Ethics Corporate Culture and Business Decisions Lawrence Kalbers

Ethics, Corporate Culture, and Business Decisions Lawrence Kalbers, Ph. D. , CPA (NY, OH) R. Chad Dreier Chair in Accounting Ethics Director, Center for Accounting Ethics, Governance, and the Public Interest Loyola Marymount University lawrence. kalbers@lmu. edu March 22, 2013

Overview • Ethical approaches • Why are unethical or “bad” decisions made by organizations and individuals? • Why is corporate culture important? • Why do people “cheat”? • Using an ethical decision making model • Improving organizational ethics and decisions • Q&A

Definition of Ethics is “that branch of philosophy dealing with values relating to human conduct, with respect to the rightness and wrongness of certain actions and to the goodness and badness of the motives and ends of such actions. ” Source: http: //dictionary. reference. com/browse/ethics

Ethics • Personal • Professional (IIA, AICPA, IFAC, etc. ) • Organizational (codes, values)

Major Ethical Approaches • Egoism • Teleology: Utilitarianism & Consquentialism • Deontological: Duties/Motivation for Behavior • Justice & Fairness • Virtue Ethics

AACSB Summary of Ethical Frameworks • The consequentialist approach requires students to analyze a decision in terms of the harms and benefits to multiple stakeholders and to arrive at a decision that produces the greatest good for the greatest number. • A deontological approach raises issues related to duties, rights, and justice considerations and teaches students to use moral standards, principles, and rules as a guide to making the best ethical decision. • Virtue ethics focuses on the character or integrity of the moral actor and looks to moral communities, such as professional communities, to help identify ethical issues and guide ethical action. Source: AACSB International, Ethics Education in Business Schools, p. 12 http: //www. aacsb. edu/resource%5 Fcenters/Ethics. Edu-in-B-Schools. pdf

Accidents or Corporate Culture?

The Ford Pinto Case “When it was discovered the gas tank was unsafe, did anyone go to Iacocca and tell him? “Hell, no, ” replied an engineer who worked on the Pinto, a high company official for many years, who, unlike several others at Ford, maintains a necessarily clandestine concern for safety. “That person would have been fired. Safety wasn’t a popular subject around Ford in those days. With Lee it was taboo. Whenever a problem was raised that meant a delay on the Pinto, Lee would chomp on his cigar, look out the window and say ‘Read the product objectives and get back to work. ’”…Iacocca was fond of saying, “Safety doesn’t sell. ”” Source: Douglas Birsch and John H. Fielder, The Ford Pinto Case (quoted in Blind Spots, by Max H. Bazerman and Ann E. Tenbrunsel).

Corporate Responsibility? Responsible We are committed to the safety and development of our people and the communities and societies in which we operate. We aim for no accidents, no harm to people and no damage to the environment.

Mergers and Acquisitions 1978 2000 1988 2000 1998

BP Executives Lord John Browne Tony Hayward Robert Dudley

Texas City Explosion BP Texas City refinery exploded in 2005 killing 15 and injuring 170 http: //symonsez. wordpress. com/2010/05/11/bp-safety-record-wont-help-in-court-of-publicopinion/

Thunderhorse Rig 2005, Hurricane Dennis

Prudhoe Bay Spill March 2006

Obama Announces New Policy: March 31, 2010

Deepwater Horizon Oil Spill: April 20, 2010 BP's Deepwater Horizon oil well explosion last year killed 11 workers and caused the biggest offshore spill in US history. Photograph: Reuters http: //www. guardian. co. uk/environment/2011/apr/20/deepwater-horizon-key-questions-answered

T-Shirts

Corporate Stakeholder Accountability Shareholders Activists Governments Creditors Lenders Employees Corporation Customers Suppliers Others, including the Media, who can be affected by or who can affect the achievement of the corporation’s objectives Source: Leonard J. Brooks, Business & Professional Ethics, 4 th Edition

Determinants of Reputation Credibility Reliability Corporate Reputation Trustworthiness Responsibility Fombrun, p. 72 Source: Leonard J. Brooks, Business & Professional Ethics, 4 th Edition

Reasons for unethical or bad decisions • • • Culture, values, norms, and socialization Assigning responsibility Rationalization Self-deception Organizational deviance

Society and Organizations • • Culture Values Norms Socialization

Organizational Responsibility A corporation is to be held responsible for harmful conduct perpetrated by one of its employees • if the employee was acting under a general grant of authority provided to him or her and • if no measures were taken to prevent the harm, though such measures could have been taken and the harm could have been reasonably predicted. Source: Joshua Margolis, 2001, Responsibility in Organizational Context, Business Ethics Quarterly, 11(3), pp. 431 -454.

