Management Chapter 4 PDF

In the previous chapter we identified several components that help a manager to determine the “Right Work” to be done. There is another aspect to identifying the “Right Work” and that is the subject of this chapter. A manager also needs to con-sider the legal, ethical, socially responsible, and valu...

In the previous chapter we identified several components that help a manager to determine the “Right Work” to be done. There is another aspect to identifying the “Right Work” and that is the subject of this chapter. A manager also needs to con-sider the legal, ethical, socially responsible, and values-based aspects of the work to be done. Work that does not fully address these four aspects does not adequately meet the test of Doing What’s “Right”. In this chapter we will review a few business-related laws that are important for managers to understand in order to make sure their organization is legally compli-ant. We will also review the basic tenets and approaches to ethical decision making. Many organizations adopt a set of core values to guide all employees in understand-ing what work is considered the “Right” work. We will also discuss elements that might be included in an organization’s “Core Values” statement. Finally, as orga-nizations grow and prosper, it is important to address the needs and expectations of a broad set of stakeholders. Corporate Social Responsibility (CSR) is an impor-tant aspect of fulfilling an organization’s broader purpose to serve all constituents impacted by their action In this Topic we will provide a brief overview of some of the legal requirements for businesses and offer a few examples of their impact on business activities. There are a variety of laws and regulations that govern the activi-ties of businesses. Some of the major categories include: LG 4-2 4.1.1 Labor Laws and Regulations 4.1.2 The Uniform Commercial Code 4.1.3 Environmental Protection Laws and Regulations 4.1.4 Industry Specific Regulations 4.1.1 Labor Laws and Regulations – As we discussed in Chapter 2 (Evolution of Management) there was a movement during the industrialization era to protect the rights of individual workers and to avoid their exploitation by large corporations. Over the last 85 years the following are some of the laws that were enacted to protect the rights of workers: The National Labor Relations Act of 1935 gave workers in private industries the legal right to organize, engage in collective bargaining, and to strike. The Fair Labor Standards Act of 1938 established the 40-hour work week and the requirement to pay overtime at one and one half the regular rate for any hours worked beyond 40 hours. It also established a minimum wage (40 cents/hour) and eliminated use of child labor in dangerous jobs. The Social Security law of 1935 provided retirement income for workers once they reached the age of 65 years or older. The Equal Pay Act of 1963 made it illegal to have different pay rates for the same job based on gender. The Civil Rights Act of 1964 made it illegal to discriminate in employment decisions on the basis of race, color, religion, sex, or national origin. The Occupational Safety and Health Act (OSHA) of 1970 was passed to help protect the safety and health of workers. A year later, an agency of the government with the same name (OSHA) was established with responsibility for issuing regulations and overseeing compliance with the new law nce the original passage of these laws several amendments and related laws have been passed to expand and strengthen their provisions but essentially all these laws still govern labor practices in business today. In Chapter 8 (Human Resources Management) we will discuss some other labor related laws governing business practices. 4.1.2 The Uniform Commercial Code – A commercial code is a set of laws that regulates and facilitates commercial transac-tions. It sets out to provide a uniform set of standards that market participants can refer to when conducting business and resolving disputes. In the U.S., all 50 states have adopted a unified body of commercial law known as the Uniform Commercial Code (UCC). The UCC was developed in 1952 as the result of collaboration between the American Law Institute (ALI) and the National Confer-ence of Commissioners on Uniform State Laws (NCCUSL). The purpose of the UCC is to provide a set of standard statutes nationwide for the governance of commercial activities. Once a state enacts the UCC, it becomes codified in that state’s laws. States can adopt the UCC in its original form, or they can modify it to better suit their local interests. The practical benefits of this approach provides uniform laws for dealing with disputes that may arise from common business activities such as shipping goods across state lines and how responsibility for those goods are handled in transit, the interpretation of contracts between businesses located in different states, the sale of goods from a manufacturer in one state to a customer in another state, and so forth. By having a uniform law governing business activities in all states, the legal com-plexity and legal risk of doing interstate commerce is greatly reduced thus making it easier to conduct such business activities across state lines. 4.1.3 Environmental Protection Laws and Regulations – The legal responsibility of businesses to protect the environment is governed by federal statutes, federal regulations, several judicial decisions, and common law. There are over 25 different federal statutes dealing with protection of the envi-ronment including the Clean Air Act, The Clean Water Act, and the Noise Control Act. The Environmental Protection Agency (EPA) is the primary federal government institution responsible for enforcing these statutes and for promulgating regulations to guide businesses on the requirements for complying with the federal statutes. Because of the number and complexity of the various statutes and regulations, many court cases have been litigated and now establish precedent for how these laws will be interpreted. Finally, common law (law that is derived from customs and judicial rulings rather that formal statutes) is used to resolve disputes regarding, for example, rights for a business to use water from a nearby river. 