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© 2013 Cengage Learning. All Rights Reserved. 1 Part Two: Ethical Issues and the Institutionalization of Business Ethics Chapter 4: The Institutionalization of Business Ethics Chapter 4: The Institutionalization of Business Ethics
Institutionalization in Business Ethics Three dimensions to effective business compliance Voluntary practices: Include beliefs, values, and voluntary contractual obligations of a business All businesses have some voluntary commitments Philanthropy: Giving back to communities and causes Core practices: Documented best practices, often encouraged by legal and regulatory forces and trade associations The Better Business Bureau can provide direction Mandated boundaries: Externally imposed boundaries of conduct (e.g. laws, rules, and regulations) © 2013 Cengage Learning. All Rights Reserved. 2
Legal Compliance Laws and regulations established by governments Set minimum standards for responsible behavior Laws regulating businesses are required because stakeholders believe businesses cannot be trusted to do what is right in some areas Consumer safety Environmental protection Policy changes over time in response to business abuses and consumer demands for safety Telling employees to obey the law is meaningless without training in legal risk areas © 2013 Cengage Learning. All Rights Reserved. 3
4 The Elements of an Ethical Culture
Types of Laws Civil law defines the rights and duties of individuals and organizations Individuals (in court) enforce civil laws Criminal law prohibits specific actions and imposes punishments for breaking the law State or nation enforces criminal laws © 2013 Cengage Learning. All Rights Reserved 5
© 2013 Cengage Learning. All Rights Reserved. 6 Relationship Between Top Management Talking about Ethics and Employees NOT Observing Misconduct
Mandated Requirement for Legal Compliance Laws establish the basic ground rules for responsible business activities Five categories of laws 1.Regulating competition 2.Protecting consumers 3.Protecting equity and safety 4.Protecting the environment 5.Incentives to encourage organizational compliance programs © 2013 Cengage Learning. All Rights Reserved. 7
Laws Regulating Competition Laws passed to prevent the establishment of monopolies, inequitable pricing, and other practices that reduce or restrict competition among businesses Sometimes called procompetitive legislation because they encourage competition and prevent activities that restrain trade © 2013 Cengage Learning. All Rights Reserved. 8
Laws Protecting Consumers Laws protecting consumers require businesses to provide accurate information about products and services and to follow safety standards The first consumer protection law was passed in 1906 in response to poor working conditions in factories The FTC’s Bureau of Consumer Protection protects consumers against unfair, deceptive, or fraudulent practices The FDA regulates food safety, human drugs, and tobacco, among other things Groups with specific vulnerabilities have higher levels of legal protection © 2013 Cengage Learning. All Rights Reserved. 9
Laws Promoting Equity and Safety Laws promoting equity in the workplace protect the rights of minorities, women, older persons, and disabled persons Title VII of the Civil Rights Act Equal Employment Opportunity Commission (EEOC) Affirmative action programs The Equal Pay Act Occupational Safety and Health Administration (OSHA) makes inspections to ensure a safe working environment Many people still work in unsafe environments Companies may underreport accidents to avoid inspection and regulation © 2013 Cengage Learning. All Rights Reserved. 10
Laws Protecting the Environment Created in response to stakeholder concerns about businesses’ impact on environment Sustainability Meeting the present needs without compromising future generations’ abilities to meet their own needs Being a green company can boost profits The Environmental Protection Agency (EPA) was created to coordinate environmental agencies Waste disposal is a serious problem for firms and individuals © 2013 Cengage Learning. All Rights Reserved. 11
© 2013 Cengage Learning. All Rights Reserved. 12 The Green Consumer Which age groups are willing to pay significantly more for green products?
Gatekeepers and Stakeholders Trust is the glue that holds businesses together Gatekeepers: Overseers of business actions Accountants, regulators, lawyers, financial rating firms, auditors Are critical in providing accurate information to stakeholders © 2013 Cengage Learning. All Rights Reserved. 13
Accountants Measure and disclose financial information to the public Assure accuracy Some accountants have not adhered to their stakeholder responsibilities Excessive focus on growth and profits Conflicts of interest © 2013 Cengage Learning. All Rights Reserved. 14
Risk Assessors A group that failed in its duties to stakeholders during the most recent recession Problems with risk models led to inaccurate ratings Misled investors and stakeholders More oversight of credit rating firms in the future? © 2013 Cengage Learning. All Rights Reserved. 15
The Sarbanes-Oxley (SOX) Act Established a system of federal oversight of corporate accounting practices Gives the Public Company Accounting Oversight Board (PCAOB) authority to monitor accounting firms Standards and rules for auditors in accounting firms Requires top managers to certify their firms’ financial reports More accountability for CEOs and CFOs Some legal protection for whistleblowers Loopholes existed and misconduct continued © 2013 Cengage Learning. All Rights Reserved. 16
Dodd-Frank Wall Street Reform and Consumer Protection Act The most sweeping consumer protection legislation since the Great Depression Seeks to improve financial regulation, increase oversight, and prevent excessive risk-taking and deceptive practices Created new offices The Office of Financial Research The Financial Stability Oversight Council The Consumer Financial Protection Bureau (CFPB) Increased whistle-blower protections Whistle-blower bounty program © 2013 Cengage Learning. All Rights Reserved. 17
Federal Sentencing Guidelines for Organizations Passed as an incentive for organizations to develop and implement programs for ethical and legal compliance Applies to all felonies and class-A misdemeanors committed by employees Philosophy that legal violations can be prevented through organizational values and commitment to ethical conduct Passed in 1991; amendments in 2004, 2008, and 2010 © 2013 Cengage Learning. All Rights Reserved. 18
© 2013 Cengage Learning. All Rights Reserved. 19 Employees Who Feel Better Prepared are More Likely to Report
Highly Appropriate Core Practices Focus on developing sound organizational practices and structural integrity for performance measures Not a focus on individual morals Most ethical issues relate to nonfinancial issues The Sarbanes-Oxley Act and Dodd-Frank Act provide standards for financial performance The Integrity Institute developed a model that standardizes measures for nonfinancial performance © 2013 Cengage Learning. All Rights Reserved. 20
Voluntary Responsibilities Relate to business’ contributions to stakeholders Four major benefits Improves quality of life in communities Reduces government involvement Develops employee leadership skills Helps create an ethical culture Cause-related marketing: Ties an organization’s product(s) to a social concern through a marketing program Strategic philanthropy: The synergistic and mutually beneficial use of a company’s core competencies and resources to deal with social issues © 2013 Cengage Learning. All Rights Reserved. 21
The Importance of Institutionalization in Business Ethics Involves embedding values, norms, and artifacts in organizations, industries, and society The failure to understand highly appropriate core practices provides the opportunity for unethical conduct © 2013 Cengage Learning. All Rights Reserved. 22
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