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Chapter 5

Organizational Ethics
and the Law


Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

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


Figure 5.1

The Components of Ethical Climates


Business Ethics across Organizational


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


Professional Codes of Conduct

Accounting Ethics
- Financial records should be audited by certified
professional accounting firm. Accountants faced with
conflicts of interest where loyalty or obligation to company
(the client) may be divided or in conflict with self interest
(the accounting firm) and the interest of others.
Financial Ethics
- Finance department is responsible for managing the
firms assets and for raising capital issuing stock and
bonds. Recession happened due to violation of ethical
conduct by backdating stock options.


Professional Codes of Conduct

Marketing Ethics
- Ethics during advertising, distributing and selling
products or services. Ethical elements in advertising:
Honesty and fairness.
Information Technology Ethics
-Complex and fast changing. Involve invasion of
privacy: Collection, storage and access of personal
information via the Internet.

2011 The McGraw-Hill Companies, Inc. All rights reserved.


Building Ethics Safeguard into the


To improve the quality of a companys ethical

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


Figure 5.2

Organizations Ethics Safeguards


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


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
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


Ethics Programs and Policies

Ethics and Compliance Officers
Relatively new position (started in 1980s) that has grown
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 companys ethics assist or
Are present in over 83% of large companies recently surveyed


Ethics Programs and Policies

Ethics Training Programs

Is very effective method for promoting workplace ethical
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


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


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
In 2002 Business Ethics magazine created Living Economy
Award for companies that focused on fair profit, locally based,
stakeholder owned companies


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

International watchdog agency, Transparency

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


Efforts to Curtail Bribery on the Global Level

Organization for Economic Cooperation and Development (OECD)
Effort for member countries to agree to steps to prevent and combat

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

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

based companies to pay bribes to foreign government officials


Relationship between Law and Ethics

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

Ethical concepts are more complex than laws

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

Managers who are trying to improve their companys

ethical performance need to do more than comply with

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
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

Many costs of lawbreaking points to need for companies to

promote ethical behavior