Chapter 1
The Importance
of Business
Ethics
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Learning Objectives
Explore conceptualizations of business ethics from
an organizational perspective
Examine the historical foundations and evolution of
business ethics
Provide evidence that ethical value systems support
business performance
Gain insight into the extent of ethical misconduct in
the workplace and the pressures for unethical
behavior
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Intro
The ability to anticipate and deal with business
ethics issues has become a priority in the 21st
century.
Demand
for improved business ethics, greater
corporate responsibility, and laws.
Highly visible business ethics issues influence the
public’s attitude toward business.
Making good ethical decisions are just as important
to business success as mastering management,
accounting, marketing or financial management.
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Intro
Ethical behavior requires understanding and identifying issues, areas of
risk, and approaches to making choices in an organizational environment.
The field of business ethics deal with question about whether specific
conduct and business practices are acceptable.
A salesperson omitting facts about a product’s poor safety
An accountant reporting inaccuracies in an audit report
A manufacturer intentionally concealing a safety concern to avoid a massive
recall
By its very nature, the field of business ethics is controversial.
Values and judgments play a critical role in the making of ethical
decisions.
All organizations have to deal with misconduct, even the most
prestigious companies and organizations.
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About this Chapter
Overview of business ethics.
Definition of business ethics and discusses why it
has become an important topic in business
education.
Evolution of business ethics in North America
Benefits of ethical decision making in business.
Framework for examining business ethics in this
text.
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Business Ethics
Business ethics comprises organizational principles, values,
and norms that originate from individuals, organizational
statements, or from the legal system that guide individual
and group behaviour in business
Morals: a person’s personal philosophies about what’s right or
wrong
Principles: Specific boundaries that should not be violated and
become the basis for rules
Values: Existing beliefs and ideals that are socially enforced. Often
based on organizational best practices (teamwork, trust, integrity)
Ethics - Behavior or decisions made within a group’s values by a
group of people representing the business organization.
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Business Ethics
Businesses should hire employees with sound moral
principle. However, some special aspects need to be
considered when applying ethics to business:
1.
Businesses must earn a profit to survive, but these
profits should not come from misconduct.
2.
To be successful, businesses must address the needs
and desires of stakeholders.
To address these unique aspects of the business world,
society has developed rules, both legal and implicit, to
guide businesses in their efforts to earn profits in ways
that help individuals or society and contribute to social
and economic well-being.
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Why Study Business Ethics? A Crisis in
Business Ethics
1. Ethical misconduct is a major business concern, and
organizations are under greater scrutiny than ever by
The case of JP Morgan Chase
The conflict between U.S. regulators and Swiss banks
see figure 1.1
2. There is no doubt negative publicity associated with
major misconduct lowered the public’s trust in certain
business sectors.
3. Decreased trust leads to a reduction in customer
satisfaction and customer loyalty, which in turn can
negatively impact the firm or industry.
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Specific Issues
Misuse of company resources, abusive behavior, harassment,
accounting fraud, conflicts of interest, defective products,
bribery, and employee theft are all problems cited as evidence of
declining ethical standards in business and in other areas like
government or sports.
Product knockoffs: products that imitate physical appearance of other products
although not copying the brand name or logo (AliBaba in China)
Accounting fraud: intentionally manipulating financial statements (Enron)
Bribery: giving or receiving something of value in exchange of an influence
(NOLA Mayor, College Admission Scandal)
Abusive behaviour: aggressive, controlling, destructive acts (Domestic abuse by
NFL stars and Pop stars)
Harassment: aggressive pressure or intimidation: (Physical, Psychological,
Cyberbullying, HWE vs Quid pro Quo (USA Gymnastic National Team scandal,
#MeToo Movement)
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Specific Issues
Misconduct can occur in any organization (private
companies, the public sector, military, sports,
Showbiz, etc)
Regardless of an individual’s beliefs about a
particular action, if society judges it to be unethical
or wrong, new legislation usually follows.
Whether correct or not, that judgment directly
affects a company’s ability to achieve its business
goals
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Before 1960: Ethics in Business
(theology)
Ethical issues related to business were often discussed
within the domain of theology or philosophy.
Religious leaders raised questions about fair wages,
labor practices, and the morality of capitalism.
The first book on business ethics was published in 1937
and covered 4 sections:
Fair
service, fair treatment of competitors, fair price,
moral progress in the business world.
Also
demonstrated the necessity of the ethical treatment
of different stakeholders.
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The 1960s: The rise of Social Issues in
Business
The American society witnessed the development of
anti-business trend b/c many critics attacked the vested
interests that controlled the economic and political
aspects of society.
