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Beyond survival: ethics for industrial managers.

Beyond Survival: Ethics For Industrial Managers

During the last three years, it has become increasingly fashionable for executives, professionals, and labor leaders to request an ethics audit of their corporations. This has been done for six reasons, according to L.J. Brooks in the Journal of Business Ethics. First is a growing distrust of corporate activity in financial dealings; environmental protection; health and safety; and claims about questionable payments. Secondly, there is an emphasis on improving the quality of life - health, leisure time, working conditions, fresh air and water. The third reason is the heavy penalties that the corporation and its executives are having to pay when caught in unethical or illegal behavior. Fourth is the growing power of special interest groups to impact corporate activity. The fifth factor is the level of publicity generated by these forces. Lastly, there is a change in objectives from narrow profit maximization to a broader focus to include social issues.

In evaluating a company's ethical practices, one needs to look at what type of situations are involved in determining whether a company is ethical or not; what research says about ethics; what is being done in industry to provide managers with tools for ethical decisions; what are the results of ethical behavior and practices; and what can be done in a company to institutionalize ethical decision making.

Situational Ethical Dilemmas. Every manager has to deal with situational ethical dilemmas. Situations vary in their complexity but may be classified as (a) ethical and legal; (b) ethical but illegal; (c) unethical but legal; or (d) unethical and illegal.

The unethical and illegal situations are the check-kiting scam in E.F. Hutton; defense contract fraud by such corporations as General Dynamics and General Electric; failure by the Bank of Boston to report large cash deposits made by reputed leaders of organized crime; failure by Eli Lilly to report deaths of patients who took Oraflex; the investigation of Cartier regarding collusion with customers to avoid sales tax by mailing empty boxes out of state; an alleged coverup by A.H. Robins of the dangers of the Dalkon Shield; cyanide poisoning of employees within Film Recovery Systems; and unfair takeover tactics by Texaco. Michael Hoffman in Bell Atlantic Quarterly mentions the lack of adequate safety standards by Union Carbide, leading to the tragedy in Bhopal, India. Other situations involve how "good" managers made "bad" ethical choices, such as how top-level executives at the Manville Corporation suppressed evidence for decades that proved that asbestos inhalation was killing their own employees; how the managers of Continental Illinois Bank pursued a course of action that threatened to bankrupt the institution, ruined its reputation, and cost thousands of innocent employees and investors their jobs and their savings as have so many other savings and loans; and why managers at E.F. Hutton pled guilty to 2,000 counts of mail and wire fraud, accepted a fine of $2 million, and put up an $8 million fund for restitution to the 400 banks that the company had systematically bilked, according to Saul W. Gellerman in Harvard Business Review. While industrial first and middle managers are often not the instigators in these examples of unethical decisions, they do suffer along with the unethical decision makers. In addition to situational ethical dilemmas, there are other ethical dilemmas which the first line supervisors or industrial managers must confront or may be affected by. A few of these - commercial bribery, insider information, and other conflicts of information - are discussed in the next sections.

Commercial Bribery. Commercial bribery seemed by the 1970s to have become chiefly a matter of offering excessive gifts and entertainments to the buyer and expecting similar gifts from the supplier. Most of the newer codes - unlike those trade association codes established in the 1920s that considered it a great evil - forbade such gifts or entertainment except as a matter of "normal" social relationships, with "normal" costs varying from a $25 limit to a $200 limit. A manufacturing company, for example, forbids gifts and entertainment unless they are within the bounds of common courtesy or they are of "sufficiently limited value" so they will not be interpreted as bribes or payoffs. Mattel limits employees to receiving gifts worth $60 on one occasion or $300 over a year. Occidental Petroleum provides an example of a wide-ranging prohibition on the acceptance of large gifts. Some companies ask their employees to send gifts back to a charity so the supplying firm will know that gifts are not wanted. A hotel company includes a polite sample letter to accompany returned gifts.

Most corporations allow an exception for gift-giving and gift-taking in foreign countries where this is a common practice. Ameron has such a clause following its prohibition on the acceptance of favors. It recognizes "that in certain countries refusal of personal gifts with a value substantially in excess of accepted United States business practices could result in awkward business situations." Carnation argues that "in some areas of the world outside the United States facilitating payments are by custom or practice made to obtain governmental action." They then go on to list rigorous standards that must first be met by the payer.

One corporation that does not allow such acts, however, is Levi's, according to George C.S. Benson in the Journal of Business Ethics. The company's corporate code of ethics states that: "None of the above practices, gift-giving and taking, are to be engaged in, whether or not prevalent or legal in the foreign country involved."

