Topic 4 – Guidelines of Code

of Ethics
J.W. WEISS (2014) MCCG 2017
Chapter topics
• Major purposes of ethics of codes
• Ombudspersons and peer review programmes
• Managing Corporate Social Responsibility

202001 - UKML3043 BECG LYW 2

Ethics and Corporate Governance
• What is ethics?
• a moral principle or a set of moral value held by an individual or group also about
choices. How we act in order to make the ‘right’ choice, and produce ‘good’
behaviour ?

• What is corporate ethics?

• the study of what constitutes right or wrong behaviour by people in an organisational
context.

• What is ethical conduct?

• behaviour that is in accordance with a written or unwritten code of ethics and a set of
moral values.
• behaviour that is considered correct or good.

202001 - UKML3043 BECG LYW 3

Ethics and Corporate Governance
• Law and regulations alone can NEVER guarantee fair practice.
• Good practice in CG calls for ethical conduct because
ethical considerations are said to be at the root of many
perceived problems in public corporations.
• CG can only provide a system and a procedure that is seen to
be ‘ethical’ and fair to shareholders.

202001 - UKML3043 BECG LYW 4

Ethics and Corporate Governance
• Without ethical conduct, regulations and codes will not work.
• Companies should maintain a culture of good corporate ethics,
providing a code of conduct for all in the companies.
• Lack of a high standard of ethical behaviour in a company
(especially directors) will diminish trust and loyalty of
investors – reputational risk.

202001 - UKML3043 BECG LYW 5

Code of Ethics on Corporate Governance
• A comprehensive set of rules or guidelines for moral
behaviour.
• Has NO FORCE of law.
• Purpose is to guide directors and employees along the path of
better management and governance of their companies.

202001 - UKML3043 BECG LYW 6

Code of ethics on Corporate Governance
• Issues to be included:
avoid conflict of interests
compliance with the laws and regulations
fair dealings with customers, suppliers and employee
encouragement to report illegal and unethical behaviours –
“whistle blowing’
protection and proper use of the company’s assets

202001 - UKML3043 BECG LYW 7

Ethics Codes
• Ethics codes are value statements that define an organization.
• Six core values that researchers have found desirable in such codes
include:
(1) Trustworthiness
(2) Respect
(3) Responsibility
(4) Fairness,
(5) Caring
(6) Citizenship

202001 - UKML3043 BECG LYW 8

The Need for Organizational Ethics Programs
• Corporate scandals have lowered the public’s trust of businesses.
• Understanding the factors that influence ethical decision-making can help
companies encourage ethical behavior.
• Employees are not legal experts and therefore need guidance with legal
issues impacting their jobs.
• One reason why ethics programs are required is to help sensitize
employees to the potential legal and ethical issues within their work
environments

202001 - UKML3043 BECG LYW 9

The Need for Organizational Ethics Programs
• Five top recommendations to CEO’s for rebuilding
trust and confidence in American firms
Making customers the top priority
Assuming personal responsibility and accountability
Communicating openly and frequently with customers
Handling crises more honestly
Sticking to the code of business ethics no matter what

202001 - UKML3043 BECG LYW 10

Major purposes of ethics codes include:
• To state corporate leaders’ dominant values and beliefs, which are the foundation of the
corporate culture.
• To define the moral identity of the company inside and outside the firm.
• To set the moral tone of the work environment.
• To provide a more stable, permanent set of guidelines for right and wrong actions.
• To control erratic and autocratic power or whims of employees.
• To serve business interests (because unethical practices invite outside government, law
enforcement, and media intervention.

202001 - UKML3043 BECG LYW 11

Major purposes of ethics codes include:
• To provide an instructional and motivational basis for training employees regarding
ethical guidelines and for integrating ethics into operational policies, procedures, and
problems.
• To constitute a legitimate source of support for professionals who face improper
demands on their skills or well-being.
• To offer a basis for adjudicating disputes among professionals inside the firm and
between those inside and outside the firm.
• To provide an added means of socializing professionals, not only in specialized
knowledge, but also in beliefs and practices the company values or rejects.