Decay of inner cities and growth of ecological problems
such as pollution .
1962’s Consumer Bill of Rights: outlines 4 basic
consumer rights (safety, information, choice, and to be
heard).
Activities that could destabilize the economy or
discriminate against any class of citizens began to
viewed as politically unethical and unlawful.
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The 1970s: Business Ethics as an
Emerging Field
Business ethics began to develop as a field of study.
Universities began to teach about corporate social
responsibility (an organization’s obligation to maximize its positive impact on
stakeholders and minimize its negative impact).
Conferences were held to discuss the social responsibilities
and ethical issues of business.
By the end of this era, major ethical issues have emerged
(bribery, deceptive advertising, price collusion, product
safety)
Business ethics became a common expression and academic
researchers began to identify ethical issues and describe how
business people might choose to act in particular situations.
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The 1980s: Consolidation
Business academics, practitioners, and centers for
business ethics provided publications, courses,
conferences and seminars.
The Defense Industry Initiative on Business Ethics and
Conduct (DII) was developed to guide corporate support
for ethical conduct.
This era witnessed the rise of self-regulation as being in
the public’s interest rather than regulation by
government.
Many
tariffs and trade barriers were lifted, and businesses
merged and divested within an increasingly global
atmosphere.
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The 1990s: Institutionalization of
Business Ethics
Administration continues supporting self-regulation
and free trade.
However, many
reforms were abolished (Arthur
Levitt, SEC 1993)
Federal Sentencing Guidelines for Organizations
(FSGO) set the tone for organizational ethical
compliance programs in the 1990s.
The
guidelines focus on firms taking action to
prevent and detect business misconduct in
cooperation with government regulation.
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The 21st Century of Business Ethics
New evidence emerged in the early 2000s that not all business executives
and managers have fully embraced the public’s desire for high ethical
standards.
Highly publicized corporate misconduct and global accounting fraud at Enron, WorldCom, Tyco,
Royal Ahold, Parmalat, etc)
Increase public and political demand to improve ethical standards in business
2008 financial crisis caused by systemic use of high-risk financial instruments such as CDS, risky
debt, subprime lending, Asset-backed securities and corruption in major corporations.
Response: SOX (2002) that institutionalized the need to discover and address ethical and legal risk)
Response: Dodd Frank Wall Street Reform and Consumer Protection Act (2010): designed to make
the financial services sector more ethical and responsible.
Further ethical issues revolve around the acquisition and sales of
information
Facebook breach of trust (2019): sharing subscribers’ info with third parties
plus accusations regarding role in election meddling and spread of
disinformation.
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The Big 4
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Developing an Organizational and Global Ethical
Culture
Ethical culture: Acceptable behavior as defined by the company
and industry that captures the values and norms of the company
Encourages the use of principles for ethical reasoning
Companies are creating ethics programs for their employees and
appointing ethics officers to oversee them
Globally, businesses are working together to establish global
standards of acceptable behavior
Many companies demonstrate their commitment to acceptable
conduct by adopting globally recognized principles, such as the
United Nations’ Global Compact.
ISO 19600—a global compliance management standard
The UN Global Compact—a set of ten principles concerning human rights,
labor, the environment, and anti-corruption
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The Role of Organizational Ethics in
Performance
Ethisphere brings together leading global companies to
define and promote best practices for ethics and
compliance; and helps to advance business performance
through data-driven assessments, benchmarking, and
guidance.
NiSource, a distributor of natural gas, electricity, and
water in the Midwest and Northeast United States, has
earned a place in Ethisphere’s “World’s Most Ethical
Companies” for three consecutive years.
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Chapter 2
Stakeholder
Relationships, Social
Responsibility, and
Corporate Governance
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Learning Objectives
Identify stakeholders’ roles in business ethics
Define social responsibility
Examine the relationship between stakeholder
orientation and social responsibility
Delineate a stakeholder orientation in creating
corporate social responsibility
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Learning Objectives (continued)
Explore the role of corporate governance in
structuring ethics and social responsibility in
business
List the steps involved in implementing a
stakeholder perspective in social responsibility and
business ethics
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Stakeholders Define Ethical Issues
in Business
Building effective relationships is considered one of
the more important areas of business today.
In a business context, anyone with a “stake” or
claim in some aspect of a company’s products,
operations, markets, industry, and outcomes are
known as stakeholders.
