Institutionalizing Business Ethics

1. Institutionalizing Business Ethics • What’s missing? Check out current events • Fraud Triangle and Ethical Decision-making • Managing Ethical Risk and Legal Compliance • Gatekeepers and Stakeholders • Sarbanes–Oxley Act (SOX) • Laws that Encourage Ethical Conduct • Federal Sentencing Guidelines for Organizations Highly Appropriate Core Practices

2. There can be no successful capitalist system without trust; we expect honesty in our everyday dealings. Investors have to have faith that their business leaders strive to be ethical and to comply with existing laws and regulations in spirit and in substance, not just form…a successful capitalist system must be predicated on fairness, honesty, and integrity. Scholars describe the capitalist system as a three-legged stool—economic freedom, political freedom, and moral responsibility. A weakness in any one and the stool topples. --Sharon Watkins, former Enron VP

3. Fraud Triangle • Purposeful communication to deceive, manipulate, or conceal facts to create false impression • Accounting fraud • Misrepresent financial reports (Enron) • SOX tried to address this • 2008-09 Wall Street meltdown/recession

4. Ethical Decision-Making (Sekerka & Bagozzi, 2007)

5. Institutionalization in Business Ethics Dimensions to effective business ethics compliance Voluntary practices Mandated boundaries Core practices • Legal Compliance • Laws and regulations established by governments • Laws regulating business passed because stakeholders believe business cannot be trusted to do what is right

6. 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 (in court)

7. Business Law Regulating competition Protecting consumers Protecting equity and safety Protecting the environment Encourage ethical conduct Gatekeepers/ Stakeholders • Trust is the glue that holds businesses together • Gatekeepers are overseers of business actions • Accountants • Risk Assessment • Ethics Officers • Attorneys • CFOs

8. 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 Requires top managers to certify firms’ financial reports Some legal protection for whistle-blowers

9. Federal Sentencing Guidelines for Organizations Applies to all felonies and class A misdemeanors committed by employees Incentive to develop and implement programs for ethical and legal compliance Legal violations can be prevented through org values and a commitment to ethical conduct My research studies ethical strength –promoting ethical action vs preventing unethical action Hewlett Packard Jazz Pharmaceutical Affymetrix PayPal The Gap, Inc. Applied Materials, Inc. Agilent Sonic Wall Apple Wilson, Sonsini, Goodrich, & Rosati Catholic Healthcare West Advanced Micro Devices, Inc.

10. Enron: Show Time Skilling and Lay wrapped their mission in an ideology that everyone in the American business community wanted to believe: that all rules and regulations are an 'affront' to 'free markets'.

11. The Enron Case • How did the corporate culture at Enron contribute to its bankruptcy? • Did Enron’s bankers, auditors, and attorneys contribute to Enron’s demise? If so, what was their contribution? • What role did the CFO play in creating the problems that led to Enron’s financial problems? • What are the “lessons learned” from the demise of Enron? Has anything changed since that period? Support your response with specifics.

12. Organizational Culture • OB theories that relate to ethical decision-making in organizations • Culture • Leadership • Motivation • Groups, etc. • Relationship between individuals, groups, and organizational ethical decision-making

13. Your Organization Examine and describe the ethical culture of your organizations (bank, team, class, club, group). How do you know this is real (as opposed to marketing or rhetoric)? How are organizational members protected if they “blow the whistle” on an ethical issue? What type of power do leaders in this organization use? How are employees motivated to engage in ethical behavior? How does the organization’s structure influence the ethical culture?

14. Corporate Culture The behavioral patterns, concepts, values, ceremonies, and rituals that take place in the organization May be formal statements of values, beliefs, and customs May be informal through direct or indirect comments conveying management’s wishes Two dimensions Concern for people Concern for performance

15. Ethics: Org Culture Types Apathetic Caring Exacting Integrative Cultural audits assess the organization’s values Who Stole the People’s Money? Do Tell, Nast, 1871

16. 5 Reasons Ethical Culture Doesn’t Just Happen 1. A human performance system must align across functions. 2. Depends on consistent messages about ethics across the organization and safe spaces to talk about grey areas not covered by corporate values and ethics codes. 3. Zero tolerance for abusing situations for personal gain, and quick correction of behaviors that fall outside of expected values and behavior. 4. Requires trust, built on a strengths-based foundation of positive values (respect, care, sustainability), not on a baseline foundation of compliance with laws. 5. Every member is held accountable for living out ethical decisions and ethical behavior. No exceptions.

17. Compliance or Value-Based Culture Compliance-based - legal departments to determine ethical risk Values-based - explicit mission statement that defines the firm and stakeholder relations

18. By Association People learn ethical/unethical behavior while interacting with others

19. White Collar Crime “Crimes of the suite” do more damage in monetary and emotional loss in 1 year than the “crimes of the street” over several years combined The presence of technology has aided WCC FBI is often engaged, typically involves fraud, laundering, pyramid, telemarketing, and ponzi schemes

20. Whistle Blowing Exposing an employer’s wrongdoing to outsiders (external to the company) SOX and FSGO has institutionalized whistle blowing to encourage discovery of misconduct http://www.cnn.com/2014/09/19/us/peanut-butter-salmonella-trial/

21. Individual Factors Organizational Factors • Ego/greed/self-interest • Social self-conscious emotions • Fear, doubt, insecurity • Perceptions/attribution • Background (education, religion, family, culture) • Social group • Structure • Motivation • Culture • Leadership • Power • Groups • Communication

22. Leadership & Power Reward: Offering something desirable to influence behavior Coercive: Penalizing negative behavior Legitimate: Titles and positions of authority Expert: Knowledge based Referent: Exists when goals or objectives are similar Motivation • A force within the individual that moves behavior toward goal achievement • Hierarchy of needs that influence motivation and ethical behavior • Needs or goals may change over time

23. Org Structure In a centralized organization, decision-making is concentrated amongst top-level managers In a decentralized organization, decisions are delegated as far down the chain of command as possible Groups • Formal groups • Informal groups • Group norms

24. Can People Control Their Own Actions Within a Corp Culture? Ethical decisions often made by committees and groups Many decisions are beyond individual influence When entering business, it takes time/experience to learn how to manage and resolve ethical issues YES, you can control your own actions….but you need help and practice

25. Industry Best Ethics Training Practices (Sekerka, 2009) • Training to instruct rules, policy, and to address compliance issues • Education for awareness and moral development, with ongoing dialogue to create culture/climate of moral strength • Performance metrics associated with ethics (risk factors) • Rules and values are equally tied to objectives in achieving the org strategy • Ethics focus is driven by all managers and applied to all functional areas (audits, assessments, evaluations) • Equal treatment for unethical acts; all levels

26. Movie: Boiler Room • What kind of apples? • Use psychology to explain presence/lack of morals. • What kind of barrel? • Use organizational theory to explain presence/lack of ethics.

27. LINK TO OB As you think about your Org Ethics Audit… What company will you investigate? Contact me if you encounter road blocks. Find examples of professional reports for format ideas. Find examples of audits, use library DBs, current events (WSJ, NYTs, etc.)