Corporate Governance And Business Ethics Of IKEA Commerce Essay

The origin of IKEA concept dates back to the year 1943 in Sweden. The founder of the organization Ingvar Kamprad was just 17 years old when he started this organization. The company is almost six decades old now. The organization which was started in a small village in Sweden today has spread across 36 countries world over and has created a brand image for itself as one of the world’s leading furniture dealers.

The owner of the business, Ingvar Kamprad, as already stated was very young when he started this organization. It was his ambition to start his own business since his childhood years. He started selling small household things like matches etc, since the age of five. As he grew a little older he started going a little ahead of his neighborhood to carry out the selling of matches and he realizes that it is possible to buy matches in bulk at a lesser price and possible to earn decent profits. His product portfolio ranges from matches to various other things like Christmas gifts, greeting cards, pencils and ball point pens etc (IKEA, 2009).

In the year 1943, at the age of 17 Ingvar receives a small sum of money from his father as a gift for his exceptional academic performance which he uses as capital for his business and starts his own business. The name of the company IKEA is actually the initials of the Founder Ingvar Kamprad and the first letters of the farm and village he grew up – Elmtaryd and Agunnaryd. In the initial days of origination, the company used to sell stationery stuff like ball point pens, table runners, and other miscellaneous stuff like watches and jewelry etc. However, an interesting fact about the store is that the products were priced lesser.

As the years passed, the product portfolio of the company increased and it has primarily become a furniture retailer. Today, the organization has got its presence in over 36 countries across the globe. From opening stores in various parts of the world to acquiring business units and being environment friendly, the company has created a name for itself in the world.

Business Idea of IKEA

IKEA is famous all across the globe for their affordable price range for the well-designed and varied range of functional home furniture. Price affordability is the predominant ides behind every step that the company takes, right from product development to product sales (IKEA, 2009).

However, one may think how is the company making it possible to offer high quality products at a very low price? This is where the company differentiates itself from other players in the industry. The organization constantly develops ideas that are both innovative and at the same time cost-effective. Low prices, flat packing looking everything differently are a few such ideas of the organization to differentiate itself in the market.

IKEA – Responsibility

IKEA strongly believes that taking responsibility for the society and the environment in which it does business are the foundation for its sustainability in the industry. The IKEA group has got managers who work constantly to ensure social and environmental responsibility in the day-to-day activities of the business. “To support business, there are a number of specialists covering a wide range of areas, such as chemical experts, foresters, IWAY auditors and energy experts.

All IKEA Group stores and distribution centers have environmental coordinators who work in the areas such as training, waste management, water and energy conservation (IKEA, 2009).

Code of Conduct of IKEA – IWAY

The company introduced its code of conduct – IWAY in the year 2000 and it applies to all of its suppliers. The company has got independent IWAYs for all of its various businesses. All of IKEA’s suppliers and service providers are required to strictly adhere to this code of conduct. The code of conduct specifies certain requirements for suppliers and service providers and also the support that the company offers to them. The suppliers and service providers are required to communication the same to the co-workers and ensure that all of the channel members those are involved implement the same.

Corporate Social Responsibility and its importance to today’s Business

Many corporate bodies have made an impression in the countries of their adoption. The impact is more so, in countries that are either developing or underdeveloped. These conglomerates play active roles in the social and economic development of the society they live in apart from generating highly profitable overtures from themselves in the bargain. This dissertation sets out to explore just this, and how they are able to manipulate their corporate social responsibilities (CSR) to ensure extremely favorable business conditions and growth.

An individual must not forget that CSR alone is not enough for a company to progress; it takes a lot of personal involvement and hard management decisions to turn hostile terrains to viable solutions. Companies with high levels of CSR recognize the need to lead from the front; they show collective understanding of cultural, political and social issues, and issues pertaining to the local community and their grievance, as well as supporting their cause. A key element of business is knowledge management. Intangible assets can be easily shared through partnerships to achieve mutual benefits (Halal 2000) [1] . Kay (1993) argues that successful innovation and management of distinct possibilities for companies; such as the reputation of the company, which lead to the competitive advantage. Reputation, like knowledge management, is an intangible asset which can affect and be affected by the community in which a company operates. A company that supports the community wherein it operates, has the advantage of enhanced performance through image-building, and has the effect of empowering that community. It is therefore right in assessing that, those companies that play a major role in corporate social leadership can maintain their competitive advantage over other market players (Hilton and Gibbons 2002) [2] . A first in the market is seen as a big step forward to maintaining a competitive advantage. Becoming a CSR leader can also create competitive advantages. CSR helps to create a motivated workforce, which is easy to recruit and retain. It is thus natural to say that a constructive relationship with the community leads to knowledge exchange and mutual profit [3] (Halal 2000, Handy 2002).

