Part 1: Introduction

Chapter 1

Managers
and
Management

PowerPoint Presentation by Charlie Cook

Copyright © 2004 Prentice Hall, Inc.
All rights reserved.
 Revision

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–2

 Business & Management
Terms and concepts

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–3

 LEARNING OUTCOMES
After reading this chapter, I will be able to:
1. Describe the difference between managers and
operative employees.
2. Explain what is meant by the term management.
3. Differentiate between efficiency and
effectiveness.
4. Describe the four primary processes of
management.
5. Classify the three levels of managers and
identify the primary responsibility of each group.

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–4

 Organizations

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–5

 Organizations
• Organization
A systematic arrangement of people brought together
to accomplish some specific purpose; applies to all
organizations—for-profit as well as not-for-profit
organizations.
Where managers work (manage)
• Common characteristics
Goals
Structure
People

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–6

 Common Characteristics of Organizations

EXHIBIT 1.1
Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–7
 Levels of People
in an Organization

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–8

 Organizational Levels

EXHIBIT 1.2
Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–9
 People Differences
• Operatives
People who work directly on a job or task and have no
responsibility for overseeing the work of others
• Managers
Individuals in an organization who direct the activities
of others

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–10

 Identifying Managers
• First-line managers
Supervisors responsible for directing the day-to-day
activities of operative employees
• Middle managers
Individuals at levels of management between the
first-line manager and top management
• Top managers
Individuals who are responsible for making decisions
about the direction of the organization and
establishing policies that affect all organizational
members

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–11

 Management

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–12

 Management Defined
• Management
The process of getting things done, efficiently and
effectively, through and by the people

Efficiency
❖ Means doing the thing correctly; refers to the
relationship between inputs and outputs; seeks to
minimize resource costs
Effectiveness
❖ Means doing the right things; goal attainment

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–13

 Efficiency and Effectiveness

EXHIBIT 1.3
Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–14
 What do managers do?

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–15

 Functions of a Manager

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–16

 Functions of A Manager

▪Planning
▪Organizing
▪Leading
▪Controlling

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–17

 Management Process
• Planning
Includes defining goals, establishing strategy, and
developing plans to coordinate activities

Mr. Ali owns a Retail Store in Mid High_Way.

He has to install Security systems
and a wind resistant windows.
He also has to prepare for
grasping the greater share
of the market.
Mr. Ali is preparing for Future
Events
Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–18
 Management Process
● Organizing
● Includes determining what tasks to be done, who is to do
them, how the tasks are to be grouped, who reports to
whom, and where decisions are to be made

• In order to keep the monthly income record

• Mr. Ali decided to put all the records of
purchases and sales in a special folder.
– He is Organizing

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–19

 Management Process
• Leading
Includes motivating employees, directing the activities
of others, selecting the most effective communication
channel, and resolving conflicts.

Mr. Ali decided to hire a Sale Representative.

He also decided to train some of existing
employees with the required business ethics.
He is performing HR activities

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–20

 Management Process
• Controlling
The process of monitoring performance,
comparing it with goals, and
correcting any significant
deviations.
Mr. Ali compares his
Actual Sales with the
Estimated sales at the
end of each Month.
He is measuring the results

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–21

 Management
Process
Activities

Management process:
planning, organizing,
leading, and controlling EXHIBIT 1.4
Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–22
 Other Management concepts
• Span of Control.

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–23

 Other Management concepts
• Span of Control.
• It is the Number of subordinates (workers) reporting to
the single manager

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–24

 Management Concepts
• Wider Span of Control

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–25

 Management Concepts
• Wider Span of Control
• The more the number of subordinates reporting to
single manger; the wider the span of control.

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–26

 Management Concepts
• Narrow span of control

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–27

 Management Concepts
• Narrow span of control
• The lesser the subordinates; the span of control
Is Narrow

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–28

 Vision, Mission, Strategy
• Vision Statement

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–29

 Vision, Mission, Strategy
• Vision Statement
• A one-sentence statement describing the clear
and inspirational long-term desired change
resulting from an organization or program’s
work. It tells about the Future.

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–30

 Vision, Mission, Strategy
• Vision Statement
• A one-sentence statement describing the clear
and inspirational long-term desired change
resulting from an organization or program’s
work. It tells about the Future.

• I am a student of BSSE(F..).
• My vision is to be at the top and secure
• overall 4.00 CGPA at the end of this degree
program. (individual Aim)
Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–31
 Vision, Mission, Strategy
• Business Example

• Toyota’s VisionStatement:

• "To be the most successful and respected

car company in America."

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–32

 Vision, Mission, Strategy
• Mission Statement

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–33

 Vision, Mission, Strategy
• Mission Statement
• A mission statement is a brief description of a
company's fundamental purpose. ... However,
all mission statements will "broadly describe an
organization's present capabilities, customer
focus, activities, and business makeup“

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–34

 Vision, Mission, Strategy
• Mission Statement
• A mission statement is a brief description of a
company's fundamental purpose. ... However,
all mission statements will "broadly describe an
organization's present capabilities, customer
focus, activities, and business makeup“

• In order to achieve 4.00 CGPA I have to secure

4.00 in all subject offered to me in this semester
e.g. MIS
Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–35
 Vision, Mission, Strategy
• Business example

• Toyota’s Mission statement

• "To attract and attain customers with high-valued
products and services and the most satisfying
ownership experience in America.

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–36

 Vision, Mission, Strategy
• Management Strategy

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–37

 Vision, Mission, Strategy
• Management Strategy
• A plan of action (method) for achieving long term
goal.

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–38

 Vision, Mission, Strategy
• Management Strategy
• A plan of action (method) for achieving long term
goal.

• In order to get 4.00 CGPA in this semester I have

to :
Listen lectures carefully.
Attempt all quizzes with best performance
Attempt mid term and final term ending with min. 85
marks.

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–39

 Firm & Industry
• Firm

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–40

 Firm & Industry
• Firm
• A firm is a business organization, that sells
goods or services to make a profit. ... "Firm" is
often used interchangeably with "business" or
"enterprise” e.g.

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–41

 Firm & Industry
• Firm
• A firm is a business organization, that sells
goods or services to make a profit. ... "Firm" is
often used interchangeably with "business" or
"enterprise” e.g.

• Systems, Agile, APEX Consulting Pakistan,

Digital technologies etc
• Nishat, Gul Ahmed, Al-karam, Khadi etc

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–42

 Firm & Industry
• Industry
• An industry is a group of similar Firms competing
in a predefined market under similar bases of
competition e.g

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–43

 Firm & Industry
• Industry
• An industry is a group of similar Firms competing
in a predefined market under similar bases of
competition e.g

• Software Industry
• Textile Industry

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–44

 Organizational Structure (Hierarchy)

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–45

 Organizational Structure (Hierarchy)

• Pattern in which members of an organization or

society are ranked according to relative status or
authority.
• is a system used to define a hierarchy within an
organization. It identifies each job, its function
and where it reports to within the organization. ...
The structure is illustrated using
an organizational chart.

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–46

 Organizational chart (Hierarchy)

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–47

 Mintzberg’s Roles

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–48

 Mintzberg’s Managerial Roles

Source: Adapted from The Nature of Managerial Work (paperback) by H. Mintzberg, Table 2, pp.92–93. EXHIBIT 1.5
Copyright © 1973 Addison Wesley Longman. Reprinted by permission of Addison Wesley Longman.
Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–49
 Mintzberg’s Managerial Roles
(IID)
• Interpersonal (FLL)
Figurehead
Leader
Liaison

Source: Adapted from The Nature of Managerial Work (paperback) by H. Mintzberg, Table 2, pp.92–93. EXHIBIT 1.5
Copyright © 1973 Addison Wesley Longman. Reprinted by permission of Addison Wesley Longman.
Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–50
 Mintzberg’s Managerial Roles
(IID)
• Interpersonal (FLL)
Figurehead
Leader
Liaison
• Informational (MDS)
Monitor
Disseminator
Spokesperson

Source: Adapted from The Nature of Managerial Work (paperback) by H. Mintzberg, Table 2, pp.92–93. EXHIBIT 1.5
Copyright © 1973 Addison Wesley Longman. Reprinted by permission of Addison Wesley Longman.
Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–51
 Mintzberg’s Managerial Roles
(IID)
• Interpersonal (FLL) • Decisional (EDRN)
Figurehead Entrepreneur
Leader Disturbance hander
Liaison Resource allocator
• Informational (MDS) Negotiator
Monitor
Disseminator
Spokesperson

Source: Adapted from The Nature of Managerial Work (paperback) by H. Mintzberg, Table 2, pp.92–93. EXHIBIT 1.5
Copyright © 1973 Addison Wesley Longman. Reprinted by permission of Addison Wesley Longman.
Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–52
 Mintzberg’s Managerial Roles

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–53

 Interpersonal Skills
• The Figurehead:

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–54

 Interpersonal Skills
• The Figurehead: performs ceremonial duties.

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–55

 Interpersonal Skills
• The Figurehead: performs ceremonial duties.

• Examples: greeting visiting dignitaries, attending

an employee’s wedding, taking an important
customer to lunch.

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–56

 Interpersonal Skills
• The Leader: responsibility for the work of
subordinates, motivating and encouraging
employees, exercising their formal authority.

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–57

 Interpersonal Skills
• The Liaison:

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–58

 Interpersonal Skills
• The Liaison:

Manager 1 Manager 2
Subordinate Subordinate
Subordinate Subordinate
Subordinate Subordinate

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–59

 Interpersonal Skills
• The Liaison: making contacts outside the
vertical chain of command including peers in
other companies or departments, and
government and trade organization
representatives.
Manager 1 Manager 2
Subordinate Subordinate
Subordinate Subordinate
Subordinate Subordinate

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–60

 Informational Skills
• The Monitor:

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–61

 Informational Skills
• The Monitor: scans the environment for new
information to collect.

• Scan environmental factors such as customers,

suppliers, govt. and other stakeholders
• To see the affect of your product on these
environmental factors and vice versa
• To seek new opportunities

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–62

 Informational Skills
• The Disseminator:

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–63

 Informational Skills
• The Disseminator: Passing on privileged
information directly to subordinates.

• Examples: Addressing first line manager for

product modifications, market expansion etc

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–64

 Informational Skills
• The Spokesperson:

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–65

 Informational Skills
• The Spokesperson: Sharing information with
people outside their organization.

• Examples: a speech to a lobby or suggesting

product modifications to suppliers.

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–66

 Decisional Role
• The Entrepreneur:

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–67

 Decisional Role
• The Entrepreneur: Seeks to improve the unit by
initiating projects.

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–68

 Decisional Role
• The Entrepreneur: Seeks to improve the unit by
initiating projects.

• Takes risk
• Start New projects
• Derive Creativity and Innovation

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–69

 Decisional Role
• The Disturbance Handler:

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–70

 Decisional Role
• The Disturbance Handler:

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–71

 Decisional Role
• The Disturbance Handler: Responds
involuntarily to pressures too severe to be
ignored.

• Examples: a looming strike (Young Doctors

Strike in Pakistan), a major customer gone
bankrupt, or a supplier reneging on a contract.
•

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–72

 Decisional Role
• The Resource Allocator:

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–73

 Decisional Role
• The Resource Allocator: Decides who gets
what.

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–74

 Decisional Role
• The Resource Allocator: Decides who gets
what.
• a resource allocator distributes funding,
also determines such things as:
• space needs,
• how many people are needed,
• where their skills should be applied,
• how long a project will take,
• how much time each worker will spend on the
project, and how many and what kind of supplies
or equipment are needed.
Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–75
 Decisional Role
• The Negotiator:

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–76

 Decisional Role
• The Negotiator: Committing organizational
resources in “real-time” with the broad information
available from their informational roles.

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–77

 Decisional Role
• The Negotiator: Committing organizational
resources in “real-time” with the broad information
available from their informational roles.
• They negotiate for resources.
• They negotiate for budget increases.
• They negotiate to move team members from one
project to another,
• They negotiate with end-users when the outcome
of the project is not exactly what the end-user
expected.
Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–78
 Business
• A firm is a business organization, that sells
goods or services to make a profit. ... "Firm" is
often used interchangeably with "business" or
"enterprise” e.g.

• Systems, Agile, APEX Consulting Pakistan,

Digital technologies etc
• Nishat, Gul Ahmed, Al-karam, Khadi etc

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–79

 Business Routines
• Routines (standard operating procedures)
• •Precise rules, procedures, and practices
• developed to cope with virtually all
• expected situations

• The functions that are performed in routine that

support to business goals
Receptionist has his own set of routines
System analyst has his own
System developer has his own
Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–80
 Business Process
• It is a Collection of Business Routines

• Examples:
Generating sales
Purchasing Raw Materials
Reporting to manager
Responding to customers feedback

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–81

 So, Business
• Business is a collection of Business Processes

• Systems Inc.
• APEX Consulting

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–82

 Departments

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–83

 Departments
• For the achievement of Efficiency and
effectiveness Businesses processes are
organized into related Functional Business Units
called Departments.

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–84

 Departments
• For the achievement of Efficiency and
effectiveness Businesses processes are
organized into related Functional Business Units
called Departments.
• Marketing Department
• Finance Department
• HR Department
• Production Department
• R& D Department

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–85

 Business process in Departments
• Marketing Department
Survey of Market
Generating sales
Interacting with Final customers
Delivery of Product
Advertisement
Responding to Customer’s feedback

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–86

 Business process in Departments
• Finance Department
Approving Finance
Accounting of Daily transactions
Customer billing etc

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–87

 Business process in Departments
• HR. Department
Recruiting capable candidates
Provide trainings, bonuses
Motivation

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–88

 Business process in Departments
• Production Department
Creating the product
Meeting the targets

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–89

 Business process in Departments
• R&D Department
Designing new product
Suggesting product variations etc

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–90

 Why Study Management?
• We all have a vested interest in improving the
way organizations are managed.
Better organizations are, in part, the result of good
management.
• You will eventually either manage or be
managed
Gaining an understanding of the management
process provides the foundation for developing
management skills and insight into the behavior of
individuals and the organizations.

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–91

Ethics and Business Ethics
 Ethics - Meaning
• Greek word
ETHIKOS
• Means CHARACTER
• Study of Behaviour
• Study of values
Ethics is the study of Behaviour
What is Good and What is
Wrong
Branch of Philosophy
Science of morals
 Meaning of Ethics
• The term ‘ethics’ defines the standards that
bear on right and wrong issues of society.

• Other fields, such as social science, also study

ethics
– Normative Study: attempts to reach normative
conclusions
– Descriptive Study: attempts to describe or explain the
world without reaching conclusions.
 Ethics
• Dictionary Definition:
1. The principles of conduct governing an
individual or a group (e.g. personal ethics
or accounting ethics)
2. “The study of morality”
• Standards of what is right and wrong, good and evil
(e.g. Case – Goodrich)
» Physics: Study of Matter
» Biology: Study of life
» Ethics: Study of Morality
 Morality
Moral Standards
• The norms/standards about the kinds of actions
believed to be morally:
– right and wrong
– Good or Bad
– Justice or Injustice
– The person obeying is called ethical and non-obeying
called as unethical.
• Moral standards come from:-
• Family
• Friends
• School
• T.V.
• Educational Institutions
 Nonmoral Standards
• Moral standards contrasted with standards we hold about
things that are not moral,

• Examples of Nonmoral standards include:

– Standards of etiquette by which we judge manners as
good or bad.
• Chewing bubble in class
• Not listening to your parents
• The person is called ill-mannered, un-civilized,
Ethics and Morality
 Ethics & Morality
Ethics and Morality are different:

• Ethics – a kind of investigation and includes

both the activity of investigating and the
results of that investigation.

• Morality is the subject matter that ethics

investigates.
Ethics and LAW
 Law and Ethics
• The law is an expression of the ethical beliefs of our
society.

• Law and ethics are not the same thing.

The question, “Is an act legal?” is different from the question, “Is
an act ethical?”

• Therefore, an action might be unethical, yet not

necessarily illegal.
• For example, it might be unethical to lie to your family, but it is not
necessary illegal.
• Similarly, just because an act is illegal does not
necessarily mean it is immoral.

• Should an individual obey the law even if it would

be unethical to do so?

• Can you think of any examples

of acts that would be illegal, yet
arguably ethical?
SOURCES OF ETHICS
 Sources of Ethics
• Genetic Inheritance
– The qualities of goodness is a product of genetic traits
strengthened over time by the evolutionary process.
• Family
• Friends
• School
• T.V.
• Educational Institutions
• Religion
• Culture
• Organizational code of conduct
 NOW,
BUSINESS ETHICS
 What Is Business Ethics?
• Business ethics involves applying general ethical
principles and standards to business activities,
behavior and decisions
• Ethical principles in business are not different from
ethical principles in general
• Business actions are judged
– By general ethical standards of society
 What is Business Ethics?
• Business ethics is the application of general ethical ideas to
business behavior.

• It is based on the principle of integrity and fairness and

concentrates on the benefits to the stakeholders, both internal
and external. Stakeholder includes those individuals and groups
without which the organization does not have an existence. It
includes shareholders, creditors, employees, customers, dealers,
vendors, government and the society.
 NOW,
PROFESSIONAL ETHICS
 Professional Ethics
◦ A profession is a job that requires specific training and
is regulated by certain standards

Professional ethics: the ethical norms, values, and

principles that guide a profession and the ethics of
decisions made within the profession.
Lecturer
Doctor
Accountant
Manager
Teacher
Etc.
 Other Key Concepts
Ethics: The process of determining right and wrong conduct. The
discipline dealing with what is good and bad and with moral duty
and obligations

Ethical Behavior: Behavior that conforms to accepted standards of

conduct.

Ethical System: A specific formula for distinguishing right from

wrong.

Unethical: An action or conduct which violates the principles of

one or more ethical systems, or which is counter to an accepted
ethical value, such as honesty.

Ethical responsibility is the duty to follow a morally correct path

 Other Key Concepts
Non-ethical Considerations: Powerful human motivations that
are not based on right or wrong, but on considerations of survival
and well-being, such as health, security, love, wealth, or
self-esteem.

Ethical Dilemma: This is an ethical problem in which the ethical

choice involves ignoring a powerful non-ethical consideration. Do
the right thing, but lose your job, a friend, a lover, or an
opportunity for advancement. A situation or problem facing an
individual that involves complex and often conflicting principles of
ethical behavior.

Ethical Reasoning: The process of sorting out the principles that

help determine what is ethical when faced with an ethical
dilemma.
 NOW,
TYPES OF BUSINESS ETHICS
 Types/Levels of Ethical Issues
Systemic—ethical questions about the social,
• political, legal, or economic systems within
which companies operate.
• Corporate—ethical questions about a
particular corporation and its policies, culture,
climate, impact, or actions.
• Individual—ethical questions about a
particular individual’s decisions, behavior, or
character.

Copyright © 2012 Pearson Education, Inc. All rights reserved.

 NOW,
TYPES OF BUSINESS ETHICS
 Can ethical qualities be attributed to
Corporations?
• View #1: corporations, like people,
act intentionally
• and have moral rights, and obligations, and are morally
responsible.
View #2: it makes no sense to attribute ethical qualities
• to corporations since they are not like people but more
like machines; only humans can have ethical qualities.
View #3: humans carry out the corporation’s actions so
they are morally responsible for what they do and
ethical qualities apply in a primary sense to them;
Copyright © 2012 Pearson Education, Inc. All rights reserved.
 READ
CASE STUDY
GOODRICH
 READ: CASE STUDY
GOODRICH
Write the names of Persons mentioned in Case study

Write the names of Organizations mentioned in Case study

Explain briefly what is described in case study

Evaluate the actions of persons as moral or non moral

Write down the possible Ending….(book)

Describe the actions of persons at different levels of ethics.

Do this on your notepad and show in the next session.
Introductory Case Study: Goodrich Business Ethics
BS(PUCIT)

Morality :

So what, then, is morality? We can define morality as the standards that an individual or a group has about what
is right and wrong, or good and evil.

Several years ago, B. F. Goodrich, a manufacturer of vehicle parts, won a military contract to design, test, and
manufacture aircraft brakes for the A7-D, a new light airplane the U.S. Air Force was designing. To conserve
weight, Goodrich managers guaranteed that their compact brake would weigh no more than 106 pounds,
contain no more than four small braking disks or “rotors,” and be able to repeatedly stop the aircraft within a
specified distance. The contract was potentially very lucrative for the company and so its managers were
anxious to deliver a brake hat “qualified,” that is, that passed all the tests the U.S. Air Force required for the A7-
D.

An older Goodrich engineer, John Warren, designed the brake. A young engineer named Searle Lawson was
given the job of determining the best material to use as the brake lining and testing the brake to make sure it
“qualified.” Searle Lawson was in his twenties. He had just graduated from school with an engineering degree
and Goodrich had only recently hired him.

Lawson built a “prototype”—a working model—of the small brake to test lining materials. He found that when
the brake was applied, the linings on the four rotors heated up to 1500 degrees and began disintegrating. When
he tried other linings and got the same results, Lawson went over Warren’s design and decided it was based on
a mistake. By his own calculations, there was not enough surface area on the rotors to stop an airplane in the
required distance without generating so much heat the linings failed. Lawson went to Warren, showed him his
calculations and suggested Warren’s design should be replaced with a new design for a larger brake with five
rotors. Warren rejected the suggestion that his design was based on a mistake that a “green kid” just out of
engineering school had discovered. He told Lawson to keep trying different materials for brake linings until he
found one that worked.

But Lawson was not ready to give up. He went to talk with the manager in charge of the project but in vain. The
project manager told Lawson that if Warren said the brake would work, then it would work. He should just keep
trying different materials like Warren told him to do. Lawson left the project manager feeling frustrated. If he
did not have the support of his superiors, he thought, he would just keep working with the brake Warren
designed.

Several weeks later Lawson still had not found a lining that would not disintegrate on the brake. He spoke with
his project manager again. This time his project manager told him to just put the brake through the tests
required to “qualify” it for use on the A7-D airplane. Then, the manager told him in no uncertain terms that no
matter what, he was to make the brake pass all its qualifying tests. His manager’s orders shook Lawson and he
later shared his thoughts with Kermit Vandivier, a technical writer who had been assigned to write a report on
the brake:

I just can’t believe this is really happening. This isn’t engineering, at least not what I thought it would be. Back in
school I thought that when you were an engineer you tried to do your best, no matter what it cost. But this is
something else. I’ve already had the word that we’re going to make one more attempt to qualify the brake and
Introductory Case Study: Goodrich Business Ethics
BS(PUCIT)

that’s it. Win or lose, we’re going to issue a qualification report. I was told that regardless of what the brake
does on tests, it’s going to be qualified.

Lawson put together a production model of the brake and ran it through the tests a dozen times. It failed every
time. On the thirteenth attempt, Lawson “nursed” the brake through the tests by using special fans to cool the
brake and by taking it apart at each step, cleaning it carefully, and fixing any distortions caused by the high heat.
At one point, a measuring instrument was apparently deliberately miscalibrated so it indicated that the pressure
applied on the brake was 1000 pounds per square inch (the maximum available to the pilot in the A7-D aircraft)
when the pressure was actually 1100 pounds per square inch.

Kermit Vandivier, who was to write the final report on the tests, was also troubled. When Kermit Vandivier was
told to write up a report that concluded the brake had passed all qualifying tests, he refused. Such a report, he
felt, would amount to “deliberate falsifications and misrepresentations” of the truth. 11 But a short time later,
he changed his mind. He later said:

My job paid well, it was pleasant and challenging, and the future looked reasonably bright. My wife and I had
bought a home ___ If I refused to take part in the A7-D fraud, I would have to either resign or be fired. The
report would be written by someone anyway, but I would have the satisfaction of knowing I had had no part in
the matter. But bills aren’t paid with personal satisfaction, nor house payments with ethical principles. I made
my decision. The next morning I telephoned [my superior] and told him I was ready to begin the qualification
report.

Lawson and Vandivier wrote the final report together. “Brake pressure, torque values, distances, times—
everything of consequence was tailored to fit” the conclusion that the brake passed the qualifying tests. 13 A
few weeks after Goodrich published their report, the U.S. Air Force put the brakes on A7-D test planes and pilots
began flying them. Continued…

At this point, note that Lawson believed that as an engineer he had an obligation “to do your
best, no matter what it cost,” and that Vandivier believed it was wrong to lie and to
endanger the lives of others, and believed also that integrity is good and dishonesty is bad.
These beliefs are all examples of moral standards. Moral standards include the norms we have about
the kinds of actions we believe are morally right and wrong, as well as the values we place on what we believe is
morally good or morally bad. Moral norms can usually be expressed as general rules about our actions, such as
“Always tell the truth,” “It’s wrong to kill innocent people,” or “Actions are right to the extent that they produce
happiness.” Moral values can usually be expressed with statements about objects or features of objects that
have worth, such as “Honesty is good,” and “Injustice is bad.”

Group One Group Two

“Do not harm other people,” “Do not eat with your mouth open,”
“Do not lie to other people,” “Do not chew gum in class,”
“Do not steal what belongs to others.” “Do not wear sox that do not match.”
Lying(Goodrich) Grammatical Errors in Report writing
MADIHA SALEEM

Ethical and Social Issues in Informa on Systems/Technology

Ethics refers to the principles of right and wrong that individuals, ac ng as free moral agents,
use to make choices to guide their behaviors. Informa on systems raise new ethical ques ons
for both individuals and socie es because they create opportuni es for intense social change,
and thus threaten exis ng distribu ons of power, money, rights, and obliga ons. Like other
technologies, such as steam engines, electricity, the telephone, and the radio, informa on
technology can be used to achieve social progress, but it can also be used to commit crimes and
threaten cherished social values. The development of informa on technology will produce
benefits for many and costs for others.

