Week 4 assign Leg Env

Business Ethics and Conflict Management 4

Business ethics has become one of the most important and timely topics for business students. Traditionally, business ethics was approached as a discussion of individual ethical philoso-phies. This is still important and will be part of this chapter. However, since the 1960s, busi- ness ethics has become an area of scholarly study within the business academy, a specialty worthy of research into the day-to-day issues faced by companies of all sizes as well as the individuals making crucial decisions that affect our whole economy. Business scandals prompt distrust of our profession, trigger government regulation, and can be so serious that some businesses do not sur- vive them.

As a manager, you set standards for those who work for you, and employees look to you for guid- ance. As such, having an understanding of the connection between ethics and business law is cru- cial to your success. In this chapter, we will review the basics of ethical philosophy as it relates to business law, look at some of the important findings scholars have discovered in the last 50 years of studying business ethics, and provide specific suggestions for how to create an ethical corporate culture and how to make individual ethical decisions.

4.1 Ethics and the Law

By definition, law concerns itself with issues of right and wrong and the administration of jus-tice. Those who help shape the law need valid ethical reference points to steer the law in the direction of the common good. Philosophy of Ethics

Ethics is the branch of philosophy that is concerned with the study of morality. Ethical inquiry centers on concepts such as good and evil and right and wrong. Thousands of years of philosophi- cal inquiry into the field of ethics have produced numerous conflicting theories by noted classical and contemporary philosophers. Not surprisingly, however, no consensus has emerged as to which theory is the most valid. While this may not be surprising, it is troubling, since law is closely tied to the fragile, ephemeral principles that are at the heart of ethics.

Legislators, judges, presidents, governors, and regular citizens who help to shape the law through their official capacity or at the ballot box may not consciously engage in the study of ethics in shap- ing their views on what constitutes justice or how to best promote the common good. Nevertheless, most of us act in accordance with certain principles that we may commonly refer to as our values. Whether we acknowledge it or not, the guiding principles by which we steer our lives and which form the basis for our core ideas about right and wrong are an expression of our ethical philosophy. The names of the ethical systems we adhere to, and the notable philosophers who espouse them, are not as important as the views themselves, which help shape our government and mold our laws.

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Philosophical Theories

The quest to discover ethical truths has led Western philosophers on some very different paths throughout the past 2,500 years. Law inevitably reflects a society’s ethical views and values. Therefore, even a brief glimpse at some of the core principles that underlie various systems of ethics can be very useful. This study will enhance our understanding of the common thread of ethics that runs through every nation’s system of jurisprudence.

Ethical Absolutism Ethical absolutism is an ethical philosophy with many diverse branches all tied in to the central idea that there are certain universal standards by which to measure morality. Under this philosophy, concepts such as good and evil, right and wrong, and justice have a separate objective existence that can be discovered and understood by human beings through philosophical inquiry and introspection. Right and wrong are concepts that stand on their own and do not change based on circumstances or on the outcome of a person’s actions. If stealing is wrong, then it is always wrong, regardless of the circumstances sur- rounding it. Thus, stealing is always morally wrong, whether it is done out of greed, for sport, or to feed a hungry child. Proponents of this broad branch of ethics represent a wide range of schools of thought that often include diametrically opposed worldviews.

Religious Fundamentalism Like ethical absolutism, religious fundamentalism as a theory of ethics relies on the exis- tence of certain immutable truths. Unlike ethical absolutism, however, which requires that these values be discovered through philosophical inquiry and introspection, ethical norms under religious fundamentalism can be found by studying the lives and writings of prophets or by consulting holy scriptures. Under this philosophy, living a moral life depends upon strict adherence to religious principles and values. Also, its proponents often view theocracy (a state governed by divinely revealed principles) as the most just form of government.

Utilitarianism Utilitarianism has as its ethical basis the assignment of value to actions based on their outcome. Under utilitarianism, the ultimate good is defined as actions intended to bring about the greatest utility (or greatest good) for the greatest number of people. Thus, moral action under utilitarianism requires the constant evaluation of actions based on their intended result. Actions that bring about the greatest good to the greatest number of people are ethical, or good, whereas actions that fall short of that goal are unethical, or wrong. Put another way, utilitarianism does not recognize an intrinsic value to actions but rather assigns a positive or negative moral judgment to actions only in view of their intended consequences.

Deontology Deontology is a duty-based ethical theory that focuses on individual rights and good intentions. In this school of thought, an act’s morality depends on the actor’s motive, and the only unconditionally good motive is duty. Therefore, for an act to be moral or good, it

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must be undertaken out of a sense of duty. Unlike utilitarianism, in deontology, the rights of the individual are very important and there are some things one should not do, even if they would benefit a large number of people.

Ethical Relativism Like utilitarianism, ethical relativism denies the existence of absolute moral values. Also known as situational ethics, this system of thought holds that moral judgments cannot be made in a vacuum. Unlike utilitarianism, however, the yardstick by which to measure the morality of an act is not the common good but rather the circumstances that surrounded the person committing an act at the time it was committed. It is a precept of this philosophy that a person’s actions cannot be judged other than by placing oneself in the same situation that the actor faced at that point in time. So, stealing to feed one’s hungry child, for exam- ple, is not necessarily wrong. On a societal level, ethical relativism acknowledges differ- ences among cultures (cultural relativism) in the definition of right and wrong, which means that what is considered wrong or even hateful in one culture may be acceptable in another.

