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Chapter 4: The Corporate Culture—Impact and Implications Chapter Objectives After reading this chapter, you will be able to: 1. Define corporate culture. 2. Explain how corporate culture impacts ethical decision-making. 3. Discuss the differences between a compliance culture and a values-based culture. 4. Discuss the role of corporate leadership in establishing the culture. 5. Explain the difference between effective leaders and ethical leaders. 6. Discuss the role of mission statements and codes in creating an ethical corporate culture. 7. Explain how various reporting mechanisms such as ethics hotlines and ombudsmen can help integrate ethics within a firm. 8. Discuss the role of assessing, monitoring, and auditing the culture and ethics program. 9. Explain how culture can be enforced via governmental regulation. ** Teaching Note: This chapter can be introduced by picking up a theme that was presented in Chapter 3. Ethical decision-making by individuals can be both encouraged and discouraged by the social context in which they operate. A corporate culture can have significant influence on the decision making of all employees, indeed, on all stakeholders. Therefore, a corporation has a responsibility to create a culture that will support ethical decision-making and deter unethical decisions. The following Decision Point asks students to think about this very issue. Opening Decision Point Creating an Ethics Program This Decision Point asks students to imagine that they work in the Human Resources department of their company and that the CEO has asked the HR department to develop an ethics program for the firm. They have been assigned the responsibility of creating this ethics program and have two weeks to come up with a draft version of a code of ethics for the company, a summary of other elements that the ethics program will include, and a proposal for how to assess whether the program is working. The CEO also asks them to come prepared to explain what role she can play in promoting ethics and insuring the success of the ethics program. The Ethics & Policy Integration Centre (EPIC) suggests seven potentially desirable outcomes of effective ethics programs and the extent to which they have been achieved: 1. Discovering unethical/illegal behavior. 2. Generating awareness of ethical and legal issues. 3. Providing a resource for guidance and advice. 4. Reporting wrongdoing. 5. Incorporating values in decision processes. 6. Developing greater employee commitment to the organization. 7. Meeting external and internal stakeholder needs. The students are asked to play the role of this HR person in several different types of businesses: a fast-food restaurant, an automobile dealership, a retail store selling consumer electronics, a government agency, and a large international corporation. Students are asked to consider the following questions as they complete the task of developing an ethics program in each of these business settings: • List the issues you think should be addressed in a code of ethics. • Other than a code of ethics, what other elements would you include in an ethics program? • How will you define “success?” Are there any facts that you will need to gather to make this judgment? • How would you measure success along the way? How will you measure whether your ethics program is “working” before you reach any end objective? • Who will you define as your primary stakeholders? • What are the interests of your stakeholders in your program and what are the impacts of your program on each stakeholder? How might the measurement of the program’s success influence the type of people attracted to the firm or who are most motivated within your organization? • How will you answer the CEO’s questions about her own role in promoting ethics? I. Introduction: What is Corporate Culture? a. Developing an Ethical Culture: This chapter examines the ways in which corporations develop ethical cultures, cultures in which individuals are encouraged and supported in making ethically responsible decisions. b. Consequences of Business Decisions: The decision-making model of ethics that we have introduced in the opening chapters emphasizes the responsibility of individuals for the decisions they make in business. These decisions impact one’s own personal integrity and also have consequences for many stakeholders with whom business organizations interact. c. Corporate Culture: influences, limits, shapes, and sometimes determines decision making within a firm. i. Individuals can be helped or hindered in making the “right” or “wrong” decision (according to their own values) by the expectations, values, and structure of the organization in which they live and work. d. This chapter surveys: some of the major issues surrounding the development, influence, and management of a corporate culture as well as the role of business leaders in creating, enhancing, and preserving cultures that support ethical behavior. e. Corporate Culture Perseveres: Even in the age of decentralized corporations and other institutions, there remains a sense of culture in organizations. i. Despite the fact that corporations have many locations, with diverse employee groups and management styles, an individual working for large global firm in one country will share various aspects of her or his working culture with someone working for the same firm halfway around the world. ii. Corporate culture survives the distance and differences. *Chapter Objective 1 Addressed Below* f. Organizational Culture: Every organization has a culture, fashioned by a shared pattern of beliefs, expectations, and meanings that influence, guide, and shape the thinking and behaviors of the members of that organization. i. Businesses have unspoken yet influential standards and expectations. *Reference: Figure 4-1 Here* *Reference: “Reality Check - Built To Last”* 1. Example: IBM was once famous for a culture in which highly starched white shirts and ties (for it was a very male culture) were part of the required dress code. ii. If you join a firm with a culture that supports other