Ethical Management

Sustainable management is ethical management, and businesses seeking to act in a sustainable manner need to take ethics seriously and establish and enforce ethical standards for current and future workers.  However, defining “ethics” and identifying “ethical behavior” are not easy tasks.  It is has been said that, in general, ethics can be defined as a set of beliefs about right and wrong, good and bad, and that business ethics is the application of right and wrong, good and bad in a business setting.[1]  Daft and Marcic defined ethics as “the code of moral principles and values that governs the behaviors of a person or group with respect to what is right or wrong” and explained that ethics can be seen as setting the standards for what is good or bad in conduct and decision making when the conduct or decision may harm or benefit others.[2]  

The concept of “ethics management” has been described as a managerial function to regulate the conduct or behavior of the employees from top to bottom through written code or unwritten code and as a managerial tool to enforce integrity of employees where codified rules and regulations are absent yet it is necessary for employees and the company to follow reasonable ethical standards or well-founded standards of right and wrong that prescribe what humans ought to do.[3]  Managerial ethics include principal-based ethics about what is considered fair and ethical in the scope of the workplace (e.g., department boundaries and the use of company equipment), policy-based ethics that cover responses to various situations that arise in the course of day-to-day workplace activities such as conflicts of interest and responding to gifts from vendors and other business partners and strategic-based ethics which includes decisions made with regard to the plans that the company intends to pursue in order to achieve its financial goals and objectives (e.g., deciding whether to outsource manufacturing activities to reduce costs even though taking such an action would mean laying off workers in the community in which the company is headquartered).[4]

Ethics and ethical behavior have always been a concern for managers; however, ethical issues have become even more important over the years beginning in the early 2000s when news of corporate scandals based on fraud, financial dishonesty and personal greed of senior executives emerged from major US corporations such as Enron, Arthur Andersen, Adelphia, WorldCom and Tyco.  In the aftermath of the distressing events at these companies and many others, surveys showed that large numbers of Americans believed that questionable business practices were widespread and that the honesty of CEOs should be questioned.  A significant percentage of survey respondents reported that they had personally observed their managers making false or misleading promises to customers, discriminating in hiring or promotions and violating employees’ rights.[5]  Another factor that has made business ethics even more complex and challenging is the accelerating globalization of business activities that has pushed executives, managers and employees to interact with counterparts in foreign countries where the answers to questions about what constitutes ethical behavior may be quite different.  For example, numerous surveys have shown that several countries continue to consider bribery an acceptable, even necessary, practice to conduct business.

Daft and Marcic suggested that ethics and ethical standards can be understood by reference to a continuum of human behavior that crosses three categories or domains.[6]  At one extreme is the domain of “codified law”, which includes the legal standards for conduct formally set out in statutes, regulations and court decisions.  In the business context, these standards include requirements such as obtaining licenses to engage in certain business activities, paying corporate taxes, refraining from anti-competitive activities prescribed under antitrust laws and fully and truthfully disclosing all material facts about a company’s business and financial condition.  At the opposite end of the continuum is a second domain, referred to as “free choice”, which includes behavior that is not covered by any legal standard as to which individuals and companies have complete freedom, at least in the eyes of the law, and are only accountable to themselves.  In the middle of the continuum, between law and free choice, is the domain of ethics.  No specific laws apply in this domain; however, individuals and companies are not free to act only in their own interest, ignoring the interests of others, but are instead expected to engage in conduct and make decisions based on shared principles and values about moral conduct that guide an individual or company and consider the interests of the larger community.

Ethical management requires awareness, commitment, and action from all levels of the organization, especially the top management.  In fact, creating and maintaining an ethical organization requires attention to organizational culture, ethical leadership, codes, training, and audits, and organizations have created the position of chief ethics officer to assume responsibility for developing and implementing ethical policies and programs, educating employees on the importance of ethics, investigating complaints of ethical violations, influencing decision-making by key leaders, and reflecting the moral character and integrity of the organization and its leaders.  Ethical management is a dynamic and ongoing process that must adapt to the changing internal and external context of the organization (i.e, the industry, the market, the stakeholders, the culture, and the values).  Ethical management benefits organizations by enhancing reputation, trust, loyalty, productivity, and profitability, and avoiding legal, regulatory, and reputational risks.

