Chapter 4 The Institutionalization of Business Ethics
Measure and disclose financial information, with an assurance of accuracy, to the public. They provide information to managers, investors, tax authorities, and other stakeholders who make resource allocation decisions for corporations. Accountants have their own set of rules. One is that if there is a choice between equally acceptable accounting methods, they should use the one least likely to overstate or misdirect.
Those that focus on weakening or destroying a competitor have spurred antitrust legistration
The primary objectives of U.S. antitrust laws is to protect employees.
Better Business Bureau
A leading self-regulatory body that provides directions for managing customer disputes and reviews advertising cases.
Ties an organization’s products directly to a social concern through a marketing program. Cause related marketing can affect consumer buying patterns, if consumers are sympathetic to the cause and the brand and cause are seen as a good fit.
Defines the rights and duties of individuals and organizations, including businesses.
Compliance Programs for Due Diligence
Steps that the U.S. Sentencing Commission requires for an effective compliance program include: developing a code of conduct, providing oversight by high-ranking personnel, creating a communication system for disseminating standards and procedures, and monitoring and auditing systems designed to detect misconduct.
Consumer Financial Protection Bureau
Established after the latest financial crisis, in response to a situation that caused many consumers to lose their homes. The Consumer Financial Protection Bureau is an independent agency within the federal Reserve System that “regulates the offering and provision of consumer financial products or services under the Federal consumer financial laws.”
Documented best practices, often encouraged by legal and regulatory forces as well as industry trade associations. Core practices focus on developing sound organizational practices and integrity for financial and nonfinancial performance measures, rather than on an individual’s morals.
Not only prohibits specific actions in business such as fraud, theft, or securities trading violations, but also imposes fines or imprisonment as punishment for breaking the law.
Differences Between Civil and Criminal Law
The primary difference between criminal and civil law is the state or nation enforces criminal laws, whereas individuals (generally, in court) enforce civil laws. 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 (statutory law), and federal and state administrative agencies (administrative law).
Dodd-Frank Wall Street Reform and Consumer Protection Act
The new law seeks to improve financial regulation, increase oversight of the industry, and prevent the types of risk-taking, deceptive practices, and lack of oversight that led to the 2008 financial crisis. It was called “a sweeping overhaul of the financial regulatory system…on a scale not seen since the reforms that followed the Great Depression.” Provisions of this act 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; creating additional incentives for whistle-blowers to come forward; and increasing oversight of the financial industry.
An ethical organizational culture creates an environment in which to structure behavior that is then evaluated by stakeholders. The key elements of an organizational culture include values, norms, artifacts, and legal compliance.
Federal Sentencing Guidelines for Organizations
Passed by Congress in 1991, these guidelines created incentives for organizations to develop and implement ethical compliance programs. The Federal Sentencing Guidelines for Organizations and the Sarbanes-Oxley Act provide incentives for developing core practices within a firm that could help ensure ethical and legal compliance.
Financial Stability Oversight Council (FSOC)
Responsible for maintaing the stability of the financial system in the U.S. through monitoring the market, identifying threats, promoting market discipline among the public, and responding to major risks that threaten stability. The FSOC has the authority to limit or closely supervise financial risks, create stricter standards for banking and nonbanking financial institutions, and disband financial institutions that present a serious risk to market stability . (Current voting members all belong to the democratic party.)
Food and Drug Administration (FDA)
Regulates tobacco, dietary supplements, vaccines, veterinary drugs, medical devices, cosmetics, products that give off radiation, and biological products.
Forces of the Business Environment
The competitive dimension force of the business environment involves the rivalry among businesses for customers and profits.
Four Sources of Criminal and Civil Law
Common Law, Constitutional Law, Administrative Law, Statutory Law
Include accountants, who are essential to certifying the accuracy of financial information, as well as lawyers, financial rating agencies, and even financial reporting services. These groups are critical in providing information allowing stakeholders to gain an understanding of the the financial position of an organization. Most of these gatekeepers operate with professional codes of ethics and face legal consequences, or even disbarment, if they fail to operate within agreed-upon principles of conduct.
Global Financial Meltdown
Part of the reason why credit ratings firms did not catch major problems prior to the global financial meltdown of 2008 was because they were paid by the firms that they rank which creates a conflict of interest. Investigations into the financial rating industry after the financial meltdown of 2008 found that: analysts cut corners when faced with less time to perform due diligence; analysts’ ratings were inaccurate; many high ratings were based on inadequate historical data; and analysts were overwhelmed with the volume and complexity of trades. Perhaps the biggest complaint is in spite of the Sarbanes-Oxley Act, financial executives discovered new loopholes that allowed them to engage in the misconduct that contributed to the global financial crisis.
