Identify what role HR should play as a strategic business partner in addressing this incident.

Write a 700- to 1,050-word analysis of the incident, “Illegal Hiring.” Include the following in preparing your response:

Identify what role HR should play as a strategic business partner in addressing this incident.
Summarize what you would have done in response to learning about the facts in this incident.
Discuss what factors in this incident might influence a company to make less-than-ethical decisions.
Summarize a brief policy that would help an organization like the one in “Illegal Hiring” make sound and legal hiring decisions within the framework of the law and support a culture of diversity and inclusion.

Chapter two reading:
References

Martochhio, J. J. (2017). Human Resources Management (15th ed.). Retrieved from
https://phoenix.vitalsource.com/#/books/9780134739755/cfi/6/8!/4/2/58@0:20.8.

2 Business Ethics, Corporate Social Responsibility, and Sustainability
LEARNING OBJECTIVES
After completing this chapter, students should be able to:

2.1 Discuss what ethics means and the sources of ethical guidance.

2.2 Explore human resource management’s (HRM) role in creating an ethical culture and a code of ethics.

2.3 Define human resource ethics.

2.4 Explain the concepts and practices related to corporate social responsibility and corporate sustainability.

2.5 Describe a social audit.

MyLab Management
Improve Your Grade!
If your professor is using MyLab Management, visit www.pearson.com/mylab/management for videos, simulations, and writing exercises.

Learn It
If your professor has chosen to assign this, go to www.pearson.com/mylab/management to see what you should particularly focus on and to take the Chapter 2 Warm-Up.

Choosing how ethical and socially responsible an organization needs to be and when it should be brings up difficult issues all managers may have to address as they perform their duties. These issues can and do shape their decisions. HR professionals play a significant role in helping organizations start and stay on a path of ethical practice, corporate social responsibility, and sustainability. Let’s explore the role of HR professionals in managing ethical obligations and considerations related to corporate social responsibility and sustainability.
Defining Ethics and the Sources of Ethical Guidance
2.1  Discuss what ethics means and the sources of ethical guidance.

Ethics is the discipline dealing with what is good and bad, right and wrong, or with moral duty and obligation. Ethics at times may appear to be complicated because businesses are created to produce a short-term profit, which could potentially conflict with ethical behavior.1 Today most executives have a different view in that integrity and ethical values have an important place in business and should form the foundation of a company’s culture.2 Unfortunately, some companies and individuals still behave unethically, perhaps, because ethics moves to the back burner while executives focus on what they believe to be more important concerns.

ethics
Discipline dealing with what is good and bad, or right and wrong, or with moral duty and obligation.

Business Ethics
The past corrupt conduct of corporations such as WorldCom and Enron and the senior managers who led them provides deplorable examples of just how unethical company leadership can be. We also forgot to guard against the type of ethical abuses that ultimately bankrupted companies such as Bear Stearns and Lehman Brothers. Unfortunately, unethical behavior manifests in other ways. For example, Volkswagen (VW) distinguished itself from the competition when it developed the so-called clean diesel engine. The company falsely advertised these engines as good for the environment because they emitted low levels of harmful nitrogen oxides. However, it was revealed that VW knowingly installed software, which, when the car was being tested for emissions, cleaned these pollutants from the exhaust. U.S. law enforcement agencies determined that the deception started in 1991 involving not only top executives but also lower level engineers.3 Since the news came to light, VW’s CEO resigned and numerous engineers were fired.4 Andrew McCabe, FBI deputy director, stated “It is now clear that Volkswagen’s top executives knew about this illegal activity and deliberately kept regulators, shareholders and consumers in the dark—and they did this for years.”5

CEOs should be clear that unethical behavior is not acceptable. In one survey, 67 percent of investors said they would move their account if they discovered the company was involved in unethical behavior.6 Jeff Immelt, General Electric’s (GE) CEO, begins and ends each annual meeting of 220 officers and 600 senior managers by restating the company’s fundamental integrity principles: “GE’s business success is built on our reputation with all stakeholders for lawful and ethical behavior.”7 At GE, when it comes to integrity violations, it is one strike and you are out. There are no second chances.8 The focus should be on just doing the right thing. The image of the business world would be in much better shape if this simple advice were followed. Hopefully, ethical standards are improving.

HR Web Wisdom
International Business Ethics Institute

www.business-ethics.org

The Institute was founded in 1994 in response to the growing need for transnational organizations in the field of business ethics.

Most of the 500 largest corporations in the United States now have a code of ethics, which encompasses written conduct standards, internal education, and formal agreements on industry standards, ethics offices, social accounting, and social projects. Even so, business ethics scandals continue to be headline news. Lying on résumés, obstruction of justice, destruction of records, stock price manipulation, cutting corners to meet Wall Street’s expectations, fraud, waste, and abuse are unfortunately occurring all too often when those in business decide to make poor ethical choices. Then, there are the corporate executives that took home millions even though their company failed and employees were laid off. Even more noteworthy is that some are rewarded for bad behavior. For instance, Jeff Smisek, former CEO of United Continental Holdings, was paid a severance package worth a whopping $36.8 million. He left the airline following alleged participation in a corruption scandal.9

However, business is not alone. There is virtually no occupation that has not had its own painful ethical crises in recent years. There were the teachers who provided answers on standardized tests to improve their schools’ performance scores. Doctors who make money by falsely billing Medicare do not even make the headlines anymore. Certainly, a devastating blow to society has been dealt by business, and ethical breaches in business continue today.

Compliance with the law sets the minimum standard for ethical behavior; ethics, however, is much more. There must be leaders who are able and willing to instill ethics throughout the culture of the organization. Ethics is about deciding whether an action is good or bad and what to do about it if it is bad. Ethics is a philosophical discipline that describes and directs moral conduct. Those in management make ethical (or unethical) decisions every day. Do you hire the best-qualified person, who is a minority? Do you forget to tell a candidate about the dangerous aspect of a certain job? Some ethical decisions are major and some are minor. But decisions in small matters often set a pattern for the more important decisions a manager makes. Attitudes such as “It’s standard practice,” “It’s not a big deal,” “It’s not my responsibility,” and “I want to be loyal” are simply not acceptable.10 The Roman philosopher Cicero echoed this when he said, “It is a true saying that one falsehood leads easily to another.”11 In the sixteenth century, Sir Thomas More said, “If virtue were profitable, common sense would make us good and greed would make us saintly.”12 More knew that virtue is not profitable, so people must make hard choices from time to time.

Sources of Ethical Guidance
The sources of ethical guidance should lead to our beliefs or a conviction about what is right or wrong. Most would agree that people have a responsibility to avail themselves to these sources of ethical guidance. In short, individuals should care about what is right and wrong and not just be concerned with what is expedient. One might use several sources to determine what is right or wrong, good or bad, and moral or immoral. These sources include the Bible and other holy books. They also include the small voice that many refer to as conscience. Many believe that conscience is a gift of God or the voice of God. Others see it as a developed response based on the internalization of societal mores. Another source of ethical guidance is the behavior and advice of the people psychologists call “significant others”—our parents, friends, and role models and members of our churches, clubs, and associations.

Laws also offer guidance to ethical behavior, prohibiting acts that can be especially harmful to others. They codify what society has deemed to be unacceptable.13 If a certain behavior is illegal, most would consider it to be unethical as well. There are exceptions, of course. For example, through the 1950s, laws in most southern states relegated black Americans to the backs of buses and otherwise assigned them inferior status. Martin Luther King Jr. resisted such laws and, in fact, engaged in civil disobedience and other nonviolent forms of resistance to their enforcement. King won the Nobel Peace Prize for his efforts.

The sources of ethical guidance should lead to our beliefs or a conviction about what is right or wrong. Most would agree that people have a responsibility to avail themselves of these sources of ethical guidance. In short, individuals should care about what is right and wrong and not just be concerned with what is expedient. Two conditions must exist if an individual or organization is to be considered ethical. First, ethics consists of the strength of the relationship between what an individual or an organization believes to be moral and correct and what available sources of guidance suggest is morally correct. For example, suppose a manager believes it is acceptable not to hire minorities, even though almost everyone condemns this practice. This person would not be considered ethical. Having strong beliefs about what is right and wrong and basing them on the proper sources may have little relationship to what one does.