A MODEL FOR THINKING ABOUT ETHICAL, SOCIAL, AND POLITICAL ISSUES

Ethical, social, and poli cal issues are closely linked. The ethical dilemma you may face as a
manager of informa on systems typically is reflected in social and poli cal debate. One way to
think about these rela onships is shown in Figure 4.1. Imagine society as a more or less calm
pond on a summer day, a delicate ecosystem in par al equilibrium with individuals and with
social and poli cal ins tu ons.

Individuals know how to act in this pond because social ins tu ons (family, educa on,
organiza ons) have developed well-honed rules of behavior, and these are supported by laws
developed in the poli cal sector that prescribe behavior and promise sanc ons for viola ons.
Now toss a rock into the center of the pond. What happens? Ripples, of course. Imagine instead
that the disturbing force is a powerful shock of new informa on technology and systems hi ng
a society more or less at rest. Suddenly, individual actors are confronted with new situa ons
o en not covered by the old rules. Social ins tu ons cannot respond overnight to these
ripples—it may take years to develop e que e, expecta ons, social responsibility, poli cally
correct a tudes, or approved rules. Poli cal ins tu ons also require me before developing
new laws and o en require the demonstra on of real harm before they act. In the mean me,
you may have to act. You may be forced to act in a legal gray area. We can use this model to
illustrate the dynamics that connect ethical, social, and poli cal issues. This model is also useful
for iden fying the main moral dimensions of the informa on society, which cut across various
levels of ac on—individual, social, and poli cal.
MADIHA SALEEM

FIVE MORAL DIMENSIONS OF THE INFORMATION AGE

The major ethical, social, and poli cal issues raised by informa on systems include the
following moral dimensions:

1. Informa on rights and obliga ons. What informa on rights do individuals and
organiza ons possess with respect to themselves? What can they protect?
2. Property rights and obliga ons. How will tradi onal intellectual property rights be
protected in a digital society in which tracing and accoun ng for ownership are difficult
and ignoring such property rights is so easy?
3. Accountability and control. Who can and will be held accountable and liable for the
harm done to individual and collec ve informa on and property rights?
4. System quality. What standards of data and system quality should we demand to
protect individual rights and the safety of society?
5. Quality of life. What values should be preserved in an informa on- and
knowledge-based society? Which ins tu ons should we protect from viola on? Which
cultural values and prac ces are supported by the new informa on technology?

KEY TECHNOLOGY TRENDS THAT RAISE ETHICAL ISSUES

Ethical issues long preceded informa on technology. Nevertheless, informa on technology has
heightened ethical concerns, taxed exis ng social arrangements, and made some laws obsolete
or severely crippled. There are five key technological trends responsible for these ethical
stresses.

⮚ Doubling of computer power

• More organiza ons depend on computer systems for cri cal opera ons.
MADIHA SALEEM

⮚ Rapidly declining data storage costs

• Organiza ons can easily maintain detailed databases on individuals.
⮚ Networking advances and the Internet
• Copying data from one loca on to another and accessing personal data from remote
loca ons are much easier.
⮚ Advances in data analysis techniques
• Profiling –Combining data from mul ple sources to create dossiers of detailed
informa on on individuals
• Nonobvious rela onship awareness (NORA) –Combining data from mul ple sources to
find obscure hidden connec ons that might help iden fy criminals or terrorists
⮚ Mobile device growth
• Tracking of individual cell phones

The doubling of compu ng power every 18 months has made it possible for most
organiza ons to use informa on systems for their core produc on processes. As a result, our
dependence on systems and our vulnerability to system errors and poor data quality have
increased. Social rules and laws have not yet adjusted to this dependence. Standards for
ensuring the accuracy and reliability of informa on systems (see Chapter 8) are not universally
accepted or enforced.

Advances in data storage techniques and rapidly declining storage costs have been
responsible for the mul plying databases on individuals—employees, customers, and poten al
customers—maintained by private and public organiza ons. These advances in data storage
have made the rou ne viola on of individual privacy both cheap and effec ve. Very large data
storage systems capable of working with terabytes of data are inexpensive enough for large
firms to use in iden fying customers.

Advances in data analysis techniques for large pools of data are another technological
trend that heightens ethical concerns because companies and government agencies are able to
find out highly detailed personal informa on about individuals. With contemporary data
management tools, companies can assemble and combine the myriad pieces of informa on
about you stored on computers much more easily than in the past. Think of all the ways you
generate computer informa on about yourself— credit card purchases, telephone calls,
magazine subscrip ons, video rentals, mail-order purchases, banking records, local, state, and
federal government records (including court and police records), and visits to Web sites. Put
together and mined properly, this informa on could reveal not only your credit informa on but
also your driving habits, your tastes, your associa ons, what you read and watch, and your
poli cal interests. Companies with products to sell purchase relevant informa on from these
sources to help them more finely target their marke ng campaigns.

The use of computers to combine data from mul ple sources and create electronic
dossiers of detailed informa on on individuals is called profiling. For example, several thousand
MADIHA SALEEM

of the most popular Web sites allow DoubleClick (owned by Google), an Internet adver sing
broker, to track the ac vi es of their visitors in exchange for revenue from adver sements
based on visitor informa on DoubleClick gathers. DoubleClick uses this informa on to create a
profile of each online visitor, adding more detail to the profile as the visitor accesses an
associated DoubleClick site. Over me, DoubleClick can create a detailed dossier of a person’s
spending and compu ng habits on the Web that is sold to companies to help them target their
Web ads more precisely. ChoicePoint gathers data from police, criminal, and motor vehicle
records, credit and employment histories, current and previous addresses, professional
licenses, and insurance claims to assemble and maintain electronic dossiers on almost every
adult in the United States. The company sells this personal informa on to businesses and
government agencies. Demand for personal data is so enormous that data broker businesses
such as ChoicePoint are flourishing. In 2011, the two largest credit card networks, Visa Inc. and
MasterCard Inc., were planning to link credit card purchase informa on with consumer social
network and other informa on to create customer profiles that could be sold to adver sing
firms. In 2012, Visa will process more than 45 billion transac ons a year and MasterCard will
process more than 23 billion transac ons. Currently, this transac onal informa on is not linked
with consumer Internet ac vi es.

A new data analysis technology called nonobvious rela onship awareness (NORA) has
given both the government and the private sector even more powerful profiling capabili es.
NORA can take informa on about people from many disparate sources, such as employment
applica ons, telephone records, customer lis ngs, and “wanted” lists, and correlate
rela onships to find obscure hidden connec ons that might help iden fy criminals. NORA
technology scans data and extracts informa on as the data are being generated so that it could,
for example, instantly discover a man at an airline cket counter who shares a phone number
with a known terrorist before that person boards an airplane. The technology is considered a
valuable tool for homeland security but does have privacy implica ons because it can provide
such a detailed picture of the ac vi es and associa ons of a single individual.

Finally, advances in networking, including the Internet, promise to greatly reduce the
costs of moving and accessing large quan es of data and open the possibility of mining large
pools of data remotely using small desktop machines, permi ng an invasion of privacy on a
scale and with a precision heretofore unimaginable.
MADIHA SALEEM

THE MORAL DIMENSIONS OF INFORMATION SYSTEMS

In this sec on, we take a closer look at the five moral dimensions of informa on systems
first described in Figure 4.1. In each dimension, we iden fy the ethical, social, and poli cal
levels of analysis and use real-world examples to illustrate the values involved, the stakeholders,
and the op ons chosen.

1. INFORMATION RIGHTS: PRIVACY AND FREEDOM IN THE

INTERNET AGE
Privacy is the claim of individuals to be le alone, free from surveillance or interference
from other individuals or organiza ons, including the state. Claims to privacy are also involved
at the workplace: Millions of employees are subject to electronic and other forms of high-tech
surveillance. Informa on technology and systems threaten individual claims to privacy by
making the invasion of privacy cheap, profitable, and effec ve.

Internet Challenges to Privacy

Internet technology has posed new challenges for the protec on of individual privacy.
Informa on sent over this vast network of networks may pass through many different
computer systems before it reaches its final des na on. Each of these systems is capable of
monitoring, capturing, and storing communica ons that pass through it.

Web sites track searches that have been conducted, the Web sites and Web pages
visited, the online content a person has accessed, and what items that person has inspected or
purchased over the Web. This monitoring and tracking of Web site visitors occurs in the
background without the visitor’s knowledge. It is conducted not just by individual Web sites but
by adver sing networks such as Microso Adver sing, Yahoo, and DoubleClick that are capable
of tracking personal browsing behavior across thousands of Web sites. Both Web site publishers
and the adver sing industry defend tracking of individuals across the Web because doing so
allows more relevant ads to be targeted to users, and it pays for the cost of publishing Web
sites. In this sense, it’s like broadcast television: adver ser-supported content that is free to the
user. The commercial demand for this personal informa on is virtually insa able.

Cookies are small text files deposited on a computer hard drive when a user visits Web
sites. Cookies iden fy the visitor’s Web browser so ware and track visits to the Web site. When
the visitor returns to a site that has stored a cookie, the Web site so ware will search the
visitor’s computer, find the cookie, and know what that person has done in the past. It may also
update the cookie, depending on the ac vity during the visit. In this way, the site can customize
its content for each visitor’s interests. For example, if you purchase a book on Amazon.com and
MADIHA SALEEM

return later from the same browser, the site will welcome you by name and recommend other
books of interest based on your past purchases. DoubleClick, described earlier in this chapter,
uses cookies to build its dossiers with details of online purchases and to examine the behavior
of Web site visitors. Figure 4.3 illustrates how cookies work.

Web sites using cookie technology cannot directly obtain visitors’ names and addresses.
However, if a person has registered at a site, that informa on can be combined with cookie data
to iden fy the visitor. Web site owners can also combine the data they have gathered from
cookies and other Web site monitoring tools with personal data from other sources, such as
offline data collected from surveys or paper catalog purchases, to develop very detailed profiles
of their visitors. There are now even more subtle and surrep ous tools for surveillance of
Internet users. So-called “super cookies” or Flash cookies cannot be easily deleted and can be
installed whenever a person clicks on a Flash video. These so-called “Local Shared Object” files
are used by Flash to play videos and are put on the user’s computer without their consent.

Marketers use Web beacons as another tool to monitor online behavior. Web
beacons, also called Web bugs (or simply “tracking files”), are ny so ware programs that keep
a record of users’ online clickstream and report this data back to whomever owns the tracking
file invisibly embedded in e-mail messages and Web pages that are designed to monitor the
behavior of the user visi ng a Web site or sending e-mail. Web beacons are placed on popular
Web sites by third-party firms who pay the Web sites a fee for access to their audience. So how
common is Web tracking?

Some popular sites such as Dic onary. com, MSN, and Comcast, installed more than 100
tracking files! Two-thirds of the tracking files came from 131 companies whose primary business
is iden fying and tracking Internet users to create consumer profiles that can be sold to
MADIHA SALEEM

adver sing firms looking for specific types of customers. The biggest trackers were Google,
Microso , and Quantcast, all of whom are in the business of selling ads to adver sing firms and
marketers.

Other spyware can secretly install itself on an Internet user’s computer by piggybacking
on larger applica ons. Once installed, the spyware calls out to Web sites to send banner ads and
other unsolicited material to the user, and it can report the user’s movements on the Internet to
other computers.

About 75 percent of global Internet users use Google Search and other Google services,
making Google the world’s largest collector of online user data. Whatever Google does with its
data has an enormous impact on online privacy. Most experts believe that Google possesses the
largest collec on of personal informa on in the world—more data on more people than any
government agency. The nearest compe tor is Facebook.

A er Google acquired the adver sing network DoubleClick in 2007, Google has been
using behavioral targe ng to help it display more relevant ads based on users’ search ac vi es
and to target individuals as they move from one site to another in order to show them display
or banner ads. Google allows tracking so ware on its search pages, and using DoubleClick, it is
able to track users across the Internet. One of its programs enables adver sers to target ads
based on the search histories of Google users, along with any other informa on the user
submits to Google such as age, demographics, region, and other Web ac vi es (such as
blogging). Google’s AdSense program enables Google to help adver sers select keywords and
design ads for various market segments based on search histories, such as helping a clothing
Web site create and test ads targeted at teenage females. A recent study found that 88 percent
of 400,000 Web sites had at least one Google tracking bug.

Google has also been scanning the contents of messages received by users of its free
Web-based e-mail service called Gmail. Ads that users see when they read their e-mail are
related to the subjects of these messages. Profiles are developed on individual users based on
the content in their e-mail. Google now displays targeted ads on YouTube and on Google mobile
applica ons, and its DoubleClick ad network serves up targeted banner ads. The United States
has allowed businesses to gather transac on informa on generated in the marketplace and
then use that informa on for other marke ng purposes without obtaining the informed
consent of the individual whose informa on is being used. An opt-out model of informed
consent permits the collec on of personal informa on un l the consumer specifically requests
that the data not be collected. Privacy advocates would like to see wider use of an opt-in model
of informed consent in which a business is prohibited from collec ng any personal informa on
unless the consumer specifically takes ac on to approve informa on collec on and use. Here,
the default op on is no collec on of user informa on. The online industry has preferred
MADIHA SALEEM

self-regula on to privacy legisla on for protec ng consumers. The online adver sing industry
formed the Online Privacy Alliance to encourage self-regula on to develop a set of privacy
guidelines for its members. The group promotes the use of online seals, such as that of TRUSTe,
cer fying Web sites adhering to certain privacy principles. Members of the adver sing network
industry, including Google’s DoubleClick, have created an addi onal industry associa on called
the Network Adver sing Ini a ve (NAI) to develop its own privacy policies to help consumers
opt out of adver sing network programs and provide consumers redress from abuses.
Individual firms like Microso , Mozilla Founda on, Yahoo, and Google have recently adopted
policies on their own in an effort to address public concern about tracking people online.
Microso has promised to ship its new Internet Explorer 10 Web browser with the opt-out
op on as the default in 2012. AOL established an opt-out policy that allows users of its site to
not be tracked. Yahoo follows NAI guidelines and also allows opt-out for tracking and Web
beacons (Web bugs).

In general, most Internet businesses do li le to protect the privacy of their customers,

and consumers do not do as much as they should to protect themselves. For commercial Web
sites that depend on adver sing to support themselves, most revenue derives from selling
customer informa on. Of the companies that do post privacy policies on their Web sites, about
half do not monitor their sites to ensure they adhere to these policies. The vast majority of
online customers claim they are concerned about online privacy, but less than half read the
privacy statements on Web sites.

Technical Solu ons

In addi on to legisla on, there are a few technologies that can protect user privacy
during interac ons with Web sites. Many of these tools are used for encryp ng e-mail, for
making e-mail or surfing ac vi es appear anonymous, for preven ng client computers from
accep ng cookies, or for detec ng and elimina ng spyware. For the most part, technical
solu ons have failed to protect users from being tracked as they move from one site to another.

Because of growing public cri cism of behavioral tracking and targe ng of ads, and the
failure of industry to self-regulate, a en on has shi ed to browsers. Many browsers have Do
Not Track op ons. For users who have selected the Do Not Track browser op on, their browser
will send a request to Web sites reques ng the user’s behavior not be tracked. Both Internet
Explorer 9 and Mozilla’s Firefox browsers implement this opt-out op on. However, these
browsers are shipped with tracking turned on as the default. And most consumers never visit
the Op ons Privacy tab in their browser. The online adver sing industry has bi erly opposed
Microso ’s plans and warns that Web sites are not obligated to follow users’ requests to Do Not
MADIHA SALEEM

Track. There is no online adver sing industry agreement on how to respond to Do Not Track
requests, and currently no legisla on requiring Web sites to stop tracking.

2. PROPERTY RIGHTS: INTELLECTUAL PROPERTY

Contemporary informa on systems have severely challenged exis ng laws and social prac ces
that protect private intellectual property. Intellectual property is considered to be intangible
property created by individuals or corpora ons. Informa on technology has made it difficult to
protect intellectual property because computerized informa on can be so easily copied or
distributed on networks. Intellectual property is subject to a variety of protec ons under three
different legal tradi ons: trade secrets, copyright, and patent law.

⮚ Trade Secrets

Any intellectual work product—a formula, device, pa ern, or compila on of data—used for a
business purpose can be classified as a trade secret, provided it is not based on informa on in
the public domain. Protec ons for trade secrets vary from state to state. In general, trade secret
laws grant a monopoly on the ideas behind a work product, but it can be a very tenuous
monopoly.

So ware that contains novel or unique elements, procedures, or compila ons can be
included as a trade secret. Trade secret law protects the actual ideas in a work product, not only
their manifesta on. To make this claim, the creator or owner must take care to bind employees
and customers with nondisclosure agreements and to prevent the secret from falling into the
public domain.

The limita on of trade secret protec on is that, although virtually all so ware programs
of any complexity contain unique elements of some sort, it is difficult to prevent the ideas in the
work from falling into the public domain when the so ware is widely distributed.

⮚ Copyright
Copyright is a statutory grant that protects creators of intellectual property from having
their work copied by others for any purpose during the life of the author plus an addi onal 70
years a er the author’s death. For corporate-owned works, copyright protec on lasts for 95
years a er their ini al crea on. Congress has extended copyright protec on to books,
periodicals, lectures, dramas, musical composi ons, maps, drawings, artwork of any kind, and
mo on pictures. The intent behind copyright laws has been to encourage crea vity and
authorship by ensuring that crea ve people receive the financial and other benefits of their
work. Most industrial na ons have their own copyright laws, and there are several interna onal
conven ons and bilateral agreements through which na ons coordinate and enforce their laws.
MADIHA SALEEM

Copyright protects against copying of en re programs or their parts. Damages and relief
are readily obtained for infringement. The drawback to copyright protec on is that the
underlying ideas behind a work are not protected, only their manifesta on in a work. A
compe tor can use your so ware, understand how it works, and build new so ware that
follows the same concepts without infringing on a copyright.

⮚ Patents

A patent grants the owner an exclusive monopoly on the ideas behind an inven on for
20 years. The congressional intent behind patent law was to ensure that inventors of new
machines, devices, or methods receive the full financial and other rewards of their labor and yet
make widespread use of the inven on possible by providing detailed diagrams for those wishing
to use the idea under license from the patent’s owner. The gran ng of a patent is determined by
the United States Patent and Trademark Office and relies on court rulings.

The key concepts in patent law are originality, novelty, and inven on. The Patent Office
did not accept applica ons for so ware patents rou nely un l a 1981 Supreme Court decision
that held that computer programs could be a part of a patentable process. Since that me,
hundreds of patents have been granted and thousands await considera on. The strength of
patent protec on is that it grants a monopoly on the underlying concepts and ideas of so ware.
The difficulty is passing stringent criteria of nonobviousness (e.g., the work must reflect some
special understanding and contribu on), originality, and novelty, as well as years of wai ng to
receive protec on. In what some call the patent trial of the century, in 2011, Apple sued
Samsung for viola ng its patents for iPhones, iPads, and iPods. On August 24, 2012, a California
jury in federal district court delivered a decisive victory to Apple and a stunning defeat to
Samsung. The jury awarded Apple $1 billion in damages. The decision established criteria for
determining just how close a compe tor can come to an industry-leading and standard-se ng
product like Apple’s iPhone before it violates the design and u lity patents of the leading firm.
The same court ruled that Samsung could not sell its new tablet computer (Galaxy 10.1) in the
United States. This was not just a loss for Samsung but a warning shot across the bow for
Google, which developed the Android opera ng system, and all other makers of Android
phones, including Google’s newly purchased Motorola Mobile Devices, makers of Motorola
Mobility phones.

Challenges to Intellectual Property Rights

Contemporary informa on technologies, especially so ware, pose severe challenges to

exis ng intellectual property regimes and, therefore, create significant ethical, social, and
poli cal issues. Digital media differ from books, periodicals, and other media in terms of ease of
replica on; ease of transmission; ease of altera on; difficulty in classifying a so ware work as a
MADIHA SALEEM

program, book, or even music; compactness—making the easy; and difficul es in establishing
uniqueness.

The prolifera on of electronic networks, including the Internet, has made it even more
difficult to protect intellectual property. Before widespread use of networks, copies of so ware,
books, magazine ar cles, or films had to be stored on physical media, such as paper, computer
disks, or videotape, crea ng some hurdles to distribu on. Using networks, informa on can be
more widely reproduced and distributed.

The Internet was designed to transmit informa on freely around the world, including
copyrighted informa on. With the World Wide Web in par cular, you can easily copy and
distribute virtually anything to thousands and even millions of people around the world, even if
they are using different types of computer systems. Informa on can be illicitly copied from one
place and distributed through other systems and networks even though these par es do not
willingly par cipate in the infringement.

Individuals have been illegally copying and distribu ng digi zed MP3 music files on the
Internet for a number of years. File-sharing services such as Napster, and later Grokster, Kazaa,
and Morpheus, sprung up to help users locate and swap digital music files, including those
protected by copyright. Illegal file sharing became so widespread that it threatened the viability
of the music recording industry and, at one point, consumed 20 percent of Internet bandwidth.
The recording industry won the legal ba les for shu ng these services down, but it has not
been able to halt illegal file sharing en rely.

While illegal file sharing s ll goes on, it has actually declined since the opening of the
iTunes Store in 2001. As legi mate online music stores expanded, and more recently as Internet
radio services like Pandora expanded, illegal file sharing has declined. Technology has radically
altered the prospects for intellectual property protec on from the , at least for music, videos,
and television shows (less so for so ware). The Apple iTunes Store legi mated paying for music
and entertainment, and created a closed environment where music and videos could not be
easily copied and widely distributed unless played on Apple devices. Amazon’s Kindle also
protects the rights of publishers and writers because its books cannot be copied to the Internet
and distributed. Streaming of Internet radio, on services such as Pandora and Spo fy, and
Hollywood movies (at sites such as Hulu and Ne lix) also inhibits piracy because the streams
cannot be easily recorded on separate devices. Moreover, the large Web distributors like Apple,
Google, and Amazon do not want to encourage piracy in music or videos simply because they
need these proper es to earn revenue.

3. ACCOUNTABILITY, LIABILITY, AND CONTROL

MADIHA SALEEM

Along with privacy and property laws, new informa on technologies are
challenging exis ng liability laws and social prac ces for holding individuals and
ins tu ons accountable. If a person is injured by a machine controlled, in part, by
so ware, who should be held accountable and, therefore, held liable? Should a
public bulle n board or an electronic service, such as America Online, permit the
transmission of pornographic or offensive material (as broadcasters), or should
they be held harmless against any liability for what users transmit (as is true of
common carriers, such as the telephone system)? What about the Internet? If you
outsource your informa on processing, can you hold the external vendor liable for
injuries done to your customers? Some real-world examples may shed light on
these ques ons.

4. SYSTEM QUALITY: DATA QUALITY AND SYSTEM ERRORS

The debate over liability and accountability for uninten onal consequences of system
use raises a related but independent moral dimension: What is an acceptable, technologically
feasible level of system quality? At what point should system managers say, “Stop tes ng, we’ve
done all we can to perfect this so ware. Ship it!” Individuals and organiza ons may be held
responsible for avoidable and foreseeable consequences, which they have a duty to perceive
and correct. And the gray area is that some system errors are foreseeable and correctable only
at very great expense, an expense so great that pursuing this level of perfec on is not feasible
economically—no one could afford the product. For example, although so ware companies try
to debug their products before releasing them to the marketplace, they knowingly ship buggy
products because the me and cost of fixing all minor errors would prevent these products from
ever being released. What if the product was not offered on the marketplace, would social
welfare as a whole not advance and perhaps even decline? Carrying this further, just what is the
responsibility of a producer of computer services—should it withdraw the product that can
never be perfect, warn the user, or forget about the risk (let the buyer beware)? Three principal
sources of poor system performance are

(1) So ware bugs and errors,

(2) Hardware or facility failures caused by natural or other causes, and
(3) Poor input data quality.

5. QUALITY OF LIFE: EQUITY, ACCESS, AND BOUNDARIES

The nega ve social costs of introducing informa on technologies and systems are
beginning to mount along with the power of the technology. Many of these nega ve social
MADIHA SALEEM

consequences are not viola ons of individual rights or property crimes. Nevertheless, these
nega ve consequences can be extremely harmful to individuals, socie es, and poli cal
ins tu ons. Computers and informa on technologies poten ally can destroy valuable elements
of our culture and society even while they bring us benefits. If there is a balance of good and
bad consequences of using informa on systems, who do we hold responsible for the bad
consequences? Next, we briefly examine some of the nega ve social consequences of systems,
considering individual, social, and poli cal responses.

⮚ Maintaining Boundaries: Family, Work, and Leisure

Parts of this book were produced on trains and planes, as well as on vaca ons and
during what otherwise might have been “family” me. The danger to ubiquitous compu ng,
telecommu ng, nomad compu ng, mobile compu ng, and the “do anything anywhere”
compu ng environment is that it is actually coming true. The tradi onal boundaries that
separate work from family and just plain leisure have been weakened.

