Chapter 03 – Organizational Ethics
3-1
CHAPTER 3
Organizational Ethics
Table of Contents
Chapter Summary 3-2
Learning Outcomes 3-2
Frontline Focus: “Just Sign the Forms” Questions 3-2
Learning Outcome 1 3-3
Learning Outcome 2 3-4
Learning Outcome 3 3-5
Learning Outcome 4 3-6
Learning Outcome 5 3-7
Life Skills 3-7
Progress ✓Questions 3-8
Ethical Dilemma 3-11
Frontline Focus: “Just Sign the Forms–Matt Makes a Decision” Questions 3-13
Key Terms 3-13
Review Questions 3-14
Review Exercises 3-16
Internet Exercises 3-17
Team Exercises 3-18
Thinking Critically 3-21
Chapter 03 – Organizational Ethics
3-2
Chapter Summary
This chapter examines how each functional department, within an organization, manages the
challenge of building and maintaining an ethical culture. The chapter begins by defining
organization’s culture and an organization in terms of its functional areas within a value chain.
Then the chapter begins looking at the ethics involved in research and development,
manufacturing, marketing, human resources, and finance. The ethical challenges presented by
generally accepted accounting principle (GAAP) are explained and how the accounting industry
is dealing with those challenges. The chapter also goes over potential conflicts of interest within
various organizational functions.
Learning Outcomes
After studying this chapter, the student should be able to:
1. Define organizational ethics.
2. Explain the respective ethical challenges facing the functional departments of an
organization.
3. Discuss the position that a human resource (HR) department should be at the center of any
corporate code of ethics.
4. Explain the potential ethical challenges presented by generally accepted accounting
principles (GAAP).
5. Determine potential conflicts of interest within any organizational function.
Extended Chapter Outline
Frontline Focus
“Just Sign the Forms” Questions
1. HR requires that these training videos be viewed for a reason. What risks is Scott taking
here? Review the four reasons (found in the “Ethics in Human Resources” section of this
Chapter 03 – Organizational Ethics
3-3
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
• HR is responsible for ensuring that the right programs and policies are in place.
• HR must stay abreast of ethics issues (and in particular the changing legislation and
sentencing guidelines for unethical conduct).
2. Do you think Scott’s argument for skipping the training videos is justified?
3. What should Matt do now?
Learning Outcome 1: Define Organizational Ethics.
• Organizational culture is the values, beliefs, and norms that all the employees of that
organization share.
o The culture represents the sum of all the policies and procedures—both written and
informal—from each of the functional departments in the organization in addition to
the policies and procedures that are established for the organization as a whole.
• A value chain is the key functional inputs that an organization provides in the
transformation of raw materials into a delivered product or service.
o Traditionally, these key functions are identified as:
➢ Research and development (R&D)—develops and creates new product designs
➢ Manufacturing—sources the components and builds the product
➢ Marketing (and advertising)
Chapter 03 – Organizational Ethics
3-4
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
external websites, as well as the individual hardware and software needs that
are specific to the organization and its line of business).
➢ Management—the supervisory role that oversees all operational functions.
Learning Outcome 2: Explain the Respective Ethical Challenges Facing the Functional
Departments of an Organization.
• Research and development (R&D) professionals carry the responsibility for the future
growth of the organization.
o However, alongside this responsibility comes an equally critical commitment to the
consumer in the provision of a product that is of the highest quality, safety, and
reliability.
➢ Defective products not only put consumers at risk but also generate negative
press coverage (damaging the organization’s reputation) and very expensive
number of people.
➢ Critics argue that the process itself is wrong irrespective of the outcome
achieved—that is, how can marketers be proud of an outcome when the
customer never needed that product to begin with and was manipulated, or at
the very least influenced, by a slick ad campaign into feelings of envy,
Chapter 03 – Organizational Ethics
3-5
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
• Marketing professionals abide by a code of ethics adapted by the American Marketing
Association (AMA).
o The code speaks eloquently about doing no harm, fostering trust, and improving
“customer confidence in the integrity of the marketing exchange system,” and
establishes clear ethical values of honesty, responsibility, fairness, respect, openness,
and citizenship.
Learning Outcome 3: Discuss the Position that a Human Resource (HR) Department
Should Be at the Center of Any Corporate Code of Ethics.
• The human resource function within an organization should ideally be directly involved in
the relationship between the company and the employee throughout that employee’s
contract with the company:
o The creation of the job description for the position.
o The recruitment and selection of the right candidate for the position.
o The orientation of the newly hired employee.
o The efficient management of payroll and benefits for the (hopefully) happy and
productive employee.
o The documentation of periodic performance reviews.
o The documentation of disciplinary behavior and remedial training, if needed.
corporate code of ethics—not as the sole creator of the code, since it is a document that
should represent the entire organization, but certainly as the voice of reason in ensuring
that all the critical areas are addressed.
o HR professionals must help ensure that ethics is a top organizational priority.
Chapter 03 – Organizational Ethics
3-6
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
• The finance function of an organization can be divided into three distinct areas—financial
transactions, accounting, and auditing:
o The financial transactions—the process by which the flow of money through an
organization is handled.
o The accounting function—the function that keeps track of all the company’s
financial transactions by documenting the money coming in (credits) and money
going out (debits) and balancing the accounts at the end of the period (daily, weekly,
professionals—typically certified professional accountants and/or auditing
specialists.
