OMM 640 Business Ethics and Social Responsibility

3 Identifying Ethics Issues

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Learning Outcomes

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

• Detect the signs of an ethical dilemma and assess the ethical dimension of a business decision.

• Classify recurring ethical issues in business relating to misuse of company resources, company stakeholder relationships, and employee workplace issues.

• Devise a strategy to address challenges in determining an ethical issue in business.

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Introduction

Introduction

Stories From the Workplace

Scenario 1: Betty and Selma have worked together for a few years as technologists at a radi- ology clinic and share the responsibilities for quality control checks. It is Betty’s week to per- form the mandatory quality control/quality assurance checks. Midweek, Selma accesses the quality control book to verify the information on one of the quality tests of the X-ray equip- ment. Selma realizes that Betty has not yet registered the quality control results. Recognizing that they could both be in great trouble if the documentation is not up to date, Selma ques- tions Betty. In response, Betty becomes defensive and says, “I forgot to run the tests, have you never forgotten anything?” and she proceeds to fill in the forms using yesterday’s data.

Scenario 2: A large car parts manufacturer is building a new plant in South Carolina and is seeking competitive bids for the environmental compliance of the site preparation and con- struction process. Jason works for a civil engineering firm that wants to win the environmen- tal compliance work for the project. The team is putting a great deal of pressure on Jason to secure this job. Jason discovers that his good friend, Jack, is providing temporary consulting work for the car parts manufacturer and has access to many of their data files. To strengthen the bid for the South Carolina work, Jason asks Jack to search their files for information useful for preparing the proposal.

Scenario 3: Tom is excited about his new job with a nonprofit organization because he wants to make a difference by helping others. Tom also wants to impress his boss, Jim. Shortly after joining the organization, Jim asks Tom to make copies of a computer software program to distribute to the entire staff. Jim explains that the budget cannot accommodate buying a copy of the software for everyone in the office. He tells Tom, “Just do it. They charge too much for that software already.”

What do all of these scenarios have in common? Each represents a normal part of doing busi- ness. Yet each situation has the potential to put the workers in an ethically compromised posi- tion, depending on the decision they make. Ethical dilemmas occur when a situation requires an individual to choose among alternatives that create a values conflict among stakeholders. In these situations, a conflict develops between the personal moral philosophy of the employees and the organization’s goals or culture. What should Selma do after witnessing Betty lie on the quality control documentation? How would it affect their working relationship if she reports the incident? If the discrepancy were discovered, would Selma lie for a coworker? If Tom’s boss gives him an order, will Tom agree to make illegal copies of the software (which is stealing)?

The potential for unethical conduct adds risks for the viability of an organization. Consider the repercussions if a patient receives harmful radiation exposure because of Betty’s falsified qual- ity check reports. What would happen to Jason’s future relationship with the car parts manu- facturer if its management learned of the unauthorized access to the company data files for his bid? Tom’s ethical dilemma of copying a software program may not seem as risky as the other issues. After all, making copies of music CDs and computer software is quite common in today’s society. However, if caught copying software in the United States, the organization could have to pay damages of up to $150,000 for each program copied. If criminally prosecuted, the employee making the copies could be sentenced to up to five years in jail (BSA, 2014).

Employees should expect to encounter ethical issues as a regular part of the workplace. Employee awareness of the common ethical issues that could arise can help avoid ethical

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Section 3.1 Recognizing Ethical Dimensions of Business

lapses that create risks for an organization. The chapter addresses three questions: How can an employee recognize an ethical issue? What types of ethical issues arise in business? More- over, how can one prepare for ethical dilemmas and professional risks in the workplace?

3.1 Recognizing Ethical Dimensions of Business Executive leadership sets the expectations for ethical behavior within an organization, but it is up to the managers to set the example, ensure that employees follow suit, and watch for ethical risks and problems. A manager is not able to cultivate an ethical culture without knowing the ethical risks that are most likely to affect the organization. The first step in avoid- ing unethical decisions in business is to be able to anticipate and identify an ethical issue. According to the scholar Herbert Simon, decisions have two different dimensions—factual and ethical (Grier, 2013). Factual dimensions of a decision relate to the known data and are testable, whereas ethical dimensions of a decision describe what ought to be and include value judgments. Businesspeople need to consider both dimensions of a business decision. Not all business decisions and activities have an obvious ethical dimension, however. The challenge for decision makers is to anticipate ethical issues that could arise. Recognizing the ethical dimensions of business requires thinking beyond the immediate business decision or activity and looking at the long-term effect on stakeholders and the organization.

Defining an Ethical Issue

At first, the task of identifying an ethical issue seems easy. By definition, an ethical issue is 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. In prac- tice, however, not all ethical issues are so obvious. The short-term profit motive of a business may obscure the ethical dimensions of an action. When is there time to consider all stake- holders when employees are under pressure to make sales, secure business, and save the company money? When focusing on meeting organizational goals, the ethical implications of an action may not be factored into the decision-making process. Likewise, personal goals and interests for career advancement can mask the ethical dimensions of business activities.

How can one spot an ethical issue? Business decisions do not come with red flags that say, “Danger! I’m an ethical issue.” Instead, ethical issues may be hidden by using phrasing like “sign for me” instead of “forge my signature,” or “make this accounting adjustment” instead of “enter this fraudulent entry.” The language of business is one factor influencing the ability to spot an ethical issue. Knowing the common and recurring misconduct in business equips employees to recognize the ethical considerations of a business task.

The ethical issues that a company is likely to encounter depend on its size, location, products and services, the business strategy, and the business cycle (e.g., a start-up, growing, or mature company). Managers should consider the legal, regulatory, and business landscapes that guide acceptable behaviors for an industry. Employees can be great resources for identifying the ethi- cal issues that are most likely to occur in the workplace. The Ethics Resource Center (2013b) conducted a survey of U.S. employees to identify ethical issues observed in the workplace and an employee’s willingness to report misconduct. Table 3.1 provides the results of the 2013 sur- vey, listing the types of misconduct that employees are most likely to observe and report.

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Section 3.1 Recognizing Ethical Dimensions of Business

Table 3.1: Reported misconduct

Reported Misconduct 2013

Stealing or theft 64%

Abusive behavior or behavior that creates a hostile work environment 60%

Violating contract terms with customers or suppliers 59%

Delivery of substandard goods or services 57%

Violations of health or safety regulations 56%

Misuse of company’s confidential information 54%

Breaching customer or consumer privacy 54%

Retaliation against someone who has reported misconduct 53%

Offering anything of value (e.g., cash, gifts, entertainment) to influence a public official

53%

Improper use of competitor’s proprietary information 53%

Abusing substances, such as drugs or alcohol, at work 52%

Sexual harassment 51%

Violating employee wage, overtime, or benefit rules 50%

Falsifying time reports or hours worked 49%

A conflict of interest 49%

Violation of environmental regulations 49%

Falsifying expense reports 48%

Breaching employee privacy 47%

Discriminating against employees 47%

Falsifying and/or manipulating financial reporting information 45%

Making improper political contributions to officials or organizations 45%

Lying to employees 44%

Offering anything of value (e.g., cash, gifts, entertainment) to influence a potential/existing client or customer

43%

Falsifying invoices, books, and/or records 40%

Improper hiring practices 39%

Lying to customers, vendors, or the public 38%

Violating company policies related to Internet use 37%

Accepting inappropriate gifts or kickbacks from suppliers or vendors 36%

Source: National Business Ethics Survey® of the U.S. Workforce, by Ethics Resource Center, 2013b. Arlington, VA: Ethics Resource Center. Reprinted with permission.

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Section 3.1 Recognizing Ethical Dimensions of Business

Another factor for recognizing ethical issues is the perception that a behavior is honest or dishonest. The determination of acceptable behavior derives from societal norms. What may have once been an unacceptable action may become commonplace and considered accept- able. For example, during the latter half of the 20th century, most companies in the United States discouraged receiving personal calls at the office claiming that it was misuse of com- pany property. However, the prevalent use of smartphones now allows employees to make and receive personal calls, text messages, and e-mails without using company property. Now companies must address the issues related to wasting company time when employees respond to these personal communications. Some ethical issues appear to be more dishonest than others. Take the questionnaire in Consider: How Ethical Are These Work Practices? to rate the acceptability of some work practices.

Consider: How Ethical Are These Work Practices?

Take a few minutes to rate these work practices using the following rating system:

1 = always okay 2 = sometimes okay 3 = it depends (sometimes okay and sometimes wrong) 4 = usually wrong 5 = always wrong

Ethical Perception Questions

Downloading movies posted on the Internet before release in the theater. 1 2 3 4 5 Taking longer than the time allowed at work for lunch and not reporting it. 1 2 3 4 5 Telling your employer a false reason for missing work. 1 2 3 4 5 Doing less work than your share in a group project at work. 1 2 3 4 5 Obtaining a competitor’s customer list with the intent of stealing customers. 1 2 3 4 5 Showing a friend who works for a competitor your customer list. 1 2 3 4 5 Writing a report for a coworker. 1 2 3 4 5 Signing someone else’s name to authorize an expenditure. 1 2 3 4 5 Filling out a false expense report and submitting it. 1 2 3 4 5 Falsifying information on a job application. 1 2 3 4 5 Presenting the ideas of a coworker as your own. 1 2 3 4 5 Pressuring a colleague to do your work and then taking credit for it as your own. 1 2 3 4 5 Clocking in for an absent coworker. 1 2 3 4 5 Selling confidential information about a client. 1 2 3 4 5

Questions to Consider

1. Which practices did you label as “always wrong”? Which did you label “always okay”? What is your reasoning for these designations?

2. In a study of college students in the workforce, women consistently found the practices as dishonest more often than men do (Smyth, Davis, & Kroncke, 2009). The practice that students considered most unethical was selling confidential information about a client. However, most students felt it okay to sometimes take longer than the time allowed for lunch or giving a false reason for missing work. How did your ratings compare to the study results?

3. Ask colleagues from different age groups or managerial levels to complete the questionnaire. Are there differences in the perceptions of dishonesty for the work practices?

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Is this legal?

Ask yourself:

Does this comply with Cisco policy?

Does this reflect Cisco values and culture?

Could this adversely affect company stakeholders?

Would you feel concerned if this appeared in a news headline?

Could this adversely affect Cisco if all employees did it?

