Integrity tests indirectly estimate employee honesty by measuring psychological traits.

Chapter 3

Ethics and Social Responsibility

© 2016 Cengage Learning

What Would You Do?

American Express (New York, New York)

On what basis should the company decide whether to hire smokers? Should the decision be based on what’s in the best interest of the firm, what the law allows, or what affirms and respects individual rights?

Is this an issue of ethics or social responsibility? Is refusing to hire smokers a form of discrimination?

© 2016 Cengage Learning

*

American Express Headquarters, New York, New York

With medical costs rising 10 to 15 percent per year, one of the members of your Board of Directors at American Express mentioned that some companies are now refusing to hire smokers and that the board should discuss this option at the next month’s meeting. Nationwide, about 6,000 companies refuse to hire smokers. Weyco, an employee benefits company in Okemos, Michigan, requires all applicants to take a nicotine test. Weyco’s CFO says, “We’re not saying people can’t smoke. We’re just saying they can’t smoke and work here. As an employee-benefits company, we need to take a leadership role in helping people understand the cost impact of smoking.” The Cleveland Clinic, one of the top hospitals in the United States, doesn’t hire smokers. Paul Terpeluk, the director of corporate and employee health, says that all applicants are tested for nicotine and that 250 people have lost job opportunities because they smoke. The Massachusetts Hospital Association also refuses to hire smokers. The company’s CEO says, “Smoking is a personal choice, and as an employer I have a personal choice within the law about who we hire and who we don’t.”

As indicated by your board member, costs are driving the trend not to hire smokers. According to the U.S. Centers for Disease Control, a smoker costs about $4,000 more a year to employ because of increased health-care costs and lost productivity. Breaking that down, a smoker will have 50 percent higher absenteeism, and, when present, will work 39 fewer minutes per day because of smoke breaks, which leads to 162.5 lost hours of annual productivity. A smoker will have higher accident rates, cause $1,000 a year in property damage (from cigarette burns and smoke damage), and will cost up to $5,000 more a year for annual insurance premiums.

Although few would disagree about the costs, others argue it is wrong not to hire smokers. Jay Whitehead, publisher of a magazine for human resources managers, says, “There is discrimination at many companies—and maybe even most companies—against people who smoke.” Even if applicants aren’t asked whether they smoke, it “doesn’t mean that hiring managers turn off their sense of smell.” Paul Sherer, a smoker who was fired less than a week after taking a new job, says, “Not hiring smokers affects millions of people and puts them in the same category as women able to bear children, that is, people who contribute to higher health-care costs. It’s unfair.” Law professor Don Garner believes that not hiring smokers is “an overreaction on the part of employers whose interest is cutting costs. If someone has the ability to do the job, he should get it. What you do in your home is your own business. . . . Not hiring smokers is ‘respiratory apartheid.’”

Well, with the meeting just a month away, you’ve got to prepare for questions from the Board of Directors. For example, on what basis should the company decide whether to hire smokers? Should the decision be based on what’s in the best interest of the firm, what the law allows, or what affirms and respects individual rights? The Board is interested in making good decisions for the company, but “doing the right thing” is also one of its core values. Is this an issue of ethics or social responsibility? Is refusing to hire smokers is a form of discrimination?

The dilemma facing American Express is an example of the tough decisions involving ethics and social responsibility that managers face. Unfortunately, no matter what you decide to do, someone or some group will be unhappy with the outcome. Managers don’t have the luxury of choosing theoretically optimal, win–win solutions that are obviously desirable to everyone involved. In practice, solutions to ethics and social responsibility problems aren’t optimal. Often, managers must be satisfied with a solution that just makes do or does the least harm. Rights and wrongs are rarely crystal clear to managers charged with doing the right thing. The business world is much messier than that.

If you were in charge at American Express, what would you do?

Ethics

The set of moral principles or values that defines right and wrong for a person or group.

© 2016 Cengage Learning

3-1

Ethics and Management

Ethical behavior follows accepted principles of right and wrong.

Managers must be careful of…

authority and power.

handling information.

influencing the behavior of others.

the goals they set.

