Integrity-Based and Compliance-Based Ethics Program - Literature review Example

Integrity-Based and Compliance-Based Ethics Program Integrity-Based and Compliance-Based Ethics Program Introduction Fraudulent behavior in the workplace continues to be a common occurrence. Hess and Ross (2006) discovered that 5% of the respondents in a 2005 study had seen “misrepresentation or falsification of financial records” in the past year. In a more recent study by Weiss (2009), the findings indicted the incidents of dishonesty were three times as great for people particularly concerned in finance and accounting. Hess and Ross (2006) projected that organizations were losing approximately 5% of their revenue to work-related fraud, which sums up to $652 billion each year. Congress passed the Sarbanes Oxley Act (2002) in an effort to restore people’s trust in the American markets. The Sarbanes Oxley Act (2002) enhanced organizational ethics through defining ethical codes as comprising of the endorsement of “honest and ethical conduct,” urging for disclosure on the codes, which also apply to top financial officers and provisions to support whistle blowing (Weiss, 2009). Most managers dispute such efforts to “legislate” ethical action, even if they acknowledge the significance of vigorously running the ethical environment of their organizations (Pinnington, Macklin & Campbell, 2007). Some critics claimed that the techniques applied in trying to enhance an organization’s ethical actions—codes of conduct, as well as compliance programs—were costly and ineffective. Hess and Ross (2006) put forward that others argued that because of the capacity of organizations to assume a compliance-based program devoid of actually shifting their operations, those methods could bring about more unethical or illegal behavior. Keeping in line with this topic, this paper will analyze the key differences between integrity-based and compliance-based ethics programs and evaluate the implications for organizations in the current business climate. In essence, the paper will start by discussing business ethics and then talk about corporate compliance programs in general, as well as the criticisms revolving around the programs. The paper will then compare integrity-based and compliance-based ethics programs and then dwell on the implementation of the programs. After that, it will discuss integrity-based systems and how they relate to the Theory of Planned Behavior (TPB). Businesses Practices and Ethical Perceptions Many managers perceive ethics as an issue of individual scruples, a private matter between people, as well as their consciences (Paine, 2006). Such managers are quick to judge any wrong endeavor as a secluded act, the doing of a rouge worker. The notion that the organization could bear any blame for the person’s misdeeds is never accepted by those individuals; after all, ethics has nothing to do with management (Ferrell O., Fraedrich & Ferrell L., 2011). In reality, critics argue that everything about ethics circulate around the management. More characteristically, unethical corporate practice concerns the tactical, if not overt, cooperation of others in the management and echoes the attitudes, values, belies, behavioral and language patters, which define a business’ operating culture (Ferrell O., Fraedrich & Ferrell L., 2011). Therefore, business ethics is as much an organizational/managerial problem as it is an individual. Thus, managers who do not offer proper leadership or institutional system, which support ethical conduct, share liability with those who envision, carry out and intentionally gain from business misdeeds (Ferrell O., Fraedrich & Ferrell L., 2011). In order to curb the behavior, businesses have developed ethics (compliance) programs that can be categorized into—integrity-based and compliance-based. A compliance-based ethics program ensures that an organization and its workers comply with all rules and regulations in a stated manner (Bies, 2014 and Ferrell O., Fraedrich & Ferrell L., 2011). The three key aspects comprise—detection, prevention, and punishment of disobedient actions. Ferrell, Fraedrich & Ferrell (2011) proposed that an integrity-based ethics program also includes rules banning illegal actions, but centers on proper behavior or effects, which must be accomplished instead of actions to be avoided. Business Ethics In order to understand why compliance programs were developed, it is vital to understand what business ethics and why the principles are critical to the proper functioning of the organization. Ethics concerns doing the right thing. Business ethics demands that workers act in a manner, which stakeholder deem to be both honest and fair (Ferrell et al., 2011). Managers making ethical choices consider their impacts and fairness, i.e., who does the decision harm or affect and will the decision be judged as fair by the people it affects. Business ethics are normally steered by law (Paine, 2006). The basic framework are put in place to guarantee that a certain needed level of trust is present between clients and numerous types of market participants (Pinnington et al., 2007). For instance, a portfolio manager is expected to grant the same thought to the portfolios of small individual investors, as well as family members. Such practices make sure that the general public is fairly treated and echo the philosophy and beliefs of the organization (Paine, 2006). Ethical problems comprise of the rights and responsibilities between an organization and its workers, customers, suppliers, and neighbors (Blodgett, 2011). Stakeholders have a lawful right to want the business to be moral; if an organization has no ethical duties, then other institutions can make a similar claim, which would act as a counterproductive to the business (Paine, 2006). If an organization’s goal is to make the most of shareholder returns, then forfeiting profits to other concerns is a violation of its fiduciary