The link between CSR, community stakeholders and financial goals is seen at various levels from tenuous (Fryxell and Wang 1994), to relevant only as it impacts on primary stakeholders (MacMillan et al. 2004), to a necessity (Chakraborty et al. 2004) and finally as an investment (Schiebel and Pochtrager 2003). Chakraborty et al. (2004), says that in a developing country like India, for example, there is so much that can be done to fight poverty and deprivation and bring about advancement without losing track of its ethical and spiritual moorings.

What these corporations seek is to support community development, while at the same time, concentrate on profitable propositions and enrich business practices.

This can be done through cooperation with local NGOs who have reliable and time-tested networks and relationships in place (Millar et al. 2004) [4] .

Stakeholder involvement through NGOs is not without its problems, as in many cases, some international and national NGOs have no accountability at the local level. Many areas in developing countries are either backward or tribal, which could lead to conflicting cultural norms within one geographic community area itself, and the possibility of inadvertent exclusion of any intended beneficiary can be disastrous (Blowfield, 2004) [5] .

Another aspect of CSR is the expression of indirect marketing. CSR and marketing are frequently linked and thus, CSR is in more than one way, considered a marketing tool employed to generate profit and recognition. The overriding projection of CSR as a great marketing tool is as good as the benefits the community derives from these practices.

There is no doubt that good work can enhance the reputation of the company and significantly affect the competitive advantage.

There are two ways of aligning with the community they operate in. at first, the conglomerate uses the community to its advantage (cause-related marketing) while in the other, develops the community with the hope of deriving benefits in the long run (Banyan, 2004) [6] .

Organizations function more effectively if they operate as open systems, interacting with and responding to changes in the external environment. Since such organizations are influenced by the transformations in the external setting, executives must comprehend the nature of this environment. The external environment of an organization consists of the mega environment otherwise called the general environment and the task environment.

The mega environment reflects the major trends in the societies within which the organization operates. These societies have various sub components namely the technological, economic, socio-cultural and international [7] . The task environment consists of specific external elements with which an organizations interacts while conducting its business. These include customers and clients, competitors, suppliers, labor supply and government agencies. The task environment, which depends largely on the products and services offered by the organization and its business location, may vary from firm to firm. While a firm may to be able to directly influence its mega environment, it can certainly influence its task environment (ICFAI Centre for Management Research, 2003).

Working within a large and complex external environment affects a business in terms of its social responsibility, its social responsiveness and its ethical behavior.

During the initial years of the 20 century, business entities were predominantly concerned with maximizing their profits. In the 1970s, social advocates started to question industry enterprises’ singular objective of profit maximization. They argued that because businesses receive their existence from society, they need to have a little obligation towards it. The concept of social responsibility became popular after the publication of Howard R. Bowen’s Social Responsibilities of Business. Bowen argued that business enterprises should consider the impact of their decisions on society.

The operational definition of social responsibility is as follows:

“Social responsibility contends that management is responsible to the organization itself and to all the interest groups with which it interacts. Other interest groups such as workers, customers, creditors, suppliers, government and society in general are placed essentially equal with shareholders (ICFAI Centre for Management Research, 2003).”

According to the above stated definitions, business entities should pay attention to the welfare of workers, consumers’ needs and their security, the wellbeing and privileges of creditors, government regulations and the obligations of the enterprise towards the social order as a whole.

Nowadays, numerous organizations are concerned about social activities and are playing an active role in the same. While the outlook of the society have transformed, companies have become further conscious of their social responsibilities. A cautious analysis of opinions for and against the participation of organizations in social welfare activities is essential to conclude whether an organization should employ social programs.

Arguments favoring Social Responsibilities of Business

The needs of present day customers have changed, ensuing in a change in their outlook of businesses. As businesses oblige their profits to humanity, they have to thus counter to the needs of the society. Society and business gain mutual advantage when there is a symbiotic association between them. Society benefits through economic expansion and the proviso of employment prospects; and business gains through the employees and customers provided by the same society.

By being socially responsible, business entities attract a smaller amount of attention from regulatory agencies, this gives them superior liberty and suppleness in their operations. Businesses have substantial command and influence. The application or use of this command should be accompanied by an equivalent amount of accountability. “Most firms are open systems, that is, they interact with the external environment. The internal activities of such firms have an impact on the external environment to avoid negative impact on the external environment, firms should be socially responsible. In addition, by being socially involved a company can improve its image and thus protect its shareholders interests (ICFAI Centre for Management Research, 2003).”

