The economy has slowed to the point that the conglomerate Jackson works for has asked him to choose which of its four plants to shut down. Jackson needs a framework to decide how to make that decision. Which one should he use?

A manager has instructed Ellen to falsify entries in the corporate books. She doesn’t feel comfortable doing it, but isn’t sure she can risk her job by saying no. What should she do?

These situations arise in the business environment and force individuals to make difficult decisions. Ethics is the system of moral precepts that can help employers and employees decide which course of action to take. This chapter will illustrate a few of the ethical frameworks people can use when faced with decisions in a business setting.

Ethics is the system of moral principles that govern our actions. Put another way, ethics is the search for right and wrong. Ethics provides a framework for making decisions in all contexts, but recent events have highlighted the importance of this area in the business world. As a result of ethical breaches in large companies that led to their collapse and billions of dollars in losses, the government has turned its attention to enforcing ethical standards in the workplace.

Ethical dilemmas are constantly evolving as technology develops. The Ethical Resource Center defines the ethical dilemmas of the twenty-first century as privacy issues, financial mismanagement, intellectual property theft, cyber crime, and international corruption. In a world that is vastly different than the Leave-it-to-Beaver world of the 1950s, what should business ethics look like?

One ethical framework draws moral standards from codified law. Under this approach, the test of whether an action is justified is whether it is legal. This approach is frequently used in the business context. It’s a relatively flexible approach because the law can be altered as the perceived need for ethical standards changes. For example, under codified law, businesses extend warranties to purchasers and failing to meet those warranty standards is unethical behavior.

When the law is the standard, ethics will evolve as judges apply it to new areas. As a result, what was ethical before may become unethical behavior. For example, prior to the Emancipation Proclamation it was perfectly legal to own slaves. Accordingly, from a positive law approach, it was also ethical. But since the Emancipation Proclamation and laws passed after the Civil War, slavery is illegal. The law changed and moved the ethical boundaries with it.

Under this approach, Jackson asks himself if it’s legal to close a plant. If the company isn’t doing anything illegal, it has the right to close any plant that it chooses. However, Jackson still feels unsettled and unsure what to do. Ellen has concerns that the book-keeping magic she’s supposed to work isn’t legal, but her boss has given her an explanation that seems right. After all, she’ll only have to do it once.

Universal standards for ethics arise from several fronts. Fundamentally, this approach holds that ethics are set and cannot be changed by the shifting winds of the law. Instead, there is a natural law that sets the standards we should live by. This framework allows civil disobedience because sometimes the laws do not comply with a higher ethical standard.

Individuals such as theologian and philosopher Thomas Aquinas (1225?-1274) believed that natural law derived from the nature of the world and the nature of humans. That is, there are clear moral constraints—actions that are always right or always wrong regardless of what the culture or law state.

Continuing the slavery example, it was morally and ethically right for the individuals in the north who had stops on the Underground Railroad to help the slaves escape to Canada. Even though there was a law on the books that made those actions illegal, a higher moral standard compelled them to act contrary to the law.

Ellen knows that it’s wrong to lie, and that’s what doctoring the books feels like. She drafts a resignation letter but hopes she doesn’t need to turn it in since she’s the primary breadwinner for her family and caregiver to her husband, who is terminally ill. Jackson evaluates his instructions to choose a plant to close and can find nothing about the situation that violates natural law. It’s simply a decision that has to be made for the good of the company. Feeling somewhat better, he conducts his analysis and makes a recommendation.

Situational business ethics, or moral relativism, calls for individuals to look at the underlying situation and make decisions based on those facts. While there may be large absolutes, those can only be understood and applied in the context of the current situation. For example, natural law states that stealing is wrong. Situational ethics might agree in general that stealing is wrong, but someone who is starving might find stealing justified. Do the motivations and circumstances excuse and justify the actions? If the answer is yes, the action is ethical.

Jackson evaluates the facts about each plant, and ultimately decides to keep three of them because he has friends employed at each. Situationally, that seems like the best approach. Sure, some people will lose jobs, but at least it won’t be people he knows. And he can justify the decision with a cost analysis. Ellen decides that she can doctor the books this once, because she needs her job. With her husband’s terminal illness, they can’t afford to lose her insurance.

