Business Ethics Final Review PDF

# Chapter 3 ## What do you know about? - Leadership Virtues ### 1. Prudence - Does as he/she ought to do in a given situation. - Carefully considers all the info available before making an important decision that impacts others. - Does not jump into a situation without considering the consequen...

# Chapter 3 ## What do you know about? - Leadership Virtues ### 1. Prudence - Does as he/she ought to do in a given situation. - Carefully considers all the info available before making an important decision that impacts others. - Does not jump into a situation without considering the consequences of his/her actions. - Seeks out info from a variety of sources so the best decision can be made. ### 2. Fortitude - Would rather risk his/her job than do something that was unjust. - No difficulty standing up for his/her beliefs among friends who do not share the same views. - Makes the morally best decision in a given situation. - Does not hesitate to enforce ethical standards when dealing with close friends. - Does not ignore his/her "inner voice” when deciding how to proceed. ### 3. Temperance - Not overly concerned with his/her personal power. - Is not overly concerned with his/her own accomplishments. - Does not wish to know everything that is going on in the organization to the extent that he/she micromanages. ### 4. Justice - Gives credit to others when credit is due. - Demonstrates respect for all people. - Does not take credit for the accomplishments of others. - Respects the rights and integrity of others. - Would make promotion decisions based on a candidate's merit. - Treats others as he/she would like to be treated. # Chapter 4 ## What do you know about? - How corporate culture impacts ethical decision-making. ### What is corp culture? - Defining the specific culture is not an easy task since it is partially based on each employee's perception of the culture. - Perception may actually impact culture in a circular way. - In addition, culture is present in and can be determined by exploring any of the following among others: - Tempo of work - The org's approach to humor - Methods of problem-solving - The competitive environment - Incentives - Individual autonomy - Hierarchical structure ### Culture and ethics - If attended to, a strong ethical culture can deter stakeholder damage and improve bottom-line sustainability. - If ignored, the culture could destroy long-term sustainability in both financial performance and employee retention. - Responsibility for creating and sustaining ethical corporate cultures rests on business leaders. - While true that individuals can shape an org, it is equally true that orgs shape individuals. - The person you become, your attitudes, values, expectations, mindset and habits, will be significantly determined by the culture of the org in which you work. ### Elements of culture - Definition: a shared pattern of beliefs, expectations, and meanings that influences and guides the thinking and behaviors of the members of a particular group. - Corporate culture can be a sustaining value. - The culture can push you forward. - Offering direction and stability during challenging times. - Or it can prevent a firm from responding to challenges in creative and timely ways. - The stability a culture provides can be a benefit at one time and a barrier to success at another time. - Some corporate cultures are defined from the top-down, others are developed by the employees themselves. ### The Differences Between a Compliance Culture and a Values-Based Culture #### 1. Compliance Based Cultures (Traditional Approach) - The goals of a traditional compliance-oriented program may include: - Meeting legal and regulatory requirements. - Minimizing risks of litigation and indictement. - Indictment: fine $ - The more the firm does (training, etc.) the lower the fine will be when the employee goes rogue. - Improving accountability mechanisms. #### 2. Values-Based Culture (Integrity-Based) - DEF: a corporate culture in which conformity to a statement of values and principles rather than simple obedience to laws and regulations is the prevailing model for ethical behavior. - You can motivate good behavior for employees, you don't need rules to regulate it. - More flexible and far-sighted corporate environments focus on: - Maintaining brand and reputation. - Recruiting and retaining desirable employees. - Helping to unify a firm's global operations. - Creating a better working environment for employees. - Doing the right thing in addition to doing things right. ### The Role of Corporate Leadership in Establishing the Culture - Building a values-based corporate culture. - Culture derives from: leadership, integration, assessment, and monitoring. - One of the key manifestations of ethical leadership is the articulation of values for the org. - Integration, assessment and monitoring is facilitated in part by a code of conduct or statement of values. ### The Difference Between Effective Leaders and Ethical Leaders - **Textbook (pg 112)** - **Effective:** - Effective leaders