The Twelve Ethical Business Practices (EBP) for an ethical organsiation

ABSTRACT

Business ethics for long has been considered an oxymoron. The view of Milton Friedman that the sole purpose of business is profit maximization has often been considered an appropriate view. Good ethics are not usually viewed as good for business.

This study helps establish a list of ethical practices which can be used by companies to create an ethical culture.

The list of EBP was drawn from literature review. The pilot study was conducted across 4 organizations and 40 employees. The final questionnaire with 26 EBP was administered in 10 companies to a total of 120 employees across all levels. The organisations were from the ET 500 list.

For the 26 items which measures EBP, descriptive statistics is generated which includes minimum, maximum, mean, standard deviation. EFA (exploratory factor analysis) and then CFA (confirmatory factor analysis) was conducted on the list of ethical business practices, 12 items with 3 factors emerged. The 3 factors are 1) Company ethical policy oriented 2)Society oriented and 3) Customer oriented.

INTRODUCTION

Emergence of Ethics and Ethical Business Practices (EBP):

Until the year 1992, ethics in business was hardly a topic of concerted engagement at any level- except in 2 or 3 business schools in the country. It was only the 2 billion dollar stock exchange fiasco in 1992, the Harshad Mehta scam which threw up the ethics issue at the macro level. [Chakraborty, 1997].Business Ethics is in the forefront since India got its own Enron - The Satyam scandal, (Shantaram, 2012)

As one Shell executive observed ‘we have 300 years of experience with financial accounting, 30 years with environmental accounting and virtually none with social/ethical accounting [Paine, 2003].

Globalisation has multiplied the ethical problems facing organisation(Mahapatra, 2009)

Literature Review:

The new companies act 2013 with its focus on corporate governance  has created the the need for organisations setting ethical practices and an ethics programme.

Most of the changes have been made with the aim of increasing ethical conduct and creating more transparency in order to to prevent repition of scandals and economic crisis(Sharbatoghlie, 2013).

Evidence suggest that companies should create a proper work environment or ‘ethical context’, that encourages employees to think, feel and behave in desirable ways (Sins,1999)

An ethics programme is a set of activities, policies and procedures intended to support employees to understand and comply with the ethical standards and policies set by the organization ( ERC, 2008).

Programmes comprise various elements designed to prevent misconduct, defined as “behaviour that violates the law or organisational ethics standard” (ERC 2008)

ERC (2005) concluded that although there has been an increase in the number of ethics programmes, their impact on misconduct was not as great as hoped, and appeared to be strongly reliant upon culture.

Proenca (2004) suggest five elements: a code of ethics, an ethics officer, an ethics training programme, an ethics audit system, and dedicated ethics telephone hotlines.

The Ethics Resource Center (ERC), on the other hand, proposes six elements, based on US Federal Sentencing Guidelines (FSG):

  1. Written codes of conduct
  2. Ethics training
  3. Mechanisms to seek ethics advice or information
  4. Channels to report misconduct anonymously
  5. Discipline of employees who violate ethical standard and
  6. Evaluation of employees ethical performance(ERC 2005; US Office of Government Ethics, 2008).

Despite positive claims for the value of ethics programmes, studies suggest their direct effect on behaviour is rather slight. One possible explanation is that ethical culture, rather than ethics programmes, has the strongest influence on behaviour.

(ERC 2007) measures ethical culture in terms of four elements: “ethical leadership, supervisor reinforcement, peer commitment to ethics, and embedded ethical values”

This does not mean ethics programmes are unimportant, as they may serve to nuture and strengthen ethical culture (Kaptein, 2009)

Before controlling for ethical culture, the elements which had the greatest effect on ethical culture were ethics training and discipline for violators (Park,2013). This is further reinforced by my research as these were among the top two suggestions give by management in creating an ethical culture (Shantaram, 2012) and these elements would thus appear to provide the best return on investment, although clearly the starting point will continue to be the development of a code of conduct, as the basis for both training and discipline (Park, 2012).

Though it demonstrates that ethics programmes influence ethical culture (Park, 2012) the existing ethical culture may also influence the implementation and effectiveness of ethics programmes (Webley , 2008).