Nihilism Nihilism is a philosophy that denies the existence of any ethical standards. Derived from the Latin word for nothing, nihilism originated as a German philosophical movement that was popularized in 19th-century Russia and that is central to the political philosophy of anarchists, who reject all centralized authority. In nihilism, we find the ultimate rejection of order, absolute codes of behavior, or the existence of any transcendent truths. Assuming that each individual’s will, guided by the individual’s conscience, can dictate what is right or wrong, then centralized government with its “arbitrary” laws and sanctions represents an illegitimate, oppressive restraint on individual freedom.

Virtue Ethics Virtue ethics looks at the basic values one needs to develop to have a good moral char- acter. We develop these traits by making personal commitments and practicing them in our lives. Some of the virtues we can encourage are honesty, truth, trust, tolerance, kind- ness, diligence, and self-restraint. We can learn as well as absorb these qualities from our parents, religion, and schools or consciously choose to strive to be virtuous persons. This philosophy has practical application in the business world because we can model, encour- age, and reward these traits among our employees and within our companies.

Justice Ethics Justice ethics is based on the concept of fairness. This theory is closely related to deontol- ogy and the rights of the individual. The U.S. legal system has a strong grounding in pro- cedural justice and is focused on judicial process. Many of our constitutional rights protect the integrity of the legal process and ensure that all people are treated fairly in the courts. We also find this philosophy in the procedures and consistent rules that businesses create for their employees and other stakeholders. In a similar fashion, appellate judges decide cases that set precedents that apply to all of us. They must balance doing justice for the individuals involved in the case with the ramifications of how decisions will affect future case law and society as a whole.

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Ethics and Political Systems

The different ethical systems described above all have important political implications. Whether by design or by default, the ethical values held by political leaders and lawmak- ers invariably become a part of the political system and are reflected in the legal system. Ethical systems have profoundly influenced both public policy and the politics of nations. For example, the influence of religious fundamentalism can readily be seen today in a number of countries, including the United States. Taken to their logical conclusion, abso- lutist ideals can be used to justify totalitarianism. If there are certain knowable, immu- table truths that are valid for all time, then the only moral form of government, the argu- ment goes, is one that educates (or indoctrinates) the people to recognize those truths and ensures that they conform to the moral conduct that those truths dictate. Ethical absolut- ism is also readily observable in its secular (or atheistic) form in 20th-century, nonreligious totalitarian regimes. Totalitarian regimes, be they Marxist, communist, or fascist in nature, are usually based on principles of ethical absolutism.

If totalitarian regimes are based on ethical absolutism or religious fundamentalism, it is clear that democratic systems lean toward nonfundamentalist ethical principles. The assumption that a variety of plausible views exists, even on essential ethical principles, is central to a democratic form of government. The principles of representative government and majority rule inevitably lead to the adoption of some type of moral relativism as the guiding ethical principle. The very notion that issues of great import are subject to debate and can ultimately be decided by a vote, and the democratic tolerance for opposing view- points, institutionalize a kind of ethical relativism. Laws are subject to change and do, in fact, undergo change slowly over time, reflecting the changing values of their society. Individuals in democracies are free to reject ethical relativism, and many do. They can lobby their government for change, arguing for the adoption of their point of view. But a pluralistic democratic system that completely abandons ethical relativism cannot remain a democracy for long. Ultimately, questions of ethics come down to personal belief. The strength of a democracy rests in its ability to incorporate differing points of view and to obtain functional compromise on a host of issues.

Ethics and Legal Systems

It can be argued that the ethical principles of a society are reflected even in the type of legal system it chooses. The civil law system that we find in most of Europe, with its detailed codes that carefully prescribe individual rights and responsibilities, its swift administration of justice, and its limited power of judicial interpretation, tends to rein- force an absolutist or deontological ethical philosophy. In effect, governments with such systems demand strict adherence to set codes of behavior and leave relatively little room for their citizens to deviate from the established norm.

Common law systems such as ours, on the other hand, leave the judiciary wide latitude for interpreting governmental edicts found in legislative enactments. Such systems pro- vide a multilayered structure of appellate courts to further review trial courts’ application of the law, with the determinations of fact usually left to the interpretation of juries. (See also Chapter 1, The Civil Law and Common Law Traditions.)

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In short, the civil law leaves little room for arguing the validity or meaning of the law, while the common law allows great latitude to litigants to argue both. Criminal law is largely based on prohibiting and punishing antisocial behavior; as such, criminal law inevitably reflects society’s ethical standards and attempts to discourage behavior that society deems immoral. (See Chapter 6 for further discussion.)

4.2 The Regulatory Environment of Business

The ethical accountability of business is one of the areas in which government has tried to legislate ethical conduct. These policies have been vigorously debated over the years. Many people today believe that businesses have a duty to society to act in a responsible manner and to work for the betterment of society as the price for being allowed to do business and make a profit. Others hold that the sole social responsibility of business is to obey the law and turn a profit for investors. Although the issue is by no means settled, the trend over time—especially since the mid-20th century—has been to increase the amount of government regulation of business, both at the federal and state levels. Primarily through the establishment of administrative agencies (see Chapter 5), federal and state governments have put in place far-reaching regulations to ensure that business is conducted responsibly. Notably, the federal government actively regulates business through antitrust laws, securities laws, and regulations (see Chapter 31); labor laws (see Chapter 21); tax incentives; and consumer protection. The federal government has responded to business scandals by passing regulatory legislation.

Sarbanes–Oxley Act of 2002

The Sarbanes–Oxley Act of 2002 (SOX) was passed by Congress in response to the Enron scandal and other corporate misconduct. The act holds CEOs and CFOs of U.S. public companies, international companies that have registered equity or debt securities with the Security and Exchange Commission, and all accounting firms that provide auditing services to them personally liable for the accuracy of their financial reports. It also requires that companies have their internal control systems audited by an external auditor at the same time that their financial statements are being audited. The main goal of SOX is to instill in companies a culture of careful, responsible, and transparent financial reporting and corporate governance. That goal does come at a price, however. Since the passage of the bill, businesses have spent millions of dollars per year complying with the act’s strict accounting requirements. (For more on this law, see Chapter 31, Federal Securities and Antitrust Laws.)