202001 - UKML3043 BECG LYW 12

 Financial Integrity & Assurance

Legal & Effective E-mail

Codes of Conduct Ethical Principles

Anti- Money Laundering

• “An organization’s code of Intellectual Property

conduct, alternatively referred Conflicts of Interest

to as ‘code of ethics’ or ‘code Information Security
of business standards,’ is the Health & Safety
stated commitment of the Workplace Violence
behavioral expectations that Harassment
an organization holds for its Insider Trading
employees and agents. Record Keeping & Destruction

• Examples of items in a code Illegal Business Practices

of conduct include the OSHA (Occupational Safety and Health Administration) guidelines

following list: Gifts & Gratuities

Antitrust

Diversity

202001 - UKML3043 BECG LYW 13

Codes of Conduct
• Intended Outcome 3.0 MCCG 2017 Page 20
• Practice 3.1 ~ The Code of Conduct and Ethics is published on the company’s website.
• Practice 3.2 ~ The board establishes, reviews and together with management implements
policies and procedures on whistleblowing.
• Guidance 3.1 ~ The Code of Conduct and Ethics should describe measures put in place to
 handle actual or potential conflict of interest;
 prevent corrupt practices which include the offering and acceptance of gifts and other form of
benefits;
 encourage the reporting of unlawful or unethical behaviour;
 protect and ensure the proper use of the company’s assets; and
 ensure compliance with laws, rules and regulations.

202001 - UKML3043 BECG LYW 14

Codes of Conduct
• Codes of conduct
• Formal statements that describe what an organization expects of its
employees
• Codes of ethics
• Most comprehensive document consisting of general statements that
serve as principles and the basis for the rules of conduct
• Statement of values
• Serves the general public and addresses stakeholder interests

202001 - UKML3043 BECG LYW 15

Problems with Ethics and Conduct Codes
1) Most codes are too vague to be meaningful; that is, the codes do not inform
employees about how to prioritize conflicting interests of distributors, customers, and
the company. What does being a “good citizen” really mean in practice?
2) Codes do not prioritize beliefs, values, and norms. Should profit always supersede
concern for customers or employees?
3) Codes are not enforced in firms.
4) Not all employees are informed of codes.
5) Codes do not relate to employee’s actual work and ethical “gray” areas.

202001 - UKML3043 BECG LYW 16

An Effective Ethics Program
• Helps ensure that all employees understand the organization’s values and
comply with the policies and codes of conduct that create its ethical
climate
• Diverse employee backgrounds (education, experience, family)
make organizational socialization more critical.

• Ethics Programs Can Help Avoid Legal Problems

• The program must be communicated to all employees—providing a common
understanding of organizational values, policies, and procedures.
• Companies that act to prevent organizational misconduct may receive a “carrot” and
avoid organizational penalties.
• Those that do not may receive a “stick” - fines and penalties.

202001 - UKML3043 BECG LYW 17

Code of Conduct for Market Participants
• Issued by the Securities Commission of Malaysia.
• Business Ethics and Compliance – market integrity will be facilitated if
investors are confident that the market is fair, transparent and free from
manipulation and abuse. Regulations should be directed at eliminating
unacceptable market practices.
• Market institutions include the approved exchanges, clearing houses or
central depositories under the SC.
• Market participants include persons and/or body corporate that are bound
by the rules of a market institution, e.g. company directors.

202001 - UKML3043 BECG LYW 18

 Code of Conduct for Market Participants
Objectives:
1. To provide guidance to individuals (e.g. decision makers: directors and
CEO) as to the standards of governance and conduct
2. To ensure that there is integrity in the performance of the
institution’s regulatory functions and responsibilities

Areas of coverage – the regulatory process, standards of conduct of

directors, CEO and employees, transparency and accountability

202001 - UKML3043 BECG LYW 19

Ethical expectations by the market
Market participants Ethical expectations of the Executive’s roles
entity

Owners, Ongoing viability Effective governance

shareholders and Reputation and credibility and objective risk
fund providers Integrity of information management
process
Accountability
Integrity in financial
management
Transparency,
objectivity and
disclosure

202001 - UKML3043 BECG LYW 20

Ethical expectations by the market
Market participants Ethical expectations of the entity Executive’s roles

Other public Product safety and product Understand CSR and

stakeholders, quality triple bottom line
employees and Socially responsible activities reporting
individuals Fair compensation Ensure compliance
Open communications with standards, legal
and regulatory matters
Maintain integrity and
duty of care
Undertakes corrective
actions in cases of
wrongdoings

202001 - UKML3043 BECG LYW 21

Threat to Ethics
• The risk of failure to achieve certain expected standard of behaviour.
• Issues that pose threats to the ability of directors, auditors, CEO,
managers to maintain their ethical position and implement sound CG
practices.
• Origins of ethics risks – self-interest motive and incompetence

202001 - UKML3043 BECG LYW 22

 Sources of ethical threats

• Failure to manage staff • Concealing health-

leads to fraud hazard on products
• Releasing misleading Product • Compromise
Stakeholder
information or product safety
• Selling defective
s
products and services service standards
• IS pressure for s • Incorrect
earnings leads to accounting advice
earnings management given

202001 - UKML3043 BECG LYW 23

 Sources of ethical threats

• Failure to discharge • Maximise bonus by

fiduciary duties manipulating accounts
• Compromise audit Organisation
• Wrong tone at-the-top
al – setting non-
Reputatio standards after • Compliance culture
culture, norm
n receiving and • Inappropriate handling
• Bribe objectives
of complaints by
• Low balling by • Staff – leads to whistle
accounting firms blowing situations

202001 - UKML3043 BECG LYW 24

In short…
• Law and regulations alone can never guarantee fair practice.

