Business Ethics Ethical Decision Making and Cases 9th Edition by Ferrell
Fraedrich
ISBN 1111825165
9781111825164
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CHAPTER 4
The Institutionalization of Business Ethics
SUMMARY
In this chapter, we examine the boundaries of ethical conduct and focus on the voluntary, core practices, and mandated requirements for legal compliance three important areas in developing an ethical culture. In particular, we concentrate on compliance in specific areas related to competition, consumers, safety, and the environment. We consider the requirements of the Sarbanes–Oxley legislation, its implementation by the Securities and Exchange Commission (SEC), and how its implementation has affected companies. We also discuss the 2010 passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act and examine some of its major provisions. Additionally, we provide an overview of the FSGO for organizations and give recommendations and incentives for developing an ethical corporate culture. The FSGO, the Sarbanes–Oxley Act, the Dodd-Frank Act, industry trade associations, and societal expectations support core practices. Finally, we examine voluntary responsibilities and cause-related marketing, along with how strategic philanthropy can be an important core competency to manage stakeholder relationships.
INSTRUCTOR NOTES FOR “AN ETHICAL DILEMMA”
Students may wish to debate the controversy surrounding the marketing of products that have psychological as well as physical dependencies associated with them. The products in this example are marketing betel nuts in India and Khat around Asia. Myron is a recent graduate who just started working for Producto International (PI). He is excited to work on discovering and marketing medical products around the world. Myron’s dilemma is that if he agrees to help market the two products, he will become an active participant in promoting products that may result in addiction. However, he and his wife will be generously compensated for his endeavors. Both products are grown legally around the world and have no distribution restrictions in the countries in which PI wishes to market them (although they do face restrictions in the United States). His other option is to reject the position, which may not be enthusiastically received by his wife. It would also hurt his chances for future projects and promotions within PI. Also, by choosing to reject the marketing opportunity, Myron may be “labeled” in the industry, making it difficult to get hired by another company if he chooses to leave PI. In addition, students may wish to discuss the similarities of these products to tobacco and cigarettes and the marketing of such items to children/teenagers in countries where no restrictions exist.
LECTURE OUTLINE
I. Managing Ethical Risk Through Mandated and Voluntary Programs
A. Voluntary practices include beliefs, values, and voluntary contractual obligations. All businesses engage in some level of commitment to voluntary activities in order to benefit both internal and external stakeholders.
B. Most firms engage in philanthropy giving back to communities and causes.
C. Core practices are documented best practices, often encouraged by legal and regulatory forces as well as trade associations.
D. The Better Business Bureau (BBB) is a leading self-regulatory body that provides directions for managing customer disputes and reviews advertising cases.
E. Mandated boundaries are the externally imposed boundaries of conduct, such as laws, rules, regulations, and other requirements.
1. Corporate governance, compliance, risk management, and voluntary activities all help to maintain an ethical culture and to manage stakeholder expectations for appropriate conduct in an organization.
2. Compliance represents areas that must conform to existing legal and regulatory requirements.
3. Corporate governance is structured by a governing authority providing oversight and checks and balances to make sure that the organization meets its goals and objectives for ethical performance.
4. Risk management analyzes the probability or chance that misconduct could occur based on the nature of the business and the exposure to risky events.
5. Voluntary activities often represent the values and responsibilities that firms accept in contributing to stakeholder needs and expectations.
II. Mandated Requirements for Legal Compliance
A. Laws and regulations are established by governments to set minimum standards for responsible behavior society’s codification of what is right and wrong.
B. Laws regulating business conduct are passed because certain stakeholders believe that business cannot be trusted to do what is right in certain areas, such as consumer safety and environmental protection.
1. Civil law defines the rights and duties of individuals and organizations (including businesses).
2. Criminal law prohibits specific actions such as fraud, theft, or securities trading violations and imposes fines or imprisonment as punishment for breaking the law.
