CH 3 The Managers Changing Work Environment & Ethical Responsibilities – Flashcards

The bottom line: Is a company principally responsible only to its stockholders and executives? Or are other groups equal in significance? Further, is it sufficient that a company simply be legal, as PG&E evidently was? Or, isn't it equally important that it be ethical as well? It turned out that PG&E had relied on gas-leak surveys to determine whether transmission pipelines were safe, but the company's incentive system awarded bonuses to supervisors whose crews found fewer leaks and kept repair costs down. Indeed, the company's own internal audit found the incentives actually encouraged crews to produce inaccurate surveys. An independent audit found that over an 11-year period PG&E collected $430 million more from its gas operations than the government had authorized—and it "chose to use the surplus revenues for general corporate purposes" rather than for improved safety.9 In fact, in the three years prior to the explosion, the company spent $56 million a year on an incentive plan—stock awards, performance shares, and deferred compensation—for its executives and directors, including millions to the CEO. Despite this sleazy history—which will probably result in hundreds of millions of dollars in fines—it is unclear, the Chronicle concluded, "whether PG&E broke any criminal statutes governing its behavior, unless there was fraud."

Stakeholders—the people whose interests are affected by an organization's activities.

Whether small or large, the organization to which you belong has people in it who have an important stake in how it performs. These internal stakeholders consist of employees, owners, and the board of directors, if any. Let us consider each in turn.

As a manager, could you run your part of the organization if you and your employees were constantly in conflict? Labor history, of course, is full of accounts of just that. But such conflict may lower the performance of the organization, thereby hurting everyone's stake. In many of today's forward-looking organizations, employees are considered "the talent"—the most important resource.

The owners of an organization consist of all those who can claim it as their legal property, such as Walmart's stockholders. In the for-profit world, if you're running a one-person graphic design firm, the owner is just you—you're what is known as a sole proprietorship. If you're in an Internet startup with your brother-in-law, you're both owners—you're a partnership. If you're a member of a family running a car dealership, you're all owners—you're investors in a privately owned company. If you work for a company that is more than half owned by its employees (such as W. L. Gore & Associates, maker of Gore-Tex fabric and No. 38 on Fortune's 2012 "Best Companies to Work For" list, or Lakeland, Florida, Publix Super Markets, No. 78), you are one of the joint owners—you're part of an Employee Stock Ownership Plan (ESOP). And if you've bought a few shares of stock in a company whose shares are listed for sale on the New York Stock Exchange, such as General Motors, you're one of thousands of owners—you're a stockholder. In all these examples, of course, the goal of the owners is to make a profit.

Who hires the chief executive of a for-profit or nonprofit organization? In a corporation, it is the board of directors, whose members are elected by the stockholders to see that the company is being run according to their interests. In nonprofit organizations, such as universities or hospitals, the board may be called the board of trustees or board of regents. Board members are very important in setting the organization's overall strategic goals and in approving the major decisions and salaries of top management. Not all firms have a board of directors. A lawyer, for instance, may operate as a sole proprietor, making all her own decisions. A large corporation might have eight or so members on its board of directors. Some of these directors (inside directors) may be top executives of the firm. The rest (outside directors) are elected from outside the firm.

External stakeholders—people or groups in the organization's external environment that are affected by it. This environment consists of: The task environment The general environment

The task environment consists of 11 groups that present you with daily tasks to handle: customers, competitors, suppliers, distributors, strategic allies, employee organizations, local communities, financial institutions, government regulators, special-interest groups, and mass media.

The first law of business (and even nonprofits), we've said, is take care of the customer. Customers are those who pay to use an organization's goods or services. Many customers value service over price, according to a Forrester Research report, with 54% thinking it would be easy to have a customer service issue resolved in clothing and apparel outlets but only 30% thinking the same in health insurance companies.

