Ethics and HR Management

In this final lesson, we conclude working with the IMA's Statement on

Management Accounting (SMA), "Values and Ethics: From Inception to
Practice," which provides guidance to design and implement an organization-
wide system of ethical conduct. We studied the first five steps of that process
in the previous lesson. Now we'll conclude on the last three steps in the
process, the result of which should be a strong ethical culture in the
organization. In particular, we'll discuss the details of what it means to have
a whistleblower framework in the organization.

Upon completion of this lesson, candidates should be able to:

• Define corporate culture and demonstrate an understanding of the role

corporate culture plays in ethical decision making.
• Explain the importance of an organization’s core values and how they
promote ethical behavior and ethical decision making.
• Explain the importance of human capital to an organization in creating a
climate where “doing the right thing” is expected (e.g., hiring the right
people, providing them with training, and practicing consistent values-
based leadership).
• Discuss the importance of employee training to maintaining an ethical
organizational culture.
• Explain the importance of a whistleblowing framework to maintain an
ethical organizational culture.

I. Human Capital
A. Most organizations make significant investments in capital assets,
such as land, buildings, machinery, patents, and trademarks.
These investments are carefully considered before being made,
and subsequently carefully managed and evaluated to be sure
that the investment pays off in terms of cash or income flows.
Most organizations, though, spend considerably more resources
on human capital, which includes the health, knowledge,
motivation, skills, and ethics of its employees. Given the size and
the potential of human capital versus traditional capital assets,
most organizations are committed to making smart investments
in, and effectively managing, their human capital for long-term
 value and sustainability. This work is both crucial and strategic to
the organization.
B. Remember that everyone can improve their professional ethics,
particularly with respect to being more conscious and aware
of specific ethical issues and how they relate to different business
decisions and activities. Hence, organizations can
establish specific expectations and make specific investments to
strengthen the ethical practice of their employees, which is a
crucial aspect of the human capital in the organization.
C. If you are familiar with the traditional Balanced Scorecard
framework, you'll remember that at the foundation of this strategic
management model is the “Learning & Growth Performance”
perspective (see below). Learning and growth is not entirely about
employees. This perspective includes the development of
systems and structure in the organization as well. If establishing
better professional ethics in the organization is a strategic
imperative, then building a clear and effective system of ethical
conduct by employees falls squarely in this perspective.

II. Operational Development

A. In the previous lesson, we studied the first five steps of an eight-
step framework for building a system of ethical conduct as
described in the IMA's Statement on Management Accounting
(SMA), Values and Ethics: From Inception to Practice. The last
 three steps of this framework are depicted below. Each of these
steps involves significant and detailed work.

B. Step 6—Operational Development of Ethical Practice—is perhaps

the most detailed and intensive work in the process of
establishing strong professional ethics across the entire
organization. There are essentially three aspects to this work. The
first aspect involves investments in the three core HR processes
to institute a focus on professional ethics. The three core HR
processes are:
1. Carefully hiring employees who are personally committed to
professional ethics
2. Deploying solid training in professional ethics
3. Establishing effective incentives to practice professional
ethics
C. The second aspect of Step 6 is a careful review and, as
necessary, a reengineering of the core operational processes in
the organization to ensure that these processes are anchored on
ethical practices. For most organizations, there are three core
operational processes as follows:
1. Research and development (R&D) processes
2. Production processes
3. Post-sale service processes
 D. Once the organization's internal processes (i.e., HR process and
operational process) are grounded in professional ethics, the third
and final aspect of implementing Step 6 is to turn attention to
partnering with external suppliers to ensure that the supply-chain
process has a clear ethical orientation. This work may include
reviewing and restructuring some supply-chain relationships.
III. Monitoring and Measuring
A. Step 7—Monitor Ethical Behavior and Measure Results—is
primarily about establishing an internal control system around
ethical behavior in the organization. The IMA SMA on Values and
Ethics recommends three well-known business processes as
highly effective methods for strengthening internal controls on
ethical processes. Remember, “You can't manage what you don't
measure.”
B. Business process reengineering (BPR) involves periodically
returning back to the original design phase of the company's
ethics system to completely evaluate every aspect to determine
how the system can be better built, and then rebuilding and
redeploying the system.
C. Total Quality Management (TQM) is fundamentally a teams-based
approach to create a high-quality ethics system with zero
tolerance for error. TQM is about moving the responsibility for
high-quality ethics from a few individuals to ownership by the
whole organization.
D. Continual process improvement (CPI) is a mindset of constantly
evolving the organization's system for ethical conduct not only in
response to the ever-expanding demands of business and
competition, but also anticipating those demands by continuously
investing in improved ethical practices.
IV. Feedback and Improving
A. Step 8—Gather Feedback and Make Improvements—is used to
establish a feedback loop environment in the organization, both
for individual employees and for the organization as a whole.
B. There are various methods organizations can employ to provide
feedback for employees in support of continuous improvement in
professional ethics. These methods include annual reviews that
include feedback on ethical performance. Rather than be
scheduled “as needed,” refresher training events on professional
ethics should take place regularly. And awards, recognitions, and
other celebration events can be used to reinforce and exemplify
excellent ethical performance.
 C. The organization itself needs to evolve its own feedback and
learning system. One obvious approach is to invest in survey
systems of employees, clients, suppliers, and other stakeholders.
If designed well, these surveys can capture candid and helpful
feedback to help map the organization's progress toward an
ethical culture that contributes significantly to both a successful
enterprise risk management program and a sustainable company
strategy. An ethical culture is the culminating objective of a
management campaign to build and deploy a system of
organization-wide ethical conduct, as illustrated once again in the
framework below.