Personal Responsibility Organizational actors must • investigate the projects they are working on and what others are doing with the outputs of their work; • communicate doubts and concerns; • protect those with less power from adverse consequences of investigation and communication; • establish structures and mechanisms that prevent wrongdoing; • take precautions not to get involved in questionable organizations to begin with. Source: Joshua Margolis, 2001, Responsibility in Organizational Context, Business Ethics Quarterly, 11(3), pp. 431 -454.

Why Do We Cheat? • Dan Ariely, behavorial economist • Experiment on cheating (at MIT, Carnegie Mellon) • Paying people to solve math problems – A lot of people cheated a little bit – Outcome was insensitive to the amount of money and the probability of being caught – Personal “fudge factor” – Ten commandments/honor code – Paid in tokens instead of money, then exchanged – Acting student openly cheated (sweatshirt-norms)

Human Dignity • The Golden Rule • "Always recognize that human individuals are ends, and do not use them as means to your end. ” (Immanuel Kant) • “All human beings are born free and equal in dignity and rights. They are endowed with reason and conscience and should act towards one another in a spirit of brotherhood. ” (Article 1, The Universal Declaration of Human Rights, 1948)

The Fraud Triangle Pressure/Need Opportunity Rationalization

Rationalization Tactics • • • Legality* Denial of responsibility* Denial of injury* Denial of victim* Social weighting* • • Appeal to higher loyalties* Balancing the ledger* Everyone else is doing it** Entitlement** *Source: Blake Ashforth and Vikas Anand, “The Normalization of Corruption in Organizations, ” Research in Organizational Behavior, 2003, Vol. 25: 1 -52. **Source: Joseph Heath, “Business Ethics and Moral Motivation: A Criminological Perspective, ” Journal of Business Ethics, 2008, Vol. 83: 595 -614.

“Ethical Fading”: The Role of Self-Deception Avoiding or disguising moral implications of a decision in favor of self-interest • Language euphemisms • The slippery slope – “Numbing” through repetition • Errors in perceptual causation – Individuals, systems Source : A. Tenbrunsel and D. Messick, “Ethical Fading: The Role of Self-Deception in Unethical Behavior, ” Social Justice Research, 2004, Vol. 17, No. 2: 223 -236.

Organizational Deviance/Routine Nonconformity The system responsible for the production of routine nonconformity includes: • the environment of organizations, • organization characteristics (structure, processes, tasks), and • the cognitive practices of individuals within them. Source: Diane Vaughan. The Dark Side of Organizations: Mistake, Misconduct, and Disaster. Annual Review of Sociology, Vol. 25 (1999), pp. 274.

Simple Approaches to Ethical Decisions • • The sniff test The gut test The momma test The Wall Street Journal test

Laura Nash’s 12 Questions • • • Have you defined the problem accurately? How would you define the problem if you stood on the other side of the fence? How did this situation occur in the first place? To whom and what do you give your loyalties as a person and as a member of the corporation? What is your intention in making this decision? How does this intention compare with the likely results? Whom could your decision or action injure? Can you engage the affected parties in a discussion of the problem before you make your decision? Are you confident that your position will be as valid over a long period of time as it seems now? Could you disclose without qualm your decision or action to your boss, your CEO, the board of directors, your family, or society as a whole? What is the symbolic potential of your action if understood? If misunderstood? Under what circumstances would you allow exceptions to your stand? Source: Laura L. Nash, Ethics without the sermon, Harvard Business Review, November-December, 1981, pp. 78 -90.