values than those with which you are comfortable, there will be values conflicts—for better or worse. g. Cultures Change: No culture is static, but modifying culture is a bit like moving an iceberg. One person cannot alter its course alone, but strong leaders (sometimes from within but often from the top) can have a significant impact on a culture, and a strong business leader can certainly have an impact on a corporate culture. i. A firm’s culture can be its sustaining value—offering it direction and stability during challenging times. ii. For example, some point to Toyota’s culture as the basis for its high quality and consistent customer satisfaction. *Reference: “Reality Check – Walk this Way: The Toyota Way”* iii. The culture can also constrain an organization in the common ways of managing issues, as in the typical phrases, “that’s how things have always been done here,” or “that’s our prevailing climate.” h. Defining Culture: Defining the specific culture within an organization is not an easy task since it is partially based on each participant’s perception of the culture. i. Perception may actually impact the culture in a circular way—perpetuating itself over time. ii. Several of the elements that are easiest to perceive, such as attitudes and behaviors, are only a small fraction of the elements that comprise the culture. iii. In addition, culture is present in and can be determined by exploring any of the following, among others: • Tempo of work. • The organization’s approach to humor. • Methods of problem solving. • The competitive environment. • Incentives. • Individual autonomy. • Hierarchical structure. iv. It can be difficult for individuals in a firm to identify the specific characteristics of the culture in which they work. 1. Culture becomes so much a part of the environment that participants do not even notice its existence. 2. Example: When individuals go off to college, they can finally begin to recognize that their family has its own culture. Each family has a culture that is distinct and self-perpetuating, as does each business. ** Teaching Note: Students can be helped to understand the influence of organizational culture on decision making and values by using examples from their own experience. Ask students to compare character traits of typical students living in particular residence halls or fraternities/sororities. Or, ask what distinguishes the “typical student” at your own school from a “typical” student at a rival school. Students often will want to argue that the culture doesn’t create character and that a process of self-selection is operating as well. People of a certain type are attracted to organizations of certain types. But, of course, this is part of the point. Organizations of any type will tend to attract people who will fit in a flourish—Enron is an example. The question remains: What type of organization and person are you going to be? *Reference: Figure 4-2 Here* II. Culture and Ethics *Chapter Objective 2 Addressed Below* a. What Role Does Corporate Culture Play in Business Ethics? In situations where the law provides an incomplete answer for ethical decision making, the business culture is likely to be the determining factor in the decision. i. Ethical businesses must find ways to encourage, to shape and to allow ethically responsible decisions. b. Role of Social Environment: Each of the factors in the decision-making mode we introduced in chapter 2, from fact gathering through moral imagination to assessment, can be supported or discouraged by the environment in which the decision is made. i. An ethical environment, or culture, would be one in which employees are empowered and expected to act in ethically responsible ways even when the law does not require it. c. Creating an Ethical Corporate Culture: In order to understand that cultures can influence some types of behaviors and discourage others, consider as an example two organizational approaches to the relief efforts following Hurricane Katrina in September 2005. i. On one hand, Federal Emergency Management Agency (FEMA) was charged with overall responsibility for the government’s response to the hurricane. 1. At the time of the hurricane, FEMA was a bureaucratic, hierarchical organization. 2. Established rules and procedures were to be followed when making decisions. Many decisions required approval from people in authority. At one point, FEMA personnel were delayed in reaching the hurricane area because the organization required them to do mandatory training in prevention of workplace sexual harassment. 3. Despite years of preparation and plans, the magnitude of the hurricane and resultant flooding overwhelmed FEMA’s ability to respond. When the situation did not fit into plans and the rules no longer applied, FEMA’s bureaucracy seemed incapable of acting. 4. Temporary homes and supplies that were stored nearby were not delivered to the area until months later because the proper approval was not yet received by authorities in the organization. Decisions were made and then retracted. 5. Days after the hurricane, while television reports showed thousands of people stranded at the New Orleans Convention Center, FEMA director Michael Brown claimed he had only learned of these survivors from a reporter. ii. Explored from a utilitarian perspective, introduced in Chapter 3, it certainly was not a culture that revolved around the consequences its decision-making process. While the ultimate decision might have incorporated this type of consideration, the culture itself did not place great weight on the impact of its process on its stakeholders. iii. In comparison, the US Coast Guard is an organization with similar responsibilities for search and rescue during emergency situations. 1. The Coast Guard has a reputation for being a less bureaucratic organization. The unofficial motto is “rescue first, get permission later,” reflecting a far more utilitarian perspective to its mission. 