OUM Business School

BDOE4103
Organisation and Environment

Copyright © Open University Malaysia (OUM)

 BDOE4103
ORGANISATION
AND ENVIRONMENT
Saaidatul Ibrahim

Copyright © Open University Malaysia (OUM)

Project Directors: Prof Dato’ Dr Mansor Fadzil
Prof Dr Wardah Mohamad
Open University Malaysia

Module Writer: Saaidatul Ibrahim

Universiti Putra Malaysia

Moderator: Ruhana Busu

Universiti Putra Malaysia

Developed by: Centre for Instructional Design and Technology

Open University Malaysia

First Edition, May 2007

Copyright © Open University Malaysia (OUM), October 2010, BDOE4103
All rights reserved. No part of this work may be reproduced in any form or by any means
without the written permission of the President, Open University Malaysia (OUM).

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Malaysia (OUM)
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Table of Contents
Course Guide ixă xiv

Topic 1 Business Organisation and Its Environment 1

1.1 Business and Environment 2
1.1.1 The Meaning of Business 3
1.1.2 Business Activity Model 3
1.1.3 Business in Its Environment 4
1.1.4 Macro Environment 5
1.2 The Concept of Stakeholder 7
1.2.1 Primary and Secondary Stakeholders 8
1.2.2 StakeholdersÊ Union 9
1.3 Pressures That Form Business ă Society Relations 10
1.3.1 First Pressure: Strategic and Social Challenges 11
1.3.2 Second Pressure: Ethical Expectations and 11
Public Values
1.3.3 Third Pressure: Global Economic Changes 12
1.3.4 Fourth Pressure: Changes in Government Roles and 12
Public Policy
1.3.5 Fifth Pressure: Issues on Ecology and Natural 13
Resources
1.3.6 Sixth Pressure: Technology and New Knowledge 14
Summary 15

Topic 2 Business and Government 17

2.1 Why Public Issue is Important 18
2.1.1 The Emergence of Public Issues 18
2.1.2 The Functions of Public Relations 20
2.1.3 Issues Management 21
2.1.4 Crisis Management 23
2.2 Public Policy 24
2.2.1 Elements of Public Policy 24
2.2.2 Public Policy and Business 26
2.2.3 National Economic Development 28
2.2.4 Social Welfare Policy 29
2.2.5 Government Regulations towards Business 30
Organisations
2.2.6 Problems That Arise from Regulations 32
2.3 Business Organisation and Government Relations 34
2.3.1 Strategic Management of Government Relations 34
2.3.2 Techniques of Political Action 35

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2.3.3 Political Involvement 36

2.3.4 Critical Problems 37
Summary 39

Topic 3 Corporate Social Responsibility 42

3.1 Definition of Corporate Social Responsibility 43
3.1.1 How Did Corporate Social Responsibility Begin 44
3.1.2 Modern Idea of Corporate Social Responsibility 46
3.1.3 Limitations of Corporate Social Responsibility 47
3.1.4 Balancing Economic, Legal and Social Responsibilities 50
3.2 Corporate Social Conditions 52
3.2.1 Implementing Social Responsiveness 53
3.2.2 Becoming a Socially Responsive Firm 56
Summary 58

Topic 4 Business and Ethical Environment 60

4.1 Definition of Ethics 61
4.1.1 What is Business Ethics? 63
4.1.2 Why Do Businesses have to be Ethical? 64
4.2 Business Ethics in Organisational Functions 66
4.2.1 Why Do Ethical Problems Occur in Business 68
4.3 The Core Elements of Ethical Behaviour 70
4.4 Corporate Culture and Ethical Climate 75
4.4.1 Ethical Climate 75
4.5 Analysing Ethical Problems in Business 77
4.5.1 Utility: Comparing Benefits and Costs 77
4.5.2 Rights: Determining and Protecting Entitlements 78
4.5.3 Justice: Is This Fair? 79
4.6 Accomplishing Ethics in Companies 80
4.6.1 Building Ethical Safeguards into the Company 80
Summary 85

Topic 5 Business and Stakeholders 86

5.1 Shareholders 87
5.1.1 Types of Shareholders 87
5.1.2 The Objectives of Owning Shares 88
5.2 Legal Rights and Protection of the Shareholders 90
5.3 Corporate Governance 91
5.4 Trends in Corporate Governance Today 91
5.5 Government Protection of Shareholder Interests 93
5.6 Consumers and Consumerism 94
5.6.1 The Anatomy of Consumerism 94
5.6.2 Reasons for Consumer Movements 95

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5.7 The Development of Consumerism in Malaysia 96

5.7.1 The Birth of Fomca 97
5.8 Consumer Protection 98
5.8.1 Government and Consumer Protection in Malaysia 98
5.8.2 Consumer Tribunal 99
5.9 Business OrganisationÊs Response to Consumerism 99
5.9.1 Total Quality Management 100
5.9.2 Consumer Affairs Department 100
5.9.3 Arbitration or Mediation 100
5.10 Employers-employee Relations 101
5.10.1 Role of Government in Employer-employee 101
Relations
5.10.2 Diversity at the Workplace 105
Summary 108

Topic 6 Business and the Natural Environment 110

6.1 Ecological Challenges 111
6.1.1 Global Commons 111
6.1.2 Sustainable Development 112
6.1.3 Threats to the WorldÊs Ecosystem 112
6.1.4 Pressures for Change 113
6.2 Global Environment Issues 115
6.2.1 Ozone Depletion 115
6.2.2 Global Warming 116
6.2.3 Biodiversity 117
6.3 Response from the International Business Community 118
6.3.1 World Business Council for Sustainable 118
Development
6.3.2 Voluntary Initiative of Businesses 119
6.4 GovernmentÊs Role in Protecting the Environment 120
6.4.1 GovernmentÊs Role 121
6.5 Costs and Benefits of Environmental Laws 125
6.6 Green Management 126
6.6.1 Stages of Corporate Environmental Responsibility 127
6.6.2 Ecologically Sustainable Organisation 127
6.6.3 Elements of Effective Environmental Management 128
6.7 Environmental Management as a Competitive Advantage 130
Summary 132

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 TOPIK 2 KAEDAH DAN TEKNIK W 17

Copyright © Open University Malaysia (OUM)

COURSE GUIDE

Copyright © Open University Malaysia (OUM)

Copyright © Open University Malaysia (OUM)
 COURSE GUIDE  ix

COURSE GUIDE DESCRIPTION

You must read this Course Guide carefully from the beginning to the end. It tells
you briefly what the course is about and how you can work your way through
the course material. It also suggests the amount of time you are likely to spend in
order to complete the course successfully. Please keep on referring to Course
Guide as you go through the course material as it will help you to clarify
important study components or points that you might miss or overlook.

INTRODUCTION
BDOE 4103 Organisation and Environment is one of the courses offered by the
Faculty of Business and Management at Open University Malaysia (OUM).

COURSE AUDIENCE
This is an elective course for students undergoing Diploma in Management,
majoring in General Management.

As an open and distance learner, you should be able to learn independently and
optimise the learning modes and environment available to you. Before you begin
this course, please confirm the course material, the course requirements and how
the course is conducted.

STUDY SCHEDULE
It is a standard OUM practice that learners accumulate 40 study hours for every
credit hour. As such, for a three-credit hour course, you are expected to spend
120 study hours. Table 1 gives an estimation of how the 120 study hours could be
accumulated.

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Table 1: Estimation of Time Accumulation of Study Hours

STUDY
STUDY ACTIVITIES
HOURS
Briefly go through the course content and participate in initial discussion 3
Study the module 60
Attend 3 to 5 tutorial sessions 10
Online participation 12
Revision 15
Assignment(s), Test(s) and Examination(s) 20
TOTAL STUDY HOURS ACCUMULATED 120

LEARNING OUTCOMES
By the end of this course, you should be able to:
1. Explain social issues in an organisationÊs environment;
2. Identify issues related to the environment, business, ethics and
stakeholders;
3. Establish skills in analysing social problems in an organisation; and
4. Choose and administer social policies for development and
implementation.

COURSE SYNOPSIS
This course is divided into six topics. The synopsis for each topic can be listed as
follows:

Topic 1 will introduce students to companies and stakeholders as well as the

relationship between them. It will also discuss the main pressures that business
and society relationships face in the effort to move into the latest era, as well as
the roles of firms in social, economic and political stability.

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Topic 2 will introduce students to the strategic management methods that

executives use to deal with public issues. Understanding the relationship
between stakeholders and a companyÊs performance makes it possible to follow
the evolution of public issues through public lifecycles.

Discussion on the responses of businesses towards public issues and issues of the
management process will focus on crisis management and ways to strategically
manage the organisationÊs relations with its stakeholders. This topic will also
explain the relationships between business organisations, public policymakers
(government) and the community. These are complex relationships. The system
of dependency that exists between the three requires suitable cooperation and
reaction so that stability can exist between them. Among the important forms of
cooperation and responses are the relationship between the government and the
business organisation, and the relationship between the business organisation
and the natural environment.

Topic 3 will discuss the publicÊs expectation that companies will act in a socially
responsible manner. Students will see how corporate social responsibilities are
practised and what the limitations are. Students will be exposed to the main
challenges that modern businesses face, that is, to achieve a balance between
their economic, legal and social responsibilities.

Topic 4 will explain how socially responsive firms manage their relations with
stakeholders. Firms must pay attention to environmental pressures in forming a
successful social strategy. This topic also provides a model to determine whether
firms respond in a socially responsive manner. Those who are employed in a
business, whether as a manager or worker, are often involved in and will
definitely face work ethics issues. Therefore, it is necessary for them to have
business skills by learning how to identify various kinds of ethical dilemmas and
knowing why they happen. A business firm will get more support from the
society and social legitimacy if they hold on to ethical principles and the societyÊs
laws. In this topic, we will learn about ethics, business ethics, ethical problems
that arise in business and efforts to overcome ethical problems.

Topic 5 will explain the changes in the roles and responsibilities of shareholders,
managers, boards of directors and other stakeholders in supervising a
contemporary company. This topic will also focus on consumers and
consumerism. Protecting consumers and simultaneously offering the products
and services that they need is the main social responsibility of a company.
Employer-employee relationships will also be discussed in this topic. Employees
influence a companyÊs performance. Employees provide the labour force to
businesses, while employers give compensation to employees for their skills and
productivity contributions. Managing employer-employee relationships well will
provide benefits to firms, employees and society.

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Topic 6 global environment issues such as the depletion of the ozone layer, global
warming and biodiversity will be discussed. The topic will also touch on
ecological challenges faced by life forms and actions that can be taken by the
business community to manage them. Next, the concept of sustainable
development, which refers to economic growth without reducing resources for
the future generation, will be given attention. The governmentÊs role in handling
ecological challenges and environmental issues, and the debate concerning the
benefits and costs of environmental laws will also be discussed.

TEXT ARRANGEMENT GUIDE

Before you go through this module, it is important that you note the text
arrangement. Understanding the text arrangement should help you to organise
your study of this course to be more objective and more effective. Generally, the
text arrangement for each topic is as follows:

Learning Outcomes: This section refers to what you should achieve after you
have completely gone through a topic. As you go through each topic, you should
frequently refer to these learning outcomes. By doing this, you can continuously
gauge your progress of digesting the topic.

Self-Check: This component of the module is inserted at strategic locations

throughout the module. It is inserted after you have gone through one sub-
section or sometimes a few sub-sections. It usually comes in the form of a
question that may require you to stop your reading and start thinking. When you
come across this component, try to reflect on what you have already gone
through. When you attempt to answer the question prompted, you should be
able to gauge whether you have understood what you have read (clearly,
vaguely or worse you might find out that you had not comprehended or retained
the sub-section(s) that you had just gone through). Most of the time, the answers
to the questions can be found directly from the module itself.

Activity: Like Self-Check, activities are also placed at various locations or junctures
throughout the module. Compared to Self-Check, Activity can appear in various
forms such as questions, short case studies or it may even ask you to conduct an
observation or research. Activity may also ask your opinion and evaluation on a
given scenario. When you come across an Activity, you should try to widen what
you have gathered from the module and introduce it to real situations. You should
engage yourself in higher order thinking where you might be required to analyse,
synthesise and evaluate instead of just having to recall and define.

Summary: You can find this component at the end of each topic. This component
helps you to recap the whole topic. By going through the summary, you should
be able to gauge your knowledge retention level. Should you find points inside
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 COURSE GUIDE  xiii

the summary that you do not fully understand, it would be a good idea for you
to revisit the details from the module.

Key Terms: This component can be found at the end of each topic. You should go
through this component to remind yourself of important terms or jargons used
throughout the module. Should you find terms here that you are not able to
explain, you should look for the terms from the module.

References: References is where a list of relevant and useful textbooks, journals,

articles, electronic contents or sources can be found. This list can appear in a few
locations such as in the Course Guide (at References section), at the end of every
topic or at the back of the module. You are encouraged to read and refer to the
suggested sources to elicit the additional information needed as well as to
enhance your overall understanding of the course.

PRIOR KNOWLEDGE
Learners of this course are required to pass BDPP1103 Introductory
Management.

ASSESSMENT METHOD
Please refer to myINSPIRE.

REFERENCES
Lawrence AT, Weber, J And Post JE, (2007). Business And Society:
Stakeholders, Ethics, Public Policy McGraw-Hill, 12th Edition.

Buchholz, RA, (1989). Fundamental Concepts And Problem In Business Ethics .

New Jersey: Prentice-Hall, 2nd Edition.

Buchholz, RA, (1986). Business Environment And Public Policy. New Jersey:
Prentice-Hall.

Carrol, AB, (2003). Business And Society. South-Western Publishing Company.

Frederick, WC, Davis, K, And Post JE, (1988). Business And Society.
Mcgraw-Hill, 6th Edition.

Luthans, F, Hodgetts, RM And Thomposon, KR (1990). Social Issues In Business.

Macmillan Publishing Company Inc.

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(OUM)
xiv  COURSE GUIDE

Madsen, P, And Shafritz, JM, (1990). Essentials Of Business Ehitcs.

Penguin Books Inc.

Mohd Hamdan Adnan, (1987). Kepenggunaan. Dewan Bahasa Dan Pustaka,

Kuala Lumpur.

Preston, LE, And Post, JE (1975). Private Management And Public Policy.
New Jersey: Prentice-Hall.

TAN SRI DR ABDULLAH SANUSI (TSDAS) DIGITAL

LIBRARY
The TSDAS Digital Library has a wide range of print and online resources for the
use of its learners. This comprehensive digital library, which is accessible
through the OUM portal, provides access to more than 30 online databases
comprising e-journals, e-theses, e-books and more. Examples of databases
available are EBSCOhost, ProQuest, SpringerLink, Books24x7, InfoSci Books,
Emerald Management Plus and Ebrary Electronic Books. As an OUM learner,
you are encouraged to make full use of the resources available through this
library.

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University Malaysia
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(OUM)
 Topic X Business
1 Organisation
and Its
Environment
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the meaning of business organisation and business activity
models;
2. Explain main segments in the macro environment of business;
3. Discuss the concept of stakeholders; and
4. Evaluate factors that shape the relationship between business and
society.

X INTRODUCTION
Business organisations have a complex relationship with the various segments of
society. The existence and power of stakeholders require careful attention and
action by management. A companyÊs success can be positively or negatively
influenced by its stakeholders. In an era where business strategies need to change
due to pressures such as global competition, new political arrangements, changes
in society values and ecological concerns, the managers are challenged to achieve
good economic results and meet the needs of the stakeholders at the same time.

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2 X TOPIC 1 BUSINESS ORGANISATION AND ITS ENVIRONMENT

1.1 BUSINESS AND ENVIRONMENT

ACTIVITY 1.1

Imagine that you own a company that produces plastic-based products.

It was discovered that your company made a small mistake that
resulted in excessive smoke to be produced from your factory. Will your
action affect the community living in the area where you operate, the
government or your company? Provide your opinion.

What are clearly being illustrated here are the direction and basic factors that
shape the relationship between the business and its environment. We will look
closely at the existence of these relationships through the examples below:

Example 1:

Recently, Bank Negara Malaysia declared that banks in Malaysia will be

merged to form only six major banks. For example, the merger between Bank
of Commerce and Bank Bumiputra Berhad created Bank Bumiputra
Commerce Berhad. This merger affects the activities of both banks, such as the
employeesÊ transition from a small bank to a major bank.

Example 2:

At one time, our country endured an economic recession that caused many
companies to close down. The recession reduced job opportunities as well as
the governmentÊs income from personal income and company taxes.

Example 3:

A combination of individuals, groups or organisations have caused acts or

laws to be changed or restructured.

For example, the government, under the control of the Ministry of Consumer
and Trade Affairs, implemented fixed prices for a few products due to
pressure from consumers. This is a result of complaints made not only by
consumers but also the distributors of the products.

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These examples clearly illustrate certain strong and major pressures in this
modern economy. It also shows that every business involves the public, groups
and organisations within the society.

1.1.1 The Meaning of Business

The term „business‰ used in our study refers to any organisation that is involved
in the making of a product or the supply of a service to gain profit. So, it is more
accurate if we define business as a collection of commercial organisations (profit
oriented), from a sole proprietorship (such as a small restaurant) to giant
corporate companies (such as Microsoft and Petronas). In between, there are also
medium-sized proprietary, partnerships and corporations.

Business organisations, in the context of this course, refer to businesses of various

sizes and industries. However, in our discussions on organisations and
environments, we will refer more to large companies in selected industries only.
Why? One clear reason is that large businesses are more obvious or ÂvisibleÊ to
our eyes. Their products and advertising efforts are more recognised by the
public. So, large businesses are more often scrutinised by the public. In addition,
our society tends to relate size with power, and the powerful are always given
more attention. Although the number of small companies is more than the large
companies, the impact, power and visibility of the large companies make them
more prone to be featured in our daily newspapers.

Some industries often create more social problems compared to other industries.
The manufacturing industry is known for causing air and water pollution. For
example, the car manufacturing industry contributes extensively to
environmental pollution ă smoke from factories emitted into the air, chemical
waste, tyres and plastics not carefully managed. These firms are criticised more
than insurance companies that may not cause air pollution.

1.1.2 Business Activity Model

All business organisations, whether they are small or big, will finally be involved
in one basic activity, which is the transformation of inputs (resources) into
outputs (products or services). This process can be seen in Figure 1.1.

Organisations obtain resources (such as labour, building, technology, financing

and raw materials) and transform these resources into products or services
needed by consumers. Although the type, quantity and the combination of
resources differ according to the needs of each organisation, the transformation

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process take place at all kinds of organisations and this provides us with a
starting point in examining organisational activities and its environment.

Figure 1.1: Business organisation as a transformation system

1.1.3 Business in Its Environment

A simple business activity model is based on the systems approach towards
management. Organisation is an open system and interacts with its environment
while transforming inputs into outputs.

Output includes products and services, ideas and wastes that are returned to
the environment after usage by consumers.

Input includes labour force, money, raw materials and information provided
by the environment in which the company operates.

Therefore, the systems approach clearly shows that organisation is the entity that
is closely connected to the outside world, or its external environment. The
environment will affect business activities in various ways, not only in the
transformation process but also in the resources acquisition process as well as
output formation and usage. Figure 1.2 will further explain the idea of the
business organisation in its environment.

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Figure 1.2: Business organisation in its environment

1.1.4 Macro Environment

The external environment is divided into two levels: micro and macro. However,
emphasis will be given to the macro environment, which consists of the whole
external environment of an organisation. The macro environment is made up of
four segments: social, economy, politics and technology. Figure 1.3 shows all four
segments of a business macro environment. By analysing the macro
environment, a manager will be able to see the changes that occur in the
environment to help make decisions.

Figure 1.3: BusinessÊ macro environment

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(a) Social Segment

The social segment focuses on the information related to demographics,
lifestyle and social values of society. A manager has to understand the
changes in the population pattern, characteristics of the population, the
emergence of a new lifestyle and social values that seem to be liked and
disliked by the majority of the population.

(b) Economic Segment

The economic segment focuses on the general setting of economic factors
and conditions faced by the industry in a society. For example, information
on interest rates, unemployment, imports are all relevant to business.
Therefore, it can be seen that the economic segment has a strong influence
on a business organisation.

(c) Political Segment

The political segment is related to specific political relationships in a
society, changes in a society and the process by which society makes
political decisions. For example, the changes in tax codes, redistribution of
income, and tax burdens. This involves political relations within various
segments in a society. The creation and dissolution of planning institutions
that determine the standards of business conduct is an example of changes
in a political process.

(d) Technological Segment

The technological segment emphasises on technological advancement and
the dangers that may arise in a society. Products, processes and new
materials including any negative socials effects; general level of scientific
activity and development of basic sciences (such as biology) are the key
concerns in this area.

Macro environment is a system of interconnected segments whereby each

of them is related and influences one another. A manager has to understand
each of these segments, its interconnected relations and issues that are of
direct interest to the company. This knowledge will improve their
understanding of the relevant environment with which strategies are
formulated.

ACTIVITY 1.2

Now, imagine that you are a law enforcer. Recently, there was a change
in government law that sets an increase in corporate tax on each
business. In your opinion, what is the effect of the new law on
businesses as well as within the local society of the business?

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1.2 THE CONCEPT OF STAKEHOLDER

During the 1970s and 1980s, the business atmosphere was simple. An investor
will invest his funds to start a business. The investor may deal with a bank to
finance the business, find a few workers to carry out the production activities,
find suppliers to get raw materials and identify potential customers to buy the
products or services produced. Business was clearly not complex and the parties
involved did not place high expectations on each other.

However, the present business atmosphere is completely different. Organisations

are in a complex environment or society. TodayÊs society consists of various
kinds of people that has various kinds of priorities, expectations, wants and
needs that an organisation has to provide in order to meet the changes in
societyÊs trends of living. Individuals and groups, who were considered
powerless and cannot make demands, have started to act otherwise.

When businesses interact frequently and closely with the society, an interest and
interdependency will be formed between the companies and other groups. These
organisations are interacting with their stakeholders. Who are these
stakeholders?

Stakeholders are all individuals and groups influenced by, or are able to
influence, the decisions, principles and operations of an organisation.

Since the interest of certain stakeholders is significant, the companyÊs decisions

can be very complex. Government, as an example of a stakeholder, creates a
situation that can influence a company to remain or leave the market; but the
final decision is still under the companyÊs control. However, a business cannot
act without taking into consideration the interests of its stakeholders.

ACTIVITY 1.3

Imagine that you are in a supermarket. In your opinion, who are the
main stakeholders for the supermarket? Write down what you have in
mind.

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1.2.1 Primary and Secondary Stakeholders

Businesses interact with society in many ways, and company relationships are
different with different stakeholders. Figure 1.4 shows how a business interacts
with groups that influence its ability to achieve its main purpose, which is to
provide society with products and services. Investors (shareholders) and
creditors provide monetary capital to companies; workers provide skills and
work knowledge; suppliers provide raw materials, labour and other resources;
while wholesalers, distributors and grocers help take the products from the
factory to sales offices and customers. This is the basic interaction between the
company and society, and they help to determine the main economic objective of
the company.

A businessÊ main involvement with society includes all the direct interactions
required in performing its main mission to produce products and services for
customers. This interaction occurs in a marketplace and often involves a buying
and selling process. This involvement of the company forms the basis for
company strategies and basic decisions for the manager, thus an interest to the
stakeholders exists. These stakeholders are critical to the companyÊs existence
and activity, which includes customers, suppliers, workers and investors.

Figure 1.4: Relationship between a business firm and its primary stakeholders

By referring to Figure 1.5, it can be seen that a business relationship is broader

compared to the involvement of other groups in the society. Secondary
interaction and involvement happens when other groups show interest in or pay
attention to company activities. Secondary stakeholders are individuals or
groups in a society that are influenced, directly or indirectly, by the companyÊs
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main activities and decisions. They include the public, various levels of the
government and social activity groups.

Remember that even though the involvement of these stakeholders is called

secondary, it does not mean that they are less important than the primary
stakeholders in a society.

The combination of both primary and secondary interactions has given an

interactive model for the business and society. It is the basic role of a business as
an economic contributor to the society. It also suggests that a manager must
make decisions and take actions that can be beneficial to the society as a whole,
as well as to the companyÊs economic interest.

Figure 1.5: Relationship between a business firm and some of the stakeholders
(secondary)

SELF-CHECK 1.1
Figure out who are the secondary stakeholders for the supermarket as
mentioned earlier.

1.2.2 Stakeholders’ Union

Normally, stakeholders do not act alone in any matter. They will act as a group
by uniting with each other to achieve the same objectives. The union of
stakeholders is not static. A stakeholder who is actively involved with the
company today may not be involved in the future.

