Understanding Business Ethics

The Importance of Business Ethics

• Explores business ethics from an organizational perspective
• Examines the historical foundations and evolution
• Provides evidence of the support of ethical value systems for business performance.

Icebreaker Questions

• The definition of "ethics"
• The importance of ethics in business
• Examples of a business engaging in unethical behavior

Business Ethics Defined

• Morals are a person's personal philosophies about right and wrong.
• Business ethics include organizational principles, values, and norms that guide behavior in business.
• Principles set specific boundaries for behavior that should not be violated.
• Ethics are behaviors or decisions within a group's values or morals.
• Right or wrong conduct is defined by the group.

Why Study Business Ethics

• Business ethics is a major concern.
• Workplace integrity involves pressure to compromise standards, observed misconduct, reporting misconduct, and retaliation.
• Ethical issues must be addressed to prevent misconduct.
• Ethics plays an important role in the public sector.
• Most decisions need ethical judgement
• Business ethics goes beyond an individual's personal values.
• Professionals deal with personal moral dilemmas.
• Being a good person is insufficient for handling ethical issues in business.
• Studying business ethics helps to identify ethical issues, recognize approaches for resolving them, and gain knowledge for more ethical decisions.

The Development of Business Ethics

• Before 1960, capitalism dictated business practices.
• 1930s: The New Deal (President Franklin D. Roosevelt) blamed business for U.S. problems.
• 1950s: The Fair Deal (President Harry S. Truman) defined environmental responsibility as ethical issues.
• The 1960s saw the rise of social issues in business, including growth of ecological problems and an anti-business trend.
• President John F. Kennedy introduced the Consumers' Bill of Rights.
• President Lyndon B. Johnson introduced the "Great Society".
• 1970s: Business ethics became a common expression.
• Corporate social responsibility emerged as an organization's obligation to maximize positive impact and minimize negative impact on stakeholders.
• Academic researchers sought to identify ethical issues, describe how businesspeople might choose to act in particular situations.
• 1980s: Business ethics reached maturity.
• Centers for business ethics provided publications, courses, conferences, and seminars.
• Stakeholder theory was developed.
• Defense Industry Initiative on Business Ethics and Conduct was an organization developed to guide corporate support for ethical conduct.
• The Reagan-Bush Era involved a belief that self-regulation rather than regulation by government was in the public's interest.
• President Bill Clinton continued to support self-regulation and free trade.
• Government action with health-related social issues such as teenage smoking took place.
• Federal Sentencing Guidelines for Organizations (FSGO) codified into law incentives to reward organizations for preventing misconduct.
• The 2000s: President George W. Bush: Misconduct at Enron, WorldCom, Halliburton, and Arthur Andersen caused government and public scrutiny for new ways to encourage ethical behavior.
• The Sarbanes-Oxley Act changed organizational control and accounting regulations since the Securities and Exchange Act of 1934, which made securities fraud a criminal offense.
• President Barack Obama inherited the great global financial recession.
• The 2010s: New Challenges in Business Ethics occurred.
• The Dodd-Frank Wall Street Reform and Consumer Protection Act addressed issues related to the financial crisis and recession and designed to make the financial services industry ethical and responsible.
• President Donald Trump decreased environmental and financial regulations; questioned sustainability.

Environmental Social Governance

• Environmental social governance (ESG) is a framework for evaluating firm performance in environmental, social, and governance areas.
• There is increasing demand for responsible ethical conduct to be a part of organizational culture.
• Future ethical issues will relate to artificial intelligence (AI) and big data.

Developing Organizational and Global Ethical Cultures

• Ethics and compliance are designed to establish appropriate conduct and core values.
• Ethical culture constitutes acceptable behavior as defined by the company and industry.
• Globally, businesses are working closely together to establish standards of acceptable behavior.
• ISO 19600 is a global compliance management standard that addresses risks, legal requirements, and stakeholder needs.
• Global compact consists of 10 principles concerning human rights, labor, the environment, and anti-corruption for openness and alignment among business, government, society, labor, and the United Nations.

