7. Regulating and institutionalizing Business Ethics, Business Ethics Management

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Questions and Answers

What is the primary purpose of a compliance management program?

To ensure legally and ethically correct behavior (correct)

To increase profit margins

To create corporate social responsibility initiatives

To enhance market competitiveness

Which of the following is NOT a minimum requirement of an ethics program as per the United States Sentencing Commission?

Implement procedures to detect criminal conduct

Establish standards to prevent criminal conduct

Conduct annual ethics seminars for all employees (correct)

Ensure reasonable oversight from top management

What common mistake can hinder the effectiveness of an ethics program?

Frequent training sessions

Lack of employee engagement (correct)

Implementation of a comprehensive compliance policy

Clear communication of ethical policies

How do voluntary private boundaries differ from mandated boundaries of ethical conduct?

Voluntary boundaries lack legal enforceability Signup and view all the answers

What role do codes of ethics play within a company?

To establish a framework for ethical behavior Signup and view all the answers

What changing role do governments play in shaping business ethics?

They promote ethical business practices through regulations Signup and view all the answers

Why is it important for an organization to enforce its compliance policy with persistence?

To prevent unethical behavior from recurring Signup and view all the answers

What is a key aspect of compliance as defined in the content?

Adherence to both external and internal requirements Signup and view all the answers

What is essential for developing an effective ethics program in a company?

Implementation of a training program and communication system Signup and view all the answers

Which of the following is NOT a role of compliance officers in an organization?

Developing marketing campaigns Signup and view all the answers

What is a common mistake organizations make regarding codes of ethics?

They are often not referred to by top management Signup and view all the answers

What is one of the minimum requirements for an ethics and compliance management program?

Regular feedback from employees Signup and view all the answers

Which factor distinguishes between voluntary and mandated boundaries of ethical conduct?

Enforcement of government laws Signup and view all the answers

How can organizations empower employees regarding ethical decision-making?

By providing resources and support systems Signup and view all the answers

Which of the following is a key component for communicating values and ethical policies in a company?

Training programs for employees Signup and view all the answers

What is a key role of ethics officers within an organization?

To ensure compliance with government regulations Signup and view all the answers

What is the primary reason for establishing an ethics and compliance management program?

To ensure adherence to ethical standards Signup and view all the answers

Which of the following is not a minimum requirement for an ethics and compliance management program?

Promotion of a competitive corporate environment Signup and view all the answers

Which of the following is a common mistake in implementing an effective ethics program?

Failing to provide adequate training Signup and view all the answers

How can the boundaries of ethical conduct be classified?

Voluntary, private, mandated Signup and view all the answers

What is one of the changing roles of governments in the regulatory process?

To enhance the ethical accountability of corporations Signup and view all the answers

Which factor is most critical for fostering an ethical corporate culture?

Effective communication of ethical standards Signup and view all the answers

What consequence can arise from non-compliance with ethical standards?

Legal penalties and fines Signup and view all the answers

Study Notes

Business Ethics

Developing and implementing an effective Ethics Program is key to institutionalizing ethical business practices.
Learning Objectives include: explaining the need and scope for ethics and compliance management, defining ethics and compliance management, listing minimum requirements for an ethics and compliance program, describing the role of codes of ethics in managing ethical behaviors, identifying factors and common mistakes for an effective ethics program, distinguishing between voluntary, private, and mandated boundaries of ethical conduct, and describing changing roles of governments, business, and civil society in the regulatory process.
Crane et al. chapters 5 (pp. 182-195) and 11 (pp. 478-516) provide further details on the subject.

Learning Objectives

Explain the need and scope for ethics and compliance management programs, define ethics and compliance management
List the minimum requirements for an ethics and compliance management program
Describe the role of codes of ethics in managing the ethical behaviors within a company
Identify factors and common mistakes for an effective ethics program
Distinguish between the voluntary, private and mandated boundaries of ethical conduct
List and explain consequences of non-compliance
Describe the changing roles of governments, business and civil society in the regulatory process

Minimum Requirements of an Ethics Program

Establish standards and procedures to prevent and detect criminal conduct.
Ensure the firm's board, top management, and high-level personnel exercise reasonable oversight of these standards and procedures.
Make reasonable efforts to keep individuals whom organizations knew or should have known to engage in illegal activities out of key positions.
Communicate standards and procedures by training directors, employees, and appropriate agents.
Monitor and audit the program to detect criminal conduct, evaluate the program periodically, and have a system for reporting suspected violations.
Promote and consistently enforce the program through appropriate incentives and appropriate discipline.
After criminal conduct is detected, take reasonable steps to respond appropriately and prevent further similar criminal conduct, including necessary modifications to the ethics and compliance program.
Source: United States Sentencing Commission, Guidelines Manual, §3E1.1

Responsibility of the board of directors

(2)(A) The organization's governing authority shall be knowledgeable about the content and operation of the compliance and ethics program and shall exercise reasonable oversight with respect to the implementation and effectiveness of the compliance and ethics program.
Source: Fed. Sent. Guidelines Chapter 8

Ethical Culture

Key elements include ethical leadership, core ethical values, ethical corporate culture, and ethics program.
Source: Schwartz, 2013

Compliance Management - Example (Alstom)

Alstom was convicted of not taking necessary precautions to prevent bribery of foreign public officials.
The Office of the Attorney General found that Alstom had implemented compliance policies that were not enforced consistently, allowing acts of bribery in multiple countries.
Source: news.admin.ch, 2011

Compliance in a nutshell

Compliance ensures correct legal and ethical behavior of a company and its employees.