Is there any line of work you could enter in which there would not be competitors—people or organizations that compete for customers or resources, such as talented employees or raw materials? Every organization has to be actively aware of its competitors. Florist shops and delicatessens must be aware that customers can buy the same products at Safeway or Kroger.

A supplier is a person or an organization that provides supplies—that is, raw materials, services, equipment, labor, or energy—to other organizations. Suppliers in turn have their own suppliers: The publisher of this book buys the paper on which it is printed from a paper merchant, who in turn is supplied by several paper mills, which in turn are supplied wood for wood pulp by logging companies with forests in the United States or Canada.

A distributor is a person or an organization that helps another organization sell its goods and services to customers. Publishers of magazines, for instance, don't sell directly to newsstands; rather, they go through a distributor, or wholesaler. Tickets to the Black Keys, Foo Fighters, or other artists' performances might be sold to you directly by the concert hall, but they are also sold through such distributors as Ticketmaster, Live Nation, and StubHub. Distributors can be quite important because in some industries (such as movie theaters and magazine sales) there is not a lot of competition, and the distributor has a lot of power over the ultimate price of the product. However, the popularity of the Internet has allowed manufacturers of cellphones, for example, to cut out the "middleman"—the distributor—and to sell to customers directly.

Companies, and even nonprofit organizations, frequently link up with other organizations (even competing ones) in order to realize strategic advantages. The term strategic allies describes the relationship of two organizations that join forces to achieve advantages neither can perform as well alone.

As a rule of thumb, labor unions (such as the United Auto Workers or the Teamsters Union) tend to represent hourly workers; professional associations (such as the National Education Association or the Newspaper Guild) tend to represent salaried workers. Nevertheless, during a labor dispute, salary-earning teachers in the American Federation of Teachers might well picket in sympathy with the wage-earning janitors in the Service Employees International Union. In recent years, the percentage of the labor force represented by unions has steadily declined (from 35% in the 1950s to 11.8% in 2011). Indeed, most union members are now government employees, and private-sector unionization, mainly because of recession-related job losses in manufacturing and construction, has fallen off. The composition of the membership has also changed, with 45% of the unionized workforce now female and 38% of union members holding a four-year college degree or more.

Local communities are obviously important stakeholders, as becomes evident not only when a big organization arrives but also when it leaves, sending government officials scrambling to find new industry to replace it. Schools and municipal governments rely on the organization for their tax base. Families and merchants depend on its employee payroll for their livelihoods. In addition, everyone from the United Way to the Little League may rely on it for some financial support. If a community gives a company tax breaks in return for the promise of new jobs and the firm fails to do so, does the community have the right to institute clawbacks—rescinding the tax breaks when firms don't deliver promised jobs?

Want to launch a small company? Although normally reluctant to make loans to startups, financial institutions—banks, savings and loans, and credit unions—may do so if you have a good credit history or can secure the loan with property such as a house. In the recent recession, even good customers found loans hard to get. (Best advice: Get to know some bank loan officers and try to educate them about your business.) Established companies also often need loans to tide them over when revenues are down or to finance expansion, but they rely for assistance on lenders such as commercial banks, investment banks, and insurance companies.

The preceding groups are external stakeholders in your organization since they are clearly affected by its activities. But why would government regulators—regulatory agencies that establish ground rules under which organizations may operate—be considered stakeholders? We are talking here about an alphabet soup of agencies, boards, and commissions that have the legal authority to prescribe or proscribe the conditions under which you may conduct business. To these may be added local and state regulators on the one hand and foreign governments and international agencies (such as the World Trade Organization, which oversees international trade and standardization efforts) on the other. Such government regulators can be said to be stakeholders because not only do they affect the activities of your organization, they are in turn affected by it. The Federal Aviation Agency (FAA), for example, specifies how far planes must stay apart to prevent midair collisions. But when the airlines want to add more flights on certain routes, the FAA may have to add more flight controllers and radar equipment, since those are the agency's responsibility.

