Organizational Ethics and the Law Chapter 5 Organizational Ethics and the Law

Ch. 5: Key Learning Objectives Classifying an organization’s culture and ethical climate Recognizing ethics challenges across the multiple functions of business Creating effective ethics polices, ethics training programs, ethics reporting mechanisms, and similar safeguards Assessing the strengths and weaknesses of a comprehensive ethics program Understanding how to conduct business ethically in the global marketplace Identifying the differences between ethics and the law

Corporate Culture and Ethical Climates 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

The Components of Ethical Climates Figure 5.1 The Components of Ethical Climates

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

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

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

Organizations’ Ethics Safeguards Figure 5.2 Organizations’ Ethics Safeguards

Two Ethics Approaches Compliance-based approach Seeks to avoid legal sanctions Emphasizes threat of detection and punishment to promote lawful employee behavior 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 lessen unethical conduct, but in somewhat different ways

Ethics Programs and Policies Top Management Commitment and Involvement Critical to fostering employee ethical behavior Ethics Policies or Codes 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 policies 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

Ethics Programs and Policies Ethics and Compliance Officers 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 Reporting Mechanisms Purposes include providing interpretations of proper ethical behavior, avenue for reporting unethical conduct, and information-sharing tool Employees can place a call on the company’s ethics assist or helpline Are present in over 83% of large companies recently surveyed

Ethics Programs and Policies Ethics Training Programs Is very effective method for promoting workplace ethical behavior Online training has emerged as the most widely used form of training over the last five to ten years Ethics Audits Formal study of deviations from company ethical standards Management must report on corrective action to be taken in response to found deviations

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

Corporate Ethics Awards Awarded to companies for efforts in creating and improving their ethical performance These companies serve as models for others to follow Demonstrates that firms can be financially successful and ethically focused In 2002 Business Ethics magazine created “Living Economy Award” for companies that focused on fair profit, locally based, stakeholder owned companies

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

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 2009, 38 countries had ratified the treaty Other initiatives China’s National Corruption Prevention Bureau International Labour Organization and the United Nations have attempted to develop an international code of conduct for multinational corporations U.S. Foreign Corrupt Practices Act prohibits executives of U.S. based companies to pay bribes to foreign government officials

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

Cost of Corporate Lawbreaking Lawbreaking in business is often a result of acts committed by the organizations'’ own employees 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