Section 3.1 Recognizing Ethical Dimensions of Business

Despite the subtleties, there are some indicators of ethical issues in the workplace. Do you or others justify a behavior because everyone else is doing it or agree to an action because no one will get hurt? These justifications infer that there are underlying ethical considerations of a business action. Fear of discovery is another sign of an ethical issue. When an employee is uncomfortable about an activity, he or she may express feelings like “no one is going to com- plain,” “I hope no one finds out,” or “just this once.” Often, employees will question a request just because it didn’t feel right. These feelings are an indication of an instinctive moral judg- ment that individuals develop from family, social interaction, and personal experiences.

Companies need to rely on more than instinct for identifying ethical issues in the organization. Through training programs, employees can gain awareness of potential misconduct such as harassment, discrimination, and conflict of interest. Some companies have detailed checklists so employees can determine if there is an ethical dimension to a business decision. Cisco includes an ethics decision tree as part of its code of business conduct (see Figure 3.1). This tool provides questions for the employees to ask and where to find more information if needed.

Two-Fold Test to Identify Ethical Dimensions

A business issue has an ethical dimension when it meets one or both of two types of tests. The first test relates to rules and values. The second test considers the consequences to stake- holders. Ethical dimensions exist when a business problem, situation, or opportunity has the potential for the business to knowingly or unknowingly:

1. “Violate a commonly accepted ethical principle . . . or stated business standard” and 2. “Inflict significant, undue, inappropriate harm on any stakeholder” (Pekel & Wallace,

2006, p. 3).

Company-specific guidelines such as Cisco’s incorporate both types of tests to help employees identify ethical dimensions in a business decision.

Figure 3.1: Cisco ethics decision tree

A decision tree can be a useful tool for employees facing a difficult decision. Cisco provides an interactive online tool that includes links to supporting information and guidance to help employees when they are confronted with an ethics-related issue.

Source: Reprinted with permission from Cisco. (2014). Code of Business Conduct.

Is this legal?

Ask yourself:

Does this comply with Cisco policy?

Does this reflect Cisco values and culture?

Could this adversely affect company stakeholders?

Would you feel concerned if this appeared in a news headline?

Could this adversely affect Cisco if all employees did it?

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Section 3.2 Recurring Ethical Issues

Consider the organization of Cisco’s ethics decision tree (Figure 3.1). The first three ques- tions relate to rules and ethical principles. The first step focuses on whether an action is in accordance with the law. After the legal implications, the next consideration is whether an action meets company policy as conveyed through codes of conduct and standards of opera- tion. These company policies set the business standards of acceptable behavior, such as accu- rate accounting, appropriate use of company resources, and fair treatment of employees. The third step relates to the ethical principles of the organization formalized through stated val- ues such as honesty, fairness, respect, and transparency.

The next group of questions in the decision tree focuses on the consequences of the action on stakeholders. Choices may require that the company balance conflicting stakeholder inter- ests. If a company stakeholder could experience harm or danger, then the situation becomes an ethical issue. For example, an ethical dimension exists if a situation results in a potential change in working conditions for employees, such as the number of hours worked or tasks performed. Another consideration is the individual or organization making the decision. Rely- ing on instincts, the decision maker’s comfort level is an indicator that an ethical issue exists. Likewise, making an unethical decision has consequences for the decision maker. If caught, there may be fines, jail time, or job loss. The last step in the decision tree relates to the busi- ness continuity and success of Cisco. The question asked is “Could this adversely affect Cisco if all employees did it?” A situation has ethical dimensions when alternative actions could create reputational, financial, or operational risks for the company.

Employees of many companies undergo training to learn how to recognize ethical issues that may arise. General frameworks allow employees to identify the ethical consideration of a business situation. However, studies show that some misconduct is more likely to occur in certain businesses than others (Ethics Resource Center, 2012a, 2013b). Employees should pay particular attention to recurring ethical issues that may disrupt their work.

3.2 Recurring Ethical Issues Business ethical issues do not relate solely to isolated misconduct involving a few bad people. Almost two thirds of unethical behavior in the workplace involves repeating or ongoing occur- rences (Ethics Resource Center, 2013b). Most of the ethical violations in a company involve more than one individual, suggesting that misconduct is often pervasive in the culture of a functional area or the organization. All levels of management and non-managerial employees engage in unethical behavior. The 2013 Ethics Resource Center study found that the most common ongoing ethical issues were violations of Internet policy and abusive or intimidating behavior. The most likely issues that permeate throughout the organization include offering bribes or health and safety violations.

What types of ethical issues should companies prevent? Ethical misconduct occurs when one stakeholder group takes advantage of another. One category of misconduct relates to employee misuse of company resources. Other ethical issues relate to honest communica- tion that demonstrates respect and fairness toward company stakeholders. For each category of misconduct, definitions and examples of common ethical issues will expose the ethical dimensions of daily business activities.

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Internet misuse

Falsifying time reports

Stealing

Misuse of company’s confidential information

0%

2003 2005 2007 2009 2011 2013

5% 10% 15% 20% 25%

Section 3.2 Recurring Ethical Issues

Misuse of Company Resources

The misuse of company resources is a form of occupational fraud or “the use of one’s occupa- tion for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets” (Association of Certified Fraud Examiners, 2012, p. 6). In 2012, misappropriations of company assets accounted for more than 86% of fraud cases glob- ally, and each incident cost the company an average of $120,000 (Association of Certified Fraud Examiners, 2012). Managerial and non-managerial employees can misuse company cash, inven- tory, time, supplies, equipment, and information. Figure 3.2 provides employee observations of misconduct relating to misuse of company resources over 10 years of the Ethics Resource Cen- ter National Business Ethics Survey®. The trend shows a reduction in resource misuse overall, but at least 10% of U.S. employees know of improper use of company resources.

The use of company resources for personal, charitable, or nonbusiness purposes can include time, telephones, copy machines, Internet connections, e-mail systems, company vehicles, and other equipment. An example of misuse of employee resources is an employee who also has a small real estate business, who spends an hour or two during work hours talking with clients to close a deal, uses company copy machine and fax equipment to complete real estate transactions, and takes long lunch hours to show houses. Some companies allow limited per- sonal use of the telephone, Internet, and e-mail as long as it does not occur during work hours

Figure 3.2: Misuse of company resources

Misuse of company resources has been a major ethical issue for businesses since 2003.

Source: Adapted from Ethics Resource Center. (2013). National business ethics survey of the U.S. Workforce. Arlington, VA: Ethics Resource Center.

Internet misuse

Falsifying time reports

Stealing

Misuse of company’s confidential information

0%

2003 2005 2007 2009 2011 2013

5% 10% 15% 20% 25%

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Section 3.2 Recurring Ethical Issues

and does not distract employees from performing work. However, one study has estimated that the average office worker spends over an hour a day checking social media and reading news websites (Crawford, 2013). Employees use paid work time texting, making personal phone calls, searching for new jobs, organizing personal calendars, bidding on online auc- tions, and talking about outside activities with coworkers. Lost productivity from employee personal business at work costs companies up to $600 per week per employee (“Employees’ personal stuff robbing productivity,” 2011).

Employees’ personal use of company-issued cell phones or cars also creates an accounting dilemma. The U.S. Internal Revenue Service considers company phones or cars as a taxable benefit to employees if a valid business purpose is lacking (“Determine the cost of personal cell phone use to your company,” 2009). Personal use can limit the tax deduction for com- pany cell phones and vehicles as a business expense. Some companies allow employees to use their own mobile phones and tablets for professional purposes. However, the businesses are reluctant to install security safeguards to prevent downloading on employees’ own mobile devices, increasing risks of company system breaches from malicious applications, phishing messages, and rogue websites (Ankeny, 2014). On the other hand, employees do not want their employer to have access to private information or restrict the ability to download music and videos on their own mobile devices.

Most organizations have strict guidelines for lawful and responsible use of the Internet and e-mail. Employee misuse of company computer hardware and software jeopardizes the secu- rity of the business. For example, downloading software or music to company computers provides an opportunity for malicious programs to infiltrate company systems. Personal use of the Internet may cause network congestion, inhibiting business applications that require reliable connection speeds. Research of 250 companies’ web activity shows that downloading material from Facebook, YouTube, and Google accounts for over 18% of the internet band- width (“Remote working and social network use at work are biggest security concerns for business, says network box,” 2010). Information technology managers are concerned for net- work security from malware due to employee use of e-mail links, social media sites such as LinkedIn and Twitter, and YouTube videos.

The previous examples relate to occupational fraud in the misuse of paid time, company equipment and vehicles, and Internet and e-mail resources. Another type of occupational fraud involves stealing company property or funds.

Stealing Employees are more likely to report observations of stealing materials and cash than any other misconduct. The Ethics Resource Center (2012a, 2013b) surveys have found that 9% to 12% of employees have observed stealing or theft in the workplace since 2004. Conduct that constitutes stealing or theft includes “borrowing” funds or goods, even if there is a genuine intention to make restitution. Appropriating resources for personal use or removing surplus materials from the workplace can amount to theft. The restaurant industry estimates that employee theft of inventory can cost a company as much as 4% of sales (Strenk, 2011). The retail industry estimates that employee theft contributes to almost 44% of $34.5 billion in U.S. retail shrinkage in 2011, or $15.8 billion (National Retail Federation, 2012).

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Section 3.2 Recurring Ethical Issues

An employee cheating on expense accounts is another form of stealing from the company. In the United States, fraudulent expense reimbursements cost companies around $26,000 per case, with most cheating undetected for two years (Association of Certified Fraud Examiners, 2012). Less than half of the employees are willing to report coworkers who falsify expense reports (Ethics Resource Center, 2013b). Common approaches for receiving reimbursement greater than expenditures include the following (Wells, 2003):

• Mischaracterized expenses: Employees represent a nonbusiness transaction as a legitimate business expense. Example: A sales representative submits a receipt from a dinner with friends as a customer selling opportunity.

• Overstated expense reports: Employees inflate the amount of actual expenses and keep the difference. Example: An employee adds $20 to a taxicab receipt or a larger tip than paid to a restaurant receipt.

• Fictitious expenses: Employees submit false documentation for expenses that are not incurred. Example: A manager requests mileage reimbursement for more out- side meetings than were actually made.

• Multiple reimbursements: Employees resubmit invoices as a different purchase for payment more than once. Example: An administrator copies an office supply receipt and claims the cost again on next month’s expense reimbursement.

