UNIT - 2 MANAGERIAL ETHICS

STRUCTURE

2.0 Learning Objectives

2.1 Introduction

2.2 Categories of management morality

2.2.1 Management Ethics: Meaning, Need and Importance

2.3 Ethical Problems

2.3.1 Ethical Dilemma at Work-Sources

2.4 Resolutions Overview of Creative Accounting

2.4.1 Its role in business

2.4.2 Scandals

2.5 Corporate Ethical Leadership

2.6 Whistle Blowing

2.7 Summary

2.8 Keywords

2.9 Learning Activity

2.10 Unit End Questions

2.11 References

2.0 LEARNING OBJECTIVES

After studying this unit, you will be able to:

 State the meaning of Management Morality

  Explain the Ethical Dilemma

 Discuss the Resolutions Overview of Creative Accounting

 Identify Corporate Ethical Leadership

 Understand Whistle Blowing

2.1 INTRODUCTION

Business ethics is nothing but the application of ethics in business. Business ethics is the
application of general ethical ideas to business behaviour. Ethical business behaviour
facilitates and promotes good to society, improves profitability, fosters business relations and
employee productivity. The concept of business ethics has come to mean various things to
various people, but generally it‘s coming to know what is right or wrong in the workplace
and doing what‘s right - this is in regard to effects of products/ services and in relationships
with stakeholders. Business ethics is concerned with the behaviour of a businessman in doing
a business. Unethical practices are creating problems to businessman and business units. The
life and growth of a business unit depends upon the ethics practiced by a businessman.
Business ethics are developed over the passage of time and custom. A custom differs from
one business to another. If a custom is adopted and accepted by businessman and public, that
custom will become an ethic. Business ethics is applicable to every type of business. The
social responsibility of a business requires the observing of business ethics. A business man
should not ignore the business ethics while assuming social responsibility. Business ethics
means the behaviour of a businessman while conducting a business, by observing morality in
his business activities. According to Wheeler, Business Ethics is an art and science for
maintaining harmonious relationship with society, its various groups and institutions as well
as reorganizing the moral responsibility for the rightness and wrongness of business conduct.
According to Rogene. A. Buchholz, Business ethics refers to right or wrong behaviour in
business decisions.

Business Ethics or Ethical standards are the principles, practices and philosophies that guide
the business people in the day to day business decisions. It relates to the behaviour of a
businessman in a business situation. They are concerned primarily with the impacts of
decisions on the society within and outside the business organizations or other groups who
keep interest in the business activities. Business ethics can be said to begin where the law
ends. Business ethics is primarily concerned with those issues not covered by the law, or
where there is no definite consensus on whether something is right or wrong. - School of
Distance Education.

2.2 CATEGORIES OF MANAGEMENT MORALITY

Managerial ethics is the standard of social norms and values, truth, and justice that is
accepted by the manager in the decision-making process. It is the moral principles and rules
of conduct that are applied in the business. Where ethics is the set of moral principles and
rules guiding an individual’s behavior.

Ethics is the foundation of deciding what is wrong or what is right in a given position. It is an
individual’s personal beliefs and perceptions while taking decisions. A moral standard or
code of conduct determined by society defines how ethical an individual is.

Managerial ethics is the set of standard behavior that guide the individual manager in their
work to make managerial decisions. Making ethical choices can often be difficult for
managers. It is compulsory to obey the law about ethics but acting ethically goes beyond
mere compliance with the law.

Ethics is derived from society and the norms, values, beliefs, culture, and standards of society
determine it. A manager or businessman is a part of society and he has to make business
ethics accepted by society. Business ethics is the moral behavior of a businessman. An
ethical businessman can promote goodwill and reputation in society, gain benefit in the long
run, and promote uniform growth of the business.

A simple difference between ethics and managerial ethics is that ethics determines wrong and
right in our daily social life, in informal nature and managerial ethics is based on the
periphery of the organization, follow the standard rules of making decisions.

In other words, ethics is related to individual personal life and managerial ethics is related to
organizational life.

From the above definitions, it may be concluded that ethics is the personal beliefs of an
individual about right or wrong. Similarly, managerial ethics is the standard of societal norms
and values that is accepted by the manager in the decision-making process. Manager’s
behaviour is humane or wrong is subject to many factors such as a person’s morality, values,
personality, and experience.

Importance/Significance of Managerial Ethics at Workplace

Following are some major importance of management ethics;

 Promotes Goodwill and Image

 Helps to Maintain Good Relations with Stakeholders

 Less Interference from Government

 Promotes Fair Competition

 Promotes Social Responsibility

 Improves Working Environment

 Helps to increase Market Share

Let’s understand above the importance of management ethics;

#1 Promotes Goodwill and Image

Goodwill and image are gained through the trust of society towards the organization. The
supply of goods and services by considering quality, quantity, time, and price expected by the
customers facilitates gaining their trust.

#2 Helps to Maintain Good Relations with Stakeholders

Stakeholders are all the parties who are directly or indirectly related to the organization such
as employees, customers, suppliers, lenders, government, etc. Ethical behavior helps to
maintain relations with them. An ethical manager always tries to meet their requirements.

#3 Less Interference from Government

In case a business is not unethical, violates the government rules, will attract interventions of
government. But an ethical businessman never performs any business activity by violating
government rules and regulations.

#4 Promotes Fair Competition

Business ethics helps to promote fair competition among business firms. It discourages
businessmen to involve in unfair trade practices like an artificial shortage, black marketing,
adulteration, obsolescence, etc.

#5 Promotes Social Responsibility

The manager performs business in society to fulfill his economic objectives. Business ethics
guide managers to involve in social welfare programs like participating in education, healthy
sports, environmental protection, etc.

#6 Improves Working Environment

It guides a manager to develop a better working environment in the organization. He tries to

motivate employees by introducing a feeling of justice, equality, freedom, belongingness, a
sense of responsibility, and ownership.

#7 Helps to Increase Market Share

By gaining prestige and reputation in society, in long run, helps to increase the market share
of a business firm.

2.2.1 Management Ethics: Meaning, Need and Importance

Meaning of Management Ethics:

‘Management Ethics’ is related to social responsiveness of a firm. It is “the discipline dealing

with what is good and bad, or right and wrong, or with moral duty and obligation. It is a
standard of behaviour that guides individual managers in their works”.

“It is the set of moral principles that governs the actions of an individual or a group.”

Business ethics is application of ethical principles to business relationships and activities.

When managers assume social responsibility, it is believed they will do it ethically, that is,
they know what is right and wrong.

Ethical Activities:

Amongst a host of ethical activities that managers can perform, a study conducted by
Barry Posner and Warren Schmidt highlights the following ethical activities observed
by managers:

1. The foremost goal of managers is to make their organizations effective.

2. Profit maximisation and stakeholders’ interests were not the central goals of the managers
studied.

3. Attending to customers was seen as important.

4. Integrity was the characteristic most highly rated by managers at all levels.

5. Pressure to conform to organisational standards was seen as high.

6. Spouses are important in helping their mates grapple with ethical dilemmas.

7. Most managers seek the advice of others in handling ethical dilemmas.

Types of Management Ethics:

Three types of management ethics or standards of conduct are identified by Archie B.

Carroll:

1. Immoral management:

It implies lack of ethical practices followed by managers. Managers want to maximise profits
even if it is at the cost of legal standards or concern for employees.

2. Moral management:

According to moral management ethics, managers aim to maximise profits within the
confines of ethical values and principles. They conform to professional and legal standards of
conduct. The guiding principle in moral management ethics is “Is this action, decision, or
behaviour fair to us and all parties involved?”

3. Amoral management:

This type of management ethics lies between moral and immoral management ethics.
Managers respond to personal and legal ethics only if they are required to do so; otherwise
there is lack of ethical perception and awareness.

There are two types of amoral management:

a) Intentional:

Managers deliberately avoid ethical practices in business decisions because they think ethics
should be followed in non-business activities.

(b) Unintentional:
Managers do not deliberately avoid ethical practices but unintentionally they make decisions
whose moral implications are not taken into consideration.

Guidelines for Ethical Behaviour:

Though every individual and group has a set of ethical values, the following guidelines
are prescribed by James O’Toole in this regard:

1. Obey the law:

Obeying legal practices of the country is conforming to ethical values.

2. Tell the truth:

Disclosing fair accounting results to concerned parties and telling the truth is ethical
behaviour of managers.

3. Respect for people:

Ethics requires managers to respect people who contact them.

4. The golden rule:

The golden business principle is ‘Treat others as you would want to be treated’. This will
always result in ethical behaviour.

5. Above all, do no harm:

Even if law does not prohibit use of chemicals in producing certain products, managers
should avoid them if they are environment pollutants.

6. Practice participation – not paternalism:

Managers should not decide on their own what is good or bad for the stakeholders. They
should assess their needs, analyse them in the light of business needs and integrate the two by
allowing the stakeholders to participate in the decision-making processes.

7. Act when you have responsibility:

Actions which cannot be delegated and have to be taken by managers only (given their
competence and skill) must be responsibly taken by them for the benefit of the organisation
and the stakeholders.

Approaches to Management Ethics:

There are three approaches to management ethics:

1. Utilitarian approach:

In this approach, managers analyse the effects of decisions on people affected by these
decisions. The action rather than the motive behind the action is the focus of this approach.
Positive and negative results are weighed and managerial actions are justified if positive
effects outweigh the negative effects. Pollution standards and analysing the impact of
pollution on society is management ethics code under utilitarian approach.

2. Moral rights approach:

In this approach, managers follow ethical code which takes care of fundamental and moral
rights of human beings; the right to speech, right to life and safety, right to express feelings
etc. In the context of business organisations, managers disclose information in the annual
reports necessary for welfare of the people concerned. The nature, timing and validity of
information is taken into account while reporting information in the annual reports.

3. Social justice approach:

According to this approach, managers’ actions are fair, impartial and equitable to all
individuals and groups. Employees are not distinguished on the basis of caste, religion, race
or gender though distinction on the basis of abilities or production is justified. For example,
all employees, males or females with same skills should be treated at par but it is justified to
treat employees who produce more differently from those who produce less.

Need for Business Ethics:

Business ethics is important for the following reasons:

1. Business organisations are economic and social institutions that serve customers’ needs by
supplying those right goods at the right place, time and price. This is possible if the
institutions engage in ethical practices.

2. Business ethics help in long-run survival of the firms. Unethical practices like paying low
wages to workers, providing poor working conditions, lack of health and safety measures for
employees, selling smuggled or adulterated goods, tax evasion etc. can increase short-run
profits but endanger their long-run survival. It is important, therefore, for firms to suffer
short-term losses but fulfill ethical social obligations to secure their long-term future.

3. Business houses operate in the social environment and use resources provided by the
society. They are, therefore, morally and socially committed to look after the interests of
society by adopting ethical business practices.

4. Ethical business activities improve company’s image and give it edge over competitors to
promote sales and profits.

5. Legal framework of a country also enforces ethical practices. Under Consumer Protection
Act, for example, consumers can complain against unethical business practices. Labour laws
protect the interests of workers against unethical practices. Legal framework of the country,
therefore, promotes ethical business behaviour. Business houses want to avoid Government
intervention and, therefore, follow ethical practices.

Barriers to Management Ethics:

Ames A. Waters describe three “organisational blocks” of management ethics:

1. Chain of command:

If employees know that superiors are not following ethical behaviour, they hesitate in
reporting the matter up the hierarchy for the fear of being misunderstood and penalized. The
chain of command is, thus, a barrier to reporting unethical activities of superiors.

