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BUSINESS ETHICS Ethical Decision Making and Cases

TENTH EDITION

O. C. Ferrell University of New Mexico

John Fraedrich Southern Illinois University—Carbondale

Linda Ferrell University of New Mexico

Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States

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Business Ethics: Ethical Decision Making & Cases, 10e O.C. Ferrell, John Fraedrich and Linda Ferrell

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WCN: 02-200-203

To James Collins Ferrell and George Collins Ferrell.

—O.C. Ferrell

To Debbie FIBJ. —John Fraedrich

To Bruce and Becky Nafziger. —Linda Ferrell

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iv

FM TITLEBRIEF CONTENTS

4: Sustainability Challenges in the Gas and Oil Industry 424

5: New Belgium Brewing: Ethical and Environmental Responsibility 434

6: National Collegiate Athletic Association Ethics and Compliance Program 444

7: Google: The Quest to Balance Privacy with Profitss 458

8: Zappos: Delivering Customer Satisfaction 475

9: Enron: Questionable Accounting Leads to Collapse 486

10: Home Depot Implements Stakeholder Orientation 498

11: Frauds of the Century 508

12: Insider Trading at the Galleon Group 517

13: Whole Foods Strives to Be an Ethical Corporate Citizen 525

14: Apple Inc.’s Ethical Success and Challenges 537

15: PepsiCo’s Journey Toward an Ethical and Socially Responsible Culture 548

16: Ethical Leadership at Cardinal IG: The Foundation of a Culture of Diversity 563

17: Better Business Bureau: Protecting Consumers and Dealing with Organizational Ethics Challenges 572

18: Managing the Risks of Global Bribery in Business 583

19: Mattel Responds to Ethical Challenges 594

20: Best Buy Fights Against Electronic Waste 604

Index I-615

PART 1: An Overview of Business Ethics 1 1: The Importance of Business Ethics 1

2: Stakeholder Relationships, Social Responsibility, and Corporate Governance 28

PART 2: Ethical Issues and the Institutionalization of Business Ethics 57 3: Emerging Business Ethics Issues 59

4: The Institutionalization of Business Ethics 90

PART 3: The Decision-Making Process 125 5: Ethical Decision Making 126

6: Individual Factors: Moral Philosophies and Values 152

7: Organizational Factors: The Role of Ethical Culture and Relationships 181

PART 4: Implementing Business Ethics in a Global Economy 211 8: Developing an Effective Ethics Program 213

9: Managing and Controlling Ethics Programs 239

10: Globalization of Ethical Decision-Making 272

11: Ethical leadership 308

12: Sustainability: Ethical and Social Responsibility Dimensions 344

PART 5: Cases 380 1: Monsanto Attempts to Balance Stakeholder

Interests 382

2: Starbucks’ Mission: Social Responsibility and Brand Strength 396

3: Walmart Manages Ethics and Compliance Challenges 407

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v

FM TITLECONTENTS

Chapter 2: Stakeholder Relationships, Social Responsibility, and Corporate Governance 28 Chapter Objectives, 28 | Chapter Outline, 28

An Ethical Dilemma, 29

Stakeholders Define Ethical Issues in Business 31 Identifying Stakeholders, 32 • A Stakeholder Orientation, 33

Social Responsibility and Ethics 36 Issues in Social Responsibility 38 Social Responsibility and the Importance of a Stakeholder Orientation 40 Corporate Governance Provides Formalized Responsibility to Stakeholders 41

Views of Corporate Governance, 45 • The Role of Boards of Directors, 46 • Greater Demands for Accountability and Transparency, 46 • Executive Compensation, 47

Implementing A Stakeholder Perspective 48 Step 1: Assessing the Corporate Culture, 49 • Step 2: Identifying Stakeholder Groups, 49 • Step 3: Identifying Stakeholder Issues, 49 • Step 4: Assessing Organizational Commitment to Social Responsibility, 50 • Step 5: Identifying Resources and Determining Urgency, 50 • Step 6: Gaining Stakeholder Feedback, 50

Contributions of a Stakeholder Perspective 51 Summary 51 Important Terms for Review, 53 | Resolving Ethical Business Challenges 54 | Check Your EQ, 55

PART 1: AN OVERVIEW OF BUSINESS ETHICS 1

Chapter 1: The Importance of Business Ethics 1 Chapter Objectives, 1 | Chapter Outline, 1

An Ethical Dilemma 2

Business Ethics Defined 4 Why Study Business Ethics? 6

A Crisis in Business Ethics, 6 • Specific Issues, 7 • The Reasons for Studying Business Ethics 8

The Development of Business Ethics 9 Before 1960: Ethics in Business, 9 • The 1960s: The Rise of Social Issues in Business, 10 • The 1970s: Business Ethics as an Emerging Field, 11 • The 1980s: Consolidation, 11 • The 1990s: Institutionalization of Business Ethics, 12 •The Twenty-First Century of Business Ethics, 13

Developing an Organizational and Global Ethical Culture 14 The Benefits of Business Ethics 15

Ethics Contributes to Employee Commitment, 16 • Ethics Contributes to Investor Loyalty, 17 • Ethics Contributes to Customer Satisfaction, 17 • Ethics Contributes to Profits, 19

Our Framework for Studying Business Ethics 19 Summary 22 Important Terms for Review, 23 | Resolving Ethical Business Challenges, 24 | Check Your EQ, 25

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vi Contents

PART 2: ETHICAL ISSUES AND THE INSTITUTIONALIZATION OF BUSINESS ETHICS 57

Chapter 3: Emerging Business Ethics Issues 59 Chapter Objectives, 59 | Chapter Outline, 59

An Ethical Dilemma 60

Recognizing an Ethical Issue (Ethical Awareness) 61 Foundational Values for Identifying Ethical Issues 63

Integrity, 63 • Honesty, 63 • Fairness, 64 Ethical Issues and Dilemmas in Business 65

Misuse of Company Time and Resources, 66 • Abusive or Intimidating Behavior, 66 • Lying, 69 • Conflicts of Interest, 70 • Bribery, 70 • Corporate Intelligence, 71 • Discrimination, 73 • Sexual Harassment, 75 • Fraud, 76 • Consumer Fraud, 79 • Financial Misconduct, 80 • Insider Trading, 81 • Intellectual Property Rights, 82 • Privacy Issues, 83

The Challenge of Determining an Ethical Issue in Business 84 Summary 85 Important Terms for Review, 86 | Resolving Ethical Business Challenges, 87 | Check Your EQ, 88

Chapter 4: The Institutionalization of Business Ethics 92 Chapter Objectives, 92 | Chapter Outline, 92

An Ethical Dilemma 93

Managing Ethical Risk Through Mandated and Voluntary Programs 94 Mandated Requirements for Legal Compliance 96

Laws Regulating Competition, 97 • Laws Protecting Consumers, 101 • Laws Promoting Equity and Safety, 103

Gatekeepers and Stakeholders 105 Accountants, 105 • Risk Assessment, 106

The Sarbanes–Oxley (Sox) Act 106 Public Company Accounting Oversight Board, 108 • Auditor and Analyst Independence, 108 • Whistle- Blower Protection, 108 • Cost of Compliance, 109

Dodd–Frank Wall Street Reform and Consumer Protection Act 109

New Financial Agencies, 109 • Consumer Financial Protection Bureau, 110 • Whistle-Blower Bounty Program, 110

Laws That Encourage Ethical Conduct 111 Federal Sentencing Guidelines for Organizations 112 Highly Appropriate Core Practices 115

Voluntary Responsibilities, 116 • Cause-Related Marketing, 116 • Strategic Philanthropy, 117

The Importance of Institutionalization in Business Ethics 118 Summary 118 Important Terms for Review, 120 | Resolving Ethical Business Challenges, 121 | Check Your EQ,122

PART 3: THE DECISION- MAKING PROCESS 125

Chapter 5: Ethical Decision Making 126 Chapter Objectives, 126 | Chapter Outline, 126

An Ethical Dilemma 127

A Framework for Ethical Decision Making in Business 128

Ethical Issue Intensity, 128 • Individual Factors, 131 • Organizational Factors, 132 • Opportunity, 134 • Business Ethics Intentions, Behavior, and Evaluations, 137

Using the Ethical Decision-Making Model to Improve Ethical Decisions 138 Normative Considerations in Ethical Decision Making 139

Institutions as the Foundation for Normative Values, 140 • Implementing Principles and Core Values in Ethical Decision Making, 142

Understanding Ethical Decision Making 144 Summary 145 Important Terms for Review, 146 | Resolving Ethical Business Challenges, 147 | Check Your EQ, 148

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Contents vii

Chapter 6: Individual Factors: Moral Philosophies and Values 152 Chapter Objectives, 152 | Chapter Outline, 152

An Ethical Dilemma 153

Moral Philosophy Defined 154 Moral Philosophies 156

Instrumental and Intrinsic Goodness, 157 • Teleology, 158 • Deontology, 161 • Relativist Perspective, 162 • Virtue Ethics, 164 • Justice, 166

Applying Moral Philosophy to Ethical Decision Making 167 Cognitive Moral Development and Its Problems 168 White-Collar Crime 171 Individual Factors in Business Ethics 174 Summary 175 Important Terms for Review, 176 | Resolving Ethical Business Challenges, 177 | Check Your EQ, 178

Chapter 7: Organizational Factors: The Role of Ethical Culture and Relationships 181 Chapter Objectives, 181 | Chapter Outline, 181

An Ethical Dilemma 182

Defining Corporate Culture 183 The Role of Corporate Culture in Ethical Decision Making 185

Ethical Frameworks and Evaluations of Corporate Culture, 186 • Ethics as a Component of Corporate Culture, 188 • Compliance versus Values-Based Ethical Cultures, 189 • Differential Association, 191 • Whistle-Blowing, 192

Leaders Influence Corporate Culture 196 Power Shapes Corporate Culture, 196 • Motivating Ethical Behavior, 198 • Organizational Structure and Business Ethics, 199

Group Dimensions of Corporate Structure and Culture 202

Types of Groups, 202 • Group Norms, 204 Variation in Employee Conduct 205 Can People Control Their Actions Within a Corporate Culture? 206 Summary 207 Important Terms for Review, 208 | Resolving Ethical Business Challenges, 209 | Check Your EQ, 210

PART 4: IMPLEMENTING BUSINESS ETHICS IN A GLOBAL ECONOMY 211

Chapter 8: Developing an Effective Ethics Program 213 Chapter Objectives, 213 | Chapter Outline, 213

An Ethical Dilemma 214

The Responsibility of the Corporation as a Moral Agent 215 The Need for Organizational Ethics Programs 217 An Effective Ethics Program 219

An Ethics Program Can Help Avoid Legal Problems, 220 • Values Versus Compliance Programs, 222

Codes of Conduct 223 Ethics Officers 226 Ethics Training and Communication 227 Systems to Monitor and Enforce Ethical Standards 229

Continuous Improvement of an Ethics Program, 231 • Common Mistakes in Designing and Implementing an Ethics Program, 232

Summary 233 Important Terms for Review, 234 | Resolving Ethical Business Challenges, 235 | Check Your EQ, 236

Chapter 9: Managing and Controlling Ethics Programs 239 Chapter Objectives, 239 | Chapter Outline, 239

An Ethical Dilemma 239

Implementing Ethics Programs 241 The Ethics Audit 243 Benefits of Ethics Auditing 244

Ethical Crisis Management and Recovery, 247 • Measuring Nonfinancial Ethical Performance, 248 • Risks and Requirements in Ethics Auditing, 251

The Auditing Process 252 Secure Commitment of Top Managers and Board of Directors, 254 • Establish a Committee to Oversee the Ethics Audit, 255 • Define the Scope of the Audit Process, 255 • Review Organizational Mission, Values, Goals, and Policies and Define Ethical

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viii Contents

Priorities, 255 • Collect and Analyze Relevant Information, 258 • Verify the Results, 261 • Report the Findings, 262

The Strategic Importance Of Ethics Auditing 263 Summary 265 Important Terms for Review, 267 | Resolving Ethical Business Challenges, 268 | Check Your EQ, 269

Chapter 10: Globalization of Ethical Decision-Making 272 Chapter Objectives, 272 | Chapter Outline, 272

An Ethical Dilemma 273

Global Culture, Values, and Practices 274 Economic Foundations of Business Ethics 277

Economic Systems, 279 Multinational Corporation 283 Global Cooperation To Support Responsible Business 286

International Monetary Fund, 286 • United Nations Global Compact, 286 • World Trade Organization (WTO), 287

Global Ethics Issues 288 Global Ethical Risks, 288 • Bribery, 289 • Antitrust Activity, 292 • Internet Security and Privacy, 292 • Human Rights, 294 • Health Care, 294 • Labor and the Right to Work, 296 • Compensation, 297 • Consumerism, 298

The Importance of Ethical Decision Making in Global Business 299 Summary 301 Important Terms For Review, 302 | Resolving Ethical Business Challenges, 303 | Check Your EQ, 304

Chapter 11: Ethical leadership 308 Chapter Objectives, 308 | Chapter Outline, 308

An Ethical Dilemma 309

Defining Ethical Leadership 311 Requirements for Ethical Leadership 313 Benefits of Ethical Leadership 315 Ethical Leadership and Organizational Culture 316 Managing Ethical Conflicts 318

Conflict Management Styles, 319

Ethical Leaders Empower Employees 321 Ethical Leadership Communication 322

Ethical Leadership Communication Skills, 323 Leader–Follower Relationships in Communication 326

Ethics Programs and Communication, 327 • Power Differences and Workplace Politics, 328 • Feedback, 329

Leadership Styles Influence Ethical Decisions 329 The Radar Model 332 Summary 335 Important Terms for Review , 337 | Resolving ethical business challenges, 338 | Check Your EQ, 339

Chapter 12: Sustainability: Ethical and Social Responsibility Dimensions 344 Chapter Objectives, 344 | Chapter Outline, 344

An Ethical Dilemma 345

Defining Sustainability 347 How Sustainability Relates to Ethical Decision Making and Social Responsibility 347 Global Environmental Issues 349

Atmospheric, 350 • Water, 352 • Land, 354 Environmental Legislation 358

Environmental Protection Agency (EPA), 358 • Environmental Legislation, 359

Alternative Energy Sources 363 Wind Power, 364 • Geothermal Power, 364 • Solar Power, 364 • Nuclear Power, 365 • Biofuels, 365 • Hydropower, 365

Business Response to Sustainability Issues 366 Green Marketing, 368 • Greenwashing, 368

Strategic Implementation of Environmental Responsibility 369

Recycling Initiatives, 370 • Stakeholder Assessment, 371 • Risk Analysis, 371 • The Strategic Environmental Audit, 372

Summary 373 Important Terms for Review, 374 | Resolving Ethical Business Challenges, 375 | Check Your EQ, 376

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Contents ix

PART 5: CASES 380

Case 1: Monsanto Attempts to Balance Stakeholder Interests 382

Case 2: Starbucks’ Mission: Social Responsibility and Brand Strength 396

Case 3: Walmart Manages Ethics and Compliance Challenges 407

Case 4: Sustainability Challenges in the Gas and Oil Industry 424

Case 5: New Belgium Brewing: Ethical and Environmental Responsibility 434

Case 6: National Collegiate Athletic Association Ethics and Compliance Program 444

Case 7: Google: The Quest to Balance Privacy with Profitss 458

Case 8: Zappos: Delivering Customer Satisfaction 475

Case 9: Enron: Questionable Accounting Leads to Collapse 486

Case 10: Home Depot Implements Stakeholder Orientation 498

Case 11: Frauds of the Century 508 Case 12: Insider Trading at the Galleon Group 517 Case 13: Whole Foods Strives to Be an Ethical Corporate Citizen 525 Case 14: Apple Inc.’s Ethical Success and Challenges 537 Case 15: PepsiCo’s Journey Toward an Ethical and Socially Responsible Culture 548 Case 16: Ethical Leadership at Cardinal IG: The Foundation of a Culture of Diversity 563 Case 17: Better Business Bureau: Protecting Consumers and Dealing with Organizational Ethics Challenges 572 Case 18: Managing the Risks of Global Bribery in Business 583 Case 19: Mattel Responds to Ethical Challenges 594 Case 20: Best Buy Fights Against Electronic Waste 604 Index I-615

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x

This is the Tenth Edition of Business Ethics: Ethical Decision Making and Cases. Our text has become the most widely used business ethics book, with approximately one out of three business ethics courses in schools of business using our text. We were the first major business ethics textbook to use a managerial framework that integrates ethics into strategic decisions. Today in corporate America, ethics and compliance has become a major functional area that structures responsible managerial decision making. Now that ethics has been linked to finan- cial performance, there is growing recognition that business ethics courses are as important as other functional areas such as marketing, accounting, finance, and management.

Our approach is to help students understand and participate in effective ethical deci- sion making in organizations. We approach business ethics from an applied perspective, focusing on conceptual frameworks, risks, issues, and dilemmas that will be faced in the real world of business. We prepare students for the challenges they will face in understand- ing how organizational ethical decision making works. We describe how ethical decisions in an organization involve collaboration in groups, teams, and discussions with peers. Many decisions fall into grey areas where the right decision may not be clear and requires the use of organizational resources and the advice of others. Students will face many ethical challenges in their careers, and our approach helps them to understand risks and be pre- pared to address ethical dilemmas. One approach to business ethics education is to include only a theoretical foundation related to ethical reasoning. Our method is to provide a bal- anced approach that includes the concepts of ethical reasoning as well as the organizational environment that influences ethical decision making.

The Tenth Edition includes the most comprehensive changes we have made in any revision. Each chapter has been revised based on the latest research and knowledge avail- able. Throughout the book, up-to-date examples are used to make foundational concepts come to life. There are 11 new cases, and the other nine cases have been revised with all major changes occurring through the middle of 2013. The most significant change is the inclusion of two new chapters that cover topics which were included in previous editions but that we now believe need separate chapters. First, chapter 11 focuses on ethical leader- ship. It is not enough to just make good ethical decisions; every employee has the respon- sibility and opportunity to lead others. Second, chapter 12 is dedicated to sustainability.

PREFACE

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Preface xi

While sustainability is usually associated with social responsibility, ethical issues and deci- sions in this area are important to the long-term success of the organization.

Using a managerial framework, we explain how ethics can be integrated into stra- tegic business decisions. This framework provides an overview of the concepts, processes, mandatory, core, and voluntary business practices associated with successful business eth- ics programs. Some approaches to business ethics are excellent as exercises in intellectual reasoning, but they cannot deal with the many actual issues and considerations that people in business organizations face. Our approach supports ethical reasoning and the value of individuals being able to face ethical challenges and voice their concerns about appropriate behavior. Employees in organizations are ultimately in charge of their own behavior and need to be skillful in making decisions in gray areas where the appropriate conduct is not always obvious.

We have been diligent in this revision to provide the most relevant examples of how the lack of business ethics has challenged our economic viability and entangled coun- tries and companies around the world. This book remains the market leader because it addresses the complex environment of ethical decision making in organizations and prag- matic, actual business concerns. Every individual has unique personal principles and values, and every organization has its own set of values, rules, and organizational ethical culture. Business ethics must consider the organizational culture and interdependent relationships between the individual and other significant persons involved in organizational decision making. Without effective guidance, a businessperson cannot make ethical decisions while facing a short-term orientation, feeling organiza- tional pressure to perform well and seeing rewards based on outcomes in a challenging competitive environment.

By focusing on individual issues and organi- zational environments, this book gives students the opportunity to see roles and responsibilities they will face in business. The past decade has reinforced the value of understanding the role of business ethics in the effective management of an organization. Widespread misconduct reported in the mass media every day demonstrates that busi- nesses, governments, non-profits, and institutions of higher learning need to address business ethics.

Our primary goal has always been to enhance the awareness and the ethical decision-making skills that students will need to make business eth- ics decisions that contribute to responsible busi- ness conduct. By focusing on these concerns and issues of today’s challenging business environment, we demonstrate that the study of business ethics is imperative to the long-term well-being of not only businesses, but also our economic system.

6 Part 1: An Overview of Business Ethics

WHY STUDY BUSINESS ETHICS?

A Crisis in Business Ethics As we’ve already mentioned, ethical misconduct has become a major concern in business today. The Ethics Resource Center conducts the National Business Ethics Survey (NBES) of about 3,000 U.S. employees to gather reliable data on key ethics and compliance out- comes and to help identify and better understand the ethics issues that are important to employees. The NBES found that 45 percent of employees reported observing at least one type of misconduct. Approximately 65 percent reported the misconduct to management, an increase from previous years. 7 Largely in response to the financial crisis, business deci- sions and activities have come under greater scrutiny by many different constituents, including consumers, employees, investors, government regulators, and special interest groups. For instance, regulators carefully examined risk controls at JP Morgan Chase to investigate whether there were weaknesses in its system that allowed the firm to incur billions of dollars in losses through high-risk trading activities. In another investigation, regulators cited weaknesses in JP Morgan’s anti-money laundering practices. Regula- tors place large financial institutions under greater scrutiny with the intent to protect consumers and shareholders from deceptive financial practices. 8 Figure 1–1 shows the percentage of global respondents who say they trust a variety of businesses in various industries. Financial institutions and banks have some of the lowest ratings, indicating that the financial sector has not been able to restore its reputation since the most recent recession. There is no doubt negative publicity associated with major misconduct low- ered the public’s trust in certain business sectors. 9 Decreased trust leads to a reduction in customer satisfaction and customer loyalty, which in turn can negatively impact the firm or industry. 10

FIGURE 1–1 Global Trust in Industry Sectors

Source: Edelman Global Deck: 2013 Trust Barometer, http://www.edelman.com/trust-downloads/global-results-2/ (accessed January 30, 2013).

50%

50%

53%

58%

59%

62%

62%

65%

66%

69%

77%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Financial Services

Banks

Media

Energy

Pharmaceuticals

Brewing and spirits

Telecommunications

Consumer packaged goods

Food and beverage

Automotive

Technology

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xii Preface

PHILOSOPHY OF THIS TEXT

The purpose of this book is to help students improve their ability to make ethical decisions in business by providing them with a framework that they can use to identify, analyze, and resolve ethi- cal issues in business decision making. Individual values and ethics are important in this process. By studying business ethics, students begin to under- stand how to cope with conflicts between their personal values and those of the organization.

Many ethical decisions in business are close calls. It often takes years of experience in a particu- lar industry to know what is acceptable. We do not, in this book, provide ethical answers but instead attempt to prepare students to make informed ethical decisions. First, we do not moralize by indicating what to do in a specific situation. Sec- ond, although we provide an overview of moral philosophies and decision-making processes, we do not prescribe any one philosophy or process as best or most ethical. Third, by itself, this book will not make students more ethical nor will it tell them how to judge the ethical behavior of others. Rather, its goal is to help students understand and use their

current values and convictions in making business decisions and to encourage everyone to think about the effects of their decisions on business and society.

Many people believe that business ethics cannot be taught. Although we do not claim to teach ethics, we suggest that by studying business ethics a person can improve ethical decision making by identifying ethical issues and recognizing the approaches available to resolve them. An organization’s reward system can reinforce appropriate behavior and help shape attitudes and beliefs about important issues. For example, the success of some cam- paigns to end racial or gender discrimination in the workplace provides evidence that atti- tudes and behavior can be changed with new information, awareness, and shared values.

CONTENT AND ORGANIZATION

In writing Business Ethics, Tenth Edition, we strived to be as informative, complete, acces- sible, and up-to-date as possible. Instead of focusing on one area of ethics, such as moral philosophy or social responsibility, we provide balanced coverage of all areas relevant to the current development and practice of ethical decision making. In short, we have tried to keep pace with new developments and current thinking in teaching and practices.

The first half of the text consists of 12 chapters, which provide a framework to identify, analyze, and understand how businesspeople make ethical decisions and deal with ethical issues. Several enhancements have been made to chapter content for this edition. Some of the most important are listed in the next paragraphs.

Chapter 1: The Importance of Business Ethics 15

and respond to ethical issues. In our book the term ethical culture is acceptable behavior as defined by the company and industry. Ethical culture is the component of corporate cul- ture that captures the values and norms an organization defines and is compared to by its industry as appropriate conduct. The goal of an ethical culture is to minimize the need for enforced compliance of rules and maximize the use of principles that contribute to ethical reasoning in difficult or new situations. Ethical culture is positively related to workplace confrontation over ethics issues, reports to management of observed misconduct, and the presence of ethics hotlines. 33 To develop better ethical corporate cultures, many businesses communicate core values to their employees by creating ethics programs and appointing ethics officers to oversee them. An ethical culture creates shared values and support for ethical decisions and is driven by top management.

Globally, businesses are working closely together to establish standards of acceptable behavior. We are already seeing collaborative efforts by a range of organizations to estab- lish goals and mandate minimum levels of ethical behavior, from the European Union, the North American Free Trade Agreement (NAFTA), the Southern Common Market (MER- COSUR), and the World Trade Organization (WTO) to, more recently, the Council on Economic Priorities’ Social Accountability 8000 (SA 8000 ), the Ethical Trading Initiative, and the U.S. Apparel Industry Partnership. Some companies refuse to do business with organizations that do not support and abide by these standards. Many companies dem- onstrate their commitment toward acceptable conduct by adopting globally recognized principles emphasizing human rights and social responsibility. For instance, in 2000 the United Nations launched the Global Compact, a set of 10 principles concerning human rights, labor, the environment, and anti-corruption. The purpose of the Global Compact is to create openness and alignment among business, government, society, labor, and the United Nations. Companies that adopt this code agree to integrate the ten principles into their business practices, publish their progress toward these objectives on an annual basis, and partner with others to advance broader objectives of the UN. 34 These 10 principles are covered in more detail in Chapter 10 .

THE BENEFITS OF BUSINESS ETHICS

The field of business ethics continues to change rapidly as more firms recognize the bene- fits of improving ethical conduct and the link between business ethics and financial perfor- mance. Both research and examples from the business world demonstrate that building an ethical reputation among employees, customers, and the general public pays off. Figure 1–2 provides an overview of the relationship between business ethics and organizational per- formance. Although we believe there are many practical benefits to being ethical, many businesspeople make decisions because they believe a particular course of action is sim- ply the right thing to do as responsible members of society. Granite Construction earned a place in Ethisphere ’s “World’s Most Ethical Companies” for four consecutive years as a result of its integration of ethics into the company culture. Granite formulated its ethics program to comply with the Federal Sentencing Guidelines for Organizations and helped inspire the Construction Industry Ethics and Compliance Initiative. To ensure all com- pany employees are familiar with Granite’s high ethical standards, the firm holds six man- datory training sessions annually, conducts ethics and compliance audits, and uses field compliance officers to make certain ethical conduct is taking place throughout the entire

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Preface xiii

Part One, “An Overview of Business Ethics,” includes two chapters that help provide a broader context for the study of business ethics. Chapter 1, “The Importance of Busi- ness Ethics,” has been revised with many new examples and survey results to describe issues and concerns important to business ethics. Chapter 2, “Stakeholder Relationships, Social Responsibility, and Corporate Governance,” has been significantly reorganized and updated with new examples and issues.

Part Two, “Ethical Issues and the Institutionalization of Business Ethics,” consists of two chapters that provide the background that students need to identify ethical issues and un- derstand how society, through the legal system, has attempted to hold organizations re- sponsible for managing these issues. Chapter 3, “Emerging Business Ethics Issues,” has been reorganized and updated and provides expanded coverage of business ethics issues. Chapter 4, “The Institutionalization of Business Ethics” examines key elements of core or best practices in corporate America today along with legislation and regulation require- ments that support business ethics initiatives. The chapter is divided into three main areas: voluntary, mandated, and core boundaries.

Part Three, “The Decision-Making Process” consists of three chapters, which provide a framework to identify, analyze, and understand how businesspeople make ethical decisions and deal with ethical issues. Chapter 5, “Ethical Decision Making,” has been revised and updated to reflect current research and understanding of ethical decision making and con- tains a new section on normative considerations in ethical decision making. Chapter 6, “Individual Factors: Moral Philosophies and Values,” has been updated and revised to explore the role of moral philosophies and moral development as individual factors in the ethical decision-making process. Chapter 7, “Organizational Factors: The Role of Ethical Culture and Relationships,” considers organizational influences on business decisions, such as role relationships, differential association, and other organizational pressures, as well as whistle-blowing.

Part Four, “Implementing Business Ethics in a Global Economy,” looks at specific mea- sures that companies can take to build an effective ethics program as well as how these programs may be affected by global issues, leadership, and sustainability issues. Chapter 8, “Developing an Effective Ethics Program,” has been refined and updated with corporate best practices for developing effective ethics programs. Chapter 9, “Managing and Con- trolling Ethics Programs,” offers a framework for auditing ethics initiatives as well as the importance of doing so. Such audits can help companies pinpoint problem areas, measure their progress in improving conduct, and even provide a “debriefing” opportunity after a crisis. Chapter 10, “Business Ethics in a Global Economy” has been updated to reflect the complex and dynamic events that occur in global business. This chapter will help stu- dents understand the major issues involved in making decisions in a global environment. Chapter 11 is a new chapter on ethical leadership. Reviewers indicated that they wanted more information provided on the importance of leadership to an ethical culture, and this chapter answers these requests. Finally, Chapter 12 is a new chapter on sustainability. It examines the ethical and social responsibility dimensions of sustainability.

Part Five consists of 20 cases in the text that bring reality into the learning process. Eleven of these cases are new to the tenth edition, and the remaining nine have been

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xiv Preface

revised and updated. In addition, four shorter cases are available on the Instructor’s Companion website:

• Toyota: Challenges in Maintaining Integrity • The Container Store: An Employee-centric Retailer • The Ethics Program at Eaton Corporation • Barrett-Jackson Auction Company: Family, Fairness, and Philanthropy

The companies and situations portrayed in these cases are real; names and other facts are not disguised; and all cases include developments up to the end of 2013. By reading and analyzing these cases, students can gain insight into ethical decisions and the realities of making decisions in complex situations.

TEXT FEATURES

Many tools are available in this text to help both students and instructors in the quest to improve students’ ability to make ethical business decisions.

• Each chapter opens with an outline and a list of learning objectives. • Immediately following is “An Ethical Dilemma” that should provoke discussion about

ethical issues related to the chapter. The short vignette describes a hypothetical incident involving an ethical conflict. Questions at the end of the “Ethical Dilemma” section focus discussion on how the dilemma could be resolved. All new ethical dilemmas have been provided for this edition.

• Each chapter has a contemporary real world debate issue. Many of these debate issues have been updated to reflect current ethical issues in business. These debate issues have been found to stimulate thoughtful discussion relating to content issues in the chapter. Topics of the debate issues include workplace privacy, the universal health care debate, the contribution of ethical conduct to financial performance, legislation concerning whistle-blowing, and the benefits of organic food.

• At the end of each chapter are a chapter sum- mary and an important terms list, both of which are handy tools for review. Also included at the end of each chapter is a “Resolving Ethical Busi- ness Challenges” section. The vignette describes a realistic drama that helps students experience the process of ethical decision making. All new vignettes have been provided for this edition. The “Resolving Ethical Business Challenges” mini- cases presented in this text are hypothetical; any resemblance to real persons, companies, or situ- ations is coincidental. Keep in mind that there are no right or wrong solutions to the minicases.

CASE 1 Monsanto Attempts to Balance Stakeholder Interests

CASE 2 Starbucks’ Mission: Social Responsibility and Brand Strength

CASE 3 Walmart Manages Ethics and Compliance Challenges

CASE 4 Sustainability Challenges in the Gas and Oil Industry

CASE 5 New Belgium Brewing: Ethical and Environmental Responsibility

CASE 6 National Collegiate Athletic Association Ethics and Compliance Program

CASE 7 Google: The Quest to Balance Privacy with Profits

CASE 8 Zappos: Delivering Customer Satisfaction

CASE 9 Enron: Questionable Accounting Leads to Collapse

CASE 10 Home Depot Implements Stakeholder Orientation

CASE 11 Frauds of the Century

CASE 12 Insider Trading at the Galleon Group

CASE 13 Whole Foods Strives to Be an Ethical Corporate Citizen

CASE 14 Apple Inc.’s Ethical Success and Challenges

CASE 15 PepsiCo’s Journey Toward an Ethical and Socially Responsible Culture

CASE 16 Ethical Leadership at Cardinal IG: The Foundation of a Culture of Diversity

CASE 17 Better Business Bureau: Protecting Consumers and Dealing with Organizational Ethics Challenges

CASE 18 Managing the Risks of Global Bribery in Business

CASE 19 Mattel Responds to Ethical Challenges

CASE 20 Best Buy Fights Against Electronic Waste

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Preface xv

The ethical dilemmas and real-life situations provide an opportunity for students to use concepts in the chapter to resolve ethical issues. Each chapter concludes with a series of questions that allow students to test their EQ

(Ethics Quotient). • Cases. In Part Five, following each real-world case are questions to guide students in

recognizing and resolving ethical issues. For some cases, students can conduct addi- tional research to determine recent developments because many ethical issues in com- panies take years to resolve.

EFFECTIVE TOOLS FOR TEACHING AND LEARNING

Instructor’s Resource Website. You can find the following teaching tools on the pass word protected instructor site.

• Instructor’s Resource Manual. The Instructor’s Resource Manual contains a wealth of information. Teaching notes for every chapter include a brief chapter summary, de- tailed lecture outline, and notes for using the “Ethical Dilemma” and “Resolving Ethical Business Challenges” sections. Detailed case notes point out the key issues involved and offer suggested answers to the questions. A separate section provides guidelines for using case analysis in teaching business ethics. Detailed notes are provided to guide the instructor in analyzing or grading the cases. Simulation role-play cases, as well as implementation suggestions, are included.

• Role-Play Cases. The tenth edition provides six behavioral simulation role-play cases developed for use in the business ethics course. The role-play cases and implementation methods can be found in the Instructor’s Resource Manual and on the website. Role-play cases may be used as a culminating experience to help students integrate concepts cov- ered in the text. Alternatively, the cases may be used as an ongoing exercise to provide students with extensive opportunities for interacting and making ethical decisions.

Role-play cases simulate a complex, realistic, and timely business ethics situation. Students form teams and make decisions based on an assigned role. The role-play case complements and enhances traditional approaches to business learning experiences because it (1) gives students the opportunity to practice making decisions that have business ethics consequences; (2) re-creates the power, pressures, and information that affect decision making at various levels of management; (3) provides students with a team-based experience that enriches their skills and understanding of group processes and dynamics; and (4) uses a feedback period to allow for the exploration of complex and controversial issues in business ethics decision making. The role-play cases can be used with classes of any size.

• Cengage Learning Testing Powered by Cognero. This is a flexible, online system that allows you to author, edit, and manage test bank content from multiple Cengage Learn- ing solutions; create multiple test versions in an instant; and deliver tests from your LMS, your classroom or wherever you want. Cengage Learning Testing Powered by Cognero works on any operating system or browser, no special installs or downloads needed. You can create tests from school, home, the coffee shop – anywhere with Internet access.

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xvi Preface

• Video Segments. These brand new BBC video segments can be used across sev- eral chapters, and the Video Guide (which appears on the instructor website) contains a matrix intended to show the closest relationships between the videos and chapter topics. The Video Guide also includes summaries of each video as well as teaching guidelines and issues for discussion. Some topics include: Environmental waste reduc- tion and Sony’s efforts to reduce waste; The Rebuilding of the Starbucks Brand; BP Oil Spill and Risk Management ; PepsiCo’s move into Russia; and many other timely and relevant segments.

CourseMate. This unique student website makes course concepts come alive with inter- active learning, study, and exam preparation tools supporting the printed text. CourseMate delivers what you need, including an interactive eBook, an interactive glossary, quizzes, vid- eos, KnowNOW blogs, and more. The site contains links to companies and organizations highlighted in each chapter; links to association, industry, and company codes of conduct; case website links; company and organizational examples; and academic resources, includ- ing links to business ethics centers throughout the world and the opportunity to sign up for weekly abstracts of relevant Wall Street Journal articles. Four Ethical Leadership Challenge scenarios are available for each chapter. Training devices, including Lockheed Martin’s Gray Matters ethics game, are also available. As well, a link to the Career Transitions site is pro- vided for students where they can search for internships and career opportunities.

CengageNow. This robust online course management system gives you more control in less time and delivers better student outcomes—NOW. CengageNow includes teaching and learning resources organized around lecturing, creating assignments, casework, quizzing, and gradework to track student progress and performance. The 20 end of book cases and ques- tions appear in CengageNow. Multiple types of quizzes, including BBC video quizzes, multiple choice and essay questions for the chapter opening cases, closing cases, and “Check Your EQ” are assignable and gradable. Flexible assignments, automatic grading, and a gradebook option provide more control while saving you valuable time. A Personalized Study diagnostic tool empowers students to master concepts, prepare for exams, and become more involved in class.

Additional Teaching Resources. O.C. Ferrell and Linda Ferrell are leading the Daniels Fund Ethics Initiative at the University of New Mexico. This initiative is part of a four-state initiative to develop teaching resources to support principle-based ethics education. Their publically accessible website contains original cases, debate issues, videos, interviews, and PowerPoint modules on select business ethics topics, as well as other resources such as articles on business ethics education. It is possible to access this website at http://danielsethics.mgt.unm.edu.

ACKNOWLEDGMENTS

A number of individuals provided reviews and suggestions that helped to improve this text. We sincerely appreciate their time and effort.

Donald Acker Brown Mackie College

Donna Allen Northwest Nazarene University Suzanne Allen Walsh University Carolyn Ashe University of Houston–Downtown

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Preface xvii

Laura Barelman Wayne State College Russell Bedard Eastern Nazarene College B. Barbara Boerner Brevard College Serena Breneman University of Arkansas at Pine Bluff Lance Brown Miami Dade College Judie Bucholz Guilford College Greg Buntz University of the Pacific Hoa Burrows Miami Dade College Julie Campbell Adams State College Robert Chandler University of Central Florida April Chatham-Carpenter University of Northern Iowa Leslie Connell University of Central Florida Peggy Cunningham Dalhousie University Carla Dando Idaho State University James E. Donovan Detroit College of Business Douglas Dow University of Texas at Dallas A. Charles Drubel Muskingum College Philip F. Esler University of St. Andrews Joseph M. Foster Indiana Vocational Technical College— Evansville Lynda Fuller Wilmington University Terry Gable Truman State University

Robert Giacalone University of Richmond Suresh Gopalan West Texas A&M University Karen Gore Ivy Technical College Mark Hammer Northwest Nazarene University Charles E. Harris, Jr. Texas A&M University Kenneth A. Heischmidt Southeast Missouri State University Neil Herndon Educational Consultant Walter Hill Green River Community College Jack Hires Valparaiso University David Jacobs American University R. J. Johansen Montana State University–Bozeman Jeff Johnson Athens State University Edward Kimman Vrije Universiteit Janet Knight Purdue North Central Anita Leffel University of Texas at San Antonio Barbara Limbach Chadron State College Victor Lipe Trident Tech Nick Lockard Texas Lutheran College Terry Loe Kennesaw State University Nick Maddox Stetson University Isabelle Maignan ING Bank

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xviii Preface

Phylis Mansfield Pennsylvania State University–Erie Robert Markus Babson College Therese Maskulka Kutstown College Randy McLeod Harding University Francy Milner University of Colorado Ali Mir William Paterson University Debi P. Mishra Binghamton University, State University of New York Patrick E. Murphy University of Notre Dame Lester Myers University of San Francisco Catherine Neal Northern Kentucky University Cynthia Nicola Carlow College Carol Nielsen Bemidji State University Sharon Palmitier Grand Rapids Community College Lee Richardson University of Baltimore James Salvucci Curry College

William M. Sannwald San Diego State University Ruth Schaa Black River Technical College Zachary Shank Albuquerque Technical Vocational Institute Cynthia A. M. Simerly Lakeland Community College Karen Smith Columbia Southern University Filiz Tabak Towson University Debbie Thorne Texas State University–San Marcos Wanda V. Turner Ferris State College Gina Vega Salem State College William C. Ward Mid-Continent University David Wasieleski Duquesne University Jim Weber Duquesne University Ed Weiss National-Louis University Joseph W. Weiss Bentley University Jan Zahrly University of North Dakota

We wish to acknowledge the many people who assisted us in writing this book. We are deeply grateful to Jennifer Sawayda for her work in organizing and managing the revision process. We would also like to thank Danielle Jolley and Michelle Urban for all their assistance in this edition. Finally, we express appreciation to the administration and to our colleagues at the University of New Mexico and Southern Illinois University at Carbondale for their support.

We invite your comments, questions, or criticisms. We want to do our best to provide teaching materials that enhance the study of business ethics. Your suggestions will be sin- cerely appreciated.

– O. C. Ferrell – John Fraedrich

– Linda Ferrell

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CHAPTER OBJECTIVES

• Explore conceptualizations of business ethics from an organizational perspective

• Examine the historical foundations and evolution of business ethics

• Provide evidence that ethical value systems support business performance

• Gain insight into the extent of ethical misconduct in the workplace and the pressures for unethical behavior

CHAPTER OUTLINE

Business Ethics Defined

Why Study Business Ethics?

A Crisis in Business Ethics Specific Issues The Reasons for Studying Business Ethics

The Development of Business Ethics

Before 1960: Ethics in Business The 1960s: The Rise of Social Issues in Business The 1970s: Business Ethics as an Emerging Field The 1980s: Consolidation The 1990s: Institutionalization of Business Ethics The Twenty-First Century of Business Ethics

Developing an Organizational and Global Ethical Culture

The Benefits of Business Ethics

Ethics Contributes to Employee Commitment Ethics Contributes to Investor Loyalty Ethics Contributes to Customer Satisfaction Ethics Contributes to Profits

Our Framework for Studying Business Ethics

THE IMPORTANCE OF BUSINESS ETHICS

CHAPTER 1

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could eat the added expenses. We’re the only ones who actually generate revenue and he tells me that I’m overpaid!”

“So what did you do?” inquired Sophie. “I do what my supervisor told me years ago.

I pad my account each week. For me, I tip 20 percent, so I make sure I write down when I tip and add that to my overall expense report.”

“But that goes against company policy. Besides, how do you do it?” asked Sophie.

“It’s easy. Every cab driver will give you blank receipts for cab fares. I usually put the added expenses there. We all do it,” said Emma. “As long as everyone cooperates, the Vice President of Sales doesn’t question the expense vouchers. I imagine she even did it when she was a lowly salesperson.”

“What if people don’t go along with this arrangement?” asked Sophie.

“In the past, we have had some who reported it like corporate wants us to. I remember there was a person who didn’t report the same amounts as the co-worker traveling with her. Several months went by and the accountants came in, and she and all the salespeople that traveled together were investigated. After several months the one who ratted out the others was fired or quit, I can’t remember. I do know she never worked in our industry again. Things like that get around. It’s a small world for good salespeople, and everyone knows everyone.”

“What happened to the other salespeople who were investigated?” Sophie asked.

“There were a lot of memos and even a thirty minute video as to the proper way to record expenses. All of them had conversations with the vice president, but no one was fired.”

“No one was fired even though it went against policy?” Sophie asked Emma.

“At the time, my conversation with the VP went basically this way. She told me that corporate was not going to change the forms, and she acknowledged it was not fair or equitable to the

Sophie just completed a sales training course with one of the firm’s most productive sales representatives, Emma. At the end of the first week, Sophie and Emma sat in a motel room filling out their expense vouchers for the week. Sophie casually remarked to Emma that the training course stressed the importance of accurately filling out expense vouchers.

Emma replied, “I’m glad you brought that up, Sophie. The company expense vouchers don’t list the categories we need. I tried many times to explain to the accountants that there are more expenses than they have boxes for. The biggest complaint we, the salespeople, have is that there is no place to enter expenses for tipping waitresses, waiters, cab drivers, bell hops, airport baggage handlers, and the like. Even the government assumes tipping and taxes them as if they were getting an 18 percent tip. That’s how service people actually survive on the lousy pay they get from their bosses. I tell you, it is embarrassing not to tip. One time I was at the airport and the skycap took my bags from me so I didn’t have the hassle of checking them. He did all the paper work and after he was through, I said thank you. He looked at me in disbelief because he knew I was in sales. It took me a week to get that bag back.”

“After that incident I went to the accounting department, and every week for five months I told them they needed to change the forms. I showed them the approximate amount the average salesperson pays in tips per week. Some of them were shocked at the amount. But would they change it or at least talk to the supervisor? No! So I went directly to him, and do you know what he said to me?”

“No, what?” asked Sophie. “He told me that this is the way it has always

been done, and it would stay that way. He also told me if I tried to go above him on this, I’d be looking for another job. I can’t chance that now, especially in this economy. Then he had the nerve to tell me that salespeople are paid too much, and that’s why we

AN ETHICAL DILEMMA *

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Chapter 1: The Importance of Business Ethics 3

salespeople. She hated the head accountant because he didn’t want to accept the reality of a salesperson’s life in the field. That was it. I left the office and as I walked past the Troll’s office—that’s what we call the head accountant—he just smiled at me.”

This was Sophie’s first real job out of school and Emma was her mentor. What should Sophie report on her expense report?

* This case is strictly hypothetical; any resemblance to real persons, companies, or situations is coincidental.

QUESTIONS | EXERCISES 1. Identify the issues Sophie has to resolve. 2. Discuss the alternatives for Sophie. 3. What should Sophie do if company policy

appears to conflict with the firm’s corporate culture?

The ability to recognize and deal with complex business ethics issues has become a sig-nificant priority in twenty-first–century companies. In recent years, a number of well-publicized scandals resulted in public outrage about deception and fraud in business and a subsequent demand for improved business ethics and greater corporate responsibility. The publicity and debate surrounding highly publicized legal and ethical lapses at a number of well-known firms highlight the need for businesses to integrate ethics and responsibility into all business decisions. On the other hand, the majority of ethical businesses with no or few ethical lapses are rarely recognized in the mass media for their conduct.

Highly visible business ethics issues influence the public’s attitudes toward business and destroy trust. Ethical decisions are a part of everyday life for those who work in organi- zations. Ethics is a part of decision making at all levels of work and management. Business ethics is not just an isolated personal issue; codes, rules, and informal communications for responsible conduct are embedded in an organization’s operations. This means ethical or unethical conduct is the province of everyone who works in an organizational environment.

Making good ethical decisions are just as important to business success as mastering management, marketing, finance, and accounting decisions. While education and training emphasize functional areas of business, business ethics is often viewed as easy to master, something that happens with little effort. The exact opposite is the case. Decisions with an ethical component are an everyday occurrence requiring people to identify issues and make quick decisions. Ethical behavior requires understanding and identifying issues, areas of risk, and approaches to making choices in an organizational environment. On the other hand, people can act unethically if they fail to identify an ethical issue. Ethical blind- ness results from individuals who fail to sense the nature and complexity of their deci- sions. 1 Some approaches to business ethics look only at the philosophical backgrounds of individuals and the social consequences of decisions. This approach fails to address the complex organizational environment of businesses and pragmatic business concerns. By contrast, our approach is managerial and incorporates real world decisions that impact the organization and stakeholders. Our book will help you better understand how business ethics is practiced in the business world.

It is important to learn how to make decisions in the internal environment of an orga- nization to achieve goals and career advancement. But business does not exist in a vacuum. As stated, decisions in business have implications for shareholders, employees, customers, suppliers, and society. Ethical decisions must take these stakeholders into account, for uneth- ical conduct can negatively affect society as a whole. Our approach focuses on the practical consequences of decisions and on positive outcomes that have the potential to contribute to both business success and society at large. The field of business ethics deals with questions

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4 Part 1: An Overview of Business Ethics

about whether specific conduct and business practices are acceptable. For example, should a salesperson omit facts about a product’s poor safety record in a sales presentation to a client? Should accountants report inaccuracies they discover in an audit of a client, knowing the auditing company will probably be fired by the client for doing so? Should an automobile tire manufacturer intentionally conceal safety concerns to avoid a massive and costly tire recall? Regardless of their legality, others will certainly judge the actions taken in such situa- tions as right or wrong, ethical or unethical. By its very nature, the field of business ethics is controversial, and there is no universally accepted approach for resolving its dilemmas.

A cheating scandal at Harvard revealed what some see as a crisis in ethics. Approxi- mately half of the students in a Harvard course allegedly collaborated on a take-home test despite directions from the professor not to do so. Some of the students were also accused of plagiarism when test answers were found to be similar or identical. Because these stu- dents are the business leaders of tomorrow, it is disturbing to see them at such a presti- gious school acting unethically. 2 In addition to students, fraud among faculty has also been widely documented. 3 Cheating scandals are widespread in the academic community.

Before we get started, it is important to state our philosophies regarding this book. First, we do not moralize by telling you what is right or wrong in a specific situation, although we offer background on normative guidelines for appropriate conduct. Second, although we provide an overview of group and individual decision-making processes, we do not prescribe any one philosophy or process as the best or most ethical. However, we provide many examples of successful ethical decision making. Third, by itself, this book will not make you more ethical, nor will it tell you how to judge the ethical behavior of others. Rather, its goal is to help you understand, use, and improve your current values and convictions when making business decisions so you think about the effects of those deci- sions on business and society. In addition, this book will help you understand what busi- nesses are doing to improve their ethical conduct. To this end, we aim to help you learn to recognize and resolve ethical issues within business organizations. As a manager, you will be responsible for your decisions and the ethical conduct of the employees you supervise. For this reason, we provide a chapter on ethical leadership. The framework we develop in this book focuses on how organizational ethical decisions are made and on ways compa- nies can improve their ethical conduct. This process is more complex than you may think. People who believe they know how to make the “right” decision usually come away with more uncertainty about their own decision skills after learning about the complexity of ethical decision making. This is a normal occurrence, and our book will help you evaluate your own values as well as those of others. It also helps you to understand incentives found in the workplace that change the way you make decisions in business versus at home.

In this chapter, we first develop a definition of business ethics and discuss why it has become an important topic in business education. We also discuss why studying business eth- ics can be beneficial. Next, we examine the evolution of business ethics in North America. Then we explore the performance benefits of ethical decision making for businesses. Finally, we provide a brief overview of the framework we use for examining business ethics in this text.

BUSINESS ETHICS DEFINED

To understand business ethics, you must first recognize that most people do not have spe- cific definitions they use to define ethics-related issues. The terms morals, principles, val- ues, and ethics are often used interchangeably, and you will find this is true in companies

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Chapter 1: The Importance of Business Ethics 5

as well. Consequently, there is much confusion regarding this topic. To help you under- stand these differences, we discuss these terms.

For our purposes, morals refer to a person’s personal philosophies about what is right or wrong. The important point is that when one speaks of morals, it is personal or sin- gular. Morals, your philosophies or sets of values of right and wrong, relate to you and you alone. You may use your personal moral convictions in making ethical decisions in any context. Business ethics comprises organizational principles, values, and norms that may originate from individuals, organizational statements, or from the legal system that primarily guide individual and group behavior in business. Principles are specific and pervasive boundaries for behavior that should not be violated. Principles often become the basis for rules. Some examples of principles could include human rights, freedom of speech, and fundamentals of justice. Values are enduring beliefs and ideals that are socially enforced. Several desirable or ethical values for business today are teamwork, trust, and integrity. Such values are often based on organizational or industry best practices. Inves- tors, employees, customers, interest groups, the legal system, and the community often determine whether a specific action or standard is ethical or unethical. Although these groups influence the determination of what is ethical or unethical for business, they also can be at odds with one another. Even though this is the reality of business and such groups may not necessarily be right, their judgments influence society’s acceptance or rejection of business practices.

Ethics is defined as behavior or decisions made within a group’s values. In our case we are discussing decisions made in business by groups of people that represent the busi- ness organization. Because the Supreme Court defined companies as having limited indi- vidual rights, 4 it is logical such groups have an identity that includes core values. This is known as being part of a corporate culture. Within this culture there are rules and regulations both written and unwritten that determine what decisions employees con- sider right or wrong as it relates to the firm. Such right/wrong, good/bad evaluations are judgments by the organization and are defined as its ethics (or in this case their busi- ness ethics). One difference between an ordinary decision and an ethical one lies in “the point where the accepted rules no longer serve, and the decision maker is faced with the responsibility for weighing values and reaching a judgment in a situation which is not quite the same as any he or she has faced before.” 5 Another difference relates to the amount of emphasis decision makers place on their own values and accepted practices within their company. Consequently, values and judgments play a critical role when we make ethical decisions.

Building on these definitions, we begin to develop a concept of business ethics. Most people agree that businesses should hire individuals with sound moral principles. However, some special aspects must be considered when applying ethics to business. First, to survive, businesses must earn a profit. If profits are realized through mis- conduct, however, the life of the organization may be shortened. Peregrine Financial Group collapsed after the firm used fraud to take more than $ 100 million from inves- tors over a 20 - year period and the CEO used fake financial statements to cover up the fraud. 6 Second, businesses must balance their desire for profits against the needs and desires of society. The good news is the world’s most ethical companies often have superior stock performance. To address these unique aspects of the business world, society has developed rules—both legal and implicit—to guide businesses in their efforts to earn profits in ways that do not harm individuals or society and contribute to economic well-being.

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6 Part 1: An Overview of Business Ethics

WHY STUDY BUSINESS ETHICS?

A Crisis in Business Ethics As we’ve already mentioned, ethical misconduct has become a major concern in business today. The Ethics Resource Center conducts the National Business Ethics Survey (NBES) of about 3,000 U.S. employees to gather reliable data on key ethics and compliance out- comes and to help identify and better understand the ethics issues that are important to employees. The NBES found that 45 percent of employees reported observing at least one type of misconduct. Approximately 65 percent reported the misconduct to management, an increase from previous years. 7 Largely in response to the financial crisis, business deci- sions and activities have come under greater scrutiny by many different constituents, including consumers, employees, investors, government regulators, and special interest groups. For instance, regulators carefully examined risk controls at JP Morgan Chase to investigate whether there were weaknesses in its system that allowed the firm to incur billions of dollars in losses through high-risk trading activities. In another investigation, regulators cited weaknesses in JP Morgan’s anti-money laundering practices. Regula- tors place large financial institutions under greater scrutiny with the intent to protect consumers and shareholders from deceptive financial practices. 8 Figure 1–1 shows the percentage of global respondents who say they trust a variety of businesses in various industries. Financial institutions and banks have some of the lowest ratings, indicating that the financial sector has not been able to restore its reputation since the most recent recession. There is no doubt negative publicity associated with major misconduct low- ered the public’s trust in certain business sectors. 9 Decreased trust leads to a reduction in customer satisfaction and customer loyalty, which in turn can negatively impact the firm or industry. 10

FIGURE 1–1 Global Trust in Industry Sectors

Source: Edelman Global Deck: 2013 Trust Barometer, http://www.edelman.com/trust-downloads/global-results-2/ (accessed January 30, 2013).

50%

50%

53%

58%

59%

62%

62%

65%

66%

69%

77%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Financial Services

Banks

Media

Energy

Pharmaceuticals

Brewing and spirits

Telecommunications

Consumer packaged goods

Food and beverage

Automotive

Technology

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Chapter 1: The Importance of Business Ethics 7

Specific Issues Misuse of company resources, abusive behavior, harassment, accounting fraud, conflicts of interest, defective products, bribery, and employee theft are all problems cited as evidence of declining ethical standards. For example, Chesapeake Energy received negative publicity after it was revealed that CEO Aubrey McClendon had the unique perk of acquiring a small stake in every oil well that Chesapeake drilled. However, to pay for the costs, McClendon secured loans from firms, some of which were investors in Chesapeake. This represented a massive conflict of interest, and resulting criticism caused Chesapeake to eliminate the perk. 11 McClendon was later forced to resign. 12 Other ethical issues relate to recognizing the interest of communities and society. For instance, Whole Foods faced immense pres- sure when it took over the Latino-centered Hi-Lo market in Jamaica Plains, Massachusetts. Many residents of the community feared that the presence of an up-scale grocery chain would displace the lower-income residents of the community who could not afford Whole Foods’ higher-priced grocery products. Opposition to Whole Foods continued even after the store was established when a neighborhood advisory committee suggested rejecting the store’s request to add indoor and outdoor seating. 13 This demonstrates the commu- nity as a primary stakeholder. Although large companies like Whole Foods have significant power, pressures from the community still limit what they can do.

Ethics plays an important role in the public sector as well. In government, several politicians and high-ranking officials experienced significant negative publicity, and some resigned in disgrace over ethical indiscretions. Former Illinois governor Rod Blagojevich was sentenced to 14 years in prison for corruption while in office, including trying to “sell” the Illinois Senate seat vacated by Barack Obama when he became President. 14 The Blago- jevich scandal demonstrates that ethical behavior must be proactively practiced at all levels of society.

Every organization has the potential for unethical behavior. For instance, Defense Sec- retary Leon Panetta ordered a review of military ethics after potential indiscretions were uncovered on the part of top military leaders. Investigations into improper relationships of top military personnel, including an extramarital affair by former Central Intelligence Director David Petraeus, have the potential to damage the reputation of the military. According to Panetta, senior officers in the military have a responsibility to do their jobs to the best of their abilities and also display high ethical standards in their personal behavior and in their handling of government resources. 15

Even sports can be subject to ethical lapses. Well-known cyclist champion Lance Armstrong was stripped of his Tour de France titles after the U.S. Anti-Doping Agency found evidence that Armstrong participated in a large illicit drug scheme for more than a decade. 16 Another ethical dilemma in sports occurred when a number of lawsuits were filed against the National Football League (NFL) accusing them of hiding the risks and long-term harm that can occur from concussions sustained during games. 17

Whether they are made in the realm of business, politics, science, or sports, most deci- sions are judged either right or wrong, ethical or unethical. Regardless of what an indi- vidual believes about a particular action, if society judges it to be unethical or wrong, new legislation usually follows. Whether correct or not, that judgment directly affects a com- pany’s ability to achieve its business goals. You should be aware that the public is more tolerant of questionable consumer practices than of similar business practices. Double standards are at least partly due to differences in wealth and the success between busi- nesses and consumers. The more successful a company, the more the public is critical

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8 Part 1: An Overview of Business Ethics

when misconduct occurs. 18 For this reason alone, it is important to understand business ethics and recognize ethical issues.

The Reasons for Studying Business Ethics Studying business ethics is valuable for several reasons. Business ethics is not merely an extension of an individual’s own personal ethics. Many people believe if a company hires good people with strong ethical values, then it will be a “good citizen” organization. But as we show throughout this text, an individual’s personal moral values are only one factor in the ethical decision-making process. True, moral values can be applied to a variety of situa- tions in life, and some people do not distinguish everyday ethical issues from business ones. Our concern, however, is with the application of principles, values, and standards in the business context. Many important issues are not related to a business context, although they remain complex moral dilemmas in a person’s own life. For example, although abortion and human cloning are moral issues, they are not an issue in most business organizations.

Professionals in any field, including business, must deal with individuals’ personal moral dilemmas because such dilemmas affect everyone’s ability to function on the job. Normally, a business does not dictate a person’s morals. Such policies would be illegal. Only when a person’s morals influence his or her performance on the job does it involve a dimension within business ethics.

Just being a good person and having sound personal values may not be sufficient to handle the ethical issues that arise in a business organization. Although truthful- ness, honesty, fairness, and openness are often assumed to be self-evident and accepted, business-strategy decisions involve complex and detailed discussions. For example, there is considerable debate over what constitutes antitrust, deceptive advertising, and violations of the Foreign Corrupt Practices Act. A high level of personal moral development may not prevent an individual from violating the law in a complicated organizational context where even experienced lawyers debate the exact meaning of the law. For instance, the Supreme Court struck down a ruling against a Thai student who was selling foreign text- books in the United States at lower costs than books sold by the publishers. The student would purchase textbooks developed for foreign markets overseas and resell them in the United States. While normally people have the right to resell copyrighted items they have purchased legally, the courts found the Thai student’s actions violated a law that prohibited the importation of copyrighted materials without the copyright holder’s permission. How- ever, the Supreme Court rejected the arguments and ruled in favor of the student. 19

Some approaches to business ethics assume ethics training is for people whose per- sonal moral development is unacceptable, but that is not the case. Because organizations are culturally diverse and personal morals must be respected, ensuring collective agree- ment on organizational ethics (that is, codes reasonably capable of preventing misconduct) is as vital as any other effort an organization’s management may undertake.

Many people with limited business experience suddenly find themselves making deci- sions about product quality, advertising, pricing, sales techniques, hiring practices, and pol- lution control. The values they learned from family, religion, and school may not provide specific guidelines for these complex business decisions. In other words, a person’s experi- ences and decisions at home, in school, and in the community may be quite different from his or her experiences and decisions at work. Many business ethics decisions are close calls. In addition, managerial responsibility for the conduct of others requires knowledge of ethics and compliance processes and systems. Years of experience in a particular industry may be

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Chapter 1: The Importance of Business Ethics 9

required to know what is acceptable. For example, when are advertising claims more exag- geration than truth? When does such exaggeration become unethical? When Zale Corp. claimed that its Celebration Fire diamonds were the “most brilliant diamonds in the world,” it automatically implied its competitors’ diamonds are not as brilliant. Sterling Jeweler’s Inc. filed a lawsuit claiming that Zale was engaging in false advertising. A judge refused to block Zale’s advertising because there was not enough proof that the ads harmed Sterling’s busi- ness in any way. This would seem to be an example of puffery, or an exaggerated claim that customers should not necessarily take seriously, rather than a serious attempt to mislead. 20

Studying business ethics will help you begin to identify ethical issues when they arise and recognize the approaches available for resolving them. You will learn more about the ethical decision-making process and about ways to promote ethical behavior within your organization. By studying business ethics, you may also begin to understand how to cope with conflicts between your own personal values and those of the organization in which you work. As stated earlier, if after reading this book you feel a little more unsettled about potential decisions in business, your decisions will be more ethical and you will have knowledge within this area.

THE DEVELOPMENT OF BUSINESS ETHICS

The study of business ethics in North America has evolved through five distinct stages— (1) before 1960, (2) the 1960s, (3) the 1970s, (4) the 1980s, and (5) the 1990s — and continues to evolve in the twenty-first century (see Table 1–1 ).

Before 1960: Ethics in Business Prior to 1960, the United States endured several agonizing phases of questioning the con- cept of capitalism. In the 1920s, the progressive movement attempted to provide citizens with a “living wage,” defined as income sufficient for education, recreation, health, and retirement. Businesses were asked to check unwarranted price increases and any other prac- tices that would hurt a family’s living wage. In the 1930s came the New Deal that specifi- cally blamed business for the country’s economic woes. Business was asked to work more closely with the government to raise family income. By the 1950s, the New Deal evolved into President Harry S. Truman’s Fair Deal, a program that defined such matters as civil rights and environmental responsibility as ethical issues that businesses had to address.

Until 1960, ethical issues related to business were often discussed within the domain of theology or philosophy or in the realm of legal and competitive relationships. Religious leaders raised questions about fair wages, labor practices, and the morality of capitalism. For example, Catholic social ethics, expressed in a series of papal encyclicals, included concern for morality in business, workers’ rights, and living wages; for humanistic values rather than materialistic ones; and for improving the conditions of the poor. The Protestant work ethic encouraged individuals to be frugal, work hard, and attain success in the capitalistic system. Such religious traditions provided a foundation for the future field of business ethics.

The first book on business ethics was published in 1937 by Frank Chapman Sharp and Philip G. Fox. The authors separated their book into four sections: fair service, fair treatment of competitors, fair price, and moral progress in the business world. This early

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10 Part 1: An Overview of Business Ethics

TABLE 1–1 Timeline of Ethical and Socially Responsible Concerns

1960s 1970s 1980s 1990s 2000s

Environmental issues

Employee militancy Bribes and illegal contracting practices

Sweatshops and unsafe working conditions in third-world countries

Cybercrime

Civil rights issues Human rights issues

Influence peddling Rising corporate liability for personal damages (for example, cigarette companies)

Financial misconduct

Increased employee- employer tension

Covering up rather than correcting issues

Deceptive advertising

Financial mismanagement and fraud

Global issues, Chinese product safety

Changing work ethic

Disadvantaged consumers

Financial fraud (for example, savings and loan scandal)

Organizational ethical misconduct

Sustainability

Rising drug use Transparency issues

Intellectual property theft

Source: Adapted from “Business Ethics Timeline,” Ethics Resource Center , http://www.ethics.org/resource/business-ethics-timeline (accessed June 13, 2013). Copyright © 2006, Ethics Resource Center (ERC). Used with permission of the ERC, 1747 Pennsylvania Ave. N.W., Suite 400, Washington, DC, 2006, www.ethics.org.

textbook discusses ethical ideas based largely upon economic theories and moral philoso- phies. However, the section’s titles indicate the authors also take different stakeholders into account. Most notably, competitors and customers are the main stakeholders emphasized, but the text also identifies stockholders, employees, business partners such as suppliers, and government agencies. 21 Although the theory of stakeholder orientation would not evolve for many more years, this earliest business ethics textbook demonstrates the neces- sity of the ethical treatment of different stakeholders.

The 1960s: The Rise of Social Issues in Business During the 1960s American society witnessed the development of an anti-business trend because many critics attacked the vested interests that controlled the economic and politi- cal aspects of society—the so-called military–industrial complex. The 1960s saw the decay of inner cities and the growth of ecological problems such as pollution and the disposal of toxic and nuclear wastes. This period also witnessed the rise of consumerism—activities undertaken by independent individuals, groups, and organizations to protect their rights as consumers. In 1962 President John F. Kennedy delivered a “Special Message on Protect- ing the Consumer Interest” that outlined four basic consumer rights: the right to safety, the right to be informed, the right to choose, and the right to be heard. These came to be known as the Consumers’ Bill of Rights .

The modern consumer movement is generally considered to have begun in 1965 with the publication of Ralph Nader’s Unsafe at Any Speed that criticized the auto industry as a whole, and General Motors Corporation (GM) in particular, for putting profit and style ahead of lives and safety. GM’s Corvair was the main target of Nader’s criticism. His consumer protection organization, popularly known as Nader’s Raiders, fought success- fully for legislation requiring automobile makers to equip cars with safety belts, padded

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Chapter 1: The Importance of Business Ethics 11

dashboards, stronger door latches, head restraints, shatterproof windshields, and collaps- ible steering columns. Consumer activists also helped secure passage of consumer protec- tion laws such as the Wholesome Meat Act of 1967, the Radiation Control for Health and Safety Act of 1968, the Clean Water Act of 1972, and the Toxic Substance Act of 1976. 22

After Kennedy came President Lyndon B. Johnson and the “Great Society,” a series of programs that extended national capitalism and told the business community the U.S. gov- ernment’s responsibility was to provide all citizens with some degree of economic stability, equality, and social justice. Activities that could destabilize the economy or discriminate against any class of citizens began to be viewed as unethical and unlawful.

The 1970s: Business Ethics as an Emerging Field Business ethics began to develop as a field of study in the 1970s. Theologians and philoso- phers laid the groundwork by suggesting certain moral principles could be applied to busi- ness activities. Using this foundation, business professors began to teach and write about corporate social responsibility , an organization’s obligation to maximize its positive impact on stakeholders and minimize its negative impact. Philosophers increased their involvement, applying ethical theory and philosophical analysis to structure the discipline of business ethics. Companies became more concerned with their public image, and as social demands grew, many businesses realized they needed to address ethical issues more directly. The Nixon administration’s Watergate scandal focused public interest on the importance of ethics in government. Conferences were held to discuss the social responsibilities and ethical issues of business. Centers dealing with issues of business ethics were established. Interdisciplin- ary meetings brought together business professors, theologians, philosophers, and business- people. President Jimmy Carter attempted to focus on personal and administrative efforts to uphold ethical principles in government. The Foreign Corrupt Practices Act was passed during his administration, making it illegal for U.S. businesses to bribe government officials of other countries. Today this law is the highest priority of the U.S. Department of Justice.

By the end of the 1970s, a number of major ethical issues had emerged, including bribery, deceptive advertising, price collusion, product safety, and ecology. Business ethics became a common expression. Academic researchers sought to identify ethical issues and describe how businesspeople might choose to act in particular situations. However, only limited efforts were made to describe how the ethical decision-making process worked and to identify the many variables that influence this process in organizations.