responsibility (Pinnington et al., 2007). Business entities are lawfully regarded as persons in the United States, as well as in most countries (Weiss, 2009). To support the point made at the introduction of this paper that ethics is not only any employee’s wrongdoing, but the entire organization, many business owners or managers deem that acting ethically or morally raises costs and thus, lessens profits. For instance, organizations opt to cut costs through recruiting child labor at low wages and paying under average wages decreases the firms total costs (Weiss, 2009). As Kaptein and Schwartz (2008) posited, other businesses and organizations have established an ethical brand image, judging that clients are ready to pay extra for goods and services that consider the environment plus pay a sensible wage. Higher sales recompense for greater costs. Profits from performing morally are greater compared to organizations that simply think about their own shallow self-interest (Weiss, 2009). Business activities, which meet the demands of the law, but are judged as unjust by stakeholders, can lead to bad publicity (Pinnington et al., 2007). For instance, Weiss (2009) used the example of a restaurant, which pays its employees the required minimum wage but takes their tips to increase profits would not be violating the law but the organization risks losing the customers’ goodwill. As organizations grapple with ethical concerns many have turned to the implementation of integrity-based programs and compliance-based programs to guide and minimize instances of unethical behaviors Ferrell O., Fraedrich & Ferrell L., 2011. Integrity-Based versus Compliance-Based Programs Integrity-Based Programs Integrity-based ethics programs center on internal control or self-control practice by every public servant (Bies, 2014). The self-control mechanism comprises two elements. The first element is the employee’s moral judgment capability, which can be reinforced by two methods: a) through understanding and learning the vital values and norms, and b) through improving the skills in ethical or moral decision-making needed in order to use those values (especially when in conflict with each other) (Bies, 2014; Maesschalck, 2012). The second component of internal control is ethical character (Shahinpoor & Matt, 2007). This constituent is the essential will to perform upon judgments acquired through ethical or moral decision-making. Integrity-based management aimed at stimulating moral character and enhancing moral decision-making skills may be acquired through interactive workshops, training sessions, and personal coaching programs (Maesschalck, 2012). An integrity-based ethics program includes rules and regulations banning illegal actions, but centers on appropriate effects or actions, which should be accomplished instead of actions to be avoided. In an integrity-based ethical program, organizations set values by which the business and workers maintain transparency and treat clients with respect (Shahinpoor & Matt, 2007). The focus of the integrity-based program is on what the firm can accomplish instead of the manner by which the behavior is accomplished. Integrity-based ethical programs are results-orientated initiatives (Maesschalck, 2012) that support proper, ethical actions instead of concentrating on observing and punishing bad actions or errors (Hejk, 2007). For sure, this form of ethical code requires a certain level of employee autonomy and trust, which may go wrong (Maesschalck, 2012). Integrity-based ethics programs are designed to raise human independence through aspirational aims avoiding law structures. They are comprise of: a) the classification of broad aspirational principles, b) concentration on what is accomplished instead of how it was accomplished, and c) emphasis on supporting good behavior instead of punishing and policing bad behavior or errors (Maesschalck, 2012). Supporters of those approaches propose that most employees and officials understand the distinction between right and wrong and only have to be guided. More significantly, they claim that being obsessed with low-road ethics or morals might offer employees a good reason for not thinking about the much wider effects of their dealings and the dealings of their companies for their customers and society at large (Hejk, 2007). For instance, managers are forced on evening out discrimination in order to fulfill legislative obligations (Maesschalck, 2012). Critics of integrity-based approach, argue that the principles were established on the quicksand of “wishful thinking” and have the risk of empowering “ethically bankrupt” workers. Those individuals also claim that the public and the media consider low-road ethics violations as a much more serious matter than public officials and employees do. This is because citizens are taxed or obligated to pay charges or fees to support most of these programs (Maesschalck, 2012). Compliance-Based Programs Businesses are subjected to a number of laws and regulations, which direct conduct (O’Leary, 2006). There are laws, which direct the employee-worker relationship, safety and health at workplace and protect clients. It is unlawful for a salesperson to make a material falsification of fact about a product (Beis, 2014). A compliance-based ethics program is designed to ensure that the organization and its workers obey all rules and regulations (Cialdini, Petrova & Goldstein, 2004). The three elements of the application include detection, prevention, and punishment of disobedient behavior (Maesschalck, 2012). For instance, most financial institutions’ compliance-based ethics programs might stop their employees from making misrepresentations and falsifications of information when acting in the scope of their work (O’Leary, 2006). Compliance-based ethics programs stress the significance of external controls on the actions of public personnel (Maesschalck, 2012). The principles focus on formal and explicit