2. Group membership:

Informal groups lead to group code of ethics. Group members are strongly bonded by their
loyalty and respect for each other and unethical behaviour of any member of the group is
generally ignored by the rest.

3. Ambiguous priorities:

When policies are unclear and ambiguous, employees’ behaviour cannot be guided in a
unified direction. It is difficult to understand what is ethical and what is unethical.

Solutions to Barriers:

The following measures can improve the climate for ethical behaviour:
1. Organisational objectives and policies should be clear so that every member works towards
these goals ethically.

2. The behaviour of top managers is followed by others in the organisation. Ethical actions of
top managers promote ethical behaviour throughout the organisation.

3. Imposing penalties and threats for not conforming to ethical behaviour can reduce
unethical activities in the organisation. Formal procedures of lodging complaints help
subordinates report unethical behaviour of superiors to the concerned committees.

4. Educational institutions also offer courses and training in business ethics to develop
conscientious managers who observe ethical behaviour.

Values:

Values are a set of principles that people cherish. They enhance the quality of individual and
collective life. They involve personal and community discipline and sacrifice of immediate
gratification needs. Quality of life is a product of physical, social, environmental, mental and
spiritual health and wholeness. Values refer to intrinsic worth or goodness.

They are the beliefs that guide an individual’s actions. They represent a person’s belief about
what is right or wrong. Values lay standards against which behaviour is judged. They
determine the overall personality of an individual and the organization he is working for. His
family, peer group, educational institutions, environment and the work place develop values
in him. Values apply to individuals and institutions, both business and non-business.

Values and Behaviour:

Values remain embedded in our minds since childhood. As children, we are taught what is
good, bad, right or wrong by parents, educational institutions and social groups. These values
become part of our behaviour and personality when we grow up and are transmitted to future
generations, thus, creating a healthy society.

In the business world, every person, whether manager or non-manager, whose behaviour is
value-based shapes the culture of the organisation. Organisation is a group of people
responsible for its formation, survival and growth. How good an organisation is depends
upon how good the people are managing it.
Good people are those whose actions and behaviour are based on a sound value system and
ethical principles. Value system is a combination of all values that an individual should have.
Values lay foundation for organisational success.

They develop the attitudes, perceptions and motives that shape the behaviour of people
working in the organisation. This develops a sound organisation culture that promotes image
of the organisation in the society. Values in individuals develop a value-based organisation,
society, nation and the world as a whole.

Values in Business Management:

There are many ways in which the basic human values – truth, righteousness, peace, love and
non-violence can be practiced in the day-to-day conduct of business. There are different
aspects of management such as marketing, finance, industrial relations, etc., but the most
important aspect is “man-management.” Each country has its own historical and cultural
background and Indian managers should not mechanically copy practices from abroad but
should keep in mind the Indian milieu and our national ethos.

Values of Managers:

Management is a systematic way of doing work in any field. Its task is to make people
capable of joint performance, to make their weaknesses irrelevant and convert them into
strengths. It strikes harmony in working equilibrium, in thoughts and actions, goals and
achievements, plans and performance, products and markets.

Lack of management will cause disorder, confusion, wastage, delay, destruction and even
depression. Successful management means managing men, money and material in the best
possible way according to circumstances and environment.

Most of the Indian enterprises today face conflicts, tensions, low efficiency and productivity,
absence of motivation, lack of work culture, etc. This is perhaps due to the reason that
managers are moving away from the concept of values and ethics.
The lure for maximizing profits is deviating them from the value-based managerial
behaviour. There is need for managers to develop a set of values and beliefs that will help
them attain the ultimate goals of profits, survival and growth.

They need to develop the following values:

1. Optimum utilization of resources:

The first lesson in the management science is to choose wisely and utilize optimally the
scarce resources to succeed in business venture.

2. Attitude towards work:

Managers have to develop visionary perspective in their work. They have to develop a sense
of larger vision in their work for the common good.

3. Work commitment:

Managers have to work with dedication. Dedicated work means ‘work for the sake of work’.
Though results are important, performance should not always be based on expected benefits.
They should focus on the quality of performance. The best means for effective work
performance is to become the work itself. Attaining the state of nishkama karma is the right
attitude to work because it prevents ego and the mind from thinking about future gains or
losses.

Managers should renounce egoism and promote team work, dignity, sharing, cooperation,
harmony, trust, sacrificing lower needs for higher goals, seeing others in you and yourself in
others etc. The work must be done with detachment. De-personified intelligence is best suited
for those who sincerely believe in the supremacy of organisational goals as compared to
narrow personal success and achievement.

Value based managers do the following to discharge their duties well:

a. Cultivate sound philosophy of life.

b. Identify with inner core of self-sufficiency.

c. Strive for excellence through ‘Work is Worship’.

d. Build internal integrated force to face contrary impulses and emotions.

e. Pursue ethic-moral righteousness.

4. Vision:
Managers must have a long-term vision. The visionary manager must be practical, dynamic
and capable of translating dreams into reality. This dynamism and strength of a true leader
flows from an inspired and spontaneous motivation to help others.

Vision includes the following:

(a) Forming a vision and planning the strategy to realize such vision.

(b) Cultivating the art of leadership.

(c) Establishing institutional excellence and building an innovative organization.

(d) Developing human resources.

(e) Team building and teamwork.

(f) Delegation, motivation and communication.

(g) Reviewing performance and taking corrective steps whenever called for.

The management gurus like Lord Krishna, Swami Vivekananda and Peter F. Drucker
assert that managers should develop the following values:

1. Move from the state of inertia to the state of righteous action.

2. Move from the state of faithlessness to the state of faith and self-confidence.

3. Their actions should benefit not only them but the society at large.

4. Move from unethical actions to ethical actions.

5. Move from untruth to truth.

6. ‘No doer of good ever ends in misery’. Good actions always produce good results and evil
actions produce evil results.

7. Take the best from the western models of efficiency, dynamism and excellence and tune
them to Indian conditions.

2.3 ETHICAL PROBLEMS

Definition: Ethical issues in business are situations where a moral conflict arises and must be
addressed. In other words, it is an occasion where a moral standard is questioned.

What Does Ethical Issues Mean?

Ethical issues occur when a given decision, scenario or activity creates a conflict with a
society’s moral principles. Both individuals and businesses can be involved in these conflicts,
since any of their activities might be put to question from an ethical standpoint. Individuals
are subject to these issues in their relationships with other individuals or in their relationships
with organizations and same goes for organizations.

These conflicts are sometimes legally dangerous, since some of the alternatives to solve the
issue might breach a particular law. In other occasions, the issue might not have legal
consequences but it might generate a negative reaction from third parties. Ethical issues are
challenging because they are difficult to deal with if no guidelines or precedents are known.
For this reason, many professional and industry associations have ethical codes that are
discussed and approved by key participants to provide a useful framework for companies and
individuals to make adequate decisions whenever they face one of these conflicts.

Business Example

Mr. Pollard is a Regional Sales Manager at a company called Synthetic Fabrics Co. He
currently overseas ten different states within the U.S., supervising more than 50 sales
representatives. He travels very frequently to visit each of these states to meet with clients
and help representatives to close deals. As part of these assignments he receives a sum of
money for all his travel expenses. He has to report his actual expenses after the trip have
ended and he has to send back the remaining money to the company.

Some of his colleagues, other regional managers, often tell him about how they cheat the
system to keep the remaining money. This is a practice that is not considered illegal but it
breaches the company’s Code of Conduct. For Mr. Pollard, this is an ethical issue that he
must address. He could do what his peers do and make some extra cash or he could be ethical
about it and send back what’s left.

Using the Code of Conduct as reference, Mr. Pollard decided to make the ethical decision of
reporting the right amount, therefore, avoiding future conflicts that may arise because of the
issue.

What Are Ethical Issues in Business?

Ethical issues in business encompass a wide array of areas within an organization’s ethical
standards. Fundamental ethical issues in business include promoting conduct based on
integrity and trust, but more complex issues include accommodating diversity, empathetic
decision-making, and compliance and governance that is consistent with the organization’s
core values. According to the Global Business Ethics Survey of 2019, 25% of employees still
feel that their senior managers do not have a good understanding of key ethical and
compliance business risks across the organization.

In order to manage the ethical issues in business that arises in your organization, you first
need to develop a thorough understanding of what those issues can look like. Understanding
how to detect and, most importantly, deter these issues before they become a problem can
ensure your focus stays on business growth and success instead of remediation.

6 Ethical Issues in Business and How to Address Them

1. Harassment and Discrimination in the Workplace

Harassment and discrimination are arguably the largest ethical issues that impact business
owners today. Should harassment or discrimination take place in the workplace, the result
could be catastrophic for your organization both financially and reputationally.

Every business needs to be aware of the anti-discrimination laws and regulations that exist to
protect employees from unjust treatment. The U.S. Equal Employment Opportunity
Commission (EEOC) defines many different types of discrimination and harassment
statutes that can have an effect on your organization, including but not limited to:

 Age: applies to those 40 and older, and to any ageist policies or treatment that takes
place.

 Disability: accommodations and equal treatment provided within reason for

employees with physical or mental disabilities.

 Equal Pay: compensation for equal work regardless of sex, race, religion, etc.

 Pregnancy: accommodations and equal treatment provided within reason for

pregnant employees.

 Race: employee treatment consistent regardless of race or ethnicity.

 Religion: accommodations and equal treatment provided within reason regardless of

employee religion.

 Sex and Gender: employee treatment consistent regardless of sex or gender identity.

2. Health and Safety in the Workplace

As outlined in the regulations stipulated by the Occupational Safety and Health
Administration (OSHA), employees have a right to safe working conditions. According to
their 2018 study, 5,250 workers in the United States died from occupational accidents or
work-related diseases. On average, that is more than 100 a week, or more than 14 deaths
every day. The top 10 most frequently cited violations of 2018 were:

1. Fall Protection, e.g. unprotected sides and edges and leading edges

2. Hazard Communication, e.g. classifying harmful chemicals

3. Scaffolding, e.g. required resistance and maximum weight numbers

4. Respiratory Protection, e.g. emergency procedures and respiratory/filter equipment

standards

5. Lockout/Tagout, e.g. controlling hazardous energy such as oil and gas

6. Powered Industrial Trucks, e.g. safety requirements for fire trucks

7. Ladders, e.g. standards for how much weight a ladder can sustain

8. Electrical, Wiring Methods, e.g. procedures for how to circuit to reduce

electromagnetic interference

9. Machine Guarding, e.g. clarifying that guillotine cutters, shears, power presses, and
other machines require point of operation guarding

10. Electrical, General Requirements, e.g. not placing conductors or equipment in

damp or wet locations

However, health and safety concerns should not be limited to physical harm. In a 2019
report conducted by the International Labour Organization (ILO), an emphasis was placed on
the rise of “psychosocial risks” and work-related stress and mental health concerns. Factors
such as job insecurity, high demands, effort-reward imbalance, and low autonomy, were all
found to contribute to health-related behavioural risks, including sedentary lifestyles, heavy
alcohol consumption, increased cigarette smoking, and eating disorders.

3. Whistle blowing or Social Media Rants

The widespread nature of social media has made employees conduct online a factor in their
employment status. The question of the ethics of firing or punishing employees for their
online posts is complicated. However, the line is usually drawn when an employee’s online
behavior is considered to be disloyal to their employer. This means that a Facebook post
complaining about work is not punishable on its own but can be punishable if it does
something to reduce business.

In the same vein, business owners must be able to respect and not penalize employees who
are deemed whistle blowers to either regulatory authorities or on social media.

