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CORPORATE GOVERNANCE
Blackwell Publishing Ltd.Oxford, UK
CORGCorporate Governance: An International
Review0964-8410Blackwell Publishing Ltd. 2005
November 2005136730738Original Articles
CORPORATE GOVERNANCE AND BUSINESS ETHICS
CORPORATE GOVERNANCE
Corporate Governance and Business
Ethics: insights from the strategic
planning experience*
Ingrid Bonn** and Josie Fisher
In this paper we develop an integrated approach towards corporate governance and business
ethics. Our central argument is that organisations can learn from the development of strategic
planning in the 1970s and 1980s. We identify three weaknesses – a bureaucratic and formalised
approach, lack of implementation and lack of integration throughout the organisation – which
were prevalent in strategic planning in the past and which are potentially just as problematic
for an integrated corporate governance approach to business ethics. We suggest ways these
weaknesses might be avoided and provide questions for boards of directors to consider when
integrating ethical concerns into their organisations’ corporate governance structures.
Keywords: Corporate governance, business ethics, strategic planning
Introduction
orporate governance is concerned with
the processes by which organisations are
directed, controlled and held accountable
(Australian Standard AS8000, 2003). It deals
with the rights and responsibilities of an
organisation’s board, its management, shareholders and other stakeholders (OECD, 2004)
and requires balancing their interests with the
economic goals of the organisation as well as
the interests of society as a whole. Sir Adrian
Cadbury (2000) made this point very clear:
C
*An earlier version of this
paper was presented at the
2004 Australian and New
Zealand Academy of Management Conference, Dunedin,
New Zealand.
**Address for correspondence:
Graduate School of Management, Griffith University, PMB
50 Gold Coast Mail Centre,
Queensland 9726, Australia.
E-mail: I.Bonn@griffith.edu.au
Volume 13
Corporate Governance is concerned with holding the balance between economic and social
goals and between individual and communal
goals. The corporate governance framework is
there to encourage the efficient use of resources
and equally to require accountability for the
stewardship of those resources. The aim is to
align as nearly as possible the interests of individuals, corporations and society.
Cadbury’s definition suggests that corporate
governance is an overarching concept with
implications for an organisation’s approach to
Number 6
November 2005
corporate social responsibility and business
ethics in addition to ensuring that regulatory
responsibilities are fulfilled.
Over the past decade, there has been an
increased interest in corporate governance.
This can partly be attributed to a rising number of corporate crises and failures. Events
such as the Exxon Valdez disaster, where an
entire ecosystem was threatened, or the
Ford Pinto scandal (where the organisation
decided to put profit ahead of human safety
by not recalling cars despite their known
defects) have sparked discussions about the
role of large corporations in society and
raised questions about their ethical standards, management decisions and corporate
governance practices (Kiel and Nicholson,
2003). Corporate failures such as Enron and
WorldCom in the United States and HIH
Insurance, Ansett and Pan Pharmaceuticals in
Australia have raised concerns over the effectiveness of corporate governance and corporate accountability.
The above examples of corporate failures
and managerial misconduct highlight the
need for organisations to pay more attention
© Blackwell Publishing Ltd 2005. 9600 Garsington Road, Oxford,
OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
CORPORATE GOVERNANCE AND BUSINESS ETHICS
to corporate governance practices. In this
paper we focus on how organisations can
address concerns about corporate social
responsibility and, particularly, business
ethics in their corporate governance structures, and how they can encourage high
standards of ethical behaviour throughout
their organisations. We first discuss the
relationship between corporate social responsibility, business ethics and corporate governance. We then draw an analogy between the
approach towards strategic planning in the
1970s and early 1980s and the approach
towards corporate governance and business
ethics at present. We argue that there are lessons to be learnt from the development of strategic planning that can be used to provide
guidance for an integrated corporate governance approach that incorporates principles
relating to ethical conduct. We identify three
areas of potential weakness in incorporating
business ethics into corporate governance that
were also evident in the development of strategic planning, namely (1) a bureaucratic and
formalised approach, (2) lack of implementation and (3) lack of integration throughout the
organisation. We discuss the ways strategic
planning has overcome these areas of weakness and suggest how corporate governance
can deal with them. We then provide a number
of questions that can guide boards of directors
when integrating ethical concerns into their
organisation’s corporate governance structure
and evaluating their success in doing so.
