Ethical Management

Sustainable management is ethical management, and businesses seeking to act in a sustainable manner need to take ethics seriously and establish and enforce ethical standards for current and future workers.  However, defining “ethics” and identifying “ethical behavior” are not easy tasks.  It is has been said that, in general, ethics can be defined as a set of beliefs about right and wrong, good and bad, and that business ethics is the application of right and wrong, good and bad in a business setting.[1]  Daft and Marcic defined ethics as “the code of moral principles and values that governs the behaviors of a person or group with respect to what is right or wrong” and explained that ethics can be seen as setting the standards for what is good or bad in conduct and decision making when the conduct or decision may harm or benefit others.[2]  The concept of “ethics management” has been described as a managerial function to regulate the conduct or behavior of the employees from top to bottom through written code or unwritten code and as a managerial tool to enforce integrity of employees where codified rules and regulations are absent yet it is necessary for employees and the company to follow reasonable ethical standards or well-founded standards of right and wrong that prescribe what humans ought to do.[3] 

Ethical Organizational Culture

While individual integrity and ethical values play a large role in any one person’s behavior and decisions, executives, managers and employees are inevitably influenced by the values, attitudes, beliefs, expectations and behavior patterns of the organizational culture in which they operate.[4]  A strong corporate culture can be an important tool in helping executives, managers and employees make ethical decisions in a continuously shifting business environment that brings changes on a daily basis and creates new problems for which solutions have yet to be developed.  Common elements of organizational culture can be used to create and enhance an ethical mindset among executives, managers and employees.  Daft and Marcic suggested that high ethical standards can be affirmed and communicated through public awards and ceremonies and that people can be recognized and celebrated as organizational heroes, and thus role models, based on their ethical decision making practices.[5] 

Code of Ethics

One of the elements of a strong ethically-focused organizational culture is formal documents that provide concrete guidelines for ethical behavior and making ethical decisions.  Companies of all sizes have taken to creating formal ethics programs and the centerpiece of these programs is a written code of ethics that serves as a formal statement of the organization’s values concerning ethics and social issues.[6]  Codes can be presented using several different approaches and formats.  For example, the code of ethics for some organizations are essentially a list of core principles, accompanied by a brief description of each, intended to define fundamental values that organizational leaders hope to infuse into the organization’s culture such as integrity, quality, safety, diversity and inclusion, trust and respect, corporate citizenship and stakeholder success.[7]  Other organizations implement codes of ethics or conduct that are based on setting out policies and procedures that members of the organization are expected to follow in specific ethical situations (e.g., observe fair dealing in all transactions and interactions and protect all organizational, customer and supplier assets and use them only for appropriate activities approved by the organization).  As is the case with the principle-based approach, the intent is that the code will serve as a foundation for the workplace culture and a guide for conducting business affairs in an ethical manner. 

Organizational Structure

Organizations striving to improve their ethical profile create various organizational structures and systems to help put values into practice and shape and influence ethical behavior throughout the organization.  One structural move is the creation of an ethics committee and the appointment of a chief ethics officer.  The role of the ethics committee, which is composed of executives from different functional areas, is to oversee the company’s ethics and this includes interpreting, clarifying and communicating the codes of ethics, resolving thorny ethical issues and, quite importantly for the signals sent to other managers and employees, disciplining wrongdoers.  The ethics committee is led by the chief ethics officer, who is an executive of the company with responsibility for overseeing all aspects of ethics including[8]:

• Establishing and broadly communicating ethical standards
• Developing and maintaining policies and procedures for the general operation of the ethics program, including standards of ethical conduct and related activities
• Overseeing the ongoing operation of the ethics program
• Collaborating with other departments to ensure that there are reasonable and appropriate channels for reporting, investigating, and resolving ethical issues
• Responding to alleged violations of rules, regulations, policies, procedures, and standards of ethical conduct
• Identifying potential areas of vulnerability and risk, developing plans for resolution and providing guidance on how to avoid similar situations in the future
• Advising senior managers as they make ethical decisions and providing counseling for employees faced with ethical dilemmas
• Regularly reporting to executives and board members on the operation and progress of compliance efforts
• Developing and maintaining an ethics communication program for the organization, including ethics/compliance, awareness of standards of ethical conduct, and understanding of new and existing ethics issues
• Working with the human resources department and others as appropriate to develop a corporate ethics training program
• Establishing and administering confidential hotlines that managers and employees can use to report behavior they believe to be unethical or otherwise questionable

Reporting channels for the chief ethics officer should be carefully considered.  In general, the position reports to the CEO with a dotted-line reporting structure to the chair of the committee of the board of directors responsible for overseeing ethics issues, which may be the audit committee or a separate ethics committee that also has authority over related areas such as compliance and/or corporate governance.  If an ethics issue arises with respect to the CEO and/or other members of the executive team, the chief ethics officer should report the matter directly to the appropriate board member and seek guidance from the relevant board committee as to the steps that should be taken with respect to notifying the CEO.

