OMM 640 Business Ethics and Social Responsibility

1 Ethics and Business

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Learning Outcomes

After reading this chapter, you should be able to do the following:

• Examine the function of business ethics in a global business environment.

• Summarize the modern history of organizational ethics that has shaped business practices.

• Analyze the roles of customers, employees, and managers in business ethics.

• Outline organizational best practices that foster an ethical business culture.

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Introduction

Introduction

Ethical Dilemma: Personal and Professional Lives Collide

Wendel Torres considers himself an honest and ethical person. As the co-founder and chief executive officer (CEO) of a small construction company in Colorado Springs, Wendel has a reputation as a business leader in the community. Torix General Contractors, LLC began with small projects that generated $200,000 in sales in 1987. Business began to grow and after 10 years, the company had 167 full-time employees. Under Wendel’s direction, Torix secured large local military installation projects and sales grew to $108 million by 2007. In addition to his business contributions, Wendel wants to make a difference in the community. He thinks that giving back is important and holds board member positions for a number of nonprofit organizations. When asked how he would like to be remembered, Wendel stated, “I think when you retire you want to be remembered as a good person to work with. That you are fair and honest. I certainly don’t want to be remembered for my golf game” (Colwell, 2006, para. 3).

One day in 2007, Wendel received a phone call from Bill, who asked if Torix had any railroad ties that could be used to landscape his home. Wendel and Bill had been friends for about eight years, after becoming acquainted through multiple construction projects at the local military base where Bill worked as construction chief. Bill indicated that he needed squared and treated rail- road ties of a specific size and asked Wendel to check with his suppliers. Wendel arranged for the delivery of the railroad ties to Bill’s home. The value of the landscaping material came to $3,500. Bill called Wendel to thank him and asked how much he owed. Knowing that Bill was struggling financially following his wife’s recent fight with cancer, Wendel responded, “Don’t worry about it.”

What are the implications of Wendel’s actions to help a friend? According to ethical guide- lines for government purchasing, giving gifts to a person in a position of authority to grant business is a crime. Though Wendel has insisted that he was not trying to obtain a business contract and was only helping a friend, he did not realize that future business with the military base could be perceived as returning the favor because Bill and Wendel were in a government-contractor relationship. An investigation ensued, and in 2010, Wendel pleaded guilty to federal charges for providing illegal gratuities to a public official.

Because he said, “Don’t worry about it,” Wendel is a convicted federal felon with restrictions on his right to vote, serve on a jury, and possess firearms. His actions put the viability of Torix at risk. The business suffered with the loss of reputation, and Wendel is restricted from future govern- ment contracts. He acknowledges that he set the wrong example for his staff and their families, but is most upset about the loss of his upstanding reputation. He knows that there are a number of people who believe that he acquired the company’s military contracts by bribing officials.

Could Wendel’s ethical lapse have been prevented? A strong ethical program and ethical leader- ship could prevent misconduct. Wendel admits that the company lacked business ethics train- ing that would guide employees on the parameters of gift giving. To meet Bill’s request, Wendel relied on company employees to order, deliver, and track the landscaping material. With proper training on how to spot and report unethical behavior, employees could have voiced concerns of the repercussions of not invoicing Bill for the material. Now, Wendel speaks to business asso- ciations on the importance of understanding the ethical risks of a small business and the need for a strong ethical program. To hear Wendel tell his story, visit https://www.youtube.com /watch?v=JduFZ9gP-eI.

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If 1,000 employees observe

misconduct... ...then only 602

report what they observe.

209 employees report to HR, Legal, or other

corporate function (outside Compliance).

Forty percent of observed misconduct

never leaves the workforce.

50 employees take their reports directly

to Compliance.

408 employees tell their direct manager

or supervisor.

About 290 managers talk to their direct

manager or supervisor.

About 213 managers talk to HR, Legal, or other

separate function (outside Compliance).

About 123 managers take their reports

directly to Compliance.

Introduction

Ignoring ethics in business can jeopardize a company’s existence. Ethical transgressions can ruin a company’s reputation and can result in large fines that affect its financial and profitabil- ity margins. For example, India’s second-largest outsourcing firm Infosys Ltd. settled with the U.S. Attorney’s Office for a record $34 million for visa fraud (Preston, 2013). Alcoa Inc. agreed to pay $384 million in fines after the discovery that an independent consultant bribed Bahraini officials to secure business with a government-owned aluminum plant (ElBoghdady, 2014). Six major financial institutions received penalties from the European Union regulators of €1.71 bil- lion ($2.32 billion) for allegedly colluding to manipulate interest rates.

These examples of misbehavior highlight a key point of business ethics—individual behaviors matter. Employees at all levels of an organization may deviate from acceptable practices, yet they can also help detect ethical lapses. Research in organizational ethical conduct has found that each ethical employee has a spillover effect to encourage others to act ethically (Mitten- dorf, 2008), but companies struggle with organizational resistance to speak up against devia- tions from acceptable behavior.

The Ethics Resource Center’s 2013 National Business Ethics Survey (2014) found that while 41% of employees in the United States observed misconduct, only 63% reported the unethical practices. Of those who reported the misconduct, 82% reported the incident to their immediate supervisor, while only 15% reported misconduct to the company’s ethics officer. These results are consistent with a CEB Compliance & Ethics Leadership Council global study (2013) that found that, on average, only 17% of observed misconduct reaches the company’s ethics and compliance office (see Figure 1.1). The CEB study also revealed that reporting of misconduct varies among regions from 67.4% in the Middle East and Africa to a low of 53.9% in Asia. A strong ethical culture reduces observed misconduct and increases reporting of unethical prac- tices. Therefore, it is important for business leaders to recognize the need for employee ethics training and monitoring for risks of misconduct in order to avoid ethical scandals.

Figure 1.1: How information regarding misconduct travels

Despite having a compliance office available in their workplace, of the employees who witness misconduct, 82% will report the incident to their supervisor, while only 15% will report it to the compliance office.

Source: Reprinted with permission from CEB Compliance & Ethics Leadership Council. (2013). Key Trends in Global Misconduct. RiskClarity Quarterly: The Corporate Executive Board Company. Arlington, VA, 2013, p. 9.

If 1,000 employees observe

misconduct... ...then only 602

report what they observe.

209 employees report to HR, Legal, or other

corporate function (outside Compliance).

Forty percent of observed misconduct

never leaves the workforce.

50 employees take their reports directly

to Compliance.

408 employees tell their direct manager

or supervisor.

About 290 managers talk to their direct

manager or supervisor.

About 213 managers talk to HR, Legal, or other

separate function (outside Compliance).

About 123 managers take their reports

directly to Compliance.

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Section 1.1 Ethics in a Business Context

This book focuses on ethical and responsible business with an emphasis on managerial eth- ics. The chapter organization incorporates four perspectives on business ethics. The first two chapters provide a macro view of business ethics and social responsibility as components of an ethical business. These chapters will introduce important ethical terminology, provide a histori- cal context for greater understanding of today’s ethics and compliance environment, and intro- duce frameworks that will be referenced throughout the text. The next perspective, featured in Chapters 3 and 4, looks at ethics within a business through an examination of common ethical issues and forces that promote organizational ethics and compliance. Chapters 5 and 6 focus on the ethical decision making of individuals within organizations, providing discussions of how to include ethical dimensions in decision making, traps that encourage unethical behavior, and the role an ethical leader must play in preventing ethical lapses. Chapters 7 through 10 offer an organizational perspective and provide steps for implementing an ethics program while incor- porating innovative approaches to encourage responsible business conduct.

As you proceed through this book, consider the following themes regarding business ethics and social responsibility. First, ethics are a normal part of business and an integral compo- nent of any organization’s social responsibilities. Second, ethical behavior in business may differ from personal ethical situations, and may necessitate distinct approaches in handling ethical dilemmas within an organization. Third, ethics and social responsibility affect mul- tiple stakeholders; business actions can impact customers, employees, shareholders, suppli- ers, and the community. Lastly, the global nature of business dictates an international view of ethics and social responsibility.

This chapter begins with the fundamental concepts of business ethics, values, and ethical decision making in a global context. Next, the chapter explores the events that shaped the modern perspectives of business ethics and social responsibility. The third section of the chapter emphasizes that ethics in business is the responsibility of customers, employees, and managers. The final section explores best practices to foster an ethical business culture.

1.1 Ethics in a Business Context Ethics refer to the moral values and principles that help determine if a decision, choice, or action is right or wrong. Personal ethics give individuals the confidence to make decisions in their daily life. However, even minor day-to-day decisions made in the business realm can have far-reaching implications that employees may not be able to anticipate. Applying per- sonal ethics in business decisions is not always appropriate; each employee has his or her own unique ethical assumptions that may not coincide with the company’s position on eth- ics and compliance (see Consider: Common Assumptions of Business Ethics). Companies seek employees who understand how ethics relate to business and who exhibit ethical decision- making and leadership skills. Integrity is one of the top five desired qualities that employers seek in job applicants (GMAC, 2012).

Despite its importance, the language of ethics is uncomfortable for some. Bird and Waters (1989) recognize the phenomenon of moral muteness, or the reluctance of managers to frame a decision in ethical terms rather than economic or business benefits, “even when they are acting for moral reasons” (p. 73). It is easy to understand why some people may avoid talking about ethics at the office. Words like morals, character, values, and principles are not business

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Section 1.1 Ethics in a Business Context

terms and may evoke feelings of judgment that are uncomfortable. Other phrases like ethical leader and responsible management suggest standards imposed on managers in addition to their functional duties. Therefore, the first step in understanding business ethics in a global marketplace is to learn the language.

Business Ethics Defined

Before addressing ethics in the workplace, let’s revisit its definition. A simple explanation of ethics is the “study of what is good and evil, right and wrong, and just and unjust” (Steiner & Steiner, 2012, p. 72). Though it is clear and simple, this definition does not provide much insight into how ethics apply in everyday life. The concept of ethics is more complex. For example, ethics and morality are often interchangeable. Ethics derives from the Greek term hē ēthikē tekhnē, meaning the science of morals, based on the Greek word ēthos, relating to the beliefs, morals, and character of a person or organization. The Merriam-Webster Dictionary presents these definitions: “The discipline dealing with what is good and bad and with moral duty and obligation; a theory or system of moral values; the principles of conduct governing an individual or a group; a guiding philosophy” (“Ethic,” 2013, para. 4-7). The Ethics Resource Center (2009b) describes ethics as “the decisions, choices, and actions (behaviors) we make that reflect and enact our values” (Ethics section, para. 1). All of these conceptualizations reflect the overall theme of relying on values and principles in determining right from wrong. Therefore, ethics refers to how people make decisions that align with societal moral values and principles.

Consider: Common Assumptions of Business Ethics

Have you heard or used these phrases in the workplace? The choice of words and tone can shed light on an individual’s view of business ethics. Some assumptions about business eth- ics can inadvertently encourage unethical behavior and misreading others’ actions.

