Chapter 4 The Institutionalization ofBusiness Ethics Chapter 4 Review 4-9aSummary To understand the institutionalization of business ethics, it is important to understand the voluntary and legally mandated dimensions of organizational practices. Core practices are documented best practices, often encouraged by legal and regulatory forces as well as by industry trade associations. The effective organizational practice of business ethics requires three dimensions to be integrated into an ethics and compliance program. This integration creates an ethical culture that effectively manages the risks of misconduct. Institutionalization in business ethics relates to established laws, customs, and the expectations of organizational ethics and compliance programs considered a requirement in establishing reputation. Institutions reward and sanction ethical decision making by providing structure and reinforcing societal expectations. In this way, society as a whole institutionalizes core practices and provides organizations with the opportunity to take their own approach, only taking action if there are violations. Laws and regulations established by governments set minimum standards for responsible behavior—society’s codification of what is right and wrong. Civil and criminal laws regulating business conduct are passed because society—including consumers, interest groups, competitors, and legislators—believes business must comply with society’s standards. Such laws regulate competition, protect consumers, promote safety and equity in the workplace, and provide incentives for preventing misconduct. Largely in response to widespread corporate accounting scandals, Congress passed the Sarbanes–Oxley Act to establish a system of federal oversight of corporate accounting practices. In addition to making fraudulent financial reporting a crime and strengthening penalties for corporate fraud, the act requires corporations to establish codes of ethics for financial reporting and develop greater transparency in reporting to investors and other stakeholders. The Sarbanes–Oxley Act requires corporations to take greater responsibility for their decisions and provide leadership based on ethical principles. For instance, the law requires top managers to certify their firms’ financial reports are complete and accurate, making CEOs and CFOs personally accountable for the credibility and accuracy of their companies’ financial statements. The act establishes an oversight board to oversee the audit of public companies. The oversight board aims to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports for companies. Largely in response to the widespread misconduct leading to the global recession, the Dodd–Frank Wall Street Reform and Consumer Protection Act was passed. The purpose of the act is to prevent future misconduct in the financial sector, protect ...

1. Chapter 4 The Institutionalization
ofBusiness Ethics
Chapter 4 Review
4-9aSummary
To understand the institutionalization of business ethics, it is
important to understand the voluntary and legally mandated
dimensions of organizational practices. Core practices are
documented best practices, often encouraged by legal and
regulatory forces as well as by industry trade associations. The
effective organizational practice of business ethics requires
three dimensions to be integrated into an ethics and compliance
program. This integration creates an ethical culture that
effectively manages the risks of misconduct. Institutionalization
in business ethics relates to established laws, customs, and the
expectations of organizational ethics and compliance programs
considered a requirement in establishing reputation. Institutions
reward and sanction ethical decision making by providing
structure and reinforcing societal expectations. In this way,
society as a whole institutionalizes core practices and provides
organizations with the opportunity to take their own approach,
only taking action if there are violations.
Laws and regulations established by governments set minimum
standards for responsible behavior—society’s codification of
what is right and wrong. Civil and criminal laws regulating
business conduct are passed because society—including
consumers, interest groups, competitors, and legislators—
believes business must comply with society’s standards. Such
laws regulate competition, protect consumers, promote safety
and equity in the workplace, and provide incentives for
preventing misconduct.
Largely in response to widespread corporate accounting
scandals, Congress passed the Sarbanes–Oxley Act to establish
a system of federal oversight of corporate accounting practices.
In addition to making fraudulent financial reporting a crime and
strengthening penalties for corporate fraud, the act requires

2. corporations to establish codes of ethics for financial reporting
and develop greater transparency in reporting to investors and
other stakeholders. The Sarbanes–Oxley Act requires
corporations to take greater responsibility for their decisions
and provide leadership based on ethical principles. For instance,
the law requires top managers to certify their firms’ financial
reports are complete and accurate, making CEOs and CFOs
personally accountable for the credibility and accuracy of their
companies’ financial statements. The act establishes an
oversight board to oversee the audit of public companies.
The oversight board aims to protect the interests of investors
and further the public interest in the preparation of informative,
accurate, and independent audit reports for companies.
Largely in response to the widespread misconduct leading to the
global recession, the Dodd–Frank Wall Street Reform and
Consumer Protection Act was passed. The purpose of the act is
to prevent future misconduct in the financial sector, protect
consumers from complex financial instruments, oversee market
stability, and create transparency in the financial sector. The act
created three financial agencies, the Financial Stability
Oversight Council, the Office of Financial Research, and the
Consumer Financial Protection Bureau. The bureau was created
to regulate and ensure consumers are protected against overly
complex and/or deceptive financial practices. Whistle-blower
protection includes a bounty program whereby those who report
corporate misconduct to the SEC may receive 10 to 30 percent
of settlement money if their reports result in a conviction of
more than $1 million in penalties.
Congress passed the FSGO to create an incentive for
organizations to develop and implement programs designed to
foster ethical and legal compliance. Their guidelines help the
U.S. Sentencing Commission apply penalties to all felonies and
class A misdemeanors committed by employees in their work.
As an incentive, organizations that have demonstrated due
diligence in developing effective compliance programs that
discourage unethical and illegal conduct may be subject to

