page 11S fol TN 1) 4 Organizational Ethics Faced with increasing pressure to create an ethical environment at work, businesses can take tangible steps to improve their ethical performance. The organization's culture and ethical work climate play a central role in promoting ethics at work. Ethical situations arise in all areas and functions of business, and often professional associations seek to guide managers in addressing these challenges. Corporations can also implement ethical safeguards to create a comprehensive ethics program. This can become a complex challenge when facing different customs and regulations around the world, This Chapter Focuses on These Key Learning Objectives: Lo6-4 Lo62 Lo63 Loe4 Loes Classifying an organization's culture and ethical climate. Recognizing ethics challenges across the multiple functions of business. Creating effective ethics policies, ethics reporting mechanisms, ethics training programs, and similar safeguards. Assessing the strengths and weaknesses of a comprehensive ethics program. Understanding how to conduct business ethically in the global marketplace page 119Most parents know that shiny objects can catch a small child’s attention. Duracell became aware of a potential product hazard involving one such shiny object—a lithium coin battery. The National Battery Ingestion Hotline reported, “Every year hundreds of lithium coin batteries are accidentally ingested, with more than half being swallowed by children under age 6.” In response, Duracell added a bitter coating to the back side of its lithium coin batteries. The firm explained that “if a child puts a lithium coin battery in their mouth, the bitter coating will immediately react with saliva to release a bitter taste which will discourage swallowing.” The firm also created child-secure packaging, included on-pack safety warnings, and engraved a warning on the positive side of the battery. Oklahoma judge Thad Balkman ordered Johnson & Johnson to pay $572 million for contributing to the state’s opioid-addiction crisis. More than 2,000 cases were brought by state and local municipalities to hold drug makers, retail pharmacy chains, and distributors accountable for the widespread opioid abuse that began gaining public attention in the early 2000s. Balkman said the state proved Johnson & Johnson launched a misleading marketing campaign to convince the public that opioids posed little addiction risk and were appropriate to treat chronic pain. “The increase in opioid addiction and overdose deaths following the parallel increase in opioid sales in Oklahoma was not a coincidence,” the judge wrote. In 2015, more than 326 million opioid pills were dispensed in the state, enough for every adult Oklahoman to consume 110 pills. Duracell and Johnson & Johnson demonstrate two very different organizational actions. Duracell saw a potentially grave harm caused by their product and moved proactively to prevent its occurrence, while Johnson & Johnson appeared to seek profits from actions that caused severe harm to the people in the communities the company served. Why are some business executives, managers, and employees ethically proactive in protecting people in society, but others seem willing to conduct illegal or unethical activities? What is it about the organization that supports these very different organizational actions? Corporate Ethical ClimatesPersonal values and moral character play key roles in improving a company’s ethical performance, as discussed in Chapter 5, However, they do not stand alone, because personal values and character can be affected by a company’s culture and ethical climate. The terms culture and climate are often used interchangeably and, in fact, are highly interrelated, Corporate culture is a blend of ideas, customs, traditional practices, company values, and shared meanings that help define normal behavior for everyone who works in a company. Culture is “the way we do things around here.” Erica Salmon Byme, Executive Vice President, Governance and Compliance for The Ethisphere Institute, wars businesses and the public: “This is a lesson we have learned, re-learned, and will likely learn again. Regulators around the globe are increasingly calling on organizations to examine their culture. From Enron to Volkswagen, the Challenger to WorldCom, there are multiple examples of organizations with formal systems that say one thing and cultures that promote another. When those kinds of alignment gaps are allowed to persist, you eventually have a failure of one variety or another: ethics, quality, safety, or a combination of all three.”? pagel The Ethics Resource Center (ERC) observed that a “strong ethical culture in a company has a profound impact on the kinds of workplace behavior that can put a business in jeopardy.” Weak ethical cultures can foster ongoing bad behavior. In a global business ethics survey conducted by the Ethics and Compliance Initiative, the most common kinds of misconduct observed by employees in the United States and globally were favoritism, management lying to employees, and conflicts of interest. Forty- one percent claimed that the unethical behavior was repeated more than once, indicating a weak ethical work culture. However, some evidence suggests that workplace ethical cultures are improving. In 2019, 1 in 5 employees in the United States reported that they worked in organizations with “strong ethical cultures,” compared to 1 in 10 in 2000.4Most companies have a kind of moral atmosphere. People can feel which way the ethical winds are blowing. They pick up subtle hints and clues that tell them what behavior is approved and what is forbidden. The ethical climate represents an unspoken understanding among employees of what is and is not acceptable behavior based on the expected standards or nomms used for ethical decision making. It is the part of broader corporate culture that sets the ethical tone in a company. One way to view ethical climates is diagrammed in Figure 6.1. Three distinct ethical criteria are egoism (self-centeredness), benevolence (concern for others), and principle (respect for one’s own integrity, norms, or laws). (These parallel the levels of moral development developed by Lawrence Kohlberg that are discussed in Chapter 5.) These ethical criteria can be used to describe how individuals, a company, or society at large approach various moral dilemmas. FIGURE 6.1 ‘The Components of Ethical Climates Source: Adapted from Bart Victor and John B. Cullen, “The Organizational Bases of Ethical Work Climates,” Administrative Science Quarterly 33 (1988), p. 104. Ethical Criteria Focus of Individual Person Organization Sociaty