The 1980s: Consolidation In the 1980s, business academics and practitioners acknowledged business ethics as a field of study, and a growing and varied group of institutions with diverse interests promoted it. Centers for business ethics provided publications, courses, conferences, and seminars. R. Edward Freeman was among the first scholars to pioneer the concept of stakeholders as a foundational theory for business ethics decisions. Freeman defined stakeholders as “any group or individual who can affect or is affected by the achievement of the organiza- tion’s objectives.” 23 Freeman’s defense of stakeholder theory had a major impact on strate- gic management and corporations’ views of their responsibilities. Business ethics were also a prominent concern within leading companies such as General Electric, Hershey Foods, General Motors, IBM, Caterpillar, and S. C. Johnson & Son, Inc. Many of these firms estab- lished ethics and social policy committees to address ethical issues.

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12 Part 1: An Overview of Business Ethics

In the 1980s, the Defense Industry Initiative on Business Ethics and Conduct (DII) was developed to guide corporate support for ethical conduct. In 1986, 18 defense contractors drafted principles for guiding business ethics and conduct. 24 The organization has since grown to nearly 50 members. This effort established a method for discussing best prac- tices and working tactics to link organizational practice and policy to successful ethical compliance. The DII includes six principles. First, the DII supports codes of conduct and their widespread distribution. These codes of conduct must be understandable and cover their more substantive areas in detail. Second, member companies are expected to pro- vide ethics training for their employees as well as continuous support between training periods. Third, defense contractors must create an open atmosphere in which employees feel comfortable reporting violations without fear of retribution. Fourth, companies need to perform extensive internal audits and develop effective internal reporting and volun- tary disclosure plans. Fifth, the DII insists member companies preserve the integrity of the defense industry. And sixth, member companies must adopt a philosophy of public accountability. 25

The 1980s ushered in the Reagan–Bush era, with the accompanying belief that self- regulation, rather than regulation by government, was in the public’s interest. Many tariffs and trade barriers were lifted and businesses merged and divested within an increasingly global atmosphere. Thus, while business schools were offering courses in business ethics, the rules of business were changing at a phenomenal rate because of less regulation. Corporations that once were nationally based began operating internation- ally and found themselves mired in value structures where accepted rules of business behavior no longer applied.

The 1990s: Institutionalization of Business Ethics The administration of President Bill Clinton continued to support self-regulation and free trade. However, it also took unprecedented government action to deal with health- related social issues such as teenage smoking. Its proposals included restricting cigarette advertising, banning cigarette vending machine sales, and ending the use of cigarette logos in connection with sports events. 26 Clinton also appointed Arthur Levitt as chairman of the Securities and Exchange Commission in 1993. Levitt unsuccessfully pushed for many reforms that, if passed, could have prevented the accounting ethics scandals exemplified by Enron and WorldCom in the early twenty-first century. 27

The Federal Sentencing Guidelines for Organizations (FSGO), approved by Congress in November 1991, set the tone for organizational ethical compliance programs in the 1990s. The guidelines, which were based on the six principles of the DII, 28 broke new ground by codifying into law incentives to reward organizations for taking action to prevent miscon- duct, such as developing effective internal legal and ethical compliance programs. 29 Provi- sions in the guidelines mitigate penalties for businesses striving to root out misconduct and establish high ethical and legal standards. 30 On the other hand, under FSGO, if a com- pany lacks an effective ethical compliance program and its employees violate the law, it can incur severe penalties. The guidelines focus on firms taking action to prevent and detect business misconduct in cooperation with government regulation. At the heart of the FSGO is the carrot-and-stick approach; that is, by taking preventive action against misconduct, a company may avoid onerous penalties should a violation occur. A mechanical approach using legalistic logic will not suffice to avert serious penalties. The company must develop corporate values, enforce its own code of ethics, and strive to prevent misconduct. The law

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Chapter 1: The Importance of Business Ethics 13

develops new amendments almost every year. We will provide more detail on the FSGO’s role in business ethics programs in Chapters 4 and 8 .

The Twenty-First Century of Business Ethics Although business ethics appeared to become more institutionalized in the 1990s, new evi- dence emerged in the early 2000s that more than a few business executives and managers had not fully embraced the public’s desire for high ethical standards. After George W. Bush became President in 2001, highly publicized corporate misconduct at Enron, WorldCom, Halliburton, and the accounting firm Arthur Andersen caused the government and the public to look for new ways to encourage ethical behavior. 31 Accounting scandals, espe- cially falsifying financial reports, became part of the culture of many companies. Firms outside the United States, such as Royal Ahold in the Netherlands and Parmalat in Italy, became major examples of global accounting fraud. Although the Bush administration tried to minimize government regulation, there appeared to be no alternative to develop- ing more regulatory oversight of business.

Such abuses increased public and political demands to improve ethical standards in business. To address the loss of confidence in financial reporting and corporate ethics, in 2002 Congress passed the Sarbanes–Oxley Act , the most far-reaching change in organiza- tional control and accounting regulations since the Securities and Exchange Act of 1934. The new law made securities fraud a criminal offense and stiffened penalties for corporate fraud. It also created an accounting oversight board that requires corporations to estab- lish codes of ethics for financial reporting and to develop greater transparency in financial reports to investors and other interested parties. Additionally, the law requires top execu- tives to sign off on their firms’ financial reports, and risk fines and long prison sentences if they misrepresent their companies’ financial positions. The legislation further requires company executives to disclose stock sales immediately and prohibits companies from giv- ing loans to top managers. 32

Amendments to the FSGO require that a business’s governing authority be well informed about its ethics program with respect to content, implementation, and effective- ness. This places the responsibility squarely on the shoulders of the firm’s leadership, usually the board of directors. The board is required to provide resources to oversee the discovery of risks and to design, implement, and modify approaches to deal with those risks.

The Sarbanes–Oxley Act and the FSGO institutionalized the need to discover and address ethical and legal risk. Top management and the board of directors of a corporation are accountable for discovering risk associated with ethical conduct. Such specific industries as the public sector, energy and chemicals, health care, insurance, and retail have to discover the unique risks associated with their operations and develop ethics programs to prevent ethical misconduct before it creates a crisis. Most firms are developing formal and informal mechanisms that affect interactive communication and transparency about issues associated with the risk of misconduct. Business leaders should consider the greatest danger to their organizations lies in not discovering any serious misconduct or illegal activities that may be lurking. Unfortunately, most managers do not view the risk of an ethical disaster as being as important as the risk associated with fires, natural disasters, or technology failure. In fact, ethical disasters can be significantly more damaging to a company’s reputation than risks managed through insurance and other methods. The great investor Warren Buffett stated it is impossible to eradicate all wrongdoing in a large organization and one can only hope the misconduct is small and is caught in time. Buffett’s fears were realized in 2008 when the

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14 Part 1: An Overview of Business Ethics

financial system collapsed because of pervasive, systemic use of instruments such as credit default swaps, risky debt such as subprime lending, and corruption in major corporations.

In 2009, Barack Obama became president in the middle of a great recession caused by a meltdown in the global financial industry. Many firms, such as AIG, Lehman Brothers, Merrill Lynch, and Countrywide Financial, engaged in ethical misconduct in developing and selling high-risk financial products. President Obama led the passage of legislation to provide a stimulus for recovery. His legislation to improve health care and provide more protection for consumers focused on social concerns. Congress passed legislation regarding credit card accountability, improper payments related to federal agencies, fraud and waste, and food safety. The Dodd–Frank Wall Street Reform and Consumer Protection Act addressed some of the issues related to the financial crisis and recession. The Dodd–Frank Act was the most sweeping financial legislation since the Sarbanes–Oxley Act and possibly since laws put into effect during the Great Depression. It was designed to make the finan- cial services industry more ethical and responsible. This complex law required regulators to create hundreds of rules to promote financial stability, improve accountability and trans- parency, and protect consumers from abusive financial practices.

The basic assumptions of capitalism are under debate as countries around the world work to stabilize markets and question those who manage the money of individual corpo- rations and nonprofits. The financial crisis caused many people to question government institutions that provide oversight and regulation. As societies work to create change for the better, they must address issues related to law, ethics, and the required level of com- pliance necessary for government and business to serve the public interest. Not since the Great Depression and President Franklin Delano Roosevelt has the United States seen such widespread government intervention and regulation—something most deem necessary, but is nevertheless worrisome to free market capitalists.

Future ethical issues revolve around the acquisition and sales of information. Cloud computing has begun a new paradigm. Businesses must no longer develop strategies based on past practices; they begin with petabytes of information and look for relationships and correlations to discover the new rules of business. What once was thought of as intrusive is now accepted and promoted. Only recently have people begun to ask whether the informa- tion collected by business is acceptable. Companies are becoming more sophisticated in understanding their customers by the use of predictive analytic technologies.

Is it acceptable for a business to review you on Facebook or other social networking services? When shopping, does the fact that Q codes and microchips give your information to businesses regarding where you are, what you are looking at, and what you have done in the last day (via cell phone tower triangulation) bother you? Should your non-professional life be subject to the ethics of the corporation when you are not at work? Finally, are you a citizen first and then an employee or an employee first and then a citizen? These are some of the business ethics issues in your future.

DEVELOPING AN ORGANIZATIONAL AND GLOBAL ETHICAL CULTURE

Compliance and ethics initiatives in organizations are designed to establish appropriate conduct and core values. The ethical component of a corporate culture relates to the val- ues, beliefs, and established and enforced patterns of conduct employees use to identify

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Chapter 1: The Importance of Business Ethics 15

and respond to ethical issues. In our book the term ethical culture is acceptable behavior as defined by the company and industry. Ethical culture is the component of corporate cul- ture that captures the values and norms an organization defines and is compared to by its industry as appropriate conduct. The goal of an ethical culture is to minimize the need for enforced compliance of rules and maximize the use of principles that contribute to ethical reasoning in difficult or new situations. Ethical culture is positively related to workplace confrontation over ethics issues, reports to management of observed misconduct, and the presence of ethics hotlines. 33 To develop better ethical corporate cultures, many businesses communicate core values to their employees by creating ethics programs and appointing ethics officers to oversee them. An ethical culture creates shared values and support for ethical decisions and is driven by top management.

Globally, businesses are working closely together to establish standards of acceptable behavior. We are already seeing collaborative efforts by a range of organizations to estab- lish goals and mandate minimum levels of ethical behavior, from the European Union, the North American Free Trade Agreement (NAFTA), the Southern Common Market (MER- COSUR), and the World Trade Organization (WTO) to, more recently, the Council on Economic Priorities’ Social Accountability 8000 (SA 8000 ), the Ethical Trading Initiative, and the U.S. Apparel Industry Partnership. Some companies refuse to do business with organizations that do not support and abide by these standards. Many companies dem- onstrate their commitment toward acceptable conduct by adopting globally recognized principles emphasizing human rights and social responsibility. For instance, in 2000 the United Nations launched the Global Compact, a set of 10 principles concerning human rights, labor, the environment, and anti-corruption. The purpose of the Global Compact is to create openness and alignment among business, government, society, labor, and the United Nations. Companies that adopt this code agree to integrate the ten principles into their business practices, publish their progress toward these objectives on an annual basis, and partner with others to advance broader objectives of the UN. 34 These 10 principles are covered in more detail in Chapter 10 .

THE BENEFITS OF BUSINESS ETHICS

The field of business ethics continues to change rapidly as more firms recognize the bene- fits of improving ethical conduct and the link between business ethics and financial perfor- mance. Both research and examples from the business world demonstrate that building an ethical reputation among employees, customers, and the general public pays off. Figure 1–2 provides an overview of the relationship between business ethics and organizational per- formance. Although we believe there are many practical benefits to being ethical, many businesspeople make decisions because they believe a particular course of action is sim- ply the right thing to do as responsible members of society. Granite Construction earned a place in Ethisphere ’s “World’s Most Ethical Companies” for four consecutive years as a result of its integration of ethics into the company culture. Granite formulated its ethics program to comply with the Federal Sentencing Guidelines for Organizations and helped inspire the Construction Industry Ethics and Compliance Initiative. To ensure all com- pany employees are familiar with Granite’s high ethical standards, the firm holds six man- datory training sessions annually, conducts ethics and compliance audits, and uses field compliance officers to make certain ethical conduct is taking place throughout the entire

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16 Part 1: An Overview of Business Ethics

organization. 35 Among the rewards for being more ethical and socially responsible in busi- ness are increased efficiency in daily operations, greater employee commitment, increased investor willingness to entrust funds, improved customer trust and satisfaction, and better financial performance. The reputation of a company has a major effect on its relationships with employees, investors, customers, and many other parties.

Ethics Contributes to Employee Commitment Employee commitment comes from workers who believe their future is tied to that of the orga- nization and from a willingness to make personal sacrifices for the organization. 36 The more a company is dedicated to taking care of its employees, the more likely the employees will take care of the organization. Issues that foster the development of an ethical culture for employ- ees include the absence of abusive behavior, a safe work environment, competitive salaries, and the fulfillment of all contractual obligations toward employees. An ethics and compliance program can support values and appropriate conduct. Social programs improving the ethical culture range from work–family programs to stock ownership plans to community service. Home Depot associates, for example, participate in disaster-relief efforts after hurricanes and tornadoes, rebuilding roofs, repairing water damage, planting trees, and clearing roads in their communities. Because employees spend a considerable number of their waking hours at work, a commitment by an organization to goodwill and respect for its employees usually increases the employees’ loyalty to the organization and their support of its objectives. The software company SAS topped Fortune ’s “ 100 Best Places to Work For” list for eight years thanks to the way it values its employees. During the most recent recession, founder Charles Goodnight refused to lay off workers and instead asked his employees to offer ideas on how to reduce costs. By actively engaging employees in cost-cutting measures, SAS was able to cut expenses by 6 to 7 percent. SAS is also unusual in that its annual turnover rate is four percent, versus the 20 percent industry average. It also has an organic farm for the firm’s four cafeterias. 37

Employees’ perceptions that their firm has an ethical culture lead to performance- enhancing outcomes within the organization. 38 A corporate culture that integrates strong ethical values and positive business practices has been found to increase group creativity and job satisfaction and decrease turnover. 39 For the sake of both productivity and teamwork, it is

FIGURE 1–2 The Role of Organizational Ethics in Performance

Ethical Culture

Employee Commitment

and Trust

Investor Loyalty

and Trust Prof its

Customer Satisfaction

and Trust

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Chapter 1: The Importance of Business Ethics 17

essential employees both within and among departments throughout an organization share a common vision of trust. The influence of higher levels of trust is greatest on relationships within departments or work groups, but trust is a significant factor in relationships among departments as well. Programs that create a trustworthy work environment make individuals more willing to rely and act on the decisions of their coworkers. In such a work environment, employees can reasonably expect to be treated with full respect and consideration by their coworkers and superiors. Trusting relationships between upper management and managers and their subordinates contribute to greater decision-making efficiencies. One survey found that when employees see values such as honesty, respect, and trust applied frequently in the workplace, they feel less pressure to compromise ethical standards, observe less misconduct, are more satisfied with their organizations overall, and feel more valued as employees. 40

The ethical culture of a company matters to employees. According to a report on employee loyalty and work practices, companies viewed as highly ethical by their employ- ees were six times more likely to keep their workers. 41 Also, employees who view their company as having a strong community involvement feel more loyal to their employers and positive about themselves.

Ethics Contributes to Investor Loyalty Ethical conduct results in shareholder loyalty and contributes to success that supports even broader social causes and concerns. Investors today are increasingly concerned about the ethics and social responsibility that creates the reputation of companies in which they invest, and various socially responsible mutual funds and asset management firms help investors purchase stock in ethical companies. Investors also recognize that an ethical cul- ture provides a foundation for efficiency, productivity, and profits. Investors know, too, that negative publicity, lawsuits, and fines can lower stock prices, diminish customer loy- alty, and threaten a company’s long-term viability. Many companies accused of miscon- duct experienced dramatic declines in the value of their stock when concerned investors divested. Warren Buffett and his company Berkshire Hathaway command significant respect from investors because of their track record of financial returns and the integrity of their organizations. Buffett says, “I want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper—to be read by their spouses, children and friends—with the reporting done by an informed and critical reporter.”

When TIAA-CREF investor participants were asked if they would choose a financial services company with strong ethics or higher returns, surprisingly, 92 percent of respon- dents said they would choose ethics while only 5 percent chose higher returns. 42 Investors look at the bottom line for profits or the potential for increased stock prices or dividends, but they also look for any potential flaws in the company’s performance, conduct, and financial reports. Therefore, gaining investors’ trust and confidence is vital to sustaining the financial stability of the firm.

Ethics Contributes to Customer Satisfaction It is generally accepted that customer satisfaction is one of the most important factors in a successful business strategy. Although a company continues to develop and adapt products to keep pace with customers’ changing desires and preferences, it must also develop long- term relationships with its customers and stakeholders. As mentioned earlier, high levels

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18 Part 1: An Overview of Business Ethics

of perceived corporate misconduct decreases customer trust. 43 On the other hand, companies viewed as socially responsible increase customer trust and satisfaction. Patagonia, Inc., engaged in a broad array of ecological, socially respon- sible, and ethical behaviors over many years to better connect with its target markets. The com- pany donates 1 percent of its sales to environ- mental preservation and restoration. Employees can volunteer for environmental groups and earn up to one month’s pay. The entire clothing line was sourced using organic cotton beginning in 1996. In addition, the company is currently creating the Patagonia National Park to protect ecosystems and biodiversity in Chile and Argen- tina. All new facilities are being built with LEED certification, demonstrating a commitment to green building and the environment. 44

For most businesses, both repeat purchases and an enduring relationship of mutual respect and cooperation with customers are essential for success. By focusing on customer satisfaction, a company continually deepens the customer’s dependence on the company, and as the cus- tomer’s confidence grows, the firm gains a better understanding of how to serve the customer so the relationship may endure. Successful busi- nesses provide an opportunity for customer feedback that engages the customer in coopera- tive problem solving. As is often pointed out, a happy customer will come back, but disgruntled customers will tell others about their dissatisfac-

tion with a company and discourage friends from dealing with it. Trust is essential to a good long-term relationship between a business and consumers.

The perceived ethicality of a firm is positively related to brand trust, emotional identifica- tion with the brand, and brand loyalty. 45 A Nielsen survey revealed two-thirds of global consumer respondents stated they preferred companies that give back to society in a socially responsible manner. 46 As social responsibility becomes more important for com- panies, corporate social responsibility may be viewed as a sign of good management and may, according to one study, indicate good financial performance. However, another study indicates the reverse may be true, and companies who have good financial performance are able to spend more money on social responsibility. 47 Google would be an example of such a company. Google shows extreme care for its employees at its Googleplex headquarters in Mountain View, California. Investment in employee satisfaction and retention involves providing bicycles for efficient travel between meetings, lava lamps, massage chairs, shared work cubicles to allow for intellectual stimulation and idea generation, laptops for every employee, pool tables, volleyball courts, outdoor seating for brainstorming, snack rooms packed with various snacks and drinks, and more. 48

Does Being Ethical Result in Better Performance?

While research suggests ethical businesses have better performance, there is also an alternate view. Many businesspeople think ethics and social responsibility require resources that do not contribute to profits and time spent in ethics training could be better used for other business activities. One viewpoint is that when companies push the edge, pay minor fines for misconduct, or are not caught in wrongdoing, they may end up being more profitable than companies with a strong ethical culture. Many financial companies became extremely profitable when taking high-risk opportunities with limited transparency about the nature of the complex products they sold. To gain competitive advantage, a firm needs to be able to reach markets and make sales. If a firm is too ethical, it might lose competitive advantages. On the other hand, Ethisphere ’s World’s Most Ethical Companies index indicates ethical companies have better financial performance.

1. Ethical businesses are the most profitable.

2. The most ethical businesses are not the most profitable.

DEBATE ISSUE TAKE A STAND

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Chapter 1: The Importance of Business Ethics 19

When an organization has a strong ethical environment, it usually focuses on the core value of placing customers’ interests first. However, putting customers first does not mean the interests of employees, investors, and local communities should be ignored. An ethical culture that focuses on customers incorporates the interests of all employees, suppliers, and other interested parties in decisions and actions. Employees working in an ethical envi- ronment support and contribute to the process of understanding customers’ demands and concerns.

Ethics Contributes to Profits A company cannot nurture and develop an ethical culture unless it has achieved adequate financial performance in terms of profits. Businesses with greater resources—regardless of their staff size—have the means to practice social responsibility while serving their cus- tomers, valuing their employees, and establishing trust with the public. Ethical conduct toward customers builds a strong competitive position shown to positively affect business performance and product innovation. 49 Zappos values the well-being of its employees and gives them the freedom to provide high-quality customer service to its customers. For instance, call-center employees are given the freedom to spend as much time as needed to answer customer concerns. This emphasis on the customer enables the firm to fulfill its goal of being able to “deliver WOW through customer service.” It also made the firm widely successful, leading to its acquisition by Amazon.com in a $ 1.2 billion agreement. 50 Every day, business newspapers and magazines offer new examples of the consequences of business misconduct. It is worth noting, however, that most of these companies learned from their mistakes and recovered after they implemented programs to improve ethical and legal conduct.

Ample evidence shows being ethical pays off with better performance. As indicated earlier, companies perceived by their employees as having a high degree of honesty and integrity have a much higher average total return to shareholders than do companies per- ceived as having a low degree of honesty and integrity. 51 The World’s Most Ethical Com- panies index was developed through methodology designed by a committee of leading attorneys, professors, and organization leaders. In a five-year period, the companies in this index outperformed the other indexes of publicly traded companies. 52 These results provide strong evidence that corporate concern for ethical conduct is becoming a part of strategic planning toward obtaining the outcome of higher profitability. Rather than being just a function of compliance, ethics is becoming an integral part of management’s efforts to achieve competitive advantage.

OUR FRAMEWORK FOR STUDYING BUSINESS ETHICS

We developed a framework for this text to help you understand how people make ethical decisions and deal with ethical issues. Table 1–2 summarizes each element in the frame- work and describes where each topic is discussed in this book.

In Part One, we provide an overview of business ethics. This chapter defines the term business ethics and explore the development and importance of this critical business area.

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20 Part 1: An Overview of Business Ethics

In Chapter 2 , we explore the role of various stakeholder groups in social responsibility and corporate governance.

Part Two focuses on ethical issues and the institutionalization of business ethics. In Chapter 3 , we examine business issues that lead to ethical decision making in

TABLE 1–2 Our Framework for Studying Business Ethics

Chapter Highlights

1. The Importance of Business Ethics • Definitions

• Reasons for studying business ethics

• History

• Benefits of business ethics

2. Stakeholder Relationships, Social Responsibility, and Corporate Governance

• Stakeholder relationships

• Stakeholder influences in social responsibility

• Corporate governance

3. Emerging Business Ethics Issues • Recognizing an ethical issue

• Honesty, fairness, and integrity

• Ethical issues and dilemmas in business: abusive and disruptive behavior, lying, conflicts of interest, bribery, corporate intelligence, discrimination, sexual harassment, environmental issues, fraud, insider trading, intellectual property rights, and privacy

• Determining an ethical issue in business

4. The Institutionalization of Business Ethics

• Mandatory requirements

• Voluntary requirements

• Core practices

• Federal Sentencing Guidelines for Organizations

• Sarbanes–Oxley Act

5. Ethical Decision Making • Ethical issue intensity

• Individual factors in decision making

• Organizational factors in decision making

• Opportunity in decision making

• Business ethics evaluations and intentions

• Normative considerations in ethical decision making

• Role of institutions in normative decision making

• Importance of principles and core values to ethical decision making

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Chapter 1: The Importance of Business Ethics 21

6. Individual Factors: Moral Philosophies and Values

• Moral philosophies, including teleological development philosophies and cognitive moral deontological, relativist, virtue ethics, and justice philosophies

• Stages of cognitive moral development

7. Organizational Factors: The Role of Ethical Culture and Relationships

• Corporate culture

• Interpersonal relationships

• Whistle-blowing

• Opportunity and conflict

8. Developing an Effective Ethics Program

• Ethics programs

• Codes of ethics

• Program responsibility

• Communication of ethical standards

• Systems to monitor and enforce ethical standards

• Continuous improvement of ethics programs

9. Implementing and Auditing Ethics Programs

• Implementation programs

• Ethics audits

10. Business Ethics in a Global Economy

• Global Culture and Cultural Relations

• Economic Foundations of Business Ethics

• Multinational Corporations

• Global Cooperation

• Global Ethics Issues

11. Ethical Leadership • Requirements for Ethical Leadership

• Managing Ethical Conflicts

• Ethical Leadership Communication

• Leader-Follower Relationships

12. Sustainability: Ethical and Social Responsibility Dimensions

• Sustainability and Ethical Decision Making

• Global Environmental Issues

• Business Response to Sustainability Issues

• Strategic Implementation of Environmental Responsibility

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22 Part 1: An Overview of Business Ethics

organizations. In Chapter 4 , we look at the institutionalization of business ethics, including both mandatory and voluntary societal concerns.

In Part Three, we delineate the ethical decision-making process and then look at both individual factors and organizational factors that influence decisions. Chapter 5 describes the ethical decision-making process from an organizational perspective. Chapter 6 explores individual factors that may influence ethical decisions in business, including moral philos- ophies and cognitive moral development. Chapter 7 focuses on organizational dimensions including corporate culture, relationships, and conflicts.

In Part Four, we explore systems and processes associated with implementing business ethics into global strategic planning. Chapter 8 discusses the development of an effective eth- ics program. In Chapter 9 , we examine issues related to implementing and auditing ethics programs. Chapter 10 considers ethical issues in a global context. Chapter 11 examines ethi- cal leadership and its importance in creating an ethical corporate culture. Finally, Chapter 12 discusses the ethical and social responsibility considerations of sustainability.

We hope that this framework helps you develop a balanced understanding of the various perspectives and alternatives available to you when making ethical business decisions. Regard- less of your own personal values, the more you know about how individuals make decisions, the better prepared you will be to cope with difficult ethical decisions. Such knowledge will help you improve and control the ethical decision-making environment in which you work.

It is your job to make the final decision in an ethical situation that affects you. Some- times that decision may be right; sometimes it may be wrong. It is always easy to look back with hindsight and know what you should have done in a particular situation. At the time, however, the choices might not have seemed so clear. To give you practice making ethi- cal decisions, Part Five of this book contains a number of cases. In addition, each chapter begins with a vignette, “An Ethical Dilemma,” and ends with a mini-case, “Resolving Ethi- cal Business Challenges,” that involves ethical problems. We hope these give you a better sense of the challenges of making ethical decisions in the business world.

SUMMARY

This chapter provided an overview of the field of business ethics and introduced the frame- work for the discussion of this subject. Business ethics comprises organizational principles, values, and norms that may originate from individuals, organizational statements, or from the legal system that primarily guide individual and group behavior in business. Investors, employees, customers, special interest groups, the legal system, and the community often determine whether a specific action is right or wrong, ethical or unethical.

Studying business ethics is important for many reasons. Recent incidents of unethi- cal activity in business underscore the widespread need for a better understanding of the factors that contribute to ethical and unethical decisions. Individuals’ personal moral philosophies and decision-making experience may not be sufficient to guide them in the business world. Studying business ethics helps you begin to identify ethical issues and rec- ognize the approaches available to resolve them.

The study of business ethics evolved through five distinct stages. Before 1960, busi- ness ethics issues were discussed primarily from a religious perspective. The 1960s saw the emergence of many social issues involving business and the concept of social conscience as well as a rise in consumerism, which culminated with Kennedy’s Consumers’ Bill of Rights . Business ethics began to develop as an independent field of study in the 1970s, with

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Chapter 1: The Importance of Business Ethics 23

academics and practitioners exploring ethical issues and attempting to understand how individuals and organizations make ethical decisions. These experts began to teach and write about the idea of corporate social responsibility, an organization’s obligation to maxi- mize its positive impact on stakeholders and minimize its negative impact. In the 1980s, centers of business ethics provided publications, courses, conferences, and seminars, and many companies established ethics committees and social policy committees. The Defense Industry Initiative on Business Ethics and Conduct was developed to guide corporate sup- port for ethical conduct; its principles had a major impact on corporate ethics.

However, less government regulation and an increase in businesses with interna- tional operations raised new ethical issues. In the 1990s, government continued to support self-regulation. The FSGO sets the tone for organizational ethics programs by provid- ing incentives for companies to take action to prevent organizational misconduct. The twenty-first century ushered in a new set of ethics scandals, suggesting many companies had not embraced the public’s desire for higher ethical standards. The Sarbanes–Oxley Act stiffened penalties for corporate fraud and established an accounting oversight board. The Dodd–Frank Wall Street Reform and Consumer Protection Act was later passed to reform the financial system. The current trend is away from legally based ethical initiatives in organizations and toward cultural initiatives that make ethics a part of core organiza- tional values. The ethical component of a corporate culture relates to the values, beliefs, and established and enforced patterns of conduct employees use to identify and respond to ethical issues. The term ethical culture describes the component of corporate culture that captures the rules and principles an organization defines as appropriate conduct. Ethical culture can be viewed as the character of the decision-making process employees use to determine whether their responses to ethical issues are right or wrong.

Research and anecdotes demonstrate building an ethical reputation among employees, customers, and the general public provides benefits that include increased efficiency in daily operations, greater employee commitment, increased investor willingness to entrust funds, improved customer trust and satisfaction, and better financial performance. The reputation of a company has a major effect on its relationships with employees, investors, customers, and many other parties, and thus has the potential to affect its bottom line.

Finally, this text introduces a framework for studying business ethics. Each chapter addresses some aspect of business ethics and decision making within a business context. The major concerns are ethical issues in business, stakeholder relationships, social respon- sibility and corporate governance, emerging business ethics issues, the institutionalization of business ethics, understanding the ethical decision-making process, moral philosophies and cognitive moral development, corporate culture, organizational relationships and con- flicts, developing an effective ethics program, implementing and auditing the ethics pro- gram, global business ethics, ethical leadership, and sustainability.

IMPORTANT TERMS FOR REVIEW

business ethics 5

principles 5

values 5

Morals 5

Consumers’ Bill of Rights 10

social responsibility 11

Defense Industry Initiative on Business Ethics and Conduct 12

Federal Sentencing Guidelines for Organizations 12

Sarbanes–Oxley Act 13

Dodd – Frank Wall Street Reform and Consumer Protection Act 14

ethical culture 15

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

24 Part 1: An Overview of Business Ethics

RESOLVING ETHICAL BUSINESS CHALLENGES *

Lael was just hired by Best East Motels into their manager training program and was excited about the potential benefits after her graduation from Florida State University. Working part-time and going to school full-time was the norm for her, but the Best East job replaced her two part-time jobs. With this new job, she would be the one to assign work times. Her luck continued when she met her mentor Nikhil, who was the son of the owner. Best East Motels was a franchise motel chain in the United States. Owners bought into the chain with a $ 500,000 franchise fee and paid for the construction of the motel. In return for the fee, Best East gave each owner a comprehensive pack- age of marketing, management, accounting, and financial materials to boost motel success rates to over 90 percent. In addition, Best East assisted each owner with groups of people that trained staff for every new job, from housekeeping to accounting. The new-hire training course for each type of employee was developed and based on the best practices within the industry. This particular motel had been in business for ten years and was seen as successful.

As Lael went through the manager train- ing program, everything she heard was great. It sounded like Best East was a career path she would want to pursue long-term. Six months into her job, however, Lael started to hear strange rumors. For example, on the night shift she found there was heavy employee turnover and most were females. Lael began to investigate by scheduling herself onto several night shifts. One night, as she chatted with one of the front desk employees, she discovered the girl planned on quitting. She was seventeen and worked at this Best East motel for a year. “Why are you leaving?” asked Lael.

Her reply startled Lael. “I don’t want trouble, just my last paycheck, a good letter of recommen- dation, and that’s it.”

As Lael pressed her for more information, the seventeen-year-old opened up. She spoke about Nikhil talking suggestively about her to other

employees and how he made suggestive physical gestures when she was around. She told Lael about other female employees treated similarly, and this always occurred during night shifts when Nikhil was on duty.

Digging a little deeper, Lael spoke to sev- eral former employees. Most were fairly young female employees. They told her essentially the same thing. For example, Nikhil would routinely make suggestive comments to female employees. In one incident under Nikhil’s watch, some male employees flirted with female employees, includ- ing undocumented workers. Nikhil reportedly sat there with a smile. They also told her Nikhil allowed customers at the motel to offer their room keys to female employees.

After a few weeks, Lael heard the same story from younger female employees and even some of the maids. Their responses to these situations were similar. They ranged from “Nikhil told me if I was older he would ask me out” to “I don’t want to make a big deal out of this because it might appear I’m a tattle tale.” Another common excuse for not reporting was that Nikhil assured them this was part of the motel business and was normal. Most employees were afraid to report on the boss’s son and put their jobs on the line.

Lael reviewed the section of the franchise employee handbook. It clearly stated sexual harassment of any kind would not be tolerated and should be reported immediately to the proper manager. Lael could tell from the manual the alle- gations against Nikhil constituted sexual harass- ment. While the Best East Franchise Corporation had no ethics hotline, Lael thought this could be a legal issue.

She knew putting pressure on the female employees to report the behavior of the boss’s son was problematic. Lael also felt that going to Nikhil personally about these allegations may not be a wise move. If the behavior was reported to the owner, it would become an official allegation and impact the motel’s reputation and image in the community, and she would be responsible for it.

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Chapter 1: The Importance of Business Ethics 25

The things these women were saying had not per- sonally happened to her yet.

QUESTIONS | EXERCISES 1. Why should Lael get involved in reporting if

she has not experienced any of the allegations the other employees are making?

* This case is strictly hypothetical; any resemblance to real persons, companies, or situations is coincidental.

2. What are some of the characteristics of Best East’s ethical culture that would create the cur- rent dilemma for Lael?

3. What should Lael do to resolve her concerns?

> > > CHECK YOUR EQ

Check your EQ, or Ethics Quotient, by completing the following. Assess your performance to evaluate your overall understanding of the chapter material.

1. Business ethics focuses mostly on personal ethical issues. Yes No

2. Business ethics deals with right or wrong behavior within a particular organization. Yes No

3. An ethical culture is based upon the norms and values of the company. Yes No

4. Business ethics contributes to investor loyalty. Yes No

5. The trend is away from cultural or ethically based initiatives to legal initiatives in organizations. Yes No

6. Investments in business ethics do not support the bottom line. Yes No

ANSWERS 1. No. Business ethics focuses on organizational concerns (legal and ethical—employees, customers, suppliers, society). 2. Yes. That stems from the basic definition. 3. Yes. Norms and values help create an organizational culture and are key in supporting or not supporting ethical conduct. 4. Yes. Many studies have shown that trust and ethical conduct contribute to investor loyalty. 5. No. Many businesses are communicating their core values to their employees by creating ethics programs and appointing ethics officers to oversee them. 6. No. Ethics initiatives create consumer, employee, and shareholder loyalty and positive behavior that contribute to the bottom line.

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

26 Part 1: An Overview of Business Ethics

ENDNOTES

1. Guido Palazzo, Franciska Krings, and Ulrich Hoffrage, “Ethical Blindess,” Journal of Business Ethics 109 (2012), 323–338.

2. Kayla Webley, “Cheating Harvard,” Time , September 17, 2012, 22.

3. Teressa L. Elliot, Linda M. Marquis, and Catherine S. Neal, “Business Ethics Perspectives: Faculty Plagiarism and Fraud,” Journal of Business Ethics 112 (2013), 91–99.

4. United v. Federal Election Commission, 558 U.S. 310 (2010), Accessed 2.5.13 http://www.supremecourt.gov/ opinions/09pdf/08-205.pdf .

5. Wroe Alderson, Dynamic Marketing Behavior (Homewood, IL: Irwin, 1965), 320.

6. Tom Polansek, “Peregrine Financial ex-CEO expects life of fraud to end in jail,” Reuters , January 30, 2013, http:// www.reuters.com/article/2013/01/30/us-peregrine- financial-fate-idUSBRE90T1BL20130130 (accessed January 30, 2013).

7. Ethics Resource Center, 2011 National Business Ethics Survey (Arlington, VA: Ethics Resource Center, 2012), 22–23.

8. Dan Fitzpatrick and Robin Sidel, “New J.P. Morgan Jam,” The Wall Street Journal , November 16, 2012, C1–C2.

9. Edelman, Global Deck: 2013 Trust Barometer , http:// www.edelman.com/trust-downloads/global-results-2/ (accessed January 30, 3013).

10. Leonidas C. Leonidou, Olga Kvasova, Constantinos N. Leonidou, and Simo Chari, “Business Unethicality as an Impediment to Consumer Trust: The Moderating Role of Demographic and Cultural Characteristics,” Journal of Business Ethics 112 (2013): 397–415.

11. Daniel Gilbert, “Chesapeake CEO McClendon to Exit,” The Wall Street Journal , January 29, 2013, http://online. wsj.com/article/SB10001424127887324329204578272 353396167988.html?mod=WSJ_business_whatsNews (accessed January 30, 2013).

12. Christopher Helman, “McClendon Out At Chesapeake-Is a Takeover Next?” Forbes , January 29, 2013, http:// www.forbes.com/sites/christopherhelman/2013/01/29/ aubrey-mcclendon-out-at-chesapeake-energy/ (accessed March 25, 2013).

13. Chris Helms,“Jamaica Plain Neighborhood Council Rejects Whole Foods Seating Proposal,” Jamaica Plain Patch , April 25, 2012, http://jamaicaplain.patch.com/ articles/jamaica-plain-neighborhood-council-rejects- whole-foods-seating-proposal (accessed February 1, 2013); John Ruch, “JP prof to head Whole Foods study,” Jamaica Plain Gazette , April 27, 2012, http://jamaicaplaingazette.com/2012/04/27/jp-prof-to- head-whole-foods-study/ (accessed February 1, 2013).

14. The Associated Press, “Rod Blagojevich, convicted on corruption charges, begins serving 14-year prison sentence in Colorado,” New York Daily News , http:// www.nydailynews.com/news/national/rod-blagojevich- convicted-corruption-charges-begins-serving-14-year- prison-sentence-colorado-article-1.1040164 (accessed February 1, 2013).

15. Julian E. Barnes and James Hookway, “Military Ethics Review Is Ordered,” The Wall Street Journal , November 16, 2012, A6.

16. Reed Albergotti, Vanessa O’Connell, and Suzanne Vranica, “Armstrong Gets Dumped,” The Wall Street Journal , October 18, 2012, B1.

17. Ken Belson, “Concussion Liability Costs May Rise, and Not Just for N.F.L.,” The New York Times , December 10, 2012, http://www.nytimes.com/2012/12/11/sports/ football/insurance-liability-in-nfl-concussion-suits-may- have-costly-consequences.html?pagewanted=all&_r=0 (accessed February 1, 2013).

18. Tim De Bock, Iris Vermeir, and Patrick Van Kenhove, “‘What’s the Harm in Being Unethical? These Strangers are Rich Anyway!’ Exploring Underlying Factors of Double Standards,” Journal of Business Ethics 112 (2013), 225–240.

19. Brent Kendall, “High Court Rules in Favor of Book Reseller,” The Wall Street Journal , March 19, 2013, http:// online.wsj.com/article/SB10001424127887324323904578 370263406999592.html (accessed March 25, 2013); Brent Kendall and Wilawan Watcharasakwet, “High Court Dives into Resale Trade,” October 29, 2012, The Wall Street Journal , http://online.wsj.com/article/SB10001424 052970204789304578084730729110360.html (accessed March 25, 2013).

20. Ann Zimmerman, “Judge Refuses to Block Zale Diamond Ads,” The Wall Street Journal , January 24, 2013, http:// online.wsj.com/article/SB1000142412788732453930457 8262202669342698.html?KEYWORDS=zales (accessed February 1, 2013).

21. Frank Chapman Sharp and Philip G. Fox, Business Ethics (New York, NY: D. Appleton-Century Company Incorporated, 1937).

22. Archie B. Carroll and Ann K. Buchholtz, Business and Society: Ethics and Stakeholder Management (Cincinnati: South-Western, 2006), 452–455.

23. R. Edward Freeman, Strategic Management: A Stakeholder Approach (Boston: Pitman, 1984).

24. Alan R. Yuspeh, “Development of Corporate Compliance Programs: Lessons Learned from the DII Experience,” in Corporate Crime in America: Strengthening the “Good Citizenship” Corporation (Washington, DC: U.S. Sentencing Commission, 1995), 71–79.

25. Eleanor Hill, “Coordinating Enforcement Under the Department of Defense Voluntary Disclosure Program,” in Corporate Crime in America: Strengthening the “Good Citizenship” Corporation (Washington, DC: U.S. Sentencing Commission, 1995), 287–294.

26. “Huffing and Puffing in Washington: Can Clinton’s Plan Curb Teen Smoking?” Consumer Reports 60 (1995): 637.

27. Arthur Levitt with Paula Dwyer, Take on the Street (New York: Pantheon Books, 2002).

28. Hill, “Coordinating Enforcement.” 29. Richard P. Conaboy, “Corporate Crime in America:

Strengthening the Good Citizen Corporation,” in Corporate Crime in America: Strengthening the “Good Citizenship” Corporation (Washington, DC: U.S. Sentencing Commission, 1995), 1–2.

30. United States Code Service (Lawyers’ Edition), 18 U.S.C.S. Appendix, Sentencing Guidelines for the United States Courts (Rochester, NY: Lawyers Cooperative Publishing, 1995), sec. 8A.1.

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Chapter 1: The Importance of Business Ethics 27

31. “Fraud Inc.,” CNN/Money , http://money.cnn.com/news/ specials/corruption/ (accessed February 5, 2002); “SEC Formalizes Investigation into Halliburton Accounting,” The Wall Street Journal online, December 20, 2002, http://online.wsj.com; “WorldCom CEO Slaps Arthur Andersen,” CNN , July 8, 2002, www.cnn.com .

32. “Corporate Reform Bill Passed,” CNN , July 25, 2002, www.cnn.com .

33. Muel Kaptein, “From Inaction to External Whistleblowering: The Influence of the Ethical Culture of Organizations on Employee Responses to Observed Wrongdoing,” Journal of Business Ethics , (2011) 98: 513–530.

34. United Nation, “Global Compact: Corporate Citizenship in the World Economy,” http://www.unglobalcompact. org/docs/news_events/8.1/GC_brochure_FINAL.pdf (accessed February 15, 2011).

35. “The 2010 World’s Most Ethical Companies—Company Profile: Granite Construction,” Ethisphere , Q1, 33; “Granite Construction Named to Ethisphere’ s 2011 “World’s Most Ethical Companies” for 2nd Year in a Row,” Granite, http://www.graniteconstruction.com/investor- relations/release_detail.cfm?printpage=1&Release ID=558348 (accessed April 27, 2011); Ethisphere Institute, “2012 World’s Most Ethical Companies,” http:// www.ethisphere.com/wme/ (accessed February 1, 2013).

36. Bernard J. Jaworski and Ajay K. Kohli, “Market Orientation: Antecedents and Consequences,” Journal of Marketing 57 (1993): 53–70.

37. Michael Lee Stallard, “Has SAS Chairman Jim Goodnight Cracked the Code of Corporate Culture?” The Economic Times , June 18, 2010, http://economictimes.indiatimes. com/features/corporate-dossier/has-sas-chairman-jim- goodnight-cracked-the-code-of-corporate-culture/ articleshow/6060110.cms (accessed February 15, 2011); “100 Best Companies to Work For: SAS,” CNNMoney , http://money.cnn.com/magazines/fortune/bestcompanies/ 2011/snapshots/1.html (accessed February 15, 2011); “100 Best Companies to Work For: SAS,” CNNMoney , http://money.cnn.com/magazines/fortune/best- companies/2013/snapshots/2.html?iid=bc_sp_list (accessed February 1, 2013).

38. Terry W. Loe, “The Role of Ethical Culture in Developing Trust, Market Orientation and Commitment to Quality” (PhD diss., University of Memphis, 1996).

39. Sean Valentine, Lynn Godkin, Gary M. Fleischman, and Rolan Kidwell, “Corporate Ethical Values, Group Creativity, Job Satisfaction and Turnover Intention: The

Impact of Work Context on Work Response,” Journal of Business Ethics (2011) 98: 353–572.

40. Ethics Resource Center, 2000 National Business Ethics Survey, 5.

41. John Galvin, “The New Business Ethics,” SmartBusinessMag.com , June 2000, 99.

42. “Investors Prefer Ethics over High Return,” USA Today , January 16, 2006, B1.

43. Leonidas C. Leonidou, Olga Kvasova, Constantinos N. Leonidou, and Simo Chari, “Business Unethicality as an Impediment to Consumer Trust: The Moderating Role of Demographic and Cultural Characteristics,” Journal of Business Ethics 112(2013): 397–415.

44. Conservacion Patagonica , http://www. conservacionpatagonica.org/index.htm (accessed February 16, 2011); Patagonia Homepage , http://www. patagonia.com/us/home (accessed February 16, 2011).

45. Jatinder J. Singh, Oriol Iglesias, and Joan Manel Batistia- Foguet, “Does Having an Ethical Brand Matter? The Influence of Consumer Perceived Ethicality on Trust, Affect and Loyalty,” Journal of Business Ethics 111(2012): 541–549.

46. “The Global, Socially Conscious Consumer,” Nielsen Wire , March 27, 2012, http://blog.nielsen.com/nielsenwire/ consumer/the-global-socially-conscious-consumer/ (accessed February 1, 2013).

47. Marjorie Kelly, “Holy Grail Found. Absolute, Definitive Proof that Responsible Companies Perform Better Financially,” Business Ethics , Winter 2004.

48. “Google’s Corporate Culture,” http://www.google.com/intl/ en/corporate/culture.html (accessed February 1, 2013).

49. O. C. Ferrell, Isabelle Maignan, and Terry W. Loe, “The Relationship between Corporate Citizenship and Competitive Advantage,” in Rights, Relationships, and Responsibilities , ed. O. C. Ferrell, Lou Pelton, and Sheb L. True (Kennesaw, GA: Kennesaw State University, 2003).

50. Simone Baribeau, “How Tony Hsieh Pivoted Zappos into a $1.2 Billion Amazon Acquisition,” Fast Company , September 4, 2012, http://www.fastcompany.com/3000591/ how-tony-hsieh-pivoted-zappos-12-billion-amazon- acquisition (accessed February 1, 2013); “Zappos Family Core Values,” Zappos, http://about.zappos.com/our- unique-culture/zappos-core-values/deliver-wow-through- service (accessed February 1, 2013).

51. Galvin, “The New Business Ethics.” 52. Ethisphere Institute, “2011 World’s Most Ethical Companies,”

Ethisphere , http://ethisphere.com/2011-worlds-most-ethical- companies/ (accessed February 1, 2013).

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CHAPTER OBJECTIVES • Identify stakeholders’ roles in

business ethics

• Define social responsibility • Examine the relationship between

stakeholder orientation and social responsibility

• Delineate a stakeholder orientation in creating corporate social responsibility

• Explore the role of corporate governance in structuring ethics and social responsibility in business

• List the steps involved in implementing a stakeholder perspective in social responsibility and business ethics

CHAPTER OUTLINE Stakeholders Define Ethical Issues in Business

Identifying Stakeholders

A Stakeholder Orientation

Social Responsibility and Ethics

Issues in Social Responsibility

Social Responsibility and the Importance of a Stakeholder Orientation

Corporate Governance Provides Formalized Responsibility to Stakeholders

Views of Corporate Governance

The Role of Boards of Directors

Greater Demands for Accountability and Transparency

Executive Compensation

Implementing a Stakeholder Perspective

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

Contributions of a Stakeholder Perspective

© Galyna Andrushko/Shutterstock.com

CHAPTER 2

STAKEHOLDER RELATIONSHIPS, SOCIAL RESPONSIBILITY , AND CORPORATE GOVERNANCE

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and video of personal conversations, dinners, and hotel rooms. On Tuesday Megan went to Jeremy, who worked for the company for several years, and asked him if he knew of employee tracking at the company.

Jeremy responded, “Well, I have heard rumors that managers want to keep track of employees and monitor whether they share confidential information with competitors. I’ve also heard they monitor where each employee goes through the GPS located in the company car.”

Megan felt uneasy. “Jeremy, is what they are doing legal? Can they track and monitor our every move and conversation?”

Jeremy shrugged. “As far as I know it’s legal, but I’ve never looked into the actual laws. I don’t know why a company should track my personal time outside the office. But what are we supposed to do about it? We all need a job, and each one comes with a price.”

On Thursday Megan met with Debbie and expressed her concerns about the information GAC collects through the employee tracking activities. After she finished, Debbie responded. “Don’t be so naïve, Megan. You know as well as I do what employees do outside of work could legally hurt the company. It’s also necessary to make sure employees aren’t sharing confidential information with rivals. This is a competitive industry.”

“But what about this employee using the company car to visit his daughter in the hospital? It was outside work hours and I heard his daughter is sick. What about an individual’s right to privacy concerning medical records?”

Debbie brushed her concerns aside. “We don’t have access to anybody’s medical records. We got this from the GPS device in the company-owned car issued to him. We can’t make exceptions for these types of things. Our reputation for ethics is excellent.”

Then Debbie said, “I hope you haven’t spoken to anyone about these cases because that

After Megan Jones finished her BS degree in Management at The University of Rhode Island, she landed a great job with the “app” developing company Global App Creations (GAC). In her six months of training in Human Resources (HR) she faced challenges, but enjoyed working with people and solving their problems.

On Monday morning Megan’s boss, Debbie, placed a 20 - inch-thick personnel folder on her desk. “Megan, I want you to review these files and by Friday start the process of finding possible ethics violations. Some employees know this is coming, while others don’t have a clue. It’s your job to write them up for ethics violations and suggest whether you think some of them should go to legal as well. I will add my write-up to each one so you won’t be the only one making the decisions. For now, I’ll make the primary decisions, but sooner or later you’ll be in charge of these tasks. If you have any questions, just stop by and we can talk.”

That afternoon Megan began going through the files. Some were straightforward involving theft of office supplies, inappropriate remarks, and tardiness. GAC’s code was straightforward on such matters. Yet other events appeared confusing. One salesperson was getting an official reprimand for using a company car for personal activities. This didn’t make sense because all the salespeople drove company cars they took home after work. According to the file, the person visited a hospital ten miles away every evening for the past month. Megan realized every GAC car was equipped with a GPS device. While she didn’t think it was illegal for companies to install tracking devices on items they owned, she heard having information about health or religion could become the basis of a lawsuit if the person’s employment was terminated.

The most shocking file Megan reviewed was that of another employee being fired for sharing confidential information with a competitor. The file contained reports on computer activity, cell phone usage, GPS tracking, and included audio

AN ETHICAL DILEMMA *

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30 Part 1: An Overview of Business Ethics

violates confidentiality. Your job is to review the files and suggest appropriate action. All files and communications about the files are confidential.”

QUESTIONS | EXERCISES 1. If tracking employees through technology is not

illegal, why should Megan be concerned if she is not involved in any misconduct?

2. At this point, what are Megan’s alternatives to resolve her current dilemma about her involvement and knowledge about GAC’s tracking employees?

3. Who should have a stake or an interest in how GAC tracks and monitors its employees?

* This case is strictly hypothetical; any resemblance to real persons, companies, or situations is coincidental.

Business ethics issues, conflicts, and successes revolve around relationships. Build-ing effective relationships is considered one of the most important areas of busi-ness today. Many companies consider business ethics as a team sport where each member performs and supports others. A business exists because of relationships between employees, customers, shareholders or investors, suppliers, and managers who develop strategies to attain success. In addition, an organization usually has a gov- erning authority, often called a board of directors, that provides oversight and direc- tion to assure the organization stays focused on its objectives in an ethical, legal, and socially responsible manner. When unethical acts are discovered in organizations, in most instances cooperation or complicity facilitated the acceptance and perpetuation of the unethical conduct. 1 Few decisions are made by one individual. Therefore, relationships are associated with organizational success and also organizational misconduct.

A stakeholder framework identifies the internal stakeholders (employees, boards of directors, and managers), and the external stakeholders (customers, special interest groups, regulators, and others) who agree, collaborate, and engage in confrontations on ethical issues. Most ethical issues exist because of conflicts in values and belief patterns about right and wrong among and within stakeholder groups. This framework allows an organization to identify, monitor, and respond to the needs, values, and expectations of different stakeholder groups.

The formal system of accountability and control of ethical and socially responsi- ble behavior is corporate governance. In theory, the board of directors provides over- sight for all decisions and use of resources. Ethical issues relate to the role of the board of directors, relationships with shareholders, internal control, risk management, and executive compensation. Ethical leadership is associated with appropriate corporate governance.

In this chapter, we first focus on the concept of stakeholders and examine how a stakeholder framework helps us understand organizational ethics. Then we identify stake- holders and the importance of a stakeholder orientation. Using the stakeholder frame- work, we explore the concept and dimensions of social responsibility. Next, we examine corporate governance as a dimension of social responsibility and ethical decision making to provide an understanding of the importance of stakeholder oversight. Finally, we pro- vide the steps for implementing a stakeholder perspective on social responsibility and ethical decisions in business.

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Chapter 2: Stakeholder Relationships and Social Responsibility 31

STAKEHOLDERS DEFINE ETHICAL ISSUES IN BUSINESS

In a business context, customers, investors and shareholders, employees, suppliers, gov- ernment agencies, communities, and many others who have a “stake” or claim in some aspect of a company’s products, operations, markets, industry, and outcomes are known as stakeholders . Business influences these groups, but these groups also have the ability to influence business; thus, the relationship between companies and their stakeholders is a two-way street. 2 Sometimes activities and negative press generated by special interest groups force a company to change its practices. For example, consumer groups have put pressure on government and business to decrease the amount of sodium, sugars, and other fatty ingredients in fast food and sodas. This increased pressure as well as the trend toward healthier food prompted Olive Garden, Red Lobster, and Carl’s Jr. to reduce the amount of sodium in some menu items. Additionally, Boston Market removed salt shakers from tables in their restaurants. 3

There are three approaches to stakeholder theory: normative, descriptive, and instrumental approaches. 4 The normative approach identifies ethical guidelines that dictate how firms should treat stakeholders. Principles and values provide direction for normative decisions. The descriptive approach focuses on the actual behavior of the firm and usually addresses how decisions and strategies are made for stakeholder relationships. The instrumental approach to stakeholder theory describes what hap- pens if firms behave in a particular way. 5 This approach is useful because it exam- ines relationships involved in the management of stakeholders including the processes, structures, and practices that implement stakeholder relationships within an organiza- tion. The survival and performance of any organization is a function of its ability to create value for all primary stakeholders and attempt to do this by not favoring one group over the others. 6

Many firms experience conflicts with key stakeholders and consequently damage their reputations and shareholder confidence. While many threats to reputations stem from uncontrollable events such as economic conditions, ethical misconduct is more difficult to overcome than poor financial performance. Stakeholders most directly affected by negative events experience a corresponding shift in their perceptions of a firm’s reputation. On the other hand, firms sometimes receive negative publicity for misconduct that destroys trust and tarnishes their reputations, making it more difficult to retain existing customers and attract new ones. 7 To maintain the trust and confidence of its stakeholders, CEOs and other top managers are expected to act in a transparent and responsible manner. Providing untruthful or deceptive information to stakeholders is, if not illegal, certainly unethical, and can result in a loss of trust. Brian Dunn, former CEO of Best Buy, was fired for having an inappropriate relationship with an employee. Richard Schulze, founder of Best Buy and former Chairman of the company, was also ousted when it was determined he knew about the relationship but failed to report it to the audit panel of the board. 8

Ethical misconduct and decisions that damage stakeholders generally impacts the company’s reputation in terms of both investor and consumer confidence. As inves- tor perceptions and decisions begin to take their toll, shareholder value drops, expos- ing the company to consumer scrutiny that can increase the damage. According to

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32 Part 1: An Overview of Business Ethics

a recent Edelman trust survey, three industries in terms of the lowest level of trust were the media, banks, and financial services; the most trusted industries were tech- nology, automotive, and food and beverage. 9 Reputation is a factor in consumers’ perceptions of product attributes and corporate image and can lead to consumer will- ingness to purchase goods and services at profitable prices. Perceived wrongdoing or questionable behavior may lead to boycotts and aggressive campaigns to dampen sales and earnings. When Apple decided to leave the green registry EPEAT, a government- backed registry that certifies products based on their sustainability, the company did not anticipate the backlash from governments. San Francisco announced it would boycott Apple by no longer purchasing Apple computers for its agencies. Under this pressure, Apple rejoined the registry. 10 New reforms intended to improve corporate accountability and transparency suggest that stakeholders, including regulatory agen- cies, local communities, attorneys, and public accounting firms play a major role in fostering responsible decision making. 11 Stakeholders apply their values and stan- dards to diverse issues, including 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 an organization bears by scrutinizing its effects on the issues of concern to its stakeholders. 12

Stakeholders provide resources critical to a firm’s long-term success. These resources may be 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 with word-of-mouth promotion; local communities provide infrastructure; and the media transmits positive corporate images. In a spirit of reciprocity, stakeholders should be fair, loyal, and treat the corporation in a responsible way. 13 When individual stakeholders share expectations about desirable business conduct, they may choose to establish or join formal communities dedicated to defining and advocating these values and expectations. Stakeholders’ abilities to withdraw these needed resources gives them power over businesses. 14

Identifying Stakeholders We can identify two types of stakeholders. Primary stakeholders are those whose continued association is absolutely necessary for a firm’s survival. These include employees, custom- ers, investors, and shareholders, as well as the governments and communities that provide necessary infrastructure. Some firms take actions that damage relationships with primary stakeholders. Figure 2–1 indicates that strong ethical corporate cultures have decreased in recent years. Ethical corporate cultures are important because they are linked to positive relationships with stakeholders. By the same token, concern for stakeholders’ needs and expectations is necessary to avoid ethical conflicts.

Secondary stakeholders do not typically engage in transactions with a company and are therefore not essential to its survival. These include the media, trade associations, and special interest groups like the American Association of Retired People (AARP), a special interest group working to support retirees’ rights such as health care benefits. Both primary and secondary stakeholders embrace specific values and standards that dictate accept- able and unacceptable corporate behaviors. It is important for managers to recognize that

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Chapter 2: Stakeholder Relationships and Social Responsibility 33

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. 15 Table 2–1 shows a select list of issues important to various stakeholder groups and identifies how corporations impact these issues.

Figure 2–2 offers a conceptualization of the relationship between businesses and stake- holders. In this stakeholder interaction model , there are reciprocal relationships between the firm and a host of stakeholders. In addition to the fundamental input of investors, employ- ees, and suppliers, this approach recognizes other stakeholders and explicitly acknowledges that dialogue exists between a firm’s internal and external environments. Corporate social responsibility actions that put employees at the center of activities gain the support of both external and internal stakeholders. 16

A Stakeholder Orientation The degree to which a firm understands and addresses stakeholder demands can be referred to as a stakeholder orientation . A stakeholder orientation involves “activities and processes within a system of social institutions that facilitate and maintain value through exchange relationships with multiple stakeholders.” 17 This orientation comprises three sets of activities: (1) the organization-wide generation of data about stakeholder groups and assessment of the firm’s effects on these groups; (2) the distribution of this informa- tion throughout the firm; and (3) the responsiveness of the organization as a whole to this information. 18

9%

100%

80%

60%

40%

20%

20 00

20 03

20 05

20 07

20 09

20 11

9%

34%

48%

9%

30%

52%

9%

9%

29%

48%

14%

11%

28%

44%

17%

9%

26%

44%

21%

11%

31%

40%

18%

Pe rc

en t i

n A

gr ee

m en

t

NBES Year

Culture Strength

Weak Weak Leaning Strong Leaning Strong

FIGURE 2–1 Decline in the Strength of Ethical Cultures

Note: Due to rounding, some numbers do not equal 100 percent.

Source: Ethics Resource Center, 2011 National Business Ethics Survey (Arlington, VA: Ethics Resource Center, 2012), p. 19.

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34 Part 1: An Overview of Business Ethics

TABLE 2–1 Examples of Stakeholder Issues and Associated Measures of Corporate Impacts

Stakeholder Groups and Issues Potential Indicators of Corporate Impact on These Issues

Employees

1. Compensation and benefits • Ratio of lowest wage to national legal minimum or to local cost of living

2. Training and development • Changes in average years of training of employees

3. Employee diversity • Percentages of employees from different genders and races

4. Occupational health and safety • Standard injury rates and absentee rates

5. Communications with management • Availability of open-door policies or ombudsmen

Customers

1. Product safety and quality • Number of product recalls over time

2. Management of customer complaints

• Number of customer complaints and availability of procedures to answer them

3. Services to disabled customers • Availability and nature of measures taken to ensure services to disabled customers

Investors

1. Transparency of shareholder communications

• Availability of procedures to inform shareholders about corporate activities

2. Shareholder rights • Frequency and type of litigation involving violations of shareholder rights

Suppliers

1. Encouraging suppliers in developing countries

• Prices offered to suppliers in developed countries in comparison to countries’ other suppliers

2. Encouraging minority suppliers • Percentage of minority suppliers

Community

1. Public health and safety protection • Availability of emergency response plan

2. Conservation of energy and materials • Data on reduction of waste produced and comparison to industry

3. Donations and support of local organizations

• Annual employee time spent in community service

Environmental Groups

1. Minimizing the use of energy • Amount of electricity purchased; percentage of “green” electricity

2. Minimizing emissions and waste • Type, amount, and designation of waste generated

3. Minimizing adverse environmental effects of goods and services

• Percentage of product weight reclaimed after use

© C

en ga

ge L

ea rn

in g

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Chapter 2: Stakeholder Relationships and Social Responsibility 35

Generating data about stakeholders begins with identifying the stakeholders relevant to the firm. Relevant stakeholder groups should be analyzed on the basis of the power each enjoys, as well as by the ties between them and the company. Next, the firm should characterize the concerns about the business’s conduct each relevant stakeholder group shares. This information is derived from formal research, including surveys, focus groups, Internet searches, and press reviews. For example, Best Buy obtains input on social and environmental responsibility issues from company representatives, suppliers, customers, and community leaders. Shell has an online discussion forum that invites website visitors to express their opinions on the implications of the company’s activities. Employees and managers also generate this information informally as they carry out their daily activities. For example, purchasing managers know about suppliers’ demands, public relations execu- tives are tuned into the media, legal counselors are aware of the regulatory environment, financial executives connect to investors, sales representatives are in touch with customers, and human resources advisers communicate directly with employees. Finally, companies should evaluate their impact on the issues of importance to the various stakeholders they identify. 19 While shareholders desire strong profitability and growth, societal stakeholders have needs extending beyond these two requirements. 20

Given the variety of employees involved in the generation of information about stake- holders, it is essential the information gathered be circulated throughout the firm. The firm must facilitate the communication of information about the nature of relevant stake- holder communities, issues, and impact of the firm on these issues to all members of the organization. The dissemination of stakeholder intelligence can be formally organized through newsletters and internal information forums. 21 In particular, companies should use these activities to communicate the company’s code of conduct to employees. Such

COMPANY

Special Interest Groups The Mass Media

Trade Associations Competitors

Government Regulatory Agencies Shareholders

EmployeesCustomers

SuppliersCommunity

Primary stakeholders

Secondary stakeholders

FIGURE 2–2 Interactions between a Company and Its Primary and Secondary Stakeholders

Source: Adapted from Isabelle Maignan, O. C. Ferrell, and Linda Ferrell, “A Stakeholder Model for Implementing Social Responsibility in Marketing.”

European Journal of Marketing 39 (2005): 956–977. Used with permission.

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36 Part 1: An Overview of Business Ethics

communication informs employees about appropriate and inappropriate conduct within the organization. Research suggests employees in organizations with ethical codes of con- duct are less accepting of potential misconduct toward stakeholders. 22 Ethical codes are of little use if they are not effectively communicated throughout the firm.

A stakeholder orientation is not complete without including activities that address stakeholder issues. For example, manufacturers in some countries have been under attack for product quality issues and safety violations. Walmart came into the spotlight when the public learned that a Bangladeshi factory with unsafe work conditions made goods for the retailer. This connection was discovered after a fire in the factory killed 112 workers. Walmart claimed some suppliers used the factory without approval. Even if Walmart did not have knowledge about the factory, as the most powerful member of the supply chain the company is expected to promote safety and workers’ rights throughout its distribution network. 23

The responsiveness of an organization as a whole to stakeholder intelligence consists of the initiatives the firm adopts to ensure it abides by or exceeds stakeholder expecta- tions and has a positive impact on stakeholder issues. Such activities are likely specific to a particular stakeholder group (for example, family-friendly work schedules) or to a particu- lar stakeholder issue (such as pollution reduction programs). These responsive processes typically involve participation of the concerned stakeholder groups. Kraft, for example, includes special interest groups and university representatives in its programs so the com- pany is sensitized to present and future ethical issues.

A stakeholder orientation can be viewed as a continuum in that firms are likely to adopt the concept to varying degrees. To gauge a firm’s stakeholder orientation, it is neces- sary to evaluate the extent the firm adopts behaviors that typify the generation and dis- semination of stakeholder intelligence and the responsiveness to this intelligence. A given organization may generate and disseminate more intelligence about some stakeholder communities than others and respond accordingly. 24

SOCIAL RESPONSIBILITY AND ETHICS

The terms ethics and social responsibility are often used interchangeably, but each has a distinct meaning. In Chapter 1 , we defined social responsibility as an organization’s obliga- tion to maximize its positive impact on stakeholders and minimize its negative impact. For example, Google makes it a mission to become a zero-carbon company by investing in alternative energy, purchasing carbon offsets, and constructing more energy-efficient data centers. 25 Intuit matches employee donations and gives employees paid time off for volunteering in their communities. 26 SC Johnson gives 5 percent of pre-tax profits to corporate giving and is investing in wind turbines to power some of its manufactur- ing plants. 27 Conversely, one study found that a firm’s sales margin will be damaged by the unethical treatment of stakeholders. 28 Many other businesses have tried to determine what relationships, obligations, and duties are appropriate between their organizations and various stakeholders. Social responsibility can be viewed as a contract with society, whereas business ethics involves carefully thought-out rules or heuristics of business con- duct that guide decision making.

There are four levels of social responsibility—economic, legal, ethical, and philan- thropic (see Figure 2–3 ). 29 At the most basic level, companies have a responsibility to be

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Chapter 2: Stakeholder Relationships and Social Responsibility 37

profitable at an acceptable level to meet the objectives of shareholders and create value. Of course, businesses are also expected to obey all relevant laws and regulations. For example, the European Union established an online privacy law going beyond what other countries require. Under the law individuals will be able to delete uploaded personal data if there are no legitimate grounds for retaining it. The law also addresses cookies, the common Internet files websites use to remember data about users that other firms collect to track users’ online behavior. This means if a U.S. company such as Google wants to do business in the EU, it must obey the law or pay up to $ 1.4 million per violation. 30

Business ethics, as previously defined, comprises principles and values that meet the expectations of stakeholders. Philanthropic responsibility refers to activities that are not required of businesses but that contribute to human welfare or goodwill. Ethics, then, is one dimension of social responsibility. Ethical decisions by individuals and groups drive appro- priate decisions and are interrelated with all of the levels of social responsibility. For exam- ple, the economic level can have ethical consequences when making managerial decisions.

The term corporate citizenship is often used to express the extent to which businesses strategically meet the economic, legal, ethical, and philanthropic responsibilities placed on them by various stakeholders. 31 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 its stakeholders expect. Corporate citizenship involves acting on the firm’s commitment to corporate citizenship philosophy and measuring the extent to which it follows through by actually implementing citizen- ship initiatives. Table 2–2 lists some of the world’s most ethical companies, all of which have demonstrated their commitment to stakeholders. As Chapter 1 demonstrated, many of these companies have superior financial performance compared to the indexes of other publically traded firms.

Reputation is one of an organization’s greatest intangible assets with tangible value. The value of a positive reputation is difficult to quantify, but it is important. A single neg- ative incident can influence perceptions of a corporation’s image and reputation instantly and for years afterward. Corporate reputation, image, and brands are more important

Philanthropic: “giving back” to society

Ethical: following standards of acceptable behavior as judged                by stakeholders

Economic: maximizing stakeholder wealth and/or value

Legal: abiding by all laws and government regulations

FIGURE 2–3 Steps of Social Responsibility

Source: Adapted from Archie B. Carroll, “The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders,”

Business Horizons (July–August 1991): 42, Fig. 3.