The business stakeholder theory looks at ethics from the viewpoint of the different constituencies a company has. Stakeholders are groups that share a common interest. The problem is that the needs and goals of the varying groups often conflict. Under this approach, business must find the right balance between the stakeholders where they interact so together they can create value.

Let’s say a company is considering taking a potential cancer treatment into drug trials. One set of stakeholders are the company’s shareholders: their goal is to maximize profits and dividends. The FDA, as the regulatory agency overseeing the trials, has an interest in how the trials are conducted. People with the cancer the drug is designed to treat are also stakeholders. They want a cure, but may be adversely impacted by unknown side effects. And employees want to see the company grow while maintaining their jobs. These various interests can collide. The business stakeholder model balances the diverse needs as it searches for the ethical course of action.

Under this analysis, the decision-maker should follow these steps to reach a decision:

After considering these elements, the decision-maker should reach a decision about whether to take the contemplated action.

As these steps indicate, it’s important under this analysis to first articulate the impact of the decision on the various stakeholders. But then, the decision-maker has to decide whether he or she can defend the decision in public. Or, as I like to put it, are you willing to defend the action if the decision is exposed on the front page of the local paper or The New York Times? (More on this a little later in the chapter.)

This framework can be used to decide whether to act in a legal manner—will I help myself to money from the corporate account? But it also helps companies decide whether to do more than the law requires. Employers have no legal obligation to offer their employees options like telecommuting or dental and vision insurance (usually). However, employers may decide to offer it as a way to maintain a qualified workforce. In the stakeholder analysis, the employees need or ask for greater flexibility or insurance benefits, and the company decides the benefit it receives in exchange is valuable.

This stakeholder analysis can also be used to address issues like the social responsibility of a company. Will the company actively engage in environmental issues like Ben & Jerry’s or will it take an approach that believes the money should go to shareholders so that they can support the causes that are important to them? Neither is right or wrong, but companies can land on different sides of the issue.

Jackson uses a stakeholder analysis to evaluate which plant to close. Each community needs the plant as a source of jobs. However, one of the plants will need substantial upgrades to comply with new EPA regulations. There have been whispers in the company that it is releasing toxins into water sources. Jackson recommends that plant be closed. Ellen looks at the situation from all sides. She decides that she’s going to go with her gut and refuse to adjust the profit-and-loss statements. Her manager finds someone else who is willing to move the numbers.

All this discussion of the frameworks for making ethical decisions is great, but why does it matter? In addition to the need for standards that company scandals like Enron and WorldCom highlight, there are sound business reasons to behave in an ethical way.

The capitalist system succeeds in no small measure because companies build trust, make sound financial decisions, and build solid reputations. Ethical lapses threaten each of these.

Trust is essential in a capitalist system. Trust means that others can rely on the character, strength, and integrity of a business. Without trust, investors would be reluctant to invest capital in companies. Employees would be hesitant to work day in and day out for those companies. Customers enter contracts with companies because they believe they can trust the companies to honor the obligations.

Yet, in a survey conducted by Gallup for the Better Business Bureau that was released in October 2007, 18 percent of adult respondents said their trust in businesses they regularly deal with had decreased. In the same survey, they rated honesty and fairness as essential elements for a company to win their trust.

Many of the recent scandals have led to this decrease in the trust the public has in large companies. Not only are Enron and Arthur Andersen affected. Those companies’ breach of trust affects the trust the public is willing to extend to other companies.

Ethics also has an impact on the financial performance of companies. Studies suggest a direct correlation between the way companies ethically treat stakeholders and the financial performance of that company. These studies find that if investors want a solid return from their investments, investors should invest in companies that are consistently candid in their financial standards. While this tidbit seems self-evident, the number of companies caught in accounting and other ethical scandals highlights the importance of investors being able to trust the books of companies.

Each scandal becomes a black eye on that company’s reputation. With an ethical breach, the company loses the public’s trust, which affects the company’s reputation. That in turn affects the willingness of the public to purchase from that company for years to come.

Many companies have a clear understanding of the value of their reputations. As a result, some hire search engine optimizers (SEOs) to manage their reputations on the Internet. SEOs find ways to create positive content about the client and push the bad information down the search engine rankings. Is it ethical to actively manage a reputation? Or is it image management like a publicity campaign?

