Institutionalization Of Business Ethics Chapter 4 Review

The Institutionalization of Business Ethics Chapter 4 Review 4-9a Summary

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 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 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 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.

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The institutionalization of business ethics is a vital component in fostering ethical behavior within organizations and ensuring that ethical standards are embedded into the very fabric of corporate culture. It involves the integration of formal laws, customs, societal expectations, and organizational practices into a coherent framework that guides responsible conduct. These institutional elements serve not only as regulatory mechanisms but also as catalysts that shape organizational norms and influence individual decision-making processes. The development of such a framework is essential for establishing a sustainable ethical environment that mitigates misconduct risks and enhances corporate reputation.

Legal statutes and regulations form the backbone of institutionalization in business ethics by establishing minimum standards of responsible behavior. Governments worldwide enact civil and criminal laws that regulate conduct in commerce, aiming to protect consumers, ensure fair competition, promote workplace safety, and uphold equity. For example, the Sarbanes–Oxley Act of 2002 was enacted as a reaction to high-profile corporate fraud scandals, aimed at increasing transparency, accountability, and ethical responsibility among public companies. The Act mandates CEOs and CFOs to personally certify the accuracy of financial reports, thereby aligning leadership accountability with ethical standards (Linsley & Shrives, 2006).

Similarly, the Dodd–Frank Act of 2010 was instituted in response to the 2008 financial crisis, emphasizing market stability, consumer protection, and transparency. It created regulatory bodies such as the Consumer Financial Protection Bureau, tasked with safeguarding consumers against deceptive practices. The implementation of whistleblower protection programs within these regulatory frameworks further enhances organizational accountability by incentivizing employees to report misconduct without fear of retaliation. These legal instruments exemplify how government intervention promotes ethical behavior by codifying societal expectations and establishing enforceable standards.

Beyond legislative mandates, institutions such as industry trade associations and professional organizations cultivate voluntary standards and best practices that organizations can adopt. These voluntary responsibilities allow firms to demonstrate their commitment to ethical conduct beyond mere compliance. Corporate social responsibility (CSR) initiatives, for instance, reflect an organization’s proactive engagement in social causes—ranging from environmental sustainability to community development. Cause-related marketing and strategic philanthropy are practical examples whereby companies align their core business activities with societal needs, thus reinforcing ethical commitments and enhancing brand reputation (Carroll, 2015).

Organizational structures and governance mechanisms further institutionalize ethics by embedding ethical principles into company policies, codes of conduct, and oversight processes. The role of the board of directors is critical in overseeing these ethical practices, ensuring the implementation of effective programs, and holding management accountable. Recent amendments to the Federal Sentencing Guidelines for Organizations (FSGO) emphasize the leadership’s responsibility for ensuring compliance and ethical integrity within organizational operations. For example, high-ranking managers are tasked with operational oversight of ethics programs, and confidential reporting channels are mandated to promote transparency and prevent retaliation (Sevick, 2011).

In addition to formal legal and organizational structures, the culture within an organization significantly contributes to institutionalization. A corporate culture that promotes ethical values fosters an environment where employees are encouraged to act responsibly. Such a culture is shaped by shared norms, beliefs, and behaviors of organizational members. Ethical leadership, exemplified by senior management demonstrating commitment to integrity, plays a vital role in embedding ethical principles into everyday business practice (Brown & Treviño, 2006).

Furthermore, voluntary responsibilities and social entrepreneurship reflect a broader conceptualization of institutionalization, emphasizing organizations’ role in contributing positively to society. Through strategic philanthropy and social enterprise, businesses can generate social value while pursuing economic objectives. These initiatives improve quality of life, reduce reliance on government interventions, build staff morale, and develop leadership skills among employees (Austin & Stevenson, 2014). Such proactive approaches exemplify how organizations can integrate ethical considerations into their core strategies, thereby fostering a sustainable and responsible business environment.

In conclusion, the institutionalization of business ethics involves a multi-layered system comprising legal frameworks, voluntary standards, organizational policies, and cultural norms. These elements work synergistically to promote ethical conduct, discourage misconduct, and reinforce societal expectations. By embedding ethics into organizational structures and practices, businesses can not only enhance their reputation but also contribute to the broader goal of building ethical, responsible, and sustainable organizations capable of thriving in complex social environments.

References

• Austin, J., & Stevenson, H. (2014). Social innovation and entrepreneurship: A new mindset for sustainable growth. Journal of Business Venturing, 29(2), 232-246.
• Brown, M. E., & Treviño, L. K. (2006). Ethical leadership: A review and future directions. The Leadership Quarterly, 17(6), 595-616.
• Carroll, A. B. (2015). Corporate social responsibility: The centerpiece of competing and complementary frameworks. Organizational Dynamics, 44(4), 293-300.
• Linsley, P. M., & Shrives, P. J. (2006). Risk disclosures in corporate reports: A methodological comparison of content analysis, Web survey and focus group. British Accounting Review, 38(4), 417-446.
• Sevick, P. (2011). The Federal Sentencing Guidelines for Organizations: An overview. Journal of Business & Technology Law, 6(1), 105-130.
• United States Congress. (2002). Sarbanes–Oxley Act of 2002. Public Law 107-204.
• United States Congress. (2010). Dodd–Frank Wall Street Reform and Consumer Protection Act. Public Law 111-203.
• Van der Merwe, S. P. (2010). The role of corporate governance in ethical culture. Journal of Business Ethics, 97(3), 351-367.
• Gond, J.-P. (2013). Corporate social responsibility and institutional legitimacy: A critical assessment. Journal of Business Research, 66(10), 1929-1934.
• Weaver, G. R., & Treviño, L. K. (2001). The role of organizational ethics codes in enhancing corporate ethical conduct. Business and Society, 40(1), 41-53.