University of Luzon Graduate School

Corporate Governance and Social Responsibility STRATEGIC APPROACHES TO IMPROVING ETHICAL BEHAVIOR

Presented to: Jean V. Ramos, D.B.A Professor Presented by: Jeanica C. Joson MBM Student

THE NEED FOR ORGANIZATIONAL ETHICS PROGRAM

Organizational Ethics is the ethics of an organization, and it is how an organization ethically responds to an internal or external stimulus. Organizational ethics is interdependent with the organizational culture. Although, it is akin to both organizational behavior (OB) and business ethics on the micro and macro levels, organizational ethics is neither OB, nor is it solely business ethics (which includes corporate governance and corporate ethics). Organizational ethics express the values of an organization to its employees and/or other entities irrespective of governmental and/or regulatory laws.

Usually, an organization is held accountable for the conduct of its employees. Companies must assess their ethical risks and develop values and compliance systems to avoid legal and ethical mistakes that could damage the organization. Organizations are sensitive to avoid infringing on employees personal freedoms and ethical beliefs. In cases where an individuals personal beliefs and activities are inconsistent with company policies on ethics, conflict may develop. Fostering ethical decisions within an organization requires eliminating unethical behavior and improving the firms ethical interest regardless of organizational goals or accepted standards of conduct. Some people are bad apples who will always do things in their own self-interest regardless of organizational goals or accepted standards of conduct.

Eliminating such bad apples through screening and techniques and enforcement of the firms ethical standards can help improve the firms overall ethical conduct. Organizations can create unethical corporate cultures not because individual within them are bad but because the pressures to succeed create opportunities that reward unethical decisions. Most businesses attempt to improve ethical decision making by establishing and implementing a strategic approach to improving organizational ethics. To be socially responsible and promote legal and ethical conduct, an organization should develop an organizational ethics program by establishing, communicating, and monitoring ethical values and legal requirements that characterize its history, culture, industry,

and operating environment. Without such programs and uniform standards and policies of conduct, it is difficult for employees to determine what behaviours are acceptable within a company. A strong ethics program includes a written code of conduct, an ethics officer to oversee the program, care in the delegation of authority, formal ethics training, auditing, monitoring, enforcement, and revision of program standards.

5 Top recommendations to CEOs for rebuilding trust and confidence in firms. (According to survey by Golin/Harris International) 1. Making customers the top priority 2. Assuming personal responsibility and accountability 3. Communicating openly and frequently with customers 4. Handling crises more honestly 5. Sticking to the code of business ethics no matter what. Ethics is not something to be delegated to lower level employees while top managers break the rules.

Ethics programs are developed as organizational control systems, the aim of which is to crate predictability in employee behavior. Two types of control systems can be created. A compliance orientation creates order by requiring that employees identify with and commit to specific required conduct. It uses legal terms, statutes, and contracts that teach employee the rules and penalties for noncompliance. The other type of system is a values orientation, which strives to develop shared values. Although penalties are attached, the focus is more on abstract core of ideals such as respect and responsibility. Instead of relying on coercion, the companys values are seen as something to which people willingly aspire.

Research into compliance- and values-based approaches reveals that both types of programs can interact or work toward the same end, buta a values orientation can better help explain and influence employees. Values-based increased employees awareness of ethics at work, their integrity, their willingness to deliver bad news to supervisors, and the perception that better decisions are made. Compliance-based programs are linked to employees awareness of ethical issues at work and their perception that decision making is better because of the expectations of its employees.

CODES OF CONDUCT (codes of ethics) are formal statements that describe what an organization expects of its employees. These has to reflect the board of directors and senior managements desire for organizational compliance with the values, mission, rules, and policies that support an ethical climate. Development of a code of ethics should involve the board of directors, president, and senior managers who will be implementing the code. Legal staff should be called on to ensure that the code has correctly assessed key areas of risk and that potential legal problems are buffered by standards in the code. A code of ethics that does not address specific high-risk activities within the scope of daily operations is inadequate for maintaining standards that can prevent misconduct.

Developing and Implementing a Code of Ethics 1. Consider areas of risk and state values as well as conduct necessary to comply with laws and regulations. Values are an important buffer in preventing serious misconduct. 2. Identify values that specifically address current ethical issues. 3. Consider values that link the organization to a stakeholder orientation. Attempt to find overlaps in organizational and stakeholder values. 4. Make the code understandable by providing examples that reflect values. 5. Communicate the code frequently and in language that employees can understand 6. Revise the code every year with input from organizational members and stakeholders.