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Relationships and Business
Relationships are associated with both organizational success
and misconduct
Businesses
exist because of organizational relationships
between employees, customers, shareholders, and the
community
Stakeholder framework identifies the internal and external
stakeholders who agree, collaborate, and engage in
confrontations on ethical issues
Allows
organizations to identify, monitor, and respond to
the needs and expectations of stakeholder groups
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Stakeholder Theory
The survival and performance of any organization is a
function of its ability to create value for all primary
stakeholders
Approaches to stakeholder theory
Normative
- Sets forth ethical guidelines that dictate how
firms should treat stakeholders. Principles and values
provide direction
Descriptive
- Focuses on the actual behavior of a firm
and addresses how decisions and strategies are made for
stakeholder relationships
Instrumental
- Describes what happens if a firm behaves
in a particular way
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Role of Stakeholders
The relationship between companies and their stakeholders is
a two-way street. Foster decision making
The level of social responsibility of an organization can be assessed by
scrutinizing its effects on the issues of concern to its stakeholders
Stakeholders apply their values and standards to many diverse
issues—working conditions, consumer rights, environmental
conservation, product safety, and proper information
disclosure—that may or may not directly affect an individual
stakeholder’s own welfare.
provide both tangible and intangible resources that can be critical to a firm’s
long-term success.
individual stakeholders with similar expectations about desirable business
conduct may choose to organize into communities.
Ethical misconduct can damage a firm’s reputation, causing stakeholders to
withdraw valuable resources. This gives stakeholders power over businesses.
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Stakeholder Orientation
Degree to which a firm understands and addresses
stakeholder demands can be expressed as a
stakeholder orientation.
Consists of the following activities:
Organization-wide generation
of data about
stakeholder groups and assessment of the firm’s
effects on these groups
Distribution
of the generated data throughout the
firm
Responsiveness of
the organization as a whole to the
data generated
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Stakeholder Orientation
Given the variety of employees involved in the
generation of information about stakeholders, it is
essential the information gathered be circulated
throughout the firm.
A stakeholder orientation is not complete unless it
includes activities that address stakeholder issues.
Responsiveness processes may involve the
participation of the concerned stakeholder groups.
A stakeholder
orientation can be viewed as a
continuum as firms adopt the concept to varying
degrees.
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Issues in Social Responsibility
Social responsibility rests on a stakeholder orientation.
Companies are looking at broader issues that consider
the long-term welfare of society; each stakeholder is
given due consideration.
Long-term relationships with stakeholders develop trust,
loyalty and the performance necessary to maintain
profitability.
Issues generally associated with social responsibility
can be separated into four general categories: social
issues, consumer protection, sustainability and corporate
governance.
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Issues in Social Responsibility
Social
issues are associated with the common good and
deal with concerns that affect large segments of society
and the welfare of our entire society.
There
is a need to reflect on issues indirectly related to business,
such as jobs lost through outsourcing, health issues, and gun
rights when developing strategies in certain cases.
Issues that
more directly relate to business include obesity,
smoking, and exploiting valuable or impoverished populations, as
well as a number of other issues
Another major
social issue involves internet tracking and privacy
and may soon become a consumer protection issue as the
government is considering passing legislation limiting the types
of tracking companies can perform over the Internet without
users’ permission.
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Issues in Social Responsibility
Consumer protection often occurs in the form of laws passed to
protect consumers from unfair and deceptive business practices; these
issues usually have an immediate impact on the consumer after a
purchase.
Major areas of concern include advertising, disclosure, financial practices,
and product safety
Because consumers are less knowledgeable, it is the responsibility of
companies to take precautions preventing consumers from being harmed by
their products.
Deceptive advertising has been a hot topic in the consumer protection area,
and some advertising practices skirt the line between ethical and
questionable behavior.
For example, native advertising blends digital advertisements or
company promotions with content on the website where it is featured.
This may be construed as deceptive if consumers cannot tell the
difference between the ad and the content.
Companies must be knowledgeable about consumer protection laws and
recognize whether their practices could be construed as deceptive or unfair.
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Issues in Social Responsibility
Sustainability
is defined as the potential for the longterm well-being of the natural environment and
businesses can no longer ignore the environment as a
stakeholder.
Because
sustainability is a major ethical issue, we will cover this
topic in more detail in chapter 12.
Corporate
governance involves the development of
formal systems of accountability, oversight and control.
Strong corporate governance mechanisms help remove
the possibility for employees to make unethical decisions.
Research
has shown that corporate governance has a positive
relationship with social responsibility and we discuss corporate
governance in more detail later in this chapter.
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Corporate Citizenship
Degree to which businesses strategically meet the
economic, legal, ethical, and philanthropic
responsibilities placed on them by their stakeholders
Dimensions
Strong
sustained economic performance
Rigorous compliance
Ethical
actions beyond what the law requires
Voluntary contributions that
advance the reputation
and stakeholder commitment of the organization
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A selection of the world’s most
ethical companies who have
demonstrated their commitment to
stakeholders.
