BUSINESS ETHICS
Business Ethics Defined
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01:09
The termethicshas many nuances and definitions:
One difference between an ordinary decision and an ethical one is that
accepted rules or standard practices are not clearly applicable, and the
decision-maker must weigh values and diverging perspectives in a situation
which is not quite the same as any he or she has faced previously. Values
and judgments play a critical role in the making of ethical decisions, as does
recognizing how different groups may be impacted by a decision.
Some special aspects must be considered when applying ethics to business:
Businesses must earn a profit to survive. Businesses must balance their
desires for profits against the needs and desires of society, and maintaining
this balance often requires compromises or tradeoffs.
Business ethicscomprises principles and standards that guide behavior in
the world of business. Investors, employees, customers, interest groups, the
legal system, and the community often determine whether a specific action
is right or wrong -- ethical or unethical.
Why Study Business Ethics?
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Reports of unethical activities, such as accounting fraud, insider trading,
falsifying documents, deceptive advertising, defective products, bribery,
abusive behavior, harassment, and employee theft regularly appear in the
media. These issues are not new, nor confined to any one country or culture.
Many examples of unethical activities go unreported and/or undetected. But
many do come to light, with devastating implications for the individuals
involved, and potentially impact many other innocent individuals. Simple
misrepresentations on resumes have caused CEOs and politicians to lose
their jobs. In other cases, financial fraud has not only been bad for the
careers of those involved, but also cost innocent investors their life savings.
In situations where customers have not been informed about the dangers of
using certain products, lives have been lost. Individuals and organizations
need to be cognizant of the potential implications of their decisions and the
scope of stakeholders who may be affected.
We all make mistakes, and bad outcomes can occur even when everyone
makes decisions with the best intentions. Many bad outcomes can be
avoided if we recognize the ethical implications of decisions and who might
be impacted. Organizations that develop a culture where ethical
considerations are part of every decision are more likely to make a positive
impact on society and less likely to be embroiled in scandals.
Reasons for Studying Business Ethics
Studying business ethics is valuable for several reasons:
1. An individual’s personal values and morality are only one
factor in the ethical decision-making process
2. Being a good person and having sound personal ethics may
not be sufficient to handle the ethical issues that arise in a
business organization
3. Business strategy decisions involve complex and detailed
discussions, and a high level of personal moral development
may not prevent an individual from violating the law in an
organizational context
4. The values people learn from family, religion, and school may
not provide specific guidelines for complex business
decisions
Studying ethics helps business people begin to identify ethical issues,
recognize the approaches available to resolve them, learn about the ethical
decision-making process and ways to promote ethical behavior, and begin to
understand how to cope with conflicts between personal, organizational, and
societal values.
The Development of Business Ethics
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Historic Tensions
With the development of big businesses, large mining operations, and
expansive agricultural firms, along with the Industrial Revolution, society
struggled to determine the appropriate role of these large organizations.
Unions developed to ensure workers’ interests and well-being were
considered, and the idea of a living wage that was sufficient for education,
recreation, health, and retirement began to take hold.
Industrialization also led to concerns about pollution and the environment,
with early environmental groups arguing for the preservation of certain
forests, rivers, and natural landscapes. Air pollution in certain cities became
a significant problem, as did water quality in rivers and lakes.
Consumer protection became increasingly important, with legislation in
many countries that sought to safeguard consumers from potentially
dangerous products.
The sense that corporations could become too large and have too much
power over consumers, workers, and governments led to the enactment of
anti-trust legislation that split up some large firms and prevented others
from becoming too powerful.
The Business of Business
Using the groundwork laid by theologians and philosophers, business
professors began to teach and write about corporatesocial responsibility,
an organization’s obligation to maximize its positive impact on stakeholders
and to minimize its negative impact. Philosophers applied ethical theory and
philosophical analysis to structure the discipline of business ethics. Academic
researchers sought to identify ethical issues and describe how business
people might choose to act in particular situations. The idea that businesses
should “give back” to society gained support.
There were debates over the role of businesses in society. Economist Milton
Friedman argued persuasively that the “business of business” was business,
and the primary role of a business was to maximize profits within the rules
dictated by governments and society. He and others argued that companies
should make charitable contributions and engage in social issues only if
these actions also contributed to the companies’ reputation, ability to recruit
qualified employees, or other factors that ultimately contributed to profits
and shareholder value. In society, he argued, there are other entities, such
as governments and non-profit organizations, that bear the primary social
responsibilities of society and are best equipped to deal with social issues.
(One of his articles can be found in the Davidson et al. book listed in
references.)
Philosophical Foundations
There is no single approach to dealing with ethical issues but rather several
approaches that each may be applicable (or not) in certain situations.
Theutilitarian approachsuggests decisions should be made that result in
the greatest good for the greatest number of people, while minimizing any
negative consequences to others. Hence, a community might decide to build
a road that will improve the flow of traffic for many citizens, even if that
means that some individuals may be forced to sell their land, homes, or
farms to allow for the road. Similarly, a company should develop an
employee benefits package that serves the interests of most employees,
although some employees would prefer a slightly different package.
Themoral rights approachsuggests that every human being has some
fundamental rights that must always be protected, and that no decision
should infringe upon those fundamental rights. Employees should not be
expected, for example, to perform dangerous operations unless they are
properly trained and are fully aware of the risks (e.g., firefighters). Similarly,
a toy manufacturer should not sell a product that is likely to be dangerous to
children.
Thejustice approachsuggests that decisions should be guided by impartial
standards of fairness and equity. Justice can apply to both the outcomes of
decisions (are differences in salaries paid to different employees justified by
differences in the work they do) as well as the procedures by which decisions
are made (was every applicant for a job evaluated using the same
criteria).The first is referred to asdistributive justice, while the second
isprocedural justice.
The idea that we should treat others as we would like to be treated (the
“golden rule”), or “don’t do something if you would be embarrassed to see it
on the front page of the paper,” are also simple rules of ethics that can be
applied in many situations. In an era where any email we write, any
comment we post, or any action we take might be digitally captured and
distributed, it has become harder for individuals to believe that unethical
decisions they make will never be revealed.
The 21st Century: A New Focus
New evidence emerging in the early 2000s demonstrated that more than a
few business executives and managers had not fully embraced high ethical
standards. To address a loss of confidence in financial reporting and
corporate ethics, the U.S. Congress passed theSarbanes-Oxley Act.
The law made securities fraud a criminal offense and stiffened penalties for
corporate fraud. It created an accounting oversight board that requires
corporations to establish codes of ethics for financial reporting and to
develop greater transparency in financial reports to investors and other
interested parties. It required top executives to sign off on their firm’s
financial reports and risk fines and long jail sentences if they misrepresented
their company’s financial position. It also required company executives to
disclose stock sales immediately and prohibited companies from giving loans
to top managers.
A 2004 amendment required that a business’s governing authority be well
informed about its ethics program with respect to content, implementation,
and effectiveness. This placed the responsibility squarely on the shoulders of
the firm’s leadership, usually the board of directors.
Developing an Organizational and Global Ethical Culture
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The current trend is away from legally based compliance initiatives in
organizations to cultural initiatives that make ethics a part of core
organizational values. To develop more ethical corporate cultures, many
businesses are communicating core values to their employees by creating
ethics programs and appointing ethics officers to oversee them. The ethical
component of a corporate culture relates to the values, beliefs, and
established and enforced patterns of conduct that employees use to identify
and respond to ethical issues.
The termethical culturecan be viewed as the character of the decision-
making process that employees use to determine whether their responses to
ethical issues are right or wrong. Ethical culture is used to describe the
component of corporate culture that captures the rules and principles an
organization defines as appropriate conduct.
Globally, businesses are working more closely together to establish
standards of acceptable behavior. The development of global codes of ethic,
such as the Caux Round Table, highlights common ethical concerns for
global firms.
The Benefits of Business Ethics
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Employee Commitment
Employee commitment comes from employees’ belief that their future is tied
to that of the organization and their willingness to make personal sacrifices
for the organization. The more a company is dedicated to taking care of its
employees, the more likely it is that the employee will take care of the
organization. Issues that may foster the development of an ethical climate
for employees include a safe work environment, competitive salaries, and
the fulfillment of all contractual obligations toward employees.
Employees’ perceptions of their firm as having an ethical environment leads
to performance-enhancing outcomes within the organization. Trusting
relationships within an organization between managers, their subordinates,
and upper management contribute to greater decision-making efficiencies.
When employees see values such as honesty, respect, and trust applied
frequently in the workplace, they feel less pressure to compromise ethical
standards, are more compliant and more satisfied with their organizations
overall, and feel more valued as employees.
Investor Loyalty
Investors today are increasingly concerned about the ethics, social
responsibility, and reputation of companies in which they invest. Investors
recognize that an ethical climate provides a foundation for efficiency,
productivity, and profits, while negative publicity, lawsuits, and fines can
lower stock prices, diminish customer loyalty, and threaten a company’s
long-term viability.
Investors look not only at the bottom line for profits or the potential for
increased stock prices or dividends, but also for any potential flaws in the
company’s performance, conduct, and financial reports. Thus, many
executives spend considerable time communicating with investors about
their firms’ reputation and financial performance and trying to attract them
to the company’s stock. The issue of drawing and keeping investors is a
critical one for CEOs, and gaining investors’ trust is vital for sustaining
financial stability
Customer Satisfaction
Customer satisfaction is one of the most important factors in a successful
business strategy. Both repeat purchases and an enduring relationship of
mutual respect and cooperation with their customers are essential for
success.
Research indicates that a majority of consumers place social responsibility
ahead of brand reputation or financial factors when forming impressions of
companies; consumers may avoid the products of companies they perceive
as irresponsible. A strong organizational ethical environment usually focuses
on the core value of placing customers’ interests first.
An ethical culture that focuses on customers incorporates the interest of all
employees, suppliers, and other interested parties in decisions and actions.
