CHAPTER 4
The Institutionalization of Business Ethics
SUMMARY
In this chapter, we examine the boundaries of ethical conduct and focus on the voluntary, core practices, and
mandated requirements for legal compliance—three important areas in developing an ethical culture. In
particular, we concentrate on compliance in specific areas related to competition, consumers, and safety. We
INSTRUCTOR NOTES FOR “AN ETHICAL DILEMMA”
Students may wish to discuss the dilemma in which a supervisor tells Randy, a newly hired employee, to
extend the expiration dates on some medications, contradicting his training and his better judgment. Randy
works for Meeker, a medical warehouse supplying medication and equipment to hospitals. Meeker trained
Randy for the first two months of his employment, schooling him in hospital and clinic regulations, laws,
various system procedures, and software applications.
Meeker supplies hospitals in three states. When these hospitals conduct their annual inventory, the warehouse
Chapter 4: The Institutionalization of Business Ethics 21
LECTURE OUTLINE
I. Managing Ethical Risk Through Mandated and Voluntary Programs
A. Voluntary practices include beliefs, values, and voluntary contractual obligations. All businesses
engage in some level of commitment to voluntary activities in order to benefit both internal and
external stakeholders.
B. Most firms engage in philanthropy—giving back to communities and causes.
C. Core practices are documented best practices, often encouraged by legal and regulatory forces as
well as trade associations.
2. Core practices are appropriate and common practices that have industry acceptance and meet
societal expectations.
D. Mandated boundaries are the externally imposed boundaries of conduct, such as laws, rules,
regulations, and other requirements.
1. Corporate governance, compliance, risk management, and voluntary activities all help to
2. Compliance represents areas that must conform to existing legal and regulatory requirements.
3. Corporate governance is structured by a governing authority providing oversight and checks
5. Voluntary activities often represent the values and responsibilities that firms accept in
contributing to stakeholder needs and expectations.
E. An ethical culture consists of values, norms, artifacts, and behavior.
1. Norms dictate and clarify desirable behaviors through principles, rules, policies, and
procedures.
2. Artifacts are visible, tangible external symbols of values and norms (e.g., rituals, codes of
ethics).
II. Mandated Requirements for Legal Compliance
A. Laws and regulations are established by governments to set minimum standards for responsible
behavior—society’s codification of what is right and wrong.
B. Laws regulating business conduct are passed because certain stakeholders believe that business
cannot be trusted to do what is right in certain areas, such as consumer safety and environmental
protection.
2. Criminal law prohibits specific actions—such as fraud, theft, or securities trading violations—
and imposes fines or imprisonment as punishment for breaking the law.
3. The state or nation enforces criminal laws, while individuals enforce civil laws.
a. Criminal and civil laws are derived from four sources: the U.S. Constitution (constitutional
law), precedents established by judges (common law), federal and state laws or statutes
(statutory law), and federal and state administrative agencies (administrative law).
22 Chapter 4: The Institutionalization of Business Ethics
or organization to court. Lawsuits are expensive and many organizations seek to avoid
them.
d. Laws establish the basic ground rules for responsible business activities.
C. Laws Regulating Competition
1. The issues surrounding the impact of competition on a business’s social responsibility arise
from the rivalry among businesses for customers and profits.
2. Procompetitive legislation involves laws that have been passed to prevent the establishment of
monopolies, inequitable pricing practices, and other practices that reduce or restrict competition
among businesses.
a. They were enacted to encourage competition and prevent activities that restrain trade.
b. There are some exceptions. Under the McCarran-Ferguson Act of 1944, Congress
exempted the insurance industry from the Sherman Antitrust Act and other antitrust laws.
D. Laws Protecting Consumers
1. Laws that protect consumers require businesses to provide accurate information about products
and services and to follow safety standards. The first consumer protection law was passed in
1906.
2. Large groups of people with specific vulnerabilities have been granted special protections under
the law (the elderly, children, etc.)
3. The FTC’s Bureau of Consumer Protection was created to protect consumers against unfair,
deceptive, or fraudulent practices. It is divided into five divisions.
