The Institutionalization of Business Ethics

C H A P T E R 4

Institutionalization in Business Ethics

• Three dimensions to effective business ethics compliance– Voluntary practices: Include the beliefs, values,

and voluntary contractual obligations • All businesses have some voluntary commitments

(e.g., philanthropy)– Mandated boundaries: Externally imposed

boundaries of conduct (e.g., laws and regulations)– Core practices: Documented best practices, often

encouraged by legal and regulatory forces

Legal Compliance

• Laws and regulations established by governments – Minimum standards for

responsible behavior • Laws regulating business

passed because stakeholders believe business cannot be trusted to do what is right

Source: Hisham Ibrahim

Elements of an Ethical Culture

Types of Laws

• Civil law defines the rights and duties of individuals and organizations

• Criminal law prohibits specific actions and imposes punishment for breaking the law

• The difference is enforcement– Criminal laws enforced by the state or nation– Civil laws enforced by individuals

(generally in court)

Only 1 in 4 Companies Has a Well-Implemented Ethics Program

Source: “2007 National Business Ethics Survey,” Ethics Resource Center, p. 20

Most Laws Affecting Business Fall into 5 Categories

• Regulating competition • Protecting consumers• Protecting equity and safety • Protecting the environment • Those that encourage ethical

conduct

Source: Ryan McVay

Laws Regulating Competition

• Laws passed to prevent the establishment of monopolies, inequitable pricing practices, and other practices that reduce or restrict competition among businesses – Sometimes called procompetitive legislation:

Enacted to encourage competition and prevent activities that restrain trade

Laws Protecting Consumers

• Laws protecting consumers require businesses to provide accurate information about products and services and to follow safety standards

• Groups with specific vulnerabilities have higher levels of legal protection

• The FTC’s Bureau of Consumer Protection protects consumers against unfair, deceptive, or fraudulent practices

Laws Promoting Equity and Safety• Laws promoting equity in the workplace protect the

rights of minorities, women, older persons, and persons with disabilities– Title VII of the Civil Rights Act – Equal Employment Opportunity Commission

(EEOC) – Affirmative action programs – The Equal Pay Act

• Occupational Safety and Health Administration (OSHA) makes regular inspections to ensure that employees have a safe working environment – Many still work in unsafe environments

Laws Protecting the Environment

• Largely in response to stakeholder concerns about businesses’ impact on environment

• Sustainability has become an important concept to businesses lately. – Means “meeting the present needs without

compromising future generations’ abilities to meet their own needs”

– Being a green company can boost profits• The Environmental Protection Agency (EPA)

created in 1970 to coordinate environmental agencies

Shopping for Environmentally Friendly Products in a Recession

Source: 2009 Cone Consumer Environmental Survey of 1,087 adults, January 29–30.

Gatekeepers and Stakeholders

• Trust is the glue that holds businesses together • Gatekeepers are overseers of business actions

– Accountants, regulators, lawyers, financial rating corporations, auditors

– Are critical in providing accurate information that allows stakeholders to gauge the true health of a corporation

Source: © image100/Corbis

Risk Assessment

• A group that failed in its duties to stakeholders during the most recent recession were assessors of financial products– Misled investors and

stakeholders– More oversight of credit

rating firms in the future?

Source: Stockbyte

The Sarbanes-Oxley Act

• Establishes a system of federal oversight of corporate accounting practices

• Gives the Public Company Accounting Oversight Board (PCAOB) authority to monitor accounting firms that audit public corporations – Standards and rules for auditors in accounting

firms• Requires top managers to certify their firms’ financial

reports– More accountability for CEOs and CFOs

• Some legal protection for whistle-blowers

Cost of Compliance• Estimated at $1 million per $1 billion in revenues• Compliance with Section 404 requires:

– That management create reliable internal financial controls

– That management attest to the reliability and accuracy of the financial statements

– An independent auditor must attest to the statements

Source: C Squared Studios

Federal Sentencing Guidelines for Organizations

• Incentive for organizations to develop and implement programs for ethical and legal compliance

• Applies to all felonies and class A misdemeanors committed by employees

• Philosophy that legal violations can be prevented through organizational values and a commitment to ethical conduct

Percentage of U.S. Workforce Who Feel the Government is Currently

Providing too Little Oversight

Source: 2009 National Business Ethics Survey, Ethics Resource Center, p. 31

Highly Appropriate Core Practices

• Sarbanes-Oxley and FSGO seek to provide incentives to develop appropriate core practices– Focus on developing structurally sound

organization core practices and developing structural integrity for financial performance and non-financial performance

Employees’ Preparation to Respond to Ethical Misconduct Risk

Source: National Business Ethics Survey, How Employees View Ethics in Their Organizations 1994-2205, (Washington D.C.: Ethics Resource Center, 2005): 39

Philanthropic Issues

• Involve business’s contribution to the local community and society

• Quality of life issues– Responsible production of goods and services– Technology improvements…yet not damaging to

the environment or jeopardizing personal privacy• Philanthropic issues

– Making the local community a better place to live• Strategic philanthropy: Synergistic and mutually

beneficial use of a company’s core competencies and resources to deal with social issues