Egcism|settcentered Selfnterest Company interest Economiceficency approach) Benevclence (concem- Friendshp Team interest ‘Social responsibilty fer-others approach) Principle (integrity Personal morality Companyrulesand Laws and approact) procedures professional codes For example, if a company approaches ethics issues with benevolence in mind, it would emphasize friendly relations with its employees, stress the importance of team play and cooperation for the company’s benefit, and recommend socially responsible courses of action. The opening example depicting Duracell’s ethical action manifests this sort of approach. However, a company using egoism would be more likely to think first of promoting the company’s profit and striving for growth at all costs, as illustrated by Johnson & Johnson in the opening example of this chapter and by the Brazilian company Vale Mining, whose cultural egoism is described in the Discussion Case at the end of this chapter.Some organizations that recognize the presence of a misfocused ethical climate attempt to change and improve their culture. In 2020, Wells Fargo Chief Executive, Charles W. Scharf, appeared before the House Financial Services Committee and admitted that the company’s “flawed business model and broken culture” and efforts to reform itself had been stumbling and incomplete. He told the Committee that ‘the sense of urgency that people are working with inside the company is very different today than it was four months ago.” The bank was operating under a dozen consent orders (judicial or regulatory orders imposed on a company to prevent or avoid a lawsuit), including a rare restriction imposed by “page 127 the Federal Reserve Bank in 2018 that prevented the bank from growing. Scharf tried to reassure the Congressional committee members that things were turning around at Wells Fargo.> Researchers have found that multiple ethical climates, or subclimates, may exist within one organization. For example, one company might include managers who often interact with the public and government regulators, using a principle-based approach, compared to another group of managers, whose work is geared toward routine process tasks and whose focus is mainly egoistic—higher personal pay or company profits.© Corporate ethical climates can also signal to employees that ethical transgressions are acceptable. By signaling what is considered to be right and wrong, corporate cultures and ethical climates can pressure people to channel their actions in certain directions desired by the company. This kind of pressure can work both for and against good ethical practices. Business Ethics Across Organizational Functions Not all ethics issues in business are the same, Because business operations are highly specialized, ethics issues can appear in any of the major fanctional areas of a business firm. Accounting, finance, marketing, information technology, supply chain management, and other areas of business all have their own particular brands of ethical dilemmas. In manycases, professional associations in these functional areas have attempted to define a common set of ethical standards, as discussed next. Accounting Ethics The accounting function is a critically important component of every business firm. By law, the financial records of publicly held companies are required to be audited by a certified professional accounting firm. Company managers, external investors, government regulators, tax collectors, and labor unions rely on such public audits to make key decisions. Honesty, integrity, transparency, and accuracy are absolute requirements of the accounting function, and the impact can be devastating for organizations when these values are absent. KPMG, one of the largest U.S. accounting firms, agreed to pay $50 million in 2019 to settle Securities and Exchange Commission allegations that former employees obtained an unlawful sneak peek at regulators’ plans to inspect its work and that its auditors had cheated on internal training exams. Earlier this investigation had led to the criminal convictions of four former audit partners and managers. “KPMG’s ethical failures are simply unacceptable,” said SEC Chairman Jay Clayton. The actions violated the professional accounting standard that requires accountants to maintain integrity as they carry out their professional duties.” Accountants often are faced with conflicts of interest, introduced in Chapter 5, where the self-interest (of the accountant or accounting firm) may be divided or in conflict with their obligation to the page 122 company (the client) or the interests of others (such as shareholders and the public). For example, while conducting an audit of a company, should the auditor look for opportunities to recommend to the client consulting services that the auditor’s firm can provide? Sometimes, accounting firms may be tempted to soften their audit of a company’s financial statements if the accounting firm wants to attract the company’s nonaudit business. For this reason, the Sarbanes-Oxley Act severely limits the offering of nonaudit consulting services by the auditing firm. Examples of the U.S. accounting profession’s efforts promoting ethics are shown in Exhibit 6.A. Spurred by a threat of liability suits filed againstaccounting firms and a desire to reaffirm professional integrity, these standards go far toward ensuring a high level of honest and ethical accounting behavior.$ Exhibit 6.A ate Rm Professional Codes of Conduct in Accounting and Finance AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS (AICPA) Code of Profe These Principles of the Code of Professional Conduct of the American Institute of Certified Public Accountants express the profession's recognition of its responsibilities to the public, to clients, and to colleagues. They guide members in the performance of their professional responsibilities and express the basic tenets of ethical and professional conduct. The Principles call for an unswerving ‘commitment to honorable behavior, even at the sacrifice of personal advantage. The Principles include: professional responsibilities, serving the public interest, maintaining integrity, maintaining objectivity and independence, exhibiting due care, and adhering to the Principles when providing services. nal Conduct CHARTERED FINANCIAL ANALYST (CFA)® CFA Institute Code of Ethics and Standards of Professional Conduct Members of CFA Institute [including Chartered Financial Analyst® (CFA®) charterholders] and candidates for the CFA designation (‘Members and Candidates") must: act with integrity, competence, diligence, respect, and in an ethical manner, place the integrity of the investment profession and the interests of clients above their own personal interests, exercise independent professional judgment when making decisions, practice in a professional and ethical manner, promote the integrity for the ultimate benefit of society, and maintain their professional competence.