Business Ethics

Chapter 3

WHY BE ETHICAL IN BUSINESS?


  No business can exist without establishing guidelines for operation. Guidelines include, but are not limited to office procedures, sales procedures and employee conduct.  Many business guidelines also include a code of ethics, whether that code is written or merely implied.  Every business tells their employees what actions are right and wrong.  It may be as simple as stating that overtime will not be paid unless properly authorized, or it may be as complex as an office manager who turns his or her head when a forgotten signature is forged on an insurance form.

  Ethical decisions are made every day in the workplace.  These decisions affect the quality of work performed, employment opportunities, safety of workers and products, advertising, and simple day-to-day operations.

  Major businesses nearly always have a written code of ethics for their management and employees; it is foolish not to in this lawsuit prone society.  Today most companies realize that written codes of business ethics not only prevents lawsuits but also reduces pressures for management and workers to compromise company standards.  Many of the regulations on various businesses evolved into law because companies were not voluntarily following ethical codes when conducting their business activities.

  Many of the causes of business misconduct resulted in laws being passed.  We saw this often in environmental issues.  Americans demanded that government correct some of the abuses that became very evident, from ruined waters to unsightly land resulting from business activities.  However, even small companies with only a few employees are wise to adopt some form of written ethical guidelines for employees.

  Business owners eventually realize that unethical employees result in lost revenue.  Ethical employees work for the business and for their customers so increased revenue is a natural result.  In order to find and keep ethical employees, the workplace must display ethical values or the employees business owners want to keep will go elsewhere.  Without ethics, any business transaction that was not witnessed and recorded could not be trusted.  It would certainly cripple a business if employees could not be trusted.  On the other hand, when employees cannot trust their employer to be fair, problems can also develop.  Those who own and manage the business must also be trustworthy.

  Unfortunately it is sometimes the business owners themselves that turn out to be untrustworthy.  America has an unfortunate history of unethical business dealings.  During the 1970's, 11 percent of the largest U.S. firms were convicted of bribery, criminal fraud, illegal campaign contributions, tax evasion, or some sort of price fixing.  Those companies with two or more convictions included Allied, American Airlines, Bethlehem Steel, Diamond International, Firestone, Goodyear, International Paper, J. Ray McDermott, National Distillers, Northrop, Occidental Petroleum, PepsiCo, Phillips Petroleum, Rapid-American, R. J. Reynolds, Schlitz, Seagram, Tenneco, and United Brands.  Some companies, including Braniff International, Gulf Oil and Ashland Oil had four or more convictions at that time.

  Some of the companies were specific in their illegal goals.  For example, most of the major petroleum companies illegally contributed to Richard Nixon's reelection committee in the mid-1970s.  They included Gulf, Getty, Standard of California, Phillips, Sun, Exxon, and Ashland.

  When an industry, like the petroleum industry, seems to be involved in widespread illegal and certainly unethical behavior the cause is nearly always greed.  Embezzlement, fraud and political backbiting affects even the ethical person who simply happens to work in the industry.  When an industry is perceived to be dishonest, the ethical individual often finds himself or herself painted with the same dark brush.

  Sometimes the reason given for illegal and unethical conduct comes under a different name.  Bribery, price fixing and compromising product and worker safety is often said to stem from pressure for "bottom line" results.  A survey conducted by Business Week stated that 59 to 70 percent of managers felt pressured to compromise personal ethical views in order to achieve corporate goals.  This perception of pressure seemed to be especially high among lower level managers.  It appears that these views continue to exist today, based on numerous studies on business management.

  Although some years seem to have more examples of unethical behavior than others, there has never been a year in which nothing came into view.  A list of companies that pled guilty to, no contest to, or have been convicted of a felony offense (one or more) in either state or federal court and not been overturned upon appeal include Bankers Trust, BP Oil, British Airways, General Electric, International Paper, Louisiana Pacific, Samsung, Sears, Roebuck & Company, and Tyson Foods.  This is not a complete list by any means.

  For example, Tyson came under fire for advertising that they were committed to the well-being of their product animals, providing a “favorable” environment, yet a Wyoming facility that raised pigs for Tyson’s use was found in an undercover investigation to be more than just indifferent to the animals they raised; they were outright cruel in their treatment of the pigs. Piglets were seen on film being thrown forcefully like footballs, and swung by their back legs.  Sows were viciously punched and kicked as their piglets were forcefully removed from them.  Additionally the facility used gestation crates, where pregnant sows are unable to turn around, lie down or take more than a step or two.  Many states ban gestation crates and animal experts say they are inhumane.  Five employees of one Tyson pig supplier were found guilty of criminal animal cruelty based on the HSUS undercover investigation.

  Unfortunately many states are under pressure from big agribusinesses to eliminate any opportunity to look at the internal operations of factory farms (large corporations outside of the traditional small farming operations).  In effect they are trying to create ‘anti-whistleblower” laws that prevent internal operations from being scrutinized, keeping secret how they are ran.  Their view is that letting outside people in allows competitive companies to gain access in some way and takes away their ability to keep trade secrets from being viewed by others.  Animal activists believe this is an attempt to operate on the basis of profit, not the well-being of farm animals.  When the outside has no way to inspect how animals are treated there may not be any incentive to recognize that farm animals (our meat sources) are living creatures deserving a comfortable existence while they are alive.  Animal advocates have routinely exposed animal cruelty in slaughterhouses, and often those slaughterhouses have been connected to Tyson Foods.