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Groups always change their relationships with each other in a society. This
means that stakeholders are a temporary union for a group of stakeholders that
share the same view on certain issues or problems. Groups such as
environmental movements or human rights movements involve hundreds of
countries and international organisations. These groups may operate with a
coordinated policy development, or without it.

SELF-CHECK 1.2
Based on your understanding, what is the difference between primary
and secondary stakeholders?

1.3 PRESSURES THAT FORM BUSINESS –

SOCIETY RELATIONS
Businesses today face various social and political problems and controversies.
Business managers face threatening and difficult pressures that mostly also
involve a global scope. Figure 1.6 shows six critical forces that shape business-
society relations in this era. Each of these forces will be explained next.

Figure 1.6: Six forces that form business ă society relations

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1.3.1 First Pressure: Strategic and Social Challenges

In every corner of the world, companies of all sizes and industries are rethinking
critical business theories on ways to compete. Strategic rethinking has caused
enormous changes in all companies in every industry. Many companies have
restructured their business operations, usually eliminating activities which are
too far beyond the companyÊs strengths and too easily hampered by competitors.
The restructuring of business operations is also known as reengineering. The
company redevelopment process has many social consequences. Among them is
the possibility workers being laid-off that could cause tension among workers, or
salary reductions which could result in workers to feel a lack motivation.

Strategic changes in a companyÊs business also influence its relations with other
segments in the society. Foreign stakeholders may be affected if a business shuts
down. For example, suppliers, competitors and other businesses (food stalls,
grocers and banks) may suffer a loss.

The traditional concept of a companyÊs responsibility towards its stakeholders

may be challenged when a company starts to rethink its strategies. Many experts
explain the relationship of stakeholders as a social contract, which is an
unspoken understanding between companies and stakeholders on how to act
towards each other.

However, what has emerged in the eyes of experts today is a new social contract
between companies, their workers and other stakeholders. The more companies
change, the more will their relationships with stakeholders change. The roles and
responsibilities that have been accepted by the companies also change. The new
social contract depicts that stakeholders can, with reason, expect that managers
are aware of the relationships, handle the impact of their decisions and act
towards the public who are affected by the companyÊs activities.

1.3.2 Second Pressure: Ethical Expectations and Public

Values
Ethical expectations are an important aspect of a business environment. The
public expects businesses to be ethical and they want company managers to use
ethical principles when making business decisions; in other words, a guideline
on what is right and wrong, fair and unfair, and morally correct.

The question is not ÂShould businesses be ethical?Ê or ÂShould businesses be

economically competent?Ê. Society wants businesses to place importance on both

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12 X TOPIC 1 BUSINESS ORGANISATION AND ITS ENVIRONMENT

at the same time. Ethical actions are important aspects for a companyÊs social
performance.

To maintain public support and credibility ă that is, businesses legitimacy - a

business must find a way to balance and integrate both these social demands;
high economic performance and high ethical standards. When a company and its
workers act ethically in dealing with other stakeholders, this means that they are
improving their contribution to society. When they fail to act ethically, they will
face the risk of losing public support that is needed by the organisation to be
credible and successful.

1.3.3 Third Pressure: Global Economic Changes

Another important factor that influences businesses is the global economic
changes. Dramatic changes have changed the scenario of world economics.
Consider these events: Asian economic expansion, the economic development of
third world countries, Western European economic integration, Eastern
European economic experimentation with free markets and competition, NAFTA
(North American Free Trade Agreement) and AFTA (Asean Free Trade Area).

The latest economic problems were felt by the whole world when The United
States of America suffered an economic slowdown. All countries were affected,
including Malaysia, when in 2001 worker retrenchment were seen taking place as
a result of the slowdown.

With economic changes, the government, political and social systems also
change. To achieve business goals in this global change requires a deep
understanding and the inter-relations between the direction of social, economy,
politics and cultural changes.

1.3.4 Fourth Pressure: Changes in Government Roles

and Public Policy
If we look back, all acts of law that exist today are based on agreement at
government level and most of them have changed according to time. During the
1990s, there was a political struggle with the reformation movement who were
against the changes made by the government. This shows that the power of the
government, especially its role, government was challenged.

Demands were made so that power can be spread out wider among society and
country. This means that they wanted power not only to be in the hands of rulers
but also in the hands of the people who gave the power to the rulers. With the

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 TOPIC 1 BUSINESS ORGANISATION AND ITS ENVIRONMENT W 13

belief that too much power has been given to the upper-class society, the public
took action by conducting a democratic reformation.

1.3.5 Fifth Pressure: Issues on Ecology and Natural

Resources
One of the most important social challenges to the business is to achieve a
balance between industrial production and the natural environmentÊs limitations.
Production, mining and industrialisation relate closely to pollution and waste
disposal. However, the demand for products and services are also increasing.
Waste and pollution is the price that society has to pay as a result of the increases
in population, townships and demands on products and services.

All industrial societies, whether it is America, Japan, Germany, Russia or South

Korea, has created an imbalanced segregation (relative to population) on
pollution and waste due to the inevitably high level economic activity. The
emergence of third world countries with a high rate of development and limited
pollution control also contributed to the ecological problem since they are
developing towards becoming industrial economy.

Consumers are also responsible for solid waste and pollution because they make
the demands, buy and use the products that pollute, such as automobiles,
refrigerators, air conditioners and computers.

Environmental protection, involving pollution management, minimising wastage

and restoration of natural resources have become an important priority for
developing countries and developed industrial nations. International agreements
have been formed to handle pressing issues such as the thinning of ozone,
biodiversity and global warming.

Today, companies have started learning how to accommodate their products,

production processes, buying activities and business strategies to meet the needs
of sustainable economic and ecological practices. Although much effort has been
made to restore nature, it cannot be denied that reducing the effects of ecological
damage will continue to be a major social challenge for corporate managers.
Pollution and waste cannot be stopped entirely, but the figure can be reduced
through improvements in product design, better controls and recycling of
reusable materials.

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1.3.6 Sixth Pressure: Technology and New

Knowledge
Technology is one of the most powerful forces influencing businesses and
societies. Technological advancement includes machines of various sizes, shapes
and functions; processes that enable businesses to produce products at a higher
speed with less cost and wastage; and software that combines new knowledge
into a format that directs machines to function, which otherwise may take longer
hours and are less efficient.

Although new technologies have the potential to provide benefits to most of the
population, it may also have a negative effect on some people. Many
technologies have wide social impacts as well as effects towards competition.
New technologies push managers and organisations to examine all the ethical
implications for its usage.

Technology has created what experts call k-economy (knowledge economy). This
is an economy in which new knowledge, in all its various forms, has reshaped
and changed old industries and businesses, creating new industries and
businesses and ultimately affecting individuals, families, communities and
institutions throughout in the world. For these reasons, technology has to be
understood as the main driving force to changes in both business and society.

In attempting to understand issues that are becoming the major concerns of

primary and secondary stakeholders, managers will be well equipped to predict
future demands and make decisions.

ACTIVITY 1.4
Please visit these websites for additional information. Then discuss in
class for further understanding. Retrieved February 20, 2008.
http://www.businessweek.com/
http://www.economist.com/
http://www.fortune.com
http://www.ethics.org
http://www.whitehouse.gov

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 TOPIC 1 BUSINESS ORGANISATION AND ITS ENVIRONMENT W 15

SELF-CHECK 1.3

(a) List the important elements in the macro environment of

business.
(b) Explain briefly each of the following pressures that form the
business-society relationship:
• First Pressure;
• Second Pressure;
• Third Pressure;
• Fourth Pressure;
• Fifth Pressure; and
• Sixth Pressure.

• Business organisations refer to any organisation involved in the production

of a product or in providing services to gain profit.
• All business organisations are involved in one basic activity that involves the
transformation of inputs (resources) into outputs (products or services).
• The external environment basically is divided into two levels ă micro
environment and macro environment.
• By analysing the macro environment from its political, economical, social and
technological aspects, a manager will be able to see the changes that take
place in the environment to assist in making decisions.
• Every business involves the economic and social relationship in a society.
• The involvement in the companyÊs basic mission is called primary
involvement, while those that are related to the primary involvement and
have an indirect relationship are secondary involvements.
• People, groups and organisations that interact with companies and have an
interest in their performance are called stakeholders.

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16 X TOPIC 1 BUSINESS ORGANISATION AND ITS ENVIRONMENT

• Those who are directly and closely involved with the business are the
primary stakeholders, while those who have an indirect relationship with the
business are called secondary stakeholders.
• Stakeholders can use economic, political and other influences in many ways
that would benefit as well as challenge the organisation.
• Stakeholders can also act freely or create a union to influence the company.
• There are six main pressures that influence business-society relationship ă
strategic refocusing and restructuring of businesses; changes in ethical
expectations and public values; global economic changes; global direction
towards the rethinking of government roles; ecological and natural resources
concerns; and the role of technological transformation.
• To deal with globalisation effectively, ecological, ethical and corporate
strategy issues must consider the interests, wants and expectations of all
stakeholders. Companies must adopt strategies that combine business goals
and interests as well as the broad social wants.

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 Topic X Business
2 and
Government
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the importance of public issues and the functions of public
relations;
2. Describe major factors of economic policy that affects businesses in
all countries;
3. Discuss social welfare policies that affect the workplace, markets
and profits;
4. Discuss the major forms of government regulations towards
business organisations and the problems faced as a result of these
regulations;
5. Analyse reasons that support and oppose business organisations
involvement in political processes; and
6. Assess major problems in the political system that affects business
organisations.

X INTRODUCTION
Business organisations have a complex relationship with the various segments of
society. The existence and power of stakeholders require careful attention and
action by management. A companyÊs success can be positively or negatively
influenced by its stakeholders. In an era where business strategies need to change
due to pressures such as global competition, new political arrangements, changes
in society values and ecological concerns, the managers are challenged to achieve
good economic results and meet the needs of the stakeholders at the same time.

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18 X TOPIC 2 BUSINESS AND GOVERNMENT

2.1 WHY PUBLIC ISSUE IS IMPORTANT

ACTIVITY 2.1

In Topic 1, there was an example of government-business-society

relationship where banks in Malaysia were merged as a result of
demands by the government. Lately, issues related to the outcome of
the mergers have cropped up. Many workers have been retrenched
voluntarily or involuntarily. If you were a manager at a bank in
Malaysia, what would you do in this situation?

Syarikat Bas Naela was an express bus service in Malaysia. In the 1990s, many
accidents involving the companyÊs buses took place. The lives of many
passengers were lost. Consequently, it was made compulsory for bus companies
to install a Âblack boxÊ in their buses.

For businesses today, it is important to understand that their every activity will
be looked into and scrutinised, especially when there are mistakes or
wrongdoings by the company.

Therefore, companies cannot ignore their stakeholders. Customers, suppliers and

competitors could gather their demands quickly to pressure the companyÊs
management. Not all complaints are true and not all stakeholders have
reasonable demands, but a manager who is inattentive towards stakeholders
may place the company in a risky situation.

2.1.1 The Emergence of Public Issues

Early signs of a problem are complaints and objections from important parties
whose desires are not met. For example, a group of villagers may object to the
dust and unpleasant smell surrounding their residential area as a result of
activities from a nearby factory. Workers may object to being transferred to other
branches as a result of company mergers. Creditors may freeze their loans as a
result of late loan repayments by companies. In each of these cases, complaints
reflect the early signs of a problem that needs to be examined by the
management.

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 TOPIC 2 BUSINESS AND GOVERNMENT W 19

Performance-Expectation Gap
In each of the examples above there is a gap between the stakeholdersÊ
expectation (individuals or group) and the real performance of the company.

Figure 2.1 illustrates the gap, which is called the performance-expectation gap.
StakeholdersÊ expectations are a combination of peopleÊs opinions, attitudes and
beliefs on what are considered as reasonable business conduct. Villagers believe
that smell and dust pollution caused by the nearby factory as unreasonable and
immoral. Employees of a company do not believe it is ethical to transfer workers
without a reasonable excuse.

Figure 2.1: Performance-expectation gap

ACTIVITY 2.2
In your opinion, are there gaps between what is expected by society and
the real performance of companies in the context of businesses in
Malaysia? Discuss.

Managers and organisations have the responsibility to identify stakeholdersÊ

beliefs and expectations as early as possible. Failure to understand their concerns
and take the right action will provide the opportunity for the performance-
expectation gap to grow bigger. This gap shows the magnitude of the difference
between what is expected by the stakeholders and the real performance of the
company. The bigger the gap, the bigger will be the risk of negative response
from stakeholders.

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20 X TOPIC 2 BUSINESS AND GOVERNMENT

2.1.2 The Functions of Public Relations

SELF-CHECK 2.1
In your opinion, what are the functions of a public relations officer?

Demands on business firms that arise from public issues, with the addition of the
increase in complex organisational relations with stakeholders, have caused
companies to create a staff department to exclusively manage public relations.

Public relations management refers to active management of a companyÊs

external relations, especially its relations with external stakeholders such as
government, planning agencies and communities.

In general, the important thing to know is that there are three types of
contributions that can normally be made by the public relations department,
which are:

• Social and Political Intelligence

Public relations are responsible for getting, analysing and preparing social
and political intelligence information for other managers. Issues are
identified, trends are forecast and activists in the external environment are
examined.

• Internal Communication
Public relations must convey whatever they have discovered to other
managers in the organisation. Normally, public relations produce daily
reports to the Chief Executive Officer.

• External Action Programme

Public relations are responsible in developing and conducting action
programmes targeted at external stakeholders. Therefore, public relations
department often have media contact programmes in order to build regular
interactions with the press; local community affairs programmes to
strengthen relations with the local community; and state and federal
government lobbying operations to ensure the companyÊs voice can be heard
by the lawmakers and government.

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 TOPIC 2 BUSINESS AND GOVERNMENT W 21

2.1.3 Issues Management

(a) Issues Management Process
Issues management is a structured and systematic method, through which
companies respond to public issues that are most important to the
company. Companies seldom have full control of public issues because of
the many factors involved. But it is possible for a company to create
management systems that monitors issues when they emerge and involve
the managers who act to minimise negative effects to the public or to
maximise positive effects to the companyÊs benefits.

Managers have less influence on public issues as they emerge. This is

another way of saying that the faster a company can be involved in
managing the issue, the more likely it can shape an outcome that is
acceptable to the organisation and other people. Issues management
process is the basic method used to achieve this objective. Figure 2.2
illustrates the component of a typical issues management system.

(b) Issue Identification

In this stage, it involves the active scanning of newspapers, other media,
expertsÊ views and the community to identify issues of concern to the
public. Since there are many ways to identify emerging issues, managers
must decide on the best way to focus their efforts.

Figure 2.2: Issues management process

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22 X TOPIC 2 BUSINESS AND GOVERNMENT

(c) Issues Analysis

Once the issue has been identified, the facts and implications of the issue
must be analysed. Analysis of the issue is guided by two basic questions
that need to be answered by the manager, which are:
(i) What is the impact of the issue on our business?
(ii) What are the probabilities that the issue will evolve into a higher level
of the public issue lifecycle?

(d) Programme Design

As soon as policy choices have been made, the company must design and
implement a suitable programme. Identifying issues at an earlier stage
makes it possible for the company to build a political capital before it is
needed. Normally, companies build goodwill by helping other
organisations, which can lead those organisations to become allies to the
company.

(e) Policy Choices

The effect and the probabilities of an issue happening tells the manager
how important an issue is to a company; but it does not tell the manager
what actions are to be taken. Developing a policy choice involves creation
of choices. It requires a complex evaluation that combines ethical
consideration, reputation and good name of the company, and other non-
quantifiable factors.

A manager can decide to change the internal practices, operations

procedures, or the product itself. Manager can also focus on changing the
views of government, public or media. Not doing anything is also a choice
if the issue does not need urgent action.

(f) Evaluation of Results

As soon as the company has tried an issues management programme, it has
to examine the results and make the correct adjustments. Since political
issues may take considerable time to evolve, it is important for a manager
to be given responsibility for a particular issue affecting stakeholders. The
company may change or review its approach towards certain issues.

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2.1.4 Crisis Management

Crisis management is a process used by companies to respond to short term

shocks or anything related to it, such as accidents, disasters, catastrophes and
injuries.

It is difficult to manage when a crisis happens. According to some experts, four

characteristics that explains crisis are:

(a) Shock
A shock means that organisations are not ready for the incident and it
happens without warning. For example, the terrorist activity directed at the
World Trade Centre, New York City.

(b) Shortage of Information

A crisis normally puts a manager in a situation that requires them to act but
is forced to do it without sufficient or valid information.

(c) Escalating Pace of the Incident

A crisis does not wait for the company to be ready to face it. As soon as a
crisis happens, it normally creates a chain reaction to the incident with
increasing volume and complexity to the company.

(d) Intense Scrutiny

During a crisis, the world scrutinises each movement made by the
company. Normally, every decision will be looked into and evaluated
promptly by the media, government and other external stakeholders.
Feedback comes quickly, whether in the form of praises, criticisms or
condemnations. This makes it difficult for managers to evaluate the
feedback received from others.

Is it possible to really manage a crisis? Although managers will face many

problems, there are a few principles believed by experts that are able to minimise
crisis faced by companies. Managers can try to learn from a previous crisis in
order to be ready for the future. Executives can also depend on intuition and
feelings in handling stakeholders when facing a crisis.

SELF-CHECK 2.2
What do you understand about crisis and crisis management? Provide
one real example.

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24 X TOPIC 2 BUSINESS AND GOVERNMENT

2.2 PUBLIC POLICY

ACTIVITY 2.3
Have you heard of public policy? Name the types of public policy that
you have heard or read about.

Public policy is an action plan implemented by the government to achieve certain

goals that affect a substantial section of a countryÊs population. Generally,
government will not act until an incident that occurred has affected a section of
the general public or the government has certain public objectives to achieve.
This is the essence of the concept of government acting in the public interest.

In the modern economy, government roles are wide. Although there are many
debates on the size and specific actions of the government, most people agree
that government has a few suitable roles in this modern world. With the growth
in population, a country has more citizens whose needs, interest and concerns
have to be matched to the governmentÊs action plan. This is the role played by
the government in a modern world. Specifically, public policy is a set of goals,
plans and actions that differ between one country and another and each country
practices it to achieve their own objectives.

2.2.1 Elements of Public Policy

ACTIVITY 2.4

Name some consequences of public policy development that you think

are desired and not desired.

Government actions can be understood through several basic elements of public

policy. There are four important elements of public policy. Among them are as
shown in Figure 2.3, which are input, public policy goals, instruments and
effects.

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 TOPIC 2 BUSINESS AND GOVERNMENT W 25

Figure 2.3: Elements that influence public policy.

Various factors or inputs influence the level of public policy development.

Government may determine the forms of its actions based on its economy or
foreign policy, internal political pressures from the society and activist groups,
technical information and ideas arising from national level politics. Public policy
can also be influenced by technical studies of complicated issues such as tax, or
new technological development such as fibre optic electronics. All these inputs
can assist the government in its policy development and implementation.

Public policy goals can be in the forms that are noble and broad, or narrow and
self-serving. National values such as freedom, democracy and equal
opportunities for the citizens to share in economic prosperity, which is a broad
form of public policy goal, leads to the acceptance of civil rights laws and aid
programmes for those who need them. A closed and self-centred goal is when a
country plans to implement tax laws that will burden certain income groups and
particular groups of people.

Government uses various public policy tools, also known as instruments, to

achieve their policy goals. For example, in preparing budgets many discussions
are directed towards increasing profits, such as higher taxes for business
organisations and individuals, and new sales taxes for selected items like
vehicles, tobacco, gas and alcohol. Generally, public policy instruments are a
combination of incentives and punishments used by the government to help its
citizens, including business organisations, in order to achieve the policy goals.

Public policy actions have several effects. Since public policy affects many
people, organisations and other activist groups, it is not possible for all public
policies to fulfil everyoneÊs needs. Some may benefit by the governmentÊs
actions, while some may be disadvantaged. This situation is often unavoidable.

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26 X TOPIC 2 BUSINESS AND GOVERNMENT

Therefore, in evaluating any public policy, it is important for a manager to

develop answers to these questions:
• What inputs will affect the public policy?
• What are the goals to be achieved?
• What are the tools to be used in achieving these goals?
• What effects, intended or unintended, are likely to happen?

The answers to these questions will provide management with a basis or

foundation to understand how a countryÊs policy actions will affect the economic
and business sector.

2.2.2 Public Policy and Business

Government actions would certainly influence the business activities of an
organisation. At the national level, governments attempt to manage economic
development by using fiscal policy and monetary policy. Meanwhile, state
governments shape the business environment through various regional economic
policies; and local governments affect businesses through policies that involve
providing operating permits and licenses.

Table 2.1 shows that a countryÊs well-being is the result of a combination

between social and economic policies. Public policy affects business
organisations directly and indirectly by shaping the climate in which companies
operate within the country or abroad.

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Table 2.1: Public Policy and Its Effects to Businesses

CountryÊs Economic Policy Economic Effects

Policies that affects the macro • Employment/unemployment, welfare

economy: assistance.
• Economic Development • Government expenditure and tax.
• Fiscal Policy • Currency exchange and interest rates.
• Monetary Policy • Exports/imports, trade barriers (e.g.,
tariffs).
• Trade Policy
• Support from major industries.
• Industry Policy
Social Welfare Policies Social Effects
___________________________ ________________________________

Policies that affect the workplace:

• Limited pool of labour, labour cost.
• Child Labour Law
• Labour cost, safety cost.
• Minimum wages and maximum
• Equipment and maintenance cost.
hours
• Exposing confidential information.
• Safety and health standards
• Right to know disclosure rules • Production Cost.
• Taxation.
Policies that affect the market place:
• Cost sharing between employer and
• Consumer safety protection employee.
• Government subsidies for the • Increasing labour cost and higher cost
poor, disabled and needy for older employees.
• Labour cost, firing of employees are
Policies that affect profitability: discouraged.
• Payment of Social Security Tax • Labour cost, incentive for using
• Mandatory Retirement Benefit managed health care plans.

• Rules for disability and

unemployment compensation
• Health insurance benefits and
protection

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28 X TOPIC 2 BUSINESS AND GOVERNMENT

2.2.3 National Economic Development

Slow economic development can contribute to social problems such as the high
level of unemployment, higher cost of charity programmes and demands to
increase taxes. Economic development, on the other hand, provides more
employment opportunities for trained workers. However, it also increases the
labour cost for business organisations. To achieve a balance, political leaders
prefer the economy to develop because it increases the countryÊs wealth.

Fiscal policy refers to the forms of government expenditure and taxation in an

economy that is essential to encourage or support the macro economy. Local
governments usually spend a large amount of money on roads, social services
and parks. Meanwhile governments at the national level spends larges amount of
money on national security, international relations and hundreds of public
projects. Nowadays, governments use fiscal policies as a primary method to
achieve economic development and prosperity.

Taxation policy is usually formed as a consequence of other government goals.

The government is probably forced to increase taxes due to other needs or higher
commitments. When a country is facing a war for example, tax will be increased;
the collection of taxes will be more aggressive in order to support the cost of war.
The spending priority during easier times also affects the tax policy. Large social
welfare programmes can involve high government expenditure and require tax
support.

The monetary policy of a country has an effect on supplies, demand and

currency value of a country. The high currency value of a country is caused by its
economic strength in relation to the economy of other countries. A healthy
economy requires sufficient supply of money and credit to enable the public and
organisations to sustain the economic development. The high or low currency
value of a country has a serious effect on business organisations and society. It
affects the consumerÊs purchasing power, stability and value of savings, and the
citizensÊ and international investorsÊ confidence in the future of the country. This
affects the countryÊs ability to borrow money from other countries and to attract
capital from private investors.

Trade policy refers to government actions to encourage or discourage trade with

other countries. Countries that have a vast amount of natural resources such as
oil, timber, coal, minerals and farm products are keen to do business, as this can
create markets for their products and assist them in achieving economic
development. Cost-effective countries that produce clothes, electronics
appliances, computers and vehicles are more inclined to trade internationally as

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they can offer better prices to customers compared to their less efficient
competitors.

Industry policy is used by national governments to direct economic resources

towards the development of specific industries in a country. A country that has
oil resources, for example, may structure their taxation and other policies to
encourage the exploration and production of oil. With a broad industrial policy,
government can invest directly in new technologies (such as fibre optics) by
forming a company owned by the country, or indirectly by developing new rules
and regulations that encourage other organisations to invest in the new business.