V. A Whistleblower Framework
A. We'll conclude this lesson by describing a particularly powerful
method for feedback and improvement in support of the
organization's commitment to ethics. This method is a
whistleblower framework. This formidable management tool
 effectively gives everyone in the organization the right and
responsibility to say, “Stop! This isn't right. We need to address
this situation.” There are six very specific facets of a successful
whistleblower framework in an organization.
1. Everyone needs to be trained in what whistleblowing means
and how it will specifically work in the organization.
2. Everyone needs to feel safe in a whistleblowing framework.
Hence, there needs to be clear and effective protection
systems established to encourage everyone to take action
when needed.
3. Anonymous helplines are then set up to capture
whistleblower reports.
4. There are differences between concerns and grievances,
and those differences should be described in the training
process. But employees should be encouraged to report
both concerns and grievances, and let the whistleblowing
process distinguish between the two.
5. An independent analysis is set up to distinguish between
concerns to be considered and serious grievances that
must be addressed. Those designated to provide these
analyses must be independent and empowered to move
forward appropriate concerns and grievances directly to
those responsible to address the report.
6. When the grievance is serious enough, the reporting system
in the independent analysis must be able to provide direct
feedback to directors and owners.
B. Establishing a successful whistleblower framework is a serious
investment in the practice of professional ethics. If done well, the
result should be a significant reduction of the potential for ethical
failure, which is a major contribution to enterprise risk
management in the organization.

Practice Question
Continuing from the previous lesson, Rosenbloom, Inc., a fast-growing residential
landscaping company with operations throughout the southern United States, is
working through the design and delivery of a new system of ethical conduct
across its entire organization. At this point, it has completed a gap analysis of
ethical practice, defined its values and standards for ethical practice, and
thoroughly trained and committed its executive leadership team to ethical
practice.
According to the IMA Statement on Management Accounting, "Values and Ethics:
From Inception to Practice," what are the remaining steps for Rosenbloom's
cross-functional implementation team to accomplish as they roll out a new
system of ethical conduct throughout the company?
Answer:
With the vision and mission of ethics effectively defined for Rosenbloom, and its
executive team fully trained and committed, the implementation team is ready to
begin the detailed and challenging work of operational development of ethical
practice. This is the next step in the IMA framework for creating a system of
ethical practice. Operational development of ethical practice is threefold. First,
HR processes for hiring, training, and incentivizing need to be carefully anchored
to the organization's values and standards. Second, processes throughout the
organization's core operations involving R&D, production, and service-after-sale
need to be evaluated and, as needed, redesigned to assure adherence to the
organization's values and standards for ethical practice. Finally, the organization
needs to consider how to strengthen partnerships with key suppliers with
respect to its values and standards.
Once the operational development of ethical practice is complete, the next step
for the implementation team is to monitor ethical behavior and measure results.
A number of classic management models can be used in this effort to capture
performance measures and track progress. These models include BPR (business
process reengineering), TQM (total quality management), and CPI (continual
process improvement).
Finally, the implementation team should understand that the work of
establishing a system of ethical conduct is never complete. The organization
must make investments to gather feedback and make improvements in the
future. A feedback loop (i.e., learning system) is built to provide improvement
data both to individual employees and to the organization as a whole. Regular
feedback reviews, refresher training, and celebration events are great
investments in individual employee improvement. Regular company-wide
surveys and a whistleblower framework are valuable mechanisms to help the
organization improve and control its overall structure for professional ethics.
Summary
This lesson concludes our discussion of the IMA Statement on Management
Accounting, "Values and Ethics: From Inception to Practice." In the previous
lesson, we described the first five steps in a framework for creating a system of
ethical conduct throughout the organization. In this lesson, we laid out the final
three steps of the eight-step framework. Step 6 is a significant multilayered effort
to develop ethical practice throughout the entire operation of the organization,
and involves work with HR management, core operating processes, and partner
suppliers. Step 7 describes the process of establishing the internal control system
for ethical practice. Measurement is a key aspect of Step 7. Step 8 involves
creating a learning organization using feedback that operates both at the level of
each employee and for the organization as a whole. One very powerful feedback
method is the establishment of a whistleblower framework across the
organization.
ASSESSMENT

1.

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5.

6.
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8.

9.
ANSWER KEY

1. A Human capital is a combination of hiring the right people,

training these people, and building an organizational culture
that encourages ethical decision making.
2. D If an organization decides to not establish and maintain a
company-wide training program, the odds of ethical lapses
by employees at all levels will increase over time.
3. C Several items that should be included in the stakeholder
analysis of societal issues with regard to ethical decision
making include the environmental impact, noise pollution
and other externalities, and the impact on customers.
4. B Management is responsible for establishing an ethical
culture, and for establishing training and incentive programs
that support that culture by exemplifying consistent behavior
and enforcing organizational values.
5. B Organizations should ensure that the core values of the
firm are in alignment with, and incorporated into, the training
and ethics programs in place at the organization.
6. A A competitive advantage in the marketplace versus
domestic and international competitors due to cost savings
generated from ethical behavior.
7. C Implementing ethical training that is updated and kept
current to reflect changes in the market enables
management and employees to remain informed and up-to-
date on possible changes in the ethical environment.
8. D Focusing on the ideas of continuous process
improvement supports management to improve policies and
procedures that, in turn, strengthen internal controls to help
offset or prevent possible unethical activity.
9. C Setting up a whistle-blower hotline provides a means by
which employees can report potential ethics issues and
demonstrates strong management commitment to an ethical
culture and values.