Ethics Training

Ethics training is one of the most important activities for the chief ethics officer and his or her staff and companies implement training programs as a means for assisting executives, managers and employees in identifying ethical issues and applying the principles of the code of ethics to their day-to-day activities.  Ethics must play a role in new employee orientation and in all ongoing training.  Larger companies typically require all employees to participate in ethics training at least annually and many firms, large and small, have training events more frequently (e.g., weekly or monthly meetings to discuss workplace ethics and role play the proper steps for assessing commonplace ethical dilemmas).  Specialized training should be made available for employees who face more temptation (e.g., purchasing agents, overseas sales reps).[9]  Of course, a training program will only be effective if organizational leaders support and practice the principles that are covered in the program.

Whistleblower Procedures

One area where the law has moved over the soft line between the legal and ethical domains is “whistleblowing”, which is disclosure by managers or employees of illegal, immoral, illegitimate, dangerous or unethical practices by or on behalf of their employer.  For a long time, whistleblowers had no practical internal path for reporting wrongdoing and often made their disclosures to outside parties such as regulators, legislators or reporters.  This was often done because whistleblowers feared that internal reporting would not be taken seriously and/or would jeopardize their positions with the company.  Recently, however, companies have begun to see that whistleblowing is a benefit to the company and have established procedures to make it easier for reports to be filed and, quite importantly, protect whistleblowers from retaliation.  While these steps have been positive, and protection from retaliation is now mandated by federal and state laws, whistleblowing remains a risky proposition for employees and persons reporting issues are still often seen as simply being disgruntled troublemakers.  Nonetheless, creating an atmosphere in which employees feel free to come forward with ethical concerns using a clear, trusted reporting structure is essential for an effective ethics program since there will always be mistakes and/or people who simply are not interested in following the ethical path.

Board Oversight of Ethical Management Systems

While the chief ethics officer can and should be the C-suite officer with primary responsibility for drafting and proposing a code of ethics, the members of the board of directors are ultimately accountable for the contents of the code, committing the resources necessary to provide education and training regarding ethical matters throughout the organization and ensuring that everyone in the organization has access to tools for reporting suspected ethical wrongdoing without fear of retribution.  The board also needs to set the appropriate “tone at the top” with respect to ethics, as it should with other sustainability-related issues, and communications between the board and chief ethics officer regarding the code of ethics should be extensive and interactive rather than a quiet acceptance of proposals by the board without challenges or questions.[10]

Many companies have supplemented their organization-wide codes of conduct with codes of conduct and ethics for the board of directors that include specific rules for directors relating to legal compliance, prohibition of unethical behavior and reporting and investigation of unfair dealing and unethical behavior that comes to their attention.  In addition, directors should take appropriate steps to ensure that the company follows recommended principles and practices of high quality ethics and compliance programs including making ethics and compliance central to business strategy; creating and supporting systems to ensure that ethics and compliance risks are identified, owned, managed, and mitigated; placing leaders at all levels across the organization who are willing and able to build and sustain a culture of integrity; encouraging, protecting and valuing the reporting of concerns and suspected wrongdoing and taking action and holding itself accountable when wrongdoing occurs.[11]

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This article is an excerpt from the author’s forthcoming book on Sustainability Management, which will be published by Routledge in late 2020.  For further information, visit the following page on the author’s Sustainable Entrepreneurship Project website: https://alangutterman.com/topics/governance-management/