* AICPA Code of Professional Conduct. American Institute of CPAs. For a full text of the professional code, see www.aicpa.org. ” CFA Institute. For full text see www.cfapubs.org/doi/pdi/10.2469/cob.v2014.n6. 1. In addition, a new international Code of Ethics for professional accountants was unveiled in 2018. According to Kim Gibson, member of the International Ethics Standards Board for Accountants (IESBA), “the new standards are designed to be easier to use, navigate, and enforce; be more relevant for professional accountants in business, [and] distinguish more clearly between requirements and application material.”? page | Financial Ethics Within companies, the finance department and its officers are typically responsible for managing the firm’s assets and raising capital—for example, by issuing stocks and bonds. Financial institutions, such as commercial banks, securities firms, and so forth, assist in raising capital and managing assets for both individuals and institutions. Whether working directly for a business or in a firm that provides financial services, finance professionals face a particular set of ethical issues. Consider the following ethical lapses in corporate finance and a recent attempt by government regulators to improve ethical conduct: » Following a crackdown on tax evasion in France, French judges ordered UBS, a Swiss multinational investment bank and financial services company, to pay a record €3.7 billion fine ($4.2 billion) for conducting a long-running scheme to help French clients hide huge sums of money from government tax authorities. A decade earlier, UBS paid a $780 million fine in the United States for similar charges.!° + JPMorgan Chase agreed to pay $920 million and admitted misconduct tied to manipulation of precious metals and Treasury markets in 2020. This was the largest fine to date imposed by the U.S. Commodity FuturesTrading Commission Traders would place orders on one side of the market which they never intended to execute, to create a false impression of buy or sell interest that would raise or depress prices, according to the settlement.!! » In 2019, the U.S. Securities and Exchange Commission approved the Regulation Best Interest rule aimed at giving investors more information about brokers’ complex pay incentives and other potential conflicts of interest that can influence their clients. With technological advances in the financial services industry, brokers have shifted their focus from transacting trades to giving clients investment advice and acting as financial advisers. Because of this shift, noted SEC Chairman Jay Clayton, a new professional standard was needed. “We elevate, enhance and clarify these obligations in a comprehensive manner. This action is long overdue.” The lapses in ethical conduct described above occurred despite efforts by the finance professions to foster an ethical environment. As shown in Exhibit 6.A, the highly regarded Chartered Financial Analyst Institute, which oversees financial executives performing many different types of jobs in the financial discipline, emphasizes self-regulation as the best path for ethical compliance.!3 Marketing Ethics Marketing refers to advertising, distributing, and selling products or services. Within firms, the marketing department is the functional area that typically interacts most directly with customers. Outside the firm, advertising agencies and other firms provide marketing services to businesses. The complex set of activities involved in marketing generates its own distinctive ethical issues. page L Two issues in marketing ethies emphasize customer privacy, especially for children, and honesty and transparency in advertising, as shown in the examples next.In 2019, the Federal Trade Commission and the New York Attorney General announced that Google, and its subsidiary YouTube, would pay $170 million to settle allegations that the YouTube video- sharing service illegally collected personal information from children without their parents’ consent, violating the 1998 Children’s Online Privacy Protection Act (COPPA). Reportedly ‘YouTube eamed millions of dollars by inserting technology into its website to identify user’s personal information, commonly known as cookies, to deliver targeted ads to viewers of children-directed channels.!* Dish Network agreed to pay $210 million in penalties related to telemarketing violations, according to the Justice Department. In California, Illinois, North Carolina, and Ohio, Dish made millions of unlawful telemarketing calls to consumers and supported millions of more calls by retailers that marketed Dish products and services. “The settlement sends a strong message to would-be violators that telemarketing laws and regulations cannot be ignored,” said Jeffrey Bossert Clark, of the Justice Department’s Civil Division.!° In addition to the general ethical questions that surround the marketing or advertising of products to consumers, consumer health and safety is another key ethics issue in marketing. Chapter 14 discusses several other issues in marketing ethics, including deceptive advertising, firm liability for consumer injury, and a firm's responsibility for the unethical use of produets by buyers, To improve the ethics of the marketing profession, the American Marketing Association (AMA) has adopted a code of ethics for its members, as shown in Exhibit 6.B. The AMA code advocates professional conduct guided by ethies, adherence to applicable laws, and honesty and faimess in all marketing activities. The code seeks to help marketing professionals translate general ethical principles into specific working rules.!6 Information Technology Ethics One of the most complex and fast-changing areas of business ethics is in the field of information technology. Ethical challenges in this field involve invasions of privacy; the collection and storage of, and access to, personaland business information, especially through e-commerce transactions; confidentiality of electronic mail communication; copyright protection regarding software, music, and intellectual property; cyberbullying; the emergence of artificial intelligence, and numerous others, France’s data protection regulator, the Commission Nationale de [Informatique et des Libertes (CNIL), fined Google €100 million (around $121 million) and Amazon €35 million (around $42 million) for violating the country’s