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Part Two Ethical Issues and

the Institutionalization of Business Ethics

Chapter 4 The

Institutionalization of Business Ethics

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Learning Objectives (1 of 2)

• Distinguish between the voluntary and mandated boundaries of ethical conduct

• Provide specific mandated requirements for legal compliance in specific subject matter areas related to competition, consumers, and safety

• Specifically address the requirements of the Sarbanes–Oxley legislation and implementation by the Securities and Exchange Commission (SEC)

• Describe the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act

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Learning Objectives (2 of 2)

• Provide an overview of regulatory efforts that provide incentives for ethical behavior

• Provide an overview of the recommendations and incentives for developing an ethical corporate culture contained in the Federal Sentencing Guidelines for Organizations (FSGO)

• Provide an overview of highly appropriate core practices and their relationship to social responsibility

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‹#› Figure 4.1 – Elements of an

Ethical Culture

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Managing Ethical Risk through Mandated and Voluntary Programs (1 of 2)

• Voluntary practices: Include beliefs, values, and voluntary contractual obligations of a business.

• All businesses engage in some level of commitment to voluntary activities to benefit both internal and external stakeholders.

• Strategic philanthropy: Giving back to communities and causes.

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Managing Ethical Risk through Mandated and Voluntary Programs (2 of 2)

• Voluntary boundary: A management-initiated boundary of conduct (beliefs, values, voluntary policies, and voluntary contractual obligations).

• Core practice: Helps ensure compliance with legal requirements, industry self-regulation, and societal expectations.

• Mandated boundary: An externally imposed boundary of conduct (laws, rules, regulations, and other requirements).

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‹#› Mandated Requirements for Legal

Compliance • Laws and regulations established by governments to

set minimum standards for responsible behavior— society’s codification of what is right and wrong.

• Civil law: Defines the rights and duties of individuals and organizations (including businesses).

• Criminal law: Prohibits specific actions (fraud, theft, or securities trading violations) and imposes fines or imprisonment as punishment for breaking the law.

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‹#› TABLE 4-2 Laws Regulating

Competition (1 of 2)

Sherman Antitrust Act, 1890 Prohibits monopolies

Clayton Act, 1914 Prohibits price discrimination, exclusive dealing, and other efforts to restrict competition

Federal Trade Commission Act, 1914 Created the Federal Trade Commission (FTC) to help enforce antitrust laws

Robinson–Patman Act, 1936 Bans price discrimination between retailers and wholesalers

Wheeler–Lea Act, 1938 Prohibits unfair and deceptive acts regardless of whether competition is injured

Lanham Act, 1946 Protects and regulates brand names, brand marks, trade names, and trademarks

Celler–Kefauver Act, 1950 Prohibits one corporation from controlling another where the effect is to lessen competition

Consumer Goods Pricing Act, 1975 Prohibits price maintenance agreements among manufacturers and resellers in interstate commerce

FTC Improvement Act, 1975 Gives the FTC more power to prohibit unfair industry practices

Antitrust Improvements Act, 1976 Strengthens earlier antitrust laws; gives Justice Department more investigative authority

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‹#› TABLE 4-2 Laws Regulating

Competition (2 of 2)

Foreign Corrupt Practices Act, 1977 Makes it illegal to pay foreign government officials to facilitate business or to use third parties such as agents and consultants to provide bribes to such officials

Trademark Counterfeiting Act, 1980 Provides penalties for individuals dealing in counterfeit goods

Trademark Law Revision Act, 1988 Amends the Lanham Act to allow brands not yet introduced to be protected through patent and trademark registration

Federal Trademark Dilution Act, 1995 Gives trademark owners the right to protect trademarks and requires them to relinquish those that match or parallel existing trademarks

Digital Millennium Copyright Act, 1998 Refines copyright laws to protect digital versions of copyrighted materials, including music and movies

Controlling the Assault of Non- Solicited Pornography and Marketing Act (CAN-SPAM), 2003

Bans fraudulent or deceptive unsolicited commercial email and requires senders to provide information on how recipients can opt out of receiving additional messages

Fraud Enforcement and Recovery Act, 2009

Strengthens provisions to improve the criminal enforcement of fraud laws, including mortgage fraud, securities fraud, financial institutions’ fraud, commodities fraud, and fraud related to the federal assistance and relief program

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

Overhaul of the U.S. financial regulatory system

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‹#› TABLE 4-3 Laws Protecting

Consumers (1 of 3)

Federal Hazardous Substances Labeling Act, 1960

Controls the labeling of hazardous substances for household use

Truth in Lending Act, 1968 Requires full disclosure of credit terms to purchasers