Special-interest groups are groups whose members try to influence specific issues, some of which may affect your organization. Examples are Mothers Against Drunk Driving, the National Organization for Women, and the National Rifle Association. Special-interest groups may try to exert political influence, as in contributing funds to lawmakers' election campaigns or in launching letter-writing efforts to officials. Or they may organize picketing and boycotts—holding back their patronage—of certain companies, as some public-interest groups did in 2010 of BP gas stations to protest the company's gigantic oil spill in the Gulf of Mexico.

No manager can afford to ignore the power of the mass media—print, radio, TV, and the Internet—to rapidly and widely disseminate news both bad and good. Thus, most companies, universities, hospitals, and even government agencies have a public-relations person or department to communicate effectively with the press. In addition, top-level executives often receive special instruction on how to best deal with the media.

Beyond the task environment is the general environment, or macroenvironment, which includes six forces: economic, technological, sociocultural, demographic, political-legal, and international. You may be able to control some forces in the task environment, but you can't control those in the general environment. Nevertheless, they can profoundly affect your organization's task environment without your knowing it, springing nasty surprises on you. Clearly, then, as a manager you need to keep your eye on the far horizon because these forces of the general environment can affect long-term plans and decisions.

Economic forces consist of the general economic conditions and trends—unemployment, inflation, interest rates, economic growth—that may affect an organization's performance.

Technological forces are new developments in methods for transforming resources into goods or services.

Sociocultural forces are influences and trends originating in a country's, a society's, or a culture's human relationships and values that may affect an organization.

Demographic forces are influences on an organization arising from changes in the characteristics of a population, such as age, gender, or ethnic origin.

Political-legal forces are changes in the way politics shape laws and laws shape the opportunities for and threats to an organization.

International forces are changes in the economic, political, legal, and technological global system that may affect an organization.

Ethics are the standards of right and wrong that influence behavior. These standards may vary among countries and among cultures. Ethical behavior is behavior that is accepted as "right" as opposed to "wrong" according to those standards. A situation in which you have to decide whether to pursue a course of action that may benefit you or your organization but that is unethical or even illegal.

Ethical dilemmas often take place because of an organization's value system, the pattern of values within an organization. Values are the relatively permanent and deeply held underlying beliefs and attitudes that help determine a person's behavior, such as the belief that "Fairness means hiring according to ability, not family background." Values and value systems are the underpinnings for ethics and ethical behavior. Organizations may have two important value systems that can conflict: (1) the value system stressing financial performance versus (2) the value system stressing cohesion and solidarity in employee relationships.

1. The Utilitarian Approach 2. The Individual Approach 3. The Moral-Rights Approach 4. The Justice Approach

1. The Utilitarian Approach: For the Greatest Good Ethical behavior in the utilitarian approach is guided by what will result in the greatest good for the greatest number of people. Managers often take the utilitarian approach, using financial performance—such as efficiency and profit—as the best definition of what constitutes "the greatest good for the greatest number." Thus, a utilitarian "cost-benefit" analysis might show that in the short run the firing of thousands of employees may improve a company's bottom line and provide immediate benefits for the stockholders. The drawback of this approach, however, is that it may result in damage to workforce morale and the loss of employees with experience and skills—actions not so readily measurable in dollars.

2. The Individual Approach: For Your Greatest Self-Interest Long Term, Which Will Help Others Ethical behavior in the individual approach is guided by what will result in the individual's best long-term interests, which ultimately are in everyone's self-interest. The assumption here is that you will act ethically in the short run to avoid others harming you in the long run. The flaw here, however, is that one person's short-term self-gain may not, in fact, be good for everyone in the long term. After all, the manager of an agribusiness that puts chemical fertilizers on the crops every year will always benefit, but the fishing industries downstream could ultimately suffer if chemical runoff reduces the number of fish. Indeed, this is one reason why Puget Sound Chinook, or king salmon, are now threatened with extinction in the Pacific Northwest