The Benefits of Business Ethics

• There is a willingness to sacrifice for the organization.
• It increases group creativity and job satisfaction and decreases turnover.
• Strong community involvement increases loyalty and positive self-identity.
• Ethics provides a foundation for efficiency, productivity, and profits.
• Negative publicity, lawsuits, and fines can lower stock prices, diminish customer loyalty, and threaten a company's long-term viability.
• The demand for socially responsible investing is increasing.
• High levels of perceived corporate misconduct decrease customer trust.
• Companies viewed as socially responsible increase customer trust and satisfaction.
• Consumer respondents would pay more for products from socially responsible and sustainable companies.
• Being ethical leads to better business performance.
• Corporate concern for ethical conduct is part of strategic planning for higher profitability.
• Business ethics is becoming more than compliance; it's part of management's competitive advantage efforts.

Discussion Activity

• Pros of ethics include contributing to employee commitment, customer satisfaction, and profits.
• Cons of ethics include eating into revenues, sales, profitability.
• Cons of ethics include decreasing competitive edge.

Stakeholders Relationships

• Social Responsibility and Corporate Governance
• Identify stakeholders' roles
• Define social responsibility
• Explore corporate governance's role

Stakeholders Define Ethical Issues

• Stakeholders are individuals or groups with a claim in a company's operations and outcomes.
• A stakeholder orientation involves understanding and addressing stakeholder demands through data generation, information distribution, and organizational responsiveness.
• Identifying relevant stakeholders, their concerns, and their impact is key to data generation.

Social Responsibility and Business Ethics

• Social responsibility means maximizing positive and minimizing negative impacts on stakeholders.
• Corporate citizenship involves meeting economic, legal, ethical, and philanthropic responsibilities.
• A company's reputation is an intangible asset with tangible value.

Issues in Social Responsibility

• Social responsibility relies on considering each stakeholder and building long-term relationships.
• Major issues include data privacy, consumer protection, sustainability, and corporate governance.
• Corporate governance involves formal systems of accountability, oversight, and control.

Social Responsibility and the Importance of a Stakeholder Orientation

• Legal and economic responsibilities are often seen as key to performance.
• Economist Milton Friedman believed the market is a better deterrent to wrongdoing than laws.
• Caring about stakeholders can lead to increased profits.

Corporate Governance Provides Formalized Responsibility to Stakeholders

• The stakeholder model balances the interests of various constituencies.
• Fiduciaries (directors, officers) must act in the organization's best interests.
• Accountability, oversight, and control are key aspects of corporate governance.

Implementing a Stakeholder Perspective

• Key steps include assessing corporate culture, identifying stakeholder groups and issues.
• Assessing organizational commitment and identifying resources.
• Gaining stakeholder feedback through surveys and other methods is crucial.

Contributions of a Stakeholder Perspective

• Balancing stakeholder interests requires information and good judgment.
• Societal interests can conflict with consumer desires.
• Balancing stakeholder interests can be a challenging process.

Defining Boundaries of Ethical Conduct

• External requirements like laws, rules, regulations
• Civil law: Defines rights and duties of individuals and organizations
• Criminal law: Prohibits specific actions with fines or imprisonment as punishment

Voluntary Boundaries

• Includes beliefs, values, and voluntary contractual obligations
• Philanthropy: Giving back to communities and causes
• Helps improve communities and reduce government involvement

Legal Compliance Requirements

• Procompetitive legislation prevents monopolies and inequitable pricing
• Helps regulate business rivalry and prevent unfair competitive practices
• Protects against corporate espionage and abuse of size advantages

Consumer Protection

• Requires businesses to provide accurate information and follow safety standards
• Bureau of Consumer Protection: Guards against unfair/deceptive practices
• FDA: Regulates food, drugs, medical devices, and other products

Equity and Safety Laws

• Title VII of Civil Rights Act: Prohibits workplace discrimination
• Equal Pay Act: Mandates equal pay for equal work
• OSHA: Enforces safe working conditions through inspections

Key Regulatory Acts

• Made fraudulent financial reporting a criminal offense
• Established Public Company Accounting Oversight Board (PCAOB)
• Prohibited accounting firms from providing both audit and non-audit services
• Provides whistle-blower protection
• Compliance costs were initially high but have declined over time

Dodd-Frank Act (2010)

• Created Financial Stability Oversight Council to monitor markets and identify threats
• Established Consumer Financial Protection Bureau (CFPB) to regulate financial products
• Implemented Whistle-blower Bounty Program offering 10-30% of fines/settlements

