Professional Documents
Culture Documents
Ethical Governance
To be effective, a Corporate Code of Conduct must be reinforced by a
comprehensive ethical culture.
Corporate Codes of Conduct should encourage employees to behave at
higher levels of Kohlbergs stages of moral development:
http://www.haverford.edu/psych/ddavis/p109g/kohlberg.stages.html
Organizational structures should be established to encourage and facilitate
individuals moving to higher levels of moral reasoning.
Each stage has a broader perspective than the one before regarding the
duties role, and obligations of the individual to society.
The final stage of Kohlbergs moral development hierarchy is where the
individual develops a principled conscience that adheres to moral and
social codes because the codes are guided by the same moral principals
that guide society.
TABLE 5.15
CODE GUIDANCE ALTERNATIVES
AND THE CONTROL/MOTIVATION SIGNALED
GUIDANCE PROVIDED
CONTROL/MOTIVATION SIGNALED
Imposed Control
Self-control
TABLE 5.8
ETHICAL CULTURE: IMPORTANT ASPECTS
An ethical culture combines formal and informal elements to guide
employee thought and action, including:
Ethical leadership by executives and supervisors*
Reward systems incorporate ethical considerations*
Perceived fairness, fair treatment of employees*
Open discussion of ethics in the organization*
Authority structure that emphasizes an employees accountability and
responsibility to question his or her own actions, and an obligation to
question authority when something seems wrong*
Organizational focus that communicates care for employees and the
community, rather than self interest
Official policies and procedures (code of ethics, practice, conduct)
Supporting offices (e.g. Ethics officer, ombudsperson)
Supporting structures (e.g. telephone hotline, whistleblower
protection, code sign-off, training, etc.)
* Most influential factors as found by Trevio et al. (1999)
TABLE 5.12
DEVELOPMENT AND MAINTENANCE OF AN ETHICAL CORPORATE CULTURE
STEP
PURPOSE
Assign responsibility:
Chairman or CEO
Ethics officer
Ethics committee
Ethics Audit
TABLE 5.22
COMPARISON OF AGENCY THEORY & STEWARDSHIP THEORY
Agency Theory
Stewardship Theory
Economic agent
Behavioral assumptions
Behavioral characteristics
want to contribute
will choose to do right
strive to achieve
like to innovate
want to do competent work
interested in a work-life balance
Management philosophy
Control-oriented
Involvement-oriented
Motivation
Extrinsic rewards
Organizational identification
High Commitment
Trust
Sources: James H. Davis, F. David Schoorman and Lex Donaldson, Toward a Stewardship Theory of Management,
Academy of Management Review 1997, Vol. 22, No. 1, 20-47, and Steven E. Salterio and Alan Webb, Honesty in
Accounting and Control: A Discussion of The Effect of Information Systems on Honesty in Managerial Reporting: A
Behavioral Perspective, Contemporary Accounting Research 2006, Vol. 23, No. 4, 919-932.
FIGURE 5.4
ALIGNING VALUES
FOR ETHICAL MOTIVATION & ACTION
Identification
Assessment
Rank
Stakeholder
Interests
Reports
Observations
Stakeholder
Evaluation
Corporate
Value System
Values
Transmission
Policies, Codes
Reinforcement
CORPORATE CULTURE
Created by Management
Leads to Corporate Actions
Actions
Motivation
Beliefs
Values
Other
Influences
TABLE 5.19
MECHANISMS FOR COMMPLIANCE ENCOURAGEMENT,
MONITORING, & REPORTING WRONGDOING
Compliance encouragement
Awards, bonuses
Inclusion in performance reviews, remuneration decisions, and promotion
Reprimands, suspension, demotion, fines, dismissal
Monitoring
Ethics audit or internal audit procedures
Reviews by legal department
Annual sign-off by all or some employees
Employee surveys
Facilitation of reporting of wrongdoing
Assurance of a fair hearing process
Protection: absolute confidentiality, whistle-blower protection plan
Counselling/information: ombudsperson program, hotline, human resources
Committee oversight assured: ethics committee of board, Audit Committee
TABLE 5.9
ETHICAL PROGRAMS USUAL DIMENSIONS
1. Formal ethics codes
2. Ethics committees developing policies, evaluating actions, investigating and
adjudicating policy violations
3. Ethics communications systems
4. Ethics officers or ombudspersons coordinating policies, providing
education or investigating allegations
5. Ethics training programs to raise awareness and help employees respond to
ethical problems
6. Disciplinary processes for unethical behavior
TABLE 5.13
DEPTHS OF CODE COVERAGE
Credo
Code of Ethics
Code of Conduct
Code of Practice
TABLE 5.2
AREAS OF CORPORATE RISK ASSESSMENT
Governance and objectives
Areas of impact
Reputation
Assets, revenues, costs
Performance
Stakeholders
Sources of risk
Environmental
Strategic
Operational
Informational
Specific hazards
Degree of control over risklittle, some, great deal
Documentation
TABLE 5.7
ETHICS PROGRAM ORIENTATION TYPES
ORIENTATION
PRIMARY FOCUS
Compliance-based
Integrity or Values-based
Satisfaction of external
stakeholders
SOURCES: Trevio, Weaver, Gibson and Toffler, 1999, 135-139; Paine, 1994, 111; Badaracco & Webb, 1995, 15.
