Business Ethics
obedience to authority
-Another aspect of the influence significant others can exercise, helps explain why many employees resolve business ethics issues by simply following directives of a superior -in organizations that emphasize respect of superiors, employees may feel expected to carry out orders by a supervisor, even if they're contrary to an employee's morals -rewards and punishments managers use also influence decisions
role of BoD
-BoD made up of both independent members and internal (CEO, senior management, etc.) -in position of balancing interests and conflicts of company's various constituents -assume legal responsibility and fiduciary duty, have duty of diligence and duty of loyalty -choose top executives and set compensation (controversial issue) -organizational ethics: receive training to increase competency in ethics program development -audit committee: address issues such as whistle blower claims, cyber security, and bribery (esp. with international business) -protected to a certain degree by law against disgruntled stakeholders, but depends on situation (many still don't face consequences for misconduct) -hold ultimate responsibility of firm's success or failure, as well as ethics, for public corporations -held responsible by FSGO -directors chosen for expertise, competence, and ability to bring diverse perspectives
1990's: Institutionalization of Business Ethics (2)
-Clinton continued with self-regulation and free trade, but took unprecedented government action on health issues, such as banning teen smoking -Federal Sentencing Guidelines for Organizations (FSGO) developed, set tone for organizational ethical compliance programs in 1990's: "carrots and sticks" method, lesser punishments for companies that have ethical compliance programs in place
corporate culture
-a set of values, norms, and artifacts, including ways of solving problems that members (employees) of an organization share -overtime employees come to view company as living organism with mind and will of its own
ethical culture
-acceptable behavior as defined by the company and industry. -the component of corporate culture that captures the principles, values, norms an organization defines and is compared to by its industry as appropriate conduct, adhered to by its company and personnel (written and unwritten)
Twenty-First Century of Business Ethics
-accounting scandals led to Sarbanes-Oxley Act of 2002 -2008 financial system collapse -Amendments to the FSGO require that a business's governing authority be well informed about its ethics program with respect to content, implementation, and effectiveness: places responsibility on leadership (BoD) -Obama inherited recession -2017: Trump became President, decrease regulation, sustainability concerns
social issues
-associated with common good (idea that people live in a community and social rules should benefit the community) -deals with concerns affecting welfare of entire society -belief that all people should have right to try and obtain basic necessities of life (eg health, poverty, obesity, data privacy)
executive compensation
One of the biggest issues corporate boards of directors face, controversial -concern centered on ratio between highest paid executive at company and median employee salary: believed it should be less -average CEO compensation of S&P company is $12.5 million, 355 times average worker making $36,900 -many stakeholders support high levels of executive compensation only when directly linked to company performance -on other hand, can be argued that executives deserve it because they take on so much risk for company: many boards feel offering high compensation is a way to attract and retain top executives (but there is not necessarily a positive relationship between high pay and company performance) -another problem is performance-linked compensation may encourage executives to focus on short term performance at expense of long term growth
step 4: assessing organizational commitment to stakeholders and social responsibility
-brings first 3 steps together to arrive at understanding of social responsibility that specifically matches the organization and interest -this general definition will then be used to evaluate current practices and to select concrete social responsibility initiatives -transparency and disclosure in reporting social responsibility commitment important for BoD and top company officers (eg Starbucks)
1980's: business ethics reaches maturity
-business ethics acknowledged and promoted as field of study: provide publications, seminars, etc. -concept of stakeholders as foundational theory for business ethics decisions: "any group or individual who can affect/is affected by achievement of the organizational objectives" -Defense Industry Initiative (DII) developed to guide corporate support for ethical conduct, first widely diffused initiative: affected all of corporate America -Regan-Bush Era: less regulation of business and trade, promote self-regulation
sustainability
The potential for the long-term well-being of the natural environment, including all biological entities, as well as the interaction among nature and individuals, organizations, and business strategies -businesses must consider natural environment as a stakeholder too
morals
a person's personal philosophies about what is right or wrong
business ethics
comprises organizational principles, values, and norms that may originate from individuals, organizational statements, or from the legal system that primarily guide individual and group behavior in business
organizational factors (4)
corporate culture, ethical culture, significant others, obedience to authority
stakeholders
customers, shareholders, employees, suppliers, government agencies, communities, and many others who have a "stake" or claim in some aspect of a company's products, operations, markets, industry, and outcomes. give necessary resources to company. business exists because of these relationships. relationship is a two way street. stakeholders are both affected by and affect business. internal and external ones. like in any relationship, fundamental element is trust
instrumental approach to stakeholder theory
describes what happens if a firm behaves in a particular way. useful because it examines relationships involved in management of stakeholders including processes, structures, and practices that implement stakeholder relationships within an organization.
