When you work, you fulfill a part of Earth's furthest dream, assigned to you

when that dream was born,

And in keeping yourself with labour you are in truth loving life,
And to love life through labour is to be intimate with life's inmost secret.
~ Kahlil Gibran

Everyone agrees that BUSINESS managers must understand finance and marketing.
But is it necessary for them to study ethics?

Managers who answer in the negative generally base their thinking on one of three rationales. They
may simply say that they have no reason to be Ethical. They see why they should make a profit, and
most agree they should do so legally. But why should they be concerned about ethics, as long as they
are making money and staying out of jail? Other managers recognize that they should be Ethical but
identify their Ethical duty with making a legal profit for the firm. They see no need to be Ethical in any
further sense, and therefore no need for any background beyond business and law.

A third group of manager’s grant that Ethical duty goes further than what is required by law. But they
still insist that there is no point in studying ethics. Character is formed in childhood, not while reading
a college text or sitting in class. These arguments are confused and mistaken on several levels. To see
why, it is best to start with the question raised by the first one: why should business people be Ethical?

Why Should One Be Ethical?

There is already something odd about this question. It is like asking, “Why are bachelors unmarried?”
They are unmarried by definition. If they were married, they would not be bachelors. It is the same
with ethics. To say that one should do something is another way of saying it is Ethical. If it is not
ethical, then one should not do it. Perhaps when business people ask why they should be Ethical, they
have a different question in mind: what is the motivation for being good? Is their something in it for
them? It is perfectly all right to ask if there is a reward for being good, but this has nothing to do with
whether one should be good. It makes no sense to try convincing people that they should be good by
pointing to the rewards that may follow. One should be good because “good” is, by definition, that
which one should be.
As for motivation, good behavior often brings a reward, but not every time. Think about it. If it were
always in one’s interest to be good, there would be no need for ethics. We could simply act selfishly
and forget about obligation. People invented ethics precisely because it does not always coincide with
self interest.

Ethical Issues in Business

 Key Causes of Unethical Behavior...

• meeting overly aggressive financial or business objectives

• meeting schedule pressures
• helping the organization survive
• rationalizing that others do it
• resisting competitive threats
• saving jobs

Key Influences on Ethical Behavior...

• personal values
• supervisor influence
• senior management influence
• internal drive to succeed
• performance pressures
• lack of punishment
• friends/coworker influence

Why Misconduct Is Not Reported...

• fear of not being considered a team player

• did not think corrective action would be taken
• fear of retribution (from management)
• “no one else cares, why should I”
• did not trust the organization to keep report confidential

Classification of Ethical Issues...

• conflict of interest
• honesty and fairness
• communications
• organizational relationships

Conflict of interest
A "conflict of interest" occurs when an individual's private interest interferes or appears to
interfere with the interests of the Company. A conflict of interest can arise when a
director, officer or employee takes actions or has interests that may make it difficult to
perform his or her Company work objectively and effectively. For example, a conflict of
interest may arise if a director, officer or employee, or a member or his or her family,
receives improper personal benefits as a result of his or her position in the Company.
Conflicts of interest must, whenever possible, be avoided.

Honesty
Honest executives should be truthful to people involved. They should not intentionally
mislead or deceive others by distorting information, exaggerating or giving partial truth.
Nor should they discriminate against people by doing or abstaining from doing something
required to be done.

Fairness
Executives should be fair and just towards all people. They should not use their power
deliberately, neither should they resort to cheating or inappropriate tactics to obtain or
maintain benefits or advantages from misled or distressed people. Fair-minded executives
should disclose the agreements set for consideration and treat everyone equally, be open
to disagreeable opinions, willing to admit the mistakes they make, and ready to shift
positions and beliefs to appropriate and correct ones, if the situation demands.

Communication
Communication is one of the basic functions of management in any organizations and its
importance can hardly be overemphasized. It is a process of transmitting information,
ideas, thoughts, opinions and plans between various parts of an organization.
Organizations should have effective and speedy communication policy and procedures to
avoid delays, misunderstandings, confusion or distortions of facts and to establish
harmony among all the concerned people and departments.