2. The Coast Guard empowers frontline individuals to solve problems without waiting for superiors to make decisions or to give directions. iv. The same person working in either of these organizations would approach a decision—and who that person might perceive to be her or his primary stakeholders—and you will have some idea of the importance of organizational culture. 1. FEMA and the Coast Guard are two very similar organizations with similar missions, rules, and legal regulations; but, they have significantly different cultures, and the decisions made throughout both reflect the culture of each. *Reference: Figure 4-3 Here* d. Expectations and Habits: The cultivation of habits, including the cultivation of ethical virtue, is greatly shaped by the culture in which one lives. i. The virtue of ethics tradition reminds us that our decision and our actions are very often out of habit, and not the result of careful deliberation. Thus, the question of where we get our habits and character is all-important. ii. We can choose to develop some habits rather than others, but it is also clear that our habits are shaped and formed by culture. This culture exists in every social context, iii. including the workplace, where individuals quickly learn behaviors that are appropriate and expected through those which get rewarded and promoted. iv. An ethical culture can have a direct and practical impact on a firm’s bottom line. 1. Research supports this impact; when looking at financial returns from 2007 to 2012, the publicly-traded businesses on the Ethisphere Institute's World's Most Ethical Companies list consistently outpaced the Standard & Poor's 500 by an average of 7.3 percent. 2. If attended to and supported, a strong ethical culture can serve as a deterrent to stakeholder damage, and can improve bottom line sustainability. But, if ignored, the culture could reinforce a perception that “anything goes,’ and could destroy long-term sustainability. 3. Example: Goldman Sachs may have allowed attention to drift away from its culture, and it suffered as a result. 4. Perception is more important than reality with regard to influencing decision-making. 5. Business leaders are responsible for creating and sustaining an ethical corporate culture. Ralph Larsen sets the leadership example by affirming that, at Johnson & Johnson, its “credo is all about personal responsibility.” v. Corporate culture is very powerful in shaping the individuals that work for a firm. Collins and Porras’ book, Built to Last: Successful Habits of Visionary Companies, explains that power in detail. III. Compliance and Value-Based Cultures *Chapter Objective 3 Discussed Below* a. Two Types of Corporate Culture: In the 1990’s a distinction was recognized between the traditional compliance-based approach and values-based or integrity-based approaches to corporate culture, which are perceived to be more far-sighted and flexible. i. The distinction between compliance-based and values-based cultures perhaps is most evident in accounting and auditing situations, but can also be used to understand wider corporate cultures. *Reference: “Reality Check – Compliance vs. Values”* *Reference: Table 4.1 Here* ii. Compliance-based culture: Emphasizes obedience to the rules as the primary responsibility of ethics. 1. Compliance-based culture will empower legal and audits offices to mandate and monitor compliance with the law and with internal codes 2. Goals of Compliance: A compliance-based culture will empower legal counsel and audit offices to mandate and to monitor compliance with the law and with internal codes. It will also focus on meeting legal and regulatory requirements, minimizing risks of litigation and indictment, and improving accountability mechanisms. iii. Values-based culture: Reinforces a particular set of values rather than a particular set of rules. 1. These firms may have codes of conduct, but the codes are predicated on a statement of values and it is presumed that the code includes mere examples of the values’ application. 2. In Favor of a Values-Based Culture: The argument for values-based culture is based on the fact that a compliance culture is only strong and as precise as the rules with which workers are expected to comply. 3. A firm can only have a certain number of rules and the rules can never unambiguously apply to every conceivable situation. 4. A values-based culture recognizes that where a rule does not apply, the firm must rely on the personal integrity of its work force when decision need to be made. 5. Compliance as Part of Values-Based Culture: Values-based organizations do include a compliance structure. In fact, an Ethics Resource Center study found that “[e]ighty-six percent of companies with a well-implemented ethics and compliance program also have a strong ethics culture" while "[f]ewer than 25 percent of companies with little to no program have a strong culture that promotes integrity in the workplace." b. Choosing an Ethics Program: If a firm decides a values-based orientation to its ethics program, it must find a way to integrate ethics into the compliance environment to prevent dilemmas and create a culture of ethics. IV. Ethical Leadership and Corporate Culture a. The primary responsibility of corporate culture: is to steward the effort to cultivate values, expectations, beliefs, and patterns of behavior that best and most effectively support ethical decision making. b. Who Is Responsible For The Corporate Culture? The tone of the firm comes from the top, so leaders are charged with this duty to guide stakeholders throughout the organization. i. This is not at all to relieve leaders throughout an organization from their responsibilities as role models, but instead to suggest the pinnacle position that the executive leader plays in setting the direction of the culture. In fact, neither can be successful independent of the other; there must be a consistent tone throughout the firm. ii. Merck’s CEO, Raymond Gilmartin, explains, “In thought, word and deed, a company’s leaders must clearly and unambiguously both advocate and model ethical behavior.” *Reference: “Reality Check – Spitzer, Weiner, and the Mirror Test for Leaders”* iii. The leader is the model for either ethical or unethical behavior in a firm, and her or his actions and attitude