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©John Dienhart 2005
Thank you to the Banta Family Thank you to the Banta Family and The Banta Center at the and The Banta Center at the
University of Redlands for the University of Redlands for the opportunity to speak with you opportunity to speak with you
about business ethics.about business ethics.
Thanks to all the participants who Thanks to all the participants who added valuable information to our added valuable information to our
discussion and to all those who discussion and to all those who silently followed along.silently followed along.
----John Dienhart, Seattle UniversityJohn Dienhart, Seattle University
©John Dienhart 2005
The Following Slides “Corporate The Following Slides “Corporate Responses to Sarbanes-Oxley” Responses to Sarbanes-Oxley”
are copyrighted by John are copyrighted by John Dienhart and Tom Tyler (specific Dienhart and Tom Tyler (specific
slides). slides).
They may used without They may used without permission for non-profit permission for non-profit educational purposes. educational purposes.
Permission is required for all Permission is required for all other purposes.other purposes.
©John Dienhart 2005
Corporate Responses to Corporate Responses to Sarbanes-OxleySarbanes-Oxley
Ethics, Compliance, and Business Ethics, Compliance, and Business ExcellenceExcellence
Presented to the Presented to the
Banta Center for Business Banta Center for Business Ethics and SocietyEthics and SocietyUniversity of RedlandsUniversity of Redlands
Copyright ©John W. Dienhart 2005Copyright ©John W. Dienhart 2005Seattle University dienharj@seattleu.eduSeattle University dienharj@seattleu.edu
©John Dienhart 2005
AgendaAgenda How Did We Get to SOX and How Did We Get to SOX and
Other Legislation?Other Legislation? Success Depends On Knowing Success Depends On Knowing
How We Act in GroupsHow We Act in Groups Compliance or Ethics?Compliance or Ethics? Ethical Culture – The DataEthical Culture – The Data The Quest for Business The Quest for Business
ExcellenceExcellence
©John Dienhart 2005
Market Failures: Zebras Market Failures: Zebras and Horsesand Horses
Japan
Korea
&
©John Dienhart 2005
Efficient Efficient MarketsMarkets
Four Condition of Efficient MarketsFour Condition of Efficient Markets InformationInformation Property RightsProperty Rights Risk-Reward RelationshipsRisk-Reward Relationships CompetitionCompetition
Fundamental Assumption of Fundamental Assumption of CompetitionCompetition Players are subject to the marketPlayers are subject to the market Players do not control the marketPlayers do not control the market
©John Dienhart 2005
Models for Models for Financial ControlFinancial Control
Committee of Sponsoring Committee of Sponsoring Organizations of the Treadway Organizations of the Treadway Commission (COSO)Commission (COSO)
Cadbury Commission (England)Cadbury Commission (England)
Canadian Criteria of Control Canadian Criteria of Control Committee (CoCo)Committee (CoCo)
Turnbull Report (England)Turnbull Report (England)
©John Dienhart 2005
A New Role for ControlA New Role for Control
““Applied with care and visionApplied with care and vision, the , the models can directly support the models can directly support the
success of the organization.”success of the organization.”
““Applied mechanicallyApplied mechanically they may they may support control, but not support control, but not
necessarily success.”necessarily success.”
Galloway, 1994: Internal Auditor (edited)Galloway, 1994: Internal Auditor (edited)
©John Dienhart 2005
What’s New for Control?What’s New for Control?