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38 Part 1: An Overview of Business Ethics

than ever and are among the most critical aspects of sustaining relationships with con- stituents including investors, customers, employees, media, and regulators. Although an organization does not control its reputation in a direct sense, its actions, choices, behav- iors, and consequences influence stakeholders’ perceptions of it. For instance, employees are likely to perceive their firm’s corporate social responsibility initiatives as authentic if the program appears to fit with the company’s true identity and if they take a leadership role in these initiatives. Employees who feel their firms’ corporate social responsibility programs are authentic are more likely to identify and connect with the organization. 32

ISSUES IN SOCIAL RESPONSIBILITY

Social responsibility rests on a stakeholder orientation. The realities of global warming, obesity, consumer protection, and other issues are causing companies to look at a broader, more inclusive stakeholder orientation. In other words, a broader view of social responsi- bility looks beyond pragmatic and firm-centric interests and considers the long-term wel- fare of society. Each stakeholder is given due consideration. There needs to be a movement away from self-serving “co-optation” and a narrow focus on profit maximization. 33 In fact, there is strong evidence that an overemphasis on profit maximization is counter-produc- tive. Long-term relationships with stakeholders develop trust, loyalty, and the performance necessary to maintain profitability. Issues generally associated with social responsibility can be separated into four general categories: social issues, consumer protection, sustain- ability, and corporate governance.

TABLE 2–2 A Selection of the World’s Most Ethical Companies

L’ORÉAL Salesforce.com , Inc.

Xerox T-Mobile USA

OfficeMax Hasbro

Cummins, Inc. Microsoft Corporation

Ford Motor Company ARAMARK

General Electric Eaton

PepsiCo International Paper

Whole Foods Market Time Warner, Inc.

Aflac eBay

Petco Intel Corporation

Kellogg Company Gap

Starbucks UPS

Target Waste Management

Source: Ethisphere Institute, “2013 World’s Most Ethical Companies,” Ethisphere , http://m1.ethisphere.com/wme2013/index.html (accessed March 7, 2013).

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Chapter 2: Stakeholder Relationships and Social Responsibility 39

Social issues are associated with the common good. In other words, social issues deal with concerns affecting large segments of society and the welfare of the entire society. In terms of social responsibility, managers address social issues by examining the different groups to which they have an obligation. Marketers failing to meet these social obligations can create criticism and negative publicity for their organizations.

Social issues may encompass events such as jobs lost through outsourcing, abortion, gun rights, and poverty. While these issues may be indirectly related to business, there is a need to reflect on them in developing strategies in certain cases. Issues that directly relate to business include obesity, smoking, and exploiting vulnerable or impoverished populations, as well as a number of other issues. For example, marketers are increas- ingly targeting food advertising to children through Internet websites. One study found approximately 85 percent of food brands have websites with content targeted toward children. 34 With the childhood obesity epidemic increasing, marketers of foods per- ceived to be unhealthy are being pressured to change their strategies to account for this growing concern. In addition, some economic issues have ramifications to society such as antitrust, employee well-being, insider trading, and other issues that diminish compe- tition and consumer choice.

Another major social issue gaining prominence involves Internet tracking and pri- vacy for marketing purposes. Many consumers are shocked when they realize marketers are using cookies and other mechanisms to track their online activity. Internet privacy may soon become a consumer protection issue because the government is considering passing legislation limiting the types of tracking companies can perform over the Inter- net without users’ permission. On the other hand, companies that develop signals on their websites reassuring consumers their information will be kept private are more likely to establish trust with consumers, which could help to build mutually beneficial online relationships. 35

The second major issue is consumer protection, which often occurs in the form of laws passed to protect consumers from unfair and deceptive business practices. Issues involving consumer protection usually have an immediate impact on the consumer after a purchase. Major areas of concern include advertising, disclosure, financial practices, and product safety. Because consumers are less knowledgeable about certain products or business practices, it is the responsibility of companies to take precau- tions to prevent consumers from being harmed by their products. For instance, busi- nesses marketing products that could potentially be harmful have responsibility to put warning labels on their products. The Federal Trade Commission and the Consumer Financial Protection Bureau are intent on enforcing consumer protection laws and pursuing violations.

Deceptive advertising has been a hot topic in the consumer protection area. For instance, covert marketing occurs when companies use promotional tools to make consumers believe the promotion is coming from an independent third party rather than from the company. 36 Often companies are forced to disclose to consumers if they are paying another entity to promote their products. However, as with many busi- ness ethics issues, some advertising practices skirt the line between ethical and ques- tionable behavior. For instance, some believe promotions embedded into television programs without informing consumers are a type of covert marketing that warrants greater consumer protection. 37 Companies must be knowledgeable about consumer

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40 Part 1: An Overview of Business Ethics

protection laws and recognize whether their practices could be construed as decep- tive or unfair.

The third major issue is sustainability. We define sustainability as the potential for the long-term well-being of the natural environment, including all biological entities, as well as the mutually beneficial interactions among nature and individuals, organizations, and business strategies. With major environmental challenges such as global warming and the passage of new environmental legislation, businesses can no longer afford to ignore the natural environment as a stakeholder. Even industries traditionally considered high in pol- lution, such as the oil and gas industry, are investing in sustainable practices like alternative energy. Because sustainability is a major ethical issue, we cover this topic in more detail in Chapter 12 .

Corporate governance is the fourth major issue of corporate social responsibility. Corporate governance involves the development of formal systems of accountability, over- sight, and control. Strong corporate governance mechanisms remove the opportunity for employees to make unethical decisions. Research has shown that corporate governance has a positive relationship with social responsibility. For instance, one study revealed a positive correlation with corporate governance and corporate social responsibility engagement. 38 Additionally, firms with strong corporate governance mechanisms that prompt them to disclose their social responsibility initiatives can establish legitimacy and trust among their stakeholders. 39 We discuss corporate governance in more detail later in this chapter.

SOCIAL RESPONSIBILITY AND THE IMPORTANCE OF A STAKEHOLDER ORIENTATION

Many business people and scholars question the role of ethics and social responsi- bility in business. Legal and economic responsibilities are generally accepted as the most important determinants of performance. “If this is well done,” say classical economic theorists, “profits are maximized more or less continuously and firms carry out their major responsibilities to society.” 40 Some economists believe if companies address economic and legal issues they satisfy the demands of society, and trying to anticipate and meet additional needs would be almost impossible. Milton Friedman has been quoted as saying “the basic mission of business [is] … to produce goods and services at a profit, and in doing this, business [is] making its maximum contribu- tion to society and, in fact, being socially responsible.” 41 Even with the business ethics scandals of the twenty-first century, Friedman suggests that although those individu- als guilty of wrongdoing should be held accountable, the market is a better deterrent to wrongdoing than new laws and regulations. 42 Thus, Friedman would diminish the role of stakeholders such as the government and employees in requiring businesses to demonstrate responsible and ethical behavior. Friedman’s capitalism is a far cry from Adam Smith, one of the founders of capitalism. Smith developed the concept of the invisible hand and explored the role of self-interest in economic systems; however, he went on to explain that the “common good is associated with six psychological motives and that each individual has to produce for the common good, with values such as

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Chapter 2: Stakeholder Relationships and Social Responsibility 41

Propriety, Prudence, Reason, Sentiment and promoting the happiness of mankind.” 43 These values correlate with the needs and concerns of stakeholders. Smith established normative expectations for motives and behaviors in his theories about the invisible hand. For instance, he distinguished justice as consisting of perfect or inalienable rights, such as the right to property, from benefi- cence, consisting of imperfect rights that should be performed but cannot be forced. A stakeholder orientation perspective would advocate managers take into account both the perfect and imperfect rights of stake- holders. Yet when tradeoffs are neces- sary, justice should be given priority over beneficence. 44

Evidence suggests caring about the well- being of stakeholders leads to increased profits. One study found when firms were placed on a socially responsible index, stake- holders reacted positively. 46 Other stud- ies also associate a stakeholder orientation with increased profits. 47 Therefore, although the purpose of a stakeholder orientation is to maximize positive outcomes that meet stakeholder needs, 48 the support stakehold- ers have for companies they perceive to be socially responsible also serve to enhance the firms’ profitability. Table 2–3 lists CR Maga- zine’s best companies in terms of corporate citizenship and social responsibility. Many of these firms are highly profitable, succeeding both ethically and financially.

CORPORATE GOVERNANCE PROVIDES FORMALIZED RESPONSIBILITY TO STAKEHOLDERS

Most businesses, and often many subjects taught in business schools, operate under the assumption that the purpose of business is to maximize profits for shareholders—an assumption manifest, for example, in the 1919 decision of the Michigan Supreme Court. In Dodge v. Ford Motor Co. 49 the court ruled that a business exists for the profit of sharehold- ers, and the board of directors should focus on that objective. In contrast, the stakeholder

Is It Acceptable to Promote a Socially Irresponsible but Legal Product to Stakeholders?

When you think of cheating, you may think of irresponsible behavior in the classroom. But Noel Biderman created a company called Avid Life Media (based in Toronto) that is dedicated to another form of cheating.

Avid Life Media is owner of six website brands, including Cougar Life and Hot or Not. One of its more controversial brands is Ashley Madison, the motto of which is “Life is Short. Have an Affair.” The website has more than 8.5 million members. The company encourages married men and women to spend less than a minute to register on the largest website to openly promote infidelity. The company employs hundreds of programmers, designers, and marketers and has conducted a private placement for investors. While many stakeholders would say the purpose of the website is wrong, there is nothing illegal about this business. But the fact that the website helps people engage in cheating on their spouses— including providing an email address to which one’s spouse would never have access—has many people concerned. They consider facilitating secrecy for socially questionable conduct to be wrong. 45

1. There is nothing wrong in providing a legal service many people desire.

2. From a stakeholder perspective, it is wrong to provide socially irresponsible services.

DEBATE ISSUE TAKE A STAND

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42 Part 1: An Overview of Business Ethics

model places the board of directors in the position of balancing the interests and conflicts of a company’s various constituencies. External control of the corporation resides not only with government regulators but also with key stakeholders including employees, consum- ers, and communities, which exert pressure for responsible conduct. In fact, social respon- sibility activities have a positive impact on consumer identification with and attitude toward the brand. 50 Mandates for stakeholder interests have been institutionalized in legis- lation that provides incentives for responsible conduct. Shareholders have been pushing for more power in the boardroom, as many feel their interests have not been well represented in the resolution of issues such as executive compensation.

Today, the failure to balance stakeholder interests can result in a failure to maximize shareholders’ wealth. Money managers sometimes engage in risky trading that leads to large losses, as evidenced in the conduct of traders at Citi. A trader at JP Morgan was nick- named the London Whale for his risky trades. Eventually, these trades lost the company billions. Most firms are moving toward a more balanced stakeholder model as they see that this approach sustains the relationships necessary for long-term success.

Both directors and officers of corporations are fiduciaries for the shareholders. Fidu- ciaries are persons placed in positions of trust that act on behalf of the best interests of the organization. They have what is called a duty of care, or a duty of diligence, to make informed and prudent decisions. 51 Directors have a duty to avoid ethical misconduct and provide leadership in decisions to prevent ethical misconduct in the organization.

Directors are not generally held responsible for negative outcomes if they have been informed and diligent in their decision making. Board members have an obligation to request information, conduct research, use accountants and attorneys, and obtain the ser- vices of ethical compliance consultants to ensure the corporations in which they have an interest are run in an ethical manner. The National Association of Corporate Directors, a board of directors’ trade group, has helped formulate a guide for boards to help them do a better job of governing corporate America. 52

Directors share a duty of loyalty, which means all their decisions should be in the best 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. For

TABLE 2–3 CR’s Best Corporate Citizens

1 Bristol-Myers Squibb

2 International Business Machines Corp.

3 Intel Corp.

4 Microsoft Corporation

5 Johnson Controls Inc.

6 Accenture plc

7 Spectra Energy Corp.

8 Campbell Soup Co.

9 Nike, Inc.

10 Freeport-McMoran Copper & Gold Inc.

Source: CR’s 100 Best Corporate Citizens 2012 , http://www.thecro.com/files/100Best2012_List_3.8.pdf (accessed February 14, 2013).

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Chapter 2: Stakeholder Relationships and Social Responsibility 43

example, before the passage of the Sarbanes–Oxley Act in 2002, directors could give them- selves and their officers interest-free loans. Scandals at Tyco, Kmart, and WorldCom are all associated with officers receiving personal loans that damaged the corporation.

Officer compensation packages present a challenge for directors, especially those on the board who are not independent. Directors have an opportunity to vote for others’ compen- sation in return for their own increased compensation. Following the global financial crisis, many top executives at failed firms received multimillion dollar bonuses in spite of the fact their companies required huge government bailouts simply to stay afloat. This has led to a greater amount of shareholder activism regarding the issue of executive pay. Directors now find shareholders want to vote on executive officers’ compensation, and although their votes are not binding, investor pressure has increased the shareholder role in deciding exec- utive compensation. For instance, investors voted against the compensation plan proposed for Citigroup CEO Vikram Pandit because of dissatisfaction with company performance. 53

Directors’ knowledge about the investments, business ventures, and stock market information of a company creates issues that could violate their duty of loyalty. Insider trading of a firm’s stock has specific rules, and violations should result in serious punish- ment. The obligations of directors and officers for legal and ethical responsibility interface and fit together based on their fiduciary relationships. Ethical values should guide deci- sions and buffer the possibility of illegal conduct. With increased pressure on directors to provide oversight for organizational ethics, there is a trend toward directors receiving training to increase their competency in ethics programs development, as well as other areas such as accounting. Automated systems to monitor and measure the occurrence of ethical issues within organizations are increasingly used in this oversight process.

Accountability is an important part of corporate governance. Accountability refers to how closely workplace decisions align with a firm’s stated strategic direction and its com- pliance 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 aimed at preventing unethical and illegal activities. Control is the process of

TABLE 2–4 Corporate Governance Topics

Executive Compensation

Enterprise-Wide Risk Management

Short- and Long-Term Strategies

Board Composition and Structure

Shareholder Relations

CEO Selection, Termination, and Succession Plans

Role of the CEO in Board Decisions

Auditing, Control, and Integrity of Financial Reporting

Compliance with Government Regulation and Reform

Organizational Ethics Programs

Source: “Corporate Alert: Top 10 Topics for Directors in 2011,” December 6, 2010, http://www.corpgov.deloitte.com/binary/com.epicentric.

contentmanagement.servlet.ContentDeliveryServlet/USEng/Documents/Board%20Governance/Top%2010%20Topics%20for%20Directors%20in

%202011_Akin_120610.pdf (accessed February 15, 2011).

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44 Part 1: An Overview of Business Ethics

auditing and improving organizational decisions and actions. Table 2–4 lists examples of major corporate governance issues.

A clear delineation of accountability helps employees, customers, investors, govern- ment regulators, and other stakeholders understand why and how the organization iden- tifies 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 com- pliance and ethics culture so employees feel integrity is at the core of competitiveness. 54 Even if a company adopts a consensus approach for decision making, there should be oversight and authority for delegating tasks, making difficult and sometimes controver- sial decisions, balancing power throughout the firm, and maintaining ethical compliance. Governance also provides mechanisms for identifying risks and planning for recovery when mistakes or problems occur.

The development of a stakeholder orientation should interface with the corpora- tion’s governance structure. Corporate governance also helps establish the integrity of all relationships. A governance system without checks and balances creates opportuni- ties for top managers to indulge self-interest before those of important stakeholders. For example, while many people lost their investments during the recent financial crisis some CEOs actually made a profit from it. Some directors tweaked performance targets in order to make goals easier to achieve so they could receive more bonus money. Bonuses have become a contentious issue since they are the part of an executive’s pay most tied to per- formance. Many people ask why executives receive bonuses as their companies fail; the fact is most executive bonuses are tied to targets other than stock prices. 55 Concerns about the need for greater corporate governance are not limited to the United States. Reforms in gov- ernance structures and issues are occurring all over the world. 56 Table 2–5 outlines some of the changes we have seen in corporate governance over the past 25 years.

Corporate governance normally involves strategic decisions and actions by boards of directors, business owners, top executives, and other managers with high levels of authority

TABLE 2–5 Changes in Corporate Governance

40 % of boards split the CEO and Chair functions

Boards are getting smaller, with an average of 11 members ( 5 : 1 ratio independent: non-independent)

74 % of boards have mandatory retirement rules for directors

Almost all boards conduct annual board performance evaluations

71 % limit the time that board members can serve on outside boards

21 % of new directors are women, although 10 % of boards have no women directors

Over 50 % of CEOs in the S&P 500 do not serve on outside boards

Important characteristics in directors: strong financial background, industry background, and international experience

Average board member retainer: $ 20,00 in 1986 ($ 40,000 in today’s dollars) and $ 80,000 in 2010

Average total director compensation has risen to $ 215,000 in 2010

Source: Julie Hembrock Daum, “How Corporate Governance Changed from 1986–2010,” Business Week , http://www.businessweek.com/managing/ content/nov2010/ca2010118_316346.htm (accessed April 2, 2013).

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Chapter 2: Stakeholder Relationships and Social Responsibility 45

and accountability. In the past these people have been relatively free from scrutiny, but changes in technology such as social media, consumer activism, as well as recent ethical scandals have brought new attention to communication and transparency. Corporate man- agers engage in dialogue with shareholder activists when the firm is large, responsive to stakeholders, the CEO is the board chair, and there are few large institutional investors that control significant shares of stock. 57

Views of Corporate Governance To better understand the role of corporate governance in business today, we must 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 a citizen, of society, and therefore must assume broad responsi- bilities that include complying with social norms and expectations. From these assump- tions, we can derive two major approaches to corporate governance: the shareholder model and the stakeholder model. 58

The shareholder model of corporate governance is 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 firm’s share- holders. 59 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, in which ownership (investors) and control (managers) are separate. Managers act as agents for investors, whose primary goal is increasing the value of the stock they own. However, investors and managers are distinct parties with unique insights, goals, and values with respect to the business. Managers, for example, may have motivations beyond stockholder value, such as market share, personal compensation, or attachment to particular products and projects. Because of these potential differences, corporate governance mechanisms are needed to align investor and management interests. The shareholder model has been criticized for its singular purpose and focus because there are other ways of “investing” in a business. Suppliers, creditors, customers, employees, business partners, the community, and others also invest their resources into the success of the firm. 60

The stakeholder model of corporate governance adopts a broader view of the purpose of business. Although a company certainly has a responsibility for economic success and viability to satisfy its stockholders, it must also answer to other stakeholders, including employees, suppliers, government regulators, communities, and special interest groups with which it interacts. Because of limited resources, companies must determine which of their stakeholders are primary. Once the primary groups are identified, managers must implement the appropriate corporate governance mechanisms to promote the develop- ment of long-term relationships. 61 This approach entails creating governance systems that consider stakeholder welfare in tandem with corporate needs and interests. Patagonia, Yahoo!, and Google all use the stakeholder model of corporate governance to direct their business activities.

Although these two approaches represent the ends of a continuum, the reality is the shareholder model is a more restrictive precursor to the stakeholder orientation. Many businesses evolved into the stakeholder model as a result of government initiatives, con- sumer activism, industry activity, and other external forces.

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46 Part 1: An Overview of Business Ethics

The Role of Boards of Directors For public corporations, boards of directors hold the ultimate responsibility for their firms’ success or failure, as well as the ethics of their actions. This governing authority is held responsible by the 2004 and 2007 amendments to the Federal Sentencing Guidelines for Organizations (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. Board members have a fiduciary duty, meaning they have assumed a position of trust and con- fidence that entails certain responsibilities, including acting in the best interests of those they serve. Thus, board membership is not intended as a vehicle for personal financial gain; rather, it provides the intangible benefit of ensuring the success of both the organi- zation and the people involved in the fiduciary arrangement. The role and expectations of boards of directors assumed greater significance after the accounting scandals of the early 2000s, and the global financial crisis motivated many stakeholders to demand greater accountability from boards. 62

Despite this new emphasis on accountability for board members, many continue to believe current directors do not face serious consequences for corporate misconduct. Although directors may be sued by shareholders, the SEC does not usually pursue corporate directors for misconduct unless it can be proved they acted in bad faith. The traditional approach to directorship assumed board members managed the corporation’s business, but research and practical observation show that boards of directors rarely, if ever, perform the manage- ment function. 63 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. Therefore, boards of directors primarily concern themselves with monitoring the decisions made by executives on behalf of the company. This function includes choosing top executives, assessing their performance, helping to set strategic direction, and ensuring over- sight, control, and accountability mechanisms are in place. Thus, board members assume ulti- mate authority for their organization’s effectiveness and subsequent performance.

Perhaps one of the most challenging ethical issues boards of directors must deal with is compensation. When considering executive pay raises, directors may put their own self-interest above the interests of shareholders. 64 Another issue is the compensation the directors themselves receive. Trends show that director compensation is rising, with ana- lysts predicting 50 percent of boards could see pay raises of up to 15 percent in a one-year period. Proponents argue that high compensation for part-time work is necessary because directors have a difficult job and good pay is needed to attract top-quality talent. On the other hand, critics believe this level of compensation causes a conflict of interest for direc- tors. Some speculate compensation over $ 200,000 makes directors more complacent; they become less concerned with “rocking the boat” and more concerned with maintaining their high-paying positions. 65 Clearly, the debate over director accountability continues to rage.

Greater Demands for Accountability and Transparency Just as improved ethical decision making requires more of employees and executives, boards of directors are also experiencing a greater demand for accountability and trans- parency. 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

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Chapter 2: Stakeholder Relationships and Social Responsibility 47

officers, consultants, major shareholders, and others who benefit directly from the success of the organization. Directors today are increasingly chosen for their expertise, compe- tence, and ability to bring diverse perspectives to strategic discussions. Outside directors are also thought to bring 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 creates a conflict of interest.

Many of the corporate scandals uncovered in recent years might not have occurred if the companies’ boards of directors were better qualified, knowledgeable, and less biased. Diversity of board members, especially in age and gender, has been associated with improved social performance. 66 Shareholder involvement in changing the makeup of boards has always run into created difficulties. Most boards are not true democracies, and many shareholders have minimal impact on decision making because they are so dis- persed. The concept of board members being linked to more than one company is known as interlocking directorate . The practice is not considered illegal unless it involves a direct competitor. 67 A survey by USA Today found that corporate boards have considerable over- lap. More than 1,000 corporate board members sit on four or more boards, and of the nearly 2,000 boards of directors in the United States, more than 22,000 of their members are linked to boards of more than one company. For example, of the 1,000 largest compa- nies, 20 percent share at least one board member with another top 1,000 firm. This overlap creates the opportunity for conflicts of interest in decision making and limits the indepen- dence of individual boards of directors. In some cases, it seems individuals earned place- ment on multiple boards of directors because they gained a reputation for going along with top management and never asking questions. Such a trend fosters a corporate culture that limits outside oversight of top managers’ decisions.

Although labor and public pension fund activities waged hundreds of proxy battles in recent years, they rarely had much effect on the target companies. Now shareholder activ- ists attack the process by which directors themselves are elected. Shareholders at Saks are not the only ones voting to change board election rules. Resolutions at hundreds of com- panies require candidates for director to gain a majority of votes before they can join the board. It is hoped this practice makes boards of directors more attentive and accountable. 68

Executive Compensation One of the biggest issues corporate boards of directors face is executive 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. 69 How execu- tives are compensated for their leadership, organizational service, and performance has become a controversial topic. After announcing that Hostess would go bankrupt, Hostess CEO Gregory Rayburn was highly criticized for cutting employee salaries but not cutting his own. Although he gave up his bonus, many stakeholders were unhappy he received such high compensation even though the company had failed. 70

Many people believe no executive is worth millions of dollars in annual salary and stock options, even if he or she brings great financial return to investors. Their concerns often center on the relationship between the highest-paid executives and median employee wages in the company. If this ratio is perceived as too large, critics believe employees are not being com- pensated fairly or high executive salaries represent an improper use of company resources. According to the AFL-CIO, the average executive pay of an S&P 500 index company is nearly $ 13 million. Executive bonuses can reach into the hundreds of thousands of dollars. 71

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48 Part 1: An Overview of Business Ethics

Understandably, many stakeholders are angry about this situation. The business press now supports high levels of executive compensation only when directly linked to strong com- pany performance. Although the issue of executive compensation gained much attention in the media of late, some business owners long recognized its potential ill effects. In the early twentieth century, for example, JP Morgan implemented a policy limiting the pay of top man- agers in the businesses he owned to no more than 20 times the pay of any other employee. 72

Other people argue that because executives assume so much risk on behalf of the com- pany, they deserve the rewards that follow from strong company performance. In addi- tion, many executives’ personal and professional lives meld to the extent they are on call 24 hours a day. Because not everyone has the skill, experience, and desire to take on the pressure and responsibility of the executive lifestyle, market forces dictate a high level of compensation. When the pool of qualified individuals is limited, many corporate board members feel offering large compensation packages is the only way to attract and retain top executives, thus ensuring their firms maintain strong leadership. In an era when top execu- tives are increasingly willing to “jump ship” for other firms offering higher pay, potentially lucrative stock options, bonuses, and other benefits, such thinking is not without merit. 73

Executive compensation is a difficult but important issue for boards of directors and other stakeholders to consider because it receives much attention in the media, sparks shareholder concern, and is hotly debated in discussions of corporate governance. One area board members must consider is the extent executive compensation is linked to com- pany performance. Plans basing compensation on the achievement of performance goals, including profits and revenues, are intended to align interests of owners with those of man- agement. Amid rising complaints about excessive executive compensation, an increasing number of corporate boards impose performance targets on the stock and stock options they include in their CEOs’ pay packages. Some boards also reduce executive compen- sation for corporate losses or misconduct. For example, CEO of JP Morgan Chase James Dimon had his compensation cut by half after a high-risk trading scandal cost the firm more than $6.2 billion in trading losses. As CEO he is responsible for noticing red flags that signal potential misconduct in the company. 74

The SEC proposed companies disclose how they compensate lower-ranking employ- ees as well as top executives. This proposal was part of a review of executive pay poli- cies that addressed the belief that many financial corporations have historically taken on too much risk. The SEC believes compensation may be linked to excessive risk-taking. 75 Another issue is whether performance-linked compensation encourages executives to focus on short-term performance at the expense of long-term growth. 76 Shareholders today, however, may be growing more concerned about transparency and its impact on short-term performance and executive compensation. One study determined companies that divulge more details about their corporate governance practices generate higher share- holder returns than less transparent companies. 77

IMPLEMENTING A STAKEHOLDER PERSPECTIVE

An organization that develops effective corporate governance and understands the importance of business ethics and social responsibility in achieving success should also develop processes for managing these important concerns. Although there are different

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Chapter 2: Stakeholder Relationships and Social Responsibility 49

approaches to this issue, we provide basic steps found effective in utilizing the stakeholder framework to manage responsibility and business ethics. The steps include (1) assess- ing the corporate culture, (2) identifying stakeholder groups, (3) identifying stakeholder issues, (4) assessing organizational commitment to social responsibility, (5) identifying resources and determining urgency, and (6) gaining stakeholder feedback. These steps include getting feedback from relevant stakeholders in formulating organizational strategy and implementation.

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 likely to have implications for social responsibility. Relevant existing values and norms are those that specify the stakeholder groups and stakeholder issues deemed most important by the organization. Often, relevant organizational values and norms can be found in corporate documents such as the mission statement, annual reports, sales brochures, and websites. For example, REI states its mission is to “inspire, educate and outfit for a lifetime of outdoor adventure and stewardship.” REI fulfills its mis- sion by offering high-quality outdoor products, investing in green energy, and providing outdoor classes in areas such as rock climbing, cycling, and camping. 78

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 con- frontations exist, there is a need for a decision-making process such as a model of col- laboration to overcome adversarial approaches to problem solving. Managers can identify relevant stakeholders who may be affected by or may influence the development of organi- zational policy.

Stakeholders have a level of power over a business because they are in the position to withhold organizational resources to some extent. Stakeholders have the most power when their own survival is not affected by the success of the organization and when they have access to vital organizational resources. For example, most consumers of shoes do not need to buy Nike shoes. Therefore, if they decide to boycott Nike, they endure only minor inconveniences. Nevertheless, consumer loyalty to Nike is vital to the continued success of the sport apparel giant. A proper assessment of the power held by a given stakeholder com- munity includes an evaluation of the extent to which that community collaborates with others to pressure the firm.

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 stakeholders’ power and legitimacy determines the degree of urgency in addressing their needs. Step 3, then, consists of understanding 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 adversarial approaches to problem solving are clearly inadequate.

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50 Part 1: An Overview of Business Ethics

For example, obesity in children is becoming an issue across groups and stakeholders. 79 The United States is the most obese nation in the world with almost 40 percent of its popula- tion obese or overweight. This results in a huge rise in health problems. Additionally, while Americans have traditionally not supported government health care plans, increasing health care costs are causing some stakeholders to reconsider their stance. Job-based health insur- ance costs for families doubled in the past decade. Over 15 percent of Americans went with- out health insurance in 2011, although the number of uninsured decreased from the previous year. 80 Stakeholder concerns pushed the government into taking action on this important issue through the passage of the Affordable Care Act. The Affordable Care Act is estimated to extend health care coverage to 30 million Americans. 81

Step 4: Assessing Organizational Commitment to Social Responsibility

Steps 1 through 3 are geared toward generating information about social responsibility among a variety of influences in and around an organization. Step 4 brings these three 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 evalu- ate current practices and to select concrete social responsibility initiatives. Firms such as Starbucks selected activities that address stakeholder concerns. Starbucks formalized its initiatives in official documents such as annual reports, web pages, and company bro- chures. Starbucks is concerned with the environment and integrates policies and pro- grams throughout all aspects of its operations to minimize its environmental impact. The company also has many community-building programs that help it to be a good neighbor and contribute positively to the communities where its partners and customers live, work, and play. 82

Step 5: Identifying Resources and Determining Urgency The prioritization of stakeholders and issues and the assessment of past performance lead to the allocation of resources. Two main criteria can be considered: the level of financial and organizational investments required by different actions, and the urgency when priori- tizing social responsibility challenges. When the challenge under consideration is viewed as significant and stakeholder pressures on the issue can be expected, the challenge is con- sidered urgent. For example, the Federal Trade Commission fined Google $ 22.5 million to settle charges it misled users about privacy settings on the Safari web browser. Although users were told they would be opted out of tracking, the company circumvented privacy settings and used cookies to track users for advertising purposes. 83 Internet privacy has become such an issue that regulators are proposing a “Do Not Track” list and a social net- workers’ bill of rights. 84

Step 6: Gaining Stakeholder Feedback Stakeholder feedback is generated through a variety of means. First, stakeholders’ gen- eral assessment of a firm and its practices can be obtained through satisfaction or repu- tation surveys. Second, to gauge stakeholders’ perceptions of a firm’s contributions to specific issues, stakeholder-generated media such as blogs, websites, podcasts, and

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Chapter 2: Stakeholder Relationships and Social Responsibility 51

newsletters can be assessed. Third, more formal research may be conducted using focus groups, observation, and surveys. Many watchdog groups use the web to inform con- sumers and publicize their messages. For example, Consumer Watchdog, a California- based group that keeps an eye on everything from education to the oil industry, called for the new FTC chair to prioritize Internet privacy protection for consumers. This protec- tion includes pressuring Congress to pass Do Not Track legislation, creating legislation to regulate data brokers, and developing a code to increase transparency regarding how mobile devices use data. 85

CONTRIBUTIONS OF A STAKEHOLDER PERSPECTIVE

While we provide a framework for implementing a stakeholder perspective, balanc- ing stakeholder interests requires good judgment. When businesses attempt to provide what consumers want, broader societal interests can create conflicts. Consider that the cheapest car in the world is the Tata Nano, made in India. The Nano has a starting price of $ 2,900 , but it has only a small two-cylinder, 35 - horsepower engine that could be sui- cidal on a modern expressway. Furthermore, the car has poor crash protection and no air bags. The Nano’s manufacturer cuts many corners to be cheap, including using three lug nuts instead of four to hold the wheel to the axle. After launching the car, Tata beefed up the heat shield for the exhaust and added a fuse to the electrical system after several cars caught on fire. The company plans to export the Nano into the United States, but in order to successfully create an export market, the company must install more eco-friendly engines; this will drive up the price. 86 There are a number of ethical, social responsibil- ity, and stakeholder issues with the Nano. Many consumers may only be able to afford a $ 2,900 car. On the other hand, stakeholders concerned with auto safety may object to a car that is potentially dangerous to drive. In the United States, regulatory authorities will prevent its sales as equipped in India. It is clear that balancing stakeholder interests can be a challenging process.

This chapter provides a good overview of the issues, conflicts, and opportunities of understanding more about stakeholder relationships. The stakeholder framework rec- ognizes issues, identifies stakeholders, and examines the role of boards of directors and managers in promoting ethics and social responsibility. A stakeholder perspective creates a more ethical and reputable organization.

SUMMARY

Business ethics, issues, and conflicts revolve around relationships. Customers, investors and shareholders, employees, suppliers, government agencies, communities, and many others who have a stake or claim in an aspect of a company’s products, operations, mar- kets, industry, and outcomes are known as stakeholders. Stakeholders are influenced by and have the ability to affect businesses. Stakeholders provide both tangible and intan- gible resources that are critical to a firm’s long-term success, and their relative ability to withdraw these resources gives them power. Stakeholders define significant ethical issues in business.

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52 Part 1: An Overview of Business Ethics

Primary stakeholders are those whose continued association is absolutely necessary for a firm’s survival. Secondary stakeholders do not typically engage in transactions with a company and are not essential to its survival. The stakeholder interaction model suggests there are reciprocal relationships between a firm and a host of stakeholders. The degree to which a firm understands and addresses stakeholder demands is expressed as a stakeholder orientation and includes three sets of activities: (1) the generation of data about its stake- holder groups and the assessment of the firm’s effects on these groups, (2) the distribution of this information throughout the company, and (3) the responsiveness of every level of the business to this intelligence. A stakeholder orientation can be viewed as a continuum in that firms are likely to adopt the concept to varying degrees.

Although the terms ethics and social responsibility are often used interchangeably, they have distinct meanings. Social responsibility in business refers to an organization’s obliga- tion to maximize its positive impact and minimize its negative impact on society. There are four levels of social responsibility—economic, legal, ethical, and philanthropic—and they can be viewed as a pyramid. The term corporate citizenship is used to communicate the extent businesses strategically meet the economic, legal, ethical, and philanthropic respon- sibilities placed on them by their stakeholders.

From a social responsibility perspective, business ethics embodies standards, norms, and expectations that reflect the concerns of major stakeholders including consumers, employees, shareholders, suppliers, competitors, and the community. Only if firms include ethical concerns in foundational values and incorporate ethics into business strategies can social responsibility as a value be embedded in daily decision making.

Issues in social responsibility include social issues, consumer protection issues, sus- tainability, and corporate governance. Social issues are associated with the common good and include such issues as childhood obesity and Internet privacy. Consumer protection often occurs in the form of laws passed to protect consumers from unfair and deceptive business practices. Sustainability is the potential for the long-term well-being of the natural environment, including all biological entities, as well as the mutually beneficial interactions among nature and individuals, organizations, and business strategies. Corporate gover- nance involves the development of formal systems of accountability, oversight, and control.

Most businesses operate under the assumption that the main purpose of business is to maximize profits for shareholders. The stakeholder model places the board of directors in the position of balancing the interests and conflicts of various constituencies. Both directors and officers of corporations are fiduciaries for the shareholders. Directors have a duty to avoid ethical misconduct and provide leadership in decisions to prevent ethical misconduct in their organizations. To remove the opportunity for employees to make unethical decisions, most companies develop formal systems of accountability, oversight, and control known as corpo- rate governance. Accountability refers to how closely workplace decisions are aligned with a firm’s stated strategic direction and its compliance with ethical and legal considerations. Over- sight provides a system of checks and balances that limit employees’ and managers’ opportuni- ties to deviate from policies and strategies intended to prevent unethical and illegal activities. Control is the process of auditing and improving organizational decisions and actions.

There are two perceptions of corporate governance that can be viewed as a contin- uum. The shareholder model is founded in classic economic precepts, including the max- imization of wealth for investors and owners. The stakeholder model adopts a broader view of the purpose of business that includes satisfying the concerns of other stakehold- ers, from employees, suppliers, and government regulators to communities and special interest groups.

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Chapter 2: Stakeholder Relationships and Social Responsibility 53

Two major elements of corporate governance that relate to ethical decision making are the role of the board of directors and executive compensation. The members of a pub- lic corporation’s board of directors assume legal responsibility for the firm’s resources and decisions. Important issues related to boards of directors include accountability, transpar- ency, and independence. Boards of directors are also responsible for appointing top execu- tive officers and determining their compensation. Concerns about executive pay center on the often-disproportionate relationship between executive pay and median employee wages in the company.

An organization that develops effective corporate governance and understands the importance of business ethics and social responsibility in achieving success should develop a process for managing these important concerns. Although there are different approaches, steps have been identified that have been found effective in utilizing the stakeholder framework to manage responsibility and business ethics. These steps are: (1) assessing the corporate culture, (2) identifying stakeholder groups, (3) identifying stakeholder issues, (4)  assessing organizational commitment to social responsibility, (5) identifying resources and determining urgency, and (6) gaining stakeholder feedback.

IMPORTANT TERMS FOR REVIEW

stakeholder 31

primary stakeholder 32

secondary stakeholder 32

stakeholder interaction model 33

stakeholder orientation 33

corporate citizenship 37

reputation 37

corporate governance 40

shareholder model of corporate governance 45

stakeholder model of corporate governance 45

interlocking directorate 47

executive compensation 47

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54 Part 1: An Overview of Business Ethics

RESOLVING ETHICAL BUSINESS CHALLENGES *

Demarco just graduated from Texas University and had been snatched up by Xeon Natural Resources Incorporated, one of the top natural resource extraction companies in the world. Because he was Brazilian, bi-lingual, and spoke several spe- cific Brazilian dialects, his stationing in Brazil was a no-brainer. Xeon was deeply involved with a project within the Brazilian rain forests in min- ing an extremely valuable element called niobium. Niobium is a rare earth element essential for micro alloying steel as well as other products such as jet engines, rocket subassemblies, superconduct- ing magnets, and super alloys. Brazil accounts for 92 percent of all niobium mined, and Xeon Natu- ral mines much of the element in Brazil. Xeon dis- covered a large niobium deposit, and estimates the corporation could make an additional $5 billion in profits over the next two decades.

Demarco soon discovered he was one of sev- eral employees assigned to explain to the indig- enous population that Xeon wanted to extract the niobium from the lands given to the tribes by the Brazilian government. The land was, by decree, compensation for native minorities. Hav- ing spent several months with various tribes, Demarco learned they were communities that had not been altered by western culture. It was obvious to Demarco if Xeon began strip mining the area, thousands of “outsiders” would be brought in and would impact the cultural heritage of the indig- enous populations.

Demarco discussed this with his boss, Bar- bara. “Yes, I understand all you are saying, and I agree this will change their lives as well as their children and grandchildren’s lives,” Barbara said. “But think of it this way, their standard of living will be greatly enhanced. Schools will be built, hospitals will be available, and there will be more employment opportunities.”

Demarco responded, “While the tribal lead- ers want a better life for their people, I feel they are being steamrolled into accepting something they don’t understand.” I’ve talked to some of the

tribal leaders, and I am positive they have no idea of the impact this will have on their culture. We have many stakeholders involved in this decision, including Xeon’s employees, the tribes, the Brazil- ian government, and even communities beyond the tribal lands. I think we need to reevaluate the impact on all of these stakeholders before proceeding.

Barbara sighed, “I think you make some good points, and I am concerned about these differ- ent stakeholders. But you should understand we already have buy-in from the key decision-makers, and our business depends upon being able to mine niobium. We’ve got to continue this project.”

Demarco returned to the camp. The other specialists questioned him about Barbara’s reac- tion. As he spoke, some of the specialists became concerned about their jobs. A few admitted they heard the local and national media were raising awareness about the negative impact mining this mineral could have on the indigenous populations.

A few days later, Demarco heard that some of the tribal leaders had new concerns about the project and were organizing meetings to obtain feedback from members. Demarco approached one of the mining specialists that studied the potential impact of strip mining the land. The spe- cialist said that while he understood stakeholder interests, he felt the extraction methods Xeon used were environmentally friendly. While creat- ing a temporary disruption in the ecosystem of the rainforest, Xeon’s strip mining methods provided an opportunity for restoration. In fact, strip min- ing that was done in the United States before there were any regulations provides a good example of how the forest can recover and grow back to its original condition.

Demarco knew despite the potential ben- efits, there would still likely be opposition from the tribal community. Additionally, no method of strip mining is entirely environmentally-friendly. Demarco realized even with restoration, the lives of the indigenous tribes would be forever altered.

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Chapter 2 Stakeholder Relationships and Social Responsibility 55

Demarco was to meet with tribal elders the next day to discuss their concerns. He understood that whatever the decision, it would negatively impact some stakeholders. On the one hand, the tribal members might compromise their traditional way of life and the environment would be harmed if the strip mining project began. On the other hand, Xeon’s future and the future of its employees depended upon being able to mine the niobium. It could also benefit the tribes economically. He was not sure what he should tell the tribal leaders.

QUESTIONS | EXERCISES 1. How should Demarco approach this issue when

he meets with the tribal leaders? 2. What should be the priorities in balancing the

various stakeholder interests? 3. Can the CEO and board of directors of Xeon

continue operations and maintain a stake- holder orientation?

* This case is strictly hypothetical; any resemblance to real per- sons, companies, or situations is coincidental.

> > > CHECK YOUR EQ

Check your EQ, or Ethics Quotient, by completing the following. Assess your performance to evaluate your overall understanding of the chapter material.

1. Social responsibility in business refers to maximizing the visibility of social involvement. Yes No

2. Stakeholders provide resources that are more or less critical to a firm’s long-term success. Yes No

3. Three primary stakeholders are customers, special interest groups, and the media. Yes No

4. The most significant influence on ethical behavior in an organization is the opportunity to engage in unethical behavior. Yes No

5. The stakeholder perspective is useful in managing social responsibility and business ethics. Yes No

ANSWERS 1. No. Social responsibility refers to an organization’s obligation to maximize its positive impact on society and minimize its negative impact. 2. Yes. These resources are both tangible and intangible. 3. No. Although customers are primary stakeholders, special interest groups and the media are usually considered secondary stakeholders. 4. No. Other influences such as corporate culture have more impact on ethical decisions within an organization. 5. Yes. The six steps to implement this approach were provided in this chapter.

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56 Part 1: An Overview of Business Ethics

ENDNOTES

1. Vikas Anand, Blake E. Ashforth, and Mahendra Joshi, “Business as Usual: The Acceptance and Perpetuation of Corruption in Organizations,” Academy of Management Executive 18, no. 2 (2004): 39–53.

2. Debbie Thorne, O. C. Ferrell, and Linda Ferrell, Business and Society (Boston: Houghton Mifflin, 2003), 64–65.

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11. Adapted from Isabelle Maignan, O. C. Ferrell, and Linda Ferrell, “A Stakeholder Model for Implementing Social Responsibility in Marketing,” European Journal of Marketing 39 (2005): 956–977.

12. Ibid. 13. Yves Fassin, “Stakeholder Management, Reciprocity and

Shareholder Responsibility,” Journal of Business Ethics 109 (2012): 83–96.

14. Ibid. 15. Thorne, Ferrell, and Ferrell, Business and Society . 16. Sharon C. Bolton, Rebecca Chung-hee Kim, and Kevin D.

O’Gorman, “Corporate Social Responsibility as a Dynamic Internal Organizational Process: A Case Study,” Journal of Business Ethics , published online, January 7, 2011.

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19. Ibid. 20. Wenlong Yuan, Yongjian Bao, and Alain Verbeke,

“Integrating CSR Initiatives in Business: An Organizing Framework,” Journal of Business Ethics , published online, January 8, 2011.

21. Ibid. 22. Joseph A. McKinney, Tisha L. Emerson, and Mitchell

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Chapter 2: Stakeholder Relationships and Social Responsibility 57

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58 Part 1: An Overview of Business Ethics

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com/aboutus/csr.asp (accessed April 14, 2011). 83. Federal Trade Commission, “Google Will Pay $22.5

Million to Settle FTC Charges it Misrepresented Privacy Assurances to Users of Apple’s Safari Internet Browser,” August 9, 2012, http://ftc.gov/opa/2012/08/google.shtm (accessed February 14, 2013).

84. Jon Swartz, “Facebook changes its status in Washington,” USA Today , January 13, 2011, 1B–2B; “Details of 100 Million Facebook Users Published Online,” MSNBC.com , July 29, 2010, http://www.msnbc.msn.com/id/38463013/ ns/technology_and_science/?GT1=43001 (accessed April 14, 2011).

85. Consumer Watchdog, “As Leibowitz Steps Down, Consumer Watchdog Says Next FTC Chair Must Focus On Do Not Track Legislation, Data Brokers and ‘Wild West’ Of Mobile Devices,” February 1, 2013, http://www.consumerwatchdog.org/newsrelease/ leibowitz-steps-down-consumer-watchdog-says-next- ftc-chair-must-focus-do-not-track-legis (accessed February 14, 2013).

86. Alex Taylor III, “Tata Takes on the World Building an Auto Empire in India,” Fortune , May 2, 2011, 92; Fox News, “3,000 Tata Nano coming to U.S.,” October 15, 2012, http://www.foxnews.com/leisure/2012/10/15/3000- car-coming-to-us/ (accessed February 14, 2013).

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CHAPTER 3

EMERGING BUSINESS ETHICS ISSUES

CHAPTER OBJECTIVES

• Define ethical issues in the context of organizational ethics

• Examine ethical issues as they relate to the basic values of honesty, fairness, and integrity

• Delineate misuse of company resources, abusive and intimidating behavior, lying, conflicts of interest, bribery, corporate intelligence, discrimination, sexual harassment, fraud, insider trading, intellectual property rights, and privacy as business ethics issues

• Examine the challenge of determining an ethical issue in business

CHAPTER OUTLINE Recognizing an Ethical Issue (Ethical Awareness) Foundational Values for Identifying Ethical Issues

Integrity Honesty Fairness

Ethical Issues and Dilemmas in Business

Misuse of Company Resources Abusive or Intimidating Behavior Lying Conflicts of Interest Bribery Corporate Intelligence Discrimination Sexual Harassment Fraud Consumer Fraud Financial Misconduct Insider Trading Intellectual Property Rights Privacy Issues

The Challenge of Determining an Ethical Issue in Business

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“I’m sorry,” she replied, “It’s just that my sales have been slipping, and my paychecks are much smaller than they used to be. If my pay decreases much further, I may lose my health benefits. My daughter is asthmatic, and she has been in and out of the hospital over the last few months.” Jayla looked at Mary sympathetically and tried her best to console her.

The next week, before the salespeople started coming into the office to pick from the pile, Jayla had some documents for Deon to sign. When she arrived at his office, the door was slightly open. She peeked in and saw Deon and Greg going through the stack of clients. Jayla watched as Greg rifled through the pile and picked out files.

“Thanks, Deon. These are the top clients for the week,” Greg said.

“No problem, Greg,” Deon responded “Anything for my favorite brother-in-law. Just keep up the good work.”

Jayla stood there, mouth open. She turned to walk back toward her desk. She could not believe what she just saw. The boss was giving Deon all the good clients, while the rest of the salespeople had no choice in which they were assigned. Jayla knew this favoritism was a serious conflict of interest. Then she thought of Mary and her situation.

“What am I supposed to do?” Jayla wondered. “If I say something to Deon, he will give me a bad evaluation. If I say anything to Mia, I may get fired. And I definitely can’t say anything to the other salespeople. There would be a riot.” Saddened, she sat at her desk and wondered what to do.

QUESTIONS | EXERCISES 1. Discuss how this conflict of interest situation

affects other salespeople, the organizational culture, and other stakeholders.

2. Describe the decision that Jayla must make. What are the potential ramifications of her choices?

3. Are there legal ramifications to this kind of behavior? If so, what are the potential consequences?

Jayla just landed an internship with Acme Incorporated in the payroll department. She was excited because these internships usually turned into a full time job after graduation. Jayla was hired by Deon, the head of the Payroll Department. He told her about their policies and stressed the need for maintaining strict confidentiality regarding employee salaries and pay scales. “Several years ago we had an intern who violated the confidentiality policy and was given a negative internship summary,” explained Deon.

“I understand, sir,” Jayla responded. Jayla was determined to learn as much as she

could about the job. She made sure she was always on time, followed all of the policies and procedures, and got along well with her co-workers. She started to feel like she fit in at Acme and dreamed of the day when she worked there permanently. However, one day while studying the books, Jayla began to notice abnormalities in one of the salespeople’s salary. Greg, one of the senior sales representatives, made three times as much as the next highest earning salesperson in the company. Jayla assumed he must be a spectacular salesperson and worked efficiently. She often overheard Mia, the General Manager, and Deon praise Greg for his sales numbers. She also noticed the three of them would often go to lunch together.

One morning, Deon handed a stack of client folders to Jayla. He explained, “These are the clients for the salespeople for the week. They will come to you when they need more work, and they are only to take the files on top of the pile. You are in charge of making sure the salespeople don’t pick and choose the files. This is how we keep things fair among the sales force.”

“I will make sure the files are distributed fairly,” Jayla promised. She was excited to be trusted with this responsibility, and she made sure she did her best. Mary, one of the salespeople, came by to get files for the week. They made small talk as Mary looked into her files. She looked disappointed.

“You didn’t get any good clients?” Jayla asked. “Nope, not a one,” replied Mary, “which is just

my luck!” She threw down the files in exasperation. Jayla was concerned and asked, “What’s the matter?”

AN ETHICAL DILEMMA *

* This case is strictly hypothetical; any resemblance to real persons, companies, or situations is coincidental.

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Chapter 3: Emerging Business Ethics Issues 61

Stakeholders’ concerns determine whether specific business actions and decisions are perceived as right or wrong, which drives what the company defines as ethical or unethical. In the case of the government, community, and society, what was merely an ethical issue can become a legal debate and eventually law. Ethical conflicts in which damages occur can turn into litigation. Additionally, stakeholders often raise issues when they exert pressure on businesses to make decisions that serve their particular agendas. Other stakeholders can exert different pressures as well. For example, some stakeholders believed Caterpillar acted unethically when it decided to close its plant in Canada and move production to the United States. Caterpillar had locked out employees who were protesting their wages. By moving to the United States, Caterpillar saved on labor costs since average pay for U.S. factory workers is less than Canadian factory workers. The move resulted in approximately 450 jobs lost. On the other hand, moving the plant to the United States benefited U.S. workers badly in need of jobs. 1

People make ethical decisions only after they recognize a particular issue or situation has an ethical component; therefore, a first step toward understanding business ethics is to develop ethical issue awareness. Ethical issues typically arise because of conflicts among individuals’ personal moral beliefs and values and the core values and culture of the orga- nizations where they work. Institutions in society provide foundational principles and val- ues that influence both individuals and organizations. The business environment presents many potential ethical conflicts. Organizational objectives can clash with its employees’ attempts to fulfill their own personal goals. Similarly, consumers’ need for safe and qual- ity products may create a demand for consumer regulation. The desire of an oil company like BP or Chevron to create a profitable and dependable supply of oil and gas may conflict with the needs of many stakeholders. The fact BP possibly placed profits over the safety of employees and the environment culminated in the Deepwater Horizon explosion, which released 206.2 million gallons of oil into the Gulf of Mexico. 2

In this chapter, we consider some of the ethical issues emerging in business today, including how they arise from the demands of specific stakeholder groups. In the first half of the chapter, we explain certain universal concepts that pervade business ethics, such as integrity, honesty, and fairness. The second half of the chapter explores a number of emerg- ing ethical issues, including misuse of company time and resources, abusive and intimi- dating behavior, lying, conflicts of interest, bribery, corporate intelligence, discrimination, sexual harassment, fraud, financial misconduct, insider trading, intellectual property rights, and privacy. We also examine the challenge of determining decisions that have an ethical component for the firm to consider. Because of the rise of the multinational corporation as well as increased vertical systems competition, there are certain practices and products that become ethical and legal issues. It is important you understand that what was once a legal activity can become an ethical issue, resulting in well-known practices becoming illegal.

RECOGNIZING AN ETHICAL ISSUE (ETHICAL AWARENESS)

Although we have described a number of relationships and situations that may generate ethical issues, in practice it can be difficult to recognize them. Failure to acknowledge or be aware of ethical issues is a great danger in any organization. Some issues are difficult to recognize because they are gray areas that are hard to navigate. For example, when does a

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62 Part 2: Ethical Issues and the Institutionalization of Business Ethics

small gift become a bribe? Employees may engage in questionable behaviors because they are trying to achieve firm objectives related to sales or earnings. Our personal ethical issues are easier to define and control. The complexity of the work environment, however, makes it harder to define and reduce ethical issues.

Business decisions, like personal decisions, may involve a dilemma. In a dilemma all of the alternatives have negative consequences, so the less harmful choice is made. An ethi- cal issue is simply a situation involving a group, a problem, or even an opportunity that requires thought, discussion, or investigation before a decision can be made. Because the business world is dynamic, new ethical issues emerge all the time. Table 3–1 defines spe- cific ethical issues identified by employees in the National Business Ethics Survey (NBES). Misuse of company time, abusive behavior, and lying to employees are personal in nature, but are committed in the belief that the action is furthering organizational goals. Falsifying time or expenses, safety violations, and abuse of company resources are issues that directly relate to an ethical conflict that could damage the firm. The table compares the percent- age of employees who observed specific types of misconduct over the past two National Business Ethics Surveys.

Employees could engage in more than one form of misconduct; therefore, each type of misconduct represents the percentage of employees who witnessed that particular act. Although it is impossible to list every conceivable ethical issue. Any type of manipulation or deceit, or even just the absence of transparency in decision making, can create harm to others. For example, collusion is a secret agreement between two or more parties for

TABLE 3–1 Specific Types of Observed Misconduct

Behavior 2011 (%) 2009 (%)

Misuse of company time 33 n/a

Abusive behavior 21 22

Lying to employees 20 19

Company resource abuse 20 23

Violating company Internet use policies 16 n/a

Discrimination 15 14

Conflicts of interest 15 16

Inappropriate social networking 14 n/a

Health or safety violations 13 11

Lying to outside stakeholders 12 12

Stealing 12 9

Falsifying time reports or hours worked 12 n/a

Employee benefit violations 12 11

Sexual harassment 11 7

Source: Ethics Resource Center, 2011 National Business Ethics Survey: Workplace Ethics in Transition (Arlington, VA: Ethics Resource Center, 2012), p. 39.

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Chapter 3: Emerging Business Ethics Issues 63

a fraudulent, illegal, or deceitful purpose. “Deceitful purpose” is the relevant phrase in regard to business ethics, as it suggests trickery, misrepresentation, or a strategy designed to lead others to believe something less than the whole truth. Collusion violates the gen- eral business value of honesty. Next, we examine three foundational values that are used to identify ethical issues.

FOUNDATIONAL VALUES FOR IDENTIFYING ETHICAL ISSUES

Integrity, honesty, and fairness are widely used values for evaluating activities that could become ethical issues. Ethical issues can emerge from almost any decision made in an orga- nization. Understanding these foundational values can help identify and develop discussions and a constructive dialogue on appropriate conduct. It is just as important to emphasize appropriate conduct associated with these values as it is to discover inappropriate conduct.

Integrity Integrity is one of the most important and oft-cited elements of virtue, and refers to being whole, sound, and in an unimpaired condition. Integrity is a value that relates to all busi- ness activities, not just ethical issues. Integrity relates to product quality, open commu- nication, transparency, and relationships. Therefore, integrity is a foundational value for managers to build an internal organizational culture of trust. In an organization, it means uncompromising adherence to a set or group of values. Integrity is connected to acting ethically; in other words, there are substantive or normative constraints on what it means to act with integrity. An organization’s integrity usually rests on its enduring values and unwillingness to deviate from standards of behavior as defined by the firm and industry.

At a minimum, businesses are expected to follow laws and regulations. In addition, organizations should not knowingly harm customers, clients, employees, or even other competitors through deception, misrepresentation, or coercion. Although they often act in their own economic self-interest, business relations should be grounded in values such as honesty, integrity, and fairness. Failure to live up to these expectations or abide by laws and standards destroys trust and makes it difficult, if not impossible, to continue business exchanges. 3 These values become the glue that holds business relationships together, mak- ing everything else more effective and efficient.

Honesty Honesty refers to truthfulness or trustworthiness. To be honest is to tell the truth to the best of your knowledge without hiding anything. Confucius defined an honest person as junzi , or one who has the virtue ren. Ren can be loosely defined as one who has humanity. Yi is another honesty component and is related to what we should do according to our relation- ships with others. Another Confucian concept, li , relates to honesty but refers to the virtue of good manners or respect. Finally, zhi represents whether a person knows what to say and what to do as it relates to the honesty concept. The Confucian version of Kant’s Golden Rule is to treat your inferiors as you would want your superiors to treat you. As a result, virtues such as familial honor and reputation for honesty become paramount.

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64 Part 2: Ethical Issues and the Institutionalization of Business Ethics

Issues related to honesty also arise because business is sometimes regarded as a game governed by its own rules rather than those of society as a whole. Author Eric Beversluis suggests honesty is a problem because people often reason along these lines:

1. Business relationships are a subset of human relationships governed by their own rules that in a market society involve competition, profit maximization, and personal advancement within the organization.

2. Business can therefore be considered a game people play, comparable in certain respects to competitive sports such as basketball or boxing.

3. Ordinary ethics rules and morality do not hold in games like basketball or boxing. (What if a basketball player did unto others as he would have them do unto him? What if a boxer decided it was wrong to try to injure another person?)

4. Logically, then, if business is a game like basketball or boxing, ordinary ethical rules do not apply. 4

This type of reasoning leads many to conclude that anything is acceptable in business. Indeed, several books have compared business to warfare—for example, The Guerrilla Marketing Handbook and Sun Tsu: The Art of War for Managers. The common theme is that surprise attacks, guerrilla warfare, and other warlike tactics are necessary to win the battle for consumer dollars. Larry Ellison, the CEO of Oracle, exemplified this when he sold PeopleSoft’s technology and let most of its 8,000 employees go. PeopleSoft CEO Craig Conway stated, “Ellison has followed a page straight out of Genghis Khan.” Ellison frequently quotes the thirteenth-century Mongol warlord, saying things such as, “It’s not enough that we win; everyone else must lose.” 5 Even when Ellison was ordered to donate $ 100 million to charity and $ 22 million to the attorneys who sued him for alleged stock- trading abuses, he argued he acted in good faith and in the best interests of Oracle and Oracle’s shareholders. 6 This business-as-war mentality fosters the idea that honesty is unnecessary in business.

Many argue that because people are not economically self-sufficient, they cannot with- draw from the relationships of business. Therefore, business ethics must not only make clear what rules apply in business but also develop rules appropriate to the involuntary nature of its many participants. Such rules should contain the value of honesty.

The opposite of honesty is dishonesty. Dishonesty can be broadly defined as a lack of integrity, incomplete disclosure, and an unwillingness to tell the truth. Lying, cheat- ing, and stealing are actions usually associated with dishonest conduct. The causes of dishonesty are complex and relate to both individual and organizational pressures. Many employees lie to help achieve performance objectives. For example, they may be asked to lie about when a customer will receive a purchase. Lying can be defined as (1) untruthful statements that result in damage or harm; (2) “white lies,” which do not cause damage but instead function as excuses or a means of benefitting others; and (3)  statements obviously meant to engage or entertain without malice. These definitions become important in the remainder of this chapter.

Fairness Fairness is the quality of being just, equitable, and impartial. Fairness clearly overlaps with concepts of justice, equity, equality, and morality. There are three fundamental elements that motivate people to be fair: equality, reciprocity, and optimization. In business, equality

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Chapter 3: Emerging Business Ethics Issues 65

is about the distribution of benefits and resources. This distribution could be applied to stakeholders or the greater society.

Reciprocity is an interchange of giving and receiving in social relationships. Reciprocity occurs when an action that has an effect upon another is reciprocated with an action that has an approximately equal effect. Reciprocity is the return of favors approximately equal in value. For example, reciprocity implies workers be compensated with wages approxi- mately equal to their effort. An ethical issue regarding reciprocity for business is the amount CEOs and other executives are paid in relation to their employees. Is a 380 to 1 pay ratio an example of ethical reciprocity? That is the wage differential between a CEO and an average worker in the United States. 7

Optimization is the trade-off between equity (equality) and efficiency (maximum pro- ductivity). Discriminating on the basis of gender, race, or religion is generally considered unfair because these qualities have little bearing upon a person’s ability to do a job. The optimal way to hire is to choose the employee who is the most talented, proficient, edu- cated, and able. Ideas of fairness are sometimes shaped by vested interests. One or both parties in the relationship may view an action as unfair or unethical because the outcome was less beneficial than expected.

ETHICAL ISSUES AND DILEMMAS IN BUSINESS

As mentioned earlier, stakeholders and the firm define ethical issues. An ethical issue is a problem, situation, or opportunity that requires an individual, group, or organization to choose among several actions that must be evaluated as right or wrong, ethical or unethi- cal. An ethical dilemma is a problem, situation, or opportunity that requires an individ- ual, group, or organization to choose among several actions that have negative outcomes. There is not a right or ethical choice in a dilemma, only less unethical or illegal choices as perceived by any and all stakeholders.

A constructive next step toward identifying and resolving ethical issues is to classify the issues that are relevant to most business organizations. Table 3–2 reflects some pressing

TABLE 3–2 Shareholder Issues

1. Core values

2. Shareholder participation in electing directors

3. Executive compensation

4. Legal compliance

5. Lobbying and political activities

6. Reputation management

7. Integrity in collecting and managing data

8. Supply chain relationships and human rights

Source: Jaclyn Jaeger, Top Shareholder Issues for 2012 Proxy Season, Compliance Week, March 8, 2012, http://www.complianceweek.com/top-

shareholder-issues-for-2012-proxy-season/article/231150/ (accessed April 17, 2013).

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66 Part 2: Ethical Issues and the Institutionalization of Business Ethics

ethical issues to shareholders. Note some of these issues deal with the economic conditions and/or misconduct at firms from other countries. For instance, accounting irregularities at Chinese firms created concern among companies with Chinese-based partners or sup- pliers. Caterpillar Inc., for instance, was forced to write down its earnings due to fraud at a Chinese subsidiary. 8 In this section, we classify ethical issues in relation to misuse of company time and resources, abusive or intimidating behavior, lying, conflicts of interest, bribery, corporate intelligence, discrimination, sexual harassment, fraud, insider trading, intellectual property rights, and privacy issues.

Misuse of Company Time and Resources Time theft can be difficult to measure but is estimated to cost companies hundreds of bil- lions of dollars annually. It is widely believed the average employee “steals” 4.25 hours per week with late arrivals, leaving early, long lunch breaks, inappropriate sick days, exces- sive socializing, and engaging in personal activities such as online shopping and watching sports while on the job. 9

Although companies have different viewpoints and policies, the misuse of time and resources has been identified by the Ethics Resource Center as a major form of observed misconduct in organizations. In the latest survey 33 percent of respondents observed oth- ers misusing company time, and 20 percent observed company resource abuse such as theft of office supplies. Therefore, over 50 percent noted misconduct related to resources issues. Often lax enforcement of company policies creates the impression among employees that they are entitled to certain company resources, including how they spend their time at work. Such misuse can range from unauthorized equipment usage to misuse of financial resources.

Using company computer software and Internet services for personal business is one of the most common ways employees misuse company resources. While it may not be acceptable for employees to sit in the lobby chatting with relatives or their stock bro- kers, these same employees go online and do the same thing, possibly unnoticed by others. Typical examples of using a computer to abuse company time include sending personal emails, shopping, downloading music, doing personal banking, surfing the Internet for information about sports or romance, or visiting social networking sites such as Facebook. It has been found that March Madness, the NCAA basketball tournament, is one of the most significant periods during which employees engage in time theft. Many firms block websites where employees can watch sports events.

Because misuse of company resources is such a widespread problem, many firms, such as Boeing, implemented policies delineating the acceptable use of such resources. Boeing’s policy states resource use is acceptable when it does not result in “significant added costs, disruption of business processes, or any other disadvantage to the company.” The policy further states use of company resources for non-company purposes is only acceptable when an employee receives explicit permission to do so. 10

Abusive or Intimidating Behavior Abusive or intimidating behavior is another common ethical problem for employees, but what does it mean to be abusive or intimidating? These terms refer to many things— physical threats, false accusations, being annoying, profanity, insults, yelling, harshness, ignoring someone, and unreasonableness—and their meaning differs from person to person. It is important to understand that within each term there is a continuum. For

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Chapter 3: Emerging Business Ethics Issues 67

example, behavior one person might define as yelling could be another’s definition of nor- mal speech. The lack of civility in our society has been a concern, and it is as common in the workplace as elsewhere. The productiv- ity level of many organizations has been dam- aged by time spent unraveling problematic relationships.

Is it abusive behavior to ask an employee to complete a project rather than be with a family member or relative in a crisis situation? What does it mean to speak profanely? Is profanity only related to specific words or terms that are, in fact, common in today’s business world? If you are using words acceptable to you but that others consider profanity, have you just insulted, abused, or disrespected them?

Within abusive behavior or intimida- tion, intent should be a consideration. If the employee tries to convey a compliment, then he or she probably simply made a mistake. What if a male manager asks a female subor- dinate if she has a date because she is dressed nicely? When does the way a word is said (voice inflection) become important? There is also the problem of word meanings by age and within cultures. Is it okay to say “honey” to an employee, fellow employee, employee friend, and/or your superior, and does it depend on gender or location? For example, if you called a friend that worked with you “honey” in south- ern Illinois, Arkansas, or Kentucky, do you have the same acceptability factor as you would in northern Illinois, Michigan, or Minnesota? Does abusive behavior vary by gender? It is possible the term honey could be acceptable speech in some environments, and be con- strued as being abusive or intimidating in other situations. The fact that we live in a mul- ticultural environment and do business and work with many different cultural groups and nationalities adds to the depth of the ethical and legal issues that may arise.

Bullying is associated with a hostile workplace where someone (or a group) con- sidered a target is threatened, harassed, belittled, verbally abused, or overly criticized. Bullying creates what is referred to as a “hostile environment,” but the concept of a hostile environment is generally associated instead with sexual harassment. Regardless, bullying can cause psychological damage that may result in health-endangering consequences to the target. For example, workplace bullying is strongly associated with sleep disturbances. The more frequent the bullying, the higher the risk of sleep disturbance. Other physical

Is Workplace Bullying Serious Enough to Warrant Legal Action?

Workplace bullying is abusive behavior used to assert one’s power over another. One survey shows that 35 percent of employees claim to have been bullied at work, up from 27 percent the year before. In many cases, the bullies are the supervisors of the organization. Yet while some countries have laws against workplace bullying, the United States does not.

Many believe employees should be legally protected from workplace bullying because bullying is harmful to employee health. Victims of bullying suffer from symptoms including depression, anxiety, and low self-esteem. Bullying permeates the environment of the workplace, causing bystanders to feel its unpleasant effects and creating a toxic workplace. Others, however, believe anti-bullying laws would limit managers’ ability to manage since they would constantly be afraid their management styles could be perceived as bullying. Also, critics of such a law argue that bullying is hard to define, making such a law difficult to enforce. Instead, they are in favor of internal ways to combat bullying, including conflict resolution, harassment awareness, and sensitivity trainings. 11

1. Bullying in organizations can be harmful to employees and therefore warrants legal action.

2. Laws against bullying are not feasible as they are hard to define and have the potential to limit managers’ ability to manage.

DEBATE ISSUE TAKE A STAND

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68 Part 2: Ethical Issues and the Institutionalization of Business Ethics

symptoms include depression, fatigue, increased sick days, and stomach problems. 12 As Table 3–3 indicates, bullies can use a mix of verbal, nonverbal, and manipulative threat- ening expressions to damage workplace productivity. Bullying happens more than people realize. One in three American workers has been the victim of bullying, and 20 percent of bullying is technically harassment, which is illegal. Additionally, corporate bullies often target employees who excel at their jobs and are popular with their coworkers. 13 If manag- ers do not address bullying behaviors in the organization, then what starts out as one or two bullies may begin to spread. It has been found that employees who have been bullied are more likely to find it acceptable to bully others. 14

There is currently no U.S. law prohibiting workplace bullying. However, 24 states have introduced the Healthy Workplace Bill to consider ways to combat bullying. 15 Workplace bullying is illegal in many other countries. Some suggest employers take the following steps to minimize workplace bullying:

• Create policies that place reprimand letters and/or dismissal for such behavior. • Emphasize mutual respect in the employee handbook. • Encourage employees who feel bullied to report the conduct via hotlines or

other means.

