Business & Professional Ethics
for Directors, Executives &
Accountants, 8e
Leonard J. Brooks and Paul Dunn
Cengage Learning, Boston, MA, 2018
Chapter 5 – Corporate Ethical Governance &
Accountability
Chapter Questions and Case Solutions
Chapter Questions…………………………………………………………2
Case Solutions………………………………………………………………9
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Chapter Questions
1. Must a company be incorporated as a benefit corporation in order to legally consider actions other
than those in pursuit of profit?
No.
All publicly traded corporations must meet governance requirements. Given the ability of non-
shareholder stakeholders to exert pressure on corporations, that may include taking
2. If Lynn Stout is correct, that the drive for shareholder value is a myth, why do so many companies
continue to use it as a goal?
Stout asserts that U.S corporate law does not require corporations to maximize share price,
shareholder wealth, or shareholder value; thus, the myth. But many lawyers, board members
and executives have been living in a world where they only needed to be concerned that a
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3. What is the role of a board of directors from an ethical governance standpoint?
The board is responsible for the actions of the corporation, both with regard to the achievement
of the corporation’s strategic objectives to enhance shareholder value and maintain the support
4. Explain why corporations are legally responsible to shareholders but are strategically
responsible to other stakeholders as well.
Corporations are created under the laws of a particular jurisdiction (Country, state,
province …) and the directors, as agents of the shareholders’, must account to those
5. What should an employee consider when considering whether to give or receive a gift?
An employee should be aware that giving or receiving a gift may raise conflicts of
6. When should an employee satisfy his or her self-interest rather than the interest of his or her
employer?
An employee’s self-interest, should be satisfied first, if satisfying the employer would be
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7. Can an apparent conflict of interest where there are adequate safeguards to prevent harm be as
important to an executive or a company as one where safeguards are not adequate?
Yes, because an apparent conflict of interest can be perceived as real and actions triggered in
of interest is ideal; managing them is second-best.
8. How can a company control and manage conflicts of interest?
See the discussion on pages 257-264 of the text. Employees must be constantly made aware of
9. What is the role of an ethical culture and who is responsible for it?
An ethical culture provides continual guidance to executives and other employees with regard
Business & Professional Ethics for Directors, Executives & Accountants, 8e
10. What is the most important contribution of a corporate code of conduct?
Guidance to ensure minimum standards of behavior and protect the reputation of the person,
that’s what top management wanted.”
11. Are one or more of the fundamental principles found in codes of conduct more important than the
rest? Why?
I would argue that all of the ethical principles named at the start of Table 5.18 – honesty,
12. Why should codes focus on principles rather than specific detailed rules?
Principles are susceptible to interpretation to give guidance on complex or newly emerging
13. How could you monitor compliance with a code of conduct in a corporation?
The internal auditor should be charged with testing to see if employees have complied with the
14. How can a corporation integrate ethical behavior into their reward and remuneration schemes?
Rewards could be offered for outstanding performance, such as for assistance in revealing fraud.
15. Other than a code of conduct, what aspects of a corporate culture are most important and why?
See the discussion beginning on Chapter 5, page 264 of the text. Tables 5.10 and 5.11 are
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16. Is the SOX-driven effort being made to check on the effectiveness of internal control systems worth
the cost? Why and why not?
The SOX governance reforms, and the ensuing SEC internal control certification by the CEO and
CFO, and audit thereof, have triggered costly Section 404 reviews of internal control and
17. Why should an effective whistle-blower mechanism be considered a “failsafe mechanism” in SOX
Section 404 compliance programs?
No matter how good a company’s internal controls are, frauds will still occur because systems
18. If you were asked to evaluate the quality of an organization’s ethical leadership, what would the five
most important aspects be that you would wish to evaluate, and how would you do so?
Linda Treviño and others, in 1999, identified five important aspects of a company’s ethical
leadership. Beside each are some questions of many that could be asked to test a corporation’s
adherence to each.
• Ethical leadership by executives and supervisors: Do they espouse the values of the
organization? Support and promote ethical decision making? Are decisions made in
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19. Why is it suspected that corporate psychopaths gravitate to certain industries, and what should
corporations within those industries do about it?
