Chapter 3

Organizational
Ethics

McGraw-Hill Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved.
 I very much doubt that the Enron executives came to work one
morning and said, "Let's see what sort of illegal scheme we can
cook up to rip off the shareholders today." More likely, they
began by setting extremely high goals for their firm . . . and for a
time exceeded them. In so doing they built a reputation for
themselves and a demanding expectation among their investors.
Eventually, the latter could no longer be sustained. Confronting
the usual judgmental decisions which one presented to executives
virtually every day, and not wanting to face reality, they
gradually began to lean more and more towards extreme
interpretations of established accounting principles. The next
thing they knew they had fallen off the bottom of the ski jump.

Norman R. Augustine, Retired Chairman of Lockheed Martin

Corporation in his 2004 acceptance of the Ethics Resource
Centers Stanley C. Pace Leadership in Ethics award

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 Defining Organizational Ethics

Business Ethics separate from General

Ethics for 2 reasons:
Other parties have a vested interest in the
ethical performance of an organization
In a work environment, you may be placed
in a situation where your personal value
system may clash with the ethical
standards of the organizations operating
culture
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 Defining Organizational Ethics
Organizational culture the values,
beliefs, and norms that all the employees
of that organization share
The culture represents the sum of all the
policies and procedures
(written/informal) from each of the
functional departments in the
organization.

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 Defining Organizational Ethics
In this chapter, we will examine
individual departments within an
organization and ethical dilemmas that
members of those department face each
day.
Value chain the key functional inputs
that an organization provides in the
transformation of raw materials into a
delivered product or service
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 Defining Organizational Ethics
Key Functions
Research & Development: which develops
and creates new product designs.
Manufacturing: building the product.
Marketing (and advertising)
Sales
Customer service
Supporting each of these functional areas are
the line functions:
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 Primary Line Functions
Human Resource Management: which
coordinates the recruitment, training,
and development of personnel for all
aspects of the organization.
Finance: include internal and external
accounting personnel, and external
auditors who are called upon to certify
the accuracy of a companys financial
statements.
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 Primary Line Functions
Information system: maintain the
technology backbone of the organization
data transfer and security, email
communications, as well as the hardware
and software needed for the
organization.
Management: the supervisory role that
oversees all operational functions.

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 Primary Line Functions
Each of these functional line areas can
represent a significant commitment of
resources (personnel, technology and
dollars).
From an ethical perspective, employees
in each area can face ethical challenges
and dilemmas.

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 Organizational Ethics

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 Ethics in R & D
Directly involved in future growth
Without new products to sell, organizations
can lose their customers to competitors
who are offering products that are better,
faster, cheaper.
R&D teams incorporate customer feedback
from market research and competitive
feedback

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 Ethics in R & D
However, alongside this responsibility
comes an equally critical commitment to
the consumer in the provision of product
quality, safety, and reliability
Defective products not only put
consumers at risk but also generate
negative press coverage (damaging the
organizations reputation).

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 Ethics in R & D
When we consider these opposing
objectives, the potential for ethical
dilemmas is considerable.
R&D teams are tasked with making a
complex set of risk assessments and
technical judgments in order to deliver a
product design.

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 Ethics in R & D
However, if the delivery of that design
does not match the manufacturing cost
figures that are needed to sell the
product at a required profit margin, then
some tough decisions have to be made.

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 Ethics in R & D
If better, cheaper, faster is the ideal,
then compromises have to be made in
functionality or manufacturing to meet a
targeted cost figure.
If too many features are taken out,
marketing and advertising wont have a
story to tell, and the salespeople will face
difficulties in selling the product against
stiff competition.
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 Ethics in R & D
If too few changes are made, the
company wont be able to generate a
profit on each unit and meet its
obligations to shareholders who expect
the company to be run efficiently and to
grow over the long term.

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 Ethics in R & D
For the R&D team, the real ethical
dilemmas come when decisions are
made about product quality:
Do we use the best materials available or
the second best to save some money?
Do we run a full battery of tests or
convince ourselves that the computer
simulations will give us all the
information we need?
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 Ethics in Manufacturing
The relationship between R&D and
manufacturing is often a challenging one.
Managers complain about designs being
thrown over the wall to manufacturing
with the implication that the product
design may meet all the required
specifications, but now it falls to the
manufacturing team to actually get the
thing built.
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 Ethics in Manufacturing
The pressures here are very similar to
those in the R&D function as
manufacturers face the ethical question:

Do you want it built fast, or do you want

it built right?

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 Ethics in Manufacturing

From an organizational perspective, you

want both, especially if you know that
your biggest competitor also is racing to
put a new product on the market (and if
it gets there before you do, all your sales
projections for your product will be
worthless).

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 Ethics in Manufacturing

Here again, you face the ethical

challenges inherent in arriving at a
compromisewhich corners can be cut
and by how much.