Defense Industry Initiative on Business Ethics and Conduct (DII)
developed in 1980's to guide corporate support for ethical conduct, six principles 1. DII supports understandable, detailed codes of conduct and widespread distribution 2. Companies are to provide training and continued support for employees 3. Defense contractors must create open atmosphere where employees feel comfortable reporting violations 4. Companies must perform internal audits/reporting 5. Companies preserve integrity of defense industry 6. Companies adopt philosophy of public accountability
duty of loyalty
directors and officers share this, have duty to make all decisions in best interest of corporation and stakeholders (eg, knowledge of inside information can't be used for personal gain)
secondary stakeholders
do not typically engage directly in transactions with a company and are therefore not essential to its survival. include the media, trade associations, and special interest groups
internal stakeholders
employees, owners, board of directors (held to fiduciary duty)
duty of care (duty of diligence)
fiduciaries have this responsibility to make informed decisions
corporate culture and ethical decision making
formed because groups have an identity that includes core values -within it there are written and unwritten rules that determines what constitutes right and wrong for the firm -these are judgments by organization and its ethics -ethical decisions place weight on judgments and values: decision makers must decide how much weight to place on their own values and those of the company -different than an ordinary decision because accepted rules no longer serve
shareholder model of corporate governance
founded in classic economic precepts, including the goal of maximizing wealth for investors and owners -potential for conflict between investors' and managers' interests
Consumers' Bill of Rights (4)
four basic consumer rights: the right to safety, the right to be informed, the right to choose, and the right to be heard, originally outlined in speech by JFK during 1960's
individual factors in ethical decision making (5)
gender, education, nationality, age, locus of control
step 6: gaining stakeholder feedback
generated through variety of means -stakeholders' general assessment of firm and its practices can be obtained by satisfaction or reputation surveys -can also assess stakeholder generated media such as blogs, websites, etc to gauge perceptions -more formal research may be conducted using focus groups, surveys, and observations -secondary stakeholders can have impact as well
Committee on Publishing Ethics (COPE)
helps editors of scholarly journals prevent and manage misconduct
normative approach to stakeholder theory
identifies ethical guidelines that dictate how firms should treat stakeholders. principles and values provide direction for decisions. affirms that stakeholders have legitimacy and right to engage in organization. clear policies of do/don't
step 1: assessing the corporate culture
identify organizational mission, values, norms, and behavior likely to have implications for social responsibility - important for social responsibility program to align with these values
step 2: identifying stakeholder groups
important to recognize stakeholder needs, wants, and desires - they have power over organization to withhold resources -many issues gain visibility because stakeholders express concern -important to have decision-making process in place to overcome adverbial approaches to problem solving
framework for ethical decision making process in business (4)
includes: -ethical issue intensity -individual factors -organizational factors -opportunity lead to business ethics evaluations and intentions which results in ethical or unethical behavior
corporate governance
involves development of formal systems of accountability, oversight, and control (checks and balances) -remove opportunity for employees to make unethical decisions -positive relationship with social responsbiilty
control
is the process of auditing and improving organizational decisions and actions
specific issues in business ethics (9)
misuse of company resources, abusive behavior, harassment, accounting fraud, conflicts of interest, defective products, bribery, product knockoffs, and employee theft
three approaches to stakeholder theory