Ethical conduct toward customers builds a strong competitive position that
has been shown to positively affect business performance and product
innovation.
Profits
A company cannot nurture and develop an ethical organizational climate
unless it has achieved adequate financial performance in terms of profits.
Many studies have found a positive relationship between corporate social
responsibility and business performance. Companies convicted of
misconduct experience a significantly lower return on assets and return on
sales than firms that have not faced such charges.
Many companies have experienced significant performance declines after
discovery of their failure to act responsibly toward various stakeholders.
Ample evidence reflects that being ethical pays off with better performance.
More firms are recognizing the benefits of improving ethical conduct and the
link between business ethics and financial performance.
A Framework for Ethical Decision-Making in Business
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The first step in ethical decision-making is to recognize that an ethical issue
requires an individual or work group to choose from several actions that
various stakeholders inside or outside the firm will ultimately evaluate as
right or wrong.
This model of the ethical decision-making process in business includes
ethical issue intensity, individual factors, and organizational factors such as
corporate culture and opportunity. All of these interrelated factors influence
the evaluations of, and intentions behind, the decisions that produce ethical
or unethical behavior.
Ethical Issue Intensity
The intensity of an ethical issue relates to its perceived importance to
the decision-maker. Ethical issue intensity, then, can be defined as the
relevance or importance of an ethical issue in the eyes of the
individual, work group, and/or organization. Research suggests that
individuals are subject to six “spheres of influence” when confronted
with ethical choices: the workplace, family, religion, legal system,
community, and profession. The level of importance of each of these
influences will vary depending on how important the decision-maker
perceives the issue to be.
Additionally, the individual’s sense of the situation’s moral intensity
increases the individual’s perceptiveness regarding ethical problems,
which in turn reduces his or her intention to act unethically. Moral
intensity relates to a person’s perception of social pressure and the
harm the decision will have on others.
Positive or negative incentives can affect the perceived importance of
an ethical issue.
Individual Factors
When people need to resolve ethical issues in their daily lives, they often
base their decisions on their own values and principles of right or wrong. In
the workplace, ethical issues can involve honesty, conflicts of interest,
discrimination, nepotism, and theft, among others. The individual’s stage of
cognitive development can affect their decisions.
Gender:5Extensive research shows that, in many aspects, there are no
differences between men and women; but when differences are found,
women are generally more ethical than men.
Education:5The number of years spent in pursuit of academic knowledge is
also a significant factor in the ethical decision-making process.
Nationality:5Nationality is the legal relationship between a person and the
country in which they are born or have become a naturalized citizen.
Research about nationality and ethics suggests there are significant
differences regarding what is considered right and wrong in different
nationality-based cultures.
Age:5Age is another individual factor that has been studied as it relates to
business ethics. Several decades ago, it was believed that age was positively
correlated with ethical decision making. However, recent research suggests
there is probably a more complex relationship between ethics and age.
Locus of Control:5This factor relates to individual differences in relation to a
generalized belief about how one is affected by internal versus external
events or reinforcements. Those who believe in external control (that is,
externals) see themselves as going with the flow because that is all they can
do. Conversely, those who believe in internal control (that is, internals)
believe they control the events in their lives by their own effort and skill.
These individuals view themselves as masters of their destinies and trust in
their capacity to influence their environment. Current research suggests that
we cannot be sure how significant locus of control is in terms of ethical
decision-making. One study that found a relationship between locus of
control and ethical decision-making concluded that those people who
believed their fate is in the hands of others were more ethical than those
who believed they formed their own destiny.
Organizational Factors
Although people can and do make individual ethical choices in business
situations, no one operates alone. Research has shown that in the workplace,
an organization’s values often have a greater influence on decisions than a
person’s own values. Although people outside the organization, such as
family members and friends, also influence decision-makers, an
organization’s culture and structure operate through the relationships of its
members to influence their ethical decisions.
Acorporate culturecan be defined as a set of values, beliefs, goals,
norms, and ways of solving problems that members (employees) of an
organization share. An important component of corporate or organizational
conduct is the company’s ethical culture. Whereas corporate culture involves
values and rules that prescribe a wide range of behavior for organizational
members, the ethical culture reflects whether the firm also has an ethical
conscience. Corporate cultures can support and reward unethical behavior as
well as ethical behavior.
The ethical climate includes the character or decision processes used to
determine whether actions are ethical or unethical. The ethical climate also
consists of corporate codes of ethics, top management actions, ethical
policies, coworker influence, and the opportunity for unethical behavior. The
perceived ethics of the immediate work group have been found to be a major
factor influencing ethical behavior.
Those who have influence in a work group including peers, managers,
coworkers, and subordinates are referred to as “significant others”. They
help on a daily basis with unfamiliar tasks and provide advice and
information formally and informally. Significant others have more influence
on daily decisions than any other factor. Obedience to authority is another
aspect of the influence that significant others can exercise.
Obedience to authority helps to explain why many employees resolve
business ethics issues by simply following the directives of a superior. In
organizations that emphasize respect for superiors, for example, employees
may feel that they are expected to carry out orders by a supervisor, even if
those orders are contrary to the employees’ sense of right and wrong.
Opportunity Factors
Opportunity describes the conditions in an organization that limit or
permit ethical or unethical behavior. Opportunity results from
conditions that either provide rewards, whether internal or external, or
fail to erect barriers against unethical behavior. Opportunity relates to
individuals’ immediate job context: where they work, with whom they
work, and the nature of the work.
Using the Ethical Decision-Making Framework to Improve Ethical
Decisions
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Ethical dilemmas often occur when decision rules are vague or in conflict.
Critical thinking plays a key role in ethical decision-making. An individual’s
intentions and the final decision regarding what action he or she will take are
the last steps in the ethical decision-making process. If intentions and
behavior are not consistent with ethical judgments, the individual may feel
guilt. Most businesspeople do make ethical mistakes, whether out of
ignorance of the ethical issues or because of competing pressures.
Because it is impossible to agree on normative judgments about what is
ethical, business ethics scholars developing descriptive models have instead
focused on regularities in decision-making and the various phenomena that
interact in a dynamic environment to produce predictable behavioral
patterns. It is unlikely that an organization’s ethical problems will be solved
strictly by having a thorough knowledge about how ethical decisions are
made. Business ethics involves value judgments and collective agreement
about acceptable patterns of behavior.
An important conclusion is that ethical decision-making within an
organization does not rely strictly on the personal values and morals of
individuals. Organizations take on a culture of their own, which when
combined with corporate governance mechanisms, have a significant
influence on business ethics.
The Role of Leadership in a Corporate Culture
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Top managers provide a blueprint for what a firm’s culture should be. If
these leaders fail to express desired behaviors and goals, a corporate culture
will evolve on its own, but it may or may not reflect the goals and values of
the company.
Leadership, the ability or authority to guide and direct others toward
achievement of a goal, has a significant impact on ethical decision-making
because leaders have the power to motivate others and enforce the
organization’s rules and policies as well as their own viewpoints. Leaders are
key to influencing an organization’s corporate culture and ethical posture.
Leadership styles influence many aspects of organizational behavior,
including employees’ acceptance of, and adherence to, organizational norms
and values.
The Role of Leadership in Developing an Ethics Program
Leadership Styles Influence Ethical Decisions
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Six leadership styles that are based on emotional intelligence, the ability to
manage ourselves and our relationships effectively, have been identified by
Daniel Goleman.
Coercive:the coercive leader demands instantaneous
obedience and focuses on achievement, initiative, and self-
control. Although this style can be very effective during times
of crisis or during a turnaround, it otherwise creates a
negative climate for organizational performance.
Authoritative:the authoritative leader, considered to be
one of the most effective styles, inspires employees to follow
a vision, facilitates change, and creates a strong positive
performance climate.
Affiliative:5the affiliative leader values people,
theiremotions and needs, and relies on friendship andtrust
to promote flexibility, innovation, and risk-taking.
Democratic:the democratic leader relies on
participationand teamwork to reach collaborative decisions.
This stylefocuses on communication and creates a positive
climatefor achieving results.
Pacesetting:the pacesetting leader can create a negative
climate because of high standards that he or she sets. This style
works best for attaining quick results from highly motivated
individuals who value achievement and take the initiative.
Coaching:the coaching leader builds a positive climate by
developing skills to foster long-term success, delegates
responsibility, and is skillful in issuing challenging
assignments.
The most successful leaders do not rely on one style, but alter their
techniques based on the characteristics of the situation. Different styles can
be effective in developing an ethical culture depending on the leader’s
assessment of risks and their desire to achieve a positive climate for
organizational performance.
Another way to consider leadership styles is to classify them as transactional
or transformational. Both transformational and transactional leaders can
positively influence corporate culture.
Transactional Leadersattempt to create employee satisfaction through
negotiating or “bartering” for desired behaviors or levels of performance.
Transactional leaders focus on ensuring that required conduct and
procedures are implemented. Their negotiations to achieve desired
outcomes result in a dynamic relationship with subordinates in which
reactions, conflict, and crisis influence the relationship more than ethical
concerns.
Transformational Leaders5strive to raise employees’ level of commitment
and foster trust and motivation. Transformational leaders promote activities
and behavior through a shared vision and common learning experience. As a
result, they have a stronger influence on coworker support for ethical
decisions and building an ethical culture than do transactional leaders.
Transformational ethical leadership is best suited for organizations that have
higher levels of ethical commitment among employees and strong
stakeholder support for an ethical culture.
Habits of Strong Ethical Leaders
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Ethical Leaders have Strong Personal
Character:Ethical leadership is highly unlikely without a
strong personal character.
Ethical Leaders have a Passion to DO Right:Archie
Carroll describes the passion to do right as “the glue that
holds ethical concepts together.” Some leaders develop this
trait early in life, while others develop it over time through
experience, reason, or spiritual growth.
Ethical Leaders are Proactive:Ethical leaders do not hang
around waiting for ethical problems to arise. They anticipate,
plan, and act proactively to avoid potential ethical crises.