relay the tone to the stakeholders. *Reference: “Reality Check – The Impact of Ethical Leadership”* *Chapter Objective 4 Discussed Below* iv. Leadership sets the tone through other mechanisms such as the dedication of resources. Ethical business leaders allocate corporate resources to support and promote ethical behavior. c. Why Ethics Officers? i. Ethics officers were introduced to the corporate structure in the early 1990’s as a way to emphasize to firms, and their stakeholders, that ethics were both relevant and influential within their organizations. ii. Ethics would no longer be a job for the general counsel to do in her “spare time,” rather a highly skilled individual would be hired and given a staff and budget to do the required work. iii. Ethics officers would ensure that firms maintain their dedication to ethical decision making within the company, as well as in its dealing with vendors, suppliers and other contractors. They would make sure the code of conduct was upheld across the board. iv. When firms are effective in enacting ethics programs, employees are more likely to see themselves as participants in an ethical workplace culture. v. A 2008 study by KPMG demonstrated that 86 percent of the Fortune Global 200 have a business code of ethics, with the number of codes represented by that group doubling over the past 10 years. d. Ethical Leaders: One study of the nature of ethical leadership emphasized the importance of being perceived as a people-oriented leader, as well as the importance of leaders engaging in visible ethical action. i. Traits of ethical leaders include receptivity, listening, openness, integrity, honesty, trustworthiness, broad ethical awareness, concern for multiple stakeholders, and using ethical decision processes. ii. Ethical leaders do many things that “traditional leaders” do, but do them within the context of an ethics agenda. Their goal is not simply job performance, but performance that is consistent with a set of ethical values and principles. iii. Ethical leaders demonstrate caring for people in the course of their work. *Reference: “Reality Check – Perception of Leadership Qualities”* e. These ethical traits and behaviors must be socially visible and understood in order to be noticed an influence perceptions. i. Executives are expected to be focused on the financial bottom line and short-term demands of stock analysts, but it is noteworthy when they focus on broader and longer-term concerns. V. Effective Leadership and Ethical, Effective Leadership a. Role of an Ethical Leader: Being perceived as a leader plays an important role in a leader’s ability to create and transform an ethical corporate culture. Leaders have the responsibility for shaping the corporate environment so that ethical decision making can flourish. b. What is the difference between the effective leader and the ethical, effective leader? i. An effective leader is someone who guides, directs, and escorts others towards a destination successfully and, presumably, efficiently. ii. But, not every effective leader is an ethical leader. 1. Example: Wal-Mart executive Eduardo Castro-Wright was an effective business leader who led the Mexican division to tremendous profitability. But he was an unethical leader. *Chapter Objective 5 Addressed Below* iii. One key difference between effective leaders and ethical leaders lies in the means used to motivate others and achieve one’s goals. 1. Effective leaders can achieve their goals through threats, intimidation, harassment, or coercion. 2. Leaders can also use more amenable interpersonal means such as modeling ethical behavior, persuasion, or using the impact of one’s institutional role. c. “True” Leadership: Promoters of certain styles of leadership tend to identify a method of leading with “true” leadership in an ethical sense. i. Some say that the best leaders are individuals who lead by the example of serving others in a non-hierarchical style. ii. Others suggest that true ethical leaders are those “transformational” or “transactional” leaders who employ methods that empower subordinates to take initiative and to solve problems for themselves. iii. Creating a corporate culture in which employees are empowered and expected to make ethically responsible decisions is a necessary part of being an ethical business leader. d. Direction and Goals: It is not the method alone that establishes an ethical leader, the other element of ethical leadership involves the end or objective toward which the leader actually leads. i. This distinction should sound reminiscent of the emphasis on means in the deontological theory of universalism or the focus on ends or results in utilitarianism. 1. If we judge a leader solely by the results produced – the utilitarian greatest good for the greatest number - we may ignore the mistreatment of workers that was necessary to achieve that end. 2. Alternatively, if we look only to the working conditions protected by universalism, we may not appropriately account for a failure to produce a marketable product or one sufficient to reap a profit necessary to support the working conditions provided in a sustainable manner. ii. Comparisons/Dichotomies: 1. A business executive who leads a firm into bankruptcy is unlikely to qualify as an effective or successful leader, while an executive who transforms a business into a productive, efficient, and profitable business likely will be judged as a successful business leader. 2. A leader who succeeds in a manner that that respects subordinates and/or empowers them to become creative and successful themselves is, at least at first glance, an effective and ethical leader. 