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Ethics, Compliance & Social Responsibility

Across the globe, businesses are now expected to be responsible—to improve their business performance, make profits, and contribute to the economic progress of their communities by learning how to meet the reasonable expectations of their stakeholders: all those involved in, affected by, or able to influence the enterprise.

Nature of the Responsible Business Enterprise

The responsible business enterprise (RBE) is an essential part of a market economy. Its responsibility is to serve the needs of customers while making a profit for its owners. It does so by cooperating well with its key stakeholders: employees, suppliers, and many others. Business ethics is an essential discipline of the RBE in a market economy. It guides the choices made and actions taken by the RBE in all its business conduct. The discipline of responsible business provides a toolkit of management practices to aid any enterprise in the responsible pursuit of its vision of a desired future.

The RBE is a collection of people who come together freely to pursue shared purposes. As a business, its purpose is to produce goods and services that customers freely choose to buy. As a responsible business, the enterprise - and its employees and other agents - takes responsibility for business choices made and actions taken as well as the results, impacts, and outcomes that follow. The RBE engages its stakeholders so that - through its business decisions and activities - it adds on balance value to its stakeholders.

Among the body of practices of the RBE, we distinguish between good management practices in general and specific ethics, compliance, and social responsibility management practices. This distinction is productive provided it is understood to be arbitrary. What we are really talking about are the practices management must be adept at, and pursue, if an enterprise is to be responsible. responsibility resources

Ethics and Policy Aspects of the Responsible Business

Growth within an enterprise occurs most surely where its members respect and trust one another. The RBE pursues respect and trust through four integrated approaches: business and professional ethics, organizational ethics, corporate social responsibility, and corporate governance. These approaches underlie our inquiry into what it means for an enterprise to be responsible. They combine to form a fifth, integrating discipline: the discipline of the business ethics.

Each of these approaches represents a distinct body of theory and technique, which, when integrated, help us define the RBE. Taken together, these approaches describe a process that surfaces the essences of an enterprise where they are not yet clear and infuses them through all the enterprise says and does.

The RBE guides its employees and other agents through standards, procedures, and reasonable expectations based upon its core beliefs. It encourages and supports their responsible business conduct through structures, systems, and strategies designed and developed to foster reasonable stakeholder expectations and guide their employees and other agents. For the RBE, its strategies declare its purpose and core values. They establish how it will govern itself. They set boundaries to what its employees and other agents can do to achieve its purposes. They establish what its external stakeholders can expect from it by way of its business conduct.

In short, the discipline of responsible business establishes how an enterprise intends to succeed, what it assumes responsibility for, and how it holds itself accountable. Without the discipline such an approach instills, an enterprise risks a lack of focus. This discipline applies whether an enterprise is large and complex (LCE) or small to medium (SME).

1. Business Ethics as the Discipline of the Responsible Business

Each of the following approaches to business ethics developed to meet specific ethics and policy issues. Corporate social responsibility grew because business ethics was not inclusive enough. Corporate governance grew because the shareholder-owners had limited legal liability, but no voice in management. Organizational ethics grew because organizations of all sorts had common issues of policy and structure. We integrate all of these approaches as the 'discipline of the RBE' under the general term of business ethics.

Business ethics, then, is a tool to meet two important enterprise goals. It is a tool to help managers ensure that their employees and other agents comply with legal minimums. One must never lose sight of that goal. It is also a tool to help managers move beyond merely complying with rules and regulations. This allows them to set another, higher goal: to help lay the foundation for good business practices and functioning market economies for all.

2. Business and Professional Ethics

In its classic sense, business and professional ethics is the pursuit of what is good in the production and exchange of goods and services. It defines business as a contributing member of society. Professional ethics more typically reflect trade association standards, peer pressure, and public opinion. Business ethics, in its narrowest sense, reflect a common sense of how the public is best served by a business.

Business and professional ethics are not recent events. Many professional codes have been around for a long time. An early example is the Hippocratic Oath, which provides, in part, "First, do no harm." But some codes or their provisions are new. Examples are biomedical ethics, especially the ethics of genetics, and cyber ethics, or the ethics of the Internet. Some codes are extensions, such as the ethics of health care, which reflects the political and economic trade-offs of providing social health care. Others are specific trade association ethics, such as journalism, advertising, or public relations. Still others reflect typical business functions such as human resources, finance, or procurement.

3. Organizational Ethics

Organizational ethics serves as a bridge. It links the policy governance of the directors and the individual choices and actions of the enterprise's employees and other agents. Corporate social responsibility is the approach guiding the enterprise's aspirations for the future. Corporate governance is the approach of translating these aspirations into the policies of the owners. Organizational ethics is the means by which management guides its employees and other agents in their day-to-day business conduct.

