Session 3

Chapter 4
The Institutionalization of Business
Ethics
Managing Ethical Risk
Through Mandated,
Core, and Voluntary
Practices
 Voluntary, legally Mandated, and Core Practices (best
practices)

The effective organizational practice of business

ethics
requires all three dimensions to be integrated into
ethics and compliance programs
This integration can create
an ethical culture that
effectively manages the
risks of misconduct.
Institutionalization of business behavior
relates to established laws, corporate
culture, and industry best practices in
establishing an ethical reputation

This means deviations from expected

conduct are often considered ethical issues
and are therefore a concern to stakeholders
Mandated boundaries are externally imposed levels of appropriate
conduct—such as laws, rules, and regulations

Antitrust and consumer protection laws, which create boundaries of

propriety that must be respected by companies

Failure to adhere to these laws results in civil and criminal penalties

Example, the Federal Trade Commission (FTC) launched a special task

force to monitor the U.S. tech market including businesses such as Google,
Amazon, Apple, and Facebook. With increasing current public concern
about data privacy, the tech industry has been under scrutiny because tech
companies collect the personal data of their users to better target advertising
to them. The task force will monitor anticompetitive behavior and take
enforcement actions if necessary.
Core Practices are documented best practices, often encouraged by
legal and regulatory forces as well as industry trade associations.

Better Business Bureau (BBB) is a leading self-regulatory body that provides

directions for managing customer disputes and reviews advertising cases. For
instance, the National Advertising Division (NAD), an investigatory division of the
BBB’s National Advertising Review Council, recommended that Huggies
revise its leakage protection claims for its Little Snugglers diapers to be more
specific as to not mislead consumers. Although Huggies is not legally mandated to
follow the decision, advertising perceived to be misleading could attract the
attention of the media and public interest groups if not corrected.
Core practices are appropriate and common practices that have industry
acceptance and meet societal expectations

No reporting or investigation is required by government regulatory bodies,

but there are incentives for the firms that effectively implement this

If misconduct occurs, firms may have opportunities to avoid serious

punishment if they operated in a proactive, responsible manner.
Another way of thinking about following core practices is
complying with norms.

Norms are behavioral expectations that are not legally

required, but there can be consequences for violating these
expectations.

Consider airlines, which are expected to provide a safe

environment for passengers. There is negative publicity
when a passenger is abused or has a poor experience.
Voluntary boundaries All businesses engage in some level of
commitment to voluntary activities to benefit both internal and external
stakeholders.

?
Organizations need to maintain an ethical culture and manage
stakeholder expectations for appropriate conduct.

They achieve these ends through corporate governance,

compliance, risk management, and voluntary activities.

The development of these drivers of an ethical culture has

been institutionally supported by government initiatives and
the demands of stakeholders.
These three elements
have different impacts
on behaviors.
Values are the fundamental beliefs or principles that guide the
behavior and decision-making of individuals and
organizations. They represent what is considered important
and desirable.

Norms are the accepted standards of behavior within a group

or society. They define how individuals within the group
should behave and what is considered appropriate or
inappropriate.
 Mandated
Requirements for Legal
Compliance
 Laws and regulations are established by governments to set minimum
standards for responsible behavior—society’s codification of what is right
and wrong.

Laws regulating business conduct are passed because some stakeholders

believe businesses cannot be trusted to do what is right in certain areas,
such as consumer safety and environmental protection.

Civil Laws (violation of agreement, patent) and Criminal Law (theft,

murder)

businesses often want to avoid lawsuits if possible because of the high

costs involved.
Opinions of society, as expressed in legislation, can change
over time, and different courts and state legislatures may take
diverging views. For example, the thrust of most business
legislations can be summed up as follows: Any practice is
permitted that does not substantially lessen or reduce
competition or harm consumers or society.
Courts differ, however, in their interpretations of what
constitutes a substantial reduction of competition. Laws can
help businesspeople determine what society believes at a
certain time, but what is legally wrong today may be perceived
as acceptable tomorrow, and vice versa.
 Laws are categorized as either civil or criminal.

Civil law defines the rights and duties of individuals

and organizations (including businesses).

Criminal law not only prohibits specific actions—such

as fraud, theft, or securities trading violations—but also
imposes fines or imprisonment as punishment for
breaking the law.
Businesses often want to avoid lawsuits if
possible because of the high costs involved
When violations of organizational standards occur, many
employees do not feel their company will stand by their policies.

It is therefore important for a company to have a functioning

ethics program in place long before an ethical or legal disaster
strikes
Most of the laws and regulations that govern business
activities fall into one of five groups:
(1) regulation of competition
(2) protection of consumers
(3) promotion of equity and safety
(4) protection of the natural environment
(5) incentives to encourage organizational compliance
programs to deter misconduct
Laws Regulating Competition
Small companies and even whole communities may resist the efforts of firms like
Walmart, Home Depot, and Dollar General to open stores in their vicinity. These firms’
sheer size enables them to operate at such low costs that small, local firms often cannot
compete.

Some companies’ competitive strategies may focus on weakening or destroying a

competitor that harms competition and ultimately reduces consumer choice. The
primary objective of U.S. antitrust laws is to distinguish competitive strategies that
enhance consumer welfare from those that reduce it.

