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Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Office of the Vice President for Academic Affairs College of Business Administration INSTRUCTIONAL MATERIALS FOR BUMA 20033: GOOD GOVERNANCE AND CORPORAT...

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Office of the Vice President for Academic Affairs College of Business Administration INSTRUCTIONAL MATERIALS FOR BUMA 20033: GOOD GOVERNANCE AND CORPORATE SOCIAL RESPONSIBILITY COMPILED BY: Prof. Paul Timothy S. Garcia PUP A. Mabini Campus, Anonas Street, Sta. Mesa, Manila 1016 Direct Line: 335-1730 | Trunk Line: 335-1787 or 335-1777 local 000 Website: www.pup.edu.ph | Email: [email protected] THE COUNTRY’S 1st POLYTECHNICU  INTRODUCTION This instructional materials aims to enable students grasps the relevance and impact of good governance and corporate social responsibility in our society nowadays. Lessons 1 will be discussing CSR framework, its definition, key principles and arguments. Lesson 2 will be discussing stakeholder’s relationship. Lesson 3 is about corporate governance and its purpose. Lesson 4 will be discussing the relationship of government and business. Lesson 5 is about the role of ethics in business, Lesson 6 will enlighten us about the impact of corporate philanthropy in our country. Lesson 7 will be discussing sustainability and other global issues that affect companies. Lastly lesson 8 is about globalization and its impact to company’s initiatives towards corporate social responsibility. Students are expected to answer all activities/assessments required at the end of each lesson and accomplish the final exam attached in this instructional materials. COURSE OUTCOMES Acquire and demonstrate an understanding on the evolution of corporate governance Demonstrate the corporate, economic, and social challenges of Corporate Social Responsibility. Illustrate and explain levels of social responsibility and analyze the stakeholders involved Analyze the role and function of business in society. Evaluate a CSR program considerate to all stakeholders, encompassing all levels of social responsibilities Create a CSR program to all stakeholders involving all levels of social responsibilities  TABLE CONTENTS LESSON 1- CORPORATE SOCIAL RESPONSIBILTY FRAMEWORK 1 TOPIC 1- CORPORATE SOCIAL RESPONSIBILITY DEFINED 1 TOPIC 2- KEY PRINCIPLES OF CSR 2 TOPIC 3- CSR PYRAMID 2 TOPIC 4- ARGUMENTS IN SUPPORT AND AGAINST CSR 6 LESSON 2- STRATEGIC MANAGEMENT OF STAKEHOLDER RELATIONSHIPS 8 TOPIC 1- STAKEHOLDERS DEFINED 8 TOPIC 2- IDENTIFICATION OF KEY STAKEHOLDERS 9 TOPIC 3- TACTICS TO MAINTAIN POSITIVE STAKEHOLDER RELATIONSHIP 11 LESSON 3- CORPORATE GOVERNANCE 13 TOPIC 1- CORPORATE GOVERNANCE DEFINED 13 TOPIC 2- KEY CORPORATE ACTORS 14 TOPIC 3- KEY RESPONSIBILITIES OF THE BOARD OF DIRECTORS AND MANAGEMENT 15 TOPIC 4- GUIDING PRINCIPLES OF CORPORATE GOVERNANCE 18 LESSON 4- LEGAL, REGULATORY AND POLITICAL ISSUES 20 TOPIC 1- GOVERNMENT’S INFLUENCE ON BUSINESS 20 TOPIC 2- BUSINESS INFLUENCE ON GOVERNMENT AND POLITICS 22 LESSON 5- BUSINESS ETHICS 24 TOPIC 1- THE NATURE OF BUSINESS ETHICS 24 TOPIC 2- CHARACTERISTICS AND ADVANTAGAES OF BUSINES ETHICS 26 TOPIC 3- ETHICAL ISSUES IN BUSINESS 28 LESSON 6- STRATEGIC PHILANTHROPY 30 TOPIC 1- STRATEGIC PHILANTHROPY DEFINED 30 TOPIC 2- THE BENEFITS OF PHILANTHROPY AND VOLUNTEERISM 31 TOPIC 3- CORPORATE PHILNATHROPY PROGRAMS 34 LESSON 7- SUSTAINABILITY ISSUES 43 TOPIC 1- GLOBAL ENVIRONMENTAL ISSUES 43 TOPIC 2- CORPORATE PRACTICES TOWARDS SUSTAINABILITY 45 LESSON 8- CSR IN A GLOBAL ENVIRONMENT 48 TOPIC 1- NATURE OF GLOBALIZATION 48 TOPIC 2- CSR IN THE ERA OF GLOBALIZATION 49 GRADING SYSTEM 54 REFERENCES 54 LESSON 1- CORPORATE SOCIAL RESPONSIBILITY FRAMEWORK OVERVIEW Corporate social responsibility (CSR) is also often referred to as business responsibility and an organization's action on environmental, ethical, social and economic issues. You need to think of CSR simply as ensuring that your business is aware of its impacts, is accountable for its actions, and that it undertakes these actions in a responsible manner. Furthermore, a well-run business is transparent in its decision-making and processes and this makes for good governance. LEARNING OUTCOMES By the end of this lesson, you should be able to: Define corporate social responsibility Explain the key principles of CSR Understand the CSR pyramid Discuss the arguments in support and against CSR COURSE MATERIALS TOPIC 1- CORPORATE SOCIAL RESPONSIBILITY DEFINED Corporate social responsibility (CSR) is a self-regulating business model that helps a company be socially accountable to itself, its stakeholders, and the public. By practicing corporate social responsibility, also called corporate citizenship, companies can be conscious of the kind of impact they are having on all aspects of society, including economic, social, and environmental. To engage in CSR means that, in the ordinary course of business, a company is operating in ways that enhance society and the environment, instead of contributing negatively to them. Corporate social responsibility is a broad concept that can take many forms depending on the company and industry. Through CSR programs, philanthropy, and volunteer efforts, businesses can benefit society while boosting their brands. As important as CSR is for the community, it is equally valuable for a company. CSR activities can help forge a stronger bond between employees and corporations; boost morale; and help both employees and employers feel more connected with the world around them. Corporate social responsibility is important to both consumers and companies and programs are a great way to raise morale in the workplace. For a company to be socially responsible, it first needs to be accountable to itself and its shareholders. Often, companies that adopt CSR programs have grown their business to the 1 point where they can give back to society. Thus, CSR is primarily a strategy of large corporations. Also, the more visible and successful a corporation is, the more responsibility it has to set standards of ethical behavior for its peers, competition, and industry. TOPIC 2- KEY PRINCIPLES OF CSR Sustainability - This is concerned with the effect which action taken in the present has upon the options available in the future. If resources are utilized in the present then they are no longer available for use in the future, and this is of particular concern if the resources are finite in quantity. Thus raw materials of an extractive nature, such as coal, iron or oil, are finite in quantity and once used are not available for future use. At some point in the future therefore alternatives will be needed to fulfill the functions currently provided by these resources. This may be at some point in the relatively distant future but more immediate concern is the fact that as resources become depleted then the cost of acquiring the remaining resources tends to increase, and hence the operational costs of organization tend to increase. Accountability - This is concerned with an organization recognizing that its actions affect the external environment, and therefore assuming responsibility for the effects of its actions. This concept therefore implies in quantification of the effects of action taken. Transparency - As a principle, means that the external impact of the actions of the organization can be ascertained from the organization’s reporting and pertinent facts are not disguised within that reporting. Thus all the effects of the actions of the organization, including external impacts, should be apparent to all from using the information provided by the organization’s reporting mechanism. TOPIC 3- CSR PYRAMID Carroll's CSR Pyramid is a simple framework that helps argue how and why organizations should meet their social responsibilities. The key features of Carroll's CSR Pyramid are that: CSR is built on the foundation of profit – profit must come first Then comes the need for a business to ensure it complies with all laws & regulations Before a business considers its philanthropic options, it also needs to meet its ethical duties 2  For CSR to be accepted by a conscientious business person, it should be framed in such a way that the entire range of business responsibilities are embraced. It is suggested here that four kinds of social responsibilities constitute total CSR: economic, legal, ethical and philanthropic. Furthermore these four categories or components of CSR might be depicted as a pyramid. Archie Carroll’s Pyramid of Corporate Social Responsibility Economic Responsibilities Historically business organizations were created as economic entities designed to provide goods and services to societal members. The prof it motive was established as the primary incentive for entrepreneurship. Before it was anything else, business organization was the basic economic unit in our As such, its principal role was to produce goods and services that consumers needed and wanted and to make an acceptable profit in the process. At some point the idea of the profit motive got transformed into a notion of maximum profits, and this has been an enduring value ever since. All other business responsibilities are predicated upon the economic responsibility of the firm, because without it the others become moot considerations. Legal Responsibilities Society has not only sanctioned business to operate according to the profit motive; at the same time business is expected to comply with the laws and regulations promulgated by federal, state, and local governments as the ground rules under which business must operate. As a partial fulfillment of the "social contract" between business and society firms are expected to pursue their economic missions within the framework of the law. Legal responsibilities reflect a view of "codified ethics" in the sense that they embody basic notions of fair operations as 3 established by our lawmakers. They are depicted as the next layer on the pyramid to portray their historical development, but they are appropriately seen as coexisting with economic responsibilities as fundamental precepts of the free enterprise system. Ethical Responsibilities Although economic and legal responsibilities embody ethical norms about fairness and justice, ethical responsibilities embrace those activities and practices that are expected or prohibited by societal members even though they are not codified into law. Ethical responsibilities embody those standards, norms, or expectations that reflect a concern for what consumers, employees, shareholders, and the community regard as fair, just, or in keeping with the respect or protection of stakeholders' moral rights. In one sense, changing ethics or values precede the establishment of law because they become the driving force behind the very creation of laws or regulations. For example, the environmental, civil rights, and consumer movements reflected basic alterations in societal values and thus may be seen as ethical bellwethers foreshadowing and resulting in the later legislation. In another sense, ethical responsibilities may be seen as embracing newly emerging values and norms society expects business to meet, even though such values and norms may reflect a higher standard of performanc e than that currently required by law. Ethical responsibilities in this sense are often ill-defined or continually under public debate as to their legitimacy, and thus are frequently difficult for business to deal with. Superimposed on these ethical expectations emanating from societal groups are