Ethical Leaders Consider Stakeholders’
Interests:Ethical leaders consider the interests of and
implications for all stakeholders, not just those that have an
economic impact on the firm. Ethical leaders have the
responsibility to balance stakeholder interests to ensure that
the organization maximizes its role as a responsible
corporate citizen.
Ethical Leaders are Role Models for the Organization’s
Values:5If leaders do not actively serve as role models for
the organization’s core values, then those values become
nothing more than lip service.
Ethical Leaders are Transparent and Actively Involved
in Organizational Decision-Making:5Being transparent
fosters openness, freedom to express ideas, and the ability
to question conduct. It encourages stakeholders to learn
about and comment on what a firm is doing. Transparent
leaders will not be effective unless they are personally
involved in the key decisions that have ethical ramifications.
Ethical Leaders are Competent Managers Who Take
a5Holistic View of the Firm’s Ethical
Culture:Ethicalleaders can see a holistic view of their
organization and,therefore, view ethics as a strategic
component ofdecision-making, much like marketing,
informationsystems, production, and so on.
Ethical leaders must stick to their principles and, if necessary, be ready to
leave the organization if its corporate governance system is so flawed that it
is impossible to make the right choice.
Ethical Perceptions and International Business
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When businesspeople travel abroad, they sometimes experience different
and unfamiliar ways of doing business, interacting with foreign
clients/suppliers/customers/colleagues, and working with regulatory
agencies. “We” versus “them” is referred to asself-reference criterion.
The self-reference criterion is an unconscious reference or comparison to
one’s familiar cultural values, experiences, and knowledge. When confronted
with a situation, we react on the basis of past experiences accumulated over
a lifetime and grounded in our culture of origin.
These reactions are based on meanings, values, and symbols that relate to
the culture of origin but may not have the same relevance or meaning to
people of other cultures. Interpersonal interactions can be even harder when
one or both individuals are communicating in a language other than their
own first language.
Culture as a Factor in Business
Culture consists of everything in our surroundings that is made by people,
both tangible items and intangible things like concepts and values.
Language, religion, law, politics, technology, education, social organizations,
general values, and ethical standards are all included in this definition. Each
nation has a distinctive culture and, consequently, distinctive beliefs about
what business activities are acceptable or unethical. Distinct subcultures can
also be found within many nations.
When transacting international business, individuals encounter values,
beliefs, and ideas that may diverge from their own because of cultural
differences: 1) One significant area of cultural difference is language. 2)
Cultural differences in body language can also lead to misunderstandings. 3)
Perceptions of time may likewise differ from country to country. 4) Different
religious values also impact culture.
Cultural differences can also become liabilities when firms transfer
personnel. Consequently, large corporations spend thousands of dollars to
ensure that the employees they send abroad are culturally prepared.
Due to long-term interactions and repeated business dealings, as well as
cultural values, many times “foreigners” are treated differently than “locals”,
just like “tourists” (who may never be seen again) might be taken advantage
of compared to “locals.”
Adapting Ethical Systemes to a Global
Framework
Cultural relativismis the concept that morality varies from one culture to
another, and business practices are therefore differentially defined as right
or wrong by particular cultures.
As with most philosophies, cultural relativists fall along a continuum.Ethical
relativismis the belief that only one culture defines ethical behavior for the
whole globe with no exceptions. For thebusiness relativist, there may be
no ethical standards except for the ones in the transaction culture, or none
at all. Such individuals may adjust to the ethics of a particular foreign culture
or use their own culture as a defense against something perceived as
unethical in a foreign country. The disadvantage is that they may be in
conflict with their own individual moral standards and perhaps with their own
culture’s values and legal system.
As business becomes more global and multinational corporations proliferate,
the chances of ethical conflict increase.
Global Values
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Many theorists have tried to establish a set of global or universal ethical
standards. These efforts show a pattern of shared values, such as
truthfulness, integrity, fairness, and equality, which suggests a universal set
of ethics that can be applied to business across the globe. The Caux Round
Table in Switzerland, in collaboration with business leaders in other European
countries, Japan, and the United States, has created an international ethics
code. The shared values assume we all have basic rights and responsibilities
that must be adhered to when doing business.
If there is a universal set of ethics, why then do business people have trouble
understanding what is ethical and unethical? Research suggests there is
variation between cultures and values, but there also appears to be
consensus on sets of core values that many cultures may have, including
integrity, altruism, collective motivation, and encouragement. When
someone from another culture mentions words such
asintegrityordemocracy, most listeners feel reassured because these are
familiar concepts. Differences surface when someone from another culture
explains what these concepts mean from the perspective of his or her
culture.
The concern is to develop not only the legal limitations for behavior but also
incentives for self-regulation and ethical conduct that are acceptable in a
global business environment. The key to improving global and legal
performance is determining the relationship between national differences in
individual moral philosophies and the corporate core values in management
systems.
The Multinational Corporation
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Multinational corporations (MNCs) operate on a global scale with significant
ties to multiple nations. A MNC’s strategy focuses on opportunities
throughout the world. Because of their size and financial power, MNCs have
been the subject of much ethical criticism, and their impact on the countries
in which they do business has been hotly debated. Many times they create
jobs and opportunities for individuals in developing countries, lower the
prices for consumers worldwide, ensure access to high technology, shift
pollution away from where consumers live, and achieve higher levels of
quality. (Does the mobile phone you own fit this description?
Critics believe that the size and power of MNCs creates ethical issues related
to the exploitation of both natural and human resources. Critics accuse MNCs
of exploiting labor markets of host countries. Some labor leaders believe it is
unfair for MNCs to transfer jobs abroad where wage rates are lower. The
activities of MNCs may also raise issues of unfair competition if they use their
size and power to put small local firms out of business. Although MNCs are
not inherently unethical, their size and power can seem threatening to less-
developed countries and smaller corporations.
Sexual and Racial Discrimination
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Various U.S. and European laws prohibit businesses from discriminating on
the basis of sex, race, religion, or disabilities in their hiring, firing, and
promotion decisions. However, the problem of discrimination is still a reality
in the world. Discrimination is sometimes justified on the basis of cultural
norms and values; for example, businesswomen are rare in the Middle East,
and some religions discriminate against women for certain ceremonial roles.
Discrimination remains one of the more prevalent concerns in international
business.
Businesses around the world benefit by acknowledging and attempting to
curb discrimination, including a decrease in employee turnover; people who
believe they are hired, promoted, and treated according to their skills and
abilities rather than their personal characteristics or beliefs are more likely to
remain loyal. In turn, this can reduce the costs of hiring and training new
employees. Productivity also improves when jobs are filled with loyal and
qualified employees.
Additionally, when companies hire a diverse local work force, they are more
likely to enjoy the goodwill and support of the communities surrounding their
facilities. Companies that take steps to eliminate discrimination may receive
favorable attention from such stakeholders as labor and women’s rights
groups, enhancing the reputation of the firm overall, as well as its brands.
How Companies Might Address
Discrimination Issues
When we show up to the present moment with all of our senses, we invite
the world to fill us with joy. The pains of the past are behind us. The future
has yet to unfold. But the now is full of beauty simply waiting for our
attention.
Develop a company policy on discrimination
Communicate the policy internally and externally
Determine benchmarks for activities in which discrimination
can arise
Determine indicators of possible noncompliance
Establish methods for identifying noncompliance
Develop a plan and implement the plan
Human Rights
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Corporate concern for global human rights emerged in the 1990s as news
stories depicting the opportunistic use of child labor, payment of low wages,
and abuses in foreign factories helped reshape our attitudes about
acceptable behavior for organizations. Companies struggling with human
rights issues sometimes make short-term decisions to boost profitability that
have negative long-term implications.
Relationships with subcontractors have proven problematic for some firms.
MNCs should view the law as a floor of acceptable behavior and strive for
greater improvements in workers’ quality of life. Although concern for human
rights issues is increasing, abuses still occur.
Advancing human rights includes the following principles:
Engage in an open dialog with workers and management.
Be aware of human rights issues and concerns in each
country in which the company engages in business.
Adopt the prevailing legal standard but seek to embrace a
“best practices” approach and standard.
Price Discrimination
Lesson22of44
A major ethical issue in international business is how products sold in other
countries are priced. When a firm charges different prices to different groups
of customers, it may be accused ofprice discrimination. When a market is
artificially divided into segments and each segment is subject to different
prices, inequalities may emerge that cannot be explained by added costs.
When companies market their products outside their own countries, the
costs of transportation, taxes, tariffs, and other expenses can raise their
prices. Price discrimination is allowable if justified based on costs. But when
prices increase beyond the level needed to meet the costs of these
additional expenses, an ethical issue emerges. Increasing prices in this way
is sometimes referred to asprice gouging.
Dumpingoccurs when companies sell products in foreign markets at low
prices that do not cover all the costs of the products. Price differentials,
gouging, and dumping create ethical issues because some groups of
consumers have to pay more than a fair price for products.
Bribery
Lesson23of44
In many cultures, giving bribes, also known asfacilitating payments, is an
acceptable business practice. Companies that do business internationally
should be aware that bribes are an ethical issue, and the practice is more
prevalent in some countries than in others.
The U.S. Foreign Corrupt Practices Act prohibits American corporations from
offering or providing payments to officials of foreign governments for the
purpose of obtaining or retaining business abroad. This may place U.S.
businesses at a disadvantage, but this has been somewhat alleviated
through global treaties. The expense of bribery around the world is becoming
more apparent through business transparency, leading more government
agencies to crack down on the practice.
Harmful Products
Lesson24of44
Governments in advanced industrialized nations have banned the sale of
certain products that are considered harmful. However, some companies in
those nations continue to sell those products in other countries where they
remain legal. Other ethical issues involve the export of tobacco products and
dumping of hazardous waste materials in less-developed countries. Some
products that are not harmful in some countries may be so in others because
of issues related to literacy, unsanitary conditions, and cultural values. The
concern is growing over safe drinking water, genetically modified products,
and tainted foodstuffs entering the food chain.