• As an organization grows and eventually goes public by selling stock in the organization
on a public stock exchange, the need for certified financial documents becomes even
greater.
o Existing and potential investors will make the decision to invest in the shares of an
organization based on the information presented in the certified financial
prepared for just about anything.
o They are coaches, internal and external stakeholder advocates, risk managers,
controls experts, efficiency specialists, and problem-solving partners.
Learning Outcome 4: Explain the Potential Ethical Challenges Presented by Generally
Accepted Accounting Principles (GAAP).
• GAAP is the generally accepted accounting principles that govern the accounting
profession—not a set of laws and established legal precedents but a set of standard operating
procedures within the profession.
• It is legal to defer receipts from one quarter to the next to manage the tax liability.
o However, accountants face ethical challenges when requests are made for far more
Chapter 03 – Organizational Ethics
3-7
illegal practices, such as falsifying accounts, underreporting income, overvaluing
assets, and taking questionable deductions.
• A set of accurate financial statements that present an organization as financially stable,
operationally efficient, and positioned for strong future growth can do a great deal to enhance
Learning Outcome 5: Determine Potential Conflicts of Interest Within Any Organizational
Function.
• A conflict of interest is a situation in which one relationship or obligation places people in
direct conflict with an existing relationship or obligation.
• As per the value chain model, the potential for conflicts of interest within an organization can
go far beyond the finance department:
o At the most basic level, simply meeting the needs of the organization’s stakeholders can
present conflicts of interest when the organization considers the possibility that what is
best for the shareholders may not be best for the employees and community.
o Selling a product that has the potential to be harmful to the customers represents a
Life Skills
Being Ethically Responsible
This Life Skills box discusses how each department in an organization holds a specific place and
function in the value chain. The extent of interaction with other departments on that chain in a
Chapter 03 – Organizational Ethics
3-8
professional and ethical manner has a great deal to do with the long-term growth and success of
Progress ✓Questions
1. Explain the term organizational culture.
2. Define the term value chain.
3. List the five key functional areas within an organization.
The five key functional areas within an organization are:
4. List the four primary line functions.
The four primary line functions are:
5. Identify the three functional components of the marketing process.
Chapter 03 – Organizational Ethics
3-9
6. Explain why marketers feel that their involvement in the production and delivery of goods
and services is an ethical one.
7. Explain the opposing argument that marketing is an unethical process.
8. Which argument do you support? Provide an example to explain your answer.
9. Explain why HR personnel might consider themselves to be the conscience of the
organization.
Most HR professionals see their direct involvement in every aspect of an employee-
3-10
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Student’s answers will vary. Ethical transgressions are listed in the “Ethics in Human
Resources” section.
11. Why is HR’s involvement in the selection of the leaders of the company so important to
ethical business conduct?
12. Why have ethics policies and ethics training suddenly become so important?
13. List the three primary areas of the finance function in an organization.
The three primary areas of the finance function in an organization are:
14. Explain how the accounting profession is governed by GAAP.
GAAP is the generally accepted accounting principles that govern the accounting
15. Why would audited accounts be regarded as being “clean”?
3-11
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
been certified by an objective third party to be “clean” only adds to that. However, that
certification is meant to be for the public’s benefit rather than the corporation’s.
16. What key decision brought about the demise of Arthur Andersen?
Ethical Dilemma
3.1 – A Firm Production Date
1. Tom was obviously overconfident in the final stages of the testing process, but was his
behavior unethical? Why or why not?
2. Given Scott’s concerns over R&D’s credibility, should he have taken Tom’s production data
as being absolutely firm?
3. In fact, Scott was so skeptical of Tom’s production date that he recorded their original
conversation without Tom’s knowledge and then produced the recording when Tom denied
giving a firm production date. Tom responded: “You taped my conversation without telling
me! That’s unethical.” Was it?
Chapter 03 – Organizational Ethics
3-12
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
conflict of interest because the conversation was tape recorded. Tom could have a privacy
violation against the company, or the company might not be able to use the tape-recorded
conversation against Tom.
4. Has Scott’s behavior damaged future relations between marketing and R&D? In what way?
How could this situation have been avoided?
3.2 – A Different Perspective
1. Which ethics theories are being applied here?
2. If homeowners made poor financial decisions—taking too much equity out of their houses
or buying at the wrong time—do the predatory lending practices of the banks and mortgage
companies justify walking away from those mortgages?
Students’ responses will vary. The homeowners need to consider their debt obligation and
3. Are homeowners really “throwing good money after bad” in making payments on mortgages
for homes that are worth much less than the mortgage?
Chapter 03 – Organizational Ethics
3-13
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
financial markets.
4. Would you walk away from your mortgage in this situation? How would you justify that
decision?
Frontline Focus
“Just Sign the Forms–Matt Makes a Decision” Questions
1. What should Matt tell the HR director?
2. What do you think the HR director’s reaction will be?
Students’ answers will vary. The HR director will most likely be disappointed in both Scott
3. What are Matt’s chances of joining the management-training program now?
Key Terms
Accounting Function: The function that keeps track of all the company’s financial transactions
by documenting the money coming in (credits) and money going out (debits) and balancing the
accounts at the end of the period (daily, weekly, monthly, quarterly, annually).