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Ethical Orientation

‘Commerce is as a heaven, whose sun is trustworthiness and whose moon is trustfulness

—Baha u llah’

 

 

Five stages of ethical erosion wherein one would likely to get caught doing¹

Good business ethics should be a part of every business. Many global businesses, including most of the major brands that the public use, can be seen not to think too highly of good business ethics. The eye-catching headlines like Mattel does damage control after Recall, Del Monte Pet Products recalls food items, Toshiba Laptop Batteries Pose Fire Hazard, and Dole Pre-packaged Salads Recalled are a real-world example of a leading brand taking the hit for ethics or compliance breaches committed by suppliers. Money is the major deciding factor. If a company does not adhere to business ethics and breaks the laws, they usually end up being fined. Billion dollar profits blind the companies to their lack of business ethics, and finally the money wins.

INTRODUCTION

Being an ethical company is not enough anymore. These days, leading brands are judged by the company they keep and trust they build. Consumers, investors, business partners, regulators and media organizations now expect a company and its entire supply chain to be ethical. The supplier-generated ethics scandal is probably one of the biggest (and least foreseen) business risks most leading companies face today. The damage can be great, and protective measures can and should be adopted immediately. The good news is that feasible, affordable solutions exist and can be implemented relatively quickly and painlessly.

Today the business organizations are facing pressures from various sources (government, consumer forums and competition) to improve upon the working conditions in their supply chains. The stakeholders are focussing more on the ethical issues, corporate social responsibilities and environmental issues. Hence, managing the issues in supply chain is one of the indicators of how well a company is ethically run. The pressure on companies is increasing and the media is gunning on business practices.

The poor labour standard in many companies is coming in their way of progress on establishing good labour practices and implementing ethical codes. However, the organizations that are taking these issues seriously are at various stages of the process and are out of public and government focus.

The eighteenth-century economist Adam Smith demonstrated how in a free market the self-interest of producers and consumers will produce an outcome desirable to all concerned. He further indicated that the market can also lead to inequality of income, wealth and market power. According to him, monopoly suppliers can exploit consumers, monopoly buyers can exploit supply firms and worldwide inequality of income can result in unethical practices such as the child labour. The prominent ethical issues in the society are involvement in the community, honesty, truthfulness and fairness in marketing, use of animals in product testing, agricultural practices (intensive farming), degree of safety built into product design, donation to good causes, etc. The real ethical issue in the business is the extent to which a business accepts its alleged responsibilities for mishaps, spillages, leaks and selling of addictive products. Some of the ethical issues arising from the industry practices are as follows:

• Treatment of customers
• Organization's loyalty to employees in difficult economic conditions
• Working conditions and treatment of workers
• Supply firms’ business practices
• Child labour

PROCUREMENT—ETHICAL PRACTICES

Purchasing is a strategic function in the organization. It has broadened the scope of purchasing. Procurement is the process of acquisition of goods and services in a responsible manner for conducting a business. It has also changed the responsibilities of the purchasing managers who are empowered to spend a huge amount of money in purchasing the goods and services for the organization. This responsibility has presented them with ethical dilemmas involving questionable purchasing practices.

The approaches by institutions/organisations to ‘ethical procurement’ often concentrate only on supplier standards and practices rather than on the institution's/organisation's own policies and practices. According to the UK's Institute of Business Ethics, ² ethical issues arise mainly in three areas of procurement practice and all three should be considered as follows:

Procurement Conduct

This refers to the way the firm's staff does the business. The procurement conduct is the manifestation of the organization culture. It encourages and supports the employees to act with integrity and in line with the firm's ethical values in establishing and maintaining vendor relationships. The suppliers are treated with dignity and paid on time. The corporate gifts are officially registered. The buying firm provides adequate transparency during tendering or engagement in contract terms.

Selection of Suppliers

In the process of supplier selection, there are set criteria and guidelines rather than the subjective decision-making base of likes and dislikes and personal gains. In the process, the buying firm seeks to further its corporate responsibility objectives through its purchasing activity and supplier relationships.

Supplier's Practice

In this, the firm will go to the extent of understanding the supplier's supply chain and also their procurement practices. The buying firm imposes social and environmental standards on their suppliers (e.g., health and safety).

In today's competitive business, the importance of sustainable supplier relationship cannot be denied. The reliability of a firm's suppliers can be considerably enhanced through mutually beneficial terms, fair practice and trust. The risk with regards to the firm's reputation very much depends on its suppliers’ integrity and reputation.

