Corporate Intelligence
Many issues related to corporate intelligence have surfaced in the last few years. Defined broadly, corporate intelligence (CI) is the collection and analysis of information on markets, technologies, customers, and competitors, as well as on socioeconomic and external political trends. There are three distinct types of intelligence models: a passive monitoring system for early warning, tactical field support, and support dedicated to top-management strategy.
CI involves an in-depth discovery of information from corporate records, court documents, regulatory filings, and press releases, as well as any other background information about a company or its executives. CI can be a legitimate inquiry into meaningful information used in staying competitive. For instance, it is legal for a software company to monitor its competitor’s online activities such as blogs and Facebook posts. If the company learns from monitoring its competitor’s public postings it is likely planning to launch a new product, the company could use this intelligence to release the product first and beat the competition. Such an activity is acceptable.
CI has its own set of procedures. For example, can you tell which of the following are acceptable strategies and practices in CI?
1. Develop an effective network of informants. Encourage staff members to gather competitive information as they interact with people outside the company.
2. Have every salesperson talk to those customers who are believed to have talked to competitors.
3. When interviewing job applicants from competitors, have Human Resources ask about critical information, including social network accounts.
4. Have purchasers talk to suppliers to attempt to discover who is demanding what and when it is needed.
5. Interview every employee about his or her knowledge or expertise and leverage it for outside information about other firms within the industry.
6. When you interview consultants, ask them to share examples of their work.
7. Use press releases announcing new hires as an indicator of what type of talent companies are hiring.
8. Use web services to track all the changes anyone makes on a company’s website, thus giving you an indication of which areas a competitor is thinking about and where it might be headed.
9. Use a proxy or other firm to act as a client for the competitor so as to ask about a company’s pricing structure, how fast they ship, turnaround time, and number of employees. Ask for references and call those people as well.
All of these scenarios are legal and frequently used by corporate intelligence departments and firms.
However, corporate intelligence, like other areas in business, can be abused if due diligence is not taken to maintain legal and ethical methods of discovery. Computers, local-area networks (LANs), and the Internet have made the theft of trade secrets very easy. Proprietary information like secret formulas, manufacturing schematics, merger or acquisition plans, and marketing strategies all have tremendous value. Theft of corporate trade secrets has been on the rise among technology companies such as Samsung. Corporate espionage is estimated to cost the world economy $445 billion each year—about 1 percent of global income. If discovered, corporate espionage can lead to heavy fines and prison sentences. A lack of security and proper training allows a person to use a variety of techniques to gain access to a company’s vital information. Some techniques for accessing valuable corporate information are included in Table 3-4.
Table 3-4
Ways to Steal Corporate Trade Secrets
Method of Corporate Espionage
Definition
Examples
Hacking
Breaking into a computer network to steal information
System hacking : Assumes the attacker already has access to a low-level, privileged-user account
Remote hacking : Involves attempting to remotely penetrate a system across the Internet
Physical hacking : Requires the hacker to enter a facility physically and find a vacant unsecured workstation with an employee’s login and password
Social engineering
Tricking individuals into revealing their passwords or other valuable corporate information
Shoulder surfing : Someone simply looks over an employee’s shoulder while he or she types a password
Password guessing : When an employee is able to guess a person’s password after finding out personal information about him or her
Dumpster diving
Digging through trash to find trade secrets
An employee obtains several organizational charts from a rival business by digging through that organization’s trash
Whacking
Using wireless hacking to break into a network
An intruder uses a radio to tap into a wireless network to access unencrypted data
Phone eavesdropping
Using a digital recording device to monitor and record a fax line
A person records a message from a fax line and recreates an exact copy of the message by playing back the recording
3-3gDiscrimination
Although a person’s racial and sexual prejudices belong to the domain of individual ethics, racial and sexual discrimination in the workplace create ethical issues within the business world. Discrimination on the basis of race, color, religion, sex, marital status, sexual orientation, public assistance status, disability, age, national origin, or veteran status is illegal in the United States. Additionally, discrimination on the basis of political opinions or affiliation with a union is defined as harassment. Discrimination remains a significant ethical issue in business despite decades of legislation attempting to outlaw it.
A company in the United States can be sued if it
1. refuses to hire an individual,
2. maintains a system of employment that unreasonably excludes an individual from employment,
3. discharges an individual, or
4. discriminates against an individual with respect to hiring, employment terms, promotion, or privileges of employment as they relate to the definition of discrimination.
Nearly 89,000 charges of discrimination were filed with the Equal Employment Opportunity Commission (EEOC) in 2014.
Race, gender, and age discrimination are major sources of ethical and legal debate in the workplace. Once dominated by European American men, the U.S. workforce today includes significantly more women, African Americans, Hispanics, and other minorities, as well as disabled and older workers. These groups traditionally faced discrimination and higher unemployment rates and were denied opportunities to assume leadership roles in corporate America. For example, only five Fortune 500 companies are led by African American CEOs.
Another form of discrimination involves discriminating against individuals on the basis of age. 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. The act prohibits employers with 20 or more employees from making employment decisions, including decisions regarding the termination of employment, on the basis of age or as a result of policies requiring retirement after the age of 40. Despite this legislation, charges of age discrimination persist in the workplace. Age discrimination accounts for approximately 23 percent of the complaints filed with the EEOC. Given the fact that nearly one-third of the nation’s workers are 55 years old or over, many companies need to change their approach toward older workers.
