Professional Documents
Culture Documents
Strategicanalysis:Ethics
andcorporatesocial
responsibility
Chapter learning objectives
Lead Component
A1.Evaluatetheinfluenceofkey (c) Discussthedriversof
externalfactorsonan externaldemandsfor
organisationsstrategy environmentalsustainability
andcorporatesocial
responsibilityandthe
organisationsresponseto
these.
Externaldemandsforsustainabilityandresponsiblebusiness
practicesandwaystorespondtothese.
BusinessethicsandtheCIMACodeofEthicsforProfessional
Accountants(PartsAandB)inthecontextoftheimplementation
ofstrategicplans.
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Strategic analysis: Ethics and corporate social responsibility
Inthemodernworld,itisseenasbeingincreasinglyimportanttoconsider
howorganisationsmanagetheirbusinessprocessestohaveanoverall
positiveimpactonsociety.
Itisworthnotingthatcorporatesocialresponsibility(CSR)isdistinctfrom
ethics.Businessethicscompriseprinciplesandstandardsthatgovern
behaviourintheworldofbusiness.
Theextenttowhichtheorganisationfulfilstheeconomic,legal,ethicaland
charitableresponsibilitiesplacedonitbyitsstakeholderswilldetermineto
whatextentitisseenashavinggoodCSR.
TheproblemisthatthereisnoonedefinitionortheoryofCSR.
Considerthefollowingpoints.Isitethicalto:
Experimentonanimals?
Drillforoil?
Buildroadsthroughcountryside?
Payhighsalariestoseniorexecutives?
Differentindividualswillhavedifferentviewsoneachoftheseissues.
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Asfaraspossible,managershavetotakeaccountofarangeofdiffering
viewpointswhendecidingontheirstrategies.Inaddition,thereisalwaysthe
needtobalanceacompanysresponsibilitytosocietywithitsresponsibility
toearnfinancialreturnsforitsinvestors.
Nikonisawellknownmultinationalcompanythatspecialisesinthe
manufactureofcamerasandotherphotographicandvisualequipment.
Thecompanyscorporatesocialresponsibility(CSR)statement
(extractsofwhichareshownbelow)highlightsanumberofkeyexamples
ofissuesthatcompaniesneedtoconsiderwhenthinkingaboutCSR.
TheNikonGroupendeavorstocomplywithinternationalregulations,
relatedlaws,andinternalrules,exercisesoundandfaircorporate
practices,earnthetrustofstakeholderssuchascustomers,
shareholders,employees,businesspartners,andsociety.TheGroupwill
maintainconstructiverelationshipswithadministrativebodies,remaining
politicallyneutralandcomplyingwithlaws,andwillnotengagein
relationshipswithindividualsorgroupsthatthreatensocialorderor
safety.
TheNikonGroupwillprovidevaluableproductsandserviceswith
superiorqualityandsafetytosociety,endeavoringtoincreasethe
satisfactionandtrustofourcustomersandcontributingtothehealthy
developmentofsociety.
TheNikonGroupwillrespectdiversityandindividualhumanrightsand
provideahealthyandsafeworkingenvironmentinwhichallpersons
receivefairtreatmentwithoutdiscrimination.Itwillalsoopposeenforced
laborandchildlaborandrespectfundamentalhumanrightsaswellas
workers'rights.
TheNikonGroupwillproactivelyengageinenvironmentaleffortsand
worktoprotectthenaturalenvironment,asthesearecommonissuesfor
allofmankind.
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Strategic analysis: Ethics and corporate social responsibility
TheNikonGroupwillcarryoutcorporateactivitiesthattakeintoaccount
theculturesandpracticesofeachcountryandregionandproactively
engageinactivitiesthatcontributetosocietyasagoodcorporate
citizen.
TheNikonGroupwillencouragesociallyresponsiblebehaviorwithinits
supplychain.
TheNikonGroupwillcommunicateextensivelywithcustomers,
shareholders,employees,businesspartners,andsocietyanddisclose
businessinformationinatimelyandfairmanner.Itwillalsoconduct
reliablefinancialreportingthroughaccurateaccountingprocesses.
Topmanagementandemployeesinmanagerialpositionswithineach
departmentmustunderstandthattheyplayanessentialroleinfulfilling
thespiritofthisCharterandthus,inadditiontoleadingbyexample,they
mustensurethatthisinformationisdisseminatedtoeveryoneinthe
Groupandallrelatedparties.
Itcanbearguedthatcompaniesshouldnotpursuecorporatesocial
responsibility.MiltonFriedmanarguesthat:
Thismeansthattheprimarypurposeofabusinessistotryandearnaprofit.
Inacompany,forinstance,themanagershavebeenemployedinorderto
earntheownersofthebusinessareturnontheirinvestment.
Assuch,itisamanagersdutytoactinawaythatmaximisesshareholder
wealth,whileconformingtoallrelevantlawsandcustoms.Ifamanagerdoes
anythingthatisnotdirectlyrelatedtowealthmaximisation,heisfailinginhis
responsibilitiestotheownersandthereforeactingunethically.
Forexample,itcanbearguedthatitisnotrightforamanagertodonateany
companyfundstocharity.Themanagershouldinsteadworktomaximise
thereturntotheowner.Iftheownerwishestomakedonationstocharity,he
candosooutofhisearningsfromthebusiness.
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Inaddition,itcanbearguedthatmaximisingthewealthofbusinessowners
is,initself,sociallyresponsible.Thisisbecause:
Increasedreturnswillleadtoincreasedtaxpaymentsmadetothestate.
Thesecanthenbepassedontoworthycauses.
Ahighproportionofcompanysharesareownedbypensionfunds.This
meansthatanygainswillgotohelpprovidepensionstoindividualswho
maywellbedisadvantaged.