Keeping Your Colleagues Honest • Many Excuses for Silence – – It’s standard practice It’s not a big deal It’s not my responsibility I want to be loyal • Confronting the Problem – – – Treat the conflict as a business matter Recognize that this is part of your job Be yourself Challenge the rationalizations Turn newbie into an asset Expose faculty either/or thinking Source: Mary C. Gentile, Keeping Your Colleagues Honest, Harvard Business Review, March 2010, pp. 114 -117.

The Moral Person and Moral Manager Moral Person Moral Manager Traits Role Model Behaviors Rewards and Discipline Decision-Making Communicating About Ethics and Values Source: Trevino, L. K. , L. P. Hartman, and M. Brown. Moral Person and Moral Manager: How Executives Develop a Reputation for Ethical Leadership. California Management Review, Summer 2000, Vol. 42, Issue 4: pp. 128 -142.

Applied Ethical Decision Model • Recognize an Ethical Issue Consultation/ Collaboration • Get the Facts • Evaluate Alternative Actions – Consider and prioritize: • Professional principles and standards • Consequences (stakeholder analysis) • Personal and organizational values • Make a Decision and Test It • Act and Reflect on the Outcome Give Voice To Values Adapted from an ethical decision model developed by the Markkula Center for Applied Ethics: http: //www. scu. edu/ethics/practicing/decision/making. pdf.

Potential Applied Ethical Approaches • Professional Principles and Standards (Deontological) – – – – Accounting principles Auditing standards Tax laws Professional and regulatory codes and rules of conduct Fiduciary responsibilities Legal responsibilities Organizational rules and procedures Other relevant standards of practice, codes, or rules • Consequences (Consequentialism) – Stakeholders and their interests • Personal and organizational virtues/values (Virtue Ethics) – – – Integrity Responsibility Commitment Objectivity Courage Etc.

IPPF IIA Code of Ethics • Principles and Rules – Integrity – Objectivity – Confidentiality – Competency

Integrity and Trust • For an individual we distinguish integrity as a matter of that person’s word being whole and complete. In that context, we define integrity for an individual, group, or organization as: honoring one’s word. • Oversimplifying somewhat, “honoring your word”, as we define it, means you either keep your word, or as soon as you know that you will not, you say that you will not be keeping your word to those who were counting on your word and clean up any mess you caused by not keeping your word. By “keeping your word” we mean doing what you said you would do and by the time you said you would do it. Source: Erhard, Jensen, and Zaffron. 2009. Integrity: A Positive Model That Incorporates The Normative Phenomena of Morality, Ethics, and Legality. Working Paper.

Stakeholder Analysis Stakeholders: Now you are at a stage to identify the interested parties (i. e. , stakeholders) based on the compiled facts and alternatives. • Who is affected by our decision or any of the alternatives? • What are their relationships, their priorities to me, and what is their power over my decision? • Who has a stake in the outcome? • Do not limit your inquiry only to those stakeholders to whom you believe you owe a duty; sometimes a duty arises as a result of the impact. For instance, you might not necessarily first consider your competitors as stakeholders; however, once you understand the impact of your decision on those competitors, an ethical duty may arise. Source: Laura P. Hartman, Perspectives in Business Ethics, Third Edition, Mc. Graw-Hill Irwin, New York, 2005.

Consultation/Collaboration • In applying the ethical decision model, DON’T GO IT ALONE! • Find others to get their feedback (consultation) • Work with others toward a solution (collaboration)

Giving Voice to Values (GVV) • Seven Pillars of GVV Curriculum – Acknowledging shared values – Choosing to act – Normalizing values conflicts – Defining professional purpose – Understanding the self – Using one’s voice – Preparing responses (“scripts”) Source: Mary C. Gentile, Voicing Values, Finding Answers, Biz. Ed, July/August 2008, pp. 40 -45.

Improving Organizational Ethics and Decisions • • • Mission Tone at the top Leadership (at all levels) Culture, shared values, shared responsibilities Appreciation of cultural differences Policies and procedures Ethical decision models, including consultation/ collaboration Risk assessment, including ethics/reputational risk Proper reward structure Training and reinforcement Hiring and retention practices

Questions?