6 Values that have been suggested as desirable elements in a code of ethics: 1. trustworthiness 2. respect 3. responsibility 4. fairness 5. caring 6. Citizenship

ETHICS OFFICERS are usually high-ranking person known to respect legal and ethical to respect legal and ethical standards who is responsible for assessing the needs and risks addressed in an organizational ethics program, developing and distributing a code of conduct or ethics, conducting training programs for employees, establishing and maintaining a confidential service to answer questions about ethical issues, making sure that the company is in compliance with government regulation, monitoring and auditing ethical conduct, taking action on possible violations of the companys code, and reviewing and updating the code. Ethics officers meet with company employees on a regular basis to provide training and updates on the companys code of conduct and ethics policies.

The ethics or compliance officer is usually responsible for companywide disciplinary systems, implementing all disciplinary actions the company takes for violations of its ethical standards. During performance appraisals, employees may be asked to sign and acknowledgment that they have read the companys current guidelines on its ethical policies. The company must also promptly investigate any known or suspected misconduct. The appropriate company official, often the ethics officer, needs to make a recommendation to senior management on how to deal with a particular ethical infraction. Building an ethics program and hiring an ethics officer to avoid fines will not be effective alone. Only with the involvement of top management and the board can an ethics officer earn the trust and cooperation of all key decision makers.

Ethics officers are responsible for knowing the contents of thousands of pages of regulations as well as for communicating and reinforcing values that build an ethical corporate culture. ETHICS TRAINING AND COMMUNICATION Instituting a training program and a system to communicate and educate about the firms ethical standards is a major step in developing an effective ethics program. Such training can educate employees about the firms policies and expectations, relevant laws and regulations, and general social standards. Training programs can make employees aware of available resources, support systems, and designated personnel who can assist them with ethical and legal advice. Training also can help empower employees to ask tough questions and make ethical decisions.

The employees capacity to exercise judgements that result in ethical decisions must be effective. Ethics training that is done only because it is required or reinforced or because ethics involvement is considered something that other companies do will not be effective. Ethics training must be customized to the specific nature of the employees in the organization and the risk areas they face. Factors Crucial to Ethics Training 1. Identify the key ethical risk areas. 2. Relate ethical decisions to the organizations values and culture 3. Communicate company codes, policies, and procedures regarding ethical business conduct.

4. Provide leadership training to model desired behavior. 5. Provide directions for internal questions and reporting mechanisms. 6. Engage in regular training events using a variety of educational tools. 7. Establish manuals, websites, and other communication to reinforce ethics training. 8. Evaluate and use feedback to improve training. If ethical performance is not a part of regular performance appraisals, the message is that ethics is not an Important component of decision making. For ethics training to make a difference, employees must understand why it is conducted, how it fits into the organization, and their own role in its implementation.

Top corporate executives must communicate with managers at the operations level and enforce overall ethical standards within the organization. In addition, employees must be offered direction on seeking assistance from managers or other designated personnel in resolving ethical problems. An effective ethics program can reduce criminal, civil, and administrative consequences, including fines, penalties, judgments, debarment from government contracts, and court control of the organization. An ineffective ethics program that results in many unethical acts may cause negative publicity and a decrease in organizational financial performance. An ethical disaster can do as much damage (or more) to a company than a natural disaster.

To be successful, business ethics programs need to educate employees about formal ethical frameworks and models for analyzing business ethics issues. Then, employees are able to base ethical decisions on their knowledge of choices rather than emotions. If ethics training is to be effective, it must start with a foundation, a code of ethics, and ethical concerns procedure, line and staff involvements, and executive priorities on ethics that are communicated to employees. Managers from every department must be involved in the development of an ethics training program. Most experts on training agree that one of the most effective methods of ethics training is involvement in resolving ethical dilemmas that relate to actual situations that employees experience in carrying out their responsibilities.

A relatively new training device is the behavioural simulation or role-play exercise in which participants are given a short hypothetical ethical issue situation to review. The participants are assigned roles within the hypothetical organization and are provided with varying levels of information about the issue. They then must interact o provide recommended course of action representing short-term, midrange, and long-term considerations. The simulation recreates the complexities of organizational relationships and of having to address a situation without complete information. Learning objectives of the simulation exercise include (1) increased awareness by participants of the ethical, legal, and social dimensions of business decision making; (2) development of analytical skills for resolving ethical issues; and (3) exposure to the complexity of ethical decision making in organizations. According to recent research, the simulation not only instructs on the importance of ethics but on the processes for managing ethical concerns and conflict.