Second, ethics consists of the strength of the relationship between what one believes and how one behaves. For example, if a manager knows that it is wrong to discriminate but does so anyway, the manager is also unethical. If a board of directors considers it wrong to pay excessively high salaries relative to the CEO’s job performance, yet pays salaries that are excessive in this context, this behavior is also unethical. Generally, a person is not considered ethical unless the person satisfies both conditions.

For most professionals, there are codes of ethics that prescribe certain behavior. Without this conscience that has developed, it might be easy to say, “Everyone does it,” “Just this once won’t hurt,” or “No one will ever know.” Some still believe that greed is acceptable if the Equal Employment Opportunity Commission (EEOC) or other regulatory agencies do not find out.14 Fortunately, the HRM profession subscribes to a code of ethics, which we discuss later in this chapter.

Legislating Ethics
In 1907, Teddy Roosevelt said, “Men can never escape being governed. If from lawlessness or fickleness, from folly or self-indulgence, they refuse to govern themselves, then in the end they will be governed [by others].”15 Many contend that ethics cannot be legislated. Although laws cannot mandate ethics, they may be able to identify the baseline separating what is good and what is bad. Much of the current legislation was passed because of business ethics breakdowns. There have been at least four attempts to legislate business ethics since the late 1980s. We discuss some of these laws next.

PROCUREMENT INTEGRITY ACT
The Procurement Integrity Act of 1988 prohibits the release by government employees of source selection and contractor (for the purposes of this act, a business that enters into contracts with government to provide goods or services) bid or proposal information. Examples of information contained in bids include employee pay rates and proprietary information about the contractor’s business processes. Further, this act applies this restriction to non-government employees who provided consulting services on procurement matters. Finally, a former government employee who served in certain positions on a procurement action or contract more than $10 million is barred from receiving compensation as an employee or consultant from that contractor for one year. The act was passed after there were reports of military contracts for $500 toilet seats. There was also a $5,000 hammer.

FEDERAL SENTENCING GUIDELINES FOR ORGANIZATIONS ACT
The second attempt occurred with the passage of the 1992 Federal Sentencing Guidelines for Organizations (FSGO) Act, which outlined an effective ethics training program and explained the seven minimum requirements for an effective program to prevent and detect violations.16 The FSGO promised softer punishments for wayward corporations that already had ethics programs in place. In the law were recommendations regarding standards, ethics training, and a system to anonymously report unacceptable conduct. Executives were supposed to be responsible for the misconduct of those lower in the organization. If executives were proactive in their efforts to prevent white-collar crime, it would lessen a judgment against them and reduce the liability. Organizations responded by creating ethics officer positions, installing ethics hotlines, and developing codes of ethics. But it is one thing to have a code of ethics and quite another to have this code instilled in all employees from top to bottom.

CORPORATE AND AUDITING ACCOUNTABILITY, RESPONSIBILITY, AND TRANSPARENCY ACT
The third attempt at legislating business ethics was the Corporate and Auditing Accountability, Responsibility and Transparency Act of 2002, which criminalized many corporate acts that were previously relegated to various regulatory structures. Known as the Sarbanes–Oxley Act, its primary focus is to redress accounting and financial reporting abuses in light of corporate scandals.17 The Sarbanes–Oxley Act was intended to eliminate or at least reduce conflicts of interest by requiring audit-committee-level pre-approval for non-audit services auditors at companies they audit and enforcing a code of ethics on senior client financial management.18 The act contains broad employee whistle-blower protections that subject corporations and their managerial personnel to significant civil and criminal penalties for retaliating, harassing, or discriminating against employees who report suspected corporate wrongdoing. The whistle-blower protections of the act apply to corporations listed on U.S. stock exchanges; companies otherwise obligated to file reports under the Securities and Exchange Act; and officers, employees, contractors, subcontractors, and agents of those companies.

The act states that management may not discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee protected by the act. It protects any employee who lawfully provides information to governmental authorities concerning conduct he or she reasonably believes constitutes mail, wire, or securities fraud; violations of any rule or regulation issued by the Securities and Exchange Commission (SEC); or violations of any other federal law relating to fraud against shareholders. The act evidently has teeth because in the Bechtel v. Competitive Technologies Inc. (2003) Supreme Court case involving wrongful termination under Sarbanes–Oxley’s whistle-blower protection rule, the Court ruled that the company violated the act by firing two employees and ordered them reinstated. They were fired because during a meeting they had raised concerns about the company’s decision not to report, on its SEC filing, an act they thought should have been disclosed.19

The law prohibits loans to executives and directors. It requires publicly traded companies to disclose whether they have adopted a code of ethics for senior officers. The act does not require banks and bank-holding companies that report to the SEC to have a code of ethics, but if an SEC reporting company does not have one, it must explain why.20 However, as former SEC Chairman Arthur Levitt said, “While the Sarbanes–Oxley Act has brought about significant change, the greatest change is being brought about not by regulation or legislation, but by humiliation and embarrassment and private rights of action.”21

DODD–FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT
The fourth, the Wall Street Reform and Consumer Protection Act (Dodd–Frank Act), was signed into law in 2010. The act was brought on by the worst financial crisis since the Great Depression, which resulted in the loss of 8 million jobs, failed businesses, a drop in housing prices, and wiped out personal savings of many workers. As the financial crisis advanced, it became clear that executive compensation played a major role in the financial services sector as well as in the capital markets following the collapse of investment services firms such as Lehman Brothers, Merrill Lynch, Bear Stearns, and AIG.22 The Dodd–Frank Act enhances the transparency of executive compensation practices. The act requires the companies that trade stock on public exchanges to comply with several provisions of which we describe three. The first provision requires say on pay. Say on pay gives company shareholders the right to vote yes or no on executive compensation. Although the say on pay provision guarantees shareholders the right to vote on executive compensation proposals, the vote is non-binding. The non-binding vote advises the company’s board of directors of possible concerns about the structure of executive compensation packages, including excessive perks and the lack of clarity between compensation and business results. The board may choose to modify the proposed compensation package.

The second provision details independence requirements for compensation committee members and their advisors, such as compensation consultants and legal counsel. Members of compensation committees typically receive compensation for their services, and this practice is acceptable. However, possible violations of the Dodd–Frank independence requirement may arise when at least one committee member also receives compensation as a company employee. For example, a compensation committee member who also serves as the company’s executive vice president may be considered violating the independence requirement.

The third provision addresses whistle-blower protection. In the legal use of the term, a whistle-blower is someone who participates in an activity that is protected. Corporate whistleblowing involves ethics, a topic of this chapter. It requires an individual to choose between personal ethics and the status quo. Often whistle-blowers view themselves as the company’s conscience.23 The use of whistle-blowers has been around since 1863 when President Abraham Lincoln signed into law the Federal False Claims Act, which was designed to protect the United States from purchases of fake gunpowder during the Civil War.24 The number of whistle-blower suits has increased dramatically in recent years under federal and state laws aimed at uncovering fraud and protecting the public. Since 2007, the Justice Department recovered more than $3 billion in taxpayer funds thanks to whistle-blowers, who originated hundreds of lawsuits.25 In 2015 alone, whistle-blowers shared $501 million of the proceeds.26

FYI
The number of whistle-blower tips has increased dramatically since the passage of the Dodd–Frank Act:

