issue to be resolved, put aside our emotions to make objectir.e and effective decisions. Consequentll,, u'e should set aside any speciai relationships that we have with particular indir.iduals, relatives and lrrends in determining what we should do, especially at the r'r,urkplace As a supply and material services manager, responsible tor negotrat urg Lontracts for the organization, Mr" A should avoid any possibility of oflering contracts clirectiy to relatives, friends, etc., which is unfair and nepotistic, and tl"rereftrre uncthical. A utilitarian advocate lr,ould assess from the good and bad conserlr:ences of such actions, especially on issues related to efficiencp Kant's first calegorical irlperative mav share the same view since it does not seem to follow a r,Lniversal lar,r,of justrce anci fairness. Perhaps, Aristotle's Virtue Ethics ma1, require further anaiysis to justify the rishtness or wrongness of such actions based on the reasoll or purpose and r.irtues oi l1're person himself, such as honesty, compassion, etc. Interestingly,, contrary to these theories is Ethics ,rf Care, developed 1-,v psychologist, Carol Giliigan, seen as a feminist theory by the West, a ner,r. approach to moral development, though not quite in eastern dimensions as caring is a value in a society u.hich promotes collectivism rather than ir-rdividualism. fhis theory requires one to be partial in resoiving ethical issues. Ethics of Care is an ethic that emphasizes caring for the concrete lvell-being of those near to us. Tt emphasrTcs on preservirrg and .

Erh.,

"f

G;;;-1

eth,c thar emphasizes caring for the concrete well-being of those near to us. lr emphasizes on preserving and nurturing concrere valuable relationships. Also, this rheory requires one ro be

partial in resolving ethical issues.

nurturilg

concrete valuable relationships. We shouid care for those who are dependant and related to us. A moralit1, of care rests on an understanding of relationships as a response to another in their terms (Lyons, i983). According to this 'care'view of ethics, the nr:,ral task is not to fbllow universil anC impartial moral principles, but instead to attend ancl respond to the good of particular concrete persons with whom we are in a valuable and cJose relatronship (Blum, 1994;

!

Ei

*i

h k

s

Ethical Theories and Principles

Dillon, 1992). Compassion, concern, love, friendship and kindness are all sentiments or virtues that normally manifest this dimensron of morality (Velaquez,2012). In applying this ethicai theory, it is also irnportant not to restrict the notion of relationships between two individuals or a relattonship between an individuai "oncrete and a specific group. Advocates of Ethics of Care have emphasized that it should encompass the larger system relationships'that make up concrete communities. It is classified as a communitarian ethic, an ethic that sees concrete comtnitnities and communai relationships as having a fundamental value that should be preserved and :iraintained. For example, in an organization where employees suPPort the employer's business r.entures, the'caring' culture should be cultivated and nurtured since there is a .oncrete relationship between the employer and employees. The organization's success ivould not have been made possible without the invaluable contribution of the employees aithough the emplove. has pioughed in capital and taken risks to spin the busitless.

3.5.1

Justification to Support an Ethic of Care

The identity of oneself (i.e. rvho i am) is based on relationships with other people. rn indir.idual human being cannot exist in isolation from caring relationships rvith 'fo start r'vith, we u,ere born and cared for by our parents; we were taught by our 'rthers. teachers in schools, lecturers in higher learning institutions, etc. We join the Iabour mark:t and lvork in organizations as part of the workforce. We live in a community sharing the same language, tradition, cuiture and other benefits that define our ,hr,sica1 and spintual needs. We emulate a culture and tradition, derived from people ,rtlr-rnd us. lt is also these concrete relationships that make us understand our ort'l.t sr-1f. 1n i'act, the value of oneself is uitimately derived from the value of the comnrunity. , heretbre, it is pertinent for us to nurture a caring t alue among those who havc pported us to be nhat 1.,,e are toda1,, not only fro,.r an individual dimension but fronr .' r,ocietal dirnension, inciuding the business arena.

3.5.2 Distinguishing the Three Forms of Caring .hics of care classifies three forms of :.0rreore, and caring for someone.

3.5.3

caring-caring about something, caring after

The Difference between the Three Forms of Ca

ring

.{ccortiiris to Ethics oiCare, there are three forms of caring, \,-r- rvi1l discuss thern in the following sections.

i ...,:re 3.4: -Ihree forrns of caring according tc Ethics o{ Care

as rllr:stratecl

in

Figr-rre

t---.--

I A communrtarran ethic is an ethic

that sees concrete communities and communal relarionships as having a fundamenral value rhat should be preserved and

mainrained.

11

/J

4

Business Ethics

Caring about something T'his relates to the kind of concern and interest that one can ha\re for things or ideas where there is no second person i:r whose subjective reality one becomes engrossed. For example, the'care'seen in bureaucratic service institutions such as the gr:r,ernment social and rvelfare departments, water works departments, etc. 'Ihough they 'care' for the needs of the people concerned, the'care' remains'objective' and'distant'. There is an element of impartiality since as long as the sen,ice is provided, the'care' is seen and 'delivered' to the appropriate people or parties who need such services" However, caring after people in this manner is not considered as 'caring' from the Ethics of Care perspective.

Caring after someone

Th"

krd;f

.*.

I

promoteci by Erhics of Care is 'caring for someone'. lr is engaging and deep

wirh feelings and

erlotion.

The values

rhar maniiesr rlrt r,rirtLre of 'carir-rq' in rhis situarion are cor-npassion, concern.

love, friendslrip and kind ness.

This relates to caring for someone who requires our supporl or services because of some limitations that the person is experiencing. For example, Miss A is sick and requests that we send her to the hospital. Wc offer our help out of syrnpathy. This is seen to bc caring, no doubt, but we are helping because the person needs he1p. Ethrcs of Care does not classify this as'caring'too.

Caring for someone 'I'he kind of care promoted by Ethics of Care is 'caring {,rr soineone'. It is the kind of care shown by a mother to her child. It is engaging and deep, r'r,itir feelings and emotions. The'caring'is not'detached'br.rt 'engrossed' rn the person and atlempts to see the norld through the eyes and values of the person (\relacluez, 2012). 'Ihe values that manifest the virtue of 'caring'in this situation arc c()nlpassion, concern, [ove, f riendship and kindness. Aptly, the caring is for the persons'general nell-being. It involr,es a tu,o way process of nurturing for personal individual development" Ihe caring process; should not, however, develop or foster over-dependence on ()ne another.

3.5.4 rh"

Ek;;;i;;-1

theory emphasizes on

two moral

.

den-rands.

We exist in a rveb

of relationships and

Ethics of Care theory emphasizes on two moral demands:

r r

rve should preserve

and nurture

We exist in a web of relationships and we should preserve and nurture those concrete and valuable relationships. Each one of us must exercise special care for ihose r,r,ith u,hont lve are concretely related by attending to their needs, vaiues, desires and concrete rvell-being"

those concrere

Hou,ever, there are two important issues to note under this theor1,.

and valuable

1.

relationsh ips.

.

The Moral Demands of Ethics of Care

Each one of us musr exercise special

care for those

with whom we are concretely related to by arrending ro their needs, values, desires and

concrete well-being.

Not all reiationships have value, and not all would re sult in the dutics of ca'c towards others. The following reiationships lack the value that an ethic of care requires:

r o o

Relationships in which one persoil attempts to dominate, oppress or harm anotherReiationships characterized by hatred, violencc:, disre specl and viciousness.

Relationships characterized by injusticc, exploitat ion and harm to others.

Therefore, wc are not obliged to maintain or nurtrlre these relationships A relationship that exhibits the virtues of compassion, love, concern, friendship and loyalty should be maintained and nurtured.

Ethical Theories and

2. it

is important to recognize that the demands of caring are sometimes conflicting with the commands to uphold justice. E.g. Amy is the human resource manager of ABC Sdn. Bhd. By offering a job to her relative out of being caring, it may be in conflict with the demand to be just and fair i"e" by offering the job to someone who is better qualified than her relative"

3.5.5

Ethics of Care Theory from lslamic Contexts

Although the non-caring demands and reasoning based on Ethics of Care (as highlighted in the first issue above) seemsvalid from rationai thinkingand judgements, it is conflicting with Islamic ethics. Isiamic ethics totally beiieves in rnaintaining a harmonious relationship based on peace and compassion. Caring is preached even tor enernies. The classic story of Prophet Muhammad SAW visiting a sickly |ewish o1d ]adv, his neighbour who used to throw human waste in front of his house, clearly suggests that in Islam, there is no relationship that is free from care of others" In fact, believers are encouraged to e..en patch up relationships lvithin three days after a conflict. Faiiure to do so is a sin in the eyes of God. Another episode was how the famous Islamic military leader, Salahudin Al Ayubi treated Richard the Lion Heart and the Crusaders during the Battle of ArsLir to capture ]erusaiem from the Muslims in 1192. When Richard was suffering frorr fever, his appeal to his enem),, Salahudin Al A1.ubi, to send fresh water and fresh fruit was an,su-eretl as a religious obligation to help those in need out of care, even for an enemy. Salahudin's positive response to send frozen snow to the crusaders, to be used as u,ater and fresh frLrit during the war is another proof that the yirtue of care is promoted rn lsian under a1i circumstances (History Learning Site, n.d.). Believers are nell reminded in a Quranic verse: 'l.l one tltnong the Pctgans ask thee for as1,lum, grant it to him, so that he tnay hear lhe \\rord of God; and then escort i,im to where he cart be secure . ?-,lrl.s i-s becttLse they are men without knowledge'

(Al-Quran, At Taubah, Surah 9 Verse 6)

The sprrit of caring is beyond bad relationships and enemies in Islam. These sentiments are aiso reflected by the emphasis on promoting ukhuwrtft among the ummah, despite cultural diversity and other demographic differences. The second conflicting issue between caring and justice seerrs to bc an ethical tlilemma but may be resolved by being honest and transparent in the process. I{elating to tl-re above scenaricr, perhaps Amy, the human resource mana!'.er of AB(l Sdn. Bhd. could still help her relative to be considered for the job out of care by encourasing her to apply for the vacant position with other interested candidates. ,o!{€ver, Amy rvill not get invoived in the shortlisting process or eyen sit in ihc irttervieri'session with panel members. She will choose to be an independent party , : the decision-making process as a professional employee. If her relative turns out to be the raost suitable candidate to fill the position, it is the decision of the rnterview panel by which Amy is not a member. Amy still displays a caring attitude by giving a chance for her relative to be considered for the vacant position. However she does iiot use her power to directly appoint her relative into the position to uphold justic.e , r the recruitment process. Ethics of Care seems to focus only on the virtue of care, much as there are many other i:rod values that hrimans need to internali ze in life. Certainll,, as we had noted eariier, lhe vaiue of caring encompasses several other sub-values such as love, conrpassion, etc. Let us next understand some of the strengths and weaknesses of this theory.

Pr-inciples 75

/O

Busrrtess tthics

3.5.6

The Strengths of Ethics of Care

It forces us to focus on the moral value of being partial towards those concrete persons u,ith whom we have special and valuable relationships. fhe closest are our parents, immediate family members, neighbours, colieagues at the wr.rrkplace, etc. 'fhey are those who have made.us what we are today. This is certainly a ctvil and humane action, deeply rooted and supported by all religious principles, irrespective of differences in the fundamentals of beliefs. It obligates one to realize the moral importance of responding tn such persons as particular individuals with characteristics that demand a response to them that we do not extend to others. It reminds us of the moral obligation to care fbr these peopie who are speciai to us in all ways.

3.5.7

The Weaknesses of Ethics of Care

Ethics 'f Care can degenerate into unjust favouritism. As favouritism is an act o{ injustice,the.over-caring,behaviclurmay1eadtoinequa1ityoftreatmentzrmongthosc we are fond of, leading to unfair treatment towards others. For exaurple, ii Amy, the human resource manager, becomes too engrossed in wanting to hclp her niece to get a iob in the same organization, she may directly offer her niece ..r.tthin the porver given to her and not consider the applications of all otlrer caudiclates; an act of injustrce and lack of professionalism since it will violate organizational polrcies ancl guidelines, nhat more justice and rights principles. The Ethics of Care demands can lead to stress and 'burn-out' I his ethic seems to deniand that people sacrifice their orvn needs and desires to care for the r,vell-being of others. While we may {ocus our cnre on immediate farnilv members, neighbclurs, etc., since this theory requires one to care like 'carir-rg for sorteone' a.,. earlier described, over-caring may lead to stress in the process of balancing the myriad of needs oiothers. Assuming that over-caring rnay lead to 'burn-out', it may bc minimized by settrng priorities and by being honest and sincere in the relatrorrship in the spirit of carins. \\'e need not be extreme in the caring process. \4re certainly have to exercise jr-rdgement and prudence in our actions. For example, our parents rvish to see Lls visiting them this weekend, If we are very bus1,, rve just har,e to say so aircl suggest other ways to shorv that we care for them. We can call them often, e-mail a note or evrn suggest another day to visit them out of the caring feeling and obligation. \\re do not have to endure the stress of maintaining the carrng feeling, seen to be a sigr-r of insrncerity 1r-r our relationship. Despite its weaknesses, Ethics of Care reminds us of the rmportance of ir-rternalizing the virtue of caring from not oniy an inclividuiri perspective but also from communitarian dimensions. As socialbeings, we are obligated to complement one another as a two-way process to nurture harmonious relationships, especrelll' arnong those who are closely a.ssociated with us, be it irnmediate family members, business colleagues, etc. It is certainly a call from ali rclieions fbr humans to develop nobie values such as coinpassion and caring, universaily accepted moral virtues" Perhaps, we must continuousiy remind ourselves rvith this slogan, 'Caring is sharing'. Tire extent of caring is no doubt subjective and relative since it is dependent on the rviilingness of oneself to reach out to others, the lol,ed oiles as lvell as e.,reryorle else in the webr of relationships that we sustain in life. Let us examine the following business case before we go on to the Theory of

Rights.

1

2:

i

,

,.

;

Ethical Theories and Principlesr ,,77

Rayland lnrernarional, a mulrinarional corporation, has been operating at Senawang lndustrial Area for rhe lasr 15 years, producing microchips for the export market. The company provides employmenr opporruniries for 1,000 Malaysians, holding execuiive and non-executive positions. lr has been providing a competitive compensation package to all employees. High performance employees are further rewarded with performance bonus over and above rheir yearly salary increments to moiivate them ro continue performing well for murual benefits. The

company has also been paying bonuses to all employees for rhe last five years due ro commendable bLrsiness performance. The microchips have been extensively used for rhe prodr-rction of mobile phones anC computers, highly demanded in today's global market To everyone's shock, on 31 August 2010, Rayland lnternational, Senawang caught f rre The whole plant

was burnr down and losses incurred were massive. En. Ridzuan, the chief linancral controller, esrimared rhe losses ro be RM30 million. The chief execurive officer (CiO), Mr. Andrew Leong, r.vhen con[acted was

srill in a stare of dilemma, rrying ro find out what led ro the plant's fire. However, he felt greatly relreved afrer realizing rhat the company had secured a fire insurance policy from Allianz lnsurance. ,: Following rhe frre incidenr, rhe Board of Directors (BOD) immedrately met to discuss the

nexr steps ro be raken. Should rhe Senawang plant be rebuilt or should rhe operation of Rayland 'lnrernarional be shifted ro other ASEAN nations such as Vietnam or Thailand where labour cosl rs comparatively lower? After all, business has to continue since there is a readv matl.er lor rnrc.rochips. Furrhermore, Rayland has esrablished a strong network and good reputation all rhese years However, should ihe company also consider some other related busrnesses as a diversil'rcalion straiegy . nce ihe Senai,vang planr has been forcibly shut down due to the fire?

AssLrme you are N{r. Andrelv Leong. What will be your immediate steps to addrcss the prc,blerr-r after the plant caught fire? As a CEO of Rayland Internation?l}, yg11 or.

also a men'ber of the BOD. According to the Utilitarian Theory of Ethics, should the piant be rebr,riit or otheru'ise? Will your decision differ if you were to apply Aristotle's

\-irtr.ie Ethics and Ethics of Care? 'Iheory of Rights. -r"e-rt, u,e shali cover the

3,6

THEORY OF RIGHTS

i:.iqhts plar. an important role in business ethics; what more in moral issues. The political struggles in Egypt and Syria, the survival of Rohingya Muslims in Myanmar, the future of Gaza Paiestinians, the cries of women activists to promote gender equality and the recognition given by the West for the rights of homosexuals are i'nough to explain the emphasis placed on human rights in today's global environment. In the husiness environment, employers, employees, consurrlers) the generaipublic, etc., each have their own rights. Employees have their right to be treaied fairlv bv ,'nployers for the services pror.ided in the production of goods and services. irrnployers also har.e their rights to minimize cost of production by retrenching re,iiurdant staff '.;ring an economic crisis to sustain business. In the marketing arena> consumers have

!r

1irl1

7B

Business Ethics

their rights to enjoy quality and safe products. Likewise, producers and manufacturers also have their rights to produce the kind of goods that reap rnaximLrm profits for the high risks taken. Practically, everyone is claiming for their rights nowadays. I'he concept of rights, though humanistic, can be confusing and manipulative if not well-understood because everyone claims that they have rights. We may realize that rights can be conflicting and the claim of a right by a party is frequentiy the beginning of an ethical debate rather than an end (Boatright, 2012). Nevertheless, 'right' is an important ethical concept that needs io be appropriately understood within individual as well as social contexts.

t'

E

* ia

*i

3.6.1

R,ghrr.r. b.

--1

explaineci as

entiiiemenrs

t,-,

scrnethrng. To irave

rights is ro be er.rrrrled to act on our own or ro be treared by orhers in cerrain ways

wi:hout askirrg

per inission 6f 2nyr;ne.

Conceptualizing Rights

Al1 religions acknowledge that humans and non-humans have rights. The c-oncept of rights is certainly closely linked to justice and fairness. Horvever. in order to fbcus on rights as an ethical concept, ethics scholars have attempted to separate the concepts of right" and justice although they are ciosely related. \{e shali firstly examine the Theory of Rrghts" United Nations [Jniversa] Declaration of l{uman Rights in 1948 set forth basic human rights for all people. But what are rights? ltights can be explained as entitlernents to something. To have rights is to be cntitled to act on our owtl or to be treated by others in certain rvays without asking permission ol anvone. T'o have rights is to he free and independenf of someone's good r.vill" In r:ther u,ords, it gir.es a person freedom to act in the manner he or she deems fit r'r,ithout lravinq to follol Some terms and conditions laid down by others. Although today's rvorld promotes standarclization and Lrnilbnnity at the workplace, an employee has a right to 1\'ear any outfit that si-rit,c hi-c or her taste and colour as iong as it is decent and suitable lbr work. It i'nav be r,iolating rinc's right if another person or colleague comments on one's dressrng because ever)'one has a right to dress up in the Inaniler he or she u,ishes as a cir.i1 hr.tmart being. Conceptually, rights may be classified into legai and moral rights, spec"ific and general rights, and negative and positive rights (Boatright, 2009 aiid 2012; \relasquez, 2012). Figure 3.5 summarizes the various types of rights.

h

ff-.

*

ti *!

# I

Negacive and

posirive righrs

Figure 3.5: The various types of rights

Ethical Theories and Principles

3.6.2

Legal and Moral Rights

Legal rights are those which have been recognized and enforced as part of a legal system or law. For example, the Employment Act 1955 (r ith revisions) in Malaysia lays down provisions to protect workers from being exploited by employers. Tire detlned legal rights of employees are out of a legal system which states employees' rights to ensure justice and fairness. On the other hand, moral rights are those entitlements that we ought to irave out of general ethical rules or principles. Moral rights do not have to depend on the existence of a legal system to determine the individual right. For example, the right to be treated with respect by others is a moral right of any human being. Although Mr. A is a floor sweeper in the streets, he has a moral right to be respected as a human being. We treat hiin well bv acknorvledging his contribution and supporting him in any way. It challenges his right if rve \r,ere to mistreat or humiliate him because he is undertaking a low income job in the streets. It is a moral right to act fairiy towards everyone irrespectir.,e of differences out of respect for human dignity. Moral rights is synonymous with natural or human rights which shall be covered i,- greater detail in Section 3.6.5.

3.6.3

f t"grl tighu^*those which have been recognized and enforced as part of a legal system or law.

lMr"hqht*r*h"* entirlemenis rhar we oughr ro have out of general erhical rules or principles.

Specific and General Rights

Specific rights reiate to and involving identifiable individuals or parties e.g. in contrarts and agreements. It creates mutuai obligations, duties and commitrnents between the parties. For example, when we sign a sales and purchase agrcement to buv a house, there are specific rights that are defined for both parties, be it the buycr rr seller'der.'eloper. One of the rights of a buyer is the ou,nership of the property n ithin : stipulilgd perlod of 18 months. Failure of the de'r,eloper to fulfil the buyer's right rvilJ obligate him to pay corrpensation to the buyer for the inconvenience caused. '1'hrs is a specific right of the buyer, clearly written in the contract through mutual agreement that is binding between the two parties. General rights, on the other hand involve claims against everyone, or huntanity in gencrai, e.g. freedom of speech, the right for survival, the riglrt to be resl'rected as a PerSon. etc Relating to freedom of speech, if Mr. A stops Mr. B frorn givine his viervs Lr\'.r a concern or issue of interest, such an act is seen to be vioiating Mr. B's riglrt to erpress ]rimself as a civil human being. In fact, enforcernent of general rig]'rts rests 'rith the n-hole community.

lSprofl-Eh"

-

relare ro and rnvolve rdenrhable

individuals or parties e.g. in conrracrs and

agreements.

lcrrrrrk,gh" involves claims againsr everyone, or

humanity in general, freedom of

e.g.

speech, rhe righr for survival, the right to be respected as

a

person, etc.

3.6.4

Negative and Positive Rights

Negative rights are correlated with obligations on the part of other people or parties to conscit-rusly refrain themselves from acting in ways that interfere u,ith one's i)\\.11 rreedon-. of action. It relates to the right of human beings to be free from outsirlt, interference. Examples of negative rights are individual right to property ar"rd rvealth accumulation, one's choice of religion and beliefs, freedom from injury or tl're right lbr survival, and the right to individual privacy. Negative rights, thus, requir-e another person or party to respect the rights of others by not interfering in their pcrsonai life

f Nrgrr-, tghtt^" correlared wirh obligations on rhe part of orher people or parries to consciously refrain from acting in ways rhar interfere

with one's own freedom of action.

\)r undertakings.

Positive rights, on the othe; hand, impose obligations on other peopie to provide us with sorne good or service and thereby act positively on our behaif. It ref iects the vital interests that human beings have in receiving certain benefits f.om son',:one or society. For example, the right to be provided with adequate health care, provisron of child education, the right to a decent standard of iiving as proclaimed by the United lrlation's 1948 Human Rights Charter, etc. In other words, it closely relates to the rights

fP"t.r,r, ,',ch*'^p obligations on other people to provide us

with some good or servrce and thereby

act positively on our behalf

0

Business Ethics

of society members to enjoy social benefits provided by the priblic sector through government expenditure to fulfil one's basic physiological needs. We have elaborated on the types of rights. Let us focus on naturai rights or human

rights.

3.6.5 N*r;;EG;-l rights rhat belong ro all persons, being humans.

Th; U.ir.d

Nr""* I

Universal Declaration Human Rights '

of in 1948 sets forrh

basic human righrs

for all people. This declararion covers natural righrs. However, they call it by a differenc rerm

i.e.

human rights.

T*"

.rrj.;t.t

human righrs'.

"f

. Universaliry r.e. righis rhat are possessed by everyone, and

.

Uncondirionaliry i.e. rrghrs

rhar do

not depend on any panicular pracrice or instirurions in society.

I

Natural or Human Rights

In the classification of types of rights, we had earJier explained moral rights. A sub-set of moral rights is natural rights. This type of rights had been prominently covered in historical literature. These are rights that belong to all persons, being humans. it also covers general rights that society has to enforce to respect an individual being. The idea of natural rights has long been debated in history, going back to the ancient Greeks, who held that there is a 'higher' law that applles to ai1 persons everylvhere and serves as a standard fbr evaluating the larvs of the states. Both Roman law and the medieval church adopted this idea and developed it into a comprehenslve legal theory. The United Nations Universal Declaration of Hurnan Rights in 1948 sets forth basic human rights for all people. This declaration covers natural rights. Horvever, they call it by a different term i.e. huinan rights. These are rights that belong to all persons purely by virtue of being humans, rrrespective of race, gender, nationality and othcr diflercnces. There are two main features of human rights i.e. universality and unconditionalitl r Universality refers to rights that are possessed by everyone, rrrespecttve of demographic differences such as race, religior-r, gender, nationality and so forth. r Unconditionality refers to rights thai cio not depend {)n any particular practice or institutions in society. It is therefore not conditronal, and noi dependent on situations or circurlstances. It also means tirat there is nothing we can do to deprive ourselves or others of these rights. Examples of natural or human rights are the riglrt to be treated u,ith justice and fairness, the right for freedom of speech, the right to choose one's way of life, religior,

li:

)'

etc. t

3.6.6

Natural Rights Theory

g I

The most influential natural rights theory is the theory presented b.v Iohn Lercke 0633-1701) in his famous Second Treatise o_f Goyernv'tent (1690).l,ocke began rvith the assumption of a state of nature, rvhich is the condition of a free human being, in the absence of any government. According to lohn Locke's Natural Rights Theor1,, human beings have rights, even in the state of nature, and the justification for uniting into a state is to protect these rights. In other words, a society or nation tbrms a go\rernment as a representative of all members to protect their individual naturai rights as human beings. The most important natural right fcrr Locke is the right to property. Although the borrnty of the earth is provided by God for the benefit of everyrine, no one can nrake use of it without taking some portion as one's orvn. Each of us has a right to a fair share of the bounty of the earth based on our efforts and contributions to the society that we iive in. T'his is done by means of our labour, which, to Locke, is a fornr of propertl," As he writes,

'Etery man has property in his own pet s0t1, so Jllte Labour of his bady and thr work of his hands.. ... . cre praperly his.' (Boatright, 2012)

Ethical Theories and Pnnciples

Man survives by reason and in order to do so, he must be free from the ignition of force, as required by his rational nature. Society can be greatly beneflcial to the individual because of mutual protection, division of labour and economies of scale. However, it is only beneficial to the extent that the individual is free to act and survive according to his olvn reason" A right is a moral principle defining a man's freedom of action in a social contexi. Individual rights state explicitly the requirements for a person to benefit rather than sufter from living in a society" Rights are absolute requirements of iife within a society (lmportance of Philosophy, n.d.). By the rational nature of humans, rights are not arbit rari' or negotiabie. It appears that the Natural Rights Theory very much complements capitaiistic teatures such as individualism (i.e. pursuance of self-interests) and freedom to accumulate t'ea1th. The Theory of Natural Rights has in fact spurred the development of more rights-based theories such as the Libertarian/ Entitlement 'fheory and the Theory of Egoism. Horvever, we shali ieave readers to do their own research on these theories in the knowledge seeking process. Let us examine the concep. of property rights from the Islamic ethics dimension. Islamic ethics recognizes that man has the right to own property and weaith. and this right is protected as long as the means of acquisition is lawfui and within the ethical Irar-rerr'trrk devised by Allah (i"e" based on the commandments in Al-Quran and the Stinti,iit;. The rieht to use and benefit from one's wealth and property rnust not be exercise -i at ti-re expense of the interest of the community (Gaafland et al., 2006'). As a vicegererrt orr carLir, rnarr is required lo acl as lrustee and depuly of AIIah SBT, in dealing r.r-ith the univcrsc and its environment, wealth and othcr creatures (Zinkin and \\-illiams, l0i{-ll. In this sense, man's right is not absolr,rte but subject to the ruies .rithe Alrrqhir in all aspects of lif'e. Let us 'brieflv discuss the strengths and weaknesses of the Theory of Rights.

3.6.7 The Strengths of Theory of Rights r It defines and confirms r r

that ali humans have rights by virtue of being an jndir.idual being. In social relationships, we have to respect this right as one's .'iriitlement oui of respect for human dignity. ii rs aiso a concept that is relevant from religious dimensions and interhnkcd rvitl-i justice principles, a virtue to be emulated by all humans. f'he Natural Rights Theory acknowledges that every person has a clairlr or.er his efforts to accumulate property. As long as he uses his onn efforts, body and hands, he has an ownership/right towards his wealth and propert,v. This is a capitalist principle, well accepted based on social justice.

3.6.8 r r r

The Weaknesses of Theory of Rights

'I'hrs theory can be confusing to the mind, especialiy if everyone claims for indl.'idual rights. The issue will be whose rights are we going to fulfil? If any rights rnaybe conflicting rvith one another (refer to earlier explanations). i\{ore oflen, Theory of Rights cannot be seen as an independent theory

without linking to justice principles. It may not also be justifiabie to be applied independently ivithout relating to other ethical or religious principles because it is a theory based on rational thinking and human judgement. i.et us elaborate further on the;rbove point b1 correlating the concept of rights with justice ancl religion. In Islam, rights are no doubt duly recognized to uphold

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justice. However, the context of uphoiding justice has to be done by referring closely to the divine commandments/verses of Al-Quran and the Sunnah.In Islam, adherence to this ethical code is part of faith (Haniffa and Hudaib,2002). For example, the cry to legalizehomosexuality as a human right in today's world will not appeal to believers of Islam who will stand by the Quranic verses, Surah Hud, t2:77-83 that homosexuality

is an outright sin although from human rights principles, it is rationaily iustified" Muslim readers may want to refer to these Yerses in Al-Quran. Interestingly, similar views are shared by believers of other religions in Malaysia on this controversial issue. Aptly, all religions recognize that homosexuality is rnoraily wrong. It is clearly violating the rules of God from Shari'ah princ.iples and all other religious principles. Even from Kant's Ethics, such an act is in conflict with the uniyersalizability principle; what more the acts and rules of natLrre. Certainly, the homosexuals have a right to live and based on justice principles, one cannot discriminate them in en-rployment or in other areas. It is also noted that we cannot control peopie's lives. Humans are given the free will and right to decide for themselves how they are going to conduct :heir personal lives as a responsibility but they will be accountable for their actions; right or wrong' Jnstitutionally, we cannot legalize wrongful acts by compromising religious principles although from human rights principles, homosexuality may be rationally justified since it has somewhat been accepted as a norm tn the \\rest. Malaysia, with Rukun Negara as its guiding principle, is a nation ivhich upholds belief in religion. With Islam as the main religion, it will be appalling to legalize hotnosexuality as a human right although the West has long recognrzed rt. Wi: believe that human judgements have iimitations indeed. Certainly, thr: degree of ttne's religiosity and indepth knowledge lvill determine hrs or her actions in exercising inriividual rights to fulfi1 social obligations. Finally, we shall discuss the Theory of iustice.

3.7

THEORY OF JUSTICE

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Justice.as a Concept

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|ustice is another important moral concept witir a wide range of applicatrons. ]ustice is also a religiousiy accepted fundamental concept tbr a good human li1e. Buddhism asks us to;

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Islamic believers are also well reminded to uphold justice rn all aspects of life" A Quranic verse reads:

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Ethical Theories and

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'Oh you y,ho believe! Be L/[aintainers of justice, witnesses for the sake of Allah, and though ii is against l.,otLrselves, or yoLtr parents, and your relations, be he rich or poor, tlrcn Allah is nearer to them ( than you), therefore follow not (your)

lou, desires lesi vott do not do justice. And if you distort (the evidence), or keep away fhgn, sureit' AIlal'L knctx,s well what you do.' 1 6t-Quran, Surah An I'lisa 4:35)

In fact, the Isiamic ethical s,vstem is underpinned by two core valucs of unity (tathid) and justice (adl) (Alhabshi, 1987). These corevalues have a tremendous impact on how Islamic ethics guide economic activities and business dealings (Rahayu, 2012). Today, justice is listed as a unir.ersally good moral value to be internaiized by everlrone, irrespective ofdemographic differences and cuitural diversity. Conceptually, :i is used to er.aluate not only individtial actions but society as a whole. The 1 Malaysia ancept, introduced by the Malaysian Prime Minister, YAB Datuk Seri Najib Abdul .' rzak, rs aimed at addressing sociai justice within the diverse multr-culturai society. Justice relates to equality of treatment. We often hear this phrase, 'Do me Justice,l

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It is literaily fairness" Justice and fairness have been used interchangeably although ,..,r serious cases, we always use the term 'justice'. |ustice is associated rvith probity ii,;. con-rplete uprightness, honesty/integrity) and virtue, legality and the erxerclse of

r:r.is.rs

sen'ing the administration of rights, rewards and punisirments (Roget's '-lesaurls). To uphold justice, the good orres rrrusl be recogrrizeci and ren,arcled. The .-j on.s n'Lust be punished.

trrr,.. "h"t ," equality of treatment. It is literally-falrness. To uphold jusrice,

the good ones must be recognized and rewarded. The bad ones must be punished.

3.7.2

Justice as a social process

We earlier note that justice is also a social process. It refers to the qr.ralit,v of being

morally ,r,1 andlor demonstration of righteousness, fairness and equity in just conduct when .1e aling r"ith others. One's self-interest is balanced with altruistic (i.e. concern for needs .l ietirngs of others above one's orvn)regard, respecting rights of others. For example, . a marketer, I1r. A has to fulfil his self-interests to achieve iris key perfbrmance :.ircators (KPIs) as lvell as meet his employer's profit objectives. Hor.r'ever, he also has --: fulfil the expectations of his customers to ensure justice andfairness out of a social r ,:1r6n5iSili1y. Failure to do so wili result in biame for his unfair treatment. Over and above this, in executing justice, there has to be the maintenance of 'right' lt an exercise of authority or power so that the right can be vindicated (i.e. clear of ' l-'lrme or suspicion) rvith distribution of equitable rewardlpunishment. N{ore often, the process of ensuring justice constralns action by rules, })rocesses ' procedures. It also defines dutiesiimperatives to act accordingly. For examl.,ie, Llolr' Qurarz clearly states the importance of upholding justice as a virtue:

'l) t't'tu n'ho believe! Stand out firmll, for Allah as jttst tttitnesses; and let not the ei,,nit)'ttndhalred of others make you avoid justice. Be_just: tl'tat is n€urti to piety; and fear Allah. Verily, Allah is Well-Acquainted u,ith what you tlo.' (Al-Qurcn, Surah Al Moidah, 5: Yerse

B)

'Allah has promised those who beliet,e (in tlrc onenes: oJ Altah - lsrantic Monotheism) and do deeds of righteousness, tl'tat for tl'Lem there vvill be

forgivencss and o great reward ( i.e. Paradise)'.

(Al-Quran Surah Maidah, 5' Verse 9)

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rhe qr-rality of being nrorally jusr and/ or demonstration of righteousness, fairness and equiry in just conduct when dealing wirh others.

Ones self-interest is balanced

with

altruistrc (i.e. concern for needs and feelings of others above one's own) regard,

respecting rights of others.

\4

Business Ethics

These verses apply to all aspects of life of a believer. It must be observed by all Muslim leaders and followers alike. It governs all reiigious, political, social and economic affairs, including business. Certainly, it also links with distribution of benefits and burdens among the members of society.

3.7.3 Justice and Business Ethics In the study of busrness ethics, the concept of justice is relevant primariiy in the distribution of beneflts and burdens (costs) when we correlate the concepts of justice and rights. It is a moral right to treat ail individuais as fiee and equai persons out of uan act of justice. Likewise, benefits and burdens should aiso be distributed equally rn a social context.

|ustice is an important concept in evaluatingvarious lbrms of social organization.

We can aiso ask about the justice of the economic system in which business activity takes place. The formulation of the Annual Budgets and Malaysia Plans by the .,ialaysian government takes into consideration the interests of all partieshouseholds, businesses, the government sector and international trade to ensure the cardinal ofjustice is upheld in all institutionai aspects. One of the first literatures on social justice is from Ar istotle's works. Let us examine Aristotle's justice principles in greater detaii.

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Aristotle's Theony of Justice

justice is a virtue, long highlighted by Aristotle during the glorious Greek civilization. Within a social context, Aristotle noted that a rust societv is a prec-ondition for a rewarding life. He emphasized upon the responsibility of poiiticians and social scientists to develop social order u,ithin a just environntent for individuals' ultimate happiness and rvell-being. Figure 3.6 outlines Aristotle's Theor,v of iustice. In Book V Nicomarchean Ethics, Aristotle divided justice into trvo forms-universai justice and particular justice:

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or procedural justice, a

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upright person is one who always does what is morally right and obeys the law.

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Universal or procedural justice-in the universai application of justice as a moral concepti virtue, a jr:st or morally upright person is one who always does what is morally right and obeys the larv. ln administering justice, fair, impartial ruies and procedures should be applied. Particular justice.- in the second application of justice as a moral e oncept, it may be applied in particular or speciii,- situatious. It is aiso concerned with upholding the r.irtue of considerateness, empathy and avoiding greed in oneself by taking only a proper share of soir-ie good. In other words, to be just, we may have to sacrifice our self-interests ancl be reasonable in our judgements to utilize the resources that are avaiiable in society. There rs certainly an element of moderation in action here.

To quote a relevant statement from Boatright, (200tr): 'An unjust person is thus a grosping pcrson v,ho tokes too muth weaLth. hctnour or other benefit that sociell, offers, or a shirker u,ho reJtLses to bcar a fair share of sorne btirden.'

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Ethical Theories and Principles

Figure 3.6 summarizes Aristotle's Theory of |ustice.

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Figure 3.6: Aristotle's Theory of Justice Le

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us further elaborate on the forms of particular juslice based on Aristtltle's

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3.7.5

Forms of Particular Justice

Aristotle further sub-divided particular justice into three-corrective or colllpensatory justice, retributive justice and distributive justice.

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Corrective or compensatory-a matter of compensating persons lor r'r'rongs done to them. Retributive-the extent of punishrnent should fit the offence. Distributive-deals n ith distribution of benefits and burdens.

Both corrective and retributive justice relate to correcting rn'rongdoings

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maintain a moral equiiibrium. Distributive justice, on the other hand, is comparative in nature and considers benefits and burdens of a person in relation to other persons. Le1 us elaborate on each form ofparticular justice.

Corrective/co

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pensatory justice

This type of justice involves someone who has committed wrongcloings to another pariv. In order to be just, he or she has to compensate the other party out of etrptrthv. For exernple, while driving, we accidentally knocked into a motorcyclist. He feli down and needed help. As a result, we have to perhaps compensate his burdens by .leanng his niedicai charges or at the least, take responsibility to bring him to tlie hospital for immediate treatment, etc. It is an act of injustice to biame him on the spot and defend ourselr,es to show that we were driving in the right path or lane. If u,e are in the u'rong, certainly rve will have to arrange lor our insurance companli to cover the cost of his motorcycle repairs. Such acts need not even be determined by legality. it is in the name of corrective justice that our actions are taken for the unfortunate party stncu ire are in the tvrong.

f c"*rr;rr/ compensatory jusrice involves someone

who has comrnirted wrongdoings to anorher parcy. ln order to be jusr, he or she has to

compensate the orher party oui ofempathy.

85

6

Business Ethics

Retributive justice

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punishments for one's wrongdolngs. The exrenr of punishment should fit rhe crime or offence char has been

commitred.

We earlier noted that justice also relates to punishments for one's wrongdorngs" The extent of punishment should fit ttie crime or offence that has been committed. For example, drug tralficking is a wrongful act according to the Malaysian law. Anyone caught for such an offence faces a death sentence. Is it a just and fair punishment? Perhaps so, because the consequences of drug trafficking causes widespread deaths in the long run due to drug addiction, what more r.",ith the astcuishing increase in the number of AIDS cases! Therefore, a death sentence to uphold retributive justice seems fair if there is clear evidence that the person caught really committed the drug

trafficking offence. Aristotle's retributive justice resembles the Qlsas principle in the Al-Quran. To quote:

'ah you who believe (those with Iman), the law oJ' equal.itl'(Ql.sas) is prescribed to you. In cases of murder; the free for th efree, the slave Jor the slave, the woman for the woman. But if any rentission is made by the brother (or relatives), of the slain, then grant any reasonable demand, and cornpensatr: him u,itl'r handsrtme gratitude" l'his is a concession and the mercl, from your Lord. Aiter this, u,hoever exceeds the lirnits shall be iru grnve pennlty' (Al-Quran, Surah Al Baclarah, 2: 178) n s

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Distributive justice

l'*.,il;;;*.1 jr-rsrice arise nrosr

ly-

in the evaluarion of social, political and economic insritutions, where the benefits and burdens of engaging in cooperative activrttes

must be spread over a group.

poiitical and economic institutions, where the benefits and burdens of engagrng in cooperative activities must be spread over a group (Boatright, 2012). In some tnstances, a jr-rst distribution is one in which each person sharcs equaliy, but in others, unequal sharing is just if the inequality is in accordance rvith some principie of distribution. For example, the implementation of a progresslu inctrnre tax system. 'I'he richer 1ve are, the higher the income tax u.e have to pay. After all. thc re \renues collected will be channelled accordingly for public expenditure as rveil as project development to Issues on distributive justice arise mostiy

in the evaluation

o1 social,

enhance the weli-being of society at iarge. Generally, distributive justice is comparative, in the sense that it does not consider the absoiute amoulrt of benefits and burdens of each person but each person's amount relative to that of others.

Ontheotherhand,bothcorrectiveandretribuiivejusticeare'non comparative'

in their applications. The restoration of the moral equilibrium under

i

these trr,o

forms of justice is determined by the features of each case and not by comparison rvith other cases. For exampie, under retributive jr-rstice, a punishment fits the crime. We shali next focus on justice and the free market system. \Ve shail try to link the concept of justice in a competitive environment and introduce ]ohn Rawls's Egal itarian/lustice Theory.

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JUSTICE A ND THE MARKET

3.8

SYSTEM The worid economy today promotes globalization and a free market system. The free market features u ,yri.- rvhere all ecoiromic decisions are taken by individual the households and firms with no or minimal government intervention. It recognizes rights of individuals to accumulate u,ealth and maximize their potential. Competition is"encouraged among individuals and businesses. Major decisions about what. to produce, hiw to prod,r.. and for whom to produce are made through the market tl-re operation. Markeidecisions are made on the basis of prices, largely determined by forces of demand and suPPlY" Thc follon,ing are rights of individuals under the free market system:

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To own Private ProPertY. To own a business and to keep all its profits after taxes'

Freedom to compete

rl rvealth accumulation

and consumption of goods and

services.

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Freedom ofchoice based on the ability to pay.

3.8.1

Justice and Competitiveness

to pursue self interests with some selt-referential altruism, problems of distributive justice u'ti1 obviouslv surface, tspeciall,v the issue of inequality of distribution of weaith, power and incotre. ' Arisiotle's justice principles contain much value that lies in its insistence tirat different treatment be justified by citing relevant differences and that djfference in treatment b,e in proportion to these differences. Hot^,,ever, there is a contemporar,v lheory on distributive justice to resoir.e social conflicts tt'ithin a free markct system, der.elopecl bv an American philosopher, John Rawls (1921-2002).

In

a conrpetitive society where members compete

Il"h. R.r/* Egalimrian/Justice

fheor,v recognizes rhat conflicrs and inequality in

disrribution of wealth,

3.8.2

John Rawls'sEgalitarian/JusticeTheory

theory is related to the distribution of society's benefits and burdens lr'ithin .i competitive free market system environment. The theory recognizes thai conflicts :.nd inequality in distribution of wealth, power and income no doubt exist in suc.h an enr,ironment. However, it assurles that conflicts may be settied hy .ll'-irirrg a fair rteti-rod of choosing the principles by n'hich conflicts are resolved; for example, bv hin.ing a contract or agreement betlveen parties involved in the business. To quote from Boatright (2006): Ii.awls's

'lohn Rawls uses the notion of contract (uhich assutnes thol iJ rndivtduui,' rn sorne hypothetical pre-contract situstion would unanimously accel)l t.e-rtttirt ternts governing their relations, then those terms are just and all peoltLt: nove an obligation to abide by then) andJormulote s an original positiort (n d'rslinct 'yeil of ignorance' whereby the individuals vtho ore i'kcd lo _featttre of this is agre€ on the principles of ju stice must do so witl'tout knowing ntany fttcts trbout them,:iyes and the situation) to oyercarne indeterminacies in delining torttt:pts LJ

jLrstice.'

power and incbme no doubt exist in such an environment. However, it assumes

rhat conflicts n'ray be sertled by devising a fair

method

of choosing the principles by which conflicts are resolved; for example, by having a contract or

agreement between parties involved in the business.

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Bt,siness Etirics

To resolve social conflicts, Rawls proposed two basic principles to be applied in the process of selecting a fair method of making choices/decisions:

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Principle l-Principle of Equal Liberty Principle 2-divided into two parts-(a) Difference Principle, (b) Principle of Fair Equality of Opportunity

Rawls's First Principle of Justice l.rh" l-t,;lplrrf 1 Equal Liberty,each

person is to have an equal righr ro

the most extensive

rotal system of basic liberries (i.e. freedom) compatrble wirh a similar system of liberry for all.

'

As mentioned, this is the Principle of Equal Liberty. Each person is to have an equal right to the most extensive total system of basic liberties (i.e. freedom) compatible with a similar system of liberty for all. Everyone has basic rights; the right to liberty i.e. right to life, specifically refbrring to freedom of action and the rigirt to pursue happiness. Right to property is an extension of right to life. Equal share of whatever goods are available is the most that any person may reasonably expect, given the requirernent <-rf unanimttus agreement. This principle aiso supports the claim that each citizen's liberties must be protected from invasiorr by others and must be equalto those of others.

Rawls's Second Principle of Justice Social and economic inequalities are to be arranged so that the1, are both: 1.

To the greatest benefit of the least advantaged (Difference Principle)

Tliis principle supports the claim that a productive society r'viii incorporate inequalities, but takes steps to rrnprove the positton o1'the most needyi 5",.d

unprivileged members of thc society. Ilorvever, there are conditions under u4rich rational persons rvould make exception to the first principle ancl accept less than an equal share of sonie primary goods. An unequal share or distribution r.vil1 be justified if everyone would be betier off l^,rith the inequalitl,llror, withor-rt it. For example, assLlflre that there is an increase in total income but it is not possible to distribute it equallv among society rnernbers. Honeve'r, if er.erl,oilg benefir"s frorn tlral extra income, it is still considered a just action.

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inequalrties are to be arr'anged so rhar they are both:

.

To the grearesr

benefir of rhe least advanraged

(Difference

2.

Principle).

. Attached to the offices and positions open ro all under condirions

of fair equaliry of opporuuniry (Principle of Fair Equaliry

of

Opporruniry).

Attached to the offices and positions open to all under conditions of fair equality of opportunity (Principle of Fair Equality of Opportunit,v) This principle supports the claim that everyone shoulc'l be given arr equal opportunity to qualify for the more privileged positior-rs in society's institutions i.e. basecl on talent and corrpelence. -lhere should not be inequality of treatment based on gender, race, econorlic status, etc" to uphold social justice and fairness. 'Ib conciude our discussion on Theory of ]ustice, it is noted that both Aristotle and Rawls's social justice theories are primariiy,developed to pror.idc a means for evaluating exrsting and proposecl institutional arrangements. Insofar as the market systenr promotes utility i nc1 protects rights, it is doubly justified that these justice principles be applied accordingiy to ensure social justice rvithin a competitrve market environment. Certainly, lve cannot also rule out the appiication of religious based justi:e prlnciples that are found iir buoks o[ d ivine r tvelatious.

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Ethical Theories and Principles

Figure 3.7 summarizes )ohn Rawls's Egalitarian/Justice Theory'

Figure 3.7: John Rawls's Egalitarian/Justice Theory

Tnis chapter has outlined common teleological and deontological ethical theories introducecl that 1.;rr-e been rvidely applied in the study of ethics. It has amotlg others; over developed been readers ro the ,ruin .o,-,."pts and ti'reories of ethics that have spurred centuries b1. inf-1uential moral philosophers. Where applicaL,ie, it has aiso rcligious and ethics Islamic within discussions on the cor-r-rpatibililiof these theories contexts. The value oi uty theory depends on its applicability rqitliil existrng institutional arrangements, including business. Howe\rer, one n'ould realiz'e that no one theory, is compiehensive enough to be applied in all situations and circumstances' Each theorl, has iis strengths and lirnitatrrrns. One's in depth conceptual knou'ledge 1-ili derernrine thc chorceind appropriateness of each theory to be applied in resolving morar issues, be rt business or ,',or-r-b,",siness. The subseqilent chapters will apply this theoreticalfoundation to resoive a r,vide range of business ethics topics of interest. T'he globally competitive business, l^/hich supports the free market system, certainiy has io operate wiihin ethical consideratior-rs to sustain long-terrn organizational sun'iva1 andreputablecorporateimage'I-ikelvise,emplol,eeshavetoadequatell.Possessa]l epistemology of elhics knowiedge to be appiied and internalized whrie resolving business issues rr,ithin the context of fulfilling a social responsibility as a vicegerent and tiustee on iv{other Earth"

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Business Ethics

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To consolidate Four learning, the learning outcomes are surnmarized belorv:

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Explain the fundamentals of moral philosophy. Ethics is derived fiom the Greek word ethos,which means character, spirit and attitudes of a group of people or culture. Ethics concerns what is good or right in hurnan interaction and deals rvith justice and rights issues" It is therefore a study of action and how man should act. Ethics is also a branch of philosophy" Conceptually, the five branches of philosophy are metaphysics, epistemology, ethics, politics and aesthetics. As a field of study, ethics is sub-divided into two branches-meta" ethics and prescriptive/normative ethics. Meta-ethics classifies morality into two main forms*moral relativism and moral objectivism. Moral reiativism considers that what is right or wrong is not absolute" It depends on the person, circumstances and social situation" Moral objectivism on the reverse considers that what is right or wrong is independent of human opinion because some rules or codes originate from a divine entity and must be followed religiously. Prescriptive ethics divides ethical theories rnto two-teleologicai and deontological theories.

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Differentiate between teleological and deontological theories of ethics. Teleological theories hold that the rightness of actions is solely determineci bv the amount of consequences they produce. They are aiso referred as consequential theories. C)n the reversel Jeontological theories deny that consequences are relevant in deterrnining ttre rightness of actions. The rightness of action is based on the nature of the action itself or the rules fiom which they follou Deontological theories are also referred as non-cinsequential theories. Explain influential ethical theories and/or principles applied in today's global era-Lltilitarian Theory, Kant's Ethics of Duty, Aristotle's Virtue Ethics, Carol Gilligan's Ethics of Care, Theor,v of Rights, Theory of |ustice and Rawls's Distributive |ustice/Egalitarian 'fl-reory.

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Utilitarian Theory of Ethics It is a teleological theory of ethics widely applied b), econornists. There ;rre two forms o{' Utilitarian Theory of Ethics-Classical and Ruie Utilitarianisn,. - Classical theory requires consequences to be measured in soire \\iay so that the pleasure and pain of different individuals can be added together and the results ol different courses of action compared. An action is right only if it produces the greatest balance of pleasure over pain for everyone. In Classical Utjlitarian principles, an action is judged to be right by virtue of the consequences of performing that action. It rs silent on conlpliance to codes and rules"

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Rule Utilitarian Theory emphasizes that an action is right onlv if it conforms to a set of ruies the general acceptance of which will produce the greatest balance o1'pleasure over pain for everyone" This principle relates to the importance of complying rvittr rules while assessing the rightness of actions. It seems to give firmer ground to thc rules of rloralitv and role obligations. However, it does not specify what rules one should conform to. Presun-rably, it includes man-made rules as well as God-made rules and pi'inciples. Again, one has to make their olvn moral judgements in their actions, an indicator of moral reiativism. There are four theses of Utilitarianisnr i.e. consequentialisn . hedonism, rnaximalism and

universalism.

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Ethical Theories and

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Kant's Ethics of Duty Theory

It is a deontological theor1,. 'An action is morally right if and only if the actor is motivated by good will.' Only actions done for rational prrncipled reasons from a sense of duty has moral worth. It is not a matter of weighing up consequences. Reasons alone can give us the absoiute moral truth and discover our sense of duty. li.;r:tl championed the tu,o categorical imperatives:

1.

First Categorical Imper ative--Act only according to that maxim by which you can at the saime time will that it shauld become a universal law. Sr,rond Categorical Imperative-A ct so that you treat humanity, whether in your own person or in that of another, altvays as an end and neyer as a means only.

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Aristotle's Virtue Ethics Theory This ls another deontological theory that is value based. Aristotle's theory begins with a basic assumption that morality is both necessary and vital for human beings. His theory focuses on human virtues i.e. good character traits that manifest themselr.es in habitual action. Aristotle defines a virtue as 'an activity of the soul'. Peopie who compromise morality are degrading themselves and they have missed their goai in life. Ethics errable mankind to lead successful and rewarding lives. This theory throws back at each individual a fundanrental question- what kind of person should we be? The individual himself must reason this out based on intelligence. Aristotle distinguished trvo dimensions of humans-the rational and the irrational dimension. He rdentified our natural desires as natural dispositions. J'l'rese natural desires must be controlled bv rational thinking and prudence to be virtuous. Aristotle introduced the concept of mean or moderation in actions. He does not assume there is a universal standard that applies to all people. Aristotle defines a virtuous person as someone r.vho has taken control oi Lis life, cultivated his natural dispositions into moral r,irtues, and has ahr,ays throughout his lifetime found happiness in his actions based on these der.eioped virtues. Some of the virtues identified b), Aristotie are honesty, self-control, courage, justice, respect, prudence and shame of failures. Ethics

o.f

Care

This theory is a deontological theory that propagates a pcrson to be partial to make ethical decisions. It emphasizes caring for the concrete rveli-being of rhose near to us. It promotes the preservation and nurturing of valuable relationships on indiviciual as well as collective dimensions. This theory distinguishes three forms of caring- caring about something, caring after someone and cariilg for someone. The form of caring that is promotecl by Ethics oi Care ls 'caring for someone'. It is the kind of care that is not detached but engaging, deep in feelings and emotions. [t involves a tno \{ayprocess of nurturing ferr personal individual develoPment. This theory however recognizes tiiat liot all relationshrps must be preserved. Only relationships based on compassion, iove, concern, friendshrp and loyalty should be maintained and nurtured.

.

Theory of Rigltts Rights play an important role in business ethics as well as in all rnoral issues. The concept of rights can be confusing and manipulative if not well understood because everyone ciaims that they have rights. Nevertheless, it is an important etirical concept that is very much corelated ivith justice and fairness. According to Boatright (}AD), rights may be classified intr. legal and moral rights, specific and general rights, and negative and positive rights.

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Business Ethics

features two main characteristics-'universality' (i.e. rights that are possessed by everyone) and 'unconditionality' (i.e. do not depend on any particular practice or institutions in society). |ohn Locke's Natural Rights Theory recognized that each human being has a right to a fair share of the bounty of the earth based on his or her efforts and contributions to the society that he or she lives in. This is done by means of the labour services provided by an individual. Locke regards this as a

A fbcus on natural/human rights

form ofproperty. Theory of lustice Iustici is another important moral concept with a wide range of applications. |ustice is fairness' )ustice is associated with probity (complete uprightness, honesty/integrity) and virtue, Iegality and the exercise of processes serving the administration of rights, rewards and punishments (Roget's Thesaurus). |ustice as a concept may be appiied in individual as well as social contexts' It is also a universaliy accepted moral vaiue to be internalizedby all people. Aristotle clas,:'fied justice into two forms-Universal and Particular Justice.

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Universal justice is also referred to as procedural justice. A just and morally upright person is one who alrvays does what is rnorally right and obeys the 1aw. Particular justice, on the other hanc1, may be applied in particular or specific. situations. It is further sub-ciassified into three forms corrective or compensatorl, justice, retrrbutive justice and distributive justice. Corrective and retributive justice is non-comparative an
Egal

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A contemporary distributive iustice theory, rvas cleveloped by John Rau,ls u,ithin a conrpetitive free market system environn,ent. This is tl-re Egalitarian Theor1,. The theory recognizes that conflicts and inequality in distribution of lvealth, power and income exist in such an environment. Horvever, it assumes that contlicts rnay be settlecl/r'esolved b). devising a fair method of choosing the principies, e.g. having contracts and agreements. To resoive such conflicts, Rawls came uir r,vith the folloiving principles:

-

Principle l-Principle of Equal Liberty. E,ach person is to have an equal right to the most extensive total sy.51gm of basic libertie s compatrble with a similar s\/sten-) of libertv for all. Principle 2- divided into two parts: (a) Difference Princrpie, (b) Principle of Fair Equalit,v of Opportunity, In the Difference Prir-rciple, social an,,l economic inequalities are to be arranged so that they are both to the greatest benefit of the leirst adr,antaged. In the Principle of Fair Equality of Cpportunitl,, s1,.iu1 and econotnic inequalities are to be arranged so that they are both attached to the offices and positions open to all uncler conditions of fair equality of opportunity.

Elaborate on the important features of each ethical theory' There are strengths and limitations of each theory described above. Refer to the chapter texts on the strengths and limitations of each theory rvith further elaborations, where appropriate. List and analyse the strengths and limitations of each theory, rvhere appropriate. Students' analysis on the strengths and limitations of each theory u,i11 depend on one's corrceptual understanding of each theor1., its contexls ;ind dimensions. Some rvill aiso deepen the analysis by comparing and contrasting these theories with religious principlcs, based on divine coprnnndpcnts rather lhan rational thinking and judgements.

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Ethical Theories and

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Principles 93

Apply the ethical theories to make sound business decisions.

An understanding of the main features and epistemology of each theory rvill give an individual the edge to apply them in resolving moral issues, be it business or non-business. Students will have to create or relate to specific cases or scenarios and choose the appropriate theory/theories that are relevant to determine rightness of an action in a particular situation or condition. The application of these theories certainly depends on one's logical thinking, judgements as well as in-depth knorr'1edge and consciousness to practise and internalize ethics in the decision-making process.

Altruistic Concern for needs and i-eelings of others above one's o$,n

needs and feeiings.

Categorical That is u'ithout exceptior"t

theory An economic theory that seeks to deterrnine consumer equilitrriurn i.e. a condition in which total utility cannot be increased by spending more of a given budget on one sood ancl spencling less Consurner choice

on another good. Deontological theories A thcorynhich denies that rightness of action depends on thc good consequences thei produce" Rightness of actioir depends on the nature of the action itself or the rules from which they li,llorr'.

Epistemology A study of our n'rethod of acquiring knowledge, how does one knou, about something? it rncompasses the nature of concepts, the constructing of concepts, the validity of the senses, logical reasonirtg. as well as thoughts, ideas, memories, emotions, and all things mental. It is concerned u.rth how our minds are reiated to reality, and whether these relationships are vaiid or invalid. Ethics A branch of study r,vitl-r rvhat is the proper course of action for man A study of action; rvhat should person do? It rs the stud,v of right and wrong in human endeavours. At a more fundamental level, it is the met}rod bv rvhich rve categorize our values and pursue them. a

Aesthetics A study of art; wirat can life be like? Art is a seiective recreation of realit,v. The purpose is to concretize an abstraction to bring an idea or emotion within the grasp of the obsener. Iror erampie, music, literature and painting. The selection process depends on the value judgements of the creator. These value judgements can be observed and evaluated via the field of ethrcs.

lmpartial Putting aside one's emotion or 'detaching' from another person to avoid

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object ivc/effect ive deci siorr s.

fularginal analysis An examination of the effects of additions to or subtractions fronr a current situation.

lmperative A command or duty

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Metaphysics 'I'he fbundation of philosophy" A study of existence; what is out there? A study to explain and interpret the worl<1 art'rund us in order to deal with reality Metaphysics is also the foundation of a woridview.

Maxim A saying that

expresses a general

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Moral relativism 'fhe view that what is right or wrong is not absolute. It is rather relative and variable

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Moral objectivism The view that certain acts are objectively right or wrong. it is independent of human opinion due to the beiie{'that moral codes originate from a divine entity; either frorn God or some cosmic

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Politics It is ethics applied to a group of people. Politics tells us how a society must be set up and how one should act within a society. A study of force; what actions are permissible? However, reason is man's prime means of survival. A human being cannot survive in an environment where reason is ineffective. The primary goal of a political systcm must be the preservation and enabling of the faculty of reason. Reason does not function under fbrce or coercion. A moral political system must ban force and coercion, and promote justice and individual fieedom within larvs that are reasonable.

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Prudence Being careful and sensible

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Tawhid The islamic concept o1'unity of God. A person's relationship with A1lah, F{is people and I{is Universe. The first relationship (i.e. man and Allah) signifies that Al1ah rs the only God and creator of everything in the heavens and earth. It requires mankind to follorv the cominandments of Al1ah bv fLrlfiiling all obligations, and avoiding unethical conduct u,hich is detrimental to allbeings on the planet. Ever)'thought and behaviour of a Muslin-r is drrected towards attaining tl"ie blessings of Allah. Allah appointcd man as His vicegerent on earth, and requires him to act as his trustee and dcpr-rt,v in dealing rvjtl-r the universe and its environment, rtealth and other creatLrres.

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Teleological theories Anc,ther term for consequential based ethical theorics

Theory of Comparative Advantage A countrl, should sell to other cout-rtries those products that it produces efficiently and shor-rld buy from other countries those products that it cannot produce a.s ef ficiently.

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Utility

Satisfaction or pleasure that people receive from consuming a goocl or serr.,ice.

Unconditionality Anotirer feature of human rights. Rights that institutions in society.

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Universality A feature of human rights i.e. rigl-rts that are possessed by everyonc.

Vindicated Clear of blame or suspicion Qisas Principle A principle in the Al-Quran to describe tl-re lan, of equality of treatment when handling humans. For example, in cases of murder, if someone kills another person, the punishment should be a death sentence as lvell.

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Ethical Theor-ies and Principles

95 .

l.

Discuss the relevancy of Utilitarian Theory of Etirics from a business climension.

2.

Compare and contrast between Kant's Theory of Ethics and Aristotie's Virtue Ethics Theory.

3.

Ethics of Clare Theory demands for partiality and nurturing of relationships in moral decisionmaking" Elaborate on this statement.

4.

Discuss the strengths and weaknesses o[Ethics of Care Theory from Islamic perspectives.

5.

Define rights and differentiate between the types of rights.

6.

Differentiate between the concepts of justice and rights.

7.

Explain John Locke's iiatural Rights Theory. Discuss how this theory fits into the competitive capitaiistic free market system.

8.

Eiaborate on Aristotle's Theory of Justice. Compare and contrast Aristotle's theory with Rawls's Egaiitarian Theory to uphold social justice.

Ihe Reality TV Controversies; A Series of Controyersies ln January 2001, religious and conservative pressure groups worldwide (i e. America, Europe, Australia and Asia) protesred strongly against the airing of Tempration lsland, a TV show. The show, belonging ro rhe genre of reality TV, was made by the U5 media house, Fox TV. lt was designed to 'resr rhe fideliry' or fairhfulness of four unmarried but committed couples, who were taken ro an exorjc island, where 25 singles tried ro lure them so that they would cheat on their partners. Whoever succeeded in remaining faithful ro his or her partner was declared the winner. Crirics of the programme demanded a ban on ir on the grouncis rhar ir promored illicir sex and endangered the relationship between ihe participaring couples. A spokesman for the American Family Associarion, Randall Murphree, remarked, 'Even the rrailers for the show were enough ro upsei conservarive organizations and various religious groups.'The activisrs, in their campaign, publicized rhe advertisers'idenriry and encouraged the public to compel the adverrisers ro boycorr the show. Though Fox TV authorities argued that rhe focus of Temprarion lsland was on exploring rhe dynamics of serious relationships and not sex, the fact that Fox screened all contestanrs raking parr in rhe show for sexually rransmitted diseases weakened its argumenrs. Many family associarions accused it of capiralizing on

the entertainment value of sex and infidelity. The controversy deepened when ir was discovered rhat one of the four couples had an infanr son. Though Fox TV pleaded ignorance and removed the couple from rhe series, rhe proresrers argued rhar Fox TV could have broken up a family. Melissa Caldwell of Parenrs TV Council, a division of Media Research Centre, said, 'l think a lot of people are appalled at the concepr of trying ro break relationshrps for rhe purpose of entertaining millions of viewers

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sur:h The programme artractecl simiiar reactions in orher counlries, especially in conservative countries lndra, was aired' ln aslapan, Tarwan and india. in Taiwan, ihe show was scrapped even before a single episode ro give up the had network TV STAR and ihe programme was aired, ir faced severe opposirion

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1. Starc any three (3) erhrcal tssues in this case. 2. Several Asian coun[ries cleoded ro ban Temptarion

3.

lsland from being shown on television.Apply Utilitarian' jusrify whether rhe banning action is a rightful action' Kanrian and Virrue Erhics rheories ro assess and Rights and Justtce Relaring ro quesrion (Z) abc e, is rhe banning aciion justifiecl from the Theory of

4.

principles? Discuss. Is the realiry show promotrng social justice? Justify your answer'

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The Holy Quran: Text, Translation and Commentary. Ali, Abduliah Yussuf. Maryiand, US: Amana Corporation, i989. Print. Abdullah, A.G. and e. irnohd ZainolAbidin (2011).

Business Ethics. Selangor:

Oxford University Press.

l-15. Alhabshi, S.O. (1937). The Roie of Ethics in Economrcs and Business" Journal of Islamic Economics, 1(i):

Boatright, J.R. (2007)" Ethics and the CondtLct of Business(,5'h Ed.). New |ersey: Prentice Hail. Boatright, J.R. (2009). Ethics snd the Conduct trfBirsi ness {0"' F,d.;. New lersey: Pearson International Edition' Eoatright, l.R. (2012). Ethics and the Conduct of Business (7'h Ed.)" New )ersey: Pearson lnternatiottal Edition. Blum L.A. (1994). Moral Perception and Particularity. Carnbridge: Cambridge Uiriversity Press" p"

12.

and Chandra Muzaffar (2005)" Global Ethic or Global Hegemorn,t| Reflections on Religion, Human Dignity Civilisational lnteraction. London: ASEAN Academic Press Ltd. p" 2.

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I

Chandra Muzaffar (2009)" Religion cnd Governance. Selangor: Arah Pendidikan. Di1lon, R.S. (1992). Care and Respect.lnEveBrowning Cole and Susan Coultrap-McQuin, eds., Explorations in feminist ethics: Theory and Practice. Bloomington: Indiana Uiriversity Pr.ss'

Doris, l. (20c2). Lack of Clraracter: Personality and Moral Behavior. Cambridge: Cambridge University

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& $i

Press-

Dusuki W.A. and Abdullah, t"N. (2006). Whv do Malaysian customers patronize islarnic banks. International !ournal of Bank Marketing,25 (3): 142- 160.

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GaafTandl.,Mazereeuw, C. and Yahia, A. (2006). Islam and Socially Responsible Business Conduct-An Empirical Study of Dutch Entrepreneurs. Business Ethics: A European Rettiew,15(a): 390,a06. Haniffa, R. and Hudaib, M" (20A2). A theoretical frarnework for the development of Islamic Perspective of Accounting. Accounting, Commerce and Finance. Journal of Business Finance and Accounting,zl (l-a): 1034 1062.

Harmon, G. (1999). Moral Philosophy Meets Social Psychology: Virt'.re Ethics and the Fundamental Attribution Error. 1ru Proceedings of the Aristotelian Society, New Series, YoL.99(1999): 315-331. History Learning Site (n"d.). Saladin. . Accessed on l3 November 20i3. Importance of Philosophy (n.d.). . Accessed on 25 Octob er 2013.

Ibn Manzur (1990). Lisan al-'Arab,vo1.l0. Beirut: Dar Sadir. Ibrahim, M.S.H (2000), The l-.:ed for Islamic Accounting: Perception of its Objectiyes and Characteristics by Malaysian Musiim Accountants and Accounting Academics. PhD. thesis. Scotland: Llniversity of Dundee. Khalidah Khalid Ali, Rohani Salleh and Mashitah Sabdin (2010). A Srudy on the Level of Ethics at a Malaysian Private Higher Learning Institution: Comparison Between Foundation and Undergraciuate Technical-based Students. International lournal o-f Basic and Altplied Sciences,l0(5): 35-49.

Khalidah Khalid Ali, Satirenjit Kaur |ohl, Lai Fong Woon, Rohani Salleh, Sofiah Molek Lope Arnan Shah, Ilmiah Ibraliim (2012). Busine.ss Management: A Malaysian Perspective (2"d Ed).

Rahayu Abd' Rahman and Selangor: Oxford Fajar

Lyons, N. (1983). Tivo Perspectives: On Self, Relationships and Morality. Hat'varcl Erigcational Review, 53(2): I

36.

Maududi, Abul A'la al Publications Ltd.

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(1978). Ethical Viewpoint of Islam, Khurshid Ahmad (trans.). l.ahore: Islamic

McDonougli, S' (1984). Muslim Ethics and Moderrtity. Canada. Wilfrid Laurice University press. Miqdad Yaljin (1973). Al-tttijah al-Akhlaqi

fi

al-Islam. Egypt: Maktabah al-Khanji.

Newall, P. (2005). Introducing Phiiosoph,v 11: Ethics. 'fhe Galilean Library. . Accessed o, 12 November 2013. Nickels, W.G., McHugh, |.M" and McHugh, S.M. (2008). LlnderstontlingBusiness(S'h Ed.). Ner,v york: McGraw

Hill/lrwin.

IJorazzah Kamri (2010). Implementation of Islamic Ethics in Organizations: Malaysian Experience. iru Proceedings of 20l0International Conference on Humanities, Historicai and Social sciences (CHHSS 2010), Singapr,re, 26 -28 F ebr uary 201 0" Rahman, A.R.A. (2003). Ethics in Accounting Education: Contribution of the Islamic principle of Maelaiah. {IUM lournal o_f Economics and Manageme,Tr, i1(i): 1-lg. Rahayu Abdul Rahman (2012). Religious Ethical values ancl Earnings Quality: Some Evi.lence from Malaysia. PhD thesis. New Zealand: Massev Universitv

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Roget's Thesaurus online. Definition of justice. . Accessed on 20 October 2010. Shaw,

WIl"

(2011). Business Ethics (Zth Ed.). Belmont, CA: Thompson Wadsworth.

Aidit, H.G" (1994) .Islamic Values and Management.K:ualalumpur: Institute of Islamic Understanding Malaysia (IKIM)" Syed Othman, A" and

Tucker L (2005). Econom|cs

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Today (4'h Ed.). Ohio: Thomson South \Vestern.

Velasquez, M.G. (2012) " Business Ethics: Concepts and Cases (7'h Ed.). New fer:sey: Pearson Education.

Zinkin

]" and Wiiliams, G. (2010)" Islam and CSR. A Study of the Compatibility between the Tenets of Islam and the LIN Giobal lmpact. laurnal oJ Business Ethics,9l (a): 519-533.

CI{APTER

Ethical Leadership and Corporate Culture

LEARNING OUTCOMES At the end of this chapter, you should be able to: r Define ethical ieadership. r Describe the two pillars of ethical leadershrp-moral person and moral manager. r Explain the meaning and importance of the right tone from the top in the context of ethical leadership role. r Lxpiain some critical elements of a formal ethics programme. r Define corporate culture and ethicai corporate culture. r Explain the role of ethical leadership in establishing ethical corporate culture.

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INTRODUCTION

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This chapter covers the topic of ethical leadership and corporate culture. There are two parts to this chapter. The first part covers the topic of ethical ieadership whilst the second part examines the link between ethical leadership and ethical corporate culture. First, we wili look at the definition of ethical leadership to set the context of our discussion. Second, we will examine the pillars of ethical leadership. Third, we will discuss the importance of setting the right tohe from the top in the context of establishing ethical leadership in an organization. Next, we will look at the meanings of corporate culture and ethical corporate culture. Then, we will examine the role of ethical leadership in creating an ethical corporate culture. Finally, we will delve into the elements of an ethics programme in an organization. The ethics programme is an important aspect of ethical leadership. It helps the leaders to set the right tone from the top and instil ethical corporate culture in the organization.

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DEFINING ETHICAL LEADERSHIP

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;rpl"r; b;---1 through observation. 5o, leaders ought

to send the right nressage by first

behaving ethically themselves and then

motivating their followers to observe erhical conduct.

Th"i--r-.,]** I of ethical and unethical practices are reflected in the organizational values and ethical standards established by the organization.

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the behaviour of their followers through role-modelling and esrablishing systems and processes that

promore eihical behaviour.

influencer of corporate culture and source of' ethical guiclance for employees because Lhey have the porver and ability to guide and motivate others. They can use their pov/er to establish organizationai norms, practices and policies. Tliey shouid be able to demor"rstrate the desired behaviour, goals, values and norms of the company. Employees emulate the personal behaviour of their leaders" They get their ethical cues by observing what their bosses do (|ames, 2000). If their leader's are known r.r have committed unethical behaviour and corporate practices, employees might perceive ti-rat these behaviours are acceptable and expected of them. Leaders, in tiris context, are not limited to corporate directors, CEOs and other senior executives, but also at every levei of an organization, ir-rcluding line managers or supervisors. Given this background, it is pertinent for leaders to be the main source of ethical guidance for employees. So what is the meaning of ethical leadership? According to Broln, Trer.ino and Harrison (2005), ethical leadership is the ability or po\\rer to instil ethically acceptable behaviour through personal actions and motivate followers to emulate such behaviour ihrough tr.,r'o-u'ay communication, reinforcemcnt and ethical decision rnaking, Ethical leadership embraces the values of trustworthiness, respect, responsibility, fairness and caring as shorvn in Figure 4.1. It-l fact, an organization is ethical only if its leaders are ethical and most importantly, if the leaders are able to motivate their foilolvers to behave ethically. Ethicalleaders set an ethical tone-at-the-top by behar.ing ethically and encouraging their employees to do the same. This type of leaders leads by example and encourages their employees to take the initiative to solve problems in a fair and ethical manner. Some studies found that employees behave ethicaily when their leaders pay attention to ethics, take ethics seriously and valuc ethics as mrch as making profits (Trevino ef a\.,1999; Hitt, 1990). Other than role-modelling, ethrcal leaders also allocate adequate financial and physical resources to promote and support ethical behaviour and Leaders have long been vierved as the key

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Next, we shall examine the two pillars of ethical leadership, which greatly affect the extent to which a leader is a strong or weak etliical leader.

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Core components of ethical values

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ETHICAL LEADERSHIP Trevino et al" (2003') suggest tr,vo pillars of ethicalleadership-a'moral person'and a 'moral manager.' These tu,o pillars basically reinforce the idea that ethical leadership requires someone that does not only have a set of core ethical vaiues and acts upon them, but also establishes various piatforms and a rvork environment that promotes such values among his followers. The rnoral person pillar represents the leader's personal traits, character and altruistic motivation. The moral man?ger piilar represents the proactive efforts of the manager to influence the way his employees behave, ethically and unethically. These two piliars are important to ethical ieadership because individuals learn appropriate behaviour through a role-modelling process, which is by observing the behaviour of others (Bandura, 1977). Figure 4.2 shows the two pillars of ethical leadership.

Figure 4.2: Iwo pillars o{ ethicai leadershrp

Culture

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ethically in borh their personal and professional lives. They should avoid being hypocrites.

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alone is nor enough ro develop erhical leadership. lt has to be supplemented

by rewards and a penalty system and

constant two-way cornmunication about rhe importance of ethics.

The rnoral person pillar requires a leader to be a person of integrity, honesty, trLrstworthiness, and competent. He must also shorv concetn for people, b,e socially responsible and treat others with respect and dignity, and most crucially, live a moral life at the personal level. As a moral person, the leader must be a role model to all his employees. His behaviour and the way he makes decisions must be consistent with what he preaches i.e. 'walk the talk' and he must live his beliefs i.e. 'live the talk' as opposed to being a hypocrite. In a nutsheil, he must behave ethically in his personal and professional iives. A rnorai person knows what is right and wrong anri then acts out of conscience and integrity. l{e must lead by example and be aware of how the use of his authority, actron and behaviour affects others. in addition, a moral person must be brave enough to take a stand on questions of ethics, behaviour and morality. in short, a moral person is a principled decision-maker. Figure 4.3 summarizes the characteristics of a'moral person' and a'moral manager.' The moral manager pillar requires a manager not only to be a role model lhrougL visible action, but also to use his authority to estabiish work en\rironment and system that promotes ethical behaviour and discourages unethical behaviour. For example, a moral nlanager puts in place a reward system that promotes personal accountability and irrstitutes a disciplinary systern that punishes unethical practices in an organization. A moral nlanager also consistently and regularly communicates the importance of ethics and values to hts employees. He makes conscious effbrts to transter his ethical vaiues and beliefs to his employees so as to fbster an ethical work envtronment. A moral manager must ensllre that all decisions are in line r.t ith the ethical r'alues that he professes. He must not be afraid to even decline business that is not aligned to the ethrcal r,alues of the organization. These actions must be visibie to ali emplo,vees in rrlder 1o Bcl llreir lttention In a nutshell, ethical leadershrp is about how leaders exercise their porver b1' being both rnoral indir.iduals and moral managers. In the next section, lve will look at another impolterilt aspect of ethical leadership, which is the right tone {iom the toP.

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Ethical Leadership and Corporate Culture

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SETTING THE RIGHT TONE FROM THE TOP

A very important dimension of ethical leadership is for the leaders to transform their words into action, which is to set the right tone from the top so that they rvill not be seen as paying lip service to ethics. What does it mean by setting the right tone at the top? 'Ihere are many ways to interpret this expression. In this book, we can take it as the efforts undertaken by corporate leaders, including the board ofdirectors, to create an ethical atmosphere in the workplace" It is about creating a culture that is conducive for everyone to take ownership and responsibility to do the right thing because it is the right thing to do. This type of culture is so infused in the daily lives of aii employees that it becomes a porverful tool to mitigate risk arising from fraud, corruption and unethical behaviour. For example, a manager sets the right tone from the top when he decides to discard a component of a product that fails to meet a critical safety test. The manager believes that faulty products shor,ld not be sold in the market even if the colTrpany is under pressure due to time and budeet constraints. His empioyees emulate this belief and expectation, then internalize them in their daily lr.ork. The manager has, in fact, set the right tone for the company for years aheacl that ensuring product safety is paramount to the company. The irnportarrce of setting the right tone from the top is greatly emphasize d by.l oot and Ofori (2009) u,hen they assert that 'leadership r,r,hich lacks ethical conduct can be dangerous, destructive, and even toxic'. If the top management sets an inappropriate: or wrong tone at the top, that is the atmospirere that encouragcs urnethical practices lhe ernployees will not take ethics seriousiy. If the top management shirks, misuses company assets, misrepresents the capabilities and perfbrmance of the organizatiot't, sii,es bribes, Lrreaks the law and engages in other unethical practices, then the emplol,ees receir.e the message that these types of behaviour are not only acceptable, but perhaps expectecl. They might think that it is certainly the r.vay to get ahead in that iirganization. Employees watch the behaviour of their managers, iisten trr rvhat the1, say and follow their lead. Case for review 4.i highlights the incident where the top rnanagement rvas so u.ith the achievement of financial goais at any cost that the emplovees ',,bsessed 'sorted to unethical prac.tices to meet the goals to avoid harsh actions from their

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Bausch & Lomb: Overstated Earnings

fhe Hong Kong division of Bausch & Lomb had tremendous

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103

)4

Business Ethics

The SEC's investigation revealed rhar Bausch & Lomb had been overstating its earnings for years.

Nor only the l long Kong division was involved rn rhis unethical and unlawful acr, but also other divisions in Latin America and orher Asian counrries. How did Bausch & Lomb rnanage to oversta[e irs earnings? Apparently, the company resorred to various unethical sales tactics to boost sales, such as durnping Ray-Ban sunglasses ar cheaper prices ro'black'markets and shipping con[act lenses to doctors who did not make any orders in the firsr place. In some extr€me cases, the distributors even held up to r-wo years of unordered invenrories. ln short, the company relied on financial manipularion ro meet sales targers, thus arrificially boosted rheir earnings. The SEC charged rhe company for breaking rhe US law for overstaternenr of earnings. Several of its top executives were named in rhe charges. As a resulr of the unethrcal sales ractics, Bausch & Lomb had to restate rhe earnings. l-he revenues were reducedby 542.1 miliron and ner profrrs by413 million for 199-3. Although the SEC did nor find any evidence rhat could direcrly irnplicare rhe rop executrve-( on rhe oversraremenr of profirs, rhe invesrigarion revealed that rhe culture ar rhe company focused roo much on the achievement of earnings and sales goals. The rop executrves gave challerrging sales targets and expected the salespeople ro achieve them at any cost. They did nor wanr ro hear any excuses for not meeting rhe rargels. Sometimes, employees who failed ro meet the targets would be sub;ecred to severe humiliarion. T.he top executives failed to emphasrze chat rhe achievemenr of f inancial goals must be made rhrough ethical means and values such as honesry and fairness. They had pur tremendous pressure orr the salespeople to achieve sales rargers unril rhey resorted ro whaiever means ro meer them. lr-i short, rhe top executives set the

wrorlg Lorre [rorrr t-lre Lup Lirar Llre errrployees had Lo do whatever it takes to boost sales. Nor only the culture became so obsessed with the ochieverrenL of earnings. the cornpany also gave higher weighr ro achieving higher saies and earnings growth and profitabilrty than the werghr on ensuring customer sarisfacrion As a resulr, Bausch & Lomb pard deariy fr:rr-this lack ol ethical leadership and had to serie a shar-eholder Iarvsuit over the overstatement oI earnings as well as the SEC charges. The company's reputation was badly damaged too. (Adaprcd

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right tone from the top about putting customer's safety first, it heiped to gain public confidence and restored its damaged reputation in the long run. Case for Review 4.2 shows when the CEO of iohnson and )ohnson set the

Johnson and Johnson: Tylenol lncident

ln 1982, several people dred after raking Tylenolcapsules rn Chrcago, USA. The then CEO of Johnson and]ohnson, James Burke, clurckly referred to the company's credo of olacrng cusromer safety ahead of financial considerations io make a swift decision to recall the prod.rct from ihe market nationwide, fuliy knowing ihat rhe sales and share price would fall. He rook a big risk because the recall meanr rhe company had ro absorb a massive cost bLr his conscience was clear because he knew rhat he could not rrsk more lives. He did not wait for the investigarion ro be complered before making such a decisicn ln ocing so, rhe CEO had ser the righr tone irom the rop-to put the cuslomer's interest and safety firsr in whatever they do in rhe company.

Ethical Leadership and Corporate

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He belreved rhar only when rhe cusromers were happy then rhe interests of shareholders would be served. His acrion and rone frorn rhe top enarled the company ro endure the Tylenol crisis and derive a long-rerm comperrrive advantage from the incident. How is thar possible? l-le was nor afraid to make a decision when there was a quesrion of ethics and stakeholders took notice of rhis acrron Akhough iniriallyJohnsorr andJohnson suffered a temporary serback due to the massive loss from rhe recali, ir came back stronger with higher customers' rrust and loyalry as well as enhanced repulation. Since then, rhe company has been one of rhe mosr profitable and successful companies worldwide.

Holv do the leaders set the right tone from the top? Leaders must embrace the two pillars of'ethical leadership that lve discussed in the eariier section of this chapter. A summary of the actions that can be taken is as follons:

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Always act as roie mode,ls by being ethical towards employees, customers, suppliers, shareholders and regulators. If the CEO himself breaks tire law, then he could riot have been setting the right tone from the top for the organ izat ion

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Actively embed values so tirat ernpioyees know ti-rat ethics and honesty are rmportant in thc orglnizatiutt. Regularly talk about the <;rganization's ethical values and standards in all compan)'er,,en1s to show that ethics is a prioritv. Consistentl,v 'clo as the,v sar,r' as opposed to double talk, ivhere in the organization the leaders talk about the irnportance of ethics and integrity, but ignore them in therr personal lives and social engagernents. Implement policies, processes and systems to support the tone from the top. Make it clear that comphance and ethical risks are not tolerated, and infuse this stance in the organization's rervard and disciplinary system. l-ake imrnediate action to fix anv ethical problem and remedy the harm, rvhich includes taking appropriate action against tl-re offending ernployee in a su,ift and firm manner. Provide, sponsor and endorse adequate and regular ethical training on a code of ethical business conduct of the organization.

horvevcr, nurrerous firms have failed to establish the right tone frorn the top, leading to l-rarmful scanclals and even their collapse. Take 0nron, for example. It had a corporate slogan of 'Respect, Integritl., Community, Excellence' but the top executives were the ones that betrayed the trust of the empioyees and shareholders by getting invoived in massir.e lrauds. The former CEO, ]effrey Skilhng, emphasizcd bottom-line results over ethical values whereas another former CEO, Ken La1,, showed unethical leadership bv instructir-rg his managers to use his travel agency for arranging ail overseas trips for Enron's executives. As such, the lr,ords of that slogan meant nothing to the stakeholders as they lost their jobs, pensions and life savrngs. Similarly, rve had rvitnessed how the CEO and founder of Computer Associates International, Sanjay Kumar, proudly talked about his company's corporate qovernance and business ethics practices. However, at the same time, he committed large-scale fraud that led to his indictment in the US court. He obviously did not walk and live the talk. In the next section, we rsill look at some critical elements of a forrnal ethics programme, lvhich is one of the building blocks of an ethical leadership and corporate

In reality,

105

06

Business Eihics

culture. We can also take this ethics programme as a way to safeguard against unethical practices in the workplace or the way to institutionalize ethics in an organization.

4.4

CRITICAL ELEMENTS OF A FORMAL ETHICS PROGRAMME

In the earlier section of this chapter, we have learned the importance of setting the right tone from the top. Here, we wiil explore a structure that leaders can estabhsh to support the effort to 'walk the talk' and ultimately establish an ethical leadership. It is normally referred to as a formal ethics programme, which provides ethical safeguards in the workplace. This programme consists of a set of formal activities, policies, practices, processes and procedures to deal with ethical issues in an organi: rtion. This 1-'rsg12mme aims to affect employees' perception and view of ethical issues, and rnost cruciail1,, to guide them to address those issues that arise on the job. It is also inter-rded to suppnrt employees to comprehend the ethical standards set by the organization and ensure compliance with the standards. Employees necd to har.e ethicai standards, training and channels to seek advice whcn they encounter an ethicalrJilemma in their dailywork. Then, theyu,ill tre able to rnake an informed arrrl ethical decision to address such a dilemrla. T'he top management, particularly the CEO, should take the lead to initiate and sponsor this ethics programme. Furthermore, it is a manner in rvhich the top managernent team and the employees' irnmediate si-rpervisors can sholtr strong ccxrmitrnent to create an ethical atmosphere throughout the organization. The supen.isors har.,e a crucial role in impiementing a formal ethics programme because they need to give support to employees in adopting the cthical standards. Frgr:re 4.,1 shorvs a list of critical elements in a formal ethics programnte.

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Core Value Statement

An important dimension of ethical leadership is the articulation of organizational values to all empioyees and other stakeholders. This can be done via a core value statement. Top management needs to identify anri derine a clear shared meaning of values/befiefs, priorities and principles that can guide everyone in the organization in their daily activities"

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4.4.2

Code of Ethical Conduct

Code of ethical conduct or simply ref"erred to as code of ethics is one of the most common critical elements of a formal ethics proJramme. Many established organizatrons have formulated such a code. We can take it as one of the best-known and important instruments for implementing business ethics in an organization because it can influence behaviour of the employees. It usually contains poiicies and ethical principles that sirould be followed by all members of the organizalion so that they can behave ethically. It is meant to guide managers and employees on what is viewed as ethical behaviour and to enhance their ability to deal with ethical issues. Schwartz (2004) suggests that code of ethics shouid have the follorvino characteristics for it to be useful and effective.

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Applicable to er.eryone in the organization and all business partners Easy to understand and non-legalistic Contains reievant exampies of ethical and unethical behaviour or practices Avoid negative tone Specify sanctions or penaltics for violatron of the code

Other than the abovementioned characteristics, code of ethical conduct should also specify the procedure for handling complaints and rnciude the descriptions of standarcl of condr-rct ancl standard of practice expected of ail rnembers of the organlTation. It is conrmon for tire codc of ethics to be a stale document, u,hich is rreant to be stasired ar,vay sotrrer,r'hele in the desk drawer of errrployees afler atLelrtling an induction programme. Hence, it is pertinent for organizations to ensure ali employees are reqr-rired to sign-off on ti-re code annually to indicate that they have read, understoocl and undertake to contply with the code. In additjon, the code of ethical conduct wiil be more effective if it is follorved by an employee ethics training prograrnme so that ethics can be infused in the company's dav-to-day activities. Figure 4.5 lists typical provisions or issues covered ir-r a code clf ethical conduct r,r'hereas Figure 4.6 shows the PETRONAS no gifts policy statement, ,,"hich is also rnclucled in its code of business conduct and business ethics.

Accepting or refusing gifrs from business partners policy

Conflict of rnteresr Securiry of propnerary and conlideniial infornrarion .p!lQ!f les

Figure 4.5: Con',mon prcvisions of the coie of ethical conduct

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Business Ethics

NO GIFTS POLICY pETRONAS aspires ro achieve rhe h;ghesr standards of inregrity and honesty in rhe conduct

of its business and operations. pETRONAS staff are required ro acr in rhe besr inrerests of PETRONAS and to refrain from engaging in rhe conducr whrch may affecr the besr interests of PETRONAS.

fherefore PTTRONAS staff shall NOT:

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The policy is meanr ro avoid conflicrs of interest or the appearance of conflicrs of interesr rn any ongoing or potential business deallngs of PETRONAS pETRONAS staff are required ro familiarize rhemselves wich the provisions of PETRONAS' wirh Code .-rf (..onducr and Business Erhics (CoBE) to ensure rheir conducr is in compliance

rhe CoBE (Scturce: http://www.petronasgas.com/events-prctmorions/Pages,/articlel GENTLEREMINDERNOGIFTSPaUCv: aspx, accessed on 12 lune 2014 )

Figure 4.6: The PFTRQNAS no gifis policy statement

4.4.3

Compliance Manuals

It is common for large org,anizations to have corrp.liirnce nlattuals to communicate

relevant rules, policiei a,r.l regulations that must be adhered to by all employegs. $n6h a manual guides enployees to understand the rules and helps them to implemerrt them in th"eir .1ally u.tiviti"r. Some rnanuals include a checklist of things tcl compiv n,ith for easy ref-erence of employees. For example, HSBC Bank Malaysia reciuirer all

functiolal lteacis of clepartment to ensurc that a11 employees rcad and con'rpl1' 1r i1fi the provisions of the bank's compliance manual. They are also required to sign off on the manuai annuaily. The heads of department need to complete arrd sign off on a checklist that specifies all the relevant banking policies, regulations and provisions of larvs that need to be complied rvith in the bank's dal'-to-day operations.

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Ethics Training Programme

Ethics training programme aims to train all levels cif ctuployees to engage in ethical practices and behai.iour in the workplace environment. It is liot meant to teaclt employees about morality but to help them make the nght dee isions that are consistent with the organizations'ethical standards. Training can be in the fornr of briefings, lectures, workshops, gloup discussrons, high-level spceches and uewsletters' The training ihould cover the provisions of the cocie of ethtcs and ethical issues E,.r- ;,,rrrg-_--1 that are specific to an industry or profession. In other words, it should be tailor-made Leiomes nerrfei rrve if rhe ourcomes a,'e Tror to address issues encountered by different business ftrnctions in an organization assesseci or 1ev1sv,,s1l For example, human resource managers may face unique ethrcal concerns in the i'egulariy recruitment process and ernployee relations. Meanlvitile, procurement managers may have to deal *,ith the issues of accepting gifts, b, ibes or benefits-in-kind in the supplier selectron process"

Ethical Leadership and Corporate

Culture

Ethics training can help to shape the behaviour and perceptions of employees toward acceptabie and unacceptabie practices in the organization. Hence, it is important for the ethics training to provide them with the exposure and skill to analyse case studies on real ethical dilemmas in the workplace and guide employees in the process to make the right decisions to resolve them. Organizations can also use training programmes to convey their expectations and ethical rules to the employees. Finally, organizations should put in place a system to measure and track the progress and success of ethics training. Periodic qaizzes or tests can be arranged to check the employees' knowledge retention. Supervisors can keep track of any behavioural change that is more in tune with the ethical standards or an increase in reported concerns or complaints about potential unethical activity.

4.4.5

Ethics Officers and Compliance Officers

Ethics offlcers (EOs) are basically administrators who have a direct and full responsibility to oversee all matters related to a formal ethics programme in an organization. They inplemeirt and monitor the programme and advise the top management and board of directors on ethical problem identification and resolution. They are senior corporate officers whc, have the clout and power to act on ethics-related matters. To ensure the EOs act independenth,, a reporting mechanism should also be established to provide confidentiajit-r and anonymity without any fear of retaliation. O..6.r.L,1it the EOs shouid report directlv to the board of directors with a dotted line reporting to the ClrO 1br adrninrstrativc matters. ivlembers of an organization will not be confident to refer potential ethical problems to an EO lvho is rrot impartial for fear of reprisals or a conflict of inlerest.

One of the more critical fr-rnctions of an L,O is to assist the top management leam and board of directors to rnstrl ethical culturc in an organization. EOs are the key contact point for marlagers, employees, customers, directors, shareholders arrd even suppiiers on issues reiating to cthics. Petry and Tiez (.1992) suggested that the responsibilities ol'ethics oificers include advising empioyees, investigating aliegatrons of ethicai problerns, as r,e1l as der.eloping and coordinating ethrcs and compliance policies. An rmportant point to consider is to ensure that EOs have the resources to perform their fui-ictions. Hence, the support from the CEO in aliocating the budget and human capital resollrces is paramount to ensure the etfectiveness of the EOs"

Conipliancc officers (COs), on the other hand, are tuliy responsible for not lr,ith policies, rules and regulations, tut also monitoring adherence to ethical procedures ancl standards. It is comrlon to combine the functtons oi erhics and compliance officers in most organizations. In short, EOs and COs are the anchors of a successl'u1 ethics programixe in an organization. onl-v ensuring compliance

4.4.6 Whistleblowing Policy and Ethics Helplines Whistleblorving is the disclosure of information about unethical or illegai practices tcr someone rvithin an organization who can take action to investigate, prevent and punish the lvrongdoers. It is an important risk management mechanism to uncoyer unethical activities that could expose the crrganization to various risks. A whistlebiower is an individueii who reports the evidence eif wrongdoing or unethical activities. Tlvo famous whistleblo\vers rvere Sherron Watkins and Cynfhia Cocper of Enron and \{orldCom respectively. They reported accounting irregula,-ities in the

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Business Ethics

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know how to do it and they are nor confident thar rhey will nor suffer from reprisals from doing 50.

In the case of Ms. Watkins, she reported her concerns to the CEO, Ken Lay. Unfortunately, the CEO did not take the report seriously and failed to investigate companies.

the concerns thoroughly. This incident highlights the importance of having an independent whistleblowing channel of reporting so that any reporl of wrongdoing can be investigated instead ofshoving them under the carpet.

Employees are the ones who usually have the inforrnation about conduct or activities that could have ethical or legal ramifications. However, they are reluctant to report such activities due to fear or simply mrsplaced loyalty to coworkers or superiors" So, it is pertinent for organizations to have a written policy and procedure on whistleblowing in order to guide and encourage employees to report unethical and

illegal activities. Further, the policy and procedure is necessary to prevent abuse or misreporting. Swoan (2007) suggests the foilowing reasons for having a whistleblowing policy in an organization.

r fb identify risks that the top management

or the board of directors might

not know.

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To encourage employees to voice out their concerns. To provide an alternative channel for employees to report unethical activities if they cannot report them to their immediate superior.

An inrportant element of an effective whistlebiowing policv is to specify the protection to be accorded to the whistleblowers. Protection in terrns of confidentialit,v of in{brmation and rmmunity from civi} or criminal actions is necessary to encourage u,histleblou,ing activities. Whistieblowers should also be protected from an1, fornt of retaliation such as dismissal, pay cut, job transfer or e\ren a demotion. Without this protection, nobody will dare to speak out for fear of being victirnize d. In Malaysia, the government has introduced Whistleblorver Protection Act 2010 rn Decenrber 2010 to give legal protection to individuals who expose corrupt practices in the public and prn ate sectors. The Act assures confidentiality and gives irnmunitv from criminai trr civil cl-rarges. An essential element to the rvhistleblor,ving policy is the etl'rics helpline, rvhi,-h serves as a confidential channel for everyone in the organization to communicate information on ethical violations and illegai activities. Members of an organization can also call the helpline to seek advice on ethical problems or dilemmas in case of doubt. Thel'can choose to remain anonymous. Thr heipline can be in the form of telephone lines or via the Internet. Establishing helplines indicates that an organization is serious in promoting ethical practices, which in turn gives confidence to employees to b1ou, the vr,histle on bad behaviour.

4.4.7 Ethics Audit Some firms have put

in place an ongoing process or mechanism to verify and assess the effectil,eness of their ethicai safeguards by conducting an audit of their ethics programmes and standards. This process helps the organizations to determine any loopholes, tr,eaknesses and warning signs that could lead to future ethical problems. Another purpose of the audit is to ensure that thc managers and employees closely foliorv the desrred ethicai standards specified in the code of ethicai conduct. The audit also periociically revien s and assesses the adequacy of the existing ethics policies and procedures and suggests improvements. Ethics audit ts also perlormed in order to identify anlr d.,riu,toirs from the code of ethics and assess whether the manageinent has taken the necessary steps to rectify them.

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4.4.8

Ethics Awards

demonstrate arganizations can give recognition to empioyees who have gone all out to ,nj.mbru.. the core and ethical values in their daily routi'res. This form of recognition them, which helps to show other empioyees the appropriate behaviour expected of thei shguid emulate. Ethical employees can be role models and set good examples of ethical conduct fbr their coworkers. The role models can provide supPort and give encouragement for their coworkers to follow the ethical standards establislied in the organiza-tlon and to consider ethics in decision-making. " In ,u*-ury, the top management needs to ensure that they use or integrate a1l the eight elements of an ethics programme together because they reinforce each other and iiis more effective to do so. Studies have found that employees in the companies

that have a comprehensive ethics programme are less likely to engage in unethical ()oseph, behaviour and inclined to report such behaviour to the relevant authority 2000; Kaptein, 20U9). A formal ethics programme must not only exist on paper but must be present in the hearts, minds and actions of every member of an organization

for it to be effective. In the last few sections of this chapter, we lvill explore the link between ethical -1b begin with, first we need to be clear on the leadership and corporate culture" definitions of corporate culture and ethical corporate cuiture. We may have briefly broached on these tlvo areas eariier in this chapter so it is now the time to delve into theitt

4.5

Culture

t'Jstrril.

DEFI N ING CORPORATE CULTURE

AND ETHICAL CULTURE Personalvalucs and nroral character play crucial roles in influencing an organization's ethical stance and perforn'lance. Hor'l.ever, they are not sufficient to prevent nr isconduct because research has shonn that ethical culture is the one that has the strongest inflr-rence on behaviour (Whetstor-re, 2005; lurkiewicz, 2007).In this section, rve will revieu'the compot"tents of an ethical culture. However, to begin rvith, we need to knorv the nteaning of corporate culture and its role in shaping the decision-rnaking process

oian organization. Corporate culture is the sirarecl beliefs, values, norms, customs, expe :tations artd meanings of the members of an organization that shape or influence their thinking and behaviour. Simpll, pr-rt, it is the way everyone does things in an organization. It also ties indir.iduals in thc organization and guides how thev ought to treat each other. F,:rther, corporate culture gives a sense of identity to achieve common goals and enhances social stability because it holds the organization together. Elements of a corporate cuiture include methods of probiem-solr.ing and conflict resolution, rules and policies, incentives and rer,vard system, reporting line and authority, tempo of' rvork, pirysical layout of workplace, mode and channels of communications and leadership styles. An example of a corporate culture is AirAsia's culture--team,orientated, fun, low cost and high productivity. Financial institutiotis, on the other hand, are knolvn to har.e a compliance based culture and strict control. Ethicai cuiture rs an unspoken understanding amongst meri'lers of an organization of the legitiinate and unacceptable practices. It is the part of corporate

mri;il;6,,

-.

musc be included in

an erhics programme

for it ro be effective.

111

12

Br.rsiness Eti,ics

Th. rbt-,-*

"f

an ethical culrure

could bring abour a disastrous effecr on the sustainability of an organization.

I

culture that promotes the ethical values of an organization and guides employees to understand the importance of doing the right thing. In a strong ethical culture, employees know that doing the rieht thing is expected and they have a positive attitude towards the ethical decision-making process. They also know that doing the right thing is a priority in the organization. The top management team is instrumental in developing a strong ethical culture because their attitudes, choices and actions have a great influence on the expectations of the employees. Organizations that have a strong ethical culture embed ethical values in the actions and decisions of the management and employees, in the company policy and procedures and formuiation of incentive systems. The establishrnent of a formal ethics programme is one of the key components of the development of an ethical culture. The other component is the top management's commitment to ethics, which is encapsulated in the concept of ethical leadership. In a strong ethical culture, employees are not merely concerned with getting the job done, but getting them done in the right/ethicai way. In fact, a stronger ethical climate ,rncourages ethical conduct, promotes ethicalleadership (Brown and Trevino, 2006) ancl enhances employees' perception that the management is committed to ethicai practices (Sims and Keon, 1999). A survey of Ethics Resource Center (2009) in U.S. companies revealed the folloning findings *,ith regard to the companies that have a strong ethical culture:

r r r r r

Fewer employees felt pressure to commit unethical behaviour. Lotver incidents of miscottducl alttuttg etttpluyees. I{igher tendency to report for observed misconduct. Actions and perception of top management team drive the ctl-rical culture.

Strong top managerrrent commitment erlcourages reporting of financial misconduct.

'l'rer.ir-ro et al. (1999)

in a survey of more than 10,000 U.S. employees found that ernployees are more r'r,i11ing to report bad news and ethical violations to management and they perceive that the presence of ar-r ethics programme enhances their decisjonmaking process. The findings of this survey indicate that ethical culture plays an irnportant role in the employees' decision-making process. Employees are inclined to make ethical choices when the culture of an organization gives priority to ethical values and conduct and the top management does not compromise ethics in their actions and decisions. In summarv, corporate cuiture piays an important role to bind emplot'ees together and to make them understand the expectations ,.nd values of their organizations. I'hey are guided by the corporate culture not only in the ivay they do things but also the rvay thev interact with each other and ti-re ntannel they treat other stakeholders. Ethical culture is the component of corporate culture that griides employees on what is acceptable and unacceptable behaviour in therr datly activities in the organization. A strong ethical culture fosters the environment that makes being ethical a priorrty and essential to achieve organizational goa1s. Ethrcal leadership and a formal ethics programme are key comprJrlents of an ethical culture. Next, rve shall examine the relationship between ethical leadership and ethical corporate culture.

Ethical Leadership and Corporate

Culture 1i3

ETHICAL LEADERSHIP AND ETHICAL CORPORATE CUrIURE We have noted that ethical leaders embrace a set of universal ethical values and personal traits such as trustworthiness, respect, responsibility, fairness, caring and integrity, among others" Further, leaclers explicitly make the statements of values, beliefs and customs through their conduct, speeches and various systems and procedures established in the organization. Ail of these become ingrained in the organizational culture. Ethical leaders are both 'moral persons' and'moral managers'who encourage ethical behaviour by role modelling, purposefully managing ethics and making eyeryone in the organization accountable for ethics. Given these characteristics, ethical leaders are instrumental in cultivating ethicai culture in an organization. In other words, ethicai leadership is a precondition to an ethicai culture. Leaders are influential in shaping the expectations, perceptions, practices and behaviour of everyone in thei. organization. Trevino, Hartman and Brou,n (2000) highlight that the 'moral manager' piliar makes ethical leadership stand out, which in turn greatly affects the corporate cuiture of an organization. They have polver and influence that they use to motivate their followers. Motivation is, in fact, a powerful force that influences individuals to channel their behaviour, energy and concentration to achiet'e organizationa) goals. So, ethical leaders motivate or even compel others to confor rrr to their cxpcctalions ahout cllrir.al conrlrrct Horv do ethical leaders motjvate others to embrace ethic:l principles in their daily actir.'ities? They can creatc motivation by establishing an incentive systcrn that rewards the achievernent of goals througl-r ethrcal means and punishes emplol,ees who fail to coniply with the ethical standards of the organization. This reward system is a porverful reinforcement for ethical behavior.rr. F,,rrther, it is through such incentive systems that leaders can convey their expectations of ethical conduct. Further, ethicai leaders lead bv erampie and are role models for the einployees. Grojean, Resick, Dickson and Srnith (2004) assert that role rnodelling can be an important determinant of an ethical culture because it increases trust in leaders and aligns the values of the ernployees r,vith those of the leaders. In aildition, ethical leaders provide the direction and facilitate the process of achieving organizational goals through role modeiling. Sci, naturall,v, employees look up to thern to determine lhe expected beiraviour. . In addition, policies of ethical leaders greatly affect the rva1, employees perform their daiiy work and behave in the organization. Ernployees vierv leaders tha,1 introduce policies and take actions that are in Iine with the core values of the organisation are more trustworthy. Thus, in a nutshell, ethical ieadership is a critical iomponent of an ethical culture, which is an ultimate source of ethical behaviour (Slnclair, tqq:). in.fact, \^ e can say that ethical leaclers play a dominant roie in developing an ethical culture. it is through their ethical tone from the top and actions that they.*u, p.ornot. and reirrforce ethical culture. In summary, ethical leaders promote ethical culture. Unethical leaders demonstrate a severe lack of ethical conduct in business operations and breed a culture of anything goes that we have witnessed in various companies such as Bausch & Lomb, TVco [nternational, Artirur Andersen, Parmalat, Satyam Computer Services, Lehrnan Brothers, Merrill Lynch and most recently HSBC Banking Group

C,h'.ril.rd"rth,p h* a posirive relarionship

with erhical corporate culture.

4

Business Ethics

The learning outcomes for this chapter are summarized below:

l

Define ethical leadership. Ethical leadership is the abiiity to cultivate ethical behaviour in the workplace by role modelling and motivating followers to observe ethical conduct in their daily acrivities. Leaders can encourage ethicai behaviour through two-h,ay communication, reinforcement and ethical decision-rnaking.

2.

Describe the two pillars of ethical leadership: moral person and moral manager. The moral per.son pillar represents the ieader's personai traits, character and altruistic motivaticin. 'fhe moral manager pillar represents the proactive efforts of the manager to influence the way his employees beirave, ethically and unethically.

3.

Explain the meaning and importance of the right 'tone-from-the-top' in the context of ethical leadership role. 'Ihe initiatives by corporate leaders and the board of directors to create an ethical atmosphere in the workplace where eyer).one takes ownership and responsibility to do the right thing because it is the right thing to do.

4.

Explain some critical elernents of a formal ethics programme. Core value statement--a u,ritten statement issued by the top management team to convc,v values of the organization to en-rployees and other staketolders.

Lhe

Code of ethical conduct a r,r,ritten set of rules, policies and ethical principles to gurcle managers and employees to behave e thically and to resolve ethical problems at the workplace.

Compliance manuals -a set of guidelines to guide employees to understand and implernent the relevant rules, regulatjons arnd laws in their daily activities. Ethics training programme a programme to train all empioyees to engage in etl"iical practices and behaviour in the rvorkplace environrnent and to help them inake the right decisions based on the establisl-red ethical standards. Ethics offices and compliance officers-Administrators who have a direct and ful1 resporrsibilitl, to oversee al1 matters related to a formal ethics programme and to advise the top management, board of directors and employees on ethical problem identification and resolutlon.

Whistleblowing policy- a policy that outlines the procedure to disclose information about rinethical or iJlegal priictices rvithin an organization and specifics the protection accorded to the r'r-1ristleblon er.

Ethics helpline-a conficlential channei of communication establi.shed for all members of the organization to report on ethrcal violations and illegal activities to seek guidailce on resolvins etl, ical problerns or dilemnras.

Ethics audit-an on-golng process to verify and assess the adequacy and eff-ectiveness o1'ethical safeguards and to check that the managers and employees closely follorv the desired ethical standards specified in the code of ethical conduct. Ethics arvards-Recognition tti employees who have gone all out to demonstrate and embrace the core and ethical I'alues in their daily routine.

i ?

f, I,

r E.

u

ii k i &

r I r E

& fr:

s

5.

Define corporate culture and ethical corporate culture. Corporate culture rs tire shared beliefs, values, norms, customs, erpectations and rleanings of the members of an organization that shape or influence their thinkrng and behaviour. It is the wav everyone does things in an organization.

#

x

li

& H

B B

E

s

E

Ethical Leadership anci Corporate

Culture

Ethical culture is an unspoken understanding amongst members of an organizationof the legitimate and unacceptable practices. It is the part of corporate culture that promotes the ethical values of an organization and guides employees to understand the importance of doing the right thing.

6.

Erhics

Explain the role of ethical leadership in establishing ethical corporate culture. Ethical ieaders play a dominant role to cultivate ethical corporate culture in an organization' They embrace ethical values in their personai and professional lives. Thcy make decisions based on ethical principies and ethical r.alues. Ethical leaders have a great influence on the way the followers behave and perceive things in the organization. Hence, they can influence and motivate them to pay attention to ethics in their daily activities through role-modelling and establishing policies and reu,ard systems that promote ethical practices. They can reinforce ethical behaviour by talking about ethics and emphasize on the importance of ethics to the organization. When leaders practise ethical leadershrp, the follolvers iearn the appropriate behaviour through observing them and copying such behaviour. Ethical leadership lets employees know the boundaries of acceptable and unacceptable behaviour in the workplace.

audit An on going

proce ss of assessing the adequacy and effectiveness of a formal ethics Programme

,lf an organization. Ethics awards Recogi'ution given to emplol,ees who are known to observe ethical conduct actn ities consistentl-v.

in their dailv

Ethics helpline A confidentialchannel of communication for all members of an organrzatton to seek advice on ethic,ai problems and to report any rt'rongdoing. Ethics

officer A senior rnember ofthe management

team who is responsible for overseeing the implementation

of a ibrn'a1 etl-rics programmt: and ensuring adherence to established cthical standards.

Ethical culture An unspoken understanding amongst members of an organization of the legitimate and unacceptable practices"

Ethical leadership fhe ability or po\,\rer to instil ethicaliy acceptable behaviour through personal actions and ,notivate follotvers to emulate such behaviour through two-wa1'communicatiun, reinforcement and ethical ,.iecision-making.

programme A set of fortnal activities, policies, practices, processes and procedures to deai with ethical tssues in an organizatiott. f thics

Ethics

training A prograrnrne that aims to irain all levels of employees to

engage

in ethical practices

and

lehaviour in the workplace environment. Code of eth ical conduct A written set of rules to guide managers and employees to observe ethical conduct and to help them rvork through ethical <-lilemmas.

Compliance manuals A set of written guidelines about policies, iules, rcgulations and provisions of laws to 1r-ride employees

to implement them in their daily work.

l'15

ib

Busrness tthics

Compliance officers A manager who is responsible for ensuring that the organization and its members comply with the policies, relevant rules, regulations and provisions of laws. Core value statement stakeholders.

A written statement articulating organizational values to all employees and other

Corporate culture The shared beliefs, values, norms, customs, expectations and meanings of the members of an organization that shape or influence their thinking and behaviour. Moral manager Represents the ef'forts of the managers to be role models and to establish a work environment and system that promotes ethical behaviour and discourages unethical behaviour in an organization" Moral person Represents the leader's personal traits, character and altruistic motivation.

top

The efforts undertaken by corporate leaders, including the board of directors, to create an ethical atmosphere in the workplace.

Tone from the

Whistleblower An individual H.ho provides the information or evidence about potential unethical or iliegal activities in the organizatioir. Whistleblowing Disclosure of information or evidence about potential unethical or illegal activities by an individual within an organization to the parties outside or the authorities in the organizatioti.

t.

Explain the meaning of ethical leadership.

2.

List and briefly explain five common organizationai ethical values.

3.

In your opinion, explain rvhat happens if

4.

Illustrate. with examples, the meaning of setting the right tone from the top.

5.

Analyse the importance ol ethical leadership in cultivating ethical culture in an orqanization.

a moral person

fails to be a nroral manager?

Earnings Growth: The Orbit Way Mac was a Senlor Vice President in the Customer Credit Department at Orbit lntern.:'ional Broadcasi Network (Orbit), a leading inregrated consumer media entertainment group in Malaysia and Soutlreast Asra Crbir operates in four areas of business, iiamely Pay-TV Radio, Publrca:ions and DigiLal Media Mac was responsrble for customer i)ayrnents, credirs and reconciliations of accor-inis. Ihe top managenlent gave hinr chrlienging monthly revenLle growth targets. He felt pressured ro achieve the targets He knew thai not meeting ihe targers would put his 1ob on the line.

Ethical Leadership and Corporate

Culture

ln Orbrr, ir was common for upper level management to'massage'the company's financial records' Mac knew thrs. They were willing ro do wharever was neLessary ro achieve revenue growth withour farl. growth and The board of drrecrors did nor know about this activiry. They were happy to see performance team to deliver management top in the trust did nor borher to ask any quesrtons. They pur their complete srress. He had resulrs. One evening, a week before the end of the month, Mac was under rremendous yer ro meer the current monrh's iarger. He did nor have much time left. He ccrrainly did not wanr to be few humiiiared during rhe deparrmental heads' meering for not meering the target. He went rhrough it a year. had He rimes lasr year. lt was nor a good experience. He lost a hefry poriion of his annual bonus last All of them occasions. numerous on time hellish go a rhrough also warched orher heads of deparrmenr were very fearful of rhe CEC. Mac knew his bosses manipulared financial records and said ro himseli "l should do the same in this bur desperare rime. Why nor? My bosses never get caught. There is a slim chance that lwill be discovered, his Larer, records. rhe financial lconrrol all rhe records." soon, ir became a habir for Mac ro manipulate subordinares would also do rhe same fraudulenr activity under his v;atch. ln fact, they worked together ro'brainsrorm'creative ideas rct cook rhe company's books. The inrention was ro fraudulenrly stare as if rhey were meeting revenue growrh orojections albeit artificially. Mac wanted ro make hls bosses happy, lro more importantly, he could save himself from further humiliation. He had had enough. lr was during D:ainsrorming sessrons rhar Mac learned how to hide bad debt, which caused the assers and profit to

-.:

;.

nilaied

!re i ne Cay in Decenrbcr, a ream of inrernal audirors paid a visit ro rhe Customer Credit Department'

They They v,,enr srrarght ro see Mac and dernanded to examtne the accounting records of the department.

did nor rake long ro frnd unusual journal enrries made and appro\ed by Mac. They confronted him about rhe entries. Mac panrcked and coulcl nor rhink of any plausible explanation. lt was then that he confessed .

o his iraudulerr prz( r cp

Questions:

1. ldentify rhe elements in Orbir lnrernarional Broadcast Network that contributed to the decisions to manipulate financral records and continue to do

so.

2. Wharwasrheronefromrheropinthiscompany?lnwhatwaydidtheboardofdireciorscontriburedto rhi: lraudulenr activrryl

Bandura,

\.

(1977). Self-efficao,: 'l'or,r,ard a

unifying theory of behavioral change.

PsS'chological Reliew, B4'.

t91-215"

Brown, M.E. and Trevino, L.K. (2006). Ethical leadership; a revierv and future directions. The Leadership Quarterly, 17 : 595 - 616. Brown, M.E., Treyino, L.K" and F{arrison, D.A. (2005). Ethical leadership: a social learning perspective for construct deyeloprnent and testin g. Organisational Behavior and Human Decision Processes, gT(2): 117-134. Irthics Resource Center (2009). The rmportance of ethical culture: increasir-ig t:ust and driving dorvn risks. Accessed on 12 ]anua f '; 2014.

ts*

117

118

Business Ethics

Grojean, M.\V., Resick, C.J., Dickson, M.\Ar. and Smith, D.B. (2004). Leaders, values, and organizational climate: examining leadership strategies for establishing an organizational climate regarding ethrcs. Ictttrneil oJ Bu sine s s

Ethic s, 55: 223 -24

l.

Hitt, W.D. (1990). Ethics and leadership: putting theory into practice. Ohio: Battelle

Press.

iames, H.S., )r" (2000). Reinforcing ethicai decision-making through organizational structure. laurnal of Business Ethics, 28(1): a3 -58.

Iennings, M.M. (2009). Business ethics: case studies and selected readings (6th Ed.). Ohio: South Western' Cengage Learning. |oseph, J. (2000). National ethics survey, Volume l: Hou, employees perceive etlrics at work. Washingtorr D.C.: Ethics Resource Centcr.

