Chapter 03 - Organizational Ethics

CHAPTER 3

Organizational Ethics
Chapter Summary

This chapter examines how each functional department, within an organization, manages the
challenge of building and maintaining an ethical culture. The chapter begins by defining
organization’s culture and an organization in terms of its functional areas within a value chain.
Then the chapter begins looking at the ethics involved in research and development,
manufacturing, marketing, human resources, and finance. The ethical challenges presented by
generally accepted accounting principle (GAAP) are explained and how the accounting industry
is dealing with those challenges. The chapter also goes over potential conflicts of interest within
various organizational functions.

Learning Outcome 1: Define Organizational Ethics.

 Organizational culture is the values, beliefs, and norms that all the employees of that
organization share.
o The culture represents the sum of all the policies and procedures—both written and
informal—from each of the functional departments in the organization in addition to
the policies and procedures that are established for the organization as a whole.
 A value chain is the key functional inputs that an organization provides in the
transformation of raw materials into a delivered product or service.
o Traditionally, these key functions are identified as:
 Research and development (R&D)—develops and creates new product designs
 Manufacturing—sources the components and builds the product
 Marketing (and advertising)
 Sales
 Customer service
o Supporting each of these functional areas are the line functions:
 Human resource management—coordinates the recruitment, training, and
development of personnel for all aspects of the organization.
 Finance—can include internal accounting personnel, external accounting
personnel, and external auditors who are called upon to certify the accuracy of
a company’s financial statements.
 Information systems (IS or IT)—maintain the technology backbone of the
organization (data transfer and security, e-mail communications, internal and

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Chapter 03 - Organizational Ethics

external websites, as well as the individual hardware and software needs that
are specific to the organization and its line of business).
 Management—the supervisory role that oversees all operational functions.

Learning Outcome 2: Explain the Respective Ethical Challenges Facing the Functional
Departments of an Organization.

 Research and development (R&D) professionals carry the responsibility for the future
growth of the organization.
o However, alongside this responsibility comes an equally critical commitment to the
consumer in the provision of a product that is of the highest quality, safety, and
reliability.
 Defective products not only put consumers at risk but also generate negative
press coverage (damaging the organization’s reputation) and very expensive
lawsuits that can put the organization at risk of bankruptcy.
 For the R&D team, the real ethical dilemmas come when decisions are made about product
quality.
 The relationship between R&D and manufacturing is often a challenging one.
o 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?”
 The marketing process (which includes advertising, public relations, and sales) is
responsible for ensuring that the product reaches the hands of a satisfied customer.
 Marketers see themselves as providing products (or services) to customers who have
already expressed a need for and a desire to purchase those products.
 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.
o This represents a view of ethics called utilitarianism.
 Utilitarianism is the ethical choices that offer the greatest good for the greatest
number of people.
 Critics argue that the process itself is wrong irrespective of the outcome
achieved—that is, how can marketers be proud of an outcome when the
customer never needed that product to begin with and was manipulated, or at
the very least influenced, by a slick ad campaign into feelings of envy,
inadequacy, or inequality if he or she didn’t rush out and buy it?
 On this side of the debate, people are considering universal ethics.
 Universal ethics are 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.

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Chapter 03 - Organizational Ethics

 Marketing professionals abide by a code of ethics adapted by the American Marketing

Association (AMA).
o The code speaks eloquently about doing no harm, fostering trust, and improving
“customer confidence in the integrity of the marketing exchange system,” and
establishes clear ethical values of honesty, responsibility, fairness, respect, openness,
and citizenship.

Learning Outcome 3: Discuss the Position that a Human Resource (HR) Department
Should Be at the Center of Any Corporate Code of Ethics.

