Business Ethics by S Lioukas Business Ethics principles

Business Ethics (by S. Lioukas) Business Ethics – principles and standards that determine acceptable conduct in business Exec who allegedly made $270 M off Enron to pay SEC $31. 5 M

The Role of Ethics in Business Unethical and/or Illegal • • Accounting fraud Deceptive advertising Unfair competitive practices Internet theft

Types and Incidences of Observed Misconduct Many business issues may seem straightforward and easy to resolve on the surface, but are in reality very complex. 2 -3

Individual: types of “bullying” behavior Abusive and intimidating behavior “Bullies” behavior: 2 -4

Sources of Unethical Behavior in Organizations Conflict of interest – – Advance personal interests over others’ interests – Benefit self at the expense of the company Bad “apples’ or bad “barrel”? 2 -5

Least Corrupt Countries 2 -6

C 7 -S 4 Sources of the Business Ethos BUSINESS ETHICS RELIGION CULTURE LAW PHILOSOPHY

Three Approaches to Ethics § § § Conventional Approach Principles Approach Ethical Tests Approach

The Conventional Approach Behavior or act that has been committed compared with Value judgments and perceptions of the observer Prevailing norms of acceptability

Three Major Principles § § § The Utilitarian Ethic The Rights Ethic Theory of Justice

Utilitarianism § Act so as to produce the greatest ratio of good/evil § Look at the costs and benefits of alternatives, sum them, and chose the option with the greatest benefit

Utilitarianism: Strengths & Weaknesses § What are the Strengths of Utilitarianism? – Clear, simple guideline § What are the Weaknesses of Utilitarianism? – Could justify suppression of human rights

Kant’s Categorical Imperatives § Provides Foundation for Duties, Moral Rights § Universality – Would I want everyone to behave according to that rule? § Reversibility – Would I want that rule to apply to me? § Treat individuals as autonomous ends, and so never solely as means. Respecting their autonomy to chose

Perspectives on Justice § The Basic Notion in Justice Theory is Fairness § Perspectives on the Meaning of Fairness – Egalitarianism - equality – Socialism - need – Capitalism - effort, merit, contribution – Libertarianism - free choice, contracts § Which Perspective is Dominant in Society?

Three(+1) Spheres of Justice 1. DISTRIBUTIVE JUSTICE Refers to distribution of benefits and burdens Discrimination only for fair, relevant reasons Rewards proportionate to efforts and achievements 2. RETRIBUTIVE JUSTICE Applies to punishment of wrongdoing Blame fairly imposed Punishment proportional to crime 3. COMPENSATORY JUSTICE Covers compensation for injury Compensation should be adequate 4. PROCEDURAL JUSTICE rules of representation, legislative, regulatory rule making Grievance, hiring, firing, performance review, etc. procedures

A principle centered approach to ethical problems Step 1 Ask Utility Do benefits exceed costs? Yes No Rights Are human rights respected? Yes No Justice Are benefits and costs fairly distributed? Yes No

Step 2 Compare results If yes is the answer to all three questions, it is probably ethical If no is the answer to all three questions, it is probably unethical If the answers are mixed, it could be either ethical or unethical

Step 3 Assign priorities to Utility Rights Justice

Ethical Tests Approach § Focus - A simple, practical heuristic (rule of thumb) that can guide decision making § Examples – Test of common sense (The Intuition Ethic) – Test of one’s best self – NY Times Test (making something public) § (The Disclosure Rule) – Test of ventilation (reaction by others) – Test of the purified idea (OK’d by authority) – Gag Test

International aspect of ethics § “Man is the measure of all things” Protagoras (490 -420 BC) § Man = Each individual man (human), Plato’s interpretation § Man = Society, different societies different ethics § Man = Humanity § Plato’s approach: Ethics are independent of humanity

Donaldson (1996) § Respect for core human values, which determine the absolute moral threshold for all business activities. § Respect for local traditions. § Context matters when deciding what is right and what is wrong.

The Dilemma of the Multinational Corporation Home Country Stakeholder Pressures The Multinational Corp. Host Country Stakeholder Pressures

Ethical Choices in Home vs. Host Country Situations International Law Global Codes of Conduct ETHICAL IMPERIALISM Home Country • Ethical/moral standards of home country CULTURAL RELATIVSM Broad Middle Ground Mix of Home and Host Country Standards Application of Ethical Principles (see notes) Host Country • Ethical/moral standards of host country

Corporate Corruption Why do managers act in unethical ways? Or What are the sources of corporate corruption?

The Arthur Andersen Story: Founding § In 1913, in Chicago, a new accounting firm was founded by two young CPAs. § On December 1, 1913, Arthur E. Andersen (a 28 year old of Norwegian descent) and Clarence M. De. Lany founded the company Andersen, De. Lany & Co. § In an environment where accounting was not synonymous to honesty, the firm stood out for its integrity. § Arthur Andersen’s motto was "Think straight, talk straight. "

The AA story: the railway company incident § Andersen notices that the railway company was not properly accounting for its maintenance charges, which should have been part of its operating expenses. § He informed the company, but received no response. § Then he informed the company’s president that he would mention this in his report if the errors were not corrected. § Furious, the president of the railway company came to Andersen’s office to confront him. § “There’s not enough money in the city of Chicago to induce me to change that report!” § Andersen lost the business. § One month later the railway company went bankrupt.

