Ethics_Universe - Corporate Ethics Contemporary Challenges and Imperatives Oswald A J Mascarenhas S.J Ph.D JRD Tata Chair Professor of Business Ethics

Ethics_Universe - Corporate Ethics Contemporary Challenges...

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Unformatted text preview: Corporate Ethics: Contemporary Challenges and Imperatives Oswald A. J. Mascarenhas S.J., Ph.D. JRD Tata Chair Professor of Business Ethics, XLRI, Jamshedpur August 15, 2016 Prologue As expected, Angela Merkel, Chancellor of Germany, has been nominated by Time the person of the year, 2015. The year 2015 also marks the start of Merkel’s 10 th anniversary as Chancellor of a united Germany. She is for all purposes the de facto leader of the European Union, arguably the most prosperous joint venture on the planet. Deservedly, Time called her the Chancellor of the world. A great political and corporate executive, Merkel steered the EU enterprise through two existential crises, either of which could have veritably ended the EU that has kept pace for the last seven decades. The first crisis was thrust upon her when the euro, the currency shared by 19 nations, eroded and together with it endangered the future of the EU nations, allegedly, all because of the default of a single member, Greece. The second was late summer 2015, when Merkel’s government decided to throw open Germany’s doors to a pressing throng of over a million refugees and migrants seeking desperate asylum within her peaceful and promising borders. It was an audacious corporate decision, act, and strategy that threatened both to redeem and endanger EU, testing the resilience of the European alliance. For Merkel, the refugee decision was a galvanizing moment in a career that until then had been defined by caution and avoidance of anything resembling drama. The most generous, openhearted gesture of recent history blossomed from Germany, the country that within memory had blown apart the European continent. No one in Europe has held office longer, or to a greater effect than Angela Merkel (Time, December 2015). This is political corporate ethics at its peak, the triumph of corporate humanity, and the resurgence of corporate morality. This is what this book is all about. The Paris Committee of Climate Change represented by 195 countries ended on December 12, 2015. The participating countries agreed on the goal of keeping the increase in the global average temperature to “well below 2oC above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5oC above pre-industrial levels.” They will also pursue a goal of zero net carbon emissions – removing as much greenhouse gas from the atmosphere as is being added to it by 2050. In all, 187 countries vowed to make “intended nationally determined contributions” (INDCs). Their pledges are lodged with the Secretariat of the UN Framework Convention on Climate Change (UNFCCC), which convened the Paris talks. The main sticking points were deciding who should do what, and who should pay. The UNFCCC, which dates from the 1992 Rio Earth Summit, calls on nations to “act in accordance with their common but differentiated responsibilities.” The world’s biggest carbon emitters China followed by USA will also be held to their differentiated responsibilities. The new agreement requires a flow of $100 billion from the developed countries to developing ones by 2020 much of it earmarked for meeting the climate change goals. The UNFCCC framework also lays out how to ensure that countries are doing what they pledged to do. It is typical that in a zero-sum game all players will want others to do more while they do less. Having countries sign up only to what they think they can do made the Paris agreement possible, but thereby, weak. For instance, the pledges from China and India to double the world’s wind and solar capacity within 15 years will be great INDC once realized. Currently India generates 71% of its electricity from coal. Its INDC makes no commitment to cut total emissions; its pledge to install 100 gigawatts (GW) of solar power capacity by 2022, up from just 5GW now, would require serious reforms to its energy sector that currently stretch credulity. Meanwhile, the Paris Summit 1 Agreement may inspire leaders of cities and companies to redouble their ecology and sustainability efforts. Firms including Apple, Google and Unilever are taking steps towards cutting their emissions by large amounts, as are some cities like Hong Kong, London and Rio de Janeiro. i “As we settle into the twenty-first century with all its unique challenges, it is clear that we can no longer regard success as a zero-sum game: one group riding only at the expense of the other. In this new century people worldwide will rise and fall together. Our mission must be to create a global community of shared responsibilities, shared benefits, and shared values” [Bill Clinton, in the “Foreword” to Seidman (2012), p. xi]. This is a laudable and a doable objective, a global mission and vision, and a great goal for a book on Corporate Ethics. Dov Seidman, a