3. But is profitability and efficiency accomplished through ethical means alone enough to make a business leader an ethical leader? Other socially responsible goals might be necessary before we conclude that a leader is fully ethical. a. EXAMPLE: Imagine a business leader who empowers her or his subordinates, respects their autonomy by consulting and listening, but who leads a business that publishes child pornography or pollutes the environment or sells weapons to radical organizations. VI. Building a Values-Based Corporate Culture a. Modifying culture alone seems about as tough as moving an iceberg. b. Each individual in an organization has an impact on the corporate culture, although no one individual can build or change the culture alone. c. Culture derives from: leadership, integration, assessment, and monitoring. VII. Mission Statements, Codes of Conduct, and Statements of Values a. Articulation of Values: One of the key manifestations of ethical leadership is the articulation of values for the organization. These values may evolve from an inclusive process of values identification, not simply from the values of one particular executive. b. Guidance: It is the leader’s responsibility to ensure that the firm is guided by some set of organizing principles that can guide employees in their decision making processes. *Reference: “Reality Check - Do Codes Make a Difference?”* *Chapter Objective 6 Addressed Below* c. Mission is Critical: Before impacting the culture through a code of conduct or statement of values, a firm must first determine its mission. i. In the absence of other values, the only value is profit, at any cost. Without any further guidance from the top, a firm sends a clear message that a worker should do whatever it takes to reap profits. d. Codes of conduct: Codes may more specifically delineate the firm’s foundation both for internal and external stakeholders. i. The code of conduct has the potential to both enhance corporate reputation and provide concrete guidance for internal decision making, thus creating a built-in risk management system. ii. The firm’s vision can and should be inspiring, and its code of conduct should lay down the law with regard to the basis and objectives for all future decisions. In fact, the mission statement or corporate credo serves as an articulation of the fundamental principles at the heart of the organization and those that should guide all decisions, without abridgment. e. Corporate Response to Federal Sentencing Guidelines: The past two decades brought a proliferation of corporate codes of conduct and mission statements as part of the corporate response to the Federal Sentencing Guidelines. A 2008 survey found that 497 of the S&P 500 made their codes of ethics publicly available. i. How successful these codes are depends in large part on the process by which they are conceived and written, as well as their implementation. ii. The mission statement asks why a firm exists, what its purposes are, and how it will implement these objectives. iii. Once the parameters for the mission are determined, they must be shared and encouraged among colleagues and subordinates. iv. Codes of conduct articulate the way the firm strives to conduct itself and how they apply their values to daily business practices. They help stakeholders understand how they can expect to be treated by the firm and what the firm stands for. f. Implementing Ethical Culture: It is important to identify clear steps as to how the shift to an ethical culture will occur. i. You cannot simply, “print, post, and pray,” as Ethics Resource Center past-President Stuart Gilman has referred to the Enron experience. ii. You must put processes and procedures in place and then sustain that vision in the future. *Reference: Table 4-2 Here* g. Belief in the Culture: In order to have an effective code that will successfully impact culture, there must be a belief throughout the organization that this culture is actually possible and achievable. h. While many organizations have individual codes of conduct, industries and/or professions might also publish codes of conduct that apply to firms or people who do business in those arenas, many of which are implemented only a voluntary basis. i. The key elements of success are specific goals; performance measures oriented to outcomes; monitoring by independent, external groups to verify compliance; and fully transparent disclosure to the public. Culture Integration: Ethics Hotlines, Ombudspersons and Reporting *Chapter Objective 7 Discussed Below* j. Communication Systems: Many firms must have mechanisms in place that allow employees to come forward with questions, concerns, and information about unethical behavior. i. Integrating an ethical culture throughout a firm and providing means for enforcement is vitally critical both to the success of any cultural shift and to the impact on all stakeholders. ii. Integration can take a number of different forms, depending both on the organizational culture and the ultimate goals of the process. iii. One of the most determinative elements of integration is communication. 1. Communication of culture must be incorporated into the firm’s vocabulary, habits, and attitudes to become an essential element in the corporate life, decision making, and determination of success. Decision Point: Short Term versus Long Term You are a corporate vice president of one of the largest units in your organization. Unfortunately, you have noticed over the past few years that your unit has developed a singular focus on profits, since employees’ performance appraisals and resulting compensation increases are based in significant part on “making the numbers.” Though the unit has done well in this regard, you have noticed that people have been known to cut corners, to treat others less respectfully than you would like, and to generally disregard other values in favor of the bottom line. While this might be beneficial to the firm in the short run, you have grave concerns about the long-term sustainability of this approach. • What are the ethical issues involved in striving to define or impact the culture of a unit? • How might you go about defining the culture of your unit so that employees might be able to understand your concerns? • What will be the most effective means by which to alter this culture? • What stakeholders would be involved in your suggestion in response to the previous question? How might the different stakeholder groups be impacted by your decision on this process? • How can you act in order to ensure the most positive results? How will you measure those