Jurkiewicz, C.L- (2007). Louisiana's ethical culture and its effect on the administrative faiiures foiiowiug Katrina. P ubli c Adm ini s t r at i o n Re v i ew, 67 (l) : 57 - 63. Kaptern, M. (2009). Ethics programme and ethical culture: a next step relationship . I ournal o"l' Business Ethics, 89 261-268.

in unravelling tireir multi-faceted

No Gifts Policy. . Accessed on i2 lune 2014. PETR.ONAS Gas Berh:rd.

Petry, E. and Tietz, Schu,artz, )-7 -

4.,1.S.

f.

(1992). Can ethics officers improve ethics? Business and Society Ret,iev,,, 82(1): 21 25.

(2004). L-inir.ersal moralvalues for corporate codes of etl'rics. Journal of BtLsiness Erfuir-s, 59 (1):

44

Sims, R.L. anC Keon, I'.1 . (1999). Determinar-its oiethical decision-making: The relatronship of the percerved organizational enr.iron nrcnl. lournnl of Bu:iness Ethics, D@):393-401.

Sinclair,

A

(1993). Approaches to organisational ctilture and ethics. Journal of Business litltics,12:6'3 73

Snoan V (2007). L,stablishir-rg a u,histleblowing procedure. ICSA Best Practrce Guide (Z'd Ed.). London: International Charterecl Secretaries and Administrators. Toor, S.R" and Ofori, G (2009). Ethicai leadership: examining the reiationships with full range leadership model, ernplovee outconres, and organizational culture. Iournal of Business Ethics,90(4): -533-5'17

Trevino, l-. K., Hartman, L. P. and Brorvn, M. (2000). Moral person and moral manager: horv erecutives develop a reputiition for ethical leader:ship. California Management Review,42 l2B-142. Trevino, L,. K., Brorvn, M. and Pincus Hartman, L. (2003). A quantitative rnvestigation of perceived execulivc ethical icadership: perceptions from ir"rside and outside the executive suite. Htnnon Relations,56(l): 5-37 Trer.i.no, L. K., Weaver, G.R., Gibsoir, D.G. ancl Toffler, B.L. (i999). Managing ethics and legal c.ompliance: whai hurts and rvhat ',r'orks. Oalifornic Management Review,41: 131-i51.

Whetstone,'f.i. (2005). A framervork for organizational virtue: the interreiatronship of mission, culture and leadership. Business Ethtcs: A E'uropean Review, V(4\367-378.

CHAPTER

Corporate Governance

I-EARNING OUTCOMES At the end of this chapter, you should be able to: r Explain the meaning of corporate governancen Explain in what way that the separation of ownership ano control in public corporations could lead to corporate governanc'e problems. s Elaborate on the meaning of conflict of tnterest in the context of the relationship between shareholders and professional rnanagers.

r

Explain the implications of the Malaysian corporate ownership structure on corporate governance. Describe the nature of the principal-agent relationship in the context of corporate governance. Explain the stakehoider, property and social institution theories that are applied to the corporate governance discipline. Describe the role of various Corpordte governance mechanisms in protecting the interest of the shareholders and stakeholders. Describe the various ethlcal issues in corpcrate governance.

CHAPTER

5

Corporate Governance

LEARNING OUTCOMES At the end of this chapter, you shouid be able to: n Explain the meaning of corporate governancer Explain in what way that the separation of ownership and control in pukrlic corporations could Iead to corporate governance problems. s Elaborate on the meaning of conflict of interest in the context of the reiationship between sharehoiders and professional managers.

a

l:

Explain the implications of the Malaysian corpcrate ownership structure on corporate governance. Describe the nature of the principal-agent relationship in the context o{ corporate governance. Explain the stakeholder, property and social institution theories that are applied to the corPorate ciovernance discipline. Describe the role of various corporate governance n-'echanisms in protecting the interest of the shareholders and stakeholders. Describe the various ethical issues in corporate governance.

:0

Business Ethics

.-

5;0.

-'

INTRODUCTION

By nature, human beings are egoists. Recall the discussion on ethical theory where egoists tend to place emphasis on their self-interest. Their actions are based on promoting their own'happiness. Being egoists, human beings can be greedy too. Horvever, the extent of the greediness differs from one person to another. In a business context, when greed is combined with unfettered power, it can almost certainly lead to corrupt or unethical practices. Corporate governance problems largely arise due to the unethical behaviour of corporate managers. They are human beings who can be egoists, greedy and have power in their hands. undeniably, there are many good and ethical corporate managers out there who work diligently to ensure that shareholders are not short-changed. Howeveq there are aiso sufficient numbers of errant and unethical managers who had caused havoc in the corporate worid at the expense of stakeholders.

In llre past decades, we have witnessed various corporate scandals, be it in the or other parts of the world. The US government responded to the Enron

rArestern

scandal by tightening the legal framework governing corporate managers and public corporations. Meanwhile, the UK and Asian countries introduced various corporate governance codes to address the issue of abuse of power by corporate managers and revamped their respective company laws. 'lhese initiatives were mainly taken to strengthen the oversight function within public corporations. The ultimate aim is mainly to protect shareholders and stakeholders and to improve corporate rnanagement of public corporations. In Malaysia, \^re have a good share of corporate scandals invoiving pubiic corporations, namely the financial irregularities in Renong Berhad, the Perwaja Steel fiasco, the downfall of Sime Bank Berhad and the massive trouble at Malaysian Airlines System (MAS) Berhad in the late 1990s.In 2006, we witnessed the'llransmile Berhad's financial manipulation case in which tu,o of its dircctors were sentenced to jail for providing misleading financial information to Bursa Malaysia Securities. In 2010, the case of former Sime Darby Berhad's top executir.e in connection with trvo alleged failed investments overseas and the Bakun Project had rocked corporate Malaysia. Sime Darby Berhad allegedly suffered a massive loss dr-re to these failed investments. Poor corporate governance is of great concern to not only shareholders, but also to other stakeholders as well, because it can lead to massive losses and the collapse of corporations such as Enron, Worid Com and closer to home, Sime Bank Berhad. Hence, robust corporate governance provides a mechanism for the board of directors and shareholders to control corporate managers so as to give them little room to misuse their porver and to advance their greed at the expense of stakeholders. Hower.er, this mechanism needs to be supported by the promotion of ethicai practices amongist the corporate managers. In this instance, the board of directors play a crucial role to inculcate ethicai behaviour in a business organization. Hence, the interrelationship between corporate governance as a mechanism to oversee the way power is exercised in a pubiic corporation and the role of ethical practicts or behaviour in ensuring the achier.ement of organizational objectives is established. This chapter attempts to provide an overview of corporate governance in the context of business ethics. We will focus on corporate governance issues relating to public corporations. Then, we will learn about the developrnent of corporate go\rernance in Malaysia and the uniquencss of the Malaysian corporate olr.nership structure that is said to be an important corrtributing factor to corporate governance

CorporateGovernance 121

problems in our public corporations. We will also examine the theories of corporate gou..nur.. to understand why corporate governance problems occur and the remedies ior them. Finally, we will delve into some of the ethical issues in corporate governance. However, we first need to be clear about the meaning of .orporate governance and its importance to public corporations.

5.'1.".

DEFIN ITION OF CORPORATE

GOVERNANCE According to Tricker (1984), the term 'governance' is derived from the Greek word gubernare, which means 'to steer'. Shareholders of public corporations rely on board if directors to steer the corporation on their behalf. In contrasi, owners of small private companies steer the con-rpany on their own. The official definition of corporate governance in Maiaysia as adopted hry the Malaysian Code on Corporate Governance (2000) is:

'Tht'

process tmd -strtLcture ttseLl to direct and n'LanLtg€ the business ond ;irs of the compctrtl, to)+,ords e nhcncing business prasperity ancl corporate ttlt ttccorrttabilitlt ,,ytisJ, thc ultimate objective of realisit'Lg long-tcrm sharcholdcr value, whilst taking into accotult the interests of other stakeh,'lders-'

This definition takes a broader perspective where companies need to take into .onsideration the welfare of stakeholders in fulfilling the objective of maximizing value for the shareholders. The ultimate role of corporate governance is to oversee the management that manages the business on a daily basis. Corporate governance, in this contexl, should ultimately lead to enhancement of accountabilit,v of the board of directors and corporate wealth. Corporate governance encompasses a broad spectrum of internal and external mechanisms inter-rded to mitigate agency risk by increasins the monitoring of managements' actions, limiting managers' opportunistic behaviour, aird irnproving the quality of firms' information florvs.

gorrernance in public corporations. But first, we need to have a good understanding of the structure of the public corporatiotr that gives rise to various corporate goverttance problems.

Next,

5.2

r,r,e

rvill look at the significance of corporate

CORPORATE GOVERNANCE AN D PUBLIC CORPORATIONS

In this section, lve urill examine the structure of a public corporation, rn'hi.h has a srgnificant implication on corporate governance. To begin with, though, we should note that a public corporation is one of the common forms of business ot,nership. The other two fbrms are sole proprietorship and partnership. Our focus in this chapter rs on public corporations. Knorving the structure is crucial to the undrrstanding of rvhy peopie give prominent attention to corporate goyernance of public corporations

fc*p*r" governance aims ro ensure that

rl-re

company serves and prorecrs the inrerests

of irs shareholders and stakeholders.

22

Business Fthics

to private companies. Most importantly, we will investigate in what way the structure ofpublic corporations contributes to the various corporate governance problems. We will pay close attention to the misalignment of interest between the shareholders and controllers in pubiic corporations. Most companies started off as small entities where a group of people or family members pool their funds together to form a business entity. The orvners are effectively tiie managers of the company. This form of orvnership is called the 'ownet-ntanager firm'. As firms aspire to expand tiieir businesses, the otvners need substantial capital to support the expansion. A common way of raising capital rs to issue shares and bonds to the public through. capital markets. The shares are tradabie in the stock market. Once a company goes public, often times it is no longer fully ccintrolled by the founders. This situation is typical of the Anglo-American type of public corporation. rvhich is found in the US and UK. Pubiic corporations in these countries are characterrzed by dispersed share ownership in which there is a large number o{ shareholders with small shareholdings. It is uncommon to find a single or a group of large shareholders. Figure 5.1 shows the corporate ownership structure for private and public companies. A public corporation is its own lega1 entity, as if it r\re re a person. iror example, a public corporation can enter into a contract to organize a business transaction and own a property in its own name. Similarly, it can sue and Lre sued for as oPposed

rnp'*;"r,pill the owners are directly involved in rhe management

of day-to-day operations.

breaching a contract.

Managen :nr

Figure

l" prbh.

ilt"d --_l

companies, rhe owners delegate

the managemenr of day-ro-day operarions ro a group of professional managers.

5.1

:

Corporate ownership structure for private and public cornpanres

1'he dispersion of share ownership into hundreds of thousands or er.e n

miliions of'

sharehoiders meant that no single sharehoider has enough shares to exercise cffective control over the company. In this instance, the shareholders do not manage or have fuil controi over the enlarged entity anymore. They effectively surrender or deiegate

most power to their appointed board of directors. .r board of directors consists of professioral directors that control corporate resources on behalf of the shareholders. Thc leader of the board is the chairman. He or she is the highest ranking officer and is the cirairman of the public corporation too^ Figure 5 2 illustrates the relationshrp betu,een the shareholders and the board.

Corporate Governance

BETWEEN THE SHAREHOLDERS AND THE BOARD OF DIRECTORS

The shareholders delegate power and aurhoriry to the board of directors

The board delegates porver

to the management

Figure 5.2: Relationsl'rp between shareholders and board of directors

The control or mariaBenrcnt of public corporations are distinctiy separate from ownership. Corporirte ownership and control is divided bettveen two partiesshareholders and the boirrd o1'directors. The sharehoiders own the firm and the board r-.i directors control thc pubiic corporation. This situation is possible because it is not ;-raclical fbr the large number of shareholders to speak in one voice in managing the daili' alfhirs of the public corporation. Further, some shareholders prefer to beirar,e like investors rather than shareholders. Thci, fls not wish to take part in managing bilsiness actiyities" 'I'hey are only concerned lvith business performance so tirat ther. car) reap the desired retLlt ns {'rom their investment. The separatisn rrf o\{rnership and control has two important implications. First, the delegation of control ovt:r corporate resources to the board of directors diiutes the porver of the shareholclers. Tl-rey are the owners but irave limited power over the r"ay the public corporatiolt is managed. The board of dirbctors usually cor-rsists of a small nurnbcr c',1 people depending on the size of the corporation. Hencc, thel, are unable to control and manage the affairs of the corporation by themselves. The,v hire prolessional corporate rnalrallers to manase and make decisions on daily operations of the e orporation. \\re call this group the top management team. It is led by a chief executive offlcer. The board of directors then focuses on charting the strategic direction anri making srrategic decisions. In tiris structure, the board of directors should be rJeally the shareholders' first line of defence against potential abuse of po\,\,er by the professronal managers. In reality, hor,r,ever, r,ve have witnessed numerous faiiures of the board of directors to ellectivel.y play the important role of protecting the interests .'f sliareholders. So, in this chapter, we shall consider the directors and prolessional rorporate managers as controllers of a pi:blic corporation. They have the tendency io abuse their immgnse po\{er if they are left unmonitored. It is rvorthr,vhile to bear ;n mrnd that the boarcl o|directors can be a powerful mechanism for protecting the interests of sharehoidcrs rf it is coinposed of a sufficient number of i;idependent direcfors" We shall examine this issue in Section 5.7 of this chapter.

I

Shareholders are rhe

owners br-rr rhey do nor direcrly conrrol all the decisions in their company.

k*p*r",.n.rrg." have the tendency to pur:sue self-inreresrs firsr,

often making

decisions rhat do nor serve the interesi

of

rhe shareholders. This

situarion is known conflicr of interesr.

as

112 ILJ

24

Business Ethics

Corporare -1 governance in public listed companies aims to align the interests

of the professional managers wich those

of the shareholders.

Second, when there is a separation of ownership and control, there is bound to be

a conflict of interest between the shareholders and controllers. Shareholders expeet the controliers to maximize their wealth so that they can enjoy good returns on their investment in the forms of dividends, capital appreciation and iong-term survivai of the public corporation. The controllers, however, do not necessariiy share the same aspiration or objective as the shareholders. The controllers may have their own agenda or motir.e in exercizing control over the public corporation. This divergence oi misalignment of interest between the shareholders and controilers is said to be the origin or key contributor of corporate governance problems in public corporations. Recall the opening section of this chapter-that human beings are opportunistic

greedy by nature. The controllers' power to control the public corporation combined with the natural tendency to be greedy and an ineffective monitoring of' their behaviour can lead to disastrous outcomes. We have learned from the media of various corporate governance issues such as creative accounting, the controllers paying hefty bonuses to themselves despite poor performance, taking excessive risk by icquliing other companies that may only serve to enhance their prestige and power, committing fraud, etc. Mismanagement issues are bound to arise . The effect of these to shareholders and stakeholders' corporate 'We g()vernance problems are far reaching have now seen that this type of corporate structure renders shareholders to be aimost pow,erless except for the power to exercise the voting rights to reject major corporate decisions that are not in their favour. In reality, ho\t'ever, it is not easy to coordinate a large number of shareholders to speak in one voicc in oppositlg corporate actions during the general meeting of shareholders. Hence, tvhen left to their own devices, opportunistic and errant controllers tend to exercise their pon'er not to advance the interests of sharehoiders as expected, br-rt to prornote their self-interest. This is argued to be the starting point of corporate governanc€r problems tllat lve have been witnessing so far. The precedilrg discussion establishes the r-reed l'or corporate governance in public coiporations. Corporate governance is meant to mot'titor those errant and opportunistic managers so as to ensure they exercise therr Po\,\'er to advance the: interests of shareholders at all times. In contrast, the role of corporate governan,-c is said to be less needed or significant in private companies r'r'here there is iittle separation of ownership and control between the on'ner and manager. The owner-manager is basically the same person who orvns and manages the cornpanyhimself or herself. He or she has full control over the direction oithe companY and makes his or her own decisions on matters of importartce to the company i.e. or,r,nership and control are in the hands of the shureholders. In this respect, there is no divergence of interests as in the case of public corporations because tl-re shareholders cum controllers are pursuing the same objectives or interests. Further, it is in the o\vner-manager's best interest to ensure that their comPany is rvell-managed and profitable. The conflict of interest situation common in public corporatiolrs is ke;rt to a minimum or does not exist at all. In summary, the structure of public corporalions gives rise to the various corporate governance problems that we had witnessed so far. The structure leads to the cletachment of shareholders as owners of the public corporation-they are separated fiom controlling their ou,n property. They rely on the controllers to protect their interest but why would the controllers care about the shareholders? They might pursue their own interest because they are greedy by nature, and with Power in their hands, they are in the best position to enrich themselr,es at the expense of the shareholders. ln this situation, the controllers need to be rn;nitored so as to ensllre thel' do not deviate from the activities and decisions that u,rl} give priority to serve the objective

or

CorporateGovernance 125

to maximize shareholders' wealth. 'Ihis monitoring comes in the form of corporate governance mechanisms, which will be discussed in Section 5.7 of this chapter. In the next section, we shall take a look at an alternative form of corporate ownership and its implication to the nature of corporate governance problems. Unlike the typical diffused shareholding in Anglo-American corporations, Malaysian public corporations have concentrated ownership: It is common to find family groups, institutions, the government and individual shareholders having large proportion of ownership; thus exerting substantial control over the public corporations. As such, there is little or rare separation of ownership and control compared to the diffused corporate ownersh ip envj ronment.

5.3

THE CONCENTRATED OWNERSHIP OF MALAYSIAN PUBLIC CORPORATIONS

Corporate governance in Malaysia is generaily characterized by a high degree of concen:ration of corporatc otvnership and tight insider control. Concentrated ownership refers to the situation where the ordinar), share ownership in a public corporation is largely held bv individuais, a group of individt als, famiiy members, instittttions and the government. In this tvpe of ownership environment, olvnership and controi tend to be concentrated in the hands ofa large group ofshareholders that har-e sigitiiicarrt direct control in a company. Concentrated shareholders are known as the 'insiders' that have long-term stable relationships with the public corporation. Insiders exert control over the public corr)oration either through exercising their outright majority voting rights or by orvning a significant minority shareholding. In thls section, wc siraIl focus on the concentrated ownership of family and government owners ancl their in-iplications to corporate governance. In particular, \re are interested to look at in rn',hat way concentrated owners may act in their or,vn tnterest at the expense of minority shareholders. The situation may get worse when the controlling owners also serve in the top management capacity. Concentrated o\\rners have controlling interest in a public corporation when they own a large percentage of shareholdings, which gives them greater control or voting rights to influence the decrsions of the corporation.

fo-*rrhe .f prbht corporarions in Malaysia is mosrly

concentrared in the hands of family groups and governmenr

institutions.

fC"*.."r"d ownership refers ro the large percenrage of share ownership

that belongs to

an

individual, a group of individuals, family groups or government

5.3.1

institurions.

Family Ownership

According to Claessens et al. (2000), corporate ownership in Malaysian public lorporations is highly concentrated predominantly in the hands of individuals and family groups. In fact, they found that the most significant controlling shareholders rvere family groups, follou,ed by the government. This finding is not surprising because nany public corporations including the conglomerates have evolved from traditional family-owned enterprises (Kean and Cheah, 2000). A more recent study revealed that from the p-riod 1999 through 2005, over 43 per cent of the main board companies of ihe Maiaysian Bourse are family-owned (Haslindar et a\.,2009). As traditional family orvired firms in Malaysia grew prosperous, thry expanded and went public" However, the founders of the family firms still retain significant

Frrdy

**rr *.d

to have

a close or

tighr conrrol over rhe company they own.

2-6

Business Eihics

o\,\,nership and control

in the newly listed corporations. Exampies of family-owned

compani;s are Robelt Kuok Group, Genting Group, YTL Group, Hong Leong Group, Lion Group and Kuala Lumpur-Kepong Berhad. The government introduced the secondboaid of the Bursa Malaysia (formerlyknown as Kuala Lumpur Stock Exchange) in 1998, which rnade it easier for smaller family firms to access the capital market for raising capital to support their business expansion. This initiative had contributed to significani grorvth rn the number of small listed family-owned corporations and the growth of the Malaysian equities market (Mak, 2006). Family owners tend to exert controi on the corporation because they have longer investment horizons and usually plan to pass the business to future generations of the famiiy (E11u1, Guntay and Lel, 2006). This important characteristic has helped familyowned corporations to persevere and prosper in business.

5.3.2

rl*

g"*r"d"r

Malaysia has been involved in business way to manage

a5 a

the economy and to correct rhe socioeconomic imbalance

I

Government OwnershiP

In Mai*ssia, the government has been involved in business enterprises for more than 40 years, since the early 1970s. The involvement of the government in businesses can be attributed to the historical and political developments of Malaysia, especialiy after the implementation of the New Economic Policy (NEP) in 1971. l)uring the fornrative yeirs post independence from 1957 until 1969, the foreigners and Chinese businessnten largely dominated business actir.ities in Malaysra (forrnerly knou'n as Malaya). A major ethnic group, Malays were ieft far behind in sharing the economic rve alth of the neu,ly independent natior-. The unequal distrrbr-ition of r."'ealth between the Mala1,s and Chinese led to social unrest in 1969, follorn'ed by brief political instabilitl', particularly in Kuala Lumpur. The noble aims of the NEP u.ere to eradicate poverty regardless of race in N4alaYsi.r 'i'he NEP's specific ald to enhance the participation of the ethnic Malays in business. objective r.vas to achieve 30 per cent of corporate ort,nership and nranagemetlt for Br-irniputera by 1990. The government had hoped that tlie NIrIr u-ortld be able to reducc

the huge inequality in nealth distribution and ultintateh,proinote social stabilit'" in the country. The NEP has created the building blocks for thc Present da,v corporate eni ironrnerrt in Malaysia. The NEP served as an important impetus for greater governl.nent participation in business. During the initial years of its implementatiot-t, the goverument had actively acquired corporations in strategic industries such as plar-rtations. lnining as u,ell as banking from the foreigners (Azham, 2002). The gor,ernrnent had technicaiil' transferred the ownership and control of those c,lntpanies in major industries into their hands. The NEP has entrenched government inr.olvement in the corporate sector, ancl a more intimate relationship was forged betrveen business and poiitrcs irr Malaysia.

Further, corporate on,nership in Malaysran public corporations is also lareely aff'ected by the national economic agenda. Beginning tn the 1980s, the governinent of lVlalaysia under the leadership of Datuk Seri Dr. Maliathtr Mohammad (now Tun Dr Mahathir) has aggressively embarked on privatization of key state companies, but at the same time, remained a major shareholder in t1,'ose privatized entities (Rashidah, 2006). The privatized corporations are now knorvn as go\rerllirlent-linked companies (GLCs). Currently, the GLCs greatly influence the perforn-rance and vibrancy of the lvlalaysian capital markets. The GLCs also play a promincnt role as one of the kel engines of economic growth in Malaysia. The govemment also embarked on the 'l.ook East Policy' in the early t980s. Urrder this policy, many iapanese corporations invested in Mala1.sia, especially rn the

CorporateGovernance 127

manufacturing sector" They either invested directly by opening their manufacturing plants in the country or formed joint-venture entities with local companies. The prtvatization exercise, coupled with the active involvement of foreign-controlled corporations, helped to spur the economic growth of trre country in the mid 1980s until the Asian financial crisis in the iate 1990s. Following the Asian financial crisis in 1997, the government established its investment arm company known as Khazanah Nasional Berhad. It is a major shareholder of a few public corporations such as TM, Malaysia Airlines, Tenaga Nasional, Edaran Otomobil Nasional (EON), Petronas Dagangan, Petronas Gas, UMW Holdings, Faber Group, Perusahaan Otomobil Nasional (Proton)'and Sime Darby, to name a fer,r The natrire of"Malaysian corporate ownership influences the type of agency probiems that exists in public corporations. In view of the highly concentrated ownership in Malaysian firms, the extent of the traditional agency conflict between sharehoiders and professional managers may be less severe than the conflict between major shareholder (or.vner-manager) and minority shareholders. We shall now examine this issue in the next sub-section.

5.3.3

The Nature of Agency Conflict in a Concentrated Ownership Environment

owuership environment such as in Malaysian public corporations, there exists one iarge shareholder and a fringe of minority shareholders. In such an env:ironrnent, the classic o\\'ner manager conflict in diffused ownership (referred to as -f1.pe I Agencl, Problem) described by Berle and Means (1932) or ]ensen and Mecklir-rg i1976) rs niitigatecl due to the iarge shareholder's greater incentives to mor-ritor the controllers. Horvever, a second type of conflict appears (referred to as Type II Agency, Problem) in r'r,hich the large shareholder that is also the controller may use its controlling position in the firm to extract private benefits at the expense of minority shareholders through managerial entrenchment or various other forms of seil intercst related party transactjons (Morck and Yeung, 2003). Minorlt,v shareholders refer to those shareholders that own a small percentage olshares in a public corporation. Technically, shareholders that onn less than five per cent of total shareholdings are classified as minority owners. In this instance, corporate governance is mearit to alleviate the Type II agency problen-rs that are detrimentalto ilitrority s1-rareholders and other stakeirolders such as the creditors ancl lenders. Hence, givetr this background, corporate governance in Malaysra is not only meant to curb the potential abuse of power by the controllers, but most intportantll., to curtail the tendenc,v of the large shareholders to expropriate funds fron-r the rninority shareholdcr:s. An important aspect of corporate gor/ernance, in this instance, rs the strt'ngthening of tl're reguiatory framework to give protection to the minority

In

a concentratecl

:'lrareholders"

t

us now move on to the development of corporate governance in lvlalaysia, which was accelerated by the firancial crisis in the late 1990s. The government, through regulators of f-inancial markets such as the Securities Commission, Bursa ivialaysia and Companies Commission of Malaysia, has initiated various corporate Le

governance reforins following the financial crisis. One of the most significance outcomes of tiiis initiative rvas the implementation of the Malaysian Code on t-orporate Governatrce in March 2000. The code was revised and strengihened trvice in 2007 and 2012.

mp. hg.*y

-

problem exists between owners and managers in

diffused rype of corporate ownership. It is also known as a

owner-manager

conflicr.

m. il rr*y problem occurs in a concenrrated ownership

environment between rhe large owners and the minoriry owners. lr is also known as principal-principal conflicr.

:t1

Busrness Lthrcs

5.4

k

Mrlrr,"r,.-dA

governance received

prominent atlention during the financial crisis in i997-1998 Poor corporate

was , idenrified as one of rhe key causes of the

SOVernance

financral crisis

lr.;;-,.. ---l identified the weaknesses in

corporate Eovernance and established a set of guidelines for listed companies to implement. Tlrese guidelines are called

the Malaysian Code on Corporate Covernance (MCCC)

Ar

Mrhysanprbil

listed companies did nor have a proper standard ofcorporare governance, the

government established

a

commitree to look

into rhis

issue.

THE DEVELOPMENT OF CORPORATE GOVERNANCE IN MALAYSIA

Although corporate governance issues emerged wrth the birth of firms, they were targely unheard of in Malaysia until the Asian financial crisis in 1997-1998. The financial crisis basically served as the irnpetus for.aggressive corporate governance reforms in Malaysia. The crisis exposed the structurally weak foundation of Malaysian public corporations. In general, the consensus was that Malaysian public corporations had poor corporate governance, which led to their lack of flnancial resilience to surr.ive the financial crisis. Many public corporations sr-rffered frorn poor corporate performance and some even collapsed (Mitton, 2002). Poor corporate governance allowed corporate managers and Iarge shareholders to transfer tl,e y,ealth of the corporations to enrich themselves. Prior empirical studies observed that corporate abuses rn Malaysian public listed con-rpanies inciuded poor board oversight, numerous conflict of interest transactions involving directors and rnajor shareholders and severe lackof transparency in financial disclosure (Mak, 2006). Further, in general, sharehoiders were sceptical of the abilrtt, of the board of directors

to safeguard their interests against rampant and blatant abr-rse of power of corporate ruanagers and major shareholders.'1'he board also tailed to detei:t breacl-res of internal financial controls.Investors, in general, nad almost cornpletelylost contldence in the Nlirlaysian capital markets (Finance Committee Report on (.orporate Cloternance, 1999). As a resuit, the Malaysian stock exchange nearly collapsed if not for govcrnment intervention. Follolving the financial crisls, corporate governance of public corporations have come under increasing scrutrny by regulators, the investing public and acadenticians alike. 'fhe call to rmplement a higher quality of corporate governance had been greater than ever before. The poor state of corporate govcrnance led the gotrernntertt to accelerate the forrnulation of a comprei-rensive and co-ordinated reform to improve corporate governance in Malaysia. The Malaysian gor,ernment, thror.rgh the Ministry of Finance, had established a high-level Finance Committee (tire Committee) on 24 March 1998 to conduct a detailed study on cort)orate go\rernance and to make recommend ations for improvements. The prirnary aim of the Committee -,vas to cstablish and cler.eiop a world-class corporate go\rernance framework mainl1, for pLrbiic corporatiotts, for the market to foilow. The Committee comprised 12 members represcnting ahnost a1l sectors of buslness and regulatory communities including the Securities Commission, the Frnancial Reporting Foundation, the Malaysian Accor:nlirrg Slandards Board, the Registrar of Companies (now known as Companies Lommission of l\lalaysia), the Kuala Lumpur Stock Exchange (norn,known as the Bursa Ir4alaysia), tl-ie Centrai Bank, Federation of Public Listed Companies and the Association of Banks. T'he Committee had two working groups, namely (i) rvorking group on best practices in corporate governance, training and education and (2) working group on lau, reforrn issues in corporate governance. The Committee fourid that the corporate governance quality in Malaysia prior and during the financial crisis was lacking and ihere was a need to impror.e it. Moreover. the Committee l'e1t that firrns needed guidance in raising iheir corporate governance c,lalit)', rvhich shc,uld be on par lvith the internationa I level.

b

CorporateGovernance 129

The most significant outcome of the Committee was the establishment of the Malaysian Code on (Jorporate Governance (MCCG) in 2000, which consisted of the recommendations to strengthen the statutory and regulatory framework for corporate governance, enhancing the checks and balances and self-regulatory mechanisms towards good governance. The recommendations were aimed at strengthening the internal processes within the company, and in particular, the role of the board of directors (Nathan, Chiew and Soo,2000). The MCCG set out a set of principles and best practices aimed at enhancing the quality of corporate governance. The Committee opined that good corporate governance rests firmly with the board of directors whilst the shareholders and auditors play secondary roles (Shim, 2006). The MCCG (2000) placed great emphasis on the governance role of the board of directors by setting the best practices for improving board structures and procedures. The Bursa Malaysia adopted this comprehensive code on corporate governance in its Revamped Listing Requirements (2001), now known as the Bursa Malaysia Listing Requirements (BMLR). This approach essentially meant that it v:as mandatory for pubiic corporations to disclose rn their annual reports the manner in which they have implemented the MCCG's (2000) principles of corporate governance and the extent of compliance with its best practices recommendations. The underlying priiicipie in the enforceability of the MCCG (2000) is that compliance nith the recommendations in the MCCIG (2000) is r.ciluntary, but compliance with the disclosure provisions under the B\{ 'R is mandator}, (i.e. a hybrid approach). The Securities Commission (SC) had undertaken various initiatives to increase awareness among directors on the significance ofcorporate gover nance and the need to strengthen the lbundation of the governance structure in their respective companics. L-or example, in 2003, the SC n-randated the directors of public corporations io acquire 48 points o1'continuing professional education annually. This requirentent eruphasises the irnportairce of training the directors in order to enhance their knor.vledge and eflectiveness.

In the foilorvtng section, we shail take a look at the MCCG. The discussion is based on the first vcrsion introduced in 2000. The recommendations of the N4CCG serve as a benchmark for public corporations to emulate and for the rnarket participants to assess the quaiity of corporate governance in Malaysian public corporations.

5.5

THE MALAYSIAN CODE ON CORPORATE GOVERNANCE

]'he NICCG (2000) is primarily aimed at listed firms given the paramount responsibility that the board of directors has in promoting shareholders' objectives and safeguarding firms' assets. The Malaysian government revised the MccG (2000) in 2aa7, incorporating changes, amongst others the settr:rg up of an internal audit department that reports directly to the audit comntiltee and making it ntandatory to have only non-executive directors in the audit committee (MCCG, 2OA7).

frh.

-", "b,il;

of rhe MCCC (2000) was ro improve rhe. qualiry of corporate governance in Malaysian lisred companies.

fGy

f*rt *.*

"f

rhe MCCC (2000)

were strengrhening rhe role of the board of direcrors in monitoring rhe professional managers

and ro enhance rhe financial reporting and transparency.

l0

Business Ethics

5.5.1 Thr",. rpprr*-.|*t

al

rhe implernentatron of corporate governance are prescriprrve, non-

presciiptive and hybrld. The Malaysiai-r

auihoriries adopted the third approach

The lmplementation Approach

In developing the MCCG (2000), the Committee had considered three implementation approaches as wideiy adopted in various jurisdictions in the worid. The three approaches are prescriptive, non-prescriptive and hybrid. The prescriptivc approach specifies corporate governance practices and requires legal compliance with them" It provides hard and fast rules that may be easier to report compliance with, but it encourages a'tick in the box' attitude to foliowing lules (Shim, 2006). The SarbanesOxley Act20A2 in the United States adopted this rather rigid approach. In contrast, the non-prescriptive approach places prominence on the disclosure of actual practices undertaken and allows firms a complete flexibility to determine their governance needs. This approach permits maximum creativity and flexibiiity, but makes comparisons difficult. The Greenbury report in the United Kingdom adopted thrs flexible approach. The hybrid approach takes elements of both the prescriptive and the non prescriptive approaches. Under this approaeh, broad guidelines are introduced, which should oe flexibly implemented in the 'comply or explain' reporting styie" Firms are provided rvith a framework for disclosure of the implementation of various provisions of the corporate governance code. This approach recognizes that there are significant differences in corporate governance practices, depending on the size, circumstance and financial capability of firms. In addition, this approach encouraged the market to recognize the importance of corporate governance provisions. The U"K. Clombined Code on Corporate Governance (1998) adopted this approach. Figure 5.3 iiluslraies the three approaches to the implementa.ion of the corporate governance code.

Prescriptive approach

Hi"d

rpffih I

Non-prescriptive approach

Effi@

$ffi@

prescribes the best practices for

the directors ro follow and gives them flexibility to implement the recommendations based on their needs

Specifies details of corporate governance and requires legal compliance with them. It is mandatory to comply.

Gives firms flexibility to determi ne their ccrporate

governance practices but disclosure of such practices is a must.

Broacl guidelines issued for

Flybrid approach

Bffi@

firms to emulate. The extent of compliance and non-compliance must be disclosed in annual reports.

and circumstances. However, companies are required to

Figure 5.3: Three implementation approaches to corporate governance

disclose the level of compliance and reasons for non-

compliance ro the best practices in rhejr annual report.

The Committee members, upon revielving the i:trree approaches, decided on adopting the hybrid approach, outlined in Sectiun I of the N{CCG (2000). Firs'., they argued that it -!vAS necessary to prescribe corporate governance best practices diie to

CorporateGovernance

the fact that there were no established standard of corporate governance in Malaysia.

Hence, the prescriptive approach of requiring actual disclosures of corporate governance practices was not adequate to address this lack ofstandard. Second, the Committee strongly felt that good corporate governance is not mereiy a matter of prescribing the desired practices and expecting fuli adherence to hard and fast ruies. Instead, directors as controllers of.the firm need to be guided and given some freedom to apply the guidelines based on their needs and with common sense (Shim, 2006)" In other rvords, each company should be allowed to flexibly de.relop its own approach to corporate governance. Companies may be able to develop alternative ways to the best practices. These alternative ways may be as good as the prescriptions. By doing this, companies are encouraged to consciously address their governance needs. However, the prescriptions of best practices musl be accompanied with a rule mandating disclosure on the ievel of compliance and reasons for non-compliance. The non-prescriptive approach is also ruled out, because of the absence of a benchmark for good corporate sovernance, and most importantly:.ts adoption gives too much flexibility to the companies. In so doing, the Committee takes cognizance of the fact that the qualit,v of corporate governance is lacking in Malaysia and the intention of the Malavsian governmeut is to raise such quaiity;thus, necessitating some lorm of benchmark for frrms to emulate. In short, directors should be encouraged to consciouslv address the governance needs of their firms, as outlined in Section 2 ol

rh<\i('CtJtl0U).

5.5.2

The Structure

-irl,e

MCCf; (2000) rs dn idecl into four parts-(1) broad principles, (2) best practices, (3) principles and best practices for other corporate particrpants, and (4) explatrator-r' notes. 'Ihe first part outlines the recommendations on thc broacl princrpies of good corporate governance for Malaysia. The purpose o1'the principles i-i i(-1 gi\.e flexibility to companies in appil,ing the principles depencling

on their needs anci rndivrduai circumstances. The Committee recognrzes tirat rn inrprovrng corporate governance, a combination of statutory regulation, seif regulation and market regulation is the most appropriate approach for Malaysian firms, as specified in Sectron 1 of the MCCG (2000). The broad structure of the MCCG (2000) is depicted iir Figure 5.4, The BMLR makes it mandatory for companies to explain in a narrative statcntent in thc anniral rcport thc cxlent to u,hich they have applied the relevanl rrinciples. Ihis conrpulsor-v reqLtrrenrcnt is meant to allow the market participants, namell, shareholders and other uscrs of annual reports, to evaluate companies' performance and governance prac,tices. 'I he Committee believes that the market should be ailor^,,ecl to assess llie extent of firms' compiiance to the corporate governance principles. The market rs then able to 'puntsh' non-compliance if shareholders are dissatisfied with the explanatron for failure to comply. There are 13 broad principies covering fcur key areas, namely (1) board of directors, (2) directors'remuneration, (3) shareholders ancl (4) accorintability and audit. Figure 5.5 shows the 13 broad principles in four key areas. Some of the brietprinciples of corporate gor.ernance are as follows:

r

Th,' board and its directors are to be properly structured with sufliciently

r

expcrienced, skilied and knorvledgeabie members. The cornposition of the board should be balanced by executive, non-executive ancl independent directors.

fTh. Mccc is

(rooo)

divrded inco for-rr

parts:

. .

Broad principles Besr practices Principles and best practices for

other corporare

.

partici pants Explanatory nores

13'1

I

"1,/

FJLISIneSS EthiCS

Figure 5-4: The structure of the Malaysian Code on Corporate Governance (2000)

r r r r

Committees of the board should be estahlished to crrr1. out revierr,s atrd recommend important matters concerning audrting, rtlnruncralion and nomination, among others. There should be reasonable svstems to er.aluate and access nsks and internal control, so as to form risk management pracrices. Sufficient care should be devoted to financial reirorting and disclosure, Constructive communication and dialogue rvith shareholders ar-rd rndivrtlr-ral directors shouid be encouraged.

The second part sets out best practices for companies in designing their approach to corporate governance. This part provides a set of guidelines for firms to adopt in implementing the board principles on corporate gvvernance as set out in Part One. Complirnce to the best practices is voluntary but firms are reqr-rired to explain the extent of compliance and explain any deviations from such besr practices. f his second part sets out 33 best practices covering three kev areas including board of dtrectors, accountability and audit and reiationship with s| areholders.

CorporateGovernarrce 133

1 Directort Remuneration J

l-i

J'I Shareholders

l

'

11. Financial reporting 12. Internal control t-

Accountability and Audit

13. Relationship rvith auditors

''

-:. *

Figure 5.5: The l3 broad princrples Tire MCCG (2000) dedicates most of the guidelines for sti'engthening the board structure and procedures as well as enhancing accountability 3n.1 audit processes. Less attention seems to be allocated to the relationship between the board and shareholders bv t,irtue of having only one guidance note under this area. The third part consists rtf exhortations to other participants such as instiiutional shareholders and auditors, wh ich are purei-v voh:ntary and aimed at en hancing the roles of externai auditors and shareholders. 'l'l're fourth part providcs explanatory notes on the principles and best practices set out in Parts One and Two. Sirnilar to the U.K. Cornbined Code (1998), the MCCG (2000) requires lirtns to ciisclose the extent to which they have complied with the MCCG (2000) recommendations and to give reasons for non-compliance. The disclosure, as stated in paragraph 15"26 of the BMLR, is to be made in the form of a narrative statement (kt'rolvn as corporate governance statement) to be included in firn-rs' annual reports. In essence, irnder the hybrid approach, the requirement to 'r:omply or explain' is rot a passive thing tn which firms are not free to choose non-compliance tf ,'ompliance '" loo much trouble. Fims need to recognize that in order to reassure shareholders, 'r.rch explanation often makes clear how and lvhen the area of non-compiiance rr,ill be '. medied. 'fhe SC revised the MCCG (2000) in 2007, incorporating changes, amongsl 'hers the setting up of an internal audit department that reports directly to the audit omnrtttec and making it mandatory to have only non-executive directors in Llie audit 'r:ommittee. In 2011, the SC introduced a five-year Corporate Governance Blueprint /the Blueprint), which provides the action plan to raise the quality of corporate b.i\rernance in Malaysia by strengthening self and market discipline and prt;moting ,lreater internalization of the culture of good governance. The Blueprint focuses on :,ix corporate governance areas, namely shareholder rights, the roles of institutional ..rl'estors, ltoards, gatekeepers and influencers. ciisclosure and transparency and

;,ublic and private enforcement. The recommendations of the Bluepnnt are to be implemented ovtr a five-year period"

4

Busrness Ethrcs

Recently, the SC launched the Malaysian Code on Corporate Governance (MCCG) (2012), which incorporated the recommendations of the Blueprint and supersedes the MCCG (2007).The MCCG (2012) focuses on clarifying the role of the board in providing

leadership, enhancing board effectir.eness through strengthening its composition and reinforcing its independence. Firms are also encouraged to establish corporate disclosure policies and to make public commitment to respecting shareholder rights. The MCCG (2012) came into effect on 31 December 2012 and iisted frrms are required to report therr compliance with its principles and recommendations in their annual reports. We shall now turn our discussion to the theories of corporate governance, which will further enhance our understanding of the corporate governance framework in terms of its origin and remedies for poor corporate governance.

5.6

U.d.""*.d"g -_-| rheories ofcorporare governance is

imporranr in order

to identify the obligatron of a public corporation and to make sense of the reasons behind the occurrence of corporate governance problems"

This

section

highlighis four corporate governance-related theories: Agency, Stakeholder, Property Rights and Social

Institurion Theories.

I

THEORIES OF CORPORATE GOVERNANCE

In this section, we shail exan-rine several corporate governancc theories such

as the

agency, stakeholder, property rights and social institution theories. Hor,ver.er, the trvo most commonly uscd thcorics in accounting and financc-rclatcd ficlds arc thc Agcncl' and Stakehoider Theories. Agency Theorl' criginated from the fields of finance and eccinomics. Stakeholder and Social Institution Theories, meannhile, arise lrom a Inore social-oriented vien on corporate governanct" Property Rights Theory originates from the larv discipline that emphasizes property rights and the right of indrviduals to conlract. These theories serye three common purposes (1) to offer insights as tcr rvhose interest that a crrpora[ion shor-rid serve, (2) to explain the behaviour of those contribr.rting to corporate governance problems in public corporatiot-rs, atid (3) to offer solutions to alleviate those problems. Briefly, agency theory suggests that firms solely exrst for advancing tlie interest ol shareholders, which is basicaliy a narrol,v agenda. Hence, the objective of a corporation should be to maximize sharehoiders'r,vealth. This objective can be attainecl b,v ensuring that the shareholders earn the best possible returns of investment in the fbrms of annual dividends and share price appreciation. The controllcrs should exercise the polrer bestor,red upon them by the shareholders in a way that can fulfil this narrow objectrve. Stakeirolder T'heory, on the other hand, argucs that tlre objective o1'the firm should be broadiy defined to include the advancement of the stakeirolders' welfare in addition to the traditionai objective of shareholder wealth maximization. Str, the controllers shall strive to promote the interests of shareholders without neglecting the rvclfare of stakeholders. Next, the property rights theory argLles that a corporation is tlie private properti of shareholders who exercise their rights to incorporate and to contract. By virtue ol having property rights, shareholders have the right to controi thc corporation" 'fhe property rights of the owners in a corporation must be fully protected by the larv. The social institution theory, on the other hand, indiczites that shareirolders can exercise their right to incorporate because the state aliows thenr do so. Without the sanction of the state, corporations will not exist. Hence, corporations should not be treated solely as organizations that serve the interests of indii,idual shareholders, because they should promote the interests of the public at large. Next, we shall examine each of the theories in turther detail. Let us begin u,ith the Agency Theory.

CorporateGovernance 135

5.6.1

Agency Theory

as a contract under rvhich otre Jensen and Mecklin g(1976) defined'agency relationship'

a

party (the principal) hires another party (the agent) to utdertake specified functions tn the principal's behalf. The principal delegates some decision-making authority to the agent to cnable the agent to perform the.assigned tasks. The principal also trusts that the agent wili always act in the best interest of the former by discharging his or her fiduciary duty. The agents are expected to protect the interests of the pri,rcipal and discharge their duties diligently. In i public corporation, the agency relationship exists in the contractual relationship between the shareholders (principal) and controllers (agents). fhe controllers are the directors of the public corporation. Shareholders eiect the directors to control the resources of the company and represent their interests in the cor poration. Shareholders delegate authority to the directors to make most decisions on their behalf. The board of directors appoint a team of senior managers to manage the daily operations of the corporation. They make key operational clecisions pertaining to the al,cication of corporate resources. As such, the senior managers can be considered as indirect agents of the shareholders. Shareholders ."p..i the directors to closely morritor the senior management team to ensure that thet.ni11 rneet the objectives placed upon them. In return, the controllers enjo,v good ren-luneratiorr packages and incentives so as to motivate them to fulfil their duty tc promote thc shareholders'interest. In this sysLerrr of corporate ownership, problems arise r,vhcn thc controllels clo not necessarily make decisions and allocate resources in the best interests of the sharcholclers, In other l'ords, the controllers do not consistently strive to etlsure the ac|ier.ernent of the shareholder wealth maxinrization objective. Agency Theory .Lssumes that this situirtion exists due to the conflict of goals between shareholde rs and controllers. f'he controllers, by nature, prioritize their own self-interests or are opportunistic. They are hkeiy to display ego;stic behaviour, which is to make decisions that are ruotivated b,v self-interests. Il academic terms, this situation is knor'r'n as the principal agent problem or the agency problem. Self-interests motivate the controllers to divert the corporation's resortrces to activities that are detrinental to the objective of maximizing shareholders' r'r'ealth (Jensen and Meckling, 1976; Williamson, 1985). Examples of the controllers' irersonal asenda inclucle paying higher bonuses to themselves regardless of cortlpanl' performarice, enloying paid holidays, buying expensive club memberships, acquiring ?. corporate jet and l'raving a luxurious office. The corporation pays for tirese perl.s, rvhrch ]eads to the reduction in shareholder wealth. The controliers are in a unique posrtion to pursue self-interests in a public corporation lvhere the orvnership is separated from control. In this type of cr-rrporate orvnershrp, shareholders do not have effective control over the managenlent t.,f tl-re corporation, because the controllers have most of the decision-making powers. Irl this situation, if the controllers har.e the chance to control the company without effective supervision by shareholders, they are likely to give iower priority to the obj.ctive of maximizing the rn,ealth of shareholders. The shareholders are unable to effectively monitor the controilers due to information asymmetry. This situation exists because shareholders do not have access to the infirrmation about the corporation, unlike the controllers. They largely depend on the controllers to furnish the relevant infonnation. This is because the controllers know more about the coinpany and they are in a position to control such information. lnfbrmation asymmetry leads to two agency problems, nameiy adverse :relection and moral hazard. Adverse selection problem arises when shareholders are unabie to

fAg.".y Th.*y attempts to explain rhe narure of rhe relationshiP berrnreEn shareholders and rhe professional managers,

Cgs*y Tl*-y proposes thar corporate governancc problems exisi ciue to rhe selfish tenderrcies

of tl-re professional managers that prompt thern ro engage rn conflict oi interest siruations.

36

Business Ethics

ascertain whether the controllers actually perform their tasks as expected. 'l'he moral hazardproblem occurs when the shareholders cannot be sure whether the controilers are pursuing their own self-interests or truly striving to perforrn their tasks for the benefit of the shareholders.

It is also important to note that often times the controllers do not own

M*rg.r*#--1 prioririze rheir selfinterests tend to errgage in acriviries

rhat will reduce rhe wealth of shareholders.

the

corporation. They are merely salaried employees and likely to behave differently than the owner of the corporation toward the long-term success of the corporation. They have the tendency to work inefficiently and focrrs on short-term profits only in order to demonstrate success. Focusing on short-term profits enables them to maximize their bonuses and give them high salaries and perks, Shareholders, on the other hand, expect the controllers to seek out profitable new long-term investments to ensure the survival of the company in the long run. As salaried employees, the controllers stand to lose little compared to the shareholders if the corporation goes bankrupt due to the former's seif-interest-inspired agenda. The managers may look for other employment whereas the shareholders stand to iose their entire investment. The dir.ergence of interests between shareholders and controllers leads to the need for the former to take steps to exercise control over the latter. The primary purpose of exercising this control is to align the interest of the shareholclers and controllers. Agency Theory argues that it is expensive and time-consuming for the shareholders to do so. They have to incur agency cost, which is the costs that arise from the neeci of the shareholders to monitor the activities and performance of the controllers. 'lhe shareholdes need to determine what the controllers are doing, nhici-t is not an east, task due to the information asymmetry Hence, tl"re shareholders need to put rn place control mechanisms that are costly in terms of the monev spent, resources consurned or time taken. We will review the various control mechanisnrs in Section 5.7 of thrs cl'rapter. Briefl1', they may include, amongst others, incentive schemes ancl contracts, external and internal auditors, shareholder activism or engagenrent and regulation. Ttre control mechanisms are encapsulated in the concept of corporate gorrernance. Public corporations need to impiement effective corporate governance to alleviate the problerrrs associated lvith the agency relatrorrship betrveen shareholders ancl controllers. The primary aim of corporate governancc is to ensure the alignment of tire interests of the shareholders and controllers so that the loss of sl-rareholder value resulting from the controllers' opportunistic behar.iour can be rninirnized. Agency conflict betrveen the shareholders and conLrollers lvi11 result in a loss of value to the shareholders in two ways. First, shareholder value is adversely affected through the transfer of u.eaith from the profits available to sharel'rolclcrs to the controllers rvhen the latter engage in opportunistic behaviour. Second, shareholder value r.r,ill be iorver r,r'hen the corporation establishes the costly control meci'ianisnrs to oversee the activitie-s of the controllers. it is true that the control mechanisms n ill help to mitigate the effects of agency conflict, but it rvill be impossible to eliminate everv opportunity for Liehaviour fuelled by self-interest. As such, some ioss of shareholder value that will be incurred vra transfer of wealth from the shareholders to the controllc,s rs simply inevitable. Similarly, agency costs may increase the uncertainty of the corporation's future cash flows (|ensen, 1986), which may adversely affect the corporation's ability to provide good returns to shareholders. Shareholders that invest in corporations ivith rampant agency problems wilt likely demand higher premium lor rvhich they need to expend additional resources to monitor controllers tvith vested self-interests (Lombardo and Pagian o, 2002). Next, we shall examine an alternative thc,;ry of corporate governance that promotes a broader agenda of public corporations as opposed to the narrow agcnda

CorporateGovernance

of the Agency Theory-stakeholder Theory. It has been receiving greater prominence in recent years in view of the disastrous effects that corporations can bring to the livelihood of their various stakeholders-

5.6.2 Stakeholder Theory Traditionaily, corporate objectives tend to give priority to creating value for shareholders as the main supplier of capital, In the Agency Theory, thc bilateral relationship between shareholders and controllers is paramount. Corporate directors are argued to owe a duty to shareholders only and hence, are obligated to'maximize returns fcrr them (Friedman, 1970). This belief has shaped the ways in which corporate governance mechanisms, such as board of directors, play a role in aligning the interests of shareholders and controllers. However, in the last decade, we have witnessed a grou'ing interest

in corporate

responsibility in view of the disastrous impacts of firms' operations on the well-being of itakeholders such as employees, creditors and customers. For example, thousands of Enron's employees lost therr jobs and pension fund savings when the corporation collapsed due to financial mismairagement and abuse of top executive pol\rer. In 2008, rve also observed how investors lost their investment when giant investment banks in the US such as Lehman Brothers, Salomon, and Smith Barney collapsed. Also in 2008, we learned from the nerr.s horv Sanlu Corporation endangered the lives of thousand infant> in China and worldwide when they purposely used hazardous ingredients in their baby milk powder. Figure 5.6 provides a typical representation of'Stakeholder Theorv.

Iigure 5"6: StakeholderTheory

In view of this contemporary perspective, policies and corporate governance rnitratives have highlighted the need to broaden the corporate governance agenda to not only focus on the interest of shareholders but also on the needs and reqi.rirentents of all corporate stakeholders (Solomon and Solomon, 2A04). This i'iew is known as stakeholder perspective or theory. Stakeholder Theory basicall,v extended the agency relationship beiween controllers and shareholders to include stakeholder groups

I S"k.h"id.r

Th.*y

offers a more inclusive approach to corporate governance by broadening the

accountability of rhe professional managers to serving

borh the inrerests of shareholders as well as

other srakeholders.

137

JO

Business Ethics

(Ezzamel and Watson,1997). Each stakeholder group has differing interests or stakes. A stake can be viewed as having an interest or share in r,rndertaking. Freeman (1984) defined stakeholder as an individual or a group that has various iinds of stakes or legitimate claims in the business. Stakeholders are said to have an interest in a corporation given the fact that whatever business decisions, policies, practices and actions taken by the company may affect the stakeholders in the same way the stakeholders may have influerr.., on business practices and policies. Stakeholder Theory' is relevant given the increasing pressure for businesses to voluntarily spend on ad,n ancing the welfare of the social stakeholders as well as protecting the environment (Robins, 2009). Ilusinesses are also pressured to report such spending in annuai reports. According to ]ones (1995), a public corporation is viewed as a nexus of contract or relationship bett'een controllers and stakeholders. Fience, the controllers are nol only the agents of shareholders but aiso contracting agents of those stakehoiders. Tricker (1984) advances the notion that public corporations have corporate accountabiiity to a wider range of stakeholders and socieiy at large. The controllers should also be made acccttntable to stakeholders and proiect their rights in managing the public corporation towards achieving business goals. In so doing, the controllers a-re expected to balance the interests of shareholders with public interest. Kay and Silberston (1995) argue that although shareholclers enjoy many of the benefits usually associated with ownership, they are not stricti,v the orvneri of the public corporation. In fhct, tl-ie shareholders is just taken as one of the stakeholder groups. T'herelbre, they shouid not be gir.en priority in a public corporalion" With this argument in mind, the centrai proposition o1'the Stakeholder Theory is thai tl-re objective function of the priblic corporations shor-rltl not bc confined to the tlaximization of shareholders' u,ealth only. 1r'rstead, pLrblic corporations sl'rould also recognize the welfare of other groups that have long-terru relationships n,ith them, and therefore an interest or stake in their long-term success (I)lair. 1995). The wider objective of a firnr is not only seen as more equitable but also brings benefits to both the shareholders and stakeholders. Hcnce, tire corporate governance reforrn derived from this theory should be tl'iat of u,ider ctrrporate goals thin focusr ng on shareholder profits only. For example, the creditors make up an important stakeholder group of a public corporation. Whilst the1, d6l not irave a direct ituk" i, the public corporation, their interest is to ensure that the firncls provided is channelled fbr its intended use and the public corporation is able to fulfil iti obiigations stipulatecl in the lending agreements. Sirr-rilarly, the interests of empio,vees sholld be taken intcr account in decision-making to give them enough sa.I-eguards, ensure their saf-ety and rnaintain heaithy working conditions. Gir,,en the fact that business activities may harm the environment, the managers aiso need to take aclequate measures to ensure conservation and protection of the environment. The intensive ethicai debate since the 1950s has influcnced businesses to tre more humane, ethical and transparent (Maignan and F-errel, 2003). Moreover, pubtic corporations adopting the stakeholder approach in managing thcir resources sirould be respected. Thus, public corporations adopting the corplraie governance approach that is consisteni with the stakeholder theory are likely to be vierved as ethical organizations-they are concerned about the interests of stakeholders, including communities, instead of focusing on wealth rnaximization a1one. 1n addition, public corporations with a reputation for fair and reliable collaboiation tend to eljoy successfui cooperative outcomes with their stakeholders (for-res, 19g5). In contrasi, if they do not take social factors into accouilt, thei: interests are jeoparclized (l,alrtos, 2A0D.

Corporate Governance .139

In summary, the stakeholder perspective provides an alternative explan ation to the debate on corporate governance. It can be viewed as an extension ofthe agency theory in rvhich the roies and influences of other interested parties in a public corporation play crucial roles in determining its governance structure. It extends the concept of agency reiationship in which the controllers do not only have fiduciary duty to protect the wellarc of shareholders but also the stakeholders of the public .o.poruiiorri. Next, we shall look at the other two alternative theories of corporate governance, namely the Property Rights Theory and Social Institution Theory.

5.6.3

Property Rights Theory

As noted earlier, a corporation is its own legal entity, as if it were a person. The prinrary purpose of a corporation is to conduct business, which requires it to brilg together various parties such as shareholders, controllers, customers, suppliers and empioyees for the said purpose. These parties have their own stake or cliim against the corporation. Often, these ciarms are conflicting, which makes it challenging for the controllers to determine according to whose interest the corporation shtulcl be managed. Further, ailocating resources to other constituents other than shareholders will result in a reduced r,vealth for the latter. The Property Rights Theory offers a solution to this predicament. It proposes that a corPora'ion should first and foremost serve the interests of its owner. In practical terlrs. this theory asserts that the primary objective of a corporation is to make profits ibr ils shareholders. This argument is based on three premises. Firsr, when the orvners r'r'ish to corlduct a husiness in a corporate form, they are said to be exercising thcir 'i'asic itldividual rrghts to incorporate. They use the corporation as a rneans to can\. out their trusiness. 81' doing so, the owners are said to be merely exercising their rndiviclual right to coutract, that is to conduct their business ,,r,ith their orvn propertv. Second' lhe corporatioti issues shares to the uwners as evidence of on,nerihip. 'Ihe share is considered as property of the owners, and by extension, the corporatjon ald its assets are considered their private property. Third, owners have certain property rtsitts accorcled to them and these rights are protected by the law. The right to control is cortsidered as a fundamental property right of the owners. The other right is to assume responsibilitv over the way the corporation is run. Given this background, controllers must give priority to the interest oi the sharcholders rn4ro o\,trn a corporation" I'hey do not have rights to deploy c()rporirte rcsources for thc purpose of serving the interests of other constituents su;h as thc enrpiovees, cttstomers and suppiiers (Friedman, l97A).ln short, this theory asserts that irL a corporation, shareholders are supreme i.e. the interests of shareholclcrs are primar1..

'fhe

Protection of the welfare of other constituents is accordetl by the cr)ntract that governs the relationship between the corporation and each constituent. 11 aldition, the government is responsible for pioviding such protection througlr the enactment of various regulations. Hence, ih. irt.r.rt of cuitomers, employe*es a.nd suppliers should not be of concerned to corporate governance. Iistead, the focus of corporate governance is to strengthen t^he abiiity of shareholci.ers to controi the corporation. This aim could be achieved by making sure the controllers are accountahle to shareholders through various control mechanisms such as shareholder voting rights, internal and eiternal audit, highiy independent boar.i of directors and ir rclepenclent directors. Next, Ive slrall examine the Social Institution Theory, rvhich is simiiar to the

Sta

l-.ehoider Theory.

fProp"rry R€h* Theory argues rhar rhe owners have

properry righrs over ihe corporarion rhar ihey have invesred in. They have rhe righrs by virrue of owning

the shares of rhe corporacion.

,,

4A

Busrness Ethir:s

5.6.4

Social lnstitution Theory

Recall the concept of separation of ownership and control in public eorporations" This concept has implications on the nature of corporate property. According to this concept, shareholders surrendered control and responsibility over their wealth to the controllers. in this sense, they are not regarded as true owners but merely the main providers of finance. The controllers have great power [o control the resources of public corporations. Then an important question arlses--according to whose interests should they manage the resources?

fhirh..r)r rtg*t 1 rhat corporations will not exist wirhout the supporI and sanction of rhe sociery. Hencg rhe managers of rhe corPorarions have ro ensure they do nor get involved in activiries or make decisions rhar will

harm rhe sociery.

This theory asserts that corporations do not.exist by themselves" Instead, it is the society that allows them to conduct their businesses and supports their survi'ral The society gives its approval through the state. In other words, the state regulates the use of corporate property. Hence, their existence is a privilege, not a right. So, corporations should not ignore the need to ensure that their activities and decisions do not cause harm to society as a whole. In view of this argument, the controllers are required to exercise their powers in trust for the entire society (Dodd, 1932)' This theory, honever, does not deny the fact that that public corporations need to make profit for their sharehoiders. It is just that they must not achieve this objective at the expense ofthe society. Dodd (1932) argued that public corporations were economic institutions that served both the interests of societl, and sharehoiders. Public corporations have become pubiic institutions instead of merely private properties of the shareholders. As such, ihey have social responsibilities torvards t}-re employees, customers and the society as a nhole. In this respect, the controllers shoulcl not be seen as exclusive servants to shareholders. They need to balance the conflicting interests of the various stakeholders in their public corporation. The controllers have to assume public responsibilities to do well and avoid harm. Let us now look at the common corporate governance mechanisms that can be implemented in a public corporation. We first need to be clear about the aim of these mechanisms. Corporate governance mechanisms are aimed at ensuring that the controllers make decisions and allocate corporate resolirces with the objectrt'e of maximizingwealth forthe sharehoiders and to promote the wellare of the stakeholders. \Are should also bear in mind that these mechanisms shor,rld work in a comprehensive and interdependent way to ensure their effectiveness.

5.7

T-".".g*l.t

"f

I

corporate governance mechanisms are

internal and exrernal mechanisms.

CORPORATE GOVERNANCE MECHANISMS

In this section, we will take a look at a few common e oi porate governance mechanisms that could be put in piace to protect the interests of the o\{ners and stakeholders. We should consider these mechanisms as monitors of the or-res rvho need monitoring, the controliers. Some of these mechanisms are availablc within the corporation; hence they are classified as internal governance mechanlsms. The tnternal mechanisms that are most commonly examined are the board of directors, independent directors, board committees, board compensation pracrice-r, director's traitting, internal c ontrol system and internal audit, external audit and shareholder aciivism.

CorporateGovernance

141 :

Meanwhile, the market for corporate control or takeover market and the regulation or iegal svstem are the two commonly researched external governance mechanisms. However, in this section, we will focus briefly on the role of regulation only. The market for corporate control is not very active in Malaysia, but it can be a powerful governance mechanism to discipline errant managers. Figure 5.7 illustrates the position of monitors in the corporate structure.

:ttoriidite

Constituents

Monitors

Controllers

Figure 5.7: The position of monitors in the corporaie structure

5.7.1 The Board of Directors In the tramelvork o{'Agency Theory, ti're board of directors is a r.erv importr,nt and porverfr-rl control mechanism to mitigate agency probiems. Owners eiect directors to lhe board, and in theor,v, the board of directors is the on,ners' first line of del-ence against any aLtempt to expropriate their wealth by professional managers. The boar.i of drrectors' :ole is to provide an rndependent oversight of management (Walsli. and Seward, 1990), hold management accountable to shareholders for its actions (Mizruchi, 1983), and ensure shareholders'wealth is maximized (Denis, 2001). In a nutsheli, the board of directors govern and oversee the management of the company and ensure that the managers give priority to the interests of the shareholders Case for Review 5"1 illustrates the importance of accountability of the board of directors to shareholders lor their actions.

fTh. b"rrd

"r

directors is rhe most important corporate governance mechanrsm.

I

hey

should be the shareholders' first line of defence against rhe self-inreresis of

42

Business Ethics

-B""d

d*..;J "f

drreccly acr,ounrabie

to shareholders. They should be the gatekeepers for ihe shareholders ancl cn(Lre a'l Jc(lclOnS are in line wrth the oblectives ancl inrerests of rhe shareh olders

The management consists of a group of individuals employed by the board tcr run the company and perform its daiiy operations. In reality, however, the value of the board's contributions is not apparent, and in fact, it is a subject of much debate. Boards have been known to be a 'rubber stamp' to management decisions i.e. lack of independence against the influence and control of the management team and often times failed to safeguard the interests of shareholders aswitnessed in corporate scandals such as Enron Corporation, WorldCom, Adelphia, Tyco International, HII{ Insurance, and most recently, American International Group, Lehrnan Brothers, Salomon Smith Barney and Satyam Computer Services. In the Malayslan concentrated ownership environment, the board of directors may be dominated by family members who are inclined to extract benefits for themseives at the expense of minority shareholders.

Securities Commision (SC) took NasionCom Directors to Court

Accountability of direcrors is central io corporate governance. Dtrectors musr be accounrable ro shareholders for rheir acrions and rhe exercise of power vesred upon them The SC had called upon company ciirecrors ro acr in good farth and fulfrl the accountabiliry aspecL of therr duty ln thc spirit of accc-,untabiltry, direcrors and officers must reaiize that rhey are purting invesiors at risk by reporrirrp misleading and inaccurare information about their corporate performance and value. The drrecrors were ac.cused of submirring false informarron wirh regard ro NasionCom's 2005 i'inancial stalemenls Ihe SC's invesrigarion revealed that NasionCom's group revenue of RM-l94,984.186 as reflecred rn rrs 2005 financial sraremenrs conrained a toral of RM143,-] 09,727 sales thai were nor Lransac[ed These sales were recorded in rne financial statements of rwo NasionCcm subsidiaries, namely Nasroncom Sdn Bhd and Express Top-up Sdn Bhd. ln rhis enforcemenr actron againsr NasionCom directors, the 5C had shov,rn rhar they roo; accourrrability of directors seriously. They would nor hesitate to prosecute direcrors who were found to have violated ihe rules on accounrability. The direcrors and companies should noi iake the enforcernent acrion lightly for which the lack of accountabrliry could undermine ihe invesror confidence The SC would take corrective acrion ro ensure irs credrbility as the marn regulatory force of the Malaysian financial markets. lts regularory role is crucial to the vibrancy and effrciency of ihe [inancal markets (Adapred from Minoriry Shareholder Warchdog Croup, 20 April 2007)

Tr*.-ffip*,;;l element of

a

board of direcrors is independence

from rhe influence and control of rhe professional managers.

The increasing incidents ofcorporate scandals in the last ten years have brought about an aggressive effort to reform boarci of directors. The r.arious reform initiatives mainly stem from the realization that the board can be a potent monitoring mechanism if certain aspects such as the board structure is improvcd anrl gir.en more attention by lawmakers, regulators and sharehoiders. Important structural elements of a board include the board leadership structure and the number of inciependent directors. With respect to the board ieadership structure, the variahle of greatest interest is the nature and characteristic of top leader.,hip positrons in a firm, nanrely the chairpersoir of the company and the chief executive o{ficer. Elements of board

'' Corporate Governance

structure determine the effectiveness of board monitoring. Effective board monitoring is a crucial component of a robust corporate governance mechanism. Firms tend to benefit from strong board monitoring capability because it helps to curb the opportunistic behaviour of managers and enhance the credibility and reliabiiity of financial reporting; thus, reducing information asymmetry and agency problems.

Roles of the board of directors Shareholders appoint members of the board of directors in a generai rneeting to represent their interests in the company. Shareholders give them power and authority to control and allocate the company resources and make decisions on their behalf. ln return, the board ofdirectors is accountable to the shareholders. Perks (1993) defines

fB"*dr;f

d-'"e.ro"

have borh leadership

and control roles.

accountability as the obligation to give an account. As such, the board of directors as a collectivc group is required to justify its actions and decisions in controlling and managing the company to the shareholders. Keasey and Wright (1993) posit that ensuring accountability of the board and management is one of the two key elements of a robust corporate governanc€ 'nechanism. The other element is the supervision of management perfortnance. In a nutshell, the board of directors has two important roles--leadership and control. In their leadership role, the boards of directors formuiate company policics lnd determine the overall strategic direction of the compan?v. They are expected to supervise aqd scrutinize the strategic formulation process led by the Chief Executive Officer (tEO) [o ensure that the strategy is in linc rvith thc vision and mission of the cornpanl'. They need to ensure that the management team mar,?ges the business u'ith the objective of providing good returns to shareholders and at the same tinte is a1 tentive to tl're interests of stakeholders. In their control role, the boarcl of directors is required to monitor the perforrnance and activities of the executive management team so that they consistentll. pursue shareholders' obiectives and interests. They carry out the responsibility as caretakers or guardians for shareholders in a transparent and accountable manner. 'fhey are also r"equired to cnsure thal the company coinplies with all larvs and regulations gor.e rninu the business.

Board leadership structure fhe board of directors must have a clear division of responsibiiities

betu,een the chairperson of the board and CEO so that there is a balance of power and to prevent ol']e person lt om having unrestricted power to make decisions. The chairperson ol thc board and CIIO are pcir'verful positions in a company. Hence, the roies of chairpersor-r and CEO should not be exercised by one person. The chairperson is responsible fbr leading the board of directors and ensuring its effectiveness. In order to ensure thal meetings are properly facilitated, and the board properly ied, thc board rvili nor mal11, i:lect among tlremselves a chairperson of the board. In summary, roles of a chairperson .rre as follorvs:

I e c

faEo drdt,y

**,r"

.creates a very . powerful execurive in a

corporation. Hence,

corpbrare governance code recommends

two different persons holding these two key positions in a

company to prevent

To lead the board as a whole, and in particuiar, in the meetings of the board of directors ar-rd general meetings. To ensure the proper practices and procedures are observed in the calling of meetings and to decide on agenda items that would emphasize on important issues lacing the company as lvell as strategic issues. 'Ib ellsure the whole board plays a fuli and constructive part irr de,.,eloplng and determining the company's strategy and overali business and con'rniercial objectives.

one person from. having unfetrered powers.

:'.''

,tr.43.. ri;:

44

Buslness Ethics

r r r r r

To ensure clear and timely information in relation to the company is given to

the board. To ensure effective communication between the company, the shareholders, executive management and other stakeholders. To take a concerned view of the developmental needs of each member of the board such as the induction programmes and continuous education and

training. To promote the highest standards of integrity, probity and corporate governance in the company. To be concerned with future succession planning of the board and executive management.

r

To report and sign off on the company's financial statements.

The CEO, on the other hand, is the leader of the management team at and below board level. He has the daily executive management power, controls the allttcations of organizational resources and impiements board decisions and company policies. In a nutsheir, the CEO performs the following roles:

r r r

To ensure that the company business is properly and efficiently managed. To assist the chairperson in drar,ving up the agenda fbr board meetings by providing input in relation to important strategic issues facing the business. To ensure that the executive team implements ti-ie decisions of the board and its committees.

r

To highlight and update the chairperson on compiex and sensttite issues that might affect the company and maintain a consistent dialogue with the

r

To consult lt,ith the chairperson and llie coml)any secrelary on

chairperson. board-

approved procedures and matters reservecl for the board's decisions.

The chairpersor. and the CEO positions make up the board leadership structure of a company. Board leadership structure can be categorized into dualit,v and nonduality. Duality structure means the posts of chairperson and Cl,O are held by the same individual. Non-duality structure, on the other hand, necessitates difl'erent individuals holding each position separately. Both elements are the primary determinants of an independent board. Board leadership structure, in this instance, provides an insight into the degree of board independence. Tireoretically, non-duality structure signifies greater board independence because it avoids the concentra[ion of porver ln c,ne individuai who can dominate decision-nraking. in particuiar, influencing decisions that are not in the best interests of the shareholders.

lndependent directors s"-r

;'eCt;I "f "f-rd

must have a sufficient number of independent directors to ensure rhat rhey are independenr from the influence of rhe professional managers.

An independent director simply mealls a director who does not have any. personal or business relationships with the company or its officers, u,hich could interfere ivrth the exercise of independent judgement or the abilit.,' to act in the best interests of a compan)'. A higher ratio of independenl directors' participation implies greater degree of independence of the board from the executir.e management's influence in making decisions. Boards that are more indepenclent are seen as effective monitors of management as opposed to boards that are infested by drrectors with famiiy or business ties to firm manageinent (Shamsui Nahar, 2004). The relatrve independence of the board can be implied by looking at the ratio of independent directors' participation in the buard. A higher ratio implies gi'eater

CorporateGovernance 145

of the board. Independent directors are also known as independent non-executive directors. As non-executive directors, they do not have executive independence

management responsibilities in the company i.e. they do not get involved in managing

the company on a daily basis. They dedicate their time to attending meetings and deliberating on company issues and evaluating proposals given by the management team.

Independent directors are usually individuals with vast skills and knowledge in managing companies and serving board of directors. They also have well-establisheC networks or connections with regulators and industry players. They can bring in technical and non-technical expertise to the board. These elements help the executive managernent to see 'a big picture' or macro-environment factors by looking at issues from a broader perspective in setting the strategic direction as well as formulating strategic plans for the company. Independent directors can challenge the view of the management by asking questions until they get an acceptable answer. This scrutiny is done in order for the management to consider every possible risk and potential of the company, say, in a strategy formulation exercise. bther than contributing their speciaiist knowiedge and expertise in the deiiberation and decision-making process of the board, independent directors provide a check and balance mechanism against the domination of the executive trairagement team because they have no relationship or affiliations u,hatsoever with the company and its officers" Hence, the element of biasness may be controlled in which they may make an independent or objective stance on conflict of interest issues as well as scrutinizing corporate activities and management proposals obiectivell'. In short, independent directors piay a very important control role to ensure that the board of directors allvays strives to protect and pursue the interests of shareholders in its decisions. They monitor the performance and activities of the management team so as to ensure they are in line with shareholders' objectives. Independent directors are relied upon to give outside and objective views to challenge the ideas presented by the management team and to control the CEO from abusing his power and making

ll;J6."d.* direceors provide a check and balance element in the board of drrecrors. I hey ensure that rhe

corporate manager5 do not control rhe decision-making of the board and steer it

to promote rheir

self-

interesrs and personal agenda.

decisions that benefit hirnself only.

Board committees The purpose of establrshing board committees within a board structure is primarily to assist the board in decision-making as well as supervising the management team. f he MCCG (2000) recommends that firrns establish board committees to divide rvork among board members so that they can accomplish more in their iimitecl time, u'hici"r ultimately contributes to an effective board. Most importantly, boarci t.ommittees are needed to support the control role of the board The three most common board committees in Malaysian listed firms are tire nomination, rentuneration and audit committecs.

lrlom inatio n co m mitte e The role of the nomination committee in corporate governance is paramoui-rt. This committee is a crucial component of an effective board.It is responsible for selecting and nominating the right candidates for directorship and top managemen' team for the board's sanction (Ruigrok, Peck, Tacheva, Greve and Hu, 2006). The corrtmittee is also respo'rsible for ensuring a periodic review of size and composition of the board is carried out so as to reflect the needs of the business. A nomination comriittee should be composed of majority independent directors. I I

{

t I

I

t.

fB".rd....l,** are meant

to

help the board of directors to examine specific issues of remunerarion,

nominatron of directors, top executives and audirs. They report to the board of directors.

5

Business Ethics

n co m mitte e A remuneration committee forms part and parcel of a desirabie board stmcture and procedures to enable the boa-d ofdirectors to be a potent corporate governance Re m u n e rati o

remuneration committee is to devise a board compensation plan that is linked to individual director's performance and corporate performance as well as industry benchmarks" T'he board of directors as a lvhole makes the final decision on llre remuneration of each director based on the recommendation of the remuneration committee. A remuneratiorr committee shouid be composed of majority independent directors. mechanism. The MCCG (2000) states that the main task of

a

Audit committee Malaysian Bourse has made it compulsory for public corporations to establish an audit committee beginning 1 August 1994. The arrdit committee's formation and composition are fully regulated by the stock exchange listing requireinents in Malaysia. The audit committee is seen as the most crucial oversight body within a board due to the fact that it helps to ensure the quaiity of the financial and control systems. Furthermore, according to the Agency Theory, an independent and effective audit committee reduces the severity of information asymmetries between shareholders and corporate managersi thus, attenuating agency costs. The audit committee rvorks closely with the external auditor in ensuring the independence of the financial reporting process. It oversees the audit and verification process of financral reports. The audit committee ensures that the external auditor is able to exercise his professional judgement ano it is not inflr-renced bv tl're closeness of- the relationshtp u,ith the client con-rpanv or rts officers/directors, rnonclar,Y rervards or remuneration ent icement.

Board compensation practices

R"r"*ar--r* I of direcrors and

top executives plays a crucial

role in corporate governance.

Appropriately devised remuneration systems can morivate managers ro forego their'self-in terests and realign rheir interests with those of shareholders.

'I'he board of drr-ectors as a wirole must deliberate on thc issues of board compensation practices focusing on the extent to nhich the director-s and managers are remuneraled in way,s that align their interests u,ith those of thcir firr-ns ()r^'nL'rs. )ettsetr artd Meckling (1976) underscored the irnportance of ir-rcentive alignment solutions to agency problems rvhen they proposed tirat executive compe nsation should be designed in such a way that can reduce the degree of conflict of interest betrveen shareholders and managers.

Theoretically, an eft-ective compensation system is the one that motivates managers to forego their opportunistic behaviour .rnd focus on value nraxirnization activities. The cornpensation system should consist o1 a combinatron of short-term and long-term cornponents. The short-term cotrrponent includes annual salary increment, bonus or any other benefit-in-kind for the executives.'I'1ris cornponent is meant for reu,arding strong current performance and motivating executirres to strive har.lcr shareholders. The long-term component inciudes the incentive plans such as the sirare option scheme to encourage ri-Ianagers to focus on building long-term sustainability of the firm and to discourage short terrirism. Tlie MCCG (2000) places great emphasis on the aspects of board remuneration in which it shouid reflect the responsibilities and commitment of the board members. The principles adopted by the MCCG (2000) with regard to directors' remuneration are as foilou,s. First, directors' remuneration package should be linked to individual and corporate perfbrmance so as to ensure that it is abie not onlv to attract, motivate and reward good performers but also to a.,'oid pavrng excessive pay. Second, eact, firm needs to have a remuneration cornmittee, mainly or u,holly conlposed of non -executive

in creating value for

CorporateGovernance

directors, whose tasks being to make recommendations to the board pertaining to the remuneration of the executive directors. Finally, the board as a whole is responsible to make decisions relating to directors' remuneration.

Directors' induction and training A director's induction programme is a one-off in-house programme organized by the company to introduce newly elected directors to the company and its ke' officers" The overall purpose of induction is to minimize the amount of time taken for the new director to become effbctive in his or her new job. The development of an induction programme should be tailored to the needs of the company and individual directors. Nevertheless, there are four common aspects of a director's induction programme:

r r r r

To convey the organization's norms, yalues and culture to the nerv starter.

To communicate practical procedural duties to the nelv director, including company policies relevant to a new employee. To convey an understanding of the nature of the compai)y, its operations, strategy, key stakeholders and external relationships. To establish and develop the new director's relationships with colleagues, especially those with whom he or she will interact with on a regular birsis.

Directors' training is a continuous professional deveiopment programme organized either in-l-rouse or externaliy for all directors. Directors must strive to continuously extend their hnowledge and skills in ordcr to bc cffcctivc. Thc,v nccd io undergo professional development programmes so that they can keep abreast of char-rges in the regulatory requirements such as company law, securitics lalv, taxation larv and corporate governance code, acquire and update their skills anci knowledge in risk management, strategic and management supervision, as weli as harness their professional expertise such as infl.rencing, conflict resolution and chairing skiils. Effectir,e corporate governance can be achieved if directors are competent and skilfui irr carrying out their expected roles in directing and controlling the company. In Malaysia, continuous training for every director is compuisory for all public corporations. This requirement is stipulated in the Bursa Malaysia Listing Requiremcnts. Every director must attend Mandatory Accreditation Programmc (MAP) and Continuing Education Programme (CEP). MAP is a one-off event to train directors on various aspects of securrties and company larvs. CEP is compuisory for directors to attend annually to ensure they continuously update themselves on developments in the securities indr:strv, particularly in areas of corporate governance and regulatory changes. Conrpanies can organize various types of training programmes for their directors such as mentoring, schemes, forinai directors' training courses> formal personal developnrcnt programnres, seminars and conferences and in-house company workshops.

5.7.2

lnternal Control and lnternal Audit

internal control system is an important eiement of corporate governance because it helps to enhance the accountabiiity of the board of directors in ensuring that shareholder s' assets are adequateiy safeguarded against the exposure to risks and expropriation. T'he IJ.K. Turnbull Report (1999) and the MCCG (2An) recommend a sound internal control system, which is meant for facilitating operations- rdentrfying and nranaging risks within an organization for the achievement of the urganization or shareholders' oDjeetir.es.

fD"..r*r *.d co be skilful and

-

knowledgeable

to carry our rheir fu

ncrions effecrively. they need ro

So,

conrinuously update and upgrade their skills by atrending appropriate training programmes.

147

18

Business Ethics

h.,;'d;;l--l procedures help the company ro prolect its investmenrs and assets.

lt

is subjecc

to an inrernal audit process.

The board of directors is fully responsibie for establishing ancl reviewing the effectiveness of an internal control system. The management team is responsible for implementing and monitoring tht' internal control system. The internal control systern can assist the board to ensure adherence to internal policies, safeguard the company assets, prevent and detect fraud or error and ensure accuracy and completeness ofthe accounting records. The effect of a faiied internal controi system cart be devastating as demonstrated by the collapse of Barings Bank Plc. in the 1990s. Hence, it is an important aspect of the board's accountability to shareholders. The MCCG (2000) has off'ered some guidelines in setting up and evaluating firms' internal control system. Moreover, the Bursa Malaysia has made it mandatory for public corporations to disclose the process and adequacy of their internal control system and risk management framework in a form of a narrative statement in the annual report and accounts. Specifically; the general objectives of internal control are as follo.*'s:

r

r I r

r

To ensure the orderly and efficient conduct of business in respect of systems bcing in place and fully impiemented. Controls mean that business Processes and transactions take piace without disruption with less risk or disturbance and this, in turn, adds value and creates shareholder value. lb safeguard the assets of the business. Assets include tangtbles and intangibles, and controls are necessary to ensure they are optirnally utilized and protected from misuse, fraud, misappropriation and theft" 'lb prevent and detect fraud. Controis are necessary to unco-r,er any operational or financial irregularities that nught bc the result of thefl or fraud To ensure the completeness and accuracl, of accounting records" Ensuring that all accounting transactions are fu1l,v and accurately recorded, that assets and liabilities are correctly identified and valued, and that all costs and revenues can be fuiiy accounted for. To ensure the tirnely preparation of financiai information, lvhich applies to statutory reporting of year end accounts, fbr example, and also management accounts, if appropriate, for the facilitation , rf effective management decist*rtt

making.

;*""t*a;-----l [uncrion assists the board of directors to review the effeciiveness of the company's internal conrrol procedures,

The board of directors relies on lhe irrternal audit function to review the effectiveness of the internal control system. Internal audit function complements the role of internal control system in reducing the frrm's overallrisk exposure. Given the importance of monitoring and reviewing firms' exposure to various rrsk factors, internal control systems har.e become part of the ,iubject matter of auditing. In thrs respect, internal auditors piay an important role in helping the board to review the system of internai controis and the financial reporting process. Most importantly, internai audits can mitigate the extent of information asynrmetry and agency risks in a firm by attesting to the reliability of a firm's publishcd financial statements (Ashbarrgh and Warfield, 2003). The internal audit department is established to prov ide a service to the organization

in which it performs an independent appraisal activity on the internal control and risk management system. It is actualiy a control rvhich functions by examining and evaluating the adequacy and effectiveness of othcr controls within a company. In view of the crucial role of an internal audit department in providing an independent assurance and verification of the effectiveness and adequacy of the internal controi and risk management system in a company, it is pertinent for the chief internal arrditor to report directly to the audit committec. This r:rporting structure helps to support

CorporateGovernance 149

and strengthen the need for the internal audit team to function and act, independent of executive management.

5.7.3

External Audit

In a contractual relationship between shareholders and djrectors, the latter are entrusted with the control over the resources of the former in the mosl efficient and effective way. Hence, the corporate governance model that encapsulates this reiationship of accountability is based on the idea that when ownership is separated from control, directors need to be accountable to shareholders. One method of showing accountability is by way of quality corporate and financial reporting through the participation of an independent external audit. In fact, quality reporting by management is one of the most important corporate governance goals (Gramling et a\.,2004). J.he annual external audit by an independent external auditor is particularly aimed at achieving that goal. The external audit serves as a monitoring tool to alleviate the agency cor,s due to the separation of ownership and control (Ashbaugh and Warfield,2A$) and enhance the confidence of shareholders (Fan and \\rong,2005). External auditors are viewed as important gatekeepers to protect the interests of capital providers from financial manipulation and compliance risk. In vierv of this crucial role, it is pertinent for tire external auditor to be objective and fair in perfcrnning its function. Shareholders will not trust a firm's financial statcmcnts if they are not confident with the objectivity and fairness of the e,,ternal auditor. It is, therefore, pcrtinent for the external auditor to be indepenclent from any influence or pressure from the executive n-ranagement team of a firm. The independence of the external auditors may also be questionable if they also provide non-audit services with substantialiy greater fee income than the audit fees to the same client companv. Corporate scandals such as Enron, WorldCorr and Satyam Computer Services have l,ighlighted the failure of externai auditors in ensurinq their independence from the influence of the management teanr, which ultimately led them to condone the dissemination of inaccurate and false tlnancial reports to stakehoiders.

5.7.4

r

function verifies the accuracy and reliability of financial reports on behalfof shareholders.

Shareholder Activism

Shareholder activism is the exercise and enforcement of tl-re voting rights of shareholders against the board of directors at the company s annual generai meeting (AGM). Shareholder activism arises when sirareholders believe that the board of directors has failed in its duty to pursue and protect sharel'rolders' intcrest. Sharcholders, for example, can withhold r.otes for directors r'oho do not attend board meetings or who have conflicts of interest. They can, in fact, vote against the proposed :itrategy if they are not convinced that it can boost the performance and competitive advantage of the company. Some examples of shareholder activism by institutional shareholders in the US are as follows.

r

fE""r.rkr.,dL

California Public Einployees' Retirement System (CaIPERS), a public en.rployee pension fund withheld votes against five directors of Hewlett-Packard Co. for approval of non-audit work for the auditors. Shareholders at Hewlett-Packard rejected a plan fbr generous sel,rrrance packages at its AGM.

fG;r,;h...'

'h"rtd

not be passive

owners where they allow the board and managers to fully

conrrol their own company.

)tl

FJrrsrness

tthrcs

Th.brrd.f directors should rnainiain a regular dialogue with shareholders and the larrer should make use of rhis channel of communication ro relay their grouses and ro seek

explanation from rhe former abour any issues of concern.

I

r

CaIPERS urged General Electric's shareholders to demand that its executives' share options be performance-related.

r

Glass, Lewis & Co, a proxy advisory firm, withheld votes against three directors of PeopleSoft Inc., citing unusual customer rebate aimed at fendino off a hostile bid from Oracle Corp.

r

Illinois Board of investment, a pension fund, withheld votes against the

r

chairman and two board members of Safeu'ay Inc. Shareholders at Shell threatened a revolt over its directors' remuneration"

Another important element of shareholder activism is having a two-way dialogue between shareholders and the board of directors. The purpose of this dialogue is for the shareholders to have a say in the decision making process of a board of directors. In reality, activism is usually championed by institutional shareholders. In this respect, the chairman of the board is responsible to ensure that the board has regular meetings with the institutionai shareholders. Issues of concern that are normally discussed during the dialogues include the companlr's financial performance, internal controls, succession planning in the board of directors and the company's acquisition or disposal strategy. Examples of large and important institutional shareholders in Malaysia are the Social Security

Organization (Pertubuhan Keselamatan Sosial), National Equity Corporation (Permodalan Nasional Berhad), Pilgrimage Board (Tabung Haji) and Armed Forces Fund Board (Lembaga Tabung Angkatan 'l'entera). These four organizations founded the Minority Shareholder Watchdog Group (MSWG) in the year 2000 as a part of the government's initiatives to protect the interests of rninority shareholders through shareholder activism. Other institutional shareholders include insurance companies, unit trust fund companies, pension fr-rnds and professional fund managers.

MSWG has been actively championing shareholder activism in N4alaysia by providing a platforn, and a collective voice to both retarl and institutional rninoritl' shareholders. MSWG also advises on voting at general meetings of public corporations. Among others, MSWG monitors public corporations in rvhich its founding meml:crs have equity stakes on issues such as questionable practices by management of public listed companies, breaches and non-compliance lr.ith the corporate governance code and failing financial performance. Corporate governance would improve if shareholders play a nlore active role in making their views knorvn to their company andior use their voting po\\rer against the board ofdirectors ifthe board does not sufficiently address their concerns and do not act in the best interests ofshareholders. Activrsm can encollrage better corporate goyernance because it pressures the management to avoid negative publicity. An,v act of reprimand by shareholders is seen as bad publicity for the board of directors or management. So this can keep them on their toes at all times. Also it is more constructive for shareholders to shou, disapproval o1 a company and its boarci of directors than simply selling off the shares they hold. In summary, it is pertinent for the shareholders of public corporations to behave like owners in rvhich they need to show great interest in the running of the company. Shareholders must be willing to work together wilh the board rn achieving their wealth maximization objective i.e. ownership with responsibility.

Corporate Governance i 51

5.7.5

Reg u lation

primary objective of regulation is to restore and enhance public confidence in the business environment by introducing stronger self-regulatory standards and ru1es. In Malaysia, the main regulatory forces entrusted with the duty to protect investors include SC, Bursa Malaysia Securities, Bank Negara Malaysia, Companies T'he

lR{,,l..ry'

Commission of Malaysia and the Royal Malaysian Poiice Department. Table 5.1 shorvs the relevant provisions of laws and their significance in providing protecttr,n for the

established standards ,' and

rules: .

investors in MalaYsia"

Table Securiries

Commission

Capiral Market and Services Mostly related to securities offences. S.317A of CMSA gives rhe SC power ro Acr 2007 (CMSA) and prosecute directors for breach of fiduciary Securities Conrmission

the Act

duties

(1ee3) l l,qulsa ,lnllaysia Securicies ,, 1 Li5ring,iequilem.enr1,(].Q01)

,

t1p,91g1 mandator,y-:dilqlosure obligations

.

framework airns ro regulate corporate behaviour to ensure it is in line with rhe

5.1

Regu lators, re I eva

nt

legislation and their significance in protecting i

nvestors

on Public corPorarions Bank Negara

Malaysia

Companies Commission

of

Financial Mainly regulates Iisred banks and financiat lnstitutions Acr (1989), now institutions in relation to ownership known as Financial Services and directors'appointments and disqualifications Acr (2013) Banking and

Companies Acr (1965)

Malaysia

to the fiduciary duiy ol' directors of both pi-ivare and public S.132 relates

companies The Royai Malaysian

Poiice

Penal Code

Departmenr

Prosecutes criminal breach of

trusl

cases

under sections 405 ro 409 and chearingi fraud under secrions 415 ro 4)0

(Source: The Srat Starbzweek, 2A10)

Bricfly, the roles of regulation in corporate Sovernance include:

r r r

Ensuring timely disclosure of critical information. E,nsuring compliance with various regulations, such as occupational health and safety and environmental law Ensuring proper discharge ofduties by directors and executives, etc.

-lhe focus of the reguiators is on strengthening the lau.,s and tak-ing srvift enforcentent action in a firm and fair nlanner against errant market players rt'ho hart-n investors or damage the integrity of the capital market. Laws and reguiations serr,e as control ntechanisms to ensure companies, directors, executives and emplovees obev the laws and observe good corporate governance practices. Laws and regulatiot-t.s usuaily mandated full compliance failing u.hich penal punishment may be meted out to errar,t parties. Non-adherence to regulations by companies and directors may learl to the occurrence of compliance and reputation risks. Case for Review 5.2 illustrates the enforcement action that can be taken by a regulator of corporate goverlrance for breach of a law by top executives of a public listed corporation.

f

L^r^,r

-d ,.g.il.il"*

require mandatory compliance failing which companies and their officers

can be sublecied to various penalties and

punishment.

Business

lthics

Securities Commission (SC) Charges Three Former Executives of Transmile

took three former execurives of Transmrle ro couru and charged rhem for aberrrng the company in making misleading statements. Two of rhe former executives were ai:o independent non.executive

SC

direcrors and members of the audic commitree As members of rhe audir commirree, they had knowingly allowed Transmile to issue misleading srarements with regard to its f inancial performance to Bursa Malaysia Securities Berhad. SC also offered compounds of RM500,000 each to the two independent non-execuaive direcrors. This swift enforcement action showed rhat rhe SC would not tolerate any abuses of power and wrongdoings by those in fiduciary duty to prorect shareholders'interests. They could expect that ,.,,9!e,5C would take srern action against the cransgressors that caused massive losses to rnvestors. This action is nor only timely bur also sends a dererrent message ro orher garekeepers such as . manjgement, externai auditors, internal audirors and shareholders tirar their foremost role is to protect and enhance the o'edibility of the Malaysian capital marker. (Adapred fram Minority Shareholder Watchdog Group. n d )

Recall in Section 5.6, the MCCG adoptecl a hybrid approach to ttre implementation of various corporate governance best practices. h-r thrs approacl-r, a f'erv of the best practices have been made compuisory for public corporations to implement. The mandatory requirement came trbout u,hen the Bursa Malaysia Securrties incorporated those best practices rnto its Listing Requirements. l'he Bursa Malaysia Securities inay impose fines and/or publicly reprimand d jrectors and public corporations for failure to comply n ith the provisions of the Listing Requ irements. The mirndatory corpor ate governance-related provisions are listed as follorvs:

r r r r

One-third of the board of directors nrust consist of independent directors-to raise the bar on independence ofthe board. The board must have an audit committee at all times. The audit committee must coi'nprise a minimum of three directors with the majoritybeing independent-to cnhance the independence of the committee. At ieast one audit commrttee member must be a member of the accounting profession, having suitable qualifications in thc discipline.

Next, we wiii take

look at some comnlorl ethical issues rn corporate go\rernance, which mainiy stem from the conflict of interest betlveen the shareholders and controllers. Most importantiy, the various issues illustiate the importance of corporate governance in public corporations. a

CorporateGovernance 153

ETHICAL ISSUES IN CORPORATE GOVERNANCE

i5,B

In this final section, we will examine a few common corporate governance issues in public corporations. If you look closely, most of the issues originated from the

unethical practices of corporate managers. Ineffective corporate governailce provides an opportunity for them to commit such misconduct. Hence, one may conclude that corporate governance and inculcating an ethical climate should come hand in hand in a quest io combat or minimize the tendency of corporate managers to abuse their power to the detriment of various stakeholders. We shall focus our discussion on the following common issues of corporate governance:

r r r r

Financialmanipulation Inflateddirector'sr:'uuneration Excessive business risk taking and lack ofrisk control Poor communication of information

5.8.1

Financial ManiPulation

The board of directors is accounl,able to report the financial health and status of the corporation to shareholders. Shareholders, investors and othcr users relr'' on financial

statemelts to make rlreaningful analysis about the performance and prospects of the corporation, lvhich in turn aid them to nrake inforrned decisions. Hence, accuracy, tiilteliness and completeness of information are paramount to them. Further, financial

reports should show balanced assessment of the corporation's financiai position. As stated earlier in this chapter, tlre contrcilers have an Llpper hand in assessing and controlling the information about the corporation than the shareholdcrs. In fact, rhey are the ones who prepare the financial reports for shareholders, \Are have learned 'I'ransmiie, from the scandals of Enron, WorldCom, Satyam Computer Services and hou, the controllers manipulated financial reports to their advantage to the extent of causing giant corporations to collapse. The following cases for i-evien' 5.3 and 5.4 summarize the gravity of this issue-er.en the judiciary meted out a strong deterrent sentence to the offenders. On a related point, the board of directors must ensure that the corporation prepares financial reports in accordance with tl're established accountiugs standardsl{oit i-po.tantly, t}re financial reports should be subject to an independent audit. Recali i1 the earlier section, we discussed the role of an external auditor in providing a.ssurance and verification of the reliabiiity of financial reports. One important question remains-is the auditor irrdependent from the influence of the corrtrollers? The independence ofan external auditor is crucial to ensure shareholders have access to reliable and complete information about the financral health of the corporation. The case of Xerox Corporation and KPMG LLP illustrates this issue.

l%t**p-r" scandals exhibited

a

common featurethat was accounting irregulariiies and frnancial manipulacion.

'1

54

Business Ethics

Transmile Berhad The company had issued fake invoices to a few clienr companies for delivering some services. Some issLied such fake invoices in order ro inflate profits in the income statement. The Securities Commission (5C) found thar rwo independent directors and also members of rhe audir commitree aberred the issuance of misleading financial statements. SC compounded them RM500,000 each. The KL Sessions Courr sen[enced rhe rwo former independenr direcrors ro one year imprisonmenr and a fine of RM300,000 (rn defaulr of six monrhs imprisonment).

of these client companies were dormant Transmile deliberately

(Adaprcd fro m www.sc.co m. my)

MEMS Technology Berhad Two directors aurhorized the issuance of misleading financial statements io Bursa Malaysia Securiries Berhad. The income s[atemenr reported inaccurare revenue figures, which consisied r-.f fic,r,iLious sales of RM30,000,000. Both direciors pleacied guilry irr the Kuala Lumpur Sessions Courc bui. r'eceived a iight sentence of RM300,000 fine each. The SC appealed rhe sentence in rhe High Courr and succeeded.

The Courr imposed a custodial punishment by senrencing them ro six months imprrsonmenr and upheld rhe fine. The rwo directors appealed to the Courr of Appeal bur were unsuccessful (Ad a pred fro

m www.b

u

r sa

m al ayst a co rn)

The Securities and Exchange Commission (SEC) rn the US would be charging several KPMC errployees, includrng a former auditor and two cLlrrent employees, for rheir role in rhe accounrrng srandal in Xerox KPMC was the auditor of Xerox in 2000 r,nrhen rhe SEC discovered a huge oversraremenr of profirs in its accounrs f rom T997 unril 2000 KPMC had approved tire accounrs in Xerox's 2000 annual report afier rhe company made mrnor restatemenrs only.

The SEC had evidence that KPMC knew about this accounting irregulariry bur approved

ri-re

accounts anyway. The inflated revenues had mrslec the public abour the company's financial postrion The SEC contended that KPMC partners allowed their close relationships wirh Xerox ro iinparr rherr

ludgement and role as gatekeepers for the publrc Thrs lack of independence led to rhe legal action by the SEC. (Adapred front Pulliam and Bandler, 2003)

CorporateGovernance 155

In the cases of Enron and WorldCom, the external auditors had failed in their duty to protect the interests of shareholders. Enron's external auditor, Arthur Andersen, for example, was involved in various conflict of interest situations that jeopardized their independence. The audit partners had business dealings with Enron's top executives and they freely socialized with each other after work. Many of Arthur Andersen's audit partners left the firm to join Enron in top positions. They were aiso responsible

for preparing financial reports in Enron. The audit partners were found to have helped Enron's top executives to 'adjust' their accounts to show a more i.rvourable financial health, which misled shareholders into believing that Enron was doing well financially. In actual fact, Enron had huge debts that caused the giant energy corporation to collapse. This action was motivated by self-interest.

5.8.2

I

InflatedDirector'sRemuneration

The board of directors is responsible for deciding the remuneration package of the controllers and they usually make such decisions at their own discretion. For example, in Malaysia, the law does not require the board of directors to seek shareholders' approval for remunerating directors cxcept for the share option scheme. Shareholders certainly do not mind the corporation paying the controllers high salaries and benefrts so long as the remuneralion package commensurate with the financial and individual performance of the controllers. The controliers should be rewarded for outstanding perforniance to provide an incentive for innovation and risk-taking as well as to attract scarce talent to run large and complex public corporations. In the framework of agency theor1,, the directors'remuneratron is an important nrechanism to align the interests of the shareholders witir those of its controllers. I-lorveyer, this mechirnism does not alrvays work well and it is often subject to abuse. Ihe main criticism of directors' remuneration is it has become too excessive to the extent of eroding shareholders' value. The following examples sholv the abuse of drrectors' remuneration in public corporations around the rvorld.

r in 2009, shareholders of Royal Dutch Shell criticized

r

r r

the board of directors during the general meeting for paying huge amount of salaries to its executives despite failure to meet their perforrnance targets (Chazan and Lublin, 2009). N4ore than halfofthe shareholders voted against the rerruneration proposal. In 2008, critics argued that it was irresponsible for the CEO of the AIG Group to pay big bonuses to its executives when the corporation u.as at the brink of bankruptc,v if not for the government baii-out. Worse, the corporation used a portion of the US government bail-out money to pay the honusesl ln Australia, the founder and CEO of HiH Insurance, i{ay Williams, handed out millions of dollars in bonuses to senior executives a fer,r, months hefbre the company went bankrupt (The Star, 2008). L,nron's board of directors aiso announced millions of dollars in bonuses to its top executives just before the corporation filed for bankruptcy in 200i.

It is also an issue of concern to sharehoiders when the controllcrs are given free rein to decide their olvn remuneration. They may reward themselves u,ith huge salaries and other rewalds such as bonuses, pension scheme and other benefits i,vhen the corporation is not doingneli finenciaily. Hence, corporate governance code cails for a clear proc':dure to be estabiished for determining the remuneration packages of the controllers, They should be reivarded based on clear criteria, and most intportantly,, they should not be allorved to decide their own remuneration package.

fwhilr*.*r*rr,i* system can alieviare agency conflict, ir may also creaie a

corporate goVernance problem when ir is excessive

and

iacks alignment to

performance.

l5b

Bustness Ethtcs

5.8.3

Excessive Business Risk Taking and Lack of Risk Control

_-]

a,*;''.';"

exposed to various rypes of risks. Managers who

prioritize self-interests may rake excessive risks ro

promote

rheir own agenda,

which might result in shareholders facing huge losses.

The controllers must be mindful of the relationship between risk and return in making investment decisions. In general, investors want to be compensated with higher rewards for the higher risk that they take. investors expect that when a corporation takes on additional risks in a business the profits and dividends are to increase as well. It is an issue of concern to corporate governance when the controllers make decisions to increase profits without giving adequate attention to the risks associated with the decisions. In this instance, sharehoiders may be exposed to unnecessary risks, which could lead to losses. Shareholders expect the controllers to grow the business, and in doing so, to take additional risks. The controilers may expand the business by way of taking over other companies, for example. But takeover is a risky strategy and it invoives huge funds. The controllers may be motivated to go for an acquisition spree in order to 'build an empire' and enhance their prestige and power. They might not give due regard to risks in the event the takeover fails. As such, shareholders expect that the controllers will put iu place a suitable risk management system to identify and manage various risks associated with the business. The following case of HIH Insurance illustrates the disastrous effects of failure to account for risk m.rnagement system.

The Collapse of HIH lnsurance HIH lnsurance was rhe second largest general insurer in Australia prior to its collapse in early 200i. Thousands of its policy l'rolders ended up with worthless policies Fmployees lost their lobs The general public losr confidence in the insurance industry in Australra. \,\rhat had happened to HIH insurance? The HIH Royal Commissron repori indicared that corporate governance farled rn the company The CEO was given free rein ro conrrol ihe company and he had lack of acco.rntabiliry to the board of directors The investigation also revealed rhar money was wasied on poor and extravagant business acquisitions. HIH re-enrered ihe US rnsurance market in 1996 and expanded rts UK business tn 1991. HiH d'd nor have any adequate local market knowiedge before making such decisions The board of direcrors failed ro put rn place adequate safeguards to manage risk cxposurc in this strategy. lr also acquired poorly performing FAI Insurance Ltd irr 1998 for a whopping AtlDS300 millron lllH had ro borrow ro finance rhe acquisirion. ln September 2000, HIH had tc write-ofl its inves:ment rn F,\l lnsurance. HIH larer admirred thar ir had overpaid for FAI's acquisirion. The iasr poor in'!/pstment decision that led ro l--tlH s collapse was the escablishment of a loint venture wrth Allranz Australia Ltd in 2000 HIH sold off irs,profirable business units ro suppori this joint venture, resukin3 in a negative cash-flow soon after. (Adapted frorh Dellaportas et al., 2005)

CorporateGovernance 157

5.8.4

Poor Communication of lnformation

Shareholders rely on information

to make various decisions. However, they do not

to company information. The controllers have the information because they are directly involved in managing the daily affairs of the company. They do not only have the information but alsolontrol the manner and the timing have direct access

in which the information is reported to shareholders. Not only sharehoiders expect to receive information in a timely and accurate manner, they also wish to be abie to raise their concerns and want the board of directors to listen to their views. 'Ihe board of directors, in this instance, is responsible to ensure that the corporation has a clear communication policy with shareholders. The board of directors must establish various communication channels to communicate with its shareholders. Amongst others, the board can use the following

nrh" a-*ir,

.

shareholders have rhe

right to be informed of rhe developmenrs in a company. The board of direcrors is responsible ro ensure rhey have an effective

communicacion .. mechanism wirh rhe shareholders,

channeis;

I

The annual reports and accounts-it is common for corporations to provide

online versions of

tl"

annual reports, which can be easily u.."rribl. to

shareholders.

r r r r

The dialogue during annual general meeting rvhere shareholders are able to interact directlywith the chairman of the board on issues of concern to them.

Electronic communications such as an interactir.e conlpany website and email to convey importance updates or news about the .o-puny and share

price performance. Establish a dedicated investor relations department to handie shareholders' enquiries and to disseminate the latest information about the cornpany to the press and other media channels. Engage a

in regular dialogue u,ith institutional shareholders on performance

nd corporate governance-reiated matters.

Shareholders require accurate and timeiy information becausc information may affect the share price performance of the corporation. Thev need to be informed

in a timeit'manner so that they can make informed decisrons. fhe follorvinq case lbr review illustrates the importance of providing timely information to shareholclers, especially material information about the company.

Ehar.hdd.r-.q*. timely, accurare and complere information in order to assess rhe

performance of rhe company and ro make business decisions.

Whati Coing on in Kenmark? Kenmark is a furniture manufacturer based in Porr Klang, selangor. lt was firsr esrablished in Tarwan way back in 1978 lt began operation in Malaysra in 1989. The Malaysian operarion was lisred in Bursa Malaysia in 1997. The founder of the corrrpany,.lames Hwang, was responsible for ihe rapid expansrol of Kenmark's business rn Singapore, Australia, London, Hong
158

Business Ethics

ln 20T0, the founder and managing director and two other direcrors suddenly disappeared, Ieaving

rhe rwo independenr directors and employees in a lurch. The factory operarrons were rmmediarely halted and employees feared losing rheir;obs. The managing director's disappearance was repor"red in the news and a few credirors and.banks were apprehensive abour Kenmark's abiliry to repay its debts due ro the uncertainry. They forced sell the shares pledged to rhem causing the share price r.o tumble. Apparenrly, Kenmark had also defaulted in various credir faciliries and a few of its key executives had resigned. The company share price declined sharply following rl're uncertainry. Abour RMl00mrl in rnarket value was wiped out wirhin a span of one week. Bursa Malaysia Securities rnitiared enforcemenr proceedings against Kenmark, rhe managing director and two other directors for various breaches of disclosure requirements under rlre I isting Requirements. They had failed to make an immediate announcement to rhe Bursa /vtaiaysra on rhe disappearance of the managing director, resignation of key executives, cessation of irs opetarrons in Vietnam and Malaysia, defaulrs in various credit facilities and failure to submit quarterly financial reports ro Bursa. (Adapted from The Star, Starbizweek, 2006)

The iearning outcomes for this chapter are summarized as follows:

1.

Explain the meaning of corporate governance. According to Tricker (i984), the term 'governance' is derived from the Greek word gubernare, which rneans 'to steer'. The Malaysian Code on Corporate Governance (2000) defined corporate governance as 'The process and structure used to direct and manage the business and affairs of the company tolvards enhancing business prosperity and corporate accountability with the ultimate objective of realisrng long-term sl'rareholder value, whilst taking into account the interests of other stakeholders.' In a nutshell, corporate governance erlcompasses a broad spectrum of internal and externai mechanisms intended to mitigate agency risk by increasing the monitoring of managements'actions,limiting managers'opportunistic behaviour. and improving the quaiity of firms' information flows.

2.

Explain in what way that the separation of ownership and control in public corporations could lead to corporate goyernance problems. The controi or management of public corporations are distinctly separate from ownership. Corporate ownership and control is divided between two parties -shareholders and the board of directors. The shareholders own the firm and the board of directc,rs controi the public corporation. This structure of public corporation gives rise to the various corporate goyernance prolrlems that we had witnessed so far. The structure leads to the detachmerit of shareholders as owners of the public corporation from control oitheir or,vn propertl They rel1,,sn the controllers to protect their

CorporateGovernance 159

interests but why would the controllers care about the shareholders? They might pursue thetr own interests, because by nature they are greedy, and lvith power in their hands, they are in the best position to enrich themselves at the expense of the shareholders.

3.

Elaborate on the meaning of conflict of interest in the context of the relationship betrveen shareholders and professional managers. The controllers do not own the corporation. They are merely salaried empioyees and likely to behave differently than the owner of the corporation toward the long-term success of the corporation. They have the tendency to work inefficiently and focus on short-term profits only in order to demonstrate success. Focusing on short-term profits enables them to maximize their bonuses and give them high salaries and perks. Shareholders, on the other hand, expect the controilers to seek out profitable new long-term investments to ensure the survival of the company in the long run. As salaried employees, the controllers stand to lose little compared to the shareholders if the corporation goes bankrupt due to the former's personal agenda. The managers may iook fbr other employment whereas the shareholders stand to lose their entire investment.

4.

Explain the implications of the Malaysian corporate ownership structure on corporate governance.

In a concentrated ownersllip environment, there exists one large shareholder and a fringe of minority shareholders. The classic owner-manager conflict in diffused ownership is mitigated due i-tr the large shareholder's greater incentives to monitor the controllers. However, a second type of conflict appears (referred to as 'Iype II Agency Problem) in which the large shareholder that is also a controller may use its controlling position in the firm ro extract private benefits at the expensc: of rninorit,v sharehoiders through managerial entrenchment or various other forms oI self-interest related partv t raitsilcti( )ns.

5.

Descritre the naiure of the principal-agent relationship in the context of corporate governance. In a public corporation, agency relarionship exists in the contractual relationship betr,r,een the shareholders (principal) and controllers (agents). Sharehoiders expect the directors to closely rnonitor the senior rnanagement teanl to ensure that they lvili r-neet the objectives placed upon them. Agency problenis arise r'vhen the controllers do not necessariiy make decisions and allocate the controllers do not consistentllr resources in the Liest interest ofthe shareholders. In other "vords, strive to ensLlre the achievement of shareholder rveaith maximization objective. Agency theory assumes that this situation exists ciue to the conflicting of goals between shareholders and controllers. The controllers, by nature, are fr-relled by seif-interest or opportunistic tendencies. They are iikely to displa,v egoist behaviorir-to make decisions that are nrotivated by self interest.

6.

Explain the Stakeholder, Property and Social Institution Theories that are applied to the corporate governance discipline. . Stakeholder Theory-This theory arglles that corporations should serve a broader agenda of maximizing wealth tbr shareholders and protecting the weifare of stakeholders. 'l'hrs wider objective is necessary because the company's actions and decisions have impacts on the weilbreing of their stakehoiders. The larger the size and operations of a corporatiori, the greater the impact of its actions or decisions on stakeholders. * Propertl Rights Theory-v-11is theory asserts that a corporatiun is a private property of shareholders who exercise their rights to incorporate and to contrirct. By virtue of having p;operty rights, shareholders have the right to control the corporation. The property right of the owners in a corporation must be fr:lly protected by the law.

IOU

Busrness tth rcs

.

7.

Social lnstitutions Theory-This theory indicates that shareholders can exercise their right to incorporate because the state allows them to do so. Without the sanction of the state, corporations will not exist. Hence, corporations should not be treated solely as a body that serves the interests of individual shareholders, but also to promote the interests of the public at large.

Describe the role of various corporate goyernance mechanisms in protecting the interest of the shareholders and stakeholders. . Board of directors-The board of directors can be a potent monitoring mechanism to minimize agency conflict in a public corporation. They must be accountable to shareholders and supervise the management team on behalf of shareholders. The board of directors must be independent from the influence of the top executives, especially in making decisions. They should give priority to protecting the interests of shareholders in making decisions. Board independence can be strengthened by separating the roles of chairperson and CEO and appointing a sufficient number of independent directors to sit on the board.

.

.

.

.

.

Board committees-The three common board committees in Malaysia are the nomination, remuneration and audit committees. Board committees are primarily responsible for helping the board of directors make decisions on board appointments and remuneration and supervision of the financial reporting process. The independence of board committees is crucial to ensure they can effectively safeguard the interests of shareholders. For example, the remuneration committee is meant to prevent directors from setting their own pay package whilst the audit committee ensures that financial information is reliable. Board cornpensation practices-Whilst a directors' incentive system can heip to align the interest of the controllers with those of shareholders, it can also cause corporate governance problems. This situation is possible if the directors are given free rein to decide their own rernuneration. So, ihe board of directors with the assistance of the remuneration committee musl ensure that the remuneration package is linked to performance. Further, there must be clear procedures for determining the pay packages of directors. Directors' induction and training-Directors must continuously update their knowledge and skiils to be effective in performing their function. They need to keep abreast of developmerrt in various relevant laws governing a business, corporate governance requirements and risk management. In Malaysia, continuous training for every director is compulsory for all public corporations. This requirement is stipulated in the Bursa Maiaysia Listing Requirements. Every director must attend Mandatory Accreditation Programme (MAP) and Continuing F)ducation Programme (CEP). Internal control and oudit-internal controi system is aii important element of corporate goyernance because it helps to enhance the accountability of the board of directors in ensuring that shareholders' assets are adequateiy safeguarded against the exposure to risks and expropriation. Internal control system can assist the board to ensure adherence to internal policies, safeguard the company's assets, prevent and detect fraud or error and ensure accuracy and completeness of the accounting records. Internal audit function complements the role of the internal control system in reducing the firm's oyerall risk exposure. [t is actually a control which functions by examining and evaluating the adequacy and effectiveness of oiher controls within a companlr.

External audit-External auditors are viewed as important gatekeepers to protect the interests of capital providers from financiai manipulation and compliance risk. In view of this crucial role, it is pertinent for the external auditor to be objective and fair in performrng its function. [t is, therefore, pertinent for the external auditors to be independent from any influence or pressure from the executive management team of a firm.

CorporateGovernance 159

interests but why would the controllers care about the shareholders? They might Pursue their own interests, because by nature they are greedy, and with power in their hands, they are in the best position to enrich themselves at the expense of the shareholders.

3.

4"

Elaborate on the meaning of conflict of interest in the context of the relationship betrveen shareholders and professional managers. The controilers do not own the corporation. They are merely salaried employees and likely to behave differently than the owner of the corporation toward the long-term success of the corporation" They have the tendency to work inefficiently and focus on short-term profits only in orcler to demonstrate success. Focusing on short-term profits enables them to maximize their bonuses and give them high salaries and perks. Shareholders, on the other hand, expect the controilers to seek out profitable new long-term investments to ensure the survival of the company in the long run. As salaried employees, the controllers stand to lose little compared to the sharehc-rlders if the corporation goes bankrupt due to the former's personal agenda. The managers may look fbr other employment whereas the shareholders stand to lose their entire investment.

Explain the implications of the Malaysian corporate ownership structure on corporate goYernance. sharehoider and a fringe of orvnershrp is mitlgated due in diffused minority shareholders. The classic olvner-manager conflict to the large shareiroider's greater incentives to monitor the controllers. However, a second type of conflict appears (referred to as Type II Agency Problem) in which the large shareholder that is aiso a controiler may use its controiling position in tire firm ro extract private benefits at the expense of rnrnority sharehoiders through manageriai entrenchment or various other forms of self-interest

In a concentrated ownership environment, there exists one large

relaled part)'- t ransact ions.

Describe the naiure of the principal-agent relationship in the context of corporate governance. In a public corporation, agency relationship exists in the contractuai relationship between the sharehoiders (principal) and controllers (agents). Shareholders expect the directors to closely monitor the senior management team to ensure tha{ they r,r,ill meet the objectives placed upon them. Agency problems arise rvhen the controllers do not necessarily make decisions and ailocate resources in the best interest ofthe shareholders. In other lvords, the controllers do not consistentll. strive to ensure the achieveilent of shareholder weaith maximization objective. Agencl, theory assumes that this situation exists ciue to the conflicting of goals between shareholders and -fhe1' controilers. The controliers, b1, nalure, are fuelled by self-interest or opportunistic tendencies. are likely to displa,v egoist behaviour-to make decisions tliat are nrotivated by self-interest. 6.