Fiscal Year 2011: 334

Fiscal Year 2012: 3,001

Fiscal Year 2013: 3,238

Fiscal Year 2014: 3,620

Fiscal Year 2015: 3,923

Fiscal Year 2016: 4,21827

The Dodd–Frank Act contains a whistle-blower protection provision, which is shaped after the successful IRS program. In passing the act, Congress believed that award programs were a good method to get people to provide fraud information to responsible law enforcement officials. The act requires the Securities SEC to give an award to qualified whistle-blowers of between 10 and 30 percent of the total amount obtained if the information is voluntarily provided and leads to a successful enforcement or related action. The act also improves whistle-blowers’ retaliation protection from their employers through the expansion of the whistle-blower protections of the Sarbanes–Oxley Act of 2002. Firms may not directly or indirectly discharge, demote, suspend, threaten, harass, or in any way discriminate against whistle-blowers that provide information to the SEC as specified in the program.28 This is important because in the past whistle-blowers often were fired, demoted, blacklisted, or quit under duress. Former SEC Chair Mary L. Schapiro said, “While the SEC has a history of receiving a high volume of tips and complaints, the quality of the tips we have received has been better since Dodd–Frank became law, and we expect this trend to continue.”29 The most common complaint categories reported by whistle-blowers were corporate disclosures and financials (22 percent), fraud offerings (156 percent), and manipulation (11 percent).30 Until the end of 2016, the largest award to a whistle-blower totaled $30 million.31

Many believe that information provided by whistle-blowers is much more effective in uncovering wrongdoings than are external auditors. In testimony to the Senate Banking Committee, Certified Fraud Examiner Harry Markopolos stated that “whistle-blower tips detected 54.1 percent of uncovered fraud schemes in public companies. External auditors detected a mere 4.1 percent of fraud schemes.”32

Companies have some uneasiness regarding the whistle-blower provision of the Dodd–Frank Act.33 A recent survey of senior legal, compliance, and HR executives at publicly traded or highly regulated companies found that 96 percent expressed either moderate or great concerns about potential whistle-blower complaints.34 The major concern is that the rules run counter to a firm’s internal compliance efforts.35 Companies are afraid that employees will not go through internal channels first and instead go directly to government authorities to collect the reward.36 Another fear is that an employee might have another grievance with the company and use the whistle-blower provision to get back at the company.
Creating an Ethical Culture and a Code of Ethics
2.2 Explore human resource management’s (HRM) role in creating an ethical culture and a code of ethics.

Ethics is an important component of an organization’s culture. And it’s turning out to be more key for organizations to conduct business in an ethical fashion. Why? The public insists on it. Customers call for it. Most companies that take ethics seriously have a code of ethics that codifies ethical principles and guides employees to behave ethically. Let’s explore HR professionals’ roles in facilitating ethical cultures and codes of ethics.

Ethical Culture
Mark Twain once said, “Always do right. This will gratify some people and astonish the rest.”37 This is certainly good advice for both employees and employers if the firm wants to create an ethical culture. Saying that a company has an ethical culture and having one may be two different things. Culture is concerned with the way people think, which affects the way that they act. Changing an organization’s culture thus requires modifying the common way of thinking of its members.38 Organizations with strong ethical cultures take steps to ensure that their standards are widely accessible, promoted, and followed by their leaders and employees.39 For example, the Volkswagen debacle was not supposed to happen. The Volkswagen Code of Conduct was 24 pages long and had a foreword by Martin Winterkorn, who was then the company’s CEO, and other top executives saying, “We stand for respectable, honest, and actions in everyday business that are in accordance with rules, and we commit ourselves to the following Code of Conduct.”40 Even with the ethical code, it is apparent that Volkswagen’s top management pursued business as usual.

One way for a firm to create and sustain an ethical culture is to audit ethics, much like a company audits its finances each year.41 An ethics audit is simply a systematic, independent, and documented process for obtaining evidence regarding the status of an organization’s ethical culture. It takes a closer look at a firm’s ethical culture instead of just allowing it to remain unexamined. An ethical culture is made up of factors such as ethical leadership, accountability, and values. The climate with top management is fundamental to a company’s ethical culture.42 Ethical leadership begins with the board of directors and CEO and continues to middle managers, supervisors, and employees.43 Building an ethical culture that lasts requires a foundation of practices that continue even when leaders change.44 The following Watch It video illustrates how employees and members of management are brought together to enact a change within the company. Their goal is to limit the negative environmental impacts of their company as much as possible by applying the best practices concept to their everyday activities.

Watch It 1
If your instructor has assigned this, go to www.pearson.com/mylab/management to watch a video titled Patagonia: Ethics and Social Responsibility and to respond to questions.

According to the Corporate Executive Board in Arlington, Virginia, companies with weak ethical cultures experience 10 times more misconduct than companies with strong ethical cultures.45 In workplaces with a strong ethical culture, only 4 percent of employees feel pressure to compromise standards and commit misconduct compared to 15 percent in a weaker culture.46 That’s a noteworthy difference. As important as endorsing ethical cultures is, more companies need to get on board. A survey of compliance and ethics professionals revealed that only half maintain that promoting an ethical culture is a priority.47 Perhaps this is the case because only 13.3 percent believe that management embraces an ethical culture as a primary objective of ethics programs. The results are not much better when it comes to their view of the board of directors’ values. Only 15.6 percent of the respondents saw creating an ethical culture as the board’s primary objective.

For organizations to grow and prosper, good people must be employed. Recent studies suggest that six personality characteristics are useful predictors of ethical individuals.48 Individuals who are conscientious and morally attentive are more likely to recognize whether activities are ethical. Dutiful employees and those who are customer-oriented are more likely to take ethical challenges seriously. Individuals who are highly proactive and assertive are more likely motivated to rectify them. Dov Seidman, a management guru who advocates corporate virtue to many companies, believes that companies that “outbehave” their competitors ethically will generally outperform them financially.49 Further, according to the National Association of Colleges and Employers, the ethical—or unethical—behavior of an organization is a critical factor for new college graduates seeking jobs.50

Selecting the right people doesn’t ensure a strong ethical culture. Unfortunately, good people sometimes make unethical choices because the organization has allowed and reinforced dysfunctional behavior. A body of research suggests that there are five common ways that companies may lead good employees to make unethical choices:

It is psychologically unsafe to speak up.

There is excessive pressure to reach unrealistic performance targets.

Conflicting goals provoke a sense of unfairness.

Ethical behavior is not part of the routine conversation.

A positive example isn’t being set.51

Organizations need to be willing to change their ways. By fostering a strong ethical culture, firms are better able to gain the confidence and loyalty of their employees and other stakeholders, which can result in reduced financial, legal, and reputation risks, as well as improvements in organizational performance. Organizations are redesigning their ethics programs to facilitate a broader and more consistent process that incorporates the analysis of outcomes and continual improvement. To build and sustain an ethical culture, organizations need a comprehensive framework that encompasses communication of behavior expectations, training on ethics and compliance issues, stakeholder input, resolution of reported matters, and analysis of the entire ethics program. Well-designed training programs can educate employees about what is and is not ethical. Effective training starts with the recognition that problems such as conflicts of interest are not recognizable to many employees.52 Oftentimes, companies just assume that employees naturally know the difference, which is not always the case. To make it work, involvement by top management is certainly necessary.

Code of Ethics
A distinction needs to be made between a code of conduct and a code of ethics; the former should tell employees what the rules of conduct are. A code of ethics establishes the rules that the organization lives by. It helps employees know what to do when there is not a rule for something.53 Jim Ward, associate vice president of ethics and compliance at Georgetown University, summed it up by saying, “You can’t draft enough rules to cover everything.”54 A broad-based participation of those subject to the code is important. For a company to behave ethically, it must live and breathe its code of ethics, train its personnel, and communicate its code through its vision statements. It cannot just print a manual that sits on a corporate shelf. The code is a statement of the values adopted by the company, its employees, and its directors and sets the official tone of top management regarding expected behavior. Many industry associations adopt such codes, which are then recommended to members. There are many kinds of ethical codes. An excellent example of a code of ethics was developed by the Society for Human Resource Management (SHRM). The six core provisions in the SHRM code of ethics are professional responsibility, professional development, ethical leadership, fairness and justice, conflicts of interest, and use of information.55 Another excellent example is the code of ethics developed by the International Ethics Standards Board for Accountants (IESBA). The IESBA recognizes that accountants and auditors feel bound by client confidentiality rules, making them reluctant to report any wrong doing. These ethical standards are designed to guide accountants who face such conflicts of interest. Stavros Thomadakis, chairman of the IESBA, stated that “It’s trying to bring about early, early detection, if you will, but also early action by management authorities.”56

code of ethics
Establishes the rules that the organization lives by.

