The Institutionalization of Business Ethics

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