data protection laws. When Google or Amazon users visited the company’s French websites, cookies—including some used for advertising —were placed on the user’s devices without prior consent. CNIL criticized the “page D5 companies for not providing enough information on their cookie banners or for not making it clear enough that visitors could turn down these cookies.!” As discussed in later chapters of this book, the explosion of information technology has raised serious questions of trust between individuals and businesses. In response to calls by businesspeople and academies for an increase in ethical responsibility in the information technology field, professional organizations have developed or revised professional codes of ethics, as shown in Exhibit 6.B.18 Exhibit 6.B ate Rm Professional Codes of Conduct in Marketing and acoeue Lier} TechnologyAMERICAN MARKETING ASSOCIATION (AMA) Statement of Ethi The American Marketing Association commits itself to promoting the highest standard of professional ethical norms and values for its members (practitioners, academics, and students). As Marketers, we must: do no harm, avoiding harmful actions or omissions by embodying high ethical standards and adhering to all applicable laws and regulations; foster trust in the marketing system, striving for good faith and fair dealing as well as avoiding deception in product design, pricing, communication, and delivery of distribution; and, embrace ethical values, building relationships and enhancing consumer confidence by affirming these core values: honesty, responsibility, fairness, respect, transparency, and citizenship. We expect AMA members to be courageous and proactive in leading and/or aiding their organizations in the fulfilment of the explicit and implicit promises made to those stakeholders.” Association for Computing Machinery (ACM) Code of Ethics and Professional Conduct ‘The ACM Code of Ethics and Professional Conduct frames for members of the professional association to focus on contributing to society and to human well- being, avoid harm, be honest and trustworthy, be fair and do not discriminate, respect the work required to produce new ideas or inventions, respect privacy, and honor confidentiality. These ethical principles are supported by a series of professional responsibilities, such as strive to achieve high quality, accept and provide appropriate professional review, and access computing and ‘communication resources only when authorized, and professional leadership principles, which include manage personnel to enhance the quality of working life and create opportunities for members to grow as professionals.” * American Marketing Association's Statement of Ethics, 2017, as it appears in wwnw.marketing.com. ** Copyright (c) 2018 by the Association for Computing Machinery. A full text of the ACM code of ethics and professional standards can be found at www.aom org/code-of ethics. Supply Chain Ethics Production and operations functions are part of an organizations’ supply chain and have also been at the center of some ethics storms.are Japan’s Quality Assurance Organization is responsible for certifying that the quality of products meets Japanese and international standards. Based on this agency’s investigations, Kobe Steel Limited, a Japanese metals manufacturer, admitted to misleading 500 companies about the quality of the copper the firm shipped to its customers for over 10 years. The company admitted to falsifying quality documents on tens of thousands of metal orders involving copper piping and later to covering up evidence. Breaches in the failure to report accurate information expanded to include other manufacturing facilities owned by Kobe, violating laws, regulatory standards, and customers’ trust.!° Similar to other professional associations, supply chain managers also guided by a professional code of ethics, shown in Exhibit 6.C. Exhibit 6.C Teel Reel 9 of Conduct in Supply Chain Management Similar to the other professional associations, whose codes of ethical conduct are presented in Exhibits 6.A and 6.B, the institute for Supply Management (ISM) developed its Principles and Standards of Ethical Supply Chain Management Conduct with Guidelines that emphasize integrity, value, and loyalty across 10 main principles. The specific principles are: avoid impropriety, conflict of interest, and negative influences; be responsible to your employer, suppliers, and customers, and social responsibility and sustainability practices: protect confidentiality; avoid reciprocity, follow applicable laws, regulations, and trade agreements; and exhibit professional competence. ‘Source: Institute for Supply Management's Principles and Standards of Ethical Supply Management Conduct with Guidelines from wwnw.instituteforsupplymanagement.org.Efforts by professional associations to guide their members toward effective resolution of ethical challenges make one point crystal clear: All areas of business, all people in business, and all levels of authority in business encounter ethics dilemmas from time to time. Ethics issues are a common thread running through the business world. Specific steps that businesses can take to make ethics work are discussed next. Making Ethics Work in Corporations Any business firm can improve the quality of its ethical performance. Doing so requires a company to build ethical safeguards into its everyday routines. This is sometimes called institutionalizing ethics. The percentage of the world’s largest firms (the Fortune 500 or 1000 as reported in Fortune magazine each year) adopting these safeguards has grown since the 1980s. By the mid-2020s, these safeguards were almost universal at large corporations. The 2021 Ethics Research Center study found that organizations with high-quality ethics and compliance programs are not only more likely to have strong ethics cultures, but they also have an impact on the four major ethics outcomes in the following ways: less pressure to compromise ethics standards; less observed misconduct; more reporting of misconduct observed; and less retaliation for reporting. However, even companies with strong ethical safeguards can experience ethical lapses, as discussed in the Boeing case at the end of the book.?