Federal Sentencing Guidelines for Organizations (FSGO)

• Purpose and Development
• Incentivizes organizations to develop advice programs
• Reduces penalties for organizations with effective compliance programs
• First established in 1991

Key Implementation Requirements

• Develop effective compliance standards and procedures
• Oversight by high-ranking personnel
• Avoid giving authority to those with propensity for misconduct
• Communication system to disseminate standards
• Reporting system without fear of retaliation
• Fair disciplinary action for misconduct
• Take steps to prevent similar offenses

Evolution Through Amendments

• 2004: Added requirement to develop ethical organizational culture
• 2007-2008: Extended ethics training to board members and all employees
• 2010: Direct reporting from compliance officers to board
• 2014-2020: Emphasis on sharing best practices and creating ethical cultures

Core Practices and Social Responsibility

• Documented best practices encouraged by legal/regulatory forces
• Focus on integrity in organizational practices
• Better Business Bureau provides direction for customer disputes

Social Responsibility Strategies

• Cause-related marketing: Ties products to social concerns
• Strategic philanthropy: Uses core competencies to address stakeholder concerns
• Social entrepreneurship: Creating organizations with social value purpose

Importance of Institutionalization

• Helps implant values, norms, and artifacts in organizations and society
• Understanding core practices prevents opportunities for unethical conduct
• Institutionalization has advanced rapidly as stakeholders recognized need to improve business ethics

Key Takeaways

• Ethical business conduct is governed by both mandated boundaries (laws and regulations) and voluntary boundaries (values and commitments).
• Responsible business operations are given a framework.
• The Federal Sentencing Guidelines for Organizations provide concrete incentives for businesses to develop ethical cultures by reducing penalties when effective compliance programs are in place.
• Ethical values are embedded throughout an organization, and misconduct opportunities are reduced through the institutionalization of ethics (through core practices, strategic philanthropy, and regulatory compliance).

Emerging Business Ethics Issues

• Recognizing Ethical Issues (Ethical Awareness)
• People make ethical decisions when they identify an ethical component
• Failure to recognize ethical issues is hazardous to organizations
• Dilemma: A situation where all alternatives have negative consequences, requiring selection of the least harmful option
• Collusion: Secret agreement between parties for fraudulent, illegal, or deceitful purposes

Foundational Values for Identifying Ethical Issues

• Integrity:
• One of the most important elements of virtue
• Refers to being whole, sound, and in unimpaired condition
• Implies balanced organization making ethical decisions financially and in corporate culture
• At minimum, businesses must follow laws and regulations
• Business relations should be grounded in integrity

Honesty

• Refers to truthfulness or trustworthiness
• Business sometimes regarded as a game with its own rules rather than society's rules People cannot withdraw from business relationships due to economic dependence

Business and rules

• Business must clarify applicable rules
• Rules must be appropriate to the involuntary nature of participants

Dishonesty

• Lack of integrity, incomplete disclosure, unwillingness to tell the truth

Fairness

• Quality of being just, equitable, and impartial Three fundamental motivating elements include:

1. Equality: Fair and even distribution of benefits and resources
2. Reciprocity: Interchange of giving and receiving in social relationships
3. Optimization: Trade-off between equity and efficiency (maximum productivity)

Emerging Ethical Issues and Dilemmas in Business

• Problem requiring choice among actions evaluated as right/wrong, ethical/unethical
• Ethical dilemma: Problem requiring choice among actions with negative outcomes

Types of Ethical Issues

Misuse of Company Time and Resources

• Time theft costs companies hundreds of billions annually
• Late arrivals, leaving early, long lunches, inappropriate sick days, socializing, personal activities
• Using company computer/internet for personal business Many companies have policies on acceptable resource use

Abusive or Intimidating Behavior

• Common ethical problem including:
• Physical threats, false accusations, profanity, insults, yelling
• Harshness, ignoring someone, unreasonableness
• Intent should be considered
• Bullying creates hostile environment

Conflicts of Interest

• When individual must choose between advancing personal, organizational, or other interests
• Employees must separate private interests from business dealings

Bribery

• Offering something (often money) for illicit advantage Active bribery: Offense committed by person giving bribe
• Passive bribery: Offense committed by official receiving bribe
• Facilitation payments: Payments to obtain/retain business that don't constitute bribery for US companies in some situations

Corporate Intelligence

• Collection/analysis of information on markets, technologies, customers, competitors, and trends
• Three intelligence models:
  • Passive monitoring for early warning
  • Tactical field support
  • Support for top-management strategy Involves in-depth discovery from corporate records, court documents, regulatory filings, etc.