Don'tforgetthattheremayalsobepracticalreasonswhyabusiness
choosesnottopursueCSR.Thesecaninclude:
Increasedcostofsourcingmaterialsfromethicalsources(e.g.
Fairtradeproductsorfreerangeeggs).
Havingtoturnawaybusinessfromcustomersconsideredtobe
unethical(e.g.anethicalbankmaychoosenottoinvestinacompany
thatmanufacturesweapons).
ThemanagementtimethatcanbetakenupbyCSRplanningand
implementation.
Arguments for CSR
NoteveryoneagreeswithFriedman'sstatements.Thereareanumberof
reasonswhymanybusinessesfeelthatCSRisavitalpartoftheirstrategy.
Theseinclude:
Akeypartofrunningasuccessfulbusinessistheabilitytooffer
customersandconsumerswhattheyneed.Oneofthoseneedsisoften
arequirementforsociallyresponsiblebehaviourfromtheorganisation.
GoodCSRislikelytoinvolvegoodworkingconditionsforemployees,
allowingthebusinesstoattract a higher calibre of staff.
Avoidingdiscriminationagainstworkersislikelytogivethecompany
access to a wider human resource base.
Avoidingpollutionwilltendtosavecompaniesinthelongrunmany
governmentsarenowfining or increasing taxes of more polluting
businesses.
Sponsorshipandcharitabledonationsaretaxdeductible,improvestaff
moraleandcanbeseenasaform of advertising.
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Strategic analysis: Ethics and corporate social responsibility
GoodCSRwillreducetheriskofadverseenvironmentalreactions
againstthecompany.Anythingthatreducesriskshouldlowertherisk
adjustedcostofcapital,increasingthevalueofthecompany.
Asociallyresponsiblebusinesswillbeallowedtooperateforlongerin
society.Thiswillmeanthattherewillbemoreyearsofcashflowsinthe
future.Thiswouldalsoincreasethevalueofthecompany.
Ifanorganisationwishestoconsiderhowitshouldapproachcorporate
socialresponsibility,thereareanumberofmodelsthatitcanusetohelpit.
Carroll(ThePyramidofCorporateSocialResponsibility:TowardtheMoral
ManagementofOrganizationalStakeholders),devisedafourpartmodelof
CSR:
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TrueCSRrequiressatisfyingallfourpartsconsecutively.
Thisisthefundamentallevelallotherlevelsrestonthis.
Shareholdersdemandareasonablereturn.
Employeeswantsafeandfairlypaidjobs.
Customersdemandqualityatafairprice.
Thelawisabaselineforoperatingwithinsociety.
Itisanacceptedrulebookforcompanyoperations.
Thisrelatestodoingwhatisright,justandfair.
Actionstakeninthisareaprovideareaffirmationofsociallegitimacy.
Thisisnaturallybeyondtheprevioustwolevels.
Relatestodiscretionarybehaviourtoimprovethelivesofothers.
Charitabledonationsandrecreationalfacilities.
Sponsoringtheartsandsportsevents.
Thedifferentpartswillhelpthemanagementofanorganisationto
understandthevariousobligationsthatsocietyexpectsfromthem.
Carrollsuggestsfourpossiblestrategies(orphilosophies)thatthe
organisationcanadoptwithregardtocorporatesocialresponsibility.
Reaction
Thecorporationdeniesanyresponsibilityforsocialissues,arguingthatitis
nottoblameorrequiredtoact.
Defence
Thecorporationadmitsresponsibilitybutfightsit,doingtheveryleastthat
seemstoberequired.Typicallythisisonlydoneasanattempttodefendthe
organisationscurrentposition.
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Strategic analysis: Ethics and corporate social responsibility
Accommodation
Thecorporationacceptsresponsibilityanddoeswhatisdemandedofitby
relevantgroups.
Proaction
Thecorporationseekstogobeyondindustrynormsandanticipatesfuture
expectationsbydoingmorethaniscurrentlyexpected.Theorganisation
attemptstoimprovesociety.
Qisalarge,multinationalcompanywhichmanufacturesapopular
carbonatedsoftdrinkYu.Yuisoneoftheleadingsoftdrinksincountry
Handaccountsforaround75%ofQsprofits.Inrecentmonthsithas
beenreportedintheinternationalpressthatoneoftheflavouringsinYu
hasbeenlinkedtoanincreasedriskofcancer,thoughatmuchhigher
levelsthanthosefoundinYu. ThishasledtoYubeingcriticisedby
pressuregroups,whohavealreadycomplainedaboutYushighsugar
contentwhichtheyclaimisnothealthyforQscustomers(thoughYus
salescontinuetorise).TheGovernmentofcountryHhasnotstatedthat
theywillbantheingredient,thoughithasindicatedconcernoverrising
levelsofobesityinthelocalpopulation.
QsmanagementcouldconsideradoptinganyofCarrollsfourcorporate
socialresponsibilityphilosophieswithregardstoYu.
Reaction
QdeniesthatthereisanyproblemwithYuwhatsoever.Itsmanagers
releaseastatementarguingthatthereisclearlynohealthrisk
associatedwithconsumptionofYubycustomersasthegovernmenthas
notmadetheproductillegal.Qthenignorestheissueandmakesno
changestoYusrecipe.
Defence
Qsmanagementacceptsthatthereisapotentialriskfromthehigh
sugarcontentandtheflavouringidentifiedbytheinternationalpress.It
thereforeplacesadditionalhealthinformationonthebottleaboutthe
caloriecontentofthedrink,alongwithasuggestedamountthatshould
beconsumedeachday.Itarguesthatthissuggestedconsumptionlevel
wouldalsoreduceanyrisktotheconsumeroftheflavouringidentifiedin
theinternationalpress.
Thepressuregroupsclaimthisisinsufficientasmostconsumersdonot
readthelabelonsoftdrinkstheyconsume.
