Ch 5 Corporate Ethical Governance - Accountability

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  • Chapter 5Ethical GovernanceTo be effective, a Corporate Code of Conduct must be reinforced by a comprehensive ethical culture. Corporate Codes of Conduct should encourage employees to behave at higher levels of Kohlbergs stages of moral development: http://www.haverford.edu/psych/ddavis/p109g/kohlberg.stages.htmlOrganizational structures should be established to encourage and facilitate individuals moving to higher levels of moral reasoning. Each stage has a broader perspective than the one before regarding the duties role, and obligations of the individual to society. The final stage of Kohlbergs moral development hierarchy is where the individual develops a principled conscience that adheres to moral and social codes because the codes are guided by the same moral principals that guide society.

  • TABLE 5.15CODE GUIDANCE ALTERNATIVES AND THE CONTROL/MOTIVATION SIGNALED

    GUIDANCE PROVIDEDCONTROL/MOTIVATION SIGNALEDObey these rulesImposed ControlSeek advice before actingAct on your best judgment, but disclose what you have doneGuiding principles which indicate this is what we are and what we stand for Self-controlSOURCES: Clarkson & Deck, 1992, Clarkson, Deck & Leblanc, 1997.

  • TABLE 5.8ETHICAL CULTURE: IMPORTANT ASPECTS

    An ethical culture combines formal and informal elements to guide employee thought and action, including: Ethical leadership by executives and supervisors* Reward systems incorporate ethical considerations* Perceived fairness, fair treatment of employees* Open discussion of ethics in the organization* Authority structure that emphasizes an employees accountability and responsibility to question his or her own actions, and an obligation to question authority when something seems wrong* Organizational focus that communicates care for employees and the community, rather than self interest Official policies and procedures (code of ethics, practice, conduct) Supporting offices (e.g. Ethics officer, ombudsperson) Supporting structures (e.g. telephone hotline, whistleblower protection, code sign-off, training, etc.)* Most influential factors as found by Trevio et al. (1999)

  • TABLE 5.12DEVELOPMENT AND MAINTENANCE OF AN ETHICAL CORPORATE CULTURE

    STEPPURPOSEAssign responsibility: Chairman or CEO Ethics officer Ethics committee Successful initiatives usually involve: top level accountability and adequate budget champions, arbiters monitoring, feedback, advice and cheerleadingEthics AuditTo understand the organizations ethical practices, and its network of stakeholders and interestsEthics risk assessmentTo identify important ethics problems that could arise (Ch6)Top management supportAbsolutely vital to successful adherenceDevelop consensus on key ethical valuesNecessary to frame policies and proceduresDevelop code of conduct, ethical decision-making criteria and protocols incl. sniff tests Provide guidance for employees and all other stakeholdersDevelop ethics program: Leaders involvement Launch Training Reinforcement policies: Compliance Sign-off Measurements of performance Include in strategic objectives and managers objectives Include in monitoring and reward structures Communications programs Exemplar award system Ethics inquiry service Crisis managementTo successfully present and provide supporting mechanisms for the guidance process Information, investigation and whistle-blower protection To ensure that ethics are part of survival reactionsEstablish a review mechanism

  • TABLE 5.22COMPARISON OF AGENCY THEORY & STEWARDSHIP THEORY

    Agency TheoryStewardship TheoryView of the individualEconomic agentComplex & modernBehavioral assumptionsOpportunistic wealth maximizerHolistic & rounded view of human natureBehavioral characteristicsself-serving employees will choose the options that are in their own best interestsrisk-averse there is an increasing disutility for wealtheffort-averse employees will shirkwant to contribute will choose to do rightstrive to achievelike to innovatewant to do competent workinterested in a work-life balance Management philosophyControl-orientedInvolvement-orientedMotivationExtrinsic rewardsMore intrinsic than extrinsic rewardsOrganizational identificationLow value commitmentHigh CommitmentTrustLow employees are work averse and so they will shirk High stewards have an inherent preference for honestySources: James H. Davis, F. David Schoorman and Lex Donaldson, Toward a Stewardship Theory of Management, Academy of Management Review 1997, Vol. 22, No. 1, 20-47, and Steven E. Salterio and Alan Webb, Honesty in Accounting and Control: A Discussion of The Effect of Information Systems on Honesty in Managerial Reporting: A Behavioral Perspective, Contemporary Accounting Research 2006, Vol. 23, No. 4, 919-932.

