Chapter 5

Organizational Ethics
and the Law
McGraw-Hill/Irwin

Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

Ch. 5: Key Learning Objectives

Classifying an organizations culture and ethical
climate
Recognizing ethics challenges across the multiple
functions of business
Creating effective ethics polices, ethics training
programs, ethics reporting mechanisms, and similar
safeguards
Assessing the strengths and weaknesses of a
comprehensive ethics program
Understanding how to conduct business ethically in
the global marketplace
Identifying the differences between ethics and the law

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Corporate Culture and Ethical Climates

Corporate culture
A blend of ideas, customs, traditional practices, company
values, and shared meanings that help define normal
behavior for everyone who works in a company.

Ethical climate
The unspoken understanding among employees of what is
and is not acceptable behavior.
Multiple climates (or subclimates) can exist within one
organization.

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The Components of Ethical Climates

Figure 5.1
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Business Ethics across Organizational unctions

Business operations can be very specialized, leading to
ethical challenges related to those functional areas.
Accounting Ethics - Accountants may face with conflict of interests
such as obligation to company (Client) and self interest (Accounting
firm) and interest of others (shareholders and public).
Financial Ethics Financial officers are responsible for managing the
firms assets and raising capital.
Marketing Ethics emphasized in honesty and fairness in advertising
health and safety issue, firm is liable for consumer injury).
IT Ethics invasion of privacy, access to personal and business info,
e-com transactions, confidentiality.
Professional ethical standards may conflict with the ethical standards
within the organization.
Professional associations may have specific ethical standards that apply
to that function.
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Professional Codes of Conduct

Examples of business professional associations and
their codes:
American Institute of Certified Public Accountants (AICPA)
Code of Professional Conduct
Chartered Financial Analyst (CFA), CFA Institute Code of
Ethics and Standards of Professional Conduct
American Marketing Association (AMA) Code of Ethics
Association for Computing Machinery (ACM) Code of Ethics
and Professional Conduct

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Building Ethics Safeguard into the Company

To improve the quality of a companys ethical
performance you have to change the culture so that
ethics is part of everyday decision-making.
To do so means institutionalizing ethics or building
ethics safeguards in to everyday routines.
A recent survey of ethics safeguards or programs of
major corporations companies is shown on next slide.

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Figure 5.2 Organizations Ethics

Safeguards
Percentage of Firms Reporting They Have the Ethical Safeguard

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Two Ethics Approaches

Compliance-based approach:
Seeks to avoid legal sanctions.
Emphasizes threat of detection and punishment to promote
lawful employee behavior.

Integrity-based approach:
Combine concern for law with emphasis on employee
responsibility for ethical conduct.
Employees instructed to act with integrity and conduct business
dealings honestly.

Both approaches have been found to lessen unethical

conduct, but in somewhat different ways.
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Ethics Programs and Policies

Top Management Commitment and Involvement
Critical to fostering employee ethical behavior. The example set by
the top executives is critical to fostering ethical behavior.

Ethics Policies or Codes

Provides guidance to managers and employees on what to do
when faced with an ethical dilemma.
In U.S. policies tend to be instrumental, providing rules and
procedures.
In Japan policies tend to be combination of legal compliance and
company values.
Just having a code or policy is insufficient, must be widely
distributed and have associated training.
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Ethics Programs and Policies

Ethics and Compliance Officers
Relatively new position (started in 1980s) that has grown
significantly.
Membership in professional association, Ethics and Compliance
Officers Association, doubled between 2000 and 2004.

Ethics Reporting Mechanisms

Purposes include providing interpretations of proper ethical
behavior, avenue for reporting unethical conduct, and informationsharing tool.
Employees can place a call on the companys ethics assist or
helpline.
Executives tend to use the helpline more often than middle
managers.

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Ethics Programs and Policies

Ethics Training Programs
Is very effective method for promoting workplace ethical
behavior
Most expensive and time-consuming element of an ethics
program

Ethics Audits
Formal study of deviations from company ethical standards
Management must report on corrective action to be taken in
response to found deviations

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Comprehensive Ethics Programs

Integration of various program/policy components is
critical to effective ethics design
Integrated approach is called a comprehensive program

26% of companies recently surveyed had a 6

element program integrating
Written policies, training, advice resources, hotline, ethics
discipline, and evaluation systems

Those working at firms with a comprehensive

program are
More likely to report ethical misconduct
More likely to be satisfied with any investigation and
response to ethical misconduct
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Corporate Ethics Awards

Awarded to companies for efforts in creating and improving
their ethical performance
These companies serve as models for others to follow
Demonstrates that firms can be financially successful and
ethically focused
The Foundation for Financial Service Professionals
sponsors the American Business Ethics Awards (ABEA)
recognizes companies that exemplify high standards of ethical
behavior in their everyday business conduct and in response to
specific crises or challenges
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Ethics in a Global Economy

Doing business in global context brings up host of
complex ethical challenges
Common example is bribery
Bribery is defined as a questionable or unjust payment often
to a government official to ensure or facilitate a business
transaction

International watchdog agency, Transparency

International, publishes a survey of countries levels of
corruption
Bribe-taking more likely in countries with low per capita
income, low salaries for government officials, and less
income variation

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Efforts to Curtail Bribery

on the Global Level

Organization for Economic Cooperation and Development (OECD)

Treaty
Effort for member countries to agree to steps to prevent and combat
bribery
Nearly 40 countries ratified the treaty

Other initiatives
Chinas National Corruption Prevention Bureau
International Labour Organization and the United Nations have
attempted to develop an international code of conduct for
multinational corporations

U.S. Foreign Corrupt Practices Act prohibits executives of U.S.

based companies to pay bribes to foreign government officials
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Relationship between Law and Ethics

Both define proper and improper behavior
Laws are societys attempt to formalize ethical
standards
Written to capture publics wishes about what constitutes right
and wrong behavior

Ethical concepts are more complex than laws

Often apply to areas not covered by laws
Some businesses proactively address ethical areas not covered
by law through voluntarily adopted practices

Managers who are trying to improve their companys

ethical performance need to do more than comply with
laws
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Cost of Corporate Lawbreaking

Lawbreaking in business is often a result of acts committed
by the organizations own employees
White-collar crime accounts for more than 330,000 arrests a
year
illegal acts committed by individuals, employees or business
professionals such as fraud, insider trading, embezzlement, or
computer crime

The Association of Certified Fraud Examiners (ACFE)

reported in 2012 that the typical organization lost five percent
of its revenues to fraud each year
This translated to a potential global fraud loss of more than $3.5
trillion
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