Companies can also utilise pragmatic approaches such as ethics training , codes , ethics officers/committees to enhance ethical context ( Adams et al, 2001, Farrell 1998)

Adams et al (2001) reaffirmed stating that ethics code helps employees better recognise an organsiations support for business ethics. My study emphasised the code of conduct for vendors and outsourced companies ( Shantaram, 2012)

When top management acts ethcially, the actions of their employees are aso likely to be more ethical ( Ferrrel et al, 2008)

Defining Ethical Business Practices:

Most definitions of BE, on the one hand,  relate to ethical standards rules, standards and moral principles regarding what is right or wrong in specific situations. BE comprises the principles and standards that guide behaviour in the world of

business[Ferrel, 2008]. EBP then is not just ‘right action’ but is also an on-going effort to develop and strengthen the habit of right action[Gupta, 2006].

For an ethical dilemma presented, 80% of the participants acting in a corporate capacity made a decision that 97% of those acting in a personal capacity judged to be morally unacceptable. This discrepancy suggests how powerfully and subtly corporate roles can influence behaviour [Paine, 2003].  Thus the importance of setting up EBP.

The FSG -Federal Sentencing guideline- has motivated almost all large companies to adopt a code of ethics. With regards to environment it looks at positive programmes in place such as pollution reduction, recycling and energy saving measures as well as negative measures such as level of pollutants, EPA (Environmental Protection Agency) citation, fines, law suits and other measures. [Hopkins, 2003]

Not only Community relations, Employee relations, Diversity, Customer relations [Curtis, 1999]. But also, business practices ie diversity- women representation in the workforces are also to be taken into account [Paine, 2003]. EBP now embraces a wide range of corporate responsibilities ranging from working conditions dealing with corruption and fraud, through to environmental and social responsibility [Holt, 2010]. This expansion of terminology is a result of the widening remit of business studies to include social and environmental dimensions alongside the traditional economic concerns [Holt, 2010].

While most companies have basic policies on employee integrity, confidentiality and sexual harassment, relatively few have established policies regarding bribery, exploitive child labour, human rights violations and other issues they may encounter in the global market place [Nader, 2002].

However, a cut paste action of ethics code is not enough. In practice many organisations try to influence norms and values by formulation and communication of ethical codes[McDonald, 1999]. This together with professional training will not only improve the standards adopted generally by companies but also introduce the necessary level of support from the boardroom to ensure effective implementation in areas which to date is causing many companies some difficulty[Summerfield, 2004].

Also a reward and punishment system is a key factor in promoting ethical behaviour (Baucus et al 2005) and many organsiations include ethics in their performance appraisals (Peny, 1992).

One way of improving employee compliance with ethical standards is by generating a sense of threat , while evaluation of ethical behaviour is used as a tool to incentivise employees to behave ethically(Park, 2013)

Importance of Ethical Business Practicess

The establishment of the GRI-Global Reporting Initiative gives the minimum standards that companies should meet [Holt, 2010]. Thus this will help companies know if they are on track.

The empirical study of Fortune 1000 firms assessed the degree to which the firms have adopted various practices associated with corporate ethics programmes [Weaver, 1999]. Ethics training had a positive effect on behaviour, however very few firms provided such training [McDonald, 1999].

The report of Environics 2001 CSR monitor reported that the majority of respondents ranked environmental impacts, labour practices, business ethics and social contributions as the most important factors for forming an impression of the company.

Hence it reemphasises the fact that ethical practices needs to be focussed on [Economist, 2001].

The benefit of implementing EBP in the organisations.BE principles appropriately applied has helped many struggling companies to turn their fortunes around [Gupta, 2006]. However, results show a high degree of corporate adoption of ethics policies, but wide variability in the extent to which these policies are implemented. In effect, the vast majority of firms have committed to the low cost, possibly symbolic side of ethics management (e.g. adoption of ethics codes and policies etc). But firms differ substantially in their efforts to see that those policies or codes actually are put into practice [Weaver, 1999]. The mere existance of ethics codes in firms may correspond with only a little impact on ethical practices [Eyun, 2012]. The Chinese business executives report a much stronger belief that positive ethical practices are rewarded with additional sales or revenues in comparison to the US business executives who were on average not nearly as certain [Baglione, 2007].

Some researchers believe ethical lapses spring from employees putting their own needs above honesty [Kelly, 2002]. As an ethical culture gets built through the establishing of Ethical Business Practices the employee is more likely to make the right choices.However, certain actions taken by organisations fail to produce the desired results. Stock compensation actually increases the likelihood of accounting regularities [Bowie, 2011]

EBP sets up norms of functioning that are transparent in every respect. It is transparency that adds to the bottom line on a more enduring basis [Gupta, 2006].

Research Gap:

What are the various EBP, what are their outcomes? These and many other questions abound within this research domain.

Understanding what are the various ethical business practices (EBP) was needed to be developed.