Most corporate law is state rather than federal. The regulation of privately held and close corporations is specific to the states in which they are registered or doing business; thus, the standards may differ from state to state and from the federal rules in SOX. However, the SOX requirements can provide a model of good practice that exempt companies can use to create more transparent and accountable processes.

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Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010

In 2010, unethical acts by business organizations again triggered new regulation. In response to the 2008 financial crisis, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act. This act was intended to increase oversight of the finan- cial industry and prevent the types of risk-taking and deceptive practices (in subprime mortgage lending, for example) that were blamed for the failure of several large financial service firms, the housing market collapse, and the subsequent recession. It also created a Consumer Financial Protection Bureau (CFPB) to enforce federal consumer protection laws. CFPB has a mandate to educate and inform consumers so they can understand the terms of the agreements they make with financial companies, such as credit card issuers. (For a brief, 16-page summary, see the U.S. Senate Banking Committee website: http:// banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_compre hensive_summary_Final.pdf.)

Dodd–Frank also strengthened federal protections for whistleblowers (many states have similar laws) and promised financial rewards for individuals who come forward with information about unlawful business acts. The act aims to protect workers who come for- ward with potentially incriminating information from retaliation and firing.

A Closer Look: The Enron Scandal

The downfall of energy giant Enron in 2001 led to the government enactment of sweeping legislation to regulate the accounting prac- tices of business: the Sarbanes–Oxley Act of 2002. Operating in a newly deregulated energy industry, in the 1990s Enron had made enormous profits from trading electricity and natural gas resources to state utility companies. However, its increasingly unethical busi- ness culture created a complex web of subterfuges and deception.

In November 2001, Enron lost the vast majority of its $11 billion value. Investigated by the Securities and Exchange Commission, it was discovered that the firm was hiding billions of dollars in debt under the cover of shell companies, from which its executives were profiting richly. The company routinely destroyed, altered, or fabri- cated financial documents to hide its true actions. The scandal also led to the dissolution of accounting firm Arthur Andersen, one of the largest auditing firms worldwide at that time, which was found guilty in federal court for its negligent oversight of Enron’s finances. Several Enron company executives received jail sentences for their role in the scandal. The enactment of Sarbanes–Oxley was intended to require transparency from public companies and to prevent financial fraud from happening again on such a vast scale. According to the authors of The Smartest Guys in the Room, “The Enron scandal grew out of a steady accumulation of habits and values and actions that began years before and finally spiraled out of control.” For a description of the unfolding events, see the 2002 Time article “Enron: Who’s Accountable?” at http://www.time.com/time/magazine/article/0,9171,1001636,00. html.

The Sarbanes–Oxley Act of 2002 (SOX) was passed in response to the Enron scandal and other incidences of corporate misconduct.

James Nielsen/Stringer/Getty Images

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International Business

Legislatures and the courts (both state and federal) have also addressed ethical concerns about U.S. companies doing business abroad that are trying to skirt U.S. regulations or evade taxes. Conduct that was once seen as acceptable, such as the bribery of foreign offi- cials in the regular course of business in some foreign countries, can now bring criminal penalties. In 1977, in response to an international scandal involving U.S. companies brib- ing foreign officials to receive contracts, Congress passed the Foreign Corrupt Practices Act (FCPA). This act makes it unlawful for American companies to make payments to for- eign governments and officials to assist in obtaining or retaining business. It has also been amended to make it so that foreign officials who facilitate these bribes in the United States can be held criminally liable. Companies have paid hundreds of thousands of dollars in fines for violating this act—perhaps they consider this just another cost of doing business.

A debate has also been taking place for years about the responsibility of American firms that are selling products in foreign countries that cannot be sold in the United States (because it would violate health and safety regulations) but whose sale is not prohibited in foreign countries. This battle is likely to be fought largely in civil courts in the United States and abroad, as foreign nationals sue American companies for selling allegedly unsafe products. In the past, such claims have been made with regard to a wide range of products, including baby formula, pharmaceutical products, and pesticides. Thus, there is often a chasm between what is legal and what is right.

In an attempt to set a higher standard for the world’s businesses, the United Nations has created the U.N. Global Compact, a set of 10 principles to be voluntarily used by busi- nesses to guide their global enterprises:

• Support and respect the protection of internationally proclaimed human rights; • Ensure that businesses are not complicit in human rights abuses; • Uphold the freedom of association and the right to collective bargaining; • Work toward the elimination of forced and compulsory labor; • Work toward the abolition of child labor; • Eliminate discrimination in employment and occupation; • Support a precautionary approach to environmental challenges; • Undertake initiatives toward greater environmental responsibility; • Work toward the development and diffusion of environmentally friendly tech-

nologies; and • Resist corruption of all forms, including extortion and bribery.

Regulating From Within

In the wake of the many highly publicized corporate lapses of good ethical judgment by key players at companies such as WorldCom, Enron, and Arthur Andersen, companies rushed to implement codes of ethics, ethical training, and other processes. These measures were meant to help make employees more aware of ethical issues and provide them with practical tools for resolving potential ethical problems when they arise. While these were steps in the right direction, they cannot merely be public relations maneuvers or schemes to avoid litigation for poor risk management.

