Conducting an Ethics Audit

Promoting an Ethical Organizational Culture and the Implications for Stakeholders

In the past, corporate social responsibility was widely considered as a way to enhance an organization’s reputation or brand, but some corporate leaders may be unaware that a growing number of companies of all sizes and types have identified ways to leverage these initiatives to improve their profitability as well. Likewise, although most corporate leaders are accustomed to financial audits that are used to ensure that their accounting practices are up to date and conform to all legal requirements, there are likely far fewer who are aware of the need for or importance of conducting ongoing ethics audits. To help overcome these gaps, this paper provides an explanation of the purpose of corporate social responsibility, a discussion concerning the importance of ethical leadership and a proposed ethical framework that could be used when confronted with an ethical dilemma. Finally, the paper presents a proposal for implementing an ethics training program at Paradigm Toys.

A. Explain the purpose of corporate social responsibility

Until fairly recently, corporate social responsibility (CSR) was typically regarded as a means to promote and protect an organization’s reputation and public image (Harrington, 2011). In recent years, though, CSR has increasingly been viewed as a viable strategy to help organizations of all types and sizes achieve their goals through socially and environmentally conscientious business practices (Harrington, 2011). In fact, growing numbers of companies have recognized that thoughtfully implemented and administered CSR initiatives can actually contribute to profitability (Amarasekere, 2011).

Although every organization’s strategies will differ, CSR is comprised of four basic operational elements: (a) how the company is contributing to the development of its local economies; (b) how the company is restricting its operations to the given regulatory boundaries; (c) how ethically acceptable the company's operations are to society; and (d) how the company is making philanthropic contributions to society (Amarasekere, 2011, p. 43).

1. Identify two primary and two secondary stakeholders that influence Paradigm Toys. Two primary stakeholders for Paradigm Toys include the company’s employees and supply chain partners and two secondary stakeholders include its customers and the residents of the communities in which the company operates.

2. Analyze two ways that the board of directors at Paradigm Toys should meet their corporate social responsibility to the primary and secondary stakeholders identified in part A1. The leadership at Paradigm can meet their corporate social responsibilities to employees and supply chain partners by treating them fairly and honestly and by ensuring that its business practices are environmentally responsible for the secondary stakeholders.

B. Reflect on the importance of ethical leadership by doing the following:

1. Explain why it is important for an organization to develop an ethical culture.

An ethical culture is important for any type of organization because it helps to promote honesty, transparency and integrity in employee behaviors (Ketchner, 2016). Therefore, it is vitally important for organizational leaders to personally model ethical behaviors and inculcate a sense of responsibility and accountability among employees so they will be more likely to follow suit. Moreover, highly qualified employees are attracted to companies that place a high priority on ethical business practices (Bannon & Ford, 2010; Post, 2017).

a. Discuss the role that Paradigm’s leadership can play in fostering an ethical culture. While every organizational setting is unique, there is a general consensus among organizational behaviorists that an ethical culture begins at the top. For example, Bannon and Ford (2010) emphasize that, “Management must preempt employee misconduct to the fullest extent possible by conveying an open message about the need for strong ethical values throughout the organization” (p. 57). While it is essential for an organization’s top leadership team to model ethical behaviors, there are other steps that they can take as well to foster an ethical culture. For instance, Bannon and Ford (2010) report that, “A robust ethical culture can be achieved by implementing training and other programs that tie a company to its community” (p. 57).

2. Explain what an ethics audit is. An ethics audit is essentially a process whereby an organization examines its business practices in-depth in order to identify unethical behaviors and opportunities for improvement (Agheorghiesei & Tatiana, 2013). Some indication of what is involved in conducting an ethics audit can be discerned from the six steps outlined by Krell (2010) as set forth in Table 1 below.

Table 1

Six steps to conducting an ethics audit

Step

Description

Begin with a detailed foundation

An ethics audit is a comparison between actual employee behavior and the guidance for employee behavior provided in policies and procedures. The more descriptive and specific ethics-related policies and procedures are, the easier it is to make these comparisons.

Develop metrics

Ethics audits may not be as black-and-white as financial or operational audits, but they run more smoothly when appropriate ethics measures are in place. Consider adding ethics goals to annual performance reviews and, where possible, tying compensation to ethical behaviors.

Create a cross-functional team

Include a human resource professional familiar with people in the business unit being audited. Most ethics audit teams include an ethics and compliance manager where possible as well as an internal auditor and legal managers.

Audit efficiently

Audits frequently disrupt normal operations in business areas subjected to review. Before scheduling an audit, find out if internal auditors or the finance team may be conducting reviews of the same area. If so, combine these efforts to limit disruptions. Once the audit has been scheduled, create a plan that spells out employees to be interviewed, information that requires review and any processes that require observation.

Look for other issues

Keep an eye out for other improvement opportunities, and share those with relevant colleagues. For example, ethics issues in a sales area may have revenue-recognition implications from a financial reporting perspective.

Respond consistently and communicate

Discipline ethics violations in complete accord with policies and procedures and the code of conduct every time. Also, use ethics issues, when possible, as grist for "lessons learned" in ethics-related communications and training.

Source: Adapted from Krell, 2010, para. 5

a. Discuss the value that an ethics audit could bring to Paradigm Toys. Although ethics audits are generally used as a preparatory method for developing and improving ethics programs, they can also form an ongoing and integral and ongoing part of these programs (Agheorghiesei & Tatiana, 2013).

C. Develop the ethical framework that you would use if you were faced with an ethical dilemma by doing the following:

1. Identify and analyze an ethical dilemma in a business setting. A potential ethical dilemma for a toy company such as Paradigm would involve being presented with a request from a gay activist organization to create and sell same-sex partner dolls in a youth marketplace where traditional values still hold sway.

2. Evaluate two potential solutions to the dilemma.

a. This company could dismiss this request with a high-profile refusal (complete with press releases) based on its longstanding commitment to cherished American ideals of traditional marriage between a man and a woman only.

b. The company could accede to this request and develop a tasteful same-sex doll partner series that included both male-male and female-female versions and release them with the same fanfare as described in 2a above.

3. Explain which solution from part C2 you would recommend and why that solution would be the more ethical choice.

Ethical decisions are frequently shaped by prevailing social attitudes and the most ethical choice in a given dilemma may vary over time. Given the increasingly widespread acceptance and visibility of same-sex marriages in more than half of the states and with current trends indicating that more if not all will follow, the solution outlined in C2b above would represent the most ethical decision for this toy company.

D. Create a proposal for implementing an ethics training program at Paradigm Toys by doing the following:

1. Identify three key components that you would include in your training program. The three key components that should be included in Paradigm’s ethics training program are: (a) overview of Paradigm’s codes of ethics and employee conduct and the importance of compliance; (b) description and examples of unacceptable workplace practices and behaviors; and (c) enforcement of the codes including reporting mechanisms for unethical behaviors and/or practices.

a. Explain why you would include the three components from part D1 in your training program.

The first component (i.e., overview of Paradigm’s codes of ethics and employee conduct and the importance of compliance) is needed to ensure that all employees fully understand the company’s expectations and how these codes apply to them. The second component (i.e., description and examples of unacceptable workplace practices and behaviors) will provide Paradigm employees with relevant examples of the types of ethical dilemmas they may encounter and what types of responses are inappropriate and which are acceptable. The final component (i.e. enforcement of the codes including reporting mechanisms for unethical behaviors and/or practices) will ensure that employees understand the implications of violating the codes and what is expected of them if they observe others engaging in these types of unacceptable practices or behaviors.