are able to get followers to their common destination. - Might be able to achieve their goals through threats, intimidation, harassment, and coercion. - Can lead using more amendable interpersonal means such as modeling ethical behavior, persuading, or using the impact of their institutional role. - **Ethical:** - Determined sole by the **METHODS** used in leading. - **Examples:** - **Servant leadership**: coined by Robert Greenleaf. Best leaders are individuals who lead by the example of serving others, in a nonhierarchical style. - **Transformative/transactional leaders**: employ methods that empower subordinates to take the initiative and to solve problems for themselves, and that this constitutes the best in ethical leadership. - “Creating a corporate culture in which employees are empowered and expected to make ethically responsible decisions” - "Not the **method** alone that establishes a leader as ethical. Involves also the **END** or **OBJECTIVE** toward which the leader leads.” - Focus on **means** and **ends** - similar to **means** in **deontology** theory of universalism, and **results** in utilitarianism. - Ethical leadership involves **BOTH**. - Solely focusing on **results** (utilitarianism) can lead to ignoring unethical practices (e.g., mistreatment of workers). - Solely focusing on **means** (deontology theory of universalism) can neglect the necessity of producing **profitable**, **sustainable** results. - Key difference: - "The **means** used to motivate others and achieve ones goals." ### Culture. The Role of Mission Statements and Codes in Creating an Ethical Corporate Culture - Building a values-based corporate culture. - Before developing the statement of values and code of conduct a firm must determine its mission. - **Mission** is an articulation of the fundamental principles at the heart of the org and guides all decisions. - In developing the mission, an org must ask "what the company stands for?" ### Code of Conduct - DEF: it is a statement of values driven by the **mission**. In the absence of other values, the only value is **profit** at any cost. Without a code, a firm sends a clear message that a worker should do whatever it takes to reap **profits**. - The code has the potential to: - Enhance corp reputation. - Provide concrete guidance for internal decision-making. - Creating a built-in risk management system. - Monitoring and an ongoing ethics audit allow organizations to uncover silent vulnerabilities that could pose challenges later to the firm. ### Signs of a Potentially Damaging or Ethically-Challenged Corp Culture - Referred to as a "Toxic" Culture - Lack of any generally accepted base values for the org. - How a firm treats its customers, suppliers, clients, workers (its stakeholders). - How the firm manages its finances. ### Due Diligence, How Culture Can Be Enforced Via Governmental Regulation (Sentencing Guidelines) #### Mandating and Enforcing Culture - When internal mechanisms for creating ethical corporate cultures provide inadequate, the business community can expect governmental regulation to fill the void. - The United States Sentencing Commission (USSC), created in 1984 is an independent agency in the US Judiciary, regulates sentencing policy through the Federal Sentencing Guidelines for Organizations (FSGO). These guidelines apply to the individual and organizational defendants. - "Offense levels" based on the severity of the offense. - Each defender is categorized based on the extent and recency of past misconduct. - The court inputs this information into a sentencing grid and determines the offender's sentence guideline range. - The USSC wants to create both a legal and an ethical corporate environment and requires that organizations shall "exercise due diligence to prevent and detect criminal conduct". - The guidelines highlight specific acts an organization can use as due diligence and the minimal requirements for an effective compliance and ethics program. #### Mandating and Enforcing Culture - In 2010 the USSC lowered the penalties for compliance violations if the organization met the following four criteria: - Those responsible for the programs must have direct reporting obligations to the governing authority. - The program detected the offense before outside discovery. - The offense was promptly reported to governmental authorities. - No person responsible for the program confines the offense. - The guidelines encourage corps to create or maintain effective ethics and compliance programs. - Those companies with documented programs may receive a mitigated penalty if any ethical issues do arise. - Firms without effective ethics programs may receive additional probation and ordered to develop a program. ### Keeping Business Ethical When We Internationalize FCPA and USSG #### FCPA - **Who**: business based in the United States or traded on a United States stock exchange US citizens; (ii) US permanent residents; (iii) entities incorporated in the US and their foreign branch offices; and (iv) persons located in the US. - **Covers**: payment to a