Financial Management Report
Renaaz
MBA4032021Week8.pdf
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MBA403 FINANCIAL AND ECONOMIC
INTERPRETATION AND COMMUNICATION
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Week 8:
BUSINESS ETHICS AND SUSTAINABILITY
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Week 8:
BUSINESS ETHICS AND
SUSTAINABILITY
• Sustainable Development
• Business Sustainability and Reporting
• Business Ethics
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World Economic Forum, Davos, January 2019
SUSTAINABLE
DEVELOPMENT
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ENVIRONMENTAL PROTECTION
“Sustainable development is development that meets the needs of the present without compromising the ability of future generations
to meet their own needs” (from Report of the World Commission on Environment and Development: Our
Common Future, 1987, commissioned by the United Nations)
SUSTAINABLE DEVELOPMENT
SOCIAL PROGRESS
ECONOMIC GROWTH
There are three pillars to sustainable development:
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SUSTAINABLE DEVELOPMENT GOALS
In 2012, the objective of sustainable development was more clearly defined by the UN in the form of 17 Sustainable Development Goals
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SUSTAINABLE DEVELOPMENT GOALS
Each goal falls within one of the three pillars for sustainable development: economic growth, environmental protection and social progress
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SUSTAINABLE DEVELOPMENT GOALS
Each goal has specific targets for 2030, supported by the UN. Information on progress towards the targets can be found at www.sdgs.un.org
Goal Description Example of 2030 Target
1 No Poverty End poverty in all its forms everywhere Eradicate extreme poverty
2 Zero Hunger End hunger, achieve food security & improved nutrition & promote sustainable agriculture
End all forms of malnutrition
3 Good Health and Well-Being
Ensure healthy lives and promote well-being for all at all ages
Halve deaths and injuries from road traffic accidents
4 Quality Education
Ensure inclusive & equitable quality education & promote lifelong learning opportunities for all
Ensure access to quality early childhood care & education
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SUSTAINABLE DEVELOPMENT GOALS
Goal Description Example of 2030 Target
5 Gender Equality
Achieve gender equality & empower all women & girls
End all forms of discrimination against all women & girls everywhere
6 Clean Water & Sanitation
Ensure availability & sustainable management of water & sanitation for all
Universal and equitable access to safe & affordable drinking water for all
7 Affordable & Clean Energy
Ensure access to affordable, reliable, sustainable, & modern energy for all
Double the global rate of improvement in energy efficiency
8 Decent Work & Economic Growth
Promote sustained, inclusive & sustainable economic growth, full & productive employment & decent work for all
Sustain per capita economic growth in accordance with national circumstances
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SUSTAINABLE DEVELOPMENT GOALS
Goal Description Example of 2030 Target
9 Industry, Innovation & Infrastructure
Build resilient infrastructure, promote inclusive & sustainable industrialisation & foster innovation
Enhance scientific research & upgrade the technological capabilities of industrial sectors
10 Reduced Inequalities
Reduce inequality within & among countries
Income growth of the bottom 40% of the population above the national average
11 Sustainable Cities & Communities
Make cities & human settlements inclusive, safe, resilient & sustainable
Ensure access to adequate, safe & affordable housing & basic services
12 Responsible Consumption & Production
Ensure sustainable consumption & production patterns
Halve per capita global food waste at the retail & consumer levels
13 Climate Action Take urgent action to combat climate change & its impacts
Integrate climate change measures into national policies, strategies & planning
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SUSTAINABLE DEVELOPMENT GOALS
Goal Description Example of 2030 Target
14 Life Below Water
Conserve & sustainably use the oceans, seas & marine resources for sustainable development
Manage and protect marine and coastal ecosystems
15 Life on Land
Protect, restore & promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, & halt & reverse land degradation & halt biodiversity loss
Halt deforestation, restore degraded forests and substantially increase reforestation globally
16 Peace, Justice & Strong Institutions
Promote peaceful & inclusive societies for sustainable development, provide access to justice for all & build effective, accountable & inclusive institutions at all levels
Significantly reduce all forms of violence and related death rates everywhere
17 Partnerships For The Goals
Strengthen the means of implementation & revitalise the global partnership for sustainable development
Promote the development & transfer of environmentally sound technologies
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INCOME INEQUALITY
• SDGs 1 and 10 concern poverty and inequality. Although global inequality is declining, inequality within countries has risen, especially in advanced economies (Source: https://www.imf.org/en/Topics/Inequality/introduction-to-inequality)
• Income inequality refers to the extent to which income is evenly distributed within a population
• Income inequality can be measured using the Gini coefficient. The Gini coefficient varies between 0, for perfect equality, and 1, for perfect inequality
BUSINESS ETHICS & SUSTAINABILITY
• Sustainable Development
• Business Sustainability & Reporting
• Business Ethics
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INCOME INEQUALITY
% share of population
% share of income
% share of population
% share of income
% share of population
% share of income
Gini = 0
Gini = 1
1. Perfect Equality 2. Some Inequality 3. Perfect Inequality
Plotting income versus population, Chart 1 shows perfect equality (Gini = 0) as each share of the population has a corresponding share of income. Chart 3 shows perfect inequality (Gini = 1), where one individual has 100% of income. Chart 2 is between these extremes.
