Introduction to Business Ethics Chapter 3 PDF

Introduction to Business Ethics Chapter III  Introduction  This chapter starts with the general definition of ethics, its field of study, including meta-ethics, normative ethics, and applied ethics, and proceeds with business ethics. Ethics are broadly...

Introduction to Business Ethics Chapter III  Introduction  This chapter starts with the general definition of ethics, its field of study, including meta-ethics, normative ethics, and applied ethics, and proceeds with business ethics. Ethics are broadly described in the literature as moral principles about right and wrong, honorable behavior reflecting values, or standards of conduct.  Honesty, openness, responsiveness, accountability, due diligence, and fairness are core ethical principles.  Chapter Objectives: Present the definition of ethics in general and business ethics in particular. Recognize the need for a code of ethics that is upheld especially by setting the right “tone at the top”. Become familiar with the SEC rules and regulations relating to ethics. Provide an overview of listing standards and suggestions relating to ethics. Understand the board’s role in setting the company’s ethical codes. Recognize the benefits of and need for an ethical workplace. Identify incentive programs and their roles in promoting an ethical workplace.  Chapter Objectives: Illustrate that actions speak louder than words in promoting an ethical workplace. Discuss the integration of business ethics into the business curriculum. Provide an example of proficient implementation of an ethical code by examining the Defense Industry Initiatives on Business Ethics and Conduct.  Ethical Theories There are several broadly accepted ethical theories: Consequentialist Theory. Nonconsequentialist Theory. The Individualist Dimension of Ethical Decision Making. Collectivism Theory. Meta-ethics. Normative Ethics. Applied Ethics.  Ethical Theories First: Consequentialist Theory: Advocates that ethical behavior or the moral rightness of one’s actions are determined by the results of the act and its impact on either the individual (egoism) or all involved (utilitarianism). Second: Nonconsequentialist Theory: In contrast, assess the nature of the act as being either ethical or unethical regardless of its results.  Ethical Theories Third: The Individualist Dimension of Ethical Decision Making: Asserts that individuals are only concerned with the impact of their decisions on their own and their immediate family’s well-being and interests. Fourth: Collectivism Theory: postulates that individuals tend to belong to groups and thus focus on the group’s interests when making ethical decisions. Fifth: Meta-ethics: Focus on ethical theories, their evolution, and the social, religious, spiritual, and cultural influences shaping those theories.  Ethical Theories Sixth: Normative Ethics: emphasize practical aspects by providing principles of appropriate behavior and guidance for what is right or wrong, good or bad in behavior (principles of justice, honesty, social benefits, lawfulness). Seventh: Applied Ethics: deal with the application of moral principles and reasoning as well as codes of conduct for a particular profession or segment of the society ( e.g. business ethics, environmental ethics, medical ethics).  Ethical Theories moral structure for the entire organization. Integrity and ethical conduct are key components of an organization's control environment as set forth in both reports of the Committee of Sponsoring Organizations of the Treadway Commission (COSO): "Internal Control- Integrated Framework" and "Enterprise Risk Management (ERM) -Integrated Framework".  The SEC rule describes the term code of ethics as written standards designed to deter wrongdoing and to promote: 1. Full, fair, accurate, timely, and transparent disclosures in reports and documents filed or submitted to the SEC and in other public communications. 2. Honest and ethical conduct throughout the company, including the ethical handling of apparent or actual conflicts of interest between personal and professional activities and relationships. 3. Accountability for compliance with the established code of ethics. 4. Compliance with applicable regulations and professional standards. 5. The timely and effective internal reporting of noncompliance and any violations of the established code of ethics to an appropriate person or persons designated in the code. Note: Codes of business ethics and conduct are intended to govern behavior, but they cannot substitute for moral principles, culture, and character.  