Ethics of Profits in Australian Retail Industry

Question: Discuss about the Ethics of Profits in Australian Retail Industry. Answer: Introduction Australian retail industry is facing many challenges in maintaining profits due to the consumers expectations regarding product prices. Price reduction is not just one problem as there are other competitors also who are participating in this price war. Retail giant Woolworths also took serious step of closing their sick stores in order to finance the price reductions. The major challenge for these retailers are infrastructure and operating cost which is a matter of serious concern as the online stores are giving tough competition as they are able to fulfil the promise of low price products easily as they dont have any major cost commitment to fulfil. Retailers in order to remain competitive fall into the trap of unethical decisions of saving cost. In order to reduce the cost, retailers focus on Cost of goods sold and cost of doing the business. Retailers since a long time relies overseas suppliers situated in usually developing or under developed nation so that raw material can be ac quired at a cheaper price. To support the argument the case of garment industry of Australia has been highlighted who imports around 90% garments. Due to serious competition among major fashion brands, the customers are price sensitive. In order to cater the needs of low price fashionable products, the buyers or exporters choose countries in which cheap labour is available. Not only this, the labour is exploited and made to work in poor working condition. Rana Plaza disaster in Bangladesh is a clear example of this. Many retailers take sincere efforts in monitoring the workplace condition of its suppliers and continuously conducts audit. Consumers on the other side are willing to pay extra if the workers in the industry are treated ethically. Many big suppliers like Wesfarmers and Coles are using their bargaining power to on the local suppliers as they both compose a large share of market segment. Also the suppliers are deliberately paid late and threatened of downsizing their product from retailers shelves. Rebate deals is another problem is retail industry. The target group reportedly showed increased profits of $21m after accounting for debate. The electronic giant DSG also took the help of rebated to inflate their profits. It is the responsibility of the CEO and CFO to control these activities. The management of an organization should not only focus on financial measure but also on non-financial measures to review the companys operating efficiency. The environment in which each of the following companies mentioned in the case study operates in the retail industry. All of them facing a common problem of price reduction and still ensuring sustainable profits. Ensuring profits should not be the common agenda but earning it ethically is very important. The issues arising in the case study is the role of accountant and CFO in identifying such unethical practices and take immediate decisions to prevent the negative effects on the shareholders and stakeholders of the organization. The Food and Grocery code of conduct requires the retailers and wholesalers to act lawfully and in good faith of the suppliers. Good faith refers to the fair and honest intention in dealing with the other party. As mentioned in the case study many renowned supermarket retailers have a long history of exploiting the suppliers to reduce their cost of operations and earning some extra profits. Dealing in good faith means the retailers should pay the dues of the suppliers on timely basis. Also, threatening the suppliers to boycott or downgrade their products when they dont agree to the terms and conditions of the suppliers violates the law of good faith. The retailers should not take undue advantage of their bargaining power and pay them as mentioned in the terms of contract. In case of any dispute arising from the terms of contract, the retailers and wholesaler should act in a fair and equitable manner and provide resolution of the problem that will serve in the best interest of both the parties (Federal Register of Legislation, 2015). In order to deal in a good faith the buyer should clearly lay down clear terms and condition and the consent of both the parties are equally important (ACCC, 2017). ACCCs Food and Grocery code of conduct have been responsible in giving clear and fair guidelines in protecting the interest of the suppliers. Government codes are often rigid and complex when it comes to the implementation part, but organization like ACCC provides a more flexible approach and accommodate the necessary changes required in many situations. They provide instant and effective remedies to the problems faced by the suppliers while dealing with the retailers and wholesalers. The government legislation requires to follow a set of code of conduct which is very time consuming and there are other pending cases also in case individuals wants to approach them regarding any dispute. As the name suggests it is a voluntary code, which means it is not imposed forcefully like Government codes rather welcomed by the organization who decides to adopt it. This ensures effective compliance of rules and regulations mentioned in the code of conduct. Also in order to make these voluntary codes into law requires lots of legal formality, resources, time and amendments which may not solve the purpose of protecting the interest of the suppliers (Consumer Affairs Victoria, 2016). The use of power by the dominant firm in the market is justified when it is exercised in order to regulate the prices in the market. Any unexpected fluctuation may lead to a situation of inflation and deflation in an economy. Also the power should be used to control any unfair trade practices done with an intention to deceive customers. The power should also be exercised in order to protect the interest of the suppliers who are in minority. Power gives the senior manager an authority to enforce decisions which are important for the organization in the legitimate way. Whenever new strategies are designed and implemented, the main problem lies in the resistance and opposition on the part of employees. A manager can use its power to implement strategies and convince every individual to be the part of the