Explain the Stakeholder, Property and Social Institution Theories that are applied to the corporate governance discipline. . Stakeholder Theory-This theory argues that corporations should serve a broader agenda of maximizing wealth for shareholders and protecting the weifare of stakeholders. This wider objective is necessary because the company's actions and decisions have impacts on the weilbeing of their stakeholders. The larger the size and operations of a corporatron, the greater the impact of its actions or decisions on stakeholders. , Pro?ert/ Rights Theory-*This theory asserts that a corporation is a private property of shareholders who exe;cise their rights to incorporate and to contract. By virtue of having pi'operty rights, shareholders have the right to control the corporation. The prcperty rigirt of the owners in a corporation must be fuily protected by the law.

4/

IOU

LJusrness tth!c-s

.

7.

Social Institutions Theory*-This theory indicates that shareholders can exercise their right to incorporate because the state allows them to do so. Without the sanction of the state, corporations will not exist. Hence, corporations should not be treated solely as a body that serves the interests of individual shareholders, but also to promote the interests of the public at large.

Descritre the role of various corporate governance mechanisms in protecting the interest of the shareholders and stakeholders. . Board of directors-The board of directors can be a potent monitoring mechanism to minimize agency conflict in a public corporation. They must be accountable to shareholders and supervise the management team on behalf of shareholders. The board of directors must be independent from the influence of the top executives, especially in making decisions. They should give priority to protecting the interests of shareholders in making decisions. Board independence can be strengthened by separating the roles of chairperson and CEO and appointing a sufficient number of independent directors to sit on the board.

.

.

.

.

.

Board committees-The three common board committees in Malaysia are the nomination, remuneration and audit committees. Board committees are primarily responsible for helping the board of directors make decisions on board appointments and rernuneration and supervision of the financiai reporting process. The independence of board committees is crucial to ensure they can effectively safeguard the interests of shareholders. For example, the remuneration committee is meant to prevent directors from setting their own pay package whilst the audit committee ensures that financial information is reiiable. Board cornpensation practices-Whilst a directors' incentive system can help to align the interest of the controllers rvith those of shareholders, it can also cause corporate governance problems. This situation is possible if the directors are given free rein to decide their own rernuneration. So, the board of directors u,ith the assistance of the remuneration committee must ensure that the remuneration package is linked to performance. Further, there must be clear procedures for determining the pay packages of directors. Directors' induction and training-Directors must continuously update their knowledge and skiils to be effective in performrng their function. They need to keep abreast of developrnerrt in various relevant laws governing a business, corporate governance requirements and risk management. In Malaysia, continuous training for every director is cornpulsory for all public corporations. This requirement is stipulated in the Bursa Malaysia Listing Requirements. Every director must attend Mandatory Accreditation Programme (MAP) and Continuing E)ducation Programme (CEP). lnternsl control and audit-Internal control system is an important e]ement of corporate governance because it helps to enhance the accountability of the board cif directors in ensuring that shareholders' assets are adequateiy safeguarded against the exposure to risks and expropriation. Internai control system can assist the board to ensure adherence to internal policies, safeguard the company's assets, prevent and detect fraud or error and ensure accuracy and completeness of the accounting records. Internal audit function complements the role of the internal control system in reducing the firm's overail risk exposure. [t is actually a control which functions by examining and evaluating the adequacy and effectiveness of other controls within a compan)'.

External audit-External auditors are viewed as important gatekecpers to protect the interests of capital providers from financiai manipulation and cornpliance risk. In view of this crucial role, it is pertinent for the external auditor to be objective and fair in performing its function. [t is, therefore, pertinent for the external auditors to be indepcndent frrtm any influence or pressure from the executive management team of a firm.

CorporateGovernance

Shareholder activism-Shareholder activism is the exercise and enforcement of the voting rights of shareholders against the board of directors at the company's annual general meeting (AGM)- Shareholder activism arises when shareholders believe that the board of directors has failed in its duty to pursue and protect shareholders' interest" Another important element of shareholder activism is.having a two-way dialogue between shareholders and the board of directors. The purpose of this dialogue is for the shareholders to have a say in the decision-making process of a board of directors. In reality, activism is usually championed by institutional shareholders. Regulation--The primary objective of reguiation is to restore and enhance public confidence in the business environment by introducing stronger self-regulatory standards and rules. The focus of the regulators is on strengthening the laws and taking swift enforcement action in a firm and fair manner against errant market players who harm investors or damage the integrity of the capital market. Laws and regulations serye as control mechanisms tr:r ensure companies, directors, executives and employees obey the laws and observe good corporate governance

i

practices.

8.

Describe the various ethical issues in corporate governance. , Financial manipulation The controllers controi the information about the company. They might manipulate financial information to serve their own agenda. It is common for errant controllers to report inaccurate financial information that is misleading to shareholders. Shareholders require the controllers to communicate corporate information in a timely and accurate manner so that they can rely on the information to make informed decisions. Corporate scandals such as Enron, WclrldCom,

Transmile and Xerox Corporation have highlighted the disastrous effects of financiai manipulation. There vr,ere also instances w{rere the external auditor had failed in therr duty to protect shareholders by ensuring reliability of financial reports. In those cases, the auditors

:

compromised their professional independence by helping the management of the client conlpan)/

.

"

,

to'adjust' their accounts. InJTated director's remuneration

When directors are given free rein to decide their orvn remuneration, they are likely to abuse this power and relvard thernseives excessively. Shareholders object to remuneration packages that do not reward directors based on clear performance measures. The cases of Royal Dutch Shell, AIG Group, HIH Insurance and Enron demonstrate hor,r, top executives blatantlv paid huge bonuses to themselves despite poor performance. Excessive business risk taking and lack of risk control Risk taking is important in business because it provides opport,:nities to earn returns. I{owever, the controllers may take on high risk projects without putting in place adequate risk safeguards to protect the company from losses. They may undertake risky ptojects to serye their own agenda for gaining prestige and power and at the same time exposing the assets of sharehoiders to unnecessary risk. Hence, the board of directors is responsible to establish risk management and internal control systems so as to safeguard shareholders' assets and investment. Poor communication of information Shareholders rely on information to make informed decisions. However, the controllers might not release or communicate corporate information to shareholders in a timely and accurate manner. Often, sharehoiders are kept in the dark about the developments within the company. The board is responsible for ensuring timely dissemination of material information to the general i;rvesting public. As owners, sharehoiders also expect the board to listen to iheir concerns and views. The board should have a clear communication policy to proviCe suitable communication channels for shareholders to interact directlv u.ith them.

161

162

Business Ethics

Adverse selection Arises when shareholders are unable performed their tasks as expected

to

ascertain whether the controilers actually

Agency cost Costs that arise from the need of the shareholders to monilor the activities and perfbrmance of the controllers. Agency problems Arise when the controllers do not necessarily make decisions and ailocate resources in the best interest of the shareholders. In other words, the controllers do not consistently strive to ensure the achievement of the shareholder wealth maximization objective.

rI I

A contract under which one party (the principal) hires another party (the agent) to undertake specified functions on the principal's behalf. The principal delegates some decisron'rnaking Agency relationship

t

authority to the agent to en..blc the agent to perform the assigned tasks.

I ,

L-

Annual general meeting A yearly meeting called by the board of directors for the purpose of reporting to the shareholders on the current performance and futtire prospects of a corporation.

I !

r ; I

Audit committee A body established within

a

board to oversee the financial repor llng process.

Board of directors An elected group of individuals r,vho ha'',e legai duty to control the resources and make decisions on behalf of tl-re corporations' shareholders.

r l

*I t l

Board monitoring An internal corporate governance mechanism primarily rllcant

to suprervl5q ths

management team orr beiraif of the shareholders.

I

!

r

? I

Concentrated ownership A situation where the ordinary share ownership in a public corporation is iargelv held by individuals, a grollp of individuais, family members, institutions and the government.

l

Conflict of interest Occurs rn,hen an individual's self-interest conflicts with the obligation of the individual to act in the best interest of another.

i

L

I

LE

r ,

Controllers Consist of both directors and the senior management team of a public corporation.

t

k s

Controlling interest Gives sharehoiders greater control or voting rigirts to influence the decisrc,ns of the corporation.

i I

* $

Corporate governance Encompasses a broad spectrum of internal and extcrnal mechanisrns intencled to initiga'.e agency risk by increasing the monitoring of rnanagements' actions, lirniting managers' opportunistic behar.iour, and inrproving the quality of firms' information flows.

Corporation Legally, an artificial legal person, created under the laws of a particular state or countr),. Directors' remuneration The compensation of executive directors and corporate executives, including salar,v, honuses, share options and other benefits.

I I

k' 6

r I I

I

I E I

i

L. g B

Egoist An individual rvho puts his or her own selfish interests above rii other considerations.

7 7

I

i

a

Externalaudit An independent verification process to give assurance on the reliability of finanr:ial reports.

$

k

CorporateGovernance 163

lxternal corporate governance control Monitoring mechanisms that are available outside a corporation to control the activities and behaviour of controllers. iarnily ownership Shares of a public corporation owned by family members. 6overnment ownership Shares of a public corporation owned by the government or its agencies. lndependence Can be achieved when the board of directors, as well as extertral and internal auditors, are free rvith the management fi.om the influence of the management team and free from any interests or relationship team.

lnternal audit Established within an organization to perform an independent appraisai activity on the internai control and risk management system' lirternal corporate governance control Monitoring mechanisms that are available within a corporation to rontrol the activities of the controliers. Minority shareholders Sharehoiders that orvn a small percentage of shares in a public corporation. Technicaily, shareholders that own less than five per cent of total shareiroldings are classified as minority owners. Moral hazard Occurs nhen the shareholders cannot be sure whether the controllers are pursuing their own self-intcrests or truly striving to perform their task for the benefit of the shareholders.

hiomination committee A body establisl-red r,r,ithin a board of directors to assist in seiecting and norninating the right candidates ior directorship and the top managemellt team for the board's sanctiotl. Performance The achievement of economic and business obiectives. performance-based remuneration Remuneration that is linked to the overall performance of a corporation.

lXemuneration committee compensatii;n package. Share

A body established within a board of dire,-tors to heip

options The right to buy a share in the future at the price of the option

design directoi.s'

at grant date.

Shareholder The legal owner of a corporation; a person, group or institutiott owning one or more shares in : corporation. 5hareholder activism 'I'he exercise and enforcemer-)t of the voting rights of slrareholders against the board of ilirectors al the cornprany's annlral general meeting (AGN'{).

litake Having an interest or share in undertaking. lrakeholder Any party that can affect or be affected by the decisions of an organizatioti; an individual or group that iras various kinds of stakes or legitimate clairns in the business.

a

Type I Agency Probtem A situation where the controliers of a public corporation do not share or pursue the same objeciive as expected of their shareholders.

Problem A situation where a large shareholder, that is also a controller, is using its controlling rcsition in a public corporation to extract private benefits at the expense of minority shareholders. Type ll Agency

164

Business Ethics

1. Explain the meanings of agency relationship and agency costs. 2, Identify and explain the three implementation approaches of the corporate governance

codes"

3.

Explain why it is usually desirable ior the chairman of the board of directors ancl the chief executive officer to be different individuals.

4.

Describe briefly the role of the three board committees.

Super lnfrastructure Super lnfrastructure is listed on the Bursa Malaysia Securiries Berhad. The company is a medium-sized developer of infrastructure projecrs with rhree offices rn Kuala Lumpur, Penang and lskandar Malaysia, Johor. The founder and chief executive officer, Rrcky Lee, rs a high-profile entrepreneur wirh a penchanr for a luxurious lifestyle and risky strategies. A fcw months ago, hc had cxtravagantly spcnr RM250,000 on gold watches as gifts and insralled a marble and gold barhroom in his office. He also boughr a whopping RM1 million worrh of paintings to adorn rhe guesr area outside his luxurious office. Ricky is a very dominanr personality in the company. He has a strong hold on the company by virrue of holding borh the chairman and chief executive officer (CEO) posts. His views are hardly challenged by orher board members. lt is not surprising that there is hardly any debaie or disagreemenr during board meerings. Shareholders are very concerned about Ricky's dominance in the board and his pursuit of whar they regarded as very rrsky straregies. They are certainly unhappy with Ricky's lavish lifesryle at the company's expense. Ricky just brushed these concerns aside. He said, "l know how to run rhe business and rhey should jusr rrust me to do my job." Lasi year's earnings were down 20 per cent. Ricky was unperrurbed by the decline in earnings and boasted rhat he knew how ro rurn rhe profirs of rhe company around this year. The board of directors comprises Ricky Lee as chairman cum CEO, four executive and rwo non-execurive directors and two independent directors. Three of the execurive direcrors are Ricky's close family members. The company has esrablished remuneration, nominarion and audir commirrees. Ricky Lee is rhe chairman of both rhe remuneration and nomination comrnitrees These rwo commitrees hardly meer to discuss issues such as che board's nomination and executive remuneration packages. lr is widely known amongsr board members anci top executives that Rrcky regards corporate governance as irrelevanr to real business. Super lnfrastructure recenrly appointed an exrernal audiror upon recommendarion by Ricky. This appoinrment received great atrention in the financial press, parricularly highlighting rhe facr thar rhe same audit firm also provided consultancy services on Ricky's acquisirion srraregy abour ren years ago.

Questions:

1. Explain the nature of agency problem rhar exisrs in Super lnfrasrrucrure. 2. Assess rhe corporate governance structures within Super Infrastrucrure rn light of corporare governance best practices.

3. Recommend any improvements you consrder I

nfrastrucrure.

necessary for the corporaie governance struc[ures oisuper

CorporateGovernance 165

Ashbaugh, H. & Warfield, T. D. (2003). Audits as a corporate governance mechanism market. lournal of [nternational Accounting Research,2: 1-21r.

lrom the German

Azham, M.A. (2002). Ethnicity, foreigr investment and strong pragmatic government: towards interpreting accounting progress in Malaysia. Paper presented at the seminar in Universiti Teknologi MARA (UiTM), Shah Alam, Selangor. Berle, A. & Means, G. (1932). The modern corporation ancl private property.I'{ew York: Macmillan.

Blair, M. (1995). Ownership and control: Rethinking corporate governance \4Iashington: Brookings Institution.

for the twenty-first

century"

Boatright, J.R. (2007)" Ethics and the conduct of business (5'h Ed.). New |ersey: Prentice Hall. Chazan, G.

& Lublin, I.S. (20Co). Shell Inr.estors revolt over executive pay plan. The Wall Street lournal"


s

I

587242745166837 3491 5>. Accessed on 20 May 2009.

The Walt Street lournal,20 May 2O09.Ciaessens, S., Djankov, S. & Lang, L.H,P. (2000). orvnership and control in East Asian firms. lournal of Financial Economics,58: 81-112. Crane,

lf. & Matten, D. (2010).

-fhe

separation o{'

Bttsiness ethics (3'd Ed.). Oxford: Oxford University' Press.

Dellaportas, S, Gibson, K., Alagial-r, R. Hutchinson, I\4., Leung, P. & Homrigh, H. (2005)" Ethics, got)ernance and accountability: a professional perspective. Queesland: ]ohn Wiley & Sons Australia Ltd"

Denis, D. (2001). Trventy-five years of corporate governance research and counting. Review of Financiol Economics,l0 \91-212 Dodd, E. M. (1932). For whont are corporate managers trustees? Harvard l.aw Review" 45: 1148.

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n"

Ezzamel, N4. & Watson, R- (1997). \Arearing two irats: The conflicting control and management roles of non-executive directors.lnK. Keasey, S. Thompson, & M. Wright, eds., Corporate goveniance: Economic, nlarLageffieti, and finartcial issues. Oxford: Oxford University Press.

Fan, P.H. & Wong, T"J. (2005). l)o external auditors perform a corporaie governance role nrarkets? Evidence from East Asia. ]ournal of Accounting Research, 43 (1): 35-72.

in

emergine

Freeman,ll. (i984). Strategic managen"rcnt: A stakeholder approach. Boston: Pitman Publishing. Friedman, M. (1970). The social responsibilitl, of business is to increase its prof its. l'{ew York I'ime s Magazirre

,

JJ.

Gramling, A.A., Maletta, M.]., Schneider, A. & Church, B.K. (2004). The role of internal audit function in corporate governance: A synthesis ofthe extant internal auditing literature and directions for future research. I o ur n al of Ac c o unt i n g Lit er at ur e, 23 : 19 1 -2 4 4. Haslindar, i., Fazilah, A.S. & Afizar, A. (2009). Board Structure and Corporate Performance: Evidence front Public-Listed Family-Cwnership in Malavsia . Global Reyiew of Business dv Economic Resecrch,5 (2): \85 2A4.

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Business Ethics

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A

synthesis

of ethics and

econom ics. Academy

oJ

Kay, I. & Silberston, A. (1995). Corporate governance. National Economic lnstitute Review, 84: 84-97.

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An editorial. Accounting

Lantos, G.P. (2002). T'he ethrcalitv of altruistic corporate social responsibility. Journal of Consunter Marketing,

l9 (3): 20s-BA. Lombardo, D. & Pagiano, M. (2002). Law and equity markets: A siinple model. In J.A. McCahery, ed., Corporate governance regimes: Convergence ond diversity (pp.39 - 44). London: Oxfbrd University Press. Margnan, L & Ferrel, O Cl. (2003) Nature of corporate responsibilities-pcrspertive from Arnerjcan, French and German conslrmers. lournal of Business Research,56 (1)' 55-67. Mak, Y.T. (2006). From confortnaflce to performance: Best corporate governonce prottices for Asttul conlpaltics. Singapore: N4cClrar^,, if il 1.

Maiaysian Code

on Corporate Governance (2000).

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/11r1,1r11i.

Malaysian Institute of Corporate Governance (MICG). Internul control: Guidance for directors on the combine code. Turnbull Report (1999). . Accessed on 3 October 2008.

Minority Shareholder Watchdog Group (MSWG)

(n

d.).

Se.curitics Commrssiot'r (SC') charges three

f'ctre

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Minority Shareholder \\ratchdog Group (MSWG) (n.d.). org.n,y>. Accessed on 20 April 2007.

SC took NasionConr directors to Court. <\,v\{w. rnswg.

MEMS Technology Berhad. . Accessed on l2 November 2012.

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T-heory

fsrporate Governance

167

1

:

Nathan, R.S., Chiew, S.1,. & Soo, WF. (2000). 2"d Asian roundtable on corporate goverfi{tnce. o ecd.or g I datao ecdI 6 I 40 I l93l2l2.p df>. Accessed on 1 1 |une 2009' perks, R.W. (1993). Accounting and society. London:


Chapran & Hall.

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Management. Robins, F. (2009). The future of corporate social responsibili ly. Asian Business dr

4:95-Il5'

& Hu, Y. (2006). The determinants and effects ofboard nomination committees .lournal of Management and Governance, N (2):119-148. Ruigrok, W., Peck,

S., Tacheva, S., Greve, P.

12 November Securities Commission Malaysia (".d.). Transmile Berhad. . Accessed on 2012.

listed firms. Shamsui Nahar, A. (2004). Board composition, CEO duality and performance of Malaysian Corporate Governance, 4 (4): 47'61. 13 (3): 300Shim, S. (2006). Governance in the markets: Malaysian perspective . Journal of Financial Crime, 322.

Wiley & Sons, Solomon, I.F & Solomon, A. (2004). Corporate governance and accatmtability. Chichester: |ohn

r.l l,Lu.

The Star, Starbizweek (2006). What is going on in Kenmark? . Accessed on

5

June 2006.

The Star, Starbizweek (2010). Getting away with white collar crime- 3 |uly 2010. The Star (2008). Wrecked lives while a director walks free.20 January 2008.

Tricker, R.I. (1984). lnternational corporate governance. London: Prentice Hal1. Walsh, l.P. & Seward, |.K" (1990). On the efficiency of internal and external corporate control mechanisms. Academy of Managentent Review,15: 421-58.

1\/illiamson, O.E. (i985).T'he economic institutions of capitalism. New York: Free Press.

:

CFIAPT'ER

Corporate Social Responsibility

:i:

l:,

.;{}

LEARNING OUTCOMES At the end of this chapter, you should be able to:

x Defrne stakeholders. r Expiain a firm's primary and secondary stakeholders. a Contrast the Sharehoider Theory with Stakeholder Theory. r Describe the different forms of Stakeholder Theory" n Explain the meaning of corporate social responsibility. r Examine the critical arguments for and against corporate social responsibility.

x

Analyse a firm's corporate social responsibility performance ilsrng Carroll's four-part model.

I

Summarize Keith Davis's modei of cor;>crate social responsibility. Distinguish between corporate responsibiiity and corporate social responsiveness.

T

CorporateSocial Responsibility 169

INTRODUCTION to the shareholders, It is widely accepted that corporate managers have a responsibility Theory perspective, who are the o*n..r of the firm. In the finance-dominated Agency In fulfilling such wealth. shareholder this responsibility is interpreted as maximizing

*_

t'

r --i

i

L

*"

of ,.rpor.iUitity, corporate managers are required to always act in the best interest all sharehold.rr. ihr., shareholders should be given priority in a firm's decisions not only.deal with and business dealings. However, in reality, corporate managers do activities. These shareholders but also interact with other constituents in their daily ability constituents are called stakeholders, rvhich can greatly influence the firm's decisions firm's the Likewise, to be a going-concern entity and continuing success. have greatly iff..I tfr. well-being of its stakeholders. As such, corporate managers io take into consideration ihe social objectives in their pursuit of econontic goals. putting it differently, there is an increasing support for broadening accountability.of the corporate managers to focus n. t only on the interests of shareholders but aiso needs and expectations ofall stakeholders. In the past two decades or so, rve have witnessed a growing concern on the negative effects of firrns' activities on consumers, employees, local communities a.ri the natural environment. The effects of the firm's operations can be felt across national boundaries because many firms have become so large due to their global cxpansion. In fact, manv multinationai firms have a net worth that is greater than the Gross Domestic Products of some poor and deveioping countries. The,v have so much power that can be abused at the expense of various stakeholders. We lvili learn more about this topic in ChaPter 12' This development serves as an irnpetus for the growing interest in corporate social responsibility. So a few pertinent questions arise out of this growing interest and concern-do corporate managers have sociai responsibility to their stakehoiders? What is the nature oi such responsibilrties? I{orv do firms prioritize and manage the multiple and often conflicting demands of their various stakehoiders? Is it sufficient for corporate managers to mereiy react lo the demands of their flrms' stakeholders? Should they be n-,oi. ptoo.tive in anticipatrng their stakeholders' needs and take actions to address those needs? We are trying to explore the response to these questions in this chapter. This &apter covers the topic of corporate social responsibility. First, we will look at the definitions of stakeholders to set the context of our discussion. Second, we lvill examine the types of stakeholders and their stakes in a ftrm. Thi'd, we wlll explore tire different fbrms of stakeholder theories, nameiy normative, descriptive and initrumental. Then, u,e will learn about the concept and nature of corporatc social responsibility by examining two models of corporate social responsibilitl', namelv the Cairoll's t-cur-part and Keith Davis's models. Next, we will examine the debate oi corporate social responsibility. The debate focuses on two issues: (l) arguments for and uguin.t a firm to be socially responsible, and (2) the nature of the social responsibilities oi a firm. Finally, we will delve into an action-oriented concept of corporate sociai responsibility known as corporate social responsiveness. However, to begin with, we first need to learn about the primary constituent that will benefit from the corporate social responsibiiity concept, n'htch is the stakeholders.

I,

-

f*

""*.",rgh firms to merely focus on creating and expanding wealth for shareholders.

fs*k.h"ld.r*r"

b.

adversely affecred by

frrms'actions so it is right for the firms to be responsible for their actions.

174

Business Ethics

6.1

Sh..h"k.rr..y

t*l

taken as one of r-he stakeholders.

Table

DEFir\irr

6FTIATHoLDERS --

-

There are many ways of defining a stakeholder, some of which are shon n in Table 6.1. There is no consensus as to how best to define stakeholders" One of the earlier definitions focuses'on the bi-directional or two-way relationship between a firm and its stakeholders (Freeman , 1962). Stakeholders are any group of irdiridrals who are able to affect and is affected by activities and decisions of a firm in pursuit of its objectives. Common stakeholders of a firm include shareholders, ernpleiyees (including the management), customers, suppliers and communities. Sometimes, stakeholders can be in an organized form such as employee or trade unions, consumer associations, community activists and environmental groups" Larger and more compiex organizations can have many more stakeholders than these. For example, stakeholders of a large multinational corporation or a public university can have a variety of stakei.older groups compared to a convenience store or a night market trader in a local neighbourhood. Businessmen are required to fulfil their social responsibility due to the concern of the effects their actions might bring on the welfare of others (Davis, i967)" Eval and Freeman (1993) extended the definition of stakeholder b1 suggesting a test to determine whether a group or an individual can be considered as a stakeholder of a firm. This tcst is bascd on trvo principles, namely the principle of corporate riehts and the principle of corporate effect. In thc first principie, firms are required to respect the rights of others whilst the second principle says that firins are responsible for the effects oftheir actions on others. Clarkson (1995b) emphasized that stakeholders are any group or an rndivrdual u,ho have a'stake,' 'claim' or'interest'in a corporation. Recall in Chapter 5 we stated that a stake is a share or an interest in something- in our context, a firm. If an individual has a stake in a firm, he or she has an important connection to the flrrn A shareholder has an interest in a firm by virtue of holding a share of the busincss. A very important element of this definition is that stakeholder"s are risk-bearers in which 'without the element of risk, there is no stake'(Clarkson, .l995b). A stake may be taken as a claim too. Recall in Chapter 5 we deflned a claim as a demand or assertion for something that is due Claims can be direct or indirect. Each stakehoider group has different expectations about what it wants and different ciaims or stakes upon the firm. For example, employees demand to be paid fair u,ages and to be provided lvith a safe aird heaithy workplace. Meanwhiie, customers wanl to be charged a fair price and demand that a firm ensures its products are safe for consumption.

6.1

Some early

Freeman (1962)

Can affect

Evan and Freeman (1993)

'Benefit from or are harmed by, and whose righrs are violared or respected by, corporate aciions.'

definitions of

or

is

affected by rhe achrevement oi rhe firm's objectives.'

stakeh olders

Clarksorl

CorporateSocialResponsibility 171

Based on Evan and Freeman (1993), Crane and Matten (2010) defined stakeholder as:

a

'... an individual or a grouP which either is harmed bv, or benefits from, the corporation; or whose rights can be violated, or have to be respected, by the cor po ra I ion

This definition captures tire essence of the relationship between a firm and its stakeholders. Each firm has different groups of stakeholders depending on thc- nature, operations and location of its business. In fact, a firm may have to deal with different stakeholders depending on different situations, tasks or projects. Hence, in view of this variation, it is difficult to clearly identify a specific group of relevant stakeholders in any given time and situation. Nevertheless, a firm can generally identify its stakeholders as customers, employees, suppliers, shareholders, community, etc' In summary, a stakeholder refers to a specific person or groups of people, who have an interest or a claim in a firm and can affect and be affected by the firm's decisions and actions. The management of the firm ought to determine how the interests of such groups can be incorporated or represented in their decisions and actions. Further, corporate managers need to take a more inclusive approach in managing the firm by taking into consideration the effects of their decisions and actions on stakehoiders rather than taking an exclusive approach of focusing on maximizing shareholders u,ealth only. They cannot deny that the survival of the firm very much depends on their int.,raction and treatment of both the shareholders and stakeholders. Next, r,r,e will look at tl-re different types o{'stakeholders. There are many wa\rs to categorize or classify stakehoiders. In this book, we will focus on primary and

fFl*d r*-,*ff.. stakeholders and in turn stakeholders can also affect rhe firm. So, stakeholders' inrerests have to be considered in firms' decision-making.

secondary stakeholders.

6.?

TYPES OF STAKEHOLDERS

A firm's stakeholders can be categorized into primary and secondary stakeholders (Clarkson, 1995a). Primary stakeholders have a direct stake or claim in a firm. They are said to have a direct ciaim because a firm engages in a direct economic relationship or transaction r,r,ith them. The economic relationship is derived from cor;tractual connection between the firm and its stakeholder groups. For example, shareholders contribute capital, customers purchase products and services and suppliers suppl1, materials to the firm. This classification emphasises to what extent that the stakeholders affect the firm. The participation of the prirnary stakeholders is necessary tc-r ensure that a firm is solvent, so clearly the firm must strive to keep this group huppy. lf an,v primary slakeholder group, such as customers or suppliers, becomes dissatisfied and withdraws their participation in a firm, the firm will be seriously damaged or unable to contiliue as a going concern. Secondary stakeholders have an indirect stake or claim in a firm. They do not have a contractually determined direct economic relationship with the firm. They will rrot affect the ahility of the firm to continue as a going concern. Nevertheless, failure to address their concerns may alfect the firm's reputation and public standing. For example, farlure to quickly address negative publicity highiighted in the rnedia due to product safety issue may damage the firm's reputation. Similarly, failure to ensure food products are safe for consumption may prompt the government to in'pose strict and often more costly regulation of the firm's production processes. Table 6.2 outlines the two types of stakeholders and their stakes in a firm.

IP,-"ys,.k.hdd." are rhe most

influenrial so firms have to treat them well

Il..".drty

-

srakeholders may

not be

as influential primary as the

stakeholders, bur rhey can negarively

affect the reputarion of firms.

172

Business Ethics

Table 6.2 Types of

Profits-return on nvestment

Shareholders

stakeholders their stakes

ancJ

i

:' i'r:::1!'i1-1

r:':::

;::

'

tsefe

and healthy working cohditions'and faii'wa$e!

"'l

.,;,r',& :.t]

High quality products ar a fair prlce

Customers

i:. :r:

i'

,

,i

:

;;: .'

-, Consistent market and prompr payments

Local

lnvestment in the lc-.,ial communltles

Covernmenr

Source of revenue rhrough business taxation; ensures

compliance wirh the laws and regulations Source of business news, influences public opinion

Adherence ro trade teguiatto,rs

Trade bodies

:j.L :: ,. I

groups

Soci-r pressure groups

Protection of rhe environment and socier-al welfare

In the next section, we shall anaiyse the relative importance of stakeholders using three relationship attributes-legitimacy, po\ver and urgenc)'. A firm has multiple stakeholders and their claims may be competlng. Hence, this arralysis enables the firm to assign relative importance or priority to competing stakeholder clairns.

6.3

---I ^n.trt*, srakeholder attribures is imporrant to determine rhe

salience of each srakeholder group.

Srh.*.

"f

,

----l

stakeholder will

determine how fasr firms respond to its demands.

ANALYSI NG STAKEHOLDERS' RELATIVE IMPORTANCE

Firms deal rn,ith multiple stakeholders, and rather tl-ran addressing the demands oi each stakehoider individually, they respond to the demands simultaneously. However, it is unlikely that firms will give the same prioritl' or imptrr tance to all stakeholders' Agle, Mitchell and Sonnenfield (i999) proposed that firms determine the importance or salience of their stakeholders by analysing tl-riee attributes of each stakeholder-legitimacl,, power and urgency. This analysis is important for tlvo related re3sons. First, tl"re analysis helps corporate managers to deternrine the relative influence tirat each stakeholder has over the firm. Thus, they can identify rvhich stakeirolders have the most influence over the firm's ol'rjectives and strategy. Second, stakeholder salience determines whether a firm will take ineasures to address their interests and how soon or fast they will rcacl to rneet the demands of a particular stakeholder. Corporate managers will usually attend to tire demands oi a stakeholder group that have the most influence. For erample, pritnary stakeholders have a high degree of legitimacy, power and urgency in a firm" Thus, managers are likely to place greater importance on this type of stakeholders (Mitchell et al., 1997). Firms need to continuously perform the analysis of stakeholder attributes because it is likely that the importance of each attribute to a stakeholder may change throughout the relationship and over time. For examplc. a stakeholder may be influential at one stage but that does not mean it wili continue to be powerful at other times. An organizational life cycle will also delermine the degree of poweq legitirnae y and urgency of a stakeholder. This issue will be explored in further detail in Sectiori 6.3 of this chapter.

CorporateSocial Responsibility 173

Legitimacy refers to the extent of validity or an appropriateness of a stakeholder's claim to a stake. Primary stakeholders have a legitimate interest in a firm. For example, shareholders, employees, customers and suppliers have high degree of legitimacy due to their contractual relationship with the firm. High legitimacy of claims increases a stakeholder salience to a firm. In short, legitimacy of a stakeholder's claim will determine rvhich stakeholders 'really count' (Mitchell et a|.,1997). Power refers to the abiiity to exert influence over a particular decision. Primary stakeholders have a high degree of power that they can exert in the firm. Their concerns are taken into account in the firm's decision-making process. For example, employees in top management actively participate in decision-making and their views are regularly consulted. Finally, urgency refers to the extent to rvhich stakeholders' demands or claims call for an immediate attention from the firm. A delay in addressing an urgent demand or claim is unacceptabie The urgency of a claim or demand depends on its degree of sensitivity and the importance of the relationship to a firm. For example, the firm needs to immediately address the concerns of employees'unions due to an impending threat of strike. Likeu,ise, the trrn is required to response or act immediately to a threat of consumers' boycott due to the poor quality of its products and services. In the prer.ious chapter, r,ve have reviewed the Stakeholder Theory and in the next section, we will look at the three perspectives of the theory, which provide the justifications or reasons for corporate managers to adopt the stakeholder approach to manag€ a firm.

6.4

llh". r*lb,*t of srakeholders are legitimacy. power and urgency.

rHnrr prnSrrCtrvEs oF STAKEHOLHOLDER THEORY

ln Chapter 5, we have examined the salient points of Stakeholder Theory. In a nutshell, this theory argues that firms have a wider fiduciary responsibility to a broad range of stakeholders other than to their sharehoiders. This argument is based on the fact that a firm's actions and decisions have an impact on its stakeholders. The larger the flrm, the greater the impact it brings to its stakeholders. Hence, the firm cannot simply ignore their stakeholders and focus on shareholders only. In this section, ne sliall revierv the drfferent perspectives or forrns of Stakeholder Theory, namely normative, descriptive and instrurnental (Donaldson and Preston, 1995). Lach of these three perspectives attempts to explain the motivations for firms to respond to stakeholder concerns or justify Stakeholder Theory.

6.4.1 Normative Perspective According to Donaidson and Preston (1995), normative perspective is the core of the Stakehoider Theory. It attempts to explain the motivation for a firm to take into consideration its stakeholders' viervs in decision-making. It is important ior us to note that firms have moral or ethical obligations to look after the welfare of not only shareholders, but also ail their stakeholders. This moral obiigation is derived from the bi-directional understanding of stakeholder relationships. Stakeholders affect the firm and are also affected by the firm's acl;.ons. So, firms' actions or de,:isions have to bc ethical. Corporate managers must take into account the effect of their actions

fThr.. frrr"

"r

Stakeholder Theory attempt to explain or jusrify why firms

should treat rheir stakeholders well.

174

Business Ethics

or decisions on stakeholders. Likewise, although honouring stakeholders'

interests

might not promote the strategic interests of the firms, they must not simply ignerre them because doing so is deemed unethical. Normative perspective is based on Kant's Theory of Duty, which was discussed in Chapter 3. Firms have civil duties that are important to increase or maintain the net good in society. Failure to perform these duties will result in a lack of cohesion in society. This perspective rejects egoism, dictating that neither the firm nor the individual stakeholders should exist solely to serve its own ends (lones and Wicks, 'Firms should not 1999). In short, normative perspective is categorical in which it says (should) do this because it is wrong (right) thing to do.' Stakeholders should be treated based on some underlying moral or philosophical principles'

6.4.2

Descriptive PersPective

Descriptive perspective attempts to describe and explain the behaviour of firms and :lreir managers in dealing with various stakehol
6.4.3

Instrumental Perspective

This perspective argues that a firm must manage its stakeholder relations lvell rn order to niake profits. For example, if a firm selis def"ective products and ,,harges unreasonably high prices, customcrs will not buy its prcc1r-rcts and many o{'its extsting customers lvill migrate to competitors. Hence, corprtrate managers have to brlance and meet the needs of various stakeholders. ]ones (1995) argued that firms will be able to gain a competitive edge over other firms if they treat their stakeholders based on mulual trust and cooperation. Stakeholders, in this instance, are considered part of a firm strategy to achie.re corporate performancc goals such as profit maximizatiott and financial growth. Hence, this perspective argues that there is a justification for treating stakeholders wel1, because such ireatment is necessary tor firms ttl achieve its economic goals. :

t.

II l

r I I

I

t $ G

f i

Corporate Social Responsibility

, . t75 ':

After reviewing some forms of Stakeholder Theory, we are now ready to delve into the concept and nature of corporate social responsibility.

: o.3

THE CONCEPT AND NATURE OF CORPORATE SOCIAL RESPONSIBII-ITY

Corporate social responsibility (CSR) means that firms are not only responsible to shareholders but also accountable for the effect oftheir actions on various stakeholder groups. Firms have an obligation to take actions that protect and enhance the welibeing of their stakeholders other than promoting their own inrerests. Firms are expected to protect the welfare of their stakeholders by avoiding negative impacts that their actions can bring onto them. For example, firms should ensure their products are of good quality because defective products can cause injury or even death" As ft.rr enhancing the welfare of stakeholders, firms can do so by generating positive benefits for society. For example, firms can give financial support for the social activities of the locat community. In his iandmark article arguing the case for and against business taking on social responsibilitl', Davis (1973) defined CSR:

Il-.r *- r.q,r*d . adopt CSR for which their acrions affecr the welfare of rhe stakeholders.

'... the firrn's consideration of, and response to, issues beyond lhe narrttw e t,ononric, technical, ttnd legal requirements of the Jirm. It is the Jirrn's obligation to evaluote in its decision-n'Laking processes the effects of its decisions on the external social ,,stem in a manner that will occomplish social benefits along wilh lhe traditional economic gains whi;h the firm seeks. It n'teans thett socinl responsibility begins where the law ends. A firm is not being sociolly responsible i,f it rnerely con'Lplies with the minimurn requirements of the lau,, becau.se this is y,hat any good citizen would do.'

The CSR concept promotes the idea that firms cannot exist in a vacuum. They need the support of both sharehoiders and other stakeholders to survive. Firms have economic and legal obligations to their shareholders as rveli as other responsibilities to the stakeholders. So, other than being responsible fbr the actions that affect stakeholders, firms need to take into account the interests of stakeholders rn their decisions. In short, firms do have responsibilities beyond making a profit for shareholders. CSR extends the fiduciary responsibility of corporate managers to stakeholders because they also have legitimate claims on the firra. Thus, we can see that this concept represents the stakeholder model. In Malaysia, Bursa Malaysia Securities launched a CSR framework for public listed firms in2006. The framework emphasizes that CSR is more than phiianthropy and community initiatives. CSR is defined as 'open and transparent business practices that are based on ethicai values and respect for the community, employees, the environment, shareholders and other stakeholders to deliver sustainable value to society at large' (Bursa Malaysia, 2AAq.In 2A07, Bursa Malaysia made it compuisory for all publrc listed firms to disclose CSR initiatives in the financiai reports in a form of a CSR statement. The CSR framework highlights four dimensions of sustainable practices as shown in Table 6.3 below.

ITrn,

A4rl4,srI

four dimensions of CSR are community, wor:kplace,

rnarketplacq and rhe environment.

: I

w I

/b

Busrness Ethrcs

]J

Table 6.3

.:

Bursa Malaysia's

lnvestmenrs or donarions rn capital, time, producis, servrces, management knowledge and orrrer resources that bring posirive impact on local communirres

CSR Dimensions

I

,tt*

I Markerplace

Activities io encourage and influence shateholders, vendors and customers to behave in a sustainable manner across the value charn

The government of Malaysia has introduced a few initiatives to encourage corporate Malaysia to embark on CSR" Amongst others, flnns makirrg donations to approved institutions or organtzations enjoy higher tax deductions, and in 2002 the government introduced the CSR Prime I'[inister's Award to recognize and appreciate the conlribution of the corporate sector to society. Public Bank Berhad, one of'the iargest and most profitable commercial banks in Maiaysia, won the inaugural award in2007. rve will examine the nature of firrlrs' social responsibilities. We will look at two modeis for this purpose. The most established and accepted model of CSR that explains the nature of firms' social responsibilities is the four-part model of corporate social responsibility by Carroll (1979). 'J'he second model is derived from the notion that i-i-re exercise of corporate powers comes with the responsibility to improve the welfare of the society. Keitti Davis pioneered tiris idi:a in u,hat he called the 'iron Law of Responsibiiity'.

I

I I

In the next two sub-sections,

lI

It

6.5.1 F-rt *ad a ---l fulfil all four layers of responsibiliry concurrenrly.

Econoil-------_l responsibility requires firms to be profitable for rhe benefit of srakeholders.

i

Carroll's Pyramid of Corporate Social Responsibility

Carroll (1979) suggest there are four levels of social responsibility-econortic, icgal, ethical and philanthropic. The definition of each responsibility helps us to understarrd the nature of firms' social responsibilities and the expectations of thc societ,v of each responsibility. Each of the four responsibilities is interreiated and can be best expiained by imagining a pyramid that has four layers. At the base of this p,vramid of corporate social responsibility is economic responsibility followed by iegal, etl-rical and philanthropic. This pyramid is depicted in FigLr',e 6.1. Irrrms need to sirrrultaneously fulfil all the four layers of responsibility. Hence, a firm's total corporate responsibility is the sum of its economic, legai, ethical and philanthropic- responsibilities, whrch aims to promote long-term benefits to society at large. Economic responsibiiity requires firms to be profitable so that shareholder:, can earn a reasonable rate of return on their investrnent and employees can be gainfully employed to support their lives. Likewise, customer: require firms to produce quality goods and services at a fair price. Suppliers seek to do business with the firms in order to survive. In short, the first responsibility of firms is to be a functioning economic unit and a going-concern entity. Firms should be committed to maintaining a strong competitive position and a high level operating efficiency in order tr:r achieve a successful position on the market. Carroll (1979) suggest that all firms are requrred to meet these economic responsibiiities.

T

l i I

br

:

CorporateSocialResponsrbility

177

Desired by sociery

Expected by society

Requrred by sociery

Required by

,oii.ry

(Source: Crane and Marren,2010)

Figure

6.1

: The pyramid of corporate social responsibility

Legal responsibility requires flrms to obey ail lau.s and adhere to regr-rlations that are reievant to business operations. Lau.s codify society's moral views, thus society imposes iegal obligations on businesses. For example, company laws require the directors to discharge their fiduciary duty to managing the assets and investments of a firm. This duty requires them to always act in the best interests of sharehoiders.

Likewise, firms are required to honour all contractual obligations to all business partners. According to Carroil (1979), the fulfilment of lega1 responsibilities is required of all firms. Ethical rcsponsibility requires firrns to do wl-rat is riglit, fair and just in its dealing with all stakeholders cven if the law does not compel them to do so. Firms Lave to act in a ntanner consistent tvith expectations of societai mores and ethical norms. For example, stakeholders expect firms to avoid questionable practices that could harm them. Thus, the management of a firm must strive to practice ethical leadership. These expectations of the stakeholders are based on the fact that the lay,s are not enough to govern all corporate behaviour and actions. Firms are expected to fulfil these responsibilities beyond the requirements of economic and Iegal resp,rnsibiiities (Carroll, 1979). Philanthropic responsibiiity is something that is desired or expected by the society rather than being required of firms. Firms voluntarily fulfil this responsibilit), in ordcr tti 'give back' to the society that supports their existence and well-being. The society does not require firrns to engage in corporate philanthropy, nor are they obliged to carry uut economic, legal and ethical responsibilities. 'Giving back' in this ;ontext includes donating cash for improving the community's quality of life and supporting its activities. Other examples include providing recreational and childcare facilities for employees, supporting recycling activities of a local community, sponsoring sports events of local schools and giving scholarships tr; needy students. In Malaysia, during Ramadhan and festive seasons commemorating Eid Mubarak and Chinese New Year, many firms engage in philanthropic activities such as sponsoring breakinq of fast and

I L.grtr.rp".tbill,y requires firms ro obey laws in rheir business dealings.

Erh"rk.tp"r.rrbrlr,y requires firms ro avoid harm and do what is right, just and fair.

m.-g,

g""d

corporare citizen is the essence

of corporate

philanrhropy.

donating to the poor, elderly and orphans.

i:

1/B

Business Ethics

According to Carroll (1979), society does not require or expect firms to fulfil philanthropic responsibilities, but it is something good to have if firrns can afford to do so. Firms are not considered unethical if they do not meet these responsibilities. Case for review 6.1 highlights some examples of Malaysian firms and corporate captains engaging in philanthropic activities by 'giving back to do good for society.' '

Domino's Pizza inrroduced an annual specially designed educatton seminar <,alled rhe Domtno's Supporrs Schools (DSS) in 7OO2 ro help students to improve rl-reir performance in academrc and co-curricular acriviries. The programme also aimed to develop che srudents' social well-berng and ensure that th., learn about career options and developmenl. Usaha Tegas Berhad, a company controlled by Tan Sri T" Anarrda Krishnan, srarred rhe Yu f-ai EdLtcation Foundation in 2003 with an initial grant of RM25 millron. l-he foundarion donated RMir million ro esrablish a Chinese rraditional studies deparrment at L.]niversrty TunkrL Abdul llahrnan ln 2003, Usaha Tegas founded Harapan Nusantara, an educarton iuntl foruserl on ,V\alays to !ponsor srudents ro artend foreign universitys'rwinning programmes at fulalaysrart prlvare univerciries.

ln rhe afrermarh of rhe rsunami in December 2004, the AmBank group donated RM250,000 tcr rhe Malaysian Tsunami Disasrer Fund, a collaboration wrth a local newspaper The Croup also contribuied 15,000 blankets worth RM330,000 for rhe Aceh tsunarnr \/rf trms TheRHBbankinggrouphasbeensponsorrngthe'MissingChrldren ReunitrngFarnilies'prograrf nre since 2007 The Croup helps ro locare missing children through placing cf ar.lverttsement5 1n malor newspapers and posting piclrres of missing children in all rheir ATM machrrres nationwrde as rveil as alerting mobile phorre users.

DiCi Berhad, a major relecommunication comparry, provided computef and lnterner r-onneclit,' ' for underprivileged children and school children who sought treatrnent in hosprtals ln 2008, Tan Sri T. Ananda Krishnan conrributed abour RM5 mrllion ro rhe openirrg of the A"4onrfort Cirls Cenrre rhar included a dormitory and training cenrre where gtrls could learn baking, corrtputel reparr, graphic design and other vocations.

Tan Sri Syed Mokhrar Albukhary, a major sharehol.der of Malaysia Miriing Corporation and rhc founder and soie donor of Albukhary Foundation, a Muslim cl-r.rrity thal assisis the disadvantaged, conri'ibured funds io conduct remedial classes in English, Scient.e and A4arhemarics for 20,000 underachieving srudents from poor rural families each year.

.

ln early 20'1'1, Berjaya Corporation Berhad founder and one of tfre riches'- men in Malaysra, ian Vincenr Tan, pledged to donate at least half of his wealrh io charity

Sr-

Each of the four levels of responsibility may be related to cliff'erent stakeholders. For example, economic responsibility greatly aff'ects shareholders and einployees because their livelihood depends on the financi;l position of a firm" Whe n companies

go bankrupt, employees lose their jobs and are unable to support their famrlies financially. The Enron case is a good example where its collapse affected the ernployees adversely. The employees did not oniy lose their johs but also their retirernent benefits.

CorporateSocialResponsibrlity 179

Meanwhile,phiIanthropicresponsibilitiesthatrequirefirmsto.giveback,tothe loial community in which the firm operates' IoL:Y-plt, to build Ronald McDonald's Malaysia has contributed substantial financial support centre in cheras' McDonald House in the vicinity of the National University Medical are Th. hor.r. provides accommodation for families of out-of-town patients that society mostly aifect the

seeking medical treatment at the irospital' In a nutshell, CSR requires firmi to make profits, obey laws, be ethical an{ Sive U".[i. r".iety. iuble 6.4 provides examples o] the socially responsible activities of

firms.

,tioffers

.

safe and.good qualigy

Promotes erhicai practices ar workplace

Practises retYcling

Donations to help natural disaster vicrims

lj'Donato to chariable fi rms

.

Employees serve as volunteers

.:

Provides:healcfcarq to p.9o!:e5! p-eople

. .

Cives scholarshiPs to students Allocates funds to help address social programmes

Table 6.4

Provides safe working environmenr

products

Funds local communitY services r.

Examples of socially

responsible a ctivities

Commitments to Prevenl Pollution Responds quickly to customer complains Sponsors skills rraining programmes for local

youths and underPrivileged women

that firms

ir-r this section, we ha\re revier,ved the four ievels of responsibility their economic and shor-rld strir.e to fulfil. Stakehoiders require firms to meet concerns leqal respolsibilitjes and at the san-ie time expect them to address social an exanrine will we Next, .ri.uprr,iur.d in ethical and philernttrropic responsibilities' Davis' alternatir.e mgdel of corporaie social responsibilitv introduced by Keith

6.5.2 Keith Davis's Model of Corporate Social ResponsibilitY for firms to enjoy long'1ron Larv of term econo,-rrc benefitsl He articulated this idea in the weli-known

In

1960, Keith Davis argued that cSR would pave the way

Responsibilitv', ,.r,hich states that the social responsibility of a- business correlates with its social porr;... He associared social power *ith th. size of the business. Thus, larger the best busrnesses have greater social ,"rpo,-,iibiiities than smaller businesses. It is in the interests oi a business to behave responsibly because failure to do so might lead to lists loss of its sociai power and legitinai,v. Davis (1960) proposed a rnodel of CSR that down five propositions.

Proposition 1: Social responsibility arises from sociaI Power This proposition suggests that abusiness has a great influence on and Power over social issuei ,.r.h u, .-plol'-.nt, environment and community deveiopment' This assertion is particularly true when firms have become so large that even the government and market mechanisms are unabie to control their activities and behaviour. As such, society requires firms to be responsible for the sociai issues that arise from the exercise of their power.

I

irir.*

'-in

proposrrrons lrsrr[1 [it rns'

acloprror o]

LSL rn lrurrnrss ileri !rt)r"!

180

Business Ethics

Proposition 2: Business shall operate as a two-way open system This proposition states that a business receives inputs from society and hence, should disclose its operations to the public. Inputs, in this context, are suggestions or views of society on actions to be taken to promote the welfare of sr:ciety, which a business must be willing to listen to. The business should disclose all the actions taken to fulfil its sociai respoi'rsibilities and society must pay attention to such diselosure. ln short, a beneficial relationship between a business and in the community in which it operates can only be achieved and sustained if there is an open contmunication between both parties and willingness to work together.

I I

I I

I

Proposition 3: Business should thoroughly analyse the social costs and benefits of its activity, Product and service before Pursuing it

II

Business must consider the short-term and long-term benefits and consequences of operations before proceeding with any business decision.

!

Proposition 4: Consumer should absorb the social costs from each activity, Product or service

Lts

arising

Business should reahze that some socially beneficial activities can reduce thett profitability. Hence, society should not expect the business to L,ear the cost of sucl activities completely. Instead, the cost should be passed on to tl'ie consumers in the form of higher prices for the goods or services related to these activities.

Proposition 5: Business institutions, as citizens, have the responsibility to become involved in certain social problems that are outside their normal areas of operations Although a business does not contribute to a social problem, it should be held

I

t I r

t

f

t

to help society solve such a problem if it has the expertrse to do so, like any t good .itir.n. This proposition is premised on the notion that the business wi]1 stand I io benefit from a generally improved society, thus, it ought to share the responsrbility

,.rponiibl.

to promote the welfare of society. In the next section, we will examine the argument against and for CSR in ordet to further comprehend the objection and support for firms to allocate resources and efforts to promote the well-being of their stakehoiders.

F F

t t

6.6

--l

THE DEBATE OF CORPORATE SOCIAL RESPONSIBILITY

against CSR are

In the previous section, we have seen that there are various ways of describing the nature of firms' CSR. Now, we shall examine th^ arguments against and fbr CSR ln

largely influenced

order to give

by the classical economisr, Milton

rational justrfication for firms to undertake CSR initiatives" The argunlents against CSR are primarily based on the classicai ecolromics point of view as articulated hry Milton Friedman, a Noble-prize rvinner. The more recent argument against CSR Ls based on the criticism that it is nothing rnorc than a publicity stunt to cover the reai

Th"-r=*..."

Friedman.

a balanced

view of this concept. The arguments for CSR basically provide

E

Corporate Social Responsibility

intention of generating much more profit for the business. You will be able to use this knowledge to ludge the extent to which a firm has fulfilled its CSR and for you to make a more balanced business judgement in your future career in business. First, let us look at a few arguments against CSR'

6.6.1

Arguments Against CSR

Classical economics

'fhe classical economics argument holds that the idea that firms have social responsibility is against the functioning of a free market system. Th'e most influential classical economist in America and the UK is Milton Friedman, a staunch proponent of a free market system. According to Friedman (1962), business's function is economic, not social. The only social obligation or responsibility that a management of a firm has is to maximize profit for its shareholders. Shareholders are the focal point of the firm. This view could be considered the 'narrow' perspectivr on CSR. Firms can achieve this goal by focusir,g .rn producing goods and services and selling them at competitive prices to society. Firms should not be distracted from this important economic function. Firms do not have a moral obligation to undertake CSR initiatives unless the shareholders benefit from them. If a firm uses corporate resources to solve social problems, it ivill reduce efficiency and impair profitability.

Fri.lman's argument is derlved from the Agency Theory perspective of _the firm in which corporate managers are responsibie to the shareholders only. When they manage the firm, they are acting as the agents of the shareholders instead of acting in their private capacitl,. So, they cannot simply use corPorate resources to adr,ance the weli-being of society. Friedrnan (1970) believed that corporate managers

that spend money on charitable causes or try to satisfy the stakeholders other than shareholders u,ere at best misguided. He interpreted social issues and social responsibilities to mean non-business issue: and non-business responsrbilities. The concept of CSR is inconsistcnt with the role of a business, which is to make money and maximize shareholder r.r'ealth. Seeking profit is a moral obligation. CSR is seen as endangering this motive. He further argued that solr,,ing social issues should be the function of a free economy (the private sector) failing which the government (the public sector) and legislation should take on such responsibility. However, he agreed tirat firms must obey the law and clo not cause I'rarm to others in carrying out their business operations. This argument is in line with the idea that firms have economic,legal and eihical responsibilities. He also criticized the proponents of Instrumental Srakeholder Theory as a form of CSR. He considered that undertaking CSR to promote the iongterm interest of a firm as 'window-dressing' at best and morally wrong. In short, Friedman did not deny that firms have economic, Iegal and ethical responsibrlities. He was against the idea of corporate philanthropy, e.g. making a lonation to a charity, school or hospital because such activity distracted corporate inanagers and distorted profitabiiity.

lncompetent to deal with social issues Firms do not have the necessar) technical and social skills to deal with social issues or make socially oriented decisions (Davis, 1973). Corporate managers are trained 1c be competent in managing the finance and operations aspects of a business, thus tirey shoulcl focus on this special area of competence only. It is dange'ous for the

181,, , :i

182

w Business Ethics

managers to accept responsibility for something that they are not equipped to handle or something that they do not know about. The responsibility to solve social issues such as product defects, unemployment, poverty, teen violence, school truancy, etc. would be better handled by democratically elected public officials. The public gave them the mandate to develop public policy to solve such social issues.

I I

Com petitive disadva nta ge Undertaking CSR initiatives is not without a price" Firms will have to bear the cost of doing so, which put them at a competitive disadvantage. Competitor flrms that do not adopt CSR wili earn higher profit as a resuit of a lower cost of doing a business. For example, in Malaysia, there is no law requiring all restaurants to obtain 'halal' certification, but many restaurant operators go the extra mile to ensure their supply chaiir only uses 'halal' ingredients in order to obtain a 'halal' certification from the relevant religious authority. They will have to incur additional cost for doing so. Meanwhile, their competitors that do not take a similar initiative are still able to attract a srzeable numl er of Muslim customers albeit at a lower cost. They will earn a higher profit. This argument is also especially relevant in today's global environment where iaws and regulations are likely to differ from country to country. Multinationals imposing stricter safety requirements and more rigorous testing to ensure the saiety of their products than the law requires will incur higher cost than the local firms that do not observe such higher safety standards due to the absence of stringent regulations ern product safety. As a result, there is unequal competition among {irms operating the sarle type of business. Responsible firns are put at a disadvantage c.ompetrtively

lndividuals have moral responsibility Critics argue that placing moral responsibility on a firnr is misguided because only human beings have moral responsibility fbr their actions. In thrs context, corporate managers or individual businesspersons are the ones to be held responsible socially instead of a firm" Hence, a firm should nol be required to set aside a surn of mone,v for a social cause in the name of corporate social responsibility. This argurrr('nt is essentially iinked to the classical economics idea that firms should not bear the cost to solve social issues for which it impairs profitabiiity"

Stakeholders bear the cost Firms that allocate funds and incur cost for engaging in CSR will ultimately pass on some of those costs to their stakeholders in orde. to recr)vcr thern.'l'hrs cost is borne by stakeholders in the form of a higherprice of products or sen,ices. For example, a factory mav need to build its own waste disposal system or trcatment piant to avoid polluting the nearby river or drainage system. 'l'he cost of such an initiative rnay be imposed on consumers in the form of higher price of the frrm's product.

Dilutes the primary purpose of a business This argument stems from the classical economics point of view that a business exists to sen e its shareholders, i.e. to create wealth for shareholders. Hayek (1969) considers CSR as an undertaking that is unrelated to the 'proper aim' of a business. Next, rve shail look at the arguments to support firms to adopt CSR. lvlost arguments represent the business case for CSil. where firrns enjoy the bene{lts of adopting CSR.

I

I

:-,

CorporateSocial Responsibility

6.6.2

Arguments for CSR

Good for the business in the long-term The most compelling argument is CSR promotes the firm's own self-interestenlightened self-interest. Putting it differently, it pays for the firm to be socially responsible. Firms will enjoy a good reputation and gain trust from their stakeholders if they promote their well-being. Reputation is considered as a valuable intangible asset as it enhances the loyalty of customers and other business partners. Ultimately, firms can ensure their long-term profits and continued existence. A good example to illustrate this argument is the )ohnson & )ohnson Tylenol incident in 1982. The CEO took a decisive stance to recall the product immediately when several people died in the Chicago area. He did not wait for the authorities to complete their investigation to take such an action and lived up to the company's credo that placed customers' safety first. Initially, |ohnson & Iohnson's share price took a heavy beating in the share market and profit tumbled. It turned oul at-t irresponsibie party tampered -,' ith the product packaging and laced Tylenol capsuies n ith the poison cyanide. The company was not at fault at all. Subsequently, |ohnson & ]ohnson gained higher customer trust and enhanced reputation for putting consumers' health and well-being first. In the end, the company enjoyed higher sales and better share price performance.

Likervise, firms that are knou,n to treat their employees fairly and allocate for employees' personal and professional development as well as ensuring rvorkplace safetl, wili be able to attract and retain cluality and talented emplo,vees to rvork for them. Other business partners such as high quality and reliabie vendors rvould compete to do business rvith the firm if it pays its suppliers promptly. As a result, the firrn lvill be able to obtain a steady supply of high quality materials ancl ensure timely production. adequate funds

Prevent future external interference Socialll- responsible firms rvill ensure that business policies do not adversell, affect their stakehclders. 1'hey have high self-discipline standards to fulfil the expectations of in this instance, external interference such as future government intervention rn the form of costly requirements to comply with new regulations can be prevented. Excessi't,e government regulation can curtail business freedom and limit decisionmaking flexibility. In short, firms can ensure greater corporate independence from the government. society.

Businesses have the resources so let them try In contrarl, to the argument that businesses are not equipped to deal rvith

social

issues, they actually do have the resources to do so. For example, firms have a pool of talented managers, expertise, and most importantiy, capital to handle social problems. Dar.is (1973) argued that businesses should be given an opportunity to deal with social problems because they have the required resources and so many others have tried to do so but failed. Carroll and Buchholtz (2009) suggest that there are so:ne social problems that could be solved only by businesses, such as ensuring a safc w'orkplace and products, engaging in fair advertising, ensuring continuous supplies of essential food items and protecting shareholder rights.

Fh.;ffiilE.. primarily derived from the insrrumental for:m of CSR are

srakeholder model.

1183,

184

Business Ethics

It is the right thing to do The final argument to support firms' adoption of CSR lies on the moral point of view that promoting the welf.ire of stakeholders is the right thing to do" Firms do create social problems such as pollution to the environment that might affect the quality of life of the local community, product defects that might injure consumers or even cause death, and employing children and illegal immigrants. Firms then must voluntarily take the responsibility to rectrfv such social problems. Failure to voluntarily do the right thing will result in legai intervention such as court action against the firms. In the next section, we u,ill learn about an extension of CSR, which is known as corporate social responsiveness. In a modern and giobalized world, it is not enough for firms to embrace CSR in order to meet the expeclations of various stakeholders. Firms should be more proactive in anticipating the needs o1 their stakeholders and take the necessary actions to meet those needs.

6.7

C"rp"rr*

*.,,l--1

re.sponsiveness

is

an extension of the CSR

concept that

focuses on actions

rather rhan merely

idenrification of firms'obligarions.

T;;",sh

--_l

for firms to merely identify and fulfil rheir obligations ro srakeholders. lnsread, they need

to be proactive in determining.the needs of the society and do something io meet those needs.

I I

CORPORATE SOCIAL RESPONSIVEN ESS

aspect of CSR is encapsulated rn a concept known as corporate social responsiveness. This concept n,as cleveloped by Ackerman and Bauer (I976). They criticized the CSR concept for whrch it gave too much ernphasis on the obligations of firms to do good for the society as opposed to making sure that they actually fulfil those obligations. They further argued that firms sl.iould go beyond determining the actions to be taken to meet stakeholders' demands. Instead, they should respond to those demands proactively. Thus, a more dynamic and action-oriented CSR is preferred, i.there firms should be assessed bl their ability to respond to sociai demands (Frederick, 1994). For example, a firni provides childcare facilities for its employees so that the1, can have a peace o1 mind and concentrate on their work fully without having to worry about their children's safety and weil-being. Corporate managers should place more emphasis on their readiness to respond to social pressures, which depends on the L.rocess, procedures, mechanisms and behaviour of corporate managers. Thus, to be responsive, corpc-rrate managers need to use firm resources to anticipate social probienrs and take a proactive action to devise policies, programmes and methods to address them" llhe cases of Son1, Corporation and KPMG Malaysia below iliustrate the c:oncept of corporate social

A more contemporary

f I

I

responsiveness.

II

t

r

6

I

Is j

CorporateSocial Responsibility'185

Sony Promotes Work-Life Balance.and Health of Employees

ro offer versatile working styles sony appreciates rhe diversiry of irs workforce and takes initiatives sryles in order to help so thai employees can be more productive' Employees have flexible 'i"orking have ro luggle between rhem ro balance work and home life. Sony recognizes rhar many employees Almosr all female employees take rhe demands of work and caring for children or ill famrly members. thereafrer' childcare leave afrer giving birth About 90% of them return to work it easier for the employees make to policy in response ro the employees'need, Sony devised a for childcare and nursing cate to rake childcare leave. Employees can rake up to 20 days'paid ieave has flexi-time' where co both male and female employees ln addirion, Sony also

This system applies can also work from home eligible employees have reduced working hours for childcare' Employees members' wlien they are involved in child rearing or providrng nursing care for family working hoirrs anci longer ro due illness menral and physical Realizing rhe increasing incidenrs of have access to lndusrrial rnedical rhe siress of handling complex rasks, Sony ensures rhar employees external counsellirig ro seek practitioners and counselling services. Employees can go for in-house and also undergo special rrarning ro advice on their hea6h probL*s and work-related problems. Managers developing into serious illnesses' frorn identify symproms of disorders ar early srages and to Prevent them (Adapred from: SonY MalaYsia, 2004)

Case

Coral Reef Conservation Efforts by KPMC younger genelat on KPMC Malaysia recognizes rhe importance of crearing awareness an'rong rhe accounl-ing firrn has The abour rhe value of reef ecosystems and rhe current threats facing marine life. Marine Park for school been organizing and sponsoring an annual coral reef camp at Tioman lsland by facilitating the children since 2009 Employees of KPMC have been direcrly involved in rhe camp programme,

to participate in hands-on activrties such as snorkelling and a visit to the rurtle to basic ecology sanctuary during the 4-day 3-night camp The camp aims to expose studenrs the camP creates and gain knowledge on rainforesr and coral reef ecosysrems' . Most importantlY, human aciivitY'on rhe awareness and understanding of the effects of potiuiion and irresponsible Srudenrs get

'

natural environment. Malaysra ln 2011, KpMC conducred the Eco Dive programme in collaboration wrth Reef Check of the to conserve coral reefs. This programme subsequently became an anntlal activitl" The aim can health their so rhat programme is ro collecr data on coral reefs off the coast of Tioman lsland and t. ior.ty monitored. ln rhe same year, rwelve KPMC volunteers atttnded rhe Eco Dlve course reef underwaier coral they managed ro become certrfied eco-divers. They went on to conduct annual t oral reef ,urr"yr. Th-e data has been used by various related parties and rhe United Narions to track

conservalion pro;ects(Adaored from: KPMC, n d.)

186

Business Ethics

of

,h;f";;--.--l

philosophres of

corporate social responsiveness, being

proacrive

rs

the rnost

desirable mode.

Table 6.5 Four philosophies of corporate social

In short, the prime focus of corporate social responsiveness is not on the acceptance of a moral obligation, but on the extent of managerial action to fulfil the obligation. McAdam (1973) as quoted by Carroll (1979) outlined fcrur philosophies or modes of corporate social responsiveness-reactive, defensive, accommodative and proactive. These philosophies reflect the four possible business responses to social demands. Table 6.5 summarises the four philosophies.

Reactive

Emphasize economic achievernenr and completely ignore CSR.

('Fighr all rhe way')

Oblivious ro socral complainrs

respons iveness Defensive

Comply with the minimum legal requiremenrs ro prorecr rhe firm and

('Do only whar is required')

t0 meer social expectations.

Accommodarive

Accept CSR and try to sarisfy economic, legal and erhical responsibiliries.

('Be progressive')

Behaviour is consisrent with socieral values and norrns dr.re to external pressures.

Proacrive ('Lead rhe indusrry')

Most comprehensive rype of response. Comply with all CSR requirements, including philanrhroprc ones Lead social initiarives and prevent negarive effecrs of rheir acriviiies. Anticipare social problems and de';ise actrons rr-i soive rhem

In this sectiolt, we ltave reviewed the concept of social responsiveness. It can be considered as an extension or imp:ovement of the CSR concept, in rvhich firn-rs are required to fulfil their economic, legal, ethical and philanthroprc obligatrr ns to varior'rs stakeholders. However, firms should not merely do the minirnum that would satisfy their obiigations to the society.'fhey are required to be nrore proactive - that is to actively seek to meet social needs even befbre the stakeholders make an official demand or claim against them. By taking proactive steps for CISR, firms c an contribulc towards improving the quality of life of their stakeholders and mitigate the adverse effects of their actions.

The learning outcomes for this chapter are summarized belolv:

l

2.

Define stakeholders. A stakeholder refers to a specific person or groups of people, which have an jnterest or iirm and can affect and be affected by the firm's decisions and actions

a

claim in

a

Explain a firm's primary and secondary stakeholders. Primary stakeholders have a direct stake or claim in a firm. They are said to have a direct claim because a firm engages in a direct economic relationship or transaction with thern. The economic reiationship is derived from a contractual connection between the firm and its stakehoider groups. Secondary stakeholders have an indirect stake or claim in a firm. They cio not have a contritually determined economic relationship with the firm. They will not affect the ability of the firm to continue as a going concern. Nevertheless, tailure to address th,.ir concerns mav affect the firm's reputation and public standing.

Corporate Social Responsibility

J.

Describe the different forms of stakeholder theory.

.

Normative form

This form of stakeholder theory tries to explain the motive for firms to adopt CSR. Firms undertake CSR because they have moral or ethical obligations to look after the welfare of not only shareholders but also all their'stakeholders. This moral obligation is derived from the bidirectional understanding of stakeholder relationships. Stakeholders af{bct the firm and are also affected by the firm's actions. So firms' actions or decisions have to be ethical. Thus corporate managers should take into consideration the views of its stakeholder in decision-making.

.

,

Descriptive

form This form of stakeholder theory attempts to describe and explain the behaviour of firms and their managers in dealing with various stakeholders. Corporate managers prioritize their stakeholders based on three attributes, namely legitimacy, power: and urgency" The importance given to each stakeholder also depends on the stage ofan organrzational life c1,clg. Instrumental form This form of stakeholuer theory attempts to provide justification fbr firms to adopt CSR. Firms must manage its stakeholder relations well because such treatment is necessarl, for firms to achieve the goal of value maximization, and most importantly, their survival and continued SUCCCSS.

4.

Fxplain the meaning of corporate social responsibility. There are rnany nays of explaining the meaning of CSR. Simply put, CSR requires firms to be responsible to both sharehoiders and stakeholders. Thei are accountable for the effect o{ their actions on r.arious stakeholder groups. Firms are required to protect the welfhre of tlre ir stakeholclers by avoiding negative impacts that their actions can bring on them.

5.

Examine the critical arguments for and against corporate social responsibility. Arguments against CSR

,

C,lassical econamics

The ciassical cconomists, Friedman in particular, argued that firms do not har.e social responsibilrty. Instead, the responsibility to soive social issues shouid be ieft to the goyernment and legislation. The only social and moral responsibility a firm has is to make profit fbr its sirareholders. CSR is said to endanger this motive. Corporate managers cannot use firm resources to solr.e social probiems, but they can do so in their private capacity'. The firm, irowever, must obey iaws and regulations, and should not get involve in fraud and deception in its business dea lirrgs.

.

Incontpetent to deal with social issues Firms are not equipped to soive social issues. Corporate managers do not have the necessary tecl"inical and social skills to deal with social issues or make socialiy oriented decisions. Tl-reir competency is in managing a business, which should be their main f"ocus.

.

Competitite disadvantage Firms have to bear the cost of undertaking CSR, which can reduce th.ir profitabiiitl,. In the end, firms will be less competitive from other firms that do not incur the cost of adopting CSR i.e. they have higher profit.

.

Individuals have moral responsibility lVloral responsibility should be placed on individuals, not the firm. So, corporate managers should be held responsibie for their actions instead of a firm.

.

Dilutes primary purpose of a business

187,

CorporateSocialResponsibility 1Bl

J.

Describe the different forms of stakeholder theory.

.

,

,

Normalive form This form of stakeholder theory tries to explain the motive for firms to adopt CSR. Firms undertake CSR because they have moral or ethical obligations to look after the welfare of not only sharehoiders but also all their'stakeholders. This moral obligation is derived from the bi' directional understanding of stakeholder relationships. Stakeholders affect the firm and are also affected by the firm's actions. So firms' actions or decisions have to be ethical. Thus corporate managers should take into consideration the views of its stakeholder in decision-making. Descriptive

form This form of stakehoider theory attempts to describe and expiain the behaviour of firms and their managers in dealing with r.arious stakeholders. Corporate managers prioritize their stakeholders based on three attributes, namely legitimacy, Power and urgency" The importance given to each stakeholder also depends on the stage ofan organizational life cycle. lnstrumental form This form of stakeholcc: theory attempts to provide justification for firms to adopt CSR. Firrns must manage its stakeholder relations well because such treatment is necessary fbr firms to achieve the goal of value maximization, and most importantly, their sun'ival and continued SUCCESS.

4.

Explain the meaning of corporate social responsibility. There are many u,ays of explaining the meaning of CSR. Simply put, CSR requires firms to be responsible to both sirarehoiders and stakeholders. They are accountable for the effect of their actions on various stakeholder groups. Firms are required to protect the rveifhre of their stakeholde rs by avoiding negative impacts that their actions can bring on them.

5.

Examine the critical arguments for and against corporate social responsibility. Arguments against CSR . Classical economics The classical economists, Friedman in particular, argued that firrns do not have social responsibiiity. Instead, the responsibility to solve social issues sl-rould be lefi to the govcrnment and legislation. The oniy social and moral responsibility a firm has is to make profit for its sirareholders. CSR is said to endanger this motive. Corporate managers cannot use firm resources to solve social problems, but they can do so in their private capacity. The firm, however, must obey laws anci regulations, and should not get invoive in fraud and deception in its business deal i ngs.

"

IncomPetent to deal with social issues Firms are not equipped to solve social issues. Corporate managers do not ]rave the necessar\r 'lheir technical and social skiils to deal with social issues or make sociaily oriented decisions. competency is in managing a business, which should be their main focus.

"

Competitive disadvantage Firms har.e to bear the cost of undertaking CSR, which can reduce their profitability. In the end, firms will be less competitive from other firms that do not incur the cost of adopting CSR i.e. they have higher profit.

.

Individuals have morct responsibility N{oral responsibility should be placed on individuals, not the firm. So, corporate managers should be held responsible for their actions instead of a firm.

.

Dilutes primary purpose of a business

1BB

Business Ethics

Requiring the firm to look after social issues will cause it to deviate frorn the purpose of its existence, which is to create wealth for shareholders. Argumentsfor CSR

,

for the business in the long-term Firms can benefit from undertaking CSR. The benefits come in the forms of enhanced image and reputation, trusting relationship with stakeholders anC higher business partners' loyalty. These so called ingredients are necessary for the long-term survival of the firms" In short, CSR Good

is good for the business.

.

Prevent future external interference

Firms can prevent the government's interference in terms of imposing new and expensive regulations by being socially responsible. The new regulations will not be necessary to govern corporate behaviour because firms have already shown high self-discipline standards to fulfil

the expectations of society.

6.

.

Businesses hat,e the resources so let them

.

It

try Firms do have the necessary resources to deal with social issues" They have a pool of talented managers, expertise and capital, so they should be given an opportunity to deal itith social problems. Others have tried to do so but failed. Firms can solve social problems arising from their business operations such as ensuring a safe rvorkplace and prtiducts, engagtng in fair advertising, ensuring continuous supplies of essentiai food items and protecting shareholder rights. is the right thing to do Frorn the moral point of view, promoting the rvelfare of stakeholders is tl-ie right thing to do Firms contribute to social problems such as poliution, product def'ects, chrlcl labour and hiring illegal immigrants. So it is right for them to voluntarilv take the responsibility' lo rectify such social problems.

Analyse a firm's corporate social responsibility performance using Carroll's four-part model of corporate social responsibility. A firm's CSR performance can be analysed based on four types of responsibiiitl', namel,v econontic, legal, ethical and philanthropic. These responsibilities represent the expectations or demands ofthe firm's stakeholders. The assessment u,ill determine the extent to which the firm has met each of the four responsibilities. The firm is said to have fulfilled its economic responsibility il it is able to function as a profitabie economic unit so that shareholders and stakeholders can benefit frorn their relationship rvith the firm. Shareholders can enjoy a relatively good rate of return on ,heir investment rvhereas ertployees can be gainfully employed to support their iivelihood. Horvever, it is not enough for the firn-r to focus on short,term profit only. It is expected to be a going concern. "l'hus, the firm's strategy should reflect this expectation. The firm's legal responsibility can be assessed based on its track record and beiraviour in adhering to relevant lans and regulations governing its business. The firms should also strive to honour all contractual obligations. In terms of ethical responsitrility, the firm is said to have inet this responsibility if the actions are deemed right, fair and just by the stakeholders. The firm shorrld do all these even if the law does not compel it to do so. Firms have to act in a manner consistent u'ith expectations of societai mores and ethical norms. Philanthropic responsibility is voluntary in nature. The firin's phrlanthropic responsibility carr be assessed by looking at its rnonet ary or non-monetary contrrbutron to society in order to promote the community's well-being.

CorporateSocialRespons,brlrty

7.

8.

Summarize Keith Davis's model of corporate social resPonsibility. Keith Davis argued that adopting CSR enabled firms to enjoy long-term economic benefits" Firms have social responsibility due to their sociai power, which can influence and shape society. Larger firms have g..ut.. influence on the livelihood of the community in wl-rich they operate. So firms should behave responsibly because failure to do so might lead to a loss of its social power and Iegitimacy. Divis's model comprises five propositions as outlined below. . Social responsibility arises from social Power. Businesses shall operate as a two-way open system' . Businesses should thoroughly analyse ihe social costs and benefits of its activity, product and service before pursuing them. . Consumers should absorb the social costs arising from each activity, product or service. . Business institutions, as citizens, have the responsibility to become involved in certain social problems that are outside their normal areas of operations

Distinguish between corporate social responsibility and corporate social responsiveness. Corpor"ate social ,..po.rribility focuses on the obligations that firms have on their shareholders and stakeholders. Fiims should identify such obligations based on the demands or claims of their stakeholders. Typical obligations include economic, legal, ethical and philanthropic. In contrast, corporate ro.iul responsiveness focuses on the extent of managerial action to fulfil the obligation. It is a more action-oriented form of CSR where firms anticipate the needs of their stakehoi'ders proactively and take measures to fulfil those needs or expectations. Firms, then, should be assessecl baseci on their readiness to respond to those needs by establishing an appropriate process, policies, procedures and mechanisms.

Corporate Social Responsibility The idea that firms should be accountable for the effects of their actiotts on a wide range of stakeholders as opposed to shareholders only. Corporate social responsiveness A more action-oriented approach to CSR ir, which firms actively anlicipale the needs of their stakeholders and proactively take action to meet those needs. Descriptive perspective A form of stakeholder model that attempts to describe and explain the behtiviour of firms and their managers in deaiing rvith various stakeholders' Economic responsibility An obligation of a firm to be profitable in the long-tcrm so that sharelroiders arrd stakeholders can benefit from their reiationship with the firm. Ethical responsibility An obligation of a firm to be fair, just and io do what is right in rts dealings rvith all stakehoiders, even the lau'does not compel them to do so.

lnstrumental perspective A form of stakeholder model that attempts to justify managers to treat their stakeholders well because such treatment wiil enable the firm to achieve ils economic goais. Legal responsibility

operations.

An obligation of a firm to obey laws and adhere to regulations governing its busrness

189

w 190

Business Ethics

Legitimacy An important attribute to determine the relative importance or salience of any stakeholder group. It refers to the extent of validity or an appropriateness of a stakeholder's claim to a stake in a business.

I tr

I

Normative perspective A form of stakeholder model that attempts to explain the motivation from a firm to take into consideration its stakeholders'views in decision-making.

Philanthropic responsibility Gifts and contributions made by a business to the local community and nongovernmental and non-profit organizations as a way of giving back to the society that supports its existence. Power An important attribute to determine the relative importance or salience of any stakeholder group. It refers to the ability of a stakeholder group to exert influence over a particular firm's decision" Primary stakeholders The most influential group of stakeholders that has a direct stake or clairn in a firm due to their direct economic relationship with the firm. The firm's long-term survival depends on the support of this group of stakeholders. Secondary stakeholders A group of stakeholders that do not have a direct stake or ciaim against a firm because it does not have a direct economic relationship with the firm" Whilst this group does not directly

affect the long-term sun.ival of the firm, it is capable of ruining the firm's reputaiion if the firm f'aiis to address its concerns.

Urgency An important attribute to determine the relative importance or salience of any stakeholder grouP. It refers to the extent to which a stakeholder's claims or demands call for intmediate attention from the firm.

1.

IIow can firms

assess

the relative importance of their stakeholders? Why is this

assessment

irnportant? 2.

In your opinion, which is the strongest argument for corporate sccial responsibility? Explain your answer.

3.

Review the CSR policies of a company of your choice. Would you ulassify their policies descriptive or instrumental? Give examples to support your answer.

4.

Do you agree with Friedman's argument? Explain why or why not?

5.

Illustrate with appropriate examples the pyramid of corporate social responsibility.

6.

Explain the difference between corporate social responsibility and corporate social responsiveness. Give an example of each.

as

normarive,

I

Corporate Social ResPonsibrlitY

The Conquest of a Giant Retailer billion in sales' The lndonesia, singapore and Brunei with RM15 ABC is rne largesr retailer rn Malaysia, companyemploys50,000employeesinthefour.o'nt'ituandservesaboui20millioncustomersperweek' to Irome improvemenr and products from groceries and household items ABC carries an exrensive range of friendly service and high a core or roy"al cusromers who rove rhe fast, Ieisure producrs. The company has always ensures the CEo who is also rhe grandson of ABCIs founder qualrry producrs with lower pii..r. The Week with low-cosr quality goods Lasr year' Business lives up ro irs credo of supplying consumers company

reportedthatABCWaSoneofrhemostprofitablecompaniesinSourhEastAsia.assured of a pleasanr shopplng service Customers are Employees receive good rraining in cusromer

r.rqy^r:-r:tl:: *n.""ver rhey need help However'

friendly experience where ABC's-employees aie

this

lnd goodrmageistaintedwithcomplainrsagainsrthewayABCtreatsitsemployees.lnlndonesta,forexample, with only lirtle overtime forced to work,round the clock, without or employees complained rhat they were they ate immigrant low pay and few or low beneflts' marniy because pay. The backroom employees recerve was accused of ABC Malaysia' their rest and meal breaks ln workers. Employees ,r.'oft.n asked to sacrifice against rhe clearlli are do menial lobs' These employmenr pracrices hrring illegal immrgranrs with low pay to lav;,

of

laws

but ABC gor away due ro weak enforcement -- -^*^r-;- ^{, WhiisrCuStomersloveABC,smalllocaisundryshopsandnrerchantscomplainofuniatrCor.npeIItlon,

ManywtnroutofbusinessbecauseABCseilssimilarproductsburarlowerpricesABCcouidaii.ordto in Malavsia' giu.,, t-ry irs supplrers for large orders. ln addirion' offer lower.prices due ro hefry discounrs chrna and from rhose as glu., p'io'i',y ro foreign pi'rducts such nrany local suppliers complained thar ABC due rountries irsin.,'' ABC buys irs products from these two Bangladesh.5ome even had ro close their ro cheaper

prices'

grear rnarket porential - L'c omhrrlrer] nn an an aggressive expanston st rategy due to rhe 1n lndonesia, ABC has embarked on stores are due to and Norrhern Sumatra next year' Ten new ABC plans ro open 20 stores each in East Java ln some oI the nevr severe resistance from locai conrmunir'tes be opened in Sulawesi this year. ABC receives and after rhe noise and other forms of pollurion during locarions Their main grouses are traffic.ong.r,ion, ir-r Malaysra' ABC irun, ABC's presence disturbing their daily irves consrrucrion of rhe new srores. They do no, illegal imnrigrants ttr The main grrevance rs rhe empioyment of gers rhe same resisrance, bur at a lower scale. of forelgn workers influx locals due ro a sudden consrrucr new srores, which raises securiry concerns "ong

ln their area.

company to be sociallv receives wide support and many consider the and 5g[vi6s ABC thousands of iobs, low prices and hrgh value responsible in addirion ro being a provider of scholarshlps to ro the sociery For example, ABC awards annual also underrakes some iniriarives io give back l h.e company rs underprivireged famiries in rncronesia and Malaysra secondar y schoor chirdren from poor and N\oreover' lt bags practices such as recycling and using paper also acrrve in promoring good environmenral the publrc aboui by local environmental groups to educate

ln spiie ol irs critlcs, ABC

also sponsors educarional programmes organized

recyclrng

lnd oiher environmental topics'

Questions:

1.

using carroll's four-parr CSR model' Assess ABC',s corporate social responsibility

3

by irs various stakeholdersl Whar should ABC do wirh regard to the issues raised

lf

irs various programnres? Hovr woul(] 2. HasABc baiancecl irs economic and social responsibilities through you imProve ABC's CSR Perfor;riance?

191

. :

:-1,.::.:

:"";1w -'_.a:..:

Business Ethics

Ackerman, R.W. and Bauer, R.A. (1976). Corporate social respotlsiveness. Virginia: Reston. Agle, B. R., Mitchell, R. K" and Sonnenfeld, |. A. (1999). Who matters to CEOs? An investigation of stakeholder attributes and salience, corporate performance, and CEO values . Academy of Management !ournal (a2):5a7_ 525.

Carroll, A.B. (1979). A three dimensional conceptual model of corporate social performanc e. The Academy of Management Review, (4): a97

-

505.

Clarkson, M.E. (1995a). A stakeholder framework for analyzrngand evaluating corporate social performance. The Ac ademy of M anage ment Review, 20 (l) : 92-L17.

Clarkson, M.E. (1995b). A risk based model of stakeholder theory. In Proceedings of the Second Toronto Conference on Stakeholder Theory. Toronto: Centre for Corporate Social Perfbrmance and Ethics, University of Toronto. Crane, A. And Matten, D. (2010). Business ethics. New

lbrk: Oxford University

Press,

Davis, K. (1960). Can business afford to ignore social responsibiiities? Cali.fornia lvlanagernent Review, Z:70 76.

Davis, K. (1967). Understanding the social responsibility puzzle: What does the businessman owe to society? Business Horizons, 10: 45 -50.

Davis, K. (i973). The case for and against business assumption of social resporlsibllities. Academy ot' M anagement Journal, 16: 312-322. Donaldson, T. And Prestcin, L.E. (1995). The stakeholder theory of the corporation: Concepts, eviderice and inrplications. The Academy of Managem;nt Review,20(i): 65-91. Evan, W.lVi. and Freeman, R.E. (1993). A stakeholder theory of the modern corporation: Kantian capitalism. In'T.L. Beucharnp &N.E. Bowie, eds.,Ethicaltheory andbusiness,T5-84. Nervlerse\,: Prentice Hal1. Frederick, W.C. (1994). From CSRl to CSR2: The maturing ot business-society tlrought. Busitress and Society Rcvictv,33: i50-164. Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston: Pitnran. Freeman, R. E. (1994). The politics of stakeholder theory: Some future clirectigns. Business Ethies Quarterly, 4:409-421. Friedrrran, M. (1962). Capitalism andfreedom. Chicago: IIniversity of Chicago Press. Friedman, M. (1970). The social responsibility of business is to increase its profits. lley,York'l'imes Magazrne, 13 Septemb er: 32-33,

I22, 126.

Hayek, F'A. (1969). The corporation in a democratic society: In whose interest ought rrn? In Ansoff, H., ed., Business strategy. Harmondsworth: penguin Booxs. ]ones,

TM.

M an ageme

(1995). Instrumental stakeholder theory:

nt

Revi ew, 20 (2): aA 4 - a37.

it

and wili it

be

A synthesis of ethics and economtcs.I'he Acarlemy of

CorPoratesocial Responsrbrlity 193 :

(-nnrreroenr stakeholder theory. Rev' \^I;'L" A r- llqqq\ theorv' Academy Academv of Management Review (1999). Convergent |ones, T. M., & Wicks, A. C. 206-221.

_

2412):

G.L. (2001). Towardg 2 fls56riptive stakeholder theory: an organisational life|awahar, LM and Mclaughlin, cycleapproach. The Academy of Management Review,26: 317'414' Citizenship Focus - Rainforest-to KpMG (n.d.). Coral Reef Conservation Programme. KPMG Corporate Reef (R2R) programme. ' Accessed on l2 August 2014. Business and Society Review/ McAdam, T.W. (1973). How to put corporate responsibility into practice. [nnovation,6: B-16.

.

identification and salience: Mitchell, R. K., Agle, B. R., & Wood, D.I. (1997).Toward a theory of stakeholder Review,22:853-886' Defining the piinZipt. of who and what really counts. Academy of Management Sony Malaysia (2014). Support

for

Resources.
2014'

employees undertaking child care or nursi.ng care. CSR Reporting: Human

foi.ri-r.port/employees/diversity/index.html>. Accessed on 12 August

CHAPTER

Common Issues at the Workplace

% IrQ LEARNING OUTCOMES At the end of this chapter, you should be :ble to: Explain the types of wlristleblowing and the justification for blowing the whistle. lllustrate with examples the meaning t f trade secrets and conflict of interest in an organizational context. Conceptualize privacy from individual, employee and consumer perspectives and differentiate between privacy and surveillance at the workplace. Apply ethical principles to justify the need to slrsrain and respecr privacy as a human right.

rriq 1ii. : .rir';:

i

La i i :i

-j rl

.:'

.rl.,al:,,

7.0

INTRODUCTION

An important aspect of human resource management in a company is managinu ernployec relations. Managers spend a iot of time and effort on managine their u'orkforce for tI-re obviotts reason of sustaining a beneficiai reiationship that will promote productivity and enhance the company's perforrriance. In a nutshe1l, employers and en-rployees are involved in an intricate relationship that is critical to the surr.ival of the company. Employees certainly have economic significance because they bring in their skilis, efforts, energy and productivity to the employers. In return, they expect the employers to compensate then'r for making such a contribution. However, the employee-emplover relationship is not at ali rosv due to various issues that may have ethical rar'ifications to both parties. Whiist employers expect ernployees to perform, they must also recognize that the latter are also concerned about the way the company treats them. Hence, it is crittcal for both ei-rployees and employers to pay attention to the issues that mav jeopardize their relationship and ultimately, affect the performance of the company. This chapter covers the topic of common issues at the workplace foeusing

on the employee-employer relationship. We shall explore some of those critical issues in this chapter. In particular, we will focus on workplace issues relating to uvhistleblowing activities, trade secret protection, conflict of interest, empioyee privacy at the rvorkplace, discrimination, issues relating to women in the workforce, sexuai harassment, rights and duties of employees, occupational safety and health, and finally, the due process in terminating an employee. We shall approach this topic from the perspectives of both empioyees and employers. They need to play their roles i'.) ensure a conslructive economic relationship for the benefit of all in the company.

,i)

196

Business Ethrcs

WHISTLEBLOWING

Wl"rrbbb*,.g I is che release

of

informarion or evidence of immoral or illegal behaviour by an employee or former employee of an organizarion ro

someone within the

organizalon who has rl-.c aurhoriry to i

nvesrigare, prevenr

and punish the perper rators.

We have briefly covered the topic of the whistleblowing policy in Chapter 5 of this book. We learned that whistleblowing is an essential element of a comprehensive ethics Programme becauSe it could help organrzations to uncover serious risks associated with fraud, corruption, workplace safety, environrnental hazards and discrimination" In this section, we shall explore this topic in greater detail by examining the definition of whistleblowing so as to clearly distinguish this activity from other a-ts of reporting a wrongdoing. Next, we will examine the types of whistleblowing and ethical justification for it to take place in an organization. To begin with,let us recall the meaning of whistleblowrng, nhich is the release of information or evidence of immoral or illegal behaviour by an employee or former employee of an organization to someone within the organization who has the authority to investigate, prevent and punish the perpetrators. We need to take note of a few pointr relating to this definition.

First, whistleblowing takes place only when a (past or present) member of an organization voluntarily reports such information. A whistleblower can be any employee (or former employee), brut those rvho are in p,rsitiorrs of power and privy to confidential and sensitive information arc expectcd to blorv the whistle. Examples of such employees include company secretaries, accountants, internal

and external auditors and financial executivcs. -['hcrc[orc, a busincss journalist who Lrncovers evidence of corporate scand.,]s and exposes it to the public domain is not a whistleblor.t'er. Likewise, a person who -,vitnesses a criminal ac-t and rnakes a police report is not a whistleblower. Second, whistleblowing does not take place if'an employec spreads gossip about other employees' personal l-rabits or indecent behaviour or takes retaliatory action against his or her s,rperior for reprimanding him or her. The evidence or infbrmation released by al employee must be pertaining to matters of substantial importance or of public interest such as practices that violate larvs or regulations, infringemc,rt of human rights, threats to public heaith or safuty, financial rnalpractice or activities that are not consistent with the objectives of the organization. Third, whistleblowing can also arise in a situatron where an employee has information about his or her superior's wrongdoing and reports it to someone else in a position of authority within the organization. Sirnilarly, an employer can blort: the whistle when he does not get a response from his reporl o1-wrongdorng that he matle through a normal channel of reporting in an organization, tbr example, giving the rnformation to his immediate superior. Further, whistiebiowing takes piace if an einplol'ee has inforrnation or evidence about wrongdoing as opposed to a mere allegatron that cannot be sLibstantiated with credible evidence that is not publicly available. Whrstlchlowers usually rnake the rcport out of a sense of professional and ethicai responsibility -fhe aim of whistlebloweis is to prevent harm to others or to an organization as a ivhoie, rather than securing therr own personal interests. They believe that public interest can he more important than organizational interest, especially when it is not ccirsistent with the former. They se,. aside loyalty to their organizations to protect public interest. We learnt in Chapter 4 that organizations should establish a clear written policy and procedure to encourage whistleblowing. Emplo).ees r,r,ho have evic1e.r., ot information about wrongdoing face two ethical dccisions--whethcr to blolv the whistie and to whom to blow the whistle" Hence, a whistleblowing policy and procedure is crucial to encourage whistleblowing and to prevent ernployees frorn disck;sing the

Common Issues at the Workplace

information to a third party such as politician or the press, which could damage the reputation of the organization. Nevertheless, a whistleblower tends to resort to such action if the organization does not have a clear procedure for whistleblowing or it fails to take any action to investigate and punish the r,r,rongdoers following a report by the former.

In a nutshell, u,histieblowing is actually a yoluntary practice that is made through a formal or informal reporting system whereby a person of lesser authority and power is abie to inform a person of authority within an organization of wrongdoings or malpractice, so that positive actions can be taken to uncover such misdeeds. A nhistleblowing procedure must also specify explicitly the protection given to a whistleblower against any retaliatory actions. Otherwise, the procedure is likeiy to faii to encourage employees to come forward with evidence of wrongdoing for fear of reprisal and safety concerns. Next, we shall delve into the two types of whistleblowing-internal and external.

Organizations should strive to encourage internal whistleblowing by ensuring a clear and comprehensive whistleblowing policy and procedure. Employees should be encouraged to report any wrongdoing or illegal practices and their identity should be kept confidential.

7.1.1

f0..g,*;;--r should strive to encourage inrernal, whisrleblowing by ensuring a clear and comprehensive whisrleblowing policy and procedure. Employees should be

encouraged to report any wrongdoing or

illegal practices and their identity should be kept confidential.

lnternalVersus ExternalWhistleblowing

There is a misconception that ivhistleblorving can onl1, take place if the inforrnation is released into a public dornain. A whistleblower does not nccessarily have to 'go

ft.*"d

public' u.ith his or her information of immoral or unlalvful conduct. Howe',,er, it is necessary for the information to be released outside normal channels of communication (i.c. reporting directly to his or her irnmediate supervisor), because the superior may be involved in the misconduct. Iniernal whistleblowing arises when a rr.histleblor'r'er reports the evidence of wro,rgdoing to someone of authority within an organization (other than his or her immediate superior or the CEO) and hopes that tire recipient of the information will take action to deai lvitir the misconrluct or illcgal practicc.

when

Organizations tnust have a ciear procedure for internal whistieblowing to prevent abi:se. For example, the procedure specifies the channel of reporting the information such as an employee can direct or pass the evidence of misconduct to the chief etl'rics officer, cotnpliance officer, company secretar)'or independent directors of tire organization. Some organizations establish an ethics hotline for the same purposc. Most importantly, the internal rvhistleblowing mechanism must ailorv enonymity to be effective. Hor,r'ever, the main challenge to this approach is that empioyees are reluctant or uncomfortable to make a report for feai of reprisal despite assllrance given tirat they will be protected frorn any adverse consequences. In Chapter 4. rvc indicated that protection tbr whistleblowers in Malaysia was clearly enshrined in the reu4y introduced legislation known as Whistleblower Protection Act 20i0. !\rhrstleblowing is a risky activity. Whistleblowers face the risk of being excluded, harassed by their organization or colleagues. For example, Sheron Watkins of Enron suffered from retaliatory actions from Enron following her report of accounting irregularities to Kenneth Lay, Enron Chairman. Her computer was confiscated. Enron moved her office from an executive suite to a smaller office. She aiso found out that Enron had considered terminating her employment, but did not do so. Other forms of retaliation include transferring or reassigning the n histleblowers, restricting therr activities, access to information or access to other organizational resources, with the irrtention of isolating them from other employees.

whisrleblowing arises a

whistleblower

reports rhe evidence of wrongdoing

to scmeone of aurhority within an organization

(other than his or her immediare superior or the CEO) and hopes rhat rhe recipienr of rhe information will rake action to deal with the misconduci or illegal practrce.

197

198

Business Ethics

E'*r.d------l whisrleblowing arises when employees who discover corporate misconduct choose ro bring ir ro rhe arrenrion ofexternal parries. such as law

enforcement agencies or rhe mass media.

Employees will be discouraged from disclosing wrongdoing internally if ths organization fails to take action and instead reprimands or intimidates whistleblowers for doing so. Some whistleblowers were fired after making a report of misconduct. For example, Donna Busche, a manager of environmental and nuclear safety at Hanford Nuclear Reservation in Washington, USA was fired after filing a safe[ complaint relating to design flaws that could lead to a radioactive leak at the plant (Second whistleblower cries foul in Washington nuke plant firing, n.d")" As such, some whistleblowers tend to go public by disclosing thc information to the media, regulators or politicians" Further, internal whistleblowing will not take place if the organization has a 'culture of hush' or a culture of preferring to 'keep things to ourselves' and misconstrues obedience for loyalty. External whistlebiowing arises when emp;ioyees tvho discover corporate misconduct choose to bring it to the attention of external parties, such as taw enforcement agencies or the mass media. Callahan and Drvorkin (199a) observe that employees are likely to use media as an externalu,histlebiowing channel when there is no effective response to an internal report, when top level management is involved in the miscondrict, or when they fear retaliation from employers above the level of their supervisors. Whistleblowers tend to choose mass media to report their employers'illegitimate activities because they can remain anonymous arrd the rnedia trusts them (due to credible evidence) and they can choose to release it at an appropriate time. However, when employees choose to report corporate misconducl through the mass media, they tend to suffer a severe and more comprehensive forrn of retaliation from their employers than when they report the wrongdoing internally (Drn,orkin and Baucus, 1998)" This situation arises because the mass media report js hkely to bring adverse publicity to the organization. Organizations rnay vier'r, externai whistleblowers as disloyal and fire them or subject them to other forms of retahation prior to the firing. On the other hand, fear of retaliation and a retaliatory environnlent motivates employees to resort to external channels of reporting (Nlrceli and Near, 1984). In a similar vein, whistlebioling is an effective conduit to bring about organizational change to put an end to tl-ie lr,rongful practice rn the organization" C)rganizatlJns are forced to rectify the situation ir-r-rmediately or at Ieast initiate prompt investigation into the allegation.

7.1.2 Justif ication for Whistleblowing Aithough whistleblowing is an important anci irraisenorlhv activity to uncover i1legal, immoral and iilegitimate corporate conduct, it can also be an immoral and problematrc action to both individuals and organizations. Whistleblorvers rnay be seen as traitors or disloyal i,vhilst the organization suffers from advcrsc repercussions. According to De George (2006), employees may be morally jr-rstified to blou, the whistle under the lollowing corrdrtions.

Driven by appropriate moral motive Employees disclose evidence of wrongdoing in order to expose activities, practices or products that pose a serious threat to public safetv aird health" In addition, it is morally justified to stop dishonesty or some unethicai behaviour in orcler to protect the interests and reputation of the organization. In contrast. immoral rnotives include revenge, malice, violation of privacy and cr-,r,fldentiality, to get attention or"profit or simply to cause trouble for their employers. in short, rvtristleblov.'ing is not moral\' justified if it is meant to advance one's personalagenda or interests.

Common lssues at the

Workplace 199

Employees' immediate supervisor or the internal whistleblowing channel failed to take appropriate action Consistent with loyalty to their organization, employees should first use the internal line of reporting-up to the board of directors-to report wrongdoing, before blowing the whistle pubiicly. If they have tried and exhausted all the normal lines of reporting, including the internal whistleblon ing procedures, and failed to elicit any positive response> then it is morally justified to blow the whistle to external parties.

Employees must have strong or credible evidence of wrongdoing It may be difficult to establish whether evidence is credible or not, but employees must assess whether a reasonable and impartial person would be convinced that wrongful actions have taken place if he or she is shown the evidence. Other,,vise, they may be putting themselves at unnecessary and serious risk.

Employees must have good reasons to justify blowing the whistle Whistieblowing is justified if an employee reasonably gxr..,s that by providing evidence of wrongful actions, it will lead to the organization taking steps to remedy the situation, aird more importantly, it does not pose a serious risk to him or her. If there is a slim chance that necessary changes will take place follon'ing the report, then he or she is not obliged to blow the whistle. It is not worth the effort to go through challenging times foilor,ving the whistleblowing act if the chance of success is far less than the extent of nsk and danger that the employee has to endure. In the next section, we shall examine the issue of trade secrets rn'hich organizations

strive to protect in order to remain competitive.

7.2

TRADE SECRETS

IA,rr.1.

*..*

a valr-rable asset

Inlormatiorr is a valuable business asset that could possibly give an organization a competitive edge against its competitors. A trade secret is a vaiuab,le asset because the organization may have spent pienty of money to acquire or deveiolr the inforrnation and it has a significant impact on its financial position. Hi tech companrcs in the softrvare industry such as Apple and Samsung, for example, ciosely guarcl therr tradc secrets. The,v have been involr,ed in numerous court proceedings due to ailcgatiex"rs ttf r-iolatioi-r of trade secrets. Likewise, Coca Cola has a secret formuia fbr its carbonatetl drinks. It ts r-rot patented, but remains a secret to its competitors. Closer to home, Secret Recipe cioseiy guards its secret formula for baking delicious cakes. OrgaLi:izations closely guard their trade secrets so as to avoid them frorn being known to otlrers. If information has no value to competitors, it is not necessarl'to be kept confidential. Then, it makes sense for the organization to protect it. Tradc secrets are also known as proprietary data. Ernployees play a crucial role here in safeguarding trade secrets and ensuring that the information does not fall into the hands of competitors. They have a moral and legal obligation not to reveal it. Emplove rs face a chailenging task to prevent employees from selling or using their trade secrets, especially the employees n ho have left the company. The World Intellectual Property Organization (WPO) defines tradc sc..rct as any cor-rfidentiaibusiness information including manufacturing or indusirial secrets, which gives an crganization a competitive edge. A trade secret nlust be unknorvn ttr

because the organrza,"ion may have sperrt plenry

of money to acqutre or develop the rnfornration and ir has a sigrrificant rmpact on its financial position.

Ilt-.e w"'rd lntellecrual Property Organization (WPO) defines trade secret as any

confidential busirress information including manufacturing or irrdusrrial secrets,

which gives an organization

a

competitive edge.

240

Business Ethics

r'rdesec'ec;-----l may be known ro competirors rhrough commercial espionage, breach

of conrract where employees or any oiher parries that have knowledge

of

such informaiion

either voluntarily release or sell them for personal benefir.

competitors. Otherwise it will not be a secret. Virtually any information can be a trade secret so long as it is not known to others and the proprietor protects its confidentrality. Hence, trade secrets are the intellectual property of the organization. Examples of trade secrets are sales methods, distribution methods, consumer profiles, advertising strategies, iist of suppliers and clients, manufacturing processes, formulae, patterns, ingredients or chemical composition of products, design of a machine, methods of quality control, results of market research and financial projections. Trade secrets may be known to competitors through commercial espionage, breach of contract where employees or any other parties that have knowledge of such information either voluntarily release or sell them for personal benefit. Theft of trade secrets is unfair competition. Ownership of trade secrets gives the right to protect them from being wrongfully acquired by others" Trade secrets can be considered as a type of property whose owner is entitled to certain r:ights. However, unlike patents, copyrights and trademarks, trade secret protection does not require any registration and it is not limited by time. However, without permission of the holder, others are forbidden from using this type of proprietary data.

\,!brld Intellectuai Properties Organization (World Intellectuai

Properties Organization, n.d.) outlines three conditions for information to be considered a trade secret:

r r r

The information must be secret i.e. nol revealed or known to others that are not supposed to have the information. It must have commercial value because it is a sc'cret. The rightful owner of the informatiorr has taken reasonable steps to keep it secret. For example, imposing confidentialitv agreernents, restricting access and cautioning employees who har.e access to the information about its secrecy.

Let us look at an example to further comprehe nd ttre concept of a trade secret. Company X has ur,dertaken rigorous research and tests to improve its quaiity control mechanism so as to ensure high quality produc-ts that can be sold at premium price. The company has been the market leader ancl is highly profitable compared io its competitors ever since the implementation of the mechanism. This quality control know-how ciearly provides Company X rsith a cornpetitive edge over its competitors. Company X, therefore, closely guards this knolr,, how and certainly does not want its competitors to know about it. It has taken stei.rs to ensure that oniy a handful of key employees know about this trade secret and they have been cautioned to keep it confidential. Company X made sure that each emplo,vee that has access to this information signs a confidentiality agreement. In this situation, if a competitor company obtains such information without the consent of Cornpany X, it is in vioiation of Company X's trade secret. Empioyees who have access to trade secrets and tl'ren disclose then-r to others ol use them fbr personal advantage are said to have violated confidentialiry, rvhich rs an important element in the employee-empioyer relationship. When they are subjected to a confidentiality agreement, employees will have an explicit coniractual obligation not to disclose the trade secret, as in the earlier example about Company X. Other than taking steps to protect trade secrets, employers must also improve their enployee reiations to treat their employees fairly and keep thern happy. Often, unhappy employees use their knowledge of the company's trade secret as a bargaining point to secure alternative employment with a compctitor contpany or esrabhsh their own business that is in direct competition with fbrmer emplsysl. Arguahlv, this 'heir approach is less expensive and messy than gorng through iegal proceedings to seek recourse from errant employees.

Cornmon issues gt

Conflict of interest may arise in any professionai relationship, such as betlveen board of directors and shareholders and external auditors and a company. We have examined this concept in Chapter 2. llowever, in this section, we will focus on conflict of interest in the employee-employer relationship. Empioyees are expected to be loyal agents of their employers. Avoiding conflict of interest situations is one of the primary obligations of an employee towards his employer. 1h... ur" -urry ways for an employee to show loyalty to his or her.employer. One way is to prevent the employee'.s personal interests from getting in the way of the employer's interest. As loyal agents, employees have an obligation to act in a manner consisient with the objectives and interests of their employers. They must not abuse their official position to obtain personal benefit. A code of ethics normally specifies practices that may lead to conflicts of interest in an organization" The employee and the erployer are in an agency relationship. Employees are agents of the employers (principal). 'fhey have a duty to act in the best interests of their employers. Conflict of interest occurs 'i.vhen employees have personal interests that interfere with their obligation to promote the interests of their ernployers. Employees are said to be involved in a conflict of interest when they give priority to their personai agenda cver their job duties. By doing so, employees make decisions or behave in a ,iunn.. that girre them personal gain or advantage thal may harm their empioyer's interests.

Next, rye shall delve into conflict of interest at the workplace, a contemporary topic that is r.er,v much discussed in today's competitive rvorld of global business.

7.3.1

Conflict of lnterest at the Workplace

Contlict of interest in an employee-employer relationship may arise in one of the fb11on,i

ng situations:

t

When an employee uses his official position for personal financial goin or to benefit a compan)t in which he or she has a financial interest. In Chapter 4, we gave an example of top executives who use corporate funds for private purposes such as golf club memberships, vacation travel, renor.,ating their homes and corporate jets for their family travel. The-v are clearly abustng their official position and power in the compan)' for perst-,na1 gain. As another exarnple, an employee is a tender manager in Company A. He also has financial investments in a company that supplies goods to (lotnpany A. The employee uses his position or polver to influence the decision to artard a contract to the supplier comPany.

a

When an effiployee's external financial or other interest may inappropriately influence the way in which he or she performs his or her official respotliibilities. This situation highlights that conflict of interest need not be flnancial. For example, a procurement manager is a member of a tender coinnrittee that awards a project to a company owned by his spouse. He participates in a dcliberation and evaluation of the tender document submitted by his sPouse's company. His affection and love for his spouse influence his evaluation and those of other committee members. Clearly, he has exerc:sed a biased judgement in evaluating the tender appiication at the expense of other bidders.

t[9

fC".fl",

Workpla.qe.

"f

,,.r*

occurs when employees have persenal

,in

terests

rhar inrerfere wirh their obligaeion co

promote the interesrs of rheir employers. Employees are said

to be involved in a conflict of inrerest when rhey give

priority to their personal agenda over rheir job duties. By doing so, employees make decisions or behave in a manner

-

that give them personal gain or advantage that may harm their employer's i

n

terest

s.

2.A1

-.,

:

202

Business Ethics

When an enxployee receives 0r giyes a bribe or kickback for persanal finqncial gain.

A bribe is the act of giving or receiving any gratification or rervard in the form of financial or other advantage of high value for performing or not performing a task in relation to a person's job description. For example, I purchasing manager demands a bribe from a vendor in return for selecting them as the main supplier of the company. The vendor agrees to give a sum of money to the purchasing manager in order to secure the supply business. A kickback is a form of bribery. It is a sum of money given to someone in return for facilitating a transaction or appointment. For exampie, a medical doctor receives a kickback in the form of a hefty commission from a medical sales representative for recommending and buying medical supplies and drugs for their clinics or hospitais. This unethical behaviour is also unlawful in mani countries. When an ernployee receives gifts, entertainment, hospitality and other beneJits .from clients and business associates. Receiving gifts or entertainment may lead to a conflict of interest, particularly the employee's judgement or call iirto question hrs integrity. However, it is not airvays straightforu.arcl or easy to determine lr.hether such behaviour is morally questionable or not. For exarnple, somc companies prohibit acceptance ofcash or cash equivalents (gift cards or cheques), tickets to major entertainment or sporting er.,ents, cigarettes or alcohol rvhilst other companies do not have such a policy" Shau,and Barn. (2010) outlined several factors to be considered to determine the r-norality oiaccepting gifts as follows:

if it influences

-

The value of the gift-is the value nominal or substantial enough to influence a business decision? The purpose of the gift-is the intention to bribe an emp1o1,ee or to jnfluence his busrness decision? The circumstances under which the gift t'as git'etL or rtt'eived-is the eifi given in conjunction with a festival slilson or opening of store or spc'cial event or is it given without any specific event? Is the gift given openlv or secretly?

-

-

-

The position of the person receiving the gi'ft*-is the person receir,ing the gift in the position to make a decision or ai-,Je to influence the dectsron? The acceptedbusiness practice in the industry is it a norm to gii,e or recer\-c gifts in the business? For example, it is an accepted business practice in the US service industry to give tips to r,r'aiters and u,ailresses in restaurants, or

I

I I

I

I

I

r rI I

I

ft I I

i

r i I

hotei staff, to reward gooci sen ice. The company's policy-does the company hu,e a polio, to prohibit giving or accepting gifts or set a limit to the value of gifts that can be given or accepted? This policy is usually specified in the code of ethics o1 the company. The law of the country-is there a lar,', fortridding gir.ing and accepting gifts? Some countries legally forbid giving and accepting gifts, for example, among government employees. When there is such a law, then any gifl

r-

trarisaction is unacceptable.

l

When an effLployee eilgages in direct cottipctition with his ar her employer.

A conflict of interest occurs when an gn:ployee or his or her spouse establishes a similar business that is in direct conrpetition with his or her employer. For example, B works in a bakery in Bangsar Lltama titat suppiies fresh bread and

I I

i-* I !I I

!

F I l ,

!-I i 1

t

t-

I i

I

r

Common lssues at

pastries to nearby restaurants, cal6s and convenience stores. B's husband has just received some gratuity payment due to his retirement. He used the funds to open a bakery within the vicinity of Bangsar Utama. After her work shift and during weekends, B will help her husband to r un their shop" Both of them also visit the restaurants and cafds in the area to market their products.

t

When an employee engages in insider trading.

Insider trading involves buying and selling of securities by people rvho have price sensitive information that is likely to affect the price of the securities of a company. Such possession allows the insider to benefit from the trading of the securities or is important to make an informed investment decrsion. Price sensitive information is material information that is yet to be released or made public. Examples of price sensitive information include negotiation for a large business contract or impending mergers or acquisition, failure to meet profit forecast, losing a major client, legal action by creditors, etc. The insider stands to make massive gains or avoid massive losses by buying or selling the s: :urities before the material information is released to the public. Only a few people have or know about the price sensitir.e information by r..irtue of their position or role in a company, such as directors, top executives, external auditors, investment bankers, company secrL'teries and share dealers. Ken Lay, the former CEO of Enron, and his colleagues, for example, allegedlv sold off their Enron shares knowing that it would filc lor brirr-riiruptcy lvhilst at the same time advising othcr inycstors to hold on to thc shares.

'lhere are three elements fbr insider trading to tak-e place. First, the buying and selling of a company's securities is done by an 'insider', r'r,hich r-efers to the peopie in a corporate setting rvho are likely to'be in the kr-rur't-' about the material corporate information oi'matters. The concept of insider' jncludes those persons that have relationships rvith or are connecteci to an insider or the company such as business partners, empioyees, farnily rnem'Ders or others that have been tipped off by the insider. Second, the tracling of company securities is carried out pursuant to the possession of the rraterial and non-public information regarding the company. Finaili,, the rnformation u.ill ]rave an effect on the company's securities price once it is disclosed to tl-re general pubiic. lnsider trading is unethical not only because i1 is a ibrrr-r of conllict of interest but also because it promotes unfair competition, tr,1-rich could undermine investor confidence and the integrity of the capital rr-rarkct.

a

\,{hen an

en-LPloyee uses confidential information of the employer for personol gain ctr interest. We have discussed this situation in Section 7.2 of this chapter in rn,hrcl'r entplo-vees that have access to their employer's trade secrets or other confidential information voluntarily release or seli them to others. such as competitors, for personal benefit or for their other business interests

As companies face a variety of conflict of interest situations, it is important to prevent them because of their ethical andlegal implications. Some of the corflict of Lrterest situations are illegal, which expose the company and eilployees c,-rncerned to legal risks. such as iawsurts and criminal prosecution. How can conflict of interest situations be prevented or managed? Organizations should establish a forrnai or comprehensive ethics programme, rvhich includes amongst others code of ethrcs, rompliance programmes, ethics hotline and clear policies and procedures ior carrying iiut business acttvities such as proclrrement, investment and customer relationship.

theWorkplacs 203

2O4

Business Ethics

We have discussed in great detail the various elements of a formal ethics programrnq in Chapter 4.

7.3.2

Types of Conflict of lnterest

Velasques (2006) classified two types of conflict of interest-potential and actual conflict of interest. First, potential conflict of intcrest arises when an employee has an interest that could potentially affect the way he makes decisions for the employer but he has yet to be assigned such a responsibility or task to make the decision. Going back to our earlier example on the procurement manager, his spouse's company submits a tender for bidding a project in his company, but he is not in the tender committee that evaluates and makes the decision to award the contrai.t to his spouse's company. Second, actuai conflict of interest occurs when an employee has an interest that could potentially influence the way he makes a dectsion on behalf of his employer and the employer has actually given him the authority to make such a decision. For exa.-lple, the procurement manager is actually involved in the decision to alvard the contract to his spouse's company when he sits in the tender committee.

7.3.3

Preventing Conflict of lnterest Under the Malaysian Legal Framework

As conflicts of interest can lead to criminal offences, it is pertinent for us to examine briefly the Malaysiarr legal framervork w'itir regaru1 lo thi-u issue. \{e wtl1 fbcus on the roles of the Malaysian Anti-Corruption Corrn-itssion (ll'IACC) and Compantes

Commission Malaysia (CCM) in prer.enting, conllict of interest in Malavsian companies. To begin with, Iet us be clear that couflict of interest or corrupt practlces can occur in both the public and private sectors. Further, it is nrong to assume that every conflict of rnterest case is a criminal off'ence" For example, a social scientist in a university r,vho receives funding from Facebook to conduct a study on the effects of social media on society might find it difficult to he rnrpartial in reporting hrs trsearch findings" But this conflict of interest situation mav not lcad to a criminai oifence or dishonestl,.

ITi. rtn.fry* Anri-Corruprion Commission (MACC) manages caSes

relared to corruption and leads ihe various iniriarives ro

combar corruption nationwide.

