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
consider the requirements of the Sarbanes–Oxley legislation, its implementation by the Securities and
Exchange Commission (SEC), and how its implementation has affected companies. We also examine the
stakeholder relationships.
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 medication, 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.
Cheryl says the company uses shorter expiration dates than their competitors, putting them at a disadvantage.
She identifies the idea of replacement labels as her own idea and when Randy questions the safety of the
product, Cheryl assures him their competitors offer longer expiration and cause no harm.
Randy’s dilemma is whether to follow Cheryl’s instructions or not. He can remember personally taking
expired over-the-counter medications in the past with no ill effects, and the new labels only extended the time
by three months. However, his feeling of unease grew because this went against his training, which cautioned
against using expired medication. How was he to explain the lack of credit on the account when he asked
someone to sign off on the paperwork when he left? How would he explain the “new policy” to them without
being dishonest?
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.
E. 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
maintain an ethical culture and to manage stakeholder expectations for appropriate conduct in
an organization.
2. Compliance represents areas that must conform to existing legal and regulatory requirements.
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.
1. Civil law defines the rights and duties of individuals and organizations (including businesses).
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
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.
22 Chapter 4: The Institutionalization of Business Ethics
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.
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
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,
originally passed in 1964 and amended several times since.
III. Gatekeepers and Stakeholders
A. Trust is the glue that holds businesses together. It creates confidence and helps build long-lasting
business relationships. Ethics help to create the foundational trust between two business parties.
1. There are many people who must trust and be trusted to make business work properly.
Sometimes these parties are called gatekeepers (accountants, regulators, lawyers, financial
rating corporations, auditors)
2. They are critical in providing information that allows stakeholders to gauge the true health of a
corporation
B. Accountants
1. Measure and disclose financial information to the public
2. Some accountants have not adhered to their duties as stakeholders and have allowed profits or
IV. 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.
1. The law requires corporations to establish codes of ethics for financial reporting and to develop
Chapter 4: The Institutionalization of Business Ethics 23
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
the costs of compliance have gone down somewhat since the law’s implementation.
V. 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
available to government officials and creating a better system of analysis for the financial
industry.
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
consumer financial laws, and check the safety of financial products before their launch into the
market.
2. Critics believe that the CFPB has too much power that could result in heavy sanctions for
financial institutions.
in penalties.
VI. Laws That Encourage Ethical Conduct
A. Laws and regulations have been passed to discourage unethical decisions—and to foster programs
designed to improve business ethics and social responsibility.
B. The most important of these are the FSGO, the Sarbanes–Oxley Act, and the Dodd-Frank Act.
VII. Federal Sentencing Guidelines for Organizations
24 Chapter 4: The Institutionalization of Business Ethics
C. 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.
D. The Guidelines had four new amendments in 2010. The guidelines recommend simplifying the
complexity of reporting relationships; encourage companies to extend their internal ethical controls;
VIII. Highly Appropriate Core 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.
1. Most ethical issues relate to non-financials such as marketing, human resource management,
and customer relationships.
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.
C. Cause-related marketing ties an organization’s product(s) directly to a social concern
through a marketing program.
1. Cause-related marketing can affect buying patterns if consumers sympathize with the
cause, the brand and cause are perceived as a good fit, and consumers are able to
transfer feelings toward the cause to the brand.
2. 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.
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 multilevel marketing (MLM). While some believe MLM is a
pyramid scheme, others believe MLM is simply a sales compensation method. The team in favor of
MLM could argue about the legality of the method, the quality of the products, and the reasons people
Chapter 4: The Institutionalization of Business Ethics 25
“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 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