Employee theft of a client’s property or funds can jeopardize the employer’s reputation and generate a legal liability for compensating the victim. Occupational fraud includes employees using a position of trust with a client to steal cash or other valuables, unauthorized withdraw- als from bank accounts or use of credit cards, and misappropriation of a client’s income or assets. An investigation by USA Today raised awareness of recurring instances of employee misuse of nursing home residents’ savings (Eisler, 2013). The nursing home environment offers many opportunities for employees to access resident accounts and personal prop- erty, and some reported instances of fraud occur for months or years. For example, an office employee at multiple nursing homes in Mississippi billed $101,000 in personal expenses to the trust accounts of 83 nursing home residents. No company audit exposed the fraud. Instead, a receipt for a $90 purchase for a pair of designer jeans caught the eye of an admin- istrator at the Vicksburg Convalescent Center because the patient supposedly purchasing the jeans was a double amputee.

Managers have found that often the most unlikely people embezzle from the company. The Association of Certified Fraud Examiners (2012) reported that first-time offenders com- mit most occupation fraud. After discovering an employee’s fraudulent loan account at the Michigan State University Federal Credit Union, the executive vice president remarked, “You don’t know what’s going on in their lives. A long-time employee could have a setback in his or her personal life that makes them desperate” (Dahl, 2012, p. 16). Attention to employee well-being and financial compensation can prevent employee theft. One study of retail outlets found that higher employee wages reduce the tendency for employees to steal from cash reg- isters or inventory (Chen & Sandino, 2012).

Leaking Corporate Intelligence The phrase “loose lips sink ships” relates to the ethical issues relating to corporate intelli- gence. Employees have access to confidential company information that if disclosed would harm people, projects, or the firm’s competitiveness. Such information may include customer

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Section 3.2 Recurring Ethical Issues

lists and data, proprietary manufacturing processes, secret product formulas, and financial projections. Unauthorized disclosure of certain information has legal implications for the employee and employer. For example, violating Health Insurance Portability and Accountabil- ity Act (HIPAA) regulations that protect patient health information can result in fines of up to $1.5 million for the company and criminal charges against the employee (U.S. Department of Health & Human Services, n.d.).

In the United States, the Uniform Trade Secrets Act protects company information from competitors. The definition of a trade secret is commercially valuable information for which the owner has taken reasonable efforts to maintain its secrecy. Trade secrets can include formulas, patterns, compilations, programs, devices, methods, techniques, business records, or data. Examples of employee misappropriation of company trade secrets include the following scenarios:

• “A trusted employee with access to valuable company information who, after becom- ing disgruntled, downloads and transmits the information to others outside the company who offer it to the ‘highest bidder.’

• An employee, who after learning how a new prototype is made, decides to form his own company and use the trade secret and other proprietary information to launch his own competing product. . . .

• Employees who execute a plan to steal proprietary information and take it to another country and are stopped at the airport.

• After being offered a senior position with a direct competitor, and before tendering his resignation, an employee uses his supervisory position to request and obtain propri- etary information he would not normally be entitled to access. After taking as much proprietary information as he can, he submits his resignation and takes the materials of his former employer to his new position and employer.” (Krotoski, 2009, p. 3)

The misuse of corporate intelligence occurs in many industries. For example, three financial investment firms experienced breaches of contract when employees stole proprietary soft- ware code by e-mailing it to themselves. In another example, a former employee of a chemi- cal company earned two years in a federal prison for disclosing formulas for silicon-based and rubber products to a Korean competitor (U.S. Attorney’s Office, 2014). The formulas for Coca-Cola soft drinks are a closely guarded trade secret. In 2006, Pepsi contacted the FBI when three people offered to sell trade secrets from Coca-Cola (Krotoski, 2009). Two of the individuals were employees of Coca-Cola.

Not all corporate intelligence leaks are for personal gain. The prevalence of social media sites like Facebook and YouTube are platforms for personal expression where employees may ignore company policies against sharing information and justify disclosure based on the right to be heard (Sussman, 2008). The Ethics Resource Center (2013a) found that more than half of active social networkers post information about work projects and a third make comments about coworkers, management, and customers. The results from their study highlight that “workplace ‘secrets’ are no longer secret, and management must assume that anything that happens at work—any new policy, product, or problem—could become publicly known at almost any time” (Ethics Resource Center, 2013a, p. 9).

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0

10

20

30

40

50

60

70

FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012

50 46 47 61 37 53 57 58

Section 3.2 Recurring Ethical Issues

Insider Trading Insider trading occurs when a person trades corporate securities based on access to non- public information. In the United States, normal buying and selling of stock by company employees and directors is legal with disclosure to the Securities and Exchange Commission (SEC). It becomes an ethical and legal issue when a company’s officers, directors, or employ- ees buy and sell stock in a company while knowingly in possession of information obtained by a fiduciary duty or position of trust. Insider trading violations involve the misappropriation of company confidential information by employees. In addition, sharing the information with friends, business associates, and family members who benefit through stock trading is illegal insider trading.

Laws prohibiting insider trading protect investors, thereby reducing risk and increasing con- fidence in financial reporting. Insider trading is a federal crime in the United States, and con- victions can result in jail time of up to 20 years. In the 1990s and 2000s, the number of countries with insider trading laws and enforcement agencies grew from just a few countries to 52 countries (Bris, 2005). Enforcement of insider trading in the United States is increasing, with an average of over 50 cases a year since 2004 (see Figure 3.3).

All employees of publicly listed companies, or employees of businesses that service publicly listed companies, should understand the actions that lead to illegal insider trading. They should not assume that all cases involving insider trading are limited to corporate officers or directors. In 2013, the SEC charged a Green Mountain Coffee Roasters information technol- ogy employee and a friend with insider trading (U.S. Securities and Exchange Commission, 2013d). According to the SEC, the employee had access to servers that contained confidential company earnings information. Not only did the company employee allegedly profit through

Figure 3.3: U.S. enforcement of insider trading

Enforcement of unfair and illegal insider trading is on an upward trend after a low of actions taken in 2009.

Source: Insider Trading Enforcement Actions, by U.S. Securities and Exchange Commission, 2012, retrieved from http://www.sec.gov /spotlight/insidertrading/insider-trading-enforcement-actions.pdf

0

10

20

30

40

50

60

70

FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012

50 46 47 61 37 53 57 58

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Section 3.2 Recurring Ethical Issues

trades in advance of the public release of the information, but also shared the information with a friend and the friend’s mother. The employee and his friend realized $7 million in ille- gal profits over the course of three years.

The following groups have been identified as targets for insider trading transgressions:

• Corporate officers, directors, and employees who trade the corporation’s securities after learning of significant, confidential corporate developments;

• Friends, business associates, family members, and other “tippees” of such officers, directors, and employees, who trade the securities after receiving such information;

• Employees of law, banking, brokerage, and printing firms who are given such infor- mation to provide services to the corporation whose securities they traded;

• Government employees who learn of such information because of their employment by the government; and

• Other persons who misappropriate, and take advantage of, confidential information from their employers (U.S. Securities and Exchange Commission, 2013e).

The cost for a company found profiting from insider information could be extensive. The hedge fund advisory firm Sigma Capital Partners agreed to pay nearly $14 million to settle SEC charges that portfolio managers used confidential information for company gains (U.S. Securities and Exchange Commission, 2013f ). Another hedge fund advisory firm, CR Intrinsic Investors, LLC, settled SEC insider trading charges for more than $600 million. According to the SEC, the firm’s portfolio manager avoided losses by selling the pharmaceutical company’s stock before nega- tive results from a clinical trial became public. In the press release, an SEC spokesperson stated, “A robust culture of compliance and zero tolerance toward employee misconduct can help other firms avoid the severe financial consequences that CR Intrinsic is facing for its misconduct” (U.S. Securities and Exchange Commission, 2013b, para. 5).

Ethical Issues of Company–Stakeholder Relationships

The second category of ethical issues involves relationships with company stakeholders. An ethical business promotes truthful communication with company stakeholders. As described in Chapter 2, stakeholders have a two-way relationship with a business. For example, con- sumers expect safe products that perform as promised. Distribution channels rely on a fair and reliable inventory of product. Companies trust that customers will be honest and pay promptly. Shareholders expect accurate depictions of the company’s financial performance. Suppliers desire that companies honor contract terms and provide accurate purchase esti- mates, while companies require a reliable supply of services and goods. The community expects that a business will respect the environment and avoid damaging vital natural resources. Competitors are industry stakeholders that are part of the community and value a fair business environment.

Ethical misconduct occurs when one group in a relationship misuses its influence in a busi- ness transaction to gain a direct or indirect benefit. Examples of misconduct include lying, fraud, conflicts of interest, bribery, and kickbacks. Figure 3.4 provides employee observations of misconduct relating to company stakeholder relationships as reported in the 2013 Ethics Resource Center National Business Ethics Survey®.

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Breaching customer privacy, 5%

Misuse of competitor’s information, 3%

Poor product quality, 9%Environmental

violations, 4%

Violating contract terms, 4%

Lying to outside stakeholders, 10%

Conflicts of interest, 12%

Accepting kickbacks or bribes, 4%

Falsifying financial reports, 3%

Other, 25%

Section 3.2 Recurring Ethical Issues

Some unethical behaviors that employees observe have a direct impact on an external stake- holder. For example, poor product quality affects the consumers and distribution channels of a business. Every year since the 2005 National Business Ethics Survey®, over 10% of respon- dents have been aware of their employer delivering substandard goods or services (Ethics Resource Center 2012a, 2013b). Breaches of consumer or customer privacy are mentioned by 5% of respondents in more recent surveys, as more customers complain about the level of information that marketers access (Bush, 2010). Violating contract terms affects suppli- ers and distribution channels as their livelihood may depend on a company’s business rela- tionship. Misconduct also affects community stakeholders. Almost 5% of respondents knew of improper use of a competitor’s proprietary information, while more than 5% observed environmental violations that affect the local community (Ethics Resource Center, 2013b). However, the most prevalent acts of observed misconduct are conflicts of interest and lying to external stakeholders.

Lying Lying occurs when an individual makes a statement that he or she knows to be false. The act of lying reflects a lack of honesty or trustworthiness on the part of the lying person. What if someone makes an untrue statement, but believes it to be true at the time? This would likely not be an example of a lie, given that most definitions of lying include an intent to deceive (Carson, 1988; Jones, 1986). Some lies are less severe; they merely signify a trivial untruth or occur when trying to avoid hurting someone’s feelings. For example, lying about your age or the price you paid for new shoes is not very serious. In business, employees may fib to explain a late assignment, such as “traffic was terrible” or “I didn’t receive that e-mail.” A white lie may be appropriate to remove oneself from aggressive sales representatives, stating, “I’ll get back to you” or “let me think about it” (Bonanos, 2013).

