Ethics in an organization

Introduction

An ethical tone within an organization should be set by the management by acting as role models in upholding the established ethical codes. The ethical standards will be highly observed by subordinates if they perceive that top management’s decisions and behaviors are unquestionable. Employees are required to uphold their moral standards even when managers are engaged in unethical practices and decline requests by their bosses to be involved in malpractices. The Sarbanes-Oxley Act (2002) legislated after the WorldCom scandal has improved ethical practices by ensuring that disclosure of ethical standing of top officers is done by firms.

Role of management in establishing ethical tone

An organizational culture whose focus is ethical behavior minimizes cases of misbehavior and ensures that the set code of conduct is observed. The tone that top management including Board of Directors sets acts as guiding values that create an ethical climate, and when such a foundation is rightly nurtured the culture of the organization is built (Woodbine, Fan & See, 2014). The management has to set the ethical tone by deliberately creating a culture that is more ethical through various practices.  The management has to set an example since the employees look up to the leadership as a model of the expected behavior.  When the top management is seen by employees as taking the high road in regard to ethics, a positive message is sent across the organization (Woodbine, Fan & See, 2014). The management role also involves communicating the ethical expectation so as to eliminate or minimize ethical ambiguities. This can be achieved through the establishment and dissemination of the code of ethical conduct that outlines the basic values and rules that should be followed. The code, however, will be ineffective unless the management model its ethical behavior.  The creation and maintenance of the ethical tone through the code of ethics will serves as the basis of strong ethics and even compliance. The code should also clarify and harmonize the roles of various levels of management so that the established tone can truly bind all people in the organization (Woodbine, Fan & See, 2014).

After communication the ethical expectations, the management has to ensure that ethical training is offered in the organization. In the process, ethical training through programs such as workshops and seminars can be used to reinforce the standards of conduct in an organization and clarify the practices considered ethical or unethical while addressing possible ethical dilemmas (Downe, Cowell & Morgan, 2016). It is also the role of management to carry out performance appraisals upon which the rewards for ethical actions and punishment for unethical ones will be based. The evaluation should start by determining how the management’s decisions and actions measure up against the set ethical standards.  Individuals whose actions and behavior are ethical must be visibly rewarded while unethical ones punished (Downe, Cowell & Morgan, 2016).  Ethical tone also includes protective mechanisms that will enable employees to explore ethical dilemmas and report cases of unethical acts. The employees should do so freely and without fear of reprisal. 

Tone from the management is important in setting and embedding the desired ethical culture and its impact will not only be felt internally but in the external marketplace. The consistent behavior of managers especially when a crisis arises and how they are perceived to react will critically affect the perception of external stakeholders of the organization (Nguyen, 2011).  This is especially true at a time when organizations and their management or leaders are having a clearer obligation to the society in which they operate. Failure to set such a tone in a business often openly reveals itself in governance and management failures which can have detrimental effect on investor confidence and overall market value.  When ethical tone is set at the top management level, people across the organization will be influenced in a positive way. The decision making process will be enhanced, and this will go a long way in enhancing the overall brand value to the benefit of organizational performance (Nguyen, 2011).  Moreover, the investors’ perceived value of a business will also be enhanced.

Unethical managers

 When employees find out that their bosses are engaging in unethical actions or behavior, they are faced with a challenging ethical dilemma at the workplace.  The manager actions or doings may be unethical and even outright illegal but since he or she is the boss, the employees often choose to remain silent.  The employees should first find out how many others in the work place are informed on what is happening, given that “there is safety in numbers” (Taylor, 2009).After gathering enough information and having their facts in order such through documentation that can serve as a back up to the complaints, the employees should together approach one of the senior managers for a discussion on the issue (Taylor, 2009).  Just because a manager is doing totally unethical things does not mean that subordinates should compromise their morals and thus, they should be honest and open to the top managers. Even where the employees jobs’ are threatened, they have to be ready for any eventuality. The subordinates should also be aware of managers who can set them up so that they bear the blame for their actions and ethical errors (Taylor, 2009). This may even call for employees to seek protection for their attorney if they feel targeted for reporting the unethical decisions or actions of their bosses.

Moreover, where the subordinates have been requested to engage in unethical practices, they should not comply with such requests. In such a scenario, the employees should first understand the issue and related facts, know the options available to them, and consider the possible outcomes before responding (Smith, 2015). Self- protection is important in this case since some misdeeds can plague an individual for a lifetime if they decided to morally engage.  They should also try to reason with the manager so as to raise their concerns, and the manager may finally see the light and desist from such engagements (Smith, 2015).  They may also have ideas on alternative ethical path through which better results can be achieved and which the manager has not considered.

WorldCom Scandal

WorldCom scandal can be considered as the biggest in United States history that came with the largest bankruptcies.  The company reported that, after an internal audit, it was discovered that a whole $3.3 B in terms of profits had wrongly been recorded in the accounting books (Train, 2002). The fraud had taken place since 1999, to first quarter of 2002 financial year. This is in addition to $3.8bn in form of expenses that the firm reported that had incorrectly been recorded as capital investments. The firm was forced to issue financial statements that had been revised (for 2000 and 1999) (Train, 2002).  The company became an epitome of financial fraud, and served as a clear warning to the market investors that when performance of firms appears too good to be true, they are likely to be.  Once tech boom for the firms in the market turned to dust and firms reduced spending significantly on telecom equipment and/or services, WorldCom reverted to some accounting tricks that were aimed at maintaining the picture of the firm’s increasing profitability (Scharff, 2005).   Most investors by the time had become suspicious of the management’s success story more so give the previous Enron Scandal (Scharff, 2005). After Ebbers, the CEO, was forced to resign the revelation of the massive accounting, including a loan of $400 M for covering margin calls, and the CEO had used his shares in the firm as collateral (Train, 2002). The capitalization of expenses led to exaggeration of profits and thus, profits were reported rather than net loss. The firm eventually filed for bankruptcy.