  Tyson Foods also ran into difficulty on an environmental basis.  Multiple courts have held the company responsible for various environmental hazards.  In April, 2013, for example, they were charged, and settled with the EPA, for nearly $4 million regarding how the company released dangerously high levels of ammonia, critically injuring and killing their own employees.

  Of course Tyson Foods is not the only company to have had difficulties based on how they chose to operate.  Waste Management, Inc. discharged untreated wastewater and storm water directly in the Indianapolis sewer system in violation of the Clean Water Act.  Many companies have had difficulties, some regarding the welfare of animals, some regarding environmental issues, and some regarding the treatment and hiring practices of their employees.

  When a company or industry participates in widespread illegal and certainly unethical behavior the cause is nearly always greed.  Embezzlement, fraud and political backbiting affects even the ethical person who simply happens to work in the industry.  When an industry is perceived to be dishonest, the ethical individual often finds himself or herself painted with the same dark brush.

  There is no doubt that illegal activity is profitable; that is why there is a constant need for oversight by authorities.  Our health care industry has had rampant fraud of the Medicare and Medicaid systems.  Private insurance companies have experienced constant and continual claims fraud.  When there are minor penalties given for millions of dollars in profit the situation is unlikely to change.  Most who commit insurance fraud are not caught so only the worst of the cases ever come before a court.  An example of very little consequences for large fraud is the case of Glen Justice who made over $1 million in Medicare fraud but only probation.  He eventually was given one year in prison but only because he continued to defraud the Medicare system.  In many cases, individuals lose their license to continue practicing medicine but many feel there should be more prison time given to such individuals (sentences vary widely however, so this may not be typical of all jurisdictions).

  The reasons given for illegal and unethical conduct are often called something other than the names most people give illegal activities (for example, “contribution” sounds much better than “bribery”).  It is not that individuals do not understand what they did but in many cases another name has successfully kept them out of the court systems.  Even the general public is guilty of excusing behavior when better sounding names are used.

   Such things as bribery, price fixing, and compromising product and worker safety is often said to stem from pressure for "bottom line" results.  A survey conducted by Business Week stated that 59 to 70 percent of managers feel pressured to compromise personal ethical views in order to achieve corporate goals.  This perception of pressure seemed to be especially high among lower level managers.  On the positive side, 90 percent of the managers said they supported a written code of ethics in their business place and the teaching of ethics in business schools.

  Even honest and ethical individuals may be influenced by unethical pressure from others.  This may especially be true if that pressure is coming from the workplace.  In today's economic climate, many individuals feel that they would be unable to survive financially if they lost their job.  As a result, he or she may be willing to participate in an activity once hired that they would not have participated in prior to being hired.

  Steven N. Brenner stated in his book "Corporate Political Actions and Attitudes" that individuals who worked in corporate political activities displayed a declining interest in ethical issues.  This particular area of work, in fact, seemed to show the lowest level of ethical interest.  It would be hard to know if unethical individuals were drawn into this line of work or if ethical individuals were simply pressured to the point that they lost their ethical base.  Whatever the reason, it seems to confirm what many Americans have been voicing: politics seem to have very little ethical interests. The “actions-justify-the-means” philosophy develops, if not already in existence.

  It is not surprising to note that laboratory research has shown that unethical behavior tends to rise as the industry or climate becomes more competitive.  Perhaps that is why some insurance agencies use competitive contests and look the other way when activities seem to compromise ethical behavior.  These studies further indicated that when unethical behavior is rewarded (as with prizes or additional commissions) it further erodes ethical standards.  On the other hand, the same studies also noted that when unethical behavior was punished, such behavior was deterred.

  Those who study the rise and fall of ethical behaviors report some basic requirements for continued ethical behavior:

  1. Individuals must have a sensitive and informed conscience;

  2. He or she must have the ability to make ethical judgments individually; and

  3. A corporate climate must exist that rewards ethical behavior and punishes unethical behavior.

  Most ethicists believe that the more complex our society becomes, the more we need to teach ethics to the general population.  In the past, ethical behavior was primarily taught to children by their parents and by the churches to their congregations.  Fewer parents seem to be teaching their children ethics as American families become more complex and spend increasing amounts of their time in the work place.  There has been a movement back to religion in the last ten years and this must certainly be a benefit for ethical teachings.  Even so, many of our religious leaders see a decline in America’s overall desire to have ethical behavior promoted.  This can be noted by the number of politicians who were proven to be dishonest and were still re-elected.  Apparently enough people accept unethical behavior as part of life and see no need to try to eliminate it.

  Additionally, there seems to be another factor present in the decline of ethical behavior.  When a person deals face-to-face with people, there is less likelihood that dishonesty will take place.  However, when individuals deal with people over the telephone or through a computer, dishonesty tends to increase.  Perhaps that is because it is easier to be dishonest when there is no face attached to the illegal act.