Ethical decision making is influenced by organizational culture, by co-workers and supervisors, and by the opportunity to engage in unethical behavior. All three types of influence can be affected by ethics training. Full awareness of the philosophy of management, rules, and procedures can strengthen both the organizational culture and the ethical stance of peers and supervisors. If adequately and thoughtfully designed, ethics training can ensure that everyone in the organization (1) recognizes situations that might involve ethical decision making, (2) understands the values and culture of the organization, and (3) is able to evaluate the impact of ethical decisions on the company in the light of its value structure.

ESTABLISHING SYSTEMS TO MONITOR AND ENFORCE ETHICAL STANDARDS Ethics assistance lines, help lines, or help desks offer support and assist members of the company who wish to ask questions about regulatory compliance, seek guidance about the policies or procedures, or report suspected violations of law, policy, or business ethics. This also gives employees an opportunity to register ethical concerns. Although there is always some worry that people may misreport a situation or misuse a help line to retaliate against another employee, help line have become widespread, and employees do utilize them.

A helpline or desk is characterized by ease of accessibility and simple procedures, and it serves as a safety net that facilitates monitoring and reporting. Outside companies can provide help line services that enable employees and consumers to voice concerns twenty-four hours a day, seven days a week. This reporting approach increases the chance of detecting unethical conduct and enables responsible management to take adequate and timely measures to maintain compliance with standards. OBSERVATION AND FEEDBACK Questionnaires that survey employees ethical perceptions of their company, their superiors, their coworkers, and themselves, as well as ratings of ethical or unethical practices within the firm and industry, can serve as benchmarks in an ongoing assessment of ethical performance.

Then, if unethical behavior is perceived to increase, management will have a better understanding of what types of unethical practices may be occurring and why. A change in the ethics training within the company may be necessary. Appropriate action involves rewarding employees who comply with company policies and standards and punishing those who do not. When employees comply with organizational standards, their efforts may be acknowledged and rewarded through public recognition, bonuses, raises, or some other means. Conversely, when employees deviate from organizational standards, they may be reprimanded, transferred, docked, suspended, or even fired.

USE OF AN OMBUDSMAN TO RESOLVE ETHICAL CONFLICT The Chinese and the Romans were the first to use the ombudsman, a position originally designed to safeguard ordinary citizens against crime and corruption by public officials. The word ombudsman is Scandinavian in origin. The Scandinavian ombudsman was appointed by Swedish King Charles XII in 1713 to watch over various government functions. The king had been out of the country for several years and subsequently, the country and government had fallen into disarray. The purpose of the ombudsman was to ensure that public officials acted lawfully. Today, and ombudsman may be employed by any organization, including companies, governments, universities, and nonprofit firms.

Essentially, the ombudsman acts as a third party to help resolve disputes between two parties by receiving complaints from individuals, investigating the complaints, and taking corrective action when needed. Ombudsman deals with two primary issues: 1. a decision, process, recommendation, or act that is contrary to law, rules, regulations, is a departure from established practice or procedure, or is perverse, arbitrary or unreasonable, unjust, biased, oppressive, or discriminatory 2. neglect, inattention, delay, incompetence, inefficiency, and ineptitude in the discharge of duties and responsibilities.

Ethics ombudsmen are also very common in todays business workplace and often serve an important role in developing an effective ethical compliance program. Employees will call upon the ombudsman when they have questions or concerns that, for some reason, cannot be resolved by their supervisor or department. Thus, an ombudsman offers an alternative for conflict resolution and essentially swerves as a third party, so the individual occupying this position must be highly respected and trusted. However, the ombudsman is not considered management, and employees must believe that he or she is neutral and reliable. Company ombudsmen also track new issues within the organization or its environment, make policy recommendations, and take on other projects that ensure employee and stakeholder interests are fully respected.

WHISTLE BLOWING means exposing an employers wrongdoing to outsiders, such as media or government regulatory agencies. A whistleblower (whistle-blower or whistle blower) is a person who tells the public or someone in authority about alleged dishonest or illegal activities (misconduct) occurring in a government department, a public or private organization, or a company. The alleged misconduct may be classified in many ways; for example, a violation of a law, rule, regulation and/or a direct threat to public interest, such as fraud, health/safety violations, and corruption. Whistleblowers may make their allegations internally (for example, to other people within the accused organization) or externally (to regulators, law enforcement agencies, to the media or to groups concerned with the issues).