Pollution and the Natural Environment
Lesson25of44
Many countries are working together to create alliances and standards for
environmental responsibility to minimize the negative effects of pollution.
Some countries are taking legal action against polluting firms in an effort to
defend air and water quality. In some countries, however, groups have
lobbied governments to increase the level of pollution they allow. For
organizations to thrive globally, their governments should form joint
agreements that set reasonable emission standards for members.
Many pollution-control efforts have relatively short payback periods and have
a long-term positive effect on profitability. In contrast, violating
environmental initiatives has both human and financial costs, with the
human costs being the health hazards associated with pollution.
Telecommunication Issues
Lesson26of44
With the advent of satellites, email, and the internet, information can be
accessed in a matter of seconds instead of weeks; as a result, businesses
can become the victims as well as the perpetrators of unethical actions. The
ease of information access poses ethical issues, particularly regarding
privacy, that can differ by country. Whereas one country may place a high
value on transparency and a free press, another may place greater value on
privacy and individual liberties.
Questionable financial activities, such as money laundering, have also been
made easier by global telecommunications.Money launderingconsists of
using or transferring illegally received funds in a financial transaction to
conceal their source of ownership or to facilitate illegal activity.
Intellectual Property Protection
Lesson27of44
Intellectual property5refers to ideas and creative materials people develop
to solve problems, carry out applications, educate, and entertain others. A
patent is a legal document issued to an inventor that grants the right to
exclude others from using or selling the product for a period of time. A
copyright is a protection that covers published and unpublished literary,
scientific, and artistic works.
World Trade Organization
Lesson28of44
TheWorld Trade Organization(WTO) was established in 1995 at the
Uruguay round of negotiations of the General Agreement on Tariffs and
Trade (GATT). Today, the WTO has 133 member nations and an additional 33
nations that have applied for membership and hold observer status. On
behalf of its membership, the WTO administers its own trade agreements,
facilitates future trade negotiations, settles trade disputes, and monitors the
trade policies of member nations.
The WTO addresses economic and social issues involving agriculture, textiles
and clothing, banking, telecommunications, government purchases,
industrial standards, food sanitation regulations, services, and intellectual
property. It also provides legally binding ground rules for international
commerce and trade policy. The organization attempts to reduce barriers to
trade between and within nations and settle trade disputes.
Although its goals are certainly lofty, the WTO has been criticized by a
number of groups, especially environmental organizations.
Stakeholders Define Ethical Issues in Business
Lesson30of44
In a business context, customers, investors and shareholders, employees,
suppliers, government agencies, communities, the media, and many others
who have a "stake" or claim in some aspect of a company's products,
operations, industry, and outcomes are known as stakeholders. These groups
are influenced by companies, but they also have the ability to influence
companies; thus, the relationship between companies and their stakeholders
is a two-way street. Stakeholders can influence a company’s decisions and
can be impacted by a company’s decisions.
The interests of companies and their stakeholders are sometimes similar,
while at other times they diverge. Failing to consider the ethical implications
of decisions can damage a company’s reputation and shareholder
confidence. Stakeholders who are most directly affected by negative events
will have a corresponding shift in their perceptions of a firm's reputation. On
the other hand, even those indirectly connected to negative events can shift
their reputation attributions. In many cases, those indirectly connected to
the negative events may be more influenced by the news media or general
public opinion than those who are directly connected to an organization.
It often takes years to develop the reputation of being a highly ethical and
responsible company, which can be quickly lost as the result of an ethical
lapse. In addition, firms that work hard to develop a strong ethical
reputation are sometimes held to higher expectations than those with a less
stellar record. Therefore, the value of a good reputation can lead to much
better relations with multiple stakeholders and improved shareholder
returns.
New reforms to improve corporate accountability and transparency also
suggest that other stakeholders including banks, attorneys, and public
accounting firms can play a major role in fostering responsible decision-
making. Stakeholders apply their values and standards to many diverse
issues such as working conditions, consumer rights, environmental
conservation, product safety, and proper information disclosure–that may or
may not directly affect an individual stakeholder's own welfare. We can
assess the level of social responsibility that an organization bears by
scrutinizing its effects on the issues of concern to its stakeholders. Table 1
provides examples of common stakeholder issues along with indicators of
businesses’ impacts on those issues.
Stakeholders provide resources that are more or less critical to a firm's long-
term success. These resources may be both tangible and intangible.
Shareholders, for example, supply capital; suppliers offer material resources
or intangible knowledge; employees and managers grant expertise,
leadership, and commitment; customers generate revenue and provide
loyalty and positive word-of-mouth promotion; local communities provide
infrastructure; and the media transmits positive corporate images. When
individual stakeholders share similar expectations about desirable business
conduct, they may choose to establish or join formal communities that are
dedicated to better defining and advocating these values and expectations.
Stakeholders' ability to withdraw, or to threaten to withdraw, these needed
resources gives them power over businesses.
Stakeholder Issues
S E of an Issue O
Employees Pay and benefits
Higher levels may lead to less turnover,
higher productivity, and greater
commitment
Customers Reputation for quality May lead to repeat purchases and
willingness to pay higher prices
Suppliers Tight integration
Can lead to better products/services
and suppliers being willing to invest in
specialized assets
Media Coverage of events
Positive media coverage can improve
relations with employees, suppliers,
and communities, while negative
coverage can do the opposite.
Special interest groupsEnvironmental impact or
pollution control efforts
Special interest groups can label
companies as being “good” or “bad”,
which affects some customers’
decisions as well as media coverage.
S E of an Issue O
Regulators Product safety
Companies with a reputation for high
quality and safety may receive smaller
fines if there is a problem.
Investors Transparency in reporting Increased confidence, leading to higher
stock value
Community Charitable contributions Increased support for growth and
zoning requests
Competitors Industry standards
All competitors can benefit if they
agree to standardize some things, while
competing on others.
Types of Stakeholders
We can identify two different types of stakeholders:
Primary stakeholdersare those whose continued association is absolutely
necessary for a firm's survival; these include employees, customers,
investors, and shareholders as well as the governments and communities
that provide necessary infrastructure.Secondary stakeholdersdo not
typically engage in transactions with a company and thus are not essential
for its survival; these include the media, trade associations, and special-
interest groups.
Both primary and secondary stakeholders embrace specific values and
standards that dictate what constitutes acceptable or unacceptable
corporate behaviors. It is important for managers to recognize that while
primary groups may present more day-to-day concerns, secondary groups
cannot be ignored or given less consideration in the ethical decision-making
process.
Figure 1 offers a conceptualization of the relationship between businesses
and stakeholders. In thisstakeholder interaction model, there are two-
way relationships between the firm and a host of stakeholders. In addition to
the fundamental input of investors, employees, and suppliers, this approach
recognizes other stakeholders and explicitly acknowledges the dialogue that
exists between a firm's internal and external environments.
Interactions Between a Company and its
Stakeholders
A Stakeholder Orientation
The Responsibility of the Corporation as a Moral Agent
Lesson36of44
Increasingly, corporations are viewed not merely as profit-making entities
but also as moral agents that are accountable for their conduct to their
employees, investors, suppliers, and customers. Companies are more than
the sum of their parts or participants. Because corporations are chartered as
citizens of a state and/or nation, they generally have the same rights and
responsibilities as individuals. Through legislation and court precedents,
society holds companies accountable for the conduct of their employees as
well as for their decisions and the consequences of those decisions. Publicity
in the news media about specific issues such as employee benefits,
executive compensation, defective products, competitive practices, and
financial reporting contribute to a firm's reputation as a moral agent.
Viewed as moral agents, companies are required to obey the laws and
regulations that define acceptable business conduct. However, it is important
to acknowledge that they are not human beings who can think through moral
issues. Because companies are not human, laws and regulations are
necessary to provide formal structural restraints and guidance on ethical
issues. Although individuals may attempt to abide by their own values and
moral philosophy, as employees they are supposed to act in the company's
best interests. Thus, the individual as a moral agent has a moral obligation
beyond that of the corporation because it is the individual, not the company,
who can think responsibly through complex ethical issues.
Though obviously not a person, a corporation can be considered a societal
moral agent that is created to perform specific functions in society and is
therefore responsible to society for its actions. Because corporations have
the characteristics of agents, responsibility for ethical behavior is assigned to
them as legal entities as well as to the individuals or work groups they
employ. A corporate culture without values and appropriate communication
about ethics can facilitate individual misconduct. As such, companies may be
punished for wrongdoing and rewarded for good business ethics. The Federal
Sentencing Guidelines for Organizations (FSGO) holds corporations
responsible for conduct they engage in as an entity.
Some corporate outcomes cannot be tied to one individual or even a group,
and misconduct can be the result of a collective pattern of decisions
supported by a corporate culture. Therefore, corporations can be held
accountable, fined, and even receive the death penalty when they are
operating in a manner inconsistent with major legal requirements. Some
organizations receive such large fines and negative publicity that they must
go out of business because there is no way to survive under these pressures.
On the other hand, companies that have been selected as the top corporate
citizens receive awards and positive publicity for being responsible moral
agents in our society.
One major misunderstanding in studying business ethics is to assume that a
coherent ethical corporate culture will evolve through individual
interpersonal relationships. Because ethics is often viewed as an individual
matter, many reason the best way to develop an ethical corporate culture is
to provide character education to employees or to hire individuals with good
character and sensitize them to ethical issues. This assumes that ethical
conduct will develop through company-wide agreement and consensus.