• “Ethics is just a matter of opinion . . . who’s to judge?” • “Ethics is about following my ‘gut.’ It’s about doing what feels right.” • “Ethics? What you really mean is ‘compliance.’” • “As long as we adhere to policy, we will be okay.” • “All I want to know is if it is legally defensible.” • “The right thing to do is always going to depend on the particulars of the situation.” • “When in Rome . . .” • “Who are we to impose our standards on [suppliers, agents, country X]?” (Priest, 2013)

Questions to Consider

1. Discuss why workers would make each statement. 2. Consider how these assumptions influence an understanding of ethical issues in

business. Why would diverse perspectives of business ethics increase the risk of misconduct within an organization?

3. What do you recommend to encourage a broader perspective of business ethics in an organization?

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Section 1.1 Ethics in a Business Context

Business ethics relates to rules, principles, and standards for deciding what is morally right or wrong when doing business (Ferrell, Fraedrich, & Ferrell, 2013). Ethical issues conflict with an accepted value, principle, or standard, and can arise in any area of an organiza- tion, including accounting, customer service, marketing, production, human resources, and beyond. These issues occur when an individual, group, or entity must choose between alter- native actions that have the potential to harm others (Jones, 1991). Gentile (2010a) calls for employees to accept the normality of ethical issues in business and to anticipate the gray areas that are most likely to arise in their profession. The gray areas refer to those situations where the laws are lacking and the right thing to do is unclear (Bruhn, 2009).

Consider the many pressures facing accounting professionals that might compel them to skew financial reports. Are the entries within the spirit of accounting standards or a creative interpretation of the law? How would you handle requests from customers for preferential treatment in payment terms? Would an exception to company policy be permissible to save a sale? Marketing professionals must consider how advertising, selling techniques, and product offerings are interpreted by customers and the public. Supply chain supervisors must manage offshore suppliers whose working conditions may be legal in their country yet are not rep- resentative of company practice. Therefore, ethical challenges are a normal part of business, rather than as something separate from daily work (Gentile, 2010a).

A perception prevails that ethics and business are disparate concepts, and that law-abiding behavior is ethical behavior. This attitude derives from Milton Friedman’s influential views in Capitalism and Freedom, which state that the primary responsibility of business is to make a profit “so long as it stays within the rules of the game” (1962/2009, p. 133). Companies accepting these interpretations often place profits before ethics, emphasize short-term rev- enues, and consider ethics as a public relations issue. They have a compliance approach to business ethics that focuses on preventing, detecting, and punishing legal violations.

While illegal actions are not ethical, business ethics goes beyond complying with the law. In pursuit of profits, businesses must take risks with innovative products and services while complying with existing regulations. In the face of stiff competition, some companies may feel pressure to push the legal boundaries in their industries.

A survey of 500 financial professionals in the United States and the United Kingdom found that 24% of respondents would break laws in order to be successful and 30% felt pressure to compromise ethical standards (“Bad Behavior in the Financial Industry,” 2012). In a trade journal for financial professionals, Gentile (2010b) stated, “Just because financial executives know the appropriate laws, regulations and policies does not mean they are confident about applying them when organizational pressures push them to step across the line” (p. 40). Rather than sidestepping the ethical gray areas, Gentile recommends focusing not on what the law permits, but on doing the right thing or acting ethically.

Goldman Sachs Group, Inc.’s marketing strategy of a complex mortgage-linked security is an example of how a firm can engage in disreputable conduct while remaining within industry regulations. In 2007, the firm offered a synthetic collateralized debt obligation (CDO) called Abacus 2007-AC1, which included a portfolio selected by hedge fund manager John Paulson (Gandel & Altman, 2010). Synthetic CDOs are not against the law. As a tradable security, they are derivatives of mortgage bonds, not actual assets. Derivatives are a form of futures contract that obtains its value from stocks, bonds, or other commodities.

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Section 1.1 Ethics in a Business Context

The U.S. Securities and Exchange Commission (SEC) charged Goldman Sachs and Goldman Sachs trader Fabrice Tourre for fraud in misleading investors by omitting pertinent infor- mation regarding the Abacus security. Paulson had purchased insurance in case the security failed, whereas Tourre allowed investors to incorrectly believe that Paulson had equity in the fund. Goldman Sachs settled the SEC lawsuit for $550 million that included $250 million as restitution for investors who lost money (U.S. Securities and Exchange Commission, 2010). A jury found Tourre personally liable for six charges of securities law violations that would bring fines of more than $825,000 (Rubin, 2014).

As more businesses cross international borders, ethical business practices reflect a global perspective. Perceptions of acceptable behavior may vary by country or region. Religious beliefs, traditions, rituals, and habits distinguish a nation’s culture, guide ethical behavior, and create tensions in an international business environment.

Companies typically address value tensions of international business in one of two approaches. Some managers may adopt a relativistic approach, which considers each culture’s ethics as equally valid and to promote the practice of “When in Rome, do as the Romans do” (Don- aldson, 1996, p. 48). This attitude derives from a concept of moral relativism, a belief that ethical judgments are tied to societal factors such as class, race, gender, age, and religion that allow people to have differing views on what is right or wrong. International companies that embrace relativism establish different business conduct guidelines by country, allowing activities that would not be acceptable in other jurisdictions. For example, payment of a bribe to secure a license for a manufacturing facility in Nigeria may occur by a local representative of an international company, though it would directly violate anticorruption legislation in developed countries. A relativistic approach increases risks of misconduct that could create criminal charges or civil litigation against the organization.

Another approach relates to universalism, a belief that certain absolutes apply regardless of circumstances (Trompenaars, 1996). Enforcing a single ethical viewpoint across cultures is ethical imperialism. International companies embracing an ethical imperialistic approach apply conduct standards of the company headquarters to all operations regardless of respect- ing cultural differences (Donaldson, 1996). Companies such as PepsiCo, Cisco Systems, and H.J. Heinz Company publish global codes of conduct that outline consistent policies on labor, corruption, and environmental practices. For example, Heinz includes worldwide marketing guidelines to stress principles that go beyond jurisdictional regulations such as, “All commu- nications must be accurate, factual, and honest,” and “Products that are deemed inappropri- ate for children should not be advertised or promoted to children” (Heinz, 2010, p. 11). A major challenge in implementing a global ethical standard is that an informal culture of non- compliance emerges from differing perceptions of what is acceptable behavior in the region. For example, managers may ignore company policies that prohibit hiring family members in countries with strong familial loyalty. Global managers that strive to understand the values of a culture are more likely to espouse ethical principles in a global workplace.

Values and Principles

Values and principles provide guidelines to address ethical issues within an organization. Values describe what is important to a person or organization. Personal values are endur- ing beliefs shaped by cultural context and society (Ferrell et al., 2013), which can include

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Section 1.1 Ethics in a Business Context

an individual’s family, friends, education, and religion. Examples of values include honesty, integrity, trustworthiness, respect, responsibility, fairness, citizenship, charity, and loyalty. Our individual values are so ingrained that oftentimes we are unaware of the influence they play in everyday decisions (Posner, 2010; Urbany, Reynolds, & Phillips, 2008). With- out realizing it, people are more likely to choose the option that most closely aligns with their values.

Ethical principles are statements that are universal and absolute, and provide specific boundaries to guide behavior (Ferrell et al., 2013). Principles are the rules or standards that inform actions and thinking, and provide the boundaries of value judgments. Therefore, val- ues are complementary to principles and help operationalize fundamental beliefs that result in appropriate behaviors.

Ethics in business apply on individual and organizational levels. When a company estab- lishes clearly defined organizational values, each employee shares the same understanding of expected ethical behavior and social responsibility. Core corporate values serve as the cultural cornerstones to guide conduct throughout the organization (Lencioni, 2002). For example, the aerospace company United Launch Alliance has tied its ethical behavior and corporate values to company goals, such as mission success, performance excellence, business excel- lence, and employee involvement (see Business Best: United Launch Alliance’s Ethical Values- Based Culture). The company has a values-based culture that encourages ethical behavior and integrates its values into strategic decisions. There is an expectation that a values-based organizational culture is more likely to prevent abusive behavior or improper business con- duct than a culture based solely on compliance (Lager, 2010).

Business Best: United Launch Alliance’s Ethical Values-Based Culture

United Launch Alliance (ULA) is a contractor that provides launch services to a variety of customers within the U.S. government. The company prides itself on setting the standard for ethical business practices in its industry. ULA follows an ethos of always do the right thing and has established an organizational culture that promotes a high standard of integrity and personal accountability for its employees. Its values appear on the company website and are an integral part of the ethics program:

We achieve mission success, performance excellence, business excellence and employee involvement through an unwavering commitment to our values. Ethi- cal behavior is our fundamental principle, guiding the rest of our values: Lead- ership, Customer Focus, Teamwork, Our People, Diversity and Inclusion, Quality, Innovation, Continuous Improvement and Corporate Citizenship. Ethics is the hub of the ULA Values Wheel [see Figure 1.2]. (United Launch Alliance, 2013, para. 4)

(continued)

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Section 1.1 Ethics in a Business Context

ULA’s ethical values-based culture is based on self-governance that encourages employees to model their behaviors on the organization’s core values and integrate these behaviors into their day-to-day duties. ULA executives provide a strong voice in creating an ethical culture and reinforce its importance to the organization and their government customer.

ULA defines ethical values-based culture as follows:

• “An environment built on a foundation of trust where decisions, behaviors, and actions are innately driven by core values and not solely due to requirements.

• An evolution from primarily compliance-based controls to one of self-governance where individuals strive to always do the right thing and fulfill the spirit and intent of a requirement rather than seeking the minimum path.

• An organization that promotes values through continued positive messaging, high- lighting the ethical role models, and appropriately responding to any issue in a manner that exemplifies ideal behaviors as a normal course of business.” (Corrigan, 2012, p. 7)

Business Best: United Launch Alliance’s Ethical Values-Based Culture (continued)

Figure 1.2: ULA Values Wheel

Ethical behavior is at the hub of the United Launch Alliance Values Wheel as a guiding principle for the company’s values.

Source: Reprinted with permission from United Launch Alliance.

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(continued)

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Section 1.1 Ethics in a Business Context

Conflicts occur in business when personal values fail to align with those of the organization. Value congruence refers to the similarity between individual and organizational values. One study of American managers has found that the agreement between personal values and corporate values is greater for executives than middle and senior managers (Posner, 2010). Another study has found that the values of middle managers in private firms align with orga- nizational values and these managers are less likely to engage in unethical behavior than managers in public firms (Suar & Khuntia, 2010).

Value congruence may be particularly challenging in a multinational corporation where the diversity of values varies from family, religious, and cultural differences in the home market. Yet research in business ethics has shown that there are more similarities in values across cultures than one might expect. Donaldson and Dunfee (1999) recognize the important role of hypernorms, or global values, when establishing global ethical policies. Hypernorms are described as “principles so fundamental that, by definition, they serve to evaluate lower-order norms, reaching to the root of what is ethical for humanity” (Donaldson & Dunfee, 1999, p. 46). Through extensive cross-cultural surveys, Rushworth Kidder found five shared values across cultures: honesty, respect, responsibility, fairness, and compassion (as cited in Gentile, 2010a). The presence of hypernorms allows companies to promote adherence to organizational values.