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Perhaps the best way to ensure ethical conduct from corporate citizens is to hire, promote, and retain ethical leaders. The most effective training model for ethics in any company is to have its leaders—from boards of directors to line supervisors—model ethical behavior. In such a company, leaders consistently act ethically and make it clear that they expect the same of their subordinates. In an ideal company, individuals are not rewarded for unethical behavior that is profitable but reprimanded for ethical behavior that hurts the bottom line. People who work for these organizations will not only consistently act in an ethical manner but will likely feel positive about themselves and the company for which they work.

Often, the law reactively seeks to address well-publicized ethical lapses by imposing new and stiffer penalties for ethical violations and corporate mismanagement of corporate directors and officers. In turn, corporations struggle to implement processes to show their stakeholders that they are “doing something” about the problem. Instead, they might ask themselves the following questions:

• Are existing policies or procedures encouraging unethical behavior in their employees?

• Are they appropriately screening current and prospective employees for ethical competency and integrity?

• Are employees who lie on their resumés fired if the lie is discovered? • Is adherence to ethical standards a criterion evaluated during periodic performance

reviews? • Can subordinates trust the word and motives of supervisors and executives at all

levels? • Are principled leaders, who take personal responsibility for the failure of those

they lead and share credit for the success that others have made possible, pro- moted and retained? Do people at all levels feel valued for their contributions and proud to go to work every day?

If the answer to these and similar questions is no, then ethical training and implemen- tation programs will be seen for what they are by employees and stakeholders in a company—mere window dressing.

4.3 Social Responsibility of Businesses

In the 1960s, when academia began to see business ethics as a separate topic worthy of study, the term corporate social responsibility was coined. The role of the organiza-tion as a corporate citizen that has great power to affect the whole of society became a serious topic for discussion.

Some scholars firmly contend that the corporation’s one and only responsibility is to be a lawfully run, profitable business. This point of view has many good arguments. A profitable company provides valuable goods and services, jobs, tax revenues, and return on investments by shareholders and venture capitalists. A successful economy depends on thriving businesses. However, while this is true, some people feel it does not go far enough.

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There is an old saying that “with great power comes great responsibility.” Business in the United States is very powerful, and the decisions and actions of businesses have a great influence on society, so their responsibility goes further than just making a profit and doing what is legally required of them. Rather, corporations should use their wealth and power to take on voluntary roles to support social good. One way to be socially responsible is through charitable giving. Many arts and social programs in the United States are supported by funds from corporate sponsors. Some entrepreneurs see oppor- tunities to solve social problems while nurturing a viable business venture. They are using their skills to start new companies and projects in which they can be innovative, creative, and socially responsible and make a good living at the same time. This is often referred to as “enlightened self-interest.” For example, if you have a strong personal commitment to improving the environment, you might start a business that provides recycling for rural areas not covered by a municipal recycling program, thereby help- ing the environmental cause and making money at the same time. In his book Stirring It Up: How to Make Money and Save the World (Hyperion, 2008), Gary Hirshberg describes how he built a $300 million-per-year business (Stonyfield Farm) using environmentally sound practices to manufacture organic yogurt.

All businesses employ skilled individuals that can benefit society in many ways. For example, an engineering firm or a company that has many scientists on staff could give their employees release time to work with children in their local schools to interest them in science. An accounting firm could volunteer time to audit the books of local nonprofits. Many companies now pride themselves in their commitment to improving (or at least not harming) the environment through responsible business practices. Companies that con- tribute to their communities create goodwill and make their employees proud to work for them, which is a potent motivator.

Companies should approach planning for social responsibility like any other business strategy. Possible steps to achieve this goal are as follows:

• Look at the core competencies of your organization and see what skills you have to offer;

• Look for unmet needs in the community that your employees would be proud to be involved in;

• Ask your employees for ideas and projects; • Find partners you can work with. For example, a TV station could launch a

yearly coat drive and team up with a dry-cleaning company to provide clean, mended coats to people in need;

• Assign someone the responsibility of implementing and following through. You may need to form a committee to make decisions and do planning;

• Make a timeline, set goals, and determine a budget; • If charitable giving is what you feel would be best, set a financial limit and deter-

mine the criteria for distribution. For example, decide on a goal to fund special projects for the public schools;

• Carry through with your plan; • Assess the success of your efforts; and • Make improvements if necessary.

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4.4 How to Create an Ethical Company: Lessons From the Field of Business Ethics

In the almost 50 years of studying business ethics, several important specific lessons have been learned: 1. Ethical businesses are more successful. 2. It is crucial to have the commitment of the leadership of the company to create an

ethical organization. 3. The values and ethics of the corporate culture from the top to the bottom of a

company are vitally important and difficult to change. 4. It is important to hire good people, but that isn’t enough. Companies need to

train people on how to handle the specific issues that may arise in their work and how to think through difficult ethical choices.

5. Businesspeople need to be able to “voice their values” and be heard. 6. Ethics must be implemented like any other strategic business decision.

Let’s discuss these key principles in more detail.

Ethical Businesses Are More Successful

Although not all businesses practice ethical integrity, research shows that ethical busi- nesses are more financially successful (“2010 World’s Most Ethical Companies,” 2010, http://ethisphere.com/past-wme-honorees/wme2010). A study of companies that had been consistently successful for more than 100 years revealed that greater than 80% of them shared some interesting common characteristics. They all had a highly focused strat- egy based on their reputation, concentrated on good relationships with customers, valued long-term employees, and held to strong core values that had been passed on through the years by the company’s leaders (TenHagen, 2008).

Many other reasons account for the success of ethical organizations:

• A good reputation is crucial: All stakeholders, customers, suppliers, bankers, and others in the mercantile community need to trust a company and want to do business with it. For example, investors don’t want to invest in companies they cannot trust to handle their funds.

