Actions That Are Completely Legal Can Still Be Unethical Continue

  This module is a resource for lecturers

Key issues

Corporations are legal persons and, just like human beings, are subject to moral scrutiny. Therefore, from an ethical perspective, their activities must go beyond legal compliance and have legitimacy in the eyes of the broader community. Such legitimacy underlies the societal licence to operate the business, and must be earned and re-established on a daily basis. This is the larger context for this Module's discussion of business integrity and ethics.

It should be noted at the outset that the concept of business integrity and ethics, as used in this Module, refers to the application of ethics at the organizational level of the business. Other levels at which ethics could be applied in a business environment include: systemic, industry, organizational and individual. The different levels can be conceptualized as follows:

• The systemic level is the highest level and addresses the question: What is the most ethical system? This level involves ideological discussions such as the crude distinction between socialism and capitalism. In recent years, the systemic level has become more nuanced with different views on government intervention. For example, in the 2008 Global Financial Crisis some supporters of the free market advocated for government bail-outs to save large financial institutions.
• The industry level mostly addresses questions about ethically controversial industries like tobacco, alcohol and gambling, but this level has been expanded to address industries that were previously regarded as uncontroversial, e.g. fast food, fashion and financial services.
• The organizational level poses the question: How does the corporation behave? This is the level where concepts like business integrity and ethics are applied and where the role of the board of directors and the senior management of the corporation will be scrutinized.
• The individual level addresses behaviour at the level of individual employees. Someone might work for a corporation with a good reputation in an industry with a good reputation, but - as an individual - still engage in unethical behaviour, e.g. cheating on expense claims or treating fellow employees with disrespect.

The last two levels are directly related and mutually reinforcing: When a corporation acts ethically, it fosters a culture of integrity that motivates its employees to act ethically on the individual level. For example, a business that has zero tolerance for getting contracts through bribery, and trains its employees on how this can be applied even in difficult situations, is likely to have employees who find it easier to be ethical compared to employees in workplaces where ethical behaviour is not prioritised. It is moreover likely that the ethical behaviour of employees in such enterprises tends to manifest itself in other spheres, including at home and in the wider society. This works the other way around as well: unethical employees conducting unethical business will adversely affect the organizational culture, driving more unethical business practices. Paine (1994, p. 106) elaborates further on the relationship between organizational and individual ethics within a business:

Rarely do the character flaws of a lone actor fully explain corporate misconduct. More typically, unethical business practice involves the tacit, if not explicit, cooperation of others and reflects the values, attitudes, beliefs, language, and behavioral patterns that define an organization's operating culture. Ethics, then, is as much an organizational as a personal issue. Managers who fail to provide proper leadership and to institute systems that facilitate ethical conduct share responsibility with those who conceive, execute, and knowingly benefit from corporate misdeeds.

Against this backdrop, it is important to note that while the Module addresses ethics at the level of the organization, the interconnection between organizational and individual ethics is a thread that runs through the discussions. To further clarify what is meant by business integrity and ethics, the Module starts by discussing basic ethical principles that apply in corporations. It subsequently elaborates on the business case for business integrity and ethics, and then discusses the importance of implementing an integrity and ethics programme in any given business, regardless of its size or other characteristics.

Ethical principles for business

The literature refers to a variety of theories and approaches to applying ethics in the business environment. For example, Elegido (1996) refers to six basic ethical principles that apply to businesses: solidarity, efficiency, rationality, fairness, refraining from willingly harming others, and role-responsibility. These principles have been defined as follows:

• Solidarity manifests itself when one shows active interest in the good of others and leads the business to contribute to the overall common good of the society in which it operates. This active interest could, for example, lead to developing goods that are truly of value to customers rather than trying to sell whatever one can to them whether or not it is truly good.
• Efficiency refers to an optimal use of resources to do responsible business. Some possible ways to practice this include avoiding waste in terms of time and other resources or providing adequate onboarding, training and development to employees so that they can do their work well.
• Rationality entails acting in a fully rational way - not basing business decisions on caprices, whims or biases or solely on emotions, but rather on well thought-out considerations. Rationality includes being aware of the value of emotions and feelings but taking them into account in such a way as to be able to attempt objective decisions.
• The principle of fairness demands that one treats other people as one would wish to be treated - it means avoiding instances of partiality such as favouritism in decision-making, in promotions, in reward systems, and in hiring. A business should not sell goods or services based on misrepresentations to their customers since they would not like to be deceived into such purchases either.
• Refraining from willingly harming others entails taking full cognizance of the consequences of the actions proposed in business transactions and events. If the consequences are clearly harmful - for example, the sale of expired drugs - then the action should not be carried out. When the harm is merely an unintended side effect of an intended good effect, the business may be justified in taking the action if the harmful effect is outweighed by the good effect, there are no reasonable alternative courses of action, and the harm is being mitigated as far as possible. This is sometimes referred to as the principle of double effect.
• The role-responsibility principle recognizes that the business does not owe the same duty in the same way to all stakeholders. For example, after abiding by all the previously mentioned principles, a business would need to ensure reasonable returns to shareholders before contributing profits to improving the society.

This last principle has been challenged by another approach to business ethics based on the stakeholder theory. According to the stakeholder theory, the purpose of a business is to create value not only for shareholders but also for different kinds of stakeholders such as customers, suppliers, employees, and communities. The theory suggests that business integrity and ethics requires a holistic approach that considers stakeholders that may not directly affect the business in an economical manner, e.g. employees' family members who might suffer when the business invades their privacy. Some scholars have explored the purpose of business in general and conceptualized it as shared value (Porter and Kramer, 2011) or collective value (Donaldson and Walsh, 2015). Such contributions build in different ways on stakeholder theory.

Part and parcel of organizational ethics is fostering a culture of integrity. When a corporation acts ethically, it fosters a culture of integrity that motivates employees individually to act ethically. This contributes to meaningful and purposeful lives for the employees and ultimately to a better society. To achieve such a culture, the business can make use of modeling, mentoring and other activities that promote integrity, as well as the application of ethical codes, rules and regulations. In particular, to enable a culture of integrity and demonstrate to employees that the business is willing to "walk the talk", the business should ensure that its performance management and reward systems do not contradict or undermine its core values. While there is no one-size-fits-all model, every business should implement a business integrity and ethics programme that goes beyond compliance with rules and regulations, and fosters a culture of integrity. Strong ethical values must be at the core of such a programme, and those values must be identified and developed carefully. Ethical behaviour should be embedded in all day-to-day operations and communicated in interactions with stakeholders.

Importance of integrity and ethics for business

The individual and corporate choices of business professionals impact the wider community - families, the organization, the district or town, the society, and ultimately the world. These choices also impact the business professionals themselves. As shown by behavioural ethics research, when a person intends or does something that harms others, the person's respect for human nature is damaged. This person, often without noticing it, develops lower self-respect and integrity when he or she denies respect to another person, increasing the chances that the harming person will continue to cause harm. The psychological explanation of this is that after a first unethical action, the person's integrity is weakened which lowers his or her resistance to further unethical action, unless this dynamic is interrupted by some internal or external intervention (Welsh, Ordonez, Snyder and Christian, 2015). Similarly, once a company has paid a bribe, it is often expected to do so again, such that it enters a vicious cycle that is difficult to break. After a while, both old and new employees see this negative practice as the normal thing to do. For more insights from behavioural ethics see Integrity and Ethics Module 6 (Challenges to Ethical Living) and Module 8 (Behavioural Ethics).

An example could illustrate this. A salesperson from a multinational pharmaceutical company asks a doctor to prescribe the drugs produced by the company, rather than a generic drug that has the same ingredients and is cheaper. The sales representative does not care that this might cause hardship to the indigent patient. The salesperson persuades the doctor by offering him an all-expense paid trip to an overseas resort to attend a medical conference. The doctor agrees to the deal. Both disregard the ethical requirement to be fair to the patient. If they do not care about the patient, it means that a fellow human being does not matter to them and, in the end, human beings in general will not matter to them as much as before they made this unethical decision. Thus, it may become easier for them to do the same to another patient. The patient is directly harmed by being deceived into paying more for medical care, trusting the doctor. Having paid the costly medical bills, the patient cannot afford to pay the school fees of the patient's three children. Thus, the direct harm suffered by the patient has led to indirect harm to the children. In the long run, this impacts the entire community.