Although authors have tradi onally worked just about anywhere (typewriters have been
portable for nearly a century), the advent of informa on systems, coupled with the growth of
knowledge-work occupa ons, means that more and more people are working when
tradi onally they would have been playing or communica ng with family and friends. The work
umbrella now extends far beyond the eight-hour day into commu ng me, vaca on me, and
leisure me.

Even leisure me spent on the computer threatens these close social rela onships.
Extensive Internet use, even for entertainment or recrea onal purposes, takes people away
from their family and friends. Among middle school and teenage children, it can lead to harmful
an -social behavior, such as the recent upsurge in cyberbullying.

Weakening these ins tu ons poses clear-cut risks. Family and friends historically have
provided powerful support mechanisms for individuals, and they act as balance points in a
society by preserving private life, providing a place for people to collect their thoughts, allowing
people to think in ways contrary to their employer, and dream.

⮚ Computer crime

Computer crime is the commission of illegal acts through the use of a computer or
against a computer system. Computers or computer systems can be the object of the crime (
destroying a company’s computer center or a company’s computer files), as well as the
instrument of a crime (stealing computer lists by illegally gaining access to a computer system
MADIHA SALEEM

using a home computer). Simply accessing a computer system without authoriza on or with
intent to do harm, even by accident, is now a federal crime.

⮚ Health Risks: RSI, CVS, and Technostress

The most common occupa onal disease today is repe ve stress injury (RSI). RSI
occurs when muscle groups are forced through repe ve ac ons o en with
high-impact loads (such as tennis) or tens of thousands of repe ons under
lowimpact loads (such as working at a computer keyboard).

The single largest source of RSI is computer keyboards. The most common
kind of computer-related RSI is carpal tunnel syndrome (CTS), in which pressure
on the median nerve through the wrist’s bony structure, called a carpal tunnel,
produces pain. The pressure is caused by constant repe on of keystrokes: in a
single shi , a word processor may perform 23,000 keystrokes. Symptoms of carpal
tunnel syndrome include numbness, shoo ng pain, inability to grasp objects, and
ngling. Millions of workers have been diagnosed with carpal tunnel syndrome.

RSI is avoidable. Designing worksta ons for a neutral wrist posi on (using a
wrist rest to support the wrist), proper monitor stands, and footrests all
contribute to proper posture and reduced RSI. Ergonomically correct keyboards
are also an op on. These measures should be supported by frequent rest breaks
and rota on of employees to different jobs.

RSI is not the only occupa onal illness computers cause. Back and neck
pain, leg stress, and foot pain also result from poor ergonomic designs of
worksta ons. Computer vision syndrome (CVS) refers to any eyestrain condi on
related to display screen use in desktop computers, laptops, e-readers,
smartphones, and handheld video games. CVS affects about 90 percent of people
who spend three hours or more per day at a computer (Beck, 2010). Its
symptoms, which are usually temporary, include headaches, blurred vision, and
dry and irritated eyes.

The newest computer-related malady is technostress, which is stress

induced by computer use. Its symptoms include aggrava on, hos lity toward
humans, impa ence, and fa gue. According to experts, humans working
MADIHA SALEEM

con nuously with computers come to expect other humans and human
ins tu ons to behave like computers, providing instant responses, a en veness,
and an absence of emo on. Technostress is thought to be related to high levels of
job turnover in the computer industry, high levels of early re rement from

computer-intense occupa ons, and elevated levels of drug and alcohol

abuse. The incidence of technostress is not known but is thought to be in the
millions and growing in the United States. Computer-related jobs now top the list
of stressful occupa ons based on health sta s cs in several industrialized
countries.

In addi on to these maladies, computer technology may be harming our

cogni ve func ons or at least changing how we think and solve problems.
Although the Internet has made it much easier for people to access, create, and
use informa on, some experts believe that it is also preven ng people from
focusing and thinking clearly.

Conclusion

The computer has become a part of our lives—personally as well as socially,

culturally, and poli cally. It is unlikely that the issues and our choices will become
easier as informa on technology con nues to transform our world. The growth of
the Internet and the informa on economy suggests that all the ethical and social
issues we have described will be heightened further as we move into the first
digital century
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
Content of Presentation

• What ethical, social, and political issues are raised

by information systems?
• What specific principles for conduct can be used to
guide ethical decisions?
• Why do contemporary information systems
technology and the Internet pose challenges to the
protection of individual privacy and intellectual
property?
• How have information systems affected everyday
life?

2
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
Understanding Ethical and Social Issues Related to Systems

• Ethics
– Principles of right and wrong that individuals, acting
as free moral agents, use to make choices to guide
their behaviors

3
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
Understanding Ethical and Social Issues Related to Systems

• Key technology trends that raise ethical issues

1. Doubling of computer power
• More organizations depend on computer systems for
critical operations
2. Rapidly declining data storage costs
• Organizations can easily maintain detailed databases on
individuals
3. Networking advances and the Internet
• Copying data from one location to another and
accessing personal data from remote locations is much
easier

4
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
Understanding Ethical and Social Issues Related to Systems

• Key technology trends that raise ethical issues (cont.)

4. Advances in data analysis techniques
• Companies can analyze vast quantities of data gathered
on individuals for:
– Profiling
» Combining data from multiple sources to create dossiers
of detailed information on individuals
– Nonobvious relationship awareness (NORA)
» Combining data from multiple sources to find obscure
hidden connections that might help identify criminals or
terrorists

5
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
Understanding Ethical and Social Issues Related to Systems

NONOBVIOUS
RELATIONSHIP
AWARENESS (NORA)
NORA technology can take
information about people from
disparate sources and find
obscure, nonobvious
relationships. It might discover,
for example, that an applicant
for a job at a casino shares a
telephone number with a
known criminal and issue an
alert to the hiring manager.

FIGURE 4-2

6
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
Understanding Ethical and Social Issues Related to Systems

• Model for thinking about ethical, social, political

issues:
– Society as a calm pond
– IT as rock dropped in pond, creating ripples of new
situations not covered by old rules
– Social and political institutions cannot respond
overnight to these ripples—it may take years to
develop etiquette, expectations, laws
• Requires understanding of ethics to make choices in
legally gray areas

7
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
Understanding Ethical and Social Issues Related to Systems

• Information systems and ethics

– Information systems raise new ethical
questions because they create
opportunities for:
•Intense social change, threatening
existing distributions of power, money,
rights, and obligations
•New kinds of crime

8
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
Understanding Ethical and Social Issues Related to Systems

THE RELATIONSHIP
BETWEEN ETHICAL,
SOCIAL, AND POLITICAL
ISSUES IN AN
INFORMATION SOCIETY

The introduction of new information

technology has a ripple effect, raising
new ethical, social, and political
issues that must be dealt with on the
individual, social, and political levels.
These issues have five moral
dimensions: information rights and
obligations, property rights and
obligations, system quality, quality of
life, and accountability and control.

9
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
Understanding Ethical and Social Issues Related to Systems

• Five moral dimensions of the

information age
1. Information rights and obligations
2. Property rights and obligations
3. Accountability and control
4. System quality
5. Quality of life

10
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
Understanding Ethical and Social Issues Related to Systems

• Five moral dimensions of the

information age
1. Information rights and obligations

11
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

• Privacy:
– Claim of individuals to be left alone, free from
surveillance or interference from other individuals,
organizations, or state. Claim to be able to control
information about yourself

12
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

• Internet Challenges to Privacy:

–Cookies
–Web beacons/bugs
–Spyware

• Google’s collection of private data; behavioral

targeting
13
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

• Internet Challenges to Privacy:

–Cookies
•Tiny files downloaded by Web
site to visitor’s hard drive to help
identify visitor’s browser and
track visits to site
•Allow Web sites to develop
profiles on visitors
14
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

HOW COOKIES IDENTIFY WEB VISITORS

FIGURE 4-3 Cookies are written by a Web site on a visitor’s hard drive. When the visitor returns to that Web site, the Web server requests the
ID number from the cookie and uses it to access the data stored by that server on that visitor. The Web site can then use these
data to display personalized information.

15
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

–Cookies
•Some examples of companies that
place cookies on your computer
include the websites you visit and
advertising companies that display
ads to you.

16
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

THE P3P STANDARD

FIGURE 4-4 P3P enables Web sites to translate their privacy policies into a standard format that can be read by the user’s Web browser
software. The browser software evaluates the Web site’s privacy policy to determine whether it is compatible with the user’s
privacy preferences.

17
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

•Types of Cookies
We generally talk about two kinds
of cookies in digital marketing,
First-party Cookies.(useful)
Third-party Cookies. (harmful)

18
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

• First-party cookies
• First-party cookies are placed on your
computer by a site when you visit its pages.
• Purpose:
First-party cookie is to help the site recognize
a visitor.
First- party cookies can help sites
automatically log in a person, associate her
behavior with previous actions, customize
content and experiences to previously
expressed interests, and more.
19
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

• First Party Cookies

• Generally, consumers don’t try to block
first-party cookies because they add value to the
experience, and because the individual actually
chose to visit the site in the first place.
• First-party cookies can serve great benefits to the
consumer, like recognizing them when they
revisit a site so they don’t have to log in again. In
addition, a consumer that sets their browser to
reject first-party cookies will find it very difficult
to surf the web because many sites require them
in order to
20
gain access to content.
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

• Third-Party Cookies
• Third-Party Cookies and Mobile Third-party
cookies are placed on your computer by
companies other than the site you visit.

21
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

• Most sites display content from a variety of

sources when you request a web page. For
example, an ad network might place a cookie on
all browsers that are exposed to an advertiser’s
banner ads.
• Or if a site includes “like” buttons or embedded
videos, these can also deliver third-party
cookies.

22
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

• Purpose:
• Third-party cookies help advertisers track
what consumers do after they view or
interact with content. This kind of
measurement is important because most
people exposed to an ad don’t click to visit
an advertiser immediately but may
subsequently visit. Advertisers want to be
able to understand these “long-term”
advertising effects.
23
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

• Technical solutions
• The Platform for Privacy Preferences (P3P)
• Allows Web sites to communicate privacy policies to
visitor’s Web browser – user
• User specifies privacy levels desired in browser
settings
• E.g. “medium” level accepts cookies from first-party
host sites that have opt-in or opt-out policies but
rejects third-party cookies that use personally
identifiable information without an opt-in policy
24
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
Understanding Ethical and Social Issues Related to Systems

• Five moral dimensions of the

information age
1. Information rights and obligations
2. Property rights and obligations

25
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

• Property rights: Intellectual property

– Intellectual property: Intangible property of any kind
created by individuals or corporations
– Three main ways that protect intellectual property
1. Trade secret: Intellectual work or product
belonging to business, not in the public domain.
Trade secrets protect valuable secret information.
Ideas that must be kept confidential and others to
whom they are disclosed to must also keep them
confidential.

26
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

• Property rights: Intellectual property

1. Trade Secret______Example
come in an endless array of types, for example:
R&D information
Software algorithms
Inventions
Designs
Formulas
Ingredients
Devices
Methods
27
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

• Property rights: Intellectual property

1. Trade Secret______Example:
Google developed a search algorithm and
continues to refine it. Some changes are
announced but many are not. Google
continues to modify its top secret algorithm to
keep businesses and people from gaming the
system.

28
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

• Property rights: Intellectual property

2. Copyright:
Copyright law applies to "works of authorship"
that are fixed in a tangible medium of
expression (such as a CD or a book)
Statutory grant protecting intellectual property
from being copied for the life of the author,
plus 70 years. Copyrights protect original
textual works and visual or artistic expressions.

29
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

• Property rights: Intellectual property

3. Patents:
Grants creator of invention an exclusive
monopoly on ideas behind invention for
20 years.
Patents protect new, useful, and
non-obvious inventions (ideas!).
An invention can be a device, a structure,
process, machinery, etc.
30
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

• Challenges to intellectual property rights

– Digital media different from physical media
(e.g. books)
•Ease of replication
•Ease of transmission (networks, Internet)
•Difficulty in classifying software
•Compactness
•Difficulties in establishing uniqueness

31
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
Understanding Ethical and Social Issues Related to Systems

• Five moral dimensions of the

information age
1. Information rights and obligations
2. Property rights and obligations
3. Accountability and control

32
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

• Accountability, Liability, Control

– Computer-related liability problems
• If software fails, who is responsible?
– If seen as part of machine that injures or harms,
software producer and operator may be liable
– If seen as similar to book, difficult to hold
author/publisher responsible
– What should liability be if software seen as service?
Would this be similar to telephone systems not
being liable for transmitted messages?

33
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
Understanding Ethical and Social Issues Related to Systems

• Five moral dimensions of the

information age
1. Information rights and obligations
2. Property rights and obligations
3. Accountability and control
4. System quality

34
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

• System Quality: Data Quality and System Errors

– What is an acceptable, technologically feasible level of
system quality?
• Flawless software is economically unfeasible
– Three principal sources of poor system performance:
• Software bugs, errors
• Hardware or facility failures
• Poor input data quality (most common source of
business system failure)

35
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

• Quality of life: Equity, access, and boundaries

– Negative social consequences of systems
• Balancing power: Although computing power
decentralizing, key decision-making remains centralized
• Rapidity of change: Businesses may not have enough
time to respond to global competition
• Maintaining boundaries: Computing, Internet use
lengthens work-day, infringes on family, personal time
• Dependence and vulnerability: Public and private
organizations ever more dependent on computer
systems

36
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

• Computer crime and abuse

– Computer crime: Commission of illegal acts through use
of compute or against a computer system – computer
may be object or instrument of crime
– Computer abuse: Unethical acts, not illegal
• Spam: High costs for businesses in dealing with spam

• Employment:
– Reengineering work resulting in lost jobs
• Equity and access – the digital divide:
– Certain ethnic and income groups in the United States
less likely to have computers or Internet access

37
 Management Information Systems
ETHICAL AND SOCIAL ISSUES IN
INFORMATION SYSTEMS
The Moral Dimensions of Information Systems

• Health risks:
– Repetitive stress injury (RSI)
• Largest source is computer keyboards
• Carpal Tunnel Syndrome (CTS)
– Computer vision syndrome (CVS)
– Technostress
– Role of radiation, screen emissions, low-level
electromagnetic fields

38
MADIHA SALEEM REASONS OF ETHICAL ISSUES IN BUSINESS

Reasons of Ethical Issues in Business

Businesses and societies are continuously changed and transformed by the rapid
evolution of new technologies. These new technologies lead to new ethical issues
in business. These changes have had an impact on businesses and society in several
decades.

In the agricultural revolution humans developed farming technologies. Because of

these new technologies they did not had to rely on foraging and hunt anymore. The
new farming technologies provided them with a constant supply of food.

In this revolution there was also the invention of irrigation, wind power, levers,
wedges, and hoist. All the new technologies increased the trade. With this trade
came the first issues related to business ethics. They had to make rules and
agreements for fair trade.

There was another transformation during the Industrial Revolution with the
introduction of electromechanical machines. To manage the enormous amount of
people that were needed for these machines large organizations were founded.
These large corporations dominated the society and led to new issues related to
business ethics.

In the end of the twentieth and begin of the twenty-first century there have again
been transformations in society and business due to technology changes. The most
of these technology changes are developments in information technology.

Information technology
Information technology is the use of extremely powerful and compact computers,
the internet, wireless communications, digitalization and numerous other
technologies that have enabled us to capture, manipulate and move information in
new and creative ways.

Information technology raises new ethical issues related to risk, privacy and
property rights. Computers enable us to collect detailed information about
MADIHA SALEEM REASONS OF ETHICAL ISSUES IN BUSINESS

individuals which reduced out privacy. To deal with these rapid changes in
technology, business organizations have to become smaller, flatter and more
nimble.

Cyberspace: a term used to denote the existence of information on an electronic

network of linked computer systems.

The development of computers also helped the development of nanotechnology.

This is a new field that encompasses the development off tiny artificial structures
only nanometers (billionths of a meter) in size. Critics have raised questions about
the potential harms of nanotechnology to the environment.

Another ethical issue is created by biotechnology: genetic engineering.Genetic

engineering refers to a large variety of new techniques that allows change in the
genes of the cells of humans, animals and plants.

Nanotechnology and biotechnology both raise new ethical issues related to risk and
the spread of dangerous products.

The ethical issues we discussed so far arise within the national borders of a single
country. We will now turn to ethic issues that occur in the international area. Most
of the issues in business ethics in this area are related to globalization.

Globalization
Globalization is the worldwide process by which the economic and social systems
of nations have become connected, facilitating between them the flow of goods,
money, culture and people.

The amount of goods traded and moved across national boundaries has increased
significantly since World War II. Products that one uses at home can be found
everywhere in the world because of globalization.
MADIHA SALEEM REASONS OF ETHICAL ISSUES IN BUSINESS

At the heart of the globalization process we find multinational corporations.

A multinational corporation or MNC is a company that maintains
manufacturing, marketing, service or administrative operations in several host
countries. These corporations are responsible for a large part of the international
transactions.

⮚ Many U.S. firms, both large and small, receive a substantial portion of their
profits and sales from other countries.
⮚ Firms such as Coca-Cola, Exxon, Mobil, Microsoft, Ford, and General
Electric derive half or more of total sales and profits outside the United
States. The reverse is also true.
⮚ For example, Toyota, based in Japan, is growing its market share and its
number of jobs in the United States,

Forms/Methods of Globalization

⮚ Visible Trade, Merchandise Trade (Exports and Imports)

⮚ Invisible Trade, Service Trade (Service Exports, Service
Imports)
⮚ Investments
⮚ Joint Ventures (for example Sony Ericson)
⮚ Strategic Alliances

Reasons for Globalization

⮚ Increase in Sales, ownership, manufacturing in new

markets
⮚ More Consumer pressure
⮚ To acquire resources
⮚ Lower Labor cost (such as China, Thailand, or India)
MADIHA SALEEM REASONS OF ETHICAL ISSUES IN BUSINESS

⮚ Global Security and Terrorism (Incident of 9/11)

MADIHA SALEEM REASONS OF ETHICAL ISSUES IN BUSINESS

Benefits of globalization

Two huge benefits of globalization:

1. It enabled multinationals to build factories and start operations in countries

with low labor costs. They bring jobs, skills, income and technology to
regions of the world that were formerly underdeveloped. These actions made
it possible to offer the products at a lower price.
2. It enabled nations to specialize in producing and exporting the goods and
services that they produce most efficiently. These specialized goods then
could be traded for goods that the nation does not make. This specialization
has increased the overall productivity of the world.

Negative Effects of Globalization

However, there are also negative effects of globalization:

1. It brings significant harms on the world. Poor nations with only cheap
agricultural products to trade have been left behind. Inequality between and
within nations has increased because of the globalizations. The Western
culture has been spread to many parts of the world driving out local cultures
and traditions.
2. It is charged with paying the way for multinationals to have a kind of
mobility that critics say has had adverse effects. When a company moves its
operation to another country the factories in the home country shut down
leading to enormous job losses.
3. Some critics say that multinationals import technologies or products into a
developing country that is not ready to deal with the risks of the new
technologies and products.

When a multinational moves to another country it has to deal with other laws,
regulations, cultures, practices or even an entire other government than it faces in
its home country. This leads to dilemmas for the managers of the company.

Managers may be in countries that are very underdeveloped. When this is the case
then the actions of a manager could have a different effect on the people there than
MADIHA SALEEM REASONS OF ETHICAL ISSUES IN BUSINESS

on the people in developed countries. The question then is how should the manager
act? Scholars have suggested that managers should stick to the higher standards
that are typical in their home country.

If the cultures of the home and host country differ a lot than it could happen that
there is a misunderstanding or misinterpreting between managers and the people in
the host country. Managers often find it very difficult to deal with the differences in
moral standards.

The END
 MADIHA SALEEM

Ethical Theories
Several philosophers have propounded different types of ethical theories which are
listed below:

1. Teleological/consequentialism Ethical Theories

2. Deontological Ethical Theories
3. System Development Ethical Theories
4. Virtue Ethical Theories

1. Teleological Ethical Theories

Definition:

The Teleological Ethical Theories are concerned with the consequences of actions
which mean the basic standards for our actions being morally right or wrong depends
on the good or evil generated (results).

1. Ethical Egoism: The ethical egoism is a teleological theory that posits, an action is
good if it produces or is likely to produce results that maximize the person’s self-
interest as defined by him, even at the expense of others. It is based on the
 MADIHA SALEEM

notion that it is always moral to promote one’s own good, but at times avoiding
the personal interest could be a moral action too. This makes the ethical egoism
different from the psychological egoism which holds that people are self-centered
and self-motivated and perform actions only with the intention to maximize their
personal interest without helping others, thereby denying the reality of true
altruism (sacrificing one’s personal interest in the welfare of others).

2. Utilitarianism: The Utilitarianism theory holds that an action is good if it results

in maximum satisfaction for a large number of people who are likely to get affected by
the action. Suppose a manager creates an annual employee vacation schedule
after soliciting the vacation time preferences from all the employees and honor
their preferences, then he would be acting in a way that shall maximize the
pleasure of all the employees.

3. Eudaimonism: This teleological theory posits, that an action is good if it results in

the fulfillment of goals along with the welfare of the human beings. In other words, the
actions are said to be fruitful if it promotes or tends to promote the fulfillment of
goals constitutive of human nature and its happiness. Suppose manager enforce
employee training and knowledge standards at work, which are natural
components of human happiness.

Thus, a moral theory that maintains that the rightness or wrongness of actions
solely depends on their consequences is called as a teleological theory.
 MADIHA SALEEM

2. Deontological Ethical Theories

Definition:

The Deontological Ethical Theories hold that the actions are morally right
independent of their consequences.

1. Negative and Positive Rights Theories: The negative rights theory asserts that an
action is right if it protects the individual from harm or unwarranted interference
from other people or the government while exercising his right. Suppose an
individual has the right to use, sell or dispose of his personal car then the other
persons have the correlative duty to not to prevent him from doing whatever he
want to do with his car.

The positive rights theory posits that an action is right if it provides or tends to
provide an individual with anything that he needs to exist. Suppose an individual
has the right to adequate health care services to survive. This means other
 MADIHA SALEEM

agents, perhaps the government has the correlative duty to provide him with the
necessary health care services.

2. Social Contract Theories: The social contract theories posit that people contract
with each other to abide by the moral and political obligations towards the society
in which they live. This theory is based on the notion that if there is no order and
law in the society, then people will have unlimited freedoms, i.e. the right to all
things and will resort to all misdeeds such as theft, murder, plunder, etc.

Thus, there will be an endless “war of all against all” and in order to overcome
such situation people enter into an agreement with each other to give up some of
their freedoms and accept the obligation to respect and safeguard the rights of
the others. Thus, an individual gains the civil rights that constitute the social
benefits that he is entitled to the extent he fulfills his due obligations towards the
society.

3. Social Justice Theories: The social justice theories state that the action will be
considered right if it confirms the fairness in the distributive, retributive and
compensatory dimensions of cost and rewards. The distributive dimension means
the perceived fairness in the distribution of social benefits and burden among the
group members. The retributive dimension considers the punishment
proportionate to the extent of crime while the compensatory dimension is the way
people are compensated in relation to the injuries inflicted upon them.

For example, if the second-hand smoke hurts the passive or non-smokers at

work, there should be a fair distribution of health risk burden and the
proportionate punishment should be imposed on the party responsible for it. Also,
the affected parties shall be compensated to the extent they have suffered the
injuries.
 MADIHA SALEEM

Thus, a theory asserts that the rightness or wrongness of actions does not
depend on the goodness or badness of their consequences.

3. Virtue Ethical Theories

Definition: The Virtue Ethical Theories hold that ethical value of an individual is
determined by his character. The character refers to the virtues, inclinations and
intentions that dispose of a person to be ready to act ethically.

1. Individual Character Ethics: The individual character ethics hold that the
identification and development of noble human traits help in determining the
value of human ethical interactions. These noble traits are courage, self-
discipline, prudence, gratitude, wisdom, sincerity, understanding, benevolence,
etc.
2. Work Character Ethics: The identification and development of reflective,
practitioner, noble traits at works such as creativity, honesty, loyalty, honor,
 MADIHA SALEEM

trustworthiness, civility, dependability, shared work pride, empathy, etc.

determine the intrinsic and instrumental ethical quality of work life.

For example, suppose a manager is facing global competition, huge productivity

expectations and requires an effective teamwork, then his work character
behavior should be such that he is considered as a role model for task
accomplishment and his considerate relations with everyone at the workplace.

3. Professional Character Ethics: The professional character ethics hold that self-
regulation, loyalty, impartial judgment, altruism, truthfulness, public service
determine the intrinsic and instrumental ethical quality of an individual associated
with some communities.

For example, if a business manager of a firm of doctors detects the double billing
for the OT’s services, then his ethical professional behavior will enforce him to
inform about this to the doctors-in-charge to get the problem solved. And in case
the problem still persists, then he will act as a whistleblower and inform about this
to the public outside and will not be silent until the problem is rectified. He does
all this because of his loyalty towards the professional code of ethics.

Thus, the Virtue Ethical Theories are based on the notion that developing a
sound character is what the life is all about. The character builds a substantive
moral foundation for one’s actions.

It is believed that a person with the strong character has imbibed emotional,
intellectual, moral and social virtues to achieve the self-discipline and do the right
things or want what is actually good for him. Whereas, the person with weak
MADIHA SALEEM

character finds himself doing all the wrong things, wanting what is truly harmful
and making excuses for all his ill doings.
 MADIHA SALEEM

4. System Development Ethical Theories

Definition:

The System Development Ethical Theories state that the extent to which organization
system is sensitive to the need to develop a work culture supportive of ethical conduct
determines the ethical value of actions.