  • FIGURE 5.4ALIGNING VALUESFOR ETHICAL MOTIVATION & ACTIONPolicies, Codes ReinforcementReports ObservationsCORPORATE CULTURECreated by ManagementLeads to Corporate Actions

    ValuesBeliefsMotivationActionsOther InfluencesValues TransmissionStakeholder EvaluationCorporate Value SystemIdentification Assessment RankStakeholder InterestsCorporate Value System

  • TABLE 5.19MECHANISMS FOR COMMPLIANCE ENCOURAGEMENT, MONITORING, & REPORTING WRONGDOING

    Compliance encouragement Awards, bonuses Inclusion in performance reviews, remuneration decisions, and promotion Reprimands, suspension, demotion, fines, dismissalMonitoring Ethics audit or internal audit procedures Reviews by legal department Annual sign-off by all or some employees Employee surveysFacilitation of reporting of wrongdoing Assurance of a fair hearing process Protection: absolute confidentiality, whistle-blower protection plan Counselling/information: ombudsperson program, hotline, human resources Committee oversight assured: ethics committee of board, Audit Committee

  • TABLE 5.9ETHICAL PROGRAMS USUAL DIMENSIONS

    1. Formal ethics codes2. Ethics committees developing policies, evaluating actions, investigating and adjudicating policy violations3. Ethics communications systems4. Ethics officers or ombudspersons coordinating policies, providing education or investigating allegations5. Ethics training programs to raise awareness and help employees respond to ethical problems6. Disciplinary processes for unethical behavior

  • TABLE 5.13DEPTHS OF CODE COVERAGE

    CredoInspirational short statement on key valuesCode of EthicsDeals with ethics principles (short)Code of ConductDeals with principles plus additional examples, etcCode of PracticeDetailed rules of practice

  • TABLE 5.2AREAS OF CORPORATE RISK ASSESSMENT

    Governance and objectivesAreas of impact Reputation Assets, revenues, costs Performance StakeholdersSources of risk Environmental Strategic Operational InformationalSpecific hazardsDegree of control over risklittle, some, great dealDocumentation

  • TABLE 5.7ETHICS PROGRAM ORIENTATION TYPES

    ORIENTATIONPRIMARY FOCUSCompliance-basedPreventing, detecting, and punishing violations of the lawIntegrity or Values-basedDefines organizational values and encourages employee commitmentSatisfaction of external stakeholdersImprovement of image with and relationships with external stakeholders (customers, the community, suppliers)Protect top management from blameDefensive CYA or cover your ___Combinations of the aboveValues- and compliance-based, for exampleSOURCES: Trevio, Weaver, Gibson and Toffler, 1999, 135-139; Paine, 1994, 111; Badaracco & Webb, 1995, 15.

  • TABLE 5.1CULTURAL VALUES AND HYPERNORMS

    Sphere/CultureBasis of Value-systemN. AmericanRights-based: rights, justice, utilitySino-ConfucianDuty-based: obligation to familyJapanDuty-based: obligation to companyMiddle EastDuty-based: obligation to saviorEuropePersonal rightsSouth AmericaDuty-based: obligation to family, religious valuesImpact Exident On:Dealing with people: hiring, gender;Bribery;Motivation for doing business;Short- or long-term time horizons;Importance of quality-of-life issuesHypernorm Values:Honesty, Fairness, Compassion, Integrity, Predictability, Responsibility

  • TABLE 5.16SUBJECTS FOUND IN CODES

    Ethical principles honesty, fairness, compassion, integrity, predictability, responsibilityRespect for stakeholder rights, and duties owed to each stakeholderVision, mission, and key policies tied into the aboveEthical decision making frameworks, sniff tests, rules of thumb, and guidance on making tradeoffs between competing objectivesWhen to seek counsel, and whom to seek it fromSpecific topics found in over 5% of employee, supplier and joint venture codes: Bribery/improper payments or influences Conflict of interest Security of proprietary information Receiving gifts Discrimination/equal opportunity Giving gifts Environmental protection Sexual harassment Antitrust Workplace safety Political activities Community relations Confidentiality of personal information Human rights Employee privacy Whistle-blowing and protection programs Substance abuse Nepotism Child labour

    SOURCE: The Conference Board Research Report, Global Corporate Ethics Practices, 1999, 29.

  • FIGURE 5.2STAKEHOLDER ACCOUNTABILITY ORIENTED GOVERNANCE PROCESSPUBLIC INTERESTSHAREHOLDERS + OTHER STAKEHOLDERSCORPORATE CULTURECreated by ManagementLeads to Corporate ActionsFeedbackGuidanceAll Interests

    SetsVision, Mission,Strategy, Policies,Codes, Compliance,Feedback, Compensation

    AppointsCEO, CFOBOARD OF DIRECTORSExternalAuditorsLawyersFinancialReports

  • FIGURE 5.1MAP OF CORPORATE STAKEHOLDER ACCOUNTABILITYShareholdersActivistsGovernmentsLenders & CreditorsCompetitorsSuppliersCustomersEmployeesCorporationOthers, including the Media, who can be affected by or who can affect the achievement of the corporations objectives

  • FIGURE 5.3STAKEHOLDER INTERESTS RANKING, RISK ASSESSMENT, & USAGEFeedbackGuidanceAccountability = Financial & Strategic including Ethical & LegalAll Interests CORPORATE RISK ASSESSMENTPrepared by management for Board review and approvalIntegrateInto CorporateValue System& ActionsAssess & Rank All InterestsIdentify AllStakeholders