° pagel Building Ethical Safeguards into the Company Managers and employees need guidance on how to handle day-to-day ethical situations; their own personal ethical compass may be working well, but they need to receive directional signals from the company. Several organizational steps can be taken to provide this kind of ethical awareness and direction.Lynn Sharp Paine, a Harvard Business School professor, has described two distinct approaches to ethics programs: a compliance- based approach and an integrity-based approach. A compliance- based program seeks to avoid legal sanctions. This approach emphasizes the threat of detection and punishment in order to channel employee behavior in a lawful direction. Paine also described an integrity-based approach to ethics programs. Integrity- based ethics programs combine a concem for the law with an emphasis on employee responsibility for ethical conduct. Employees are told to act with integrity and conduct their business dealings in an environment of honesty and faimess. From these values a company will nurture and maintain business relationships and will be profitable! Researchers found that both approaches lessened unethical conduct, although in somewhat different ways. Compliance-based ethics programs increased employees’ willingness to seek ethical advice and sharpened their awareness of ethical issues at work. Integrity-based programs, for their part, increased employees’ sense of integrity, commitment to the organization, willingness to deliver bad news to supervisors, and their perception that better decisions were made.?? Ethical Leadership Research has consistently shown that the “tone at the top” or ethical leadership—‘the demonstration of normatively appropriate conduct through personal actions and interpersonal relationships”—is critical to fostering ethical behavior.2? According to a Washington Post article, “more CEOs were forced out for ethical lapses in 2018 than for poor financial performance.” As Dan Amos, CEO and Chairperson for Aflac stated, when senior-level managers and directors signal employees, through their own. behavior, that they believe ethics should receive high priority in all business decisions, they have taken a giant step toward improving ethical performance throughout the company.24 Led by CVS Health’s CEO Larry Merlo, in 2020 in the midst of the COVID-19 global pandemic, Merlo announced plans to pay workers bonuses of $500 as it hired 50,000 more employees. “As [CVS workers] continue to be there for the individuals and families we serve, we’re takingextra steps to provide some peace of mind and help them navigate these uncertain times,” said CVS chief executive officer Larry Merlo.?° Another example of ethical leadership is shown in Exhibit 6.D. page Exhibit 6.D ora E erase CEO of Popeyes uisiana Kitchen— tal fer eat La Reg Popeyes Louisiana Kitchen was in deep financial trouble. The company's profits were stagnant, the stock price had dropped to $13.00 a share, the brand was suffering, and franchise owners were confronting corporate leadership. Then Cheryl Bachelder took over the reins of the company with a new ethical leadership style. During the next eight years, Popeyes posted average global sales growth of 8.4 percent, average global same-store sales growth of 4.1 percent, and average earings per share growth of 14.1 percent. Bachelder is not only recognized as one of the restaurant industry's top executives for the remarkable turnaround her company achieved, but also for her leadership philosophy. Bachelder declared, "We needed to serve the people who have invested the most in Popeyes.” This was evident in an unswerving dedication to serve the people who owned the restaurants—the franchise ‘owners. The idea of customers coming second was not new. Many people oriented companies have recognized the incredible financial return that comes from the development, care, and engagement of those on the front lines. As Bachelder believed, ethical leaders need to improve the employee experience, or in Popeyes’ case the franchisee experience, by acting as ethical or servant leaders, Bachelder envisioned a culture based on six ethically grounded principles essential to serving people well: passion, listening, planning, coaching, accountability, and humility. Bachelder called these principles a “living plaque’— it lives and breathes in the Popeyes’ franchisees as they go through each business day.‘Sources: For more information see, Cheryl Bachelder, Dare to Serve (Oakland, CA: Berrett-Koehler Publishers, 2015); and "This Popular Female CEO's Leadership Style May End the Debate on Best Leadership Style,” Inc., n.d., wwnw.ine.com/marcel-schwantes/this-popular-female-ceos-leadership-style-may- end-the-debate-on-best-leadership- htm Whether the issue is sexual harassment, honest dealing with suppliers, or the reporting of expenses, the ethical leadership (or lack thereof) demonstrated by senior management is one of the most essential safeguards. Ethics Policies or Codes Many U.S. businesses, especially large firms, have ethics policies or codes. An example of one of the first corporate ethics codes is shown in Exhibit 6.E. The purpose of such policies and codes is to provide guidance to managers and employees when they encounter an ethical dilemma. Research has shown significant differences among countries. In the United States and Latin America, ethics policies were found to be primarily instrumental—that is, they provided rules and procedures for employees to follow in order to adhere to company policies or societal laws. In Japan, most policies were a mixture of legal compliance and statements of the company’s values and mission. Values and mission policies were also popular with European and Canadian companies. Despite some differences in orientation, codes of ethics are clearly becoming more common. Exhibit 6.E 3M’s Code of Conduct Named one of the world's most ethical companies for five straight year by Ethisphere Institute, 3M maintains its reputation for its personal integrity, shared values and ethical business practices around the world. (See the discussion case in Chapter 3 highlighting an ethical challenge facing 3M.) Their code of conduct emphasizes six main principles:1. Be Good. Obey the law and 3M's Code of Conduct. 2. Be Honest. Act with uncompromising honesty and integrity. 3. Be Fair. Play by the rules, whether working with government, customers, or suppliers, 4, Be Loyal. Protect 3M's interests, assets, and information 5. Be Accurate. Keep complete and accurate business records. 