In addition to the three items mentioned, firms are now helping employees under- stand what bullying is by the use of the following questions:

• Is your supervisor requiring impossible things from you without training? • Does your supervisor always state that your completed work is never good enough? • Are meetings to be attended called without your knowledge? • Have others told you to stop working, talking, or socializing with them? • Does someone never leave you alone to do your job without interference? • Do people feel justified screaming or yelling at you in front of others, and are you pun-

ished if you scream back?

TABLE 3–3 Actions Associated with Bullies

1. Spreading rumors to damage others

2. Blocking others’ communication in the workplace

3. Flaunting status or authority to take advantage of others

4. Discrediting others’ ideas and opinions

5. Use of e-mails to demean others

6. Failing to communicate or return communication

7. Insults, yelling, and shouting

8. Using terminology to discriminate by gender, race, or age

9. Using eye or body language to hurt others or their reputations

10. Taking credit for others’ work or ideas

Source: Based on Cathi McMahan, “Are You a Bully?” Inside Seven , California Department of Transportation Newsletter, June 1999, 6.

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Chapter 3: Emerging Business Ethics Issues 69

• Do human resources officials tell you that your harassment is legal and you must work it out between yourselves?

• Do many people verify that your torment is real, but do nothing about it? 16

Bullying also occurs between companies that are in intense competition. Even respected companies such as Apple have been accused of monopolistic bullying. Former Palm CEO Edward Colligan accused the late Steve Jobs, former CEO of Apple, of anti- competitive behavior toward his firm. Jobs allegedly contacted Colligan to propose an agreement not to hire workers from each other’s companies. According to the allegations, Jobs went on to state if Palm continued to poach Apple employees, it could expect a law- suit from Apple accusing Palm of patent infringement. Five tech workers filed lawsuits against Apple, Google, and other tech firms regarding the existence of “no hire” agree- ments. If these agreements were made, they would most likely be considered anticompeti- tive because they place both employees and rival companies at a disadvantage. 17 In many cases, the alleged misconduct can have not only monetary and legal implications but can also threaten reputation, investor confidence, and customer loyalty.

Lying Earlier in this chapter, we discussed the definitions of lying and how lying relates to dis- torting the truth. We mentioned three types of lies, one of which is joking without malice. The other two can become troublesome for businesses: lying by commission and lying by omission. Commission lying is creating a perception or belief by words that intention- ally deceive the receiver of the message; for example, lying about being at work, expense reports, or carrying out work assignments. Commission lying also entails intentionally cre- ating “noise” within the communication that knowingly confuses or deceives the receiver. Noise can be defined as technical explanations the communicator knows the receiver does not understand. It can be the intentional use of communication forms that make it diffi- cult for the receiver to actually hear the true message. Using legal terms or terms relating to unfamiliar processes and systems to explain what was done in a work situation facilitate this type of lie.

Lying by commission can involve complex forms, procedures, contracts, words that are spelled the same but have different meanings, or refuting the truth with a false state- ment. Forms of commission lying include puffery in advertising. For example, saying a product is “homemade” when it is made in a factory is lying. “Made from scratch” in cook- ing technically means that all ingredients within the product were distinct and separate and were not combined prior to the beginning of the production process. One can lie by commission by showing a picture of the product that does not reflect the actual product. For example, many fast-food chains purchase iceberg lettuce for their products but use romaine lettuce in their advertising because they feel it is prettier and more appealing than shredded iceberg lettuce.

Omission lying is intentionally not informing others of any differences, problems, safety warnings, or negative issues relating to the product or company that significantly affect awareness, intention, or behavior. A classic example of omission lying was in the tobacco manufacturers’ decades-long refusal to allow negative research about the effects of tobacco to appear on cigarettes and cigars. Another example is the behavior of FreeCreditReport. com, a company that promotes itself as a way for consumers to check their credit scores. Many customers do not realize that FreeCreditReport.com is a credit-monitoring service

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70 Part 2: Ethical Issues and the Institutionalization of Business Ethics

that costs $ 14.95 per month and they will be charged if they do not cancel the service within 30 days. When lying damages others, it can be the focus of a lawsuit. For example, prosecutors and civil lawsuits often reduce misconduct to lying about a fact, such as finan- cial performance, that has the potential to damage others. CEOs at AIG, Lehman Brothers, Fannie Mae, and Freddie Mac were scrutinized to see if they told the truth about the finan- cial conditions of their companies.

The point at which a lie becomes unethical in business is based on the context of the statement and its intent to distort the truth. A lie becomes illegal if it is determined by the courts to have damaged others. Some businesspeople may believe one must lie a little or that the occasional lie is sanctioned by the organization. The question you need to ask is whether lies are distorting openness and transparency and other values associated with ethical behavior.

Conflicts of Interest A conflict of interest exists when an individual must choose whether to advance his or her own interests, those of the organization, or those of some other group. The three major bond rating agencies—Moody’s, Standard & Poor’s, and Fitch Ratings—analyze financial deals and assign letters (such as AAA, B, CC) to represent the quality of bonds and other investments. Prior to the financial meltdown, these rating agencies had significant con- flicts of interest. The agencies earned as much as three times more for grading complex products than for corporate bonds. They also competed with each other for rating jobs, which contributed to lower rating standards. Additionally, the companies who wanted the ratings were the ones paying the agencies. Because the rating agencies were highly compet- itive, investment firms and banks would “shop” the different agencies for the best rating. Conflicts of interest were inevitable.

To avoid conflicts of interest, employees must be able to separate their private interests from their business dealings. Organizations must also avoid potential conflicts of interest when providing products. The U.S. General Accounting Office found conflicts of inter- est when the government awarded bids on defense contracts. Conflicts of interest usually relate to hiring friends, relatives, or retired military officers to enhance the probability of getting a contract. 18

Bribery Bribery is the practice of offering something (often money) in order to gain an illicit advan- tage from someone in authority. Gifts, entertainment, and travel can also be used as bribes. The key issue regarding whether or not something is considered bribery is whether it is used to gain an advantage in a relationship. Bribery can be defined as an unlawful act, but it can also be a business ethics issue in that a culture includes such fees as standard prac- tice. Related to the ethics of bribery is the concept of active corruption or active bribery , meaning the person who promises or gives the bribe commits the offense. Passive bribery is an offense committed by the official who receives the bribe. It is not an offense, however, if the advantage was permitted or required by the written law or regulation of the foreign public official’s country, including case law.

Small facilitation payments made to obtain or retain business or other improper advantages do not constitute bribery payments for U.S. companies in some situations. Such payments are often made to induce public officials to perform their functions,

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Chapter 3: Emerging Business Ethics Issues 71

such as issuing licenses or permits. In the United Kingdom these facilitation payments were initially illegal. However, the U.K. government has decided to review this prohibi- tion because it is often necessary in developing countries to pay low-level government officials small gratuities or tips for them to carry out their duties. 19 Ralph Lauren Corp. employees gave Argentine customs officials dresses, perfume, and cash to accelerate the passage of merchandise into the country. Over $ 580,000 was paid. This amount was not considered to be facilitation payments—they were considered to be bribes. When dis- covered, Ralph Lauren reported the bribery and cooperated with an investigation. As a result of their cooperativeness, they became the first company not to be prosecuted under the Foreign Corrupt Practices Act. However, they agreed to pay $ 1.6 million to resolve the investigation. 20

In most developed countries, it is generally recognized that employees should not accept bribes, personal payments, gifts, or special favors from people who hope to influence the outcome of a decision. However, bribery is an accepted way of doing business in other countries, which creates challenging situations for global businesses. Bribes have been associated with the downfall of many managers, legislators, and gov- ernment officials. The World Bank estimates that more than $ 1 trillion is paid annually in bribes. 21

When a government official accepts a bribe, it is usually from a business that seeks some advantage, perhaps to obtain business or the opportunity to avoid regulation. Giving bribes to legislators or public officials is both a legal and a business ethics issue. It is a legal issue in the United States under the U.S. Foreign Corrupt Practices Act (FCPA). This act maintains it is illegal for individuals, firms, or third parties doing business in American markets to “make payments to foreign government officials to assist in obtaining or retain- ing business.” 22 Companies have paid billions of dollars in fines to the Department of Justice for bribery violations. The law does not apply only to American firms, but to all firms transacting business with operations in the United States. This could also mean firms do not necessarily have to commit the bribery in the United States to be held accountable. For instance, Royal Philips Electronics NV paid $ 4.5 million to settle allegations that it had paid bribes in Poland to procure sales. 23

Corporate Intelligence Many issues related to corporate intelligence have surfaced in the last few years. Defined broadly, corporate intelligence is the collection and analysis of information on markets, technologies, customers, and competitors, as well as on socioeconomic and external political trends. There are three distinct types of intelligence models: a passive moni- toring system for early warning, tactical field support, and support dedicated to top- management strategy.

Corporate intelligence (CI) involves an in-depth discovery of information from corporate records, court documents, regulatory filings, and press releases, as well as any other background information about a company or its executives. Corporate intelli- gence can be a legitimate inquiry into meaningful information used in staying competi- tive. For instance, it is legal for a software company to monitor its competitor’s online activities such as blogs and Facebook posts. If the company learns from monitoring its competitor’s public postings it is likely planning to launch a new product, the company could use this intelligence to release the product first and beat the competition. Such an activity is acceptable.

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72 Part 2: Ethical Issues and the Institutionalization of Business Ethics

CI has its own set of procedures. For example, can you tell which of the following are acceptable strategies and practices in CI?

1. Develop an effective network of informants. Encourage staff members to gather com- petitive information as they interact with people outside the company.

2. Have every salesperson talk to those customers who are believed to have talked to competitors.

3. When interviewing job applicants from competitors, have Human Resources ask about critical information.

4. Have purchasers talk to suppliers to attempt to discover who is demanding what and when it is needed.

5. Interview every employee about his or her knowledge or expertise and leverage it for outside information about other firms within the industry.

6. When you interview consultants, ask them to share examples of their work. 7. Use press releases announcing new hires as an indicator of what type of talent compa-

nies are hiring. 8. Use web services to track all the changes anyone makes on a company's website, thus

giving you an indication of which areas a competitor is thinking about and where it might be headed.

9. Use a proxy or other firm to act as a client for the competitor so as to ask about a com- pany's pricing structure, how fast they ship, turnaround time, and number of employ- ees. Ask for references and call those people as well.

All of these scenarios are legal and frequently used by corporate intelligence departments and firms.

However, corporate intelligence, like other areas in business, can be abused if due dili- gence is not taken to maintain legal and ethical methods of discovery. Computers, LANs (local-area networks), and the Internet have made the theft of trade secrets very easy. Proprietary information like secret formulas, manufacturing schematics, merger or acqui- sition plans, and marketing strategies all have tremendous value. 24 Theft of corporate trade secrets has been on the rise among technology companies such as Samsung. Corporate espionage is estimated to cost the American economy $ 13 billion annually, while German companies lose between $ 28 billion and $ 71 billion each year. 25 If discovered, corporate espionage can lead to heavy fines and prison sentences. For instance, former software engi- neer Hanjuan Jin was found guilty of stealing trade secrets from Motorola. She had in her possession more than 1,000 Motorola documents. 26 A lack of security and proper training allows a person to use a variety of techniques to gain access to a company’s vital infor- mation. Some techniques for accessing valuable corporate information include physically removing hard drives and copying the information they contain to other machines, hack- ing, dumpster diving, social engineering, bribery, and hiring away key employees.

Hacking is considered one of the top three methods for obtaining trade secrets. Currently, there are thousands of websites that offer free downloadable and customizable hacking tools that require no in-depth knowledge of protocols or Internet protocol addresses. Hacking has three categories: system, remote, and physical. System hacking assumes the attacker already has access to a low-level, privileged-user account. Remote hacking involves attempting to remotely penetrate a system across the Internet. A remote hacker usually begins with no special privileges and tries to obtain higher level or administrative access.

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Chapter 3: Emerging Business Ethics Issues 73

Several forms of this type of hacking include unexpected input, buffer overflows, default configurations, and poor system administrator practices. Remote hacking activity against businesses and financial institutions is increasing, with hackers even penetrating the computer network of the company that runs the Nasdaq Stock Market. 27 Physical hacking requires the CI agent enter a facility personally. Once inside, he or she can find a vacant or unsecured workstation with an employee’s login name and password. Next, the CI agent searches for memos or unused letterheads and inserts the documents into the corporate mail system. CI agents could also gain physical access to a server or telephone room, look for remote-access equipment, note any telephone numbers written on wall jacks, and place a protocol analyzer in a wiring closet to capture data, user names, and passwords.

Social engineering is another popular method of obtaining valuable corporate infor- mation. The basic goals are the same as hacking. Social engineering is the tricking of indi- viduals into revealing their passwords or other valuable corporate information. Tactics include casual conversations with relatives of company executives and sending e-mails claiming to be a system administrator and asking for passwords under the guise of “impor- tant system administration work.” Another common social engineering trick is shoulder surfing , in which someone simply looks over an employee’s shoulder while he or she types in a password. Password guessing is another easy social engineering technique. If a person can find out personal things about someone, he or she might be able to use that informa- tion to guess a password. For example, a child’s name, birthdays, anniversaries, and Social Security numbers are all common passwords and are easy to guess.

Dumpster diving is messy but successful for acquiring trade secrets. Once trash is discarded onto a public street or alley, it is considered fair game. Trash can provide a rich source of information for any CI agent. Phone books can give a hacker names and numbers of people to target and impersonate. Organizational charts contain informa- tion about people who are in positions of authority within the organization. Memos pro- vide small amounts of useful information and assist in the creation of authentic-looking fake memos.

Whacking is wireless hacking. To eavesdrop on wireless networks, all a CI agent needs is the right kind of radio and to be within range of a wireless transmission. Once tapped into a wireless network, an intruder can easily access anything on both the wired and wire- less networks because the data sent over networks are usually unencrypted. If a company is not using wireless networking, an attacker can pose as a janitor and insert a rogue wireless access node into a supposedly secure hard-wired network.

Phone eavesdropping is yet another tool for CI agents. A person with a digital recording device can monitor and record a fax line. By playing the recording back an intruder can reproduce an exact copy of a message without anyone’s knowledge. Even without monitor- ing a fax line, a fax sent to a “communal” fax machine can be read or copied. By picking up an extension or by tapping a telephone, it is possible to record the tones that represent someone’s account number and password using a tape recorder. The tape recording can then be replayed over the telephone to gain access to someone else’s account.

Discrimination Although a person’s racial and sexual prejudices belong to the domain of individual ethics, racial and sexual discrimination in the workplace create ethical issues within the business world. Discrimination on the basis of race, color, religion, sex, marital status, sexual orienta- tion, public assistance status, disability, age, national origin, or veteran status is illegal in

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74 Part 2: Ethical Issues and the Institutionalization of Business Ethics

the United States. Additionally, discrimination on the basis of political opinions or affili- ation with a union is defined as harassment. Discrimination remains a significant ethical issue in business despite decades of legislation attempting to outlaw it.

A company in the United States can be sued if it (1) refuses to hire an individual, (2)  maintains a system of employment that unreasonably excludes an individual from employment, (3) discharges an individual, or (4) discriminates against an individual with respect to hiring, employment terms, promotion, or privileges of employment as they relate to the definition of discrimination. More than 99,000 charges of discrimination were filed with the Equal Employment Opportunity Commission (EEOC) in 2012. 28

Race, gender, and age discrimination are major sources of ethical and legal debate in the workplace. Once dominated by European American men, the U.S. workforce today includes significantly more women, African Americans, Hispanics, and other minorities, as well as disabled and older workers. These groups traditionally faced dis- crimination and higher unemployment rates and been denied opportunities to assume leadership roles in corporate America. For example, only somewhat more than one dozen Fortune 500 companies are led by African American CEOs. Although this is still highly disproportionate to the population, however, there are more African American CEOs than ever before. 29

Another form of discrimination involves discriminating against individuals on the basis of age. The Age Discrimination in Employment Act specifically outlaws hiring practices that discriminate against people 40 years of age or older, as well as those that require employees to retire before the age of 70 . The act prohibits employers with 20 or more employees from making employment decisions, including decisions regarding the termi- nation of employment, on the basis of age or as a result of policies requiring retirement after the age of 40 . Despite this legislation, charges of age discrimination persist in the workplace. Age discrimination accounts for approximately one-quarter of the complaints filed with the EEOC. 30 Given the fact that nearly one-third of the nation’s workers will be 55 years old or over by 2016, many companies need to change their approach toward older workers. 31

To help build workforces that reflect their customer base, many companies have initiated affirmative action programs , which involve efforts to recruit, hire, train, and promote qualified individuals from groups that have traditionally been discriminated against on the basis of race, gender, or other characteristics. Such initiatives may be imposed by federal law on an employer that contracts or subcontracts for business with the federal government, as part of a settlement agreement with a state or federal agency, or by court order. 32 For example, Safeway, a chain of supermarkets, established a pro- gram to expand opportunities for women in middle- and upper-level management after settling a sexual-discrimination lawsuit. 33 However, many companies voluntarily imple- ment affirmative action plans in order to build a more diverse workforce. Although many people believe affirmative action requires the use of quotas to govern employ- ment decisions, it is important to note two decades of Supreme Court rulings made it clear that affirmative action does not permit or require quotas, reverse discrimina- tion, or favorable treatment of unqualified women or minorities. To ensure affirma- tive action programs are fair, the Supreme Court established standards to guide their implementation: (1) There must be a strong reason for developing an affirmative action program; (2) affirmative action programs must apply only to qualified candidates; and (3) affirmative action programs must be limited and temporary and therefore cannot include “rigid and inflexible quotas.” 34

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Chapter 3: Emerging Business Ethics Issues 75

Discrimination can also be an ethical issue in business when companies use race or other personal factors to discriminate against specific groups of customers. Many compa- nies have been accused of using race, disabilities, gender, or age to deny service or to charge higher prices to certain ethnic groups. Employees have also been terminated or denied hire due to discrimination. Outback Steakhouse paid $ 65,000 to settle an EEOC lawsuit that an Arizona manager terminated a server due to a disability. The company stated it would revise its policies on discrimination regarding disabilities. 35

Sexual Harassment Sexual harassment is a form of sex discrimination that violates Title VII of the Civil Rights Act of 1964. Title VII applies to employers with 15 or more employees, including state and local governments. Sexual harassment can be defined as any repeated, unwanted behavior of a sexual nature perpetrated upon one individual by another. It may be verbal, visual, written, or physical and can occur between people of different genders or those of the same gender. Displaying sexually explicit materials “may create a hostile work environment or constitute harassment, even though the private possession, reading, and consensual shar- ing of such materials is protected under the Constitution.” 36 The EEOC receives between 11,000 and 14,000 charges of sexual harassment annually. 37

Even the United Nations, an organization whose mission is to protect human rights globally, has dealt with a series of sexual harassment cases. Many U.N. employees who have made or faced accusations claim the system is poorly equipped to handle complaints, resulting in unfair, slow, and arbitrary rulings. For example, one employee who claimed she was harassed for years in Gaza saw her superior cleared by one of his colleagues. 38

To establish sexual harassment, an employee must understand the definition of a hostile work environment , for which three criteria must be met: the conduct was unwel- come; the conduct was severe, pervasive, and regarded by the claimant as so hostile or offensive as to alter his or her conditions of employment; and the conduct was such that a reasonable person would find it hostile or offensive. To assert a hostile work environ- ment, an employee need not prove it seriously affected his or her psychological well- being or that it caused an injury; the decisive issue is whether the conduct interfered with the claimant’s work performance. 39

Sexual harassment includes unwanted sexual approaches (including touching, feeling, or groping) and/or repeated unpleasant, degrading, or sexist remarks directed toward an employee with the implied suggestion that the target’s employment status, promotion, or favorable treatment depend on a positive response and/or cooperation. It can be regarded as a private nuisance, unfair labor practice, or, in some states, a civil wrong (tort) that may be the basis for a lawsuit against the individual who made the advances and against the employer who did not take steps to halt the harassment. The law is primarily concerned with the impact of the behavior and not its intent. An important facet of sexual harass- ment law is its focus on the victim’s reasonable behaviors and expectations. 40 However, the definition of “reasonable” varies from state to state, as does the concept of expectations. In addition, an argument used by some in defense of what others term sexual harassment is the freedom of speech granted by the First Amendment.

The key ethical issues associated with sexual harassment are dual relationships and unethically intimate relationships. A dual relationship is defined as a personal, loving, and/ or sexual relationship with someone with whom you share professional responsibilities. Unethical dual relationships are those where the relationship could potentially cause a direct

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76 Part 2: Ethical Issues and the Institutionalization of Business Ethics

or indirect conflict of interest or a risk of impairment to professional judgment. 41 Another important factor in these cases is intent. If the sexual advances in any form are considered mutual, then consent is created. The problem is unless the employee or employer gets some- thing in writing before the romantic action begins, consent can always be questioned, and when it comes to sexual harassment, the alleged perpetrator must prove mutual consent.

To avoid sexual misconduct or harassment charges a company should take at least the following steps:

1. Establish a statement of policy naming someone in the company as ultimately respon- sible for preventing harassment at the company.

2. Establish a definition of sexual harassment that includes unwelcome advances, requests for sexual favors, and any other verbal, visual, or physical conduct of a sexual nature; that provides examples of each; and reminds employees the list of examples is not all-inclusive.

3. Establish a nonretaliation policy that protects complainants and witnesses. 4. Establish specific procedures for prevention of such practices at early stages. How-

ever, if a company puts these procedures in writing, they are expected by law to train employees in accordance with them, measure their effects, and ensure the policies are enforced.

5. Establish, enforce, and encourage victims of sexual harassment to report the behavior to authorized individuals.

6. Establish a reporting procedure. 7. Make sure the company has timely reporting requirements to the proper authorities.

Usually, there is a time limitation (ranging from six months to a year) to file a com- plaint for a formal administrative sexual charge. However, the failure to meet a shorter complaint period (for example, 60 to 90 days) so a rapid response and remediation may occur and to help ensure a harassment-free environment could be a company’s defense against charges it was negligent.

Once these steps have been taken, a training program should identify and describe forms of sexual harassment and give examples, outline grievance procedures, explain how to use the procedures and discuss the importance of them, discuss the penalty for viola- tion, and train employees about the essential need for a workplace free from harassment, offensive conduct, or intimidation. A corporation’s training program should cover how to spot sexual harassment; how to investigate complaints, including proper documentation; what to do about observed sexual harassment, even when no complaint has been filed; how to keep the work environment as professional and non-hostile as possible; how to teach employees about the professional and legal consequences of sexual harassment; and how to train management to understand follow-up procedures on incidents.

Fraud When individuals engage in intentional deceptive practices to advance their own interests over those of the organization or some other group, they are committing fraud. In gen- eral, fraud is any purposeful communication that deceives, manipulates, or conceals facts in order to harm others. Fraud can be a crime and convictions may result in fines, imprison- ment, or both. Global fraud costs organizations more than $ 3.5 trillion a year; the average company loses about 5 percent of annual revenues to fraud. 42 Figure 3.1 indicates some of

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Chapter 3: Emerging Business Ethics Issues 77

the major ways fraud is detected. Note the majority of fraud detection occurs due to tips, thereby making reporting an important way of preventing and detecting wide-scale fraud. In recent years, accounting fraud has become a major ethical issue, but as we will see, fraud can also relate to marketing and consumer issues as well.

Accounting fraud usually involves a corporation’s financial reports, in which companies provide important information on which investors and others base decisions involving mil- lions of dollars. If the documents contain inaccurate information, whether intentionally or not, lawsuits and criminal penalties may result. Former AIG CEO Maurice Greenberg and other defendants agreed to pay AIG shareholders $ 115 million to resolve allegations charg- ing them with misleading investors regarding an illegal bid-rigging arrangement in the insurance industry, as well as making misleading statements about a purported accounting fraud that took place at the firm years before. 43

The field of accounting has changed dramatically over the last decade. The pro- fession used to have a club-type mentality, and those who became certified public accountants (CPAs) were not concerned about competition. Now CPAs advertise their skills and short-term results in an environment where competition has increased and overall billable hours significantly decreased because of technological innovations. Additionally, accountants are permitted to charge performance-based fees rather than hourly rates, a rule change that encouraged some large accounting firms to promote

FIGURE 3–1 Initial Detection of Operational Frauds

0% 10% 20% 30% 40% 50%

2010

2012

Other*

IT Controls

Confession

Surveillance/Monitoring

Notified by Police

External Audit

Document Examination

Account Reconcilliation

By Accident

Internal Audit

Management Review

Tip

Percent of Cases

D et

ec ti

o n

M et

h o

d

43.3%

14.6%

14.4%

7.0%

4.8%

4.1%

3.0%

1.9%

1.5%

1.1%

1.1%

3.3%

40.2%

15.4%

13.9%

6.1%

5.2%

4.6%

1.8%

2.6%

1.0%

0.8%

Initial Detection of Occupational Frauds

8.3%

Source: Association of Certified Fraud Examiners, Report to the Nations on Occupational Fraud and Abuse: 2012 Global Fraud Study , 14.

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78 Part 2: Ethical Issues and the Institutionalization of Business Ethics

tax-avoidance strategies for high-income individuals because the firms can charge 10 to 40 percent of the amount of taxes saved. 44

Pressures on accountants today include time, reduced fees, client requests to alter opinions concerning financial conditions or lower tax payments, and increased competi- tion. Other issues accountants face daily involve compliance with complex rules and regu- lations, data overload, contingent fees, and commissions. An accountant’s life is filled with rules and data that must be interpreted correctly, and because of these pressures and the ethical predicaments they spawn, problems within the accounting industry are on the rise.

As a result, accountants must abide by a strict code of ethics that defines their respon- sibilities to their clients and to the public interest. The code also discusses the concepts of integrity, objectivity, independence, and due care. Despite the standards the code provides, the accounting industry has been the source of numerous fraud investigations in recent years. Congress passed the Sarbanes–Oxley Act in 2002 to address many of the issues that create conflicts of interest for accounting firms auditing public corporations. The law gen- erally prohibits accounting firms from providing both auditing and consulting services to the same firm. Additionally, the law specifies corporate boards of directors must include outside directors with financial knowledge on the company’s audit committee.

Marketing fraud —the process of dishonestly creating, distributing, promoting, and pricing products—is another business area that generates potential ethical issues. False or misleading marketing communications destroys customers’ trust in a company. Lying, a major ethical issue involving communication, is a potentially significant problem. In both external and internal communications, it causes ethical predicaments because it destroys trust. The SEC charged two units at financial services firm Oppenheimer & Company with misleading investors about the value of their private equity funds. They agreed to pay more than $ 2.9 million to settle the lawsuit. 45 Misleading marketing can also cost consumers hard-earned money.

False or deceptive advertising is a key issue in marketing communications. One set of laws common to many countries concerns deceptive advertising—that is, advertisements not clearly labeled as advertisements. In the United States, Section 5 of the Federal Trade Commission (FTC) Act addresses deceptive advertising. Abuses in advertising range from exaggerated claims and concealed facts to outright lying, although improper categorization of advertising claims is the critical point. Courts place false or misleading advertisements into three categories: puffery, implied falsity, and literal falsity.

Puffery can be defined as exaggerated advertising, blustering, and boasting upon which no reasonable buyer would rely and is not actionable under the Lanham Act. For example, in a lawsuit between two shaving products companies, the defendant advertised the mois- turizing strip on its shaving razor was “six times smoother” than its competitors’ strips, while showing a man rubbing his hand down his face. The court rejected the defendant’s argument that “six times smoother” implied that only the moisturizing strip on the razor’s head was smoother. Instead, the court found the “six times smoother” advertising claim implied that the consumer would receive a smoother shave from the defendant’s razor as a whole, a claim that was false. 46

Implied falsity means the message has a tendency to mislead, confuse, or deceive the public. Advertising claims that use implied falsity are those that are literally true but imply another message that is false. In most cases, accusations of implied falsity can be proved only through time-consuming and expensive consumer surveys, the results of which are often inconclusive. An example of implied falsity might be a company’s claim that its prod- uct has twice as much of an ingredient in its product, implying that it works twice as well,

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Chapter 3: Emerging Business Ethics Issues 79

when in reality the extra quantity of the ingredient has no effect over performance. The characterization of an advertising claim as literally false can be divided into two subcat- egories: tests prove ( establishment claims ), when the advertisement cites a study or test that establishes the claim; and bald assertions ( nonestablishment claims ), when the advertise- ment makes a claim that cannot be substantiated, as when a commercial states a certain product is superior to any other on the market. Another form of advertising abuse involves making ambiguous statements; when the words are so weak or general that the viewer, reader, or listener must infer the advertiser’s intended message. These “weasel words” are inherently vague and enable the advertiser to deny any intent to deceive. The verb help is a good example (as in expressions such as “helps prevent,” “helps fight,” “helps make you feel”). 47 Consumers may view such advertisements as unethical because they fail to com- municate all the information needed to make a good purchasing decision or because they deceive the consumer outright.

Labeling issues are even murkier. For example, Monster Beverage Corp. decided to change its label to indicate it is a beverage rather than a dietary supplement. Rather than putting “Supplement Facts” on its cans, the company will replace it with “Nutrition Facts.” This may seem like a small change, but it is intended to stave off the increasing scrutiny of critics who believe that energy drink caffeine levels are unsafe. As part of the labeling change, Monster labels now display the drink’s caffeine content. 48

Advertising and direct sales communication can also mislead consumers by con- cealing the facts within the message. For instance, a salesperson anxious to sell a medical insurance policy might list a large number of illnesses covered by the policy but fail to mention it does not include some commonly covered illnesses. Indeed, the fastest-growing area of fraudulent activity is in direct marketing, which uses the telephone and impersonal media to communicate information to customers, who then purchase products via mail, telephone, or the Internet.

Consumer Fraud Consumer fraud occurs when consumers attempt to deceive businesses for their own gain. Shoplifting is estimated to cost retailers approximately $ 30 billion annually. 49 Consumers engage in many other forms of fraud against businesses, including price tag switching, item switching, lying to obtain age-related and other discounts, and taking advantage of generous return policies by returning used items, especially clothing that has been worn (with the price tags still attached). Such behavior by consumers affects retail stores as well as other consumers who, for example, may unwittingly purchase new clothing that has actually been worn. Fraudulent merchandise returns are estimated to cost about $ 8.9 bil- lion a year. 50

Consumer fraud involves intentional deception to derive an unfair economic advan- tage by an individual or group over an organization. Examples of fraudulent activities include shoplifting, collusion or duplicity, and guile. Collusion typically involves an employee who assists the consumer in fraud. For example, a cashier may not ring up all merchandise or may give an unwarranted discount. Duplicity may involve a consumer staging an accident in a grocery store and then seeking damages against the store for its lack of attention to safety. A consumer may purchase, wear, and then return an item of clothing for a full refund. In other situations, a consumer may ask for a refund by claim- ing a defect. Guile is associated with a person who is crafty or understands right/wrong behavior but uses tricks to obtain an unfair advantage. The advantage is unfair because

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80 Part 2: Ethical Issues and the Institutionalization of Business Ethics

the person has the intent to go against the right behavior or result. Although some of these acts warrant legal prosecution, they can be difficult to prove, and many companies are reluctant to accuse patrons of a crime when there is no way to verify wrongdoing. Businesses that operate with the philosophy “the customer is always right” have found some consumers take advantage of this promise and have therefore modified return poli- cies to curb unfair use.

Financial Misconduct The failure to understand and manage ethical risks played a significant role in the financial crisis. The difference between bad business decisions and business misconduct can be hard to determine, and there is a thin line between the ethics of using only financial incentives to gauge performance and the use of holistic measures that include ethics, transparency, and responsibility to stakeholders. From CEOs to traders and brokers, all-too-tempting lucrative financial incentives existed for performance in the financial industry.

The most recent global recession was caused in part by a failure on the part of the financial industry to take appropriate responsibility for its decision to utilize risky and complex financial instruments. Loopholes in regulations and the failures of regulators were exploited. Corporate cultures were built on rewards for taking risks rather than rewards for creating value for stakeholders. Ethical decisions were based more on what was legal rather than what was the right thing to do. Unfortunately, most stakehold- ers, including the public, regulators, and the mass media, do not always understand the nature of the financial risks taken on by banks and other institutions to generate prof- its. The intangible nature of financial products makes it difficult to understand complex financial transactions. Problems in the subprime mortgage markets sounded the alarm for the most recent recession.

Ethics issues emerged early in subprime lending, with loan officers receiving com- missions on securing loans from borrowers with no consequences if the borrower defaulted on the loan. “Liar loans” were soon developed to create more sales and higher personal compensation for lenders. Lenders encouraged subprime borrowers to provide false information on their loan applications in order to qualify for and secure the loans. Some appraisers provided inflated home values in order to increase loan amounts. In other instances consumers were asked to falsify their incomes to make the loans more attractive to the lending institutions. The opportunity for misconduct was widespread. Top managers and CEOs were complacent about the wrongdoing as long as profits were good. Congress and President Clinton encouraged Fannie Mae and Freddie Mac to support home ownership among low-income people by giving out home mortgages. Throughout the early 2000s, in an economy with rapidly increasing home values, the cul- ture of unethical behavior was not apparent to most people. When home values started to decline and individuals were “upside down” on their loans (owing more than the equity of the home), the failures and unethical behavior of lending and borrowing institutions became obvious.

The top executives or CEOs are ultimately responsible for the repercussions of their employees’ decisions. Top executives at Merrill Lynch awarded $ 3.6 billion in bonuses shortly before the company’s merger with Bank of America in 2008. 51 A combined $ 121 million went to four top executives, in spite of the fact that Merrill Lynch had to be rescued from bank- ruptcy by the government. Two ethics issues are at play in this situation. First, paying out the

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Chapter 3: Emerging Business Ethics Issues 81

bonuses at all; and second, rushing their distribution in order to complete the job before Bank of America’s takeover. Risk management in the financial industry is a key concern, includ- ing paying bonuses to executives who failed in their duties. Unfortunately, at the same time the industry was focused on its own bottom line, regulatory agencies and Congress were not proactive in investigating early cases of financial misconduct and the systemic issues that led to the crisis. The legal and regulatory systems were more focused on individual misconduct rather than systemic ethical failures.

This widespread financial misconduct led to a call for financial reform. The U.S. Treasury Secretary, Timothy Geithner, is trying to change how the government goes about overseeing risk-taking in financial markets. He is pushing for stricter rules on financial management and controls on hedge funds and money market mutual funds. He believes the United States needs greater openness and transparency, greater over- sight and enforcement, and clearer, more commonsense language in its financial sys- tem. 52 The Dodd–Frank Wall Street Reform and Consumer Protection Act was passed in 2010 to increase accountability and transparency in the financial industry and protect consumers from deceptive financial practices. The act established a Consumer Financial Protection Bureau (CFPB) to protect consumers from unsafe financial products. The CFPB was provided with supervisory power over the credit market. Its responsibility includes making financial products easier to understand, curtailing unfair lending and credit card practices, and ensuring the safety of financial products before their launch into the market. The Dodd–Frank Wall Street Reform and Consumer Protection Act also gives federal regulators more power over large companies and financial institutions to prevent them from engaging in risky practices, or becoming “too big to fail.” The act also holds CEOs responsible for the behavior of their companies. Large financial firms must retain at least half of top executives’ bonuses for at least three years. The goal is to tie compensation to the outcomes of the executives’ decisions over time. 53 We will discuss the Dodd–Frank Act and the Consumer Financial Protection Bureau in detail in Chapter 4 .

Insider Trading An insider is any officer, director, or owner of 10 percent or more of a class of a company’s securities. There are two types of insider trading : illegal and legal. Illegal insider trading is the buying or selling of stocks by insiders who possess information that is not yet public. This act, that puts insiders in breach of their fiduciary duty, can be committed by anyone who has access to nonpublic material, such as brokers, family, friends, and employees. In addition, someone caught “tipping” an outsider with nonpublic information can also be found liable. To determine if an insider gave a tip illegally the SEC uses the Dirks test, that states if a tipster breaches his or her trust with the company and understands that this was a breach, he or she is liable for insider trading.

Legal insider trading involves legally buying and selling stock in an insider’s own com- pany, but not all the time. Insiders are required to report their insider transactions within two business days of the date the transaction occurred. For example, if an insider sold 10,000 shares on Monday, June 12, he or she would have to report the sale to the SEC by Wednesday, June 14. To deter insider trading, insiders are prevented from buying and sell- ing their company stock within a six-month period, thereby encouraging insiders to buy stock only when they feel the company will perform well over the long term.

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82 Part 2: Ethical Issues and the Institutionalization of Business Ethics

Insider trading is often done in a secretive manner by an individual who seeks to take advantage of an opportunity to make quick gains in the market. The Justice Department has cracked down on insider trading in recent years, including recording phone calls of suspected insider traders to gather evidence. Galleon Group founder Raj Rajaratnam and former Goldman Sachs director Rajat Gupta were both sentenced after secretly videotaped phone conversations appeared to implicate them in an insider trad- ing scheme. The government also used telephone conversation recordings to convict former hedge-fund manager Doug Whitman for trading on nonpublic information from Google and other firms. 54 Surveys revealed people who get involved in this type of activ- ity often feel superior to others and are blind to the possibility of being discovered or facing consequences. 55

Intellectual Property Rights Intellectual property rights involve the legal protection of intellectual property such as music, books, and movies. Laws such as the Copyright Act of 1976, the Digital Millennium Copy- right Act, and the Digital Theft Deterrence and Copyright Damages Improvement Act of 1999 were designed to protect the creators of intellectual property. However, with the advance of technology, ethical issues still abound for websites. For example, until it was sued for copyright infringement and subsequently changed its business model, Napster. com allowed individuals to download copyrighted music for personal use without provid- ing compensation to the artists.

A decision by the Federal Copyright Office (FCO) helped lay the groundwork for intellectual property rules in a digital world. The FCO decided to make it illegal for web users to hack through barriers that copyright holders erect around material released online, allowing only two exceptions. The first exception was for software that blocks users from finding obscene or controversial material on the web, and the second was for people who want to bypass malfunctioning security features of software or other copyrighted goods they have purchased. This decision reflects the fact that copyright owners are typically being favored in digital copyright issues. 56

However, digital copyrights continue to be a controversial issue in the United States and across the world, and existing laws are often difficult to enforce. Almost a quarter of all Internet traffic involves copyrighted material, including illegally downloaded or uploaded music, movies, and television shows. 57 As China grew into an economic powerhouse, the market for pirated goods of all types, from DVDs to pharmaceuticals and even cars, has become a multibillion dollar industry. 58 China’s government has proven weak in protecting intellectual property, and the underground market for such pirated goods—which are sold all over the world—has grown at a rapid pace. Downloaders of illegal content are less con- cerned with the law than non-downloaders and are more likely to engage in other forms of illegal conduct such as shoplifting. 59

While intellectual property rights infringement always poses a threat to compa- nies that risk losing profits and reputation, it can also threaten the health and well- being of consumers. For example, illegally produced medications, when consumed by unknowing consumers, can cause sickness and even death. Research on software piracy has shown that high levels of economic well-being and an advanced technology sector are effective deterrents to software piracy. 60 However, as the number of pat- ents filed in China increase, so are intellectual property lawsuits. It seems intellectual

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Chapter 3: Emerging Business Ethics Issues 83

property theft is becoming a more important issue in China. 61 Perhaps as China’s economy moves forward piracy will become less of a problem, but for now it poses a major threat.

Privacy Issues Consumer advocates continue to warn consumers about new threats to their privacy, especially within the health care and Internet industries. As the number of people using the Internet increases, the areas of concern related to its use increase as well. Some privacy issues that must be addressed by businesses include the monitoring of employees’ use of available technology and consumer privacy. Current research suggests that even when businesses use price discounts or personalized services, consumers remain suspicious. However, certain consumers are still willing to provide personal information despite the potential risks. 62

A challenge for companies today is meeting their business needs while protecting employees’ desire for privacy. There are few legal protections of an employee’s right to pri- vacy, which allows businesses a great deal of flexibility in establishing policies regarding employee privacy while using company equipment on company property. From computer monitoring and telephone taping to video surveillance and GPS satellite tracking, employ- ers are using technology to manage their productivity and protect their resources. The abil- ity to gather and use data about employee behavior creates an ethical issue related to trust and responsibility.

Electronic monitoring allows a company to determine whether productivity is being reduced because employees spend too much time on personal activities. Having this information enables the company to take steps to remedy the situation. Many employers have policies that govern personal phone and Internet use on company time. Additionally, some companies track everything from phone calls and Internet history to keystrokes and the time employees spend at their desks. 63 One study found that 42 percent of full-time employees with a company-assigned e-mail account “fre- quently use” it for personal communications, while another 29 percent “sometimes” do. Another survey found 89 percent of workers say they sent e-mail from work to an outside party that contained jokes, gossip, rumors, or disparaging remarks, while 14 percent sent messages that contained confidential or proprietary information, and 9 percent of respondents admitted to sending sexual, romantic, or pornographic text or images. 64 Instituting practices that show respect for employee privacy but do not abdi- cate the employer’s responsibility helps create a climate of trust that promotes opportu- nities for resolving employee–employer disputes without lawsuits. On the other hand, if personal data is gathered that includes medical or religious information, it can result in litigation.

There are two dimensions to consumer privacy: consumer awareness of information collection and a growing lack of consumer control over how companies use the personal information they collect. For example, many are not aware that Google, Inc., reserves the right to track every time you click on a link from one of its searches. 65 Online purchases and even random web surfing can be tracked without a consumer’s knowledge. A survey by the Progress and Freedom Foundation found 96 percent of popular commercial web- sites collect personally identifying information from visitors. 66

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84 Part 2: Ethical Issues and the Institutionalization of Business Ethics

Personal information about consumers is valuable not only to businesses but also criminals. It is estimated an identity is stolen once every three seconds. 67 Personal informa- tion is stolen and sold online. Although some of this information comes from sources such as social networking profiles, poorly protected corporate files are another major source. U.S. organizations report hundreds of security breaches annually. 68

Companies are working to find ways to improve consumers’ trust in their web- sites. For example, an increasing number of websites display an online seal from the Better Business Bureau, available only to sites that subscribe to certain standards. A similar seal is available through TRUSTe, a nonprofit global initiative that certifies those websites adhering to its principles. (Visit http://e-businessethics.com for more on Internet privacy.)

THE CHALLENGE OF DETERMINING AN ETHICAL ISSUE IN BUSINESS

Most ethical issues concerning a business will become visible through stakeholder con- cerns about an event, activity, or the results of a business decision. The mass media, special interest groups, and individuals, through the use of blogs, podcasts, and other individual- generated media, often generate discussion about the ethical nature of a decision. Another way to determine if a specific behavior or situation has an ethical component is to ask other individuals in the business how they feel about it and whether they view it as ethi- cally challenging. Trade associations and business self-regulatory groups such as the Better Business Bureau often provide direction for companies in defining ethical issues. Finally, it is important to determine whether the organization adopted specific policies on the activ- ity. An activity approved by most members of an organization, if it is also customary in the industry, is probably ethical. An issue, activity, or situation that can withstand open discus- sion between many stakeholders, both inside and outside the organization, probably does not pose ethical problems.

However, over time, problems can become ethical issues as a result of changing societal values. For instance, products manufactured by Kraft Foods, Inc., such as Kraft Macaroni and Cheese, Chips Ahoy! cookies, Lunchables, Kool-Aid, Fruity Pebbles, and Oreos, have been staples in almost every home in the United States for decades without becoming subjects of public debate; but when parents, schools, and politicians became more aware that the United States has the most overweight people in the world, things changed. 69 Additionally, since 1980 the rate of obesity in children and adolescents has more than tripled. 70 As a result, Congress proposed legislation focused on the advertis- ing of unhealthy food products to children. Kraft faced an ethical situation regarding the advertising of many of its foods. Some consumer groups might perceive Kraft’s advertising budget, which was primarily directed at children, as unethical. Because ignoring the situa- tion could be potentially disastrous, Kraft decided to stop advertising some of its products to children and instead market healthier foods.

Once stakeholders trigger ethical issue awareness and individuals openly discuss it and ask for guidance and the opinions of others, one enters the ethical decision-making process, which we examine in Chapter 5 .

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Chapter 3: Emerging Business Ethics Issues 85

SUMMARY

Stakeholders’ concerns largely determine whether business actions and decisions are perceived as ethical or unethical. When government, communities, and society become involved, what was merely an ethical issue can quickly become a legal one. Sharehold- ers can unwittingly complicate the ethical conduct of business by demanding managers make decisions to boost short-term earnings, thus maintaining or increasing the value of their stock.

A first step toward understanding business ethics is to develop ethical issue aware- ness; that is, to learn to identify which stakeholder issues contain an ethical component. Characteristics of the job, the corporate or local culture, and the society in which one does business can all create ethical issues. Recognizing an ethical issue is essential to under- standing business ethics and therefore to create an effective ethics and compliance pro- gram that minimizes unethical behavior. Businesspeople must understand the universal moral constants of honesty, fairness, and integrity. Without embracing these concepts, running a business becomes difficult.

Fairness is the quality of being just, equitable, and impartial, and overlaps with concepts of justice, equity, equality, and morality. The three fundamental elements that motivate people to be fair are equality, reciprocity, and optimization. Equality relates to how wealth is distributed between employees within a company, country, or globally; reciprocity relates to the return of favors approximately equal in value; and integrity refers to a person’s character and is made up of two basic parts, a formal relation one has to oneself and a person’s set of terminal, or enduring, values from which he or she does not deviate.

An ethical issue is a problem, situation, or opportunity that requires an individual, group, or organization to choose among several actions that must be evaluated as right or wrong, ethical or unethical. By contrast, an ethical dilemma has no right or ethical solution.

Abusive or intimidating behavior includes physical threats, false accusations, being annoying, profanity, insults, yelling, harshness, ignoring someone, and unreasonable- ness. Bribery is the practice of offering something (usually money) in order to gain an illicit advantage. A conflict of interest occurs when individuals must choose whether to advance their own interests, those of the organization, or some other group. Corporate intelligence is the collection and analysis of information on markets, technologies, custom- ers, and competitors, as well as on socioeconomic and external political trends. There are three intelligence models: passive, tactical, and top-management. The tools of corporate intelligence are many. One tool is hacking, accomplished through systemic, remote, and physical means; another is social engineering, in which someone is tricked into revealing valuable corporate information. Other techniques include dumpster diving, whacking, and phone eavesdropping.

Another ethical/legal issue is discrimination, which is illegal in the United States when it occurs on the basis of race, color, religion, sex, marital status, sexual orientation, public-assistance status, disability, age, national origin, or veteran status. Additionally, discrimination on the basis of political opinions or affiliation with a union is defined as harassment. Sexual harassment is a form of sex discrimination. To build workforces that reflect their customer base, many companies initiated affirmative action programs. In

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86 Part 2: Ethical Issues and the Institutionalization of Business Ethics

IMPORTANT TERMS FOR REVIEW

integrity 63

honesty 63

fairness 64

equality 64

reciprocity 65

optimization 65

ethical issue 65

ethical dilemma 65

abusive or intimidating behavior 66

lying 69

conflict of interest 70

bribery 70

active bribery 70

passive bribery 70

facilitation payment 70

corporate intelligence 71

hacking 72

system hacking 72

remote hacking 72

physical hacking 73

social engineering 73

shoulder surfing 73

password guessing 73

dumpster diving 73

whacking 73

phone eavesdropping 73

discrimination 73

Equal Employment Opportunity Commission 74

Age Discrimination in Employment Act 74

affirmative action program 74

sexual harassment 75

hostile work environment 75

dual relationship 75

unethical dual relationship 75

fraud 76

accounting fraud 77

marketing fraud 78

puffery 78

implied falsity 78

literally false 79

labeling issue 79

consumer fraud 79

insider trading 81

intellectual property rights 82

privacy issue 83

general, fraud is any purposeful communication that deceives, manipulates, or conceals facts in order to create a false impression. There are several types of fraud: accounting, marketing, and consumer.

An insider is any officer, director, or owner of 10 percent or more of a class of a company’s securities. There are two types of insider trading: legal and illegal. Intellectual property rights involve the legal protection of intellectual property such as music, books, and movies. Consumer advocates continue to warn consumers about new threats to their privacy.

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Chapter 3: Emerging Business Ethics Issues 87

Daniel just graduated from Michigan University and landed a job as a copywriter at Young, Olsen, Lindle, and Olson (YOLO) Advertising assigned to one of the subsidiary accounts of Delicious Uber Bacon Ingredients Extraordinaire Corpo- ration. This conglomerate was primarily a food processing manufacturer beginning one hundred years ago with pork in the Midwest. Overall cor- porate sales of beef, chicken, pork, and seafood were more than $ 750 million each year. YOLO considered many advertising options and opted for a celebrity spokesperson. That meant Daniel would work with Gloria Kunies as the celebrity endorser. Ms. Kunies is a well-known, well-loved, young, and vibrant actress with a large younger following.

Chloe, President of YOLO, asked Daniel to step into her office. “Daniel, this new account is a good start for you. We usually don’t let our new copywriters handle accounts by themselves, but you have proven to be a capable employee. Your job on this account is to write copy for the com- mercials using Ms. Kunies’ product testimoni- als. The copy needs to be crafted as a testimonial, targeting the market of seventeen to thirty-year- olds. Ms. Kunies already signed an affidavit as to being a bona fide user of the product. The scripts should feature her testifying to the quality, value, and tastiness of the bacon. I want you to meet her tomorrow so you can start the writing process and understand her personality in order to script the messages. Spend the rest of the day immers- ing yourself in her biography and researching her on the Internet.” As Daniel left Chole’s office he remembered a Facebook post about Ms. Kunies being a vegetarian.

The next day at their meeting, Daniel asked her if she had actually tasted the bacon. Ms. Kunies replied, “Why yes, technically and legally I have tried Uber. In fact, I’ve been a huge fan since I was a kid. Bacon is my favorite food. I’ve done several testimonials in the past and know the American Advertising Federation (AAF) rules. I know as

RESOLVING ETHICAL BUSINESS CHALLENGES *

long as my comments are based on verifiable per- sonal use, the message cannot be challenged as deceptive. In fact, Uber bacon has been a favorite of mine since I was young. It wasn’t until a month ago I became a vegetarian. Eating all that bacon for decades really did a number on my cholesterol.”

“So, you feel comfortable about endorsing Uber even though you don’t eat it now?” asked Daniel.

“No question about it. As far as bacon goes, Uber is second to none in taste. If people are going to eat bacon, why not eat the best? Even if it is a heart attack waiting to happen,” Ms. Kunies joked.

The next day Chloe asked Daniel how it went. He explained their conversation and expressed concern over the fact Ms. Kunies is currently a vegetarian, and she attributed her high choles- terol to Uber bacon. Daniel felt relief when he saw the concern in Chloe’s face, but soon realized her concern was about Ms. Kunies pulling out of the advertisement. Daniel reassured Chloe Ms. Kunies still wanted to promote the product, but it seemed like a contradiction to have a vegetarian promot- ing bacon. Chloe responded by saying as long as Ms. Kunies had eaten the bacon at some point in her life and thinks it is a good product, it makes no difference as to whether she currently eats the bacon. She continued, "Sometimes in advertis- ing, you have to add a spin to the message you are communicating so it fits with the product you are selling. Not only are you selling a product, but more importantly, you are selling an experience, a feeling, an idea that appeals to consumers."

As Daniel walked home that evening, he won- dered how he was going to write this advertisement. He did not want to begin his career in a dishon- est manner, but he also wanted to produce work that pleased his boss. He tried to think of creative ways to mask the contradiction of the advertise- ment. Maybe with humor? He asked himself if this approach would still feel dishonest. The next morn- ing Daniel was going to meet with both Ms. Kunies and Chloe about what he had written thus far.

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

88 Part 2: Ethical Issues and the Institutionalization of Business Ethics

QUESTIONS | EXERCISES 1. Describe the ethical issues that David is

encountering. 2. Does this situation in any way violate the con-

cepts of fairness, honesty, and integrity?

3. If the advertisement does not violate any laws, then why should Daniel be concerned? What are the possible consequences of the advertisement?

* This case is strictly hypothetical; any resemblance to real per- sons, companies, or situations is coincidental.

> > > CHECK YOUR EQ

Check your EQ, or Ethics Quotient, by completing the following. Assess your performance to evaluate your overall understanding of the chapter material.

1. Business can be considered a game people play, like basketball or boxing. Yes No

2. Key ethical issues in an organization relate to fraud, discrimination, honesty and fairness, conflicts of interest, and privacy. Yes No

3. Only 10 percent of employees observe abusive behavior in the workplace. Yes No

4. Fraud occurs when a false impression exists, which conceals facts. Yes No

5. Time theft is the most commonly observed type of misconduct. Yes No

ANSWERS 1. No. People are not economically self-sufficient and cannot withdraw from the game of business. 2. Yes. Fraud, discrimination, honesty and fairness, conflicts of interest, and privacy are some key ethical issues that businesses face. 3. No. According to Table 3–1 , 21 percent of employees observe abusive behavior in the workplace. 4. No. Fraud must be purposeful rather than accidental, and exists when deception and manipulation of facts are concealed to create a false impression that causes harm. 5. Yes. The most observed form of misconduct in Table 3–1 is misuse of company time.

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Chapter 3: Emerging Business Ethics Issues 89

ENDNOTES

1. James R. Hagerty, “Caterpillar Closes Plant in Canada After Lockout,” The Wall Street Journal , February 4, 2012, http://online.wsj.com/article/SB1000142405297020388990 4577200953014575964.html (accessed February 14, 2013).

2. Peter Elkind, David Whitford, and Doris Burke, “An Accident Waiting to Happen,” Fortune February 7, 2011, 106–132.

3. Vernon R. Loucks, Jr., “A CEO Looks at Ethics,” Business Horizons 30 (1987): 4.

4. Eric H. Beversluis, “Is There No Such Thing as Business Ethics?” Journal of Business Ethics 6 (1987): 81–88. Reprinted with permission of Kluwer Academic Publishers, Dordrecht, Holland.

5. Carolyn Said, “Ellison Hones His ‘Art of War’ Tactics,” San Francisco Chronicle , June 10, 2003, A1.

6. Michael Liedtke, “Oracle CO to Pay $122M to Settle Lawsuit,” Associated Press, USA Today November 22, 2005, http://usatoday30.usatoday.com/tech/2005-11-22-ellison- oracle-stock-settlement_x.htm (accessed April 22, 2013).

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9. William Atkinson, “Stealing time,” BNet , November 2006, http://findarticles.com/p/articles/mi_qa5332/ is_11_53/ai_n29304996/?tag=content;col1 (accessed February 17, 2011).

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20. Chad Bray, “Ralph Lauren Corp. Settles Bribe Probe,” The Wall Street Journal , April 22, 2013, http://online.wsj.com/ article/SB100014241278873242353045784387040931872 88.html?mod=googlenews_wsj (accessed April 23, 2013).

21. Leslie Wayne, “Hits, and Misses, in a War on Bribery,” The New York Times , March 10, 2012, http://www.nytimes. com/2012/03/11/business/corporate-bribery-war-has- hits-and-a-few-misses.html?pagewanted=all&_r=0 (accessed April 17, 2013).

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25. Jun Yang and Kyunghee Park, “The Curious Case of Samsung’s Missing TVs,” Bloomberg Businessweek , December 3–December 9, 2012, 19–20.

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90 Part 2: Ethical Issues and the Institutionalization of Business Ethics

26. Andrew Harris, “Ex-Motorola Worker Guilty of Trade Secret Theft, Judge Rules,” Bloomberg Businessweek , February 13, 2012, http://www.businessweek.com/ news/2012-02-13/ex-motorola-worker-guilty-of-trade- secret-theft-judge-rules.html (accessed April 17, 2013).

27. Develin Barrett, “Hackers Penetrate Nasdaq Computers,” The Wall Street Journal , February 5, 2011, http://online. wsj.com/article/SB10001424052748704709304576124502 351634690.html (accessed February 10, 2011).

28. U.S. Equal Employment Opportunity Commission, “Charge Statistics,” http://eeoc.gov/eeoc/statistics/ enforcement/charges.cfm (accessed April 17, 2013).

29. “Black millionaire: Fortune 500 CEOs,” Rolling Out , http://rollingout.com/business/executive-suite/black- millionaire-fortune-500-ceos/ (accessed April 17, 2013).

30. Ann Brenoff, “Age Discrimination: Older Workers Worry about Hiring Bias,” The Huffington Post , October 8, 2012, http://www.huffingtonpost.com/2012/10/08/ ageism_n_1881619.html (accessed April 17, 2013).

31. “AARP Best Employers for Workers over 50: About the Program,” AARP September 2009, http://www. aarp.org/work/employee-benefits/info-09-2009/ about_the_best_employers_program.html (accessed February 18, 2011).

32. “What Is Affirmative Action?” HR Content Library , October 12, 2001, http://www.hrnext.com/content/ view.cfm?articles_id=2007&subs_id=32 (accessed August 5, 2009).

33. “What Affirmative Action Is (and What It Is Not),” National Partnership for Women & Families , http:// www.nationalpartnership.org/site/DocServer/ AffirmativeActionFacts.pdf?docID=861 (accessed August 5, 2009).

34. Debbie M. Thorne, O. C. Ferrell, and Linda Ferrell, Business and Society: A Strategic Approach to Social Responsibility and Ethics , 4 th ed. (Mason, OH: South- Western Cengage Learning, 2011), 182.

35. U.S. Equal Employment Opportunity Commission, “Outback Steakhouse to Pay $65, 000 to Settle EEOC Disability Discrimination Lawsuit,” March 22, 2013, http://www.eeoc.gov/eeoc/newsroom/release/3-22-13.cfm (accessed April 17, 2013).

36. Paula N. Rubin, “Civil Rights and Criminal Justice: Primer on Sexual Harassment Series: NIJ Research in Action,” October 1995, http://www.ncjrs.org/txtfiles/ harass.txt (accessed August 5, 2009).

37. U.S. Equal Employment Opportunity Commission, “Sexual Harassment Charges,” http://www.eeoc.gov/eeoc/ statistics/enforcement/sexual_harassment.cfm (accessed April 17, 2013).

38. Steve Stecklow, “Sexual Harassment Cases Plague UN,” The Wall Street Journal , May 21, 2009, http://online.wsj. com/article/SB124233350385520879.html (accessed April 17, 2013).

39. Zabkowicz v. West Bend Co ., 589 F. Supp. 780, 784, 35 EPD Par.34, 766 (E.D. Wis.1984).

40. Iddo Landau, “The Law and Sexual Harassment,” Business Ethics Quarterly 15, no. 2 (2005): 531–536.

41. “Enhancements and Justice: Problems in Determining the Requirements of Justice in a Genetically Transformed Society,” Kennedy Institute Ethics Journal 15, no. 1 (2005): 3–38.

42. Association of Certified Fraud Examiners, Report to the Nations on Occupational Fraud and Abuse: 2012 Global Fraud Study , 4.

43. Nate Raymond, “NY judge approves $115 million AIG shareholder settlement,” Reuters , April 10, 2013, http:// www.reuters.com/article/2013/04/10/us-aig-settlement- idUSBRE93913H20130410 (accessed April 17, 2013).

44. Cassell Bryan-Low, “Accounting Firms Face Backlash over the Tax Shelters They Sold,” The Wall Street Journal online, February 7, 2003, http://online.wsj.com/article/ SB1044568358985594893.html?mod=googlewsj (accessed August 5, 2009).

45. U.S. Securities and Exchange Commission, “SEC Charges New York-Based Private Equity Fund Advisers With Misleading Investors About Valuation and Performance,” March 11, 2013, http://www.sec.gov/ news/press/2013/2013-38.htm (accessed April 17, 2013); Dan Primack, “Oppenheimer admits to misleading investors,” CNN , March 11, 2013, http://finance.fortune. cnn.com/2013/03/11/sec-charges-oppenheimer-with- misleading-investors/ (accessed April 17, 2013).

46. Gillette Co. v. Wilkinson Sword, Inc ., 89-CV-3586, 1991 U.S. Dist. Lexis 21006, *6 (S.D.N.Y. January 9, 1991).

47. Archie B. Carroll, Business and Society: Ethics and Stakeholder Management (Cincinnati: South-Western, 1989), 228–230.

48. “Monster to label caffeine content on energy drinks,” CBS News February 14, 2013, http://www.cbsnews.com/8301- 204_162-57569470/monster-to-label-caffeine-content- on-energy-drinks/ (accessed April 17, 2013).

49. Pierre Thomas, “Shoplifting on the Rise as Thieves Swipe Small, Pricey Items for Resale,” ABC News , October 26, 2012, http://abcnews.go.com/blogs/headlines/2012/10/ shoplifting-on-the-rise-as-thieves-swipe-small-pricey- items-for-resale/ (accessed April 17, 2013).

50. Caroline Winter, “When Christmas Brings Retailers Many Unhappy Returns,” Bloomberg Businessweek , December 30, 2012, http://www.businessweek.com/ articles/2012-12-30/when-christmas-brings-retailers- many-unhappy-returns (accessed April 17, 2013).

51. Richard Esposito, “Thain Tells All on Merrill Lynch Bonuses,” ABC News , February 25, 2009, http://abcnews. go.com/Blotter/WallStreet/story?id=6959962&page=1 (accessed February 21, 2011).

52. Damian Paletta, Maya Jackson Randall, and Michael R. Crittenden, “Geithner Calls for Tougher Standards on Risk,” The Wall Street Journal , March 25, 2009, http:// online.wsj.com/article/SB123807231255147603.html (accessed April 14, 2011).

53. Jennifer Liberto and David Ellis, “Wall Street reform: What’s in the bill,” CNN Money.com , June 30, 2010, http://money.cnn.com/2010/06/25/news/economy/ whats_in_the_reform_bill/index.htm (accessed February 14, 2011).

54. Chad Bray, “Former Hedge-Fund Manager Is Sentenced,” The Wall Street Journal , January 25, 2013, C3.

55. Jason Zweig, “Insider Trading: Why We Can’t Help Ourselves,” The Wall Street Journal , April 2, 2011, http:// online.wsj.com/article/SB10001424052748704530204576 236922024758718.html (accessed April 27, 2011).

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Chapter 3: Emerging Business Ethics Issues 91

57. Jennifer Martinez, “Report: One-fourth of web traffic is pirated content,” Politico.com , February 21, 2011, http:// hamptonroads.com/2011/02/report-onefourth-web- traffic-pirated-content (accessed February 21, 2011).

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CHAPTER OBJECTIVES • Distinguish between the voluntary and

mandated boundaries of ethical conduct • Provide specific mandated requirements

for legal compliance in specific subject matter areas related to competition, consumers, and safety

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

• Describe the passage of the Dodd– Frank Wall Street Reform and Consumer Protection Act along with some of its major provisions

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

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

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

CHAPTER OUTLINE Managing Ethical Risk through Mandated and Voluntary Programs Mandated Requirements for Legal Compliance

Laws Regulating Competition Laws Protecting Consumers Laws Promoting Equity and Safety

Gatekeepers and Stakeholders Accountants; Risk Assessment

The Sarbanes–Oxley (SOX) Act Public Company Accounting Oversight Board Auditor and Analyst Independence Whistle-Blower Protection Cost of Compliance

Dodd–Frank Wall Street Reform and Consumer Protection Act

New Financial Agencies Consumer Financial Protection Bureau Whistle-Blower Bounty Program

Laws That Encourage Ethical Conduct Federal Sentencing Guidelines for Organizations Highly Appropriate Core Practices

Voluntary Responsibilities Cause-Related Marketing Strategic Philanthropy

The Importance of Institutionalization in Business Ethics

THE INSTITUTIONALIZATION OF BUSINESS ETHICS

CHAPTER 4

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inventory in the hospitals. Randy began to get uncomfortable.

“But Cheryl, couldn’t this be dangerous if the hospital uses expired products?”

Cheryl shook her head. “You don’t have to worry. Our competitors offer similar products with a longer expiration date, and there’s really no harm in using these products after their expiration date. They are just a little less potent, but not more harmful in any way.”

Randy took the labels and headed to the hospitals. As he drove, he went over the instructions in his head. Something about this made him feel uneasy, but he also understood there was no harm in changing the labels. In fact, there were times he remembered taking expired over-the-counter medication himself and it didn’t hurt him in any way. Additionally, he would only be extending the date by three months, which is not a long time for medications.

On the other hand, he recalled a moment from his training when he was cautioned about expired medical products. Thinking back, Randy only recalled being cautioned against using expired prescription medications, not anything about over- the-counter medications. Randy also wondered if he would be questioned by the hospital administration staff when he asked for their signature on the inventory paperwork. He knew they would find it odd if there were no credits to their account for expired medications. How would he explain the “new policy” to them without being dishonest?

QUESTIONS | EXERCISES 1. How should Randy deal with the dilemma he is

facing? 2. What are the implications of comparing Meeker’s

practices with those of its competitors? 3. What kind of responsibility does Randy have to the

different stakeholders involved in this situation? Does his responsibility to Meeker differ from his responsibility to the hospitals?

One year out of the Pennsylvania university system, Randy was hired by Meeker, a medical warehouse that provides pharmaceutical products to various hospitals and clinics within a three state area. Meeker was the dominant company in the market. Equipped with his BS degree, Randy was eager to learn, get ahead, and begin his career. As a new employee, he was required to go through extensive training to learn about hospital and clinic regulations, laws, various system procedures, and software applications. The two-month training included descriptions of the usual type of emergencies experienced in clinics and hospitals and what the needs were concerning equipment and supplies. He learned how to use various products and equipment and to train others in these areas. Part of his training was working in all areas of the medical warehouse.

One day Randy’s supervisor, Cheryl, brought him into her office to discuss his next assignment. She explained to him that several of the hospitals they serve were about to begin their annual inventory counts. When these inventory counts occur, a representative from Meeker must go into the hospitals and replace all expired supplies and equipment with new ones.

“One of the problems we’ve been having is the expiration dates on the products we supply are shorter than those of our competitors,” Cheryl explained. “To keep our clients loyal, we offer a credit to our clients when we take back the expired products. Unfortunately, that’s caused us to lose profits.”

Cheryl paused for a moment, then continued. “We can’t keep losing profits like this, so I’ve developed an idea for cutting costs and increasing our competitive advantage.”

Cheryl handed several sheets of sticky labels to Randy. He looked them over and found they were exact replicas of the labels on their medical products for over-the-counter medications. The expiration dates on these labels were three months from the current date. Randy looked at Cheryl for more of an explanation.

Cheryl turned to Randy and told him to replace the old labels with the new ones and leave the

AN ETHICAL DILEMMA *

* This case is strictly hypothetical; any resemblance to real persons, companies, or situations is coincidental.

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94 Part 2: Ethical Issues and the Institutionalization of Business Ethics

To understand the institutionalization of business ethics, it is important to under-stand the voluntary and legally mandated dimensions of organizational practices. In addition, there are core practices, sometimes called best practices most responsible firms—those trying to achieve acceptable conduct—embrace and implement. The effective organizational practice of business ethics requires all three dimensions (legal, voluntary, and core practices) be integrated into an ethics and compliance program. This integration cre- ates an ethical culture that effectively manages the risks of misconduct. Institutionalization relates to legal and societal forces that provide both rewards and punishment to organiza- tions based on stakeholder evaluations of specific conduct. Institutionalization in business ethics relates to established laws, customs, and expected organizational programs consid- ered normative in establishing reputation. This means deviations from expected conduct are often considered ethical issues and are therefore a concern to stakeholders. Institutions provide requirements, structure, and societal expectations that reward and sanction ethi- cal decision making. For example, institutions such as federal regulatory agencies establish rules for appropriate conduct and even suggest core practices for ethical cultures.

In this chapter, we examine the boundaries of ethical conduct and focus on voluntary and core practices and mandated requirements for legal compliance—three important areas in developing an ethical culture. In particular, we concentrate on com- pliance in specific areas related to competition, consumers, and safety. We consider the requirements of the Sarbanes–Oxley legislation, its implementation by the Securities and Exchange Commission (SEC), and how its implementation has affected compa- nies. We also examine the Dodd–Frank legislation and its rules affecting the finance industry. We provide an overview of the Federal Sentencing Guidelines for Organiza- tions (FSGO), along with recommendations and incentives for developing an ethical corporate culture. The FSGO, the Sarbanes–Oxley Act and Dodd–Frank legislation, and industry trade associations, as well as societal expectations, support core practices. Finally, we examine voluntary responsibilities and look at how cause-related marketing and strategic philanthropy can be an important core competency in managing stake- holder relationships.