According to Han (n.d.), a criminal offence arrses rvhen a conflict of interest situation resulted in an improper or dishonest act irr rvhich the offender takes advantage of his or her employ,er or gains persc,nal benefrt or: obtains the same for third parties. For example, giving trnd takinc a bribe as.,'r,e11 as engaging in insider trading are ciearly against the lau, in N4aia),sia. In contrast, eslabhshing a business that is in direct competition with one's employer is Lrrrcthicai but not necessarily unlalvfu[. Next, we also need to note that there are .spccilic provisions of lalvs that deal with conflict of interest or corruption in the public scctor rnvolving government employees and officials. For erample, the Anti-Corruption Act 1997 (ACA) and the Emergency (Essential Powers) Ordinance No" 22, i970 allorv fhe MACC to investigate such corrupt practices. Hower.er, Malaysian lalv does not hai'e similar provisions to criminalize cases of conflict of interest involr,ing private secior empioyees who abuse their position other than cases that involve givirrg and taking bribes or gratification (Han, n.d.). Nevertheless, the MACC has a role to plal.in preventing corruption in all sectors in Malaysia, which we shall examine now.

The Malaysian Anti-Corruption Corr,mission (MACC) The MACC was established in ]anuary 2009, replacing its predecessor, the Arrti

Common lssues at the

Corruption Agency (ACA). It is the sole body that is independent, transparent and professional in curbing corruption. 'i"he MACC manages cases related to corruption and leads the various initiatives to combat corruption nationwide. The key role of the MACC is to eradicate corruption, abuse of power and maipractice in order to create a corruption-free society. The specific functions of the MACC are as follows: r To detect and investigate corruption offences. r To educate the public against corruption. r To enlist and foster public support against corruption. r To detect the risk of corruption in practices, systems and work procedures in all sectors. r To advise as deem necessary on the likelihood ofthe occurrence ofcorruption" The MACC has introduced a few initiatives in relation to its role (Community Education Division, Malaysian Anti-Corruption Commission, 2013). We shall cover a fen, such initiatives here. First, the Malaysian Anti-Corruption Commission Act 2009 senes as a tool to enforce and prevent corruption and prescribes the structure and functions of the MACC. Tirere are four core offences under this Act--soliciting and accepting bribes, offering and giving bribes, making false claims and abuse of position or office. The MACC also investigates and prosecutes cases relating to giving and receiving gifts in the civil service. lJnder the MACC Act 2009, under certain circumstances, these practices can be classified as a form of corruption. Sec,,nd, the N4ACC created a 'name and shame database' on its rvebsite to highlight the detaiis of offenders and those under trial for public viewing. The objective of this initiative is to create higher awareness on the seriousness of the crime of corruption. Next, the MACC collaborated with the Malaysian Institute of Integritl. (lIM), Transparency International Malaysia (TI-M), Bursa Malaysia, PEMANDU, Central Bank of Maiaysia and Companies Commission of Malaysia (CCM) and Securities Con'rmission of N{alaysia (SC) to engage corporate companies to make an offrcia} piedee to uphoid integrity in their processes, procedures and policies. This initiative rs knorvn as the Corporate lntegrity Pledge (CIP). Companies that signed tire pledge made a commitment that they wiil not engage in corrupt practices and rvill strive tct create a corruption-free business environment. As at 2B August 2014,444 companies havc signed the pledge. Finaily, the MACC through the Malaysian Anti-Corruption Acaciemy conducts a training programme called Certified Integrity Officer Programme (CelO) in ordcr to create an integrity-based rvork culture in both the government and private sectors. Under this programme, the N4ACC wili give certification to those officers of an organization that have completed the training programme. They .Lre called Certit jccl Integrity Officers (CelOs). CelOs are to assist the MACC in the corruption prevention initiatives. Various organizations such as Petronas, Telekom Malaysia, Feida Global Ventures Holdings Berhad, Pilgrimage Board, Tenaga |.Iasional Berhad, Johor Corporation, Amanah Raya Berhad, Royal Malaysian Police and Road T'ratisport Department have participated in this programme. Now, we shall briefly look at the role of the Companies Commission of Malaysia (CCM) in promoting anti-corruption measures amongst officers of the private sectors, in particular, company directors that have fiduciary duties towards the comp an1.. We shail direct our attention to the issue of conflict of interest only. t

I

The Companies Commission of Malaysia (CCM) The CClvl is the main regulatory body fbr companies and businesses r;i 1t is

Workplace 205

fTh. Mrtarr""

-

Anti-Corrupcion Commission Acr 2009 serves as

.-

a

,

rool ro enforce and prevent corruption and prescribes the srructure and

funcrions of rhe

'

MACC.

I

rl""r".*

f*r*."

offences under rhe MACC Act 2009-soliciting and accepting bribes, offering and giving bribes, making false

claims and abuse of posirion or office.

fTh. Mrcc

*.r*d

a 'name and shame

darabase'on its website to highlight rhe derails of offenders and those uncier trial for public viewing, ro creaie higher awareness on the seriousness of

corruption.

[1.

,he

C*p"{r"

lntegrity Pledge (ClP), companies make

a

commitment that rhey will not engage in corrupt practices and will strive to create a corruprion-

free business

rh"

C"-p-*f

Commission of Malaysia (CCM)is

rhe main regulatory

Malaysia.

the guardi;l and enforcer of various legislation governing corporate conduct

body for companies and businesses in Malaysia.

.1

ZUO

w

Busrness Lthrcs

:,

Other than

adminrsrerrng---l laws governing corp.lrate

and busi ness conduct, CCM also issued code ol'

erhics for company direcrors

and businesses such as the Companies Act 1965 and the Registration of Businesses Act 1956. Sections 131, 131A, L32 and 132(2) of the Conipanies Act I965 specifically govern conflict of interest situations involving company directors. We need to note that laws require mandatory compliance, hence, failure to comply is an offence and legal action can be taken against them. These provisions of laws are discussed in brief in Table 7.1. Other than administering laws governing corporate and business conduct, CCM also issued code of ethics for company directors, which covers corporate governance, relationships with shareholders, employees, creditors and customers as well as their social responsibilities and the environment. An excerpt of the relevant codes relatino to avoiding conflict of interest is as fbliows:

r r r r

A director should at all times exercise his powers fbr the purposes they were conferred, fbr the benefit and prosperity of the company; A director should disclose immediately all contractual interests whether directly or indirectly with the company; A director should neither divert to his own advantage any business opportunrty that the company is pursuing, nor may he use confidential information obtained by reason of his office for his own advantage or that of others; A director should at all times act u,ith utmost good fhith towards the company in any trernsaction and act honestly and responsibly in the exercise of his powers in discharging his duties.

I

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Table

7.1

Provisions of laws governing

conflict of interest situatiorrs involving company directors under the Conrpanies Ar:t

i Seciion

13.1

Secrion 13iA

Requires company direcrors that have a direct or an indirecr inreresr in a contract or a proposed contract to disciose rhe interest at a meetlng of direcrors.

Sripulares rhat direcrors thar have such inrerest as indicared in Secrion 131 are p;ohibited from pariicipating in the discussion ro consrder the conrracr as weli

from voting on rhe same. Directors who farl to comply wirh this requirement commit an offence and rhe company has rhe rrght ro cancel rhe ionrract. lf found guilty, rhey can be rmprisoned for five years or fined RMl50,000, or borh. as

1965 Section l32

Prescribes che prohibrtion against improper use of cornpany's property, positron, corporate opportuniry or compeLing wirh the company. This provision strengthens the duties and responsibiliries of directors in which ir requires rhem io exercise their power for a proper purpose, in goo,J fairh and rn ihe besr interesrs of the (

om

pa ny.

Secrion 132(2)

Next, we shall cover privacy.

Common Issues at the WorkPIace

',t:J.4

PRIVACY

privacy has often been regarded as a controversial issue. Some people may even vierv that it is of less relevance in today's contemporary global society, highly driven by information and communication technology (ICT) which Promote freeclom of speech, expression and information sharing" Virtual communication at r.:al time within a click of a finger is the norm of today's global society. The availability of social networks such as Facebook and Twitter, as well as mobile chat applications on smartphones such as Whatsapp and Telegram, practically allows an individual to share limitless information with others, whether in private or in public. On our computers and smartphones, we sometimes receive information which challenges or. o*n privacy, not to mention the unsolicited junk mails received in our letter boxes at home and email inbox. We sometimes wonder where the senders get or-rr addresses from, since we do not recall providing such personal information to them. One may even pose a logical que ..tion-what right do these people have to oLitrightly invade a person's prir.acy?

The tremendous advancement in computer information and cotnmunicatiotl technoiog], seriousl,v ca1ls for protection of privacy, a human right, as peopl<,' are becoming somervhat open and transparent in addressing issues, be it persoiral, organizational, business or non-business. People are now taking privacl' matters ioi granted. Imagine our personai data travelling freely from one person to antlther and from one organization to another without our prior consent Such scenarios are certainly an invasion of one's privacy rvhich ought to be protected as a right. Tiiis topic ain"is to educate the younger generation on the value of privact'and reernphasize its importance in the study of business ethics. It will firstly examitrc the various spectrunts in the definitions of privacy, the difference between privacv and surr.eiilance, followed by the justifications on the importance of protecting Pr.l\rac)' from moral and ethical dimensions. This topic will also cover the legislation st ipulated in Malaysia to protect individual privacy in the global ICT era. Before we dwell further on privacy as a workplace issue, let us deline and coneeptualize it from a personal/individual perspective.

7.4.1

Defining and Conceptualizing Privacy

The concept of privac,v is a n,idely accepted legal and moral notion but has uncertain leeal and philosophical foundations (Moor, 1990). In general, privacy relatcs to the confrdentiality of information of private individuals. Difficulties, hou'ever, oflcn ari.e in elefining privacy because it may differ between individuals due to manl' clill-erent claims on the right to privacy in different situations. A prir,.rcy, issue to onc pcls()ll may not be a privacy issue to another. For example, a photo of a lady taken by N{r. A and posted on his Facebook page and shared with his friends without her prior consent may not be seen as a privacy issue to some but to others, it is, if the 1ad1' vicws that her privacy is violated because she did not expect Mr. A to share her photo rvith others. Therefore, in analysing this scenario, what is a right of privacy not'ld then depend on the context of rvhich an individual's right would have been vioiatetl. Below a.e three classic definitions of privacy:

r r

The right to be ieft alone. The claim of individuals to determine for themselves when, how a nd to '"r'hat extent information about them is communicated to others.

ll}r*y

r'.h"t.

I-

confidentiality of informatron on private individuals. Difficulties arise ro def ine privacy as a

concept because ir may differ between individuals due

io many differenr claims on the r:ight to

privacy in different situations.

ZU/

208

Business Ethics

r

The condition of not having undocumented persotral knowledge about ons possessed by others.

Samuel Warren and Louis Brandeis in 1890 defined privacy as the right to be left alone (Warren and Brandeis, 1984)-free from intrusion; the most comprehensive of rights and the right most valued by civilized men (Mehafdi, 2000). Their definition was concerned mainiy with the pubiication of idle gossip in sensation-seeking newspapers

Srr*l \^,r*" -l and Lr:uis Brandeis defined privacy as r-he right io be lefi alone

Alrrt'-\rt/.r*---l defined privacy as the clarm oi indiviciual: ro detern.rne I'crr rhemselves when, horv and ro whar exrent rnformation about them rs cor-n

r-n rr

rricateci icr

orhers.

p*.* -----l explained privacy

-r.ry-q

as the condirion

of not having undocumented personal knowledge

about one possessed by orhers Oniy rhose facrs rhai an individr"ral does not wanr io be widely known to others are private informarion.

(Boatright, 2007)" ln their famous lB90 Harvard Law Review articie, Warren and Brandeis provided a sensible analysis and evolutionary justification for the right to privacy. Ihey argued that privacywas an emerging right that needed to be recognized due to political, social and economic changes. They also claimed that common iaw is not static but undergoes continuing growth as culture deveiops (Moor, 1990). Therefbre, privacy laws should protect the 'privacy of private life' from unwanted publicity. While televisions ano computers, as publicity media, were not yet available during Warren and Brandeis's time, today, reality television programmes such as Melodi on TV3, which update the audi. ^rce on the latest gossip of show business celebrities, mav fall under this category ifthe coverage invades the celebrities'personal lives. Whilc Warren and Brandeis covered a broad scope of the definition of privacy as non-intrusion of private 1ife, Alan F. Westin (1967) ciefined privacy as the claim of individuals to determine for themselves when, hou, and to u,hat extent information about them is cornmunicated to others. Therefore, inclividuals themselves will have to assess the kind of information that they nould like others to know about them since information may be classified a: public and pnvate" If tbr example, Miss Arny sends her photo to a group of friends through lracebook, then it is assumed that it is no more a prir.ate piece of information unless she specifically informs her frrends not to share the photo rvith people she is not acquainted with. This definition thus throws back tire comnritment of protecting person:rl prir,ac,v to the individuals themseives based .rn the type and extent of personal intormation they u,ish to share with others. Another definition by WA. Parent (1983), building on Ailan F. Wlstin's information-reiated definition explained privacy. as the condition of not having undocumented personal knolvledge about one possessed by others. However, this does not mean ali information about oneseif but onl,v those facts that an individual does not want to be widely known to others. It rs necessary that the definition be restricted to'undocumented'personal informatioli because some facts that individuals commonly seek to conceai are a matter of public knorvledge and can be known lvithout intruding into their private lives. As an exampl., rvhen a job application is made, we share a lot of personal information that are docur-nentcd to potential employers such as qualification, marital status, age, last dralvn salar,v, etc. Once this information is revealed to the potentialemployers, we trust that it r,r,ili i'rot be shared or used by other peopie or third parties. This demographic data u,i1l bc used in the shortlisting process, We reveai such information to these prospective employers since we are keen to join the organizations. Although this information may be regarded as public facts, any leakage to other parties without our consent is also regarded as violation of privacl since we would like to restrict the sharing of this information with our employer to' be only" After all, we are revealing personal information 1'or a clear purpose-to seek employment with that particular employer.

Assessing invasion of privacy We have so far discussed the three definitions of privacy above. Privacy, as a right

'' Cornrnon lssues at the Workplace

:

to be left alone, though comprehensive, is too broad a definition, leading some to conclude that a better understanding of privacy as a concept will be to assess or focus on the control of personal information (Desjardins, 2009). From this dimension, the most obvious case of violation to privacy is when other people know our personal information provided by others without our consent, perhaps, through forrvarded enrail, social media postings by others or through other communication channeis" However, it seems unclear if we are to claim that our right to privacy is invaded. Certainly, there are numerous occasions, especially in a working envit,lnment, whereby our personal information is shared with others, especiaiiy among the HRM as part oftheir job function. personnel Philosopher, George Brenkett argued that the informatiortal sense of privacy involves a relationship between tr,r,o parties, A and B, and personal information X about A (Desjardins,2009). Privacy is violated if B comes to know As information (i.e. X) and no relationship exist between A and B that rvould justify B knorving As personal information. Therefore, to assess whether one's privacy has been violated depends on his/her relationship with the person or persons who come to know a particular piece of personal infortrration, in this case, X. Let us create a scenario. Mr. A has borrolved money from Miss C to settle arl urgent housing loan rvith a commercial bank. Only Mr. A and Miss C knorv this and Mr A has told Miss C to keep it as private and confidential. Mr. A n-reets the bank officer in charge, through a business relationship to settle the loan. But if l\4r. As borrowing from Miss C is made knon,n to a third party rvho docs not have any relationship with Mr. A (including the loan officer himseif since his job is oni,v tcr ensure that Mr. A settles the loan sum. He need not knorv the source of the settled amount.), this is considered as violation of Mr" As personal privacy" Surely, lVIr. A does not u,ant this private infbrmation to be openly knowtr to just anybody, not to mention the ioan officer himself. Limiting access of personal inforinatiott on1,v to those with whom one has a personal relationship is an in-iportant lvay to preserve his/her personai integrity and individuality. Thi.s will prove important r'vhen te vierv privacy from the employment context and consicler the employer-employee reiationships at the workplace. We may wonder why the privacv issue is highlighted nowadays. Ileloiv are three major reasons to explain its emphasis in this age.

r r r

Advancements in ICT Vast arnount of information collected for organizational decision-making

Signification grou,th in database marketing facilitated by advancen-ients in TCT

7.4.2

Why has Privacy become an lssue in the Global Era?

As mentioned in the introductory part, progress and advancements in ICT have challenged individual/personal privacy although IC'f has facilitatcd overall communication, a significant achievement of the new miilennium. Toda1,, it is very easyto share personal information, viervs, comments, crrticisms or even gossip through social media. Although freedom of speech and expression have become the norm, one may violate individuai privacy from a moral perspective, if he or she does not respect privacy as a human right. For example, gossip or taking pictures of sometrite from a smartphone without his/her permission and sharing with others through sc:ial media -retu.orks such as Facebook and Twitter for various reasons. Prtvacy is a negative

right-the right to be free from

outside interference. Humans, as a matter of dignitl',

m;*;"f

pil.y---

occurs when other people know 5Omeone's personal

information provided by others

without his

or her consent.

1no

210

Business Ethics

il.y h"' fi;tl an issue in rhe global era due ro (.1)

progress and

advancemenrs in lCT, (2) the vasr amount of personal information collecred

for organizarional decision-making rn rhe public as well as pnvate secicrs, and (3) significanr

growrh in darabase marketing facrlirared by ICI

reserve certain private information to be shared with only those who have established relationships with them. However, individual privacy may be threatened if the private infbrmation is shared by others or manipulated to the advantage of other parties. The creation of smartphones, though seen as an innovative initiative, has aggravated this problem since information sharing in real time is now possible, challenging individual privacy if not used appropriately"

i

Privacy has become a major issue in government and business institutions in recent years for numerous reasons. One main reason is the vast amount of personal information collected by the government, banks and Internet businesses in the course of making organizational decisions. For exampie, the lncome Tax Department has practically all the personal data of employees of registered organizations or employers to enable it to trace tax payments and collections. Simiiarly, banks through online inter-banking services are bound to have substantial customers' personal information to facilitate daily formai business transactions" l,eakage of private personal information collected by these institutions is certainly a violation of individual privacy. Let us examine the following newspaper article for a better understanding of the

I

above reason.

l i

I I

'Blacklist' Civil Servant Sues Firm for RM2m t t

KUALA LUMPUR. A 45-year-oid crvil servant from Rompin lrled a RM2 milliorr negligence surr againsi CTOS Sdn. Bhd. yesLcrday for biackiisring him luhari Alr, a Heairh Deparrmenr employee, claimed his srarus had affected hrs applicatron for a car ioan last rnonrh. lle named CIOS, baseC jn Megan Avenue, Jalan Tun Razak, as the defendanr The suit wa; filed by a firi-n of M.K Crhmarr and Co at rhe High Court C.rvrl Regrstry here.Juharr claimed he had also rried ro make sirnilarapplicarions with orher instirutions bur failed. He said Bank Perranian Malaysia informed hrnr on 12 June rhat his application has been rejected because of a RM3,050 debr. As a resulr of rhe CTOS informarion, banks and financial insrirutions had declined ro give him loans as he allegedly had a bad record, he added.Juhari claimed he had not owed anyrhing ro anyone or any financial instirurron as srared jn rhe record. He claimed rhat CTOS had provided informarion ro banks and financial insrirutions wirhour hisknowledge,approval andconsenr,wirhrheinforrnationgainedrryirhourhisapproval Ileclaimed ^-i-, CICS had no tighr to keep such information in irs darabase as he had no knowleclge of ir and could not'verify the rruth of such information. Juharr said it was an invasion of privacy which wenr agarnst rhe law" He is seeking declararions rhar he dc,es nor have an\, debr anC thar rhe CTCS acrron rn blacklisting him was wrong. He is also seeking an injunction to prevent CTCS from producing or publishrng hrs name as person who had'unpaid debrs He is seeking RMl,030 in specral damages as a resulr of rhe search he had ro make'foi being blackllsred; and RM2 million in exemplary and general damages.luhari was ,:,pu4zted as'ctl howCTOS gained rhe informarion on him as he h.d not raken a loan or owed anyone. 'l'l believe llm'noi th€ only one in such a predicament as rhere may be orhers involved," he said. ::1sourr",

New Srraix Times, Saturda/.

7 July

I

I

I

II

r

I f

I

200t)

r

I a

I I

Common lssues at the

Workplace

En. ]uhari claimed that CTOS had invaded his privacy. Is this a fair accusation from an ethical point of view? From the above case, |uhari took legal action to resolve his conflict with CTOS. Based on your reasoning, could this conflict be resolved without having to go to court in an attempt [o ensure justrce? We have examined two reasons why privacy has become an issue in the global era nowadays. The third reason is the significant growth in database marketing facilitated by computer technology and advar-rced information systems. Companies specializing in data coliection are able to provide direct marketers with customized mailing lists that target groups with the desired characteristics. This development has posed a challenge toindividual /personal privacy and at times could impose threats although from a business dimension, this is seen as an innovative business strategy to increase sales in the quest for profit maximization. Next, we shall differentiate between privacy and surveillance.

7.4.3 Differentiating Between Privacy and Surveillance Surveillance may be defined as a systcmatic investigation or monitoring of the actions of one or more persons. It is no doubt intertwined u,ith privacy although both are clearly defined and contrasting concepts. While privacy is aimed at protecting the right of indir.iduals from being intruded, the main objective of survelllancc is to pierce the prir.acv shield, sometimes justified by the vierv that 'if you have done nothing \\'rong, y,ilu should have nothing to hide'. In simple terms, surveillance is spying on others' activities. 'l'he primary- aim behind a surveillance activity is to collect information about the individual's concerns, tireir activities or their associates for specified reasons. Data surveillance is defined as a systematic use of personal data systems to investigate and monitor t}'re actions or communications of one or more persons. It ma\- occur an1r11,]-ta.a for numerous reasons. For example, consumers are being monitored through hidden close circuit televrsion (CCTV) carneras rvhile shopping at complexes nor'vadayrs as part of a surveillance process to reduce theft cases. Similar11,, at the w-orkplace, so.rne organizations monitor employees' u,ork perfornlances through CCTVs and assign personnel on confidential basis to check on empioyees' e-rnail interactions/excl-ranges for organizational efficiency and effectiveness. Some ma),e\ren do video surveillance through iridden video cameras. One may ask to rvha{ extent employers or businesses have the right to undertake consumer and ei-nployee surr.eillance?

\\'e have so far defined privacy, explained reasons wl-ry it has beconre :ln issue itou-adays and differentiated surveillance u,ith privacy as concepts. We shall next link the privacy concept and its rele.,.ance in business ethics from three perspertivc\:

r r

Eirrployee privacy such as use of personal information for recruitment and

r

selection, performance appraisai, promotion and eligibility of employee benefits. Consuiner privacy relating to primary and secondary use of information.

Individuallpersonalprivacy.

fs**lilr*"

-

may be defined as a systematic

investigation or moniroring of the actrons of one or more persons. lts main objective is to pierce rhe privacy shield

211

lll

[Jusrness tthrcs

7"4"4 lndividualPrivacy *c,*-T righr ie rhe ,ghr of human beings ro be free frc,n ourside inrei-ference p,^q, b,

We learnt in Chapter 3 under the Theory of Rights that privacy is a negative right i.e. the right of human beings to be free from outside interference" 'Ihis has been recognized through the Universal Declaration of Human Rights and adopted by Malaysia as a member of the United Nations. However, are existing laws sufficient to protect individual right to privacy from all dimensions? Must we have new laws to cover intrusion to privacy considering lire vast developments in computer technology? Some moral philosophers ha.,,e viewed that there is no need for us to dwell on this issue further as existing legislation is sufficient to address violation of privacy even in the ICT age. 1'his may be rational if the society recognizes and respects privacy as a human right. But the issue is-does society still recognize it as a right to be respected? In Malaysia, prior to May 2010, there were only minor clauses that were concerned with privacy in the Penal Code and Minor Offences Act. There was no comprehensive act that dealt specifically with privacy issues. You may recall the two controversial intru.>icrn of privacy cases covered in the media in 2008 and 2009 respectively, i.e. on Elizabeth Wong's nude photographs shared through the Internet and mobile phone by her own ex-bol,friend and a video of Datuk Chua Soi Lek engaging in sexual acts with an unklorvn woman, and the iimitations of cxisting lan s in defending their cases as a matter of dignity and integrity. However, r,vith the technological adr.ancenrents in N4alaysiar-r society, the Personal Data Protection Act 2010 (PDPA), a pr ivauy spee rlie legislation rvas finall-v passed by the Malaysian Parliament in earll,lvfai'2010. It officially took effbct on I January 2013. The key objective of the PDPA is to regulate the processing r:f personal data by data users in the context of personal transactions, rr.ith the intention of saleguarding the data subject's/owner's interest (Murni and Ratnar,r'ati, 2011). Quoting from the words of t1-re Deputy Nlinister of Information, Conirnunications and Culture, Datuk Joseph Salang: 'The act ;,r,'ill play a crucicrlrola in sofr:gttardin! the intere:ts ol indit,iduals, ctn,l makes it illegal for corporatc entities or indit,i,luttls to sell per"sonal inforrratici:: or alloyv the use of data by third Ttartie s,

(Bernctmt, 20lz). We shall re-examine this nerv larv in greater detail tor,vards the end of this subchapter wlien rve cover privacy laws in Maiavsia.

7.4.5

Individual/Personal Privacy at the Workplace

in Chapter 3, r,r,e noted that individual

prir,acy is a negative nght from human rights priirciples-to be free from outside intert"erencc. Applying this at the workplace. 1et us pose the foliowing questions in reality:

r r

As human beings, to lvhat extent do we have the right to personal privacy?

Tci what extent should employers intrude

in the personal lives of their

employees?

r

To rvhat extent is personal privacy applicablc at the workplace?

Common lssues at the Workplac

Employers today would scarcely dare to intrude so openly in the private lives of employees because of the presence of privacy laws but they possess less obvious rneans of acquiring the information of employees (Boatright, 2007). Employees, on the other hand, being a resource or input in the production process and an intellectual property of the employer are obligated to comply with employers' procedures, policies and guidelineu. Today's employment scenario commonly features the availability of tools to take drug tests, assessment instruments to assess the level of employees'honesty aird other

personality traits, extensive computer networks for storing and retrieving personal empioyee information and sophisticated telecommunication systems with concealed cameras and microphones for supervising employee's activities. Some employers irave also conducted genetic testing to screen employees for genes that can make them more vulnerable to chemicals at the workplace. Aren't such initiatives violating individual privacy in a moral sense while they are common busiuess management practices nowadays? Aren't they intruding on the right of empioyees to be left alone and freedom from outside interference? Do employees have a choice not to put up with 'interfering' employers during ttreir employment? Let us read and reflect on this interesting surveillance case and appreciate the negative outcomes that may happen in one's life if privacy is intruded upon.

Email and lnternet Usage at Work - Big Brother is Watching Youl The case of Rrchard Chang may be 1n extreme example of what can happen when employees are exposed to surveillance in the office, but it is nevertheless represenraLive of a nurnber of problenrs that have begun to enter rhe modern workplace. As reporred in rhe Cuarulian newspaper in 2005, senior managers in the UK burlding society Abbey had been receiving anonyrnous malicious documenrs, causing them to draw up a list of 600 suspect.s in the company. Arrong orhers, rhey put Rrchard undersurveillance, secretly checking his emaiis, computer, and ei,ci'r frngerprints on hrs water bottles. When called to rvhat he r,hoLrghr was a routine meeting v'iith hrs supei-iors, it turned int.o a gruelling two-hour investigative rnterview in which he cliscovered Lhe full exteni of the firm's surveillance of his life. He returned to his desk, wrote a suicide note, climbeC onto a balcony on rhe fifth floor oi rris building and jumped ro his death. Employers have access to their employees' emails and companies are increasingly cracking down on employees who misuse the internet, writelokes or smurty cornments aLrout coileagues or sirnply abuse company time whrle surfing rhe web. ln 2003 a UK survey iound out rhat 3l per cent of employers,had deak with between two and five disciplrnary cases relared ro email abuse in the past year. Oqe case even reported punishing as many as ten workers for lnrernet and email abuse On ihe !!S,fe,.aregood reasons to suggest rhar emplovers are well withirr their rights. .-;-.,,.i. -..:

;t*!l]r-:

-..

. "- l:.-,

i'

and Matren,2007)

e

213

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l4

Busrness tthrcs

7"4.6

Tl*

***hr.-,.

consumer privacy comes from the explosive giowth of darabase marketing. The countless birs

of information generated in each

transaction are now used to generate lists for direct mail and telemarketing solicitarions.

t

Consumer Privacy

Consumers, in the study of marketing ethics, are viewed as 'kings' and businesses are supposed to acknowledge the importance of consumer sovereignty, i.e. the right to buy or not to buy a product or service. Yet, they are targets for information gathering to boost sales. Businesses view this as part of developing their marketing strategies to stay competitive in the global market. In addition, the installation of CCT'Vs anu video cameras at retail outlets are regarded as common features in the technoiogical ICT era. These used to be part of the surveillance techniques that are used to monitor employees, but today, even consumers are victims, much as businesses may justify its use to reduce potential theft. Certainly, these actions challenge consumer privacy. The main threat to consumer privacy comes from the expiosive growth of database marketing. The countless bits of information generated in each transaction are now used to generate lists for direct mail and teiemarketing solicitations" The barcode scanner technology and the Internet have made it possible for companies to track the purchirsrng behaviour of consumers and this has raised privacy concerns, more so by those who value their rights to privacy. Why should consumers'purchasing habits be monitored? Yet, business people validly justify and claim it is a business marketing strategy to stay competitive in a challenging g1obal environmentl If such is the case, how do rve then baiance the privacy needs of individuals r,vith business needs? Perhaps, busiiesses must firstly acknolviedge and accept the imporrance of upholding privacy as a human right in order to lind the right balance between these two rather contrasting needs. But wh,v do n,e need to value privacy so highly and hold that it ought to be protected as zr right rn the first place? The follor'ving rvill jLrstify it from LItilitarian,

Kantian a nd Islanr ic perspcrtir

7.4.7

.I ,l

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The Ethics of Protecting Privacy

Utilitarian perspectives Utilitarians weigh tl-re good and bad consequences of incomplete or: inaccurate information. Let us analyse employee personal data gathering by employers from a rvorkplace context. It may cause rrore harrn than good if rnformation is incomplete or inaccurate, thereby violating privacy as a right. If the information is inaccurate, it can jeopardize an employee's career. For example, inaccurate information on an empiol,ss's pertbrmance appraisal ar-rd/or health status may deprive him/her of promotion opportunities. It can also affect a person's morale and integrity. Therefore, if empioyers are to gather personal information on ernployees for decision making at the workplace, they have to cnsure that the information is accurate and up to date. They also have to perform data auditing as a rnatter oi accountability and responsibrlity in processing personal data disclosed to thern by respective empioyees. Next, we shall examine the good and bad consequences of surveillance activities, piercing the right to individual privacy. Observing workers lvith hidden cameras or eavesdropping on business conducted over the phone are generally considered as unethical, much as it is surveillance activity by empioyers to sustain work efficiency Although employers may justify that they want to catch dishonest employees, such spying practices may also lead to loiv employee morale and motivation due to lack of trust of employees'commitment to tvork.

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Common lssues at the

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Whatever harm done to employees by invading their privacy has to be balanced in utilitarian calculation against the undesirable benefits that these practices produce for both employees and employers. Employers must not only consider their business interests but also employees' well-being, in this case, a right to privacy. Perhaps, employers must be honest and transparent with employees when explaining their policies and guidelines on privacy issues for better appreciation by employees, although employers may perceive that it is their right to develop policies and guidelines to be followed by employees. Next, let us justify the need to protect privacy from Kantian arguments.

Kantian perspectives As Immanuel Kant's theory promotes goodwill and actions performed as a duty to feliou, humans, the theory therefore links privacy to having respect to persons. In other words, the defence of a right to privacy involve autonomy and respect for individuals. Hence, by invading a person's privacy, it violates the principle of respect for persons and prevents him/l,,r froil making a rational choice as an autonomous being.

Privacy and identity as earlier defined by Aian F" Westin (1967) is of value because of the role it plays in developing and maintaining a healthy sense of personal identity. Privacy is also of importance in promoting a high degree of individuality and freeCom of action among members of society. Although there are critics of these argumcnts bascd on thc littic cvidcnce to prove such normative statements, this vielv is justified from a moral perspective since humans by nature do.,rlue individualism, independence and freedom of action. In fact, Stanley I. Benn (1988) er.en notes that utilitarian arguments for a right of privacy are not able to shou. what is moral11, wrong rvhen a person is secretly obserr.,ed rvithout any actualharm being done" But respect for persons wiiisustain an objectron even to secret u,atching, which ma1, do no acrual harm at all. This argument seerns to support that sun eillance activities with an intention of spying may not be calleci fbr at ail out ofrespect for persons. Another vier.t, by Charles Fried (1984) explains that privacy is of value because it provides a 'rationai context' for some of our most significant ends, such as love, friendship, trust and respect. Invasions of privacy destroy one's own rntegritv as a person. In f-act, privacy in itself is essential for respect, love and trust among humarrs. Tht'se are intimate relations and intimacy is created by the iimited sharing of personal information about ourselves that is not knor,r,n to other people"

Privacy and its role in the human socialization process Several philosophers have suggested tirat the key to a more satisfactory theory of privacy can be constructed by understanding the way individuals are socialized in a culture (Boatright, 20A7). For exampie, according to Jeffrey H. Reiman (1997), prl\racy is an essential part of the complex social practice by means of which the social qroup recognizes and communicates to the individual-that his existence is his own-and this is a pre-condition of personhood. There are certain beiiefs about what ought to be private in the process of human growth and maturity. The ability to mairrrain the confidentiaiity of personal value of information is the halimark of an autonoirous individuai pr:ivacy. A person has to recognize what is private. Helshe is responsible for the good and bad consequences.

Workplace 215

216

Business Ethics

Protection of privacy therefore safeguards social norms, the 'rules of civility', tirat in significant measure constitute both individual and community. While we have intellectually rationalized the need to protect privacy from contemporary ethical dimensions,let us finally examine it from a religious context.

Privacy from the Islamic viewpoint Isiam, as a way of life, places great importance cn the fundamental human right to privacy. T'his is evident from relevant verses of the Holy Quran. To quote: 'Oh ye who believe! Avoid suspicion as much,.for suspicion in some csses is a sin: And spy not on each other, nor speak ill of eaclt otl.ter. Would any of you like to eat the JTesh of his dead brother? Nay, ye u,ould abhor it. But Jear Allah: For Allah is Oft-Returning, Most MercifuL.' (Al Hujurat, 49:12)

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Next: 'Oh ye who believe! Enter not houses other than your own, until ye, have asked permLssion and saluted those in them: that is best.for you, in order that ye may heed (what is seemingly).'

(An

I'lur, 24:27).

From Islamic principles, it is absoluteiy rvrong to spy on the secrets of others, including those hidden or stored inside computers, despite one's suspicion. Certainly, this also refers to surveillance activitres of all forms if the intention is to spy on others. It is also proliibited for any person to come physically into one's property without pernlission (or logically into one's corrputer resources and spy on data) for curiosity or to look at their contents without prior pennission of the owner and he should be aware of the limit of the given permission (Mansoor A1-A' alr, n.d.; Tamrin Amboala et ul", n.d

i

).

The Prophet has gone to the extent of instmcting his followers that a man should not enter even his own house suddenly or surreplittously. Hc has also reiterateci that good Muslims are those who leave other people's business alone. To qr-rote a hadith from Inram Malik Ibn Anas, 'It is betterfor a Muslim to mind his own business'(Malik

ibn Anas, l9B9). 'fo summarize, much as prir.acy is a human right ar-rd jr-rstified through conventional ethical theories aird rational judgements, it is also religiously promoted from Islarlic contexts. Hence, it is dor"rbly iustiilel that privacl. nlust be protecterl as a human value in respect for individual dignity and autonomy as a human being. Let us norv exantine the Malaysian lau,s to protect prir,acl as a right.

7.4.8

Privacy Laws in Malaysia

The Maiaysian Constitution does not explicitly ciiscuss or cover privacy. Hence, it does not specifically recognize the right to privacy, aithough it does provide for related rights such as freedom of assernbly, speech and movement. Other laws with implications to protect privacy include the Cornmunications and X,{ultimedia Act (CMA), the Anti-Corruption Act, the Companies Act, the Computer Crrimes Aet (CCA), modelled after the United Kingdom's Ccarputer Misuse Act of 1990, the Penal Ccide and Minor Offences Act.

Common lssues at the Workplac

With the rigorous ICT developments, Malaysia has movecl forward to gazette privacy laws for protecting individual frivacy in the cyber age. Section 234 of the Communication and Multimedia Act 1998 prohibits unlawful interception of

i

communications, commonly referred as cracking or hacking. The Computer Crirne Act 1997, enforced in 1999, prevents any unauthorized access to computers, programmes, data and other IT information. The unauthorized access to computers is further classified as (i) unauthorized access with intent to commit or facilitate further offence (ii) unauthorized modification of thc contents of any computer and (iii) wrongful communication of the means of access (Tamrin Amboala et al., n.d.). In addition, the Personal Data Protection Act (PDPA), supposed to be enacted 2002,was finally passed by Parliament in 2010 and enforced on 1 January March by 2013. This act is aimed at preventing abuse of the personal data of citizens for commercial purposes. Its enforcement has been delayed due to the numerous requests for exemptions by business institutions (Munira Sulaiman, 2012). Under this Act, it is illegal for corporate entities or individuals to sell personal information or aliow the use of data by third parties. The enactment of the Act gives the public more control over their personal data. Whenever consent is required for data processing, it will have to be given ciearly ratirer than implied or assumed. On the other hand, organizations need to do continuous data privacv auditing to ensure compliance rvith the law as they norv have to shoulder increascd responsibility and accouirtability in processing personal data disclosed to tl-rem. PDPA is similar to legislation to protect personal data enacted in other countries such as Hong Kong, New Zealand, Canada and the European Union. Under this ;\ct, offenders, if convicted, will be iiable to be jailed for up to two years or l'rned RM300,000 or both. The public is urged to be carefui about information they share online, especially in social media applications (Bernama, 12 L)ecernber 2012). To conclude our sectioll oil privacy, rve note that nelv cyber larvs ]rave beeir introduced to protect individual privacy in the ICT era. It is du1,v enlorced for retributrve justice, should people coir-imit offences resulting in harm and injustice. Ilowever, laws alone will not be able to ful1y protect individual privac,v. Indir,iduais themselves will have to play their role to protect their own privacy as a right. 'l'his rvill be made possible if one personally determines what coirstitutes I'ris or her privacy and upholds it as a principle or value in life. Both Utilitarian and Kantian arguments point to a key insight - irrivacy is important to uphold individual dignity and u,ell-being. Islamic principles have also acknou.ledged the importance of protecting privacy as an indivirlual right. In additioir, privacy is a unir.ersally accepted human right that needs to bc respected, be it in private life or in the conduct of br.rsiness. Violation of a right to privacl. may lead to injustice, an unethical act lvhich needs to be rectified under ali circunrstances to uphold human dignity and integrity. Finding the right balance betrveeu business, employees'and consumers'needs and expectations is a great chailenge for business iirms as they utilize new technologies in this global era. Privacy certainlr. requires .l'he a coordinated solution of many involving parties. responsibilit,v of 14alaysian, based businesses rvill be to develop and implement transparent privacy policies to be effectively communicated to employees and other stakeholders, apart from complying with availabie privacy iaws for justice. Next, we will cover discrimination u,ithin the employment context follorved by ;:ffirmative action.

I Secrion

234 of eommunicario6

e

-'

and Mukimedia

Acr 1998 prohibits unlawful interception of communicarions,

- commonly referred ro as 'cracking' or

tilp;;.;;; -Act 1997, enforced in 1999 in Malaysia, preventS any

unaurhorized access

to computers, programmes, data and other lT information, i.e. hacking or

cracking someone's ir.rformarion.

fP**.rl nr-Prorecrion Acr (PDPA), passed by the

Malaysian Parliament in 2010 and enforced

on

1 January 2013 is

aimed at preventing abr-rse

of personal

data of citizens for

commercial purposes.

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218

Business Ethics

7.$,,., DISCRIMINATION AND AFFIRMATIVE ACTION Zk bil.rr*r,

L*

I

Ied ro diversiry of

the workforce, an

outcome of human resource mobilization across narions. greatly

facilitated by trade liberalizarion policres and formarion of

irade blocks among member naiions.

W"rkf";d*.r",y

_l

relates ro differences

in demographic faciors such as age, gender, race,

erhniciry, sexual tario n, socio -economic o rien

background, talents and capabiliLies

Globalization features diversity of the workforce, an outcome of human resource mobiiization across nations, greatly facilitated by trade liberalization policies anri formation of trade blocks u*orrg member nations. Human resource mo-bilization is apparently seen in all regions to capitalize on the available job opportunities across nations, supporting the increasing production process of goods and services, economic growth and overall enhancement of consumer welfare (Khalidah et a1.,2012)" Workforce diversity relates to differences in demographic factors such as age, gendeg race, ethnicity, sexual orientation, socio-economic background, talents anii capabilities. While diversity is seen to be a positive feature in today's global age, it also brings to surface a moral issue to be deliberated in business ethics-the act of discr:mination at the workplace within a cross-cultural environment. The 21" century seems to show a commitment to equal treatment for individual rights, providing each person with equal opportunity at work and in life in general. With these sentiments, inequality of treatment will be more often seen as an unjust act, what more with discriminative acts. This sub-chapter wili initially introduce readers to discrimination as an ethical concept and how to apply it with in the employnrent r ontext Tf will rationalize that not all cases of unequal treatment are discriminative. Further deiiberations u,illbe made to explain why discrimination in emplovment is a wrongful act based on conventional ethicai theories and principles. Follorving the understanding on discrimination, it will irrtroduce readers to the concept of affirmative action and justify that it is not reverse discrirnination although it is a form of unequal treatment. The arrn is to strengthen the readers' understanding of drscrimination and affirmative action as two interiinked concepts, while studying business ethics as a subject. Finally, ethical principles n ili be applied to justify affirmatir.e action lor social iustice.

7.5.1 D*",',n,,,;;;l wrongful acr whereby a person is deprived

of or marginalized from enjoying sbme benefirs

or opporruniries because he or she is a member of a group towards which rhere is subsiar.rtial prejudice.

Defining Discrimination and its Scope

Discrimination is a wrongful act whereby a person is deprived of or marginaliz.ed from enjoying some benefits or opportunities bccause he or she is a nrember of a group toward which there is substantial prejudice. For example, Mr. A is auadernrcally qualified, talented ar-rd has perfornred very weil during a job rntervierr". Hou,ever, because he does not belong to the salre race as the manager he is supposed to report to, he is not offered the job. The job was offered to a candidate of the same race with a lolver quaiification" This is an acl of discrimination because there is no good reason

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to treat Mr. A unequaliy coinpared io other

candidates due to racial differences. The manager who interviewecl Mr. A seems to have prejudice torvards him since he belongs to a different race. Ethnicity is rarely a job requirement in most positions at the workplace. on this account, it seems to suggest that Mr. A is a victim of a discriminative act in the course of seeking employnent. Discrimination can happen in various aspects of life, be it social, economic or political. It rnay happen in employment, housing, education and many other areas of pubiic life. However, in our study of busiitess ethics, rve shall emphasize on

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Ccmmon lssues at the

Workplace 219

discrimination in employment at the workplace-hiring decisions and compensation rnatters such as pro*otion, salary and fringe benefits. Generally, discrimination may take different forms as follows:

Forms of discrimination

r r r r r

Gender/sex

Religion

Natiorralorigin Age

Handicapped

At the workplace, gender discrimination may occur. For exampie, women are not given prcmotion opportunities as much as the male employees due to stereotyping. The organization assumes that female employees are not as capable as their male counterparts. Such unjust acts are certainly not called for based on comparable lvorth arguntents, what more th. richts arguments. If there is a female staff capable of holding a challenging position, she should be given the opportunity to prove herself. By ignoring her capability and treating her with inferiority, a discriminative act has been performed that is both wrongful and unjust. Similarly, discrimination may exist because of differences ln religion, national origin, aqe factors or e\ren health status. For example, a qualified blind person is percetr.ed to be unable to do a job as cfficicntly as another candidate who is physically norn-ial. He ma,v be exclLrded in the shortlisting pro,-ress itsell'aithough the job may be performed by a blind person, if given the opportunity. Er,en if he is calied to attend the interview, the job intervie\^/ers are unwilling to recorrmend hin-r although he possesses all the credentials and talents because of one mere reason-he is a handicapped personl Studies have shown that discrimination happens around racial, ethnic grollps, gender and financial status aspects (i.e" poor peopie are being discriminateci as compared to the high income groups) (Boatright, 2AA9). We note that as responsible humans, we are expected to uphold justice and fairness in all aspects of lite. At the worliplace, irr managing ethics and diversity, managers must duly exercise jr-rstice and fairness to all employees and avoid discriminative practices, be it on a personal or organizational level. Managers must establish employrnent practices that are iegal, fair and do not discriminate against any organizational rnembers (iackson e/ a/., 1992). Gendcr or racial discrimination, discrimination due to religious differences, handicapped people, etc. must be avoided under all circumstances in thc name of humanity. Certainly, these are wrongful acts of unequal tre atment rvhich challenges social justice.

7.5.2 Unequal Treatment Versus Discriminative Acts !\'e have just introduced discriminatior-i as a negative ethical concept and defined its broad scope. Let us pose a question is unequal treatment always discriminative and therefore unethical? Although, we have earlier noted that discriminatjcn is a wrongful act, we cannot generalize that ali unequal treatments are discriminative. Some unequal treatments may be classified as discriminative acts but some may not.

For example, preferential or seiective hiring

in employment i.e. giving 'preferences'

filhil;kpr..egender discriminarion may occur due ro

stereotyping.

fur-rlr.,t, ,.rt ,hr, b.d to discriminaiion such as stereoryping are certainly nor called for based on

comparable rvorth arguments, whar more the rights arguments.

220

Business Ethics

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is seen as a

form ofgender discrimination.

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to a particular job applicant based on job-related reasons or some justified grounds, much as it appears to violate the ethical commitmelrt to equal treatment. T et us create a scenario. A vacancy exists for the post of a civil engineer and the job scope has stated that the incumbent has to be physically strong to take on outdoor tasks in rain and shine to monitor the construction of a high rise building in the outskirtsofametropolitanarea.Qualifiednewmaleandfemalegraduatesarecalled in for an interview. However, the position was finally offered to a male graduate. In this situation, it is unlikely that it is classified as a discriminative act since the candidates have been duly informed of the demanding job scope and requirements, expected duties and working conditions. Perhaps, it is justified to take a maie candidate to fill such a challenging position since it requires masculinity and toughness; more so to monitor the foreign general workers/labourers of different cultural backgrounds at the worksite. There is good justification to consider a male candidate instead of a fbmale candidate, assessing the consequences of the recruitment exercise and the potential implications that may follc' ,, the process. To summ arize, preterential or selective hiring under justified circumstances may be undertaken at the workplace. Not all unequal treatment is therefore discriminative. Preferential hiring may not be a wrongful act if the justification is reasonable although it is a form of unequal treatment. We shali revisit this employment issue in our discussions on affirmative action later in this chapter. Next, let us create another scenarlo. An international commercial bank had just l'reen set up in Kuala Luntpur and it was recruiting new staff. In the media advertisement, it did not specificalll rnention the nationality of applicants, so many job-seeking foreign candidates applied for the positions. 'I'hey were called for the interview but in one of the sessions, the interr,iewers indicated that they rvere looking for loca1 candidates only without grving valid reasotrs. Aithough to sotne business peopie, it may be seen as a preferential hiring activity, such acts may be perceived tc, be discriminative or even manipulative because the foreign candidates may not have applied for ihe posts if the bank had been transparent at the initial advertising phase of the seiection process. Obviousiy, this is a case of unequal treatment, rvi-rich maybe an act of injustice because of a simple reason-the candidates had not been earlier informed that the bank was looking for local candidates to fill the vacancies" While we have created simple business scenarios and engaged in rational discussions to assess whether certain actions are discriminative or otherlvise. let us further elaborate on discriminative ancl non-discriminatir.e acts for better understanding. One may ask: How do we categorize whlrther an action is discrirninative or not as it seems rather situational and dependent on the actions and circumstances? Boatright (2009) suggested that one kind of discrrrnination occurs u,hen there is an express intent to treat members of certain grolrps diftcrently. In other words, one has to determine whetherthe intention itseif is to discriminate a person out of preiudice since he or she belongs to a particular group. Sexual harassment, for example, is seen as a form of gender discrimination (Desjardins, 2009). Bccause a female employee is labelled or stereotyped as a sex symbol or object, she is being sexuaiiy harassed by her male counterparts. The intention is clea,; to treat her differently compared with the other male colleagues because shs f s]ongs ter a different gender, a female and not a male. Professionally, they are no different since both genders have to perform similar workplace duties and responsibilities. On this account, a woman is seen to be

I

Common lssues at the Workplac

unworthy and inferior compared tcl a male employee with such unequal treatment. This is an act of sexual harassment as well as gender discrimination due to the bad intentions of the male counterparts and negative treatment of the female colleague, as a consequence of stereot1,Ping. Ceriainly, the act of sexual harassment challenges justice and rights principles, apart from a woman's dignity. In addition, if a male manager utters before he goes "I hate for un interview session at the Human Resource Management Department women employees. They are just too emotional and I am not going to consider any "I female candidatesl " Or during an interview session, a panel member comments, just do not like her face, so out she goes..." These are clearly indications of gender drscriminative acts and unequal treatment that are unjustified because of one's immoral intent and an act of prejudice towards someone or a group member. Interestingly, Desjardins (2009) highlighted in his book that:

'If a woman is harassed at the workplace because she is a woman, and if this harassment reaches the point where it interJ'eres with her ability to work, sexual httrassruent is a case of unjuti sexual discrimination.' \\re shall further discuss the forms of sexual harassment under a special sub-topic, 'Wromen at the Workplace' in this chapter later. We have just categorized discriminative as acts based on one's conscious intention to discriminate for unjustified reasons such the pere eption of one's unrvorthiness and inferiority.

Next, let us understand the ethical arguments against discrin-ritration in err"rployment by applying Utilitarian Ethics, Kantian Ethics, Tustice and Rights priirciples as well is iohn Rawls's Socral )ustice/Egalitarian Theory-, further subdividecl into Difference Principle and Principle of Fair Equaiity of Opportunity.

7.5"3

Ethical Arguments Against Discrimination in Employment

;he foll,lvrng is a summary of the ethical arguments against discriminatiotl from r.arious ethrcal theorres and principles. Elaboration rvill foliorv next.

r r r

Utiiitarian'fheory cites the ways discrimination harms rnclividuals, business firms, and society as a whole. Kantian Theory supports the notion that discrin-rination violates human dignity and respect for Persons. Principles of )ustice has highlighted the point that discrirr-iinatio;r is to treat people differently when there is no good reason for doing so.

r r

Rights principles clearly acknou,ledges that all hurnans have basic rights such as respect, privacy, freedom of religion, etc. Discrimination chalienges i;rdividual rights. |ohn Rawls' Distributive Justice/Egaiitarian Theory highlights that sociai and economic inequalities are to be arranged so that they are both'to the greatest benefit of the least advantaged' and 'attached to the offices and positions open to all under conditions of fair equality of opportllnity'. Discriminative practices are unjustified in a free market system.

llire

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harassment chalienges justice

and rights principles, apart from a woman's

dignity

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2?2

Business Ethics

Utilitarian argu ments against discri mination eff i ci e n cy j u stif i cati o n Much as it is acknowledged that preferential hiring exists at the workplace, discrimination creates an economically inefficient matching of people to jobs. To elaborate on this drgument, let us recall an earlier case discussed on the candidate who was deprived of being employed because hr belongs to another race compared with his manager. Although he has more taient and possesses better qualifications, he was not offered the position. Instead, the job was offered to another candidate who possesses lower qualification trut belongs'to the same race as the manager. Utilitarian T'heory rationally weighs the good and bad consequences of such actions. If this continues to be an organizational culture, such discriminative acts I'ill lead to I

n

organizational inefficiencybecanse of mismatch of people to positions.Imagine if thrs is a critical position. Certainly, the less qualified car-rdidate will not be able to perform as efficiently as the more quaiified candidate, leading to organizational inefficiency in t1,- long run. Exte rn ality ju stifi cati

_1 Erplo1-tt

Employers who discrirninate on the basis of genderlsex, racc' or heaith conditions can impose negative externalities and costs on society. Society has to bear the burden of addressing social problem6 created from discrimination. Assume that organizations in the employment process discriminate handicapped peopie although they are qualified to fill the positions. Eventually, because they cannot sustain their orvn lives, society has to bear the cost. The (]overnment or non-gor.ernmental organizations (NGOs) may need to provide welfare or care centres, financial assistance or subsidies to thern, etc. Sirnilarly, if a particular racc is discriminated in employment, eventually-, out of desperation {br survival needs, they lviil indulge themselves in r.rndesirable professions such as theft, clrug trafficking, prostitution, etc., which will lead to social problems in the community. The consecluences of discrrmination in employment lvjli result in rnore negative consequences to society in the long run.

-L

discriminate on the basis of gender/ sex, race or healrh conditions can

impose negative externaliries/cosrs to socieiy.

----

-------- ----r

lrearrng people a means

as

to an end

and discriminating at one's whims and fancies is also

unjusii[ied, seen to be immoral

acts-a challenge to the principle of u n

iversalizabrliry.

on

I

Kantian arguments against discrimination From Kant's perspective, obviously, discrimination does not promote goodu,ill and respect for human clignity- If one rvere to piac.e hirnself in tlie position of the discriminated person, certainly, he r,r,ould not want others to treat him as such. The victims of racial and gender discrimination, f'or example, are not only deprir.ed of desirable employment but a fundamenta) right to be treated with dignity and respect. Treating people as a means to an end and discriminating at one's nhims and fancies is also unjustified, seen to be rmmoral acts-a chalienge to the principle of universalizability (i.e. to be consistent in our judgements anri actions as a matter of iogic). Kantianism provides a strong foundation for rights. tndiviciual human rights must be acknowledged and inviolable (Boatright, 2007). Likewise, the Theory of Rights will fully support that the act of discrimination, in any manrler, vioiates human rights principies ancl therefore is an immoral act' under all circumstances.

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{; Common Issues at the Workplacr:

Justice arguments against discrimination Perhaps, the strongest arguments against discrimination are those that appeal to some principles o{' justice (Boatright, 2009), as advocated by many deontological scholars.

point that an act of discrimination is unethical since people are treated differentiy when there is no good reason or justification for doing so. Committing acts which make people feel unworthy and inferior through discrimination in any form are certainly unjust and immoral based on logical thinking, what more from religious These views

constderations" For example, front the Islamic dimension, the act of discrimination is none other than an act of injustice. Quoting a Quranic verse: 'O People! Verily We have created you Jrom a man and woman and we made you into various tribes and creeds for the purpose of mutual recognition (not

discrtmtnation and racial pride| Verily the most prestigious and honoured amongst you is he who fears Allah 'fa'ala most. Verily Allah Ta'ala is all Knowing" AII Aware.' (Surah Al- Hujurat,

49: 1 3).

As believers, Muslims are to internalize justice as a virtue. To quote another related verse: 'Oh 1,6v who believe (those with iman). Stand out firmly, For God, as witnesses to jan' dealing . and let not the hetred of others to yott make ylu s:l',erve t0 wrong and depart from Justice. Be just: that is next to piety (toqwa): and fe ar

God. For God is v,ell-acquaintetl with all tlmt you do.' (Surah Al-M aidah,

5:8)

"

Next, recalling from Jotin Rarils's Egalitariar Iheory (note: Rawls's theory relates to distributive justice), it is cle arly stated tl-rat althougl-r the free market system acknowledges inequalities in distnbution of power and resources, where it exists, social and economic inequalities arc to be arranged so that they are both (a) to the greatest benefit of the least advantaged (i.e. Difference Principle), and (b) attached to the offices and positions open to all under conditions of fair equalityof opportunity (i.e. Principrle of Fair Equality of Opportunity). However, there are conrlitions under which rational persons wouid make exceptions to the first principle and accept less than an equal share of some primary goods. While many schoiars view tirat ltawls' theory is very much Kantian in perspectivc, .fheory presumably, his Distributive Justice may also apply and relate ic positir,e unequal treatments such as selective hiring as discussed earlier in this sub,chapter,

a commonly justified practice in human resource management for organizatronal efficiency. (Refer and recall for nore detail under Ethical Theories in Chapter 3. i e. under a sub-topic 'Justice in the Free Market Systern'). Obviously, his Principle o1 Equal I-iberty

will fully support that discrimination

is unethicai.

To end our discussions on discrimination, by and large, we note discrimination is a morally wrongful act although unequal treatment exists under preferential hiring at the workplace, not to mention in other aspects of public life, with good intentions. I{owever, many people have linked discrimination with affirmative action. Some groups have even made it a contruversial issue, ciaiming that affirmative action leads to discrimination. Some have also advocated that there should not be any form of

224

Business Ethics

affirmative action because it may lead to reverse discrimination. We will next look at these dimensions, but before this, Iet us try to see the difference between discrimination and affirmative action by understanding affirmative action in definition.

7.5.4

Affirmative Action

I I

Affi'.,t,.;;;--l refers

to policies

that rake factors including race, colour, religion, gender, sexual orientarion

or national origin into consideration in order to benefit an unrepresented

group in areas of employment, education and business, usually

justified

as

countering rhe effecrs of a history of

What is affirmative action? Generalll,, it refers tc policies that take factors including race, colour, religion, gender, sexual orientation or national origin into consideration in order to benefit an unrepresented group in areas of employment, education and business, usually justified as countering the effects of a history of discrimination. The term 'affirmative action' was first used in the United States of America (USA) in 1961 during the presidency of fohn F. Kenned1.. It refers to measures implemented to achieve non-discriminatron in employment against the coloured citizens. In tlie United Kingdom, affirmative action is known as positive discrimination. Llnequal special treatment is given to certain groups to correct an inequality problem, be it wealth or distribution of resources. The main aim is to correct a sociai-economic imbalance within a nation to uphold social justice. For ex ample, wornen at u,ork are given preferential treatment based on comparable rvorth to correct a social inequality that has long existed in the US employment scenario. In Malaysia, in the I970s, the Malay race, being the pclorest, has been given speciai beneflts to correct the income disparity rvithin a multi-racial society.

discriminarion.

7.5.5

5"r..*";.f*;'-I

Literatures on affirmative actior-r seem to suggest that it is a noble act to correct past injustice over a longperiod of time. Ho$,ever, some critics including Utilitarian tenci to claim that affirmativc actior-r leads to reyerse discrimination. Some even refer to affirmative actior. as reverse discrimination and they are therefore against affirmative action. The strongest objection to affirmative action in the tlSA is that this policy deprives n hite men of their legitimate rights (Shaw and Barry, 2004) because the '1r 2pL. now being discriminated against for no fauit of their orvn. Thei, become victims of circumstances, being caught in tl"re rniddle of socialpolicy to correct a past injustice committed by their predecessors. As somc of the successful court cases show, their point is ne1l received by some judges-that affirmative actron has turned out to be reverse discrimination. Br:t some other judges do not concur u,ith the verdict, thus sending out mixed messages on the legality of affirmative action. While \ve are open to the above viewpoints, let us anal,vse and justif,v that affirmative action is not re\rerse discrimination. Firstly', discrtmination, as rt is widely understood, is accompanied by prejudice and stereotyping of groups. Discrimination carries a negativc connotation (Hasictt, 2002). Those lvho perform discriminative acts are motivated by hatred and are driven by a feeling of superiorit,v over minorities or other targeted groups. It is synonymous with being biased, bigotry or racism. Conversely; affirmative action is a resuiL of advanced human endeavour, self-conscience and commitnient to finding the most agreeable solution to the long history of human injustice. The intent of affirnative action is thus a noble one, based on a genuine realization to correct serious wrongs of the past; certainly not' to take revenge. In Islamic ethics, an act is judged by its intent-good iirtent implies high moral rvorth; but bad intent (e.g. to discrirninate soneone based on religious diffcrenccs) has no moral north, and attracts only God's anger. Prophet Muhammad SAW once

affirmative action as reverse discrimination and they are rherefore against

affirmative action.

said:

ls Affirmative Action Reverse Discrimination?

lI

f. l l

I i

Common lssues at the WorkPlace

'The reward of cleeds rlepends upon the intentions, and every) person will get the reward according to tvltat he his intended"'

(Llmar bin Al-Khattab, Vol.

B, Book 78,

Number 68)

every This hadith emphasizes on the importance of having an intention for good purPose for everyaction' physicai act that *. ,1^o, and the importance of having a is right it utro indicates that intention is the measure for assessing whether an action inrentions, out of bad or truthfui. Obviously, since discriminative acts are committed affirmative action because However, ethics. it is the.efore morallywrong from Islamic morally justified and sound is undertaken out of good intentions, it is therefore a ethical action. In fact, the principle of good intent as explained in Islamic ethics is somewhat only out of a feeling similar to Kantian ethics i.e. an act has moral worth if it is done based on good or au,y to fellorv humans. since affirmative action is implemented Isiamic ethics as well intentions, it is therefore a positive action from the viewpoints of discrimination as reverse as Kantian ethics. Affirmative action is thus not regarded

from deontological justification'

7.5.6

Ethics and Affirmative Action

action. The following are ethical arguments to further support affirmative

Principles of justice justice' Special privileges It is in iine u'ith the retributive or compensator)r principle of i.e' those who, and due consideration are given to the deprived or marginaiized groups would otherwise because of past and present discriminatory employment practices, measure a corrective as seen is be excluded from the Job market. Affirmative action since to uphold social justice. It is also in iine with the distributive justice principle a affirmative action initiatives always have a noble intent of correcting inequaljty in Rawls's of ]usticeiEgalitarian society's distribution of resources. The first principle is to have an equal person each that states clearly Principle Liberty Equal the Theory, with right to the most extensive total system of basic libertres (i.e. freedom) compatible u'hatever of share Equal rights. a iirnilar system of liberty for all. Everyone has basic the goods are avaiiable is the most that any Person may reasonably expect, given requirement of unanimor-rs agreement'

Utilitarianism ib support affirmative action, Utiiitarianism claims that such programines help the *uloiiiy of people in soclety. Affrrmative action promotes the greatest good for the graatesi nu-bei. Although it nloy be true that affirmative action has produced some

Inintended side effects si,ch as depriving a few people of their deserved reu'ards, this is unavoidable in any social policy-since in any process of change there are always gainers and losers. bverali, the gainers are expected to outnumber the losers' For Instance, assume that a quota is set fbr a job allocation between the majority and minority/underprivileged /neecly group" If there are ten positions availabie, rnd three group)' are reserved for this 'sp?cial' g.orp', (i.e. the minorities/underprivileged/needy there are sf ill seven positions avrilubi. for the majority. For the common good, surely' job' it is not too much to ask the eighth 'majority' candidate who failed to be given a justified socially to be to find alother job elsewhere. Such a small sacrifice seems compared to the injuries suffered by these 'special' groups, be il in the v-ears past or

225

ffi

226

ffir: 'w aw

Business Ethics

"'ffi present. Affirmative action therefore stands number, as proposed by Utilitarianism.

for the greatest good for the

greatest

.$r.'

,-t

sl Principles of rights 'Protected' or 'special' groups (for example, the minoritiesiunderpriviJeged/needy

I I

group), through affirnative action have a right to different treatment because these groups have not had equal or fair access to benefrts as other groups have. It rs fair for these groups to be given special treatment as a right for the lost opportunities in the past to correct social inequality. They have a positive right to claim on society; to be obligated to provide them with some good or service that they have been deprived of" It reflects the vital interests that human beings have in receiving certain benefits" E.g. adequate health care, provision ofchild education and the right to a decent standard of living as proclaimed by the United Nation's 1948 Human Rights Charter. Certainly. job opportunities and the right for survivai fali rvithin these rights Next, let us analyse the following short business case.

I

r

T

i t-

I Discrimination or Affi rmative Action?

T An esrabirshed ioca oii corporarion, lrerroleum Excel, ls having a recruitment drve for dealers to expancl irs rerail outlers and compere wrrh major long established multinational oil companres at. Nation A. in a compararive markei research study to assess the comperrtors'marker shares, Perroleum Excel has found iha. irs comperirors have all {ong been appointing dealers who possess srrong finarrcial standing. They are obvrously rlre rich ones who have accumulated subsrartrral wealth and resources Their appointment is furrher econornically justified by rhe compeiitors; to ensure th.,t the stations are operated effrcrently to reap maximum rewards from the high invesrnrent Ihis wrll consequenriy lead to higher profits for not only the dealers themselves but the parenr oil company roo. Moreover; this straregy fairly resulrs in a'win-win'situarion Coincidentally, rhe malorrty of rhe

T T

r I i

appointed dealers belong ro a parricular erhnic group which also controls rhe economy of Nation A. Assume that tlre CEO of Petroleum Excel is developing the company's 5-year business plan and srrateg,y beginning year 2A14. ln a managemeni meeting, he sard, "Whrle our competirors are appoinring rich people to operate srations, let us prioritize and appoint the less prrvilegerll needy people, provided that rhey can secure sufficient funds and are compe[enr ro shoulder the responsrbrlity as dealers. Let us develop a special scheme for rhrs category of dealers. We shall focus on newly developed residential areas and rhe outskirLs of urban areas as our market niche. Please advrse our sales executives to idenrify the potential dealers from the poor eihnic groups."

i I I J

I I

j

I

I I l i

Based on the case above, identify the ethical issues and differentiate whether it is a case of discrimination or affirmative action. Would you agree that a certain ethr-ric

group r,viii be reversely discriminated if the t-,EO of Petroieum Excel continues implement his business strategies as discussed in the case? lustify your views.

[o

I

I i

iI I

I I I

i a T

a

, t

Comnron lssues at the

Workplace 227

7.5.7 Affirmative Action in Malaysia as Public Policy Since 1957 The New Economic Policy as an affirmative action Malaysia implemented her'affirmative action' (Klitgaard and Katz, r9B3), the New Economic Policy (Ayob, 2004), folloiving the racial clashes of 1969,to give preferential treatment in corporate equity, and piaces in higher education to the indigenous peoples {"bumiputera'), who form the majority (Rasiah and Shari, 2001; Chitose, 2003; Cohen,2004). From I970 to I990, the Malaysian New Economic Policy (NEP) served as a form

of affirmative action to protect Malay rights, being the indigenous group. Malaysia provides affirmative action to the majority race because in general, the Malays and indigenous groups have lower incomes compared to the Chinese who have traditionally been involved in businesses and industries since the nation's independence in 1957. The NEP was introduced with a noble aim of alleviating poverty aed narrowing the wealth and income inequality gap betrveen the rich and the poor within Malaysia's ethnically based communities. The Maiay ethnic group has always been the poorest and remains as the poorest race in Malaysia until today. A lar.v rvas passed by the government in 1970 for businesses to recruit 30% of their employees from the Malay/buntiputera race" Scholarships and other forrns of financial assistance and subsidies \,vere given out by the gor.ernment to the ir-rdigenous bumiputera communitl'. For exampie, outstanding Malay/bumiputera students were sent to study at public boarding schools and higher learning institutions and given special preferences and financial assistance to pursue their studies. NEP goais rvere corttinued after the 1990s through the National Developrnent Policy (1991 2000) and National vision Policy (2001-2010). The law on the recruitment of 30% bumiputera participation in the business sector was finaliy lifted uirder the present Barisan Nasional governrllent to promote competitiveness rn the global era apart from sustaining poiitical stability in a multicultural societ1,. The government introduceil tl're Nerv Economic Model in March 2010 with the main goai of transforming Malavsia into a high income and advanced nation with inclusiveness anci sustainability by 2020 u,ithin a competitir.e global scenario (Khalidah et a\.,2012). The 1 N{aiaysia Concept had also been adopted to prornote unity among the diverse ethnic grouPs. (For more information, read the New Economic Policy in Malaysia, Affirmative Action, Ethnic Inequalities and Sociai ]ustice, edited by Edmuncl ltrence Gomez and ]ohan Sarar.anamuttu, ISEAS, 2013). Despite the uplift of the law to recruit 30o/o bumiputera in the private sector as mentioned, there is still affirmativc action implentented to address pockets of poverty and inequality in distribution of resources issues at present. For example, although meritocracy is widelv practised today to justify competition and pursuance of individuai interests, the hardcore poor bumiputera (t.e. Malays and Orang Asli) r:re still given preferential treatment such as special housing/welfare allocations, scholarships for qualified children to pursue tertiary education, etc. However, such benefits are also open to other ethnic groups/races that are poor to promote social iustice withrn a t'liversity contexl.

Other affirmative actions in Malaysia \n 2012, special quotas have been allocated for indian students at public institutions of higher learning since based on 'meritocracy', they fall out compared to tire Chinese

:nd Malays. This is an affirmative action to correct an ethnic imbalance in rducation arena.

the

fhr,h.1r?0-ro period, the Malaysian New Economic Policy (NEP) served as a

form of affirmarive action ro prorecr Malay rights, being rhe indigenous group

fTh. h*

* ,h"-

recruitment ol 30o/o bumipurera parriopation rn rhe business secror was

finally lifred under the presenr Bartsan Nasional governmenr

to Promote competiriveness in the global era aparr

from susraining political srabiliry in a mulcicukurai sociery.

228

Business Ethics

-Tfre

govern;enCs

I

disbursement of Banruan Rakyat I Malays,a 1BRlM)

rn

2013 may be seen

ancther form of affirmarive acrion initiared ro ease the burdens of ihe low

as

income groups.

Tl* rrkrrtytr.n'l

rn

I

Malaysia is anorher

form of affirmarive action.

Zrk tf,rrdt*" 1 consistently disbursed

ro the B asnaF' wirh the maloriry of benefrciartes berng

the p,t61' anC neeoy.

n ta*,ta

,"t

,, I

colleciron and

distribution

are

adminrsLered b,v a o| tt tlP'll 'tdlP 8O\

appointed councrl, hlallis Agan:a lslam

The government's disbursement of Bantuan Rakyat 1 Malaysia (BRIM) in 2013 (Note: RM2 billion was allocated during Budget 2013 for this benefit) may also be seen as another form of affirmative action initiated to ease the burdens of'the low incorne groups. A one-off initiative, this was disbursed to the head of each household/family unit of hard-core poor citizens, irrespective of race, i.e. those earning a monthly income of RM3000 and below and single citizens of 21 years of age and above with a monthly income of RM2000 and below. Perhaps, it may also be appropriate to inciude lhe zakat system in Malaysia as another form of affirmative action, though closely linked to Islamic religious requirements. Zakatfunds are consistently disbursed to the B asnafs, with the majority of beneficiaries being the poor and needy (refer to glossary for further clarifications and classification of the groups eligible to receive zakat).In Malaysia, zakat collection and distribution are administered by a state governntent-appointed councll, Majlis Agama lslam. The aim is to irelp the needy and least advantaged Muslim citizens, much as competition and pursuance of individuai interests are encouraged in Malaysia's mixe l economic system. Although affirmative action may be a controversial issue in this competitive global environment which strongly promotes capitalistic features such as competition and pursuance of individual interests, it should be appropriately implemented by the community as an initiative to redistribute income and nealth to the needy, least advantaged or deprived groups as society progresses. Such groups may include senior citizens, the hard-core poor, single mothers, orphans, the handicapped, etc., who will mostly be marginalized under a free market system. Affirrnative action is still relevant in a competitive environment nhich recognizes inequalities in the distribution of resources and unequai treatment, based on justified socio-ecclnomic and moral considerations. In a business conteit, affirmative action may be instituted as part of a human resource policy. For example, special treatment will be given to qualified candidates lvho are from a poor family background and so forth, or-rt of social responsibilitl', provided that they meet the selection criteria. Therefore, such policies are to be developed rvith consensus and communicated transparently to staff for fair execution and implernentation. To conclude, affirmative action should be positively seen to support the needy and least advantaged raiher than being perceived as an act of reverse discrimination. Affirrnative action is no doubt unequal treatment but its irrtent is noble; to correct social inequality in an effort to uphold justice and rights principles. If it is not implentented accordingly in a competitive soc;ety, inequality in tucome gaps and resource distribution wili becorne wider, leading to social problems atrd negatil'e externality costs in the iong run. Society has to bear such costs, some of which were deliberated in our earlier discussions on discrimination, as a consequence of the ignorance and assumptions that market forces rvill correct the disparities. Markets are not always 'Prince Charmings' although the price system coordinates a nation's economic activities (Tucker, 2003). Market failures exist in reaiity when it creates problems to society (such as inequality in income distribution). Therefore, society has io address such issues in consensus for social justice. Business is part and parcel of soctety from social responsibility contexts, so ivithout exception, affirmative action' rnay become a feature to be impiemented in orgar-rizations in tlie spirit of corporate citizer-rship, even if it is not solicited by government laws. Next, rve will deive into the challenges of women at the rvorkplace.

Common lssues at the Workplac

e

WOMEN AT WORK The influx of women into the workforce has been one of the dominant social trends during the past thirty years (Noor Rahmah., 2012; Desjardins, 2009).In Maiaysia, between 1970 and i999, the number of women employed significantly rose from just under 0"9 million to 3 million. More and more women are joining the l\.lalaysian workforce today. In i999, women accounted for about 34o/o of all employed workers (i.e. total labour force). In 2011, female participation in the total labour force in Malaysia was 35.97o/o, its highest value over the past 2l years.ln addition, the majority of the women in the workforce belong to the 25-34years age group.

Official statistics also showed that the ratio of femaie to maie labour force participation in Malaysia registered an increase from 44o/o in 1998 to 44.5o/o in 2000. According to the Labour Force Survey Report in 2007, total iabour force participation rate for Malaysia was 63.2Vo and the female to male ratio increased to 46.40/o.In 2010, it further increased to 56.680/o, irre hiqhest over the past 20 years (lndex Mundi, n.d.). These figures clearly show that there is a continuous increase in the number of women in the Malaysian workfbrce. It also indicates their significant contribution to the Malaysian economy as a human resource, pertinent to the production of goods and

fTh"* -, -"drr"* increase in the

number of women in rhe Malaysian workforce. The figures indicare

their significant

conrribution to the Malaysian economy

services.

as a

human resource.

'The growth in worneil'-c .jobs in Malal,sia has occurred in alrnosl all sectors o.[ employment and a smoll number of iobs seen as being traditionally.ferninine . The biggest incrense in tlte nurnher of women employetl has be en in the cle rical and service jobs, while there has been tt significant portion of *,omen witl't good educational qualifications rnLtvinq into lnorL' senior po,si/loru.s. Thesc jobs remain concentratetl in ltublic sector work such o s teaching.'

(Noor I{ahrnah, 2012)

Whal factcrs have c:ontributed rmployment scenario?

to this demographic shift in the N4alaysian

7.6.1 Factors Contributing to the Participation of Women at the Workplace Socio-economic factors have, among otl-rers, contributed to this shift since the 1970s. it all began when Malaysia decided to transform fion an agricultural to an industrial nation. -l'he Maiaysian economic development process, export-,rriented industriaiization policies and an increase in the educational attainment of rvomen ,,ince the 1970s have all contributed signilic-antl1r 1s an emerging pattern of dual cilreer families in employment. Foreign direct inr..estment and the set up of manufacturing nd eiectronic industries have further increased employment opportunities for women. The Malaysian culture has aiso been seen to shift somewhat, acceptrng the participation of women in employment, to improve the economic status and quality of life of family units, although they are also expected to play equal\, import,'nt roles r,s wife, mother and lamiiy manager at home. In addition to socio-economic factors, political and legai lactors have also contributed to the increasing participation of women in the Malaysian workforce. , ire government has always been supportive of developing the fernale workforce :rlrough its educational, economic as lvell as human resource policies to support Liie economic growth agenda. With higher educational attainments, lvomen were

fs*b*."""*. factors have, among others, conrribured

to this shift since the 1

970s.

Ilh. Mrt4,r".economic development process, export-oriented industrializarion poiicies and an increase in rhe

educational

attainmenr of women .1970s since rhe have all conrribured significantly to an emerging pattern of dual career families in

employment.

221r..,

230

Business Ethics

able to compete rvith men in technical and non-technical disciplines, all job scopes such as engineering, medicine, teaching, management, etc" Jhg Employment Act 1955 in fact has been revised to include special provisions for employers to comply with, and to consider the welfare of women in employment. For example, women at work may now apply for maternity leave at 28 weeks of pregnancy. Women have also been given a legal right to enjoy 60 days of paid maternity leave and a further 90 days of extended unpaid leave to mairage a newborn baby. As at 1 April 2012, further provisions were included on sexual harassment matters to protect the dignity of women at work. You may refer to the Employment Act 1955 as at 30 April 2012 available online at http;//www.agc.gov. my/Akta/ Vol.o/o20 6 I Acto/o20265.p df . The government has even set up the Ministry of Women, Family and Cornmunity Development to expiicitly show the commitment to and recognition of women's significant role in the Malaysian society, apart from addressing specific issues typical to women as a human right.

7.6.2

Women and the Challenges at Work

W}iile these are positive developments highlighted in the Malaysian socio-economic scenario for society's well-being, the increasing participation of women in the workforce also poses several challenges to women themselr,es within social and employrnent contexts. The following are some of the major challenges highlighted in the study of business ethics

r r r r r r

as

women enter the rvorkforce:

Stereotyping \\iomen as sex objects even in the working environrnent. Discriminative acts-less salary, prestige and potential for promotion. Non-acceptance by male counterparts. f)iscrimination against pregnant women. Combining full-tirne rvork with family obligations. Sexuai harassment.

Let us elaborate on each ofthe above challenges.

Stereotyping-women as sex objects lvomen are naturally born different from men irr their physical make up. Men are certainly physicaily stronger than women although the emotional and spiritual strength of the latter may be similar if not stronger. Fronl an Islamic perspective, \\'omerl are created bv God to complement men, while playing the role of khalifahs on eiirth; including all aspects of life, be it at home, or in ihe workplace. 'And one oJ His Srgrrs is that He has created you from dtLst, and thcn, behold! You are human beings scattered..'

'And one of His Srgns is that He created rtates for you from yourselves, in order thst you rnay find satisfaction in them, and He has put love and mercy between you. Surely, there are Signs in this for people who reJlect.'

(Al-Quran, Surah Ar Rum, 20: Verses 20

21)

Women are by no means inferior to men in any way. The problem is, at times, of their difference in physical appearance compared with males and because of their role as men's life partners/h,:memakers, stereotyping exists at the workpiace. Women are seen as sex objects even in the rvorking environment when they are supposed to play their professional roles at work, alongside with their male because

Common lssues at the

WorkPlace 231

counterparts. As a consequence of the gender difference and/or sex label, women may face sexual harassment by their male counterparts, more so if the profession is maledominated. Later in this sub-chapter, we shall discuss at length on sexual harassment at the workplace as a consequence of stereotyping by male counterparts. Next, we look at the second listed issue i.e. less salary, prestige and potential for promotion faced bY women at work.

Discriminative acts-less salary, prestige and potential for promotion On the surface, we can safely generalize that there is no discrimination of women at work in Malaysia. We have acknowledged earlier that Malaysia promotes equal opportunities for women to prove their potential in the public as well as the private ,..to6 as a human right. Although issues of less salary, prestige and potential promotion may not be commoniy discussed in literatures within the Malaysian context compared with the West, women at work do experience these adversities from which men are spared due to s!-reotyping (Boatright,20A7; Desjardins, 2009; Weiss, 2006).

Gender/sexual stereotypes about women's commitment to work or their capacity for leadership may also interfere u,ith their career advancement up the corporate ladder. perceive that rvomen may not be able to cope with the challer-rges Because "r,lpioy.rr with famiiy comrnitme-nts, they are somewhat 'discriminated work to balan;e their against' by employers. At times, they may be offered less salary, lorver opportunity and ,Ltu, for promotion comp.r.red with their male counterparts. Secondary data seems to shott, tl-rat in Malavsia, the biggest increase ln the number of women employed has been in the clerical and service jobs, i.e. the lower paid jobs, much as there has been a signrficant increirse in emploved women doing administrative and managerial work-from 3.1% in the 1990s to 2L.50/o in 1999 (Noor Rahmah, 2012). This data, though implicit, may suggest the possibility of women being marginalized or treated differently by employers in Malaysia. In addition, greater diversity within the lr,ider society in a global environment also provides managelnent lvith the opportunrty to find empioyees with a wider range of talcnts, experiences and abilities, which may sometimes result in gender bias. Quoting

tC..d.r/=rrrl

--

stereotypes

about women's commitment to work or rheir capacrty for leadershrp may also

interfere witlr their career advancement

up the corporate Iadder.

from Desjardins (2009):

of legul and political initiatives to bring equal opportuttiyig5 io women, significant Ltnd economic social inequalities remain in the wider 'Despite decades

fG*"r. d["r", wirhin the wider

society' and tlre increasingll' ciit'erse v'orkiorce also has not yet translated into incre ttsed tlit,ersit.y in positions of outhority, in equalittt of wages and benefits, positior.ts o.f pou,er nrtd prestige. Et,idencc suggests that true erlual aitri

society in a global

opportunity does not yet flourislt within business institutions-'

management wirh

in

Non-acceptance by male counterParts This is another challenge, though remote, faced by women at work due to gender difference, sexual stereotyping or even cultural influences. Chauvinistic male counterparts do not seem to openly accept females as equal working partners or their leaders. Maie counterparts perceive that they are more superior or capabie cotnpared to their female counterparts. Some feel threatened seeing women being promoted. 'Ihey sometimes retaliate or even refuse to cooperate with female counterparts, not to mention refusing directives and instructions from female bosses. These negative attitudes among men pose a challenge to rvomen at work, more so wiren they are supposed to plai signi{icant roies as team members or leaders while filling critical

environment also provides

the opportunity to

find employees wirh a wider range of ralents, experiences and abilities, which may sometimes result in gender bias

l5l

Busrness tthics

positions in the organization. Professionally and ethically, the male counterparts should treat women as equals and accept them as working partners, as a matter of mutual respect for women, not to mention respect for human rights. After all, women have shown their ability, capabil ity as well as responsibility to assume the organizational positions in a fair and competitive working environment. They therefore deserve to be accepted by men as working partners at the workplace!

Discrimination against pregnant wcmen We har.e just discussed a gender related issue on the non-acceptance of women by male counterparts. Employers are sometimes biased/ discriminative towards pregnant women, perceived to be underproductive or less efficient at this phase, while women are trying to balance their famiiy life with work life. Some organizations may even impose implicit or explicit policies against pregnant women, suggesting that women empioyees cannot get pregnant while at work or they will have to leave service. Employers may view that they are already ethical by cautioning their female empiuvees on this policy when service contracts are mutually signed without reaiizing that they are contradicting with the acts of nature. When a female employee gets married, they are boundto bear children, the generation of tomorrow, critical to drive society's progress and sustainabiiity. T'herefore, treating pregnant \\,omen differentiy, rvithout justified reasons, is viewed as discriminative, unjust and therefore unethical. Yet, this is a challenge faced by some \\romen at work in today's global environment, aithough Employment (Amendment) Act 2012 rvhich came iirto force on 1 April2012 protects women on maternity lear,e from being dismissed bv employers in Malaysta, among other related provisions. For more details, refer to Act 265 in Employment Act 1955 as at 30 April 2072, avatlable online at http://ww\{.agc.gov.my/AktaiVol.Vo206l

I

I

I

I

Act%20265"pdf. I

Combining ful!-time work with family obligations

fh..hril.,.g*-f I dual career parenrs in roday's capiralisric

and marerialisric global environmenr combining full-rime work with family obligarions

is

Combining full-time workwith famil;v obligaiions is certainiy a challenge of dual career parents, a comn-Ion feature in today's capitalistic and materialistic globa1 envirorrrnent. Before the 1970's, most rvomen in Malaysia were homemakers. It rr.as a cultural norm, typical in Eastern society then, for women to stay at horne and manage the family while their husbands were the breadwinners. Women's role at home rvas seen to be nobie, raising and nurturing children to be good citizens. However, economic grori th and industrialization, modernism/urbanization and higher educational attainments among rvorten changed this sc,cial scerrario. Yorr may recall that we irave discussed tl-ris earliei under the sub-topic 7.6.i-'Factors contributir-rg to women's participation at lhc workplace'. As more women enter the workforce, they havc to f:rce the strains of matntainrng their challenging triple roles-as wives, family managers and career women. In fact, rvhile coping with these roles simultaneously, married working \,vomen have to depend liighly on blbysitters, nurseries, family support or even foreign mards to manage the children and housework whiie they are at work. Very often, they wili have to make sacrifices, be it at home or the workplace, although their husbands may contributc partly to doing housework or even gir" u helping nand in childcare. It is not un.rri' job to balance working life with family life for womeii. In Eastcrn culture, no matter how successfui they are in their careers, their roles as rvivcs and familv managers continue to be equaliy important as their careers in the eyes of their life partners, not to mentiorr from societalperspectives too. In fact, today's social problems among the younger generation and increasing divorce cases have been significantly contributed by dual career parents who fail to

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Common lssues at the

Workplace 233

..!-

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l;alance family life with career life. On several occasions, qualified women may have to sacrifice their careers for a better family life to reduce stress while trying to balance family life with work life, Some have personally deciined promotion opportunities or tn thr worst scenario, they quit their jobs and found other options such as starting a home-based business which allnws them to look after their children whiie performing work commitments as their own bosses. At least they do not have to face the challenges of being questioned by employers now and then when they have problems at home r,rhile managing children, etc. Having said this, certainly, in order to support woil)en at the workplace, employers rnust appreciaie the tripie role of rvomen-an employee at work, as well as a wife and a family manager at home. Unless employers are supportive enough to give moral sLrpport to women at work, the challenges of combining full-time work with family obligations will remain a major challenge for today's career women, who are striving to balance family life with work life. Perhaps, employers must treat women more as an ;:nd rather than as a means at work, much as they are paid salaries to perform certain job functions in the organizationl 'I'he foliowing strategies or approaches may be adopted by employers to support l^,,omen at work while adapting to thc fast changing dual career family pattern in the clohal employment scenario:

r

r *lr

" a

r

Flexible rvork arrangements such as flexi-time, flexi-year, part-time lvork, job sharing, working from home arrangements as weil as seasonal staff. These are not only applicable to rvomen but men as well, to support the dual career pattern in employrnent nolvadays. Such flexible working arrangemelrts will l-relp the male and female employees to accornmodate their changing family

patterns and meet the psychological responsibilrties associated with their children's erlucatioir and rvell being. Career planning, includrng voluntary reduced time (V-time) and career brcak schemes. Voiuntary reduced time is a sl.stem that allorvs full-time empioyees to reduce I,r,orking hours for a specified period witl"r a reduction in salar1,. It differs from the i.isual concept of part-timc lvork in tl-iat it rs temporary, 1"i11, a return to iull-time job guaranteed. Career break scheme is another form of career planning. Many \\,omen prefer to spend more time rvith their infants tlian maternity leave allows. Childcare centres/services at the rvorkplace. Employers may inr.e,..t in the setup o1'such centres/services in the spirit of ethics of care for their empioyees to ease the challenges of dual career parents in managing their srirall children lr,hile at work. Provision of trainrng on work-hfe balance aird counselling services. Worklife balance programmes, practices and information can enable employees to t,a,lance work and personallives in order to manage lifestyle and commitments, especially women, in performing their family responsibilities. Such programmes are also aimed at reducing and avoiding the negative impacts of their participation in employment nowadays. Employees will be in coirtrol of their rvorking life which can lead to increased productivity, Iower absenteeism, increased morale and motivation and a happier and less stressed workforce. \York-life balance programmes may be in the form of workshops or sharing sessions to give dual career parents the opportunity to discuss famiiy related issues where appropriate to manage stress and revitalize emctional strength in coping with a challenging life. It may be organized specificall; for women ,rr for bnth genders at the sanre time.

lErd"yerr

r*i -

appreciate the triple role of women-an employee at work, as well as a wife and family manager ar home.

fs*"g.t

r"

",pp*,

women at work while adapting to

-

the fast changing dual career family pattern in the global

employment scenario include flexible

work arrangemenrs, career planning,

childcare centres/ services at the

workplace, provision of training on worklife balance and counselling services, and provision of

information services.

234

Business Ethics

r

Provision of information services such as childcare referral services and general advice on work-life balance and ways to maflage stress. Mentoring initiatives may also be considered. This role would entail helping the female workers to meet colleagues, to better understand the organization's informal procedures and customs, and concernirlg rvork/corporate life.

to acquaint them with any other issues

In addition to the above approaches, anrl to reduce work-related prohlems T arising from gender issues such as stereotyprng, etc., training programmes may be I established to help male workers to come to terms with female workers. T'he objecttve is to get the male workers to support and cooperite with their female counterparts as rvell as overcome stereotyping problems and the male feeling of being threatened by : successfui women at work. Whiie these strategies are options open for employers to support women at work,let us examine a survey jointly conducted by Talent Corp and the Association of Certified Chartered Accountants (ACCA) on women and family issues in Mal"7'sia (Golr, 2013). The survey has significantly revealed that women have fbund it difficult to re-enter the workforce after a career break. Women who have taken a break are also perceived by employers to be less committed than employees who have ner.er left serr.ice. In addition, they may also be penalized in terms of slower career progression and bypassed in favour of other candidates. You ma,v recall that these issues have been discr-issed under challenges faced by women at work and interestingly, they are still prevalent in the real employment scenario toda,v. \\rh,v is it hard for r,r.on'len to c.me back to rvork? Talent Corp CEO, |ohan lVlahmood Merican, explains that this is largely due to iack of framer,r,ork to assist these rvomen back into the rvorkforce. In addition, many emplol,ers feel there is no need for suci-r lramervorks to be developed. Ihey also do not see the need to change the existing system as it is working adequately. Holt ever, 93o/o of the responclents ha.',e thought olreturn:ng to work ar-rd 637o have indicated their difficulty to re-enter the lvorkforce. Why do \\romen 1ear.e their jobs in the first place? About 650/o of the respolrlents said that they have to raise a family, foliowed by complaints about the lack of rvork-life balance (43o/r), rn,hile some r,r,anted to care for a family member (380/"). Other reasons irrclude expensive chiidcare (35%), iack of support facilities for r,r,omen from employers (34%) and inflexible work arrangements (32yo). Clearly, these are valid reasons based on justice, rights and ]rthics of Care principles. It is perhaps tinreiy for employers to seriously make the effort to support \\.omen r,vanting to make a comcback to work aiter doing good deeds for the familv. It is also timely for empioyers to seriously deveiop a framework to sr.rpp.,ort womell at work as a social responsrbility. Referring to the above survey again, 69% .,r.anted sllpport facilities for rvomen and family which included chiidcare centres, while 40% said competitive rvages and benefits tvould keep women in employment. T The majority of the respondents also revealed that their current or former i eniployers do not have a formal policy for flexible work arrangements and childcare slrpporl facilities. It is high time for companies to seriously develop a policy on flexible I , t r,vorking arrangements and childcare facilities 1't support the dual career family. pattern in employment, a common feature in todal"s social system, for the u,el1-being ofsociety at large. i \{rhile N,e are zealously discussing the empioyer's commitment and responsibilitres I to support women at work, what has the legal system providcd to stipport female employees rn Malaysia? The Ernployrnent Aci 1955 (revised) provides 60 days of I rnaternity leave, a maximum of five times throughout her employment service. I "t

Common lssrres at the

Women are further eligible for 90 days of unpaid leave to be applied from the 61" day after maternity. Husbands are given seven (7) days of unrecorded leave when their wife deiivers a newborn baby. Maternity leave for female workers in Malaysia is still short compared to developed nations. The law, however, has yet to cover provisions for flexibie working arrangements, career breaks, re-entry and retainer schemes, etc. to ensure women do not lose seniority when they.return to work. Considering the above, more initiatives shouid be developed and implemented to promote family friendly programmes at organizational level as a social responsibility. Certainly, with a consistently increasing trend of women's participation in the diverse global workforce and a dual career family pattern, it is doubly justified for the government to take the lead, if employers are not sensitive to introduce change within their human resolrrce policies and frameworks. Perhaps, an integrated coliaborative effort betrveen the Malaysian Ministry of Women, Family and Development and Ministry of Human Resources r.r,ith representation from the employment sectors (i.e. both public and private) needs to be initiated urgently to address this pressing issue. A further revision of existing employment acts to include flexi-time, careerbreak, etc must be seriousiy examirieC withrn the competitive and challenging global employment scenario. We have jr-rst covered a major challenge faced by women at work-combining full time rvork lvith family obligatior-is. Fina1ly, ive sha1l cover another challenge related to gender drfference-scxual harassment. You may recall that we have earlier mentioned this issue u,hen lve v,ere discussing 'stereotvping' as one of the challenges faced by \,vo[Ien at work.

Sexual harassment N,lore and more sexrlal harassment cases are heard today and

highlighted in the media. cite an example, on 29 August 2012, a former pei'sonal assistant who was sexually harassed by her boss tvas ar,r,arded RM25,000 with interest by a sessions court here (The Star, 2012). A 20A2 study conducted by the Ali Women's Society (AWAM) and \Aromen's I)evelopment Collective (\\rDC) found that 35% of respondents in Malaysia had experienced one or more forms of scxual harassment (AWAM,2010). What is sexual harassment? It consists of a n ide range of behaviours and actions, the most conlmon of these are verbal forms of harassment such as jokes, obscene language and suggestive reinarks. I\{any consider these 'harmless' and victims are often accused of over-r'eacting. No matter rvhat the accusations are, certainiy such harassments chailenge the rnodesty of women. Although sexual harassment may involr.e either men or women as th.r victirn, men are not frequent victims of sextial harassment but pose more as the harassers (Mohd Nazari Ismail et a\.,2007). Sexual harassment cases may challenge the dignity of women at rvork and such experiences will negativeiy affect the work efficiency and productivii'r of a female worker if not managed professionally at the workplace. Scxual harassment, in extreme cases can also be very traumatizing for women resulting in emotional stress, low productivity and damaged self-esteem.

lo

Conceptualizing sexual harassment Sexual harassment may be defined as unwelcomed sexual advances, requests for sexual favolrs and other verbal or physical conduct of a sexuai nature. It also covers sexual attention imposed on sonleone who is not in a position to oppose or refuse. In addition, sexual harassment also includes deliberate or repeated unsoliciied verbal i.omments, gestures or pliysrcal contact of a sexual nature lvhich are unweicomed.

Workplace 235

iil 7W Z3!

Business Ethics ,&

&

.,:'

Sexual

harassm.n,

can be classified under rhree rypes/

forms-sexual rhreats, sexual of fers, and hostrle wor king

environment.

I

Conceptually, sexual harassment can be classified under three types/fbrmsr

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;q

Sexual threats Sexual offers

:x

Hostile working environment.

Sexual threats and offers are also referred as quid pro quo, sexual coercion psychological harassment.

Sexual

i

or

I

threats

i

Usually, it occurs when a male denies a female Staff of employment benefits to exact sexual favours. The female employee is put in a difficult situation to obligate the male's sexual demands before she enjoys some benefits or to avoid negative consequences. In other words, a male employee is forcing a female employee to perform some sexuai favours in exchange for some rewards or to avoid harmful consequences. Let us create a scenario. Lrnda l-ras just been appointed as Mr. As personal assistant. She has to organize Mr. As business appointments and work commitments. One da1', Mr. A requested Linda to stay back to complete some urgent jobs. However, Mr. A, whiie giving instructions to Linda in his room, forced Linda to fulfil some of his sexual demands and tirreatened her-that if she does not fulfil his wish, he will terminate her sen'ice. Linda is certainly being sexually threatenecl while she is striving to perform well in hcr ncw job.

Sexual

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offers

I

Sexuai offers may also occur under similar situations.'Ib create another scenario, Dina is due for promotion after striving hard to maintain outstanding r,r'ork perforntance for the last three years and competing with her male counterparts. Her matrager, Mr. X, openiy suggests to Dina that before he recommends her for promotiori, she has to have dinner with him and spend a night at his apartment. Dina is thus put in a difficult situation--.he.,vouid like to be consider-ccl for promotion, but an unethical act by her boss is chailenging her dignity . If she does not fulfil his rvish, she will lose the opportunity to be promoted even if she rvorks irard to ach ieve her dream.

Hostile working

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environment

'fhis is also referred to

as sexual annoyance. -.'he sexual conduct

I

or behavlour of

lvoman to be very uncomfortable. It usually happens in a working environment with a majority of male staff. The males do not seenr to respect the particular needs and preferences of the fernales since they are the m inority group. It also relates to demeaning behaviour that challenges the modesty and dignity of tvomen" For exampie, male counterparts telling lewd jokes. pinnrng up sensational pictures or displaying pornography, making sexually oriented remarks about sonleone's personal appearance, and other sei-related actions that make the work environment unpleasant. These can aiso be unwelcomed sexually-related behaviour that are offensive, hostile, intiiridating to the victim but have no direct connectton rvith an1' job benefits. The annoying behaviour creates an offensive lvurliirrg environment which affects the victim's ability to continue working. co-rvorkers and others causes

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Common Issues at the WorkPlace 237

at an oil Let us create a scenario. Julie is a petroleum engineer and she works teased by her male rig lvith a majority of male staff. After a hard day, she was being stre-ss' Some of counterparts through lewd jokes, etc. as a means io r.dr.e theirivork as a suggestion to relax the male staff evenlnvited irer to watch a pornographic film as her modesty in the evening. |ulie feels offended and viciimized by their behaviour' and dignity as a woman is challenged'

The legality of sexual harassment in Malaysia Prior to 2012, there was only one law to deai specificaily with

sexual harassment

cases-section 509 of the Penal code. According to this law:

,whoever intendingto insult the modesty of any women, u-tters in words, makes woman, shall any sound or gestie or exhibits any object shall be seen by such may extend to five(S) years or be punished itth imprisonment for a term which ruith fine, or with both.' other provisions Today,legal action against sexual harassment can be taken under Act 1967' Relations l,dustrial the in the Penal boc1e, the Elployment Ac1 1955, and and deveioped part X\r A, a nelr,part of the'Employment Act 1955, was specifically provisions binding enforced on t April 20L2 t
-

Developing a firm poiicy against harassment, including decent dress codes, professional communication at the workplace, etc' communicating this policy to employees and provide training, where necessary, to ensure comPliance. Setting up procedu.", io, reporting violations and inyestigating all complaints thororighly with lairness' Taking appropriate action against the offenders such as dismissal'

frod.y,

legal action

against sexual

harassment can be iaken under orher provisions

in rhe Penal Code, rhe Employment 1955, and the

Acr

lndustrial Relarions Acr1967. Part XV A, a new paru ofrhe Employment Act '1955 was sPecificallY

developed and enforced on 1 APril 2012

to cover sexual

harassment.

238

Business Ethics

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,u, uruitubL better tn nrcrrent co-,,^l l-^-^^^*^-- , ",,,ih,.u,.-;"i;;;;,ratherthanconrro#;[HTJ*.[.] occur at the workplace. iS

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fi:T*:.': #:i'*Trf "5 L:'::1,"f ;l'f t':ii:i#xxi:':i:::,'::::::i:::lt]:liir#;;il;il,:;:::::Li ,r'*""ir,"i;,*#;;1,";;ffi ffiiTil; at the workplace" In short *r^-o.^rho-.^r-,^^ tle-'.r,,., jl". :::PY::;; ; il.; j; ;;: ;, i' ;:?:,# -, il lomen ,""1:::?l erparts"':1.".r' treat rhem as sex r

objects ar the workplace.

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It is true thnt you have certain rights in regard lo your womert, but they also have rights over you. Remem-ber ihat you itav,e taken thent as your wives, ,nly under Ailah's trust and witrr His peimission, If the1, abidc b1,),out rigltt, then to the.m ber.ongs the right to befed'and.toii,.a;,

yout" t4/orn€tr well and be k_ind to them, heLpers. Arrd

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your right that

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for

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.not approve, as well as,eye-r to be tLrtchasie.,

n,itrt anyone

o;f trr.rorrr

Next, n'e shall cover a workplace issue that relates to employees, rights and duties at the workplace, beirg primary stakeholders of businesses.

7.7

EMPLOYEES' RIGHTS AND DUTIES

There are very feh'tt'ho control their orvn working lives. 'rhis statement highlights a rcal rveakness" \Arhire the vast majority of peopre r".c to work, ott ., peopre tvpicalry determine most aspects of our ,"o.k, in.luding wheth.. ru"*o.k at all. usually there of emptoyee rights ihat are .un,n,on in business. Firsrlv, iT,::..":,:::i,l,i'_l.cts trre re arc legal nghts granted to employees on the basis of larv or legal j,dgements Ihus, employees have a right to u minim.,m *rg"r-equar opportunity,

to bargarr, collectively as parr of a unlon and so for,th s..oiity,!;;i;y.. rights might refer to those goods that empioyees are entitled to on the uuri, o?.ortractual agreements with employ:r_s A pariicurar emproyee might have a right to a specific hearth care package, paid hoiidays, pension iunds, etc. Finaily, employee rights might refer to those entitiements to which have a claim independent of any particr,rlar legal or contractuar fu.r:r:'. "-ploy..s s".}, iigi,t. would originate witt tt.,e respect or,r,ed rcr them as human beings' Table7-2prJvides a selectiJn of the most important rights and duties and the main ethicar irobrems commonry associated r.,,ith them in rhe day-to day reality of business.

Common lssues at the

1

3

Fable 7.2 Rights and duties o{ ernployees as stakeirolders o{ the

Equal opPortunirY Affirmative acrion Reverse discrimination

Rrght ro freedom from discrimination

firm

a

Righr ro due Process

a

Firing

a

DisciplinarY ProceedIngs

a

5

Right ro heakhY and safe working

condirions a a

7 B

Righr ro freedom of conscience and speech

1

Ducy ro comply wirh labour

Whistleblowing ' Fair treatmEnr in rhe interview recruirmenr Non-discriminatory rules for

Rrght to work

contract

' a a

2 3

Duty ro comPlY with rhe

law

Duty lo respect the empioyer's property

' ' . .

Acceptable level of Performance Work qualirY I oyalty ro the firm Bnbery

Working

rime

:

UnauLhorized use o( company resource' for private PurPoses Fraud, theft, embezzlement

(Source: Crane and Niatrert.20lA)

need to prer.iously, we have lbcused ot'r etnployee rights. However, these rights that are expected of empluvces' The be corsiderecl in the context oi a sel of riuties the rights of employ.ers, primarily rights of ernployees are more endarngered than empioyer and face a risk of sacrif icing or since emplovees are more dependent on the o, i.."1, a job, or face other undesircd bargaining away their. rights in order to secure cluties of employees are the duty to colnply consequences. Among the most important proPerty Among with the iabour contiact and the duty to resPect the employer's perforinancc'.make of acceptable levei these cluties are the oUtigotiorl to pro'ide an resources.and to refrain from il1egal company appropriate use of workirg tinie.and. Normally, these duties are codified activities such as tiaucl, theft and embezzlement. E'thically delicate issr'ies arise in the employment contract and other legal frarneworks' these duties aiiJ monitor employee compliance'

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The next sub-topic

will tiwell on

occupational health and safetv' a joint

responsibility betrveetr the employers and employees'

WorkPiace 239

240

Business Ethics

OCCU PATIONAL SAFETY

H

EALTH AN D

The right to healthy and safe working conditions has been one of the very first ethicaj concerns for employees, right from the early part of the industrial revolution" loday, most developed countries have implemented a solid network of health, safety and environmental regulations that companies have to abide by. The main issue, howevel, concerns the enforcement and implementation of existing regulations. In practice, some companies may cut corners on heaith and safety measures through negligence or in disapproval of regulators. Similarly, many of these guideiines, ro.h u, *"uiing u safety helmet or ear plugs, maybe unpopular among n orkers themselves. This imposes a tesponsibility on employers to monitor workers' compliance with the regulaiions" The safety of employees at the workplace is the responsibility of the empioyer and also the employees. The health of employees is also their joint responsibility. Good

I f-

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employees have plenty of choices when it comes to job offers. Therefore, companies need to be perceived as offering a safe working environment to ensure thai good employees stay in the organization.

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in

keeping with the economic thrust to industrialize rapid11., there is a corresponding need io put in place safety standards and responsible rvork practices in the 'n'orkpiace. The Malaysian government took this initiative by introciucing the Occupational Saf'ety and Health Act 1994. in so doing, it places the responsibility of ensuring that the implementation of certain saf'ety and health stanclirds in the workpiace squarely on the employer. This Act is an addrtion to the provisions of other written lar,r's relating to occupational safet,v and heaith. Section 4 explicitly spells out the objectives of the Act:

r r r r

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To secure the safety, health and welfare of persons at work against risks to safety or health arising out of the activities of tlie persons at rvork. To protect persons at a place of work other than persons at work againsr risks to safety or health arising out of the activrties o[persons at work. To promote an occupational environment 1or persons at rvork r,r,hich is adapted to their physiological and psvchological needs, and To provide the means rvhereby the associated occupational safety and heaith legislation may be progressively replaced by a svstenr of regulations and approved industry codes of practice operating in combinatron r,vith the provisions of this Act designed to mainta,n or improve the standards of safety and health.

r I I

It is ciear that the Act demonstrates the intention to

cover the ground comprehensively. Essentially, it airns to promote and secure the safety, healih anr,l well'are of persons at work and it protects others agarnst certain risks to healtl'r and safety in connection with the activities of persons at work. Occupational safety and health is about improving the quality of work life in general and ensuring that work systems in any workplace be it on the factory floor or in the air-conditioned office are designed to safeguarii safety and health. Employers will have to ensure that the operating of machinery and supervision r-;f harmful substances and the storage of dangerous things are done at all times in tl-re workplace with aclequate care and protection for the workers and for others r.vho come into contact rvith the lvorkplace. However, despite much purlicity and efforts to promotc safetv al the workplace, for certain industries, the resr.rit seems to be less than clesiral-.ie. as reported in case for review 7.3.

.

Common lssues at the Workplace '241

Worksite Fatalities: More Need to be Done? Safery at construcrion sites, especially high-rise buildings, has becomc a major concern with

tt

deaths

recorded in 2013 and another six faraliries in rhe first four montits of 2014. Many of rhe deaths were due ro falls, said Johor Occupatronal SaleLy and Health deparumenL drrecror Cmar MaL Piah. "ln rhe year 2013,10 deaths were due to workers falling while rhis year, we have recorded five such cases so far," he rold reporrers after launching a'Fall Prevenrion Campaign'at a construcrion site in [aman Sutera Utama The departmenr had noriced an increase in rhe construction of high-rise burldings over the past few years, which could be a factor in rhe number of worksite faraliries. "We identified over 500 acrive consrruction work across the state and75o/o of the sites are based in Johor Bahru, whe : mosi falling accidenrs take place," he said. Omar added that a slew of safety programmes and campaigns had been introduced to reduce such fatal incidenrs, including actively engaging developers and main contraciors to create a safer environment for workers. The deparrmenr would also conduct regular checks at sites to ensure that developers and construction companies adhered to occupational safety rules and regulations. "lf the sires are deemed unsafe for work, those in charge could be served with stop-work orders unril che problem rs recrified," he :aid, adding that the department could also impose a fine or even charge the companies involved in court. (Source: Ttre Srar, 29 April 2014)

As far as the general health of tire employee is concerned, an employer could encourage a rrlore conducive work atmosphere and reduce work stress. Stress is not a classifiable condition under the Act. Horvever, it can arise at work in a situation where an employee is required to produce certain expected results using the available rneans rt his disposal over which he has no real control. Within the work system, this could Lake place because of irnproperlv designed work processes or inappropr iate work lools. Stress dr.res not come about immediately, but is built up, a little at a time, untrl it begins to affect the individual and his performance. When that happens, the worker's performance at u,ork and his behaviour outside the u,orkplace will be affected. Apart fion-r the rvork system, some of the other causes of stress are unreesonabie

superior behar.iour, excessive rvorkload, uncooperative colleagues, unrealistic deadline';, jobs with no prospects, conflicting loyalties and unfair treatment. Where ' he workplace has a combination of these factors, its people will lose their motir.ation to work hard. Some of the symptoms that rvill surface as a result of such sL;ess will be manifested in the form of absenteeism, poor performance, mistakes at rvork, ;ccidents, loss of self-esteem and excessive medical visits. When this happens to ,';mployees, the management will have to find workable solutions to get tc the root of the probiem. Giving due care to employees'psychological needs and at the same time fostering a positir.e organizational culture which promotes a conducive.vork climate are certainly lrto of the most effective lvays of resolving stress at rvork- Perhaps we could look to other countries that have an exemplary record cf occupational safety end health systcm as sholvn in case for review 7.4.

242

Business Ethics

;l'I ,l

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The Scandinavians are the Best Example i I

to Scandinavian counrries to learn abour improving occuparional safeiy and healrh,saidNarional lnsritureofOccupational SaferyandHealih NIOSH)c,hairmanTanSri LeeLant Thye. lle said rhar counrries lrke Denmark, Norway and Sweden are'exemplary in their occupational Malaysians need ro look

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safery and healrh pracrice'. Lee said rhat Ausrralia and rhe United States are also good examples to follow bur ihe Scandinavians are leaders in rhe area of making rhe workplace safe for rhe employees. "They have excelled in rheir pracrice by making occupational safety and health part of their work culture. This has made them achieve almosr zero to one accidenr per few thousand employees compared to Malaysia's ratio of about 31 out of T,000 workers," he said tee added rhar Malaysians were getring increasingly conscious about workplace safery as figures

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showed rhar occuparional accidenrs have gone down bv 50% in rhe past 10 years. Besrdes that, Le.' advised employe." nor ro pur iheir workers'safety at risk just for the sake of cutring costs in their respecrive organizarions by not providing the right and adequare personal protection equipment "lr is unders[andable rhar employers want to cur cost but ir should nor be done at the expense of the employees' safery," he sard. He also said rhar employees who do not wear proper safety gear especially rn hrgh-risk industries like orl anci gzS; Consruction and chernical frelds is an offence and the employers could be imposed a fine. (Source: I'he Srar online,

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2j May 2013)

to wrap up our chapter on con-]mon r,vorkplace issues, termination of service and due process in terminating ernployees. Final11,,

r.r,e sha1l discuss

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TERMINATION OF SERVI CE/ UNJUST DISMISSAL

Many empiol,ees are constantly at risk of arbitrarily losing tl-ierr jobs for relatively minor indiscretions or personality clashes. The right to use due process in the instance of unjust dismissal has a long history in rvorking practices and can be deduced from the notion ofprocedural justice. Promotion, disciplinarl' proceedings ar-rd firirig are the most common processes where the right to due pro( css is particulariy important. In the case of disciplinary procedure.s, employees should be subject to these if a clear and objective negiert of their duties and a breach of their contractual obligations has occurred. The iegal framework provides detailed codification of employee and employer rights in the case of firing and redundancies. l)ue process can be defined as limitations that offer protection against arbitrary uses o1'authority. Due process in the lvorkplace nould mean that employees have a right to be protected from the arbitrary use of managerial authority. This means that while employees can be dismissed for- a good ieason, they cannot be dismissed lor no cause> or even for a cause that is mora;ly wrong. So, in these circurlisiances, due process rvould establish the procedures that an enrployer must go thrtrugh to ensure that the dismissal is not arbitrary.

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would be to specify the what might such procedures involve? one apProach job performance' u...piuUt. reasins for d'ismissal. Reasons such as incomPetent and economic necessity would be intoxication, excessive absenteeism, theft, fraud ccnditions for dismissal' justifiable. This approach seeks to establish just cause ,"uro, and distinguishing them However, specifying every possible acceptubl. result' -igttt well be impossible' As amust from unacceptable go outline a procedure through which employers typical due process policies ".uro.rr^b.forehand tiriough before they can dismiss an employee' include such things as prior This more procedural account of due process might probationary periods' a warning, documentation, written p"rfor-u.t.e stan?ards, appealed, an opportunityto respondto allegations ;;..Jby*hich deci"sions canbe is proportionate to the infraction' Thus' and prior a.t.r,,,irruiion of punishment that of hiln, k.tow the consequences of failing an employee should know what is expected when any problem is first recognized to meet those expectations, be given a warning impartial judge' and have a right to appeal any decision,to an appeals to the The strong"rt d'"?".r.. of an employee's right to'due,process Without due process in the fundamental ethical concepts o1 ,.sp".t and fairness' that allows individuals to exercise workplace, society is sanctioning an institution the power they have over others without restraint' So

Theremightbeinstanceswhereterminationofemploymenlisdueto situations where the employee misconduct. Most cases o1'misconduct relate to Ali organizations need rules to ensure breaks an d{press ruie of the organization. a differeir t", an orderly.vorking cnvironn-reJt. !,ach cornpury"*iu.l,ove :li:].t will normally be given out witl-r depending on the nature of its business. The rules to sign ancl every new employee would be required

the contract of empioymenl rules and that he has .';..i;r;;;, that he has been given a copy of the company the rules in large lettering on the understood them. Conlpur]i", Ior1.1 also post of company rules that spell out company notice board. Flg.,.. 7.1 is an "xrmple actions to be considered as misconduct'

The followrng acts shall be considered as misconduct: reasonable order of a superior' 1. wilful insubordinarion or disobedience ro any lawful and business or proper! v' 2. Thefr, fraud or dishonesry in connecrion with the employer's property' or 3. Wrlful damage to or loss of employer's goods

4. Repeated absence rvithour leave' 5. Repeared Ia[e attendance' 5. Drunkenness, fighting, being under the infiuence 7.

of illegal drugs' disorderly or indecent behaviour

Repeated negligence or neglecr of work'

8-' \leepi'rg during working hours'

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Smoking in Prohibrred areas' Pariicipatrng in illegal indusrriai action' Falsifying time cards or orher documenls'

12. Cambling on comPany, Premises' premtses' 13. Possession of a dangerous weapon on company manner' 14. Sexual harassmenc in any form or

which is against the witt be considered miscanduct' Any other behaviour Note: The abave are exampres oJ behaviour which misconduct' interests of the company will alsa be considered (Source. Am i n uddin, 21 02)

$:igure

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as misconduct Corrrpany ruies that spell out actions to be considered

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The learning outcomes for this chapter are summarized belolv:

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Explain the types of whistleblowing covered in this chapter and the justification for blowing the whistle. Internal whistleblowing occurs when an einployee reports credible evidence of wrongdoing in his organization to a person of authority within the organization hoping that the person will take quick action to remedy the situation. External whistleblowing arises when an employee releases credible evidence of wrongdoing in his organization to external parties such as the mass media and the regulators in order to protect public interest. Whistleblowing is morally justified under the following conditions: r Driven by appropriate moral motive such as to protect the interests and safety of the public and to prevent the organization from reputational damage. . The employee has made the report to his immediate superior or the organization's internal whistlebiowing channel but failed to get any satisfactory response. . Employees have strong or credible evidence of wrongdoing because rvithout such evidence they may be putting themselves in unnecessary and serious risk. . Ernplo)'ees are reasonably convinced that by blowing the whistle the organization w,iIl take concrete and irnmediate actrons to remedy the situation. lllustrate with examples the meaning of trade secrets and conflict of interest in an organizational context. A trade

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crel is a vahiable asset because the organi zationmay har.e spent plentv of monev to acquire

or develop rhe information and it has a significant impact on its financial position. Exarnples of trade secrets include manufacturing process, ingredients, formula methods of quality, control, list of cher-rts and customers.

Conflict of interest occurs lvhen employees have personal interests that interfere rvith their obligation to promote the interests of their employers. An example of conflict of interest rs a university lectLrrer serving the Shari'ah committee of a commercial bank while receiving sponsored research from that bank. Another example, a marketing manager is involved in the decision to hire a market research comPany in which his spouse is an employee to provide marketing slirvey service to his company.

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Conceptualize privacy from individual, employee an
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Common lssues at the

Workplace 245

and consumption patterns for strategic planning to gain competitiveness in the global business

environment. In differentiating between privacy and surveillance at the workplace, surveiiiance may be defined as a systematic investigation or monitoring of the actions of one or more persons. While privacy is aimed at protecting the right of individuals to be free from external interferences, the main objective of surveillance is to pierce the privacy shield, sometimes justified by the view that 'if you have done nothing wrong, you should have nothing to hide'. In simple terms, survcillance is spying on others' activities. The primary aim behind a surveillance activity is generally to collect information about the individuals concerned, their activities or their associates for specified reasons. 4.

Apply ethical principles to justify the need to sustain and respect privacy as a human right. Ethical theories such as Theory of Rights, Utiiitarian Theory, Kant's Theory of Ethics or Islamic ethics rnay be applied to justify the need to sustain and respect privacy as a human right. Further elaborations are available at sub-topic7.4.7 i.e. The Ethics of Protecting Privacy Explain why discrimination in employment is unethical based on Utilitarian Theory, Kantian Theory and |ustice and Rights Principles. o Utilitarian Theory cites the ways discrimination harms individuais, business firms, and society as a whole based on the consequences of the action. Discrimination in employment leads to inefficiency and externality costs to the society. r Kantian Theory supports the notion that discrimination violates human dignity and respect for

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Principles of Justice has highlighted on the point that discrimination is to treat people differently rvhen there is no good reason for doing so. Rights principles clearly acknorviedge that all humans have basic rights such respect, privac1,, freedom of religion, etc. Discriminatron challenges individual rights.