Let’s take a closer look at the concept of principles to determine how they can help companies manage issues of value congruence. A principle is a fundamental, unchanging statement of belief by an individual or business used as a guide for making decisions that the individual or business will not violate. Business ethics principles relate to human relationships and orga- nizations and are believed to be self-evident, self-validating, and provide constant direction.

Principles can relate to equity, liberty, and distributive justice. Equity principles refer to treating people fairly, engaging in fair competition, and creating just relationships. Liberty principles recognize that individuals have basic rights to pursue goals and business policies should safeguard those rights by forbidding collusion, encouraging transparency, and hon- oring contracts (Pichler, 1983). Distributive justice refers to the fair allocation of resources among societal stakeholders (Ferrell & Ferrell, 2008). A stakeholder is “any group or indi- vidual who can affect or is affected by the achievement of the organization’s objectives” (Free- man, 1984, p. 25). Ethical principles concerning distributive justice include contributing to

Questions to Consider

1. Consider how the values of United Launch Alliance relate to individual ethical behavior.

2. How does the values-based culture of United Launch Alliance differ from a compliance-based culture? Why would a company in the aerospace industry move away from a compliance focus?

3. Would you want to work for a company like United Launch Alliance? How would their values align with your personal values?

Business Best: United Launch Alliance’s Ethical Values-Based Culture (continued)

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Section 1.1 Ethics in a Business Context

the local community, creating healthy workplaces, and providing educational opportunities for employees. Communication of principles in the workforce often includes key values for implementing the principles, which sometimes makes it difficult to differentiate between a value and a principle.

Given the steadfast nature of principles, businesses can use them to address value conflicts from cultural differences that arise in international business. In 1994, the Caux Round Table (CRT) Principles for Business set forth ethical norms for acceptable business behavior world- wide (see Business Best: Global Companies Adopt the Caux Round Table Principles for Business). The Caux Round Table is an international network of business leaders that first met in 1986 to promote socially responsible management through a set of ethical principles for business and government (Caux Round Table, 2014). Their approach to responsible business consists of seven core principles rooted in three ethical foundations for responsible business and a fair and functioning society, namely: responsible stewardship, living and working for mutual advantage, and the respect and protection of human dignity.

Business Best: Global Companies Adopt Caux Round Table Principles for Business

To provide businesses with a written guide of responsible business practices, members of the Caux Round Table drafted the CRT Principles over two years. First published in 1994, the CRT Principles are now available in 16 languages. Dominic Tarantino, former chairman of Price Waterhouse World Firm Ltd., stressed the importance of the CRT Principles during a 1998 speech to the Charter for Good Corporate Behavior in Tokyo, Japan:

Global business ethics is no longer just a matter of playing by the rules. It’s a matter of making the rules to ensure that the global economy reaches its full potential and everyone gets a piece of the pie or sushi as the case may be. Enough business leaders must take personal responsibility to create the critical mass to get this done. The Caux Principles call on business to make the rules, to be an agent of positive social change. The principles must have struck a respon- sive chord, because they are now the most widely-accepted code of business standards in the world. (Tarantino, 1998, p. 560)

In 2008, the principles were reviewed and reformulated as the Principles for Responsible Business.

Caux Round Table Principles for Responsible Business (Caux Round Table, 2010, Principle sections 1-7)

PRINCIPLE 1 – RESPECT STAKEHOLDERS BEYOND SHAREHOLDERS

• A responsible business acknowledges its duty to contribute value to society through the wealth and employment it creates and the products and services it provides to consumers.

• A responsible business maintains its economic health and viability not just for shareholders, but also for other stakeholders.

• A responsible business respects the interests of, and acts with honesty and fair- ness towards, its customers, employees, suppliers, competitors, and the broader community.

(continued)

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Section 1.1 Ethics in a Business Context

PRINCIPLE 2 – CONTRIBUTE TO ECONOMIC, SOCIAL, AND ENVIRONMENTAL DEVELOPMENT

• A responsible business recognizes that business cannot sustainably prosper in soci- eties that are failing or lacking in economic development.

• A responsible business therefore contributes to the economic, social, and environ- mental development of the communities in which it operates, in order to sustain its essential ‘operating’ capital—financial, social, environmental, and all forms of goodwill.

• A responsible business enhances society through effective and prudent use of resources, free and fair competition, and innovation in technology and business practices.

PRINCIPLE 3 – BUILD TRUST BY GOING BEYOND THE LETTER OF THE LAW

• A responsible business recognizes that some business behaviors, although legal, can nevertheless have adverse consequences for stakeholders.

• A responsible business therefore adheres to the spirit and intent behind the law, as well as the letter of the law, which requires conduct that goes beyond minimum legal obligations.

• A responsible business always operates with candor, truthfulness, and transparency, and keeps its promises.

PRINCIPLE 4 – RESPECT RULES AND CONVENTIONS

• A responsible business respects the local cultures and traditions in the communities in which it operates, consistent with fundamental principles of fairness and equality.

• A responsible business, everywhere it operates, respects all applicable national and international laws, regulations and conventions, while trading fairly and competitively.

PRINCIPLE 5 – SUPPORT RESPONSIBLE GLOBALISATION

• A responsible business, as a participant in the global marketplace, supports open and fair multilateral trade.

• A responsible business supports reform of domestic rules and regulations where they unreasonably hinder global commerce.

PRINCIPLE 6 – RESPECT THE ENVIRONMENT

• A responsible business protects and, where possible, improves the environment, and avoids wasteful use of resources.

• A responsible business ensures that its operations comply with best environmental management practices consistent with meeting the needs of today without compro- mising the needs of future generations.

PRINCIPLE 7 – AVOID ILLICIT ACTIVITIES

• A responsible business does not participate in, or condone, corrupt practices, bribery, money laundering, or other illicit activities.

Business Best: Global Companies Adopt Caux Round Table Principles for Business (continued)

(continued)

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Section 1.1 Ethics in a Business Context

• A responsible business does not participate in or facilitate transactions linked to or supporting terrorist activities, drug trafficking or any other illicit activity.

• A responsible business actively supports the reduction and prevention of all such illegal and illicit activities.

Source: Reprinted with permission from Caux Round Table.

Questions to Consider

1. Which principles relate to equity, liberty and distributive justice? Do the Principles for Responsible Business tend to stress one category more than others?

2. Do the Principles for Responsible Business provide for a company to adopt a relativist or universalist approach to ethics across national borders?

3. How closely do the Principles for Responsible Business align with the shared values of Rushworth Kidder of honesty, respect, responsibility, fairness, and compassion?

Business Best: Global Companies Adopt Caux Round Table Principles for Business (continued)

By establishing a principle-based culture, companies can hold employees accountable for complying with nonnegotiable principles. Since 1998, Nestlé S.A. has continually published and updated business principles that encompass all aspects of the business and apply to stake- holders worldwide. These principles focus on consumers, human rights and labor practices, employees, suppliers and customers, and the environment. Total S.A., an energy company in more than 130 countries, bases its global ethical business principles on three core values: respect, responsibility, and exemplary behavior. Its code of conduct stresses to employees that they are part of a company that:

[Complies] with all applicable laws, regulations, and decisions of the United Nations and the European Union, especially concerning the environment, competition and employment.

Is sensitive to the concerns expressed by international, European Union, gov- ernmental and non-governmental organizations in matters concerning our operations.

Observes the rules of free competition.

Rejects bribery and corruption in all forms, whether public or private, active or passive.

(Total S.A., 2012, p. 6)

Multinational corporations such as Nestlé and Total S.A. base their codes of conduct on global guidelines that provide ethical principles for responsible business. Common principles address human and labor rights, consumer rights, environmental stewardship, transparency,

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Section 1.1 Ethics in a Business Context

corruption, and sustainable development (Laczniak & Kennedy, 2011). Voluntary global ethi- cal guidelines will be explored further in Chapter 4. These organizational principles serve as a basis for ethical decision making in business, regardless of company location.

Ethics and Decision Making

Consider a time when you experienced an ethical dilemma. How did you handle the issue? Do you feel that you did the right thing at the time? Oftentimes we feel that our personal ethics are enough to handle any situation. Yet studies in behavioral ethics have shown that people tend to overestimate their degree of honesty and fairness (Bazerman & Tenbrunsel, 2011; De Cremer, Tenbrunsel, & Dijke, 2010) and believe that they are more ethical than others. To test this assumption, a study asked students to complete puzzles for which they would self check their answers. For each correct answer, they would receive money (Gino & Pierce, 2009). Though some students resisted cheating and overstating their performance, the groups that were exposed to the money they could earn were more likely to overstate their performance. The results showed that unethical behavior increased when abundant wealth was a condition.

Decisions in business are complex and are rarely made alone. Personal ethics may not be sufficient to address choices about product quality, hiring practices, supplier selection, advertising strategy, and pricing policies. New employees may ask, “What differentiates an ethical decision from a regular business decision?” The answer is that all decisions have some basis in values, thereby a decision maker should consider ethical implications to some extent (Urbany et al., 2008). As the previous examples demonstrate, personal ethics may change within an organization depending on the circumstances. When focusing on organi- zational goals and task completion, ethical fading may occur. Ethical fading is described as “a process by which a person does not realize that the decision she is making has ethical implications and thus ethical criteria do not enter into her decision” (Tenbrunsel, Diek- mann, Wade-Benzoni, & Bazerman, 2010, p. 159).

Why shouldn’t employees rely solely on personal ethics in a business decision? Take child labor as an example. Perceived moral intensity, or the personalized impact of a moral issue, significantly influences a person’s ethical decision making and behavior. It is probably safe to assume that your own personal ethics would cause you to be concerned if you worked alongside children who were paid low wages and lived in squalor. Would you feel the same level of concern about purchasing products that were made by children experiencing similar conditions in a faraway country? Some people feel that child labor under any circumstance is wrong and cannot be tolerated. Arguments against child labor include human rights for decent working conditions and acceptance of the United Nations Convention on the Rights of the Child that promotes basic education for all children. Consumer groups organize boy- cotts and media campaigns against companies using child labor, such as the United Kingdom (UK) media call for boycotting cotton from Uzbekistan that has affected the apparel industry (http://www.cottoncampaign.org/).

The issue is further complicated when considering the organizational implications of such a com- plex issue. Imagine you are a new employee tasked to secure a supplier of hand-knotted carpets

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Section 1.2 The Importance of Ethics in Business

for sale through retail and catalog outlets. The highly competitive industry for carpets includes suppliers from India, Nepal, China, Pakistan, Iran, and Morocco. The Indian hand-knotted carpet industry relies on child labor to keep costs low even though the work is considered hazardous and some factories engage in debt bondage in which children work off their parents’ debt (Ballet, Bhukuth, & Carimentrand, 2014). Would you consider purchasing rugs from a company using child labor if it were your only option for staying competitive in your industry? Now imagine you are collaborating with international managers who show varying degrees of concern about the issue of child labor. One cross-cultural study of ethical responses to business situations found that sampled Chilean managers expressed less concern about child labor when compared to manag- ers from Australia, Ecuador, and the United States (Robertson, Crittenden, Brady, & Hoffman, 2002). If people made decisions such as this based on their own personal ethics, the outcome would be as varied as the individuals themselves. Each employee needs a clear set of organiza- tional guidelines on acceptable behavior to make the best possible decisions and avoid putting their company’s reputation and even existence in jeopardy.