Discrimination

• Prejudices based on race, color, religion, sex, etc. (illegal in US)
• EEOC: Federal agency protecting against workplace discrimination
• Age Discrimination in Employment Act: Protects workers 40+ years old
• Affirmative action: Efforts to recruit/hire/train/promote from traditionally discriminated groups

Sexual Harassment

• Repeated, unwanted behavior of sexual nature

• Hostile work environment criteria:

  1. Unwelcome conduct
  2. Severe, pervasive, offensive conduct altering employment conditions
  3. Conduct reasonable person would find hostile/offensive

• Dual relationship: Personal/sexual relationship with professional colleague

Steps to avoid sexual misconduct/harassment

1. Establish policy statement
2. Define sexual harassment
3. Establish non-retaliation policy
4. Create prevention procedures
5. Establish reporting procedure
6. Enforce policies
7. Ensure timely reporting to authorities

Fraud

• Purposeful communication that deceives/manipulates/conceals facts to harm others

Accounting fraud: Inaccurate information in financial reports

• Marketing fraud: Dishonest creation/distribution/promotion/pricing
  • Puffery: Exaggerated advertising no reasonable buyer would rely on
  • Implied falsity: Message tending to mislead/confuse/deceive
  • Literally false: Claims about tests/studies that don't exist
  4. Ambiguous statements

Consumer Fraud

• Consumers deceiving businesses for personal gain
  • Price tag switching, item switching, lying for discounts, abusing return policies
  • Collusion: Employee assisting consumer in fraud
  5. Duplicity: Staging accidents, purchasing/wearing/returning items
  6. Guile: Using craftiness or tricks for unfair advantage

Common types include:

• Chargeback fraud: Disputing legitimate transactions
• Price arbitrage: Swapping similarly priced items for higher return
• Return fraud: Defrauding through return process
• Showrooming: Examining in-store, purchasing online cheaper
• Wardrobing: Purchasing, using, then returning for refund

Financial Misconduct

• Failure to understand/manage ethical risks contributed to global financial crisis
• Caused partly by financial industry's failure to take responsibility for risky instruments
• Subprime lending emerged as ethics issue
  • Loan officers received commissions regardless of defaults
  7. "Liar loans" developed for more sales/higher compensation
• Risk management remains key concern

Insider Trading

• Buying/selling stocks using non-public information
• Illegal when using non-public information
• Legal when insider legally buys/sells own company stock and reports to SEC within two business days

The Challenge of Determining Ethical Issues

• Most ethical issues become visible through stakeholder concerns
• Problems become ethical issues due to changing societal values
• Crisis management: Process of handling high-impact events characterized by ambiguity and need for swift action to address potential damage

Ethical Issues in Business

• require recognizing problems through the lens of foundational values (integrity, honesty, fairness), understanding how they impact stakeholder relationships
• Common ethical issues include misuse of resources, abusive behavior, lying, conflicts of interest, bribery, discrimination, harassment, and various forms of fraud
• Ethical awareness is crucial for business success as failure to recognize and address ethical issues can lead to legal problems, damaged reputation, and financial losses.

Framework for Ethical Decision Making

Ethical Issue Intensity

• Ethical awareness: Ability to perceive ethical dimensions in situations/decisions
• Ethical issue intensity: Relevance/importance of an event.
• Moral intensity: Individual perceptions of social pressure.

Individual Factors Influencing Ethical Decisions

• Gender: Research shows few differences between men and women in ethical decision-making.
• Education: More education/work experience provides better ethical decisions.
• Nationality: Legal relationship between person and country of birth.
• Age: Younger managers are more influenced by organizational culture.
• Locus of control: External control: Belief that life events are due to uncontrollable forces. Internal control: Belief that one controls events through effort and skill.