Although these assumptions are laudable and have some truth, the
companies that are responsible for most of the economic activity in the world
employ thousands of culturally diverse individuals who will never reach
agreement on all ethical issues. Many ethical business issues are complex
close calls, and the only way to ensure consistent decisions that represent
the interests of all stakeholders is to require ethical policies. Implementing a
centralized corporate ethics program can provide a cohesive, internally
consistent set of statements and policies representing the corporation as a
moral agent.
a firm understands and addresses stakeholder demands can be referred to
as astakeholder orientation. This orientation comprises three sets of
activities: (1) the organization-wide generation of data about stakeholder
groups and assessment of the firm's interactions with these groups, (2) the
distribution of this information throughout the firm, and (3) the organization's
responsiveness as a whole to this information.
Generating data about stakeholders begins with identifying the stakeholders
that are relevant to the firm. Relevant stakeholders should be analyzed on
the basis of the power each enjoys as well as by the ties between them.
Next, the firm should characterize the concerns about the business's conduct
that each relevant stakeholder group shares. This information can be derived
from formal research including surveys, focus groups, internet searches, or
press reviews. Employees and managers can also generate this information
informally as they carry out their daily activities. Finally, the company should
evaluate its impact on the issues that are important to the various
stakeholders it has identified.
Given the variety of the employees involved in the generation of information
about stakeholders, it is essential that this information is circulated
throughout the firm. This requires that the firm facilitate the communication
of information about the nature of relevant stakeholder communities,
stakeholder issues, and the current impact of the firm on these issues to all
members of the organization. The dissemination of stakeholder intelligence
can be organized formally through activities such as newsletters and internal
information forums.
The responsiveness of the organization as a whole to stakeholder
information consists of the initiatives that the firm adopts to ensure it abides
by, or exceeds stakeholder expectations, and has a positive impact on
stakeholder issues. Such activities are likely to be specific to a particular
stakeholder group (for example, family-friendly work schedules) or to a
particular stakeholder issue (for example, pollution-reduction programs).
These responsiveness processes typically involve the participation of the
concerned stakeholder groups.
A stakeholder orientation can be viewed as a continuum in that firms are
likely to adopt the concept to varying degrees. To gauge a given firm's
stakeholder orientation, it is necessary to evaluate the extent to which the
firm adopts behaviors that typify both the generation and dissemination of
stakeholder information and responsiveness to it.
Social Responsibility and the Importance of a Stakeholder
Orientation
Lesson31of44
From the perspective ofsocial responsibility, business ethics embodies
standards, norms, and expectations that reflect a concern of major
stakeholders, including consumers, employees, shareholders, suppliers,
competitors, and the community. In other words, these stakeholders have
concerns about what is fair, just, or in keeping with respect to stakeholders’
rights. Many businesspeople and scholars have questioned the role of ethics
and social responsibility in business. Legal and economic responsibilities are
generally accepted as the most important determinants of performance.
Much evidence shows that social responsibility, including business ethics, is
associated with increased profits. Social responsibility contributes to
employee commitment and customer loyalty–vital concerns of any firm
trying to increase profits. It should be obvious from this discussion that
ethics and social responsibility cannot be just a reactive approach to issues
as they arise. Only if firms make ethical concerns a part of their foundation
and incorporate ethics in their business strategy can social responsibility as a
concept be embedded in daily decision-making. A description of corporate
ethical responsibility should include rights and duties, consequences and
values, all of which refer to specific strategic decisions. The ethical
component of business strategy should be capable of providing an
assessment of top management, workgroup, and individual behavior as it
relates to ethical decisions.
Social Responsibility and Ethics
Lesson32of44
The concepts of ethics and social responsibility are often used
interchangeably, although each has a distinct meaning. Social responsibility
is an organization’s obligation to maximize its positive impact on
stakeholders and to minimize its negative impact. Social responsibility can
be viewed as a contract with society, whereas business ethics involves
carefully thought-out rules or heuristics of business conduct that guide
decision-making.
If social responsibility is considered an important corporate concern, then it
does need quantitative credibility. Employee satisfaction, consumer loyalty,
and other stakeholder concerns can be quantified to some extent, but some
of the values and other dimensions are more qualitative. The International
Organization for Standardization (ISO) has tried to establish a corporate
responsibility standard, the ISO 26000. Although the ISO 26000 has been
demoted to a guideline rather than a standard, the discussion and debate
surrounding the process is valuable. Whereas corporate responsibility needs
quantitative credibility, significant aspects are more qualitative in nature:
employee satisfaction, customer motivations, company values, and ethical
decision-making processes, for instance. All, to some extent, can be broken
down into quantitative data, but the essence of them cannot. However, they
also shift constantly, which makes yesterday's survey an addition to today's
recycle bin.
Four Levels of Social Responsibility
There are four levels of social responsibility–economic, legal, ethical, and
philanthropic–and they can be viewed as steps (see image below). At the
most basic level, companies have an economic responsibility to be profitable
so they can provide a return on investment to their owners and investors,
create jobs for the community, and contribute goods and services to the
economy. If a business cannot create economic value, it will fail and cease
to exist. Of course, businesses are also expected to obey all laws and
regulations. If it occasionally falls short, fines or other sanctions may be
levied. Business ethics, as previously defined, comprises principles and
standards that guide behavior. Finally, philanthropic responsibility refers to
activities that are not required of businesses but promote human welfare or
goodwill.
The termcorporate citizenshipis often used to express the extent to
which businesses strategically meet the economic, legal, ethical, and
philanthropic responsibilities placed on them by their various stakeholders.
Corporate citizenship has four interrelated dimensions: strong sustained
economic performance, rigorous compliance, ethical actions beyond what
the law requires, and voluntary contributions that advance the reputation
and stakeholder commitment of the organization. A firm's commitment to
corporate citizenship indicates a strategic focus on fulfilling the social
responsibilities that its stakeholders expect of it.
Steps of Social Responsibility
Reputation
Reputationis one of an organization's greatest intangible assets with
tangible value. The value of a positive reputation is difficult to quantify, but it
is very important. A single negative incident can influence perceptions of a
corporation's image and reputation instantly and for years afterwards.
Corporate reputation, image, and brands are more important than ever and
are among the most critical aspects of sustaining relationships with
constituents including investors, customers, financial analysts, media, and
government watchdogs. It takes companies decades to build a great
reputation, yet just one slip can cost a company dearly. Although an
organization does not control its reputation in a direct sense, its actions,
choices, attitudes, behaviors, and consequences do influence the reputation
that exists in perceptions of stakeholders.
Corporate Governance Provides Formalized Responsibility to
Stakeholders
Lesson33of44
Most businesses, and often courses taught in colleges of business, operate
under the belief that the purpose of business is to maximize profits for
shareholders. In 1919 the Michigan Supreme Court in the case of Dodge v.
Ford Motor Co. ruled that a business exists for the profit of shareholders, and
the board of directors should focus on that objective. On the other hand, the
stakeholder model places the board of directors in the central position to
balance the interests and conflicts of the various constituencies. External
control of the corporation includes not only government regulation but also
key stakeholders including employees, consumers, and communities that
exert pressures for responsible conduct. Many of the obligations to balance
stakeholder interest have been institutionalized in legislation that provides
incentives for responsible conduct. The Federal Sentencing Guidelines for
Organizations (FSGO) provides incentives for developing an ethical culture
and efforts to prevent misconduct.
Today, the failure to balance stakeholder interests can result in a failure to
maximize shareholders' wealth. Most firms are moving more toward a
balanced stakeholder model as they see that this approach will sustain the
relationships necessary for long-term success.
Both directors and officers of corporations are fiduciaries for the
shareholders. Fiduciaries are persons placed in positions of trust who use
due care and loyalty in acting on behalf of the best interests of the
organization. There is a duty of care, also called a duty of diligence, to make
informed and prudent decisions. Directors have a duty to avoid ethical
misconduct in their director role and to provide leadership in decisions to
prevent ethical misconduct in the organization.
Directors are not held responsible for negative outcomes if they are informed
and diligent in their decision-making. This means they have an obligation to
request information, research, use accountants and attorneys, and obtain
the services of ethical compliance consultants. The duty of loyalty means
that all decisions should be in the interests of the corporation and its
stakeholders. Conflicts of interest exist when a director uses the position to
obtain personal gain (usually at the expense of the organization).
Corporate Governance Provides Formalized Responsibility to
Stakeholders
Lesson33of44
Most businesses, and often courses taught in colleges of business, operate
under the belief that the purpose of business is to maximize profits for
shareholders. In 1919 the Michigan Supreme Court in the case of Dodge v.
Ford Motor Co. ruled that a business exists for the profit of shareholders, and
the board of directors should focus on that objective. On the other hand, the
stakeholder model places the board of directors in the central position to
balance the interests and conflicts of the various constituencies. External
control of the corporation includes not only government regulation but also
key stakeholders including employees, consumers, and communities that
exert pressures for responsible conduct. Many of the obligations to balance
stakeholder interest have been institutionalized in legislation that provides
incentives for responsible conduct. The Federal Sentencing Guidelines for
Organizations (FSGO) provides incentives for developing an ethical culture
and efforts to prevent misconduct.
Today, the failure to balance stakeholder interests can result in a failure to
maximize shareholders' wealth. Most firms are moving more toward a
balanced stakeholder model as they see that this approach will sustain the
relationships necessary for long-term success.
Both directors and officers of corporations are fiduciaries for the
shareholders. Fiduciaries are persons placed in positions of trust who use
due care and loyalty in acting on behalf of the best interests of the
organization. There is a duty of care, also called a duty of diligence, to make
informed and prudent decisions. Directors have a duty to avoid ethical
misconduct in their director role and to provide leadership in decisions to
prevent ethical misconduct in the organization.
Directors are not held responsible for negative outcomes if they are informed
and diligent in their decision-making. This means they have an obligation to
request information, research, use accountants and attorneys, and obtain
the services of ethical compliance consultants. The duty of loyalty means
that all decisions should be in the interests of the corporation and its
stakeholders. Conflicts of interest exist when a director uses the position to
obtain personal gain (usually at the expense of the organization).