the implied levels of ethical performance suggested by a consideration of the great ethical principles of moral philosophy. This would include such principles as justice, rights, and utilitarianism. The business ethics movement of the past decade has firmly established an ethical responsibility as a legitimate CSR component. Though it is depicted as the next layer of the CSR pyramid, it must be constantly recognized that it is in dynamic interplay with the legal responsibility category. That is, it is constantly pushing the legal responsibility category to broaden or expand while at the same time placing ever higher expectations on business persons to operate at levels above that required by law. Philanthropic Responsibilities Philanthropy encompasses those corporate actions that are in response to society’s expectation that businesses be good corporate citizens. This includes actively engaging in acts or programs to promote human welfare or goodwill. Examples of philanthropy include business contributions to financial resources or executive time, such as contributions to the arts, education, or the community. A loaned-executive program that provides leadership for a community’s United Way campaign is one illustration of philanthropy. The distinguishing feature between philanthropy and ethical responsibilities is that the former are not expected in an ethical or moral sense. Communities desire firms to contribute their money, facilities, and employee time to humanitarian programs or purposes, but they do not regard the firms as unethical if they do not provide the desired level. Therefore, philanthropy is more discretionary or voluntary on the part of businesses even though there is always the societal expectation that businesses provide it. 4  One notable reason for making the distinction between philanthropic and ethical responsibilities is that some firms feel they are being socially responsible if they are just good citizens in the community. This distinction brings home the vital point that CSR includes philanthropic contributions but is not limited to them. In fact, it would be argued here that philanthropy is highly desired and prized but actually less important than the other three categories of social responsibility, In a sense, philanthropy is icing on the cake—or on the pyramid, using our metaphor. It portrays the four components of CSR, beginning with the basic building block notion that economic performance undergirds all else. At the same time, business is expected to obey the law because the law is society's codification of acceptable and unacceptable behavior. Next is business's responsibility to be ethical. At its most fundamental level, this is the obligation to do what is right, just, and fair, and to avoid or minimize harm to stakeholders (employees, consumers, the environment, and others). Finally, business is expected to be a good corporate citizen. This is captured in the philanthropic responsibility, wherein business is expected to contribute financial and human resources to the community and to improve the quality of life. No metaphor is perfect, and the CSR pyramid is no exception. It is intended to portray that the total CSR of business comprises distinct components that, taken together, constitute the whole. Though the components have been treated as separate concepts for discussion purposes, they are not mutually exclusive and are not intended to juxtapose a firm’s economic responsibilities with its other responsibilities. At the same time, a consideration of the separate components helps the manager see that the different types of obligations are in a constant but dynamic tension with one another. The most critical tensions, of course, would be between economic and legal, economic and ethical, and economic and philanthropic. The traditionalist might see this as a conflict between a firm’s "concern for profits versus its "concern for society," but it is suggested here that this is an oversimplification. A CSR or stakeholder perspective would recognize these tensions as organizational realities, but focus on the total pyramid as a unified whole and how the firm might engage in decisions, actions, and programs that substantially fulfill all its component parts. In summary, the total corporate social responsibility of business entails the simultaneous fulfillment of the firm's economic, legal, ethical, and philanthropic responsibilities. Stated in more pragmatic and managerial terms, the CSR firm should strive to make a profit, obey the law, be ethical, and be a good corporate citizen. Upon first glance, this array of responsibilities may seem broad. They seem to be in striking contrast to the classical economic argument that management has one responsibility: to maximize the profits of its owners or shareholders. Economist Milton Friedman, the most outspoken proponent of this view, has argued that social matters are not the concern of business people and that these problems should be resolved by the unfettered workings of the free market system. Friedman's argument loses some of its punch, however, when you consider his assertion in its totality. Friedman posited that management is "to make as much money as possible while conforming to the basic rules of society, both those embodied in the law and those embodied in ethical custom" (Friedman 1970). Most people focus on the first part of Friedman's quote but not the second part. It seems clear from this statement that prof its, conformity to the law, and ethical custom embrace three components of the CSR pyramid- economic, legal, and ethical. That only leaves the philanthropic component for Friedman to reject. Although it may be appropriate for an economist to take this view, one would not encounter many business executives today who exclude philanthropic programs from their firms' range of activities. It seems the role of corporate citizenship is one that business has no 5 significant problem embracing. Undoubtedly this perspective is rationalized under the rubric of enlightened self-interest. TOPIC 4- ARGUMENTS IN SUPPORT AND AGAINST CSR Arguments in Support Convinced that the corporation should be more than simply a profit machine, proponents of social responsibility have offered the following arguments: Business is unavoidably involved in social issues. - As social activists like to say, business is either part of the solution or part of the problem. There is no denying that private business shares responsibility for societal problems including unemployment, inflation, and pollution. Like everyone else, corporate citizens must balance their rights and responsibilities. Business has the resources to tackle today’s complex societal problems. - With its rich stock of technical, financial and managerial resources, the private business sector can tip the scale in favor of solving society’s more troublesome problems. After all, it is argued, without the support of society, business could not have built its resource base in the first place A better society means a better environment for doing business. - Business can enhance its long-run profitability by making an investment in society today. In other words, today’s problems can turn into tomorrow’s profits Corporate social action will prevent government intervention. - As evidenced by waves of antitrust, equal employment opportunity and pollution control legislation, the government will force business to do what it fails to do voluntarily. Arguments Against These arguments are based on the assumption that business should stick to what it does best, that is, pursuing profit by producing marketable goods and services. Social goals should be handled by other institutions such as family, school, church and government. Profit maximization ensures the efficient use of society’s resources. - By buying goods and services, consumers collectively dictate where assets should be deployed. Social expenditures amount to theft if stock holders equity. As an economic institution, business lacks the ability to pursue social goals. - Gross inefficiencies can be expected if managers are forced to divert their attention from their pursuit of economic goals. 6  Business already has enough power. - Considering that business exercises powerful influence over where and how we work and live, what we buy, and what we value, additional concentration of social power in the hands of business is undesirable. Since managers are not elected, they are not directly accountable to the people. - Corporate social programs can easily become misguided. The market system effectively controls business’s economic performance, but it is a poor mechanism for controlling business’s social performance. ACTIVITIES/ASSESSMENTS 1. Write an essay about the importance of CSR and the role of the key principles in the attainment of long term success for the company. 2. In your own words, discuss the four levels of responsibilities. 3. Give your own explanation about the different arguments in CSR 7 LESSON 2- STRATEGIC MANAGEMENT OF STAKEHOLDER RELATIONSHIP OVERVIEW Stakeholders are crucial to the successful delivery of any organizational activity. Successful activities are those whose important stakeholders perceive them to be successful. The identification of the right stakeholders and the development of targeted communication to meet the needs of the activity and the expectations of stakeholders, will lead to a higher level of commitment and support from these stakeholders. Stakeholders are more likely to support activities that they think will succeed; and are more likely to withdraw support from activities that they perceive are not succeeding. Therefore, it is essential to communicate relevant information to important stakeholders to provide them with the perception the activity is being well managed. This can be achieved through targeted communication that is aligned with their expectations and their information requirements LEARNING OUTCOMES By the end of this lesson, you should be able to: Define and identify stakeholders Discuss the tactics to maintain positive stakeholder relationships COURSE MATERIALS TOPIC 1- STAKEHOLDERS DEFINED Stakeholder is a person or group that has an interest in a company and can either affect or be affected by the business. The primary stakeholders in a typical corporation are its investors, employees, customers and suppliers and other business partners. However, the modern theory of the idea goes beyond this original notion to include additional stakeholders such as a community, government or trade association. Any individual or groups/group of individuals who believe and have an interest in an organization’s ability to deliver intended results and affect or are affected by its outcomes are called stakeholders. Stakeholders play an integral part in the development and ultimate success of an organization. An organization is usually accountable to a broad range of stakeholders, including shareholders, who are an integral part of an organization’s strategy execution. This is the main reason managers must consider stakeholders’ interests, needs, and preferences. A stakeholder is anybody who can affect or is affected by an organization, strategy or project. They can be internal or external and they can be at senior or junior levels. 