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Unethical Practices In Business

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Unethical Practices In Business Powered By Docstoc
					                  Ethical Concerns in Business and Their Solutions

                                          Sarah Meisinger
                                          Dr. Fife Eng 300
                                              04-18-05


       It was one of the biggest bankruptcy cases in U.S. history, and many employees were left

without retirement savings while executives and higher management made a profit (Cuplan 59).

I think after reading about Enron and scandals like it we all have wondered “how could this

happen?” What was it that led them to believe that it was okay to misrepresent their financial

records? In the ethics community many people are talking about these very questions and

attributing unethical behavior to personal background, the business environment and the

undergraduate business programs. All three have their own arguments and solutions, whether it

is better ethical training or different business environments. Although it is a complex

undertaking, something must be done to improve conditions to prevent such scandals in the

future. This prevention is important as business ethics affect not only employees and

undergraduate business majors but also everyday consumers and investors. If certain steps are

taken in both the business world and the education of business students, corporate scandals are

likely to decrease noticeably.

       With many different debates going on about ethical behavior, one argument stands out as

the definitive contributor to ethical behavior-- a person‟s convictions. These personal convictions

can be due to a person‟s upbringing, culture and other life experiences, but the general consensus

in the ethics community seems that this will override any sort of ethics training or business

structure. The logic to this argument is that in real life situations with multiple pressures and

responsibilities, a person is going to perform based on the type of person they are and their

personal value system.


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       In a study of business students in Taiwan and American, the culture of the student

seemed to have an impact on how well they performed on ethics reasoning tests (Venezia 204).

Obviously moral values and attitudes are going to differ between cultures. Because Taiwanese

students are taught to “save face” as part of their culture they are much less like likely to behave

dishonestly because of the values placed on doing your best for the group (Venezia 200). In

contrast to American culture, Taiwan has an overriding need to blend in with a group and

participate within that group whereas in American culture the focus is on individualism and

independence (Venezia 200). The focus on the individual gain by American students often

resulted in them picking an alternative during the study that would be beneficial to them rather

than beneficial to the group (Venezia 200). In some cases this focus led to them marking

unethical behavior as acceptable as long as the benefits were high enough. This study supports

the theory that culture has an impact on how students respond to ethical situations.

       Other studies have looked at how gender affects ethical reasoning abilities. Female

students tended to be more conservative and harsh in how they scored each situation causing

them to be less tolerant of dishonesty (Fischer). The male students in the study tended to be more

tolerant of where the line was between ethical and unethical behavior (Fischer). The study

offered no explanation other than females are traditionally more empathetic than males and

would look at how other people would be effected more so than how it would advance their

careers (Fischer). This same study also looked at how age affected each person‟s score, which

was also shown to be a factor: students under 21 scored the lowest and the scores went up

consistently as age increased(Fischer). In the article “Schools for Scandal” the author says

“becoming a successful leader of men and women in a turbulent business world requires maturity

and wisdom.” These results certainly show that the experience and maturity that come with age




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affect how students scored in this study. Maturity and wisdom are something an individual has to

acquire outside of their college education and workplace instruction, so this is something every

person must come to terms with on a personal level of what they believe is acceptable. There

haven‟t been any long term studies to see if ethics training was presented to students of a

younger age, perhaps in junior high or high school, it would help override personal experience

and age. Children are often more open to ideas and instruction, so it is my belief that earlier

introduction might make students receive their ethical training at the college level as more of a

core value than merely as a theory or practice.

       Although most people in the business and ethics community believe personal conviction

to be the overriding determining factor in ethical behavior, there are several credible people who

believe that business structures are almost entirely responsible for corporate scandals. In Dr.