Figure 3.4: Company stakeholder relations

Ethical issues arise when honesty and transparency in stakeholder relationships are missing. The percentage of U.S. employees observing violations relating to company stakeholders in 2013 was around 54%, broken into the following categories.

Source: Adapted from Ethics Resource Center. (2013). National business ethics survey of the U.S. Workforce. Arlington, VA: Ethics Resource Center.

Breaching customer privacy, 5%

Misuse of competitor’s information, 3%

Poor product quality, 9%Environmental

violations, 4%

Violating contract terms, 4%

Lying to outside stakeholders, 10%

Conflicts of interest, 12%

Accepting kickbacks or bribes, 4%

Falsifying financial reports, 3%

Other, 25%

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Section 3.2 Recurring Ethical Issues

Lies that have a greater impact on business are of two types. Commission lying is making a statement that intentionally deceives the receiver of the message. Omission lying is inten- tionally not disclosing relevant information. Research in business negotiations has shown that most people are more comfortable with lying by omission than commission (Schweitzer & Croson, 1999). For example, consider how you would handle the following scenario (adapted from Schweitzer & Croson, 1999, p. 230):

Suppose you are planning to move, and must sell your current car—a 2001 Honda Civic (4 door, automatic transmission, and sunroof ). You have taken good care of the car and believed it to be in decent condition. Recently, though, you have had some transmission trouble. Your mechanic told you that the car would need costly repairs soon, but that the problem does not require imme- diate attention. The car seems to run perfectly fine most of the time.

Would you tell a prospective buyer about the transmission problem? If not, that would be a lie of omission. Would you admit to the expensive repairs if the potential buyer asks if there are any problems with the transmission? If instead you chose to state, “The car works perfectly and has no problems,” you would be lying by commission. Would your answer change if the potential buyer were your best friend? Research has shown that most people are likely to tell friends of the potential repairs, but would only disclose the information to strangers if specifi- cally asked about the transmission (Schweitzer & Croson, 1999).

Lying by omission is prevalent in many sales and service industries. Untruths or omitted information is common in used car sales, but buyers can often spot a lie or encourage full disclosure by asking questions. In the world of business, the principle of buyer beware—also known by the adopted Latin expression caveat emptor—is said to rule, and most of the popu- lation would be presumed to understand that people trying to sell a product have a financial interest in doing so.

In the financial services industry, clients entrust their brokers with managing investments. However, an investigation into the credentials of U.S. stockbrokers showed that more than 1,600 stockbrokers with bankruptcies or criminal charges failed to disclose such information to investors (Eaglesham & Barry, 2014). Brokers with records of misconduct are more likely to incur higher numbers of customer complaints of inappropriate investments, with some individuals losing their life savings.

Lying in business damages the company stakeholders’ trust that they will be treated fairly. Customers may ask, “Did you lie to us? And can we ever trust you again?” (Whitford, 2013). When lying causes someone injury or a loss, it is a criminal offense and fraud.

Fraud Fraud is a deceptive act by one person, group, or organization that causes another to part with something of value or to surrender a legal right. The Association of Certified Fraud Examiners (2012) has estimated that companies incur over $3.5 trillion in annual losses attributed to fraud. The interpretation of what is or is not fraud varies by subject and context. Earlier in the chapter, occupational fraud was introduced as employee misuse of company resources. Other types of fraud include accounting fraud and marketing fraud.

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Accounting fraud is the misrepresentation of a company’s financial reports through a misstatement or omission of material information. Accounting fraud hurts investors and employees by misrepresenting a company’s financial viability. For example, after Enron’s collapse due to fraudulent accounting practices, thousands of employees were without a job, healthcare, and pension. In the United States, the Sarbanes-Oxley Act of 2002 was designed to improve financial disclosures and impede corporate and accounting fraud. However, financial statement fraud persists. Around 5% of employees are aware that their employer falsified and/or manipulated financial reporting information, and over 45% of those observing accounting fraud would be willing to report the misconduct (Ethics Resource Center, 2013b). Financial statement fraud by employees costs a company about $1 million on average (Association of Certified Fraud Examiners, 2012).

Accounting fraud is more often perpetrated at the senior executive level to present the com- pany in a better financial light. The justification is that the financial statement manipulation is an intermediate action until the company situation improves. Cynthia Cooper, former internal auditor and whistle-blower for the WorldCom accounting scandal, stated that the controller and accounting staffs made false accounting entries because of pressure from Chief Financial Officer (CFO) Scott Sullivan (Cooper, 2008). According to her account, when the controller reported that a large expense for leasing telecommunications lines was driving earnings below expec- tations, Sullivan’s response was to reduce line-cost expenses in order to keep the stock price high. Sullivan implied that the accounting transactions to move expenses were only a one-time adjustment. These transactions played only a small part in WorldCom’s $3.8 billion accounting scandal involving double-counting revenue, undisclosed debt, and booking of unrealized rev- enues (Haddad, Foust, & Rosenbush, 2002).

Accounting fraud includes several unethical practices, some of which include:

• Accelerating revenues: when a company brings forward future receipts as if they were earned today.

• Delaying expenses: when a company books its current expenses in the future. • Other income or expense: a term used when a company hides excess income or

expenses. • Pension plans: used by companies to deflate or inflate their financial position. If a

company runs a pension plan and the fund is doing well, it can reduce payments into the plan to make its costs look better than they are.

• Off-balance-sheet items: when a corporation wishes to hide liabilities and expenses that it does not want to report in other corporations that it owns.

Accounting fraud is difficult to detect; the deceptive accounting entries at WorldCom went undiscovered for 3 years. Threats from accounting fraud exist throughout the organization, and everyone from the CFO, controller, accounting clerks, and administrators can learn to recognize misrepresentations of the financial performance of the firm. Learning from past accounting scandals, employees could look for the following warnings of financial reporting misconduct:

• Frequent changes to estimate procedures. • Unexpected areas of profitability. • Recurring negative cash flows during periods of earnings growth. • Revenue reported after established cut-off periods.

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Section 3.2 Recurring Ethical Issues

• Rapid growth compared to peers. • Abnormal pressure or involvement of management in selection of accounting

principles. • Write-offs for loans provided to directors, officers, and management. • Requests to establish bank accounts in nonoperational locations. • Excessive number or frequent changes in bank accounts. • Budget activity that is repeatedly “right on the money.” • Unusual ratios between budget and actual expenses. • Recurrent reclassification of expenses.

During the last decade, reports of accounting scandals have prevailed, and the losses to share- holders increased in magnitude. Table 3.2 provides characteristics of high-profile accounting scandals over the years.

Table 3.2: Accounting scandals

Company—Year of Scandal—$ amount Industry Fraudulent Activity Outcome

Sunbeam Products 1996–1997 $60 million

Consumer durables Understated inventory value, underreported cost of goods sold, rec- ognized revenue from undelivered goods, channel stuffing.

Chief executive officer (CEO) and CFO settled SEC civil charges, termination of senior management.

Waste Management, Inc. 1998 $1.7 billion

Trash collection and disposal

Misrepresented depre- ciation for property, plant, and equipment; excess revenues.

Senior management sued for fraud, com- pany settled civil litiga- tion for $457 million.

Xerox Corporation Ltd. 1997–2000 $1.5 billion

Office equipment Booked revenue from foreign subsidiaries before earned, misclas- sification of assets.

$10 million fine

Enron 2001 Over $1 billion

Energy Boosted profits and hid debts by improperly using off-the-books partnerships, manipu- lated the power market, bribed foreign officials.

Bankruptcy, convictions of fraud, jail time.

WorldCom 2002 $3.8 billion income, $400 million in loans

Telecommunications Misreporting of expenses and off-the- book loans to CEO.

CEO charged with fraud, CFO and other executives pleaded guilty to criminal fraud. CEO sentenced to 25 years in prison.

Tyco 2002 $600 million

Diversified manufacturer

Unauthorized loans and payments to senior executives.

Senior management indicted for corruption, conspiracy, grand lar- ceny, falsifying records.

(continued)

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Section 3.2 Recurring Ethical Issues

Company—Year of Scandal—$ amount Industry Fraudulent Activity Outcome

Parmalat SpA (Italy) 2003 8 billion euros

Dairy products Reporting nonexistent assets.

CFO and founder receive jail time, assets are frozen.

Ahold (Netherlands) 2003 900 million euros

Groceries and food distribution

Overstated income by recognizing manu- facturer rebates and discounts prior to sale.

CEO and CFO resigned.

HealthSouth Corporation 2003 $1.4 billion

Healthcare Reported nonexistent assets and underre- ported revenues.

Accounting fraud charged, prison time for bribing official.

Saytam Computer Ser- vices (India) 2009 $1.5 billion

Information technology services

Falsified revenues, mar- gins, and cash balances.

Company board dismissed, founder confessed and has had continuing legal battles.

Source: Adapted from Table II in Legislated Ethics: From Enron to Sarbanes-Oxley, the Impact on Corporate America, by H. Rockness, and J. Rockness, 2005, Journal of Business Ethics, 57(1), pp. 36–38.

Accounting fraud is a white-collar crime and is treated differently than violent crimes by the courts. White-collar crime is defined as “economic offenses committed through the use of some combination of fraud, deception, or collusion” (Simpson, 2013). There is a perception among the public that white-collar crime is not as serious as other crimes against people or property. Studies have found that individuals engaged in financial statement fraud were much more likely to face excessive pressure from within their organizations than other defrauders were. Only 9% of people involved in high-level financial corporate fraud are women (Tut- tle, 2013), and median losses by males are more than twice as high as the losses caused by females (Association of Certified Fraud Examiners, 2012).

Marketing fraud relates to illegal practices perpetrated by a company in the distributing, pro- moting, and pricing of products or services. It hurts customers with deceptive advertising, questionable selling methods, and unfair pricing. Deceptive marketing erodes customer trust in a company that may be difficult to recover. Bait and switch advertising occurs when a company offers consumers an appealing deal and then changes the deal when consumers make direct inquiries. The U.S. Federal Trade Commission (FTC) enforces truth-in-advertising laws that require advertisements to be truthful and supported by evidence, but buyers must be diligent to avoid becoming victims of marketing fraud. To comply with regulations, compa- nies disclose all of the information about an offer; for example, an advertisement must inform the customer if there are supplemental charges in addition to the featured price. While adver- tisers include this type of information, they may bury it in densely packed lines of fine print or as small-type footnotes. Online advertisers may provide a hyperlink for terms that most consumers ignore. Television ads will include pertinent details in type that shows briefly or in a small statement in the middle of a longer phrase.