]ohn Rawls' Egaiitarian Theory highlights that social and econornic inequaiities are to

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arranged so that they are both 'to the greatest benefit ofthe least advantagcd' and 'attached to the offices and positions open to ali under conditions of fair equality of opportunity'. Discriminative practices are unjustified in a free market system. For further elaboration refer to sub-section 7.5.3 ofthis chapter. 6.

I)efine affirmative action and differentiate it from discriminatory acts. it refers to policies that take factors including race, colour, religion, gendel, sexual orientation or national origin into consideration in orcler to benefit an unrepresented group 'in areas of emplovnent, education and business, usually justified as counter;ng the eff-ects of a histor). of discrimination. Affirmative action is thus taken beyond the need to ensure equality of treatment for a certain group or groups. Affirrnative programmes are designed to set goals, quotas and trme frames for firms to hire women and rninorities in proportion to their numbers in the labour force. This is solicited by ialq D;scrimination, as it is widely understood, is accompanied by prejudice and stereotyping of groups. Discrimination carries a negative connotation or implication. Those who perform discriminative acts are motivated by hatred and are driven by a feeling of superiority over minorities. It is synonymous with being biased, bigotry or racism. Conversely, affirrnative action is a resuit of advanced human endeavour, conscience and commitment to find the most agreeable solution to the lolg history of human injustice. The intent of affirmative action is thus a noblc one, based on a genuine realization to correct serious wrongs of the past, not to take reverrge.

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Discuss specific work related issues and challenges faced by women at work and recognize the positive approaches and strategies that employers can take to support women at work. There are several work issues and challenges faced by women at work. The following are the challenges:

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o Stereotlping-women as sex objects even in the working environment. . Discriminative acts--less saiary, prestige and potential for promotion. r Non-acceptance by male counterparts. . Discrimination against pregnant women. r Combining full-time work with family obligations. . Sexual harassment.

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One may elaborate on each issue as per this sub-topic. Employers rnay take the following positive approaches and strategies to supPort women at work: . Flexible work arrangements such as flexi-time, flexi-year, part-time work, job sharing, working from home arrangements as well as seasonal staff. r Career planning i,icluding voluntary reduced time and career break schemes. . This include V-time (voluntary reduced time) and career break schemes. r Childcare centres/services at the workplace. Employers may invest in the setup of such centres/ services in the spirit of ethics of care for their employees to ease the challenges of dual career parents in managing their small chiidren while at work. o Provision of training on u.ork-life balance and counselling services. . Work-life halance programmes may he in fhe form of workshops or sharing sessions to give dual career parents opportunities to discuss familv related issues where appropriate to manage stress and revitalize emotional strength in coping with a challenging life. It may be organized specifically for women or for both genders at the same time. . Provision of infcrrmation services such as childcare referral services and general advice on work-lif'e balance and ways to manrge stress. Mentoring initiattves may also be considered. This role wouid entail helping the female workers to meet coileagues, to better understand the organization's informal procedures and customs, and to acquaint her rvitii any otirer issues of corporate life. In addition to the above approaches, and to reduce work-related problems arising from the gentler issue such as stereotyping, etc., training programmes may be established to help male workers to come to terms with female workers. The objective is to get the male workers to support and cooperate with their female counterparts as well as overcome stereotyping problems and the male feeling of being threatened by successful women at work.

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8.

Explain the various forrns of sexual harassment and outline the steps to prevent sexual harassrnent at the workplace. Sexual harassment is defined as unwelcomed sexuai advances, requests for sexual favorirs and other verbal or physical conduct of a sexual nature. It also covers sexual attention imposed on someone who is not in a position to oppose or refuse. in addition, sexual harassnrcnt also includes deliberate or repeated unsolicited verbal comments, gestures or physical contact of a sexual natLlre which are unwelcomed. Sexual harassment can be classified under three types/categories: . Sexual threats . Sexual offers

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Sexual threats and offers are also referred as quid pro quo, sexual coercion or psychologicaiharassment. The following are steps to prevent sexual harassment at the workplace: When it has been determined that sexual harassment has i.rken place, the employer has t,r take

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co;"rective action as soon as possible.

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Business Ethics

7.

Discuss specific work related issues and challenges faced by women at work and recognize the positive approaches and strategies that employers can take to support women at work. There are several work issues and challenges faced by women at work. The following are the challenges:

o Stereotyping--women as sex objects even in the working environment. . Discriminative acts--less saiary, prestige and potential for promotion. . Non-acceptance by male counterparts. o Discrimination against pregnant women. . Combining full-time work with family obligations. . Sexual harassment. One may elaborate on each issue as per this sub-topic. Employers rnay take the following positive approaches and strategies to sttpport women at work: . Flexible work arrangements such as flexi-time, flexi-year, part-time work, job sharing, working from home arrangements as well as seasonal staff. . Career planning i'rcluding voluntary reduced time and career break schemes. . This include V-time (voluntary reduced time) and career break schemes. r Childcare centres/services at the workplace. Employers may invest in the setup of such centres/ services in the spirit of ethics of care for their employees to ease the challenges of dual career parents in managing their small children while at work. r Provision of'training on rvork-life balance and counselling services. . Work-life halanr:e programrnes may he in the form of workshops or sharing sessions to give dual career parents opportunities to discuss familv related issues where appropriate to manage stress and revitalize emotional strength in coping with a challenging lifb. It may be organized specifically for rvomen or for both genders at the same time. r Provision of infclrmation services such as chiidcare referral services and general advice on work-lif'e balance and ways to manage stress. Mentoring initiatives may also be considered. This role wouid eirtail helping the female workers to meet colleagues, to better understand the organization's informal procedures and customs, and to acquaint her with any other issues of corporate life" In addition to the above approaches, and to reduce work-related problems arising from the gender issue such as stereotyping, etc., training programmes may be established to help male workers to come to terms with female workers. The objective is to get the male workers to support and cooperate with their female counterparts as well as overcome stereotyping problems and the male feeling of being threatened by successful women at work. B.

Explain the various forms of sexual harassment and outline the steps to prevent sexual harassment at the workplace. Sexual harassment is defined as unwelcomed sexual advances, requests for sexual favours and other verbal or physicai conduct of a sexual nature. It also covers sexual attention imposed on someone who is not in a position to oppose or refuse. In addition, sexual harassmenl- also inciudes deliberate or repeated unsohcited verbal comments, gestures or physical contact of a sexual nature which are unwelcomed. Sexual harassment can be classified under three types/categories: o Sexual threats

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Sexual threats ancl offers are also referred as quid pro quo, sexual coercion or pslchoiogical The following are steps to prevent sexual harassment at the workplace:

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When it has been determined that sexual harassment has i:rken place, the employer has t,r take corrective action as soon as possible. I

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provide sexual harassment education and training to ail organizational members, including managers. This initiative is aimed at creating awareness among ali empioyees, especially *o*"-rr, on the haz.ards of sexual harassment and how to prevent it from happening at the workplace. of Sexual harassment prevention programmes are aimed at making firms recognize the costs are: features Its major sexual harassment and take responsibility to prevent it. Developing a firm policy against harassment, including decent dress codes, professional communication at the urcrkplace, etc. Communicating this policy to employees and provide training, where necessary, to secure compliance. Setting up procedures for reporting violations and investigating ali complaints thoroughly and fairly" Taking appropriate action against the offenders.

9.

Discuss the rights and dtrries of employees in an organization' There are three main aspects of employee rights that are common in business. Firstly, there are rights legal rights granted to employee, o, ih.'buris of law or legal judgements. Secondly, employee with agreements are entitled to on the basis of contractual ,rrluy ,.I", to'those goods thui "-ployees might refer to those entitlements to which employees have and finilly, employeeiights "*pluy".. a .iaim independent of any particular legai or contractual factors. Among the most important the duties of employees are the d,rty 1o .o-piy with the lahorrr contract anel the duty to respect empioyer's pioperty. These duties are the obligation to provide an acceptable level of perfbrmance, nrni. nppropriate use of norking time and company resources and to refrain fron-r illegal activities such as fraucl, the{'t and embezziement.

10.

f)escribe the occupational safety and health issues in the context of employrnent' Most developecl ciuntries implemented a solid network of health, safety and etrvironmental regulations tirat companies have to abide by. The main issue, however, is about the enforcement and iJpiementarion of existing regulations. The safety of employees at the workplacc is the responsibility uf ih. emplovcr and aiso ihe emptoyees. The health of employees is also their joint responsibility. T'he Malaysian government introduced the Occupational Safety and Health Act 1994. it piaces t5e responsibiliti' of ensuring that certain safety and heaith standards in the workplace fali on the e*pio1rer. This Act is an adJition to the provisions of other written iaws relating to occupatior-ral safety and health.

11.

Explairr the due process in the case of termination of service or unjust dismissal' The right to use ciue process in the instance of unjust dismissai has a long hrstory in working practices arrd ."n l-,e tleduced fropr the notion of procedural justice. Promotion, disciplinary proceedings and firing are the most common processes where the right to due process is particuiariy important. D1,e process can be defined as limitations that offer protection against arbitrary uses of authoritl'. Due process in tire rvorkplace would mean that employees have a right to be protected from the arbitiary use of managerial authority. Due process Inay include prior warning, documentation, n ritten performance itanclards, probationary periods, a process by which decisions can be appealed, ar-r opportunity to respond to allegations and prior determination of punishment that is pioportionate io the infraction. The strongest defence of an employee's right to due Process appeals io tie fuldamental ethical concepts of respect and fairness. Without due process in the workplace, society is sanctioning an institution that allows individuals to exercise the power they have over others lvithout restraint.

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Affirmative Action It refers to policies that take factors including race, colour, religion, gender, sexual orientation or national origin into consideration in order to benefit an unrepresented group in areas of employment, education and business, usually justified

Autonomy Independent. free

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countering the effects of a history of discrimination.

rightful human beings.

Bantuan Rakyat t Malaysia (BRtM) An allocation of RM 2 billion was announced by the Malaysian Prime Minister, Dato' Seri Najib Tun Abdul Razak, during the 2013 Budget. The head of households with a total income of RM3,000 and below, andsingle (i.e. unmarried) citizens of 21 years and above earning a monthly income of RM2,000 and beiou. enjoyed a disbursement of RM500 and RM250, respectively (Ministry of Finance Malaysia, 30 October 2012).

Bribery: The act of giving i ' receiving any gratification or reward in the form of financial or other advantage of high vaiue for performing or not performing a task in relation to a person's job description"

Bumiputera The indigenous groups of Malaysia. The Malay ethnic group is classified as the main indigenous group in Malaysia" The legal definition of a Malay as in Article 160 of the Malaysian Constitution is someone

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to a Malaysian citizen who professes to be a Muslim, habituaily speaks the Ivlalay language, adheres tcr A4alav custorns and is domiciled in Malaysia or Singapore. The Malay ethnic group comprises the ma;ority of the population of Malaysia i"e. 63^1% ofthe totai popuiation of Peninsuia Maiaysia and 53.30/o of the populatron of Malaysia (Department of Statistics Malaysia,2010). Career breaks schemes T'his benefit gives an employee the opportur-rity to lea',,e the .1ob ancl return a{'ter a certain period of tinie, to be negotiated betweerr the employee and the entpioirer. This scheme ailorvs for reentry into sert,ice at the same workplace without loss of seniority. For example, a female ernployee decides to look after her ner,vborn baty after her maternity leave and appiies iear.e for tn o years. Career breaks are open lo men as well as women, aithough in practice they tend to be taken onlv b1, \vomen. Career planning In the context of women at work and famiiy issues, it refers to voluntar), reduced time and .areer brcak schenrrs. Companies Commission of Malaysia: The main regulatorybody, the guardian and the enforcer of legislation governing corporate conduct and businesses in Malaysia.

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worth A doctrine or principle which holds that men and women should be paid on the same just scale, not for doing the same or equivalent jobs but for doing diffcrent jobs of equal skills, effort and responsibiiit)..in short, in rewarding male and female employees at nork, tliev must be treated the sarne. Their salary and rernuneration must be on the same scale or band even if they are doing diff-erent j.bs, to recognize their work contributions, measured based on several criteria such as knowledge and sktlls, cluties an,,1 responsibil ities, including accountability. Comparable

Conflict of interest Occurs when employees have personal interests that interfere with their obligation promote the interests of their employers. Consumer sovereignty The recognition that consumers are'kings' in the economy. 'ihey have the liberty right to decide whether to buy or not to buy a product.

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Discrimination A wrongfui act whereby a person is deprived of or margin alizedfrom enjoying some benefits or oppoitunities because he or she is a member of a group towards which there is substantial prejudice. Mort^often, those who perfbnn discriminative acts are motivated by hatred and are driven by a feeling of superiority over others. It is synonymous with being biased, bigotry or racism. Externalities Costs and benefits imposed on people or society other than the consumers and producers of good or service.

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External whistleblowing An act when an employee releases credible evidence of wrongdoing in his organization to external parties such as the mass media and the regulators in order to protect public interest. in Female labour force A percentage of the total labour force to show the extent to which women are active the labour force.

Flexi working arrangemenr They can be flexi-time, flexi year or part-time work. Within this system, employees' working houru can be decided for the whole year and then individuals are free to choose their own *nikirrg times in order to fulfii ihe yearly quota. The employee is given the flexibility to work longer hours at certJin periocls and reduce workrng hours during certain periods such as school holidays, while retaining a secure aird regular system of paynrent. The firm is able to take full advantage of a vast pool of full-time, part tirne. lrtb-sharing and seasonal staff. Cender./:ex discrirnination A form of sexual harassment; the unequal discriminatirze acts committed by eomeone because of sexual differences. LIsualiy, it happens when a male perceives that he is more superior than a female counterpart and performs discriminative acts by sexually harassing her.

Clobalization The global integration of many formal smail economies into one global econotny. insider tratiing The buying and selling of securities by people who have price sensitive infornration that is likely to aiJect the price of the securities of a company for an unfair advantage or benefit-

lnrernal rvtrisrEebiowing An act when an employee reports credible evidence cif u'rongdoing in his ,r-ganiz.itiolr lo a pcrsor-r of authority nithin the organization hoping that the persot'r rvill talie quick acti,rl to remedl. the situation.

ustice An important moral concept with a rvide range of applications, used to evaluate not only the actions ,f indiViduals but society as a whole. ]ustice is synonymous with fairness. I'hc good ones must be recognized and reu,arded. fhc bad ones must be punished. The quality of being moraliy just or righteousiress, fairness ,:nd equity in just conduct and dealing with others, Self-interest is balancecl u,ith altruistic regard (i.e. concern for needs and leelings of-others above one's ottn.), respecting rights of others.

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t{anr's Ethics A deontological (action-based) ethical theory deveioped by lrmmanuel Kant, a Clerman the role of'humans to perform good acts l,irilosopher. It is a theory which promotes goodn,ill and emphasizes as a dutv t3l,ards feilow humans. An action is morally right if the actor is motivated by goodrvill Action dorle ;r rational principled reasons, i.e. from a sense of duty, has moral worth. Kant chainpioned two categorical imperatir.es, (l) *. have to place ourselves in the place of the receiving party. If our ae t causes pain to the ..."i"ing party, then the u.ii, irrr*oral. {2) Never treat humans as a means to get soinething. They inust be treated as an end i.e. as a human being with dignity and respect. Kickback .\ sllm of money given to someone in return for facilitating

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KhutbatulWada' 'I'he last serrnon of the Prophet Muhammad SAV/. It i; mentioned in almost all books of Haclith. See AI,Rukhari, l]adith 1623,1626,636]. Sahih of Imam Muslim also refers to this sermon in Hadith

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number 98. Imam Al-Tirmidhi has mentioned this sermon in Hadith nos. 1628, 2046,2085.Imam Ahmed bin Hanbal has given us the longest and perhaps the most complete version of this sermon in his Masnud, Hadith no. L9774.

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Malaysian Anti-Corruption Agency The sole body that is independent, transparent and professional in curbing corruption in Malaysia

Mailis Agama lslam A government institutionlcouncil set up in every state in Malaysia to manage affairs, including zakat collections and distribution to the eight asnafs

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Negative right A right that is correlated with obligations on the part of others to refrain from acting in ways that interfere with our own freedom of action. It relates to the right of human beings to be free fiom outsid. interference, i.e. right to property, choice of religion, freedom from injury and privacy.

Occupational, Health and Safety (OSH) An area concerned with protecting the safety, health and welfire of people engaged in work or empiovment. The goals of occupational safety and health programmes include fostering a safe andhealthy work environment. OSH may also protect co-workers, familymembers, empioyers, customers, and many others who might be affected by the workplace envrronment. Occupationai Safety and Health Act "1994 Also known as Act 514, it is a piece of Malaysian legislation which was gazetted on 25 February 1994by the Malaysian Parliament. The objectives of this act are: (l) to secure the oafety, health and welfare of'persons at work against risks to safety or health arising out of the actrvities of persons at work; (2) to protect persons at work other than persons at work against risk to safety or health arising out of the activities of persons at work; (3) to promote an occupational environrnent lor persons at work lrhich is adapted to their physiological and psychoiogical needs; and (4) to provide the means wherebl. the associated occupational safety and health legislation may be replaced by a system of reguiation and approved industry codes of practice designed to maintain or improve the stand ards of safety and health. Personal Data Protection Act 2010 (PDPA) An Act passed by the Malaysian govcrnmcnt to protect the abuse o{ personal data of citizens for commercialpurposes.

Principle of Universalizability This is a principle in Kant's Ethics. As a matter of logic and respect for humans, one's actions must be consistent in his/her judgements, No doubie standards or contradictions from

corltrlon

ilorms" For example, lying is morally wrong and this understanding is acceptecl universally. Therefore, one cannot manipulate his/her stand to say that lying is right. Another exanrpie is Robin Hood's act of stealing frorn the rich to give to the poor is wrong from the perspective of Kant's Theory becausc stealing is universall), accepted as a wrongful act. Although Robin Hood was giving to the f,oor, ure cannot contradict to sa,v that slealing in this particular situation is a rightfui action.

Privacy A moral concept which relates to the right to be left alone. It also gcnerally relates to confitlentiality of in{brmation on private individuals. Rights They may be understood as entitlements to something. To have rights is to be entitled to act on our o!r'n or to be treated by others in certain ways without asking permission of anyone or being dependent on other people's goodwill. There are several types of rights-legal and moral rights, positive and negative rights, general and specific rights.

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Sexual harassment Unrvelcomed sexual advances, requests fbr sexual far.ours and other verbal or physical

conduct of a sexual nature. It also covers sexual attention irnposed on sorneone rvho is not in a positrou to oppose or refuse. Sexual harassment also includes deiiberate or reueated unsolicited verbal conrmenls, gestures or physical contact of a sexual nature which are unweicomed.

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Masakeen-people who are destitute and extremely needy to the extent they are forced to beg for their daily food rations. a

Al-Amileen-people appointed by an Islamic Gor-ernment to collect zakat.

a

Mu-Allafatul-Qulub*-persons who have recently accepted Islam and are in need of basic necessities. They w,ould benefit from encouragement by Muslims which would help strengthen their faith. Ar-Riqaab-slaves who are permitted to work for remuneration and have an agreement from their masters to purchase their fieedom on payment of fixed amounts.

a

Al-Ghaarimeen-persons who have a debt and do not possess any other wealth or goods with which they can repay that which they owe. It is conditional that this debt was not created for any un-Islamic purpose"

a

Ft-sabilillah-persons who have to carry out an obligatory deed which has become obligatory fbr them and subsequently (due to loss of wealth) are unable to complete that obligation. Ibn-Lls-Sabeel-persons who are travellers and during the course of their journey do not possess basic necessities, though they are well to do at home. They couid be given zakat in order to fulfii travei needs to return home.

I 1.

Expiain the conditions that justify whistleblowing in an organization.

2.

Describe the ethical issues arising from trade secret protection.

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Why must employees avoid conflict of interest situations at the workplace?

4.

Discuss the challenges of obserr,lng privacy in the digitai age.

5.

Information and communication technology (ICT ) has enhanced netrvorking giobally and f acilrtated the development of knowledge-based economies. However, it has also posed threats to individual or personal privacy. Discuss these contentions.

6.

'Discrimination happens in ali facets of public life.' Share in class a discriminative incident that you have experienced as a student. Why do you classify it as a case of discrimination?

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Assume you have been asked to irnplement an affirmulius 6gtion programme at the rvorkplace with a diversified workforce. Discuss the steps you would take to ensure its succe ss. 8.

Elaborate on three (3) major challenges faced by women at work.

9.

Explain how empioyers can contribute towards a work-life balance u'ith the increasing participatlon of women in the workforce.

10.

1

List and explain some examples of employee duties at the workplace.

11. Explain the reasons why both employer and empioyee need to adhere to the occupational saf-ety and

1

health practices at wcrl;. I ,

L2. What are the procedures that an employer needs to do to ensure that an employee's dismrssal is not

arbitrarily

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Common lssues at the Workplace

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CASE STUDY Anita's First Day at Work Anita had an undergraduate clegree in Chemical Engineering from a Malaysian higher learnrng insrrrurion. She was sponsored by a renowned multinarronal corporarion. ln return, she v,as to serve this organization as a contractual arrangement after graduarion. To her surprise, jusr a mon:h afrer her final examination, she was called to report for duty ar a subsidiary chemical plant producing plasric marerials, based at Senawang industrial Park, Negerr Sembilan. Cn rhe firsr day of work, Mr. Kassey, the human resource executive, brought her around the plant to be inrroduced to ihe shop floor supervisors and general workers. While touring, she was iaken to a drying shed where an intermediate chemical product was being washed wirh benzene and then dried in the hor sun. This task was done by general foreign workers and their eyes were watering while striving to complete their assigned rask. En. Atiz, a supervrsor, was assigned to monitor them ro ensure efficiency and that they meet key performance indicarors (Knls) set by Dr. Aaron, the plant manager. Anira knew through her readings rhat benzene is a carcinogenic produci. Whrle all the general rvorkers r.vere busy completing their tasks, to her shock, a worker by the name of Sivan suddenly retaliared and refused to continue doing his task due to excessive eye irritation. He also accused rhe management, sayrng rhat nobody informed him on rhe workplace risks and hazards when he tori'.ed the piant. Encik Aziz shouced ar him and they ended up rn a frghr. En. Aziz even urtered, "Do it or shai dismiss youl" Luckrly, a few of Sivan's co-workers rried to be mecliarors All parries frnally lefr rhe scene af rer a chailenging 15 mrnutes atremprrng ro calm down the rense siIuation. Anira saw this unexpected scene rn front of her eyes. ln another instance, one of rhe supervisors purposely tried to brush her shouldtrs r,i,hen she was passing bv ancl winked at her. She felt confused and did not have a clue as ro whai he was up ro. Ar 5 p m, she clocked out and decided to queue for a company-provided hus to Seremban LRT sta[ion Anita srays in Kuala [,urnpr-rr with her parents and she has to commute daily ro work. During the train .lourney home, reflecrions of her experlcnccs on the lirsr day at work crossed her mind. ln fact, she was so deepiy nvolved in her thoughrs that she m ssed rhe rrain sration where she was supposed to get off Anira finally arr-rved horne ar 9 p m. and felt relieved to see her family waiting for her ro have dinner rogether. Bur, beft,re she slepL, she pondered in suspense on what would be rhe next episode ar rhe workpiace rhe follov;ing day I

I

Questions:

-l

ldenrrfy and elaborare on three (3) erhical issues in rhis case 2. Cori-rmenr on rhe working environmenr at rhe chemical planr 3 ls it ethical for Sivan to refuse ro do his assigned task and disobey En Aziz's insrrucrions? ,i Apply Kanr's Theory of Erhics and Theory of Righrs in your analysis 5 Assess whetlrer Anita was sexually harassed on her firsr day ar work

254

ffi tr 'u

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.re1

ffi &

.15&rG

ffi ffi Ahmad Mahdzan Ayob (n.d.). Affirmative Action is Nut Reyerse Discrimination. .

Accessed on 5 October 2013.

i -Tc -1-';i

Al-Quran, King Fahd Complex: Madinah Munawawarah, K.S.A. For the Printing of the Holy Quran. . Women's Action Society (AWAM) (2010). What is sexual harassment? " Accessed on 5 ]uly 2013.

All

Arninuddin, M" (2002). A Guide to Human Resource Management: Attracting and Keeping Good Selangor: Penerbit Fajar Bakti.

;q

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People.

A.G. Abdullah and A. Mohd Zainol Abidin (2011). Business Ethics. Seiangor: Oxford University Press.

Ayob, A.M. (2004). Malay .mages in Economic Affairs: Viewing Through the Lenses of a Malay. Paper presented at the Second International Conference on Malay Civilization Organized by Universiti Pendidikan Suitan Idris. Held at the Legend l{otel, Kuala Lumpur, Malaysia, 20-28 February 20A4.

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Benn, S.I. (l98B). A Theory of Freedom" New York: Cambridge University Press. Ber,rama (12 Decemb er 2012). Data privacy law starts lan 1. . Accessed on 15 August 2013.

Y I

I3r-ratright, J.R. (2007). Ethics and the Conduct of Business (S'n nd.). New )ersey: Prentice I{a11.

Boartright, ].R. (2009), Ethics and the Conduct of Business (6'h E,d). New

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erse,v: Pearson

International Edition.

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Ca11ahan, E" S.,

& I)workin, T. M.

(1994).

Who blows the whistle to the media, and rvhy: organizational

chara.teristics of media u.histleblo-vers. American Business Law lournal,32(2):151-184. Clhitose, Yosirimi. (2003). Effects of Government Policy on lnternal Miqration in Peninsular Malaysra; A C)omparison betu,een N4alays and Non-M alays. The lnternational Migration Review. New York: Winter 2003, 37 \4):1191-1220.

T I

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(iolren, D. (2004). In Malaysia, the End of Quotas. The Chronicle of Higher Education \\rashington: 13 Feb 200,1. 50 (23): A.a2.

()omnrunity Education Dir.ision, Malaysian Anti-Corruption Comrl-rission (22 May 2013). Anti'corruptron Initratives in Malaysia - Official Portal of Malaysian Anti=Corruption Cnrnmission (pp. 1-93). . Access ed on 27 August 2 0 4. 1

L-'ornl,anies Commission of Malaysia (n.d.). Act 125 Companies Act 1965 (REVISED - 1973) Incorporating l,atest Anrendment-Act A1299 12007. Companies Commission of Malaysia. <]rttp://u.r,r,w.ssm.com.mylactsi f.sc,,:mmand/CompaniesAct.htm>. Accessed on 26 Aug. 2014.

Crane, A. and Matten, D. (2007). Business Ethics (2"d Ed.). Oxford: Oxford University Press. De George, R.T. (2006). Business Ethics (6'h Ed.). New )ersey: Pearson Education.

f)epartrnent of Statistics Malaysia. (2010). Population Distribution ar,d Basic Demographic Characteristics Report 20fi. . AccesseC on 10 August 20 t4.

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Desjardins, ). (2009). An Introduction to Business Ethics

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Dworkin, T. M., & Baucus, M. S. (1998). Internal vs. external whistieblowers: a comparison of whistleblowing processes. J ourn al of B u sin e s s Ethic s, 17 (12) : 1281 -l2g B (1" Ed"). EdmunC Terence Gomez and |ohan Saravanamuttu (2013). The New Economic Policy in Malaysia Singapore: ISEAS Publishing.

Fried,C.(19B4).Privac1,.InSchoeman,F.D.,ed.,Philosophicaltlimensionsofprivac7.NewYork:Cambridge Universrty Press. pP. 203 22. Garrett, J. (2004). Discrimination and Affirmative Action. . Accessed on 26 MaY 2005. Goh,

1.. (3

March 2Ol3). M/oes for Women who want to work. Sunday STAR. p.

B.

Grey, T L. (1983). The legal enforcement of morality. New York: Alfred Knopf. Griswold v. Connecticut, 3Bl 11.s.479, (196s).

Han, C.H. (n.d.). Conflict of interest cases: An ACA success story. The enhancement of integrity ond anticorruption measure s. . Accessed on 20 .\ugtrst 2014. Haslett, D.W. (2002). \{orkplace Discrimination, Good Cause, and Color iliindness. The Journal o.f \ralue Enquiry, 36:73-88. Index Mundi (n.d.). lvlalaysia labour participation rate. Labour Force Report 2007. . Accessed on 9 July 2011.

International Labour Organization (n.d.) O.E.C.D. definitions. O.E.C.D. Data Collection Prograttme. . Accessed on 10 August 2011. Ner'r' Yor[ ]ackson, S.Il. and Associates {1992)" Diversity in the Workplace: Human ll.esource lnitiatives. Guilford Press.

]ohnson, D. (19S5). Computer ethics. New |ersey: Prentice Hall. Jones G.R. and George

,.M. ( 2003) . Contemporary Management.

(3'd Ed.). New York:

McGraw-Hil1/lrwin.

Khalidah Khaiid Ali, Satirenjit Kaur ioirl, Lai Fong Woon, ilohani Saileh, Sofiah Molek Lope Aman Shah, Ilahayu Abd. Rahman and Ilmiah Ibrahim QAl2). Business Management: A Malaysian Perspective (2'd Ed.). Seiangor: Oxford Fajar. Klitgaard, R" and Katz, R. (1983). Overcoming Ethnic Inequalities: Lessorrs from Malaysta. Journal of Policy Analysis and Management, NewYork: Spring 1983,2 (3): 333-350Malaysian

Alti-Corruption Commission (n.d.). Corporate Integrity

Pledge (CIP).
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14'

Malik lbn Anas (1989). Al-Muwqtta of Imam Matik lbn Anas: The Islamic Classical Library

Series.

United

Kingdom: l'loutledge. Mansoor A1-Aaii (2008) Cornputer ethics for the cornputer professronal from an islarnic point of view lournal of InJarmation, communic*tion and Ethics in society,5(i): 2B-a5

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Messaoud Mehafdi (2000). The Ethics of International Transfer Pricing. Iournal of Business Ethics,2B(2000):

367,374 75.

Miceli, M" P", &Near, J. P. (1984). The relationships amongbeliefs,organizational position, and whistleblowing status: A discriminant analysis . The Academy of Management Journal,2T(4): 687-705.

.,.

2Ol2). Pelaksanaan Program Bantuan Rakyat lMalaysia (BRIM 2"0')" . Accesseo on 9 October 2013.

Ministry of Finance Malaysia (30 Octobei

rn..S

1:t

Mohd Nazari Ismail, Lee Kum Chee and Chan Foong Bee. (2007). Factors Influencing Sexuai Harassment in Malaysian Workplace. Asian Academy of Management lournal,l2(2): l5-3l,luly 2007"

"--{

Moor,l. H. (1990). The Ethics of Privacy Protection. Library Trends. (Summer/Fall 1990), 39 (1 & 2):69-82.

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-l5 r:t1

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Accessed on 25 Septenrber 2013. i

Muhammatl Haslam Hayat (]une 2007). Privacy and Islam: From the Quran to Data Protection in Pakistan. Information and Communicutions Technology Law lournal,16 (2): 137-148.

Munira Sulaiman (2012). Privacy Act. . on 18 September 2013.

Accessed

Murni Wan Mohd Nor and Ratnawatr Mohd Asraf. (2011). Technology and the Deterioration of Right Privac1,, [riernational Iournal of Asia Pacific Studies,T(2):37-54, ]uly 2011. Muslirr-r American Society (n.d ). 'I'he 40 Hadith compiled by Imam Nawawi. com/index.php/the-hadiths/hadith-1 >. Accessed on l0 Octob er 2013.

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to

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Noe, R. A", Hollenbeck, J.R., Gerhart, B. and Wright, P.M. (2003). Human ResotLrce Managemr:nt: Competitive Advantage (4'h Ed.). New York: McGraw-Hill.

Oaining i

Noor l{ahrnah H.l. Abu Bakar (2012). Malaysian Women in Managenient. Geografio-Malq,sian Journal sd./e/) aud Spare.SA): 12-20. Parent, W.A. (1983). Privacy, Morality. and the Law. Philosophy and Public Affuirs,

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of'

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)2(.4):269-288. i

Rasiah, R. and Shari, I. (2001). Market, Government and Malaysia's New Economic Policy. Can'Lbridge Journal of Economics,25:

57-78.

I

Reimarr, J.H. (1997). Critical Moral Liberalism: Theory ancl Practice. US.A.: Rou,man and Littlefielcl

CBS Evening News. (19 February 2014). Second whistleblower cries

Shaw,

Moral

Issues

in

Business (g'h gd.).

firing iring/>.

foul in \{ashingtort nuke plant


Publishen

California: Thornpson

Wadsworth

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i I

i

WH. (2008). Business Ethics (6'h Ed.). California: Thompson Wadsworth

Shaw,W.H.andBarry',V.(2010). Moralissuesinbusiness(il'hEd.).Califonria:Wadsrvorth Cengagel,earning. Shaw, \4'FI. (2011) . Business Ethics (7'h Ed.). California: Thornpson

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Wadsivorth

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(a):577-598

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"

i

enL. Public

Pt,rsonnel lvlanagement,

I

Common lssues at the Workplac

e

Tamrin Amboala, Mohd Zulkifli Muhammad, Siti Faeizah Mohd Ali (n.d.). An Overview of Cyber Law.s in MaIaysiafromIslamicPointofView'.Accessedon l8 September 2013.

,

The Star (29 August 2012). Woman wins sexual harassment case against ex-employer.

'Ihe Star (23 May ZOt3). Adopting good occupational safety andhealth practices. . Accessed on 23 May 2013.

The Star (29 April 2014) Concern grows over worksite fatalities. . Accessed on29 Aprll2014Tucker, I. B (2003). Economics

for

Today (3'd Ed.). USA: Western College Publishing'

Ltmar bin Al-Khattab. Hadith on Intention. Vol. 8, Book 78, Number 68, Bukhari Muslim. . Accessed on 10 October 2013.

--

Velasquez, M.G. (2006). Business Ethics Concepts and Cases (6th Ed.). New |ersey: Pearson.

-

\{rarren, S., & Brandeis, L. (1984). The right to priuacy.ln Schoeman, F.D., ed, Philosophical dimensions of privacl, . |'jsu, York: Cambridge University Press' pp' 75-103. \\Ieiss J \r, . (2006). Business Ethics (4'h Ed.)" USA: Thomson-South Western.

'

',\'estir-r, A. F. (1967). Privacy andfreedom' NewYork: Atheneum.

\\rorld Ir-rtellectual Properties Organisation. (n.d.). What is a trade secret? . Accessed on l0 May 2014-

257

CHAPTER

Business Ethics and Information Technology **fi@t*"*

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LEARNING OUTCOMES At the end of this chapter, you should be able to: r ldentify the underlying ethical and social issues in information technology. r ldentify the various security threats ol information systems. r Discuss some current ethical issues in information technology. r Explain how organizations can establish information system controls to ensure better information system security.

Business Ethics and lnformation

{,8.0 lNrnoDucr!oN Information technology (IT) has provided much variety in terms of available information and resources, as weli as new prospects for users, and this in turn has given much needed understanding of ethics in contemporary times. The risks posed by unethical adoption of information technology have also increased in tandem with the increase of IT acceptance in our everyday lives. Some of the examples are the spread of the Internet, the ability of some devices to capture and store vast atlounts of personal data and also the greater reliance on information systems in all aspects of our Iives. However, despite the many IT breakthroughs in recent years, the importance of ethics and human values have been seriously undermined with dire consequences. Therefore, developing and sharing information technoiogy guidelines are imperative as they cor-rid influence individuals'present and future practices. The following are some examples of serious questions raised on how organizations, managers, employees and users vien ethics in the Conr-Xt of IT usage:

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In the context of the n orkplace, many employees found that their e-rnail and Internet access were monitored closely by the organization. Ernployers seem to be balancing the need to manage important company information and work productivity rvith their employees' need for privacy and self-respect. 'i'here also seems to be rampant copyright violations when rnillions of consLrmers worldwide dorvnloaded music and movies illegally at the expense of the music and movie producers, causing them millioris of dollars in loses every year.

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r

Spamming is often used as a marketing tool by compzrnies to send unsolicited e-mails to unsuspecting customers. On many occasions, it is common for companies to use cookies or spyware planted purposefully on the compairy's website to track consumers' online

activities and purchases. Financial institutions and retail establishments r,vere often tarqeted by hackers lvho break into their databases and steal customers' information to commit identity theft, thereafter using the stolen identities to open accounts and charge illegal purchases. Plagiarism and il1egal dorvnload of materiais from the Internet are also common and rvidespread among students worldwide.

to be reminded that ineffective implementation of policies thai ?overtr IT usage nla): cause unique etl'rical issues to emerge. To avoid and address such concerns,

It

r"reecls

the fbllorving sections tvill discuss the relevance of ethics in lT in the context of current problerrrs.

;. 8.1

OVERVIEW OF ETHICAL AND SOCIAL CONCERNS IN r

N

FORMAilON TECH NOLOGY (lT)

In today's environment, information technology dominates businesses which have iruly become IT.enabled companies. As such, we use and process vast ainounts of data and information collected internally and externaily. This information is then L $"

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Technology 259

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Business Ethics

A.*r*.

drr-l

and information are imporrant

to

organizations in order

to achieve efficiency and e[[ectiveness in daily acrivities and decision-making processes.

within the business and used by organizations to make operational, managerial and strategic decisions. In business, information is seen as the means through which organizations expand and increase their capacity to achieve their disseminated

goals. Therefore, information forms inteliectual capital and organizations value this capital as an important resource. As such, this capital is at risk when organizations are faced with ethical and social challenges. There are many and varied ethical and social challenges in businesses, in particular tron'data and infbrmation are collected, handled and distributed to ensure that the information is of vaiue to them. The main ethical and social concern is people's fear of losing their personal information; the fear of their information being used or made accessible to the public without their consent^ There is also the added threat of information that may contain errors that could affect the decision making processes, which could threaten the survivai of organizations.

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The ethical concerns that most organizations face are related to privacy, accuracy, inteilectual property and accessibility. Each of these concerns is discussed in the following section.

1

8.1.1

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Privacy

With the advancements in IT, especiaily in Internet technologr,, personai informatjon is now more accessible and easier to collect. Some ol this information might reveal personal details of a person which may affect professional and personal relationships through thc manipulation of such information. X4ore and more people are afraid that their privacy may be invaded by thircl parties, lr,here personal identifying information is often collected by businesses and stored in r.arious formats, both digitally and on paper. The lnain concern related to prir.acy is nhat kind of information shoulcl people be required to divulge of themselves and under rvhat conditions should they do it? People ought to be cautious when providing their personal information, especially those that need to be kept strictiy confidential. There are tu'o main factors that threaten the privacy, of individuals, and thai is the adyancement of information technology, and the value of information. Advances in

information technology, such as the use of fibre optics and telecommunications, have increased the capabilities of information :;1'stems. Nor.r', most information systems have the capability to compute, store and retrier.e data quickl,v. Also, information systems har.e the capability to monitor information that goe s in and out of a network, thus allon,ing information to be intercepted by otl-rers. With information no',t,seen as a valued resource in organizations, par:ticularli- in assisting managemeltt in strategrt decision-makrng, organizations are compelied to seek more information. Therefore, in acquiring information on their customers, organizatjons rnay indirectly coilect personal information, thus invading their customers' privac1,. Threats to privacy rvil1 always be a concern to individuals; however, therc is an arra,y of technologres that are available that could mitigate some of the risks associated with privacy. One such technologlr is the use of encryption technologies that protect data frorn unauthorized access. Organizations can also use anonymization or pseudonymization technologies that automaticaliy biur all personal informatior,, whereby personai information to authorized persons at a particular point of time through authentication n,ill be just enough to verify that a channel is secure. Organizations can also use rveb browsers' interface technologies to display hidden infcrmation about cookies that can alert people to threats to their privacy and also remind the m to set therr privacy pa'ameters. There has been a growing concern arnong -[nternet users worldwide on the erosion of their privacy. On Data Privacy Da,r,, a survey rvas conducted by GlobalWcbindex

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Business Ethics and lnformation Technology

and many eonsumers were found to be sceptical of the level of privacy assurance given by Internet companies as shown in case for review B.l.

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lnternet Users Losing Trust in Companies Every year on 28 January, the world celebrates Data Privacy Day. The day is commemorated

to

tatse

Privacy Day, it

was reported thar a awareness and to promote dara privacy education. On Dara study done by ClobalWeblndex, which is a reputable research company, showed rhar there were increased concerns over privacy matters rn how informarion and data had been used. The survey done by ClobalWeblndex of 170,000 individuals found thai 560/o of them were concerned about the effect of rhe lnterner in eroding rheir personal privacy. This was in fact a 5% increase from the survey conducred in the pasr 2 years. The report also stated rhat among countries around the world, 17% of lnrernet users in Sweden expressed concerns compared ro 58% in Sourh Korea. A toral of 28o/owete found ro be using Virrual Privare Nerwork (VPN) tools when online, which eguales ro approximately -120 millron people worldwide. ln anorher reporr from lpsos Mori, ir was revealed that in the case of UK, the number of British lnterner users rhat trusred companies wirh rheir personal rnformaiion had dropped rc 55%, which is an 8% decrease over the last 2 years. The polt ol 2,000 UK lnrernet users found that an overwhelmingglo/oof consumers would be less likely to click on onlirre advertisemenis, while a similar 89% of rhose surveyed said thar they avoid -ompanies that they beireve do not protect their privacy. (Adapred from 't)K lnternet users'losing trusr' in compantes' by Ellen Hammerr, A,lediaTel i'le'vusltrte,

2E

January

2A14)

'l'hc Mala,vsian Government passed a bill on the Personal f)ata Protection Act (PDPA) 2010 to regulate the processing of personal databy data users in the context of con-imercial transactions that lt,ill safeguard the personal data and interests of individuals" According to the PDPA, all personal data obtained must have the consent of the olvner of the datir prior to processing it. The PDPA also states that indivrduals th;rt pror.ide tlieir data have the right to access, correct and control the processing o[ lheir personal data.

[i

h. M.hr,r*.,

Covernmenr passed a bill on the Personal Dara Prrotection

Act (PDPA) 2010 to regulate the processing of personal dara by data .

users in the context

8.1.2

Accuracy

Previously, organizations worked with iess data. Therefore, the only tluality :,rssurance needed to be performed was on data. In addition, Irlost of the operations and procedures rvithin the organizations were rnanual, and thus the focus was on the output of those business activities. The advancement of Internet technologies ruch as database management systems and cloud computing has contributed to the emergence of shared and comoutertzed databases. These technologies also enable *rganizaticns to carry out more complicated and interconnected Processes. These nerv technologies allow organizations the potential to collect, handle, and distribute iarge amounts of data and contain a variely of information. Hence, o'ganizations have more data to work with in providing relevant information to assist managers in strategic, managerial and operational decision-making.

of commercial transactions that

will safeguard the personal data and interests of individuals.

tbl

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Business Ethics

Working with vast amounts of data may cause irreparabie harm to organizat such that inaccurate information are collected and/or disseminated to author users that can lead to inappropriate decision-making. Effective decision is driven by accurate information. Therefore, organizations must ensure thaf thl' information disseminated across and within the organization is accurate. Ethical issues involving accuracy can be mitigated by determining the basis for the level of accuracy in any given system and whether it is sufficient, The responsibilities in attaining data accuracy also depend on the person assigned as the custodian of the information, in this context the Chief Information Officer. With the advancement of information technology, organizations can no\{ use automated data entry systems that caution users of bad data entry, thus improving accuracy.

8.1.3 rr..*;..'*ilryl four rypes of intellectual property righrs relevanr ro sofrwareparenrs, copyrighrs,

irade secrets and rradcmarks.

Many debates have arisen as to who has the right to the intellectual property of information technologies, particularly the right to its applications or software. In the software industrl,, intellectuai property rights have become the main concern of organizations, especialiy the issues of intangible rights of ownership in an asset such as a software program, which includes the source code, object code and idea. There are essentialiy four types of intellectual property rights relevant to softwarepatents, copyrights, trade secrets and trademarks. Copyright protection involves the protection of a particular form in which an idea is expressed. However, with the advancement of information systems, copyright law has been used to protect sof tware developers from having their softnare copied, and that lncludes the source and object code, as well as certain unique elements of the user interfacc. Softnare developers can protect their rights by obtaining softivare patents. Ther, can patent for systems, methods, algorithms, and functions embodied jn the softu,are, In addition, any editing functions, user-interface features, compiling techniques, operating system techniques, program algorithms, rnenlr arrangements, display presentatiorls or arrangements, and program language transiation methods can also be patented. Patent righrs are exclusive, therefore any infringement on the rights by another party to use or seli the patent without the patent owner's authorization is considered illegal. Other ways of protecting software owners is through trademarks and trade secrets to identify any of their software products, services, and progrants on packaging, promotional, and advertising material. Using trademarks and trade secrets allorv for a much ionger Iasting protection of the softr,r,are.

8.1.4 rh.

b*hr

I

accessibility of

information systems rhreatens to increase the gap between the haves and the haveNOTS.

lntellectual Property

Accessibility

In this era of information, a person needs to acquire the intellectuai skills to cope with information and to use the information to its full potential. Apart from inteilectual skills, an individual must also have the technical skills to access the information from electronrcaliy stored databases that store, convey and process information. By using electronic shared databases, one has access to the ,nformation for a cost. Conversely, some people have the ability to access the informatron databases, b,.rt do not have the required intellectual and technical skills to make full use of them. Hence, this group is excluded from taking part in using the information systems, and as such is left behind. In the long run, the gap betrveen those who are able to access and those that do not know how to access the information sysr.ems may create social problems and gaps in society.

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Technology 263

SECURITV THREATS iHAT AFFECT INFORMATION SYSTEMS r

sources' Infbrmation systems are also subject to security threats from unexpected Valuabie particularlybusinesses that have websites, intranet and access to the Internet. a major is considere'i thus information can be accessed by authorized users, and it is more the threat to organizations. The more sophisticated the information system, .rpor.d to iecurity threats. These securitythreats maybe caused by operating systems' ...."kn"rr.r, network operating systems; weaknesses, default configurations of the firewalls, operating systems and network operating syst€ms, netwo_rk devices and the encryptiin ouerkners.r, and poorly written applications. We will look at some of common informatiort security threats in the next section'

8.2.1

Hacking and Cracking

jnside and outside the Security threats from humails are malicious acts by people orga'ilation. This human threat may manifest itseif in the form of attacks from and iliigruntled or malicious employees and non-employees who are trying to harm the are .iisiupr Ln organization. Ivlaiicious attacks from peopie rvithin organizations da ngerous inost dangerous, especiaily those who are former einployees. fhey are more therefore applications, and because tirey are familiar with the organization's computers tnaliciotts T]-rese are most likely to know lvhat actions will cause tnaxitlum damage' acts from insiders can affect aii components of the colnputer security-unauthorized capacity-and cause access to informatioir, overload of s1'5136 processing and storage

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threats from oucside the organization.

a system crash.

Nlalicious attacks can also come from individuals outside the organization rvhtr try to access and brorvse through computer systems to reveal confidential infrrrmation term to the public. Attacks from outiiders are often calied'cracking'or'hacking'- The in hacker rei-ers to sonleone who enjoys going into a system and using it extensively expert an become that they so order to understand how the entire system works, in that particular system. In the past, most hackers were persons sought out by orguniruiions to feret out informaiion. However, technology irencls such as big data or-,i Irrt..rr.t technologies have created new marketing and operational capabilities' thr-rs cl-ranging the role"of hackers in the digital world. Norvadays, the term'hackers' words, r-efer to inciir,iduals who break into systems without authorization. In other rvhich for systelns on boundaries irackers are people who intentionally overstep their the1, do ,rot iror" Iegitimate access> and therefore commit a criminal offence. Crackers are people who try to break into systems through comlrloll methods a such as cracking passwords, exploiting known security rveaknesses, and spoofing of *etwor-k. The rnotive of hackers and crackers for going into an organization's computer system is normally to disrupt services and the continuity of business operations by using denial-of,service attaik tools. Many of these hackers and crackers may also want to steal information to sell it to competitors'

8.2.2

Computer Viruses

Malicious attacks from parties outside the organizations can aiso come ln the fcrrm of computer program threats or malicious codes, knolvn as .omputcr virttses or ,nalwaie. Computer viruses that occur in the system can create nuisance, alter

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or damage data, steal information, or cripple the system's functions.

Examples

program threats or malicious codes include comPuter Program viruses, Trojan horses, logic bombs and worms. The most common malicious code is computer viruses that actually contain a destructive program. As the name indicates, computer viruses are viruses, whereby the destructive program codes attach themselves to a host in a file or program of a computer system. By attaching themselves to a file or program, they are able to copy themselves and spread to other hosts via e-mail. 'Ihe computer viruses can also be spread when users download files from the Internet, or when users open a contaminated file. Computer viruses are written by individuais with the intention of creating serious damage to private, business and government computers" Computer viruses are being written by virus writers eyery year as they feel the need to create new generations of viruses to rival the latest computing techniques. The more computer applications and software are developed, the more computer viruses are written, with hundreds ofnew viruses discovered each year.

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programs thar disguise themselves as uscful applications,

and are able to caprure private irrfornration. Worn'rs, logic bombs and Trojan horses are dif ferent forms of malware.

8.2.3 Malware, Spyware and Adware

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Trojan horse, logic bombs and worm programs are not true viruses as they do not replicate. They are categorized as malware. Maiware are malicious independent programs that disguise themselves as something useful sucir as a screen saver or build themselves into a free download. When this malware is loaded onto a computer system, it has the ability to capture information from thc system, such as uscr names anr.t passwords. Access to user names and p:sswords will then allorv hackers or crackers tcr remoteiy control the organization's computer system. Malrterrc' can cause significant darlage to prir.acy and security. One form of malr,r''are rs the computer rvonr. Worms do not have to attach themselves to a computer program -thev are independent programs that replicate themseives by sending copies of files to other computers in the network. The network infected by the computer wonl rs damaged, as a lot of bandwidth is used to send millions of messages in the form of spam e-mails. Worms usually affect the computer's memory and cause the svstem to be unresponsive. I oqic bombs are also a type of mairvare, but they work differently from the rvorm. Logic bomb malware remain hidden in the main computer system and rviil only be actir,,ated at some point in time, when users begin to use the prograrn then the malu,are will begin destroying data in the computer system. Troian horse, another type of malware, impersonates as an independent and iegitimate softrvare program. It then attaches itself to the computer system, and once it is triggered by a pre-set errent or date in the computer system, it starts to destroy files or disks, Like malware, spyware is also an independent soft,,r,are program ernbedded in computer systems. Spyware is used to gather privatc personal infrrrmation that is then relayed to third parties that har.e vested interests in tlre information, for example, advertisers. Spyware applications can monitor keystrokes, scan files, and snoop on other applications, for example, chat programs and word processors. Other spyware programs can be installed into the main spyware. Spyware can also read cookies, and change the ciefault homepage on the web browser. Inforruation gathered by the spyware is then sent to the spyware home base. Spyware is often installed u,hile a person visits a website, by clicking on a disguised pop-up u,indorv, or rvhen dou,nloading a file' {rom the Internet. Although instaliing spyware may expose users to malicrous attacks, rrsers are usually aware that thev have installed spyware. Adware is another form of corlputer progrrm that is maliclous. Advertisements such as pop-up windows or advertising banners on web pagcs are one form of adware. Generally, adware is software offered by software developers as free trials. Users would

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then use the free trial adware, and sometimes even view the sponsored advertisements, reports and this infbrmation is captured by the adware. The adware also captures and third users' habits, preferences, or even personal information to advertisers or other part ies.

8.2.4

Non-malicious Threats

rvho Threats to information systems security can also come from authorized users empioyees the from come are not aware of their actions. Usualiy, these threats with themselves, such as data-entry clerks and system operators who are unfamiliar the system. Although actions ty these employees are unintentional, they still directly and indirectly coniribute to security problems. For example, when users use the Notepad to open a Microsoft Word document, edit and then save this document, they or can cause ,.iiort damage to the information stored in the document. Data entry be to data valuable cause programming errors can cause a system crash, which can

iost, damaged or altered, causinq organizations to operate at

8.2.5

a loss.

Spamming, Phishing and Spoofing and

Spam is any form of e-mail message that contains copies of the same message, aie fbrced on people that clo not request or require the message. Spamming is usually done br, r-,rrurthoiir.d individuals, who steal Internet maiis, scan Usenet postings' or search addresses ,,,ia the web. Spam is normaliy an email message that contains :omrt-iercial advertisement messages for products and services of dubious quality and tluestionable legality. Sparn messiges aiso include chain letters, poiiticai rnails and other forms of ,o,-, l.ornmerciai mai1. Spam e-mails are often ref'erred to as'Internet iunk mail' and the recipient rather than the sender bears the cost. phishing is also related to e-mail messages that are forced onto its recipients. llowever, phirl-ri,-,g is nrore critical than spam, because phishing is used to gather personal ancl finaircial information by sending e-mails to the recipient disguised as .cgitimate e-mails. Most phishing e-mails come from weli-known and trtrstrvorthl' wlbsites such as PayPal, eBa,v, Yahoo and BestBuy that perpetrators use to try and iurc people into giving up their personal and financial information' Spooiiilg refers to e-mail messages that appear to have been sent lrom someotle

ither than ihe real sender with malicious intentions, such as virus rvritcrs and

individuals r,r4ro send spam mail. I{ence, they disguise themseh'es as someone usltrg an ;-mail that rs r-rot tileir orvn. Thus, the e-mails cannot be traced back to ths originator' A critical concern of spoofing is that people do not realize until it rs too late that thev have received spoof mails.

8.2.6

Denial s{ Service, Abuse of Wireless Networks, Misuse cf Public Web APPlications

:ometimes organizations receive vast amounts of fake requests sent through their server by hostie Llsers. These requests can cause the server to crash, making it difficult for the organization to establirh u .orrrr.ction between its server and its legitimate ;1ients. 'i'he difficulty to establish connections between servers and legitimate clients is termed as denial oi service (DoS). Hackers use this condition to their advantage by hijacking anci controiling thousanels of computers remotely to launch massive and ;oordinated attacks. Massive DoS attacks within the organization cal paraiyse a network systen], resulting in significant server downtime and financial loss-

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With the advancement of wireless networks , organizalions can now gain access to clients'data and information. However, the convenience and flexibility of wireless networks in providing data and information is often abused by organizations or people, and this is referred to as abuse of wireless networks. As the networft5 nr. flexible and can be conveniently accessed by users, indir,,iduals begin to abuse the network by cracking passwords and reading network data without having to physically access the network. The gaining of access to an organization.'s netw-ork and data by unauthorized users disrupts the organization's activitres. Wireless networks can also help create new business models in organizations, especially the e-commerce business model. As such, e-commerce applications over the Internet can create vulnerability and abuse of this application. Hackers or crackers will attack the e-commerce applications directly by evading traditional network firewalls and intrusion-prevention systems. Usually, hackers and crackers evade user interfaces'web applications and steal customers' data, particularly their credit card information, by adding commands into databases.

8.2.7

Computer Theft and Website Defacement

Laptops and desktops are important artefacts of information systems and need tg be protected. The main security concern is that they becorre the target for thieves. Theft of these items do not only involve the loss of tangible assets (laptops and desktops), but also intangible assets. For exampie, proprietarl. corporate data, access codei to company networks and private information. Other than theft, organizations shouid also be concerned about their rvebsites. One security concern is i,vebsite cief'acement, where the r,vebsite is sabotaged by a third party and the attackers often take advantage of undisclosed system vuinerabilities or unpatched systems. In this case, the thiid party will sabotage the crganization by inserting and altering information that may lead to negative publicity affecting a company's image and credibilitv.

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8.3

CURRENT ETHICAL ISSUES IN r N FORMATTON TECH NOLOGY (tT)

The foliowing section

will address some crlrrreni erhical issue s in the use of information technologt'. These include issues on consumer prilaci, ivorkpiace surveillance, location privacl', the globalization of oniine activity and the protection of intellectual property. This list of issues is certainly not exhaustive brrt provides a sample gf the complexity of ethical problems in the context of managing rnformation technologl,.

8.3.1

Consumer Privacy

Should consumers be concern or worried every time they engage in e-commerce activities? Would they have the assurance front the retailers that their privacy is" protected when they perform online transactions? When interacting with company websites, many peopie are not aware tliat coollie technology pnr.r u serious threat to their privacy. Cookies are text files that rvebsites send to and retrieve from the computer systems of web users. Through this tg6itnology, website owners are able to collect information concerning users' preferences when interacting with them.

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However, there is a downside to this technology as the information collected from the user's computer system can be retrieved and later resubmitted to the retailer's website whenever the user accesses the site again. There are both proponents and opponents to the coorie technology. Those who oppose the technology are concern about the types of customer profiles that can

eventually be generated via cookies. Many are also concerned about the manner in rvhich the pcrsonal information is extracted, often without the knowledge and consent fiom users. Many also believe that the practice in monitoring and recording users' activities while they visit a particular website and subsequently dorvnloading that personal information is a violation of their privacy. On the other hand, the proponents of cookies are owners and operators of online businesses who argue that cookies perform a service for repeat users of their website. By customizing the customers' preferences for future vjsits, retailers would be able to serve their clients better. Some forms of technology such as the Privacy Enhancing Technologies (PET) could be used to assist Internet users rvho wish to detect, biock or restrict cookies on a selective basis. However, even with this technology, users are nct able to disable cookies for er.ery website that thev visit as some consumers are required by the retailers to accept cookies if they want to proceed with a purchase at the retailer's website.

8.3.2

Employee/Workplace Surveillance and Privacy

monitoring of enrployees at the workplace is a common phenomenon even before the introduction of technology as a surveillance tool. With the invention of better rlonitoring and computrng devices, there seems to be nou., an 'ir-rvisible supen'isor' that monitors tl-re activities of employees around the ciock. It rvas also reported irt a US study that about 45o/o o{ major businesses record and revierv their employe es' communications and actions on the job. These incltrde checking their telephone calls, T'he

computer fijes and even personal e-mails. As the surveiilance technology becomes less expensive and easiiy accessible, this has created a situation where it l-ias now become part and parcel of mor-ritoring employees' behaviour at tire workpiace. This could include actions such as monitoring horv long an employee spends on the t,:lephone completing a transaction (sucir as seiling a product or resolving customers' problems) or the number of breaks that the employee takes. In terms of employees' rights to privacy, is empioyee surveiliance ethicai? Violating individual privacy might be seen as an ethical issue as the lack of re spect for privacy seems to violate and interfere tvith the personal development of the individual's personality and identity. It can also be seen as a sign of disrespect and trust tolvards the particulirr emplo,vee. On the other hand, from the point of view of the employers, the justification ibr allowing monitoring and surveillance at the workplace stems from the problems they have to deal tn,ith, such as theft, to increase workers' productivity and the nced to linrit personal use of technology. There seems to be fears arxong companies tirat their employees might abuse the power given to them through such actions as sexual harassnrent, negligence in hiring and supervision, pornography and cyberstrlking. So, the only way to stop or discourage these occurrences is through the means of cyber rnonitoring. The question therefore wouid be to what extent is employee monitoring .:gitimate? In the context of Western society, it is generally agreed that employers have a genuine concern in employee aetivities that can be subject to scrutiny, such as their actions wiren on the job. At the same time, there is an understanding that there should le boundaries to employee monitoring and few would support the installat,on of :;urveillance cameras in company toilets. Holvever, it is not allvays clear where exactly the hmits of legitimate surveillance are.

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Currently, there seems to be a growing number of companies willing to pay good money to invest in high-tech surveillance devices to watch over the behaviour of their *tr&l employees. One of the companies that manufacture these devices is Hitachi. As shown ,.i(fri in case for review 8.2, this device is sophisticated and would be able to track and s* record the activities of employees within the office. ' -{.t :l :::-l

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There was a new producr in rhe marker to rrack the movemenc of empioyees in rheir workplace Elecrronics man'. racrurer Hitachi recenrly unveiled a hrgh-rech lD badge thar not only rracks an employee's exacr locarron wirhin the offlce, bur also keeps a record of all ihe other siaff members rhey have spoken ro, for hov; long and how energetically. The device was dubbed the'Business Mtcroscope' as ir would be able ro send ro an employer such informarion as the durarion an employee spends our of their cubicies or even how long they, spend rime in rhe torler Besides berng able to mont[or which employees spend rheir days without much productive woi'k such as gossiprng with frrends, rhe new device worrld also be recording how energetic rhe employee is durtng grQup meetings ln the company website, a message posted abour the devrce menrioned that 'Bustness Mrcroscope uses sensor rechnology to measure and analyse inner company commun cation and acrivities'. Htiachi said ihe rechnology was designed ro help boost efficiency levels in rhe woi'kplace and to help employers realize and react to problems rhar may orherwrse have gone unnoticeci Howerrer the product was unlikely ro be pr:pular among emplo;,ees. Hitachi in a statement sard rhat they hope ir wr I help boosr employee cooperation, leading ro a better atmosphere The Business Microscope rs by no means rhe firsr surveillan:e.device io be markered rowa.rds employers for use in the lvorkplace Many companies already employ'ln[ernet moniroring'sofrware that scans sent and received e-mails, as yvell as monitor the websites they visir over ihe course of the working day These systenrs ofte,-r auromarically send alerrs direcrly to the employer when company rules are belteved ro have been broken. ln 2008, Microsofr filed a parent for software rhat allowed workers ro be tracked remoteiy, monitored their competence and productiviry, and even measured personal informatlon such as body cemperature, blood pressure and facial expressions. Microsoit abandoned rhe prorii-ict shortly after the paient was frled. (Adapred from

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your boss wacching youl' by John Hall, DatlyMatl onllne, 6 Februar)t 2a14)

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8.3.3

l-ocation Privacy

Through the Global Positioning System (GPS) technologies, it rvould now be possibie to track or pinpoint a particular object or person't location at any given tirne. This has 1ed to concerrri or-, the privacy issue known as location privacy. One ofthe technologies often used is RFID which consists of a tag with an embedded microchip and a readet The device is used mainly fbr coinmercial applications such as tracking items sold at retail stores, functioning as smart labels that n-rake it easier to track inventories and

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safeguard merchandise from theft or imitation. When used in a proper situation,-it
8.3.4

Globalization of Online Activity

With the rapid advancement of the Internet where almost everyone has access to its infor:mation, the jurisdiction for governing speech, hacking' fraud or any other online activity became a major concern. The question here is n'ho regulates the Internet and to u,hat extent laws are enforceable across different countries? In the context of the international nature of the Internet, legai regulations enacted by a particular nation may har.e lesser clout in another country and hence the difficulties in enforcing these laus when violations or ethical lssues pertaining to the usage of these technology occurs. Nevertheless, the Internet may also be a force that could drive countries to cooperate with each other. In certain countries, despite the globalization of the Internet and online activit,v, there seems to be a concern on the amount of information tirat could be accessed b1' the citizens of the country. In case tbr revieu, 8.3, the Chinese government censured sopre of the Internet bascd companics such as Facebook, Twitter and YouTube. Thc amout1t and t,vpe of information avarlable to her citizens are ccqstantly rnonitored and blocked.

Facebook ln China: ls That Censorship?

Alrhough Facebook has become parr and parcel of everyday lil'e for most of the people wc'rldl'vide. ir ren-rains off limirs ro the '1 3 brllion people (one fifrh of the rvorld population) ol China Facebook has.l.2 billion'monrhly acrrve users'globally where abouL 757 rrrliron rvrll log in almosr daily io its

ihar in Chrna, the application was blocked by the'Creat Firewall of China' Visirors to China often face the impossibilrtres of uploading and updaring the l'acebook pages Besides Facebook, orher social media applications blocked by Chrna's communtst governm.ont sire. Thei-e was a loke

'Tiananrne n' include Twitrer and YouTube. Even some particular'sensitive' Coogle :earcher-. sttch as or even 'Tibet'and'Taiwan'were blocked. These were deemed unsuirable ior China's populatron lhe

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aurhoriries employed armies of censors with sophistrcared equipmeni to block and monitor various sires. Due to the censorship, alternarive homegrown websites in China such as Werbo have become v'e!y ?o-pular. Restrictions in all rhese homegrown websites were easy to enforce as their servers \^/ere locared in China, so rhe censors could just delete and block any post Jr pictures rhat they deerned

to be offensive. (Aclapred from'The Creat Firewall Blocking Facebook ln China'by Mark Stone, SkyNews,

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8.3.5 Pr*,-l,t a"

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protect invenrions, lncluding products and processes. The holder of a patent can srop a rhird parry

from making, using or selling his or her invention for years.

a6rGh;p,"".;-l original works of aurhorship, including writren, rnusical and dramatic works as well as photographs, soirware and audio and vrdeo recordings.

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the name ofyour product. lt prerrents other businesses from using rhe same name

to sell rheir products, thereby preventing rhe confusion anci deception conSumers_

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The Protection of lntellectual Property

Any product of intellectual activity such as a music score, a screenplay, computer software or new formula or drugs are referred to as inteilectual property. Ownership rights over intellectual property also includes patent of inventions, copyrights and

trademarks. As intellectual property has become a source of increasing value t6 organizations in the 21't century, protecting these rights has become a challenging task. With the advancement of technoiogy, it has now become easier to copy and distribute pirated CDs or even illegally download computer software, music and videos recordings over the Internet. The idea behind the principles of intellectual property laws is to ensure that the inventor, designer or author of the book, music, computer software, for example, are protected and hence rewarded for their hard work in their creative endeavour-s" Different countries have different degrees of enforcement rn,ith regards to intellectual property rights. Although many of these countries have a comprehensive law that specifically speit out the protection, in actual reality enforcement of the laws are often less than desirable. Due to weak enforcernent, many irresponsible parties took advantage by engaging in piracy and theft o{'intellectual propertyr Two of the countries notoriously known for their relaxed enforcement and rampant vioiations are China and Thailand, where iliegai and pirated softi,vare and luxury n atches, bags and computer software are readily available. There are several directior-rs affected companies could take to seek remedies in case of intellectual property violation. Irirstly, they could lobby their own respective goyernments to push for sterner international action. For example, the IJS government has taker-r action after companies snch as Microsoft complained about massive copyright infringements in China. The t-lS government threatened to enfbrce sanctions and 100 per cent tariffs on Chinese products before the Chinese government relented and promised to tighten enforcement of rntellectual property regulations. Secondly, firms affected could also take matters to court. In 2006, Starbucks won a landmark copyright case in China against its r.iolator. Thirdly, companies may also choose to stay out of countries where intellectual property larvs are weak, rathe' than taking the risk of having their ideas pirated by local companies. In addition, firms wili also need to be extra vigiiant to ensure that the pirated products were not sold in therr own home market or other countries but to be contained 1ocai11.. The violation of intellectual property has become so rampant in certain countries that the violators even had tl-ie audacity to make the store, ambiance and staff believe that they were hired by the genuine compan\r In case for revierv 8.4, the fake Apple stores found in China had gained rvorldrvide attention for the perpetrators' ingenious display of attention to detail in copying everything that encon-ipassed Apple's look and feel.

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Fake Apple Stores in China

It was reported that 22 bogus Apple stores were discovered in the city of Ku,rming in China When pictures of the stores were circulateci on the web, rhe auihcriries wcre quick to investigare and look for che copycats. Preliminary investigations found five pnony 3iores, trnro of which were shut tlcwn I I

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due to operaring wirhour license. All 22 srores were found to violate the inreliectual property law ihey were using Apple's brand and logo illegally.

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The discovery of rhe fake srores cam'e about when an American iiving rn the ciry inadvertently discovered rhese shops and evenrually posted the info in her blog. Ihe blogger calling herself 'BirdAbroad'described rhe stores as a'beautiful rip-off'due ro the extenr the pirares took ro copy rhe decorarion and even armosphere of rhe real Apple srore. The blogger also described how in

the bogus store, employees were seen wearing T-shirts and sporring lanyards often seen worn

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aurhenric Apple sraffers. The posring prompced rhe authorities to rake action and the Admiltrsrrattorr for lndusrry and Commerce in Kunming revealed thar these stores were guilty of violaring many of Apple's regisrered rrademarks. The shops were ordered to stop using Apple's logo as the Chinese iaws forbid copying other companys'logos and trademarks wirhout permission The Kunming retail regularors said rhat rhey would be more vigilant in monitoring any violations and had set up a hotline iso'that rhe public coulq ,er-,orl any other unauthorized violations. (Adapred from'Chinese aurhorities find 22 fake Appte srores', by BBC Netvs, 12 Augusr 2a11)

8.4

MANAGING INFORMATION SYSTEM SECURITY

As information systems become more complex, so do the ethical and social issues, vr"rinerabilities and threats. Organizations face many problents in securing their information systenrs; ethical and social issues sucir as privacl', intellectual Propert)', accessibility, andvulnerability and threats such as computer viruses, malu'are. hackillg and spamming are major security concerns. Thus, it is crucial for organizations to manage the security of their information systems and mitigate the risks thel' f2.. by iniesting in information systems security. However, implenrenting a successful .[n this security policy will be one of the biggest challenges for the organization. to inrplement take can section, lve will explore the various sieps that organizations aad adopt security policies that are manageable.

8.4.1

Ouarantine Software

Organizatit,ns can install quarantine software such as anti-virus, anti-adrvare and antt spyware to protect their information systems against viruses and nalicious softlvare. By havilg effective access control and regulariy updating quarantine soft\t'are, organizations can keep their computers free of viruses or malicious software. There are a variety of quarantine software developed in the market, for exampie, Norton Internet Securitl., ZoneAlarm Security Suite and McAfee \rirusScan. Most of these developers offer firewall, anli-virus, anti-spam, anti-spyware and parental control (for horne offices) at desktop levels and most of these quarantine software, particularly anti-adware and anti-spyware, are signature-based. It is advisable for organizations to install a number of quarantine software to ensnre effective protection. Organizations nred to install anti spam software on their servers to ensure that their e-maii messages

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do not contain spam. Unwanted messages such as spam will result in productivity loss and a waste of computing resources. Now, most Internet service providers try to reduce spam on their servers before reaching their subscribers. Organizations nggd to select anti-spam software that is easy to use, low in cost, manageable, and most importantly has effective anti-spam mail delivery.

8.4.2

Operating System Peneti'ation Software

to guard against downioading free patches offered by hackers and crackers, that is by installing several operating system penetration

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software. Organizations can use the patch-management softlvare by automating the distribution of authentic patches from multiple software vendors. The penetration software can then be used to scan systems and assess system propensity, and make the systems effective in countering malicious threats. However, for the penetration to work, organizations must regularly update the testing techniques to detect ever-changing thre. rs and vulnerabilities. Network firewall is the most common operating system penetration softlvare installed by organizations to ensure that internal addresses are not revealed to unauthorized users. Anti-sniffer software is used to mitigate datasniffing threats and to scan networks using encryption. Spoofing attacks can also be detected using operating svstem penetration so{irvare by installing all the server patches released by vendors. Other forms of penetration software such as \rOIP gatekeeper, \rOIP media controller, and broadcast serr,er shouid be installed by organizations to monitor scn ice usage at various points in the network. This software car) also be used to monitor system packet perlormance and router applications on cor-]\rerged networks. If any abnormal activity is detectcd, the software will automatically alert the persons in charge"

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8.4.3 Security Policies and Procedure lnitiatives Programmed threats are ongoing and ever-changrng. Therefore, apart from insi.rlling quarantine and penetration softrvare, organizations need to design and implement information systems security poiicies, procedures and initiatir.,es. 'lhese information systems security policies and procedures shouid effectively protect organizatiotts against unauthorized access. Designing and irlplen-ienting informatiort systems security policies and procedures can create awareness among empkryees against vulnerabilities and threats torvards information systems. The content of these securitl' policies and procedures should be on maintainirig in house and off srte backup copies of corporate data. The policies should also inclrrde nrstalling sofir,vare that can be quickly restored in the case of a system failure. In addition, t}-iere should be policies on server operating systems such as Microsoft Windon,s XP and Windorvs Server 2003, and also procedures on fireu,alls and routers that can eiiminate threats before they reach the user's desktop. By establishing a good system der.elopment policy, organizations can guard against a 'trap or back door', and can renlove the 'back door' as soon as the new system development is completed. The information systems policies and proc:dures relating to firewalls should focus on creating a controlled environment, such as the use of passwords. Firms shouid have in place policies that require all ernployees to have passu,ords to ensure access to information by unauthorized users rs reduced. Apart from policies and procedures on firewall and anti-l,irus soft$,ar-e to secure sysiems, data er;cryption policies and procedures are also important. Private information transmitted over wireless networks shouid be encrypted at the data level although it is sent over a pubiic

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network. Data encryption policies and Procedures provide good preventive controls These against data theft by unauthorized employees who steal them for personal gain' the example for controls, p-oli.i., and procedures should include policies on access ur. of pusswords, smartcarcl security, uttd firg.tprint reading biometric security' If the organization has sufficient financial resources, a more sophisticated biometric securiiy device such as retina identification and voice recognition is encouraged. Otire. forms of data encryption policies and procedures should focus on strong employees' system access. Employees must be aware of these policies; they need change prsswords and the organization should enforce company-\'\ride pass'word Ln a .eg,rlar basis. Employees should only be allowed to access data pertaining to their jo[s. preferabll., oiganizations should maintain a system activity log as a for-m of deiection controi. Computers in public areas within the organization must be equipped with a physical i.."r. control protection device, such as lock and cabie, uturn, or tracking software. Information systems security procedures to monitor and servers and applications should also be designed to identify potential problems terminate *uli.iorrt requests, and web application abuses- In this case, organizations can implement employee access control procedures, where'prompts' aliow authorized employees to gain access to certarn information, lvhich is off lirnits for others. Inftrmation systems shouid also have security procedures such as background checks on employees n'ho rvill have access to proprietary information' Businesses should also focus on policies and procedures for inteliectual property and shoulcl enrploy ;rfiornevs ,n ,r.i up inteilectual property policies to protect them. The policies should require employees to sign a non-compete and non-disciosure agreement.

To consolidate your learning, the learning outcomes ale summarized belon':

l.

Identify the underlying ethical and social issues in information technology.

The four main ethical challenges that most organizations face are those related to privacy' accuracy,

intellectual property and aciessibility. The main concern related to privacy is-n'hat kind of information shouta people be required to divulge of themselves and under u,hat conditions should they do it? Peopie need io be cautious rvhen providing their personal information, especiaily those thai need to be kept strictly confidential. Organizations must alsL) ensure that the information disseminatecl across and within the organization is accurate. Ethical issues involving accuracy can be rnitigated by determining the basis for the level of accuracy in any grven systeni and whether it is suflicient. Many debates have arisen as to rvho has the right to the intellectual property of information technoiogies, particularly the right to its applications or softrvare. In the software i,dustry, intellectual prop.ity rights have become the main concern of organizations, especialiy on the issues of intangibfe rights'of ownership in an asset such as a software program that includes the source code, objei codelnd idea. There are essentially four types of intellectuai property rights relevant to software-patents, copyrights, trade secrets and trademarks. The flip side of theability to access the information databases is that there are those who c1o not have the required intellectual using and technical skilis to access the databases. Hence, this group is excluded from taking pari in the information systems, ancl as such is left behind. In the iong run, the gap between those who are social able to access and those that c1o not know how to access the information systems may create problems and gaPs in societY.

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Identify the various information systems security threats. Security threats fromhuman actions are malicious acts bypeople inside and outside the These threats may be attacks from disgruntled or malicious employees or non-employees

trying

harm and disrupt the organization. Malicious attacks from people within organizations are the " most dangerous, especially those who are former employees of the organizations. These malicious acts from rnsiders can affect all components of a computer security system, reiating to unauthorized access to information, overload of systems processing, storage capacity and system crash" Human threats can come from individuals inside and outside the organization who try to access and browse through the system to make private information public. Attackers from outside the organization are often referred to as trackers' or 'hackers'. Computer viruses are destructive program codes that attach themselves to a host' either as a file or program, and then copies themselves and spread to other hosts via e-mail, or when downloading files from the Internet, or when opening a contaminated file. Trojan horse, logic bombs and worm programs are malware which are malicious independent prograrns disguised as something useful, such as screen savers or are built into a free, , download. Spamming, phishing and spoofing are threats that attack e-mail messages, spoofing being the most critical, where senders disguise themselves as someone else and use e-mails that are not their own, which therefore cannot be traced back to the originator. Denial of service, abuse c''f wireless networks, and misuse of pubiic web applications are examples of the consequences of information securitybreaches among people and organizations. 3.

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Discuss some current ethical issues in information technology. The common current ethical issues in infonnation technology include issues on consumer privac1,, workplace surveillance, location privacy, the globalization of online activity and the protection of

intellectual property. 4.

Explain how organizations can establish information systenr controls information system security.

to

ensure better

Organizations can protect their information systems against vir"uses, malware, adware and spyware by having effective access controls and'installing regularly updating quarantine software, such as anti-virus, anti-adware and anti-spyware. Several steps can be taken to guard against doi.l,nioading free patches offered by hackers and crackers, by installing several types of operating system penetration software. Organizations can use tire patch-management software by automating distribution of authentic patches frorn multiple software vendors. Apart fr:om installing quarantine

and penetratiorr software, organizations need to design and implement information systems security policies, procedures and initiatives. These information systems security policies and procedures should effectively protect organizations asai nst ui,a uthorized access.

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Computer crime The use of a computer to comrnit illegal activities. Computer ethics The stanriards and issues of conduct related to the creation and use of informatron systems.

Cookie A type of message sent by a web server to a rveb browser that is stoi ed in a user's compllter and back to the server each time the user's browser requests a page from '.hat server.

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Copyright protection This involves the protection of a particular form in which an idea is expressed. With the advancement of information systems, copyright lawhas been used to protect those who have developed the software from having their software copied, and that includes the source and object code, as well as certain unique elements of the user interface. Cracker An individual that breaks into a crime.

a

computer system with the intention of doing damage or committing

Hacker An individual that gains access to a computer system without authorization.

ldentity theft An individual that steais another individual's personal information such as credit card number and identity card number with the purpose of using this information for their own personal gain.

lnformation privacy An ethical concern that relates to how rnuch of the individual's personal information can be revealed to third parties. lnformation property An ethical conLern that relates to who u,ould own the information about an individual and horv this information can be transferred, sold and exchanged. lnformation security system A formal procedure and process set up by the organization to safeguard its informaLron systems from ttnauthorized access or use. Malware A form of malicious softu,are or programs such

as the \,\rorm or Trojan horse.

phishing A message sent to users of computer systems in an attempt to trick users into giving personal information such as banking information and creclit card numbers.

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their

Spam A form of electronic junk maii. Spam filter The hardware or softrvare used to stop sparn and other e-mail threats such as phishing, vrrust\ and nralrvarc.

Spyware The software or application that has the capability to gather user information via an Internet connection and with the help of a knowledge-based system. Trojan horse A malicious and destructive computer code containing instructions hidden from the user to perlorm underlying functions that can disrupt the system. T'he computer will appear to function normally. Unauthorized access The process of an individual gaining access to personal and ser-rsitive information of other users.

Virus A lbrm of malicious or destructive program that disrupts the normal functions of computer

systems.

Virus prevention A set of activities designed by organizations to detect and prevent computer viruses"

Worm A form of malicious or destructive computer code designed to copy and replicate itseif throughout the computer netrvork.

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Security is not a technology issue, it is a business issue. Discuss this statement"

2.

Explain how spamming, phishing and spoofing can be threats to individual users. What would the consequences be to individual useis and to business organizattons? Discuss.

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3. Compare and contrast the security situations of individual uscrs and business organizations" l 4" Internet technologies have become the most significant technolog.ies used in organizations. f)iscuss

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some of the threats that Internet technologies are exposed to.

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Describe how organizations can create security awareness among their ernployees.

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llI: Bell's Data Collection on Wireless Customers-ls lt Ethical?

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Lonsumer groups are challenging Bell Canada's rracking of how its wireless customers use the web, what they warch on TV and their phone call parrerns in order ro deliver targeted online adverrising. Bell ls gorng beyond its role as a provider of relecom services, according to the Public lnteresr Advocacy Cerrtre and r,he Consumers Associarion of Canada

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"Whar you're paying for is an uninlerrupred re ecom service, not for an ad-based serrrit.e supporred by behaviour-al rargering, which is the Facebook-Coogle model," lawyer John Lawford of the Publtc lnrerest Advocacy Centre said on Monday The consurnergroups have frled a cornplaint with rhe Canadian Radio-television and feLecomtnurll.atron! Commission (CRIC), describing rhe praciice as an abuse of privacy They want Bell L'o be ordered l:o siop collecring rhe data The CRTC said ir was studying the complaint and ivould not cornrnent furrher. Tire Offire of rhe Privacy Commissioner of Canada said that ir has received more than 150 complaints about Bell's dara collecrion. lr is invesrigaring wherher collecting this data is compliant with the Personal Infc.,rmariorr Prorecrion and Electronic Documenrs Act, the federal law which covers the collect.ion, use and disclostrre of informarion rn commercial activitres. Bell said irs dara collecrion program is not breaking any federal relecom rules or prrvacy guidelines and noted rhat customers can opr our ar any irme. "Because customers wcr;ld receive random online aclverttslng irr any event, rhey won'i acrually be seeing more ads, but they will see ads of greate r inrerest to them," Bell spokesman Jason Laszlo said in an e-mail. Laszlo also said Bell could segmenr a large group of cuslomers to advertisers who are interested in gaining, for example, but rhe adverrisers would not see any specific derarls about rhe customers. Llell said rt expecrs ro expand rhe programme ro orher cus[omers in rhe future, which could include its lnternet and TV' ;ubscribers. The relecom gianr announced last August ihat it would collect consuTners' dara to pur targered ads on mobile devices ro be able to compete with search engine Coogle and social neiwork sire Facebook, which offer ads to cunsumers based on their inieresrs. But Lawford said he believes rhe opt-out rate for Bell customers would be low, addrng it's r-rsually well under 10 per cenr in rhese kinds oi circumstances. "They catch all of the people who have too many other things to do witli rheir life," he said from Ottawa. Lawford said Bell will srill be collecting data on cus[omers who have opred out of rhe program, bur rhey would nor be senr targeted ads based on their behaviour lnstead, rhe informarton will be used for cusromer profiles and markering reports that could be so d ro rhrrd parties.

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Bell wrll end up with a huge database rhat can be subject to breaches, loss or theft, he added" lr's gorng to get'messy' if it is hacked or if Bell gives access to domestic surveillance agencies such as the Canadian Security

lntelligence Service (CSIS) or the US based Nacional Security Agency, said Lawford, the organization's execurive direccor. The NSA's surveillance programmes ftave scooped up phone data from millions of American users and President Barack Obama has said he will place Iimits on the way the intelligence communiry accesses

phone records. ln the U.S., brg telecoms Verizon and AT&T also allow their cLlr,tomers to opt-out of data sharing But critics have said that even with personal identities stripped out, rhe information srill can be sold to third parries who would ger a profile of customers' habits and interests. Rogers said ir does nor rrack customer information rhe same way that Bell does. But Rogers does note thar rrs privacy policy says it uses'cookies'or messages to find people's accounts. Rogers also says advertisers who place ads with Rogers.com may use cookies to record web browsing activiry. Rogers also has a program for irs cusromers ro sign Lrp for texr messages that willalert ihem to deals when rhey are near specific retailers. (Adapted from 'Advocacy groups challenge Bell's data collection on wireless customers', Edmonton Jaurnal, by Luann LaSalle, 27 January 2A

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Questions:

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Does Bell create an ethical dilemma? Why or why not? Do allegations about Bell have any merir? ln your opinion, what shourld Bell d': to address public concern on this marter/

Association fbr Computing Machinery (ACM) (2013). ACM code of ethics and professional conducf. . Accessed on 5 March 2014.

Australian Computer Society (ACS) QAID. Australian Computer Society code of ethics. . Accessed on 19 February 2014.

IiBC Nervs (12 August 20li). Chinese authorities find 22 fake Apple slur-:rs. Accessed on 12 August 2011. Brey, P. (2007). Ethical Aspects of Information Security and Privacy. In Petkovrrl, l\{. Securty, P"ivacy, and Trust in Modern Data Management.Herdelberg: Springer.

& }onker, W.,

eds.,

Chen, D.W. (lB February l99B). Man charged with sabotage of computers. The New York Times. . Accessed on 5 january 2014.

China Internet Network Information Center (CNNIC) (2010). Internet develc,pment in China in cnnic.net.cn ldtyggldtggl2Al1A5l1'20110509_20B13.html>. Accessed on 3 March 2014.

Floridi, L. (2009). Netrvork ethics: information and business ethics in Ethics.90: 649-659.

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rretn'orketi society Jtturnal of Business

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Hall, J. (6 February 2Ol4).Is your boss watching you? Surveillance device tracks employees' movements in the office, sends details of conversations and even times their toilet breaks. Mail Online. . Hammett, E. (28 January 2Ol4). UK Internet users 'losing trust' in companies. MediaTel Newsline. < http:l/ mediatel.co.uk/newslinel2Ol4l0ll28/uk-internet-users-losing-trust-in-companies/>. Accessed on 2B Ianuary 20t4.

Institute of Electrical and Electronics Engineers (IEEE) (2012).IEEE code of ethics. . Accessed on 26 February 2A14.

|iang, J. (1995). Computer Systems, Database Systems and Communications Network Security

and

Conjidentiality" China: University of Electronic Science and Technology Publishing House.

LaSaile, L. (27 ]anuary 2014), Advocacy Groups Challenge Bell's Data Collection on \{ireless Customers. Edmonton Journal.

Laudon, K.C. and Laudon, I. P. (2007). Essentials of Business InformaLion Systerns (7'h Ed.)" New |ersey: Pearson Prentice Ha11.

Moh,l. Saiieh, N.A. (2014). Security and Ethical Chailenges in N{anaging Inforrr-ration Svstems.Information Systt ms: An Intrctducflorz. Selangor: Oxford University Press. pp. 242-258. Ner,r,berr1,, B. (2010).

Katrina: Macro Ethicai Issues for Enginte

rs. Science and

Engineering Ethic-c, l6: 535

571.

Orvens, W.A., I)am, K"W. and Lin, H.S. (2009). Technology, Policy, Law, arud Ethics R.egcrrcling U.S. Acquisitrort and LJse o,f Cl,beruttack Capabilifle-s. Washington DC: The National Acaclernies Press"

in China.,Skl'Ner,r's" . Stone,

1\4.

(4 February 2014), The Great Firewall Blockrng Facebook

Il.

(2004). Ethics and Technology: Ethical Issues in an Agt c,l lrtformatton and Cortnunt;Lttiott Technology. New Tersey: |ohn Wiley & Sons, Inc.

TaviLr.ri,

D.K. (2011) Security and ethical issues in IT: an organization's perspective .Internationrtl Journal of Enterprise Computing and Busines-s. i(2): 1-i3. Tir.r,ary,

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LEARNlNG OUTCC_MEs At the end of this chapter, you should be able to: I Explain the concept of marketing. I Describe the theories of marketing ethics. I ldentify and explain ethical issues in product development. I ldentify and explain ethical issues in packaging and labelling" I

Describe ethical issues in pricing.

Describe ethical issues in advertising. I Explain ethical issues in retailing. 4 ldentify and explain ethical issues in ihe use of direct marketing I Describe what consumer ethics and customer resPonsibility are. I

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Explain the company ethical review.

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9.0 This chapter begins by providing a detailed definition of marketing. The benefits of marketing will be elaborated upon, followed by a discussion on the criticism received by marketing. The theories of marketing ethics will be explained. including the Hunt Viteli General Theory of Marketing Ethic*, and the Consumer Ethics Theory. Thereafter, the ethical issues in product development, including value duratron, safety and environmental impact, will be highlighted. This will be followed by extensive discussions on the ethical issues in packaging and labelling, pricing, advertising, retailing, and the use of direct marketing. Lastly the various aspects of consumer ethics and customer responsibility will be introduced and discoursed"

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MARKETING IN DEFINITION

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The essence of marketing is frequently explained in terms of the four P's-product, pricing, promotion and placement. Marketing involves all aspects of creating a product or service and bringing it to market where an exchange can take place" The marketing definition from Kotler et al. (1999) stated that: Mrrk.,-g

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and managerral process by which individuals and groups obrain

what they need and wanr through creating, offering and exchanging producrs of value wirh others.

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'Marketing is a socidl and ntanagerial process b), tvhich irLdit,icluals antl groups c:btain u,hat tlrey need and want through creating, o.ffering and exchangitrt prodttcts o_f'value with others.' The concept of an exchange between a seller and a buyer is central to the 'market' and is the ccre idea behind marketing. Whether exchange actually takes place depends upon whether the two parties can agree on the terms of exchange that n,ill leave them both better off (or at least not worse off) than before the exchange" Exchange is frequently described as a value-creating process because it normally leaves both parties better off. There are many benefits of marketing, and in general, ma rketing has been credited r,vith the foilowing:

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Brand marketing Brand marketing is said to provide an assurance of quality and a 1eve1 of trust and security that customers welcomc in a diverse antl multifaceted marketplace. Marketers have also been applauded for helping their suppliers to improve standards and their own quality of production and deliver,v. Competition T'hrough the competition marketing promotes, increasing numbers of people have been provided with more and better quality goods and services than previous generations have ever experienced. This has also been done at a lower cost than prior generations couid rmagine. Through the information' marketing provides, customers can make more krlohrledgeable decisions than their predecessors about which products are abie to meet their needs and desires. It is true that fear is used in sonre advertisements, but it may also move peopie to protect themselves and their families in ways they would nol r, : i:, . otherwise consider.

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Marketing Ethics and Consumerism 281

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Contributing to economies Marketing is also praised for contributing to the economies of developing nations. It brings them goods, services and knowledge of products that they would othenvise not have. Though marketers have been accused of corrupting other societies and imposing materialistic values, it remains the case that many people in developing.countries enthusiastically desire to have such consumer goods available.

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Social marketers Marketing techniques when used by social marketers have addressed social concerns such as leprosy and AIDS. The results have been rather'dramatic in some areas. For example, in sri Lanka, the levels of leprosy have dropped

dramatically. In short, marketing is said to bring multiple and important benefits to people in both developed and developing countries. In addition, due to the current business climate, marketers must also increasingiy accept responsibility for the environment. Some companies in anticipation of the changing attitude +owards environmental protection have even taken proactive measures. Trrumph International |apan has a line of underwear made from recycled polyethylene terephthalate bottles used commoniy to hold mineral rvater and soft drinks. Taiwan's Acer developed the rvorld's first 'green' computer that has a CFC circuit board, which is expandable by using a microchip, thus increasing lifespan and uses less energy. Recyclable packaging is also rrsed, Nonetheless, marketing can be seen as a double edged swoiti. Despite the many benefrts associated rvith ma rketir-rg, it 1'ras its ow'n share of criticism. Ti're condemnations of marketing are both lvell-knolvn and widespread. They are raised not only in N,lala,vsia but occur in most countries around the world. in the wider spectrum, the follor,r,ing are some common criticisms on the inappropriate use of marketing:

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Advertising Advertising is a favourite target of criticism. The use of sex and fear to increase sales, not to mention its deceptive practices, are condemned by many. Retailers are often charged with privacy invasion. For example, when customers use their credit cards at retail stores, the data frorn their use not only informs the company rvhich goods to restock but also mined as part of a data profile lvhich data processors can deveiop on individuais an.l varior-rs market segments. Similarl1', telemarketers are criticized for intruding on people's privacy.

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How marketers treat their business customers Marketers are also blamed fbr how they treat their business custotners. For example, salespeople offer money, bribes or other 'special considerations' ttr sr,ppliers or retailers to obtain speciai favours. Large retailers are attacked for exercising their considerable economic power over smaller retailers and suppliers. Some of these methods hinder open competition. For example, some of them demand that smaller retailers only stock the products from their company rather tiran those of others.

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Marketing criticized as being wasteful Marketing has been criiicized more generally as simpiy being wasteful, spending biilions of dollars to persuade people to buy products they do not need. It is accused of bringing about commercializaticn of society and human relations. It is admonished for promoting both matrrialism and colsumerism. Marketers are said to nurture conditions under which people

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take their identities from the brands they buy and wear, as opposed 1s developing their own, non-commercial identities. The current problem of obesity is attributed, at least in part, to the marketing practices of fast forid producers and advertisers.

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Anti-globalization protests relates to marketing International marketers have been charged with imposing the values of their home countries on the countries in which they do business, destroying local businesses and manipulating people to want things they cannot affbrd" The efficiency, rationality and uniformity brought by international marketers have been attacked under the banner of the 'McDonaldization of society'

(Ritzer,2000).

In Malaysia, we have often heard of unscrupulous practices by companies in their bid to make more profit or to influence customers. Beiorv are just some examples of questionable marketing manoeuvres by the sellers in Malaysia, which have been reported in several local news media: r 'Iraders often take advantage during the festive seasons (such as Hari Raya, Chinese New Year and Christmas) to 'dump' their expired or irnitation goods in pre-packaged hampers. It has become so rampant that the lr4inistry ol Domestic Trade and Industry has to come Lrp n,ith guidelines for traders tcr display the packaging and handling cost of each hanrper. Other recluirements irrclude listing non-halal goods in hampers and ensuring that the goods are of good quality and have at least a six-month lifespan before the expiry date. r It rvas reported tliat for a rnere 10 sen, custr)ilrers personal data are being sold to unauthorized bodies. A iist of 1,000 entrres contarining r-)anles, mobile phonc numbers, type of credit card owned ancl issuing banks, and place of r,vork costs only RMl00. Malaysian conslrmcrs are regular-ly harassed by unsoiicited sales cal1s, messages and e-maj1s. Customer particr.rlars in databases are vulnerable-flom loyalty cards and telecor.nmunications

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companies to hor"rsrng developers to members-oniv club. and there r'r,i11 bc a demancl for it as it represents a list of potential customcrs. In anotherreported case in the media, a customer bor-rght a powder foundation from a beauty shop and 'lvhen she returned honre she sart it \\,as a darker coiour than the tester. She tried to get it exchangecl at the store but the sales people were rude and refused to let her change it even though she pointed out to ther:-i that it was a different colour from the tester. She later took it up n,ith the company HQ and much iatcr was tolC she could change it, bul they r,vere out of stock. The whole thing caused the customer a lo1 of anxiety. In another case, a customer bought a mobile phone but later found that the f'ace plate had detached from th,-: LCD screen rviti-rin a week. The customer took the phone to the service centre in Kuala Lumpur but they did not have stocl,. So he took it to Petalin g |aya.Three days later, he picked it up and the pirone n as in working condition. However, iess than a week later, tt came loose again. The customer went through the whole hassie anolher three times. Eventually the screen went blank. This iime the custome" asked to change the phone at the shop as it lvas clearly defective but the shop refused to entertain him.

So, are there remedies to address the common grouses brought out by crlnsumers?

In Malaysia, there

are laws to protect custorners altltough soine have criticized that these laws are \rague and ineffective. Please rea,,1 case for review 9.1 rvhich drscusses the lar,r's that protect consumers in Malaysia.

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According to the law...

ln Malaysia, there are rhree main laws rhat cover the situations addressed above. These are rhe Contracts Act, rhe Sales of Coods Act, and the Consumer Protecrion Act ]999. These laws talk about the rmplied guarantee regarding producr qualiry and express guaranrees by manufacturers. They stated ihat if rhe product does not measure up in rerms of expecred qualrty, consumers can take it back and the seller must offer consumers a refund, a replacemetrt or a different product of the same value. The only exceprion to this rule is innerwear. Bras, panties and orher inrimare clothing are not replaceable for hygrenic reasons. Returned products must be accompanied by a receipr or a credir card slip as proof of purchase. Shops generally offer back cash for cash transactions. lf consumers paid rheir purchase wirh a credit car,l, mosr shops will reverse the charge rarher rhan pay back cash. This mighr rake up to ten working days ro show up in rhe cusromers' starement, depending on how swift the sysrem works lt is always advisable ro check rvhar terms and conditions apply before customers buy. As consumers agree to tlreir contract once they buy, they would be expecred ro take their business somewhere else if they do nor iike rhe ierms offered (Adaprcd from'Shoppers' Woes' by Maria Daniel, The 5tar,

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Seprember 2007)

Next r,r,e shall examine some theories on marketing ethics. This section is important as it will give you the fundamentals of the interactiott between sellers and buyers in market transactions. 'Ihis rvill act as a guide -,r'hen you go tl'rrough the sections on sorrre ethical issues faced br, marketers as weil as consumers.

9.2

THEORIES OF MARKETING ETHICS

'fhe theories of marketing etl-rics can be dir.ided into trvo main components'

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Tlie Hunt Vitel1 General Theorl. of Marketing Ethics Consumer Ethics Theory

Before we take a closer look at the two rnarketing ethics components, let us discu:;s the broad take on the interaction between sellers and buyers in a business [ransaction. : , tire study of marketing ethics, ne have to understand trvo sides of the coin. On one

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side is the dilemma faced by suppiiers or sellers of the products and on the other iiand

on one side is the

is the ethical diiemma faced by buyers or consumers. When business transactions {).cur, it inr.olves both the briyer as r,vell as t}re seller as both are accountab}e ft r their actions. The ethical diiemmas frorr-r both of these parties are unique in their own ::als and are shown in Figure 9.1. Frorn the sellers'side, theyrvouid often face several t,ossible ethical dilemmas including whether to offer a bribe to secure a contract, and acivertising decisions rvhich may inr,olve decrdrng whether to allow manipulative or C,":ceptir.e advertisirg. These are just soine of the possible dilemrnas faced by the seliers

dilemma faced by suppliers or sellers of the products and

on the other hand is rhe ethical dilemma faced by buyers or consumerS.

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Business Ethics

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besides others such as channel decisions, competitive relations decisions, product decisions, packaging decisions and pricing decisions. ' On the other hand, consumers are also not immune to having to deal with ethical issues of the business transaction. In dealing rvith sellers, they would be constantly exposed to the questions of ethics such as is it alright to return a damaged goods to the

i I

,

Selling Decisions

. . . . .

Bribery Selling trade secrets

Disparagingcustomers Misrepresentation Disclosure of customer rights UnFarrCiscrimination

Advertising Decisions

. . . .

adverrising Deceptiveadvertising Bair-and-switclr adveriisrrg Promorional allowances and services False

Channel Decisions

. . . .

Exclusive territorial disrributorships Dealers' rights

Product Decisions

" . . . "

" Exchange

Producr additions and delerions Patenr protecrion Product quality and safeiy

Passively benefiting at

rhe expense of others

"

Antr-r ompetitrve acquirition Barriers tc entry

Predatorycompetition

A.ctively benefiring

from an illegal activity

Tying agreemen[s

Competitive Relotions Decisions

. . .

.

Exclusrve dealrng

Actrvely benefiting irom deceptive b:r legal practices

Exchange

.

No harm/no fbul

'

Recycling/doing good

Product warranty Harnrful producrs

Packaging Decisions Fair packaging and labelling

. . . .

Excessive cosr Scarce resource

Poilution

Price Decisions . Price fixing

. . .

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Resale price maintenance Price discriminarron 1

Deceprive pricing

Figure 9.'l: Ethical dilemmas faced by both sellers and buyers in their interaction with each other *

Marketing Ethics and Consumerism 285

seller when the damage is their own fault, not telling the truth when trying to negotiate the price of a new car and taking unauthorized photographs using your smartphone's camera in a book store. These are just some examples of ethical dilemmas faced by consumers and rve shall examine this further in our next s.'ction.

9.2.1

The Hunt-Vitell General Theory of Marketing Ethics

One of the best known descriptive accounts on ethical decision-making was developed

by Hunt and Vitell (i986). Although the model has undergone some important revisions over the years, it is still essentially the same. It is based on a complex mixture of background conditions; individuals perceive ethical problems, alternatives and potentiai consequences. They then engage in a twofold process, part of which is deontological and part teleological. Together, the product of these processes is an ethical judgement rvhich results in intentions to behave accordingly and consequent behaviour. The consequellces of this behaviour then act as a feedback mechanism. The Hunt and Vitell (1993) generai lhcory of marketing ethics is displayed in Figure 9.2. Note that the section of the mociel outside the dashed lines represents the general theory, while the section inside the dashed lines represents the model for business professionals and managers.

Cultural environment (a) Religion (b) Legal system (c) Code enforcement

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F:gure 9.2: The Hunt-Vitell General Theory of Marketing Ethics

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According to Hunt and Vitell (i986), ethical judgement is the process

of'

considering several alternatives and choosing the most ethical alternative" Normative

ethical theories are classified into trvo categories-deontological and teleological theories (Murphy & Laczniak, 1981). Deontological theories focus on the decision maker's specific behaviours or actions, while teleoiogical theories focus on the consequences of these behaviours or actions. The Hunt Vitell model ties both the deontological and teieological theories together. The rnodel gives an individual the opportunity to compare various alternatives and perceive the possible consequences of each alternative for various stakeholders. The decision'maker has more than one option to choose from. The HunfVitell model also requires the decision-maker to compare various alternatives. In the model, the concept of 'ethic' can be weighted. The decision-maker is required to weight various alternatives and ciroose the one

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considered most ethical.

9.2.2

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fheory consists oI four dimensionsactively benefitting f rom iilegal activities, passively benefiring,

actively benefiring from deceprive but legal practices, and no harm, no foul acrivi ries.

Consumer Ethics I'heory

Consumer ethics refers to the moral values and beliefs that individuals or groups observe when they bu1., consume and dispose of products ancl services. Ethical issues involving consumers are equally as important as marketing and acivertising practices. Hou,ever, in the past, there \vas a noticeable lack of attention given 1o this area of ethics. The original consumer ethics theory by N4uncv and \/itell (1992) consists of four distinct dimensions: r Activeiy benefiting from iiiegal actn'ities r Passively benefiting r Activeiy benefiting frorn deceptive but lega1 practices r No harm, no fcul activities The first dii,rension signifies the beliaviour in which the consumers activeiy take advantage of a situation at the expense of tlie seller. Iror exirmple, a customer gives rnisleading price information to the cashler lvl'ren the price tag has been peeled ,,if.'lhe second dimension consists of a situation where consumers r,r.,ere passively benefiting themselves due to the seller's mistake. An example of this situatiot-t is when a cllstomer gets too much change aird does not inform the cashier. l'he third dimension represents actions in which conslimers were actively involved in unethical but not necessarily illegal practices. For example, a customer keeps quiet when a lvaitress at the fast lbod restaurant serves hirn first instead oi the otlrer custorner iining up irr lront of him. The final dirnension refers to the behaviour tl"rat is not seen as harmful to others" An example of this situatior-r is the act of spending an hour trving on different shoes and not purchasing any.

-l'heir findings revealed that actions in the first dirnension are initiated by consumers, and most of them perceive that these actions are illegal. 'Ihe second drmension involves actions where consumers passively benefit from sellers' mistake. The third dimension is also initiated by the consumers, however, these actions are not

perceived to be illegal. Yet, they are still morally questionable. Study finclings indicated consumers believe that it is more unethical to actively benefit from an illegal activity than to passively benefit. Finally, the fourth dimension involves actions that most

consllmers perceive as not even being unethrcal at ali. Most of these actions involve the copying of rntellectual property s,tch as s,rftware, tapes or movies (Srvaiclan ef al., 2004;virell, 2003). )

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Marketing Ethics and

,{ctively benefiting from an illegal activity

. . "

Changing price rags on merchandise in a retail srore Drinking a can of soda in a supermarket without payrng for it Reporting a lost item as'stolen' to an insurance company in order to collecr the money

Passively benefiting at the expense of others ' Cetting coo much change and not saying anything . Lying about a child's age in order to get a lower price Not saying anyrhing when rhe waitress miscalculates the bill in your

"

favour

Actively benefiting from deceptive but legal practices . Returning merchandlse to a store by clarming rhat lt was a gift when ir was not

. .

Using an expired coupon for merchandise

Not relling the trurh when negor iating rhe price of a new automobile

No harm/no foul . Using computer sofrware or games tlrat you drd not buy . Spending over two hours rrying on different dresses and not purchastng any

.

Retu.ring merchandise after trying it and nor lrkrng it

Recycling/doing good

.

Buying producrs labelled as 'environmentaliy frrendly' even if they

.

Con't work as well as competing products Purchasing something made of recycled materials even rhough rt

. .

more expensive Rerurning to the store and paying for sonrerhing rhat the cashier mistakenly did not charge you for Correcring a bill that has been miscalculared in your favour

rs

Degree of

Unethicality

Figure 9.3: Five-Factor Structure of Consumers' Ethical Belie{s by Vitell and lluncy (2005)

2005, the consumer et1-rics theory rvas modified and a r-te\'v din-rension that represents coltsumers' desire to recycle products and 'do tire right thing' rr'as added (Vitell & X4uncy, 2005). An exarnple of this situation rs not purchasing products from companies that consuiners believe are not treating their employees fairly (refer to

In

Figure 9.3).

9,'3''

ETHICAL ISSUES IN PRODUCT DEVELOPMENT

llusinesses are under considerable pressure to develop products that vrill he far-oured br. customers over those of their competitors. Part of the pressure to ievelop new

Consumerism 287

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Business Ethics

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There are three

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in product

devclop.nenr-va durability, safety anci environmental

rmpaci.

ue

products derives from the declining profits associated with products that have been around for some time. It is significant to take note that a large percentage of the many products that businesses sell today did not exist a decade or two ago. This illustrates the importance of innovation. Let us consider three important areas of ethical issues in product developmentvalue durabiiity, safety and environmental impact.

9.3.1

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Value Durability

Value durability of a product refers to the likelihood that a product will continue to maintain its value over time. This may not occur for a variety of reasons. Some products are designed with current fashions in mind and may consequently lose their value (as they go out of fashion) quite quickly" Others are made cheapiy so that they break down more quickly than others. Some lose their value because they are replaced by new technological developments and some products might be built such that they do n. : incorporate, but seek to block the use of, technohgical developments that could make more durable and valuable products" Many argue that marketers have a responsibility to produce products u,hose value rn,ill not decline in any of the ways noted above. This is unlikely since technological advances do occur and people's taste in clothing, cars etc. niay change.

9.3.2

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Safety

Proclucts may pose safety risks in a rvide variety of wa,vs. Thrnk about tobacco, heavil,v sugared cereals, fatty foods, larvn mon ers and other machinerl'that can l tl.lurc a Person, as well as pesticides and poisons. If you are to think deeper, almost an1'product nray pose dangers and become hazardous under certain conditions. Those safcty risks rnay arise from the marcriais of the product, its design, metl-rod of use, how tlre product was advertised or some combination of the above. In developing new products, marketers must be alert for the possible harm that the proposed products may cause. A traditional guideline has been that a marketer's responsibility is to produce the

products which peopie will buy and it is the customer's responsibilit.v to determine u,hether, and to rvhat extent, such a product may cause them harm. Of course, companies are not to conceal features of a product that may be harmful, but it is up to the custorner to acquire reievant information regarding the product and to act accordingly. In short, caveat emptor (let the br-ri'er beware) guides both custonrers and companies. In as much as customers must be wary of the exchanges c,-,mpantes offer them, they must aiso iook out for themselves. This vierv holds that there is a lack of trust between seilers and bu1,ers. For most customers today, products are of stich complexity that it rs diffrcirlt, if not impossible to know what product features may result in their own harm, or the harm of others or even the environment. The assumption that is made by the caveat emptor doctrine simpiy does not hold in the case of the cars, computers, smartphones or medicines lve buy. Customers are at a significant disadvantage. In this instance, a more credible ethical guideline for marketers rvould be that they must exercise due' care in their production and marketing c.f a product. Therefore, marketr'rs must take all reasonable measures to ensure that their products do not have f'eatures that rvill cause harm to customers. This does not mear, that people rnight not t,e harmed by a product. Someone who buys a pocket knife and accidentaliy cuts his {inger shortlv after does not have a reason to complain to the manufacturer. Instead, ftrr a customer

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Markelrnq Ethics and Consumeristrr ZBq

defective in some manner' to have a justified complaint, the product must have been or producing such a The marketer must have failed to exercise due care in designing sense. defective product, i.e. he must have been negligent in some ln summary, companies cannot simply place a product on the market and expect

product' They are in consumels to protect ihemselves from possible harm from the the real and potential dangers of a position to know, far better than customers, what them' the product are. Hence, companies must seek to protect the custom..lt.ugui,:: could cause Doing this requires that they study various potential situations which from happening' The harm to the customer and then devise ways to prevent mishaps on the shoulders of the due care standard places these ethical responsibilities squarely companies.

9.3.3

Environmental lmPact

the environment can The impact of the products that companies choose to produce on in which they not oniy reduce be quite significani. corporatiorrs need to think of ways

products the negative impacts of their products on the environment, but produce of impact the Since that ha've a benevolent effect (N4cDonough & Braungart,2002)' of current products ma1, last generations, thro,-rgh poliution and the consumption regarded as the cause of resources, the companies iniich produced the products are negative effects' those aff:cts. Therefore, they also ha'*'e to bear responsibility for the 'Ihey cannot deny responsibility since it is their customers who have brought and used theii prodr,rcts. Assuming responsibility n-ray involve changing P':oductio.n processes, changes can make then-r less as r,veli as tl-re materials .ir"d io make the product. Both envircnmentally harmful and more suitabie for recycling' that Many of the products we presently use are designed and built in such a way approximates etther they cannot be repaired or their repair requires an expense that is throwtl arvay that product The to, if it isn't greater than, the price of a new p;oduct. are made must be carried to a scraPyard anil thron'n au'a)'. Often, these products with scarce materiais that are poisonous and ma,v leak into groundrvater or give off toxic fumes that may reach rvhere people live' Companies should consider that serviced or such prorlucts need to be rnade in a manner such that they can either be on recycled. Companies also ought to market products that have a minimal impact the environment and can meet foreseeable sustainability standards.

9,4

ETHICAL ISSUES IN PACKAGING AND LABELLING

Most of the products we buy corne with some kind of packaging ivhich is labelled. Both packaging and labeliing serve multiple purposes and raise some ethical issues. Packaging .o-., in an endleis variety of forms and may serve to protect the product' make heip iJitJdistribution (from manufacturer to wholesaler, retailer and customer), of its theft much more cirfficuit, or attract customers as rvell as make the dispensine ai'sthetic the product itself much more convenient. In addition, it also has symbolic, its best and emotional aspects. Packaging can n-iake a product look'special', higiiiight it' opening features and make the customer feel good upon

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;tu iffi. The use of labels on packages has grown immensely in recent years. Ihey may ,* identify a product, but also describe the product, provide important information about it in the form of contents, place of origin, how it should be cleaned and seek to #ffi promote it. As with packaging, labels are not oniy a means of dispensing information. ,: For example, labels on clothing do not just inform consumers about who made the product, but may have emotional and psychologicai purposes as u'ell. In both these areas, marketers face ethical challenges concerning the information that customers need to have or should have regarding the product" Hence, companies have the responsibility to address the issue of deception and adequacy of information in their products'packaging and labels. ,.

9.4.1 Packaging Erhi.rtr**t t involving packaging are commun,cation

of contents, safery and environmental impact.

Among the many ethical dilemmas marketers need to address when it comes to packaging, the following three are among the most important-the use of packaging to reveal or to disguise the nature of the product being ofT'ered for sale; the safety the packaging provides; and the environmental impact of packaging.

Commu nication of contents Any companies will seek to place a product in a package that presents rt in its best light, while making the item look appealing and desirahle fo f he custorncrs. As srrch, packaging can reveal (and also hide) what it encioses. An ethical issue arises rvhen this effort amounts to a form of deception, in that it hides undesjrabie aspects of the product for which the customer ltould otherwise reject it. l:or ex;rmple, nht:n fruit or vegetable dealers place the rotten fruit or vegetables at the botlorn r:rf the package the y are selling, they are trying to conceal the truth about the content. Ariother famiiiar example is when a small amount of cereal or chocolate is placed in a much larger box, to make it lcok as if the custon-)er is making a large purchase. In this n,al,, packaging may make it appear that the contents of a package are greatcr than they real11, 319

Safety

It is the responsibility of companies to ellsure the safei,v of the products they sell through packaging. It requires that the product the customer rccr:ives rs the one the seller intended them to receive, i.e. not somethirig that has becn altered in w'a\.s that might compromise the consumer's safetv. Marketers have to seek rr,a\,s to ensure that their products are not harmfuliy modif ied. In strme products, for exampie fresh fruit, this is hardly possible. With drugs and other fbods, it is possible. Hence, sellers now enclose products in severai levels of safety packaging" It is the underlyrng principles that companies are ethically responsible for ensuring that the product customers buy is not only the one they believe they are buying, but also one that has not been alterec-1 in ways that will harm them. The second issue concerns children who might be able to get hold of a product, such as drugs or poisons and do harm to themselves through consumption or using it. The ethical issue concerns the responsibility to ensure tliat individuals rvho are cognrtively and motivationally immature and lack the understanding of what might harm them are not able to gain access to these products. Thc practical u,;ry is ensuring that sufficient safety is built into the packaging so that the product's intcgrit,v and use will be protected without rendering the prodr:: t impossible to open.

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Marketing Ethrcs and Consumerism 291

Environmental impact Though packaging serves many purposes, once a customer has used or consumed the product, the packaging is thrown away. This raises addirional ethical questions of wasiefulness and harrnful environinental impact. What responsibiiities do companies have in regards to this aspect ofpackaging? Ethicaliy, it would seem that a minimal amount of packaging should be used to accomplish the purposes. Often, companies fail to consider whether there are simpler, more effective or less wasteful ways of providing a product to the customer. Most of the time, companies often fail to consider what happens after the usage of the packaging. For example, we often see mineral water botties and wrappers along the roadside. The underlying ethical principle here is that companies should use a minimal amount of packaging materiais, and those they use should be recyclable, recoverable or reusable. An important part of the responsibility for fulfilling this principle lies with companies who, though they have greater knowledge and abiiities, do not use them to help set an example for more reasonable nackaging activities. Such responsrbilities are not simply individual responsibilities oi-lust one company but should be the collective responsibiiity of all marketers.

9.4.2

Labelling

'l'he labe1 rs practicall), the last point of contact betrveen companies and consumers, a last opportunit,v to convey some information or warning to the customer. As such, rvhaterrer form iabels ma1, 12p. (text, pictures or other visual representations); thel' 'Ihe,v can tell customers, nray pror.ide extremely valuable information for customers. ibr'eiample, ."vhat is in a package thel'cannot otheru,ise inspect, or r,r'hen the product ntight be expected to perish, or whether it contains a substance that might harm a .rr1o-.., out of *hrt substances the product is made, rvhere it rvas produced, ho$'it should be used, cleaned or cliscarded, etc. ]ust as labels may be helpful, they are also the source of many ethical disagreements as well'fhere are tno central ethical issues regarding labe11ing. The first has to do rvith the nature and antount of information that companies are obligated to place on a labei. The second has to do r,vith tl-re potential deceptiveness of a label. Labels might be deceptive, but they might also be used to make up for potentially deceptive packaging.

lnformation \,l,hat information rnust labels include? If customers have a right to know u'hat they are bu,ving; then rvhat cioes that right inciude? Can customers clair-r-r that particular labels must contain certain information? There are no simple answers here. It u'i1l depend on ihe prorluct, the informatiorr involved, as well as those people lvho are potentlai custorners. Companies also need to consider that some of those lvho Purchase or use their prodrict are iiliterate. Those individuals might need to have different labels than literate consumers.

Deception When marketers use certain terms, omit certain details or make it difficult to find the relevant information on a label, customers may end up beiieving what rs false. For example, a product that advertises itself as 'light' or 'lite' might reasonably be thought to have fewer calories or less fat. Holvever, some manufacturers llse thes. words to rerer not to those ineanings but instead to the colour or the texture of the product.

fr*"..r"r1

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issues regarding

labelling are

information and rhe use of deceplion.

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Business Ethics

Information on the package might also be deceptive through the way it is presented and the size in which it is presented. If consumers are in a hurry and do not read the small print on the labels that indicate that the product is actually somewhat different than they might otherwise think, they may be deceived into believing that the product they are buying is better or different than what it really is. l,ikewise, companies have tried to deceive customers through misleading labels that state the levei of salt, sugn1, fats, etc. contained in the product. The only thing that is shocking about all this is that companies are then surprised when customers express their lack of confidence in their products. Case for review 9.2 shows an example of the change in product name as well as labelling due to the changing times. A name that is acceptable and has become synonymous with clean teeth might no longer gain acceptance in the future. T'his might be due to the fact that an acceptable iabel, logo and even packaging might be deemed offensive with new awareness and sensitivity among consumers and marketers.