normative, descriptive, instrumental. taking just one approach may be lacking something: a mix of the 3 may be the most effective
work experience
number of years in a specific job, occupation and/or industry
consumer protection
occurs in form of laws passed to protect consumers from unfair/deceptive business practices - advertising, product safety, environmental hazards
reputation
one of organization's greatest intangible assets with tangible value. firm does not control it in a direct sense, but its actions, choices, and consequences all influence stakeholders' perceptions if it. if reputation is tarnished, trust is gone: will have tangible impact on profits
"other" stakeholders
others who have a "stake" in some aspect of a company's products, operations, markets, industry, and outcomes (eg financial services industry - when it crashed, there were a lot of parties affected)
classic agency problem
ownership (investors) and control (managers) are separate -managers act as agents for investors, whose primary goal is increasing the value of the stock -investors and managers are distinct parties with unique insights, goals, and values -corporate governance mechanisms are needed to align investment and management interests (prevent fraudulent activity)
fiduciaries
persons placed in positions of trust that act on behalf of best interests of organization -have duty of care/duty of diligence to make informed decisions
oversight
provides system of checks and balances that limit employees' and managers' opportunities to deviate from policies and strategies aimed at preventing unethical and illegal activities
first step in ethical decision making
recognize that an ethical issue EXISTS requiring an individual or work group to choose among several actions that various stakeholders will ultimately evaluate as right or wrong
Issues in Social Responsibility (4 categories)
rests on stakeholder orientation: considers longterm welfare of society, there is evidence that narrowing focus on simply term-65profit maximization is counterproductive. -social issues -consumer protection -sustainability -corporate governance
10 Biggest Corporate Scandals (in class) - what do they have in common?
rules: broken -company policies -laws -environmental damage -lack of safeguards -lies to stakeholders -reckless negligence -financial fraud -greed -executive compensation: controversy -fear of employees to speak up, even if they're suspicious
potential ethical risk areas
sexual harassment, conflict of interest, bribery, time theft, and insider trading
social responsibility - four levels
social responsibility: organization's obligation to maximize positive impact on stakeholders and minimize negative impact. -economic: maximize stakeholder wealth and/or value (most basic level) -legal: abiding by all laws/regulations -ethical: follow standards of acceptable behavior as judged by stakeholders -philanthropic: "giving back" to society
steps to implement a stakeholder perspective
step 1: assessing the corporate culture step 2: identifying stakeholder groups step 3: identifying stakeholder issues step 4: assessing organizational commitment to stakeholders and social responsibility step 5: identifying resources and determining urgency step 6: gaining stakeholder feedback
interlocking directorate
the concept of board members being linked to more than one company -not illegal unless with a direct competitor
workplace integrity
the pressure to compromise organizational standards, observed misconduct, reporting of misconduct when observed, and retaliation against reports
1970s: Business Ethics as an Emerging Field
-business ethics began to develop as field of study, professors taught it -defined corporate social responsibility -Nixon Watergate Scandal -Foreign Corrupt Practices Act passed, making it illegal for US officials to bribe government officials of other countries - today a high priority for US Dept of Justice -"business ethics" was common term, but limited emphasis on ethical decision making process, more focus on defining and identifying issues such as bribery, deceptive advertising, price collusions
stakeholder orientation
-degree to which a firm understands and addresses stakeholder demands -involves "activities and processes within a system of social institutions that facilitate and maintain value through exchange relationships with stakeholders."