Corporate social responsibility,
business ethics and corporate
governance
It is widely claimed that businesses have obligations that go beyond profit maximisation
and that businesses should make a positive
contribution to society (see for example,
Boatright, 2003; Carroll, 1999; Fisher, 2004;
Robbins et al., 2003; Shaw and Barry, 2004).
Corporate social responsibility, according to
Epstein, “relates primarily to achieving outcomes from organizational decisions concerning specific issues or problems which (by some
normative standard) have beneficial rather
than adverse effects upon pertinent corporate
stakeholders” (1987, p. 104). It involves
“bringing corporate behavior up to a level
where it is congruent with the prevailing
social norms, values, and expectations” (Sethi
quoted in Boatright, 2003, p. 374). Corporate
social responsibility encompasses those expectations society has of organisations at a given
point in time. They are “the behaviors and
© Blackwell Publishing Ltd 2005
731
norms that society expects business to follow”
(Carroll, 1999, p. 283). Society expects businesses to make a profit and obey the law and,
in addition, to behave in certain ways and
conform to the ethical norms of society.
These behaviours and practices go beyond
the requirements of the law, and seem to be
constantly expanding (Carroll, 1999).
The relationship between corporate social
responsibility and business ethics can be characterised in various ways. Carroll’s “Pyramid
of Corporate Social Responsibility” (1991, p.
42), one of the most widely cited approaches,
identifies four dimensions of corporate social
responsibility: economic, legal, ethical and
philanthropic (or discretionary). More recently, Schwartz and Carroll (2003) proposed a three domain account of corporate
social responsibility. These domains are consistent with the earlier model except that
philanthropy is no longer a discrete category.
The domains are represented by a Venn diagram with the overlapping circles representing economic, legal and ethical responsibilities
resulting in seven combinations. In both
models, ethics is one aspect of the corporate
social responsibilities of business.
As pointed out above, corporate governance
is concerned with the processes by which
organisations are directed, controlled and held
accountable and requires balancing the interests of various stakeholders and society as a
whole with the economic goals of the organisation. While corporate governance is concerned with all of the dimensions of corporate
social responsibility identified above, it is the
way that ethics is dealt with at the governance
level that is the focus of this paper. In other
words, we focus on organisational approaches
to ethics at the level of corporate governance.
Corporate governance principles and
business ethics
The need for organisations to make explicit the
behaviour expected from board members is
widely recognised. For example, the Australian Stock Exchange (ASX) Corporate Governance Council advises organisations to
“clarify the standards of ethical behaviour
required of company directors and key
executives . . . and encourage the observance
of those standards” (2003, p. 25). The ASX recommends establishing a code of conduct that
identifies practices for directors, the CEO and
other key executives necessary to preserve the
ethical reputation and integrity of the company and that outlines the responsibility of
individuals to report unethical practices. The
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Number 6
November 2005
732
CORPORATE GOVERNANCE
ASX also suggests a number of areas with
which a code of conduct should deal: conflicts
of interest, corporate opportunities, confidentiality, fair dealing, protection of and
proper use of the organisation’s assets, compliance with laws and regulations, and encouraging the reporting of unlawful/unethical
behaviour (ASX, 2003).
Similar guidelines for corporate governance
have also been developed by the OECD, the
Higgs report in the United Kingdom, the New
York Stock Exchange (NYSE) and the Council
of Standards Australia. The Higgs report, for
example, states that “[t]he board should set
the company’s values and standards and
ensure that its obligations to its shareholders
and others are understood and met” (2003, p.
21). The report further outlines the personal
attributes that should be possessed by nonexecutive directors: “First and foremost, integrity, probity and high ethical standards are a
prerequisite for all directors” (p. 29).