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Accommodation
Qsmanagersformafocusgroupmadeupofconsumers,government
healthofficialsandpressuregrouprepresentativestodiscusstheir
concerns.Afterlengthydiscussionstoensureitfullyunderstandstheir
needs,QlowersthesugarcontentofYuandreplacesitwithnaturallow
caloriesweetenerstoreducethecaloriecontentbutwithoutalteringthe
tasteoftheproduct.Italsochangestherecipetoeliminatetheneedfor
theflavouringinquestiontoensurethegovernmentandconsumer
confidenceismaintained.
Proaction
Qundertakesdetailedanalysisofitsproductandtheimpactofallthe
ingredientsitusesonconsumerhealth.Unlikeitscompetitors,Q
significantlyreducesthelevelofsugarinYu,aswellaseliminatingall
artificialadditivesinanattempttoreduceanynegativehealthimpactof
consumingYu.
Loperatesapopularchainofgyms.Aswellasstandardexercise
equipment,Lsgymsalsohavepersonaltrainersthatworkwithclients
foranextramonthlyfee(thepersonaltrainerearns25%ofthis,withL
keepingtheremainder).Lalsohascafesineachofitsgyms,which
servefoodanddrinktogymmembers.
Lisawarethatsomecustomersfeelthattheyarenotseeinganybenefit
fromattendingitsgymsorseeingapersonaltrainer.Onecustomer
recentlycomplainedthatLscafesofferfoodthatishighinfatandsalt,
meaningcustomersthateattherewillgetlittlebenefitfromtheirearlier
workout.Lspersonaltrainersalsohaveanincentivetoensurethat
clientsmakeslowprocesssothattheycancontinuetoearnrevenue
fromtheclientforaslongaspossible.
LhasdecidedtouseCarrollscorporatesocialphilosophiesmodelto
decidehowtoreacttotheseissues.
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Strategic analysis: Ethics and corporate social responsibility
Whichofthefollowingapproachesaremostconsistentwithan
accommodationstrategy?Selectallthatapply.
A Iftheserviceofferedtocustomersdoesnotbreachanylocallaws,
nofurtheractionneedstobetakenbyL
B Admitthattheservicebeingofferedtocustomersisnotappropriate
orsociallyresponsible
C Addnutritionalinformationtothemenuinthecafetoprovidemore
informationtocustomers
D Redesignpersonaltrainerpayinordertoremoveanyincentiveto
ensureclientsmakeslowprogress
E Introduceahealthiermenuforcustomersinthecafe
Johnson,ScholesandWhittington(Exploringcorporatestrategy)definean
ethicalstanceas:
Theextenttowhichanorganisationwillexceeditsminimumobligationsto
stakeholders.
Therearefourpossibleethicalstances:
Thisethicalstancehasashorttermfocusinthatitaimstomaximiseprofits
inthefinancialyear.Organisationswiththisethicalstancebelievethatitis
theroleofgovernmentstosetthelegalminimumstandard,andanything
deliveredabovethiswouldbetothedetrimentoftheirtaxpayers.
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Thisethicalstancetakesbroadlythesameapproachastheshortterm
shareholderinterestexceptthatittakesalongertermview.Henceitmaybe
appropriatetoincuradditionalcostnowsoastoachievehigherreturnsin
thefuture.Anexamplecouldbeapublicservicedonatingsomefundstoa
charityinthebeliefthatitwillsavethetaxpayerthecostsassociatedwith
providingtheentireserviceshouldthecharityceasetowork.Hencethis
ethicalstanceisawareofotherstakeholdersandtheirimpactonlongterm
profitorcost.
Thisethicalstanceacceptsthattheorganisationexistsformorethansimply
makingaprofit,orprovidingservicesataminimalcosttotaxpayers.Ittakes
theviewthatallorganisationshavearoletoplayinsocietyandsotheymust
takeaccountofallthestakeholdersinterests.Hencetheyexplicitlyinvolve
otherstakeholders,andbelievethattheyhaveapurposebeyondthe
financial.
Shaper of society
Thisethicalstanceisideologicallydrivenandseesitsvisionasbeingthe
focusforallitsactions.Financialandotherstakeholdersinterestsare
secondarytotheoverridingpurposeoftheorganisation.
Jrunsabusinesswhichsellsflowersfromasmallshop.Heensuresthat
allofhisflowersaresourcedfromethicallyresponsiblesuppliers,even
thoughthisisnotlegallyrequired.Whiletheseflowersaremore
expensivetopurchase,hefeelsthathisethicalapproachdifferentiates
himfromhisrivalsandallowshimtochargeapremiumprice.
WhichONEofJohnson,ScholesandWhittingtonsethicalstancesisJ
adopting?
A Shaperofsociety
B Multiplestakeholderobligation
C Longertermshareholderinterest
D Shorttermshareholderinterest
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Strategic analysis: Ethics and corporate social responsibility
3Sustainability
OneaspectofCSRthatisalsobecomingincreasinglyimportantis
sustainability.
Sustainabilityistheuseofresourcesinsuchawaythattheydonot
compromisetheneedsoffuturegenerations.Italsoinvolvesnotpollutingthe
environmentataratefasterthantheycanbeabsorbed.
Therearemanyexamplesofthis.Forexample,someloggingcompanies
plantatreeforeveryonetheyfell.
Othercompaniestrytomaketheirproductseasytorecycle,helpingto
ensurethatmaterialsarereusedratherthanwasted.Thecomputer
manufacturerApplehasusedthisaspartofitsmarketingapproachfor
someyears.(http://www.apple.com/recycling/)
Thereasonthatsustainabilityissoimportantformanybusinessesisthat
actinginasustainablemannernotonlyhelpslookaftertheenvironmentand
thewidercommunity,butitstrengthensthebusinessandhelpsensureits
longtermsurvival.
