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CHAPTER 8
Developing an Effective Ethics Program
SUMMARY
This chapter first provides an assessment of the corporation as an entity in society, and then gives an
overview of why businesses need to develop an organizational ethics program. It covers the factors that
are requisite parts of an ethics program: a code of conduct, the role of ethics officers and the appropriate
delegation of authority, effective ethics training, systems for monitoring and supporting ethical
compliance, and the importance of continual efforts to improve the ethics program. Finally, the chapter
discusses the common mistakes made in designing and implementing ethics programs.
INSTRUCTOR NOTES FOR “AN ETHICAL DILEMMA”
Todd must face the possibility his best manager may be stealing and putting the company at risk for tax
liability action by the IRS. The company is Jennings Department Store, and its code of ethics is vague,
sparse, and lacks any contact information. Students should be aware that employee theft is a common
example of unethical behavior in the workplace. Why does Jennings’s code of ethics not address this
obvious industry threat? Using Table 8.1, Minimum Requirements for Ethics and Compliance
Programs, Jennings appears to fail on all seven counts contained in this table. Would a strong code of
ethics have stopped this behavior?
Both Zara and Jennings appear to be at fault in this instance. Jennings needs a better ethics program in
place to address issues similar to the one Todd currently faces. However, employees have a moral
obligation to both think and act ethically. Is Zara following this implied obligation? A corporate
culture without values and appropriate communication about ethics can facilitate individual
misconduct. Did Jennings communicate its ethical values to all employees? If so, why had no one
uncovered Zara’s behavior earlier? Fostering ethical decision making within an organization requires
terminating unethical employees and improving the firm’s ethical standards. Do Zara’s actions warrant
termination? Would the company fire its highest sales earner? Is Zara a “bad apple”? Could it lead to
a “bad barrel”?
A second issue here is the bonuses Zara pays to her employees. The company has paid no payroll taxes
on these extra “wages,” putting the company at risk with the IRS. While Todd is aware this is against
company policy, is Zara aware of the same policy? Is Zara aware she is putting the company at risk?
When opportunities to engage in unethical conduct abound, companies are vulnerable to both ethical
problems and legal violations if their employees do not know how to make the right decisions.
Students should think about all of the ethical issues in this case and the risks courted by silence.
LECTURE OUTLINE
I. The Responsibility of the Corporation to Stakeholders
43 Chapter 8: Developing an Eective Ethics Program
A. Corporations are increasingly viewed as moral agents that are accountable for their conduct
to stakeholders.
1. Through legislation and court precedents, society holds companies accountable for the
conduct of their employees as well as for their decisions and the consequences of those
decisions.
2. Viewed as moral agents, companies are required to obey the laws and regulations that
define acceptable business conduct. However, because companies are not human, laws
and regulations are necessary to provide formal structural restraints and guidance on
ethical issues.
a. A coherent ethical corporate culture does not evolve through independent
individual and interpersonal relationships.
II. The Need for Organizational Ethics Programs
A. Understanding the factors that influence the ethical decision -making process can help
companies encourage ethical behavior and discourage undesirable conduct.
B. To promote legal and ethical conduct, an organization should develop an organizational
ethics program by establishing, communicating, and monitoring the ethical values and legal
requirements that characterize its history, culture, industry, and operating environment.
1. Organizations can become “bad barrels,” not because individuals are bad, but the
pressures to succeed create opportunities that reward unethical decisions.
C. Without uniform standards and policies of conduct, it is difficult for employees to determine
what behaviors are acceptable within a company, and they may make decisions based on
how their coworkers and superiors behave.
1. A strong ethics program includes a written code of conduct, an ethics officer to oversee
the program, careful delegation of authority, formal ethics training, and auditing,
monitoring, enforcement, and revision of program standards.
2. There are no universal standards for organizational ethics programs.
3. Ethics is not something to be delegated to lower-level employees.
a. If a company’s leadership fails to provide the vision and support needed for
ethical conduct, then an ethics program will not be effective.
III. An Effective Ethics Program
A. The more misconduct occurs at a company, the less trust employees feel toward the
organization—and the greater the turnover will likely be.
B. A company must have an effective ethics program to ensure that all employees understand
its values and comply with the policies and codes of conduct that create its ethical culture.
C. Managers cannot assume that employees will automatically know how to behave when
entering a new organization.
D. An Ethics Program Can Help Avoid Legal Problems.
1. Some corporate cultures provide opportunities for unethical conduct because their
management lacks concern or the company has failed to comply with the minimum
requirements of the FSGO, which can result in penalties and loss of public confidence.
a. The FSGO encourages companies to assess their key risk areas and customize a
compliance program to address these risks and satisfy key effectiveness criteria.