There are good reasons to encourage industry associations to develop and promote codes of ethics. It is difficult for a single firm to pioneer ethical practices if its competitors take advantage of unethical shortcuts. For example, U.S. companies must comply with the Foreign Corrupt Practices Act (FCPA), which prohibits bribes of foreign government officials or business executives. Obviously, this law does not prevent foreign competitors from bribing government or business officials to get business, and such practices are common in many countries. This reality sometimes puts U.S. companies at a disadvantage. For instance, Johnson Controls violated the FCPA because one of its Chinese subsidiaries made nearly $5 million in illegal payments to employees of Chinese government-owned shipyards. The company avoided charges for its violations because it took immediate actions to rectify the problem. Johnson Controls’ CEO Alex Molinaroli showed that the company is poised to address ethical problems. He said: “The ability to identify and address issues when they do occur, reflects the company’s commitment to ethics, responsible management practices and the good governance systems that uphold them.”57

Just what should be included in a code of ethics? Topics typically covered might be business conduct, fair competition, and workplace and HR issues. For example, employees in purchasing would be shown what constitutes a conflict of interest. The same would occur for sales. At Walmart, it is considered unethical to accept gifts from suppliers. Gifts are either destroyed or given to charity. Fidelity International recently fired two Hong Kong-based fund managers over breaches of its internal code of ethics. Fidelity said, “Our routine checks discovered a pattern of behavior that breached our internal policies.”58 Some companies even include the subject of romantic relationships, which can sometimes lead to conflicts of interest. For instance, Fifth Third Bancorp fired its general counsel because she was engaged in a romantic relationship with Fannie Mae’s CEO. Fifth Third’s code of ethics states: “We all must avoid actual or apparent conflict of interest with Fifth Third or its Customers.”59 Fifth Third Bancorp’s leadership considered the relationship a possible conflict of interest because both companies conduct business with each other, and the appearance of conflict of interest even where one has not occurred could lead to public perception of impropriety. Fannie Mae’s approach was less punitive because it did not fire its CEO. Instead, the company’s board of directors prohibited the CEO from conducting any business transactions with Fifth Third Bancorp.

To keep the code on the front burner for employees, larger firms appoint an ethics officer. The ethics officer is the point person in guiding everyone in the company toward ethical actions. This individual should be a person who understands the work environment. To obtain the involvement of others within the organization, an ethics committee is often established.

Even the criteria for winning the Malcolm Baldrige National Quality Award have changed, and an increased emphasis on ethics in leadership is now stressed. The criteria say senior leaders should serve as role models for the rest of their organizations. Baldrige applicants are asked questions about how senior leaders create an environment that fosters legal and ethical behavior. They need to show how the leaders address governance matters such as fiscal accountability and independence in audits.

We have made a case for creating both an ethical culture and code of ethics. Is one more important than the other in promoting ethical business practice and employee behavior? Not surprisingly, there are differing opinions. Some business experts weigh culture as more important. For instance, Melissa Stapleton Barnes, chief ethics and compliance officer at Eli Lilly, maintains that emphasizing rules over culture can be detrimental to the organization because employees might seek loopholes to get around them.60 Rather, she believes that promoting an ethical culture motivates employees to seek ways to act ethically. Others assert that culture is too vague and should not be relied on to guide ethical behavior. Brian Beeghly, vice president of compliance at Johnson Controls, suggests that culture should be aligned with concrete practices, including compliance programs, training, policies, and procedures.61 Perhaps maintaining an ethical culture and enforcing a code of ethics are likely to provide the best outcomes.
Human Resource Ethics
2.3 Define human resource ethics.

Human resource ethics is the application of ethical principles to HR relationships and activities. It is vitally important that HR professionals know the practices that are acceptable and unacceptable and work to ensure that organizational members also have this awareness in dealing with others.

human resource ethics
Application of ethical principles to human resource relationships and activities.

Some believe that those in HR have a great deal to do with establishing an organization’s conscience.62 In fact, according to a SHRM report, integrity and ethical behavior rank in the top five competencies needed for senior HR leaders.63 Certainly ethics is a quality the HR professionals should possess; it is the duty of HR professionals to help create an ethical climate in their organization.64

HR professionals can help foster an ethical culture, but that means more than just hanging the ethics codes posters on walls. Instead, because the HR professionals’ primary job is dealing with people, they must help to instill ethical practices into the corporate culture. Those values must be clearly communicated to all employees, early and often, beginning with the interview process, reinforced during employee orientation, and regularly recognized during performance reviews, public ceremonies, celebrations, and awards. They need to help establish an environment in which employees throughout the organization work to reduce ethical lapses. The ethical bearing of those in HR goes a long way toward establishing the credibility of the entire organization.

There are many topics through which HR professionals can have a major impact on ethics, and therefore, on creating an ethical corporate culture. Some ethical questions that might be considered include:

Do you strive to create a diverse workforce?

Do you insist that job descriptions are developed to accurately depict jobs that are dangerous or hazardous?

Do you strive to recruit and select the best-qualified applicant for the job?

Are your training initiatives geared so that everyone will have an opportunity to receive the best training and development possible?

Is your performance management and appraisal system able to identify those who are indeed the best producers and rewarded accordingly?

Is your compensation and benefit system developed so that employees will view it as fair and impartial?

Does your organization make a sincere attempt to provide a safe and healthy work environment?

Does your organization attempt to develop a work environment in which employees will not feel compelled to join a union?

Are you fair and impartial when dealing with disciplinary action, promotion, transfer, demotion, resignation, discharge, layoff, and retirement?

Does your firm adhere to ethical norms when operating in the global environment?

HR should review, develop, and enforce organizational policies to ensure a high level of ethics throughout the organization. All employees should know what is ethical and unethical in their specific area of operations. It is insufficient to say that everyone should behave ethically. Let’s turn our attention to two areas where HR professionals use their expertise to promote practices and employee behavior in organizations: pay and training.

Linking Pay to Ethical Behavior
The City of Los Angeles sued Wells Fargo Bank based on allegations that the company engaged in unlawful and fraudulent conduct. Bank employees routinely opened customer accounts without their authorization, and those accounts came with monthly fees. Los Angeles City Attorney Michael Feuer maintained that bank management was regularly, “abusing employees and telling them ‘to do whatever it takes’ to reach quotas on the number of new accounts they must open.”65 Shortly after the suit was filed, Wells Fargo agreed to settle the case out of court without admitting wrongdoing.66 The bank also agreed to reimburse customers for all of the fees associated with accounts the accounts in question. Clearly, management sent the signal that performance would be rewarded based on opening a highly unrealistic number of new accounts, and employees felt pressure to perform. Since this incident took place, Wells Fargo restructured its compensation plan. Spokeswoman Mary Eshet stated that the new compensation plan, “eliminates sales goals, measures performance based on customer experience and adds more oversight and risk management.”67

Wells Fargo is just one of many companies where the ethics of pay practices are in question, highlighting the importance of linking pay to performance when discussing ethics. It is well known in the compensation world that “what you reward is what you get.” If the statement is correct, then a problem exists because most companies do not link pay to ethical behavior but base pay on entitlement and custom.68 A survey of 358 compliance and ethics professionals by the Society of Corporate Compliance and Ethics (SCCE) and Health Care Compliance Association found that only a few companies have made ethics and compliance a process for determining how employees are compensated, and only about one company in six ties employee bonuses and incentives to ethical performance.69 In another survey, when asked how much impact the ethics and compliance function has on the compensation process for executives, just 34 percent of respondents said it had some or a great deal of impact. The majority indicated that compliance and ethics played very little (27 percent) or no role (29 percent), and the balance was unsure of the role of ethics and compliance.70 CEO Roy Snell of SCCE said, “The net result is that there is more work to be done in aligning business practices with stated commitment to compliant, ethical behavior.”71 For example, ethical expectation could be made part of the performance review and the results tied to pay raises.72 As one author recently stated, “When employees behave in undesirable ways, it’s a good idea to look at what you’re encouraging them to do.”73

FYI
Eighty-one percent of companies provide ethics training.74

Ethics Training
The FSGO Act outlined an effective ethics training program and explained the seven minimum requirements for an effective program to prevent and detect violations. The fourth requirement stated, “Educate employees in the company’s standards and procedures through publications and training.” Companies train employees on many topics, but ethics training is often not considered, which is a major oversight. Because of its inclusion within the FSGO, a brief discussion of ethics training will be provided in this chapter.