Ethics in the Workplace Ethics in the workplace are receiving a considerable amount of attention as the emerging corporate governance reforms require setting an appropriate tone at the top promoting ethical conduct. A review of the reported financial scandals proves that most ethical dilemmas have financial consequences and dimensions. There is increased interaction between the board of directors, audit committees, internal auditors, external auditors, executives, and employees in general regarding ethical conduct in the workplace. SOX is reported to have a positive impact on business codes of ethics. But OTHER elements are required to promote competency and integrity among all participants. Findings of Deloitte Touche 2007 Survey on Ethics and Workplace Key factors in promoting ethical workplace management behavior direct supervisors behaviour positive reinforcement compensation (bonus +salary) behaviour of peers Findings of Deloitte Touche 2007 Survey on Ethics and Workplace Reasons why people make unethical decisions lack of personal integrity job dissatisfaction financial rewards pressure to meet goals ignorance of code of conduct Findings of Deloitte Touche 2007 Survey on Ethics and Workplace Aspects that cause conflicts high levels of stress long hours fast-paced environment inflexible schedule highly competitive environment Findings of Deloitte Touche 2007 Survey on Ethics and Workplace results pertaining to questionable behavior in the workplace environment stealing petty cash cheating on expense reports taking credit for another person’s accomplishment lying on time sheets about hours worked other results Findings of Deloitte Touche 2007 Survey on Ethics and Workplace Majority believes that following actions are acceptable use company technology for personal use take a sick day when not actually ill date a subordinate ask a colleague for a personal favor THUS: All organizations, regardless of their mission (e.g., profit oriented, nonprofit) and size (large vs. small), should establish an “organizational ethical culture.” The phrase “organizational ethical culture” consists of three words: (1) organization, which is defined as a group of individuals or entities bound to achieve a shared goal; (2) ethics, which is honorable behavior conforming to the norm of the group; (3) culture, which is a pattern of shared beliefs adopted by the group in dealing with its internal and external affairs.  Business Ethics Four different levels of business ethics have been identified based on the type of business and how its actions are evaluated. These levels are: 1. The society level, which defines ethical behavior and assesses the effect of business on society. 2. The industry level, which suggests that different industries have their own set of ethical standards (e.g., chemical industry vs. pharmaceutical industry). 3. The company level, under which different companies have their own set of ethical standards. 4. The individual manager level, at which each manager and other corporate participants are responsible for their own ethical behavior. Consequently, one feasible way to judge ethical behavior is to focus on determinants of business ethics and behavior such as corporate culture, incentives, opportunities, and choices.  Business Ethics Corporate Culture A corporate culture of setting an appropriate tone at the top of promoting ethical and honorable behavior can play an important role in establishing ethical behavior throughout the company. Corporate culture is influenced by the delegation of authority, assignment of responsibilities, and the process of accountability. Proper communication of corporate culture such as code of conduct and job descriptions throughout the company is essential in promoting and enforcing ethical behavior. Corporate culture and compliance rules should provide incentives and opportunities for the majority of ethical individuals to maintain their honesty & integrity and provide measures for the minority of unethical individuals to be monitored, punished, and corrected for their unethical conduct. Companies should promote a spirit of integrity that goes beyond compliance with the established code of business ethics.  Business Ethics Incentives The most essential determinant of business ethics. Individuals within the company tend to act according to incentives provided to them in terms of rewards and the performance evaluation process. Opportunities Effective corporate governance, internal controls, and enterprise risk management can reduce the opportunity for unethical conduct. Choices Individuals, in general, are given the freedom to make choices and usually choose those that will maximize their well-being. Managers and employees make decisions, take actions, and exercise their choices on behalf of the company as agents of their company. Nevertheless, their choices are often influenced by corporate culture, incentives, opportunities, and actions because other individuals in the organization do not work in isolation.  Triangle of Business Ethics The triangle of business ethics consisting of (1) ethics sensitivity, (2) ethics incentives, and (3) ethical behavior.  Triangle of Business Ethics Ethics sensitivity: is defined as moral principles, workplace factors, gamesmanship, loyalty, peer pressure, and job security that influence one’s ethical decisions and are derived from the organization’s ethical culture. Ethics incentives: encompass rewards, punishments, and requirements for behaving either ethically or unethically. Examples of ethics incentives are an organization’s appropriate tone at the top promoting ethical conduct & AICPA professional code of conduct.  Triangle of Business Ethics Ethics incentives: Incentives for ethical behavior come from several sources, including: Individual-based incentives: Pertain to one′s ethical values and moral principles to do the right thing. Organization-based incentives: Come from setting appropriate tone at the top and establishing, maintaining, and enforcing ethical behavior throughout the organization. They include measures for motivating and mandating individuals to comply with the company’s applicable regulations and ethical standards and act within ethical and legal constraints.  