An Ethical Organizational Culture

While individual integrity and ethical values play a large role in any one person’s behavior and decisions, executives, managers and employees are inevitably influenced by the values, attitudes, beliefs, expectations and behavior patterns of the organizational culture in which they operate.[7]  This is particular true given that, as discussed above, most people are at level two of personal moral development and thus feel a strong duty to fulfill the obligations and expectations of others including the persons in their specific social networks within their organization. A strong corporate culture can be an important tool in helping executives, managers and employees make ethical decisions in a continuously shifting business environment that brings changes daily and creates new problems for which solutions have yet to be developed. While hopefully the obligations and expectations embedded in the organizational culture are ethically sound, if a person works within a team, department or an entire organization where unethical behavior is tolerated or even encouraged it is more likely that he or she will be socialized into thinking that it is necessary to follow suit.  In fact, a person working in that type of culture may became fearful about losing his or her job if she does not go along with the unethical behavior.

Common elements of organizational culture can be used to create and enhance an ethical mindset among executives, managers, and employees.  Daft and Marcic suggested that high ethical standards can be affirmed and communicated through public awards and ceremonies and that people can be recognized and celebrated as organizational heroes, and thus role models, based on their ethical decision making practices.[8]  Kelly et al. reported on research carried out by the Ethics Resource Center (ERC) that suggested that organizational culture has more influence than any other variable on the ethical conduct of individual employees and that, in fact, organizations with a strong ethical culture had significantly lower levels of observed misconduct.[9]  Kelly et al. noted that the ERC found that the key elements of a strong organizational culture included displays of ethics-related actions at all levels of an organization and accountability at all levels for acting in a manner that conforms to company standards (i.e., the company proactively and consistently confronts misconduct and establishes and enforces a rigorous system of sanctions and remedial actions to reduce the likelihood of recurrences).  Alison Taylor suggested that building an ethical organizational culture requires attention to five levels: individual (creating incentives that proactively reward ethical behavior); interpersonal (supporting effective whistleblowing and grievance mechanisms), group (ensuring role and task clarity within teams), intergroup (empowering oversight functions), and inter-organizational (incorporate sustainability commitments into strategic decisions).[10]

Code of Ethics

One of the elements of a strong ethically focused organizational culture is formal documents that provide concrete guidelines for ethical behavior and making ethical decisions.  Companies of all sizes have taken to creating formal ethics programs and the centerpiece of these programs is a written code of ethics that serves as a formal statement of the organization’s values concerning ethics and social issues.  The code of ethics explicitly announces the company’s intent to act in an ethical manner in furtherance of its core values and lays out overriding principals and specific rules and procedures that employees are expected to follow when confronted with an array of common situations that raise ethical dilemmas.  The code of ethics should be supported by continuous communications to employees and appropriate training programs.

Codes can be presented using several different approaches and formats.  For example, the code of ethics for some organizations are essentially a list of core principles, accompanied by a brief description of each, intended to define fundamental values that organizational leaders hope to infuse into the organization’s culture such as integrity, quality, safety, diversity and inclusion, trust and respect, corporate citizenship and stakeholder success.  Other organizations implement codes of ethics or conduct that are based on setting out policies and procedures that members of the organization are expected to following in specific ethical situations.  As is the case with the principle-based approach, the intent is that the code will serve as a foundation for the workplace culture and a guide for conducting business affairs in an ethical manner. 

Compliance Programs

Since laws can form the boundaries and a basis for human and corporate conduct, and laws and ethics together define acceptable behavior, companies should implement compliance programs as a fundamental aspect of their overall ethics initiatives.[11]  Compliance programs build awareness among executives, managers and employees of the specific legal requirements that are applicable to the company’s activities and which need to be considered when taking actions within the company (e.g., actions and decisions subject to laws and regulations relating to the employment relationship) and in dealings with customers, suppliers, regulators and other external stakeholders.

Organizational Structure

Organizations striving to improve their ethical profile create various organizational structures and systems to help put values into practice and shape and influence ethical behavior throughout the organization.  One structural move is the creation of an ethics committee and the appointment of a chief ethics officer.  The role of the ethics committee, which is composed of executives from different functional areas, is to oversee the company’s ethics and this includes interpreting, clarifying and communicating the codes of ethics, resolving thorny ethical issues and, quite importantly for the signals sent to other managers and employees, disciplining wrongdoers. 