Companies that consistently rank high on the lists of best corporate citizens tend to make ethics training part of a company-wide initiative to promote integrity.75 Ethics training should be part of a proactive, not reactive, strategy. Regular training builds awareness of common ethical issues and provides tools for effective problem solving. Warren Buffett once said, “Pick out associates whose behavior is better than yours and you’ll drift in that direction.”76 Ethics training should begin at the top and continue through all levels in the organization.77 Ethics training should also take into consideration the differences in these levels. Although boards of directors and top management set the ethical tone, middle managers are the ones who will likely be the first to receive reports of unethical behavior. Unfortunately, many companies do not follow this prescription. A survey of ethics and compliance officers revealed that board members receive less training about important matters including cybersecurity, workplace harassment, and conflicts of interest than others in the company.78 For instance, only 12 percent provides training to board members about workplace harassment versus 76 percent for employees.

KPMG believes that there are three fundamental factors in handing ethics issues: provide multiple channels for raising alarms, eliminate fear of retaliation for those who raise questions, and ensure consistent investigation and resolution of all matters reported. Individuals who report potential ethics violations could be subject to retaliation, so KPMG monitors performance reviews and other metrics to proactively identify retaliatory behavior. The credibility of the program requires all reports to be consistently investigated and resolved.79

Cisco created a unique ethics training program that showcased cartoon contestants singing about various ethical workplace situations found in Cisco’s Code of Business Conduct. Jeremy Wilson, manager, ethics office for Cisco Systems, Inc., said, “We wanted what was right for our employees, based upon our own risk analysis.” When Cisco created its program, it invited input from more than 120 people from departments across the organization, including legal, human resources, IT security, and records management.80

HR BLOOPERS
Sales Incentives at Pinser Pharmaceuticals

Quarterly sales reports are in at Pinser Pharmaceuticals and Ben Ross looks forward to sharing the reports with the sales team. As a compensation analyst, Ben calculates sales commissions for the sales representatives, and high sales mean big paychecks for the team. The sales representatives receive incentive pay bonuses based on how many times doctors in their sales territory prescribe Pinser drugs. The number of prescriptions has increased with several of the popular drugs Pinser makes and the sales representatives that have the doctors writing the most prescriptions stand to benefit significantly. Ben knows that they have steep competition on some of their products, but he has also heard some rumors about how they stay ahead of competitors.

Apparently, many of the sales representatives are using some of their own extra earnings to earn the favor of the doctors. Gifts, dinners, and other incentives are provided to the doctors to encourage them to write Pinser prescriptions. At first he thought there might be a problem with this practice, but Ben knows that Pinser has a Code of Ethics and provides ethics training to all employees, so the sales representatives must know that their practices are acceptable. Ben understands that this is just the way business is done, and Ben’s job is just to make sure they get paid what they have earned.

If your professor has assigned this, go to www.pearson.com/mylab/management to complete the HR Bloopers exercise and test your application of these concepts when faced with real-world decisions.

Ethics training for global organizations is more complicated than preparing the training for U.S. employees. One must also train for the country in which the global company operates. Since 1994, LRN has helped 15 million people at 700 companies across the world simultaneously navigate legal and regulatory environments and foster ethical cultures.81 A few of their customers include CBS, Dow Chemical, eBay, 3M, and Siemens. Chris Campbell, creative director at LRN, says, “Localization is as important as the accuracy of the translation process. Learners need to be able to connect in a way that is believable to them.”82
Corporate Social Responsibility and Sustainability
2.4 Explain the concepts and practices related to corporate social responsibility and corporate sustainability.

Related to ethics are the concepts of corporate social responsibility and corporate sustainability. Corporate social responsibility (CSR) is the implied, enforced, or felt obligation of managers, acting in their official capacity, to serve or protect the interests of groups other than themselves, and corporate sustainability focuses on the possible future impact of an organization on society, including social welfare, the economy, and the environment. CSR and corporate sustainability differ from ethics in an important way. Ethics focus on individual decision making and behavior and the impact of ethical choices on employee welfare. As noted, CSR and corporate sustainability consider the broader impact of corporate activities on society.

corporate social responsibility (CSR)
Implied, enforced, or felt obligation of managers, acting in their official capacity, to serve or protect the interests of groups other than themselves.

corporate sustainability
Concerns with possible future impact of an organization on society, including social welfare, the economy, and the environment.

Ethics, CSR, and corporate sustainability are everyone’s business. HR professionals particularly concern themselves with establishing policies to promote ethical behavior and discourage unethical behavior. In addition, the HRM function’s leadership works with other executive leadership to identify training opportunities for educating employees about how they may make positive contributions to these objectives and developing performance-based pay programs that align employee performance with CSR and social responsibility goals.

FYI
Eighty-eight percent feel their job is more fulfilling when they are provided opportunities to make a positive impact on social or environmental issues.83

Corporate Social Responsibility
As previously stated, CSR is the implied, enforced, or felt obligation of managers, acting in their official capacity, to serve or protect the interests of groups other than themselves. A recent survey revealed that 86 percent of consumers wanted companies to tell them more about the results of CSR efforts.84 Another survey revealed that 58 percent of respondents consider a company’s social and environmental commitments when deciding where to work: 58 percent said they would choose to work for a socially responsible company, even if the salary was less, and 51 percent indicated they won’t work for a company that doesn’t have strong social or environmental commitments.85 Many companies are listening. About 60 percent of companies offer workers paid time off to volunteer, and 33 percent of them volunteered in 2015—up from 28 percent in 2013.What do the following U.S. companies have in common: Johnson & Johnson, Cisco Systems, Inc., McCormick & Co, Inc., Allergan, plc, and Prologis Inc.? They have been identified as having a commitment to excellence in CSR and are included in the 2017 Global 100 Most Sustainable Corporations in the World.86 These companies have demonstrated the ability to manage the “triple bottom line” of social responsibility (society, environment, and economy).87 They represent the top 5 percent of socially responsible companies.

CSR is the model in which economic, social, and environmental responsibilities are satisfied concurrently.88 Figure 2-1 illustrates the layers of responsibility associated with CSR. When a corporation behaves as if it has a conscience, it is said to be socially responsible. CSR considers the overall influence of corporations on society at large and goes beyond the interests of shareholders. It is how a company behaves toward society. In many companies, social responsibility has moved from nice to do to must do.89 More and more companies are issuing CSR reports that detail their environmental, labor, and corporate-giving practices. Some firms, such as Burger King, have created the position of director of CSR.

HR Web Wisdom
Business for Social Responsibility

www.bsr.org

This is a global organization that helps member companies achieve success in ways that respect ethical values, people, communities, and the environment.

Carroll’s pyramid of corporate social responsibility.
FIGURE 2-1 Carroll’s Pyramid of Corporate Social Responsibility
Source: SHRM Foundation, “HRM’s Role in Corporate Social Responsibility and Environmental Sustainability,” 2012, Alexandria, VA: SHRM Foundation, page 4. Accessed January 14, 2017, at www.shrmfoundation.org.