1.1. A broad definition of A broad definition of control control
2.2. Learning and reflection Learning and reflection
3.3. Values essential to the Values essential to the control environmentcontrol environment
©John Dienhart 2005
Market & Control Market & Control FailuresFailures
Zebras, Horses, and ColtsZebras, Horses, and Colts Information failures thatInformation failures that
Violated property rightsViolated property rightsMisrepresented risk-Misrepresented risk-reward relationshipsreward relationships
Violated standards of Violated standards of competitioncompetition
©John Dienhart 2005
U.S. – Voluntary No LongerU.S. – Voluntary No Longer SOXSOX
Broad definition of controlBroad definition of control Ethical rules and standardsEthical rules and standards Professional EthicsProfessional Ethics Code of Ethics for Financial ManagersCode of Ethics for Financial Managers
Federal Sentencing Guidelines Federal Sentencing Guidelines for Organizations for Organizations Broad definition of controlBroad definition of control Ethical CultureEthical Culture Learning and ReflectionLearning and Reflection
©John Dienhart 2005
Will SOX and Will SOX and FSGO Succeed?FSGO Succeed?
Managers Have Less and Managers Have Less and More Power Than they More Power Than they
RelizeRelize
©John Dienhart 2005
Individuals in Individuals in GroupsGroups
1.1. The Longest LineThe Longest Line
2.2. High VoltageHigh Voltage
3.3. Rolling Into RolesRolling Into Roles
©John Dienhart 2005
Shocking Others, Shocking Others, OurselvesOurselves
100% sent electric shocks up through 100% sent electric shocks up through 135 volts135 volts
80% administered shocks up through 80% administered shocks up through two hundred and eighty-five voltstwo hundred and eighty-five volts
Slightly more than 60% went up to 450 Slightly more than 60% went up to 450 voltsvolts
Austria, Italy, Jordan, Germany, Austria, Italy, Jordan, Germany, Holland, South Africa, Spain, United Holland, South Africa, Spain, United Kingdom, USA (Australia)Kingdom, USA (Australia)
©John Dienhart 2005
Decision-Makers Who
Attend to NarrowPersonal Interests
Decision-Makers Who
Rely on Principles
Decision-Makers Who Rely on Rules
Ethical Decision Making
©John Dienhart 2005
Organizations: 3 in 1Organizations: 3 in 1
The judgments of othersThe judgments of others
Who have authorityWho have authority
To define rolesTo define roles
©John Dienhart 2005
Managerial Power: More Managerial Power: More and Less Than We Might and Less Than We Might
ThinkThink The three experiments show that The three experiments show that
managers exert a great deal of managers exert a great deal of power over a significant number power over a significant number of direct reportsof direct reports
The three experiments show how The three experiments show how managerial power can drop off managerial power can drop off sharply with reports of reports. sharply with reports of reports.
©John Dienhart 2005
Supplying the Supplying the Demand for Demand for
ReliableReliableInformation and Information and
ControlControlCompliance or Compliance or
Ethics?Ethics?
©John Dienhart 2005
The Case for The Case for ComplianceCompliance
MissionValues General CodeSpecific Codes
Employees are mostly governed by specific rulesEmployees are mostly governed by specific rules
Lines of Text
©John Dienhart 2005
The Case for The Case for EthicsEthics
MissionValues General CodeSpecific Codes
Employees Are More Easily Aware of Mission & ValuesEmployees Are More Easily Aware of Mission & Values
Awareness
©John Dienhart 2005
Ethical CulturesEthical Cultures
The Special Role of The Special Role of
Procedural JusticeProcedural Justice
©John Dienhart 2005
What Makes an Ethical What Makes an Ethical Culture?Culture?
Ethical LeadershipEthical Leadership FairnessFairness Ethical issues can be discussedEthical issues can be discussed Bring bad newsBring bad news Obedience to AuthorityObedience to Authority Ethical is part of promotion, Ethical is part of promotion,
assignments, hiringassignments, hiring Reward for ethical behaviorReward for ethical behavior Reporting mechanismsReporting mechanisms Self-InterestSelf-Interest Punish unethical behaviorPunish unethical behavior Follow through on violationsFollow through on violations
NO
©John Dienhart 2005
Compliance v. ValuesCompliance v. Values
In a six company study a values In a six company study a values approach had better behavioral approach had better behavioral outcomes than a compliance approach outcomes than a compliance approach (Trevino, et. al. 1999)(Trevino, et. al. 1999)
Data: Companies with value based Data: Companies with value based culturescultures Lower rates of illegal/unethical behaviorLower rates of illegal/unethical behavior Employees more likely to seek guidance Employees more likely to seek guidance More willing to report violationsMore willing to report violations More willing to deliver bad news to managementMore willing to deliver bad news to management
©John Dienhart 2005
Why Follow Why Follow Rules?Rules?
