Archive for Business Ethics

Rationalization and Escalation…a possible explanation for the VW fiasco

Volkswagen recently admitted that  millions of clean diesel cars sold worldwide contain software to fool regulators. In contrast to the GM safety scandal, however, where unclear standards and communications issues contributed to the production of unsafe vehicles, it will be pretty hard for VW to find a rationale for its use of technology that blatantly violated regulations. This is particularly difficult given VW’s high profile efforts to assert its “greenness” – and many laudable efforts to support these assertions.  When this type of event happens, the question always comes up:  How do people that, in all likelihood, are reasonable, ethical people, end up making such unethical decisions.

One possible answer can be that they are able to develop rationalizations for why these decisions are not unethical.  In a paper published in Journal of Business Ethics, we argue that these clearly faulty rationalizations don’t occur over night.  We propose that corruption in organizations often spreads through a process of overcompensation, where rationalization and action interact in a dynamic way. To give people a margin of error in defending unethical behavior, rationalizations are developed that that ‘over-shoot’ the actual corrupt deed.  This overshoot then provides an impetus for more serious forms of illegality. In other words, the over rationalizations push out the boundaries of what might be considered ethical, so when the next decision is made, the reference point for ethical decision making has moved.  This occurs in a cycle, eventually leading to decisions that to the common person would seem blatantly unethical.

To avoid this escalation, you need an organization that questions these types of rationalizations early on.  This requires a strong culture, and organizational mechanisms to double check ethically questionable decisions.

See the entire paper at: http://scholarworks.rit.edu/cgi/viewcontent.cgi?article=1600&context=article

 

Congratulations to Tamara Osipov

Congratulations to Saunders College of Business student Tamara Osipov for being this year’s recipient of the Rochester Area Business Ethics Foundation Scholarship. As part of her application, she wrote a thoughtful essay on ethics. More information on the scholarship can be found at the RABEF website.  You can also see past Saunders  winners there as well.

Holiday Ticket Gift

Question to Ask the Prof: I asked around for sports tickets right before the holidays, willing to pay for them to give as a gift. None came through and as a result, I bought tickets to an away game for the person as they were the only reasonably priced alternative. Now a supplier has sent me free tickets, to a home game, as he was away when I asked and just got the email. Should I return the tickets or use them myself?

A (Professor Barbato): You should explain to the supplier that your friend no longer needs the tickets and give him the option of reclaiming them, selling them to you, or giving them to you.

It’s a Gas

Question to Ask the Prof: My car was damaged and the insurance company agreed to pay for the rental of a car while mine was being fixed. When I arrived there were no rental cars available, even though I had a confirmed reservation. I waited 30 minutes for my car, but it was a gas guzzling pickup truck instead of the sedan that I was promised. I told the agent I was not satisfied with the service or the truck, and she told me that I could return the truck with an empty tank of gas. That seemed fair and I felt more satisfied, but now I realize that I will be doing very little driving during this time, and I will probably return the truck with an almost full tank of gas. I could use the truck for a trip that my wife and I will be taking, but I’d rather use her fuel efficient car. Would it be unethical for me to siphon the gas into my wife’s car?

 

A (Professor Palanski): One relevant question is: what are you actually buying when you buy a tank of gas? Gas really does not have much value in and of itself – instead its value is comprised of the ability to operate a vehicle for a certain amount of time and distance.  A good-faith understanding of the rental car representative’s offer was to prevent you from suffering any undue financial hardship because you had to drive a gas guzzler instead of a more fuel-efficient car.  In effect, s/he was not giving you a tank of gas, but instead saving you from having to pay more than you normally would for your gas.

Changing the Rules Mid Bid

Question to Ask the Prof: I work for a medium sized company that tells it’s employees that ethics and fair treatment of others are core values. Recently the company has been encouraging project managers to change the typical way projects are bid out. Under the new scenario a project is put out for bid. Once the bids are received and bidding is closed, the project leader is encouraged to go back to some of the bidders (including the lowest bidder) and try to get new lower bids by using phrases like, “Your bid was very close to bidder x, do you think you can do any better?” This just feels wrong to me. I thought bids were meant to be final offers by bidders and that each bidder should not have an indication of competitive bids. Am I way off base here? Thanks in advance.

A (Professor Barbato): Fairness is an ethical principle, so a company should treat bidders fairly.  If the bidders have a reasonable expectation that the company will contract with the low bidder, then it is not fair to squeeze the bidder further after the bidder reveals how low he is willing to go.  This is not dealing in good faith.

Unethical Tutor?

