25557 Final EXAM Revision PDF

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Lecture 4: Ethics and Corporate Social Responsibility in Business Why is ethics important in business?  Business ethics is a process of a decision making. Business must take ethics into account and integrates ethics into its organizational structure Levels of ethical decision making  In term of individual, organization and individual businesses’ and industries’ Goals of business ethics  Develop some skills and knowledge to identify issues  Understanding how and why people behave unethically  Deciding how one should act, what should do and the type of person one should be as an individual  Creating ethical organisation  Thinking through social, economic, and political policies Making a case for business ethics

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Separation thesis: ethical standard should be kept separate from business decisions

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Wide range of stakeholders is anyone who affects or is affected by decisions made within the firm, for better or worse

Ethics and law  Legal norms and ethical norms are not identical  Whistle-blowing is the voluntary release of non-public information, as a moral protest. This is where someone has seen some behaviour happened and they see or believe that it not ok, and they go to someone above them to tell it. It is where they go outside the organisation.  Policy: If you see any bad behaviour, you should go to “trained personnel” to receive and investigate reports. And it should be an appropriate action. There should be a guarantee against retaliation.

Risk assessment is a process to identify potential events that may affect the entity, and manage risk to be withing its risk appetite.

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Normative has criteria of right and wrong

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How and why they act the way they do – describe

 Social-scientific approach (descriptive rather than normative): look at situation and factors and then what we going to do, why they act the way they did?  Normative approach: I should step back from what should I do? What rights and responsibilities are involved? What “good” will come from this situation? Am I being fair, just, virtuous, kind, loyal, trustworthy?

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Practical reasoning: reason about what we should do

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Theoretical reasoning: what we should believe => the pursuit of truth

Corporate social responsibility  Business has a social responsibility to obey (tuan thu) the law  Business has a social responsibility to produce the goods and services society demands Models of corporate social responsibility  We want to achieve profit but not to cause harm and not to break the law  Business has a responsibility to prevent harm  Business has a social responsibility to do good things and to make society a better place 

Narrow economic model of CSR to maximize profit and shareholders wealth

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Stakeholders model neither a business nor the employees are exempt from ordinary ethical responsibilities

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Integrative model part of the managerial responsibility

1. Economic model  Business is an institution. Business is creating jobs and wealth provide further social benefits

 Business has no social responsibilities beyond the economic and legal ends for which it was created  Business is free to contribute to social causes as a matter of philanthropy o Builds good reputation/motivation by doing the good things for people in the communities

2. Stakeholders model  Business exists within social and ethical relationships and create value for shareholders  Norman Bowie suggest business has ethical duty to respect human rights o Moral minimum that we can expect for every person o Causing no harm o Should maximise profits  Benefits some and impose costs on others  Try to balance the ethical interest of all parties 3. Integrative model

Indigenous Australia – 2020 closing the gap report

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The target to halve the gap in child mortality by 2018 is ON track

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The target to have 95% of all indigenous 4-year-old enrolled in early childhood education by 2025 is ON track

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To close the gap in school attendance by 2018 is NOT on track

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To halve the gap in reading and numeracy by 2018 is NOT on track

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To halve the gap in year 12 attainment by 2020 is ON track

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To halve the gap in employment by 2018 is NOT on track

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To close the gap in life expectancy by 2031 is NOT on track

Reconciliation action plan (RAP)

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Vision of RAP is based and measured on 5 dimensions:

 Historical acceptance  Race relation  Equality and equity  Institutional integrity: is the active support of reconciliation by the nation’s political, business and community structures  Unity

The role of reputation  A firm’s financial goals must be balanced against, environmental considerations  CSR can impact a firm’s reputation within a community

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Social marketing

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Practice of attending to the “image” of a firm is referred to as reputation management

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Companies may be challenged for engaging in CSR activities

 There are many aspects of a firm’s reputation

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Well-respected for its products and services, financial performance, good place to work

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If a firm develops a bad reputation, create barriers to business success

Ethics and CSR in business

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Responsibility may be based in concept of good corporate citizenship, ethics and social contract or enlightened self-interest.