1.2 The Importance of Ethics in Business News coverage of Enron Corporation and Arthur Andersen, WorldCom, Tyco International Ltd., and Countrywide Financial Corporation highlights the reputational damage, conse- quences, and regulatory responses from ethical scandals. Of the four companies, only Tyco continues to operate under its corporate name. Enron filed for bankruptcy in 2001, World- Com in 2002, and Arthur Andersen no longer exists as an accounting and auditing firm. Bank of America Corporation continues to handle the litigation related to allegations of fraud in subprime mortgage manipulations after purchasing Countrywide in 2008. In addition to ruin- ing the reputation of each company, these scandals damaged the public’s perception of the financial services industry overall. At the time of the misconduct, each company had an ethics and compliance program in place because they had learned from the unethical behaviors of others. What have we learned about the importance of ethics in business? We can examine consequences for ethical lapses, understand the institutionalization of ethics and compliance in business, and recognize the benefits of an ethical business.

Ethical Lapses and Reputation

What does it mean when unethical behavior in business is described as an ethical lapse? The term ethical lapse implies a short-term or temporary deviance from normal standards of conduct. Nevertheless, when business leaders make decisions that result in misconduct or irresponsible behavior, the impact on the organization can have long-term effects. Figure 1.3 outlines some of the business costs of ethical failures. At a minimum, companies can incur fines for noncompliance with regulations. When the misconduct receives attention from reg- ulators, a business can find greater expenses in audits, legal representation, and mandated corrective actions. The greatest costs of ethical lapses come from a loss of reputation that

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Government fines and penalties

Level 1 Costs Administrative and audit Legal and investigative

Remedial education Corrective actions

Government oversight

Level 2 Costs Customer defections

Loss of reputation Employee cynicism

Lost employee morale Employee turnover

Government cynicism Government regulation

Level 3 Costs

Section 1.2 The Importance of Ethics in Business

influences customer loyalty, employee satisfaction, and government intervention. The reputa- tion of a business encompasses its past actions, which influence its overall appeal to key stakeholders when compared to other leading rivals (Fombrun, 1996).

Trust is a fundamental component of a business’s reputation. The Edelman Trust Barometer examines the public’s perception of trust in business and governments across the globe (see Going Global: Trust in Business Relies on Integrity). In the 2014 results, less than 20% of the general public believes that business leaders will make ethical and moral decisions and tell the truth in difficult situations (Edelman, 2014). Financial services remains the industry with the lowest trust since 2009, with an global average trust of 48% due to news coverage sur- rounding mortgage fraud, money laundering, Libor manipulations, and rogue traders. How- ever, the levels of trust in the financial industry vary greatly by geographical region, from 76% in China to 23% in Ireland and Germany.

The study also examined the most relevant attributes for trusting a business. Beginning around 2008, the public’s attention began shifting from operational performance to engage- ment and integrity components. After offering high-quality products or services, the most important actions of a business include responsible engagement by listening to customers, treating employees well, placing customers ahead of profits, and honest communication. Dem- onstrating integrity is the next important attribute for a business to gain the public’s trust. Actions relating to integrity include taking responsible steps in a crisis, following ethical busi- ness practices, and transparency.

Figure 1.3: Executive decisions and the business costs of ethical failures

An ethical lapse can have long-term negative effects on an organization, such as increased expenses and loss of reputation.

Source: Thomas, T., Schermerhorn Jr, J. R., & Dienhart, J. W. (2004). Strategic leadership of ethical behavior in business. Academy of Management Perspectives, 18(2), 58. (Fig. 1).

Government fines and penalties

Level 1 Costs Administrative and audit Legal and investigative

Remedial education Corrective actions

Government oversight

Level 2 Costs Customer defections

Loss of reputation Employee cynicism

Lost employee morale Employee turnover

Government cynicism Government regulation

Level 3 Costs

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Section 1.2 The Importance of Ethics in Business

Company reputations suffer from the negative publicity of a business leader’s misconduct. Investors, employees, and consumers consider the moral behavior of top executives as a reflection of the organization’s culture. Hewlett-Packard Company has been attempting to

Going Global: Trust in Business Relies on Integrity

The importance of business ethics worldwide is evident in the results of the Edelman Global Trust Survey. The 2014 Edelman Trust Barometer is the result of an online survey of 33,000 respondents across 27 countries. The survey included 6,000 informed publics who were college-educated, had a higher household income, and read or watched news media at least several times a week for business and public policy issues.

Globally, the results showed that 58% of the population trust business, but only 43% trust CEOs as credible spokespeople. Only 21% of the population trust business leaders to make ethical and moral decisions, while 20% trust business leaders to tell the truth. The countries with the greatest trust in business include Indonesia (82%), India (79%), and Mexico (73%). The countries with the lowest trust in business include Spain (38%), South Korea (39%), and Ireland (41%).

Trust in business varies based on the nationality of the company, whether it is from an emerging market, a BRIC country (Brazil, Russia, India, China), or a developed country. Com- panies headquartered in Canada, Germany, Sweden, and Switzerland experience the great- est trust overall. Companies from emerging countries have lower trust scores, with Mexico (34%), India (35%), China (36%), Russia (38%), and Brazil (42%) forming the bottom five of the 17 countries in the survey.

Emerging markets tend to view companies headquartered in their own or other emerg- ing markets as more trustworthy than developed markets. For instance, the United States and Germany have only 18% trust in companies from Russia, whereas Russians have an average of 42% trust in Russian companies. Chinese companies experience a larger gap in trust. While 76% of the Chinese population trust companies headquartered in China, people in the United States, United Kingdom, France, and Germany have an average trust of 26% in Chinese companies.

There are two reasons for the lower trust of Chinese firms in developed countries. First, developed countries were less likely to trust companies from China to do the right thing (24%) than Chinese respondents believed (83%) (Edelman, 2013). Developed markets per- ceive a lower performance of all BRIC-based companies in transparency, ethical behavior, and responsible crisis response. Second, respondents in Germany (70%), the United Kingdom (47%), and the United States (42%) have a negative perception of state control or govern- ment interference in China.

Questions to Consider

1. How can the Edelman Trust Barometer results be used to encourage organizations to engage in ethical and responsible behaviors?

2. Imagine that a German company moves its production to China. How might German consumers’ perceptions of Chinese ethical behavior influence their acceptance of products manufactured in China? What could the German company do to address these concerns?

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Section 1.2 The Importance of Ethics in Business

overcome a series of ethical lapses affecting its reputation, including a spying scandal in 2006, criticism of the board’s handling of sexual harassment allegations against former-CEO Mark Hurd in 2010 (Kopytoff, 2011), and a foreign bribery scandal in 2014. Reactions to unethical behavior are not limited to Western and developed economies. A study of consumer responses to ethical scandals involving the founders of Chinese businesses found similar negative opin- ions of the company image (Zhu & Chang, 2013). In 2010, Huang Guangyu, the founder and chairman of retail company GOME Electrical Appliances Holding Limited, was found guilty of bribery, insider trading, and stock manipulation. The company suffered a negative corporate reputation, resulting in a 17% drop in share price due to declining sales in 2012 (Trieu, 2012).

Shift From Compliance to Ethics

Organizations struggle with delineating the functions of compliance and ethics, as well as the broader concept of corporate social responsibility. The reality is that if a company desires to be seen as a responsible business, all of these issues must be attended to, as they are interre- lated. Compliance involves not doing the wrong things and focusing on adherence to laws and regulations (Priest, 2008). Ethics focuses on doing the right thing with a greater emphasis on values such as integrity and honesty. A company with a strong ethical culture makes doing the right thing a priority through leadership, fair policies, open discussion of ethics, and rewards for ethical behavior (Treviño, Weaver, Gibson, & Toffler, 1999). An ethical business includes the broader concept of corporate social responsibility, which refers to the obligations of a business to meet or exceed the stakeholders’ expectations of organizational behavior (Maig- nan & Ferrell, 2004).

The institutionalization of the ethics and compliance functions in business is relatively young in comparison with areas such as accounting, marketing, and human resources. During the start-up phase of a business, the founder’s ethics permeate the organization through infor- mal norms, though this is not enough to prevent misconduct. In many countries, the ethical behavior within a business is implicit through embedded practices that fulfill societal expec- tations for acceptable conduct (Matten & Moon, 2008). Regulations and compliance address unethical practices by creating rules of acceptable behaviors. This focus on ethics and social responsibility goes beyond the legal requirements of business. Companies now have ethics and compliance offices with staff responsible for the ethical culture in the organization. This shift from informal norms to compliance and ethics raises some questions. What are the his- torical perspectives of ethics in business? What events shaped societal expectations of ethi- cal businesses? What led to a need for a distinct ethics function in a business? The following sections address these questions through a review of historical events that prompted a shift from compliance to ethics.

Business ethics has attracted attention since the beginning of commerce. During the early years of trading, philosophers sought to balance the social benefits of commerce including wealth acquisition and the ethical issues from the profit-seeking motive of businesspeople. The philosophers reasoned that profit-seeking commercial activity led to excess, corruption, and misery. Philosophical concepts of wisdom, moral duty, and happiness that applied to the business practices of their times are still relevant today and provide a foundation for the mod- ern business ethics and compliance discipline (Small, 2011).

Philosophers in the 1700s and 1800s explored similar concepts of business ethics and jus- tice in response to the transitions in Western Europe and the United States from agrarian,

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Section 1.2 The Importance of Ethics in Business

agriculture-based societies to industrial societies based on mass production, division of labor, and the corporation as a driving force in the economy. Religious beliefs shaped many of the ethical philosophies of modern society including Christian tenets in Anglo-Saxon countries (Dempsey, 1949; Donham, 1933; Johnson, 1957), Confucian principles of morality and har- mony in many Asian countries (Ip, 2009; Zhao & Roper, 2011), and social responsibility tenets from other religions such as Hinduism, Buddhism, and Islam (Brammer, Williams, & Zinkin, 2007). A summary of early thoughts on ethics in business is shown in Table 1.1.

Table 1.1: Early thought on ethics in business

Source Teachings on Business Ethics

Ptahhotep (2450–2300 BCE), sage and advisor to an Egyptian pharaoh

Warned of the danger that wealth and power exempts individuals of ethical responsibilities that include “vigilance against those who want to bribe or make secret deals” (Cuillla, 2011, p. 336).

Aristotle (384–322 BCE) and Cicero (106–43 BCE)

Distrusted the profit motive of business that could lead to corruption, inequality, envy, and exploitation of others and espouse justice and fair treatment of all involved in a transaction.

Adam Smith, Scottish philosopher (1723–1790)

Smith’s 1759 publication The Theory of Moral Sentiments and 1776 book Wealth of Nations supported free market capitalism and the invisible hand theory, while also promoting business ethics through notions of justice, equal opportunity, care for the poor, and liberty (Bragues, 2009; de Vries, 1989; Wilson, 1989).