© 2016 Cengage Learning

3-1

*

Areas of unethical behavior are: authority and power, handling information, influencing the behavior of others, and setting goals.

Unethical management behavior occurs when managers personally violate accepted principles of right and wrong. The authority and power inherent in some management positions can tempt managers to engage in unethical practices. Since managers often control company resources, there is a risk that some managers will cross the line from legitimate use of company resources to personal use of those resources. For example, some managers have used corporate funds to pay for extravagant personal parties, lavish home decorating, jewelry, or expensive pieces of art.

Handling information is another area in which managers must be careful to behave ethically. Information is a key part of management work. Managers collect it, analyze it, act on it, and disseminate it. However, they are also expected to deal in truthful information and, when necessary, to keep confidential information confidential. Leaking company secrets to competitors, "doctoring" the numbers, wrongfully withholding information, or lying are some possible misuses of the information entrusted to managers.

A third area in which managers must be careful to engage in ethical behavior is the way in which they influence the behavior of others, especially those they supervise. Managerial work gives managers significant power to influence others. If managers tell employees to perform unethical acts (or face punishment), such as “faking the numbers” to get results, then they are abusing their managerial power. This is sometimes called the “move it or lose it” syndrome. “Move it or lose it” managers tell employees, “Do it. You’re paid to do it. If you can’t do it, we’ll find somebody who can.”

Setting goals is another way that managers influence the behavior of their employees. If managers set unrealistic goals, the pressure to perform and to achieve these goals can influence employees to engage in unethical business behaviors.

U.S. Sentencing Commission Guidelines for Organizations

It is important to know:

to whom the guidelines apply and what they cover.

how an organization can be punished for the unethical behavior of managers and employees.

3-2

© 2016 Cengage Learning

U.S. Sentencing Commission

Guidelines for Organizations

Companies can be prosecuted and punished even if management didn’t know about the unethical behavior.

3-2

© 2016 Cengage Learning

*

Historically, if management was unaware of such activities, the company could not be held responsible for an employee’s unethical acts. However, under the 1991 U.S. Sentencing Commission Guidelines, companies can be prosecuted and punished even if management didn’t know about the unethical behavior. Moreover, penalties can be substantial, with maximum fines approaching $300 million dollars!

Who, What, and Why?

Nearly all business are covered by the U.S. Sentencing Commission’s guidelines.

The purpose of the guidelines is to punish companies after they break the law and discourage crime before it happens.

3-2

© 2016 Cengage Learning

*

Nearly all businesses, nonprofits, partnerships, labor unions, unincorporated organizations and associations, incorporated organizations, and even pension funds, trusts, and joint stock companies are covered by the guidelines. If your organization can be characterized as a business (remember, nonprofits count, too), then it is subject to the guidelines.

The guidelines cover offenses such as invasion of privacy, price fixing, fraud, customs violations, antitrust violations, civil rights violations, theft, money laundering, conflicts of interest, embezzlement, dealing in stolen goods, copyright infringements, extortion, and more. However, it’s not enough to stay “within the law.” The purpose of the guidelines is not just to punish companies after they or their employees break the law. The purpose is to encourage companies to take proactive steps that will discourage or prevent white-collar crime before it happens. The guidelines also give companies an incentive to cooperate with and disclose illegal activities to federal authorities.

Determining the Punishment

Stick: the threat of heavy fines.

Carrot: reduced fine if the company has an effective compliance program.

3-2

© 2016 Cengage Learning

The guidelines impose smaller fines on companies that take proactive steps to encourage ethical behavior or voluntarily disclose illegal activities to federal authorities. Essentially, the law uses a “carrot-and-stick” approach. The stick is the threat of heavy fines that can total millions of dollars. The carrot is greatly reduced fines, but only if the company has started an effective compliance program to encourage ethical behavior before the illegal activity occurs.

*

Determining the Punishment

The process takes several steps:

Compute the base fine by determining level of offense

Compute culpability score

Total fine = base fine x culpability score.

