Chapter 4:
The Institutionalization of
Business Ethics
Part Two:
Ethical Issues and the
Institutionalization of Business
Ethics
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Institutionalization in Business
Ethics
Three dimensions to effective business
compliance
 Voluntary practices: Include beliefs, values, and
voluntary contractual obligations of a business
 All businesses have some voluntary commitments
 Philanthropy: Giving back to communities and causes
 Core practices: Documented best practices, often
encouraged by legal and regulatory forces and
trade associations
 The Better Business Bureau can provide direction
 Mandated boundaries: Externally imposed
boundaries of conduct (e.g. laws, rules, and
regulations)
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2
Legal Compliance
Laws and regulations established by
governments
 Set minimum standards for responsible behavior
 Laws regulating businesses are required because
stakeholders believe businesses cannot be trusted
to do what is right in some areas
 Consumer safety
 Environmental protection
 Policy changes over time in response to business
abuses and consumer demands for safety
 Telling employees to obey the law is meaningless
without training in legal risk areas
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The Elements of an Ethical Culture
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Types of Laws
 Civil law defines the rights and duties of
individuals and organizations
 Individuals (in court) enforce civil laws
 Criminal law prohibits specific actions and
imposes punishments for breaking the law
 State or nation enforces criminal laws
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Relationship Between Top Management Talking about
Ethics and Employees NOT Observing Misconduct
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Mandated Requirement for Legal
Compliance
 Laws establish the basic ground rules for
responsible business activities
 Five categories of laws
1.
2.
3.
4.
5.
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Regulating competition
Protecting consumers
Protecting equity and safety
Protecting the environment
Incentives to encourage organizational compliance
programs
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Laws Regulating Competition
Laws passed to prevent the establishment
of monopolies, inequitable pricing, and
other practices that reduce or restrict
competition among businesses
 Sometimes called procompetitive legislation
because they encourage competition and
prevent activities that restrain trade
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Laws Protecting Consumers
 Laws protecting consumers require businesses to
provide accurate information about products and
services and to follow safety standards
 The first consumer protection law was passed in 1906
in response to poor working conditions in factories
 The FTC’s Bureau of Consumer Protection protects
consumers against unfair, deceptive, or fraudulent
practices
 The FDA regulates food safety, human drugs, and
tobacco, among other things
Groups with specific vulnerabilities have higher
levels of legal protection
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Laws Promoting Equity and Safety
Laws promoting equity in the workplace protect the
rights of minorities, women, older persons, and
disabled persons




Title VII of the Civil Rights Act
Equal Employment Opportunity Commission (EEOC)
Affirmative action programs
The Equal Pay Act
Occupational Safety and Health Administration
(OSHA) makes inspections to ensure a safe working
environment
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•
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Many people still work in unsafe environments
Companies may underreport accidents to avoid inspection
and regulation
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Laws Protecting the Environment
Created in response to stakeholder concerns
about businesses’ impact on environment
 Sustainability
 Meeting the present needs without compromising
future generations’ abilities to meet their own needs
 Being a green company can boost profits
 The Environmental Protection Agency (EPA) was
created to coordinate environmental agencies
Waste disposal is a serious problem for firms
and individuals
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The Green Consumer
Which age groups are willing to pay significantly more for green products?
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Gatekeepers and Stakeholders
Trust is the glue that holds businesses
together
 Gatekeepers: Overseers of business actions
 Accountants, regulators, lawyers, financial rating
firms, auditors
 Are critical in providing accurate information to
stakeholders
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Accountants
Measure and disclose financial information
to the public
 Assure accuracy
Some accountants have not adhered to their
stakeholder responsibilities
•
•
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Excessive focus on growth and profits
Conflicts of interest
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Risk Assessors
A group that failed in its duties to
stakeholders during the most recent
recession
 Problems with risk models led to inaccurate
ratings
 Misled investors and stakeholders
More oversight of credit rating firms in the
future?
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The Sarbanes-Oxley (SOX) Act
Established a system of federal oversight of
corporate accounting practices
 Gives the Public Company Accounting Oversight
Board (PCAOB) authority to monitor accounting
firms
 Standards and rules for auditors in accounting firms
 Requires top managers to certify their firms’
financial reports
 More accountability for CEOs and CFOs
 Some legal protection for whistleblowers
 Loopholes existed and misconduct continued
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Dodd-Frank Wall Street Reform
and Consumer Protection Act
The most sweeping consumer protection
legislation since the Great Depression
 Seeks to improve financial regulation, increase
oversight, and prevent excessive risk-taking and
deceptive practices
 Created new offices
 The Office of Financial Research
 The Financial Stability Oversight Council
 The Consumer Financial Protection Bureau (CFPB)
 Increased whistle-blower protections
 Whistle-blower bounty program
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Federal Sentencing Guidelines for
Organizations
Passed as an incentive for organizations to
develop and implement programs for
ethical and legal compliance
 Applies to all felonies and class-A
misdemeanors committed by employees
 Philosophy that legal violations can be
prevented through organizational values and
commitment to ethical conduct
 Passed in 1991; amendments in 2004, 2008,
and 2010
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Employees Who Feel Better Prepared are
More Likely to Report
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Highly Appropriate Core Practices
Focus on developing sound organizational
practices and structural integrity for
performance measures
 Not a focus on individual morals
 Most ethical issues relate to nonfinancial
issues
 The Sarbanes-Oxley Act and Dodd-Frank Act
provide standards for financial performance
 The Integrity Institute developed a model that
standardizes measures for nonfinancial
performance
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Voluntary Responsibilities
Relate to business’ contributions to
stakeholders
 Four major benefits




Improves quality of life in communities
Reduces government involvement
Develops employee leadership skills
Helps create an ethical culture
Cause-related marketing: Ties an organization’s
product(s) to a social concern through a marketing
program
Strategic philanthropy: The synergistic and
mutually beneficial use of a company’s core
competencies and resources to deal with social
issues
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The Importance of
Institutionalization in Business Ethics
Involves embedding values, norms, and
artifacts in organizations, industries, and
society
 The failure to understand highly appropriate
core practices provides the opportunity for
unethical conduct
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