foreign official, official of a political party, candidate for foreign office, or executives and other employees of state- owned or controlled businesses. - **What**: can be money or anything else of value, (gift, excessive meals, hospitality, entertainment, travel expense, or favors internship for a fam meber), for the purpose of obtaining or retaining business, and intending to induce the recipient to misuse his or her official position. #### Warning Signs for Managers - Unusual payment patterns or financing arrangements or unusually high commissions. - Lack of transparency in expenses and accounting records. - A history of corruption in the country and refusal by a foreign company or person to accept contractual FCPA language. - Foreign company or person has been recommended by an official of the potential governmental customer and lack of qualifications to perform these services. #### Compliance Programs Incorporating FCPA - Protects companies and individuals against civil liability and criminal prosecution. - Foreign officials are less likely to ask for bribes from companies. - Promotes positive morale in the firm. - Once a foreign official knows that a company is willing to pay bribes, that foreign official will request larger bribe amounts. - If left unchecked, corrupt practices can become so prevalent that they create enormous liability exposure for the company. - Maintaining a focus on FCPA compliance allows companies to develop effective internal controls that promote efficiency in their business operations. - Developing a robust compliance policy is the best way to educate personnel, reduce the risks of corruption and bribery, and eliminate the human rights abuses associated with these risks. #### 1. The General Recommendations Within the Monaco Memorandum - **Guidance on accountability** - Trying to figure out if ppl are acting in their own volition or out of ignorance. - Government is looking for individual accountability. - Government looks at the rate of your willingness to help. - How quick could they resolve issues with you. - If you are helpful, they reduce fine "expediency." - **A. Timely disclosures and prioritization** #### II. Guidance on Corporate Accountability - **A. Evaluating a corporate history** - If they've done it before, its a ding. - Pervasive: tiny issues in big volumes. - Cant control employees. But we can educate then and motivate them with +/- reinforcement. - **B. Voluntary self-disclosure by corporations** - Basically have u gotten urself into trouble. - Voluntarily giving up information. - **D. Evaluation of corps compliance program** - Have u educated the employee? - Compliance program: series of activities business does to ensure good practices. - Code of conduct. - Evidence is enforced. - That it accessible to employees. - Signatures; employees signed the code of conduct. - HR Compliance: how they execute punishment. - Supplies: making sure they have supplier code of conduct. ### 10 Reasons Why FCPA Compliance Is Critically Important for Businesses # Chapter 5 - RECREATE THAT IMAGE OF EACH OF THE MODELS (economic, etc.) # Chapter 10 ## What do you know about? - Fiduciary Duties ### 1. Duty of Care - This one is all abt the financials. - All about the business judgment rule (expertise). - Must be informed of all material information reasonably available. - You must be able to prove or u will be subject to oversight. Do u know what u should know? - Material info: quarterlies, statistics, financials, etc. - Must carefully consider the available options within the constraints presented before making a decision on behalf of the firm. - Satisficing (settlings, simplified decision making) would be the opposite. - Doesnt work for fiduciary duty. - Must use the business judgment rule. - You have the expertise to make a business decision that cant be understood by an ignorant observer. - The c-suite has to have expertise and you get expertise thru work experience. ### 2. Duty of Good Faith - Must act with regard for their duties. - Behind a duty there is a RIGHT. - What are the rights of your stakeholder? - Stockholder primacy: a right to their return. - Employee rights: OSHA laws. - Customers: getting what they paid for. - Must be honest. - Community: EPA laws (clean air/water, no interference w ur land unless imminent domain) - Must act in best interest of the firm. - Egoism: act in the interest of the self. - Don’t do that. Ur not the primary recipient. ### 3. Duty of Loyalty - Self-interest must not be given precedence over the interests of the firm and stockholders. - No **egoism**. - No conflict of interest. - Must avoid corporate opportunity. - Insider trading: if the information isnt communally known, don’t share it principle / agent problem. ### Ethical Issues Related to Executive Compensation - Skyrocketing executive compensation packages raise numerous ethical questions. - Greed and avarice are the most apt terms for the moral character of such people from a virtue ethics perspective. - Fundamental questions of distributive justice and fairness arise when these