Research Design:

One of the objectives of the study was to measure the ethical business practices in corporate India.  With help of literature review, pilot study and expert review 26 variables were identified.  All these variables are exploratory in nature so exploratory factor analysis was done by using PCA extraction. In order to confirm these extracted variables, E/CFA approach is adopted, that is, extracting variables in EFA by using ML estimation, then the number of variables came to 12 and factors were 3.  In order to confirm these, factor structure loadings relation CFA was done. 

The general purpose of factor analysis is to find a method of summarizing the information contained in a number of original variables into a smaller set of new composite dimensions (Factors) with minimum loss of information. That is, Factor Analysis tried to identify and define the underlying dimensions in the original variables

Cronbach alpha reliability test was done on the questionnaire.

Findings:

1. Cronbach Alpha reliability test was done on the questionnaire of 26 items which gave a reliability score of .861.

2. CFA resulted in the three factors namely:  Factor 1: Company Ethical Policy oriented, Factor 2: Society oriented and Factor 3: Customer oriented. A total of 12 items came under the 3 factors. Thus just the 12 items Table 1.1 can be used to understand the ethical practices followed by organisations instead of the 26 items Table 1.2 in the list of EBP.

A few of the respondents from each of the organsiations were also interviewed. A variety of suggestions for the implementation of EBP in the organizations were also got , among them were top management involvement, ethics training and taking strong disciplinary action against unethical behaviour. This is reinforced by the findings of (Park, 2012).

References:

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Table 1.1: Reliability Test of Ethical Business Practices Measures

 Ethical Business Practices Measures

S.No

Factor 1: Company Ethical Policy Oriented

No of items

Cronbach alpha

1

v15 -There is fair opportunities in promotion and reward systems

5

0.814

2

v14 –Company is a member of associations which deals with ethics, corporate governance even though it is not mandatory.

3

v13 -Code for punishment of sexual harassment is clearly designed and communicated to all employees

4

v12 -It enforces Code of conduct for outsourced companies

5

v11 -Ethics hotline (reporting misconduct over phone or mail) is functional and accessible to all employees

 

Factor 2: Society Oriented

   

6

v4 –It volunteers employee hours towards social projects

4

.811

7

v3 -CSR is based on the urgent needs of the communities it works in

8

v2 -The organisation has a well thought out CSR policy just not charity and donations

9

v1 -The organisation spends a significant percentage of the profit on social development activities

 

Factor 3: Customer Oriented

   

10

v25 -Company ensures that the promises made to customers are fulfilled(delivery, services and after sales services)

3

.774

11

v24 -It maintains customer information confidential

12

v23 -The company provides complete information about products and services to the customers

 

Ethical Business Practices Measures

12

.811

 

Ethical Business Practices Split 1

6

.787

 

Ethical Business Practices Split 2

6

.628

Table 1.2Perceived EBP Items Contributing to the Financial Health of the Organisation

Sr. No.

Statements- Ethical Business Practices

 
 

1.

The organisation spends a significant percentage of the profit on social development activities

 

2.

The organisation has a well thought out CSR policy just not charity and donations.

 

3.

 CSR is based on the urgent needs of the communities it works in.

 

4.

It volunteers employee hours towards social projects

 

5.

It has a significant minority representation across the employees level

 

6.

It has a fair level of Women representation on the companies roll

 

7.

It has number of Independent directors as per SEBI guidelines

 

8.

It has a clearly laid out ethics code

 

9.

It enforces ethics training across its employees

 

10.

There is a specially designated Ethics officer

 

11.

Ethics hotline (reporting misconduct over phone or mail) is functional and accessible to all employees

 

12.

It enforces Code of conduct for outsourced companies.

 

13.

Code for punishment of sexual harassment is clearly designed and communicated to all employees.

 

14.

Company is a member of associations which deals with ethics, corporate governance even though it is not mandatory

 

15.

There is fair opportunities in promotion and reward systems

 

16.

The company ensures good and safe working conditions for the employees

 

17.

It ensures timely payment of salaries

 

18.

It ensures timely payment to vendors

 

19.

It ensures timely payment of taxes etc (no fines levied)

 

20.

The organisation is concerned about the energy efficiency (uses LED lights, water conservation etc)

 

21.

The organisation practices waste management (e-waste, water recycling etc)

 

22.

It follows Triple bottom line and not just financial indicators

 

23.

The company provides complete information about their products and services to the customers

 

24.

It maintains customer information confidential

 

25.

Company ensures that the promises made to customers are fulfilled (delivery, services, after sales services)

 

26.

 It follows the corporate governance voluntary guidelines

 

 

Total