Ralph Waldo Emerson (1803–1882) and Henry David Thoreau (1817–1862)

Concerned about the demise of traditional values in the United States.

Populist Movement in United States (1870s–1900)

Farmers and workers demanded reforms resulting from abuses of power by the railroads, financiers, and moguls of the era, resulting in the U.S. Interstate Commerce Commission in 1887 and the Sherman Antitrust Act in 1890.

Walter B. Donham Referenced the Lord’s Prayer to expound on the lack of ethical leader- ship (Donham, 1933).

Bernard W. Dempsey Quoted the Roman Catholic pope to propose business responsibilities of social or contributive justice (Dempsey, 1949).

Harold L. Johnson Related Christian ethical principles to business (Johnson, 1957).

Modern business ethics, compliance, and social responsibility functions come from a history of events that shape societal expectations of business. Table 1.2 lists ethical issues and busi- ness ethics developments over the past century. In each era, aspects of the socio-political environment prompted corporate responses. Social issue life cycle theory asserts that issues change over time, as does corporate attentiveness and responsiveness to issues (Ackerman, 1975). Social issues follow a path from a period in which the issue was unthinkable, to a period of increasing awareness and expectations for action, and then to a period where dealing with the issue becomes ingrained in the normal functioning of the company (Zyglidopoulos, 2003). Ethical guidelines or mandatory regulations for responsible business behavior evolve when the public and other interested parties such as individuals, organizations, associations, gov- ernments, and governmental agencies feel strongly about a social issue.

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Section 1.2 The Importance of Ethics in Business

Table 1.2: Timeline of modern business ethics and social responsibility

Era Major Ethical Dilemmas Business Ethics Developments

1900-1950s Monopolies and power abuses Labor rights Women in workforce

Antitrust laws Fair labor laws Johnson & Johnson Credo (1943) Britain’s Clean Air Act (1956)

1960s Civil rights issues Environmental issues Increased employee–employer tension Product safety Drug use

Consumer Bill of Rights (1962) Companies begin establishing codes of conduct Birth of social responsibility movement Corporations address ethics issues through legal or personnel departments

1970s Employee versus management mentality Human rights issues (forced labor, sub-standard wages, unsafe practices) Some firms cover rather than correct dilemmas

Compliance focus continues Occupational Safety and Health Act (1970) Federal Corrupt Practices Act of 1977 Values movement begins to move eth- ics from compliance orientation to being values centered

1980s Bribes and illegal contracting practices influence peddling Deceptive advertising Financial fraud Transparency issues

Defense Industry Initiative established (1986) Some companies create ombudsman posi- tions in addition to ethics officer roles

1990s Unsafe work practices in third world countries Increased corporate liability for personal damage (cigarette companies, Dow Chemi- cal, etc.) Financial mismanagement and fraud

Federal Sentencing Guidelines for Organizations (1991) Ethics Officer Association (1992) Transparency International (1993) Caremark Decision (1996) Global Sullivan Principles (1999)

21st century Financial mismanagement Cyber crime Privacy issues (data mining) Loss of privacy—employees versus employers Intellectual property theft International corruption

Sarbanes-Oxley Act of 2002 Dodd-Frank Wall Street Reform and Con- sumer Protection Act (2010) Amendments to the U.S. Sentencing Com- mission Guidelines (2004 and 2010) Anticorruption regulation extends beyond the United States:

OECD Anti-Bribery and Anti-Corruption Convention (2009) OECD Good Practice Guidance on Inter- nal Controls, Ethics, and Compliance (2010) UK’s Bribery Act 2010 Brazil, Mexico, Italy and other countries establish anticorruption legislation (2012)

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Section 1.2 The Importance of Ethics in Business

1900s–1950s: New Legislation and the Movement Toward Ethics The 20th century began with World War I, known at the time as the Great War. After the war, the United States began to focus on new experiences such as the automobile, radio, cinema, and women in the workforce. Women could vote for the first time in 1920. In Europe, the Rus- sian Revolution led to the formation of the Union of Soviet Socialist Republics (USSR), which created a fear of communism in Western Europe and the United States. The changing value system alarmed some of the U.S. population to pass a prohibition of alcohol.

The optimism of the 1920s preceded the stock market crash of October 1929 that began the Great Depression. To rally the public toward recovery, President Franklin D. Roosevelt estab- lished a number of reforms, called the New Deal. Business owners were encouraged to gen- erate a profitable return to stimulate the economy and provide for families’ income. These reforms were not enough; unemployment was still too high in 1935 and a second New Deal provided for increased consumer buying power and more government regulation of business.

Subsidized farming began in the 1930s, and the Federal Deposit Insurance Corporation insured consumer bank deposits. The Social Security Act was enacted in 1935 and instituted care for the elderly, disabled, and unemployed. The Fair Labor Standards Act of 1938 pro- vided employees a minimum wage, maximum hour limits, and abolished child labor in inter- state commerce. Scholars of this time stressed the moral obligations of business leaders to address social ills (Donham, 1927) and consider the treatment of their employees, satisfac- tion of customers, and return for investors (Chester, 1936). In 1943, Robert Wood Johnson crafted Our Credo to outline the values that guide decision making at Johnson & Johnson well before the formal practice of ethics and compliance became common practice.

By the 1950s, the U.S. economy was the strongest in the world and products made in the United States were in demand worldwide for their quality and reliability. The first modern credit card changed the way people paid for goods and services. In 1955, McDonald’s Cor- poration began with a restaurant in Des Plaines, Illinois. In an effort to support business, the government strove to curb rising costs, passed new antitrust regulations, addressed energy shortages, and reduced labor union power. In Great Britain, the smog from coal prompted the Clean Air Act and establishment of a nuclear power station to supply electricity in 1956.

1960s: A Decade of Social Unrest Advances Social Responsibility The 1960s was a decade of social unrest around the world. In the United States, polls showed that people began having antibusiness attitudes in the mid-1960s, believing that companies held too much control and power (Lipset & Schneider, 1983). An antiwar sentiment prevailed as the participation of troops in the Korean conflict ended, and the Vietnam War escalated. Social movements argued for equality for women and minority groups. The civil rights move- ment began in 1955 when Rosa Parks refused to give up her seat on a bus in Alabama, and Martin Luther King, Jr. emerged as the movement’s leader. Nine years later, President Lyndon B. Johnson signed the Civil Rights Act of 1964, ending discrimination based on race, color, religion, sex, or national origin. Internationally, violence to maintain apartheid in South Africa resulted in pressure for businesses worldwide to disinvest. Violence in the United States included the assassinations of Malcolm X, Martin Luther King, Jr., and John F. Kennedy.

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Section 1.2 The Importance of Ethics in Business

Conflicts arose in the workplace between management and employees. In response to the social strife of the 1960s, the music, clothing, hairstyles, and outlook created an antiestablish- ment culture. Drug use increased as heroin and LSD became a way of escape. A popular senti- ment at the time was to blame capitalism and materialism for corrupting society and harming the environment. Values shifted from employer loyalty to ideals of love and freedom from materialism. Initially, companies were not sure how to respond to this cultural change. Legal departments began drafting codes of conduct to establish guidelines of acceptable behavior in the workplace.

The decade saw a rise of consumer rights movements to set an expectation that businesses act responsibly in their product and service offerings, selling methods, and advertising. In 1962, President John F. Kennedy outlined the Consumer Bill of Rights, which became the ethi- cal standard for a company to meet customer expectations. This includes the right to safety, the right to be informed, the right to choose, and the right to be heard. During this period, two books contributed to the consumer rights movement: Silent Spring by Rachel Carson spurred a call to terminate the use of the toxic chemical DDT and demanded that businesses consider the ecosystem and long-term effects on human, animal, and plant life, while Unsafe at Any Speed by Ralph Nader exposed the automotive industry’s marketing of unsafe products to make a profit. From the efforts of consumer activist groups, consumer protection laws such as the Clean Air Act of 1963, National Traffic and Motor Vehicle Safety Act (1966), and numerous acts within the Food and Drug Administration were passed to enforce honest product labels and warnings of hazardous substances.

As employee, consumer, and environmental issues gained traction among the public, pressures mounted for businesses to adopt socially responsible practices. New companies emerged to provide alternatives to the products from big business. Celestial Seasonings was founded in 1969, offering natural teas made from herbs gathered by hand from the Rocky Mountains, which were packaged in hand-sewn muslin bags and distributed in local health food stores. Social responsibility efforts received criticism as well. Friedman’s book Capitalism and Free- dom argued for a free market in which the social responsibility of business is to make a profit as long as it “engages in open and free competition, without deception or fraud” (Friedman, 1962/2009, p. 133).

1970s: Scandals and Social Issues Lead to New Agencies and Guidelines The antibusiness attitude prevailed during the 1970s as the world faced environmental crises, a recession, and ethical scandals. Business ethics and social responsibility became a focal topic in academic institutions with conferences that attempted to promote the study of ethical decision making. John Rawls’s A Theory of Justice (1971) became the foundation for principle-based ethical reasoning. The events of the 1970s had the greatest influence on business ethics, and were a result of investigations of the Watergate scandal that exposed the fact that U.S. companies were bribing foreign government officials. Businesses asserted that bribery was legal in most countries and was the cost of doing business internationally. In 1976, major U.S. defense contractor Lockheed revealed that payments to foreign govern- ments to secure business totaled $22 million.

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Section 1.2 The Importance of Ethics in Business

Amid strong lobbying of business against regulation, Congress passed the Foreign Corrupt Practices Act of 1977 (FCPA) that makes it illegal for any company or person in the United States to bribe government officials of other countries. Within the FCPA was a requirement that publicly traded companies maintain records and have adequate internal accounting con- trols to demonstrate compliance with the law. This burden on the legal departments was the precursor to a formal ethics and compliance function within U.S. corporations. Although U.S. companies initiated compliance efforts, critics argued that the FCPA inhibited competitive- ness in international trade.

Social issues of environmental concerns, worker safety, and the feminist movement height- ened during the 1970s. Environmentalism led to the establishment of the Environmental Pro- tection Agency in December 1970. Then, a 1973 embargo and production reduction by the Organization of the Petroleum Exporting Countries created an international energy crisis. Due to the resulting shortage and oil price increases, businesses were encouraged to con- serve energy through reduced business hours and energy efficient products. Unsafe work- ing conditions resulting in deaths and injuries prompted the creation of the Occupational Safety and Health Administration by President Richard M. Nixon and Congress in 1970. Both the environmental and labor activists were outraged when a nuclear accident at Three Mile Island occurred in 1979. The disaster brought regulatory scrutiny on the health and safety of nuclear power plants in the United States.