results or determine your success? Will you measure inputs or outcomes, responsibilities, and rights? *Reference: “Reality Check - Examples of Culture Integration”* k. How is ethical behavior encouraged and acknowledged? i. Consider whether incentives are in the right place to encourage ethical decision making and whether ethical behavior is evaluated during a worker’s performance review. ii. Reward employees for doing the right thing through appropriate honors and positive appraisals. iii. Encourage employees to raise questions related to unethical behavior, establish multiple and varied reporting mechanisms, and ensure employees that their reports will be free from retaliation. iv. Ensure that employees who violate company code are disciplined appropriately, even if they are good performers. No one is exempt from discipline for violations. l. Reporting Ethical Issues: i. Reporting ethically suspect behavior is difficult to do because there is a general social prohibition against informing on others. ii. Individuals often pay a real cost when they report on unethical behavior (such as retaliation), especially if workplace superiors are involved in the report of wrongdoing. m. “Whistleblowing” involves the disclosure of unethical or illegal activities to someone who is in a position to take action or prevent or punish the wrongdoing. i. Whistleblowing can expose and end unethical activities. But it can also seem disloyal; it can harm the business; and, sometimes, it can extract significant costs on the whistleblower. ii. Whistleblowing can occur internally, such as to a superior; or it can occur externally, such as an outside consultant reporting to someone inside the firm, some unethical behavior within the firm; or externally from someone inside the firm to a legal authority. iii. Internal mechanisms for reporting wrongdoing are preferable for all concerned because the effects of whistleblowing to an external group can be quite damaging. 1. The internal mechanisms for reporting must be effective, must allow confidentiality, if not anonymity, and they must strive to protect the rights of the accused party. n. Reporting Mechanisms: In addition to, or as part of ethics and compliance officers’ responsibilities, many firms have created ethics ombudsman and internal or external ethics hotlines. i. These mechanisms allow employees to report wrongdoing and create to mechanisms for follow-up and enforcement. ii. While these responses might seem evident, reasonable and commonplace, many organizations do not have them in place for a variety of reasons. iii. In addition, even when they are in place, people who observe threats to the organization opt not to report the threat or possible wrongdoing. iv. One of the challenges with reporting systems is that they do not make clear the values of the organization, what is accepted and what is not accepted within its culture. v. There are methods by which firms might actively curtail these negative influences. 1. For instance, leaders should model the act of reporting wrongdoing, in an obvious manner, so that everyone throughout the organization can see that reporting is the highest priority – not covering up malfeasance. 2. Leaders can explain the process of decision-making that led to their conclusion. 3. Running drills or rehearsals of challenging events will allow for much greater comfort and generate a level of expectation among workers that might not otherwise exist. 4. Finally, the most effective way to ensure clarity and thereby also ensure a successful reporting scheme is to consistently and continuously communicate the organization’s values and expectations to all stakeholders, and to reinforce these values through the firm’s compensation and reward structure. vi. Beyond the question of cultural differences in reporting sensitivities and processes, a firm must consider the bare logistical questions in global implementation of its code of conduct and ethics and compliance program. 1. How will the code and accompanying program align with local standards of practice, laws and customs? 2. Will there be just one version of the code for world operations, or multiple versions for each local base of operations, and not simply in the local language but modified in order to be sensitive to these local standards and customs? 3. How ‘deep’ will your code reach into your supply chain? Assessing and Monitoring the Corporate Culture: Audits *Chapter Objective 8 Discussed Below* o. Encouraging Participation in Ethical Culture: If we cannot or do not measure, assess, or monitor culture, it is difficult to encourage others throughout the organization to pay attention to it. i. Monitoring and an ongoing ethics audit allow organizations to uncover silent vulnerabilities that could later pose challenges to the firm, thus serving as a vital element in risk assessment and prevention. ii. By engaging in ongoing assessment, organizations are better able to spot areas of vulnerability before other stakeholders (both internal and external) spot them. iii. Beyond uncovering vulnerabilities, an effective monitoring process may include: 1. An evaluation of appropriate resource allocation 2. Whether the program is keeping pace with organizational growth 3. Whether all of the program’s positive results are being accurately measured and reported 4. Whether the firm’s compensation structure is adequately rewarding ethical behavior 5. Whether the ‘tone at the top’ is being disseminated effectively iv. How do you detect a potentially damaging or ethically challenged—sometimes referred to as “toxic”—corporate culture? 1. The first sign would be a lack of any generally accepted fundamental values for the organization. 2. Additional warning signs can occur in various component areas of the organization, such as the management of the firm’s internal and external relationships. *Reference: “Reality Check-Warning Signs!”