To remove the opportunity for employees to make unethical decisions, most
companies have developed formal systems of accountability, oversight, and
control–known ascorporate governance. Effective corporate governance
starts with a board of directors, but to be completely effective must be
implemented through policies and procedures that help guide decisions and
gather data on the impact of decisions.
Accountability refers to how closely workplace decisions are aligned with a
firm's stated strategic direction and its compliance with ethical and legal
considerations.
Oversight provides a system of checks and balances that limit employees'
and managers' opportunities to deviate from policies and strategies and that
prevent unethical and illegal activities.
Control is the process of auditing and improving organizational decisions and
actions. Control processes also provide feedback on whether decisions have
achieved the desired results and if future decisions could be improved to
provide even better results.
A clear delineation of accountability helps employees, customers, investors,
government regulators, and other stakeholders understand why and how the
organization chooses and achieves its goals. Corporate governance
establishes fundamental systems and processes: for preventing and
detecting misconduct, for investigating and disciplining, and for recovery and
continuous improvement. Effective corporate governance creates a
compliance and ethics culture so that employees feel integrity is at the core
of competitiveness. The development of stakeholder orientation should
interface with the corporation's governance structure. Corporate governance
is also part of a firm's corporate culture that establishes the integrity of all
relationships. A governance system that does not provide checks and
balances creates opportunities for top managers to put their own self-
interests before those of important stakeholders.
Reforms in governance structures and issues are occurring all over the
world. In many nations, companies are being pressured to implement
stronger corporate governance mechanisms by international investors, by
the process of becoming privatized after years of unaccountability as state
companies, or by the desire to imitate successful governance movements in
the United States, Japan, and the European Union. Below is a list of examples
of major corporate governance issues. These issues normally involve
strategic-level decisions and actions taken by boards of directors, business
owners, top executives, and other managers with high levels of authority and
accountability.
Shareholder rights
Risk management
Executive compensation
Auditing and control
Board of directors' composition
CEO selection and termination decisions
Integrity of financial reporting
Shareholder participation and input level
Compliance with corporate governance reform
CEO’s role in board decisions
Organizational ethics programs
Views of Corporate Governance
To better understand the role of corporate governance in business today, it
is important to consider how it relates to fundamental beliefs about the
purpose of business. Some organizations take the view that as long as they
are maximizing shareholder wealth and profitability, they are fulfilling their
core responsibilities. Other firms, however, believe that a business is an
important member, even citizen, of society and therefore must assume
broad responsibilities that include complying with social norms and
expectations. From these assumptions, we can derive two major approaches
to corporate governance: the shareholder model and the stakeholder model.
Theshareholder model of corporate governanceis founded in classic
economic precepts, including the goal of maximizing wealth for investors and
owners. For publicly traded firms, corporate governance focuses on
developing and improving the formal system for maintaining performance
accountability between top management and the firms' shareholders. Thus,
a shareholder orientation should drive a firm's decisions toward serving the
best interests of investors. Underlying these decisions is a classic agency
problem, where ownership (investors) and control (managers) are separate.
Investors cannot directly monitor all the actions and decisions of managers,
for they do not have the same information as the managers.
The shareholder model has been criticized for its somewhat singular focus
because other stakeholders also "invest" in a company; suppliers, creditors,
customers, employees, business partners, the community, and others invest
their resources into a company.
Thestakeholder model of corporate governanceadopts a broader view
of the purpose of business. Although a company has a responsibility for
economic success and viability to satisfy its stockholders, it also must
answer to other stakeholders. At times, these stakeholders have interests
that converge, while at times they may diverge. A community may enjoy the
benefits of a growing company and workforce and the positive impact on
jobs and tax revenues. But increased traffic congestion and higher levels of
pollution could cause a community to limit a company’s growth. As another
example, paying employees unusually well may make them happy and
attract the best individuals, but higher costs may have to be passed on to
consumers, lead to lower prices for suppliers, and/or smaller returns to
investors. Hence there is a need to maintain a balanced approach to all
stakeholders.
Once the primary groups have been identified, managers must then
implement the appropriate corporate governance mechanisms to promote
the development of long-term relationships. This approach entails creating
governance systems that consider stakeholder welfare in tandem with
corporate needs and interests.
Boards of Directors
For public corporations, boards of directors hold the ultimate
responsibility for their firms' success or failure as well as for the ethics
of their actions. This governing authority is being held responsible by
the 2004 amendments to the FSGO for creating an ethical culture that
provides leadership, values, and compliance. The members of a
company's board of directors assume legal responsibility for the firm's
resources and decisions, and they appoint its top executive officers.
The traditional approach to directorship assumed that board members
managed the corporation's business. Research and practical
observation have shown that boards of directors rarely, if ever,
perform the management function. First, boards meet only a few
times a year, which precludes them from managing effectively. In
addition, the complexity of modern organizations mandates full
attention on a daily basis. Thus, boards of directors are concerned
primarily with monitoring the decisions made by senior company
managers. These include choosing top executives, assessing their
performance, helping set strategic direction, and ensuring that
oversight, control, and accountability mechanisms are in place. In
summary, board members assume ultimate authority for their
organization’s effectiveness and subsequent performance.
Accountability and Transparency
Just as improved ethical decision-making requires more of employees
and executives, so too are boards of directors feeling greater demands
for accountability and transparency. In the past, board members were
often retired company executives or friends of current executives, but
the trend today is toward "outside directors" who have little vested
interest in the firm before assuming the director role. Inside directors
are corporate officers, consultants, major shareholders, or others who
benefit directly from the success of the organization. Directors today
are increasingly chosen for their expertise, competence, and ability to
bring diverse perspectives to strategic discussions. Outside directors
are also thought to bring more independence to the monitoring
function because they are not bound by past allegiances, friendships, a
current role in the company, or some other issue that may create a
conflict of interest.
Many of the corporate scandals uncovered in recent years might have
been prevented if each of the companies' boards of directors had been
better qualified, more knowledgeable, and less biased. There is a
difficult balance between selecting board members who are
knowledgeable about a firm and its industry through their own direct
expertise and having board members who can view things from an
entirely independent and objective perspective. The former group may
lack independence and be less likely to ask why certain decisions are
being made, while the latter may not have the background to fully
understand the interrelationships between the company and many of
the stakeholders.
Executive Compensation
One of the biggest issues that corporate boards of directors face
isexecutive compensation. In fact, most boards spend more time deciding
how much to compensate top executives than they do ensuring the integrity
of the company's financial reporting systems. How executives are
compensated for their leadership, organizational service, and performance
has become a controversial topic. One area for board members to consider is
the extent to which executive compensation is linked to company
performance. Plans that base compensation on the achievement of several
performance goals, including profits and revenues, are intended to align the
interests of owners with management.
Another issue is whether performance-linked compensation encourages
executives to focus on short-term performance at the expense of long-term
growth and relationships with stakeholders.
mplementing a Stakeholder Perspective
Lesson34of44
An organization that develops effective corporate governance and
understands the importance of business ethics and social responsibility in
achieving success should develop some processes for managing these
important concerns. Although there are many different approaches, these
steps have been found effective to utilize the stakeholder framework in
managing responsibility and business ethics.
Step 1: Assessing the corporate culture
Step 2: Identifying stakeholder groups
Step 3: Identifying stakeholder issues
Step 4: Assessing organizational commitment to social
responsibility
Step 5: Identifying resources and determining urgency
Step 6: Gaining stakeholder feedback
S 1
Step 1: Assessing the Corporate Culture
To enhance organizational fit, a social responsibility program must align with
the corporate culture of the organization. The purpose of this first step is to
identify the organizational mission, values, and norms that are likely to have
implications for social responsibility. In particular, relevant existing values
and norms are those that specify the stakeholder groups and stakeholder
issues deemed most important by the organization.
Very often, relevant organizational values and norms can be found in
corporate documents such as the mission statement, annual reports, sales
brochures, or websites.
Step 2: Identifying Stakeholder Groups
In managing this stage, it is important to recognize stakeholder needs,
wants, and desires. Many important issues gain visibility because key
constituencies such as consumer groups, regulators, or the media express an
interest. When agreement, collaboration, or even confrontations exist on an
issue, there is a need for a decision-making process. Managers can identify
relevant stakeholders who may be affected by or may influence the
development of organizational policy. Sometimes the stakeholders make
their interests very clear, while at other times stakeholders may remain
silent unless they feel they are being ignored. These days, when employees
decide they would like to form a union it is often because they feel their
concerns were not being properly taken into consideration. Stakeholders
have some level of power over a business because they are in the position to
withhold, or at least threaten to withhold, organizational resources.
Stakeholders have the most power when their own survival is not really
affected by the success of the organization and when they have access to
vital organizational resources.
Step 3: Identifying Stakeholder Issues
Together, steps 1 and 2 lead to the identification of the stakeholders who are
both the most powerful and legitimate. The level of power and legitimacy
determines the degree of urgency in addressing their needs.
Step 3 consists then in understanding the nature of the main issues of
concern to these stakeholders. Conditions for collaboration exist when
problems are so complex that multiple stakeholders are required to resolve
the issue, and the weaknesses of adversarial approaches are understood.
tep 4: Assessing Organizational Commitment
to Social Responsibility
Steps 1 through 3 consist of generating information about social
responsibility among a variety of influencers in and around the organization.
Step 4 brings these three first stages together to arrive at an understanding
of social responsibility that specifically matches the organization of interest.
This general definition will then be used to evaluate current practices and to
select concrete social responsibility initiatives.
Step 5: Identifying Resources and
Determining Urgency
The prioritization of stakeholders and issues, along with the assessment of
past performance, provides for allocating resources. Two main criteria can be
considered: First are the levels of financial and organizational investments
required by different actions; second is the urgency when prioritizing social
responsibility challenges.
When the challenge under consideration is viewed as significant and when
stakeholder pressures on the issue could be expected, then the challenge
can be considered as urgent.