Buying firm's ethical business policies imbibes ethical values and responsibilities in their employees. A standard of ethics covers issues not covered by law concerning a specific function—like procurement. Once commitments and expectations have been established, it is important to ensure that they are met and continued to be appropriate. The procurement staff will need training, particularly in how to resolve dilemmas and competing priorities. For establishing ethical procurement practices in business the following steps need to be carried out by the firms:

• Establish a code of conduct in purchasing
• Integrate ethical purchasing into existing management systems
• Use rewards and performance review system
• Ensure top management support for establishing ethical code
• Understand the business environment and culture of the countries wherefrom goods are sourced
• Develop skills and knowledge appropriate to ethical buying
• Develop a communication strategy for all stakeholders
• Provide ethical training for purchasing staff
• Ensure that labour standards are a key criterion when selecting suppliers
• Visit factories and workplaces of suppliers for ethical audits

MANUFACTURING—ETHICAL PRACTICES

This area of business ethics usually deals with the duties of a company to ensure that the manufacturing processes do not cause harm to employees and the society. In manufacturing, to define a degree of permissibility depends on the changing states of preventative technologies or changing social perceptions of acceptable risk. It deals with defective, addictive and inherently dangerous products and services, (e.g., tobacco, alcohol, weapons, motor vehicles and chemical manufacturing), ethical relations between the company and the environment, ethical problems arising out of new technologies and product testing ethics (animal rights and animal testing, use of economically disadvantaged groups as test objects).

The leading business organizations in general follow the following ethical policies:

Forced labour   The firm will not make use of forced labour in the manufacturing operations. The employment in the organization including overtime shall be on a voluntary basis.

Child labour   The firm will not put children (below 16 years of age or younger than the age for completing compulsory education in the country) to work.

Working hours and compensation   The applicable national and local wage and working hour laws will be followed consistently by the firm. Overtime work if necessary will be conducted with the consent of the workers. The workers will be given adequate compensation for overtime work as per the prevailing standards.

Health and safety   The firm will provide a clean, safe and healthy place to work and all facilities to promote an awareness of health and safety issues to their employees. The firm will give proper training to their employees for fire prevention, emergency evacuation, proper use of safety equipment, basic first-aid and the proper use and disposal of hazardous waste materials.

Abuse and discrimination   The firm will not discriminate employees on any ground. The treatment to all employees will be with dignity and respect. No employee shall be subject to abuse, cruel or unusual disciplinary practices.

Communication of principles   All employees will be communicated properly through oral and written way.

Environmental impact   The firm takes care of the environmental issues through proper programs and practices. The emphasis is mainly on reduction and recycling of waste. The manufacturing facilities comply with all applicable laws relating to the environment pollution.

Freedom of association   Firms allow employees to choose (or not) to associate with legally sanctioned organizations or associations. The firm will not make any unlawful interference in their rights.

Monitoring   The management conducts periodic on-site visits of working and living conditions. They initiate audits of production records and practices and of wage, hour and payroll information maintained by facilities, to review and ensure compliance with these principles.

Compliance with applicable laws   The manufacturing facilities would comply with the laws of the country in which they are conducting business.

Fair dealing   Employees would endeavour to deal fairly with the company's customers and suppliers and each other. No one should take unfair advantage of anyone else through manipulation or misrepresentation of material facts.

Quality   Products that meet the quality standards are essential to the enterprise success. Everyone in the company is responsible for product quality and must be committed to ensuring the effectiveness of the quality management system.

Confidentiality   Employees, officers and directors would maintain the confidentiality of information entrusted to them by the company, its customers, and its vendors and suppliers, except when disclosure is authorized or legally mandated. Confidential information includes all non-public information.

MARKETING—ETHICAL PRACTICES

In marketing, the common ethical issues are a lack of clarity in pricing, selling at a loss to increase market share and destroy competition in order to subsequently raise prices, price fixing cartels, encouraging people to claim prizes when they phoning premium rate numbers, “bait and switch” selling, high pressure selling to the elderly, counterfeit goods and brand piracy, copying the style of packaging in an attempt to mislead consumers, deceptive advertising, irresponsible issue of credit cards and the irresponsible raising of credit limits, unethical practices in market research and competitor intelligence. The ethical issues relating to products are selling goods abroad, which are banned at home, omitting to provide information on side effects, unsafe products, built in obsolescence, wasteful and unnecessary packaging, deception on size and content, inaccurate and incomplete testing of products, and treatment of animals in product testing.

