Factors in the failure of ethics management

The prevailing economic crisis and the popularization of corporate social responsibility heightened the academe’s interest regarding the concept of Ethics Management. This paper talks about the relevance of ethics in business and the impact of its absence not only on the corporation, but also on the employees and stakeholders alike.

It was concluded that the failure of ethics management is a product of various factors, the most significant of which are commitment, leadership, communication, trust, core values, communication, trainings, and a reward and recognition system. It was recommended that further study be done on how to specifically implement Ethics Management.

Table of Contents

[Due Date] 1

Introduction 4

Literature Review 5

A.What is Ethics? 5

B.Business Ethics in Society’s Institutions 5

C.Business Ethics in Hong Kong 7

Discussions and Analysis 9

A.Factors that Cause the Failure of Ethics Management 9

B.Benefits of Ethics Management 12

Conclusion and Recommendation 14

Bibliography 16

Introduction

Business Ethics as distinguished from an individual or personal ethics emphasizes that even corporate entities, they possessing legal personality performs a particular conduct necessarily conforming to certain expectations ascribed by prevailing laws, customs and traditions affecting corporate and work relations arising out of employer-employee relationships. More often than not, individual ethical standards take a backseat in favor of business ethics where certain corporations have developed corporate goals and guidelines to guarantee excellent performance and establish a track record which could solidify corporate goodwill, reliability and sustainability not to mention good return of investment.

Over the decade, corporations have developed their own ethics management committees that define corporate goals and guidelines to address certain ethical dilemmas. While these dilemmas can be defined, it appears that the “know how” of managing ethical dilemmas in the workplace is a problem for managers and leaders (McNamara n.d.). This and other reasons contribute to the failure of managing ethics in the workplace. The scope of this paper is to identify and analyze significant factors contributory to the failure of managing ethics in the workplace, particularly in Hong Kong based companies. The objective is to present recommendations on the strengthening of ethics management in a corporation.

Literature Review

What is Ethics?

The Meriam-Webster dictionary (2011) defines ethics as the rules or standards governing the conduct of individuals or members of a profession. Despite its succinct definitions, there have been many disagreements about what ethics is all about. McNamara (n.d.) exemplifies such a situation by stating that many of the ethicists out there claim that there is always a right action based on moral principle, while others argue that the right thing to do is purely situational. This disunity in its definition did not remove its relevance to interpersonal relationships.

Business Ethics in Society’s Institutions

Contrary to what others may claim, the concept business ethics is not a mere fad popularized by profit-oriented corporations in order to get customer patronage. This concept has been known since the 1960s and has continued to be an area of academic inquiry to the present. Such interest in this field of study is fueled in part, by the ongoing financial crisis, which could have been alleviated or even been prevented only if ethical matters were taken into consideration by the leading companies’ top brass. Some of such ethical lapses which resulted to a fiasco for the business community are the Wall Street insider trading, fictional profits as exemplified by the Enron’s downfall (Berenbeim 2002), Texaco’s racial discrimination, Mistubishi’s sexual harassment, as well as the collapse of major financial institutions epitomized by Lehman Brothers because of their under estimation of credit default risk and over estimation of fair valued intangible assets.

Such ethical lapses, however, are not limited to the business sector. Every societal institution, even religious, educational, sports, philanthropic and government is not immune to such corruption. Extensive media coverage has exposed the anomalies existing in such institutions, which led to an international public outcry for sound practices.

The authorities worldwide resorted to various means of answering the public’s complaints. Many established high-level ethics committees, which drafted codes of ethical conduct and also conducted ethics training programs. Such initiatives of ethical and legal compliance have increased quite steadily since the 1970s. For example, in the United States, the Ethics Resource Center in its 2005 survey found that 86 percent of respondents employed across a cross section of employers throughout the country reported that their employers have a written set of ethical standards as compared to the employees’ 1994 rating of 67 percent. As documented, 69 percent of American companies now offer ethics training, 65 percent have their own resource for obtaining ethics related advice, 73 percent have developed their own process for reporting misconduct, and a staggering 88 percent of employees reported that their supervisor disciplines ethics violations (“Introduction to Business”).