Triangle of Business Ethics Ethics incentives: Incentives for ethical behavior come from several sources, including: Profession-based incentives: are defined by a professional affiliation of individuals. For example, practicing accountants should observe the AICPA’s and PCAOB’s code of professional ethics. Professional codes of conduct serve as a reference and a benchmark for individuals, establish rules of conduct relevant to the profession, and provide a means of facilitating enforcements of rules and standards of conduct.  Triangle of Business Ethics Ethics incentives: Incentives for ethical behavior come from several sources, including: Market-based incentives: are provided by markets in imposing substantial costs on organizations and individuals that engage in unethical behavior. For example, reducing costs by lowering the quality of products and services would cause a market reaction. Regulatory-based incentives: are induced through rules and regulations by imposing sanctions, fines, penalties on organizations and individuals who engage in unethical and unacceptable behavior.  Triangle of Business Ethics Ethical behavior: Doing “the right thing” rises above a rules-based mindset that asks “is this legal?”, and adopts a more principles-based approach that asks “is this right?” The company’s directors and executives should demonstrate, through both their actions and their policies, a firm commitment to ethical behavior throughout the company and a culture of trust within the company.  SEC Rules on Corporate Code of Ethics The SEC rule describes the term “code of ethics” as written standards designed to deter wrongdoing and to promote: (1) Full, fair, accurate, timely, and transparent disclosure in reports and documents filed or submitted to the SEC. (2) Avoidance of conflicts of interest, including disclosure of any material transaction or relationship that reasonably could be expected to give rise to such a conflict to an appropriate person or persons identified in the company’s adopted code. (3) Honest and ethical conduct throughout the company (4) Accountability for compliance with the established code of ethics (5) Compliance with applicable laws, rules, regulations, and professional standards (6) The prompt internal reporting of noncompliance and any violations of the established code of ethics to an appropriate person or persons designated in the code.  SEC Rules on Corporate Code of Ethics The SEC extended code of ethics requirements to both the company’s principal financial officers (SOX’s Section 406) and principal executive officers (SOX’s Section 407). The SEC rules in implementing Section 406 of SOX require public companies to disclose whether they have adopted a code of ethics for their principal officers, including principal executive officers, principal financial officers, principal accounting officers, controller, or other personnel performing similar functions in the annual report filed with the SEC. If the company has not adopted such a code of ethics, it must disclose the reason for not doing so.  Listing Standards The listing standards of the NYSE further expanded on the SEC rules by requiring listed companies to: adopt and disclose a code of business conduct and ethics for directors, officers, and employees; promptly disclose any waivers of the adopted code for directors and executive officers. Example: The NYSE listing standards recommend that each company determines its own business conduct and ethics policies, but provide an extensive list of matters that should be addressed by the company’s code, including conflicts of interest, corporate opportunities, confidentiality, protection of proper use of the company’s assets, fair dealing (limited use of copyrighted work without the permission of the owner), reporting of any illegal or unethical conduct, and compliance with applicable regulations.  Ethics Teaching in Business School The emerging corporate governance reforms have had a positive impact on academic programs. The goal of corporate governance and business ethics education is to teach students their responsibilities and accountability to their profession and society. Almost all states require CPA candidates to pass an ethics exam before licensing and report the ethics component in their continuing education requirements. Almost all states require a minimum amount of ethics education for their practicing CPAs (external auditors).  Ethics in Institutions of Higher Education Financial scandals of the twenty-first century have reinvigorated interest in business ethics and academic programs, because investors are now more educated about the impacts of unethical behavior on their investment, and business schools realize the importance of training future ethical business leaders. Several incidents of ethical violations and cheating have been reported at highly rated business schools. Academic integrity and ethical conduct by students and faculty are important to the sustainable well-being and reputation of institutions of higher education. This academic integrity can be achieved when: (1) there is an effective and fairly enforceable academic honor code, (2) faculties are willing to take proper action against suspected cheaters, (3) adequate research is conducted to identify factors that affect academic integrity, including fundamental ethical values, (4) ethics are integrated into the business curriculum, and pedagogies (teaching methods) are developed to teach and encourage adherence to ethical values and conducts.  