Business case for a path of integrity and ethics

Unethical behaviour constitutes a business risk and can lead to significant costs at the organizational level. These include but are not limited to:

• Legal sanctions such as fines, impositions of damages, confiscations, and even imprisonment of individuals.
• Commercial consequences such as the termination of business relationships and blacklisting (exclusion from future opportunities).
• Damage to brand reputation.
• Lower levels of employee satisfaction and retention.
• Increased unethical employee behaviour that directly harms the company such as embezzlement, wrong use of employee time and resources, confidentiality breaches.
• Absenteeism.
• Lower level of customer retention and customer loyalty.
• Risk of negative reactions from the community in which it operates.

Ethical business practices, on the other hand, can bring about tangible business advantages such as access to opportunities, assignment of preferential conditions (e.g. whitelisting of suppliers that champion integrity efforts), improved market access, higher reputation and customer loyalty, and increased attractiveness to talented employees. Besides, a level playing field and fair competition provide a conducive environment for innovation in the industry, which is good for both the business and its customers and may therefore benefit the whole society. Ethical business practices also attract other businesses and lead to business partnerships that create greater value for both parties. Over time, this can enhance the profitability of the business. One must note that factors such as a weak value proposition, tough economic environment, poor marketing and technical incompetence may lead to the failure of any company irrespective of its approach to ethics.

The following example illustrates the business case for ethics. The doctor from the previous example works at a hospital where the core values, as stated by the management, include honesty and care. All medical personnel have been trained to recognize situations in which there is a potential lack of honesty and care and encouraged to demonstrate these values even when tempted not to. The hospital also has an employee handbook and a gift policy which give clear indications regarding business courtesies from pharmaceutical companies, and where to draw the line in terms of bribes. Neither of these specifically mention all-expenses paid trips, but the doctor knows that ethical behaviour goes beyond the letter of the code. This doctor has also seen that the behaviour of top management is in line with these values and with the code; in similar situations, they have put the patients' interests ahead of their personal interests. Having reflected on all of this, the doctor says no to the salesperson's suggestion, out of a desire to do what is good for the patients and treat them fairly. This standard of behaviour is followed by all doctors at the hospital. Consequently, this hospital has won the award for the hospital with the highest integrity. This attracts greater funding for the hospital. More patients come. The organizers of the conference at the overseas resort hear about the incident and invite the doctor - all-expense paid - to speak at the conference in the section of the programme themed integrity in the health industry. The doctor being chosen to speak at the prestigious conference also enhances the reputation of the hospital.

Further discussions of the "business case" for business integrity and the range of sanctions and incentives that have been developed to prevent and address corruption within the private sector are available in the United Nations Office on Drugs and Crime (UNODC) publication entitled A Resource Guide on State Measures for Strengthening Corporate Integrity (2013).

Managing business integrity and ethics programmes

Despite its clear benefits, business integrity and ethics have traditionally been left outside the formal management processes. In the last decades, there has been increasing pressure on companies, from the top and the bottom, to create effective business integrity and ethics programmes. Stricter regulation requires and incentivizes companies to strengthen compliance with rules and regulations. Two well-known examples are the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act. On the international level, the United Nations Convention against Corruption requires States to ensure that their private sector complies with basic standards of integrity and ethics. To stress the importance of business ethics to the fight against corruption, the Conference of States parties to the Convention adopted resolution 5/6 of 29 November 2013 (entitled "Private sector") and resolution 6/5 of 6 November 2015 (entitled "St. Petersburg statement on promoting public-private partnership in the prevention of and fight against corruption"). Against this background, many companies have set up compliance programmes to ensure that business operations are carried out in full accordance with rules and regulations.

At the same time, stakeholders such as employees, customers, shareholders, business partners and civil society expect even higher standards of integrity and ethical business conduct. Focusing on rules and regulations alone will often fall short of meeting these higher expectations of ethical business practices. An effective business integrity and ethics programme, therefore, goes beyond pure compliance and aims to foster a culture of integrity. Such a programme can include internal, external and collective measures.