trained moral philosopher, founder and CEO of LRN (a pioneering organization since 1994 that has helped hundreds of global companies build winning cultures inspired by principled performance), argues that in this century, it is no longer what you do or what you know that matters most in any business or non-business organization. In this networked global economy, it is getting harder for organizations and individuals to succeed just on the basis of what they know, produce or provide. Whatever we do can be easily copied by our competition, and even done better. What really matters for success is HOW we do the things we do, how we differentiate from the rest, personally, professionally, organizationally, and even nationally. How we choose to be bold, to stand out, to excel, to seek greater excellence – how we behave; this is a long and tacit process that is hard to copy or duplicate (Seidman 2012). This is hard to realize without solid commitment to ethical and moral principles. This is a desirable and achievable mission, vision and goal for a unique experience of Corporate Ethics that this book explores. One of the world’s leading business thinkers, Professor Michael Porter of the Harvard Business School, in a dialogue with social entrepreneurs and government innovators of the world, recently confessed thus: The last 50 years have been dominated by the idea that economic growth is the most direct route to better our lives for the world’s expanding population. But the signs are everywhere environmental destruction, inequality, injustice— that is, economic development alone is not enough. What is a framework for the next 50 years? We must create a new paradigm in which economic development is the servant of social progress, not vice versa.ii Students, readers and practitioners of corporate ethics should note this paradigm shift: economic development alone is not enough; it should be the servant of social progress. Economic development without social progress breeds economic inequality, social injustice, and popular unrest. This book assumes this paradigm shift and strives to generate skills in readers to implement the paradigm shift. David Orr, an environmental educator and the founder of the Meadow Creek Project, an environmental education center in Fox, Arkansas, USA, in his Commencement Address to the graduating class of 1990 at Arkansas College, said: We are accustomed to thinking of learning as good in and of itself. But our education up till now has in some ways created a monster. He spoke about six myths of education, and the fifth myth is that the purpose of education is for giving one the means for upward mobility and success. Thomas Merton once identified this as the "mass production of people literally unfit for anything except to take part in an elaborate and completely artificial charade." The plain fact is that the planet does not need more "successful" people. But it does desperately need more peacemakers, healers, restorers, storytellers, and lovers of every shape and form. It needs people who live well in their places. It needs people of moral courage willing to join the fight to make the world habitable and humane. And these needs have little to do with success as our cultures have defined it (Orr 1990). This book on corporate ethics is not written for achieving success. All success is short-lived, fleeting and transient. This book is for business students and corporate executives who chose to be peacemakers, healers, and restorers. Hopefully this book will produce people of moral courage willing to join the fight to make the world more habitable and humane. 2 Corporate Statesmen More than 100 years ago, Henry Ford manufactured the model T as an affordable car for all Americans in 1907, and then campaigned for world peace. Andrew Carnegie advocated universal education. The CEO statesman is not content with just accepting a job in the private or pubic sector. Nor does he simply lobby behind the scenes. He is an evangelist, out to persuade the world of the righteousness of his chosen causes. Ford and Carnegie were CEO statesmen by choice. In the 1908s and 1990s, the CEO celebrity was more prominently typified by Alfred Sloan of GM, Jack Welsh of GE or Lou Gerstner of IBM, such figures penned books on their management philosophies and posed for magazine covers. Current CEO-statesmen are different because they are after more than publicity. They want to craft a legacy, as politicians do in their final terms. Leaving behind a healthy business may not be enough to secure a page in history books. Current CEOs often seem to feel it is no longer enough to have admired products and solid financial performance. A CEO needs to have values, and preach them by witnessing them. From Starbucks’ Howard Schultz to Unilever’s Paul Polman, corporate bosses in diverse industries have taken positions on controversies including race relations, climate change, and carbon emissions. They want to leave corporate footprints on planet’s earth far beyond the narrow scope of their corporations. The