Procedural JusticeProcedural Justice I trust the organization has fari I trust the organization has fari
processes and procedures to processes and procedures to determin important issuesdetermin important issues
Distributive JusticeDistributive Justice The outcomes of rules seem fairThe outcomes of rules seem fair
Outcome favorabilityOutcome favorability The rules are good for me: I will The rules are good for me: I will
punished if I don’t follow them, punished if I don’t follow them, rewarded if I do, or the rules hage rewarded if I do, or the rules hage other good outcomes for me, such as other good outcomes for me, such as creating a safer workplace.creating a safer workplace.
©John Dienhart 2005
Procedural Justice Drives Procedural Justice Drives ComplianceCompliance
Multi-company studyMulti-company study
0
0.05
0.1
0.15
0.2
0.25
0.3
Legitimacy,values
Comply Defer
Procedural justice Distributive justiceOutcome favorability
Beyond Compliance
Compliance Behavior
©Tom Tyler ©Tom Tyler 20032003
©John Dienhart 2005
Procedural Justice Drives Procedural Justice Drives Compliance Compliance
Single Corporation StudySingle Corporation Study
0.24 0.23
0.0200
0.03
0
0.05
0.1
0.15
0.2
0.25
0.3
Legitimacy, values Rule following behavior
Procedural fairness Distributive fairness
Outcome favorability
Entries are beta weights for regression equations
©Tom Tyler ©Tom Tyler 20032003
©John Dienhart 2005
Procedural Justice Drives Procedural Justice Drives Compliance Compliance Supervisor Rating in Supervisor Rating in
Single CorporationSingle Corporation
0.25
0.060.04
0
0.05
0.1
0.15
0.2
0.25
0.3
Procedural fairness Distributive fairness
Outcome favorability©Tom Tyler ©Tom Tyler 20032003
©John Dienhart 2005
1% carbon lays down the framework for 99% iron
Ethics and Ethics and ComplianceCompliance
©John Dienhart 2005
Establishing a Establishing a ProgramProgram
What We Name it MattersWhat We Name it Matters
©John Dienhart 2005
Ethics Ethics ProgramsPrograms
Compliance Compliance ProgramsPrograms
Business Business Conduct Conduct ProgramsPrograms
Business Business
Practice Practice
ExcellenceExcellence
Integrity Integrity Programs
ProgramsEthics and Ethics and
Business Business
Conduct Conduct
ProgramsPrograms
©John Dienhart 2005
The Center for The Center for Excellence in Excellence in
Business Business ConductConductTMTM
©John Dienhart 2005
The Center for ExcellenceThe Center for ExcellenceTMTM
Work with the board, senior Work with the board, senior leaders, managers, and employees leaders, managers, and employees to develop and promoteto develop and promote
1.1. MissionMission
2.2. ValuesValues
3.3. General code of conductGeneral code of conduct
4.4. Specialized codes for different areasSpecialized codes for different areas
5.5. An ethical, procedurally fair An ethical, procedurally fair cultureculture that supports 1-4that supports 1-4
©John Dienhart 2005
Special topics for the Special topics for the CenterCenter
1.1. M&AM&A
2.2. Global and Domestic Global and Domestic Cultural IssuesCultural Issues
3.3. Board TrainingBoard Training
4.4. Strategy and BrandStrategy and Brand
©John Dienhart 2005
Could a Center for Excellence Could a Center for Excellence in Business Conduct have in Business Conduct have
helped in your organization helped in your organization with a specific issue? with a specific issue?
How can you build coalitions How can you build coalitions to get that information to a to get that information to a
higher level?higher level?
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