• Employees want to be proud of where they work. Employee commitment and satisfaction are crucial for productivity.

• An ethical workplace where people are making good decisions and clearly understand their job responsibilities increases efficiency in daily operations. In contrast, placing unrealistic expectations on employees may make them feel so pressured that they make bad decisions and cut corners. According to Friedrich and Ferrell (1992, pp. 243–252), approximately 60% of the unethical behavior in companies is not motivated by personal greed but comes from pressure to reach business goals.

• Ethical disasters large and small are costly to companies. Even the publicity of a minor ethical mistake can adversely affect share prices for up to six months. O. C. Ferrell, a respected scholar of business ethics, refers to “ethical tsunamis” that

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can damage a company as badly as any natural disaster can wreak havoc on a city. We have seen large, famous companies fail completely after an ethical disas- ter. Businesses that are found guilty of crimes often pay huge fines and have their reputations permanently tarnished (Brewer, Chandler, & Ferrell, 2006).

• Ethical thinking is strategic, holistic thinking: the ability to look at the big picture and determine consequences large and small. Ethical thinking requires planning, looking at alternatives, and making wise choices. It also thrives on awareness, analysis, and action, just like any other sound business decision making.

Creating an Ethical Corporate Culture

Corporate culture refers to the values, goals, and character of the organization. You learn these by osmosis—by being part of the organization, from your leaders and peers. We have all started a new job and worried whether we are dressed correctly and what we need to learn to fit in, know how things are done, and what to expect. We proceed to learn how to dress, behave, and communicate from being part of a group. The culture of a business enterprise is unique. A company’s character and goals may have been set up by its founders and are imbedded in the day-to-day life of the company. If one is lucky, it is an ethical culture, and in that case, all that is needed is to reinforce the existing culture or bring it up to date. However, if ethical problems are endemic to an organization, changing that established culture can be difficult and will take time and effort to achieve.

To create an ethical corporate culture, it is crucial to have the commitment of company leadership, which sets the direction and tone of the business. Strategic planning, overall goals, and commitment of resources are decided at the top. Further, leaders are the role models for their employees and the organization’s values. Boards of directors who hire CEOs are well served to look for individuals of good character who can do the kind of holistic thinking that is needed to make both good business decisions and ethical decisions. Being the best in business certainly requires making a profit, but it also requires making a commitment to all your stakeholders. An exemplary business is fair to its employees, pays its bills on time, makes useful and safe products, operates with transparency, and is a good neighbor and citizen.

Guidelines and Codes of Conduct Leaders have the resources to implement the steps to create an ethical environment in their companies. They also know that companies and managers can be held liable for the illegal and unethical behavior of their employees. However, these guidelines and laws won’t be effective if they are just a superficial way to create better public opinion and avoid legal fines. Creating an ethical corporate culture takes a deeper commitment by leadership and must become part of the everyday thinking and action of the individuals throughout the organization.

In 1991, Congress passed the Federal Sentencing Guidelines (FSG), which encourage employers to adopt ethics and compliance programs. Because employers can be held liable for their employees’ conduct, the FSG gives organizations incentives to put into place organizational structures that build up ethical cultures. Its seven requirements are as follows:

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1. The organization must develop and disseminate a code of conduct that commu- nicates the required standards and risk areas.

2. High-ranking personnel who are known to abide by the law must have oversight of the program.

3. No one with a known tendency to engage in misconduct should be put in a posi- tion of authority.

4. A communications system for disseminating standards and procedures must be put in place.

5. Organizations must create a way for employees to report ethical issues without fear of retaliation. Monitoring and auditing systems to detect misconduct must also be developed.

6. If misconduct is detected, then the firm must take appropriate and fair disciplin- ary action.

7. After misconduct has been discovered, the organization must take steps to pre- vent similar offenses in the future.

Companies that have implemented these voluntary guidelines can reduce their liability and penalties when one of their employees commits a crime. As a result, many companies have done at least the basics necessary to comply with them.

Many organizations have developed a code of conduct and a mission and value state- ment. A good value statement is specific to your company, meaningful for your work, and something all your employees can aspire to achieve. However, creating it and posting it on your website or on the wall is not enough. This may meet the minimum standards of the FSG, but without a more active commitment, it will not be effective at creating a truly ethical corporate culture. These values must be a priority, modeled by managers, and integrated into the thinking and actions of the company. Deep-seated ethical goals should be included in the strategic planning of the company and measured like any other corporate goal for effectiveness. These general goals are important, but the company must also find practical ways to affect all employees and send this message to every corner of the enterprise.

Protecting Whistleblowers The whistleblower provisions of Dodd–Frank have been criticized for encouraging indi- viduals to go outside the organization before using the internal procedures to solve the problem. This gives companies even more incentive to make sure they are really listening to employees. Many companies are hiring independent contractors to act as ombudsper- sons who enable individuals to make anonymous reports of ethical violations without fear of reprisal. Again, this works only if it is done well with real follow-up on information and if anonymity is actually maintained.

Ethical “Risk Management” One crucial first step toward instilling an ethical culture in an organization is identifying the specific ethical risks your employees will be facing and developing a training program to directly address these risks. For example, a bank may have different ethical pitfalls than a company dealing largely in sales and marketing. A buyer may face different ethical

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questions than an engineer. The issues one faces in business may differ from those faced in everyday life. A person may be prepared to handle the ethical dilemmas in everyday life but not so much the difficult and complex issues that arise in a business setting. Hiring good people is a good start, but managers must also make sure that new hires have the tools to make decisions specific to their work.