Organizational Relationships

Why do companies develop ethics programs?

• to allow employees and stakeholders to understand the values of the
business
• to comply with policies and codes of conduct
• to create the ethical climate of the business
 Federal Sentencing Guidelines for
Organizations...
Main objective:

“To create an ethical environment/ climate in the organization”

Abstract
Minimizing criminal activity through effective procedures does not necessarily create an
ethical organization. The Federal Sentencing Guidelines for Organizations (FSGO) has
been seen as a standard for establishing elements that are important in limiting judicial
risk. Research has confirmed that four of these elements also seem to indicate whether or
not a company has a strong ethics program and seems to have an impact on how well the
company does in managing financial loss based on illegal behavior.

The FSGO - Background

The Federal Sentencing Guidelines for Organizations (FSGO) were born out of problems
in the 1980s where companies were not punished due to crimes. Individuals were able to
hide behind corporate status so punishment was lessened. The FSGO gave guidelines for
punishment of companies based on size and culpability. But with the punishment came
some opportunity. If a company could show that they were making a good faith effort to
reduce criminal activity within their organization through programs, the company would
be less liable should an investigation be needed.

This was implemented through a FSGO Culpability Score (starting with 5) which
determined the amount of the fine and other sanctions leveled on the organization that
broke the law. The culpability (or specifically the culpability score) could be reduced by
showing that the company had been trying to do the right thing.
 For example if an organization was over 5000 employees and if the offense occurred
despite an effective program to prevent and detect violations of law, then 3 points were
subtracted from the 5 point total, thus reducing the punishment issued.

Designed to encourage "good corporate citizenship," the organizational

guidelines focus on remedying the harm caused by the organization by
requiring restitution and awarding an appropriate fine reflecting the
seriousness of the offense and the culpability of the organization or ordering
it to serve community service.

Recent Amendments to the Organizational

Guidelines
Effective November 1, 2004, the organizational guidelines now incorporate over a
decade of experience, including statutory and regulatory reforms, to provide a
more comprehensive and demanding framework.

In general, board members and senior executives must now assume more
specific responsibilities for a program to be found effective:

High-level personnel and substantial authority personnel of the organization shall

be knowledgeable about the content and operation of the compliance and ethics
program, shall perform their assigned duties consistent with the exercise of due
diligence, and shall promote an organizational culture that encourages ethical
conduct and a commitment to compliance with the law.

More specifically, the Commission's definition of an effective compliance and

ethics program now has three subsections:

Subsection (a) the purpose of a compliance and ethics program,

Subsection (b) seven minimum requirements of such a program, and

Subsection (c) the requirement to periodically assess the risk of criminal conduct
and design, implement, or modify the seven program elements, as needed, to
reduce the risk of criminal conduct.
Purpose of an Effective Compliance and
Ethics Program
The purpose of an effective compliance and ethics program is "to exercise due diligence
to prevent and detect criminal conduct and otherwise promote an organizational
culture that encourages ethical conduct and a commitment to compliance with the
law."

The new requirement to promote an ethical organizational culture significantly expands

the scope of an effective program. It should be read together with a requirement in a later
section that requires the organization to report an offense to the appropriate governmental
authorities without unreasonable delay.

Organizations under FSGO

1. Corporations
2. Partnerships
3. Associations
4. Joint-stock companies
5. Unions
6. Trusts
7. Pension funds

8. Unincorporated organizations, governments and political

subdivisions, and nonprofits

Original 7 Hallmarks of an Effective

Compliance and Ethics Program

To demonstrate the presence of an effective Compliance and Ethics program, an

organization must have, at a minimum, the following key ingredients in its
Compliance and Ethics Program:

• Prevention and Detection Procedures:

Establish standards and procedures to prevent and detect criminal conduct

“Standards and procedures” encompass standards of conduct and internal
controls that are reasonably capable of reducing the likelihood of criminal
conduct.