Among other traits, corporate psychopaths pursue their own objectives, rather than others’, and
lack empathy and conscience. When working in the finance industry, in areas such as investment
20. Descriptive commentary about corporate social performance is sometimes included in annual
reports. Is this indicative of good performance, or is it just window dressing? How can the
credibility of such commentary be enhanced?
Sometimes CSP reporting indicates good performance, while at other times it is window
dressing. The credibility of such disclosure can be enhanced by:
21. Should professional accountants push for the development of a comprehensive framework for the
reporting of corporate social performance? Why?
Yes, such a framework will assist in making directors and executives aware of what they should
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22. Do professional accountants have the expertise to audit corporate social performance reports?
They have an understanding of audit and reporting principles. However, they usually lack specific
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Case Solutions
Cases on Ethical Corporate Culture
1. Hospital Governance Challenges (for Chapter 5)
This case is new to Chapter 5, and is provided here:
ETHICS CASE
Hospital Governance Challenges
Kelly Brown had been a member of the
Board of Governors of the Wolfson
General Hospital for two years, and had
been asked to consider becoming the
all hospital functions, its reputation, and
the generation of funds for growth. She
realized that her knowledge of
governance matters was limited, and she
asked for your assistance in helping her
the board who was better equipped wanted to
take the time required.
Kelly realized that she had the advantage
of growing up in the community and of
and of their governors, including the
following:
• Fraud, embezzlement and kickback
schemes by senior managers of
construction projects, including:
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• A manager of redevelopment,
who was involved in the
contractor selection process,
failed to disclose conflicts of
interest with contractors,
including:
o Two business
ventures (bottled
• A manager arranged for
purchases from companies her
husband was involved with
without competing quotations,
purchase orders or contracts. In
fact, the paper trail for
purchases was frequently
created after purchases had
been made. Also, her husband
hospital were doctors or nurses, and many of
them didn’t want to get involved in
disciplinary or dismissal processes.
Kelly realized that WGH had a mission
statement and code of conduct that called for
high levels of service and integrity, but they
hadn’t been updated for over 15 years and,
although they had been provided to new
corporate Board expertise, and preferred to
leave financial matters and administrative
detail to others. In fact, of the five Board
Subcommittees, four (Executive, Medical
Advisory, Nursing Advisory, Quality
Committee, Quality of Care) concentrated
primarily on health services, and only one
focused on financial matters (Fiscal
Advisory), and that one was chaired by the
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any organized review and discussion of
the risks WGH was facing, and of plans
to reduce those risks.
Questions:
Kelly has asked you to give her advice
on the following matters:
1. What major governance problems
does WGH face? Which problems
are the most important and need to
be fixed as soon as possible?
2. What are the most important ethical
problems faced by a general
1. Hospital Governance Challenges (Case above)
What this case has to offer
Hospitals can be for-profit or non-profit, and they answer to many stakeholders. Where health is
Teaching suggestions
This case can be used to examine board structures, director nomination, roles and responsibilities, in
Discussion of ethical issues
Kelly has asked you to give her advice on the following matters:
1. What major governance problems does WGH face? Which problems are the most important and
need to be fixed as soon as possible?
Major governance problems
Kelly has a board of directors whose members have…
• little independence on the board: this is one of most important issues and needs to be
addressed
o inappropriate recruiting methods (e.g., the current Chair—“her dear friend”—
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o the directors have poorly defined roles, since they “preferred to leave financial
matters and administrative detail to others.” ➔ When roles are defined and
understood, directors perform the duties required of the role, rather than
deciding they don’t like some duties and passing them off.
• limited time for hospital matters
Kelly would have a hospital with…
• Ethical Risk: this is one of most important issues and needs to be addressed, because
of:
o a moribund mission statement and code of conduct: no review in many years,
no associated training, no commitment from employees to agree with the
2. What are the most important ethical problems faced by a general hospital? How could these ethical
problems best be managed?
Ethical Problems
Useful reference: (Der Bedrosian 2015)
• Fair and safe treatment of stakeholders, for example, patients and staff. For example:
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• Quality versus Efficiency
o Quality care versus inexpensive care or faster care (the latter due to staff
shortages, for example)
• Access to health care
o hospital personnel as gatekeepers (including access to limited resources, which
How to Address Ethical Problems
Table 5.14 in Chapter 5 outlines how to develop and maintain an ethical corporate culture. By
stating a set of values and a mission, and developing a supportive ethical corporate culture that
3. Should WGH introduce a crisis management process? If so, what should its objective be? How could
that best be achieved?