salaries are compared to the pay of average workers or to the billions of human beings who live in abject poverty on a global level. - In theory, lofty compensation packages are thought to serve corporate interested in 2 ways: - They provide an incentive for executive performance. - They serve as rewards for accomplishments. - In practice, reasonable doubts exist about these rationals as there is much less correlation between pay and performance than one would expect. - In terms of stock performance, executives seem to reap large rewards regardless of business success. - The fiduciary duty of boards ought to involve approving high enough salaries to provide adequate incentive, but not more than what is needed. - Another crucial governance issue is the disincentives that compensation packages, and in particular the heavy reliance on stock options, provide. - When executive compensation is tied to stock price, executives have a strong incentive to focus on short-term stock value rather than long term corporate interests. - One of the fastest ways to increase stock price is through layoffs of employees. This may not always be in the best interests of the firms. - A case can be made that stock options have also been partially to blame for the corruption involving managed earnings. - When huge amounts of compensation depend on quarterly earnings reports, there is a strong incentive to manipulate those reports in order to achieve the money. ### Corporate Governance Subsequent to the Sarbanes-Oxley Act - SOX applies to publicly held American companies (Same as FCPA) - Public - Same as FCPA - International companies registered to the SEC - Third parties that provide services to the above. - SOX audits must be separate from other internal audits. ### SOX: Protects Investors - Investors look at Financials. A company is in good shape according to profit margin, working capital, earnings, leverage, etc. - Must make sure financials are reliable. SOX holds business people accountable. - Creates the public company accounting oversight board (PCAOB). - Revises corporate governance standards. - Adds new disclosure requirements. - Increases criminal penalties for violations of the securities laws. - New federal crimes related to fraud. ### Paperwork - Requires paperwork retention for 5-7 years. Knowingly violating this rules carry penalties of up to 10 years in prison. - Fines and/or up to 20 years imprisonment for altering, destroying, mutilating, concealing, falsifying records, documents for the purpose of intent to obstructing a legal investigation ### Auditors - Independence: prohibits accounting firms from performing certain non-audit services for audit clients. - Partner rotation: requires audit partner and review partner rotation every 5 years. - Cooling off period: audit firm cannot perform if CEO, CFO, controller, chief accounting officer, etc. was employed by and participated in the audit 1-year prior to the start of the audit. - **Verification**: second-person review and approval of audit reports. ### Sox Reporting and Disclosure - Issuers are required to disclose on an urgent basis, information on changes in the financial condition or operations. - Annually, CEO and CFO must certify financial reports and verify: - Report does not contain any material untrue statements or material omission or be considered misleading. - Financial statements and related information fairly present the financial condition of firm. - Officers have evaluated these internal controls within the previous ninety days and report on their findings on the effectiveness of internal controls and procedures. - Internal controls; multi-signature controls on a bank to prevent laundering. - Controls mechanisms to crosscheck employees. - The #1 control mechanism is budget. - If you are doing your **fiduciary** duty you have a lot of control mechanisms. - Control mechanisms can be used unethically. ### Benefit Corporations (Also Related to CSR) - What's the governance (fiduciary duty) aspect of benefit corps? - If ur not upholding **fiduciary duty**, who can come after you? (shareholder & law) - The judge wants to see if the leaders used their business judgment rule. - When ur a b-cop, when you spend $, it goes to benefit of society so it has to all come back to that. - **2 purposes to benefit corps:** - Benefit **society**. - Communicate **clearly** how **business judgment rule** will be exercised and how they will executive **governance duties** (fiduciary duties). - The idea behind a corp is that the product is the solution to the problem. - "Patagonia is trying to build a company that could last 100 years". - "Benefit corp legislation creates legal framework to enable mission-driven companies like patagonia to stay mission-driven through succession, capital raises, and even changes in ownership, by institutionalizing the values, culture, processes, and high standards put in place by founding entrepreneurs". - The **legal framework** gives the new CEO the legal responsibility to make sure the company continues to provide public benefit. - Brings **accountability**. - Provides **clarity** to **directors**. - Ur article of incorporation (legal instrument) has to state what specific benefit you are trying to give to society. - It has to be stated before the investment. - Offers legal protection to directors and officers. - Helps **maintain mission** over time. - Creates accountability to be a good company. - **Purpose**: The firm SHALL create **general public benefit** (a material positive impact on society and the environment) and MAY create **specific public benefit** *(a specific intent of the company)*. - **Accountability**: directors shall consider effect of decisions on stakeholders. - **Transparency**: publish and distribute annual benefit report to all shareholders and make available on website. - **Firm must prepare an annual benefit report on its creation of public benefit.** - **Report must be given to the shareholders and posted on the firms website.** - **Assessment must be against an independent, transparent third-party standard.** - **Benefit report must detail the ways in which the company pursued general public benefit and how successful it was in doing so and the reasons why the firm may not have achieved benefit.** - **(COSO will not be on the final)** - The USSG - Agent/Principle problem # Review Pre-Test Questions: 1. Milton Friedman's perspective is that increased levels of social responsibility have political consequences. To which political system does he compare this? - **a**. Free market - **b**. Socialism - **c**. Democracy 2. Which of the following is a traditional approach to corporate culture? - **a**. Integrity based - **b**. Compliance based - **c**. Values-based - **d**. Customer based 3. Which of the following best represents a firms triple bottom line? - **a**. Economic, social, and environmental sustainability - **b**. Economic, legal, and environmental sustainability 4. Milton Friedman takes what position on business and social causes? Business should - **b**. Contribute if it is good for the financial position of the firm - **c**. Contribute because its the right thing to do 5. Payment to the following person is not considered under the FCPA. - **c**. Official of a political party 6. Regarding accountability within Benefit Corps, directors must consider the effect of decisions on - **a**. Stakeholders - **b**. Shareholders 7. If we judge a leader solely by the results produced, we are following the - **a**. Utalitarian - **b**. Deontolgical - **c**. Virtual - **d**. Kantian 8. Which of the following is not a benefit for having a strong compliance program incorporating the FCPA? - **b**. Foreign officials are more likely to ask for bribes from companies 9. Before shareholder primacy took hold of corporations, were employees considered to be at least equal or less important than shareholders? - **a**. Less important - **b**. At least equal 10. Which state features strongly in its support of the shareholder primacy doctrine (at least according to your readings) - **c**. Delaware 11. Corporate Social responsibility (CSR) refers to the: - **c**. Accountability that a manager has to his subordinates 12. Business professionals have _ in that their professional and ethical obligations to the firm override their personal interests - **c**. Fiduciary duties 13. Which of the following statements is true about the economic model of csr? - **b**. It holds that businesses should fully integrate the economic and social goals by bringing social responsibilities into the core of their business model. 14. Identify the correct fiduciary duty that suggests board members are not permitted to act in a way that is inconsistent with the best interest of a firm. - **a**. Duty of candor 15. Which of the following is not an annual requirement of a benefit corp? - **c**. The firm must audit itself to determine if it has provided the benefit it claimed it would. 16. According to the economic model of CSR, the sole responsibility of the business is to: - **c**. Fulfill the economic functions that it was designed to serve 17. The _ serves as an articulation of the fundamental principles at the heart of the org and should guide all decisions. - **b**. Mission statement 18. Which of the following is an essential element in being an ethical leader? - **d**. The end or objective towards which the leader leads. 19. _ and an ongoing ethics audit allow organizations to uncover silent vulenerablilites that could pose as challenges later to the firm, thus serving as a vital element in risk assessment and prevention. - **c**. Monitoring 20. A true statement about corp culture is that _ - **b**. It provides stability that can benefit one time and can be a barrier to success at another. 21. Which of the following should management NOT be watching out for as a warning sign that an overseas employee might be violating the FCPA? - **b**. Lack of transparency in expense and accounting records. 22. Which of the following is not an annual requirement of a B corp? - **c**. The firm must audit itself to determine if it has provided the benefit it claimed it would.