8 TOPIC 2- IDENTIFICATION OF KEY STAKEHOLDERS It is very important for any business to identify its key stakeholders and scope their involvement as they play a vital role right from strategizing to implementation of outcomes throughout the lifetime of a business. Stakeholders can be of two types: ✓ Primary or Internal stakeholders ✓ External stakeholders Primary or Internal Stakeholders These are groups or individuals who are directly engaged in economic transactions within the business, such as employees, owners, investors, suppliers, creditors, etc. For example, employees contribute their skill/expertise and wish to earn high wages and retain their jobs. Owners exercise control over the business with a view to maximizing the profit of the business. 9 Secondary or External Stakeholders These are groups or individuals who need not necessarily be engaged in transaction with the business but are affected in some way from the decisions of the business, such as customers, community, trade unions, and the government. For example, the trade unions are interested in the organization’s well-being so that the workers are well paid and treated fairly. Customers want the business to produce quality products at reasonable prices. Different stakeholders have different interests in the organization and the management has to consider all their interests and create a synergy among them to achieve its objectives. Identifying all of a firm’s stakeholders can be a daunting task. It is important to have the optimum number of stakeholders, neither too many nor too few. Having too many stakeholders will dilute the effectiveness of the company objectives by overwhelming decision makers with too much information and authority. Following are some effective techniques to identify key stakeholders: Brainstorming - This is done by including all the people already involved and aware of the company and its objectives, and encouraging them to come out with their ideas. Stakeholders can be brainstormed based on categories such as internal or external. Determining power and influence over decisions - Identify the individuals or groups that exercise power and influence over the decisions the firm makes. Once it is determined who has a stake in the outcome of the firm’s decisions as well as who has power over these decisions, there can be a basis on which to allocate prominence in the strategy-formulation and strategy-implementation processes. Determining influences on mission, vision and strategy formulation - Analyze the importance and roles of the individuals or groups who should be consulted as strategy is developed or who will play some part in its eventual implementation. Checklist - Make a checklist or questions to help identify the more influential or important stakeholders. - Who influences the opinions about the company? - Who has been involved in similar projects in the past? - Which group will benefit from the successful execution of the strategy which may be adversely affected? Involve the already identified stakeholders - Once the stakeholders are identified, it is important to manage their interests and keep them involved and supportive. This is a daunting task to be performed tactfully by managers so that the organization’s higher objectives are not subordinated by individual interests. 10 TOPIC 3- TACTICS TO MAINTAIN POSTIVE STAKEHOLDER RELATIONSHIPS A well-developed stakeholder communications plan is essential for building positive stakeholder relationships. However, this leads to the question, what is an effective engagement strategy? The key is to find a balance and ensure the right tactics suit the appropriate stakeholders. If you get the process right, then your stakeholders will champion your project. They will help your project reach positive outcomes and people will be more accepting of your decisions. Fail to create effective stakeholder management and your project may end up costing your thousands, millions or even billions. In this article, several factors to help you maintain strong relationships with stakeholders. 1. Group your stakeholders More often than not, stakeholders will fall into two groups. Those who: - Have a vested interest in the project - Are affected by the project outcomes These two groups can be further split into those: Directly involved in the project Who have influence over decisions Who need to stay informed about the process and decisions Grouping your stakeholders according to their level of decision-making will make it easier to develop a tailored approach to engaging each group. 2. Clearly, communicate your project scope Tell your stakeholders the process you will use to communicate information to them right from the start. Also, clearly explain how you will engage with them in decisions. People are more willing to listen when you tell them their influence over the final outcome, the decision-making process, what is negotiable and what is not. 3. Gain your stakeholders trust right from the start Stakeholder relationship management includes communicating with people early and often so they fully understand the benefits of your project. Having an understanding of a situation means people are more likely to support you when necessary. It also means even if stakeholders don’t agree with the final decision, they have the benefit of understanding the process, history and the trade-offs made. Therefore, they will be less likely to aggressively object at the final stage. Social Pinpoint’s article about taking the community along the journey outlines the different factors of why it’s important to engage right from the start. 11 4. Stay consistent with your messaging Confusing your stakeholders is incredibly dangerous. Inconsistent messaging can lead to public outrage, loss in trust, and a negative reputation. Your stakeholders value consistent messaging and want to know they can rely on you for the most current and up-to-date information. If there is a hurdle to overcome, your stakeholder will be more willing to help overcome the problem rather than blame the issue for coming up. For more information, have a look at a recent we wrote an article about consistent messaging to your stakeholders. 5. Meet up with stakeholders who are resistant to change Wouldn’t the world be a much nicer place if we all agreed on everything? Unfortunately, if it were true, we would lose creativity, innovation, and uniqueness. All projects will include people who love, hate or want to shape or want to mould the project idea. It’s our job to find a way to balance these differing views. One of the worst things that can happen is you’ve gone through your engagement process, made a final decision and then you receive angry phone calls and emails about the project outcomes. To prevent this from happening, it’s important to regularly meet with key stakeholders who are resistant to change. The meeting could be in person, by email or through a phone-call. Involving stakeholders in decisions and listening to concerns re- emphasizes the benefits of the potential change. In the instance where stakeholders are resistant to change, it’s important to discuss the project scope. Some things aren’t negotiable and it’s important to show stakeholders what influence they do have to shape the project. 6. Use data management systems to summarize key information It all comes down to the power of reflection. If you have a meeting with a stakeholder then write a summary of the event. What was the meeting about? What were the key findings? Are there any actions? When is the next meeting? Use your data management system to its full potential. 7. Keep surprises to a minimum Some of us love surprises but placing your stakeholders off -guard can result in a huge mistake and can cost you from building positive stakeholder relationships. Most stakeholders like to be given an early view of risks and issues. However, this doesn’t mean you need to present every issue as it occurs. Go into the meeting solutions-based rather than problem-focused. Create various options to resolve the issue and then ask stakeholders to add their input to create an informed decision about the next step. ACTIVITIES/ASSESSMENTS 1. Identify the different types of stakeholders and explain their relationship to the company. 2. In your own words, discuss the steps to maintain positive stakeholder relationship. 12 LESSON 3- CORPORATE GOVERNANCE OVERVIEW Corporate governance is the combination of rules, processes or laws by which businesses are operated, regulated or controlled. The term encompasses the internal and external factors that affect the interests of a company’s stakeholders, including shareholders, customers, suppliers, government regulators and management. The board of directors is responsible for creating the framework for corporate governance that best aligns business conduct with objectives. Specific processes that can be outlined in corporate governance include action plans, performance measurement, disclosure practices, executive compensation decisions, dividend policies, procedures for reconciling conflicts of interest and explicit or implicit contracts between the company and stakeholders. An example of good corporate governance is a well-defined and enforced structure that works for the benefit of everyone concerned by ensuring that the enterprise adheres to accepted ethical standards, best practices and formal laws. Alternatively, bad corporate governance is seen as poorly-structured, ambiguous and noncompliant, which could damage the image or financial health of a business. LEARNING OUTCOMES By the end of this lesson, you should be able to: Define corporate governance Identify the key corporate actors Explain the key responsibilities of the board of directors and management Discuss the guiding principles of corporate governance COURSE MATERIALS TOPIC 1- CORPORATE GOVERNANCE DEFINED Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community. Since corporate governance also provides the framework for attaining a company's objectives, it enc ompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure. Corporate governance is the structure of rules, practices, and processes used to direct and manage a company. A company's board of directors is the primary force influencing corporate governance. Bad corporate governance can cast doubt on a company's reliability, integrity, and transparency, which can impact its financial health. 