1. Personal Improvement Ethics: The personal improvement ethics posits that the
action is good if it is intended to promote the individual’s personal responsibility
for the continuous learning, improvement, holistic development and moral
excellence.

For example, the employees in order to gain expertise in their work enroll in the
company’s training programmes with a view to improving themselves as well as
the organization’s functioning.
 MADIHA SALEEM

2. Organizational Ethics: The organizational ethics hold that the action is right if it
confirms the development of the formal and informal organizational processes
which in turn enhances the procedural outcomes, respectful caring, innovation in
ethical work culture and systematic justice.

For example, If there is no employee complaints “Redressal system” in the

organization and also the employees do not have a voice system for feedback
then it is the responsibility of the manager to implement such system and give a
voice to the employee. By doing so, the manager supports individual and
organizational moral development and reduces the intense resistance to the
overall moral development.

3. Extraorganizational Ethics: The extra organizational ethics asserts that the action is
right if it promotes or tends to promote the collaborative partnerships and respect
the global and domestic constituencies representing the diverse political,
economic, legal, social ecological and philanthropic concerns that affect the firm.

For example, it is the social responsibility of a manager to consider all the factors
external to the organization such as political, legal, social, environmental, etc.
that can affect the organizational business processes.

Thus, the managers who cautiously assess the moral conduct of his employees
and retribute (punish) their wrong doings then he is said to have successfully
developed the system of ethics. In case, the manager relies exclusively on the
character of his employees and do not implement morally supportive Intra-
organizational systems and stable processes; then the organization is exposed to
the future ethical risk.
MADIHA SALEEM

Some Other (Six) Candidate Ethical Principles

1) Golden Rule

• Do unto others as you would have them do unto you

2) Immanuel Kant’s Categorical Imperative

• If an action is not right for everyone to take, it is not right for anyone

For example, the categorical imperative applies to an

employee who tries to steal money from his employer. He
SHOULDN’T do this, because if ALL employees attempted
to do so, the company would fail.

3) Descartes’ Rule of Change

• If an action cannot be taken repeatedly, it is not right to take at all

While the employee’s stealing one dollar from the company

would not lead to any true problem, BUT repeatedly
stealing one dollar, or stealing a lot of dollars, would be
unacceptable and ultimately lead to the destruction of the
company.

4) Utilitarian Principle

• Take the action that achieves the higher or greater value

5) Risk Aversion Principle

• Take the action that produces the least harm or least potential cost

6) Ethical “no free lunch” Rule

• Assume that virtually all tangible and intangible objects are owned
by someone unless there is a specific declaration otherwise.
 Responsibilities of a Business
Towards Various Interest Groups

Interest groups consist of the various persons connected with a business, such as consumers,
shareholders and the community. The responsibilities of a business towards various interest
groups are as follows:

 Responsibilities towards consumers: 

A consumer is a person who determines what goods shall be produced and whether they should
be sold in the market or not. Consumers not only determine the income of the business but also
affect the success and survival of the business. Therefore, a business has some basic
responsibilities towards the consumers and these are as follows:

 To produce those goods that meet the needs of consumers of different tastes, classes and
purchasing power
 To establish the lowest possible price with efficiency and reasonable profit to the business
 To ensure fair distribution of products among all sections of the consumers
 To make the products more satisfactory to consumers through the study of consumer needs
 To handle the complaints of consumers more carefully and to analyze them properly
 To answer consumers’ enquiries related to the company, its products and services

 Responsibilities towards shareholders: 

The basic responsibility of a business is to ensure the safety of investment and higher rate of
return on the investment. Owners of a business may be proprietors, partners or shareholders. The
interest of shareholders lies in participating in the management and getting regular dividends at
appropriate rates. It is, therefore, the responsibility of the management to improve communication
between the company and its shareholders. This can be done by providing maximum information
to the shareholders through newsletters, annual reports or by holding the annual general meeting
of the company at an appropriate time and place so that the maximum number of members can
come and participate in the discussions.
3. Social responsibility of business
Social responsibility of business involves the consideration of general public interest by
businessmen while taking business decisions and actions.

According to Bowen, social responsibility refers to the ‘obligations of businessmen to pursue

those policies, to make those decisions or to follow those lines of action which are desirable
in terms of the objectives and values of our society’.

This entails that businessmen should perform their operations with due consideration to
the aspirations of society. They should fulfill the demands of those who have a claim on
the operations of business. They must measure the consequences of their decisions and
courses of action on the society and ascertain that no undue harm is done to the interests
of the society.

The concept of social responsibility has emerged due to several economic, social, political and
legal influences. These forces, which have obliged, persuaded and helped businessmen to
become aware of their responsibility to society, are as follows:

Public relations: Modern businessmen are aware that a good public image contributes to their
growth. There is a greater alertness in their hearts that business is a construction of society and
hence, it should consider and react positively to the expectations of society.

Managerial revolution: Separation of ownership from control in large corporations has resulted
in professionalism in management. A professional manager is fairly aware of the society’s
expectations and attempts to meet the demands of all social components, like customers,
employees, shareholders and the government, in a well-adjusted manner.

Long-term self-interest of business: As stated earlier, a good public image gives better returns to
a business enterprise. Businessmen can benefit in the long run by providing for the welfare of
the society through education and better living conditions. This will result in better employees
in business and enlightened customers in society who will benefit through their increased
purchasing power.

Ascertainment of law and order: Social responsibility on the part of business can avoid unrest in
society. If the society feels that it is not getting its appropriate share in business, it can create
disorder by adopting anti-social and illegal activities and rebellions. Pursuing the doctrine of
social responsibility can help business organizations prevent social chaos.
Maintenance of free enterprise: Government or public regulation can hinder the development of
business by decreasing the flexibility of decision-making and the freedom of choice and action.
Therefore, the voluntary assumption of social responsibilities is essential for the growth of a
business organization.

Creation of society: Business is a part of society and survives on the demands of the society.
Therefore, it should be responsive to social expectations and welfare. The right of the business
to grow goes hand in hand with its awareness of social responsibility and welfare. It is the duty
of the business enterprise to contribute in some way to the well-being of its society.

Moral justification: Enlightened businessmen have now become more aware about their moral
duty to serve the society. Business has the resources and power to solve social problems.
Therefore, its power should be balanced with social responsibility.

Profitable environment: To ensure a profitable environment in the society in which it operates,

business needs to meet the challenges of social evils. Active interference on the part of
businessmen in solving

Trade union movement: The recent development of socialism that boosted the strength of labour
unions has forced businessmen to give a fair share to workers. Human relations and labour
legislation have facilitated trade unions to increase their influence.

Consumerism: Consumer organizations have encouraged awareness about consumer rights.

Consequently, businesses have become more responsive to consumer needs and stress the
dictum of ‘consumer is the king’. Businessmen can no longer adopt the approach of ‘let the
buyer beware’.

Education: Extensive education has made businessmen conscious about the quality of life, moral
values and social standards. Liberal business leaders have been pressing the business
community to acknowledge its social obligations.

Myths regarding Business Ethics

Business ethics maintains moral values and ensures that the behaviour of employees is aligned
with these values. Still, there are certain myths regarding business ethics, which are as
follows:

 Business ethics is a matter of belief than management.

 Organizations believe that their employees are ethical so they are not required to pay
attention to business ethics.

 Many people are of the opinion that business ethics is a religion or a theoretical debate. In
the day-to-day issues of the organization, business ethics has very little to contribute.
However, ethics is a management discipline that requires a planned approach and several
management programmes.

 Business ethics only states the obvious do-good situations. Several people are of the
opinion that ethics represents the values that a person should naturally aspire to have and,
therefore, establishing codes of ethics is unnecessary. However, importance should be
given to the ethical values of an organization. For instance, it is understood that
everybody should be honest. If the workers of an organization are not honest then the
code of ethics of that organization should have honesty listed in it. Code of ethics changes
with the change in the society and the needs of an organization.

 Business ethics is an opinion. Many people believe that stress and confusion may inspire
good people to behave unethically. Ethics in an organization can be managed by helping
each other to stay ethical and to work together through confusing and stressful ethical
dilemmas.

 Business ethics is the new trend. Many people believe that business ethics is a recent
phenomenon and has recently gained attention. However, it is an old phenomenon that has
received importance now.

 Business ethics is unmanageable by an organization. Actually, ethics is not directly

‘managed’ by an organization, but the behaviour of the team leader has a strong moral
influence on the employees. The objectives of an organization, such as maximizing profit
and minimizing costs also have a strong impact on the ethics of an organization. Even the
laws, regulations and rules have a good impact on the ethical values of the employees and
hence minimize the harm to the business. But still, some believe that business ethics
cannot be managed by an organization.

 Business ethics is a social responsibility. Many people believe that ethics is a social
responsibility that does not deal with practical matters. 

 Business ethics is not needed if the organization has no legal problems. People are of the
belief that persons who are unethical can function within the limits of law. For example,
 complaining constantly about others and withholding information from superiors.
However, breaking the law often starts with unethical behaviour that has gone unnoticed.

 Business ethics has little practical significance in a business. Business ethics helps
identify and prioritize the values to guide the behaviour of employees in an organization
and establish associated policies and procedures for ensuring that certain behaviour is
followed.

Benefits of Managing Ethics in Business

The various benefits of managing ethics in a business are as follows:

 Business ethics helps in improving society by establishing government agencies, unions, laws
and regulations in the society.

 Business ethics helps an organization maintain ethical values during times of crisis. Business
ethics programmes guide leaders about the right or wrong ways of dealing with complex
dilemmas and how they should act during that time.

 Business ethics helps employees behave according to the ethical values that are preferred by
the top management of an organization. An organization discovers many differences between
the values that reflect in the actions of the employees and the values preferred. Employees
experience a relationship that is strong between the values of the organization and their values.
Ethical values induce teamwork and increase the efficiency of the employees.

 Ethics supports employee growth. When an employee pays attention to ethics, it induces
confidence in the employee to deal with reality and face both good and bad circumstances.
Bennett, in his article ‘Unethical Behaviour, Stress Appear Linked’, explained that the more an
employee is emotionally healthy, the more ethical he is.

 Ethics have become legal instruments. These days, there are several lawsuits regarding
personnel matters and the influence of the services of the organization on the investors and
customers. Major ethical principles that are applied in the organization are the laws that are
made by the government. A greater attention on ethical issues on the part of the government
ensures high ethical procedures and policies in the workplace. An employee, for example, is
subject to breach of contract on non-compliance of the terms and conditions of the contract.

 Business ethics helps to avoid criminal acts of ‘omission’ and it also helps in lowering the
fines. Ethics helps in ascertaining the violation of ethical issues and helps in rectifying the
 violation that is committed by the organization. The guidelines set by an organization about
ethical values helps to lower fines. An organization, for example, that has knowingly violated
a contract is considered to have committed a criminal act and the organization is subject to
penalty.

 Business ethics helps to identify and manage the values associated with quality management,
strategic management and diversity management. For managing these values, ethical
programmes record the values, develop policies and procedures and then provide training to
the employees on these policies and procedures. These ethical programmes manage certain
values of quality management, such as reliability, performance, measurement and feedback.
Similarly, these programmes also manage various strategic values, such as reducing cost and
increasing market share.

 Business ethics helps in building a strong and positive public image of an organization.
Ethical values enable an organization to increase their goodwill in the market. Those
organizations that value their customers have a positive influence in the market. Ethical values
are the milestones that enable the establishing of a successful and socially responsible
business.

 Business ethics strengthens organizational culture. Ethical values improve relationships

between an organization and its customers. They strengthen the organization by ensuring
consistency in the standard and quality of the product.

 Business ethics makes sure that the right activities are performed in an organization.
EMERGING BUSINESS ETHICS
ISSUES

Chapter 3: Business Ethics by Ferrell

TABLE OF CONTENT
◼ Ethical Issues and Dilemmas in Business
◼ Misuse of company time and resources
◼ Abusive or intimidating behaviour
◼ Lying
◼ A conflict of interest
◼ Bribery
◼ Corporate Intelligence
◼ Discrimination
◼ Harassment
◼ Fraud
◼ Financial Misconduct
◼ Insider Trading
◼ Intellectual Property Rights
◼ Privacy Issues
◼ The Challenge of Determining an Ethical Issue in
Business
SUMMAR
YInemerging
◼ this chapter, we consider some of the ethical issues
in business today, including how they arise from the
demands of specific stakeholder groups.

◼ In the first half of the chapter, we explain certain universal

concepts that pervade business ethics, such as integrity,
honesty, and fairness.

◼ The second half of the chapter explores a number of emerging

ethical issues, including misuse of company time and
resources, abusive and intimidating behavior, lying, conflicts of
interest, bribery, corporate intelligence, discrimination,
harassment, fraud, financial misconduct, insider trading,
intellectual property rights, and privacy.

◼ We also examine the challenge of determining decisions that

have an ethical component for the firm to consider.
ETHICAL ISSUES AND
DILEMMAS IN
BUSINESS
ETHICAL ISSUES AND
DILEMMAS IN BUSINESS
Ethical Issue Ethical Dilemma
◼ An ethical issue is a ◼ An ethical dilemma is a
problem, situation, or problem, situation, or
opportunity that requires an opportunity that requires an
individual, group, or individual, group, or
organization to choose organization to choose
among several actions that among several actions that
must be evaluated as right have negative outcomes.
or wrong, ethical or
unethical.
 TYPES OF ETHICAL
ISSUES AND DILEMMAS IN
BUSINESS
TYPES OF ETHICAL ISSUES
AND DILEMMAS IN BUSINESS
1. Misuse of company time and 8. Harassment
resources
9. Fraud
2. Abusive or
intimidating behaviour 10. Financial
Misconduct
3. 11. Insider
Lying Trading
4. A conflict of 12. Intellectual Property
interest Rights
5. 13. Privacy
Bribery Issues
6. Corporate 14. Environmental
Intelligence Issues
7.
Discrimination
 TYPES OF ETHICAL
ISSUES AND DILEMMAS IN
BUSINESS
MISUSE OF
COMPANY TIME AND
RESOURCES
Misuse of company time and
resources
A Major Misconduct Computer and Internet
◼ Misuse of company time ◼ Using company computer
software and Internet
and resources is a major services for personal
form of observed business is one of the
misconduct in most common ways
organizations. employees misuse
company resources.
◼ Many companies, like
Boeing, have implemented
official policies delineating
acceptable use of
company resources.
 TYPES OF ETHICAL
ISSUES AND DILEMMAS IN
BUSINESS
ABUSIVE OR
INTIMIDATING
BEHAVIOUR
ABUSIVE OR INTIMIDATING
BEHAVIOR
What is abusive or
Common for Employees intimidating means?
◼ Abusive or intimidating ◼ The concepts of abusive or
behavior is a common intimidating behavior can
mean anything from physical
ethical problem for threats, false accusations,
employees. annoying behavior,
profanity, insults, yelling,
harshness, ignoring
someone, or even
unreasonableness.
ABUSIVE OR INTIMIDATING
BEHAVIOR
Bullying
◼ Bullying is associated with a
hostile workplace where a
person or group is
threatened, harassed or
overly criticized.
◼ The concept of bullying is
now considered a legal
issue, with millions of
Americans reporting having
experienced or witnessed
bullying at work.
 TYPES OF ETHICAL
ISSUES AND DILEMMAS IN
BUSINESS
LYING
 LYING
◼ Lying relates to distorting the
truth.
◼ The point at which a lie
Omission Lying
becomes unethical in business
is based on the context of the
statement and its intent to
distort the truth. A lie becomes
illegal if it is determined by the Commission
Joking
judgment of courts to damage Lying
others.

◼ There are three types of

lies
LYING
◼ Joking without malice

Omission Lying

Joking Commission
Lying
LYING
◼ Commission lying is creating a
perception or belief by words
that intentionally deceive the
receiver of the message. Omission Lying

◼ Commission lying involves

using words or creating noise
that intentionally confuse the
receiver of a message. Noise Joking Commission
Lying
can be the intentional use of
modes of communication that
the sender knows the receiver
does not fully understand.
LYING
◼ Omission lying is
intentionally not
informing others of any Omission Lying
differences, problems,
safety warnings, or
negative issues related
to the product or Commission
Joking
company that significantly Lying
affects awareness,
intention, or behavior.
 TYPES OF ETHICAL
ISSUES AND DILEMMAS IN
BUSINESS
A CONFLICT OF INTEREST
A CONFLICT OF
INTEREST
◼ A conflict of interest exists
when an individual must
choose whether to advance
his or her own interests,
those of the organization, or Personal Business
those of some other group. Dealings Dealings

Separation

◼ To avoid conflicts of
of Interest

interest, employees must

be able to separate their
private interests from
business dealings.
 TYPES OF ETHICAL
ISSUES AND DILEMMAS IN
BUSINESS
BRIBERY
BRIBER
YBribery is the practice of
◼
offering something (usually
money) in order to gain an illicit
advantage.

◼ Bribery can be defined as an

Active Passive
unlawful act, but it can also be a Bribery Bribery
business ethics issue in that a
culture includes such fees as Types
standard practice. of
Bribery
◼ Types of Bribery
BRIBER
Y◼ Active bribery means that the
person who promises or gives
the bribe commits the offense.

Active Passive
Bribery Bribery
Types
of
Bribery
BRIBER
Y◼ Passive bribery is an offense
committed by the receiver of the
bribe.

Active Passive
Bribery Bribery
Types
of
Bribery
BRIBER
YFacilitation payments to obtain or retain business do
◼
not constitute bribery payments in the United States,
as long as they are small.

◼ However, the legality of this practice varies in other

countries.
 TYPES OF ETHICAL
ISSUES AND DILEMMAS IN
BUSINESS
CORPORATE
INTELLIGENCE
CORPORATE INTELLIGENCE
(CI)
What is CI? Tools of CI
Corporate intelligence is the collection
and analysis of information on markets,
technologies, customers and competitors, Hacking Social
as well as on socioeconomic and external
political trends. Engineering

CI involves in-depth discovery of

information from corporate and court
documents, regulatory filings, and press
releases. CI is not an ethical issue if the Dumpster Whacking
information is obtained legally. diving
However, there are a number of
questionable or illegal techniques used
to collect information.
Phone
Eavesdropping
CORPORATE INTELLIGENCE
(CI)
Tools of CI
◼ Hacking is one of the top
methods for obtaining trade Hacking Social
secrets. Engineering
◼ System hacking assumes
that the attacker already has
access to a user account
◼ Remote hacking involves Dumpster Whacking
remotely trying to penetrate a diving
computer system via the
Internet
◼ Physical hacking requires
that an agent personally enter Phone
a facility Eavesdropping
CORPORATE INTELLIGENCE
(CI)
Tools of CI
◼ Social Engineering is another
popular method of obtaining
valuable corporate information. Hacking Social
Social Engineering is tricking or Engineering
fooling individuals into revealing
their passwords or other
valuable corporate information.
◼ Shoulder surfing is when Dumpster Whacking
someone looks over an diving
employee’s shoulder to obtain
a password
◼ Password guessing is self-
explanatory Phone
Eavesdropping
CORPORATE INTELLIGENCE
(CI)
Tools of CI
◼ Dumpster diving is looking
for treasure in someone Hacking Social
else's trash. (A dumpster is Engineering
a large trash container.) In
the world of information
technology, dumpster Dumpster Whacking
diving
diving is a technique used to
retrieve information that
could be used to carry out an
Phone
attack on a computer
Eavesdropping
network.
CORPORATE INTELLIGENCE
(CI)
Tools of CI
◼ Whacking is wireless hacking.
Hacking Social
Engineering

Dumpster Whacking
diving

Phone
Eavesdropping
 CORPORATE INTELLIGENCE
(CI)
◼ Phone Eavesdropping is yet another Tools of CI
tool for CI agents. A person with a
digital recording device can monitor Social
and record a fax line. Hacking
Engineering
◼
Eavesdropping is the unauthorized
real-time interception of a private
communication, such as a phone call, Dumpster Whacking
instant message, videoconference or diving
fax transmission. The
term eavesdrop derives from the
practice of actually standing under the
eaves of a house, listening to Phone
conversations inside. Eavesdropping
 TYPES OF ETHICAL
ISSUES AND DILEMMAS IN
BUSINESS
DISCRIMINATION
DISCRIMINATION
Discrimination on the basis of race, color, religion,
gender, marital status, disability, age, national origin etc.
is illegal in the United States.

A company in the United States can be sued for

discrimination if it:
◼ Refuses to hire an individual for discriminatory reasons
◼ Maintains a system of employment that unreasonably
excludes an individual from employment
◼ Unreasonably discharges an individual
◼ Discriminates against an individual with respect to hiring,
employment terms, promotion, or privileges of employment
as it relates to discrimination
DISCRIMINATION
◼ The Equal Employment Opportunity Commission (EEOC)
handles discrimination filings.

◼ The Age Discrimination in Employment Act specifically

outlaws hiring practices that discriminate against people 40
years of age or older, as well as those that require employees
to retire before the age of 70.

◼ Many companies have initiated affirmative action programs,

which involve efforts to recruit, hire, train, and promote qualified
individuals from groups that have traditionally been
discriminated against on the basis of race, gender, or other
characteristics. These programs may be mandated from the
federal level, but many companies opt to implement them
voluntarily. Discrimination can also be an ethical issue in
business when companies use race or other personal factors to
discriminate against specific groups of customers.
 TYPES OF ETHICAL
ISSUES AND DILEMMAS IN
BUSINESS
HARASSMENT
HARASSMENT
◼ Harassment is a form of discrimination that violates
Title VII of the Civil Rights Act of 1964. It is defined
as a repeated, unwanted behavior perpetrated upon
one individual by another.
 TYPES OF ETHICAL
ISSUES AND DILEMMAS IN
BUSINESS
FRAUD
FRAUD
What is Fraud? Types of Fraud
◼ In general, fraud is any
purposeful communication
that deceives, manipulates, Marketing
or conceals facts in order to Fraud

harm others. Accounting Consumer

Fraud Fraud
◼ Fraud is a crime that can
result in fines and/or Types
imprisonment. of
Fraud
FRAUD
Types of Fraud
◼ Accounting fraud usually involves
falsifying information about a
corporation’s financial reports, which
would otherwise provide important Marketing
information about the financial health Fraud
of the company to investors and
other stakeholder groups. Accounting Consumer
Fraud Fraud
◼ Accountants today feel increased
pressure to perform, to keep fees
low, and must follow complicated Types
regulations—all of which can of
contribute to the pressure to commit
fraud. Fraud
FRAUD
Types of Fraud
◼ Marketing fraud is the process
of dishonestly creating,
distributing, promoting, and
pricing products. Marketing
◼ Serious ethical issues can Fraud
occur in this area.
Accounting Consumer
◼ False or misleading marketing Fraud Fraud
communications can destroy
stakeholder trust in a
corporation. Types
◼ False or deceptive advertising of
is a key issue in marketing Fraud
communications.
FRAUD – MARKETING FRAUD
Categories of Misleading
Advertisements
◼ Puffery can be defined as exaggerated
advertising, blustering, and boasting
upon which no reasonable buyer would Puffery
rely.
◼ Implied falsity means that an
advertising message has a tendency to
mislead, confuse, or deceive the public.

◼ Literally false claims can be divided

into tests prove (establishment Categories
claims), when the advertisement cites
a study or test that establishes the
claim; and bald assertions Literally Implied
(non-establishment claims), when
False Falsity
the advertisement makes a claim that
cannot be substantiated, as when a
commercial states a certain product is
superior to any other on the market.
FRAUD
Types of Fraud
◼ Consumer fraud occurs
when consumers attempt to
deceive businesses for their Marketing
own gain. Fraud

Accounting Consumer
◼ There are many different Fraud Fraud
ways of engaging in
consumer fraud, from Types
stealing from stores, to of
price tag switching, to lying Fraud
to obtain discounts.
FRAUD
Types of Consumer Fraud
◼ Collusion involves an employee
who helps a consumer commit
fraud.
Duplicity
◼ Duplicity involves a consumer
duping a store. For example, a
customer who stages an Collusion Guile
accident and then sues the store
for damages is engaging in
duplicity. Types of
Consumer
◼ Guile is associated with a Fraud
person who knows right from
wrong but uses tricks to obtain
an unfair advantage.
 TYPES OF ETHICAL
ISSUES AND DILEMMAS IN
BUSINESS
FINANCIAL MISCONDUCT
FINANCIAL MISCONDUCT
◼ The failure to understand and manage ethical risks
played a significant role in the financial crisis. The
2008 global recession was caused in part by a
failure on the part of the financial industry to take
appropriate responsibility for its decision to utilize
risky and complex financial instruments.

◼ Corporate cultures were built on rewards for taking

risks rather than rewards for creating value for
stakeholders.
 TYPES OF ETHICAL
ISSUES AND DILEMMAS IN
BUSINESS
INSIDER TRADING
INSIDER TRADING
Insider Trading. An insider is any officer, director, or
owner of ten percent or more of a class of a
company’s securities.
INSIDER TRADING
Types of Insider Trading
◼ Illegal insider trading is the
buying or selling of stocks by Legal
insiders who possess Insider
information that is not yet trading
public.
◼ Legal insider trading involves
legally buying and selling stock
in an insider’s company, but
not all of the time. Insiders are Illegal
required to report their trades Insider
within two days of the
Trading
transaction.
 TYPES OF ETHICAL
ISSUES AND DILEMMAS IN
BUSINESS
INTELLECTUAL PROPERTY
RIGHTS
INTELLECTUAL PROPERTY
RIGHTS
Intellectual Property Rights involve the legal
protection of intellectual property (IP), such as music,
books, and movies.