Insider Information. Many of the insider information situations involve computer businesses where new ways of developing a chip may make millions of dollars of difference in profits. Other situations involve specific times, periods of time beginning so many days after the publication of financial reports and lasting only for a specific period like a month, in which employees may buy or sell stock of their employing company. For example, a major paint company meets the problem by listing company information on which disclosure is not allowed, such as trade secrets, sales lists and records, vendor and purchasing lists, credit information, and confidential technical information. Such negative statements sound forbidding, but they are a simple way of settling many legal points.

Other Conflicts Of Interest. Other conflicts of interest may include dealing with suppliers for personal gain, employee stock ownership in competing companies, moonlighting, and price-fixing. Benson writes that Great Western Financial Corporation's guidelines state: "A conflict of interest exists where an employee has a personal financial interest or other relationship outside Great Western that is or could be adverse to the best interests of Great Western." More specifically, in most companies the employee should not own more than a certain percent of the outstanding shares of stock of a competing, supplying, or purchasing company, without special permission. For Wyle Laboratories, this percentage is one-half of one percent; American Medical International and Hilton Hotels, one percent; and The Gap Stores, five percent.

Employee moonlighting is another type of conflict of interest. Most corporations believe that their employees should not seek a second job and certainly not one with a competing, supplying, or purchasing firm. Di Giorgio Corporation states that no member of a division or of corporate management may be employed other than by Di Giorgio Corporation or its operating divisions.

Price-fixing in the industry - certainly in the heavy equipment section of the industry - has been a problem area. In his chapter in the book Business Ethics: Readings and Cases, Christopher Stone says that Westinghouse appointed an outside advisory panel. The advisory panel insisted not merely that the company instruct its employees that price-fixing was illegal and unethical, but encouraged the establishment of inhouse courses, workshops, and conferences to support ethical behavior.

Results of Ethical Survey Research. Research in this area ranges from opinion polls to actual corporate level surveys. Public opinion, increasing unethical business transactions and losses from them, and employee concerns are all pressuring corporations to deal with the wide array of ethical issues they face. Business people are thought of as unethical by the general public. Public opinion from various polls over a 19 year period confirm this. A Harris poll reported that in 1966, 55 percent of the public had confidence in business leaders, whereas more recently only 20 percent say that they do. A poll by Yankelovich, Skelly, and White reported that in 1968, 70 percent believed business tried to balance their focus on profits and concern for the public, compared with only 15 percent believing so 10 years later. In 1977, a Gallup poll taken for the Center for Business Ethics found that big business was rapidly becoming, in the public's eyes, the biggest threat to the country's future. And a New York Times poll reported in June 1985 that 55 percent of the 1,500 responding adults thought that most U.S. corporate executives were not honest, says Michael Hoffman in Business Ethics: Readings and Cases.

Admittedly, some corporations are involved in illegal behavior and such involvements are costing them many dollars. According to a survey of the 1984 Fortune 500 largest industrial corporations by the Center for Policy Research, roughly two-thirds of the companies had been involved in illegal behavior during a 10-year period. Furthermore, the 100 largest corporations accounted for 55 percent of illegal offenses such as price-fixing, overcharging, violation of environmental regulations and anti-trust laws, bribes, fraud, patent infringements, and violations of various other market regulations. Hoffman also reported that white-collar crime related to unethical activity is estimated to cost business $200 billion annually; fines and penalties run into the millions; and resulting governmental regulations cost business over $100 billion annually in compliance expenses.

Employees also report that ethics codes are not well applied in their workplaces. Industry Week did a reader survey and found that almost a third of them (30.6 percent) claim that the business ethics in their company, compared with two years ago, are "lower." Less than a quarter of those surveyed (23.3 percent) noted some improvement in the ethical behavior of their company. About four in 10 of the respondents (37.2 percent) contended that the subject of ethical behavior was never discussed in the context of their work. Moreover, 30.6 percent claim to have been asked by a supervisor to act in an unethical manner on the job. Nearly two thirds of them (64.7 percent) said that they felt they had to follow the supervisors' orders or risk losing their jobs, according to Stanley Modic in the Industry Week article. These public polls and reader surveys clearly point to the fact that businesspersons must address integrating ethical behavior in the workplace.

Today about 80 percent of the Fortune 500 companies have ethics codes in place (Murphy, 1988; Hoffman, 1989). But, the question remains: To what extent are companies institutionalizing ethics? This is the very question that the Center for Business Ethics addressed in a lengthy questionnaire to the 1984 Fortune 500 industrial and 500 service companies. Of the 279 responding companies, almost 80 percent or 223 companies indicated that they were taking steps to incorporate ethics.

