The Importance Of Ethics

Published Date: 02 Nov 2017

The Importance of Ethics

EXHIBIT 1-3 Stakeholder Analysis

The third step is to assess each stakeholder's power and influence. This is im-portant because it helps the company to prioritize how it responds to the various stakeholders. In the current situation, employees likely have little power. They may threaten to strike or bring the matter to the attention of local media, but the ef-fective power of these actions is limited. The employees may offer wage conces-sions, which could be beneficial to the company and increase the likelihood that the company will not offshore their jobs. Suppliers may have sonic power based on their ability to reduce the price of materials to the company. Customers have power by virtue of their decision to purchase or not purchase products made out-side the United States. The company may or may not have adequate information to assess the likelihood of a customer backlash if it moves operations offshore. The citizens of the affected communities and government agencies may collectively ex-ercise power in this situation through the use of economic incentive packages (e.g., reduced taxes and low-cost loans to the company). The fourth step requires the company to assess its social, legal, ethical, and economic responsibilities to the stakeholders. This step is critical because the com-pany must be careful to assess its responsibilities to all stakeholders, a big endeavor in some cases. For example, what are the company's responsibilities to employees? If the employees belong to a labor union, the union may have a contract that stipu-lates how the company must treat them. If this is the case, then there are clear eco-nomic responsibilities that the company must address. In addition, the company's management may believe it has an ethical responsibility to treat employees with fairness and compassion. On the other hand, management has a responsibility to provide an acceptable economic return to the company's owners as well. The chal-lenge for the company is to adequately assess all of these and other responsibilities and prioritize them for use in the final decision. The fifth step in the analysis requires the company to develop strategies to ad-dress the demands of the stakeholders. For example, if the company decides that off shoring is the best decision, then it may also decide to provide educational or job-training benefits to employees who lose their jobs. Also, the company may un-dertake efforts to work with its suppliers so that existing relationships can be lever-aged to ensure a continuing supply of high-quality materials at a reasonable cost. The final step in the stakeholder analysis is to evaluate whether the chosen strategy was effective in addressing the company's needs and the stakeholders' de-mands. Whether the company ultimately decides to offshore part of its production or pursue some other alternative, using this stakeholder analysis should allow the company to make a decision that is optimally informed about the social, legal, eth-ical, and economic consequences. In addition, evaluating the chosen strategy after its implementation allows a company to assess the effectiveness of its stakeholder analysis in a real setting. Without an evaluation of the chosen strategy, a com-pany may be less effective in applying the analysis to future decisions. Exhibit 1-3 graphically illustrates stakeholder analysis.

Assess Assess Develop Understand Identify stakeholders' -.- stakeholders' --.- --,- responsibilities-o- strategies stakeholders power and interests to stakeholders influence

Evaluate chosen strategy

Ethics Programs Companies frequently create ethics programs to establish and help maintain an ethical business environment. Some of the most common elements of ethics pro-grams include written codes of ethics, employee hotlines and ethics call centers, ethics training, processes to register anonymous complaints a bout wrongdoing,

8 Governance, Ethics, and Managerial Decision Making . Inatetko

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and ethics offices. Ethics programs may include any combination of these elements. However, according to a recent survey, an ethics program with multiple elements is more likely to encourage employees to recognize and report wrongdoing than a single-element program. EU rthermore, companies with weaker ethical cultures are likely to benefit more from formal ethics programs than companies with stronger ethical cultures. A company may also choose to make the necessary investment in an ethics pro-gram for legal reasons. Federal sentencing guidelines related to fraud and corporate wrongdoing provide partial relief for companies that have effective compliance and ethics programs in place. Recently, the standards for compliance and ethics pro-grams were made more stringent by imposing greater responsibility on hoards of directors and management for their oversight and operation. Specifically, directors and management must assume an active leadership role for the content and operation of the programs. tinder the new standards, companies that seek to reduce criminal penalties imposed on them must be capable of promoting an organizational culture that encourages a commitment to legal and ethical conduct by all employees. Codes of Ethics A fundamental element of every ethics program is a code of ethics. Codes of ethics vary greatly, but fall into three primary types. The first type, often called a code of conduct, lays out specific rules or standards of behavior for various business situations. Codes of conduct tend to be lengthy and somewhat legalistic in their form. The second type describes the vision of a company and is often called a credo or mission statement. Within a mission statement, a company generally asserts its commitment to key stakeholders, such as employees, customers, suppliers, stock-holders, and the community. The third type is a corporate philosophy statement that outlines in broad terms the principles that guide the company in its business endeavors. Exhibit 1-4 shows examples of two codes of ethics, a mission statement and a corporate philosophy statement.