laws and procedures, and aims at a state wherein the personal ethical choice is restricted to opting to follow the rules and regulations (the ethical way of acting) or violate them through omission or commission (O’Leary, 2006). Critics of compliance-based ethics programs point to the free-thought and independence component of the application. As Shahinpoor and Matt (2007) suggested, the principles do not persuade workers to be ethical, but instead apply strict principles of fear and chastisement to implement the code. More importantly, compliance-based ethics programs do not support a general idea of ethical conduct. Instead, the codes focus on what is ethical and what is legal and these to concepts are not the same. Maesschalck (2012) proposed that compliance-based ethics programs focused on not breaking laws–the people shall not, instead of the people shall (p. ?). Under such plan, organizations might be in legal observance and in obedience with its compliance-based ethics programs and still take part in ethically dubious behavior, such as needless, but lawful, polluting the environment to save money (Maesschalck, 2012). In reality, some critics consider compliance-based ethics programs to be taking the low-road, which might be more a waste of time, effort, and resources. The 2002 Sarbanes-Oxley Act (SOX) was passed by the United States Congress as a way of reacting to the 2002 financially ill endeavors at WorldCom and Enron that enriched the top executives and defrauded their stakeholders (Maesschalck, 2012). SOX (2002) summarized: a) specific rules and regulations for corporations, b) distinguished the roles of the chief executive officer (CEO) and board chairman, c) required each company’s CEOs to verify financial statements, d) defined fines and prison terms for fallacious statements, and e) registration of company’s ethics principles registered with the American Securities and Exchange Commission (SEC). While many have supported this Act, Maesschalck (2012) suggested that the disadvantage of this Act was its cost which projected that a $5 billion organization might spend almost $5 million to set off compliance, as well as $1.5 million a year later. Application of Integrity-based and Compliance-based Programs Management researchers often differentiate between integrity-based programs and compliance-based programs (Hejk, 2007). A firm making use of a compliance-based program centers its endeavors on avoidance through threat of exposure and penalty for breaking the law or code of ethics. On the other hand, an organization using an integrity-based approach centers its endeavors on developing legitimacy with workers through internally developed self-governance and organizational values (Maesschalck, 2012). While a compliance-based program centers on teaching workers the rules and laws that they have to obey, an integrity-based program centers on incorporating ethics into workers’ decision making skills and supporting them to practice the organization’s ethical ideals (Shahinpoor & Matt, 2007). Therefore, with an integrity-based system, complying with the law is seen as a positive element of organizational life, instead of an unsolicited constraint forced by external institutions. Maesschalck (2012) suggested that the assumption was in line with the study launched by Tom Tyler that shows that compliance to the law was rooted in a feeling of moral obligation to valid laws, instead of only on threats of penalty. An integrity-based program is centered on forming a corporate culture where workers feel at ease talking about ethical problems and are awarded for good behavior. In such an environment, managers demonstrate commitment to ethics by individually living up to the organization’s principles and integrating those principles into strategic choices (Paine, 2006). Although Hess and Ross (2006) based the conclusion regarding integrity-based application on a few studies, ensuing research has established that an integrity-based system was more effective than a compliance-based system in allowing the organization to realize constructive outcomes. In contrast, Weiss (2009) discovered that compliance-based programs had a constructive impact on workers’ awareness of ethical problems. Many workers were willing to look for advice and observedand observed unethical behavior was lessened. However, the view by workers that a compliance program should be integrity-based was linked to workers’ readiness to report bad behaviors, their commitment to the organization, and the belief that workers could live by their individual values at work (Weiss, 2009). In another study by Roberts (2009), the findings indicated that a compliance-based system displayed positive impacts, but that an integrity-based system was more efficient in producing positive results. Research findings proposed that an effective ethics program will have aspects of integrity-based programs and compliance-based programs (Weiss, 2009). The emphasis for organizations would be to develop the suitable balance and not exaggerate the features related to compliance-based principles. However, managers could also execute a compliance-based program to safeguard top-management from liability (Hess & Ross, 2006). The latter program would be to manage misconduct. When management create such compliance-based programs, they are often unsuccessful or counterproductive and do not accomplish constructive ethical outcomes or improve ethical behaviors. Maesschalck (2012) and Pinnington et al. (2007) provide additional support for the findings discussed above. The findings from the survey study conducted by Maesschalck’s (2012) implied considerable distinctions between organizations that adopted a compliance-based program in line with an “effective” program under the Organizational Sentencing Guidelines (OSG), 2010 compared to organizations that had a compliance-based program which was devoid of all of the aspects of an efficient program. Martin (2013) used a similar investigative approach to that of Maesschalck’s (2012) to gathered information on organizations’ compliance-based programs with the focus on the organizations’ cultures. Martin (2013) measured culture through studying participants’ responses to the occurrence of “ethics related actions” in a firm. The findings showed that the culture of the organization was influential in the willingness of employees to discuss ethical issues, endorse responsible behaviors, and to serve as good examples of ethical behavior for others. Pinnington et al. (2007) noticed that organizations with full compliance-based programs show considerably more constructive ethical behavioral values. According to the Theory of Planned Behavior (TPB), those ethical behavioral values must translate into lessened fraudulent actions and enhanced whistle blowing behavior (Pinnington et al., 2007). Nevertheless, Martin (2013) discerned that culture had a much greater effect on positive ethical behaviors compared to the implementation of formal program without any consideration of the organizational culture. Even if whistleblower laws such as those developed under a formal program might safeguard reporter; neither whistleblower statutes nor compliance-based programs offer much protection for workers who deem that they have a moral obligation to individually protest arguably immoral policies or actions authorized by their organizations (Maesschalck, 2012). Such conditions force workers either to sabotage the firm or sit silently and follow the ethic of neutrality. Integrity-Based Programs and the Theory of Planned Behavior (TPB) Evidence supports the argument that compliance-based programs in line with the OSG, and most significantly integrity-based system, can enhance the ethical conduct of workers (Hejk, 2007). Integrity-based programs present concepts of The Theory of Planned Behavior (TPB). According to Boston University School of Public Health (2013), TPB started as the Theory of Reasoned Action in 1980 to predict an individuals intention to engage in a behavior at a specific time and place. The theory was intended to explain all behaviors over which people have the ability to exert self-control (¶1). Integrity-based applications enhance the attitudes of workers by creating avenues through which all member of the organization are provided with ways to use self-control to avoid unethical conduct (The theory of planned behavior, 2013). In line with the premise of TPB that the individual will have all that is needed to be successful, the integrity-based programs affect attitudes through supporting workers’ to judge outcomes rooted in their own values instead of focusing simply on their own personal payoffs (Hejk, 2007). Second, compliance-based programs persuade subjective norms through lessening social pressure for immoral conduct and developing an environment where workers feel free to talk about ethical issues and look for advice (Hejk, 2007). To connect these points with TPB, when leaders become proactive and begin discussion on ethical problems in the firm, workers were able to voice their views and look for expert advice (The theory of planned behavior, 2013). In support of this, Martin (2013) discovered that in firms where workers discussed ethics and encouraged good ethical behaviors that there was reduced incidents of negative behaviors. Third, integrity-based protocols improved a worker’s ethical behavioral control because most workers did not engage in fraudulent acts and were more willing to report any witnessed bad behavior. Martin’s (2013) survey found out that worker in an organization with a well-built corporate culture or ethics training deemed that they were ready to deal with any issues that they might endure. They felt that, through training, they had the necessary resources and skills vital to follow through with their aims. A study concerning Chief Financial Officers (CFOs) discovered that training on the organization’s ethical codes made it possible to use the principles of the code in formulating strategic decisions (The theory of planned behavior, 2013). Finally, integrity-based systems allowed workers to feel empowered to act upon their moral obligations and values. And, as shown by Martin’s (2013) work, that inspiration elevated an employee’s moral duty to follow the organization’s regulations. Of course, it is significant to remember that there are a number of limitations to all of the studies presented in this paper. The evidence is rooted in surveys carried out by authors, some sponsored by financial organizations that have vital limits like not controlling for other potential persuasive variables. However, the empirical evidence strongly points in the same direction and support additional study in this field. Rooted in the above analysis, there is a strong urge to believe that suitably executed compliance programs can improve ethical behavior in firms and decrease the levels of fraud, which exist. The argument by some critics that compliance programs are not effective is premature. The world is still a long way from having organizations put into practice “effective” compliance programs. Implications of Applications for Organizations in the Current Business Climate Between 2007- 2008, the United States economy and the entire global economy faced what many economists consider the great financial crisis. The consequences involved unemployment for millions of people, financial institutional failures, decline in the manufacturing sectors, and the housing market downturn. As the period of unemployment grew longer, many individuals lost their homes to foreclosures and evictions (Stiglitz, 2009). However, especially in the housing market, economists presented evidence to show that the crisis was the direct result of fraudulent underwriting behaviors by leaders in many financial institutions (Stiglitz, (2009). A number of the measures that the government undertook to curb this