Consumer Product Safety Act, 1972 Created the Consumer Product Safety Commission to establish safety standards and regulations for consumer products

Fair Credit Billing Act, 1974 Requires accurate, up-to-date consumer credit records

Consumer Goods Pricing Act, 1975 Prohibits price maintenance agreements

Consumer Leasing Act, 1976 Requires accurate disclosure of leasing terms to consumers

Fair Debt Collection Practices Act, 1978 Defines permissible debt collection practices

Toy Safety Act, 1984 Gives the government the power to recall dangerous toys quickly

Nutritional Labeling and Education Act, 1990 Prohibits exaggerated health claims and requires all processed foods to have labels showing nutritional information

Telephone Consumer Protection Act, 1991 Establishes procedures for avoiding unwanted telephone solicitations

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‹#› TABLE 4-3 Laws Protecting

Consumers (2 of 3)

Children’s Online Privacy Protection Act, 1998

Requires the FTC to formulate rules for collecting online information from children under age 13

Do Not Call Implementation Act, 2003 Directs the FCC and the FTC to coordinate so that their rules are consistent regarding telemarketing call practices including the Do Not Call Registry and other lists, as well as call abandonment

Credit Card Accountability Responsibility and Disclosure Act, 2009

Implemented strict rules on credit card companies regarding topics such as issuing credit to youth, terms disclosure, interest rates, and fees

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

Promotes financial reform to increase accountability and transparency in the financial industry, protects consumers from deceptive financial practices, and establishes the Bureau of Consumer Financial Protection

Reverse Mortgage Stabilization Act, 2013 Established more requirements to improve the fiscal safety and soundness of the reverse mortgage program to consumers

Supervisory Privilege Parity Act, 2014 Amended the Consumer Financial Protection Act of 2010 to specify that privilege and confidentiality are maintained when information is shared by certain nondepository covered persons with federal and state financial regulators, and for other purposes

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‹#› TABLE 4-3 Laws Protecting

Consumers (3 of 3)

E-Warranty Act, 2015 Allows manufacturers to meet warranty and labeling requirements for consumer products by displaying the terms of warranties on websites, and for other purposes

Federal Cybersecurity Enhancement Act, 2015

To improve federal network security and authorize and enhance an existing intrusion detection and prevention system for civilian federal networks

Consumer Review Fairness Act, 2016

Prohibits the use of certain clauses in form contracts that restrict the ability of a consumer to communicate regarding the goods or services offered in interstate commerce that were the subject of the contract, and for other purposes

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‹#› TABLE 4-4 U.S. Laws Promoting

Equity and Safety (1 of 2)

Equal Pay Act of 1963 (amended) Prohibits sex-based discrimination in the rate of pay to men and women doing the same or similar jobs

Title VII of the Civil Rights Act of 1964 (amended in 1972)

Prohibits discrimination in employment on the basis of race, color, sex, religion, or national origin

Occupational Safety and Health Act, 1970 Designed to ensure healthful and safe working conditions for all employees

Title IX of Education Amendments of 1972 Prohibits discrimination based on sex in education programs or activities that receive federal financial assistance

Pension Reform Act, 1974 Designed to prevent abuses in employee retirement, profit- sharing, thrift, and savings plans

Equal Credit Opportunity Act, 1974 Prohibits discrimination in credit on the basis of sex or marital status

Age Discrimination Act, 1975 Prohibits discrimination on the basis of age in federally assisted programs

Pregnancy Discrimination Act, 1978 Prohibits discrimination on the basis of pregnancy, childbirth, or related medical conditions

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‹#› TABLE 4-4 U.S. Laws Promoting

Equity and Safety (2 of 2)

Immigration Reform and Control Act, 1986 Prohibits employers from knowingly hiring a person who is an unauthorized alien

Americans with Disabilities Act, 1990 Prohibits discrimination against people with disabilities and requires that they be given the same opportunities as people without disabilities

Civil Rights Act, 1991 Provides monetary damages in cases of intentional employment discrimination

Don’t Ask, Don’t Tell Repeal Act, 2011 Act banned discrimination on the basis of sexual orientation in the military

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The Sarbanes–Oxley (SOX) Act (1 of 4)

• Oversight of corporate accounting practices. • Makes fraudulent financial reporting a crime. • Strengthens fraud penalties. • Requires corporations to establish codes of ethics

for financial reporting. • Must demonstrate greater transparency in

financial reporting to investors and other stakeholders.