Organizational ethics is the basis for a process that surfaces the essences of an enterprise and infuses those essences throughout all that it says and does. The process is typically called an 'ethics and compliance' initiative or program. It is an integral part being a 'RBE.' For an enterprise, an ethics and compliance initiative declares its social purpose and core values. It establishes what its stakeholders can expect of its business conduct. It influences how it will govern itself. It sets boundaries to what its employees and other agents can do to achieve shared purposes. If its context raises particular pressures, such as bribery or corruption, organizational ethics develops anti-corruption measures to combat them. In short, an ethics and compliance initiative establishes what an enterprise is responsible for and how it will hold itself accountable.

However, an ethics and compliance initiative also frees the moral imagination of employees and other agents. Goals and objectives are made clear. Boundaries are made known. Employees and other agents become free to pursue shared purposes by whatever means they have the capacity to dream. They must be able to justify their decisions and actions in terms of shared purposes, values and visions. But if individual choices and actions are otherwise within the boundaries set by the enterprise itself, they may proceed without fear, even if a mistake is made in good faith.

4. Corporate Social Responsibility

The classic 'narrow' formulation of business's social responsibility is the economist Milton Friedman's declaration that "the sole of purpose of business is making profits for its shareholders." While Friedman noted that this pursuit had to follow the law and social norms, he was explicitly opposed to holding business responsible for curing a variety of social ills not directly caused by it.

Those advocating increased social responsibility come from a variety of perspectives. Some resent corporate power and influence in general. Others want business to take "greater account of its social and environmental-as well as its financial-footprints." Others look at the power and affluence of corporations, especially in the industrialized West, and want to see them share that power and distribute that affluence in order to achieve their notion of 'social justice.'

There is no global shared definition of corporate social responsibility. A number of the main ones follow:

Business for Social Responsibility: Business decision making linked to ethical values, compliance with legal requirements, and respect for people, communities, and the environment.

Canadian Business for Social Responsibility: A company's commitment to operating in an economically and environmentally sustainable manner while recognizing the interests of its stakeholders.

CSR Europe: A new business strategy in which companies conduct business responsibly by contributing to the economic health and sustainable development of the communities in which they operate, offer employees healthy, safe, and rewarding work conditions, offer quality, safe products, and services … are accountable to stakeholders … and provide a fair return to shareholders whilst fulfilling the above principles.

Whatever their perspective, there is one principle on which most will agree. The responsible business cannot afford to ignore the legitimate interests of the stakeholders who make its success possible-owners, customers, employees, and suppliers. Another principle is perhaps more controversial for some than others. But most would also agree that the RBE cannot ignore those other stakeholders affected by its choice and actions-the community and environment. In a world of cable news and the Internet, a reputation can be made or undone through the simplest of choices and actions-and their impacts on others.

The RBE defines itself through the approach of corporate social responsibility (CSR). Through this process, the RBE defines itself in terms of core purpose, values, and vision of a valued future. It defines that vision by determining which stakeholders will be involved in, or affected by, its choices, actions, and their outcomes.

The RBE binds these elements of business life together as a sound set of beliefs about who it is and how the world works. It knows where it is and what challenges it chooses to address. It has a core to hold onto and a vision toward which to stimulate progress.

This is, then, is a mark of the RBE: that it knows who it is, what it aspires to, and who will be involved or affected along its way. The principal tool for the RBE is the process of 'stakeholder analysis.'

5. Corporate Governance

The dominant form of business in the global market economy is the business corporation. A fictional 'person,' the corporation is a government-chartered structure to organize collective effort. Its owners, the shareholders, have limited liability, by law, and may freely transfer their ownership shares. It is characterized by a separation of personal responsibility from business ownership. This has important ethical implications. While the owners are granted liability to the extent of their capital contributions, the enterprise itself is not relieved of the social roles and responsibilities that an unincorporated business must meet.

A board of directors represents the owners' interests, but a core of professionals manages the enterprise itself. The issues corporate governance addresses revolve around questions of who reflects the desires of shareholders, and how well they do so. The RBE defines how it will govern itself through the approach of corporate governance. Through this process, the RBE defines itself in terms of the three relationships: (1) owner-shareholders and their representatives, the board of directors; (2) the board of directors and management; and (3) controlling shareholders and minority shareholders.

A mark of the RBE is that it knows what ownership and management can expect from one another as stakeholders. In large part, external forces, such as laws, security regulations, and capital markets, define the viable options for corporate governance. This makes it all the more important for its governance to reflect, as much as possible, the aspirations of the enterprise itself and clearly defined responsibilities to the shareholders. But, to define the role of the board of directors broadly to meet social needs rather than represent the interests of its shareholders is to give "uncontrollable power" to the board. A poorly defined grant of discretion virtually invites abuse and further government intervention in the market.

Where ownership is separated from responsibility, shareholder liability is limited, as a matter of public policy, to encourage the free flow of capital. But what of the ethical responsibility of these owners? Does limited legal liability imply limited ethical responsibility? The global dialogue generally ignores this aspect of corporate ownership, though there is an increasingly significant movement for "socially responsible investing," which law does not wholly recognize as yet. Nonetheless, the RBE must take into account all the interests of it shareholders-ethical as well as legal-so we look here to the ethical responsibilities of stock ownership.