Table 3.2: Accounting scandals (continued)

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Section 3.2 Recurring Ethical Issues

Companies violating truth-in-advertising regulations incur fines and need to make restitution to consumers purchasing their products. Footwear company SKECHERS USA, Inc. discontin- ued ads for Shape-ups, Resistance Runner, Toners, and Tone-ups shoes after FTC charges of untruthful claims about strengthening, weight loss, or other fitness-related benefits (Ellis, 2012). Customers who experienced injuries while using the shoes filed a class action lawsuit that drained the company’s corporate resources. To settle the charges, SKECHERS paid over $50 million in fines, portions of which were used for customer refunds.

Advertising of products under the U.S. Food and Drug Administration (FDA) must comply with regulations enforcing truthfulness in health and nutritional claims. The Federal Food, Drug, and Cosmetic Act stipulates that manufacturers who advertise human and animal prescription drugs must disclose certain information about the advertised product’s uses and risks. With the increased use of direct-to-consumer advertising of prescription drugs, the regulatory agency issues guidelines for truthful marketing on television, radio, and print outlets. According to the FDA (2012), advertising for prescription drugs that makes claims must include:

• The name of the drug (brand and generic); • At least one FDA-approved use for the drug; and • The most significant risks of the drug.

Product claim ads must present the benefits and risks of a prescription drug in a balanced fashion. Guidelines specify that if a prescription drug advertisement is on television, the risks must be spoken instead of streamed across the screen.

Ambiguous or deceptive pricing communications prevent consumers from evaluating the actual value of a product accurately. Table 3.3 lists common misleading pricing communica- tion practices that exaggerate reference prices or present customers with dishonest price information, vague pricing, or incomplete product costs (Romani, 2006). In the United States, state regulations require advertisers to identify the basis for a price comparison or savings if the reference price is not the seller’s own price. Some industries inflate the list price or manufacturer’s suggested retail price (MSRP) to give the impression of granting special dis- counts. Studies have shown that consumers expect that substantial sales be at the listed price (Lindsey-Mullikin & Petty, 2011). Therefore, several jurisdictions require that advertisers demonstrate ample sales at the list price or disclose that the list price is not representative of area sales. Chinese regulators fined Walmart and Carrefour S.A. stores for defrauding custom- ers by overstating discounts by inflating pre-discount prices or charging higher prices than indicated on the labels (Fletcher, 2011).

Table 3.3: Misleading pricing communication practices

Practices Examples

Comparison made between retail price and seller’s subjective and exaggerated evaluation of the product

A ring claimed to have a retail price of over $5,000 is offered at $2,000. The effective market value does not correspond with that declared, which relies on an unsubstantiated estimate, with the sole objec- tive of creating a strong incentive to adhere to the promotion.

(continued)

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Section 3.2 Recurring Ethical Issues

Practices Examples

Comparison made between retail price and a ficti- tious, exaggerated competitor’s price

Ads based on claims such as “always the best prices” or “savings guaranteed every time” lead the consumer to believe that the dealer is able to offer products at a lower price than all market competi- tors. However, not all prices applied are better in value than those of competitors.

Lower advertised price compared with the actual selling price

A newspaper ad announces a product’s promotional offer for a limited period: “Zanetti Grana Padano— matured 14 months—reduced from 15.900 to 7.950 Lira/kg—50 per cent”; however, during the promo- tional period the cheese was not on sale as offered but at the full price.

The advertised price is not applicable to the product cited but rather to a product with inferior features

An ad for a car features an image of a five-door sedan with double airbag and air-conditioning, with an indicated price of $18,000, while this actually refers to the three-door model.

Unclear price due to the graphics used Ad based on claim: “Calls within the same city after 6:30 and weekends only 0.18/min.*” The asterisk refers to fine print in a horizontal box which reads: “177/min, 1.00 on reply, 20% Tax.” The costs are communicated in full, but in a way that does not render them clearly enough.

Incomplete multidimensional prices Ad based on claim: “Affordable for all! Monthly payments from only $100 and no deposit.” How- ever, there is no indication of total price, number of monthly payments, or upfront costs.

Incomplete partitioned prices The product’s price is advertised as “$49.99 plus postage & packaging,” but fails to specify the addi- tional amount involved.

Source: Modified from Table 1 in Price Misleading Advertising: Effects on Trustworthiness Toward the Source of Information and Willingness to Buy, by S. Romani, 2006, Journal of Product & Brand Management, 15(2), p. 133.

Conflicts of Interest In business, individuals sometimes experience situations in which objectivity conflicts with personal or other interests. A conflict of interest is a situation in which regard for private interest or gain leads to a disregard for the needs of a company or company stakeholder. According to the Ethics Resource Center (2012a, 2013b), conflicts of interest comprise 17% of all observed employee misconduct cases from 2004 to 2013. Conflicts of interest, in fact or appearance, can harm relationships with customers, suppliers, investors, and employees, and expose the company and employees to legal liabilities. One such example, now illegal under the Sarbanes-Oxley Act, occurs if a director of a company grants interest-free loans to him or herself or other officers. Personal loans totaling $400 million to CEO Bernard “Bernie” Ebbers compounded the fraudulent accounting entries leading to WorldCom’s downfall. Insider trad- ing is another conflict of interest in which an individual misuses nonpublic company informa- tion to advance his or her own interests.

Table 3.3: Misleading pricing communication practices (continued)

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Section 3.2 Recurring Ethical Issues

A conflict of interest is particularly difficult to identify because it may exist even if no unethical or improper conduct ensues. Employees should be aware of potential situations that can lead to a conflict of interest. Sales representatives, buyers, and hiring managers need to consider the risks of losing objectivity when negotiating selling terms, selecting a supplier, or recruit- ing new employees. Employee training on conflicts of interests typically includes at least these three topics: outside business interests, nepotism, and supplier/customer gratuities.

Business transactions with outside businesses must be in the best interest of the company. Most companies consider an outside business organization to include any person, partnership, firm, corporation, or other entity which supplies (or seeks to supply) goods or services to the company, or which transacts (or seeks to transact) with any business that will result in reimbursement or compensation from the company. Conflicts of interest occur when employees in a position of influence can gain personally or financially from transactions with an outside business. Employ- ees should disclose all personal connections to outside business (such as partial ownership, as a customer, or family employment) and remove themselves from the decision process.

Relating to the conflicts inherent with outside business organizations are company policies on outside employment. Outside employment refers to moonlighting—owning a business, consulting, teaching, or other for-profit activities outside the normal working hours. While most companies may not restrict an employee’s rights to have a second source of income, a conflict of interest develops when the second business or job has a current or future relation- ship with the company. For example, Sue, an employee of ABC Company, develops an innova- tive cleaning product at home. Sue then forms a business to market the cleaning products. Can Sue’s business sell products to ABC Company? A company’s conflict of interest policy may allow Sue to sell products as long as she is not part of the purchasing decision. Other compa- nies may not allow any employee to own a company that provides goods or services.

Nepotism in business refers to showing favoritism toward one’s family members or friends in employment or economic benefits. Examples include hiring family members or others with whom an employee has a close personal relationship without considering merit, or purchas- ing from a company owned by a family member. A conflict of interest exists when these busi- ness decisions are for personal reasons rather than business reasons. Such practices can ruin the company’s reputation for fair and equitable practices. Managers need to be objective in ascertaining people’s strengths and weaknesses before bringing them into the company or granting contracts. However, it is hard to be objective about relatives and friends. Emotional ties between coworkers may affect decision making. Family and friends may have expecta- tions for preferential treatment. Nepotism creates situations where employees have to choose between business interests and avoiding losing a friend or embarrassing a family member.

To avoid the potential conflicts of interest that nepotism creates, companies should have clear policies regarding hiring family and friends, as well as interacting with them as suppli- ers, contractors, consultants, customers, or competitors. The employee policy should outline what to expect when hiring family members, regardless of whether they are coming into an entry level or executive position. To avoid perceptions of favoritism, there should be no hiring, retention, transfer, promotion, wage, and leave decisions regarding a family member made directly by another family member. Therefore, most companies forbid family members from having direct or indirect reporting relationships.

The code of conduct for Harley-Davidson includes this example of the right way to handle a potential conflict of interest in a hiring decision: “Kate and two colleagues are interviewing

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Section 3.2 Recurring Ethical Issues

several candidates for a position in their department. At the beginning of the selection pro- cess, Kate tells her manager that she is dating one of the candidates” (Harley-Davidson, n.d., p. 14). Kate correctly informed her manager of her personal relationship with a job candi- date. The department manager must make decisions on how to handle the situation ethically. Should Kate participate in the interviews or contribute to the selection process? How could the department manager handle potential conflicts of interest should the candidate be the best person for the job based on merit?

Company relationships with suppliers and customers are vital to the success of the business. The practice of exchanging gifts, meals, forms of entertainment, and other gratuities with suppliers and clients can foster goodwill. However, a conflict of interest exists when gifts or entertainment are for personal gain and appear to influence business decisions. Accepting and offering gifts among business partners can give the appearance of buying favorable treat- ment. Gifts and entertainment to obtain or retain business is a form of corruption and illegal in many jurisdictions. Therefore, employees need to be aware of company policies on gifts and entertainment, bribery, and kickbacks.

Bribery and Kickbacks Corruption is the abuse of entrusted power for private gain. In business, the consequence of corruption such as bribery and kickbacks is an ongoing concern. Bribery is the offering, promising, giving, accepting, or soliciting of gifts, loans, fees, rewards, or other inducements for an action that is illegal, unethical, or a breach of trust. In business, bribery involves offer- ing or soliciting improper payments in order to retain or obtain business. Companies may engage in bribery to win contracts, grease the wheels of bureaucracy, or circumvent regula- tions. Transparency International (2012) found that more than one in four business people worldwide believe that they have lost business because of a competitor’s bribe; lost business due to bribery is prevalent in Malaysia (50%), Mexico (48%), and Indonesia (47%).