3. The state or nation enforces criminal laws, while individuals enforce civil laws.
a. Criminal and civil laws are derived from four sources: the U.S. Constitution (constitutional law), precedents established by judges (common law), federal and state laws or statutes (statutory law), and federal and state administrative agencies (administrative law).
b. The Consumer Financial Protection Agency was established after the latest financial crisis, which resulted in many consumers losing their homes.
c. The primary method of resolving conflicts and serious business ethics disputes is through lawsuits in which one individual or organization uses civil laws to take another individual or organization to court. Lawsuits are expensive and many organizations seek to avoid them.
d. Laws establish the basic ground rules for responsible business activities.
C. Laws Regulating Competition
1. The issues surrounding the impact of competition on a business’s social responsibility arise from the rivalry among businesses for customers and profits.
2. Procompetitive legislation involves laws that have been passed to prevent the establishment of monopolies, inequitable pricing practices, and other practices that reduce or restrict competition among businesses.
a. They were enacted to encourage competition and prevent activities that restrain trade.
D. Laws Protecting Consumers
1. Laws that protect consumers require businesses to provide accurate information about products and services and to follow safety standards. The first consumer protection law was passed in 1906.
2. Large groups of people with specific vulnerabilities have been granted special protections under the law (the elderly, children, etc.)
3. The FTC’s Bureau of Consumer Protection was created to protect consumers against unfair, deceptive, or fraudulent practices. It is divided into five divisions.
4. The Food and Drug Administration regulates food safety, human drugs, tobacco, dietary supplements, vaccines, veterinary drugs, medical devices, cosmetics, products that give off radiation, and biological products.
E. Laws Promoting Equity and Safety
1. Laws promoting equity in the workplace were passed during the 1960s and 1970s to protect the rights of minorities, women, older persons, and persons with disabilities; other legislation has sought to protect the safety of all workers.
a. Of these laws, probably the most important to business is Title VII of the Civil Rights Act, originally passed in 1964 and amended several times since.
b. The Occupational Safety and Health Administration (OSHA) makes regular inspections to ensure that employees have a safe working environment.
c. Many employees still work in unhealthy or dangerous environments, in spite of the passage of laws to protect them.
d. Competitive pressures can lead to workplace safety problems, such as manufacturing injuries or careless accidents by overworked employees.
F. Laws Protecting the Environment
1. Environmental protection laws have been enacted largely in response to concerns over business’s impact on the environment, which began to emerge in the 1960s.
2. Sustainability has recently become an important concept to businesses. It means “meeting the present needs without compromising future generations’ abilities to meet their own needs.”
a. Many consumers are interested in environmental issues and expect companies to be environmentally responsible.
b. Being green is even a competitive issue for some firms.
3. The Environmental Protection Agency (EPA) was created in 1970 to coordinate environmental agencies involved in enforcing the nation’s environmental laws.
4. While pollution can be harmful to people, animals, and industries, trying to pinpoint who is responsible for environmental degradation is not always easy, especially when it involves different countries.
III Gatekeepers and Stakeholders
A. Trust is the glue that holds businesses together. It creates confidence and helps build longlasting business relationships. Ethics help to create the foundational trust between two business parties.
1. There are many people who must trust and be trusted to make business work properly. Sometimes these parties are called gatekeepers (accountants, regulators, lawyers, financial rating corporations, auditors)
2. They are critical in providing information that allows stakeholders to gauge the true health of a corporation
B. Accountants
1. Measure and disclose financial information to the public
2. Some accountants have not adhered to their duties as stakeholders and have allowed profits or conflicts of interest to interfere with their objectivity
C. Risk Assessment
1. Assessors of financial products failed in their duties to stakeholders during the most recent recession.
2. By not appropriately assessing the risks associated with various financial instruments, investors and stakeholders were misled.
3. Many are calling for more drastic oversight of credit-rating firms.
IV. The Sarbanes–Oxley (SOX) Act
A. Congress passed the Sarbanes–Oxley Act in 2002 to establish a system of federal oversight of corporate accounting practices.