3. reduced organizational penalties if an employee commits a
crime. Overall, the government philosophy is that legal
violations can be prevented through organizational values and a
commitment to ethical conduct. A 2004 amendment to the FSGO
requires a business’s governing authority be well informed
about its ethics program with respect to content,
implementation, and effectiveness. This places the
responsibility squarely on the shoulders of the firm’s
leadership, usually the board of directors. The board must
ensure there is a high-ranking manager accountable for the day-
to-day operational oversight of the ethics program. The board
must provide adequate authority, resources, and access to the
board or an appropriate subcommittee of the board. The board
must also ensure there are confidential mechanisms available so
the organization’s employees and agents report or seek guidance
about potential or actual misconduct without fear of retaliation.
A 2010 amendment to the FSGO directs chief compliance
officers to make their reports to the board rather than to the
general counsel.
The FSGO and the Sarbanes–Oxley Act provide incentives for
developing core practices that ensure ethical and legal
compliance. Core practices move the emphasis from a focus on
the individual’s moral capability to a focus on developing
structurally sound organizational core practices and integrity for
both financial and nonfinancial performance.
Voluntary responsibilities touch on businesses’ social
responsibility insofar as they contribute to the local community
and society as a whole. Voluntary responsibilities provide four
major benefits to society: improving the quality of life,
reducing government involvement by providing assistance to
stakeholders, developing staff leadership skills, and building
staff morale. Companies contribute significant resources to
education, the arts, environmental causes, and the
disadvantaged by supporting local and national charitable
organizations. Cause-related marketing ties an organization’s
product(s) directly to a social concern through a marketing

4. program. Strategic philanthropy involves linking core business
competencies to societal and community needs. Social
entrepreneurship occurs when an entrepreneur founds an
organization with the purpose of creating social value.
Chapter 05: Ethical Decision Making - Reading
Chapter Review
5-5aSummary
The key components of the ethical decision making framework
include ethical awareness, ethical issue intensity, individual
factors, organizational factors, and opportunity. These factors
are interrelated and influence business ethics evaluations and
intentions that result in ethical or unethical behavior.
The first step in ethical decision making is to recognize that an
ethical issue requires an individual or work group to choose
among several actions that will ultimately be evaluated as
ethical or unethical by various stakeholders. Ethical issue
intensity is the perceived relevance or importance of an ethical
issue to an individual or workgroup. It reflects the ethical
sensitivity of the individual or work group that triggers the
ethical decision making process. Other factors in our ethical
decision making framework influence this sensitivity, and
therefore different individuals often perceive ethical issues
differently.
Individual factors such as gender, education, nationality, age,
and locus of control affect the ethical decision making process,
with some factors being more important than others.
Organizational factors such as an organization’s values often
have greater influence on an individual’s decisions than that
person’s own values. In addition, decisions in business are most
often made jointly, in work groups and committees, or in
conversations and discussions with coworkers. Corporate
cultures and structures operate through the ability of individual
relationships among the organization’s members to influence
those members’ ethical decisions. A corporate culture is a set of

5. values, beliefs, goals, norms, and ways of solving problems that
members (employees) of an organization share. Corporate
culture involves norms that prescribe a wide range of behavior
for the organization’s members. The ethical culture of an
organization indicates whether it has an ethical conscience.
Significant others—including peers, managers, coworkers, and
subordinates—who influence the work group have more daily
impact on an employee’s decisions than any other factor in the
decision making framework. Obedience to authority may
explain why many business ethics issues are resolved simply by
following the directives of a superior.
Ethical opportunity results from conditions that provide
rewards, whether internal or external, or limit barriers to ethical
or unethical behavior. Included in opportunity is a person’s
immediate job context that includes the motivational techniques
superiors use to influence employee behavior. The opportunity
employees have for unethical behavior in an organization can be
eliminated through formal codes, policies, and rules that are
adequately enforced by management.
The ethical decision making framework is not a guide for
making decisions. It is intended to provide insights and
knowledge about typical ethical decision making processes in
business organizations. Ethical decision making within
organizations does not rely strictly on the personal values and
morals of employees. Organizations have cultures of their own
that when combined with corporate governance mechanisms
may significantly influence business ethics.
Normative approaches describe how organizational decision
makers should approach an ethical issue. Institutional theory is
an important normative concept that states that organizations
operate according to taken-for-granted institutional norms and
rules. Political, economic, and social institutions help
organizations determine principles and values for appropriate
conduct. Principles are important in preventing organizations
from “bending the rules.” Philosopher John Rawls contributed
important work on principles, particularly principles of justice.

6. Core values are enduring beliefs about appropriate conduct and
provide guidance for the ethical direction of the firm.
Week 3 Lecture video
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