Itisworthnotingthatsustainabilityisincreasinglybeingseenasimportant
withinthepublicsector.Ensuringthatgoodsandservicesprocuredbythe
publicsectoraresustainablecanhelpmeetenvironmentalgoalsacross
government,saveconsiderableamountsofpublicmoneyandhelpsupport
innovationandeconomicgrowth.Thiswillinvolvetakingaccountofawide
rangeofcosts,suchaspollutionimpacts,carbonemissionsandwaste
disposal.
Thedifficultyformanybusinessesisthatmanycompaniesfocusonshort
termgains,ratherthanthelongtermsustainabilityofthebusinessandits
environment.Thisisoftenevidentinbusinessesthatofferseniormanagers
bonusesbasedonshorttermorannualperformance.
However,itshouldbenotedthatsustainabilitycanleadtocostsavingsfor
anorganisationintheshortterm.Forexample,anorganisationthatreduces
packagingonitsproductsmayhaveapositiveimpactontheenvironment
bygeneratinglesswaste,butitwillalsoreduceitscosts,therebyimproving
profits.
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CIMAitselfhasbeenheavilyinvolvedinidentifyinganddiscussingthe
implicationsofsustainabilityforthebusiness.Tothisend,in2010they
publishedaresearcharticlediscussingthis.
Thearticlecametosixkeyconclusions:
Strongethicalprinciplesthatgobeyondupholdingthelawcanadd
greatvaluetoabrand,whereasfailuretodotherightthingcancause
social,economicandenvironmentaldamage,undermininga
companyslongtermprospectsintheprocess.
Oncetheyhaveadoptedanethicalapproach,companieswilloftenfind
therearebottomlinebenefitsfromdemonstratinghighethical
standards.
Theethicaltonecomesfromthetop.
Highqualitymanagementinformationonsocial,environmentaland
ethicalperformanceisvitalformonitoringtheenvironmentalandsocial
impactsofacompanyandforcompilingconnectedreportsshowing
howeffectiveitsgovernancearrangementsare.
Corporatecommunicationsandreportingonsustainabilityneedtodo
morethanjustpaylipservicetothegreenagenda.Theyneedto
providehardevidenceofthepositiveimpactonsociety,the
environmentandthestrategicreturnsforthebusiness,andhowany
negativeeffectsarebeingaddressed.
Managementaccountantshaveaparticularethicalresponsibilityto
promoteanethicsbasedculturethatdoesntpermitpractisessuchas
bribery.
Thefullreportcanbefoundhere:
http://www.cimaglobal.com/Thoughtleadership/Research
topics/Sustainability/incorporatingethicsintostrategy.
Corporatesocialresponsibilityisseenasvitalformanyorganisations.
OnecompanythatisoftenhailedasaleaderinthisareaisBen&
JerrysaUSbasedmanufactureroficecream,frozenyoghurtand
sorbet.Thecompanyhasstatedthatbusinesshasaresponsibilityto
thecommunityandtheenvironment.
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Strategic analysis: Ethics and corporate social responsibility
Ben&JerrysCSRhasincludedthefollowing:
FairTradeingredientsthisensuresthatsuppliersofmanyofthe
companysrawmaterialsenjoysafeworkingconditions,reasonable
workhoursandarepaidfairly.
EthicallysourcedsuppliesaswellasacommitmenttoFairTrade,
thecompanyalsoensures,wherepossible,thatitsources
ingredientsfromsupplierswhoshareitsvalues.Forexample,Ben&
Jerryshashistoricallysourcedfreerangeeggsandsustainably
produceddairyforitsproducts.
Communityworkthecompanyhasengagedwithcommunitiesto
improvesustainability.Ben&JerrysVermontDairyFarm
SustainabilityProjectwaslaunchedin1999andsoughttodevelop
practicalmethodsfordairyfarmstoreducenitrogenand
phosphorousrunoffinordertoprovewaterqualityandoverall
sustainability.
Corporatephilanthropythecompanydonatesaportionofitspre
taxprofitstocorporatephilanthropyvia,inpart,theBen&Jerrys
Foundation.
InDecember2010,CIMAcollaboratedwiththeAICPAandCICAina
reportentitledEvolutionofcorporatesustainabilitypractices.
Somekeyissuesthatthisreportraisedinclude:
General
Businesssustainabilityisaboutensuringthatorganisationsimplement
strategiesthatcontributetolongtermsuccess.Organisationsthatactin
asustainablemannernotonlyhelptomaintainthewellbeingofthe
planetandpeople,theyalsocreatebusinessesthatwillsurviveand
thriveinthelongrun.
Theaccountingprofessioncanplayanimportantroleinthis.
Accountantscanserveasleadingagentsforchangebyapplyingtheir
skillsandcompetenciestodevelopsustainabilitystrategies,facilitate
effectiveimplementation,accuratemeasurementandcrediblebusiness
reporting.
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AccordingtoresearchconductedbyCIMA,thekeyreasonsinclude:
Compliance theneedtocomplywithlawsandregulations.
Reputational risk companiesareconcernedwithhow
stakeholderswillviewthemiftheyfailtoactinasustainable
manner.
Costcutting and efficiencyactinginasustainablemanner(for
examplebecomingmoreenergyefficient)canhelptoreduce
businessexpenditure.Thisisespeciallyvaluableforsmaller
companies.
Ten elements of organisational sustainability
Thefollowingareasareconsideredcrucialtothesuccessfulembedding
ofsustainabilitywithinanorganisation.Itisworthnotingthatthe
accountingfunctionwillbeusefulinanumberoftheseareas.
Boardandseniormanagementcommitment.
Understandingandanalysingthekeysustainabilitydriversforthe
organisation.
Integratingthekeysustainabilitydriversintotheorganisations
strategy.
Ensuringthatsustainabilityistheresponsibilityofeveryonewithin
theorganisation(notjustaspecificdepartment).