1. The law requires corporations to establish codes of ethics for financial reporting and to develop greater transparency in financial reporting to investors and other stakeholders.
2. The Public Company Accounting Oversight Board represents the heart of SarbanesOxley
a. It oversees the audit of public companies in order to protect the interests of investors and to further the public interest in the preparation of informative, accurate, and independent audit reports for companies.
b. The Sarbanes–Oxley Act also seeks to ensure auditor and analyst independence, in order to reduce conflicts of interest and to ensure enhanced financial disclosures of public companies’ true condition Registered public accounting firms can no longer provide both auditing and non-auditing services to public companies.
c. The Sarbanes–Oxley Act is better able to ensure compliance with the enhanced financial disclosures of public companies’ true condition
d. Sarbanes–Oxley offers whistle-blower protection to employees that would prohibit the employer from taking certain actions against employees who
lawfully disclose private employer information However, employees who witness wrongdoing are often still afraid to be whistle-blowers because of backlash and difficulties finding employment elsewhere.
e The national cost of compliance to the Sarbanes–Oxley Act was high, but studies show that the costs of compliance have gone down somewhat since the law’s implementation.
i) Many companies benefit from compliance in spite of the costs.
V. The Dodd-Frank Wall Street Reform and Consumer Protection Act
A. The Dodd-Frank Act was passed to improve financial regulation, increase oversight of the industry, and prevent the type of risk-taking, deceptive practices, and lack of oversight that led to the 2008-2009 financial crisis.
B. One of the provisions of the Dodd-Frank Act instituted the creation of two new financial agencies.
1. The Office of Financial Research is charged with improving the quality of financial data available to government officials and creating a better system of analysis for the financial industry.
2. The Financial Stability Oversight Council (FSOC) is responsible for maintaining the stability of the financial system in the United States through monitoring the market, identifying threats, promoting market discipline among the public, and responding to major risks that threaten stability.
C. The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB) to regulate consumer financial products and protect consumers from deceptive or toxic financial instruments.
1. The CFPB has the responsibility to curtail unfair lending and credit card practices, enforce consumer financial laws, and check the safety of financial products before their launch into the market.
2. Critics believe that the CFPB has too much power that could result in heavy sanctions for financial institutions.
D. The Dodd-Frank Act instituted a whistle-blower bounty program to reward whistle-blowers who report misconduct to the SEC. Whistle-blowers who report financial fraud to the Securities and Exchange Commission and Commodities Exchange Commission are eligible to receive 10 percent to 30 percent of fines and settlements if their report results in a conviction of more than $1 million in penalties.
VI. Laws That Encourage Ethical Conduct
A. Laws and regulations have been passed to discourage unethical decisions and to foster programs designed to improve business ethics and social responsibility.
B. The most important of these are the FSGO, the Sarbanes–Oxley Act, and the Dodd-Frank Act
VII. Federal Sentencing Guidelines for Organizations
A. The FSGO was passed in 1991 to create an incentive for organizations to develop and implement programs designed to foster ethical and legal compliance.
1. It applies to all felonies and class A misdemeanors committed by employees in association with their work
B. A 2004 amendment to the FSGO requires that a business’s governing authority be informed about its ethics program with respect to content, implementation, and effectiveness.
C. 2007–2008 amendments to the FSGO extend the ethics training of individuals to members of the board or governing authority, high-level personnel, employees, and the organizations’ agents.
D. The Guidelines had four new amendments in 2010. The guidelines recommend simplifying the complexity of reporting relationships; encourage companies to extend their internal ethical controls; add more specific language of the word “prompt” to help employees
recognize what it means to report an ethical violation promptly; and amend the extent of operational responsibility to apply to all personnel within a company’s ethics and compliance program
VIII. Highly Appropriate Core Practices
A. The concept of core practices is to focus more on developing structurally sound organizational practices and structural integrity for financial and nonfinancial performance measures than on an individual’s morals.