This means that employees should be encouraged, and cannot be penalized, for raising
awareness of workplace violations online. For example, a Yelp employee published an
article on the blogging website Medium, outlining what she claimed as the awful working
conditions she was experiencing at the online review company. She was then fired for
violating Yelp’s terms of conduct. The ambiguity of her case, and whether her post was
justifiable, or malicious and disloyal conduct, shows the importance of implementing clear
social media policies within an organization. In order to avoid this risk of ambiguity, a
company should stipulate which online behaviors constitute an infringement.

4. Ethics in Accounting Practices

Any organization must maintain accurate bookkeeping practices. “Cooking the books”, and
otherwise conducting unethical accounting practices, is a serious concern for organizations,
especially in publicly traded companies.

An infamous example of this was the 2001 scandal with American oil giant Enron, which was
exposed for inaccurately reporting its financial statements for years, with its accounting firm
Arthur Andersen signing off on statements despite them being incorrect. The deception
affected stockholder prices, and public shareholders lost over $25 billion because of this
ethics violation. Both companies eventually went out of business, and although the
accounting firm only had a small portion of its employees working with Enron, the firm’s
closure resulted in 85,000 jobs lost.

In response to this case, as well as other major corporate scandals, the U.S. Federal
Government established the Sarbanes-Oxley Act in 2002, which mandates new financial
reporting requirements meant to protect consumers and shareholders. Even small privately
held companies must keep accurate financial records to pay appropriate taxes and employee
profit-sharing, or to attract business partners and investments.
5. Nondisclosure and Corporate Espionage

Many employers are at risk of current and former employees stealing information, including
client data used by organizations in direct competition with the company. When intellectual
property is stolen, or private client information is illegally distributed, this constitutes
corporate espionage. Companies may put in place mandatory nondisclosure agreements,
stipulating strict financial penalties in case of violation, in order to discourage these types of
ethics violations.

6. Technology and Privacy Practices

Under the same umbrella as nondisclosure agreements, the developments in technological

security capability pose privacy concerns for clients and employees alike. Employers now
have the ability to monitor employee activity on their computers and other company-provided
devices, and while electronic surveillance is meant to ensure efficiency and productivity, it
often comes dangerously close to privacy violation.

According to a 2019 survey conducted by the American Management Association, 66% of

organizations were found to monitor internet connections, with 45% tracking content,
keystrokes, and time spent on the keyboard, and 43% storing and reviewing computer files as
well as monitoring employee emails. The key to using technological surveillance in an ethical
manner is transparency. According to the same survey, 84% of those companies tell their
employees that they are reviewing computer activity. In order to ensure employee
surveillance does not turn into an ethical issue for your business, both employees and
employers should remain conscious of the actual benefits of being monitored, and whether it
is a useful way of developing a record of their job performance.

Final Thoughts on Addressing Ethical Issues in Business

Avoiding ethical issues in business always starts with top management. Providing clearly
written policies and processes that ensure those policies are both acknowledged and adhered
to, can ensure transparency and ethical business practices are applied.

In order to effectively detect and, most importantly, deter ethical issues in business from
surfacing in your organization, there are several everyday efforts you can take. Be sure to
communicate and enforce a robust code of ethics when making decisions and ask the same of
your employees. Remain aware of the discrimination laws that exist in your region. Stay
informed on the rules that impact your industry, and ensure your organization is acting in
compliance with those regulations. Collaborate with accountants, maintaining transparency
and honesty in your financial reports. Be present in your company, making sure your
organization and employees alike are always doing the right and ethical thing.

From factory working conditions at the turn of the 20th century, to today’s emphasis on
diversity training, the history of workplace ethics is the ongoing story of the relationship
between employees and employers.

Ethical Issues in Business

According to the Global Business Ethics Survey of 2018, employees (40%) believe that their
company has a weak leaning ethical culture, and that little progress has been made to mitigate
wrongdoing. Here are some of the ethical issues in business and real-world cases of how
these ethical issues have affected companies.

1. Unethical Accounting

“Cooking the books” and otherwise conducting unethical accounting practices is a serious
problem, especially in publicly traded companies. One of the most infamous examples is the
2001 scandal that enveloped American energy company Enron, which for years inaccurately
reported its financial statements and its auditor, accounting firm Arthur Andersen, signed off
on the statements despite them being incorrect. When the truth emerged, both companies
went out of business, Enron’s shareholders lost $25 billion, and although the former “Big
Five” accounting firm had a small portion of its employees working with Enron, the firm’s
closure resulted in 85,000 jobs lost.

Although the Federal Government responded to the Enron case and other corporate scandals
by creating the Sarbanes-Oxley Act in 2002, which mandates new financial reporting
requirements meant to protect consumers, the “Occupy Wall Street” movement of 2011 and
other issues indicate that the public still distrusts corporate financial accountability.

2. Social Media Ethics

The widespread nature of social media has made it a factor in employee conduct online and
after hours. Is it ethical for companies to fire or otherwise punish employees for what they
post about? Are social media posts counted as “free speech”? The line is complicated, but it
is drawn when an employee’s online activities are considered disloyal to the employer,
meaning that a Facebook post would go beyond complaining about work and instead do
something to reduce business.

For example, a Yelp employee wrote an article on Medium, a popular blogging website,
about what she perceived as awful working conditions at the influential online review
company. Yelp fired her, and the author said she was let go because her post violated Yelp’s
terms of conduct. Yelp’s CEO denied her claim. Was her blog post libelous, or disloyal
conduct, and therefore a legitimate cause for termination? In order to avoid ambiguity,
companies should create social media policies to elucidate what constitutes an infringement,
especially as more states are passing off-duty conduct laws that prohibit an employer’s ability
to punish an employee for online activities.

3. Harassment and Discrimination

Racial discrimination, sexual harassment, wage inequality – are all costly ethical issues that
employers and employees encounter on a daily basis across the country. According to a news
release from the Equal Employment Opportunity Commission (EEOC), the EEOCC secured
$505 million for victims of discrimination in the private sector and government workplaces in
2019. The EEOC states that there are several types of discrimination, including age,
disability, equal pay, genetic information, harassment, national origin, race, religion,
retaliation, pregnancy, sex and sexual harassment.

One type of discrimination, families responsibilities discrimination (FRD), has had an

increase in cases of 269% over the last decade, even as other forms of employment
discrimination cases have decreased. FRD is found in every industry and at every level within
the company, according to a 2016 report by the Center for WorkLife Law at the UC Hastings
College of Law. The report defines FRD as “when an employee suffers an adverse
employment action based on unexamined biases about how workers with caregiving
responsibilities will or should act, without regard to the workers’ actual performance or
preferences.” FRD includes many types of family responsibilities and caregiving, including
pregnancy and eldercare. For example, a father being fired for wanting to stay home to care
for his sick child, or a pregnant employee not being allowed to take a break even though it
was her doctor’s orders.

These cases are expected to continue to rise due to the growing number of family members
who have disabilities, the increase in people 65 and older who need care, the increase of men
who are becoming caregivers, and growing expectation for employees that they can work and
provide family care. Employers will need to adjust to these employee perspectives and
restructure how work can be accomplished to reduce FRD.

4. Health and Safety

The International Labour Organization (ILO) states that 7,397 people die every day from
occupational accidents or work-related diseases. This results in more than 2.7 million deaths
per year. According to the Occupational Safety & Health Administration, the top 10 most
frequently cited violations of 2018 were:

1. Fall Protection, e.g. unprotected sides and edges and leading edges

2. Hazard Communication, e.g. classifying harmful chemicals

3. Scaffolding, e.g. required resistance and maximum weight numbers

4. Respiratory Protection, e.g. emergency procedures and respiratory/filter equipment

standards

5. Lockout/Tagout, e.g. controlling hazardous energy such as oil and gas

6. Powered Industrial Trucks, e.g. safety requirements for fire trucks

7. Ladders, e.g. standards for how much weight a ladder can sustain

8. Electrical, Wiring Methods, i.e. procedures for how to circuit to reduce

electromagnetic interference

9. Machine Guarding, e.g. clarifying that guillotine cutters, shears, power presses and
other machines require point of operation guarding

10. Electrical, General Requirements; i.e. not placing conductors or equipment in damp or
wet locations

Physical harm isn’t the only safety issue to be aware of, though. In 2019, an ILO report
focused on rise of “psychosocial risks” and work-related stress. These risks, which include
factors like job insecurity, high demands, effort-reward imbalance, and low autonomy, have
been associated with health-related behavioral risks, including a sedentary lifestyle, heavy
alcohol consumption, increased cigarette smoking, and eating disorders.
5. Technology/Privacy

With developments in technological security capability, employers can now monitor their
employees’ activity on their computers and other company-provided electronic devices.
Electronic surveillance is supposed to ensure efficiency and productivity, but when does it
cross the line and become spying? Companies can legally monitor your company email and
internet browser history; in fact, 66% of companies monitor internet connections, according
to 2019 data from the American Management Association. 45% of employers track content,
keystrokes, and time spent on the keyboard, and 43% store and review computer files as well
as monitor email. Overall, companies aren’t keeping this a secret: 84% told employees that
they are reviewing computer activity. Employees should review the privacy policy to see how
they are being monitored and consider if it can indicate a record of their job performance.

2.3.1 Ethical Dilemma at work-Sources

There exist many different ethical issues in an organization or at the workplace.

Some of them are as follows:

 Identifying the conflict issues in the organization and trying to avoid them

 Deciding different methods to motivate employees

 Managing fairness in employee performance appraisals

 Protecting secret information of the organization

 Identifying the areas of interest of customers, employees, suppliers,owners and the

staff

 Taking action against the reports of complaints in the organization

 Handling different problems of employees

 Taking corrective action against employees

Ethics management programmes are used by the organizations to manage ethics

At their workplace. According to Brain Schrag, ‘Ethics programmes convey corporate values
using codes and policies to guide decisions and behaviour, and can include extensive training
and evaluating, depending on the organization.’

Ethics management programmes are made up of values, policies and activities that can affect
the behaviour of the organization.
Managing ethics as a programme is advantageous to organizations in many ways.

These are:

 These programmes can assign an independent role to each individual in the

organization to manage ethics.

 Ethics management can provide the necessary operating values and behaviour to the
organizations.

 These programmes are used to align the operating values and behaviour.

 Ethics management programmes are used to schedule different ethics requirements.

 These programmes are used to make the organizations aware of ethics issues.

 These programmes provide structural mechanisms to handle ethical problems.

 They also provide some guidelines to decision-making.

An ethical dilemma is a situation where one is in conflict between moral imperatives. Often
rejecting either solution has major consequences. It is also known as ethical paradox or moral
dilemma. Ethical dilemma is any situation in which guiding moral principles cannot
determine which course of action is right or wrong. To obey one action, would result in
transgressing another.

Dimensions of Ethical Dilemmas

1. Choice between equally undesirable alternatives

2. Different courses of action possible

3. Involves value judgments about actions or consequences

4. Data will not help resolve issue

5. Different sources (psychology, theology) offer resolutions

6. Achieving objectives by ethical means may be difficult than achieving the same by
unethical means

7. Unfavourable social outcomes may result in the course of fulfilling business

objectives

8. Choices have far-reaching effects on persons, relationships and society

9. Resources which must be allocated are finite or limited

 10. Can be resolved, not solved

11. There is no “right” and “wrong”

Ways to resolve Ethical Dilemmas: Organisations try to draft the Code of Ethics in as precise
a manner as possible so that it serves as a good guidance for anyone in the business when
there is ethical dilemma. However the Code of Ethics cannot envisage all the possibilities
which may emerge in the business at any point of time. Therefore one has to resort to the
general guidelines by asking following questions in order to overcome the dilemma in
Business Ethics.