6.Be Respectful. Respect one another and our social and physical environment around the world.2” Source: From solutions.3m.com. Typically, ethics policies cover issues such as developing guidelines for accepting or refusing gifts from suppliers, avoiding conflicts of interest, maintaining the security of proprietary information, and avoiding discriminatory personnel practices. Yet, researchers have found that a written ethies policy, while an important contributor, is insufficient by itself to bring about ethical conduct. Companies must circulate ethics policies frequently and widely among employees and extemal stakeholder groups (e.g., customers, suppliers, or competitors). Many companies — page 29" use posters, quick reference guides, and brochures to raise awareness and importance of their code. Ethics and Compliance Officers Ethical lapses in large corporations throughout the 1980s prompted many firms to create a new position: the ethics and compliance officer (ECO), or sometimes called the chief compliance officer (CCO) or the chief integrity officer (CIO). A second surge of attention to ethics and the creation of ethics offices came in response to the 1991 U.S. Corporate Sentencing Guidelines, discussed in Chapter 5. The wave of corporate ethics scandals in the early 2000s and the passage of the Sarbanes-Oxley Act once again tured businesses’ attention toward entrusting ethical compliance and the development and implementation of ethics programs to an ethics or compliance officer. From 2000 to 2004, the number of members in the Ethics Officer Association doubled from 632 to more than 1,200 members and continued to grow to approximately 1,300 members representing over 400 organizations in over 50 countries. In 2015, the Ethics and Compliance Officer Association (ECOA), having renamed itself to reflect the growingnumber of managers charged with both compliance and ethics issues, and the Ethics Resource Center, America’s oldest non-profit organization advancing high ethical standards and practices in public and private institutions, merged into the Ethics and Compliance Initiative. One member of the ECOA is profiled in Exhibit 6.F. Exhibit 6.F Meet Karina Vollmer, PAE’s Chief Ethics and Compliance Officer ‘As the Chief Ethics and Compliance Officer at PAE, a defense and public services contractor based in Virginia, Karina Vollmer is responsible for oversight of the company's ethics and compliance program and Code of Conduct, as well as training the workforce on ethics and compliance issues and leading investigations as needed. Vollmer also chairs the PAE Compliance Council and Privacy and Data Protection Council Prior to joining PAE, Vollmer was Senior Legal and Compliance Counsel for Tata Communications in their Herndon, Virginia, office for three years and in their Singapore office for four years prior. In her global role, Vollmer managed the company's anti-corruption, data protection, sanctions, antitrust, and other compliance programs. Prior to moving to Singapore, Vollmer represented human trafficking and domestic violence survivors in the Washington D.C. Metro Area. Vollmer graduated from Boston University School of Law with a Juris Doctor degree, and from the University of San Diego with a Bachelor of Arts degree ‘major in International Relations and minor in Business Administration Sources: From the PAE website, www.pae.com/leadership/karina-vollmer. Douglas Allen, managing director at Ethisphere Institute, observed that many companies that have independent, C-suite level compliance and ethics officers and acknowledges that the independent role has led to better corporate behavior from the top down. A PricewaterhouseCoopers globalcompliance survey reported that 30 percent of the company’s ethics and compliance officers annually review the company’s code of conduct and 49 percent update their firm's compliance training and communication programs. Technology also plays a larger role for ethics officers. Half of the ethics and compliance officers surveyed reported they used technology to monitor employees’ compliance with ethies and compliance-related policies and procedures, “To prevent blind spots and flag exceptions as — page 150" they occur, we must look to automation and technology to conduct real-time data mining and analytics,” explained Karen Griffin, executive vice present and chief compliance officer at Mastereard.29 Ethics Reporting Mechanisms In most companies, when employees are troubled about an ethical issue, they seek out their immediate supervisor or someone else in senior management. But what if the employee is reluctant, for whatever reason, to raise the issue with their immediate supervisor? In that case, they can turn to their company’s ethics reporting mechanisms and call a “helpline” or send an e-mail expressing their concems, anonymously if they wish. Ethics reporting systems typically have three uses: (1) to provide interpretations of proper ethical behavior involving conflicts of interest and the appropriateness of gift giving, (2) to create an avenue to make known to the proper authorities allegations of unethical conduct, and (3) to give employees and other corporate stakeholders a way to discover general information about a wide range of work-related topics. McDonald’s encountered a massive wave of worker complaints and lawsuits charging the company and its restaurants’ and corporate offices’ employees with sexual harassment, including groping, indecent exposure, lewd comments, and propositions for sex. In response, the company took numerous actions, including working with an anti-sexual violence organization, RAINN, and adopting a new policy aimed at more clearly communicating employee rights and procedures for filing complaints. McDonald’s also created an anonymous reporting mechanism to allow victims to come forward without fear of retaliation to counter reports.2°While employees may be willing to use their companies’ ethical reporting mechanisms, such as the one created at McDonald’s, challenges remain, Executives tend to use the helpline more often than those farther down the organizational chart. The Ethies Resource Center study found that middle managers were “an area of vulnerability within companies” since they were less likely to use the helpline. The report also — page T3_ discovered that rates of helpline usage were lower in foreign- owned companies than in their U.S. counterparts. Yet, many businesses described greater success when employees use the company’s helpline/hotline and were better able to avoid serious ethical violations. But no matter how advanced the technology used in an ethics and compliance program, the ethics and compliance officer never really knows what to expect when monitoring calls to the helpline, as the following example showed: “Oh, boy, this is one of those days,” thought the ethics officer at a midsized manufacturing firm when she received a call on the ethics helpline that a toilet in the company’s administration building was overflowing. She called maintenance and they found that someone had clogged up the toilet drain. When the same call was received a week later, the ethics officer knew she had to investigate. Through interviews with personnel who worked on that floor, she discovered that the supervisor had refused to allow workers to take bathroom breaks when needed, and an employee had boasted that “he was going to get even with his supervisor and plug up the toilet” to attract attention to unsafe working conditions. The call about the overflowing toilet and subsequent investigation allowed the ethics officer to address the real issue, counsel the supervisor, and repair the deteriorating working conditions at her company.