Chapter 8: Developing an Eective Ethics Program 44
b. At the heart of the FSGO is a “carrot-and-stick” philosophy. Companies that act
to prevent misconduct by establishing and enforcing ethical and legal compliance
programs may receive a “carrot” and avoid penalties should a violation occur.
The ultimate “stick” is the possibility of being fined or put on probation if
convicted of a crime.
2. An ethics program can help a firm avoid civil liability, but the company bears the
burden of proving that it has an effective program.
a. A program developed in the absence of misconduct will be more effective than
one imposed as a reaction to scandal or prosecution.
b. A legal test of a company’s ethics program is possible when an individual
employee is charged with misconduct.
E. Values versus Compliance Programs
1. No matter what their goals, ethics programs are developed as organizational control
systems to create predictability in employee behavior.
2. Two types of control systems can be created.
a. A compliance orientation creates order by requiring that employees identify
with, and commit to, specific required conduct.
b. A values orientation strives to develop shared values, with a focus on core ideals
such as accountability and commitment.
i) Research has shown that a values orientation creates ethical reasoning among
employees. Values-based programs increase employees’ awareness of ethics
at work, their integrity, their willingness to deliver information to
supervisors, their use of reporting mechanisms, and the perception that better
ethical decisions are made.
IV. Codes of Conduct
A. Today, society expects to see organizational members adhere to ethical principles and
standards specified through company ethics programs. Most companies begin the process of
establishing organizational ethics programs by developing codes of conduct.
B. Such statements may take three different forms:
1. A code of conduct is a formal statement that describes what an organization expects of
its employees.
2. A code of ethics is the most comprehensive and consists of general statements,
sometimes altruistic or inspirational, that serve as principles and the basis for rules of
conduct.
a. Key reasons codes of ethics fail are:
i) the code is not promoted and employees do not read it
ii) the code is not easily accessible
iii) the code is written too legalistically and is not understandable by employees
iv) the code is written too vaguely, providing no accurate definition
v) top management never refers to the code in body or spirit.
3. A statement of values is conceived by management and fully developed with input
from all stakeholders.
45 Chapter 8: Developing an Eective Ethics Program
C. Regardless of its degree of comprehensiveness, a code of ethics should reflect upper
managers’ desires for compliance with the values, rules, and policies that support an ethical
culture.
D. Research has found that corporate codes of ethics often contain six core values or principles
1. Trustworthiness
2. Respect
3. Responsibility
4. Fairness
5. Caring
6. Citizenship.
E. These values will not be effective without distribution, training, and the support of top
management in making these values a part of the corporate culture. Codes of conduct will
not resolve every ethical issue encountered in daily operations, but they help employees and
managers deal with ethical dilemmas by prescribing or limiting specific activities.
V. Ethics Officers
A. Organizational ethics programs also must have oversight by high-ranking persons known to
respect legal and ethical standards called ethics officers.
1. Ethics officers are responsible for managing their organizations’ ethics and legal
compliance programs. They are usually responsible for:
a. assessing the needs and risks an organization-wide program must address
b. developing and distributing a code of conduct or ethics
c. conducting training programs for employees
d. establishing and maintaining a confidential service to answer employees’
questions about ethical issues
e. making sure the company is in compliance with government regulation
f. monitoring and auditing ethical conduct
g. taking action on possible violations of the company’s code
h. reviewing and updating the code.
2. Although recommended as best practice, it is not common for ethics officers to report
directly to the board of directors. Ethics officers often report directly to the chief
executive officer and may have some access to the board.
VI. Ethics Training and Communication
A. A major step in developing an effective ethics program is implementing a training program
and communication system to educate employees about the firm’s ethical standards.
1. It can educate employees about the firm’s policies and expectations, relevant laws and
regulations, and general social standards.
2. It can make employees aware of available resources, support systems, and designated
personnel who can assist them with ethical and legal advice.
3. It can empower employees to ask tough questions and make ethical decisions.
4. Ethics training can influence (and be influenced by) corporate culture, coworkers and
supervisors, and the opportunities available to engage in unethical behavior.
Chapter 8: Developing an Eective Ethics Program 46
a. Full awareness of a company’s philosophy of management, rules, and procedures
can strengthen both the corporate culture and the ethical stance of peers and
supervisors.
B. Ethics training must start with a foundation, a code of ethics, a procedure for airing ethical
concerns, line and staff involvements, and executive priorities on ethics that are
communicated to employees.
1. Training and communication initiatives should reflect the unique characteristics of an
organization.
2. There are many different training methods that organizations can use, such as hands on
experience or behavioral simulations.
3. Top executives must communicate with managers at the operations level and enforce
overall ethical standards within the organization.
4. When measuring the effectiveness of an ethics program, it is important to get input
from employees.