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It is impossible to engage in business without encountering and addressing ethics and CSR more broadly

Lecture 5: Sustaianbility and Governance Business Opportunities

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Create environmentally and economically sustainable products and services is creating unlimited business opportunities

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Sustainable business seeks to create new ways of doing business in which success is measured in term of economic, ethical and environmental sustainability

 Called the triple bottom line approach

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Backcasting: the natural step challenges business to imagine what a sustainable future must hold

 Sustainable business must use resources and produce wastes at rates that do not jeopardize (gay nguy hiem) human well-being

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Two environmental realities underscore the importance 

Global climate change, species extinction, soil erosion and nuclear wastes threaten future generations

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Science of ecology and its understanding of the interrelatedness of natural system show the human independence on ecosystems

The market approach

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Debate continues on whether efficient markets or government regulation is best when meeting environmental responsibilities of business

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If the best approach is efficient market, then business should seek profits and allow market to allocate resources efficiently

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If government regulation is best, then business should comply to regulatory requirements

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Environmental issues are economic problems that deserve economic solutions

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William Baxter argued that to optimal level of pollution, best way is to leave it to a competitive market 

Society could strive (phan dau) for pure air and water but the cost for this is too high

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A reasonable approach for this is air and water quality safe enough to breathe and drink

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From market perspective, resources are “infinite”

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History shows that humans always found substitutes for any shortages

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A variety of market failures point to the inadequacy ( su bat cap) of market solutions 

Example: the existence of externalities.  The “cost” of environmental degradation is borne (chịu) by parties “external” to the economic exchange, such as future generations

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Example: when no markets exist to create a price for important social goods, such as scenic vista  Only markets fail to guarantee that such things are preserved and protected

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Example: a distinction between individual decisions and group consequences  Ethical issues may be missed if policy decisions are the outcome of individual decisions

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Corporate average fuel economy (CAFÉ) standards would not happen in a market approach 

Established by U.S. Energy Policy Conservation Act of 1975, CAFE is the sales-weighted average fuel economy, expressed in miles per gallon (mpg), of a manufacturer’s fleet of passenger cars or light trucks

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Responses to the challenges faced due to market approach 

Internalising external costs and assigning property rights to unowned goods

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Market can prevent harm through information supplied by the existence of market failures  Known as first-generation problem

The regulatory approach

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U.S. environmental legislation enacted during 1970s, Australia was introduced in 1974

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Before these laws, the primary legal to address environmental problem was tort law

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As consumers, individuals could demand environmentally friendly product

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As citizens, individuals could support environmental legislation

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In May 2019, a group of eight Torres Strait Islanders lodged a complaint with UN Human Rights Committee against the Australian government for breaching human rights obligations owned under the International Covenant on Civil and Political Rights (ICCPR).  It is argued that Australian government’s failure to take sufficient action to curb emissions and implement adaption measures has violated the right to culture, to family and to life under ICCPR

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Several problems suggest that the regulatory approach is inadequate over long term  First, underestimate the influence that business can have in establishing law  Second, underestimate the ability of business to influence consumer choice  Third, assume that economic growth is environmentally and ethically begin

The sustainability approach

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The 1980s brought new model which combined financial, environmental and ethical responsibilities  Sustainable development 

Meet present needs without compromising future generations’ needs

 Sustainable business practices 

In which activities meet standards of sustainability

 Three pillars of sustainability 

Three factors used to judge the adequacy of sustainable development

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Sustainable development must be economically, environmentally and ethically satisfactory

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Over long term, resources and energy cannot be used, nor wasted produced, at rates at which the biosphere cannot replace of absorb them without jeopardizing its ability to sustain human life  Known as biophysical limits to growth  The biosphere can produce resources indefinitely, and absorb wastes indefinitely but only at a rate and within a type of economic activity  The goal is find that rate and type of activity to create a sustainable business

The business case for sustainable economy

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First, sustainability is a prudent (than trong) long-term strategy  Business need to adopt sustainable practices to ensure long-term survival

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Second, the huge unmet market potential can only be met in sustainable ways  The economic pyramid represents the largest and fastest growing economic market in human history

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Third, significant cost savings can be achieved with sustainable practices

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Fourth, competitive advantages exist for sustainable businesses

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Finally, sustainability is a good risk management strategy

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Waste should not be eliminated, or not produced at a rate faster than the biosphere can absorb it

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Three general principles that will guide the move toward sustainability for firms  Must become more efficient in using natural resources  Should model entire production process on biological processes  Should emphasize the production of services rather than products

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Eco-efficiency: introduced at Rio Earth Summit in 1992, this is a way business can contribute to sustainability by reducing resource usage in its production cycle  “Doing more with less” is a long-standing environmental guideline and a good management practice  A “Factor Four” increase in efficiency would achieve double the productivity from half the resources

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Closed loop production: seeks to integrate what is presently waste back into production in much the way that biological processes turn wastes into food