SELF-CHECK 2.3
Economic policies affect the business organisations of a country in a
variety of ways. Describe the major effects of the said policy on business
organisations.

2.2.4 Social Welfare Policy

The 20th century has provided many benefits to universal well-being. A
developed industrial nation will usually establish a distinct social service system
for its citizens. Our country has significantly improved the level of social welfare
in various fields and will continue to do so with the development of our
countryÊs economy.

(a) Health Policy

Healthcare is one of the most important forms of social services. This is
because public health problems can affect the whole population of a
country. Developed industrial nations (for example, Japan, America and
Britain) tend to focus certain resources towards providing basic healthcare
for their citizens. Developing countries also acknowledge the importance of
public health as a moral duty and investment in human resources.

Developing industrial societies depend on hospitals, medical technologies

and sophisticated health products through local clinics, community
education and local medicines. Investment in basic healthcare has shown
many benefits. This is clearly shown from indicators such as the decrease in
infant mortality rates during birth, the decrease in the illness among
children and the increase in life expectancy rates.

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30 X TOPIC 2 BUSINESS AND GOVERNMENT

(b) Social Security

Governments have established various mechanisms to fulfil the needs of
specific segments in their population. We have to realise that children, the
elderly, the disabled and the homeless make up a large portion of the
population who needs help. With better healthcare systems and food
programmes, the life expectancy rate of society has increased. As a response
to this change, governments need to form a better social security system to
provide guaranteed economic assistance to this segment of population.

ACTIVITY 2.5
You have learned how a social welfare policy is implemented through
health and social security policies. Give an example of its
implementation in our country.

2.2.5 Government Regulations Towards Business

Organisations
(a) Goals and Objectives
Society depends on the government to establish laws to control its citizens
and business organisations. Meanwhile business organisations, usually
require lawyers, public relations experts and government relations
managers to supervise and manage interactions with the government. This
is because the laws and regulations of the government are very complex
and operate at various levels, which are the federal, state and local levels.
There are several reasons why society depends on rules and regulations to
solve problems. Some of them are shown in Figure 2.4:

Figure 2.4: Factors that facilitate societyÊs problem solving methods.

(i) Economic Objective

Economic objective is influenced by several government laws, for
example social goal, which is the most important goal compared to

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 TOPIC 2 BUSINESS AND GOVERNMENT W 31

other goals. There is an argument that supports government laws,

which is the debate on market failure whereby a market is said to
have failed to adapt product prices to the companyÊs real cost. For
example, there is no market incentive for a company to spend on
pollution control tools if the customer does not demand for it.

The market fails to relate social cost (environmental threats) of

pollution to the economic equation. Governments can use the law to
compel all competitors in the industry to accept anti-pollution
standards. The companies will add the cost incurred in complying
with the standards into the price of products. In this way, the social
cost applied to the environment has been transferred to the consumers
who are actually using the environmental resource.

(ii) Ethical Rationale

There is an ethical rationale behind the establishment of a rule.
Training and educating workers require high costs and it is a huge
loss if these workers are involved in accidents that can be avoided.
There are also fair and just reasons for governments to establish
standards and establish rules to protect consumers, workers and other
stakeholders. Therefore, economic and ethical arguments will have to
be studied before a rule or a law is passed by the relevant authorities.

(iii) Political Aspect

Other reasons for the development of business regulations are the
representatives who speak for the benefit of others. Nature loversÊ
groups pressure governments to stop pollution; organisations
representing minority groups and women will push for equal
opportunities in employment; consumer groups wants to ensure that
government rules are enforced so that products are safer and of better
quality; workerÊ unions lobbies law makers to establish rules that
protect workers from workplace hazards and health risks.

(iv) Media Attention

The mediaÊs role in depicting disasters and confrontations between
business organisations and the public helps convince governments
that certain actions have to be taken. Based on previous experiences,
objections will pressure governments to act. At the end of the 20th
century, news through the media that connects people from all over
the world was able to show particular incidents that were taking
place, creating awareness on how important it is for the government
and the general public to fulfil social needs.

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32 X TOPIC 2 BUSINESS AND GOVERNMENT

(b) Types of Rules

Government rules come in various forms. Some are direct while others are
indirect. Some are targeted to specific industries (such as banking), and
others are concerning work discrimination and pollution that applies to all
industries.

(i) Economic Regulations on Specific Industries

Some forms of government regulations target specific industries such
as roads, telecommunication companies and banking. This type of
rule is more economic oriented with the purpose of changing normal
operations in a free market as well as the forces of supply and
demand. In this situation, law enforcement changes price
determination, capital growth, service quality and the entry of new
competitors. For example, railway systems are not allowed to raise its
fares without the permission of the trade representatives and they
cannot charge service cost that would burden the community like
companies in other free markets. Telecommunication companies are
also not allowed to raise their charges to users, expand their business
to other forms or not provide their service to users without prior
approval from the government.

(ii) Social Regulations on All Types of Industries

Regulations on all industries are targeted for important social
objectives, such as protecting consumers and the environment as well
as providing a safe and healthy work environment. Equal
employment opportunities, retirement benefits protection and
healthcare for workers are important social laws. Unlike the economic
regulations mentioned above, social regulations are not limited to just
a single type of business or industry. Laws concerning pollution,
safety, health and work discrimination are enforced on all industries;
laws of consumer protection are enforced on business organisations
that are related to production and sale of consumer goods.

2.2.6 Problems that Arise from Regulations

We need valid laws and regulations, but regulations can also cause problems.
These problems are deeply felt by business organisations because these
regulations directly affect their operational costs and the freedom of managers to
design their business operations. In the modern economy, there are serious issues
on costs arising from regulations and their effectiveness that cannot be taken
lightly. This matter is discussed next.

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 TOPIC 2 BUSINESS AND GOVERNMENT W 33

(a) Cost of Regulations

The enforcement of laws or regulations may be inevitable, but there are
costs that need to be borne. At this point of time, much attention is given to
the cost of enforcing government laws. It is called the rule of cost and is
applied in all socio-economic systems, whether in free markets or markets
under the control of the central government.

Society today can afford to bear anything including social regulations, as

long as they are willing to pay the cost involved. Sometimes, the benefit is
worth its cost, but there are times when the cost exceeds the benefit. Cost
and benefit analysis test assists society in understanding the burden they
will have to bear when a regulation or law is enforced.

(b) Effectiveness of Regulations

The need for government regulations has to be balanced with both the cost
of the regulations as well as the evaluation on whether the rule will achieve
its intended purpose. Therefore, the government will be referred to from
time to time to ensure certain business behaviours are followed, and at the
same time deregulate the rules that are felt as unnecessary. Deregulation
means to abolish or reduce the power of legislation and the regulatory
activity of the government.

ACTIVITY 2.6

Name the types of enforcement below based on the following examples:

Example Type of Enforcement

Highway developers are not

allowed to raise toll rates without
the permission from the Ministry of
Works, as it will burden users.

Government agencies set a

minimum salary of RM900 for
diploma graduates.

Malaysian manufacturing industry

gives equal rights to all genders,
minority and majority groups as
well as all age levels in obtaining a
job.

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34 X TOPIC 2 BUSINESS AND GOVERNMENT

2.3 BUSINESS ORGANISATION AND

GOVERNMENT RELATIONS
Business organisations face a complicated challenge in managing their relations
with the government and the process of public policy development. Managers
must identify the emergence of current issues and know how to respond. A
dynamic public policy process requires an understanding of the political
environment and strategic views on how stakeholders act on certain issues. In
most countries, business organisations have the right to demand that the
government act in the way the organisations want. However, political pressures
often create an ethical dilemma for companies and managers.

2.3.1 Strategic Management of Government Relations

There is a serious debate between those who agree and disagree to the
involvement of business organisations in government. The debate involves the
question of whether business organisations should be involved in the political
process and how far. As shown in Table 2.2 below, there are some who believe
that business organisations should stay away from politics, while others say that
business organisations should be involved.

Table 2.2: Reasons that Support and Oppose Business OrganisationsÊ

Involvement in Political Process

Reasons Why Business Reasons Why Business Organisations

Organisations Should be Involved: Should Not be Involved:

• Pluralistic systems encourage • Business executives are not qualified to

involvement in politics be involved
• High economic stakes • Business organisations are naïve about
politics
• Counterbalances other social
interests • Business organisations are too big and
too powerful
• Business organisations are
important stakeholders to the • Business risks its credibility by engaging
government in politics

In the modern world, business organisations and politics are closely related. This
makes it impossible for managers to ignore what is going on in the political life.
Gradually, business leaders have come to realise that the survival and the
prosperity of their businesses are related to political decisions. Even though this

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 TOPIC 2 BUSINESS AND GOVERNMENT W 35

trend is clear in all countries, there are criticisms from certain parties who worry
about the influence of business organisations on certain decisions of the
government. Dilemmas faced by managers are quite clear: How can companies
be involved in political processes regarding issues related to their companies and
industries, and at the same time be consistent with the ethical standards and
norms of the society that supports their business?

ACTIVITY 2.7
Now that you know the reasons why a business organisation should or
should not be involved in a political process, do you agree if a business
organisation is involved in politics? Provide your reasons.

2.3.2 Techniques of Political Action

Techniques used by business organisations to participate in government politics
are similar to the techniques used by other interest groups. Three techniques that
are widely used are shown in Figure 2.5:

Figure 2.5: Techniques of political action

(a) Direct Representatives

Most large corporate companies place full-time representatives and staff to
observe the developments that may affect the company as well as to
facilitate communication with government officers. This enables the
companyÊs staff to represent his or her business organisation directly before
the government agency and officials who are involved in determining
legislative and regulatory activities. Lobbying is a process of

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36 X TOPIC 2 BUSINESS AND GOVERNMENT

communication in an effort to convince others to support the companyÊs

interest after considering certain laws, policies and regulations. Company
lobbyists may be actively involved at the local, state as well as national
levels.

(b) Trade Associations

Many companies are members of certain trade associations such as
Malaysian Manufacturers Association, Small Businesses Association, Malay
Chamber of Commerce Malaysia and others. The strength of these
associations depends on their number and centralised staff to promote their
interest and major concerns to government officials.

(c) Specific Purpose Union (Ad Hoc Union)

The third technique that is usually used includes the formation of specific
purpose or ad hoc unions. It is used to bring together various business
groups to lobby or object certain regulations or laws. Sometimes, these
business organisations cooperate with competitors, companies from other
industries and non-governmental organisations that share a concern about
the enforcement of certain laws, tax proposals and other issues.

SELF-CHECK 2.4

You have learned the techniques of political actions that can be used by
business organisations. Think of a suitable example for each of the
techniques below:
(a) Direct Representatives;
(b) Trade Associations; and
(c) Ad hoc Unions.

2.3.3 Political Involvement

Business executives must determine the appropriate level of political
involvement for their company. In order to succeed, a business organisation must
think strategically on the objectives and implementations of specific political
issues as well as the opportunities that they can obtain from these objectives.

A companyÊs strategic interest may be direct or indirect. For example, there are
business organisations that seek to persuade the state, local and federal
government to improve public education. Some business organisations believe
that it is immoral for students to leave school without obtaining the skills needed
to get jobs and live in the modern economy.
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 TOPIC 2 BUSINESS AND GOVERNMENT W 37

2.3.4 Critical Problems

Business organisations operate in political systems that are full of conflicts, issues
and problems. As participants in the political process, business organisations
have a large stake to ensure that the system operates consistently with the ideals
of a democracy. Some important problems that exist as a result of political
management will be discussed next. (Please refer to Figure 2.6)

Figure 2.6: The problems of political management influences

(a) Money and Financing Campaign

A political process involves a large amount of money. Candidates
competing for public service positions from the position of government
officers to the presidency level have to spend money to contest in an
election. The cost involved ranges from thousands of ringgit for a local level
election up to millions of ringgit for a high ranking post at the federal level.
This cost is expected to rise in the coming years. The need for money in
campaigns and contests requires candidates to try and raise funds from
willing donors.

Business organisations are involved in the financing of election campaigns

in several ways. Direct contributions from business organisations to
political candidates are prohibited by federal law. State governments also
limit business organisationsÊ contributions to state election candidates.

(b) Lobbying
Business organisations and other interest groups use various methods to
directly influence the development of public policy. A lot of effort involving
the transfer of information, providing opinions and delivering messages to
officials or lawmakers is made. One of these methods is lobbying. Lobbying
involves direct contact with government officials to influence the views or
actions of that person on an issue or public policy. It is usually done
through face-to-face contact or in meetings that last only a few minutes, and
sometimes through long discussions.

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38 X TOPIC 2 BUSINESS AND GOVERNMENT

(c) Role of the Media

The 1990s saw the outburst of new media channels including radio and TV
talk shows, public relations programmes, coverage on parliamentary
debates and Internet services. Television stations often provide live
telecasts of debates and voting on certain political and business decisions.
There are critics who claimed that the growth of these media outlets has
resulted in more attention being given to the personalities of the
government officials than to their ideas. The issue may have been
exaggerated, but there is no doubt that the media can influence the views
and opinions of the public.

(d) Transparency of Political Process

Transparency refers to the level of openness and the clarity of government
decision-making process. It gives the opportunity for the public to observe
closely the decisions made and the methods used in making the decisions.
Some scholars argue that government officials act as agents to voters and
the people who appointed them. This view is called corporate political
agency theory. This theory explains that conditions that enable the public to
observe how the elected officials behave will promote the desires of the
parties who gave them the position.

(e) Responsibilities of Officials Appointed

Society normally dislikes things that are related to politics because of the
politicians that are involved in politics. Politicians and officials appointed
for life are sometimes crude, arrogant and self-serving designed to
perpetuate power. This includes doing favours to those who voted them,
directing public funds to local communities and acting on behalf of local
companies that have problems with the law. The more senior the officials,
the more likely they are to use their powers in government affairs. This
makes them targets of political influence, which can help them raise funds
for the party. They will then be re-elected and continue in their positions of
power.

Political research experts suggest several steps in reducing the abuse of

power. One of the most popular ideas is called Âterm limitsÊ. It allows the
elected officer to serve for a predetermined maximum number of years.
This will weaken the power of the long-serving members of Parliament.
This situation will open the number of assignments to the committee, create
opportunities for new members and provide basic experience in the
legislature. Experts who object this suggestion argue that the term limit
would deprive the voters and communities who chose them of the benefits
of the officersÊ experience, such as knowledge, contacts and credibility that
cannot be used as a result of the action.

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 TOPIC 2 BUSINESS AND GOVERNMENT W 39

SELF-CHECK 2.5

List five critical problems that can happen in the relations between
business organisations and the government political process. Explain
briefly how they occur.

SELF-CHECK 2.6
In a political election, business organisations also have a role to play.
State the roles played by business organisations that you have learned
from this topic.

ACTIVITY 2.8

Please visit these websites for additional information. Then discuss in

class for further understanding. Retrieved February 20, 2008.
http://www.mampu.gov.my/
http://www.jphpk.gov.my/malay/Jan%202001%2019.htm
http://www.nstpi.com.my/
http://www.processrenewal.com/files/srm2000.html
http://www.3m.com/about3m/environment/visionAndStrategy.html
http://www.nationaljournal.com/njonline/
http://www.whitehouse.gov/
http://www.sec.gov/

• StakeholdersÊ expectations, if not fulfilled, can result in actions that change

social concerns into pressures towards businesses and government.

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40 X TOPIC 2 BUSINESS AND GOVERNMENT

• The existence of the gap between what is expected and the real performance
leads to the formation of public issues.
• The function of public relations involves the gathering and analysing of
information about the social and political environment, conveying them to
the company and interacting with stakeholders to achieve the companyÊs
objective.
• Issues management consist of identifying and analysing issues, developing
policy choices, designing programmes, implementing and evaluating the
result of the said activities.
• Crisis management is a process used by organisations to act on short term
shocks and anything related to it, such as accidents, illnesses and disasters.
Several practical guidelines have emerged through experience. An effective
crisis management usually starts with the proactive step of always being
prepared.
• Government actions originate from the public policies of a country. It then
shapes the environment for the business organisation.
• This topic has explained how policy development decisions by the
government will affect the business organisation and vice versa.
• Some policies such as welfare and trade policies, and regulations for running
a business within and outside the country have also been introduced.
• After learning this topic, you should already know the important elements in
a public policy process such as inputs, goals, tools and effects.
• You should also understand the main factors of economic policy that affect
businesses in a country, as well as explain the forms of government
regulations towards business organisations and factors that encourage the
development of regulations in industrialised countries.
• This topic also discusses the management of relations between business
organisations and the government.
• The topic discussed in this topic introduces you to corporate political activity
that focuses on policies and government decision-making as well as the
politics of election.
• Among the popular types of corporate political activities are political
campaign contributions and lobbying.
• Business organisations play a part in political elections by providing
campaign funds and other forms of support to the election candidate.

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 TOPIC 2 BUSINESS AND GOVERNMENT W 41

• Business organisations also participate in campaign issues; give support to

ideas that are in their companiesÊ interest and object to ideas that interfere
with company activities.
• There are several reasons why business organisations are involved in political
decision-making. Among them is because they are the main parties affected
by the governmentÊs actions and are able to voice out their opinions on
economic issues and social policies.
• You should now be able to understand the forms of political activities that
affect business activities.
• You should also have understood the role of business organisations in a
political election and know the meaning of strategic management in business
organisations and government relations.
• Besides, you should also be able to explain the importance of business
organisationsÊ involvement in the development of public policies and
describe the problems in the political system that affects business
organisations.

Copyright © Open University Malaysia (OUM)

 Topic X Corporate
3 Social
Responsibility
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Define corporate social responsibility and its origins;
2. Describe types of modern corporate responsibilities;
3. Explain advantages and limitations to corporate social
responsibility;
4. Differentiate between corporate social responsibility and corporate
response according to their basis, focus and actions;
5. Discuss the levels of corporate social response model;
6. Elaborate ways to improve the success of business social policy;
and
7. Evaluate aspects of the management of a firm to become socially
responsive.

X INTRODUCTION
Corporate social responsibility challenges businesses to be responsible towards
the outcomes of their actions that affect the firmsÊ stakeholders while they are
pursuing their economic goals. The public expects businesses to be socially
responsible and most companies have responded by making social goals as part
of their company operations. The guideline to act in a socially responsible
manner is often unclear; therefore creating controversies on what is considered
socially responsible and what the disadvantages of being socially responsible are.

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 TOPIC 3 CORPORATE SOCIAL RESPONSIBILITY W 43

A socially responsive company considers and carefully tries to create a

relationship that is mutually beneficial with its stakeholders. In this section, we
will see how businesses evaluate the demands of the environment before
attempting to implement a successful social strategy.

Strategic alliances have now become a norm as the number of social issues
continues to increase. In order to act against complex social problems that
influence them, companies merge with one another and with their stakeholders
(government, society and specific interest groups, schools and others) for a joint-
venture partnership. By combining their financial and human resources, an
organisational network can better overcome the challenges created by the various
social issues and achieves their respective goals more effectively.

3.1 DEFINITION OF CORPORATE SOCIAL

RESPONSIBILITY
SELF-CHECK 3.1

Before we proceed with further explanations, think about these

questions: What do you understand by social responsibility? Can giving
up your seat to the elderly or a pregnant lady in a public transport be
considered as being socially responsible? In the business context, can we
consider a shop selling daily goods to a community as being socially
responsible, or just making profits? What is your opinion? Discuss.

Corporate social responsibility means that a company must be responsible for

any actions that may affect people, the community and the environment. This
implies that all negative effects from businesses on people and society should be
identified and corrected. This may require companies to sacrifice their profits if
the social effects bring serious harm to stakeholders, or if the funds can be used
to encourage more positive social benefits.

(a) Business Responsibility

Becoming a socially responsible company does not mean that the company
has to neglect its other major missions. A business has many
responsibilities, such as economic, legal and social responsibilities. The
challenge for management is to combine these responsibilities into a
comprehensive corporate strategy without disregarding any of its
obligations.

Social responsibility requires companies to balance the benefits that will be

gained with the costs of achieving those benefits. Many believe that both

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44 X TOPIC 3 CORPORATE SOCIAL RESPONSIBILITY

business and society will benefit if firms actively strive to be socially

responsible. Some say that the competitive strength of business will weaken
when they take on social duties.

(b) Social Responsibility and Corporate Power

Business social responsibility developed directly from two characteristics of
modern companies, which are:
• The important functions carried out companies for various
stakeholders; and
• The extent of influence that companies has on the lives of stakeholders.

The first characteristic is the function carried out by the company for the
consumers. For example, a company functions as a manufacturer and
retailer of goods needed by consumers. To suppliers, companies serve as a
source of income because companies buy raw materials from the suppliers.
Apart from this, companies are also responsible in providing tax income to
the government. With taxes, governments will be able to provide facilities
to the society.

The second characteristic is the extent of influence it has. For example, if a

company pollutes the environment, they may affect the health of the local
community. They may face legal actions that can lead to the closing of the
companyÊs operations, which would then cause employees of the company
to lose their sources of income.

Some of the social responsibilities of companies are in creating job

opportunities, better standards of living, banking and financial services
facilities, insurance, transportation, communication, utilities, entertainment
and the development of healthcare.

ACTIVITY 3.1
Think of the social responsibilities that have been performed by
companies that you know. Discuss and state your explanation.

3.1.1 How Did Corporate Social Responsibility Begin

Most businessmen previously believed that businessesÊ responsibilities toward
the society are more than or equal to their effort in making profits. There are also
businessmen who believed that they should be a good philanthropist by giving
away some of their wealth to those who need them, for example to learning and

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 TOPIC 3 CORPORATE SOCIAL RESPONSIBILITY W 45

welfare institutions. Others feel that they should develop programmes that
support the needs of their stakeholders, for example, the support programmes
for their employees or the local community.

Resulting from the ideas of the roles of business that should expand into society,
two broad principles emerged. These principles shaped the business thinking
towards social responsibility in the twentieth century and formed the basis for
the modern idea of corporate social responsibility. The two principles are the
charity principle and the stewardship principle.

(a) The Charity Principle

The charity principle is the idea that the wealthier members of a society
should be charitable to those who are less fortunate. This is the ancient
understanding of social responsibility. For example, many large companies
in Malaysia have performed their social responsibilities based on the
charity principle.

Petronas, Shell, Maybank are some of the giant companies in Malaysia that
offer scholarships to students at higher learning institutions. They also
provide financial assistance to the poor in society.

(b) The Stewardship Principle

Many corporate executives today see themselves as stewards or trustees,
who act in the interest or demands of the general public. Even when their
companies are privately owned and they try to make profits for their
shareholders, these businessmen who follow the stewardship principle
believe that they have an obligation to see that everyone, especially those
who are in need, benefits from the companyÊs actions.

Based on this opinion, corporate managers have been placed in a position

of public trust. They control vast resources, the usage of which can affect
people in fundamental ways. As a result of their influence, they have the
responsibility to use the resources in ways that are not only good for their
shareholders, but also for the society in general.

This kind of thinking produced the modern theories for the management of
stakeholders. Based on this theory, corporate managers should interact
skilfully with all groups that have an interest in whatever the company does.

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46 X TOPIC 3 CORPORATE SOCIAL RESPONSIBILITY

SELF-CHECK 3.2
Define and provide examples of the:
(a) Charity principle; and
(b) Stewardship principle.

3.1.2 Modern Idea of Corporate Social Responsibility

Both the charity principle and the stewardship principle have created a new
original meaning to corporate social responsibility. Table 3.1 shows that both
principles have created a modern idea of corporate social responsibility.

Table 3.1: Basic Principle for Social Responsibility and Its Modern Expression

Charity Principle Stewardship Principle

Definition
• Business should give voluntary • Business, acting as a public
assistance to individuals and trustee should consider the
groups in society who are in interests of all who are
need. affected by business decisions
and policies.
Modern
• Corporate philanthropy. • Acknowledge the
Expression
interdependency between
• Voluntary actions to promote
business and society.
social good.
• Balancing the interest and
needs of various groups in
the society.
Example
• Corporate philanthropic • Self-interest awareness.
foundations.
• Meeting legal requirements.
• Private initiatives to solve social
• Volunteer workers
problems.
• Stakeholder approach to
• Volunteer workers
corporate strategic planning.
• Social partnerships with groups
in need.

Source: Post, Lawrence and Weber (2004)

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 TOPIC 3 CORPORATE SOCIAL RESPONSIBILITY W 47

(a) Corporate Philanthropy

Corporate philanthropy is a modern expression of the charity principle.
Stewardship principle is given a new meaning today when corporate
managers recognise that businesses and society are interdependent and
need one another. This interdependent interest places a responsibility on
business to exercise care on social issues when formulating policies and
controlling business operations.