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Yes! Its objective should be to prevent crises, if possible, by anticipating and planning for risks—
internal and external—that could affect the hospital. Crisis management should stem from risk
analysis and management, and understanding stakeholders—their issues and expectations and
4. Why should WGH introduce a protected whistleblower program? Who should administer it, what
factors would make it successful, and how should it report?
A protected whistleblower program is necessary, especially in a hospital setting, where power
hierarchies—and, therefore, the risk of intimidation—exist. Medical and financial improprieties
are possible in a hospital setting (see ethical problems in Question 2). In fact, the “cone of
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5. Are there any other governance issues that Kelly should consider?
Should the Vice-Chair automatically become the Chair in two years’ time, or should a chair be
recruited, nominated and voted for by shareholders (for a for-profit hospital) or stakeholders
6. Should Kelly accept the nomination as Vice-Chair?
Table 5.1 in Chapter 5 outlines the roles of directors, of which the Chair is one.
Independent directors or an independent Chair should not be employees of the hospital. The
Chair (and in this case, the Vice-Chair who succeeds the Chair) needs leadership skills to steer
the corporation and guide its building of an ethical corporate culture (and the CEO must play a
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* Kelly has many friendship ties that may cloud her judgement even if they may not be
challenged as creating potential and/or apparent conflicts of interest. She will be lonely at the
Useful Articles, Links, and Videos
American Hospital Association’s Center for Healthcare Governance.
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2. Siemens’ Bribery Scandal (Chapter 5, pages 295-297)
What this case has to offer
This case focuses on the ethical governance implications of bribery to obtain or maintain business
opportunities. Several recent worldwide initiatives have recently been mounted to change the rampant
regime of bribery that has existed for centuries. In 1998, 34 countries signed the Organization for
Teaching suggestions
It would be useful to explore bribery with the class, particularly the forms it can take and the history
noted above. The discussion can move on to the governance issues behind the questions posed at the
end of the case.
There are several interesting questions related to bribery that help to start the discussion, for example:
• What is the purpose of a bribe?
• What forms can a bribe take?
Discussion of ethical issues
1. The senior executives at Siemens’ spent most of their working environment that condoned bribery
outside Germany but not inside. However, they failed to take notice of the changes that
Transparency International – championed by a German who was embarrassed by the double
standard of his countrymen – was proposing, and that ultimately resulted in a new worldwide anti–
bribery regime. Why did they ignore the change?
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There are several potential reasons why Siemens’ executives ignored the changes in public
expectations about bribery:
• Wrong-headed incentives, pushing executives to obtain more contracts but disregarding
or even encouraging unethical methods required to win contract bids;
2. If you were Löscher, the new CEO, how would you show the employees and external stakeholders
that you actually have a zero tolerance policy concerning corruption?
The new CEO could make a public statement regarding the company’s views on bribery and
should establish policies and procedures aiming to prevent and detect this practice. There are a
number of possible controls that may help to detect and prevent bribery, for example:
• Board members and senior executives should verify that the company has an effective
Useful Articles, Links, and Videos
Schubert, Siri & Christian Miller (February 13, 2009). “At Siemens, Bribery Was Just a Line Item.”
Nicholson, Chris (December 2, 2009). “Siemens to Collect Damages from Former Chiefs in Bribery
Scandal.” New York Times,
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Cases on Ethical Leadership
3. Salary Equity at Gravity Payments (Chapter 5, pages 297-298)
What this case has to offer
This case explains how the founder and CEO of the company raised the minimum wage for all employees
to $70,000 and the positive and negative reactions to his arbitrary decision.
Teaching suggestions
I begin by asking the students to identify factors that should influence salary levels. Normally they
mention: education and training; work experience; level of responsibility; past performance; number of
Discussion of ethical issues
1. Do you think that Dan Price’s decision to raise the minimum salary to $70,000 represented ethical
leadership?
Dan seems to have characteristics of an ethical leader, which, from Chapter 5, include integrity,
trustworthiness, honesty, sincerity, and forthrightness. He shows compassion and that a