Question to Ask the Prof: Hello, I have a complex question so please bear with me. I am in a mentor-student relationship with an established individual in my industry. We have private tutoring sessions, for which I pay him (this is not uncommon in my field.) I have made vast improvements in my work in this field, in which my tutor’s support has been invaluable. Recently my tutor asked if I wanted to help out on a project with an ex-student of his, a person who I assumed was in a similar position to mine. I said yes, and began to help this person. After I’d done about half the work, my tutor suggested we meet together to discuss the results and it was then I found out my tutor and his student have a professional relationship and that this project would benefit them both financially. I felt betrayed but couldn’t object due to the high position of my tutor (it could potentially affect my young career). The tutor encouraged me to get help with my own project from his ex-student so the arrangement would be “mutually beneficial” but my project is in the beginning stages and has no professional prospects so it isn’t beneficial in the same way. Did my tutor cross an ethical line despite offering a “work exchange” between his ex-student and myself?

 

Answer (Professor Barbato): This is pretty vague, and without more specifics and details it’s hard to know if the tutor crossed a line, stepped on a line or toed a line.  Since you learned about the arrangement in a meeting with all concerned, it doesn’t look like anyone is trying to hide anything.  That’s a good sign.  I’m more troubled that you feel you can’t object, because you feel the tutor might retaliate.  That’s not a good sign.

Ethical Tax Advice

Question to Ask the Prof:

Under any professional codes of conduct, does a CPA have an obligation (ethical , moral or otherwise) to advise a long-term client ( then 97 years old), that the taxpayer is NOT required to file a Federal (nor State) Tax return? Or alternatively, would it be more ethical and proper for the CPA to recommend to this taxpayer to utilize a FREE tax prep service provided by the IRS VITA program for exactly this scenario. background: for at least the prior 22 years, the (recently deceased) taxpayer had (only) tax returns prepared by the CPA in question. Recently, (over at least the prior 7 tax years) the taxpayers annual income was always less than the federal poverty level (excluding S.S. benefits; none being taxable). So, those recent tax returns all report $0.00 taxable income (Federal & State). According to the the State and IRS 1040 instructions (Chart A), this aged taxpayer clearly was NOT required to file income tax returns. But, the CPA continued to file these unnecessary returns and collect preparation fees.

 

A (Professor Dresnack): This violates the American Institute of CPAs’ Code of Professional Conduct. The standard involving client advocacy states:

“…there is a possibility that some requested professional services involving client advocacy may appear to stretch the bounds of performance standards, may go beyond sound and reasonable professional practice, or may compromise credibility, and thereby pose an unacceptable risk of impairing the reputation of the member and his or her firm with respect to independence, integrity, and objectivity. In such circumstances, the member and the member’s firm should consider whether it is appropriate to perform the service.

The AICPA is a voluntary organization, so its rules primarily apply to members, but some of its rules have been adopted into law by various states.

In NY, licensed CPAs are prohibited from engaging in “unprofessional conduct,” which includes “exercising undue influence on the patient or client, including the promotion of the sale of services, goods, appliances or drugs in such manner as to exploit the patient or client for the financial gain of the practitioner or of a third party.”  (Rules of the Board of Regents).

It’s clear from this that at a minimum this violates ethics (AICPA) and probably violates law (Board of Regents).  To me it is obviously immoral.

 

A (Professor Zhang): The Code of Ethics of the National Association of Tax Consultants states that the tax consultants should “maintain the highest standards of honesty, integrity and confidentiality in all relationships with clients, keeping as the utmost concerns the client’s best interest.” In a word, the behavior stated in the first issue was not in the client’s best interest and thus should be unethical.

How do I explain the carpenter is getting screwed?