Ethics is the set of rules or standards that govern the conduct of a person or members of a profession. Selling is a profession that has been widely criticized for the unethical dimensions associated with it. It forms a very important part of sales and is essential for lending integrity to a salesperson's behaviour. Social responsibility covers ethical behaviour and is defined as an individual's or institution's concern for the consequences of his/its actions as these might affect the interests of others in the society.

In general, the companies doing business with no regard to social responsibility run the risk of attracting the attention of environmental groups, earning negative publicity, and losing the goodwill of society. Therefore, companies try to instil a sense of ethics in their employees and conduct business in a socially responsible way. Indian companies are now more concerned with corporate social responsibility than ever before. Companies in the past were concerned more about making profits than anything else.

All companies are expected to imbibe values pertaining to corporate social responsibility in their mission and make CSR a part of the organizational policies. There is a much wider scope for corporate social responsibility in the Indian corporate scenario with its coverage extending to human rights, labour standards as well as environmental issues. Companies in the current scenario are operating in an intensely competitive environment due to globalization.

In organizations, a sales manager faces ethical issues that cover the ethical dilemmas of his sales people as well as the ethical aspects pertaining to his decisions regarding hiring and evaluating of salespersons, assigning territories, etc. The ethical issues facing a sales manager may be studied with regard to the sales manager's relationship with his subordinates, the company, customers and competitors.

On the other hand, the ethical issues facing a salesperson pertain to the salesperson's accountability to the top management, and his relationship with other salespeople and with customers. The following are the areas in marketing wherein the firms should have an ethical code of conduct for exhibiting its responsibility towards corporate social responsibility.

Product safety should be a top priority for a firm. The firm should stand behind every product it makes and takes product safety very seriously. Product safety and quality assurance systems are based on a comprehensive and stringent review process at every stage of product development. Products shall be reviewed from the design stage to the point where they are ready for shipment to the store shelves.

All products should be reviewed by quality assurance reliability engineers in the development stage and safety and reliability specifications are issued and a test plan for each product is required and is a must. The test plan should specify all design and manufacturing criteria that the product must meet. The specifications also include labelling and any warnings required on the packaging, the product or the instructions. Following production, there are also regular sample audits made periodically throughout each shift by both factory and quality assurance personnel. Testing by independent outside labs could be used as part of the quality assurance process. No product should be shipped until testing is complete to the satisfaction of the firm's quality assurance department.

In the areas of environment, health and safety (EHS) at both the corporate and industry levels, the firm should have longstanding commitment to sustainability. The firm's commitment should include specific short- and long-term goals at manufacturing sites, including solid waste reduction goals, paper and chipboard recycling goals, plastic recycling and emissions reduction goals. Some of the EHS compliance should include:

• Industrial fire protection and emergency preparedness guide.
• Environmental protection agency (EPA) programme
• EPA waste wise programs (US).
• ISO14001 environmental management system registration
• Occupational safety and health association (OSHA)
• Voluntary protection program (VPP)
• STAR site certification of manufacturing facility

To oversee all of EHS activities, a firm should have an EHS committee designed specifically to address issues of sustainability.

DESIGNING AND IMPLEMENTING ETHICAL CODE

The ethical code is a set of principles governing morality and acceptable behaviour. It covers personal behaviour, for example, when dealing with customers and suppliers, corporate behaviour, for example, when negotiating deals, behaviour towards society, for example, when recruiting, and behaviour towards the environment, for example, when deciding on a process. Institute of Business Ethics (UK)² suggests for good ethical practices, which, according to them, organizations should issue statements of ethical practice in respect of:

• Relations with stake holders
• Environment and society
• International business
• Mergers, acquisitions and takeovers
• Governance

To check the implementation of ethical codes, the companies should conduct ethical audits. This is an audit of the firm's activities with the purpose to check that ethical principles are being pursued or check the extent to which actions are consistent with the organization's stated ethical intentions.

ETHICAL ISSUES IN THE SUPPLY CHAIN

Codes and compliance   Many companies have purchasing codes in purchase manuals. Having a code is not enough to make change happen. The effectiveness of a code depends on how serious the management is to implement it. It all depends on the management's commitment to compliances.