Breakingdownthesustainabilitytargetsandobjectivesforthe
organisationasawholeintotargetsandobjectiveswhichare
meaningfulforindividualsubsidiaries,divisionsanddepartments.
Processesthatenablesustainabilityissuestobetakenintoaccount
clearlyandconsistentlyindaytodaydecisionmaking.
Extensiveandeffectivesustainabilitytraining.
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Strategic analysis: Ethics and corporate social responsibility
Includingsustainabilitytargetsandobjectivesinperformance
appraisal.
Championstopromotesustainabilityandcelebratesuccess.
Monitoringandreportingsustainabilityperformance.
Thefullreportcanbefoundhere:
http://www.cimaglobal.com/Documents/
Thought_leadership_docs/CIMA_AICPA_CICAsustainability_report.pdf
YouareA.Northandyouhaverecentlybeenprovidedwiththe
followingletterfromoneofyourcompanysmajorclients,Routerplc(a
majorminingcompany).
H.West
21EppWay
Helway
Helland
HDH67TY
DearMrNorth,
Routerplchasanopportunitytomineforgoldinaremoteandsparsely
populatedarea.Theminingprocessproposedinthisinstancewould
removeallvegetationfromthelandconcerned.Aftermininghas
finished,therewillremainsubstantiallakesofpoisonouswaterwhichwill
remaintoxicforahundredyears.
Theminingprocessisprofitable,giventhecurrenthighworldvalueof
gold.However,ifthecompanyweretoreinstatetheminedland,the
processwouldbeextremelyunprofitable.Thecompanyhasreceived
permissionfromthegovernmenttocarryoutthemining.Thefewlocal
residentsareopposedtothemining.
Asyouknow,ourmissionstatementsaysthatwewillendeavourto
makethemaximumpossibleprofitforourshareholderswhile
recognisingourwiderresponsibilitytosociety.
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Severalinvestorshaveraisedconcernsregardingourmission
statement,suggestingthatitiscontradictory.Iwouldappreciateyour
thoughtsonthis.
Weareawarethatourdecisionrelatingtotheabovegoldmining
opportunitycouldpotentiallycauseaconflictbetweenourobjectives.We
wouldbegratefulforyouradviceonhowwecandealwithstrategiesthat
causesuchaconflict.
Finally,couldyoupleaseoutlinetheethicalissuessurroundingthe
proposedgoldminingoperationsforourconsideration.
Thankyouforyourhelpandwelookforwardtoyoururgentresponse.
Kindregards
H.West
Required:
Draftaresponsetotheaboveletter.
(45 minutes)
Introduction
CIMAscodeofethicsisan81pagedocumentthatoffersguidanceonhow
torecogniseandrespondtotrickyethicalsituations.Youareonlyexpected
tobeawareofthemainconceptsinthecodeintheexam.Thecodeis
structuredasfollows:
PartA:fundamentalprinciplesandgeneralapplicationofthecode
PartB:professionalaccountantsinbusiness
PartC:professionalaccountantsinpublicpractice.
Thefullcontentofthecodecanbefoundat:
http://www.cimaglobal.com/Professionalethics/
Section100.1ofpartAstatesthatprofessionalaccountantsshould"actin
thepublicinterest"andtherefore"responsibilityisnotexclusivelytosatisfy
theneedsofanindividualclientoremployer".
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Strategic analysis: Ethics and corporate social responsibility
Thecodeprovidesaconceptualframeworkwithguidanceonfundamental
ethicalprinciples:
Integrity
Objectivity
Professionalcompetenceandduecare
Confidentiality
Professionalbehaviour
Integrity
Integrityimpliesfairdealingandtruthfulness.
Membersarealsorequirednottobeassociatedwithanyformof
communicationorreportwheretheinformationisconsideredtobe:
materiallyfalseortocontainmisleadingstatements
providedrecklessly
incompletesuchthatthereportorcommunicationbecomes
misleadingbythisomission.
Objectivity
Accountantsneedtoensurethattheirbusiness/professionaljudgement
isnotcompromisedbecauseofbiasorconflictofinterest.
However,therearemanysituationswhereobjectivitycanbe
compromised,soafulllistcannotbeprovided.Accountantsarewarned
toalwaysensurethattheirobjectivityisintactinany
business/professionalrelationship.
Therearetwomainconsiderationsunderthisheading:
(1) Accountantsarerequiredtohavethenecessaryprofessional
knowledgeandskilltocarryoutworkforclients.
(2) Accountantsmustfollowapplicabletechnicalandprofessional
standardswhenprovidingprofessionalservices.
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Appropriatelevelsofprofessionalcompetencemustfirstbeattained
andthenmaintained.Maintenanceimplieskeepinguptodatewith
businessandprofessionaldevelopments,andinmanyinstitutes
completionofanannualreturnconfirmingthatcontinuedprofessional
development(CPD)requirementshavebeenmet.
Whereprovisionofaprofessionalservicehasinherentlimitations(e.g.
relianceonclientinformation)thentheclientmustbemadeawareof
this.
Confidentiality
Theprincipleofconfidentialityimpliestwokeyconsiderationsfor
accountants:
(1) Informationobtainedinabusinessrelationshipisnotdisclosed
outsidethefirmunlessthereisaproperandspecificauthorityor
unlessthereisaprofessionalrightordutytodisclose.
(2) Confidentialinformationacquiredduringtheprovisionof
professionalservicesisnotusedtopersonaladvantage.
Theneedtomaintainconfidentialityisnormallyextendedtocoverthe
accountants'socialenvironment,informationaboutprospectiveclients
andemployers,andwherebusinessrelationshipshaveterminated.
Basicallytheremustalwaysbeareasonfordisclosurebefore
confidentialinformationisprovidedtoathirdparty.