(b) Volunteer Workers

A volunteer worker is a new phenomenon. Many large companies develop
charitable contribution programmes but left the aspect of employee
involvement in serving the community to the employees themselves. More
recently, companies started to realise that community service will improve
their image internally and externally. Today, there are two types of
programmes for volunteer workers, mainly:
(i) Team model, whereby a team of employees plan and implement
voluntary group activities.
(ii) Voluntary home-settlement model, whereby full-time coordinators or
part time workers provides volunteer opportunities to employees.

Volunteer employee programmes help companies to attract and retain good

employees. Volunteer works help develop characteristics such as creativity,
trust and team work. It also develops skills and attitudes that create
commitment, company loyalty and job satisfaction in the company.

3.1.3 Limitations of Corporate Social Responsibility

ACTIVITY 3.2
Have you heard of an employee who was awarded by his/her company
for helping a drowning student? What is the connection between this
story and the term volunteer workers above? Give your comments or
experience.

The society as a whole expects companies to be socially responsible. This is

because it will benefit both the business as well as the firmÊs stakeholders. There
are strong arguments on the benefits of social responsibility to companies.
However, social responsibility is also criticised by certain parties. Table 3.2 shows
the debate between those who support and oppose to the social responsibility
practices.

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48 X TOPIC 3 CORPORATE SOCIAL RESPONSIBILITY

Table 3.2: Support and Opposition to Corporate Social Responsibility

Support for Corporate Social Opposition to Corporate Social Responsibility

Responsibility

• Balance corporate power with • Decrease economic efficiency and profit

responsibility
• Create unequal costs among competitors
• Reduce government regulations
• Create hidden costs that are passed on to
• Promotes long term profit for the stakeholders
company
• Requires social skills that companies may
• Respond to stakeholdersÊ changing not have
demands
• Places responsibility on business instead
• Correct social problems caused by of individuals
business

ACTIVITY 3.3

By being socially responsible, does it give benefits to the company, or

will having programs related to social responsibility cause companies to
incur losses resulting from the cost of the programs? Give your opinion.

Even if corporate social responsibility is encouraged in a business strategy, it still

has limitations in its implementation. The main limitations of corporate social
responsibility are:
• Legitimacy;
• Cost;
• Efficiency; and
• Scope and complexity.

Due to these limitations, the number and type of social actions carried out by
businesses are sometimes lower than what the public would like to see. Table 3.3
explains each of the main limitations of corporate social responsibility.

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 TOPIC 3 CORPORATE SOCIAL RESPONSIBILITY W 49

Table 3.3: Main Limitations of Social Responsibility

Main
Limitations of Explanation
Social
Responsibility

Legitimacy Are the social issues raised relevant to our organisation? Would the social
issue affect our business significantly? Does solving the issues help our
business and others? These questions will determine whether or not we
really want to undertake social responsibilities. We are not certain about the
validity of certain social issues, and whether it relates to our organisation or
not. Most organisations feel that if the answers to these questions are
negative, then the organisation need not have to care about the social
problems emerging in their environment.

Cost Every social action incurs certain costs. Consider for example the
companyÊs contributions to charity or developing a child-care centre for
their employees. The money used to manage the child-care centre could
instead be used to increase employee salaries. Based on these excuses, many
companies avoid from fulfilling their social responsibility.

Efficiency The cost of social responsibility, just like other business expenses, has the
potential to reduce efficiency and influence the companyÊs ability to
compete in the market. For example, a competitor produces a product at a
price of RM200 per unit, but our company has to put a price of RM210 per
unit. This is because we develop many social responsibility programmes,
thus increasing the cost of products and forces the company to charge a
higher price. In the short term, our company is regarded as inefficient for
charging a higher price compared to our competitors. This is the reason
many companies do not want to be socially responsible.

Scope and Some social problems are too large, complex and complicated to be solved
complexity by even the most socially considerate companies, or by companies who
combine to solve them. For example, environmental problems such as acid
rain, thinning of the ozone layer and deforestation.

Problems such as these are too difficult for companies to solve on their own.
What they need is a joint action by companies with the governments of
several countries.

ACTIVITY 3.4
Why are there companies who do not fulfil their social responsibilities?
Give your explanation.

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50 X TOPIC 3 CORPORATE SOCIAL RESPONSIBILITY

3.1.4 Balancing Economic, Legal and Social

Responsibilities
Research has found that companiesÊ responsibility is not just to make money. As
shown in Figure 3.1, businesses face the challenge to manage their economic,
legal and social responsibilities towards their stakeholders. Although these
obligations may at certain times conflict, a successful firm is one that will succeed
in finding ways to fulfil their critical responsibilities and develop strategies to
enable these obligations to assist each other.

Figure 3.1: BusinessÊ various responsibilities

(a) Self-Interest Awareness

Being a socially responsible company by fulfilling the publicÊs ever
changing expectations requires wise leadership at the companyÊs top levels.
Companies with the ability to recognise large social changes and anticipate
how it will affect their operations have proven to be successful companies.
Corporate leaders who possess this vision believe that businesses should
help create social changes instead of hindering it.

Companies with this vision are driven by self-interest awareness, which

means that they are socially aware without giving up their own economic
interest. Based on this view, profit is a reward to the company for providing
responsible value as corporate citizens.

ACTIVITY 3.5
What can you conclude about these terms:
(a) Volunteer workers;
(b) Self-interest awareness.

(b) Economic Obligations and Social Responsibility

Do socially responsible companies sacrifice their profits by working
conscientiously to promote social benefits? Do these companies make

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higher, more than average profits, or lower profits than companies that
ignore societyÊs expectations for a high standard of responsibility for social
performance?

Some studies show that companies that perform social good also tend to
have a good record of profit making, which could be an example of self-
interest awareness.

For example, researchers found that there was no evidence to show that
social responsibility and profit making are a burden to companies.
However, other researches report that the association between profit
making and social responsibility are positive. In this opinion, after
companies have made profits, they are ÂableÊ to be socially responsible in
their actions. Others believe that by becoming socially responsible,
companies are able to attract investors into their companies.

(c) Legal Requirements compared to Corporate Social Responsibility

Besides economic obligations to shareholders, firms also have legal
obligations. As members of society, firms must obey laws and regulations
that govern the society. How are a firmÊs legal obligations related to its
social responsibility? Laws and regulations are created to ensure companies
practice social responsibility. Businesses that obey laws and public policies
fulfil the minimum level of social responsibility that is expected by the
general public. According to a scholar in corporate social performance,
firms need only to obey the law in order to fulfil public expectations.

(d) Shareholder Interests compared to Other Stakeholder Interests

Top level managers, together with the companiesÊ board of directors, are
generally expected to generate as much value as possible for the companyÊs
owners and investors. This can be done by paying high dividends and
running the company operations in ways that increases the share value of
the company. High profits will enable the payment of high dividend
returns to investors. On the other hand, a lower profit means lower
dividends, and this will put great pressure on managers to improve the
financial performance of the company.

However, shareholders are not the only stakeholders who must be given
attention by the managers. Company leaders must acknowledge that all
stakeholders are to be considered without ignoring any one.

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ACTIVITY 3.6
Assuming that the government has appealed to all business organisations
to contribute to charity organisations in the country. If the companies
readily accept the governmentÊs appeal and make contributions either in
the form of money or otherwise, would they be considered as socially
responsive companies? What is your opinion?

3.2 CORPORATE SOCIAL CONDITIONS

The challenges of corporate stakeholders come from various groups. These
stakeholders dramatically change the business environment within which
managers try to perform their jobs. The contributions of these groups to the
collective social movements demand a different response from businesses in
addition to corporate social responsibility. Firms are now expected to develop an
awareness of corporate social responsiveness, which means that companies
attempt to develop a response towards the social issues that exist in their
business environment.

Corporate social responsibility is based on the principles of charity and

stewardship. The expression of this concept is seen in corporate philanthropy
and the care of public resources. However, the basis for corporate social
responsiveness is not dependent on the company senior managementÊs
generosity or the awareness of their role as trustees of public interests. Corporate
social response is seen as the firmÊs processes in handling social demands
initiated by the companyÊs stakeholders or in social actions taken by the firm that
affects its stakeholders. The difference between corporate social responsibility
and what is labelled as corporate social responsiveness can be seen in Table 3.4.

Table 3.4: The difference between Corporate Social Responsibility

and Corporate Social Responsiveness

Corporate Social Responsibility Corporate Social Responsiveness

Basis Charity and stewardship Demands made by various social

principles stakeholder groups

Focus Moral obligations to society at Practical responses by businesses to

large corporate stakeholders

Action Philanthropy, trustee of the Social programmes

publicÊs interest

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3.2.1 Implementing Social Responsiveness

The process of becoming a responsive company takes a long time. A new attitude
has to be developed, a new routine has to be learned and a new policy and action
programme has to be designed. When the company is ready to implement social
strategies, it has to follow a specific guideline to achieve its social objectives.
Many obstacles have to be overcome in the implementation of social
responsiveness strategies.

(a) Corporate Social Responsiveness Model

An early model of how large companies effectively implement socially
responsive policies is illustrated in Figure 3.2. There are three levels to the
social responsiveness process shown in the model.

Figure 3.2: Three-stage model for corporate social responsiveness

(i) Policy Level

In the first level of social responsiveness, companies become aware of
their surrounding environments to which they need to respond and
act on. Awareness may happen after the expectations of stakeholders
change, or as a result of a systematic analysis of the environment.
Whether or not stakeholder pressure exists, the companiesÊ
management may think, based on their environmental analysis that
they have to respond to the emerging issues or social trends.

A companyÊs social responses have to be guided by policies that are

carefully and cautiously developed by its top management and board of
directors. These policies provide the framework to determine other

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aspects of organisationÊs response. For example, a new production policy

may result in better quality control to product users, eliminating work
hazards and reduce water pollution, all at the same time.

(ii) Learning Level

After companies have identified the social problems (for example, the
increase in the number of failed and dismissed students) and adopted
the use of a public policy (for example, restoration policy through an
academic advisor system), companies must learn how to handle
problems and make the new policy work. Two types of learning are
required, which are specialised learning and administrative learning.
Table 3.5 explains both types of learning.
Table 3.5: Two Types of Learning: Specialised Learning
and Administrative Learning

Learning Type Explanation

Specialised Specialised learning happens when socio-technical experts (for example

Learning student counsellors who are trained in the cultures, lifestyles, motivations
and student problems) are hired to advice company officers and
managers. The specialised knowledge that they can provide is helpful in
the early level of social responsiveness when the company is facing
unfamiliar social problems, whether they are related to the increase in the
number of failed and dismissed students, discrimination towards female
employees or toxic waste pollution in factories.

Administrative Administrative learning happens when company supervisors and

Learning managers who administer the organisationÊs daily affairs become
familiar with the new routine needed to cope with social problems.
Technical experts can help the company in taking the first step to solve
the problems but cannot do the whole job alone. Social responsiveness
requires the full cooperation and knowledge of line managers and staff
experts. Personal involvement is important.

(iii) Organisational Commitment Level

This final step is needed to achieve full social responsiveness. An
organisation has to institutionalise its new social policy. The new
policy and routine learned in the two earlier levels has to be fully
accepted throughout the whole organisation as part of the companyÊs
normal operations. Institutionalisation means that the new policy has
to be a part of the company and its standard operating procedures.
For example, when managers respond to the needs of the local
education system or to students without depending on directives
from the top management, this is considered as institutionalisation.

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Anticipation of objections to normal organisational changes means that

both time and effort are needed to increase the organisationÊs level of
social responsiveness. It is clear that the combination of internal factors,
especially the specific wishes of management, and the external factors,
such as stakeholdersÊ continuous actions on particular problems, is
needed for an effective change.

(b) Framework for Social Policy

After reaching the organisational commitment level, the company must
develop guidelines to direct the strategic social policy. In order to enhance
the success of the businessÊ social policy, it needs to:

(i) Focus action programmes on limited objectives

The company should select areas in which to focus its efforts, as it
cannot take significant action on all areas of social responsibility. For
example, finance companies can only focus on one social policy at a
time, that is to give financial aid to students of higher learning
institutions every semester.

(ii) Focus action programmes on products and services related to the firm
For example, finance companies can have a social policy that revolves
only around activities related to money that is giving financial aid to
those who need it.

(iii) Start action programmes close to the company

Companies need not look too far to carry out social activities. For a
start, it would be more meaningful to focus on the area where they
operate.

(iv) Facilitate employee action

Implement programs in which employees can be involved as
individuals rather than as representatives of the company to
encourage participation and commitment.

SELF-CHECK 3.3
What do you understand about the social responsiveness model? Give
an example for each of the levels in the model.

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3.2.2 Becoming a Socially Responsive Firm

How do firms become more socially responsive? In response to pressures,
businesses have increased their effort to manage their corporate social
environment. The social environment involves business activities that are
influenced by various social groups and the government. There are several ways
in which a firm can be more socially responsive.

(a) Top Management Philosophy

How companies address its exposure to the corporate social environment is
very dependent on the values and beliefs of company managers that is the
philosophy he holds about the role of the company in society. This is called
the top management philosophy. Managers who are sensitive to the impact
of social pressures and find ways to strategically manage their stakeholders
will hold the view that the firm is a social as well as an economic
institution. In response to the emerging social issues, these managers are
more inclined to modify their social practices and policies compared to
managers who hold the opinion that the firmÊs responsibility is only
towards the economy.

(b) Socially Responsive Strategy

By using a socially responsive top management philosophy as a foundation,
a firm must develop a socially responsive strategy. This strategic
orientation tends to emphasise on a collaborative and problem-solving
approach, as opposed to one that emphasises only on the firmÊs interest.

This collaborative and problem-solving strategy is distinguished through

their emphasis on maintaining long-term relationship based on trust and
open communication with all company stakeholders. Managers show this
collaborative characteristic by being involved in regulatory advisory
committees and trade associations that compromise to obtain mutual
benefits.

(c) Socially Responsive Structure

The next step in becoming a socially responsive organisation is by changing
its organisational structure to be more responsive to external social
challenges and more capable of implementing socially responsive
strategies. This structure develops from the values and beliefs held by the
top management and are conveyed through socially responsive business
strategies. There are four dimensions in a basic design to help differentiate
a socially responsive structure in the organisation, as explained in Table 3.6.

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Table 3.6: Four Dimensions of a Basic Design to Differentiate Socially Responsive

Structures in Organisations

Dimension Explanation

Breadth Breadth refers to the number or staff units specialising in

social responsiveness strategies implemented by the
company. The breadth of this design must be sufficient to
enable the company to observe and respond to the social
demands.

Depth Depth is the diligence of organisationÊs learning process in

response to future social challenges and is handled through
the social responsiveness strategy process.

Influence and Influence and integration are the final two dimensions for an
Integration organisationÊs social responsiveness structure. It refers to the
quality of relationship that exists among company staff units.

Line ManagerÊs The last element for a firm to be socially responsive is the
Involvement degree to which the line managers are involved in a strategic
process. The line managerÊs degree of involvement depends
on how advanced is the companyÊs socially responsive
strategic process. The involvement of line managers is
critically needed if the strategic process is too broad and
advanced.

SELF-CHECK 3.4
What are the steps that can be taken by companies to be responsive
towards social and environmental issues?

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ACTIVITY 3.7

Please visit these websites for additional information. Then discuss in

class for further understanding. Retrieved February 20, 2008.
http://members.iquest.net/~hats/promos.html
http://www.bsr.org/
http://jim.org.my/v1jos/
http://members.tripod.com/~payung/mid2.htm
http://www.cafonline.org/Default.aspx?page=12481
http://harvardbusiness.org/
http://www.mcs.net/

• Corporate social responsibility means that companies should be held

responsible for every action that affects the general public, local community
and their environment.
• The idea of corporate social responsibility has existed centuries ago. It is
divided into two types: Charity Principle and Stewardship Principle.
• The charity principle means giving help to those who need them, and the
stewardship principle, which means acting as public trustees and taking
consideration of all the companyÊs stakeholders when making business
decisions.
• Social responsibility is usually demonstrated through the concept of
philanthropic contribution and volunteer workers.
• The efforts of socially responsible firms are limited. It normally does not
involve actions that are not related to companyÊs goals and abilities, not
involving high costs, or actions that hinder the companyÊs efficiency or are
too complex.
• A socially responsible business should try to balance between its economic,
legal and social obligations.

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• Companies which follow the self-interest awareness approach may mutually

benefit society as a result of the firmÊs actions. Complying with legal
requirements will also help various groups in society. Managers have to
consider all stakeholders and their interests.
• In the effort to respond to social challenges faced by businesses, managers
have recognised the need to develop formal social action programmes and
strategies.
• A business should monitor the various segments in the macro environment of
business and conduct a thorough and complete environmental scanning
before developing socially responsive programmes.
• The socially responsive model consists of the policy level, learning level and
the organisational commitment level.
• The framework for managing the corporate social environment consists of
four critical elements, namely top management philosophy, socially
responsive strategy, socially responsive structure and line manager
involvement.
• Corporate social auditing and performance auditing are used to evaluate the
firmÊs management of the corporate social environment.

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 Topic X Business and
4 Ethical
Environment
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Define ethics and business ethics;
2. Describe factors that contribute to stress at workplace;
3. Explain reasons why businesses should be ethical;
4. Discuss ethical problems that occur in business as well as the
efforts to overcome it;
5. State eight qualities of a charismatic leader;
6. Propose methods of ethical reasoning and analysing ethical
Dilemmas; and
7. Evaluate steps that can be taken when facing an ethical dilemma in
an organisation.

X INTRODUCTION
People employed in business, whether as a manager or an employee, are often
and are very likely to face ethical issues at work. Therefore, it is important for
them to have business skills by learning how to identify the various kinds of
ethical dilemmas and knowing why they happen. A business firm will receive
more support from society and social legitimacy if they abide by ethical
principles and the laws of society.

There are clear steps that businesses can take to improve their ethical
performance. The most important element in ethical realignment is corporate
values and personal character of employees, especially company managers.
Corporate ethical actions can be improved by establishing or reviewing the

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various organisational controls, such as the code of ethics, ethical committees and
employee ethical training. These programmes would enable workers to improve
their ethical reasoning abilities by emphasising on achieving the most good for
all parties affected by their actions while respecting the rights of the public and
striving for fair and equitable solutions.

Also in this topic, we will learn about issues that are related to ethics and
business ethics, ethical problems that arise in business, and the efforts made to
overcome unethical behaviour. We will look into the goals and values held by
managers and the role of individual characteristics and morals in business ethics.
Next, this topic will explain how cultures and work environment can influence
the managersÊ and employeesÊ ethical views. We will also analyse certain ethical
issues and understand the strengths and weaknesses of the code of ethics, ethical
training programmes, ethics hotline and other similar modification efforts.

4.1 DEFINITION OF ETHICS

ACTIVITY 4.1

Company XYZ is a chemical processing company. The company has its

own code of ethics. Among them is no smoking order within the
company and factory premises. There is also a dress code, whereby
factory workers must wear a special outfit inside the factory.
Unfortunately, the code of ethics is just a piece of paper stuck on the
walls of the company and factory. No one cares much about it. Only a
few workers obeyed, and these are workers who were recently recruited
by the company. You have been appointed as a manager in the
company. You have very high ethical values. Faced with this situation,
what would you do? Why does this situation continue to happen?

The case given above is just one of the ethical dilemmas commonly faced by
managers and workers in business firms. We will now look at the definition of
ethics in order to understand the subject better.

Ethics is a concept of right or wrong practice. It explains whether or not our

behaviour is morally correct as the basis for human relations, which is how
we think and behave towards other people and how we want others to think
and behave towards us.

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Ethical principles are a guide to moral conduct. For example, in most societies
lying, stealing, hitting and disturbing other people are considered as unethical
and immoral behaviours. Behaviours such as honesty, sincerity, kindness,
generosity, humility and respecting others are considered as ethical and moral
behaviours that the society wants.

The meaning of right or wrong comes from various sources. Religious belief is a
major source of ethical guideline for most people. All religions want goodness for
everyone. Family institutions also contribute to the development of the ethical
principles of individuals. In schools, the meaning of right and wrong are also
taught. As working adults, we are also supposed to understand what is
considered ethical and unethical. These core beliefs then acts as a moral compass
that help to guide people when faced with an ethical dilemma.

The idea of ethics can be seen in all societies, organisations and individuals,
although they may differ from one person to another. The ethical principles held
by person A may be different from those held by person B. Ethical beliefs of one
religion may be different from another religion. Moral principles held in one
society may not be the same in another society.

These differences create an important and controversial issue, which is known as

Âethical relativismÊ.

Ethical relativism believes that an ethical principle must be explained through

various times in history, social traditions, special situations of a particular
time, or personal opinions.

Today, you may feel that killing an animal is not wrong, but tomorrow you may
believe that killing animals is an unethical action. These differences create an
important and controversial issue that is ethical relativism.

However, although differences in ethical systems exist in societies around world,

people everywhere depend on ethical systems to judge whether their actions are
right or wrong, morally correct or incorrect, accepted or otherwise. Ethics, from
this point of view, is a universal human characteristic that is present everywhere.

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ACTIVITY 4.2

Imagine that you are a managing director in a company. There is a

vacancy for an administration executive at your company. After it was
advertised, many qualified candidates applied for the job, and most of
them have very suitable qualifications and experience. Meanwhile, your
friendÊs child has just completed her studies and is also trying to find a
job. Your friend called to ask you to accept her child to fill the said
vacancy. What would you do?

4.1.1 What is Business Ethics?

Business ethics is the application of general ethical ideas in business

behaviour.

If fraud is considered as unethical and immoral, whoever commits fraud towards

their stakeholders in business is considered as acting unethically and immorally.

If keeping the society harmonious is considered as ethical and morally correct,

therefore, whoever in business that keeps the society harmonious will be
considered as acting ethically and morally?

Workers often confess that they feel stressed at work. This may cause unethical
behaviours. A research done by the Ethics Officer Association and two other
professional groups claimed that more than half of workers feel slightly
pressured to behave unethically at work.

Almost half of them (about 48 percent) reported that they were involved in
unethical actions or broke rules, and related their actions to work pressure. Table
4.1 shows the percentage distribution of factors that contribute to pressures to
behave unethically as reported by workers in the research.

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Table 4.1: Factors that Contribute to Pressures at Workplace

Response by Workers towards Researches that Shows These Factors as

Contributing Pressures to Act Unethically at Workplace
Balancing work and family 52%
Weak leadership 51%
Weak internal communication 51%
Working hours/workload 51%
Lack of support from management 48%
Little or no recognition for achievement 46%
Need to achieve goals 46%
Company politics 44%
Insufficient resources 40%
Incompetent subordinates 39%
Effect of company downsizing 33%

Source: Ethics Officer Association and American Society of Chartered

Life Under Writers and Chartered Financial Consultants (1997)

SELF-CHECK 4.1

Can you differentiate between ethics and business ethics? Explain.

4.1.2 Why Do Businesses have to be Ethical?

Why do businesses have to be ethical? Why do we have to restrict businesses
from multiplying their profits, irrespective of whether or not they are concerned
about ethical behaviour? Why do we need to be responsible towards nature,
which we have destroyed, when no legal action is being taken against us? Table
4.2 lists the main reasons why business firms should encourage a high level of
ethical behaviour.

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Table 4.2: Main Reasons Why Businesses Should Be Ethical

• To fulfil societyÊs expectations towards businesses

• To avoid harming other people
• To improve business relations and worker productivity
• To reduce penalties under government regulations
• To protect business from others
• To protect workers from their employers

Corporate stakeholders expect businesses to have a high level of ethical

performance and social responsibility. Companies who fail to fulfil this public
need will face situations such as bad reputation, criticisms, punishment and
ridicule. Another reason for businesses and their workers to act ethically is to
avoid causing any damage or harm to the public and other stakeholders. One of
the strongest ethical principles is stated very simply: ÂDo no harmÊ. For example,
a company who carelessly pollute nature by releasing toxic gas from their factory
is a company that causes harm to the public. Many ethical rules have been
implemented to protect society from various kinds of damages, and it is hoped
that businesses observe this rational ethical principle.

Another reason to encourage ethical behaviour is to protect businesses from

being abused by unethical employees and unethical competitors. Security
expertsÊ estimate that employee theft, has caused more businesses to go bankrupt
then compared to other crimes. A high ethical standard will also be able to
protect individuals who work in business. For example, workers are protected
from being forced to do things that contradict with their ethical beliefs or being
asked to work in an area that may be hazardous to their safety. Businesses that
treat their workers with respect and integrity gain many benefits in the form of
high morale and increased productivity. It is a win-win situation for the firm,
workers and society.