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From Darkie to Darlie

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Darlie, formerly Darkie, is

a

roorhpasre brand

of

Hawley

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Hazel Chemical Company.

First

manufacrured rn Shanghai in '1933 and later based in Hong Kong and Taiwan. Hawley & Hazel was acquired in 1985 by rhe US corporarion Colgaie-Palmolive, akhough ihe product is not marketed by Colgare-Palmolive. Darky, or darkie, is a rerm used primarily in the Unired Stares and Britain to refer ro black people, and is now generally considered a racial slur. The packaging featured an image of a wide-eyed, smiling dark-skinned black male wearing a rop hat, spyglass and bow-tie. Due ro rhe conrrasr wirh rherr dark skin, ir was a common misperception that the teeth of rhe people of African origin were exceprionally whire. ln 1985, after Colgate-Palmolive acquired Hawley & Hazel, rhe English name of rhe roorhpasre was changed ro 'Darliel and the image on the packaging was alrered to show a racially ambiguous face in a top hat. The Chinese name of the brand ('Black Person Toorhpasre'), remains the same, and a Chinese-language adverrising campaign reassured customers that 'Black Person Toorhpaste is siill Black Person Toorhpaste'. The toorhpaste remains popular in some Asian

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countries such as China, Malaysia and Thailand. (Adapted from'Cc;lgate's Distasteful Toothpaste' by Hodgerts and Luthans,2004)

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9.5

ETHICAL ISSUES IN PRICING

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Marketing discussions of pricing often portray it as a technical, objectir.e undertakrng wholiy answerable through marginal anaiyses, cost plus prictng, return on investment studies, etc. Such discussions often take place at a very high level of abstraction. Among the items marketers are to consider are the price customers expect, wlierher the product is a new or established one, the cost of the procluct, the nature of distribution

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Marketing Ethics and

channels, possible competitive reactions, the compatibility of this price with the firm's objectives, the level of demand and tlie implications or consequences of the price for those who are asked to pay it.

The price of a product is an important (although not the only) consideration for customers. Among the ethical issues regarding prices are-what knowledge the customer can have regarding the price; deceptive aspects of the price; and various special circumstances (e.g. natura] disasters and new products) that may al'fect the price.

9.5.1

frh;;,h'.. issues in

the erhics of

pricing-customer knowledge of the pi:ice,

deceprion and

special siruations.

Customer Knowledge of the Price

Most of the ethical issues regarding what customers know about the prices of products have to d<, with deceptive practices companies are involve in. There are a fett', however, that concern the customer's knowledge of the price. What information regarding prices are customers entitled to and companies responsible for providing? ShourJ a business provide full information on how prices are determined? In generai, it does rlot seem reasonable that customers have a right to know how prices have been determined. For example, how Apple arrives at the price ofthe nen, iPad or even how Proton arrived at its car prices are usually not revealed to the consumers. These determinations may involve confidential processes within a business to which customers cannot claim a right to access. On the other hand, customers have a right to know lvhat the true and total financial cost of a prospective purchase rvill be to them. This must be presented in a u,a)'that discloses, rather than disguises the full price to the customer. Companies are concerned rvith the profit margin. Customers are concerned about getting valtte at a reasonable cost tor their purchases. 1n addition, this information should be availabte to customers in a timely rnanner, i.e. before they have had to decide whether or not to buy it. To learn lvhat the price is at ti-re check-out counter is to learn the price too late. Hence, the prices on products in a retail store should be clearly marked. A barcodc that onl1, rnachines can read is not sufficient. A customer's right to know r.rha1they mr,rst pay is what is at stake hcre. \\r}ren customers are buying a product on credit, or through an instalment pian, they not only have a right to knon,r,r,hat the monthly palrments will be, but also whal r,r,ili be the total price to them, after the last payment is made. They have a right to knorv u.hether there n ill be extra fees or charges added to their purchase. For examprle, car buyers should knon, about various preparation charges, holv much tle interest n,iil be as r.vell as other fees. Tl-rese are features of the total price which the companies should reveal to the customer.

9.5.2

Consumerism 293

Deception

Too often, companies try to deceive customers such that their patrons nlay find it difficult to know what the full price of a product is, or understand the significance of a particular price. Customers are deceived regarding the price of the product. Tlie efforts companies ntake to disguise or hide the true price to the customer of a particular product are unethicai. They can do this simply by not telling the customer what the total price is until after an agreement is reached. For example, a hotel might offer a room for avery reasonable price but then charge the customer with additi,,nal hidden i.es such as 'resort', 'energy surcharges', 'communication charges', etc. Those who pay

294

Business Ethics

by credit card may be offered reasonable interest rates hut other hidden charges e1 special conditions added on to it in effect raise the cost of its use. When companies conceal the information to which customers are entitled to know to the extent that customers end up not knowing or misunderstanding what the real price is, they are, in fact, engaging in a fbrm of deception. Sometimes companies just simply do not tell customers the full price, or reveal it in ways that are extremely difficult to understand or to detect. This may be a form of 'soft' deception, but the result is the same. The outcome is customers cio not have the full infbrmation and do not know what it is they are committing themselves to spending when they buy the product.

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9.5.3 Special Situations The pricing of a product might be altered in any number of 'special situations', for example, during a natural disaster. if a flood has just hit the state of lohor, people might bc v,'illing to pay greatly inflated prices for bottled ttater, power generators or building materiais. The ethical dilemma here wouid be, is it legitimate or morally right for businesses to charge a higher price? In this kind of circumstances, there are people rvho may be desperate for certain products and their safety and health may be at risk" If companies can charge any amount that customers are willing to pay at that tinre, the companies are taking advairtage of buyers' desperation and weakened position. Tb dtt this is to explott them

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Another example where a different special circumstance arises occllrs when a new product is being introdr-rced. One pricing strategy rs that o{''market skirnrr-iing'. This is tl-re practice of charging a very high price for a nerv product at the rntroduction of the prodnct to the market, Among the justifications offered for this practlce are that it lviil cover R&D costs, that it suggests high quality to custorners, that the 'newness of the product is worth a premium to customers, that it r,r'ill help match the levr:1s of customer demand lvith those of the firm's production abilities, and that after time, the business can lower the price of the product, thus making it seem desirable to more

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people. Suppose that the special situations involve an on-going critical situalion such as HlN1, where peopie's lives are at stake. The firm might developed a vital drug that is not available elsewhere. Should the compan),use a marginal annlvsi.s to determine its price? In the US, pharmaceuticalcompanies ciaim that higher prices arelustrfied in order to engage in the research and development required to produce the drugs that har.,e been developed in recent years. Horvever, who is responsible [or seeing that

those peopie who are sick and dying get the drugs the,v rrced?

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if this 1,*g1g lfis sole

responsibilrty of the drug manufacturer and if fuifilling that respotrsibility wor-rld drive the drug manufacturer into bankruptcy, then there rvould be ver,v felv drug manufacturers u,ho would be motivated to work on develop new drugs. T'his certainly is not a win-win situation and the outcome is undesirabie for everyone. However, having said that, drug manufacturers also cannot be left to soleiy dictatc the market price at their own whim and fancy without some form of control. Goternntents, non-governinental groups and international bo
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9.6

ETHICAL ISSUES IN ADVERTISING

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The forms advertising can take are limited only by the imagination of marketers' They include everything fiom print media, television and radio, the Internet, billboards, and posters, point-of-p"urchase displays, school bus.es, bathroom doors to sky-writing ih" bu.r*.r pulled behind airplanes. In short, almost any place in which an advertising message .u, b" displayed has been used to carry some advertisement' Advertising is notinly difficulito escape, it is becoming craftier and subtler these days, based on extensive studies in consumer psychology and behaviour. The understanding of what appeals to and can motivate people is much greater today than in past decades' Adveriiiers seek to use that knowledge to accomplish their purposes' The consequence and is that advertisements have wide ranging and significant impacts on individuals

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lf the buying and selling of products is a morally permissible form of exchange

relationship, then the question we must ask is which of the ways companies use to inform urd to influence customers are morally permissible and which are not' Adr.ertising is one area in particular in which this question must be raised. Do certain kinds of advertisements go against important marketing values and norms? It is hardly surprising to find that.most forms of advertising involve ethical issues of deceptron, manipulalion, harm and value integrity.

9.6.1

Truth in Advertising

The current economic system lvould suffer a significant decline iiadvertising r'rrere lo stop; tt would be considerably iess efficient. in this sense, it is better for aiI involved in business transactions, especially producers and marketers, to advertise' In any economic system, some way of making knon'n what is available, its price, features, how they reiate to customer's lives, etc. is necessary. Advertising satisfies this need for

infornration. Advertisements that make factual clairns about a product may make tliem witl'r regard to their cost, availabilitl,, quality, construction, uses ctc. Issues of truth plal' an extremely important role here. An advertisement tells the truth if what it (or some part of it) states or portrays, captures or reflects, in some substantive or materially relevant manner, the actual characteristics of the product advertised. An advertiser who knorvingly includes some false statement in an ad, when this false item i: nlalcrial to the understanding of the product, and who does so with the intention to deceivc sorteone, u,ould be lying about the product. As such a lie requires that the person, or adirerti.er, present some sort of statemeirt to the viewer. if, horvever, an adverttser omits saying or presenting something about a product and thus misie ads the customer, the advertiser has not lied. In such a case, the customer has been deceived.

9.6.2 Puffery and the Desire for Deception A lot of advertising does not make claims that could strictly be evaluated as true or 'best burger in the world'false. Instearl, overstated statements are used, for example, In acldition, advertising also utilizes association anC implicit connections betrveen products anil various needs or desires people have (for acceptance, approral, securitv

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manipulation.

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;.-:1 etc.). These forms of puffery are viewed differently than the statements advertisements make about prices, durability, contents, etc.

Are these forms of puffery deceptive? Some say they are not but are rather embellishments and are recognizedas such. According to Levitt (1970), people desire

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to have puffery. On Levitt's view, customers want the puffery, the symbolism and the visual and auditory embellishments that ads carry to make their lives a littie less dull" Since advertisements that engage in puffery do not rnake straightforward cognitive ciaims, therefore, they cannot be directly evaluated as true or false. Hence, they cannot be directly deceptive. Still, their exaggerations and associations are intended to attach an emotional or symbolic glow to a product. In general, these emotional associations are effective in moving people to purchase the advertised products or otherwise they would not be used in the first place.

9.6.3

Offensive Advertisements

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Advertisements may be criticized not only for questions of truth, deception or dishonestl', but also for their offensiveness. This rnay occur in a number of ways. Some are offensive because of what people do in the ads, or the situations they portray. Ads can aiso be offensive by portraying people in various stereotypical and clemeaning roles. This is said to occur when women are portrayed in a manner that emphasizes their sexuaiity6.r, de-emphasizes their intelligence or leadership qr.ialities Similarly, certain groups of people (for" example, the handicapped) may be portrayed rn dismissive and stereotypical rvays. Ads can also be offensive through the language they use, lvhich might be particulariy obscene, cirauvinislic or
9.6.4

M anipu

lation

Advertising must be evaluated not only for its truthfuiness and offensiveness, but also for the impact it may have on people's view of themselves and therr behar iour. Advertisements are not only informational, but also motivational and perspectir.al. They seek to move people. In addition, they offer representations of the lvorld. it is not surprising then that adr.ertising is often said to raise issues of rnanipulation. In order to manipulate people, advertising may appeal, among other thit-tgs, tcr desires, needs, emotions and wishes customers have regardrng, for example, their the physical appearance or safety, accepta;rce by others, sexual interests r)r patl tottsnt. 'I'hus, advertisements that relate to one's acceptance by others may feature bacl breath (rnouthrvash), bodily smells (deodorant) or dandruff (speciai sharnpoos).Ihev may aiso relate to the protection of one's children or loved ones (spccraltyres fbr ole's car, life insurance policies, fire insurairce policies, etc.). In the above examples, objections have been raised--that compan ies are not sr rnplv seeking to persuade or influence people, but are engaeed in a form of manipr,rlation that is ethicaliy inappropriate. The question is what would constitute manipulation then? Someone is manipuiated when some other person (or organiz.ation) non-coercively creates or rearranges a set of conditions so that he or she can motivate a person to tccl,' believe or act in certain ways that they wouid not otherwrse have f'e1t, believed or acted in. The objective is to fulfil an aim of the person exercising thrs influence. Even thing rvili depend upon the means used to appeai to those targeted, who is targetecl and the narrowness or breadth of the appeal. In general, when markete r-s lreat people as objects

to be rnanoeuvred or pursued in certain directions for their orvn ends, then lirere manipulation and also reason for companies to avoid these forms of marketing.

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Case for review 9.3 illustrates how a negative connotation attached to a culture can be used as a marketing and advertising tool to seli a product. In your opinion, is this ethical? Will you consider this as a form of manipulation?

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Capitalizing on Kiasu ln Singapore a'Kiasu'is a boorish grab-all-you-can person, or one who is afraid ro lose out. Every narionaliry has irs own Kiasu rypes, but Singaporeans have coined a word and mascor for it. McDonald's in Singapore has even pui its stamp of approval on the concept wirh the lntroduc-cion

of a chicken sandwicir ,.virh exrra letruce, extra sauce, exrra-long buns and 47 sesame seeds, aprly "A year ago we called rhe Kiasu Burger. Fanny Lai, McDonald's marketing manager in Singapore sard, identified Mr Kiasu as a popular iocal cartoon character and began conceptualizing our marketing plans wirh irs crearors "

Singapore, when McDonald's ralks, people listen. As rhe repubiic's brggesr advertiser, McDonald's spends over Szi rnillion annually on advertising and promotions The Krasu carnpargn ro cosr rhe charn nearly 5433,U0U, and rhe burgers practically flew our the door. MlDcrrrald's expected in 600,tlit0 sold alreadl' protnorion, bur sell l5 mrllion Kiasu burgers narionwide during ihe-10-week Srngaporeans latrrrched, rhe first rhree weeks. ln one of rhe marketrng gimmicks when the burger was .135 were sold showed up ar 5:30 a m. could buy the burger for one Singapore cent As many as ',vho on earth. last sale rhe it was as if rn half an hour, wirh Kiasu Singaporeans queuing up McDonald's promorion of rhe Kiasu Burger is part of a worldwide ir-end 1'or internarional

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adverrisers ro localize rheir marketing efforrs. "singapore is a global city, an open market, so Kiasu-ism is one of the few thrngs uniquely Singaporean rhar sets Singapore apari l'rom the rest of SoLrtheast Asia," says Jamie Pfafl crearive director at Leo Burnett Pte. Lrd., whic[, handles McDonalcl's account in rhe U.S. anci three Asian counrries. "There is a lot of homegrown prrde among some Chinese

Singaporeanstharoneof rheirrermsisgetringacceptancefromaglobalorganizatronlikeMcDonald's" (Adapted from'SOCIETY: Singapore's Kiasu syndrome', Asia lnc, Seprember 199j)

9.7

ETHICAL ISSUES IN RETAILING

Retailing relates to the sale of products and services to the ultimate customer for personal, non-business use. It is generally conducted in various departmental stores and retail shops but may also be done door to door as well as through the mail and the Internet. Retailers come in all sizes, from giant hypermarkets such as'lesco to neighbourhood retail stores. There are different marketing strategies used by drfferent retail outlets, for exampie department stores, discount houses, spccialty storgs, factory outlets, supermarkets, convenience stores and warehouses.

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ethical issues in retailing are gifts and entertainment, honesty in sales, privacy in rerailing and retail sales pressures.

There is a wide variety of ethical issues concerning retailing. 'Ihe following are some of the common issues.

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Gifts and Entertainment

Retailers acquire the products they sell to individuai customers by purchasing them from other producers through various sales representatives and suppliers. In the quest to procure their products, what is the role of grfts and entertainment in this process? Suppose that a sales representative, after a discussion of whether the retail chain will carry a particular product line, casually offers some tickets to a concert or to a movie. Does this raise any ethical questions? Some argue that the answer depends on the intent of the gift-giver. It is wrong if the person intends to ir-rfluence onc's decision, but not wrong if the person is only offering the gift as a nice gesture. The problem ll,ith this argument is that it is difficult and perhaps impossible to asc ertar n a person's

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intent in such cases. TLe fact is that gifts and entertainment received inay influence the person who is making the decision on whether the retail chain will carry the line proposed. Acceptance of such gifts maymake the recipients f'eel obliged to those who have given the gifts. After all, this is one of the traditional aspec-ts of grft gi.,,rng--t}rose receiving gifts do feei a certain obligation to respond in kincl" \\rherr the receiver of the gift makes an agreement that he or she rorould not otheru,ise have made, it appears Lhal Lhe persun has been urrduly irrfllrelrced, if not bribcd rvhcn they accept the gift. Hence, gifts may raisc questions of"conflicts of interest between both parties.

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9.7.2

Honesty in Sales

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\\rhat is the standard of honesty retail saiespeople irusl nlcet nrth regard to the products or services they are selling [o cuslomers? The:ialr:spersorr's responsibility is not to tell iiteraily everythins about lhe product, gooclr or service. Most buyers would experience an informatior.r o',,erload, lvhich is r-rnheipful. Those in the legal profession sometimes use this techniqr.re to bury the truth, ratherthan reveal it^ If honesty involves portra,vrng situations the way they are, teliing someone everything might obscure impcirtar-rt truths about the product or service in a mass of details. In short, some pieces of infolrnation are more significant than others. The generai moral consideration or principle here rs 1lrat honestv rerlulres providing accurate information, in response both to questions asked ancl to relevant questions not asked, in situations in which the legitimate cxpcctirlions of tl-re custt.rmer require that those questions be accurately answered. To detc'rnline exactly hou, nruclr information needs to be provided is not always clear cut. Consumers ntllsl rn genei al rely on their assessments of rvhat a reasonable perscn would \.rant to knorv (Ho11e1,, 1986). Certainly any information that wo,-rld materiall,v affuct the customer's decision shouid be disclosed. In relation to honesty in sales, in 201 1 there n as an uproar in N4alavsia on the tvay a boutique hotel 'discrrminated' certain groups of people" Is the orvner of tl-re hotel merely being 'honest' in their sales tactics? Wheri do you thinlr. is honesty ,rpprcciated and when rvill it cross the line? Read case for rer,/rew 9 4 to finrJ otit.

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299 Marketing Ethics and Consumerism

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Reggae Mansion Out of Tune has

Malaysians relects selected nationalities including A hosrel for inrernarional backpackers which states that'Reggae Reggae Mansion chain of hoscels'web:ite caused uproar among Malaysians. The bookings by accept not do backpackers unfortunately' they Mansion is a hosrel ior lnternational would be narionalities narionals'' Reservations made by these Malaysian, lndian and Middle Easrern The new

adding rhar rhe hostel was nor wheelchair-ac-cessible deemed null and vold, the hostel said, also rloes nor Tun H s Lee and ceorge Towir' Penang' in bourique backpackers hosiel franchise Jalan polrcy hosrel's the wrote abour years old. A human rights blogger accepr guesrs who are above 60 and Facebook frusrrations agulnst the hosrel on Ti"r'irrer prompring angry Netizens to vent their

TheStarnewspapermadeacalltoReggaeMansioninPenangandwasansweredbyareceptionisr, the hostel and thar the website \\as- not operated by who was apologeric abouLrie policy, ,rying branch' The receptionist in rhe Kuala Lum;:ur thar bookings by Malaysiarrs were still accepred ro give reasons 1'or such a practice was being enforced but refused however, mainrained thar rhe ol the Kuala the notice was removed from the websiLe policy. However, afrer the hype of oubllcity, Lumpur branch (Atlapte,lfrom,Rcggae,4.lensiont)t'trofTtne,,byRegtnaLee'Theftaronline,4Novembet?C11)

q.7.3 PrivacY in Retailing t[rt:

come to know certain things aboLlt a cusLomer buys a prorluct, retailers ,."d {r1 pa}I rvhat proclucts r,vere brought, the means r-'tt.stomer' For ex3mp1e, tl-rey ktlor,r. locatiorr rvere bought',Depending on the ior rhose pro
wl]eir

. 1- ^.-^r^61,1 bank. customcrs 'l-hese retailers need to make considerable eftbrts to ensure that priYate dangers the lnternet' databases and the infornarion .emains private. \{ith computer have increased greatly' Stories of databases

of the loss of confidential information u'ith confidential information on them being being 'hacked' into and of computers online commerce may involve prii'ate sold, lost or stolen are increasingly frequentone s credit card number' inc.me inlorntatio' of considerable significance regardingof identity theft or loss of information and othcr private information. The possiblity encrypteci must make special efforts' such as utilizing htrs become ver,v real. Companies passwords, etc., to ensllre that private information, trrirrlnfof "mploy.er, firei'al1s, remaiirs private' infortnation r'r'ith wh]ch they have been entrusted

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9.7.4

Retail Sales Pressures

Retailing also raises issues of freedom. Retailers can bring various pressures ancl forces to bear upon customers, which may constrain or direct their eleciiions and behaviou. in ways such that their freedom has been negativeiy affbcted. Often, they involve subtle measures, for example, appealing to emotions (fear, self-regard), comments made kr affect-the perceptions of customers, store environment.s created to encourage buying and efforts to alter customer risk assessments. Warning that a certain product may be soid out il'the customer does not buy it now is only one of several methods retailers use to put pressure on customers to buy. Salespeople have also used guilt as a psychological weapon when a saiesperson encourages a grieving son or daughter to buy an expensive coffin by saying, ,,surely you want to buy the very best coffin for your fatherl" Again, by appealing to the notion of friendship, a salesperson might try to get someone to buy somethlng to strengthen the bonds that friendship suggests. Another scenario would be when saiesp"eople gather a number of customers together so that they can try to use peer pressure or embarrassment to get a person to buy certain thrngs (e.g. time sharing, cosmetics, health products). The use of pressures upon customers that are particularly vulnerable raises special ethical probiems. Those who have suffered death in the farnily or hirve a family member who is very sick or who are themseh,es underaee or perhaps aged (and uncertain of themselves) are not people who are'easy targeti'. Tire ubor.. g.Jup of customers require special consideration. Salespersons shoul,:l be careful not to take advantage o1'these vulnerabiiities to sell their products or scn,ices.

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ETHICAL ISSUES IN THE USE OF DIRECT MARKETING

Direct marketing is a form of advertising that allorvs businesses and non-profit organizations to communicate straight to the customer, lvith advertising techniques

such as rnobile messaging, e-mail, interactive consurner websites, onlinJciisplay ads, flyers, catalogue distribution, promotional letters and outcjoor aclr,ertising Characteristics that distinguish direct marke ting frorn other forms of marketing:

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;*b., *f",.*;l deception and fraud and invasion of privacy are rhe main issues in the erhics of direct markering.

Marketing messages are addressed directll, to custotners. I)irect marketing relies on being abie to address the members of a target market. Addressability

comes in a variety of forms including e-mail addresses, mobile phone numbers, web browser cookies, fax numbers and postal addresses. Direct marketing seeks fo drive a specific'call to action'. For: example, an advertisement may ask the prospect to call a free phone number or click on a link to a website. Direct marketing emphasizes trackable, measurable responses from customers, regardiess of medium.

Direct marketers and their customers uslrally enjoy mutually

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relationships. Occasionally, however, a darker sitle emerges. Concerns inclucle e xcesses that irril ate consumers, instances of un{hirness, cases oi outr ight rJeception anri fraud and invasion of privacy.

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9.8.1

Irritation

Manypeople find the increasing number of hard-sell and direct marketing solicitations to be a nuisance. They dislike direct response TV commereials that are too loud, too long and too insistent. Especially bothersome are dinner-time or late-night phone cails, poorly trained callers and computerized.calls placed by an auto-dial recorded message player.

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Some direct marketers take advantage of impulsive or less sophisticated buyers" TV

shopping shows and infomerciais may be the worst offenders. They feature smooth talking hosts, elaborately staged demoirstrations, claims of drastic price reductions 'whiie they last' time limitations and unexcelled ease of purchase to capture buyers who have iow sales resistance.

9.8.3

Deception and Fraud

Some direct marketers design mailers and write advertorials intended to mislead br-ryers. They may exaggerate product size, performance claims or the retail price. Some non-profit organizations pretend to be conducting research surveys when they are actualli, asking leading c}-restions to screen or persuade consumers. By the time the buyers reahze that they have been cheaLed artd alerl tlte aulltorities, tlte culprits are usually somervhere else plotting nelv schemes.

9.8.4

lnvasion of Frivacy

Invasion of privacy is perhaps the toughest public poiicy issue confronting the direct rnarketing industry. lt seems that almost every 'ime consumers order products by mail or telepl-rone, enter a contest, appl1, fcrr a credit card, ortake a magazine subscription, their names, addresses and purchasing behaviour are entered into some compan)"s database. Consumers often benefit from such database marketing when they receive more offers that are closely matched to their interests. However, direct marketers sometimes find it difficult to distinguisir the fine line betrveen their desrres to reach carefully targeted audiences and consumers' right to privacy. Many critics worry {[21 direct rnarketers ntay knou., too much about consumers' personal details and that they may use this knorvleclge to take unfair advantage of consumers. In this instance, is it right for credit card companies to compile and seli lists of customers -*'ho have recently applied for credit cards as they are considered prime direct markeiing targets because of their spending behaviour? Is it alright to sell the names and addresses of driver's licence holders, along with hcight, weight and gender information allowing apparei retaiiers to target ta11 or overweight potential customers with special clothing offers? Some might think that the actions taken are legitimate as it does not break any ialv and aiso it is considered to be "smart' marketing as it targeted a seiected grorrp of customers thus eliminating the run around time to search for the right customers. Others might perceive that giving vital personal information to companies is a serious violation ofpersonal privacy and space. We will cnd this section on the seller side of marketing exchange by looking at the case for review 9.5 on the confession of an ex-marketer. In your opinion, is the company soleiy responsrble for the 'deception' or should the responsibility be shouldered by the c,)nsumers themselves as well? Do yor-r agree that if the consumers are ntri 'greedy' they will not be victims?

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Confession of an Ex-marketer .

Sean Tan rhoughr he had been recruited by a direct sales con.,irany bur it turned our rhat their versiorr of 'sales'was chearing vicrims for a scratch-and-win company. He was 23years old then and

could noi find a lob after he graduated. His friend who was involved in the scraich-and-wrn scam asked Sean to jotn him insiead of lazing at home. He was given a hands-on tr-aining on cheattng as soon as he joined rhe company and only realized rhar it was a scam during rhe training session. fhe company brainwashed the recruits every day saying that rhis was the fastesr way to make money. Newbies were rhen paired wrth a senior who showed them rhe rricks of rhe rrade. They would approach people on rhe prerext of conducting a survey and rhey are given a coupon after complering ir. There is a mix of coupons, you eirher win a prize or lea,ue home empty handed rf you get ihe 'rhank you'coupon. Unbeknown ro the victims, the market,ers know which coupons conrained a prrze and which did not. The marketer usually promised poienrial victims a chance to ro,,in a car or RM'10,000 bur the prizes are acruaily electrical appliances like rnicrowave ovens and they need to pay a deposit

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before the prize is revealed. the company makes a profir as rhe producrs glven our as prizes are bought at a lorv price from China. Aside from rheir monrhly income, employees ger a commission for every'sale' rhal they make. Cne of rhe ractics ro morivare their employees is to praise the one who raked in rhe highesl sales for rhe week rn fronr of orlreremployees at rheirweekly rneetrng Those who got the leasL sales or none were made fun of. Sean ended up being laughed at most of tl-re tinre as he drd nol have Il'](t hreart to cheat people. The company also encouraged employees to work their way up the iadcler and evenlually ser

up their own company After working for a while, t,hey can recruit nett,blr-,od and be prornoted ro supervisor When an employee becomes a supervisor, he/she will not have ro do the hard work rhernselves bur wili still get a cur of the profits. They will be prornored to ber,ome a manager when they lrave ernough supervisors working under rhem. The manager can then set up their o\^/rr con-lpa r\' but rhe condirion is that they srill need to purchase products from the parent company" "l he parent company will give managers a BMW 3 series," said Sean. (Adapted from'Former scrarch-and-win employee tells how it's done', The Srar,

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CONSUMER ETHICS AND CUSTOMER RESPONSI BILITY

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Previr.rus discussions in this chapter have focused on ho',^: companies ot marketers should relate to their customers. This is the standard approacl, of most markcting ethics discussions. Some har.e suggested that this vieu,, is ,-1ue to the tmphasis in marketing

on the marketing concept (Polonsky et al.,20Cr). A more acc-urate view instc;:,d rvor,rld be that marketing ethics can best be understood as a two-way reiaiion;ihip. As tve

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exchange to take place, there is the interaction between marketers and consumers. This is a more holistic vierv and approach. The ethical aspects from the consumers' side are often neglected in most discussions on marketing ethics. In this section, we will look at the aspect of customer

have seen earlier

in Section 9.2, for a marketing

responsibilities in their relationship with marketers. Customers have various rights against companies. These include a right to relevant information regarding the product or service a customer is considering buying and rights with regard to product safety, non-deception in advertising, etc" These rights imply obiigations on the side of the marketers. Hotvever, customers also have responsibilities towards businesses and correspondingly companies have their rights as well. Among the more obvious responsibilities customers have regarding companies are-acquiring the products and services in a legal and ethicai manner; paying bills on time; informing about their intended purchases; using the products they purchase in a manner that respects the safety limitations producers identify; and not purchasing goods they know have been produce , irr an illegal or unethical manner, |ust as not all marketing responsibilities can be incorporated under the law, the same can be said about customers' responsibilities.

9.9.1

Customers and the Law

Shoplifiing is a serious offence against the law and yet many companies lose a great deal of products to shoplifters eyery year. When customers take things off the shelves and put them in their pockets or handbags, or rvhen they put on a dress or a shirt under their ou,n ciothing and lvaik out from the store rvithottt paying fbr thenr, ther' are stealing these prodricts. Hotel guests have taken tor'r,els, phone b,ooks, trlankr:ts, light bLrlbs, etc. A more subtle forn-r of this occurs when some custotners cl'range price tags on products in a store and try to buy the item they lvant under the cheaper price tag. For example, the shirt costing RM75 is now RM55 or the CD being sold for RMi4.99 is row RM9.99. There are several etl-ricai issues here. These acts are sintpll, wrollg. Thc ethical issue that can arise is whether a person is ever justified in engaging in illegal actions rf they t-eel that they are being exploited or mistreated themselves. Though shoplifting is a form of theft, some customers feel ' justified' or 'entitled' to do so since they also feel that they are being 'rippeci olf' by the retailers. This is seen as simply the chance to get even. lndeed there is a great deal of anger and distrust that rnany people feei ar;airtst businesses. They feel tl'rat large businesses are exploiting them. The1,belier,e that thcl' arc not listened to or cared about. After all, some sales personnel are indifferertt to u'hal a custorner tvants; many times the attenlpt to reach a business by telephone and to get service scerrrs almost impossible (and when it is possible stili requires a lengthl' period of responding to computers telling one to press this or that nttmber on the telephone).

These feelings of anger appear to justify theft, from significant items down to petty ones from retail stores. Clearly these feelings and emotions do not justifl' "p6fi retaliatory actions. A person may feel aggrieved. Nonetheless, even if wronged by a store, it does not justify the theft of that store's products as the solution. Further, some people may take out their feeiings of injustice on stores or businesses that did nothing wrong to them. These customers are responding to other more general wroni's from bus,r-iesses that they perceive themselr,es to have suffered.

mrr,.,c rh. more obvious responsibilities customers have regarding companies are acquiring the

products and services in a legal and ethical manner; paying bills

on rime; informing abour their inrended purtirases; usitrg

the producis they purchase in a manner rhar respecrs che safety limitations producers idenrify; and nor purchasing goods they know have been produced in an illegal or unerhical manner.

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At other times, consumers may perceive that businesses have a lot of money. Sei, retailers will not notice if an item is missing from their stores. This rnight be true especially when we are talkinq about very small items. For example, sotne customers load up on ketchup, chilli, sugar or creamer packets at fast food restaurants" It is possible that in some locations, this occurred to such an extent that these restaurants have to put these packets behind the counter, rather than leave them out for customers to help themselves. Again, such actions are not iiistified, although consumers use this rationalization anyway. 'Ihere is another broader rationalization that customers sometimes use regarding business and justification for their actions. Therr rationale is that marketing is a form of war or a ruthlessly competitive game. To some custonters, they betieve strongly these comparisons and greatly admire those who respond liken,ise. To take advantage of a business's weaknesses is only doing what that business does to customers, and so fully justified. The following case for review 9.6 discusses some of the problems faced by Malaysian retailers in trying to curb certain shopping habits among consumers. In your opinion, do yeu think what the shoppers did are r,r,'rong? Are there any other ways for retailers to minimize this besides instailing CCl'f\rs?

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Bad Shopping Habits: A Norm Among Malaysians? Bad shopprng habits and dishonesty are causrng reiailers millions of ringgrt in monthly loses Shoppers

opening up packaged p;oducrs but nor buying it, pokrng and prodding frurts and vegetables tcr determine freshness, addrng irems after they have been weighed and frxed with price rags a:,ri swapping price tags or barcodes are.lust some r:f rhe bad shopprng habits. Some shopDers hare even been found tryrng on underwear, despire clear signs prohibiting them from dorng so due to hygiene reasons. But ir is fresh produce that are more prone to abuse by irresponsible people. Mydin Mohamed Holdings Bhd. managing director Datuk Ameer Alr Mydrn said such habris stem from the lack of trust between consumers and rerailers. According to him, A,\alaysians seem ro have ihe cult.ure of going to markers and inspecting the goods r,losely to check lor freshness but hypermarkers and supermarkets sei hrgher srandards on rlreir goods" He sard tha'. consumers mus[ learn to trust th.. labelling instead of opening up packages or poking fruirs. In the case trf Alytlrn s cha n of ,,r,holesale s[ores, the disposal rate of fresh produce resulting from these acts is berween i96 and 2% oidarly sales

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for non-perishable irems. A direcror of a retail chain said bad consumer behaviour was bccomrng more common. Wh,'n chey close their stores, they found items on wrong shelves and rubs ol ice'cream and packed meat left in the open. They had no choice but to throw these items away. On average, rhe lc.rsses ar hrs companyi stores amounted to between 0.3% and A.5a/o of daily sales, or about RMlg million a yeai and rhis cost is nor passed on to consumers because in doing so they nright lose rheir comperrrrve edge:,Malaysian Retailer-Chains Association (MRCA) president Dat.uk Nelson Kwok said rnrhrle most ,,, thgppels were.(gcent.consumers, rhe few black sheep were enough for rerailers to incur sLibsranrral .., , losses. He said rhai previousiy, consumers were more reasonable but now rhey rhrnk they have rhe right to open and inspect goods. is less rhan

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Marketing Ethics and Consumerism 3C5

KK Croup founder Daruk Dr Chai Kee Kan mentioned an incidenr in which a cusromer swappecl

the RM5 price tag on a bottle of chicken essence wrrh a RM30 box of six borrles. lJe said some

suppliers accepred the damaged goods and were wrlling ro exchange rhem for new ories bur retailers had ro bear rhe losses for rhose who do nor. To minimize losses, his company, which operates -104 supermarkets natjonwide, placed more valuable items nearer to the cashiers and also insralled more CCTVs. Each of rhe srores has berween 10 and 15 CCTVs. (Adapredt'tom'Bar1 ShoppingHabitsteaveaBigHoleinReratltr<'Poclers,bytileenNg 7hc 5tat, -,Jluly)at))

9.9.2

Soft Theft

Not all cases of illegality are as straightforward, at least to those involved. One area in which this is true and in which new technologies such as the Internet had a profound effect is the downloading of music and software on the Internet. For many rvho do this, they u'ill perceive rvhat thcy are doing is not wrong, technically. They might say that they'are simpiy shzrring files with other pcople. Hoi,ever, this may roi .rr'.tly b. the case here. One's music files can be sharedrvlth tens of thousands of otherpeople and not jus' u'ith your best lliend. They can then be used by all those people at the same tinte. The argument of the intellectual property rights irolders (the music companies, etc-) is that people don'nloacling music u,ithout paying for it are steaiing. 'I'heir prinlar-v response st]ems to be tryine to scare customers enough so that .ult,,-.., rvill not contitlue doing this and thereatter go rnto the stores ior shop online ,,vith legitimate music sotrrces) to buy the music thev r.r,ant. In summary, compalies seek to force thosc dorvnloading music ancl other copyrighted materials back into some format that respects t1're traclition of property rights.

9.9.3

Soliciting lnformation

Some customers hat'e the idea of going to iocai stores, often rather small ones. rvith the irltention crf solicitittg informirtioi from the owner or salespersons regarcli,e

a particular product. example, canteras, computers, smartpht,nes, etcl After .For havrng acquired sr-rch kno_wlcdge, they woul
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argument here is that they simply want the best for themselves and their families, the argument justified?

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KC Lam is a self-confessed 'poker' of fruits and vegetables. The 50-year-old housewife justifies her habir as a good way of helping her pick out fresh produce. Unperturbed by rhe marks she leaves

behind on the produce, she said rhar what she did was within her rights as a consumer. When she does her shopping at a local hypermarker, she squeezes rhe apples and oranges and snapi off the tips of ladies fingers as parr of her freshness test. According to Lam, she will not do it if the produce looks really fresh, bur somerimes rhe fruits and vegetables did not seem like it She added thar if the okras' tips cannor be snapped easily, she will nor buy them as this is one of the rips she learned from her late mother. She shrugged off suggesiions'that her acrions could dissuade other customers from buying rhe goods, saying, "l am acrually doing the others a favour". Anorher housewife, identified as Ramlah, said she would peel rhe heads off rhe prawns before buying them, "The heads are the heaiiest part No one in my family eats them. "By peeling off the heads, I get more value for money," she added. "Besides, rhere's nothing wrong wirh doing it. l've seen others do it too." Another shopper, Cheng, said she would peel off rhe firsr three layers of a cabbage before buying rt as they are usually bruised and dirty because many people have handled rhem" (Adapred from'Bad Shopping Habits Leave a Big Hole in Retailers' Pockers', by Eileen Ng, The 5rar, 23 Jttly 2012.)

9.9.4 ExploitingCompanies'ReturnPolicies Retailers, usually the large hypermarkets, har.e a variet-y of return policies r'r,tth regard to customers and the products the1. purchase. Sorne oi- these may be expioited b,v custoillers to their own advantage. For example, some (.llstonlers InaY tet urn products rvhich the1. thsrrr.lves broke, but which they saf i,r,erc clcfcc tive . Otirer r uslcrmers 1]1ay use the products they bought over a rveekend or sirort pe riocl oi Iimi: and then tr-v to get their money back. The return rate of nervl1, I,urchascd large scre .:ll teicr,isiclt'ls shortly after football tournaments such as the rvorJcl cup or !,rLr',rpt'art (t1P lrrrrr'.r\cs sharpiy. Customers may lie about the reasons rvlrt,the), are returnit-ig the pr,rdr,rct. They may claim that it is unsatisfactory in some n,av, rvlten rn fact thev n anted lo purchase it for a single use. Some argue that if stores have return policies that perrnit this type of'behaviour, then nhat customers did are notwrong. Of cour.,e, it is not legally wrong. However,. the rctailers that instituted such policies obviously clid no1 intend to participate iir a 'iending program' for no money at all. It is obvrous that custttittel s are taking advantage of the retailers'policies which are not so discerning as to catch those rvhtr rvish to'borror,v'ratherthan'buy'the produo It is generallv understood th:rt rf onc buys a product, unless it is defective in some manner, it becomes 1}re propertv of the customer.

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Marketing Ethics and Consumerism 307

However, suppose a customer decides that he or she no longer likes or wants the product because of what it is or how it operates. Then it is up to the store to decide rvhether that is a sufficient reason to allow a customer to return it. If, hou,ever, a cllstomer no ionger likes or n ants the product because they only wanted it for a singie occasion, and nor,r, seek to return it, they are being deceptive themselves. 'fhey are treating the retailers as a irleans to their own bnds. In short, they are mistreating the retailers. In the past, large departmental stores have liberal policies for returnrng products. However, customers who have engaged in the actions highlighted above have takelr unfair and dishonest advantage of these return policies. In doing so, they have nranipulated those policies. Many of these stores have nou, begun to tighten their product policies. Unfortunately, those people who have a genuine reason to returtt a product might be negativeiy affected as a result.

9.9.5

Sourcing of P.-oducts

What responsibilities do consumers ]rave with regard to the sources of the prroducts they buy and use? \\'ould it be an issue if the products are produced by workers.uvho are badly exploited in otl'rer countries? What if the coffee and teas are from explorted farmers, or clothing is frorn horribie sr,veatshops? Shouid this knou,ledge make an,v differen;e to a custoi-ner? 'fhe first issue here is the extent to which a customer has knowledge abor-rt the soLlrce of the products he or she buys. In addition, given rapid globallz-ation evcr.r sucir rnunclane items such as T-shirts may u,ell be produced in more than one coLlntr\,. Surelr'' this is true rvith morc complex products such as cars, computers, etc. Perhaps sonre of the sources involved in the production of the product are legitimate and crcdible, yet others are not. in tl-ris situation, hor,r,w'ould then one decide? If one refuses to buv a product becar.ise sonre part of it comes from an unethical solirce, even though other parts of its sotrrcir-rg are ethical-is it being unfair to the innocent source? Labelling lau,s r,r,iil n-rake it possible to know iir general r,r,here a product is made. Stili, it is djfiicr-l1t to knorv the details of where other products come front, such as food, cars, furniture, etc. Nonetheless, consumers can find out a great deal about the sources of the products they intend to briy. Products that are made with cheap labour are prodr-rcls that sar-e the crLlstomers money, but this of course is at the expense oi poorlv paid irnd erploited u,orkers. A strongcr response to the ethical issue is the consumei: boycott. I'his can bc clone in a varicty of rva,vs. A customer can just stop buying the products of a ccmpany. This is a form of silent boycott. Customers may also publicly stop buying ilrose: products through lvriting letters to the producer or to the ne\rrspaper. More aggressivc consunlers may also join interest groups protesting or lobbying against ur-rethical practices. This might be done by conducting demonstrations outside a store, for example. Of course, the iast reaction is a rather extreme measure for most customers. It is therefore a debatable matter whether it would be a customer's obligation to put a rtop to t}-re purchase or simply just accept the fact of the matter. The strongest obiigation requires customers not purchasing or using products that are produced through ur-rethical or e\ren iiiegal activities. To purchase the products tfrat are sourced through unethical means might constitute a form of support lo those u,ho are involved in those activities. In buying a product that was illegally or unethically produced, one is ;,raking oneself a member of a supply chain that permits the illegalit,v

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to exist. Some might argue that the responses from such proactive responsibilities from consumers are fairly limited because they in reality cannot individually do much to affect the situation. In conclusion, customers have a. host of responsibilities when it comes to their interactions with companies" These responsibilities highlight the fact that all of us can understand the marketer-customer relationship and marketing ethics only if we consider both sides of this relationship. If markel ing ethics is to be a reality, both sides of this relationship must acknowledge their own duties and responsibilities. Only this will fully capture the integrated marketing concept.

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9.10

THE COMPANY'S ETHICAL

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REVIEW

l;*;;;;;;;al conrinually satisfving rhe cusiomer and other stakeholders are inrimarely tied ro the adoption and implemenration of high srandards of business and marketing conducr.

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Companies need to evaluate whether they are truly practising ethical rnarketrng Business success and continually satisfying the custorner ancl other stakeholders are intimately tied to the adoption and implementation of high standards of business and marketing conduct. Most companies try to abide by a code of serving customer's interests and not only their own. Cleariy, the company's bottorn line canrlot be the sole measure of corporate performance. Society at large must reject those practices which are i1legal, antisocial or anticornpetitive. Companies rnust adopt and propagate a rvritten code of ethics, build a company tradition of ethical behaviour, and l-rolcl their employees iully responsrble for obsen,ing the i:thical anc'1 iegal guidelines. Finaliy, individual marketers must practice a social conscience in therr specific dealings n'ith customers and various stakeholders"

The learning outcomes for this chapter is summarized

as

follorvs:

1.

Explain the concept of marketing. The essence of marketing is frequently explained in terms o1' the four P's--product, pricing, promotion and placement. Marketing involves all aspects of creatrng a product or service and bringing it to market where an exchange can take place. The concept o1'an exchange betrteen a seller and a buyer is central to the 'market' and is the core idea behind marketing. Whether exchange actually takes place depends upon whether the two parties can agree on the terms of exchange that will leave them both better off (or at least not rvorse off) than before the exchange.

,,

Describe the theories of marketing ethics. The theories of marketing ethics can be divided into two main comporleni.s, namely the HuntVitell General Theory of Marketing Ethics and Consumer Ethics Theory. Hunt and Viteli's ethical judgement is the process of considering several alternatives and choosing the most ethical alternative. Consumer ethics refcrs to the moral values and beli:fs that individuals or groups ohserve rvhen they buy, consume and dispose of products and services ancl consists of five dimensions.

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Marketing Ethics and Consumerism 309

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3.

Identify and explain ethical issues in product development. There are three ethical issues in product development: Value durability-vahe durabiiity of a product refers to the likelihood that a product will continue to maintain its value over time. This may not occur for a variety of reasons. Many argue that companies have a responsibility to produce products which value will not decline in any way' Safeiy-a company's responsibility is to produce the products which people wiil buy and it is the customer's responsibility to determine whether, and to what extent, such a product may cause therrt harm. Companies are not to conceal features of a product that may be harmful, but it is up to the customer to acquire relevant information regarding the product and to act accordingly" Environmental impact-the impact of the products that companies choose to produce on the environment can be quite significant. Corporations need to think of ways in which they can not only reduce the negative impacts of their products on the environment but produce products that have a benevolent ellect.

4.

Identify and explain ethi.al issues in packaging and labelling. The following are the three ethical issues when it comes to packaging: Communication of contents-any companies will seek to place a product in a package that presents it in its best light, tvhile making the item look appealing and desirable to the custorners. As such, packaging can reveai (and also hide) what it encloses. An ethical issue arises rvhen this effort u,ro.rnt, to a form of deception, in that it hides undesirabie aspects of the product fbr rvhich the customer wouid othenvise reject it. Safety-it is the responsibility of companies to ensure the safety of the products they sell through packaging. It requires that the product the customer receives is the one the se11er intende d thetn to receive.

Environntental impact-though packaging serves many purposes, its instrun-ient;rl llaturi: is apparent once a customer has used or consumcd the product and thereafter the packaging is tht-on'n anay. Ethlcail1,, it rvould seem that a mrnimai amount of packaging sirould be used to acctlirplisl-r the purpose. Often, companies f-ail to consider rvhether there are simpler, more effeclive or less wasteful rvays of providing a product to the customer. There are trvo central cthical issues rvith regard to labelling: Infornrution-customers have a right to know what they are buying and companies need to provicle accurate information through labeliing. Deception-rvhen companies use certain terms, omit certain detaiis or make it dilficult to frncl the reievant information on a label, customers may end up believing rvhat is false. 5.

I)escribe ethical issues in pricing. Among the ethical issues regarding prices are: Custorrer knonledge of the price-in general, it does not seem reasonable that custotners have a right to know how prices have been determined. On the other hand, ctistonrers hilve a right to 'lhis must be ]insr^r u,hat tire true and total financial cost to them of a prospective purcltase iv 11l be. presented in a way that discloses, rather than disguises the full price to the e ustomer. Deception-too often, companies try to deceive cusLomers such that their Patrorls may find it difficuit to know r,vhat the full price of a product is, or understand the significance of a particular price. Customers are deceived regarding the price of the product. The efforts cornpanies make to 'I'he1' can do disguise or hide the true price to the customer of a particuiar product are unethical. this siinply by not teiiing the customer what the total price is until after an agreement is reached' Special situations-the pricing of a product might be altered in any number of 'special situations', for example during a natural disaster.In this kind of circumstances, theic are pcople who uray be desperate for certain products and their safety and health may be a'. risk If compantes can charse

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any amount that customers are willing to pay at that time, the companies are taking advantage the buyers' desperation and weakened position. To do this is to exploit them as customers. 6.

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Describe ethical issues in advertising. Ethical issues in advertising involve the following: Truth in advertising-advertisements that make factuai claims about a product may make them with regard to their cost, availability, quality, construction, uses, etc. Issues of truth piay an extremely important role here" An advertisement tells the truth if what it (or some part of it) states or portrays, captures or reflects, in some substantive or materially relevant manner, the actual characteristics of the product advertised. Puffery and the desire for deception-alot of advertising does not make claims that could strictly be evaluated as true or false. Instead, they consist of overstated statements. Offensive adyertisements-ads can be offensive by portraying people in various stereotypical and demeaning roles. This is said to occur when women are portrayed in a manner that emphasizes their sexuality but C '-emphasizes their intelligence or leadership qualities. Manipulation-in order to manipulate people, advertising may appeal, arnong other things, to the desires, needs, emotrons and wishes customers have regardiug, for exampie, their physical appearance or safety, acceptance by others, sexual interests or patriotism.

7.

Explain ethical issues in retailing. Thcre are four ethical issues pertaining fo reiailing: Gifts and entertainment-retallers acquire the products they sell to inclividual customers by purchasing them from other producers through various saies representatives and suppfiers. Gifts and entertainment received may influence the person who is rnaking the decision on wlretl-rer the retail chain wiil carry the line proposed. Acceptance of such gifts may make the recipienfs feel obiiged to those r,vho have given the gifis. Honesty in ssles-the salesperson's responsibility is not to tell literally everythrng about the product, goods or service. Most buyers r,vould experience an information overload, rr,hich is unhelpful. Those in tl-re iegal profession sometimes use this technique to bury the trr,rth, rather than reveal it. Privacy in retailing-when a customer buys a product, retailers come [o knorv certarn things about 'Lhe customer. These retailers need to make considerable efforts to ensure that private customer information remains private. With computer databases and the Internet, the dangers of the loss of confidential inlbrm ation have increased greatly. Retail sales pressures-retailers can bring various pressures and forces to bear upon customers r'r,hich rlay 66rltltain or direct their decisions and behaviour in rvays such that their freedom has been negatively affected. Often, they involve subtle measures such as appcal to emotions (fear. self-regard), coilrments made to affect the perceptions of customers, store environments created to encollrage br,rying and efforts to alter customer risk assessments.

B.

Identify and explain ethical issues in the use of direct marketing. llthical concerns in direct marketing involve: lrritation-many people find the increasing number of hard-seli arid direct marketing solicitations to be a nuisance.

Unfairness-some direct marketers take advantage of impulsive or less sophisticated bu\.ers. Deception and fraud-some direct marketers design mailers and u,rite advertorials intended to mislead buyers. They may exaggerate product size, performance ciaims or the retail prrce lnvasion of privacy-direct marketers sometimes find it djfficult to distinguish the tine iine

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Marketing Ethrcs and Consumertsm 311

Many between their desires to reach carefully targeted audiences and consumers' rights to privacy' that and details personal critics worry that direct marketers may know too much about consumers' they may use this knowledge to take unfair advantage of consumers.

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9.

Describe what consumer ethics and cUstomer responsibility are. Among the more obvious responsibilities customers have regarding companies are-acquiring the prJducts and services in a legal and ethical manner; paying bills on time; informing about theii intended purchases; using the products they purchase in a manner that respects the safety limitations prodo..r, identify; and not purchasing goods they know have been produced in an illegal or unethical manner. ]ust as not alimarketing responsibilities can be incorporated under the law, the sarne can be said about customers'responsibilities.

10.

Explain the company ethical review. CJmpanies needlo evaluate whether they are truly practising ethical marketing. Business success and continually satisfying the customer and other stakeholde's are intimately tied to the adoption to and implementation of high standards of business and marketing conduct. Most companies try abide by a code of serving customer's interests and not only their own.

o{ a Actively benefiting from illegal activities Behaviour ir"r which the consumers actir:civ take advantage the situation at the expense of th" seller. For example, a customer gives misleaciing price il'rtbrmatiotl to cashier when the price tag has been peeled

off

i11 Actively benefiting from questionable behaviour Actions in which consunrers are artively involl'gfl fhst a1 the unetl-iical bpt not r-recessarily illegal practices. For example, a customer keeps quiet whcll a u'aitress iood restaurant serves hirn first instead of the other custotner lining up in front of hrttr

Consumer ethics fhe moral principles and standards that guide the behavior-rr of indn'iciuais or groups they obtain, use and dispose ofgoods and services.

as

act oi No harm,rnofoul lJehaviourthat is not seen as harmful to others. An exai.,rple of this slluation is the spending an hour trying on different shoes and not purchasing any" passively benefiting at the expense of others A situation where consumers passiveiv bcrrefit due to the seller's nistake. Ar-r example of this situation is when a customer gets too much charrge anci tloes not inform the cashier.

puffery in advertising Advertising relying on exaggerations with littie or no reiiahl.' prr,of to support its \rague .lrirrr. In mosi cases, puffery may be toierated so long as it does not amount to misrepresentation. of thrs Recyclingldoing good Consumers desire to recycle products and 'do the right thing'. An example sltuationls norl-,u=rchasing products from companies that consumers believe are not [reatrng t]reir ernployees

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Return policies The rules retailers establish to manage the process by which eustomers return or unwanted or defective products that they have purchased previously. Social marketing The systematic application of marketing to achieve specifie behavioural goals fbr a social good. For example, this may include asking people not to smoke in public areas, asking them to use seat belts, protect the environment through recycling, etc. Value

durability

T'he

likelihood that

a

product will continue to mainiain its value over time" ii!i*

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,t6 -,.I I :

1.

Discuss some criticism aimed at the improper use of marketing among companies.

2. In

your opinion whai should companies do to minimize environmental impact in product

development?

3.

What are some ethical concerns that may arise in product packaging'/

4.

Explain offensive advertisements and give several examples to illustrate your pont.

5.

What should companies do to address the issue of the exploitation ol retail store return policies by

*

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customers?

The Case of Extra Change Lisa is a full-rime mother taking care of three active children. On one particularly busy afrernoon, Lisa decides thar she does not have time to cook for herself and her children, orsit down to ear in a restaurant. Wirh her rhree children in the car, she decides ro use rhe drive-through line at her neighbourhood fast food restaurant. Since it is a Friday, the resrauranr is very busy. There is a long queue at the drive through. Due to rhe long wait, her children start to feel restless and begin to throw tantrums. Lisa finds ir difficult to concentrate with all the commotion as she rries io keep her children quiet. When her turn comes, she quickly orders what she wanred and her order amounts to RMl6. Lisa gives the cashier a RM20 nore. Due ro rhe resraurant being so busy, the cashier mistakes Lisa's RM20 note for a RM50 note. lnstead of returning RM4 ro Lisa, the cashier misrakenly hands her RM34. Alrhough Lisa realizes that the cashier has made a misrake. she is in a hurry, so

she drives away.

Questions: .l What would you have done in Lisa's case? 2 Dc you consider Lisa's acrion ro be appropriatei

Discuss.

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Marketing Ethics and Consumerism 313

Asia Inc (September 1993). Singapore's Kiasu Syndron.e. . Accessed on 5 September 2012-

Daniel, M. (B September 2007) . Shopperi Woes. The Star. . Accessed on 14May 2012" (5'h Ed')" Hodgetts, R.M. & Luthans, F. (2004). lnternational Management: Culture Strategy and Behavior New York: McGraw Hill.

Holley, D. (1986). A morai evaluation of sales practices. Business and Professional Ethics Journal,5: 3-21. (spring): Hunt, S.D. & Viteli, S.J. (1986). A generaI theory of marketing ethics. Journal of Macromarketing,6 s-16. S.J. (1993). The general theory of marketing ethics: A retrospective and revision. In Smith, N.C. & Quelch, J.A., eds., Ethics in Marketing.Illinois: Irwin. pp"775-784.

Hunt, S.D. & Vitell,

Kotler, p., Ang S.H., Leong, S.M. & Tan, C.T. (1999). Marketing Managemertt: An Asian Perspective {Z'd Ed.)' Singapore: Prentice-Hall. Lee, Regina (4 November 2011). Reggae Mansion out of tune. The Star. . Accessed on 4 May 2012.

Levitt, T. (1970). The morality of advertising. Hary arrl Business Review, 4B(4):84-92 McDonougli, W. & Braungart, M. (2002). Cradle to Cradle. Nen' iork: North Poinl Press. Muncy I.A. & Vitell, S.J. (1992), Consumer ethics: An investigation of the ethical belief.s of the final consLlnle r. I o ur n al of B u s in e s s lle s e a r ch, 24 (4) : 297 -3ll "

& Laczniak, G. (19S1). Marketing ethics: A revier,r'rvith implications for managers, educators and researchers . Review of Marketing. pp.251-26o-

Murphy,

P.

Ng, Eileen (23 |uly 2012). Bad Shopping Habits Leave a Big Hole in Retailers' Pockets. The Star. < http://wr'r'rt'' hole in-retailers pockets/ th"estar.com.mylNews/Nalionl2Ol2lATl23lBad-shopping-habits-leave-a-big Accessed on B August20L2.

Pololskl', Iv1.)., Brito, P.Q., Pinto, ]. & Higgs-Kleyn, N. (200i). Consuuer ethrcs in the European lJnion: A comparison of Northem and Southern views. Journal of Business Ethics,31 (May 1l): 1l7 130. Ritzer, G. (2000). T'he lvlcl)onaldizatiort of Society. California: Pine Forge Press. Srvaidan, 2., Rawnas, l,t.Y.A. & Ai,Khatib,

of a micro-culture i n the \JS. lnternational

QA04). Consumcr ethics: Moral ideologies ancl ethical beliefs Bu sine ss Review, 13: 7 49 -761.

I.A

.ll-re

Star. .

The Star (14 lairuarv 2Al1). Fornter Scratch and Win Emplovees Tells how its Dotre

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The Star. (23 luly 2AlD. Like it or Not, Consumers Want the Besf.'Ihe Star. . Accessed on 9 Augrist2A12. Vitell, S.l. (2003). Consumer ethics research: Review, synthesis, and suggestions for the Future. Journal of Bu sin e s s Ethic s, 43 (1-2):

33 - 47.

Vite]|, S.). & Muncy, I A. (2005). The Muncy-Vitell consumer ethics scale: A modification and applicatron. lournal of Business Ethics, 62(3):267-275.

CHAPTER

Ethics and the rr' Hnvrronment iffi

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u,o the three main sources of threats to the current environment-global warming, pollution and resource depletion. uo

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Recognize other emerging environmental threats facing humankind in the globalized world of today"

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Conceptualize and classify sustainabrlity 3n6 differentiate it sr.rstainable

development.

from "

;nd non-renewable resources

I

Discuss the sources of renewabie

T

Assess rr:hether sustainable devel, rprfre rlt rs arr c,xymoron.

I

Explain the free market arguments on sustainability preservation of the environment.

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10.0

INTRODUCTION

importance of ethics in the condlict oJmarketing. Whiie n e recognize that marketing is an essential function of any business, it l'ras to be conducted ethical11', especially in view of it being a major function i.e. to reach the consumers and to attract them to pr.rrchase products and services in orcler to make proiits. As a business transaction is seen to be a mutual contract betu.,een the br-rver and ti-re se]ler, it is pertinent to see that it is conducted in a fairranner, fulfilling not only the seller's profit making objectives but meeting the expectations, needs ancl interests of tl-re buyer since payment has duly been made by tlre bu1,e1 10 ths se11er in good faith i.e. to enjoy the product/service. Consumers' sovereigntl,, rights f-or freeclom and rvell l)einc must be equallir respected by the sellers, mr:ch as thc buycrs respect and trust the qualit,v of the products and services produced by the sellers. \\e shail leave rnarketing ethics to look at the state of the environment that u,e 1rr,.: in rert. Tiris chapter rvill outirne the importance of ethics in managing the enr.ironmeritt. It is cerlainli, reiated to Chapter 6 rvhich has discussed corporate social responsihrlrtl,. Hou,eyer, Chapter l0 will focus on the need for a total commitrnent to prcserr.e,rird sustain th, environment that we live in as a matter of ethics. Humans are drrectiy dependant on nature for survir.al. lv{uch as businesses are reaping the benelrts of exploiting natural resources to maximize profits, they have to be equally respo,tsible lo presen e the environment for sustainability of the future generations. This chapter u,il1 initially introduce readers to the emerging enviror.lncntal :hreats faced by hunians in the 21't Century. It then dwelis on the conceptualization of sustainability and sr-rstainable development. lrlext, it assesses rvhether sr,rstainable development is an oxymoron considering the need to exploit natural rcs()urces lor econornic growth in addition to supporting the call for globalization and free trade Ly the World Trade Organization (WTO). It discusses the free market arguments against sustainabilrty issues, causing detrimental effects on the environtnent, rviuch 1n Chapter 9, ,vou have been enlightened on the

316

Business Eihir:s

further justifies the need for internalization of ecological/environmental ethics by humankind. This chapter also looks at ecological/environmental ethics from the Islamic dimension. ti

DUSTRIALIZATION, MODERN ISM AND SUSTAINABILITY IN THE WAKE OF THE 21ST CENTURY

11,0"1

I

N

Industrialization and modernism have provided us rvrth material well-being and prosperity. It has promoted mass production, resulting in economies of scale, empl,tymgnt opportunities for the global iabour force and overall economic growth" Technoiogical advancements especially in information and communication technology and research and development have become pertinent for today's business activities. Mutual exchanges of goods and sen ices thror-rgh international trade and globalization have also been facilitated by efficient transportation systems and supply chains. Consumers are abie to enjoy a wider variet,v of goods and services at the lowest cost due to healthy/fair competition, resuiting in efficient allocation of resources from economic perspectives. However, these seemingly favourable scenarios have also caused environmentai threats and hazards to humankind. Toda,v, our life is thrcatened by all forms of pollution, be it land, water, air, sound, etc. \\re are aiso striving to reduce giobal warming apart from addressing the depletion of naturai resources. Figure 10.1 summarizes the environmental trends and challenges that prevail as humans step into the 21" Centur)., based on research conducted b1, the \\torldWatcir Institute and documented in its 2000 report (Velasquez, 2006). WORLDWATCH INSTITUTE 2OOO REPORT Several well-established environmental trends are

setting the tone of the future of civilization 21st Century began. They include:

as

the

. Population growth . Rising temperature . Falling water tables . Shrinking cropland per person . Collapsing fisheries . Shrinking forests

. Loss of plant and animal specie:

Figure

10.1

: The environmental

trends and challenges oi the

21 s

I C.entury

l,et us outline each of the challenges and disciLss their latest developments to date:

10.1.1 Population Growth The world population has been grorving at an unusually rapid pacc, as illustrated in Figure 10.2. There has been more growth in popula[ion in tlre last 50 years than the

{, :

Ethics and the

previous 2 million years that humans have existed (Population Media Center, 2009)" During the last half-century, the world's population has more than doubled. In 1950, the world population was 2"5 billion. Between i960 and 2010, it rose from 3 billion to 6.8 biilion. In 2000, it rose to 6.1 billion; an increase of 3.6 biilion, i.e. approximately a150o/o increase over a 50 year periodl In 2008, the world population was 6.7 billion; 1.2 billion people live in regions classified as more developed by the United Nations; 5.5 billion people reside in less developed regions. According to Carl Haub, Population Reference Bureau (PRB) senior demographer and co-author of year 20OB Data Sheet, "We will likely see the 7 billion mark passed within four years." However, on 30 October 2011, the world population hit the 7 billion mark, eailier than anticipated. Even though birth rates have fallen, the world's population continues to grow by 82 million people per year. By 2050, global population is projected to rise to 9.3 billion. Between now and mid-century, these diverging growth patterns will boost the population iiving in the less developed countries from 82 percent to 86 percent. (Popuiation Reference Bureau, 2008a). Currently, the rate of pop,ulation increase is 1.2o/o per year, which means the planet's human population is on a traiectory to double again in 58 years (Popul21i., Media Center, 2009). Refer to Figure 10.2 below Population (billions) 10 o

6

4 3

1970

1990

2010

2030

Figure 10.2: World Population, 1950-2050 'l'he abovementioned statistics glaringly shou, the dilen-rma facing mar,liind. l'hc ,,vorld's population is increasing but the earth's natural system does not. For cxample, the amount of fresh rvater produced by the hydrological cycle still remains the same. Some resources are renewable but some are not. In view of this, there is a strong likeiihood that there will be shortage of natural resources for human consumption rvith the world's high population growth. Next, we shall discuss the second challenge rising temperature and/or giobal warming.

rc1.2

Rising Temperature and/or Global Warming

Global warming refers to rising weather temperatures of nations across the globc despite climatic differences. Global warming is a great concern today d''re to .rsing atmospheric concentrations of carbon dioxide" Evidence of unprecedented environrnental changes at the giobal and regional leveis are increasingly apparent due

Envrronment

317

318

Business Ethics

Clobal warrring refers to

-1

rising weather temperarures of narions across the globe despite clrmarrc-

differences Clobal v/armi-lg s a greJt concern roday due ro rrsrrg atrospherr,

concertr:t ions of carbon droxide

to human activities in an increasingly globalized, industrialized and intereonneeted world (Veiasquez, 2012)" Climatic change is underway and an avera€Je temperature increase of 0.74"C over the past century has been recorded. In the I969-98 period, the average global temperature was 13.99'C. By 1996-98, it increased to 14.43"C" If carbon dioxide concentrations doubie pre-industrial levels during this century, as projected, global temperature is likely to rise by at least loC. Meanwhile, sea level is projected to rise from minimum of 17 cm to as much as 1 m by 2100. Consequently, this will alter every eco-system on earth. We have often "een media coverage and National Geographic articies and television programmes on coral reefs, fishes and other sea habitats affected by the rising sea surface tempe'ratures apart from hearing news on the melting of the ice caps and glaciers at the Artic, Antartica, the Quinghai-'Iibetan Plateau, etc. If global warming and rising temperatures persrst, the habitats across the globe may not be able to survive. Figure 10.3 shows some of"tl're evidences that th: global cli rnate is changing.

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oa

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ra

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Glaciers and ice sheets

Figure 10.3: Multiple lines of evidence showrng that the clrmate is charrging

Global warming has been recognized as today's most pressrng problem by the United Nations (UN) and the World Bank. Governrnents, companies and societies are urged to reduce dependence on fbssil fuels and pursue low cartron economy or green gror,vth. The Kyoto Protocoi is an inLernationerl agreement linked to the United Nations Framework Conventron on Climate Change, rvhich commits its parties by setting internationally binding emission reductior"r targets. Recognizing that developed countries are principally responsible for the cLrrrent high levels of greenhouse gas (GHG) emissions in the atmosphere as a result ol more than t50 years of industrial actir.,ity, the Protocol places a heavier burderi on developed natrons under the principle of 'common but differentiated respoirsibrlities'. (LInited Nations Framework Convention on Ciimate Change, n.d.). For more information, you may do a iiterature search on this subject. Although the Kyoto Protocol is targeted at reducing greenhouse gas emissions rn the developed nations, developing nations are also in.,,olvecl" l"4alaysia is no exception" It has outlined its strategies to reduce carbon emiss'ions as the nation embarks on its industrialization and economic growth p.,licres. Horvever, much as Malaysra is

-j

I

Ethrcs anri the

Environrnent 319

committed to reduce carbon emissions to comply with the Kyoto Protocol and United Nations Framework on Climate Change, global warrning is glaringly feit today by the community. Although the nation's average temperature is 30'C (86'F), due to glohral warming, current daily temperatures have even reached as high as 40'C! What are the impacts of global warming and rising temperatures? For us in Malaysia, global rvarming might not be seen as a serious problem that needs attention" However, for some nations, an increase in several degrees of world temperattr re might spell disaster for them. The following is a case for review that looks at the impact of global rvarming on Kiribati, a smali island in the Pacific. There is a real danger that the colrntrv might cease to exist torvards the end of the 21" Century. When this happens, an entire culture and civilization might be wiped out.

Kiribati to be Relocated Over Rising Sea Level Threat ln whar could be rhe world's firsr climate-induced migrarion of modern rimes, Anote_Tong, the Krribatr presidenr, said he was in ralks with Fiji's military gclvernment ro hrrry rrp ro 5,000 acres of freehold

land on which his countrymen could be housed. Some of Kiribari's 32 pancake-flar coral atolls, which srraddle rhe equator over i,350,000 square miles of ocean, rs already disappearing beneath the waves. -1i3,000 people are crammed on ro Tarawa, the adminisrrative centre, a chain of islets Mosr of irs which curve in a horseshoe shape around a lagoon. ,"This is.ihe last resorr, rhere's no way out of rhis one. Our people wili have to move as the rides have reached our homes and villages," Mr Tong said" The plan would be to send a trickle of skilled workers first, so they could merge more easily wrth rhe Fijian population and make a positive conrribution to that country's economy "We don't.want 100,000 people from Kiribari coming to Fiji in one go. They need to ftnd

employmenr, not as refugees bur as immigrant people with skills to offer, people who have a place in the community, people who will nor be seen as second-class cirizens. What we need is the international community to come up with an urgent funding package to deal with that ambirion, and the needs of countries like Kiribari," he rold the state-run Fiji One television channel. The land Kiribaii wants to buy is understood to be on Vanua Levu, Fili's second largest island Mr Tong's proposal is rhe latesr in an increasingly desperate search for solutions. ln 2011, he suggested rhe possibiiiry' of consrrucring man-made islands Iike oil rgs for peopie to live on. His government has launched an Education for Migration programme, aimed at upskrlling its population ro make them more atrractive as migrants. Kiribati youngsters srudy for degrees at rhe University of rhe South Pacific, which is based in the Fijian capiralof Suva and joinily owned by 12 Pacific island countries. Dr. Alumita Durulato, a lecturer in international affairs at rhe university, said: "They are already preparing quite well. They have educated their youth ro be able to survive in the new lands that they want ro go to. They are going to leave behind their culture, their way of life and lifestyle, which is a little bit dift r.nt from ours in Fiji." Tarawa lies 1,400 miles from Suva and some i-Kiribari, as the islanders are known, hold concerns about whether their culture would survive after the popularion moves, especially if those who leave firsr are mainly the young. A member of the Commonwealth, Kiribati was known as the Cilbert

:at ;w

{.qEilr-

324

?g

Business Ethics

islands untrl rndependence from Britain in 1979. The islands were first narned afrer T.homas Cilberi, a British naval caprain whr: navigated the arci-rrpelago in 1788, Krribati being rhe local pronunc!arton of 'Cilbert' The total land area is 313 square miles and none of the coral atolls rise more than a few feer above sea level. (Adapted from'Kiribati to be relocated over rising sea level rhrear', by p",tl Chapman, fhe Telegraph, T March 2012)

When discussing the matter of global u,arming, many articles and authors of textbooks argue that this phenomena is dangerous and serious actions need to be taken to address this probiem. However, as with any other issue, there are two sides of the coin" The following case for review demonstrates that giobal warming could actualiy be good. For the small town in Norway, global warming has been credited with bringing the once isolated communit), closer to trade^

Melting lce Pulls Norway Closer to Asia The town of Kirkenes in northernmosr Noruvay used ro be funher away from Asra rhan vrrtually any orher European porr, bur it suddenly seems a lor closer The reasorr global warmrng Melring rre has opened up the Norrhern Sea Route along Russia's Arcrrc coasrline, changing inrernarional trade patterns in profounci ways, even if so far it looks more like a sleepy counry road rhan a busy, four-lane highway. ln a change of potentially revolutionary signrficance, rhe rravel time between the Japanese port of Yokohama and Hamburg in Cermany has been cui by 40 per cenr, whiie fuel expendrture is

down by 20 per cenr "For rhe first rime in history, we are wirnessing a nr\^i o.eJn opening up rn rl-re hrgh norrh whrch will have a malor impacr on borh rrade and provision ol energy," said Srur a HenriIsen, rhe presrdent of the Norwegian Shipowners' Associarion. ln 2a12, when the ice reached its lowest exlen[ on record, l4 rrrllion square krlometres (1.3 million square miles),46 ships used rhe new roui-e, compared r^rirh only io,rr in 2010, according ro Rosatomflot, a Russian operator of icebreakers. However, ihe traflic is srrll neglrgrils 6srrrpared wiri, rradirional routes. Ships transit the Panama Canal T5,000 rrnres a year, while passing rhrough the Suez i9,000 times. Bur the future looks promising. The volume of goods transported along rhe Norrhern Sea Route is likely to grow strongly in rhe coming years, from 126 mililon ionnes lasr year ro 50 million tonnes tn2020, according to the Norwegian Shrpowners'A.,sociarion. Kirkenes, whose 3,400 ' inhabitanrs live in nearly uninreirupted darkness during rhe winter monrhs, is sr-rddenly prepanng ' fiantically fot the expecred boom.

ai,rt.

Ethics and the

Environment 321

The Tschudi Shrpping Croup plans to open a logistics hub measuring the equivalent of 2AO football fields in a flord nearby that rs held rce-free all year by the warm Culf Srrearn The porr's locacion is extrernely srrategic. lc is nine days'travel from boch rhe Pacific and rhe Medirerranean, and close to major oil and gas deposits in the Arctic as well as mines in northern Sweden and Finland. Twenty-six of the ships rhat traversed the Arcric Ocean berween Eurerpe and Asra iasr year were carrying hydrocarbons, while six were rransporting iron ore or coal. The new ror-rte also opens up an interesting marker for lrquefied natural gas (LNC) exrracred in rhe Barents Sea, especially afrer North America, the customer that local companies inirially had in mind, has rurned away following a decision ro use its own shale gas. On the other hand, Asra's apperire for gas has increased afrer rhe Fukushima nuclear disaster in Japan in 2011, and prices there are srgnificantly higher rhan in Europe. Adding to the lucrarive nature of the rrade, each shrp rransporring LNC by rhe nor-rhern roure can do

it close to S7 nrillion cheaper ihan vessels going through the Suez. Traditional goods traffic, however, not realisric in rhese laritudes, according to Tschudi Shrpping "The big trading rouies in dry bulk shipping are located roo far South for rhe Norrhern Sea Roure tp become relevant," said Henrik Falck, the company's project manager for Easrern Europe "And we can forget about containers," he added, noiing that owners preferred tradrtional roures wrrh stops at denseiy populared cities along the way. ln a fragiie ecosystem thals rhe source of immense lvorry among envrronmentaiisrs, Russia plays a cenrral role in assisting navigation with icebreakers lr has also decrded ro esrablrsh 10 bases along its coast to redress the current ablect lack of infrastructure. China also wants ro be parr of the game. After the first transit of its icebreaker Snow Dragon in 2017, the world's second-largesr economy now plans to send irs first commercial shipmenr along rhe norrhern roure in sumrner 20l3 Berween 5 and 15 per cent of Chinese international rrade could take this nerar road by 2020, lhe clrrecror of rhe Polar Research lnsriture of China, Yang Huigeng, was quoied as sayrng in rhe media is

i '

(Adapted from'Meking ice pulls Norwav :loser to Asia', by Pierre-tlenry Desha,ves, f l.e Datly 5rar,

l0.l and 10.2, what is your oprnion on global narming? It contrasting scenario where on one hand there is a threat that an entire community might be displaced and civilization affected and yet at the other extreme, it n-iight bring mucl-r trade and prosperity to a smail community in Ncrrvay. Discuss how these vastly different scenarios affect your perception torvards global rvarming. Based on cases for revielv

st:en-Is

that there is

a

10.1.3 Falling Water Tables, Shrinking Cropland and Leveling off of Fish Catch Next to globai warming is the problem of insufficient water supply to feed the gr^wing population adequately over the next few decades. In fact, Kuala Lumpur, the capital city of Malaysia, is already facing this problem and water supply has become a pressing issue to be addressed by the government for the city dwellers' well-being. Svarikat Bekalan Air Selangor (SYABAS) is currently managing a limited supply of rvater for the consumprion of the Selangor residents in general and Kl, residents, in particular, due to the shortage of water suppiy and limited catchment areas, aggravated l.-,, the ievelling of hilis for housing projects, industrialization and urbanization.

2.3

june

2011)

;-u?

.ffi dii&

322

Br-rsiness Ethics

:r -, a

In addition to the falling water table problem, there is aiso worldwide shrinkage in cropland per person. Since the mid-trventieth century, grain land area per person has fallen by half, from 0.24hectares to 0.12 hectares (Velasquez, 2012)" This is because a substantiai amount of cropland has been either converted to industrial land or residentiai land. There will therefore be a shortage of cropland for cuitivation if the present scenario cicntinues. On top of this, there is also the problem of levelling ofl'of the oceanic fish catch. From 1950-97, ocean fish catch expanded tronr l9 miilion tons [o more than 90

million tons due to the availability of more efficient trawlers and modern fishing techniques for commercial purposes arising irom the high demand of international customers. Fish has become an export cominodity rather than for domestic

consumption. Because of over-fishing, most marine biologists beiieve that oceans cannot sustain an annual catch of 95 million tons of fish by humans since there is no time for the fishes to grow and breed to recover the fish stocks that have been depleted (Velasquez, 2006).

'fhesc three parallel trends seem to suggest that it u,ill be difficult to keep the growth rn world demand for food over the next half century, implying that humans wiii be f'acing an acute food shortage in the near future if they are not conscious of the implications of their own activities and actions.

10.1.4 Shrinking Forests and Loss of Animal Species The treasLrres of the forests are no doubt bountifr,rl gifts of nature. But they are also overwhelmed by hurnan clemands. Nations exploit the forests ancl expand the tirnber and {irrniture industry to fulfil the neecls of prospective dornestic and foreign consunlers. The pharmaceutical ancl cosmetics indr,rstries also utiiize animal/plant based natural resources fbr cornmercializirtron tl-rrough innovative research and development initiatives. Over the past half century, tl-Le u,orld's forested areas have shrunk substartiall), u,ith the loss occurring in developing cor,rntries, in particular, due to ir-rdustrialization and privatization poiicies to generate the nations' cconomic grou,th. Ttie habitats and piants are also depleting due to their inabilitl, to r.,.u,re as a result of excessive exploitation of natural forests due to human activities such as the timber industry, housing and construction industry, manu{actLrrir-rg ancl other inclustrial developments. It is projected that the forested area per perion norldwide nill shrink from 0.-56 hectares todav to 0.38 hectares in 2050. 'l'his u.ill er.cntualit, resuit in the extinction of plant and animai species if noi nronilorecl effectir,eiv. These are some of the challenges facing hurlankind at the beginning of the millennium, not to mention natural disasters such as tsunanris, hurricanes, landsl ides, earthquakes, soil erosion, etc. lvhich irave affected the environment. \\rhile natural calamities are beyond human control, aren'l hunians expected to effectively manage the environment as leaders on Mother Earth? l.et us pose more cluestions to spur discussions" Aren't humans responsible to conserve the environment fbr survival or are the,v only here to maximize or fulfil their desires and enjo1, the gifts of nature witlr" no limitations? Or at'e humans obligated to consume resollrces within sustarnable limits as a matter of ethics? What rs sLrstainabrlit)'ancl sustainable developmsnt in the first place?

,{

Ethics and the

*rc.2

THE CONCEPTS OF SUSTAINABILITY AND SUSTAI NABLE DEVELOPM ENT

Envii-onment 323

fil;,-;iiltty-^' firsr

considered

a pr.e-eminenrly

ecological concept prescribing rules and prlnciples for

Sustainability was certainiy first considered a pre-eminently ecologicai concept prescribing rules and principles for the usage of natural resolrrces in such a way rvhich allows future generation to survive on this planet (Pearce and Turner, 1990). However, to capture a broad understanding of the concepts of business, poiitics and wider parts of society, sustainability in the current scenario is redefined as the long-term maintenance of systems according to environmental economic and social considerations (Crane and Matten, 2010). Sustainability may be further classified as environmental sustainability, economic sustainability and social sustainability. Below are some detail exampies of each type for our further understanding: t Environmental sustainability-For example, environmental reporting, ecodesign, environmental management systems, executivc commitment lo environmental issues t Economic strstoinability-For example, strategic planning, qualitl, and knou4edge management, supply-chain management, corporate qovernance ilrecha

t

n

ro survive on ihis planet. Howevei in order ro caprure a broad understanding oi the concepts of business, polirics and wider parts of sociery, sustainability in che current scenario is r:edefined as rhe longterm maintenance of sysrems according

to environmental, eronomic and sorial

isnrs

-For example employmenl policies, nlanagement der.elopment, stakeholder dialogue, affirmative action ancl human rights policies, anti-corruption policies Social sustainability

Sustainable developmcnt (SD), on the other hand, is a pattern of resource use that aims to meet human needs r,r,hile preserving the environment, so that these needs can be nlet not only in the present, but also fbr future generations. The concepts of sustainability and sustainable development are certainiyconsistent with Islarric Ethics t','hich emphasize the role and responsibiiity of humans in ensuring the progrcssior oI the earth. Wc noted in Chapter I that man is duty bound to keep tire physical rvorld ia a balanced state.

i 0.3

.

RENEWABLE AND NONRENEWABLE RESOURCES

I lrder to achieve sustainable development, we need to look at rthere thc sources ol enersy come from. Basically, there are two types of resources; non renewal,le and tctretable resources. The decisions on the types of resources to invest in r,vill not only 1:rve long term effects on the enr.ironment but also on whether future generatroits will I , able to reap these benefits. Non-renelvable resources are used worldwide to create electricity, heat homes, lotver vehicies and manufacture goods. Resources are considered non-renewable if

rhe usage of natural resources,in.such a way which allows furure generarions

considerations

f5.-*',rn.

'

development (5D), on tlre other hand, is a palrern of resource r-rse thar aims to meet human needs while preserving the environment, so ihat rhese needs can be

mer noi only in rhe presenr, but also for future generations.

'

324

Business Ethics

their quantities are limited or if they cannot be replaced as fast as they are used up. Some non-renewable resources have been formed over miliions of years ago and will eventuaill, be depleted altogether. The following Table 10.1 describes the sources of some non-renewable resources currently utilized.

Table 10.1 Sources and

Petroleunr

descriptions of non-renewable rESOU TCCS

Oil, or perroleum, comes from the liquefied, fossrlized remains of plants and animals rhat lived hundreds of millions of years ago; once oil sources are depleted, rhey cannot be replaced. Oil is an ener:gy source that mosr countries around rhe world depend upon. lt is used to create fuels, such as gasoline, diesel and jer fuel. lt

rs also used in the manufacruring of plastics and indusrrial chemicals. The environmenta! impacrs of mining oil include rhreats ro waterways, plants and wildlife

due ro oil spills and increased infrastructure in natural areas. The impacts of oil combusrion include air pollution, smog and Increased greenhouse gas emissions Coal

Coal is rhe mosr plenriful non-renewable resoufge in the world. Co-al is made when plant marerial has been compressed in bogs for millions of years. The extraction of ccal lrom surface and sub-surface mines creates numerous problems for humans and the envrronmenr" Subsurface mines are dangerous for mrners as runnels can collapse anci built-up gas can explode. They also create subsidence, meanrng that rhe ground {evel lovrers when rhe coal is removed Surface mrning, caus€s erosion and water pollution and decreases biodiversrty by reducing planr and animal habirats Additionally, rhe combusrion of coal contributes to air pollurron and globai climate

or strip-mining,

change and creat-es a roxic, ash as a byproduct..

Natural gas

Natural gas is rhe result of decomposing planrs and antmals that were rrapped beneath rock mrllrons ol years ago Thrs gas rs drilled from rhe ground or exti-acteri using ciynamiie and iherr processec and

piped through rhousands oi mrles of pipelines for cooking, heatrng homes and fueling vehicles. Though natural gas is c.onsidered to be a relatively 'clean' fossil fuel, rhe environmenral impacrs of extracting it and insralling pipelrnes include severe disruotion of rvrldiife habitar and groundwater con[aminaIion Nuclear energv

Although nuclear energy

is

often prornoted as a viable airernatrve to

coal and oil, it is not a renewable energy source. Nuclear power requrre\

uranium, a radioactive metalllc element that musr be mined from the earth and is nor quickly replenished. Nuclear energy does not create air pollurion through combusrion irke fossil fuels. lt does, however, produce radioactrve waste, whrch mrr:t be disposeci of and whrch can cause problems for humairs arrd ecosystems for thousands of years. Additionally, accidents and leaks from nuclear power piancs can have carastrophic effects on rhe eriiire planet. Source:'What are examples of non-renewable resources?' by National Ceographic.

Th.

**, fr.q*rtlyl

used renewable te50urces are biomass, water, geothermal, wind and solar.

Rrner,vable resources are an important aspect of sLrstainability. According lo the National Geographic website, the most frequentll, used rene\{able r,,:sources are biomass, water, geotherrnal, wind and solar. Unlike fossil tirels, we can regenerate or replenish these resources. With the rising c,)st and decreasing availabilit)'o{ non renewable fossil fuels, renewable resourcrs are receiving iricrc'asing attention Table 10.2 provides sources and descriptions of renewable resources.

Ethrcs and the

Envrronment 325

Table 10.2 Biomass resources include trees, food crops, algae, agriculrural and forestry

Biomass

byproducrs, and even Merhane fumes from landfills. Trese biomass resources provide fuels, power production and products typically made from non-renewable fossil fuels. Such 'bio' products include plastics, insulation, adhesives and fabric. Energy producrion from biomass is imporrant because it can help reduce dependence

Sources ancj descr-iptions

of renewable resou rces

on oil. ln addirion, it has rhe po[ential to reduce greenhouse gas emissiors. The agricukural and forestry industries also benefit from the demand for biomas:.

Ceothermal

Ceothermal energy comes from harnessing heat from rhe earth. A large uriliry company, for example, can directly use a geothermal reservoir ro drive generators and produce elecrriciry for rheir municipaliry. ln contrasr, residential heat pumps use rhe shallow gror rlrl temperature of the earrh to heai and cool a home on a smaller scale. The shaliow ground temperature remains between 50 and 50 degrees Fahrenheit. Orher applicarions put geothermal hear to use in commercial buiidings, roads, agriculture and industrial facrories.

;wlha,"ii:.::' i

Wind

;.,'ri::!i.*rr.:

Solar

:,,]

just moving aircreated'as rhe sun heats the earrh's surface. As long as the sun is shining, the wind rematns an infrnire, renewable resource. Wind power is clean energy because wind rurbines do not produce any emissions. The classic Durch windmill harnessed rhe wrnd's energy hundreds of years ago. Modern wrnd rurbines wirh three blades dot the iandscape roday, rurning wind inrc eleciricrry. is

The sun has produced energy in the form of heat and light since the earth formed. 5olar energy syslems do not produce emissions and are often not harmlul to rhe environment Thermal solar energy can heat water ot buildings" Photovoltaic devices, or soiar cells, directly convert solar energy into electricity. lndividual solar cells grouped into panels range fror,, small applications thar charge calcularor and warch batieries, ro large systems that power residential dwellings PV power planrs

and concentrar.ing solar power planrs are the largest solar applications, coveritrg acre5.

Source:'Definition and examples of renewable resources'by National Ceographic

14.4

THE HISTORY BEI.{IND SUSTAINABILITY AND SUSTAI NABLE DEVELOPM AN OXYMORON?

ENT-

ll.*,h.lr8ot human sustainability has implied the

integration of

Sustainability, as an issue, was first highlighted by the Brundtland Comnission, convened by the United Nations in 1983. It rvas to address the growing conce rn about 'the accelerating deterioration of the human environment and natural resources and the consequences of that deterioration for economic and social development'. Since the 1980s, human sustainability has implied the integration of econonric, sociai and environmental spheres to 'meet the needs of the present without compromising the abllity of future gerlerations to meet their own needs'.

economic, social and environmenral spheres

to'meet

rhe needs of rhe present without

compromising the ability of fuiure generations to meet their own needs'.

:6

ffi

326

Business Ethics I t I

Whil"

*t,rrrhkt_1

and sustainable development were recognized by ihe Unired Nacions in rhe 1980s as major issues of concern,

narions conrinued ro

promoie economic growth for sociery's well-being and prosperiry.

While sustainability and sustainable development were recogniz.ed by the United Nations in the 1980s as major issues of concern, nations continued to promote i ', economrc growth for society's well-being and prosperity. Industrializ.ation seemed to be the agenda of most governments. Natural resources were exploited in abundance to reap maximum benefits within the rules of the game. Following this" the Worjd Trade Organization (WTO) called for nations to globalize and promote free trade by Ioosening trade barriers and withdrawing prote, tionist policies. In view of these developments, to most people, the term 'sustainable development' may seem to be an oxymoron-bringing together two apparently contradictory concepts (Desjardins, 2009). To say that 'sustainable deveiopment' (SD) is an oxymoron suggests that there cannot be sustainable development when humans ilre supposed to use the natural resources fbr survival. The irnplementation of globalization, which supports the free market system, in the mid-1990s lurther challenged'sustainable development'. T'he establishment of multinational corporations, joint ventures and strategic ailiances mushroomed in deveJoping natr<.rrrs lo further tap the unexploited natural resources ivith government support to sustain economic growth seems to support this notion (i.e. SD is an oxymorr:n). 'fraditionally, business organizatrons have alrvays considered the enr,ironment to be a free, neariy iimitless good (Shaw, 2011). At this juncture, it is tirnely to relate globalization with the free market arguments on preservation of the environment and their impacts on sustainable der.elopment.

10.5

FREE MARKET ARGUMENTS

ON SUSTAINABILITY AND PRESERVATION OF THE ENVIRON M ENT Th. fr..

**k*

I

mrndset on resources is rhat rhey are

'infinire'and to an end.

a means

Advocators of the free market will not share tire views of many environmentalists with regard to moraliy relevant topics such as the intriirsic vahre of animals and

other natural objects, commitmeut to rusporisible qoals for reducing pollution and u.aste, conserving resources and preserr.ing natural areas and biological diversity (Desjardins,2009). This is due to their belief that resources are'infinite'ancl should not be vierved as material objects but as a means to an end. Simply put, economically, the resources are to be efficiently Lrtiiized to support tire production of gooLls and services for the benefit of humans. On preservation of environrnentally sensitivc ireas, thev argue that'preservation' will be a 'waste' since it wouid represent resorlrces that are 'unemployed' and the,v yield less in human satisfaction compared rvhen they are processed to produce goods and services. Natural objects have no vaiue in their own right and have value only to the degree that humans place value upon them (Desjardins, 2009). On a strict free market vien, preserving biological diversltl-rs an appropriate policy goal only if doing so satisfies more consumer preferences rhan the alternatrve of preserving the rrr. However, if peopie are lvilling to pay to preser ve species, then doing so rs a legitimate business goai"

Ethics and the

{.sa.

t

rr ru.o

Environment 327

FREE MARKET ARGUMENTS AND THEIR IMPACT ON THE

ENVIRONMENT While tl-re above free market arguments may remain as valid justifications 01 many advocates of the free market system, humans are faced with problems such as environmental pollution, groundwater contamination and depietion, soil erosion, etc. These are forms of market failure i.e. negative externalities creating inconvenience to society, threatening the quality of iife of humans and non-humans. 'Ihe latest scientific evidence continues to show that humanity is living unsustainabiy and returning human use of natural resources to within sustainable Iimits will certainly require a major collective effort. In fact, the tlnited Nations 2005 World Summit Outcome Document further supports these views and regards the 'interdependent and mutually reinf,treingpillars'of sustainable development as ecotrottlic deveiopment, social development, and environmental protection (see Figure 10.4).

Figure 10.4: The inter-dependent and mutually reinforcing pillars o{ sustainable J:velopment Therelbre, in today's challenging and competitive global scenario, sustitinable developmerrt shouid not focus soiely on environmental issues but it has to be lrtrked to ihe con.,mitment tolvards the socio-economic development of a nation. 'fl-re kel' players in the macro-economy, i.e. the households, businesses, and foreign sectors, have to come forward and work together to address this issue on a collective basis. The government, as regulator, and the business sector, as tire driving force behind a nation's economic growth, have to be totally committed towards sustainablc development. Firms must be socially responsible. They have to consider the impact of their organization's activities on society. They must be conimitted to maximize their positive impact and minimize their negative impact. While firms, es;reciallv corporations, fulfil their economic roles of inaximizing profits within tire niles oi the flame, they must aiso take into consideration ethics and corporate citizenslrip in tlie conduct ofbusiness.

fs*,*"b1.-developmenr should not focus solely on environmental issues

but it has to

to the commitment towards be linked

rhe socio-economic development of a nation. The key players in rhe

macro-economy, i e the households, businesses, and

foreign secrors, have to come forward and

work togerher to address this issue on a collective basis.

328

Business Ethics

To conclude, development and business strategies have to be well-balanced with social aspirations for quality of life and preservation of the environment frrr the wellbeing of humankind, be it for the present generation or for the future generatrons to come" Certainly, this calls for an appreciation and internalization fnr environmental or ecoiogical ethics.

10.7

E;,h. uN

I

now regards rhe promotion oi susLainable

consumption as a basic elemenr of consumer protecrion.

SUSTAI NABLE CONSU M PTION

Consumption is the main reason that drives most economies today. The massjve growth in consumption, especially in the lattcr part of the twentieth century, has placed tremendous pressure on the natural environment. Tl-rere is this problematrc notion that consumption can continue to increase because there is no limit to our natural resources and furthermore the by-product and wastes created by consumption could be disposed of indefinitely. Whilst currerlt ievels of consumption may indeed be unsustainable, the question of how [o move towards a more sustainab]e forn"r of consumption is a vexed one, but also a vital one . Even the UN nor,r, regards the promotion of sustainable consumption as a basic element of consumer protection. So, what would constitute a sustainable level of consumption? One reasonable definition which is used by the European Environment Agency (EEA) and a nufirber ol"other organlzations corrles fiom the I994 Osio Syrnposium: Su.stainabk: corrsumption is: 'the

thttt re spond to basic needs and bring a better tlualily o_l liJe , n,hile rurttntainrng tltt: use oJ"trotural resources, tot;ic materio.ls ttnd emissiot'rs of'u,osle ancl pollutants otter the lfe cycLe, so as not to jeopardize lhe needs o-f -future g€ileratlons.'

Sur,*"bh consumption includes various aspects of

environmental, socral equiry and moral concerns, meaning

it

is

not only about

buying ecological goods and prorecring rhe environment. Ohe also has to think about personal health and lifestyle such as

inappropriare eating habits, consumption of damaging and addicrive substances, stressful lifesryle, erc-

I

z;.sc ofgr,,or1-s L.Lnd

services

This indicates that not only the ecological impact of'goods or services that society consulnes has to be taken into account. It is eqria111, iniportant to consider such aspects as human rights, equity and political dimensions in the production and consumption process" Moreover, since there are various stakelroldcrs involved in the consumption process, it has to be vierved from all possible leve Is- individual, household, community, business and government (Robins & Roberts, I 9Lr8). Sustainabte consumption inclucles various aspects of'environmental, social equitv and moral concerns, meaning it rs not only about buying ecological goods and protecting the environment. One also has to think about personal health and iifestyie such as inappropriate eating habits, consumption of damaging and addictive substances, stre.ssful iifestyle, etc. These are just a few examples of hon,our health can be negatively affected in the long term. Also, increasing importance of material values is of a gi eat concern for sustainability. It is very often assumed that the quality of iife is determined by the material values one possesses, such as a house, a car, expensive clothing, etc" In addition, one's financiai situation is to a certain extent influenced by spcnciing or saving decisions made now. Thus, consumption patterns affect heaith, lifestyie, financial and social environment, as well as the giobal environlnent and the natural resources available. Sustainable consumption is the oniy way to ensure a proper balance of ali these issues in the long term.

Ethics and the

Hou,ever, it would be a mistake to assume that people can or will rea"dily give up current levels of consumption, given that it is widely regarded as enjoyable, liberating

and expressive activities in modern society (Borgmann, 2000). Indeed, tire whole notion of ensuring that the satisfaction of needs does not compromise the satisfaction of future generations' needs is extremely problematic if the 'needs' satisfied by contemporary consumption are those of sustaining our image, our identity and even our social reiationships and culture (Schaefer and Crane,2005).

BARRIERS TOWARDS SUSTAI NABLE CONSU M PTION

10.8

To achieve sustainable CoflSlrli,otion is often challenging. In this section we will discuss some barriers that might impede sustainable consumption, as illustrated in Figure 10.5. .

//'-Lack ol)', \ , informaticn

\./ X,/

7

/\ Habits and

routines

\/

\

_-z

Figure 10.5: Barriers towards sustainable consumption

Willingness to act Some people state that they simpiy do not want to change their behaviour or do not have time to do rt. Thus, people are just too lazy or do not care about the environment. Older people might feel that they have done their share for society and norv they rvar-it to enjoy the rest of their lives without any inconvenience that sustainable der.ek:rpment might incur (Holdsworth, 2003). Another argument is that they cannot consulre anY 1ess, e.g. water (Auzane and Elere, 20A7)"

Envrronment 329

330

Business Ethics

Lack of awareness and information Often, daily activities are carried out on a lorv level of consciousness. A lot of the environmentally significant behavioural patterns are a matter of habit and daily routine, thus they are not even considered. Many consumers are also simply not aware of what they could do to consume sustainabiy or the impact their actions have on the environment. Some also do not know what facilities are available (Holdsrvorth, 2003)"

Habits and routines Habits are very strong barriers to changing one's behaviour. In the research by Agyeman and Kollmuss (2002) it was found to be the biggest obstacle to sustainable consumption. General routine often prevents consumers from implementing changes in their consumption patterns. Their habits and routines are closely relateri to their priorities, thus, friends and financial resources are often valued higher than sustainable consumption.

Convenience A major t.,arrier for consumers is the inconvenience of undertaking sustainable consumption actions. This is the most commonly mentioned reason of those not rvilling to change their behaviour to a more sustainable one. The concept of convenience is subjectir.e but not absolute, and sometimes consumers base their opinions about the inconvenience of sustainable consumption on assumption and without any real experience or actual inforrnation (Auzane and Elere, 2007).

Lack of access to facilities Lack of access to facilities is a major obstacle for not undertaking sustainable behaviour. For example, in the countryside, public transport is o{'ten infrequent and thr,rs cannot provide an alternaiive to driving a car. People are not very likely to undertake such actir.ities as rec,vcling if there are no facilities provided fbr this pllrpose (Holdsworth, 2003).

Cost High cost is one more excuse for not changing one's behaviour. Silnilar to convenience, it is a subjective concept and sustainable products ar.: often assumed to be too expensive r,r'ith the best example being organic food. Another related problem rvith cost is that it also hides other barriers such as inconr.eniencc and habit. For exanrple, many people see driving a car as something essential and therefore calculate the cost of using priblic. transport as an extra expense rather than an alternative (Holdsrvorth, 2003).

Psychological effects People commonly see environmentai problems as too distinct from their daily lives aird do not see a necessity to change their behaviour. They have a perception that giobal problems do not affect them and the consequences rvill only be seen in the long term. A similar idea is also perceived about the po.itive effects of changed behaviour, suggesting that they will only be seen in several years (Burnineham and Thrush, 2001).

Perceived consumer effectiveness This factor has been found to strongly correlatc with the undertaking of sustainable behaviour. In many studies, it has been proven that people who feel thaLt they can make

tthics and the Fnvirorrment 331

a difference are more likely to be environmentally active and consume sustainable products (Auzane and E1ere, 2007).

Relative sustainability People are frequently confused as to how they should behave when the types of behaviour are interrelated. For example, is it sustainable behaviour to recycle if they have to use a car to go to the facilities? Also, whether they should buy conventionally grown food or organic food that has originated from another continent? (Holdsrvorth, 2003).

10.9

STEPS TOWARDS SUSTAI NABLE

CONSUMPTION There is much that business, government and consumers can do to seek more sustainable modes of consumption. The following sections shott,some potential steps that could be taken to move towards this direction, as iiiustrated in Figure 10.6.

Figure 10.6: Working towards sustainable consumpt on

Producing environmentally responsible products Perhaps the ntost obvious way for firms to respond to the challenge of su,stainable consumption is to develop and market products that impact less harmfuily on the environment. This has been an area of activity for some 25 years or so and has led to the development of a vast array of products inciuding rec,vcied and unbieached paper, 'green' detergents, low-ene"gy iight bulbs, non-toxic toys and energy-efficient appliances. Ilven the car market has begun to see genuine inno';ations towards -['esia more environmentally responsibie products. For example, companies such as produced eiectric cars for the mass market and Toyota produced green cars such as tlre Tolrota Prius.

M

trffi W .w

332

Business Ethics

Product recapture

:..

Current business systems of production tend to operate on a linear model where materials are used to make products which are then consumed and disposed 01" Usually, that is the last we see of the products. Holvever, rnoving towards a circular use of resources-ensuring that so called'waste' is recaptured and brought back into productive use-not only minimizes waste but means that less 'virgin' material is needed at source (Fuller, 1999). Reconstructing products in this way-by recycling, refurbishing or re-manufacturing-can also help to bring prices down, because the cost of materiai inputs is often lorver (Pearce, 2009), The challenge for companies is to design for recycling, reuse and repair and to establish channels that facilitate the flow of product recapture. One example of product recapturing is in Singapore where the government initiated the conversion of wastewater into drinkable water, known as 'new water'.

Service replacement for products There rs no reason for the consumer to own the product in the first piace. After all, what u'e are often seeking when we buy products is their perfbrmance-the ability to wash clothes, for example-not necessarily the ownership of the physical product itseif, a n ashing machine. By replacing the sale of the product with an agreement to provide an ongoing service, firms can substantially reduce the amount of material goods being produced, as well as mairaging certain emissions and energy inputs more effectively (Rothenberg,2007). What rve have seen in recent years arc c.ompanies experimenting with fbrms of product leasing, lr,,here the companl'maintains or,vnership, but conducts servicing, repiacement of norn parts, upgrading of obsolete elelrents and ultirnately replacement ancl redistribution. Tl-re 'servicirlg' approach has been most common in industrial contexts. For example, Xerox t,vpically rerrts and leases most of its commercial photocopiers, largely because crlstomers are larger and easier to service.

Product sharing Another similar rvay of reducing consumption is ibr products to be shared by groups of consumers, tl-rereby getting n-Iore use out of tl're same resources. This wav of increasing eco-efficiency has been fairly successful in certain parts of Europe, such as Germany and the Netherlands, with products such as cars, washing machines and certain tools being found to be particulariy sr-ritabie for sharing (Schrader, i999). Although inconvenience is a major disadvantage, studies suggest that consumers welcome the savings in storage space, money ancl the h:rssle of repairs and maintenance, not to mention benefiting the enr.ironment. For example, in many countries across E,urope and North America, there is a citywide initiative to redr:ce pollution through encouraging cit1, folks to use bio.cles in a bicycle sharing system.

Reducing demand Ihe challenge of sustainabilit). can only be reahzed if society accepts that

people

buy fewer things. However, this notion might not be popular with businesses. Some consumers or even governnrents might nol be agreeable to this concept. Wiiere excessive consurnption can e\ren mar consumer enjoyment ar-rd threaten businesses, such as in the tourism industry, demand reduction can he particularly pertinent. Demand reduction can also come from consumers thernselves. In this instance' consumers choose to participate in 'volun:ary simpiicity' or 'downshifting' by consuming iess. A studyby Sharv and Newhoinr (2001) on voluntary simplifiers shows that some degree of reflectinn or restraint is required once consumers take the ethical

ha.,,e to

:,.(

Ethics and the

Environment 333

stance to reduce consumption. Some countries have been taking the steps to reduce

carbon footprints and environmental destruction. This can be seen especially in the tourism industry. ln case for review 10.3, it can be seen that a countrylike Bhutan has been deliberate in controlling the number of tourists going into the country. llhutan is putting a cap on the number of tourists through its sustainable tourism initiative.

I

t. I

Bhutan's Policy on Tourism 'Low volume, high valuel rhis is rhe motro thai enables Bhuran to mainrain irs unique culrure and protect its environment despite modernization. The Kingdom of Bhuran opened iis doors to tourism only in 1974 under a regulared program. ln 199",], the Royal Covernmenr of Bhuran privarized the iourism industry to encourage increased private sector paruicrpation. Today, rhe number of tourisrs visiring the country conrinues to increase each year as Bhuran becomes better known globally ' The Royal Covernment of Bhuran has always been aware rhat an unrestncted flow ol tourists can have adverse impacts on Bhutan's Lrnique culture and traditions and rts prrsrine environment. Bhuran rherefore adopred a policy of 'Low Volume and Hrgh Value'tourism on rhe principle of sustainabiliry, meaning thar rourism musr be envrronnrentally and ecologically friendly, socially and cukurally acceprable, and economically viable Hence, toursts must arrange rravel throLrgh a licensed Bhutanese rravel agency and cannor iravel independently Having resrricted rhe flow of rourism righr from the beginning, Bhutan is now a livrng museum, rich in culrure, rradirion, religion, history, and has successfully preserved its environmenr in its pristine -lhough form. chere is no quora or limir on rhe number of tourisrs aliowed ro visit Bhutan, the volume of tourisrs visrring to Bhuran is regulared to a manageable level by the consrraints of tourism infrastrucrure and the high tourist tariff ser by rhe Royal Covernment ol Bhutan. (Adapted from 'Bhucan's policy on Tourism', Bhutanyourway.corn)

10.1,0

GREEN JOBS

The other side benefits of encouraging sustainable consumption and ensuring environmentally safe products coming to the market is that it rvil1 spin off the creation of more green jobs. One aspect of green jobs is that they are in industries producing environmentally friendly products (such as hybrid cars or solar panels) and services (such as recycling or car sharing). Another aspect of this morzernent torirards green jobs is that the job itself, the workpiace, the way iabour is organized, be come more environmentaily sustainable (Forstater, 2006; Gnuschke, 2008). 1'here arc a number of approaches companies have taken to achieve the goai of a greener workplace.

r*

,a*r :tl

334

Business Ethics

:

t

Incentivizing carpooling, introducing the paperless office, substituting business travel with videoconferencing, increasing recycling, moving into lorv energy use office space are just some examples of the tvpes of initiatives organizations have explored to green the workplace. Another widely advocated solution is home based teleworking. There are ecological advantages for this. Rather than commuting to work and adding to road congestion and air pollution, teleworkers are likeiy to use far fewer resources by staying at home and communicating remotely. Case for review 10.4 takes a look at the Philippines and how the country is moving fbrward to embrace and unearth the potential of green jobs. In your opinion, do you think that Malaysia needs to move in this direction as well?

Philippines: Unlocking the Potentialfor Green Jobs Renewabir: energy is r-ror- JLlsr a means of complying with environmental siandards; it is also the key ro unlock economic growtlr A massive uptake of renewables addresses climate change by reducrng greenhouse gas emissions, while also increasing energy securty and generarinB more jobs..-'green'

jobs. Accordrng ro rhe Worldwarch lnstirure, "Renewables tend to be a rnore iabour-intensive energy source rhan rhe srill-dominanr fossil fuels, whrch rely heavily on expensrve preces of produciion equiprneni,. i-'ierrce, a Iransitiorr rowards renewable energy also brings job garns " In rhe case of rhe Philippines, one of Asia's fastest growing economies at the moment, Creenpeace believes rhar rhe country can [urrher srimulate its prosperiry by reaping the berrefrrs from renewables, in which 'green can bring 3old'. "Once we invest in renewable en€rgy, it would help the econonry .by brrngrng new lobs anC harnessing what we have in rhe country," said Anna Abad, Creenpeace Soirrheast Asia Clirnate Campaigner. At present, she nored that renewable energy investments in the Philippines remain siim. ln a published study assessing the potenrial of green jobs in the Philrpprnes, Creenpeace noted rhat

many countries across the world are already expanding their rerrewabie energy sector and have generared many lobs that way. ln Europe, a Deutsche Bank reporr found rhai nearly 550,000 green jobs have been created, wirh Cermany accouniing for over half .rf rhe region's toral ln the Unrted States, the National Resources Defense Council estimated 75,000 Americarrs are employecj in rts wind industry, while the Solar Foundation estimated that 100,237 peopie are working for the solar industry as of 20-11. China has an estimated one nrilJioir green lobs wirh 600,000 employees in rhe solar industry alone Other Asian countnes, such as lndia, Banglairesh and Tharland, are seeirrg rapid renewable energy development and a corresponding rise in green lobs. Lookrng at what other nations have been doing, the Creenpeace repori, believes that the Philrppine:, can walk the same pathway "Clobally, there are already so many exisring green jobs, 2 to3.5 million green lobs. lt's not a smail number and ir's rapidly increasing. ln the Philippines, we are also hoprng to become parr of rhat global trend, where we increase the numberof green jobs, increase reinvestment for the country," said Ms. Abad.

'f, .r. tr

Ethrcs and the Environment

According ro her, a 10-megawarr solar power piant in rhe country can employ 1,000 people for six rlonths during irs consrruction, while-100 permanent full-rrme posirions will be created for irs operalion and mainienance. A 33-MW wind farm can also generate about a thousand lobs durrng consrrucrrop and 2T direcr;obs during its operarion As for an 8-MW hydropower planr, about 1,000 Frlrpinos will be employed over a period of three years and once the facili'y gets done,30 Frlipinos will have permanenr posirions. Creenpeace said there are currenily seven proposed biomass prpjecrs in rhe counrry, whrch would mean 78,000 consrrucrion jobs and 3,400 to 4,000 jobs once the prolecrs are operational. Addirionally, 2000 people will be rapped rn rhe supply chain including the farmers producing the agriculrural wasres rhar will be used ar rhe planrs. Currently, geothermal power is the mosl mature renewable energy secror in rhe Philrppines, which comes in second behind the l.lnired Sraies in the global rankings The georhermal indusrry is also a prerty brg employer. To pur things in perspecrive, one georherrral company in rhe counrry has hired abour2,582 employees for a 1,189-MW plantdeveloped between rhe late 60s and early 70s when oil was peakrng very high, said Ms Abad lr wa: a brg leap for rhe government ro invesr in geothermal ener-gy back rhen,

Ceorherrnal power

\^i

as

burirhadabigpayoff.CeothermaipowernowsavesiheCountryoverSTbiilionfrorncoalrmports and srgnrficanrly brings down rhe cosr of elecrrrcrry

"lmagine whar ir can do ro our electriciry prces when all of the renewable energy investments come in and become mature technologies," she stressed Creenpeace stressed in rheir report thar renelvable energy can bring lobs, as well as cost savings and earnings ro rhe Phrlippines. ln order to harvesr: rhese advantages, Ms. Abad poinred out rhar rhe missing link is nor policies bur rhe government's commirmenr. There is a iack of acrion and inrplenrenrarion of rhese policies. When the renewable energy law was passed lrr December 2008, she said rr was hailed as rhe mosr comprehensive and most lorward-looklng lar.v for renewable energy, rhat ir was even praised and looked up ro b;i neighbouring counrries in sourheasr Asia. Under rhis lar,v, rhe Philippines seeks to raise irs renen,able energy consurnptron by three rime: ro r5,000 MW.

''Ulforiunarely, whar

is perfect on paper is nor the same as

it

is in practice," nored A'1s Abad

qovernment Since irs passage, ir has nor really raken off due to many delays and the fact that rhe is srill pushing for- coal wirh ihe Department of Energy looking to build 23 coal-fired power plants across rhe counrry. When these coal-frred power planrs are approved and go into rhe pipeline, it is feared that rhey will edge our any potential renewable energy investnent:s. Ms Abad urged rhat the governmenr should revoke approval of these coal plant construclion plans, as well as phase out existing coal faciiiries and replace them wirh more sustainable prole,-t5 lrke burldrng soiar and wind faciliries Meanwhile, Ms. Abad said Filipinos, especially the youth, are slowly becoming aware of green job rn which they could enjoy a berter and healrhier lobs and rhar rhey wanr ro be employed in a green working environment than workers in coal planrs. However, there are no avatiable oppcrtuniiies and rhe governmenr has ro provide rhese opporruniries for the people. "lr's really rhe commirment and the government has to walk the walk, and not just say rhat we qure that they get enforced have good policies. They really have to commit to these...and musr make

(Adapted fron'Phitippines: Llnlocking rhe Porcnrial ot' Creen Jobs. by Catherine Dominguez, EcoSeed, f

ebruary 20

t 7)

14

??(

JJJ

a-!&

i,ffi lEW. 336

.:

Business Ethics ,;,&

10.1

1

CHALLENGES OF DIFFERENT LABOUR AND ENVIRONMENIAL STANDARDS ACROSS THE GLOBE

Diff"erent enl,ironmental and health and safety standards in suppliers' countries can provide a loophole through which firms can potentiaily secure lower cost supplies by bypassing the stringent standards in their country of origin. For example, ths

recycling

of 'end-of-life'

electronic waste has increasingly been outsourced to

developing countries in Asia and Atiica. Despite international larvs banning the export of hazardous waste to developing countries, the combination of spiralling amounts of waste, lax regulation and a thriving and lucrative informal economy in countries such as China, India, Ghana and Nigeria has led to a growing prohlem of unregulated reprocessing, where the release of lead, mercury and other dangerous chemicals poses serious threats to human and environmentai health. With millions of tonnes of electronic waste being illegally shipped by companies in the developed rvorld to unscrupuious processors in developing countries, the problem of 'digital cemeteries' of e-waste has become a major ethicai issue for manuf-acturers and recyclers alike. Case for revier,v 10.5 illustrates how such occurrence over the scrapping and recycling of ships in india, Pakistan and Bangladesh can have a potentialiy explosive relationship among countries. The argument is not as clear cut or as black and white as would have thought. It needs to be looked upon and weighted in from the perspective of'providing job opportunities to thousands and at the same trme the concern about health hazards and envrronrnenlal d i:aslels.

EU and South Asia Scrap Over Recycling Ships

A

7

European effort

to bar the

use of potenrially hazardous ship recyclers rn lndia, Pakisran and Bangladesh has i-un aground, sralled by an ourcry from rhe Solrh Asian counrnes. The proposed legrslatron would bar ships flying European Union flags 1'rom'beaching'old shrps onro shore, where they are dismantled by hand at informal shipyards The low-cosL, ship-scrapping rndusrry of lndra, Pakistan and Bangladesh is a mulribrllion-dollar business employing aboui a million workers, and rhe three countnes accounr for more rhan 70% of rhe global ship-recycling rndusrry. The European Parliament has approved measures rhar wouid ban beaching and frne EU ship owners for vtoiarions. Advocacy groups have criticized beaching for it: poor safery and environmental record, preferring that shrp breaking, as the Sroader vessel-recycling indusrry is known, be conducred in dry dock r:r at piers so rhat warers aren'r exposed ro roxic spills. Amid pressure from South Asia, the European C-ouncil has cpposed rhe ban on beaching. App,loval by the council, whicfr includes the heads of El-l member srares, is necessary ro rarify the , -'lellslaiion. European Parliament iawmakers and the council are scheduled ro hold ralks l,1onday, having conclucred a oreliminary round of ralks lasr monrh.

Ethics and the

Environment 337

Ship breaking: A breakdown Low-cost South Asia dominates giobal ship recycling Annual volumes of reycled tonnage

mW

[PAK6'^

12

I 1,,.HtN4r:l ffi

re

-10

B

6 4 2

0

2003 '10 2003

]ffi

,nn1

(Source: IHS Fairplay)

Asian scrap yards generated S5.3 biilion from beaching in 2012, according ro shippingindusrry data provider Lioyd's List. Iuropearr ship owners sent a record 355 vessels to South Asia's beaches lasr year. Turkey and China also recycle ships but rhey don't pay as well for scrap and rheir capacity is Iimited. Yards rn Turkey and China buy ships for scrapping at S300 to 5340 a ton of sreel, depending on the grade, compared r'virh Sql0 rn South Asia Ships usually are sold ro middlemen who then sell the vessels to ship breakers who can seli the scrap steel South Asian ship breakers rypically will recycle nor only the sreel, bur the contenrs of a ship, such as its furnirure and dinnerware, as well. The NCC Shrpbreaking Platform, a coalirion ol i8 errvironmental, labour and human-righrs nongovernmental organizations, has led rne campaign agarnst beaching "When shrp breaking takes place directly on the beaches, full conrainment of the pollutants is impossrbie," says platform Executive Director Patrizia Heidegger Thr World Bank esrrmares that 79,000 rons of asbesros and 250,000 tons of orher carcinogenic chemicals will be dumped on Bangladesh's beaches alone over the next 20 years, Ms. Heidegger says her group recorded 40 deaths in India, Bangladesh and Pakistan in 2012, compiling reports from trade unions and local media. "No adequare eme:gency respunse rs available. How can an ambulance reach a vessel stuck in mud?" she

says.