The RBE chooses and acts in ways that reflect the best interests of their owners. But these should be the interests of responsible citizens in their own right. This is one important political-economic-social implication for the RBE. Governance at substantial variance from the norms of society as a whole inevitably invites either shareholder disapproval or government intervention.

Corporate governance has been largely a matter of national or, in the case of the USA, state development until recently. On the international scene, there have been two major developments: the OECD published Guidelines for Corporate Governance and the influential body, the International Corporate Governance Network (ICGN), representing more than $6 trillion in assets, recommended that companies adopt the OECD guidelines "as amplified" by the ICGN.

In response to the growing importance of cross-border capital markets investments, the OECD adopted "Principles of Corporate Governance" (the "OECD Principles") in 1999. These principles are based upon the ethical premise that business leaders have an obligation to be fair, transparent, accountable and responsible in their conduct. The OECD Principles have been influential in shaping corporate governance codes in several countries throughout the world, including the Russian "Code of Corporate Governance," issued in April 2002.

The OECD Principles include recommendations on how an enterprise should operate its board of directors, set policies and procedures for internal supervision and control, and develop business long-term strategy. They set forth best practices of corporate governance including: instituting independent auditing; placing strong independent directors on boards of directors; following a clear and consistent concept of "conflict of interest"; guaranteeing shareholder rights, especially minority shareholders; establishing high standards of financial accountability and transparency; and commitment to honest and fair dealings with all elements of the business community.

Reflecting the interests of investors in responsible business, the ICGN made a number of far-reaching recommendations. In a "Working Kit" statement of corporate governance criteria, they addressed the issue of corporate citizenship in this manner:

1. Corporate Objective
The overriding objective of the corporation should be to optimize over time the returns to its shareholders. Where other considerations affect this objective, they should be clearly stated and disclosed. To achieve this objective, the corporation should endeavor to ensure the long-term viability of its business, and to manage effectively its relationships with stakeholders. (emphasis added)

9. Corporate Citizenship
Corporations should adhere to all applicable laws of the jurisdictions in which they operate.
Boards that strive for active cooperation between corporations and stakeholders will be most likely to create wealth, employment and sustainable economies. They should disclose their policies on issues involving stakeholders, for example workplace and environmental matters.

The duties of individual members of the board of directors include actively monitoring the activities of the enterprise. In a 1996 case in the influential Delaware Chancery Court in the USA, the Chancellor held that:

A director's obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system . . . exists, and that failure to do so under some circumstances may, in theory at least, render a director liable for losses caused by noncompliance with applicable legal standards . . . .

This case has been widely interpreted to require more effective organizational Corporate Responsibility Programs to prevent and detect criminal behavior. The decision, however, sets a relatively low standard to follow for individual directors to avoid personal liability.

Standards for Responsible Business: An International Trend

Global standards and expectations have developed over the last few decades. Governments, international institutions, transnational organizations, organized labor, and civil society conducted a global dialogue into what it means to be a responsible business enterprise.

This dialogue has not been complete. Many voices have not been heard or have been heard imperfectly. Moreover, there is an inherent tension between setting global standards and respecting local conditions. This being said, the standards and expectations of the last two decades reflect current best thinking and realistic best practices.

It is important to realize as well that these standards and expectations reflect the thinking and practices of market economies that are more or less successful at meeting the most urgent needs of their citizens. Many of them are honored in their breach to be sure. But as noted above, in developed market economies, breach is the exception not the rule. In fact, it is precisely because the behavior is not the norm is what makes the breach possible. Moreover, it does not follow that meeting these standards and expectations will necessarily lead to flourishing communities. Business can lead, but it cannot control the political-economic-social environments in which it operates.

On the other hand, it is highly doubtful that businesses and economies that do not aspire to-and largely meet-these standards and expectations will be invited to join a market economy in any enduring fashion. And if invited, it is highly unlikely that they will be able to participate fully in market economies that are largely characterized by these standards and these expectations.

There is a "global paradox" at play here. For the RBE to meet the urgent, often dire needs of expanding populations, it must use all the innovation, imagination, and independent thinking that characterize successful businesses everywhere. But it must do so from a solid foundation of norms, values, and standards that provide the starting point for deciding whether a business is or is not responsible. Click here for a number of emerging global standards organized by the stakeholders they affect and the major issues they address, Click here for news, features, and editorials on emerging market economies.

Business owners and managers have learned that a Corporate Responsibility Program helps owners and managers improve their business performance, make profits, and contribute to economic progress by better:

  • Recognizing the pressures presented by its relevant context: political, economic, social, technological
  • Understanding its organizational culture: core beliefs, participation, responsibility, knowledge-sharing, and dealing with conflict
  • Fostering reasonable stakeholder expectations
  • Developing responsible management practices to meet stakeholder expectations
  • Learning from enterprise decisions and activities

As a resource, see Business Ethics: A Manual for Managing a Responsible Buisness Enterprise in Emerging Market Economies

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