Introduction to Business Ethics Chapter III

Chapter Objectives:

• Present the definition of ethics in general and business ethics in particular.

• Recognize the need for a code of ethics that is upheld especially by setting the right

“tone at the top.”

• Become familiar with the SEC rules and regulations relating to ethics.

• Provide an overview of listing standards and suggestions relating to ethics.

• Understand the board’s role in setting the company’s ethical codes.

• Recognize the benefits of and need for an ethical workplace.

• Identify incentive programs and their roles in promoting an ethical workplace.

• Illustrate that actions speak louder than words in promoting an ethical workplace.

• Discuss the integration of business ethics into the business curriculum.

• Provide an example of proficient implementation of an ethical code by examining the

Defense Industry Initiatives on Business Ethics and Conduct.

Key Terms Business ethics Code of Ethics Committee of Sponsoring Organizations Of the Treadway Committee (COSO) Conference boardDefense Industry Initiatives on Business Ethics and Conduct Ethical BehaviorEthical Incentives Ethical Sensitivity

Ethical Theories

There are several broadly accepted ethical theories.

- Consequentialist Theory

- Nonconsequentialist Theory

- The Individualist Dimension of Ethical Decision

- Collectivist Theory

- Metaethics

- Normative Ethics

- Business Ethics

Ethics In Workplace

There is increased interaction between the board of directors, audit committees, internal auditors, external auditors, executives, and employees in general regarding ethical conduct in the workplace.

IS IT A RESULT OF SOX IMPLEMENTATION?

SOX is reported to have a positive impact on business codes of ethics. But OTHER elements are required to promote competency and integrity among all participants.

Findings of Deloitte&Touche 2007 Survey on Ethics and

Workplace Key factors in promoting ethical

workplace

management behav-ior direct supervisors behaviourpositive rein-forcementcompensation (bonus +salary)behaviour of peers

Findings of Deloitte&Touche 2007 Survey on Ethics and

Workplace Reasons why people make unethical

decisions

lack of personal in-tegrityjob dissatisfactionfinancial rewardspressure to meet goalsignorance of code of conduct

Findings of Deloitte&Touche 2007 Survey on Ethics and

Workplace Aspects that cause incentives conflicts

high levels of stresslong hoursfast-paced envi-ronmentinflexible schedulehighly competitive environment

Findings of Deloitte&Touche 2007 Survey on Ethics and

Workplace

results pertaining to questionablebehavior in the workplace environment

stealing petty cash cheating on expense reports

taking credit for another person’s accomplishment

lying on time sheets about hours worked

other results

Findings of Deloitte&Touche 2007 Survey on Ethics and

Workplace Majority believes that following actions

are acceptable

use company technology for per-sonal usetake a sick day when not actually ill date a subordinateask a collegue for personal favour

THUS: All organizations, regardless of their mission (e.g., profit oriented,

nonprofit) and size (large vs. small), should establish an

“organizational ethical culture.” The phrase “organizational

ethical culture” consists of three words:

(1) organization, which is defined as a group of individuals or

entities bound to achieve a shared goal;

(2) ethics, which is honorable behavior conforming to the norm of

the group;

(3) culture, which is a pattern of shared beliefs adopted by the

group in dealing with its internal and external affairs.

Business Ethics

Four different levels of business ethics have been identified based on what type of business and how their actions are evaluated. 1. The society level, which defines ethical behavior and

assesses the effect of business on society.2. The industry level, which suggests that different industries have

their own set of ethical standards (e.g., chemical industry vs. pharmaceutical industry)

3. The company level, under which different companies have their own set of ethical standards

4. The individual manager level, at which each manager and other corporate participants are responsible for their own ethical behavior

CONSEQUENTLY, one feasible way to judge ethical behavior is to focus on determinants of business ethics and behavior such as corporate culture, incentives, opportunities, and choices.

Corporate Culture Companies should promote a spirit of integrity that goes beyond compliance.

Incentives Individuals within the company tend to act according to incentives provided to them in terms of rewards and the performance evaluation process.

Opportunities Effective corporate governance, internal controls, and enterprise risk management can reduce the opportunity for unethical conduct.

Choices Individuals, in general, are given the freedom to make choices and usually choose those that will maximize their well-being.

Business Ethics (Cont.)

Triangle of Business Ethics

The triangle of business ethics consisting of (1) ethics sensitivity, (2) ethics incentives, and (3) ethical behavior.

Ethics sensitivity: Moral principles, workplace environment, gamesmanship, loyalty, peer pressure, and job security that influence one’s ethical decisions. Ethics incentives: Rewards, punishments, and requirements for ethical behavior (e.g., tone at the top, AICPA code of professional ethics).