Another reason to encourage ethical behaviour in business is peopleÊs

personality. Most people want to behave in a way that is consistent with their
beliefs on what is right and wrong. When they are pushed to do something that
contradicts with their beliefs, this will cause emotional stress. People will feel
more comfortable working in an ethical company because they know they are
protected.

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4.2 BUSINESS ETHICS IN ORGANISATIONAL

FUNCTIONS

ACTIVITY 4.3

Should an accountant manipulate accounting data in an effort to save

the company from being charged with high taxes? Explain.

Not all ethical issues in business are the same. This is because business
operations are much specialised. Ethical issues can exist in any of the major
functional areas of business. Functional-area ethics have the tendency to have its
own particular ethical dilemmas. Some of the functional areas involved are:

(a) Accounting Ethics

The accounting function is an important component in every business firm.
Every year, it is compulsory for a company to prepare a report to show
whether the company has been operating well and in order. Company
managers, external investors, government, tax collectors and worker union
depend on accounting data to make major decisions.

Honesty, integrity and accuracy are absolute requirements in an accounting

function. There is no other single issue that is of greater importance in an
accounting function besides than ethics.

(b) Financial Ethics

Lately, finance issues have produced one of the most spectacular ethics
scandals. Many companies have been found guilty of insider trading, illegal
shares transactions and other financial embezzlements. Among other
examples involving ethics in a financial function are investment banks that
attempt a takeover that may put workerÊs jobs or the local community at
risk; trust departments which were charged with illegally investing the
money they have been entrusted with; stock market managers who must
vote in stock holdersÊ resolutions that deal with controversial ethical issues.

(c) Marketing Ethics

Relations with customers also have the tendency to generate many ethical
problems. Pricing, promotion, advertising, product information, relations
with advertising agency and their customers, and market research are
among the marketing areas that may be involved in ethical problems.

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SELF-CHECK 4.2
Have you ever noticed that the sizes of products advertised in
newspapers or marketing brochures are different from the actual sizes?

(d) Information System Ethics

One of the fastest growing areas of business ethics that expands is in the
field of information technology. The most controversial ethical challenge in
this era involves invasions of privacy; the gathering, storing and access of
personal and business information; the confidentiality of telephone,
electronic mail and fax communications; copyright protection of software
and numerous other related issues. The explosion of information
technology has raised serious issues of trust and integrity between
individuals and businesses.

(e) Ethics in Other Functional Areas

Among the other functional areas that may be involved in ethical problems
are in production and maintenance. Products that have defects that may be
dangerous and cause injuries or death, and the process of toxic waste
disposal may endanger the health of workers as well as the general public.

Ethical issues also involve the purchasing and supplies function. For
example, a purchasing officer gives an opportunity to his/her friend to
become a seller to get personal benefits from the purchase transaction. This
is an example that is closely related to ethical issues in the purchasing
function area.

These examples provide a clear picture that all businesses, everyone in

business and all levels of authority in business may face ethical dilemmas
from time to time.

ACTIVITY 4.4

Imagine if your conversation with one of your companyÊs customers

was tapped by your supervising officer due to a lack of trust towards
you. How would you feel?

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4.2.1 Why Do Ethical Problems Occur in Business

Ethical problems in business appear in many forms. One step that can be taken is
to find out why it happens so that we can reduce its impact on the organisationÊs
operations and on the people affected by it. The following are some major
reasons why ethical problems occur in business.

(a) Personal Benefits and Self-Interest

Personal benefits, gains or greed have caused some ethical problems. It
occurs as a result of the firm taking in workers whose personal values are
less than desired. These workers have the tendency to put their own
interest above others, without considering the damage or harm to other
workers, company or society. Although companies may conduct intensive
screening when selecting employees, it is difficult to predict or measure
oneÊs ethical beliefs.

Managers or workers who put their interests above others are called ethical
egoists. Some of the characteristics of ethical egoists are greed, selfishness
and arrogance. Usually, ethical egoists are individuals who constantly
break or ignore other peopleÊs ethical principles and believe that ethical
rules are meant only for others and not them. The opposite of the ethical
egoist are individuals known as altruist or generous. An altruist acts for the
benefit of others while their own interests are sacrificed.

(b) The Pressure of Competition on Profit

Companies faced with intense competition are more likely to be involved in
unethical activities to protect their profits. Research has found that
companies with a weaker financial performance and lower profits tend to
be more involved in actions that are illegal. However, the financial
condition is not the only factor in unethical actions because companies with
large profits are also involved in unethical activities.

Price-fixing is a practice that often happens when companies are involved

in markets that have limited potential for growth. Price-fixing is not only an
illegal behaviour, but is also unethical to customers who have to pay a
higher price than they would in a free market.

Another unethical behaviour that may happen under the pressure of

competition is when companies force suppliers to reduce their prices
through non-market pressures (for example, threatening to give the tender
to someone else), resulting in the company getting a price lower than what
it should be.

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(c) Business Goals versus Personal Values

Ethical conflict in businesses sometimes happens when companies have
goals or methods that are not acceptable to their workers. Whistle-blowing
may be a result of conflicts between organisational goals and the values that
workers hold. This takes place if employees fail to get the company to
ensure there are no contradictions between their values and the companyÊs
goals.

Another issue that may arise as a result of this contradiction is legal action
may be taken against employers by their employees. They are not
troublemakers but they take such actions to correct the wrongdoings in the
company. This ethical dilemma arises because the companyÊs goals and
methods require workers to obey orders that they believe will bring harm
to themselves, to other workers, customers, the company and the general
public.

In their opinion, they have been ordered to do something that they believe
is unethical.

SELF-CHECK 4.3

What do you understand by the following? Briefly in your own words,

describe each of these;
(a) Ethical egoist;
(b) Altruism; and
(c) Whistle-blower.

(d) Cross-cultural Differences

Some of the most complicated ethical problems can happen when
companies conduct their business in another society whose ethical
standards differ from the standards in their own country. Most companies
that are moving towards multinational business operations face this
dilemma. Consider the case below:

A manufacturer of childrenÊs pyjamas found that the material used to

make the clothes contains a chemical that may cause cancer when
absorbed by the childrenÊs skin. The sale of the clothes has been banned
by country XYZ. Some of the material manufacturers have sold the
material to distributors in countries that do not ban the use of the
material. Is this ethical?

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The more global a company becomes, with more companies that are
expanding into overseas markets, the more often that this question will be
asked. Workers and managers need ethical guidance in the form of a clearly
stated company policy if they are to avoid the psychological pressures.

ACTIVITY 4.5
Do you belong in the Âethical egoistÊ category or in the ÂaltruismÊ
category? Explain your answers.

SELF-CHECK 4.4

In your opinion, why do ethical problems occur in business? Share your

opinion in class.

4.3 THE CORE ELEMENTS OF ETHICAL

BEHAVIOUR
SELF-CHECK 4.5
What values do you place on the followings:
(a) Getting an attractive income?
(b) Providing harmony to the local community?

There are some core elements that play an important role in businessesÊ effort to
improve their companyÊs ethical performance. The core elements are:
• Goals or values that managers hold;
• Personal character and spirituality of managers and other employees; and
• Traditions, attitudes and business practices built into the companyÊs culture.

These three elements will determine whether companies are capable of

improving their ethical performances. The implementation of good ethical
practices is not only possible, but it can become a normal practice with the right
combination of all three elements.

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(a) ManagerÊs Goals and Values

Who is responsible to ensure that organisationÊs operations run smoothly
and the achieve its targets? If you can recall, the responsibility certainly falls
on the managers. A manager is the main individual that can determine
whether a company shall act ethically in their efforts to achieve the
organisationÊs goals. As an important decision maker, they have a bigger
opportunity to create an ethical environment in their company than others.
The values that these managers hold, especially the top managers, will
become the model for other employees to follow.

Current discussions about effective organisational leadership often center

on individual values. For example, an ethical charismatic leader who shows
strong moral character is able to positively influence the whole department
or organisation. Although there are risks associated with assuming a higher
moral ground, ethical charismatic leaders (as shown in Table 4.3) are seen
to bring out the best in followers. An ethical managerÊs moral standards
may enable business leaders to better handle complicated moral decisions
faced at work.

SELF-CHECK 4.6
How are the values held by managers able to encourage ethical
reconstruction?

Table 4.3: Qualities of an Ethical Charismatic Leader

ETHICAL CHARISMATIC LEADER

• Uses power to serve other people.

• Aligns vision with the needs and aspirations of followers.
• Consider and learns from criticisms.
• Guides followers to think freely and give comment on the
leaderÊs opinions.
• Encourages open and two-way communication.
• Trains, develops and supports the followers.
• Shares recognition with others.
• Relies on internal moral standards in fulfilling the interest of
organisation and society.

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(b) Personal Character, Spirituality and Moral Development

ACTIVITY 4.6
Imagine that you are a manager of a company. What are the personal
characteristics that you will demonstrate to implement high ethics in the
organisation?

(i) Personal Character

An experienced observer of management behaviour said that personal
character is the key to high ethical standards in a business. For
example, a company with a manager of high moral integrity will
produce an organisational culture that is also of high integrity. On the
other hand, a manager that is immoral will produce an organisational
culture that is immoral too.

(ii) Personal Spirituality

Personal spirituality refers to personal beliefs of a person towards
quality of life, religious organisation, and the power of nature or other
external life-guiding force. It is a part of the human make-up. In
simpler terms, personal spirituality is more focused on the religious
beliefs of an individual. More recently, there have been efforts to
integrate a personÊs work with their spirituality. The influence of
personal spirituality on the decisions and actions at the work place
was often mentioned in previous business-related researches.
Combining the two sets of values of religious principles and business
practices will produce a challenging ethical dilemma. Refer to the
examples below:
• A student in an institution of higher learning need to apply for
PTPTN loan which has a 4% interest rate, while in Islam taking
interest is forbidden.
• A follower of a religion, who only eats meat in his diet, has been
asked to attend a seminar in a country that forbids killing animals.
• A reporter, who believes that it is a sin to lie or slander others, has
been asked to release news about some one, which details have yet
to be confirmed.

The spirituality or religious belief of a person can change the practices

of a company. For example, a company only provides an hours break
from 1.00 pm till 2.00 pm from Mondays to Fridays. However, after a
male Muslim worker was hired, the break time on Fridays has been

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changed to start at 12.30 pm until 2.30 pm to enable him attend his

Friday prayers.

(iii) ManagerÊs Moral Development

The combination between personal values, character and spirituality
provide a strong influence on the behavioural pattern regarding
ethical work issues. Since people have different personal history and
have developed values, characteristics and personal spirituality in
different ways, they will therefore think differently about ethical
problems. Managers in a company can be positioned at various moral
development levels. Some will reason at a higher level, while others at
a lower level.

Table 4.4 shows a summary of how a person develops and expands

their personal morals. From childhood to a mature adult, most people
move upwards steadily in the moral reasoning ability beginning from
level 1.

Table 4.4: Levels of Moral Development and Ethical Thinking

Source: „Kohlberg, L. The Philosophy of Moral Development (1981)

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From Table 4.4, it can be said that from the child to the adult level, people
develop and are able to become more advanced in their moral reasoning. At the
beginning stage, they are limited to ego-based reasoning (Level 1), their actions
are restricted to avoiding punishment and obeying those who are in authority.
Slowly and sometimes painfully, the child learns that what is considered right
and wrong is related to reciprocity: „I will let you play with my toy, if I can play
with yours‰ (Level 2).

At Level 3, individuals start to widen their horizons. They start to learn to

compromise with their playmates, school friends and other similar groups. Research
has found that by interacting with other people, it helps individuals to improve their
moral reasoning. This process continues until pre-adult stage. At this level, pleasing
others and being admired are important leads to good behaviour. This produces
certain behaviours and most people at this stage are able to focus not only on their
own self-interest, but tend to base it on others as well.

When individuals enter Level 4, which is the adult stage (around their early 20s),
most individuals are able to focus their reasoning based on the customs, traditions
and laws of society to determine between right and wrong actions. They depend a
lot on societyÊs laws to make decisions when faced with ethical dilemmas.

At Levels 5 and 6, which is the mature adult age, individuals will possess the
basic ethical reasoning abilities based on broad principles such as human rights
and freedom of expression. In the highest stage, they start to define right and
wrong from the perspectives that are related to universal principles of justice,
fairness, equality and common rights of all humanity.

Research has found that most people, including managers, usually rely on the
Level 2 and 3 criteria of ethical reasoning. Although they may be capable of
higher ethical reasoning, their ethical horizons are often defined by their self-
interest, work group or family relationships.

For those with Levels 3 and 4 reasoning capabilities, company rules and norms in
doing things become their main guideline. When at work, the company becomes
the ethical reference group. To them, the right way to do business depends on the
acceptance of leaders and co-workers regarding what is right and wrong (Level
3), and it is sufficient that people show respect to societyÊs laws (Level 4).

SELF-CHECK 4.7

Based on the moral development model in Table 4.4, do you think that
you have gone through the same basic ethical reasoning stages?

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4.4 CORPORATE CULTURE AND ETHICAL

CLIMATE
We have to remember that personal moral values and character of a person are
not the only factors that play an important role in improving the performance of
companyÊs ethics. There is also another factor, called the corporate culture that
plays an equally important part.

Corporate culture refers to the blending of ideas, customs and traditional

practices, company values and shared meanings that help to define the normal
behaviour for a person who works in a company. Culture is the „way we do
things around here‰.

4.4.1 Ethical Climate

In most companies, the ethical climate can be detected. People can feel the ethical
winds that blow around them. They pick up hints and clues that indicate the
acceptable behaviours and those that are to be avoided. The unspoken
understanding among employees of the acceptable or unacceptable behaviours is
called an ethical climate. It is a part of company culture that determines the
ethical climate in the company. There are three ethical yardsticks, namely egoism
(based on self), generosity (based on concern for others), and principle (based on
oneÊs own integrity). These ethical measurements can be applied to the dilemmas
concerning individuals, company or society.

For example, if a manager approaches an ethical issue based on benevolence, he/she

may emphasise on friendly relations with workers, stress the importance of team
work and cooperation for the benefit of the company, and suggest socially
responsible courses of actions. On the other hand, if a manager uses egoism when
faced with ethical problems, he would be more likely to place importance on self-
interest, increasing companyÊs profit and striving for efficiency.

SELF-CHECK 4.8
List the levels and the major ethical references contained in the
individual moral development model.

From research results, it was found that companies have different ethical
climates. There are five company ethical climates as shown in Table 4.5. The
researches concluded that workers will be more satisfied with their companyÊs

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ethics when they have a high level of responsibility and a low level of
instrumentalism.

Table 4.5: CompanyÊs Ethical Climate

Company Ethical Explanation

Climate
Responsible A benevolence criterion is important here.
Climate
Laws and Codes Principle criteria produce a positive attitude towards societyÊs
Climate laws and professional codes.
Rule Climate Company rules and regulations are the principles emphasised.
Instrumental Egoism criteria are usual in this climate, and it is focused
Climate towards company and worker interest.
Free Climate A person in this climate focuses on personal beliefs as the
criteria

Read the following case:

Jetun Institution is a banking institution. The company officially starts its

operations at 9.30 am and ends at 6.00 pm (8 hours 30 minutes). The
companyÊs policy allows the payment of overtime after the official hours.
This means that after 6.00 pm, workers can claim overtime payment.
However, most workers start work at 8.00 am and stop at 6.00 pm. An issue
emerged when those who start work early claimed payment for overtime.
They claimed that they had worked for a total of 10 hours (8.00 am until 6.00
pm), exceeding the normal 8 hours and 30 minutes (9.30 am to 6.00 pm). This
has become a norm and has not been rectified, although it clearly contradicts
the companyÊs policy.

ACTIVITY 4.7
Do you think the claims for overtime payment are ethical? Which
ethical climate is held by the companyÊs workers? Discuss.

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4.5 ANALYSING ETHICAL PROBLEMS IN

BUSINESS
Managers and workers often face ethical dilemmas at work. They need a set of
guidelines on how to deal with ethical issues at work. This guideline should help
them to identify and analyse the nature of ethical problems, and decide which
course of action is likely to produce an ethical result. There are three ethical
reasoning methods that can be used to conduct an analysis ă utilitarian, rights and
justice. From Table 4.6, you can compare the three ethical reasoning methods.

Table 4.6: Three Methods of Ethical Reasoning

Method Critical Deciding Actions are Limitations

Factor Ethical When⁄

Utilitarian Comparing benefits Net benefits Certain costs are difficult to

and costs exceeds total cost measure. The majority may
ignore the rights of the minority

Rights Respecting Basic human Difficult to balance conflicting

entitlements rights are rights
respected

Justice Distribute fair share Benefits/costs Difficult to measure benefit and

are fairly cost. Lack of agreement on fair
distributed share

4.5.1 Utility: Comparing Benefits and Costs

One approach to ethics emphasises on utility, which refers to the overall amount of
good that can be produced by an action or a decision. Is it necessary for a company
to terminate some of their staff so as to reduce operating cost? The answer to this
question depends on how much good can be produced by terminating some of the
employees, compared to keeping them in the company. If it is found that the
advantages exceed the disadvantages of the action, therefore, according to this
method, the action is considered necessary as well as ethical.

This ethical approach is called the utilitarian ethical reasoning. It is often referred
to as cost-benefit analysis because it compares the cost and benefit of a certain
action, policy or decision. The cost and benefit can be in the form of economic
(expressed in ringgit values), social (the effects on society as a whole) or human
(psychological or emotional impact). Next, the manager has to add up all the
costs and benefits and compare them with one another. If the benefits exceed the
cost, therefore the action or decision is considered ethical. On the other hand, if

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the costs exceed the benefit, the action or decision is probably unethical because
more harm than good is produced.

Although this method appears easy to carry out, it has a few weaknesses. One of
the main disadvantages of the utilitarian ethical reasoning is the difficulty to
measure the costs and benefits accurately. For example, how do you measure the
costs and benefits of terminating employees from a company? What is the
method to measure a personÊs emotional and psychological state in terms of its
costs and benefits values? Social and human costs are difficult to measure
accurately. Unless it can be measured, the calculation of costs and benefits will be
incomplete, and difficult to determine whether all decisions are good or bad,
ethical or unethical.

Another limitation of this method is that the majority may disregard the rights of
the minority. Since the utilitarian reasoning only emphasises on the results of an
action, managers who use this reasoning process often fail to consider the
methods used to achieve the results. For example, the result desired by
companies is to multiply profits. What is the method that can be used by the
company to achieve this result? The company may employ a method that can
harm certain people, as long as the profit is achieved as desired. Based on this
method, if the profit gained produced more benefits than costs, the action is
considered ethical even though the method of obtaining the profit had harmed
the lives of certain individuals.

Despite the weaknesses of this reasoning process, it is still widely used in most
companies when faced with an ethical dilemma. Since this method works well when
used to measure economic and financial results, business managers sometimes are
tempted to rely on it without being fully aware of its limitations or the availability of
other methods that may improve the ethical quality of their decisions. Some of the
other methods besides the utilitarian reasoning are methods that consider the effects
of the companyÊs actions or decisions on human rights.

4.5.2 Rights: Determining and Protecting

Entitlements
Human rights are another basis for making ethical judgements. A right means
that a person or group is entitled to something or to be treated in a certain
manner. The most basic human rights are the right to life, to make choices and to
realise their potential as a human. Denying these rights or failing to protect them
for other people or groups is considered unethical.

Respecting others, even if we do not like them or do not agree with them, is the
essence of human rights, provided other people do the same for us. This

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approach to ethical reasoning holds the concept that every individual must be
treated as valuable ends in them, as they are human beings.

Using others for your own purposes is unethical if, at the same time, you deny
them their goals and purposes.

One of the weaknesses of using rights as a basis for ethical reasoning is the
difficulty of balancing conflicting rights. For example, the workersÊ right to
privacy may differ from the employersÊ right to protect the companyÊs assets by
testing the honesty of their workers. In spite of the problems with this method,
the protection and promotion of human rights is an important ethical benchmark
for judging the behaviour of individuals and organisations. Surely many would
agree that it is unethical to deny a personÊs fundamental right to life, freedom,
privacy, growth and human dignity.

4.5.3 Justice: Is This Fair?

The last method that can be used to analyse ethical issues is called the justice
ethical reasoning. The question of „Is this fair or just?‰ is common in human
relations. Is it fair to be placed in an isolated workplace? Is the amount of salary
received fair considering the unsafe working conditions?

Justice, or fairness, exist when benefits and burdens are distributed equitably and
based on accepted rules. For the society as a whole, social justice means that the
societyÊs income and wealth are distributed among the people in fair proportions.
However, a fair distribution does not necessarily mean an equal distribution. Most
societies try to consider peopleÊs needs, abilities, efforts and the contributions they
make to societyÊs welfare. Since these factors are rarely equal, fair sharing will differ
from one person to another or from one group to another.

Justice reasoning is not the same as utilitarian reasoning. A person who uses
utilitarian reasoning adds up the costs and benefits to see whether one exceeds
the other; if benefits exceed costs, then the action may be considered ethical. A
person who uses justice reasoning considers who pays the cost and who gets the
benefit; if cost and benefit sharing seems fair (according to societyÊs rule), then
the action is probably just.

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SELF-CHECK 4.9

Explain briefly the following methods of analysing ethical problems:

(a) Utilitarian method;
(b) Justice method; and
(c) Rights method.

4.6 ACCOMPLISHING ETHICS IN COMPANIES

In managing and handling daily ethical issues, managers and workers need a
guideline that can help them to overcome the issues. Personal ethics guidelines
can be used, but they may need directions and guidance from the company.

4.6.1 Building Ethical Safeguards into the Company

Several organisational steps can be used to provide ethical awareness and
direction, and improve the quality of its ethical performance. The company
requires to build ethical safeguards into its everyday routines.

(a) Commitment and Involvement of Top Management

Possibly one of the best and effective steps to improve ethical performance
is when the top management of the company make known to employees
their belief that ethics should be given high priority in all business
decisions. The commitment of senior management and their involvement in
ethics as a daily influence on employee behaviour are the most essential
safeguards for creating an ethical workplace. Ponder on the case below:

Ahmad Albab is a very successful individual and has opened a very famous
business at his birthplace. He was raised with a strong religious
background and he still holds on to the principle of maintaining harmony
in society. He tries to apply this principle in his business activities. Workers
have been trained from the day they started working in the company and
are constantly reminded of the need to be ethical when working. As a
result, his company is well-known for being a socially responsible company
with an excellent ethical performance.

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ACTIVITY 4.8
If you are a member of Ahmad AlbabÊs company, how would you feel?

(b) Code of Ethics

It is said that almost half of the companies in the world have their own code
of ethics. For example, in America, more than 90 percent of large companies
have code of ethics in their companies. What is a code of ethics?

Basically, a code of ethics is a statement that guides managers and

workers or any one else who deals with the company when they are
faced with ethical dilemmas.

Normally, a code of ethics provides rules and procedures for employees to

follow in order to comply with company policies or societal laws. For
example, a code of ethics that provide guidance on the usage of office
equipments for personal use, such as using the company lorry to transport
personal items; having a personal interest in supplier companies or
competitors (you being the youngest child of the supplier companyÊs
director); guidelines on accepting or refusing gifts from suppliers and
others. The rules to obey laws such as environmental laws, trade laws or
consumer protection laws are examples of popular stipulations in codes of
ethics.

The most effective codes of ethics are those that are developed with the
cooperation and involvement of employees. The use of the internal
enforcement mechanism, such as penalties on fraud is also a method that
helps to develop an effective code of ethics. Some failures of most code of
ethics is because they are more concerned with safeguarding the companyÊs
own welfare rather than the employeesÊ or the general publicÊs welfare.

They tend to emphasise on a minimum level of compliance with the law,

instead of taking more positive steps for social responsibility towards all
company stakeholders. The codes also tend to stress on conflicts of interest
that may damage to the company.

(c) Ethics Committee

Almost half of all companies listed in the Fortune 100 studied have
established an ethics committee to provide guidance regarding ethical
matters. The members of these committees vary. They can be members of

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the companyÊs board of directors, senior management or can also include

representatives of the employees. It can be said that ethics committees are
formed to reinforce and implement the companyÊs code of ethics.

