Self Interest in Ethical Decision Making Questions Response Complete the required readings and answer the following questions (10 points): How much and in

Self Interest in Ethical Decision Making Questions Response Complete the required readings and answer the following questions (10 points):

How much and in which ways did unbridled self-interest contribute to the subprime lending crisis?
How could increased regulation improve the exercise of unbridled self-interest in decision making?
How could ethical considerations improve unbridled self-interest in ethical decision making?
Identify and explain five examples where executives or directors faced moral hazards and did not deal with them ethically.
Given that the marketplace for securities is global, and that the risks involved can affect people worldwide, should there be a global regulatory regime to protect investors? If so, should it be based on the regulations of one country?
Should members and executives in investment firms be forced to be members of a profession with entrance exams and with adherence to a professional code such as is the case for professional accountants or lawyers?
Identify and explain three important ethical failures that contributed to the subprime lending fiasco © Keith Reicher
© Keith Reicher
CHAPTER 4
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The Institutionalization
of Business Ethics
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CHAPTER OBJECTIVES
•
To distinguish between the voluntary
and mandated boundaries of ethical
conduct
•
To provide specific mandated
requirements for legal compliance in
specific subject matter areas related to
competition, consumers, safety, and
the environment
•
To specifically address the
requirements of the Sarbanes–Oxley
legislation and implementation by the
Securities and Exchange Commission
•
To provide an overview of regulatory
efforts to provide incentives for ethical
behavior
•
To provide an overview of the
Federal Sentencing Guidelines for
Organizations recommendations and
incentives for developing an ethical
corporate culture
•
To provide an overview of voluntary
boundaries and the relationship to
social responsibility
CHAPTER OUTLINE
Managing Ethical Risk Through Mandated
and Voluntary Programs
Mandated Requirements for Legal
Compliance
Laws Regulating Competition
Laws Protecting Consumers
Laws Promoting Equity and Safety
Laws Protecting the Environment
Gatekeepers and Stakeholders
Accountants
Risk Assessment
The Sarbanes–Oxley Act
Public Company Accounting
Oversight Board
Conflicts of Interest: Auditor
and Analyst Independence
Enhanced Financial Disclosures
Whistle-Blower Protection
Corporate and Criminal
Fraud Accountability
Cost of Compliance
Laws That Encourage Ethical Conduct
Federal Sentencing Guidelines for
Organizations
Highly Appropriate Core Practices
Philanthropic Contributions
AN ETHICAL DILEMMA*
Myron had just graduated from West Coast University with
both chemistry–pharmacy and business degrees and was
excited to work for Producto International (PI). He loved
having the opportunity to discover medicinal products
around the world. His wife, Quan, was also enthusiastic about
her job as an import–export agent for a subsidiary of PI.
Producto International was the industry leader, with
headquarters in Paris. Worldwide, hundreds of small firms
were competing with PI; however, only six had equivalent
magnitude. These six had cornered 75 percent of world
sales. So many interrelationships had developed that
competition had become “managed.” However, this did
not constitute any illegal form of monopolistic behavior as
defined by the European Union.
Myron’s first assignment was in India and concerned
exporting betel nuts to South and perhaps North America.
It is estimated that more than 20 million people chew betel
nuts in India alone. The betel nut is one of the world’s most
popular plants, and its leaf is used as a paper for rolling
tobacco. The betel nut is also mashed or powdered with
other ingredients and rolled up in a leaf and sold as candy.
Myron quickly found that regular use of the betel nut, in
time, stains the mouth, gums, and teeth a deep red, which in
Asia is a positive quality. As Myron was learning more about
the betel nut, he came across the following report from the
People’s Republic of China: “Studies show that the chewing
of the spiced betel nut can lead to oral cancer. According
to research, 88 percent of China’s oral cancer patients are
betel nut chewers. Also, people who chew betel nuts and
smoke are 90 times more likely to develop oral cancer than
nonusers.” Myron found that the betel nut primarily affects
the central nervous system. It increases respiration while
decreasing the workload on the heart (a mild high). Myron
also found that demand for it was starting to emerge in the
United States as well as in other developed countries.