Aside from the integration of ethics into corporate strategy, the leaders and entities alike sought to popularize an ethical culture by making it a part of daily living. As for instance, an ethicist would write a column for the Sunday New York Times and would appear regularly on National Public Radio. Also, character education has been proliferating in schools in order to inculcate the youth with the values that determine ethical conduct (“Introduction to Business”).

For the business sector, ethical issues are addressed through its corporate social responsibility. According to Hammond & Slocum (1996), the four attributes below measure how much an entity’s reputation reflects its social responsibility: (1) customer relations through the quality of its products and/ or services; (2) employee relations, which is the ability to attract, develop and retain talented people; (3) community and environmental relations; and (4) corporate governance . Angelidis & Ibrahim (1993) further state that over the years, the concept of fulfilling said responsibility evolved from mere giving of donations, to the complicated task of satisfying the social needs of a dynamic society.

Furthermore, corporations are currently reengineering their operational strategies in order to identify their goals with existing community values as for instance, turning into an environment friendly corporation and making a commitment. For example, CEOs of 10 industrial companies, which include Caterpillar, Inc., Deere & Company, and DuPont, are publicly advocating for major reductions in greenhouse emissions. Likewise, GE’s Ecomagination deals with investing in technology and innovation towards environmentally sustainable business ideas (“Shaping Tomorrow’s Business” 2007).

Business Ethics in Hong Kong

With the trend of globalization and increased economic interdependency especially with Hong Kong’s integration with mainland China, it has become more difficult for its companies to survive in such a dynamic and competitive environment. Desperation and ambition sometimes drives its institutional leaders to resort to means which are other than ethical. Because of this, the Hong Kong Ethics Development Centre (HKEDC) was created.

According to Mr. Kenneth W.S. Ting, the Honorary President of the Federation of Hong Kong Industries and Chairman of the Hong Kong Ethics Development Advisory Committee (EDAC), strong ethics helps enhance brand value, keeps customers happy and enables companies to command a premium in product and share prices.

However, the advocacy of business ethics remains to be mere lip service because of the proliferation of fraud, corruption and unethical practices, which crippled not only financial institutions, but entire economies as well. In Hong Kong alone, Ting (2010) substantiates that out of the 1,751 corruption reports received by ICAC from January to June of 2010 alone, Public bodies were responsible for eight percent, Government departments for 30 percent, and the private sector for a whopping 62 percent. Out of the 62 percent covered by the private sector, 44 percent is attributed to building management, 28 percent to miscellaneous activities, seven percent to catering and entertainment, six percent for finance and insurance, and five percent each for construction, transportation, and education.

The Hong Kong Ethics Development Centre (HKEDC) was created in 1995. So far, the HKEDC has assisted over 16,000 persons, including around 2,500 overseas visitors from more than 40 territories. It has also provided integrity and ethics training to company directors and small and medium enterprises, as well as professionals through continuing development programs, with a yearly average of 36,000 managers and frontline workers receiving such ethics training (Ting 2010).

Discussions and Analysis

Factors that Cause the Failure of Ethics Management

According to Haas (1994), “ethics is a function of the collective attitudes of people. Such attitudes are cultivated and supported by at least seven factors, namely: commitment to responsible business conduct; management’s leadership; trust in employees; programs and policies that provide people with clarity about the organization’s ethical expectations; open, honest and timely communications; tools to help employees resolve ethical problems; and a reward and recognition system that would reinforce the importance of ethics.” The absence of one would eventually lead to management failure.

Paine (1994) agrees with Haas that leadership plays a crucial role in both the development and implementation of an ethics management strategy. The top management is responsible for the overall work ethics to be followed, so without their commitment, the entire workforce under them would either follow their unethical ways or be discouraged from ethical practices because the system they belong to does not value such initiative.