Questions to Ask Before Engaging in External Whistle-Blowing 1. Have I exhausted internal anonymous reporting opportunities within the organization? 2. Have I examined company policies and codes that outline acceptable behavior and violations of standards? 3. Is this a personal issue that should be resolved through other means? 4. Can I manage the stress that may evolve from exposing potential wrongdoing in the organization? 5. Can I deal with the consequences of resolving an ethical or legal conflict within the organization?

CONTINOUS IMPROVEMENT OF THE ETHICS PROGRAM Improving the system that encourages employees to make more ethical decision is not very different from implementing other types of business strategies. Implementation means putting strategies into action. Implementation in ethical compliance means the design of activities to achieve organizational objectives using available resources and given existing constraints. Implementation translates a plan for action into operational terms and establishes a means by which organizational ethical performance will be monitored, controlled, and improved.

A firms values statement is its foundation. It guides the company in all of its actions. Peoples attitudes and behavior must be guided by a shared commitment to the business instead of by obedience to traditional managerial authority. Encouraging diversity of perspectives, disagreement, and the empowerment of people within the organization helps to align the companys leadership with its employees. Mutual of Omahas Values for Success Openness and Trust We encourage an open sharing of ideas and information, displaying a fundamental respect for each other as well as our cultural diversity.

Teamwork (Win/Win) We work together to find solutions that carry positive results for others as well as ourselves, creating an environment that brings out the best in everyone. Accountability/Ownership We take ownership and accept accountability for achieving end results, and empower team members to do the same. Sense of Urgency We set priorities and handle all tasks and assignments in a timely manner. Honesty and Integrity We are honest and ethical with others, maintaining the highest standards of personal and professional conduct.

Customer-Focus We never lose sight of our customers, and constantly challenge ourselves to meet their requirements even better. Innovation and Risk We question the old way of doing things and take prudent risks that can lead to innovative performance and process improvements. Caring/Attentive (Be Here Now) We take time to clear our minds to focus on the present moment, listening to our teammates and customers, and caring enough to hear their concerns. Leadership We provide direction, purpose, support, encouragement, and recognition to achieve our vision, meet our objectives and our values.

Personal and Professional Growth We challenge ourselves and look for ways to be even more effective as a team and as individuals.
IMPLEMENTING ORGANIZATIONAL ETHICS PROGRAMS

4 Things that a leader must do according to John Kotter: 1. Leaders should create a common goal or vision for the company. 2. Leaders are also good in getting buy-in or support from significant partners. 3. Great leaders are also great motivators and know how to use the resources available to them. 4. The spirit of great leaders who enjoy their jobs and approach them with an almost contagious tenacity, passion, and commitment.

If a company is to maintain ethical behavior, its policies and standards must be modelled by top management. Maintaining an ethical culture can be difficult if top management does not support such behavior. In an effort to keep earning high and boost stock prices, many firms have engaged in falsifying revenue reports. Top executives in these firms encouraged the behavior because they held stock options and could receive bonus packages tied to the companys performance. Thus, higher reported revenues meant larger executive payoffs. Along with strong ethical leadership, a strong corporate culture in support of ethical behavior can also play a key role in guiding employee behavior.

THE ROLE OF LEADERSHIP 2 Dominant styles of Leadership 1. Transformational Leadership Transformational leaders communicate a sense of mission, stimulate new ways of thinking, and enhance as well as generate new learning experiences. Transformational leadership considers the employees needs and aspirations in conjunction with organizational needs. Therefore, transformational leaders have a stronger influence on coworker support and the building of an ethical culture than transactional leaders. Transformational leaders also build a commitment and respect for values that provide agreement on how to deal with ethical issues. Transformational ethical leadership is best suited for higher levels of ethical commitment among employees and strong stakeholder support for an ethical climate.

2. Transactional Leadership Transactional leadership focuses on making certain that the required conduct and procedures are implemented. The barter aspects of negotiation to achieve the desired outcomes result in a dynamic relationship between leaders and employees where reactions, conflicts, and crises influence the relationship more than ethical concerns. Transactional leaders produce employees who achieve a negotiated level of required ethical performance or compliance. As long as employees and leaders find the exchange mutually rewarding, the compliance relationship is likely to be successful. However, transactional leadership is best suited to quickly changing ethical climates or reacting to ethical problems or issues.