• High Level Oversight:

Assign specific individuals within high-level personnel an overall responsibility to

oversee compliance and provide adequate resources and authority to carry out
such responsibility

• Due Care in Delegation of Authority:

Use reasonable efforts not to include within high authority personnel any
individual who engaged in illegal activities or other improper conduct

“Use reasonable efforts not to include within substantial authority

personnel of the organization any individual whom the organization knew,
or should have known through the exercise of due diligence, has engaged
in illegal activities or other conduct inconsistent with an effective
compliance and ethics program.”

• Communication, Training and Education:

It extends the training requirement to upper levels in the organization, including

the governing authority and high-level personnel, in addition to all employees and
agents. Furthermore, the communication and training must be ongoing with
periodic updates.

• Monitoring, Auditing and Reporting Systems

Take reasonable steps to achieve compliance, specifically, use auditing and

monitoring systems designed to detect criminal conduct, and use internal
reporting systems to report or seek guidance regarding potential or actual criminal
conduct, The organization must have “a system which may include mechanisms
that allow for anonymity or confidentiality.”

• Enforcement and Discipline

Enforce and encourage compliance through, respectively, disciplinary measures and

appropriate incentives to perform in accordance with the program

• Appropriate, Consistent Response:

The guideline retains the obligation to take reasonable steps, after an offense had been
detected, to respond to and prevent further similar criminal conduct, including making
any necessary modifications to the program and prevent further similar criminal conduct.

FSGO Considerations if Misconduct Is

Determined...
• organizations must remedy any harm caused by the offense
• if criminal purpose, fines are designed to put the firm out of business
• fines are based on the seriousness of the offense as well as culpability
• probation may be assigned

Top Ten Unethical Behaviors Reported by

Employees...
• sexual harassment
• lying on reports or falsifying records
• conflicts of interest
• theft
• lying to supervisors
• discrimination
• drug or alcohol abuse
• improper accounting procedures
• violation of environmental laws
• gift/entertainment violations

Code of Ethics...
• formal statement of what an organization expects in the way of ethical
behavior (what behaviors are acceptable or unacceptable)
• reflects senior management’s organizational values, rules, and policies

Six Steps in Implementing a Code of Ethics...

 • distribute internally & externally
• assist employees in understanding
• specify management’s role
• make employee’s responsible for understanding the code
• establish grievance procedures
• provide a concluding statement

How CEOs Support Ethics Initiatives...

• communicate directly with employees
• use their own “phraseology”
• tout successes and condemn failures
• use one standard for all employees (regardless of level)
• acknowledge & promote ‘ethically aware’ managers
• survey employees about the program

Role of an Ethics Officer...

Step 1: Conduct a rigorous self-assessment
What are our company’s values? What do employees believe are our real values? What
elements of an ethics and compliance program are already in place? What must we
create a new?

Step 2: Ensure commitment from the top of the organization

What outcome does the board and executive managers want to achieve? How do we
describe what will be different once this program is in place? How do we demonstrate our
commitment and involvement? Are we ethically neutral or ethically committed?

Step 3: Publish and distribute Code(s) of Ethics and related guidance materials
Do we have written guidance that explains our rules and expectations? Do employees
know what they can expect of us? Can employees find, read, and apply these rules? Are
the policies readily available? Are they written at the average employee’s reading level?

Step 4: Communicate, communicate, and communicate once again

Do employees hear and believe us? What are the key messages that must be repeated
over and over? Are we using multiple channels to get our messages heard?

Step 5: Training
How are our messages reinforced? Do employees get just-in-time training and learning
opportunities that help them use our rules and values? Are we building capacity among
all employees to exercise moral judgment?

Step 6: Provide confidential resources

Where can employees go with problems, concerns, and allegations of misconduct? How
reliable and trusted are those resources? Are confidences maintained? What happens
after a call is made?