While Myron was working on the betel nut, David,
Myron’s boss, also wanted him to work on introducing khat
(pronounced “cot”) into Asia. Khat is a natural stimulant from
a plant grown in East Africa and southern Arabia. Fresh khat
leaves, which typically are chewed like tobacco, produce a
mild cocaine- or amphetamine-like euphoria. However, the
effect is much less intense than that produced by either
of those substances, with no reports of a rush sensation
or paranoia, for example. Chewing khat produces a strong
Strategic Philanthropy
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Part ?: Ethical Issues and the Institutionalization of Business Ethics
aroma and generates intense thirst. Casual users
claim that khat lifts spirits, sharpens thinking, and,
when its effects wear off, generates mild lapses
into depression similar to those observed among
cocaine users. The body appears to have a physical
intolerance to khat due in part to limitations in
how much can be ingested by chewing. As a
result, reports suggest that there are no physical
symptoms accompanying withdrawal. Advocates
of khat use claim that it eases symptoms of
diabetes, asthma, and disorders of the stomach
and the intestinal tract. Opponents claim that
khat damages health, suppresses appetite, and
prevents sleep. In the United States, khat has
been classified as a schedule IV substance by the
Drug Enforcement Agency (DEA): freshly picked
khat leaves (that is, within 48 hours of harvest)
are classified as a schedule I narcotic, the most
restrictive category used by the DEA.
After doing his research, Myron delivered
his report to David and said, “I really think that,
given the right marketing to some of the big
pharmaceutical companies, we should have two
huge revenue makers.”
“That’s great, Myron, but the pharmaceutical
market is only secondary to our primary market—
the two billion consumers to whom we can
introduce these products.”
“What do you mean, David?” Myron asked.
“I mean these products are grown legally
around the world, and the countries that we are
targeting have no restrictions on these substances,”
David explained. “Why not tailor the delivery of
the product by country? For example, we find
out which flavors people want the betel nut in,
in North and South America or the Middle East.
The packaging will have to change by country as
well as branding. Pricing strategies will need to
be developed relative to our branding decisions,
and of course quantity usages will have to be
calculated. For example, single, multiple, and super
value sizes need to be explored. The same can
be done for khat. Because of your research and
your business background, I’m putting you on the
marketing team for both. Of course, this means
that you’re going to have to be promoted and at
least for a while live in Hong Kong. I know Quan
will be excited. In fact, I told her the news this
morning that she would be working on the same
project in Hong Kong. Producto International tries
to be sensitive to the dual-career family problems
that can occur. Plus you’ll be closer to relatives.
I told Quan that with living allowances and all
of the other things that go with international
placement, you two should almost triple your
salaries! You don’t have to thank me, Myron.
You’ve worked hard on these projects, and now
you deserve to have some of the benefits.”
Myron went back to his office to think about
his and Quan’s future. He had heard of another
employee who had rejected a similar offer,
and that person’s career had languished at PI.
Eventually, that individual left the industry, never
to be heard from again.
QUESTIONS • EXERCISES
1.
2.
3.
Identify the social responsibility issues in this
scenario.
Discuss the advantages and disadvantages of
each decision that Myron could make.
Discuss the issue of marketing products
that are legal but have addictive properties
associated with them.
*This case is strictly hypothetical; any resemblance to real
persons, companies, or situations is coincidental.
T
o understand the institutionalization of business ethics it is important to
understand the voluntary and legally mandated dimensions of organizational
practices. In addition, there are core practices sometimes called best practices
that most responsible firms—trying to achieve acceptable conduct—embrace and
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Chapter 4: The Institutionalization of Business Ethics
96
implement. The effective organizational practice of business ethics requires all three
dimensions (legal, voluntary, and core practices) to be integrated into an ethics and
compliance program. This creates an ethical culture that can effectively manage the
risks of misconduct. Institutionalization relates to legal and societal forces that provide
both rewards and punishment to organizations based on the stakeholder evaluations
of specific conduct. Institutionalization in business ethics relates to established laws,
customs, and expected organizational programs that are considered normative in
establishing reputation. This means that deviations from expected conduct often are
considered ethical issues and therefore concern stakeholders. Institutions provide
requirements, structure, and societal expectations to reward and sanction ethical
decision making.