13 Understanding Corporate Governance Governance refers specifically to the set of rules, controls, policies, and resolutions put in place to dictate corporate behavior. Proxy advisors and shareholders are important stakeholders who indirectly affect governance, but these are not examples of governance itself. The board of directors is pivotal in governance, and it can have major ramifications for equity valuation. A company’s corporate governance is important to investors since it shows a company's direction and business integrity. Good corporate governance helps companies build trust with investors and the community. As a result, corporate governance helps promote financial viability by creating a long-term investment opportunity for market participants. Communicating a firm's corporate governance is a key component of community and investor relations. On Apple Inc.'s investor relations site, for example, the firm outlines its corporate leadership—its executive team, its board of directors—and its corporate governance, including its committee charters and governance documents, such as bylaws, stock ownership guidelines and articles of incorporation. Most companies strive to have a high level of corporate governance. For many shareholders, it is not enough for a company to merely be profitable; it also needs to demonstrate good corporate citizenship through environmental awareness, ethical behavior, and sound corporate governance practices. Good corporate governance creates a transparent set of rules and controls in which shareholders, directors, and officers have aligned incentives. TOPIC 2- KEY CORPORATE ACTORS Effective corporate governance requires a clear understanding of the respective roles of the board, management and shareholders; their relationships with each other; and their relationships with other corporate stakeholders. The Board of Directors - Has the vital role of overseeing the company’s management and business strategies to achieve long-term value creation. Selecting a well-qualified chief executive officer (CEO) to lead the company, monitoring and evaluating the CEO’s performance, and overseeing the CEO succession planning process are some of the most important functions of the board. The board delegates to the CEO-- and through the CEO to other senior management-- the authority and responsibility for operating the company’s business. Effective directors are diligent monitors, but not managers, of business operations. They exercise vigorous and diligent oversight of a company’s affairs, including key areas such as strategy and risk, but they do not manage or micromanage — the company’s business by performing or duplicating the tasks of the CEO and senior management team. The distinction between oversight and management is not always precise, and some situations (such as a crisis) may require greater board involvement in operational matters. In addition, in some areas (such as the relationship with the outside auditor and executive compensation), the board has a direct role instead of an oversight role. 14 Management, Led by the CEO, is responsible for setting, managing and executing the strategies of the company, including but not limited to running the operations of the company under the oversight of the board and keeping the board informed of the status of the company’s operations. Management’s responsibilities include strategic planning, risk management and financial reporting. An effective management team runs the company with a focus on executing the company’s strategy over a meaningful time horizon and avoids an undue emphasis on short-term metrics. Shareholders Invest in a corporation by buying its stock and receive economic benefits in return. Shareholders are not involved in the day to-day management of business operations, but they have the right to elect representatives (directors) and to receive information material to investment and voting decisions. Shareholders should expect corporate boards and managers to act as long-term stewards of their investment in the corporation. They also should expect that the board and management will be responsive to issues and concerns that are of widespread interest to long-term shareholders and affect the company’s long-term value. Corporations are for-profit enterprises that are designed to provide sustainable long-term value to all shareholders. Accordingly, shareholders should not expect to use the public companies in which they invest as platforms for the advancement of their personal agendas or for the promotion of general political or social causes. Some shareholders may seek a voice in the company’s strategic direction and decision making- areas that traditionally were squarely within the realm of the board and management. Shareholders who seek this influence should recognize that this type of empowerment necessarily involves the assumption of a degree of responsibility for the goal of long-term value creation for the company and all of its shareholders. Effective corporate governance requires dedicated focus on the part of directors, the CEO and senior management to their own responsibilities and, together with the corporation’s shareholders, to the shared goal of building long-term value. TOPIC 3- KEY RESPONSIBILITIES OF THE BOARD OF DIRECTORS AND MANAGEMENT An effective system of corporate governance provides the framework within which the board and management address their key responsibilities. Board of Directors A corporation’s business is managed under the board’s oversight. The board also has direct responsibility for certain key matters, including the relationship with the outside auditor and executive compensation. The board’s oversight function encompasses a number of responsibilities, including: Selecting the CEO. The board selects and oversees the performance of the company’s CEO and oversees the CEO succession planning process. 15  Setting the “tone at the top.” The board should set a “tone at the top” that demonstrates the company’s commitment to integrity and legal compliance. This tone lays the groundwork for a corporate culture that is communicated to personnel at all levels of the organization. Approving corporate strategy and monitoring the implementation of strategic plans. The board should have meaningful input into the company’s long-term strategy from development through execution, should approve the company’s strategic plans and should regularly evaluate implementation of the plans that are designed to create long- term value. The board should understand the risks inherent in the company’s strategic plans and how those risks are being managed. Setting the company’s risk appetite, reviewing and understanding the major risks, and overseeing the risk management processes. The board oversees the process for identifying and managing the significant risks facing the company. The board and senior management should agree on the company’s risk appetite, and the board should be comfortable that the strategic plans are consistent with it. The board should establish a structure for overseeing risk, delegating responsibility to committees and overseeing the designation of senior management responsible for risk management. Focusing on the integrity and clarity of the company’s financial reporting and other disclosures about corporate performance. The board should be satisfied that the company’s financial statements accurately present its financial condition and results of operations, that other disclosures about the company’s performance convey meaningful information about past results as well as future plans, and that the company’s internal controls and procedures have been designed to detect and deter fraudulent activity. Allocating capital. The board should have meaningful input and decision making authority over the company’s capital allocation process and strategy to find the right balance between short-term and long-term economic returns for its shareholders. Reviewing, understanding and overseeing annual operating plans and budgets. The board oversees the annual operating plans and reviews annual budgets presented by management. The board monitors implementation of the annual plans and assesses whether they are responsive to changing conditions. Reviewing the company’s plans for business resiliency. As part of its risk oversight function, the board periodically reviews management’s plans to address business resiliency, including such items as business continuity, physical security, cyber security and crisis management. Nominating directors and committee members, and overseeing effective corporate governance. The board, under the leadership of its nominating/corporate governance committee, nominates directors and committee members and oversees the structure, composition (including independence and diversity), succession planning, practices and evaluation of the board and its committees. 16  Overseeing the compliance program. The board, under the leadership of appropriate committees, oversees the company’s compliance program and remains informed about any significant compliance issues that may arise. CEO and Management The CEO and management, under the CEO’s direction, are responsible for the development of the company’s long-term strategic plans and the effective execution of the company’s business in accordance with those strategic plans. As part of this responsibility, management is charged with the following duties. Business operations: The CEO and management run the company’s business under the board’s oversight, with a view toward building long-term value. Strategic planning: The CEO and senior management generally take the lead in articulating a vision for the company’s future and in developing strategic plans designed to create long-term value for the company, with meaningful input from the board. Management implements the plans following board approval, regularly reviews progress against strategic plans with the board, and recommends and carries out changes to the plans as necessary. Capital allocation: The CEO and senior management are responsible for providing recommendations to the board related to capital allocation of the company’s resources, including but not limited to organic growth; mergers and acquisitions; divestitures; spin- offs; maintaining and growing its physical and nonphysical resources; and the appropriate return of capital to shareholders in the form of dividends, share repurchases and other capital distribution means. Identifying, evaluating and managing risks: Management identifies, evaluates and manages the risks that the company undertakes in implementing its strategic plans and conducting its business. Management also evaluates whether these risks, and related risk management efforts, are consistent with the company’s risk appetite. Senior management keeps the board and relevant committees informed about the company’s significant risks and its risk management processes. Accurate and transparent financial reporting and disclosures: Management is responsible for the integrity of the company’s financial reporting system and the accurate and timely preparation of the company’s financial statements and related disclosures. It is management’s responsibility— under the direction of the CEO and the company’s principal financial officer — to establish, maintain and periodically evaluate the company’s internal controls over financial reporting and the company’s disclosure controls and procedures, including the ability of such controls and procedures to detect and deter fraudulent activity. 17  Annual operating plans and budgets: Senior management develops annual operating plans and budgets for the company and presents them to the board. The management team implements and monitors the operating plans and budgets, making adjustments in light of changing conditions, assumptions and expectations, and keeps the board apprised of significant developments and changes. Selecting qualified management, establishing an effective organizational structure and ensuring effective succession planning: Senior management selects qualified management, implements an organizational structure, and develops and executes thoughtful career development and succession planning strategies that are appropriate for the company. Business resiliency: Management develops, implements and periodically reviews plans for business resiliency that provide the most critical protection in light of the company’s operations. 1. Risk identification- Management identifies the company’s major business and operational risks, including those relating to natural disasters, leadership gaps, physical security, cyber security, regulatory changes and other matters. 