3. The Moral-Rights Approach: Respecting Fundamental Rights Shared by Everyone Ethical behavior in the moral-rights approach is guided by respect for the fundamental rights of human beings, such as those expressed in the U.S. Constitution's Bill of Rights. We would all tend to agree that denying people the right to life, liberty, privacy, health and safety, and due process is unethical. Thus, most of us would have no difficulty condemning the situation of immigrants illegally brought into the United States and then effectively enslaved—as when made to work seven days a week as maids. The difficulty, however, is when rights are in conflict, such as employer and employee rights. Should employees on the job have a guarantee of privacy? Actually, it is legal for employers to listen to business phone calls and monitor all nonspoken personal communications

4. The Justice Approach: Respecting Impartial Standards of Fairness Ethical behavior in the justice approach is guided by respect for impartial standards of fairness and equity. One consideration here is whether an organization's policies—such as those governing promotions or sexual harassment cases—are administered impartially and fairly regardless of gender, age, sexual orientation, and the like. Fairness can often be a hot issue. For instance, many employees are loudly resentful when a corporation's CEO is paid a salary and bonuses worth hundreds of times more than what they receive—even when the company performs poorly—and when fired is then given a "golden parachute," or extravagant package of separation pay and benefits.

At the beginning of the 21st century, U.S. business erupted in an array of scandals represented in such names as Enron, WorldCom, Tyco, and Adelphia, and their chief executives—Jeffrey Skilling, Bernard Ebbers, Dennis Kozlowski, and John Rigas—went to prison on various fraud convictions. Executives' deceits generated a great deal of public outrage, as a result of which Congress passed the Sarbanes-Oxley Act, as we'll describe. Did that stop the raft of business scandals? Not quite. Next to hit the headlines were cases of insider trading, the illegal trading of a company's stock by people using confidential company information. In 2004, Sam Waksal, CEO of ImClone, a biotechnology company, sold his shares of stock when he learned—before the news was made public—that the U.S. government was blocking ImClone's new cancer drug. For this act of insider trading, he ultimately was sentenced to 87 months in prison and fined $3 million. (This was the case that affected lifestyle guru Martha Stewart as well.) In 2009, authorities arrested billionaire hedge-fund manager Raj Rajaratnam for trading on tips from persons at companies who slipped him advance word on inside information; he was convicted and sentenced to 11 years in prison. Also there was the shocking news of financier Bernard Madoff, who confessed to a $50 billion Ponzi scheme, using cash from newer investors to pay off older ones.52 He was sentenced to 150 years in prison. Another charged with creating a Ponzi scheme was Texas financier R. Allen Stanford, who built a flashy offshore $7 billion financial empire; he was convicted of 13 counts of fraud in March 2012 The Sarbanes-Oxley Act of 2002, often shortened to SarbOx or SOX, established requirements for proper financial record keeping for public companies and penalties of as much as 25 years in prison for noncompliance. Administered by the Securities and Exchange Commission, SarbOx requires a company's chief executive officer and chief financial officer to personally certify the organization's financial reports, prohibits them from taking personal loans or lines of credit, and makes them reimburse the organization for bonuses and stock options when required by restatement of corporate profits. It also requires the company to have established procedures and guidelines for audit committees.

The illegal trading of a company's stock by people using confidential company information

Using cash from newer investors to pay off older ones

The Sarbanes-Oxley Act of 2002, often shortened to SarbOx or SOX, established requirements for proper financial record keeping for public companies and penalties of as much as 25 years in prison for noncompliance.