Question to Ask the Prof: I need to explain to a company why what they are doing is unethical. My company was hired by an interior designing company to install cabinets in their client’s kitchen. Our carpenter was asked to remove their clients’ appliances, which never was discussed prior? During the removal carpenter realized these high end appliances were built-ins. This means special brackets and trim kits (case / metal box to house appliances with front flat trim showing) were installed into existing cabinetry before the actual units were installed. Unknowing my carpenter tried to remove the entire unit (i.e. microwave) as 1 piece. When the microwave came lose 2 bottom brackets broke, the momentum of those brackets breaking our carpenter fell back with microwave/convection oven fell to the floor. To replace the microwave is $969. Designer decides since the microwave is broken & we’re going to replace it. They can just get all upgraded appliances. We told them we are not going to pay the $831.00 difference for an $1800 for upgrade. The microwave is from 1998 & parts to repair it are no longer available. I spoke to corporate ofc of GE & they said the comparable which the exact model form 1998, just a few new features $969 if it were available. That one was discontinued in 2000. After researching I found the exact unit in California. My issue is that the interior design company is deducting my carpenter’s paycheck for a totally unrelated job. We submitted a claim to our insurance company & they will mail them a check for the $969 that is the cost of this unit if I wanted to buy it today & if it were available. The insurance will not pay $1800 for a microwave that is not comparable to microwave client purchased in 1998. Help me explain how unethical it is to take money from our carpenter’s check. Especially when this check had nothing to do with this accident & our insurance is sending them a check to pay for the unit he broke. How can I explain to the designer our carpenter should have been in the meeting when designer & client decided they will take the money from his paycheck? Please help. This company is also deducting his check for a scratch that one of their client claims our carpenter made. Our carpenter did not do this & there were several people in the room after the custom top addition to existing credenza was installed. The scratch was not there when everyone left. But the next day the client said our carpenter scratched the top of credenza. So in good faith, our carpenter & designer offered to have it repaired; the client refused repair. This to me is a Big Red flag, my theory is the client wanted to check out the custom top addition top & when he moved it he scratched the top of the credenza. So here we go again the designer met with their client & they decided that a 10% refund is fair which is $1850.72 & will designer will deduct 5% from carpenters check, since they really can’t prove he did it & to be fair we will take $925.36 from him. Again this was never discussed with the carpenter or his office. The scratch 10% of the refund for what clients’ custom made top has nothing to do with check that the designer is deductions from. Anyway our insurance is mailing them a check. Our Carpenter needs his paycheck these designers think that his hard earned $ is up for grabs, just because they met with client & decided, that makes it okay. It’s not okay & it not just unethical it is illegal. I am calling attorney in the morning. Also to explain how unethical it is not to include our carpenter in the meeting where a decision was being made regarding his paycheck. Nor was anything ever in writing or sign by all 3 parties to state an agreement had been reached & all parties agree. This to me is blatant robbery at the finest of white color junctions. So unethical and demeaning to a carpenter that does incredible & pristine work. He is as honest as they come. I am at a loss for words. Please help me explain this unethical behavior to this interior deigning firm. Thanks.

A (Professor Barbato): You are asking how best to construct an argument that explains the unfair treatment the carpenter is receiving.  The best way to do this is to simply explain that replacing the damaged microwave with a model of comparable value is fair.  It is not fair to expect a replacement that is of higher cost and higher value.  If they refuse to accept that argument, then the best thing to do is use the justice system to ensure that the carpenter is treated fairly.  It sounds like he is already doing that.

Ethics as a student vs a professional

Question to “Ask the Prof”: Is it different being ethical as a student as compared to being a “professional”?

A (Professor Barbato): A professional is expected to self-regulate his or her behavior, because outsiders don’t have the knowledge or expertise to regulate these behaviors.  A doctor is an obvious example, because he or she is the only one with enough knowledge about a patient to determine the proper treatment.  A professor who is grading a student is in a similar situation.  If professionals don’t impose high ethical standards on themselves, then the profession cannot operate effectively, and the cost of regulation from the outside will be very burdensome.  For this reason, it is especially grievous when a professional violates ethical norms.  We use the term, “moral intensity” to understand that there are degrees of moral transgressions, so when a professional uses his or her professional privileges to commit moral transgressions it is worse.  For instance, when a doctor uses his or her privileges to dispense drugs illegally, like the case of Michael Jackson’s doctor, that is worse than if a common criminal dispenses drugs illegally, even though the outcomes are the same.

A student does not fall into this category.  He or she is expected to behave ethically, but a transgression by a student is no different than the same transgression by anyone else.

 

Is bribing always unethical?

Question to Ask the Prof: If it is the norm to bribe public officials when doing business in  a foreign country and it is hard to get anything done if you don’t, is it unethical to offer bribes?

A (Professor Barbato): Corruption and bribery distort the marketplace so that the most deserving actors don’t gain what they deserve.  This is unfair and unethical, and it results in suboptimal outcomes in the aggregate.  However, we must remember that business ethics is a practical endeavor, and cannot solely rest on lofty principles that deny the realities of the world in which we behave.  For instance, there are societies where bribery is part of the game, so to speak.  In other words, if you don’t bribe, then you can’t participate, and everyone knows that and everyone accepts that.  This would be like bluffing in poker.  It may not seem very honest, but everyone understands that it is part of the game.  However, business should not simply accept the status quo, it must also be an ethical leader in trying to change the status quo.  So honest businesses should participate in such an economy, but they should also take the lead in trying to change these economies into more honest and fair economies.  They should not use the excuse that “everyone does it” to free themselves of all their ethical obligations.  So, like so many cases of business ethics, the answer is to be practical and principled at the same time.

 

One more word about bribery.  Some societies use gifts to reinforce cooperation and loyalty; two values that lead to higher ethical behaviors.  Without a certain level of cooperation and loyalty, it is hard for businesses in some societies to arrive at optimal levels of productivity.  Although these gifts may seem like bribes that have the goal of corrupting, they can actually be seen as gifts with the goal of enhancing trust and cooperation.  Once again, business must be both ethical and practical in situation like these.