Copyright © 2013 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 3

Organizational Ethics

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Defining Organizational Ethics

• Business ethics, as an area of study, is separate from the general subject of ethics because:• Stakeholders have a vested interest in the

ethical performance of an organization• The situation where one’s personal value system

may clash with the ethical standards of the organization’s operating culture

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Defining Organizational Ethics

• Organizational culture: Values, beliefs, and norms that all the employees of that organization share

• Value chain: Key functional inputs that an organization provides in the transformation of raw materials into a delivered product or service

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Figure 3.1 - A Representative Company Value Chain

Sources: Adapted with permission of the Free Press, a division of Simon & Schuster Adult Publishing Group, from Competitive Advantage: Creating and Sustaining Superior Performance, by Michael Porter. Copyright © 1995, 1998 by Michael E. Porter. All rights reserved. And from A. A. Thompson Jr. and A. I. Strickland III, Crafting & Executing Strategy: The Quest for Competitive Advantage: Concepts and Cases, 14th ed. (New York: Irwin McGraw-Hill, 2005), p. 99.

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Ethical Challenges in Research and Development

• Critical commitment to the consumer in the provision of product quality, safety, and reliability

• Tough decisions made when delivery of a design does not match the manufacturing cost figures• Use of fresh materials or second best to save

money• Full battery test run or just computer

simulations

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Ethical Challenges in Manufacturing

• Ethical challenges inherent in arriving at a compromise• Supply problem if a product is built precisely

based on the design specifications• Use of a less reliable supplier when delivery is

held up• Assurance of quality from the alternative

supplier

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Ethical Challenges in Marketing

• Provide products or services to customers who have already expressed a need for and a desire to purchase those products

• Unsuspecting customers are induced to buy products they don’t really need by commercials and advertisements• Marketers argue that customer satisfaction

justifies the methods used to achieve the outcome inspite of the misleading message

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Ethical Challenges in Marketing

• Ethical choices that offer the greatest good for the greatest number of people

Utilitarianism

• Actions that are taken out of duty and obligation to a purely moral ideal rather than based on the needs of the situation since the universal principles are seen to apply to everyone, everywhere, all the time

Universal ethics

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Ethical Challenges in Marketing

• Code of ethics by American Marketing Association (AMA)• Do no harm• Foster trust• Improve customer confidence • Clear ethical values

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Ethical Challenges in Human Resources

• Ensure that ethics is a top organizational priority

• Ensure that the leadership selection and development processes include an ethics component

• Ensure that the right programs and policies are in place

• Stay abreast of ethics issues

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Areas in Finance Function

• Financial transactions - Handling flow of money through an organization

• Accounting function: Keeps track of all financial transactions by documenting the credits and debits and balancing the accounts at the end of the period

• Auditing function: Certification of an organization’s financial statements, or books, as being accurate by an impartial third-party professional

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Internal Auditors

• Grounded in professionalism, integrity, and efficiency

• Make objective assessments of operations and share ideas for best practices

• Provide counsel for improving controls, processes and procedures, performance, and risk management

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Internal Auditors

• Suggest ways for reducing costs, enhancing revenues, and improving profits

• Deliver competent consulting, assurance, and facilitation services

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Auditor’s Code of Ethics

• Not falsifying documents• Not stealing money from the organization• Not undertaking any other form of fraudulent

activity • Related to the management of the

organization’s finances

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Ethical Challenges Faced by Internal Auditors

• Generally Accepted Accounting Principles (GAAP): Set of standard operating procedures that govern the accounting profession• Not a set of laws and established legal

precedents

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Ethical Challenges Faced by Internal Auditors

• Creative bookkeeping techniques• Legal to defer receipts from one quarter to the

next to manage the tax liability• Ethical challenges faced• Falsifying accounts• Underreporting income• Overvaluing assets• Taking questionable deductions

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Conflicts of Interest

• Situation where one relationship or obligation places you in direct conflict with an existing relationship or obligation• Meeting the needs of your organization’s

stakeholders • Selling a product that has the potential to be

harmful to your customers • Selling a product that has the potential to be

harmful to the environment