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1 Professional and Business Ethics Prof. Peter Hadreas Spring, 2014 Course Website: urses/ProfandBusEthics/

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Presentation on theme: "1 Professional and Business Ethics Prof. Peter Hadreas Spring, 2014 Course Website: urses/ProfandBusEthics/"— Presentation transcript:

1 1 Professional and Business Ethics Prof. Peter Hadreas Spring, 2014 Course Website: http://www.sjsu.edu/people/peter.hadreas/co urses/ProfandBusEthics/

2 2 Ethics as Organizational Culture (continued) Corresponds to chapter five of Nelson and Treviño textbook.

3 3 Ethical Culture: Multisystem Framework (Again) FORMAL SYSTEMS INFORMAL SYSTEMS Executive Leadership Role Models/ Selection Systems Heroes Policies/Codes Norms Orientation/Training Ethical and Rituals Performance Mgmt. Unethical Myths/Stories Authority Structure Behavior Language Decision Processes Alignment? Treviño and Nelson textbook, p. 153.

4 4 Developing and Changing the Ethical Culture Treviño and Nelson textbook, pp. 185-9.

5 5 The Story of Arthur Andersen, LLP Treviño and Nelson textbook, pp. 185-9.

6 6 Arthur Andersen (1885-1947)

7 7 Arthur Andersen (1885-1947) Arthur E. Andersen was born in Illinois in 1885. He was orphaned at 16. He worked as a mailboy attending school at night. He managed to be hired as assistant to a controller Andersen began working as a mailboy by day and attended school at night. He was eventually hired as the assistant to the controller of Allis-Chalmers Manufacturing Company in Chicago. When he was 23 he became is CPA. He was then the youngest CPA in his home state of Illinois.

8 8 Arthur Andersen (1885-1947) The firm of Arthur Andersen was founded in 1913 by Arthur Andersen and Clarence DeLaney as Andersen, DeLaney & Co. The name of the company was changed to Andersen & Co. in 1918.

9 9 Arthur Andersen (1885-1947) Andersen saw that the new profession of accounting should maintain impeccable standards and was elemental in the field leading it to become elemental to business training in universities. He created the profession's first centralized training program. While practicing accounting, he was a lecturer at Northwestern University (1909–12), then an assistant professor (1912–15), and then a professor (1915-22). In 1922 he resigned his university affiliation to devote full-time to his professional accounting practice.

10 10 Arthur Andersen (1885-1947) Andersen headed Andersen & Co. until his death in 1947. Andersen’s behavior became the stuff of which business heroes are made. As the textbook authors write: “... at the age of 28, Andersen confronted a railway executive who insisted that the accounting firm approve his company’s books. Andersen said, ‘There’s not enough money in the city of Chicago to induce me to change that report.’ Andersen lost the railway companies business, but when that company later went bankrupt, Arthur Andersen became known as an organization people could trust to be honest, and to stand up for what was right.” textbook, p. 186.

11 11 Ethical Culture: Multisystem Framework (Again) FORMAL SYSTEMS INFORMAL SYSTEMS Executive LeadershipRole Models/ Selection Systems Heroes Policies/Codes Norms Orientation/Training Ethical and Rituals Performance Mgmt. UnethicalMyths/Stories Authority Structure Behavior Language Decision Processes Alignment? Treviño and Nelson textbook, p. 153.

12 12 The high standard of Arthur Andersen LLP continued longh after his death. The company dissociated itself from a number of clients in the 1970s. The company foresaw the effect that stock options would have on U. S. corporations. The leadership of Arthur Andersen LLP insisted that stock options be treated a form of compensation. It was the first of the major accountancy firms to propose to the Financial Accounting Standards Board that stock options should be included on expense reports, just as cash compensation was. Offices of Arthur Andersen LLP, Chicago

13 13 The Problem of Stock Options “It is hard to think of a better example of what is wrong with corporate America [than the repricing of stock options]. When the firm’s stock does well, the people in charge make out like lottery winners. When the stock plummets, they get another set of chances to win. The scheme, in its audacity, and its logic is almost beautiful. Graef Crystal, who wrote the book, In Search of Excess: The Overcompensation of American Executives, told me [John Cassidy, staff writer for The New Yorker] recently that if you combine a volatile stock with a willingness to reprice stock options “then you have created a money machine, an antigravity device, which guarantees that the senior executives will get super-rich.” 1 1. Cassidy, John, The New Yorker, Sept. 23, 2002.