Themainreasonsfordisclosurearewhen:
(1) itispermittedbylawandauthorisedbytheclient
(2) itisrequiredbylaw,e.g.duringlegalproceedingsordisclosing
informationregardinginfringementsoflaw
(3) thereisprofessionaldutyorrighttodisclose(whennotbarredby
law),e.g.provisionofinformationtotheprofessionalinstituteor
compliancewithethicalrequirements.
Theaccountantneedstoconsidertheextenttowhichthirdpartiesmay
beadverselyaffectedbyanydisclosure.
Theamountofuncertaintyinherentinthesituationmayaffecttheextent
ofdisclosuremoreuncertaintymaymeandisclosureislimitedornot
madeatall.
Theaccountantneedstoensurethatdisclosureismadetothecorrect
personorpersons.
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Strategic analysis: Ethics and corporate social responsibility
Professional behaviour
Accountantsmustcomplywithallrelevantlawsandregulations.
Thereisalsoatestwherebyactionssuggestedbyathirdpartywhich
wouldbringdiscredittotheprofessionshouldalsobeavoided.
Anaccountantisrequiredtotreatallpeoplecontactedinaprofessional
capacitywithcourtesyandconsideration.Similarly,anymarketing
activitiesshouldnotbringtheprofessionintodisrepute.
UndertheCIMACodeofEthics,membersarenotallowedtobe
associatedwithanymateriallyfalseormisleadingstatements.
WhichONEofthefundamentalethicalprinciplesdoesthisstatement
relateto?
A Integrity
B Professionalcompetence
C Objectivity
D Professionalbehaviour
(1) Anadvertisementforafirmofaccountantsstatesthattheiraudit
servicesarecheaperandmorecomprehensivethanarivalfirm.
(2) Anaccountantpreparesasetofaccountspriortoundertakingthe
auditofthoseaccounts.
(3) Adirectordiscussesanimpendingshareissuewithcolleaguesata
golfclubdinner.
(4) Thefinancedirectorattemptstocompletethecompanystaxation
computationfollowingtheacquisitionofsomeforeignsubsidiaries.
(5) Afinancialaccountantconfirmsthatareportonhiscompanyis
correct,eventhoughthereportomitstomentionsomeimportant
liabilities.
(6) Youbelieveyourcolleaguehasaskedyoutoincludewhatyou
believetobemisleadinginformationinyourforecast
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(7) Youranalysisofastrategicproposalsuggeststhatprofitabilitywill
beimprovedbymaking30peopleredundant.
(8) Youcanoutsourceyourmanufacturingtoacountrywherelabour
costsaremuchlower.
(9) Yourcountryisallowed,legally,todumpitswasteintoariver.This
willkillallaquaticlifealonga50milestretch.
Thecodeisclearthattheprofessionalaccountantshouldrespondtoan
ethicalconflict.Inactionorsilencemaywellbeafurtherbreachofthecode.
Ethicalconflictscanberesolvedasfollows:
(1) Gatherallrelevantfacts.
(2) Establishethicalissuesinvolved.
(3) Refertorelevantfundamentalprinciples.
(4) Followestablishedinternalprocedures.
(5) Investigatealternativecoursesofaction.
(6) Consultwithappropriatepersonswithinthefirm.
(7) Obtainadvicefromprofessionalinstitutes.
(8) Ifthematterisstillunresolved,considerwithdrawingfromthe
engagementteam/assignment/role.
Additional resources
Formoreexamplesofreallifeethicaldilemmasandtheirrecommended
solutions,seetheCIMAwebsite.
http://www.cimaglobal.com/Professionalethics/Ethics/Responsible
business/Ethicaldilemma/Casestudies/
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Strategic analysis: Ethics and corporate social responsibility
(1) Youremployerasksyoutosuggesttoajuniormanagerthattheywill
receivealargebonusforworkingovertimeonaprojecttohide
liabilitiesfromthefinancialstatements.
(2) Inselectingemployeesforanewdivision,youareadvisedtounfairly
discriminateagainstonesectionoftheworkforce.
(3) Youhavebeenaskedtopreparethemanagementaccountsfora
subsidiarylocatedinSouthAmericainaccordancewithspecific
requirementsofthatjurisdiction.Inresponsetoyourcommentthat
youdonotunderstandtheaccountingrequirementsofthat
jurisdiction,yoursupervisorstatesnoproblem,noonewillnoticea
fewthousanddollarserroranyway.
Oneofyourcolleagues,ajunioraccountantatABCLtdhassentyouthe
followingemail:
Email
To: J. Bank
From: A. Halifax
Date: 15/06/XX
Subject: Professional ethics
HiJ,
Iwashopingyoucouldgivemesomeadvice!
TheITDirectorofABCLtdaskedmeundertakeacostbenefitanalysis
ofaproposednewITsystem.TheITDirectorwillusethisanalysistotry
andconvincetheBoardofDirectorsofABCthattheyshouldinvestinthe
newsystem.
Aspartofmyanalysis,Ifoundthatthenewsystemwillnotrunproperly
onABCsexistingcomputers.ThismeansthatABCwouldhaveto
replacethemajorityoftheirdesktopcomputersandservers,leadingto
anexcessofcostsoverbenefits.
TheITDirectorhassuggestedthatIdownplaythecostsofreplacingthe
ITinfrastructureashewassurethathecouldfindaworkaroundthat
wouldallowtheexistingcomputerstousethenewsoftware,thoughhe
wascurrentlyuncertainhowthiswouldbeaccomplished.
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chapter 3
TheITDirectorhastoldmethatheexpectsthecostbenefitanalysisto
showafavourableresultforthenewsystemandhasindicatedthatmy
futurepromotionprospectsmaydependonthisbeingthecase.
CouldyouemailmebackrightawayandexplaintheCIMAfundamental
ethicalprinciplesthatIwouldbebreachingifIagreetotheITDirectors
request.IneedtoknowbeforeIdecideontheappropriatecourseof
action.
Thanksforyourhelp!