100 100 100
100 100 100000
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INCOME INEQUALITY
• A range of factors have been proposed in the literature to account for income inequality trends.
• Global factors such as technological progress play a role. For instance, technological advancement has contributed to a ‘skill income premium’ for individuals with a higher education and a comparative advantage in using new technologies.
• Country-specific factors such as economic conditions and domestic policies - including fiscal policies and regulation - also help to explain inequality within countries. Examples include minimum wage and taxation rates and the welfare system.
BUSINESS ETHICS & SUSTAINABILITY
• Sustainable Development
• Business Sustainability & Reporting
• Business Ethics
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CONSIDER DIFFERENCES IN
INCOME INEQUALITY
BETWEEN COUNTRIES AND
OVER TIME
LIABILITIES
SUSTAINABILITY ACTIVITY • In groups, go to https://www.gapminder.org/data
• Scroll down and type Gini coefficient in the indicator search box
• Choose two countries and consider:
a) the difference between the Gini coefficients of the two countries
b) the change in income inequality over time for each country (Note: not all countries will have updated data. Where data has not been updated, it will appear as a constant over time)
• Based on your knowledge, discuss and propose possible explanations for the observed income inequality characteristics of these two countries
INCOME INEQUALITYINCOME INEQUALITY
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BUSINESS
SUSTAINABILITY &
REPORTING
“The statement from the leaders of companies including JPMorgan Chase, Apple, Amazon and Walmart affirms that the nation’s largest companies have a “fundamental commitment” to all their stakeholders: putting employees, suppliers and communities on a pedestal that once belonged only to shareholders”
Reuters, 16th September 2020
Sydney Morning Herald, 4th August 2020
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BUSINESS SUSTAINABILITY & REPORTING
“the true philosophy of sustainability is the interdependence .. if you do the right things in the community, the community will do right things for you. If you do the right things for the environment, you’ll have a stronger business so that you can make more money” (anonymous manufacturing executive, 2005, in Kurucz, E.C, Colbert, B.A, & Wheeler, D, The Oxford Handbook of Corporate Social Responsibility (2009), p 84)
• The traditional focus on maximising shareholder wealth alone has broadened to take into account the interests of a range of stakeholders, including employees, suppliers, customers and the community.
• A sustainability report refers to a report that not only presents information about the economic value of an entity, but provides information upon which stakeholders can also judge the environmental and social value of an entity.
BUSINESS ETHICS & SUSTAINABILITY
• Sustainable Development
• Business Sustainability & Reporting
• Business Ethics
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True Business SustainabilityVIDEO:
‘TRIPLE BOTTOM LINE’
Aligned to the three pillars of sustainable development, businesses are shifting to a “Triple Bottom Line” approach: pursuing economic (or financial) goals along with social and environmental ones.
These goals are supported by sustainability strategies, systems and reporting.
The sustainability terminology is not uniform, however. Other frequently used references include:
• Environmental, Social and Governance (ESG)
• Corporate Social Responsibility (CSR)
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ORGANISATIONAL INITIATIVES
Many organisations are active in the area of business sustainability and reporting. Amongst the initiatives are the following.
• The International Integrated Reporting Council. “The IIRC’s mission is to establish integrated reporting and thinking within mainstream business practice” (www.integratedreporting.org).
One of the IIRC’s goals is to “provide a comprehensive, globally accepted, corporate reporting system that includes both financial accounting and sustainability disclosure”.
• Global Reporting Initiative. GRI’s seeks “to enable organizations to be transparent and take responsibility for their impacts”. The GRI has developed 36 Sustainability Reporting Standards.
BUSINESS ETHICS & SUSTAINABILITY
• Sustainable Development
• Business Sustainability & Reporting
• Business Ethics
VIDEO: Why Does Integrated Reporting Matter?
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ORGANISATIONAL INITIATIVES
• In Australia, sustainability reporting is voluntary. Legislation does cover aspects such as environmental and health & safety yet this does not constitute a sustainability reporting framework.
