C HAPTER 4
The Institutionalization of
Business Ethics
Institutionalization in Business Ethics
• Three dimensions to effective business ethics
compliance
– Voluntary practices: Include the beliefs, values,
and voluntary contractual obligations
• All businesses have some voluntary commitments
(e.g., philanthropy)
– Mandated boundaries: Externally imposed
boundaries of conduct (e.g., laws and regulations)
– Core practices: Documented best practices, often
encouraged by legal and regulatory forces
Legal Compliance
• Laws and regulations
established by governments
– Minimum standards for
responsible behavior
• Laws regulating business
passed because stakeholders
believe business cannot be
trusted to do what is right
Source: Hisham Ibrahim
Elements of an Ethical Culture
Types of Laws
• Civil law defines the rights and duties of individuals
and organizations
• Criminal law prohibits specific actions and imposes
punishment for breaking the law
• The difference is enforcement
– Criminal laws enforced by the state or nation
– Civil laws enforced by individuals
(generally in court)
Only 1 in 4 Companies Has a WellImplemented Ethics Program
Source: “2007 National Business Ethics Survey,” Ethics Resource Center, p. 20
Most Laws Affecting Business Fall into
5 Categories
•
•
•
•
•
Regulating competition
Protecting consumers
Protecting equity and safety
Protecting the environment
Those that encourage ethical
conduct
Source: Ryan McVay
Laws Regulating Competition
• Laws passed to prevent the establishment of
monopolies, inequitable pricing practices, and other
practices that reduce or restrict competition among
businesses
– Sometimes called procompetitive legislation:
Enacted to encourage competition and prevent
activities that restrain trade
Laws Protecting Consumers
• Laws protecting consumers require businesses to
provide accurate information about products and
services and to follow safety standards
• Groups with specific vulnerabilities have higher levels
of legal protection
• The FTC’s Bureau of Consumer Protection protects
consumers against unfair, deceptive, or fraudulent
practices
Laws Promoting Equity and Safety
• Laws promoting equity in the workplace protect the
rights of minorities, women, older persons, and
persons with disabilities
– 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 regular inspections to ensure that
employees have a safe working environment
– Many still work in unsafe environments
Laws Protecting the Environment
• Largely in response to stakeholder concerns about
businesses’ impact on environment
• Sustainability has become an important concept to
businesses lately.
– Means “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)
created in 1970 to coordinate environmental
agencies
Shopping for Environmentally Friendly
Products in a Recession
Source: 2009 Cone Consumer Environmental Survey of 1,087 adults, January 29–30.
Gatekeepers and Stakeholders
• Trust is the glue that holds businesses together
• Gatekeepers are overseers of business actions
– Accountants, regulators, lawyers, financial rating
corporations, auditors
– Are critical in providing
accurate information
that allows stakeholders
to gauge the true health
of a corporation
Source: © image100/Corbis
Risk Assessment
• A group that failed in its
duties to stakeholders during
the most recent recession
were assessors of financial
products
– Misled investors and
stakeholders
– More oversight of credit
rating firms in the future?
Source: Stockbyte
The Sarbanes-Oxley Act
• Establishes a system of federal oversight of
corporate accounting practices
• Gives the Public Company Accounting Oversight
Board (PCAOB) authority to monitor accounting firms
that audit public corporations
– 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 whistle-blowers
Cost of Compliance
• Estimated at $1 million per $1 billion in revenues
• Compliance with Section 404 requires:
– That management create reliable internal financial
controls
– That management attest to the reliability and
accuracy of the financial statements
– An independent auditor must
attest to the statements
Source: C Squared Studios
Federal Sentencing Guidelines for
Organizations
• 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 a commitment to
ethical conduct
Percentage of U.S. Workforce Who
Feel the Government is Currently
Providing too Little Oversight
Source: 2009 National Business Ethics Survey, Ethics Resource Center, p. 31
Highly Appropriate Core Practices
• Sarbanes-Oxley and FSGO seek to provide
incentives to develop appropriate core practices
– Focus on developing structurally sound
organization core practices and developing
structural integrity for financial performance and
non-financial performance
Employees’ Preparation to Respond to
Ethical Misconduct Risk
Source: National Business Ethics Survey, How Employees View Ethics in Their Organizations 1994-2205, (Washington D.C.: Ethics Resource Center, 2005): 39
Philanthropic Issues
• Involve business’s contribution to the local
community and society
• Quality of life issues
– Responsible production of goods and services
– Technology improvements…yet not damaging to
the environment or jeopardizing personal privacy
• Philanthropic issues
– Making the local community a better place to live
• Strategic philanthropy: Synergistic and mutually
beneficial use of a company’s core competencies and
resources to deal with social issues