*! Ethics Training Programs Another step companies can take to build in ethical safeguards is to offer employee ethics training. This is generally the most expensive and time- consuming element of an ethics program. Studies have shown that only 20 to 40 percent of small businesses formally offer ethics training to their employees, often using less formal ways to communicate ethical values and procedures. Larger businesses, by contrast, usually conduct regular ethicstraining. As shown in Figure 6.2, businesses have several motivations for developing employee ethics training programs. In general, larger and more mature organizations are more inclined to believe that a culture of ethics encourages employees to speak up; whereas, small and medium organizations are more likely to define training as an alignment with regulatory guidelines.22 ‘As shown in Figure 6.2, most ethics and compliance training programs focus on making sure employees know what the law requires and the company expects. Some firms have gone further, exploring how individuals can contribute to strengthening the firm’s ethical culture. An ethics training seminar sponsored by the Italian Cultural Institute in Copenhagen focused on the importance of individual creativity in making company cultures more ethical. Speakers at this cross- country congress of corporate governance professionals championed the great capacity of human ingenuity to facilitate ethical behavior in organizations. For example, sessions at this conference included “The Responsibility of Individuals and Organizations for Community Development and Progress” and “Innovative Approaches to Sustainable Development: From the Education of ‘New Generations to the Processes for the Integration of Social Responsibility into Business Models.”33 FIGURE 6.2 Organizational Benefits of Employee Ethics Training Programs Source: "2019 Ethics & Compliance Training: Top Market Trends & Analysis,” NAVEXGlobal, 2019 (Lake Oswego, OR: NAVEXGlobal).Reduces lagal liability 50% Increases repoing/speaking up 50% Irmpeovce trust in laadorship 45% Improves employee morale 40% Improves mastery of this and 20% ‘compliance issues 0% © 20% «= 40% GOR BOK 100K, page 132, The effectiveness of the ethics and compliance program is important to executives. Companies used to conduct formal ethics audits to ensure the quality of these programs, but today most firms have tumed to a company- wide risk assessment audit to determine the effectiveness of the ethics program along with other risks. Experts believe that integrating various ethics safeguards into a comprehensive program is critically important and minimizes the firm's risk, When all five components discussed in this chapter—ethical leadership, ethical policies or codes, compliance officers, reporting mechanisms, and training programs—are used together, they reinforce each other and become more effective. Ethics in a Global Economy Doing business in a global context raises a host of complex ethical challenges. One example of unethical activity is bribery, a questionable or unjust payment often to a government official to ensure or facilitate a business transaction. The act of bribery introduces an economic force that is not based on the product or service’s quality or other sales characteristics, therefore the element of bribery corrupts the economic exchange.Bribery is found in nearly every sector of the global marketplace, but is more common in some countries than others. A Berlin-based watchdog agency, Transparency International, annually publishes a survey that ranks countries by their level of corruption, as perceived by executives and the public. In the 2020 survey, countries where having to pay a bribe was least likely included New Zealand, Denmark, Finland, Switzerland, Singapore, and Sweden. At the other end of the index, Somalia, South Sudan, Syria, Yemen, and Venezuela were considered the world’s most corrupt countries. The United States was tied for 25th on the list of 180 countries; with Norway 7th; the Netherlands and Luxemburg tied for Sth; Canada, the United Kingdom, and Australia tied for 11th; China 78th; India 86th; and Russia 129th.34 page 133 In some settings, corruption is so common as to be almost unavoidable. In a Transparency International interview of over 160,000 adults from 119 countries around the globe, they found that one in four people claim to have paid a bribe when accessing public services in the 12 months prior to the survey. On average, the European Union had the lowest reported bribery rate at 9 percent compared to an average rate of 30 percent in the Middle East, North Africa, and the Commonwealth of Independent States in Eurasia. The Latin American and Asia Pacific regions were close behind with average bribery rates up to 29 percent. A survey in Nigeria found that Nigerians paid about $4.6 billion in bribes each year. According to a 2017 study by the Prosecutor General’s Office in Russia, 25 percent of Russians admitted to having paid a bribe in the prior year.3> Bribery has significant economic, as well as ethical, consequences. Mythili Raman, a former senior executive at the Department of Justice explained, “Our fight against foreign corruption is critical for so many reasons. The corrosive effects of transnational corruption are felt not just overseas, but also here in the United States. Although we may not experience as acutely, or as personally, some of the consequences of foreign bribery, such as hospitals or roads that go unbuilt becauseinfrastructure funds are siphoned off by a corrupt official, American companies are harmed. They are denied the ability to compete in a fair and transparent marketplace. Instead of being rewarded for their efficiency, innovation and honest business practices, U.S. companies suffer at the hands of corrupt governments and lose out to corrupt competitors.”36 The following examples further demonstrate the harmful effects of bribery. » Brazilian oil company Petrobras agreed to pay an $853.2 million settlement to U.S. and Brazilian authorities to end a four-year investigation tied to one of the biggest corruption schemes ever uncovered. The