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The goal of biomimicry is to eliminate waste rather than reducing it. There are two phases:  Take-make-waste: business takes resources, makes products out of them and discards whatever is left over  Cradle (nôi) to grave (mồ): cradle-to-grave or life-cycle responsibility holds that a business is responsible for the entire life of its products, including the ultimate (cuối cùng) disposal (xử lý) even after the sale

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A cradle-to-cradle responsibility holds that a business should be responsible for incorporating the end results of its products back into the productive cycle

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Service-based economy: interprets consumer demand as a demand for services such as clothes cleaning rather than a demand for products such as washing machines  This change produces incentives for product redesigns that create more durable and more easily recyclable products

Professional duties and conflicts of interest

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Enron Corporation brought ethics of finance to prominence at the start of the 21st century  Gatekeepers: act as “watchdogs” to ensure those in marketplace play by rules and conform to the market functions as it should

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The most basic ethical business issue facing gatekeepers involves a conflict of interest  This exists when a person holds a position of trust that requires that he or she exercise judgement on behalf of others, but where his or her personal interest and/or obligations conflict with the proper exercise of that judgement

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Conflicts can arise when a person’s ethical obligations in their professional duties clash with personal interests  Such professionals are said to have fiduciary duties – a legal duty, grounded in trust, to act on behalf of or in the interests of another – to their clients

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The gatekeepers function is necessary, but self-interest can make it difficult to fulfill gatekeepers duties.

Internal controls: mechanism are established internally to comply with financial reporting laws and regulations. The elements comprising control are:

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Control environment: cultural issues such as integrity, ethical values, competence, philosophy, and operating style

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Risk assessment

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Control activities

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Information and communications

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Ongoing monitoring

Board of directors The corporate failures of recent years would suggest:

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A failure on the part of corporate boards

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A failure of government to impose high expectations of accountability on board

In many cases, boards and executives operated with the law

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Board should keep an eye on the operations

Conflicts of interest in a company

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Think for the whole organisation. Who are going to be affected by?

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In accounting and auditing area, it requires a good level of compliance. They need to audited to make sure everything is clear and in fair and accurate in the report

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CEO and Executives to help determine who will be in the boards, and the boards help to determine how to pay => there is a little conflict here

Insider trading

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Private information that not yet been released to public

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Trading would be illegal if I hold a private inside information that would impact the value of the stock and then I tell anyone and trade on it.

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Insider trading may be based on a claim of unethical misappropriation of proprietary knowledge  Proprietary knowledge refers to knowledge only firm should have, knowledge own by the firm and not to be used by abusing one’s fiduciary responsibilities to the firm.

Lecture 6: Management compensation and performance measurement What is the agency problem?

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Is a conflict of interest inherent in any principal-agent relationship. That is, where one party (the agent) act on behalf of another party (the principal)

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In corporate finance, agency problem usually refers to a conflict of interest between a company’s management and the company’s stockholders

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The manager acting as the agent for shareholders, or principals, is supposed to make decisions that will maximise shareholder wealth even though it is maximise their own wealth

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Incentives

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Bonding cost (cost incur in managing the principal-agent rela)

Incentive bypass problems

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Top management cannot bypass middle managers and employees to make investment decision for several reasons:  Top management must rely on analysis done at lower level  The details of capital investment project are beyond the view of executives and top managers so they need to rely on employees  Many investments are not in the capital budget, include R&D, keep up skilling the workers and middle managers’ qualification  Operating managers make small decisions every day, these will add up to large capital outlay  Executives are subject to the same kinds of temptations (sự cám dỗ) that afflict lower layers of management

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So top managers need to ensure that middle managers and employees have the right incentives to find and invest in positive NPV

Agency problems in capital budgeting

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Manager with fixed salary will face various temptations all of the time  Reduced effort – slack off  Perks (đặc quyền) – non-pecuniary (phi tiền tệ) rewards (rewards not part of our pays)  Empire building – reluctant (miễn cưỡng) to disinvest  Entrenching investment – projects that requires or reward the skills of existing mangers (skills only I have)

Agency problems and risk taking

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Managers are too risk averse (xu hướng không muốn take risk) but there are some exceptions:  Some managers take some risks to reach the top ranks (get promoted)  Managers compensated with stock options have an incentive to take risk  Managers have nothing to lose by taking on risks; gambling on redemption  Organisations hesitate to curtail (cắt giảm) risky activities that are delivering, at least temporarily, rich profits

Monitoring

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Agency costs can be reduced by monitoring a manager’s efforts and a...