The AA story: Andersen’s and Spacek’s legacy § § § § Andersen (1913 – 1947), Spacek (1947 – 1973) Honesty and Professionalism Reputation for sticking to principle at the expense of losing customers The AA way was focused on training so that all AA auditors would take the same approach in dealing with a particular problem AA established a training centre in St. Charles, Illinois and spent millions over the years to train its people. In 2000, the St. Charles centre had a permanent staff of 500. AA always led the industry in developing new standards and procedures AA was not afraid to take on all the other auditing firms and some industries (Railways, Savings & Loans).

Are we talking about the same company here?

The More Recent AA story § Poor Ethical leadership after Spacek § Enter consulting – different business with MUCH higher fees § Charging $ 150, 000 for a cd § Culture deterioration – the biggest sin became to loose a customer! § AA had quite a few similar problems before Enron

“…Usually, unethical or illegal behaviour happens when descent people are put under unbearable pressure to do their jobs and meet ambitious goals without the resources to get the job done right” (B. Toffler, 2003)

Enron put itself in a similar situation “This was Enron’s dirty little secret: a company built around trading and deal making cannot possibly count on steadily increasing earnings. . . As one former Enron managing director says, ‘A business that had stable and predictable earnings that’s primarily engaged in the trading of commodities is a contradiction in terms. ” (Mc. Lean and Elkind, 2003: 126)

Motive and Opportunity § Very difficult to achieve desired results without ‘cheating’ § Inadequate Control Mechanisms § But this is not the whole story…

Trust Violators and their Rationalizations § One trust violator from the ones described by Cressey (1953) ‘borrowed’ thousands of dollars from the bank he was working for. § But was keeping track of exactly how much he had ‘borrowed’ on the back of the envelope where he kept the title papers of an apartment he owned which he was planning to sell in order to return the money to the bank. § So when he was caught, in his mind it was not fraud, just bad timing.

Types of Rationalizations 1. 2. 3. 4. 5. “| was just following orders” “Nobody got hurt” “They deserved it” “After what they did, this is nothing” “I did it for the good of the company”

Types of Rationalizations Sykes and Matza (1957) Ashforth and Anand (2003) 1. Denial of responsibility: The delinquent defines ‘himself as lacking responsibility for his deviant actions. ’ (1957: 667) 1. Legality: Actors may argue that acts are not actually illegal 2. Denial of injury: The delinquent can argue that he/she did not really hurt anybody. 3. Denial of injury … 3. Denial of the victim: The delinquent argues that the victims were not really victims but deserved what they got. 4. Condemnation of the condemners: The delinquent argues that his condemners are blaming him for inappropriate reasons, they are hypocrites. 5. Appeal to higher loyalties: The delinquent argues that he had to break some rules for the greater good. 2. Denial of responsibility … 4. Denial of the victim … 5. Social Weighing: a broader version of the ‘condemnation of the condemners, ’ the main idea is “we are not so bad. ” 6. Appeal to higher loyalties … 7. Metaphor of the Ledger: here past good works are see as having earned credit that counterbalances current minor offences. 8. Refocusing Attention: coping through the shifting of attention away from the so-called ‘dirty work. ’

Facilitating Factors 1. Ethical Distance (too far to know who is hurt) 2. Organizational Complexity (can facilitate rationalizations and increase ethical distance) 3. Shifting Baseline (loss of perception of change with time) 4. Social Pressure (pressures from friends, colleagues, bosses…) 5. Escalating Commitment

Shifting Base Line Level of morality What the actor can see Acceptable Change time

Escalation of Commitment “There are many instances in which individuals can become locked into a costly course of action. Because it is often possible for persons who have suffered a setback to recoup their losses through an even greater commitment of resources to the same course of action, a cycle of escalating commitment can be produced. ” (Staw, 1981: 577) § § Vietnam Enron 1 st World War …

MORE § § § Motive Opportunity Rationalization ↓ § Escalation of Corruption

Escalation of Corruption

Regulations Laws and regulations encourage businesses to conform to society’s standards, values, and attitudes. Sarbanes-Oxley Act - 2002 2 -42

Improving Ethical Behavior in Business Codes of Ethics – Formalized rules and standards that describe what a company expects of its employees. 2 -43

Codes of Ethics National Business Ethics Survey (NBES) According to the NBES, employees in organizations with written standards of conduct are more likely to report misconduct when they observe it. 2 -44

Codes of Ethics Whistleblowing The act of an employee exposing an employer’s wrongdoing to outsiders, such as the media or government regulatory agencies. 2 -45

Application to your company Given our previous discussion about MORE, can you apply what we discussed above to your own work situations. More specifically, please (1) Identify the Motives and Opportunities that might lead one to unethical behaviour. (2) Identify the possible Rationalizations that he/she might use. (3) Come up with any measures that you think might prevent the above from occurring and leading to escalation of unethical/corrupt behaviour.