Reputation Institute, a think-tank, reckons perhaps a third of a CEO’s legacy could be attributed to financial performance, the rest being influenced by external actors such as perceived leadership and corporate citizenship. iii Today CEO statesmen use and address the global base of technophile supporters. The IT CEOs have higher profiles than the CEO statesmen of the technology industry. Microsoft’s bruising antitrust case with the Department of Justice (DOJ) in the USA and settled in 2001 enabled IT bosses that they could not disdain politics, and needed to invest in lobbying. Mark Zuckerberg, founder CEO Facebook, who claims he has 1.6 billion users, is on a mission to bring Internet to the world’s poor. He speaks of it as a human right, along with education and nutrition, even though this global “mission” is a strategy to boost Facebook users. It could even backfire. Recently Mark Zuckerberg suffered a defeat in India, where his plan to bring free Internet to the poor was dismissed as a colonialist attempt to impose a corporate agenda. iv John Mackey, Co-CEO of Whole Foods Market, wrote: “The world urgently needs a richer, more holistic, and more humanistic philosophy and narrative about business than the one we have encountered in economic textbooks, in business school teachings, and even from the mouths and pens of many prominent business leaders (see Mackey and Sisodia (2014), Conscious Capitalism, pp. 7-8). The tapestry of human behavior is so diverse, so rich and so global that it presents a rare opportunity, the opportunity to out-behave the competition and create enduring value. This is ethics for corporate sustainable advantage. This is what this book is all about. In the long run, corporate ethics has to generate sustainable competitive advantage. In this process, lies our greatness, success and our future. This book is about HOW of doing business – the economic, social, ethical, moral and spiritual values we bring with our business venture, and how thereby we impact the world. Currently, the business world is still not 100% eco-friendly or environment-friendly. In many countries, especially the rural areas, environmental degradation goes on unabated. Students of business and related studies, the corporate leaders of tomorrow, have therefore an extremely important role to play in building a more sustainable society (Robinson 2014). Hence, almost all courses in the business curriculum must train students to understand, be sensitive to, the environmental lens of sustainability, not only in terms of sustainability knowledge, but also in terms of skills and models for formulating, 3 designing and implementing sustainability solutions in every department and division of the company (e.g., see Molthan-Hill 2014). This Book on Corporate Ethics seeks to take a lead role in this transformational process of corporate statesmanship. Wherever possible, we integrate ecology, sustainability, cosmic spirituality, world harmony and peace into ethics, business ethics, managerial ethics and especially, corporate executive ethics. Current Market and Economic Chaos We are currently witnessing high turbulence in large and small corporations, and in large and small market economies. Bigger companies, in particular, are failing more frequently and with gigantic losses. Of the 20 largest U. S. bankruptcies in the two decades, 1985-2005, ten occurred in 2001-2002. During the September-October 2008 collapse of the financial markets, about eighteen mega investment banks of the world suffered a loss of a trillion dollars in market capitalization within the space of eleven months (See Chapter One; see also New York Times, Thursday, September 18, 2008, A1). Most stock market indices and corporate earnings have been erratic since. Even perennially successful companies are finding it more difficult to deliver consistently superior returns. Companies like Disney, Ford, General Motors, Daimler-Chrysler, Hewlett-Packard, Motorola, Nordstrom, and Sony – one time “built to last” companies (Collins and Porras 1997; Collins 2001) – are performing just around the Dow Jones Industrial Average (Hamel and Välikangas 2003). High CEO turnover in large corporations is becoming commonplace (e.g., Delphi, Ford, GM, Hewlett-Packard, Nokia, Merrill Lynch, Gateway, and K-Mart). With imminent threats of junk bond ratings, leveraged buyouts (LBO) or hostile takeovers, the Wall Street financial analysts and investor sharks are exerting all-time high pressure on corporate executives to perform. The big global promoter investors now own and control over 70 percent of the stock markets of the world, and have, accordingly, penetrated corporate boardrooms and started exerting undue pressure on CEO’s to perform. Corporate boards and shareholders are increasingly demanding higher financial returns on investment (ROI), on equity (ROE), on assets (ROA), net worth (NW) and higher earnings per share (EPS) and price-earnings (P/E) ratios. The corporation as it has existed for the last 125 years is an endangered species. We must reinvent