1. Most ethical issues relate to non-financials such as marketing, human resource management, and customer relationships.
B. Voluntary responsibilities relate to business’s contributions to stakeholders. Voluntary responsibilities provide four major benefits to society:
1. They improve the quality of life and help make communities places where people want to do business, raise families, and enjoy life.
2. They reduce government involvement by providing assistance to stakeholders.
3. They develop employee leadership skills.
4. They help create an ethical culture and values that can act as a buffer to organizational misconduct.
C. Cause-related marketing ties an organization’s product(s) directly to a social concern through a marketing program.
1. Cause-related marketing can affect buying patterns if consumers sympathize with the cause, the brand and cause are perceived as a good fit, and consumers are able to transfer feelings toward the cause to the brand.
2. A potential problem is that consumers may perceive a company’s cause-related campaign as merely a publicity stunt, especially if they cannot understand the link between the campaign and the company’s business practices
D. Strategic philanthropy is the synergistic and mutually beneficial use of an organization’s core competencies and resources to deal with key stakeholders so as to bring about organizational and societal benefits.
IX. The Importance of Institutionalization in Business Ethics
A. Institutionalization involves embedding values, norms, and artifacts in organizations, industries, and society.
B It is important to recognize that institutionalization of business ethics has advanced rapidly over the last 20 years as stakeholders have recognized the need for improving business ethics.
DEBATE ISSUE: TAKE A STAND
Have your students split into two teams. One team will argue for the first point, and the other will argue for the opposing view. The purpose is to get students to realize that there are no easy answers to many of these issues. This issue involves the creation of the Consumer Financial Protection Bureau. While some believe the agency is necessary to protect consumers, others believe the agency may have too much power. The team in favor of the CFPB could argue about the necessity for consumer protection and the need to regulate the excessive risk-taking and questionable financial practices that led to the last recession. The team against the CFPB could argue that the agency will increase the costs of financing and put too many burdens on banks and other companies.
“RESOLVING ETHICAL BUSINESS CHALLENGES” NOTES
Students will probably feel that some of Albert’s business practices are unethical but may not recognize that Albert and his wife have also been involved in some illegal activities. Purchasing stock from
Mary’s father’s company while conveying sensitive information to investors about activities within the company could be construed as insider trading. Insider trading has also occurred if Albert buys the stocks for his boss and friends and then receives the “bonus.” Also, Albert and Mary’s use of the information gleaned from Uncle Chen can be construed as corporate espionage. Albert is guilty of trading stocks within portfolios in order to gain the fees, even if the activity does not benefit the client. He is also guilty of allocating hot IPOs to the personal brokerage accounts of corporate or venturecapital executives. The shares are often sold, or “spun” for quick profits to get future business from these clients. Finally, Albert and Barry are involved in front-running, which is the exchange equivalent of waiting in line and having someone cut in front of you. In the stock market, an investor places an order to buy a large amount of shares and, knowing that the trade will likely boost the value of the shares, will first trade some stock for himself or a partner. After the second trade is completed, the broker can cash in, netting a profit with no risk involved. Several firms have pleaded no contest to allegations such as these and are now being scrutinized by the SEC. Students may also want to discuss Uncle Chen’s friends, especially those elderly clients who wanted low-risk investments.
Students can also discuss Mary’s feelings of depression and potential relocation to Taiwan in case the SEC discovers their activities. In reality, many of the things that Albert and Mary have done are usually settled out of court; however, insider trading such as what Albert’s superior is attempting could potentially result in jail time. Spinning, when detected, is usually handled internally before the SEC gets involved.
One fundamental point is that the stock exchange is based upon the trust between the broker and the client. Trust is defined as the perception that everyone who enters the market has an equal opportunity to make money. When activities such as spinning, churning, and insider trading come to the attention of exchange members, the matters are usually dealt with internally to avoid damaging the general public’s perception of trust.