More than 20 generic drug makers, including Teva Pharmaceuticals and Mylan
Pharmaceuticals, have been accused of colluding to increase prices to the detriment of
consumers.
 Intense competition also leads companies to resort to
corporate espionage. Corporate espionage is the act of illegally taking
information from a corporation—such as intellectual property,
customer information, and marketing plans—through computer
hacking, theft, intimidation, sorting through trash, and impersonation
of organizational members. According to the FBI, counterfeit goods,
pirated software, and theft of trade secrets alone cost the U.S.
economy $225–$600 billion each year. In one highly publicized case,
Anthony Levandowski was charged with trade secret theft when he
shared Google’s self-driving technology with Uber.
Determining an accurate amount for corporate espionage losses is difficult
because most companies do not report such losses for fear the publicity
will harm their stock price or encourage further break-ins.

Espionage may be carried out by outsiders or employees—executives,

programmers, network or computer auditors, engineers, or janitors who
have legitimate reasons to access facilities, data, computers, or networks.
They may use a variety of techniques for obtaining valuable information,
such as dumpster diving and hacking.
 Laws have been passed to prevent the establishment of monopolies,
inequitable pricing practices, and other practices that reduce or restrict
competition among businesses. These laws are sometimes called
procompetitive legislation because they were enacted to encourage
competition and prevent activities that restrain trade (Table 4–2). One
example is the Sherman Antitrust Act of 1890, which prohibits
organizations from holding monopolies in their industry, and the
Robinson–Patman Act of 1936 bans price discrimination between retailers
and wholesalers.
Laws Protecting Consumers
 The FTC sued YouTube for violating COPPA by collecting data on
children, resulting in a $170 million settlement and new privacy rules for
the popular video platform. Internet safety among children is another
major topic of concern. Research shows filtering and age verification are
not always effective in making the internet safer, and businesses,
regulators, and parents are trying to decipher how to better protect
children from dangers ranging from online predators to unethical video
content.
Laws Promoting Equity and Safety
The Sarbanes-Oxley
(SOX) Act
In 2002, largely in response to widespread corporate accounting
scandals, Congress passed the Sarbanes–Oxley Act to establish a
system of federal oversight of corporate accounting practices. In
addition to making fraudulent financial reporting a criminal
offense and strengthening penalties for corporate fraud, the law
requires corporations to establish codes of ethics for financial
reporting and develop greater transparency in financial reporting
to their investors and other stakeholders.

More details refer the book

 Dodd-Frank Wall
Street Reform and
Consumer Protection
Act
 The act contains 16 provisions that include increasing the
accountability and transparency of financial institutions, creating
a bureau to educate consumers in financial literacy and protect
them from deceptive financial practices, implementing additional
incentives for whistle-blowers, increasing oversight of the
financial industry, and regulating the use of complex derivatives.

More details refer the book

Laws that Encourage
Ethical Conduct
 The Sarbanes-Oxley Act (SOX), the Dodd-
Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act), and the
Federal Sentencing Guidelines for
Organizations (FSGO) are all significant
pieces of legislation in the United States that
address various aspects of corporate
governance, financial regulation, and ethical
behavior within organizations
Federal Sentencing
Guidelines for
Organizations
Congress passed the FSGO in 1991 to create
an incentive for organizations to develop and
implement programs designed to foster
ethical and legal compliance. These
guidelines, developed by the U.S. Sentencing
Commission, apply to all felonies and class A
misdemeanors committed by employees in
association with their work.
The commission delineated seven key criteria companies must implement
to establish an effective compliance program:

1. A firm must develop and disseminate effective compliance standards and procedures.
2. There must be oversight by high-ranking personnel in the organization who are known
to abide by the legal and ethical standards of the industry (such as an ethics officer).
3. No one with a known propensity to engage in misconduct should be put in a position
of authority.
4. A communications system (such as ethics training) must be in place to disseminate
standards and procedures to all levels of employees.
5. Organizational communications should include a way for employees to report misconduct
without fearing retaliation Monitoring and auditing systems designed to detect
misconduct are also required.
6. If misconduct is detected, the firm must take appropriate and fair disciplinary action.
7. After misconduct has been discovered, the organization must take steps to respond to
and prevent similar offenses in the future
Core or Best Practices
The focus of core or best practices is on integrity in developing structurally sound organizational
practices and integrity for financial and nonfinancial performance measures rather than on an
individual’s morals.

Voluntary Responsibilities
The most common way businesses demonstrate their voluntary responsibilities is through donations to
local and national charitable organizations.

Cause-Related Marketing
percentage of a product’s sales is donated to a cause that appeals to the target market.

Strategic Philanthropy
Tesla, which supports local high schools, universities, and nonprofits in its communities to address the
growing need for skilled labor in science, technology, engineering, and mathematics (STEM) jobs.
Social Entrepreneurship
Grameen Bank in Bangladesh. Founder Muhammad Yunus wanted to help alleviate poverty in
Bangladesh by offering individuals the chance to become entrepreneurs through small loans
 The Importance of
Institutionalization in
Business Ethics
 Those in charge of corporate governance should be
especially mindful of the institutions, including
mandated requirements for legal compliance as well as
core industry practices and voluntary actions that
support ethics and social responsibility. Voluntary
conduct, including strategic philanthropic activities, is
not required to run a business. The failure to understand
highly appropriate common practices, referred to as
core practices, provides the opportunity for unethical
conduct.