Ship-owners, recyclers and ihe three South Asian governments say a ban on beaching would be counterproductive, undermining existing internatronal efforts ro improve the indusrry's performance and exacting a huge cost to the economies of lndia, Bangladesh and Pakistan. "The Et-i is asking for something r,hat will cripple the economy ol South Asia," says Shafr Chaudhari, who ran one of Bangladesh's first beaching operaiions and nor,ry operates a small marriime cargo operatron, Comfort Shipping Line. "lt is a way for keeping our economies permanently poor." Yasmin Sultana, depucy secretary of policy at Bangladesh's Ministrv of lndustries says jobs

could be at stake" "l can't stop the business suddeniy...There are 300,000 people dependent on the industry," she says An EU ban could threaten

a

global proposal, rhe 2009 Hong Kong Corrvention, meant to regulare

rhe scrapping industry by establishing standards [hat are safe for workers and environmentally sound. That agreemenr awairi rarificarion by natronal parliamenrs, which is expecteC to take about six years.

w a4

338

Business Etirics

i?

l, I

"lf sense does nor prevail in Europe, we will lose all motivation ro adopt the Hong Kong Convenrion," says Nikos Mrkelis, a non-executrve director of CIobal Marketing Systems, a middleman in rhe shrp-breaking indusrry. Mr. Mikells, a former executive of rhe Unired Nations'lnternational Maririme Organization who helped draft the conveonon, says owners would circumvenr rhe ELI ban by changing rhe flags on rheir aging vessels. European-flagged sirips account for around 15% of the global merchant fleet. In the shoreline scrap yards of wesrern lndia, workers who moved 1,000 miles from home say the work is dangerous bur rhey accepr rhe hazardous condirions because of rhe wages and sready lobs

Condirions are gerring safer, rhey say. Shipyard operators say they have made improvernents, such as oursourcing the handling ol'hazardous waste, undergoing periodic audits by regularors and getring medical check-ups for workers Bur rhe operators complain thar it is never enough for Furopean reguiarors.

"The safery measures are very good. We have introduced a number of precaut.ionary steps befr:re ships are allcwed ro beach," says J K. Sinha, a rnember of lndia's National Disasrer Management Aurhority.'Accrdenr-s may occur once in a while, but there is no scope of disasters," he sard (Adapred from 'ElJ anci sourh Asta scrap over recycling shtp', by Cosras Parts and Btnart A,4ukher1i, Wall Srreet

lournal,

-16

Jurte 207

j)

10.12

ENVIRONMENTAL ETHICS

"fhe

field o.'f environmentcrl ethics cancerns human beings' ethical reLotionshil., v,ith the nattLral environment. While numeroLLs philosophers have written on this toltic througltout history, environmurtal ethics only developed into a specific philosophical discipline in the 1970s. This entergenc€ h/as no doubt due to the increa-
The de.t,elopntent o_f such awareness was aided by the publication of two important boctks at tkis time. Rachel Carson's Silent Spring, Jirst publtshcd in 1962, alerted readers to how

tl^,e widespread use of chemicalpesticide s v,asposing serious tltreat to public health and leading to the de struction of wildlife. i)f similar significance was Paul Ehrlich's 1968 book, The Population Bomb, which warned of the devastating effects the spiralling human population has on the planet's resources. Of course, pollution and the depletion o.f natural resources have not been the only environmental concertis since that time: dwindlingplant ond rtnimtrl biodiversity, the loss of wilderness, the degradatian of ecosystems, and clirnate change are all part of a raft af 'green' issue c that have tmplanted themselves into both public consciousness and public policy over subsequent years. 'l'lrt 1tb oJ ent,ironmental ethics is to cttrtline our rnoral obligations in

a

, i :

Ethics ancl the

Environment 339

face of such concerns. [n a nutshell, the two t'undamental questions that environmental ethics must address are: ttthat duties do humans have with respect to the enyironment, and why?' the

(Alasdair Cochrane,

r-r.d.)

Environmental or ecological ethics is therefore part of environmental philosophy which considers extending the traditional boundaries of ethics from includirrg soieiy humans to encompassing the non-human world or gifts of nature, complementing human lives. It also relates to how humans use the natural environment as'a matter of ethics. There are manlr ethical decisions that human beings make with respect to the environment. For example, should we continue to cut down forests and level hilis for the sake of hun'ran consumption? Is it right for humans to knowingly cause the extinction of a plant or animal species for the convenience of humanity? How do we adjust from our present materialistic lifestyles to sirnpler lifestyles to reduce our present consumption in order to -rotect the environment as t'ell as preserve resources for the r.r,ell-being of our future generations? \A/e note in several earlier chaptcrs that business organizations are set up to n"rake profits. Hower.er, rve cannot ruie out the fact that businesses inust also have a commitment and social responsibility to protect the ern'u,irorrment and enhance society's irterests (Khalidah et al.,2012). |Jorvadays, society has other concerns and interests such as quality o1 iite as well as preservalion of the environment. Therefore, a business decision-maker, in the process of serving his or her o,,vn interests, is morally obligated to take actions to fulfil these socjal needs rvhile frlfilling economic obiectives. After ali, business organrzations, not to mention other public/social institLrtions, are part of the 'spacesl'rip earth'" Business firms, in particular, depend on the natural environment for their energy, material resources and rvaste disposal and that the environment in turn is affected by commercial and non.comntcrcial activities of firnt s. Due to the fact that human activities are holisticall,v part of the larger ecological system, many n,riters and philosophers insist that lve should recognize our moral duty to protect the nelfare olhumans and non-humans/living creatures; not just based on the idea that the envrronment should be protected for the benefit of the iruman kind. An ecoiogical ethic is thus an ethic r.vhich ciainrs the u,ellhre of at ieast some non humans is intrinsicall,v vah-rabie, and because of its intrinsic va[ue, hurnrns have a dutv to respect and preserve them. Human survival is rvholly dependent on nonhutnans; the food that r,r,e take, the oxygen that we breathe every second, the ciothes that we wear, the houses that lve live in, etc. Therefore, failure to respect and appreciate the gifts of nature may affect our quality of life and rvell-being. Case for revierr, 10.6 looks at the yearly occurrence of haze coming from Inclonesra, which atfects its neighbouring countries such as Malaysia, Srngapore and Thariand. The article stated that palm oil companies were behind the indiscriminate burning and iand clearing that causes the haze. Holvever, are they soleiy to be biamed' Y/hat about the role of governments, enforcement agencies or even consllmers themselves? In your opinion, what responsibilities should each stakeirolder in the ecosystem play to address this issue?

tEnvkonmenral or is therefore par,r of environmenral philosophy which

'

"

considers extending

the rraditional boundaries of ethics

from including humans solely

ro including the non-human world or gifrs of nature, complementing hunran lives

fA,*."l"c"rk,h,-; rhus an erhic which claims the welfare of at least some nonhumans is intrinsically valirable, and because

of irs rntrinsrc value, humans have a

dury ro respecr and preserve rhem.

*

:-I

..&

340

Brrsiness Ethics

Palm Oil Companies Behind Haze

on lndonesia's Sumatra, which have cloaked Singapore anC Malaysia in record-breakrng haze, raging are on palm oil plantations owned by lndonesran, Malaysian and Singaporean companres, environmental activist group Creenpeace International said. "NASA hotspot data in Sumatra over the past"10 days (iune 11-21) has revealed hundreds of Fires

fire hotspots in palm oil concessions rhat are owned by lndonesian, Malaysian and Srngaporean companies," the group said in a statement received by AFP. Singapore's PSI index hit the critical400level on Friday, making ir potenrially life-threarening ro che rll and elderly, a government moniLoring sire sard "Fires across Sumarra are wreaking havoc for millionr of people in rhe regiorr and descroying ihe climate. Palm oil f)!'()ducers musr immediately deploy fire crews to exringuish rhese fires But reaiiy cleaning up their acl srarts with adopting a zero deforesration policy," said Busrar Mairar, head of Creenpeace lndonesia's loresr campaign, The lndonesian environment minisrer Balthasar Kambuaya said rhat a team has invesrigated eight companies suspecred to be behind rhe fires and promised to reveal rhe conrpanies'names afrer rhe probe. A senior presidential aide Kunioro Mangkusubroto said that the fires happened in concessron areas belonging ro Asia Pulp & Paper (APP)and Asia Pacific Resources lnrernaiional (APRit) "lr is very clear rhar rhe fires are in APP and APFlir c.oncessions We need to settle rhis matter" -18lune in concessicn areas rn Riau he told reporters whiie showing the distriburion of fires from 1 to APP, the world's thirrl'largest paper producer said in a srarement rhar'ground verrficarion' dereccedonlysevenpoinrsrhatareactuallyforesrfire,affecringaround200hectaresof land Theyare under and hreing controlled by approximately a thousand fire-frghting crews. "Our team's prelrminary

invesrigation found that five of ;he fires were set by rhe cornmunity to clear land for crops and two cases are still under investrgation," APP added lndonesia stepped up its fire-fighting efforrs by deploying aircraft to artificially create rarr ai .i to water bomb rhe blaze. The haze crisis has caused a dramatrc escalation in tensions between tiny Singapore and irs vasr neighbour; with the city-state repeatedly demanding that Jakarta steps up rts efforrs ro pur out the fires. (Adapred from'Palm Oil Companies Behind Haze', by Channel NewsAsia, 22 June

207

j)

As rightly viewed by Holmes Rolston III (2003), a great deal of work in environmental ethrcs can be done from within the'social contract'. To quote: 'Huruans need to be l'Lealthy. It is hard to har,e a healthy culture in a stck e,nvironment. More tharu tJtat, humons destre t quality enyironrnent, enjoytng the amenities of nature-v,ildlife and wild flowers, scenic yiews, places oJ soLttutle- cts well as the commodities-timbcr, tvater, soil, natural resources. Supportrng environmental health and a qualit',' environntent can certatn\' be cowtte d .ts duties withirr a social contract.' (Holmes Rolston

111, 2003)

Ethics and the

iVfuch as we support the above rational views on environmental/ecologicai ethics, most religions place emphasis on the believers to protect the environment and respect the glfts of nature. ior erumple, from an Islanic dimension, as aleader (khalifah or vicegerent) of the universe, humans have a duty to recognize and preserve the ecological systems within which we live to sustainable limits. Over-exploiting resources is seen to be unethical as it promotes greed and extravagance. Let us further discuss ecological/ environmental ethics from the Islamic dimcnsion.

10.13 ENVIRONMENTAL ETHICS-AN ISLAMIC DIMENSION Quoting from Shomali (2008):

-ri

'In lslam, the environment is sacred and has an intrinsic value. Even if there is no threat or shortage, we must sttll look after natural resottrce.s, protect animals and plants, and mora generalll, irnprot,e and dt:velolt the a.nvironment. As the vicege-ent of God, y,e hat,e to channei t!'te tnert.1, oJ' God to everything tvithin

our reoch"' Below are some of the relevant Quranic \rerses frotn Surah Al Hijr to support ecological ethics and sustainable clevelopment from an Islarnic perspective. 'And the F,artJt We hat,e spread oul, and hctve ploced tlteretn -f irm mountains, arLd caused to grou' therein all kinds of things in dLtc ltrrtstortion.' 'And y,e hat,e prot,ided thcrcin ftte ans of lit,Lng and -for those n'ltom you prot'ide (living) creatures, cattle , beasl,r and other nnintals).' not (ntoting

'And there is not o tlting, but with Lls are the stores thereo.f. And lMe senrl tt down except in a known tnectsurc.' (Surah Al Hijr, Verse 19'21)

'And we send the winds jt:rtilizing (to f ill heavilv tLre ciouds with water) tlrcn cause the water (rctin) to descend -front the sky, and lt/c gi lr: 1'ttu to drink, ru'Ld it is not..,ou who are the o:,tners of ils stores (i .e . to gi.',c tt,ote r to whorut you like or to tvithold it J-rom whom vou like).'

'And certainly \t"e! We Inherit.tr.'

it

is who give life, and cause deatlt, and We are the (Surah Al

Hijr , Verse 22-23)

These verses remind the believers that there are linits to the utilization of natural resources and humans are reminded that the gifts of nature are not solely ours to be freely exploited. Even God bestows them in modest portions; therefore, .we must also utilize naturai resources in suitable portions to sustain them for our rvell-being. One of the greatest threats to human society and the environment is extravagance, r,.'hich originates from greed and negiigence (Shomali, 2008). Certainly, wasteful

Environment 341

,t&

.,.

342

Business Ethics

, 1

corlsumption is an act of extravagance. This character relates to self-control in fulfilling human desires and is much controlled by religious teachings. While Muslims are taught to have Iimits in their consumption patterns, they are also taught to benefit from natural resources in a responsible way. A believer should be moderate in all aspects of life, including his use of natural resources. The Holy Prophet said: "The best aJfairs is the medium one.' (N

ahj al-F asahah, No. 148 l)

Indeed the whole world is based on order and harrnony (mizaan). Quoting from Surah Ar Rahman:

'That yctu should not transgress in the balance. And keep up the balanc.e witlt justice, and;t'all not short in the balance."

(Al-Quran,

55:7-9)

Refer to the glossary for further explanations on mizaan. For the purpose of discussion, let us elaborate further on the value of water, earth, plants and anirnals to humankind from the Islamic perspective.

10.13.1 Water In isiamic culture, water is very highly regarded" Water is introduced source of life. Quoting a verse: 'And t'e have matJe

o.f

as the

origin and

water everything living.'

(Al-Quran, 21:30) Next,

'lnfl

to gr"ow there witi, gcrrderLs ancl grain for harvests, and the tall palm trees v,hich have spadices layer upon layer.' rre serLd down

from the

sky blessed water , then tve causc

(Al Quran 50:9-10) Water is also a basic essential resource for Muslims to take ablution before performing prayers. Therefore, due to its intrinric value, water must be kept pure and clean for huinan consumption.

1A.13.2 Earth In Islamic scriptures, the earth is introduced

as an

origin for the creation of human

beings:

'From it (ectrtli, We created you and into We w'ill raise you a secand time.'

it \[e shall send 1'ou back and.irom it (Al-Quran, 20:55)

Prophet Muhammad SAW once said: 'God created tlte ettrtlt and laid it ou.t for hit'nanity.' (See also

AI-Quran, 55:i0)

fthics arrd the Environment 343 l

He (i.e. God) also made the earth manageable and tractable. Refer Verse 67:15 which say s:

'It

is He who has matle the earth manageable

for you'..'

God has also made for humans a means for their liveiihoods on earth. Refer Al-Quran, ZJ0 which says: 'Gocl has given you (mankind) the power on earth and appointed thereitt a

livelihoodior ylu.' Next,

'And we have spread out the earth and we have placed mountains in it, and we haye caused to grow therein every kind of beautiful thing. This is an en'rightenment and a reminder for every servant who turns frequently to Allah"' (Al-Qttran, 50:7-B)

; .

These verses clearly implicate the importance and value of the earth to humans' Thus, as a shor,r, of gratitude, human beings should sensibly utilize the gifts of nature

and construct upon it u'ith prudence.

10.13.3 Plants islam recognizes the value of piants and encourages farming as a nob]e economic activrty of human beings. Planting trees and protecting them are also duly encouraged to ihe extent that planting a tree is considered an act of worship (Shomali, 2008). The Hoiy Prophet once said: 'Llnless you are compelle d, do not cut down a tree.'

(Wasaa'il al-Shi'a, Volume

11)

ln addition, there are many hadithsthat recommend Muslims to plant and do {arming. For cxample, the ProPilet said: '\,\rhoet,er plants a tree and then a human or a creature of God eats its fruit,

will

be considered as an act of

it

charity for him.' (Nai Al-Fasahah, Volume 2)

In anothei: instance, imam Sadiq once said: 'Farnt

r.tnd

plant! Ily God, there is no rnore occupation

n'Lore

lawful and pleasont

than this.' (Al Kaafi, Volume 5)

?0.13"4 Animals lilamic teachings aiso acknowiedge that animals have numerous rights, foi which human beings are held responsible. A fundamental right for animals is the right to life in addition to food and nater, a home and medicine (Shomali, 2006). Animals must rlso be loved and respected. According to a u,ell known hadith,the Holy Prophet SAW once said:

w

.r%' "_ffi{

344

Business Ethics

A woman will

be

(Najh al-Fasahah,

I'he Prophet also

died.' No. 1559)

put in the hell because she imprisoned a cat until the cat

said:

'"',& j}

,

'Whoever kills a sparrow without any reasan will be questioned by God on the day of ludgement.'

r

i

(Najh al-Fasahah, No.2224 & No. 2610)

In addition, Imam Ali said: 'Whoever curs€s an anirral, he himself will be cursed by God.' (Wasaa'il al-Shi'a, Volume

8)

I

All

these statements seem to support the notion that human beings cannot be cruel to animals. Referring to Imam Bukhari's collection of hadiths and narrated by Abu Huraira r.a., when people asked, "O Allah's Messengerl Is there a reward for us in serving (the) animals?" He replied, "Yes, there is a reward for serving any animate."(3:551 - Original Bukhari (O.8.) and Summarized Sahih Al Bukhari by Dr.

Nluhammad Muhsin Khan, 1996). We have seen the value of rvater, earth, plants and animals to humankind from the lslamic perspective. Recognizing that nature has its intrinsic value, Islamic teachings in fact recognize humans as trustees on Mother Earth. Humans have been given the

rcsponsibility of stcwardship and trust by God to carc for the earth and serve as a channel for the blessings of God to all Ilis creations. Humans must therefore fulfil the requirements of His trust as a vicegerent. '\,Ve

oflered lhe trLtst t.rttto lhe hesvens and the t'ortlt trnLl the hills btLt they

shrank lrom bearing il and were aj'raid of it. .A.nrl rnrLn ttssunte cl it.'

(Al-Quran,

33:72)

'lo conclude this section, nature is therefore a dir,ine trust and man is the trustee. Future generations also har.e a right to enjoy the bcrunty of the earth so the present generation must not do mischief and deprive their rights to continue benefiting from it! This Quranic yerse is a clear reminder to the believers: 'Do not do mischief oit the earth, after it has becn set in order, but call on Him with fear and longing (in your hearts): J'or the Mercy oi God is (always) near to those u,ho do goad.'

(Al-Quran, 7:50) Next, quoting from Imam Bukhari, the Prophet SAW once said: 'Whoever does good equal to the u,eight of an atorn (or o small ant) shall see t (its reward)" And whoever does evil, equal to the weight of an atom shall see it (its recompense) (on the Day of Resurrection).' (j:559

-

Original Bukhari (O.8.) and Su.mmarized Sahih Al Bukhari by Dr. Muinmmad Muhsin Khan, 1996)

Thrs quote is practically relevant and applicable to all acts of humankind, not to

mentionouractivitiesinmanagingtheenvironnrentl

i i

Ethics and the Envrronment 345

Tb consolidate your learning, the learning outcomes are summarized below:

l.

Identify the three main sources of threats to the current environment-global warming, pollution and resource depletion. There are three major sources of threats facing human civiiization toCay: . Global warming-an increase in weather temperatures due to rising atmospheric concentrations of carbon dioxide.

. Pollution-the undesirable and unintended contamination of the environment by the .

rnanufacture or use of commodities, There are various types of pollution such sound and light.

as air, water,

land,

depletion-the human consumption of finite or scarce resources. It is ciosely linked to the way humans consume the gifts of nature, which has its limits, to satisfy the unlimited Resource

human desires. i ,-

2.

Recognize other emerging environmental threats facing humankind in the globalizedworld of today. While humans are faced with three major sources of threats in today's global world, other emerging threats include population increase, falling water tables, shrinking cropland per person, collapsing fi.heries, shrinking forests and loss cf plant and animal species.

3.

Conceptualize and classify sustainability and differentiate it from sustainable development. Sustainability was first considered an ecological concept prescribing rules and principles for the usage of natural resources in such a rvay rvhich allows future generations to survive on this planet (Pearce and Turner, 1990). Ho$,ever, to capture a broad understanding of the concepts of business, politics and r+,ider parts of societ1,, sr-rstair-iabilit,v in the current scenario is redefined as the iongterm maintenance of systems according to environmentai, economic and social considerations (Crane and Matten, 2010). Sustainability rnay be further classified as environmental sustaiirability, economic sustainability and social sustainability. Sustarnable development (SD) is a pattern of resource use that aims to neet hunran needs ir4rile preserving the enviror"rment, so that these needs can be met not only in the present, but also for future generations. The concepts of sustainability and sustainable development are certainly consistent with islamic ethics which emphasize the roie and responsibilitl.of humans in ensuring the progression of tl-re earth since man is duty bour-rd to keep the physicel world in a balanced state.

4.

Discuss the sources of renewable and non-renewable resources. Ncrn-renewable resources are used worldwide to create electricity, heat homes, pol&'er vehicles and manufacture goods. Resources are considered non-renervable if their quantities are limited or if they cannot be replaced as fast as they are used up. Sorne non-reneu,'able resources have been formed over millions of years and wili eventually be depleted aitogether. Renewable resoltrces are an important aspect of sustainability. According to National Geograpiric, the most frequentiy used renewable resources are biomass, water, geothennal, wind and solar. Unlike fossil fuels, we can regenerate or replenish these resources. With the rising cost and decreasing availabiiity of non-renewable tossil fuels, renewabie resources are receiving increasing attention.

5.

Assess whether sustainable development is an oxymoron. Whilc sustainable development has been promoted by the United Nations

t r:

!'

in the 1980s as a major well-being and society's for promote economic growth issue of concern, nations continued to prosperitl.. Industriaiization seemed to be the agenda of most governments. Natural resources were exploited in abunclance to reap maximum benefits within the rules of the game. Following this,

xIU: .,

'4

346

Business Ethics :

the World Trade Organization (WTO) called for nations to globalize and promote free trade by loosening trade barriers and r,vithdrawing protectionist policies. In view of these developments, to rnost people, the term 'sustainable development' may seem to be an oxymoron, i.e. bringing together of two apparently contradictory concepts (Desjardins, 2009).1b say that'sustainable development' (SD) is. an oxymoron suggests that there are not or cannot be sustainable development when humans are supposed to use the natural resources for survival. The implementation ofglobalization, which supports the free market system, in the mid-1990s further challenged'sustainable development'. Perhaps, it rnaybe true to view this concept as an oxymoron,looking from the reaiity and pace of economic development, which has somewhat compromised social and moral considerations.

6.

l l

Explain the free market arguments on sustainability and preservation of the environment. . They believe resources are 'infinite' and shouid not be viewed as material objects but as any

. .

means to an end.

'Preservation'will be a'waste' since it would represent resources that are 'empioyed so as to yield less than they might yield in human satisfaction'. Natural objects have no value in their own right and have value onl,v to the degree that humans place value upon them. Preserving biological diversity is an appropriate policy goal only if doing so satisfies more consumer preferences than the alternative. If peopie are willing to pay to preserve species, then doing so is a legitimate business goal. Otherwise, it is not cost effective to preserve resources.

7.

Compare and contrast the arguments of capitalists and environmentalists on exploitation and utilization of resources" . Although free markets lead to over-exploitation of resources, advocators of the free market will not share the r.iews of environmentalists on such topics as the intrinsic value of animals and other natural objects, commitment to responsible goals for reducing pollution and x,aste, conserr.ing resources and preserr,,ing natural areas and biological diversity^ They believe resources are 'infinite' and should not be r.ier^,,ed as nraterial objects but as any means to our end. . On preservation of environrnentaliy sensitive areas, they argue that'preserr.ation'r.lill be a 'waste' since it would represent resources that are'employed so as to yield iess than they might yreid in hurnan satisfaction'. Natural objects have no value in their own right and have vah,,: only to the degree that humans place vaiue upon them. . On a strict free market vierv, preserving biological diversity is an appropriate policy goal only if doing so satisfies more consumer preferences than the alternative. If people are r.villing to pay to preserve species, then doing so is a iegitimate business goal.

8.

llxplain the concept and importance of sustainable consurnption. The massive grorvth in consumption, especiaily in the latter pa't of the tnentieth centurl', has placed tremendous pressure on the natural environment. There is this problematic notion tirat consumption can continue to increase because there is no limit tri our natural resources ancl furthermore the by-products and h,astes created by consumption could be disposed of indefinrtelt'. Whilst current levels of consumption may indeed be unsustainable, the question of how to movc towards a more sustainable form of consumption is a vexed one, but also a vitai one.

9.

Discuss barriers towards sustainable consumption. To achieve sustainable consumption is often chalienging. There are nine possible barriers that might impede sustainabie consumption-rvillingness to act, lack of awareness and information, habits and routines, cor,venience, lack of access to facilities, cost, psl.chological effects, perceived cr;ilsurrrer effectiveness and relative sustainability.

10. Explore some steps that could be taken ton,ards sustainable consumption. Many steps may be taken by businesses, governments and consumers for more sustainable modes oi

t

Ethics and the

Environment 347

consumption. Potentially, there are five initiatives that could be taken-producing environmentally responsible products, product recapture, service replacement for products, product sharing and reducing demand. I1" Explain the concept of green jobs. Green jobs entail a situation when companies produce environmentally friendly products (such as hybrid cars or solar panels) and services (such as recycling or car sharing) to encourage sustainable consumption and to ensure that environmentally safe products are available in the market. Another aspect of green jobs is how the labour market is organized to be more environmentally sustainable through various green initiatives at the workpiace. 12. Discuss the challenges of different labour and environmental standards across the globe. Mary developed countries bypass the laxlaws in emerging economies to send'end-of-life'electronic waste. This situation can lead to serious environmental catastrophes. T'here seems to be a growing problem of unregulated reprocessing of environmental and electronic waste where the release of lead, mercury and other d^ngerous chemicals poses serious threats to human and environmental healttr rn these countries.

r3. Conceptualize and rationalize the importance of ecologicallenvironmental ethics. Environmental ethics concerns human beings'ethical relationship with the natural environment. Environmental ethics onl1. developed irrto a specific philosophical discipline in the 1970s. l'his eniergence was no doubt due to the increasing awareness in the 1960s of the effects that technologl', industry, economic expansion arrd population growth were having on the enr.ironment. Pollution and the depletion of naturai resources have certainly not been the only environmental concerns since that time-drvindling plant and animai biodiversity, the loss of wiiderness, the degradatiorr of ecosysterns, and climate change are ail part of a raft of 'green' issues that have irnplar-rted themselves into both public consciousness and pubiic policy over subsequent vears. Enl'ironmental ethics rs to outline our moral obligations in the face of such concerns. Tko fundamental questions that environmental ethics must adclress are: rvhat duties do humans have u,ith respect to the environment, and i,l'hy? Environmental or ecological etirics is therefore part of environmental l',hilosophy n hich considers extending the traditional boundaries of ethics from including humans solely to inciuding the nonhuman world or gifts of nature, compiementing human lives. It also relates to how humans use ti-re natural environrnent as a matter of ethics"

from an Islamic perspective the obligations that one has to conserve and consume resources within sustainable limits.

14" Recognize

'ln lslarn, lhe envirortment is sacretl and has an intrinsic value. Lvcn if there is no tlreat or shorlage, we rnttst still look t$ter natttrctl resottrces, protect animals ontl plonts, and morc generalll, improve and develop lht environrnent. As tlte vicegerent of God, we havt to chonnel the ril€rc)' of God to ercrything withiu our rt:ach-'

(Shomali,200B) Nature is therefore a divine trust and man is the trustee as a Khalifah on earth. It has to be managed within sustainable limits since extragavance is prohibited and moderation is promoted in Islamic teachings.

This following Quranic verse is a clear reminder to the believers:

'I)o not do mischief on the earth, aJ'ter it has been set in order, but call on Hint with fectr and longing (in your hearts): for the h'ie.rc,v oJ God is (alway) near to th.ose u'ho ,1o goad.' (Al-Quran,7:56)

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Business Ethics

Next, quoting from Imam Bukhari, the Prophet SAW once said: 'Whoever does good equal to the weigfit of an atom (or a small ant) shall see it (its reward)" And whoever does evil, eclual to the weight of an atom shall see it (its recompense) (on the Day of Resu rrectton).' (3:559

- Original Bukhari (O"8.) and Summarized Sahih Al Bukhari

by Dr. Muhammad

Muhsin Khan, 1996)" This quote is practically relevant and applicable to all acts of humankind, not to mention our activities in managing the environment!

Believer A supporter or an advocate" In Islam, a believer is a Muslim with iman. He is someone who consciously believes the 6 principles of iman and practises the five principles of Islam" lrnan is an Islamic term for 'faith' i.e. pior-rs adherence ivhich is a highly regarded religious ideal in the A/ Quran. Conservation The saving or ratirrning of natural resources for future use. The process of conserr.,ation also relates to preservation and protection ofresources. Consumer sovereignty "1'he recognitron that consumers are 'kings' in the economy. 'l hey hal,e the libert,v and right to decide wirether lo bu,v or not to buy a product. Ecological system An interrelated

ar-rd

interdependent set of organisms and environments.

Environment 'Ihe surrounding in rvhich an entity finds itself. Environmental ethics E,nr.ironrnental ethics concerns human beings' etirical relationship rvith tl-re natural environnrent" A philosophy rvhich considers extending the traditional boundaries of ethics i'roin oniy humans to includir-rg the non-human world or gifts of nature, complementing human lives. Environmental sustainability fo maintain and preserve nature during and after lhe use of its resources" Gifts of nature Another term for nalurai resources. Greenhouse gases Carbon dioxide, nitrous oxide, methane and chlorofluorocarbons--gases that absorb arrd hold heat from the slrn. prevelrting it from escaping back into space, much like a greerihouse absorhs and hoids the sun's heat. Green jobs ,[obs in businesses thal produce goods or provide services that benefit the environment or conserve naturai resources. It might also include jobs in which workers' duties invoive making their establishment's prcrduction processes more envirorrmentaily friendly or use fewer natural resources.

Clobalwarming 'I'he tncrease irt temperatures around the globe due to rising leveis of greenhouse

gases"

Hadiths A report of the sayings or actions of Prophet Muhamrrrad SAW or his companions, together rvith the tradition of its chain of transmission. Related to hadiths are also sunnrths-the collective bodv of the Prophet's traditions. Haze Atmospheric moisture, clust, srnoke and vapour that diminishes visibility. I i

Ethics and the

Envrronment 349

lntrinsic value It is the ethical or philosophical value that an object or resource has 'in itself' or 'for its own sake', as an intrinsic property. An object with intrinsic value may be regarded as an end or having inherent value by itself or belonging to a thing by its very nature. 'fhe value that humans place on gifts of nature depends on his or her level of appreciation of the resource. For example, the intrinsic value of the scenic views at beaches and mountains in their natural states which may bring happiness and satisfaction to nature lovers. This value may not be quantifiable because it depends on individual feelings and happiness. Khatifah A concept by early Muslim scholars which focuses on the status and quality (free will) of humankind vis-a-vis other creatures in the universe-leadership, responsibility and accountability. iesults in too few or too many resources being usecl in the production of a good or service. A situation where resources cannot be efficiently allocated due to the breakdown of the price mechanism caused by factors such as lack of competition giving rise to monopoly power, unequal distribution of income, externalities such as poilution, etc. Market failure creates problems for society due to the breakdown in the norrnal functioning of the forces of demand and supply (i.e. pricing mechanism). This inefficiency may justify government intervention.

Market failure

It is defined as a situation in which market equilibrium

Multi stakeholders Those who har.e an interest in an idea or state of affairs. Mizaan It literally means 'balance'. Islamic philosophy relates 'al-mizaan' with the balance of the universe itself through that Divine Wisdom which preser\res everything in its place. Quoting from A/ Quran Chapter 55 (Surah Al- Rahrnan), Verses 3-i0: 'He ,realed mttrt, And He tought ltint speech. 'fhe stm nnd the moon.follow cours€s accttrding to nfixed reckoning" Ancl tl;t: plonts anr) the trecs clo tLilctre. And the Heaven he has raisecl high, And l'le has set up the Balarrce . '[''ttr.tt t,r:u s]rculd nol tronsgress ilr the bttlnnct. And keep up the balance with iustice , and j'all not short in tlre bolance. Anr.l lle hcts ltlattd the earth -for the living creatures'

(Al Quran,

55:

.i

10)

Refer to The Holy Quran Text and T\'anslation by Restu Foundation (2008).

Non-renewable resources Any natural resolrrce from the earth that exists in limited suppiy and cannot be replaced if it is used up; also, any natural resource that cannot be replenished by natural means at the same rates that it is consumed. Organic waste Largel,v untreated human lvastes, se\\rage and industrial wastes from processing various food products, from the pulp and paper industry and from animal feedlots.

Oxymoron An oxynroron is a term used to explain bringing together of tivo apparentl-v coiltradictory or conflicting concepts. For example, business people often perceive that there is no ethics in business or ethics contradicts with brisir-ress profit maximization principies. Therefore, ethic.c in business is an oxr-nroron.

Pollution The undesirable and unintended contamination of the environment

b1-

manufacturels. or

by'

people in general during the utilization o{'commodities.

Quality of life The general well-being of society in terms of political freedom, a clean natural environment, rducation, health care, safety, free time and everything else that leads to one's happiness and satisfaction. Renewable resources Any natural resource that can be repienished naturaliy with the passage of time. Resource depletion The consumption of finite or scarce resources.

Sustainability An ecological concept prescr:ibing rules and principles for the usage of natural resources in such a way which aliow the future generation to survive on this planet. It may also be broadly definecl as longterm maintenance of systems accorcling to environmental, economic and sociai consideraiions. Sustainable development A pattern of resource use that aims to meet human needs rvhile preserving the environment i.e. these needs can be met not only in the present, but also for future generations.

.?.

350

Business Ethics

1.

Discuss the three main sources of threats to huraan civilization in the global era.

2.

Sustainable development is an oxymoron" Do you agree with this contention?

3.

Discuss the sources of renewable and non-renewable resources.

4.

Assume ihat you are the CEO of a corporation" Discuss the strategies that you support sustainable development.

5.

Define sustainable consumption and explain some possible barriers that might impede its

will

develop to

implementation. 6.

Do a literature search on environmental hazards in Malaysia. Discuss why these problems exist.

7.

l)efine ecological/environmental ethics and justify its importance in today's global

business

scenario"

JS Carpets: Moving Forward

for a Sustainable Business

Carpet nranufacturrng lvould nor normally be caregorized as an environmentally praiseworthy industry. Many are derived from petroleum, a non-renewable resource, and synthesrzed lvilh fibreglass and PVC, rwo knourn carcinogens. The carpers ar" then dyed, and the waste produced from thrs process conidur5 toxrns and heavy merals Carper irranufacturing factories are heavy industrial producers of carbon dioxide emissions lJsed carpers, especially nylon-based producrs, are not recycled and theretorr: end up in landfills This carpet wasle is often toxic and non-brodegradable. lS Corporation is based in Kuantan, Pahang lt produces carpets from man-made fibres derived from perroleum. Current procluction is to meet the demands from the average and low income Malaysian households. Reflecting on the environmental record of the carpetrng indirsrry and having a moral concern to be'environmenrally frrendly', En. Jalis Said, Chief Execurive Officer and ow'ner of lS Corporarion, calied for' a rneetrng wirh hrs Board of Directors (BCD) to develop new sIrategies to reengineer hrs carpet business Tc his surprise, the board menrbers made conflicting, yet rarional comments drd not resolve his issue ol '^rhich concern when the i'neeting ended. Below are some of rhe comments documented by the Company Secretary in the last minures of meeting:

.arpet fibres

.1"

Why should we be concerned abour the environment? After all, resources are gifts of nature and should be exploited to give added value for humans to gain the satisfaction and a competitive edge in rhe challenging business world of today. The technology applied for the production of our carpets is cost-effective and innovative. The chemical conversion process to transform perroleum by-producrs to carpet fibres has managed to keep our profits consistently high since our operation began. We have, therefore, managed to sustain our business while fulfilling the needs cf our :onsumers.

3. We shorrld be concerned wrrh the environmenr. The carpets produced by JS Corporarion should

be

environmenrally friendly" Therefore, we should develop new strategies ro reengineer our business.

_a

Ethlcs and the

Environment 351

En. Jalis became more confused and felt guilry for not being able io convince his t-,oarcl members ro supporr his moral concern. What shouid he do? ls he nor responsible for sustainrng a good

After rhe meering,

environment for rhe furure generations?

Questions: 1. ln your judgemenr, is ir erhical for

2.

JS

Corporarion to marker its carpers

to rhe

Malaysian community?

Provrde your reasons. Assess rhe rhree (3) commenrs made by the board members of JS Corporation. In your opinion, why did

they come up wrth these conflicring comments? 3. Assume you are En. Jalis. Explain rhe sreps you would take

ro clear the erhical diiemma thar he is

experiencing

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Bhutan,vour\\ray.com (n d ). Bhutan's policy on Tourism. Tourism policy: Overview. . Accessed orl 23 |une 2013. Boatright, I.R. (2007)" Ethics and the Concluct of Business

(5'1'

Ed.). irierv ]ersey: Prentice Hai1.

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>. Accessed

on

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August

2014. ,

Crane, A and Matten, D (2010). Business Ethics (:'d Ed.). New York: Oxford University Press.

I)epartment of the Environment, Australian Government (n.d.). Indicators of climate change. . Accessed on t2 August 2014. Deshayes, Pierre-Henry (23 fune 2013). Melting ice pulls Norway closer to Asia. The Daily Star.
wu,w.daiiystar.com"lb/NewslEnvironmentl2 0I3llun-231221309-melting-ice-pulls -norway-closer-to-asia. ashx#axzz3A9xtuhhO>. Accessed on 25 |une 2013. Desjardins,

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Q0A9). An lntroduction to Business Ethics (3'dEd.). Singapore:

McGraw-Hiil Higher E,clucation.

Dominguez, C. (14 February 2013). Philippines: Unlocking the Potential of Green /obs. Ecoseed. . Accessed on 24 )une 20t3. Forstater, M. (2006) Green )obs. Challenge,4g(4):58-72. Fuller, D.A. (1999). Sustainable marketing: managerial-ecological issues. Caiifornia: Sage.

Gnus.hke, J.E. (2008). Is the Green Revolution for real this time? Wili green jobs be created in sufficrent numbers to offset declines in other parts of the economy? Willgreen jobs replace reai estate as the engine for the next round of economic expansion? Business Perspectives, 19(3): 6-9. Holdsrvorth, lvl- (2003). Green Choice: What Choice? Summary of I'ICC research into consum€r ottitudes to sustainable consuLnption. f,ondon: National Consumer Council. IslamiCitl,. Al Quran, Yusuf Aii. . Accessed 3 August

2{J12.

Khalidah Khalid Ali. Satirenjit Kaur ]ohl, Lai Fong Woon, Rohani Saiieh, Sofiah j\4olek Lope Aman Shah, Rahar.u Abd. Rahman and Ilmiah Ibrahim (2012). Business Managemeti: A lv4dlal,sian Perspettive (z'd l;d.). Selangor: Oxford Fajar" Mulrammad Muhsin Khan (1996)" Summarized Sahih Al Bukhari Arabic-Englislr. Saudi Arabia: Maktaba Dar-us-Salam Publishers and Distributors. p.515. Najh al-Fasahah, No.2224

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No. 2610

Natior-ral Geographic (n.d.). Noir-renewable energy. National Geographic Educatiorr. . Accessed on 24 |une 20t3.

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). Renewable energ)t. National Geographic Lrducarion. . Accessed on 22,[une 2013. (n.d

Paris,C.andMukherji,B.(i6fune2013).EUandSouthAsiascrapoverrecyciingship.'t-heWallstreetlournal. . Accessed

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D

(2009). The profit making al1ure of product reconstruction.

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Sloan Management Reyiew,50(3):

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Environment

Population Media Center (2009). Population: An Underlying Theme in Addressing Soffie of the World's Most Challenging Problems. . Accessed on 7 April 2013. Population Reference Bureau (PRB) (2008a). 2008 World Population Data Sheet.
datasheets/2008/200Bwpds.aspx>.

Population Reference Bureau (PRB) (2008b). World Population Highlights. Z00A World Population Data Sheet (p.3). < http:/lwwwprb.orglpdf08/0BWPDS*Eng.pdf>. Accessed on 12 August 2014). Restu Foundation (2008). The Holy Quran Text and Translation. Selangor: Tiries Offset (M) Sdn. Bhd.

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Environmental Ethics. /iz Bunnin, N. and E.P. Tsui-]ames, eds., The Blackwell (2"o Companion to Philosoph) Ed.). (p.519). Oxford: Blackwell Publishing. . Accessed on 3 |une 2013. 18:

Rothenberg, S. (2007). Sustainability through servicizing. MIT Sloan Management Review, 48(2): 83-91. Schaefer, A. and Crane, A. (2005). Addressing sustainability and consumption. lournal of Macromarketing,

25:76-92.

_

Schrader, U. (1999). (lonsumer acceptance of eco-efficient servic I

es. Greener

Management lnternational, 25

05- 121"

Shaw, W.H. (2008). Business Ethics(o'n Ea.). California:Thompson Wadsworth.

_

Shaw,

WH.

Shar,r',

D. and Newholm, T" (2001). \roluntary simplicitv and the ethics of consumption. Psychology nnd

(2011) . Business F.thics

(7'r'Ed.). California: Thompson Wadsworth.

M arketing, l9(2): 167- 185.

Shornaii, M. (2008). Aspects of Environmentai ethics: An Islamic Perspective. Thinking Faith-The Online lournal of the British lesuits. Accessed on 20 February 2A14. United Nations, Department of Economic and Social Affairs, Population Divisron (2007). Worid Population Prospects: The 2006 Revision, Highlights, Working Paper No. ESAi P/WP.202. United Nations Framework Convention on Climate Change (n.d.). Kyoto Protocol. . Accessed on 2B May 2012" \ielasquez, M.G. (2006). Business Ethics Concepts and Cases (6tl' E.i.). International Edition. Nerv Jersey: Pearson Education. Velasquez, M.G. (2006). Busirtess Ethics Concepts ctnd Cases (7tt' Ed.). Internationai Editioir. Neu,, Jersey. Pearson.

\\rrt:t,:'i! ai-Shi'a, Volume

B,

p.i56.

353

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;'

,4

:r

t ; i

CHAPTER

11

*x r

Islamic Ethics

:

&

s

;

'fr

LEARNING OUTCOMES At the end of this chapter. you should be able to: r Define ethics from the lslamic perspective. m Explain the source and origin of the lslamic ethical system. u Describe the concept of lslamic worldview. E Explain the five axioms of lslamic etl ical philosophy and their importance to a Muslim's life. a Explain the lslamic perspective of the relationship between firms and their stakeholders. x Explain some prohibited matters rn business transactiorrs.

lslamrc

11.0

-i

x

INTRODUCTION

In islam, the rules and principles laid down in Shari'ah law guide ethics. The guidance is holistic because it covers ail aspects of life such as faith in Allah, social behaviour, polrtics and commercial practices. The Shari'ah law is derived from the divine book of Al-Quran and the traditions or way of life of the Prophet Muhammad [peace bu upon him (pbuh)], known as the Sunnah. One is said to be ethical if he follows the Shari'ah in ail his dealings. Behaving ethically in the midst of various temptations in life is an important precondition for Muslims to prove their worth to Allah. Hence, a Muslim should aim to live a iife of worship that seeks to attain Allah's blessing (al-barakah) and to promote justice, harmony and nelfare (al-'adl wal-ihsan) of society- In Islam, there is no separation betrveen ethics and religion because the maqasid al-Shari'alr (the ideals and objectives of the Shari'ah) is to have a good life (al-hayyat-at-tayyibah) and to promote the weli-being of society (falah). In upholding the principle ot m:rqasid al-Shari'ah,Islamic ethics create a sense of responsibility and accountability in the minds of its believers. Hence, ethics from the Islamic perspective is also known as the ethics of action in which Muslims must not onlv beiieve in the teachings of the Qura n and Sunnahbfi must demonstrate this belief through action. For erample, it is not enough to have good intentions only. It must be accompanied by good deeds that are in line with the Shari'ah. Further, Muslims must both refrain from behaving unethically and strive to stop any unethical practices that they observe. ln the context ofbusiness, Islam acknowledges the pivotal role oftrade and business in developing and sustainins human civilization throughout the ages. However, in lslanr, the purpose of business activities is not only meant to satisfy material needs and wants but more im1',o1131r11r'to fulfil religious obiigations (Al-Shaibani,1997) and to meet sociai needs (Abdul Rahman and Goddard, 1998). Hence, business and ethics are noI separatc entitics. This chapter covers the lopic of Islarnic ethics. First, we will look at the deflnrtion ethics from the Islamic perspective by examining two important concepts-akhlaq of and ctdab. Second, we u,i1l explore the sources and origin of Islamic ethics namel,v lhe Quran and Sunnah. Third, rve rvili discuss the concept of Islamic worldview, nhich is central to the Islamic ethical system. Next, we will delve into five axioms of islamic ethical philosophy. Then, u.e will examine the stakeholder relationship from the Islamic perspective, fbcr"rsing on shareholders, consumers, suppliers and the natural enr,,ironn-ient. This chapter concludes by discussing some prohibited br-Lsiness transactions in lslam and the rationale fbr such prohibition.

11:1

DEFINITION OF ETHICS FROM THE ISLAMIC PERSPECTIVE

We can refer to trvo interrelated Arabic terms in defining Islamic ethrcs-akhlaq or khulurl (the plural o{ akhlaq) and adab. Akhlaq has iwo meanings. First, aklrlaq is the foundation that establishes the standards of right or wrong of humar condu,-t. It sets out whar humans ought to do in this world (Haneef, 1997).It is the essence of islamic

tthrcs J))

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356

Business Ethics

., i i :

teachings and the mission of the Prophet Muhammad pbuh to guide human beings to live the best way that is in accordance with the will of Allah. Hence, it is no wonder tlrat Islam places great emphasis on akhlaq. The Prophet Muhamamd pbuh, as narrated by Anas, said in a hadith:

'The most complete of believers in tharactcr (akhlaq).' T*" Arrh.

*rrnr I

thar besr represent lslamic ethics are

akhlaqand adab. Muslims who have good akhlaq and observe adab when dealing with Allah and other human beings are said ro have fairh rn lslam.

Ahlr"rgfi;/.,ttl can be natural, we can change

it because

Allah gives us bqi (inrelligence) and free wrll ro make a choice berween good akhlaq

or the opposite. Muslims should always be guided

by ihe Quran and Sunnah in developing rhetr akhlaq.

I I I t

I I

faith (imon) are those who are best in

This hadith is the manifestation of the fact that Islam is a religion of cleanliness, rvhich refers to not only the physical self (body), but also the inner self-- that is the purity of the soul. In Islam, one is said to be successful in life when he does good or the right thing and avoids wrongdoing. Hence, Akhlaq represents the Islamic faith. One is said to have faith in Islam ifhe has good akhlaq. Ifhe does not have good akhlaq then he does not have faith in Islam. Second, akhlaqrefers to Isiamic disposition or the practice of virtue and morality. Disposition or character is the faculty {malakah) of the soul (nal.s)" It is the origin of al1 hu rran behaviour and activities that become a natural way of conduct or lifestyle. One develops malakah as he progresses in his life through repeated behaviour or habit that the soui becomes accustomed to it. If one develops honourable faculties, he wili have a decent character and behave ethicaily. For example, a person of noble disposition embraces upright virtues such as truthfulness, generositl,, benevolence, selflessness, humility, trustworthiness, tolerance, generosity, equity, integrity, mutual consideration, cooperation, kindness and compassion. On the other hand, if one develops evil faculties, he will prodirce evii or immoral behaviour such as 1ying, stealing, cheating, dishonesty, corruption, involvement in prohibited actir,ities such as garnbling and prostitution and interest-bas ed (riba) transactions, etc. We need to note that one's disposition can be natural (fitrah) rvtrereb,v \,\re can see that some people are simply worked up over trivial matters such as waiting in a line u,irilst others are easily depressed over problems in their 1ives. However, this naturai disposition can be changed because we have the por,ver to make a choice in order to o\rercome it. This can be done through continuous practise and effort as rvell as a strong wi1l to change. After ail, Allah created humans r,vitl-r the inteliigence and abiiity to choose between good and evil and between noble character and abhorred conduct. Ihey need to refer to the divine commandments in the QtLran and Sunnalz to acquire the knorvledge that can guide them to make the right choices or choose the right path. Next, iet us explore the meaningof adab, whi.h refers to the manners, etiquette or behavicrur of an individual. The Quran and Sunnah (hadith or the recorded sayings and actions of the Prophet Muirammad pbuh) rrescribe the akhlacl and adab of a Miislim. Allah says: 'When a (courteous) greeting is offered to 1,ou, meet it v,ith a greeting still rntre cottrteous, ar (dt least) of equLtl courtesy. Allah lake: careful accoru'Lt of all thirtgs.' (Surah

An

Ntsu, 4: 86)

The Prophet Muhammad pbuh stated: 'M),Lord has taught me good manflers and He nannered me v,ell.' He alsu said: 'T'he nearest of you to me on the Day of

ludgemeri will be the one wha is best

tn , haractct'.' Examples of adab include gocd manners, righteousness, courtesy, respect,liclp{u1, dccency, decorum and appropriateness.

j I

i

---,\ I

I I \

Ethics

lslamic

Muslims must observe their adqb with Allah by respecting Him, His attributes, His signs, His Symbol s(the Quran,themasajid or Mosque,the Kaabah and everything connected to Him). In observin g adab with parents, one has to be kind, compassionate, lespectful and obedient to them unless they order you to do something that Allah forbids. The Quran stated: 'Worship me (Atlah) and join not any partners with me; antl be kind to your parents. Whether one or botlt oJ'them attain old age in your life, say not to th.m a word of contempt, nor repel them, but address them in terms of honour. And out of kindness,lower to them the v,ing of humility and say, "My Lord! Bestow on them Your mercy even as they cherished me in childhood.'

lMrd*-

^*

,observe adabwirh Allah, His attribures, His signs and symbols.

(Surah Al-Isra', 17: 23-24) Based cn the meanings of akhlaq and adab, we can define Islamic ethics as a set of universal standards of right or wrong that prescribe the acceptable or unacceptable

Ilrh"*.rhi.t *. derived from the

human conduct as highlighted in tbe Quran and shown by the exemplary life of the Prophet Muhammad pbuh. T'rese universal standards are absolute in nature or

Quran and Sunnah rhat prescribed

known as ethical absoiutes. Muslims are required to observe these absolute standards in everything they do and in whatever position they are-whether employer or employee, entrepreneur or customer, leader or follower in all circumstances. Further, in defining Isiamtc ethics it is important to note that Islam is a comprehcrsil,g 11,3y of life ethics that govern ali aspects of a Muslim's life including comnlerctal transactions" Isiam is a religion that does not separate religious matters from rvorldiy pursuits. So, Isiamic ethics is not a component but the Yery core of Islam. l'he tern-r'lsiarnic ethics' rel'ers to all virtuous deeds (al'amal assalih) that allMuslin-rs shouid embrace ir-r their personirl life or prolessional life- According to the Qttran, r,irtuous deeds are consistent it,ith the natlire of human beings. In Islam, humans naturally have good character. Thel' 31g not evil. The Prophet N4uhamnrad pbuh asserts that righteousness is a part of human nature whilst vice is not. Unsurprisingiy, humans will not feel calm rvhen they behave in a manner that is inconsistent rvith human nature. Next, in is1am, ethics and religion are inseparable. The Quran likens human nature fo religion. So, religion and ethics are part of human nature. If an individual behaves ethically, it is actually a ret-lection of l-ris or her religious faith and r.ice versa. In other r,vords, a pit-rus person einbraces all virtuous deeds in his iife. Muslims believe that one vay of showing devotion to tl-reir religion is through obsen,ing moral conduct. islam teaches its followers that ethics is not just a personal affair. Instead it also governs an individual's relatioirshrp with tl're community and other creatures of Allah, inciuding nature. Allai-r created human beings to be vicegerents (Khali"fah) in this rvorld. We shall deir.e into this principle in a later section when we explore the concept of Islarnic

standards of acceptable and nacceptable behaviour for all u

aspects of human life.

fu.ilk. *..-il* lslam does nor

""*"

separaie religious

from worldly pursuits. Everything

that Muslims do in life that is in line with the reachings of lslarl is considered ibadaah (acts of worship

toward Allah).

n orldview.

Further, Islamic ethics has trvo dimensions-ethics tonards Ailah and ethics towards others. Islam means peace, subrnission and acceptance. Allah is the Creator and the rcal Orvner of the universe and everything therein antl of mankind too. ,\llah ithe most exalted) is the source of ail goodness, truth and beauty. Fience, Muslims must believe in Allah and rvorship Him, which is the utmost irnportant pillar of lslamic faith. Man's ultimate responsibility is to Aliah and must aim to achievc His pleasure and blessings.

Given this background about the reiationship between Allah and mankind, Muslims must live their lives in accordance with the values that Allah and His Messenger, the Prophet Muhammad pbuh, have prescribed. Ethics torvaids others reiers io the treatrnent of others (e"g" colleagues, friends, siblings, stakeholders, etc.) either in social interactions or business deaiings. Muslims must deal with others in an

fT*"

d*""""r*f

lslamic ethics are erhics toward Allah and ethics roward others. Humans are

ultimarely responsible to Allah and to orher human beings. The latter responsibility is derived from the spirit of ukhuwwah (brotherhood).

357

358

Business Ethics

ethical manner and strive to maintain good relationships so as to achieve harmony and balance in Iife. In the next section, we shall learn about the sources and origin of Islamic ethics. We need to note that Islamic ethics is not an additional doctrine or branch of knowledge in Islam. It is an important part of Islamic teachings, which all Muslims must closely adhere to.

11.2

r*;;;:;;;;al lslamic ethics are the

Quran and Sunnah.

SOURCES AND ORIGIN OF ISLAMIC ETHICS

There are two primary sources of Islamic ethics-the Quran and Sunnah, which prorrrue complete guidance for Muslims to live their lives. In this section, we shall examine the meanings of the Quran and Sunnah and their reiationships with Islamic ethics. In living their lives, Muslims must rely on the teachings of Islam as exemplified in the Quran and Sunnah. Whenever they are in doubt or dispute, they inust refer to these tr,r,o sollrces for guidance. The Quran and Sunnah are timeless. They are valid in any situatior) at any time or era. The teachings are universal.

11.2.1 The H oly Ouran The Quran is a divine book of revelation that comprises the r,erbatin and unalterable of Allah revealed to the Prophet Muhammad pbuh over a period of 22 years and dictated word-for-word by Archangel Gabriel. The Quran represents the will of A1lal-r that must be carried out. It does not only lay the foundation fcrr the beiiefs and religious practices of Muslims but also provides ethical guidelines and standards for

r,r,ords

bh-;;'ily-I but also of life. As such, borh rhe a religion a way

Quran and Sunnah give a complere

guide for Muslims ro adminisrer all aspecrs of rheir

life-

personal, professional, business, political and social affairs"

Muslims. The Quran is the primary point of reference in evaluating ethical behaviour. It prescribes the permissible and forbidden in the lives of Muslims. The teachings of Islam comprise ruies and guidelines for governing one's 1ife, commercial ancl economic tra.nsactions as well as social interactions. The teachings of Isiam are usually referred to as Shari'ah or the sacred law of Islam. The objective of Shari'alr for the good oi hurlankincl is universai in its scope anci application. It is meanl to protect man fion"r evil and to benefit him in ail aspects of hfe. Next, we shall look at some examples of ethical standards prescribed in the Quran. First, iet us be clear that the Quran provides a code of ethics for a1l Musiims" Adherence to the code of ethics is part of Islamie faith whilst the acts of krndness, generosity or charity, righteousness, forgiveness, justice, equit,v, truth, piety and patience are considered goodness and acts of worship to Aliah. Goodness or good behaviour contributes to the formation of good character of a lv1us1im. Aliah describes that people who attain success as those:

'...invitrng to all that is good, enjoining whnt is right and forbidding what is wrorlg...' (Surah Al-im ran, 3: 1 04') "[hose who spend (t'reetl, vhcther in prosp,rity, or in atlyersity; who onger, and pardon (all) humans; - for Allah loves those y,ho do good.' (surcth

yg5S7r:irt

Al A'ruJ, 7:56)

lslamic

The Quran strictly prohibits unethical conduct to the extent that abetting the acts of wrongdoing is the same as committing the act itself. Thus, Muslims must not oniy refrain from unethieal conduct, but also distance themselves from them and help to prevent them. The Quran clearly specified unethical conduct such as fasad (corruption), cheating and betrayal oftrust. These acts lead to harm and injustice to other"s. The following yerses describe the requirements to refrain from committing sucli unethical acls.

"Do not mischieJ on tltc carrh, t{rer it harh becn set in order, but call on Hirn with fear and longing (in your hearts): for the Mercy of Allah is (always) near to those who do good.' (Surah Al-A'raf, 7: 56)

'lf any person is so false, He shall, on the Day of ludgement, restore uthat he

is

misappropriated; then shall every soul receives its due, - whatever it earned,and none shall be dealt with uniustly.' (Surah Al-lmran, 3: 161)

Islant supports business activities but they must be done within some bourrdaries in the Quran, which states:

as prescribed '..

" bttt .Allah has permitted trade and has forbidden interest.' (Surah Al-Baqaralt, 2: 275)

f he follou,ing verses emphasize the need to observe honesty in business deaiings.

Tirc second verse highlights the warning given to those who violate this injunction. (honest) _full n.rea_sure v,hen yau tneasl.tre and weigh with an even balunce,'I'hat is good antl the better at the end.' (Surah Al-lsraa, 17: i5) ".."git,e

'i,tiot: rcr those. that dcal tn

wlrc when they have receive by measttre bul tu/ten they have to give by measure or .t'r-om hunans exat.t .f'ull neasur-c, weight to humans gilc /e-s-s than rlue. Do they not think that they will bc csiled

fi'dud

tl'tose

Io ai,count?' (Suroh

Al'Mutaffifin, 8j:

1-4)

The Quran enjoiits N4uslims to l-nake business decisions based on their faith in Islam. Businesspeople rnust only engage rnhalal (lawful/legitimate) transaclions and a-,otd haranr (illegitimate/prohibited) ones. Th.e Quran and Sunnah clearll' specifl, the prohibitions in business actrvities. Lawful business activities are also morai and 'l'he iliegitimate ones, on the otirer hand, are also the,v bring benefits to thc people. immoral and they bring harnt tci t1-ie people. For example,lhe Quran prohibits the productior and seliing of n'ines or other intoxicants as well as any activity that is related to gambling and prostitution. The rnotir.ation for Muslims to adhere to the Islamic code of ethics in business deaiings lies in the lbilowing rvords of Allah:

'[n whalever business you may be, rtnd whatever portion you may be recit'n{ .from the Quran ond whatet'er deed you (mankind) may be doing-)\'e ttre witness rttereof ruhen you are deepll, engrossed therein...' ttu'ou Yunus' 10: 61) ,Dear

not unjttstLy, and 1,ou sha, not be creart trith

,njustrr' (Surah Al Baqarah, 2: 279)

Ethics

'l,i',

359

i.ti

!j!,!

rlt

*

360

Business Ethics

This first \rerse indicates that Allah bears witness to all transactions of mankind. The second verse states that all transactions including those related to business and economic activities must be based on justice. There is no compromise or exception to these requirements because all conduct or behaviour will certainly be judged. Any unlawful conduct will not escape the wrath of Allah.

11.2.2 The Sunnah fh. Srrrf*

I

derived from the

reports of recorded sayings, personal

reachings, practices, behaviour, character and deeds of the Propher Muhammad

'IhesecondsourceofIslamicethics istheSunnah. Theknonledge of theSunnafucomes from hadiths or reports about the recorded sayings, personal teachings, character, deeds, actions and practices of the Prophet Muhammad pbuh in personal and public life that exemplify the teachings of Islam. In the Quran, Allah described the Prophet Muhammad pbuh as a Prophet of good ethics and considered al insan alkamil (the ideal man) who had a superior standard of character. Allah stated; 'Andmost certainly you are on sublime worality

(rroh*t

tto(!:;:h"Ii!6iy;1;r,

pbuh rhat exemplify rhe reachings of lslam

;hh d"t-b.r,h" I Prophei Mr-rhammad pbulr as a persorl of an impeccable clraracter and a role model for Muslims to emulaie. However, he is nor to be rvorshipped in the same manner that they worship Allah.

,

However, this notion of an ideai man should not be mistaken as divine or someone to be worshipped. Rather, he is the model par excellence for all Muslims as to hou, they should conduct themselves. Muslirrs only rvorship the one and onlv Allah. I'he Prophet Muhammad pbuh was a Messenger of Aliah. He is the final Prophet rvho dictatedthe Quran, the eternai and unalterable u,ords of Allah to his followers. 'The hadiths were initially passed dort,n verbally to those who knen, the Prophet Muhammad pbuh personally and were close to him during his life. In the eighteen century, Islamic scholars codified the hadiths in written fornr and authenticated them. Henceforth, Muslims refer to the authenticated hadiths only to guide tl'rern The Prophet Muhammad pbuh is the ultimate role model fbr N4uslims in terms of hou, they should conduct themselves. Al-Bukhari narrated in a hadith that the Prophet Muhammad pbuh once said:

'l was not sent except

to perfect the qualities

o_f

tood charttL'ter (akhloq).'

Tlrere are numerous hadiths that explicitly reinforcecl the virtues of ethical conduct. A few of them are outlined below.

'lf you guarantee me

six things on your

part I shall guarantee

paradise. Speak the truth when you talk, keep a promise wlten you make it, when you are 1,011

trusted with somethingfulfil your trust, ayr-,id sexuttl immorality, lctu,er your your hand from inlustice.' (Abu Huraihah)

eyes and restrain

'Truthfulness leads to righteousness and righteoustie-s-' /cads to pdratlise. A man continued to tell the truth until he becomes o trutlr.ful persoil Falsehooti leads to evil-doing and it leads to the (Hell) fire, and a nlail may contintLe to teli lies till he is written before Allah, a liar.' (Abu Huraihah) 'The most beloved to me (The Prophet Muhammad) arrongst you is the one who has best character and manners.' (,\l Bukhcri) 'Kindness is not to be found in anything but titot tt ttdcJs to its beauty and not withdrawn from anythingbut it inakes it de.fective.'

it

is

(Muslim)

lslamic

Ethics

'Among the Muslims the wtost perfect with regard to his faith is the one whose ,haroitu is excellent and the best amongyou are those who treat their wives well.'

('al-Tharmidhi)

'The best seryants of Atlah are thrtse y,ho, when they are seen, cause Allah to be remembered. The worst seryants of Allah are those who go about slandering, who separate friends and seek to distress thd upright.'

('al-Thannidhi)

'There is nothing heavier (in wetght) on the scale (on the Day of ludgement) than good characler.' (Abu Dawud) In summary, Muslims must rely on the principies of ethics and morality embedded in the Quran and Sunnah to guide them in their daily lives and any business or economic endeavours" islamic. ethics prescribe what one should do or abstain from doing" These prescriptions and injunctions are valid at ali times and places. It is imprirtant to note that there is nci ,ey.regation between ethics and law in Islam' In the next section, we will examine the concept of Islamic worldview, which is central to the lslamic ethicai system" 'fo begin .,r.,ith, let us look at the definitions of world view and Islamic rvorldview.

11.3

ISLAMIC WORLDVIEW AND ETH ICAL SYSTEM

According to Chapra (1992), woridvieu. is a'set of iniplicit and explicit assumptions abc,trt the-origin oithe universe and the naturc of human life'. This concept relates to how man pcrieives and explains the realrty or the truth regarding the existence of the universe ancl their role in it. A u,orldyiew consists of a collection of one's beliefs, ideas or vaiues abont God, the world and the reiationship with God and the world. This rvorldvieu, influences not only the n ay one thinks and behaves but also the norms and r.alues that govern his or her iif'e. Our lvorlclview can be intluenced by our religion, science, the things that we read, people that rve associate with and the society that we belong to. Hence, it is highly ilkeiy that the norldview can be different from person to person. For example, those r,vho believe in a secular worldview separate religious affairs fronr worldl;' affairs rvhilst Muslirns who believe in the Islainic worldview iake a dual perspective that is concerned with the universe (world) and the Hereafter and the Day of Judgemenl 'fhe Islamic perception of the world is founded on the fact that Islam is not onl1'a religion but also a way of iif-e, an ail-ernbracing social, political and legal systen"r that other -ui., it a unique worid view (Izetbegovic, 1984), that distinguishes itself from rvcrrld views (Ahmad, i976). The duai perspective of this worid is derived the Qttran. One's world view may aiso change over the course of his or her life. However, a Muslim must hoid on to the Islamic world view steadfastly across all times in order tt' attain

in life and the Hereafter. Mawdutii (1988) outltned the Quran's view of reality as follows: r Allah is the one and only Creator and Sovereign of the entire universe. He is living, eternal and self subsisting. Man must accept the reality that He exists. T'he rnost basic aspect of Ailah is His Oneness or Unity (tawheed)'

success

fA *",1d""*.""t-" of

a

collecrion of

one's beliefs, ideas or values abour Cod,

rhe world and the relarionship with Cod

and the world.

fhh-. *",1d**

hrt

dual perspectivesconcerns for borh the worldly pursuirs and the life Hereafter and the Day of Judgemeni. ln lslam, life in this world is temporary, in which the whole universe will come to an end one day. Humans should aim for rhe eternal life after death.

361

.

'.

{"ii l:ii:

362

Busir^ress Ethics

r

r

r r

r

r r

llah created man as the best creation and gave him cognitive and reflective abilities as well as intelligence ('ac1l) and heart (,qalb) to distinguish between good and evil. He gave man the freedom of choice and desire, to be exercised solely based on Allah's will i.e. Islamic framework. He appointed man as His vicegerent on earth. Man must not consider himself independent from Aliah-he must believe that Allah is the absolute Lord, Sovereign and the unshared Divine authority. Hence, he must worship and obey Allah, who is the cause and end of everything. The life of this world is temporary in which the whole universe will come to an end one day. Humans should aim for the everlasting life after death. The world is a place to test their faith in Allah and the trust He placed on them. Man is accountable to Allah for which He wili judge him based on his actions in life. If man obeys Allah and follows the right path as prescribed in ttre Quran and hadiths, the reward is a place in Paradise, where he will enjoy eternal bliss and happiness. Disobedience will result in corruption and disorder in the world for which man will be punished with eternal grief and suffering in Heil in tl-re lfereafter. Allah is most forgiving. Thus, if man commits sinful acts or r,r,rongdoing, he must seek fbrgiveness and repent to Him directly. Allah has chosen a few humans as Prophets (peace be upon them) to show humans the right path to live in the world. The first Prophet was Adam pbuh and the last one was Prophet Muhammad pbuh. Some of these Prophets received Allah's commandments in the fbrm of scriptures (e.g. Torahs, Psalms and the Evangel) whilst others received them rn the form c,,{"scrolls (e.g. Abraham and Moses (pbuh)). Ali of tl.renr carried the same rnessage-that is to lvorship only Allah and to obey his commandments revealed through the Prophets. Allah had sent Prophets to virrious parts of the world before the Prophet Muhammad pbuh. A

'I'he Prophet Muhammad pbuh was the only one that Allah com manclecl to lc.rr1 the entire humanity" He was the last of ail Prophets. He received Aliah's commandments

through revelation in the last scripture known as the Quran,wl-rich shall last until the Day of |udgement. The Quran contains the most comprehensive guide for all aspects of hurnan life"

Figure

11.1

:

lslamic worldview

lslamic

Ethics 363 ].

How does the Isiamic worldview relate to the Islamic ethical system? The Islamic worldview sets the foundation for four r..ital principles in the Islamic ethical systemtawheed, taclwa, Khalifah, and 'abd (servant) of Allah. Tawheed or monotheism or unity of Ciod is the key concept that infuses allaspects of life in Islam.In fact, the first and foremost requirement to embrace an islamic faith is to believe in the Oneness of Allah (Surah Al-Ikhlas,2: l-4) and His perpetual presence in one's life. There are six pillars of Islamic faith. Allah is the source of all laws, values, and norms of all Mrrslims. He is not only one but unique and incomparable to any of His creatures. This concept requires a total submission to Allah as indicted in Surah Adh-Dhariyat (51: 56): "AnrJ

I

ltthr* *rildr** sets rhe [oundarion

for four vital principles in the lslamrc ethical

system-ruwheed, raqwa, Khalifah, and 2bd (servanr) of Allah.

have not createri Jinns and humankind except to worship (serve) me."

This element is said to be the cornerstone of Islam. In Chapter 1, we have briefly touched on the principle of taqwa. Now, let us examine the principle of taqwa. Beekun and Badawi (1999) defined taclwa as 'ailencompassing, inner consciousness of one's duty towards Allah (the most exalted) and the awareness of one's accountability toward Hrm'. Taqwa is a quality of human beings that is related to the state of the hean, which manifests in the behaviour that complies rvith tlre will of Aliah. According to thc hadith narrated by Al-Bukhari and Muslim: 'There is it piece in tlrc human body; if it is in good condition, the whole body ryill bt: well and if it is t.orrupted the y,hole body will be corrupted as well, this pie ce ,' the heart.'

Indii,iduals who practice taqwa are called muttaqeen (pious individuals). They are l\rary of Allah and understand their role in this world is to manage and der..elop the u.orld in accordance r,r,ith the Shari'ah. Pious individuals have a state of the heart that is always conscious of Alla1-r's presence, hoping for His acceptance, fearing His punishment, and hesitating to commit any rvrongdoing that might bring His wrath (Ghazaii-hanbali, 1995). They are aiways in the state of a constant remembrance of Allah. Further, they will strive to protect themselves from fbrbidden activities by refraining from committing such acts because tirey 1v;]1be made accountable fbr their actions on the Day of Judgmcnt. 'fhe end result of ttqwa is thc conduct that is in line with the will of Aliah and His reward for having such qualitl.. Pious individuals har.e unwavering faith in the Oneness of Allah and the finality of the prophet-hood of Muhammad pbuh as indicated in the declaration of shtihadah (Islamic prolession of faith). They also diligently perform their ibadat (rituals) such as obligator| daii1, pra)/ers, fasting in the month of Ramadhan, Haij (pilglimage to Makkah) and paying zaftar (lslamic tax). These are known as the five piilars of Islarn. Further, pioris indir,iduals alr'r,ays seek Allah's forgiveness and repent from doing sinfui acts. T'hey rvill not be persistent in disobeying Allah. Further, they also fulfil their responsibil,'.ies to themselves, to other human beings and to nature at large (Mohsen, 2007; Kamil,2012), lr.,hich is consistent with their role as vicegerents in this world. bnfAllah, .It,is S:last

:

,

Norv,let us move on to tire principle o{ Khalifuh (vicegerency) or leader, which has an important implicatior-r to the Islamic ethical system. Aliah created humans as His b:st creations of alI cre ations so that they can be His Khal{oh to carry out FIis divine rvill in this world. ile accorded humans the highest degree of free will and intellect but

F^re p,ilart

"f

tsh--

reciting shahadah, performing obligatory daily prayers, fasting

during Ramadhan, performing Hajj ro Makkah and paying zakat.

lslamic

Ethrcs 365

quality of life and prosper in this world. According to Saeed et al. (2001),there are four categories of responsibilities expected of a Khalifah, as iisted below

t t t t

Responsibility to Allah-to have unwavering faith in the Unity of Allah and His divine commandments as well as to vigorously perform the role of Khalifoh and trustee of this world for the benefit of mankind. Responsibility to himself-to make ourselves good by making the right choices based on the Shari'ah and the intelligence accorded by Allah. Responsibility to society-to help others do good and strive to maintain peace and harmony. Responsibility to the environment (physical world)-to make the earth an inhabitable place and to use natural resources for the benefit of mankind without causing damage to the environment.

Finally, let us explore the principie of servants of Allah. Humans are servants of Allah" They do not have any independent authority or absolute rights or total freedom to choose their way of life. Humans have to follow the will of Allah because they live to serve Aliah. They must obey His rules in all their dealings. In fact, life is one of worship (ibadaah) as stated in Surah Al-An'am (6: 162): 'Said (O Muhammad pbuh): Verily, my prayers, my devotion, nty death are ,for Allah, the l.ord of the *-orlds.'

lfe and my

Accoiding to Nasr (1990), a Khalfah who do not consider himself as an'abd of Al1ah is the most dangerous creature on earth. Humans are requested to reflect on the existence of nature (includingplants and animals) as evidence of the existence of Allah, to be used in accordance rvith His will as opposed to their whims and fancies. 'fhese t\'vo concepts cletrrly depict thc relationship between humans and A11ah and betrveen humans and nature. In the next section, r,ne shali exanrine the axioms of Islamic ethicai philosophy namely unity', ecluilibriurn, free will, responsibilrty and benevolence. These axiorns are derived from the Quran and Sunnah. Thev are consistent with the Islamic rvorldvien, tl-rat is basecl on the principles of tawhecd, taclwa, Khalifah and'abdof Allah.

11.4

AXIOMS OF ISLAMIC ETHICAL PH

ILOSOPHY

Naovi (l981), in his scholarly u,orl< of islirrlic economic theory, presented four ethical axiorns that serve as the philosophical foundations of Isiamic ethical and econontic systems. He explained that the axiom of unit1. is derived from the belief in one God. Equilibrium refers to a sense of balance in various aspects of human life to achieve social ideals and justice" Free will relates to individual freedom of choice. Responsibiiity is the dutv of inCividuals to obey the will of Allah, duty to oneself and the soc,ety at iarge. The fifih axiom is bener.olence, which simply means an act of kindness to others (Beekun, 1997).lt is an important characteristic of a pious individual. Axioms of isianic ethical philosophy represent the core values accepted as being true to guide the day-to-dar. conduct of a Muslim. They are derived fr<;m tlre Quran at,d" Su4nah. A holistic lslamic ethical framework comprises the Islamic worldview

ffi;;"f

br,,.

ethical philosophy represent the core values accepted as

being rrue to guide rhe day-to-day

conducr of a Muslim.

366

Business Ethics

The lslamic

erhical I

system is based

on the Quran and Sunnah from which the principles of rawheed, aqwa, Khalifah and'abd of Allah and the five

from which we derive the principles of tawheed, taqwa, Khalifuh and 'abd of Allah and the five axioms. Table 11.1 describes the five axioms of Islarnic ethical philosophy-.

Axiom'

'

The foundation of lslamic faith and erhical system. lr reflects man's submisstve relition to Allah. Everything on earrh and rhe universe belong ro Allah. All other principles and axioms originate from r.aivheed. The faith in AIlah is a strong morai filrer for Muslims because they will be held accounrable for their actions T'hey should be wary of Allah's divine jusrice only and avoid drsobeying His will and rules Muslims should not allow others to coeIce rhem inro commirring forbidden acrs. The enrire political and socioeconomic system is based on this axiom. Allah created resources (bounties) for mankind to utilize them equrtably in accordance wirh the

Uniry (tawheed)

axioms are derived.

Table 11.1 Axio,ns o1 lslamrc

maqasyid al-Shariah.

ethicai p',hrlosophy

'al.r ,.t ,, ll.

Free rvill

(ikhriyar)

This axiom relares ro an individual freedom to live their lif e as Khalifah and servants of Allah and their make own choice between good and evil. However, this freedom

musr be exercised with inrellecr and wrrhin the bounds of rhe 5hari'ah. ln lslam, there is no such thing as absolute freedom because it comes wirh responsibi{iry as reflected in the principle of Khalifah. One musr not act selfishly at the expense of others as rr wrll disrupr the sense of equilibrrum in the society

with the expectarions of unity, equilibrium and free will. ln lslam, unlimited freedom is absurd because ir implies no responsibiliry or accouniabiliry. Consistent wirh the axiom of tawheed, humans are responsible for their actions for which they will be called to account (hisab) on rhe Day of Judgement. The ulrimate reward is an eternal scay in heaven Allah's punrshmenr is severe when one could end up in heilfor their rransgressions in life. However, Allah is mosr forgiving, so one musi always seek His forgiveness and repent.

Responsibiliry (fard)

This axiom ties in

Benevolence

Refers

(ihsaan)

to acts of kindness, which can be defined as behaviours that bring benefits to other individuals One should do ir volunrarily and vrithoui expecting any return except to atrain the pleasure of Allah.

In the next section, we will explore the application of the principles and axioms of the Islamic ethical system in business. We shall examine the requirements and injunctions of the Islamic ethicai system with regard to the treatment of various business stakeholders such as sharehoiders, employees, consurners, suppliers and the

enYironment.

11

.5

ISLAM AND STAKEHOLDER RELATIONSH IPS

Islam does not only permit business activities but also encourages its lollowers to engage in business because it provides susten?nce (rizq).'I'he Prophet Muhammad pbuh, as narrated by'a1-Ghazaii, said: 'Encouraged upon yau is bttsiness,

for in it

is nine tenths of income (rizt1).'

,

':,:i

lslamic Ethics 367 ii

. r f, 1 -,- *^r *1-'-L a full-time merclhant and he married In fact, the Prophet Muhammad pbuh was I,lu* considers all forms of productive. rvork successfui businesswoman. Furth.,, the primary act of worship to Allah. However, Lcluding venturing into a business an to earning a profit only" A business. venture rrust of a business ,.nro." is not limited enhancemenfthat is to conduct the business rust promote social j"r;i;. and spiritual the legality of business holeheartedly for the sake of Allah. The Quran'acknowledges busines'"fot-t' transactions and nd provides various guideiines on permissible

rnduct. Islamic Context, to promoting the welfare We can equate social objectives, in the principle of Khalifah' Business f stakeholders" This requirement arises from the are hurnan beings who are the stewards wners, directors and managers of a .o*pu,]y world and to use the resources created ,r representatives on earth io administer the that they are al.so responsible for other nd owned by Allah. So, iir.y must realize of free environment' In addition' the axiom ruman beings, the society and the natural that constraints on individuais' freedom so vill is also applicable here. A1lah imposes who social behaviour- Business owners hey will not engage in u.bltrury sgif-.entred objective the commit themselves to achieve rre wary of Allah Vrii*ri *ttlvoluntarily f mainiaining stakeholders' welfare' is a part.o.f human nature (fitrah). lslam ,..ogni,., that the 1or.e for wealth

irt

Itrluil-*.*ogut

followers ro embark on entrePreneurial acriviries but the objecrive of a business must be in

line with the maqasid al-5hari'ah and

wirhin the bounds of 5nan an.

Il'il;",**, of broader PurPose a business

that

is

being profitable. lt also promotes social

justice bY taking care the welfare of stakeholders in rhe

spirit of iustice and brotherhood.

Ilence,itshou}dnotbecurbed.However,humansshouldnotmakewealthasthe as opposed to '1.1-rey inust give prioritf to the duty of so-cial welfare :b1ect of rvorship. ii.'tti.uito tt " concept of the stakeholder approach pc-rsonal interesrs. Th;l ;;i;;i, concePt of iorporate social responsibiliLy' to corporate *unug"-",'rt and the modern in the earlier sections are .Ihe principles and values that lve have learned

Islamic in Islam business ethics takes a special place applicable to business activities. Hence, Muslims socioecouomic and commercial activities' becar-rse it pror.icles guidance for is dependent upon how they choose that therr ultimate destinf in the Hereafter realize

to live (Naqvi' 2003)"

Businessventuresmrrstbeestabiishedandmanagedinaccordancewiththe axioms and servants olAllah as well as the principles of t,r*'t rrii,, taqwa, KhaliJah i. a participants AIl equiiibriurn,'f *. *ifl, respt.sibility and benevolence' of tuily 'nit,v, empioyees, Customers,and suppliers.mrrst business venturC such as the or,vner, More importantly,Islam forbids Muslims adhere to the Islamic c0rcept of business. of iliegal goods and services such as from engaging in tfr. f .rai.rion a,d selling and resorts, riba-based banking gambli.g, prostitution, entertai,ment, r-,oiets in this section, we shall explore and financiut i,-rrtii,rt-r.,r, dr.rg, and alcohol. from the Islamic ethics rhe relationship between a fir,i and its key stakeholders

perspectiYe is

r Ll- welfare of ,,f society' .^.iarrr This expectati exnectatiorr for the^ -.-^rr^-^ Business o\^rners are exPected to care A firm's justice' (brotherhood) and social based, o, the ,p;;- oi'ukhu*rah and Syed

society' According.to Al-Habshi stakehoiders .rre inevitably memb"t' of justice because it makes Agil (1994), the co,rcept o'f brotherhood strengihens.sociai promote. the w"elfare of resionsibility to Musiims ,.uporrribi. to .u.h other. The of accountability, which originates from the stakeholders arises from the concept 'fhis principle as we recall requires a total commitment to the will principle of unity. not only to Allah but also to sc'ciety of Allah. Hence, business owners are accountable and the environment

the care lbr the environment arises from The responsibility of business owners to (,aturai . beneficiaries of Allah's bounties principle of Kltalifahi;;.;;;;un, o."-tt thein to sustain their lives' However' humans resources) and they are free to use created for them so as to avoid disruption rnu-.t not abuse thc resources that Allah

Ilrtm g*., g..r, emphasis on rhe

spirit of brotherhood so as to maintain balance and harmonY rn societY- Firms must

pursue and uPhold this sPirrr bY ensuring

that theY care for the welfare of the stakeholders.

i Business Ethics

As humans

are

responsible to the natural environment, business owners

must prevent their business activiries

from damaging and desrroying-the environmenr.

I

to the balance and harmony in the universe. If business owners create problems such as pollution and deforestation, they are accountable fbr rectifying the problems and removing the harm. According to Beekun and Badawi (2005), the Islamic ethical system that promotes the welfare of stakeholders is based on several concepts-jLlstice, trust anci benevolence. It is important to note that all business participanti are, required to observe these concepts in their business dealings. However, in this section, we will direct our attention to the responsibilities of business owners and in the case of listed companies, the board of directors, to embrace such concepts in their dealings with various stakeholders. First, in the concept of justice, Muslims must treat others justly as indicated in the Quran: 'Be

just! For justice is nearest to piety.' (Surah Al-Maidah, 5:

and

B)

'o you who believe! stand out firmly for justice, as witnesses to Allah, eyen as against yourselves, or your parents or your kin, and n,hether it is ogainst rich or poor, for Allah can protect both.' (Strrah An-Nisa, 4: 135) Business owners are required to treat their stakeirolders jr-rstly. For example, thcy nced to ensule fair [teal.tttent of employees in terms of recrurtment, nages and working conditions. Similarly, customers sirould be treated fairi,v in terms of ciiarging fair prices and ensuring a continuous supply of goods as opposed to hoardrng th;. Second, business owners are required to be trustl,orthv in their clealings with stakeholders. In Islam, fuifilling trust is a religious obligation n ithout *,hi.h , Muslim's faith is incomplete. Business owners rnust keep their part of the bargain in any business contracts. Tlte Quran asserts that fulfilment of trr-rst i, paramoun-t,

'... render backyour trust to those to wham thet,are due; oncl v,hert ye jufige between man anci man, that ye.iudge with justicc."' (Surah An-l'lisa, 4: 58) The Prophet Muhammad pbuh once said,

ibn Amir:

as

narrated by ibn N,{ajah from .uqbah

'Not permissible to a Muslim to sell a defective asset to his brotlrer ext.ept lte

informs it to the brother.'

This hadith cieariy indicates that one must be trustworthl, in executing his trade. Breach oftrust is considered an act ofbetrayal. f'he \Vestern concept oftrist is fiduciary obligation in which directors of a company have fiduciary obli[ation to act in the best interests of shareholders. Third, business owners must strive to engage in ihsaan (benevolent) acts in their relationship with stakeholders. They must undertake activities that bring benefit to society (i.e. stakeholders) without any requirement or obligation to do so and without expecting any benefit for thernselves. This concept is similar to the phiianthropic aspect of corporate social responsibiiitl Companies are encouraged io ,to charity work so as to promote societal well-being. The Prophet Muharr.nrad pbuh once said, Muslim:

as narrated by Sahih

'-'. and the person who is merciful

and. kind hearted towctrds ltis relatives anci to ercry pious Muslirn, and who does not stretch ottt his Lroncl in spite of having a large family to support.'

lslamic

that the Al-Qurtubi (1966) as cited in Beekun and Badawi (2005) explains act of the whilst fair be follorving Quranicverse makes it mandatory for Muslims to benevolence is over and above the mandatory' 'Lo! Atlah enjoins justice andkindness''

(Surah Yunus, 10: 165)

and their Next, we shall examine the relationship between business owners lrom firm a of various stakeholders. We will explore the treatment of stakeholders employees, customers' the Islamic ethics perspective. we shall focus on shareholders, suppliers, competitors and the natural environment'

_.-._.,-..-,-;*-,.-.--

11.6

..

RELATIONSHIP WITH STAKEHOL DERS FROM THE PERSPECTIVE OF ISLAMIC ETHICAL SYSTEM

thc board of directors In the context of a modern corpolation (i.e. iisled companics), Hence, in this ,"p."r.r-,t, shareholders in the.o,rpury. dealings with stakeholclc'-s' describe directors'to of discussron, \\re are going to refer to the'.o*puny'or'board Further' ,Ll-it.' relationship belr,veen business owners and their various stakeholders' primary stakeholder shareholders or business o\{ners are also taken as one of the l'rorlps of a cotttpalty. l-rave equal ciaims Accorcling to -Beekun ancl Badawi (2005), s-akeholders do not groups i1 a comparlyiro* the lslarlic perspective. The more important stakeholder 'fhe suppliers' and custorners are o!\.r-Iers/sharehoiders and ernplwees, followed by further assert that iast group of st:keholtlcrs includes ail other external parties' They not Islair coirsiders stakeholders' ciaims as moral ciaims because companies must stakeholders. pllrsue profit at the expense of the well-being of their and decisions affect Stakehoiderc u.. r..y important b..u.rrJ.o*panies' activities or corporate their r.r,el1-being. N,{ore importantly, Mus}im business olvners, directors A1lah atld to primarily rnanasers ,r-,l,riuirvuy, b.u, ir-r mind that they are resPonsible against tilen to society at large" So, business activities and decislons must be pursued this backgrouncl.

11.6.1 Relationship with shareholders j..low, let us look at the relationship betlveen a company and its sharehoiders. Owners

invest

in a cornpany by contributing capital to commence the business' in Isiam'

called a company' they a)thougl-r shareholders operate thelr biisinlss through an entity and stakehdders' to Allah cannot"be excused from shouldering their responsibility to the board of directors Flence, shareholclers must not cielegate the entire obligation that the board of anrl ilanagetJ t0 run the business. For example, theymust ensure or engage in cirectors do not venture into illegitimate (haratir) business activities such as giving-a bribe to cbtain a business contract' Sha reholders

prohrbited practices must rectify the ai.: equaliy accountable as tte board of directors to Allah. So they

Ethics

369

l .j

370

1

Business Ethics

i ;

wrongdoing and monitor the board of directors so that they conduct the business

,

witliin the bounds of Islam.

:

Shareholders expect that the board of directors allocate the company's resources for beneficial and profitable ventures. According to Saeed et al. (2001), in Islam, the goal of a company is to seek value maximization for both sharehoiders and other stakeholders as opposed to profit maximization for shareholders only. The pi.rrsuit of this goal must be in line with the Shari'ah. For example, islam prohibits riba (interest) in business transactions as indicated in Surah Ai-Baqarah , verse 27 5:

'...Altah has permitted trade and has forbidclen riba.' MrrL'rr rh.*h"H;rl cannot absolve themselves for responsibility ro ensure that business

activities of a-firm

that rhey invest in are in line with Shari'ah. Ar

"**rr

"f

J-*, I

shareholders expect to ger fair rerurn and be treared fairly in

terms of sharing of

information.

Riba means addition or increase or the premium that a borrower must pay to the lender in addition to the principal amount as a condition lor granting the ioan" So, riba carries the same meaning as interest in the conventional banking system Conventional banks charge a pre-determined rate of interest on the borrowed amount. Money must be put into productive use first before one can earn a rate of return on it. We shall dwell into this topic in greater detail in the final section of this chapter. Shareholders contribute funds to run a business but they are only entitled to the retttrn from this investment once the capital (money) is used to buy physicai assets for productive purposes. In other rvords, in Islam, the money capital cannot be considered as a factor of production; hence, it cannot earn a pre-deterrnined rate of return (interest). Shareholders must not expand their business through lending on interest (i.e. participating in and expanding a conventional banking business is unlawful). In Islam, a person (e.g. a shareholder) has to earn rvhat he seeks to obtain. Hence, shareholders cannot expect to receive return frorn their investment w,ithout taking any risk and at the same time let the other stakeholders bear all the risks (I3eekun and Badan i, 2005). Further, shareholders also want the board to protect their inr.estrnent fiom possible losses and be given complete, accr-rrate and timely reports abor-rt the financial ireaith

of the company. AL-Quran asserts the requirement for proper record keeping and the need for transparency and disclosure of business dealings jn Surah AI,Baqarah, verses 282-283. These verses highlight the requrrement to have clear and written contracts for all business transactions. It is unlawfui for board of drrectors to faisify financial records and withhold value relevance information from the knowledge of shareholders. They are accountable to report the financial perfrirmance and business activities of the compdny to the shareholders. This i-equirement is consistent rvith the principle of responsibility and the concepts of trust and justice.

11.6.2 Relationship with employees Tl* brr.

f;;*,gf

employees ar

a

workplace is based on the principle of fairness.

In this section, we wili

focus on the relationship betiteen a compan)r ancl its to recruitnrent antl selection, job promotion, remuneration, working conditions, privacy and performance appraisal. The main principle that govcrns ail these activities is justice or fairness. Companies must treat their employees fairly. Ernpioyees are human bcings that deserve respect and recognition. Further, Muslims in the position of leaderslrip must not treat Shari'ah requirements irreler..ant in the treatment of their ernpioyees. They must also uphold and promote the spirit of brotherhood in this relationship. Recruitment and selection of potential candidates for eniployment must be based on competency. Islam prohibits any form of discrimination inclutling gender discrimination. Competent and qualifieri women candidates mrrst be equatly considered as their maie courrterparts. employees. Common workplace or human resourcc issues related

lslamic

Ethics

Likewise, companies must not appiy any form of discrimination or favouritism in giving job promotions to their employees. Promotions should be based on merit, level of responsibility and the extent of contribution of the employee to the company. The Prophet Muhammad pbuh said: 'Whoever delegates a position to someone whereas he sees someone else as more competent (for the position), verily he has cheated Allah and His Apostle and

all llte Muslims Employers must pay fair wages to their employees. Islam abhors any act of exploitation at any level, shape and under any situations. Underpayment of wages and refusal to pay overtime pay are common forms of exploitation at the workplace. The wage level must be equitable and reasonable, otherwise employees wiil feel demotivated (George and ]ones, 2005). The Prophet Muhammad pbuh, as narrated by A1-Bukhari, said: 'There are three persons of whorn I am an opponent on the Day of Judgement: A man who gave a word in t,..y rtame then he deceived, a man who sold a free person and devoured his price and a man ytho hired a worker where he received (the worl) in [ulL ft'ont hitn in full and did not give him his wage.'

in another hadith. tire Prophet is also reported to have said: 'Tlre 'ttrgts

oJ

tltc labourars ntust be pcid to him beJore the sweat dries upon

his bodl'.'

This hadith shorvs that employers must pay wages promptly. Any form of empioyee exploitation such as the en-rployment practices in the sweatshops and chiid labour are unlarvful. Next, employers must respect the beliefs of their employees. Muslim employers, in particuiar, must not consider Isiam as unimportant at the workplace. This belief goes against the principle of Unity of Al1ah. Instead, they must be considerate, for exampie, by a)lowing N4ushm employees time-off to perform their obligatory prayers durirrg working i-tours. In addition, employees must not be coerced into doing something that is againsi Islarn such as taking off their hijab (vell) or requiring them to wear an outiit that is prohibited by Islam and participating in forbidden business activities. This practrce is inconsistent wit}r the principle of Unity of Ailah. Employees must be respected as human beings, so ernployers must not sexually harass them or permit any form of sexual harassmeilt at the workpiace. As Islam is very particular about mainloirrtng fairress and balance (equilibrium), employers must also equallv respect the beliefs of non-Muslim employees. Islamic ethics promotes the welfare of empioyees at the workplace. Employcrs must t'tot treat employees rrerely as the means to achieve profitability without showrrrg care and concern for their welfare. It is the responsibility of employers to provide a safe and healthy workplace. Employers are accountable if employees injure themselves whilst performing their duty without being negligent or careless. They must take measures to prevent such injury or accident. In addition, Isiam encourages employers to act benevoiently towards the employees by helping them to cope when they have family issues. For example, duai income families are very common nowadays. There are many working mothers out there who are juggling between taking care of their children and performing their work duties. Employers can provide support to female employees by introducing flexible work arrangements or provide child care facilities at the u.orkplace.

ll,dq"rr *. rrear rheir employees with respect and rhey must fulfil their responsibiliry ro care

for their welfare, which is consisrent with the spirit of brotherhood and tawheed.

371

372

Business Ethics

Further, employers must ensure safe working conditions. Employees must not be subjected to a workplace that will cause them to be ill or suffer from health problems. Islam prohibits unsafe and unhealthy working conditions in the infamous sweatshops, fbr example. The concept of trustee (al*amanah) highlights the need for employers [o ensure the safety of their employees at the workplace. Islam also recognizes the individual's right to. privacy. Employers must not disclose personal information (e.g. medical records, disabilities, etc.) about the employees without their consent. In a similar vein, if employees commit wrongdoing, employers cannot publicize and shame them in front of other employees. In other words, employers must not air the employee's 'dirty laundry' for others to see. Likewise, employers have the freedom to take action against employees who commit wrongdoing. Horvever, any discipliriary action against an employee must be done discretely and in an equitable and fair manner. Performance appraisal is one of the most contentious issues at the workplace. It is common for employers to give employees performance targets or key performance indicators (KPIs) to be achieved over a specified period of time. lslarn promotes excellence, which is reflected in the concept of bener.olence. The Quran emphasizes that reward must commensurate with effort (Surah Al-Imraan, 3: 136; Az-Zalzala, 99: 7).In fact, Allah will also evaluate the performance of His subjects on the Day of ]udgement (Surah Al-Kahf, lB: 30). The process of performance appraisal at a workplace can be controversial if it is not done transparetrtly and f'airly. Employees might feel victimized if performance appraisal is unfair because job promotion and pay raise are often based on the outcome of tl-re perfbrmance appraisal. In the context of Islamic ethics, employers must ensure fairness in the process of setting lhe performance targets and evaluating the performance of crnplclyees. For example, employees must be given measurable and achievablc perftrrmance targets and they must be informed of the targets in advance. Then, the performance assessment must be done in an unbiased manner where other factors such as gender, ethnicrty or age should not be included in the assessment. In short, employess should oniy be evaluated on the extent to which they have achieved the perforrnance targets.

11.6.3 Relationship with customers

g.,rfi;rr-.,*_l a weaker bargarning

power than sellers so lslam requires the

latrer to observe fair play in trading.

Customers are important stakehoiders to a company. They contribute to the profits directly. Companies must treat tl-rem fairly and honestl).. Tradlng activities must be transparent too. Islamic ethics addresses common issues tl'rat are close11. related to the rights of customers-products, full disclosure oi p,roducts, pricing, and deceptive and rnisleading rnarketing/advertising. First, companies must sell products that are secn (in existence), or,r'ned by them and in good working condition. Islam prohibits the sale of unseen items because it puts the buyer at an unfair disadvantage. The buyer must be able to see and inspecl the item before the transaction occurs. Further, companies cannot trade when they are uncertainties regarding the existence and ownership uf a product. They must have and own the products before selling them. For example, selling food produce such as fruits and vegetables that have not been gror,r,n yet is not permitted. The follou,inghadiths

clarify those prohibitions. 'Allah's Messenger (pbuh) forbade the

so.le of

fruits until thrl' are ripe and in

a

gooC condition,'

(Muslim)

lslamic

Ethics

'Whoeyer buys cereals shall not sell them until he has obtained possession.'

(Muslim) 'Bargain not about that which is not with you.'

(Muslim)

In addrtion, the sale of items that one cannot possess is also forbidden because it has an element of uncertainty (al-gharar). For example, one cannot sell fish in a river/ ocean before he catches them. The rationaie for this prohibition is one party is at a disadvantage. We shall delve into this topic in the final section of this chapter. Islam also pays great attention to the quality of products sold to customers. A few verses of the Quran highlight the requirement to give correct weight and measure. 'And give Jull measure when you measure, and weigh That is the best (wa1t) and best in result.'

And observe the weight with equity and do not make the balancc cieficient.' (Surah Ar-Rahman,

just tneasure and weight, not withhold from

"r**ri* must be free from

gharar ele.ment, ,' transparent and free

from any forms of deception.

with an eyen balance. (Surah Al-lsra, 17:

'...give

fB,r*.rt

j5)

55: 9)

the people the things that

are their due.' (Surah

Hud,

11: B5)

Islarri also forbids the sale of defective products to customers. This prohibitron is based on the requirement to be honest in business dealings. Businessmen must be forthright and reveal any defects before selling a product so that a customer will not [,e cheated and he can make an informed buying decision. ]n a similar vein, as stealing rs iorbidden in Islam, one cannot knowingly buy and sell stolen goods. If one fails to adhere to this injunction, he is seen to be encouraging criminal activitl.. The Prophe t Vlr"iharnmad pbuh, as reported by Al-Bayhaq, said: 'He who buys stolen proPerty, with lhe sin and shame of slealing.'

tLLe

knoy,ledge that

it

vvas stolen, shares

in

Second, Islam does not belier.e in the principle of cayeat emptor wbere the buycr is responsible to ascertain the quality and suitability of goods before buying it as statcd in a hadith narrated by Al-Hakim and A1-Bayhaq:

'[t is not permissible to sell an item without making everything altout it clt'ar, nor is il perrnissible .for anyone who knows about its de-fect to refrain front mentiorrirrg it"'

Thishadith requires a sellerto make full disclosure about a product that he intends to sell, which prromotes transparency in business transactions. This requirement is tarr because the sellers know more about the products (features, quality and defects, if any) than the customers. Lack of disclosure of product features and ingredients put the cLrstomers at an unfair disadvantage. In terms of pricing, Islam forbids the activity of hoardin g {ihtikar) of supplies in order to manipulate the price. The Prophet Muhammad pbuh, as narrated by Muslim, :,aid:

'Hc who !raards is u sinnr'r.'

Islam forbids this practice because it is a form of market i.ntervention that goes ;rgainst a free market system, which leads to urrfair prices. Prices must be d:termined fairly through market suppiy and demand forces. Price fixing is then prohibited.

Ild.,. pr""." the inreresrs of cusaomers in rerms

of full disclosure of information about a producr, supply and price manipulation.

373

374

Business Ethics

Hoarding and price manipulation only benefit one party at the expense of society, especially the poor and those who cannot afford to pay more. For example, the general public needs essential items such as food produce, cooking oil, clothes, houses, etc.. So, sellers must charge a fair price so as not to burden society and disrupt the social

equilibrium. Hoarding activities normally occur during the period leading to major festivals like Hari Raya, Christmas, Deepavali and Chinese New Year. Businessmen create an artificial shortage of food supplies by hr;arding the stock in order to drive the prices up and earn the maximum profit. The only exception for a price control mechanism is nhen it meets the needs of the society and it provides protection against greed. Price manipulation shall not be equated with the natural increase in price due to the changes in the forces of supply and demand. Prices may increase when there is a shortage of supply due to natural disasters such as drought, flood and monsoon season. Artificial price increase is fcrrbidden.

Finally, Islam aiso forbids any act of deception in business, for exampie, misleading (kh,:tabah) marketing. Islam forbids sellers from making exaggerated claims about their products or services. Deceptive advertising, for example, influences customers to buy a product that does not have the attributes as advertised. As Islam emphasizes the free will of an individual to make a choice, deceptive or misleading advertising is forbidden because it contains coercive elements. Customers'purchase decisions should be free from all elements of coercion. We have explored this unethical activity in the earlier chapter of ethics in marketing. The Prophet Muhammad pbuh had condemned tl"rose who sold a product based on false oath.

11.6.4 Relationship with suppliers Srpph.r*r.

r

I

business to nrake

profit. They depend on firms ro pay promptly to be abie to achieve rhis objective, amongsi others. So firms must nor delay paymenr to

rheir suppliers.

Next, let us explore the relatronship between a company and its stippliers" A manufacturer buTs raw materials and unfinished products from a supplier. Likervise, retailers such as Tesco, Giant, AEON, Parkson, Harvey Norman and Courts Mammoth buy finished products from many suppliers beforc selling them to consumers. Suppliers are also running their own businesses, which hai.e to be profitable. 'I'hey expect therr customers (i.e. manufacturers and retailers) to pay them prornptiy so that they have iunds to pay for overheads, payrolls, utilitics and other expenses.

Clear terms and conditions, pricing, payment terms, delivery arrangements for tire supply of goods and raw materials must be agreed upon by both parties so as to avoid any disputes. In Islam, Surah Al-Baoarah (2:282) places great emphasis on business transactions to be governed by a clear written contract (record-keeping) so as to avoid future disputes regarding payn-rent and quality of goods, etc. Further, as iu any other business contracts, lslarn requires the fulfilrnent of all contracts including the ones involving suppliers and buyers (see Surah Ai-Mu'minun, 23: B). As buyers (companies) expect suppliers to keep tireir part of the bargain, suppliers also cxpect the buyers to honour the contracts, particularly, regardiirg pa,vments. The other requirements or prohibitions as applied to sellers such as charging fair price, hcrarding, price manipulation and engaging in uncertain (gharar) transactions etc. are also to be observed in this relationship. IsL m also forbids a monopoly business, which could lead to higher prices. A company can work in cohort with a supplier to only supply merchandise to the compan)r, which then becomes the sole r.en
lslamic

Ethics

11.6.5 Relationship with the natural environment As explained in the earlier sections of this chapter, nature belongs to Allah because it signifies His presence. He created the world in a perfect balance so that humans can sustain their lives by utilizing the natural resources. In Islam, the environment includes all things found in the grounds of the earth and in the atmosphere such as the land, rvater, air, plants, animals, ocean, oil, natural gas, gold and other minerals, etc. Humans are free to consume the natural resources to sustain their lives. Aliah regards humans as the guardians or stewards of the environment. Humans are responsible for protecting and conservlng the environment, not only because it is created by Aliah, but also because the environment is the only resource of life. In Islam, environmentai protection is a religious or sacred duty. Aliah has not created everything in this universe in vain as indicated inthe Quran, Surah Sad, verse 27:

'We have not created the heaven ctnd the earth and all that lies betweert them

in vain.'

Allah appreciates the efforts to protect the environment and rewards those who carry out tiris endeavour, as indicated by the Prophet Muhammad pbuh: '\\:hoet,cr plartts a tree and diligentll, looks after it, until it matures and

.iruit,

's rew,rde

be

frl* prt*,ph of awheedand Khalifahgovern the

ars

relarionship berween a firm and rhe natural

tl.'

environment.

and 'IJ'a l)4uslim plorfis a tree or sows a field and nten and beasts and birds eat it, all o.f it is charitl, orL his part.'

front

(Akbar, 1992: p.27')

The pronrii-rence of protecting the environment can also be traced back to the Islarnic cir.'ilization during the rule of the First Caliph, Abu Bakar when he ordered his troops: 'Do not cut dov,rt d tree, do not abuse a river, do not harm animals anrl be alu,a),s kmtl and hL.Lmane to God's creation, even to your enemies.' (Akbor, 1992: p.27) The Quran states that r,vasting in any form including lvasting the natural

re

tources

is forbidden.

'And do trctt waste (God's bounties): verily, He does not love the tvastefuii (Surah Al-An'arn, 6:

111')

Degradation of the natural environment due to human activities has long been a grave conc^rn of most modern societies. Businesses are said to be the key contributor

to this phenomenon. We provide a lengthy discussion of this issue in Chapter 10 of this hook. Islamic rvorldview places great emphasis on the relationship between humans and the natural environment from which we derive the principle o{ tawheed. I'he right to use natural resources belongs to not only human beings but also all the creatures of Allah. Humans will be punished if they do not protect nature. Hence, Islam emphasises on enr.ironmental protection for the benefit of the current and future gener;iions. Compranies tlrat poilute and cause damage to the environment are expected to clean it up or remove the cause of the damage. The use of toxic and ,razardous rraterials in business that iriay cause pollution and endanger humans and othe r species are clearly against the vicegerent role of a Khalifaft; thus, prohibited. Aliah created

375

376

Business Ethics

all things in this universe in perfect balance and measurement. Ilresponsible and harmful business activities disrupt the balance and the perpetrators will he punished on the Day of ]udgement.

11.7 PROHIBITED EARNINGS AND BUSINESS TRANSACTIONS ] u;tr6t ii'adrng rn lraram rerns, thai lras riba, gharar and b[r"

masyirelemenrs

Ccndemrraron againsi. riha (as rr

rhr e.rran)

srareci

i,

trPiicit, srrorg atrd \"/ rhoui compromise

r,."ipt,

Muslims cannot engage in business activities that contravene the Shari'ah" 'The Quran has ciearly spelt out specific prohibitions against certain types of business transactions. In this chapter, we are focusing on prohibitions against trading in haram

(illegitimate) items, riba {interest), gharar (speculation) and masyir (gambling). Haran- rtems include carrion (dead meat), pork, sculpture and alcohoiic drinks. Rlba is an excessive profit or unlawful gain. Gharar is a transaction involr.ing uncertainty ?nd/or speculation'

11.7.1 Dealing in haram (illegitimate) items islam prohibits trading of haram (illegitimate) goods as outlined by the Shari'ah.

"ir,r**l gcor:s inclrrrre There are many haram goods but in this chapter, we wiil only focus on intoxicants, r' ,irr ca;ris, por[, slvine and other prohibited foods/crops in generai, as rvell as ido]s, crosses, statues, L.l.,acio, rrr,rnuana ald the like. As such, our discussion on this topic is not exhaustive. 'fhe rationale for rri rer cr'rl): ro this prohibition is such trading promotes the hararn goods and encourages people prodL'rce rlrLrgs' rclo 5' to <1o what is horam. The Prophet Muhan-rmad pbuh, ai narratecl by Al-Bukhari and . rosses sralre-c ancl Musiim. said: I ili

'Surely, Allah and His Messenger have prohibited the sale oJ wine, the t'l.csh oi dead animals, swine snd idols.'

He further said (as reported by Ahmad and Abu Daoud): 'When Allah prohibits a thing, He prohibits (giting and receiying) the ltrtce it as well.'

oJ

Firsi, let us discuss the prohibitioi-r againsl khomr (intoxicants). Islarlr permits trading and consumption of food produce ai-rd its ciclivatives. However, Islam forbids tl-re sale and consumption of fermented grarns anC fruits, in particular, grapes, dates, barley or any other substance, as long as it is fermented. hi a similar vein, Isiam prohibits anything which intoxicates, affects the functioning of the brain, or harms the body. Alcoholic drinks do not only cause intoxication but also cause harnrful effects on one's mind and health, as weli as professional and social affairs. In fact, Isiam prohibits anything that can cause harm to individuals. As such, drugs such as marijuana, heroin, cocaine, opium, etc. are included in the prohibited category of intoxicants. The Prophet Muhammad pbuh, as narr ated by Ibn Majah, said: 'Do nut harm yourself or others.'

The Quran also states: 'Do not be cast into ruin by your own hands . .' (Surah Al-Baqarah, i:19 5)

islamic

Adciiction to alcoholic drinks makes an individual neglect his responsibilities and obhgations to the family, employer, colleagues and society. Alcoholic drinks also cause harm to one's health, ranging from mental disorders, to liver problems and other ailments. Surah Al-Maidah, verses 90-91, clearly state the decisive prohibition of the intoxicants:

'o you who believe, intoxicants (all types of alcoholic drinks)

and ganes of or decision) are (arr'owsfor seekingluck chance, ungodly slrines, and al-azlam (abominati'm) an abomittation of Satan's handiwork. So avoid (strictly all) that in order that you may be successful. Satan wants only to excite enmity and hatred between you u,ith intoxicants (alcoholic drinks) and gambling, .and Irinrier you from the remembrance of Allah and from as-salat (the prayer). So, will you not then abstain?'

The prohibition covers all intoxicants including wine, beer, spirit or hard liquor and othei similar drinks that are made from honey, barley and corn by the process of ferrnentation. The prohibition remains regardless of the amount of the intoxicants taken by an individual. For example, wine is haram regardless of whether orle takes a sip or drinks a whole bottle of it. Islam also prohibits producing and trading in the intoxicants, irciudrng selling them to non-Muslims. In fact, it is haram for a Musiim to serr,'e srlch drinks to others and to work in an establishment that produces and sells the intoxicants. Tl-re follou,in ghadithsby al-Tirmidhi, Ibn Majah and Muslim describe such prohibition. 'Tr.ttt. , Allsh has cursed khamr and has cursed the one who produces it, the one the one t'or whont it is protluced, the one who drinks it, the one who serves it, one wlto it, the sells who the one is carried, it whom the one v,lto carries it, J'or is bought.' it whom the one e rrrrts for .t'i'om tlLe sale o-l'it, the one wlto bnys it, and

(al-f irmidhi and lbtt Nlajalt)

'7t.ttly, Allah has prohibited khamr. Therefore, whoever hears.t'i'om this t'erse (Surdh Al Maidah, 90-91) and possesses soTne of this substance should neither ilrtnk it nor sell it.' (Muslim) Second, Islam prohibits Musiims from selling, eating and er.en touchrng pork. Pigs ,,re naturally filthy animals and carry a deadly parasite (trichina), which may cause harm to a person. The prollibitlon against pork is explicit in the Quran as indicated in t

hr: f.rilorving verses.

t do not find within thot w,hich was reyealed to me r.tne wl'ro would eat it r.tnless it be a drnd uti"'tnl or to i,.rriytLtingl forbitltlen !tlood sltille d out or the flesh of swine (pork) - for indeed, it is an aborninatittn' or it bc [that slaughtered in] disobedience, dedicated to other than Allah. But .,Lroet,e r is forced [by necessity], neither desiring [it] nor transgressing [its limitj, 'l't:rt h.t)eed, your Lorcl is Forgiving and Merciful.' (Surah Al-An'am, 6: 1'15) 'Say (O Mthamn.Lad),

'L:orbiddcn to you (!or food) are: dead meat, blood, the flesh of swine, and th,.it on which had not been invoked the name of other than Allah.' (Surzh Al-Moidah, 5: 3)

'lle

has only forbidden to you decd animals, blood, the JTesh of swine, and Allah. But whoever is forced [by ,.r:r-essityl, neither desiring [it] nor transgre55ing [tts ltmit], there is no sitl t.tpoit ' n. [ndeed, Allah is Forgiving and Merciful."' t c.rt vhich has been dedicated to other than

(Surah Al-Baqarah, 2: 17j)

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'He has only forbidden you dead meat, and blood, and the flesh of swrne, and any (food) over which the name of other than Allah has been invaked. But iJ one is forced by necessity, without wilful disobedierLce, nor transgressing due limits,- then Allah is Oft-Forgiving, Most Merciful.' (Surah Al-Nahl, 16: 115)

The first verse above states that pork is an abomination. This term refers to something that is regarded as abhorrent in Islam and hurnan nature. Surah Al-Araf, verse 152 further explains this term: 'He allows them as lawfut AtTayyibaat (i.e. atl goocl and law;ful as regards things, deeds, beliefs, persons and food), and prohibits them as unlawful AlKhabaa'ith (i.e. all evil and unlawful as regards things, deeds, beliefs, Persons and food).'

Pork is harmful to human health. The pig is a filthy animal and lives in a filthy condil.on. It carries various germs and tapeworms that are harmful to the human body. So to preserve life and health, Islam prohibits consumption of pork or any pork based products. In this verse, exemption is given to those who do not have any other food to consume (e.g. during strict emergencics such as war, natural disasters, etc") other than pork only so as to prevent starvation. Earlier in this section, ',r,e mentioned that intoxicants that are made f rom fruits or grains such as grapes, barlel', wheat or corn are haram in Islarn. However, the Muslims can consume those fruits a,ld grains u,hen they are in the unf'ermenteel state. Likewise, they can also cultivate and trade those crops. Islam prohibits planting and trading of certain crops such as hashish (marijuana) and the like for u,hich they cause harm to our health. The prohibition against trading of hararn crops is all encompassing in rvhich a Mr-rslim cannot clairn that it is not harant ta sell cigarettes/tobecco to a non-Muslim, for example. Likervise, a Muslim cannot sell grapes ot grains to other parties knowing that they r,r,t1l r-rse them to make u,ine or intoxicating drinks. Smoking of marijuana, just like taking drugs, is also harom in Islam (see eariier paragraph). Similarly, cultivating and trading of tobacco is haram in Isiam on the basis that smoking of tobacco is haram. The Nationai Fatr,r,a Council of Malaysia asserts that smokingis haram based the follorving reasons:

r r r

Cigarettes contain poisonous substances (nrcotine and other chemrcal substances) that can be hazardous to our health. The smoking of cigarettes leads to varior-rs serious illnesses such as cancer, heart and respiratory probierns, among others, n l"iich cause a lot of deaths. A famous Islamic scholar, Imam Al-Shafie has issued an edict to prohibit smoking. He said: 'l-f

people are taking,rn.t fuo,l, ,lrinks, sntokirrg rtr srri-fiing sontething thnt trtloxicates, then it is clccrrly haram. Thrs includes those that contain poisonous substances thut couid cause deatlt- Ailah forbids whatever type oJ-killing or murder including taking -
r

Islamic scholars agreed that smoking is a wastef,rl behaviour, which is despicable in Islam. The consensus is based on tlrc following verses and hcidith:

lslamic

'And spend of your substance in the cause of Allah, and make not your own hands contribute lo (your) destruction; but do good;for Allah loveth those who do good''

(surah Ar-Baqarah,

2:

195)

'He (Allah) comntands them what is jus.t andforbids them what is evil; IIe allows them as lawful what is good (and pure) and prohibits them from

wlrat is bad @nd intpurc).' (Surah At-A'raf, 7: 157) 'l-et there be no harnting or reciprocating harm.'

(Ibn Majolt)

As smoking is prohibited, the selling of cigarettes, as well as the planting and trading of tobacco are also haram. We need to take note, however, that unlike the prol-ribition of pigs and intoxicants, the Quran does not explicitly prohibit smoking and cigarettes. Islamic scholars claimed that tobacco was unknown du"ing the birth of Islam until people started to use ri for producing cigarettes (National Fatwa Council, i995). Then, Islamic scholars got together and deliberated on this issue and came to a consenslts that the smoking of cigarettes, and planting and trading of tobacco are prohibited in Islain based on the above verses and hadith. They also sought expert opinions from medical and health professionals regarding the danger and hazardous effects of . rgarettes betbre arriving at such a decision. Latel,v, it is a trend for people to smoke shisha, which is easily available in cafes and restaurants. In 2013, the National Fatwa Councii, after much deliberation and consicleration of the views of health and medical experts, concluded that the smoking of shisha is also ltaram in Isiam for the sanle reasons as prohibiting the smoking of cigarettes.

Finally, Islam prohibits the manufacturing of objects of worship or objects that are likened to Al1ah's creations (e.g. animal", humans, etc.). Likewise, tracling in such objects (idols, statutes and sculptures) is also prohibited. In ahadith narrated b-v Aishah: '.\llal'r's Apostle (pbtLh) re-tttrned from a journey when I had placed a curtttirr (the door o-f) one of my rooms. When He sav' it, of rnine having pictures ot,er "'fhe people u,ho tvill receive the severest punishment on he tore it and said, the I)ct1, oi RestLrrcction v,ill Lte those trho try to make the things that lilicn of ALlah's creations. So v'e turned the curtain inta one or two cushions."'

I'rirdirrg of such items tends to promote the haram and encourage hLtram behaviour. Finai11,, Muslims cannot eat animals that die of natural causes without being slaughtered or hunted b), *un. Likewise, trading in such animals is also forbirldcn. Muslims mrrst properly slaughter animais (that are allou,ed to be eaten) first. Surah Al-Maidah, verse 3 states: 'Forbdden to you (ior food) are: dead meat, blood, the flesh of swine, and t'nat on which had been invoked the narne of other than Allah.' f'he last part of this verse states the requirement to slaughter animals and by inzoking the name of Ailah before consuming them. The Shari'ah exempts marine animals (those that live in water anC cannot survive outside it) such as fish, whales, shrimps, calamari and other sea creatures from the category of dead animals as indicated tn a had.ith narrated by Ahmad:

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'When the Prophet Muhammad pbuh was asked abctut the sea, he replied, tts water is pure and its dead are halal.' The Quran states that:

..And it is He Who has subjected the sea to you in order that yt:u may eat Jresh meat from it ...: (Surah Al-Maidah, 5: 99) '.