The function of the ethics committee is to gather feedback from employees

regarding ethical issues before drawing up policies pertaining to new or
uncertain areas, advising the board of directors on ethical issues, and
sometimes developing ethical training programmes.

ACTIVITY 4.9

Imagine you are a woman suffering from sexual harassment done by one
of the members of the ethics committee. What would you do?

(d) Ethics Officers

When companies expand from small to large companies in the global
markets, they would certainly encounter various ethical issues and
dilemmas. When the company is small, ethical issues can be solved by the
top management themselves. However, if the company has expanded and
has more than a thousand employees, they would need someone who
specialises in the handling of ethical issues: the ethics officer. The ethics
officer is responsible for applying and implementing ethical safeguards to
encourage ethical behaviour at the workplace such as the code of ethics,
ethics hotline, ethics training and ethics audits.

(e) Ethics Hotline

In some companies, when workers are burdened with ethical issues but are
reluctant to report them to higher management, they would raise the issues
by calling the ethics hotline. In many cases, the hotline can be interpreted as
creating a reporting system that employees can use without fear of any
negative response from employers.

The implementation of ethics hotline in Malaysia should be welcomed. A

former ethics manager stated that there are three functions common of
ethics hotlines, which are:
• To provide the right interpretation of ethical behaviour that involves
conflicts of interest, and the issue of receiving gifts/souvenirs;
• To create an opportunity in informing the right authority on claims of
unethical practices;

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• To provide workers and other stakeholders a channel to obtain general

information on a wide range of work-related topics.

(f) Ethics Training Programmes

Most companies nowadays do not focus or provide training to their
employees relating to their specific fields only. For example, an accounts
officer is given training on accounting matters, while finance and marketing
officers are given training on financial and marketing skills. In addition,
companies have also taken the step to provide social and ethical
responsibility training to managers and employees.

Various approaches are used to improve awareness and ethical decision-

making, such as by using case studies, corporate rules and guidelines,
decision-making framework, and other approaches that attempt to develop
a higher moral reasoning capability (Levels 5 and 6 in the moral
development model). Most corporate ethics training programmes are
permanent modules in the employee-training curriculum, with the majority
being offered to all management staff.

(g) Ethics Audits

Some companies use ethics audits to evaluate the effectiveness of ethical
safeguards or to detect any evidence of improvement in their employeesÊ
ethical behaviours. Usually, companies will develop an ethical standard
that is acceptable within the company. Ethics audits will be conducted by
auditors who will evaluate the real ethical behaviours and compare them to
the ethical standards. Auditors will take note of any deviations from the
ethical standards and bring them to the attention of the audit supervisor. In
addition, managers of each department will also be required to report any
deviations that may emerge. Managers also report on the written
procedures established for informing new employees on the standards and
for providing ongoing review of the standards with other employees.

(h) Comprehensive Ethical Programmes

A critical component in the development of effective ethical programme is
the integration or combination of various suitable safeguards in one
comprehensive ethical programme. Generally, a comprehensive ethical
programme is a programme that integrates or combines ethical codes,
employee ethical trainings and ethics officers.

Research has found that people who work in a company that has a
comprehensive ethics programme are more likely to:
• View their company as a responsible entity in fulfilling ethical
obligations to various stakeholder groups.
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• Have better opinions or perceptions of worker commitments to ethical

business practice.
• Report wrong ethical practice at the work place to the companyÊs
relevant authorities.
• Be satisfied with companyÊs investigations and actions towards claims
of wrongful practices.

On the other hand, a company that practices only an ethics code is usually
considered as less responsible and less capable of handling unethical
practices at the work place, compared to companies without any ethical
safeguards.

(i) Corporate Ethics Awards

Firms will be honoured for their efforts to create an ethical climate and
improve their ethical performance. In Malaysia, companies that practice
ethics in their business operations have also been presented with awards.

For example, in order to achieve ISO 9000 standard, companies have to

meet the ethical requirement in their operations. Awards such as this are
able to provide the basis for the role of a collective corporate ethics model.
Their efforts and commitment to ethical values to produce a corporate
ethics programme show that the companies can be financially successful
while focusing on ethical issues.

ACTIVITY 4.10

Please visit these websites for additional information. Then discuss in

class for further understanding. Retrieved February 20, 2008.
http://www.doi.gov/ethics/ethics.html
http://members.tripod.com/~syarikat/etikapengarah.html
http://sc.com.my/
http://www.us.kpmg.com/ethics
http://www.depaul.edu/
http://www.per2per.com/

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• Ethics is a concept of right or wrong behaviour that explains whether our

actions are morally correct or otherwise.
• Business ethics is the application of the general idea of ethics on business
behaviour.
• BusinessesÊ ethical behaviour is expected by society and by being ethical;
businesses can avoid doing harm to society, focus on business relations and
employee productivity, reduce penalties for crimes, protect the business from
irresponsible workers and unethical competitors, protect workers from
destructive employer behaviour and encourage people in business to behave
consistent with their own personal ethical beliefs.
• Ethical problems occur in business for various reasons, such as selfishness,
pressure of competition on profits, conflicts between personal values and
business goals and the cultural contradictions in global business operations.
• The values held by managers at the workplace are more likely to be
company-oriented, which means giving priority to company goals.
• Managers normally place higher value on being outstanding and competent
while striving to achieve a comfortable lifestyle compared to other values.
• A managerÊs personal character and spirituality will help him in facing
ethical dilemmas, changing company practices and influencing company
decision-making and welfare issues.
• The companyÊs culture and ethical climate, on the other hand, can positively
shape the attitudes and actions of all employees to produce the best ethical
behaviours, or sometimes contribute to an undesirable ethical performance.
• Ethical dilemmas can be analysed using three major ethical reasoning
methods, which are the utilitarian reasoning, the rights reasoning and justice
reasoning.
• Companies can improve ethical performance when top management provide
their support and when organisational safeguards such as code of ethics,
ethics committee, ethics officer, ethics training programmes and ethics audits
are effectively implemented.

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 Topic X Business and
5 Stakeholders

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the meaning of shareholders, the objectives of owning
shares, and the legal rights of shareholders;
2. Discuss the problems faced by shareholders as a result of insider
trading and government laws that protect shareholders from share
market embezzlement;
3. Explain the major rights of consumers and the development of
consumer movements in Malaysia;
4. Discuss benefits of diversification and work force diversities that
influence businessesÊ obligations to its workers; and
5. Apply diversification principles and types of diversity training and
practices in the organisation.

X INTRODUCTION
Shareholders, consumers and workers are some of the important stakeholders of
a business organisation. They have an important role in the existence of a
business organisation. Shareholders who hold important positions in their
company are the legal owners and they expect a high economic performance
from the company. However, companies do not operate only for their benefit.
Nevertheless, the latest changes in company authority have strengthened the
influence of shareholders on the company and indirectly force managers and
board of directors to give higher attention to their expectations.

Besides shareholders, consumers also have become more aware of their right of
safety, rights to be informed, to choose, to be heard and their right of privacy.

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Protecting consumers and at the same time offering them products and services
they desire are the social responsibility of companies. Many companies have
recognised that providing the best quality products and services to customers are
effective and ethical business strategies.

Workers also influence the companyÊs performance. Workers provide labour to

the company, while employers compensate workers for their skills and
productivity contributions. Managing employer-employee relations can be
beneficial to firms, workers and society.

5.1 SHAREHOLDERS

Shareholders are the legal owners of a business company. By purchasing

shares from the company, they become part owners of the company.
Therefore, shareholders or owners of the company have a very large interest
in determining the performance level of the company. Managers must also
pay close attention to their needs and place a high priority to their demands
and interests.

5.1.1 Types of Shareholders

There are usually two types of shareholders that become the legal owners of a
company. They are individual shareholders and institutional shareholders. In
order to become a shareholder, individuals can buy company shares or stocks
from stock brokers. As a contributor to the Employees Provident Fund (EPF), for
example, individuals are also considered as individual shareholders.

After the independence of Malaysia, a new phenomenon emerged. The number

of shareholders consisting of institutions has increased. A research in the United
States of America in 1997 showed that 43 percent of adults there own shares in
companies, either directly or indirectly through institutional investments.

Generally, shareholders consist of various groups. Individuals in all employment

sectors own shares, such as professionals, farmers, managers, clerks, retirees or
possibly even the unemployed.

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5.1.2 The Objectives of Owning Shares

ACTIVITY 5.1

If given a chance, would you invest your money in a company that

makes large profits or in a socially responsible company?

As explained earlier, shareholders consist of two groups. Whether they are

individual investors or institutional investors, each of them have their own
interests and desires to own company shares. We will next discuss the reasons
for a person or institution in wanting to own shares in a company. Among the
objectives are economic, social, mixed and corporate controls.

(a) Economic Objective

Generally, almost every investor, whether individuals or institutional, have
the same objective in owning company shares, which is the economic
objective. In their economic-objective view, investing in company shares
pays far higher profits or benefits compared to keeping money in banks,
although the risks may be higher.

Investors will try to invest in companies that have a high profit

performance and at the same time provide attractive dividends for
investors. Clearly, the most important thing for investors with an economic
objective is to gain high profits and benefits, and they do not consider other
aspects. They are more attracted to investing in companies that offer the
highest benefits or profits.

(b) Social Objective

Contrary to investors with economic objectives, investors with a social
interest will try to invest in companies that care about societyÊs overall
harmony. In other words, those with a social objective will only invest in a
company that is ethically and socially responsible in its business activities.
For example, they may not want to invest in cigarette producer companies,
even though these companies usually offer higher profits and benefits than
other companies.

Investors who invest for social causes would not even consider investing in
a cigarette company, because they believe that smoking affects the health of
the people in society. Cigarette companiesÊ activity of selling their product
is considered unethical and not socially responsible as it disrupts the well-
being and harmony of society, although it is legal. Therefore, they will
definitely not invest in these companies even if they promise generous
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returns. Investors who are economically oriented, however, would surely

seize the opportunity to gain high returns.

(c) Mixed Objective

Lately, it was found that most investors have more than one objective when
investing in a company. They have mixed objectives. Besides getting profit
returns from the investment, they also would like to ensure that the
company they invest in hold a high social responsibility principle.

The reason they want to invest in such companies is because they believe
that companies not only have responsibility towards shareholders, but they
are also responsible for the universal well-being and harmony of society.
Some fund managers who adopt a social criterion in selecting shares believe
that this approach would increase economic gains, as socially responsible
companies would achieve a higher profit performance in the long-term.

(d) Corporate Control

Apart from those mentioned above, another reason to invest in a company
is to gain the rights to control the company. An example of investment with
the intention to gain control is by taking over a company, by an investor
company. Through this method, the investor company would buy the
highest number of shares in the company in order to gain control.

These types of investors have a long term economic objective in mind.

However, the short term objective is to gain control of the company by
buying its shares. By gaining control of the company, possibly as a member
of the board of directors, they would be able to influence the companyÊs
strategy.

SELF-CHECK 5.1
Now that you have learned the four objectives of investing in
companies, in which company would you invest in if given the
chance? Would it be in a company that promises high profit returns or
in a socially responsible company, or in both? Would you also invest
with the intention to control the activities of the company?

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5.2 LEGAL RIGHTS AND PROTECTION OF THE

SHAREHOLDERS
For the purpose of protecting the economic interest of the company they are
investing in, shareholders are protected in a few ways. The shareholdersÊ specific
rights have been decided by the law, and some of these legal rights are:
• Right to claim the companyÊs profit if the board of directors declares
dividends.
• Right to receive annual reports on the financial position of the company or
obtain information on its profit and activities.
• Right to vote in the election of the board of directors.
• Right to vote if the company is conducting a merger, buying and selling, or
changes in contracts and rules.
Usually, these rights are applied during companyÊs annual meetings, when
directors and managers present their annual reports, and shareholders have the
opportunity to approve or disapprove the plans of the management team.

(a) ShareholdersÊ Prosecution

Sometimes a situation can arise when companies are not properly managed
by the managers or company directors. If shareholders think that the
company has been exploited through the actions of officers or directors,
they have the right to file a complaint in court. Lawsuits can be brought
either by individual shareholders or groups. Shareholder lawsuits can be
initiated by scrutinising various frauds including insider trading or other
misconduct by company officials.

(b) Corporate Exposure

The best way to protect the interests of shareholders is to provide more and
better information. The theory behind the transition towards disclosing
more of the companyÊs information is that shareholders as investors should
be as fully informed as possible in order to make sound investments.
According to the law, shareholders have the right to know the affairs of the
company they invest in.

Information about the company can be obtained through two methods.

Those who attend annual meetings will be informed of the companyÊs past
performance and future goals through presentations by the company
officials or directors. Those who do not attend the annual meeting can
obtain this information from the annual reports issued by the company.

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SELF-CHECK 5.2
What are the legal rights and protections that a shareholder has?

5.3 CORPORATE GOVERNANCE

The term corporate governance refers to the overall control of the companyÊs
actions. There are several groups of major stakeholders who are involved in
governing the company. The following are the groups of major stakeholders:
• Managers hold strategic positions due to their knowledge and daily decision
making;
• Board of directors use their formal legal authority on the company policy;
• Shareholders, whether institutions or individuals, have a vital stake in the
company;
• Workers are represented by unions, or those who own shares in the company
can influence certain policies of the company;
• Government is involved in the company through laws and regulations; and
• Creditors, who grant loans to companies, can influence a companyÊs policy.

5.4 TRENDS IN CORPORATE GOVERNANCE

TODAY
As discussed earlier, there are several changes in the trend of company
management. We will discuss on the changes mentioned in greater detail.

(a) The Increase in Institutional Investors

As already mentioned, there are two types of shareholders - individuals
and institutional shareholders. Since the mid-1980s, the increase in
investment by institutional shareholders became more apparent. For
example, the EmployeesÊ Provident Fund, Tabung Haji and others have
become more assertive in promoting the interests of their members. This
trend is important in determining the direction of the corporate
governance.

One of the reasons for institutions to become more active is because it is

more difficult for them to sell their share holdings if they are dissatisfied
with management performance. Large institutions are less flexible
compared to individual shareholders because selling a large block of shares

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would depress its price, thus the value of their holdings would seriously
drop.

In the 1990s, there were movements towards relationship investment. This

occurs when large shareholders like the EPF, Tabung Haji or other private
investment groups create long term relations and commitment with a
company. Institutional owners would usually buy a significant stake in a
company and acquire a seat on the board, or at least meet with the
management more often. The benefits of relationship investment are the
company will gain long term commitment from major shareholders, who
will in turn have more say in the management.

(b) The Changes in Board of DirectorÊs Roles

Just like institutional investors, certain members of board of directors have
become more assertive. This new trend emerged as a result of a few
reasons. Directors found themselves being pressured by institutional
investorÊs concerns to protect the interests of their shareholders. Another
factor is the increase in lawsuits brought against board members. Due to the
courtÊs decisions holding directors liable for the poor management
decisions, they are more sensitive to their responsibilities towards
shareholders.

(c) ShareholderÊs Resolution in Relation to Social Responsibility

Among the latest trends in corporate governance is the increase in
shareholderÊs resolution in relation to social responsibility. As examples,
the issues that concern environmental responsibility or alcohol and tobacco
advertisements. This regulation reflects that shareholders should be
allowed to vote on social and economic issues that are related to business of
the company. The Securities and Exchange Commission has tried to
minimise harassments by requiring that resolutions receive minimum
support in order to be accepted.

Since shareholdersÊ resolutions opposed by the management very seldom

obtain enough votes to be adopted, why do we need to submit a resolution?
There are several answers to the question. At the very least, annual
meetings provide a forum to discuss and debate on social issues.
Shareholders have a legal right to raise such issues and enquire on the
company actions towards social issues.

(d) Share Ownership by Workers

The latest trend is the increase in a share ownership known as employee
share ownership plan (ESOP). These are benefit plans, whereby companies
buy their own shares and place them in trust for their employees. The idea
is to give employees a direct profit-sharing interest, in addition to their

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salary. ESOP supports the claim that this kind of share ownership benefits
to the company as it increases workersÊ productivity, reduces job
absenteeism and strengthens the bond between employees and
management into a common effort to make the company a success.

Research has found that when employee ownership is linked to

participation in management practices, the company experiences significant
gains in its performance. As a result, many companies have tried this
method to ensure their companies continue to achieve excellent success.

ACTIVITY 5.2

If you were given a choice between having (a) a high salary without an
employee share ownership plan and (b) an average salary with an
employee share ownership plan, which would you choose? State your
reason why.

5.5 GOVERNMENT PROTECTION OF

SHAREHOLDER INTERESTS
(a) Securities and Exchange Commission
The main government agency that protects the interests of shareholders is
the Securities and Exchange Commission. Its mission is to protect
shareholdersÊ rights by ensuring that the share market is run fairly and
investment information is fully disclosed. This agency generates its own
revenue to pay for its operations.

Government regulations are required because shareholders can be

damaged by abusive practices. One area that requires special efforts to
protect and promote shareholder interest is known as insider trading.

(b) Insider Trading

Insider trading occurs when a person has access to confidential information
about a companyÊs financial position and then uses it, before it becomes
public knowledge, to buy or sell the companyÊs shares. Since others do not
know what the insider trader knows, it is a possible for the insider trader to
take the advantage to or sell the shares in advance of other shareholders.
Insider trading is illegal under the Securities and Exchange Act. The courts
have generally interpreted that it is illegal to:
• Misuse (steal) of non-public information or confidential information
and use it to trade in shares;

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• Trade shares based on tips from someone who has an obligation to keep
the information confidential; for example, a person would be guilty of
insider trading if he/she buys shares after his relative, who is a member
in the board of directors, mentioned that an offer to buy the company
has been postponed.
• Relay information to others with the intention to gain direct or indirect
benefits, even if he did not trade the shares for his/her own account.
Insider trading, whether in the new market economies or in established markets,
contradicts the logic that the share market is based on the premise that all
shareholders have access to the same information about companies. No one
should have an unfair advantage over others. Only in this way would investors
have full confidence in the fairness of the share markets.

If they think that some investors are able to use inside knowledge for their own
personal gain while others are excluded from the same information, the system
of share buying may break down due to lack of trust.

5.6 CONSUMERS AND CONSUMERISM

ACTIVITY 5.3
Do you know that you have certain rights as a consumer? List the
rights of consumers that you know.

As long as business has existed, consumers have tried to protect their interests
when they go to the marketplace to buy products and services. They looked
carefully at the products they buy, compared the quality and prices offered by
different seller and complained when they felt cheated.

Individuals have practiced this on their own. Today, as a result of the increase in
the complexity of life in the new millennium, especially in developed industrial
countries, there is a collective, organised and collaborated group effort to protect
consumers. This organised activity is known as consumerism or the consumer
movement.

5.6.1 The Anatomy of Consumerism

Consumerism or consumer movement was created to expand the rights and
powers of consumers. The objective of consumer movement is to make consumer
power an effective counterbalance to the rights and powers of business firms that
sell products and services.

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Most consumers feel well protected if their basic rights can be guaranteed. In the
early 1960s, President John F. Kennedy told the U.S. Congress that consumers
were entitled to four kinds of protections:
• Right to safety refers to protection from the marketing of products that are
hazardous to health or life;
• Right to be informed is the right to be protected against fraudulent, deceitful,
or grossly misleading information, advertising, labelling or other practices,
and to be given the facts to make informed choices;
• Right to choose refers to the assurance or access to a variety of products and
services at a competitive prices; and in industries which competition is not
workable and government regulation is substituted, consumers are to be
assured of satisfactory quality and services at fair prices; and
• Right to be heard refers to the assurance that the interests of consumers will
receive full and sympathetic consideration in the formulation of government
policies.

If those rights are guaranteed, consumers will feel more confident when dealing
with well organised and established companies in the market place. In the mid
1990s, some activists and government regulators have started calling for a fifth
consumer right, the right to privacy. This right refers to the individualÊs right
whereby, under certain circumstances, he can avoid giving personal information
about himself.

5.6.2 Reasons for Consumer Movements

The consumer movement exists because consumers want to be treated fairly and
honestly in the market place. However, some business practices do not meet this
standard. Consumers may be harmed by abuses such as unfair high prices,
unreliable and unsafe products, excessive and deceptive advertisement claims
and the promotion of certain products that may be hazardous to human health,
such as cigarettes or farm products contaminated with pesticides.

Additional reasons for the existence of the consumer movement are as follows:
• Complex products have complicated the choices consumers need to make
when shopping
Based on this reason, consumers today are more dependent on businesses in
getting quality products than before. Since most products are too complex,
for example refrigerators or televisions, most consumers have no way to
evaluate the quality of the products at the time of purchase. Many
components in such products are not visible to consumers, who therefore are
not able examine them even if they have the technical skill to do it.
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Consumers find that they are almost entirely dependent on businesses to

deliver the quality promised. In these situations, unscrupulous business firms
can take advantage of uninformed consumers.
• Services and products have become more specialised and difficult to evaluate
When choosing a lawyer, doctor, university or hospital, most consumers do
not have a guideline to evaluate whether they are good. They can depend on
other peopleÊs experiences but the information may not be entirely reliable.
Consumers will face a two-level evaluation problem when buying. Firstly,
whether the product or service is a good one, and secondly, what are the
costs for the good product or service.
• When businesses try to sell both products and services through
advertisements, the claims may be exaggerated or may appeal to emotions
that have little to do with the expected performance of the product
For example, you see a magazine advertisement showing a product with the
size that you want. However, when you look at the real product, the size is
not as what you expected. Another example is a soft drink advertisement
which makes you will feel as though you are in the North Pole if you drink it.
Advertisement industry critics also often highlight advertisements shown
during childrenÊs television programmes that promote toys with violent
features.
• Product safety is often ignored
With the growing public interest towards health and nutrition, many
consumers worry about the food flavourings and preservatives, pesticide
contamination, diet trends that contribute to obesity and the long term effects
of tobacco to health.

5.7 THE DEVELOPMENT OF CONSUMERISM

IN MALAYSIA

ACTIVITY 5.4

Have you heard of the consumer movement in Malaysia? If yes, share

what you know with your classmates.

The rise of the consumer movement in Malaysia is the result of responses

towards the severe increase in the price of products, especially during festive
seasons. During the festive season of 1964, consumers started to openly complain
on the increase in the price of necessary goods and the mass media carried an
extensive coverage. Letters were sent to editors objecting to the increase in the

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prices of these necessary goods. The Government urged consumers to unite and
act firmly for their own sake and not to only depend on the government.

In December 1964, the Penang Buyers Association was established in answer to

the governmentÊs call. However, the association was disbanded due to lack of
support from consumers as well as due to lack of financial resources. Then, in
January 1965, the Consumers Association of Selangor emerged. This association
managed to develop and provide consumer protection activity programmes that
attracted the attention of society. Its success led to the formation of a few other
consumer associations in Malaysia, which members increasingly consist of
professionals. In November 1969, Consumer Association of Penang (CAP) was
born. The creation of CAP, which grew to become the only active consumer
association in Malaysia, was an important development in the history of
consumerism in our country.

In February 1971, the Consumer Association of Sarawak was formed, followed

by the Negeri Sembilan Association in March the same year. At a meeting
between these associations in 1971, the Malaysian National Consumers Council
was formed, but it did not last and was disbanded.

Since then, six more state consumer associations were formed. Five associations
were formed in 1971, each in Johor, Perak, Kelantan, Kedah and Perlis. In 1972,
the Melaka Consumer Association was established.

5.7.1 The Birth of FOMCA

Each state consumer association formed were free to conduct activities in their
respective states. However, the awareness to form an organisation to more
systematically and effectively protect consumers began to be emphasised. Its
formation is necessary to exchange opinions and information as well as to act
collectively to safeguard the interest of consumers. As a result of discussions, the
Federation of Consumers Association Malaysia (FOMCA) was formed in June
1973 with its headquarters situated in Alor Setar. However, until the present
time, CAP has not joined the federation because it believes that FOMCA is a pro-
government association, and therefore does not fully protect the consumersÊ
interests.

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5.8 CONSUMER PROTECTION

Consumer protection laws have three major goals, which are:

(a) Providing Consumers with Better Information When Making Purchases

Consumers are able to make more rational choices if they have accurate
information on a product, thus facilitating comparison with other products.

(b) Protecting Consumers from Potential Hazards of Products Bought

Examples of these protections are warning labels on the possible side effects
of pharmaceutical drugs, the banning of lead-based paints, and inspections
to eliminate spoiled or contaminated meat.

(c) Promote Competitive Pricing and Consumer Choice

Sometimes, business firms take advantage of consumers by secretly
dividing up market areas among themselves to dominate the market. This
artificially raises prices and limits consumer choices. Consumer protection
laws can curb such incidences.