Cross-Cultural Business Ethics Many American companies, large and small, are now doing business internationally. So they need to address the ethical and legal issues they will face doing business in other countries. Companies should not assume that the laws or codes of ethics that work well in the United States can simply be imposed on their expatriate employees and foreign subsidiaries. Creating realistic policies and procedures that are sensitive to the particular locales in which one is doing business is crucial. This doesn’t mean simply following the ethical standards of another country and jettisoning one’s own. Businesspeople must be careful to address the cultural standards in each country in a way that supports their own ethical commitments but does not offend others. Having clear guidelines protects employees and gives them solid guidance on how to address problems they encounter far from home.

Monitoring Ethics Policies Lastly, it isn’t enough for companies to put policies into effect and assume they work. Like all business actions, they must go back and evaluate effectiveness, not once but regularly, and act to correct and improve what has been put into place. Some companies are even hiring independent specialists to do “ethics audits.” For the truly committed company, these audits can give new insight from an impartial source.

How Managers Can Create an Ethical Environment

As a manager or future manager, you also have great input in creating an ethical environ- ment for the people you supervise and work with. Although a manager’s company lead- ership is vitally important in this effort, you will have daily contact with the people you supervise. Managers hire, fire, reward, discipline, train, and lead. You are the person who will be primarily responsible for the ethical decisions of your employees. Shared values that you want all your employees to possess might include honesty, respect, responsibil- ity, fairness, kindness, compassion, commitment, and trustworthiness.

Hiring Good People Hiring good people is the first step in the process. When you advertise for an open posi- tion, be clear that you are looking for an individual with not just great business skills but also one possessing sound character. Clearly state the values you expect your employees to have. When interviewing, ask situational or hypothetical questions that may be ethi- cally challenging. It will be important to see how the candidate responds. Check refer- ences and, if people are willing to tell you, don’t just find out about their job skills but also about their character.

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Train your new employees on the issues that are likely to come up in their job that may be ethically and legally challenging. This is an ongoing process. As you learn and read, pass your wisdom along and become a teacher and a supporter. Businesspeople tend to be very results oriented. One of the worst messages they can send to their employees is “Just get it done; I don’t care how.” Instead, they must reward not just results but also process. It does matter how one gets the job done. Nothing is more demoralizing to employees than seeing someone of bad character rewarded. If managers reward good results achieved the wrong way, they are encouraging unethical behavior.

Applying Discipline On the flip side, business leaders must also apply appropriate sanctions for bad or illegal behavior. It is important that companies have clear procedures and policies to guide man- agers in the area of discipline. But it is equally important for managers to be very profes- sional and consistent in applying these procedures and following the policies. Violating the code of ethics or conduct is just as serious as not having the skills for the job.

Setting the Tone A manager can create a microculture within the larger culture of the organization. The tone you set for your employees and your example are extremely important. The old say- ing “Do as I say, not as I do” doesn’t work any better in the workplace than it does with children. Your employees will be taking their cues from you. Most people would prefer and feel most comfortable doing the ethical thing. Keep in mind that the majority of your employees will basically follow company policies or simply go along with what is hap- pening in their work group. So the culture of the company and the culture you create for your employees both count.

Your employees need to feel comfortable coming to you with their most difficult prob- lems. Keep your door open. Send the message “If there is a problem, I want to hear about it.” Don’t just say it; back it up with your actions, which speak louder than words. If you have a tendency to “shoot the messenger,” the messages will stop coming, or worse, will ambush you when you least expect it. Your employees need your input when faced with issues about which they are unsure. Hearing bad news in time to deal with it isn’t easy, but it is a lot easier than cleaning up the mess later. Even with the best training and prepa- ration, you and your employees will face situations you have not anticipated. Something that is clearly wrong is easy to spot, but not all business decisions are black and white. These are the times that communication and discussion, gathering information with care- ful analysis of possible consequences, and considering business alternatives are essential. Here you can fall back on your values statement, training, and if necessary, your legal department to determine what is right and proceed accordingly.

4.5 Ethical Conflict Management

Here is a broad definition of conflict: “Conflict is when we have a different idea than someone else.” Often we may have a different idea of what is ethical than someone else. This becomes most difficult when someone in an organization is

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Section 4.5 Ethical Conflict Management CHAPTER 4

told to do something by a superior that the employee feels is wrong. This can happen in many circumstances. The CEO could be asked by the board of directors to do something he or she is not comfortable with, a manager may be asked by a superior, or a worker by a supervisor. Thus, we have the making of conflict. The most commonly cited figure is that managers spend up to 42% of their time resolving conflict (Watson & Hoffman, 1996). For more on structured forms of legal conflict resolution, such as ADR, negotiation, and arbitration, see Chapter 3.

Conflict Can Be Positive

Many of us think of conflict as negative and angry. However, conflict is a fact of life, and how we handle it is the crucial part. Conflict in an organization doesn’t always result from bad management; rather, it is often a sign that people care about what happens and are invested in ideas they believe to be worthwhile. Contrary to most of our first reactions, conflict can even be positive. Conflict can spark great conversations and stimulate our cre- ativity. People with two or more different ideas can work together and often come up with a creative solution no one would have thought of individually. In business, we often work in teams, and being able to solve problems together can strengthen relationships. Ethical dilemmas solved through cooperation can help us learn and grow and be better equipped to handle the next problem that crops up.

Handled calmly, competently, and professionally, conflict can be the seed of growth. However, handled badly, it can lead to poor communication and polarization within the workplace, decrease productivity, and damage people’s trust in one another. Unethical decisions that are forced on employees can propel them to leave for other jobs or even be fired.