◼ Digital copyrights continue to be a controversial issue

in the United States and across the world, and
existing laws are often difficult to enforce.
 TYPES OF ETHICAL
ISSUES AND DILEMMAS IN
BUSINESS
PRIVACY ISSUES
PRIVACY ISSUES
◼ Many privacy issues come
into play in the business
world.
◼ Some issues that managers
should consider involve
monitoring employee use of Employee Consumer
technology and consumer Privacy Privacy
privacy. Issues Issues

◼ It can be a challenge for

businesses today to meet the
needs of consumers while at
the same time protecting
their privacy.
PRIVACY ISSUES
◼ There are few legal protections of an
employee’s right to privacy while at
work, which allows employers a great
deal of leeway in monitoring employees.

◼ Electronic monitoring allows a

company to determine whether
productivity is lower than it could be
because employees are spending too Employee Consumer
much time on personal activities. Privacy Privacy
Issues Issues
◼ Practices that respect employee
privacy but do not abdicate the
employer’s responsibility help create a
climate of trust that promotes
opportunities for resolving employee–
employer disputes without lawsuits.
PRIVACY ISSUES
◼ There are two dimensions
to consumer privacy:
◼ Consumer awareness of
information collection
◼ Growing lack of consumer
control over how companies Employee Consumer
Privacy Privacy
use the personal information Issues Issues
they collect.
 TYPES OF ETHICAL
ISSUES AND DILEMMAS IN
BUSINESS
ENVIRONMENTAL ISSUES
 77

ENVIRONMENTAL ISSUES
◼ Kyoto protocol: international and global treaty in
a world commitment to reducing emission of
carbon dioxide in an attempt to reducing the
global warming and pollution(USA did not sign
the treaty).

◼ Water pollution

◼ 30 million plastic bottles are thrown daily for a

total 11 billion a year in the US

◼ Nuclear power VS Green Energy Practices

 THE CHALLENGE OF
DETERMINING AN ETHICAL
ISSUE IN BUSINESS
The Challenge of Determining an
Ethical Issue in Business
◼ Most ethical issues will become
visible through stakeholder concerns
about an event, activity, or the results
of a business decision.
◼ Determining ethical issues is a
constant challenge. Over time,
problems can become ethical Enters the
issues as a result of changing Ethical
societal values. Stakeholders Decision
discuss the Making
Ethical Issues
◼ Stakeholders trigger ethical issue Visible to
issues Process
awareness and individuals openly stakeholder
discuss it and ask for guidance and
the opinions of others

◼ Once discussed, one enters the

ethical decision-making process.
Madiha Saleem

A FRAMEWORK FOR ETHICAL DECISION MAKING IN

BUSINESS

The model of the ethical decision making process in business includes ethical
issue intensity, individual factors, and organizational factors such as corporate
culture and opportunity. All of these interrelated factors influence the evaluations
of and intentions behind the decisions that produce ethical or unethical behavior.
This model does not describe how to make ethical decisions, but it does help
you to understand the factors and processes related to ethical decision making.

1. Ethical Issue Intensity

The first step in ethical decision making is to recognize that an ethical issue
requires an individual or work group to choose among several actions that
various stakeholders inside or outside the firm will ultimately evaluate as right or
wrong. The first step is becoming aware that an ethical issue exists. Ethical
awareness is the ability to perceive whether a situation or decision has an
ethical dimension. Costly problems can be avoided if employees are able to first
recognize whether a situation has an ethical component.
However, ethical awareness can be difficult in an environment when employees
work in their own areas of expertise with the same types of people. It is easier to
Madiha Saleem

overlook certain issues requiring an ethical decision, particularly if the decision

becomes a routine part of the job. This makes it important for organizations to
train employees how to recognize the potential ethical ramifications of their
decisions. Familiarizing employees with company values and training them to
recognize common ethical scenarios can help them develop ethical awareness.
The intensity of an ethical issue relates to its perceived importance to the
decision maker.

Ethical issue intensity can be defined as the relevance or importance of an

event or decision in the eyes of the individual, work group, and/or organization. It
is personal and temporal in character to accommodate values, beliefs, needs,
perceptions, the special characteristics of the situation, and the personal
pressures prevailing at a particular place and time.

Senior employees and those with administrative authority contribute

significantly to ethical issue intensity because they typically dictate an
organization’s stance on ethical issues.

For instance, greenhouse gas emissions are an important global topic. The
Environmental Protection Agency (EPA) collects and publishes data on carbon
dioxide due to its negative impact on the environment. Although the EPA can
fine or sanction firms that go above carbon dioxide standards, industry groups
have filed numerous lawsuits. As a result of the controversy, power plant
companies like Scherer and Martin Lake have labeled this an ethical issue.
Additionally, insider trading is considered a serious ethical issue by the
government because the intent is to take advantage of information not available
to the public. Therefore, it is an ethical issue of high intensity for regulators and
government officials. This often puts them at odds with financial companies such
as hedge funds. A survey of hedge fund companies revealed 35 percent of
respondents feel pressured to break the rules. Because of their greater ability to
gather financial information from the market—some of which might not be public
information—hedge funds and other financial institutions have often come under
increased scrutiny by the federal government.
Madiha Saleem

Ethical issue intensity reflects the ethical sensitivity of the individual

and/or work group facing the ethical decision-making process. Research
suggests that individuals are subject to six “spheres of influence” when
confronted with ethical choices—the workplace, family, religion, legal system,
community, and profession—and the level of importance of each of these
influences varies depending on how important the decision maker perceives the
issue to be. Additionally, individuals’ moral intensity increases their
perceptiveness of potential ethical problems, which in turn reduces their
intention to act unethically.

2. Individual Factors
When people need to resolve issues in their daily lives, they often base their
decisions on their own values and principles of right or wrong. They generally
learn these values and principles through the socialization process with family
members, social groups, religion, and in their formal education. Good personal
values have been found to decrease unethical practices and increase positive
work behavior. However, values are subjective and vary a great deal across
different cultures. For example, some individuals might place greater importance
on keeping their promises and commitments than others would.

Values could also relate to negative rationalizations, such as “Everyone does it,”
or “We have to do what it takes to get the business.” Research demonstrates
that individuals with destructive personalities who violate basic core values can
cause a work group to suffer a performance loss of 30 percent to 40 percent
compared to groups with no “bad apples.”

Research regarding individual factors that affect ethical awareness, judgment,

intent, and behavior include gender, education, work experience, nationality,
age, and locus of control.

 gender

Extensive research has been done regarding the link between gender and
ethical decision making. The research shows that in many aspects there are no
Madiha Saleem

differences between men and women, but when differences are found, women
are generally more ethical than men. By “more ethical,” we mean women
seem to be more sensitive to ethical scenarios and less tolerant of unethical
actions. One study found that women and men had different foundations for
making ethical decisions: women rely on relationships; men rely on justice
or equity. In another study on gender and intentions for fraudulent financial
reporting, females reported higher intentions to report them than male
participants. As more and more women work in managerial positions, these
findings may become increasingly significant.

 Education
Education is also a significant factor in the ethical decision-making process. The
important thing to remember about education is that it does not reflect
experience. Work experience is defined as the number of years in a specific job,
occupation, and/or industry.

Generally, the more education or work experience people have, the better they
are at making ethical decisions. The type of education someone receives has
little or no effect on ethics. For example, it doesn’t matter if you are a business
student or a liberal arts student— you are pretty much the same in terms of
ethical decision making. Current research, however, shows students are less
ethical than businesspeople, which is likely because businesspeople have been
exposed to more ethically challenging situations than students.

 Nationality

Nationality is the legal relationship between a person and the country in which
he or she is born. In the twenty-first century, nationality is redefined by regional
economic integration such as the European Union (EU). When European
students are asked their nationality, they are less likely to state where they were
born than where they currently live. The same thing is happening in the United
States, as people born in Florida living in New York might consider themselves
to be New Yorkers. Research about nationality and ethics appears to be
significant in how it affects ethical decision making; however, just how
Madiha Saleem

nationality affects ethics is somewhat hard to interpret. Because of

cultural differences, it is impossible to state that ethical decision making in
an organizational context will differ significantly among individuals of
different nationalities. The reality of today is that multinational companies look
for businesspeople that make decisions regardless of nationality. Perhaps in 20
years, nationality will no longer be an issue because the multinational
individual’s culture will replace national status as the most significant factor in
ethical decision making.

 Age

Age is another individual factor researched within business ethics. Several

decades ago, we believed age was positively correlated with ethical decision
making. In other words, the older you are, the more ethical you are. However,
recent research suggests there is probably a more complex relationship
between ethics and age. We believe older employees with more experience
have greater knowledge to deal with complex industry-specific ethical issues.
Younger managers are far more influenced by organizational culture than are
older managers.

 Locus of control

Locus of control relates to individual differences in relation to a generalized

belief about how you are affected by internal versus external events or
reinforcements. In other words, the concept relates to how people view
themselves in relation to power. Those who believe in external control
(externals) see themselves as going with the flow because that is all they can
do. They believe the events in their lives are due to uncontrollable forces. They
consider what they want to achieve depends on luck, chance, and powerful
people in their company. In addition, they believe the probability of being able to
control their lives by their own actions and efforts is low. Conversely, those who
believe in internal control (internals) believe they control the events in their
lives by their own effort and skill, viewing themselves as masters of their
destinies and trusting in their capacity to influence their environment.
Madiha Saleem

Current research suggests we still cannot be sure how significant locus of

control is in terms of ethical decision making. One study that found a relationship
between locus of control and ethical decision making concluded that internals
were positively correlated whereas externals were negatively correlated. In
other words, those who believe they formed their own destiny were more ethical
than those who believed their fate was in the hands of others.
Madiha Saleem

3. Organizational Factors
Although people can and do make individual ethical choices in business
situations, no one operates in a vacuum. Indeed, research established that in
the workplace, the organization’s values often have greater influence on
decisions than a person’s own values. Ethical choices are made within groups
and committees, or in conversations and discussions with coworkers.

Employees approach ethical issues on the basis of what they learned not only
from their own backgrounds, but also from others in the organization. The
outcome of this learning process depends on the strength of personal values,
the opportunities to behave unethically, and the exposure to others who behave
ethically or unethically. An alignment between a person’s own values and the
values of the organization help create positive work attitudes and organizational
outcomes. Research has further demonstrated that congruence in personal and
organizational values is related to commitment, satisfaction, motivation, ethics,
work stress, and anxiety. Although people outside the organization such as
family members and friends also influence decision makers, the organization
develops a personality that helps determine what is and is not ethical. Just as a
family guides an individual, specific industries give behavioral cues to firms.
Within the family develops what is called a culture and so too in an organization.

 Corporate culture

Corporate culture can be defined as a set of values, norms, and artifacts,

including ways of solving problems that members (employees) of an
organization share. As time passes, stakeholders come to view the company or
organization as a living organism with a mind and will of its own. The Walt
Disney Co., for example, requires all new employees to take a course in
the traditions and history of Disneyland and Walt Disney, including the
ethical dimensions of the company. The corporate culture at American
Express stresses that employees help customers out of difficult situations
whenever possible.
This attitude is reinforced through numerous company legends of employees
who have gone above and beyond the call of duty to help customers. This
strong tradition of customer loyalty might encourage an American Express
Madiha Saleem

employee to take unorthodox steps to help a customer who encounters a

problem while traveling overseas. Employees learn they can take some risks in
helping customers. Such strong traditions and values have become a driving
force in many companies, including Starbucks, IBM, Procter & Gamble,
Southwest Airlines, and Hershey Foods.
One way organizations can determine the ethicalness and authenticity of their
corporate cultures is having organizations go back to their mission statement or
goals and objectives.
These goals and objectives are often developed by various stakeholders, such
as investors, employees, customers, and suppliers. Comparing the firm’s
activities with its mission to its values. Additionally, most industries have trade
associations that disperse guidelines developed over time from others in the
industry. These rules help guide the decision making process as well. The
interaction between the company’s internal rules and regulations and industry
guidelines form the basis of whether a business is making ethical or unethical
decisions. It also gives an organization an idea of how an ethical or unethical
culture may look.

 Ethical culture

An important component of corporate or organizational culture is the company’s

ethical conduct. Corporate culture involves values and norms that prescribe a
wide range of behavior for organizational members, while ethical culture
reflects the integrity of decisions made and is a function of many factors,
including corporate policies, top management’s leadership on ethical issues, the
influence of coworkers, and the opportunity for unethical behavior.
Communication is also important in the creation of an effective ethical culture.
There is a positive correlation between effective communication and
empowerment and the development of an organizational ethical climate. Within
the organization as a whole, subcultures can develop in individual departments
or work groups, but these are influenced by the strength of the firm’s overall
ethical culture, as well as the function of the department and the stakeholders it
serves. The more employees perceive an organization’s ethical culture to be,
the less likely they are to make unethical decisions.
Madiha Saleem

Corporate culture and ethical culture are closely associated with the idea that
significant others within the organization help determine ethical decisions within
that organization.

Research indicates the ethical values embodied in an organization’s culture are

positively correlated to employees’ commitment to the firm and their sense that
they fit into the company. These findings suggest companies should develop
and promote ethical values to enhance employees’ experiences in the
workplace.
Madiha Saleem

 Significant others

Those who have influence in a work group, including peers, managers,

coworkers, and subordinates, are referred to as significant others. They help
workers on a daily basis with unfamiliar tasks and provide advice and
information in both formal and informal ways.
Coworkers, for instance, can offer help in the comments they make in
discussions over lunch or when the boss is away. Likewise, a manager may
provide directives about certain types of activities employees perform on the job.
Indeed, an employee’s supervisor can play a central role in helping employees
develop and fit in socially in the workplace. Numerous studies conducted over
the years confirm that significant others within an organization may have more
impact on a worker’s decisions on a daily basis than any other factor.

 Obedience to authority

Obedience to authority is another aspect of the influence significant others can

exercise. Obedience to authority helps explain why many employees resolve
business ethics issues by simply following the directives of a superior. In
organizations that emphasize respect for superiors, employees may feel they
are expected to carry out orders by a supervisor even if those orders are
contrary to the employees’ sense of right and wrong. Later, if the employee’s
decision is judged to be wrong, he or she is likely to say, “I was only carrying out
orders,” or “My boss told me to do it this way.” In addition, research shows the
type of industry and size of the organization were found to be relevant factors,
with bigger companies at greater risk for unethical activities.
Madiha Saleem

4. Opportunity
Opportunity describes the conditions in an organization that limit or permit
ethical or unethical behavior. Opportunity results from conditions that either
provide rewards, whether internal or external, or fail to erect barriers against
unethical behavior. External rewards refer to what an individual expects to
receive from others in the social environment in terms of social approval, status,
and esteem.

An example of a condition that fails to erect barriers against unethical behavior

is a company policy that does not punish employees who accept large gifts from
clients. The absence of punishment essentially provides an opportunity for
unethical behavior because it allows individuals to engage in such behavior
without fear of consequences. The prospect of a reward for unethical behavior
can also create an opportunity for questionable decisions. For example, a
salesperson given public recognition and a large bonus for making a
valuable sale obtained through unethical tactics will probably be motivated
to use such tactics again, even if such behavior goes against the
salesperson’s personal value system. If ten percent of employees observe
others at the workplace abusing drugs or alcohol and nobody reports or
responds to this conduct, then the opportunity for others to engage in these
activities exists.
Opportunity relates to individuals’ immediate job context —where they work,
whom they work with, and the nature of the work. The immediate job context
includes the motivational “carrots and sticks” superiors use to influence
employee behavior. Pay raises, bonuses, and public recognition act as
carrots, or positive reinforcements, whereas demotions, firings,
reprimands, and pay penalties act as sticks, or negative reinforcements.
One survey reports more than two-thirds of employees steal from their
workplaces, and most do so repeatedly. As Table 5–1 shows, many office
supplies, particularly smaller ones, tend to “disappear” from the workplace.
Small supplies such as Post-It notes, copier paper, staples, and pens appear to
be the more commonly pilfered items, but some office theft sometimes reaches
more serious proportions. One employee was indicted for stealing more than $
376,000 in ink toner from a law firm and selling it on the black market over a
Madiha Saleem

two-year period. The retail industry is particularly hard hit—total losses from
employee theft are often greater than shoplifting at retail chains. If there is no
policy against this practice, one concern is employees will not learn where to
draw the line and get into the habit of taking more expensive items for personal
use.
The opportunities that employees have for unethical behavior in an organization
can be eliminated through formal codes, policies, and rules adequately enforced
by of interest rules to help academic economists become more transparent
about their relationships with hedge funds, banks, and financial institutions.
These rules responded to the criticisms levied against academic economists
over the consulting services and derivative risk models they provided to financial
companies such as Lehman Brothers—services that have been partially blamed
for the U.S. financial crisis. Financial companies—such as banks, savings and
loan associations, and securities companies—developed elaborate sets of rules
and procedures to avoid creating opportunities for individual employees to
manipulate or take advantage of their trusted positions. In banks, one such rule
requires most employees to take a vacation and stay out of the bank a certain
number of days every year so they cannot be physically present to cover up
embezzlement or other diversions of funds. This rule prevents the opportunity
for inappropriate conduct.
Despite the existence of rules, misconduct can still occur without proper
oversight.

UNDERSTANDING ETHICAL DECISION MAKING

Our ethical decision-making framework demonstrates the many factors that
influence ethical decisions. Ethical issue intensity, individual factors,
organizational factors, and opportunity result in business ethics evaluations and
decisions. An organizational ethical culture is shaped by effective leadership.
Without top level support for ethical behavior, the opportunity for employees to
engage in their own personal approaches to ethical decision making will evolve.
An ethical corporate culture needs shared values along with proper oversight
to monitor the complex ethical decisions being made by employees. It requires
the establishment of a strong ethics program to educate and develop
compliance policies. Consider the ethics program at construction and
Madiha Saleem

engineering company Bechtel Corporation. Top managers at Bechtel show

strong support for ethical conduct, with the chief ethics officer and vice chairman
speaking at events such as the European Business Ethics Forum and the Ethics
and Compliance Officer Association meeting to share best industry practices.
Every year the company holds an ethics awareness workshop for its employees
to discuss ethical scenarios and how best to resolve them.

On the other hand, some companies with a strong reputation for ethical conduct
sometimes fail to maintain their ethical culture. Johnson and Johnson’s (J&J)
quick action during the Tylenol murders secured its reputation for putting
customer safety first. However, J&J experienced several quality control issues
that put its reputation as an ethical company in jeopardy. Additionally, many
criticized the way J&J handled these issues and began to question whether J&J
lost its standing as a gold standard for values-based ethics. 68 Despite these
setbacks, J&J continues to be ranked among the top ten in Harris Interactive’s
reputation quotient ratings. 69 To continue maintaining credibility among
stakeholders, J&J must learn from its mistakes and return to the values in its
credo that made it a role model for ethical conduct.

Normative dimensions are also important to ethical decision making. Normative

perspectives set forth ideal goals that organizations should aspire. Normative
considerations also provide the foundation needed to develop organizational
principles and values, the building blocks of a firm’s ethical culture. Without this
foundation, companies will not be able to develop an ethical culture or have the
basis to make ethical decisions. The Ford Pinto case is an interesting example
of how normative considerations can be easily ignored.

Ford recognized that its Pintos had a design flaw that made it easier for
explosions to occur in accidents. However, it refused to initiate a recall. This led
to needless deaths. It is interesting to note that in one class discussing the Ford
Pinto case students tended to point out the monetary and reputational impact of
Ford’s actions, but only later did a student state that Ford should not have
knowingly sold a dangerous car that could harm people.
Madiha Saleem

Normative frameworks are largely influenced by political, economic, and social

institutions. However, a normative perspective also recognizes the existence of
universal ethical behaviors, such as honesty and justice. Total, a French oil and
gas company, lists human rights, financial transparency, and respect for people
as being among its main principles.

Finally, the more you know about ethical decision making in business, the more
likely you will make good decisions. There are many challenges in organizations
beyond the control of any one individual. On the other hand, as you move to
higher levels of the organization, there is the opportunity for ethical leadership to
become a role model for good ethics. The descriptive framework of ethical
decision making in this chapter provides many insights into the relationships that
contribute to an ethical culture.
 Chapter 5
Ethical Decision
Making

©2017Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Learning Objectives
 Provide a comprehensive model for ethical decision
making in business
 Examine issue intensity as an important element in
the ethical decision-making process
 Introduce individual factors that influence business
ethical decision making
 Introduce organizational factors that influence
business ethical decision making

©2017Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license 2
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Learning Objectives (continued)
 Explore the role of opportunity in ethical decision
making in business
 Understand normative considerations in ethical
decision making
 Recognize the role of institutions in normative
decision making
 Examine the importance of principles and core
values to ethical decision making

©2017Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license 3
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Figure 5.1 - Framework for Understanding
Ethical Decision Making in Business

©2017Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license 4
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Ethical Issue Intensity

Relevance of an event or decision in the

eyes of an individual, work group, and/or
organization

Reflects the ethical sensitivity of an

individual or a group in facing the ethical
decision making process

©2017Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license 5
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Individual Factors in Ethical Decision
Making
Gender

Locus of Education
control

Age Nationality

©2017Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license 6
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Organizational Factors

Corporate
Ethical culture
culture

Significant Obedience to
others authority

©2017Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license 7
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Opportunity
 Conditions in an organization that limit or permit
ethical or unethical behavior
 Results from conditions that either provide rewards
or fail to erect barriers against unethical behavior
 Relates to an individual’s immediate job context
 Can be eliminated by formal codes, rules, and
policies
 Gained by individuals through exposure to company
information
©2017Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license 8
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Business Ethics Intentions, Behaviors,
and Evaluations
 Ethical dilemmas occur when rules governing
decisions are vague or in conflict
 There are no substitutes for critical thinking and the
ability to take responsibility for one’s decisions
 Ethical decision making process includes
individuals’ intentions and the final decision
regarding what action they choose
 Work culture impacts recognition and judgement

©2017Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license 9
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Using the Ethical Decision-Making Model to
Improve Ethical Decisions
 Ethical decision-making model does not help in
determining if a business decision is right or wrong
 Provides insights about ethical decision making in
businesses
 Business ethics involves value judgments and
collective agreement about acceptable patterns of
behavior
 Gaining an understanding of the factors that make
up ethical decisions helps in differentiating between
an ethical issue and a dilemma
©2017Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license 10
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Normative Considerations in Ethical
Decision Making
 Normative approach: Examines what the ideal
standard should be in ethical decision making
 Within the firm as well as the industry
 Normative rules and standards are based on
individual moral values and the collective values of
the organization

©2017Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license 11
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Institutions as the Foundation for
Normative Values
 Organizations operate based on institutional
norms and rules
 Organizations face normative pressures from
different institutions to act in a way prescribed by
the institution
 Normative business ethics considers the political
realities outside the legal realm as industry
standards

©2017Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license 12
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Institutions as the Foundation for
Normative Values (continued)
 Nature of competition can be shaped by the
economic system
 Helps determine how a particular country or society
distributes its resources in the production of products
 Values made normative by social institutions are
followed by businesses to compete fairly

©2017Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license 13
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Implementing Principles and Core Values in
Ethical Decision Making

• Believed justice principles were beliefs that

everyone could accept
John Rawls

• Examined how individuals would formulate

principles if they were uncertain about their
Veil of future position in society
ignorance
by Rawls

©2017Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license 14
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Implementing Principles and Core Values in
Ethical Decision Making (continued 1)

 Principles of justice by Rawls

 Liberty principle - States that each person has basic
rights that are compatible to the basic liberties of
others
 Difference principle - States that economic and social
equalities (or inequalities) should be arranged to
provide the most benefit to the least-advantaged
members of society

©2017Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license 15
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Implementing Principles and Core Values in
Ethical Decision Making (continued 2)

 Companies convert basic principles into core values

 Core values:
 Provide the abstract ideals that are distinct from
individual values and daily operational procedures
 Include operating in a sustainable manner,
collaboration and teamwork, and avoiding bribery
 Provide a blueprint into the firm’s goals and how it
views ethical decision making

©2017Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license 16
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Figure 5.2 - Principles and Values

©2017Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license 17
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Understanding Ethical Decision Making

 Top level support for ethical behavior is

instrumental in helping employees engage in their
personal approaches to ethical decision making
 Normative perspectives set forth ideal goals to
which organizations should aspire
 Knowledge about ethical decision making helps in
making good decisions

©2017Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license 18
distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 MADIHA SALEEM

What is Whistleblowing?
“When a former or the existing employee of the organization raises his voice against the unethical
activities being carried out within the organization is called as whistle blowing and the person who
raises his voice is called as a whistle blower.”
The misconduct can be in the form of fraud, corruption, violation of company rules and policies, all
done to impose a threat to public interest. The whistle blowing is done to safeguard the interest of the
society and the general public for whom the organization is functioning.

Types of Whistle Blowing

1. Internal Whistle Blowing: An employee informs about the misconduct to his officers or seniors
holding positions in the same organization.
2. External Whistle Blowing: Here, the employee informs about the misconduct to any third person
who is not a member of an organization, such as a lawyer or any other legal body.