After commitment and leadership, the third factor is a well defined set of core values. The lack of a written code of conduct or values undermines the essence of management as the employees are left on their own to decide what the rightful action is. This written key values help in crisis management as it guides both management and employees in making crucial decisions. For example, Johnson and Johnson’s well-known decision to pull Tylenol bottles off the shelves and repackage them at a $100 million expense was believed to be guided by their written code (McNamara n.d.), which only shows that they value ethical principles more than profit.

However, based on some studies, managers should be careful of the strategy they would be implementing when establishing a well-defined code of conduct. Steinmann & Scherer (2000) studied the case of Levi Strauss & Co and concluded that the integrity approach was more preferable than the compliance approach of implementing a code of ethics in the company. The reason was that the authoritative style of having rules only causes more rules to be formulated. The latter strategy resulted to a pile-up of paperwork and the solving of ethical issues needed new regulations to be established. But the most compelling reason for rejecting this was its ineffectiveness in preventing employees from “exercising poor judgment and making questionable decisions.” The method which was intended to promote ethical practices instead destroyed the “intrinsic motivation and the positive attitude of the employees towards the company”.

The fourth factor that contributes to ethical management failure is miscommunication. The lack of open and honest rapport between higher and lower levels, as well as the absence of timely feedback creates an environment devoid of value congruency and goal thrust. An effective means of disseminating desired work ethics and results, including the immediate feedback from monitors enables the identification of problem areas and the timely application of a solution for it. This way, the bud is nipped before it blooms.

However, communication is senseless if the employees are not knowledgeable of what is required of them; hence, the fifth failure factor is the lack of an ethics training program. As supported by Bossaert & Demmke (2005), having a set of ethical codes is ineffective unless such are “accepted, maintained, cultivated and implemented with vigor” by the corporation’s employees. The only way for such abstract ideas to become effective tools for crisis management is to reinforce them through trainings programs. Core values not internalized causes an individual to make unethical decisions.

The sixth factor which is essential to the success of managing ethics in a work environment is to foster trust within the organization. According to Bass & Avolio (1990), “trust so necessary for authentic transformational leadership [because it] is lost when leaders are caught in lies, when the fantasies fail to materialize, or when hypocrisies and inconsistencies are exposed.” Aside from uncommitted leaders, other factors which shatter interpersonal trust are discrimination, hostility and inconsistent policy applications.

Hong Kong, in particular, is a melting pot of diverse cultures. The existence of discrimination would impede the company’s expansion because the talent and expertise needed for continuous quality improvement is not limited to a particular race. Judging capacity because of ethnicity or culture limits the resource pool that management could choose from. Aside from this, companies advocating discrimination against a culture or gender garners for itself the ire of the international community, which definitely damages business relationships.

Fostering trust by eliminating discriminatory and abusive practices is essential for a lasting management program because it creates a harmonious and relaxed working environment. If people do not worry about the security of their tenure, the adequacy of their compensation, or the support and empowerment their managers give them, then they would not be averse to doing the right thing whenever they are confronted with difficult decisions.

Finally, a factor which may make or break an ethics management program is the existence of a reward and recognition system, or the absence thereof. Haas’ argument is backed by Drexel & Elliot (1981) when they stated that “the managers must back up their commitment to an ethical atmosphere by positive outcomes in terms of promotion and other rewards.” Often, whistleblowers are viewed as deviants and are most likely ostracized by their peers, but their absence may prove to be detrimental rather than beneficial to the corporation. Such individuals have strong ethical convictions and are crucial to the check and balance system of the entity. Without a dissenting view, there would be no alternative perspective from which managers could assess the ethical implications of their own or their subordinate’s action or inaction.