There are different management models for internal measures that ensure business integrity and ethics, but they all share similar characteristics:

• Business leaders and managers are personally committed, credible, and willing to act on the values they espouse ("tone from the top").
• The guiding values and commitments make sense and are clearly communicated, e.g. in a written code of conduct or code of ethics.
• Internal measures are based on a risk assessment to spend limited resources as effectively as possible.
• The values are integrated into day-to-day business, and practical resources and trainings are provided to guide employees even in difficult situations and grey areas.
• An internal control system is established and there are channels for reporting, e.g. whistle-blowing.
• The business integrity and ethics programme is understood as a continuous process of learning, and measures are monitored and reviewed on a regular basis. Freely available resources can be used for continuous education purposes, such as the video-based e-learning tool developed jointly by UNODC and the United Nations Global Compact (which is the focus of the pre-class exercise of this Module).

Companies should not only strengthen internal measures for business integrity and ethics but also external measures, e.g. in relation to business partners and their supply chains. The public perception does not only focus on the supplier itself but also on the companies that contracted them. In addition to ensuring compliance with national and international regulations, companies should thus adopt a proactive approach to strengthen business integrity and ethics in their supply chains, regarding their corporate responsibility and sustainable business practices.

Finally, companies can also engage in collective measures such as sharing experience in working groups or joining initiatives such as the United Nations Global Compact (UNGC). In environments in which unethical practices are prevalent, companies could resort to collective action to try to change the status quo. For example, they could get regulators to intervene or set standards in areas such as supply chains.

Businesses may require different approaches to manage their integrity and ethics programmes because of their characteristics, for example, in terms of size, legal status and complexity. There is no one-size-fits-all model but the underlying principles apply to both large and small companies, including start-ups. For example, in a large business, the tone from the top can be a video statement on the website or a postcard with a quote from a management representative. In an owner-led smaller business, one-on-one talks with the employees raising the importance of integrity as a core value of the company may be appropriate. It is also noted that while the latter may not need to draft an elaborate code of ethics (although that may change as the business grows), a multinational may need to consider the best way to express the same values in different contexts and the different country regulations of which their staff must be cognizant. The multinational may also need to assess the risks of unethical behaviour in the different environments in which they operate to select the appropriate controls that they need to institute. Multinational corporations are also often faced with the problem of cultural or regional relevance. Should there be one code that applies throughout all the countries where it operates, or should there be a multiplicity of codes to make provision for different contexts? The most elegant solution is to have a global code that provides high-level guidance on the values of the company, supported by country guidelines that provide a level of flexibility, but never in contradiction with the global values.

Building a successful integrity and ethics programme in a business requires working in parallel on integrity (reinforcing prevention) and compliance (including punishment). The integrity dimension comprises initiatives that help individuals within the corporation to build their ethical sensitivity and capacity for moral reasoning and reduce excuses for rationalizing unethical behaviour. Steps along this dimension include a good example from top management, clear communication of core values, training in ethical decision-making skills, and aligning recruitment, performance management, and reward systems to core values. The compliance dimension, by contrast, comprises initiatives that help to create an environment that supports the practice of ethics and integrity. These include identifying and preventing situations that may invite unethical behaviour and implementing controls and sanctions for unethical behaviour. Procedures, processes, policies and codes of conduct play a key role in the compliance dimension. These ideas apply to any business regardless of its size, legal status, complexity and the risks/opportunities related to the operations of the business.

Recognizing this on the international level, UNODC developed a publication called An Anti-Corruption Ethics and Compliance Programme for Business: A Practical Guide , which provides advice to businesses on how to put enhanced integrity standards into practice (2013). The Guide focuses on basic common elements businesses should address, with a particular emphasis on the challenges and opportunities for small and medium-sized enterprises. Its draws on the United Nations Convention against Corruption as well as other international and regional instruments that provide businesses with guidance on how to uphold enhanced integrity standards and be good corporate citizens.

Additional international initiatives that provide business ethics guidance include the World Economic Forum's Partnering Against Corruption Initiative (PACI), the United Nations Global Compact, Transparency International's Business Principles on Countering Bribery, G20/OECD Principles of Corporate Governance and the OECD CleanGovBiz Initiative.

Codes of ethics and codes of conduct

An important way to support a path of integrity and ethics, as discussed above, is to have an effective code of ethics or a code of conduct (or both). In theory, there are some differences between the two types of codes although in practice they are often very similar. In theory, a code of ethics is more values-based, with an emphasis on encouraging and supporting ethical behaviour based on corporate values, while a code of conduct is more compliance-based, with an emphasis on practical guidelines and sanctions in the case of non-compliance. However, in practice, both types of codes often include a mix of value-based and rule-based provisions.