Step 6: Gaining Stakeholder Feedback
Stakeholder feedback can be generated through a variety of means. First,
stakeholders' general assessment of the firm and its practices can be
obtained through satisfaction or reputation surveys.
Second, to gauge stakeholders' perceptions of the firm's contributions to
specific issues, stakeholder generated media such as blogs, websites,
podcasts, and newsletters can be assessed.
Third, more formal research may be conducted using focus groups,
observation, and surveys.
The Need for Organizational Ethics Programs
Lesson37of44
One reason why ethics programs are required in one form or another is to
help sensitize employees to the potential legal and ethical issues within their
work environments. Recent ethics scandals in U.S. business have destroyed
trust in top management and significantly lowered the public's trust of
business. Understanding the factors that influence the ethical decision-
making process can help companies encourage ethical behavior and
discourage undesirable conduct. Fostering ethical decision-making within an
organization requires terminating unethical persons and improving the firm's
ethical standards.
To promote legal and ethical conduct, an organization should develop an
organizational ethics program by establishing, communicating, and
monitoring the ethical values and legal requirements that characterize its
history, culture, industry, and operating environment. Without such
programs, uniform standards, and policies of conduct, it is difficult for
employees to determine what behaviors are acceptable within a company.
In the absence of such programs and standards, employees generally will
make decisions based on their observations of how their coworkers and
superiors behave. A strong ethics program includes a written code of
conduct, an ethics officer to oversee the program, careful delegation of
authority, formal ethics training, rigorous auditing, monitoring, enforcement,
and revision of program standards. Without a strong program, problems
likely will occur.
Although there are no universal standards that can be applied to
organizational ethics programs, most companies develop codes, values, or
policies to provide guidance on business conduct. However, it would be naive
to think that simply having a code of ethics would solve all the ethical
dilemmas a company might face. Indeed, most of the companies that have
experienced ethical and legal difficulties in recent years have had formal
ethics codes and programs. The problem is that top managers have not
integrated these codes, values, and standards into their firms' corporate
culture where they can provide effective guidance for daily decision-making.
To satisfy the public's escalating demands for ethical decision-making,
companies need to develop plans and structures for addressing ethical
considerations. Some directions for improving ethics have been mandated
through regulations, but companies must be willing to have in place a
system for implementing values and ethics that exceeds the minimum
requirements.
Five top recommendations to CEOs for rebuilding trust and confidence in
American firms include making customers the top priority, assuming
personal responsibility and accountability, communicating openly and
frequently with customers, handling crises more honestly, and sticking to the
code of business ethics no matter what.
An Effective Ethics Program
Lesson38of44
A company must have an effective ethics program to ensure all employees
understand its values and comply with the policies and codes of conduct that
create its ethical culture. Because we come from diverse business,
educational, and family backgrounds, it cannot be assumed we know how to
behave appropriately when we enter a new organization or job.
Some corporate cultures provide opportunities for, or reward, unethical
conduct. In such cases, the company may face penalties and the loss of
public confidence if one of its employees breaks the law. Companies need to
assess their key risk areas and to customize a compliance program that will
address these risks and satisfy key effectiveness criteria. Concerns about
unsafe working conditions may be very important for some companies but
not an issue in others.
At the heart of the FSGO is a "carrot-and-stick" philosophy. Companies that
act to prevent misconduct by establishing and enforcing ethical and legal
compliance programs may receive a "carrot" and avoid penalties should a
violation occur. The ultimate "stick" is the possibility of being fined or put on
probation if convicted of a crime. Organizational probation involves using
consultants onsite to observe and monitor a company's legal compliance
efforts as well as to report the company's progress toward avoiding
misconduct to the U.S. Sentencing Commission.
The FSGO also requires federal judges to increase fines for organizations that
continually tolerate misconduct and to reduce or eliminate fines for firms
with extensive compliance programs that are making due diligence attempts
to abide by legal and ethical standards. Until the guidelines were formulated,
courts were inconsistent in holding corporations responsible for employee
misconduct. There was no incentive to build effective programs to encourage
employees to make ethical and legal decisions. Now companies earn credit
for creating ethics programs that meet a rigorous standard. The
effectiveness of a program is determined by its design and implementation.
It must deal effectively with the risk associated with a particular business
and has to become part of the corporate culture.
An ethics program can help a firm avoid civil liability, but the company still
bears the burden of proving it has an effective program. A program
developed in the absence of misconduct will be much more effective than
one imposed as a reaction to scandal or prosecution. A legal test of a
company's ethics program is possible when an individual employee is
charged with misconduct. The court system or the U.S. Sentencing
Commission evaluates the organization's responsibility for the individual's
behavior during the process of an investigation. If the courts find the
company contributed to the misconduct or failed to show due diligence in
preventing misconduct, then the firm may be convicted and sentenced.
The Sarbanes-Oxley Act of 2002 established new requirements for corporate
governance to prevent fraudulent behavior in business. The heart of this act
is an accounting oversight board that establishes financial reporting
requirements including instituting a code of conduct for senior financial
officers.
Value Versus Compliance Programs
No matter what their goals, ethics programs are developed as organizational
control systems, the aim of which is to create predictability in employee
behavior. Two types of control systems can be created. Acompliance
orientationcreates order by requiring that employees identify with and
commit to specific required conduct. It uses legal terms, statutes, and
contracts that teach employees the rules and penalties for noncompliance.
The other type of system is avalues orientation, which strives to develop
shared values. Although penalties are attached, the focus is more on an
abstract core of ideals such as respect and responsibility. Instead of relying
on coercion, the company's values are seen as something to which people
willingly aspire.
Research into compliance-based and values-based approaches reveals that
both types of programs can interact or work toward the same end, but a
values orientation influences employees and creates ethical reasoning
among employees. Values-based programs increase employees' awareness
of ethics at work, their integrity, their willingness to deliver bad news to
supervisors, and the perception that better decisions are made. Compliance-
based programs are linked to employees' awareness of ethical issues at
work, to their perception that decision-making is better because of the
program, and to their explicit knowledge of rules and expectations that
makes decision-making easier. In the final analysis, both orientations can be
used to help employees and managers; however, it appears that a values-
based program may be better for companies in the long run. Table 3 includes
the minimum requirements for ethical compliance programs.
Minimum Requirements for Ethical
Compliance Programs
Standards and procedures, such as code of ethics, that
are reasonably capable of detecting and preventing
misconduct
High-level personnel who are responsible for an ethics
and compliance program
No substantial discretionary authority given to
individuals with a propensity for misconduct
Standards and procedures communicated effectively
via ethics training programs
Establishment of systems to monitor, audit, and report
misconduct
Consistent enforcement of standards, codes, and
punishment
Continuous improvement of the ethical compliance
program
Codes of Conduct
Lesson39of44
Most companies begin the process of establishing organizational ethics
programs by developingcodes of conduct, which are formal statements
that describe what an organization expects of its employees. Such
statements may take three different forms: a code of ethics, a code of
conduct, and a statement of values.
Acode of ethicsis the most comprehensive and consists of general
statements, sometimes altruistic or inspirational, that serve as principles and
the basis for rules of conduct. A code of ethics generally specifies methods
for reporting violations, disciplinary action for violations, and a structure of
due process. Acode of conductis a written document that may contain
some inspirational statements but usually specifies acceptable or
unacceptable types of behavior. A code of conduct is more akin to a
regulatory set of rules and, as such, tends to elicit less debate about specific
actions. One problem with codes of conduct is that they tend to be
developed without broad-based participation from stakeholders.
The final type of ethical statement is astatement of values, which serves
the general public and also addresses distinct groups such as stakeholders.
Values statements are conceived by management and are fully developed
with input from all stakeholders. Despite our distinctions, it is important to
recognize that these terms are often used interchangeably.
Regardless of the degree of comprehensiveness, a code of ethics should
reflect upper managers' desire for compliance with the values, rules, and
policies that support an ethical culture. The development of a code of ethics
should involve the president, board of directors, and chief executive officers
who will be implementing the code. Legal staff should also be called on to
ensure the code has correctly assessed key areas of risk and that it provides
buffers for potential legal problems. A code of ethics that does not address
specific high-risk activities within the scope of daily operations is inadequate
for maintaining standards that can prevent misconduct.
These codes may address a variety of situations, from internal operations to
sales presentations and financial disclosure practices. Research has found
that corporate codes of ethics often contain about six core values or
principles in addition to more detailed descriptions and examples of
appropriate conduct. The six values that have been suggested as being
desirable for codes of ethics include (1) trustworthiness, (2) respect, (3)
responsibility, (4) fairness, (5)caring, and (6) citizenship. These values will
not be effective without distribution, training, and the support of top
management in making these values a part of the corporate culture.
Employees need specific examples of how these values can be implemented.
Codes of conduct will not resolve every ethical issue encountered in daily
operations, but they help employees and managers deal with ethical
dilemmas by prescribing or limiting specific activities. Many companies have
a code of ethics, but it is not communicated effectively. A code that is placed
on a website or in a training manual is useless if it is not reinforced every
day.
Ethics Officers
Lesson40of44
Organizational ethics programs also must have oversight by high-ranking
persons known to respect legal and ethical standards. These individuals,
often referred to as ethics officers, are responsible for managing their
organizations' ethics and legal compliance programs. They are usually
responsible for (1) assessing the needs and risks that an organization-wide
ethics program must address, (2) developing and distributing a code of
conduct or ethics, (3) conducting training programs for employees, (4)
establishing and maintaining a confidential service to answer employees'
questions about ethical issues, (5) making sure that the company is in
compliance with government regulation, (6) monitoring and auditing ethical
conduct, (7) taking action on possible violations of the company's code, and
(8) reviewing and updating the code.
To ensure compliance with state and federal regulations, many corporations
are now appointing chief compliance officers and ethics and business
conduct professionals to develop and oversee corporate compliance
programs.