Organizational Factors

• Corporate culture: Shared values, norms, artifacts, and problem-solving approaches
• Ethical culture: Acceptable behavior defined by company and industry
• Significant others: Those with influence in work groups (peers, managers, coworkers)
• Obedience to authority: Following directives of superiors to resolve ethical issues

Opportunity

• Conditions that limit or permit ethical/unethical behavior
• Immediate job context: Where individuals work, with whom, and work nature
• Can be deterred with formal codes, policies, and rules (with enforcement)
• May also come from knowledge exploitation

Business Ethics Intentions, Behavior, and Evaluations

• Ethical business issues involve situations with vague or conflicting decision rules.
• Inconsistency between intentions/behavior and ethical judgment can cause guilt.
• Success definition drives business intentions and behavior.

Normative Considerations in Ethical Decision Making

• Normative Approaches.
• Focus on how decision makers should approach ethical issues
• Most organizations develop core values about appropriate conduct.

Normative Values

• Instrumental concern: Focuses on positive outcomes (profitability, societal benefits)

Institutional Foundation for Normative Values

• Institutional theory: Organizations operate according to taken-for-granted norms/rules
• Government, religion, and education influence values, norms, and conventions
• Industry competition
  • Product substitutes
  • Entry barriers
  • Power over customers
  • Supplier power over rivals

Implementing Principles and Core Values

• Veil of ignorance: How principles would be formulated without knowing one's future position in society
• Equality principle: Each person has basic rights compatible with others' liberties
• Difference principle: Economic/social inequalities should benefit least-advantaged members of society
• Companies convert principles into core values that provide ideals and blueprints for goals and ethical decision making

Understanding Ethical Decision Making

• Top-level support helps employees with their personal ethical decision making
• Normative perspectives set ideal organizational goals
• Knowledge about improves decision quality
• Effective leadership shapes organizational ethical culture
• Ethical corporate culture needs shared values and proper oversight
• Requires strong ethics program to educate and develop compliance policies

Corporate Culture, Definition and Concepts

• Organizational culture: Shared values, norms, and artifacts that influence employees and determine behavior

Cultural Approaches to Ethics

• Compliance culture: Legalistic approach focusing on risk management
• Values-based ethics culture: Relies on explicit mission statement defining core values

Types of Structures

• Centralized organization: Decision-making concentrated at top levels

Suited for high-risk decisions

- Limited upward communication
- Bidirectional information flow

• Decentralized organization: Decision-making delegated down the chain
  • Quicker reactions to changes

Group Dimensions

Types of Groups

• Formal groups: Organized structure explicitly accepted by members
• Committees
• Work groups
• Teams Informal groups: Common interest without explicit structure

• Include grapevines and informal communication channels
  

Team vs Group Differences

• Team: Leader as facilitator, active member participation, collaborative work assignment
• Group: Leader dominates, conducts meetings, assigns work to members Group Norms Define acceptable/unacceptable behavior Provide explicit ethical directions

Implementing an Effective Ethics Program

Corporate Responsibility to Stakeholders Corporations function as moral agents accountable to stakeholders for their conduct Companies are held legally accountable for employee conduct Need for Ethics Programs Ethics programs sensitize employees to potential legal and ethical issues Programs can help mitigate ethical scandals that can destroy trust Organizations should establish, communicate, and monitor ethical values Pressures to succeed can create opportunities for unethical decisions Components of an Effective Ethics Program Legal Compliance FSGO encourages companies to Assess Key Risk Areas Customize Compliance Programs Monitor Third Party Risks Carrot: Avoiding Penalties through Prevention Stick: Potential Fines and Probation Organization- Wide Orientation - Compliance based to encourage specific behaviors from employees

Ethical Leadership

Core Definition

1. Leadership means guiding others toward a goal.
2. Ethical leadership means making a culture of ethics and demonstrating high ethical standards for employees.

Essential Qualities

1. A leader should be of good character.
2. Competence and skills, developed through training and experience
3. Leaders should show organizational values.
4. Organizational interests should the the leader's priority.

Ethical Crisis Management and Recovery

1. Large-scale unethical activity is an ethical disaster.
2. It can result in legal or financial consequences.

Ethical leaders must empower good decision making and communication.

Qualities: -

• Transparency
• Interpersonal Communication/skills
• small/large group communication skills
• actions/body language communication