4.1.4 Industry Specific Regulations – Many industries have laws and regulations that govern their specific activities. Some examples include: Publicly Traded Companies – (Publicly traded companies are companies that list their stock [ownership rights] on stock exchanges for sale to investors.) One of the most notable statutes impacting publicly traded companies was the Sarbanes-Oxley Act passed in 2002 that required senior executives in these companies to take responsibility for the accuracy of their financial reports and the reliability of their internal control systems with significant fines and penalties, including incarceration, for failure to comply. Oil & Gas Industry – most states have regulations regarding the exploration and production of oil and gas in their states. Many of these rules deal with the rights of mineral owners and their obligation to conserve the resources they are using in their operations. Financial Services – The Securities and Exchange Commission (SEC) and various bank regulations establish rules that specifically apply to stock exchanges, investments banks, commercial banks, and insurance companies regarding their activities. In the case of commercial banks, for example, there are regulations regarding capital requirements, reserve requirements, corporate governance, financial disclosures, and credit rating requirements. Professional Baseball – This is the odd case of an industry that is exempt from the application of a law that applies to all other industries. The Major League Baseball organization (MLB) has an exemption from the Sherman Antitrust Act (passed in 1890 to protect against a single organization having a monopoly, or total control over an industry). This exemption occurred as a result of a Supreme Court decision dating back to 1922 which concluded that the Sherman Antitrust Act did not apply to MLB. That decision has been upheld in two subsequent Supreme Court cases. Those Court decisions essentially allow MLB to have a monopoly on the professional sports league for baseball. Other industries have similar specific regulations that govern their activities. Unfortunately, there are many examples of misconduct in busi-ness that are the direct result of unethical behavior. Several of these incidents involve inap-propriate financial gain including the Enron, Tyco, and WorldCom scandals. Others involve corpo-rate misconduct in terms of fail-ure to address product safety issues including the Bridgestone/Firestone tire blowouts and the Ford Explorer roll-overs in 2001, and the Japanese auto supplier Takata finally recalling tens of millions of air bag inflators that would explode in accidents. There are also examples of dam-age to the environment such as BP’s massive oil spill in the Gulf of Mexico in 2010 and Volkswagen cheating on their emissions tests for diesel engines. Finally, are cor-rupt collaborations between businesses and governments as disclosed in the release of the “Panama Papers” which revealed billions in assets hidden by government and business leaders. Each of these incidents results in tremendous costs not only to the perpetrators but also to those who placed their trust in those organizations includ-ing customers, shareholders, employees, communities, and other constituents. In some cases, the impact of these behaviors includes the death of innocent people or irreparable damage to the environment. Why do businesses behave in unethical ways? What can businesses do to help ensure ethical behavior by all employees including the leaders? The answers to these questions are the subject of this Topic 4.2. To understand Ethical Decision Making in business it is necessary to address two important questions: 4.2.1 “What does happen” when someone acts unethically? 4.2.2 “What should happen” when someone is faced with an ethical decision? To focus only on the second item above is to ignore the sad reality of what is occur-ring every day in businesses around the globe. To reduce unethical practices, it is important to understand why they happen. 4.2.1 “What does happen” when unethical behavior occurs? The research indicates that there are both internal and external factors that are responsible. Linda Trevino developed the “person-situation interactionist” model describing these factors. Some of the internal factors include: Level of moral development of the individual Willingness to accept and obey authority from others Ability to control one’s own behavior Relationships with others who have an influence on perpetrator’s behavior Some of the external factors include:  Culture of the organization Consequences for unethical behavior Ease of opportunity to act unethically Characteristics of the work 4.2.2 When examining “what should happen” the model developed by James Rest suggests there are four steps that should be followed when making Ethical Decisions: 1. Moral Awareness: realize there is a moral issue or ethical problem. 2. Moral Judgment: figure out what you should do by applying moral standards in order to determine the appropriate moral course of action. 3. Moral Intention: give priority to moral values above other personal values in order to intend to do what is morally right. 