Figure 2-1 Full Alternative Text
Apparently, socially responsible behavior pays off on the bottom line. When GE CEO Jeffrey Immelt announced that the company would double its spending on green technology research, it was no grand attempt to save the planet; it was an example of astute business strategy. Immelt said, “We plan to make money doing it.”90 Social responsibility has also impacted the recruiting process. College graduates of today often seek out corporations that have a reputation for being socially responsible, which was not often the case in the past. In fact, job seekers overall tend to be more attracted to organizations known for CSR.91

Procter & Gamble (P&G) has long believed it has a responsibility for the long-term benefit of society as well as the company. Over the years, P&G has pursued programs to strengthen U.S. education, to encourage employment opportunities for minorities and women, to develop and implement environment-protection technology, and to encourage employee involvement in civic activities and the political process.

Deborah Leipziger, an Ethical Corporation Institute researcher, said, “The more credible efforts tend to be led by key players within a company.”92 An organization’s top executives usually determine a corporation’s approach to social responsibility. For example, under executive chairman and (former) CEO Howard Schultz, Starbucks Coffee focuses its corporate responsibility efforts on three main areas: ethical sourcing, environmental stewardship, and community involvement.93 Starbucks approaches ethical sourcing by helping the farmers and suppliers who grow and produce their products use responsible growing methods. Environmental stewardship has been one of the more difficult activities for Starbucks. After all, Starbucks sells billions of beverages in disposable cups each year in the United States, most of which end up in landfills. The company has invested substantial amounts of money to come up with recyclable cups—one that can be recycled into other paper products again and again. Not only has this process been time consuming and expensive, but Starbucks has had to devote substantial time and resources to educating its customers and encourage responsible disposal of empty cups. In addition, Starbucks also looks after the communities where stores are located. It provides financial support and employees are encouraged to get involved in volunteering in their communities. For instance, Starbucks spearheaded the 100,000 Opportunities Hiring Initiative, which is a coalition of companies that offer meaningful work to youths.

The same can be said about leadership’s role in supporting environmental sustainability. For instance, SC Johnson Company collaborated with a European company to develop an environmentally friendly alternative to the original formulation of Saran Wrap, which had come under criticism for containing polyvinyl chloride and is known to have ill side effects. Even though the reformulated Saran Wrap product does not work as well as the original, the company’s leadership decided not to return to the original formulation despite consumer preferences. SC Johnson’s CEO Fisk Johnson III and leadership team faced a dilemma: jeopardize losing customers and market share by replacing the original product with a lesser one or the goodwill the company had developed over the years with consumers and other stakeholders.94 Ultimately, the company sacrificed substantial market share and profits in favor of helping to protect the environment.

One of the best benchmarks for defining social responsibility in manufacturing is the one-page set of operating principles developed 60 years ago by Robert Wood Johnson, then Johnson & Johnson’s chairman of the board. The document is still in use today and addresses supporting good works and charities.95

During the Vietnam War, Dow Chemical gained a bad reputation for not being socially responsible because it produced the deadly chemical agent napalm. As a result, Dow had difficulty recruiting the best scientists and other professionals. To overcome this image, Dow built a campaign that highlighted how Dow has benefitted agricultural production. Once people saw the positive side of Dow, its ability to recruit and retain the best chemists improved.96 However, the chemical industry continues to face widespread public mistrust despite being an enabler of advances that are vital to solving global challenges as well as efforts to improve product and process safety.97

Thus far, only the virtues of CSR have been provided. However, the question of whether businesses should promote CSR is at times hotly debated and not all companies have embraced the concept.98 Some have challenged the concept that doing well is doing good (DWDG). They believe that although appealing to some, DWDG is also profoundly wrong.99 Milton Friedman was a U.S. economist, statistician, academic, and author who taught at the University of Chicago for more than three decades and was a recipient of the Nobel Memorial Prize in Economic Sciences. In his book Capitalism and Freedom, he argued that the only social responsibility of business was to increase its profits. According to Friedman, as a firm creates wealth for its shareholders, society will also be benefited.100 Friedman disciples continue to condemn CSR as a hodgepodge of “value-destroying nonsense.”101

These days, more employers are publicly endorsing a culture of ethics and social responsibility. However, some believe that it is being done more as a public relations campaign. For instance, the Wounded Warrior Project is a not-for-profit organization that helps wounded military service members, particularly facilitating access to mental health services. Television campaigns that showcase service members’ testimonial about how they (and their families) have benefited from the organization’s generosity. However, several employees claimed that the organization’s leadership routinely diverted money away from helping wounded service members to throw lavish parties and executives of the organization were subsequently fired. Certainly, Wounded Warrior is a legitimate organization; however, this incident illustrates that leaders’ behavior may sometimes be inconsistent with the mission they declare to uphold.

Also, long before the enormous oil spill in 2010, BP promoted itself as being eco-friendly. Its literature stated that BP stood for “Beyond Petroleum.” BP marketed itself as a producer of alternative energies, an image that was seriously damaged by the devastating oil spill in the Gulf of Mexico in 2010. Instead of spending billions on eco-friendly energy and building an employer brand campaign around it, many believe that BP would have been much better off if it had spent more time and effort in training its employees on its oil drilling platforms, establishing stronger safety protocols, and waiting until they were safe to operate. Even during this public relations campaign, BP had a history of safety violation. BP had been “fined more than $100 million for safety violations that led to deaths of workers, explosions of refineries, and leaking pipelines.”102 The following Watch It video describes the environmental impact of another oil company’s spill and leadership’s reaction to the disaster.

Watch It 2
If your instructor has assigned this, go to www.pearson.com/mylab/management to watch a video titled Co Responsible for Oil Spill Under Fire and to respond to questions.

Brighter Planet, a sustainability technology company, discovered in a recent survey that although more firms are engaging in green activities, the effectiveness of these efforts has declined.103 Some believe that the problem with CSR is that it consists of a universal set of guidelines such as the “triple bottom line” (society, environment, and economy) mentioned previously. To be “socially responsible,” each firm should follow the same guidelines instead of what would be the most appropriate strategy for each firm. Using this logic, it would be more logical for oil companies such as BP to focus on being profitable, yet be an environmentally conscious oil company. Fast-food restaurants such as McDonald’s and retailers such as Walmart should each use a different set of rules to do the same thing in their own industries.

There are those who believe that all shareholders should not be required to be involved in CSR investments. They think that only investors who want to be involved should participate. These investors would do so with the understanding that the objective is not just to make money but also to do good. For example, an oil company such as Exxon could establish an alternative-energy subsidiary. Exxon would own a controlling stake, but funding would come from new investors who want to support alternative energy and thus be socially responsible. If the subsidiary was unsuccessful, the losses would be confined to the new investors. If it succeeded, the profits would be shared by all shareholders.104

FYI
The 2017 Global 100 Most Sustainable Corporations were most commonly found in the following countries:

United States: 19 companies

France: 12 companies

United Kingdom: 11 companies

Canada and Germany: 6 companies

Netherlands: 5 companies105

Corporate Sustainability
Corporate sustainability has evolved from the more traditional view of CSR. According to the World Commission on Environment and Sustainability, the narrow definition of sustainability is, “meeting the needs of the present without compromising the ability of future generations to meet their own needs.”106 The Dow Jones World Sustainability Index (DJSI) provides a good working definition of this term. They define it as, “An approach to creating long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social trends and challenges.”107 In recent years, sustainability has been expanded to include the social, economic, environmental, and cultural systems needed to support an organization. This type of organization can continue both now and in the future. A recent study revealed that 90 percent of the 250 world’s largest companies reported information about their corporate responsibility initiatives.108 Also, 154 U.S. companies voluntarily signed the American Business Act on Climate Pledge to demonstrate their additional commitment to promoting environmental sustainability.109 Among the companies signing the pledge, Berkshire Hathaway Energy promised to retire more than 75 percent of its coal-fueled generating capacity in Nevada by 2019.