 The human resource function within an organization should ideally be directly involved in
the relationship between the company and the employee throughout that employee’s
contract with the company:
o The creation of the job description for the position.
o The recruitment and selection of the right candidate for the position.
o The orientation of the newly hired employee.
o The efficient management of payroll and benefits for the (hopefully) happy and
productive employee.
o The documentation of periodic performance reviews.
o The documentation of disciplinary behavior and remedial training, if needed.
o The creation of a career development program for the employee.
 The HR department should coordinate the final paperwork, including any severance
benefits, and should host an exit interview to ensure that anything the organization can
learn from the departure of an employee is fed back into the company’s strategic plan for
future growth and development.
 Every step of the life cycle of a company-employee contract has the potential for ethical
transgressions.
o If the right people are hired in the first place, it is believed, many other problems are
avoided down the road.
 Many advocates of ethical business conduct argue that HR should be at the center of any
corporate code of ethics—not as the sole creator of the code, since it is a document that
should represent the entire organization, but certainly as the voice of reason in ensuring
that all the critical areas are addressed.
o HR professionals must help ensure that ethics is a top organizational priority.
o HR must ensure that the leadership selection and development processes include an
ethics component.
o HR is responsible for ensuring that the right programs and policies are in place.
o HR must stay abreast of ethics issues (and in particular the changing legislation and
sentencing guidelines for unethical conduct).
 The finance function of an organization can be divided into three distinct areas—financial

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Chapter 03 - Organizational Ethics

transactions, accounting, and auditing:

o The financial transactions—the process by which the flow of money through an
organization is handled.
o The accounting function—the function that keeps track of all the company’s
financial transactions by documenting the money coming in (credits) and money
going out (debits) and balancing the accounts at the end of the period (daily, weekly,
monthly, quarterly, annually).
o Auditing function—the certification of an organization’s financial statements, or
“books,” as being accurate by an impartial third-party professional. An organization
can be large enough to have internal auditors on staff as well as using external
professionals—typically certified professional accountants and/or auditing
specialists.
 As an organization grows and eventually goes public by selling stock in the organization
on a public stock exchange, the need for certified financial documents becomes even
greater.
o Existing and potential investors will make the decision to invest in the shares of an
organization based on the information presented in the certified financial
statements—specifically, the profit and loss statement and the balance sheet.
 Internal auditors are well disciplined in their craft and subscribe to a professional code of
ethics.
o They are diverse and innovative.
o They are committed to growing and enhancing their skills.
o They are continually on the lookout for emerging risks and trends in the profession.
o They are good thinkers.
 To effectively fulfill all their roles, internal auditors must be excellent communicators who
listen attentively, speak effectively, and write clearly.
 Modern day internal auditors are consulted on all aspects of the organization and must be
prepared for just about anything.
o They are coaches, internal and external stakeholder advocates, risk managers,
controls experts, efficiency specialists, and problem-solving partners.

Learning Outcome 4: Explain the Potential Ethical Challenges Presented by Generally

Accepted Accounting Principles (GAAP).

 GAAP is the generally accepted accounting principles that govern the accounting
profession—not a set of laws and established legal precedents but a set of standard operating
procedures within the profession.
 It is legal to defer receipts from one quarter to the next to manage the tax liability.
o However, accountants face ethical challenges when requests are made for far more

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Chapter 03 - Organizational Ethics

illegal practices, such as falsifying accounts, underreporting income, overvaluing

assets, and taking questionable deductions.
 A set of accurate financial statements that present an organization as financially stable,
operationally efficient, and positioned for strong future growth can do a great deal to enhance
the reputation and goodwill of an organization.
o The fact that those statements have been certified by an objective third party to be
“clean” only adds to that.
o However, that certification is meant to be for the public’s benefit rather than the
corporation’s.
o This presents a very clear ethical predicament.
o The accounting/auditing firm is paid by the corporation, but it really serves the
general public, who are in search of an impartial and objective review.

Learning Outcome 5: Determine Potential Conflicts of Interest Within Any Organizational

Function.

 A conflict of interest is a situation in which one relationship or obligation places people in

direct conflict with an existing relationship or obligation.
 As per the value chain model, the potential for conflicts of interest within an organization can
go far beyond the finance department:
o At the most basic level, simply meeting the needs of the organization’s stakeholders can
present conflicts of interest when the organization considers the possibility that what is
best for the shareholders may not be best for the employees and community.
o Selling a product that has the potential to be harmful to the customers represents a
conflict of interest.
o Selling a product that has the potential to be harmful to the environment also carries a
conflict of interest.
 These attempts to address conflicts of interest all have one thing in common.
 Whether that were prompted by internal strategic policy decisions or
aggressive campaigns by customers and special interest groups, the decisions
had to come from the top of the organization.
o Changing the way an organization does business can sometimes begin with support from
the front line of the organization, but eventually the key decisions on corporate policy
and capital expenditure have to come from the senior leadership of the organization.

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