MANAGING ETHICAL RISK THROUGH MANDATED AND VOLUNTARY PROGRAMS

Table 4–1 provides an overview of the three dimensions of institutionalization. Voluntary practices include the beliefs, values, and voluntary contractual obligations of a business. All businesses engage in some level of commitment to voluntary activities to benefit both internal and external stakeholders. Google works hard to give its employees a positive work environment through its benefits package. In addition to being a famously great place to work, Google offices offer such amenities as swimming pools, gyms, volleyball courts, ping-pong tables, and dance classes. The company even allows employees to bring their dogs to work. 1 Most firms engage in philanthropy —giving back to communities and causes. There is strong evidence to suggest both the law and a sense of ethics increase voluntary corporate social responsibility practices. In addition, research has demonstrated that when both ethical and legal responsibilities are respected through core practices, economic per- formance benefits. 2

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Chapter 4: The Institutionalization of Business Ethics 95

Core practices are documented best practices, often encouraged by legal and regula- tory forces as well as industry trade associations. The Better Business Bureau is a lead- ing self-regulatory body that provides directions for managing customer disputes and reviews advertising cases. Core practices are appropriate and common practices that ensure compliance with legal requirements and societal expectations. Although these practices are not enforced, there are consequences for not engaging in them when mis- conduct occurs. For example, the Federal Sentencing Guidelines for Organizations (FSGO) suggest the governing authority (board of directors) be responsible for and assess an organization’s ethical and compliance activities. No reporting or investigation is required by government regulatory bodies, but there are incentives for the firms that effectively implement this recommendation. For example, if misconduct occurs, firms may have opportunities to avoid serious punishment. On the other hand, if the board has made no effort to oversee ethics and compliance, its failure could increase and com- pound the level of punishment the company suffers. In this way, in institutionalizing core practices the government provides organizations with the opportunity to structure their own approaches and only takes action if violations occur. Mandated boundaries are externally imposed boundaries of conduct, such as laws, rules, regulations, and other requirements. Antitrust and consumer protection laws create boundaries that must be respected by companies.

Organizations need to maintain an ethical culture and manage stakeholder expecta- tions for appropriate conduct. They achieve these ends through corporate governance, compliance, risk management, and voluntary activities. The development of these driv- ers of an ethical culture has been institutionally supported by government initiatives and the demands of stakeholders. The compliance element represents areas that must conform to existing legal and regulatory requirements. Established laws and regulatory decisions leave limited flexibility to organizations in adhering to these standards. Cor- porate governance (as discussed in Chapter 2 ) is structured by a governing authority that provides oversight as well as checks and balances to make sure that the organiza- tion meets its goals and objectives for ethical performance. Risk management analyzes the probability or chance that misconduct could occur based on the nature of the busi- ness and its exposure to risky events. Voluntary activities often represent the values and responsibilities that firms accept in contributing to stakeholder needs and expectations.

Figure 4–1 depicts the key elements of an organizational culture. These elements include values, norms, artifacts, and behavior. An ethical culture creates an environment to structure behavior that is evaluated by stakeholders. As mentioned in previous chapters, val- ues are broad and viewed as long-term enduring beliefs about issues such as integrity, trust,

TABLE 4–1 Voluntary Boundary, Core Practices, and Mandated Boundaries of Ethical Decisions

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

Core practice A highly appropriate and common practice that helps ensure compliance with legal requirements, industry self-regulation, and societal expectations

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

Source: Based on the “Open Compliance Ethics Group (OCEG) Foundation Guidelines,” v1.0, Steering Committee Update, December 2005, Phoenix, AZ.

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96 Part 2: Ethical Issues and the Institutionalization of Business Ethics

openness, diversity, and individual respect and responsibility. Norms dictate and clarify desirable behaviors through principles, rules, policies, and procedures. For example, norms provide guiding principles for anti-bribery issues, sustainability, and conflicts of interest. Artifacts are visible, tangible external symbols of values and norms. Websites, codes of eth- ics, rituals, language, and physical settings are artifacts. These three elements have different impacts on behaviors. Organizational decisions on such issues as governance, codes of eth- ics, ethics training, and legal compliance are shaped by the ethical culture.

MANDATED REQUIREMENTS FOR LEGAL COMPLIANCE

Laws and regulations are established by governments to set minimum standards for respon- sible behavior—society’s codification of what is right and wrong. Laws regulating business conduct are passed because some stakeholders believe business cannot be trusted to do what is right in certain areas, such as consumer safety and environmental protection. Because public policy is dynamic and often changes in response to business abuses and consumer demands for safety and equality, many laws have been passed to resolve specific problems and issues. But the opinions of society, as expressed in legislation, can change over time, and different courts and state legislatures may take diverging views. For example, the thrust of most business legislation can be summed up as follows: Any practice is permitted that does not substantially lessen or reduce competition or harm consumers or society. Courts differ, however, in their interpretations of what constitutes a “substantial” reduction of competi- tion. Laws can help businesspeople determine what society believes at a certain time, but what is legally wrong today may be perceived as acceptable tomorrow, and vice versa.

Instructions to employees to “just obey the law” are meaningless without experience and effective training in dealing with specific legal risk areas. One area that illustrates the

Culture

Values, Norms, Artifacts, Behavior

Voluntary Actions, Governance, Core Practices, Legal Compliance

FIGURE 4–1 Elements of an Ethical Culture

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Chapter 4: The Institutionalization of Business Ethics 97

complexity of the law is patents. Large technology companies aggressively defend their pat- ents in order to maintain their strategic advantages. Lawsuits among direct competitors in hardware and software have shifted to the mobile industry as technology companies fight to come out on top. For example, Motorola Mobility accused Apple, Inc., of using features on its iPhones that are protected under Motorola’s patents. 3 Patent issues have become so impor- tant that some firms, such as IBM and Qualcomm, have created their own patent licensing businesses. 4

Laws are categorized as either civil or criminal. Civil law defines the rights and duties of individuals and organizations (including businesses). Criminal law not only prohibits spe- cific actions—such as fraud, theft, or securities trading violations—but also imposes fines or imprisonment as punishment for breaking the law. The primary difference between criminal and civil law is the state or nation enforces criminal laws, whereas individuals (generally, in court) enforce civil laws. Criminal and civil laws are derived from four sources: the U.S. Con- stitution (constitutional law), precedents established by judges (common law), federal and state laws or statutes (statutory law), and federal and state administrative agencies (admin- istrative law). Federal administrative agencies established by Congress control and influence business by enforcing laws and regulations to encourage competition and to protect consum- ers, workers, and the environment. The Consumer Financial Protection Bureau was estab- lished after the latest financial crisis, which resulted in many consumers losing their homes. State and local laws and regulatory agencies also exist to achieve these objectives.

The primary method of resolving conflicts and serious business ethics disputes is through lawsuits, or when one individual or organization uses civil laws to take another individual or organization to court. However, businesses often want to avoid lawsuits if possible because of the high costs involved. For instance, Hon Hai Precision Industry Company signed a deal with Microsoft to license technology covered by Microsoft patents. Microsoft claims makers of Android devices have been using software elements Micro- soft has already patented. By licensing Microsoft technology and paying royalties, Hon Hai reduces the risk of future litigation with Microsoft. 5 To avoid lawsuits and maintain the standards necessary to reduce risk and create an ethical culture, both legal and organiza- tional standards must be enforced. When violations of organizational standards occur, the National Business Ethics Survey (NBES) notes many employees do not feel their company has a strong ethics program. On the other hand, effective ethics programs reduce miscon- duct. Figure 4–2 demonstrates how well-implemented ethics programs decrease ethical risks within an organization. It is therefore important for a company to have a functioning ethics program in place long before an ethical disaster strikes.

The role of laws is not so much to distinguish what is ethical or unethical as to deter- mine the appropriateness of specific activities or situations. In other words, laws establish the basic ground rules for responsible business activities. Most of the laws and regulations that govern business activities fall into one of five groups: (1) regulation of competition, (2) protection of consumers, (3) promotion of equity and safety, (4) protection of the natu- ral environment, and (5) incentives to encourage organizational compliance programs to deter misconduct that we will examine later.

Laws Regulating Competition The issues surrounding the impact of competition on businesses’ social responsibility arise from the rivalry among businesses for customers and profits. When businesses compete unfairly, legal and social responsibility issues can result. Intense competition sometimes

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98 Part 2: Ethical Issues and the Institutionalization of Business Ethics

makes managers feel their company’s survival is threatened. In these situations, managers may begin to see unacceptable alternatives as acceptable, and they begin engaging in ques- tionable practices to ensure the survival of their organizations. Both Intel and Microsoft have been hit with fines amounting to billions of dollars for alleged antitrust activity in Europe. The European Union is famous for being tough on companies suspected of anti- trust activities. For instance, Google came under investigation for allegedly manipulating search engine results so its paid services were favored over those of its rivals. This and other potential violations caused the EU to examine whether Google was competing fairly with its rivals. Google attempted to make changes to the look of its search engine to try and decrease fears it is unfairly harming competitors. 6 Being aware of antitrust laws is impor- tant for all large corporations around the world.

Size frequently gives some companies an advantage over others. Large firms can often generate economies of scale (for example, by forcing their suppliers to lower their prices) that allow them to put smaller firms out of business. Consequently, small companies and even whole communities may resist the efforts of firms like Walmart, Home Depot, and Best Buy to open stores in their vicinity. These firms’ sheer size enables them to operate at such low costs that small, local firms often cannot compete. Some companies’ competi- tive strategies may focus on weakening or destroying a competitor; that harms competi- tion and ultimately reduces consumer choice. Many countries have laws restricting such

FIGURE 4–2 Well-Implemented Ethics Programs and Strong Cultures Reduce Risk

46%

48%

89%

28%

6%

30%

7%

0% 20% 40% 60% 80% 100%

Experienced retaliation after reporting

Did NOT report misconduct they observed

Observed misconduct in previous months

Felt pressure to compromise standards 33%

Strongest Programs and Cultures

Weakest Programs and Cultures

Source: Ethics Resource Center, 2011 National Business Ethics Survey: Workplace Ethics In Transition (Arlington, VA: Ethics Resource Center, 2012), p. 35.

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Chapter 4: The Institutionalization of Business Ethics 99

anticompetitive behavior. For instance, China’s economic planning agency is attempting to move closer toward international laws by creating new rules against price collusion that occurs when businesses get together and inflate prices above what they would be if each business priced its products independently. 7 Other examples of anticompetitive strategies include sustained price cuts, discriminatory pricing, and bribery. While the U.S. Justice Department aggressively enforces the Foreign Corrupt Practices Act prohibiting bribery of foreign government officials, the U.K. has even more sweeping anti-bribery laws. These laws apply to all companies doing business in Britain and prohibit bribes to foreign officials and private businesspeople. Other nations, including China, are taking a tougher stance on bribery and are prosecuting companies caught in the act. 8

The primary objective of U.S. antitrust laws is to distinguish competitive strategies that enhance consumer welfare from those that reduce it. The difficulty of this task lies in determining whether the intent of a company’s pricing policy is to weaken or even destroy a competitor. 9 President Obama took a strong position on antitrust violations, reversing the previous administration’s policy that made it more difficult for the govern- ment to pursue antitrust violations. The former administration brought a historically low number of antitrust cases to trial. 10 President Obama attempted to follow Europe’s model for antitrust cases, which marks a return to a historic norm after eight years of noninterventionism. 11

Intense competition also leads companies to resort to corporate espionage. Cor- porate espionage is the act of illegally taking information from a corporation through computer hacking, theft, intimidation, sorting through trash, and impersonation of organizational members. Estimates show corporate espionage may cost companies nearly $ 50 billion annually. Unauthorized information collected includes patents in develop- ment, intellectual property, pricing strategies, customer information, unique manufac- turing and technological operations, marketing plans, research and development, and future plans for market and customer expansion. 12 A former engineer at General Motors and her husband were found guilty of stealing GM trade secrets on hybrid technology and trying to sell the information to Chinese automakers. General Motors estimates the stolen trade secrets were valued at $ 40 million. 13 Determining an accurate amount for corporate espionage losses is difficult because most companies do not report such losses for fear the publicity will harm their stock price or encourage further break-ins. Espio- nage may be carried out by outsiders or employees—executives, programmers, network or computer auditors, engineers, or janitors who have legitimate reasons to access facili- ties, data, computers, or networks. They may use a variety of techniques for obtaining valuable information, such as dumpster diving, whacking, and hacking, as discussed in Chapter 3 .

Laws have been passed to prevent the establishment of monopolies, inequitable pric- ing practices, and other practices that reduce or restrict competition among businesses. These laws are sometimes called procompetitive legislation because they were enacted to encourage competition and prevent activities that restrain trade ( Table 4–2 ). The Sherman Antitrust Act of 1890, for example, prohibits organizations from holding monopolies in their industry, and the Robinson–Patman Act of 1936 bans price discrimination between retailers and wholesalers.

In law, however, there are always exceptions. Under the McCarran–Ferguson Act of 1944, Congress exempted the insurance industry from the Sherman Antitrust Act and other antitrust laws. Insurance companies joined together to set insurance premiums at specific industry-wide levels. However, even actions that take place under this legal

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100 Part 2: Ethical Issues and the Institutionalization of Business Ethics

“permission” could still be viewed as irresponsible and unethical if it neutralizes compe- tition and if prices no longer reflect the true costs of insurance protection. What is legal is not always considered ethical by some interest groups. Major League Baseball has an antitrust exemption dating back to 1922. MLB is the only major sport with such a sweeping antitrust exemption, although the major effect it has on the game these days is that sports teams cannot relocate without MLB’s permission. 14

TABLE 4–2 Laws Regulating Competition

Sherman Antitrust Act, 1890 Prohibits monopolies

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Fraud Enforcement and Recovery Act, 2009

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

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Chapter 4: The Institutionalization of Business Ethics 101

Laws Protecting Consumers Laws that protect consumers require businesses to provide accurate information about their products and services and follow safety standards ( Table 4–3 ). The first consumer protection law was passed in 1906, partly in response to a novel by Upton Sinclair. The Jungle describes, among other things, the atrocities and unsanitary conditions of the meatpacking industry in turn-of-the-century Chicago. The outraged public response to this book and other exposés

TABLE 4–3 Laws Protecting Consumers

Pure Food and Drug Act, 1906 Prohibits adulteration and mislabeling of foods and drugs sold in interstate commerce

Federal Hazardous Substances Labeling Act, 1960

Controls the labeling of hazardous substances for household use

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

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

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

Consumer Goods Pricing Act, 1975 Prohibits price maintenance agreements

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

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

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

Nutritional Labeling and Education Act, 1990

Prohibits exaggerated health claims and requires all processed foods to have labels showing nutritional information

Telephone Consumer Protection Act, 1991

Establishes procedures for avoiding unwanted telephone solicitations

Children’s Online Privacy Protection Act, 1998

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

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

Credit Card Accountability Responsibility and Disclosure Act, 2009

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

Dodd–Frank Wall Street Reform and Consumer Protection Act (2010)

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

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102 Part 2: Ethical Issues and the Institutionalization of Business Ethics

of the industry resulted in the passage of the Pure Food and Drug Act. Similarly, Ralph Nader had a tremendous impact on consumer protec- tion laws with his book Unsafe at Any Speed. His critique and attack on General Motors’ Corvair had far-reaching effects on cars and other con- sumer products. Other consumer protection laws emerged from similar processes.

Large groups of people with specific vulner- abilities have been granted special levels of legal protection relative to the general population. For example, children and the elderly have received proportionately greater attention than other groups. American society responded to research and documentation showing young consum- ers and senior citizens encounter difficulties in the acquisition, consumption, and disposition of products. Special legal protection provided to vulnerable consumers is considered to be in the public interest. 15 For example, the Chil- dren’s Online Privacy Protection Act (COPPA) requires commercial Internet sites to carry pri- vacy policy statements, obtain parental consent before soliciting information from children under the age of 13 , and provide an opportunity to remove any information provided by children using such sites. Critics of COPPA argue chil- dren aged 13 and older should not be treated as adults on the web. In a study of children ages 10 to 17 , nearly half indicated they would give their name, address, and other demographic information in exchange for a gift worth $ 100 or more. Internet safety among children is another major topic of concern. Research shows filtering and age verification are not effective in making the Internet safer, and businesses, regulators, and parents are trying to decipher how to bet- ter protect children from dangers ranging from online predators to pornography. 16 Mobile tech- nology also called for updates in the law. The FTC adopted changes to COPPA to account for mobile phone applications. Many standard mobile marketing practices, such as collect- ing location information and photos, are now considered to be personal information when applied to children under the age of 13 . 17

Seniors are another highly vulnerable demographic. New laws took aim at financial

The Multilevel Marketing Controversy

Multilevel marketing (MLM) is a compensation method in direct selling when distributors earn income from their own sales of products as well as commissions from sales made by individuals they recruited. MLM creates internal consumption, involving purchasing products at a discount from the firm for the distributors’ own use. MLM is controversial because there have been some accusations that it resembles a pyramid scheme. Pyramid schemes occur when there is no product to sell or when the product has no market value. Distributors pay a fee or make an investment when “recruited,” generating money for the scheme. The scheme collapses when distributors cannot recruit anyone else. Those at the top benefit, while newer distributors lose out because the scheme is not based on selling products to consumers.

The three largest multilevel direct sellers are Avon, Amway, and Herbalife. MLM is legal because a legitimate product is sold and it is a sales compensation method. For example, Herbalife has 8 million U.S. customers that have purchased the product in three months, based on a Nielsen survey. It has 550,000 U.S, distributors, so most of its products are sold directly to consumers. Yet critics say distributors make more money from the sales of those they recruit than from selling products, although this concern has nothing to do with the implementation of a pyramid scheme. Many people enter the industry to purchase products and are not trying to earn a regular income. Oftentimes people become distributors because they enjoy using the product and often get discounts on purchases, as well as enjoying the social interaction. 19

1. Multilevel marketing is a legitimate compensation method in direct selling.

2. Although legal, the multilevel compensation method is similar to a pyramid scheme.

DEBATE ISSUE TAKE A STAND

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Chapter 4: The Institutionalization of Business Ethics 103

scams directed at seniors, such as free lunch seminars. The state of Arkansas took the lead on this issue, conducting police sweeps of suspected scams, increasing fines, and amending laws to impose increased penalties for those who prey on the elderly. Older people are the most vulnerable group for financial scams because they rely on their savings for retirement security. 18 The role of the FTC’s Bureau of Consumer Protection is to protect consum- ers against unfair, deceptive, or fraudulent practices. The bureau, which enforces a variety of consumer protection laws, is divided into five divisions. The Division of Enforcement monitors compliance with and investigates violations of laws, including unfulfilled holiday delivery promises by online shopping sites, employment opportunities fraud, scholarship scams, misleading advertising for health care products, high-tech and telemarketing fraud, data security, and financial practices.

The Food and Drug Administration (FDA) regulates food safety, human drugs, tobacco, dietary supplements, vaccines, veterinary drugs, medical devices, cosmetics, products that give off radiation, and biological products. The FDA has the power to authorize the marketing of these products as well as to ban those deemed unsafe for the public. 20 For example, the FDA sent a warning to energy drink and supplement compa- nies that use the stimulant dimethylamylamine (DMAA) in their products. The FDA found the stimulant is linked to serious health risks. Because it has not been sufficiently tested as an additive, the FDA is warning energy drink makers that products using this stimulant are illegal. 21

Laws Promoting Equity and Safety Laws promoting equity in the workplace were passed during the 1960s and 1970s to pro- tect the rights of minorities, women, older persons, and persons with disabilities; other legislation sought to protect the safety of all workers ( Table 4–4 ). Of these laws, probably the most important to business is Title VII of the Civil Rights Act, originally passed in 1964 and amended several times since. Title VII specifically prohibits discrimination in employment on the basis of race, sex, religion, color, or national origin. The Civil Rights Act also created the Equal Employment Opportunity Commission (EEOC) to enforce the provisions of Title VII. Among other things, the EEOC assists businesses in designing affirmative action programs. These programs aim to increase job opportunities for women and minorities by analyzing the present pool of employees, identifying areas where women and minorities are underrepresented, and establishing specific hiring and promotion goals, along with target dates for meeting those goals.

Other legislation addresses more specific employment practices. The Equal Pay Act of 1963 mandates that women and men who do equal work must receive equal pay. Wage dif- ferences are allowed only if they can be attributed to seniority, performance, or qualifica- tions. The Americans with Disabilities Act of 1990 prohibits discrimination against people with disabilities. Despite these laws, inequities in the workplace still exist. Women earn an average of 77 to 82 cents for every dollar men earn. 22 The disparity in wages is higher for African American women ( 64 cents for every dollar a white man earns) and Hispanic women ( 55 cents for every dollar). 23

Congress passed laws that seek to improve safety in the workplace. By far the most sig- nificant of these is the Occupational Safety and Health Act of 1970 that mandates employ- ers provide safe and healthy working conditions for all workers. The Occupational Safety and Health Administration (OSHA) enforces the act and makes regular surprise inspections to ensure businesses maintain safe working environments.

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104 Part 2: Ethical Issues and the Institutionalization of Business Ethics

TABLE 4–4 U.S. Laws Promoting Equity and Safety

Equal Pay Act of 1963 Prohibits discrimination in pay on the basis of sex

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

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

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

Age Discrimination in Employment Act, 1967

Prohibits discrimination in employment against persons between the ages of 40 and 70

Occupational Safety and Health Act, 1970

Designed to ensure healthful and safe working conditions for all employees

Title IX of Education Amendments of 1972

Prohibits discrimination based on sex in education programs or activities that receive federal financial assistance

Vocational Rehabilitation Act, 1973 Prohibits discrimination in employment because of physical or mental handicaps

Vietnam Era Veterans Readjustment Act, 1974

Prohibits discrimination against disabled veterans and Vietnam War veterans

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

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

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

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

Immigration Reform and Control Act, 1986

Prohibits employers from knowingly hiring a person who is an unauthorized alien

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

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

© C

en ga

ge L

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in g

Even with the passage and enforcement of safety laws, many employees still work in unhealthy or dangerous environments. Safety experts suspect that companies underre- port industrial accidents to avoid state and federal inspection and regulation. The current emphasis on increased productivity has been cited as the main reason for the grow- ing number of such accidents. Competitive pressures are also believed to lie behind the increases in manufacturing injuries. Greater turnover in organizations due to downsizing means employees may have more responsibilities and less experience in their current posi- tions, thus increasing the potential for accidents. Overworked employees are often cited as a primary factor in careless accidents, both in the United States and in other countries. For instance, cruise ship lawyers cite overworked employees as one of the major causes

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Chapter 4: The Institutionalization of Business Ethics 105

for the increase in cruise ship accidents. They state because cruise ship employees are no longer subject to the U.S. court system, but are directed to foreign arbitration when they have problems, they have experienced a deterioration in working conditions that has led to additional accidents. 24

GATEKEEPERS AND STAKEHOLDERS

Trust is the glue that holds businesses and their stakeholders together. Trust creates confidence and helps to forge relationships of reliance between businesses and stake- holders. Trust also allows businesses to depend upon one another as they make trans- actions or exchange value. Ethics create the foundational trust between two parties in a transaction. Many people must trust and be trusted to make business work properly. Sometimes these parties are referred to as gatekeepers. Gatekeepers include accoun- tants, who are essential to certifying the accuracy of financial information, as well as lawyers, financial rating agencies, and even financial reporting services. These groups are critical in providing information allowing stakeholders to gain an understanding of the financial position of an organization. Most of these gatekeepers operate with profes- sional codes of ethics and face legal consequences, or even disbarment, if they fail to operate within agreed-upon principles of conduct. Therefore, there is a strong need for gatekeepers to uphold ethical standards and remain independent through using stan- dard methods and procedures that can be audited by other gatekeepers, the regulatory system, and investors.

Accountants Accountants measure and disclose financial information, with an assurance of accuracy, to the public. Managers, investors, tax authorities, and other stakeholders who make resource allocation decisions are all groups who use the information provided by accountants. Accountants make specific assumptions about their clients. One assumption is the corpo- ration is an entity separate and distinct from its owners, and that it continues to operate as such in the future. Another assumption is a stable monetary system (such as the dollar) is in place and all necessary information concerning the business is available and presented in an understandable manner. Accountants have their own set of rules. One is that if there is a choice between equally acceptable accounting methods, they should use the one least likely to overstate or misdirect.

Some accountants have not adhered to their responsibilities to stakeholders. For exam- ple, Arthur Andersen was once a standard bearer for integrity. But at Andersen, growth became the priority, and its emphasis on recruiting and retaining big clients came at the expense of quality and independent audits. The company linked its consulting business in a joint cooperative relationship with its audit arm, which compromised its auditors’ inde- pendence, a quality crucial to the execution of a credible audit. The firm’s focus on growth generated a fundamental change in its corporate culture in that its high-profit consulting business was regarded as more important than providing objective auditing services. This situation presented a conflict of interest and posed a problem when partners decided how to treat questionable accounting practices discovered at some of Andersen’s largest clients. Ultimately, Arthur Andersen dissolved because of its ties to the Enron scandal.

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106 Part 2: Ethical Issues and the Institutionalization of Business Ethics

Risk Assessment Another critical gatekeeper group are risk assessors of financial products. The top three companies in the world that independently assess financial risks are Standard & Poor’s, Moody’s, and Fitch. They express risk through letters ranging from “AAA,” the highest grade, to “C,” the lowest grade. Different rating services use the same letter grades, but use various combinations of upper- and lowercase letters to differentiate themselves.

As early as 2003, financial analysts and the three global rating firms suspected there were major problems with the way their models were assessing risk. In 2005 Standard & Poor’s realized its algorithm for estimating the risks associated with debt packages was flawed. As a result, it asked for comments on improving its equations. In 2006–2007 many governmental regulators and others started to realize what the rating agencies knew for years: their ratings were not accurate. In 2008 during the financial crisis, bonds that credit agencies rated highly, with an estimated worth of $ 14 trillion, fell to “junk bond” status. 25 One report stated the high ratings given to debt were based on inadequate historical data and businesses were “ratings shopping” to obtain the best rating possible. Investment banks were among the worst offenders, paying for ratings and therefore causing conflicts of interest. The amount of revenue these three companies annually receive is approximately $ 5 billion.

Further investigations uncovered many disturbing problems. Moody’s, Standard & Poor’s, and Fitch all violated a code of conduct “that required analysts to consider only credit factors, not the potential impact on Moody’s, or an issuer, an investor or other mar- ket participant.” 26 These companies became overwhelmed by an increase in the volume and sophistication of the securities they were asked to review. Finally, faced with less time to perform the due diligence expected of them, analysts began to cut corners.

This failure to adequately account for risks is having consequences for financial credit-rating firms. New York’s top prosecutor launched an investigation into the top three credit-rating firms to determine the objectivity of their ratings prior to the financial crisis. Additionally, the Justice Department filed a lawsuit against Standard & Poor’s (S&P) due to the major losses federally-backed banks and credit unions suffered after depending upon the S&P’s high ratings for mortgage-backed deals. 27

Regulators believe more oversight for credit-rating firms is needed. Part of the prob- lem, as former SEC Chairman Mary Schapiro saw it, is credit rating firms are paid by the securities they rank. This creates a conflict of interest problem and affects the reliability of the ratings. 28 No organization is exempt from criticism over its level of transparency. While large financial firms have been the target of the public’s anger over risk taking and execu- tive pay, even nonprofits are being scrutinized more carefully. 29

THE SARBANES–OXLEY (SOX) ACT

In 2002, largely in response to widespread corporate accounting scandals, Congress passed the Sarbanes–Oxley Act to establish a system of federal oversight of corporate account- ing practices. In addition to making fraudulent financial reporting a criminal offense and strengthening penalties for corporate fraud, the law requires corporations to establish codes of ethics for financial reporting and develop greater transparency in financial report- ing to their investors and other stakeholders.

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Chapter 4: The Institutionalization of Business Ethics 107

Supported by both Republicans and Democrats, the Sarbanes–Oxley Act was enacted to restore stakeholder confidence after accounting fraud at Enron, WorldCom, and hun- dreds of other companies resulted in investors and employees losing much of their savings. During the resulting investigations, the public learned hundreds of corporations failed to report their financial results accurately. Many stakeholders believed accounting firms, law- yers, top executives, and boards of directors developed a culture of deception to ensure investor approval and gain a competitive advantage. As a result of public outrage over the accounting scandals, the Sarbanes–Oxley Act garnered nearly unanimous support not only in Congress but also from government regulatory agencies, the president, and the gen- eral public. When President George W. Bush signed the Sarbanes–Oxley Act into law, he emphasized the need for new standards of ethical behavior in business, particularly among the top managers and boards of directors responsible for overseeing business decisions and activities.

At the heart of the Sarbanes–Oxley Act (SOX) is the Public Company Accounting Oversight Board that monitors accounting firms auditing public corporations and estab- lishes standards and rules for auditors in accounting firms. The law gave the board investigatory and disciplinary power over auditors and securities analysts who issue reports about corporate performance and health. The law attempts to eliminate con- flicts of interest by prohibiting accounting firms from providing both auditing and consulting services to the same client companies without special permission from the client firm’s audit committee; it also places limits on the length of time lead auditors can serve a particular client. The Sarbanes–Oxley Act requires corporations to take greater responsibility for their decisions and to provide leadership based on ethical principles. Additionally, the law modifies the attorney–client relationship to require lawyers to report wrongdoing to top managers and/or the board of directors. It also provides pro- tection for “whistle-blowing” employees who report illegal activity to authorities. This “whistle-blower” protection was strengthened with the passage of the Dodd–Frank Act several years later.

On the other hand, SOX raised a number of concerns. The complex law imposed addi- tional requirements and costs on executives. Additionally, the new act caused many firms to restate their financial reports to avoid penalties. Big public companies spent thousands of hours and millions of dollars annually to make sure someone looked over the shoulder of key accounting personnel at every step of every business process, according to Finan- cial Executives International. Perhaps the biggest complaint is in spite of Sarbanes–Oxley, financial executives discovered new loopholes that allowed them to engage in the miscon- duct that contributed to the global financial crisis.

A major change to Sarbanes-Oxley occurred with a new law in 2012. During 2012, the administration passed the Jumpstart Our Business Startups (JOBS) Act in an effort to jumpstart the economy. This act exempts what is termed as “emerging growth companies” from having to observe the auditor attestation requirements from Sarbanes–Oxley 404 (b). The exemption can last a maximum of five years. The purpose of the law is to allow start- ups to easily attract funding and investors. One of the biggest provisions of this law is that qualified firms can raise funds in private and small public offerings without regis- tering with the Securities and Exchange Commission, thus saving them money. In order to qualify, firms must have annual gross revenues of less than $ 1 billion and/or market capitalization of less than $ 700 million. 30 The JOBS Act is one way the government tries to lessen the burden of Sarbanes–Oxley on newer, smaller businesses and encourage entrepreneurship.

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108 Part 2: Ethical Issues and the Institutionalization of Business Ethics

Public Company Accounting Oversight Board SOX aims to promote transparency, reduce conflict of interest, and increase accountabil- ity. For instance, one provision called for the establishment of a board to oversee the audit of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports for companies. The Public Company Accounting Oversight Board faced several challenges throughout the years, including a lawsuit claiming the board was unconstitutional. The lawsuit passed to the Supreme Court. The court ruled in favor of the board. The board must also overcome obstacles with foreign auditing firms. Although Sarbanes–Oxley requires registration from all auditors listed on the U.S. public market including foreign auditors, several countries, such as the European Union and China, do not allow inspec- tions of their auditing firms. 31

Auditor and Analyst Independence The Sarbanes–Oxley Act seeks to eliminate conflicts of interest among auditors, secu- rity analysts, brokers, dealers, and the public companies they serve in order to ensure enhanced financial disclosures of public companies’ true conditions. To accomplish auditor independence, Section 201 prohibits registered public accounting firms from providing both non-audit and audit services to a public company. National securities exchanges and registered securities associations have adopted similar conflict-of-inter- est rules for security analysts, brokers, and dealers who recommend equities in research reports. Such independence enables the Sarbanes–Oxley Act to ensure compliance with the requirement for more detailed financial disclosures representing public companies’ true condition. For example, registered public accounting firms are now required to identify all material correcting adjustments to reflect accurate financial statements. Also, all material off-balance-sheet transactions and other relationships with unconsolidated entities that affect current or future financial conditions of a public company must be disclosed in each annual and quarterly financial report. In addition, public companies must report “on a rapid and current basis” material changes in their financial condition or operations.

Whistle-Blower Protection Employees of public companies and accounting firms are accountable to report unethical behavior. The Sarbanes–Oxley Act intends to motivate employees through whistle-blower protection that prohibits the employer from taking certain actions against employees who lawfully disclose private employer information to parties in a judicial proceeding involving a fraud claim, among others. Whistle-blowers are granted a rem- edy of special damages and attorneys’ fees. Unfortunately, this law did not protect certain whistle-blowers from being penalized prior to the financial crisis. Whistle-blowers at Lehman Brothers, Madoff Securities, and Stanford Financial Group (that also operated a Ponzi scheme) warned auditors and government officials of misconduct at the compa- nies. Some whistle-blowers were fired or, after losing lawsuits filed against the offending company, were forced to pay large sums in back pay and attorney’s fees. 32 These cases prompted a provision for stronger whistle-blower protection in the Dodd–Frank Act, discussed in the next section.

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Chapter 4: The Institutionalization of Business Ethics 109

Cost of Compliance The national cost of compliance of the Sarbanes–Oxley Act can be extensive and includes internal costs, external costs, and auditor fees. For example, Section 404 requires compa- nies to document both the results of financial transactions and the processes they used to generate them. A company may have thousands of processes that have never been written down. Writing down the processes is time consuming and costly. 33 Also, because the cost of compliance is so high for many small companies, some publicly traded companies even considered delisting themselves from the U.S. Stock Exchange.

However, studies show although compliance costs were high shortly after Sarbanes– Oxley was passed, they have declined over the years. Companies have reported their com- pliance costs decreased 50 percent from the level when the laws were put into effect. One reason why the costs may be decreasing is that companies have more experience with Sar- banes–Oxley and therefore require less time to complete the process. 34 Today, the costs of compliance with Sarbanes-Oxley range from between $ 100,000 and $ 500,000 , depending upon the company’s size. 35

DODD–FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT

In 2010 President Obama signed into law the Dodd–Frank Wall Street Reform and Con- sumer Protection Act. It was heralded as “a sweeping overhaul of the financial regulatory system … on a scale not seen since the reforms that followed the Great Depression.” 36 The new law seeks to improve financial regulation, increase oversight of the industry, and prevent the types of risk-taking, deceptive practices, and lack of oversight that led to the 2008–2009 financial crisis. 37 The Act contains sixteen provisions that include increasing the accountability and transparency of financial institutions, creating a bureau to educate consumers in financial literacy and protect them from deceptive financial practices, imple- menting additional incentives for whistle-blowers, increasing oversight of the financial industry, and regulating the use of complex derivatives.

Response to the law was split along party lines, with vocal opponents as well as proponents. Critics have several concerns, including claims the rules on derivatives are too burdensome, the belief such wide-scale changes will create chaos in the regulatory system, and the fear the government will gain too much power. 38 Other companies, such as JP Morgan, claim they support the law in general but oppose certain provi- sions. 39 The following sections describe some of the most notable provisions of the Dodd–Frank Act.

New Financial Agencies One provision of the Dodd–Frank Act instituted the creation of two new financial agencies, the Office of Financial Research and the Financial Stability Oversight Council. The Office of Financial Research is charged with improving the quality of financial data available to government officials and creating a better system of analysis for the financial industry. 40 The Financial Stability Oversight Council (FSOC) is responsible for maintaining the stabil- ity of the financial system in the United States through monitoring the market, identifying

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110 Part 2: Ethical Issues and the Institutionalization of Business Ethics

threats, promoting market discipline among the public, and responding to major risks that threaten stability. 41 FSOC has the authority to limit or closely supervise financial risks, create stricter standards for banking and nonbanking financial institutions, and disband financial institutions that present a serious risk to market stability. 42 The addition of these two new agencies is intended not only to improve information collecting and oversight, but to close the types of loopholes that allowed financial industries to engage in risky and deceptive conduct prior to the financial crisis.

Consumer Financial Protection Bureau Another agency the Dodd–Frank Act created was the Consumer Financial Protection Bureau (CFPB), an independent agency within the Federal Reserve System that “regulate[s] the offering and provision of consumer financial products or services under the Federal con- sumer financial laws.” 43 One of the problems leading up to the 2008–2009 financial cri- sis was that average investors often did not understand the complex financial products they purchased. The CFPB aims to protect consumers from this problem in the future. The government granted the agency supervisory power over credit markets as well as the authority to monitor lenders and ensure they are in compliance with the law. 44 The CFPB also has the responsibility to curtail unfair lending and credit card practices, enforce con- sumer financial laws, and check the safety of financial products before their launch into the market. 45

The CFPB is not without its critics. Several financial firms and legislators believe the bureau has too much power. Additionally, financial institutions are concerned the bureau’s powers could lead to strict sanctions or burdensome regulations. 46 Goldman Sachs, for instance, limited its profitable practice of investing in its own private-equity funds to com- ply with the Volcker rule, part of the Dodd-Frank Act restricting financial institutions from using their own money to make large bets. 47 To protect against misconduct at all levels, the CFPB has oversight powers for institutions often accused of questionable dealings, such as payday lenders and debt collectors. 48 The goal of the CFPB is to create a more equitable and transparent financial environment for consumers.

Whistle-Blower Bounty Program It is clear the whistle-blower provisions implemented in Sarbanes–Oxley were not enough to prevent the massive misconduct occurring at business institutions before the financial crisis. To encourage more employees to come forward when they witness misconduct, the Dodd–Frank law instituted a whistle-blower bounty program. Whistle-blowers who report financial fraud to the Securities and Exchange Commission and Commodities Exchange Commission are eligible to receive 10 percent to 30 percent of fines and settlements if their reports result in convictions of more than $ 1 million in penalties. 49

While this will encourage more people to step forward, there are some challenges that need to be considered for the program to be a success. For instance, the SEC will certainly be flooded with tips, some of which will come from people who just want the money. Still, the SEC is optimistic half the tips it receives will result in payouts, suggesting the num- ber of credible whistle-blower complaints will increase dramatically. 50 In 2012 the program provided its first payout of $ 50,000 to a whistleblower who helped regulators convict a company of fraud. The payout represented approximately 30 percent of the penalty levied against the company. 51

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Chapter 4: The Institutionalization of Business Ethics 111

LAWS THAT ENCOURAGE ETHICAL CONDUCT

Violations of the law usually begin when businesspeople stretch the limits of ethical standards, as defined by company or industry codes of conduct, and then choose to engage in schemes that either knowingly or unwittingly violate the law. In recent years, new laws and regulations have been passed to discourage such decisions—and to foster programs designed to improve business ethics and social responsibility ( Table 4–5 ). The most important of these are the Fed- eral Sentencing Guidelines for Organizations (FSGO), the Sarbanes–Oxley Act, and the Dodd– Frank Act. One of the goals of these acts is requiring employees to report observed misconduct. The development of reporting systems has advanced, with most companies having some method for employees to report observed misconduct. However, while reported misconduct is up, a sizable percentage of employees still do not report misconduct, as Figure 4–3 shows.

TABLE 4–5 Institutionalization of Ethics through the U.S. Sentencing Guidelines for Organizations

1991

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

2004

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

2007–2008

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

2010

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

2012

Amendments for Securities Fraud: These amendments were developed to account for changes instituted by the 2010 passage of the Dodd-Frank Act. These amendments propose changes in how fraud losses are calculated, the sentencing of professionals guilty of insider trading, the determination of losses resulting from mortgage fraud, and different levels of offense for financial fraud.

Source: “U.S. Sentencing Guidelines Changes Become Effective November 1,” FCPA Compliance and Ethics Blog, November 2, 2010, http://tfoxlaw.

wordpress.com/2010/11/02/us-sentencing-guidelines-changes-become-effective-november-1/ (accessed April 18, 2013); United States Sentencing

Commission, Amendments to the Sentencing Guidelines , April 30, 2012, http://www.ussc.gov/Legal/Amendments/Reader-Friendly/20120430_RF_ Amendments.pdf (accessed April 18, 2013).

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112 Part 2: Ethical Issues and the Institutionalization of Business Ethics

FIGURE 4–3 Employees Who Report Misconduct

60%

40%

20%

NBES Year

20 00

20 03

20 05

20 07

20 09

20 11Pe

rc en

t o f e

m p

lo ye

es w

ho re

p or

te d

th e

m is

co nd

uc t t

he y

ob se

rv ed

56%

64%

53%

63%

65% 58%

Source: Ethics Resource Center, 2011 National Business Ethics Survey (Arlington, VA: Ethics Resource Center, 2012), p. 22.

FEDERAL SENTENCING GUIDELINES FOR ORGANIZATIONS

As mentioned in Chapter 1 , Congress passed the FSGO in 1991 to create an incentive for organizations to develop and implement programs designed to foster ethical and legal compliance. These guidelines, developed by the U.S. Sentencing Commission, apply to all felonies and class A misdemeanors committed by employees in association with their work. As an incentive, organizations that demonstrated due diligence in developing effec- tive compliance programs to discourage unethical and illegal conduct may be subject to reduced organizational penalties if an employee commits a crime. 52 Overall, the govern- ment philosophy is that legal violations can be prevented through organizational values and a commitment to ethical conduct.

The commission delineated seven steps companies must implement to demonstrate due diligence:

1. A firm must develop and disseminate a code of conduct that communicates required standards and identifies key risk areas for the organization.

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

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

4. A communications system for disseminating standards and procedures (ethics train- ing) must also be put into place.

5. Organizational communications should include a way for employees to report mis- conduct without fearing retaliation, such as an anonymous toll-free hotline or an ombudsman. Monitoring and auditing systems designed to detect misconduct are also required.

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Chapter 4: The Institutionalization of Business Ethics 113

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

7. After misconduct has been discovered, the organization must take steps to prevent similar offenses in the future. This usually involves making modifications to the ethi- cal compliance program, conducting additional employee training, and issuing com- munications about specific types of conduct.

The government expects these seven steps for compliance programs to undergo con- tinuous improvement and refinement. 53

These steps are based on the commission’s determination to emphasize compliance programs and to provide guidance for both organizations and courts regarding program effectiveness. Organizations have flexibility about the type of program they develop; the seven steps are not a checklist requiring legal procedures be followed to gain certification of an effective program. Organizations implement the guidelines through effective core practices appropriate for their firms. The programs they put into effect must be capable of reducing the opportunity employees have to engage in misconduct.

A 2004 amendment to the FSGO requires a business’s governing authority be well informed about its ethics program with respect to content, implementation, and effec- tiveness. This places the responsibility squarely on the shoulders of the firm’s leadership, usually the board of directors. The board must ensure there is a high-ranking manager accountable for the day-to-day operational oversight of the ethics program; provide for adequate authority, resources, and access to the board or an appropriate subcommittee of the board; and ensure there are confidential mechanisms available so the organization’s employees and agents may report or seek guidance about potential or actual misconduct without fear of retaliation. Finally, the board is required to oversee the discovery of risks and to design, implement, and modify approaches to deal with those risks. Figure 4–4 demonstrates employees at companies with effective ethics programs are more likely to view their corporate cultures as ethical. If board members do not understand the nature, purpose, and methods available to implement an ethics program, the firm is at risk of inad- equate oversight and ethical misconduct that may escalate into a scandal. 54

FIGURE 4–4 Ethical Culture Perceptions of Employees Based Upon Ethics Program Implementation

Little/No program

20% 40% 60% 80% 100%

23%

57%

86%

Percentage with Strong or Strong Leaning Culture

Poorly implemented program

Well-implemented program

Source: Ethics Resource Center, 2011 National Business Ethics Survey (Arlington, VA: Ethics Resource Center, 2012), p. 34.

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114 Part 2: Ethical Issues and the Institutionalization of Business Ethics

A 2005 Supreme Court decision held that the federal sentencing guidelines were not mandatory but should serve only as recommendations for judges to use in their decisions. Some legal and business experts believe this decision might weaken the implementation of the FSGO, but most federal sentences remained in the same range as before the Supreme Court decision. The guidelines remain an important consideration in developing an effec- tive ethics and compliance program. 55

The 2007–2008 amendments to the FSGO extend the required ethics training to members of the board or governing authority, high-level personnel, employees, and the organizations’ agents. This change applies not only oversight but mandatory training to all levels of the organization. Merely distributing a code of ethics does not meet the training requirements. The 2007 and 2008 amendments now require most governmental contrac- tors to provide ethics and compliance training.

As new FSGO amendments are implemented, more explicit responsibility is being placed on organizations to improve and expand ethics and compliance provi- sions to include all employees and board members, as demonstrated in four amend- ments to the guidelines implemented in 2010. The first amendment concerned chief compliance officers who report misconduct to the general counsel. The guidelines recommend simplifying the complexity of reporting relationships by having the chief compliance officer make reports directly to the board or to a board committee. Com- panies are also encouraged to extend their internal ethical controls through hotlines, self-auditing programs, and other mechanisms so misconduct can be detected inter- nally rather than externally. In the third amendment, the FSGO added more specific language of the word prompt to help employees recognize what it means to report an ethical violation promptly. Finally, the FSGO amended the extent of operational responsibility to apply to all personnel within a company’s ethics and compliance program. 56

In 2012 the Federal Sentencing Commission proposed new amendments to the Federal Sentencing Guidelines. While these amendments covered many topics, major emphasis was given to changes resulting from the Dodd-Frank Act. These new amend- ments proposed increased penalties for certain types of securities fraud. For instance, the amendments propose regulators differentiate between those who engage in frequent and deliberate insider trading and those who engage in this act due to the opportunity to make quick profits. The Federal Sentencing Commission recommended increasing sentences depending upon the money gained from the insider trading scheme as well as the willfulness of the offenders. The amendments also examined how to determine the value of collateral in cases of mortgage fraud. Additionally, the amendments listed four levels of offense for financial institution fraud: (1) whether the fraud caused the institution to become insolvent, (2) whether it forced the institution to reduce benefits to pensioners or the insured, (3) whether it caused the institution to become unable on demand to fully refund a deposit, payment, or investment, or (4) whether it depleted the assets of the institution to such an extent it was forced to merge with another insti- tution. The amount of penalties can be increased depending upon the extent of the offense committed. Those found guilty of this type of fraud can have their sentences lengthened or reduced beyond the FSGO guidelines depending upon the amount of loss the fraud caused. 57

The Department of Justice, through the Thompson Memo (Deputy Attorney Gen- eral Larry Thompson’s 2003 memo to U.S. Attorneys), advanced general principles to consider in cases involving corporate wrongdoing. This memo makes it clear ethics

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Chapter 4: The Institutionalization of Business Ethics 115

and compliance programs are important to detecting the types of misconduct most likely to occur in a particular corporation’s line of business. If it does not have an effective ethics and compliance program in place to detect ethical and legal lapses, a firm found in violation should not be treated leniently. Additionally, the prosecutor generally has wide latitude in determining when, whom, and whether to prosecute violations of federal law. U.S. attorneys are directed that charging for even minor mis- conduct may be appropriate when the wrongdoing was perpetuated by a large number of employees in a particular role—for example, sales staff or procurement officers—or was condoned by upper management. Without an effective program to identify an iso- lated rogue employee involved in misconduct, a firm may suffer serious consequences in terms of regulatory issues, enforcement, and sentencing. 58 Therefore, there is gen- eral agreement both in law and administrative policy that an effective ethics and com- pliance program is necessary to prevent misconduct and reduce the legal consequences if it does occur.

HIGHLY APPROPRIATE CORE PRACTICES

The focus of core practices is on developing structurally sound organizational practices and integrity for financial and nonfinancial performance measures, rather than on an individual’s morals. Although the Sarbanes–Oxley Act and the Dodd–Frank Act provide standards for financial performance, most ethical issues relate to non-financials such as marketing, human resource management, and customer relations. Abusive behavior, lying, and conflict of interest are still three significant issues.

A group called the Integrity Institute developed an integrated model to standardize the measurement of nonfinancial performance. Methodologies have been developed to assess communications, compensation, social responsibility, corporate culture, leadership, risk, and stakeholder perceptions, as well as the more subjective aspects of earnings, cor- porate governance, technology, and other important nonfinancial areas. The model exists to establish a standard that predicts the sustainability and success of an organization. The Integrity Institute uses measurement to an established standard as the basis for certifica- tion of integrity. 59 The Institute is one of the first to attempt such a model.

The majority of executives and board members want to measure nonfinancial perfor- mance, but no standards currently exist. The Open Compliance Ethics Group ( oceg.org ) developed benchmarking studies that are available to organizations wanting to conduct self-assessments to determine the elements of their ethics programs. Developing organi- zational systems and processes is a requirement of the regulatory environment, but orga- nizations are given considerable freedom in developing these programs. Core practices exist and can be identified in every industry. Trade associations’ self-regulatory groups and research studies often provide insights into the expected best core practices. An important priority is for each firm to assess its legal and ethical risk areas, and then develop structures to prevent, detect, and quickly correct any misconduct.

Consider Disney’s approach concerning the childhood obesity epidemic. The com- pany announced it will only advertise healthier foods to children on its Disney TV chan- nels, radio shows, and website. All food manufacturers wanting to advertise with Disney must meet Disney’s nutritional criteria. Those that meet said criteria can be certified with a

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116 Part 2: Ethical Issues and the Institutionalization of Business Ethics

“Mickey Check” symbol. Additionally, Disney plans to offer more fruits and vegetables and reduce the amount of sodium in foods offered at its amusement park venues. Disney claims to be the first major media company to introduce these nutritional advertising standards. 60

Voluntary Responsibilities Voluntary responsibilities fall into the category of a business’s contributions to its stake- holders. Businesses that address their voluntary responsibilities provide four major ben- efits to society:

1. Improve quality of life and make communities the places where people want to do business, raise families, and enjoy life. Thus, improving the quality of life in a commu- nity makes it easier to attract and retain employees and customers.

2. Reduce government involvement by providing assistance to stakeholders. 3. Develop employee leadership skills. Many firms, for example, use campaigns by the

United Way and other community service organizations as leadership- and skill- building exercises for their employees.

4. Create an ethical culture and values that act as a buffer to organizational misconduct. 61

The most common way businesses demonstrate their voluntary responsibilities is through donations to local and national charitable organizations. For example, Wells Fargo & Co. contributes around $ 315 million annually to nonprofit organizations and commu- nities, and employees volunteer approximately 1.5 million hours to their local commu- nities. The company also purchases green energy and has a website devoted to financial education. 62 Indeed, many companies are concerned about the quality of education in the United States after realizing the current pool of prospective employees lacks many basic work skills. Recognizing today’s students are tomorrow’s employees and customers, firms such as Kroger, Campbell Soup Co., American Express, Apple, Xerox, and Coca-Cola donate money, equipment, and employee time to improve schools in their communities and throughout the nation.

The Walmart Foundation, the charitable giving branch of Walmart Inc., donated $ 958.9 million in 2011 to charities and communities across the globe and is one of the largest corporate cash contributors in the nation. The money supports a variety of causes such as child development, education, the environment, and disaster relief. Walmart officials believe the company makes the greatest impact on communities by supporting issues and causes important to its customers and associates in their own neighborhoods. By supporting communities at the local level, Walmart encourages customer loyalty and goodwill. 63

Cause-Related Marketing The first attempts by organizations to coordinate organizational goals with philanthropic giving emerged with cause-related marketing in the early 1980s. Cause-related marketing ties an organization’s product(s) directly to a social concern through a marketing program.

With cause-related marketing, a percentage of a product’s sales is donated to a cause that appeals to the target market. Yoplait, for example, generates proceeds for the Susan G. Komen for the Cure cause with its Save Lids to Save Lives program. Susan G. Komen for the Cure is a nonprofit organization that raises funds to fight breast cancer. Yoplait created

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Chapter 4: The Institutionalization of Business Ethics 117

an annual philanthropic program that encourages consumers to send in pink Yoplait yogurt lids. For every lid sent in, Yoplait donates 10 cents to Susan G. Komen for the Cure, up to $ 2,500,000 . Within 12 years, the program has resulted in more than $ 50 million in contributions. 64

Cause-related marketing also affects buying patterns. For such a campaign to be successful, consumers must sympathize with the cause, the brand and cause must be per- ceived as a good fit, and consumers should be able to transfer their feelings about the cause to their brand perceptions and purchase intentions. Surveys reveal 85 percent of consumers view a brand more favorably if it contributes to a cause they care about, and 80 percent indicate their willingness to change to a brand that supports a worthwhile cause if its price and quality are equal to its competitors’. 65 When consumers identify with a cause, this identification leads to more positive evaluations of the campaign. 66 This finding lends support to the idea that cause-related marketing can bolster a firm’s reputation.

Cause-related marketing has its weaknesses too. For instance, consumers may per- ceive a company’s cause-related campaign as merely a publicity stunt, especially if they cannot understand the link between the campaign and the company’s business prac- tices. Also, cause-related campaigns are often of short duration, so consumers may not adequately associate the business with a particular cause. Strategic philanthropy is more holistic, as it ties the company’s philanthropic giving to its overall strategy and objectives.

Strategic Philanthropy Strategic philanthropy is the synergistic and mutually beneficial use of an organization’s core competencies and resources to deal with key stakeholders so as to bring about organizational and societal benefits. It uses the profit motive, but argues that philan- thropy must have at least a long-term positive impact. For example, Gentle Giant Mov- ing Company, a U.S. moving company with offices in eight states, made it a priority to incorporate philanthropy and social responsibility into its business strategy. In addition to its goal to become the best movers in the industry, Gentle Giant values customer sat- isfaction so much it provides a 100 percent money-back guarantee if customers are not happy with its service. The company established a charitable foundation that supports youth leadership development, housing assistance and homeless prevention, and green initiatives to make its practices more eco-friendly. Founder Peter O’Toole also cares for his employees and works to instill in them the f values Gentle Giant embodies. The company’s successful integration of strategic philanthropy into its organizational prac- tices won it numerous awards, including a spot on The Wall Street Journal ’s “Top Small Workplaces,” a Better Business Bureau International Torch Award for Marketplace Eth- ics, and the Better Business Bureau Local Torch Award for Excellence (an honor won four times). 67

Home Depot directs much of the money it spends on philanthropy toward afford- able housing, at-risk youth, the environment, and disaster recovery. In 2011 Home Depot committed to working with nonprofit organizations to improve the homes of low-income veterans. The retailer has since donated $ 80 million to this cause. Since the creation of the Home Depot Foundation in 2002, the firm donated a total of $ 300 million in assistance to local homes and communities. 68 These organizations demonstrate how companies suc- cessfully incorporate voluntary responsibilities into their business strategies.

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118 Part 2: Ethical Issues and the Institutionalization of Business Ethics

THE IMPORTANCE OF INSTITUTIONALIZATION IN BUSINESS ETHICS

Institutionalization involves embedding values, norms, and artifacts in organizations, industries, and society. In the United States and many other countries, institutionaliza- tion involves legislation often finalized through Supreme Court decisions. This chapter provides an overview of legal as well as cultural institutions that work both outside and inside the organizational environment to support and control ethical decision making in organizations.

As discussed in Chapter 2 , those in charge of corporate governance should be espe- cially mindful of the institutions, including mandated requirements for legal compliance as well as core practices and voluntary actions that support ethics and social responsibility. While voluntary conduct, including philanthropic activities, is not required to run a busi- ness, the failure to understand highly appropriate and common practices, referred to as core practices, provides the opportunity for unethical conduct.

It is important to recognize the institutionalization of business ethics has advanced rapidly over the last 20 years as stakeholders recognized the need to improve business ethics. The government stepped in when scandals and misconduct damaged consumers, investors, and other key constituents important for businesses. More recently, gatekeep- ers such as lawyers, financial rating agencies, and financial reporting services have been questioned because some of their decisions contributed to major scandals. Legislation and amendments related to the Federal Sentencing Guidelines for Organizations, the Sar- banes–Oxley Act, and the Dodd–Frank Act attempted to develop and enforce ethical prac- tices that support trust in business.

SUMMARY

To understand the institutionalization of business ethics, it is important to understand the vol- untary and legally mandated dimensions of organizational practices. Core practices are docu- mented best practices, often encouraged by legal and regulatory forces as well as by industry trade associations. The effective organizational practice of business ethics requires three dimensions to be integrated into an ethics and compliance program. This integration creates an ethical culture that effectively manages the risks of misconduct. Institutionalization in busi- ness ethics relates to established laws, customs, and the expectations of organizational ethics programs considered a requirement in establishing reputation. Institutions reward and sanc- tion ethical decision making by providing structure and reinforcing societal expectations. In this way, society as a whole institutionalizes core practices and provides organizations with the opportunity to take their own approach, only taking action if there are violations.

Laws and regulations established by governments set minimum standards for respon- sible behavior—society’s codification of what is right and wrong. Civil and criminal laws regulating business conduct are passed because society—including consumers, interest groups, competitors, and legislators—believes business must comply with society’s stan- dards. Such laws regulate competition, protect consumers, promote safety and equity in the workplace, and provide incentives for preventing misconduct.

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Chapter 4: The Institutionalization of Business Ethics 119

In 2002, largely in response to widespread corporate accounting scandals, Congress passed the Sarbanes–Oxley Act to establish a system of federal oversight of corporate accounting practices. In addition to making fraudulent financial reporting a criminal offense and strengthening penalties for corporate fraud, the law requires corporations to establish codes of ethics for financial reporting and develop greater transparency in finan- cial reporting to investors and other stakeholders. The Sarbanes–Oxley Act requires cor- porations to take greater responsibility for their decisions and provide leadership based on ethical principles. For instance, the law requires top managers to certify their firms’ finan- cial reports are complete and accurate, making CEOs and CFOs personally accountable for the credibility and accuracy of their companies’ financial statements. The act establishes an oversight board to oversee the audit of public companies. The oversight board aims to protect the interests of investors and further the public interest in the preparation of infor- mative, accurate, and independent audit reports for companies.

In 2010, largely in response to the widespread misconduct leading to the global reces- sion, the Dodd–Frank Wall Street Reform and Consumer Protection Act was passed. The purpose of the Dodd–Frank Act is to prevent future misconduct in the financial sector, protect consumers from complex financial instruments, oversee market stability, and cre- ate transparency in the financial sector. The Act created two financial agencies, the Finan- cial Stability Oversight Council and the Office of Financial Research. It also created the Consumer Financial Protection Bureau to regulate the industry and ensure consumers are protected against overly complex and/or deceptive financial practices. Whistle-blower pro- tection was extended to include a whistle-blower bounty program whereby whistle-blow- ers who report corporate misconduct to the SEC may receive 10 to 30 percent of settlement money if their reports result in a conviction of more than $ 1 million in penalties.

Congress passed the Federal Sentencing Guidelines for Organizations (FSGO) in 1991 to create an incentive for organizations to develop and implement programs designed to foster ethical and legal compliance. These guidelines, developed by the U.S. Sentencing Commission, apply to all felonies and class A misdemeanors committed by employees in association with their work. As an incentive, organizations that have demonstrated due diligence in developing effective compliance programs that discourage unethical and ille- gal conduct may be subject to reduced organizational penalties if an employee commits a crime. Overall, the government philosophy is that legal violations can be prevented through organizational values and a commitment to ethical conduct. A 2004 amendment to the FSGO requires a business’s governing authority be well-informed about its ethics program with respect to content, implementation, and effectiveness. This places the responsibility squarely on the shoulders of the firm’s leadership, usually the board of directors. The board must ensure there is a high-ranking manager accountable for the day-to-day operational oversight of the ethics program. The board must provide adequate authority, resources, and access to the board or an appropriate subcommittee of the board. The board must also ensure there are confidential mechanisms available so the organization’s employees and agents report or seek guidance about potential or actual misconduct without fear of retaliation. A 2010 amendment to the FSGO directs chief compliance officers to make their reports to the board rather than to e general counsel. In 2012 new amendments were passed to deal with changes resulting from the Dodd-Frank Act.

The FSGO and the Sarbanes–Oxley Act provide incentives for developing core prac- tices that ensure ethical and legal compliance. Core practices move the emphasis from a focus on the individual’s moral capability to a focus on developing structurally sound orga- nizational core practices and integrity for both financial and nonfinancial performance.

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120 Part 2: Ethical Issues and the Institutionalization of Business Ethics

The Integrity Institute developed an integrated model to standardize the measurement of nonfinancial performance. The group developed methodologies to assess communications, compensation, social responsibility, corporate culture, leadership, risk, and stakeholder perceptions, as well as the more subjective aspects of earnings, corporate governance, tech- nology, and other important nonfinancial areas.

Voluntary responsibilities touch on businesses’ social responsibility insofar as they contribute to the local community and society as a whole. Voluntary responsibilities pro- vide four major benefits to society: improving the quality of life, reducing government involvement by providing assistance to stakeholders, developing staff leadership skills, and building staff morale. Companies contribute significant amounts of money to education, the arts, environmental causes, and the disadvantaged by supporting local and national charitable organizations. Cause-related marketing ties an organization’s product(s) directly to a social concern through a marketing program. Strategic philanthropy involves linking core business competencies to societal and community needs.

IMPORTANT TERMS FOR REVIEW

voluntary practices 94

philanthropy 94

core practices 95

Better Business Bureau 95

mandated boundaries 95

civil law 97

criminal law 97

procompetitive legislation 99

consumer protection law 101

Occupational Safety and Health Administration 103

Public Company Accounting Oversight Board 107

Consumer Financial Protection Bureau 110

cause-related marketing 116

strategic philanthropy 117

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Chapter 4: The Institutionalization of Business Ethics 121

Ahmed found an envelope with his name on it when he went to his usual desk. When he opened it, there was five hundred dollars with a note saying, “Enjoy.” He started to ask people about the money, but then saw Bill smiling. At that moment, Ahmed knew the money was from Bill. He tried to give it back, but Bill refused to take it or admit he had given it to Ahmed in the first place.

Ahmed became increasingly uncomfortable with Bill’s behavior. He knew what Bill did was wrong and possibly illegal. He didn’t want to be involved with it in any way, but he also didn’t want to become a snitch. Now he was receiv- ing money for his involvement. Ahmed felt the situation was escalating and he should say something to his supervisor before something really bad happened, but he didn’t want to be the one to get Bill in trouble. Ahmed knew Bill could be expelled for something like this, which could potentially damage his entire future. Then again, Ahmed had his own future to worry about. Could he be expelled just for knowing what kind of activities Bill was involved in? What should he do with the money Bill gave him? What might happen if he doesn’t blow the whistle?

QUESTIONS | EXERCISES 1. Describe the stakeholders involved in this ethi-

cal dilemma. What stake do they have in the situation?

2. Are Bill’s actions an ethical issue, a legal issue, or both? Explain your reasoning.

3. What are some of the risks Ahmed faces if he becomes a whistleblower? What are the risks if he remains silent?

Like most students at Arizona University, Ahmed was a student and spent twenty hours each week working at the university library. He liked the library because it was quiet and he could study some of the time. One interesting aspect of the library was the access to incredible databases, some of which were only for the pro- fessors. As a student worker he was privy to all the database codes, and soon discovered large amounts of materials for almost every class on campus.

Bill, one of Ahmed’s fellow library student workers, was constantly talking about doing weird stunts and antics to put on YouTube. He was a nice person to be around but sometimes he was a little overbearing. One evening when Ahmed started work, Bill was talking about the many ways to download pirated music, movies, and books from the library’s system. “It is very easy and untraceable. I just route my requests to a professor’s IP address, then send it to several other faculty IP addresses so it is difficult to trace. I then go to one of the library computers, log in as someone else, put in a CD or Blu-Ray DVD, and burn what I want. The people’s com- puters I route through get a message that some- one logged into their account, but the IT guys just tell them it’s no big deal and it happens all the time. IT never really looks into it because of the many systems and IP addresses on cam- pus. Do you want me to get you any movies or CDs?” Ahmed politely refused, knowing full well this could get a person expelled from the university.

Several months passed and Bill became more popular. Every day someone stopped by the library desk where he worked and talked to Bill. The person walked to one of the library’s computers, stuck in a disk, and several minutes later was gone. Ahmed looked at Bill and shook his head. Bill responded with a smile. One day,

RESOLVING ETHICAL BUSINESS CHALLENGES *

* This case is strictly hypothetical; any resemblance to real per- sons, companies, or situations is coincidental.

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122 Part 2: Ethical Issues and the Institutionalization of Business Ethics

> > > CHECK YOUR EQ

Check your EQ, or Ethics Quotient, by completing the following. Assess your performance to evaluate your overall understanding of the chapter material.

1. Voluntary practices include documented best practices. Yes No

2. The primary method for resolving business ethics disputes is through the criminal court system. Yes No

3. The FSGO provides an incentive for organizations to conscientiously develop and implement ethics programs. Yes No

4. The Sarbanes–Oxley Act encourages CEOs and CFOs to report their financial statements accurately. Yes No

5. Strategic philanthropy represents a new direction in corporate giving that maximizes the benefit to societal or community needs and relates to business objectives. Yes No

ANSWERS 1. No. Core practices are documented best practices. 2. No. Civil litigation is the primary way in which business ethics disputes are resolved. 3. Yes. Well-designed ethics and compliance programs can minimize legal liability when organizational misconduct is detected. 4. No. The Sarbanes–Oxley Act requires CEOs and CFOs to accurately report their financial statements to a federal oversight committee; they must sign the document and are held personally liable for any inaccuracies. 5. Yes. Strategic philanthropy helps both society and the organization.

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Chapter 4: The Institutionalization of Business Ethics 123

ENDNOTES

1. Corporate Information: Corporate Culture,” Google , http://www.google.com/corporate/culture.html (accessed April 18, 2013).

2. Paul K. Shum and Sharon L. Yam, “Ethics and Law: Guiding the Invisible Hand to Correct Corporate Social Responsibility Externalities,” Journal of Business Ethics 98 (2011): 549–571.

3. Susan Decker, “Google’s Motorola Files New Patent Case Against Apple,” Bloomberg Businessweek , August 18, 2012, http://www.businessweek.com/news/2012-08-17/google- s-motorola-files-new-patent-case-against-apple-at-itc (accessed April 18, 2013).

4. Don Clark and Shayndi Raice, “Tech Firms Intensify Clashes over Patents,” The Wall Street Journal , October 4, 2010, B3.

5. Lorraine Luk, “Microsoft and Hon Hai Reach Agreement on Patent Licensing,” The Wall Street Journal , April 17, 2013, http://online.wsj.com/article/SB100014241278873 23309604578428680601358990.html (accessed April 18, 2013).

6. Amir Efrati, “Google Proposes Settlement Terms to EU Regulators,” The Wall Street Journal , April 13, 2013, http:// online.wsj.com/article/SB10001424127887324240804578 421043011099914.html (accessed April 18, 2013).

7. Aaron Back, “China Acts to Prevent Collusion on Prices,” The Wall Street Journal , January 5, 2011, http://online.wsj. com/article/SB10001424052748704723104576061160620 783364.html (accessed April 18, 2013).

8. Dionne Searcey, “U.K. Laws on Bribes Has Firms In a Sweat,” The Wall Street Journal , December 28, 2010, B1.

9. Gregory T. Gundlach, “Price Predation: Legal Limits and Antitrust Considerations,” Journal of Public Policy & Marketing 14 (1995): 278.

10. David Goldman, “Obama Vows Antitrust Crackdown,” CNN Money , May 11, 2009, http://money.cnn.com/ 2009/05/11/news/economy/antitrust/index.htm (accessed April 18, 2013).

11. Steve Lohr, “High-Tech Antitrust Cases: The Road Ahead,” The New York Times , May 13, 2009, http://bits. blogs.nytimes.com/2009/05/13/high-tech-antitrust-the- road-ahead/ ?scp=1&sq=high-tech%20antitrust&st=cse (accessed April 18, 2013).

12. “10 Ways to Combat Corporate Espionage,” Data Destruction News , http://www.imakenews.com/ accushred/e_article001225805.cfm?x=bdtNVCP, bbGvRs5c, w (accessed April 18, 2013).

13. Margaret Cronin Fisk and Steve Raphael, “Ex-GM Engineer, Husband Guilty of Trade Secrets Theft,” Bloomberg , November 30, 2012, http://www.bloomberg. com/news/2012-11-30/ex-gm-engineer-husband-found- guilty-of-trade-secrets-theft-1-.html (accessed April 18, 2013).