The Center's survey also indicated that these corporate attempts to build ethics into organizations need expanding before they can be successful. The survey results in Table A show the extent to which the businesses surveyed are building ethics into their organization. The most popular method of carrying out business ethics seems to be the "codes of ethics." Although 93.3 percent of the companies taking ethical steps have written codes of ethics, only 17.9 percent have ethics committees, only 7.6 percent have ethics ombudsmen, and only 1.3 percent have judiciary boards. The problem here is with enforcement of the codes. Without a committee or ombudsman assigned to that task, it is difficult to understand how codes can be overseen and enforced adequately or how alleged violations of codes can be adjudicated effectively and fairly. Even the profile of the ethics committees that exists is strongly oriented toward upper management, and they are designed without much input or representation from lower-level employees. According to the survey, "Only 23 percent have managers below the level of the board or executive officers as members of the ethics committees, and only 8 percent have non-managers as members."

Table : "Some ways that ethical values can be incorporated into the corporate environment are listed below. Which of these does your company use?"
 No. Pct. No. Pct.
Code of conduct 208 93 15 7
Ethics committee 40 18 183 82
Judiciary board 3 1 220 99
Ombudsman 17 8 206 92
Employee training in ethics 99 44 124 56
Social auditing and reporting 98 44 125 56
Changes in corporate structure 46 21 177 79
None of the above 2 1 221 99

From Business Ethics: Readings and Cases.

Communicating codes of ethics is also important. However, the Center's survey showed that almost all the companies communicate them to their employees through printed materials, but only 40 percent do so through advice from a superior, 34 percent through an entrance interview, and 21 percent through workshops or seminars. Only 11 percent post them in the workplace.

Concerning the implementation of training and development programs for employees, the Center's survey revealed that more than 44 percent of those corporations taking ethical steps have some form of ethics training, with 53 percent saying they use a workshop or seminar as one method. While the ethics workshop programs should include all levels of the corporation, the survey revealed that only 35 percent of those companies engaged in ethics training involved hourly workers. Most programs were geared to upper management.

Another corporate step toward institutionalizing ethics is the social audit or report, which analyzes the firm's activities in a number of ethically sensitive areas. The Center's survey showed that 43 percent of those corporations taking ethical steps perform a social audit including areas such as equal employment opportunity, compliance, community involvement, safety, quality of products and services, protection of the environment, and conduct in multinational operations. However, the Center's survey found that such social audit information in most cases is circulated only at the highest levels of the company. Only 22 percent disclose their social audits to the general public and to shareholders, according to Hoffman.

In summary, this survey by the Center for Business Ethics shows that corporations are paying more attention to the institutionalization of ethics within their organizational systems. They have the codes of ethics, training programs, and social audits; but they lack the structural changes, multilevel training, and broad informational disclosures that must occur in order to successfully implement a corporate-wide commitment to business ethics.

What Is Being Done In Industry. Organizations doing the best job of institutionalizing business ethics are the ones that are going beyond survival and the traditionally narrow profit motives. These companies look externally and internally to see whose interests can be folded into their firm's purpose and activities.

Control Data Corporation is such an example. The company took note of the unemployed minority youth in neighborhoods where it operated. It knew that these kids were unlikely to acquire the skills necessary to participate in the emerging information economy and started intensive computer training programs for them. Diesel Engines recognized that clean air was a priority for many stakeholder groups so it adopted a strategy to clean the air and enhance its competitive position simultaneously. Interwestern Management's policy states that every employee is an individual so its ground rules emphasize autonomy and uniqueness in all aspects of the business and make a virtue of individualism.

Johnson & Johnson's credo - a document that seeks to provide guidance through a set of principles and beliefs - focuses on responsibilities to consumers, employees, communities, and stockholders. Top management feels strongly that this credo works. It is often mentioned as an important contribution in their handling of the Tylenol crises, said Laura Nash in Harvard Business Review.

Chemical Bank, the nation's fourth largest bank, has an extensive ethics education program. All new employees attend an orientation session at which they read and sign off on Chemical's code of ethics. A second aspect of the program provides in-depth training in ethical decision making for vice presidents. The "Decision Making and Corporate Values" course is a two-day seminar that occurs away from the bank. According to a bank official, the purpose is to "encourage Chemical's employees to weigh the ethical dimensions of the decisions they make and to provide them with the analytical tools to do that."

Codes of conduct are another structural mechanism companies use to signal their commitment to ethical principles. Ninety percent of Fortune 500 firms, and almost half of all other firms, have ethical codes. Codes commonly address issues such as conflict of interest, competitors, privacy, gift giving and receiving, and political contributions. Codes must be tailored to the firms' functional areas, i.e., marketing, finance, and personnel, because functional areas have different cultures and needs. St. Paul Companies (specializing in commercial and personal insurance) is an example of a firm with an exemplary code tailored to functional areas. In each of its five sections, the code offers specific guidance and examples for employees to follow, according to Patrick Murphy in the Journal of Business Ethics.