In this chapter, we examine the boundaries of ethical conduct and focus on the
voluntary, core practices, and mandated requirements for legal compliance—three
important areas in developing an ethical culture. In particular, we concentrate on
compliance in specific areas related to competition, consumers, safety, and the
environment. We also consider the requirements of the Sarbanes–Oxley legislation
and its implementation by the Securities and Exchange Commission (SEC) and how its
implementation has affected companies. This chapter gives an overview of legislative and
administrative actions taken to help the public maintain confidence in the financial system.
We also provide an overview of the Federal Sentencing Guidelines for Organizations
(FSGO) and give recommendations and incentives for developing an ethical corporate
culture. The FSGO, the Sarbanes–Oxley Act, industry trade associations, and societal
expectations support core practices. Finally, we examine philanthropic contributions and
how strategic philanthropy can be an important core competency to manage stakeholder
relationships.
MANAGING
M
ANAGING E
ETHICAL
THICAL R
RISK
ISK T
THROUGH
HROUGH
M
MANDATED
ANDATED A
AND
ND V
VOLUNTARY
OLUNTARY P
PROGRAMS
ROGRAMS
Table 4–1 provides an overview of the three dimensions of institutionalization. Voluntary
practices include the beliefs, values, and voluntary contractual obligations of a business.
All businesses engage in some level of commitment to voluntary activities to benefit both
internal and external stakeholders. Google, Inc. works hard to give its employees a positive
work environment through its benefits package. In addition to being a famously great place
to work, Google offices offer such health and wellness-boosting amenities as swimming
pools, gyms, volleyball courts, ping-pong tables and dance classes, the company even
allows employees to bring their dogs to work.1 Most firms engage in philanthropy—giving
back to communities and causes.
Core practices are documented best practices, often encouraged by legal and
regulatory forces as well as industry trade associations. The Better Business Bureau is
a leading self-regulatory body that provides directions for managing customer disputes
and reviews advertising cases. These practices are appropriate and common practices
that help ensure compliance with legal requirements and societal expectations. Although
these practices are not enforced, there are consequences for not engaging in these
practices when there is misconduct. For example, the Federal Sentencing Guidelines
for Organizations (FSGO) suggest that the governing authority (board of directors) be
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Part ?: Ethical Issues and the Institutionalization of Business Ethics
TABLE 4?1 Voluntary Boundary, Core Practices, and Mandated Boundaries of Ethical Decisions
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 requirements, industry self-regulation, and societal expectations
Mandated boundary
An externally imposed boundary of conduct (laws, rules, regulations, and
other requirements)
Source: Adapted from the “Open Compliance Ethics Group (OCEG) Foundation Guidelines,” v1.0, Steering Committee Update, December 2005,
Phoenix, AZ.
responsible for and assess an organization’s ethical and compliance activities. There is
no required reporting of investigations by government regulatory bodies, but there are
incentives to the firm that effectively implement this recommendation. If misconduct
occurs, there may be opportunities to avoid serious punishment. On the other hand,
if there has been no effort by the board to oversee ethics and compliance, this could
increase and compound the level of punishment. In this way, the government in
institutionalizing core practices provides organizations the opportunity to take their
own approach and only takes action if there are violations. Mandated boundaries are
the externally imposed boundaries of conduct, such as laws, rules, regulations, and other
requirements. Antitrust and consumer protection laws create boundaries that must be
respected by companies.
There is a need to maintain an ethical culture, and to manage stakeholder
expectations for appropriate conduct in an organization. This is achieved through
corporate governance compliance, risk management, and voluntary activities. The
development of these drivers of an ethical culture has been institutionally supported
by government initiatives and the demands of stakeholders. The compliance element
represents areas that must conform to existing legal and regulatory requirements.
Established laws and regulatory decisions leave limited flexibility to organizations
in adhering to these standards. Corporate governance (as discussed in Chapter 2) is
structured by a governing authority providing oversight as well as checks and balances
to make sure that the organization meets its goals and objectives for ethical performance.
Risk management analyzes the probability or chance that misconduct could occur based
on the nature of the business and the exposure to risky events. Voluntary activities often
represent the values and responsibilities that firms accept in contributing to stakeholder
needs and expectations.
