Ethics and Ethical Reasoning Chapter 5 Ethics and Ethical Reasoning McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, All Rights Reserved.

Ch. 5: Key Learning Objectives Defining ethics and business ethics Evaluating why businesses should be ethical Knowing why ethical problems occur in business Identifying managerial values as influencing ethical decision making Recognizing the core elements of ethical character Understanding stages of moral reasoning Analyzing ethical problems using generally accepted ethics theories 5 - 2

The Meaning of Ethics Ethics Ethical Principles Business Ethics A conception of right and wrong conduct Tells us whether our behavior is moral or immoral Deals with fundamental human relationships—how we think and behave toward others and want them to think and behave toward us Ethical Principles Guides to moral behavior Business Ethics Application of general ethical ideas to business behavior

Sources of Ethics Notions of right and wrong come from many sources Religious beliefs Family background Education Community/neighborhood Media influences These experiences create a concept of ethics, morality, and socially acceptable behavior in each person Acts as a moral compass to guide him/her when ethical puzzles arise

Ethical Relativism Concept that holds that ethical behavior should be defined by various periods in time in history, a society’s traditions, the special circumstances of the moment, or personal opinion The meaning given to ethics would be relative to time, place, circumstance, and the person/s involved There would be no universal ethical standards on which people around the globe could agree Is an important and controversial issue

Observations of Unethical Behavior at Work Figure 5.1 Observations of Unethical Behavior at Work

Five Key Reasons Business Should be Ethical To meet demands of business stakeholders 10 country poll shows 90% of general public placed business ethics standards above traditional corporate goals Meeting demands of stakeholders is good business To enhance business performance Research shows linkage between ethically responsible behavior and favorable corporate financial performance Imparts trust, promoting positive alliances among business partners

Five Key Reasons Business Should be Ethical To comply with legal requirements U.S. Corporate Sentencing Guidelines provides that if an employee of a firm is found guilty of wrong-doing, the sentence may be reduced if preventive measures were in place in the company Measures judges look for in assessing this culpability (degree of blame) shown on next slide

U.S. Corporate Sentencing Guidelines Establish standards and procedures to reduce criminal conduct Assign high-level officer(s) responsibility for compliance Not assign discretionary authority to “risky” individuals Effectively communicate standards and procedures through training Take reasonable steps to ensure compliance—monitor and audit systems, maintain and publicize reporting systems Enforce standards and procedures through disciplinary mechanisms Following detection of offense, respond appropriately and prevent reoccurrence

Five Key Reasons Business Should be Ethical To comply with legal requirements (cont.) 2002 Sarbanes-Oley legislation was approved as result of corporate accounting scandals like Enron, and WorldCom Major provisions of Sarbanes-Oxley shown on next slide

Sarbanes-Oxley Act of 2002 The firm’s audit committee is entrusted with audit or oversight with all independent directors on the committee Tighter control on non-audit services, the lead auditor rotated every five years, and auditors report to the audit committee The CEO and CFO must sign off on financial statements as accurate and fair and must repay bonuses if a restatement of financials is undertaken A Public Company Accounting Oversight Board is established Firms are not permitted to offer loans to their executive officers or board of directors SEC guidelines for internal controls and financial reporting procedures; require the adoption of, or waiver for, a code of ethics for the board; mandate that a financial expert serve on the board; and compel the firm to state its financial condition in plain English on a rapid or current basis

Five Key Reasons Business Should be Ethical To prevent or minimize harm Overriding principle that business should “do no harm” Examples include not harming society with toxic waste, protecting business from unethical employees and unethical competitors To promote personal morality Knowing one works in a supportive ethical climate contributes to sense of psychological security People want to work for companies that do the right thing

Why Ethical Problems Occur in Business 4 Primary Reasons Personal gain and self-interest Competitive pressure on profits Conflicts of interest Cross-cultural contradictions Chart on next page provides background for each reason

Why Ethical Problems Occur in Business Figure 5.3

Core Elements of Ethical Character: Managers’ Values Managers’ values set the ethical tone for the company Corporate scandals has led to a crisis of confidence in business leadership Differences in ethical stances of U.S. versus European managers and employees Survey of new U.S. CEO’s shows concern for short-term profits One in four managers emphasizes moral values Younger generation of managers more concerned about ethics/social responsibility