1) Is it Legal? If it is not then there is no question of going ahead & asking the remaining
questions.

2) Is it balanced? Does it protect the interest of all the stakeholders or is it biased about any
particular group?

3) How does it make me feel? This is necessary because ethics to an extent is personalised &
hence subjective in nature. This model was put forward by Kenneth Blanchard & Norman
Peale.

Business Ethos principles practiced by Indian Companies:- Indian companies are guided by
certain rules of conduct in the form of ethical and moral standards. Some of the business
ethos principles, practiced by Indian companies are listed below:

1. Principle of ‘sacrifice’ An individual is trained by the principle of ‘sacrifice’ through

the process of ‘give and take’ policy. A person, who is willing to sacrifice part of his
bread or effort, commands a superior place in the organization.

2. Principle of ‘harmony’ An individual is trained in such a way that to avoid conflicts

and friction one should be guided by certain set of moral conducts and principles.

3. Principle of ‘non-violence’ This principle protects an organization from strikes and

lockouts, assaults and unnecessary avoidable conflicts.

4. Principle of ‘reward’ The one who performs well are encouraged to do so. This
implies that the activities of individuals need to be monitored and encouragement in
the form of ‘rewards’ may cultivate the spirit of higher productivity among groups.

5. Principle of ‘justice’ The one who works hard is ‘rewarded’ and the one who fails to
do so is ‘punished’. This is the essence of the principle of Justice.
 6. Principle of ‘taxation’ The one who is taxed more is encouraged to stay fit for a
longer period by proper appreciation and encouragement. This principle applies to
individuals who are hardworking and productive.

7. Principle of ‘Integrity’ An integrated mind is more productive. Groups are encouraged

to stay united in order to reap the benefits of division of labour.

8. Principle of ‘Polygamy’ This is nothing but the wedding of two different cultures by
absorption or takeover. The diversified culture arising due to absorption or take over
is promoted rather than forcing one culture upon the other. This creates a healthy
competition within the organisation.

5 Common Ethical Issues in the Workplace

Recent headline-making ethical issues, particularly those tied to discrimination and sexual
harassment, have shed light on unethical conduct in the workplace and how these ethical
lapses can permeate employee relations, business practices, and operations. According to
the Ethics & Compliance Initiative’s 2018 Global Benchmark on Workplace Ethics,
30% of employees in the U.S. personally observed misconduct in the past 12 months, a
number close to the global median for misconduct observation. These ethical breaches often
occur unreported or unaddressed, and when totaled, can command a hefty cost. Unethical
practices spurred more than half of the largest bankruptcies in the past 30 years, like Enron,
Lehman Brothers, and WorldCom, and can take a larger economic toll, estimated at $1.228
trillion, according to the Society for Human Resource Management.

These numbers suggest you’ll likely encounter ethical dilemmas in your workplace. Here are
five ethically questionable issues you may face in the workplace and how you can respond.

Unethical Leadership

Having a personal issue with your boss is one thing, but reporting to a person who is
behaving unethically is another. This may come in an obvious form, like manipulating
numbers in a report or spending company money on inappropriate activities; however, it can
also occur more subtly, in the form of bullying, accepting inappropriate gifts from suppliers,
or asking you to skip a standard procedure just once. With studies indicating that managers
are responsible for 60% of workplace misconduct, the abuse of leadership authority is an
unfortunate reality.
Toxic Workplace Culture

Organizations helmed by unethical leadership are more often than not plagued by a toxic
workplace culture. Leaders who think nothing of taking bribes, manipulating sales figures
and data or pressuring employees or business associates for “favors” (whether they be
personal or financial), will think nothing of disrespecting and bullying their employees. With
the current emphasis in many organizations to hire for “cultural fit,” a toxic culture can be
exacerbated by continually repopulating the company with like-minded personalities and
toxic mentalities. Even worse, hiring for “cultural fit” can become a smokescreen for
discrimination, which can result in more ethical issues and legal ramifications.

Discrimination and Harassment

Laws require organizations to be equal employment opportunity employers. Organizations

must recruit a diverse workforce, enforce policies and training that support an equal
opportunity program, and foster an environment that is respectful of all types of people.
Unfortunately, there are still many whose practices break with EEOC guidelines. When
discrimination and harassment of employees based on race, ethnicity, gender, disability or
age occurs, not only has an ethical line been crossed but a legal one as well. Most companies
are vigilant to avoid the costly legal and public ramifications of discrimination and
harassment, so you may encounter this ethical dilemma in more subtle ways, from seemingly
“harmless” off-color jokes by a manager to a more pervasive “group think” mentality that can
be a symptom of a toxic culture. This could be a group mentality toward an “other” group
(for example, women aren’t a good fit for our group). Your best response is to maintain your
personal values and repel such intolerant, unethical or illegal group norms by offering an
alternative, inclusive perspective as the best choice for the group and the organization.

Unrealistic and Conflicting Goals

Your organization sets a goal—it could be a monthly sales figure or product production
number—that seems unrealistic, even unattainable. While not unethical in and of itself (after
all, having driven leadership with aggressive company goals is crucial to innovation and
growth), it’s how employees, and even some leaders, go about reaching the goal that could
raise an ethical red flag. Unrealistic objectives can spur leaders to put undue pressure on their
employees, and employees may consider cutting corners or breaching ethical or legal
guidelines to obtain them. Cutting corners ethically is a shortcut that rarely pays off, and if
your entire team or department is failing to meet goals, company leadership needs that
feedback to revisit those goals and re-evaluate performance expectations.

Questionable Use of Company Technology

While this may feel like a minor blip in the grand scheme of workplace ethics, the improper
use of the internet and company technology is a huge cost for organizations in lost time,
worker productivity and company dollars. One survey found that 64% of employees visit
non-work related websites during the workday. Not only is it a misuse of company tools and
technology, but it’s also a misuse of company time. Whether you’re taking hourly breaks to
check your social media news feed or know that your coworker is using company technology
resources to work on freelance jobs, this “little white lie” of workplace ethics can create a
snowball effect. The response to this one is simple: when you’re working on the company’s
computer on the company’s time, just don’t do it, even as tempting as it may be.

2.4 RESOLUTIONS OVERVIEW OF CREATIVE ACCOUNTING

Definition of Creative Accounting

Creative accounting is accounting practice that falls outside the regulation and give benefit to
certain people. It can be described as a practice with a clear aim to interrupt the financial
reporting process which affects reported income to make it looked normal and provides no
true economic advantages to relevant parties like shareholders. Concisely, creative
accounting is the transformation of financial accounting figures from what they actually are
to what users’ desire by taking advantage of the accounting policies which is permitted by
accounting standards.

Creative accounting is a practice that potentially being undertaken as a result from some
individual care more on their own interest and indirectly causes issues arise in ethical
dimension of creative accounting. From information perspective, agency theory gives a clear
picture on creative accounting scenario. Whereby managers misuse their privileged position
in manipulating financial reporting in their own interest which providing superior information
content to shareholder. Lack of personal skill or unwillingness to carry out detailed analysis
making individual shareholders do not have the clear view on the effect of accounting
manipulation give a high possibility in the incidence of creative accounting.

Motivation for Creative Accounting

There are several motivations have been identified in stimulating the behavior of creative
accounting in the organization. Firstly, the significant motivator for creative accounting is to
report a decrease in business income to lower the tax paid. Second, to enable the company’s
performance appear better in future, company will maximize the reported loss to make bad
loss in that year. This is called ‘big bath’ accounting for the purpose in smoothing the
income. Thirdly, to provide positive view on expectations, securities valuation and reduction
on risk for analysts in anticipated capital market transactions and maintain firm’s
performance in analyst’s expectation.

Other motivations are to manipulate profit in order to match the reported income to profit
forecasts and to distract attention from negative news by boosting company’s profit figure
though change in accounting policies. Managers motivations in managing earning aim to
report a stable growth in profit not only to reduce the perception of variability toward
organisation’s earnings, but also are in relation to income measurement. In order to make
company faces less risk and gain more benefit in aspect of raising fund, takeover bids as well
as prevent takeover by other company.

Creative accounting is needed to maintain or promote the share price and create a good profit
growth. To gain benefit from inside knowledge, director of the company engage creative
accounting to postpone the release of information to the market. Last but not least, many
types of contractual right, obligation and constraints based on the amount reported in the
accounts also motivate company to apply creative accounting.

Techniques of Creative Accounting

Creative accounting is actively applied in six areas. The first area is regulatory flexibility,
whereby changes in accounting policy are permitted by accounting regulation. For example,
IAS permit carrying non-current asset can be recovered at either revalued amount or
depreciated historical cost in asset valuation. Secondly, dearth of regulation by which some
accounting treatment might not be fully regulated as there is few mandatory requirements.
The third area is management has large extent of estimation in discretionary areas, such as
assumption in bad debts provision. Fourthly, some transactions can be timed as to show the
desired appearance in accounts. For example, the manager is free to choose the timing to sell
the investment just to increase earning in the accounts. Fifthly, to manipulate balance sheet
amounts by using artificial transaction. Last but not least, by reclassification and presentation
of financial amounts through balance sheet manipulation in order to smooth financial
ratios and also based on cognitive reference point in financial numbers’ presentation.

Existence of Creative Accounting

Theoretically, manager’s motivation in creative accounting is acceptable. However, certain of

companies apply particular techniques of creative accounting to some extent, for example,
applied in non-discretionary component of the bad debts provision. Other evidence is
classificatory smoothing by using the extraordinary items, such as pensions cost, dividends
from unconsolidated subsidiaries, extraordinary charges and credits and research and
development costs in manipulating the figure of income in financial statements.

Creative accounting behaviors can be identified by having thoughtful analysis of financial

statement or observed by reasonably well- informed user of financial statement. But, how
clearness the users of statement observe creative accounting is questionable. Anyway, value
of information content in financial statement is concerned even though financial
statements give adequate information enable users to adjust for creative accounting as certain
investors rely on reported earning numbers in income statement.

Ethical Perspective of Creative Accounting

There are some ethical issues concerning the exercise of creative accounting. Loopholes in
accounting standards provide manager some spaces in the sense of manipulate the timing in
income reporting. Accounting is a tool to supervise contracts between managers and financial
groups, identify possibility of accounting manipulation and how properly it reflected in
pricing and contracting decisions. Ethics of bias in choosing accounting policy which implied
in creative accounting can be seen through accounting regulators and management level.

Managers tend to misapply accounting principles to give better appearance in financial

statement to investors. Conflict of interest, client requests to alter account and for tax evasion
are the most frequent ethical issues. Accountants’ attitudes toward creative accounting
depend on whether it is arisen from misuse of accounting principle and manipulation of
transactions. Accountants more critic in misuse of accounting principles as accountants duty
is on rule-based and it falls within their expertise. Failure to act ethically may damage the
reputation as an accountant unless he or she reports the abuse to the appropriate party.
Slotting is not an acceptable accounting treatment in company practices.
There are some action can be taken by accounting regulators in order to restrain creative
accounting:

1. Decrease allowable accounting method or fix method used in different condition so

that scope for choosing accounting method can be narrow downed. Companies should
also be consistent in using method chosen by them.

2. Some rules should be established to reduce the abuse of judgement. For

instance, International Accounting Standards presently have almost removed the
“extraordinary item” from operating profit. Also, companies should be consistent in
applying accounting policy to restrain the abuse of judgement.

3. Implementation of “Substance over form” can decrease artificial transaction and this
can make linked transaction become one as whole.