Figure 4–1 depicts the key elements of an organizational culture. The elements include
values, norms, artifacts, and behavior. An ethical culture creates an environment in which
to structure behavior that is then evaluated by stakeholders. Values are broad and are
viewed as long-term enduring beliefs about issues such as integrity, trust, openness,
diversity, and individual respect and responsibility. Norms dictate and clarify desirable
behaviors through principles, rules, policies, and procedures. For example, norms could
provide guiding principles for antibribery issues, sustainability, and conflicts of interest.
Artifacts are visible, tangible external symbols of values and norms. Websites, codes of
ethics, rituals, language, and physical settings are artifacts. These three elements have
different impacts on behaviors. For example, norms prescribe specific behaviors in certain
situations. Organizational decisions on such issues as governance, core practices, and legal
compliance help shape the ethical culture.
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98
FIGURE 4?1 Elements of an Ethical Culture
Culture
Values,
Norms,
Artifacts,
Behavior
Voluntary Actions,
Governance,
Core Practices,
Legal Compliance
MANDATED
M
ANDATED R
REQUIREMENTS
EQUIREMENTS F
FOR
OR L
LEGAL
EGAL
COMPLIANCE
C
OMPLIANCE
Laws and regulations are established by governments to set minimum standards for
responsible behavior—society’s codification of what is right and wrong. Laws regulating
business conduct are passed because certain stakeholders believe that business cannot be
trusted to do what is right in certain areas, such as consumer safety and environmental
protection. Because public policy is dynamic and often changes in response to business
abuses and consumer demands for safety and equality, many laws have been passed to
resolve specific problems and issues. But the opinions of society, as expressed in legislation,
can change over time, and different courts or state legislatures may take diverging views.
For example, the thrust of most business legislation can be summed up as follows: Any
practice is permitted that does not substantially lessen or reduce competition or harm
consumers or society. Courts differ, however, in their interpretations of what constitutes
a “substantial” reduction of competition. Laws can help businesspeople determine what
society believes at a certain time, but what is legally wrong today may be perceived as
acceptable tomorrow, and vice versa. After generations of fame for its top-secret bank
accounts, Swiss banks have been forced to disclose information about some of their
clients. The rules are changing, however, and countries like Switzerland, Liechtenstein,
and Luxembourg now must share information on potential tax dodgers with government
agencies like the Internal Revenue Service. One bank alone, UBS, may harbor the secret
bank accounts of 52,000 American tax dodgers.2 However, personal views on legal and
illegal activity in this area vary tremendously and explain why accounting firms struggle to
advise.3 Instructions to employees to “just obey the law” are meaningless without effective
training and experience in dealing with specific legal risk areas.
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Part ?: Ethical Issues and the Institutionalization of Business Ethics
Laws are categorized as either civil or criminal. Civil law defines the rights and duties
of individuals and organizations (including businesses). Criminal law not only prohibits
specific actions—such as fraud, theft, or securities trading violations—but also imposes
fines or imprisonment as punishment for breaking the law. The primary difference
between criminal and civil law is that the state or nation enforces criminal laws, whereas
individuals (generally, in court) enforce civil laws. Criminal and civil laws are derived
from four sources: the U.S. Constitution (constitutional law), precedents established
by judges (common law), federal and state laws or statutes (statutory law), and federal
and state administrative agencies (administrative law). Federal administrative agencies
established by Congress control and influence business by enforcing laws and regulations
to encourage competition and to protect consumers, workers, and the environment. State
laws and regulatory agencies also exist to achieve these objectives. Amid the fallout from
the subprime mortgage and Wall Street financial sector crises, the Securities and Exchange
Commission CEO, Mary Schapiro, moved quickly to try to fill in regulatory gaps to prevent
further financial crises and bank failures.4
The primary method of resolving conflicts and serious business ethics disputes is
through lawsuits in which one individual or organization uses civil laws to take another
individual or organization to court. To avoid lawsuits and to maintain the standards
necessary to reduce risk and create an ethical culture, it is necessary to have both legal and
organizational standards enforced. When violations of organizational standards occur,
the National Business Ethics Survey (NBES) notes that many employees do not feel that
their company has a strong ethics program. In fact, Figure 4–2 demonstrates that only
25 percent of companies in the United States have a well-implemented ethics program. A
full 30 percent of companies do not have any ethics program at all to speak of, a serious
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