2. Crisis preparedness- Management develops and implements crisis preparedness and response plans and works with the board to identify situations (such as a crisis involving senior management) in which the board may need to assume a more active response role. The CEO and management run the company’s business under the board’s oversight, with a view toward building long-term value. Management identifies the company’s major business and operational risks, including those relating to natural disasters, leadership gaps, physical security, cyber security, regulatory changes and other matters. TOPIC 4- GUIDING PRINCIPLES OF CORPORATE GOVERANCE Business Roundtable supports the following core guiding principles: 1. The board approves corporate strategies that are intended to build sustainable long-term value; selects a chief executive officer (CEO); oversees the CEO and senior management in operating the company’s business, including allocating capital for long- term growth and assessing and managing risks; and sets the “tone at the top” for ethical conduct. 2. Management develops and implements corporate strategy and operates the company’s business under the board’s oversight, with the goal of producing sustainable long-term value creation. 3. Management, under the oversight of the board and its audit committee, produces financial statements that fairly present the company’s financial condition and results of operations and makes the timely disclosures investors need to assess the financial and business soundness and risks of the company. 18  4. The audit committee of the board retains and manages the relationship with the outside auditor, oversees the company’s annual financial statement audit and internal controls over financial reporting, and oversees the company’s risk management and compliance programs. 5. The nominating/corporate governance committee of the board plays a leadership role in shaping the corporate governance of the company, strives to build an engage d and diverse board whose composition is appropriate in light of the company’s needs and strategy, and actively conducts succession planning for the board. 6. The compensation committee of the board develops an executive compensation philosophy, adopts and oversees the implementation of compensation policies that fit within its philosophy, designs compensation packages for the CEO and senior management to incentivize the creation of long-term value, and develops meaningful goals for performance-based compensation that support the company’s long-term value creation strategy. 7. The board and management should engage with long-term shareholders on issues and concerns that are of widespread interest to them and that affect the company’s long-term value creation. Shareholders that engage with the board and management in a manner that may affect corporate decision making or strategies are encouraged to disclose appropriate identifying information and to assume some accountability for the long-term interests of the company and its shareholders as a whole. As part of this responsibility, shareholders should recognize that the board must continually weigh both short-term and long-term uses of capital when determining how to allocate it in a way that is most beneficial to shareholders and to building long-term value. 8. In making decisions, the board may consider the interests of all of the company’s constituencies, including stakeholders such as employees, customers, suppliers and the community in which the company does business, when doing so contributes in a direct and meaningful way to building long-term value creation. ACTIVITIES/ASSESSMENTS 1. Discuss the guiding principles of good governance. 2. Explain the key responsibilities of the board of directors and management 19 LESSON 4- LEGAL, REGULATORY AND POLITICAL ISSUES OVERVIEW Since businesses are strongly affected by public policies, it is in their best interest to stay informed about public policies and to try to influence governmental decision making and public policy. There are different general ways that businesses view and act on their relationship with government. One perspective is for businesses to consider business and government on “two sides” and in opposition to each other. Some have argued that this was the prevailing dominant mainstream business view in the aftermath of the Great Recession at the end of the first decade of the twenty-first century. It has been characterized as the “antiregulatory” or “limited government” view, and it has been associated with those who believe that free markets with a minimal government role is best for the workings of the economy. This perspective most often focuses businesses’ interactions with government on efforts to minimize government and reduce the costs and burdens on private business and the general economy associated with government taxes, regulations, and policies. Another business perspective on government is that government should favor businesses and incentivize business performance and investment because businesses are the main source of jobs, innovation, and societal economic well-being, and therefore government should support businesses with grants, tax credits, and subsidies. LEARNING OUTCOMES By the end of this lesson, you should be able to: Differentiate business influence in government with government’s influence in business COURSE MATERIALS TOPIC 1- GOVERNMENT’S INFLUENCE ON BUSINESS Governments establish many regulations and policies that guide businesses. Some rules, like minimum wage, are mandatory, while other policies may influence your business indirectly. Businesses need to be flexible enough to respond to changing rules and policies. This is true not only at the national level but more locally as well, as states and municipalities have their own sets of rules. Indeed, there are also international treaties that can influence the way companies do business. 20 Policy as a Market Catalyst The government can implement a policy that changes the social behavior in the business environment. For example, the government can levy taxes on the use of carbon-based fuels and grant subsidies for businesses that use renewable energy. The government can underwrite the development of new technology that will bring the necessary change. Imposing on a particular sector more taxes or duties than are necessary will make the investors lose interest in that sector. Similarly, tax and duty exemptions on a particular sector trigger investment in it and may generate growth. For example, a high tax rate on imported goods may encourage local production of the same goods. On the other hand, a high tax rate for raw materials hampers domestic production. Political Stability and Political Culture Government policy will always depend on the political culture of the moment. Policy crafted in a politically stable country will be different that formed in an unstable country. A stable political system can make business-friendly decisions that promote local businesses and attract foreign investors. Unstable systems present challenges that jeopardize the ability of government to maintain law and order. This has a negative effect on the business environment. Government Taxation and Spending Governments get money to spend from taxation. Increased spending requires increases in taxes or borrowing. Any tax increase will discourage investment, especially among entrepreneurs, who take the risks of starting and managing businesses. Increased spending also eats into the limited pool of savings, leaving less money for private investment. Reduction in private investments shrinks production of goods and services. That, in turn, may lead to the elimination of jobs. Setting Interest Rates Government policy can influence interest rates, a rise in which increases the cost of borrowing in the business community. Higher rates also lead to decreased consumer spending. Lower interest rates attract investment as businesses increase production. The government can influence interest rates in the short run by printing more money, which might eventually lead to inflation. Businesses do not thrive when there is a high level of inflation. Regulations and Permits Trade regulations, the federal minimum wage, and the requirements for permits or licenses have effects on business. For example, periodic health inspections must be carried out in all restaurants. Businesses might spend a lot of money and time to comply with regulations that ultimately prove to be ineffective and unnecessary. Fair and effective regulations, however, promote business growth. 21 TOPIC 2- BUSINESS INFLUENCE ON GOVERNMENT AND POLITICS A general view of businesses and government relations is with business in partnership with government in addressing societal matters. This is in contrast to government being the regulator to ensure businesses act in a socially responsible manner. Types of Business Responses Once a business has an understanding of how government affects their operations and profitability, it can formulate strategies for how best to interact with government. There are three general types of business responses to the public policy environment—reactive, interactive, and proactive. Reactive responses involve responding to government policy after it happens. An interactive response involves engaging with government policymakers and actors (including the media) to try to influence public policy to serve the interests of the business. A proactive response approach entails acting to influence policies, anticipating changes in public policy, and trying to enhance competitive positioning by correctly anticipating changes in policy. For most businesses, a combination of the interactive and proactive approaches is the best approach. In meeting challenges from nongovernmental organizations (NGOs) and the media, businesses may respond in a variety of ways, including the following: Confrontation It may aggressively attack either the message or the messenger, and in extreme cases, business has felt justified to sue its critics for libel. Participation Business may develop coalitions or partnerships with NGOs, as McDonald’s did with the Environmental Defense Fund (EDF; see the following discussion) or as Home Depot did with the Rainforest Alliance (see the following sidebar) Anticipation Business may adopt issues management programs to forecast emerging issues and to adjust or change business practices in advance of the passage of stringent laws or regulations. When business is in a reactive response mode, it most often engages in confrontation of its adversaries. When it assumes an interactive response mode, it participates in dialogues with NGOs and the media and develops partnerships or coalitions to advance new policies and programs. When business behaves in a proactive manner, it anticipates future pressures and policy changes and adjusts its own internal corporate policies and practices before it is forced to do so. While a reactive stance may sometimes work, it often only delays needing to engage in a more interactive or proactive way. An interactive or proactive approach is usually a better way to meet political and societal challenges while also protecting the reputation of the firm. 22 Tactics That Businesses Use to Influence Government Businesses often engage in a variety of tactics to influence government policy. This includes lobbying, political contributions, and interest group politics. Business Lobbying Businesses lobby in different ways. This can include lobbying of Congress and state legislatures and executive branch agencies directly through its own government relations specialists, through an industry trade association, through consultants, or through a combination of all those avenues. Businesses may also engage in indirect or grassroots lobbying by appealing to its own employees, stakeholders, or the general