American business history is permeated with occasional malfeasance, from railroad tycoons trying to corner the gold market (the 1872 Credit Mobilier scandal) to 25-year-old bank customer service representatives swindling elderly customers out of their finances. Legislation such as SarbOx can't head off all such behavior. No wonder that now many colleges and universities have required more education in ethics. "Schools bear some responsibility for the behavior of executives," says Fred J. Evans, dean of the College of Business and Economics at California State University at Northridge. "If you're making systematic errors in the [business] world, you have to go back to the schools and ask, 'What are you teaching?'" The good news is that more graduate business schools are changing their curriculums to teach ethics. The bad news, however, is that a recent survey of 50,000 undergraduates found that 26% of business majors admitted to serious cheating on exams, and 54% admitted to cheating on written assignments. Of course, most students' levels of moral development are established by personalities and upbringing long before they get to college, with some being more advanced than others. One psychologist, Laurence Kohlberg, has proposed three levels of personal moral development—preconventional, conventional, and postconventional. Level 1, preconventional—follows rules. People who have achieved this level tend to follow rules and to obey authority to avoid unpleasant consequences. Managers of the Level 1 sort tend to be autocratic or coercive, expecting employees to be obedient for obedience's sake. Level 2, conventional—follows expectations of others. People whose moral development has reached this level are conformist but not slavish, generally adhering to the expectations of others in their lives. Level 2 managers lead by encouragement and cooperation and are more group and team oriented. Most managers are at this level. Level 3, postconventional—guided by internal values. The farthest along in moral development, Level 3 managers are independent souls who follow their own values and standards, focusing on the needs of their employees and trying to lead by empowering those working for them. Only about a fifth of American managers reach this level.

Ethics needs to be an everyday affair, not a onetime thing. This is why many large U.S. companies now have a chief ethics officer, whose job is to make ethical conduct a priority issue. 1. Creating a Strong Ethical Climate An ethical climate represents employees' perceptions about the extent to which work environments support ethical behavior. It is important for managers to foster ethical climates because they significantly affect the frequency of ethical behavior. Managers can promote ethical climates through the policies, procedures, and practices that are used on a daily basis. 2. Screening Prospective Employees Companies try to screen out dishonest, irresponsible employees by checking applicants' résumés and references. Some firms, for example, run employee applications through E-Verify, a federal program that allows employers to check for illegal immigrants. Some also use personality tests and integrity testing to identify potentially dishonest people. 3. Instituting Ethics Codes & Training Programs A code of ethics consists of a formal written set of ethical standards guiding an organization's actions. Most codes offer guidance on how to treat customers, suppliers, competitors, and other stakeholders. The purpose is to clearly state top management's expectations for all employees. As you might expect, most codes prohibit bribes, kickbacks, misappropriation of corporate assets, conflicts of interest, and "cooking the books"—making false accounting statements and other records. Other areas frequently covered in ethics codes are political contributions, workforce diversity, and confidentiality of corporate information. In addition, according to a Society for Human Resource Management Weekly Survey, 32% of human resources professionals indicated that their organizations offered ethics training. The approaches vary, but one way is to use a case approach to present employees with ethical dilemmas. By clarifying expectations, this kind of training may reduce unethical behavior. 4. Rewarding Ethical Behavior: Protecting Whistle-Blowers It's not enough to simply punish bad behavior; managers must also reward good ethical behavior, as in encouraging (or at least not discouraging) whistle-blowers. A whistle-blower is an employee who reports organizational misconduct to the public, such as health and safety matters, waste, corruption, or overcharging of customers. For instance, the law that created the Occupational Safety and Health Administration allows workers to report unsafe conditions, such as "exposure to toxic chemicals; the use of dangerous machines, which can crush fingers; the use of contaminated needles, which expose workers to the AIDS virus; and the strain of repetitive hand motion, whether at a computer keyboard or in a meatpacking plant." In some cases, whistle-blowers may receive a reward; the IRS, for instance, is authorized to pay tipsters rewards as high as 30% in cases involving large amounts of money.68 Between 1996 and 2005, whistle-blowers helped authorities recover at least $9.3 billion from health care providers who defrauded the government, over $1 billion of which was given to the whistle-blowers themselves.

A whistle-blower is an employee who reports organizational misconduct to the public, such as health and safety matters, waste, corruption, or overcharging of customers.