14 14 So How Did Arthur Andersen LLP Go Bad?

15 15 From the mid 1990s Arthur Andersen LLP began to derive its profits increasingly from management consulting rather than auditing. In terms of the Multisystem Framework, it was primarily a change in ‘performance management systems’ that eroded the standards of the company. The textbook authors write: “Under the new business realities, rather than standing for principles of honesty and integrity, consultants were encouraged to keep clients happy and to concentrate on getting return business because only revenues mattered. They were even expected to pad prices or create work to increase profits.” textbook, p. 186

16 16 Ethical Culture: Multisystem Framework (Again) FORMAL SYSTEMS INFORMAL SYSTEMS Executive LeadershipRole Models/ Selection Systems Heroes Policies/Codes Norms Orientation/Training Ethical and Rituals Performance Mgmt. UnethicalMyths/Stories Authority Structure Behavior Language Decision Processes Alignment? Treviño and Nelson textbook, p. 153.

17 17 “Andersen was convicted of obstruction of justice for shredding documents associated with its role as Enron’s auditing firm and quickly went out of business. The Supreme Court reversed the decision in 2005, ruling that the jury had not been advised that conviction in a white-collar crime case requires evidence of criminal intent. However, the Supreme Court reversal did not clear Andersen of wrongdoing. In fact, prosecutors provided evidence of criminal intent. In the end, even if someone wanted to, there was no firm to resurrect.” textbook, p. 187

18 18

19 19 Let’s consider company that was in very bad shape and analyze its culture. TAP Pharmaceuticals. textbook, pp. 201-203

20 Tap Pharmaceuticals I Some facts: 1.TAP Pharmaceuticals was formed in 1970 by Takeda Chemical Industries of Japan and Abbott Laboratories. In 1995, TAP offered Douglas Durand the position of vice- president for sales, with a 40% increase in pay and a $50,000 signing bonus. Durand had worked 20 years before for Merck & Co.

21 Tap Pharmaceuticals with Takeda Chemical Industries, largest pharmaceutic al industry in Japan formed in 1970 Abbot Laboratories has 762,000 employees and operates in over 130 countries.

22 Douglas Durand, left Merck for TAP an 40% increase in pay and $50,000 signing bonus.

23 Tap Pharmaceuticals II 2. Durand found out that TAP had a very different culture from Merck & Co. Durand discovered: a. Tap had no in-house legal counsel. Legal counsel was considered a ‘sales prevention department.’ b. Durand overheard, on a conference call, sales representatives openly bribing urologists with an up-front ‘administration fee’ to doctors who prescribed TAP’s new drug for prostate cancer, Lupron. c. TAP sales representatives gave doctors samples of drugs, encouraged doctors to charge the full Medicare price and keep the difference. d. TAP offered a big screen TV’s ($10,000) to every urologist in the country, office equipment, golf vacations.

24 Tap Pharmaceuticals II Lupron, TAP’s new drug for prostate cancer

25 TAP Pharmaceuticals III Some more facts: 3. Durand tried to change the culture at TAP by offering a bonus to sales reps who kept accurate records of their samples. The program worked, but then senior management discontinued the bonus and the reps stopped keeping track. 4. Durand wondered if he left the job in less than a year whether he’d get hired elsewhere. Perhaps, he’d become the company’s scapegoat?

26 5. Durand finally gave up on changing TAP’s corporate culture and became a double agent for the US government.

27 27 Ethical Culture: Multisystem Framework-- The Chart Again FORMAL SYSTEMS INFORMAL SYSTEMS Executive Leadership Role Models/Heroes Selection Systems Policies/Codes Norms Orientation/Training Ethical and Rituals Performance Mgmt. Unethical Myths/Stories Authority Structure Behavior Language Decision Processes Alignment? Treviño and Nelson textbook, p. 153.

28 Cultural systems Durand targeted: 1. performance management [reward system], 2. authority structure.

29 QUESTION Why did Durand’s culture change effort fail? What would it take for it to succeed?

30 QUESTIONS Suppose you succeeding in replacing the TAP leadership, how would you reorder the performance management [reward] system? Change the selection system? Install a sense of a TAP’ company hero? Construct a myth or story that would accommodate the improvements you want to make at TAP?