Ethics behavior: Doing “the right thing” rises above a rules-based mindset that asks, “is this legal,” and adopts a more principles-based approach that asks, “is this right?”

Triangle of Business Ethics (Cont.)

SEC Rules on Corporate Code of Ethics

The SEC rule describes the term “code of ethics” as written standards designed to deter wrongdoing and to promote:(1) Full, fair, accurate, timely, and transparent disclosure in reports and documents(2) Avoidance of conflicts of interest, including disclosure of any material transaction or relationship (3) Honest and ethical conduct throughout the company(4) Accountability for compliance with the established code of ethics(5) Compliance with applicable laws, rules, regulations, and professional standards(6) The prompt internal reporting of noncompliance and any violations of the established code of ethics to an appropriate person or persons designated in the code.

SEC Rules on Corporate Code of Ethics (Cont.)

The SEC extended code of ethics requirements to both the company’s principal financial officers (SOX’s Section 406) and principal executive officers (SOX’s Section 407). The SEC rules in implementing Section 406 of SOX require public companies to disclose whether they have adopted a code of ethics for their principal officers, including principal executive officers, principal financial officers, principal accounting officers, controller, or other personnel performing similar functions in the annual report filed with the SEC. If the company has not adopted such a code of ethics, it must disclose the reason for not doing so.

Listing Standards

The listing standards of the NYSE further expanded on the SEC rules by requiring listed companies to (1) adopt and disclose a code of business conduct and ethics for

directors, officers, and employees; (2) promptly disclose any waivers of the adopted code for directors

and executive officers.

Example: The NYSE listing standards recommend that each company determine its own business conduct and ethics policies, but provide an extensive list of matters that should be addressed by the company’s code. NASD ethics rules for Nasdaq-listed companies are similar to those of the NYSE and further require the company’s adopted code to provide for an enforcement mechanism and any waivers of the code for directors or executive officers to be approvedby the board and disclosed not later than the next periodic report.

Ethics Teaching in Business School

The emerging corporate governance reforms have had a positive impact on academic programs.

The goal of corporate governance and business ethics education is to teach students their responsibilities and accountability to their profession and society. Almost all states require CPA candidates to pass an ethics exam before licensing and report the ethics component in their continuing education requirements. Almost all states require a minimum amount of ethics education for their practicing CPAs.

Ethics in Institutions of Higher Education

Academic integrity and ethical conduct by students and faculty are important to the sustainable well-being and reputation of institutions of higher education. This academicintegrity can be achieved when:(1) there is an effective and fairly enforceable academic honor code, (2) faculty are willing to take proper action against suspected cheaters, (3) adequate research is conducted to identify factors that affect academic integrity, including fundamental ethical values, (4) ethics are integrated into the business curriculum, andpedagogies are developed to teach and encourage adherence to ethical values and conducts.

Personal Ethics In June 2005, the International Ethics Standards Board for Accountants (IESBA), part of the International Federation of Accountants (IFAC), issued its revised Code of Ethics for use by professional accountants worldwide.

The key principles of the IESBA’s code of ethics are:(1) integrity, (2) objectivity, (3) professional competence and due care,(4) confidentiality, (5) professional behavior.

Reporting Business Ethics and Conduct

Section 406 of SOX requires public companies to disclose in their annual financial statements the establishment (or lack of) a corporate code of conduct.

Nevertheless, public companies may choose to report their business ethics and conduct as a separate report to their shareholders or as part of their regular filings with the SEC.

Hint: Look for survey conducted by the Ethics and ComplianceOfficer Association (ECOA) and salary.com (2006)

Financial Reporting Integrity

Framework for Reporting with Integrity

Conclusion • Ethics are broadly described in the literature as moral principles about right and wrong, honorable behavior reflecting values, or standards of conduct. Honesty, openness, responsiveness, accountability, due diligence, and fairness are the core ethical principles.• Business ethics are a specialized study of moral right and wrong. • An appropriate code of ethics that sets the right tone at the top of promoting ethical and professional conduct and establishing the moral structure for the entire organization is the backbone of effective corporate governance.• SEC rules require public companies to report significant amendments or any waiver affecting specified officers pursuant to the filing of their first annual report on their code of ethics.

• Corporate culture and compliance rules should provide incentives and opportunities for the majority of ethical individuals to maintain their honesty and integrity, and provide measures for the minority of unethical individuals to be monitored, punished, and corrected for their unethical conduct.• Attributes of an ethical corporate culture or an integrity-based culture are sense of employee responsibility, freedom to raise concerns, managers modeling ethical behavior and expressing the importance of integrity. • The company’s directors and executives should demonstrate, through their actions as well as their policies, a firm commitment to ethical behavior throughout the company and a culture of trust within the company. Although a “right tone at the top” is very important in promoting an ethical culture, actions often speak louder than words.

Conclusion