Principled Negotiation

One of the best ways to handle the discussion of conflict is to use the skills of principled negotiation from Fisher and Ury’s classic book, Getting to Yes (2011). This method assumes that the vast majority of people with whom we negotiate also have a continuing relation- ship with us. The goals of principled negotiation are to improve, but at least not damage, relationships; reach a fair conclusion; and do this efficiently, without wasting time, money, or emotional energy.

Be Hard on the Problem but Soft on the People The first step in principled negotiation is to be hard on the problem but soft on the people. An ethical question is a problem that needs to be worked on together to come up with an answer. This is not the time to blame or point fingers. Working together to solve a prob- lem, rather than approaching the problem as an adversarial situation with different sides, brings people together. This is the time to understand the other person’s point of view and to communicate clearly what each one sees as the problem.

Define Your Interests, Not Positions The second step is to define your interests, not positions. This is where you work to com- municate your goals. What is the outcome you need in this situation? Fisher and Ury

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Section 4.6 Making Ethical Decisions CHAPTER 4

use the excellent example of two people sitting at a table in the library. One person gets up and opens the window by the table they are sitting at. The other person gets up and closes it. The librarian, sensing a problem, goes over to the table and asks what is going on. One person takes the position that he wants the window open, and the other says she wants it closed. The librarian, in order to discover their goals and their interests, asks each, “Why?” He says it is stuffy, and she says she doesn’t like a draft blowing on her. The librarian walks over to a nearby table and opens a window. She has solved the conflict by looking at the goals they wanted to achieve and solved the problem with a solution nei- ther had thought of. When dealing with conflict, if you dig in your heels instead of look- ing at the goal you want to achieve, you don’t leave room to solve your problem.

Invent Options for Mutual Gain The third step is to invent options for mutual gain. This is the time to look at all the differ- ent ways to reach your goals. If someone takes the position that the only way to make a profit is to cheat, that no doubt limits your options. By brainstorming and coming up with a variety of ethical ways to make a profit, you can look at alternatives and pick a better, more ethical way to handle something. Don’t stifle your creativity and leave your values behind by assuming only one way to handle the situation.

Looking for mutual gain means starting your discussion by looking for shared interests. For example, you might say, “I know we both want what is best for our company” or, “Finding a good solution to this problem is going to help us all.” Start out by practicing agreement rather than emphasizing areas of conflict.

Use Objective Criteria The fourth step in principled negotiation is to use objective criteria. Support your options with real data and information. Look at the pros and cons, the cost and benefits. Employ the tools at hand, which include online resources, business and legal libraries, and statisti- cal data, to reinforce your decisions.

Yield Only to Principle Fisher and Ury leave us with some final advice. Never yield to pressure but only to prin- ciple. Make your decisions based on real information and using your best values and character. In order to do this, be open to listen and be persuaded to do the right thing. Good ethical decisions, like all sound business decisions, come from careful thinking and planning and accurate information. Look at the possible consequences of different options and the whole picture of what is happening.

4.6 Making Ethical Decisions

In section 4.1, Ethics and the Law, we discussed personal philosophies. Making good decisions also means knowing and understanding what makes us tick. We all have to consciously decide what kind of person we want to be. Living with the guilt and stress of acting unlawfully or unethically can take its toll, and most of us want to do the right thing and are happier being our best self.

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Section 4.6 Making Ethical Decisions CHAPTER 4

Failing to Act

In a study done by Yale professor Mary Gentile, and as discussed in her book Giving Voice to Values (2010, p. 214), the author found a profound difference between people who chose to do the right thing and those who did not. The people who did the right thing weren’t smarter, stronger, or better businesspeople than those who did not choose the ethical course. The difference was in how they posed the question they needed to answer. The people who chose not to act asked, “What are the risks of doing something?” The people who made the ethical choice asked, “What are the risks of doing nothing?”

The people who acted by doing the ethical thing looked at the consequences of failing to act. They took a broad, holistic look at the possible consequences to their company and themselves instead of what might happen to them now. This way of approaching a prob- lem fits well into our discussion of ethical thinking as good business and strategic think- ing: We need to project the results of our decisions into the future and base our decisions on real facts and information that rest on our principles and values.

Many people look only at the immediate risks of a decision. The greatest fear of an employee may be the ultimate consequence of losing a job or facing retaliation. This is a serious and real fear because we all know that not all managers are open to discussion and not all companies act on the values to which they pay lip service. Here are some sugges- tions for approaching a superior about an ethical problem:

1. “I need to talk.” 2. “I need your help.” 3. “Can we work on this together?”

As discussed in section 4.5, Ethical Conflict Management, go into a discussion prepared with a good ethical and business argument. Have facts and figures to support your con- cerns. Be ready with ethical alternatives that will allow you to reach the same goal. Be ready to be persuasive, not accusatory, and remain professional, calm, and confident.

Avoiding Liability

If you do something illegal in your workplace, you will be held individually responsible. (See also the discussion of respondeat superior in Chapter 21, Establishing the Employment Relationship.) The law does not accept the defense of “But they told me to do it!” If you did the act and intended to do it, you will be held personally liable. Sometimes you have to say no. You must use your instincts and values to determine whether, in some situa- tions, you just can’t do what is asked.

Giving Voice to Your Values

According to Gentile, you need to give voice to your values. This becomes easier with practice. Be open when interviewing for a job about your values, and make good character what you practice every day—not just on the day you need to talk to someone about a specific problem. Be comfortable with yourself and treat value discussions like any other

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Key Terms CHAPTER 4

anarchist A person who rebels against any authority, established order, or ruling power.

business ethics The application of moral codes or values to problems faced by com- panies or managers in their work.

civil law system Found in most of Europe, a form of government that includes detailed legal codes prescribing indi- vidual rights and responsibilities, swiftly administers justice, and limits the power of judicial interpretation. This system tends toward an absolutist or deontological ethi- cal philosophy.

common law system A form of govern- ment that leaves the judiciary with lati- tude for interpreting the governmental edicts found in legislative enactments and provides a system of appellate courts to review trial courts’ application of the law; determinations of fact are usually left to juries. This system adapts to the local cus- toms, traditions, and needs of a people.