the corporation if we must survive and revive the corporate world (See The Economist October 24, 2015 for lead articles on this subject). This is the challenge of corporate ethics (see Chapters five and six). Possibly yielding to such Wall Street pressures, corporations have been regularly indulging in unusual business practices such as creative or aggressive accounting, creative cash flow reporting, earnings management or income smoothing via overstating earnings and understating debt, and, in general, fraudulent accounting and financial reporting. Under whatever name, these unusual activities are a financial numbers game (Mulford and Comiskey 2002) or financial shenanigans (Schilit 2002) with a singular ultimate objective – creating an altered impression of the firm’s business performance. Fortune (2002) featured twenty five such large corporate accounting frauds and security scandals, a research conducted during 2001 in conjunction with the School of Business, University of Chicago. Great industrial icons such as Enron, World.com, Parmalat, and Hollinger International became among the least trusted corporations, according to a study conducted by Harris Interactive and the New York Institute for Reputation (Deutsch 2005). Also, early 2000 marked the beginning of some of the worst corporate security irregularities in history. Rapidly rising stock prices and the market collapse that followed led corporate executives to unusual activities and accounting manipulations that were both morally questionable and reprehensible, or just outright violations of the law. Forbes (2002) listed another set of twenty five massive securities irregularities among top management executives, involving a corporate haul of over $23 billion, 4 averaging to over $923 million per company and in excess of $257 million ill-gotten gains per top executive (see Chapter Four). Some of the largest scams recently uncovered were in the utility business. Several wholesale power traders revealed that they participated in the so called "round trip" or "wash trading." For instance, wash-trading practices among some energy companies created false congestion and generated industry and household perceptions of an energy shortage in the troubled California energy market in 2001-2002. Some would even argue that this practice contributed to the bankruptcy of the two largest California electric utilities and forced subsequent government support to keep power flowing there. The price of electricity skyrocketed and, in the end, it was the consumers who had to pay the price for corporate accounting and financial irregularities or frauds, and even their bailouts. The Critical Importance of Corporate Ethics Several multinational and global companies were involved in accounting irregularities. Enron (October 2001) led the gang, followed by Quest Communications (February 2002), Global Crossing (March 2002), World.com (March 2002), Adelphia Communications (April 2002), CMS Energy (May 2002), Dynergy (May 2002), El Paso (May 2002), Halliburton (May 2002), Peregrine Systems (May 2002), AOL Time Warner (July 2002), Bristol-Myers Squibb (July 2002), Duke Energy (July 2002), and in India, Satyam (2009), 2G-3G (2010-2013), CWG (2011), Coalgate (2012), to name a few. More recent accounting scandals were associated with onetime respectable companies such as Arthur Anderson, Ernst & Young, KPMG, JP Morgan, Merrill Lynch, Morgan Stanley, Citigroup, Salomon Smith Barney, Marsh & McLennan, Credit Suisse First Boston, and even the New York Stock Exchange (NYSE) itself. Most of these failed companies represented bad business decisions and ethical failures. Most of the top executives involved in such accounting scandals and financial irregularities were business graduates of some of the topmost business schools of the United States. It was a massive failure in business ethics, managerial ethics, corporate executive ethics and corporate governance. Fraud and corruption rapidly infested the non-corporate world: scandals in the Catholic Church, fabrications by college football coaches, game-fixing in major basketball or base ball fields, professional athletes on anabolic steroids, New York Times reporters inventing stories, corrupt courts favoring rich clients, paid media flooding owner-sponsored news while blocking competition or political opponents, organized lobbies and corporate bribery to influence government legislations and licenses, and the like. Icons that we looked up to as paragons of meaningful life began to crumble and every level of society seemed suddenly vulnerable. People we normally trusted let us down, filling us with doubts about the structure of our values and beliefs. Then the World Trade Center towers came down, ushering in a series of global attacks against civilians – Madrid, London, Bali, Mumbai, and others (Seidman 2012: 45). This was followed by the mighty collapse of Lehman Brothers, AIG, Washington Mutual, Merrill Lynch, Morgan Stanley, Wachovia, and host of other giganti...
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