Required:
Replytotheemailasrequested.
(15 minutes)
Accountantsneedto Consultationwiththose
prepare/reportoninformation chargedwithgovernance
fairly,objectivelyandhonestly. Consultationwiththerelevant
professionalbody
However,theaccountantmaybe
pressurisedtoprovidemisleading
information.
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Strategic analysis: Ethics and corporate social responsibility
Referstoincentivesbeingoffered Informrelevantthirdparties
toencourageunethicalbehaviour. suchasseniormanagement
Inducementsmayincludegifts, andprofessionalassociation
hospitality,preferentialtreatment (normallyaftertakinglegal
orinappropriateappealstoloyalty. advice)
Objectivityand/orconfidentiality
maybethreatenedbysuch
inducements.
Inducements giving offers Donotoffertheinducement!If
necessary,followtheconflict
Referstoaccountantsbeing resolutionprocessoutlinedin
pressurisedtoprovide thenextsection
inducementstojuniormembersof
stafftoinfluenceadecisionor
obtainconfidentialinformation.
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chapter 3
However,theaccountantmaybe
underpressuretodisclosethis
informationasaresultof
compliancewithlegalprocesses
suchasantimoney
laundering/terrorisminthis
situationthereisaconflictbetween
confidentialityandtheneedfor
disclosure.
Whistleblowing Followthedisclosureprovisionsof
theemployer,e.g.reporttothose
Situationswheretheaccountant responsibleforgovernance.
needstoconsiderdisclosing Otherwisedisclosureshouldbe
information,whereethicalrules basedonassessmentof:legal
havebeenbrokenbytheclient. obligations,whethermembersof
thepublicwillbeadversely
affected,gravityofthematter,
likelihoodofrepetition,reliabilityof
theinformation,reasonswhy
employerdoesnotwantto
disclose.
107
Strategic analysis: Ethics and corporate social responsibility
ThemanagementaccountantofLplchasrecentlydiscoveredthatthe
companyisabouttolaunchamajornewproductwhichisexpectedto
causeahugeincreaseincompanyprofits.Hehasthereforepurchased
anumberofsharesinLplc,asheexpectsthesharepricetorise
significantlywhenthenewproductislaunched.
WhichTWOoftheCIMAfundamentalethicalprinciplesisthe
managementaccountantlikelytobeinbreachof?
A Objectivity
B Integrity
C Professionalbehaviour
D Confidentiality
E Professionalcompetence
F Honesty
TheCEOofGLtdhasstatedatarecentboardmeetingthatthe
companyhasaresponsibilitytoconsidertheneedsofawiderangeof
stakeholdersandensurethatweminimiseanynegativeimpactsthatG
Ltdhasuponthem.
WhichONEofthefollowingbestdescribestheconceptreferredtoby
theCEOofGLtd?
A Ethics
B Stakeholdermanagement
C Nonmarketstrategy
D Corporatesocialresponsibility
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chapter 3
6Summary
109
Strategic analysis: Ethics and corporate social responsibility
AwouldmatchareactionstrategywhereLdeniesanywrongdoingand
doesnothingtodealwithcustomerconcerns.Cmostcloselymatchesa
defencestrategy,wherethegymchaindoesaslittleaspossibletodeal
withcustomerconcerns.Thereisnosolutiontotheproblem,simplya
smallefforttowardskeepingcustomersquiet.
Anaccommodationstrategyoccurswhenthecorporationaccepts
responsibilityfortheidentifiedproblems(asinoptionB)andthendoes
whatisdemandedbyitsstakeholders(i.e.preventpersonaltrainers
frombehavingunethically,aswellasimprovingthemenuinthe
restaurant).
Thisapproachisalsoknownasenlightenedselfinterest.Jisgoing
beyondregulationsinanattempttowincustomersinthelongertermand
standoutinhismarket.
Jisshowingnosignsofconsideringtheroleheplaysinsocietyorhis
responsibilitytowiderstakeholders,suggestingthatheisnotoperating
asashaperofsocietyorunderthemultiplestakeholderobjectiveslevel.
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chapter 3
A.North
BusinessAdviceLtd
122LeftWay
Helland
HYYGT65
DearMrWest,
Thankyouforyourrecentletter.Ihavepleasureinenclosingourthoughts
oneachofyourqueriesbelow.
ThemissionstatementthatRouterplchaspublishedstatesthatthefirm
aimstomakethemaximumpossibleprofit.Itisquitecommonfor
objectivesofthiskindtobeincludedinmissionstatements.
Inaddition,thewiderresponsibilitiestosocietyarerecognised.This
companyobjectiveisdifficulttomeasureandtherewillbeinstances
wherethisconflictswiththemaximisationofprofit.Thegoldmining
projectprovidesaperfectexampleofthis.Itisexpectedtobeprofitable,
butalsoresultinthelossofvegetationandthecreationofpoisonous
lakesfortheonehundredyears.
Whilethebusinesscouldattempttorepairthelocalenvironment,doing
sowouldmakethemineunprofitable,leadingtoalossofvalueto
Routersshareholders.
However,itcouldbearguedthatinthelongrun,beingsocially
responsiblecouldincreasethewealthofRoutersshareholders.Router
needsthegovernmenttograntitlicencesinordertomineforgoldand
shareholderstocontinueinvestinginit.Ifitdevelopsareputationasa
dirtyfirm,bothstakeholdersmaychangetheirminds.Thiswouldcause
alossofprofitsandadropintheshareprice.Thiswouldofcourse
meanafallinshareholderwealth.
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Strategic analysis: Ethics and corporate social responsibility
Asidentifiedabove,Routersobjectivesmayconflictwitheachother.
Methodsofdealingwiththisinclude:
112
chapter 3
Ihopethisanswersyourqueries.Ifyouwishtodiscusstheseissues
further,pleasedonothesitatetocontactus.