Involves embedding values, norms, and artifacts in organizations, industries, and society. Reasons why the institutionalization of business ethics has progressed in recent decades includes; stake holders have recognized the need for improving business ethics; the government has stepped in when scandals and misconduct have damaged key constituents of businesses; gatekeepers have been questioned as to their contributions in major scandals; and highly ethical companies tend to be more profitable than those suffering from misconduct issues.
Institutionalization of Social Responsibility
Includes voluntary practices, legal responsibilities, core practices, and strategic philanthropy.
Laws and Regulations
Laws and regulations change over time; however, in the United States the thrust of most business legislation can be summed up as any practice is permitted that does not substantially reduce competition and harm consumers or society.
Externally imposed boundaries of conduct, such as laws, rules, regulations, and other requirements. Antitrust and consumer protection laws create boundaries that must be respected by companies.
McCarran-Ferguson Act of 1944
This act exempted the insurance industry from antitrust legislation. Congress exempted the insurance industry from the Sherman Antitrust Act and other antitrust laws. Insurance companies joined together to set insurance premiums at specific industry-wide levels.
Companies that establish monopolies will most likely be found in violation of procompetitive legislation. ESPN, Google, and Monsanto are monopolies in the U.S.
Occupational Safety and Health Administration (OSHA)
Mandates employers provide safe and healthy working conditions for all workers. OSHA makes regular surprise inspections to ensure businesses maintain safe working environments.
Giving back to communities and causes.
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 pro-competitive legislation because they were enacted to encourage competition and prevent activities that restrain trade.
Public Company Accounting Oversight Board
The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board to oversee the accounting firms that audit public corporations and to establish rules and standards for auditing. They monitor accounting firms auditing public corporations and establishing standards and rules for auditors in accounting firms. The law gave the board investigatory and disciplinary power over auditors and securities analysts who issue reports about corporate performance and health.
Pure Food and Drug Act of 1906
This act was passed in response to public outrage over conditions described in Upton Sinclair’s The Jungle, and was the first consumer protection legislation. The first consumer protection law was passed in 1906, partly in response to this novel. The Jungle describes, among other things, the atrocities and unsanitary conditions of the meatpacking industry in turn-of-the-century Chicago.
Robinson-Patman Act of 1936
Bans price discrimination between retailers and wholesalers.
Provisions include: strengthens penalties for corporate fraud; requires codes of ethics for financial reporting in corporations; makes fraudulent financial reporting a criminal offense; and requires greater transparency in financial reporting. By prohibiting accounting firms from providing both auditing and consulting services to the same corporate clients without permission, this act attempts to eliminate conflicts of interest. Some, especially those in business, complain that the Sarbanes-Oxley Act and similar legislation is excessively complex and financially burdensome. The Federal Sentencing Guidelines for Organizations and the Sarbanes-Oxley Act provide incentives for developing core practices within a firm that could help ensure ethical and legal compliance.
Sherman Antitrust Act of 1890
Can be classified as procompetitive legeslation. This act prohibits organizations from holding monopolies in their industry.
Special Legal Protections
Groups that receive special legal protections include: the elderly, children, senior citizens, and young consumers.
The synergistic and mutually beneficial use of an organization’s core competencies and resources to deal with key stakeholders so as to bring about organizational and societal benefits.
Title VII of the Civil right Act of 1964
Prohibits discrimination on the basis of race, color, sex, religion, or national origin.
The “glue” that holds businesses and their stakeholders together. Trust creates confidence and helps to forge relationships of reliance between businesses and stakeholders. Trust also allows businesses to depend upon one another as they make transactions or exchange value.
Include the beliefs, values, and voluntary contractual obligations of a business.
Relate to a business’s contributions to stakeholders. Donation of computer equipment to schools by companies such as Toshiba is associated with voluntary responsibilities. Benefits of engaging in voluntary responsibilities include: helping to create an ethical culture and values that can act as a buffer to organizational misconduct; reducing government involvement by providing assistance to stakeholders; developing employee leadership skills; and improving the quality of life in communities.
Are granted protection that prohibits the employer from taking certain actions against those who lawfully disclose private employer information to parties in a judicial proceeding involving a fraud claim and also provides a remedy of special damages and attorneys’ fees.