4. The Food and Drug Administration regulates food safety, human drugs, tobacco, dietary
supplements, vaccines, veterinary drugs, medical devices, cosmetics, products that give off
radiation, and biological products.
E. Laws Promoting Equity and Safety
1. Laws promoting equity in the workplace were passed during the 1960s and 1970s to protect the
rights of minorities, women, older persons, and persons with disabilities; other legislation has
sought to protect the safety of all workers.
a. Of these laws, probably the most important to business is Title VII of the Civil Rights Act,
Chapter 4: The Institutionalization of Business Ethics 23
III. The Sarbanes–Oxley (SOX) Act
A. Congress passed the Sarbanes–Oxley Act in 2002 to establish a system of federal oversight of
corporate accounting practices.
2. The Public Company Accounting Oversight Board represents the heart of Sarbanes-Oxley.
a. It oversees the audit of public companies in order to protect the interests of investors and to
further the public interest in the preparation of informative, accurate, and independent audit
reports for companies.
b. The Sarbanes–Oxley Act also seeks to ensure auditor and analyst independence, in order to
reduce conflicts of interest and to ensure enhanced financial disclosures of public
companies’ true condition. Registered public accounting firms can no longer provide both
auditing and non-auditing services to public companies.
i) It also raised a number of concerns. For instance, it imposed additional requirements
and costs on companies, caused many firms to restate their earnings to avoid penalties,
IV. Dodd-Frank Wall Street Reform and Consumer Protection Act
A. The Dodd-Frank Act was passed to improve financial regulation, increase oversight of the industry,
and prevent the type of risk-taking, deceptive practices, and lack of oversight that led to the 2008–
2009 financial crisis.
B. One of the provisions of the Dodd-Frank Act instituted the creation of two new financial agencies.
1. The Office of Financial Research is charged with improving the quality of financial data
2. The Financial Stability Oversight Council (FSOC) is responsible for maintaining the stability of
the financial system in the United States through monitoring the market, identifying threats,
promoting market discipline among the public, and responding to major risks that threaten
stability.
C. The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB) to regulate
consumer financial products and protect consumers from deceptive or toxic financial instruments.
1. The CFPB has the responsibility to curtail unfair lending and credit card practices, enforce
2. Critics believe that the CFPB has too much power that could result in heavy sanctions for
financial institutions.
1. Whistle-blowers who report financial fraud to the Securities and Exchange Commission and
Commodities Exchange Commission are eligible to receive 10 percent to 30 percent of fines
and settlements if their report results in a conviction of more than $1 million in penalties.
V. Laws That Encourage Ethical Conduct
A. Laws and regulations have been passed to discourage unethical decisions—and to foster programs
VI. Federal Sentencing Guidelines for Organizations
A. The FSGO was passed in 1991 to create an incentive for organizations to develop and implement
programs designed to foster ethical and legal compliance.
1. It applies to all felonies and class A misdemeanors committed by employees in association with
their work.
2. The commission delineated seven steps companies must implement to demonstrate due
diligence.
a. A firm must develop and disseminate a code of conduct that communicates required
standards and identifies key risk areas for the organization.
b. High-ranking personnel known to abide by legal and ethical standards of the industry
B. A 2004 amendment to the FSGO requires that a business’s governing authority be informed about
its ethics program with respect to content, implementation, and effectiveness.
C. A 2005 Supreme Court decision held that the federal sentencing guidelines were not mandatory but
should serve only as recommendations for judges to use in their decisions.
D. 2007–2008 amendments to the FSGO extend the ethics training of individuals to members of the
board or governing authority, high–level personnel, employees, and the organizations’ agents.
E. The Guidelines had four new amendments in 2010. The guidelines recommended:
2. encouraging companies to extend their internal ethical controls
4. amending the extent of operational responsibility to apply to all personnel within a company’s
ethics and compliance program.