The feminist movement gained momentum during the 1970s. Women attended professional schools in preparation for entering the workforce at higher paying jobs than the traditional secretarial and nursing professions available to them. Activist Gloria Steinem led a movement for equality in the workplace that included large marches in New York. Businesses responded by marketing to women, such as the cigarette advertisement “You’ve come a long way, baby.” Despite this progress, Workforce Management magazine noted, “judging from a January 1975 article in Personnel Journal, the forebear of Workforce Management, some of the concepts embraced by the women’s movement, including equality in the workplace and the C-suite, were not going over well in tradition-bound workplaces” (Hauser, 2012, p. 30).

In response to the ethical scandals with international implications and addressing the social issues of the time, companies began to communicate their values and principles for business practice within their organization. To incentivize companies to disinvest from South Africa dur- ing apartheid, Reverend Leon Sullivan established the first Sullivan’s Principles to guide busi- ness in responsible behavior. Reverend Sullivan was a member of the General Motors Company’s board of directors and was instrumental in shaping the organization’s core values. As Wal-Mart Stores, Inc. incorporated in the 1970s, the ethical values of founder Sam Walton included respect for the individual, service to our customers, and striving for excellence (Walmart, 2008).

1980s: Industries Take Action for Ethical Compliance Business ethics became a prominent issue in the 1980s. Business leaders recognized a need to demonstrate ethical practices in light of increased regulation, the advent of cable news net- works, and the heightened sensitivity to ethical misconduct. General Dynamics Corporation and other companies established formal ethics programs that included detailed standards of business ethics and conduct. A major driver of corporate attention on ethics and compliance derived from the Defense Industry Initiative on Business Ethics and Conduct (DII) (Defense

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Section 1.2 The Importance of Ethics in Business

Industry Initiative, n.d.). The DII is the result of a 1986 voluntary meeting of 18 defense con- tractors to establish guidelines for an effective ethics and compliance program. The group identified six core principles that remain the basis of the industry initiative today:

1. A requirement and adherence to a written code of conduct. 2. A need for employee training of the application of the code of conduct. 3. The creation of an atmosphere to encourage employee reporting of violations with-

out fear of retribution. 4. Self-governance through compliance monitoring and processes for voluntary disclo-

sure of violations. 5. Learning from peers through sharing of best practices. 6. Member companies agree to accept accountability for their actions.

1990s: Ethics and Compliance Profession Gains Recognition In the 1990s, companies witnessed how global expansion, emergence of the Internet, and a changing geopolitical landscape brought new ethical challenges to business. During this period, business expanded geographically into previously unacceptable regions. South Africa repealed apartheid laws and the USSR collapsed, opening markets in Poland, Hungary, and other Eastern European countries. Western European countries adopted a common currency and began easing country-specific regulations. These increases in international business brought greater ethical risks in child labor abuses, bribery, price manipulation, and home country unemployment due to offshoring manufacturing. Bribery and corruption remained a complex issue. In 1993, an anticorruption advocacy group, Transparency International, began a campaign to expose corrupt governments and encourage ethical behavior worldwide. In the United States, Medicare and Medicaid fraud resulted in scrutiny of the healthcare indus- try. The subsequent Caremark Rx decision impacted the role of boards of directors beyond healthcare (Robinson & Pauze, 1997).

In response, ethics and compliance professionals gained acceptance as an integral part of their organization’s ethics, compliance, and business conduct programs. The Ethics Officer Association formed in 1992 in recognition of the need of an organization for the new profes- sion of ethics officers. This organization became the Ethics & Compliance Officer Association that provides members a platform for learning effective ways to address ethical issues in their organizations. The organizational ethical compliance programs followed the Federal Sentenc- ing Guidelines for Organizations (FSGO) approved by Congress in 1991. The guidelines allow for lesser penalties for violations when a company can demonstrate a process for prevent- ing misconduct and cooperates with the regulatory agency. Based on the DII principles, the FSGO provided businesses an incentive to avoid ethical misconduct by establishing a culture of compliance based on the company’s values.

The 21st Century: New Ethical Issues Drive New Regulations The 21st century saw further institutionalization of the ethics and compliance functions in organizations in response to high-profile accounting scandals, unsound mortgage practices, and financial ethical lapses. To address a loss of confidence in financial reporting and cor- porate ethics, Congress passed the Sarbanes-Oxley Act of 2002 that made securities fraud a criminal offense and stiffened penalties for corporate fraud. On July 21, 2010, President

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Section 1.2 The Importance of Ethics in Business

Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protec- tion Act to introduce regulations affecting executive compensation, corporate governance provisions, and mortgage and lending practices. Amendments to the FSGO in 2004 and 2010 strengthened the requirement for an ethical culture in an organization, including regular risk assessments, reporting to the board of directors, and inclusion of ethical performance in employee appraisals. More countries are implementing anticorruption regulations, some of which are more stringent than the FCPA.

In addition to government regulation, companies saw increased societal pressure to take responsibility for the direct and indirect outcomes from their core business. Consumer groups used social media or protests to generate public outcries for responsible business. When reports of a bottler of The Coca-Cola Company in Colombia was allegedly involved with paramilitary murders of union organizers, student activist demonstrations cost the beverage company millions of dollars in college contracts (Foust, Smith, & Woyke, 2006). Concerns of obesity pressured snack and fast food companies such as Pepsi, McDonald’s, and KFC Cor- poration to change their product offering and marketing strategies to promote healthy food choices (“Corporate reputations: The blog in the corporate machine,” 2006).

Business Benefits

Recognizing the exorbitant costs related to paying fines and lost reputation, companies have turned their attention to preventing misconduct and legal violations. Small companies often do not have the resources to invest in compliance when regulations impose requirements for staffing, training, and auditing. Companies in the defense, healthcare, and financial industries struggle to address the rising costs of meeting new legislation because of large-scale ethical violations. As the profession and function mature, companies worldwide are recognizing the financial returns of an ethics and compliance program. According to the LRN Ethics & Com- pliance Leadership Survey (2013), 80% of the leaders consider long-term value and business performance as the greatest benefit of an ethical culture. An ethical business attracts inves- tors, strengthens employee commitment, drives customer satisfaction, and enhances finan- cial performance.

Investors are drawn to and typically remain with ethical businesses. The growth of social and ethical investment criteria among shareholders, mutual funds, and pension asset man- agers demonstrate increased demands for good citizenship (Henderson, 2000). In Europe, a greater concern with a broader stakeholder perspective has changed the capital structure, as the United Kingdom, Germany, Switzerland, and Austria now commonly practice value-based management (Mills & Weinstein, 2000). Likewise, stock price reactions primarily attributed to institutional investors occur when corporations announce the enactment of corporate governance guidelines to increase transparency and accountability (Picou & Rubach, 2006). Shareholder resolutions have become increasingly successful at promoting corporate change in global social responsiveness. In 2006, shareholders asked four companies (Lear Corpora- tion, C.R. Bard, Inc., Bed Bath & Beyond Inc., and Time Warner Inc.) to develop and monitor a code of conduct for their operations and suppliers based on conventions of the International Labour Organization and the UN Norms on the Responsibilities of Transnational Corpora- tions and Other Business Enterprises with Regard to Human Rights.

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Section 1.2 The Importance of Ethics in Business

Employees care if their employer acts ethically. A survey of U.S. employees found that the majority feel it is “critical” or “important” that the company that they work for has ethical business practices and one third of “employed Americans have left a job for ethical reasons” (LRN, 2007c, p. 1). A strong ethical culture creates greater employee commitment, loyalty, and job satisfaction, all of which affects productivity. Ethical lapses, on the other hand, create a distraction for the workforce. One employee can spend anywhere from a day to a month struggling with an unethical dilemma and will include an average of eight other employees to help address the issue (LRN, 2007d). An ethical business can attract talent more easily than a company with a reputation for dishonesty. A survey of graduating college students found that 58% of those surveyed would consider accepting a pay cut of 15% to work for an organization with values that align with their personal values (Net Impact, 2012).

Companies are recognizing the return on investment of ethics and social programs relating to human resource metrics. In a seven country study of the positive outcomes of corporate social responsibility (CSR) programs, seven of the 10 outcomes relate to employees, includ- ing improved morale, loyalty, increased retention, increased recruitment of top employees, and increased workforce productivity (Schramm, 2007). Differences persist among the coun- tries regarding the extent to which CSR influenced improvements in employee outcomes. For instance, managers perceive that CSR has improved employee morale in Brazil (68%), Australia (63%), the United States (61%), Mexico (61%), India (58%), and Canada (50%). Only 26% of the companies surveyed in China consider employee morale as an outcome of CSR programs.

A company’s reputation for ethical practices influences customer satisfaction. Customers consider their total purchase and consumption experience with a good or service over time (Fornell, 1992). Perceived fairness is a strong predictor of customer satisfaction. Unethical marketing that exploits or harms another party reduces the customer’s evaluation of per- ceived fairness and risks alienating the most committed customers (Ingram, Skinner, & Taylor, 2005). Customer satisfaction has significant implications for a company’s economic perfor- mance through repeat purchases, lower warranty expenses, and field service costs (Bolton, Lemon, & Verhoef, 2004). Additionally, customers are more loyal and less price sensitive if a company is reputed to be ethical and socially responsible.

To test this idea, The Wall Street Journal conducted an experiment to determine if consum- ers would pay a premium for ethically produced products and penalize firms for generating products unethically. For the study, ethically produced goods met three conditions: 1) pro- gressive programs for employees and consumer safety; 2) environment-friendly technol- ogy; and 3) respect for human rights, e.g., no child labor. Findings from multiple tests show that “consumers were willing to pay slightly higher prices for the ethically made goods. They would buy unethically made products only at a steep discount” (Trudel & Cotte, 2008, para. 5).

There is mounting evidence of a correlation between ethics and profitability. Academic studies have shown that responsible business practices contribute to greater financial performance (Orlitzky, Schmidt, & Rynes, 2003). Firms on the World’s Most Ethical Companies list outper- formed their peers in the stock market by an average of 7% to 8% annually (Areal & Carvalho, 2012). According to Corporate Executive Board research, companies with a high integrity corporate culture realized a 7.9% average annualized shareholder return for companies ver- sus 2.1% at other companies (“Why Integrity Pays,” 2014). Strong ethics can avoid short-term focus and generate long-term sustainability. For example, financial services companies like

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Section 1.3 The Individual’s Role in Business Ethics

Charles Schwab & Co., Inc. and U.S. Bancorp that focus on honesty and transparency avoid the pressures to market deceptive mortgages or investment schemes that could erode profitabil- ity and sustainable financial solvency (Wadhwa, 2009).

1.3 The Individual’s Role in Business Ethics Ethics in business is everyone’s responsibility. As citizens of a society, we can voice concerns about irresponsible business practices through voting and pressuring for regulation. As con- sumers, we can choose what products and from whom we purchase. As employees and man- agers, we can hold our coworkers and leadership accountable for doing the right thing, but as individuals, we are responsible for our own actions. A business is not a person; it consists of individuals that work toward achieving the organization’s goals. To hold businesses to an ethical standard, yet engage in unethical behaviors ourselves creates a difficult situation. In this section, we examine the responsibilities of three groups of individuals—customers, employees, and managers.