• We can have all the governance mechanisms in place BUT if the

individual corporate players posses lack of ethical values, CG issues
will continue to occur.

202001 - UKML3043 BECG LYW 25

Ombuds and Peer-Review Programs
• Ombuds and peer review programs are additional methods that corporations use to
manage the legal and moral aspects of potentially problematic activities in the
workplace.
• The ombuds approach provides employees with a means of having their grievances
heard, reviewed, and resolved.
• Ombuds individuals are third parties inside the corporation to whom employees can take
their grievances.
• The ombuds individuals, with the employee’s approval, can go to the employee’s
manager to discuss the grievance. The ombudsperson can continue through the chain of
command, all the way to the president of the corporation, if the problem has not been
satisfactorily resolved for the employee. Ombudspersons have no power them selves to
solve disputes or override managers’ decisions.

202001 - UKML3043 BECG LYW 26

Ombuds and Peer-Review Programs
• Complaints usually center on salary disputes, job performance appraisals, layoff s,
benefits, and job mobility.
• A problem with the ombuds approach is that managers may feel their authority is
threatened. Employees who seek out ombudspersons also might worry about their
managers retaliating against them from fear or spite.
• Confidentiality also has to be observed on the part of ombudspersons. The
ombudsperson is as effective as the support of the program by stakeholders allows him
or her to be.
• An ombudsperson’s success is measured by the trust, confidence, and confidentiality he
or she can create and sustain with the stakeholders.
• Finally, the ombudsperson’s effectiveness depends on the acceptance by managers and
employees of the solutions adopted to resolve problems.

202001 - UKML3043 BECG LYW 27

Managing Corporate Social Responsibility
• Corporate social responsibility (CSR) involves an organization’s duty and obligation to
respond to its stakeholders’ and the stockholders’ economic, legal, ethical, and
philanthropic concerns and issues.
• Managing CSR in the marketplace with multiple stakeholder interests is not easy.
• The stakeholder management approach views the corporation as a legal entity and also as
a collective of individuals and groups.
• The CEO and top level managers are hired to maximize profits for the owners and
shareholders. The board of directors is responsible for overseeing the direction, strategy,
and accountability of the officers and the firm. To accomplish this, corporations must
respond to a variety of stakeholders’ needs, rights, and legitimate demands. From this
perspective, the corporation has primary obligations to the economic mandates of its
owners; however, to survive and succeed, it must also respond to legal, social, political,
and environmental claims from stakeholders, as noted earlier.

202001 - UKML3043 BECG LYW 28

Managing Corporate Social Responsibility
• Seriously considering the impact of a company’s actions on society. Requires the
individual to consider his/her acts in terms of a whole social system, and holds him/her
responsible for the effects of acts anywhere in that system.

202001 - UKML3043 BECG LYW 29

 Click icon to add picture

External
Stakeholders, Moral
Stakes, and
Corporate
Responsibilities
Moral stakes and corporate
responsibilities of firms’ obligations
toward their different stakeholders.

202001 - UKML3043 BECG LYW 30

Carroll’s Four-Part Definition of CSR
Responsibility Societal Examples
Expectation
Economic Required Be profitable. Maximize sales, Minimize costs.
Legal Required Obey laws, adhere to regulations

Ethical Expected Avoid questionable practices.

Do what is right, fair, and just

Philanthropic Desired/ Be a good corporate citizen.

Expected Give back.

202001 - UKML3043 BECG LYW 31

32 202001 - UKML3043 BECG LYW
Management of Organizational Stakeholders,” Business Horizons (July-August 1981).
Source: Archie B. Carroll, “The Pyramid of Corporate Social Responsibility: Toward the Moral
Philanthropic
PhilanthropicResponsibilities
Responsibilities
Be
Beaagood
goodcorporate
corporatecitizen.
citizen.
Ethical
EthicalResponsibilities
Responsibilities
BeBeethical.
ethical.
Legal
LegalResponsibilities
Responsibilities
Obey
Obeythe
thelaw.
law.
Economic
EconomicResponsibilities
Responsibilities
Be
Beprofitable.
profitable.
The Pyramid of CSR
The CSR Equation

Economic Responsibilities
+ Total
Legal Responsibilities
= Corporate
+ CSR
Ethical Responsibilities