5. The 2010 amendment also made it possible for companies to have their penalties for
misconduct reduced if their ethics programs met four conditions.
a. The organization itself must have discovered the misconduct before it was discovered
externally.
F. In 2014 the Federal Sentencing Commission focused attention on the sharing of best practices
among regulatory and law enforcement agencies.
1. Agencies such as the Department of Justice’s Antitrust Division are developing compliance
programs based on aspects of the FSGO’s seven steps for an effective compliance program.
VII. Core or Best Practices
A. The concept of core practices is to focus more on developing structurally sound organizational
practices and structural integrity for financial and nonfinancial performance measures than on an
individual’s morals.
2. Use of gatekeepers is an important part of core practices. Gatekeepers are people who must
trust and be trusted to make business work properly and include accountants, financial rating
agencies, and financial reporting services.
B. Voluntary responsibilities relate to business’s contributions to stakeholders. Voluntary
responsibilities provide four major benefits to society:
1. They improve the quality of life and help make communities places where people want to do
business, raise families, and enjoy life.
3. They develop employee leadership skills.
4. They help create an ethical culture and values that can act as a buffer to organizational
misconduct.
C. Cause-related marketing ties an organization’s product(s) directly to a social concern through a
marketing program.
2. Cause-related marketing can affect buying patterns if consumers sympathize with the cause, the
3. A potential problem is that consumers may perceive a company’s cause-related campaign as
merely a publicity stunt, especially if they cannot understand the link between the campaign
and the company’s business practices.
D. Strategic philanthropy is the synergistic and mutually beneficial use of an organization’s core
competencies and resources to deal with key stakeholders so as to bring about organizational and
societal benefits.
1. It uses the profit motive, but argues that philanthropy must have at least a long-term positive
impact.
2. Companies that utilize strategic philanthropy recognize that companies do not operate
3. To be successful a strategic philanthropy program should pertain to the mission and operations
of the company.
E. Social entrepreneurship occurs when an entrepreneur founds an organization with the purpose of
creating social value. They desire to find a solution to a social problem rather than to simply earn
profits.
2. The concept of social entrepreneurship was popularized with the founding of micro-lending
organization Grameen Bank.
3. Even though its mission is social rather than economic, social enterprises use business-like
4. The major difference between a social enterprise and strategic philanthropy is that while
strategic philanthropy is strongly integrated into a firm’s operations, the organization is not
necessarily organized around a philanthropic purpose. Social enterprises, though, directly
implement their programs and are organized around achieving social objectives.
VIII. The Importance of Institutionalization in Business Ethics
A. Institutionalization involves embedding values, norms, and artifacts in organizations, industries,
and society.
B. It is important to recognize that institutionalization of business ethics has advanced rapidly over the
last 20 years as stakeholders have recognized the need for improving business ethics.
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 revolves around advertising from the company POM Wonderful. The FTC sued
POM Wonderful because it was making health claims that pomegranate juice lowers the risk of heart
disease, erectile dysfunction, and prostate cancer. The FTC feel there is not enough evidence to
substantiate these claims. POM, on the other hand, argued that the FTC was trying to infringe on its free
“RESOLVING ETHICAL BUSINESS CHALLENGES” NOTES
Students may identify Bill’s activities as illegal. They should certainly identify his actions as unethical and
grounds for expulsion from the university. However, Ahmed is the one facing the challenge.
Ahmed is a student worker at the university library, and he has access to all library databases, including the
ones reserved only for professors. Bill, a fellow student worker, uses the database access to download music
and movies, all while using a professor’s IP address and logging on as someone else. Ahmed has told Bill he
is not interested and does not want to be involved. Ahmed notices other students approaching Bill before
logging onto library computers, inserting discs, staying a few minutes, and then leaving. One day, Ahmed
finds at his desk an envelope with his name on it, and $500 inside. He suspects Bill but Bill will not
acknowledge leaving the money and will not take it back.
Ahmed is very uncomfortable with the situation. He knew that Bill’s activities were possibly illegal and he
asked not to be involved, but now he has taken money. If he told, would he be a “snitch”? He did not want to