In addition to making board expectations
explicit, there is also a recognised need for
companies to provide information relating to
expected behaviour to all employees. The
Investment and Financial Services Association
Limited (IFSA) Guideline 17 (2003, p. 36), for
example, recommends the adoption of a company code of ethics. The NYSE Rule 10 states:
“Listed companies must adopt and disclose a
code of business conduct and ethics for directors, officers and employees . . .” (2003, p. 15).
The ASX (2003) identifies ten corporate governance principles, two of which are of interest
here because they clearly refer to ethics – Principle 3: Promote ethical and responsible
decision-making and Principle 10: Recognise
the legitimate interests of stakeholders. One
obvious way for a board to respond to these
principles is to introduce a code of conduct/
ethics for all employees in addition to a code
that focuses on the board and top executives.
The above recommendations suggest that
an organisation’s approach to ethics must
have its foundation in its corporate governance framework. However, we argue that
this is just the first step. Pan Pharmaceuticals
Limited, an Australian publicly listed company, is an example of an organisation that
despite meeting its corporate governance
requirements was forced into receivership
because of its unethical behaviour. Pan
Pharmaceuticals was Australia’s largest contract manufacturer of complementary medicines such as herbal, vitamin, mineral and
nutritional supplements. They also manufactured some over-the-counter medicines, including pain relievers and cold and flu
preparations. In its 2002 annual report, Pan
Pharmaceuticals stated that the board “accepts
Volume 13
Number 6
November 2005
and observes the recommendations of the Corporate Governance Council of the Australian
Stock Exchange Limited”. However, in April
2003 the Australian medicines watchdog, the
Therapeutic Goods Administration (TGA),
suspended the licence held by Pan Pharmaceuticals to manufacture medicines after TGA
inspectors found serious deficiencies and failures in the company’s manufacturing and
quality control procedures, including the systematic and deliberate manipulation of quality
control test data, substitution of ingredients
and substandard manufacturing processes.
The Expert Advisory Committee which reviewed the audit reports advised the TGA
that the failures in manufacturing practices
were so bad that they created immediate risks
of death, serious injury or serious illness and
that no confidence could be placed in the
quality of any products manufactured by Pan
Pharmaceuticals. This led to the biggest product recall in Australia’s history and the company went into liquidation in September 2003
(Australian Consumers’ Association, 2003;
Therapeutic Goods Administration, 2003).
As the example of Pan Pharmaceuticals
demonstrates, accepting and observing the
recommendations of the Corporate Governance Council is not enough to ensure ethical
behaviour throughout the organisation. In the
next sections we discuss what organisations
can do to move beyond mere compliance with
corporate governance principles in order to
develop an integrated approach towards corporate governance and business ethics that
encourages high standards of ethical behaviour throughout the organisation. We
approach this task by drawing an analogy
between the approach towards strategic
planning in the 1970s and 1980s and business
ethics at present. We believe it is appropriate
to draw such an analogy for three main reasons. First, strategic planning can be regarded
as an on-going process by which senior managers identify objectives and choose a set of
strategies for the organisation. This process
requires input from middle managers as well
as employees at the operating level (Floyd and
Wooldridge, 2000). Similarly, a commitment to
business ethics involves establishing policies
and processes that identify and support the
ethical objectives of the organisation. This process also requires continuous input from all
levels within the organisation (Ferrell et al.,
2000; Schermerhorn, 2002).
Second, strategic planning is goal-oriented
and encourages a medium- to long-term perspective of what an organisation wants to
achieve (Hill et al., 2004). Likewise, the identification and adoption of ethical principles has
the purpose of encouraging certain kinds of
© Blackwell Publishing Ltd 2005
CORPORATE GOVERNANCE AND BUSINESS ETHICS
behaviours and outcomes, is regarded as positive for business in the long-term (Grace and
Cohen, 2005) and, together with other corporate governance principles, can drive business
performance (KPMG, 2003). Third, strategic
planning requires cross-sectional communication and cooperation and serves an important
integrative function within the organisation
(Viljoen and Dann, 2000). In exactly the same
way, a commitment to business ethics requires
the engagement of everyone in the organisation (Grace and Cohen, 2005) and involves
identifying shared values and objectives
towards which the entire organisation works.