LEADERS INFLUENCE CORPORATE CULTURE Organizational leaders use their power and influence to shape corporate culture. Power refers to the influence that leaders and managers have over the behavior and decisions of subordinates. An individual has power over others when his or her presence causes them to behave differently. Exerting power is one way to influence the ethical decision-making. The status and power of leaders are directly related to the amount of pressure they can exert on employees to conform to their expectations. A superior in an authority position can put strong pressure on employees to comply, even when their personal ethical values conflict with the superiors wishes.

5 Power bases from which one person may influence another: REWARD POWER Reward power refers to a persons ability to influence the behavior of others by offering them something desirable. Typical rewards might be money, status, or promotion. COERCIVE POWER Coercive power is essentially the opposite of reward power. Instead of rewarding a person for doing something, coercive power penalizes actions or behavior. Coercive power relies on fear to change behavior. For this reason, it has been found to be more effective in changing behavior in the short run than in the long run. Coercion is often employed in situations where there is an extreme imbalance in power. However, people who are continually subjected to coercion may seek a counterbalance by aligning themselves with other more

powerful persons or simply by leaving the organization. In firms that use coercive power, relationships usually break down in the long run. Power is an ethical issue not only for individuals but also for work groups that establish policy for large corporations. 5 Power bases from which one person may influence another: 1. REWARD POWER Reward power refers to a persons ability to influence the behavior of others by offering them something desirable. Typical rewards might be money, status, or promotion. 2. COERCIVE POWER Coercive power is essentially the opposite of reward power. Instead of rewarding a person for doing something, coercive power penalizes actions or behavior. Coercive power relies on fear to change behavior. For this reason, it has been found to be more

effective in changing behavior in the short run than in the long run. Coercion is often employed in situations where there is an extreme imbalance in power. However, people who are continually subjected to coercion may seek a counterbalance by aligning themselves with other more powerful persons or simply by leaving the organization. In firms that use coercive power, relationships usually break down in the long run. Power is an ethical issue not only for individuals but also for work groups that establish policy for large corporations. 3. LEGITIMATE POWER 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. In business, if a superior tells an employee to increase sales no matter what it takes and that employee has a strong affiliation to legitimate power, the employee may try anything to fulfil that order.

4. EXPERT POWER Expert power is derived from a persons knowledge (or the perception that the person possesses knowledge.) Expert power usually stems from a superiors credibility with subordinates. Credibility, and thus expert power, is positively related to the number of years a person has worked in a firm or industry, the persons education, or the honors he or she has received for performance. Expert power may cause ethical problems when it is used to manipulate others to gain an unfair advantage. 5. REFERENT POWER Referent power may exist when one person perceives that his or her goals or objectives are similar to anothers. The second person may attempt to influence the first to take actions that will lead both to achieve their objectives. Because they share the same objectives, the person influenced by the other will perceive the others use of referent power as beneficial. For this power relationship to be effective, however, some sort of empathy must exist between the individuals.

Identification with others helps to boost the decision makers confidence when making a decision, thus increasing his or her referent power. THE ROLE OF AN ETHICAL CORPORATE CULTURE To be most successful, ethical standards and expected behaviours should be integrated throughout every organizational process from hiring, training, compensating, and rewarding to firing. Many employees who view unethical conduct do not report it because they fear inaction, they are afraid they will not remain anonymous, or they believe their organization is not concerned about the activity. Frank Navran, a consultant to the Ethics Resource Center, has identified seven steps to changing the ethical culture of an organization.

Steps for Changing the Ethical Culture of an Organization 1. State your position, philosophy, or belief. 2. Create formal organizational systems. 3. Communicate expectations through informal (leadership) systems. 4. Reinforce the policy through measurements and rewards. 5. Implement communications and education strategies. 6. Use responses to critical events to underscore commitment. 7. Avoid the perception of hidden agendas. Employees who work in an open environment may be more likely to communicate freely and share information, including perspectives on ethical issues.

VARIATION IN EMPLOYEE CONDUCT Although the corporations is required to take responsibility for conducting its business ethically, a substantial amount of research indicates that there are significant differences in the values and philosophies that influence how the individuals that comprise corporations make ethical decisions. In other words, because people are culturally diverse and have different values, they interpret situations differently and will vary in the ethical decisions they make on the same ethical issue.

Reducing unethical behavior is a business goal no different from increasing profits. If progress is not being made toward creating and maintaining an ethical culture, the company needs to determine why and take corrective action, either by enforcing current standards more strictly or by setting higher standards. If the code of ethics is aggressively enforced and becomes part of the corporate culture, it can merely window-dressing and not genuinely part of the corporate culture, it will accomplish very little.

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