Corporate sustainability may be thought of as being a business and investment approach that strives to use the best business practices to meet the needs of current and future shareholders. According to Louis D. Coppola, executive vice president of the Government & Accountability Institute, “Leaders increasingly understand the critical importance of adopting and implementing strategies, products, services, programs and initiatives that reflect the twenty-first century business environment, and the interest of investors and important stakeholders.”110 HR professionals play an important role in promoting corporate sustainability objectives. Figure 2-2 illustrates how HR professionals can use their expertise toward this end. Today it relates to how an organization’s decisions could affect society and the environment. Essentially it is about how a firm handles its business while understanding how these decisions may affect others. One could think of corporate sustainability in a business sense as providing long-term profitability. Thus, sustainability should be a fundamental part of business strategy, product development, talent development, and capital investment. Some organizations have emphasized the importance of corporate sustainability by establishing the position of chief sustainability officer.111

FIGURE 2-2 How to Embed Sustainability Using HRM Tools
Source: SHRM Foundation, “HRM’s Role in Corporate Social Responsibility and Environmental Sustainability,” 2012, Alexandria, VA: SHRM Foundation, page 8. Accessed January 14, 2017, at www.shrmfoundation.org.

Employee attraction: Using the organization’s commitment to sustainability in recruitment helps attract more applicants and at the same time ensures the right “fit” with the company’s sustainability goals.

Employee attitudes: Although the research is unclear whether an organization’s commitment to sustainability leads to higher employee retention, it does have positive effects on employee commitment and job satisfaction.

Employee skills and knowledge: Many organizations provide initial and ongoing training and development on the knowledge and skills needed to achieve their sustainability goals, although the research on the impact of achieving sustainability goals is still limited.

Employee sustainability goal attainment: Including sustainability targets in evaluation and compensation systems can lead to greater attention to and achievement of those goals.

Sustainability organizational climate: Though the research is lacking in this area, a sustainability strategy will likely fail if the company’s organizational climate does not appropriately support it.

Employee sustainability behaviors: Supervisory and organizational support can lead to more sustainability behaviors in employees.

Others such as Johnson & Johnson prefer to see it developed into the overall culture of the firm. Tish Lascelle, Johnson & Johnson’s senior director of environment, said, “Sustainability is embedded in our culture. It’s been a part of who we are for more than 65 years, long before the notion of sustainability became trendy.”112 The following Watch It video illustrates how a company has taken to become, and remain, a “mission-driven business” with corporate social responsibility as one of its mission’s core values.

HR Web Wisdom
Deloitte Sustainability Are You Overlooking Opportunities?

www.deloitte.com/us/sustainability

Many executives are turning to sustainability to help improve the bottom line.

Watch It 3
If your instructor has assigned this, go to www.pearson.com/mylab/management to watch a video titled Honest Tea: Corporate Social Responsibility and to respond to questions.

Numerous companies are working toward becoming eco-friendly. In 2016, approximately 81 percent of the S&P 500 Index companies reported having an active sustainability program in place, up from 20 percent in 2011.113 For instance, Unilever has placed sustainability at the core of its business. The company promised by 2020 to double its sales even as it cuts its environmental footprint in half and sources all its agricultural products in ways that don’t degrade the Earth.114 Target’s waste-reduction efforts have cut waste by 70 percent. Home Depot attempts to make sure that wood and lumber sold in its stores come from sustainable forests. Corporate environmental responsibility for McDonald’s focuses on energy efficiency, sustainable packing and waste management, and green restaurant design.115 McDonald’s has eliminated the use of containers made with ozone-depleting chlorofluorocarbons, cut down on the amount and type of packaging it uses, and implemented a program of purchasing goods made from recycled materials. Walmart is working on sustainable initiatives. Solar panels are being installed in all the retailer’s super centers with unused energy being sold back into the energy grid, a cost-saving move for the community.116

Increasingly, environmentally sound and cost-cutting operating procedures are being included in firms’ business plans not only for their own employees, products, and facilities, but also for suppliers and trade partners. Walmart Stores Inc. has initiated and promoted sustainability not only in its own stores and production facilities, but also for its U.S. and global suppliers.117 Frito-Lay, which operates the world’s seventh-largest private delivery fleet, has put 176 all-electric box trucks on the road in places such as California, Texas, and the Pacific Northwest. The trucks are expected to cut diesel consumption by 500,000 gallons a year while limiting greenhouse emissions by 75 percent compared with combustion engines. The trucks will also cut annual maintenance costs by as much as $700,000.118 Coca-Cola Enterprises Corporate Responsibility and Sustainability Report stated that they have taken steps to reduce the number of calories per liter by 10 percent by 2020.119

PPG Industries recently issued a corporate sustainability report that provides information about the company’s financial performance, environmental metrics such as greenhouse gas emissions and energy use, safety statistics, stakeholder engagement, philanthropic activities, and awards and recognition. In the report, Charles E. Bunch, PPG chairman and CEO, said, “Sustainability is business as usual at PPG. An underlying principle for the company since its founding in 1883, a commitment to sustainability has been crucial to our long-term success.”120 Leading up to 2020, PPG will strive to reduce environmental impact, improve employees’ safety, health and well-being and encourage and report employee charitable donations and volunteerism.121 Dow Chemical’s way of thinking regarding sustainability is, “If you can’t do it better, why do it?” This philosophy is at the very heart of sustainability at Dow. Every decision is made with the future in mind.122

Institutional investors managing more than $1.6 trillion in assets are starting to put pressure on the world’s 30 largest stock exchanges to force companies to improve their sustainability reporting. Twenty-four institutional shareholders said they want it to be easier to judge the environmental, social, and governance risks of the firms in which they invest.123

Sustainability has also become extremely popular for companies operating in the global environment. Recently, Danone’s German division switched to a plastic made from plants (not oil) for its Activia yogurt packaging sold in Germany.124 Coca-Cola Enterprises in Great Britain has cut its carbon emissions by 470,000 tons, which is about a third of its 2020 target. It is also recycling 99 percent of the factory waste it produces, with five out of six of its production sites sending zero waste to landfills.125 Global polystyrene leader Styron LLC has more than 2,000 employees at 20 plants worldwide with annual sales of $5 billion. It begins each corporate meeting with the topic of sustainability. Employees’ bonuses are tied in to meeting sustainability goals. Recently, Styron introduced a recycled-content grade of polycarbonate at the Chinaplas trade show in Guangzhou, China.126 Renault partnered with Veolia Environment to build the world’s first zero-emissions, 100-percent renewable energy-reliant car manufacturing plant in Morocco.127
Conducting a Social Audit
2.5 Describe a social audit.

To overcome the negative publicity of corporate misdeeds and to restore trust, businesses are now conducting audits of their social responsibility activities and not just financial audits. A social audit is a systematic assessment of a company’s activities in terms of its social impact.

social audit
Systematic assessment of a company’s activities in terms of its social impact.

Some of the topics included in the audit focus on core values such as social responsibility, open communication, treatment of employees, confidentiality, and leadership. Firms are now acknowledging responsibilities to various stakeholder groups other than corporate owners.128

Some audits even set specific objectives in social areas. They are attempting to formally measure their contributions to various elements of society and to society. An increasing number of companies, as well as public and voluntary sector organizations, are trying to assess their social performance systematically. Three types of social audits are currently being used: (1) simple inventory of activities; (2) compilation of socially relevant expenditures; and (3) determination of social impact. The inventory is generally a good starting place. It consists of a listing of socially oriented activities undertaken by the firm. Here are some examples: minority employment and training, support of minority enterprises, pollution control, corporate giving, involvement in selected community projects by executives, and a hard-core unemployment program. The ideal social audit would go well beyond a simple listing and involve determining the true benefits to society of any socially oriented business activity.