In 1985, General Dynamics implemented a comprehensive ethics awareness program using a 20-page booklet called "General Dynamics Standards of Business Ethics and Conduct." Management commitment from the top down has been vital to the program's success, and the commitment of all employees at all levels has been necessary to fully implement and sustain the company's efforts. The primary aim of the program is to integrate the company's standards of business ethics and conduct into its daily business affairs. "The booklet gives practical guidelines to follow in daily business conduct and lists mandatory sanctions that will result from failure to comply with the code of conduct," according to William Wagel in Personnel.

Top managers of large companies such as Atlantic Richfield Company (ARCO), General Electric (GE), Dow Chemical Company, and Delta Airlines have either set up hotlines for employees who have worries about wrong doing in the company, or set aside meetings with employees (immediate supervisors not present) in order to try to relieve some of the pressures of whistle-blowing.

In 1984, GTE set up a Policy Committee, which developed a "code of business ethics" found in "The Financial Policy and Standard Practice Management and the Commercial Practice" manual. This manual is the backbone of the GTE Corporation and is used every business day. The manuals deal with the accuracy of reports and records, the safeguarding of company funds, and policies like equal opportunity. Additionally spelled out in policy documents are guidelines to prohibit the payment of bribes, payoffs, kickbacks as well as gift-giving, and the penalties for violators.

Results Of Ethical Business Practices. Ethical behavior may benefit a company directly and indirectly. One obvious benefit internally is improved employee satisfaction and motivation. Externally, ethical firms prosper because consumers recognize and appreciate such companies. These benefits relate directly to greater profits through greater sales revenue. Not only are benefits recognizable through consumer sponsorship, but investors may prefer buying stocks in visible, highly ethical firms.

Indirectly, the costs related to unethical behavior can be eliminated by complying with legislative controls on business activity. For those firms that have paid fines and penalties for unethical or illegal acts, the opportunity costs of being unethical are significantly reduced by ethical behavior. Dollars spent on fines can be invested in worthy corporate projects.

Using ethics not only keeps marketers out of trouble, it also benefits the company. Karen Berney states in Nation's Business that ". . . good ethics is money in your pocket. Not only do ... companies show that high ethical standards translate into higher profits, but they also speak of using ethics to achieve long-term goals, of gaining an |ethical edge.'."

According to Leonard Silk in Business Month, the principal way ethics counts as a benefit, not a cost, is that the participants in the markets feel better and happier and the markets are safer.

What Can Be Done In Your Company. Making ethical decisions is easy when the facts are clear and the choices right or wrong. But it is a different story when the situation is controversial or is clouded by ambiguity, incomplete information, multiple points of view, and conflicting responsibilities. In such situations, ethical decisions depend on both the decision-making process itself and on the experience, intelligence, and integrity of the decision maker.

Responsible moral judgment cannot be transferred to decision makers ready-made. Developing it in business turns out to be partly an administrative process involving recognition of a decision's ethical implications; open discussions to expose different points of view; and testing of the tentative decision's adequacy in balancing self-interest and consideration of others, its importance for future policy, and its consonance with the company's traditional values. In order to make quality ethical decisions, Kenneth Andrews says in Corporate Ethics: A Prime Business Asset managers must have competence to recognize ethical issues and to think through the consequences of alternative resolutions; self-confidence to seek out different points of view and then decide what is right at a given time and place; and tough-mindedness to stick to an ethical decision.

Additional successful changes can be brought about in the organization by:

Changes Of Corporate Climate And Attitudes. In order to foster an ethical climate, according to Robert Goddard in Personnel Journal, managers should identify ethical attitudes critical to each company's operation. Those attitudes may be honesty, responsibility, or loyalty just to name a few; and, the attitudes may change for each industry or corporation.

Select Employees With The Desired Critical Attitudes. The selection process, indeed, can identify ethical values through successful interviewing.

Reward For Excellence In Ethical Behavior. Ethics should be incorporated in the job appraisal process. The rewards should not be heavily geared toward profit.

Lead By Example. One of the single most effective ways to foster an ethical environment is by example from managers. Most ethics authorities report that managers set the value systems of their work units. Managers must be above reproach in what they do, in the decisions they make, and in discussions they hold.

Provide Training Sessions. Companies can provide training sessions on potential ethical dilemmas occurring. Managers can be taught to apply problem solving techniques to the issues. This type of training increases the likelihood that managers will make the right decisions when they encounter similar dilemmas on the job.

Other successful attempts to incorporate ethical values and concerns into the daily operations of the company include written codes of ethics, ethics committees, ethics ombudsmen, judiciary boards. After written codes are in place, communicating the codes is as important as the codes themselves. The codes should be communicated through printed materials, advice from a supervisor, an entrance interview, workshops or seminars, and should be posted in the workplace. Communication and promotion of ethics should be a continual process.
COPYRIGHT 1991 Institute of Industrial Engineers, Inc. (IIE)
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Nixon, Judy C.; Wiley, Carolyn; West, Judy
Publication:Industrial Management
Date:May 1, 1991
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