Business Ethics Chapter 3

Corporate culture
values, norms, artifacts, rituals, history, and unwritten rules that are specific to an
Culture gives the members of the organization?
Meaning as well as internal rules of
All organizations, not just corporations
Have cultures.
The Sarbanes-Oxley 404 compliance section codified into law that leaders are responsible for?
The actions of subordinates.
Corporations should have ?
corporate cultures
Section 404 forces firms to ?
Adopt a set of values that must make up a portion of the company’s culture.
Compliance with Sarbanes-Oxley 404 requires?
Cultural change, not merely
accounting changes.
The culture of an organization may be ?
Explicitly articulated or left unspoken.
Explicit statements of values, beliefs, and customs ?
Usually come from upper management.
Memos, written codes of conduct, handbooks, manuals, forms, and ceremonies?
All formal expressions of an organization’s culture
Corporate culture is often expressed informally?
Through comments, both direct and indirect, that communicate the wishes of management.
The “tone at the top” is often cited as a ?
Determining factor in creating a high-integrity
There are two basic dimensions to describe an organization’s culture
concern for people
concern for performance
The four organizational cultures can be classified as ?
1. Apathetic
2. Caring
3. Exacting
4. Integrative
A cultural audit is?
An assessment of the organization’s values
If a firm’s culture encourages unethical behavior,…?
Its employees may act unethically, and vice versa.
It is important for top managers to determine?
the organization’s culture
Monitor its values, traditions, and beliefs
To ensure they represent the desired culture
A compliance culture is organized
around risk.
Compliance-based cultures use
a legalistic approach to ethics.
A values-based ethics culture approach to ethical corporate cultures
relies upon an explicit mission statement that defines the firm as well as how customers and employees should be treated.
Differential association refers to
the idea that people learn ethical or unethical behavior
while interacting with others who are part of their role-sets or other intimate personal groups.
Superiors have a strong influence on
the ethics of their subordinates
Whistle-blowing means ?
Exposing an employer’s wrongdoing to outsiders
Interpersonal conflict ensues when employees think they know the right course of
action in a situation ?
Yet their work group or company promotes or requires a different, unethical decision.
The Sarbanes-Oxley Act and the Federal Sentencing Guidelines for Organizations
(FSGO) have ?
Institutionalized internal whistle-blowing to encourage discovery of misconduct.
3. The 2010 passage of the Dodd-Frank Act?
proposed additional incentives for whistleblowers.
4. If an employee provides information to the government about the company’s wrongdoing ?
under the Federal False Claims Act, the whistle-blower is known as a quitam relator.
Retaliation is still ?
a concern for whistle-blowers and they often have a difficult time winning their cases
Organizational leaders use their power and influence to
shape corporate culture.
Leaders should be both
effective and ethical.
2. There are five power bases from which one person may influence another
2. Coercive
3. Legitimate
4. Expert
a. Reward power refers to a person’s ability to influence
the behavior of others by
offering them something desirable
Coercive power is essentially
penalizes actions or behaviors.
c. Legitimate power stems from the belief that
a certain person has the right to exert influence and that certain others have an obligation to accept it.
The titles and positions of authority that organizations bestow on individuals
appeal to this
traditional view of power
Expert power is derived from
a person’s knowledge
Referent power may exist when one person perceives .
that his or her goals or
objectives are similar to another’s
Motivation is a force within the individual that focuses
his or her behavior toward achieving
a goal.
Job performance is considered to be a function of ?
ability and motivation, thus Job performance = ability × motivation, meaning that employees can be motivated, but resources and know-how are also needed to get the job done.
To create motivation ?
an organization offers incentives to encourage employees to
work toward organizational objectives
An individual’s hierarchy of needs may influence his or her ?
motivation and ethical
Relatedness needs are satisfied by
social and interpersonal relationships
Growth needs are satisfied by
creative or productive activities.
Needs or goals may change as a person
progresses through the ranks of the
The two broad structures for organizations are
centralized and decentralized.
In a centralized organization, decision-making authority is
concentrated in the hands
of top-level managers, and little authority is delegated to lower levels.