Insurance Fraud

  Although fraud exists in nearly all industries, insurance producers are most likely to notice fraud when it occurs within their own line of work.  Insurance fraud occurs when people deceive an insurance company in order to collect money to which they are not entitled.  This particular type of fraud is a legal crime in all fifty states.  Most states have established fraud bureaus to identify and investigate fraud incidents. In most states, fraudulent claims can be either a felony or a misdemeanor, depending on the nature and extent of the fraud committed. In some cases, such as health care fraud, it is also a crime under federal law.

  It is not just people filing false claims that might be committing fraud.  Insurance companies can also commit fraud by denying coverage or benefits that are legally due.

  Fraudulent insurance claims affect society as a whole, not just insurance companies, and for that reason, it is punished harshly. According to the Coalition Against Insurance Fraud, fraud schemes cost Americans at least 80 billion dollars per year in the United States.  Fraud affects Americans as well as insurers because the costs are ultimately borne by policyholders and consumers since insurance companies charge higher premiums to cover their losses.  Individual and business premium rates go up, and businesses probably pass along the increased costs to their consumers just like insurers do.

Elements of Fraud

  In order for a defendant to be found guilty of fraudulent activities, prosecutors must prove that each of the following "elements" was met.  If the judge or jury finds that each of these elements was not proven beyond a reasonable doubt, then they must acquit the defendant.

Knowingly Making a False or Misleading Statement

  An intentional misstatement means telling a lie.  Like other forms of fraud, insurance fraud requires that the defendant knowingly make a false or misleading statement, which equates into a lie.  If the individual simply refrains from telling the truth it is not the same as telling a lie; the defendant must knowingly state a falsehood.  This means he or she must intend to make the statement and be aware that the statement is false.  For example, if a person filing an automobile insurance claim mistakenly (but in good faith) tells his insurance company that the mileage on his vehicle is 50,000 miles when actually it has 60,000 miles, he has not committed fraud.  However, the claimant has a legal and moral duty to inform his insurer of the mistake once he or she discovers it.

The Statement is made in Connection with an Expected Payment from a Policy

  The false statement must have been made in support of, opposition to, or connection with an expected claim or payment from an insurance policy. This can include a false or exaggerated claim made to an insurance company, a false statement made to a physician in connection with an insurance claim, or false statements made by medical providers to insurers about the services they performed.

It is a Material Statement

  A material statement is one that would logically be considered relevant to the situation.  It is a statement of sufficient importance or relevance so that it would possibly have significant influence on the outcome of the situation (for our purposes the outcome is a claim payment).  Therefore, in order for insurance fraud to exist, the false statement must be material to the insurance payment or claim.

  An individual that tells a lie during the course of an insurance claim investigation having no actual or potential bearing on the outcome of the investigation has not committed fraud. For example, Marjorie is asked on a claim form for her date of birth.  She has always lied about her age and does so on the insurance claim form.  Although she has lied about her age, that lie does not affect how her claim will be paid so it is not a material statement.  Of course, it is always best to give complete and honest information.

  Insurance fraud occurs in many forms, including health care, automobile coverage, and property insurance.  In health care fraud it is filing a false medical claim or false injury in order to obtain insurance payments for non-existent expenditures.  Usually it involves the help of a health care provider since it would be difficult for a patient to file his or her own claim for healthcare expenditures.  Many healthcare providers file false claims without their patient ever being aware of it.  This is both fraud and a crime in all fifty states.

  Under automobile coverage, a fraudulent act occurs when someone either exaggerates or fabricates a claim on their vehicle.  It might involve stating damage that already existed under the current accident or claiming damage to a greater extent.  The policyholder might report a vehicle stolen when, in fact, he or she has either sold it or dumped the vehicle somewhere.

  Life insurance fraud occurs when a person attempts to collect on a life insurance policy when the insured is not actually deceased.  In many cases it is the insured him or herself that fabricates their own death.  It might even involve forging a death certificate on an insured; sometimes the insured is not aware of the forgery but more often the insured is involved in the fraud.

  Property fraud involves homes, businesses, and other real or personal property.  Real property is land and the buildings on it; personal property is the contents of the buildings, such as clothing, jewelry, furniture and so forth.

  A business owner might commit property fraud by paying someone to set his business on fire or doing the arson him or herself.  Property fraud would also include declaring an insured item has been stolen when, in fact, it has not been.  This is a common type of fraud since it is so easy to claim and so difficult to disprove.  Exaggerating the amount of loss even when theft or damage to property has occurred is also a type of property fraud.  For example, a burst pipe in the laundry room might be reported as causing damage in two rooms rather than just the one room where it actually happened.

Penalties

Insurance fraud can generally be divided into two categories, known in the industry as “soft fraud” and “hard fraud.”

  The penalties for insurance fraud vary widely depending on the state where the prosecution occurred, the amount of money fraudulently sought or obtained, and the criminal history of the defendant.  We are not able to provide specific information since penalties vary among the states.

End of Chapter 3

United Insurance Educators, Inc.