One would expect any company to have a combination of integrity-based and compliance-based policies, and the code should therefore reflect the two dimensions discussed earlier. For example, the various components of a code should align with the core values of the corporation and with basic ethical principles, so that they encourage individual ethical behaviour. The code should be clear and concise so that people easily grasp its content. The code should also be accessible and visually attractive. It should contain examples and be available in different formats.

The practical elements of a code provide insights into the culture of the company. They include the tone from the top, the key ethical and regulatory risks identified by the business, information on whistle-blowing systems and commitment to non-retaliation, focus on external interfaces, clear and helpful guidance to staff to decide when faced with a practical dilemma, and access to more specific sources for further guidance.

The development process for a code could involve the setting up of a committee to carry out the project; interviews and consultations with key persons in the corporation; desk research into the typical content of codes and samples of codes of similar corporations; drafting; consultation with external experts; board sign-off; implementation plan; and a review plan.

Each stakeholder of the corporation applies the principle of integrity through a different lens. Taking all their perspectives into consideration helps to prepare a more comprehensive and effective code for the corporation. For example, in the case of a hospital, the owners (shareholders) of the hospital, the patients, the staff, the community in which the hospital is built, the government, are all stakeholders of the hospital whose perspectives should be considered in drafting and implementing the code of conduct for the hospital. Some provisions would express how integrity should be practiced by staff and towards staff. Others would be concerned with how integrity should be practiced by and towards patients. Examples of codes are provided in the Core Readings section.

Businesses and sustainable development

Businesses have not only a responsibility but also an interest to contribute to society and to make it more sustainable. In 2015, the United Nations adopted the Sustainable Development Goals (SDGs), which aim to end poverty, protect the planet and ensure prosperity for all. These 17 goals call for contributions of all relevant stakeholders including the private sector and can serve as a useful framework for engagement. The following image shows all 17 SDGs.

Source: United Nations

Businesses can contribute to achieving the SDGs in many ways. For example, they can use cleaner and renewable energy, pay fair salaries to employees, ensure workplace health and safety, use local suppliers, pay taxes, and support the education system. Some businesses promote health as part of their social responsibility strategy, while others manage their waste in a way that minimizes the pollution of waterways or engage in public-private partnerships to develop public infrastructure.

The SDGs point to both risks and opportunities. If businesses do not form partnerships with governments and civil society to address these issues, the sustainability of the planet (including business operations) is at risk. But at the same time these issues present opportunities to corporations that are innovative and entrepreneurial. Providing solutions to the world's pressing problems can also be profitable.

Another way for businesses to commit to sustainability and take on shared responsibility for achieving a better world is to join the United Nations Global Compact. UNGC encourages companies to do business responsibly by aligning their strategies and operations with ten principles on human rights, labour, environment and anti-corruption. The ten principles of the UNGC are derived from the Universal Declaration of Human Rights, the International Labour Organization's Declaration on Fundamental Principles and Rights at Work, the Rio Declaration on Environment and Development, and the United Nations Convention against Corruption. UNGC also encourages businesses to take strategic actions to advance broader societal goals, such as those reflected in the SDGs, with an emphasis on collaboration and innovation.

References

• Donaldson, Thomas and James P. Walsh (2015). Toward a theory of business. Research in Organizational Behavior, vol. 35, pp. 181-207.
• Elegido, J.M. (1996). Fundamentals of Business Ethics: A Developing World Perspective. Ibadan, Nigeria: Spectrum Books Limited.
• Paine, Lynne S (1994). Managing for organizational integrity. Harvard Business Review (March-April), pp. 106-117.
• Porter, Michael E. and Mark R. Kramer (2011). Creating shared value. Harvard Business Review (January-February).
• United Nations Office on Drugs and Crime (2013). A Resource Guide on State Measures for Strengthening Corporate Integrity . New York.
• United Nations Office on Drugs and Crime (2013). An Anti-Corruption Ethics and Compliance Programme for Business: A Practical Guide . New York.
• Welsh, David T. and others (2015). The slippery slope: how small ethical transgressions pave the way for larger future transgressions. Journal of Applied Psychology, vol. 100, No. 1, pp. 114-127.

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