investigation, known as Operation Car Wash, involved the payment of hundreds of millions of dollars in bribes to Brazilian politicians and political parties and then concealed these payments from investors and regulators. These actions led to multi-billion dollar losses at the company, drastically dropped the company’s market share price, and sent former Brazilian President Luiz Inacio Lula de Silva and several top business executives to jail. » Telecom equipment maker Ericsson agreed to pay more than $1 billion to settle U.S. allegations that it conspired to make illegal payments to secure business contracts in five countries: Djibouti, China, Vietnam, Kuwait, and Indonesia. “Ericsson’s corrupt conduct involved high-level executives and spanned 17 years and at least five countries, all in a misguided effort to increase profits,” said Assistant Attorney General Brian Benczkowski. » Goldman Sachs and its Asian subsidiary paid $2.8 billion to the U.S. government and admitted wrongdoing in a Malaysian bribery scandal, settling charges stemming from its work with a corrupt government investment fund. According to the U.S., Justice Department, this multi- year scandal stretched from Southeast Asia to Hollywood, the Middle East, Las Vegas, and London. Earlier, Goldman agreed to pay “page 13d Malaysia $2.5 billion to settle its case there. Days later, Malaysia’s former prime minister was found guilty of abuse of power for his role in the scandal.”Efforts to Curtail Unethical Practices Many governments have taken action to regulate and control corruption. Since 1977, the U.S. Foreign Corrupt Practices Act (FCPA) has prohibited executives of U.S.-based companies from paying bribes to foreign government officials, political parties, or political candidates. To achieve this goal, the FCPA requires U.S. companies with foreign operations to adopt accounting practices that ensure full disclosure of the company’s transactions. In 2020, the Securities and Exchange Commission reported enforcement of the FCPA against the following companies and individuals: Goldman Sachs, J&F Investimentos, Herbalife Nutrition, World Acceptance, Alexion Pharmaceuticals, Novartis, ENI, Asante Berko, and Cardinal Health, with imposed financial penalties totaling a record $6.4 billion. For comparison, in 2019, 14 companies paid a (then) record $2.9 billion to resolve FCPA cases.3® The United Kingdom’s Bribery Act took effect in July 2011 and has quickly ascended to what most white-collar crime experts claim as one of the most powerful anti-corruption laws in the world, along with the U.S. Foreign Corrupt Practices Act. David Toube, a counsel with a global U.K- based law firm, explained: “Where there is a risk of bribery or corruption, it has become the absolute standard to include language referencing the U.K. Bribery Act in compliance manuals and any contracts. That is because the ‘Act can catch the actions of a wide range of people down the supply chain. It took 20 years for the FCPA to bite, and when it happened, it made everybody fearful; but it’s not just fear—the FCPA and the Bribery Act have served to change corporate culture and to take us to a better place.”39 Other governments have drafted and passed new legislation to combat corruption and bribery. In 2013, Brazil, one of the world’s top 10 largest economies, approved an anti-bribery law that imposed civil and criminal penalties on firms for acts committed against local and foreign government officials. Fines can be as high as 20 percent of the company’s annual gross revenues, India joined Brazil in 2014 by passing its own anticorruption legislation.“°While enforcement is often spotty, some countries have enforced their bribery laws aggressively. China imposed a $487 million fine on British pharmaceutical GlaxoSmithKline (GSK) for bribery, after Glaxo reportedly used payoffs to persuade hospitals and doctors to administer or — page 133 sell Glaxo pharmaceuticals to their patients. In 2020, the Chinese lawmakers significantly increased the sentencing of private individuals who were convicted of corruption, including the taking or offering of bribes and embezzling company assets. In late 2020, Kazakhstan’s president signed two laws introducing changes to the country’s anti-corruption legislation, including the Anti-Corruption Law. Among other acts, the laws prohibited public officials from receiving gifts of minor value.*! Businesses of all sizes and from many diverse industries around the world have attempted to respond to the increasing pressure to create an ethical environment at work. As discussed, the organization’s culture and ethical work climate play a central role in promoting ethics at work and encouraging employees to act ethically. Businesses have implemented many ethical safeguards to create effective ethics programs. Challenges remain as organizations expand their operations globally and encounter a complex network of different customs and regulations. » A company’s culture and ethical climate tend to shape the attitudes and actions of all who work there, sometimes resulting in high levels of ethical behavior and at other times contributing to less desirable ethical performance » Not all ethical issues in business are the same, but ethical challenges occur in all major functional areas of business, Professional associations for each functional area often attempt to provide a standard of conduct to guide practice. + Companies can improve their ethical performance by creating a values- based ethics program that relies on ethical leadership and organizational safeguards, such as ethics policies or codes, ethics and complianceoffices and officers, ethics reporting mechanisms, and ethics training programs. Companies that have a comprehensive, or multifaceted, ethies program often are better able to promote ethical behavior at work and avoid unethical action by employees. Ethical issues, such as bribery, are evident throughout the world, and many international agencies and national governments are actively attempting to minimize such unethical behavior through economic sanctions and international codes. Key Terms bribery, 132 corporate culture, 119 employee ethics training, 131 ethical climate, 120 ethical leadership, 127 ethics and compliance officer (ECO), 129 ethics policies or codes, 128 ethics reporting mechanisms, 130 US. Foreign Corrupt Practices Act (FCPA), 134 page 136 Internet Resources Defense Industry Initiative (Dill) on Business Ethics wonn.di.org and Conduct www.ethicaledge.com Ethics and Policy Integration Centre www.ethicalsystems.org Ethical Systems ethisphere.com Ethisphere Institute wwwethics.org Ethics and Compliance Initiative