In a decentralized organization, decision-making authority is delegated ?
as far down the chain of command as possible ?
Unethical behavior is possible in either centralized or decentralized structures when?
specific corporate cultures permit or encourage workers to deviate from accepted standards or ignore corporate legal and ethical responsibilities.
Centralized firms may have a more difficult time ?
uprooting unethical activity than decentralized
Two main categories of groups affect ethical behavior in business.
a formal group ad an informal group
A formal group is defined as an?
an assembly of individuals that has an organized structure accepted explicitly by the group.
a formal group can be divided into?
committees, work groups, and teams
A committee is a formal group of individuals
assigned to a specific task.
Work groups are used to subdivide duties
within specific functional areas of a company.
Teams bring together the functional expertise of employees from several different areas of the organization
on a single project, such as developing a new product
An informal group is defined as two or more individuals with
a common interest but
without an explicit organizational structure.
Group norms are standards of behavior that
groups expect of their members
A substantial amount of research indicates that significant
differences exist in the values and philosophies that influence how the individuals that comprise corporations make ethical decisions.
A popular way of viewing business ethics is to see it as a ?
Reflection of the alternative moral philosophies that individuals use to resolve their personal moral dilemmas.
Ethical decisions within organizations are often made by ?
committees and formal and informal groups, not by individuals.
Both individual ethics and organizational ethics have an impact
on an employee’s ethical intention.
If there is ethical congruence between individual ethics and the organizational ethical culture,
there is an increase in the potential for making ethical choices in organizational decision-making.
Corporations are increasingly viewed as moral agents that are accountable
For their conduct to stakeholders.
Through legislation and court precedents, society holds companies accountable
for the conduct of their employees as well as for their decisions and the consequences of those decisions.
Viewed as moral agents, companies are required to
Obey the laws and regulations that define acceptable business conduct.
Companies are not human, laws and regulations are necessary
to provide formal structural restraints and guidance on
ethical issues
Understanding the factors that influence the ethical decision-making process can help
companies encourage ethical behavior and discourage undesirable conduct.
To promote legal and ethical conduct, an organization should
develop an organizational ethics program by establishing, communicating, and monitoring the ethical values and legal requirements that characterize its history, culture, industry, and operating environment.
Without uniform standards and policies of conduct, it is difficult
for employees to determine what behaviors are acceptable in a company.
They may make decisions based on how their coworkers and superiors behave.
A strong ethics program what things?
1. code of conduct,
2. ethics officer to oversee the program
3. care in the delegation of authority
4. formal ethics training
5. auditing,monitoring, enforcement, and revision of program standards.
2. There are no universal standards for
organizational ethics programs.
3. Ethics is not
something to be delegated to lower-level employees.
The more misconduct occurs at a company, the less .
trust employees feel toward the organization
-and the greater the turnover will likely be
A company must have an effective ethics program to ensure that all employees understand
its values and comply with
the policies and codes of conduct that create its ethical culture.
Managers cannot assume that employees will automatically
know how to behave when
entering a new organization.
An Ethics Program Can Help
Avoid Legal Problems.
Some corporate cultures provide opportunities for unethical conduct because
their management lacks concern or the company has failed to comply with the minimum requirements of the FSGO, which can result in fines or probation.
An ethics program can help a firm avoid civil liability,
but the company bears the burden of proving that it has an effective program.
A legal test of a company’s ethics program is possible
when an individual
employee is charged with misconduct.
No matter what their goals, ethics programs are
developed as organizational control
systems to create predictability in employee behavior.
Two types of control systems can be created.
1. A compliance orientation creates order by requiring that employees identify
with, and commit to, specific required conduct.