Importance of Whistleblowing
Whistleblowing has many different facets. Among other things, it can be an act of free
speech, an anti-corruption tool, and an internal management dispute mechanism.
To Save Public: Whistleblowers often reveal information that is critically important for public life. In
China, Dr. Jiang Yanyong revealed the extent of the spread of the SARS virus and potentially saved
millions of lives by alerting the public, after being ordered by the authorities not to reveal the
information.
Political Accountability: Other disclosures are essential to promote political accountability. Allan
Cutler, a Canadian bureaucrat, disclosed suspicions of fraud that led to the revealing of millions of
misspent public funds in a sponsorship scandal, leading to the defeat of the Liberal party in the 2006
elections.
To Avoid Business Losses: Sherron Watkins of Enron internally raised the alarm over problems with
the financial situation in the company that eventually led to the arrest and conviction of its CEO and
other top officials.
To Promote Trust: Whistleblowing is also useful for bodies that want to improve their internal
management to make it more accountable. Employees are usually the first to know of problems and
whistleblowing can be an “early warning sign” for employers that something is wrong and should be
corrected before it gets out of control.

Conditions for Justified Whistle Blowing

There are certain situations when the whistle blowing can be justified. There are:
(1) Whenever the product/software of the organization will cause considerable harm to the
public, he should blow the whistle.
(2) Whenever an employee feels serious threat or harm to him or anybody he should report to the
organization.
(3) Before reporting any subject an employee should have documental evidence which should
convince on impartial observer about the necessity of whistle blowing.
 (4) If an immediate boss does not care for report (whistle blowing) the employee should go up to
highest level to present his case.
(5) There is always some risk involved in whistle blowing. If the employee is fully convinced of
his good intentions and serves good cause for society he should go ahead with whistle
blowing.

Pros & Cons of Whistleblowing

(With respect to Whistleblower)
Before you choose to disclose your knowledge of fraud in your workplace, You must have a clear
understanding of the implications of whistleblowing in the workplace. It is important for you to do the
right thing. However, you should also be clear of the pros and cons of whistleblowing in the workplace
before moving forward with a lawsuit.
In whistleblowing lawsuits, it is important to move quickly if you want to be the first to file. However,
we don’t want you to move so quickly that you make a choice you regret. That’s why we suggest
every potential whistleblower carefully consider the pros and cons of whistleblowing in the workplace:

PRO: EXPOSING FRAUDULENT ACTIVITY IS THE RIGHT THING TO DO

Perhaps the biggest advantage of becoming a whistleblower is being able to know you have made the
right choice. After becoming aware of fraudulent activity occurring in your place of work, you can make
the choice to expose the fraudulent activity so the government can recover the money lost.

CON: YOUR CAREER COULD SUFFER

Employers are prohibited from seeking revenge after an employee has exposed them for fraudulent
activity. However, your career may still suffer because of your choice. Once your case becomes public,
you may receive attention in the business world. Being labeled as a whistleblower could decrease your
chances of being hired at a new company in the future.

PRO: PROTECTION FROM RETALIATION IS AVAILABLE

Under the False Claims Act, all whistleblowers are protected from their employer’s retaliation. If you
decide on whistleblowing in the workplace, you can be sure they will be angry. But you can also know
you have legal protection if they decide to retaliate because of your choice.

CON: YOUR RELATIONSHIPS MAY SUFFER

Even though you have chosen the right thing, your coworkers may not agree with your actions.
Whistleblowers often stand alone. Friends they thought they could trust in their workplace will turn their
back on them in order to protect their own reputation.

PRO: YOU MAY GET A FINANCIAL REWARD

If a lawsuit stems from evidence of fraud you have provided, the government will seek to recover the
funds they have lost as a result of fraudulent activity. If the lawsuit is successful, you could be rewarded
up to 30 percent of the recovered funds.
 Benefits of Whistleblowing
(With respect to Organization)

Discover misconduct and act against it sooner

Whistleblowing is unique in that it gives everybody in the organization the opportunity to report a
concern if they see something they suspect is against the organization’s ethical principles.

Take care of things internally

Stronger whistleblower protection laws all over the world, such as in the EU and Australia, mean that if
you do not listen to and act upon whistleblowing tips internally, people may decide to report externally,
for example to the media, and are legally protected if they do so.

Reduce losses when misconduct occurs

According to the Association of Certified Fraud Examiners, whistleblowing benefits organizations
through significant loss savings. The ACFE’s Report to the Nations showed that organizations that did
not have a whistleblowing system in place suffered losses that were twice the size compared to those
who did have a whistleblowing system.

Build trust in your brand

In our most recent customer study on organizational whistleblowing, 50% of the participants responded
that building trust was the main benefit of a whistleblowing system. This illustrates that whistleblowing
benefits are not limited to identifying and acting on misconduct.

Ensure legal compliance

Globally, there is a trend towards stricter anti-corruption and whistleblower protection laws, for example
the EU Whistleblower Protection Directive, as well as harsher legal requirements regarding the handling
of personal data.

Barriers to Whistleblowing

1. Fear of Retaliation
The biggest barrier that prevents whistleblowing is concern that retaliation will result from
the disclosure. Retaliation can vary from minor harassment at the workplace to far more severe
consequences. Typically, once an employee has blown the whistle, increasing pressure will be
placed on them to rescind their statement and refrain from further disclosures.
• Taking away job duties so that the employee is marginalized.
• Blacklisting an employee so that he or she is unable to find gainful employment.
• Conducting retaliatory investigations in order to divert attention from the waste, fraud, or
abuse the whistleblower is trying to expose.
• Questioning a whistleblower's mental health, professional competence, or honesty.
• Setting the whistleblower up by giving impossible assignments or seeking to entrap him or
her.
• Reassigning an employee geographically so he or she is unable to do their job.
2. Legal Liability
There are also legal barriers to deter the whistleblowers from speaking out. These laws are
often used to punish whistleblowers and deter further potential whistleblowers from speaking out.
These include:

a. Duty of loyalty and confidentiality: A traditional barrier in many countries is based on a duty of
loyalty and commitment to the employer. This can prevent an employee from expressing a
personal opinion or revealing internal information.
b. Libel: In many countries, libel and defamation laws are used to deter whistleblowers from
making disclosures. Whistleblowers are threatened by senior officials or other powerful figures
who can use the court systems as effective means to silence opposition.
In Singapore, the National Kidney Foundation suppressed whistleblowers and
others from revealing that money was being spent on excessive salaries, first class
flights and gold washroom fixtures by using defamation laws to force apologies.
The story was finally fully disclosed after the NKF sued a major media company
who refused to back down.
In Kenya, the former National Security Minister recently sued the former head
of the Anti-corruption Committee who released a report concerning misdealings of
the government to force him to stop discussing the case.
In the UK, the Shipman inquiry into a doctor who was convicted of murdering
14 patients found that several of his colleagues who were concerned about his
activities were afraid that if they spoke out he would sue them for libel. Mexico is
one country that has recently made some positive advances towards addressing this
issue.
c. Secrets Acts: Most countries have criminal laws prohibiting the release of state and military
secrets by officials and often even by outsiders who have signed no agreement.
d. Other laws: There is also the possibility of criminal or civil charges for the release of
information under other laws such as those covering theft or trade secrets. In the US, an employee
of the Drug Enforcement Agency was sentenced to one year in prison for leaking information to a
reporter under the law on theft of government property.

Companies can also require that workers sign contractual confidentiality clauses. In
Austria, an American engineer concerned about the safety of the new Airbus 380 jet is facing
criminal and civil charges levied by his former employer after going public about potential design
flaws. A court has fined him $185,000 for discussing his case publicly.
3. Cultural Barriers
Beyond legal obligations, there is also a significant cultural opposition to whistleblowers in
many cultures that needs to be overcome. Whistleblowers are seen negatively as “sneaks”, “narks”,
“informers” or “dobbers”. Some of this comes from the abuses of informants going back in history.
Whistleblowers can face social sanctions for their disclosures. The disclosure of information to
outsiders can feel like a betrayal. Even in the absence of formal sanctions, being excluded from
social events or being shunned in an organization can place significant pressure on individuals.
Fellow employees may even engage in harassment or other retaliations without the awareness or
permission of the employer.
Implications for Organizations: One of the most valuable whistleblowing benefits is that it
enables organizations to access hard-to-reach information that can help leaders to minimize a wide
range of risks. In many cases, whistleblowing also has a preventive impact; the mere presence of a
well-communicated whistleblowing system will make potential wrong-doers think twice.
Staying silent is costly – allow anonymous reporting
However, to gain greater whistleblowing benefits organizations need to implement a secure
whistleblowing system that allows for anonymous reporting and dialogue. Anonymity is essential
as potential whistleblowers may be afraid of retaliation, and consequently choose to stay silent
about any unethical behavior they suspect. An anonymous reporting channel gives people more
confidence to speak up thereby increasing the chances of leaders receiving critical reports and thus
realizing the kinds of whistleblowing benefits described below.
MADIHA SALEEM

Bribery (Definition)
the offering, promising, giving, accepting or soliciting of an advantage as an inducement
for an action which is illegal, unethical or a breach of trust. Inducements can take the
form of money, gifts, loans, fees, rewards or other advantages (taxes, services, donations,
favours etc.).
Active & Passive Bribery
When a person offers, promises or gives a bribe, it is called ‘active bribery’ and when a person requests,
receives, or accepts a bribe, it is called ‘passive bribery’. Both forms are of concern to companies and are
outlawed in most countries.
Examples of Active Bribery
● Bribing a public official in order to:
o Be awarded a contract in the briber’s favour.
o Obtain an inspection report or to be awarded a license.
o Circumvent planning or safety controls.
● Channelling bribes to win public contracts through a consultant.
● Payment of small bribes to customs officials to expedite passage of goods through a port.
● Employing a public official’s son to influence the award of contracts.
● Providing sponsorship fees and excessive travel expenses for doctors to influence them to prescribe a
pharmaceutical company’s products.

Examples of Passive Bribery

Passive bribery takes place most often in certain operating functions; examples of instances are below:

● Security: A security officer in a company accepts a bribe from criminals to allow access for theft.

● Purchasing and procurement: A procurement executive demands a ‘kickback’ to award a contract. This
involves a portion of the contract fee being given back to the individual who made the decision to award
the contract. The consequences of such bribery can include financial loss through overpaying for goods,
projects or services and purchase of substandard, counterfeit or otherwise non-compliant goods or services.

● Allocation of goods and services: An employee favours a customer by expediting delivery at the expense
of other customers or giving preferential allocation of goods or services.

● Recruitment: An executive demands a bribe to appoint or promote a person who would otherwise not have
been selected. A senior buyer awards a contract on the strength of promise of a lucrative appointment with
the supplier after a suitable interval.

● Insider fraud: A bank employee accepts a bribe to provide details of the bank’s customers

● Illegal information brokering: An executive accepts a bribe to provide contract specifications to be used in
a tender ahead of time. Bribery might also be accepted to alter the specification in favour of a bidder.
MADIHA SALEEM

SECTION A: WHAT IS A BRIBE?

1. Cash is (still) King - Direct cash payments
2. Junkets and jollies - Excessive hospitality
3. It’s like Christmas. All over again.
4. In-kind Benefits as Bribes: You scratch my back. I’ll
scratch yours.
5. Grease is the word - Facilitation Payments
6. Charity. What’s not to like?
7. You say lobby. I say bribery.
8. Mr Five percent
MADIHA SALEEM

1. CASH IS (STILL) KING

Direct Cash Payments as Bribes
DESCRIPTION

Although an apparently blatant form of bribe-paying, many bribes globally still come in the form of
cash payments, alongside “in kind benefits”, such as luxury goods.

This is especially true in countries with cash economies. Even though cash is the most straightforward
means of bribery, the way that the bribe money is routed can be quite complex and involve several
stages.
•
• A bank in a Western European country is
EXAMPLE 1: Grease payment competing for a mandate to privatize a
state-owned utility company.
(One-off payment to secure an import • It is a competitive tender and to win the mandate it
permit)
has to put together a consortium of partners with
• A company providing oil services needs to import the right capacity.
a spare part into a Caribbean country. Without it, a • The government officials running the tender hint
drilling rig faces shutdown at a cost of hundreds of that the bank’s bid would get much more favorable
thousands of dollars per day. The part is held up in consideration if it appointed a particular broker.
customs. • The bank appoints the broker named by the
• A local customs official handling the transaction officials. The public officials also note that it is
refuses to release the component, saying that the normal business practice for cash payments to be
company’s license only permits temporary transferred to the personal Swiss bank accounts of
imports, and that this spare part is a permanent the CEO and senior management of the broker.
import. They say it is an unofficial but expected ‘token of
• This is the first time that the company had heard of appreciation’ of the broker’s great work.
this, and it had no previous issues with importing
similar parts. • A senior manager with the bank finds out that the
• Still, the customs official assures he can provide a broker is in fact partly owned by the officials, and
permanent import license, but to process it would realizes that transferring the cash would amount
take three weeks unless he worked late each night to a bribe. But he is under pressure to win the
and all weekend on the paperwork. He does not get mandate and feels that since they have come this
paid overtime, he adds pointedly. far already, and there is no turning back. He
• A delay could mean the oil services company agrees to make the payments.
losing an important client as well as facing
EXAMPLE 3: Bribery on the never never
additional storage charges, so the company offers
to make a cash payment to the official as (Regular payments to retain a contract)
‘overtime’.
• To avoid awkward questions over the payment, the • A management consulting firm has won
company records the payment in the books as business from a state-owned energy company
‘consulting fees’. in Eastern
Europe.

EXAMPLE 2: The out and out bribe • Six months into the project, at the contract review
(Single payment to obtain a contract) date, the energy company threatens to terminate
MADIHA SALEEM
the contracts blaming the unsatisfactory progress
made by the management consultants. (Taking a short-cut to achieve a target)

• At the same time, some energy company • An importer receives a late consignment of
officials let it be known that the contracts could seasonal products for export. They will help him
be extended for three years if certain key retain the business of a major supermarket client.
executives start to feel a greater personal
attachment to the management consultancy. • The products have a short shelf life and require
various permits from three Ministries in the
• To keep the business, the lead consultant on the relevant country – food, exports and customs.
project starts to transfer monthly cash payments of • The process to obtain the permits normally takes
USD 5000 each to 4 senior employees of the 8-12 weeks. But this is too long for the shelf life of
energy company. He has dummy contracts drawn the goods.
up saying that the executives are providing private • A local intermediary hears of the predicament and
advice on local “laws and customs” involved in offers to speed up the process but the cost is
doing business. USD6,000.
• A payment this size would eat into the profit
• After all, USD 20,000 monthly expenditure seems margin for the consignment but help to retain the
small when compared to the monthly revenues. It longer-term relationship. The importer agrees to
is booked as ‘advisory service fees’. pay the intermediary, who uses the cash to bribe
the mid-level officials who can issue the permits.
EXAMPLE 4: Never too late...?

GUIDANCE – LOOK OUT FOR RED FLAGS AND

FACT PATTERNS Avoid getting into a situation when a
bribe may be solicited or demanded
• For example, be aware of red flags such as whether demands for cash bribes are prevalent
in this country or industry.

• Build in longer lead times to avoid being exposed to ‘offers’ to speed up a lengthier
process with the use of unofficial ‘rush’ or ‘express’ services.

• Avoid using procedures that require cash as much as possible, especially when paying
suppliers. Refer all emergencies requiring cash payments to compliance.

Know how to deal with it if asked for a bribe

• Make sure key staff are trained in techniques to avoid paying bribes.

• Ensure that any staff who withdraw from a business opportunity because they refuse to
pay a bribe know they will have the support of their line managers and senior managers

Be alert to others who may be paying bribes

• Are there significant cash transfers that are booked under generalised cost headings?
MADIHA SALEEM

• Does the company appear to be retaining a particular contract even when under-performing
or in a market where competitors might be pricing more keenly?
MADIHA SALEEM

2. JUNKETS AND JOLLIES

Excessive Hospitality as Bribery

DESCRIPTION

Offering and receiving corporate hospitality is a widespread business practice. It can be an effective
way to create, build and strengthen relationships that are an important part of many business
operations. The danger is when it becomes excessive or lavish, or is offered in situations such as a
restricted period during a tender, hospitality can easily cross the line from an acceptable business
practice into an illegal bribe. Regulators are likely to ask whether hospitality is ‘reasonable,
proportionate and bona fide’. Any hospitality, offered or received, that might not pass this test should
be treated as a red flag.
be more such invitations for them in the future if the
EXAMPLE 1: Hospitality offered in city police force were to remain a client.
breach of company policy • The officers convince their colleagues in the
procurement department to extend the company’s
• A cosmetics company relies on door-to-door sales.
contract, even though another company submitted a
• It is trying to expand into a large developing
bid that represented better value for money.
country, but direct sales are strictly regulated
through licenses there.
EXAMPLE 3: Hospitality used as a
• Licenses usually take up to a year to get, and
facilitation payment to secure a permit
meanwhile the country manager has obtained a
quasi-legitimate ’interim’ licence from a senior • A company selling specialist road equipment in an
official, Asian country needs safety certification for its
• To avoid the rigorous inspections needed for products from a government agency.
official license, the company’s country manager • The government agency is under-resourced and
tells salespeople to “treat” junior inspectors to free has a backlog of applications, but the company
company merchandise in return for their needs to move quickly to consolidate the market.
“leniency”. He gives them each $1,000 worth of • The country manager offers officials from the
merchandise to dispense. agency a series of overseas training trips, in return
• At the same time, the country manager decides to for a “rush job” in processing the license
take care of the senior inspectors and licensing application.
officials through a hospitality ”programme” • Although described as training trips, the trips are
including dinner invitations to exclusive in reality an excuse to offer the officials
restaurants.
hospitality in the form of hotels, per diems and
• Although company policy prohibits gift-giving and
tourist activities.
hospitality to government officials, the salespeople • The officials make sure the company jumps the
agree to since a senior manager suggested it. application queue.
• The company’s country manager arranges the
EXAMPLE 2: Hospitality offered to an
overseas trip through a local travel agent,
individual with decision-making power
concealing the expenses as corporate travel costs.
and influence over new business
EXAMPLE 4: (Excessive hospitality for a
• A company specialising in surveillance technology senior government official)
would like to make sure that its contract with the city
police force is extended. • A telecommunications company is competing for a
lucrative tender announced by a state-owned Railway
• The company buys high-value Formula One tickets for Authority of an African country.
two senior police officers who join company staff at
the event. • The Railway Authority is part of the Ministry of
Transportation, and the Minister of Transportation has
• In casual conversation at the event, the company’s a decisive say over who wins the contract.
employees hint to the police officers that there would
MADIHA SALEEM
• The telecommunications company hires local
consultants, who organise a week’s luxury trip in • To keep the expenses of the luxury trip out of the
Europe for the Minister as part of a’ books, the consultants submit inflated bills to the
relationship-building’ exercise. One day of the trip telecommunications company for their services.
involves seeing the company’s communications
equipment in action in another railway company. • The telecommunications company approves and pays
the invoices. It then wins the contract.
 
MADIHA SALEEM
GUIDANCE – LOOK OUT FOR RED FLAGS AND FACT
PATTERNS Some red flags:
• Is it in line with company policy?

• Who is being given hospitality?

• Could the hospitality influence the award or extension of business or a contract?

• The recipient says they’ll have to take the day off. They’d never be allowed to go ‘officially’.

• Might competitors or a regulator think it is a bribe?

• How would this be perceived by others (e.g. the media)?

Set reasonable, clear limits

• These should set out precisely how much is acceptable to spend on corporate
entertainments and hospitality in a given situation and/or country

• These should be recommended by country managers and reviewed regularly

Implement a review and approval process

• All entertainment should be authorised by management

• Ensure that requests outside of set parameters in the policy require a detailed application
and rigorous approval process.

3. IT’S LIKE CHRISTMAS. ALL OVER AGAIN.

Bribery in the form of Gift-Giving

DESCRIPTION

As with hospitality, gifts can be an important way to build and strengthen relationships that are
essential to smooth business operations. In some countries, low-level gift-giving is a normal part
of doing business.

The problem is that when gift-giving starts to become excessive or lavish, it can easily cross the line
and turn an acceptable business practice into an illegal bribe. Regulators are likely to ask whether a gift
is ‘reasonable, proportionate and bona fide’. Any gift, offered or received, that might not pass this test
should be treated as a red flag – particularly if it is offered in secret or is hidden in some way. Some
companies have banned the giving and receiving of gifts altogether. However, such a strategy is likely
simply to force the practice ‘underground’.
MADIHA SALEEM
After all, bribes do not necessarily have to involve cash to be considered a criminal act or to breach a
company’s policy. For example, gift-giving to potential clients, business contacts, or government
officials may also be bribery. Sometimes, those wishing to disguise bribery may give an extravagant
gift because they feel it is easier .to hide than a straightforward cash bribe. Such gifts may be of
relatively large value – for example, a luxury car, or an expensive watch.
The defence company’s regional sales agent uses the
EXAMPLE 1: Excessively lavish gifts corporate ‘business development fund’ to buy luxury
offered to government officials cars for Interior Ministry officials in charge of
approving suppliers, and designer jewellery for their
• A subsidiary of a major global defence company wins a wives.
contract to supply the security services of a country in • The agent then tells the defence company that such
the Middle East. gifts are a “normal” part of doing business in the
• The security services are in charge of protecting the region, and they are proportionate to the size and value
Royal family, and all of its suppliers need to be vetted of the contract. The regional director feels the gifts are
and approved by the Ministry of Interior. probably too excessive to be “routine” but decides not
to enquire too deeply as the revenue from the contracts
is too large to lose. Instead, he signs off on the gifts.

EXAMPLE 2: Gifts offered to an individual with

decision-making power and influence over new
business

• A multi-national company, selling power and

automation technologies, is bidding for contracts from
the energy ministry of a Central American country,
through its local subsidiary.
• The competition is tough, and the subsidiary’s
management follows the advice of its local ‘fixer’ to
make ‘suitable’ gifts to the procurement officials from
the Ministry. This will enable them to obtain
confidential information on rival bids.

• The fixer explains that is how business is normally

done in this market, and the rival companies will be
doing the same thing.

• Through the fixer, the local subsidiary’s management

arranged a gift, the latest iPad, to each of the Energy
Ministry’s key officials.

• The company receives information on the bids of its

competitors and submits a bid with “better”
 specifications
MADIHA SALEEM
GUIDANCE – LOOK OUT FOR RED FLAGS AND FACT PATTERNS

• Could the gift(s) be considered excessive in value?

• Is the giving of gifts in line with company policy? e.g. does the gift exceed the company’s
upper value limit for the giving of gifts?

• Who is being given a gift? e.g. is the recipient a foreign public official?

• Can the giving of a gift be seen as seeking to gain influence/favourable treatment, or perceived
by others as a bribe? e.g. competitors, regulators or the media

• Could the nature of the gift or the timing of the gift-giving influence the award of business or a contract?

• Are agents or other intermediaries involved in the gift-giving?

• Is giving a gift the cultural norm in a specific country – and if so is it possible to give
the minimum acceptable gift without breaching company guidelines?

Set reasonable, clear limits

• Ask the country manager to recommend limits on how much a gift may be worth

• Ensure managers approve all gifts

• Report all gifts to foreign officials to the compliance department or equivalent

 

4. IN-KIND BENEFITS AS BRIBES:

You Scratch My Back. I’ll Scratch Yours.

Favours
DESCRIPTION

Bribery takes many forms and one of the most difficult to pin down is the exchange of favours. There
will always be some individuals or organizations that can promote the interests of a public official or a
business person through privileged connections or status. This person is then expected to “return the
favour” – for example, providing potential contractors with confidential bidding information on rival
bids, choosing a particular contractor rather than other more suitable ones, or granting an export
license. The common theme is that favours are often secured with reciprocal favours and money does
not necessarily change hands. Cronyism and nepotism are also examples of these types of bribery,
where favours are given to decision-makers’ friends or relations to extract unfair advantage. Such
favours may come in many forms, including jobs, residence permits, or the provision of education and
healthcare.

• A provincial bank in southern Europe would like to fill

EXAMPLE 1: Individual using in a vacant position on its board. One of the current
connections or position as a bribe board members is very well connected and wields a
great deal of influence over the decisions of the board
appointments.
MADIHA SALEEM
• He proposes for the vacant position a soon-to -be retired • Breaking into this market is tough, as the civil
CEO of a mortgage brokering firm of his acquaintance, engineering institutes have a virtual monopoly, but
who is a reasonably suitable but not exceptional projected profits are a big incentive to try and there are
candidate. opportunities to become major sub-contractors to the
• As a mark of gratitude, the mortgage broker’s CEO civil engineering institutes.
arranges an unusually low-cost mortgage for the bank’s •  The wife of the manufacturing company’s country
board member who is buying an investment property. manager is a local and a former civil engineer. She is
still well-connected to the directors of several state
engineering institutes.
EXAMPLE 2: Favour to a personal • She asks the directors of the two main engineering
contact in exchange for a business
institutes to design and construct projects that would
investment
explicitly favour her husband’s company by
• A UK private equity firm urgently needs to raise a incorporating elements of the specification which only
capital pool through attracting investment. her husband’s company can meet and rigs the
procurement process as a result.
• The business development director believes that a North
African sovereign wealth fund would be the ideal • In return, she promises to use her husband’s
source for this. connections to secure enrolment of the directors’
children in exclusive European schools.
• However, competition is high and the private equity
firm is relatively small. EXAMPLE 4: Jobs for the boys. And girls.