The ethics committee is led by the chief ethics officer, who is an executive of the company with responsibility for overseeing all aspects of ethics including[12]:

·       Establishing and broadly communicating ethical standards

·       Developing and maintaining policies and procedures for the general operation of the ethics program, including standards of ethical conduct and related activities

·       Overseeing the ongoing operation of the ethics program

·       Collaborating with other departments to ensure that there are reasonable and appropriate channels for reporting, investigating, and resolving ethical issues

·       Responding to alleged violations of rules, regulations, policies, procedures, and standards of ethical conduct

·       Identifying potential areas of vulnerability and risk, developing plans for resolution and providing guidance on how to avoid similar situations in the future

·       Advising senior managers as they make ethical decisions and providing counseling for employees faced with ethical dilemmas

·       Regularly reporting to executives and board members on the operation and progress of compliance efforts

·       Developing and maintaining an ethics communication program for the organization, including ethics/compliance, awareness of standards of ethical conduct, and understanding of new and existing ethics issues

·       Working with the human resources department and others as appropriate to develop a corporate ethics training program

·       Establishing and administering confidential hotlines that managers and employees can use to report behavior they believe to be unethical or otherwise questionable

Reporting channels for the chief ethics officer should be carefully considered.  In general, the position reports to the CEO with a dotted-line reporting structure to the chair of the committee of the board of directors responsible for overseeing ethics issues, which may be the audit committee or a separate ethics committee that also has authority over related areas such as compliance and/or corporate governance.  If an ethics issue arises with respect to the CEO and/or other members of the executive team, the chief ethics officer should report the matter directly to the appropriate board member and seek guidance from the relevant board committee as to the steps that should be taken with respect to notifying the CEO.

Ethics Training

Ethics training is one of the most important activities for the chief ethics officer and his or her staff and companies implement training programs as a means for assisting executives, managers and employees in identifying ethical issues and applying the principles of the code of ethics to their day-to-day activities.  Ethics must play a role in new employee orientation and in all ongoing training.  Larger companies typically require all employees to participate in ethics training at least annually and many firms, large and small, have training events more frequently (e.g., weekly or monthly meetings to discuss workplace ethics and role play the proper steps for assessing commonplace ethical dilemmas).  Specialized training should be made available for employees who face more temptation (e.g., purchasing agents, overseas sales reps).[13]  Of course, a training program will only be effective if organizational leaders support and practice the principles that are covered in the program.

Whistleblower Procedures

One area where the law has moved over the soft line between the legal and ethical domains is “whistleblowing”, which is disclosure by managers or employees of illegal, immoral, illegitimate, dangerous or unethical practices by or on behalf of their employer.  For a long time, whistleblowers had no practical internal path for reporting wrongdoing and often made their disclosures to outside parties such as regulators, legislators or reporters.  This was often done because whistleblowers feared that internal reporting would not be taken seriously and/or would jeopardize their positions with the company.  Recently, however, companies have begun to see that whistleblowing is a benefit to the company and have established procedures to make it easier for reports to be filed and, quite importantly, protect whistleblowers from retaliation.  While these steps have been positive, and protection from retaliation is now mandated by federal and state laws, whistleblowing remains a risky proposition for employees and persons reporting issues are still often seen as simply being disgruntled troublemakers.  Nonetheless, creating an atmosphere in which employees feel free to come forward with ethical concerns using a clear, trusted reporting structure is essential for an effective ethics program since there will always be mistakes and/or people who simply are not interested in following the ethical path.

Board Oversight of Ethical Management Systems

While the chief ethics officer can and should be the C-suite officer with primary responsibility for drafting and proposing a code of ethics, the members of the board of directors are ultimately accountable for the contents of the code, committing the resources necessary to provide education and training regarding ethical matters throughout the organization and ensuring that everyone in the organization has access to tools for reporting suspected ethical wrongdoing without fear of retribution.  The board also needs to set the appropriate “tone at the top” with respect to ethics, as it should with other sustainability-related issues, and communications between the board and chief ethics officer regarding the code of ethics should be extensive and interactive rather than a quiet acceptance of proposals by the board without challenges or questions.[14]

One of the primary roles of the chief ethics officer is ensuring that board members receive certain information on a regular and timely basis including a complete and regularly updated code of ethical behavior that has been customized to the company’s specific needs, but also inclusive of recent internal and external trends and events; updates on recently reported violations, resulting responses and activities, and plans to ensure violations decline over time; information on internal and external ethics trends and plans to mitigate potential risks and reports on ongoing training on ethical behavior customized to specific corporate subsets (e.g., onboarding of new employees, managers, recently merged/acquired organizations, etc.).[15]  A publication prepared by the National Association of Corporate Directors (NACD) also recommended that board members conduct regular meetings with the chief executive officer to go through questions relating to the following topics[16]:

·       The adequacy and quality of the current code of ethics, training, and reporting/hotline programs in maintaining the highest level of ethical behavior

·       How the code of ethics, as well as programs built to support it, might be improved

·       How well top executives are engaged in personally modeling desired ethical behaviors

·       Examples of how the chief ethics officer is proactively engaged in risk assessment, training, and counseling around ethics issues

·       How well the chief ethics officer is customizing programs to address the needs of distinct subsets of the corporation (new employees, managers, recently merged/ acquired organizations, etc.).