TABLE 5.1
CULTURAL VALUES AND HYPERNORMS
Sphere/Culture
Basis of Value-system
N. American
Sino-Confucian
Japan
Middle East
Europe
Personal rights
South America
TABLE 5.16
SUBJECTS FOUND IN CODES
Ethical principles honesty, fairness, compassion, integrity, predictability, responsibility
Respect for stakeholder rights, and duties owed to each stakeholder
Vision, mission, and key policies tied into the above
Ethical decision making frameworks, sniff tests, rules of thumb, and guidance on making
tradeoffs between competing objectives
When to seek counsel, and whom to seek it from
Specific topics found in over 5% of employee, supplier and joint venture codes:
Bribery/improper payments or influences
Conflict of interest
Security of proprietary information
Receiving gifts
Discrimination/equal opportunity
Giving gifts
Environmental protection
Sexual harassment
Antitrust
Workplace safety
SOURCE
Political activities
Community relations
Confidentiality of personal information
Human rights
Employee privacy
Whistle-blowing and protection programs
Substance abuse
Nepotism
Child labour
: The Conference Board Research Report, Global Corporate Ethics Practices, 1999, 29.
FIGURE 5.2
STAKEHOLDER ACCOUNTABILITY ORIENTED GOVERNANCE PROCESS
SHAREHOLDERS + OTHER STAKEHOLDERS
PUBLIC INTEREST
All Interests
BOARD OF DIRECTORS
Sets
External
Auditors
Vision, Mission,
Strategy, Policies,
Codes, Compliance,
Feedback,
Compensation
Lawyers
Guidance
Feedback
CORPORATE CULTURE
Created by Management
Leads to Corporate Actions
WhistleBlowers
Financial
Reports
Ethics
Officer
Professional
Accountants
Including
Internal Auditors
FIGURE 5.1
MAP OF CORPORATE STAKEHOLDER ACCOUNTABILITY
Shareholders
Activists
Governments
Lenders &
Creditors
Competitors
Employees
Corporation
Customers
Suppliers
Others, including the Media,
who can be affected by or who can
affect the achievement of the
corporations objectives
FIGURE 5.3
STAKEHOLDER INTERESTS RANKING, RISK ASSESSMENT, & USAGE
All Interests
Identify All
Stakeholders
BOARD OF DIRECTORS
Sets
Integrate
Into Corporate
Value System
& Actions
Vision, Mission,
Strategy, Policies,
Codes, Compliance,
Feedback,
Compensation
Guidance
CORPORATE CULTURE
Created by Management
Leads to Corporate Actions
Actions
Motivation
Beliefs
Values
Feedback
TABLE 5.3
ETHICS RISK MANAGEMENT PRINCIPLES
Normal definitions of risk are too narrow for
Stakeholder-oriented accountability and governance
An ethics risk exists where
the expectations of a stakeholder may not be met.
Discovery and remediation are essential in order to
avoid a crisis, or lose the support of stakeholders.
Assign responsibility, develop annual processes, board review
TABLE 5.4
CONFLICTING INTERESTS CAUSES OF JUDGEMENT BIAS
How might judgement be swayed
Any interest, influence, loyalty, concern, emotion, or other feature
tending to make judgement less reliable than normal
Self-interest
Bribes, kickbacks payments or property to decider, family, designees
Gifts, free travel, favors,
Special advantages non-market discounts on goods
Special treatment flattery, social involvement
Dealings with family, relatives or relations
Fraud ...