change management process also they can enhance team work and collaboration among employees. A manager can also use its decision making power to avoid any conflict between the employees and to make create an ethical working environment. A chief financial officer in an organization has a responsibility to manage the funds and financial resources of an organization, also their objective is to maximize the wealth of its shareholders but they have an ethical obligation towards companys stakeholders also. I would definitely oppose the decision as suppliers are the most important stakeholder of the organization as without them the business operations cannot run effectively. Paying the supplier later for no legitimate reason is a serious ethical issue (CIPS, 2013). I would also explain the board the implications of behaving unethically on the reputation of the business. Behaving unethically will also impact the investment decisions of investors and shareholders. An organization should not take undue benefit of its purchasing power as it is highly unprofessional and it may attract legal obligations. Also the code of conduct of a CFO clearly states that the responsibilities and dealings should be carried out honestly and in good faith and they should clearly communicate the suppliers the payment terms and follow them strictly. Companies following ethical business practices ensure sustainability and long term growth in the industry. The framework that can be used is the Fair Work Australia guidelines regarding work and wages norms. In developed countries they have a strict provision regarding minimum wage pay and other employment benefits. There are strict laws and regulations that protect the interest of the poor workers. The most vulnerable sector in developing countries is the industrial sector where workers are exploited. They dont have any rigid laws to protect their interest. These workers are also aware about their rights and duties and in case they face any unfair treatment, they immediately report it to the concerned judiciary. In developed countries wage workers are to receive wages and other benefits covered in modern award. If all these laws to be enforced in developing countries, they will require an authority to monitor the implementation of laws continuously such as Fair work commission in Australia. Another reason is that the level of poverty in developing countries is high and as a result labors are willing to work at a lower wages without even reporting to any legal authority (FWA, 2017). Most of these labors are migrants and they are staying illegally, which means laws and regulation of the country cannot protect them. In the case study, the poor and unjust treatment with factory workers has been discussed. Buyers in order to achieve bottom line benefits and achieve low cost leadership in the market try to exploit the workers by compromising in their working conditions in order to reduce the cost of doing the business. But it is morally and ethically incorrect and it has long term implications on the organizations reputation. As a senior manager I think the idea of cost price leadership is effective. I would suggest the chief marketing officer that todays consumers prefer products and services which are obtained through ethical and sustainable means (McAvoy, 2016). In the research it was also found out that Consumers are ready to pay a premium price for ethically produced product and seek discount from the companies who are involved in unethical production practices (Trudel Cotte, 2009). Consumers believe they have a personal responsibility in empowering the workers condition. This can only be effective when the company communicate the ethical issues towards the consumers and how their contribution can make a difference. Consumers feel proud when they feel they are associated with an ethical value driven company. Suppliers Audit is very important as it protects the corporate image of an organization. It is the responsibility of the management to continuously check that the suppliers complying with the ethical standards and values of the organization. As an auditor it is my responsibility to check whether the suppliers are fairly treating the factory workers properly or not. While conducting the audit, workers are manipulated to speak in the favor of organization. In order to get the true picture of the conditions of the factory workers, a secret and uninformed audit should be conducted and also rather than believing the spoken words, emphasis should be given on documents. Rather than asking the workers, they should be encouraged to write their problems anonymously so that their condition can be improved. Auditors should prepare a set of questions and should ask the workers individually and then reconfirm if they are agreeing on the same statement or not. In this method the manager will not be able to manipulate the workers and the truth about the working conditions of the workers will be in front of the auditors. In todays context both shareholders and stakeholders of an organization measures the companys performance beyond some financial figures. Integrated reporting believes in projecting the value created by an organization in terms of financial and non-financial terms. This included aspect such as human resource, social factors, and sustainability factors. Value creation is the most important concept in IR. IR assures long term success of the business and ensures long term investors. Earlier the focus of the business was on maximizing the profitability, irrespective of considering other ethical issues arising from the management decisions. But now it has become an integral part of the core values of the organization. It requires the organization to include environmental and other social factors along with the financial statements. The objectives of Integrated reporting is to address the stakeholders also as they contribute in the sustainability of the business. It aims to maximize the shareholders value through value creation. Human capital is an important component of IR. An organization in order to create value should design remuneration and performance in such a way that it meets the expectations of an individual (EY, 2013). In many organizations the remuneration of the senior level executives is independent from the performance of