Virtue Ethics Part of business ethics theory derived from Philosophy (Aristotle) Posits that a person with good character traits will use these values to show good behavior Virtue ethics holds that ethics is not rule determined but based on a way of being and valuable characteristics Stated differently – moral virtues are habits that enable a person to live according to reason and avoid extremes

Personal Spirituality Personal belief in a supreme being, religious organization, power of nature or some other life-guiding force In past 10 years has been a rise in spirituality at work McKinsey survey of Australian companies showed increase in productivity and reduced turnover for companies that provided spirituality outlets for employees Is controversial, given separation of church and state and common view that business is secular Issues include which religion should be promoted, and need for recognizing diversity of religious beliefs

Stages of Moral Development Well researched model by Dr. Lawrence Kohlberg of how individuals grow and mature in relation to moral reasoning and decision-making From childhood to mature adulthood people move up in their moral reasoning Earliest stages of reasoning are ego-centered Most developed stages are principle-centered Most managers make decisions based on criteria in levels 3 and 4 Company executives’ reasoning has wide implications both inside and outside the organization

Stages of Moral Development and Ethical Reasoning Figure 5.4

Analyzing Ethical Dilemmas in Business Model presented in next set of slides is powerful tool for reasoning through ethical problems that occur in business Based on three standards of ethical reasoning borrowed from philosophy Presents guidelines to Identify and analyze the nature of an ethical problem, and Decide which course of action is likely to produce an ethical result

Three Approaches to Ethical Reasoning Utilitarian Compares benefits and costs of a decision, policy or action Costs and benefits can be economic, social or human Rights Person or group is entitled to something or to be treated in a certain way Examples of basic human rights are right to life, safety, and due process Justice Means benefits and burdens are distributed equally, according to some accepted rule

Three Methods of Ethical Reasoning Figure 5.5

Applying Ethical Reasoning to Business Activities Can use the Utility, Rights and Justice framework as a tool to analyze real business ethics dilemmas For each possible action or decision, ask the three critical questions If all the answers are “Yes”, the proposed action is ethical If all the answers are “No”, the action is not ethical and needs to be reconsidered If “Yes” and “No” answers are mixed, you must decide which takes priority

Analytical Approach to Ethical Problems Figure 5.6 Analytical Approach to Ethical Problems

What is Whistle-blowing? When an employee in an organization uncovers wrongdoing, attempts to get it resolved within the organization and is unable to (either because mechanisms are not in place or there is no response), they then choose to report the situation outside of the organization (e.g. media or government agency) to achieve resolution Becoming a whistle-blower is challenging and potentially hazardous to one’s career Examples of government protection for whistleblowers around the world shown in next slide

Whistle-blowing Protection Around the World Exhibit 5.B Summary of some legislative efforts to protect whistle-blowers in various countries: European Union —The EU published a charter for whistle-blower protection, identifying the terms under which commission staff may blow the whistle, imposing a duty upon officials to report suspected wrongdoing, and outlining the channels for reporting malpractice. Ghana —A whistle-blower protection act has been proposed to offer rewards and protection to people who volunteer information leading to the prosecution of white-collar criminals. Israel —This country adopted whistle-blowing protection legislation that protects corporate and government workers. South Africa —The Protected Disclosures Act 26 prohibits employers from subjecting an employee to an occupational detriment (e.g., disciplinary action, suspension, dismissal, demotion, harassment, etc.) for raising concerns about unlawful or irregular conduct. South Korea —The Anti-Corruption Act established the Korea Independent Commission Against Corruption, whose mission includes the encouragement, protection, and compensation of whistle-blowers. United Kingdom —The U.K. Public Interest Disclosure Act protects most workers from retaliation by their employers, including dismissal, disciplinary action, or transfer.

Stigmas Against Whistle-blowers Divided loyalties In some Asian countries, members of the company are treated as family members and it is considered wrong to report on family members History The country may have a tragic history of reporting on others Logistics Employees of global companies may be faced with numerous time zones and language differences that could prevent whistle-blowing or make it more difficult Fear of retribution Despite government laws to protect whistle-blowers, many employees of global businesses fear retaliation