* VIII. Mandating and Enforcing Culture: The Federal Sentencing Guidelines for Organizations *Chapter Objective 9 Addressed Below* a. Government Regulation: When internal mechanisms for creating ethical corporate cultures prove inadequate, the business community can expect governmental regulation to fill the void. b. The United States Sentencing Commission (USSC), an independent agency in the United States Judiciary, was created in 1984 to regulate sentencing policy in the federal court system. i. Prior to 1984 differences in sentencing, arbitrary punishments, and crime control had been enormous issues before Congress. ii. By using the USSC to mandate sentencing procedures and make recommendations for terms, Congress has been able to incorporate the original purpose of sentencing in federal court procedures, bringing some of these challenges and variations under control. c. Mandatory Federal Sentencing Guidelines: Beginning in 1987, the USSC prescribed mandatory Federal Sentencing Guidelines for Organizations that apply to individual and organizational defendants in the federal system, bringing some amount of uniformity and fairness to the system. i. These prescriptions, based on the severity of the offense, assign most federal crimes to one of 43 “offense levels.” ii. Each offender is then placed into a criminal history category based upon the extent and recency of past misconduct; then their sentence range is determined using a sentencing grid. iii. In its 2005 decision in U.S. v. Booker, however, the Supreme Court separated the “mandatory” element of the guidelines from their advisory role, holding that their mandatory nature violated the Sixth Amendment right to a jury trial. 1. A sentencing court is still required to consider guideline ranges. The court is also permitted to individually tailor a sentence in light of other statutory concerns. d. Relevance: The relevance of these Guidelines to ethics is that the USSC strived to use them to create both a legal and ethical corporate environment. *Reference: Figure 4.4 Here* i. This effort was supported by the Sarbanes-Oxley Act, which subsequently directed the USSC to consider and review its guidelines for fraud relating to securities and accounting, as well as to obstruction of justice, and specifically asked for severe and aggressive deterrents in sentencing recommendations. ii. Further, the Sarbanes-Oxley Act required public companies to establish a code of conduct for top executives and, if they did not have one, to explain why it did not exist. Several stock exchanges followed suit and also required codes of business conduct and ethics from its publicly held companies. iii. The USSC updated the guidelines in 2004 to include references not only to compliance programs, but also to “ethics and compliance” programs and further required that organizations promote “an organizational culture that encourages ethical conduct and commitment to compliance with the law.” e. Goals of USSC Guidelines: The Guidelines seek to encourage corporations to create or maintain effective ethics and compliance programs. So, those that can demonstrate that they have these programs but, unfortunately, they find themselves in court as a result of a bad apple or two, either will not be penalized or the recommended penalty will be reduced (called a “mitigated” penalty). i. The USSC notes that organizations shall “exercise due diligence to prevent and detect criminal conduct; and otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.” f. Due Diligence: The guidelines identify those specific acts of an organization that can serve as due diligence in preventing crime and the minimal requirements for an effective compliance and ethics program. These include: i. Standards and Procedures. The organization shall establish standards and procedures to prevent and detect criminal conduct. ii. Responsibility of Board and other Executives; Adequate Resources and Authority. 1. The organization’s board shall be knowledgeable about the compliance and ethics program and shall exercise reasonable oversight with respect to its implementation and effectiveness. 2. High-level personnel must be assigned to have responsibility for the program and must then ensure its effectiveness. 3. Specific individual(s) within the organization shall be delegated day-to-day operational responsibility for the program and shall report periodically to these high-level personnel and, as appropriate, to the governing authority, or an appropriate subgroup of the governing authority, on the effectiveness of the compliance and ethics program. They shall also be given adequate resources, appropriate authority, and direct access to the governing authority. iii. Preclusion from Authority: Prior Misconduct. The organization shall avoid placing people in charge of the program who have previously engaged in illegal activities or other conduct inconsistent with an effective compliance and ethics program. iv. Communication and Training. The organization shall communicate its standards and procedures to all members of the organization through training or other means appropriate to such individuals’ respective roles and responsibilities. v. Monitoring, Evaluation, Reporting Processes. The organization shall take reasonable steps: 1. To ensure that the organization’s compliance and ethics program is followed, including monitoring and auditing to detect criminal conduct; 2. To evaluate periodically the effectiveness of the organization’s compliance and ethics program; and 3. To have and publicize a system, which may include mechanisms that allow for anonymity or confidentiality, whereby the organization’s employees and agents may report or seek guidance regarding potential or actual criminal conduct without fear of retaliation. vi. Incentive and Disciplinary Structures. The organization’s compliance and ethics program shall be promoted and enforced consistently throughout the organization through: 1. Appropriate incentives to perform in accordance with the compliance and ethics program; and 2. Appropriate disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct. vii. Response and Modification Mechanisms. After criminal conduct has been detected, the organization shall take reasonable steps to respond appropriately to the criminal conduct and to prevent further similar criminal conduct, including making any necessary modifications to the organization’s compliance and ethics program. *Reference: “Reality Check-The Global Culture for Corporations – Guidance from Ethisphere: Thailand.”