 The unethical issues in the case of WorldCom are mainly dishonesty and fraudulent activities that were carried out by the top management of the organization.  The management of the organization, led by Ebbers as the CEO failed to set an ethical tone for the firm by being the culprits of the fraudulent accounting practices.  The management involvement in the manipulation of the reserves indicate a grave unethical practice that was sanctioned from the top management and executed by the lower management level that involved the accountant of the firm (Scharff, 2005). While it’s a legitimate practice to use reserves , the abuse of such funds with the sole purpose of meeting the expected financial performance tantamount to failure by the management to establish an ethical culture especially by being role models. There seems to lack a code of ethics established in the organization and even if it was available, there were deliberate effort to ignore the standard sets for the sake of pleasing the investors. The management failed to consider the long-run impacts the actions would have on WorldCom reputation in the market especially among the investors and regulators. The failure by management to have moral standing for the purpose of ethical practices indicates that the company’s culture did not promote an ethical climate.  Another cause for the unethical behavior is lack of moral standing among the accountants in the firm who failed to report the fraudulent activities being conducted by management. The employees who might have noted the frauds failed to report the incident probably because the culture did not offer protection so that the whistle blowers could be safeguarded against reprisals. The accountants of the firm during this period were Arthur Andersen, who had been involved in other scandals such as Enron.  This shows that the company had poor ethical standards which allowed contracts to be issued to firms had previously been implicated in unethical practices.

To prevent the occurrence of such scandals, the company should have had an ethical Code of Conduct that holds the management and employees accountable for malpractices and related decisions. The bases of such an ethical code are principles of accountability and responsibility that ensures that organizational members bear the responsibility of upholding integrity and safeguarding the resources of the firm. This would have ensured that the appropriate financial information is recorded, all resources are accounted for and that the decisions of top management do to comprise the performance of the firm.  Of more importance is holding carrying out performance appraisals where the decisions of top management are evaluated by shareholders to ensure that they are in line with the established ethical standards. The management can also employ independent evaluation of the top management practices so that they do not overstep their mandate in making financial decisions. Thus, any cases of malpractices perpetrated by the management are detected early.

Effects of SOX on corporate ethical practices

 The Sarbanes-Oxley Act aimed at reestablishing public trust in share markets through various ways and one of which is through enhancing ethics in an organization .The ethical code’s definition in the Act includes the advancement of “honest and ethical conduct”, where codes that touch on senior financial officers have to be disclosed (Hess, 2006). The SOX had a great impact on the culture change especially regarding top management’s observance of ethical standards.  The role of Board of Director’s in upholding ethical practices of a company’s management was re-empowered through the Act by highlighting the independence of directors as important for checking the decision’s made (Hess, 2006). This means that failure of management to shun misconduct will not go undetected given the leverage that is derived from the Act. The management will have to make decisions that do not include fraudulent activities which involve the violation of accounting ethical standards. Companies are also required to disclose whether senior management including executives and top financial officers have adhered to the set ethical code and this goes  a long ways in minimizing cases of ethical behavior in the organization.

Conclusion

The management should ensure that ethical standards are established in a firm, communicate and train employees on what is required. Where top management failures to set an ethical tone, employees may never understand the significance of upholding the established Codes of Conduct. Subordinates should stand their ground and demand ethical behavior from the managers while considering their self-protection. The SOX has had positive impacts on ethical practices by ensuring that top management is held accountable for their decisions and actions.

References 

Downe, J., Cowell, R., & Morgan, K. (2016). What determines ethical behavior in public organizations: Is it rules or leadership?. Public Administration Review, 76(6), 898-909.

 

Woodbine, G., Fan, Y. H., & See, H. (2014). The Moral Business Tone of Organizations and Its Impact on The Ethical Decision Making of Employees. Academy of Taiwan Business Management Review, 10(3), 7-19.

Nguyen, S. (2011). Creating an ethical organizational culture. Workplace Psychology, available at: http://workplacepsychology. Net/2011/02/14/creating-an-ethical-organizational-culture

 

Taylor, L. (2009). Tame Your Terrible Office Tyrant: How to Manage Childish Boss Behavior and Thrive in Your Job. John Wiley & Sons.

Smith, J., (2015).What to do when your boss asks you to do something unethical or illegal. Retrieved from:https://www.businessinsider.com/what-to-do-when-your-boss-asks-you-to-do-something-illegal-2015-12?IR=T#ask-questions--and-more-questions-5

http://knowledge.wharton.upenn.edu/article/what-went-wrong-at-worldcom/

Train, M., (2002).WorldCom accounting scandal. Retrieved from: https://www.theguardian.com/business/2002/aug/09/corporatefraud.worldcom2

Scharff, M. M. (2005). WorldCom: A failure of moral and ethical values. Journal of Applied Management and Entrepreneurship, 10(3), 35.

Hess, D. (2006). A business ethics perspective on Sarbanes-Oxley and the organizational sentencing guidelines. Mich. L. Rev., 105, 1781.