Ethics have become pivotal in the operations of corporations. Their absence in firms has the tremendous impact. Business ethics refers to the moral principles and practices that determine how corporations should operate. The need to have ethical standards has gained importance because of scandals that corporations have faced in the recent past. Companies that acted unethically encountered the consequences that affected the employees, shareholders, consumers and economies, within which companies conducted the business. The current research paper explores the causes of ethical standards’ problems and methods to solve them.
Causes of Ethical Standards’ Problems
Conflict of Interest
The causes of unethical conducts are complex, but conditions in both the external and internal business environments play a critical role in influencing the corporate behavior. The compensation of managers depends on the value they create for their shareholders. When the shareholders’ returns increase, the bonuses and rewards for the managers also grow. Therefore, one of the motivating factors that make managers abandon ethical practices and engage in unethical conduct is the conflict of interests. The phenomenon occurs when the leaders cannot make impartial decisions regarding business approaches in their operations. The managers understand that they should take calculated risks when investing their shareholders’ capital. The risks involved in a venture may be too high and unworthy pursuing under normal ethical considerations. However, the desire of the managers to earn bonuses, should the venture become successful, leads them to make irrational and unethical decisions that may result in the collapse of their organizations. The consequence of the actions is that the shareholders may lose their investment because the management’s desire for personal achievement clouded their judgment.
Pressure to Perform
The second cause of problems with ethical standards is the pressure to perform and meet predetermined goals. In some cases, adhering to certain ethical standards may lead to increases in the cost of production and reduction in profitability. For instance, a company may realize that one of its products is faulty and should not release in the market because it is a hazard to the consumers. The moral action in the hypothetical case would be recalling the products and acknowledging the public about the possible dangers of using the product in its current state. Recalling the products and rectifying the problem may cost millions of dollars, which means that the corporation may not meet its profitability goals. Failure to realize the objectives may lead to job losses for some of the employees. Therefore, the performance expectations may influence the employees’ decision to disregard the need to recall the defective products, which is a breach of ethical standards.
Competition
Increased competition can also trigger ethical problems. Globalization has empowered corporations to enter international markets with minimal restrictions, which has increased the level of competition. Entering some countries such as India may be strenuous for organizations because of bureaucracy and corruption. Competitors from different regions may be willing to bribe officials in the target market to facilitate quick entry. Bribing is an unethical action because it provides one market actor with undue advantage over others. An ethical firm may face a dilemma because failure to give a bribe may mean unsuccessful entry into a potential market. Since the phenomenon is a common practice in some countries , executives of the firm may decide to bribe the officials. In the mentioned ethical dilemma, the external force of competition and market conditions may prompt companies to engage in immoral behavior.
Greed and Focus on Tactical Gains
Greed and executives’ overemphasis on short-term financial performance leads to accounting fraud. The management of an organization may influence the accounting commission in their pursuit of short-term objectives. A firm that may currently be seeking additional financial investment may instruct their internal auditors to misrepresent facts in their financial statements to project a positive image of performance to potential investors. Although the company may be performing poorly, the management creates a false impression, which lures owners of capital into investing in the organization. The fraud may not be imminent in the short-term, but its effects may have profound consequences in the future. Therefore, managers’ greed for additional capital prevents them from considering the ethical consequences of their actions.
Solutions to the Ethical Standards’ Problems
Proper Composition of the Board of Directors
The formulation of corporate governance structures to safeguard the interests of all the stakeholders is the key to finding the solutions to the causes of problems in ethical standards. The flawed Boards of Directors’ composition is one of the issues that make them ineffective in their oversight roles. The Boards should have executive, non-executive, independent and non-independent members. The non-executive and independent members should provide objectivity in decision-making because the non-independent executive members may have conflicting interests in the organization. Therefore, at least 50% of the Board composition should be independent members with reputation and experience to provide checks and balances. They are vital in the decisions regarding the executives’ remuneration. Their input is critical because it reduces the conflict of interests that may arise when the executive members participate in deciding their salaries and rewards. The proper governance structure can, therefore, help the managers to be objective and analytical in deciding the ventures to invest shareholders’ money.
Formation of Ethics Committee
The second solution is the involvement of ethics committees that should be headed by the independent members of the Board of Directors. The impartiality of the Board is essential because it can motivate employees throughout organizations to report unethical behaviors without the fear of retaliation. The committee should draft guidelines on the behavior workers in every department. The existence of the ethics committee can help reduce the damage caused by ethical problems such as defective products. There may be employees willing to take the right action but have no means to do so. The diligent personnel can report to the committee, which then investigates and makes recommendations to the Board for appropriate recall action. Additionally, the committee can offer guidance on the right course of action to organizations that enter global markets experiencing corruption; and thus help protect its reputation. The committee ensures that there are guidelines and deterrence mechanisms to ensure people behave ethically.
Constitution of Audit Committees
Thirdly, the Board of Directors should institute an audit committee to conduct regular analysis of risks. The committee should not involve executive members except for the internal auditor of the firm. The work of the team is to create risk management policies and standards of auditing that the company should use. The committee can tame the greed of the executive managers and help them balance their appetite for both short-term and long-term performance results. Finally, an external auditor should conduct separate audits to authenticate the internal auditor’s reports. The committee should ensure that the company changes the external auditor from time to time to prevent complacency due to a prolonged working relationship with the organization. Therefore, the committee, the internal and external auditors can help curb accounting fraud and safeguard the investments of the shareholders from executives’ risky behaviors.
The causes of ethical standards’ problems include conflicts of interests, competition, the pressure to perform, and management’s greed and appetite for short-term gains. Each of the causes leads to the ethical violations that affect different company stakeholders. The solutions to the problems include the proper composition of the board of directors, the creation of audit and ethics committees, and the engagement of external auditors.
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