• A bank expanding into a new country has identified

• The business development director realises that the
very high potential profits from corporate services, but
father of one of his childhood friends has just been
market entry is more difficult than expected.
appointed the deputy CEO of the sovereign wealth
fund. • To attract corporate clients, the country business
• The business development director asks his friend to director decides to draw on his extensive social network
convince his father to approve the investment. in the local business sector. He has decision-making
• In return, the business development director offers his power over hiring staff and interns in his own operating
friend’s sister a job in his expanding company, ensuring unit, and can make strong recommendations for hiring
that she will be granted a residence permit in the UK. of his own staff and interns elsewhere in the bank’s
global operations.
EXAMPLE 3: It’s not what you know – it’s
• He asks his contacts (who are at senior-executive and
who you know. Giving favours in a rigged
senior-management level) to persuade their operating
procurement process.
units to switch their corporate accounts to his bank.
• Company manufacturing urban waste management • In return, he promises to hire their children and relatives
equipment is expanding into a former Soviet Union for internships and entry-level positions through the
country. bank’s work experience and graduate recruitment
• The company aims to supply infrastructure projects scheme. For particularly good corporate clients, he
there, which are managed by state-owned entities. assures them that friends or relatives would be hired for
These outfits have to date relied on state-owned civil more senior roles in the business development
engineering institutes to construct and develop their department of his own operating unit.
projects.

GUIDANCE – LOOK OUT FOR RED FLAGS AND FACT

PATTERNS Some red flags:
MADIHA SALEEM

• Is there an improper advantage being offered in return for a service? e.g. privileged access to a
service otherwise difficult to obtain.

• Are family, friends, or the company gaining an exclusive advantage through the exchange of favours?

• Are normal, fair or regulated selection processes being circumvented by the exchange of favours?

• Are certain business decisions, such as employment decisions, being made without apparent
regard to merit?

• Is privileged access being offered to a particular service through a person’s connections or status,
where it is clear this person is exploiting his or her power and authority?
MADIHA SALEEM

5. GREASE IS THE WORD – FACILITATION PAYMENTS

Direct Cash Payments as Bribes
DESCRIPTION

Facilitation payments are small bribes, also called a ‘facilitating’, ‘speed’ or ‘grease’ payment, made to secure
or speed up a routine or necessary process to which the payer is entitled anyway. In this way, a transaction is
“facilitated.” For instance, paying off a customs official to release held goods (which he/she is obligated to do
anyway) would be considered a facilitation payment, as would a bribe paid to obtain a routine government
stamp. They are usually bribes to get things done quickly. These are also covered earlier in the section dealing
with payments in cash.

Variations: queue jumping; speeding things up; releasing a “blocked” transaction

the warehouse manager pays them USD 2,000 each

EXAMPLE 1: Payment to month.
complete a “blocked”
transaction • This helps the manufacturer to gain a reputation for
reliability and become the preferred supplier to the
• A biochemical pesticide company operating a factory in Ministry of Transportation.
a North American town has its stores of corrosive • As it is illegal for public officials to receive additional
chemicals guarded at all times.
payment for performance of their routine duties, the
• The local police provide this service but the officer in
manufacturing company recorded payments in its
charge requests ‘special allowances’ from the operator.
books as consulting expenses and supplies.
• Without payments from the operator, the police refuse
to allow the chemicals to be moved from the storage EXAMPLE 3: Queue jumping – utilities
bunkers to the production line citing safety concerns. connection

• A drinks distribution company has just opened a new

• Concerned with resolving the delays in production
sales and distribution office in the provincial capital of
quickly rather than increasing them even further by
a South Asian country.
reporting this incident, the site manager authorises cash
payments of travel and meal allowances in cash to the
• The General Manager is told by his local staff that it
senior police officer.
will take 12 months to obtain a phone and broadband
connection, which is necessary to communicate both to
EXAMPLE 2: Queue jumping – regular
his field agents and head office.
payment to ensure a company’s operations
• Mobile and satellite alternatives either do not work or
are handled more quickly/efficiently than
are significantly beyond the budget.
competitors’

• A railway parts manufacturer has a contract for sales of • After complaining to the landlord of his office suite, the
brake blocks to the Ministry of Transportation of a General Manager is told that a connection can be made
Central European country. within the next week for a one-off payment of $500.
The General Manager asks whether it is an official
• Before the blocks can be delivered, a government fast-track service, and is told that it is an unofficial
agency must inspect and certify them for standards and service but quite usual.
safety. The inspections are conducted at the company’s
warehouses. • He agrees to pay the $500 and the line is connected.

EXAMPLE 4: Getting what you are entitled to

• In order to make sure that the government inspectors,
who are known for delays and missing appointments, • A middle manager of a North American spare parts
would conduct the inspections regularly and on time, manufacturing company arrives off a flight at an airport
MADIHA SALEEM
in a South American country where the company would
like to set up a manufacturing plant.

• He is entitled to obtain a visa on arrival, which the

country’s embassy has told him will cost US$75.

• However, the immigration official at the airport

demands US$250 insisting it is the usual fee for a visa
obtained on entry.

• The manager pays the fee as he is tired, does not want

to ask annoying questions, and he can re-claim it on
expenses.
MADIHA SALEEM

GUIDANCE – LOOK OUT FOR RED FLAGS AND

FACT PATTERNS Some Red Flags:

• Is a payment being requested or solicited for the purpose of expediting or facilitating a service to
which there is a legal entitlement, e.g. by a public official for a routine governmental action?

• Is the company gaining business preferential treatment through making the payment?

• Does the payment appear to be unofficial or covert in any way?

• Is the payment higher than or over and above the standard fee?

Know the local rules – when requested to make a payment for a routine action such as the issuance
of licenses or permits, check whether such a payment is official.

 
6. CHARITY. WHAT’S NOT TO LIKE?
Bribes Disguised as Charitable Donations

DESCRIPTION

Corporate involvement in charities is widespread; it can benefit communities and good causes, and provides
good PR. However, charitable donations can also be used as vehicles for bribes. For example, the charity may
be connected to an individual (such as a government official) who then uses his or her influence to give special
preference to the donor.

Trustees and board members of charities may be politicians, officials, and other highly placed and influential
people. The donations they ask for may directly or indirectly benefit them personally, such as suggesting a
hospital should be built using a relative’s construction company. Sometimes, a charity may be simply a front
for hiding or receiving bribes.

Variations: donations as political favours; donations that result in budget diversion; donations with
strings attached.
for the donation, the official promises to make sure that
EXAMPLE 1: Donations as political favours when he is elected, the pharmaceutical company’s
contracts with state hospitals will be renewed.
• A Central European subsidiary of an American
pharmaceutical company supplies drugs to state EXAMPLE 2: Donations that result in budget
hospitals. diversion
• In recent months its sales have been threatened by • An oil company is after an exploration license in the
competitors selling generic drugs at lower prices. former Soviet Union.

• The company’s contracts are due to expire soon, and • It agrees with the local authority that a permit will be
management fears they will not be renewed. granted and as part of an ‘offset’ arrangement, money
will be donated to a local charity to build two new
• The company’s local director has his staff organise a schools.
large donation to a series of healthcare charities being • The oil company’s negotiators are pleasantly surprised
set up by an official running for local office. about the ease with which the permit was promised, but
are happy to have it, and knowing the difficult politics
• The official’s community involvement and commitment of the region certainly do not want to make any further
to healthcare is a major part of his campaign. In return enquiries.
MADIHA SALEEM
• The schools are built and get great publicity; there is
full transparency over the oil company’s contribution; • This is well received, but the operations manager says
the company receives the exploration permit. that it will be paid in instalments - the largest of which,
• Unfortunately, the local authority had already budgeted USD 150,000, will be transferred after the audit of her
for the building of the two schools. The funds for these company is completed.
are then siphoned off from the education budget by the
local officials who agreed the permit. • The operations manager makes it clear that the audit is
unwelcome, and that the final instalment of the donation
EXAMPLE 3: Queue jumping – utilities depends on a favourable audit report.
connection
• As the charity is an important part of the audit firm’s
• A company operates a series of casinos under a own CSR programmes and positioning as an auditor of
government-granted gaming license, which is set to educational establishments, the partner agrees to accept
expire soon. the donation in return for a favourable audit report.

• The company is also in the middle of an investigative

audit regarding potential accounting irregularities.

• A senior operations manager at the gaming company

has been notified by the finance department that the
auditors are likely to turn up indications of book
keeping “oversights”.

• The senior manager approaches a partner at the auditing

firm at a business breakfast and “casually” mentions
that his company could be glad to make a USD 250,000
donation to the education charity that the auditing firm
has recently helped to set up.
MADIHA SALEEM

GUIDANCE – LOOK OUT FOR RED FLAGS AND FACT PATTERNS

• Disclose all charitable contributions

• Exercise caution when making charitable donations where public officials

are involved. -- Can a donation be seen as influencing a public official in
some way?

-- Consider avoiding donations to organisations where foreign officials are patrons.

• Ensure that effective controls are implemented, including enforcement of adequate approval
processes and monitoring of use of funds.

• Ensure donations are made according to company policy.

-- If donations are made through intermediaries, ensure company policy is understood and adhered to.
 
7. YOU SAY LOBBY. I SAY BRIBERY.
Bribes Disguised as Political Donations
DESCRIPTION

Although corporate political contributions are permitted and regulated in many countries, as with donations to
charities, donations to a political party or a political campaign can also be used as bribes. The simplest and
most common scenario is when individuals, businesses, or other special interest groups find a way to “donate”
large amounts of money to a political party or an election campaign. In return, the politician(s) are expected to
promote the interests of whoever made the contribution, potentially in violation of their official duties.
• The consortium contacts the Minister’s Special
EXAMPLE 1: Political donation used as a Advisor and offers the donation. The conversation
bribe in a specific procurement clearly implies that the Minister is expected in return
bid/contract to favour the consortium’s bid.
• A consortium of telecommunications companies is in • The Special Advisor accepts the donation and assures
the process of applying for a mobile phone license the consortium that the Minister will support its bid,
from the Ministry of Information of a Western as long as it is not unreasonable in value for money
European country. Winning such licenses is usually or technical specifications.
very competitive.

• The Minister of Information has decisive influence of

which company is granted the license.

• One of the companies in the consortium proposes

that they make a donation to the re-election campaign
of the ruling party, of which the Information Minister
is a member.
MADIHA SALEEM
EXAMPLE 2: Political donation made to
the party of politicians with
decision-making power over an ongoing
contract

• A metal trading company holds a contract to refine

and trade iron ore that a Caribbean country receives
under concessions from another country.

• The two government ministers overseeing the

contract falls both belong to the ruling party of the
country.

• Before the contract is due to expire, the CEO of the

metal trading company meets with the two ministers.

• He offers to make a USD 550,000 donation to

sponsor their party’s annual conference, in exchange
for renewal of the contract.

• The conversation also implies that a blind eye will be

turned to a profit-share arrangement from selling
concessionary iron ore that disproportionately
favours the company over the Treasury.

• The ministers accept the donation.

MADIHA SALEEM

GUIDANCE – LOOK OUT FOR RED FLAGS AND FACT PATTERNS

• Have a clear policy and criteria for political contributions, including a definition of what is meant by a
political contribution.

• Where policy is not to make contributions, ensure there are procedures in place to prevent
contributions being made.

• Where policy is to make political contributions, the company should be able to answer the
following: -- Has the board and compliance function approved your contribution?

-- Can the donation to a political party, politician, or candidate running for office, be seen as an attempt
to gain a business or other advantage?

-- Is the donation in line with company policy?

-- Has the donation been reviewed and approved by senior management?

-- If there are agents or intermediaries that act on the company’s behalf, do they know and observe the
organisations guidelines on political contributions?

-- Are all political contributions publicly disclosed and transparent? This includes donations to
trade associations and payments associated with lobbying, as well as fees paid to consultants.

-- Have donations been made via trade associations or similar bodies, and if so were they in line with
company policy?

 
8. MR FIVE PER CENT
Bribes Masked as Commissions

DESCRIPTION

Paying commissions to an agent or intermediary as reward for bringing in new business is widespread in
commercial transactions, and is usually perfectly legitimate. However, there are situations in which commissions
are used as bribes, and these are usually secret or not properly disclosed. For example, an intermediary can pay a
bribe to win business for its corporate client out of the commission, and recover the money through an inflated
invoice.
• The state-owned company officials then “strongly
EXAMPLE 1: Sum paid for non-existing encourage” the oil services company’s country sales
services to agents/consultants, intended to be manager to hire a consulting company registered in the
passed on to the recipient as a bribe British Virgin Islands as an “agent” and pay annual
commissions of USD 1.3 million into its account for
• An oil services company puts in a bid to the
providing consultancy services.
government of a Central Asian country for a gas and
oil field development project. • Nothing is actually known about the BVI outfit’s
business, and it is likely that the only work it will be
• The project is managed by a state-owned company.
doing, consultancy or otherwise, is channelling the
After the bids are submitted, it officials let the oil
money to the state-owned company’s officials.
services company know that to win the lucrative deal,
it has to ”show generosity.” • Yet, because BVI is out of the reach of regulators and
the business opportunity is just too good to pass up, the
MADIHA SALEEM
agent is hired and arrangements for the “consultancy” EXAMPLE 3: Payment for legitimate services (to
payments are made. agents/consultants) is disproportionate to those
services so as to conceal a bribe
EXAMPLE 2: Sum described as commissions
paid directly to officials to obtain contracts • A large electronics company would like to acquire a
state-controlled firm put up for privatisation in the
• A global financial services firm is setting up its real former Soviet Union. It hires a local consultant to
estate investment business in a South Asian market. assess the financial health and prospects of its potential
purchase.
• The managing director has good long-standing
personal relations with one particular government • Senior officials in the Ministry of Infrastructure, which
official, who is the director of the state-owned real used to control the firm, have a decisive say over who
estate development body. is allowed into the privatisation process. The officials
are known to be eager to supplement their salaries.
• The managing director and government official agree
to seek real estate development opportunities in which • The electronics company’s regional business
the firm can invest with joint venture partners. The development team pays the local consultant unusually
state body will be seen to be attracting foreign high fees for his services, knowing that he will pass on
investment, while the firm will access local knowledge a proportion of the fees to the Ministry of
of deal-making opportunities. Infrastructure officials.
• The managing director and government official agree
that in return for a small share in real estate ventures,
the state entity would help the firm to obtain the
necessary licenses from the local government.

• Under the scheme, the managing director offers the

government official an opportunity to make personal
investments in five real estate deals at a reduced rate.

• Specifically, the firm would sell the official a 5%

interest in each deal, but only charge the cost of 4%;
the remaining 1% would go to the official as a
“finder’s commission”.

• The government official accepts this scheme, even

though he is legally prohibited from making personal
investments with firms because of his position.
MADIHA SALEEM
GUIDANCE – LOOK OUT FOR RED FLAGS AND FACT PATTERNS

• Refuse any request for excessive commission payments to intermediaries or ‘advisors’ who
claim they are able to secure business advantages.

• When entering business dealings that contain commission related fees, ensure these
agreements set a maximum commission, and include a description of services as well as
prohibition against payments to public officials.

• When faced with demands for large commission payments, determine whether meeting such a
demand would constitute behaviour that would violate relevant legislation, regulation, industry
codes or standards.

 
MADIHA SALEEM

SECTION B: HOW BRIBES ARE PAID?

1.Associates–Agents, Intermediaries, Introducers

2.Associates–Sub-contractors and Distributors
3.False or inflated invoicing or product pricing
4.Off-shore arrangements and off-balance sheet
payments
5.Joint ventures
6.Training
7.Per diems and expenses
8.Rebates and discounts or kickbacks
9.Employment contracts and association
agreements
MADIHA SALEEM

1) Bribery through Associates: Middlemen

Agents, Intermediaries and Introducers
DESCRIPTION

The use of intermediaries, sometimes also called introducers or agents, is widespread and legitimate in
global business. They provide local knowledge, legal advice, market research, sales, and logistics, and
are particularly useful in new or unfamiliar markets. However, the channelling of bribes through
intermediaries is a common feature of bribery schemes. To hide bribes, a chain of intermediaries is
often used to disguise the link between the recipient of the bribe and the bribe-paying company. It is
not unusual for intermediaries, or some links in a chain of intermediaries, to be professionals such as
lawyers, accountants or bankers. They can be used to add a veneer of respectability to a corrupt
transaction.

Variations: Five types of common bribery scenario via intermediaries are:

1) Intermediaries acting on their own initiative: intermediaries may decide to pay bribes of
their own accord and without the knowledge of the company that contracted them. The
amount of the bribe would be “included” in the commissions they receive for bringing
in business.

2) Intermediaries providing both legitimate business services and a bribery service: routing bribes may
be one of the services the intermediary is hired to provide. For instance, an existing consultant may
be tasked with bribing a public official to rig the bid specifications of a procurement contract so that
it favours the company.

3) Fake intermediaries: rather than providing a legitimate or commercially-justifiable service

to the company, the intermediary, often hired for “consulting,” can be controlled by
whoever will receive the bribe. The consultant is often paid through fraudulent invoices
and/or for non-existent services. This may also happen in situations where local
government insists that companies have to work with one of a list of ‘approved’ domestic
agents – who may be linked to public officials – and these approved agents are then used
to intermediate the bribery transactions.

4) Appointment of an intermediary specifically to facilitate a bribe payment: the payer of

the bribe (such as a sales manager) and the recipient of the bribe (such as a government
procurement officer) agree that the payment will be made through a designated third
party, who will be appointed as an intermediary in a transaction. The third party may be a
relative, spouse, or associate of the recipient.

5)  Fake invoices. There are several variants of schemes in which fake invoices are used to
generate slush funds that can be used for bribe-paying. For example, a so-called supplier
can be set up which in fact only exists to provide fake invoices generating cash which can
be repaid to employees in order to provide them with a slush fund for paying bribes; or a
MADIHA SALEEM
legitimate third party on the approved supplier list agrees to render a false invoice which is
paid but later refunded. The refund is paid in cash enables the third party to pay the bribe.
MADIHA SALEEM
EXAMPLE 1: Inflated invoices: bribes paid by USD 1 million for “management consulting” in 4
intermediaries masked as payments for instalments. The consultant then transfers the money
unspecified services to the state-owned company’s CFO, who distributes
it to selected senior colleagues.
• An oil services company is working on behalf of
a major state-owned oil corporation. EXAMPLE 3: Family member acting as intermediary

• The services company hires a local consultant to • A former prime minister of a Latin American country,
help with routine business tasks in the country. The who still serves as an influential cabinet minister, is
consultant then bills the services company for approached by a well-known foreign businessman.
‘in-country consultancy services’.
• The businessman is after political backing for his
• The consultant submits inflated invoices to the oil resort development project.
services company, and channels the difference to
the private accounts of the officials working at the • In return, the politician is promised a “generous
state-owned company. This helps to guarantee that contribution” to his sizeable debt and large tax
the services company will be retained as a prime liabilities.
contractor despite international competition for the
contracts. • The proposition is appealing and the two devise a plan,
in which the politician’s daughter will be paid for
• The London HQ of the services company discovers resort develpment consulting services’ she will
the bribery scheme when profit-margins decline in allegedly provide. These are entirely fictitious, and she
the country. An internal investigation reveals that the has no experience in this sector.
state company has been demanding ever-increasing
pay-offs, while the service company’s Head of • Several million US dollars are deposited in her bank
Operations in the country has been signing off account, and which she then transfers to the family’s
ever-increasing fees for the consultant. joint account.

EXAMPLE 4: Professionals as intermediaries

EXAMPLE 2: Intermediary provides no services to the
• An insurance broking firm specialises in finding private
company, but is controlled by the recipient of bribes
insurers for government entities, and has a good network of
• A wholesale telecom services company needs access contacts in both public and private spheres.
to local telecommunication lines for its business in a
• The broker knows of an insurance company that would like to
South-East Asian market. expand its sales quickly, and in time for the next quarter’s
• The lines are notoriously difficult to access due to results.
local bureaucracy and red tape, and the government
is known to be hostile to foreign companies. • A sales manager of the insurance company has already made
• To get around this, the telecom services company contact with an official in the Ministry of Infrastructure who
decides to pay over USD 1 million in kick-backs to a would help direct a number of lucrative contracts to the
handful of senior officials at the state-owned insurance company in return for a cash payment equal to 10%
of the business the company receives
telecoms company that assigns the lines.
• To channel the payments, the wholesale telecom • The sales manager of the insurance company approaches the
company hires a “local consultant” at the suggestion insurance broking company with a proposition to act as a
of the state-owned company. The consultant is conduit for the payment to the official: the company would
actually owned by the brother of the Chief Financial include the 10% bribe in the broker’s fee.
Officer at the state-owned company.
• The consultant provides no actual consulting • The official would see to it that the brokerage would be contracted
by the Ministry, while the broker would transfer the bribe to the
services, but the wholesale telecoms company pays it
 official’s Swiss bank account.
MADIHA SALEEM

EXAMPLE 5: Professionals as intermediaries

• A family-owned multinational luxury goods company
based in a Mediterranean country has been concealing
some of its profits abroad in order to avoid paying taxes.

• When the local tax authority presents the chief

accountant with a hefty fine for years of tax evasion, she
and the Vice President approach the tax officer with a
proposal.

• They ask the tax official to negotiate a 40% reduction in

their fine with a “favourably disposed” senior tax official.
• In return, they let the tax official know that he could help
himself to another 40% of their fine, keeping half for
himself and passing on the other half to the more senior
tax official in return for his “cooperation.”
• The tax authority would still receive a fine, albeit only
20% of the original.
• The proposed bribe is significant, so the tax official is
unable to resist the temptation and agrees to the
proposition.
MADIHA SALEEM

GUIDANCE

Intermediaries are a high-risk area. It is important to minimise and manage the risk.

• Monitoring and sufficient due diligence are key:

-- Due diligence should be carried out on intermediaries before appointment – for example, to check
whether the agent has faced allegations for involvement in corruption, or requests payments to
be made in unusual ways such as via a tax haven.

-- Enhanced or additional due diligence may at times be required.

-- The purpose of due diligence is to identify and avoid dealing with questionable third parties. Look
out for key red flags, such as whether an intermediary is resistant to formal written agreements,
appears able to bypass legal or bureaucratic hurdles more easily than others, or charges fees or
commissions that are well above the market norm.

-- Monitor the conduct of conduct of agents and intermediaries. If an intermediary is suspected of

bribe-paying, it is sensible to suspend the relationship immediately and make appropriate
investigations.

• Communicate to all agents and intermediaries the company’s anti-corruption standards as

well as international regulations and ensure that they are contractually obliged to abide by
these standards.

• Ensure that the market rate for their services is paid, that nothing “extra is included” and that
the agent delivers the services that are paid for.

• Do not use third parties as a conduit for making unethical payments.

• When employing public officials as consultants, extra care needs to be taken that the service is
genuine and all payments are properly recorded and disclosed:

-- It should be clear that there was a legitimate business reason to contract the official (e.g. for
technical expertise).

-- It should be clear why that particular official was selected.

-- The appointment should be permissible under the official’s employment contract as an official,
and transparent to is/her employer.

-- Fees should be based on market rates.

-- Services provided should be recorded in detail.

 
MADIHA SALEEM

2) Bribery through The Supply Chain: Sub-Contractors &

Distributors
DESCRIPTION

In today’s globalised economy, corporations often rely on large supply-chains, made up of sub-contractors based
in a number of countries. However, complex networks of sub-contractors also increase the risk of bribery. Any
link, or sub-contractor, in the chain may be approached for a bribe or decide to pay a bribe. Complex supply
chains represent a high risk of corruption since they are local, often made up of small and medium-sized
sub-contractors that have less power to resist demands for bribes, or simply have more “contact” with centres of
bribery.

Moreover, sub-contractors are of course also interested in maintaining profits, and could bribe the prime
contractor to keep them on the suppliers’ list.