Benefits of Ethics Management

An efficient and effective system of ethics management would lessen the risks of loss the company would be suffering from legal consequences of fraudulent financial reporting and asset misappropriation. Not only would sound ethical practices improve the overall organizational efficiency because of work environments conducive to productivity and creativity, it would also enhance the company’s reputation as well as costumer support for its products and/ or services. The bottom figure in its income statement would definitely satisfy not only the board, but the stakeholders as well.

As a whole, society was improved because of business ethics. Decades ago, child labor was prevalent; worker safety and health were compromised in sweat shops as workers’ limbs were torn off and disabled workers were condemned to poverty and often to starvation; economic giants fixed commodity prices which led to brutal price wars that killed small scale businesses; racial and gender discrimination was widespread; and workplace bullying and harassment were left unchecked. Influence was applied through intimidation and harassment. Because the people became conscious of ethical conduct, such derogatory and detrimental practices were curtailed or even eliminated.

Ethics programs promote teamwork and goal congruence within organizations. As explained earlier, the definition of a concrete set of core values as well as its efficient dissemination to the workforce ensures the consistency of values throughout the organization. This harmony promotes not only productivity but also a corporate culture of excellence. Such an excellence spreads out to the entity’s host community and eventually to the whole society, with adequate cooperation and support from the citizens and the government.

Creating conducive work environments because of sound ethical practices fosters not only company expansion, but also employee growth. Because trust is present and employees are treated equally, trust is culminated, and employees feel more secure with their job. This lowers the risk of them being involved in risky transactions.

Ethics management lowers the risk of legal consequences as well as penalties because part of corporate social responsibility is compliance with existing laws and regulations. The organization could avoid the possibility of being answerable for damages in court litigations. Likewise, being environmentally-concerned acts as a penalty-deterrent, which helps save on costs.

Aside from the aforementioned, having a successful ethics program helps provide the corporation with a competitive advantage over its competition. This advantage comes from the possibility of having a continuous improvement in its products and processes which cuts costs and improves the delivery of goods and or services assured of providing total customer satisfaction. Having this system gives the required operating values necessary for implementing Total Quality Management such as stakeholders’ trust, excellent performance, reliability, performance measurement criteria, and regular feedback.

According to McNamara, attention to ethics is also strong public relations. Although the thrust of ethics management is not directed towards an enhanced public image, it is its most tangible effect. When people see those organizations as valuing people more than their profit, then such companies are viewed highly even after their prime. To emphasize this benefit, research has shown that consumers are more likely to buy from socially responsible corporations and that companies that both specify the amount of money given for each purchase, and who maximize the size of the donation that they are giving to the cause have a better Cause Related Marketing campaign performance (Van den Brink, Schröder & Pauwels 2006). Success rests on ethics management.

Conclusion and Recommendation

Based on the findings above, the failure of ethics management is caused by multiple factors, namely: lack of management commitment; inadequate leadership; lack of trust within the organization; lack of open, honest and timely means of communication; inexistent programs and policies about the organization’s ethical expectations; tools to help employees resolve ethical problems in the form of ethics training; and a reward and recognition system emphasizing the relevance of ethics management within the corporation. An absence of any one of the factors stated above may threaten not only the company’s reputation, but also its survival in this competitive corporate world.

The impact of the absence of a sound ethics management system is so large because it affects not only the managers themselves, but also interpersonal relationships among employees, the atmosphere of the workplace, the quality of business operations and processes, the quality of products and/or services, the company image, and the bottom line figure in its statement of comprehensive income.

In order to have a successful management program it is essential for the organization to have defined organizational roles designed to manage ethics in the workplace; it should have a continuous process of assessing ethical issues or requirements; it must have a clearly identified set of core values; it must ensure that ethical considerations are always part of the decision making process; and that a committee be created to address ethical issues; and finally, create a dynamic system of program evaluation (McNamara n.d.).

It is therefore recommended that further study be done on the topic on how to implement ethics management. Despite numerous books and discussions regarding the subject of ethics management, this concept remains to be more theoretical rather than practical because most would only tell managers what determines the success of a program not how to do it.