Step 7: Ensure consistent implementation

Do our ethics systems work smoothly and efficiently? Are roles and responsibilities clear
and well documented? Is the right structure in place?

Step 8: Respond and enforce consistently, promptly, and fairly

Are we consistent in applying our values, standards and rules? Is appropriate conduct
recognized and rewarded? How are our internal investigations conducted? Is discipline
uniformly applied?

Step 9: Monitor and assess

What methods are used to evaluate our efforts to create an ethical organizational
culture? Do employees receive feedback on how we think we are doing?

Step 10: Revise and reform

Do we periodically update our values, rules, and program content? Are we committed to
continuous improvement?

Sustaining an Effective Program

We have all faced a moment of truth once a program is launched. We turn to our
colleagues and ask, “Now what happens?”

Planning an effective ethics program is easier than sustaining and maintaining it over
time. Because effective programs are products of their unique corporate cultures, no two
programs are ever exactly alike. There just is not a recipe book that details precisely how
to make business ethics happen. A sustainable program takes experimentation and
elbow grease.

Great ethics programs share certain characteristics of excellence. When these standards
are met, programs are sustainable over time.

• Employees are encouraged to ask questions and get advice before taking action.
• Employees receive prompt, useful, and accurate advice about ethical workplace
behavior.
• Employees receive, read, and use ethics program materials.
• Senior executives are visibly committed to the ethics program.
• Senior management and corporate governance provide knowledgeable oversight to
the program.
• Employees, managers, and board members participate in regular training about
ethics and compliance.
• Information about ethics and compliance is communicated to all internal and external
stakeholders.
• The ethics program is supported by a written business plan, resulting in regular
budget allocations.
• A commitment to business ethics and integrity in business conduct is incorporated
into employee reward and recognition processes.
• The rules (both written and unwritten) stay the same in good times as well as in bad
times.

Is Training Required?
Recognizing that effective communication of corporate procedures can’t be achieved by
simply creating brochures, the guidelines make effective compliance and ethics training a
requirement for all of the organization’s employees within the context of an effective
Compliance and Ethics Program.

How Does Ethics Training Occur

• Development of a code of ethics (79%)
• Lectures (63%)
• Workshops and seminars (53%)
• Case studies (46%)
• Videos with discussion (41%)

Ethical Compliance Audit...

• systematic evaluation of an organization’s ethics program and/or
performance to determine its effectiveness
• focuses on the key factors that influence how ethical decisions are
made

Is Risk Assessment Required?

The amended Organizational Guidelines expressly provide, as an essential component of
the design, implementation and modification of an effective program, that an organization
must periodically assess the risk that criminal conduct will occur, including addressing the
following:

• The nature and seriousness of such criminal conduct; and

• The likelihood that certain criminal conduct may occur, because of the nature of
the organization’s business and its prior history.

In other words, companies now must now demonstrate that they have identified risk areas
where criminal violations may occur. An organization must also demonstrate the use of
auditing and monitoring system to detect criminal conduct, and periodic evaluations of the
effectiveness of the program.

What Are The 10 Modifications To the

Guidelines?
The new guidelines recommend 10 modifications to the guidelines. Each item is intended
to synchronize the guidelines with Sarbanes-Oxley and emerging public and private
regulatory requirements. The 10 recommended modifications are:

1. Tone At The Top: Emphasize the importance within the guidelines of an

organizational culture that encourages a commitment to compliance with the law;
2. Conduct And Internal Control: Provide better description of compliance
standards and procedures, i.e. the standards of conduct and internal control
systems that are reasonably capable of reducing the likelihood of violations of the
law;
3. Leadership Accountability: Specify the responsibilities of an organization’s
governing authority and organizational leadership for compliance;
4. Resources and Authority: Emphasize the importance of adequate resources and
authority for individuals with the responsibility for implementing a Compliance
and Ethics Program;
5. History of Violations: Replace “propensity to engage in violations of the law”
with a more objective requirement of determining if there is a “history of engaging
in violations of the law”;
6. Conduct Training: Include both training and dissemination of training materials
within the definition of an effective Compliance and Ethics Program;
7. Evaluate Programs: Add periodic evaluation of the effectiveness of a
Compliance and Ethics Program to the requirement for monitoring and auditing
systems;
8. Risk Assessment: Provide for the ongoing risk assessment as part of an effective
Compliance and Ethics Program;
 9. Encourage Employees: establish a system for employees not only to report actual
violations, but also to seek guidance about potential violations, in order to
encourage prevention of violations; and
10. Whistleblower System: Require a mechanism for anonymous reporting.