Ethics Training and Communication
Lesson41of44
A major step in developing an effective ethics program is implementing a
training program and communication system to educate employees about
the firm's ethical standards. A significant number of employees report they
frequently find such training useful. Training can educate employees about
the firm's policies and expectations, relevant laws and regulations, and
general social standards.
Training programs can make employees aware of available resources,
support systems, and designated personnel who can assist them with ethical
and legal advice. They can also empower employees to ask tough questions
and make ethical decisions. Many companies are now incorporating ethics
training into their employee and management development training efforts.
Ethical decision-making is influenced by corporate culture, by coworkers and
supervisors, and by the opportunities available to engage in unethical
behavior. Ethics training can affect all three types of influence.
If adequately and thoughtfully designed, ethics training can ensure everyone
in the organization (1) recognizes situations that might require ethical
decision making, 2) understands the values and culture of the organization,
and (3) can evaluate the impact of ethical decisions on the company in the
light of its value structure.
If ethics training is to be effective, it must start with a foundation, a code of
ethics, a procedure for airing ethical concerns, line and staff involvement,
and executive priorities on ethics that are communicated to employees.
Managers from every department must be involved in the development of an
ethics-training program. Training and communication initiatives should
reflect the unique characteristics of an organization: its size, culture, values,
management style, and employee base. It is important for the ethics
program to differentiate between personal and organizational ethics. To be
successful, business ethics programs should educate employees about
formal ethical frameworks and models for analyzing business ethics issues.
Then, employees can base ethical decisions on their knowledge of choices
rather than on emotions.
Some of the goals of an ethics-training program might be to improve
employees' understanding of ethical issues and their ability to identify them,
to inform employees of related procedures and rules, and to identify the
contact person who could help them resolve ethical problems.
Most experts agree that one of the most effective methods of ethics training
is exercises in resolving ethical dilemmas that relate to actual situations
employees may face in their jobs. A relatively new training device is
behavioral simulation, which gives participants a short, hypothetical ethical-
issue situation to review. Each participant is assigned a role within a
hypothetical organization and is provided varying levels of information about
the scenario. Participants then must interact to develop recommended
courses of action representing short-term, mid-term, and long-term
considerations. Research indicates that "the simulation not only instructs on
the importance of ethics but on the processes for managing ethical concerns
and conflict.”
Top executives must communicate with managers at the operations level (in
production, sales, and finance, for instance) and enforce overall ethical
standards within the organization. It is most important to help employees
identify ethical issues and give them the means to address and resolve such
issues in ambiguous situations. In addition, employees should be offered
direction on how to seek assistance from managers, the ethics officer, or
other designated personnel when resolving ethical problems.
Although training and communication should reinforce values and provide
employees with opportunities to learn about rules, they represent just one
part of an effective ethics program. Moreover, ethics training will be
ineffective if conducted solely because it is required or because it is
something that competing firms are doing.
If ethical performance is not a part of regular performance appraisals, this
sends the message that ethics is not an important component of decision-
making. For ethics training to make a difference, employees must
understand why it is conducted, how it fits into the organization, and what
their own role in implementing it is.
Systems to Monitor and Enforce Ethical Standards
Lesson42of44
An effective ethics program employs a variety of resources to monitor ethical
conduct and measure the program's effectiveness. Observing employees,
internal audits, surveys, reporting systems, and investigations can assess
compliance with the company's ethical code and standards. An external
audit and review of company activities may sometimes be helpful in
developing benchmarks of compliance.
To determine whether a person is performing his or her job adequately and
ethically, observers might focus on how the employee handles an ethically
charged situation. For example, many businesses employ role-playing
exercises in training salespeople and managers. Ethical issues can be
introduced into the discussion, and the results can be videotaped so that
both participants and their superiors can evaluate the outcome of the ethics
dilemma.
Questionnaires can serve as benchmarks in an ongoing assessment of
ethical performance by surveying employees' ethical perceptions of their
company, their superiors, their coworkers, and themselves, as well as
gaining their ratings on ethical or unethical practices within the firm and
industry. Then, if unethical conduct appears to be increasing, management
will have a better understanding of what types of unethical practices may be
occurring and why. A change in the company's ethics training may then be
necessary.
The existence of an internal system by which employees can report
misconduct is especially useful for monitoring and evaluating ethical
performance. Many companies have set up ethics assistance lines– often
called help lines–or help desks to offer support and give employees an
opportunity to ask questions or report ethical concerns. Sometimes these
are designed to let “whistle blowers” voice a concern while remaining
anonymous.
Although there is always some concern that employees may misreport a
situation or abuse a help line to retaliate against a coworker, help lines have
become widespread, and employees do use them. An easy-to-use help line
or desk can serve as a safety net that increases the chance of detecting and
responding to unethical conduct in a timely manner. Help lines serve as a
central contact point where critical comments, dilemmas, and advice can be
assigned to the person most appropriate for handling a specific case.
Companies are increasingly using firms that provide professional case-
management services and software. Software is becoming popular because
it provides reports of employee concerns, complaints, or observations of
misconduct, which can then be tracked and managed. It then allows the
company to track investigations, analysis, resolutions, and documentation of
misconduct reports. This helps prevent lawsuits, and the shared
management and prevention can help a company analyze and learn about
ethical lapses. However, it is important for companies to choose the right
software for their company. They need to assess their current position and
determine what they need going forward.
If a company is not making progress toward creating and maintaining an
ethical culture, it needs to determine why and take corrective action, either
by enforcing current standards more strictly or by setting higher standards.
Corrective action may involve rewarding employees who comply with
company policies and standards and punishing those who do not. If the firm
fails to take corrective action against unethical or illegal behavior, the
inappropriate behavior is likely to continue.
Consistent enforcement and necessary disciplinary action are essential to a
functional ethics or compliance program. The ethics officer is usually
responsible for implementing all disciplinary actions for violations of the
firm's ethical standards. Many companies are including ethical compliance in
employee performance appraisals.
Efforts to deter unethical behavior are important for companies' long-term
relationships with their employees, customers, and community. If the code of
ethics is aggressively enforced and becomes part of the corporate culture, it
can effectively improve ethical behavior within the organization. If a code is
not properly enforced, it becomes mere window dressing and will accomplish
little toward improving ethical behavior and decisions.
Continuous Improvement of the Ethics
Program
Improving the system that encourages employees to make more ethical
decisions differs little from implementing any other type of business
strategy. Implementation requires designing activities to achieve
organizational objectives using available resources and existing constraints.
Implementation translates a plan for action into operational terms and
establishes a means by which an organization's ethical performance will be
monitored, controlled, and improved.
A firm's ability to plan and implement ethical business standards depends in
part on how it structures resources and activities to achieve its ethical
objectives. People's attitudes and behavior must be guided by a shared
commitment to the business rather than mere obedience to traditional
managerial authority. Encouraging diversity of perspectives, disagreement,
and the empowerment of people helps align the company's leadership with
its employees.
If a company determines that its ethical performance has been less than
satisfactory, executives may want to reorganize how certain kinds of
decisions are made. For example, a decentralized organization may need to
centralize key decisions, at least for a time, so that upper managers can
ensure the decisions are ethical.
In other companies, decentralizing important decisions may be a better way
to attack ethical problems so that lower-level managers, familiar with the
forces of the local business environment and local culture and values, can
make more decisions. Whether the ethics function is centralized or
decentralized, the key need is to delegate authority in such a way that the
organization can achieve ethical performance.
Common Mistakes in Designing and
Implementing an Ethics Program
Listed below are common mistakes business leaders make when designing
and implementing an ethics program.
Not having a clear understanding of the goals of the
program from the beginning
Not setting realistic and measurable program
objectives
Senior management’s failure to take ownership of the
ethics program
Developing program materials that do not address the
needs of the average employee
Transferring a domestic program internationally
Designing a program as a series of lectures
Many business leaders recognize that they need to have an ethics program,
but few take the time to answer fundamental questions about the goals of
such programs. Some of the most common objectives are to deter and
detect unethical behavior as well as violations of the law; to gain competitive
advantages through improved relationships with customers, suppliers, and
employees; and, especially for multinational corporations, to link employees
through a unifying and shared corporate culture. Failure to understand and
appreciate these goals is the first mistake that many firms make when
designing ethics programs.
A second mistake is not setting realistic and measurable program objectives.
Once a consensus on objectives is reached, companies should solicit input
through interviews, focus groups, and survey instruments. Research
suggests that employees and senior managers often know that they are
doing something unethical but rationalize their behavior as being "for the
good of the company." As a result, ethics program objectives should contain
some elements that are measurable.
The third mistake is senior management's failure to take ownership of the
ethics program. Maintaining an ethical culture may be impossible if CEOs do
not support an ethical culture. If top managers behave unethically, creating
and enforcing an ethical culture will be difficult, if not impossible.
The fourth mistake is developing program materials that do not address the
needs of the average employee. Many compliance programs are designed by
lawyers to ensure that the company is legally protected. These programs
usually yield complex "legalese" that few within the organization can
understand. To avoid this problem, ethics programs–including codes of
conduct and training materials–should include feedback from employees
from across the firm, not just the legal department.
The fifth common mistake made in implementing ethics programs is
transferring an "American" program to a firm's international operations. In
multinational firms, executives should involve overseas personnel as early as
possible in the process. This can be done by developing an inventory of
common global management practices and processes and examining the
corporation's standards of conduct in this international context.
A final common mistake is designing an ethics program that is little more
than a series of lectures. In such cases, participants typically recall less than
15 percent the day after the lecture. A more practical solution is to allow
employees to practice the skills they learn through case studies or small-
group exercises.
A firm cannot succeed solely by taking a legalistic approach to ethics and
compliance with sentencing guidelines. Top managers must seek to develop
high ethical standards that serve as a barrier to illegal conduct. Although an
ethics program should help reduce the possibility of penalties and negative
public reaction to misconduct, a company must want to be a good corporate
citizen and recognize the importance of ethics to success in business.