the organization. They are paid well and provided with incentives and that is why they are least concerned with maximizing the value for the shareholder. They are more interested in personal gains and involved in activities such as insider trading. In order to align the interest of the senior level executives with the interest of the shareholders, they are paid rewards in the form of equity which means they can only maximize their rewards from the shareholders gain. The size of the organization impacts the remuneration. Larger the organization, larger is the shareholders capital. In order to create and maximize shareholders value the CEOs are given larger share of equity so that they can take decision in the best interest of themselves and the shareholders. In bigger organization the scope of frauds and other illegal activity on the part of the senior board is more. The remuneration pattern is decided so that all these unethical business practices can be controlled and they work in maximizing the shareholders value as Shareholders loss is their loss too (Cooper, Gulen Rau, 2009). Stakeholders in any organization are an individual or a group of individual who have a significant impact on the performance of the organization. These individuals have stake in the organization not necessarily directly but they affect the organizations objectives and performance. The stakeholders of large supermarket company are its employees, customers, suppliers, investors, shareholders, local communities and industry groups. Stakeholders are not interested in the financial performance of an organization but in their sustainability. Sustainability can be achieved by ethical business practices. If an organization behaving unethically the stakeholders like customer will stop buying from them, suppliers may stop supplying them and investors may not be interested in investing in the business. As a result the organizations performance starts decreasing (Ferrell, 2004). In order to address the needs of the stakeholders, concept like integrated reporting came into existence. Conclusion The case study concludes on the note that earning profit are important but earning them ethically is more important. All the retailers mentioned in the case study amongst the biggest retailers of the Australia. The unethical practices implemented by them to reduce cost and earn profits have a significant impact on the public image. They should keep in mind about the stakeholders and shareholders of the organization. The misuse of bargaining power by these giants in developing countries has raised many question on the exploitation done on the factory workers. In order to improve their working condition a continuous audit is important. Many businesses like DSG group of Australia avail rebate benefits results to increase their short term profitability but it may create some moral and ethical obligation in future. The organisation such ACCC design and implement code of conduct for other business as well. CFO and other senior managers of any organization are responsible and can be held re sponsible for the after effects and consequences. Business decisions in an organization should be taken into the account the best interest of both stakeholders and shareholders. Cost reductions due to many other activities are a serious form of ethical misconduct. In order to reduce the cost of operations and cost of doing the business, exploiting the suppliers financially and threatening them is not justified. An organization should follow ethical purchasing practices as the society can perceive the organization as ethical. The major reason for adopting unethical practices is that the organizational performance is measured in terms of profits. As a result they use different ways to increase profits irrespective of the fact that they are ethical or not. The organization should rather switch to non-financial measures as it will improve the overall efficiency of the organization. If a business want to remain competitive in the long run and wants sustainability by ensuring the trust of the shareholders and stakeholders they should run their business ethically. Also, supplier is the most important factor in running the business operations, maintaining a healthy relationship will ensure long term growth and success of the organization in the future. References ACCC. (2017). Food and Grocery Code of Conduct. Retrieved from https://www.accc.gov.au/business/industry-codes/food-and-grocery-code-of-conduct on 28 April 2017. CIPS. (2013). Ethical Purchasing Practices. Retrieved from https://www.cips.org/Documents/Knowledge/Procurement-Topics-and-Skills/4-Sustainability-CSR-Ethics/Sustainable-and-Ethical-Procurement/Ethical_Purchasing_Practices-Knowledge_How_To.pdf on 28 April 2017. Consumers Affairs Victoria. (2016). About voluntary industry codes of conduct. Retrieved from https://www.consumer.vic.gov.au/resources-and-education/develop-a-code-of-conduct/about-voluntary-industry-codes on 28 April 2017. Cooper, J.M., Gulen, H. Rau, R.P. (2009). Performance for pay? The relationship between CEO incentive compensation and future stock price performance. Retrieved from https://online.wsj.com/public/resources/documents/CEOperformance122509.pdf on 28 April 2017. (2013). Integrated reporting Elevating value. Retrieved from https://www.ey.com/Publication/vwLUAssets/EY-Integrated-reporting/$File/EY-Integrated-reporting.pdf on 28 April 2017. Federal Register of Legislation. (2015). Competition and Consumer (Industry CodesFood and Grocery) Regulation 2015. Retrieved from https://www.legislation.gov.au/Details/F2015L00242 on 28 April 2017. Ferell, O.C. (2004). Business ethics and customer stakeholders. Academy of Management Executive Retrieved from https://danielsethics.mgt.unm.edu/pdf/Customer%20Stakeholders.pdf on 28 April 2017. FWC. (2017). Minimum wages conditions. Retrieved from https://www.fwc.gov.au/awards-and-agreements/minimum-wages-conditions on 28 April 2017. McAvoy, K. (2016). Ethical Sourcing: Do Consumers and Companies Really Care? Retrieved from https://spendmatters.com/2016/02/15/ethical-sourcing-do-consumers-and-companies-really-care/ on 28 April 2017. Trudel, R. Cotte, J. (2009). Does It Pay To Be Good? Retrieved from https://bear.warrington.ufl.edu/williams/MAR_6930/Readings_files/Trudel%20%26%20Cotte.pdf on 28 April 2017.