Impact of Guidelines
Although the Guidelines have been in existence for only half a decade, they have already
had a significant impact; the primary impact has been the creation or enhancement of
compliance or ethics programs by thousands of companies across the United States, and
even outside of the U.S.

In some cases, the Guidelines have provided a model for the entire compliance or ethics
program. For example, The Bank of Tokyo has made the Guidelines "the focal point of its
overall compliance effort" (U.S. Sentencing Commission, 1995:63). According to the
bank, the Guidelines gave them "...a clear picture of what a compliance program should
look like and a set of instructions on how to construct a program." The bank also found
that "...virtually every compliance directive we received, regardless of the source, fit
comfortably within the structure that is suggested by the [seven elements for compliance]"
(U.S. Sentencing Commission, 1995:65). In addition to The Tokyo Bank, other New
York-area banks as well as a Canadian bank, the CIBC, "...have begun to use the
guidelines as a foundation for their overall compliance efforts" (U.S. Sentencing
Commission, 1995:67).

Other companies, even if they already had some sort of compliance or ethics program in
place before 1991, have indicated that the Guidelines were one of the factors which
influenced the enhancement of already existing ethics programs. According to "A
National Study of Compliance Practices" which involved 333 corporations representing
various sizes and industries, 44 percent of the respondents stated that the Guidelines
caused them to add vigor to their compliance programs, while 20 percent added
compliance programs because of their awareness of the Guidelines (U.S. Sentencing
Commission, 1995:134).

According to Andrew Apel, the author of the study, "…certainly, the guidelines are
having a significant impact on what organizations are doing to prevent and detect
violations of law" (U.S. Sentencing Commission, 1995:129). Another study by the
Council of Ethical Organizations of approximately 750,000 employees from 203 large
U.S. companies also found that the Guidelines have had an influence on corporate ethics
programs. The survey found that 38 percent of the companies significantly improved their
ethics compliance environments following the enactment of the Guidelines (U.S.
Sentencing Commission, 1995:178).
Unfortunately, the studies did not break down the impact of the Guidelines on individual
components of ethics programs. Despite this gap, one can assume that the Guidelines have
had the greatest impact on four components: (1) ethics training; (2) ethics officers; (3)
ethics offices; and (4) ethics hotlines. Each of these components can be related to one of
the seven elements of an effective compliance program as stipulated by the Guidelines. It
should be noted, however, that one component in particular, a code of ethics, has not
come into existence merely as a result of the Guidelines. As several studies have
indicated, the vast majority of large companies (93 percent) already had a code of ethics
in place by 1990 (Center For Business Ethics, 1992).

Conclusion
All of society stands to benefit from reduction in corporate crime and unethical
activity. The U.S. Federal Sentencing Guidelines provide a model which to date
appears to be successful in achieving this goal. Other countries around the world,
including Australia, Europe, and Canada, have already adopted or are in the
process of adopting similar legislation.

Some believe that the Federal Sentencing Guidelines for organizations represent
a milestone both in federal criminal law and in organizational behavior. Their
impact has been wide ranging. They are a real success story for the United
States Sentencing Commission in its work to deter crime and encourage
compliance with the law. Like any body of law, however, the organizational
guidelines may need to be modified as circumstances change.

Hopefully the success of the Guidelines will encourage other countries to

consider developing their own legislative incentives for corporations to abide by
the law and engage in activities to promote the level of ethics in all organizations.