Ethics
Since the Enron scandal erupted in December 2001, the issue of business ethics has come to the forefront of discussions about the behavior of corporate executives, auditors, attorneys, and board members. Subsequent revelations about possible accounting irregularities at other multinational corporations such as AOL, WorldCom, and Global Crossing make it clear that this was not simply a case of one company that ran amok, but it was a pervasive problem at top levels of major corporations. These scandals led to passage of the Sarbanes-Oxley Act of 2002, which made many of the practices that occurred in these companies illegal and provided penalties for violations. Some of the changes made by Sarbanes-Oxley include:
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Established the Public Company Accounting Oversight Board and required all public accounting firms to register with the board, which will conduct periodic inspections to ensure their compliance with audit standards.
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Established new standards to ensure the independence of auditors relative to the businesses they audit, including restrictions on nonaudit related services such as bookkeeping, management, human resource consulting, or other similar services; rotation of audit partner assignments at least every five years; and a requirement that the audit report and recommendations to the management team be delivered directly to the audit committee of the board of directors.
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Established standards for corporate responsibility, holding the chief executive of a public company accountable for the fairness and accuracy of financial reports filed with the Securities and Exchange Commission (SEC).
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Required CEOs and CFOs to reimburse the company for incentive- or equity-based compensation in the event of a material restatement of financial reports to the SEC caused by misconduct.
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Prohibited insider trading of stock during pension fund blackout periods when employees are not able to trade the stock in their pension accounts.
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Established ethical requirements for senior financial officers.
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Took steps to ensure the fairness, accuracy, and independence of stock analysis.
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Established criminal penalties for management officials who defraud shareholders, destroy documents, or obstruct justice.
Ethical behavior begins at top levels in the organization. The Board of Directors must demand it of the executive team, and the executive team must model it for all others in the organization. It would seem that this should be a pretty simple thing to do; after all, at the end of the day, ethical behavior occurs when, as Spike Lee said, people “do the right thing.” Because the values people hold are different depending on the culture they grew up in, their family background and their personal experiences, the right thing can mean different things to different people. That is why the executive team must set the standard of behavior, communicate it, model it, and enforce it if they are serious about maintaining an ethical workplace.
Code of Ethics
A corporate values statement can begin to set the stage for ethical behavior, but a code of conduct or code of ethics is really necessary to inform people in the organization about what behavior is expected and what is unacceptable. A code of ethics should cover topics such as those discussed in the following sections.
Confidentiality
In most companies, confidential information can be found in every department: marketing plans, new product development, financial statements, personal employee information, and e-mail accounts can all contain highly confidential information. HR professionals work every day with confidential employee information and are sometimes pressured to share this information for one reason or another. The inappropriate use of information collected during the employment process, information about an employee’s age, medical condition, or credit history may not be used in making employment decisions. HR professionals and other employees with access to confidential information have a duty to maintain its confidentiality.
Conflicts of Interest
As mentioned at the beginning of this section, employees must put the interests of the organization before their own. Any time an employee stands to gain personally from an action taken by the employer, there is a conflict of interest (except, of course, for payment of the employee’s salary). At a minimum, these situations must be disclosed to the employer, or the employee should remove themselves from the situation. The ethics statement should make it clear that even the appearance or perception of a conflict of interest is damaging to the company and should be avoided.
Fairness
Actions taken by employers have the ability to significantly impact the lives of their employees. Whether decisions are being made about hiring or layoffs, or accusations of malfeasance or inappropriate behavior are being made, employers have an obligation to treat employees fairly in all their actions. Employees who have the power to make decisions such as selecting suppliers or evaluating employee performance have an equal responsibility to handle these decisions fairly.
A real test of an organization’s fairness occurs when an employee makes a complaint to a federal agency, claiming that illegal activity has occurred. A person who does this is known as a whistle-blower. Some federal statutes, such as the Occupational Safety and Health Act, Railroad Safety Act, Safe Drinking Water Act, and Toxic Substances Control Act provide protection for employees who “blow the whistle” on their employers. Even so, it is a true ethical test to see how the whistle-blower who continues to work for the company is treated in the workplace once the complaint has been made.
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In the wake of the Enron scandal, and particularly during the month when congressional hearings into the bankrupt corporation’s activities were televised each day, the Securities and Exchange Commission saw a marked increase in complaints, from an average of 365 per day in 2001 to 525 per day for the month of January 2002. On February 27, 2002, Katie Fairbank of the Dallas Morning News also reported an increase in whistle-blower complaints at the Department of Justice, from 33 in 1987 to 483 in 1999.