Consumer Financial Protection Bureau (CFPB) Agency created by the Dodd– Frank Wall Street Reform and Consumer Protection Act of 2010 to enforce federal consumer protection laws. It also has a mandate to educate and inform consumers about terms of the agreements they make with financial companies.

corporate culture The values, goals, and character of an organization.

corporate social responsibility The role of the organization as a corporate citizen rather than merely a profit-making enter- prise; the notion that corporations should use their wealth and power to take on voluntary roles to support social good.

criminal law An area of the legal system that tries to prohibit and punish antisocial behavior; it reflects society’s ethical stan- dards and attempts to discourage behavior that society deems immoral.

deontology A duty-based ethical theory that emphasizes individual rights and good intentions.

Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 Legisla- tion that increased oversight of the finan- cial industry and sought to prevent the types of risk-taking and deceptive prac- tices that led to the 2008 financial crisis.

ethical absolutism An ethical philosophy tied in to the central idea that there are certain universal standards by which to measure morality and justice.

open conversation. You are much less likely to be asked to do something wrong if you live by your values every day. Be brave: You may have to make some hard choices to stay true to yourself.

We all make mistakes, but the great thing about being human is that we have choices. Sometimes we can’t change the past, but we can forgive ourselves, learn to live with the consequences, and strive to do better next time. It is never too late to be proud of the per- son you are. Doing the right thing is not always easy, but hopefully this chapter has given you some tools you can use both as a manager and an employee to reach ethical decisions.

Key Terms

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Key Terms CHAPTER 4

ethical philosophy A set of beliefs about right and wrong that guides decision mak- ing both in individuals and in societies at large.

ethical relativism A system of thought that denies the existence of absolute moral values. Also known as “situational ethics.”

ethics The branch of philosophy con- cerned with the study of morality.

Federal Sentencing Guidelines (FSG) Voluntary parameters that companies can implement to reduce their liability and pen- alties if one of their employees commits a crime; the guidelines encourage employers to adopt ethics and compliance programs.

Foreign Corrupt Practices Act (FCPA) An act that made it unlawful for American companies to make payments to foreign governments and officials to assist in obtaining or retaining business.

justice ethics A philosophical system based on the concept of fairness guiding actions.

nihilism Derived from the Latin word for nothing, a philosophy that denies the existence of any ethical standards.

principled negotiation A system of prin- cipled business negotiation that aims to improve, and at least not damage, relation- ships; reach a fair conclusion; and avoid wasting time, money, or emotional energy.

religious fundamentalism A theory of ethics that relies on the existence of cer- tain immutable truths. Ethical norms can be found by studying the lives and writ- ings of prophets or by consulting holy scriptures.

Sarbanes–Oxley Act of 2002 (SOX) Leg- islation passed by Congress in response to the Enron scandal. It makes CEOs and CFOs personally liable for the accuracy of their financial reports and requires that companies have their internal control sys- tems audited by an external auditor at the same time that their financial statements are being audited. Its goal is to instill in companies a culture of careful, responsible, and transparent financial reporting and corporate governance.

utilitarianism The assignment of value to actions based upon their outcome. Defines the ultimate good as actions to bring about the greatest utility (or greatest good) for the greatest number of people.

values Core, underlying, or guiding prin- ciples that form the basis for one’s ideas about right and wrong and are an expres- sion of an ethical philosophy.

virtue ethics A philosophical theory that looks at the basic values one needs to develop to have a good moral character.

whistleblowers Individuals who come forward with information about unlawful business acts. Both federal and many state laws protect these people from recrimina- tions, retaliation, and firing.

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Critical Thinking and Discussion Questions CHAPTER 4

Critical Thinking and Discussion Questions

1. How does ethical absolutism differ from utilitarianism? 2. “You cannot judge a man until you have walked a mile in his shoes” is a state-

ment that is best linked to which philosophy of ethics? 3. What area of law most clearly involves a society’s effort to “legislate morality”?

Do you believe this is an effective way to change behavior? 4. Where foreign countries do not yet regulate the safety of consumer products or

the workplace, what ethical responsibility do U.S. companies working abroad have to their foreign customers and workers?

5. In your view, what is the best way for a company to promote ethical conduct among its employees?

6. Explain the steps of principled negotiation. What part of this process do you find most useful? What would be the hardest to do?

7. Some argue that government needs to increase its regulation of business for the good of society as a whole, while others believe that the marketplace is self- regulating and that government intervention through needless regulation places an unfair, costly burden on businesses generally and small businesses in par- ticular. What role do you believe government regulation should play to ensure ethical conduct by businesses?

8. XYZ Pharmaceuticals develops a new drug that causes the abortion of female fetuses up to the first trimester of pregnancy but does not affect male fetuses. The drug has no known side effects for women who take it and seems perfectly safe to use. While awaiting FDA approval of the drug, a process that takes several years, the company receives very negative publicity, and numerous groups call for a boycott of the manufacturer. Because of the negative reaction to the drug by the general public, the manufacturer decides to scrap plans to produce the drug in the United States but wants to market it abroad in a number of countries, where it expects the drug to be well received. There is nothing in U.S. law or in the laws of the countries where it intends to market the drug to prevent its sale. Make an ethical argument either for or against the drug’s sale abroad. Justify your argument with sound reasoning.

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