Business regulation often grows out of an area where an industry ceases to police itself—often due to an ethical breach. Congress steps in to legislate and agencies to regulate when Congressional studies uncover abuses. For example, the Federal Trade Commission (FTC) began policing consumer debt after Congress passed the Fair Debt Collection Practices Act when Congress found evidence of abusive, deceptive, and unfair debt collection practices. The Securities and Exchange Commission (SEC) promulgated regulations for financial disclosures regarding derivatives after several companies and local governments lost huge sums of money due to their investments. When businesses act ethically, the companies can often avoid the cost and arbitrary nature of regulation.

So how should ethical dilemmas be rectified? In theory, it’s nice to know about ethics, but the challenge is in applying it to real-life issues. There are several frameworks or sets of questions that can be used to take ethics from the theoretical to the practical. In the following sections we’ll take a closer look at three of these approaches, any of which can help managers decide which course of action is the most ethical in a particular situation.

Dr. Ken Blanchard, management expert and author of The One Minute Manager, and Dr. Norman Vincent Peale, the author of The Power of Positive Thinking and pioneer of Christian psychology, collaborated on this ethical approach that revolves around three ethics checks. In it, they recommend asking three questions when confronted with an ethical dilemma:

When examined within this framework, the correct action to take should become clear. If the action isn’t legal, the analysis can stop there since it’s rarely ethical to act in an illegal manner. If the action passes that test, is it balanced to the needs of the various groups that will be impacted? This question requires a look at the stakeholders and the impact of any decision on those groups. Finally, how does the decision make you feel? If in your gut the decision still doesn’t feel right, that’s your last indication that the decision isn’t right. This personalization of the decision allows the manager to determine how he or she physically responds to the ethical decision.

In many ways this is the clearest and simplest of the proposed frameworks. This is also called the New-York-Times Rule. The basic idea is to ask with each ethical decision, is the result of this decision something I want to read about on the front page of The New York Times, Wall Street Journal, USA Today, etc. in the morning? Is it a decision I would be comfortable telling my grandmother? If the answer to either question is no, then the decision is probably unethical. It forces the decision-maker to visualize the possible public disclosure of his action and determine whether he is willing to accept those costs.

Laura Nash, an author and educator who has focused her career on business ethics, developed a 12-step model to help managers reach ethical decisions. The questions focus on the various angles of the problem:

The purpose of this model is to examine a decision from the perspective of all stakeholders. It also highlights how the manager would feel if the decision is thrust into the media spotlight. After answering these questions, a manager should be able to determine whether a decision is ethical for them.

Congress passed the Sarbanes-Oxley Act of 2002 (SOX) as a direct response to the dramatic collapse of several large companies and loss of shareholder value due to accounting irregularities. Sarbanes-Oxley provides a comprehensive regulatory framework for regulating external accounting firms as well as internal audit functions. The failure to abide by Sarbanes-Oxley can result in jail time and civil fines.

The legislation is sweeping and cannot be covered in detail in this book. However, there are certain principles and compliance areas from SOX that every business law student should know. Keep in mind that the overarching goal of SOX is to regulate corporate governance and financial practices with strict compliance criteria. While there are eleven titles in SOX, there are six key compliance sections, which I’ll discuss in detail in the following sections.

Section 302 requires that periodic financial reports include the following certifications:

The purpose of this section is to provide a person who is ultimately responsible for any financial misstatements or fraud.

Section 401 requires companies to ensure that their financial statements are accurate and presented in a way that does not contain incorrect statements. It also requires disclosure of off-balance sheet transactions, arrangements, obligations, and other relationships the issuer has with unconsolidated entities or other persons, which may have a material or future impact on the company’s financial condition.

Section 402 provides for enhanced conflict of interest provisions. Specifically, personal loans to directors or executives are no longer allowed, except in very rare circumstances.

Under Section 404, management is required to file with each annual report an internal control report. That report should state the responsibility of management for establishing and maintaining adequate internal controls and procedures for financial reporting along with an assessment of the effectiveness of those internal controls. This section also requires the external auditor to sign off on the company’s assessment of its internal controls.

Section 409 requires companies to make real-time disclosures to the public of any material changes in the financial condition or operation of the company. Thus, if a material change occurs between annual reports, the company must issue a special report so the public is informed of those changes in real time rather than waiting until the next report.

Under Section 802 anyone who knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in an attempt to interfere with an investigation could go to jail for up to 20 years. And any accountant who conducts an audit must keep the audit or review work papers for a period of five years.