An ethical climate represents employees' perceptions about the extent to which work environments support ethical behavior. It is important for managers to foster ethical climates because they significantly affect the frequency of ethical behavior. Managers can promote ethical climates through the policies, procedures, and practices that are used on a daily basis.

A code of ethics consists of a formal written set of ethical standards guiding an organization's actions.

If ethical responsibility is about being a good individual citizen, social responsibility is about being a good organizational citizen. More formally, social responsibility is a manager's duty to take actions that will benefit the interests of society as well as of the organization.

When generalized beyond the individual to the organization, social responsibility is called corporate social responsibility (CSR), the notion that corporations are expected to go above and beyond following the law and making a profit.

In the old days of cutthroat capitalism, social responsibility was hardly thought of. A company's most important goal was to make money pretty much any way it could, and the consequences be damned. Today, for-profit enterprises generally make a point of "putting something back" into society as well as taking something out. Not everyone, however, agrees with these new priorities. Let's consider the two viewpoints. Against Social Responsibility "Few trends could so thoroughly undermine the very foundations of our free society," argued the late free-market economist Milton Friedman, "as the acceptance by corporate officials of social responsibility other than to make as much money for their stockholders as possible." Friedman represents the view that, as he said, "The social responsibility of business is to make profits." That is, unless a company focuses on maximizing profits, it will become distracted and fail to provide goods and services, benefit the stockholders, create jobs, and expand economic growth—the real social justification for the firm's existence. This view would presumably support the efforts of companies to set up headquarters in name only in offshore Caribbean tax havens (while keeping their actual headquarters in the United States) in order to minimize their tax burden. "A large corporation these days not only may engage in social responsibility," said famed economist Paul Samuelson, who died in 2009, "it had damned well better to try to do so." That is, a company must be concerned for society's welfare as well as for corporate profits. Beyond the fact of ethical obligation, the rationale for this view is that since businesses create problems (environmental pollution, for example), they should help solve them. Moreover, they often have the resources to solve problems in ways that the nonprofit sector does not. Finally, being socially responsible gives businesses a favorable public image that can help head off government regulation.

According to University of Georgia business scholar Archie B. Carroll, corporate social responsibility rests at the top of a pyramid of a corporation's obligations, right up there with economic, legal, and ethical obligations. That is, while some people might hold that a company's first duty is to make a profit, Carroll suggests the responsibilities of an organization in the global economy should take the following priorities: -Be a good global corporate citizen, as defined by the host country's expectations. -Be ethical in its practices, taking host-country and global standards into consideration. -Obey the law of host countries as well as international law. Make a profit consistent with expectations for international business.

Sustainability, or "going green," is meeting humanity's needs without harming future generations. New York Times columnist Thomas Friedman believes that greening can be used as a competitive advantage to "outgreen" other nations. Carmaker Subaru of Indiana Automotive has proved that adopting environmentally friendly processes does not add to the cost of doing business but actually makes it more efficient (reducing water use by 50%, electricity by 14%, and so on) Going green has all kinds of payoffs. Insurance companies are offering lower rates for people who drive less, own hybrid cars, or build energy-efficient homes. Office buildings with increased natural light, eco-friendly carpeting, and better ventilation result in employees taking fewer sick days and a rise in their productivity. Hotels that induce guests to reuse towels and skip having carpets vacuumed and bed linens replaced every day save on water and electricity use.