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 Ethics in Manufacturing

You want to build the product to the

precise design specifications, but what if
there is a supply problem? Do you wait
and holdup delivery, or do you go with
an alternative (and less reliable)
supplier? Can you be sure of the quality
that alternative supplier will give you?

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 Ethics in Marketing

Once the manufacturing department delivers a

finished product, it must be sold. The marketing
process(which includes advertising, public relations,
and sales) is responsible for ensuring that the
product reaches the hands of a satisfied customer.

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 Ethics in Marketing

If the marketers did their research correctly and

communicated the data to the R&D team accurately,
and assuming the finished product meets the original
design specifications and the competition hasnt
beaten you to market with their new product, this
should be a slam dunk, but with all these
assumptions, a great deal can go wrong.

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 Ethics in Marketing
Marketers see themselves as providing products (or
services) to customers who have already expressed a
need for and a desire to purchase those products.
In this respect, marketers are simply communicating
information to their customers about the
functionality and availability of the product, and then
communicating back to the organization the
feedback they receive from those customers.

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 Ethics in Marketing

Critics of marketing see it as a more manipulative

process whereby unsuspecting customers are
induced to buy products they dont really need and
could quite easily live without by slick commercials
and advertisements.

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 Ethics in Marketing
From an ethical standpoint, these opposing
arguments can be seen to line up with distinct
ethical theories. Marketers emphasize customer
service and argue that since their customers are
satisfied, the good outcome justifies the methods
used to achieve that outcome no matter how
misleading the message or how unnecessary the
product sold.

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 Ethics in Marketing
At some point you reach a place where customers
can survive without your product or service, and
marketing must now move from informing
customers and prospects about the product or
service to persuading or influencing them that their
lives will be better with this product or service and,
more importantly, they will be better with your
companys version.

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 Ethics in HR - I
The HR Relationship:
The creation of the job description for the position.
The recruitment and selection of the right candidate for the
position.
The orientation of the newly hired employee
The efficient management of payroll and benefits for the (hopefully)
happy and productive employee.
The documentation of periodic performance reviews.
The documentation of disciplinary behavior and remedial training if
needed.
The creation of a career development program for the employee.
Coordination of final paperwork - severance benefits and Exit
Interview.
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 Ethics in HR - I
You are behind schedule on a building project, and your boss
decides to hire some illegal immigrants to help get the project
back on track. They are paid in cash under the table, and
your boss justifies the decision as being a one-off besides,
the INS [Immigration and Naturalization Service] has bigger
fish to fry than a few undocumented workers on a building
site! If we get caught, well pay the fineit will be less than
the penalty we would owe our client for missing our deadline
on the project.

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 Ethics in HR - I
Your company has hired a new regional vice president. As the
HR specialist for her region, you are asked to process her
payroll and benefits paperwork. Your boss instructs you to
waive the standard one-year waiting period for benefits
entitlement and enroll the new VP in the retirement and
employee bonus plan immediately. When you raise the
concern that this is illegal, your boss informs you that this new
VP is a close friend of the company president and advises you
that, in the interests of your job security, you should just do it
and dont ask questions!

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 Ethics in HR - I
On your first day as the new HR specialist, you mention to
your boss that the company appears to be out of employee
handbooks and both the minimum wage and Occupational
Safety and Health Administration (OSHA) posters that are
legally required to be posted in the employee break room.
Your boss laughs and says, Weve been meaning to get
around to that for yearstrust me, there will always be some
other crisis to take priority over all that administrative stuff .

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 Ethics in HR - II
1. HR professionals must help ensure that ethics is a top
organizational priority.
2. HR must ensure that the leadership selection and
development processes include an ethics component.
3. HR is responsible for ensuring that the right programs and
policies are in place.
4. HR must stay abreast of ethics issues (and in particular the
changing legislations and sentencing guidelines for
unethical conduct).

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 Ethics in Finance - I
The finance function of an organization can
be divided into three distinct area:
Financial Transactions (Receiving money
from customers and using that money to pay
employees, suppliers and other creditors).
The Accounting Function (keeps track of all
those financial transactions by documenting the
money coming in (credits) and money going out
(debits) and balancing the account at the end of
the period)
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 Ethics in Finance - I I
The Auditing Function: (when an
organizations financial statements, or books, have
been balanced, they must then be reported to
numerous interested parties)

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 Ethics in Finance
Ethical Challenges:
GAAP (Generally Accepted Accounting
Principles)
The generally accepted accounting principles that
govern the accounting profession not a set of laws
and established legal precedents, but rather a set of
standard operating procedures within the
profession
A set of accurate financial statements that present
an organization as financial stable, operationally
efficient, and positioned for strong future growth
can do a great deal to enhance the reputation and
goodwill of an organization
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 Ethics in Finance - II
Ethical Challenges:
Creative Bookkeeping Techniques
It is legal to defer receipts from one
quarter to the next to manage your tax
liability
Conflicts of Interest
A situation where one relationship or
obligation places you in direct conflict
with an existing relationship or obligation
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