Customers

Would you lie about your child’s age for a lower ticket price? Would you use a friend’s employee discount for goods or services? Have you ever purchased a product with the inten- tion of returning it after use? Would you report a lost item as stolen to an insurance company in order to collect the money? These situations are related to consumer ethics, defined as “the moral rules, principles and standards that guide the behavior of an individual or groups in the selection, purchase, use, or sale of a good or service” (Muncy & Vitell, 1992, p. 298) or the extent to which consumers believe that certain questionable behaviors are either right or wrong (Vitell, 2003). Unethical consumer behavior has risen in response to the global economic recession. The United Kingdom had over 107,000 fraudulent insurance claims in 2008 that cost the insurance industry £730 million ($926 million) (“Fraudulent insurance claims on the up,” 2009). Customers can pressure employees to give unauthorized free or discounted goods and services, referred to as sweethearting (Brady, Voorhees, & Brusco, 2012). For example, a frequent customer will ask for a military or business discount when not eligible, convincing an employee to give it “just this once.” Additionally, employees can be willing to accept returns without question from friends and family than from other custom- ers. The costs of customer misconduct force companies to establish preventive controls, such as stricter return policies or rigorous accounting requirements.

Through their actions and choices, customers have the power to encourage responsible busi- ness practices. Ethical consumerism refers to buying products that align with moral beliefs by basing purchases on such social components as responsible procurement, production, and marketing. The ethical consumer market is so large that the segment has its own acronym: LOHAS, referring to Lifestyles of Health and Sustainability. There are a number of organi- zations, publications, and software apps to help consumers find products from responsible companies. One such organization, Enough Project, creates a report that highlights compa- nies that have done the most to ensure ethical sourcing of minerals and buying from repu- table suppliers rather than those with ties to violent militias and criminal networks.

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Section 1.3 The Individual’s Role in Business Ethics

Employees

Each individual working in an organization has the opportunity to engage in ethical or unethi- cal behavior. As an employee, how comfortable are you in handling ethical dilemmas in the workplace? Ethical self-efficacy relates to an individual’s belief that he or she can make cor- rect ethical decisions. When employees are unsure of their abilities to achieve a successful outcome, they are more likely to avoid threatening situations they believe exceed their cop- ing skills (Bandura, 1977). Individuals with higher ethical self-efficacy are less influenced by peers and therefore have a lower propensity for engaging in unethical behavior (Treviño, 1986). Employees can develop greater ethical self-efficacy through experiences with ethical issues, training and practice, and observing leaders as role models for ethical behavior. As employees become more confident in their ethical decision-making abilities, they are more likely to speak up or take action when observing misconduct in an organization.

Recognizing the importance of ethical compliance, companies seek employees who not only meet the technical requirements of the job but also demonstrate a strong moral character. Background checks of job candidates often include verification of education, work experi- ence, and criminal records. A semi-annually published Liars Index® finds that one in five job seekers misrepresents his or her education claims even though such falsehoods are grounds for immediate dismissal (“Liars Index News,” 2013). Zappos.com is one company that invests significant time and effort during the recruiting process to select candidates who fit within its culture. For each hire, the human resource department completes a set of interviews looking for individuals whose personal values match the company’s corporate values (Hsieh, 2010). Job candidates for any company should carefully consider how to answer behavioral ques- tions that explore their personal ethical standards (see Checklist: Prepare for Ethics-Related Questions in Job Interviews).

Checklist: Prepare for Ethics-Related Questions in Job Interviews

According to human resource recruiters, the following questions and scenarios allow manag- ers to seek employees with a high ethical bar.

1. Have you ever faced an ethics challenge on the job? Explain the situation. 2. Were you ever aware of a coworker who violated a company’s ethics policy? What

did you do? 3. What is the difference between an ethical company and an ethical person? 4. Why are ethics important in the workplace? 5. Describe your most important workplace ethics. 6. Have you read our company’s ethics policy? What do you think? 7. Did you ever see or do anything on the job that troubled your conscience? How did

you handle the situation? 8. Did you ever see an employee steal anything from the workplace? What did the

person take and how did you react? 9. Has a manager, coworker, or customer ever asked you to do anything unethical?

What was your reaction? 10. Did you ever have ethics training or education? What did you learn?

Source: “Honest or not? 10 questions to spot ethical applicants,” 2013.

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Section 1.4 The Organization’s Role in Business Ethics

Managers

A manager or supervisor must utilize leadership skills to foster an environment that values ethical conduct. While managerial skills relate to coping with complexity through processes of planning, goal setting, organizing, staffing, budgeting, and auditing, leadership relates to coping with change by inspiring and motivating people (Kotter, 1990). Ethical leaders at the executive and management level are the champions for responsible management who encourage ethical behavior that aligns with the purpose, vision, and values of the organiza- tion (Freeman & Steward, 2006). Having a leader that encourages ethical behavior can reduce employee stress and improve job satisfaction. Employees are also more likely to feel confident in doing the right thing. A long-time employee of Ecolab Inc. shared, “I am thankful that I am at a company that I don’t have to ‘go there’ [compromise his/her ethics]—I’m fortunate enough that I don’t have to make those decisions. It is something that the company is very proud of ” (Gonzalez-Padron, 2011, p. 41). A manager can make a difference in the ethical behavior of his or her staff.

1.4 The Organization’s Role in Business Ethics Business organizations must provide guidance to customers, employees, and managers on the acceptable behaviors in the workplace. To prevent misconduct and encourage ethical behav- ior, companies invest in a formal ethics and compliance program. The U.S. Federal Sentencing Guidelines require companies to show that processes are in place to “exercise due diligence to prevent and detect criminal conduct; and otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law” (United States Sentencing Commission, 2013). There are eight requirements for an ethics and compliance program that meets the sentencing guidelines:

1. Standards and procedures; 2. Program oversight and management; 3. Delegation of substantial authority; 4. Training and communication; 5. Checking evaluation and reporting; 6. Consistent disciplinary procedures and incentives; 7. Response to critical issues; and 8. Periodic risk assessment.

Implementing an effective ethics and compliance program requires the commitment of top management, a culture that encourages ethical behavior, consideration of multiple stakehold- ers, and company-wide engagement through functional integration.

Top Management Commitment

Top management’s commitment to focus on ethical programs is the most important compo- nent for encouraging ethical behavior. Managers’ concern for employees, suppliers, and the community signals to the organization that ethical issues are just as valid as the financial bot- tom line. Lack of emphasis on social issues, on the other hand, communicates apathy toward ethical responsibilities and an unwillingness to devote time or effort into anything other than

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Section 1.4 The Organization’s Role in Business Ethics

maintaining the profit margin of the organization. The UK Bribery Act of 2010 identifies top management commitment as necessary for implementing effective anti-bribery processes. The guidance document states:

The top-level management of a commercial organisation (be it a board of directors, the owners or any other equivalent body or person) are commit- ted to preventing bribery by persons associated with it. They foster a culture within the organisation in which bribery is never acceptable. (Ministry of Jus- tice, 2011, p. 23)

Top management commitment is termed tone at the top by The Committee of Sponsoring Organizations of the Treadway Commission (COSO), which provides guidelines for internal controls to deter fraudulent financial reporting. Tone at the top refers to leadership’s con- cern for ethics, the ethical atmosphere in the workplace, and the actions of the senior exec- utives. “With a good tone at the top, companies will disclose all news, both good and bad, that’s likely to influence shareholder actions and behavior” (King, 2013, p. 28). COSO stresses that tone at the top is a critical factor in the accuracy of financial reporting. Consider the consequences of the tone of Enron or WorldCom’s leadership while questionable account- ing practices became acceptable practice. Colleen Cunningham, former president and CEO of Financial Executives International, a professional organization serving chief financial officers (CFOs), noted how the requirement of management control of compliance relates to tone at the top through these examples:

Enron had a robust code of ethics that was routinely bypassed for senior exec- utives (the board provided Enron’s CFO with an exemption from the conflict of interest code, for instance). Therefore, the tone was that “although we have a written code, it does not need to be followed.” The culture of the organization almost encouraged breaking the rules and pushing the envelope—anything to keep the stock price propped up.

Similarly, at WorldCom, CEO Bernie Ebbers may not have uttered the exact words “commit fraud to keep our stock price up,” but he implied it when he gave the message that “the stock price can’t go down. The Street is expecting a certain number—deliver it.” (Cunningham, 2005, p. 6)

Company leaders set an example for ethical behavior through their actions. Leaders that dem- onstrate integrity and ethical leadership encourage ethical conduct throughout the company and an informal culture of doing the right thing develops.

Ethical Culture

An organizational culture that encourages ethical conduct and compliance with the law is a core criterion for meeting the U.S. Federal Sentencing Guidelines. According to Stephen Cohen, associ- ate director of the Division of Enforcement of the SEC, “A strong ethical culture flows from good governance and requires leaders to promote integrity and ethical values in decision-making across the organization” (U.S. Securities and Exchange Commission, 2013c, Hallmarks of compli- ance programs section, para. 14). The ethical culture of a business describes the degree of orga- nizational commitment to ethical responsibilities with expectations for appropriate behaviors of

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Section 1.4 The Organization’s Role in Business Ethics

its employees and suppliers. A culture that promotes and monitors ethical standards is a found- ing principle for responsible companies.

Companies establish an ethical culture using business ethics programs that guide employees’, suppliers’, and distributors’ expected conduct through training and communications, advice and reporting mechanisms, and monitoring through auditing systems. A comprehensive code of ethics sets the bar for the way in which a corporation handles all of its operations. The difference between success and failure of the company as a whole can be determined by the strength of its ethics code. A strong ethical culture depends on the extent to which ethical practices are encouraged by top management, and how well the code of ethics is executed by all employees. An organization that emphasizes ethics naturally tends to gravitate toward socially responsible practices of all company stakeholders.

Stakeholder Engagement

Stakeholder engagement is a fundamental part of an ethical business. Engagement with stakeholders enables a company to communicate how they intend to incorporate ethics and corporate social responsibility into their business practices. The trust and cooperation of stakeholders is imperative because they will then perceive the company as less risky, opening up future business opportunities and improving financial performance. Global ethical guide- lines, such as the Caux Round Table Principles for Responsible Business, stress that com- panies consider and respect the interests of multiple stakeholders. The Caux Round Table provides Stakeholder Management Guidelines with further details on actions that treat each stakeholder group with dignity and respect.

Ethical companies recognize important stakeholder groups, their key issues, and their poten- tial for helping or harming the business. Industry leaders that develop expertise in stake- holder engagement are able to address their concerns and interests. Stakeholder engagement includes processes for information gathering about the interests and expectations of stake- holders, information giving to share activities and performance, and dialogue and consulta- tion. Tactics vary from informal avenues such as staying in touch with customers or discussing ethical issues in other communiqués, and formal strategies such as dialogue, surveys, and inviting representatives of stakeholder groups to serve on the board of directors.