Social responsibility entails the preservation of natural resources. Preservation can be beneficial for organizations. Through social involvement, a firm can create a favorable public image for itself and endear itself to society, by so doing a firm can attract customers, employees and investors. Businesses have a history of coming up with innovative ideas, therefore they are likely to come with solutions for social problems, which other institutions were unable to tackle.

Businesses should make the best possible utilization of the expertise and aptitude of its managerial workforce and also its capital resources in order to manufacture good quality products and services. Thereby, the businesses will be able to accomplish their responsibility towards the society. It is in the interest of the business entity to avoid social harms. Instead of allowing large scale unemployment to lead to social unrest, which in turn will harm business interests, businesses can be resources of employment for qualified youth.

Arguments against social responsibility of businesses

The most important rationale of a business is revenue maximization. Hence social involvement may not be reasonably feasible for a business. When a business incurs disproportionate cost for social participation, it passes the charge on to its clientele in the form of elevated prices. Society, therefore, has to tolerate the burden of the social participation of business by paying elevated prices for its merchandise.

A destabilized international balance of payments state may be created by the social participation of organizations, as the cost of social programs would be appended to the cost of the goods, the multinational companies doing business in international markets would be at a inconvenience when contending with domestic companies which may not be involved in social actions.

Businesses are intrinsically prepared with a firm amount of power. Their participation in social activities can lead to an augment in their influence and power. This boost in power and influence may corrupt them.

Business people do not have power over the necessary skills to tackle social problems. Their proficiency and knowledge may not be pertinent to deal with such problems. Until a proper method to establish the responsibility of businesses is developed, they should not get implicated in social activities. There is no conformity regarding the kind of socially responsible actions that a business should embark on (ICMR-ICFAI Centre for Management Research, 2003 Ref.no.BECG – BR 122K3 08).

Business owners have their own sense of skewed ideas of doing business and their business practices. When businesses take up social responsibilities, the business owners tend to get these quirks into such actions too. This might at times lead to disastrous consequences. As in most situations there is no firm right thinking or wrong thinking. Businesses getting involved in social activities have their own strengths and weaknesses. There are definitely both sides to the coin.

A mere word of concern is that, there must be a sense of balance when businesses get involved in social activities and they must not go overboard nor overlook the primary purposes of their businesses.

Social Stakeholders

Business executives, who are worried about corporate social responsibility need to recognize a variety of interest groups which may persuade the operation of a firm and which, consequently, may be influenced by the organization’s decisions. Business enterprises are primarily accountable to six major interest groups namely the shareholders, employees, customers, creditors and suppliers, the social order and the administration. These groups are otherwise known as the social stakeholders.

Shareholders

The prime accountability of a business is to protect the interests of its shareholders. The shareholders provide the core resource – the capital – that enables the organization to operate and grow. They expect the management to use the capital judiciously and operate the business in a way that ensures a good return on their investment, both through dividends and through increase in stock value. Shareholders should be provided with adequate and timely information about the functioning of the organization.

“The IKEA Group co-operates with other companies, trade unions and organizations that represent stakeholders throughout the world. These include Building and Wood Workers’ International, Clean Cargo Working Group and dialogues with Greenpeace (IKEA, 2009).”

Employees

Employees are the principal assets of an organization. Traditionally, managers regarded employees only as factors of production and denied them their rightful share in the distribution of income. However, in the present times, it is mandatory for business firms to protect the interests of their employees. Laws and government regulations now define the responsibilities of the employer. A few such laws include ensuring equal employment for men and women, offering pensions and other retirement benefits, and providing a safe and healthy work environment etc.

“IKEA products must be manufactured under acceptable working conditions by suppliers who take responsibility for the environment. IKEA is a production-oriented retail company. By being on site and conducting responsible business, IKEA contributes to better manufacturing and working conditions for suppliers and their workers (IKEA, 2009).”

Customers

In recent years, customers have received great attention. Firms have begun to realize the importance of keeping customers happy. Moreover, the growth of consumerism has made firms more aware of their duties towards consumers.

IKEA concept in itself is all about offering high-quality products and affordable prices. In order to ensure this, the company constantly works its way about cost-effectiveness and innovation.

Creditors and Suppliers

Creditors and Suppliers are responsible for providing inputs for production process in the form of raw material and capital. Management is responsible for fulfilling its obligations to its creditors and suppliers. This can be done by:

i. Creating long-term and healthy business relationship with them.

ii. Making prompt payments to creditors and suppliers.

iii. Providing them with accurate, relevant and needed information.