Nevertheless, the IIRC and KPMG report (November 2020) that 79% of ASX200 companies have adopted integrated reporting (https://integratedreporting.org/news/79-of-australian-asx200-companies-adopt- integrated-reporting/).
• Other UN initiatives: Principles for Responsible Investment, Principles for Responsible Banking and Principles for Sustainable Insurance.
Each seeks to incorporate ESG issues, risks and opportunities into business practice.
BUSINESS ETHICS & SUSTAINABILITY
• Sustainable Development
• Business Sustainability & Reporting
• Business Ethics
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BENEFITS OF SUSTAINABILITY REPORTING
As with Non-Financial information and the Balanced Scorecard, businesses can benefit in numerous ways from the adoption of sustainability practices and reporting (from www.globalreporting.org).
• Improved risk management
• Enhanced stakeholder engagement
• Attracting and retaining a high quality workforce
• Demonstrates the organisation is focused on values and long- term performance
• Embeds sound corporate governance and ethics throughout the organisation
• Facilitates performance benchmarking
We return to the benefits following a discussion of Business Ethics.
BUSINESS ETHICS & SUSTAINABILITY
• Sustainable Development
• Business Sustainability & Reporting
• Business Ethics
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EXPLORE WOOLWORTH’S SUSTAINABILITY
REPORT
LIABILITIES
Explore the FY20 Sustainability Report for information on Woolworths’ sustainability measures and activities.
• What are the ‘3 pillars’ for Woolworths?
• What are Woolworths’ 5 key sustainability objectives?
• List a number of sustainability measures reported by Woolworths
• Discuss and share
SUSTAINABILITY CASE STUDY
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EXPLORE WOOLWORTH’S SUSTAINABILITY
REPORT
LIABILITIES
Explore the FY20 Sustainability Report for information on Woolworths’ sustainability measures and activities.
• What are the ‘3 pillars’ for Woolworths?
o People, Planet, Prosperity
• What are Woolworths’ 5 key sustainability objectives?
o Safety and wellbeing
o Diverse and inclusive culture
o Reduction of emissions and waste
o Responsible sourcing
o Relationships with our partners
• List a number of sustainability measures reported by Woolworths
• Discuss and share
SUSTAINABILITY CASE STUDY:
Answers
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BUSINESS
ETHICS
“The Royal Commission has highlighted for everyone the problems that arise when there is a failure of ethics and professionalism.
Too often, we have seen that financial services firms have acted other than to serve the ultimate purposes of the financial system.
Firms have put their own interests first to the detriment of customers and the public.”
Cathie Armour, Australian Securities & Investments Commission, speaking in relation to the The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, 2019
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ETHICS AND BUSINESS
What is ethics as it relates to business?
There are numerous definitions of ethics and ethical behaviour. In business, they generally revolve around “the right behaviour and the right conduct” (FASEA: The Financial Adviser Standards and Ethics Authority).
We look at two working definitions of ethical behaviour from financial services. FASEA provides the following Standards of Ethical Behaviour within their Code of Ethics:
1. You must act in accordance with all applicable laws.
2. You must act with integrity and in the best interests of each of your clients.
3. You must not advise, refer or act in any other manner where you have a conflict of interest or duty.
(www.fasea.gov.au/code-of-ethics/)
BUSINESS ETHICS & SUSTAINABILITY
• Sustainable Development
• Business Sustainability & Reporting
• Business Ethics
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ETHICS AND BUSINESS
The Royal Commission provides the following working definition of ethics via “six norms of conduct”:
1. Obey the law
2. Do not mislead or deceive
3. Act fairly
4. Provide services / products that are fit for purpose
5. Deliver services / products with reasonable care and skill
6. When acting for another, act in the best interests of that other
The report adds “These norms of conduct are fundamental precepts. Each is well-established, widely accepted, and easily understood”.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, 2019, Volume I, p7.
BUSINESS ETHICS & SUSTAINABILITY
• Sustainable Development
• Business Sustainability & Reporting
• Business Ethics
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HIGH PROFILE EXAMPLES OF UNETHICAL CONDUCT
The following are just a few high profile corporate examples of unethical conduct over recent years:
• Volkswagen emissions scandal (2015)
• AMP “charging the dead” (2018)
• NAB at the Royal Commission (2019)
• Westpac money laundering (2019)
• RIO Tinto heritage destruction (2020)
BUSINESS ETHICS & SUSTAINABILITY
• Sustainable Development
• Business Sustainability & Reporting
• Business Ethics
VIDEOS
VW:
AMP:
NAB:
Westpac:
RIO:
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ETHICAL DECISION MAKING – AAA MODEL
Many business decisions have ethical aspects. The American Accounting Association has developed the following well accepted 7-step ethical decision-marking framework:
1. What are the facts of the case?
2. What are the ethical issues in the case?
3. What are the norms, principles and values related to the case?
4. What are the alternative courses of action?
5. What is the best course of action that is consistent with the norms, principles and values identified in Step 3?
6. What are the consequences of each possible course of action?
7. What is the decision?
The AAA model is based on the work of Langenderfer and Rockness (1990). See https://www.accaglobal.com
BUSINESS ETHICS & SUSTAINABILITY
• Sustainable Development
• Business Sustainability & Reporting
• Business Ethics
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EMBEDDING ETHICAL DECISION MAKING
The literature also identifies 7 accepted practices to creating the conditions for ethical conduct in organisations:
1. Clarity: ethical expectations must be comprehensive and understandable to employees and managers
2. Consistency: the board and executives must act in accordance with ethical expectations and deliver consistent messaging
3. Feasibility: sufficient time, budget and authority must be provided to embed ethics into practices
4. Supportability: there must be support for and acceptance of changes needed to implement ethics in leadership and culture
BUSINESS ETHICS & SUSTAINABILITY
• Sustainable Development
• Business Sustainability & Reporting
• Business Ethics
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EMBEDDING ETHICAL DECISION MAKING
5. Transparency: ethical and unethical conduct must be visible to everyone in an organisation
6. Discussability: managers and employees must have the opportunity to discuss ethical issues
7. Sanctionability: ethical and unethical behaviour should be motivated by appropriate reward and punishment
(Chadegani, A. A and JAIR, A, 2006, Corporate Ethical Culture: Review of Literature and Introducing PP Model. Procedia Economics and Finance, 36, 51-61)
An alternative approach is taken by Collins in Five Levees for Improving Ethical Performance
(Collins, D, 2006, Five Levees for Improving Ethical Performance, Strategic Finance, Vol. 88 Issue 1, 19-61. Available in Kaplan Library)
BUSINESS ETHICS & SUSTAINABILITY
• Sustainable Development
• Business Sustainability & Reporting
• Business Ethics
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IN GROUPS DISCUSS THESE
HYPOTHETICAL BUSINESS ETHICS
QUESTIONS.
WHAT WOULD YOUR STANCE BE?
LIABILITIES
1. You’re close to signing a new client to a large contract.
Your boss is under pressure to increase sales. He calls you into his office, tells you his job is on the line and asks you to record the revenue for the new contract in the sales figures for the financial year that ends tomorrow.
You know the contract is a sure thing but the client is out of town and cannot possibly sign by tomorrow.
What do you do?
BUSINESS ETHICS DISCUSSION
ETHICAL DECISION MAKING
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IN GROUPS DISCUSS THESE
HYPOTHETICAL BUSINESS ETHICS
QUESTIONS.
WHAT WOULD YOUR STANCE BE?
LIABILITIES
2. You work in the Finance department of a large listed company.
An external analyst has approached your Investor Relations department for assistance with the numbers in his Excel valuation model of your company.
The request has been passed on to you. The analyst is a strong supporter of the company and can boost the share price. Not providing the requested assistance may also jeopardise your own prospects in the organisation.
What do you do?
BUSINESS ETHICS DISCUSSION
ETHICAL DECISION MAKING
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IN GROUPS DISCUSS THESE
HYPOTHETICAL BUSINESS ETHICS
QUESTIONS.
WHAT WOULD YOUR STANCE BE?
LIABILITIES
3. Your manufacturing company has experienced a favourable decline in production costs.
One of your customers, Sam, knows this because he is a close associate of the company chairman. When Sam next purchases from you he receives a reduced price as a result of the lower costs.
Another customer, Sue, is not aware of the fall in manufacturing costs and places the same order as Sam.
Do you offer Sue the same pricing as Sam?
BUSINESS ETHICS DISCUSSION
ETHICAL DECISION MAKING
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SUSTAINABILITY & ETHICS EVIDENCE
“Organizations with a well-fortified ethical culture tend to have higher degrees of employee, customer, supplier, and investor satisfaction and loyalty. These long-term trusting relationships directly benefit the bottom line” (Collins, 2006)
Investors are increasingly allocating assets “based on environmental, social, and governance (ESG) considerations”*
“ESG-related equities have outperformed global benchmarks over the past two years”**
*BCA Research, ESG Investing: No Harm, Some Benefit (2018) ** BCA Research, ESG Investing: From Niche to Mainstream (2020)
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Next Workshop:
CORPORATE FAILURE & THE ECONOMICS OF
BUSINESS
