Chapter 5

Organizational Ethics
and the Law
 Ch. 5: Key Learning Objectives
 Classifying an organization’s 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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Figure 5.1 The Components of Ethical Climates

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Business Ethics across Organizational Functions

 Business operations can be very specialized, leading to

ethical challenges related to those functional areas
 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 company’s 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

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Two Ethics Approaches
1. Compliance-based approach
 Seeks to avoid legal sanctions
 Emphasizes threat of detection and punishment to promote
lawful employee behavior

2. 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

 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 1980’s) 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
information-sharing tool
 Employees can place a call on the company’s ethics assist or
helpline
 Are present in over 83% of large companies recently surveyed

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Ethics Programs and Policies
 Ethics Training Programs
 Is very effective method for promoting workplace ethical
behavior
 Online training has emerged as the most widely used form
of training over the last five to ten years

 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

 In 2002 Business Ethics magazine created “Living Economy

Award” for companies that focused on fair profit, locally based,
stakeholder owned companies

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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
 As of 2009, 38 countries had ratified the treaty

 Other initiatives
 China’s 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 society’s attempt to formalize ethical
standards
 Written to capture public’s 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 company’s
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
 U.S. Justice Department cracking down on corporate illegal
activity
 New sentencing guidelines put corporate penalties on par with
street crimes
 Corporate executives convicted of white collar crimes no longer
allowed to serve time in halfway houses, will serve time in federal
prisons

 Many costs of lawbreaking points to need for companies to

promote ethical behavior

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