5.8.1 Government and Consumer Protection in

Malaysia
Since only the government has the power to approve, amend and enforce laws, it
definitely plays an important role in consumer protection.

In Malaysia, National Advisory Council for Consumer Protection (NACCP) was

formed on the 14th of July 1973. A year later, the Consumer Affairs Department
of the Ministry of Trade and Industry was formed to oversee the running of the
NACCP. NACCPÊs main goal is to protect consumersÊ interests and improve the
overall quality of life of Malaysians.

Realising the need to keep in touch with consumers and consumer movements,
the Malaysian government has set up the Ministry of Domestic Trade and
Consumer Affairs to specially deal with consumer problems. Besides this, there
are also other ministries directly involved in protecting consumers, such as the
Ministry of Housing and Local Government, the Ministry of Science, Technology
and Environment, the Ministry of Energy, Communications and Multimedia and
the Ministry of Agriculture.

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5.8.2 Consumer Tribunal

In the effort to protect consumers from unethical sellers and to encourage healthy
and ethical business practices among the business community, the government
has recently formed an passed an act called the Protection Act 1999, which was
first enforced on 15th November 1999. This new act contains specific consumer
protection provisions to be enforced by the National Advisory Council and
Consumer Claims Tribunal. This tribunal was formed under Section 85,
Department XII of the Act.

The Consumer Claims Tribunal is an independent body formed under the

Consumer Protection Act which main function is to hear and determine the
claims made by consumers under the Act.

Before the formation of the tribunal, all disputes between consumers and sellers
had to be brought before the civil courts. This involves a lot of time and money.
As a result, consumers prefer not to make claims against sellers, especially when
it involves only small losses. The formation of the tribunal has helped to reduce
the number of outstanding cases in the civil courts and reduce the burden on
consumers when making claims against fraud committed by businesses.

SELF-CHECK 5.3
In your own words, briefly explain the goals of the consumer laws.

5.9 BUSINESS ORGANISATION’S RESPONSE

TO CONSUMERISM
Consumer movements have demonstrated to businesses that they are expected to
perform at high levels of efficiency, reliability and fairness in order to satisfy
consumers. Since businesses normally do not respond quickly or sufficiently,
consumer advocates and their organisations have sought government protection.
On the other hand, much effort has been made by individual business firms and
by entire industries to encourage voluntary responses to consumer demands.
Among the responses are:

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5.9.1 Total Quality Management

In the 1980s and 1990s, many businesses have adopted the management
philosophy known as total quality management. This approach emphasises on
achieving high quality and consumer satisfaction through teamwork and
continuous improvement of a companyÊs products and services.

Total quality management is a response to pressure from consumer activists and

an attempt by businesses to address customersÊ needs.

SELF-CHECK 5.4
Explain the terms below:
(a) Total Quality Management;
(b) FOMCA; and
(c) Consumer Tribunal.

5.9.2 Consumer Affairs Department

Many large companies have their own consumer affairs departments led by a
manager. These centralised departments normally handle consumer inquiries
and complaints about the companyÊs products and services. Some companies
install consumer hotlines for dissatisfied customers to place telephone calls
directly to the manufacturers.

Experienced companies are aware that consumer complaints and concerns can be
addressed more quickly, at a low cost and with less risk of losing goodwill by a
consumer affairs department than if customers take legal action or if their
complaints receive wide media coverage.

5.9.3 Arbitration or Mediation

In the 1990s, the use of arbitration or mediation in handling consumer complaints
was more common. Many companies, especially in the healthcare and financial
services industry, request customers to bring the issue to a mediator rather than
suing the company. A mediator is a neutral individual unrelated to any of the
disputing parties, who will provide a final decision in a dispute.

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Most companies prefer mediation, as it tends to reduce legal costs. Consumers

prefer this process because their complaints can be handled more quickly and
easily.

Companies also handle consumer dissatisfactions by recalling the defective

products. Product recall occurs when a company, either voluntarily or under an
agreement with a government agency, takes back all items found to be hazardous
or dangerous. Products may already be in the hands of consumers, or still in
factories, warehouses, or on the shelves of supermarkets. Wherever the product
may be, the manufacturer would try to notify consumers or potential users about
the defects so that they will return the items to be repaired, replaced or
destroyed, depending on the problem.

Recently, Perusahaan Otomobil Nasional Berhad (Proton) recalled all its Perdana
models from consumers. Consumers were requested to send their cars to
authorised service centers so that the defects can be repaired. This is an example
of a product recall in Malaysia.

5.10 EMPLOYERS-EMPLOYEE RELATIONS

The employer-employee stakeholder relations include a variety of expectations
from both sides. Employers, for example, have several duties and responsibilities
that may be economic and legal, or social and ethical.

Employer-employee relations are more than just paying employees for the effort
contributed. There is now a new concept about employer-employee relations.
Employers are responsible to make employees happy at work by implementing
interesting and challenging work, performance-based reward and training to assist
employees to be more easily accepted into jobs within or outside the organisation.

In return, employees are expected to abide by the employer-employee social

contract by showing strong commitment to their job responsibilities and
teamwork. Employees are expected to be able to share the responsibilities to
achieve organisational success. In other words, employees are responsible in
sustaining their jobs and are also responsible if the organisation fails to reach its
goals according to the new social contract.

5.10.1 Role of Government in Employer-employee

Relations
Employer-employee relations is influenced significantly by laws and regulations,
including the employeesÊ rights to organise and bargaining collectively with their
employees, the rights to equal opportunities, and safety and health at work.

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(a) Roles of WorkerÊs Union

Why do workers unite to form a union? There are four factors that play
important roles in the formation of a workerÊs union. As can be seen in
Figure 5.1, the first factor in forming a union is economic. This is especially
so for lower income workers, whereby the union would try to seek an
increase in their membersÊ average salary. The second factor is attributed to
work dissatisfaction. Weak supervisory practices, favouritism, weak
communication and the assumption that a mediation process is unfair are
factors that can lead to work dissatisfaction. The third factor for the
formation of unions is that they can gain the desired benefits. The last factor
is the unionÊs image, which can determine whether a dissatisfied worker
would choose to be in a union or not. Reports on cases of union
embezzlement or breach of trust could reduce the number of workers
joining a union.

Figure 5.1: Factors for the formation of a union

(b) Equal Job Opportunities
Ensuring that employers practice and provide equal job opportunities
continues to be a goal that is socially desired. Employee relations will gain a
positive response and initiative if businesses continue to become more
socially responsive and able to obtain the support of society.

(c) Government Regulations and Policy

The governmentÊs efforts to eliminate discriminatory practices at work have
been enacted in the law with the intention to revamp companiesÊ inequality
practices towards workers. These regulations are applied in almost all
businesses in the following ways:
• Discrimination based on race, colour, religion, sex, birth country,
physical or mental disability and age are prohibited in all job practices.
This includes hiring, promoting, work and job classifications,
indemnities and other working conditions;

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• Government contractors must have a written affirmative action plan

that details how they will work positively to overcome previous and
current effects of discrimination in their work force. However, the
affirmative action plan must be temporary and flexible, designed for
current and previous discriminations, and cannot create a counter
discrimination on women; and
• Men and women should be paid equally when doing the same work,
and employers cannot discriminate pregnant women.

ACTIVITY 5.5
What is your opinion on efforts done by Malaysian government to
eliminate discrimination at the workplace?

(d) Corporate Response

Generally, businesses generate a few approaches to control discrimination
and provide equal job opportunities. Companies, which fail to create equal
job opportunities, will usually face costly legal actions brought about by
discriminated parties.

Encouraging equal opportunities in hiring, promoting, salary and job scope

is good for both parties as it enables firms to use a wide range of talents and
prevents it from costly legal actions.

(e) Affirmative Actions

One way to encourage equal opportunity and correcting previous
discrimination is through affirmative action. The reason for an affirmative
action plan is to reduce work discrimination by encouraging companies to
take positive steps (an affirmative action) to override old work practices
and traditions that may contain elements of discrimination.

Critics of affirmative action, however, oppose this concept, as they believe

that it is inconsistent with the principle of fairness and equality. Some relate
it to what is called counter discrimination. Counter discrimination happens
when a group is involuntarily being discriminated in the effort to help
another group. For example, a man with a better qualification for a clerical
position has been rejected in order to give a chance to a woman with a
lower qualification in the pretext of not wanting to discriminate.

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(f) Worker Safety and Health

Most jobs related to industrial and manufacturing will involve dangerous
conditions due to the usage of high-speed and noisy machines,
manufacturing processes that require high temperatures, the increase in the
usage of highly sophisticated chemicals and the nature of certain jobs such
as construction, drilling or digging of mines and underwater tunnel works.
Accidents, injuries and falling sick are more likely to happen under such
circumstances.

Since centuries ago, various new categories of accidents or sickness have

emerged, including work safety problems that develop rapidly as office
injuries. As a result of the increase in pressures on productivity and the
increase in work demands could cause irregular trauma such as wrist pains
suffered by cashiers, butchers and computer operators. The number of
health problems associated with the usage of video terminals and computer
keyboards and tasks that require repeated movements has multiplied. A
new term created in handling these problems is called ergonomics.
Ergonomics means adapting the work and the suitable working conditions
and appliances to workers, compared to forcing workers to adapt
themselves to the design of the machines and other working appliances.
Office furniture that does not have ergonomic characteristics may be
responsible towards weak productivity and time wastage due to injuries
and sicknesses.

SELF-CHECK 5.5

What do you understand by the following?

(a) Affirmative action; and
(b) Ergonomics.

(g) Occupational Safety and Health Administration

The Occupational Safety and Health Administration (OSHA) has significant
authority on employers requiring them to provide each worker with work
that is Âfree from dangers that may cause or has the tendency to cause death
or serious physical injuriesÊ.

Employers who are found guilty of cruelty by OSHAÊs safety and health
standards can be sued, and in intentional cruelty cases that cause a workerÊs
death, they could serve jail terms.

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(h) ManagementÊs Response

Certain businesses have developed their own system to reduce injury
threats at the workplace. A method that has become more popular and
widespread is by having a workplace security force. The security force is
generally represented in the same number of workers and management. In
operations, this force does not only reduce accidents but are also able to
reduce compensation cost to workers. This effect is most dramatic in small
companies that normally do not have the monetary or human resources to
develop expensive and complex safety programmes.

Businesses seem responsive with the careful observation to government

regulations that have been designed to protect workers. Some of them
appear to comply with the legal requirements, while others have exceeded
government standards to avoid investigations by the regulators. In spite of
these mixed results, most companies accept their responsibilities to protect
the safety and health of workers.

5.10.2 Diversity at the Workplace

SELF-CHECK 5.6
What do you understand by ÂdiversityÊ?

Diversity refers to the various differences in workersÊ demographic, culture and

personalities in an organisation and customers who conduct their business
activities there. Diversity is not an affirmative action. This is because affirmative
action is an intentional step taken by organisations to create job opportunities for
minority groups and women.

Companies that practice accepting diverse individuals in an organisation will

gain several benefits, such as:

(a) Cost Savings

Companies are able to save costs by reducing the rates of turnover and
absenteeism. Legal actions towards the company regarding diversity can
also be reduced. When companies practice diversity, different individuals
will be attracted to work and remain in the company.

(b) Attracting and retaining talented workers

Minority workers will feel attracted and interested to be in the company
and will remain.

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(c) Developing business

By having a diverse work force, the company is able to understand the
needs of the market as various individuals are able to give information on
varying market tastes. With a diverse work force, problems can be better
solved as ideas and perspectives are different.

Examples of diversity that exist in an organisation are shown in Table 5.1 below:

Table 5.1: Examples of Diversity that Exist in an Organisation

Diversity in an
Explanation
Organisation

Age Age discrimination means treating workers differently (for

example, in hiring and terminating, promoting and
compensation decisions) based on their age.

Gender Gender discrimination is treating workers differently based

on their gender.

Glass ceiling Glass ceiling is an invisible barrier that prevents women or

minorities from advancing to a higher position in an
organisation.

Race/Ethnic Race/ethnic discrimination is treating workers differently

based on their race or ethnicity.

Mental or Physical Disability is a handicap that limits one or more main life
Disability activities.

Disability Disability discrimination is treating workers differently

Discrimination based on their disability.

(a) Managing Diversity

Diversity paradigm can be used to manage diversity. There are three kinds
of paradigm/methods in managing diversity:
• Discrimination and fairness paradigm is a method related to creating
equality and fairness in an organisation.
• Legal access and validity paradigm is a method used to create
acceptance and celebrating any different individual, regardless whether
they are employees in the company or individuals dealing with the
company.

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• Learning and effectiveness paradigm is the best method in managing

diversity. This method integrates diversity to the organisationÊs real
work.

(b) Diversity Principles are as following:

• Obey rules regarding equal job opportunities carefully and sincerely.
• Place importance on group differences, but not too special.
• Give opportunities to individuals, and not to groups.
• Always check the standards, but maintain a high standard.
• Ask for positive and negative feedbacks.
• Set high but realistic goals.

(c) Diversity Training and Practices

In the effort to create an accepting atmosphere towards diverse individuals
in organisations, these are some actions that can be taken by the company:
• Awareness training is a training designed to increase workerÊs
awareness towards diversity issues and to challenge basic assumptions
or stereotypes that some people may have.
• Basic-skill diversity training is a training that teaches workers the
practical skills needed to manage a diverse work force such as flexibility
in adapting, negotiation, problem-solving and conflict resolution.
• Diversity audit is a formal evaluation that measures workersÊ and
management attitudes; investigate degree to which the workers have
advantages or disadvantages in hiring and promotion, and checking
policies and procedures regarding diversity.
• Diversity pair is a mentor programme, whereby workers from different
cultural backgrounds, gender or race/ethnic are paired together to get
to know one another, and changing their beliefs and stereotyped
attitudes.

(d) Whistle-blowing
EmployeeÊs loyalty towards employers may be challenged if the employee
thinks that the employer is doing something wrong that harms the society.
When a worker reports a companyÊs wrongdoings to the public or the
companies higher officers, whistle-blowing has occurred.

Generally, workers are not free to speak against employers as there are
public needs that ensure companies continue to operate without internal

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disturbances. Company information is considered as the companyÊs asset

and is confidential. If workers, according to their personal opinion, are free
to reveal issues to the public and reveal wrongdoings, the company may
face big problems and be unable to operate effectively. On the other hand,
there may be situations whereby societyÊs needs are greater than the
companyÊs interest; therefore workers may feel responsible to blow the
whistle.

SELF-CHECK 5.7
What can a company do in its effort to create an accepting atmosphere
towards diverse individuals in an organisation?

ACTIVITY 5.6
Please visit these websites for additional information. Then discuss in
class for further understanding. Retrieved February 23, 2008.
http://www.nyse.com/
http://www.ciicentral.com
http://www.socialinvest.org/
http://www.cpsc.gov/
http://www.ftc.gov/
http://www.igc.apc.org/
http://members.tripod.com/skypin/scntek/sai28.html
http://www.jaring.my/

• Individuals and institutions own company shares as a way to gain

economic benefits.
• Social objectives sometimes drive investors to avoid from investing in
certain companies that produce negative social effects.
• Shareholders have the right to vote, receive information, choose directors,
and try to develop company policies and actions.

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• A companyÊs corporate governance system is the relations between

directors, managers, shareholders and sometimes creditors. It decides on
who has the valid authority and how the authority is used.
• EmployeesÊ share ownership plans places importance on workers in the
financial success of a company and with it, workersÊ commitment and
productivity can be increased.
• Insider trading is illegal and unethical. It only gives advantage to those who
have privileged information. Ultimately, it reduces fairness in the share
market.
• Consumer movements in Malaysia started in the 1960s with the objective to
safeguard consumersÊ interest by balancing the forces of the market held by
sellers and buyers.
• The four main rights of consumers are the right for safety, right to be
informed, right to choose and right to be heard. The latest discussion has
focused on the right of privacy of the consumers.
• Consumer protection laws aim to ensure that consumers are treated fairly,
receives complete information, are protected from dangerous or hazardous
products, and has the freedom to choose in the market.
• Socially responsible companies have acted towards consumer movements
by giving serious consideration to consumer problems, increasing
communication channels with consumers, institutionalising mediation
procedures to solve complaints and recalling all defective products.
• Socially responsible companies also establish total quality management in
the effort to fulfil consumersÊ needs.
• The increase in diverse work force requires company managers to respect
and be able to manage various cultures and social behaviours effectively
among workers today.

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 Topic X Business and
6 The Natural
Environment
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the meaning of sustainable development;
2. Describe the human activities that threatens the natural resources
in the environmental ecosystem;
3. Discuss important environmental issues and ways to manage it;
4. Explain the steps that can be taken by businesses to reduce
ecological damage and increase sustainable development;
5. Discuss the main problems of environmental pollution and best
ways to control it;
6. Analyse the costs and benefits of environmental law enforcement;
and
7. Evaluate how green management can improve the strategic
competitiveness of an organisation.

X INTRODUCTION

The worldÊs society in general and Malaysians in particular, faces ecological

challenges that have never happened before. Many political leaders and
businessmen have held on to the idea of sustainable development, urging
towards economic development without damaging the natural environment or
reducing them for the sake of future generations. However, this concept has
created many controversies and the implementation is difficult. Therefore, the
duty of policymakers and corporate leaders is to find ways to fulfil economic and
environmental goals in this century without sacrificing either one.

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The increase in public societyÊs interest in protecting the natural environment has
caused many political and corporate leaders to be more responsible towards
environmental issues. Previously, policymakers used legal orders and restrictions
to achieve environmental goals. Today, they are more likely to using market-
based mechanisms to achieve the goals. At the same time, many business
organisations are becoming more proactive and finding new approaches in
managing the environment more effectively.

6.1 ECOLOGICAL CHALLENGES

ACTIVITY 6.1

If you use the North-South highway, you can see how humans have
changed the face of the natural environment. Humans have levelled the
mountains and hills, burned forests, redirected rivers and polluted the
air. We have built buildings, made and repaired roads and others. Why
does this happen? Can it be that humans are trying to change whatever
that has existed in order to achieve a better life? Try to think of other
reasons.

Until the end of the 20th century, about half of the earthÊs surface has been
changed. At certain places, areas utilised for transportation systems are as much
as areas for agriculture. Although natural resources such as fuel, water, fertile
land and forests still exist, the rising number of population and pace of industrial
development will one day be threatened when human demands exceed the
capacity of the earthÊs ecosystem.

Ecology is the research on how living things, plants and animals, interact with
one another in the natural environment or ecosystem. Damage in the ecosystem
at one place will affect people in other places. The thinning of the ozone layer,
deforestation and extinction of species affects society as a whole, not just a
particular area or country.

6.1.1 Global Commons

Since the ancient times, people have shared resources such as land, air and water.
This is called the global commons. Unfortunately, people will try to maximise the
use of the resources for personal interest in the short term, and other users will
suffer losses.

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There is a fishing village near a sea that is abundant with fish. Its residents live
comfortably as a result of their catch from the waters. However, there are some
clever fishermen who began to look for ways to catch more fish. They started
taking loans to buy large boats and advanced equipments. Other fishermen, not
wanting to be left out, start to imitate these new techniques. As time goes, fish
became more difficult to find and its sizes have gotten smaller. In the end, the
whole fishing industry collapsed, bringing about an economic recession to the
village. As the old saying goes „Fish are not free‰. It is our fault to assume so.

Therefore, we live in a global commons, wherein natural resources such as water,

land and air must be used together. We share an ecosystem. Caring for the global
commons and ensuring its sustainable usage is an important issue for the
government, business and society.

6.1.2 Sustainable Development

Sustainable development refers to the need to balance between the economic
factor and the environmental factor. Development here means fulfilling todayÊs
needs without compromising the ability for future generations to fulfil their
needs. This involves two core ideas:
• Caring for the environment will require economic development
Poverty is the cause for environmental degradation. People who are deprived
of food, home and basic needs will abuse the resources in order to continue
living. For this reason, caring for the environment requires an improvement
in the basic living standards of all the worldÊs societies.
• Economic development must be sustainable
Development is done without threatening the needs of future generations.
Development should not happen if it destroys forests, farming lands and air
that are needed to continue living on this planet.

This means that sustainable development gives government and

businessmen many challenges. Poverty must be eradicated and the world
economy improved, but it should be implemented without distressing the
environment and misusing the resources.

6.1.3 Threats to the World’s Ecosystem

Human activities affect three forms of natural resources: water, air and land.
Natural resources can be divided into two ă the renewable resources such as
water and forests, and the non-renewable resources such as oil, gas and coal.

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(a) Water Resources

Only three percent of the water on earth is fresh water and most of it is
underground or in the form of snow. Approximately one tenth of one
percent of water on earth is in lakes, rivers and underground water usable
by humans. Water can be renewed. For example, moisture will evaporate
from the ocean and fall back to earth in the form of rain to replenish the
used up stock. In most places, however, people use or pollute water faster
than it can be renewed.

(b) Fossil Fuels

This natural resource cannot be renewed. 80 percent of commercial energy
in the 1980s came from coal, oil and natural gas. The amount of fossil fuel
generated by the world economy in a year will take a million years to be
formed. It is hard to estimate how long the natural resource that we now
have can be sustained before a new resource is found. Fossils are on the
verge of extinction and people need to be more efficient in the context of
energy usage and switch to other energy resources, such as water, air and
solar energy.

(c) Agricultural land

Fertile land is needed for plants as sources of food for humans. Land, if
properly utilised, is a renewable resource. Some of the agricultural land in
developed countries needs to be reclaimed because of the saltiness of the
land or poor irrigation. There are also some areas that practice improper
farming methods that have transformed agricultural land into deserts.
There are also other areas which have been polluted with chemicals or
damaged by farming practices that are too intensive.

6.1.4 Pressures for Change

The demands on the earthÊs resources have become more severe nowadays.
Three critical factors such as population growth, world poverty and
industrialisation can be linked to these problems. The combination of all three
factors has escalated the ecological crisis faced by the worldÊs society and at the
same time makes sustainable development more difficult.

(a) Population Growth

The main cause for environmental destruction is the exponential growth of
world population. 10,000 years ago, the world has not more than ten
million people, scattered in small settlements. During that time, population
growth was slow. In the 1950s, as seen in Figure 6.1, world population has
reached 2.5 billion. Earlier, the United Nations had predicted that world
population would reach approximately 11 billion in the year 2150.
However, according to its 2006 revision of the worldÊs population
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prospects, after taking into account the declining fertility in developing

countries, the population is forecasted to reach 9 billion in 2300.

Figure 6.1: The growth of world population

Source: United Nations Population Fund (Estimation)

(b) World Poverty

The second reason for environmental destruction is poverty and the
imbalance between rich and poor countries. Although economic
development has improved the living standards of most people, there are
still many of the worldÊs society living in poverty. According to the 1997
estimation by United Nations, 1.3 billion people have incomes of less than
US$1 per day, which is impossible to cover for nutritious meals and basic
daily necessities. Many are facing starvation, including 158 million children
below the age of five.

World income is not equally divided between countries. For example,

JapanÊs income is estimated to be equal to the income of all developing
countries, which have approximately 35 times its population. This
imbalance is an environmental problem as countries and people who are at
this extreme level of income do more damage to the environment than
people at the average level. For example, people in richer countries use
more fossil fuel, firewood and meat. People in poorer countries, on the
other hand, will use natural resources only to survive, such as cutting down
trees for fuel to cook and heat their bodies.

(c) Industrialisation
Some of the third world countries emphasises on industrialisation and have
developed quickly due to it. This is a positive thing, as it promises the
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reduction of poverty and slow population growth. However,

industrialisation also contributes to the ecological crisis. Industries require
energy obtained from combustion that emits various pollutants. The
complex industrialisation processes produce by-products and waste
materials that will pollute the land, air and water.

6.2 GLOBAL ENVIRONMENT ISSUES

Certain environmental problems exist at the global level and require
international cooperation. Normally, the issues exist are of mutual importance,
that is the resources shared by all countries. Three global problems that will pose
an important effect to businesses and society are ozone depletion, global
warming and biodiversity.

6.2.1 Ozone Depletion

Ozone is a blue gas that floats as a thin layer in the stratosphere between 13 km
and 40 km above earth. Even though it is poisonous and hazardous to people in
the lower atmosphere, ozone in the stratosphere is critical to life on earth. Ozone
absorbs the dangerous ultraviolet rays from the sun. Too much exposure to
ultraviolet rays will cause skin cancer and damage the eyes and immune system
of humans and other species.

Did You Know?