4. To restrict the use of timing of genuine transaction, item in account should be

regularly revaluated. The increase or decrease in value should be stated in the account
each year the revaluation occurs. International Accounting Standards also tends to
value item at fair value rather than historical cost.

5. Besides alteration in accounting regulations, ethical standards and governance

codes must be properly executed to avoid individuals from performing creative
accounting.

2.4.1 Its Role in Business

A company’s balance sheet and profit & loss (P&L) statement are the key documents that
investors look at to decide if it will be a good investment option or not. Company
management is also aware of this and that’s why a few unscrupulous companies have come
up with different methods that are designed to make their financial situation look better than
the reality.

Accurately Recording Expenses

Businesses use money i.e. expenses to generate their revenue. So, decreasing expenses can
help a company increase its profits. One of the simplest ways to hide an expense is to not
record it at all. A company can just fail to record an expense and boost their net income
which will increase the profits reported by the company in their financial statement.

Another option that some unprincipled companies and vendors can employ to show lower
expenses is to record a sham rebate from suppliers. However for this to work, the company
and its vendor both need to play along.

For example, suppose a company and a supplier come to an agreement for office supplies of
Rs. 10 lakh for the coming year. But in reality, the supplies are actually worth Rs. 9 lakh and
both the company as well as the vendor know this. Now in exchange for this order, the
company asks the vendor to provide an upfront discount of Rs. 1 lakh. The company can now
record this Rs. 1 lakh discount as a reduction in expenses for the current quarter, which will
increase the current profit numbers recorded by the company.

If a company gets multiple vendors to participate in this type of unethical activity, the
company can end up with crores of rupees in profit on paper. Even though no actual profits
have been made. So as an investor, you should beware of such activities and take a close
look at any unusual cash flow that a company has received from vendors. After all, cash
should flow from a company to its vendors and it is suspicious if this movement of cash is
occurring in the opposite direction.

Decreasing Operating Reserves

A reserve is a pool of cash or other liquid assets that a company might set aside for specific
requirements at a later date. The main objective of having a reserve is to ensure that a
company remains financially stable to meet contingencies, make dividend payments, ensure
timely loan repayments, etc. From an accounting perspective, having a reserve is definitely
encouraged.

However, keeping the reserve intact is essential so that there is a sufficient amount available
when the requirement actually arises. However, some companies engage in the improper
practice of reporting a lower reserve in order to show a higher profit in the short term.

For example, a company purchasing an expensive machine would possibly decide to

purchase a comprehensive warranty plan to cover future repair/parts replacement costs of the
machine. Now if accounting is done correctly, the company will set aside a reserve and
record it on their books to cover the cost of purchasing the warranty. Additionally, the
company should also set aside an appropriate amount to cover future warranty extension
costs.
But, companies have a significant amount of discretion in deciding the amount that they can
set aside as a reserve. If they choose too high an amount, the profit numbers will decrease,
while choosing a lower reserve amount will give an immediate boost to the company’s profit
numbers.

As an investor, you should therefore look for warning signs by watching the quarterly trend
of warranty reserves as a percentage of the revenue reported by the company. If you see a
declining trend in these numbers, it might be due to the company reporting inflated earnings
by reducing the reserve set aside for the company’s warranty obligations. This might lead to
financial instability of the company in the long term.

Recording Expenses Incurred As A Capital Asset

Many companies apply a creative accounting technique that can convert an expense into a
capital asset on the company’s balance sheet. To understand how this might happen, let’s take
an example.

Suppose an insurance company finds itself falling short of its annual targets. So it decides to
run an advertising campaign costing Rs. 100 crore during the last quarter of the financial
year. Now, if the company’s annual revenue is Rs. 80 crore, this advertising campaign would
result in the company reporting an loss of Rs. 20 crore for the financial year.

But instead of following the standard accounting practice, the company can choose to engage
in a bit of creative accounting so that it does not have to report a loss. So, the company shows
the advertising expenditure as an asset with the justification that the advertising expense will
generate long-term benefits for the company over the next 2-4 years. By treating the
advertising as an asset on the books, the company can now charge depreciation on the asset.
So using the straight line depreciation method over a 4 year amortization period, the company
can show that the advertising asset depreciates by Rs. 25 crore every year as shown below:

Capitalized Advertising Costs

Revenue Expenses Liabilities Assets

 Gross Block = ₹100 crore
Revenue = Depreciation = ₹25 crore (25%
Less depreciation = ₹25
₹80 crore of 100 crore)
crore

Profit = ₹55 crore Brand Asset = ₹75 crore

This technique would enable the company to run its advertising campaign without having to
report any decline in its profit numbers.

In fact, capitalizing an expense might even result in healthier EBITDA numbers for the
company in the near term. But if the practice is continued in the long term, the company
might end up with a large number of depreciating assets on its books, which can impact the
long-term profitability of the company.

As an investor, you can look out for some key warning signs that can help you detect if a
company is engaged in capitalizing expenses. These include:

 Unexplained improvement of profit margins

 Unexpected decline in operating cash flows

 A sudden increase in capital expenditure that was not mentioned in any earlier
guidance by the management

In fact, many companies that are planning an IPO (Initial Public Offering) employ this trick
of capitalizing expenses to make their balance sheet look healthier than they actually are. A
balance sheet that looks healthy and shows strong earnings can help the company float a
successful IPO. So you need to be on the lookout for capitalized expenses in the red herring
prospectus of an IPO-bound company before you invest.

Creatively Recording Profits or Losses from One-Time Events

In standard accounting practice, one-off events such as profits/losses resulting from a merger
or an acquisition are treated separately as they have no relation to the day-to-day operations
of a company.
However, creative accounting techniques can take advantage of these one-time events and
help a company inflate its profits. An example of this is how IBM increased the profits
recorded in its income statement in 1999. In 1999, IBM was struggling and its costs were
increasing faster than its revenue, so the company was expected to show minimal or no
growth in annual profits. Instead, the company reported a 28% increase in year on year net
profit as shown below:

Income Statement of IBM (1998 and 1999)

Revenue 87,548 81,667 7.2%

Less: Cost of Goods Sold 55,619 50,795 9.5%

Gross Profit 31,949 30,872 4.4%

Less: Selling, General & Admin Expenses 14,729 16,662 -11.6%

Less: R&D Expenses 5273 5046 4.5%

Operating Income 11,927 9,164 30.2%

Less: Non-Operating Expenses 170 124

Less: Income Tax 4,045 2,712

Net Profit 7,712 6,328 21.9%

A closer look at the income statement however reveals an inconsistency in the Selling,
General and Admin (SGA) Expenses reported by the company. Typically, SGA expenses
increase in line with the growth in revenues and costs of the company. But IBM had reported
a 11.6% decline in SGA expenses for 1999 even though its revenues and costs during the
same period had increased by 7% and 9% respectively.
It was later discovered that IBM had actually set off a $4 billion one-time gain from the sale
of one of its businesses to offset the SGA expenses reported in its income statement. This had
effectively allowed IBM to use a non-operating gain into show lower operating expenses for
the year, which allowed the company to show a higher operating profit. On including this
US$4 billion as part of the SGA expenses of IBM for 1999, the company’s net profit actually
shows a decline of 20.2% instead of the 21.9% growth originally reported by the company.

Misleading Classifications That Can Boost Income on Paper

As per standard accounting practice, the profit and loss (P&L) statement of a company
contains 2 key sections – operating and non-operating. The operating section includes
revenues and the expenses incurred as part of the company’s day-to-day operations.

On the other hand, the non-operating portion includes items like profit/loss from investments,
foreign exchange gains/losses, profit or loss from the sale of subsidiaries, etc. These profits or
losses are one-time events that are due to the company’s day-to-day operations.

Typically, most investors focus on the operating portion of a company’s P&L statement as
operating income and expenses play a key role in determining a company’s financial health.
As a result, some companies attempt to shift non-operating gains to the operating section,
while others might try to shift operating expenses or losses to the non-operating section of the
P&L statement. One common way to do this is to show a portion of operating expenses as a
one-time cost in the P&L statement.

While this shifting of income or expenses in the P&L statement does not impact the net
profits numbers of the company, it can easily mislead investors.

For example, suppose a company decided to shut down a few of its poorly performing units.
Now, this action should ideally be considered as part of a company’s day to operations as
opening and closing of units can occur quite often. However, closing an unit might involve a
number of additional one-time expenses such as severance payment to employees, penalty
payments for premature termination of the office lease agreement, costs involved in shifting
equipment, etc. Now, ideally these costs should be included in the operating section of the
company’s P&L statement.

However, creative accounting techniques can help the company show these expenses as part
of the non-operating part of the P&L statement. One way companies do this is by presenting
the closure of units as part of the company’s restructuring plan. This way, the costs can be
shown as a one-time cost on the books so that an operating expense becomes a non-operating
expense for the company.

Investors should pay careful attention to the footnotes in a company’s financial statements to
uncover the existence of this type of activity. This is the only way you can protect yourself
from companies that engage in creative accounting to pad their profit numbers.

Shifting Losses to Discontinued Operations

Closure and sale of loss-making units can play a key role in improving the long-term
profitability of a company; however, some companies can take undue advantage of this
situation.

To understand how this can happen, let’s take an example. Suppose a company has 3
divisions – A, B, and C. Out of these, A and B are profitable with net profits of Rs. 1 crore
and Rs. 2.5 crore respectively. Division C on the other hand has incurred losses of Rs. 4
crore. So the consolidated loss for the business is Rs. 50 lakh.

If the company does not want to show visible losses from division C, there is one way to
move the Rs. 4 crore loss from the operating section of the P&L statement to the non-
operating section. To do this, the company puts Division C up for sale at the beginning of the
financial year and accounts for it as discontinued operations.

By doing this, the company can easily move the Rs. 4 crore of operating loss to the non-
operating part of the statement. As a result, the company can report a Rs. 3.5 crore operating
profit instead of an operating loss of Rs. 50 lakh. So, investors should check the financial
statements of companies thoroughly to figure out if there is any type of accounting trickery at
play.

Bottom Line

It is a reality that many companies big and small implement creative accounting techniques to
paint a rosy picture to investors. While it is easy to get duped by such unscrupulous activities,
there are a few ways you can recognize if a company is manipulating its financial statements
and dressing up key data like the P/E Ratio, earnings per share, etc. These warning signs
include:

 Onetime events that impact profit numbers

 Conversion of expenses into a capital asset

  Shifting of operating expenses to non-operating

 Routinely recording restructuring costs

 Shifting of losses to discontinued operations,

To prevent yourself from being duped by these types of financial shenanigans, you need to
proactively seek out signals that these types of manipulation are occurring. The good part is
the evidence of such manipulations is present in the company’s publicly available financial
statements. But you need to put in adequate time and have a high degree of patience to
identify the inconsistency in these financial documents.

2.4.2 Scandals

Top 10 biggest corporate scandals

1. Enron

2. Volkswagen

3. Lehman Brothers

4. BP

5. Uber

6. Apple

7. Face book

8. Valeant Pharmaceuticals

9. Kobe Steel

10. Equifax

Enron scandal

The Enron scandal is undoubtedly one of the most famous corporate scandals of all time.

The situation started in early 2001, when analysts questioned the accounts presented in the
company’s previous annual report. These accounts used a variety of irregular procedures,
which made it difficult to work out how the company was making money – despite it
apparently having a foothold in energy, commodities and telecoms among other industries.
The SEC began to investigate and discovered that Enron was hiding billions of dollars in
liabilities through special-purpose entities (companies it controlled), which enabled it to
appear profitable even though it was actually hemorrhaging cash.