Professional Ethics The characteristics of a profession are: (1) existence of a common body of knowledge consisting of an intellectual skill obtained through education, training, certification, and continuing professional education; (2) adoption and adherence to a common code of conduct guiding professional behavior and action and holding members accountable for their actions; and (3) acceptance of a duty to society, the profession, and its members. Thus, the acceptance of ethical duties or responsibilities is the cornerstone of the profession.  Professional Ethics The accounting profession is characterized by: Serving the public interest, Performing responsibly with integrity, competency, objectivity, and transparency, Exercising due diligence in maintaining independence and improving the quality of services provided, Protecting investors from receiving misleading audited financial reports. Professional Ethics  Professional Ethics In June 2005, the International Ethics Standards Board for Accountants (IESBA), part of the International Federation of Accountants (IFAC), issued its revised Code of Ethics for use by professional accountants worldwide. The key principles of the IESBA’s code of ethics are: integrity, objectivity, professional competence and due care, confidentiality, professional behavior.  Reporting Business Ethics and Conduct Ethical accountability refers to the behavior of individual’s and the organization’s commitment to conduct their activities in an honorable manner. Social accountability refers to the effects of the organization’s activities and behavior of its stakeholders including society, the environment, competitors, suppliers, customers, employees, directors, officers, and other profit oriented and not for profit organizations. As corporate scandals come to light, even three years after the passage of SOX, the issue of business ethics becomes more prominent. Section 406 of SOX requires public companies to disclose in their annual financial statements the establishment (or lack of) a corporate code of conduct. Nevertheless, public companies may choose to report their business ethics and conduct as a separate report to their shareholders or as part of their regular filings with the SEC.  Reporting Business Ethics and Conduct Boards should set a right tone at the top promoting ethical conduct, and management should establish policies and procedures that define, communicate, and demand ethical conduct and enforce companies’ codes of conduct. Financial Reporting Integrity Financial Reporting Integrity Financial Reporting Integrity Financial Reporting Integrity  Financial Reporting Integrity ethical senior executives and other professionals (e.g., accountants, auditors) to achieve these goals. 3. Policies- Proper policies should be established to support the stated strategy, and these policies should be reviewed periodically and on an ongoing basis for their adequacy, appropriateness, and effectiveness. Reporting policies and procedures are normally concerned with accounting policies, internal control procedures, and risk assessment policies and procedures. Effective implementation of these policies substantially reduces the risk of misleading financial information.  Financial Reporting Integrity 4. Information- An organization's policies and procedures should ensure the production of relevant, useful, reliable, and high-quality financial information to assist users in making informed decisions. 5. Culture- A culture of ethical behavior and financial reporting integrity should be promoted throughout the organization by linking rewards systems to high-quality reporting and sustainable performance rather than short-term performance or pressure to make the numbers. The integrity reporting process promotes the attributes of honesty, fairness, and compliance with applicable regulations; ensures public interests are subject to proper remediation. Financial Reporting Integrity Framework for Reporting with Integrity  Conclusion Ethics are broadly described in the literature as moral principles about right and wrong, honorable behavior reflecting values, or standards of conduct. Honesty, openness, responsiveness, accountability, due diligence, and fairness are the core ethical principles. An appropriate code of ethics that sets the right tone at the top of promoting ethical and professional conduct and establishing the moral structure for the entire organization is the backbone of effective corporate governance.  Conclusion Corporate culture and compliance rules should provide incentives and opportunities for the majority of ethical individuals to maintain their honesty and integrity, and provide measures for the minority of unethical individuals to be monitored, punished, and corrected for their unethical conduct. The company’s directors and executives should demonstrate, through their actions as well as their policies, a firm commitment to ethical behavior throughout the company and a culture of trust within the company. Although a “right tone at the top” is very important in promoting an ethical culture, actions often speak louder than words.