“The IKEA Group believes that safe, healthy, non-discriminatory working conditions and the protection of the environment at our suppliers are prerequisites for doing good business (IKEA, 2009).”As already mentioned above, IKEA has got a special code of conduct that clarifies the expectations of suppliers from the company and also the kind of support that the company offers in order to ensure the smooth functioning of the supply chain.

Society

Organizations function within a social system and draw their resources from this system. Therefore, they have certain obligations towards society. The management of business organizations can fulfill their obligations toward society by preserving and enhancing the well-being of the members of society. Management can do so in the following ways:

i. Using its technical expertise to solve local problems.

ii. Setting socially desirable standards of living and avoiding unnecessary and wasteful expenditure.

iii. Playing an important role in civic affairs. Volunteers from some companies help the traffic police regulate traffic at busy intersections. Pizza Corner in Hyderabad, India is one such organization. Many companies also put up road signs along highways to encourage safe driving habits. For instance, liquor companies such as Shaw Wallace and United Breweries have put up road signs on mountain roads in various parts of India. These road signs caution drivers against driving under the influence of alcohol.

iv. Providing basic amenities, healthcare and education facilities, hence creating better living conditions.

v. Establishing development programs for the benefit of economically weaker class of the society.

IKEA ensures that it contributes its part to the society by taking steps to prevent child labor. “IKEA has a special code of conduct called The IKEA Way on Preventing Child Labor, which is a part of The IKEA Way on Purchasing Home Furnishing Products. Monitoring of compliance to The IKEA Way on Preventing Child Labor is done by IKEA trading service offices and with unannounced visits by KPMG at suppliers and sub-contractors in South Asia (IKEA, 2009).”

Government

The government of a country provides the basic facilities required for the survival and growth of businesses. The government monitors and, to a certain extent, controls the business systems of the country. Most of the controls imposed by the government are in the best interests of businesses. To fulfill its obligations to the government, the management of business organizations should:

i. be law-abiding

ii. Pay taxes and other dues fully, timely and honestly.

iii. Not bribe government servants to obtain favors for the company.

iv. Not try to use political influence in its favor.

Measuring Social Responsiveness

“According to Keith Davis and William C. Fredrick, Social Responsiveness is “the ability of a corporation to relate its operations and policies to the social environment in ways that are mutually beneficial to the company and to society (ICMR-ICFAI Centre for Management Research, 2003 Ref.no.BECG – BR 122K3 08).” Alternatively, it can be referred to the development of organizational decision procedures that enable managers to anticipate, respond to and manage the areas of social responsibility. Though the term ‘social responsiveness’ is generally applied to business organizations, it is also applicable to not-for-profit organization also.

Numerous endeavors have been made to measure social responsiveness. Some companies establish special committees to evaluate their social responsiveness. The various categories for measuring the social responsiveness of organizations are as follows:

Contributions

Companies make direct financial contributions to charitable and civic projects. Many companies made financial contributions towards relief and rehabilitation work to earthquakes and other similar environmental disasters. Infosys Foundation, set up by Infosys, provides financial assistance to war widows.

Fund-raising

This involves fund-raising for a social cause, either by the organization itself or by assisting voluntary social organization in fund-raising.

Volunteerism

Volunteerism refers to the involvement of employees in civic activities. The Boots Company has a volunteering program called ‘Skills for Life,’ which gives employees a host of opportunities to get involved in community activities in company time. These include giving career talks; conduction mock interviews; supervising students during their work experience period; sharing business skills with local small businesses; and planting gardens and decorating community centers.

Recycling

To conserve the environment, materials like plastic, paper etc, can and should be recycled into useful products. . Such recycling efforts by business entities reduce the accumulation of plastic waste in landfills.

Direct Corporate Investment

Often, companies make direct investments to provide facilities for a locality or a community.

Attention to consumers

Consumers usually have a preference to buy goods that are of good eminence and are secure to use.

Pollution Control

Pollution is a major problem caused by rapid industrialization. Increasing public awareness and government pressure have made corporations more conscious about the environment.

Conclusion

Business owners have their own sense of skewed ideas of doing business and their business practices. When businesses take up social responsibilities, the business owners tend to get these quirks into such actions too. This might at times lead to disastrous consequences.

As in the majority of situations there is no firm right thinking or wrong thinking. Businesses getting involved in social activities have their own strengths and weaknesses. There are definitely both sides to the coin. Only word of caution is that, there must be a sense of balance when businesses get involved in social activities and they must not go overboard nor overlook the primary purposes of their businesses.