VII. Systems to Monitor and Enforce Ethical Standards
A. An effective ethics program employs a variety of resources to monitor ethical conduct and
measure the program’s effectiveness.
1. Observing employees, internal audits, surveys, reporting systems, and investigations
can assess compliance with the company’s ethical code and standards.
2. An external audit and review of company activities may sometimes be helpful in
developing benchmarks of compliance.
a. Questionnaires can serve as benchmarks in an ongoing assessment of ethical
performance by measuring employees’ ethical perceptions of their company, their
superiors, their coworkers, and themselves, as well as serving as a means of
developing ratings of ethical or unethical practices within their firm or industry.
b. The existence of an internal system that allows employees to report misconduct
is especially useful for monitoring and evaluating ethical performance (e.g.,
anonymous hotlines).
c. Companies are increasingly using consultants that provide professional
case-management services and software.
d. If a company is not making progress toward creating and maintaining an ethical
culture, it needs to determine why and take corrective action, either by enforcing
current standards more strictly or setting higher standards.
3. Consistent enforcement and necessary disciplinary action are essential to a functional
ethics or compliance program.
B. Continuous Improvement of the Ethics Program
1. Implementation requires designing activities to achieve organizational objectives using
available resources and given existing constraints.
2. Implementation translates a plan for action into operational terms and establishes a
means by which an organization’s ethical performance will be monitored, controlled,
and improved.
a. A firm’s ability to plan and implement ethical business standards depends in part
on how it structures resources and activities to achieve its ethical objectives.
47 Chapter 8: Developing an Eective Ethics Program
b. If a company determines that its ethical performance has been less than
satisfactory, executives may want to change how certain kinds of decisions are
made.
C. Common Mistakes in Designing and Implementing an Ethics Program
1. Many business leaders recognize that they need to have an ethics program, but few
take the time to answer fundamental questions about the goals of such programs.
2. The first mistake is a failure to understand and appreciate the goals of an ethics
program.
3. A second mistake is not setting realistic and measurable program objectives.
4. Senior management’s failure to take ownership of the ethics program is a third mistake.
Maintaining an ethical culture may be impossible if CEOs do not support an ethical
culture.
5. Developing program materials that do not address the needs of the average employee is
the fourth mistake.
6. Transferring an “American” program to a firm’s international operations is the fifth
mistake.
a. In multinational firms, executives should involve overseas personnel as early as
possible in the process.
7. A final mistake is designing an ethics program that is little more than a series of
lectures. In such cases, participants typically recall less than 15 percent the day after
the lecture.
DEBATE ISSUE: TAKE A STAND
Have your students split into two teams. One team will argue for the first point, and the other will
argue for the opposing view. The purpose is to get students to realize that there are no easy answers
to many of these issues. This debate asks students to examine whether they feel poorly written
codes of conduct can explain the level of misconduct in an organization. This case examines banks
and financial institutions because of the widespread misconduct that occurred in these industries.
Students who argue that the code of conduct does reflect why misconduct has run rampant in the
banking and finance industries could point out the seeming correlation between these companies’
badly constructed ethical codes and instances of misconduct. They can also argue that since codes
of conduct set forth ethics and compliance procedures for employees, a bad code of conduct could
leave employees without guidance in ethical decision
-
making. Those who argue that codes of
conduct do not affect behavior in the industry might point to the fact that other companies had
great codes of conduct, such as BP and Enron. This seemed to have no effect in preventing their
disasters. Therefore, corporate culture may be a more suitable measure.
Chapter 8: Developing an Eective Ethics Program 48
“RESOLVING ETHICAL BUSINESS CHALLENGES” NOTES
Mary works for JSYK Inc., a realty company that buys and sells businesses. Mary shows an idle
factory to a potential buyer, a local reverend, who wants to turn the site into a recreation center. The
reverend has $150,000 but is short $100,000 for the down payment. The remaining $750,000 cost of
the building is not a problem, only the down payment. Mary knows the building’s owner, a
curmudgeon, will not entertain the idea of lowering either the down payment or the price. After
explaining the situation to her supervisor, the boss encourages her to lie to the owner in order to get the
down payment price the reverend requires. How is the supervisor undermining the corporate culture?
The supervisor’s behavior supports the third common mistake of implementing an ethics program:
senior management’s failure to take ownership of the ethics program. Maintaining an ethical culture
may be impossible if top officers do not support an ethical culture.
Instructors may wish to ask the students to discuss ways out of this ethical business challenge. Since
Mary is new is this position, she is probably unsure about the common practices of the business. But is
lying part of the standard practices? Will the business owner discover the lie? What could happen if
the owner tells everyone he knows about the lie? Taking different moral views and discussing how
people may react to this situation will help students understand why people make the choices they do.
