Business Ethics: Layers, CSR, and Sarbanes-Oxley

• The following are study notes over business ethics, including layers of ethics, corporate social responsibility, and the Sarbanes-Oxley Act.

Layers of Business Ethics

• Ethics can be examined on individual, organizational, industry, and societal levels.
• Organizations may engage in ethical exchanges, such as offering YMCA memberships to students in exchange for parking lot usage.
• Industries face ethical challenges like companies pushing employees to work under certain hours to avoid providing benefits.
• Employee poaching is an example of an industry-level ethical concern.
• Society's ethical considerations include military leadership training.

Bethshemas Syndrome

• This syndrome involves leaders becoming isolated, resistant to dissent, believing they are above the rules, and prioritizing personal status over the business's well-being.
• It includes the belief that they can solve any problem due to past successes.
• It can lead a company to lose its "good purpose," such as being a great employer or providing valuable products.

Case Studies

• Penn State: A first complaint was made in 1998, followed by a conviction on 45 counts of sexual assault and rape by a coach in 2012.
• UNC: Faced issues of academic accountability for athletes, including student-athletes' cheating or having others complete their work.

Corporate Social Responsibility (CSR) - Phase 1: Labor, Voluntary, and Legislative Movement

• This phase focused on employee compensation due to high turnover rates (100%) and litigation resulting from employee injuries.
• General Electric implemented strategies for employee loyalty, including health care, grievance boards, mortgage assistance, and life insurance.
• During this time, employee strikes were illegal and viewed as a crime.
• The first strike by shoe makers resulted in charges of criminal conspiracy.
• Workers faced social issues like poverty, lack of affordable housing, and insufficient wages.
• Media attention was drawn to cases like United Health Care dismissing people's health insurance, highlighting societal problems.
• Workers compensation legislation aimed to reduce litigation costs for employers by providing specific benefits for job-related accidents in exchange for limiting negligence lawsuits.

CSR - Phase 2: 1930s-1940s, Berle and Dodd Theories, and Early Regulatory Cycle

• This phase involved debates on corporate purpose beyond maximizing profits due to public opinion and activism.
• Increased employee injuries led to government intervention.
• Berle's Theory: Managers are trustees managing corporate assets for the sole benefit of stockholders.
• Dodd's Theory: Businesses have both a profit-making and social service function.

CSR - Phase 3: 1950s-1970s and Bowen, Drucker, and Friedman

• This phase involved evaluating actions based on economic costs and benefits.
• The example of a delayed airbag recall of 13 years led to government intervention.
• Studies showed that better lighting, shorter hours, and cleaner restrooms reduced unit labor costs.
• Milton Friedman argued that a company's responsibility is to maximize profits for stockholders within legal and ethical boundaries.
• Engaging in socially responsible actions can increase profits.
• U.S. Steel reducing emissions in Gary, Indiana, improved its image, attracting workers despite a lack of regulations.

Advertising Self-Regulation

• Industries like liquor advertising self-regulate to avoid government oversight.
• Regulations include avoiding graphic nudity, overt sexual activity, and depictions of excessive or irresponsible alcohol consumption.
• Malibu Rum faced issues with ads promoting unsafe activities while drinking.
• Self-regulations also include not targeting those below the legal purchase age, using models and actors who are at least 25 years old and appear to be at least 21.
• Additionally, alcohol consumption cannot be portrayed alongside activities requiring alertness or physical coordination, religious themes, or illegal activity.

Sarbanes-Oxley Act of 2002 (SOX)

• SOX applies to all publicly traded companies, wholly-owned subsidiaries, and foreign companies publicly traded and doing business in the U.S.
• Accounting firms auditing public companies must also comply with SOX.
• It is important to consider worst-case scenarios for violating rules; following a boss's orders does not excuse legal violations.
• Congress passed SOX due to financial disasters involving Enron, WorldCom, and Arthur Anderson, among others.
• It brought the most significant securities law changes since the Securities Acts of 1933 and 1934.
• SOX aimed to restore confidence in securities markets.

Provisions of SOX

• It includes accounting reforms, such as enlarging the SEC’s budget and granting new authority.
• The SEC has the power to freeze assets of accountants to prevent wrongdoers from accessing funds during investigations.
• It emphasizes financial reporting and corporate governance by requiring public companies to have audit committees of independent directors, including at least one financial expert.
• SOX made the federal government a major player in shaping corporate governance, which was previously primarily governed by state legislatures and courts.
• It addresses the conflict of interest.
• Corporate governance is defined as the process by which corporate objectives are set and reasonable assurance of achieving goals and producing reliable financial reporting is provided.
• Corporate governance specifies the distribution of rights and responsibilities among the board of directors, managers, shareholders, and other stakeholders.

Wall Street Practices

• Stock analysts can no longer be compensated based on investment banking revenue generated for their firms.
• Investment bankers cannot have veto power over stock analysts’ recommendations.

Officer Conduct

• SOX requires companies to implement a code of ethics for top financial officers.
• It prohibits public companies from lending money to top officers and directors.
• Insiders must promptly report trades in their companies’ stocks and forfeit performance-based bonuses if financial statements are restated due to wrongful actions.
• Top officers must forfeit profits made from selling shares at inflated prices that later drop and profits earned or losses avoided during pension plan "blackout" periods.

Document Destruction

• SOX creates new provisions to punish the destruction of evidence in federal investigations.
• Auditors must preserve their work papers for seven years after completing an audit.

Whistleblowers