The 1960's: Rise of social issues in business
-development of anti-business trend due to critics' attacks of vested interests that controlled economic and political aspects of society: "military-industrial complex" -decay of inner cities and problems such as pollution -rise of consumerism -Consumers' Bill of Rights developed -Lyndon B. Johnson's "Great Society": intended national capitalism and told business community the US government's responsibility was to provide all citizens with some degree of economic stability, equality, and social justice; counter-activities wouldn't be tolerated
Federal Sentencing Guidelines for Organizations (FSGO)
-set tone for organizational ethical compliance programs in 1990's -rewards/punishes companies based on whether they implement programs and promote ethical compliance: "carrots and sticks" method to incentivize companies -if a company is making a proactive effort to be ethical and they are convicted of an ethical violation, the FSGO will tend to be more lenient with the punishment
benefits of business ethics (3)
1. Employee Commitment -willingness to sacrifice for organization -decrease turnover 2. Investor Loyalty -provides foundation for productivity and profits -don't want negative publicity (would threaten company's longterm viability) -demand for social responsibility is increasing 3. Customer Satisfaction -profits: ethics helps achieve competitive advantage (need more than just compliance)
process of legal to unethical to illegal business practice
1. major event occurs that sensitizes public to a business practice 2. public uses social media to publicize event 3. legislators (local, state, and federal) become sensitized to negative practices 4. bills, laws, and agencies are introduced to make specific items illegal or regulated -laws follow behind society -set base line/minimum standard
descriptive approach to stakeholder theory
Focuses on the actual behavior of a firm and addresses how decisions and strategies are made for stakeholder relationships
education
-education does not equal experience -generally, more education or experience one has, the better they are at making ethical decisions because they are more familiarized with the ethical decision making process: likely to spend more time examining and selecting different alternatives to an ethical issue -type of education they receive does not matter -education also refers to training (with respect to ethical awareness: how much time spent on it and how in depth) -eg Starbucks employees training: their employees aren't necessarily more ethical people than the people who work at other fast food restaurants, just better trained in the company's values
bottom line for business ethics (5)
-firm survival -profitability: revenues, sales -stakeholders: customers, employees, channel members (manufacturers, wholesalers, retailers) all affected -contribute to societal goals: community, country, world -debate about whether investing in corporate social responsibility will help or hurt profits
normative approach to ethical decision making
-how organizational decision makers SHOULD approach an issue (ideal standards) -different from descriptive approach that examines HOW organizational decision makers approach ethical decision making -revolves around standards of behavior within a firm and industry -based on an individual's moral values and collective values of an organization -concerned with general ethical values implemented into business; concepts like fairness and justice highly important -strong normative structures in organizations are positively correlated with ethical decisions
why study business ethics? (4)
-identify ethical issues -recognize approaches for resolving ethical issues -cope with conflicts between your own personal values and those of the organization in which you work -gain knowledge to make more ethical business decisions
contributions of a stakeholder perspective
-important to have this framework because when firms are focused on giving consumers what they want, broader societal interests can cause conflicts -balancing stakeholder interests requires information and good judgment!
nationality
-legal relationship between a person and the country in which he or she is born -in the twenty-first century, nationality is redefined by regional economic integration such as the European Union (EU) -just how nationality affects ethics is hard to interpret: because of cultural differences, it is impossible to state that ethical decision making in an organizational context will differ significantly among individuals of different nationalities -certain behaviors are acceptable or not depending on the culture, which makes a difference (eg bribery)
Sarbanes-Oxley Act
-most far-reaching change in organizational control and accounting regulations since Securities and Exchange Act of 1934 -require CEO and CFO to sign financial statements to ensure they're fair and transparent, can be criminally charged if something is wrong -also created an accounting oversight board that requires corporations to establish codes of ethics for financial reporting and to develop greater transparency in financial reports to investors and other interested parties -a lot of foreign companies pulled out of US because of this burden
gender
-no differences between men and women in ethical decision making -when differences are found, women tend to be more ethical: more sensitive to ethical scenarios and less tolerant of unethical actions -different leadership styles and foundations for making ethical decisions: women rely on relationships, men rely on justice or equality -females report higher intentions to report ethical misconduct