The company’s share price fell from $90.56 to under a dollar as the crisis unfolded, with
Enron forced to file for what was then the biggest chapter-11 bankruptcy in history.

Volkswagen emissions scandal

The Volkswagen (VW) emissions scandal – also known as ‘emissionsgate’ and ‘diesel gate’
– started in September 2015, when the US Environmental Protection Agency (EPA)
announced that it believed VW had cheated emissions tests.

It turned out that the company had been fitting what some industry commentators described
as ‘defeat devices’ to its diesel cars, which included software that would detect when the cars
were undergoing laboratory testing and turn on controls to reduce nitrogen emissions. The
cars would then appear to comply with the agency’s standards but, in some cases, were
actually emitting up to 40 times the nitrogen dioxide limit when driving on the road.

This discovery led to investigations worldwide, with some estimates suggesting the scandal
affected up to 11 million cars.

Lehman Brothers

Lehman Brothers filed for bankruptcy in 2008 after falling victim to the subprime mortgage
crisis.

The bank had been borrowing significant capital for many years to provide loans to those
looking to buy real estate. As a result, it faced a situation where its outstanding loans
exceeded its available capital many times over, meaning it would be at risk of collapse if the
housing market faced a downturn. To hide this fact, the company used repurchase agreements
to disguise ‘at risk’ assets. In effect, this involved ‘selling’ its liabilities to banks in the
Cayman Islands with a promise to repurchase them at a later date.

As the subprime mortgage crisis took effect, Lehman Brothers found it unable to repay its
debt as clients were defaulting on their loans. More than 70% of its value was wiped out in
the first half of 2008 alone and the company was forced to file for bankruptcy in September
of that year.

BP scandal

Next on our list is the Deepwater Horizon oil spill of 2010, which saw BP’s share price fall
dramatically.

The crisis started in April 2010 when the Deepwater Horizon oil rig exploded in the Gulf of
Mexico, causing oil to gush into the sea. Unfortunately, initial efforts to stem the flow failed
and it took months for BP to find a solution that worked. By the time the well was cut off in
July, approximately 4.9 million barrels of oil had spilled into the ocean, making this the worst
accidental oil spill of all time.

The effects were devastating for the local ecosystem, wildlife and locals, and BP has been
forced to pay billions of dollars in compensation since the crisis.

Uber scandal

Uber is no stranger to controversy. In recent years, there have been multiple accusations of
sexual harassment at the firm and questions over its ‘stop-at-nothing’ approach to expansion.
The latter allegedly saw it using illegal technology to evade law enforcement, poach drivers
from competitors and spy on users.

However, it was ultimately accusations regarding Uber’s ‘bro’ culture that proved to be the
biggest scandal, and led to the resignation of CEO Travis Kalanick in June 2017. The
allegations included complaints that senior members of staff had made sexist jokes and
visited a brothel in Seoul. Even though some were not proven, the claims affected the price of
the company’s shares, which were traded privately at the time.

With Uber building towards an initial public offering (IPO), the company brought in a new
CEO, DaraKhosrowshahi, to clean up its image and create a new culture. It listed in May
2019 at $45 per share, giving it a market capitalization of $69.7 billion.

Apple scandal

The biggest scandal to hit Apple in recent years is undoubtedly the ‘batterygate’ of December
2017.

This started when a Reddit user reported that a software update had reduced the performance
of their iPhone but that this had corrected itself when they replaced the battery. This post led
to a lot of press coverage, with some commentators suggesting that Apple was trying to force
users to upgrade by deliberately slowing devices as they aged. Tim Cook issued a statement
on the matter a week after the news broke, confirming that the software was designed to
throttle performance but claiming that the intent was only to prevent unexpected shutdowns,
which could affect devices with older batteries. The company offered a discount on battery
replacements as a gesture of goodwill for those affected.

Facebook scandal

Facebook’s biggest scandal hit in March 2018, when the Guardian and New York Times
reported that a firm called Global Science Research had harvested data from millions of
Facebook users in 2013 – without their explicit consent.

This was possible because a previous version of Facebook’s privacy policy had allowed apps
to access data about users’ friends – such as their name, birthday and location. This had
enabled Global Science Research to gather information about 87 million Facebook users even
though only around 30,000 people had actually used their app. These details were later sold
to Cambridge Analytical, who used it to create highly-targeted ads to encourage users to vote
for Trump and Brexit.

The furore surrounding this scandal was so serious that Mark Zuckerberg was called to
answer questions in front of Congress in the US.

Valeant Pharmaceuticals scandal

The Valeant Pharmaceuticals scandal started in August 2015 when Bernie Sanders and other
congressmen asked the company to explain why it had raised the price of two drugs.

Investigations showed that the company’s strategy had been to acquire small pharmaceutical
companies and raise the prices of their drugs, rather than investing in its own R&D. This led
to public outcry and a fall in the company’s share price. The scandal deepened in October
when it was alleged that Valeant controlled a chain of pharmacies called Philidor, and had
abused this position to inflate the size of its order book and report higher profits. The
company has since changed its name to Bausch Health Companies Inc.

Kobe Steel scandal

The Kobe Steel scandal started in October 2017 when the company revealed that it had
falsified data about the quality of its aluminium, steel and copper products.
These had been used by hundreds of major companies including Toyota, Honda, Subaru and
Mitsubishi Heavy Industries, leading to concerns over product safety. The Central Japan
Railway Company, for example, found that 310 parts included in its bullet trains did not meet
the agreed standards. The scandal led to a major dip in Kobe Steel’s share price and the
resignation of CEO Hiroya Kawasaki.

The company’s March 2018 report on the scandal found that it had ‘a management style that
overemphasized profitability, and […] inadequate corporate governance.’

Equifax

Equifax is one of the ‘big three’ credit agencies, sitting alongside Experian and TransUnion.

In September 2017, the company became aware of a major security breach, which it said
could affect around 145 million of its US consumers plus many more around the world. The
data stolen included names, social security numbers, birth dates and addresses – information
typically used by banks and other financial institutions to confirm identities. Many of the
consumers who were affected by the breach could therefore become victims of identity theft
in the future, making this one of the most serious breaches of personal data in recent years.

How to trade a corporate scandal

1. Open a live trading account to start speculating on the market price

2. Create a demo account to practise trading in a risk-free environment

The key to trading any corporate scandal is to understand the effect it could have the
company’s bottom line and brand equity. This involves carrying out fundamental analysis of
the company, its business model and other factors that could affect its valuation – such as
potential fines for wrongdoing and the state of the economy.

Learn how to conduct fundamental and technical analysis in IG Academy.

A typical strategy would be to go short on the market in anticipation of its price falling when
the potential scandal is first reported, and long as the company takes steps to address the
issues in anticipation of a recovery. You should therefore pay attention to the news and adjust
your fundamental analysis as the scandal develops.
2.5 CORPORATE ETHICAL LEADERSHIP

Importance of Leaders in an Organization

A leader is an integral part of an organization, because it is the leader who helps the
organization to achieve the goals and objectives.

The various reasons why the leaders are important for an organization is as follows:

 A leader acts as a friend to the employees he is leading.

 A leader recognizes the potentialities of the individuals and transforms

 them into realities.

 A leader wins the confidence of the employees of an organization.

 A leader unites the people as a team and builds up team spirit.

 A leader maintains discipline among his group and develops a sense of responsibility
among them.

 A leader builds up a high morale among the employees of the organization.

 A leader motivates his group in order to achieve the goals and objectives of an
organization.

 A leader maintains the ethical standards among the employees of an organization.

 A leader acts as a link between the work groups and the forces outside the
organization.

Leadership is a form of management, and can be defined as the art of getting things done by
others. Thus, the term management divides all the employees of the organization into two
groups. These groups are:

 Managers: Managers are the individuals in the organization who are responsible for
directing the activities of others.

 Workers: Workers are the individuals who are working under the control of the
managers or leaders.
Leadership involves planning, organizing and controlling the resources of the organization so
as to achieve the goals and objectives of the organization. The managers of the organization
make some rules to coordinate and control their subordinates in the right manner. These rules
can be determined by the environment and the culture of the organization. These rules also
define the relationship of the managers with their subordinates and peers. These rules defined
by the managers of the organization are termed as descriptive ethics because no one is forced
to follow them.

These rules are the contextual and moral guidelines that the managers derive from their
personal moral philosophy. The moral awareness of the managers can be ascertained by the
organizational administration. Management ethics in an organization deals with the morality
and conduct of the individuals and the responsibilities of the management. Therefore, ethical
management or ethical leadership deals with issues relating to managerial misbehaviour and
the moral conduct of the management.

Ethical Issues in Organizations

There exist many different ethical issues in the organization or at the workplace.

Some of them are:

 Identifying the conflict issues in the organization and trying to avoid them

 Deciding different methods to motivate employees

 Managing fairness in employee performance appraisals

 Protecting secret information of the organization

 Identifying the areas of interest of customers, employees, suppliers, owners and the
staff

 Taking action against the reports of complaints in the organization

 Handling different problems of employees

 Taking corrective action against employees

Ethics management programmes are used by the organizations to manage ethics in their
workplace. According to Brain Schrag, ‘Ethics programmes convey corporate values using
codes and policies to guide decisions and behaviour, and can include extensive training and
evaluating, depending on the organization.’ Ethics management programmes are made up of
values, policies and activities that can affect the behaviour of the organization. Managing
ethics as a programme is advantageous to organizations in many ways. Some of the
advantages are that:

These programmes can assign an independent role to each individual in the organization to
manage ethics.

 Ethics management can provide the necessary operating values and behaviour to the
organizations.

 These programmes are used to align the operating values and behaviour.

 Ethics management programmes are used to schedule different ethical requirements.

 These programmes are used to make the organizations aware of ethical issues.

 These programmes provide structural mechanisms to handle ethical problems.

 They also provide some guidelines to decision-making.

Guidelines for Managing Ethics in Organizations Some guidelines for managing the ethics in
organizations are:

Identify ethics management as a process: Ethics management is used to provide operating

values and associated behaviour. Ethics programmes are process-oriented because the
operating values are determined by ongoing reflection. The deliverables of the ethics
programmes, such as codes, policies and procedures, budget times and meeting minutes, are
not produced directly. However, these deliverables are produced by the process of reflection
and dialogue.

 Use ethics programmes to manage behaviour in organizations: The ethical values

provided by the ethical programmes can be used to direct behaviour in the workplace.
Therefore, ethical management practices, in addition to ethical values should also
generate deliverables. These deliverables can be used to transform ethical values into
behaviour.

 Avoid ethical dilemma: The codes of ethics and the codes of conduct can be used to
minimize the occurrences of ethical dilemma.

 Combine ethics management with other management practices: Ethical management

should be integrated with other management practices. While developing strategic
planning, ethical values of the organization should be considered. While developing
 personnel policies, determine the ethical values that are most effective for the
environment of the organization and then implement policies to produce these kinds
of behaviour.

 Develop ethics management programmes using cross-functional teams: The

employees of the organization should be included in the development and
implementation of the ethics management programmes.

 Value maintenance: Ethics management programmes may increase the ethics of

people in the beginning because of the sensitivity of people on their occurrence.
However, people should remain ethical on the implementation of these ethics
management programmes.

Roles and Responsibilities in Ethics Management

Each individual in the organization should be provided a specific role in managing ethics in
the organization. However, the role assigned to each individual depends on the size and
nature of the organization. The roles can also be full-time or part-time. The following
responsibilities can be assigned in ethics management:

 The chief executive officer of the organization must support the ethics management
programme.

 A committee or group should be developed in the organization to control the

development and operation of the ethics management programme.