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Take a Guess…
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Social Responsibility and the Importance of a
Stakeholder Orientation
Many businesspeople and scholars have questioned
the role of ethics and social responsibility in
business because legal and economic
responsibilities are accepted as the most important
determinants of performance.
Milton
Friedman
Adam Smith
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Importance of Stakeholder Orientation in
Social Responsibility
Friedman’s view - Stakeholders do not have any
role in requiring businesses to demonstrate
responsible and ethical behaviour
“the
basic mission of business [is]…to produce
goods and services at a profit, and in doing this,
business [is] making its maximum contribution to
society and, in fact, being socially responsible.”
Friedman believes the market is a better deterrent to
wrongdoing than new laws and regulations.
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Importance of Stakeholder Orientation in
Social Responsibility
Adam Smith’s view - Values that a firm should
adopt to produce in a more socially responsible way
correlates with the needs and concerns of the
stakeholders
Adam
Smith, one of the founders of capitalism,
established expectations for motives and
behaviors in his invisible hand theory. Smith
distinguished justice as consisting of perfect or
inalienable rights, from beneficence, consisting
of imperfect rights that should be performed but
cannot be forced.
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Importance of Stakeholder Orientation in Social
Responsibility
Stakeholder support for companies that are socially
responsible enhances a firm’s profitability
Evidence suggests that caring about the well-being
of stakeholders leads to increased profits.
The
support stakeholders have for companies they
perceive to be socially responsible can also serve to
enhance the firms’ profitability.
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Corporate Governance and
Stakeholders
Corporate governance provides formalized
responsibility to stakeholders
Directors
and officers of corporations (Fiduciaries for
the shareholders) have a duty of care, or duty of
diligence, to make informed and prudent decisions.
duty
of loyalty: all decisions should be in the best
interests of the corporation and its stakeholders.
Two major challenges for boards of directors are officer
compensation and the temptation to use knowledge about
investments, business ventures, and the stock market to
engage in insider trading.
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Corporate Governance and
Stakeholders (continued)
To remove the opportunity for employees to make unethical
decisions, most companies have developed formal systems
of accountability, oversight, and control—known as
corporate governance.
1. Accountability refers to how closely workplace
decisions are aligned with a firm’s stated strategic direction
and its compliance with ethical and legal considerations.
2. Oversight provides a system of checks and balances that
limit employees’ and managers’ opportunities to deviate from
policies and strategies and that prevent unethical and illegal
activities.
3. Control is the process of auditing and improving
organizational decisions and actions.
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Corporate Governance and
Stakeholders (continued)
A clear delineation of accountability helps employees,
customers, investors, government regulators, and other
stakeholders understand why and how the organization
chooses and achieves its goals.
Corporate governance establishes fundamental systems and
processes for:
preventing and detecting misconduct
investigating and disciplining
recovery and continuous improvement.
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Corporate Governance and
Stakeholders (continued)
Corporate governance establishes systems and
processes for:
Preventing
and detecting misconduct
Investigating
and disciplining
Recovery and
continuous improvement
The development of a stakeholder orientation
should interface with the corporation’s governance
structure
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Some of the elements in a corporate
governance structure
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Models of Corporate Governance
Shareholder model
Goal - Maximize wealth for investors and owners
Focuses on developing and improving the formal system for
maintaining performance accountability between top
management and shareholders
A shareholder
orientation should drive a firm’s decisions
toward serving the best interests of investors.
Stakeholder model
Adopts a broader view of the purpose of business because
it must answer to other stakeholders
Promotes stakeholder welfare along with corporate needs
and interests
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Board of Directors
Responsible for the ethics of a firm’s actions
Have
a fiduciary duty
Assume ultimate authority for their organization’s
effectiveness and subsequent performance
Governed by the amendments of the Federal
Sentencing Guidelines for Organizations (FSGO)
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31
Demand for Accountability and
Transparency
Directors today are increasingly chosen for their
expertise, competence, and ability to bring diverse
perspectives to strategic discussions
Outside
directors are hired as they do not have vested
interests
The
concept of interlocking directorate is not illegal
unless it involves a direct competitor
Interlocking directorate: Board
members linked to
more than one company
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Executive Compensation
Compensation paid to executives of the company
Ratio between the salaries of the highest-paid
executives and the median employee wage should
be less
Stakeholders support
high level of compensation
only when it is linked to strong company
performance
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- The purpose of this step is to identify the
organizational mission, values, and norms that are
likely to have implications for social responsibility.