4. Action or Implementation: implement a plan of action based on having sufficient perseverance, strength of conviction, and implementation skills to be able to follow through on your intention to behave morally and thus, overcome the obstacles in order to do the “Right” thing. One of the key steps in this model is the second step, Moral Judgment. The ques-tion is, “What standards should be applied in order to determine the appropriate moral course of action”? Several standards have been proposed based on various approaches to aid in moral Judgment: Utilitarian approach – should choose the option that produces the greatest good for the greatest number of people Individualism approach—should choose the option that promotes the individual’s best long-term interests. Essentially this is based on the do unto others in order to have them do unto you in the same way (for example, to be dishonest is not in the long term interest of the individual because it encourages others to be dishonest) Moral Rights approach—should choose the option that does not violate any fundamental moral rights of individuals such as free consent, right to privacy, freedom of conscience, freedom of speech, right to due process, and right to life and safety Justice approach—(there are 3 types) Distributive Justice – should choose based on standards of equity, fairness, and impartiality. For example, different treatment of people should not be based on arbitrary characteristics such as gender or race. Procedural Justice – should choose based on fair administration of pre-established rules. When using this approach, the rules should be clearly stated in advance and consistently and impartially enforced. Compensatory Justice – should compensate persons suffering damage due to the decision chosen based on the costs of those damages to the injured person. However, decision makers should not be held responsible for such damages for situations over which they have no control. Two other approaches that have been suggested in ethics literature are: Impartial Opinion –To discuss the situation with an independent, objective, knowledgeable, and respected third party to obtain an unbiased view Full Disclosure –To assume that whatever decision is made will be openly presented to the public and to assess how the majority of the informed public are likely to judge the appropriateness of the actions These last two approaches attempt to eliminate the potential for bias by the deci-sion maker. By looking at the decision in terms of how others will view it, it may help the decision maker to make a more objective decision than if he/she unilaterally uses one of the other approaches. Summary: Ethical Decision Making is an important element of “Doing What’s ‘Right’”. It requires managers to take responsibility to understand the implications of their actions on all the stakeholders in the business. It also requires that they understand how their emotions and other factors can adversely influence their ability to make the “Right” decision as described in the Trevino model that explains some of the factors that lead to unethical behavior. Alternatively, using the Rest four-step model for ethi-cal decision making combined with considering the various “moral standards” that have been developed can help managers to fully assess their choices for dealing with an ethical dilemma and guide them to “Doing What’s ‘Right’”! In the previous Topic we reviewed Ethi-cal Decision Making. The foundation for making ethical decisions is a moral compass that guides leaders and other employees in their daily actions. While most individual’s moral compass is based on the values and beliefs that were part of their personal development, organi-zations can also establish a set of Core Values that define the standards that all employees should embrace in their actions on behalf of the organization. When leaders specifically articulate, exemplify, and reinforce a set of Core Values, they can establish the foundation for responsible and ethical behavior throughout their organizations. Core Values are the underlying norms of behavior and actions that are expected of all employees in an organization. LG 4-4 Developing Core Values for a business is an essential element of defining the “Right” thing to do for all employees. The Core Values should have a broad perspec-tive to address the types of behavior and activities expected of the organization when interacting with its various constituents both internal and external. It is not enough for leadership to simply articulate these Core Values; they must also set the example in their own communications and actions. This includes recog-nizing and rewarding those who routinely demonstrate the Core Values and prop-erly addressing issues created by those who don’t. When leadership acts in this way, Core Values can become embedded in the culture of the organization. In the “Doing What’s ‘Right’ – In Practice” section at the end of this chapter there is an example of Johnson & Johnson’s Core Values statement and how it has helped guide the company in making important decisions Organizations have many stake-holders. Stakeholders consist of those persons, organizations, and other constituents who are impacted by the actions of the organization. Examples of stake-holders include: Customers Suppliers Distributors Employees Communities Business Partners Governments Shareholders (business owners) Other interested parties (e.g., possibly family members of the above stakeholders) There is not a single definition of Corporate Social Responsibility (CSR) that is gener-ally recognized. A generally accepted description: Corporate Social Responsibility (CSR) is the actions of an organization to recognize and proactively respond to the needs and expectations of all of its stakeholders. LG 4-5 Historically, CSR was considered a “voluntary” effort on the part of the organiza-tion but some have suggested that in today’s social media environment, accountabil-ity for an organization’s actions is more transparent and more rapidly disseminated making it important to