2. A values orientation strives to develop shared values, with a focus on core ideals
such as respect and responsibility.

Research has shown that a values orientation creates ethical reasoning among employees. Values-based programs increase
employees’ awareness of ethics at work, their integrity, their willingness to deliver information to supervisors, their use of reporting mechanisms, and the perception that better ethical decisions are made.
Most companies begin the process of
establishing organizational ethics programs by developing codes of conduct. Such statements may take three different forms:
1. A code of conduct is a formal statement that describes what an organization expects of
its employees.
2. A code of ethics is the most comprehensive and consists of general statements,
sometimes altruistic or inspirational, that serve as principles and the basis for rules of conduct.
3. A statement of values is conceived by management and fully developed with input from all stakeholders
Codes require continuous reinforcement to be
Research has found that corporate codes of ethics often contain six core values or principles
1. Trustworthiness
2. Respect
3. Responsibility
4. Fairness
5. Caring
6. Citizenship.
These values will not be effective without distribution, training, and the support of top
in making these values a part of the corporate culture.
Codes of conduct will not resolve every ethical issue encountered in daily operations, .
but they help employees
Managers deal with ethical dilemmas by
prescribing or limiting specific activities
Ethics officers are responsible for managing their organizations’
ethics and legal compliance programs.
It is not common for ethics officers to report
directly to the board of directors.
Ethics officers often report directly to the chief
executive officer
and may have some access to the board.
A major step in developing an effective ethics program is implementing
a training program and communication system to educate employees about the firm’s ethical standards.
It can educate employees about the firm’s
policies and expectations, relevant laws and
regulations, and general social standards.
It can make employees aware of available
resources, support systems, and designated
personnel who can assist them with ethical and legal advice.
Ethics training must start with a foundation (4 things)
1. a code of ethics,
2. a procedure for airing ethical concerns,
3. line and staff involvements,
4. executive priorities on ethics that are
communicated to employees.
Training and communication initiatives should reflect
the unique characteristics of an organization.
An effective ethics program employs a variety of resources to monitor
ethical conduct and
measure the program’s effectiveness.
Observing employees, internal audits, surveys, reporting systems, and investigations
can assess compliance with the company’s ethical code and standards.
An external audit and review of company activities may
be helpful in developing benchmarks.
Consistent enforcement and necessary disciplinary action
are essential to a functional ethics or compliance program.
Implementation requires designing activities to achieve
organizational objectives using available resources and given existing constraints.
Implementation translates a plan for action into operational terms and establishes a
by which an organization’s ethical performance will be monitored, controlled, and improved.
A firm’s ability to plan and implement ethical business standards depends in part on
how it structures resources and activities to achieve its ethical objectives.
If a company determines that its ethical performance has been less than satisfactory,
executives may want to change how certain kinds of decisions are
Many business leaders recognize that they need to have an ethics program, but few take the time to
answer fundamental questions about the goals of such programs.
Maintaining an ethical culture may be impossible if
CEOs do not support an ethical culture.
Developing program materials that
do not address the needs of the average employee.
5. Transferring an “American” program to
a firm’s international operations.
In multinational firms, executives should involve overseas personnel
as early as possible in the process.
Designing an ethics program that is little more than a series of lectures. In such cases,
participants typically recall
less than 15 percent the day after the lecture.
In order to implement a successful ethics program,
an organization must have ways of managing, evaluating, and controlling business ethics programs.
Viewing a business ethics program as a part of
strategic planning and management
activities is critical to the success of any firm.
1. Shared values among employees are the “glue” of successful management and
control of business ethics programs.

When the business ethics program helps to

align and direct activities toward an ethical culture, there will be a commitment to the long-term ethical progress of the firm.
Three types of controls are involved with implementing and managing an ethics
1. proper controls
2. process controls
3. output controls
1. Formal controls for business ethics include input controls that provide
the proper tools and resources (proper selection of employees, ethics training, and structural systems, including communication systems).
Process controls include
management commitment to the ethics program and the methods or system for evaluation.
Output controls involve setting standards against actual behavior. One of the most popular methods of evaluating ethical performance is ?
an ethics audit.
An ethics audit is a
systematic evaluation of an organization’s ethics program and
performance to determine whether it is effective.
An ethic audit
includes regular, complete, and documented measurements of compliance, measuring
conformity to the firm’s desired ethical standards.
An ethic audit can be
a precursor to setting up an ethics program.
It identifies the firm’s current ethical standards, policies, and risk areas
so that an ethics program can effectively address problem areas.
A social audit is the process of
assessing and reporting a business’s performance in
fulfilling the economic, legal, ethical, and philanthropic responsibilities expected of it by its stakeholders
Social reports often discuss issues related to a firm’s performance in the four dimensions of social responsibility as well as to specific social responsibility and ethical issues such as
staff issues, community economic development, volunteerism, and environmental impact.
In contrast, ethics audits focus on more narrow issues related to
assessing and reporting on a firm’s performance in terms of ethical and legal conduct.
3. An ethics audit can be a component of a social audit. Ethics auditing is similar to
financial auditing in that it employs similar procedures and processes to create a system of integrity that includes objective reporting
There are many reasons why companies choose to understand, report on, and improve their
ethical conduct.
1. One reason is to detect ethical misconduct before it becomes a major problem.
Accounting scandals and legal and ethical transgressions have encouraged companies
to better account for
their actions in a wide range of areas including corporate governance, ethics programs, customer relationships, employee relations, environmental policies, and community involvement.
Measuring the ethical work climate is one way to learn about the ethical culture of an