- Stakeholders have some level of power over a
business because they are in the position to withhold,
or at least threaten to withhold, organizational
resources.
- This step involves understanding the nature of the
main issues of concern to primary stakeholders.
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- This step arrives at an understanding of social
responsibility that specifically matches the
organization of interest.
Identifying resources and
determining urgency
- The prioritization of stakeholders and issues, along
with the assessment of past performance, provides
guidance for allocating resources.
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Gaining stakeholder feedback
Stakeholder feedback can be generated through a
variety of means.
-
Satisfaction or reputation surveys
Assessment of stakeholder-generated media
(blogs, websites, podcasts, and newsletters)
3. Formal research using focus groups, observation,
and surveys
1.
2.
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37
CLASS ACTIVITY
Megan Jones Case
1- What is the Ethical Dilemma in this case?
2- As a Business Ethics consultant, what
recommendations do you suggest for these issues?
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38
Business Integrity Principles: Driving Implementation For Sustainability | Riyadh, KSA
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39
ETHICS 301 PROJECT: ETHICAL AUDIT
Second Semester 2020
Dr. Rhada Boujlil
Grades: 20%
Due: April 6th
Ethical auditing is a process which measures the internal and external consistency of an
organisation's values base. The key points are that it is value-linked, and that it incorporates a
stakeholder approach. Its objectives are two-fold: It is intended for accountability and
transparency towards stakeholders and it is intended for internal control, to meet the ethical
objectives of the organisation.
The value of the ethical audit is that it enables the company to see itself through a variety of
lenses: it captures the company's ethical profile. Companies recognise the importance of their
financial profile for their investors, of their service profile for their customers, and of their
profile as an employer for their current and potential employees. An ethical profile brings
together all of the factors which affect a company's reputation, by examining the way in which it
does business. By taking a picture of the value system at a given point in time, it can:
- clarify the actual values to which the company operates
- provide a baseline by which to measure future improvement
- learn how to meet any societal expectations which are not currently being met
- give stakeholders the opportunity to clarify their expectations of the company's behaviour
- identify specific problem areas within the company
- learn about the issues which motivate employees
- identify general areas of vulnerability, particularly related to lack of openness
An ethical culture is supported by top management, has incorporated ethics at all levels of the
organization, and contains all of the components of an Ethics Program.
Task Details:
Working as a group, you need to study one organization/company of your own choice and do a
search pertaining to the topics on the ethical audit list.
1. Write an introduction (i) a brief discussion on the background of the company you have selected ;
(ii) a list of major players and changes in the organisation;
(iii) key recent changes (5years) in the industry your chosen company is located for the last 5
years
2. You need to study and discuss the company’s ethical audit in detail within your group.
A sample assessment questionnaire for the project follows:
Support by top management
- Has management established an ethical “tone at the top” by setting a good example of ethical
conduct, providing positive and open communication, and supporting ethical conduct?
- Is there a designated ethics officer or ethics contact?
- Does the ethics code start with a statement from the CEO/President about his commitment to an
ethical culture?
- Does top management positively support the ethics hotline?
Incorporation of ethics at all levels of the organization
- Are supervisors trained as contact points for ethics related questions?
- Is ethics a focus during new employee training?
- Is ethics a focus during supplier selection?
- Is ethics a focus during internal audits?
- Is an ethical culture ingrained in the organization’s brochures, materials, and website?
Components of an Ethics Program
Ethics Code
- Does the organization have a written ethics code?
- Does the ethics code cover key elements, such as conflicts of interest, financial irregularities,
and compliance to laws?
- For publicly traded companies, is the ethics code available publicly / on the company’s website
Ethics Training
- Do employees receive ethics training on a regular basis?
- Does ethics training incorporate the company’s ethics code?
Ethics Hotline
- Does the organization have an ethics hotline?
- Is the ethics hotline confidentiality and non-retaliation policy clearly conveyed to employees?
- Does the organization provide ethics hotline information to employees and other shareholders
via formats such as postings in break rooms and the company website?
- For publicly traded companies, is the “receipt, retention, and treatment” of ethics hotline
reports regarding “questionable accounting or auditing matters” aligned with the Audit
Committee
Ethics Awareness
- Is the importance of ethics communicated to all employees on a regular basis via formats such
as organization newsletter articles and posters?
- Do the ethics articles cover topics that are interesting, engaging, and in pace with the times?
3. PLEASE KEEP IN MIND that it is impossible to produce an acceptable report if you have
not researched widely. Some have failed the assignment because of lack of sufficient research, so
it is important to start work on it early.
Report should be maximum 15 pages in length and attach all the supplementary material
(such as company info, Code of Ethics, etc.) with your report.
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