Try It!
If your instructor has assigned this, go to www.pearson.com/mylab/management to complete the Management & Ethics simulation and test your application of these concepts when faced with real-world decisions.
PREPARING FOR EXAMS/QUIZZES
Chapter Summary by Learning Objectives
Discuss what ethics means and the sources of ethical guidance. Ethics is the discipline dealing with what is good and bad, right and wrong, or with moral duty and obligation. Business ethics addresses matters of choices about right and wrong made by business leaders. One might use numerous sources to determine what is right or wrong, good or bad, and moral or immoral, such as holy books or one’s conscience. Another source of ethical guidance is the behavior and advice of people, including our parents, friends, and role models and members of our churches, clubs, and associations. For most professionals, there are codes of ethics that prescribe certain behavior.

Explore human resource management’s (HRM) role in creating an ethical culture and a code of ethics. An ethical culture is made up of factors such as ethical leadership, accountability, and values. The climate at the top is fundamental to a company’s ethical culture. Ethical leadership begins with the board of directors and CEO and continues to HR managers, all other managers, and supervisors. Building an ethical culture that lasts requires a foundation of practices that continue even when leaders change.

A code of ethics establishes the rules that the organization lives by. Only a few companies have made ethics and compliance a process for determining how employees are compensated.

Define human resource ethics. Human resource ethics is the application of ethical principles to HR relationships and activities.

Explain the concepts and practices related to corporate social responsibility and corporate sustainability. Corporate social responsibility is the implied, enforced, or felt obligation of managers, acting in their official capacity, to serve or protect the interests of groups other than themselves, and corporate sustainability focuses on the possible future impact of an organization on society, including social welfare, the economy, and the environment. According to the World Commission on Environment and Sustainability, the narrow definition of sustainability is, “meeting the needs of the present without compromising the ability of future generations to meet their own needs.” In recent years, sustainability has been expanded to include the social, economic, environmental, and cultural systems needed to support an organization.

Describe a social audit. A social audit is a systematic assessment of a company’s activities in terms of its social impact.

Key Terms
ethics 29

code of ethics 35

human resource ethics 36

corporate social responsibility (CSR) 39

corporate sustainability 39

social audit 44

MyLab Management
If your instructor is using MyLab Management, go to www.pearson.com/mylab/management to complete the problems marked with this icon .

Questions for Review
2-1. What are ethics and business ethics?

2-2. What are some sources of ethical guidance?

2-3. What laws have been passed to legislate ethics?

2-4. Why is it important to have a code of ethics?

2-5. Regarding business ethics, what does the statement “what you reward is what you get” mean?

2-6. What are HR ethics?

2-7. What are the areas in which HR professionals can have a major impact on ethics?

2-8. What is corporate social responsibility?

2-9. What does corporate sustainability mean?

2-10. What are some of the practices companies can use to promote sustainability?
PREPARING FOR MY CAREER
P I A Personal Inventory Assessment
An additional Personal Inventory Assessment can be found on MyLab Management.

Ethical Leadership Assessment
Organizations need ethical leadership from all employees, but especially from managers. In this PIA, you’ll see how much thought and effort goes into being ethical in your workplace behavior.

ETHICS DILEMMA
A Selection Quandary

You are being promoted to a new assignment within your company, and your boss has asked you to nominate one of your subordinates as your replacement. The possible candidates are Randy Carlton, who is obviously more qualified, and James Mitchell, who, though not as experienced, is much better liked by the workers. If Randy is given the promotion, you are not certain the workers will accept him as their leader. James, on the other hand, is a hard worker and is well liked and respected by the others, including Randy. As you labor over the decision, you think about how unfair it would be to Randy if the feelings of the other workers kept him from getting a deserved promotion. At the same time, you feel that your primary responsibility should be to maintain the productivity of the work unit. If your former division fell apart after your departure, it would hurt your reputation, not to mention the company.

2-11. What would you do?

2-12. What factor(s) in this ethics dilemma might influence a person to make a less-than-ethical decision?

HRM Is Everyone’s Business
Most company leaders and employees will face ethical challenges at one time or another. Some employees will intentionally commit ethics violations for personal gain. Other employees may unknowingly do so. Whether you are a manager or HR professional—an employee may bring concerns about possible ethical violations to your attention or you may observe them yourself. Once you are aware of a situation where ethics are in question, you are obligated to respond.

Action checklist for managers and HR—responding to allegations of unethical behavior

HR takes the lead

Work with managers to ensure that they understand the company’s code of ethics and communicate the procedures for addressing instances of potential ethical violations.

Encourage managers to share the company’s code of ethics with employees, lead open discussions about everyone’s obligation to behave ethically, and create a safe environment for employees to report their concerns about possible ethical violations to the appropriate authority.

Guide managers through the process of handling employees who are suspected of committing ethical violations.

Managers take the lead

Educate HR on certain aspects of employee roles to better understand how unethical behavior may manifest in your department. Bringing HR up to speed creates a partnership for more effectively responding to possible ethical violations.

Discuss concerns with HR about possible ethical violations and follow through based on company policy and procedures.

Work together with HR to implement a training plan on the company’s code of ethics and creating hypothetical scenarios illustrating ethical and unethical behavior relevant to your departmental activities.

HRM by the Numbers
Paying the Price for Underpaying Workers
An additional HRM by the Numbers exercise can be found on MyLab Management.

HR professionals should ensure that workers are paid for their work on a timely basis. Sometimes, companies pay workers less than what they should and there are various possible reasons such as intent to save money or in error. Either way, paying employees lesser amounts than owed may violate the law. For instance, the Fair Labor Standards Act (FLSA), which we will discuss in Chapter 3, requires employers to pay eligible workers a higher pay for overtime work. Specifically, the overtime pay rate equals 1.5 times the regular hourly pay rate for each additional hour exceeding 40 in a work week.

You’ve learned that the company has not been paying employees appropriately for overtime work hours. It is your responsibility to calculate the amount of overtime pay owed to workers. After reviewing the payroll records, you discovered the following details:

Group 1: 225 workers. Each worker earns a regular hourly pay rate of $18.00. For each of the past 15 work weeks, everyone worked 45 hours.

Group 2: 310 workers. Each worker earns a regular hourly pay rate of $21.00. For each of the past 20 work weeks, everyone worked 47 hours.

Every worker received regular pay for all their hours worked, but they did not receive an additional overtime pay amount.

Questions
2-13. Calculate the hourly overtime pay rate for each worker in (a) group 1 and (b) group 2.

2-14. How much money does the company owe all the workers in (a) group 1 over 15 weeks and (b) group 2 over 20 weeks?

2-15. How much money did the company save by not paying all the workers (groups 1 and 2 combined) overtime pay?

Working Together: Team Exercise
In small groups of three or four, come up with specific answers to the following questions. Talk through your perspectives and come up with a brief team response. Be prepared to share your ideas with the class.

As a group, identify a company that has been in the news for committing ethical violations, exhibiting poor social responsibility, or engaging in practices that harmed the environment (sustainability). Consider those issues. In addition, review the company’s position on ethics, social responsibility, and sustainability (perhaps from its website).

2-16. What are the main issues pertaining to lapses in ethical practice, failure to be socially responsible, or harmful environmental practices that were reported in the news about this company?

2-17. How does the company’s stated position on ethics, social responsibility, and sustainability (found on the website) differ from what you have read in the news? Explain.

ANSWER

All businesses and occupations are affected by ethical issues. Some of the unethical practices that may cause harm to companies include illegal hiring, stock price manipulation, accounting fraud, employee abuse, obstruction of justice, and destruction of records. Other actions include rewarding executives millions for bad corporate behaviors or corporate executives making millions of dollars even as the business earnings are deteriorating. Managers have many places to look for guidance that can guide them to make the right business decisions such as the Bible, Koran, parents, role models and their conscience. The use of either bribing or awarding jobs unfairly to gain business competitive advantage is unethical and goes against the set legal and business standards.

Role HR Should Play as A Strategic Business Partner            

The human resource department is very crucial in the implementation of any measures to deal with ethical issues in the workplace. Human resources can set up policies that aim to reward employees who report unethical behaviours in the company. If there is no initiative to reward employees who notices illegal awarding of internship positions, it would result in them keeping quiet about the problem. The human…