    SetsVision, Mission,Strategy, Policies,Codes, Compliance,Feedback, Compensation

    AppointsCEO, CFOBOARD OF DIRECTORS

  • TABLE 5.3ETHICS RISK MANAGEMENT PRINCIPLES

    Normal definitions of risk are too narrow forStakeholder-oriented accountability and governanceAn ethics risk exists wherethe expectations of a stakeholder may not be met.Discovery and remediation are essential in order toavoid a crisis, or lose the support of stakeholders.Assign responsibility, develop annual processes, board review

  • TABLE 5.4CONFLICTING INTERESTS CAUSES OF JUDGEMENT BIAS

    How might judgement be swayed Any interest, influence, loyalty, concern, emotion, or other feature tending to make judgement less reliable than normalSelf-interest Bribes, kickbacks payments or property to decider, family, designees Gifts, free travel, favors, Special advantages non-market discounts on goods Special treatment flattery, social involvement Dealings with family, relatives or relationsFraud ... Misappropriation of funds or property Cheating on expense accounts Falsifying documents Stealing cash, assets, or resources Falsifying results to obtain bonuses, merit pay, or promotionMisunderstanding Confused signals or incentives Boss/everybodys doing it Cultural differencesSlippery slope Where a small favor leads to ever larger demands

  • TABLE 5.6GUIDELINES FOR ACCEPTANCE OF GIFTS OR PREFERENTIAL TREATMENT

    1. Is it nominal or substantial?2. What is the intended purpose?3. What are the circumstances?4. What is the position of sensitivity of the recipient?5. What is the accepted practice?6. What is the firm/company policy?7. Is it legal?

  • FIGURE 5.5CONFLICT OF INTEREST FOR A DECISION MAKERA decision maker (D) has a conflict of interest if, and only if, (1) D is in a relationship with another (P) requiring D to exercise judgement in Ps behalf and (2) D has a special interest tending to interfere with the proper exercise of judgement in that relationship.SpecialNon-P InterestsDecision Maker(D) has a duty to act/judge in Ps best interestPs Satisfaction based onFulfillment of Ps Interests

  • FIGURE 5.6TYPES OF CONFLICT OF INTERESTPotentialActual

    Decision Point

    Non-existent Apparent Imaginary

  • TABLE 5.5MANAGEMENT OF CONFLICTING INTERESTS

    Steps To Be Taken Ensure awareness through: Codes of conduct and Related initial and ongoing training Create a program and an understanding of: Employers concerns regarding conflict of interests Major issues: Avoidance is preferable Slippery slope Management techniques: Annual sign-off, confirmation review and compliance Guidelines for gifts, behavior Counseling, reporting, reinforcement Chinese walls/firewalls, scrutiny

  • TABLE 5.17EXTERNAL SHOCKS AND INFLUENCES TRIGGERING CODE MODIFICATION

    Anti-bribery legislation U.S. Foreign Corrupt Practices Act of 1977 This Act provided an early motivation for codesU.S. Sentencing Guidelines of 1991 Brought provision for Due Diligence defenseEnvironmental responsibility: Acid rain, air pollution, ozone depletion (U.N. Brundtland Commission Report of 1987) New Environmental Protection statutes Exxon Valdez oil tanker spill triggers Valdez (now CERES) PrinciplesFair treatment for: Employees: Feminism: sexual harassment, equal opportunity for pay and promotion Minorities: discrimination* Health, safety and well-being Supplier employees no sweat shop or child labor Drug problems privacy vs. safety Whistle-blowers** Customers buyer beware slowly becomes seller beware Health & safety concerns auto recalls (see Ford, Firestone case) Ethical consumerism, quality Shareholders: Misuse of inside information Conflict of interests Mandate and operations are ethical Enrons banks engage in transactions without economic substance designed to mislead* See Ethics Case: Texacos Jelly Beans in Chapter 7. ** See GE case described in reading by Andrew Singer in Chapter 1.

  • TABLE 5.18ESSENTIAL FEATURES TO DEMONSTRATE A DUE DILIGENCE DEFENCE IN RESPECT OF ENVIRONMENTAL MATTERS

    1. A written environmental policy, made known to appropriate employees2. Operating practices which guard against environmental malfeasance, including contingency plans to cover mishaps to ensure full scale, timely clean-up3. Employees briefed on their duties and responsibilities under the policy, as well as their potential personal liability, and the liability of others4. Employees informed of legal requirements, including notice to government complete with a contact list5. A person who is primarily responsible for environmental matters and monitoring compliance6. Consideration of an environmental audit or consultation with an expert to start the protection process and monitor progress7. Monitor pollution control systems and report mishaps on a timely basis8. Regularly review reports on compliance, potential problems environmental charges, conviction and employee training9. Management that keeps abreast of new legislation, makes an internal review of compliance and advise directors of the results, and allocates a real and satisfactory budget to achieve these features

  • FIGURE 5.8EXECUTIVE REPUTATION & ETHICAL LEADERSHIPMORAL MANAGERMORAL PERSONSource: Moral Person and Moral Manager: How Executives Develop a Reputation for Ethical Leadership, L.K. Trevio et al, California Management Review, Vol. 42, No. 4, Summer 2000. Reprinted with permission.

    WeakStrongStrongHypocriticalEthical LeaderWeakUnethical Leader Ethically Neutral Leader

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