14. “Baseball’s Antitrust Exemption: Q&A,” ESPN , December 5, 2001, http://sports.espn.go.com/espn/ print?id=1290707&type=story (accessed April 18, 2013).

15. “A Child Shall Lead the Way: Marketing to Youths,” Credit Union Executive , May–June 1993, 6–8.

16. Julia Angwin, “How to Keep Kids Safe Online,” The Wall Street Journal , January 22, 2009, http://online.wsj.com/

article/SB123238632055894993.html (accessed April 18, 2013).

17. Anton Troianovski, “Developers Brace for New Rules on Kids’ Apps,” The Wall Street Journal , April 5, 2013, B1.

18. Jennifer Levitz, “Laws Take on Financial Scams against Seniors,” The Wall Street Journal , May 19, 2009, http:// online.wsj.com/article/SB124269210323932723.html (accessed April 18, 2013).

19. Gerald Albaum and Robert A. Peterson, “Multilevel (Network) Marketing: An Objective View,” The Marketing Review , Volume 11, Number 4, 2011, 347–361. Daniel B. Ravicher. “Might Other Companies Be Liable If Herbalife Is A Pyramid Scheme?” Seeking Alpha , February 5, 2013, http://seekingalpha.com/article/1157581-might- other-companies-be-liable-if-herbalife-is-a-pyramid , (accessed February 5, 2013). Karen E. Klein. “A Charm Offensive by Direct Sellers,” Bloomberg Businessweek , June 25–July 1, 2012, 52–54; Duane Stanford. “Bill Ackman’s Crusade Against Herbalife,” Bloomberg Businessweek , January 14–20, 2012, 40; Gerald Albaum, “Multi-level Marketing and Pyramid Scheme: Myth versus Reality,” AMS Quarterly , November 2008, 10; Business Wire, “Herbalife announces Results of Study on Distributors and End Users in the U.S., Yahoo! Finance, June 11, 2013, http://finance.yahoo.com/news/herbalife-announces- results-study-distributors-214500826.html (accessed June 17, 2013).

20. “What We Do,” U.S. Food and Drug Administration , http://www.fda.gov/AboutFDA/WhatWeDo/default.htm (accessed April 18, 2013).

21. Deborah Kotz, “Energy drinks: FDAA warns against DMAA,” The Boston Globe , April 15, 2013, http:// bostonglobe.com/lifestyle/health-wellness/2013/04/14/ energy-drinks-fda-warns-against-dmaa/ dqcTK77PuB0EizVIeMrlTP/story.html (accessed April 18, 2013).

22. Latifa Lyles, “Closing the Equal Pay Gap: 50 Years and Counting,” United States Department of Labor , April 9, 2013, http://social.dol.gov/blog/closing-the- equal-pay-gap-50-years-and-counting/ (accessed April 18, 2013).

23. Cynthia Bell, “‘Our Journey is Not Complete’ – Equal Pay Requires Passage of Paycheck Fairness Act,” ACLU , January 29, 2013, http://www.aclu.org/blog/womens- rights-lgbt-rights-religion-belief/our-journey-not- complete-equal-pay-requires-passage (accessed April 18, 2013).

24. Business Wire, “Cruise Lawyers to Senator Rockefeller: Overworked Cruise Employees Denied,” Bloomberg , April 11, 2013, http://www.bloomberg.com/ article/2013-04-11/amJSvA8pDWGk.html (accessed April 18, 2013).

25. Steven Scalet and Thomas F. Kelly, “The Ethics of Credit Rating Agencies: What Happened and the Way Forward,” Journal of Business Ethics 111(2012): 477–490.

26. VikasBajas, “At Moody’s, Some Debt was Rated Incorrectly,” The New York Times , July 2, 2008, http:// query.nytimes.com/gst/fullpage.html?res=9505E3DB 173DF931A35754C0A96E9C8B63 (accessed April 18, 2013).

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124 Part 2: Ethical Issues and the Institutionalization of Business Ethics

27. Jeannette Neymann, “New York Looks at Ratings Firms,” The Wall Street Journal , February 8, 2013, C1–C2.

28. Sarah Lynch, “Schapiro: More Oversight Needed for Credit-Rating Firms,” The Wall Street Examiner , April 15, 2009, http://forums.wallstreetexaminer.com/index. php?showtopic=807630 (accessed March 15, 2011).

29. Mike Spector and Shelly Banjo, “Pay at Nonprofits Gets a Closer Look,” The Wall Street Journal , March 27, 2009, http://online.wsj.com/article/SB123811160845153093. html (accessed April 18, 2013).

30. Protiviti, 2012 Sarbanes-Oxley Compliance Survey, 2012, http://www.protiviti.com/en-US/Documents/ Surveys/2012-SOX-Compliance-Survey-Protiviti.pdf (accessed April 18, 2013).

31. Floyd Norris and Adam Liptak, “Justices Uphold Sarbanes-Oxley Act,” The New York Times , June 28, 2010, http://www.nytimes.com/2010/06/29/ business/29accounting.html?pagewanted=1&_r=1 (accessed April 18, 2013).

32. Tim Elfrink, “The Rise and Fall of the Stanford Financial Group,” Houston Press , April 9, 2009, http://www. houstonpress.com/content/printVersion/1173931/ (accessed April 18, 2013); Shira Ovide, “Lehman Brothers Whistle-blower Matthew Lee Again in Spotlight,” The Wall Street Journal , December 21, 2010, http://blogs.wsj. com/deals/2010/12/21/lehman-brothers-whistleblower- matthew-lee-again-in-spotlight/ / (accessed April 18, 2013).

33. Tricia Bisoux, “The Sarbanes–Oxley Effect,” BizEd , July/ August 2005, 24–29.

34. 2010 Sarbanes-Oxley Compliance Survey , http:// www.auditnet.org/articles/KL201010.pdf (accessed February 22, 2011).

35. Protiviti, 2012 Sarbanes-Oxley Compliance Survey, 2012, http://www.protiviti.com/en-US/Documents/ Surveys/2012-SOX-Compliance-Survey-Protiviti.pdf (accessed April 18, 2013).

36. President Barack Obama, “Remarks by the President on 21st Century Financial Regulatory Reform,” The White House, June 17, 2009, http://www.whitehouse.gov/the_ press_office/Remarks-of-the-President-on-Regulatory- Reform/ (accessed April 18, 2013).

37. Ibid. 38. Joshua Gallu, “Dodd-Frank May Cost $6.5 Billion and

5,000 Workers,” Bloomberg , February 14, 2011, http:// www.bloomberg.com/news/2011-02-14/dodd-frank- s-implementation-calls-for-6-5-billion-5-000-staff- in-budget.html (accessed April 18, 2013); Binyamin Appelbaum and Brady Dennis, “Dodd’s overhaul goes well beyond other plans,” The Washington Post , November 11, 2009, http://www.washingtonpost.com/ wp-dyn/content/article/2009/11/09/AR2009110901935. html?hpid=topnews&sid=ST2009111003729 (accessed April 18, 2013).

39. Maria Bartiromo, “JPMorgan CEO Jamie Dimon sees good times in 2011,” USA Today , February 21, 2011, http://www.usatoday.com/money/companies/ management/bartiromo/2011-02-21-bartiromo21_ CV_N.htm (accessed April 18, 2013).

40. “Office of Financial Research,” U.S. Department of Treasury , http://www.treasury.gov/initiatives/Pages/ofr. aspx (accessed April 18, 2013).

41. “Initiatives: Financial Stability Oversight Council,” U.S. Department of Treasury , http://www.treasury.gov/ initiatives/Pages/FSOC-index.aspx (accessed April 18, 2013).

42. Financial Stability Oversight Council Created Under the Dodd-Frank Wall Street Reform and Consumer Protection Act: Frequently Asked Questions, October 2010, http://www.treasury.gov/initiatives/wsr/ Documents/FAQs%20-%20Financial%20Stability%20 Oversight%20Council%20-%20October%202010%20 FINAL%20v2.pdf (accessed April 18, 2013).

43. “Subtitle A—Bureau of Consumer Financial Protection,” One Hundred Eleventh Congress of the United States of America , 589.

44. “Wall Street Reform: Bureau of Consumer Financial Protection (CFPB),” U.S. Treasury, http://www.treasury. gov/initiatives/Pages/cfpb.aspx (accessed April 18, 2013).

45. “Wall Street Reform: Bureau of Consumer Financial Protection (CFPB),” U.S. Treasury , http://www.treasury. gov/initiatives/Pages/cfpb.aspx (accessed April 18, 2013); Sudeep Reddy, “Elizabeth Warren’s Early Words on a Consumer Financial Protection Bureau,” The Wall Street Journal , September 17, 2010, http://blogs.wsj.com/ economics/2010/09/17/elizabeth-warrens-early-words- on-a-consumer-financial-protection-bureau/ (accessed April 18, 2013); Jennifer Liberto & David Ellis, “Wall Street reform: What’s in the bill,” CNN , June 30, 2010); http://money.cnn.com/2010/06/25/news/economy/ whats_in_the_reform_bill/index.htm (accessed April 18, 2013).

46. Jean Eaglesham, “Warning Shot on Financial Protection,” The Wall Street Journal , February 9, 2011, http://online. wsj.com/article/SB10001424052748703507804576130 370862263258.html?mod=googlenews_wsj (accessed April 18, 2013).

47. Liz Rappaport, Liz Moyer, and Anupreeta Das, “Goldman Sets Funds for ‘Volcker’, ” The Wall Street Journal , February 8, 2013, C1–C2.

48. Jean Eaglesham, “Warning Shot on Financial Protection.” 49. Jean Eaglesham and Ashby Jones, “Whistle-blower

Bounties Pose Challenges,” The Wall Street Journal , December 13, 2010, C1, C3.

50. Ibid. 51. “SEC announces first whistleblower payout under Dodd-

Frank bounty program,” Compliance Corner , August 2012, http://compliancecorner.wnj.com/?p=177 (accessed April 18, 2013).

52. Win Swenson, “The Organizational Guidelines’ ‘Carrot and Stick’ Philosophy, and Their Focus on ‘Effective’ Compliance,” in Corporate Crime in America: Strengthening the “Good Citizenship”-Corporation (Washington, DC: U.S. Sentencing Commission, 1995), 17–26.

53. United States Code Service (Lawyers’ Edition), 18 U.S.C.S. Appendix, Sentencing Guidelines for the United States Courts (Rochester, NY: Lawyers Cooperative Publishing, 1995), sec. 8A.1.

54. O. C Ferrell and Linda Ferrell, “Current Developments in Managing Organizational Ethics and Compliance Initiatives,” University of Wyoming, white paper, Bill Daniels Business Ethics Initiative 2006.

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Chapter 4: The Institutionalization of Business Ethics 125

55. Open Compliance Ethics Group 2005 Benchmarking Study Key Findings, http://www.oceg.org/view/ Benchmarking2005 (accessed June 12, 2009).

56. “US Sentences Guidelines Changes Become Effective November 1,” FCPA Compliance and Ethics Blog , November 2, 2010, http://tfoxlaw.wordpress. com/2010/11/02/us-sentencing-guidelines-changes- become-effective-november-1/ (accessed April 18, 2013).

57. United States Sentencing Commission, Amendments to the Sentencing Guidelines , April 30, 2012, http:// www.ussc.gov/Legal/Amendments/Reader- Friendly/20120430_RF_Amendments.pdf (accessed April 18, 2013); “U.S. Sentencing Commission Promulgates Amendment to the Federal Sentencing Guidelines Responding to the Dodd-Frank Act,” April 13, 2012, http://www.ussc.gov/Legislative_and_Public_ Affairs/Newsroom/Press_Releases/20120413_Press_ Release.pdf (accessed April 18, 2013); “Sentencing Panel Amends Guidelines for Mortgage Fraud,” Crime in the Suites, May 11, 2012, http://crimeinthesuites.com/ sentencing-panel-amends-guidelines-mortgage-fraud/ (accessed April 18, 2013); David Debold and Matthew Benjamin, “U.S. Sentencing Commission Approves Increased Penalties for Certain Fraud Offenses,” FindLaw, August 28, 2012, http://corporate.findlaw. com/litigation-disputes/u-s-sentencing-commission- approves-increased-penalties-for-certa.html (accessed April 18, 2013).

58. Ferrell and Ferrell, “Current Developments in Managing Organizational Ethics and Compliance Initiatives.”

59. Lynn Brewer, “Capitalizing on the Value of Integrity: An Integrated Model to Standardize the Measure of Non- financial Performance as an Assessment of Corporate Integrity,” in Managing Risks for Corporate Integrity.

How to Survive an Ethical Misconduct Disaster, ed. Lynn Brewer, Robert Chandler, and O. C. Ferrell (Mason, OH: Thomson/Texere, 2006), 233–277.

60. Nanci Hellmich, “Disney cuts junk from its ad diet,” USA Today , June 5, 2012, 1B.

61. Ingrid MurroBotero, “Charitable Giving Has 4 Big Benefits,” Business Journal of Phoenix , online, January 1, 1999, www.bizjournals.com/phoenix/stories/1999/01/04/ smallb3.html (accessed April 18, 2013).

62. Wells Fargo, Corporate Social Responsibility Interim Report 2012, https://www.wellsfargo.com/downloads/ pdf/about/csr/reports/2012-social-responsibility-interim. pdf (accessed April 18, 2013).

63. Walmart, “Community Giving,” http://foundation. walmart.com/ (accessed April 18, 2013).

64. Susan G. Komen for the Cure, http://ww5.komen.org/ AboutUs/AboutUs.html (accessed April 18, 2013); “Save Lids to Save Lives®,” Yoplait, https://savelidstosavelives. com (accessed April 18, 2013).

65. “Even as Cause Marketing Grows, 83 Percent of Consumers Still Want to See More,” Cone, http:// www.coneinc.com/cause-grows-consumers-want-more (accessed February 23, 2011).

66. Joëlle Vanhamme, Adam Lindgreen, Jon Reast, and Nathalie van Popering, “To Do Well by Doing Good: Improving Corporate Image Through Cause-Related Marketing,” Journal of Business Ethics 109 (2012): 259–274.

67. Leigh Buchanan, “More Than a Moving Company,” Inc., December 1, 2010, www.inc.com/magazine/20101201/ more-than-a-moving-company.html (accessed April 18, 2013); Gentle Giant Movers website, www.gentlegiant. com (accessed April 17, 2013).

68. The Home Depot, “Living our Values,” http://careers. homedepot.com/our-culture/community-involvement. html (accessed April 16, 2013).

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© ZoranKrstic/Shutterstock.com

CHAPTER OBJECTIVES

• Provide a comprehensive model for ethical decision making in business

• Examine the intensity of ethical issues as an important element influencing the ethical decision- making process

• Introduce individual factors that may influence ethical decision making in business

• Introduce organizational factors that may influence ethical decision making in business

• Explore the role of opportunity in ethical decision making in business

• Understand normative considerations in ethical decision making

• Recognize the role of institutions in normative decision making

• Examine the importance of principles and core values to ethical decision making

CHAPTER OUTLINE

A Framework for Ethical Decision Making in Business

Ethical Issue Intensity

Individual Factors

Organizational Factors

Opportunity

Business Ethics Intentions, Behavior, and Evaluations

Using the Ethical Decision-Making Model to Improve Ethical Decisions

Normative Considerations in Ethical Decision Making

Institutions as the Foundation for Normative Values

Implementing Principles and Core Values in Ethical Decision Making

Understanding Ethical Decision Making

ETHICAL DECISION MAKING

CHAPTER 5

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was no one watching them, and the shift supervisor also engaged in these activities. Steven felt it was the company’s responsibility to hire good people, so they were to blame if these things happened.

One day, Steven approached Julie and asked, “Why do so many people here serve food that has fallen on the floor to customers?”

Julie thought about it briefly as though she had never considered it before and replied, “I guess it’s because it would take too much time to get another beef patty out of the freezer, cook it, and serve it to the customer. This is a fast food restaurant, after all, and I’m not interested in hearing customers complain about the time it takes for them to get their food. Besides, the restaurants with the fastest service get a bonus from corporate headquarters. Last year the supervisors rewarded us with some extra money for doing our jobs so quickly.”

Steven was somewhat taken aback by the honest reply and asked, “Wouldn’t you be disgusted if you were served dirty food at a restaurant?”

This time Julie’s response was quick. She said, “What I don’t know won’t hurt me.” She walked off.

Several weeks went by and the same practices continued. Steven became more and more concerned about the consequences that could happen in an environment so laid back and unconcerned about safety and health. It seemed like the more time that passed, the worse everyone’s attitude became.

One day, at the beginning of his shift, Steven noticed the walk-in freezer had been left open. As he went to shut the door, he discovered a smell of rotten meat. It almost made him vomit. “How could this happen?” he wondered. He threw away the rotten meat without asking anyone because he was afraid of what the answer might be.

After Steven threw out the spoiled meat, he began to wonder how the culture of the restaurant got to the point of supporting such practices. He realized the seemingly minor unsanitary practices allowed major issues to arise that could possibly hurt someone. Steven felt he should say or do something, but to whom? He sat down and pondered what he should do.

Steven, a junior at Texas University, just started working part-time at a local fast food restaurant chain. Although not his dream job, it paid for tuition and books, and the restaurant gave him the flexible schedule he needed for school. After a few months, Steven found he got along well with all of his co-workers, but it was apparent they did not respect the company or the management. The employees made fun of their bosses and treated the work area like a playground. In some respects, Steven thought it was a fun environment to work in, especially after hours when management was gone for the day. They played their music loudly, laughed, and talked with one another during the down times instead of cleaning up their work areas like they were supposed to. Despite the fact there were ethical policies telling employees how they were expected to act in the workplace, these policies never seemed to be enforced.

One day, while working with his co-worker Julie on the food assembly table, Steven saw Julie accidentally drop a meat patty on the floor. Without so much as a flinch, she bent down, picked up the patty, stuck it back on the bun, and wrapped it up. It happened so fast that Steven wasn’t even sure he had seen right—especially since Julie had done it so casually. Steven watched in dismay as another worker took the hamburger out to the customer.

Over the next few weeks, Steven saw others, including the shift supervisor, do the same thing with burgers and other products. Once, an entire cheeseburger hit the greasy floor, was picked up, and was taken to the customer. This time the customer complained the burger tasted funny and sent it back. Steven noticed other unsanitary practices such as employees not washing their hands between handling meat and vegetables and not washing utensils between uses. Obviously, such practices were against company policies and, if reported, the supervisors in charge could get in trouble and the restaurant would face investigations from the health department. However, there was ample opportunity for things like this to occur. There

AN ETHICAL DILEMMA *

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128 Part 3: The Decision-Making Process

QUESTIONS | EXERCISES 1. Describe the nature of the organizational

culture in the restaurant. What kind of opportunities are there for unethical behavior to occur? Are there any opportunities for ethical behavior?

2. What are some of the incentives employees might have to engage in this type of behavior?

3. If the organizational culture of the restaurant does not change, what are some likely outcomes and consequences?

* This case is strictly hypothetical; any resemblance to real persons, companies, or situations is coincidental.

To improve ethical decision making in business, you must first understand how indi-viduals make decisions in an organization. Too often it is assumed people in orga-nizations make ethical decisions in the same way they make them at home, in their families, or in their personal lives. Within the context of an organizational work group, however, few individuals have the freedom to personally decide ethical issues independent of the organization and its stakeholders.

This chapter summarizes our current knowledge of ethical decision making in busi- ness and provides a model so you may better visualize the ethical decision making process. Although it is impossible to describe exactly how any one individual or work group might make ethical decisions, we can offer generalizations about average or typical behavior pat- terns within organizations. These generalizations are based on many studies and at least six ethical decision models that have been widely accepted by academics and practitioners. 1 Based on this research, we present a model for understanding ethical decision making in the context of business organizations. The model integrates concepts from philosophy, psychology, sociology, and organizational behavior. This framework should be helpful in understanding organizational ethics and developing ethical programs. Additionally, we describe some normative considerations that prescribe how organizational decision making should approach ethical issues. Principles and values are used by organizations as a foun- dation for establishing core values to provide enduring beliefs about appropriate conduct. Therefore, we provide both a descriptive understanding of how ethical decisions are made as well as the normative framework to determine how decisions ought to be made.

A FRAMEWORK FOR ETHICAL DECISION MAKING IN BUSINESS

As Figure 5–1 shows, our model of the ethical decision making process in business includes ethical issue intensity, individual factors, and organizational factors such as cor- porate culture and opportunity. All of these interrelated factors influence the evaluations of and intentions behind the decisions that produce ethical or unethical behavior. This model does not describe how to make ethical decisions, but it does help you to understand the factors and processes related to ethical decision making.

Ethical Issue Intensity The first step in ethical decision making is to recognize that an ethical issue requires an individual or work group to choose among several actions that various stakehold- ers inside or outside the firm will ultimately evaluate as right or wrong. The first step

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Chapter 5: Ethical Decision Making 129

is becoming aware that an ethical issue exists. Ethical awareness is the ability to perceive whether a situation or decision has an ethical dimension. Costly problems can be avoided if employees are able to first recognize whether a situation has an ethical component. However, ethical awareness can be difficult in an environment when employees work in their own areas of expertise with the same types of people. It is easier to overlook certain issues requiring an ethical decision, particularly if the decision becomes a routine part of the job. This makes it important for organizations to train employees how to recog- nize the potential ethical ramifications of their decisions. Familiarizing employees with company values and training them to recognize common ethical scenarios can help them develop ethical awareness.

The intensity of an ethical issue relates to its perceived importance to the decision maker. 2 Ethical issue intensity can be defined as the relevance or importance of an event or decision in the eyes of the individual, work group, and/or organization. It is personal and temporal in character to accommodate values, beliefs, needs, perceptions, the special char- acteristics of the situation, and the personal pressures prevailing at a particular place and time. 3 Senior employees and those with administrative authority contribute significantly to ethical issue intensity because they typically dictate an organization’s stance on ethical issues. For instance, greenhouse gas emissions are an important global topic. The Envi- ronmental Protection Agency (EPA) collects and publishes data on carbon dioxide due to its negative impact on the environment. Although the EPA can fine or sanction firms that go above carbon dioxide standards, industry groups have filed numerous lawsuits. As a result of the controversy, power plant companies like Scherer and Martin Lake have labeled this an ethical issue. 4 Additionally, insider trading is considered a serious ethical issue by the government because the intent is to take advantage of information not available to the public. Therefore, it is an ethical issue of high intensity for regulators and govern- ment officials. This often puts them at odds with financial companies such as hedge funds. A survey of hedge fund companies revealed 35 percent of respondents feel pressured to break the rules. 5 Because of their greater ability to gather financial information from the market—some of which might not be public information—hedge funds and other finan- cial institutions have often come under increased scrutiny by the federal government.

FIGURE 5–1 Framework for Understanding Ethical Decision Making in Business

Ethical Issue Intensity

Individual Factors

Organizational Factors

Opportunity

Business Ethics Evaluations and

Intentions

Ethical or Unethical Behavior

© C

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130 Part 3: The Decision-Making Process

Under current law, managers can be held liable for the unethical and illegal actions of subordinates. In the United States, the Federal Sentencing Guidelines for Organiza- tions contain a liability formula judges use as a guideline regarding illegal activities of corporations. For example, many of the Enron employees and managers aware of the firm’s use of off-the-balance-sheet partnerships—that turned out to be the major cause of the energy firm’s collapse—were advised these partnerships were legal, so they did not per- ceive them as an ethical issue. Although such partnerships were legal at that time, the way Enron officials designed them and the methods they used to provide collateral (that is, Enron stock) created a scheme that brought about the collapse of the company. 6 Thus, ethi- cal issue intensity involves individuals’ cognitive state of concern about an issue, or whether or not they have knowledge that an issue is unethical, that in turn indicates their involve- ment in making choices. The identification of ethical issues often requires the understand- ing of complex business relationships.

Ethical issue intensity reflects the ethical sensitivity of the individual and/or work group facing the ethical decision-making process. Research suggests that individuals are subject to six “spheres of influence” when confronted with ethical choices—the workplace, family, reli- gion, legal system, community, and profession—and the level of importance of each of these influences varies depending on how important the decision maker perceives the issue to be. 7 Additionally, individuals’ moral intensity increases their perceptiveness of potential ethical problems, which in turn reduces their intention to act unethically. 8 Moral intensity relates to individuals’ perceptions of social pressure and the harm they believe their decisions will have on others. 9 All other factors in Figure 5–1 , including individual factors, organizational factors, and intentions, determine why different individuals perceive ethical issues differ- ently. Unless individuals in an organization share common concerns about ethical issues, the stage is set for ethical conflict. The perception of ethical issue intensity can be influenced by management’s use of rewards and punishments, corporate policies, and corporate values to sensitize employees. In other words, managers can affect the degree to which employees perceive the importance of an ethical issue through positive and/or negative incentives. 10

For some employees, ethical issues may not reach the critical awareness level if manag- ers fail to identify and educate them about specific problem areas. One study found that more than a third of the unethical situations that lower and middle-level managers face come from internal pressures and ambiguity surrounding internal organizational rules. Many employees fail to anticipate these issues before they arise. 11 This lack of prepared- ness makes it difficult for employees to respond appropriately when they encounter an eth- ics issue. One field recognized as having insufficient ethics training is science. A panel of experts found young scientists tend to lack knowledge about ethical frameworks to navi- gate ethical gray areas. They therefore tend to be unprepared when faced with an ethi- cal issue. 12 Organizations that consist of employees with diverse values and backgrounds must train workers in the way the firm wants specific ethical issues handled. Identifying the ethical issues and risks employees might encounter is a significant step toward develop- ing their ability to make ethical decisions. Many ethical issues are identified by industry groups or through general information available to a firm. Flagging certain issues as high in ethical importance could trigger increases in employees’ ethical issue intensity. The per- ceived importance of an ethical issue has shown a strong influence on both employees’ ethical judgment and their behavioral intention. In other words, the more likely individu- als perceive an ethical issue as important, the less likely they are to engage in questionable or unethical behavior. 13 Therefore, ethical issue intensity should be considered a key factor in the ethical decision-making process.

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Chapter 5: Ethical Decision Making 131

Individual Factors When people need to resolve issues in their daily lives, they often base their decisions on their own values and principles of right or wrong. They generally learn these values and principles through the socialization process with family members, social groups, religion, and in their formal education. Good personal values have been found to decrease unethi- cal practices and increase positive work behavior. The moral philosophies of individuals, discussed in more detail in Chapter 6 , provide principles and rules people use to decide what is right or wrong from a moral and personal perspective. Values of individuals can be derived from moral philosophies to apply to daily decisions. However, values are subjec- tive and vary a great deal across different cultures. For example, some individuals might place greater importance on keeping their promises and commitments than others would. Values could also relate to negative rationalizations, such as “Everyone does it,” or “We have to do what it takes to get the business.” 14 Research demonstrates that individuals with destructive personalities who violate basic core values can cause a work group to suffer a performance loss of 30 percent to 40 percent compared to groups with no “bad apples.” 15 The actions of specific individuals in scandal-plagued financial companies such as Gold- man Sachs and JP Morgan often raise questions about those individuals’ personal character and integrity. They appear to operate in their own self-interest or in total disregard for the law and the interests of society.

Although an individual’s intention to engage in ethical behavior relates to individual values, organizational and social forces also play a vital role. An individual’s attitudes as well as social norms help create behavioral intentions that shape his or her decision- making process. While an individual may intend to do the right thing, organizational or social forces can alter this intent. For example, an individual may intend to report the miscon- duct of a coworker, but when faced with the social consequences of doing so, may decide to remain complacent. In this case, social forces overcome a person’s individual values when it comes to taking appropriate action. 16 At the same time, individual values strongly influ- ence how people assume ethical responsibilities in the work environment. In turn, indi- vidual decisions can be heavily dependent on company policy and the corporate culture.

The way the public perceives business ethics generally varies according to the profes- sion in question. Telemarketers, car salespersons, advertising practitioners, stockbrokers, and real estate brokers are often perceived as having the lowest ethics. Research regard- ing individual factors that affect ethical awareness, judgment, intent, and behavior include gender, education, work experience, nationality, age, and locus of control.

Extensive research has been done regarding the link between gender and ethical deci- sion making. The 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. 17 By “more ethical,” we mean women seem to be more sensitive to ethical scenarios and less tolerant of unethical actions. One study found that women and men had different foundations for making ethical decisions: women rely on relationships; men rely on jus- tice or equity. 18 In another study on gender and intentions for fraudulent financial report- ing, females reported higher intentions to report them than male participants. 19 As more and more women work in managerial positions, these findings may become increasingly significant.

Education is also a significant factor in the ethical decision-making process. The important thing to remember about education is that it does not reflect experience. Work experience is defined as the number of years in a specific job, occupation, and/or industry.

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132 Part 3: The Decision-Making Process

Generally, the more education or work experience people have, the better they are at making ethical decisions. The type of education someone receives has little or no effect on ethics. For example, it doesn’t matter if you are a business student or a liberal arts student— you are pretty much the same in terms of ethical decision making. Current research, however, shows students are less ethical than businesspeople, which is likely because busi- nesspeople have been exposed to more ethically challenging situations than students. 20

Nationality is the legal relationship between a person and the country in which he or she is born. In the twenty-first century, nationality is redefined by regional economic integration such as the European Union (EU). When European students are asked their nationality, they are less likely to state where they were born than where they currently live. The same thing is happening in the United States, as people born in Florida living in New York might consider themselves to be New Yorkers. Research about nationality and ethics appears to be significant in how it affects ethical decision making; however, just how nationality affects ethics is somewhat hard to interpret. 21 Because of cultural differences, it is impos- sible to state that ethical decision making in an organizational context will differ signifi- cantly among individuals of different nationalities. The reality of today is that multinational companies look for businesspeople that make decisions regardless of nationality. Perhaps in 20 years, nationality will no longer be an issue because the multinational individual’s cul- ture will replace national status as the most significant factor in ethical decision making.

Age is another individual factor researched within business ethics. Several decades ago, we believed age was positively correlated with ethical decision making. In other words, the older you are, the more ethical you are. However, recent research suggests there is probably a more complex relationship between ethics and age. 22 We believe older employees with more experience have greater knowledge to deal with complex industry-specific ethical issues. Younger managers are far more influenced by organizational culture than are older managers. 23

Locus of control relates to individual differences in relation to a generalized belief about how you are affected by internal versus external events or reinforcements. In other words, the concept relates to how people view themselves in relation to power. Those who believe in external control (externals) see themselves as going with the flow because that is all they can do. They believe the events in their lives are due to uncontrollable forces. They consider what they want to achieve depends on luck, chance, and powerful people in their com- pany. In addition, they believe the probability of being able to control their lives by their own actions and efforts is low. Conversely, those who believe in internal control (internals) believe they control the events in their lives by their own effort and skill, viewing themselves as masters of their destinies and trusting in their capacity to influence their environment.

Current research suggests we still 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 internals were positively correlated whereas externals were negatively correlated. 24 In other words, those who believe they formed their own destiny were more ethical than those who believed their fate was in the hands of others.

Organizational Factors Although people can and do make individual ethical choices in business situations, no one operates in a vacuum. Indeed, research established that in the workplace, the organization’s values often have greater influence on decisions than a person’s own values. 25 Ethical choices

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Chapter 5: Ethical Decision Making 133

in business are most often made jointly, in work groups and committees, or in conversations and discussions with coworkers. Employees approach ethical issues on the basis of what they learned not only from their own backgrounds, but also from others in the organization. The outcome of this learning process depends on the strength of personal values, the opportunities to behave unethically, and the exposure to others who behave ethically or unethically. An align- ment between a person’s own values and the val- ues of the organization help create positive work attitudes and organizational outcomes. Research has further demonstrated that congruence in personal and organizational values is related to commitment, satisfaction, motivation, ethics, work stress, and anxiety. 26 Although people out- side the organization such as family members and friends also influence decision makers, the organization develops a personality that helps determine what is and is not ethical. Just as a family guides an individual, specific industries give behavioral cues to firms. Within the family develops what is called a culture and so too in an organization.

Corporate culture can be defined as a set of val- ues, norms, and artifacts, including ways of solving problems that members (employees) of an orga- nization share. As time passes, stakeholders come to view the company or organization as a living organism with a mind and will of its own. The Walt Disney Co., for example, requires all new employ- ees to take a course in the traditions and history of Disneyland and Walt Disney, including the ethical dimensions of the company. The corporate culture at American Express stresses that employees help customers out of difficult situations whenever pos- sible. This attitude is reinforced through numer- ous company legends of employees who have gone above and beyond the call of duty to help customers. This strong tradition of customer loyalty might encourage an American Express employee to take unorthodox steps to help a customer who encounters a problem while traveling overseas. Employees learn they can take some risks in helping customers. Such strong traditions and values have become a driving force in many com- panies, including Starbucks, IBM, Procter & Gamble, Southwest Airlines, and Hershey Foods.

One way organizations can determine the ethicalness and authenticity of their corporate cultures is having organizations go back to their mission statement or goals and objectives. These goals and objectives are often developed by various stakeholders, such as inves- tors, employees, customers, and suppliers. Comparing the firm’s activities with its mission

Conflicts Over Privacy in the Workplace

There is tension between companies and their employees over privacy in the workplace. Some companies track employees via company-issued GPS-enabled smartphones and monitor employees’ behavior through social networking sites such as Facebook and Twitter. Currently, there are no laws preventing companies from monitoring and tracking employees. Companies believe not monitoring these platforms leaves them vulnerable to misconduct. For instance, the Internet increased the number of distractions in the workplace, and some employees may spend up to 30 percent of their time at work using social media sites for non-work purposes.

On the other hand, employees argue they have a right to their privacy. They see tracking as a clear sign that their employers do not trust them. Another major argument is that employers with access to employee social media sites or smartphones might be able to monitor employee activity outside the workplace. Where is the line drawn on ensuring employees are working appropriately versus their rights to privacy?

1. Companies should have the right to track employees through company smartphones and monitor their personal Facebook and Twitter accounts.

2. Employees should be able to maintain their personal privacy and not be tracked through their company smartphones or their Facebook and Twitter accounts.

DEBATE ISSUE TAKE A STAND

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134 Part 3: The Decision-Making Process

statement, goals, and objectives helps the organization understand whether it is staying true to its values. Additionally, most industries have trade associations that disperse guidelines developed over time from others in the industry. These rules help guide the decision making process as well. The interaction between the company’s internal rules and regulations and industry guidelines form the basis of whether a business is making ethical or unethical deci- sions. It also gives an organization an idea of how an ethical or unethical culture may look.

An important component of corporate or organizational culture is the company’s ethi- cal conduct. Corporate culture involves values and norms that prescribe a wide range of behavior for organizational members, while ethical culture reflects the integrity of decisions made and is a function of many factors, including corporate policies, top management’s leadership on ethical issues, the influence of coworkers, and the opportunity for unethi- cal behavior. Communication is also important in the creation of an effective ethical cul- ture. There is a positive correlation between effective communication and empowerment and the development of an organizational ethical climate. 27 Within the organization as a whole, subcultures can develop in individual departments or work groups, but these are influenced by the strength of the firm’s overall ethical culture, as well as the function of the department and the stakeholders it serves. 28 The more employees perceive an organiza- tion’s ethical culture to be, the less likely they are to make unethical decisions.

Corporate culture and ethical culture are closely associated with the idea that sig- nificant others within the organization help determine ethical decisions within that orga- nization. Research indicates the ethical values embodied in an organization’s culture are positively correlated to employees’ commitment to the firm and their sense that they fit into the company. These findings suggest companies should develop and promote ethical values to enhance employees’ experiences in the workplace. 29

Those who have influence in a work group, including peers, managers, coworkers, and subordinates, are referred to as significant others . They help workers on a daily basis with unfamiliar tasks and provide advice and information in both formal and informal ways. Coworkers, for instance, can offer help in the comments they make in discussions over lunch or when the boss is away. Likewise, a manager may provide directives about certain types of activities employees perform on the job. Indeed, an employee’s supervisor can play a central role in helping employees develop and fit in socially in the workplace. 30 Numer- ous studies conducted over the years confirm that significant others within an organization may have more impact on a worker’s decisions on a daily basis than any other factor. 31

Obedience to authority is another aspect of the influence significant others can exercise. Obedience to authority helps explain why many employees resolve business ethics issues by simply following the directives of a superior. In organizations that emphasize respect for superiors, employees may feel they are expected to carry out orders by a supervisor even if those orders are contrary to the employees’ sense of right and wrong. Later, if the employee’s decision is judged to be wrong, he or she is likely to say, “I was only carrying out orders,” or “My boss told me to do it this way.” In addition, research shows the type of industry and size of the organization were found to be relevant factors, with bigger compa- nies at greater risk for unethical activities. 32

Opportunity Opportunity describes the conditions in an organization that limit or permit ethical or uneth- ical behavior. Opportunity results from conditions that either provide rewards, whether internal or external, or fail to erect barriers against unethical behavior. Examples of

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Chapter 5: Ethical Decision Making 135

internal rewards include feelings of goodness and personal worth generated by performing altruistic acts. External rewards refer to what an individual expects to receive from others in the social environment in terms of social approval, status, and esteem.

An example of a condition that fails to erect barriers against unethical behavior is a company policy that does not punish employees who accept large gifts from clients. The absence of punishment essentially provides an opportunity for unethical behavior because it allows individuals to engage in such behavior without fear of consequences. The pros- pect of a reward for unethical behavior can also create an opportunity for questionable decisions. For example, a salesperson given public recognition and a large bonus for mak- ing a valuable sale obtained through unethical tactics will probably be motivated to use such tactics again, even if such behavior goes against the salesperson’s personal value system. If ten percent of employees observe others at the workplace abusing drugs or alco- hol and nobody reports or responds to this conduct, then the opportunity for others to engage in these activities exists. 33

Opportunity relates to individuals’ immediate job context —where they work, whom they work with, and the nature of the work. The immediate job context includes the moti- vational “carrots and sticks” superiors use to influence employee behavior. Pay raises, bonuses, and public recognition act as carrots, or positive reinforcements, whereas demo- tions, firings, reprimands, and pay penalties act as sticks, or negative reinforcements. One survey reports more than two-thirds of employees steal from their workplaces, and most do so repeatedly. 34 As Table 5–1 shows, many office supplies, particularly smaller ones, tend to “disappear” from the workplace. Small supplies such as Post-It notes, copier paper, staples, and pens appear to be the more commonly pilfered items, but some office theft sometimes reaches more serious proportions. One employee was indicted for stealing more than $ 376,000 in ink toner from a law firm and selling it on the black market over a two-year period. 35 The retail industry is particularly hard hit—total losses from employee theft are often greater than shoplifting at retail chains. 36 If there is no policy against this practice, one concern is employees will not learn where to draw the line and get into the habit of taking more expensive items for personal use.

The opportunities that employees have for unethical behavior in an organiza- tion can be eliminated through formal codes, policies, and rules adequately enforced by

TABLE 5–1 Most Common Office Supplies Stolen by Employees

1 Post-It notes

2 Tape

3 Scissors

4 Toilet paper

5 Copier paper

6 USB memory sticks

7 Notepads

8 Pens

9 Staplers

10 Highlighters

Source: “Top Office Supplies that Are Stolen and the Average Value of Contents In A Woman’s Purse!”

KMLE, May 16, 2012, http://kmle1079.cbslocal.com/2012/05/16/top-office-supplies-that-are-stolen/ (accessed April 12, 2013).

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136 Part 3: The Decision-Making Process

management. For instance, the American Economic Association adopted new conflict-of- interest rules to help academic economists become more transparent about their relation- ships with hedge funds, banks, and financial institutions. These rules responded to the criticisms levied against academic economists over the consulting services and derivative risk models they provided to financial companies such as Lehman Brothers—services that have been partially blamed for the U.S. financial crisis. 37 Financial companies—such as banks, savings and loan associations, and securities companies—developed elaborate sets of rules and procedures to avoid creating opportunities for individual employees to manipulate or take advantage of their trusted positions. In banks, one such rule requires most employees to take a vacation and stay out of the bank a certain number of days every year so they cannot be physically present to cover up embezzlement or other diversions of funds. This rule prevents the opportunity for inappropriate conduct.

Despite the existence of rules, misconduct can still occur without proper oversight. News Corp. received a blow when an investigation revealed its most popular tabloid in the United Kingdom, News of the World , engaged in wide-scale phone hacking to secure leads. Resulting backlash led to the closure of the tabloid and the arrest of more than 100 News Corp. officials. How did the tabloid manage to get away with this misconduct for years? Investigators believe the company paid off police officers to look the other way. Many offi- cers and other public officials were arrested in connection with the hacking and alleged bribery scheme. 38 To avoid similar situations, there must be checks and balances that create transparency.

Opportunity also comes from knowledge. A major type of misconduct observed among employees in the workplace is lying to employees, customers, vendors, or the pub- lic or withholding needed information from them. 39 A person with expertise or informa- tion about the competition has the opportunity to exploit this knowledge. Individuals can be a source of information because they are familiar with the organization. Individuals employed by one organization for many years become “gatekeepers” of its culture and often have the opportunity to make decisions related to unwritten traditions and rules. They socialize newer employees to abide by the rules and norms of the company’s internal and external ways of doing business, as well as understanding when the opportunity exists to cross the line. They function as mentors or supervise managers in training. Like drill ser- geants in the army, these trainers mold the new recruits into what the company wants. Their training can contribute to either ethical or unethical conduct.

The opportunity for unethical behavior cannot be eliminated without aggressive enforcement of codes and rules. A national jewelry store chain president explained to us how he dealt with a jewelry buyer in one of his stores who took a bribe from a supplier. There was an explicit company policy against taking incentive payments to deal with a spe- cific supplier. When the president of the firm learned about the accepted bribe, he imme- diately traveled to the office of the buyer in question and terminated his employment. He then traveled to the supplier (manufacturer) selling jewelry to his stores and terminated his relationship with the firm. The message was clear: Taking a bribe is unacceptable for the store’s buyers, and salespeople from supplying companies could cost their firm significant sales by offering bribes. This type of policy enforcement illustrates how the opportunity to commit unethical acts can be eliminated or at least significantly reduced.

As defined previously, stakeholders are those directly and indirectly involved with a company and can include investors, customers, employees, channel members, communi- ties, and special interest groups. Each stakeholder has goals and objectives that somewhat align with other stakeholders and the company. It is the diverging of goals that causes

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Chapter 5: Ethical Decision Making 137

friction between and within stakeholders and the corporation. Most stakeholders under- stand firms must generate revenues and profit to exist, but not all. Special interest groups or communities may actively seek the destruction of the corporation because of perceived or actual harm to themselves or those things held important to them. The employee is also affected by such stakeholders, usually in an indirect way. Depending upon the per- ceived threat level to the firm, employees may act independently or in groups to perpetrate unethical or illegal behaviors. For example, one author knew of a newspaper firm that had been losing circulation to one of its competitors and the loss was putting people at the firm out of work. The projection was if the newspaper could not turn subscriptions around they would be closed within a year. As a result of the announcement employees started pulling up newspaper receptacles and damaging the competition’s automatic newspaper dispens- ers. Both activities were illegal, yet the employees felt justified because they believed they were helping the company survive.

Business Ethics Intentions, Behavior, and Evaluations Ethical dilemmas involve problem-solving situations when the rules governing decisions are often vague or in conflict. The results of an ethical decision are often uncertain; it is not always immediately clear whether or not we made the right decision. There are no magic for- mulas, nor is there computer software that ethical dilemmas can be plugged into to get a solu- tion. Even if they mean well, most businesspeople make ethical mistakes. Therefore, there is no substitute for critical thinking and the ability to take responsibility for our own decisions.

Individuals’ intentions and the final decision regarding what action they take are the last steps in the ethical decision-making process. When intentions and behavior are inconsistent with their ethical judgment, people may feel guilty. For example, when an advertising account executive is asked by her client to create an advertisement she perceives as misleading, she has two alternatives: to comply or refuse. If she refuses, she stands to lose business from that client and possibly her job. Other factors—such as pressure from the client, the need to keep her job to pay her debts and living expenses, and the possibility of a raise if she devel- ops the advertisement successfully—may influence her resolution of this ethical dilemma. Because of these factors, she may decide to act unethically and develop the advertisement even though she believes it to be inaccurate. In this example her actions are inconsistent with her ethical judgment, meaning she will probably feel guilty about her decision.

Guilt or uneasiness is the first sign an unethical decision has occurred. The next step is changing the behavior to reduce such feelings. This change can reflect a person’s values shifting to fit the decision or the person changing his or her decision type the next time a similar situation occurs. You can eliminate some of the problematic situational factors by resigning your position. For those who begin the value shift, the following are the usual justifications that reduce and finally eliminate guilt:

1. I need the paycheck and can’t afford to quit right now. 2. Those around me are doing it, so why shouldn’t I? They believe it’s okay. 3. If I don’t do this, I might not be able to get a good reference from my boss or company

when I leave. 4. This is not such a big deal, given the potential benefits. 5. Business is business with a different set of rules. 6. If not me, someone else would do it and get rewarded.

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138 Part 3: The Decision-Making Process

The road to success depends on how the businessperson defines success. The success concept drives intentions and behavior in business either implicitly or explicitly. Money, security, family, power, wealth, and personal or group gratification are all types of success measures people use. The list described is not comprehensive, and in the next chapter, you will understand more about how success can be defined. Another concept that affects behav- ior is the probability of rewards and punishments, an issue explained further in Chapter 6 .

USING THE ETHICAL DECISION- MAKING MODEL TO IMPROVE ETHICAL DECISIONS

The ethical decision-making model presented in this chapter cannot tell you if a business deci- sion is ethical or unethical. It bears repeating that it is impossible to tell you what is right or wrong; instead, we attempt to prepare you to make informed ethical decisions. Although this chapter does not moralize by telling you what to do in a specific situation, it does provide an overview of typical decision-making processes and factors that influence ethical decisions. The model is not a guide for how to make decisions, but is intended to provide you with insights and knowledge about typical ethical decision-making processes in business organizations.

Business ethics scholars developing descriptive models have focused on regularities in decision making and the various phenomena that interact in a dynamic environment to produce predictable behavioral patterns. Furthermore, it is unlikely an organization’s ethical problems will be solved strictly by having a thorough knowledge about how ethi- cal decisions are made. By its very nature, business ethics involves value judgments and collective agreement about acceptable patterns of behavior. In the next section, we discuss normative concepts that describe appropriate ethical conduct.

We propose gaining an understanding of the factors that make up ethical decision making in business will sensitize you concerning whether the business problem is an ethi- cal issue or dilemma. It will help you know what the degree of moral intensity may be for you and others as well as how individual factors such as gender, moral philosophy, educa- tion level, and religion within you and others affect the process. We hope you remember the organizational factors that impact the ethics of business decisions and what to look for in a firm’s code of ethics, culture, opportunity, and the significance of other employees and how they sway some people’s intentions and behaviors. You now know non-business factors such as friends, family, and the economic reality of an employee’s situation can lead to unethical business decisions. Finally, we hope you remember the type of industry, the competition, and stakeholders are all factors that can push some employees into making unethical decisions. In later chapters we delve deeper into different aspects of the ethical decision making process so ultimately you can make better, more informed decisions and help your company do the right things for the right reasons.

One important conclusion that should be taken into account is that ethical decision making within an organization does not rely strictly on the personal values and morals of individuals. Knowledge of moral philosophies or values must be balanced with business knowledge and an understanding of the complexities of the dilemma requiring a decision. For example, a manager who embraces honesty, fairness, and equity must understand the diverse risks associated with a complex financial instrument such as options or derivatives. Business competence must exist, along with personal accountability, in ethical decisions.

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Chapter 5: Ethical Decision Making 139

Organizations take on a culture of their own, with managers and coworkers exerting a significant influence on ethical decisions. While formal codes, rules, and compliance are essential in organizations, an organization built on informal relationships is more likely to develop a high level of integrity within an organization’s culture. 40

NORMATIVE CONSIDERATIONS IN ETHICAL DECISION MAKING

In the first part of the chapter, we described how ethical decision making occurs in an organization. This descriptive approach provides an understanding of the role of individu- als in an organizational context for making ethical decisions. Understanding what influ- ences the ethical decision making process is important in sensitizing you to the intensity of issues and dilemmas as well as the management of ethics in an organization.

However, understanding how ethical decisions are made is different from determin- ing what should guide decisions. A normative approach to business ethics examines what ought to occur in ethical decision making. The word “normative” is equivalent to an ideal standard. Therefore, when we discuss normative approaches , we are talking about how orga- nizational decision makers should approach an issue. This is different from a descriptive approach that examines how organizational decision makers approach ethical decision making. A normative approach in business ethics revolves around the standards of behav- ior within the firm as well as within the industry. These normative rules and standards are based on individual moral values as well as the collective values of the organization. The normative approach for business ethics is concerned with general ethical values imple- mented into business. Concepts like fairness and justice are highly important in a norma- tive structure. Strong normative structures in organizations are positively related to ethical decision making. Normative considerations also tend to deal with moral philosophies such as utilitarianism and deontology that we will explore in more detail in the next chapter.

Most organizations develop a set of core values to provide enduring beliefs about appropriate conduct. Core values are central to an organization and provide directions for action. For most firms, the selection of core values relates directly to stakeholder manage- ment of relationships. These values include an understanding of the descriptive approaches we covered in the first part of this chapter. It also includes instrumental elements that justify the adoption of core values. An instrumental concern focuses on positive outcomes, includ- ing firm profitability and benefits to society. Normative business dimensions are rooted in social, political, and economic institutions as well as the recognition of stakeholder claims.

By incorporating stakeholder objectives into corporate core values, companies begin to view stakeholders as significant. Each stakeholder has goals and objectives that some- what align with other stakeholders and the company. The diverging of goals causes friction between and within stakeholders and the corporation. Ethical obligations are established for both internal stakeholders such as employees as well as external stakeholders such as the community. 41 For instance, 3 M recognizes it has societal obligations as well as obliga- tions to its employees and customers. 3 M donates millions in time and money to chari- table causes, including higher education, disaster relief, and nonprofit institutes. 42 Ethical decisions are often embedded in many organizational decisions—both managerial and societal—so it is necessary to recognize the importance of core values in providing ideals for appropriate conduct.

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140 Part 3: The Decision-Making Process

Institutions as the Foundation for Normative Values Institutions are important in establishing a foundation for normative values. According to institutional theory, organizations operate according to taken-for-granted institutional norms and rules. For instance, government, religion, and education are institutions that influence the creation of values, norms, and conventions that both organizations and indi- viduals should adhere. 43 Indeed, many researchers argue that normative values largely originate from family, friends, and more institutional affiliations such as religion and government. 44 In other words, organizations face certain normative pressures from differ- ent institutions to act a certain way. These pressures can take place internally (inside the organization itself) and/or externally (from the government or other institutions). 45 For our purposes, we sort institutions into three categories: political, economic, and social.

Consider for a moment how political institutions influence the development of values. If you live in country with a democratic form of government, you likely consider freedom of speech and the right to own property as important ideals. Organizations must comply with these types of institutional norms and belief systems in order to succeed—to do oth- erwise would result in the failure of the organization. 46 Companies such as IBM should recognize that using bribery to gain a competitive advantage is inappropriate according to U.S. and U.K. bribery laws. Political influences can also take place within the organization. An ethical organization has policies and rules in place to determine appropriate behavior. This is often the compliance component of the firm’s organizational culture. Failure to abide by these rules results in disciplinary action. For instance, engineering and construc- tion company Fluor Corporation’s code of conduct states that it is every employee’s duty to report unsafe conduct in the workplace. Those who fail to report can be subject to disci- plinary procedures. 47

Normative business ethics takes into account the political realities outside the legal realm in the form of industry standards. Different types of industries have different stan- dards and policies which either increase or decrease the ethicality and legality of their decisions. Legal issues such as price fixing, antitrust issues, and consumer protection are important in maintaining a fair and equitable marketplace. Antitrust regulators tend to scrutinize mergers and acquisitions between large firms to make sure these companies do not gain so much power they place competitors at a major disadvantage. Price-fixing is illegal because it often creates unfair prices for buyers. For instance, seven retailers sued DuPont and three other manufacturers for allegedly manipulating the prices of a pigment used in white paint. They claimed the price fixing agreement caused them to pay inflated prices for the pigment. 48 Because of their impact on the economy, these issues must be major considerations for businesses when making ethical decisions.

Competition is also important to economic institutions and ethical decision making. The nature of competition can be shaped by the economic system. The economic system helps determine how a particular country or society distributes its resources in the produc- tion of products. Basic economic systems such as communism, socialism, and capitalism influence the nature of competition. Competition affects how a company operates as well as the risks employees take for the good of the firm. The amount of competition in an industry can be determined and described according to the following: 1) barriers to entry into the industry, 2) available substitutes for the products produced by the industry rivals, 3) the power of the industry rivals over their customers, and 4) the power of the indus- try rivals’ suppliers over the industry rivals. An example of a highly competitive indus- try is smartphone manufacturing, whereas the vacuum cleaning manufacturing industry

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Chapter 5: Ethical Decision Making 141

is competitively low. High levels of competition create a higher probability that firms cut corners because margins are usually low. Competitors aggressively seek differential advan- tages from others so as to increase market share, profitability, and growth. When taken to extremes, unethical and illegal activities can become normal. To cut health care, Michelin North America charges as much as $ 1,000 more for healthcare coverage if an employee’s waist is more than forty inches or if they have high blood pressure. They are also requiring employees to share personal health information such as body-mass index and weight and blood-sugar levels. Employee-rights advocates say the penalties are akin to “legal discrimi- nation” while the company calls them wellness incentives. 49

Social institutions impact a firm’s normative values as well. Social institutions include religion, education, and individuals such as the family unit. There are laws meant to ensure an organization acts fairly, but there is no law saying people should do to others as they would prefer to have done to them. Yet many cultures adopted this rule that has been insti- tutionalized into businesses with standards on competing fairly, being transparent with consumers, and treating employees with respect. These social institutions help individuals form their personal values and the moral philosophies they bring into the workplace. From an organizational context, societal trends influence which values to adopt as well as when to adapt decisions to take into account new concerns. For instance, because of the chang- ing socio cultural concerns over obesity, Walmart decided to support an initiative to sell healthier foods.

While we might not consider stakeholders to be institutions, it should now be clear that many stakeholders actually act as institutions in terms of values. Stakeholders closely align with institutions. The regulatory system aligns with political institutions, competi- tion relates to economic institutions, and personal values and norms derive from social institutions. There is therefore a clear link between institutional theory and the stakeholder orientation of management.

As we reiterated, an organization uses rules dictated by its institutional environ- ment to measure the appropriateness of its behavior. 50 Organizations facing the same environmental norms or rules (e.g. those in the same industry) become isomorphic, or institutionalized. 51 Although organizations in a particular industry might differ, most share certain values that characterize the industry. Additionally, institutional factors often overlap in ethical decision making. For example, General Motors began releasing more fuel-efficient vehicles such as the Chevrolet Volt. We could characterize this decision as having political, economic, and social considerations. Politically, new laws are requiring automobile companies to increase the fuel efficiency of their vehicles. General Motors competes against rival vehicles such as the Toyota Prius, the Nissan Leaf, and the Fusion Hybrid. GM’s investment in greater fuel efficiency also results from society’s increasing demands for more sustainable vehicles.

While industry shared values promote organizational effectiveness when linked to goals, it can also hinder effectiveness if more efficient means of organization and structure are avoided in exchange for stability. 52 There is a risk that organizations might sacrifice new ideas or methodologies in order to be more acceptable. 53 This can limit innovativeness and productivity. On the other hand, it is important that an organization does not stray so far from industry norms and values that it creates stakeholder concerns. A company known for selling environmentally friendly apparel would not likely succeed in selling a new clothing line made of animal fur. From both an ethical and managerial standpoint, knowing which institutional norms to comply with and when it would be more beneficial to explore new norms and values is important for organizations to consider.

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142 Part 3: The Decision-Making Process

How does this fit with ethical theory? Institutions directly impact a firm’s norms, values, and behavior as well as “the long-run survival of the organization.” 54 When Galleon Group’s founder Raj Rajaratnam and other major employees were found guilty of insider trading, the firm floundered. In this case, the government was the major institution involved. By violating the law, the organization did not have the ability to bounce back from this type of misconduct. The firm did not have normative values in place to dictate appropriate (and in this case legal) behavior.

Conversely, when values from political, economic, and social institutions are embed- ded into the organizational culture to provide incentives for appropriate behavior, firms tend to act more socially responsible. 55 If incentives such as organizational rewards align with the organization’s normative values and society’s cultural institutions, employees— and therefore the organization as a whole—are more likely to act in a socially responsible manner. Many organizations provide employees with a certain amount of time off to vol- unteer in their communities. This incentive matches the normative institutional value of giving back to the community. If incentives do not align with institutional normative val- ues or if they contradict these values, then misconduct is likely. While Enron and Coun- trywide Financial outwardly supported ethical conduct, in reality the company culture rewarded those who took risks even if they violated normative values.

Implementing Principles and Core Values in Ethical Decision Making

Political, economic, and social institutions help organizations determine principles and values for appropriate conduct. Principles and values are important normative consider- ations in ethical decision making. We learned from Chapter 1 that principles are specific and pervasive boundaries for behavior that should not be violated. Principles are impor- tant in preventing organizations from “bending the rules.” Values are enduring beliefs and ideals that are socially enforced. Together, principles and values set an ideal standard for the organization. Figure 5–2 demonstrates some of the similarities and differences between principles and values.

John Rawls was one of the most influential philosophers in his research on how prin- ciples support the concept of justice. 56 Rawls believed justice principles were beliefs that everyone could accept—a key element in our own definition of principles. According to our definition, principles are beliefs that are universal in nature. For instance, most cul- tures agree that honesty and fairness are essential to a well-functioning society, although there may be differences on how to implement this principle in daily living.

In his experiments, Rawls used what he called the veil of ignorance , a thought experi- ment that examined how individuals would formulate principles if they did not know what their future position in society would be. A person might emerge from the veil of igno- rance as a rich person or as a beggar. While individuals might formulate different values based on their position in society, Rawls believed that because principles were universally accepted both the rich person and the beggar would agree upon them. Thus, using the veil of ignorance, Rawls identified principles that were not biased by one’s social position. 57

Rawls’ work led him to develop two main principles of justice: the liberty principle and the difference principle. The liberty principle, also known as the equality principle, states that each person has basic rights that are compatible to the basic liberties of others. This is similar to the U.S. Constitution’s statement that everyone has certain inalienable rights such as life,

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Chapter 5: Ethical Decision Making 143

liberty, and the pursuit of happiness. The difference principle states that economic and social equalities (or inequalities) should be arranged to provide the most benefit to the least-advan- taged members of society. This means the most ethical course of action is one that increases the benefits of those that are the least well-off. Actions that harm disadvantaged members of society should be avoided. 58 It is important to note that the difference principle does not advocate for the complete elimination of inequalities in society, but that the most ethical deci- sion seeks to benefit and not harm disadvantaged populations. In the corporate world, orga- nizations operating according to the difference principle would not take actions that could create economic and social harm to the least advantaged members of society. For example, a firm might avoid accepting business from a foreign country with a record of human rights abuses because the country supports the exploitation of disadvantaged groups. 59 Both of Rawls’ justice principles relate to political, economic, and social institutions.

While organizations might agree that they should behave honestly, transparently, and responsibly toward stakeholders, they might differ on how to implement these principles. Companies take basic principles and translate them into core values. Core values provide the abstract ideals that are distinct from individual values and daily operational proce- dures. Value practices evolve and are translated into normative definitions of ethical or unethical. Value practices become the end results and are distinct from organizational practices driven by technical or efficiency considerations. 60

Individual and organizational values can differ significantly 61 because of ethical diver- sity among individuals. To join an organization, members need to accept that some values are superior and deal with the organizational need to develop collective agreement. This results in possible tensions that must be worked out between individual and organizational values. 62 Instead of individuals just accepting core values from top management, there needs to be group discussions, negotiations, and adjustments to determine how core values are implemented. 63

FIGURE 5–2 Principles and Values

Principles • Widely accepted • Used to develop values and standards • Establishes pervasive boundaries for behavior • Valued across cultures

Values • Subjective and related to choice • Used to develop norms • Provides guidance to organizations • Differs across cultures and firms

“We will obey all relevant laws in the countries in which we do business.”

“We will practice transparency in all of our communications.”

“We will work to ensure the rights of all of our stakeholders.”

“We will establish trustworthy relationships with stakeholders.”

“We will encourage teamwork and collaboration to come up with the best solutions.”“We will offer

the best quality products in the industry.”

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144 Part 3: The Decision-Making Process

Remember that leaders, stakeholders, and the organizational culture impact the devel- opment of core values. Core values might include operating in a sustainable manner, col- laboration and teamwork, and avoiding bribery. Unlike principles, values are shaped by company specific, industry specific, country specific and global specific factors. 64 Firms from countries that stress individualism encourage the ability to work independently, whereas firms from more collectivist nations place more value on teamwork. Additionally, core values differ depending upon the industry. For example, although safety is a core value of many firms, it is more likely to be emphasized as a core value in a factory environment than in an office environment.

A firm’s core values provide a blueprint into the firm’s purpose as well as how it views ethical decision making and prioritizes stakeholders. Table 5–2 provides an example of the core values of Marriot International. How Marriot organized its core values provides a snapshot of what the firm considers important. For instance, its first value, to put people first, provides guidance for all of the firm’s stakeholder relationships. From its other core values you can determine that Marriot strives to deliver excellent customer service and operate with the highest forms of integrity. All five of Marriott’s values reinforce its vision “to be the # 1 hospitality company in the world.” 65 Organizational core values such as these are essential to ethical decision making in organizations. Organizations that have ethics programs based on a values orientation are found to make a greater contribution than those based simply on compliance, or obeying laws and regulations. 66

UNDERSTANDING ETHICAL DECISION MAKING

Our ethical decision-making framework demonstrates the many factors that influence eth- ical decisions. Ethical issue intensity, individual factors, organizational factors, and oppor- tunity result in business ethics evaluations and decisions. An organizational ethical culture is shaped by effective leadership. Without top level support for ethical behavior, the oppor- tunity for employees to engage in their own personal approaches to ethical decision making will evolve. An ethical corporate culture needs shared values along with proper oversight to monitor the complex ethical decisions being made by employees. It requires the estab- lishment of a strong ethics program to educate and develop compliance policies. Consider the ethics program at construction and engineering company Bechtel Corporation. Top managers at Bechtel show strong support for ethical conduct, with the chief ethics officer and vice chairman speaking at events such as the European Business Ethics Forum and the

TABLE 5–2 Core Values of Marriott

1. Put People First

2. Pursue Excellence

3. Embrace Change

4. Act with Integrity

5. Serve Our World

Source: Marriott, 2011 Annual Report, http://investor.shareholder .com/mar/marriottAR11/index.html (accessed April 19, 2013).

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Chapter 5: Ethical Decision Making 145

Ethics and Compliance Officer Association meeting to share best industry practices. Every year the company holds an ethics awareness workshop for its employees to discuss ethical scenarios and how best to resolve them. 67

On the other hand, some companies with a strong reputation for ethical conduct some- times fail to maintain their ethical culture. Johnson and Johnson’s (J&J) quick action during the Tylenol murders secured its reputation for putting customer safety first. However, J&J experienced several quality control issues that put its reputation as an ethical company in jeopardy. Additionally, many criticized the way J&J handled these issues and began to ques- tion whether J&J lost its standing as a gold standard for values-based ethics. 68 Despite these setbacks, J&J continues to be ranked among the top ten in Harris Interactive’s reputation quo- tient ratings. 69 To continue maintaining credibility among stakeholders, J&J must learn from its mistakes and return to the values in its credo that made it a role model for ethical conduct.

Normative dimensions are also important to ethical decision making. Normative per- spectives set forth ideal goals that organizations should aspire. Normative considerations also provide the foundation needed to develop organizational principles and values, the building blocks of a firm’s ethical culture. Without this foundation, companies will not be able to develop an ethical culture or have the basis to make ethical decisions. The Ford Pinto case is an interesting example of how normative considerations can be easily ignored. Ford recognized that its Pintos had a design flaw that made it easier for explosions to occur in accidents. However, it refused to initiate a recall. This led to needless deaths. It is inter- esting to note that in one class discussing the Ford Pinto case students tended to point out the monetary and reputational impact of Ford’s actions, but only later did a student state that Ford should not have knowingly sold a dangerous car that could harm people. 70 Normative frameworks are largely influenced by political, economic, and social institu- tions. However, a normative perspective also recognizes the existence of universal ethical behaviors, such as honesty and justice. Total, a French oil and gas company, lists human rights, financial transparency, and respect for people as being among its main principles. 71

Finally, the more you know about ethical decision making in business, the more likely you will make good decisions. There are many challenges in organizations beyond the control of any one individual. On the other hand, as you move to higher levels of the organization, there is the opportunity for ethical leadership to become a role model for good ethics. The descriptive framework of ethical decision making in this chapter provides many insights into the relationships that contribute to an ethical culture.

SUMMARY

The key components of the ethical decision-making framework include ethical issue inten- sity, individual factors, organizational factors, and opportunity. These factors are inter- related and influence business ethics evaluations and intentions that result in ethical or unethical behavior.

The first step in ethical decision making is to recognize an ethical issue requires an individual or work group to choose among several actions that will ultimately be evalu- ated as ethical or unethical by various stakeholders. Ethical issue intensity is the perceived relevance or importance of an ethical issue to an individual or work group. It reflects the ethical sensitivity of the individual or work group that triggers the ethical decision-making process. Other factors in our ethical decision-making framework influence this sensitivity, and therefore different individuals often perceive ethical issues differently.

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146 Part 3: The Decision-Making Process

Individual factors such as gender, education, nationality, age, and locus of control affect the ethical decision-making process, with some factors being more important than others. Organizational factors such as an organization’s values often have greater influence on an individual’s decisions than that person’s own values. In addition, deci- sions in business are most often made jointly, in work groups and committees, or in conversations and discussions with coworkers. Corporate cultures and structures oper- ate through the ability of individual relationships among the organization’s members to influence those members’ ethical decisions. A corporate culture is a set of values, beliefs, goals, norms, and ways of solving problems that members (employees) of an organiza- tion share. Corporate culture involves norms that prescribe a wide range of behavior for the organization’s members. The ethical culture of an organization indicates whether it has an ethical conscience. Significant others—including peers, managers, coworkers, and subordinates—who influence the work group have more daily impact on an employee’s decisions than any other factor in the decision-making framework. Obedience to author- ity may explain why many business ethics issues are resolved simply by following the directives of a superior.

Ethical opportunity results from conditions that provide rewards, whether internal or external, or limit barriers to ethical or unethical behavior. Included in opportunity is a person’s immediate job context that includes the motivational techniques superiors use to influence employee behavior. The opportunity employees have for unethical behavior in an organization can be eliminated through formal codes, policies, and rules that are adequately enforced by management.

The ethical decision-making framework is not a guide for making decisions. It is intended to provide insights and knowledge about typical ethical decision-making pro- cesses in business organizations. Ethical decision making within organizations does not rely strictly on the personal values and morals of employees. Organizations have cultures of their own that when combined with corporate governance mechanisms may signifi- cantly influence business ethics.

Normative approaches describe how organizational decision makers should approach an ethical issue. Institutional theory is an important normative concept that states that organizations operate according to taken-for-granted institutional norms and rules. Politi- cal, economic, and social institutions help organizations determine principles and values for appropriate conduct. Principles are important in preventing organizations from “bend- ing the rules.” Philosopher John Rawls contributed important work on principles, particu- larly principles of justice. Core values are enduring beliefs about appropriate conduct and provide guidance for the ethical direction of the firm.

IMPORTANT TERMS FOR REVIEW

ethical awareness 129

ethical issue intensity 129

moral intensity 130

gender 131

education 131

nationality 132

age 132

locus of control 132

external control 132

internal control 132

corporate culture 133

ethical culture 134

significant other 134

obedience to authority 134

opportunity 134

immediate job context 135

normative approach 139

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Chapter 5: Ethical Decision Making 147

RESOLVING ETHICAL BUSINESS CHALLENGES *

CrudeOil, a subsidiary of a major energy multina- tional that manufactures oil drilling parts around the world, experienced a lag in sales. The board of directors brought in a new manager to revamp the company. They recommended Jim Stone as the new manager because he had an impeccable repu- tation for achieving results, and top managers in the industry liked him because of his west Texas demeanor. After eighteen months passed, Jim was successful in increasing the company’s sales and profits. He began his tenure as manager by laying off several salespeople who had not performed according to his high standards. This made those who stayed with the company uneasy and they responded in different ways. Some tried to get on Jim’s good side, while others focused on achieving their sales goals and avoiding any type of interac- tion with him.