Sherron Watkins, who is credited with blowing the whistle on the Enron accounting practices that eventually led to its bankruptcy in December 2001, may have inspired the increased reports. Ms. Watkins followed a path typical of whistle-blowers by meeting with Enron CEO Ken Lay long before she went to the regulators. Her desire was to advise him of the wrong- doing so he could put an end to it. That unfortunately did not happen, and the company filed for bankruptcy a few months after their meeting.
While some whistle-blowers have statutory protection from retaliation, courts are divided on just what whistle-blowing activity is protected; those who go to regulators are often unable to work in their chosen profession after taking the action.
One whistle-blower who paid the price for his actions is Dr. Jeffrey Wigand, a former tobacco executive who was fired by Brown & Williamson Tobacco Corporation in 1993 after the company refused to remove a known carcinogen from their cigarette products. After his termination, Dr. Wigand testified against tobacco companies in civil lawsuits and appeared in an interview on the television show 60 Minutes; his former employers launched a campaign to discredit him. Dr. Wigand was a key witness in the lawsuit brought by 46 states against tobacco companies that was settled when they agreed to pay $206 billion to reimburse the states for medical expenses that were related to smoking.
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Gifts
An ethics policy should address the issue of gift exchanges with customers, vendors, and employees. The ethics policy should describe under what circumstances gifts are acceptable and define limitations on the amounts if they are to be allowed. When the receipt of a gift unfairly influences a business decision, it becomes unethical and should be refused.
For companies operating outside the United States, this can be a difficult issue because in some cultures exchanging business gifts is a standard and expected practice, and the failure to do so can be seen as an insult. The Foreign Corrupt Practices Act of 1977 was enacted by Congress in response to revelations by multinational corporations of the bribes that were paid to obtain business in some foreign countries. The act prohibits the payment of bribes and requires accounting practices that preclude the use of covert bank accounts that could be used to make these payments.
Honesty
The code of ethics should set an expectation of honesty in the workplace. As with all other aspects of an ethics code, the executive team must model honesty in the representations they make to employees, customers, suppliers, and all other stakeholders in order for the message to be taken seriously within the company.
Insider Information
While insider information is most commonly associated with trading securities on the stock exchange, it can also apply to other areas. Inside information is any information that an employee has access to or comes into contact with that is not available to the general public. Using this information in the stock exchanges is illegal and can result in criminal prosecution and civil penalties.
The prohibitions against using inside information apply to an employee who overhears the information as much as they apply to decision makers in the organization. Federal law requires that those with access to inside information may not act on it until the information is made public.
Integrity
Integrity is defined as a firm adherence to a code of moral values. Integrity is demonstrated when an individual does the right thing, even when that “thing” is unpopular.
Personal Use of Company Assets
A code of ethics should clearly state what the employer considers to be an appropriate and acceptable use of company assets. In some organizations, the receipt of any personal telephone calls or e-mails is considered inappropriate, while in other companies a limited number is acceptable.
Workplace Privacy
Some employers feel the need to install surveillance cameras in work areas. This happens for a variety of reasons. For a retail store open late at night, it provides a measure of security for employees. Concerns about productivity or pilferage can spur an employer to install a surveillance camera. Whatever the reason, the employer must balance the need to manage the workforce with the employee’s expectation of privacy.
Advances in technology have also made it possible for employers to monitor Internet, e-mail, and voice mail usage, and this is seen as an invasion of privacy by some employees. Employers who plan to monitor employee communication and Internet usage should develop and distribute a policy clearly stating what information is subject to monitoring and under what conditions.
The code of ethics should include a statement about the use of surveillance and monitoring.
As important as a code of ethics is, it is equally important to be aware of situations where conflicting needs and desires make doing the right thing less clear cut. As those responsible for maintaining the confidentiality of personal employee information, HR professionals make ethical decisions on a regular basis and are in a position to model ethical behavior in the way they respond to inappropriate requests for information.
Ethics Officers
Businesses serious about establishing meaningful ethics programs have appointed ethics officers or facilitators whose responsibility is to ensure the adherence of the organization to the ethical standards set by the executive team. These officers advise employees at all levels in an organization on ethical issues and manage programs designed to allow confidential reporting of ethical concerns by employees, customers, shareholders, or others and investigate allegations of wrongdoing. Ethics officers provide periodic reports for the executive team to keep them apprised of ethical issues in the organization.
