Ethical Issues in Business Chapter 5 Ethical Issues in Business The Meaning of Ethics Business Ethics across Organizational Functions Why Ethical Problems Occur in Business Ethics in a Global Economy Ethics, Law, and Illegal Corporate Behavior

The meaning of ethics Ethics A conception of right and wrong conduct. It tells us whether our behavior is moral or immoral with fundamental human relationships. Ethical Principles Guides to moral behavior. Business Ethics The application of general ethical ideas to business behavior.

Observations of unethical behavior at work Figure 5.1 Observations of unethical behavior at work Percentage of type of observed misconduct: Unsafe working conditions 56% Deceptive sales practices 56% Mishandling proprietary or confidential information 50% Violations of privacy rights 38% Shipping low-quality or unsafe products 37% Employment discrimination 36% Sexual harassment 34% Altering product quality or safety test results 32% Antitrust violations or unfair competitive practices 32% Environmental breaches 31% Source: 2000 Organizational Integrity Survey: A Summary, Integrity Management Services, KPMG LLP

Why should business be ethical? Figure 5.2 Why should business be ethical? To meet demands of business stakeholders. To enhance business performance. To comply with legal requirements. To prevent or minimize harm. To promote personal morality.

U.S. Corporate Sentencing Guidelines: Directives 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.

Sarbanes-Oxley Act of 2002 The firm’s audit committee is entrusted with auditor oversight with all independent directors on the committee. Certain nonaudit services by auditors to clients are banned, nonaudit services must be preapproved by the audit committee, the lead auditor must be 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.

Sarbanes-Oxley Act of 2002 A Public Company Accounting Oversight Board is established. The firms are not permitted to offer loans to its executive officers or board of directors. SEC rules will create guidelines for internal controls and financial reporting procedures, require the adoption of or waiver for a code of ethics for the board, mandate a financial expert must serve on the board, and compel the firm to state its financial condition in plain English on a rapid or current basis. ERISA penalties are increased from $5,000 to $100,000 and one year in prison to $100,000 to $500,000 and up to 10 years in prison.

Professional codes of conduct Exhibit 5.Aa Professional codes of conduct in accounting American Institute of Certified Public Accountants (AICPA) Responsibilities: In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities.. The Public Interest: members should act in a way that will honor the public interest. Integrity: members should perform all professional responsibilities with the highest sense of integrity. Objectivity and Independence: a member should maintain objectivity and be free of conflicts of interest in discharging services. Due care: a member should discharge professional responsibility to the best of the member’s ability. Scope and nature of services: members should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided. Source: www.aicpa.org.

Professional codes of conduct in finance Exhibit 5.Ab Professional codes of conduct in finance Association for Investment Management and Research (AIMR) Members of the Association shall: 1) Act with integrity, competence, dignity, and in an ethical manner when dealing with the public, clients, prospects, employers, employees, and fellow members. 2) Practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their profession. 3) Strive to maintain and improve their competence and the competence of others in the profession. 4) Use reasonable care and exercise independent professional judgment. Source: www.aimr.org/ethics

Professional codes of conduct in marketing Exhibit 5.Ba Professional codes of conduct in marketing American Marketing Association (AMA) Members of the AMA have embraced the following topics: Marketers must accept responsibility for the consequences of their activities and make every effort to ensure that their decisions, recommendations, and actions function to identify, serve, and satisfy all relevant publics. Marketers shall uphold and advance the integrity, honor, and dignity of the marketing profession. Participants in a marketing exchange should be able to expect that products services offered are safe, communications about offered products and services are not deceptive, all obligations in an exchange are discharged in good faith, and appropriate internal methods exist for equitable redress of grievances concerning purchases. Marketers should not demand, encourage or apply coercion to obtain unethical behavior in their relationships with others. Source: www.awma.org

Professional codes of conduct in information technology Exhibit 5.Bb Professional codes of conduct in information technology Association for Computing Machinery (ACM) General imperatives for ACM members include: contributing to society and human well-being, avoid harm to others, be honest and trustworthy, be fair and take action not to discriminate, honor property rights, honor copyrights and patents, give proper credit for intellectual property, respect privacy of others, and honor confidentiality. Source: www.acm.org/constitution/code

Why ethical problems occur in business Figure 5.3 Why ethical problems occur in business Reason Nature of Ethical Problem Typical Approach Attitude Personal gain and selfish interest Selfish interest versus others’ interests Egotistical mentality “I want it!” Competitive pressures on profits Firm’s interest versus others’ interests Bottom-line mentality “We have to beat the others at all costs!” Business goals versus personal values Boss’s interests versus subordinates’ values Authoritarian mentality “Do as I say, or else!” Cross-cultural contradictions Company’s interests versus diverse cultural traditions and values Ethnocentric mentality “Foreigners have a funny notion of what’s right and wrong.”

Anticorruption and bribery efforts in Russia Exhibit 5.C Anticorruption and bribery efforts in Russia President Putin’s commitment to end bribery and corruption is demonstrated by the following actions: 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. Source: “Cleanup Time: The Kremlin is Launching a Major Attack on Corruption,” Business Week, January 14, 2002, pp.46-47

International codes of conduct and their focus Figure 5.4 Ethical Focus ICC OECD ILO UN/CTC EU UN/GC Economic development X Technology transfer Regulatory action Employment Human rights Environmental protection Consumer protection Political action Source: William C. Frederick, “The Moral Authority of Transnational Corporate Codes,” Journal of Business Ethics 10 (1991), pp. 165-177; and Kathleen A. Getz, “International Codes of Conduct: An Analysis of Ethical Reasoning,” Journal of Business Ethics 9(1990), pp. 567-577.