The problem was Jim’s managing style was harsh and unpredictable. For example, when a mistake was made, he blamed salespeople he dis- liked even if it was not their fault. On one occa- sion, Marjorie, one of the newest salespeople, brought in an unusually big sale. Rather than giv- ing her positive feedback, Jim acted like it was a normal occurrence. What was ironic was the com- pany’s most important value was to treat everyone with respect. It was considered so significant it was printed on a banner and hung at the front of the office for all to see. When Jim lost his temper, it often happened while he stood in front of all the employees underneath the banner.

His personality really came out when he got angry. At several meetings he would randomly pick out salespeople and engage in intimidating behaviors such as staring at them for long peri- ods of time, discounting their ideas, or simply ignoring them. Jim treated all of the employees with intimidating behavior, even the ones he claimed to like. Every so often Jim picked out an employee and make snide comments over the course of several days. He made no excuses about it.

One day, when one of the employees finally broached Jim about the matter, Jim announced to the entire office, “I pick out the employees who are underperforming. I am the boss, and I need to make sure you people make as many sales as pos- sible.” He paused and looked at the expressions on the employees’ faces. He then continued, “Actu- ally, you should make more sales than that!” Jim turned toward his office, laughing as he shut the door. The employee who spoke up was given the subsidiary’s lesser sales accounts.

Madison, who hired in as a salesperson a few months before Jim took control of the company, was continuously in Jim’s crosshairs. He told her even though she made her sales quota, it was not satisfactory. Furthermore, he took credit for her performance at meetings. When her numbers exceeded the quota, he spread rumors suggesting she wasn’t meeting her goals because of problems in her personal life.

One day Peter, another sa lesperson, approached Madison and asked her how she was doing. Madison looked at him confusedly, and responded, “I’m as fine as anyone else here. Why?”

Peter answered, “Jim told me you had been in the hospital lately and you might be suffering from a serious illness.” Madison was taken aback. “Peter, Jim is just saying that because my sales numbers were low this last quarter. Believe me, I am fine.” Madison sat there infuriated that Jim would be spreading rumors about her.

Madison knew initiating a conversation with Jim would not be the way to resolve this issue. She felt she would be fired if she confronted him about his behavior or demoted like the other employee. She tried talking to others Jim had bul- lied, but many feared for their jobs and preferred to remain silent. She also considered speaking with the board of directors, but she did not know any one of them well and she knew they had a good relationship with Jim. Some kind of action had to take place because Madison could not work in an environment like that much longer. Besides, other

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148 Part 3: The Decision-Making Process

2. How is CrudeOil violating its core value of treating others with respect? What are some ways it could reincorporate this core value into its organizational culture?

3. If Madison cannot report her problems to her immediate supervisor, what are some other ways she can handle the situation?

employees’ tolerance would wear out soon and the company as a whole could suffer lasting conse- quences. As Madison walked toward the front door at the end of the day, she avoided looking at the banner featuring CrudeOil’s most important value.

QUESTIONS | EXERCISES 1. Describe the organizational culture at CrudeOil.

How does it contribute to the current situation? * This case is strictly hypothetical; any resemblance to real persons, companies, or situations is coincidental.

> > > CHECK YOUR EQ

Check your EQ, or Ethics Quotient, by completing the following. Assess your performance to evaluate your overall understanding of the chapter material.

1. The first step in ethical decision making is to understand the individual factors that influence the process. Yes No

2. “Opportunity” describes the conditions within an organization that limit or permit ethical or unethical behavior. Yes No

3. Core values are enduring beliefs about appropriate conduct. Yes No

4. The most significant influence on ethical behavior in an organization is the opportunity to engage in (un)ethical behavior. Yes No

5. Obedience to authority relates to the influence of corporate culture. Yes No

ANSWERS 1. No. The first step is to become more aware that an ethical issue exists and to consider its relevance to the individual or work group. 2. Yes. Opportunity results from conditions that provide rewards or fail to erect barriers against unethical behavior. 3. Yes. Core values are enduring beliefs about appropriate conduct. 4. No. Significant others have more impact on ethical decisions within an organization. 5. No. Obedience to authority relates to the influence of significant others and supervisors.

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Chapter 5: Ethical Decision Making 149

ENDNOTES

1. Thomas M. Jones, “Ethical Decision Making by Individuals in Organizations: An Issue-Contingent Model,” Academy of Management Review , 16 (February 1991): 366–395; O. C. Ferrell and Larry G. Gresham, “A Contingency Framework for Understanding Ethical Decision Making in Marketing,” Journal of Marketing 49 (Summer 1985): 87–96; O. C. Ferrell, Larry G. Gresham, and John Fraedrich, “A Synthesis of Ethical Decision Models for Marketing,” Journal of Macromarketing 9 (Fall 1989): 55–64; Shelby D. Hunt and Scott Vitell, “A General Theory of Marketing Ethics,” Journal of Macromarketing 6 (Spring 1986): 5–16; William A. Kahn, “Toward an Agenda for Business Ethics Research,” Academy of Management Review 15 (April 1990): 311–328; Linda K. Trevino, “Ethical Decision Making in Organizations: A Person-Situation Interactionist Model,” Academy of Management Review 11 (March 1986): 601–617.

2. Jones, “Ethical Decision Making,” 367–372. 3. Donald P. Robin, R. Eric Reidenbach, and P. J. Forrest,

“The Perceived Importance of an Ethical Issue as an Influence on the Ethical Decision Making of Ad Managers,” Journal of Business Research 35 (January 1996): 17.

4. David Doniger, “New EPA Study Shows Largest Greenhouse Gas Emitters—Are They In Your Backyard?” Eco Watch , February 6, 2013, http://ecowatch.com/2013/ epa-greenhouse-gas-emitters/ (accessed April 22, 2013); John M. Broder, “E.P.A. Will Delay Rule Limiting Carbon Emissions at New Power Plants,” The New York Times , April 12, 2013, http://www.nytimes.com/2013/04/13/ science/earth/epa-to-delay-emissions-rule-at-new-power- plants.html?_r=1& (accessed June 17, 2013).

5. Andrew Tangel, “Many at hedge funds still feel pressure to break rules, survey finds,” Los Angeles Times , April 4, 2013, http://www.latimes.com/business/money/la-fi-mo- wall-street-insider-trading-survey-20130404,0,7610072. story (accessed April 12, 2013).

6. Jack Beatty, “The Enron Ponzi Scheme,” The Atlantic Monthly , March 13, 2002, http://www.theatlantic.com/ doc/200203u/pp2002-03-13 (accessed August 17, 2009).

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8. Anusorn Singhapakdi, Scott J. Vitell, and George R. Franke, “Antecedents, Consequences, and Mediating Effects of Perceived Moral Intensity and Personal Moral Philosophies,” Journal of the Academy of Marketing Science 27 (Winter 1999): 19.

9. Ibid. 10. Ibid. 11. Kathy Lund Dean, Jeri Mullins Beggs, and Timothy P.

Keane, “Mid-level Managers, Organizational Context, and (Un)ethical Encounters,” Journal of Business Ethics 97 (2010): 51–69.

12. Beryl Benderly, “Inadequate Ethics Training Leaves Young Scientists Unprepared for “Ethical Emergencies,” Science Careers Blog , July 14, 2012, http://blogs.sciencemag.org/ sciencecareers/2012/07/difficult-ethic.html (accessed April 12, 2013).

13. Singhapakdi, Vitell, and Franke, 17.

14. Damodar Suar and Rooplekha Khuntia, “Influence of Personal Values and Value Congruence on Unethical Practices and Work Behavior,” Journal of Business Ethics 97 (2010): 443–460.

15. “Lead the Way,” Spirit , February 2011, 41. 16. B. Elango, Karen Paul, Sumit K. Kundu, and Shishir K.

Paudel, “Organizational Ethics, Individual Ethics, and Ethical Intentions in International Decision-Making,” Journal of Business Ethics 97 (2010): 543–561.

17. T. W. Loe, L. Ferrell, and P. Mansfield, “A Review of Empirical Studies Assessing Ethical Decision Making in Business,” Journal of Business Ethics 25 (2000): 185–204.

18. C. Gilligan, “In a Different Voice: Women’s Conceptions of Self and Morality,” Harvard Educational Review , 47 (4), 1977, 481–517.

19. Steven Kaplan, Kurt Pany, Janet Samuels, and Jian Zhang, “An Examination of the Association between Gender and Reporting Intentions for Fraudulent Financial Reporting,” Journal of Business Ethics 87, No. 1 (June 2009): 15–30.

20. Michael J. O’Fallon and Kenneth D. Butterfield, “A Review of the Empirical Ethical Decision-Making Literature: 1996–2003,” Journal of Business Ethics 59 (July 2005): 375–413; P. M. J. Christie, J. I. G. Kwon, P. A. Stoeberl, and R. Baumhart, “A Cross-Cultural Comparison of Ethical Attitudes of Business Managers: India, Korea and the United States,” Journal of Business Ethics 46 (September 2003): 263–287; G. Fleischman and S. Valentine, “Professionals’ Tax Liability and Ethical Evaluations in an Equitable Relief Innocent Spouse Case,” Journal of Business Ethics 42 (January 2003): 27–44; A. Singhapakdi, K. Karande, C. P. Rao, and S. J. Vitell, “How Important Are Ethics and Social Responsibility? A Multinational Study of Marketing Professionals,” European Journal of Marketing 35 (2001): 133–152.

21. R. W. Armstrong, “The Relationship between Culture and Perception of Ethical Problems in International Marketing,” Journal of Business Ethics 15 (November 1996): 1199–1208; J. Cherry, M. Lee, and C. S. Chien, “A Cross-Cultural Application of a Theoretical Model of Business Ethics: Bridging the Gap between Theory and Data,” Journal of Business Ethics 44 (June 2003): 359–376; B. Kracher, A. Chatterjee, and A. R. Lundquist, “Factors Related to the Cognitive Moral Development of Business Students and Business Professionals in India and the United States: Nationality, Education, Sex and Gender,” Journal of Business Ethics 35 (February 2002): 255–268.

22. J. M. Larkin, “The Ability of Internal Auditors to Identify Ethical Dilemmas,” Journal of Business Ethics 23 (February 2000): 401–409; D. Peterson, A. Rhoads, and B. C. Vaught, “Ethical Beliefs of Business Professionals: A Study of Gender, Age and External Factors,” Journal of Business Ethics 31 (June 2001): 225–232; M. A. Razzaque and T. P. Hwee, “Ethics and Purchasing Dilemma: A Singaporean View,” Journal of Business Ethics 35 (February 2002): 307–326.

23. B. Elango, Karen Paul, Sumit K. Kundu, Shishir K. Paudel, “Organizational Ethics, Individual Ethics, and Ethical Intentions in International Decision-Making,” Journal of Business Ethics 97 (2010): 543–561.

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150 Part 3: The Decision-Making Process

24. J. Cherry and J. Fraedrich, “An Empirical Investigation of Locus of Control and the Structure of Moral Reasoning: Examining the Ethical Decision-Making Processes of Sales Managers,” Journal of Personal Selling and Sales Management 20 (Summer 2000): 173–188; M. C. Reiss and K. Mitra, “The Effects of Individual Difference Factors on the Acceptability of Ethical and Unethical Workplace Behaviors,” Journal of Business Ethics 17 (October 1998): 1581–1593.

25. O. C. Ferrell and Linda Ferrell, “Role of Ethical Leadership in Organizational Performance,” Journal of Management Systems 13 (2001): 64–78.

26. Barry Z. Posner, “Another Look at the Impact of Personal and Organizational Values Congruency,” Journal of Business Ethics 97 (2010): 535–541.

27. K. Praveen Parboteeah, Hsien Chun Chen, Ying-Tzu Lin, I-Heng Chen, Amber Y-P Lee, and Anyi Chung, “Establishing Organizational Ethical Climates: How Do Managerial Practices Work?” Journal of Business Ethics 97 (2010): 599–611.

28. James Weber and Julie E. Seger, “Influences upon Organizational Ethical Subclimates: A Replication Study of a Single Firm at Two Points in Time,” Journal of Business Ethics 41 (November 2002): 69–84.

29. Sean Valentine, Lynn Godkin, and Margaret Lucero, “Ethical Context, Organizational Commitment, and Person-Organization Fit,” Journal of Business Ethics 41 (December 2002): 349–360.

30. Bruce H. Drake, Mark Meckler, and Debra Stephens, “Transitional Ethics: Responsibilities of Supervisors for Supporting Employee Development,” Journal of Business Ethics 38 (June 2002): 141–155.

31. Ferrell and Gresham, “A Contingency Framework,” 87–96. 32. R. C. Ford and W. D. Richardson, “Ethical Decision

Making: A Review of the Empirical Literature,” Journal of Business Ethics 13 (March 1994): 205–221; Loe, Ferrell, and Mansfield, “A Review of Empirical Studies.”

33. National Business Ethics Survey, How Employees Perceive Ethics at Work (Washington, DC: Ethics Resource Center, 2000), 30.

34. “Top Office Suppliers That Are Stolen & The Average Value of Contents In A Woman’s Purse,” KMLE , May 16, 2012, http://kmle1079.cbslocal.com/2012/05/16/top- office-supplies-that-are-stolen/ (accessed April 12, 2013).

35. Marc Santora, “For a Thief in This Office, Paper Clips Wouldn’t Do,” The New York Times , January 15, 2013, http://www.nytimes.com/2013/01/16/nyregion/man- charged-in-theft-of-copy-toner-worth-over-376000.html accessed April 12, 2013).

36. National Retail Federation, “Retail Theft Decreased in 2011, According to Preliminary National Retail Security Survey Findings,” June 22, 2012, http://www.nrf.com/ modules.php?name=News&op=viewlive&sp_id=1389 (accessed April 12, 2013).

37. Ben Casselman, “Economists Set Rules on Ethics,” The Wall Street Journal , January 9, 2012, http://online.wsj .com/article/SB10001424052970203436904577148940410 667970.html (accessed April 12, 2013).

38. “100 Arrests In News Corp. Scandal Over Phone, Computer Hacking, Corrupt Payments To Public Officials,” The Huffington Post , February 12, 2013, http:// www.huffingtonpost.com/2013/02/12/100-people- arrested_n_2669111.html (accessed April 12, 2013).

39. National Business Ethics Survey, 30. 40. Peter Verhezen, “Giving Voice in a Culture of Silence:

From a Culture of Compliance to a Culture of Integrity,” Journal of Business Ethics 96 (2010): 187–206.

41. Gene R. Laczniak and Patrick E. Murphy, “Stakeholder Theory and Marketing: Moving from a Firm-Centric to a Societal Perspective,” Journal of Public Policy & Marketing 31 (2): 284–292.

42. 3M, “Community Giving,” http://solutions.3m.com/ wps/portal/3M/en_US/3M-Sustainability/Global/ Stakeholders/Giving/ (accessed April 12, 2013).

43. R.L. Jepperson, “Institutions, institutional effects, and institutionalism,” In Walter W. Powell and Paul J. DiMaggio (eds.), The new institutionalism in organizational analysis (Chicago, IL: University of Chicago Press, 1991).

44. Patrick E. Murphy, Gene R. Laczniak, G. R., and Andrea Prothero, Ethics in Marketin g: International Cases and Perspectives (New York, NY: Routledge, 2012).

45. Lynn G. Zucker, “The Role of Institutionalization in Cultural Persistence,” American Sociological Review 42(5), October 1977, 726–743.

46. Paul J. DiMaggio and Walter W. Powell, “The Iron Cage Revisited: Institutionalized Isomorphism and Collective Rationality in Organizational Fields,” American Sociological Review , 48 (April 1983): 147–60; John W. Meyer and Brian Rowan, “Institutionalized Organization: Formal Structure as Myth and Ceremony,” American Journal of Sociology 83 (2), September 1977, 340–363.

47. Fluor Corporation, The Code of Business Conduct and Ethics , February 2011.

48. Karen Gallo, “DuPont Sued by Retailers on Price-Fixing Claim for Pigment,” Bloomberg , March 16, 2013, http:// www.bloomberg.com/news/2013-03-16/dupont-sued-by- retailers-alleging-pigment-price-fixing-1-.html (accessed April 19, 2013).

49. Leslie Kwohm, “When Your Boss Makes You Pay for Being Fat,” The Wall Street Journal , http://online.wsj.com/ article/SB100014241278873246007045784027841233345 50.html (accessed April 23, 2013).

50. Walter W. Powell and Paul J. DiMaggio (eds.), The new institutionalism in organizational analysis (Chicago, IL: University of Chicago Press, 1991).

51. Tina M. Dacin, “Isomorphism in Context: The Power and Prescription of Institutional Norms, ” Academy of Management Journal , 40 (February 1997), 46–81.

52. Lynn G. Zucker, “The Role of Institutionalization in Cultural Persistence,” American Sociological Review 42(5), October 1977, 726–743.

53. John W. Meyer and Brian Rowan, “Institutionalized Organization: Formal Structure as Myth and Ceremony,” American Journal of Sociology 83 (2), September 1977, 340–363.

54. Jay M. Handelman and Stephen J. Arnold, “The Rule of Marketing Actions with a Social Dimension,” Journal of Marketing 63 (1999): 33–48.

55. John L. Campbell, “Why Would Corporations Behave in Socially Responsible Ways? An Institutional Theory of Corporate Social Responsibility,” Academy of Management Review 32(3), 2007, 946–967; J. Galaskiewicz,“Making corporate actors accountable: Institution-building in Minneapolis-St. Paul,” In W. W. Powell & P. J. DiMaggio (Eds.), The new institutionalism in organizational analysis , 293–310 (Chicago: University of Chicago Press, 1991).

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Chapter 5: Ethical Decision Making 151

56. Bart Victor and Carroll Underwood Stephens, “Business Ethics: A Synthesis of Normative Philosophy and Empirical Social Science,” Business Ethics Quarterly 4(2), 1994, 145–155.

57. John Rawls, A Theory of Justice , Cambridge, MA: Harvard University Press, 1971.

58. Ibid. 59. Patrick E. Murphy, Gene R. Laczniak, G. R., and Andrea

Prothero, Ethics in Marketing: International Cases and Perspectives (New York, NY: Routledge, 2012).

60. Joel Gehman, Linda K. Treviño, and Raghu Garud, “Values Work: A Process Study of the Emergence and Performance of Organizational Values Practices,” Academy of Management Journal 56(1), 2013, 84–112.

61. Shalom H. Schwartz, “Cultural value differences: Some implications for work,” Applied Psychology: An International Review, 48(1999): 23–47.

62. M. Callon, P. Lascoumes, and Y. Barthe, Acting in an uncertain world: An essay on technical democracy (Cambridge, MA: MIT Press, 2009).

63. Joel Gehman, Linda K. Treviño, and Raghu Garud, “Values Work: A Process Study of the Emergence and Performance of Organizational Values Practices,” Academy of Management Journal 56(1), 2013, 84–112.

64. Bert Scholtens and Lammertjan Dam, “Cultural Values and International Differences in Business Ethics,” Journal of Business Ethics 75 (2007): 273–284.

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68. “Patients versus Profits at Johnson & Johnson: Has the Company Lost its Way?” Knowledge@Wharton, February 15, 2012, http://knowledge.wharton.upenn.edu/article. cfm?articleid=2943 (accessed April 12, 2013).

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70. Mark. D. Promislo and Robert A. Giacalone, “Sick about Unethical Business,” BizEd , January/February 2013, 20–26.

71. Total, “Our Code of Conduct,” http://www.total.com/en/ about-total/group-presentation/our-ethical-principles- and-practices/code-of-conduct-940521.html (accessed April 12, 2013).

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CHAPTER OBJECTIVES

• Understand how moral philosophies and values influence individual and group ethical decision making in business

• Compare and contrast the teleological, deontological, virtue, and justice perspectives of moral philosophy

• Discuss the impact of philosophies on business ethics

• Recognize the stages of cognitive moral development and its shortcomings

• Introduce white-collar crime as it relates to moral philosophies, values, and corporate culture

INDIVIDUAL FACTORS: MORAL PHILOSOPHIES AND VALUES

CHAPTER OUTLINE

Moral Philosophy Defined

Moral Philosophies

Instrumental and Intrinsic Goodness

Teleology

Deontology

Relativist Perspective

Virtue Ethics

Justice

Applying Moral Philosophy to Ethical Decision Making

Cognitive Moral Development and its Problems

White-Collar Crime

Individual Factors in Business Ethics

CHAPTER 6

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standard safety procedures. Additionally, Connor was horrified to realize many of the workers were not taking their required breaks in order to get rewarded for increasing their output.

Later that day, Connor confronted George. “George, these incentives are encouraging careless and unsafe behaviors. Employees are skipping safety procedures and breaks to get the work done. It’s only a matter of time before someone gets seriously hurt.”

George looked firmly at Connor. “I realize there are potential risks, but we can’t afford to hire additional workers right now. If we can just meet this output, it’ll increase our business tenfold. We’ll be able to hire new workers and pay our current employees more.”

Connor was stunned. “But these are people we are putting at risk!”

George sighed. “Connor, each worker has a choice whether or not they take advantage of these incentives. They are not being forced to do anything they don’t want to do. Besides, these are not my rules. The GM put these incentives in place. It’s really out of my control. Just think about it…we’re doing it for the greater good of our company and our employees.”

Connor replied, “But if they refuse, they are probably afraid they’ll lose their jobs. And even if they do feel the risks are worth it, isn’t it our job to make sure they have safe work conditions?”

Although George continued to reassure him, Connor left George’s office determined to enforce all safety protocols and force his employees to take their required breaks. He figured if top management would not consider the well-being of the employees, he would do what he could to protect those who fell under his authority.

Later that week, George came up to Connor and said, “I’m sorry to tell you this, but your shift is not meeting the required output levels. We need to meet these deadlines quickly and accurately, and your shift has always been our fastest. Without you we’re never going get the work done on time. That means we’ll have to start laying off employees who aren’t performing up to expectations.” Connor recognized George’s veiled threat but refused to compromise his

Connor graduated from Illinois University with a B.S. in operations and logistics after he came back from his tour in the army. His work in the army prepared him well as a manager in operations and logistics, and it showed when he was hired at AlumaArc, a manufacturing facility that produced various tank parts for the U.S. Army. Connor’s co-workers and fellow managers at his company respected him for the proficiency he showed in his work. Within eighteen months he became the key person in the logistics department, and a few months after that Connor became one of twenty managers in charge of the third shift. Above him were two Assistant General Managers (GMs) and the General Manager. The plant employed two thousand general workers and several hundred specialists.

Recently, the U.S. Army asked AlumaArc to step up production. This meant adding another shift with existing personnel and a number of incentives for increased productivity. At first, Connor was happy with the new business AlumaArc was getting. However, as he began examining the amount of output required to meet the army’s expectations, he grew concerned. Even with overtime, the plant would still find it difficult to meet output goals running at maximum capacity. He also noticed many of the workers appeared worn out.

Because the plant had heavy equipment that required workers to take several safety precautions, it was standard procedure for workers to fill out a checklist marking off the different safety requirements before they began operating the machinery. One day Connor noticed the checklist for his shift hadn’t been filled out. He asked Joe, one of the employees, about why it hadn’t been done.

“Oh, we’ve been so busy lately trying to meet our production quota that George told us we could just skip it,” Joe explained. George was one of the Assistant GMs.

“But these checklists are used to make sure you’re operating everything safely,” Connor responded.

Joe looked grim. “Well, if we filled them out, we’d just be lying anyway.” He informed Conner that to save time, the workers were encouraged to bypass

AN ETHICAL DILEMMA *

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154 Part 3: The Decision-Making Process

workers’ safety. Meanwhile, he began hearing stories of employees getting injured on other shifts.

Connor decided to talk to Wendy Smith, the General Manager. He knew she probably was not pleased with him, but he felt it necessary to try to persuade her about the dangers of what the company was doing. Connor wondered how he should approach Wendy. If he was not careful, she could fire him. He did not want to be disrespectful, but he also didn’t want to be a part of a company that knowingly put their employees in harm’s way.

QUESTIONS | EXERCISES 1. Describe Conner’s moral beliefs and values. 2. In AlumaArc’s reasoning, the benefits of

increasing production outweigh the risks of potential injuries. How could this approach potentially backfire?

3. How should Connor approach this issue?

* This case is strictly hypothetical; any resemblance to real persons, companies, or situations is coincidental.

M ost discussions of business ethics address the moral philosophies of the individual in ethical decision making, and the model we provided in Chapter 5 identifies individual moral perspectives as a central component of ethical decision mak- ing. In this chapter, we provide a detailed description and analysis of how individuals’ backgrounds and philosophies influence their decisions. People often use their individual moral philosophies to justify decisions or explain their actions. To understand how people make ethical decisions, it is useful to have a grasp of the major types of moral philosophies. In this chapter, we discuss the stages of cognitive development as they relate to these moral philosophies. We also explain why cognitive moral development theory may not explain as much as we thought. Additionally, we examine white-collar crime as it relates to moral philosophies and personal values.

MORAL PHILOSOPHY DEFINED

When people talk about philosophy, they usually refer to the general system of values by which they live. Moral philosophy , on the other hand, refers to the specific principles or values people use to decide what is right and wrong. It is important to understand the distinction between moral philosophies and business ethics. Moral philosophies are person-specific, while business ethics is based on decisions made by groups or when carrying out tasks to meet business objectives. A moral philosophy is a person’s prin- ciples and values. In the context of business, ethics refers to what the group, firm, or organization defines as right or wrong actions that pertain to its business operations and the objective of profits, earnings per share, or some other financial measure of success. For example, a production manager may be guided by a general philosophy of manage- ment that emphasizes encouraging workers to get to know as much as possible about the product they are manufacturing. However, the manager’s moral philosophy comes into play when he must make decisions such as whether to notify employees in advance of upcoming layoffs. Although workers prefer advance warning, issuing that warning could jeopardize the quality and quantity of production. Such decisions require a person to evaluate the “rightness,” or morality of choices in terms of his or her own principles and values.

Moral philosophies present guidelines for “determining how conflicts in human interests are to be settled and for optimizing mutual benefit of people living together

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Chapter 6: Individual Factors: Moral Philosophies and Values 155

in groups.” 1 These philosophies direct people as they formulate business strategies and resolve specific ethical issues. However, there is no single moral philosophy everyone accepts. Moral philosophies are often used to defend a particular type of economic sys- tem and individuals’ behavior within these systems.

Adam Smith is considered the father of free-market capitalism. He was a professor of logic and moral philosophy and wrote the treatise “The Theory of Moral Sentiments” (1759) and the book Inquiry into the Nature and Causes of the Wealth of Nations (1776). Smith believed business was and should be guided by the morals of good people. But in the eighteenth century, Smith could not imagine the complexity of modern markets, the size of multinationals, or the fact that four or five companies could gain control of the vast major- ity of the resources of the world. His ideas did not envision the full force of democracy, or the immense wealth and power some firms could wield within countries.

Under capitalism, some managers view profit as the ultimate goal of an enterprise and may not be concerned about the impact of their firms’ decisions on society. The economist Milton Friedman supports this viewpoint, contending the market will reward or punish companies for unethical conduct without the need for government regula- tion. 2 The emergence of this Friedman-type capitalism as the dominant and most widely accepted economic system created market-driven societies around the world. Even Chi- na’s communist government adapted capitalism and free enterprise to help it become a leading economic power.

The United States exported the idea that the invisible hand of free-market capitalism can solve the troubles of mankind and guide societies toward greater happiness and pros- perity as a result of the increased availability of products and services. Marketing helps consumers understand, compare, and obtain these products, thereby increasing the effi- ciency and effectiveness of the exchange. However, free markets will not solve all problems. For example, excessive consumption has negative effects on the environment and can be psychologically, spiritually, and physically unhealthy. 3 More is not necessarily best in every situation.

Economic systems not only allocate resources and products within a society but also influence, and are influenced by, the actions and beliefs of individuals (morals) and of soci- ety (laws) as a whole. The success of an economic system depends on both its philosophical framework and on the individuals within the system who maintain moral philosophies that bring people together in a cooperative, efficient, and productive marketplace. There is a long Western tradition going back to Aristotle of questioning whether a market economy and individual moral behavior are compatible. Individuals in today’s society exist within a framework of social, political, and economic institutions.

People facing ethical issues often base their decisions on their own values and prin- ciples of right or wrong, most of which they learned through the socialization process with the help of family members, social groups, religions, and formal education. Individual fac- tors that influence decision making include personal moral philosophies. Ethical dilemmas arise in problem-solving situations when the rules governing decision making are vague or in conflict. In real-life situations, there is no substitute for an individual’s own critical thinking and ability to accept responsibility for his or her decisions.

Moral philosophies are ideal moral perspectives that provide individuals with abstract principles for guiding their social existence. For example, a person’s decision to recycle waste or to purchase or sell recycled or recyclable products is influenced by moral philoso- phies and individual attitudes toward recycling. 4 It is often difficult to implement an indi- vidual moral philosophy within the complex environment of a business organization. On

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156 Part 3: The Decision-Making Process

the other hand, our economic system depends on individuals coming together and sharing philosophies to create the values, trust, and expectations that allow the system to work. Most employees within a business organization do not think about the particular moral philosophy they are using when confronted with an ethical issue.

Many theories associated with moral philosophies refer to a value orientation and concepts such as economics, idealism, and relativism. The concept of the economic value orientation is associated with values quantified by monetary means; according to this the- ory, if an act produces more value for its effort, then it should be accepted as ethical. Idealism , on the other hand, is a moral philosophy that places special value on ideas and ideals as products of the mind. The term refers to the efforts required to account for all objects in nature and experience and to assign to them a higher order of existence. Studies uncovered a positive correlation between idealistic thinking and ethical decision making. Realism is the view that an external world exists independent of our perceptions. Real- ists assume humankind is not naturally benevolent and kind, but instead inherently self- centered and competitive. According to realists, each person is ultimately guided by his or her own self-interest. Research shows a negative correlation between realistic think- ing and ethical decision making. The belief that all actions are ultimately self-motivated seems to lead to a tendency toward unethical decision making.

MORAL PHILOSOPHIES

There are many moral philosophies, but because a detailed study of all of them is beyond the scope of this book, we will limit our discussion to those that are most applicable to the study of business ethics. Our approach focuses on the most basic concepts needed to help you understand the ethical decision-making process in business. We do not prescribe the use of any particular moral philosophy, for there is no one correct way to resolve ethical issues in business.

To help you understand how the moral philosophies discussed in this chapter may be applied in decision making, we use a hypothetical situation as an illustration. Suppose that Sam Colt, a sales representative, is preparing a sales presentation for his firm, Midwest Hardware, which manufactures nuts and bolts. Sam hopes to obtain a large sale from a construction firm that is building a bridge across the Mississippi River near St. Louis, Mis- souri. The bolts manufactured by Midwest Hardware have a 3 percent defect rate, which, although acceptable in the industry, makes them unsuitable for use in certain types of proj- ects, such as those that may be subject to sudden, severe stress. The new bridge will be located near the New Madrid Fault line, the source of the United States’ greatest earthquake in 1811 . The epicenter of that earthquake, which caused extensive damage and altered the flow of the Mississippi, is less than 200 miles from the new bridge site. Earthquake experts believe there is a 50 percent chance that an earthquake with a magnitude greater than 7 will occur somewhere along the New Madrid Fault by the year 2030. Bridge construction in the area is not regulated by earthquake codes, however. If Sam wins the sale, he will earn a commission of $ 25,000 on top of his regular salary. But if he tells the contractor about the defect rate, Midwest may lose the sale to a competitor that markets bolts with a lower defect rate. Sam’s ethical issue is whether to point out to the bridge contractor that, in the event of an earthquake, some Midwest bolts could fail, possibly resulting in the collapse of the bridge.

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Chapter 6: Individual Factors: Moral Philosophies and Values 157

We will come back to this illustration as we discuss particular moral philosophies, ask- ing how Sam Colt might use each philosophy to resolve his ethical issue. We don’t judge the quality of Sam’s decision, and we do not advocate any one moral philosophy; in fact, this illustration and Sam’s decision rationales are necessarily simplistic as well as hypotheti- cal. In reality, the decision maker would probably have many more factors to consider in making his or her choice and thus might reach a different decision. With that note of cau- tion, we introduce the concept of goodness and several types of moral philosophy: teleol- ogy, deontology, the relativist perspective, virtue ethics, and justice (see Table 6–1 ).

Instrumental and Intrinsic Goodness To appreciate moral philosophy, you must understand the different perspectives on the notion of goodness. Is there a clear and unwavering line between “good” and “bad”? What is the relationship between the ends and the means in generating “good” and “bad” out- comes? Is there some way to determine if the ends can be identified independently as good or bad? Because the answers can be complex and confusing, we have simplified the discus- sion. Aristotle, for example, argued that happiness is an intrinsically good end and that its goodness is natural and universal, without relativity. On the other hand, the philosopher Immanuel Kant argued that goodwill, seriously applied toward accomplishment, is the only thing good in itself.

Two basic concepts of goodness are monism and pluralism. Monists believe only one thing is intrinsically good, and pluralists believe two or more things are intrinsically good. Monists are often characterized by hedonism —the idea that pleasure is the ultimate good, or the best moral end involves the greatest balance of pleasure over pain. Hedonism defines right or acceptable behavior as that which maximizes personal pleasure. Moral philosophers describe those who believe more pleasure is better as quantitative hedonists and those who believe it is possible to get too much of a good thing (such as pleasure) as qualitative hedonists .

TABLE 6–1 A Comparison of the Philosophies Used in Business Decisions

Teleology Stipulates acts are morally right or acceptable if they produce some desired result, such as realization of self-interest or utility

Egoism Defines right or acceptable actions as those that maximize a particular person’s self-interest as defined by the individual

Utilitarianism Defines right or acceptable actions as those that maximize total utility, or the greatest good for the greatest number of people

Deontology Focuses on the preservation of individual rights and on the intentions associated with a particular behavior rather than on its consequences

Relativist Evaluates ethicalness subjectively on the basis of individual and group experiences

Virtue ethics Assumes what is moral in a given situation is not only what conventional morality requires but also what the mature person with a “good” moral character deems appropriate

Justice Evaluates ethicalness on the basis of fairness: distributive, procedural, and interactional

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158 Part 3: The Decision-Making Process

Pluralists , often referred to as non-hedonists, take the opposite position that no one thing is intrinsically good. For example, a pluralist might view beauty, aesthetic experi- ence, knowledge, and personal affection as ultimate goods. Plato argued that the good life is a mixture of (1) moderation and fitness, (2) proportion and beauty, (3) intelligence and wisdom, (4) sciences and arts, and (5) pure pleasures of the soul.

Although all pluralists are non-hedonists, all monists are not necessarily hedonists. An individual can believe in a single intrinsic good other than pleasure; Machiavelli and Nietzsche held power to be the sole good, for example, and Kant’s belief in the single virtue of goodwill classifies him as a monistic non-hedonist.

A more modern view is expressed in the instrumentalist position. Sometimes called pragmatists, instrumentalists reject the ideas that (1) ends can be separated from the means that produce them and (2) ends, purposes, or outcomes are intrinsically good in and of themselves. The philosopher John Dewey argued that the difference between ends and means is merely a matter of the individual’s perspective; thus, almost any action can be an end or a mean. Dewey gives the example that people eat to be able to work, and they work to be able to eat. From a practical standpoint, an end is only a remote mean, and the means are but a series of acts viewed from an earlier stage. From this conclusion it follows there is no such thing as a single, universal end.

A discussion of moral value often revolves around the nature of goodness, but theories of moral obligation change the question to “What makes an action right or obligatory?” Goodness theories typically focus on the end result of actions and the goodness or happiness created by them. Obligation theories emphasize the means and motives by which actions are justified, and are divided into the categories of teleology and deontology.

Teleology Teleology (from the Greek word for “end” or “purpose”) refers to moral philosophies in which an act is considered morally right or acceptable if it produces some desired result, such as pleasure, knowledge, career growth, the realization of self-interest, utility, wealth, or even fame. Teleological philosophies assess the moral worth of a behavior by look- ing at its consequences, and thus moral philosophers today often refer to these theories as consequentialism . Two important teleological philosophies that often guide decision making in individual business decisions are egoism and utilitarianism.

Egoism defines right or acceptable behavior in terms of its consequences for the individ- ual. Egoists believe they should make decisions that maximize their own self-interest, which is defined differently by each individual. Depending on the egoist, self-interest may be con- strued as physical well-being, power, pleasure, fame, a satisfying career, a good family life, wealth, or something else. In an ethical decision-making situation, an egoist will probably choose the alternative that contributes most to his or her self-interest. Many believe egois- tic people and companies are inherently unethical, short-term oriented, and willing to take advantage of any opportunity for gain. Some telemarketers demonstrate egoism when they prey on elderly consumers who may be vulnerable because of loneliness or fear of losing their financial independence. Thousands of senior citizens fall victim to fraudulent telemar- keters every year, in many cases losing all their savings and sometimes even their homes.

However, there also is enlightened egoism . Enlightened egoists take a long-range per- spective and allow for the well-being of others although their own self-interest remains paramount. An example of enlightened egoism is a person helping a turtle across a high- way because if it were killed the person would feel distressed. 5 Enlightened egoists may

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Chapter 6: Individual Factors: Moral Philosophies and Values 159

abide by professional codes of ethics, control pollution, avoid cheating on taxes, help cre- ate jobs, and support community projects not because these actions benefit others but because they help achieve some ultimate individual goal, such as advancement within their firms. An enlightened egoist might call management’s attention to a coworker who is making false accounting reports, but only to safeguard the company’s reputation and thus the egoist’s own job security. In addition, an enlightened egoist could become a whistle- blower and report misconduct to a regulatory agency to receive a reward for exposing misconduct.

Let’s return to the hypothetical case of Sam Colt, who must decide whether to warn the bridge contractor that 3 percent of Midwest Hardware’s bolts are likely to be defective. If he is an egoist, he will choose the alternative that maximizes his own self-interest. If he defines his self-interest in terms of personal wealth, his personal moral philosophy may lead him to value a $ 25,000 commission more than a chance to reduce the risk of a bridge collapse. As a result, an egoist might well resolve this ethical dilemma by keeping quiet about the bolts’ defect rate, hoping to win the sale and the $ 25,000 commission. He may rationalize that there is a slim chance of an earthquake, that bolts would not be a factor in a major earthquake, and even if defective bolts were a factor, no one would actually be able to prove they caused the bridge to collapse.

Like egoism, utilitarianism is concerned with consequences, but unlike the egoist, the utilitarian seeks the greatest good for the greatest number of people. Utilitarians believe they should make decisions that result in the greatest total utility, or the greatest benefit for all those affected by a decision. For instance, one might use a utilitarianism perspec- tive to argue for companies who legally sell harmful products, such as tobacco, guns, or alcohol. It has been argued that despite their drawbacks, allowing them to be sold legally is less harmful than having them sold illegally and unregulated. 6 Such an approach influ- enced similar forms of legislation, such as the recent laws in Colorado and Washington permitting the regulated sale of recreational marijuana. Utilitarian decision making relies on a systematic comparison of the costs and benefits to all affected parties. Using such a cost–benefit analysis, a utilitarian decision maker calculates the utility of the consequences of all possible alternatives and then selects the one that results in the greatest benefit. For example, the U.S. Supreme Court ruled that supervisors are responsible for the sexual mis- conduct of employees, even if the employers knew nothing about the behavior, a decision that established a strict standard for harassment on the job. One of the justices wrote that the burden on the employer to prevent harassment is “one of the costs of doing business.” 7 The Court decided the greatest utility to society would result from forcing businesses to prevent harassment.

In evaluating an action’s consequences, utilitarians must consider all of the poten- tial costs and benefits for all of the people affected by a decision. For example, Baxter Pharmaceuticals sells an anticoagulant drug called heparin, and for a time Baxter’s sup- pliers in China were deliberately cutting their raw heparin batches with a counterfeit product to reduce costs. The U.S. Food and Drug Administration (FDA) discovered problems with heparin from China when patients reported difficulty breathing, vomit- ing, excessive sweating, rapidly falling blood pressure, and even death. 8 The Chinese contamination crisis was linked to 81 deaths, and the FDA identified the chemical contaminant deliberately added to unrefined heparin to stretch its supply and increase its potency. 9 If Baxter Pharmaceuticals’ suppliers had done a utilitarian analysis and included the costs associated with losing Baxter as a client and the legal sanctions from both the U.S. and China, they might have chosen to avoid using the counterfeit

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160 Part 3: The Decision-Making Process

product. Zheng Xiaoyu, former head of China’s State Food and Drug Administration, was found guilty of corruption related to this situation and other cases of deaths from tainted pharmaceuticals. He was convicted and executed for taking bribes and for der- eliction of duty. 10

Utilitarians use various criteria to evaluate the morality of an action. Some utilitar- ian philosophers argue that general rules should be followed to decide which action is best. 11 These rule utilitarians determine behavior on the basis of principles or rules designed to promote the greatest utility, rather than on individual examinations of each situation they encounter. One such rule might be “Bribery is wrong.” If people felt free to offer bribes whenever they might be useful, the world would become chaotic; there- fore, a rule prohibiting bribery would increase utility. A rule utilitarian would not bribe an official, even to preserve workers’ jobs, but instead would adhere strictly to the rule. Rule utilitarians do not automatically accept conventional moral rules, however; if they determined an alternative rule would promote greater utility, they would advocate its use instead.

Other utilitarian philosophers have argued that the rightness of each individual action must be evaluated to determine whether it produces the greatest utility for the greatest number of people. 12 These act utilitarians examine specific actions, rather than the gen- eral rules governing them, to assess whether they will result in the greatest utility. Rules such as “Bribery is wrong” serve only as general guidelines for act utilitarians. They would likely agree that bribery is generally wrong, not because there is anything inherently wrong with bribery, but because the total amount of utility decreases when one person’s interests are placed ahead of those of society. In a particular case, however, an act utilitarian might argue that bribery is acceptable. For example, sales managers might believe their firm will not win a construction contract unless a local government official gets a bribe, and if the firm does not obtain the contract, it will have to lay off 100 workers. The manager might therefore argue that bribery is justified because saving 100 jobs creates more utility than obeying a law. For example, Pfizer paid $ 60 million to settle charges of bribery; according to the SEC, the firm bribed foreign officials in Bulgaria, China, Croatia, the Czech Repub- lic, Italy, Kazakhstan, Russia and Serbia in order to obtain business and gain approvals. 13 These Pfizer employees may have decided winning the contracts generated the most utility for the company.

Now suppose that Sam Colt, the bolt salesperson, is a utilitarian. Before making his decision, he would conduct a cost–benefit analysis to assess which alternative would cre- ate the greatest utility. On the one hand, building the bridge would improve roadways and allow more people to cross the Mississippi River to reach jobs in St. Louis. The project would create hundreds of jobs, enhance the local economy, and unite communities on both sides of the river. Additionally, it would increase the revenues of Midwest Hardware, allow- ing the firm to invest more in research to lower the defect rate of the bolts it produces in the future. On the other hand, a bridge collapse could kill or injure as many as 100 people. But the bolts have only a 3 percent defect rate, there is only a 50 percent probability of an earthquake somewhere along the fault line, and there might be only a few cars on the bridge at the time of a disaster.

After analyzing the costs and benefits of the situation, Sam might rationalize that building the bridge with his company’s bolts would create more utility (jobs, unity, eco- nomic growth, and company growth) than telling the bridge contractor the bolts might fail in an earthquake. If so, a utilitarian would probably not alert the bridge contractor to the defect rate of the bolts.

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Chapter 6: Individual Factors: Moral Philosophies and Values 161

Deontology Deontology (from the Greek word for “ethics”) refers to moral philosophies that focus on the rights of individuals and the intentions associated with a particular behavior rather than its consequences. Fundamental to deontological theory is the idea that equal respect must be given to all persons. Unlike utilitarians, deontologists argue that there are some things we should not do, even to maximize utility. For example, deontologists would consider it wrong to kill an innocent person or commit a serious injustice against someone, no matter how much greater social utility might result from doing so, because such an action would infringe on individual rights. The utilitarian, however, might consider an action resulting in a person’s death acceptable if that action lead to some greater benefit. Deontological philos- ophies regard certain behaviors as inherently right, and the determination of this rightness focuses on the individual actor, not on society. Therefore these perspectives are sometimes referred to as nonconsequentialism , a system of ethics based on respect for persons.

Contemporary deontology has been greatly influenced by the German philosopher Immanuel Kant, who developed the so-called categorical imperative : “Act as if the maxim of thy action were to become by thy will a universal law of nature.” 14 Simply put, if you feel comfortable allowing everyone in the world to see you commit an act and if your rationale for acting in a particular manner is suitable to become a universal principle guiding behav- ior, then committing that act is ethical. People who borrow money and promise to return it with no intention of keeping that promise cannot “universalize” their act. If everyone borrowed money without the intention of returning it, no one would take such promises seriously, and all lending would cease. 15 The rationale for the action would not be a suitable universal principle, and the act could not be considered ethical.

The term nature is crucial for deontologists. In general, deontologists regard the nature of moral principles as permanent and stable, and they believe compliance with these principles define ethicalness. Deontologists believe individuals have certain absolute rights, including freedom of conscience, freedom of consent, freedom of privacy, freedom of speech, and due process. 16

To decide if a behavior is ethical, deontologists look for conformity to moral prin- ciples. For example, if a manufacturing worker becomes ill or dies as a result of conditions in the workplace, a deontologist might argue that the company must modify its production processes to correct the condition, no matter what the cost—even if it means bankrupting the company and thus causing all workers to lose their jobs. In contrast, a utilitarian would analyze all the costs and benefits of modifying production processes and make a decision on that basis. This example is greatly oversimplified, of course, but it helps to clarify the difference between teleology and deontology. In short, teleological philosophies consider the ends associated with an action, whereas deontological philosophies consider the means.

Returning again to our bolt salesperson, let’s consider a deontological Sam Colt. He would probably feel obligated to tell the bridge contractor about the defect rate because of the potential loss of life that might result from an earthquake-caused bridge collapse. Even though constructing the bridge would benefit residents and earn Sam a substantial com- mission, the failure of the bolts during an earthquake would infringe on the rights of any person crossing the bridge at the time of the collapse. Thus, the deontological Sam would likely inform the bridge contractor about the defect rate and point out the earthquake risk, even though he would probably lose the sale as a result.

As with utilitarians, deontologists may be divided into those who focus on moral rules and those who focus on the nature of the acts themselves. Rule deontologists believe

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162 Part 3: The Decision-Making Process

conformity to general moral principles based on logic determines ethicalness. Examples include Kant’s categorical imperative and the Golden Rule of the Judeo-Christian tradition: “Do unto others as you would have them do unto you.” Such rules, or principles, guiding ethical behavior override the imperatives that emerge from a specific context. One could argue that Jeffery Wigand—who exposed the underside of the tobacco industry when he blew the whistle on his employer, Brown & Williamson Tobacco—was such a rule deon- tologist. Although it cost him financially and socially, Wigand testified to Congress about the realities of marketing cigarettes and their effects on society. 17

Rule deontology is determined by the relationship between the basic rights of the indi- vidual and a set of rules governing conduct. For example, a video store owner accused of distributing obscene materials could argue from a rule deontological perspective that the basic right to freedom of speech overrides the indecent or pornographic aspects of his business. Indeed, the free-speech argument has held up in many U.S. courts. Kant and rule deontologists would support a process of discovery to identify the moral issues relevant to a firm’s mission and objectives. Then they would follow a process of justifying that mission or those objectives based on rules. 18 An example of a rule deontologist is JetBlue’s former CEO David Neeleman. Because of a severe snowstorm, several JetBlue flights were delayed for as many as nine hours on the runway, and passengers were kept in their seats. After the incident, Neeleman issued a public apology for his company’s mismanagement of the situ- ation, introduced a “Customer Bill of Rights,” 19 and offered $ 40 million in compensation to the affected passengers. He was replaced as CEO by David Barger. Despite the disas- ter, some criticized the ousting of Neeleman as he was considered to be a visionary who appeared to care deeply about customer service. 20

Act deontologists , in contrast, hold that actions are the proper basis to judge morality or ethicalness. Act deontology requires a person use equity, fairness, and impartiality when making and enforcing decisions. 21 For act deontologists, past experiences are more impor- tant than rules; rules serve only as guidelines in the decision-making process. In effect, act deontologists suggest people simply know that certain acts are right or wrong, regardless of their consequences. In addition, act deontologists consider the unique characteristics of a particular act or moment in time take precedence over any rule. For example, many people view data collection by Internet sites as a violation of personal privacy; regardless of any web- site’s stated rules or policies, many Internet users want to be left alone unless they provide permission to be tracked while online. Privacy has become such an issue that the government is considering regulation to protect online users. 22 Research suggests that rule and act deon- tological principles play a larger role in a person’s decision than teleological philosophies. 23

As we have seen, ethical issues can be evaluated from many different perspectives. Each type of philosophy discussed here provides a clear basis for deciding whether a par- ticular action was right or wrong. Adherents of different personal moral philosophies may disagree in their evaluations of a given action, yet all are behaving ethically according to their own standards. The relativist perspective may be helpful in understanding how people make such decisions in practice.

Relativist Perspective From the relativist perspective , definitions of ethical behavior are derived subjectively from the experiences of individuals and groups. Relativists use themselves or the people around them as their basis for defining ethical standards, and the various forms of rela- tivism include descriptive, meta-ethical, and normative. 24 Descriptive relativism relates to

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Chapter 6: Individual Factors: Moral Philosophies and Values 163

observations of other cultures. Different cultures exhibit different norms, customs, and values, but these observations say nothing about the higher questions of ethical justifica- tion. At this point meta-ethical relativism comes into play. Meta-ethical relativism pro- poses that people naturally see situations from their own perspectives, and there is no objective way of resolving ethical disputes between different value systems and individu- als. Simply put, one culture’s moral philosophy cannot logically be preferred to another’s because no meaningful basis for comparison exists. Because ethical rules are embedded in a specific culture, the values and behaviors of people in one culture do not generally influence the behaviors of people in another culture. 25 Finally, at the individual level of reasoning, we have normative relativism . Normative relativists assume one person’s opin- ion is as good as another’s. 26

Basic relativism acknowledges that we live in a world in which people have many dif- ferent views and bases from which to justify decisions as right or wrong. The relativist looks to the interacting groups and tries to determine probable solutions based on group consensus. When formulating business strategies and plans, for example, a relativist would try to anticipate the conflicts that might arise between the different philosophies held by members of the organization, suppliers, customers, and the community at large.

The relativist observes the actions of members of an involved group and attempts to determine that group’s consensus on a given behavior. A positive consensus signifies that the group considers the action to be ethical. However, such judgments may not remain valid forever. As circumstances evolve or the makeup of the group changes, a formerly accepted behavior may come to be viewed as wrong or unethical, or vice versa. Within the accounting profession, for example, it was traditionally considered unethical to advertise. However, advertising has now gained acceptance among accountants. This shift in ethical views may be the result of the increase in the number of accountants that led to greater competition. Moreover, the federal government investigated the restrictions accounting groups placed on their members and concluded that they inhibited free competition. Con- sequently, advertising is now acceptable because of the informal consensus that emerged on this issue in the accounting industry.

One problem with relativism is it emphasizes peoples’ differences while ignoring their basic similarities. Similarities across different people and cultures—such as beliefs against incest, murder, and theft, or beliefs that reciprocity and respect for the elderly are good— may be hard to explain from the relativist perspective. Additionally, studies suggest relativ- ism is negatively correlated to a person’s sensitivity to ethical issues. Thus, if someone is a relativist, he or she will be less likely to detect issues with an ethical component. 27 On the other hand, managers with high relativism may show more commitment to completing a project. This indicates that relativism is associated with dedication to group values and objectives, leading to less independent ethical decision making. 28

If Midwest Hardware salesperson Sam Colt was a relativist, he would attempt to deter- mine consensus before deciding whether to tell his prospective customer about the bolts’ defect rate. The relativist Sam Colt would look at his company’s policy and at the gen- eral industry standards for disclosure. He might also informally survey his colleagues and superiors as well as consult industry trade journals and codes of ethics. Such investiga- tions would help him determine the group consensus that should reflect a variety of moral philosophies. If he learns company policy and industry practice suggest discussing defect rates with those customers for whom faulty bolts may cause serious problems, he may infer there is a consensus on the matter. As a relativist, he probably would inform the bridge contractor that some of the bolts may fail, perhaps leading to a bridge collapse in the event

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164 Part 3: The Decision-Making Process

of an earthquake. Conversely, if he determines that the normal practice in his company and the industry is not to inform customers about defect rates, he would probably not dis- cuss the bolt defect rate with the bridge contractor.

Virtue Ethics Virtue ethics argues that ethical behavior involves not only adhering to conventional moral standards but also considering what a mature person with a “good” moral character would deem appropriate in a given situation. A moral virtue represents an acquired disposition valued as a part of an individual’s character. As individuals develop socially, they come to behave in ways they consider to be moral. 29 A person with the character trait of honesty will be disposed to tell the truth because it is considered to be the right approach in terms of human communication.

A virtue is considered praiseworthy because it is an achievement that an individual developed through practice and commitment. 30 Proponents of virtue ethics often list basic goods and virtues that are presented as positive and useful mental habits or cultivated character traits. Aristotle named loyalty, courage, wit, community, and judgment as “excel- lences” society requires. While listing the most important virtues is a popular theoretical task, the philosopher John Dewey cautions that virtues should not be looked at separately, and points out that examining interactions between virtues actually provides the best idea of a person’s integrity of character.

The virtue ethics approach to business can be summarized as follows:

1. Good corporate ethics programs encourage individual virtue and integrity. 2. By the employee’s role in the community (organization), these virtues form a

good person. 3. An individual’s ultimate purpose is to serve society’s demands and the public good

and be rewarded in his or her career. 4. The well-being of the community goes hand in hand with individual excellence. 31

The difference between deontology, teleology, and virtue ethics is the first two are applied deductively to problems, whereas virtue ethics is applied inductively. Virtue eth- ics assumes societal moral rules form the foundation of virtue. Our political, social, and economic systems depend upon the presence of certain virtues among citizens in order to function successfully. 32

Indeed, virtue ethics could be thought of as a dynamic theory of how to conduct busi- ness activities. The virtue ethicist believes a successful market economy depends upon social institutions such as family, school, church, and community where virtues can be nurtured. These virtues, including honesty, trust, tolerance, and restraint, create obliga- tions that make cooperation possible. In a market economy based on virtues, individuals have powerful incentives to conform to prevailing standards of behavior. Some philoso- phers think social virtues may be eroded by the market, but virtue ethicists believe eco- nomic institutions are in balance with and support other social institutions. 33 Some of the virtues that could be seen as driving a market economy are listed in Table 6–2 . Although not comprehensive, the list provides examples of the types of virtues that support the con- duct of business.

The elements of virtue most important to business transactions are trust, self-control, empathy, fairness, and truthfulness. Non-virtuous characteristics include lying, cheating,

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Chapter 6: Individual Factors: Moral Philosophies and Values 165

fraud, and corruption. In their broadest sense, concepts of virtue appear across all cultures. The problem of virtue ethics comes in its implementation within and between cultures. If a company tacitly approves of corruption, the employee who adheres to the virtues of trust and truthfulness would consider it wrong to sell unneeded repair parts despite the organi- zation’s approval of such acts. Other employees might view this truthful employee as highly ethical; however, in order to rationalize their own behavior, they may judge his or her eth- ics as going beyond what is required by the job or society. Critics of virtue ethics argue that true virtue is an unattainable goal, but to virtue ethicists, this relativistic argument is mean- ingless because they believe in the universality of the elements of virtue.

If bolt salesperson Sam Colt was a virtue ethicist, he would consider the elements of virtue (such as honesty and trust) and tell the prospective customer about the defect rate and his concerns regarding the building of the bridge. Sam would not resort to puffery to explain the product or its risks, and might even suggest alternative products or companies that would lower the probability of the bridge collapsing.

TABLE 6–2 Virtues That Support Business Transactions

Trust: The predisposition to place confidence in the behavior of others while taking the risk that the expected behavior will not be performed

Eliminates the need for and associated cost of monitoring compliance with agreements, contracts, and reciprocal agreements, as there is the expectation a promise or agreement can be relied on

Self-control: The disposition to pass up an immediate advantage or gratification; the ability to avoid exploiting a known opportunity for personal gain

Gives up short-term self-interest for long-term benefits

Empathy: The ability to share the feelings or emotions of others

Promotes civility because success in the market depends on the courteous treatment of people who have the option of going to competitors; the ability to anticipate needs and satisfy customers and employees contributes to a firm’s economic success

Fairness: The disposition to deal equitably with the perceived injustices of others

Often relates to doing the right thing with respect to small matters in order to cultivate a long-term business relationship

Truthfulness: The disposition to provide the facts or correct information as known to the individual

Involves avoiding deception and contributes to trust in business relationships

Learning: The disposition to constantly acquire knowledge internal and external to the firm, whether about an industry, corporate culture, or other societies

Gaining knowledge to make better, more informed decisions

Gratitude: A sign of maturity that is the foundation of civility and decency

The recognition that people do not succeed alone

Civility: The disposition or essence of courtesy, politeness, respect, and consideration for others

Relates to the process of doing business in a culturally correct way, thus decreasing communication errors and increasing trust

Moral leadership: Strength of character, peace of mind and heart, leading to happiness in life

A trait of leaders who follow a consistent pattern of behavior based on virtues

Source: Adapted from Ian Maitland, “Virtuous Markets: The Market as School of the Virtues,” Business Ethics Quarterly (January 1997): 97; and Gordon B. Hinckley, Standing for Something: 10 Neglected Virtues that Will Heal Our Hearts and Homes (New York: Three Rivers Press, 2001).

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166 Part 3: The Decision-Making Process

Justice Justice is fair treatment and due reward in accordance with ethical or legal standards, including the disposition to deal with perceived injustices of others. The justice of a situ- ation is based on the perceived rights of individuals and on the intentions of the people involved in a business interaction. In other words, justice relates to the issue of what indi- viduals feel they are due based on their rights and performance in the workplace. For this reason, justice is more likely to be based on deontological moral philosophies than on tele- ological or utilitarian philosophies.

Three types of justice provide a framework for evaluating different situations (see Table 6–3 ). Distributive justice is based on the evaluation of the outcomes or results of a business relationship. If some employees feel they are paid less than their coworkers for the same work, they have concerns about distributive justice. Distributive justice is difficult to effect when one member of the business exchange intends to take advantage of the rela- tionship. A boss who forces his employees to do more work so he can take more time off would be unjust because he is taking advantage of his position. Situations such as this cause an imbalance in distributive justice.

Procedural justice considers the processes and activities that produce a particular out- come. A climate that emphasizes procedural justice positively influences employees’ atti- tudes and behaviors toward work-group cohesion. The visibility of supervisors and the work group’s perceptions of its own cohesiveness are products of a climate of procedural justice. 34 When there is strong employee support for decisions, decision makers, organi- zations, and outcomes, procedural justice is less important to the individual. In contrast, when employees’ support for decisions, decision makers, organizations, or outcomes is not very strong, then procedural justice becomes more important. 35 For example, Nugget Mar- ket in Woodland, California, has a corporate culture that focuses on employees, who cre- ate policies for each store. Because of the economy and as a result of employee comments, Nugget Market gives employees cards good for 10 percent discounts on $ 500 worth of gro- ceries every month, and at one employee-appreciation event, the executive team members washed the cars of all the associates. 36 Thus, Nugget Market uses methods of procedural justice to establish positive stakeholder relationships by promoting understanding and inclusion in the decision-making process. The United Nations consumer protection guide- lines adopt a highly procedural justice outlook with its concerns for safety, the right to be

TABLE 6–3 Types of Justice

Justice Type Areas of Emphasis

Distributive justice: Based on the evaluation of outcomes or results of the business relationship

Benefits derived Equity in rewards

Procedural justice: Based on the processes and activities that produce the outcome or results

Decision-making process Level of access, openness, and participation

Interactional justice: Based on relationships and the treatment of others

Accuracy of information Truthfulness, respect, and courtesy in the process

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Chapter 6: Individual Factors: Moral Philosophies and Values 167

heard, and the right to privacy. 37 Evaluations of performance not consistently developed and applied can lead to problems with procedural justice. For instance, employees’ con- cerns about unequal compensation relate to their perceptions that the processes of justice in their company are inconsistent.

Interactional justice is based on the relationships between organizational members, including the way employees and management treat one another. Interactional justice is linked to fairness within member interactions. It often involves an individual’s relationship with the accuracy of the information a business organization provides. Although interac- tional justice often refers to how managers treat their subordinates, employees can also be guilty in creating interactional justice disputes. For example, many employees admit they stay home when they are not really sick if they feel they can get away with it. Such work- place absenteeism costs businesses millions of dollars each year.

All three types of justice—distributive, procedural, and interactional—could be used to measure a single business situation and the fairness of the organization and individuals involved. In general, justice evaluations result in restitution seeking, relationship building, and evaluations of fairness in business relationships. Using the example of Sam Colt, Sam would feel obligated to tell all affected parties about the bolt defect rate and the possible consequences in order to create a fair transaction process.

APPLYING MORAL PHILOSOPHY TO ETHICAL DECISION MAKING

Individuals use different moral philosophies depending on whether they make a personal decision or a work-related decision. 38 Two things may explain this behavior. First, in the business arena, some goals and pressures for success differ from the goals and pressures in a person’s life outside of work. As a result, an employee might view a specific action as good in the business sector but unacceptable outside the work environment. Some suggest business managers are morally different from other people. In a way, this is correct, in that business contains one variable that is absent from other situations: the profit motive. The various factors that make up a person’s moral philosophy are weighted differently in a busi- ness (profit) situation. The comment “It’s not personal, it’s just business” demonstrates the conflict businesspeople can experience when their personal values do not align with utili- tarian or profit-oriented decisions. The reality is if firms do not make a profit, they will fail. However, this fact should not be a justification for seeking excessive profits or executive pay, issues that are now being questioned by stakeholders.

The second reason people change moral philosophies is the corporate culture where they work. When children enter school, they learn certain rules, such as raising their hands to speak or asking permission to use the restroom. So it is with a new employee. Rules, per- sonalities, and precedents exert pressure on the employee to conform to the firm’s culture. As this process occurs, the individual’s moral philosophy may change to become compat- ible with the work environment. Many people are acquainted with those who are respected for their goodness at home or in their communities but make unethical decisions in the workplace. Even Bernard Madoff, the perpetrator of the largest Ponzi scheme in history, had a reputation as an upstanding citizen before his fraud was uncovered.

Obviously, the concept of a moral philosophy is inexact. For that reason, moral phi- losophies must be assessed on a continuum rather than as static entities. Each philosophy

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168 Part 3: The Decision-Making Process

states an ideal perspective, and most individuals shift between different moral philoso- phies as they experience and interpret ethical dilemmas. In other words, implementing moral philosophies from an individual perspective requires individuals to apply their own accepted value systems to real-world situations. Individuals make judgments about what they believe to be right or wrong, but in their business lives they make decisions that take into consideration how to generate the greatest benefits with the least harm. Such decisions should respect fundamental moral rights as well as perspectives on fairness, justice, and the common good, but these issues become complicated in the real world.

Problems arise when employees encounter ethical situations they cannot resolve. Sometimes gaining a better understanding of their decision rationale helps employees choose the right solutions. For instance, to decide whether they should offer bribes to potential customers to secure a large contract, salespeople need to understand their own personal moral philosophies as well as their firm’s core values and the relevant laws. If complying with company policy or legal requirements is an important motivation to the individual, he or she is less likely to offer a bribe. On the other hand, if the salesperson’s ultimate goal is a successful career and if offering a bribe seems likely to result in a promo- tion, then bribery might not be inconsistent with that person’s moral philosophy of accept- able business behavior. Even though bribery is illegal under U.S. law, the employee may rationalize that bribery is necessary “because everyone else does it.”

The virtue approach to business ethics, as discussed earlier, assumes there are certain ideals and values everyone should strive for in order to achieve the maximum welfare and happiness of society. 39 Aspects of these ideals and values are expressed through individu- als’ specific moral philosophies. Every day in the workplace, employees must decide what is right or wrong and act accordingly. At the same time, as members of a larger organiza- tion, employees cannot simply enforce their own personal perspectives, especially if they adhere narrowly to a single moral philosophy. Because individuals cannot control most of the decisions in their work environment, they rarely have the power (especially in entry- level and middle-management positions) to impose their own personal moral perspec- tives on others. In fact, although they are always responsible for their own actions, a new employee is not likely to have the freedom to make independent decisions on a variety of job responsibilities.

Sometimes a company makes questionable decisions from the perspective of indi- vidual customers’ values and moral philosophies. For example, some stakeholders might consider a brewery or a distributor of sexually explicit movies unethical, based on their personal perspectives. A company’s core values will determine how it makes decisions in which moral philosophies are in conflict. Most businesses have developed a mission state- ment, a corporate culture, and a set of core values that express how they want to relate to their stakeholders, including customers, employees, the legal system, and society. It is usu- ally impossible to please all stakeholders at once.

COGNITIVE MORAL DEVELOPMENT AND ITS PROBLEMS

Many people believe individuals advance through stages of moral development as their knowledge and socialization progress. In this section, we examine a model that describes this cognitive moral development process. Cognitive moral processing is based on a body

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Chapter 6: Individual Factors: Moral Philosophies and Values 169

of literature in psychology that focuses on the study of children and their cognitive devel- opment. 40 However, cognitive moral processing is also an element in ethical decision mak- ing, and many models attempt to explain, predict, and control individuals’ ethical behavior.

Psychologist Lawrence Kohlberg developed a six-stage model of cognitive develop- ment. Although not specifically designed for business contexts, this model provides an interesting perspective on the issue of moral philosophy in business. According to Kohl- berg’s model of cognitive moral development (CMD) , people make different decisions in similar ethical situations because they are in different moral development stages. The six stages identified by Kohlberg are as follows:

1. The stage of punishment and obedience. An individual in Kohlberg’s first stage defines right as literal obedience to rules and authority. A person in this stage responds to rules and labels of “good” and “bad” in terms of the physical power of those who determine such rules. Right and wrong are not connected with any higher order or philosophy but rather with a person who has power. Stage 1 is usually associated with small chil- dren, but signs of stage 1 development are also evident in adult behavior. For example, some companies forbid their buyers to accept gifts from salespeople. A buyer in stage 1 might justify a refusal to accept gifts from salespeople by referring to the company’s rule, or the buyer may accept the gift if he or she believes there is no chance of being caught and punished.

2. The stage of individual instrumental purpose and exchange. An individual in stage 2 defines right as what serves his or her own needs. In this stage, individuals no longer make moral decisions solely on the basis of specific rules or authority figures; they evaluate behavior on the basis of its fairness to them. For example, a sales representa- tive in stage 2 doing business for the first time in a foreign country may be expected by custom to give customers gifts. Although gift giving may be against company policy in the United States, the salesperson may decide certain company rules designed for operating in the United States do not apply overseas. In the cultures of some foreign countries, gifts may be considered part of a person’s pay. So, in this instance, not giving a gift might put the salesperson at a disadvantage. Some refer to stage 2 as the stage of reciprocity because from a practical standpoint, ethical decisions are based on an agreement of “you scratch my back and I’ll scratch yours” instead of on principles of loyalty, gratitude, or justice.

3. The stage of mutual interpersonal expectations, relationships, and conformity. Individu- als in stage 3 emphasize the interests of others rather than simply those of themselves, although ethical motivation is still derived from obedience to rules. A production manager in this stage might obey upper management’s order to speed up an assembly line if he or she believed doing so would generate more profit for the company and thus save employee jobs. These managers not only consider their own well-being in deciding to follow the order but also put themselves in upper management’s and fellow employees’ shoes. Thus, stage 3 differs from stage 2 in that fairness to others is one of the individual’s ethical motives.

4. The stage of social system and conscience maintenance. Individuals in stage 4 deter- mines what is right by considering their duty to society, not just to certain other peo- ple. Duty, respect for authority, and the maintenance of the social order become the focal points at this stage. For example, some managers consider it a duty to society to protect privacy and therefore refrain from monitoring employee conversations.