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The Sarbanes–Oxley (SOX) Act (2 of 4)

• Public Company Accounting Oversight Board • Monitors/establishes standards and rules for auditors. • Has investigatory and disciplinary power over auditors

and securities analysts. • Attempts to eliminate conflicts of interest by prohibiting

accounting firms from providing both auditing and consulting services to the same client companies without special permission from the client firm’s audit committee.

• Limits the length of time lead auditors can serve a particular client.

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The Sarbanes–Oxley (SOX) Act (3 of 4)

• Auditor and Analyst Independence • Section 201 prohibits registered public accounting

firms from providing both non-audit and audit services to a public company.

• All material off-balance-sheet transactions and other relationships with unconsolidated entities that affect current or future financial conditions of a public company must be disclosed in each annual and quarterly financial report.

• Public companies must report “on a rapid and current basis” material changes in their financial condition or operations.

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The Sarbanes–Oxley (SOX) Act (4 of 4)

• Whistle-Blower Protection • Granted special damages and attorneys’ fees. • Cost of Compliance • Section 404 requires companies to document both

the results of financial transactions and the processes they used to generate them.

• Compliance costs were high shortly after Sarbanes–Oxley was passed; they have declined over the years.

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‹#› Dodd–Frank Wall Street Reform and

Consumer Protection Act (1 of 4)

• Charged with improving the quality of financial data available to government officials and creating a better system of analysis for the financial industry.

• The Financial Stability Oversight Council (FSOC)

• Responsible for maintaining the stability of the financial system in the U.S. through monitoring the market, identifying threats, promoting market discipline among the public, and responding to major risks that threaten stability.

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‹#› Dodd–Frank Wall Street Reform and

Consumer Protection Act (2 of 4)

• The Financial Stability Oversight Council (FSOC)

• Has the authority to limit or closely supervise financial risks, create stricter standards for banking and nonbanking financial institutions, and disband financial institutions that present a serious risk to market stability

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‹#› Dodd–Frank Wall Street Reform and

Consumer Protection Act (3 of 4)

• Consumer Financial Protection Bureau (CFPB)

• Independent agency within the Federal Reserve System that “regulate(s) the offering and provision of consumer financial products or services under the Federal consumer financial laws.”

• Power over credit markets as well as authority to monitor lenders and ensure they are in compliance with the law.

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‹#› Dodd–Frank Wall Street Reform and

Consumer Protection Act (4 of 4)

• Consumer Financial Protection Bureau (CFPB) • Curtail unfair lending and credit card practices, enforce

consumer financial laws, and check the safety of financial products before their launch into the market.

• Whistle-Blower Bounty Program • Whistle-blowers are eligible to receive 10 to 30 percent

of fines and settlements if their reports result in convictions of more than $1 million in penalties.

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‹#› Laws That Encourage Ethical

Conduct (1 of 2)

1991 Law: U.S. Sentencing Guidelines for Organizations created for federal prosecutions of organizations. These guidelines provide for just punishment, adequate deterrence, and incentives for organizations to prevent, detect, and report misconduct. Organizations need to have an effective ethics and compliance program to receive incentives in the case of misconduct.

2004 Amendments: The definition of an effective ethics program now includes the development of an ethical organizational culture. Executives and board members must assume the responsibility of identifying areas of risk, providing ethics training, creating reporting mechanisms, and designating an individual to oversee ethics programs.

2007-2008 Additional definition of a compliance and ethics program: Firms should focus on due diligence to detect and prevent misconduct and promote an organizational culture that encourages ethical conduct. More details are provided, encouraging the assessment of risk and outlining appropriate steps in designing, implementing, and modifying ethics programs and training that will include all employees, top management, and the board or governing authority. These modifications continue to reinforce the importance of an ethical culture in preventing misconduct.

2010 Amendments for reporting to the board: Chief compliance officers are directed to make their reports to their firm’s board rather than to the general counsel. Companies are encouraged to create hotlines, perform self-audit programs, and adopt controls to detect misconduct internally. More specific language has been added to the word prompt in regard to what it means to promptly report misconduct. The amendment also extends operational responsibility to all personnel within a company’s ethics and compliance program.

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‹#› Laws That Encourage Ethical

Conduct (2 of 2)

2014 The commission investigated how the sentencing guidelines could be used by regulatory and law enforcement agencies to recommend effective ethics and compliance programs. The commission assessed its efforts to encourage corporations, nonprofits, government agencies, and other organizations to form institutional cultures that discourage misconduct.

2015 The commission continued to emphasize the importance of the organizational culture and that there should be standards and procedures in place to prevent and detect misconduct. In addition, when there is misconduct, community service may be ordered if it is designed to remedy the misconduct.

