In this article, Enterprise expert Hugo Newman takes a look at the importance of ethics not only for CIMA students and professionals, but for organisations as a whole. We break down some of the technical jargon into simple language and easy to understand examples.
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What is Ethics?

Let's start with an obvious, but important question: What is ethics? Simply put, ethics refers to a code of moral principles that people follow with respect to what is right or wrong. Ethical principles are not necessarily enforced by law, although the law sometimes incorporates moral or ethical judgments. So for example, theft obviously is wrong ethically, and is also punishable legally. But be careful not to make this mistake: sometimes students think or imply that everything that is unethical is illegal, or that everything that is illegal is unethical. In order to avoid confusion between those two categories, you want to keep them distinct, but in most cases, legal requirements are also ethical requirements. They are moral obligations. You can't steal, it's not just that it's illegal. It's also unethical. But not all unethical activities are necessarily illegal.

A number of factors might be worth considering when determining whether something is ethically right or wrong. For instance, values – that is to say, the values of the organisation. Also relevant are the identity, the mission, and the goals of the organisation; they need to be factored into decisions about whether to pursue or continue pursuing any given action or policy.

Principles are abstract rules, and are also potentially relevant to deciding which actions to pursue and which ones not to pursue. Principles are typically more general than the specific values of an organisation. Often, ethical principles prevail throughout the society within which the organisation is situated.

Motivations refer to the preferences of the organisation and motivations are particularly important when it comes to shareholders. Within a commercial entity, you do have an obligation towards shareholders in terms of trying to maximise shareholder wealth, and they're going to desire the maximisation of wealth in most cases. That “obligation” also has to be factored in when making ethical decisions within your organisation because, of course, it is your duty as a worker in the organisation to ensure that shareholder wealth is maximised.

And then finally there are consequences; it is always prudent to think not only about the nature of the action itself, but also first and second-order effects of the action, and whether those outcomes can be ethically defended.

So, these are all potential sources of obligation within an organisation and the key point here is that you need to balance all of these different considerations, while you're trying to figure out what the ethical course of action is. In some cases, you might have to ignore certain kinds of motivations, for example, because they're unethical or, indeed, because they're illegal!

Ethical Approaches

There is a range of approaches that can be taken when making ethical decisions, and there are a number of different positions we're going to look at briefly here. These are ethical positions from a philosophical perspective. We're not going to get too deep into the philosophy but it's worth just knowing some of these terms because of course, philosophies do, in some cases, underpin the kinds of actions that organisations are willing to take and that they want to avoid – even if they may not be aware of those philosophies!

One ethical position is called egoism (defenders of that position are known as “egoists”, or “ethical egoists”). They look after their own needs when making a decision, and believe that their ultimate ethical obligation is to serve their own interests. Thus, they pay little or no attention to the needs of others, except insofar as serving the needs or interests of others happens to be the best way of serving their own needs. In the case of an organisation, you can think of an egoistic organisation as one that only thinks about its own interests and disregards all other stakeholders, except when regarding other stakeholders is the best way of advancing the organisation’s own interests.

Pluralists then consider whether other stakeholders are compromised by a decision. Again, they're thinking of value, but not just from the internal perspective, but also from the external stakeholder perspective as well, and trying to balance all of those considerations and interests together when making a decision.

Absolutists, on the other hand, are concerned about whether a course of action is fundamentally correct in itself. So, the idea of absolutists is, they don't really care about the consequences of actions. They're just worried about whether the action itself is ethical or unethical. For example, you can imagine that someone might be an absolutist about lying, they would say that lying is always wrong in any circumstance. Now, most people think that actually that's probably not true, because you can think of circumstances where you might have an ethical obligation to tell a lie in order to protect someone. You can imagine if a murderer shows up at your door and they're looking for an innocent person who they want to kill, and you happen to know that this person is hiding inside your house. In that case, you might ask, “Well, do you have an obligation to tell the truth to the murderer? Do you have the obligation to tell them where this innocent person is?” And most people would say, “Actually, in that case, you do not have a moral obligation to tell the truth. In fact, you have a moral obligation to lie and to deceive the murderer.” So that's just one example of how some people think that absolutism actually isn't the correct way to think about morality. It's more about balancing a number of different values and factors.

Consequentialists, as the name suggests, are primarily focused on the consequences of a decision and action before determining a course of action. You can think of them as the opposite of absolutists. In that example above, you could think of the justification for lying as a consequential one. You're thinking about what will happen if I tell this lie? Or what will happen if I tell the truth? And the consequences are the things that determine whether or not you take the relevant course of action.  

Then you have utilitarians. Utilitarians are about maximising overall benefits. Global utilitarians are looking at the entire society and thinking, “How can we maximise the benefits to society at large when making any decision?” Utilitarians are a subset of consequentialists, as they are thinking about consequences – but in a narrower way: namely, about beneficial versus harmful consequences.