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170 Part 3: The Decision-Making Process

5. The stage of prior rights, social contract, or utility. In stage 5 , individuals are concerned with upholding the basic rights, values, and legal contracts of society. Individuals in this stage feel a sense of obligation or commitment to other groups—they feel, in other words, that they are part of a social contract—and recognize in some cases legal and moral points of view may conflict. To reduce such conflict, stage 5 individuals base their decisions on a rational calculation of overall utility. For example, the president of a firm may decide to establish an ethics program because it provides a buffer against legal problems and the firm will be perceived as a responsible contributor to society.

6. The stage of universal ethical principles. A person in this stage believes right is deter- mined by universal ethical principles everyone should follow. Stage 6 individuals believe certain inalienable rights exist that are universal in nature and consequence. These rights, laws, or social agreements are valid not because of a particular society’s laws or customs, but because they rest on the premise of universality. Justice and equality are examples of principles some individuals and societies deem universal in nature. A per- son in this stage may be more concerned with social ethical issues and therefore not rely on the business organization for ethical direction. For example, a businessperson at this stage might argue for discontinuing a product that has caused death and injury because the inalienable right to life makes killing wrong, regardless of the reason. Therefore, company profits are not a justification for the continued sale of the product. 41

Kohlberg’s six stages can be reduced to three levels of ethical concern. At the first level, a person is concerned with his or her own immediate interests and with external rewards and punishments. At the second level, an individual equates right with conformity to the expectations of good behavior of the larger society or some other significant refer- ence group. Finally, at the third or “principled,” level, an individual sees beyond the norms, laws, and authority of groups or individuals. Employees at this level make ethical decisions regardless of negative external pressures. However, research shows most workers’ abilities to identify and resolve moral dilemmas do not reside at this third level and their motives are often a mixture of selflessness, self-interest, and selfishness.

Kohlberg suggests people continue to change their decision-making priorities after their formative years, and as a result of time, education, and experience, they may change their values and ethical behavior. In the context of business, an individual’s moral devel- opment can be influenced by corporate culture, especially ethics training. Ethics training and education have been shown to improve managers’ cognitive development scores. 42 Because of corporate reform, most employees in Fortune 1000 companies today receive some type of ethics training. Training is also a requirement of the Federal Sentencing Guidelines for Organizations.

Some experts believe experience in resolving moral conflicts accelerates an individ- ual’s progress in moral development. A manager who relies on a specific set of values or rules may eventually come across a situation that these rules do not apply. Suppose Sarah is a manager whose policy is to fire any employee whose productivity declines for four con- secutive months. Sarah has an employee, George, whose productivity suffered because of depression, but George’s coworkers tell Sarah George will recover and soon become a top performer again. Because of the circumstances and the perceived value of the employee, Sarah may bend the rule and keep George. Managers in the highest stages of the moral development process seem to be more democratic than autocratic, and they are more likely than those at lower stages to consider the ethical views of the other people involved in an ethical decision-making situation.

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Chapter 6: Individual Factors: Moral Philosophies and Values 171

Several problems with CMD relate back to its origins. These problems have been termed the three hit theory. Kohlberg’s original work of CMD came from psychologist and philosopher Jean Piaget’s research with children about the nature and development of intel- ligence. When Kohlberg transferred Piaget’s theory to adults he did not take into account the full functioning and development of the adult brain (Strike One). From a philosophical perspective CMD argues for a hierarchical or step-like progression of moral philosophies starting from the lowest and going to the highest. This contradicts basic moral philosophy because there is no hierarchy. Each moral philosophy should be equal to the others (Strike Two). Finally, research suggests that CMD has a high reliability but not validity. For exam- ple, if a person shoots at a target and the shots are all close together, you can state there is high reliability. However, if the shots are all down and to the right, and the goal was to hit the center, then you have low validity (Strike Three). As a result, it is important to be cau- tious when using CMD to explain why good people make bad decisions.

WHITE-COLLAR CRIME

For many people, the terms crime and criminal tend to evoke thoughts of rape, arson, armed robbery, or murder. These violent crimes are devastating, but they are no less destructive than crimes perpetrated every year by nonviolent business criminals. So-called white-collar crime (WCC) does more damage in monetary and emotional loss in one year than violent crimes do over several years combined. 43

White-collar criminals tend to be highly educated people in positions of power, trust, respectability and responsibility within a business or organization. They commit illegal acts for personal and/or organizational gains by abusing the trust and authority normally associated with their positions. The victims of WCC are often trusting consumers who believe businesses are legitimate.

At first glance, deciding what constitutes a white-collar crime seems fairly simple. According to the U.S. Department of Justice, a WCC is a “non-violent criminal act involv- ing deceit, concealment, subterfuge and other fraudulent activity.” The corporate executive who manipulates the stock market, the tax cheat, or the doctor who falsely bills Medicaid are all obvious white collar criminals. But a government official who accepts illegal pay- ments is also a white-collar criminal, and guilty of official corruption. Additionally, a cor- porate executive who approves the illegal disposal of toxic waste is a white-collar criminal guilty of violating environmental regulations.

Online white-collar crime is a growing problem around the world. Because many companies rely on advanced technology systems, anyone with the ability to hack into a system can access the highly sensitive information necessary to commit WCC. WCCs pre- viously originating at the top of organizations now occur at any level of a firm. Common online white-collar crimes include non-delivery of merchandise or payment, FBI-related scams, and identity theft (see Figure 6–1 ).

White-collar crime is a major problem in the financial world. For instance, financier R. Allen Stanford operated a Ponzi scheme that cost investors billions. He used his South- ern Baptist roots as a springboard to promote his financial scheme, using passages such as Proverbs 13 : 11 : “Wealth from get-rich-quick schemes quickly disappears; wealth from hard work grows.” Former employees stated that a mix of religious faith, personal ties, and Stanford’s leadership created a culture that supported hard work and the promotion of the bank’s certificates of deposits—and that also indirectly promoted Stanford’s $ 8 billion

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172 Part 3: The Decision-Making Process

Ponzi scheme. The company was also characterized by family ties, because several employ- ees were related to key executives in the firm. 44 Stanford was later convicted and received a 110 - year sentence. 45

Another case of white-collar crime also involves a well-known financier. Russell Wasendorf Sr., CEO of futures brokerage firm Peregrine Financial Group, stated how he felt he had no other alternative than to falsify financial records so he could sustain his firm and lifestyle. His personal lifestyle included a personal four-star chef, $ 6.9 million life insurance policy, Hawker Beechcraft 400 A jet, and $ 20 million office building. Wassendorf was sentenced to fifty years in prison for stealing $ 215.5 million over a twenty-year time span. 46 While many in business feel such stiff sentences are excessive due to the permanent damage done to reputations and that these are non-violent crimes, others argue that being robbed at gunpoint is less devastating than working and saving for a life time only to dis- cover the sacrifices made were meaningless.

White-collar crime is increasing steadily (see Table 6–4 ). In 2012 consumers lost more than $ 1.4 billion due to fraud. 47 A few common white-collar offenses include anti- trust violations, computer and Internet fraud, credit card fraud, bankruptcy fraud, health care fraud, tax evasion, violating environmental laws, insider trading, bribery, kickbacks, money laundering, and theft of trade secrets.

In response to the surge in white-collar crime, the U.S. government stepped up efforts to combat it. The government is concerned about the destabilizing effect WCC has on U.S. households and the economy in general. The government can charge individuals and corporations for WCC offenses. The penalties include fines, home detention, paying for

20.9%

16.8%

13.8% 26.8%

21.7%

Overpayment Fraud

Non-Auction Non-Delivery of Merchandise

Advance Fee Fraud

Identify Theft

FBI-Related Scams

FIGURE 6–1 Top 5 Reported Internet Crimes

Source: IC 3 , Internet Complaint Center 2011 Internet Crime Report , http://www.ic3.gov/media/annualreport/2011_ic3report.pdf (accessed April 25, 2013).

TABLE 6–4 U.S. Consumer Fraud Complaints

Year Complaints Received Amount Paid

2012 818,239 $ 1,491,656,241

2011 1,038,966 $ 1,544,849,568

2010 818,239 $ 1,729,567,228

Source: Federal Trade Commission, Consumer Sentinel Network Datab Book , February 2013, http://www.ftc.gov/sentinel/reports/sentinel-annual-reports/ sentinel-cy2012.pdf (accessed April 25, 2013).

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Chapter 6: Individual Factors: Moral Philosophies and Values 173

the cost of prosecution, forfeitures, and prison time. However, sanctions are often reduced if the defendant takes responsibility for the crime and assists the authorities in their investigation. Many people do not feel the government is devoting enough resources to combat WCC.

Why do individuals commit white-collar crimes? Advocates of the organizational devi- ance perspective argue that a corporation is a living, breathing organism that can collectively become deviant. When companies have lives separate and distinct from biological persons, the corporate culture of the company transcends the individuals who occupy these positions. With time, patterns of activities become institutional- ized within the organization, and these patterns sometimes encourage unethical behaviors.

Another common cause of WCC is the views and behaviors of an individual’s acquaintances within an organization. Employees, at least in part, self-select the people with whom they asso- ciate within an organization. For companies with a high number of ethical or unethical employees, people who are undecided about their behavior (about 40 percent of businesspeople) are more likely go along with their coworkers.

Additionally, the incidence of WCCs tends to increase in the years following eco- nomic recessions. When companies downsize, the stressful business climate may anger some employees and force others to act out of despera- tion. Furthermore, as businesses begin to expand and grow, fraudsters find gaps in corporate pro- cesses and exploit growth opportunities. 49

Finally, as with criminals in the gen- eral population, there is the possibility some businesspeople may have inherently criminal personalities. 50 Corporate psychopaths, or man- agers who are nonviolent, selfish, and remorse- less, exist in many large corporations. Corporate psychopaths may be more likely to use moral disengagement, in which they reframe the individuals or actions of a particular situation to convince themselves certain ethical stan- dards to not apply. 51 Employees of corporate psychopaths are less likely to believe that their organization is socially responsible, the organization shows commitment to employees, or they receive recognition for their work. 52 Some organizations use personality tests to pre- dict behavior, but such tests presuppose individual values and philosophies are constant; therefore, they seem to be ineffective in understanding the motivations of white-collar criminals. 53

Why Do People Engage in White-Collar Crime?

White-collar crime occurs when highly trusted and educated individuals commit criminal misconduct. Two examples of white-collar criminals are Bernard Madoff, who developed one of the largest Ponzi schemes ever, and R. Allen Stanford, who developed an $ 8 billion certificate of deposit program promising unrealistically high interest rates. Different theories exist why individuals become white-collar criminals. Research shows one percent of business executives may be corporate psychopaths with a predisposition to lie, cheat, and take any other measures necessary to come out ahead. This possibility may account for the fact that many white-collar criminals become entrepreneurs, thus putting themselves in a position to control others. This theory might account for rogue individuals such as Bernard Madoff.

Many believe white-collar crime evolves when corporate cultures do not have effective oversight and control over individuals’ behavior. Such toxic organizational cultures occur when unethical activities are overlooked or even encouraged. For instance, many employees engaged in liar loans at Countrywide Financial because they received rewards for bringing in additional profits. It seems unlikely they all had psychological maladies. 48

1. White-collar criminals tend to have psychological disorders that encourage misconduct as a route to success.

2. White-collar crime occurs as a result of organizational cultures that do not effectively control organizational behavior.

DEBATE ISSUE TAKE A STAND

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174 Part 3: The Decision-Making Process

The reasons for the increases in WCC are not easy to pinpoint because many variables may cause good people to make bad decisions. Businesspeople must make a profit on rev- enue to exist, a fact that slants their orientation toward teleology and creates a culture in which white-collar crimes can become normalized. Table 6–5 lists top justifications given by perpetrators of white-collar crimes. The Federal Sentencing Guidelines for Organiza- tions state that all organizations should develop effective ethics and compliance programs as well as internal controls to prevent WCC.

INDIVIDUAL FACTORS IN BUSINESS ETHICS

Of course, not everyone agrees on the roles of collective moral philosophies in ethical deci- sion making within an organization. Unfortunately, many people believe individual values are the main driver of ethical behavior in business. This belief can be a stumbling block in assessing ethical risk and preventing misconduct in an organizational context. The moral values learned within the family and through religion and education are certainly key fac- tors that influence decision making, but as indicated in the models in Chapter 5, these values are only one factor. Many business schools focus mainly on personal character or moral development in their programs, reinforcing the notion that employees can control their work environments. Although a personal moral compass is important, it is not suf- ficient to prevent ethical misconduct in an organizational context. According to ethics con- sultant David Gebler, “Most unethical behavior is not done for personal gain, it’s done to meet performance goals.” 54 The rewards for meeting performance goals and the corporate culture in general have been found to be the most important drivers of ethical decision making, especially for coworkers and managers. 55

The development of strong abilities in ethical reasoning will probably lead to more ethical business decisions in the future than individualized character education for each employee. 56 Equipping employees with intellectual skills that allow them to understand

TABLE 6–5 Common Justifications for White-Collar Crime

1. Denial of responsibility. (Everyone can, with varying degrees of plausibility, point the finger at someone else.)

2. Denial of injury. (White-collar criminals often never meet or interact with those who are harmed by their actions.)

3. Denial of the victim. (The offender is playing tit-for-tat and claims to be responding to a prior offense inflicted by the supposed victim.)

4. Condemnation of the condemners. (Executives dispute the legitimacy of the laws under which they are charged, or impugn the motives of the prosecutors who enforce them.)

5. Appeal to a higher authority. (“I did it for my family” remains a popular excuse.)

6. Everyone else is doing it. (Because of the highly competitive marketplace, certain pressures exist to perform that may drive people to break the law.)

7. Entitlement. (Criminals simply deny the authority of the laws they have broken.)

Source: Based on Daniel J. Curran and Claire M. Renzetti, Theories of Crime (Needham Heights, MA: Allyn & Bacon, 1994).

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Chapter 6: Individual Factors: Moral Philosophies and Values 175

and resolve the complex ethical dilemmas they encounter in complex corporate cultures will help them make the right decisions. This approach will hopefully keep employees from being negatively influenced by peer pressure and lulled by unethical managers. 57 The West Point model for character development focuses on the fact that competence and charac- ter must be developed simultaneously. This model assumes ethical reasoning has to be approached in the context of a specific profession. The military has been effective in teach- ing skills and developing principles and values that can be used in most of the situations a soldier encounters. In a similar manner, accountants, managers, and marketers need to develop ethical reasoning in the context of their jobs.

SUMMARY

Moral philosophy refers to the set of principles or rules people use to decide what is right or wrong. These principles or rules provide guidelines for resolving conflicts and for opti- mizing the mutual benefit of people living in groups. Businesspeople are guided by moral philosophies as they formulate business strategies and resolve specific ethical issues, even if they may not realize it.

Teleological, or consequentialist, philosophies stipulate that acts are morally right or acceptable if they produce some desired result such as the realization of self-interest or utility. Egoism defines right or acceptable behavior in terms of the consequences for the individ- ual. In an ethical decision-making situation, the egoist chooses the alternative that contrib- utes most to his or her own self-interest. Egoism can be further divided into hedonism and enlightened egoism. Utilitarianism is concerned with maximizing total utility, or providing the greatest benefit for the greatest number of people. In making ethical decisions, utilitarians often conduct cost–benefit analyses that consider the costs and benefits to all affected par- ties. Rule utilitarians determine behavior on the basis of rules designed to promote the great- est utility rather than by examining particular situations. Act utilitarians examine the action itself rather than the rules governing the action, to determine if it results in the greatest utility.

Deontological, or nonconsequentialist, philosophies focus on the rights of individuals and the intentions behind an individual’s particular behavior rather than its consequences. In general, deontologists regard the nature of moral principles as permanent and stable and believe compliance with these principles defines ethical behavior. Deontologists believe individuals have certain absolute rights that must be respected. Rule deontologists believe conformity to general moral principles determines ethical behavior. Act deontologists hold that actions are the proper basis to judge morality or ethicalness and that rules serve only as guidelines.

According to the relativist perspective, definitions of ethical behavior derive subjec- tively from the experiences of individuals and groups. The relativist observes behavior within a relevant group and attempts to determine what consensus group members reach on the issue in question.

Virtue ethics states what is moral in a given situation is not only what is required by conventional morality or current social definitions, however justified, but by what a person with a “good” moral character would deem appropriate. Those who profess virtue ethics do not believe the end justifies the means in any situation.

The concept of justice in business relates to fair treatment and due reward in accor- dance with ethical or legal standards. Distributive justice is based on the evaluation of the outcome or results of a business relationship. Procedural justice is based on the processes

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176 Part 3: The Decision-Making Process

and activities that produce outcomes or results. Interactional justice is based on an evaluation of the communication process in business.

The concept of a moral philosophy is not exact; moral philosophies can only be assessed on a continuum. Individuals use different moral philosophies depending on whether they are making a personal or a workplace decision.

According to Kohlberg’s model of cognitive moral development, individuals may make different decisions in similar ethical situations because they are in a different stage of moral development. In Kohlberg’s model, people progress through six stages of moral development: (1) punishment and obedience; (2) individual instrumental purpose and exchange; (3) mutual interpersonal expectations, relationships, and conformity; (4) social system and conscience maintenance; (5) prior rights, social contract, or utility; and (6)  universal ethical principles. Kohlberg’s six stages can be further reduced to three levels of ethical concern: immediate self-interest, social expectations, and general ethical principles. Cognitive moral develop- ment may not explain as much as people once believed.

White-collar crime occurs when an educated individual who is in a position of power, trust, respectability, and responsibility commits an illegal act in relation to his or her employment, and who abuses the trust and authority normally associated with the posi- tion for personal and/or organizational gains. White-collar crime is not heavily researched because this type of behavior does not normally come to mind when people think of crime; the offender (or organization) is in a position of trust and respectability; criminology and criminal justice systems look at white-collar crime differently than average crimes; and many researchers have not moved past the definitional issues. New developments in tech- nology seem to be increasing the opportunity to commit white-collar crime with less risk.

Individual factors such as religion, moral intensity, and a person’s professional affilia- tions can influence an employee’s decision-making process. The impacts of ethical aware- ness, biases, conflict, personality type, and intelligence on ethical behavior remain unclear. One thing we do know is that the interrelationships among moral philosophies, values, and business are extremely complex.

IMPORTANT TERMS FOR REVIEW

moral philosophy 154

economic value orientation 156

idealism 156

realism 156

monist 157

hedonism 157

quantitative hedonist 157

qualitative hedonist 157

pluralist 158

instrumentalist 158

goodness theory 158

obligation theory 158

teleology 158

consequentialism 158

egoism 158

enlightened egoism 158

utilitarianism 159

rule utilitarian 160

act utilitarian 160

deontology 161

nonconsequentialism 161

categorical imperative 161

rule deontologist 161

act deontologist 162

relativist perspective 162

descriptive relativism 162

meta-ethical relativism 163

normative relativism 163

virtue ethics 164

justice 166

distributive justice 166

procedural justice 166

interactional justice 167

Kohlberg’s model of cognitive moral development (CMD) 169

white-collar crime 171

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Chapter 6: Individual Factors: Moral Philosophies and Values 177

checked files, these charges to Medicaid appeared to increase, dating back at least five years.

Saul approached his brother. “Robert, are you aware you charged Medicaid for Mr. and Mrs. Bennett’s visits?”

“Hmmm. Let me see the paper work,” Dr. Smith asked. Saul handed it to him. Dr. Smith glanced at the document and said, “Yes, they are over age 65 , so I made a bill for Medicaid.”

“But we have records they paid you with cash,” Saul replied. He handed Dr. Smith an old receipt. “And there are similar instances with some of your other patients. Besides, Medicaid is for low-income patients, not the elderly. Mr. and Mrs. Bennett are clearly not low-income.”

Looking a little bit flustered, Dr. Smith replied, “Saul, you know how I am with details. I’m no good at it. That’s why I hired you. Thanks for catching my mistake.” Dr. Smith walked back into his office and shut the door, leaving Saul standing in the hallway with a stack of files.

Saul knew what his brother gave up for their family and the good he did for the families in this small town, but he was convinced these charges were not accidental. There were too many of them and the amount of money charged exceeded $ 75,000 .

“What happened to all that money?” Saul wondered. He also wondered how to handle the situation. He thought to himself, “How can I report this without sending Robert to jail? If I don’t report it and Medicaid finds out, I could go to jail and lose my accounting license. This is such a small town. If anybody finds out, we’ll never live it down.” At that moment, the phone rang, and Saul was the only one there to answer it.

QUESTIONS | EXERCISES 1. Describe Saul’s ethical dilemma. 2. Why would Medicare fraud be a white-collar

crime? 3. How should Saul approach the situation?

RESOLVING ETHICAL BUSINESS CHALLENGES *

Dr. Robert Smith owned his family practice for over 20 years. He came from a family of success. His father was a brain surgeon and his mother a well-known author. His younger brother, Saul, owned his own accounting firm for several years, but came to work with Dr. Smith after he sold it for a modest amount.

After graduating at the top of his class from Johns Hopkins University, Dr. Smith was awarded a cardiothoracic surgery fellowship in New York. He spent a few years there and was well on his way to fulfilling his dream of becoming a heart surgeon. During this time, however, his father became ill. Dr. Smith decided to return to his hometown of Zoar, Ohio, to take care of him. Under Dr. Smith’s care, his father started showing signs of improvement. He was glad not only for his father, but that he could go back and continue his pursuit of becoming a heart surgeon. On the day he was set to leave, his mother became ill and died a few days later from a rare form of cancer that showed no symptoms. The devastation hit the family hard. Saul was still in college, and Dr. Smith’s father needed someone to be with him at all times. Dr. Smith decided to stay in Zoar to take care of his father. He opened up a family practice in the town, thus putting his dream of becoming a heart surgeon on hold indefinitely.

Over the years, Dr. Smith sometimes felt regret that he never achieved his dream, but his job as the town doctor had been fulfilling. Now Saul was working with him, helping with the business. This made things significantly easier for Dr. Smith, who haphazardly kept his own books and patient files. One day, as Saul organized Dr. Smith’s piles of paperwork, he noticed there were charges to Medicaid that must be a mistake. While most of the population of Zoar, Ohio, was considered low- level income and qualified for Medicaid, this was not the case for all patients. There were several elderly middle- and higher-income families who regularly visited the office and usually paid with a check or cash. Saul assumed his brother’s admin- istrative office skills were poor and aimed to fix it. However, as Saul organized the paperwork and

* This case is strictly hypothetical; any resemblance to real per- sons, companies, or situations is coincidental.

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178 Part 3: The Decision-Making Process

> > > CHECK YOUR EQ

Check your EQ, or Ethics Quotient, by completing the following. Assess your performance to evaluate your overall understanding of the chapter material.

1. Teleology defines right or acceptable behavior in terms of its consequences for the individual. Yes No

2. A relativist looks at an ethical situation and considers the individuals and groups involved. Yes No

3. A utilitarian is most concerned with bottom-line benefits. Yes No

4. Act deontology requires a person use equity, fairness, and impartiality in making decisions and evaluating actions. Yes No

5. Virtues supporting business transactions include trust, fairness, truthfulness, competitiveness, and focus. Yes No

ANSWERS 1. No. That’s egoism. 2. Yes. Relativists look at themselves and those around them to determine ethical standards. 3. Yes. Utilitarians look for the greatest good for the greatest number of people and use a cost–benefit approach. 4. Yes. The rules serve only as guidelines, and past experience weighs more heavily than the rules. 5. No. The characteristics include trust, self-control, empathy, fairness, and truthfulness—not competitiveness and focus.

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Chapter 6: Individual Factors: Moral Philosophies and Values 179

ENDNOTES

1. James R. Rest, Moral Development Advances in Research and Theory (New York: Praeger, 1986), 1.

2. “Business Leaders, Politicians and Academics Dub Corporate Irresponsibility ‘An Attack on America from Within,’” Business Wire , November 7, 2002, via The Free Library, http://www.thefreelibrary.com/Business+Leaders,+ Politicians+and+Academics+Dub+Corporate...-a094631434 (accessed April 25, 2013).

3. A. C. Ahuvia, “If Money Doesn’t Make Us Happy, Why Do We Act as If It Does?” Journal of Economic Psychology 29 (2008): 491–507.

4. Abhijit Biswas, Jane W. Licata, Daryl McKee, Chris Pullig, and Christopher Daughtridge, “The Recycling Cycle: An Empirical Examination of Consumer Waste Recycling and Recycling Shopping Behaviors,” Journal of Public Policy & Marketing 19 (2000): 93; Miguel Bastons, “The Role of Virtues in the Framing of Decisions,” Journal of Business Ethics (2008): 395.

5. Miquel Bastons, “The Role of Virtues in the Framing of Decisions,” Journal of Business Ethics (2008): 395.

6. Margaret Lindorff, Elizabeth Prior Jonson, and Linda McGuire, “Strategic Corporate Social Responsibility in Controversial Industry Sectors: The Social Value of Harm Minimization,” Journal of Business Ethics 110 (4), 2012, 457–467.

7. “Court Says Businesses Liable for Harassing on the Job,” Commercial Appeal , June 27, 1998, A1; Richard Brandt, Ethical Theory (Englewood Cliffs, NJ: Prentice-Hall, 1959), 253–254.

8. Gardiner Harris and Walt Bogdanich, “Drug tied to China had contaminant, FDA says,” The New York Times , March 6, 2008, http://www.nytimes.com/2008/03/06/ health/06heparin.html (accessed April 25, 2013).

9. Brandon Wirtz, “Poison Baxter’s Heparin From China Triggers Class-Action Lawsuit,” XYHD.tv, http://www. xyhd.tv/2008/12/random-news/legal-issues/poison- baxters-heparin-from-china-triggers-class-action-suit/ (accessed April 25, 2013); “Heparin Contamination leads to Two Heparin Recalls,” LawyersandSettlements.com, August 6, 202, http://www.lawyersandsettlements.com/ lawsuit/heparin.html#.UXbuM8otLp (accessed April 25, 2013).

10. “Consolidation of China’s SFDA Grants Agency More Prestige, Power,” RF, March 11, 2013, http://www.raps. org/focus-online/news/news-article-view/article/2993/ consolidation-of-chinas-sfda-grants-agency-more- prestige-power.aspx (accessed April 25, 2013).

11. J. J. C. Smart and B. Williams, Utilitarianism: For and Against (Cambridge, UK: Cambridge University Press, 1973), 4.

12. C. E. Harris, Jr., Applying Moral Theories (Belmont, CA: Wadsworth, 1986), 127–128.

13. James O’Toole, “Pfizer settles foreign bribery charges,” CNNMoney , August 7, 2012, http://money.cnn. com/2012/08/07/news/companies/pfizer-bribery-charges/ index.htm (accessed April 25, 2013).

14. Example adapted from Harris, Applying Moral Theories , 128–129.

15. Gerald F. Cavanaugh, Dennis J. Moberg, and Manuel Velasquez, “The Ethics of Organizational Politics,” Academy of Management Review 6 (1981): 363–374; U.S.

Bill of Rights, http://www.law.cornell.edu/constitution/ constitution.billofrights.html (accessed April 25, 2013).

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17. Marie Brenner, “The Man Who Knew Too Much,” Vanity Fair , May 1996, available at http://www.jeffreywigand. com/vanityfair.php (accessed April 25, 2013).

18. Norman E. Bowie and Thomas W. Dunfee, “Confronting Morality in Markets,” Journal of Business Ethics 38 (2002): 381–393.

19. “JetBlue cancels flights, to present ‘Bill of Rights,’” CNN, February 19, 2007, http://money.cnn.com/2007/02/19/ news/companies/jetblue/index.htm?postversion=2007021 917&iid=EL (accessed April 25, 2013).

20. Adam Hanft, Fast Company , “Firing Neeleman; JetBlue Just Blew It,” Fast Company , http://www.fastcompany. com/660116/firing-neeleman-jetblue-just-blew-it (accessed April 25, 2013).

21. Immanuel Kant, “Fundamental Principles,” 229. 22. Thomas E. Weber, “To Opt In or Opt Out: That Is the

Question When Mulling Privacy,” The Wall Street Journal , October 23, 2000, B1.

23. R. Bateman, J. P. Fraedrich, and R. Iyer, “The Integration and Testing of the Janus-Headed Model within Marketing,” Journal of Business Research 56 (2003): 587–596; J. B. DeConinck and W. F. Lewis, “The Influence of Deontological and Teleological Considerations and Ethical Culture on Sales Managers’ Intentions to Reward or Punish Sales Force Behavior,” Journal of Business Ethics 16 (1997): 497–506; J. Kujala, “A Multidimensional Approach to Finnish Managers’ Moral Decision Making,” Journal of Business Ethics 34 (2001): 231–254; K. C. Rallapalli, S. J. Vitell, and J. H. Barnes, “The Influence of Norms on Ethical Judgments and Intentions: An Empirical Study of Marketing Professionals,” Journal of Business Research 43 (1998): 157–168; M. Shapeero, H. C. Koh, and L. N. Killough, “Underreporting and Premature Sign-Off in Public Accounting,” Managerial Auditing Journal 18 (2003): 478–489.

24. William K. Frankena, Ethics (Englewood Cliffs: Prentice- Hall, 1963).

25. R. E. Reidenbach and D. P. Robin, “Toward the Development of a Multidimensional Scale for Improving Evaluations of Business Ethics,” Journal of Business Ethics 9, no. 8 (1980): 639–653.

26. Patrick E. Murphy and Gene R. Laczniak, “Emerging Ethical Issues Facing Marketing Researchers,” Marketing Research 4 , no. 2 (1992): 6–11.

27. T. K. Bass and Barnett G. Brown, “Religiosity, Ethical Ideology, and Intentions to Report a Peer’s Wrongdoing,” Journal of Business Ethics 15, no. 11 (1996): 1161–1174; R. Z. Elias, “Determinants of Earnings Management Ethics among Accountants,” Journal of Business Ethics 40, no. 1 (2002): 33–45; Y. Kim, “Ethical Standards and Ideology among Korean Public Relations Practitioners,” Journal of Business Ethics 42, no. 3 (2003): 209–223; E. Sivadas, S. B. Kleiser, J. Kellaris, and R. Dahlstrom, “Moral Philosophy, Ethical Evaluations, and Sales Manager Hiring Intentions,” Journal of Personal Selling & Sales Management 23, no. 1 (2003): 7–21.

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180 Part 3: The Decision-Making Process

28. Cheng-Li Huang and Bau-Guang Chang, “The Effects of Managers’ Moral Philosophy on Project Decision under Agency Problem Conditions,” Journal of Business Ethics 94 (2010): 595–611.

29. Manuel G. Velasquez, Business Ethics Concepts and Cases , 5th ed. (Upper Saddle River, NJ: Prentice-Hall, 2002), 135–136.

30. Ibid. 31. Adapted from Robert C. Solomon, “Victims of

Circumstances? A Defense of Virtue Ethics in Business,” Business Ethics Quarterly 13, no. 1 (2003): 43–62.

32. Ian Maitland, “Virtuous Markets: The Market as School of the Virtues,” Business Ethics Quarterly (January 1997): 97.

33. Ibid. 34. Stefanie E. Naumann and Nathan Bennett, “A Case for

Procedural Justice Climate: Development and Test of a Multilevel Model,” Academy of Management Journal 43 (2000): 881–889.

35. Joel Brockner, “Making Sense of Procedural Fairness: How High Procedural Fairness Can Reduce or Heighten the Influence of Outcome Favorability,” Academy of Management Review 27 (2002): 58–76.

36. “Nugget Markets Named #8 in Fortune Magazine’s “100 Best Companies to Work for,” January 20, 2011, http:// www.nuggetmarket.com/press-release/100 (accessed April 25, 2013); “100 Best Companies to Work for 2010,” Fortune, http://money.cnn.com/magazines/fortune/ bestcompanies/2010/snapshots/5.html (accessed April 25, 2013); “100 Best Companies to Work for,” CNNMoney , 2011, http://money.cnn.com/magazines/fortune/ bestcompanies/2011/snapshots/8.html (accessed April 25, 2013).

37. Gretchen Larsen and Rob Lawson, “Consumer Rights: An Assessment of Justice,” Journal of Business Ethics 112 (2013): 515–528.

38. John Fraedrich and O. C. Ferrell, “Cognitive Consistency of Marketing Managers in Ethical Situations,” Journal of the Academy of Marketing Science 20 (1992): 245–252.

39. Manuel Velasquez, Claire Andre, Thomas Shanks, S. J. and Michael J. Meyer, “Thinking Ethically: A Framework for Moral Decision Making,” Issues in Ethics (Winter 1996): 2–5.

40. Lawrence Kohlberg, “Stage and Sequence: The Cognitive Developmental Approach to Socialization,” in Handbook of Socialization Theory and Research , ed. D. A. Goslin (Chicago: Rand McNally, 1969), 347–480.

41. Adapted from Kohlberg, “Stage and Sequence.” 42. Clare M. Pennino, “Is Decision Style Related to Moral

Development among Managers in the U.S.?” Journal of Business Ethics 41 (2002): 337–347.

43. K. M. Au and D. S. N. Wong, “The Impact of Guanxi on the Ethical Decision-Making Process of Auditors: An Exploratory Study on Chinese CPA’s in Hong Kong,” Journal of Business Ethics 28, no. 1 (2000): 87–93; D. P. Robin, G. Gordon, C. Jordan, and E. Reidenback, “The Empirical Performance of Cognitive Moral Development in Predicating Behavioral Intent,” Business Ethics Quarterly 6, no. 4 (1996): 493–515; M. Shapeero, H. C. Koh, and L. N. Killough, “Underreporting and Premature Sign-Off in Public Accounting,” Managerial Auditing Journal 18, no. 6 (1996): 478–489; N. Uddin and P. R. Gillett, “The Effects of Moral Reasoning

and Self-Monitoring on CFO Intentions to Report Fraudulently on Financial Statements,” Journal of Business Ethics 40, no. 1 (2002): 15–32.

44. Michael Forsythe and Alison Fitzgerald, “Stanford Prayer with Dying Man Pumped Agents in Alleged Fraud,” Bloomberg , March 9, 2009, “ http://www.bloomberg.com/ apps/news?pid=washingtonstory&sid=aw1dZUb28Qc8 (accessed April 25, 2013).

45. Daniel Gilbert and Jean Eaglesham, “Stanford Hit with 110 Years,” The Wall Street Journal , June 14, 2012, http:// online.wsj.com/article/SB10001424052702303734204577 466634068417466.html (accessed April 25, 2013).

46. Jacob Bunge, “Peregrine Founder Hit With 50 Years,” The Wall Street Journal , February 1, 2013, C1.

47. Federal Trade Commission, Consumer Sentinel Network Data Book, February 2013, http://www.ftc.gov/sentinel/ reports/sentinel-annual-reports/sentinel-cy2012.pdf (accessed April 25, 2013).

48. “The Influence of Corporate Psychopaths on Corporate Social Responsibility and Organizational Commitment to Employees,” Journal of Business Ethics 97 (2010): 1–19; Clive R. Boddy, Richard K. Ladyshewsley, and Peter Galvin, “The Implications of Corporate Psychopaths for Business and Society: An Initial Examination and a Call to Arms,” AJBBS 1, no.2 (2005): 30–40, http://www. mtpinnacle.com/pdfs/Psychopath.pdf (accessed May 3, 2011).

49. KPMG, “Fraud contagion shows no sign of abating,” Fraud Barometer , June 2010, http://www.zurich.com/NR/ rdonlyres/61135D66-3194-4362-A9D3-07AC64C40B54/0/ KPMGAUFraudBarometerFindingsAustAug2010.pdf (accessed April 25, 2013).

50. Eysenck, “Personality and Crime: Where Do We Stand?” Psychology, Crime & Law 2, no. 3 (1996): 143–152; Shelley Johnson Listwan, Personality and Criminal Behavior: Reconsidering the Individual , University of Cincinnati, Division of Criminal Justice, 2001, http://cech.uc.edu/ content/dam/cech/programs/criminaljustice/docs/phd_ dissertations/2001/ShelleyJohnson.pdf (accessed April 25, 2013).

51. Gregory W. Stevens, Jacqueline K. Deuling, and Achilles A. Armenakis, “Successful Psychopaths: Are They Unethical Decision-Makers and Why?” Journal of Business Ethics 105 (2012): 139–149.

52. “The Influence of Corporate Psychopaths on Corporate Social Responsibility and Organizational Commitment to Employees,” Journal of Business Ethics .

53. J. M. Rayburn and L. G. Rayburn, “Relationship between Machiavellianism and Type A Personality and Ethical- Orientation,” Journal of Business Ethics 15, no. 11 (1996): 1209–1219.

54. Quoted in Marjorie Kelly, “The Ethics Revolution,” Business Ethics (Summer 2005): 6.

55. O. C. Ferrell and Larry G. Gresham, “A Contingency Framework for Understanding Ethical Decision Making in Marketing,” Journal of Marketing 49 (2002): 261–274.

56. Thomas I. White, “Character Development and Business Ethics Education,” in Fulfilling Our Obligation: Perspectives on Teaching Business Ethics , ed. Sheb L. True, Linda Ferrell, and O. C. Ferrell (Kennesaw, GA: Kennesaw State University Press, 2005), 165.

57. Ibid., 165–166.

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CHAPTER OBJECTIVES

• Understand the concept of corporate culture

• Examine the influence of corporate culture on business ethics

• Determine how leadership, power, and motivation relate to ethical decision making in organizations

• Assess organizational structure and its relationship to business ethics

• Explore how the work group influences ethical decisions

• Discuss the relationship between individual and group ethical decision making

ORGANIZATIONAL FACTORS: THE ROLE OF ETHICAL CULTURE AND RELATIONSHIPS

CHAPTER OUTLINE

Defining Corporate Culture

The Role of Corporate Culture in Ethical Decision Making

Ethical Frameworks and Evaluations of Corporate Culture

Ethics as a Component of Corporate Culture

Compliance versus Value- based Ethical Cultures

Differential Association

Whistle-Blowing

Leaders Influence Corporate Culture

Power Shapes Corporate Culture

Motivating Ethical Behavior

Organizational Structure and Business Ethics

Group Dimensions of Corporate Structure and Culture

Types of Groups

Group Norms

Variation in Employee Conduct

Can People Control Their Actions within a Corporate Culture?

CHAPTER 7

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products that were not true, such as how long the product would last.

“The salespeople are given substantial bonuses for exceeding their quotas, so many promise whatever it takes to increase their sales,” the woman explained.

Although it was not required to provide a name when reporting, the person talking to Jim gave her name as Sarah Jones. She asked Jim to make sure her sales manager Rick Martin did not find out she called the hotline. Jim gave the report to his supervisor for further investigation.

Two weeks later Jim heard that Sarah Jones had been fired for poor performance. He approached David to ask him about the situation and was horrified to find out the sales manager of Sarah’s division had been told about her report.

“But David, this is a violation of our confidentiality code! I promised Sarah we would keep her name anonymous when investigating this matter. What if Rick fired her out of retaliation?” Jim asked.

David looked at Jim in exasperation. “Jim, you are making too big of a deal out of this. Nobody forced Sarah to give her name to us over the hotline. And trust me, Rick’s a good man. He wouldn’t fire someone simply to get back at them for reporting. It seems to me that these reports didn’t have credibility, anyway. It’s likely that Sarah made up these allegations to hide her poor performance.”

Jim left David’s office upset. Even if Sarah was a poor performer, he did not feel that it was right that her sales manager was told about her report when she expressly requested otherwise. As he went back to his desk, he remembered hearing that the sales manager and David were good friends and often went out together for lunch.

QUESTIONS | EXERCISES 1. How does the company’s organizational culture

appear to conflict with its ethical policies? 2. What are the options for Sarah if this was

retaliation? 3. What should Jim do next?

When Jim began working in the human resources department at KR Electronics, he was impressed with the number of advancement opportunities the job offered. His first task was to monitor reports that came in from employees through the company’s ethics hotline. It was a simple job but one Jim felt would lead him to a higher position in the HR department. He spent two days learning about the company’s ethical policies and values, such as the importance of integrity and confidentiality. Jim felt reassured he chose a great company in which to start a career.

KR Electronics was a competitive company, and every six years employees were evaluated for performance. While the highest performers received substantial bonuses, the lowest 15 percent were consistently fired. This didn’t bother Jim too much. He knew many other well-known companies had a similar system in place.

What bothered Jim was the way the supervisors treated employees who did not perform highly. Several employees approached Jim and told him of an abusive manager who often yelled at employees in front of other co-workers. Jim heard reports that the supervisor would make comments such as “I can’t wait till the year is up and I can tell you to get lost. It’ll be nice to actually get someone in this job with half a brain.”

When Jim approached David, the human resources manager of his department, about what he heard, David shrugged off Jim’s concerns. “You’ve got to understand, Jim,” David explained. “We operate in a highly competitive field. Employees have to work quickly and efficiently in order to maintain our business. This often requires supervisors to get tough. Besides, this supervisor’s unit is one of our highest performers. Apparently, whatever he’s doing is working.” This remark made Jim feel uncomfortable, but he did not want to argue with his boss about it.

One day Jim got a call from a woman in the company’s sales department. She informed him that many of the firm’s salespeople made exaggerated claims about the quality of their electronics. He also learned salespeople were making guarantees about

AN ETHICAL DILEMMA *

* This case is strictly hypothetical; any resemblance to real persons, companies, or situations is coincidental.

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Chapter 7: Organizational Factors: The Role of Ethical Culture and Relationships 183

Companies are much more than structures in which we work. Although they are not alive, we attribute human characteristics to them. When times are good, we say the company is “well”; when times are bad, we may try to “save” the company. Understandably, people have strong feelings about the place that provides them with income and benefits, challenges, satisfaction, self-esteem, and often lifelong friendships. In fact, excluding time spent sleeping, almost 50 percent of our lives are spent in this second “home” with our second “family.” It is important to examine how the culture and structure of these organizations influence the ethical decisions made within them.

In the ethical decision-making framework described in Chapter 5 , we introduced the concept that organizational factors and interpersonal relationships influence the ethi- cal decision-making process. We also describe the normative foundation of ethical deci- sion making, such as organizational core values. In this chapter, we take a closer look at corporate culture and the ways a company’s values and traditions can affect employees’ ethical behavior. We also discuss the role of power in influencing ethical behavior within a company. Next we describe two organizational structures and examine how they may influence ethical decisions. We discuss new organizational structures created to address the organization’s corporate responsibility to employees and other stakeholders. Then we consider the impact of groups within organizations. Finally, we examine the implications of organizational relationships for ethical decision making.

DEFINING CORPORATE CULTURE

Culture is a word people generally use in relation to country of origin, language and the way people speak, the types of food they eat, and other customs. Many define culture as nationality or citizenship. Values, norms, artifacts, and rituals all play a role in culture. Chapter 5 defined corporate culture as a set of values, norms, and artifacts, including ways of solving problems that members (employees) of an organization share. Corporate culture is also “the shared beliefs top managers in a company have about how they should manage themselves and other employees, and how they should conduct their business(es).” 1 Mutual of Omaha considers its corporate culture in its mission statement. Its intent is to “back our products with fair and timely service, and pursue operational excellence at every level. Above all, we will maintain the highest degree of integrity in all our interactions.” 2 Mutual of Omaha’s executives believe the company’s corporate culture provides the foundation for its work and objectives such that the organization has adopted a set of core values called “Values for Success.” Mutual of Omaha feels these core values form the foundation for a corporate culture that helps the organization realize its vision and achieve its goals. Cor- porate culture is exhibited through the behavioral patterns, concepts, documents such as codes of ethics, and rituals that emerge in an organization. 3 This culture gives the members of the organization a sense of meaning and purpose and familiarizes them with the organi- zation’s internal rules of behavior. 4

Southwest Airlines has a strong and friendly, fun-loving organizational culture that dates back to the days of its key founder Herb Kelleher. Kelleher became legendary for appearing in a dress and feather boa and joining baggage handlers on Southwest flights. He organized an awards ceremony for employees that many felt rivaled the Academy Awards. He treated his employees like family. Today, Southwest continues that legacy. Pilots will- ingly and enthusiastically support the “Adopt a Pilot” program. Students in classrooms

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184 Part 3: The Decision-Making Process

around the country adopt a Southwest pilot for a four-week educational and mentoring program. The pilots volunteer in the students’ classrooms and send e-mails and postcards to a variety of destinations. Southwest’s culture allows it to attract some of the best talent in the industry. 5 Values, beliefs, customs, rules, and ceremonies that are accepted, shared, and circulated throughout an organization represent its culture. All organizations, not just cor- porations, have some sort of culture, and therefore we use the terms organizational culture and corporate culture interchangeably.

A company’s history and unwritten rules are a part of its culture. For many years, IBM salespeople adhered to a series of unwritten standards for dealing with clients. The his- tory or stories passed down from generation to generation within an organization are like the traditions perpetuated within society at large. Henry Ford, the founder of Ford Motor Co., left a legacy that emphasized the importance of the individual employee. Henry Ford pioneered the then-unheard-of high wage of $5 a day in the early years of the twentieth century, and current company chairman William Clay Ford, Jr., continues to affirm that positive employee relationships create a sustainable competitive advantage for the com- pany. 6 William Ford maintained his grandfather’s legacy by taking a leadership role in improving vehicle fuel efficiency while reducing emissions. Ford is trying to become an industry leader in sustainability through initiatives such as its Go Green Dealership Pro- gram. This voluntary program offers dealers the chance to receive energy assessments from Ford’s sustainability experts with the intent of increasing their energy efficiency. Dealers that wish to sell the Ford Focus Electric need to enroll in Ford’s Go Green program as well as install at least two EV charging stations at their dealerships. For dealers that choose to make changes, Ford experts provide guidance on sustainable product selections and state and federal tax incentives. 7

Leaders are responsible for the actions of their subordinates, and corporations should have ethical corporate cultures. For this reason, the definition and measurement of a cor- porate culture is important. It is defined in the Sarbanes–Oxley Act, enacted after the Enron, Tyco International, Adelphia, Peregrine Systems, and WorldCom scandals. The characteristics of an ethical corporate culture were codified within the Sarbanes–Oxley 404 compliance section. This section includes a requirement that management assess the effec- tiveness of the organization’s internal controls and commission an audit of these controls by an external auditor in conjunction with the audit of its financial statements. Section 404 requires firms to adopt a set of values that forms a portion of the company’s culture. The evaluation of corporate culture it mandates is meant to provide insight into the character of an organization, its ethics, and transparency.

Compliance with Sarbanes–Oxley 404 requires not merely changes in accounting but a change in corporate culture. The intent is to expose mismanagement, fraud, theft, abuse, and to sustain a corporate culture that does not allow these conditions and actions to exist. Many consultants that filled the need of companies wanting to comply with Sarbanes- Oxley lacked understanding of what “culture” means in this case. These consultants sought to provide direction and criteria for improving an organization’s ability to manage risk, not its ethics. In many firms, an ethical corporate culture is measured in the following ways:

• Management and the board demonstrate their commitment to strong controls and core values through their communications and actions.

• Every employee is encouraged and required to have hands-on involvement in compli- ance, especially internal control systems.

• Every employee is encouraged and empowered to report policy exceptions.

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Chapter 7: Organizational Factors: The Role of Ethical Culture and Relationships 185

• Employees are expected to be in the communication loop through resolutions and corrective actions.

• Employees have the ability to report policy exceptions anonymously to any member of the organization, including the CEO, other members of management, and the board of directors. 8

The problem with these measurement standards is they evaluate merely risk and com- pliance. They are not a complete measure of the aspects of a company that make up its ethical culture. Yet many assume the four aforementioned items define an ethical corporate culture. Since values, norms, and artifacts are the three major components of culture, all of these elements are important in measuring an ethical culture.

In the past 50 years, scholars developed at least 164 distinct definitions of culture. More recent reviews indicate the number of definitions has been increasing. 9 While these definitions of culture vary greatly, they share three common elements: (1) “culture is shared among individuals belonging to a group or society,” (2) “culture is formed over a relatively long period of time,” and (3) “culture is relatively stable.” 10

Different models of culture, and consequently different instruments for measuring it, focus on various levels (national, organizational, individual) and aspects (values, prac- tices, observable artifacts and rituals, underlying implicit assumptions). Geert Hofstede researched IBM’s corporate culture and described it as an onion with many layers repre- senting different levels within the corporation. 11 Today, IBM describes its culture as one of trust. The company adopted IBM Business Conduct Guidelines that describe ethics and compliance issues in-depth and provide direction for employees dealing with observed misconduct. The company also created an online reporting system that allows employees worldwide to raise issues and report concerns. These measures serve to advance IBM’s goal of ensuring its relationships with stakeholders “are truly built on trust.” 12 Many in business define ethics as what society considers right or wrong and develop measures that man- age the risk of misconduct. Managing risk is not the same as understanding what makes up a firm’s culture. We know for certain that culture has a significant effect on the ethical decision-making process of those in business. Ethical audits, ethical compliance, and risk culture surveys may be good tools, but in and of themselves they are not useful in defin- ing organizational culture or in explaining what makes a particular organizational culture more ethical or unethical.

THE ROLE OF CORPORATE CULTURE IN ETHICAL DECISION MAKING

Corporate culture has been associated with a company’s success or failure. Some cultures are so strong that to outsiders they come to represent the character of the entire organization. For example, Levi Strauss, Ben & Jerry’s Homemade Ice Cream, and Hershey Foods are widely perceived as casual organizations with strong ethical cultures, whereas Lockheed Martin, Procter & Gamble, and Texas Instruments are seen as having more formal ethical cultures. The culture of an organization may be explicitly articulated or left unspoken.

Explicit statements of values, beliefs, and customs usually come from upper manage- ment. Memos, written codes of conduct, handbooks, manuals, forms, and ceremonies are formal expressions of an organization’s culture. Many of these statements can be found on company websites, like that of U.S. Bank ( Table 7–1 ).

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186 Part 3: The Decision-Making Process

Corporate culture is often expressed informally through statements, both direct and indirect, that communicate the wishes of management. In some companies, shared values are expressed by instituting informal dress codes, working late, and participating in extra- curricular activities. Corporate culture can be expressed through gestures, looks, labels, promotions, programs, and legends (or the lack thereof). Many catastrophic events stem from ethical deficiencies resulting in a lack of human value judgments and actions influ- enced by different corporate cultures. Conversely, Phil Knight, Nike co-founder and sports icon, created a strong and appealing organizational culture. Knight seeks out new employ- ees on one of their first few days on the job to “borrow $ 20 for lunch.” The unsuspecting new employees are astounded Knight spoke to them. Knight uses that tactic as a subtle way to let new employees know they are on his radar. Interestingly, Knight has never paid back any of the employees. Most employees know what is happening and have fun with the new employee initiation. This ritual becomes a source of camaraderie among employees. It has contributed to building trust and commitment, and differentiates Nike’s organizational culture from that of its competitors.

The “tone at the top” is a determining factor in the creation of a high-integrity orga- nization. When leaders are perceived as trustworthy, employee trust increases; leaders are seen as ethical and as honoring a higher level of duties. 13 In a survey of chief financial offi- cers ( Figure 7–1 ), CFOs were asked what traits they look for when training future leaders of their organizations. The most popular answer was integrity. It is interesting to note that integrity was listed as more important than business savvy or the ability to motivate others. In fact, integrity is included more than any other core value by organizations.

Ethical Frameworks and Evaluations of Corporate Culture Corporate culture has been conceptualized in many ways. For example, N. K. Sethia and Mary Ann Von Glinow proposed two basic dimensions to describe an organization’s cul- ture: (1) concern for people—the organization’s efforts to care for its employees’ well- being, and (2) concern for performance—the organization’s efforts to focus on output and employee productivity. 14 Figure 7–2 provides examples of companies that display elements of these four organizational cultures.

As Figure 7–2 shows, the four organizational cultures can be classified as apathetic, car- ing, exacting, and integrative. An apathetic culture shows minimal concern for either peo- ple or performance. In this culture, individuals focus on their own self-interest. Apathetic tendencies can occur in almost any organization. Steel companies and airlines were among the first to freeze employee pensions to keep their businesses operating. Sweeping changes

TABLE 7–1 U.S. Bank’s Principles for Integrity

• Being a role model for ethical behavior

• Promoting our culture of integrity

• Fostering open communication

• Recognizing behavior that exemplifies our ethical principles and values

• Responding to misconduct and reporting violations

Source: U.S. Bank, Do the Right Thing: Code of Ethics and Business Conduct , https://www.usbank.com/hr/docs/policies/coeHandbook.pdf (accessed March 8, 2011).

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Chapter 7: Organizational Factors: The Role of Ethical Culture and Relationships 187

35% 33%

28%

15%

12%

2%

30%

25%

20%

15%

10%

5%

0% Integrity Interpersonal/

communication skills

Ability to motivate others

Business savvy Other/Don’t Know

FIGURE 7–1 Traits to Look for in Future Leaders

Note: Survey based upon responses from more than 1,400 telephone interviews with CFOs from U.S. companies with 20 or more employees.

Source: “Robert Half Management Resources Survey: CFOs Cite Integrity as Most Important Trait for Future Leaders,” PR Newswire, September 30, http://

www.prnewswire.com/news-releases/robert-half-management-resources-survey-cfos-cite-integrity-as-most-important-trait-for-future-leaders-104072008.

html (accessed April 26, 2013).

Ben & Jerry’s—A Caring Culture Ben & Jerry’s embraces community causes, treats its employees fairly, and expends numerous resources to enhance the well-being of its customers.

Starbucks—An Integrative Culture Starbucks always looks for ways to expand and improve performance. It also exhibits a high concern for people through community causes, sustainability, and employee health care.

Countrywide Financial—An Apathetic Culture Countrywide seemed to show little concern for employees and customers. The company’s culture appeared to encourage unethical conduct in exchange for profits.

United Parcel Systems—An Exacting Culture Employees are held to high standards to ensure maximum performance, consistency of delivery, and efficiency.

FIGURE 7–2 Company Examples of the Four Organizational Cultures

in corporate America affect employee compensation and retirement plans. Simple gestures of appreciation, such as anniversary watches, rings, dinners, or birthday cards for family members, are being dropped. Many companies view long-serving employees as dead wood and do not take into account past performance. This attitude demonstrates the companies’ apathetic culture.

A caring culture exhibits high concern for people but minimal concern for perfor- mance issues. From an ethical standpoint, the caring culture seems appealing. However,

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188 Part 3: The Decision-Making Process

it is difficult to find nationally recognizable companies that maintain little or no concern for performance. In contrast, an exacting culture shows little concern for people but a high concern for performance; it focuses on the interests of the organization. United Parcel Ser- vice (UPS) has always been exacting. With over 8.8 million daily customers in over 220 countries, UPS knows exactly how many employees it needs to move 16.3 million packages and documents per day worldwide. 15 To combat the uncaring, unsympathetic attitude of many of its managers, UPS developed a community service program for employees. Global Volunteer Week gives UPS employees around the world the opportunity to help paint schools, renovate shelters, and assist with many other needed projects within their com- munities. An early innovator, UPS tested ways to use alternate fuels in the 1930s. Now the company operates one of the largest private alternative fleets in the transportation industry with over 2,500 compressed natural gas, liquefied natural gas, hybrid-electric, electric, and propane-powered vehicles. 16

An integrative culture combines a high concern for people and performance. An organization becomes integrative when superiors recognize employees are more than interchangeable parts—employees have an ineffable quality that helps the firm meet its performance criteria. Many companies, such as the Boston Consulting Group (BCG), have such a culture. The Boston Consulting Group rated second among Fortune ’s “Best Com- panies to Work for. ” BCG is a financially successful global consulting firm with a strong reputation that specializes in business strategy. The company values employees and cre- ates significant mentorship opportunities and extensive training that allow employees to develop rapidly. It also has what it calls “red flag reports” to signal when employees are working too many long weeks. New consultants to the company can receive $ 10,000 for volunteering at a nonprofit organization. 17

Companies can classify their corporate culture and identify its specific values, norms, beliefs, and customs by conducting a cultural audit. A cultural audit is an assessment of an organization’s values. The audit is usually conducted by outside consultants but may be performed internally as well. Communication about ethical expectations and support from top management help to identify a corporate culture that encourages ethical conduct or leads to ethical conflict. 18

Ethics as a Component of Corporate Culture As indicated in the framework presented in Chapter 5 , ethical culture—the ethical com- ponent of corporate culture—is a significant factor in ethical decision making. If a firm’s culture encourages or rewards unethical behavior, the employees may act unethically. If the culture dictates hiring people with specific, similar values and if those values are perceived as unethical by society, society will view the organization and its members as unethical. Such a pattern often occurs in certain areas of marketing. Salespeople some- times use aggressive selling tactics to get customers to buy things based on emotional response to appeals. If a company’s primary objective is to make as much profit as pos- sible through whatever means, its culture may foster behavior that conflicts with stake- holders’ ethical values. After the Deepwater Horizon disaster, the culture of BP, with its emphasis on financial performance, became the focus of criticism. BP has a history of accidents, explosions, and other events over the past six years. The year after the disas- ter, BP was accused of criminal negligence regarding previous oil spills in Alaska. These events lead to questions about how BP’s culture views the prevention of accidents and environmental damage. 19

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Chapter 7: Organizational Factors: The Role of Ethical Culture and Relationships 189

On the other hand, if an organization values ethical behaviors, it rewards them. It is important to handle recognition and awards for appropriate behavior in a consistent and balanced manner. All employees should be eligible for recognition. All performance at the threshold level should be acknowledged, and praise or rewards given as close to the per- formance as possible. 20 FedEx’s Bravo Zulu award is one example of company recognition. The award is given to employees who demonstrate exceptional performance above and beyond job expectations. Rewards for recipients can include cash bonuses, theater tick- ets, gift certificates, and more. By rewarding employees who go above their normal duties, FedEx provides motivation for other workers to strive for excellent work conduct. 21

Management’s sense of an organization’s culture may not be in line with the values and ethical beliefs that actually guide a firm’s employees. Table 7–2 provides an example of a corporate culture ethics audit. Companies interested in assessing their culture can use this tool and benchmark against previous years’ results to measure organizational improve- ments. Ethical issues may arise because of conflicts between the cultural values perceived by management and those actually at work in the organization. For example, managers may believe their firm’s organizational culture encourages respect for peers and subordi- nates. On the basis of the rewards or sanctions associated with various behaviors, the firm’s employees may believe the company encourages competition among organizational mem- bers. A competitive orientation may result in a less ethical corporate culture. This was the case at Enron when the employees in the lowest 20 percent for performance were fired.

On the other hand, employees appreciate working in an environment designed to enhance workplace experiences through goals that encompass more than just maximiz- ing profits. 22 Therefore, it is important for top managers to determine their organization’s culture and monitor its values, traditions, and beliefs to ensure they represent the desired culture. It is also important to note that if corporate communication to improve corporate social responsibility (CSR) and ethics is reactive or focused on avoiding negative conse- quences, it may not make a significant contribution to creating an ethical culture. Reactive communication without commitment therefore fails to improve business ethics. 23 On the other hand, by placing high emphasis upon ethics and CSR, organizations are able to foster positive relationships with employees and enhance job satisfaction while gaining a good business image. Along with implementing CSR within the organization, the alternative benefit for some organizations is an ability to charge a premium price for their product. 24

The rewards and punishments imposed by an organization must reflect the culture those at the top wish to create. Two business ethics experts observed, “Employees will value and use as guidelines those activities for which they will be rewarded. When a behavior that is rewarded comes into conflict with an unstated and unmonitored ethical value, usu- ally the rewarded behavior wins out.” 25 For example, if the most important and rewarded value is sales performance, then activities to achieve performance will be given top priority.

Compliance versus Values-Based Ethical Cultures During the latter part of the twentieth century a distinction evolved between types of corporate cultures. The traditional ethics-based culture focused on compliance. The accounting professional model of rules created a compliance culture organized around risk. Compliance-based cultures use a legalistic approach to ethics. They use laws and regula- tory rules to create codes and requirements. Codes of conduct are established with compli- ance as their focus, with rules and policies enforced by management. Instead of revolving around an ethical culture, the company revolves around risk management. The compliance

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190 Part 3: The Decision-Making Process

TABLE 7–2 Corporate Culture Ethics Audit

Answer Yes or No to each of the following questions *

Yes No Has the founder or top management of the company left an ethical legacy to the organization?

Yes No Does the company have methods for detecting ethical concerns both within the organization and outside it?

Yes No Is there a shared value system and understanding of what constitutes appropriate behavior within the organization?

Yes No Are stories and myths embedded in daily conversations about appropriate ethical conduct?

Yes No Are codes of ethics or ethical policies communicated to employees?

Yes No Are there ethical rules or procedures in training manuals or other company publications?

Yes No Are penalties for ethical transgressions publicly discussed?

Yes No Are there rewards for good ethical decisions even if they don’t always result in a profit?

Yes No Does the company recognize the importance of creating a culture concerned about people and their investment in the business?

Yes No Does the company have a value system of fair play and honesty toward customers?

Yes No Do employees treat each other with respect, honesty, and fairness?

Yes No Do employees spend their time working in a cohesive way on what is valued by the organization?

Yes No Are there ethically based beliefs and values about how to succeed in the company?

Yes No Are there heroes or stars in the organization who communicate a common understanding about which positive ethical values are important?

Yes No Are there day-to-day rituals or behavior patterns that create direction and prevent confusion or mixed signals on ethics matters?

Yes No Is the firm more focused on the long run than on the short run?

Yes No Are employees satisfied or happy, and is employee turnover low?

Yes No Do the dress, speech, and physical aspects of the work setting contribute to a sense of consistency about what is right?

Yes No Are emotional outbursts about role conflict and ambiguity rare?

Yes No Has discrimination and/or sexual harassment been eliminated?

Yes No Is there an absence of open hostility and severe conflict?

Yes No Do people act on the job in a way consistent with what they say is ethical?

Yes No Is the firm more externally focused on customers, the environment, and the welfare of society than on its own profits?

Yes No Is there open communication between superiors and subordinates about ethical dilemmas?

Yes No Have employees ever received advice on how to improve ethical behavior or been disciplined for committing unethical acts?

* Add up the number of “Yes” answers. The greater the number of “Yes” answers, the less likely ethical conflict is in your organization.

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Chapter 7: Organizational Factors: The Role of Ethical Culture and Relationships 191

approach is good in the short term because it helps management, stakeholders, and legal agencies ensure laws, rules, and the intent of compliance are fulfilled. A problem with the compliance approach, however, is its lack of long-term focus on values and integrity. In addition, it does not teach employees to navigate ethical gray areas.

There has been a shift from an approach focused on compliance to a values-based approach. A values-based ethics culture approach to ethical corporate cultures relies upon an explicit mission statement that defines the core values of the firm and how customers and employees should be treated. The board of directors as well as upper management might add to the general value statements by formulating specific value statements for its strategic business units (SBU), which can be organized by product, geography, or func- tion within the firm’s management structure. Certain areas may have rules associated with stated values, enabling employees to understand the relationship between the two. The focus of this type of corporate culture is on values such as trust, transparency, and respect to help employees identify and deal with ethical issues. It is important when using a values- based approach to explain why rules exist, what the penalties are if rules are violated, and how employees can help improve the ethics of the company. The crux of any ethical culture is top-down integrity with shared values, norms that provide guides for behavior, and vis- ible artifacts such as codes of ethics that provide a standard of conduct. In developing a values-based ethical culture, a compliance element is also necessary because every organi- zation has employees who will try to take advantage if the risk of being caught is low.

Ikea represents a values-based culture, with a mission “to create a better everyday life for the many.” The company maintains a strong commitment to best business practices, ethical behavior, and environmental initiatives. Not only does Ikea sell eco-friendly prod- ucts and use alternative energy to power its stores, it also supports numerous causes such as Save the Children and American Forests. 26

Differential Association Differential association is the idea that people learn ethical or unethical behavior while interacting with others who are part of their role-sets or belong to other intimate personal groups. 27 The learning process is more likely to result in unethical behavior if the individ- ual associates primarily with persons who behave unethically. Associating with others who are unethical, combined with the opportunity to act unethically, is a major influence on ethical decision making, as described in the decision-making framework in Chapter 5 . 28

Consider a company in which salespeople incur travel expenses each week. When new salespeople are hired, experienced salespeople encourage the new hires to pad their expense accounts because some expenses cannot be charged to the company. The new employee is shown how to pad the expense account and is told that failure to engage in this conduct makes others’ reports look too high. In other words, the new employee is pres- sured to engage in misconduct.

A variety of studies support the notion that differential association influences ethical decision making and superiors in particular have a strong influence on the ethics of their subordinates. The actions of Mark Hernandez, who worked at NASA’s Michoud Assem- bly Facility applying insulating foam to the space shuttles’ external fuel tanks, provide an example of how coworker influence can produce tragic results. Within a few weeks on the job, coworkers taught Hernandez to repair scratches in the insulation without reporting the repairs. Supervisors encouraged the workers not to complete the required paperwork on the repairs so they could meet the space shuttle program’s tight production schedules.

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192 Part 3: The Decision-Making Process

After the shuttle Columbia broke up on reentry, killing all seven astronauts, investigators found that a piece of foam falling off a fuel tank during liftoff had irreparably damaged the shuttle. 29

Several research studies found that employ- ees, especially young managers, tend to go along with their superiors’ moral judgments to dem- onstrate loyalty. In one study, an experiment was conducted to determine how a hypothetical board of directors would respond to the market- ing of one of its company’s most profitable drugs that resulted in 14 to 22 unnecessary deaths a year. When the imaginary board learned that a competitor’s drug was coming into the market with no side effects, more than 80 percent sup- ported continuing to market the drug and taking legal and political action to prevent a ban. When asked their personal view on this situation, 97  percent believed that continuing to market the drug was irresponsible. 30 We have made it clear that how people typically make ethical deci- sions is not necessarily the way they should make these decisions. We believe you will improve your own ethical decision making once you understand potential influences of your interac- tions with others in your intimate work groups.

Whistle-Blowing Interpersonal conflict occurs when employees think they know the right course of action in a situation, yet their work group or company pro- motes or requires a different, unethical decision. In such cases, employees may choose to follow their own values and refuse to participate in unethical or illegal conduct. If they conclude that they cannot discuss what they are doing or what should be done with coworkers or imme- diate supervisors, and if there is no method of protection for anonymous reporting, these

employees may go outside the organization to publicize and correct the unethical situation. A number of laws exist to protect whistle-blowers.

Whistle-blowing means exposing an employer’s wrongdoing to outsiders such as the media or government regulatory agencies. The term whistle-blowing is sometimes used to refer to internal reporting of misconduct to management, especially through anonymous reporting mechanisms, often called hotlines. Legal protection for whistle-blowers exists to encourage reporting of misconduct. Whistle-blower laws have provisions against retaliation and are enforced by a number of government agencies. Under the Sarbanes–Oxley Act, the

Is Government Support for External Whistle-Blowing Effective?

A number of laws have been enacted to encourage members of organizations to report misconduct. While most firms support internal reporting of misconduct through anonymous hotlines, many organizations are concerned about employees going public or reporting misconduct to the government. Whistle-blowers are protected through the Sarbanes–Oxley Act and a number of other government agencies that deal with fraud, stock trading, and corrupt practices. In 2010 the Dodd–Frank Act gave additional incentives for whistle-blowers. Whistle-blowers are encouraged to turn themselves in if they were part of a team or group that engaged in misconduct, and doing so could result in monetary rewards. Despite these incentives, whistle-blowers in general do not get good treatment and often have trouble finding employment after they report misconduct. It has also been found that companies with good internal reporting systems have fewer whistle-blowers that report externally in an attempt to obtain rewards. This could be because employees feel that their concerns will be taken seriously and misconduct will be halted before it becomes a major problem.

1. Government support through financial incentives for reporting misconduct in organizations is effective and benefits society.

2. Government support of whistle-blowing should be redirected toward stronger incentives for internal reporting of misconduct, not external whistle- blowing that could be harmful to the individual.

DEBATE ISSUE TAKE A STAND

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Chapter 7: Organizational Factors: The Role of Ethical Culture and Relationships 193

U.S. Department of Labor (DOL) directly protects whistle-blowers who report violations of the law and refuse to engage in any action made unlawful. The Corporate and Crimi- nal Fraud Accountability (CCFA) Act protects employees of publicly traded firms from retaliation if they report violations of any rule or regulation of the Securities and Exchange Commission, or any provision of federal law relating to fraud against shareholders. It also requires attorneys to become internal whistle-blowers as well.

The 2010 passage of the Dodd–