Corporate Ethicality.

Blog 8 – 

15/12/2019 

Today’s blog is going to consider contemporary issues in financial ethics. I am going to illustrate numerous theories proposed in regards to ethical and responsible investments as well as the ethical trading initiative. This topic correlates to that taught to me in week 9 of my learning within the module ‘International Finance and Responsible Financial Management.’ Within this blog I will encapsulate my understanding of fundamental ethics and its implications to modern businesses. 

So why is ethical trading imperative within a modern day business? It’s all about the customers and how they perceive ethicality. In recent years, ethical trading has become of utmost importance, as stated in this published Forbes article: ‘If you want your company to remain competitive, spend some time defining, perfecting and promoting your company’s ethical behaviour’ (Alton, 2017). In 2010, Brunk conducted research into CPE (Customer Perceived Ethicality) and what domains customers consider when contemplating corporate ethics. I have included below a diagram from his research conveying the conclusions from his research. When studying this diagram proposed by Brunk’s research, we can see the domains of CPE origin (Brunk, 2010).

Source: Brunk (2010)

In hand with corporate ethics is corporate governance, ‘Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place’ (ICAEW, 2019). Since 2015 the OECD Guidelines have clear principles in regard to Corporate Governance, an example being ‘The board has a key role in setting the ethical tone of a company, not only by its own actions, but also in appointing and overseeing key executives and consequently the management in general’ (OECD, 2015).

So let’s consider some examples of ethical dilemmas that recent companies have faced, any spring to mind? Perhaps I’ll list just a few:

-      VW’s Diesel Emission scandal

-      Enron fraud and conspiracy 

-      Lehman Brothers collapse of ’08 – Subprime mortgage crisis (If you’d like to know more about this particular issue you can read more into this in my ‘An Inside Job’ blogpost. 

All of the aforementioned cases were extreme cases of fraudulent activities, VW cheated emissions tests, Enron hid billions of liabilities and Lehman Brothers found themselves entangled in the financial crisis of ’08 after selling subprime mortgages and contributing to the crash of the financial sector. Not all ethical issues have to end negatively though, admittedly VW’s reputation was more than slightly damaged following the emissions scandal however, it hasn’t had terminal impacts contrasting the fate of Lehman Brothers and Enron. So now let me put this situation forward, a company suffers an unforeseen mishap, a scandal unravels or manufacturing goes wrong, does it always have to end in a damaged reputation? Or can a company employ damage control quick enough to prevent further harm? Lucky for you I have the perfect example!

In 2007, Mattel faced a recall crisis when they were alerted on 7^thJuly 2007 to the potential that their toys contained illegally high levels of lead-tainted paint (Dietz & Gillespie, 2012). Once Mattel discovered this manufacturing issue, an immediate response was required, and when issues such as these come to light the ability to employ damage control is essential within the next few decisions that the company makes. Mattel had a reputation for its trustworthiness and their admired code of conduct for overseas production and business ethics, bought Mattel time and space to be able to respond in the most appropriate way to mitigate interference (Dietz & Gillespie, 2012). With an issue such as this, the concern for Mattel was safety for their consumers, and their main priority was to recall any product affected with this toxic level of lead paint(Hurley, 2012). Within days of the discovery, Mattel ceased production and launched an investigation to determine the scope of the problem, and over the course of 3 months they continued to recall products. Even voluntarily proceeding to recall toys with magnets in them that may, in the future, have dislodged and become choking hazards, not only vindicating the current issue but also preventing the potential of future problems (Hurley, 2012). They immediately publicly named the Chinese manufacturer responsible for this error in production, introduced a new test procedure as part of the manufacturing process and also employed a senior vice-president of Corporate Responsibility to oversee and audit the remaining subcontractors (Hurley, 2012). Constant communication with stakeholders throughout, with numerous apologies allowed Mattel to stay in control of the situation in hand. 

How do you think Mattel managed the crisis that unravelled in 2007? Mattel conducted a survey and it illustrated that 75% of respondents had agreed that they did a good job in handling the situation (Hurley, 2012). The real saving grace of Mattel was that it already had constructed a 114-page crisis plan in advance of such an event occurring, this was instrumental in assisting the CEO in the best course of action and minimising the damage (Hurley, 2012).

Can ethicality be taught though? Is it something that some people embody and others simply dismiss? Throughout all of our university modules within the Newcastle Business School, we are constantly taught about the importance of becoming an ethical business professional and always ensuring sustainability is at the forefront of any business decision we may make in the future. As for businesses, I feel it would be highly beneficial for all companies to have a crisis plan in place similar to that of Mattel, if it weren’t for that plan then the story could’ve ended in a very different way. As for corporate governance, as touched upon in my 5^thblogpost discussing the financial crash of ’08, unfortunately it sometimes isn’t as prominent and enforcing as is required. Corporate greed from individuals in charge of companies can often mean that ethical trading goes straight out of the window and the only issue they’re concerned about is money, money and how to make more money. 

In conclusion, with consumers having huge influential power on a business’s ethicality when trading, it has utmost importance. Especially when regarding climate change and carbon footprint….VW I’m talking to you. Consumers now consciously make their purchasing decisions based on factors such as sustainability, CSR (corporate social responsibility) and company’s ability to take ownership of their actions, thus making ethicality a HUGE contemporary financial topic to focus upon.

List of references

Alton, L. (2017, September 12). How Much Do A Company's Ethics Matter In The Modern Professional Climate?Retrieved from Forbes: https://www.forbes.com/sites/larryalton/2017/09/12/how-much-do-a-companys-ethics-matter-in-the-modern-professional-climate/#51753dff1c79

Brunk, K. H. (2010). Exploring origins of ethical company/brand perceptions—A consumer perspective of corporate ethicsExploring origins of ethical company/brand perceptions—A consumer perspective of corporate ethics. Journal of Business Research , 255-262.

Dietz, G., & Gillespie, N. (2012). The Recovery of Trust: Case studies of organisational failures and trust repair. IBE Occasional Paper 5 .

Hurley, R. (2012, January 2). How Mattel regained trust .Retrieved from Financial Times : https://www.ft.com/content/61baac6e-2a84-11e1-9bdb-00144feabdc0

ICAEW. (2019). What is Corporate Governance?Retrieved from ICAEW: https://www.icaew.com/technical/corporate-governance/principles/principles-articles/does-corporate-governance-matter

OECD. (2015). G20/OECD Principles of Corporate Governance.Retrieved from OECD Publishing : https://www.oecd.org/daf/ca/Corporate-Governance-Principles-ENG.pdf