We have a number of different positions here. I'm not saying that any of these are necessarily correct; however, I will say that within the context of modern organisations, you're going to get more commonly a mix of pluralists, consequentialist, and utilitarians as well, especially in the context of corporate social responsibility; thinking about internal and external stakeholders, as well as prospective benefits to wider society as a whole. Absolutism is less common in modern organiastions. People who think that it's always wrong to do certain things, and there's no exceptions, are often too inflexible for the modern business environment. Egoists, of course, generally are considered not to have much place in the modern organisation because of course, thinking about the needs and interests of stakeholders, as we'll see later on, is fundamental. Nevertheless, it's worth knowing at least that these are different potential positions that one can take in the context of ethics and ethical decision-making.
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Ethics within the Organisation

Let's focus now specifically on ethics in organisations. Organisations are coming under increasing pressure to adopt an ethical approach towards the following: towards shareholders, employees, customers, competitors, suppliers, and indeed in some cases, society as a whole. Environmental issues are becoming increasingly important from an ethical perspective, such as climate change and recycling. Also, the disadvantaged in society. Increasingly, organisations are expected to have some consideration for how they might be able to benefit through their actions, the disadvantaged, or some disadvantaged groups within society. And then how they deal with unethical companies or governments. Again, we've seen many examples of this in recent years.  Thinking of some controversial cases, for example, Apple were sourcing some of their parts for phones from factories in which people were deemed to be treated unethically, working conditions were poor, and there was a lot of protests about this. So the question is, do they have an ethical obligation to stop dealing with those kinds of organisations that have allegedly unethical practices in place? Especially in the globalised world, these kinds of questions are becoming increasingly important.

Ethical dilemmas are really the most important consideration when it comes to applying ethics in the context of organisations. It's all well and good talking about ethical principles in the abstract. But this is where the rubber meets the road, so to speak, when it comes to ethics; it’s when you're faced with an ethical dilemma within the organisation that you start to make use of the principles. This is a situation in which a decision-maker has to decide what is the right or wrong thing to do, usually in a context of conflicting interests or commitments. So, when you have a number of different stakeholders, for example, people who have different kinds of claims on the activities of the organisation, and you're not sure how to balance those different interests; or where the courses of action mean that some people's interests or values are compromised, and others aren't; those are typically where ethical dilemmas arise, and you want to employ ethical principles to try and guide you through those situations.

Let's look at some examples then of ethical dilemmas that might arise in organisations, starting with creative accounting. I'm sure you've come across this before. I'm sure you've heard about creative accounting: the attempt to manipulate accounts in order to conceal or exaggerate reported profits or losses. There's often going to be a temptation, perhaps not always, but often there will be a temptation to ensure that you maximise the organisation’s profits and how they appear in your financial statements. You might get pressure from senior management, for example, to ensure that they're presented in the most favorable light to shareholders or the public, and this might compromise your integrity, as we'll see later on, as a senior professional management accountant. We're going to come back to that in a little bit more detail when it comes to those ethical principles.

You have the potential of, for example, ethical dilemmas in the context of decisions about director’s pay. Directors awarding themselves generous bonuses in a situation where the company is performing poorly, that can be looked on very unfavorably and as an unethical practice. Nevertheless, there may be pressure from other board members to push for bonuses, and it may be justified by appealing to incentive effects and productivity.

Bribes are another case of potential ethical dilemmas; so paying prospective partners, clients, or project sponsors in order to win contracts. This is especially tricky in contexts where in a particular country, bribes are deemed routine or acceptable. There might be some cultures where bribes are not frowned upon to the same extent ethically as they are in some other nations, and the question then becomes: Which principles do we comply with? Which ethical obligations do we comply with? Those in the foreign country, or those in your native country where the organisation habitually operates?

Product decisions sometimes raise ethical dilemmas. For example, you could ask the question, “Are certain products inherently unethical to produce?” Sales of cigarettes is one of the more commonly cited examples. Should products that damage the environment be sold at all? So, making decisions about what products to produce; this is obviously something that needs to have an ethical component as well as a financial component.

Advertising, is it ethically appropriate to advertise potentially controversial or unhealthy products to children, for example?

Hiring practices. For example, employers may actively avoid or discourage the hiring of young married women on the assumption that they are more likely to become pregnant and miss work as a result. Does this constitute ethically unfair discrimination, even if it hypothetically saves the company money?

Health and safety. A company may wish to cut back on health and safety training, for example, in an effort to reduce costs despite it potentially putting employees at greater risk.