step 5: identifying resources and determining urgency (2 main criteria)
-prioritization of stakeholders and issues and the assessment of past performance lead to allocation of resources (resources are limited) -two main criteria: 1. level of financial and organizational investments required by different activities 2. urgency when prioritizing social responsibility challenges - considered urgent when challenge is significant and stakeholder pressure on issue can be expected
accountability
-refers to how closely workplace decisions align with a firm's stated strategic direction and its compliance with ethical and legal considerations -oversight for system of checks and balances that limit employees and managers' opportunities to deviate from policies and strategies, aimed at preventing unethical and illegal activities
ethical culture
-reflects the integrity of decisions made and is a function of many factors, including corporate policies, top management's leadership on ethical issues, the influence of coworkers, and the opportunity for unethical behavior -communication important in creating an effective one
locus of control
-relates to individual differences in relation to a generalized belief about how one is affected by internal versus external events or reinforcements -how people view themselves in relation to power -we can still not be sure how significant it is in terms of ethical decision making -one study tat found a relationship between locus of control and ethical decision making concluded that internals were positively correlated whereas externals were negatively correlated with ethical decisions -in reality, classifying someone as being entirely an internal or entirely an external is probably impossible - does not mean all externals are unethical and internals are ethical
moral intensity
-relates to individuals' perceptions of social pressure and the harm they believe their decisions will have on others -individual and organizational factors determine why different individuals perceive ethical issues differently and define them as ethical or unethical = stage is set for conflict -perception of ethical issue intensity can be influenced by management's use of rewards/punishments, corporate policies, and corporate values -some issues may not reach critical awareness of employees if managers have failed to identity and educate them about specific problem areas -lack of preparedness/failure to anticipate these issues makes it difficult to respond appropriately -many ethical issues arise from internal pressures and ambiguity surrounding organizational rules -the more an individual perceives an ethical issue as important, the less likely they are to engage in unethical/questionable behavior
Global Compact
-set of 10 principles concerning HR, labor, anti-corruption, launched by UN -purpose is to create openness and alignment among business, government, society, labor, and the United Nations
age
-several decades ago, we believed age was positively correlated with ethical decision making (older=more ethical) - more experience dealing with complex ethical issues -millennials tend to have "me first" attitude -Gen Y often justify behavior if it helps firm survive -decisions are made on knowledge, experience, and information you have at that point in time -younger managers more influenced by organizational culture because that is what they know and they have less experience to rely on; older managers more equipped to deal with complex issues
opportunity
-the conditions in an organization that limit or permit ethical or unethical behavior -result from conditions that either provide rewards (whether internal/external) or fail to erect barriers against unethical behavior (ex company policy that fails to punish employees who act unethically - will probably be motivated to keep acting in same way) -opportunity also comes from knowledge: major problem is lying to stakeholders or withholding information -people who have worked at company for a long time become "gatekeepers" of its culture, have opportunity to make decisions about unwritten rules/policies -train new employees to fit into company norms, and their actions can contribute to ethical or unethical behavior -opportunity for unethical behavior can't be eliminated without aggressive enforcement of codes and rules
six "spheres of influence" individuals face when confronted with ethical choices
-the workplace -family -religion -legal system -community -profession -level of importance of each to the business person influences and varies depending on how important the decision maker perceives the issue to be
Internals (Locus of Control)
-those who believe they control the events in their lives by their own effort and skill, viewing themselves as masters of their destinies and trusting in their capacity to influence their environment
significant others
-those who have influence in a work group, including peers, managers, coworkers, and subordinates -help workers on a daily basis with unfamiliar tasks and provide advice and information in both formal and informal ways -may have most impact on a worker's decisions on a daily basis as compared to any other factor
Externals (Locus of Control)
-those who see themselves as going with the flow because that is all they can do -believe events of their lives are determined by uncontrollable forces, such as luck, chance, and powerful people in their company, and they cannot control their own lives
Dodd-Frank Wall Street Reform
-under Obama, to make financial services industry more ethical -law required regulators to create hundreds of rules to promote financial stability, improve accountability and transparency, and protect consumers from abusive financial practices