Purposes of Codes of Ethics. Codes of ethics serve a variety of purposes and offer stihsta ntia I benefits to companies. A well-written code of ethics can reduce the likelihood that matters of right and wrong will he left to individual interpretation. (Of course, a company must ta ke ca re to avoid leaving employees with the impression that behaviors not specifically prohibited by the company's code are permitted.) A code can establish the tone of the business environment and instill in employees a sense of how to behave even in the absence of specific guidance. A code of ethics serves business interests because unethical behaviors increase the likelihood of government or media scrutiny along with potential legal or reputation costs. A code of ethics also serves as a consensus-building tool that employees can look to for guidance when they believe improper demands are being made of them. Finally, a code of ethics can he useful in conveying values anti beliefs that are important to a company's management or owners. That is, the code can explain the company's reason for existence.

Writing Codes of Ethics. Given their importance, care must be taken in creating codes of ethics. Without thoughtful consideration, codes of ethics become meaningless and vague. flow, then, should a company write a code of ethics? Management support is critical to the successful creation of a code of ethics. Company employees must know that management is fully committed to establish-ing the code. A company should seek ideas and suggestions from employees at every level of the organization. Including employee input serves to create greater consen-sus and to communicate the importance of the code and the employees' support of it. Legal and regulatory developments should be considered to ensure that the code does not conflict with recently enacted requirements. Also, the code should be

'Ethics Resource Center, 2007 National Business Ethics Survey (Washington, DC: Ethics Resource Center. 10071.

The Importance of Ethics 9 Copyiqj,

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LO5 Describe the types and putposes of codes of ethics

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written as simply as possible, avoiding excessive legal terminology. Finally, manage-ment should communicate the rationale for various provisions of the code whenever possible. Employees who understand the underlying reasons for the rules are more likely to follow and respect them. Responding to Ethics Violations The unfortunate reality is that employees do violate codes of ethics. The manner in which a company addresses these ethics violations has a significant impact on the future effectiveness of its overall ethics program. For example, if employees know that violators are treated appropriately and in accordance with stated policies, they will he more likely To respect the company's ethics program and believe that man-agement is committed to ethics. I low should a company react when an employee violates the code of ethics? As with many business decisions, there is not a single answer to this question, but rather several principles to follow. First, the apparent violation should be carefully and thoroughly investigated. The goal is to determine whether the employee acted in a manner contrary to the code of ethics. It may be necessary to interview the em-ployee's coworkers to learn details of the suspected violation. It is important that those employees responsible for the investigation be objective and free of any real or apparent conflicts of interest. Second, the company's reaction should be timely. It is unfair to the suspected violator and the remaining employees to permit a cloud of distrust or suspicion to hang over the workplace for a long period. Finally, the company should administer sanctions that are appropriate to the violation. Fair-ness is particularly important. Excessive punishment, as perceived by other em-ployees, can lead to resentment within the workforce and can create a culture in which employees adopt an "us versus them" mentality. Remember, a primary goal of an ethics program is to encourage employees to act with integrity and in accor-dance with the company's code of ethics.

Corporate Wrongdoing Although companies establish ethics progra ins to encourage employees to act with integrity, some individuals engage in behaviors that are not only unethical, but also fraudulent. The case of Enron is one example where an ethics program was not effective. In late 2001, the once high-flying company Enron filed for bankruptcy protection. Investigations into the company's failure revealed a series of question-able transactions designed by the company's top officials to enrich themselves. The company's former chief financial officer and two former chief executive officers were found guilty of the fraud. Though the actual cost of Enron's collapse will never be known, estimates are that shareholders and creditors lost more than S60 billion. Consider the following additional examples of fraud. WorldCom filed for bankruptcy in June 2002 after revelations of a massive ac-counting fraud. Bernard "Bernie" Ebbers, former chief executive officer, was found guilty of fraud and conspiracy and sentenced to 25 years' imprisonment. Scott Sullivan, former chief financial officer, pled guilty to conspiracy, fraud, and filing false financial statements and was sentenced to 3 years' imprisonment. Another recent fraud involved FlealthSouth, the largest provider of health care services in the United States. A special investigation by the company found more than $3.3 billion in either false or questionable transactions. Often the false transactions involved reclassifying operating expenses as assets, in direct violation of generally accepted accounting principles (GAM% and overstating patient revenues. Appar-ently the company's senior management colluded to hide their misdeeds by record-ing the fraudulent transactions in amounts of less than $5,000 each because they knew the company's external auditors would not likely examine such "immaterial" transactions. A final example involves Tyco, a corporate conglomerate whose products include fire suppression systems, surgical equipment, electrical tape, garbage bags,

Corporate Wrongdoing

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LO6 Explain appropriate responses to violahons of codes of ethics

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