And then there's anti-competitive behavior. Companies might engage in overt illegal, anti-competitive behavior. One example of this is price-fixing, where a number of dominant companies in an industry coordinate their setting of prices in order to undermine potential or new competitors. In most jurisdictions, such activity is now illegal. There are however more subtle forms of anti-competitive behavior, and the question is, “are they ethical?” One example might be encouraging, or indeed threatening your existing suppliers to not supply a new entrant into the market in order to squeeze them out, on the condition that if they do supply the new entrant, you will immediately end your dealings with them.

Now, the thing in all these cases is that in many of these cases, you're going to have strong financial incentives to actually engage in some of these ethically questionable activities. You might be very financially incentivized to offer bribes or to produce a product that you know is going to harm customers if they decide to purchase it, and so on. When there's a conflict between the obligation to maximise shareholder wealth on the one hand, and other ethical duties on the other, this is where ethical principles and wisdom come into play. There may need to be a balancing of ethical duties to other stakeholders like customers and their values and their preferences.
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The CIMA Code of Ethics

How do we approach ethical dilemmas? Well, CIMA has outlined certain principles which are very useful when it comes to approaching ethical dilemmas. All CIMA members and registered students are subject to CIMA’s Code of Ethics for Professional Accountants. Now bear that in mind, that's for CIMA members and students, registered students, that is you (presumably) right now! You are already required to comply with CIMA’s Code of Ethics. So, this is already something that's practical and is a real-world application. How you conduct yourself online, how you conduct yourself in your interactions with other CIMA students, and so on. You're going to have to ensure that you're manifesting these ethical principles. These guidelines make it clear that individuals must observe the highest standards of conduct and integrity, uphold the good standing and reputation of the profession, and refrain from any conduct which might discredit the profession.

Below we discuss all of the principles. We have five principles and there is a useful mnemonic which you can use to remember these principles, and that mnemonic is PIPCO: Professional competence and due care, Integrity, Professional behaviour, Confidentiality, Objectivity. Let's go through each of these principles in turn.

Professional competence and due care. This relates to the fact that you are expected to be up to date on all of the most recent standards, for example, accounting standards, to ensure that your training is up to date, and to ensure that those who work under you, if you're in a senior management position, are adequately trained, have the proper knowhow, in order to ensure that they're actually competent, and they're able to take due care when it comes to their duties, their financial activities and accounting activities.

Integrity then relates to honesty. The idea here is that you are straightforward, honest, and direct in all of your dealings as a management accountant, and do not knowingly conceal or withhold any relevant or consequential information from your employer or your clients, in a way that would mislead or undermine their interests.

Professional behavior. This is basically the idea that you should not engage in any behavior which brings the profession as a whole into disrepute, which compromises the reputation of management accounting.

Confidentiality. The idea here is that both your employers and clients have a right to keeping confidential information from getting out into the public, from being shared with third parties and so on. So you have the corresponding obligation towards your employer and clients to ensure that confidential information is not shared with third parties unless you're given special dispensations to do so.

Then finally, Objectivity. The idea of objectivity is to ensure that your personal biases, your personal prejudices, and indeed your personal preferences do not get in the way, do not dictate the decisions that you make. You're always thinking of your obligations towards the organisation as a whole and towards key stakeholders for the organisation. Those things come first, as a senior professional, and your personal preferences or biases are subordinated. You need to set those aside.

So, they are the five key principles CIMA’s Code of Ethics: Professional competence and due care, Integrity, Professional behavior, Confidentiality, and Objectivity. If this is your first time coming across these, I cannot emphasise enough how important these principles are. They come up again and again throughout your CIMA studies, at all levels, at the management level, at the strategic level, in the case studies as well. Very important in case study exams that you can show that you are able to apply these principles in order to resolve some dilemmas that might arise; to show that you know how to conduct yourself in a potentially compromising position ethically.

Let's do this now. Let's put this into practice and see if you can answer this question:

Jacob is a CIMA member and financial controller of the company X plc, a large company manufacturing furniture. X plc is currently looking for a new supplier of printed fabrics. Three suppliers are being considered, one of which is Y ltd, and Y ltd is owned by Stacy, an old school friend of Jacob’s. Stacy has asked Jacob to put in a good word for Y ltd with the procurement manager of X plc. Stacy knows that Jacob is good friends with X plc’s procurement manager.

Which one of the following principals would Jacob be violating by agreeing to Stacy's request: Confidentiality, Objectivity, Professional competence, or Integrity? Just take a moment there to think about it and let's see if you can get the right answer.

Let's see if you got it. The correct answer is objectivity. So, clearly, Jacob’s objectivity is potentially compromised in this situation if he follows through on Stacy's request. He's letting personal preferences, bias, and prejudice get in the way. His personal background, relationship with Stacy is potentially getting in the way of the organisation making an objective decision on X, making the best decision when it comes to choosing who to deal with; who's going to be the new supplier of printed fabrics.

So, objectivity means ensuring the business is not compromised by personal bias.

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