In addition, while the chief ethics officer has primary responsibility for ethical standards, issues and training, his or her success will clearly be influenced by the actions of the company’s CEO, a position that obviously has its own unique set of ethical obligations and expectations.  Ethical missteps by the CEO can cripple even the best internal programs and expose companies and their directors to harsh criticism, legal liability and tarnished reputations.  As such, directors have an obligation to assume responsibility for monitoring the actions of the CEO including the CEO’s adherence to the ethical standards that the board has established.

Assessment of board performance should be conducted through an ethical lens, and a formal evaluation on a regular basis, generally as part of the board’s annual performance assessment, should be placed on the board’s agenda and ethics should be emphasized in education and training programs that board members are required to complete.  The NACD guide recommended that directors ask themselves about these topics as reviews of overall board performance and the performance of individual directors are conducted[17]:  

·       Their familiarity with the organization’s code of ethical behavior

·       How well the directors are modeling ethical behavior

·       The adequacy of the ethics information that they are receiving and its value in supporting major decisions

·       The clarity of the company’s understanding of its key values at all levels of the organization and across all geographies

·       The roles the board can play and the additional “value add” that the board can provide with regard to ethical behavior

·       The integration of the company’s ethical values into decision making

Many companies have supplemented their organization-wide codes of conduct with codes of conduct and ethics for the board of directors that include specific rules for directors relating to legal compliance, prohibition of unethical behavior and reporting and investigation of unfair dealing and unethical behavior that comes to their attention.  In addition, directors should take appropriate steps to ensure that the company follows recommended principles and practices of high quality ethics and compliance programs including making ethics and compliance central to business strategy; creating and supporting systems to ensure that ethics and compliance risks are identified, owned, managed, and mitigated; placing leaders at all levels across the organization who are willing and able to build and sustain a culture of integrity; encouraging, protecting and valuing the reporting of concerns and suspected wrongdoing and taking action and holding itself accountable when wrongdoing occurs.[18]

To learn more, download the author’s chapter on Ethical Management.

Notes

[1] M. Kelly, J. McGowen and C. Williams, BUSN (Independence, KY: South-Western Publishing Company, 2014), 53-54.

[2] R. Daft and D. Marcic, Understanding Management (5th Edition) (Mason, OH: South-Western Publishing Co., 2006), 120.

[3] J. Thangasamy, Meaning of Ethics Management.

[4] A. Burke, What Are Managerial Ethics.

[5] R. Daft and D. Marcic, Understanding Management (5th Edition) (Mason, OH: South-Western Publishing Co., 2006), 120.

[6] Id. at 120-121.

[7] Id. at 129-130.

[8] Id. at 131.

[9] M. Kelly, J. McGowen and C. Williams, BUSN (Independence, KY: South-Western Publishing Company, 2014), 57 (citing National Business Ethics Survey: How Employees View Ethics in Their Organizations, 1994–2005, Ethics Resource Center, October 12, 2005).

[10] A. Taylor, The Five Levels of an Ethical Culture, BSR (March 2017), 5.

[11] R. Daft and D. Marcic, Understanding Management (5th Edition) (Mason, OH: South-Western Publishing Co., 2006), 131.

[12] Certain of the items in the list are adapted from C-SUITE EXPECTATIONS: Understanding C-Suite Roles Beyond the Core (Washington DC: National Association of Corporate Directors, 2013), 13-14.

[13] M. Kelly, J. McGowen and C. Williams, BUSN (Independence, KY: South-Western Publishing Company, 2014), 58.

[14] C-SUITE EXPECTATIONS: Understanding C-Suite Roles Beyond the Core (Washington DC: National Association of Corporate Directors, 2013), 16.

[15] Id.

[16] Id.

[17] Id.

[18] Principles and Practices of High-Quality Ethics & Compliance Programs (Arlington VA: Ethics and Compliance Initiative, 2016) (also including extensive lists of best practices that should be consulted when designing an ethics and compliance program).  See also Director Essentials: Strengthening Compliance and Ethics Oversight (Washington DC: National Association of Corporate Directors, 2018).