In the year 1974, scientists alleged that chlorofluorocarbon (CFC), which is gas
emitted from its use as a cooling agent, insulation, solvent, and aerosol in spray cans
can react and damage the ozone. There is not much evidence to prove the extent of the
ozone depletion. However, in 1985, scientists found a small hole in the ozone layer in
Antarctica. Research showed that the hole was caused by CFC molecules. What
happened was, on the top layer of the atmosphere, strong solar rays had caused the
CFC molecules to break up, releasing chlorine atoms which reacted and damaged the
ozone. In the early 1990s, scientists for the first time reported evidence on the
depletion of ozone in the northern latitude of Europe and North America during
summer, when ultraviolet rays were the strongest and most threatening.

World political leaders acted swiftly to the scientific evidence that showed CFC as a
threat to the earth’s protective ozone layer. An agreement was reached (the Montreal
Protocol), that the production and use of CFC is to be reduced to 50 percent by the
year 1999. Developing countries have been given until 2010 to completely stop the use
of CFC in stages.

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6.2.2 Global Warming

Another problem faced by the world society is the gradual warming of the
atmosphere. Although there are uncertainties on the rate and cause of global
warming, the private and governmental sectors have started to act on this issue.

The earthÊs atmosphere contains carbon dioxide and other trace gases, like the
glass panels in glass houses, stopping heat reflected from earth surface from
being released into outer space. Refer to Figure 6.2. Without the green house
effect, the earth will be too cold to live in. Since the Industrial Revolution, which
started in the late 1700s, the amount of gases in the atmosphere has increased by
25 percent. The earth has become warmer by 0.3ÀC and 0.6ÀC compared to a
century ago. If the production of these green house gases continues, the earth will
become warmer by more than 3.5ÀC this century.

Figure 6.2: Global warming

Many factors can cause global warming. The burning of fossil materials which
emits carbon dioxide is the main contributor. Table 6.1 shows other reasons that
can cause global warming.

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Table 6.1: Factors that Cause Global Warming

Factors of Global
Explanation
Warming

Deforestation Trees and other plants absorb carbon dioxide, therefore

reducing the rate of carbon dioxide in the atmosphere.
Deforestation ă cutting without replacing the trees ă
contributes to global warming. Burning forests for
agriculture or livestock also releases carbon directly into the
atmosphere as smoke components. Therefore, large scale
deforestation contributes to global warming.

Meat production Methane, another important green house gas, is produced as

a by-product from animal digestion, including cows. Large
scale cow rearing will release a significant amount of
methane.

Population growth Humans release carbon dioxide each time they breathe. This
means that the more people there are, the more the green
house gases will increase.

Chlorofluorocarbon Chlorofluorocarbon (CFC) is a green house gas that assists in

damaging the ozone layer. The production of this gas should
be controlled to delay the global warming.

6.2.3 Biodiversity

ACTIVITY 6.2

Think what would happen if logging and the opening of new land in
Malaysia still continue without legal control?

Biodiversity refers to the amount and the type species, and the scope of their
genetic arrangement. Till today, approximately 1.7 million species of plants and
animals have been named and described. Scientists believe that this is just a
portion of the overall quantity existing. The earth has, at the very least, 10 million
species, and maybe more than 100 million species. Scientists also estimate that
speciesÊ extinction is happening at 100 to 1000 times the normal rate, due to
pollution and habitat destruction by human society.

One major reason to the reduction of the earthÊs biodiversity is the destruction of
rainforests, especially in tropical areas. Rainforests are forest areas that receive at
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least 2000mm of rain a year. These areas are the most abundant in terms of
biology. In the 1990s, rainforest covers only 7 percent of the earthÊs surface but
has 50 to 90 percent of the earthÊs species. At todayÊs rate of deforestation, the
remaining forests will become extinct. The reasons for the destruction of these
rainforests include commercial logging, cow rearing, and transforming forests
into farms to produce crash crops for export. Excessive population also plays a
part as people who do not have land will start clearing forests for planting and
cutting down trees for firewood.

For example, Madagascar, the fourth biggest island in the world, in the north-
east of Africa, is known as an area abundant with biological treasures. For
example, researchers have found periwinkle in the tropical rainforest on the
island. It contains a unique genetic characteristic that is useful in curing diseases
such as Hodgkin, childrenÊs leukaemia and other cancerous diseases. More than
90 percent of MadagascarÊs rainforest have been cleared, destroying probably
half have the 200,000 plant and animal species found there. Are the biological
treasures of Malaysia facing the same situation?

6.3 RESPONSE FROM THE INTERNATIONAL

BUSINESS COMMUNITY
The international business community has taken several steps and initiatives to
ensure sustainable development principles are practiced.

6.3.1 World Business Council for Sustainable

Development
The World Business Council for Sustainable Development (WBCSD) is an
association established as a global effort to promote sustainable development
practices. The council was formed in 1995 through a union between the Business
Council for Sustainable Development, a corporate executive group that supports
the original Earth Summit, with the World Industry Council for the
Environment, a project of the International Chamber of Commerce. In the year
1990, the council had included almost 125 companies from 30 countries and 20
industries.

The goals of World Business Council for Sustainable Development is to

encourage a high standard of environmental management and to promote better
cooperation between businesses, governments and other organisations in relation
to sustainable development. The council urges businesses to produce and
distribute products more efficiently, consider the long term impacts and

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recyclable components. Other groups have also given serious attention to the
idea of sustainable development and its implications to businesses.

ACTIVITY 6.3
Please visit these websites for additional information. Then discuss in
class for further understanding. Retrieved February 23, 2008.
http://www.iccwbo.org/charter
http://www.ceres.org/page.aspx?pid=705
http://www.gemi.org/gemihome.aspx
http://www.iso.org/iso/home.htm
http://www.epa.gov/globalwarning
http://www.epa.gov/ozone/

6.3.2 Voluntary Initiative of Businesses

Many companies have tried to identify how sustainable development can be
channelled into real business practices. The following are examples of voluntary
initiatives taken by companies:

(a) Lifecycle Analysis

This involves the gathering of information about the long term impacts of
products on the environment, from the extraction of raw materials to
manufacturing, distribution and finally, disposal. The purpose of the
lifecycle analysis is to reduce the negative impacts of the product at all
levels. One of the pioneers of lifecycle analysis is Procter & Gamble, a
producer of consumer products. After conducting a lifecycle analysis on its
liquid fabric softener, the company had introduced refillable plastic
containers, made from recyclable materials. As a result, the company
managed to reduce waste materials and wastage in packaging.

(b) Industrial Ecology

This refers to the design of factories and distribution systems as a complete
ecosystem. For example, a business is able to save materials through
recycled covered-tubes, using the waste from one process as a raw material
for another and using energy generated as a by-product of the production.

An example of industrial ecology can be found in the city of Kalundborg,

Denmark, whereby a few companies formed cooperative relations that
produced economical and environmental benefits. A public facility
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company sells its excess steam, which previously was channelled into
rivers, to a medicine factory and a local oil-refining factory. Ashes (particles
produced when fuel is burned) are sold to local companies that use them in
making cement and building roads. Meanwhile, the oil-refining factory
produces sulphur in the natural gas that they produce to create a cleaner
burning, and sells the sulphur to a sulphuric acid factory. Calcium
sulphate, which is a residue from a smoke-reducing production process, is
sold to gypsum makers to make wall boards. The whole cycle saves money
and reduces pollution.

Preserving the environment and the well-being of the future generation is

important. Environmental regulations have become tighter. Consumers
want cleaner products and workers want to work in companies that are
concerned with a good environment. Finding ways to reduce or recycle
wastes saves money. Many executives have started paying attention to the
importance of a companyÊs moral responsibility to the future generation.

(c) Designed to be Re-used

This means that products are designed so that at the end of its lifecycle, it
can be reassembled and recycled. For example, in the Volkswagen
Company, engineers have designed cars so that it can be reassembled and
reused. Old cars can be dismantled in just three minutes. Materials such as
plastic, metal, oil and glass are separated and processed. Most of these
materials are reused to make new Volkswagen cars.

SELF-CHECK 6.1

(a) What do you understand about sustainable development?

(b) What are the main threats to the earthÊs ecosystem?
(c) How do population growth, poverty and industrialisation
accelerate the world ecological crisis?

6.4 GOVERNMENT’S ROLE IN PROTECTING

THE ENVIRONMENT

ACTIVITY 6.4
Before we continue, think about what roles can the government play in
preserving the environment? In your opinion, it is working? Discuss.

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6.4.1 Government’s Role

Government in many countries have involved themselves in formulating laws
that involve business activities to protect the environment, since the end of the
twentieth century. However, governmentÊs role in the protection of environment
started to rise in the 1970s, which is the start of the era of modern environment.

Government has an important role in enforcing environmental laws. Business

organisations have little incentive to minimise pollution if their competitors do
not do so. The actions of a company to reduce wastes thrown into a river will
involve extra cost to the company. If its competitors do not do the same, it will
not be able to compete effectively and eventually lose out to its competitors.
Government can avoid pollution control costs in competition by fixing a
standard to all business organisations. It can also provide economic incentives to
encourage business organisations, communities and regions to reduce pollution
as well as provide administrative and legal systems to solve the problem.

The Ministry of Environment is the main agency responsible in controlling the

countryÊs environment, whereby it coordinates government efforts to protect the
environment. Among other agencies involved in protecting the environment are
the Department of Environment, Wildlife Protection Department, Weather
Control Department and others. (Please refer to Figure 6.3).

Figure 6.3: Agencies involved in the protection of environment

(a) Main Aspects of Environmental Law

The Federal Government enforces three main aspects of environment
protection, which are air, water and land pollution (hazardous solid

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122 X TOPIC 6 BUSINESS AND THE NATURAL ENVIRONMENT

wastes). Refer to Figure 6.4. This section will comment on the major issues
and laws in every aspect of protection. A brief explanation on trans-media
pollution involving all three main aspects is also explained.

Figure 6.4: Aspects of environmental protection

(i) Air Pollution

Air pollution happens when pollutants enter the atmosphere and
cannot be absorbed and discharged by natural processes. There are
also pollutions that occur naturally and cannot be controlled, such as
smoke and dust from volcanoes and forest fires. However, most
pollution factors today happen as a result of human activities,
especially industrial processes and usage of motor vehicles. Air
pollution can damage buildings, reduce farm products, pollute nature
and dangerously affect peopleÊs health.

The main problem in air pollution is acid rain. When fuel discharges
from factories are released and absorbed into naturally evaporated
water, this will cause rain or snow to have a higher than normal acid
content. Acid rain can destroy the ecosystems in lakes and rivers
reduce plant produce and erode forests. The structures of buildings
and monuments can also be damaged. Acid rain is difficult to control
because it causes catastrophes hundreds of kilometres away from the
source of pollution and sometimes across international borders.

(ii) Water Pollution

Just like air pollution, water pollution happens when so much waste
is dumped into the natural water and flows to other places. Water can
be polluted by organic wastes (wastes that are not treated), chemical

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by-products from industrial processes and disposal of imperishable

product (which cannot be naturally discharged), heavy metals and
toxic chemicals such as usage of insecticides and weed killers that
stays in the water. Just like air, poor water quality can reduce
agricultural produce; threaten peopleÊs lives and affect the quality of
life. Enforcements are normally carried out on river, lake and water
surface pollutions as well as the quality of drinking water.

(iii) Land Pollution

The third focus of anti-pollution laws is against land pollution by both
solid material and hazardous waste materials. Every year, people
produce vast amounts of solid waste materials and are mostly
produced by the urban population. A large part of these waste
materials are hazardous and require specific treatments. Improper
waste disposal can seep into the underground water and evaporate
into the air and threaten public health. Most business organisations
and communities have developed programmes to recycle certain
forms of solid wastes. Toxic material producers must obtain
permission; transporters must maintain a detailed record and disposal
equipments must follow detailed procedures. It ensures that all
hazardous materials are properly treated before being disposed on
land.

(iv) Trans-media Pollution

Trans-media pollution refers to pollution that cannot be blamed on
one source or a specific media only. For example, hazardous materials
dumped on land can seep into the earth, polluting the underground
water or evaporates, causing air pollution. Pollutant transfers are
happening more often and more seriously in recent years.
Unfortunately, trans-media pollution (also known as multi-media
pollution) is very hard to control. This is because the law and
enforcement agencies tend to focus on particular types of pollution
only, such as water or air.

SELF-CHECK 6.2
What do you understand about:
(a) Air pollution;
(b) Water pollution; and
(c) Land pollution.

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(b) Alternative Policy Approaches

Government can use various policy approaches in controlling air, water
and land pollution. The legal method most widely used is the
environmental standards. However, policymakers nowadays are
depending more on market-based and voluntary approaches compared to
commands and controls to achieve environmental goals.

(i) Environmental Standard

The traditional method in controlling pollution is through
environmental standards. The standardisation of the approved levels
of various pollutants was developed through legal actions or
enforcements, and is used by the courts and administrative agencies.
This approach is also called command and control enforcement
because government ÂcommandsÊ the business organisations to
comply with the standards and often directly controls organisationsÊ
technological choices.

One form of standards is the environmental quality standards. In this

approach, a geographical area is allowed to have a certain amount
pollutants such as sulphur dioxide in the air. Polluters are asked to
control the production of their pollutants to maintain the standard of
environment quality of their area. The second form is discharge
standards. Discharge standards are usually determined by state and
local government enforcers who are familiar with the local industry as
well as topographical problems and local weather.

(ii) Market-based Mechanism

Lately, enforcers are starting not to use command and control
enforcement methods. They now seem to prefer a market-based
approach. This approach is based on the idea that the market is a
better control compared to extensive standards that determine in
detail what the company has to do.

In addition, the government is can also offer various positive

incentives to business organisations to support their environmental
performance. For example, the government may decide to buy only
from business organisations that meet anti-pollution standards or
offers assistance to business organisations that wants to and are using
environmental control equipments.

(iii) Information Disclosure

Another method of reducing pollution that is gaining more usage at
the end of 1980s and 1990s is known as regulation by publicity or
regulation by embarrassment. Government encourages companies to

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reduce pollution by revealing information on the number of polluting

individual companies every year. In most cases, companies take
voluntary steps to reduce pollutant emissions to avoid public
embarrassment.

(iv) Civil and Crime Reinforcement

Traditionally, companies who violate environmental laws will be
charged with civil penalties and fines. However, enforcers
increasingly prefer to use criminal laws to charge companies and their
executives who violate laws. The supporters of this approach argue
that threats of jail term can be an effective deterrent to corporate
criminals who destroy the natural environment.

ACTIVITY 6.5
In your opinion, which policy approach is the most effective in handling
environmental issues? Explain your answer.

6.5 COSTS AND BENEFITS OF

ENVIRONMENTAL LAWS
One of the general issues of environmental protection is how costs can be
balanced to its benefits. For the last quarter of a century, or since the dawn of the
modern environmental era, people have cooperated well to clean and maintain
environmental cleanliness. Some opinions have questioned the value options
behind the expenditures; they suggest that costs such as losing jobs, reduction in
capital investment and low productivity have exceeded its benefits. Opposite
opinions, however, shows positive gains in terms of quality of life and economy
that has resulted from a cleaner environment.

Business organisationsÊ expenditures in obeying environmental laws can actually

be used to invest in factories and new equipments or for research and
development. Sometimes, regulations that are too stringent may lead to the
closure of factories and job losses.

Several territories and industries, in particular, have been hard hit by

environmental regulations, especially industries using high abatement costs,
such as paper and wood products, chemicals, petroleum and coals as well as
metals. Economists often find it difficult to sort out job losses that are attributable
to environmental regulations and those that are due to other reasons.

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Environmental enforcement costs must be balanced with its benefits. Among the
benefits is that it has stimulated several economic sectors. Environmental services
and product industry for example developed quickly since the middle 1980s.

When jobs in industries that are becoming extinct, such as forest products and
high sulphuric coal mining, other jobs have emerge in other areas such as
environmental consultation, asbestos abatement, factory equipment, waste
disposal equipments and air pollution control.

Other jobs are saved and created in industries such as fisheries and tourism
industry when natural areas are protected and restored. Moreover,
environmental regulations can stimulate the economy by forcing business
organisations to be more efficient by conserving energy, while less money is
spent on the treating health problems caused by pollution.

SELF-CHECK 6.3

Now that you have learned about the costs and benefits of law
enforcement, identify them in your own words. Which is more, costs or
benefits?

6.6 GREEN MANAGEMENT

Environmental regulations, such as laws governing air, water and land
cleanliness explained in this topic creates minimum legal standards and must be
complied by business organisations. Most companies try to comply with these
regulations, even if only to avoid charges, legal actions and crime punishments.
However, many business organisations today have voluntarily moved towards
compliance to improve their environmental performance in all aspects of
operations.

Researchers sometimes refer to this process of changing to a more proactive

environmental management as the greening of management. This section will
explain the greening process and discuss the approaches used by companies in
managing environmental issues effectively. It also explains why green
management can improve the strategic competitiveness of a company.

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6.6.1 Stages of Corporate Environmental

Responsibility
Although environmental issues are forcing all business organisations to manage
in new ways, not all companies are really proactive in responding to
environmental issues. Researchers have identified five stages of environmental
responsibility. Referring to the model as per Table 6.2, companies pass through
five stages in the development of green management practices.

Table 6.2: Corporate Environment ResponsibilityÊs Five-Stage Model

OrganisationÊs Commitment

Development Corporate ManagerÊs ManagementÊs Top ManagementÊs

Stages General Mindset Resource Involvement and
Commitment Support

Beginning Do not need Minimum resource No involvement

environmental commitment
management

Fire fighter Environmental issues are Budget for problems Low

addressed only when if it arise involvement
necessary

Society Environmental Consistent, but Commitment in

awareness management is a minimal budget theory
beneficial function

Pragmatist Environmental Generally sufficient Aware and

management is an funds moderately
important business involved
function

Pro-activist Environmental Have an open Actively

management is the main funding involved
concern

6.6.2 Ecologically Sustainable Organisation

An ecologically sustainable organisation (ESO) is a business organisation that
operates in line with the principle of sustainable development. In other words, an
ESO could continue its activities indefinitely without changing the capacity of the
earthÊs ecosystem. An ecologically sustainable organisation would have moved
beyond even the proactive level in the stage model explained before. Such

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128 X TOPIC 6 BUSINESS AND THE NATURAL ENVIRONMENT

business organisations would not use up natural sources any faster than they
could be replenished. They would make and transport products more efficiently
using a minimal amount of energy. They would also design products that would
last a long time and when worn out, can be dismantled and recycled. These
organisations would not produce waste any faster than the natural system could
absorb and disperse it. They would also cooperate with other businesses,
governments and organisations to achieve these goals.

Obviously, no business organisation will be able to meet this definition of an

ecologically sustainable organisation. This concept is what social scientists call
the ideal type, which is a form of absolute standard that exceeds the real
organisationÊs ability. However, there are a small number of business
organisations who have adopted this concept and begun to try to make it a
reality.

Until now, no company has truly become an ecologically sustainable

organisation and it is probably impossible to achieve without supportive
government policies and a wide acceptance among many business organisations
and other social institutions.

6.6.3 Elements of Effective Environmental

Management
Companies that have started accepting environmental sustainability have
learned that new structures, processes and incentives are needed. Some elements
shared by proactive green organisations are shown in Figure 6.5 below:

Figure 6.5: Elements of Effective Environmental Management

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The explanations for each element is as explained in Table 6.3 below:

Table 6.3: Elements of Effective Environmental Management

Elements of Effective
Environmental Explanation
Management
Top Managers with One of the steps is to give more authority to managers and
Environmental access to top management level. Many companies now have a
Responsibility vice-president specifically for environmental relations who
reports to the CEO. They often supervise extensive experts and
coordinate various managersÊ jobs in the company such as
research and development, marketing and operations.
Dialogues with Environmentally proactive companies normally engage in
Shareholders dialogues external stakeholders, such as environmental
activists, protective bodies and legal regulators.
Involvement of Environmental staff experts and specialised departments are
Line Managers most effective if they cooperate with people who carry out the
companyÊs daily operations. For this reason, many green
companies involve line managers and workers directly in the
process of change.
Environmental Environmentally proactive companies place their
Behaviour Codes commitments in writing, such as in a code of conduct, or
agreement that states the companyÊs environmental goals.
Cross-functional This organisational element refers to the use of ad-hoc, cross-
Team functional teams to solve environmental problems. They
comprise individuals from various departments. These teams
gather skilful and resourceful workers to complete their jobs,
whatever position they hold in the in the corporate structure.
Rewards and Businesses are beginning to consider the environmental effects
Incentives of their actions, when their organisations acknowledge and
reward this behaviour. Organisations that practice greening
the most would give rewards that are tied to their
environmental achievements.
Environmental Green companies closely track their progress towards
Audit achieving environmental goals. Some of them implement full
environmental audits that review environmental initiatives
taken from time to time. Audits can evaluate progress and
help to disseminate good ideas throughout the company.

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Inter- There are also companies that work together with other
Organisational companies to promote mutual environmental goals.
Cooperation
Environmental Another approach is to form voluntary partnerships and
Partnerships collaborations to achieve specific objectives. This collaboration
is called environmental partnerships. It combines the unique
strengths of partners to improve environmental quality
and/or conserve natural resources. This explains how
companies identify social problems (in this case,
environmental pollution), learn how to tackle it and
consequently develop procedures to address problems
continuously.

6.7 ENVIRONMENTAL MANAGEMENT AS A

COMPETITIVE ADVANTAGE
Some researchers believe that with the change towards ecological sustainability,
business organisations can gain a competitive advantage. In other words,
companies that are proactive in managing environmental issues will tend to be
more successful than those that are not.

Effective environmental management helps a company gain competitive

advantage in four different ways:

(a) Cost Saving

Companies that reduce pollution and hazardous wastes, reuse or recycle
materials and operate with higher energy efficiency can save costs.

(b) Product Differentiation

Companies that develop a reputation for environmental excellence as well
as produce and deliver products and services while being concerned with
their sustainability can attract the interest of environment-conscious
customers. This approach is known as green marketing. For example,
Procter & Gamble introduced a refillable packaging for its liquid fabric
softener, and not thrown away. It succeeded in attracting new customers
and increased its market share. In the year 2000, the estimated size of the
green market was 10-12% of consumers.

(c) Technological Innovation

Environmentally proactive companies are usually technological leaders, as
they try to find new imaginative methods to reduce pollution and improve
efficiency. In many cases, they produce innovations that can be marketed to
others, as new regulations stimulate their acceptance in larger markets.
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(d) Strategic Planning

Companies that cultivate a vision of sustainability must adopt sophisticated
strategic planning techniques to enable their higher management to
evaluate the overall effect of the companyÊs operations on the environment.
Complex auditing and forecasting techniques facilitates these firms ability
to anticipate the many external influences besides ecological influences. A
wider-angled planning helps companies to foresee new markets, materials,
technology and products.

In short, a proactive environment management can help business

organisations in promoting sustainability as well as becoming more
competitive in the global market.

ACTIVITY 6.6

Provide the suitable element in effective environmental management for

the examples below.

Environmental
Example
Management Element

(1) A manufacturer of liquid chemicals that

produces toxic wastes collaborates with a
waste disposal company to launch a
hazardous waste cleansing programme.

(2) An oil-mining company held an open

discussion with the local community,
environmental activists as well as
environmental experts in discussing problems
that arose and may arise as a result of the
mining activity.

(3) A semiconductor company developed a Non-

Dischargeable Chemical Disposal Code.

(4) A team consisting of chemists, sea pollution

and ocean-life rescue experts was formed to
solve the problem of chemical spills from
tanker ships into the sea.

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• Many society leaders have supported the idea of sustainable development,

which refers economic growth without depleting the resources for the use of
the future generation. Achieving sustainable development is a challenge.
• The main threats to the earthÊs ecosystem include the depletion of non-
renewable resources, such as oil and coal, as well as renewable resources like
air and water pollution, and forests.
• Population growth, poverty and industrialisation in most places of the world
have contributed to ecological problems.
• Three environmental issues are shared among most countries.
• This includes ozone depletion, global warming and biodiversity.
• Global businesses have started to implement sustainable development
practices. This can be seen from the existence of innovative developments,
such as lifecycle analysis, industrial ecology and technological cooperation.
• The main areas covered under environmental laws are those concerning land,
air and water pollution. By now, you would already know about the costs
and benefits resulting from environmental law enforcement, the meaning of
environmentally sustainable organisations and the stages it goes through,
and the best ways in managing environmental issues that subsequently make
firms more competitive.

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