3-2

© 2016 Cengage Learning

The first step is computing the base fine by determining what level of offense has occurred. The level of the offense (i.e., the seriousness of the problem) is figured by examining the kind of crime, the loss incurred by the victims, and how much planning went into the crime.

After assessing a base fine, the judge computes a culpability score, which is a way of assigning blame to the company. Higher culpability scores suggest greater corporate responsibility in conducting, encouraging, or sanctioning illegal or unethical activity. The culpability score is a number ranging from a minimum of 0.05 to a maximum of 4.0.

The culpability score is critical, because the total fine is computed by multiplying the base fine by the culpability score. Going back to our level 24 fraud offense, a company with a compliance program that turns itself in will only be fined $105,000 ($2,100,000 x 0.05). However, a company that secretly plans, approves, and participates in illegal activity will be fined $8.4 million ($2,100,000 x 4.0)!

*

Exhibit 3.1

Offense Levels, Base Fines, Culpability Scores, and Possible Total Fines under the U.S. Sentencing Commission Guidelines

3-2

© 2016 Cengage Learning

The method used to determine a company’s punishment illustrates the importance of establishing a compliance program, as illustrated in Exhibit 3.1.

*

Exhibit 3.2

Compliance Program Steps for the U.S. Sentencing Commission Guidelines for Organizations

3-2

© 2016 Cengage Learning

*

Source: D.R. Dalton, M.B. Metzger, & J.W. Hill, “The ‘New’ U.S. Sentencing Commission Guidelines: A Wake-up Call for Corporate America,” Academy of Management Executive 8 (1994): 7-16.

Fortunately, for those who want to avoid paying these stiff fines, the 1991 U.S. Sentencing Guidelines are clear on the seven necessary components of an effective compliance program. These guidelines are listed in Exhibit 3.2.

Influences on Ethical

Decision Making

Influences include:

The ethical intensity of the decision

The moral development of the manager

3-3

© 2016 Cengage Learning

*

While some ethical issues are easily solved, for many there are no clearly right or wrong answers. The ethical answers that managers choose depend on the ethical intensity of the decision and the moral development of the manager.

Ethical Intensity

The degree of concern people have about an ethical issue.

© 2016 Cengage Learning

3-3

Factors of Ethical Intensity

Factors include:

Magnitude of consequences

Social consensus

Probability of effect

Temporal immediacy

Proximity of effect

Concentration of effect

3-3

© 2016 Cengage Learning

*

Managers don’t treat all ethical decisions the same. The manager who has to decide whether to deny or extend full benefits to Joan Addessi and her family is going to treat that decision much more seriously than the manager who has to deal with an assistant who has been taking paper home for personal use. The difference between these decisions is one of ethical intensity, which is how concerned people are about an ethical issue.

Magnitude of consequences is the total harm or benefit derived from an ethical decision.

Social consensus is agreement on whether behavior is bad or good.

Probability of effect is the chance that something will happen and then result in harm to others.

Temporal immediacy is the time between an act and the consequences the act produces.

Proximity of effect is the social, psychological, cultural, or physical distance of a decision maker to those affected by his or her decisions.

Finally, whereas the magnitude of consequences is the total effect across all people, concentration of effect is how much an act affects the average person.

Exhibit 3.3

Kohlberg’s Stages of Moral Development

3-3

© 2016 Cengage Learning

*

In part, according to Lawrence Kohlberg, ethical decisions are based on a person’s level of moral development. Kohlberg identified three phases of moral development, with two stages in each phase.

At the preconventional level of moral development, people decide based on selfish reasons. For example, if you were in Stage 1, the punishment and obedience stage, your primary concern would be not to get in trouble. Yet, in Stage 2, the instrumental exchange stage, you make decisions that advance your wants and needs.

People at the conventional level of moral development make decisions that conform to societal expectations. In Stage 3, the good boy--nice girl stage, you normally do what the other “good boys” and “nice girls” are doing. In the law and order stage, Stage 4, you do whatever the law permits.

