MDP Business Ethics (part1)

MDP Business Ethics (part1)

Hi, my name’s David Hillier, I’m Vice Dean of the Business School, and I’m also a Professor of Finance. Today I’m going to be talking about business ethics. I’ll be introducing the concept of business ethics, what it means to companies, and also how it impacts upon decision making within the company. I’ll be talking for a short period and then I’ll be asking you to undertake a task for the next session. So what are business ethics? First of all we have to decompose that particular statement; what are business ethics? First of all it’s a plural; there are a number of different ethics that a company needs to consider when it’s making decisions. We can think about the concept of ethics; what is ethics? And then we have to apply that to the business environment. So this particular session could just be about ethics, with the application to a business. My focus will be about business and how ethics affect business decisions. So how do we come to an idea of business ethics? Well, business ethics is based upon three broad principles. First of all, we have what is known as moral codes. A moral code could be like the ten commandments. There are ten commandments that you can base your decisions on. It could be the Quran, it could be the concept of reciprocity; whatever you do to others you would expect to be done unto yourself, and whatever you expect to be done unto yourself you should do to others. There are a number of codes that go through the history of society and civilisation for thousands of years. Right back to the very first book that was ever written, which is the Precepts of Ptah-Hotep. And that was a book that was written by an Egyptian vizier to his son, who was preparing to become the new Egyptian vizier. And there was a list of precepts that he wrote for his son, and gave him guidance on how he should hold himself and comfort himself when in his lofty position in the future. So that’s the very first book, but as you go through civilisation you can see this within the Hindu and Niyamas, in Judaism, in Buddhism, in Christianity, in Islam, in many different societies you can have what is known as moral codes. But you can also have principles on which you base your decision making on, that may not be tied to moral codes. They’re just principles of good behaviour or right behaviour. And how do we form these principles? Well, the basic concept underlying these principles are that anything you do should be to enhance what we call ‘the good.’ The welfare of society, the welfare of the individual. And finally we can have what’s known as value systems. What are the values that your society holds? What are the things which are important to the people within your society? Now, one of the big issues with this is that depending on the society that you’re in you may have different ethics. And so you could be economically developed as a society, but potentially not socially developed as a society. And this means that we can’t just have one right approach to business ethics, it depends upon the context in which you are operating in, and in which your business is operating in. So for example, business ethics in Europe may be different or may be applied differently to for example in say Asia, where you have a different value system. So in Europe we have what’s very much known historically as a Christian system, in Asia you have a Confucian system. And that means that decisions and expectations are different across these different regions. Now, moral codes, principles and value systems all combine together to what is known as business ethics. and they form our behaviour and they also drive managerial decision making. But what we want in business ethics is that all of these concepts come together to lead to good business decisions. Good in the concept of they’re good; what is good for society? In recent years there have been a number of cases where you could argue that business ethics has been at the back burner, at the end of the priorities of companies. We can look at the financial crisis in 2008 and ask was the financial crisis a result of poor business ethics? Did the managers of banks, the executives of banks make the right decisions for the borrowers of funds? We talk about something called subprime mortgage crisis. The subprime mortgage crisis was basically lending to risky individuals. We had cases where banks were offering mortgages based on a self-certification statement of your earnings. They were known as ‘liar mortgages.’ That is, you could write down how much you earnt and the banks would accept that. Now, you could argue that the individual who lied was being unethical. You could argue that the banks who ‘left open’ the possibility of lying was being unethical. You could argue that the shareholders of the banks who are getting lots of profits from this activity for that short term were being unethical. And you could argue that the Government who was receiving taxes on this activity was being unethical. You could argue that you in allowing this to happen was being unethical. So ethical decisions can permeate everything that we do in business, and also in society. So let’s go back to business ethics again. I’m going to give you some ethical decisions that companies may have to make. First of all, should businesses profit from arms sales? Should society allow arms sales? Should there be constraints on the activities of companies that produce arms? We can look at alcohol. Should companies have a responsible approach to marketing alcohol to young people? Gambling; should companies be allowed to profit from gambling? Now, those three questions, you, depending on your nationality and your culture, will have a different answer to that. I can take gambling as an example. In many parts of the world gambling is illegal, and profiting from gambling is illegal. But in other parts of the world it’s perfectly legal. And I’ve used the term legal and illegal here, because I want to talk about this in the next few minutes when I relate law to ethics. And again, how law does not equate to ethics all the time. So should businesses profit from these? We have a whole area, a growth area of finance at the moment called Islamic Financing, where the financing is based on Sharia principles. And companies that follow Sharia Law will not get involved in any activities which are to do with weapons, alcohol or gambling. And so we have that already in parts of society where you have and ethical approach to business. We have individuals who are wanting to only invest in specific types of companies. And funds have developed and started which are known as socially responsible investments. And so as individuals we can choose to decide where we invest our money. So when we talk about ethical decisions in business, it’s not just about the companies, it’s about the individuals as well. The responsibility always comes back to the individual. Another question that is being asked in business is should there be a minimum wage? Should we have a minimum wage? Does the minimum wage benefit society? One argument is that minimum wage allows people to escape the poverty trap. A counterargument is that companies will just not hire as many people. And so you don’t have a clear answer to the minimum wage. A third decision that can be made is should banks be allowed to lend to people who are unlikely to be able to repay their debt? Now, that decision has been a very important one in society over the last few years. Because it has led to the financial crisis, and it has subsequently led to the sovereign debt crisis where we are just now. And you might say how does that one decision affect now all of society? Well, the banking sector was largely unregulated. It was self-regulated to a large extent. And decisions were made predominantly to enhance profits, to enhance growth. When the banks started to fail because these decisions were risky and therefore started to have losses as well as large gains, the governments of countries had to bail out these banks. And the governments had to borrow to pay and bailout the banks who were overleveraged or over borrowed. So now the governments have taken on too much debt and they’re now cutting back, which is leading to where we are in Europe today, with governments having austerity measures. And this all came back from ethical decisions that were made several years ago. So ethical decisions affect us all. They affect us all and they affect decision making in companies, they affect investors, they affect governments, and finally they affect the individual.

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