Joseph Castello‟s article “How Corporate Culture Impacts Unethical Distortion of Financial

Numbers,” he looks at how the managing by objectives and results or MBO/MBR affects how

employees perform. The MBO/MBR form of management is a very common style for managers

to use and it involves giving targets to employees and then ranking them against their colleagues

based on how well they met the goals set for them (Castello 37). Dr. Castello says that the flaw

in this type of management is “Goals and targets are set without statistically determining whether

they are beyond the capability of the existing process. Hence, employees are often held

accountable for results that cannot be achieved without distortion of figures or they system” (38).

Giving employees unrealistic goals and penalizing them for not reaching these goals is “laying

the groundwork for an unhealthy climate through the use of MBO/MBR” (Castello 38). An

example of how unrealistic goals led to scandal can be seen in the 1992 Sears Roebuck &

Company auto service settlement of about $60 million in refunds to its customers (Paine). Lynn




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Paine discusses this particular instance in her article “Managing for Organizational Integrity”

saying that the main reason for the unethical business practices was “a new set of organizational

pressures and incentives with few options for meeting their sales legitimately, some employees

judgment understandably suffered.” Even the CEO at the time, Edward Brennan, stated that the

fault lay with the managers because they “created an environment in which mistakes did occur.”

(Paine). Of course the danger I see in blaming business structures and managers is that it

diminishes a person‟s accountability for their actions, which have already been argued to be the

biggest factor in whether a person is ethical or unethical in their behavior.

       In the coverage of the Enron scandal, MBAs and higher management were blamed for

most of the scandal (Cuplan 59). This caused the media to start looking at the MBA certification

and teachings in undergraduate programs to try and place blame on the lack of ethics training. In

Sumantra Ghoshal‟s article “Bad Management Theories Are Destroying Good Management

Practices,” he says that “Many of the worst excesses of recent management practices have their

roots in a set of ideas that have emerged from business school academics over the last thirty

years”(75). He goes on to say that specifically business schools are not adequately preparing

students for dealing with management pressures in the working world and only teach those

theories that are not useful in ethics training (Ghoshal 76). Dr. John Elliot, the dean at Oxford

University, says that “Business schools sometimes inadvertently enable and encourage greed

rather than moderating and controlling it” (569). The word that stands out to me in this quote is

“inadvertently” because universities are taking actions to educate their students and the ethics

community as a whole tends to blame individual moral values and poor business management

and structure for larger unethical problems.




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       In fact, ethics has become a bigger part of business education in recent years. In the

1960s and 1970s, ethics training was very limited and only took place in upper level auditing

classes (Elliot 537). In 1979 The Association for the Advancement of Collegiate Schools of

Business (AACSB) made ethics as a high priority for business schools and accreditation of

business schools (Elliot 573). Because of the AACSB increased emphasis on ethics textbooks

now have regular mentions of ethical issues and case studies to encourage professors and

students to think about ethics (Elliot 573) In Ronald Madison‟s survey of universities he found

that more than half of the universities require an ethics course before graduation (24). Ethical

training in undergraduate education in accounting and other areas of business is especially

important because firms often don‟t give extra training to help their employees. Dr. Christin

Earley found that “a study of accounting firms attitudes toward ethical training found that the

vast majority of firms „rely primarily on colleges to cover the ethics and ethical behavior

expected in the profession” (Earley 54). Earley‟s findings alone are enough to warrant

improvements and encourage ethical training and discussion in undergraduate education and

business schools because firms are obviously putting the burden of responsibility onto the

schools. If firms are expecting their employees to come into the business world prepared to deal

with the pressures involved in being honest in the business environment discussed above, then

undergraduate programs need to step up and work on the best methods for teaching their

students.