People at the postconventional level of moral maturity always use internalized ethical principles to solve ethical dilemmas. In Stage 5, the social contract stage, you would consider the effects of your decision on others. In Stage 6, the universal principle stage, you make ethical decisions based on your principles of right and wrong.

Practical Steps to Ethical

Decision Making

Managers can encourage ethical decision making by…

selecting and hiring ethical employees.

establishing a specific code of ethics.

training employees to make ethical decisions.

creating an ethical climate.

© 2016 Cengage Learning

3-4

*

Managers can encourage more ethical decision making in their organizations by carefully selecting and hiring ethical employees, establishing a specific code of ethics, training employees how to make ethical decisions, and creating an ethical climate.

Selecting and Hiring

Ethics can be gauged through:

Overt integrity tests

Personality-based integrity tests

3-4

© 2016 Cengage Learning

*

Overt integrity tests estimate honesty by directly asking job applicants what they think or feel about theft or about punishment of unethical behaviors. For example, an employer might ask an applicant, “Would you would ever consider buying something from somebody if you knew the person had stolen the item?” or, “Don’t most people steal from their companies?” Surprisingly, because they believe that the world is basically dishonest and that dishonest behavior is normal, unethical people will usually answer yes to such questions.

Personality-based integrity tests indirectly estimate employee honesty by measuring psychological traits such as dependability and conscientiousness. For example, prison inmates serving time for white-collar crimes (counterfeiting, embezzlement, and fraud) scored much lower than a comparison group of middle-level managers on scales measuring reliability, dependability, honesty, and being conscientious and rule-abiding. These results show that companies can selectively hire and promote people who will be more ethical.

Codes of Ethics

A company must communicate its code both inside and outside the company.

Management must develop practical ethical standards and procedures specific to the company’s business.

© 2016 Cengage Learning

3-4

*

Today, almost all large corporations have an ethics code in place. However, two things must happen if those codes are to encourage ethical decision making and behavior. First, companies must communicate the codes to others both within and outside the company.

An excellent example of a well-communicated code of ethics can be found at Nortel Networks Internet site, at http://www.nortel-us.com. With the click of a computer mouse, anyone inside or outside the company can obtain detailed information about the company’s core values, specific ethical business practices, and much more.

Second, in addition to general guidelines and ethics codes like “do unto others as you would have others do unto you,” management must also develop practical ethical standards and procedures specific to the company’s line of business. Visitors to Nortel’s Internet site can instantly access references to specific ethics codes, ranging from bribes and kickbacks to expense vouchers and illegal copying of software.

Specific codes of ethics such as these make it much easier for employees to decide what they should do when they want to do the “right thing.”

Ethics Training

Ethics training allows a manager to…

develop employees’ awareness of ethics.

achieve credibility with employees.

reinforce behavior by teaching initial ethics classes.

teach employees a practical model of ethical decision making.

© 2016 Cengage Learning

3-4

*

The first objective of ethics training is to develop employee awareness about ethics. This means helping employees recognize what issues are ethical issues, and then avoid the rationalization of unethical behavior: “This isn’t really illegal or immoral.” “No one will ever find out.”

The second objective for ethics training programs is to achieve credibility with employees. Not surprisingly, employees can be highly suspicious of management’s reasons for offering ethics training.

The third objective of ethics training is to teach employees a practical model of ethical decision making. A basic model should help them think about the consequences their choices will have on others and consider how they will choose between different solutions. This model is shown on the next slide.

Exhibit 3.4

A Basic Model of Ethical Decision Making

3-4

© 2016 Cengage Learning

Exhibit 3.4 presents a basic model of ethical decision making.

*

Creating an Ethical Climate

Managers should act ethically.

Management should be active in and committed to company ethics program.

Managers must put in a place a reporting system that encourages whistleblowers.

3-4

© 2016 Cengage Learning

*

The first step in establishing an ethical climate is for managers—especially top managers—to act ethically themselves. Managers who decline to accept lavish gifts from company suppliers; who only use the company phone, fax, and copier for business and not personal use; or who keep their promises to employees, suppliers, and customers encourage others to believe that ethical behavior is normal and acceptable.