The Ethics Resource Center (2013b) found that bribery of government officials by U.S. busi- nesses took place at local levels rather than the federal level. The 2013 report states,

Almost three out of four (74 percent) workers who witnessed attempted brib- ery of public officials at domestic-only U.S. companies said the bribery and bribery attempts involved local government officials, compared to 39 percent who said such actions targeted federal officials. The local percentage was higher still for those who had contacts with overseas clients and customers. Bribery requires personal access to targeted officials, and such access is typi- cally easier to achieve at the local level. (p. 25)

Most state laws in the United States prohibit bribery within the private sector. Now, anti- bribery laws are common practice in many countries such as Belgium, France, Germany, Italy, China, and the United Kingdom.

As introduced in Chapter 1, the Foreign Corrupt Practices Act of 1977 (FCPA) makes it illegal for any company or person in the United States to bribe government officials of other countries in order to obtain or retain business. Potential business advantages from bribery include favor- able tax treatment, avoidance of custom duties on imported goods, government protection from competition, issuance of permits without inspections, and lucrative government contracts. The

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Section 3.2 Recurring Ethical Issues

FCPA does not prohibit charitable donations, but it prevents masking bribes by funneling them through nonprofit organizations. The Department of Justice and the SEC provide a guide for global managers wanting to comply with the FCPA and prevent misuse of charitable giving. Due diligence measures and controls are necessary to avoid making a charitable donation that inad- vertently reaches an officer or employee of a government agency. Managers should consider the following five questions when making charitable payments in a foreign country:

1. What is the purpose of the payment? 2. Is the payment consistent with the company’s internal guidelines on charitable giving? 3. Is the payment at the request of a foreign official? 4. Is a foreign official associated with the charity and, if so, can the official make deci-

sions regarding your business in that country? 5. Is the payment conditioned upon receiving business or other benefits?

(United States Department of Justice, n.d.; U.S. Securities and Exchange Commission, 2014)

See “Going Global: Donation or Bribe?” for an application of the FCPA for an American company.

Kickbacks refer to a reward or compensation for making or fostering business arrange- ments. This form of bribery is prevalent in the marketing practices of pharmaceutical and health companies, and attracts scrutiny from regulators. In 2013, Johnson & Johnson agreed to a $2.2 billion settlement to resolve criminal and civil investigations into the marketing

Going Global: Donation or Bribe?

Martin Wong, the general manager for the Chinese subsidiary of an American automobile company, faces major challenges as he arranges for expatriate assignments of six managers from the U.S. headquarters in the Midwest. The managers are arriving with their families to oversee a new factory in a central Chinese town. One of Martin’s tasks is to enroll the man- agers’ school-aged children at the most prestigious school in the city. However, the school has a lengthy wait list that will prevent admittance of new students for many years. The schoolmaster indicates that uniforms are lacking for the sports program, suggesting that the company make a sizeable donation to fund equipment and team uniforms. Martin real- izes that a donation would allow the children of the company’s expatriates to move up the list and ensure admittance for the coming school year. As Martin contemplates the request, the schoolmaster adds that his brother, a high-ranking government official, would be able to assist in securing expedited permits for the new factory. What should Martin do? Is the schoolmaster requesting a donation or a bribe?

Questions to Consider

1. What ethical issues are evident in Martin’s situation? What business standards and laws are relevant to the issue? What stakeholder groups are affected by this issue?

2. What due diligence should Martin undertake before donating to the school? Suggest an action plan for his next steps.

3. How should Martin communicate with headquarters and the expatriate managers regarding the challenges in school admission without jeopardizing his reputation within the company?

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Abusive behavior

Lying to employees

Discrimination

Health or safety violations

Breaching employee privacy

Improper hiring practices

Sexual harassment

0%

2005 2007 2009 2011 2013

5% 10% 15% 20% 25%

Section 3.2 Recurring Ethical Issues

of Risperdal, an antipsychotic drug (Verschoor, 2014). Charges against Johnson & Johnson include the alleged payments of millions of dollars in kickbacks to physicians and a nurs- ing home pharmacy distributor. In another case, former Pacific Hospital of Long Beach CEO Michael Drobot pleaded guilty to paying kickbacks to doctors so they would refer patients to his hospital for spine surgery (Carreyrou & Phillips, 2014). The kickbacks and bribes in the U.S. health industry increase the costs to patients, insurance companies, and Medicare.

Employee Workplace Issues

The diverse group of men and women who work for a company are a valuable resource. Employees provide labor and employers compensate workers for their contributions of skill and productivity. Within the employee-employer relationship are various ethical issues. Employees desire a workplace that they consider to be just, fair, and right. Figure 3.5 provides the most common misconduct that has affected the employee workplace in the past decade as reported in the Ethics Resource Center’s National Business Ethics Survey® (2012a, 2013b). Ethical issues include lying to employees, discrimination leading to improper hiring practices, abusive behavior and harassment, health or safety violations, and employee privacy breaches.

Figure 3.5: Employee workplace issues

U.S. employees report that seven main types of misconduct affect the employee workplace.

Source: Adapted from Ethics Resource Center. (2013). National business ethics survey of the U.S. Workforce. Arlington, VA: Ethics Resource Center.

Abusive behavior

Lying to employees

Discrimination

Health or safety violations

Breaching employee privacy

Improper hiring practices

Sexual harassment

0%

2005 2007 2009 2011 2013

5% 10% 15% 20% 25%

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Section 3.2 Recurring Ethical Issues

Lying A consistent ethical issue for employees is catching a manager in a lie. According to the Ethics Resource Center (2013b), close to 20% of employees observe managers lying to the work- force, though the survey does not clarify which type of lying occurs. The Truth about Lies in the Workplace reports that two thirds of employees believe that senior leaders and manag- ers of their organizations do not always tell the truth (Goman, 2013). Managers may blame others, take undue credit, and break promises. The most common complaint from workers is that the company withholds crucial information by omitting negative information or telling half-truths. Though employers may feel that they are protecting employees from bad news, employees want information. They want to know whether the company is having financial problems or if layoffs are imminent. When managers are honest with employees, employees will be more inclined to be honest in return. When managers distort the truth, employees lose trust in their managers and confidence in the company.

Discrimination Discrimination is the unjust or prejudicial treatment of people on arbitrary grounds, such as race, gender, or age, resulting in denial of opportunities like business employment or pro- motion. Key to this definition is the idea that the treatment is based on arbitrary grounds. A person’s gender or skin color is irrelevant to his or her job performance, and it would be arbitrary to deny that person an employment opportunity on that basis. It should be noted, however, that it is not discriminatory to deny opportunities to individuals because of some unique feature about them. Suppose that a blind person applied for a job as an air traffic con- troller and was denied employment for the specific reason of blindness. In this case, having eyesight is a necessary requirement for performing that job, and there is nothing arbitrary about denying that opportunity to someone who is blind.

The type of discrimination that is most relevant to businesses is employment discrimination, which involves the prejudicial treatment of people in hiring, promotion, and termination deci- sions. In the United States, Title VII of the Civil Rights Act of 1964 prohibits employment dis- crimination based on race, color, religion, sex, or national origin. The U.S. Equal Employment Opportunity Commission (EEOC) is responsible for enforcing federal laws that make it illegal to discriminate against a job applicant or an employee because of race, color, religion, sex (includ- ing pregnancy), national origin, age (40 or older), disability, or genetic information. It is also illegal to discriminate against a person because he or she complained about discrimination, filed a charge of discrimination, or participated in an employment discrimination investigation or lawsuit. Affirmative action refers to policies that seek out, encourage, and sometimes give preferential treatment to employees in groups protected by Title VII.

To avoid engaging in discriminatory behaviors, companies must make hiring, promotion, reward, and other employment decisions based on individual merit—never on personal characteristics protected by law. An antidiscrimination policy needs to consider both rele- vant laws and emerging discriminatory cases. For example, legal claims of discrimination by mothers and fathers passed over for advancement because of family responsibilities have a success rate of two times greater than other employment discrimination cases (Williams & Cuddy, 2012). A mother with a young child has a 79% lesser chance of being hired and a 50% chance of a promotion than women without young children. The courts have ruled in favor of employees claiming discrimination for family responsibilities. In 2007, Bimbo Bakeries USA

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Section 3.2 Recurring Ethical Issues

paid $2.3 million to a female delivery driver after deciding her pregnancy made her unquali- fied to do her job and refused to find her another position within the company (Williams & Cuddy, 2012).

Abusive or Intimidating Behavior Abusive or intimidating behavior is one of the most common ethical problems for employees. Bullying is an abusive behavior that involves harassing, offending, socially excluding, and belittling a person or group repeatedly over time. Examples of bullying include using profan- ity, gossip, or derisive jokes; shouting at an employee; publicly embarrassing, degrading, or humiliating someone; and blocking an employee’s promotion, or actively campaigning to ter- minate their employment. When bullying creates an intimidating, hostile, or offensive work environment, the conduct is harassment. Acts of harassment make it difficult for others to feel comfortable and productive in the workplace. Harassment that includes offensive com- ments, jokes, or pictures related to race, religion, ethnicity, gender, or age is illegal and places an organization at risk for legal and financial liabilities.

Sexual harassment consists of annoying or persecuting behavior in the workplace that asserts power over a person because of his or her sexual identity. Sexual harassment can take the form of unwelcome sexual advances, flirtations, requests for sexual favors, and any other verbal, visual, or physical conduct of a sexual nature. The EEOC classifies sexual harassment as a form of sex discrimination under Title VII, and defines two situations where harassment is illegal. The first is the quid pro quo, in which submission to sexual activity is required to get or keep a job. The other is a hostile environment, where sexually offensive conduct is so pervasive that it makes work unreasonably difficult. Three conditions suggest that sexual harassment has occurred:

• “The actions are severe or repetitive; a single incident is unlikely to be viewed as harassment.

• The victim’s position at work is impacted by the behavior. • The conduct is of a sort that any reasonable person would take offense to it.” (Ferrell &

Ferrell, 2009, pp. 28–29)

Health or Safety Violations Job safety and employee health are concerns for both employers and employees. Employees expect management to act responsibly and to put employee health and safety beyond any other concern of the business. Annually, more than 3 million U.S. workers in private industry are injured or become ill while on the job (OSHA, 2014a). In 2012, workplace violence—including assaults and suicides—accounted for 17% of all work-related fatal occupational injuries. Worldwide, an estimated 317 million employees were injured at work and 2.34 million people died from work- related accidents or diseases in 2008 (ILO, 2011). The International Labour Organization (ILO) (2011) found that psychosocial factors, such as stress, harassment, and violence at work, affect worker health causing 50% to 60% of lost working days.