Kindregards
A.North
Bydefinition.
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Strategic analysis: Ethics and corporate social responsibility
(1) Potentialconflictwithprofessionalbehaviourauditservices
observethesamestandards,thereforeimplyingthatarivalhas
lowerstandardssuggeststhatafirmisnotcomplyingwith
professionalstandards.
(2) Theaccountantislikelytoloseobjectivitybecauseerrorsinthe
accountsmadeduringpreparationmaynotbeidentifiedwhenthose
accountsarereviewed.
(3) Astheinformationislikelytobeconfidential,discussingitina
publicplaceisinappropriate.
(4) Theaccountantneedstoensurethatknowledgeoftheforeign
countrystaxationregimeisunderstoodpriortocompletingthe
return,otherwisethereisthepossibilitythattheappropriate
professionalskillwillnotbeavailable.
(5) Thereisanissueofintegrity.Theaccountantshouldnotallowthe
reporttobereleasedbecauseitisknownthatthereportisincorrect.
(6) Thisisanissueofintegrity.Accountantsmustnotbeassociated
withanyformofcommunicationorreportthattheyknowtobeeither
materiallyfalseormisleading.
(7) Thereductionofthenumberofstaffinanorganisationinorderto
increaseprofitisnotnecessarilyunethical.Forexample,ifthe
businesshasanunnecessarilyhighnumberofemployees,reducing
thisnumbermaybeappropriate.However,theaccountantwould
needtoensurethattheanalysiswasaccurate,asitwillimpacton
individualslivelihoods.Ifthereisanyuncertaintyintheresults,they
mayneedtoconsiderwhetheritshouldbedisclosed.Inaddition,
theaccountantwillneedtobeawareoftheimplicationsandshould
ensurethatthedecisionmakersaremadeawareofthepotential
ethicalconsiderations.
(8) Again,thisisanoperationaldecision.Thereareethicalconcerns
overthelossofcurrentstaffwhichtheaccountantshouldmakethe
decisionmakerawareofalongwiththepotentialadverseimpacton
thereputationofthecompany.
(9) Ethicsinvolvesavoidingnegativeimpactsontheenvironmentthat
thecompanyoperatesin.Eventhoughlegal,thedecisiontodump
pollutionintoariverisunethicalduetotheimpactonmarinelife.
Shouldanaccountantbecomplicitinsuchanaction,itislikelyto
bringtheprofessionintodisrepute.
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chapter 3
Threat 1
Donotoffertheinducement!
Ifnecessary,followtheconflictresolutionprocessoftheemployer.
Considertheimpactofthefinancialstatementsbeing
misrepresented.
Threat 2
Obtainingadvicefromtheemployer,professionalorganisationor
professionaladvisor.
Theemployerprovidingaformaldisputeresolutionprocess.
Legaladvice.
Threat 3
Obtainingadditionaladvice/training.
Negotiatingmoretimeforduties.
Obtainingassistancefromsomeonewithrelevantexpertise.
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Strategic analysis: Ethics and corporate social responsibility
Email
To: A. Halifax
From: J. Bank
Date: 15/06/XX
Subject: Re: Professional ethics
HiA,
IfyouagreetotheITDirectorsdemands,youwillbeinbreachofseveral
partsoftheCIMACodeofEthics.
Integrity
Thisrequiresmembersnottobeassociatedwithanyformof
communicationorreportwheretheinformationismateriallyfalse,
providedrecklesslyorincomplete.
Youhaveidentifiedapotentialproblemwiththeproposednewsystem
thatwouldinvolvealargeoutflowofcashtoupgradeABCs
infrastructure.
FollowingtheITDirectorssuggestionwouldinvolveyouignoringthe
issuewithoutafirmideaofhowitwillberesolved(theITDirectoris
simplysuggestingavagueworkaround).Thismeansthatthereportwill
beincompleteandmisleadingtoitsusers.
Objectivity
Thisrequiresaccountantstoensurethattheirjudgementisnot
compromisedbecauseofbiasorconflictofinterest.
YouareonlylikelytoagreetotheITDirectorsdemandsbecausefailing
todosocouldjeopardiseyourcareer.Thiswouldclearlybeactingin
yourownselfinterest.
Thisrequiresaccountantstofollowallapplicabletechnicaland
professionalstandardswhenprovidingservices.
Youareawarethatthecostbenefitanalysis,whenundertakenproperly,
showsanunfavourableresultforthenewITsystem.Failingtousethe
correctlyobtainedresultcouldbeseenasafailuretomeetprofessional
andtechnicalstandards.
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chapter 3
Professional behaviour
Thisprinciplerequiresaccountantstoavoidanyactivitiesthatmight
bringtheprofessionintodisrepute.
IfyouarefoundtohaveknowinglymisledtheBoardofDirectorsinto
buyingasystemthatisnotcosteffective,itwouldclearlydamage
confidenceintheaccountancyprofessionasawhole.
Ihopethathelps!LetmeknowifyouneedanymoreinformationandI'll
trytohelp.
A.
Theaccountantisinbreachofconfidentialityasheisusinginformation
forhisownpersonalgain(regardlessofwhetherhecommunicatesthis
informationtoothers).Healsorisksbringingtheprofessioninto
disrepute(andcouldbeinbreachofinsiderdealinglaws),which
breachesprofessionalbehaviour.
Thereisnoevidencethatheisproducinganyreportsorproviding
informationrelatingtothenewproduct,whichwouldtendtosuggestthat
integrity,objectivityandprofessionalcompetencearenotbeing
breached.
Notethathonesty(whilebeingpreferable!)isnotafundamentalethical
principle.
NotethatsustainabilityispartofCSRhowevertheCEOappearstobe
referringtothewiderconceptofhowtheorganisationlooksafterits
socialresponsibility.
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Strategic analysis: Ethics and corporate social responsibility
118