chapter 4-4
Setting Corporate Ethical Standards
Learning Objective (LO 4-4)
- Distinguish between compliance-based and integrity-based ethics codes.
- List the six steps in setting up a corporate ethics code.
Adoption of Written Codes of Ethics
- Trend: Increasing number of companies adopting written codes of ethics.
- Categories of Codes:
- Compliance-Based Ethics Codes
- Focus on preventing unlawful behavior.
- Increase control and penalize wrongdoers.
- Integrity-Based Ethics Codes
- Define the organization’s guiding values.
- Create an environment that promotes ethically sound behavior.
- Stress on shared accountability.
Features Comparison: Compliance-Based vs. Integrity-Based
| Compliance-Based Ethics Codes | Integrity-Based Ethics Codes | |
|---|---|---|
| Conformity Standards | Conform to outside standards (laws and regulations) and chosen internal standards | Conform to outside standards (laws and regulations) |
| Objective | Avoid criminal misconduct | Enable responsible employee conduct |
| Leaders | Lawyers | Managers with aid of lawyers and others |
| Methods | Education, reduced employee discretion, controls, penalties | Education, leadership, accountability, decision processes, controls, and penalties |
Steps for Improving U.S. Business Ethics
Top Management Support
- Adopt and unconditionally support an explicit corporate code of conduct.
Communication Expectations
- Employees must be made aware that expectations for ethical behavior begin at the top, reinforcing that senior management expects all employees to act accordingly.
Ethical Decision Training
- Managers and others must be trained to consider the ethical implications of all business decisions.
Establishment of Ethics Office
- Create an ethics office through which employees can communicate anonymously.
- Protection for whistleblowers (insiders reporting illegal or unethical behavior) must be provided to prevent retaliation.
- Related Legislation:
- Sarbanes-Oxley Act: Protects whistleblowers; requires public corporations to allow confidential reporting of concerns about accounting and auditing. Also mandates reinstatement and back pay if an employee is punished for reporting fraud.
- Dodd-Frank Wall Street Reform and Consumer Protection Act: Includes a “bounty” provision allowing corporate whistleblowers who provide information that leads to successful enforcement actions to collect 10-30% of penalties exceeding $1 million.
- Example: In 2022, former Biogen executive Michael Bawduniak received a $266.4 million award for exposing illegal kickbacks.
Outreach to Outsiders
- Inform outsiders (suppliers, subcontractors, distributors, customers) about the ethics program.
- Pressure to set aside ethical considerations often comes from outside; awareness of ethical standards helps employees resist this pressure.
Enforcement of Ethics Code
- Timely action must be taken if any rules are broken.
- Example of Enforcement: Houston Astros' violation during the 2017 World Series led to the immediate firing of the manager and general manager.
- Importance: No matter how well-crafted, a company's ethics code is ineffective if not enforced.
Consequences of Ignoring Ethics Codes
- Example: Enron had a written ethics code but engaged in unlawful practices to hide debts, leading to a significant breach of ethics and collapse. Ignoring the code sent a message that rules could be disregarded.
- Contrast Example: Johnson & Johnson (J&J) during the cyanide poisoning crisis in the 1980s:
- Voluntarily recalled Tylenol products despite not being legally obligated. This decision enhanced their reputation for integrity.
- Current challenges:
- Facing lawsuits related to talcum powder with over 40,000 plaintiffs.
- Financial implications include more than $4 billion liabilities, reduced by court cases in 2020, and ongoing settlements can approach $5.5 billion.
- Impact on corporate integrity reputation is questioned as the company decides to continue litigation.
Role of Ethics Officer
- An effective ethics officer is critical in enforcing the ethics code:
- Attributes of Effective Ethics Officers:
- Set a positive tone within the organization.
- Communicate effectively with all employees, maintaining confidentiality.
- Serve as both counselors and investigators, ensuring objective investigations and fairness.
- Demonstrate to stakeholders the importance of ethics in all company operations.