Chapter 6 Organizational Ethics and the Law McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, All Rights Reserved.

Chapter 6

Organizational Ethics and the Law

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, All Rights Reserved.

Ch. 6: Key Learning Objectives

Classifying an organization’s culture and ethical climate

Recognizing ethics challenges across the multiple functions of business

Developing effective ethics polices, ethics training programs, ethics assist lines, and similar safeguards

Assessing the strengths and weaknesses of a comprehensive ethics program

Understanding how to conduct business ethically in the global marketplace

Knowing the differences between ethics and the law

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Corporate Culture and Ethical Climates

Corporate culture A blend of ideas, customs, traditional practices, company

values, and shared meanings that help define normal behavior for everyone who works in a company

Ethical climate The unspoken understanding among employees of what is

and is not acceptable behavior Multiple climates (or subclimates) can exist within one

organization

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The Components of Ethical ClimatesFigure 6.1

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Business Ethics across Organizational Functions

Business operations can be very specialized, leading to ethical challenges related to those functional areas Professional ethical standards may conflict with the ethical

standards within the organization

Professional associations may have specific ethical standards that apply to that function

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Professional Codes of Conduct Examples of business professional associations and

their codes: American Institute of Certified Public Accountants (AICPA)

Code of Professional Conduct Chartered Financial Analyst (CFA)®, CFA Institute Code of

Ethics and Standards of Professional Conduct American Marketing Association (AMA) Code of Ethics Association for Computing Machinery (ACM) Code of Ethics

and Professional Conduct• For Information Technology professionals

See Exhibits 6.A and 6.B in text on pp.118-120 to review these codes

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Building Ethics Safeguard into the Company

To improve the quality of a company’s ethical performance you have to change the culture so that ethics is part of everyday decision-making

To do so means institutionalizing ethics or building ethics safeguards in to everyday routines

A recent survey of ethics safeguards or programs of major corporations companies is shown on next slide

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Organizations’ Ethics SafeguardsFigure 6.2

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Two Ethics Approaches1. Compliance-based approach

Seeks to avoid legal sanctions Emphasizes threat of detection and punishment to promote

lawful employee behavior

2. Integrity-based approach Combine concern for law with emphasis on employee

responsibility for ethical conduct Employees instructed to act with integrity and conduct

business dealings honestly

Both approaches have been found to reduce unethical conduct, but in somewhat different ways

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Ethics Programs and Policies

Top Management Commitment and Involvement Critical to fostering employee ethical behavior

Ethics Code or Policies Provides guidance to managers and employees on what to

do when faced with an ethical dilemma In U.S. policies tend to be instrumental, providing rules and

procedures, in Japan tend to be combination of legal compliance and company values

Just having a code or policy is insufficient, must be widely distributed and have associated training

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Ethics Programs and Policies

Ethics Officers May also be called Compliance Officer or Ombudsperson Relatively new position (started in 1980’s) that has grown

significantly Membership in professional association, Ethics and Compliance

Officers Association, doubled between 2000 and 2004

Ethics Help Lines Purposes include providing interpretations of proper ethical

behavior, avenue for reporting unethical conduct, and information-sharing tool

Are present in over 83% of large companies recently surveyed

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Ethics Programs and Policies

Ethics Training Programs Is very effective method for promoting workplace ethical

behavior

Ethics Audits Formal study of deviations from company ethical standards Management must report on corrective action to be taken in

response to found deviations

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Comprehensive Ethics Programs Integration of various program/policy components is critical

to effective ethics design Integrated approach is called a “comprehensive” program

26% of companies recently surveyed had a “6 element” program integrating Written policies, training, advice resources, hotline, ethics discipline,

and evaluation systems

Those working at firms with a comprehensive program are More likely to report ethical misconduct More likely to be satisfied with any investigation and response to

ethical misconduct

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Corporate Ethics Awards

Awarded to companies for efforts in creating and improving their ethical performance

These companies serve as models for others to follow

Business Ethics magazine has offered awards to model companies since 1989 In 2002 created “Living Economy Award” for companies that

focused on fair profit, locally based, stakeholder owned companies

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Ethics in a Global Economy Doing business in global context brings up host of

complex ethical challenges Common example is bribery Bribery is defined as a questionable or unjust payment often

to a government official to ensure or facilitate a business transaction

International watchdog agency, Transparency International, publishes a survey of countries’ levels of corruption Bribe-taking more likely in countries with low per capita

income, low salaries for government officials, and less income variation

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Efforts to Curtail Bribery on the Global Level

Organization for Economic Cooperation and Development (OECD) Treaty Effort for member countries to agree to steps to prevent and

combat bribery As of 2006, 36 countries had ratified the treaty

Other initiatives Southern Africa Forum against Corruption Council of Europe’s Criminal Law Convention ILO and UN Ethics Codes for multinational corporations (to be

studied in Ch. 7)

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Efforts to Curtail Bribery on the National Level Efforts in a number of countries

Chile – passed 50 anticorruption laws in 2003 Indonesia – established independent corruption body Switzerland – nullified tax advantages of paying commissions

to foreign consultants Russia – full scale battle against corruption (see Exhibit 6.D)

U.S. Foreign Corrupt Practices Act prohibits executives of U.S. based companies to pay bribes to foreign government officials

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Anticorruption and Bribery Efforts in Russia

Russian President Vladimir Putin was serious about his pledge to clean up Russia, since he realized that the entrepreneurial sector of his country’s economy could never achieve its full potential without a full-scale battle against corruption.

A number of actions underscored Putin’s commitment to end bribery and corruption: A probe of high-level bureaucrats led to charges against many officials

including Railways Minister Nikolai Aksyonenko for illegally spending ministry funds.

Judges’ salaries were increased fivefold in an effort to cut down on courtroom bribery.

A new law banned the intervention of state prosecutors in private litigation between contending business parties, eliminating another potential bribery situation.

Other regulations sharply restricted discounts that railroad regulators could give to shippers.

The number of business activities that required a license was drastically reduced from 2,000 to 100—fewer licenses meant fewer chances for a bureaucrat to be in line for a bribe.

Exhibit 6.D Excerpts

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Relationship between Law and Ethics Both define proper and improper behavior Laws are society’s attempt to formalize ethical

standards Written to capture public’s wishes about what constitutes right

and wrong behavior

Ethical concepts are more complex than laws Often apply to areas not covered by laws Some businesses proactively address ethical areas not

covered by law through voluntarily adopted practices

Managers who are trying to improve their company’s ethical performance need to do more than comply with laws

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Cost of Corporate Lawbreaking

Lawbreaking in business is often result of acts of companies own employees

Recent surveys found 1/3 of companies were victims of fraud, some with costs of $2

million annually Corporate crimes from faulty goods, monopolistic practices,

and other law violations cost American consumers between $174 and $231 billion

Corporate lawbreaking in Germany estimated at 50 billion marks ($29 billion US), and in UK $73 billion

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Cost of Corporate Lawbreaking Are physical and social costs related to workplace

health and safety violations As high as 17 workplace deaths per day

U.S. Justice Department cracking down on corporate illegal activity New sentencing guidelines put corporate penalties on par with

street crimes Corporate executives convicted of white collar crimes no

longer allowed to serve time in halfway houses, will serve time in federal prisons

Many costs of lawbreaking points to need for companies to promote ethical behavior