Example (Compliance Cars)

(CARB, 2012)

Example (European Sustainability Reporting Standards)

The Commission adopted the European Sustainability Reporting Standards (ESRS) in July 2023.
This marks a step in transitioning to a sustainable EU economy.

Common Mistakes in Developing and Implementing an Ethics Program

Recognizing the need for an ethics program but not taking time to answer fundamental questions about its goals.
Not setting realistic and measurable program objectives.
Senior management failing to take ownership of the ethics program.
Not addressing the needs of the average employee ("Legalese").
Transferring a national program to an international company's operations.
Designing an ethics program as nothing more than a series of lectures.

Top Three

Tone from the Top
Update is key
Beware of Paper Tigers («check-the-box» approach)

Mandated, Private and Voluntary Boundaries of Ethical Conduct

Mandated boundaries-regulatory requirements imposed and enforceable by governmental actors
Private practice—documented best practices and rules from industry associations, companies, or civil society often encouraged by legal and regulatory forces; self-regulation
Voluntary boundaries-management-initiated beliefs, values, and voluntary contractual obligations, including strategic philanthropy

Why law is not enough

Law has limited power due to broad terms and loopholes
Law usually operates reactively—responding to past harm
Ethical issues often have an international character while laws are mostly national
Relying solely on law would be ineffective, costly and hostile

Example (The Rise and Fall of Enron)

Enron's case highlighted the importance of detecting corporate misconduct
Regulatory agencies should focus more on whistle-blowing and executives should better understand financial instruments.
Source: forbes.com

Compliance Management - Costs of Non-compliance

Monetary fines
Criminal and civil liability
Eroded consumer trust
Loss of employee morale
Decrease in competitive advantage
Shattered investors’ trust
Investigations by foreign authorities

Example (Toyota Motor Corporation)

Three separate automobile recalls occurred at end of 2009 and start of 2010 related to Toyota vehicle models and unintended acceleration.
NHTSA accused Toyota of delaying recalls for several models.
Toyota agreed to a USD$32.4 million fine to settle the dispute.
Toyota's total fines were almost USD$50 million.

One example of a legal rule with extraterritorial impact: The Sarbanes-Oxley (SOX) Act

Largely in response to widespread corporate accounting scandals in 2002
Made fraudulent financial reporting a criminal offense with stronger penalties
Requires corporations to establish codes of ethics concerning financial reporting and develop greater transparency in financial reporting to investors and other stakeholders.
Public company accounting oversight board (PCAOB) monitors accounting firms, establishes standards for auditors, and oversees inspections.

The Sarbanes-Oxley (SOX) Act [cont.]

Auditor independence—prohibits registered public accounting firms from providing both non-audit and audit services to a public company.
Whistleblowers protection—employees are required to report unethical behavior.

The Sarbanes-Oxley (SOX) Act [cont.]: costs of compliance

High initial cost of compliance, but studies show costs have declined over time.
Internal costs such as auditor fees.

Example: Anti-Money Laundering for banks and securities dealers in Switzerland, regulatory requirements and self-regulation

Legal basis—FINMA's powers to regulate banks, insurers, exchanges, and financial institutions.
Regulatory powers—issued via ordinances and circulars with published documents on market legislation.
Swiss banking code of conduct—agreement of Swiss banks regarding due diligence (CDB 2020).

The Role of Government

Government acts as stakeholder : elected representative of citizens' interests; its own independent interest; and mutual dependent relationships with society and business.
Regulation that protects citizens' interests.

Organizing an Ethics Program

In the U.S., more compliance oriented
In Europe and Asia, more external and values oriented
Four ways of organizing include compliance orientation, values orientation, external orientation, and protection orientation

Elements of effective Ethics and Compliance Management

Mission or value statement
Applicable rules and regulations (internal and external).
Code of Ethics or Code of Conduct.
Reporting/advice/monitoring channels
Risk analysis and management
Organizational measures: Ethics governance processes, Ethics consultants (Ethics and Compliance officers, external consultants)
Education and training
Stakeholder dialogue
Auditing, accounting and reporting (measuring, evaluating, communicating)

Codes of Conduct

Formal statements describing expectations for employees
Often a general set of values that serves as principles and is the basis for rules of conduct

Reasons why Codes of Conduct fail

Code is not promoted and employees do not read it.
Code is not easily accessible.
Code is too legalistic and therefore not understandable by average employees.
Code is written too vaguely.
Top management does not refer to the code in body or spirit.

Education and Training

Crucial part of an effective ethics program.
Educate employees about company policies, relevant laws, and social standards
Make employees aware of available resources and personnel for advice
Empower employees to ask ethical questions and make ethical decisions
Communicate values, culture, and policies

Organizational Measures

Ethics officers and compliance functions.
High-level personnel for oversight.
Duties include assessing needs and risks, establishing and distributing codes of conduct, and conducting training.
Establishing and maintaining a confidential service to answer employee questions.
Ensuring compliance with governmental regulations, monitoring and auditing ethical conduct.
Taking action on violations and reviewing/updating codes.

The Three Lines Model

First line: Operating management – provision of products/services to clients, managing risk.
Second line: Risk and compliance functions – expertise, support, monitoring and challenge on risk-related matters.
Third line: Internal audit(independent assurance), objective assurance and advice on all matters related to the achievement of the objectives.

Reporting, Advice, Monitoring

Systems for dealing with ethically charged situations.
Establish formal reporting channels to gather and document concerns.
Developing internal systems for addressing potentially inappropriate behavior
Using tools and software for screening, documentation and investigation should be considered

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Description

Test your knowledge on compliance management programs and ethics guidelines in business. This quiz covers key aspects, roles, and challenges related to effective ethics programs and compliance policies in organizations. Explore the impact of government regulations and the importance of codes of ethics.