       Right now at Western there is a three-hour corporate governance and ethics class

specifically for business majors, but it is a primarily a web-based class. This class is not required

by accounting majors, but from the discussion above should most certainly be to make sure

students are equipped with moral reasoning tools that their employers expect. There are more




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ethics classes offered at Western under the philosophy and psychology genres but they are not

required for accounting majors. To be fair many of the upper management courses have sections

dealing with ethical issues. However Dr. Stape observed in his research on undergraduate

business education that ”many professors are hard pressed to find the time to teach the technical

content let alone incorporate ethics into their courses.” This could mean requiring an entire class

devoted to ethics before graduation to ensure that the proper amount of time is spent on ethics

education. A study done by Dr. Lawrence Poneman comparing moral reasoning in business

graduates from liberal arts and public universities found that students from liberal arts

universities score significantly higher than graduates from public universities (204). He

suggested many reasons for this discrepancy but the one he found to be most significant is that

liberal arts schools typically have smaller classrooms more based on discussion (Poneman 204).

Clearly smaller classrooms are not only helpful in all areas of learning but in ethical training as

well. In fact many studies have found discussion and personalizing situations to be the most

effective methods for improving ethical reasoning in undergraduate students. In Dr. Daryl

Koehn‟s study of undergraduates over several semesters, he found the most effective method was

not case studies or context-specific instruction but rather that personal, real life discussions and

debates got students thinking and engaged in the material (143). For example, instead of talking

about Enron and analyzing where the executives went wrong, the instructors would put students

into groups and give them a situation more applicable such as having trouble paying for their

education with ethical dilemmas along the way (Kohen 143). The students would then debate

among themselves the pros and cons of certain questionable actions that they could take. The

students who participated in this exercise improved their scores significantly over a semester

more than students who received traditional case study instruction (Koehn 143). Dr. Earley did a




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similar study with discussion-based approaches and found that “results indicate that educational

interventions are capable of increasing students moral reasoning, regardless of the specific case

context or other current event” (Earley 61). It seems that whatever part undergraduate education

is failing to reach students with their ethical training is not from a lack of effort but merely a bad

approach. No long-term studies have been done to see if the discussion based approaches carry

over better to graduates in the business world, but it seems that the personal and engaging

method seems to have a better chance of overriding past and cultural experiences. Some

universities have come up with other creative approaches such as having an ex-con come in and

talk to students about white collar crimes (“Schools for Scandal”). This is an excellent approach

to reach students as I think it would bring home the gravity of the consequences they face if they

choose to behave unethically in business. As Elliot says, “Business schools arrive late in the

development of our students. We cannot undo formative influences of family, religion, pop

culture, environment and heredity on the future behavior of our students” (573). However from

looking at the different approaches, the undergraduate education can have some impact on an

employee‟s ethical behavior. As Dr. Early says in his conclusion, “Educational interventions

regarding ethical issues can be effective in improving student‟s moral reasoning” (61).

       Although corporations depend on undergraduate education for ethical training, they are

by no means exempt from preventing corporate scandals. In a survey of 100 ethics officers, a

mere 1% thought that ethics training would have prevented a big scandal such as Enron

(Verschor 24). As discussed above, many business structures contribute to pressures that make it

difficult for employees to act in an ethical way, no matter their undergraduate training. In

Verschor‟s study he found that only 40% of the companies he surveyed punished employees for

violating the company‟s ethics code. Even more disturbing is that 8% of the people who were




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found violating the code were promoted (Vershor 22). By overlooking violations of the ethics

code, employees are being given the message that so long as the results look good, managers

don‟t care how they were obtained. Dr. Verschor observes that “in many organizations concern

for the bottom line or making the numbers seems to override any concern for ethical values (22).

This shows that businesses need to take a stricter stance when it comes to minor ethics violations

so that they don‟t end up with a full blown scandal. As with any job, but especially in business, it

is about money. Koehn‟s survey‟s found that “the number one ethical issue within American

corporations is perceived injustice of salary differentials”(148). When looking at the higher level

executive paycheck one sees that they are not only given an annual salary but they are also

rewarded based on how well they manage and produce a profit. These rewards are often stock

options within the company (Cuplan 70). Senator Carl Levin said after the Enron scandal, “Most

executive pay packages rely heavily on options, encouraging corporation managers to push

accounting rules to the limit in order to make their financial statements look better so their stock

prices will go up and then executives can cash in their options” (Cuplan 70). If executives‟

compensations were not so heavily based in stock options, this might let some of the pressure up

on misrepresenting financial data and in doing so make it easier on employees to act in an ethical

way. It seems that overall the pressure and unattainable goals in the workplace are the factors

that researchers believe to be contributors in unethical behavior, so solutions to these should be

focused on creating what Dr. Castellano says is an “atmosphere of harmonious relationships”