31 What happened to TAP? TAP pleaded guilty to conspiracy to cheat the federal government and agreed to pay a record $875 million fine, TAP has been dissolved as of 2008. What happened to Douglas Durand? In October 2001, Durand collected $77 million ($28 million went to taxes), his 14 percent of the share of the fine paid under the federal whistle blower statute. see textbook, p. 202.

32 32 Using the Multisystem Framework to Understand the Culture at San José State

33 33 Ethical Culture: Multisystem Framework applied to San José State FORMAL SYSTEMS INFORMAL SYSTEMS Executive Leadership Role Models/Heroes Selection Systems Policies/Codes Norms Orientation/Training Ethical and Rituals Performance Mgmt. Unethical Myths/Stories Authority Structure Behavior Language Decision Processes Alignment? Treviño and Nelson textbook, p. 153. What is the

34 34 Ethical Culture: Multisystem applied to San José State FORMAL SYSTEMS INFORMAL SYSTEMS Executive Leadership Role Models/Heroes Selection Systems Policies/Codes Norms Orientation/Training Ethical and Rituals Performance Mgmt. Unethical Myths/Stories Authority Structure Behavior Language Decision Processes Alignment? Treviño and Nelson textbook, p. 153. What are the

35 35 Ethical Culture: Multisystem Framework applied to San José State FORMAL SYSTEMS INFORMAL SYSTEMS Executive Leadership Role Models/Heroes Selection Systems Policies/Codes Norms Orientation/Training Ethical and Rituals Performance Mgmt. Unethical Myths/Stories Authority Structure Behavior Language Decision Processes Alignment? Treviño and Nelson textbook, p. 153. Are there any

36 36 Ethical Culture: Multisystem Framework applied to San José State FORMAL SYSTEMS INFORMAL SYSTEMS Executive Leadership Role Models/Heroes Selection Systems Policies/Codes Norms Orientation/Training Ethical and Rituals Performance Mgmt. Unethical Myths/Stories Authority Structure Behavior Language Decision Processes Alignment? Treviño and Nelson textbook, p. 153. What about

37 37 Ethical Culture: Multisystem Framework-- The Chart Again FORMAL SYSTEMS INFORMAL SYSTEMS Executive Leadership Role Models/Heroes Selection Systems Policies/Codes Norms Orientation/Training Ethical and Rituals Performance Mgmt. Unethical Myths/Stories Authority Structure Behavior Language Decision Processes Alignment? Treviño and Nelson textbook, p. 153. What are the carrots/sti cks?

38 38 Ethical Culture: Multisystem Framework applied to San José State FORMAL SYSTEMS INFORMAL SYSTEMS Executive Leadership Role Models/Heroes Selection Systems Policies/Codes Norms Orientation/Training Ethical and Rituals Performance Mgmt. Unethical Myths/Stories Authority Structure Behavior Language Decision Processes Alignment? Treviño and Nelson textbook, p. 153. It is a hierarchical authority structure, but what are the levels?

39 39 Ethical Culture: Multisystem Framework applied to San José State FORMAL SYSTEMS INFORMAL SYSTEMS Executive Leadership Role Models/Heroes Selection Systems Policies/Codes Norms Orientation/Training Ethical and Rituals Performance Mgmt. Unethical Myths/Stories Authority Structure Behavior Language Decision Processes Alignment? Treviño and Nelson textbook, p. 153. What is the burden of proof on safety issues?

40 40 Ethical Culture: Multisystem Framework applied to San José State FORMAL SYSTEMS INFORMAL SYSTEMS Executive Leadership Role Models/Heroes Selection Systems Policies/Codes Norms Orientation/Training Ethical and Rituals Performance Mgmt. Unethical Myths/Stories Authority Structure Behavior Language Decision Processes Alignment? Treviño and Nelson textbook, p. 153. San José State has woven heroes into its culture

41 41 Tommie Smith and John Carlos who won Gold and Bronze at the Olympics on October 16, 1968 in Mexico City. Both were San José State students.

42 42 César Chavez Memorial Arch Left is Delores Huerta who helped César Chavez in founding the United Farm Workers and furthering the civil rights of farm workers. On the right is Mohandas Gandhi.