U.S. employers must comply with the Occupational Safety and Health Act, which gives workers the right to a job free from recognized hazards that are causing or likely to cause death or seri- ous physical harm. The Occupational Health and Safety Administration (OSHA) administers

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this law. The mission of OSHA is “to assure safe and healthful working conditions for work- ing men and women by setting and enforcing standards and by providing training, outreach, education and assistance” (OSHA, 2014a, para. 1). The top 10 most frequently cited safety standards by OSHA relate mainly to construction or manufacturing industries and include:

1. Duty to have fall protection (i.e., guardrails, safety nets, harnesses) 2. Hazard communication of chemicals 3. Safe scaffolding (for construction) 4. Respiratory protection 5. Powered industrial trucks (i.e. fork trucks, tractors, platform lift trucks, motorized

hand trucks) 6. Lockout/tag out (the servicing and maintenance of machines and equipment in

which the unexpected energization or startup of machines or equipment, or release of stored energy, could harm employees)

7. Ladders (capable of supporting load) 8. Electrical: wiring 9. Machine guarding (i.e. barrier guards, two-hand tripping devices, electronic safety

devices) 10. Electrical: general requirements

(OSHA, 2014b)

Although the ILO provides guidelines to member countries, every country imposes its own workplace safety code with detailed regulations addressing specific workplace risks. For example, breaching safety duties can mean criminal penalties in some countries, such as Rus- sia, France, and Italy. According to the ILO (2011), most of the estimated 317 million work- related accidents in 2008 occurred in South-East Asia and Western Pacific countries (26% and 38% respectively). In Bangladesh’s $22 billion garment and textile industry, fires and building collapses have killed or seriously injured thousands of Bangladeshi workers since 1990. Over a thousand workers died in the 2013 collapse of garment factories of Rana Plaza. Subsequent inspections of other factories in Bangladesh have found safety problems includ- ing overloaded ceilings, exposed cables, and locked fire escapes (Schneider, 2014). Working conditions remain very dangerous in many developing countries, prompting questions as to what multinational companies should do to prevent worker injuries in these countries.

Labor standards refer to the conditions under which a company’s employees, or the employ- ees of its suppliers, subcontractors, or others in its commercial chain, work. In the United States, the Fair Labor Standards Act establishes minimum wage, overtime pay, recordkeeping, and child labor standards. However, laws and practices that establish fair wages, acceptable working conditions, and employee rights vary greatly around the world. Ethical issues relat- ing to labor conditions in developing countries affect multinational companies. Well-known companies, such as Nike, Inc. and Walmart, receive criticism for sourcing products from fac- tories where employees, sometimes including children, are forced to work long hours at low wages, often under unsafe working conditions. Therefore, global companies establish sup- plier codes of conduct prohibiting sweatshops and child labor.

Safety within a company relies on a culture that values safe behavior beyond complying with regulations. Consider how devalued employees feel if a general manager says, “Before you tell me I have to do something, you provide me with the probability and financial implica- tions of getting caught not implementing these safety requirements or in not providing a

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Section 3.2 Recurring Ethical Issues

safe workplace for employees. Everything is a business decision here” (Wachter, 2011, p. 50). Instead, a company safety program based on ethics can create a culture of care with healthier workers, fewer accidents, and higher quality. An effective safety program encompassing ethi- cal and compliance aspects includes the following qualities:

• “All employees comply with safety rules and regulations at all times. • Employees continuously search for safety hazards and take personal initiative to

correct these hazards when found. • Line workers are eager to participate in all safety-related activities and are encour-

aged through positive recognition. • All safety-related issues are communicated openly and are not inhibited by fear of

reprimand. • Safety-related incidents are viewed as an opportunity to identify overall system

failures and, therefore, improve the system and thus, individuals are rarely found to be at fault.

• Education and training programs teach employees the needed knowledge, skills, and abilities to perform their jobs safely.

• All employees fully understand and appreciate the potential hazards of the opera- tions performed.

• Employees do not consider taking any unnecessary risks. • Managers never (knowingly or mindlessly) encourage employees to take unneces-

sary risks. • Regular behavior-based feedback on safety matters is a way of life, and corrective

feedback is constructive and appreciated. • Peer pressure acts toward, rather than against, safety and is actually peer support.”

(Geller, 2006, pp. 39–40)

Privacy Issues Breaches of employees’ privacy rights occur when employers seek and use information about their employees’ health, work activities, and even off-the-job lifestyles. When these issues arise, management has a responsibility to act ethically toward employees while meeting company needs. In the business context, privacy rights refer to protecting an individual’s personal life from an unwarranted intrusion by the employer. Key workplace issues where privacy dilemmas often emerge include electronic monitoring, video surveillance, and drug and alcohol abuse testing. Employer intrusion into an employee’s personal life may lead to higher levels of employee stress, lower levels of productivity, and diminished health and morale (Sánchez Abril, Levin, & Del Riego, 2012). Employees fear that information about health conditions may lead to discriminatory practices.

New communication technology creates greater risks of the unethical use of employees’ private information. Organizations are logging, monitoring, and auditing employees’ online activity to detect internal threats to the company. A survey by the American Management Association and ePolicy Institution (2007) found that significant percentages of employers monitor employee Internet usage (66%), e-mail (43%), and phone usage (45%) with 16% of employers recording phone calls and 9% recording voicemail messages. Table 3.4 lists rea- sons for employee dismissals for e-mail or Internet misuse, according to the survey.

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Table 3.4: Reasons for employee dismissals

E-mail Misuse Internet Misuse

Violation of any company policy (64%) Violation of any company policy (48%)

Inappropriate or offensive language (62%) Viewing, downloading, or uploading inappropriate/ offensive content (84%)

Excessive personal use (26%) Excessive personal use (34%)

Breach of confidentiality rules (22%) Other (9%)

Other (12%)

Source: 2007 Electronic Monitoring & Surveillance Survey, by American Management Association & ePolicy Institution, 2007, retrieved from http://www.plattgroupllc.com/jun08/2007ElectronicMonitoringSurveillanceSurvey.pdf

Employees express concern that employers are invading their online privacy via electronic monitoring in the workplace (Eivazi, 2011). Employee unease can hinder company initia- tives to improve efficiency. For example, an organization may feel that installing systems that monitor fuel and driving patterns in company cars is a socially responsible initiative to save energy. Employees, however, may perceive the monitors as invading privacy as the company learns of their movements even outside of working hours (Bolderdijk, Steg, & Postmes, 2013).

Employers and employees are disputing a company’s right to monitor personal use of e-mail and phone. According to the Wiretap Act, part of the U.S. Electronic Communications Privacy Act (ECPA), businesses may intercept employee communications if the device is provided by the company and used in the ordinary course of business (Huth, 2013). Another relevant fed- eral regulation for U.S. companies is the Stored Communications Act, which regulates access to and disclosure of stored electronic communications. Regulations alone cannot prevent misconduct. A New York district court found that an employer’s unauthorized access to a for- mer employee’s personal Internet-based e-mail accounts was a violation of the Stored Com- munications Act, despite the existence of a company policy stating that employees have no right to privacy of e-mail generated from their computer systems (Sánchez Abril et al., 2012). The employer obtained access to the former employee’s e-mail accounts by correctly guess- ing his password from stored company passwords.

Privacy laws in other countries vary greatly. In many European countries, privacy is consid- ered a human right. A review of employee monitoring cases in Europe found that overall, monitoring activities tend to be less intrusive than some U.S. cases; courts tend to favor the employees in privacy-based cases; intrusive monitoring is not an expected nor required prac- tice of European companies; and finally, employer warnings of monitoring practices are not an acceptable defense (Determann & Sprague, 2011). Worldwide, companies need to under- stand the legal and ethical considerations of breaching employee privacy.

Companies balance a need to safeguard employee privacy with the use of new technology to detect misuse of proprietary data or fraud. New technologies in monitoring employee activity include keystroke monitoring, global positioning systems (GPS), and radio frequency identi- fication (RFID) chips. Other ethical issues arise from the prevalent use of electronic devices and electronic communications by employees. The proliferation of cell phone cameras in the workplace could threaten company proprietary information or lead to harassment (Parekh, 2005). Employers claim social media postings are not private. A Massachusetts high school

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Section 3.3 Challenges in Recognizing an Ethical Issue

teacher was dismissed after posting on her Facebook page that she thought residents of the school district were “arrogant and snobby” and that she was “so not looking forward to another year” (“H.S. teacher loses job over Facebook posting,” 2010, para. 6). The challenge is for companies to recognize the recurring misconduct that pertains to their business and be alert for emerging ethical issues.

3.3 Challenges in Recognizing an Ethical Issue It can be difficult for an organization to address all of the potential ethical concerns that could affect its business. How can a company determine which ethical issues deserve the most attention? Some issues demand company attention because of societal pressures from indi- viduals, organizations, associations, governments, and governmental agencies. As described in Chapter 1, the importance of social issues shifts in response to political and social changes. Numerous examples in the preceding sections emphasize emerging ethical issues from new technology. To identify trends that could influence misconduct in the workplace, companies should routinely perform environmental scanning, a process that monitors an organiza- tion’s internal and external environments to detect early signs of opportunities and threats that may influence its current and future plans.

New ethical issues may also arise from business strategies focusing on growth and innova- tion. Ethical companies include an assessment of ethical risks as a normal step in the strategic planning process. Table 3.5 provides examples of ethical considerations of some common strategic goals of business.

Table 3.5: Identifying the ethical considerations of business strategy

Strategy Business Plan Ethical Considerations

Grow revenues 15% growth in 2015 Revenue recognition Marketing practices

Innovation Design two new products a year Product safety Protect trade secrets

Diversification Enter new business line Conflict of interest

Increase market share Grow customer base Marketing practices Customer privacy

Consider the new ethical issues that could arise if a company seeks to grow revenues. Finan- cial management should encourage truthful accounting, and look for signs of channel stuff- ing (pushing inventory to distributors to increase sales) and reporting sales of undelivered goods. The sales force should be encouraged to maintain the integrity of the company and avoid overpromising customers to make a sale or manipulating orders to meet sales goals.

