Changing Business Landscape

Size Matters

Due to globalization, organizations have now become interdependent and hence accountable for the social, environmental, and political challenges that threaten to affect our shared future.

There are about 80,000 multinational companies and ten times as many subsidiaries in the world now. There are countless small and medium sized businesses. This makes the businesses entities to have more responsibility for self-regulation to accompany the process of globalization.

However, organizations face many challenges too. The ethical challenges for business organizations include −

• Labor Standards
• Human Rights
• Climate Change and
• Marketplace Integrity

The Digital World

Internet is a hugely influential and effective media to publicize the perceived negative impacts of a business. The consumers, employees and grassroots activists can now utilize digital means if they find that business ethical standards are unacceptable.

There are many pressure groups to police the business organizations as well. International pressure groups such as Oxfam have changed their traditional focus from the government policies to business principles of global companies. Hence, there is pressure to opt ethical standards from all angles.

Responding to the new global challenges requires more than a short-term arrangement. Organizational leaders need to respond to competing priorities such as returns to shareholders, and responsibilities to the environment or community stakeholders.

Just Do It! – The Nike Way

Nike had once become famous for its exploitative sweatshop labor in developing countries. Initially it refused to accept the responsibility for the third-party suppliers.

However, the company has now become a champion in setting labor and quality standards for suppliers. Nike is also known for raising the labor standards in developing countries. It also has allowed its competitors to access its supply chain management methodologies to take part in their ethical process.

Global Financial Crisis Legacy

The Global Financial Crisis (GFC) in 2008–09 was largely initiated by poor business decisions made by boards of directors of reputed companies and executives of financial and industrial sectors.

Institutional compensation practices gave its way to a new type of ethical business management practice that did not undermine the potential negative impacts of business. It was also seen as a crisis in ‘institutional integrity’, where both business and its regulators failed to protect society.

As a result, businesses are now being more severely scrutinized by the global monitoring organizations.

Organizational Cultural Risk

The occurrence and effects of GFC has led many boards to think more on compliance than performance. The managements of organizations are now focusing towards reducing unethical practices and not just profitability.

Economic success is no longer the only measurement of organizational efficiency. Moreover, defaulting to what is legal does not cut it anymore. As a result, Google, Apple, Amazon and Starbucks, for example, are finding backlashes in the UK where they have been held for their adherence to tax minimizing regimes which offshore their profits.

According to the field research, the top ethical issues confronting business institutions today revolve around −

• Insider Trading
• Illegal Political Contributions
• Environmental Violations
• Health or Safety Violations
• Improper Contracts
• Contract Violations
• Improper Use of Competitor’s Information
• Anti-Competitive Practices
• Sexual Harassment
• Substance Abuse
• Stealing

Can Organization Culture become a Bottleneck?

The New York Times published an article by Greg Smith, the former executive director and head of the firm’s US equity derivatives business in Europe, the Middle East and Africa, on March 14, 2012 edition of the newspaper. Smith described Goldman Sachs’ culture as ‘toxic and destructive’. He said that he resigned because the firm had become a place where profit trumps all other considerations; what was good for the firm and making money was of dominant value.

The Limitations of Compliance

Business ethics challenge the cultural legitimacy of ideas such as agency theory, which prompted the business managers be driven by self-interest. The theory assumes that, the managers need to be incentivized for them to deliver maximum shareholder benefits.

Two US studies term ‘amoral management’ as both intentional and unintentional. Intentional amoral management practices occur when business and ethics are considered two separate realms. Unintentional amoral management, emerge when managers fail to canvass the ethical impacts of their decisions and actions.

There are now new researches held to investigate into how workplace context shapes managerial and employee behavior. These researches suggest that employee ethics are dynamic and that the behavioral cues of employees are taken from the social messaging of their organization in order to succeed.

Social psychology highlights that many people are likely to commit serious unethical acts in situations, such as the power dynamics embedded in workplace hierarchies. These typically result due to depersonalization in large workplaces and let the individuals to skip personal accountability.

The managers and employees can behave inconsistently across different situations. This ‘argentic shift’, first identified by Stanley Milgram’s ‘obedience to authority’ of Yale research and later supported by Stanford’s prison experiment, suggests that there can be an erosion of agency in an organization till the point when individuals simply follow directives.

Examples of Unethical Practices

In November 2012, UBS was fined £29.7 million for failures in its systems and controls that allowed former employee Kweku Adoboli to conduct Britain’s biggest bank fraud

In December 2012, HSBC agreed to pay a record $1.92 billion to settle charges, which the banking giant violated US sanctions, by transferring billions of dollars for prohibited nations, it enabled Mexican drug cartels to launder tainted money through the American financial system, and it worked closely with Saudi Arabian banks linked to terrorist organizations

In 2012, Barclays was fined £290 million for manipulating key interest rates

Business Ethics as the Basis of Business Strength

Business leaders now believe that there are many preventive measures, which should be leveraged to diminish market failure. The boards and business leaders now accept their role in building institutional integrity capital. This, in turn, makes sure that the managers are capable of managing the ethical perspectives in business decisions. There is, however, a critical role of middle managers in believing the need for change and to be champions of that change.

According to Corporate Executive Board (CEB) research, organizations with integrity capital have low misconducts and more reporting, when employees do witness wrongdoing. Integrity capital is embedded in the culture and it is not a matter of control. It can shape employee behavior, including defrauding the company or offering bribes to get business.

Their research identifies five key factors in building organizational integrity −

• Management takes action in case of misconduct
• Employees can speak up about misconduct and don’t fear retaliation
• Senior leaders and managers respect employees
• Managers hold employees accountable
• High levels of trust exist among colleagues

However, inculcation of an integrity system takes time and requires commitment. The culture of integrity is better than the regime of compliance.