Limits of audits   Audits are used by firms to monitor supplier performance. However, audits are not commonly used to improve labour standards. Audits may not find hidden problems of discrimination and harassment. Audits are inappropriate for casual/contracted workers and often do not reach beyond the first tier of suppliers.

Challenges   The future challenges for companies engaged in ethical supply chain management include: aligning commercial and ethical agendas, building suppliers’ capacity to manage the issues for themselves and engaging with local governments and organizations to widen the impact of activities. Due to the limitations of audits, companies are faced with various challenges such as improving the impact of audits by focussing on continuous improvement, providing effective follow-up, improving the quality of audits through staff training.

Governance structures   Most organizations have a wider network of vendors, suppliers, customers, distributors and business partners. Understanding and leveraging the relationships with all partners is a key success factor in managing supply chain.

Suppliers, business partners and customers come in many varieties. Many times, institutions underestimate the importance of suppliers to the viability of their enterprise. Understanding who composes supply chain is step 1 in understanding how to leverage it.

SUPPLIER ETHICS MANAGEMENT (SEM)

Supplier ethics management is the management of suppliers and supply relationships with strategies, programs and metrics that better align supplier business conduct with purchaser standards, with the goal of reducing the purchaser's overall risk of corporate integrity failure in the supply chain. ‘Corporate integrity failure’ embraces any enterprise-level scandal involving a violation of compliance, ethics or corporate responsibility standards. The corporate leaders believe that their duty to ensure ethical business conduct ended at the four walls of their organization and did not extend beyond their own employee base. The companies inserted clauses into their standard procurement contracts, requiring suppliers to represent and warrant that they would comply with all applicable laws, statutes and regulations. In short, corporate defence to allegations of wrongdoing in the supply chain has historically boiled down to suppliers.

When a supplier-generated ethics scandal occurs, this kind of defence is no longer enough to cool down angry consumers, investors, business partners, regulators, advocacy groups or media organizations. The leading brands have to do something more in order to keep the trust of the marketplace.

In most large companies, procurement executives are responsible the company's supplier relationships. In order to have any type of positive impact on these supplier networks, legal and compliance officers know they must cooperate and collaborate with their procurement and purchasing colleagues. In fact, the legal and compliance officers should proactively offer the following to colleagues in the procurement department in the following five major areas:

• Compliance and ethics—key factor in supplier selection and evaluation
• Segmenting suppliers by commercial importance and ethical risk
• Creating and maintaining compliance histories of important suppliers
• Assigning a compliance personnel to important supplier relationships
• Conducting regular assessments of supplier risk profiles

This type of internal collaboration is inexpensive and sensible from an organization's perspective. Increased procurement compliance interaction will position the organization to declare that it is not the ethics problem in the supply chain. And it stands a good chance of preventing the problem from actually occurring in the first place.

REVIEW QUESTIONS

1. What is business ethics? Discuss the various ethical practices a business organization should adopt to run a successful business.
2. Explain ‘ethical code’ and its scope.
3. Discuss the various ethical issues and challenges in the supply chain.
4. Explain, ‘suppliers ethics management’.

INTERNET EXERCISES

1. To study the ‘Manual for managing responsible business enterprise’ issued by the US Department of Commerce visit http://www.trade.gov/goodgovernance/adobe/bem_manual.pdf
2. Business Ethics is a magazine of corporate responsibility; visit http://business-ethics.com/ to study the real-life business ethics cases.
3. The Institute of Business Ethics, UK, was established in 1986 to encourage high standards of business behaviour based on ethical values. Visit http://www.ibe.org.uk/ to learn good practices in business ethics.

VIDEO LINKS

1. Ethical supply chain video podcast, http://vimeo.com/2847927
2. Ethical supply chain video podcast Series, Episode 3, Hewlett-Packard Interview, http://businessassurance.com/ethical-supply-chain-video-podcast-series-episode-3-hewlett-packard-interview/

PROJECT ASSIGNMENTS

1. The business house like ‘TATA’ in India is known for their ethical business practices. Get an in-depth view of the ‘code of conduct’ for Tata Organisations and for its implementation visit http://www.gryphonshafer.com/blog/2008/08/i_happen_to_be_a.html
2. Kodak, Hewlet Packard and Bayer have developed their ‘code of conduct’ for ethical operations in all functional areas. Write a report on their ethical business practices and its implementation.