 A committee or group should be developed which should be responsible for training

the employees on the policies and procedures of the ethics management programme
and should resolve any ethical dilemmas that may arise. This committee can contain
senior officers.

 A person in the organization should be designated as ombudsperson who has the

responsibility of investigating or resolving complaints from the employees of the
organization against the ethics management programme.

 Each person of the organization is responsible for the implementation of the ethics
management programme.

Comparative Study: Japanese Management and Z Culture of American Companies

Culture can be considered as a constellation of factors that are learned through our interaction
with the environment and during our developmental and growth years.

A growing baby learns a basic set of values, ideas, perceptions, preferences, concept of
morality, code of conduct, and so on, through family and cultural socialization and such
prevailing culture with which the member of the family is associated determines many of the
responses that an individual makes in a given situation. The organizational culture is a system
of shared beliefs and attitudes that develop within an organization and guides the behaviour
of its members. It is also known as ‘corporate culture’, and has a major impact on the
performance of organizations, especially on the quality of work life experienced by the
employees at all levels of the organizational hierarchy. The corporate culture ‘consists of the
norms, values and unwritten rules of conduct of an organization as well as management
styles, priorities, beliefs and interpersonal behaviour that prevail. Together, they create a
climate that influences the way people communicate, plan and make decisions. Strong
corporate values let people know what is expected of them. There are clear guidelines as to
how employees are to behave generally within the organization and their expected code of
conduct outside the organization. Also, if the employees understand the basic philosophy of
the organization, then they are more likely to make decisions that will support these standards
set by the organization and reinforce corporate values. The word ‘culture’ has been derived
metaphorically from the idea of ‘cultivation’, the process of tilling and developing land.
When we talk about culture, we are typically referring to the pattern of development reflected
in a society’s system of knowledge, ideology, values, laws, social norms and day-to-day
rituals. Since the pattern of development differs from society to society, the cultural
phenomenon varies according to a given society’s stage of development. Accordingly, culture
varies from one society to another requiring a study of cross-national and cross-cultural
phenomenon within organizations. For example, Japanese work culture is very different from
American work culture. In America, the ethics of competitive individualism shapes
organizational management and operational performance. The industrial and economic
performance in America is taken as a kind of a game in which each individual desires to be a
‘winner’ in order to receive a reward for successful behaviour.

This work culture is a continuation of general culture and family upbringing where children
are encouraged to ‘think for themselves’, and show a sense of assertion and independence.
The Japanese culture, on the other hand, encourages individuals as a part of a team, thus
encouraging interdependence, shared concerns and mutual help. The organization is viewed
as a family to which workers frequently make life-long commitments as they see the
organization as an extension of their own families. The authority relations are often
paternalistic in nature and strong links exist between the welfare of the individual, the
corporation and the nation.

Origins of Organizational Culture While culture has been a continuous development of values
and attitudes over many generations, at least the organizational culture can be partially traced
back to the values held by the founders of the organization. Such founders were usually
dynamic personalities with strong values and a clear vision as to where they wanted to take
their organizations. These founders usually selected their associates and their employees who
had a similar value system so that these values became an integral part of the organization.
Second, the organizational culture is influenced by the external environment and the
interaction between the organization and the external environment. For example, one
organization may create a niche for itself for an extremely high quality defect-free product as
a result of competitive forces and customer demand, while another organization may opt for
moderate quality but lower prices. The work cultures of these two types of organizations
would accordingly differ and would be influenced by external forces such as customer
demand. Third, work culture is also a function of the nature of the work and the mission and
goals of the organization. For example, in a professional, research-oriented, small
organization, the workers may be more informal at all hierarchical levels of the organization,
the dress code may not be strictly observed and the employees may be encouraged to be
independent and innovative. In contrast, other organizations may have a strictly enforced
formal classical hierarchical structure with clearly established channels of communication
and strict adherence to work rules. Accordingly, the organizational culture of these two types
of organizations would be different. Much has been written and talked about Japanese
management styles. Almost invariably, the economic success of Japanese society is
associated with Japanese culture. The cultural aspect of organizational performance came into
focus with Theory Z, proposed by William Ouchi in 1981. Even though Theory Z draws
heavily on the Japanese approach to management, it is more a combination of the current
American as well as Japanese style of managing an organization. Basically, Ouchi’s approach
to management calls for:

 Consensus decision making

 Worker participation in all phases of organizational operations

  Genuine concern for the overall well-being of employees

 Lifetime job security

The importance of strong culture as a driving force for organizational success was
emphasized by Peters and Waterman in their well-received book, In Search of Excellence.
They observed: ‘Without exception, the dominance and coherence of culture proved to be an
essential quality of the excellent companies. Moreover, the stronger the culture and the more
directed it was towards the marketplace, the less need there was for policy manuals,
organization charts and detailed procedures and rules. In these companies, people way down
the line know what they are supposed to do in most situations because the handful of guiding
values is crystal clear.’ Some of the cultural differences in a typical American organization as
compared to a typical Japanese organization can be seen in the following comparison in
various areas and aspects of organizational operations and performance.

Typical American Organization

 Usually, employment is short-term. Layoffs are quite common. Lateral job mobility is
also common.

 Performance evaluations and promotions are relatively fast.

 Career paths are very specialized. People tend to stay in the same area, such as
accounting, and become experts in their area.

 Decisions are carried out by individual managers who are responsible for the outcome
of such decisions.

 The control systems are very explicit via policies, rules and guidelines and people are
expected to strictly follow these guidelines.

 The organization is concerned primarily with the worker’s work life and his role in
the organization.

 Typical Japanese Organization

 Fairly long-term, usually lifetime employment.

 Rigorous evaluation and slow promotion.

 People are primarily generalists and they become familiar with all areas of operations.

 Collective decision making is the norm.

  Primary reliance is on implicit control (self-control). People rely heavily on trust and
good will.

 The organization is concerned with the whole life of the worker, business as well as
personal and social.

These cultural views are so contrary to each other, even though both American as well as
Japanese organizations are successful in their own ways. Theory Z essentially combines these
two approaches and in most cases, it modifies American corporate culture to be more
consistent with Japanese corporate culture. However, since total adherence to Japanese
corporate cultural values such as lifetime employment and slow promotions can stifle
creativity, dilute the intensity of challenges and restrict upward mobility, the modified Theory
Z falls short of accepting the Japanese management style to replace the American style of
management. The modified Theory Z emphasizes the following aspects in relation to the
specific areas of differences between the operating styles of a typical American organization
and a typical Japanese organization as discussed earlier. These specific aspects are:

Long-term employment and recycling of human talent through training:

This will develop a sense of loyalty and dedication among workers.

 Relatively slow evaluation and promotion: The emphasis is more on training and
enhancement of skills. Promotions are based on skills rather than seniority.

 Career paths are not highly focused in that a person acquires a variety of skills
through job rotation and training so that he/she has a better feel of the entire
organization rather than just his/her job.

 Control is both explicit and implicit. Self-control is encouraged along with respect for
established policies and regulations. Decision making is by consensus, especially on
those key issues that would affect the activities of the workers.

 Responsibility is not collective but is assigned to individual managers who are then
held accountable for their decisions? They do have the authority to delegate some of
their decision-making authority to their subordinates but the accountability still
remains with the individual managers.

In addition to the work and performance of workers, the organization takes active interest in
the worker’s family and social life and provides facilities where social interaction among all
members of the organization, irrespective of the rank, is encouraged.
While many of these factors are common to all successful organizations, such as participative
decision making and encouraging team spirit by rewarding group efforts, some other factors
are indeed culturally biased and organizations must make decisions in accordance with their
own unique culture.

2.6 WHISTLE BLOWING

What is 'Whistle blower?'

Definition: A whistle blower is a person, who could be an employee of a company, or a

government agency, disclosing information to the public or some higher authority about any
wrongdoing, which could be in the form of fraud, corruption, etc.

Description: A whistle blower is a person who comes forward and shares his/her knowledge
on any wrongdoing which he/she thinks is happening in the whole organisation or in a
specific department. A whistle blower could be an employee, contractor, or a supplier who
becomes aware of any illegal activities.

To protect whistle blowers from losing their job or getting mistreated there are specific laws.
Most companies have a separate policy which clearly states how to report such an incident.
A whistle blower can file a lawsuit or register a complaint with higher authorities who will
trigger a criminal investigation against the company or any individual department. There are
two types of whistle blowers: internal and external. Internal whistle blowers are those who
report the misconduct, fraud, or indiscipline to senior officers of the organisation such as
Head Human Resource or CEO.

External whistle blowing is a term used when whistle blowers report the wrongdoings to
people outside the organisation such as the media, higher government officials, or police.
The crime or wrongdoing could be in the form of fraud, deceiving employees, corruptions, or
any other act which misleads people. The Whistle Blowers Protection Act, 2011 lays down
the complete framework to investigate alleged cases of wrongdoing.
There is one name which pops up in history whenever we talk about 'whistle blowers' and
that is Edward Joseph Snowden. He was a former CIA employee who leaked classified and
restricted information to the public from the United States National Security Agency in 2013.

Whistle-blowing systems and protections

The need for effective whistle-blowing systems

The value of whistle-blowing cannot be overstated. A study from Australia showed that
employee whistle-blowing was "the single most important way in which wrongdoing was
brought to light in public sector organizations" (UNODC, 2015). There is accordingly no
doubt that more needs to be done by legislators as well as public and private entities to
encourage whistle-blowing and related reports of corruption; to handle reports of alleged
corruption, wrongdoing and undue risks in a sound manner; and to provide appropriate levels
of protection for whistle-blowers. Vanderkerckhove and others (2016, p. 4) suggest that
whistle-blowing systems can be more successful if they provide a combination of reporting
channels (e.g. directly to specific trusted persons, via a telephone hotline, or through an
online channel); if the authorities make a point of communicating with whistle-blowers
throughout the investigation process to maintain trust (a failure to be responsive may give rise
to a perception that the wrongdoing is being covered up or that the investigation is not
serious); and if information from reports is connected with information from other sources
(such as surveys and audits).

Methods and channels for whistle-blowing

As insiders to an organization, whistle-blowers have specific knowledge, access and expertise

which allow them to detect corruption or other matters of concern that might otherwise
remain hidden. However, they are often in a difficult situation owing to their possible loyalty
to colleagues and supervisors, contractual confidentiality obligations, and the risk of
retaliation. A distinction can be made between open, confidential and anonymous forms of
reporting (UNODC, 2015, p. 48):

 Open reporting: Where individuals openly report or disclose information, or state

that they do not endeavour to ensure or require their identity to be kept secret.

 Confidential reporting: Where the name and identity of the individual who disclosed
information is known by the recipient, but will not be disclosed without the
individual's consent, unless required by law.

 Anonymous reporting: Where a report or information is received, but no one knows

the source.

In addition to these different forms of reporting, there are also different channels through
which to report. The three main reporting channels are: 1) internal reporting; 2) external
reporting to a regulator, law enforcement agency or other specific authority (see this Korean
example); and 3) external reporting to the media or another public platform (such as in
the Mossack Fonseca Papers case). Alternative reporting channels should, in principle, be
available to any person working in a public or private organization, although there may be
some sectors such as security forces that require specialized processes. Some countries have
special provisions for reporting to a Minister or specially appointed legal advisor.
Technology has also promoted web-based whistle-blowing channels. Some of these allow for
two-way anonymous and encrypted communication between a whistle-blower and the
recipient of the report.