Source: “U.S. Sentencing Guidelines Change? Become Effective November 1,” FCPA Compliance and Ethics Blog, November 2, 2010, https:// www.lexisnexis.com/legalnewsroom/securities/b/securities/archive/2010/11/02/us-sentencing-guidelines-changes- become-effective-november-1. aspx?Redirected=true (accessed February 25, 2015); United States Sentencing Commission, Amendments to the Sentencing Guidelines, April 30, 2012, http://www.ussc.gov/sites/default/files/pdf/amendment-process/reader-friendly- amendments/20120430_RF_Amendments.pdf (accessed April 15, 2017); Paula Desio, Deputy General Counsel, An Overview of the Organizational Guidelines, http://www.ussc.gov/sites/default/files/pdf/training/organizationalguidelines/ ORGOVERVIEW.pdf (accessed February 25, 2015).

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‹#› Federal Sentencing Guidelines for

Organizations (FSGO) (1 of 4)

• Seeks to improve financial regulation, increase oversight of the industry, and prevent the types of risk-taking, deceptive practices, and lack of oversight that led to the 2008–2009 financial crisis.

• Contains 16 provisions that include increasing the accountability and transparency of financial institutions, creating a bureau to educate consumers in financial literacy and protect them from deceptive financial practices, implementing additional incentives for whistle-blowers, increasing oversight of the financial industry, and regulating the use of complex derivatives.

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‹#› Federal Sentencing Guidelines for

Organizations (FSGO) (2 of 4)

• FSGO Steps 1. A firm must develop and disseminate a code of

conduct that communicates required standards and identifies key risk areas for the organization.

2. High-ranking personnel in the organization who are known to abide by the legal and ethical standards of the industry (ethics officer, vice president of human resources, general counsel, etc.) must have oversight over the program.

3. No one with a known propensity to engage in misconduct should be put in a position of authority.

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‹#› Federal Sentencing Guidelines for

Organizations (FSGO) (3 of 4)

• FSGO Steps 1. Organizational communications should include a way for

employees to report misconduct without fearing retaliation, such as an anonymous toll-free hotline or an ombudsman. Monitoring and auditing systems designed to detect misconduct are also required.

2. If misconduct is detected, the firm must take appropriate and fair disciplinary action. Individuals both directly and indirectly responsible for the offense should be disciplined. In addition, the sanctions should be appropriate for the offense.

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‹#› Federal Sentencing Guidelines for

Organizations (FSGO) (4 of 4)

• FSGO Steps 1. After misconduct has been discovered, the organization

must take steps to prevent similar offenses in the future. This usually involves making modifications to the ethical compliance program, conducting additional employee training, and issuing communications about specific types of conduct.

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‹#› Core or Best Practices:

Voluntary Responsibilities 1. Improve quality of life and make communities the

places where people want to do business, raise families, and enjoy life. Makes it easier to attract and retain employees and customers.

2. Reduce government involvement by providing assistance to stakeholders.

3. Develop employee leadership skills. 4. Create an ethical culture and values that act as a

buffer to organizational misconduct.

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‹#› Core or Best Practices: Cause-

Related Marketing • Ties an organizations product(s) directly to a

social concern through a marketing program. • Affects buying patterns. • Often of short duration, so consumers may not

adequately associate the business with a particular cause.

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‹#› Core or Best Practices:

Strategic Philanthropy • Synergistic and mutually beneficial use of an

organization’s core competencies and resources to deal with key stakeholders so as to bring about organizational and societal benefits.

• Argues that philanthropy must have a long-term positive impact.

• Should pertain to the mission and operations of the company. Must also have strong support from top managers.

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‹#› Core or Best Practices: Social

Entrepreneurship (1 of 2)

• When an entrepreneur founds an organization with the purpose of creating social value.

• Can be for-profit, nonprofit, government-based, or hybrids.

• Many social entrepreneurs choose to organize their enterprises as nonprofits.

• The major difference between a social enterprise and a nonprofit is the use of entrepreneurial principles and business-led strategies to create social change.

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‹#› Core or Best Practices: Social

Entrepreneurship (2 of 2)

• Companies engaged in strategic philanthropy will often outsource their philanthropic programs and/or partner with other organizations.

• Directly implement their programs and are organized around achieving social objectives.

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‹#› Importance of Institutionalization in

Business Ethics • Institutionalization helps implant values, norms,

and artifacts in organizations, industries, and society.

• Failure to understand core practices provides the opportunity for unethical conduct.

• Institutionalization of business ethics has advanced rapidly in recent years as stakeholders recognized the need to improve business ethics.

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