step 3: identifying stakeholder issues
-understanding main issues of concern to stakeholders -level of stakeholders' power and legitimacy determines degree of urgency in addressing their needs -weight given to certain issues may vary by society
immediate job context
-where they work, whom they work with, and the nature of the work -related to opportunity -includes motivational "carrots and sticks" employers use to motivate employees **one of most important factors when it comes to influencing ethical decision making
three sets of activities in developing a stakeholder orientation
1. organization-wide generation of data about stakeholder groups and assessment of the firm's effects on these groups 2. distribution of this information throughout firm 3. responsiveness of organization as a whole to this information -begin with identifying stakeholders -then identify concerns relevant to each stakeholder group (will generate more info about certain stakeholder groups over others) -finally companies should evaluate their impact on the issues of importance to the various stakeholders they identified -circulate information -take initiatives to abide by/exceed stakeholder expectations can be viewed as continuum: relationships are always changing, and firms need to constantly adapt
Dodge v. Ford Motor Co
1919 decision by Michigan Supreme Court -the court ruled that a business exists for the profit of shareholders, and the board of directors should focus on that objectiveterm-68 -contrast to stakeholder model which places board of directors in the position of balancing the interests and conflicts of a company's various constituenciesterm-67
before 1960's
1920's: provide living wage 1930's: FDR's New Deal - blame businesses for problems 1950's: Truman's Fair Deal - more awareness of ethical and social issues -concern with government relationships, social issues, economic fairness -several phases of questioning capitalism in US -issues discussed within theology/philosophy framework or legal/competitive relationships (fair wages, labor practices, etc)
observed misconduct in US
30%
observed misconduct globally
33%
report observed misconduct
76% -more than half who report it experience retaliation for reporting
stakeholder interaction model
A conceptualization of the relationship between business and stakeholders - there are reciprocal relationships. acknowledges dialogue between firm's internal and external environments
ethical awareness
ability to perceive whether a situation or decision has an ethical dimension -costly problems can be avoided by having this ability -awareness can be difficult in an environment when employees work in their own areas of expertise with the same types of people: easier to overlook certain issues requiring an ethical decision, especially when they become routine -therefore, training and familiarizing employees with ethical issues is important
stakeholder model of corporate governance
accepts broader view of purpose of business, belief that company must answer to other stakeholders as well as investors
corporate social responsibility
an organization's obligation to maximize its positive impact on stakeholders and minimize its negative impact. actions associated by firms with various stakeholder (other than investors) interests as a priority
values
are enduring beliefs and ideals that are socially enforced (eg trust)
principles
are specific and pervasive boundaries for behavior that should not be violated, often become basis for rules
moral dilemma
as a situation where the person is faced with multiple choices, all of which are undesirable as defined by the person
value dilemma
as a situation where the person is faced with multiple choices, all of which are undesirable as defined by the person -individual's beliefs grounded in societal norms
ethics
behavior or decisions made within a groups' values
ethical issue intensity
the relevance or importance of an event or decision in the eyes of the individual, work group, and/or organization -personal and temporal in character to accommodate values, beliefs, needs, perceptions, the special characteristics of the situation, and the personal pressures prevailing at a particular place and time -senior employees and those with administrative authority contribute significantly to ethical issue intensity because they typically dictate an organization's stance on ethical issues -ethical issue sensitivity reflects the ethical sensitivity of the individual and/or work group facing the ethical decision making process
primary stakeholders
those whose continued association and resources are absolutely necessary for a firm's survival - employees, customers, shareholders, government (depending on industry) and communities that provide necessary infrastructure
greater demands for accountability and transparency (of BoD)
trend today is toward "outside directors" (vs. inside) who aren't bound by past allegiances or have vested interest, etc.
Consumer Protection Act
under Obama, to address some issues related to recession. laws and organizations designed to ensure the rights of consumers as well as fair trade competition and the free flow of truthful information in the marketplace
corporate citizenship and its four dimensions
used to express the extent to which businesses strategically meet the economic, legal, ethical, and philanthropic responsibilities placed on them by various stakeholders four dimensions: -strong sustained economic performance -rigorous compliance -ethical actions beyond what law requires -voluntary contributions that advance reputation and commitment of the organization