When operating overseas or fulfilling complex orders, corporations often hire local sub-contractors as they
lack local knowledge, expertise, or capacity in house. Selecting a sub-contractor with close links to an official
who is in a position to favour the main company over its competitors is a common way of disguising a bribe. It
enables the official to benefit directly or indirectly, while the company can claim it was simply tapping into
local expertise.
•

EXAMPLE 1: Sub-contracting to a
company connected to a public official as
the award of the submarines contract to the large defence
part of an offset or industrial participation
company.
agreement

• A large defence company is bidding for a contract to EXAMPLE 2: Sub-contract directed to an

sell submarines to the Ministry of Defence of a official’s business interest
European country
• As part of its defence offset regulations, the country • A group of energy and petrochemical companies is
requires that whoever wins the tender generates local setting up operations in a new market via a
sub-contracts amounting to 30% of the value of the consortium.
main submarine contract
• The tender is in the final stages, and the company is • It will need to import a large number of materials and
competing with just one other. equipment, so the consortium management decides to
• Each company is trying to put together the more hire a local logistics and freight forwarding
attractive offsets and local production package. sub-contractor.
• The senior sales manager in the large defence company
finds out that the brother of one of the chief Ministry of • It is well known that the customs service is very
Defence Procurement officials owns an electronics slow and inefficient, while the customs officials
company that manufactures radar systems that could be purposefully delay imports to solicit bribes.
adapted for the submarines.
• The sales manager assures the official that the • The consortium’s management know that the deputy
sub-contract for the manufacture and subsequent director of customs secretly co-owns a logistics
maintenance of the radar systems would be granted to company.
the brother’s company.
• To ensure that its imports are given priority, the
• Even though the submarine produced by the rival
company is an overall better fit for the specifications consortium management lets the deputy director of the
given by the Navy, the official successfully pushes for customs service know that the consortium is keen to
MADIHA SALEEM
sub-contract its logistics and freight forwarding services
to the company that he secretly co-owns.
• He offers the purchasing officials and shop
EXAMPLE 3: Distributors acting as intermediaries managers cash and free premium beverages in
for bribe payment return for authorising increased purchases of
his principal’s products and placing them in the
• A company manufacturing medical equipment has a
most attractive location on the shelves.
local distributor in one of its countries of operation.
• When the company’s sales begin to dwindle, the • The distributor then “recovers” the expense by
regional sales manager instructs the distributor to make
masking it as expenses for “special
‘incentive’ payments to the personal accounts of doctors
promotions”.
with whom it has contacts.
• In return, the doctors agree to steer “their” hospitals to EXAMPLE 6: Going the extra mile for a customer
purchase the company’s products.
• The company also uses the distributor to channel bribes • An engineering consultancy has a customer in
to the country’s Intellectual Property Board which the construction sector, for which is working on
approves patents of the company’s products. a stadium-building project in the Middle East.
• The construction company wishes to free up
EXAMPLE 4: Sub-contractor paying a bribe to some cash that it can use to pay a bribe for
retain business work permits related to the stadium-building
project.
• A multinational manufacturer of fighter jets wins a • Although the work permits are not directly
lucrative contract with an overseas Ministry of Defence. related to the engineering consultancy’s work,
• However, according to the contract specifications, 15% the construction company’s project manager
of the fighter jet components must be produced locally. asks the engineering consultancy to issued him
• To fulfil these terms, the company hires a manufacturer with an invoice for services that have not been
of ejector seats as one of its subcontractors. provided so that he can create a slush fund to
• However, due to continuous delays and cost-over-runs pay bribes.
by the ejector seat company, the fighter jet manufacturer • The engineering consultancy wants to help put
soon considers terminating the contract and switching to an important client, and issues the false invoice;
a competitor. the construction company pays the invoice.
• To avoid losing this lucrative contract, the ejector seat
manufacturer’s head of business development promises • After the invoice is paid the construction
a manager of operations at the jet-maker a company asks the engineering consultancy
“commission” equal to 10% of future orders of the for a credit note. The credit note is raised
ejector seats for the duration of the contract. for the invoice value and the corresponding
cash is returned to the construction
EXAMPLE 5: Distributor paying
company.
bribes to increase remuneration

• A multinational FMCG company selling alcoholic • The construction company uses the cash
beverages in Eastern Europe appoints a local distributor. to pay an official for the work permits it
needs.
• The distributor is responsible to generating sales from
supermarkets, off-licences, and specialised shops
catering to government orders-- all a particularly
lucrative business area.
• The distributor’s fee directly depends on the order
volumes, and when government purchases begin to
decline, the distributor decides to protect his own
compensation.
MADIHA SALEEM

GUIDANCE

• Ensure that all associates, sub-contractors, and distributors are well aware of the company’s
anti-bribery and anti-corruption policies, as well as local and international anti-corruption laws.

• Try to make sure that there are anti-corruption provisions in agreements and that associates,
sub-contractors, and distributors are obliged to abide by the company’s anti-bribery policies.

• As with agents and other intermediaries, due diligence and risk assessment should be carried
out on associates, sub-contractors, and distributors before these are appointed.

• The purpose of due diligence is to identify any risks associated with associates,
sub-contractors, and distributors. Look out for key red flags - particular attention must be paid to
ownership of companies and organisations, for example to ensure that sub-contracts are not unwittingly
granted to public officials or persons who may have a conflict of interest.

3) False or Inflated Invoicing & Product Pricing.

DESCRIPTION

The payment of a bribe is usually hidden or disguised within the organisation’s accounting records, or paid
off balance sheet (e.g. through bank accounts which are not recorded in the organisations’ accounting
records). Fake or inflated invoices provide a common veneer of legitimacy to conceal bribery. An inflated
invoice can be generated by a supplier, which covers both the fees legitimately due, and an additional
amount to be used as a bribe. An invoice can also be entirely false, and represent no legitimate service
whatsoever.

EXAMPLE 1: Customs agent pays • She pays the customs officials USD 5000-7000 each to
bribe and re-charges client using overlook the past violation and expedite the approval
inflated invoice for future imports.

• A manufacturing company is setting up factories in • To conceal the actual purpose of these expenses, the
Latin America and must import all of its manufacturing former customs agent presents invoices for
equipment into its various countries of operation. unspecified services with no supporting
• It hires a former customs agent to handle the paper documentation, which are promptly paid.
work – filling out the paper work, tracking the
shipments, and dealing with customs officials when EXAMPLE 2: Supplier over-charges its
necessary. customer to pay bribes to customer’s corrupt
employees
• The company’s imports into one Latin American
• A company supplying vegetables to a major
country are held up because the local customs officials
supermarket chain in the UK is facing the renewal of
“discover” a previous customs violation punishable by its GBP 45 million supply contract.
a “fee.”
• The manufacturer’s chief logistics officer for the • Unfortunately, the senior accounts manager is fearful
region instructs the former customs agent to pay any that this profitable business will be lost.
necessary fees and expenses to get the equipment
moving.
MADIHA SALEEM
• He invites the head buyer of the supermarket chain, EXAMPLE 3: Company creates fake
known for his love of luxury, to an expensive invoices to disguise slush fund used for
restaurant, and over dinner offers him a monthly bribes
“allowance” of GBP 20,000, to be spent on restaurants,
• A company manufacturing pesticides that supplies the
exclusive hotels, luxury goods and travel.
Ministry of Agriculture needs to register its products
• In return, the head buyer was to make sure that the
with the government’s new Insecticides Board.
supply contract is renewed for an even longer period
• However, as the company does not have the necessary
than is on the table.
environmental impact assessment certification,
• The head buyer agrees.
registration could be problematic.
• The senior accounts manager then takes his plan to his
• To secure registration despite the missing paperwork,
company’s finance director, who agrees to the bribes in
the company asks an old and trusted supplier to submit
principle, but insists that their company does not have
a series of fake invoices totalling USD 50,000,
enough cash at its disposal to make the payments.
explaining they are ‘for tax reasons’.
•
• The USD 50,000 is used to create a slush fund to pay
• The senior accounts manager then takes the second
officials in the Insecticides Board who then grant a
part of his proposal to the supermarket chain buyer. He
licence.
asks him to approve inflated prices for the vegetables,
after lower rates had already been negotiated with the
supermarket chain.
•
• The excess money would then be transferred to a secret
“fund” in an offshore bank account, for which the
buyer would be given a credit card. The senior
accounts manager assures him that the natural variation
in vegetable prices would allow them to conceal the
inflated prices.
• The head buyer feels even more secure agreeing to this
scheme.
MADIHA SALEEM
GUIDANCE

• Ensure that all invoices are properly accounted for with supporting documentation.

• Carry out investigations and audits into any payments that do not have sufficient information or are supported by
suspicious invoices.

• Ensure that managers and employees are aware of forecasts for costs associated with future business,
allowing any ‘unforeseen’ costs to be flagged and evaluated.

• Ensure there is a regular audit to monitor accounting practices that pays specific attention to irregularities or
eccentric spending. Particular attention should also be paid to accounts related to the granting and renewal of
contracts.

 
4) Sunny Places for Shady People.
OFF-SHORE ARRANGEMENTS AND OFF BALANCE-SHEET PAYMENTS.

DESCRIPTION

In addition to, and often in conjunction with, the use of intermediaries, bribes are often transited through a
number of bank accounts or front companies. It is useful for those engaged in bribery if these are located in
foreign countries with lax regulation, poor transparency, or favourable secrecy laws. The goal is to distance
the bribe from both the payer and the recipient, and also to conceal the identities of both. Slush funds can
also be located offshore. Profits from legitimate company business may be directed into offshore slush funds
through fictional or vague invoices and using a chain of agents. Once these are set up, bribes may be paid
from the slush funds at any time – to develop a relationship, obtain a specific contract, as a ‘thank you’, to
maintain favourable relations, etc.
company. Instead, their sole purpose is to funnel
payments to employees of the state-owned
telecommunications provider.
EXAMPLE 1: Bribery through an
• Once a bribe has been agreed between the software
off-shore registered company
company and an employee of the state-owned
• A software company has a contract to supply the telecoms company, the consultant is instructed to
state-owned telecommunications corporation of a submit an invoice for consultancy services.
southern European country.
• The invoices are then paid directly into the bank
• To retain this business and to attract more orders from account of the offshore company; 85% of the amount
the numerous subsidiaries controlled by the is channelled to the employees of the state-owned
telecommunications company, executives in the company, while 15% is kept by the consultant.
software company’s regional sales division devise an
illegal payments scheme. EXAMPLE 2: Bribery through an
off-shore registered company 2
• A consultant is hired to facilitate sales in the region. (bribery between private
He says that the best way forward is to have the individuals not involving public
company make unofficial payments to key officials officials)
when necessary.
• A Western European food and drink company has a
• The consultant sets up and off-shore company to lucrative supply contract with a wholesale
make these unofficial payments. Neither the offshore cooperative that brings in GBP 250 million annually.
company, nor its owner, provide any actual business
development or retention services for the software
 MADIHA SALEEM
• The contract is due to expire, and there are disputes • The broker adds that he has a company registered in
regarding future terms that may make it difficult to the Bahamas, which can issue invoices for “expert
renew. advisory services.” The food and drink company
• The CEO of the food and drink company, who would then make cheques payable to this offshore
started it and built it up himself, however, would like business, they would be deposited in its bank
to make sure that it is extended for the next 30 month accounts, and money transferred to the directors.
period. • The broker says that it is unlikely that the wholesale
• He hires a broker with whom he had worked in the cooperative will go for the deal without these extra
past, to negotiate the deal and iron out any “incentives” and assures the CEO that he would
disagreements. never be connected to the transfer, as he would
• The broker tells the CEO that there is a faster and handle everything himself through his company.
more certain way to make sure that the supply • The CEO does not want to risk the
contract is extended. He proposes paying to some supply contract not being renewed
influential directors of the wholesale cooperative and agrees to the scheme.
owner a “success fee” of GBP400,000 each.
EXAMPLE 4: Bribery using investment in
EXAMPLE 3: Bribery using an off-shore bank off-shore enterprises
account
• An US-based IT company is about to make its first
• An investment bank is contracted to represent and initial public offering, and is facing scrutiny and
advise the government of a Central Asian country in pressure to meet earnings forecasts.
the sale of rights to its oil fields. The director and • The director, and majority owner, has a strong
controlling shareholder of the bank is also given a reputational and financial stake in the success of the
quasi-official advisory role to the president of the IPO. To condition the market and hit various targets,
country in connection with oil and gas transactions. he transfers a significant proportion of last year’s
• The investment bank is due a “success fee” to the profits to a Swiss bank account and “saves” the taxes
amount of USD 67 million over five years, after the he would have paid on the funds in the US.
sales are successfully closed. • However, questions are raised during an internal audit,
• As the adviser on sale of rights, the investment bank is and US authorities request Swiss tax officials to
in charge of collecting fees from the sales. disclose the accounts.
• To ensure that he remains in the privileged advisory • To avoid detection the IT company director enlists the
position that has allowed him to close so many help of his friend, a former investment banker with a
successful deals, the director of the bank transfers multinational bank, who is very well connected.
USD 70 million from the fees paid by a number of • The banker proposes to make the tax official assigned
energy companies for oil and gas rights in the country to the case more “disposed” through making him a
into a bank account in Switzerland, via several large personal payment.
“investments” into companies in the British Virgin Islands.
• The banker offers to route the money directly to the tax
• From the diverted funds, he then transfers payments to official’s account—funds that his friend will have first
four senior government officials in the Ministry of Oil “invested” in a small Swiss bank the banker had just
and Gas Industries, who have the power to authorise joined.
his hire as adviser and to approve his success fees.

GUIDANCE
• The use of off-shore accounts to pay bribes and off balance sheet payments is often linked to
agents and intermediaries. Apply relevant due diligence on intermediaries before appointment.

• Specifically check whether the agents or intermediaries have faced allegations for involvement in
corruption. Monitor the conduct of agents and intermediaries.

-- Be on your guard if they request payments to be made in unusual ways such as via a company in a tax haven.
MADIHA SALEEM
-- If they are suspected of bribe-paying through a number of bank accounts or front companies it is sensible to
suspend the relationship immediately and make appropriate investigations

• Investigate any suspicions of payments being made that are outside the scrutiny of regulators.

• Always question whether funds routed via tax havens are legitimate in origin or objective.
MADIHA SALEEM

5) Joint Ventures. for Better for Worse.

DESCRIPTION

Joint venture structures can be used to channel bribes, with or without the knowledge of all the partner
companies in the enterprise. Sometimes, a joint venture structure may be created specifically to distance a
company from illegal practices such as bribery.

EXAMPLE 1 EXAMPLE 2

• A joint venture is created by four companies to bid for • A European state-owned shipbuilding company
natural gas projects of a Middle Eastern country. enters into a joint venture agreement with a
European defence company.
• Each of the four partner companies has designated a
senior executive to be on the joint venture board. • The joint venture puts in a bid to supply three
submarines to an East Asian government.
• The four senior executives conspire to bribe
government officials in order to win contracts in the • To win the contracts (valued at close to USD 1
project. trillion), the JV pays USD160 million in
“commissions” to a “local business practices
• The bribes are routed through the joint venture’s
consulting” company.
agents, one of whom is a UK citizen and certified
solicitor. • The company is in fact owned by an aide to the
defence minister at the time of the sale, with a
• To pull this off, the joint venture concludes contracts
brief to advise on naval purchases.
with a consultancy company operated by the
intermediary in Gibraltar, and transfers USD145
million to his bank accounts in Switzerland and
Monaco.

GUIDANCE

• Carry out due diligence on relevant companies before entering into a joint venture or consortium.

• Be confident that the prospective partners do not have a history of bribery.

• Ensure that other entities in a joint venture either have anti-corruption/anti-bribery policies in
accordance with your own, or communicate these policies and encourage all partners to adopt
them.

• Monitor the performance of joint venture partners with regard to these policies, and take
appropriate action where there are discrepancies, including termination of contracts if necessary.

• Ensure that contracts with joint venture partners allow them to be terminated on ethical grounds
such as significantly breaching a code of conduct or credible allegations of corruption.

• Ensure that the joint venture company itself has in place appropriate anti-bribery policies and procedures.
MADIHA SALEEM
MADIHA SALEEM

6) They Taught Me Everything I Know!

TRAINING COURSES.

DESCRIPTION

Customer training can be used to provide a cover for bribery. For instance, a company can create a “training
fund” or “training budget” out of which it can pay bribes in the form of travel, entertainment, per diems, and
gifts. Hospitality amounting to a bribe, such as lavish vacations organised for officials, and clients as well as
their friends and families, can also be recorded in the company’s books as “customer training”. Those actually
attending the “training” could be different from the list that was approved by management, to get around
company limits on hospitality. Another scenario is “recording” more participants than actually attended, and then
using the surplus training course funds to create a slush fund.

EXAMPLE 2: Holidays disguised as

EXAMPLE 1: Training fund set up for clients training workshops

• A Western European manufacturing company is keen • A multi-national company is supplying

to secure a new contract in Asia. radiopharmaceutical products to state-owned hospitals
• After months of negotiation, it becomes clear that the in a South American country.
customer wants the contract to include a visit to • It operates a system of “support provision” to doctors
Europe for 10 senior executives and their families. in the hospitals which it supplies.
• As part of this, the company establishes a fund, by
• The manufacturing company writes a ‘training budget’ setting aside 3% of profit from the sales of equipment,
into the contract under which, at its own expenses, it apparently to finance doctors’ attendance at training
will bring ten officials to the UK to be trained in its workshops and educational seminars.
equipment and processes. • In reality, the fund was used to fly the doctors for
• Once the contract is signed, the ten senior executives “training” at top tourist destinations, and to pay for
are invited to the course. Their flights are routed via their administrative fees, travel expenses,
Paris. A London hotel is booked for them to stay in, accommodation, meals and entertainment. They were
where the training course will take place. Since they also provided with “travel allowances” while on
will be away for two weeks, tickets are also provided training, and supplied with “professional necessities”
for their partners. They are each given a per diem such as laptops.
allowance of USD500 to cover ‘out of pocket • In return, the doctors were incentivised to ensure that
expenses’. their hospital kept up its orders with the company, even
• 8 of the executives fly to the UK via Paris, with their when there were more cost effective providers.
partners. The remaining 2 do not come, but have
already been sent their per diem.
• On the first day of the course, one executive turns up
and signs in for the whole group. Nobody attends the
course from then on.
•
MADIHA SALEEM

GUIDANCE

• Increase accountability with regards to funds spent on training and workshops. Create mechanisms
for regular monitoring and auditing on all training courses.

-- Senior management or supervisors can request regular reports on training sessions including feedback
on effectiveness of training and details of completed courses by attendees.

-- Approval procedures for training courses could be multi-level.

-- Verification of a random selection of events would enhance the audit procedure.

• Set a standard or guidelines on how training courses and workshops must be run, and ensure compliance
by creating oversight positions/bodies.

• Limit overseas training to occasions where there is a clear and justifiable business rationale for both
the people involved and the location.

• Avoid paying large per diems; ideally per diems should only be of nominal value and designed to cover
small out of pocket expenses.

• Ensure that hotel bills and other expenses are picked up directly and avoid reimbursing or
providing allowances to individuals.

• Consider insisting on post training reports (which could include photographs of the attendees) to
verify the training took place and place it in the training record.

 
7) Pocket Money. Per Diems and Expenses.

DESCRIPTION

Paying per diems can at times be equivalent to paying a cash bribe. Per diems are effectively a payment to an
individual for attending a meeting, course or event. Likewise, generous reimbursement of expenses can also be a
means of disguising a bribe. What may be considered to be reasonable, and therefore not potentially a bribe, can
be difficult to determine. Therefore, the safest option would be to avoid cash per diems all together, when
clients, officials, or business decision makers are involved.

EXAMPLE 1: Customers’ generous contract specifies that training will be provided for 18
expenses claims reimbursed individuals, covering a 3 week period.
• The training place takes place in Europe shortly after
• A European manufacturer is negotiating a sales contract the contract has been signed. The air tickets are
for the supply of products to the municipal government provided by the manufacturing company.
of a North American country. • The technical element of the training takes 2 days.
• The municipal government officer responsible for • For the rest of the three weeks, the visiting party spent
procurement negotiates a clause in the contract their time as they wish. Some travelled to 3 European
providing Euros 400 per person per day as an allowance capitals, with logistical support from the manufacturing
while attending technical training on the product. The company.
MADIHA SALEEM
• The per diems were paid in cash to the head of the
municipal government delegation on the first day of
their visit.
EXAMPLE 2: Providing improper travel per
diems

• A company specialising in bespoke software for

deepwater oil drilling operations wants to win new
contracts from state oil companies in a country
beginning to increase its oil exploration.
• Through its local representative office, the company
begins paying the employees of the state-owned
companies to act as internal consultants to evaluate the
software and then convince the procurement department
of the oil companies to buy it.
• In addition to the “consultancy” fees the regional head
sales manager of the software company signed off on
travel for the “internal consultants”.
• The trips a were masked as customer training, and while
there, the employees of state-owned companies would
be paid USD400 cash per diems.
MADIHA SALEEM
GUIDANCE

Cash per diems should be avoided, or if they are paid, be of low or nominal value. Any larger per diems that are
deemed necessary should be strictly limited and monitored – for example:

• Implement transparent and efficient policies to decrease opportunities for abuse, including setting low
maximum values for per diems and expenses.

• Increase supervision and audit functions. This can include policies such as not paying full per diem amounts in
advance.

• Increase accountability. Require regular reports from staff about where per diems have been used and why.

•  Always confirm that any per diem being paid is in line with the local laws and policies of the recipient.

8) Rebates and Discounts Or Kickbacks

DESCRIPTION

Rebates and discounts are commonly used as incentive schemes in business, particularly when they are linked to
a customer increasing the quantities it purchases. However, rebates and discounts may also be diverted to the
individuals who are responsible for procurement decisions, thus becoming a kickback to the vendor, and a bribe
in order to secure a contract.

EXAMPLE 1: Customer rebate paid in account or treat it as a “contribution towards personal

cash to client account manager discretionary business spending”, as the agent puts it.
• To receive the rebate, the credit manager would of course have to
• A credit manager in a large company would like to find use this agency, rather than its competitors.
a debt collection agency which his company could use
on a regular basis to recover money from defaulting EXAMPLE 2: Rebates used as kickbacks
customers.
• A German copper trading company would like to
• The credit manager has an introductory meeting with a
increase its copper sales in one of its countries of
sales agent from a debt collections agency.
operation.
• During the meeting, the sales agent proposes a fee
• Together with the executives of its local subsidiary, the
scheme, in which the credit manager’s company would
company’s regional sales director sets up a kickback
pay the collection agency a “success fee” of 15% of the
scheme to channel payments to purchasing managers of
debt value when the debt is recovered.
the state-owned copper wire and electronics
• In addition, the agent promises that a 3% rebate of the
manufacturer.
total amount of debt collected by the debt collection
• The copper trading company would charge inflated
agency during the month would be transferred back to
amounts for the copper supplies, and the purchasing
the credit manager’s company as a rebate.
managers would then be “refunded” through rebates equivalent to
• The agent also adds that the usual means of paying this 5-10% of the purchasing price, which would be transferred into their
would be in cash, directly to the credit manager. He personal accounts.
would then be at liberty to deposit it in the firm’s

GUIDANCE

• Make sure it is clear that these schemes are labelled as bribes/kickbacks in company compliance and training.

• Incorporate the concept of bribing through rebates, discounts, and refunds into anti-bribery
and anti– corruption policies.
MADIHA SALEEM

• Be on the alert when potential business partners offer or request exclusive benefits in return for
business decisions.

• Know how to deal with it if you are offered or requested suspicious rebates or discounts.
MADIHA SALEEM

9) Employment Contracts and Consulting Agreements

DESCRIPTION

While it may make business sense to hire candidates whose background is known, offering jobs or internships to
relatives or associates of clients or officials can also become a form of bribery. For example, hiring the children
or relatives of a client or an official, whether for an internship, a job, or work experience, could unduly influence
contract awards or other business decisions. Therefore, although there is no legal prohibition on this, it is a risky
area. There is also the possibility that a new ‘employee’ may never actually work for the company and only be a
‘ghost’ employee purely created in the accounting records as a means to extract cash. The paperwork for the
individual can be fabricated to give the impression that the appointment was via a proper process.

EXAMPLE 1: Fictitious employment contracts • While looking into the local agri-company, the director
used as vehicle for bribery of local operations finds out that it is owned by relatives
of the government official.
• A high end leather goods manufacturer just breaking • This is clearly a breach of corporate policies and due
into the market is desperate to conclude a supply diligence regulations, so the operations manager phones
contract with a luxury Western European retail chain. the government representative with his concerns.
• However, the barriers to entry in the upmarket retail • However, the official not only dismisses these worries,
industry are high and competition is fierce. he openly admits that the agri-company will steer a
• The business development manager of the leather goods percentage of the profits from the deal in his immediate
company feels the chances of winning the supply deal family’s direction. The official explains patiently that
are slim. this is how business is done in his country, and his
• Over lunch with the retailer’s supply manager, who is official salary is insufficient to support his large family.
known to struggle to finance his lavish lifestyle from his • The operations manager is of course aware that his
earnings, the business development executive offers to actions amount to bribery, but he feels the projected
retain him as a “consultant” after the contract is profits are just too large to lose, and if he walks away
concluded. from the deal his own job will be in jeopardy.
• The supply manager’s contract would say that he is • The operations manager therefore agrees to this
responsible for evaluating and inspecting the product, arrangement as a condition of doing business in the
which is entirely credible. country.
• The supply manager is promised cash payments, an
expense account and reimbursement of his ‘out of
pocket expenses’ to an agreed annual limit.

EXAMPLE 2: Specific partner mandated by

local government and used as a conduit for
payments
• A North American FMCG company is looking to
expand into a new market in the Gulf.
•
• Before commencement of trading, a local government
official with some clout insists on a specific local
agri-company becoming the company’s sole and
exclusive supplier of certain products in the local
market.
•
MADIHA SALEEM

GUIDANCE

• Ensure that any employment contracts or consulting agreements are open and transparent – for
example, not hidden or disguised internally.

• It must be clear that any employee has the skills/knowledge required for the position.

• Ensure there are policies in place to monitor and evaluate performance of employees and associates,
and these are applied across the board.

• Associates or relatives of clients or officials should be paid what other employees in a similar
position are paid, and separated from the business that deals with their high-placed relative or
associate.

•  Ensure that employees know that they will not be punished in any way for refusing to pay a bribe or
favour colleagues’ connections with business.

 
MADIHA SALEEM