(41). Employees should be given budget goals that can be met with reasonable effort and

dedication. Their compensation and bonuses should not be based on how well they did according

to unrealistic standards but on how hard they worked and what they did with what they had to

work with. Obviously the biggest motivator in the business world is keeping ones job, so




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companies need to be stricter when unethical behavior is discovered and definitely stop

promoting the offenders. Yet another problem is that there is really no good way for employees

to report unethical business practices. Many companies have anonymous hotlines for things such

as safety violations or harassment but no such system for other unethical behavior like financial

dishonesty. I see this as an added addition to any business because it allows employees to bypass

their managers, who from above are very interested in making their finances look good, and do

what they think is right without fear of being fired or hurting their careers.

       Ethics is an important issue within the business community. All the business and

educational factors are ones that can be improved and hopefully reduce scandal in the future. I

think that even though personal experience and conviction is the overall contributor to ethical

behavior, this does not mean we should give-up and accept another Enron. There are specific

fairly simple solutions: start ethics teaching before college, change the ethics instruction to a

more interactive and personal format, require ethics courses as a graduation requirement, stop

managing for the bottom line, and have harsher punishments for violators of ethics in the

workplace. If these changes are made, I am confident that corporate scandals will decrease and

we will not have to see another Enron.




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                                          Works Cited

Castellano, Joseph F., Kenneth Rosenzwig, and Harper A. Roehm. “How Corporate
        Culture Impacts Unethical Distortion of Financial Numbers.” Management Accounting
        Quarterly 5.4 (2004): 37-41

Culpan, Refik and John Trussel. “Applying the Agency and Stakeholder Theories to the
      Enron Debacle: An Ethical Perspective.” Business and Society Review 110:1 (2005): 59-
      76.

Earley, Christine S., and Patrick T. Kelly. “A Note on Ethics Educational Interventions in
        an Undergraduate Auditing Course: Is There an „Enron Effect‟?.” Issues in Accounting
        Education 19.1 (February 2004): 53-71.


Elliott, John. “Business Schools and Social Responsibility: A Dean‟s Perspective”.
         Business and Society Review 109.4 (2004): 567-576.


Fisher, J. “Ethics Check”. CMA Management 73.3 (April 1999): 36-38.

Ghoshal, Sumantra. “Bad Management Theories Are Destroying Good Management
      Practices”. Academy of Management Learning and Education 4.1 (2005): 75-91.

Koehn, Daryl. “Transforming Our Students: Teaching Business Ethics Post- Enron.”
      Business Ethics Quarterly 15.1 (2005): 137-151.

Paine, Lynn. “Managing For Organizational Integrity”. Harvard Business Review 72.2
       (1994): 106-118.

Poneman, Lawrence, and Alan Glazer. “Accounting Education and Ethical Development:
      The Influence of Liberal Learning on Students and Alumni in Accounting Practice.”
      Issues in Accounting Education 5.2 (Fall 1990): 195-208.

“School for Scandal”. The Economist (Feb. 2005): 13.

Stape, A.L. “Ethics: area business schools are not rushing to add courses on ethical behavior as a
       result of the Enron scandal”. Providence Journal April 2004.

Venezia, Chiulien. “The Ethical Reasoning Abilities of Accounting Students.” The
      Journal of American Academy of Business March 2005: 200-207.

Verschor, Curtis. “It Isn‟t Enough to Just Have a Code of Ethics.” Strategic Finance
      (December 2005): 22-24.

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