+
Philanthropic Responsibilities

202001 - UKML3043 BECG LYW 33

 Click icon to add picture

MALAYSIAN
CODE ON
CORPORATE
GOVERNANCE
(MCCG) 2017
PRINCIPLE A:
BOARD LEADERSHIP AND
EFFECTIVENESS

202001 - UKML3043 BECG LYW 34

 Click icon to add picture

MALAYSIAN
CODE ON
CORPORATE
GOVERNANCE
(MCCG) 2017
PRINCIPLE A:
BOARD LEADERSHIP AND
EFFECTIVENESS

202001 - UKML3043 BECG LYW 35

 Click icon to add picture

MALAYSIAN
CODE ON
CORPORATE
GOVERNANCE
(MCCG) 2017
PRINCIPLE A:
BOARD LEADERSHIP AND
EFFECTIVENESS

202001 - UKML3043 BECG LYW 36

Corporate Social Responsibility
• Definition of CSR: Responsibility shown by a company (or other organisations) for
matters of general concern to the society in which it operates, such as protection of the
environment, health and safety, and social welfare.
• Related to stakeholder theory.
• The LARGER companies have become, the greater potential impact (good or bad) on
society and, therefore, the greater the NEED for them to act in a socially responsible
manner.
• Companies have MORAL RESPONSIBILITIES to act in an ethical manner.

• Damaged reputation due to adverse (negative) publicity and public comment.

202001 - UKML3043 BECG LYW 37

Corporate Social Responsibility
Benefits Increase staff morale and better opportunities to attract quality staffs
and retain them.
of CSR
Improve partnerships with suppliers leading to a stable supply of raw
materials.

Improve relationships among decision makers in own locality (local

councils and communities) with higher approval ratings.

Increase customer confidence leading to higher sales.

202001 - UKML3043 BECG LYW 38

Corporate Social Responsibility
Cost savings and reduce wastage from new sustainable management
Benefits strategies
of CSR Increase in reputation within communities therefore gaining business
support from them

Corporations are expected to contribute towards CSR

CSR displays how a company relates to a wider society, such as the

environment and the community in which it operates

The governance principles of fairness and openness also apply to

shareholders as well as stakeholders

202001 - UKML3043 BECG LYW 39

Corporate Social Responsibility
Benefits Provide communication channels with the community.

of CSR
Better risk management through the protection of local supply chains.
Therefore, able to mitigate disruption in operations.

Companies that realise its corporate social responsibilities will enhance

its reputation amongst fund managers and investors

Enhances level of confidence among foreign investors

202001 - UKML3043 BECG LYW 40

Benefits of CSR and CG compared
• Enhances investor’s and market’s confidence.
• Important factor for investment decision.
• Improves company’s performance.
• Enhance the confidence of suppliers and lenders such as financial institutions.
• Attract talents to join the Company.
• Gain support from the consumers.
• Improve company image.
• Better relationships with the authorities.

202001 - UKML3043 BECG LYW 41

Is CSR Sound CG?
“... as the process and structure used to direct and manage business and
affairs of the company towards enhancing business prosperity and
corporate accountability with the ultimate objective of realising long term
shareholder value, whilst taking into account the interests of other
stakeholders”
• CSR takes a societal/stakeholder approach to corporate governance
promotes ethical behaviour in organisational practices
• In this approach, social responsibility is the key value and the corporation
will ensure that its governance principles are focused on societal needs
such as the protection of environment and the health of the community in
which it operates  sound CG

202001 - UKML3043 BECG LYW 42

CSR ACTIVITIES
• minimising damage to the
environment.
• investing in local communities.
• helping to fight against crimes.
• giving scholarship awards.
• giving aid to the victims of a
major flood or tsunami.
• having liberal employment
policies.

202001 - UKML3043 BECG LYW 43

Triple Bottom Line
• Definition: Reporting
organisational performance in
terms of financial, social and
environmental issues.
• Objective: Provides an opportunity
to demonstrate to company’s
stakeholders that it is introducing
sustainable business practices.
• In practice, companies provide a
separate corporate report containing
details of environmental and/or
social performance. E.g. Shell
Malaysia and British American
Tobacco (BAT).

202001 - UKML3043 BECG LYW 44

Examples of Triple Bottom Line
• Examples of economic / financial indicators – figures for
sales and return on average capital employed (ROCE).
• Examples of social indicators – knowledge and skills
developed or lost by the organisation.
• Examples of environmental indicators – charges for natural
capital employed and non-renewable resources consumed.

202001 - UKML3043 BECG LYW 45

 Thank you !
C:\USERS\CYNTH\DOWNLOADS\89D116C2B4526B54E5267781C3E69
CE8.PDF