"He who dies rich dies thus disgraced," 19th-century steel magnate Andrew Carnegie is supposed to have said, after he turned his interests from making money to philanthropy, making charitable donations to benefit humankind. Carnegie became well known as a supporter of free libraries. More recently, in 2000, Bill Gates of Microsoft, then the richest person in the world, made headlines when he announced that he would step down from day-to-day oversight of the company he cofounded in order to focus on his $29 billion philanthropy, the Bill and Melinda Gates Foundation, which pledged to spend billions on health, education, and overcoming poverty. This news was closely followed by the announcement of the then second-richest man in the world, investor Warren Buffet, chairman of Berkshire Hathaway, that he would channel $31 billion to the Gates Foundation to help in finding cures for the globe's most fatal diseases. Companies practice philanthropy, too. For example, Google made a pledge to investors when it went public to reserve 1% of its profit and equity to "make the world a better place." Its philanthropic organization benefits groups ranging from those fighting disease to those developing a commercial plug-in, electricity-powered car. But even ordinary individuals can become philanthropists of a sort. Mona Purdy, an Illinois hairdresser, noticed while vacationing in Guatemala that many children coated their feet with tar in order to be able to run in a local race. So she went home and established the nonprofit Share Your Shoes, which collects shoes and sends them around the world. "I always thought I was too busy to help others," she says. "Then I started this and found myself wondering where I'd been all my life."

From a hardheaded manager's point of view, does ethical behavior and high social responsibility pay off financially? Here's what some of the research shows. -Effect on Customers According to one survey, 88% of the respondents said they were more apt to buy from companies that are socially responsible than from companies that are not. Another survey of 2,037 adults found that 72% would prefer to purchase products and services from a company with ethical business practices and higher prices compared with 18% who would prefer to purchase from a company with questionable business practices and lower prices. -Effect on Employees' Work Effort Workers are more efficient, loyal, and creative when they feel a sense of purpose—when their work has meaning, says Daniel H. Pink. When employers make profits their primary focus, employees develop negative feelings toward the organization. "They tend to perceive the CEO as autocratic and focused on the short term," says one report, "and they report being less willing to sacrifice for the company." When employees observe the CEO balancing the concerns of customers, employees, and the community, plus being watchful of environmental effects, they report being more willing to exert extra effort—and corporate results improve! -Effect on Job Applicants & Employee Retention Ethics can also affect the quality of people who apply to work in an organization. One online survey of 1,020 people indicated that 83% rated a company's record of business ethics as "very important" when deciding whether to accept a job offer; only 2% rated it as "unimportant."102 A National Business Ethics Survey found that 79% of employees said their firms' concern for ethics was a key reason they remained. -Effect on Sales Growth The announcement of a company's conviction for illegal activity has been shown to diminish sales growth for several years. One survey found that 80% of people said they decide to buy a firm's goods or services partly on their perception of its ethics. -Effect on Company Efficiency One survey found that 71% of employees who saw honesty applied rarely or never in their organization had seen misconduct in the past year, compared with 52% who saw honesty applied only occasionally and 25% who saw it frequently. -Effect on Company Revenue Unethical behavior in the form of employee fraud costs U.S. organizations around $652 billion a year, according to the Association of Certified Fraud Examiners.Employee fraud, which is twice as common as consumer fraud (such as credit card fraud and identity theft), costs employers about 20% of every dollar earned. -Effect on Stock Price One survey found that 74% of people polled said their perception of a firm's honesty directly affected their decision about whether to buy its stock. Earlier research found that investments in unethical firms earn abnormally negative returns for long periods of time. -Effect on Profits Studies suggest that profitability is enhanced by a reputation for honesty and corporate citizenship. Ethical behavior and social responsibility are more than just admirable ways of operating. They give an organization a clear competitive advantage.

The system of governing a company so that the interests of corporate owners and other stakeholders are protected

Perhaps the biggest complaint concerns the independence of the directors. Inside directors may be members of the firm, outside directors are supposed to be elected from outside the firm. But in some companies, the outside directors have been handpicked by the CEO—because they are friends, because they have a business relationship with the firm, because they supposedly "know the industry." In such instances, how tough do you think the board of directors is going to be on its CEO when he or she asks for leeway to pursue certain policies? Now more attention is being paid to strengthening corporate governance so that directors are clearly separated in their authority from the CEO. While, of course, directors are not supposed to get involved with day-to-day management issues, they are now feeling more pressure from stockholders and others to have stronger financial reporting systems and more accountability