New product development requires robust quality checks to ensure the product is safe and meets customer expectations. In competitive industries, new products are tightly guarded, thus leaking of any information can harm the product release. The company must address ethical considerations that arise from diversification of the business into a new industry. For

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Section 3.3 Challenges in Recognizing an Ethical Issue

example, a manufacturer of industrial products wants to market a consumer product. The pricing and promotion of the product creates new concerns for the company. Selection of distribution channels can lead to conflicts of interest if employees have personal connections with potential retailers. A strategy for growing market share through acquiring customers or increasing purchase volume can lead to unethical marketing practices. Marketers may misuse compilations of customer personal information from multiple sources (Nunan & Di Domenico, 2013). For an example of an ethical issue relating to the use of personal data, see Reputation Risk: How Target Knows Your Secrets and if It Keeps Them.

Reputation Risk: How Target Knows Your Secrets and if It Keeps Them

A New York Times article exposed the use of personal information by the mass retailer, Target Corporation (Duhigg, 2012). The article tells the story of an irate father upset with a Minne- apolis Target store for sending coupons for baby clothes and furniture to his teenage daughter. When the store manager learned that the coupons were generated using an algorithmic calcu- lation based on prior purchases to detect pregnancy, the manager called the father to apologize for the error, only to learn that the man’s daughter was indeed pregnant but afraid to tell him.

Charles Duhigg recounts the statements he received from Target after contacting them for the article:

“We’ve developed a number of research tools that allow us to gain insights into trends and preferences within different demographic segments of our guest pop- ulation.” When I sent Target a complete summary of my reporting the reply was more terse: “Almost all of your statements contain inaccurate information and publishing them would be misleading to the public. We do not intend to address each statement point by point.” The company declined to identify what was inac- curate. They did add, however, that Target “is in compliance with all federal and state laws, including those related to protected health information.” (para. 58)

Whether or not the story in the article is true, the use of personal information for marketing has ethical implications. Target is not the only business to collect data on its customers. Many retailers track shoppers through loyalty cards, credit card use, surveys, or mail-in rebates. What is unsettling for consumers is that retailers now supplement their data with demo- graphic and purchased information such as age, ethnicity, marital status, family size, zip code, distance from nearest store, job history, salary, owns or rents, education, credit cards, politi- cal affiliations, and frequent website use.

Now consumers know that Target maintains a database full of their most private and per- sonal information. Consider then the trust consumers have of keeping their information secure after learning its December 2013 data breach that compromised personal or payment information for as many as 110 million people. Target’s sales dropped significantly as a result and prompted the resignation of the chief information officer (Harris, 2014).

Questions to Consider

1. Should customers be able to request that their personal information be deleted from a company database?

2. What should be the obligation of retailers such as Target to protect their consumers against the loss of their personal information?

3. Who should bear the responsibility if there are losses from the data breach, the retailers, or the credit card issuers?

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Summary & Resources

Recognizing ethical issues in business can be challenging. Sometimes, a focus on profits, sales goals, or other business goals blinds an employee to consider the ethical dimensions of a deci- sion. Emerging issues may create situations where misconduct occurs before processes are in place to detect and reduce unethical behaviors. As new technology enters the workforce, new ethical issues require company attention. Finally, business strategic planning should include the ethical considerations of new business activities.

Summary & Resources

Chapter Summary Ethical issues are a normal occurrence in business, but may be difficult to identify. Ethical dimensions exist when a business problem, situation, or opportunity has the potential for the business to knowingly or unknowingly: 1) violate a commonly accepted ethical principle or stated business standard; and 2) inflict significant, undue, inappropriate harm on any stake- holder. Employees should pay particular attention to recurring ethical issues that may disrupt their work. One category of misconduct relates to employee misuse of company resources, such as stealing, leaking corporate confidential information, and insider trading. Other ethical issues relate to honest communication that demonstrates respect and fairness toward com- pany stakeholders. Ethical misconduct occurs when one stakeholder group takes advantage of another through lying, fraud, conflicts of interest, and corruption. Employee workplace issues include discrimination, harassment, health and safety violations, and privacy breaches.

It can be difficult for an organization to address all of the potential ethical concerns that could affect its business. One reason is that a focus on profits, sales goals, or other business goals blinds an employee to consider ethical dimensions of a decision. Another reason is that emerging issues may create situations where misconduct occurs before processes are in place to detect and reduce unethical behaviors. As new technology enters the workforce, new ethi- cal issues require company attention. Finally, business strategic planning should include the ethical considerations of new business activities.

Key Terms

accounting fraud The misrepresentation of a company’s financial reports through a misstatement or omission of material information.

affirmative action Policies that seek out, encourage, and sometimes give preferential treatment to employees in groups protected by Title VII.

bait and switch advertising A sales pro- motion in which a company offers consum- ers an appealing deal, but then changes the deal when consumers make direct inquiries.

bribery The offering, promising, giving, accepting or soliciting of gifts, loans, fees, rewards, or other inducements for an action that is illegal, unethical, or a breach of trust.

bullying Abusive behavior that involves harassing, offending, socially excluding, and belittling a person or group repeatedly over time.

commission lying The act of making a statement that intentionally deceives the receiver of the message.

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Summary & Resources

conflict of interest A situation in which regard for private interest or gain leads to a disregard for the needs of a company or company stakeholder.

corruption The abuse of entrusted power for private gain. In business, the conse- quence of corruption such as bribery and kickbacks is an ongoing concern.

discrimination The unjust or prejudicial treatment of people on arbitrary grounds, such as race, gender, or age, resulting in denial of opportunity, such as in business employment or promotion.

employment discrimination The preju- dicial treatment of people in hiring, promo- tion, and termination decisions.

environmental scanning A process that monitors an organization’s internal and external environments to detect early signs of opportunities and threats that may influ- ence its current and future plans.

ethical dilemma A situation that requires an individual to choose among alterna- tives that create a values conflict among stakeholders.

ethical dimension The part of a decision that describes what ought to be and includes value judgments.

factual dimension The part of a decision that relates to known data and is testable.

fraud A deceptive act by one person, group, or organization that causes another to part with something of value or to surrender a legal right.

harassment Conduct that creates an intimidating, hostile, or offensive work environment.

hostile environment A work setting where sexually offensive conduct is so pervasive that it makes work unreasonably difficult.

insider trading The trading of corporate securities based on access to nonpublic information.

kickbacks A reward or compensation for making or fostering business arrangements.

labor standards The conditions under which a company’s employees, or the employees of its suppliers, subcontractors, or others in its commercial chain, work.

lying The act of making a statement that one knows to be false.

marketing fraud Communications that are false or misleading by a company in the dis- tributing, promoting, and pricing of products or services.

nepotism The show of favoritism toward one’s family members or friends in employ- ment or economic benefits.

occupational fraud The use of one’s occu- pation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.

omission lying The nondisclosure of rel- evant information.

privacy rights The protection of an indi- vidual’s personal life from an unwarranted intrusion by the employer.

quid pro quo Submission to sexual activity that is required to get or keep a job.

sexual harassment Annoying or persecut- ing behavior in the workplace that asserts power over a person because of his or her sexual identity.

trade secret Commercially valuable infor- mation for which the owner has taken rea- sonable efforts to maintain its secrecy.

white-collar crime Economic offenses committed by some combination of fraud, deception, or collusion.

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Summary & Resources

Critical Thinking and Discussion Questions

1. Mary is an administrator for Acme Company. After the first round of negotiations with a vendor over a new supply agreement, Mary finds some documents labeled “Confidential” in the conference room. The documents are from the vendor and contain their company information. What potential ethical issue(s) does Mary face in this scenario? What should she do with the folder?

2. You received a promotion and transferred to a new department a few weeks ago. Get- ting a feel for the new job and the team is taking some time, but you are eager to fit in and develop strong working relationships with this group, just as you did on your last team. However, you notice that one of your new team members, Frank, continuously makes fun of Steve, another team member. You hear Frank saying very cruel things to Steve and passing them off as jokes. Steve laughs along half-heartedly, but he is clearly uncomfortable. Oftentimes, the nasty remarks involve his age, and occasionally his eth- nicity. You feel apologetic for Frank’s behavior. On one hand, you feel that you should speak up to defend Steve. On the other, you do not want to get off on the wrong foot with the team, and figure that if the joking really bothered Steve, he would stand up for himself. What are the ethical issue(s) in this scenario? What should you do?

3. Genetic testing is becoming an accurate method of detecting the likelihood of devel- oping various diseases, including cancers. How could genetic testing create ethical issues in the workplace? Could a company require employees to undergo such tests to reduce healthcare costs and prevent employee injuries?

4. What ethical issues should an American company consider when moving production to Cambodia? How do they differ regarding domestic risks for misconduct?

5. Search the news for an ethical issue currently being faced by a company. How does the news coverage of the incident or issue differ on the underlying problem at the company?

Case Study: Family Ties

Khaled has a great job as an engineer in the Saudi Arabian office of a multinational food and consumer product company. One of his tasks is to arrange for the disposal of outdated equip- ment. The process for disposal involves issuing a fixed assets disposal order with the pur- chasing staff, which then seeks bids from a supplier. Khaled’s father owns a disposal service that is bidding for the asset disposal contract.

Generally, in the Middle East, there are strong ties among family and friends. Families tend to be large and the extended family is quite close. Saudi Arabians take their responsibilities to their family very seriously. Individuals rely on their family for support in times of trouble. In Saudi Arabia, nepotism is encouraged since employing people one knows and trusts is a pru- dent decision. There is great shame if a family member or friend is in a position of power and refuses to help when asked.

Shortly after the request for bids is announced, Khaled receives a request from his father for more information. As the project manager, Khaled has access to the book value and history of the asset to be disposed. There are other Saudi Arabian suppliers bidding on the project. Khaled knows that his father’s company is suffering from the economic downturn and needs this contract to stay in business.

(continued)

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Summary & Resources

Suggested Resources

Cisco Systems, Inc., Ethics@Cisco

www.cisco.com/web/about/citizenship/ethics/index.html

Uniform Law Commission, Trade Secrets Act

http://www.uniformlaws.org/Act.aspx?title=Trade%20Secrets%20Act

FDA, Prescription Drug Advertising

http://www.fda.gov/Drugs/ResourcesForYou/Consumers/PrescriptionDrugAdvertising /default.htm

International Labour Organization (ILO)

www.ilo.org

Occupational Safety & Health Administration

www.osha.gov

Questions to Consider

1. What should Khaled do? 2. What are the ethical issues in this situation? 3. How can the company provide direction for Khaled in handling this situation? How

does the Saudi Arabian culture affect company efforts to avoid misconduct?

Case Study: Family Ties (continued)

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