public to make their views known to policymakers. In order to build a broad grassroots constituency, business may manage “issue advertising” campaigns on top-priority issues, or purchase issue ads in media outlets that target public policymakers or Washington insiders. Business lobbying has a strong influence on public policies. There are more than 1,500 private companies in the United States with public affairs offices in Washington, DC, and more than 75 percent of large firms employ private lobbyists to make their case for policies that can benefit them. This includes more than 42,000 registered lobbyists in state capitals across the nation. Business may engage in reactive defensive lobbying (defending its own freedom from government regulation) or interactive lobbying (partnering with interest groups on policies that the firm can benefit from). Businesses can also choose to engage in social lobbying, examples of which include chemical companies with the best environmental track record joining environmental NGOs in lobbying for an increased budget for the Environmental Protection Agency (EPA) and retailers wanting to address consumer concerns joining interest groups in pressuring the Consumer Product Safety Commission to adopt more stringent product safety standards. Corporations showing a willingness to join such public interest coalitions can gain reputational rewards from NGOs, the media, and public policymakers. Political Contributions Businesses also use campaign contributions to support their position and to try to influence public policies that can help them increase profits. Seven of the ten largest corporations in the world are oil companies, based on revenues. Their access to funds for lobbying and campaign contributions gives them a significant voice in the political system and on policies that can impact sustainable businesses. There are a range of avenues a company might use in making political contributions. The most transparent and legitimate is that of forming a political action committee (PAC) to which voluntary contributions of employees are amassed and then given in legally limited amounts to selected candidates. Not surprisingly, larger firms in regulated industries, or in industries exposed to greater risk from changing public policies, such as oil companies in 2010 during and after the British Petroleum (BP) Gulf of Mexico oil crisis, use PACs more often than other firms. Beyond contributing directly to political candidates, firms can also advertise on ballot measure campaigns, and those contributions can come from corporate assets and are subject to no legal limitations. 23 Interest Group Participation Business response can include participation in interest group politics. Interest groups play a key role in all democratic systems of government. However, as an interest group is a group of individuals organized to seek public policy influence, there is tremendous diversity within interest groups. Business is just one of many interest group sectors trying to influence public policy (see the discussion previously mentioned). Businesses will encounter interest groups that may support or conflict with their position on an issue. ACTIVITIES/ASSESSMENTS 1. Discuss the different tactics that businesses use to influence government 2. Explain the reasons why government has strong influence on business 24 LESSON 5- BUSINESS ETHICS OVERVIEW It’s in the best interest of a company to operate ethically. Trustworthy companies are better at attracting and keeping customers, talented employees, and capital. Those tainted by questionable ethics suffer from dwindling customer bases, employee turnover, and investor mistrust. To be ethical means to know right from wrong and to know when you’re practicing one instead of the other. We can say that business ethics is the application of ethical behavior in a business context. Acting ethically in business means more than simply obeying applicable laws and regulations: It also means being honest, doing no harm to others, competing fairly, and declining to put your own interests above those of your company, its owners, and its workers. If you’re in business you obviously need a strong sense of what’s right and wrong. You need the personal conviction to do what’s right, even if it means doing something that’s difficult or personally disadvantageous. LEARNING OUTCOMES By the end of this lesson, you should be able to: Discuss the nature of business ethics Explain the characteristics and advantages of business ethics Determine the ethical issues in business COURSE MATERIALS TOPIC 1- THE NATURE OF BUSINESS ETHICS Ethics is a branch of social science. It deals with moral principles and social values. It helps us to classifying, what is good and what is bad? It tells us to do good things and avoid doing bad things. So, ethics separate the good and bad, right and wrong, fair and unfair, moral and immoral and proper and improper human action. In short, ethics means a code of conduct. Business Ethics means to conduct business with a human touch in order to give welfare to the society. The businessmen must give a regular supply of good quality goods and services at reasonable prices to their consumers. They must avoid indulging in unfair trade practices like adulteration, promoting misleading advertisements, cheating in weights and measures, black marketing, etc. They must give fair wages and provide good working conditions to their workers. They must not exploit the workers. They must encourage competition in the market. They must protect the interest of small businessmen. They must avoid unfair competition. They must avoid monopolies. They must pay all their taxes regularly to the government. According to Andrew Crane, “Business ethics is the study of business situations, activities, and decisions where issues of right and wrong are addressed.” According to Raymond C. Baumhart, “The ethics of business is the ethics of responsibility. The business man must promise that he will not harm knowingly.” According to Wikipedia, “Business ethics (also corporate ethics) is a form of applied 25 ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations.” TOPIC 2- CHARATERISTICS AND ADVANTAGES OF BUSINESS ETHICS Characteristics of Business Ethics Code of conduct: Business ethics is a code of conduct. It tells what to do and what not to do for the welfare of the society. All businessmen must follow this code of conduct. Based on moral and social values: Business ethics is based on moral and social values. It contains moral and social principles (rules) for doing business. This includes self-control, consumer protection and welfare, service to society, fair treatment to social groups, not to exploit others, etc. Gives protection to social groups: Business ethics give protection to different social groups such as consumers, employees, small businessmen, government, shareholders, creditors, etc. Provides basic framework: Business ethics provide a basic framework for doing business. It gives the social cultural, economic, legal and other limits of business. Business must be conducted within these limits. Voluntary: Business ethics must be voluntary. The businessmen must accept business ethics on their own. Business ethics must be like self-discipline. It must not be enforced by law. Requires education and guidance: Businessmen must be given proper education and guidance before introducing business ethics. The businessmen must be motivated to use business ethics. They must be informed about the advantages of using business ethics. Trade Associations and Chambers of Commerce must also play an active role in this matter. Relative Term: Business ethics is a relative term. That is, it changes from one business to another. It also changes from one country to another. What is considered as good in one country may be taboo in another country. New concept: Business ethics is a newer concept. It is strictly followed only in developed countries. It is not followed properly in poor and developing countries. 26 Advantages of Business Ethics More and more companies recognize the link between business ethics and financial performance. Companies displaying a “clear commitment to ethical conduct” consistently outperform companies that do not display ethical conduct. 1. Attracting and retaining talent People aspire to join organizations that have high ethical values. Companies are able to attract the best talent and an ethical company that is dedicated to taking care of its employees will be rewarded with employees being equally dedicated in taking care of the organization. The ethical climate matter to the employees. Organizations create an environment that is trustworthy, making employees willing to rely, take decisions and act on the decisions and actions of the co-employees. In such a work environment, employees can expect to be treated with respect and consideration for their colleagues and superiors. It cultivates strong teamwork and Productivity and support employee growth. 2. Investor Loyalty Investors are concerned about ethics, social responsibility and reputation of the company in which they invest. Investors are becoming more and more aware that an ethical climate provides a foundation for efficiency, productivity and profits. Relationship with any stakeholder, including investors, based on dependability, trust and commitment results in sustained loyalty. 3. Customer satisfaction Customer satisfaction is a vital factor in successful business strategy. Repeat purchases/orders and enduring relationship of mutual respect is essential f or the success of the company. The name of a company should evoke trust and respect among customers for enduring success. This is achieved by a company that adopts ethical practices. When a company because of its belief in high ethics is perceived as such, any crisis or mishaps along the way is tolerated by the customers as a minor aberration. Such companies are also guided by their ethics to survive a critical situation. Preferred values are identified ensuring that organizational behaviours are aligned with those values. An organization with a strong ethical environment places its customers’ interests as foremost. Ethical conduct towards customers builds a strong competitive position. It promotes a strong public image. 4. Regulators Regulators eye companies functioning ethically as responsible citizens. The regulator need not always monitor the functioning of the ethically sound company. The company earns profits and reputational gains if it acts within the confines of business ethics. To summaries, companies that are responsive to employees’ needs have lower turnover in staff. 27  Shareholders invest their money into a company and expect a certain level of return from that money in the form of dividends and/or capital growth. Customers pay for goods, give their loyalty and enhance a company’s reputation in return for goods or services that meet their needs. Employees provide their time, skills and energy in return for salary, bonus, career progression, and learning. TOPIC 3- ETHICAL ISSUES IN BUSINESS Ethical problems and phenomena arise across all the functional areas of companies and at all levels within the company. 