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About the Author

This article was written by Alan S. Gutterman, whose prolific output of practical guidance and tools for legal and financial professionals, managers, entrepreneurs and investors has made him one of the best-selling individual authors in the global legal publishing marketplace.  His cornerstone work, Business Transactions Solution, is an online-only product available and featured on Thomson Reuters’ Westlaw, the world’s largest legal content platform, which includes almost 200 book-length modules covering the entire lifecycle of a business.  Alan has also authored or edited over 90 books on sustainable entrepreneurship, leadership and management, business law and transactions, international law and business and technology management for a number of publishers including Thomson Reuters, Practical Law, Kluwer, Aspatore, Oxford, Quorum, ABA Press, Aspen, Sweet & Maxwell, Euromoney, Business Expert Press, Harvard Business Publishing, CCH and BNA.  Alan is currently a partner of GCA Law Partners LLP in Mountain View CA (www.gcalaw.com) and has extensive experience as a partner and senior counsel with internationally recognized law firms counseling small and large business enterprises in the areas of general corporate and securities matters, venture capital, mergers and acquisitions, international law and transactions, strategic business alliances, technology transfers and intellectual property, and has also held senior management positions with several technology-based businesses including service as the chief legal officer of a leading international distributor of IT products headquartered in Silicon Valley and as the chief operating officer of an emerging broadband media company.  He has been an adjunct faculty member at several colleges and universities, including Berkeley Law, Golden Gate University, Hastings College of Law, Santa Clara University and the University of San Francisco, teaching classes on corporate finance, venture capital, corporate governance, Japanese business law and law and economic development.  He has also launched and oversees projects relating to sustainable entrepreneurship and ageism.  He received his A.B., M.B.A., and J.D. from the University of California at Berkeley, a D.B.A. from Golden Gate University, and a Ph. D. from the University of Cambridge.  For more information about Alan and his activities, and the services he provides through GCA Law Partners LLP, please contact him directly at alangutterman@gmail.com, follow him on LinkedIn (https://www.linkedin.com/in/alangutterman/) and visit his website at alangutterman.com.

About the Project

The Sustainable Entrepreneurship Project (www.seproject.org) was launched by Alan Gutterman to teach and support individuals and companies, both startups and mature firms, seeking to create and build sustainable businesses based on purpose, innovation, shared value and respect for people and planet.  The Project is a California nonprofit public benefit corporation with tax exempt status under section 501(c)(3) of the Internal Revenue Code dedicated to furthering and promoting sustainable entrepreneurship through education and awareness and supporting entrepreneurs in their efforts to launch and scale innovative sustainable enterprises that will have a material positive environmental or social impact on society as a whole. 

Copyright Matters and Permitted Uses of Work

Copyright © 2020 by Alan S. Gutterman.  All the rights of a copyright owner in this Work are reserved and retained by Alan S. Gutterman; however, the copyright owner grants the public the non-exclusive right to copy, distribute, or display the Work under a Creative Commons Attribution-NonCommercial-ShareAlike (CC BY-NC-SA) 4.0 License, as more fully described at http://creativecommons.org/licenses/by-nc-sa/4.0/legalcode.

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[1] M. Kelly, J. McGowen and C. Williams, BUSN (Independence, KY: South-Western Publishing Company, 2014), 53-54.

[2] R. Daft and D. Marcic, Understanding Management (5^th Edition) (Mason, OH: South-Western Publishing Co., 2006), 120.

[3] J. Thangasamy, Meaning of Ethics Management, http://www.academia.edu/4152189/Meaning_of_Ethics_Management

[4] R. Daft and D. Marcic, Understanding Management (5^th Edition) (Mason, OH: South-Western Publishing Co., 2006), 129-130.

[5] Id. at 131.

[6] R. Daft and D. Marcic, Understanding Management (5^th Edition) (Mason, OH: South-Western Publishing Co., 2006), 142.

[7] http://www.boeing.com/principles/vision.page [accessed July 27, 2016]

[8] Certain of the items in the list are adapted from C-SUITE EXPECTATIONS: Understanding C-Suite Roles Beyond the Core (Washington DC: National Association of Corporate Directors, 2013), 13-14.

[9] M. Kelly, J. McGowen and C. Williams, BUSN (Independence, KY: South-Western Publishing Company, 2014), 58.

[10] C-SUITE EXPECTATIONS: Understanding C-Suite Roles Beyond the Core (Washington DC: National Association of Corporate Directors, 2013), 16.

[11] Principles and Practices of High-Quality Ethics & Compliance Programs (Arlington VA: Ethics and Compliance Initiative, 2016) (also including extensive lists of best practices that should be consulted when designing an ethics and compliance program).  See also Director Essentials: Strengthening Compliance and Ethics Oversight (Washington DC: National Association of Corporate Directors, 2018).