Functional Integration

When instituting a top-down initiative to promote ethical awareness and ethics programs, employee engagement at all levels is imperative to gain support and compliance. This can be a challenge, as the perception of the company’s ethical culture varies among employees. A senior manager is often more confident of an organization’s ethics than its line employees. This perceptual gap among executives, mid-level managers, and non-managerial employees can vary by country and tenure. A study of 40,000 employees from businesses in six countries found that greater differences of ethical culture assessment occurs between senior level and non-managerial employees, especially in U.S., Brazilian, and German companies (Ardichvili, Jondle, & Kowske, 2012). The study found that the longer the employees stay with a company, the more likely they are to have a lower view of the organization’s ethical culture than senior management.

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Summary & Resources

Perceptual differences in ethical programs occur when employees observe inconsistent enforcement of the codes of conduct or undisciplined actions contrary to stated company values. Formal ethical programs to disseminate company values have little effect if they are inconsistent with the informal culture that guides employees’ behavior. An informal culture evolves as employees “learn the ‘true values’ of the organization” (Bazerman & Tenbrunsel, 2011, p. 117). Unofficial messages of ethical norms form through employee stories, observa- tions, and experiences. Informal cultures can occur throughout the company, within a branch, or within a single department. Bringing together all the functional units of an organization can encourage support of the ethical programs and policies.

Functional integration in business relates to the degree to which differentiated functional units in an organization engage in formal interaction and unstructured collaboration (Vad Baunsgaard & Clegg, 2013). In business ethics, functional integration refers to the process of driving ethics throughout the organization. Each department within the corporation faces unique ethical challenges. For a strategy to achieve the greatest outcome, functional areas must perceive advantages in engaging with others. The Korean steel company, POSCO, embraces functional integration of business ethics not only within departments, but also with custom- ers and suppliers. Its award-winning ethics program incorporates training and support for employees at all levels, encompassing three components. First, the ethics program provides repetitive training of managers, employees, overseas subsidiaries, and suppliers. The second component relates to the embodiment of ethics in employees through tools for ethical deci- sion making, promotional messages, ethics conferences, and rewards for reporting unethical practices. The third component is ethical practice, where all employees participate in identi- fying and improving the ethical risks of their functional area. The POSCO ethical management program strives to address the hierarchical gaps of ethics program effectiveness, informal cultures within an organization, and disincentives for functional unit noncompliance.

Summary & Resources

Chapter Summary This chapter provides an overview of ethics in business to establish the foundation for the study of business ethics and social responsibility. Business ethics relate to the rules, prin- ciples, and standards for deciding what is morally right or wrong when doing business. Values and principles are the cornerstone for making ethical decisions. Values are beliefs of what is important to a person or organization, while principles are fundamental, unchanging state- ments of belief by an individual or business used as a guide or method for making decisions that the individual/business will not violate. A responsible business meets or exceeds the organizational behavior expected by its stakeholders, or any group or individual who can affect or is affected by the achievement of the organization’s objectives.

Companies that conduct business in multiple countries must consider the differing values and norms that derive from cultural, religious, and political forces. International businesses can adopt a relativistic approach of allowing variability in organizational ethical standards to account for local interpretations of what is right or wrong, or an ethical imperialistic approach that enforces the headquarters’ values and principles regardless of local customs or ethical standards. International companies should consider hypernorms, or shared values, that guide appropriate conduct for humanity.

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Summary & Resources

The institutionalization of business ethics and corporate social responsibility derives from the social and political events of the past century. Visible ethical lapses of corporate leaders erode trust in business. In response, movements for labor protection, customer rights, femi- nism, and environmental protection influence society’s expectation for ethical and respon- sible business practices. Organizations that implement strong ethical programs with a culture based on values are more likely to attract investors, strengthen employee commitment, drive customer satisfaction, and enhance financial performance.

Ethics in business is everyone’s responsibility. As consumers, we can choose what products and from whom we purchase. As employees and managers, we can hold our coworkers and leadership accountable to do the right thing. Each ethical employee can encourage others to act ethically by doing so themselves. Ethical leaders that follow the organization’s ethical principles are the champions for responsible management and demonstrate integrity, fair- ness, and trustworthiness. Companies can implement ethics and compliance programs to support ethical behavior of customers, employees, and managers. Implementing an effective ethics and compliance program requires the commitment of top management, a culture that encourages ethical behavior, consideration of multiple stakeholders, and a company-wide engagement through functional integration.

Key Terms

business ethics The rules, principles, and standards for deciding what is morally right or wrong when doing business.

compliance approach An ethics program that focuses on preventing, detecting, and punishing legal violations.

consumer ethics The moral rules, prin- ciples, and standards that guide the behavior of an individual or groups in the selection, purchase, use, or sale of a good or service.

corporate social responsibility The obligations of a business to meet or exceed the organizational behavior expected by its stakeholders.

ethical consumerism The purchase of products that align with moral beliefs by basing purchases on social components like responsible procurement, production, and marketing.

ethical culture The degree of organiza- tional commitment to ethical responsibilities with expectations for appropriate behaviors of employees and suppliers.

ethical fading A process by which a person does not realize that the decision he or she is making has ethical implications and thus ethical criteria do not enter into the decision.

ethical imperialism An approach to business ethics in which an organization imposes the standards of the company headquarters to all operations regardless of respecting cultural differences.

ethical issue A problem, situation, or opportunity requiring an individual, group, or organization to choose among several actions that must be evaluated as right or wrong, ethical or unethical.

ethical lapse A short-term or temporary deviance from normal standards of conduct.

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Summary & Resources

ethical leader A champion for responsible management by encouraging ethical behav- ior that aligns with the purpose, vision, and values of the organization.

ethical self-efficacy The belief that an indi- vidual can make correct ethical decisions.

ethics The moral values and principles that help determine if a decision, choice, or action is right or wrong.

Foreign Corrupt Practices Act (FCPA) Legislation that makes it illegal for any com- pany or person in the United States to bribe government officials of other countries in order to obtain or retain business.

functional integration The degree to which differentiated functional units in an organization engage in formal organizational interaction and unstructured collaboration.

hypernorms Principles so fundamental that, by definition, they serve to evaluate lower-order norms, reaching to the root of what is ethical for humanity.

moral relativism A belief that ethical judgments are tied to societal factors such as class, race, gender, age, and religion that allow people to have differing views on what is right or wrong.

principle A fundamental, unchanging statement of belief by an individual or busi- ness used as a guide or method for making decisions that the individual/business will not violate.

stakeholder Any group or individual who can affect or is affected by the achievement of the organization’s objectives.

sweethearting Employees giving pref- erential treatment to customers such as unauthorized free or discounted goods and services.

tone at the top Leadership’s concern for ethics, the ethical atmosphere in the workplace, and the actions of the senior executives.

universalism A belief that certain abso- lutes apply regardless of circumstances.

value congruence The similarity between individual and organizational values.

values-based culture A business environ- ment that encourages ethical behavior and integrates the organization’s values into strategic decisions.

values Beliefs of what is important to a person or organization.

Critical Thinking and Discussion Questions

1. Identify your personal ethical values. Examples of these include equality, integrity, service, responsibility, accuracy, respect, dedication, diversity, loyalty, credibility, honesty, teamwork, excellence, accountability, quality, efficiency, dignity, collabora- tion, stewardship, empathy, courage, wisdom, compassion, friendliness, and gener- osity. How can you assess if a company shares your values?

2. Imagine that you are starting your own company, and hope to employ 150 people within five years. What are the core ethical values that you would want to inspire and guide your employees from day one? How could you guide employees to apply those core ethical values in specific situations? (Consider the role of ethical prin- ciples in guiding behavior in the workplace.)

3. Do you believe large fines deter companies from engaging in unethical behaviors when the culture they operate in pressures the firm to make a profit at any cost? Why is it difficult for companies to balance ethics and business? Why would a

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Summary & Resources

compliance approach to business ethics be lacking in preventing misconduct? What would you recommend to a company to avoid the financial damage and negative publicity associated with ignoring ethical issues and violating laws?

4. What drives companies to adopt a “do as the Romans do” approach to ethics in inter- national markets? How can a global firm best ensure that it is taking into account the perceptual differences that may exist because of diverse cultures, religions, ethnici- ties, and political-economic systems in addressing business ethics?

Case Study: Customer Service or Fraud Prevention?

Handling customer requests for withdrawals from investment accounts is a typical transac- tion for Bill, an associate at a global investment management firm that serves individuals, financial intermediaries, and institutions. One morning, Bill receives a call from Telecom- munications Relay Service (TRS), a service that allows people with hearing or speech dis- abilities to place and receive telephone calls. The TRS communication assistant conveys to Bill that the call is on behalf of a deaf customer of the investment firm named Mr. Smith. Bill follows the verification procedures by checking Mr. Smith’s full name, Social Security number, mailing address, date of birth, hire date of current employer, and the approximate account balance against the information on the account. Mr. Smith requests a withdrawal of $20,000 transferred to a personal bank account.

Bill wants to review the withdrawal request to ensure that it will meet Mr. Smith’s needs and complies with company guidelines. Company management frequently states that cli- ents come first and that preserving the client’s trust is critical to the success of the financial industry. The company has a reputation of fair dealing, honesty, objectivity, and integrity. Employee training stresses following federal, state, and international regulations and that noncompliance subjects the firm and its employees to sanctions and fines. Bill does not want to be the employee that creates legal troubles for the company.

The initial withdrawal request raises no flags, but as he accesses the account history, Bill notices that Mr. Smith had withdrawn amounts over $10,000 twice in the past two weeks. Bill mentions these withdrawals to Mr. Smith through the TRS communications assistant. Mr. Smith responds that the funds are for a home renovation project. Bill still feels that something is not right, but does not want to upset Mr. Smith by accusing him of dishonesty. Since the withdrawal meets all of the requirements, he transfers the funds to the bank account number Mr. Smith provides.

About a week later, Bill’s manager receives a call from the actual client, Mr. Smith. He demands that the company explain the withdrawals from his account adding up to $80,000 over the past four weeks. Pursuant to an investigation into Mr. Smith’s claim, the manager finds that some- one stole Mr. Smith’s identify and made withdrawals on the account. The account information was in an unsecured file on Mr. Smith’s personal computer. Additionally, Mr. Smith is not deaf, and the TRS call that Bill received was fake.

Questions to Consider

1. What are the consequences from the unauthorized withdrawals for Bill, Mr. Smith, and the company?

2. Did Bill act appropriately in making the withdrawal transaction? What would you have done if something in the request didn’t feel right?

3. How did the organization’s values and leadership influence Bill’s actions? Would you recommend changes to the company’s ethical and compliance program?

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Summary & Resources

Suggested Resources

Ethics and Compliance Officers Association

http://www.theecoa.org

Financial Times Responsible Business

http://www.ft.com/reports/responsible-business

Defense Industry Initiative

http://www.dii.org

Federal Sentencing Guidelines

http://www.ussc.gov/guidelines-manual/2014-ussc-guidelines-manual

Foreign Corrupt Practices Act of 1977

http://www.justice.gov/criminal/fraud/fcpa/

UK Bribery Act 2010

https://www.gov.uk/government/publications/bribery-act-2010-guidance

U.S. Securities and Exchange Commission (Sarbanes-Oxley Act of 2002, Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010)

http://www.sec.gov/about/laws.shtml

POSCO

http://www.posco.com/

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