43 43 Mosaic panel in César Chavez Memorial Arch

44 44 Bronze bust of Dr. Martin Luther King, Jr. by artist Sascha Schnittmann at King Library (Christina Olivas photo).

45 45 Ethical Culture: Multisystem Framework applied to San José State FORMAL SYSTEMS INFORMAL SYSTEMS Executive Leadership Role Models/Heroes Selection Systems Policies/Codes Norms Orientation/Training Ethical and Rituals Performance Mgmt. Unethical Myths/Stories Authority Structure Behavior Language Decision Processes Alignment? Treviño and Nelson textbook, p. 153. Is there a difference in equity, discrimination, grading, or even commute to campus, norms different from the official (formal) policies?)

46 46 Ethical Culture: Multisystem Framework applied to San José State FORMAL SYSTEMS INFORMAL SYSTEMS Executive Leadership Role Models/Heroes Selection Systems Policies/Codes Norms Orientation/Training Ethical and Rituals Performance Mgmt. Unethical Myths/Stories Authority Structure Behavior Language Decision Processes Alignment? Treviño and Nelson textbook, p. 153. Commencement is a formal ritual, but are there any informal rites of passage, or introduction to student groups that affect student identities?

47 47 Ethical Culture: Multisystem Framework applied to San José State FORMAL SYSTEMS INFORMAL SYSTEMS Executive Leadership Role Models/Heroes Selection Systems Policies/Codes Norms Orientation/Training Ethical and Rituals Performance Mgmt. Unethical Myths/Stories Authority Structure Behavior Language Decision Processes Alignment? Treviño and Nelson textbook, p. 153. Finis Conner — founder, Conner Peripherals and co- founder of Seagate Technology, Ron Conway — angel investor, co-founder and former CEO of Altos Computer Systems, Robert Frankenberg — former CEO, Novell, Carl Guardino — President and CEO, Silicon Valley Leadership Group, Omid Kordestani — Senior Vice President, Google, Brian Krzanich — CEO, Intel Corporation, Gordon Moore — co-founder, Intel Corporation (studied two years at SJSU; graduated from U.C. Berkeley), Ed Oates — co- founder, Oracle Corporation, Daniel R. Scoggin — founder and CEO, TGI Fridays, Mike Sinyard — founder and CEO, Specialized Bicycle Components, James E. Thompson — founder and chairman, Crown Worldwide Group. These contribute to business success stories. What are stories might be relevant?

48 48 Ethical Culture: Multisystem Framework applied to San José State FORMAL SYSTEMS INFORMAL SYSTEMS Executive Leadership Role Models/Heroes Selection Systems Policies/Codes Norms Orientation/Training Ethical and Rituals Performance Mgmt. Unethical Myths/Stories Authority Structure Behavior Language Decision Processes Alignment? Treviño and Nelson textbook, p. 153. Any language typical of San Jose State? ‘articulation,’ ‘Core G. E.’, ‘San Jose State Studies’, ‘concentrations’, How about ways of talking about fees? Any local slang?

49 slide# 6: picture of Arthur Andersen: http://www.google.ca/search?q=Arthur+Andersen+picture&tbmhttp://www.google.ca/search?q=Arthur+Andersen+picture&tbm Slide # 12: Aurthur Andersen Placque: http://www.google.ca/search?q=arthur+andersen+company+picture&tbmhttp://www.google.ca/search?q=arthur+andersen+company+picture&tbm Slide #12: picture of Arthur Andersen Offices, Chicago: http://www.google.ca/search?q=arthur+andersen+company+picture&tbm=isch&tbo=u&source http://www.google.ca/search?q=arthur+andersen+company+picture&tbm=isch&tbo=u&source Slide #18, cartoon of man applying for job with shredded resume: http://www.google.ca/search?q=pictures+of+Arthur+Andersen&tbm http://www.google.ca/search?q=pictures+of+Arthur+Andersen&tbm slide # 21: logo of TAP Pharmaceuticals: http://www.vector-logo.net/logo/TAP_PHARMACEUTICAL_1- 81374.htmlhttp://www.vector-logo.net/logo/TAP_PHARMACEUTICAL_1- 81374.html +durand&tbm=isch&tbo=u&source=univ&sa=X&ei=5UZQU-h0pKzIAduwgKAG&sqi slide #22: picture of Douglas Durand: http://www.google.ca/search?q=douglas


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