Whistle-blower protection

Different jurisdictions define whistle-blowing differently. One clear distinction is the

eligibility criteria for protection. For example, some countries, such as Argentina, Bosnia and
Herzegovina and the United States, provide protection regardless of whether the reporting
person is a public or private sector employee, while other countries have more limited scopes
of protection. Some countries protect only formal employees while others also include
contractors, consultants and volunteers.

Whistle-blower protection is crucial for the success of anti-corruption detection and

enforcement and should be a key aspect of any whistle-blowing system. Owing to the
substantial benefits to the parties involved in corruption, and the serious threat of criminal
and other punishments to which these parties are exposed, persons who report these corrupt
activities can put themselves, family members and colleagues at risk. Instead of admitting to
corruption and mending their ways, persons implicated in corruption can choose to attack or
retaliate.

A study of the experience of 72 external Korean whistle-blowers of workplace bullying,

including a review of relevant literature, found frequent and significant bullying by
supervisors and colleagues in the workplace and the creation of hostile work environments
(Park, Bjørkelo and Blenkinsopp, 2018). The researchers drew two interesting conclusions
from their study: first, "bullying by superiors had a close link to bullying by colleagues" and,
second, "colleagues' understanding of the whistle-blower's reasons for acting had a significant
effect on lowering the frequency of bullying by colleagues". Female whistle-blowers might
also suffer more retaliation than male whistle-blowers do. A 2008 study on a United States
Air Force Base with 9,900 employees, of which 238 were identified as whistle-blowers,
found that more women reported poor performance reviews, verbal harassment, intimidation,
and tighter daily activity scrutiny after whistle-blowing than similarly situated male
colleagues (Rehg and others, 2008). Even if women had obtained a level of power or
authority, this did not protect them from retaliation. While this study was conducted in a very
particular, male-dominated context, and the results have not been replicated in other sectors,
it provides interesting food for thought regarding how gender might play a role in the
treatment of whistle-blowers and retaliation. For a discussion on the corruption-gender nexus,
see Module 8 of the E4J University Module Series on Anti-Corruption and for a discussion
on gender and ethics more generally, see Module 9 of the E4J University Module Series on
Integrity and Ethics.

There are many other examples, including those of individuals who do not have the resources
to survive without income or the ability to change jobs or careers. Retaliation against whistle-
blowers is a serious threat to effective anti-corruption programmes, and it harms individuals
and their livelihoods. In certain cases, such as when whistle-blowers are unjustifiably
dismissed or discriminated against on the basis of gender or sexual orientation, retaliation can
amount to a violation of human rights. Hence, a vital component of any plan to handle
corruption reports is developing a protocol for maintaining confidentiality and protecting the
people who report corruption. For more on the relationship of anti-corruption and human
rights, see Module 7 of the E4J University Module Series on Anti-Corruption. Consider also
the related discussion in Module 10 on barriers to citizen participation in anti-corruption
efforts.

Retaliation against whistle-blowers can happen regardless of the channels they use to report
on corruption, and so the relevant organization should provide protection. However, there are
certain cases where providing protection is controversial. For example, reporting to the media
as the first resort does not give the organization a chance to correct the problem and can
therefore be problematic for the organization concerned. Therefore, organizations may not
wish to provide protection in such circumstances and this may encourage such external
reporting. Furthermore, protection for reporting to the media is usually provided only when
specific legal requirements are fulfilled. Such legal requirements differ in different countries,
and could depend upon: the seriousness of the reported matter; reporting according to certain
requirements; and having previously made an internal report or a report to a regulator (see,
e.g., section 10 of the Protected Disclosure Act 2014 of Ireland; section 43 of the Public
Interest Disclosure Act of the United Kingdom; article 19 of the Law on the Protection of
Whistle blowers Act No. 128/2014 of Serbia). If the disclosure or subsequent retaliation is
brought before a court, the court will have to assess the matter on a case-by-case basis and
balance the rights and interests of the different parties. International human rights standards,
such as those enshrined in article 19 of the Universal Declaration of Human Rights (UDHR)
and article 10 of the European Convention on Human Rights (ECHR), as well as the public
interest will play a role. For a discussion on the jurisprudence of the European Court on
Human Rights regarding article 10 of the ECHR and whistle-blowing see Nad (2018).

Financial incentives

Another contentious issue, which goes beyond whistle-blowers protection, is whether or not
whistle-blowers should receive a financial reward. Financial incentives are used in the United
States and South Korea, while many European countries refrain from such a practice. One
example is Bradley Birkenfeld, the first international banker to report illegal offshore
accounts held in Switzerland by United States citizens. His disclosures resulted in recoveries
of $780 million in civil fines and penalties paid by UBS, and over $5 billion in collections
from United States taxpayers. The Swiss Government was also "forced to change its tax
treaty with the United States in order to turn over the names of more than 4,900 American
taxpayers who held illegal offshore accounts" (National WhistleblowerCenter, n.y.). Mr
Birkenfeld received a reward of $104 million. This financial incentive may have led to the
revelation of widespread illegal activity, but this flurry of reports triggered questions about
the propriety of paying for information. The pros and cons of financial incentives should be
evaluated based on the circumstances of each jurisdiction.

The (ir)relevance of motivation

The motivations of whistle-blowers make for an interesting discussion. Whistle-blowers are

often maligned and attacked as disgruntled employees, persons with a grudge against the
company or opportunists seeking some personal monetary reward or fame. However, studies
show that most whistle-blowers have motives such as integrity, altruism, care for public
safety, justice and self-preservation (Kesselheim, Studdert and Mello, 2010). In any event,
given the importance of whistle-blowing, should the motivation for reporting make a
difference? Should it matter whether an employee who reports on a corrupt supervisor is
content or disgruntled? Does it matter if the employee gets along with the supervisor or not?
It seems that the focus should first and foremost be on the reported matter, and not on the
nature or motives of the whistle-blower. Indeed, this approach has been adopted in several
jurisdictions, with Ireland being the first country to recognize the irrelevance of the
motivation for whistle-blowing in its law (section 5, subsection 7 of the Protected Disclosure
Act 2014 of Ireland).

2.7 SUMMARY

The various concepts discussed in this unit can be summarized as mentioned below:

 Ethics are those set of moral principles that guide the behavior of an individual.

 Values are defined as “things that have an inherent worth in importance and
usefulness to the possessor,” or “those standards, qualities and principles that are
regarded desirable and meaningful”.

 The core values of an organization such as professionalism, team work, integrity,

caring and stewardship.

 Managers sometimes face difficult business choices that result may result in a clash
between profits and ethics or between the public good and the company’s profits.

 Business ethics which are also referred to as corporate ethics are regarded to be the
application of ethical values to business behavior.

 Ethics are the basic rules of conduct that guides one’s actions. Laws are rules created
by the governments so as to bring about a balance in society and offer protection to its
citizens.

2.8 KEY WORDS

 Buzzword Trendy word or phrase.

 Stature Degree of development attained; level of achievement.

 Legitimate According to law; lawful; in accordance with established rules, principles,

or standards.

 Infringing To commit a breach; violate.

 Articulated Made clear or distinct.

  Veteran A person who has had long service or experience in an occupation or the
like.

 Aberration The act of departing or deviating from the right, normal, or usual course
or deviation from truth or moral rectitude.

 Dilemmas A situation requiring a choice between equally undesirable alternatives;

any difficult or perplexing situation or problem.

 Pivotal Of vital or critical importance.

 Whistle blowing The process where a person informs about another misdoings or
makes a public disclosure of corruption or wrongdoing.

 Percolate Grow or spread gradually.

 Errant Preteens of having virtues, beliefs, principles, etc., that one does not actually
possess; One who assumes a false appearance

 Manifest Evident; obvious; apparent; plain.

 Endeavour To attempt; try.

2.9 LEARNING ACTIVITY

1. What Are Ethical Dilemmas?

___________________________________________________________________________
__________________________________________________________________________

2. How Do You Make an Ethics Code Effective?

___________________________________________________________________________
__________________________________________________________________________

3. What are Core Values?

___________________________________________________________________________
__________________________________________________________________________

2.10 UNIT END QUESTIONS

A. Descriptive Questions

Short Questions

1. What do you understand by the tern conviction?

2. What are Ethical Problems?

3. Discuss the scandals of Management Ethics?

4. What is business ethics and business ethical dilemma?

5. Briefly discuss Ethical Leadership.

Long Questions

1. What Do You Do When a Valued Customer Behaves in an Unethical Manner?

2. How Do You Handle a Situation Where Something is Not in compliance with the
Ethical Standards?

3. Have You Ever Had the Challenge of Taking the Longer Route to Get Something
Done to Adhere to the Ethical Standards? Briefly Describe it

4. What Do You Do If You Find Your Friend Who Works Under You Stealing?

5. What Do You Think Is Your Most Ethical Trait?

6. Whom Did You Consult When You Were Faced with an Ethical Issue at Your Last
Workplace?

B. Multiple Choice Questions

1. What can be an apt way of defining Business Ethics?

a. Those Ethics which maximise the profitability

b. Deciding what is right & wrong in the workplace

c. Business Ethics is a Social Responsibility in business which brings down the profits

d. All of these

2. Business Ethics tries to protect the interest of ————

a. Shareholders

b. Promoters
 c. Consumers

d. Stakeholders

3. Business Ethics & Effective Corporate Governance result in ————

a. Short term profit maximization

b. Reduced taxes

c. Wealth maximisation

d. Monopoly

4. One of the principles of Business Ethics, Human Dignity means ————

a. Person should always be pardoned when he commits mistakes

b. Anyone should not be treated as a mere factor of production

c. Every employee should be promoted at periodic intervals

d. None of these

5. What is acceptable & unacceptable behaviour when one represents the organisation is
usually explained in —————

a. Mission Statement

b. Vision Statement

c. Code of Conduct

d. All three above

6. Familiarising employees with the code of ethics of the organisation is undertaken as part of
———

a. Ethics Training Programme

 b. Disciplinary system

c. Formulation of Code of Conduct

d. Grievance Redressal System

7. Which of the following statements is true?

a. All ethical issues are dealt with by law

b. Every legal act is ethical

c. Legality does not necessarily mean Ethics are followed

d. b & c both

8. Which of the following matters is related to Ethics in Finance?

a. Abiding by law

b. Executive Compensation

c. Occupational Safety

d. All of these

9. If doing unethical act appears to be lot easier & cheaper than the ethical one for achieving
a certain business goal it is a situation of —————

a. Ethical Dilemma

b. Financial Analysis

c. Weak organisation structure

d. None of these

10. Promoting diversified culture under the overall code of Business Ethics is related to ——
——

a. Principle of Sacrifice

b. Principle of Non-violence

c. Principle of Justice
 d. Principle of Polygamy

Answers

1-b, 2-d, 3-c, 4-b, 5-c, 6-a, 7-c, 8-b, 9-a, 10-d

2.11 REFERENCES

Textbooks

 S.A. Sherlekar, Ethics in Management, Himalaya Publishing House

 William B. Werther and David B. Chandler, Strategic corporate social responsibility,

Sage Publications Inc

 Robert A.G. Monks and Nell Minow, Corporate governance, John Wiley and Sons

Reference

 The Ground of Professional Ethics – Daryl Koehn

 Business Ethics – Revised Edition – Corporate Values and Society- Robert Almeder,
James Humber

 Companion to Business Ethics – Edited by Robert E Federick

 Business Ethics and Business Communications – Ashok K. Nadhani

 Ethics, Indian Ethos and Management – S. Balachandran, Raja, Nair

 Business Ethics Decision Making and Cases – O.C. Farell, John Paul Fraedrich&
Linda Ferrell

 Business Ethics Concepts and Cases – Manuel G Velasquez