The Institutionalization of Business Ethics
Institutionalization in Business Ethics
• Institutionalization in business ethics relates to established laws, customs, and expected organizational programs that are considered normative in establishing reputation.
• Institutions provide requirements, structure, and societal expectations to reward and sanction ethical decision making.
Voluntary Boundary, Core
Practices, and Mandated Boundaries
• Voluntary boundary
– A management-initiated boundary of conduct (beliefs, values, voluntary policies, and voluntary contractual obligations).
• Core practice
– A highly appropriate and common practice that helps ensure compliance with legal and requirements, industry self-regulation, and societal expectations.
• Mandated boundary
– An externally imposed boundary of conduct (laws, rules, regulations, and other requirements)
Legal and Regulatory Issues
• Laws and regulations are established by the government to set minimum standards of acceptable behavior.
• Laws are passed because society does not always trust business to act in its best interest.
Elements That Create 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 between the two is enforcement.
– Criminal laws are enforced by the state or nation.
– Civil laws are enforced by individuals
(generally in court).
Violations of Standards,
Law, or Both by Employees
Business ethics disputes are generally resolved through lawsuits.
• Most laws affecting business fall into one of five categories:
– Laws regulating competition (prevent restraint of trade)
– Laws protecting consumers (safety, disclosure, privacy, etc.)
– Laws protecting equity and safety (discrimination, workplace safety, equal employment practice)
– Laws protecting the environment (air, water, noise)
– Laws that encourage ethical conduct (Federal Sentencing Guidelines for Organizations, Sarbanes-Oxley Act)
Laws Regulating Competition
Laws Protecting Consumers
• Laws that protect consumers require businesses to provide accurate information about products and services and to follow safety standards.
• In recent years, large groups of people with specific vulnerabilities have been granted special levels of legal protection relative to the general population.
• The role of the FTC’s Bureau of Consumer Protection is to protect consumers against unfair, deceptive, or fraudulent practices.
Laws Protecting Consumers
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 mandates that women and men who do equal work must receive equal pay.
Laws Promoting Equity and Safety
Laws Protecting the Environment
• Environmental Protection Agency (EPA)
• Many environmental protection laws result in the elimination or modification of goods and services
• Affirmative action programs
• Toxic waste and disposal
• Computer recycling
Laws Protecting the Environment
Laws Protecting the Environment (cont’d)
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 and establishes standards and rules for auditors in accounting firms
• Requires top managers to certify that their firms’ financial reports are complete and accurate, making CEOs and CFOs accountable
• Provides protection for “whistle-blowing” employees who might report illegal activity to authorities
Major Provisions of the Sarbanes-Oxley Act
Benefits of the Sarbanes-Oxley Act
• Greater accountability of top managers
• Renewed investor confidence
• Greater protection of retirement plans
• Greater penalties for senior managers
• Improved information from stock analysts
• Clear explanations by CEOs as to why their compensation package is in the best interest of the company
Cost of Compliance
• Estimated at $1 million per $1 billion in revenues
• Especially compliance with Section 404
– Compliance with this section requires:
• That management create reliable internal financial controls
• That management attest to the reliability of those controls and the accuracy of the financial statements that result from those controls
• An independent auditor is required to further attest to the statements made by management
Institutionalization of
Ethics Through Laws
Federal Sentencing
Guidelines for Organizations
• Creates an incentive for organizations to develop and implement programs designed to foster ethical and legal compliance
• Developed by the U.S. Sentencing Commission and apply to all felonies and class A misdemeanors committed by employees at work
• Government philosophy behind FSGO is that legal violations can be prevented through organizational values and a commitment to ethical conduct
Recent Changes in Organizational Sentencing
Key Findings from Compliance Ethics Group Survey
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