* viii. Adequate reporting to the Board of Directors. In 2010, the USSC adopted amendments to the FSGO to lower the penalties for compliance violations if the organization meets the following four conditions: 1. The individual or individuals with operational responsibility for the compliance and ethics program have direct reporting obligations to the governing authority or an appropriate subgroup thereof (e.g., an audit committee of the board of directors); 2. The compliance and ethics program detected the offense before discovery outside the organization or before such discovery was reasonably likely; 3. The organization promptly reported the offense to appropriate governmental authorities; and 4. No individual with operational responsibility for the compliance and ethics program participated in, condoned, or was willfully ignorant of the offense. g. Adhering to FSGO Criteria: FSGO criteria are principles-based, which provides organizations flexibility in tailoring an approach that best fits their circumstances. i. This flexibility allows firms to avoid a “one-size-fits-all” standard for compliance, but the lack of clarity poses a challenge to business managers.. ii. A firm must learn from its mistakes and take steps such as follow-up investigation and program enhancements to prevent recurrences. iii. The USSC requires that each firm benchmark itself and its due diligence against comparable companies in their industry to ensure they are holding themselves appropriately accountable. *Reference: Decision Point -“Legal Pressure to Violate Confidentiality” Decision Point Legal Pressure to Violate Confidentiality This Decision Point explores the issue of confidentiality and its protection when reporting illegal and unethical information within a company. Corporate ethics officers, ombudsman, and ethics hotlines typically guarantee that any reports of illegal or unethical behavior will be held in strictest confidence. Ethics officers promise anonymity to whistleblowers; and those who report wrongdoing trust that this promise of confidentiality will be upheld. However, Federal Sentencing Guidelines can create ethical dilemmas for corporations that promise anonymity and confidentiality. The guidelines call for significantly reduced punishment for firms that immediately report potential wrongdoing to government authorities. Failure to report evidence of wrongdoing can mean the difference between a significant penalty and exoneration. Of course, failure to promise confidentiality can also be evidence of an ineffective ethics and compliance system, itself a potential risk for receiving stiffer legal penalties. Students are asked to consider the following questions when reaching their decision: • What facts would you want to know before making this decision? • Can you imagine any creative way out of this dilemma? • To whom does the ethics officer owe duties? • What are the likely consequences of either decision? ** Teaching Note: This Decision Point raises a true ethical dilemma; all options seem to result in both ethical benefits and ethical harms. Asking students to role-play in this case can be helpful. Would they be less likely to report wrongdoing even with a promise of anonymity if they knew that there is legal pressure on their company to disclose the wrongdoing to prosecutors? Does the ethics officer have a duty to inform employees that promises of confidentiality may not be honored? *Reference: Opening Decision Point Revisited-“Creating an Ethics Program”* Opening Decision Point Revisited Creating an Ethics Program This Decision Point asks students to define the “success” of an ethics program they have devised. One way to look at the inquiry would be to consider the measures by which they would be willing to be evaluated. This requires exploration of whether there are pressures in the environment that encourage worker misconduct or systematic problems that encourage bad decisions. Students are asked to consider if they have identified all of the major legal, ethical, and reputational risks that their organization faces, and to determine the means by which to remediate those risks. It is important to determine whether students will be most concerned with the end results or consequences, or with the protection of particular values articulated by their program or codes. If they measure outcomes alone, they will have a singular focus on the achievement of those outcomes by decision makers. If they measure the protection of rights alone, they may be failing to consider the long-range implications of decisions in terms of their costs and benefits to the firm. According to the Ethics Resource Centre, the Federal Sentencing Guidelines are rarely applied to large corporations today. On the other hand, ethics programs seem to be having an effect internally. A 2011 study found that corporate employees in the U.S. are witnessing record low levels of wrongdoing, but are increasingly willing to report wrongdoing when they see it. To provide some context to this exploration, ask students to consider which offenses are most likely to lead to a fine for an organization. In 2011, the USSC received information on 160 organizations sentenced under Chapter 8: • 22% had been charged with fraud; • 18.8% were charged with environmental offences related specifically to water; • 10% were charged with import/export offences. • Over 70% were required to pay a fine (or a fine plus restitution), and another 15% were required to pay restitution only. • The average restitution payment imposed was almost $2.3 million, and the average fine imposed was over $12.7 million. • The average fine for cases involving import/export offences was over $25 million, and in antitrust cases, the average was $45 million. Instructor Manual for Business Ethics: Decision Making for Personal Integrity and Social Responsibility Laura P. Hartman, Joseph R. Desjardins, Chris MacDonald 9780078029455, 9781259060588, 9781259417856