1. Ethics in Compliance Compliance is about obeying and adhering to rules and authority. The motivation for being compliant could be to do the right thing out of the fear of being caught rather than a desire to be abiding by the law. An ethical climate in an organization ensures that compliance with law is fuelled by a desire to abide by the laws. Organizations that value high ethics comply with the laws not only in letter but go beyond what is stipulated or expected of them. 2. Ethics in Finance The ethical issues in finance that companies and employees are confronted with include: In accounting ▪ window dressing, misleading financial analysis. ▪ Related party transactions not at arm’s length ▪ Insider trading, securities fraud leading to manipulation of the financial markets. ▪ Executive compensation. ▪ Bribery, kickbacks, over billing of expenses, facilitation payments. ▪ Fake reimbursements 3. Ethics in Human Resources Human resource management (HRM) plays a decisive role in introducing and implementing ethics. Ethics should be a pivotal issue for HR specialists. The ethics of human resource management (HRM) covers those ethical issues arising around the employer-employee relationship, such as the rights and duties owed between employer and employee. The issues of ethics faced by HRM include: ▪ Discrimination issues i.e. discrimination on the bases of age, gender, race, religion, disabilities, weight etc. ▪ Sexual harassment. ▪ Affirmative Action. ▪ Issues surrounding the representation of employees and the democratization of the workplace, trade. 28  ▪ Issues affecting the privacy of the employee: workplace surveillance, drug testing. ▪ Issues affecting the privacy of the employer: whistle-blowing. ▪ Issues relating to the fairness of the employment contract and the balance of power between employer and employee. ▪ Occupational safety and health. Companies tend to shift economic risks onto the shoulders of their employees. The boom of performance-related pay systems and flexible employment contracts are indicators of these newly established forms of shifting risk. 4. Ethics in Marketing Marketing ethics is the area of applied ethics which deals with the moral principles behind the operation and regulation of marketing. The ethical issues confronted in this area include: ▪ Pricing: price fixing, price discrimination, price skimming. ▪ Anti-competitive practices like manipulation of supply, exclusive dealing arrangements, tying arrangements etc. ▪ Misleading advertisements ▪ Content of advertisements. ▪ Children and marketing. ▪ Black markets, grey markets. 5. Ethics of Production This area of business ethics deals with the duties of a company to ensure that products and production processes do not cause harm. Some of the more acute dilemmas in this area arise out of the fact that there is usually a degree of danger in any product or production process and it is difficult to define a degree of permissibility, or the degree of permissibility may depend on the changing state of preventative technologies or changing social perceptions of acceptable risk. ▪ Defective, addictive and inherently dangerous products and ▪ Ethical relations between the company and the environment include pollution, environmental ethics, and carbon emissions trading. ▪ Ethical problems arising out of new technologies for eg. Genetically modified food ▪ Product testing ethics. The most systematic approach to fostering ethical behavior is to build corporate cultures that link ethical standards and business practices. ACTIVITIES/ASSESSMENTS 1. Explain the advantages of business ethics 2. Discuss the different ethical issues in business 29 LESSON 6- STRATEGIC PHILANTROPHY OVERVIEW Strategic philanthropy is a unique and powerful way to combine your company goals with your desire to increase the well-being of mankind. We call it strategic philanthropy. Two of the more popular names are cause-related marketing or community partnering. No matter what you call it, strategic philanthropy is a positioning that connects your company with a not-for-profit organization or cause. In this way, while you are being helpful and working for the common good in your community, your business is receiving parallel benefits. These benefits include exposure, lead generation, employee retention and increases in performance and productivity. They can even include benefits to your bottom line. LEARNING OUTCOMES By the end of this lesson, you should be able to: Define strategic philanthropy Understand the benefits of philanthropy and volunteerism Discuss the different corporate philanthropy programs COURSE MATERIALS TOPIC 1- STRATEGIC PHILANTROPY DEFINED Strategic philanthropy is a business concept whereby companies perform charitable deeds and receive indirect financial benefits from these actions. The process usually entails a corporation's engaging in some sort of partnership, either for one project or on a long-term basis, with a non-profit organization. In the process of strategic philanthropy, the corporation is able to perform a good for society by using its funds or other resources to help a worthy cause. The tangential benefit of this action is that the brand awareness of the company is increased and the public may form a positive association with the company, both of which can help the company's profits in the future. Most large corporations are involved with different charitable causes. These corporations can be important sources of funding for non-profit organizations, since they can provide the kind of funding that the non-profits wouldn't be able to secure anywhere else. While a company usually may not need any other reason to help charitable causes other than a simple desire to help, it can secure some indirect benefits for its bottom line in the process. That's where the concept of strategic philanthropy comes into play. To execute strategic philanthropy, a company must form some sort of relationship with a non- profit organization. This can occur simply when a corporation donates money to the non-profit's cause of choice. A corporation may even be more directly involved with a charity, providing 30 valuable resources to the cause or even having their employees volunteer at an event. In certain cases, a company may even strike up a long-term relationship with a non-profit group, acting as a corporate sponsor. One of the most important aspects of marketing is brand awareness, and strategic philanthropy is an excellent way for companies to achieve this. Brand awareness basically means that, once a consumer gets knowledge of a certain company and gets comfortable with it, he or she is more likely to buy goods or services from that company. A positive relationship with a worthy charity can certainly make consumers feel good about a specific corporation. As a result, the strategic philanthropy performed by a corporation may stay in the minds of consumers when they must decide between different alternatives to serve their needs. In this way, not only does the company help out a worthy cause, but the cause-related marketing in turn helps out sales and profits. Companies have to make sure to always put the charity's benefit first in such arrangements, or else the effect on public perception might turn out to be the opposite of what was intended. TOPIC 2- THE BENEFITS OF PHILANTROPY AND VOLUNTEERISM Participants in workplace volunteer activities are more likely to be loyal and satisfied employee.By providing opportunities for employees to lend a helping hand and contribute to charitable causes, workplaces can help foster their own sense of community. Efforts to help employees with volunteerism and philanthropy commonly include: ✓ Providing paid time off for volunteer activities. ✓ Organizing volunteer events and days of service. ✓ Matching contributions to employees’ charitable donations. These initiatives help employees strengthen bonds with colleagues and neighbors. Giving back is especially important for companies looking to attract and retain younger workers—the Millennial generation—who are keen on organizations that are active in philanthropy and service to the community. According to the 2015 Deloitte Millennial survey, 6 in 10 Millennials say the reason they chose to work for their current employer was because they felt a sense of purpose there. Volunteer and philanthropic opportunities highlight a company’s purpose and can help keep Millennials engaged, according to proponents, who point to research showing that Millennials who frequently participate in workplace volunteer activities are more likely to be proud, loyal and satisfied employees, as compared to those who rarely or never volunteer. “Companies are looking for better ways to engage young employees, and philanthropy is an effective way to reach this demographic,” said Ty Walrod, co-founder and CEO of San Francisco-based Bright Funds, a donating, matching and volunteering platform. “Employees are looking for ways to contribute to the betterment of their local communities and to society as a whole. The opportunity is to build a culture around empowering employees to see opportunities and explore the most creative and effective ways to solve big challenges.” Allowing employees to make contributions to charitable causes through payroll deductions is an obvious first step, and matching those contributions can provide a nice incentive. “Eighty-four percent of Millennials made a charitable donation in 2014, yet only 22 percent said their donation was solicited through their company,” Walrod said. 31 The federal Office of Personnel Management’s Combined Federal Campaign is one of the best- known examples of an annual workplace charity initiative. Services such as America’s Charities can help employers select appropriate recipients. Volunteer Activities For a more hands-on approach, employers can develop a program to encourage volunteerism. Footwear Company Timberland, based in Stratham, N.H., offers its employees 40 paid hours per year to spend on volunteer activities. Although using those hours is not required, the company keeps volunteerism and philanthropy front and center by sponsoring global service days twice a year and smaller monthly service events to keep employees aware of and engaged in opportunities to serve the community. To measure the program’s impact, the company tracks both the total number of volunteer hours put in by employees and the percentage of available volunteer hours that the staff actually used, which indicates whether the activity is being valued by employees. “Tracking hours is very important because it helps us set goals,” said Atlanta McIlwraith, Timberland’s senior manager of community engagement and communications. Littleton, Colo.-based Vertex Innovations Inc., which manages construction projects for the wireless telecom industry, launched its first National Service Week in February 2016, in partnership with the nonprofit group Feeding America. During the week of Feb.22-26, Vertex Innovations team members across the U.S. are spending a half -day volunteering at their local food banks, sorting, packing and stacking food donations. “As corporate citizens, we take care of our neighbors," said Erica Smith, executive director of charitable contributions at Vertex Innovations. “Feeding America is allowing us to achieve that in one, unified effort on a national scale.” The Role of Human Resource Management Volunteer and philanthropy programs often, but not always, develop through the efforts of HR staff. Senior leadership and the marketing department can also be key drivers of the program. No matter who is involved, it is important for employers to consider a few things when developing a program: Select appropriate causes “There should be agreement on what you stand for” and what the organization wants to support, said Christen Graham, president of Giving Strong Inc., a social impact consulting firm based in Portland, Maine. Many companies develop guidelines for acceptable activities—for example, they may exclude political groups or events—and some try to balance local events with support for national or international events or groups. 