The auditing process can

highlight trends, improve organizational learning, and facilitate communication and working relationships
B. One of the greatest benefits of the auditing process is
improved relationships with stakeholders
Just as companies develop crisis management plans to prepare to, respond to, and recover from natural disasters, they should also .
prepare for ethical disasters, which can result in substantial legal and financial costs, disrupt operations, reduce productivity, destroy organizational reputation, and erode stakeholder confidence
Despite the high costs of misconduct, U.S. companies are failing to identify and
ethical, social, economic, and environmental concerns.
Ethical disasters follow recognizable phases of escalation, from ethical-issue recognition and the decision to act unethically
To the organization’s discovery of and response to the act.
iAnticipation of and intervention during these situations can
stave off
organizational disaster.
Contingency planning assesses risks, plans for
these potential occurrences, and provides ready tools for responding to ethical crises.
The process of ethical disaster recovery planning involves assessing the
organization’s values, developing an ethics program, performing an ethics audit, and developing contingency plans for potential ethical disasters.
The word integrity implies a balanced organization that not only makes ethical
financial decisions but also is ethical in the more subjective aspects of its corporate
The Sarbanes-Oxley Act has focused on questionable accounting.
and the metrics that destroy shareholder value
On the other hand, models exist (Six Sigm
Balanced Scorecard, and the Triple Bottom Line) to
capture structural and behavioral organizational ethical performance.
Six Sigma is a methodology to manage process variations that cause
defects, defined as unacceptable deviation from the mean or target, and to systematically work toward managing variation to eliminate those defects.
Balanced Scorecard is a method for measuring
a company’s activities in terms of its vision and strategies.
The Triple Bottom Line captures a
an expanded spectrum of values and criteria for
measuring organizational (and societal) success—economic, environmental, and
The purpose of nonfinancial measures is to determine
the wholeness and soundness of the many aspects of a business that enhance ethics and profits without increasing risk.
The Global Reporting Initiative (GRI), which advances sustainability reporting, has become
a prominent framework that companies have adopted to report their social and sustainability progress.
Businesses can use the GRI to come up with a more
standardized method of reporting nonfinancial results in a way that users of the reports can understand.
b. Companies benefit because the GRI provides tools for 4 things ?
1.Improving their implementation of the triple bottom line

2.The disclosure of their progress in this area

3.The ability to compare their sustainability efforts to those of other companies.

4. The chance to enhance their reputation in the eyes of stakeholders.

Users benefit because this standardized sustainability reporting provides them with
a benchmark to compare companies’ sustainability initiatives.
AccountAbility is an international membership organization committed to enhancing the performance of organizations and to ?
developing the competencies of individuals in social and ethical accountability and sustainable development.
a. The AA1000 process standards link the definition and embedding of an organization’s values to the
development of performance targets and to the
assessment and communication of organizational performance.
b. AA1000 ties social and ethical issues into
the organization’s strategic management and
6. Open Compliance Ethics Group created a universal framework for compliance and
ethics management.
It ?
a. Focus on non-financial compliance and qualitative elements of internal controls.

b. Guidelines that companies can utilize as they see fit.

c. Offers tools and certification procedures.

Although ethics audits provide many benefits for individual companies and their
they do have the potential to create risks.
a. A firm may uncover a serious ethical problem that it would prefer not to disclose
it can remedy the situation.
b. It may find that one or more of its stakeholders’ criticisms
cannot be dismissed or easily addressed.
d. The auditing process imposes burdens
(especially with regard to record keeping)
and costs for firms that undertake it.
e. The process of auditing and reporting a firm’s ethics programs is
no guarantee that it will avoid challenges related to its efforts.
f. Because this type of auditing is relatively new, there are few common standards
to judge disclosure and effectiveness or to make comparisons.
2. Being viewed by the public as needing an audit can motivate companies to conduct one
in order to signal their intention to respond to concerns.
3. Although ethics and social responsibility are defined and perceived differently by
various stakeholders, a core of minimum standards for ethical performance is evolving.
a. Specific, measurable, achievable, and meaningful measurements in terms of
business impact on communities, employees, consumers, the environment, and
economic systems
b. The FSGO’s seven steps for effective ethical compliance, the Sarbanes-Oxley
Act, and the Dodd-Frank Act provide standards that organizations can use in ethics auditing

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