Building upon these similarities, we argue
that there are lessons to be learnt from the
development of strategic planning that can be
used to provide guidance for an integrated
corporate governance approach that incorporates principles relating to ethical conduct.
Strategic planning and
business ethics
When the concept of strategic planning was
developed around 1965, many large organisations embraced it as a formal technique and
established elaborate strategic planning systems. The notion of strategic planning, according to Mintzberg (1994a), became a virtual
obsession within a decade. However, by the
early 1980s there was widespread disenchantment with the planning activities from the
previous decade. The main problems with
strategic planning were: (1) a bureaucratic and
formalised approach, (2) lack of implementation and (3) lack of integration throughout the
organisation (Bonn and Christodoulou, 1996).
In the following three sections we discuss
these problems in relation to strategic planning and how they were overcome. We also
identify similar problems with implementing
corporate governance principles relating to
ethical conduct and suggest ways to deal with
them.
Bureaucratic and formalised approach
Strategic planning processes in the 1970s and
early 1980s were characterised by a high
degree of formalisation and regulation. The
planners relied extensively on planning techniques and analytical methodologies and carried out a series of mechanical steps with the
result that the form had become more important than the content. Managers described the
strategic planning process as a “repetitive
bureaucratic nightmare” which had “developed a life on its own” (Bonn and Christodoulou, 1996, p. 545). The strong emphasis
© Blackwell Publishing Ltd 2005
733
on analysis and formalisation left little room
for flexibility, creativity and strategic insight
(Mintzberg, 1994b).
During the past two decades organisations
have tried to improve the flexibility of their
planning systems and to rely less on rules
and regulations. Wilson (1994) argued that
strategic planning has moved towards an
executive-driven activity, which balances
“hard” quantitative and “soft” judgemental
tools and approaches. Bonn and Christodoulou (1996) found that greater flexibility
in the planning system was reflected in the
changing role of informal planning. Informal
planning discussions were seen as important for improving the quality of strategic
thinking in the organisation and helped the
participants in strategy meetings to focus on
issues of strategic importance.
There is a similar risk that the current focus
on compliance with corporate governance
guidelines could lead organisations to focus
on formalisation and “box ticking”, replicating
the experience with strategic planning. The
various corporate governance guidelines that
have been developed suggest that organisations actively set boundaries for business
activities and clarify the expected standards of
behaviour for their boards of directors, senior
managers and employees. Such policies “provide guidance to personnel to help them
recognize and deal with ethical issues, provide mechanisms to report unethical conduct,
and help to foster a culture of honesty and
accountability” (NYSE, 2003, p. 15). One response is to design and implement a code of
ethical conduct (sometimes referred to as a
code of conduct or a code of ethics), which is
described as a rational, top-down approach
(Johnson and Smith, 2002).
However, as the experience with strategic
planning has shown, a strategic plan that was
developed through a formalised and bureaucratic approach did not necessarily produce
the desired behaviour within the organisation.
Similarly, the existence of a code of ethical
conduct does not ensure ethical behaviour
throughout the organisation. On the contrary,
managers and employees may regard the code
of ethics “as one more set of procedures to be
undertaken to keep the bosses, the auditors or
the regulators happy” (Bartlett and Preston,
2003, p. 45). They may feel that complying
with such a code will add to their workload
and does not provide clear tangible benefits,
resulting in a lack of interest and commitment.
Enron, for example, had adopted a code of
ethics and used formal means to implement it.
The company’s actions, however, clearly demonstrated that its code did not ensure ethical
behaviour (Adam and Rachman-Moore, 2004).
Volume 13
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November 2005
734
CORPORATE GOVERNANCE
Cleek and Leonard (1998) identified the
objectives of a code of ethics as increasing
social responsibility, providing guidelines for
acceptable employee behaviour, improving
management, assisting organisations to comply with government guidelines and improving corporate culture. However, they
concluded that the mere existence of a code of
ethics was not a significant factor in influencing behaviour; rather, it is the way the code
is communicated, enforced and used that
has a greater impact. Research conducted by
S …
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