give appropriate attention to the impact of an organization’s actions on the broader community of its stakeholders. Today, CSR initiatives may be less “voluntary” and more of a requirement. Many organizations view CSR as an opportunity to create value for the organiza-tion by enhancing its reputation. Customers, business partners, potential employ-ees, and others may evaluate an organization based on its CSR actions (or lack of actions). Thus, proactive efforts to embrace CSR principles and to develop and implement impactful CSR programs can lead to positive business outcomes. What types of actions do more progressive organizations take to embrace CSR? In a recent McKinsey study, three actions of leaders who are proactive in their CSR efforts were identified: 1. Changing your mindset to act as a role model in your daily decisions 2. Using empathy to find common ground and win-win solutions 3. Creating a broader vision that points toward meaning In discussing why these actions are important, McKinsey found that the second item, using empathy, has a unique meaning in this context, referred to as Cognitive Empa-thy “... which differs from the more common emotional empathy, is the largely conscious drive to recognize and understand another person’s emotional state.” Based on McKinsey’s study, effectively meeting the varied needs and expecta-tions of multiple stakeholders requires organizations to: Be clear that their mission extends beyond just responding to customers and shareholders requirements in pursuit of a higher and broader purpose. Develop cognitive empathy with all stakeholders to fully appreciate the underlying drivers of their expectations. This empathy provides the foundation for finding win-win solutions to address the sometimes-conflicting expectations of multiple stakeholders. Have leaders be the role model through actions, and not just words, to reinforce the organization’s commitment to the higher purpose as demonstrated through funding and management of CSR initiatives. A good example of a statement of Core Values is the Johnson & Johnson (J&J) Credo which is etched in stone in the lobby of their corporate headquarters. This statement articulates the company’s responsibilities to its customers, employ-ees, communities, and stockholders with the deliberate emphasis that if the company fulfills its responsibilities to the first three constituents, the fourth constituent, stock-holders, should “realize a fair return”. Only minor modifications have been made to this document since it was first crafted by Robert Wood Johnson in 1943, just before the company offered its stock publicly. On the company’s website, J&J says “Our Credo is more than just a moral compass. We believe it’s a recipe for business success.” A good example of a “test” of these values came when James Burke, CEO of J&J in the mid-1980s, found out that several bottles of one of the company’s flagship products, Tylenol, had been found to be tainted with a dangerous substance. While the incident seemed to be isolated to a specific store in the western United States and it clearly appeared to be a case of product tampering after shipment, he none-theless decided to pull every bottle of Tylenol off all store shelves worldwide until the exact cause had been identified and confirmed. Advisors had warned that he would destroy millions of dollars invested in building the positive brand identity, in addition to the costs of removing the product, with little likelihood that the com-pany was responsible for what happened. When asked why he ignored this advice he simply said that the Credo makes it clear what I need to do - to make sure our customers were indeed our first responsibility! Later, with confirmation that the product had been contaminated by someone who placed the tainted product in the store, the company made a substantial investment in creating tamper-resistant packaging for its consumer products as part of helping to assure future customers that products had not been altered since leaving the factory. Each year, Johnson & Johnson conducts a confidential survey of its 140,000+ employees asking them to evaluate how well the company is fulfilling its responsi-bilities as defined in the Credo. The results and actions to address any shortcomings are reviewed with the Executive Committee of the company with routine follow-ups to track progress. In a recent example, J&J announced that its accelerated efforts to develop a large quantity of vaccine for COVID-19 would be done on a not-for-profit basis. The current CEO, Alex Gorsky, specifically mentioned the Credo in explaining the reasons for the company’s decision. These actions by a large and successful company are examples of the impact that strong corporate values can have on encouraging responsible corporate behav-ior. Even with such a commitment to values, however, companies like J&J are not immune from questionable practices. Most recently, J&J settled lawsuits that arose out of the opioid crisis and its production and sale of opioid based products. In another situation, the company agreed to provide restitution to patients who were impacted by a faulty hip replacement design developed in one of their businesses. While neither of these actions indicate the company deliberately chose to behave unethically, it is not always possible to fully anticipate the harmful effects that a company’s actions can have on customers and other stakeholders. In such cases, taking responsibility for adverse actions, taking steps to correct and prevent the issues, and seeking to rectify and compensate those who have been harmed can help to mitigate the impact of actions that created negative outcomes for custom-ers, their families, or other constituents. These corrective actions are all part of “Doing What’s ‘Right’” even when the original actions were unintentional.