behavior include improving collaboration, as well as coordination, with organizations, evaluating the existing security measures, examining privacy measures, automating compliance measures, advocating for documentation efforts and also erecting laws to ensure that organizations manage their information well (Stiglitz, 2009). The government has appointed agents who work is to move around and ensure that different departments within the same organization work together and exchange vital information concerning the business processes (Stiglitz, 2009). The government also encourages organizations to brainstorm on hypothetical ways through which information could be compromised, and take suitable measures to make sure that security is not, by any means, breached. If flaws exist in the system, then they put the company at risk, which affects employees and it, in turn, affects the entire economy (Stiglitz, 2009). These endeavors are being manned by laws passed by the government, and, in an organization fails to fulfill them, then they stand to face significant consequences. Corporate Compliance Programs and Ethical Behavior The objective of a code of conduct, as well as a compliance program, is to make sure that: a) workers behave lawfully and line with the rules and values stipulated in the code, b) workers report endeavors that they perceive not to be in line with the code; and c) the organization takes the necessary action to stop the disobedient behavior from ever occurring again. Although willingly assumed compliance-based programs have universal support, critics dispute the role they have in corporate criminal law (Maesschalck, 2012; Singh 2011). Since a firm can considerably decrease or even escape accountability for having a “valuable” compliance program, counting a code of ethics, compliance programs are vitally mandated by the law (Maesschalck, 2012). Nevertheless, critics argue that there is no proof that ethics codes and compliance-based programs lessen illegal behavior. Support for such arguments arises from extensive empirical studies, which find no connection between ethical behavior and codes. A review of some of the studies by Hess & Ross (2006) reveal that roughly half of the surveys found out that codes were useful in lessening unethical or immoral behavior, but another half did not find a considerable connection. Therefore, these studies do not create a clear support for whether codes of ethics openly lessen unethical behavior (Kaptein & Schwartz, 2008). Other studies focused on the absence or presence of a compliance program or code of ethics, without trying to comprehend how the codes were utilized by workers in the company. With regard to codes of conduct, the view of these commentators and researchers appears to be that the code only functions as a rule-book that workers read and then follow, as a result. However, in practice, workers use codes in a number of ways (Maesschalck, 2012). For instance, a worker might recognize that a particular behavior is “wrong” devoid of the information offered in the code of conduct, but the code can offer encouragement for that worker to desist against improper requests from co-workers or supervisors. The code, in other situations, might only work to increase general awareness concerning ethical problems in the firm or support a worker to look for advice from others (O’Leary, 2006). In general, codes of ethical conducts work in both direct and indirect manners to establish worker conduct. Even though, codes might not openly create less illegal behavior, as Hess & Ross (2006) stated, it is difficult to picture how ethics might be made an essential part of an organization’s business practices. Just as commentators claim that codes of ethics enforced on organization by the law are just ignored in the organization, commentators also claim that compliance programs are only “window dressing” utilized by firms to achieve encouraging treatment under the OSG law, but having little effect on lessening illegal or ethical behavior (Maesschalck, 2012). However, O’Leary (2006) proposed that as with codes of conduct, the firm’s execution of the compliance program is more significant than whether or not an organization has implemented one Conclusion Fraudulent behavior in the workplace is common-place act. Many managers picture ethics as an issue of individual scruples, a private matter between people, as well as their consciences (Paine, 2006). Such managers are quick to judge any wrong endeavor as a secluded act, the doing of a rouge worker. The notion that the organization could bear any blame for the person’s misdeeds never enters their thoughts; after all, ethics has nothing to do with management (Paine, 2006). Critics argue that everything about ethics circulate around the management. This paper has discussed the key differences of integrity-based ethics programs and compliance-based ethics programs. It also supports the implementation of integrity-based systems rather than compliance-based systems. I would recommend further research into the study of these applications, in particular the meaning of each application as it impacts the stakeholders, culture, and sustainability of organizations. References Berrios, R. (2006). Government contracts and contractor behavior. Journal of Business Ethics, 63(7), 119–130. Hejk, E. (2007). Ethics in In-Service Training. In Handbook of Administrative Ethics, edited by Terry L. Cooper, pp. 79–103. New York: Marcel Dekker. Hess, D., & Ross, S. M. (2006). 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The rise of compliance-based ethics management implications for organizational ethics. Public Integrity, 11(3), 261–277. Shahinpoor, N., & Matt, B. F. (2007). The power of one: dissent and organizational life. Journal of Business Ethics, 74(1), 37–48. Weiss, J. W. (2009). Business ethics: A stakeholder and issues management approach with cases (5th ed.). Mason, OH: South-Western Cengage Learning. Read More