11.7.2 Prohibition of riba (interest) r.- -l

Riba ltterally means an increase, excess, growth, increment or expansion. The Shari'ah classifies riba into two broad categories-riba rn ioan contracts and riba tn giowLrr, r..rer,enr exchange contracts. In the first category, riba is associated with loan interest. Islamrc or expansron Riba terminoiogy refers to interest as exorbitant profit that increases the principal amount occurs rn ioan and without putting any effort or simply, effortless profit. Riba ts an unjustified increment exchange.ontracrs in borrowing or lending money. It is paid in kind or money in excess of the ioan rhar are nc:t Sharlah (principal) amount. Lending on interest does not transfer ownership of good (money) ccrirplrarL to the buy"t. The buyer (borrower) returns the money plus an additionai amount for a specified time frame (loan tenure). In the second category, ribars an unjustified or .*."., profit earned by a seller in a sale or barter transactioit when goods of equal weighttut unequal value are exchanged. Similarly, riba could also take place rvhen a ",f.,r lncrease, excess, R,b,

seller se11s an asset at a price that substantiaily exceeds its market vaiue, or bclow it" The Prophet Muhammad pbuh, as narrated b,v Ubaclah bin San-rit, said:

'Goltlfor gold, silt,erfor siber, wheatJ'or t'rtr burlcv, dctte s lor dales, ^;l'teat,1111v1(1t to hurttl, if the commodities hnnd stLlt for salt, like fot' like, equal Jor e qtLal trnd di-ifer, then you tnay sell as you wish provitled tliat the excltattge is hand to hand.' T'he above hadith specifies two rules to avoid rilta tn a barter or

trading transaction of

tlvo similar commodities:

1. 2.

The transaction must be based on a spot transaction. If the delivery of at ieast one commodity is delayed, itis riba (deferment of time excl-range)' The amount of each commodity exchanged must be eqr-rai (same counter values). For example, if two traders lvant to exchange salt for salt, the amount or weight of salt must be equal i.e. 100 kg oi salt rvith 100 kg of salt"

'fhe interest on loan violates these two rlrles. l.oan involves an exchange of money (commodity) but the exchange (payment) is def-erred sometime in the future. This exchange violates the first rule. Next, the amourtt exchanged (future payment) is in excess of the principal amount, which violates the second rule. It does not matter whether the excess payment (interest) is either irr-rposed by the iender or promised by the borror,r,er. One may argue thal riba represents an opportunity cost to the lender, nhich they could earn by investing the same amount of money in other profitable ventures. Holvever, the concept of opportunity cost in this context refers to a 'chance' to earn profit, without certainty. We cannot be sure that the lender rvill get to earn the exact rate of return (opportunity cost) if he were to invesf his money elsewhere. Hence, earning a profit froin a trade is not the same as an opportunity to earn a profit. The main verse that prohibits riba is Surah

Al

Baqarah (2:275), which states:

lslamic

devour riba will not stand except as stands one whom the Satan by h"is touch has driven to madness. That is because they say, "trade is like riba," but Allah has permitted trade and has forbidden riba.' "l"hase. who

Then, how does interest on money capital (riba) differ from the exchange of trade? Trade generates ribh (profit), which is an amount of money added to the cost of goods or services. Ribh is permissible in Islam. The seller only makes his profit once, during the sale. In contrast, the lender makes profit by charging interest continuousl;r until the loan is fully repaid. Further, the lender also charges interest on the unpaid interest, which is known as compounding interest. According to Islam, this practice is unjust and exploitative in nature. In business terminology, this addition (ribh) to the cost of goods is knorvn as 'mark up'. I'he seller charges a mark-up price to cover his expenses and to compensate his effort and ior taking risks to bring the goods or services to the market. Hence. profit is earned as opposed to interest on a loan, in which the lender gets his interest witliout putting in any effort or putting the money into productive use. We can see here that riba and ribh are different because each is earned in different ways. In addition, wealth can be generated from trading activities. Money, however, is not considered to be real wealth. It is mereiy a mcdium of exchange that facilitates the florv of trade, a standard of vaiue, a unit of accounting and a store of value. Ribatransactions deviate from these ir-rnctions olmoney. f lre fcrlowing verses of the Quran expressly prohibit riba. We need to note the prohibition is unequivocal and the condemnation of the riba-based transaction is very \lrr)nB and rt ittrout compromise. 'Alloh deprives riba of all blessingbut sinne r.'

blesse s

charity; He loves not the ungrcttcful (Surah Al-Baqarah, 2: 276)

'O, beliryers! Fear Allah ancl give up w,l'Lat is still due to you .from riba if you rrre true belieyers.' (Surah Al-Baqaralt, ).: 278)

'lf you do not do so, then take notice of war .from Allah and His Messenger. But ii 7,ou rcltent, you can have your princtpal. Neither should yott commit injustice nor shoulcl you be subjected. to it.' (Surah Al-Baqarah,

): 279)

'Oh, y1ry vvho believe! Devour not riba doubled and multipLied; but fear ALldr thut you ma,y prosper. Fear the Fire which has been prepared for those n,ho reiect.fcrith and obey Allah and the Prophet so that you tTto), get n'Lercy.' (Surah Al-lmraan, 3: 130)

Isiam encourages business people to create and grow their weaith through trade as opposed ta riba-based lending and transactions. Loan on interest aliolvs the lender to increase his or her weaith n ithout any effolt. This action implies a lender is appropriating a borrower's property without giving him anything in excll.ange. in Is1am, a nlan's property is sacred for which it is meant for satisfying his needs. Charging intercst on a loan and requiring the borrower to pay a highcr amount than what he owes is akin to taking his property from him without giving him sc;mething in exchange. This type of transaction is unfair because one party receives greater value

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i I

than the counterparty (borrower). The lender receives higher benefits at the expense of the borrower, which can be seen as taking advantage of the latter. Riba ts also prohibited d,re to the negative effects it brings to society. It encourages people to be lazy instead of working to earn money to sustain their life. One can earn extra money by charging interest without working for it. Islam encourages people to put their money into productive use by participating in trade. The prohibition against riba applies to both the one who imposes it and the one who pays it. Islam encourages Muslims to engage in musyarakah (pattnership) and al-bay'(sale) of commodities. Islam forbids debt contracts but encoul'a€Jes sale and partnership contracts. Riba-basedlending promotes inequaiities of access to funding and subsequently income and weaith. Banks will only lend to big businesses with establish financial means to ensure safe return. New and small businesses without the financial strength are usually assigned lower priority and face difficulties in gaining access to financing from banks. Further, the unfair riba-based transactions in the long term propagate a divi-:d society between debtors and creditors. In the end, the rich wiil be richer and the poor will be poorer. This situation is against the ernphasis of Islam to create balanced economic development by wealth sharing as opposed to making a ferv wealthy creditors wealthier at the expense of the rnajority'

11.7.3 Prohibition of gharar (speculation,

risk,

uncertainty) ,.1.;;;,",;. ----l

ui arnr,,, spec,-rlar ire unnecessarv rsk, arnbis'-r,t)' ancl lrazarcl rr a bLrs ness rransaLron ro elcn.re.i-s uncerf

The third prohibition is business transactions that have the element c:{ gharar (speculation). Gharar implies unnecessary risk, uncertainty, an-ibiguity and hazard. In business terminoiog,v, gharar refers to a sale in i,r,hicit the sel1er either does not have the goods in hand or the goods do not exist. Gharar can also be used to describe any transaction that has an unknown outcome or consequences at the point of contracting. In short, any transaction that has a risk that could cause either ihe bu1,er or selier to lose his properties is deemed to have tbe gharar element. Future trading is permissible ifitdoesnothavetheelement ctf gharar,wherethequantityandqualityof goodsare ascertainable or predictable. The reason for prohibittng gharar transactions is such transactions could easily lead to disputes and contention between the seliers and 'Ihe following btryers. Such disputes is against the spirit of ukhuv,walr (brotherhood). are some examples of gharar transactions: r Trading of items or articlcs that tl-re sellcr is unable to deliver to the buyer. r Selling goods without adequate and accurate description-non-disclosure of product ingredients, cluantities, weight or materials they are rnade of or simply, without product 1abe1s. r Selling goods that have an incorrect or false descriptton-deceptivc marke'.rng or advertising. r Selling def-ective goods rvithout the buyer's I,nowledge of the defect. r Selling goods u,ithout pennitting the buyer to inspect them for def'ects or suitability. r Selling fruits or food produce before they ripen or gro\\r heaithiiy. r Selling goods or assets that one does not own-short seiling.

In addition, Islam forbids most derir.ative corrtracts such as forlr.ards, futures and options as rvell as short selling. Such contracts z:re inr,alid because of the uncertaintv involved in the future delivery of the underlying asset.

islamic

Ethics

Unlike fnr riba, the Quran does not directly or explicitly prohibit gharar transactions" However, the Quran clearly prohibits any type of business transaction that brings injustice to any contracting parties, especially the buyer who usually has a weaker economic and bargaining power. surah Al-Nisa'verse 29, states:

'o you v,ho believe! Eat not your Property among yourselves unjustly

b1'

you, by mutual consent'' faliehoori and deception, excePt it be a tradi amongst Islamic scholars agree that unjust practice in this verse inciudes all types cf illegal and defective eiements in commercial contracts. Gharar is a part of this prohibition because it is akin to taking the property of others without a valid reason. So; ciearly the rationale for prohib lting gharar is to reduce speculation and to ensure fairness in trading. Various hadithsclarify the prohibition of gharar inwhich the Prophet Muhammad cleariy forbids its existence in trading. Abu Huraira reported that Ailah s pbuh -N4.rr.ng., (pbuh) forbade a transaction determined by throwing stones, and the type H.hich invoives some uncertainty. Similarly, Jabir b. Abdullah is reported to have said that Al1ah's N4essenger (pbuh) prohib'ifed the sale of a heap of dates the weight of whiclr is unknonn. In this hadith, une can easily determine the tt'eight of dates but "sellingfruit failed to do so. Yet in another hadith,the Prophet Muhammad pbuh said, before it has begun to ripen is an uncertain transaction (gharar)'"

11.7.4 Prohibition of masyir (gambling) Gharar and masyir are inter-related. Gharar transactions invoive masyir too. Masyir is a game of pure chance u,here one party gains at the expense of other parties. In this ga* o, bet, the u,inner takes all ,*fii1st the losers iose all their bets. Further, Islam prohibits accun-iuiating weaith by chance regardless of rvhether it is at the expense of others or not. Islam prohibrts masyirbecause it encourages society to depend on luck or chance to get ahead in iife. Instead, Islam through the Quran and Sunnah, encoLrrage hurnans to create a stable society that thrives on the values of hard work, innovation, productivity, quality and brotherhood. Further, Islam wants its follorvers to attairr ir.."r, and create wealth through education, productive work and entrepreneurship as opposed to engaging in speculative behaviours. The follorvirlg verses and hadiths highlight the prohibition of gambling. "Thet, asked the Prophet Muhanmad pbuh about khamr (intoxicants) artd games oJ chance (gambling). He said in both of them there is great horrn although there is sonrc advantage as well in them for men, but their harrn is much greater than their advantages.' (Surah Al-Baclarah, 2: 219) 'O yot, x'ho believe, intoxicants (all types af alcoholic drink) and game ol chor;ce, ungodly shrines, and al-azlam (arrows for seekingluck or decision) are an ubontination of Satan's handiwork. So avoid (strictly ali) that (abominatio') in order that you may be successful. Satan wants oriy to excite enmity and hcttred bety,een yau with irioxicants (alcoholic drink) and gambling, and hinder you from the remembrance of Allah and from as-salat (the prayer). So, will you ttot then sbstahi' (Surah Al- Maidah, 5: 9 A -9 1)

f M*yltr"f"r*.^ game of pure chance to obtain wealth and

advance in life.

383

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A familiar example of masyir is the lottery in which gaming companies distribute coupons and provide incentives depending on uncertain and sp"coluti,re events. The Merriam-Webster dictionary defines lottery as 'a system used to decide who will get or be given something by choosing names or numbers by chance'. In addition, casino gambling or any other form of gaming activities have clear elements <>t gharar and ma syir ; thus, prohibited. Likewise, conventional insurance policies have a maysir element in it. The insured usually pays a small amount of premium hoping to gain a much larger compensation in the future if the event insured occurs. On the other hand, if the event insured does not take place, the insured loses the premium paid. As for the insurer, if the insured event occurs, it may end up having to spend a large sum of money to pay compensation, which is very much larger than the premium amount paid by the insured. The insurer may suffer from losses in such a case.

The iearning outcomes for this chapter are summarized as follows:

l.

Define ethics from the Islamic perspective. Islamic ethics is a set of universal standards of right and wrong that prescribe acceptabie and unacceptable human conduct as highlighted in the Quran and shon'n bl,tire exempiary life of the Prophet Muhammad pbuh. This definition is derived from two Arabic terrns, namely akhlucl and adab. Akhlaq sets out what humans o.rght to do in this world that is to iive their lives in accordance rvith the will of Allah. Akhlaq also refers to the Islamic disposition or character of an individual that he or she develops as he or she progresses in life through repeatccl bchaviour or habits that the scrul becomes accustomed to it. Adab refers to the manner, etiquette or behaviour of an individual. Examples of adab include good manners, righteousness, courtesy, respect, irelpfulness, decency, decorum and appropriateness.

2.

Explain the source and origin of the Islamic ethical system. Two primary sources of Islamic ethics are the Quran and Sunnah.'l'he ()uran is a divine book of revelation that comprises the verbatim and unalterable rvords of Allah reveaied to the Prophet Muhammad pbuh through Archangel Gabriel. The Quran represents the will of Aliah that lays the foundation for Isiamic beliefs and religious practices as weil as the kel,source of ethical standards for Muslims .The Quran prescribes the permissible and forbidden in the lives of Muslims, including economic transactions and social interactions. The second source of Islamic ethics is the Sunnah. The knonledge of Sunnah comes from hadiths or reports about the recorded sayings, personal teachings, chaiacter,,Jeerls, actions and practices of the Prophet Muhammad pbuh in personal and public life that exemplify the teachings of Islam. The Prophet Muhammad pbuh is al insan al kamil (the idcal man) who had a superior standard of character as indicated in Surah Al-Qalam (68: 4).

lslamic

a J"

Ethics

Describe the concept of Islamic world view. T'he Islamic perception of the world is based on the fact that Islam is not only a religion but also a way of life" The religion of Islam embraces all aspects of life such as personal, social, political and legal matters. The comprehensive teachings of islam make it a unique world vien' in which it takes a duul perspective of this world-that is one should be concerned for both his life in the world and

the Hereafter.

Muslims believe that Allah exists and He is the one and only Creatot and Sovereign of the entire universe. He is living, eternal and self-subsisting. Allah created everything in the universe and one .must serve and worship Allah only. He appointed man as His vicegerent on earth. As a vicegerent of Allah, an individual has responsibilities to Allah, himsell society and the environment. He or she will be held accountable for the way he/she lives his/her life in this world. Muslims believe that their life in this world is temporary and they will face the Day of |udgement where Allah will judge them based on their actions in life. If they obey Allah and follow the right path as prescribed in the Quran andhadiths, the reward is a place in Paradise, where they will enjoy eternal bliss and happiness. Hence, Muslims should aim for evcrlasting life after death. Ailah has chosen a few liumans as Prophets (peace be upon them) to show iiumans the right path to live their life in the world. The first Prophet was Adam pbuh and the last one was Prophet Muhammad pbuh. He received Allah's commandments through revelation in the last scripture known as the Quran, which shall last until the Day of |udgement. 'lhe Quran contains the most comprehensive guide for all aspects of human_life. 4.

Explain the five axioms of Islamic ethical philosophy and their importance to a Muslim's lif'e. The five axioms are unity, equiiibrium, free will, responsrbility and bener.'olence. Unity is the lounelation of Islamic faith. It refers to the belief in the Oneness of Allah as tl-ie sole Creator and Soveretgn of the entire universe. Aliah creates and o\^rns everything in the universe. Humans should t. *ury of Allah's divine justice and avoid disobeying Hrs r'r.'i11 and ntles. A Muslim's life should be dedicated first and foremost to serve and worship Allah. Fiquiiibrium refers to a sense of balance in various aspects of human life to acl-rieve social ideals and .;ustice. Allah created everything in equilibrium for humans to enjoy and preserve. Any acts that ciisrupt the equilibrium are condemned because they disrupt the balance and harmony in the rvorld" Free

relates to individual freedom of choice, which is to be exercised u'ith intellect and r,r.ithin the bounds of the Shari'ah.Islam does not promote absolute freedom because it implies no responsibility and encourages selfish behaviour. Freedom rvithout responsibilitY can also create chaos in society, which disrupts equilibrium in society and the r.r'orld. Responsibility refers to the duty of individuals to obey the will of Allah, duty to oneself, the society at large and the natural environment befitting one's role as a vicegerent of Allah in this

will

rvorld. The fifth axiom is benevolence, which simply means kindness to others, an important characteristic of a pious individual. 'l'he five axioms are important in a Muslim's life because they represcnt the core values accepted as being true to guide his or her day-to-day conduct. 5.

Explain the Islamic perspective of the relationship between firms and their stakeholders. Whilst Islam encourages its followers to venture into business, it does not promote a narrow objective of earning a oniy profit. Other than ensuring business activities and tiansactions are within the bounds of the Shari'ah, a business owner must aiso promote social justrce. Hence, in Islam, firms have a broader objective of promoting the welfare of stakehoiders. Common key stakeholders of a firm are shareholders, employees, customers, strppliers and the natural environment.

385

iB6

Business Ethics

Business activities and decisions must be driven by the belief that humans are primarily responsible to Allah and then to society at iarge as well as the natural environment. In islam, stakeholders are very important because companies' activities and decisions affect their well-being. More importantly, Muslim business owners, directors or corporate managers must always bear in mind that they are responsible primarily to Allah and then to society at large. So, Islam considers stakeholders' claims as moral claims because companies must not pursue profit at the expense uf the well-being of their stakeholders. The requirement for business owners (or firms) to pursue social objectives stems from their role as Khalifuh in this world. Human beings are the stewards. or representatives on earth to administer the world and to use the resources created and owned by Allah. In addition, Allah imposes constraints on individuals'freedom so that they rvill not engage in arbitrary self-centred social behaviour at the expense ofothers such as stakeholders. Business owners are expected to care for the welfare of society in the spirit of ukhuwwah (brotherhood) and social justice. The responsibility of business owners to care for the environment arises from the princinle of Khalifuhwhere humans are the beneficiaries of Allah's bounty (natural resources) and they are free to use them to sustain their lives. Horvever, humans must not abuse the resources that Allah created for them so as to avoid disruption to the balance and harmony in the universe.

6.

Explain some prohibited matters in business transactions. Islam prohibits quite a number of business transactions, but in this book, we discuss the foliowing prohibitions only. Islam prohibits dealing in haram goods such as intoxicants, pork, some types of crops, idols, crosses, statues, etc. The prohibition against these goods or items is expiicit as indicated in the Quran. The general reason for the prohibitions against intoxicants and pork lie in the fact that they bring harm to one's life. As for the prohibition against other items, the rationale is they are likened to Allah's creations or they are used for worshiping other than Aliah only" Next, Islam also strongly forbids riba, gharar and masyir in business transactions. Rlba is associated with loan interest and exchange trading. it is prohibited because the payment is deferred in the future and the interest amount is in excess of the principal amount. The lender receivcs greater vaiue than the borrorver at the expense of the borrolver. Further, this excess amount is unjustified because the lender increases his weaith rvithout putting any effort. Islam believes in productive effort to create and grow wealth. Money has to be employed in productir.e activities such as trading before one can generate wealth from it. In barter ti'ading, any exchange rnust be of equal amount or value (same counter values). If the value or amount of a commodity exchanged rs less or more than the other commodity, then riba occurs. Gharar transactions have uncertainty, ambiguity or risk elements in them. Islam prohibits such transactions because they are contentious, speculative and unfair. Exarlples of gharar include seliing goods or assets (stock) that one does not o!r,n, also knolvn as short selling, and selling defective goods without the buy61'5 knowledge of the defect. Finally, islanr prohibits transactions that have the masyir element in them. Masyir is a game of pure chance where one can stand to gain based on pure luck either at the expense of others or not. Oire should not depend on luck to advance and accumulate wealth in iife. Instead, one should put in effort and inrtiative to undertake productive work to generate wealth.

lslamic

Ethics

'abd Servants of Allah in rvhich human beings do not have any independent authority or absolute rights and total freedom to choose their way of life. Akhtag The fbundation that establishes the standards of right or wrong "f human conduct and Islamtc disposition or character that is honourable and consistent with Islamic values of trustworthiness, honesty, toierance, generosity, benevolence, humility, kindness, compassion, etc.

Adab Refers to the manner, etiquette or behaviour of an individual such

as good manners, righteousness,

courtesy, respect, helpfulness, decency, decorum and appropriateness. Axioms of lslamic ethical philosophy The core values accepted of a Muslim that are derived from the Quran and Sunnah.

as

being true to guide the day-to-day conduct

Benevolence An act of kindness to others.

Equilibrium A sense of balance in various aspects of a human's Iife to achieve social ideais and justice. Free

will An individual's

freedom of choice that must be exercised u,ithin the bor.rnds of the Shari'ah.

Gharar Elements of unnecessary risk, uncertaintl,, ambiguity or hazard that exist in business transactions, r,r,hicl-r is forbidden in Islam. Halal Lawful nr legitimate transactions

as specified

Haram Illegitimate or prohibited transactior

s as

in the Quran and Sunnoh.

specified in the Quran and Sunnah.

lslamic worldview 'Ihe perception of the rvorld and the reality or the truth frorn the Islamic perspectir.e th;,it one sirould be concerned rvith for both his iife in the world and the Hereafter.

Khalifah The role of human beings to carry out Aliah's divine wiil in this wor1d. Allah entrusted the natllre, universe ar-rd other creations to man for his use to facilitate and improve his life in the u,orld. Malakah The origin of allhuman behaviour and activities that become a natural rvay of conduct or lifbstyle. One develop s malaka'h as he progresses in his life through repeated behar.iour or habit that tl-re soul becomes accustomed to it. Maqasid al-Shari'ah The ideals and objectives of the Shari'alr for human beings to liar.e a goocl lile and to promote tt,e rvell-being of society.

Masyir A game of pure chance or luck, which is prohibited in Islam. Musyarakah A partnership or joint venture for a specific business, wherebv the clistribution of profits wiil be apportioned according to an agreed ratio. In the event of losses, both parties will share the losses on the hasis olthe rquity participation.

387

I I t

88

I

B.rsiness Ethics

I

-i

Responsibility The duty of an individual to obey the will of Allah, as well as the duty to oneself and society at large.

Riba It means an increase, excess, growth, increment or expansion in lending and trading of comrno
Ribh Profit earneri fionr trading of goods and services. Shahadah The Muslim profession of faith ('there is no god but Allah, and Muhammad is the messenger of Aliah'), one of the Five Pillars of Islam.

The Quran A divine book of revelation that comprises the verbatim and unalterable words of Allah that represent the will of Allah, which lay the foundation for beliefs and religious practices of N4uslims as well as provide ethical guidelines for Muslims.

The Sunnah Knowledge that originates from hadiths or reports about the sayings, personal teachings, character, deeds, actions and practices of the Prophet Muhammad pbuh in personal and pubirc life that exemplify the teachings of Islam. The Shari'ah The sacred law of Islarn that governs an individual Muslim's life, economic transactions and social interactions. Tawheed The Isiamic belief of Unity or Oneness of Allah and His perpetual presence in one's life

Tagwa The state of the heart that is always conscious of Allah's presence, hoping for Hrs acceptancc, tearrng His punishrnent, and hesitating to commit any wrongcloing that rnight bring His u,rath.

Unity The first axiom of Islamic ethicai philosophy which

is derived from the belief in Allah.

Worldview Relates to how man perceives and explains the reality or the truth regarding thc existcn<-e of the unir.erse and their role in it"

1.

What is the difference betr,veen islamic ethics and conventional ethics,

)

Ir, what way do the Quran and Sunnah shape the Islamic ethical system?

3.

Explain the five axioms of Islamic ethical philosophy. How does each axiom relate to a Muslim's li fe? I

ln .,our summaty, make sure

4.

Surnmarize the key characteristics of the Islamic ethical system. discuss the Islamic world view.

5.

Explain the relationship between a firm and its stakeholders based on the Islamrc ethical system.

you

I

*-

i

!

i

I

lslamic Ethir:s

XYZ's A,xiom: Profit

at AIlCost

Afiq was a junior chemical engineer in XYZ.Fertilizer Company Berhad. XYZ had a manufactur-ing plant locared adjacenr ro Sungai Renggam in Cerik, Perak. Afiq was attending a mcnthly operational meeting when rhe chief operaring officer mentioned rhat XYZ was doing extremely well financially and had bright prospects due ro rhe escalarirrg demand for fertilizer worldwide. During the meering, Ken, the plant direcror, starred

ralking about rhe need ro expand the exisring manufacturing olant to accommodare the growing business. At rhar rime, Mart, who was Afiq's immediare superior, highlighred thar the planr needed a proper waste rrearmenr faciliry. He suggesred rhar rhis facility could be included in the expansion plan. AAatt mentioned rhat since the opening of the plant ren years ago,XYZ had been releasing its waste materials rnto Sungai Renggam. XYZ had also been secrerly releasing ammonia and fluoride gases into the armosphere in rhe middle of rhe nighr, which caused air pollurion. Matt felt rhat the investmenr for the waste lreatment faciliry could not be delayed or av^ided any further. Nobody took notice ol rhrs pracrice of discharging waste marerials into the environment due to lack of inoniroring and enforcement by rhe local aurhoritles as well as the aparhy, ol rhe local community. Ironically, XYZ wirhour farl had always stated in irs annual report that the prorectiot'r of rhe natural envlronmenr was its iop priority. lt was merely lip service, The chief operating officer quickly inrerlected and highlrghted thar XYZ ,volild rncur addirional expenditure ro build such a faolrty, nrhich wouid reduce its profirability. He clarmed rirar as rheir ci:rreni practices did not give XYZ any problems, so they need not be'lrxed' He was clearly noi in favour oi Marr's proposal. He furrher argued rhar it vras rl-re government's resDOnsrbtlrty ro overcome po i ,. On PIob rm< Afiq was shocked ro know abour such an irresponsible atti:ude rowards ihe cnvtronmenr. He v'ras frusrrareci and upser abour the short-sighted views of the clriei'operarir-ig offrcer, vtliich rvoulc be harm[ul for XYZ's business in rhe long run. He did not pay af tention ro the rest of rhe discussion. lhe Cha rman nl'XYZ lvcruld be coming for a shorr visir next monih and Afiq planned Lo approach hirn to hrghlrghi hrs concern. Berng a young person who believed in dorng the rrghr thing, Afrq was dctetmineci to rrsk hrs 1ob and report rhe uvrongdoing ro rhe local authorityif XYZ failed ro take action io stop polluting thc envrronment

Questions

1. Describe the erhical issue in this case. 2. ldentify the possible stakeholders in this case and briefly explain

3

rherr sra
Analyse the ethical issue highlighred in the case from rhe lslamic persPc.rrve

Abdalati, H. (1994). Islam in Focus. Saudi Arabia: World Assembly of Muslim Youth.

Abdul Rahman, A.R. and Goddard, A. (1998). An interpretive inquirv of accounting practices in religious organi z.,ri o ns. F in ancial Ac co unt ab ility an d Man agement, l4(3) : I 83 -20 L

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Business Etirics

Ahmad, K. (1976).lslam and its meaning and message (2"d Ed.). Ann Arbor, Michigan: New Era Publications.

Akbar, K.F. (1992). Environmental crisis and religion: The Islamic vtew. Islamic Thought and Scientific Creativity,3(l): 27. Al-Habshi, S.O. and Syed Agil, S.O. (1994). The role and influence of religion in society. Kuala Lumpur: Institute qf Islamic Understanding Malaysia. Al-Shaibani,I.M.I.H. (1997). Kitab al-Kasb min Kutub al-lqtisadi al-lslami.Syria: Maktab al-Matbu'ah.

Al-Qurtubi, A.A.A. (1966). Al-Jaami'Le-Ahkaam al-Quran. Beirut: Daar Ihyaa'Al-Turaath Al-Arabi. A. (2001). Islamic business ethics. Iie Herman, S.W. and Schaefer, A.G., eds., Spiritual gaods: Faith traditions and the practice af business (pp.295-323). Virginia: Philosophy Documentation Center.

Badawi,

J.

Bahagian Pengurusan Fatwa, Iabatan Kemajuan Isiam Malaysia (23 March 1995). Merokok Dari Pandangan

Islam. Portal Rasmi Fatwa Malaysia. " Ac cessed on 2 April 2A14.

_

Beekun, R. (1997). Islamic Business Ethics. Herndor: The Internationallnstitute of Islamic Thought. Beekun, R. and Badawi, J.A. (1999). Leadership: anlslamic perspectiye. Maryland: Amana Publications.

Beekun, R.1 and Badarvi,

,.

(2005). Baiancing ethical responsibility among multipie organizational

stakeholders: the Islamic perspective. lournal of Business Ethics,60: i31-145. Clrapra, M.U. (1992) . Islam and the Economic Challenge. Leicester: The Islamic Foundatiorr. e-Fatwa (17 July 2013). Hukum Shisha Menurut Pandangan Syarak. Portal Rasmi Fatwa Malaysia" Kuala Lumpur, 17 Iuly 2013. . Accessed on 02 April 2014.

(ieorge, J.N4 and ]ones, G.R. (2005). tJnderstanding and managing organizational behavioar. New |ersey: Pearson-Prentice Hail. Ghazali-hanbali, L (1995). T'aqwa: The provision of believers. UK: Alhoda. Haneef, M.A.M. (1997).Isiam, the Isiamrc Worldview and Islamic Economics.

und M anagement, 5(l):

39 -

tl(llvl

Tournal of' Economics

65.

Izetbeqovic, A.A. (1984). lslttm between East and West (3'd Ed). Indiana: American Trust Publicarion. Kami1,

N.M. (2012). ()rganizational citizenship behavior from Islamic perspective and the role of

"t'aqwa:

Empirical analysis of business organizations in Malaysia. Unpublished doctoral dissertation. Internationai Islamic IJniversity Malaysia, Kuala Lumpur, Malaysia. Mawdudi, S.A.A. (i988). ln Zafar Ishaq Ansarl, eds. Towards Understanding the Qur'an: Voi"l Leicester, UK: The Isiamic Foundation.

Merriam-Webster (n.d.). Lottery [Def]. Merriam-Webster Online. . Accessed on 31 March 2014.

lslamic

Ethics

Mohsen, N.R.M. (2007)" Leadership from the Qur'an, operationalization of concepts and empiricul analysis: relationship between Taqwa, trust and business leadership effectiveness. Unpublished doctoral dissertation. Universiti Sains Malaysia, Kuala Lumpur, Malaysia.

Naqvi, S.N.H. (1981). Ethics and economics: an Islamic synthesis. Leicester: The Islamic Foundation. Naqvi, S.N.H. (2003). Perspectives on moraliiy and human well-being: a contribution to lslamic economics" Leicester: The Islamic Foundation. Nasr, S.H. (1990). Islam and the Environmental Crisis. MAAS Journal of lslamic Science,6(2): 32 5l

Ahmed,Z.U. andMukhtar, S.M. (2001). International marketing ethics from Islamic perspective: a value-maximization approach. lournal of Business Ethics.32(2): 127-142. Saeed, M.,

\..i

391

CHAPTER

4q

I Z

Ethics in the Globa1 Environment --9.:*e'

LEARNING OUTCOMES At the end of this chapter, you should be abie to: r Discuss the ethical conduct of multinational corporatrons. a Analyse the different ethical theories in the context of internationa I business.

r e r

Describe ethics in an rnternational cross-cultural context. Explain the framework for ethical decision-making. Discuss the current ethical issues impacting the global environment.

Ethics in the Global

1t:2.,0

INTRODUCTION

I)ue to globalization and the liberalization of various policies around the world, This there needs to be an adjustment in how businesses address their strategies. in has been brought about because of the change in demographics, uncertainties a the market, u irrsh for diversity and increase in competition- Globalization is and interdependence complex phenomenon and requires ingenuity, assimiiation with of varioui economic activities. There are now more cross-border operations The production' and transfer actions such as investment, marketing, technology distinguishable less market has become more global in nature and this resulted in changes impacted not only ;";;r and services from tieir country of origin.theGlobal environment' The various social ih. .orpo.ute and business community but also o..rrr"rr."s of globalization may cause deterioration of the physical environment of and pose manyithical issues such as exposure of toxic substances, exploitation problerns' social other and decay workers and consumers, discrimination, urban i'his chapter rvill address some of the ethical issues associated with internatronal business mentioned earlier. .5.

12.1

ETHICS IN INTERNATIONAL BUSI N ESS

lVhere'er multinationai corporations do business around tire t'or1d, Iranagers must nor only avoid breaking the larr, they should folloiv high ethical standardsOne Cor11panies encounter ethical chailenges in a range of lnternational activities. is globa1 sourcing, the procurentent of products or services frorn supplier.s located ,rf,Ioad. ln a t1,piJal scenario, the focal firm buys parts and components from-foreign companies u1d -arrfoctures such goods or the firm may establish its or'vn factories

abroad. Global sourcing raises public debate about protecting the environment and Lilsuring human rights. For example, some companies operate sweatshops, factories irl $,hich elployees may work iong hours for very low wages, often in harsh conditions. ln 5neatshops may also employ.l-rild lubo.rr, which is illegal in rnost of i1r'- u'orld. iatLd. or ,rflrer cases, firms operate factories that pollute the air, water in deceptive inarketing practices in advertising and selling Sonle firms "ngug" their products. Others offer defective or harmful products io induce people to f"y .r packaging itrrt can lead to disastrous outcomes for public health and safety or tor the natural environment. The easy accessibility of the Internet has ied shady online marketers to harm unsuspecting consumers. For example, in developing econofilies, the majority of online dr,rg tiot.. operate illegaily. The drugs offered by, such

outlets are often fake and may harm users. Although the pharmaceutical industry ;nd governments pursue such firms, they are often elusive and beyond the reach of iruthorities. Illicit use of intellectual property represents 1.g1 another ethical violation, or especially common in international business- lnteliectual property refers to ideas

Environment 393

Y4

Business tthrcs

-Ad;'rces

--l

il

telecom mun ications have intensified

such ethical issues as Drivacy

protection, lraud, and patent, copyright,

and rrademark infringemenr. They have also nrade

it

easier to carry out

queslionable financial activiries, notably money laundering,

which rnvolves rransferrrng illegally received money or usrng ir in financial

lransac[ions in order ro conceal rhe source or ownership or ro tacrlrrare an illegal

works created by individuals or firms and includes a variety of proprietary, intangible assets, discoveries and inventions, artistic, musical and literary works and words, phrases, symbols and designs. intellectual property may be stolen or copied illegally. In Russia, for example, software and movies produced by such firms as Microsoft and Disney often fall prey to counterfeiting. The assets are reproduced without compensating those who originally created them. Widely recognized global brands such as Rolex, Louis Vuitton and Tommy Hilfiger often fall victim to counterfeiting, eroding firms'competitive advantage and branC equity. Trademarks, copyrights and patents are examples of intellectual property rights, the legal claim through which proprietary assets are protected from unauthorized use by other parties. Trademarks are distinctive signs and indicators that firms use to identify their products and services. Copyrights grant protection to the creators of art, music, books, software, movies and TV programmes. Patents confer the exclusive right to manufacture, use and sell products or processes" Intellectual property rights are not guaranteed in most of the world. Laws enacted in one country are enforceable only in that country and confer no protectton abroad. For some companies, being ethical goes beyond doing rvhat is right" It also means being ethical in sourcing for the components that made up the product. In case for review 12.1, Fairphone is the world's first ethica[ly sourced smartphone. The company has a policy to ensure that their components and materiais are on1,v procured from ethical sources.

ac irvir';.

Fairphone: The World's First Ethical Smartphone The inventor behind the device publicrzed as the rnrorld's frrsr erhically sourced smariphone was a DutchmannamedBasvanAbel Thephonewasunveiledrn20]3wirhthousandsof pre-orders,which is not bad considering rhat the phone is nor an Apple or Samsung. rJowever, rhe prolect remarns a huge gamble The idea behrnd ihe smartphone called'Fairphone'is rhar ir avoids sourcrng marerials from conflict zones that use factories thar pracrise poor labou, r,ranagement Ar rhe cosr of 325 euros (RM'1,391.92), the handset received more rhan 15,000 bookings prior to irs launch Despire rhe seemingly rosy start to Fairphone, van Abel said thar erhical business was no[ easy, Allhough rhe phone looks lrke Apple's iPhone and Samsung's Calaxy, the designers say rlrgpp are many differences. Van Abel initially srarted off by looking for erhrcal ways ro obtain colran, rvhich is a rnrnerai exrrac[ed inrhe Democratic Republic of Congo and is vital for mobile phone producrion. Through rhrs search, - . he also found that cobalt was also used exrensively ro make mobile pl-,.lnes and thus broadened his r.at;*ii{ on building a smarrphone exemplifying social and eco-friendly values all along the assembly rphone is also designed to be less power-hungry and more easily recyclable rhan currenr

'First Erhical Smarrphone Takes a Big Risk', The Srar, 20 Seotember 201j)

Ethics in the Global Environment

12.2

fHE EtHIcAL corvDuCr M U LTI NATI

or

ONAL CORPORATI

O NS

Multinational corporations (MNCs) are public companies that oPelate on a- global scale without significant ties to ary nation or region. MNCs replesent the highest level of international business commitment and are characterized by a global strategy of focusing on opportunities throughout the world. Examples of mulfinational corporatiois include Petronas, Nike, Sony, Apple and Nestle. Some of these firms have gro*, so large that they generate higher revenues than the gross domestic product produced in a iCnp) of a country. fne COp is the ium of all the goods and services country Curing a calendar Year. Due to their size and financiai power, MNCs have been the subject of much ethical criticism, and their impact on the countries in which they do business has is unfair been hotly debated. Labour un:''ns in many Western countries argue that it for MNCs to transfer jobs overseas, where wage rates are iower' Other critics have charged that multinationals use labour-saving strategies that increase unempioyment in th"e countiies u,here they manufacture. MNCs have also been accused of increasing the gap between rich and poor nations and of misusing and misallocating scarce ,..rou.."r. Their size and financiai influence enable MNCs to control money supplies, employment, and e',.en the economir well-heing of less-developed countries' Critics expioitation believe that the size and po\\,er of MNCs create ethical issues involving the be able shouid MNCs whether is of both natural and human resources. One question natural and other to pay a low price for the right to remove minerals, timber, oil, price' resources and then seli products made from those resources for a much higher resources such of price sale ulrimate the In many instances, only a small fraction of comes back to benefit the country of origin. This compiaint led many oil producing countries to form the Organization of Petroleum Exporting Countries (OPEC) rn the 1960s to gain control over the revenues from oil produced in those lands' Critics also accuse MNCs of exploiting the labour markets of host ;ountries' Although some MNCs have been accused of paying rnadequate wages, the ethical issue oI fair wages is a compiicated one. Sometimes MNCs pay higher wages than locai employers can afford to match; then local businesses complain that the most productive and skilled workers go to nork for multinationais. Measures liave been iaken to curtail such practices. For example, many MNCs are trying to help orga.nize labour unions and establish minimum wage larvs. In addition, host gover;r'leirts have levied import taxes that increase the price that N{NCs charge for their products and reduce their profits. Import taxes are meant to favour local industry as sources of supnly for an^MNC manufacturing in the host country. If such a tax raises the MNC's coiis,'it rright lead the MNC to charge higher prices or accept lower profits, btit sut:it effects are iot the fundamental goal of the iarv. Host governments have also imposed export taxes on MNCs to force them to share more of their profits' The activities of MNCs may also raise issues of unfair competition. Dr-re to their diversified nature, MNCs can borrow money from local capital resources in such volume that little is left for locai firms. MNCs have also been accused of failing to caffy an appropriate share of the cost of social development. They frequently apply advanced, fiign-proauctivity technologies that locai companies cannot afford or 'Ihe MNCs thus beconie more cannot implement because they lack qualified workers. productive and can afford to pay higher wages to workers. Due to thei: teehnologV, il,tXCr require ierver employees than the local firms to produce the same product. Given

395

1n / JYO

LJusrness Lthrcs

their economies of scale, MNCs can also negotiate lorver tax rates" By manipulating transfer payments among their affiliates, they may pay little tax anywhere. All these special advantages explain why some claim that MNCs compete unfairly. For example,

many heavy-equipment companies in advanced economies try to sell construction equipment to foreign companies that build major roads, dams and utility complexes. These companies argue that the equipment will make it possible to complete these projects sooner, thus benefiting the country. Some less-developed countries counter that such equipment purchases actually removc hard currency from their economies and increase unemployment. Certain nations, such as India, therefbre beiieve that it is better in the long run to hire labourers to do construction work than to buy a piece of heavy equipment. The country keeps its hard currency in its economy and creates new jobs,leading to an improvement of the quality of iife, which it prioritizes over having a project completed sooner. Although it is unethical or iilegal acts by MNCs that makes internationai news, some MNCs also make it a point to be responsible global citizens with good ethical values Eor example, Texas Instruments (fI) has adopted a three-level global approach to ethical integrity, as outlined in Figure 12.1.

o Are there business pracrices or requiremenr ar rhe local ievel

which impact how we interacr wirh co-workers in other parrs of the world?

Figure

12.1

: Texas lnstruments'three-level

glc,bal approach to ethical rntegrity

Instruments generally follows strict rules re garding the giving and receiving of gifts. Hor,vever, rr,hat may be considered an extra\ragant gift in rhe USA may be regarcled ciifferently according to the iocal customs of other Lolrntries across the g1ohe. Texas Instruinents used to define gift iimits using U.S. dollars, but now it lust specilles that gift giving should not be used in a way that places undue pressure to win business or implies a quid pro quo. Although MNCs are not inherently unethical, theri- size and power ofien seem threatening to less-developed countries. The ethicai problems that MNCs face arise from th: opposing viewpoints inherent in multicultural situations" Differences in cultural perspectives may be as important as differences in economic interests. Because of their size and power, MNCs must therefbre take extra care to make ethical decisions that not only achieve their own objec,ives but also benefit the countries where they manufacture or market their products. 1'exas

Ethics in the Global

12.3

ETHiCAL THTONIES IN THE CONTEXT OF I NTERNATIONAL BUSI N ESS

several While reviewing the current literature on international business ethics' i*f ortunt ,.hooi, of thought emerged. We shall look at several different approaches

in the foliowing section.

12.3.1 Cultural Relativism 'When

in

Rome, do as the Rontans do''

'Ihis was the maxim for the relativist school of thought' originated from the ancient argues that Greek philosophy of the Skeptics and Sophists,- cultural relativism country u'here they are d.li18 businesses stlo.la adhere to the ethical standirds of the hold different ethical beliefs' business and they should accept that different cultures culture are better than Therefore no one should claimihat the ethical stanciards of one also believes that concepts those of another culture. Furthermore, cuitural relativism the attitudes of a given from such as ;ustice, injustice, right and wrong, originated applied to Yarlous values culture and hence trsin.ss"I.an rationaliie diflerent ethical e ountries and changes ovcr time' in In this .ur", r"L"r, an organization accepts reiativism as the nlorai standarcl moral deciding for their international conduct, ihere lvill be no common structure between cotnpatlies in clifferences or for reaching settlements on ethical matters create a rather various cuitures. Despite tie flexible natule of this theorl', it rnight point reference awkward and problematic situation rvhere there is no common between consumers rn the home and foreign market'

12.3.2 Moral lmPerialist tl-rat arguesthat The other eKtreme of ethical theory is the moral irnperialist Yjewpoint an1'rvhere functroning when people should apply their own cuitural ethical principles r'r'ottld at home" whrch around the world. Their aclage is 'lvhen in Rotne, do as yclu must ol-ey therules means that although multinat'ionals operating in another countr,v justifiable statrdards moral and regulations oihe host countrl', tley *uit ulto apply atlcl moral to their home countries'iaws and principles. Between ethical relativism are vvhat imperialism, some suggested that what organizatiols tho.uld focus on instead thc belreve They url.].. at e best for the";usinesses and cultures in which they operate' process involves both the dogmatic and innovative otrtlooks'

ethical decision-making as the response l'he main premise of thi-s perspective ls two-fo1d. Firstiy, ethics progress for cor-npetition :o the fundamental desire to survive, especially in situations rvhere limited resources is strong. Secondll', societies seek to negotiate such competitive The results cnvironments by altering ihei. cultural morals, although subconsciously. rationale, in the would be the adaptive re"action tirat unfolds as an ethic. Based on this wouid perhaps be case of global businesses, an international set of agreed standards behind the Caux the soluiion on whose ethics one should use. Such u'as the principles bccn transiated Round Table (CRT) for business that was iaunched in 1994 and had to create to collaborate into many langLiages. Global business leaders came toSether

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a global code of ethics intended to provide structural order in the dynamic world markets. The CRT principles were about business accountability, including openness to stakehoiders as well as shareholders, efforts to create fairness and a global business community adhering to laws.

12.3.3 Normative Ethical Standards Normative ethical standards, also known as universalism, provide procedures that go beyond domestic boundaries and cultural differences" The principle follows the saying 'when in Rome or anywhere else, do as we and the Romans agree to do'. Normative guidelines address common issues from the global perspective r,vith concerns such as basic human rights and freedom, environmental protection, employrnent practices and policies, political payments and invoivement and consumer protection" The United Nations, OECD, Transparency International and the Caux Round Tabie are examples of global establishments that had proposed many broad based global codes of co-- Cuct. This is seen as a move forward as business becomes more global and complex, the need for the formation of internationai moral solutions beeomes more urgent. The advantages of having a global code of ethics are; firstly, it decreases the potential for serious future problems and can diminish operating uncertainties and r,vith the common code of ethics globall,v, and secondly, it u,ould now be possible for aii international firrns to function u.ithin the sarne principles that rvould eventually produce a 'level playing field' in u.,hich many businesses prefer to play. Despite the many benefits of global ethical codes and the many compelling reasons for their adoption, it is not i,r,ithout limitations. Since globai rules are likeli, to develop from a bargaining process, they are unlikel,v to rnirror standards and practices consistent for all cultures.

12.3.4 Dialogic ldealism Apel (1988, 1990) and Habermas (1983, 1991) from lr''here th e theory of dialogic icle aiism originated from stated that it was impossibie to find or create tangible ethical doctrines that are universally binding. As an example, the many ethical codes developed by the West may not incorporate the principles of ethical conduct from other regions of the world. Values such as human rights, the principle of democratic legitimacy, or the concept of public accor.rntability are also too general to be codified into something workable across different cultures. Furtherrnore, many organizations may 1.1sv,, global ethics as a set of 'finalized'codes or as a'sealof approval'tl-rat represents a final copv of the ethical principles rather than as a starting point with the view to iniproving tle codes as time goes by, There is a need to keep global codes current as conditions may change and organizations might hiele behind obsolete codcs of conduct. T'he revision of the codes r'vould be important and should be done periodically in the best interest of many global business enl ities.

12.3.5 Rights Theories The notion that human beings have fundamental rights and privileges that go beyond national borders and cuitures is the basis of rights theories. These rights are seen as the minimum level of morally acceptabie conduct. It can also be consirued that these fundamental rights also take precedence over a '-oilective good. Ethical philosophers reason that basic human rights form the foundation for the morai direction that

Ethics in the Global

business organizations should navigate by when making choices that have ethical ramifications. Specifically, they should not follorv activities that violate these rights. In the context oiinternational business, the United Nations' Universai Declaration of Human Rights has been ratified by almost every country on earth and it lays down fundamental principles that should always be observed regardless of the culture in which one is doing business. An example of the application of the United Nations' Universal Declaration of Human Rights in the scope of employment couid be found in Article 23 of the declaration that specifies on rights to 'just and favouraLrle work conditions', 'equal pay for equal work' and remuneration that ensures an 'existence worthy of human dignity'. These indicate that it is unethicai to engage child labour or pay less than minimum acceptable wages, even if that happens to be the usual practice i.r'.o*. countries. These are fundamentai human rights, which surPass national boundaries.

12.3.6 Justice Theories The theories of justice emphasized on the realization of a just delivery of economic goods and services rvhere a just distribution is one that is considered fair and unbiased. 1h... are ser.eral tl"ieories of justice and we u,ill concentrate on the theory attributed to John Rau,1s who argued that ali economic goods and services should be disseminated equally.:xcept nhen an unequal distribution notrld rvork to everyone's benefit. Aicording to Rawis, there are trvo central doctrines of justice. The first principle states thai each individual is permitted the maximum basic liber"ty compatibie with a similar liberty for others, such as poiitical iiberty (e.g. the right to vote), freedorr-r of speech and association, right of conscience and freedom of thought, the freedom andright to own property, and frecdon"r from subjective detentron and seizure. Tl"re ,..ond principle is that once equal basic freedom is guaranteed, disparity in basic social goods-such as income and wealth distrrbution ancl prospects is to be allowed only if such inequalities benefit everyoile. Rarvis accepted that inequalities can be just ifthe system that creates inequalities is to the advantagc ofeveryone. How then can this theory be applied in the context of internationaL business ethics? Businesses should evaluate if the policies they implement in foreign countries is considered just under Rawl's principle. For example, would it be just to pay rvorkers irt the host countries iess than in the home country? The application of the theory would suggest that the inequality is just as long as it is beneficrtrl to the least advantaged members of the giobal society. However, a scenario where the foreign emploYees were paid lower lvages and were also required to work long 1-rours in an environtrent i.vhere they were exposed to toxic materials, would be clearly unjr,rst in Rawls' context and thus unethical. Therelbre, Rawls' tlieory is a conceptual instrr.rment tirat contribr.rtes to the ethical direction that international companies can usc to help them steer thrtrugir chaiiengirg ethical quandaries.

12.4

ETHICS IN CROSS.CULTURAL AND I NTERNATIO NAL CONTEXTS

A useful way to characterize ethical behaviour in cross-cultural and international contexts is in terms of how an organization treats its en-rpioyees, how empioyees

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treat the organization, and how both the organization and its employees treat other economic agents.

12.4.1 How an Organization Treats lts Employees One important area of cross-cultural and internationai ethics is the treatinent of employees by the organization. At one extreme. rn organization can strive to hire the best people, to provide ample opportunity for skill and career development, to provide appropriate compensation and benefits and to generaliy respect the personal rights and dignity of each employee. At the othdr extreme, a firm can hire using prejudicial or preferential criteria, can intentionally limit development oppo11un11i.r, can provide the minimum compensation allorvable and can treat employees cailously and with little regard to personal dignity. In practise, the areas most susceptible to ethical variation include hiring and firing practices, wages and working conditions and employee privacy and respect. In some countr,es both ethical and iegal guidelines suggest that hiring and firing decisions should be based soiely on an individual's ability to perform the job. However, in other countries, it is perfectly legitimate to give preferential treatinent to individuals based on gender, ethnicitl,, age or other non-work-related factors. Wages and rvorking conditions, while regulated in some countries, are also areas for potential controversy. A manager paying an employee less than he deserves, simply because the manager knows the employee cannot afford to quit or risk losing his job by complaining, might be considered unethical. Similarly, in somc countrles, people would agree that an organization is obligated to protect the privac.,, of its employees" A manager spreading rumours that an employee has AIDS or rs having an affair rvith a co-rvorker is generally seen as an unethical breach of privacy, Likewise, the manner in nhich an organization responds to and addresses issues associated r,r.ith sexlLal harassment also in-,'olves employee privacy and related rights. Managers in international organizations face a number of clear chailenges r'r,ith regard to these matters. The firm must deal rvith country specrfic etirical issues regarcling its treatment of empioyees, but must also be prepared to contend with international comparisons as well. Consider the myriad ethical dilemmas posed by the practice of outsourcing production to overseas locations. From one perspective, it can be argued that firms are ethicalll, bound to move jobs u,herever they can be performed for the least cost" On the other hand, some critics would argue that this practice is unethical, for it devalues the rvorkers numerous contributions to the firm and ignores the hardships imposed on displaced workers. In some countries, such as iapan, aggressive outsourcing that resulted in dornestic layoffs that violated the firm's implicit agreement t1r provide lifetime employment. The ethicai rssues facing the firrr's managers do not end once the production js moved overseas.

12.4.2 How Employees Treat the Organization Numerous ethical issues also relate to how employees treat the organization" The centrai ethical issues in this relationship include conflicts of interest, secrecy and confidentiality and honesty. A conflict of interest occurs rvher a decision ootentrally benefits the individual to the possible detriment of the organization" Ethrcal perceptions of the importance of conflicts of interest vary fiont culture to crrlture. Consider the simple example of a supplier offering a gift to a company employee. Some companies believe that such a gift can create a conflict o{'interest. They fear that

Ethics in the Global

the employee will begin to favour the suppiier that offers the best gifts, rather than the supplier whose product is the best for the firm. To guard against such dangers, many companies have policies that forbid their buyers from accepting gifts from suppliers. In some countries, exchanges of gifts between a company's employees and its customers or suppliers is perfectly acceptable. In ]apan, for instance, such exchanges are .o**o, (and expected) during the ochugen and oseibo gift giving periods. Ochugen, u,hich occurs in iuly, was originally developed to pay homage to the spirits of one's ancestors, although it has evolved to reflect one's best wishes for summer. Oseibo gifts, which are offered in December, represent a token of gratitude for favours and loyalty shown throughout the year. |apanese department stores helpfuily stock their shelves with appropriate goods at every price level during ochugen and oseibo. Well defined .rlt,.r.ai norms gor..., the level and appropriateness of the gifts to be exchanged by businesspersons, which depend upon the nature of the business relationship, its length and the amount of business transacted. Note, however, that determining an appropriate gift by the amount of business transacted is exactly the kind of behaviour thit aiouses suspicion of conflic* of interest in many North American and European countries.

China offers a similar sct of challenges to firms wishing to control conflicts of interests. Much business in China is conducted through guanxi, which is based on reciprocal exchanges of favours. Because of the importance of guanxi, North American and European firms operating in China often face a difficult task of adapting to the norms of Chinese business culture rvhile continuing to honour .o*pur-ry policv regarding cor.iflicts of interest. Typically, one finds that in highcontext, collectivist and por,r,er respecting cultures, gift exchanges are a more important part of the rvay business is done than in lorr,-context, individualistic and po\ver tolerant cultures. Divulging cornpan)r secrets is vieu,ed as unethical in some countries, but not in cithers. Empiovees u,ho work for br.rsinesses in highly competitive industrieselectronics, softu,are and fashion apparel, for exampie, might be tempted to sell informatir,rn about cornpany plans to competitors. Furthermore, Chinese 1aw offered littie prorection rvhen employees left a company and started a rival firm rLsing the fcrrner's technology. A third area of concern is honesty in general. Relatively corrlmon problems in this area include such things as using a business telephone to make personal long distar-rce calls, stealing supplies and padding expense accounts. In some business cultures, such actions are viened as r-rnethical; in others, ernployees may deyelop a sense of entitlement and believe that 'if I am working here, then it's thc company's responsibility to take care of nty needs'. The potentiai for conflict is clear whetr lndividuals from such divergent ethical perspectives work together.

12.4.3 How Employees and the Organization Treat Other Economic Agents The third major perspective for viera,ing ethics invoives the relationship between the frrm and its employees with other economic agents. The prirnary agents of interest include customers, competitors, stockholders, suppliers, dealers and iabour unions. The behaviour betrveen the organization and these agents may be subject to ethical ambiguity, including in the areas of advertising and promotions, financiai disclosures, ordering and purchasing, shipping and solicitations, bargaining and negctiation and other business relationships.

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For example, businesses in the giobal pharmaceutical industry have been at the receiving end of growing criticisrl because of the rapid escalation of the prices they charge for their newest and most powerful drugs. These firms argue that they need to invest heavily in research and development programmes to develop new drugs and higher prices are needed to cover these costs. Yet, given the extent ofthe public health crises that plague some areas of the world, such as t{IV/AIDS in sub,saharan Africa, some activists argue that the pharmaceutical manufacturers should lower their prices and/or relax their patent protection so that patients in poorer countries can afford to purchase the drugs needed to treat suctr diseases. Another growing concern in recent years involves financial reporting by businesses. Because of the complexities inherent in the financial reporting of large multinational corporations, some of them have been very aggressive in presenting their ftnanciai positions in a very positive light. Moreover, in a few cases, some managers har.e substantially overstated their earnings projections andlor hidden flnancial problems so as to entice more investment. Differences in business practices in various countries create additional ethical complextties for firms and their employees. In some countries, small bribes and side payments are a normal and customary part of doing business; foreign companies often follow the local custom regardless of what is considered an ethical practice at home. In China, forinstance, iocai journalists expect their cab fare to be paid if they are to cover a business-sponsored news conference. In Inclonesia, the norntal time span for a foreigner to get a driver's license is over a year. but it can be 'expedrted' for an extra RM300. In Romania, building inspectors loutinely expect a 'tip' for a favourable revierv.

12.5

AN ETHICAL DILEMMA

Most flrms attempt to satisfy ethical standards lvherever the.v do business. However, deciding what is right and wrong is not ahvays clear. Irthical problems arise when requirements are ambiguous, inconsistent or based on ntultiple legal or cultural norirs. Even u,hen a countr). has a sound legal system, or even when the firnt has a strong code of ethics, managers regularly face the challenge of- determining lvhat is appropriate behaviour. An ethical dilemma is a predicament rvith which deterrnining the most appropriate course of action is confounded by a set of solutioi'rs that are equaliy justifiable and often equally irnperfect. Possible actions may be ntutuallr' ,.,:rclnsive-- the choice of one automatically negates the other(s). Imagine you are a manager r.rsitinS a factory olvned by an alliliate rn Cambodia, only to discor.er the use of child labour in the factor;.. You are toid that n ithout the childrer-i's inr--ome, their families might go hungry. If the chiidren are dismissed from the plant, they rvill likeiy turn to other income sources, including prostitution or street crime. \\rhat should you do? Do you make a fuss about the immorality of child labour, or do you iook the other way? This example is typicai of the typc of ethical diienrnas that employees frequently encor,rnter in internatjonal business. Managers embedded in host countries maybe most exposcd becarrse they are caLrght beiween home countr\r ethical norms and those encountered in the forei",n country.

Ethics in the Giobal

12.6

A FRAMEWORK FOR ETHICAL DECISION-MAKING

Scholars suggest that managers follow a syStematic approach in resolving ethical dilemmas. With practice, it can become second nature. The following is a iour-step framework for arriving at ethical decisions, as iilustrated in Figure 12.2'

Figure 12.2: Four-step framework for arriving at ethical decisions Step 1: Recognize an ethical problem

The first step is to acknon4edge the presence of arr ethical probiein. Ask questions such as: Is there soirething \vrong? Is an ethical dilemma present? Is there a siluation that might harnt personnei, customers, the community or the nation? In internatronal business, recognizing the issue can be tricky because subtleties of the situation may be outside your knowledge or experience. Often, it is best to rely on your instincts -if sonre action feels rvrong, it probably is. Step 2: Get the facts

Determine the nature and dirnensions of the situation. Have all the rele\rant persons and groups been consulted? Urhat inciividuals or groups have a stake in tLe outcome? llou,, much lveight should be given to the interests of each? Do some parties have a greater stake because tirey are disadvantaged or have a special need? Step 3: Er aluate alternative courses

ofaction

trlentify potential collrses of action and evaluate each. Initially, consistent with the nyramrd of ethical behaviour, review any proposed action to ensure it is legal. If it violates host or home country laws or international treaties, it should be rejected. Next, review any proposed action to ensure it is acceptable according to company policy, the firm's code of conduct, and/or its code of ethics.If discrepancies are found, the actions shouid be rejected. Finally, evaluate each proposed action to asscss its consistency with accepted ethical standards, using the approaches described earlier:

t t t

Lltilitsrian-which action results in the most good and least harr Rights-which action respects the rights of everyone involved? Fairness--which action treats people most fairly?

r?

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t t

Common good-which action contributes most to the overall quaiity of life of the people affected? Virtue-which action embodies the character strengths you value?

The goai is to arrive at the best decision or most appropriate course of action. It may be useful to.enlist the aid of local colieagues familiar with the situation, to provide insights and help generate options. Assess the consequences of each action from the perspective of all parties who will be afllcted by it. Any decision should be tested by asking-would you feel comfortable explarning it to your mother, a colieague you respect or a valued mentor? If you had to defend the decision on television, would you be comfortable doing so? Step 4: Implement and evaluate your decision

lmplement your decision. Then, evaluate it to see how effective it rvas. How did it turn out? If you had to do it again, would you do anything differently? TLc steps in this framework will heip managers arrive at appropriate solutions to ethical dilemmas. To briefly illustrate,let us revisit the example of you as a manager visiting a company factory in Cambodia, where you discover child labour. Without the children's incorne, their families may go hungry, or the children may turn to illicit activities, such as street crime. Having recognized the problem, the manager may obtain more facts b,v consulting colleagues both at the plant and headquarters. The manager may, also .seek information on the status of the employed children. as rvell as iocal lar,r, and customs on child labour. 'Ihe manager then evaluates possible solutions, ensuring they are legai and consistent with company poiic,v. Finally the manager chooses thc best one and acts on it.

12.7

CURRENT ETHICAL ISSUES IN I

NTERNATIONAL BUSI N ESS

IVIany of the ethical issues in international business are rooted in the fact that political systems, 1arv, economic development and culture vary significantly from natiott

to nation. What ls considered norrnal practice irt one natlon may be considered unethical in another. As managers in a multinaiional f irrn r'r,ork for an instltutron that transcends national borders and cultures, they need to be particularly sensrtive to these differences. Now, 1et's turn our attention to sonre comrron global ethical issues that arise r,vhen companies transact business internatii'rnally. 'fhese inciude price discrimiriation, harmful products, employment practices, environmental polltition and corruption issues. This list of issues is certainl,v not exhaustive but provides a sample of the complexity of ethical decision-making rn the global arena.

12.7.1 Price Discrimination A major ethical issue in internationai business is horq product< sold in other countries are priced. When a firm charges different prices to clifferent groups of customers, it may be accused of price discrimination. Dif{erential pricing rs legal if it does not substantialiy reduce ccmpetition or if it can be justified on the basi:r of costs, for example, the costs of taxes and import fees associated with bringing products rnto

Ethics rn the Global

another country. However, price discrimination may become an ethical issue or even be illegal, as shown in Figure 12.3.

Environment 405

lP'L..4G,-"il;, creates an

ethical

'

issue and may be

illegal when the

The practice violares

practice violates rhe

either country's laws

laws

oF

rhe counrries

which it occurs, when the marker cannot be segmented or ihe cost of ... rn

Price

discrimination maybecomeah ethical issue or even be

illegalwhen...

The marker cannot be

divided irito segmenm

The cosc of segmenting

rhe market exceeds the extra revenue from legal

discriminarion

segmenting exceeds the extra revenue gained from legal price discriminarion, or when price

discrimination results in customer d issat

isfact ion.

The practice resuks in

exffeme customer dissarisfacrion

Figure 12.3: Reasons that make price discrimination unethica{ or illegal

\\rhen a rnarket is artificiaiiy dir,ided into segments and each segment is subjecl to different prices, inr:qualities ma,y emerge that cannot be explained by added costs. Such pricing poiicies nrav be judged iilegal if courts rule that they substantially decrease competition. When companies nrarket their products outside their own couutries, the costs of transportation, taxes, tariffs, and other expenses catr raise tl-reir prices. I-Iowever, lr.hen prices increase beyond the level needed to meet the costs of these addttional expenses, an ethical issue einerges. Increasing prices in this r,l'ay is sometirnes referred to as gouging. When the European Union converted to a single currency, tire euro, many Europeans believed that individual shops as well as countries \{ere gouging them. Gouging also refers tc charging exorbitant rates for a limited time t,-r expioit situational shortages, for instance, lr,hen timber suppliers charge premium prices to flood r.ictims seeking to rcbuiid. Conr.ersely, in the context of international trade, dumping is variously defined as seliing goods in a foreign market at belon, their costs of production or as selling goods in a foreign market at below their 'fair' market value. There is a difference between these trvo lefinitions-the fair market value of a good is normally judged to be greater than the costs of producing that good because the former includes a 'fair' profit margin. Dumping is vier,ved as a method by rvhich firms unload excess production in foreign markets. Some dumoing may be the result of predatory behaviour, with producers using substantial profits from their home markets to subsidize prices in a foreign market with a view of driving iocal competitors out of that market. C;nce this has been achieved, the predatorT firm can raise prices and earn substantial profits. Dumping is unethicai if it interferes with competition or hurts firms and workers in other countries. Furthermore, if it substantially reduces competition, it is illegal under nlany international larvs. Dumpiirg is difficult to prove, however, t,ut even the suspicion of dumping can lead to the imposition of import quotas, whrch can hurt innocent firms.

fwh.r,h. f-.s" price of a product exceeds the full costs of exporuing,

the ethical issue of gouging arises.

fDrrpl"g;u''when companies sell products in their

home markets at high prices whrle selling

rhe same products in foreign markets at low prices that

do nor cover rhe full costs of exporlng.

06

Business Ethics

P,".dfilil;l gouging, and

dumping creare ethical r:sues because sorre groups of consumers have to pay more rhan a fair prrce for products.

An industry that believes it is competing against clumped products may appeai to its government to restrict the irnports. However, deterrninrng a fbreign company's cost or domestic price is difficult because of limited access to the foreign producers' accounting statements, fluctuations in exchange rates and the passage of products through layers of distribution before reaching the end consumer. The result is that goyernments allegedly restrict imports arbitrarily through antidurnping provisions of their trade legislation and are slow to dispose of the restrictions if pricing situations change. Companies caught by antidumping restrictions often lose the export market they laboured to build. Price differentials, gouging, and dumping create ethical issues because some groups of consumers have to pay more lhan a fair price for products. Pricing is certainiy a complicated issue in international marketing because of the additional costs imposed by tariffs, taxes, customs fees, and paperwork, as well as the politicai desire to protect home markets. Nonetheless, businesses should take care to price their products so that they recover legitimate expenses and earn a reasonable profit while still co .rpeting fairly. Dumping does not only happen when products from developed countries flood into a developing market. As can be seen in case for review 12.2, Mercecles, a German automotive company, was accused of dumping their cars in the United States, which happens to have a competitive automotive market. in this instance, both Gerrnany and the United States are world leaders in car manufacturing, hut this does not stop one from taking adr.antage ofthe other.

,::,?i.i-r:1.

Dumping Mercedes Cars in the

US

Mercedes rs selling its entry-level CLA 250 sedan for RM98,570 in the United States. lr sells the san-re car in Cermany for RM146,932.1n international trade, dumping is like predarory pricing. Dumping occurs when manufacturers exporr a producr to anothcr counrry ai a prr.-e either below the price charged in its home marker or below the costs of producrion. These factors are what determine'fair value' Selling in the United States at less than fair value is illeg:l ,:nder lJ S an,l internarional lar,v Mercedes Benz is now illegally dumping cars in the Uniied Stares at a huge djscounr from what ir is selling the exact same models for rn Cermany. This constitutes an unfair trade pracrice Under rhe World Trade Organization (WfO) agreement, dumprng is condemned if rt causes or Ihreatens ro cause material injury to a domestic industry in the imporring country. ln the i.-inired Stares, domesrrc firms and unions can file an anti-dumping petirion under the regulations esrablished by ihe Llnrted Srares Department of Commerce. The Commerce Department derermines if rlre manufacrurer rs , selling its products in the United Stares for'less than fair value'. The lnternational irade C.ommrssron ' (lTC) then determines whether this causes inlury to the domesric indusrry" f here is an ongoing war between Mercedes, BMW and Audi, the rhree big Cerman luxury auromobrle brands. All rhree are striving to be rhe leader in worldwicie sales. The key ro winning this global war is winning in rhe biggesr marker of them all, the U.S. market. (Adapred from 'ls Mercedes lllegally Dumping Cars in rhe lJnited Snte:l', by Joel 2014)

D. Joseph

, The Hill, 6 lanttary

Ethics in the Global

12.7.2 Harmful Products Governments in advanced industrialized nations have banned the sale of certain products that are considered harmful. However, some comPanies in those nations continue to sell such products in other countries lvhere they remain legai. For example, many recent news stories have focused on the safety of genetically engineered products, which have become very controversial in the United States and Europe. Some investors have also fiied resolutions to prevent companies from rnarketing genetically engineered products until long-term safety testing has shown that they are iot harmiul tL humans, animals and the environment. Similar proposals'have also been made for the labelling of genetically engineered ingredients. Many countries, including lapan, Australia and New Zealand, and those in the European Union, already require labelling of geneticaiiy engineered food products' Another ethical issue involves the export of tobacco products to less-developed countries. Cigarette sales in the United States, for example, are declining in the face of stricter tobacco regulations, increasing evidence that smoking causes iliness and medical problems, and a deciine rn ihe social acceptabiiity of smoking. However, as U.S. saleJ decline, tobacco companres have increased their efforts to market cigarettes and other tobacco products in other countries, particularly less developed ones. T'he ethical issue becomes whether tobacco marketers should knowingly sell a product in other countries that is considered 1-iarmfui in their home country. Many consumers in underde'veloped countries vier.r,tobacco as beneficial, both ph1'sically and economicalil'. They argue that the tobacco industry pror,ides jobs and stimulates economies and that cigarette consumers enjoy smoliing. N4any also cite the iolr' longevity rates itl these countries as a reason to cliscount tlre health hazards of tobacco. In the long run. however, as industrialization raises the standard of Iir.,ing in less developed countries, in turn increasing longevity rates, those countries ntay chatlge their views on tobacco. As people live longer and t1-re health hazards of sn-roking begrn to cost both the people and their governmetlts nlore in tin-re and mone,v, ethical pressllre in these countries

wiil

increase.

At limes, products that are not harmlul in some countries become harrnful to consumers in others because of illiterac1,, unsanitary conditions, or cultural values. For exampie, products marketed by the Nestle Corporation in the 1970s included infant formulas, which are used in the supplemental feeding of infants and have been tested as safe rvhen used correctl,v. Wiren the compairy introduced its product rnto African c6untries as an alternative to breastfeeding, locai ntothers quickly adopted the product. As time passed, horn,ever, infant mortality rates rose dranlatically. Investigators found that due to high illiteracy rates, rnanv rnothers were not arble to follow the instructions for using the formula correctly. In addition, the water they used to mix with the powdered fcrrmula was often unsafe, and poor mothers also diluted tl.e forrnula to save money, which reduced the nutritional value of the feeding. Nestl6 was criticized for its aggressive promotion of the infant formula. For example,

the cornpany had employed so-called milk nurses to tiiscourage mothers from breastfeeding by portraying the practice as primitive and promoted Nest16's infant formulas as a safer alternative. Under heated pressure from international agencies and boycotts by consumer groups, Nestl6 agreed to stcp prornotrng the infant formuia. It also revised its product LU.[ing ald educationai materials to point out the dangers of using the formula incorrectly and to assert that breastfeeding rvas actuaily preferabie. Eventually, however, the company reverted to its previous practices, and the Wcrld Health

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Business Ethics

Organization has maintained its boycott. Thus, even traditionally safe and adequately tested products can create ethical issues when a marketer faiis to evaluate foreign markets accurately or respond adequatelyto the health problems posed by its products in certain markets. In the twenty-first century, the concern is growing over safe drinking water, genetically modified products, and tainted foodstuffs entering the fbod chain. For example, McDonald's, long synonymous with fast food, is attempting to develop healthier snacks even knowing that fat, salt, and sugar are inherently tastier than broccoli, carrots, and tomatoes. The job of marketing healthier snacks with fewer calories and cholesterol is a challenge that McDonhld's is n,iiiing to meet to improve public health. For years, multinationals have been wary of product safety and control in China, which is notorious for its lax enforcement. In case for re.,,iew 12.3, Carrefour, a French hypermarket giant, takes no chances in ensuring that the products sold in its subsidiary in China meet the food safety standards.

Carrefour's China Food Safety Efforts Clobal French rerailer, Carrefour, recenrly announced plans to reinforce efforts ro enhance its food

with the new outlets planned in 30 new ciries across China in the next 3 years, it is crucial for tighrer quality conrrol to be implemented to supporr rhe food safery testing system. ln the pipeline will be new A-grade food testing laboratories rhat will make ir possible for Carrefour China ro provide their cusromers with products that are not only safer, but also of better qualiry. At rhe presenr srage, rhe retailer has already set up ihese tesl centres in Beijing, Shanghai. Chongqing and Lraonrng province, equipped with the latest facilities to inspect food merchandises on 55 tesring areas, such as insecticide residue, food flavourings and addirives and veterinary drugs. ln addirion to these, 43 mini-laborarories narionwide had also been ser up to tesr food products from its235 stores in 73 ciries on 1i paramerers wirh quick methods of resring. ln the event rhat conraminated products were found, Carrefour would withdraw them immediately, informed their suppliers and reporr rhe case to rhe local government departments concerned. ln order to safeguard food standards, Carrefour had collaborared wirh 534 farm associations in China, from which it could acquire fruir and vegetables direcrly. The pracrice nor only increased farmers' income, but also provided consumers with higher qualiry food, berter safery and lower prices. At presenc, 30 per cent of all fruits and vegetables were purchased direcrly from safery and qualiry control in China. Da Wei, vice-president of Carrefour China said that

these farms. (Adapted from'Carrefour Boosrs Food Safety Efforrs in China', by Chen Qide, China Daily, 22 lanuary 2014)

12.7.3 Employment

Practices

Employment practices vary across nations, and becar-rse of this, ethical issues may arise. \{rhat happens when employment conditirins in the host nation is seerr to be far less satisfactory compared to the muirinational's home country? V"hich

Ethics in the Global

standards should be applied in this situation, those of the home country or tho.se of the host country or maybe a compromise? In some instances, would it be acceptable for a multinational to tolerate working conditions in their subsidiaries where the work hours are very long, coupled with extremely low pay and dangerous working conditions? Many would argue that multinationals shouid not overlook these conditions and such behaviour should not be toierated. Several ways to safeguard against ethical abuses would be for the multinationals to establish minimum acceptable standards that safeguard the fundamentai rights and dignity of employees,.checking foreign subsidiaries and subcontractors on a consistent basis and taking corrective actions r,r,hen necessary. Corporate concern for globai human rights have recently emerged as news stories depicting the opportunistic use of child labour, payment of lon, wages, and abuses in foreign factories, which helped reshape our attitudes about acceptable behaviour for orgamzations. Cornpanies struggling u,ith human rights issues sometimes make short-term decisions to boost profitability, but these decisions have negative longterm implications. These issue. include concerns about the treatment of minorities and women, as wellas the issucs cf child labour and employee rights. Multinational rorporations face even grcatcr challenges in this area because of the nature of their reiationships with manufacturers and subcontractors in other cultures. Many believe that MNCs should vielv the larv as constituting the 'floor' of acceptable behaviour and st:ive to improve rv,'rkers'qualit1- of life in every country. Understanding each country's culture can irelp MNCs make va]ttable intprovements. Various U.S. anrl European lau,s prohibit businesses from discriminating on the basis of sex, race, religion or disabilities irr their hiring, firing and promotion decisiotts. Horvever, the problerl of discrlnrination is still a reality in the world. 1n the United I.iingdom, for example, E,ast Indjans have traditionally been relegated to the lor'r'est paying, least desircd iobs. In (iermany, tlre governmetrt will not grant citizenship to lurkish r,r,orkers u'ho havc bcen living tl-rere for decades or even to second-generation Turkish Clerman residents. Australian aborigines have long been the victims oi soci;rl anci economic discrimination. In manv Southeast Asian and Far Eastern coltntries, cmpioyees fr-om particular ethnic backgrounds may not be promoted. In Russia, jol-' advertisenlents frequently spccify the age and gender of prospective ernployees, and female entrepreneurs face endless bureaucracy, problems obtaining credit, ancl a tangled legal system. Businesses around thc v,,orld benefit by acknowledging and attempting to curb discrimination, inclr,rding a decrcasc in employee turnover; people rvho believe theyare ]rired, prornoted, and treated according to their skills and abilities rathr'- than their personal characteristics or beliefs are more likely to remain loyal. In turn, this can reduce the costs of hiring and training neur employees because productivity n;rtura111' improves r.vhen jobs are filled with the rnost qualified persons. Additionalil,, rvhen companics hire a diverse locaii r,r,orkforce, they are more likely to enjoy the goodlvrll and support of the communities surrounding their facilities. Finally, companies that take steps to eliminate discrimination may receive favourabie attention from such stakeholders as labour and rvomen's rights groups, enhancing the reputation of tire firm overall as H,eii as its brands. Malaysia is notoriously known to be heavily dependent on cheap foreign labour r,vho often work in the food industry as illustrated in case for revierv 12.4. lvlost of the foreign norkers are exploited, poorly paid and discriminated upon by both local and international companies. The decision to ban these foreign rvorkers in certain industries might have a far-reaching impact in years to come.

Environment 4A?

110

Bi-rsiness Ethics

Foreign Workers Banned in Malaysian Fast-Food lndustry Durga Dasadursarumagar, a Nepalese worker, cleans rables at Carl's lunior ar Sunway Pyramid. As a foreign worker in Malaysia, he works four hours longer than his Malaysian colleagues and for less pay. He earns about RMB00 per monrh which is five rimes more rnoney rhan he could have earned back home in Nepal. Hence, his willingness to do chis type of job in.Malaysia. However, once his visa expires, his contracr will mosr likely not be renewed. This is because rhe Malaysian government had taken the srep to ban fasr-food eateries from hiring more foreign workers. The move was seen as part of rhe governmenr's efforrs ro reduce its dependence on cheap foreign labour Despire efforrs in recenr years ro make ir more difficulr and expensive ro hire foreigners, rhe rruth was thar at leasr one in six workers in Malaysia was a low-skilled immigrani. That led to much frusrratton among some Malaysians over the number of foreigners working in the country. Foreign workers who were employed in the fasr-food secror mainly carried out jobs such as cleaning, whiie Malaysians were ernployed ro cook and manage rhe cash regisrer machines. There were currently rwo rnillion legal forergrr workers in Malaysla and rhey were mainly from countries such as lndonesia, Nepal and Bangladesh. These workers were keen to rake up lobs that Malaysians ignored such as running popL-rlar roadside food sralls, constructing luxury condominiums, burlding roads and preparing planialion harvests for exporr. Hundreds of rhousands more risk being jailed for working in the counrry rlegally (Adapted from'Malaysian 14

Fasr- Food Resratt rants Face

Foreign Worl:er

by Jennifer Pak, BBC Business News,

lanuary 2014)

12.7.4 Environmental Pollution Cbbrily,c"*pil-l have begun working

together to minimize the negative effects of pollution and support environmenral responsibiliry. Joinr agreements and international cooperatives have successfully policed and prosecuted offenders of reasonable emission standards.

Whereas many iegal and ethicai violations har.e limrtecl impacts, in the case of environmental issues, the effects of abuses can be fhr reachrng and long term. For exampie, public concern over global warming has increased pressure on cotnpanies to dramaticaily increase energy efficiency. Pressnre from environmentalists is also encouraging companies to scrutinize suppliers of lr'ood ancl paper products to ensure that the trees are not endangered species and these companies are harvesting products using sustainable practices. Many multinationals are therelore working to create standards for environmental responsibility" Other companies have modified or halted the production and sale of products that have a negativc rmpat,t on the environment. Seeking to defend their air and rvater quality, some colu)tries are taking legal action against polluting firms. In other situations, outside organizations such as Greenpeace issue warirings to countries that engage in environmental abuses. ln some countries, however, groups have lobbied gor.erirments to increase the level of pollr"rtion that they ailow. For instance, Australia generates about 1.5% of global greenhouse gas emissions aird is one of the world's largest polluters. In2012,.,\ustralia's inventory emissions per capita r,vere about 24.4 tonnes carbon dioxide equivalent (CO,e) per person. Only a few countries in the world rank higher-Bahrain, Bolivia, Brunei, Kuwait and Qatar. Australia's per capita CO, emissions are nearly twice the OI1CD average and more than four times the rvorld average (Carbonne'ltral.com.au, 2L)il). Manv pcllution controi efforts have relatively short payback pcriods and have a loirg'terrn positive effect on profitability. In contrast, violating environmental initiatives has both human

Ethics in the Global

and financial costs, with the human cost being the health hazards associated with pollution. Ethical issues arise when environmental regulations in host nations are far inf"erior to those in the home nation. Many developed nations have substantial regulations governing the emission of pollutants, the dumping of toxic chemicals, the use of toxic Laterials in the workplace, and so on. Developing nations often lack those regulaiions, and according to critics, the result can be higher levels of poliution from the operations of multinatiolals than would be aliowed at home. In the quest to lower production costs and to gain a competitive advantage, many multinationals move their manufacturing plants to a country where pollution control is lax. In so doing, these companies would .ndarrg", the locai populations. The environments might be part of a public good that no onJo*rs but anyoire can damage. For instance, no one really owns the atmosphere or the ocean, but polluting both, no matter where the pollution started, harms ail. Multinational corporations might harm these common public goods when they move their production io locations where they are free to pollute the atmosphere or -{r*p toxic waste into the rivcr or o.eans. Due to the different legal set-ups in different countries, some of these actions may not be against the law' of some of the countries, but the question is-would it be ethical? I{owever, many rvould agree that such actions would seem to violate the basic societal notions of ethics and social responsibility.

12.7.5 Bribery and CorruPtion Corruption has been a probien-r in almost every society in histcrl', and it continues to be one today. There always have been and ailvavs will be corrupt government officials. International businesses can gain and have garned economic advantages by making payments to those officials. One form of corruptior-r is bribery. In man,v cultures, g,,,,ing bnbes, also known as facilitation payments, is an acceptable business practice. in Mexico, a bribe is cailed la moi lida, and South Africans call tt dash.ln tf," Uldat. E,ast, India, and Pakistan,/aksheesh, a tip or gratuity given by a superior, is rvidely used. The Germans call it schntiergeld, grease money, and the Italians call it bustarella, a little enr.elope (Ferrell & Fraedrich,2A0g). Companies that do business internationally should be aware that bribes are an ethical issue and that tire practice is more prevalent in some countries than in others. Bribes and payoff requests are frecuentiy associated with large construction projects, turnkey capital projects, and Iarge commodity or equipment contracls. Corruptioit rn the form of 'speed money'or settiements to govcrnment bureaucrats is the norm in many countries. Many would argue that the payment u'oulti eventually be beneficial to the local population rn terms of incotne and job generation and should not be frowned upon. From this point of view, although it might be construed as a little unethical, it might be the best option considering the greater good the outctrme might be ror the generai popuiation. Corruption may prove to t,e necessary in certain economies as the speeding up of business investment approvals would help pave the way for greater welfare and discourage illegai activities such as black market profiteering and smuggling as the argument goes. On the other hand, other economists reasoned that corruption reducer business returns on investment and this will cause the slorving down of econonric growth. Unproducrive bureaucrats in corrupt nations may demand side payments for granting permission for business operations and this rvould reduce multinationals' incentives io invest and hamper grol{th in the countT'. Moreover, one study of the association betryeen corruption ancl economic growth in 70 countries founci that corruption had a significant negative impact on a country's growth rate (Ahmad et a\.,2012)-

Environment

411

112

Business Ethics

The conclusion is that this is a delicate and difficult situation and the demand for speed money creates a genuine ethical dilemma. Corruption is evil, and may harrn a country's economic development, but there are also cases rvhere side payments to government officiais can remove the administrative obstacles to the creation of jobs. Nevertheless, this viewpoint overlooks the fact that corruption inclines to corrupt both

the bribe giver and the bribe taker. Once an individual started giving in to bribery, getting out of it may prove to be difficult if not impossible" 'l'his viewpoint reinforces the ethical stand against engaging in corruption, regardless of how persuasive the benefits might be. Despite the open investment environment and cheap labour market in certain ASEAN countries such as Cambodia, many investors are wary of corruption in the country (refer to case for review 12.5). Corruption has an underlying effect that would eventually increase the cost of doing business in a cciuntry. In the long run, the countr,v's reputation might drive out serious investors, and they wiil look for opportunities in another country that could provide a more conducive and 'clean' business environment.

U5 lnvestors wary of Lorruptron rn tambodia Cambodia seems to be an appealing business destination for many foreign investors but srill lags behind most of irs ASEAN neighbours due ro the perceprions of endemic corruption. This was based on a survey done in the 2013-14 ASEAN Business Outlook chat interviewed 475 senior US business executives. Can:lbodia was placed Sth out of the'10 ASEAN countries, behind Laos and Brunei, in terms of attractiveness. Often cited were concerns about unfavourable laws and regulaiions, underdeveloped infrastrucrure and shortage of skilled labour. However, rhe main worries, especially among US investors, revolve around their perception of corruption, with an overwhelming 81 per cenr raising this concern. Preap Kol, executive director of Transparency lnrernarronal (Tl) in Cambodia said thar rhe government needs to create new laws and regulations ro promore a level playing field among all businesses. However, the Ministry of Commerce Secretary of Srare Mao Thora menrioned ihar the government does have pians to address Cambodia's corruprion issue. He assured rhat the country has an entire corruption law by the Anti-Corruprion Unir in existence and the Mrnrsrry of Commerce had prepared a plan ro berter implement rhat law ro fight corruprion in business ro encourage more foreign invesrors to invesr in Cambodia. (Adapred from 'US lnvesrors Cite Corrupdon as Major tssuei by Simon Henderson, The Cambodia Daily, 22 Augusr 2013)

12.8

THE VALUE OF ETHICAL BEHAVIOUR

Behaving ethically is important for several reasons. First, ethical behaviour is simply the right thing to do. Second, it is often prescribed within ]aws and regulations.

F-thics rn

the Global Environment 4'13

Violating laws and regulations has obvious legal consequences. Third, ethical behaviour is demanded by customers, governments and the news media. Firms that commit ethical blunders attract unwanted attention from opinion leaders. Finally" ethical behaviour is good business, leading to an enhanced corporate image and seiling prospects. The firm with a reputation for high ethical standards gains advantages in hiring, motivating employees, partnering and dealing with fbreign governments. Firms that behave unethically run the risk of facing criminal or civil prosecution, hurting their own reputations, harming employee morale and recruitment efforts and exposing themselves to blackmailers or other unscrupulous parties.

To consolidate your learning, the learning outcomes are summarized belo-w:

L

Discuss the ethical conduct of multinational corporations. Muitinational corporations operate on a global scale without significant ties to aitl' otre uation or region. Due to their size and financiai power, MNCs can have a serious impact on the countries where they do business, which may create ethical issues.

Z.

Analyse the dift-erent ethical theories in the context of international business. While revierying the current literature on internationai busincss ethics, several important schoois of tirought emerged. in the context of international business, several ethical thetlries lvere Ciscussed. J'l-rese inciude cultural relativism, moral irnperialism, normative ethical standards, dialogic ideaiism, as weli as rights and justice theories.

3.

f)escribe ethics in an international cross-cultural context. Cuiturai differences often create ethical complications. Acceptable bchaviour in one culturt mar be viei,r,ed as immoral in another. One important area of cross-cultural and international ethics is the treatment of employees by the organization. In practice, the areas most susceptrble to etl-rical variation inciude hiring and firing practices, wages and working conditions, as rvell as employee privacl. and respect. Numerous ethical issues also relate to holv empioyees treat the organization. The central ethical issues in this relationship include conflicts of interest, secrec)r and confidentiality, as rvell as honesty. A third major perspective for vierving ethics involves the relationship between the firm and its employees u,ith other economic agents. The primarv agents of interest include customers, competitors, stockholders, suppliers, dealers and uniotts.

4.

Fxplain the framework for ethical decision-making. An ethical dilemma is a predicament with major conflicts among different interests. Determining the best course of action is confounded by severai possible solutions thal may be equally justifiable. Scholars have devised a four-step framework for making ethical decisions. Initially, the manager should recognize the existence of an ethical problem. The next steps are to get the facts, evaltiate alternative courses of action and then implement and evaluate the decision made.

5.

Discuss the current ethical issues irnpacting the global erlironment. The common global ethical issues that arise when companies transa.ct business internationally inciude price discrimination, harmful products, employmeut pr:rctices, environmental pollutron and cornrption issues.

+14

uusrness tlhrcs

Chitd labour Refers to the employment of children in any work that deprives children of their childhood, interferes u.ith their ability to attend regular school, and that is mentally, physically, socially or morally dangerous and hannful. This practice is. considered exploitative by many international organizations. Legislation across the rvorld prohibit chiid labour.

Corruption The

abuse of power to achieve iilegitimate personal gain-

Dumping In economics, 'dumping' is a kind of predatory pricing, especially in the context of internationai trade. It occurs rvhen manufacturers export a product to another country at a prtce either beiow the price charged in its home market, or in quantities that cannot be explained through normai market competition. storage of food in ways that to avoid potentially be followed that shouid routines of prevent food-borne illness. This includes a number i.r.r. health hazards. The traL-ks wittrin this line of thought are safety between industry and the markel and then between the market and the consumer.

Food safety

A scientific discipline describing the handling, preparation and

Clobalization 'fhe process by u,hich the economic and social systems of that goocls, sen'ices, capital and knowledge move freely between nations"

naf ions are conttectecl together so

Migrant worker The term migrant worker has different officiai meanings ancl connotations in different parts of the nor1d. The United Nations'definitior-r is broad, including any people u'or-king outstde of their hor-,-r" collntr),. The term can also be used to describe someone who migrates within a country, posslblv their or,r'n, in order to pursue rvork such as seasonal work. lllegal immigrant Refers to undocumented immigration or irregular imntigration; migratiott [o a country/ state in violation of the immigration lalvs of that country/state. Illegai inrrnigratiott raises many political, econornic and social issues and has becon,e a source of major contro\.ersv iu cleveioped countries and the more successful der.eloprng countries.

!ntellectual property ldeas or r'r.orks created byindividuais or firms, inciuding discoveries and tnventtotrs, artistic, rnusical and literary rvorks and rvords, phrases, symbols and designs. lntellectual property rights The legal claim through which the proprietar,v assets of firms and individuals are protected from unauthorized r-rse by other parties. Justice A corrcept of nroral rightness based on ethics, rationalitl,, law, natrrral 1arv, religitn, equity or fairness, as well as the administration of the law, taking into account the inalienable and inborn rights of all hurnan beings and citizens, the right oiall people and individuals to equal protection before the larv oitheir civil rights, rtithout discrimination on the basis of race, gender, sexual orientatiott, gendel identitl', national origir-r, -olour, ethnicity, religion, disability, age, or other characteristics, and is fr.rrther regarded as being inclrrsive of sociai justice.

Multinational Corporations Multinational enterprise is a corporation that is registered in more than one country or that has oper ations in more than one country. It is a iarge corporation which both produces and sells goods or services in various countries. It can also be referred to as air international corporation. T'hey pJay an iinportant role in globalization. Sweatshop Sweatshop (or su,eat factor/ is a negatively connoted term fbr any rvorking etn'ironment considercd to be unacceptably difficult or dangerous. Sweatshop wort-ers often work iong hours f'cr very iow pay, regardless of iaws mandating overtime pay or a minimum i,r,age. Child labour larvs may be violated. Srveatshops may have hazardous materials and situations. Empioyees may be subjer-t to ernployer abuse lvithout an easy way, if any, to protect them.

Ethics in the Global

Environment 415

i.

What is intellectual property? What industries arc most affected by threats to intellectual property?

2.

What is an ethical dilemma? Give an example of an ethical dilemma that multinationals encounter abroad.

3.

What are the current ethical issues that are prevalent in the context of international business today?

4.

Describe the steps in the framework for ethical conduct.

5.

What advantages do firms gain from behaving according to high ethical standards?

Donation or BriberY? {.

i r

you have been appoinred as rhe new regional manager overseeing the operations of several subsrdiaIies in are rampanI One day, Lar-,,r America. You are posted ro a country where drug rrafficking and lawlessness boss'provide a represenrarrve oia local 'big boss'approaches you and asks [or a'doriatiorr'tt, l"relp rhe'brg make sure boss'will the'brg donation, foi the in return housing for rhe poor. The represenrarrve rells you rhac rhe'big r'hat we I aware that you will have a productive sra,v in his country. No rhreats are ltrade, but you are connected boss' heads a cr-rminal organizatron rhar is engaged in drug traffrcklng. The'blg boss' rs also a very poor in the the help rndeed boss'does the'big and influenriai man in rhe counrry You also found our that run-down neighbourhood of the city where he was born

Questions: 1. What would you

2 3

done in the above situation? Apply rhe four-srep erhical decision-making framework in rhe case Would your decisron be different from the decision you would have made in Question 1? Does ir make a difference rf yo.rr competitors have been paying the'donation'for years? ha,,,e

*r,:ir"

Ahmad, E., Ullah, M. A. & Arfeen, M. L (2012). Does Corruption Affect Economic Grorvth? Latin Americstt n o m i c s, 49 (2): 27 7 3A5. J ourn al of E co

Apel, K. (1988). Transformation der Philosophie: Das Apriori der Argun'entationsgemeinsclra-ff. Stuttgart: Suhrkarnp Verlag. Apel, K. (1990). Diskurs und Verantwortung: Stuttgart: Suhrkamp Verlag.

Carbonneutrai.com.au (2011). Australia's Greenhouse Gas Emrssions. . Accessed on 29 August 2014.

+

lO

Busrness tthrcs

Cavusgil, S. T., Knight, G. and Riesenberger, I. R. (20L2).International Business: The New Realities (2"'1 Ed.)" New )ersey, USA: Pearson. Chen Qide (22lanuary 2014). Carrefour Boosts Food Safety Efforts in China. China Daily, Europe. <.http:ll europe.chinadaily.com.cn/business 12014-011z2/content_l7253853.htm>. Accessed on 4 Februa ry 2AA.

Czinkota, M. R., Ronkainen, I. K., Moffett; M. H., Ang, S. H., Shanker, D, Ahmad, A. and Lok, P. (2009). Fundamentals of International Business (First Asia-Pacific Ed.). Australia: fohn Wiley & Sons.

Daniels, J. D., Radebaugh, L. H. and Sullivan, D. P. (2011). International Business: Environments and Operations (13th Ed.). Harlow: Pearson Education Limited. Ferrell, O. C. & Fraedrich, J. (2009). Business Ethics 2009 Update: Ethical Decision Making and Cases. Boston: Cengage Learning.

Griffin,

R. W. and Pusta1., M. W. (2007)" Internationql Business (5th Ed.). New Jersey: Pearson.

Habermas, J. (1983). Moralbewul3tsein und kommunikatives Handeln. Stuttgart: Suhrkamp Verlag" Habermas, ]. (1991). Erlauterungen zur Diskursethik. Stuttgart: Suhrkamp Verlag. Henderson, S. (22 August 2013). US Investors Cite Corruption as Major issue. l'he Cambodta Darly. . Accessed r)n 5 February 2014.

Hiil, C. W. L., Wee, C. H. and Udayasankar,K. (2072).International Business: An Asian Perspecfive. New York: McGrar'r, Hrl1. Joseph, I D. (6 fanuary 20i4). Is Mercedes Illegaily Dumping Cars in the Linited States? The Ilill. . hccessed on 5 Februarv 20i4.

Pak, l. (14 |anuar1,2014). Malaysian l:ast Food Restaurants F:ace Foreign Worker Ban.P,L\C. Business . Accessed on 4 February 20i4.

N,-,n,s"

The Star (20 September 20i3). First Ethicai Smartphone Takes a Big Risk. Tech I'leu,s. Accessed on 20 September 2013.

Barriers towards sustainable consumption, 329' 346 convenienc e,3?9, 330

A Accountabiltty, I 42 - 3, 3 62 Adelphia, 142 Adverse selection problem, 135 Adware, 264 Altrrmative action, 218, 224-8

principle of un iversa lizabiltty, 222 zak:tt,228 Agerrcy prtrhlcnr, l.i5 Agency theorl', 134, I 3-5 6 AIG group, i5-5 Albukhary Founclation, 1 78 Al-Quran,2, B, 355 AmBank group, 178 American international grouP, 142 Anglo American, I22 r\nnuai General Meeting (AGM), 149 Aristotle'.s'Iheory oi' Justice, B4 corrective/conpensatory justice, distrilrtrti"e juslie c, 86 particular justrce, B4 5

B5

rct rihtrt ive .itrsl icc, s6

universal justice,

84

5

.,tristotle's Virtue Ethics 'lheory, 67-8,9l Armed iorces Fund Board, 150 ,'. rthur Andersetr, 1 13, 155

Association of Banks, 128 m

cost,329, 330 habits and routines, 329, 330 lack ofaccess to facilities, 329, 330 lack of awareness and information ' 329,330 perceived consumer effectiveness, 129, 330 psychological effects, 329, 330 relative sustainability, 329,,13 lviliingness to act, 329 1

Bausci, & Lornb, 103 4, I l3

challenging sales targets, 104 overstated earnings, 103 4 unethical sales tactics, 10'4

Believel 341.,342,348 Benevolenc e (ihsaan), 366, .368, 387 Benthamt Classical [-ltrlttarian theorl', 59, Berjaya Corporatrotr Ilerhad, 178 Best practices, t29-3i Board ieadership structure, 143 Board of directors (BOD), 122, 141, i4-l

61

, l4 3 Boards, 142, 14t, 146 committees, see committees compensation practices, 146 independent, 144 leadership structure. 143 role

Brand marketing, 280 Broad principles ofgood corporate governance, i33 Bribe, 2A2,2A5,248

\,

Bribery,24B,4ll,4i5

I":nk Negara Malaysia, 151 Financial Services Act (2013), i51 ilarings Bank Plc., 148

Buddhisi ethics, ll-12 compassion, 18 Bursa Malaysia Listing Requirements (BMLR), 129

+18

lndex

Bursa Malaysia Securities, 151 Listing Requirements (2001), 151

abuse ofpower, 35

agency problem, 35,227

breach oftrust, 35 initiatives taken by MACC, 204*5 legal framework in Malaysia, 204-6 situations that bring to,202-3 types of,204

Bursa Malaysia, 126-8 Business sustainability, 22, 24 Business systems, 33, 332

C California Pubiic Employees' Retirement System (CaIPERS), 1ae

Career break schemes, 233 Career planning, 233

Carrollt four-part model, 169 Carrollt Pyramid of Corpora*" Social Responsibility, L76-8 Cayeat emptor,2BB,373

Central Bank. 128 -see Bank Negara N{alaysia Chair;rran. 122 CI'rief executive olhcer (CEO), 123,144 dualit1,, 144 non dualrty, 144 Christian r'thrcs. l3 Claim, 170 Classical eccinomics,

1

181

Code oi Ethics, 43, 50 con'rpliance,based, 2Z 43 integritr,-ba sed, 27, 43 Commrttees, 145

audit, 146 nontination, 145 remuneration, 146 (iornmunity,, 41,42

Comilunity leaders,

41, 42

Companies Commission of Malaysia, 128, Comi,anies Act (1965), 151 Comparable worth, 219, 224 Company leaders and trustees, 41, 48

Competition,2B0 Competitive disadvantage, 1 82 Comply or explain, 130, 133 Computer Associates International, I 05 Computer viruses, 263-4 Concentrated ownersh ip, 125 Conflict of interest, 35, 123, 124, 2A1 -6

Conscience,6,7, 45 Conservation, 348 Consumer, 330,332 Consumer Ethics Theory, 286-7 actively benefiting from deceptive but legai practices,2BT actively benefiting fiorn illegal activities, 287,311 no harm, no foul activities, 287 passively benefiting from illegal activities, 287 Consumer privacy, 214,'266 7 Privacy Enhancing fechnologies (PET), 267 Consumer sovereignty, 21 4 Controllers, l2.l Controlling interest, i 25 Copyright, )62, 27 0, 27 5 Corporate, J23 ou,nership arrd control, 123 Corporate gclr.ernance, I 2 definition, I21 implementation approacl-res, 1 30 Corporate managers, I 2,1 Corporate social responsibllity (CSR), 17-q concept and natilre, i7-5 debate, i80 Corporate social responsirreness. I 84 four philosophies or rnodes of, iB6 Corruption, 205 -206, 4ll 2 Courage,1B,19 CSR framework, 175 iour dimensions of suslainablc practices, l7-5 Keith Davis see Keith Davi:'s Model oI Corporate Social Responsibility CSR Prime Minister'.s Ar,vard, 176 Culture, 11i corporate, 11 1 eiements of a corporate cu ltr:re. 1 I I ethical, 111 Custoriers, 22,24

151

Cynthia Cooper, t09

lndex Employee-employer relationship, critical issues of, 195

D

I 95, 201

Data accuracy,262 Day of judgement, 361,362,366

Emplo1,eg misconduct,

Deception, 291, 293, 295, 301

Employee surveillance and privacy, 212,267

Decision-making, 36 three-levels of,36-7 Delegation of control, 123

Enrpioyees' rights, 238-9

Denial of scrvice, 265 DiGi Berirad,17B Direct marketing, 300-1, 310 Directors induction programme, I 47

Environment, 31 4, 323 -8, 3 4l Environmentaliecological ethics, 339, 341 Environmentai pollution, 4 1 0 E,nvironmental sustainability, 323 Eqtiilibrium (' adl), 366

Directors' remuneration, 146, 153 inflated, 153 Directors' training, i47 Contirruing Education Prograrnme (CEP), lr{andatory Accreditation Programme (MAP), i47 Discrin'. in a tit:n, 218 - 28, 232

comparabie t{orth,219 consumer welfare, 218

defining, 218 externalit1,, 222 gender, 219 reverse discrirnination, 218, 224, 228 stereotl,pin g, 219, 230

uneqrral treatment, 2l 9 worliforce diversity, 2 1 8

Dispersion of share owr-rership, 122 J)omii-to'.s przza,

77 8

Due process,242-3

Dumping,405-406

E llcological system, 339, 341 Econon-irc actors,4l Ir,conomic character of a business, 33-4 corporations,33, 42 partnerships, 33, 121 sole proprietors, 33, i2l lrconomic responsibih ty, 17 6 Economic sustainabili ly, 323 Ildaran Otorlobil Nasional (EON), 127 Egoists, 120 Employee dutrcb, 239

employee loyalty in, 201 1

12

Employment pracLrces, 408-9

Enron corporation, 120, 142

Ethical culture, 40, 1 1 1- 1 3 economic, legai and moral dimensions, 44 147

opportunity costs, 33, 5l risks in the conduct ofbusiness,33,5i Ethical dilemma, 33 4, 45,284, 402 Ethical leadership, 100, I 0 I influencer of corporate culture, 100 ]effrey Skilling, i05

morai manager, 101-2 moral person, 101.'2 right tone from thc top, 103 role-modelling, 101 Sanjay Kumar, 105 set an ethicai torre-at the-top by, 100 two pillars of erhical leadership, 100 rvaik the talk, 102 Ethical management, 38-9 ethical corporate ciimate, 38, 48 organizational e1-fectir.eness, 24, 38 llthical responsibil i ty, 17 7 Ethical theories in intcrnational business, J97 cultural reiatrvisrn, 397 dialogic idealism, 39S justice theories, 399 moral imperiaiist, 397 normative ethicai standards. 398 rights theories, 398 Ethics,

i-31

analytical thought, 3, 25 application ofreason, 3, 25 awards, I11 beliefs, 3, 25 ethical theorie.s, 3, 25, 55-98

4"19

20

tndex

morality, 3,25

Framework for ethical decision making,403

no.-r, i,25

Fraud, 148, 301

rules and principles, 3,25,323 the study of moral standards, 3, 25 vaiues,3-8,25 Ethics from islamic perspectiv e,7l, 355 Adab,355-356 Akhlaq,355 defining of,355,357 dimensions of,357 Ethics of care,72-7 Exploiting companies' returir policies, 306

Free market arguments, 326*7

External audit, t+9

Gifts of nature, 339, 341 Global free market system, 33 Global warming, 317 -21 Golden rule, i6*7

independent, 149 External interference, 183 External mechanisms, i4 1

Free

will (ikhtyar),

366

G Gender/sex discriminat ion, 219, 249 Genting Group, 126 Gifts and entertainment, 298, 310 benefits, 202 conditions for assessing morality of receiving, 202

Gouging,405-6 Governance

F

,7,

121

Government orvnership, 126

Faber Group,727 Factors that influence ethicalvalues, 4

critical reflections, culture, 4

4

Government-linked companres, i 26 Green job, 333-5 Greenbury report, 1-30 Greenhouse gases, 318. 348

experience, 4

Green jobs, 333-5

sociaiization, 4 upbringing,4 Faculty (malakah) of, 356 Soul (nals), 356

H Hacking ancl crackin g, 263 crackers, 263

Famill'groups, i25 Family ownership, 125 Federation of Public Listed Companies, 128 Female labour force, 249 Fiduciary responsibility, 17 5

Hajj (prlgrimage to Makkah

Financial manipi-r1ation,

Harmfulproducts, 407

1

53

Financial Reporting Foundation, I 28 Flexi working arrangem ent, 233, 249 Formal ethics programme, 106 code ofethicai conduct, 106-07 compliance manual, 106, i08 core value statement, 106 critical eiernents, 106 ethics audit, 106, 110 ethics award, 106, i11 ethics officers and compliance officers, 106, 109 ethics training programme, 106, l0B whistieblowiirg policy and ethics helplines, 106, i09

hackers, 263 ), 3oz

H alal (legitimate/iawftr [), 3 5 9 Haram (i11egitimate/prohibited), .') 59

Haze,340 Hewlett-Packard,

149

High-ievei finance c(),rmittee, I 28 HIH Insurance, 1 42, 155, 156

Hindu ethics, I4 Hoarding {ihtikar), 37 3 Honesty in sales, 29S Hong Leong Group, i26 HStsC Bank Malaysia, i0B

Human rights. s0 unconditionality, universality, B0

B0

lndex Hunt-Vitell Generai Theory of Marketing

K

Ethics,285

Hybrid,

Kantian ethics,'221-2, 225 inefficrency,222

130

Kant's Ethics of Duty Theory, 64 I

Independent director,

-5 Information accessibility, 262 |

44

Information asYmmetrY, 1 35 Information technology (IT), 259, 266 Insider tradirtg,203 definition of,203 definition of price sensitive information, 203 three elements for,204 lnsiders, 125 Integrity, 2A-4,43 Interna1,147 audit, 147 cot)l rol, I4; Irrtellectual propertr,, 199, 262, Intelligence ('aql), 362

Khutbatul Wada',238 Kickback,202 example of,202 KPMG Malaysia, 184 Kuala Lumpur-Kepong Berhad, 126

L 2VA

internai mechanisms, 140 lnternalization of ethical r,alues, 7 Intoxicants (kharu'), 37 6, 377

Intrinsic t alue, 326,339,349 Invasior of privact, 209, 301 Iron lan, of responsibiltty, 17 6, 179 irritation, 300, 301 isianric ethics, 225, 358 axioms of, 365, 366

four vital principles of, 163-5 Rukun Negara,

universalizability, 67 Keith Daviss Model of Corporate Social Responsibility. 179 Kenmark Holdings Berhad, 157 Khalifah, 2, 10, 341,349 Khazanah Nasional Berhad, 127

Labelling, 291 Large shareholder, I 27 LegaI resporrsrhilitr.

I

--

Legality,, 6

Legitimacl', 172

3

Lehman Brothers,

ll3,

137, 142

Lion Gror"rp, 126 Location privac1,, 26E Global Positioning System (GPS), 268 Locke's Natural Rights Theorl', 80

M

S

sources and origin of, 358

Islamic perspective s, 7 1, 214, 230 lsiamic tax (zakat), 363

J ]ohnson and ]ohnson, 104, 183 right tone from the top, 104 Tyienol incident, 104 lustice,227,223 |ustice and rights, 33,221

Malaysia Mining Corporation, 178 Malaysian Accottntirrg Stanclards Board,

128

Malaysian Airlines Svstem (MAS), 120, 127 Malaysian Code on Corporate (]overnance (2000), i2r, i28 34 Maiaysian Tsunami Disaster Fund, 178 Ma|ware,264 Management of ethics, 38-9

Managers,4l as company leaders/trustees, as commtrnity leaders, 42 as economic actors, 4l

41

421

)-2

Index

o

Manipulation,296 Maqasid al-Shari ah, 355 Market failure, 327, 349 Marketir-rg,

2

1

Occupational safety and health, 38,240 Occupational Safety and Health Act 1994, 38" 240

4, 280 - 3

Marketing ethics, 283 87 theories, 283 McDonald's Malaysia, i 79 Ronald McDonald House, 179 Mechanisms, 141 MEMS Technology Berhad, 154

Merrili Ly,nch, 113 Mills Rule Utilitarian Theory,

15, 60

consequentiaiism, 60

Offensive advertisements, 296 Organic waste, 349

Organization,35

7

Organizationai effectiveness, 24, Owner-manager firm,

3B

122

Oxymoron, 325-6,349

P Packaging, 289-91

hedonism,60 maxirnalism,60 unirrersalism, 60 Milton Friedman, 181

Parmalat, 113 Partnership {mus v arakah), 382 Patents,262,270

Minoritl' Shareholder lVatchdog Group

Perusahaan Otomobil Nasronal

ISWG), 150 iv{inoritt' shareholder s, I27 Nfisconduct, 243 Nli.sleacling ( kh alab ah), Zl + advertising/marketi ng, -374 Mizoan,342,349 N4ontfort Girls Centre, 178 Moral hazard, i35 N'ioral/cthical obj ectivism, 57 Moral/ethical re1atir,,ism, 57 Moralr.alues, 18 2i Multinational corporations (MNC), 395 Multi staiieholders, 349

Perwaja Steei, 120

(N

PETRONAS, i07 no gifts poiicv statement,

(PIiOTOt\), i27

107

PETRONAS Dagangan, 127 PETRONAS Gas.

127

PETRONAS sharecl vah-rcs, 23

Philanthropic respor.rsibilrty, 1 77 Phishing,265 Pilgrimage Boarcl, 150 Pillars, 9,362 3 etliical leadersirip, of, i01 Islam, oi 9, 363 Islamic faith, oi, 362 Pious individuais Qnuttatleen). 363

N t\asionCorn, 142 National Equity Corporation (Permodalan Nasional Berhad),150 Natural lfitralt),356 Natural/human rights,

B0

Negative rights,2i2 Neu. Economic Policy (NEP), 126

No gifts policy, iOB Non-renewable resourc Normative, 173

es.

323-4

Pollution, 324,:,19 Por,r,er, 172-3 Prescriptive, non-prescriplir,e,

I 30

Price discriminatioit. 404 0:; -

Principal-agent problern, I 35

Principle, i70 of corporate effect, i70 of corporate gor.ernance, of corporate rights, 170 of jusiice, 221,225 Privacy,207-17 defining, 203 Privacy in retaiiing, 299

1

31

lndex Privacy laws in Malaysia, 216 Personal Data Protection Act 2010 (PDPA),212,

Royai Dutch Shell, 155 Royai Malaysian Police Department, 151

217

Product safety, 103, Profit (rlbft), 38i

171

5

Prohibited earnings and business transactions, 376 Gharar (specuiation, risk, uncertainty), 382 H aram (forbidden/prohibitediiilegitimate items), 376 Masyir (gambling), 383 Rlba (interest), 380, 38l Property Rights Theory, 139

Sale (al-bay),382

Salomon Smith Barne/, l'37, 142 San Lu Corporation, 137

Sarbanes-Oxley Act 2002, i30 Satyam computer services, 113,I42

Scriptures, 362 Secularism, 15-16

Public Bank Berhad,176

Securities and Exchange Commrssion (SEC), 154

Public corporation, 121 Puffer1., 295-6 Purpose of a br"rsiness, 182

Securities commission, i28, 15i, i54 CapitalMarket and Serr.,ices Act 2007 (CMSA), 151

Securitres Commission Act (1993),

o

151

Security thre ats, 263 Scl [-corrt

Qr-rality of life, 328,349 Quarantine software, 27

rol, l')

Selt-reflection, 1

2

Sexual harassneni, 235

Shahadah,363 Shareholder actiyism. l49

R Ralvls'.s Egalitarian

altrr,rism, 87 social justice, Regulation,

/

iustice The or y, 87, 89, 223

BB

151

Religion, /-B Reneu,able resources, 323-5, 349

Renong Berhad, 120 Resource clepletion, 345, 349 Respect lbr humirns and non-humans, 19

Respcxisibilities, of a, 366

behavioural codes, 2 Khalrfith,365 universal iaw, 4, 65 li.etail sales pressures, 300 i{HB Banking Gror"rp, 178 Rights, 221,226,238-9

llisk, 153, 156

Shareholder n ealth nraxirnization, 135

Sherron \Vatkins, 109 Sime Bank Berhad, 120 Sime Darbl', 127

Srnith Barney, 137 Social Institr-rtiorr'fi-reory, I 34, 140 Socral issues,

l8l

Social marketers, 281 Social responsillility, 268,

27

5, 280

Social Security C)rganrzation,

1

50

Sociai sr,rstainabilitl., 32 j Soft theft,305

Soliciting information, -105 Sony Corporation, 184 Sourcing of products, 307 Spamming,265 Spoofing,263,265

control,153,156

Spynvare. 264

excessive,156

Stake,138, 170

excessive business, 153

Stakeholder re1:rtionships, 366 from Islamic perspectivc, 366, 367,369'76

Robert Kuok Group, 126

423

?-4

index

analysing stakeholders' relative importance, 172 defining a stakehold er, 170

epistemology, 57 ethics, 57 metaphysics, 57

primary,lTl

politics, 57

Stakeholder s, 3 5,

17 0

-7 7

Theory ofJustice, 82-4 justice as a sociai process, 83

secondary, 171 social responsibiiily, 17 5 *7 7 types of stakeholders, 171

Theory ofRights, 77*82 general rights, 79

Stakeholder Theory, 134, 137, 173 descriptive perspective, 17 3 -4 forms of stakehoider theory, 173 instrumentai perspective, 17 4 norrnative perspective, 173

legal rights, 79

Steps towards sustainable consumption, 331

producing environmentally responsible products, 331 product recapture, 331, 332 product sharing, 331, 332 reducing demand, 331, 332 scrvice replacenlent for products, 33i, 332

moral rights,70 negative rights, 79 positive rights, 79 specific rights, 79 'Iotal labour force, 229 Trademark, 262,27A Trade secrets, 199-200 commercial espionage, 200

condition' ttr qualill as. Jt)t) confidential ir-rtbrmation. 199, 204 definition of, tg9 exanple of, Ztlil

Stereotypin g, 230

Sttnnah (Hadith),360 Surr,eiilance, 211 c0nsLrnler privac1,,

steps to protect, 200

r.ioiation of, iqg

2 14

World lntellectual Propcrties Organizatrot-t, 199,

data snrveillance,21l indivrdual privacy, 21 2

200

Sustainability, 3 16, 323, 325-6 exten"rality effects,'1 I

Transmile Berhad, i20

Sustainable business, 42

Truth in advertisrirg, 295 Tyco lnternatiorral, 113, 142 Type I agencli probleni, 127

"lrusl (Amanah),362

long tern-i relationships. 42 Sustainable consumption, 328 -31 barriers, 329

Type

ses Barriers tor.r,ards sustainable

II

agency pr,-.blem, 127

consumption

steps,331 sce Steps tor,vards sustainable

consumption

U

Sustainable developmeut, 323, 325-7

Llkhuww ah (brotherho ocl), 367

Sustenance (rizq),366

Ul\4W Holdings, 127 Unfairness, 300, 301 Llnited Nations Universal IJeclaratron of t{urnan

T

Rights, B0

fan Sri Syed Mokhtar Albukhary,lTS lan Sri T. Ananda Krishnan, 178 'lan Sri Vincent Tan, 178 Taqwa,3o3 Tenaga Nasional, 127

The five branches ofphilosophy,5T acsthetics, 5;

Unity of Aliah (Tawheed), 361, 362, 366 Universalism, 15,6C Urgency, 172,173 Usaha Tegas, 178

Usaha Tegas Be.had, l78

Utilitarian, 214,222

lndex matters of public interest or safbty, 196

m,225 consequentialism,60 four theses of, 60 hedonism, 6o maximalism, 60 universalism, see universalism utilitarian Theory of Ethics, 59 utilitarianis

V 2BB \ricegerent (Khalifah),2,363,364 Virtue,2l standards and definitions, 21 Virtuous deeds (al'amal assalitL,r,'t57 \ralue durability,

misconception' 197 Procedure,

197

rePorting sYstem' 197 retaliatory actions' 197' 198 voluntary, 194,196" 197 whistleblower protection Act 2010, 197 written poiicy, 196

Workstress,z37,24l Workplace surveillance and privacy, 267

WorldCom,l2}'

142

Worldview, 361 definition of, 3Ol definition of Islamic, 361

Worship ('Ibadah),362

iioluntary reduced time (V tine),2i3

X W \\Ihistieblor'r'ing' 109-10, 196 9 conditions to iustifl', i98 defini ng rvhistlebiort'er, I 96 evidence of rvrongdoing, i96 examples of wrongdoing, 196 internal and external, 197

xerox CorPoration,

154

Y YTL Group,

126

Yu Cai Education Foundation. l78

425