Misappropriation of funds or property
Cheating on expense accounts
Falsifying documents
Stealing cash, assets, or resources
Falsifying results to obtain bonuses, merit pay, or promotion
Misunderstanding
Confused signals or incentives
Boss/everybodys doing it
Cultural differences
Slippery slope
Where a small favor leads to ever larger demands
TABLE 5.6
GUIDELINES FOR ACCEPTANCE OF GIFTS OR PREFERENTIAL TREATMENT
1. Is it nominal or substantial?
2. What is the intended purpose?
3. What are the circumstances?
4. What is the position of sensitivity of the recipient?
5. What is the accepted practice?
6. What is the firm/company policy?
7. Is it legal?
FIGURE 5.5
CONFLICT OF INTEREST FOR A DECISION MAKER
A decision maker (D) has a conflict of interest if, and only if,
(1) D is in a relationship with another (P) requiring D
to exercise judgement in Ps behalf and
(2) D has a special interest tending to interfere with the
proper exercise of judgement in that relationship.
Special
Non-P Interests
Decision Maker
(D) has a duty to
act/judge in
Ps best interest
Ps Satisfaction
based on
Fulfillment of
Ps Interests
FIGURE 5.6
TYPES OF CONFLICT OF INTEREST
Potential
Actual
Decision Point
Non-existent
Apparent
Imaginary
TABLE 5.5
MANAGEMENT OF CONFLICTING INTERESTS
Steps To Be Taken
Ensure awareness through:
Codes of conduct and
Related initial and ongoing training
Create a program and an understanding of:
Employers concerns regarding conflict of interests
Major issues:
Avoidance is preferable
Slippery slope
Management techniques:
Annual sign-off, confirmation review and compliance
Guidelines for gifts, behavior
Counseling, reporting, reinforcement
Chinese walls/firewalls, scrutiny
TABLE 5.17
EXTERNAL SHOCKS AND INFLUENCES TRIGGERING CODE MODIFICATION
Anti-bribery legislation U.S. Foreign Corrupt Practices Act of 1977
This Act provided an early motivation for codes
U.S. Sentencing Guidelines of 1991
Brought provision for Due Diligence defense
Environmental responsibility:
Acid rain, air pollution, ozone depletion
(U.N. Brundtland Commission Report of 1987)
New Environmental Protection statutes
Exxon Valdez oil tanker spill triggers Valdez (now CERES) Principles
Fair treatment for:
Employees:
Feminism: sexual harassment, equal opportunity for pay and promotion
Minorities: discrimination*
Health, safety and well-being
Supplier employees no sweat shop or child labor
Drug problems privacy vs. safety
Whistle-blowers**
Customers buyer beware slowly becomes seller beware
Health & safety concerns auto recalls (see Ford, Firestone case)
Ethical consumerism, quality
Shareholders:
Misuse of inside information
Conflict of interests
Mandate and operations are ethical Enrons banks engage in transactions without economic substance
designed to mislead
* See Ethics Case: Texacos Jelly Beans in Chapter 7.
** See GE case described in reading by Andrew Singer in Chapter 1.
TABLE 5.18
ESSENTIAL FEATURES TO DEMONSTRATE A
DUE DILIGENCE DEFENCE IN RESPECT OF ENVIRONMENTAL MATTERS
1. A written environmental policy, made known to appropriate employees
2. Operating practices which guard against environmental malfeasance, including contingency plans to
cover mishaps to ensure full scale, timely clean-up
3. Employees briefed on their duties and responsibilities under the policy, as well as their potential
personal liability, and the liability of others
4. Employees informed of legal requirements, including notice to government complete with a contact
list
5. A person who is primarily responsible for environmental matters and monitoring compliance
6. Consideration of an environmental audit or consultation with an expert to start the protection
process and monitor progress
7. Monitor pollution control systems and report mishaps on a timely basis
8. Regularly review reports on compliance, potential problems environmental charges, conviction and
employee training
9. Management that keeps abreast of new legislation, makes an internal review of compliance and
advise directors of the results, and allocates a real and satisfactory budget to achieve these features
FIGURE 5.8
EXECUTIVE REPUTATION & ETHICAL LEADERSHIP
MORAL MANAGER
MORAL PERSON
Weak
Strong
Strong
Hypocritical
Ethical Leader
Weak
Unethical
Leader
Ethically Neutral Leader
Source: Moral Person and Moral Manager: How Executives Develop a Reputation for Ethical Leadership,
L.K. Trevio et al, California Management Review, Vol. 42, No. 4, Summer 2000. Reprinted with permission.