32 Set activity guidelines The organization should establish clear parameters and rules for days of service. For example, employees will have to follow certain rules when planning their days or hours of service and work with their managers to avoid workplace disruptions. “It is just like a vacation that has to be set up in advance,” said Tom Shaw, vice president of human resources for Triumph Bancorp in Dallas. “Employees have to coordinate their volunteerism with their supervisor.” Advance planning is particularly important if the organization wants to offer longer service sabbaticals to employees. “How will you help employees take four or six months off in a way that the business keeps going?” Graham asked. Keep it voluntary Employers should take care not to pressure employees to use service hours or to participate in volunteer or philanthropy programs. Timberland’s McIlwraith recalled a competition among business units to get employees more engaged with volunteerism. “Some managers took that a little too far,” she said. “They never threatened anyone’s position, but some of them reached out to employees to find out why they hadn’t signed up for the program.” Such pressure puts employees in a difficult position, and they may feel forced to participate when they would rather not. Employers may face the opposite problem, too—not enough open slots at volunteer events for all interested employees. Triumph Bancorp has been working with Living Water International to dig fresh water wells in developing countries for the past few years. So far, 48 employees have participated in several multiday trips to El Salvador. The company continues to pay employees so that participants do not have to use their vacation time. “People fill out an application for each trip, and we select employees from across the organization so that no department or part of our company is overrepresented,” Shaw said. “If they do not get selected, interested employees can apply the following year and we will give second-time applicants extra consideration.” 33 TOPIC 3- CORPORATE PHILANTHROPY PROGRAMS PHILIPPINE BUSINESS FOR SOCIAL PROGRESS (PBSP) Philippine Business for Social Progress is the largest business-led NGO at the forefront of strategic corporate citizenship and business sector leadership, contributing to sustainable development and poverty reduction. Established in 1970, PBSP remains a consultant and partner of choice of companies and donors. PBSP scales up impact by adopting the Collective Impact strategy to solve large, complex, systemic problems. PBSP organizes Platforms for Collective Engagements (PLACEs) to ensure alignment and sustainability of initiatives by multiple stakeholders. Responding to the changing landscape of CSR, PBSP’s brand of corporate citizenship taps into the core business competencies of companies and promotes inclusive business as a strategy. PBSP also continues to strategically engage companies through social investment, responsible business practices, and philanthropy. PBSP creates sustainable solutions to societal problems in its core program areas which are Health, Education, Environment, and Livelihood and Enterprise Development. It also provides off-the-shelf options for engagement of companies and their employees. With a proven track record, PBSP provides end-to-end services in development consulting which include project and grants management, events and backroom management 34 HEALTH PROGRAM NutriSapat, Batang Angat The Supplemental Feeding Program— dubbed as “NutriSapat, Batang Angat” — caters to Filipino children who are below the ideal weight for their ages. These identified undernourished children will be registered to be part of the group who will be given supplementary dietary support for 120 days (or four months). Aside from the provision of dietary supplement for the children, households within the target communities will be educated on how to observe proper nutrition for their families, simple and mindful ways to promote healthy eating habits among their children, and how to sustain their own source of nutritious food through FAITH (Food Always In the Home) gardening – a specific type of backyard gardening. PBSP takes active participation in the implementation of activities under The Philippine Plan of Action for Nutrition (PPAN) 2017-2022 to contribute to the fight against malnutrition among children, through the supplemental feeding program. This is anchored in the 2030 Sustainable Development Goals for promoting Maternal, Infant and Young Child Nutrition. PhilPAN consists of programs that are nutrition-specific, nutrition-sensitive and enabling support programs. PBSP is implementing this initiative as part of its flagship program to contribute to the reduction of stunted and wasted children under five years of age, from the baseline of 33.4% and 7.1%, respectively to 21.4% and less than 5% in 2022. Aside from the supplemental feeding, another major component of this program is the backyard gardening which is a complementary intervention at home. Communities especially the parents 35 of the undernourished children will be provided the necessary training and materials to install and maintain their own source of fruits and vegetables within their location. The main objective of the program is to contribute to the reduction of stunting and wasting among children under five years of age in the Philippines while the specific objectives include: ✓ Improve the nutritional status of children under five years of age. ✓ Capacitate families to observe and promote healthy eating habits among their children. ✓ Promote food security in communities through capacitating the parents to install and manage their own vegetable garden. In its first year of implementation, PBSP successfully secured a partnership agreement with the Department of Agriculture (DA) to combine efforts and help resolve malnutrition in the country. Through DA’s “Gulayan sa Bakuran” program, target communities will be trained by experts in the field on how to build and manage their own source of nutritious food. Also, included in DA’s commitment is the provision of resources such as seeds, garden soil, compost and initial garden tool as a start-up package or preliminary gardening production support for all identified beneficiaries. ENVIRONMENT PROGRAM Water Alliance On the brink of water insecurity, the Philippines is anticipated to have severe water shortage in major river basins by 2025. About 16 million Filipinos still suffer from lack of access to safe drinking water while fresh water resource continues to decline due to climate change, pollution, and greater demand. This situation seriously impacts on people’s health, children’s education and safety, and the homemaker’s time which could have been invested for household or livelihood activities. Confident in the strength of its membership, PBSP launched the Water Alliance in August 2015, the Alliance is a partnership of businesses led by their CEOs with strong commitment to create solutions to water problems in the Philippines. Since its launch, the Water Alliance has grown and engaged other sectors to contribute in solving water security challenges. Today, the Alliance has evolved into a multi sectoral consortium that includes private sector and business networks, academe and research institutions, and social development organizations. 36 Francis Giles Puno, Chairman of the Water Alliance, discusses the interventions they are undertaking to address water security issues at the Solb: Forum on Sustainable Solutions. The Water Alliance continues to fulfill its commitment to convene the different sectors to spread the awareness on water security challenges, and to identify and implement company wide and collective measures that each institution and individual can do to help address the problem. An action agenda was crafted to complement the government’s development plans and efforts. Through the leadership of Mr. Francis Giles Puno, Water Alliance Chairman and First Philippine Holdings President and CEO, the alliance aims to accomplish the following five-year targets (2016-2021): ✓ Provide safe drinking water to 190 waterless communities; ✓ Encourage 140 companies to adopt measures to lower water footprint and treat wastewater; ✓ Participate in policy development and advocacy, specifically support the creation of a single regulatory body with agenda on water security; and ✓ Develop area-based solutions through research and assessment. ✓ A family beneficiary of a water system installed in San Martin, Bamban Tarlac. Through social investments and core business approaches, the Alliance accomplished the following as of 2018: 37  ✓ Provided 39 communities including schools with potable water systems worth PhP81,000,000 through funding support from the members. ✓ Campaigned for the advocacy of water footprint management and reduction, and conducted two water demand management training participated by 21 companies and academic institutions. The participants are on their way to crafting their organization’s water footprint reduction program. ✓ Contributed in the discussions and consultations for the ongoing Philippine Water Supply and Sanitation Master Plan. ✓ Prepared a compendium of existing research and studies by Ateneo De Manila University, De La Salle University, and University of the Philippines Diliman in the communities of Pandi in Bulacan, Mulanay in Quezon, and San I sidro in Leyte to improve their water access. ✓ Developed a database of waterrelated studies and regional development plans. This compilation serves as a storage of knowledge which can aid the Water Alliance and other users in crafting solutions. ✓ 153 hectares of forest and mangrove covers were rehabilitated in Upper Marikina Watershed, Buhisan Watershed, and mangrove areas in San Remigio, Cebu. ✓ Held last September 13, 2018, the Water Forum is an annual activity that serves as a platform to educate, present solutions, and rally the various stakeholders. This forum was co-organized with the Department of Science and Technology (DOST) and Department of Environment and Natural Resources (DENR), and was attended by more than 200 individuals from the private sector, academe, government, and NGOs. The challenges on water security may be overwhelming but with all stakeholders onboard and contributing their efforts, we can and will overcome the problem. 38 EDUCATION PROGRAM Bayanihang Pampaaralan The Bayanihang Pampaaralan is focused on capability building of public schools as well as influencing systems of change to contribute to the attainment of desired education outcomes and impact. This program shall enable HS graduates to be ready for work or entrepreneurship, fit for jobs or ready for college. In today’s economy, all young people have to navigate a complex landscape to make their way through education and training and into work. Along the way, they meet many factors that contribute to either good or poor outcomes. In the world of work, what they know is not enough, they also need to demonstrate what they can do with what they know. The Philippine education system is trying its best to prepare the youth to be future-ready. But the enormity and complexity of the challenges facing the workforce of tomorrow call for deeper public and private sector collaboration. PBSP established the Bayanihang Pampaaralan Initia