To help build workforces that reflect their customer base, 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. Such initiatives may be imposed by federal law on an employer that contracts or subcontracts for business with the federal government, as part of a settlement agreement with a state or federal agency, or by court order. For example, McCormick & Schmicks Seafood Corporation paid a settlement of $1.3 million to settle a lawsuit that it discriminated against African American workers. It also adopted recruitment procedures to attract African American job applicants. However, many companies voluntarily implement affirmative action plans in order to build a more diverse workforce. Although many people believe affirmative action requires the use of quotas to govern employment decisions, it is important to note two decades of Supreme Court rulings made it clear that affirmative action does not permit or require quotas, reverse discrimination, or favorable treatment of unqualified women or minorities. To ensure affirmative action programs are fair, the Supreme Court established standards to guide their implementation:
1. there must be a strong reason for developing an affirmative action program,
2. affirmative action programs must apply only to qualified candidates, and
3. affirmative action programs must be limited and temporary and therefore cannot include “rigid and inflexible quotas.”
Discrimination can also be an ethical issue in business when companies use race or other personal factors to discriminate against specific groups of customers. Many companies have been accused of using race, disabilities, gender, or age to deny service or to charge higher prices to certain ethnic groups. Employees have also been terminated or denied jobs due to discrimination. Upper Chesapeake Health System paid $180,000 to settle an EEOC lawsuit alleging that it failed to provide reasonable accommodations and rehire a worker due to her disability, despite the worker’s positive performance reviews.
3-3hSexual Harassment
Sexual harassment is a form of sex discrimination that violates Title VII of the Civil Rights Act of 1964. Title VII applies to employers with 15 or more employees, including state and local governments. Sexual harassment can be defined as any repeated, unwanted behavior of a sexual nature perpetrated upon one individual by another. It may be verbal, visual, written, or physical and can occur between people of different genders or those of the same gender. Displaying sexually explicit materials “may create a hostile work environment or constitute harassment, even though the private possession, reading, and consensual sharing of such materials is protected under the Constitution.” Nearly 30 percent of the charges filed with the EEOC involve sexual harassment or pregnancy discrimination.
To establish sexual harassment, an employee must understand the definition of a hostile work environment , for which three criteria must be met: the conduct was unwelcome; the conduct was severe, pervasive, and regarded by the claimant as so hostile or offensive as to alter his or her conditions of employment; and the conduct was such that a reasonable person would find it hostile or offensive. To assert a hostile work environment, an employee need not prove it seriously affected his or her psychological well-being or that it caused an injury; the decisive issue is whether the conduct interfered with the claimant’s work performance.
Sexual harassment includes unwanted sexual approaches (including touching, feeling, or groping) and/or repeated unpleasant, degrading, or sexist remarks directed toward an employee with the implied suggestion that the target’s employment status, promotion, or favorable treatment depend on a positive response and/or cooperation. It can be regarded as a private nuisance, unfair labor practice, or, in some states, a civil wrong (tort) that may be the basis for a lawsuit against the individual who made the advances and against the employer who did not take steps to halt the harassment. The law is primarily concerned with the impact of the behavior and not its intent. An important facet of sexual harassment law is its focus on the victims’ reasonable behaviors and expectations. However, the definition of “reasonable” varies from state to state, as does the concept of expectations. In addition, an argument used by some in defense of what others term sexual harassment is the freedom of speech granted by the First Amendment.
A key ethical issue associated with sexual harassment is dual relationships. A dual relationship is defined as a personal, loving, and/or sexual relationship with someone with whom you share professional responsibilities. Dual relationships where the relationship could potentially cause a direct or indirect conflict of interest or a risk of impairment to professional judgment can be an ethical or even legal issue. Another important factor in these cases is intent. If the sexual advances in any form are considered mutual, then consent is created. The problem is unless the employee or employer gets something in writing before the romantic action begins, consent can always be questioned, and when it comes to sexual harassment, the alleged perpetrator must prove mutual consent. When relationships end, the potential for ethical conflicts increases.
To avoid sexual misconduct or harassment charges a company should take at least the following steps:
1. Establish a statement of policy naming someone in the company as ultimately responsible for preventing harassment at the company.
2. Establish a definition of sexual harassment that includes unwelcome advances, requests for sexual favors, and any other verbal, visual, or physical conduct of a sexual nature; provides examples of each; and reminds employees the list of examples is not all-inclusive.
3. Establish a nonretaliation policy that protects complainants and witnesses.
4. Establish specific procedures for prevention of such practices at early stages. However, if a company puts these procedures in writing, they are expected by law to train employees in accordance with them, measure their effects, and ensure the policies are enforced.
5. Establish, enforce, and encourage victims of sexual harassment to report the behavior to authorized individuals.
6. Establish a reporting procedure.
7. Make sure the company has timely reporting requirements to the proper authorities. Usually, there is a time limitation (ranging from six months to a year) to file a complaint for a formal administrative sexual charge. However, the failure to meet a shorter complaint period (for example, 60 to 90 days) so a rapid response and remediation may occur and to help ensure a harassment-free environment could be a company’s defense against charges it was negligent.
Once these steps have been taken, a training program should identify and describe forms of sexual harassment and give examples, outline grievance procedures, explain how to use the procedures and discuss the importance of them, discuss the penalty for violation, and train employees about the essential need for a workplace free from harassment, offensive conduct, or intimidation. A corporation’s training program should cover how to spot sexual harassment; how to investigate complaints, including proper documentation; what to do about observed sexual harassment, even when no complaint has been filed; how to keep the work environment as professional and nonhostile as possible; how to teach employees about the professional and legal consequences of sexual harassment; and how to train management to understand follow-up procedures on incidents.
3-3iFraud
When individuals engage in intentional deceptive practices to advance their own interests over those of the organization or some other group, they are committing fraud. In general, fraud is any purposeful communication that deceives, manipulates, or conceals facts in order to harm others. Fraud can be a crime and convictions may result in fines, imprisonment, or both. Global fraud costs organizations more than $3.7 trillion a year; the average company loses about 5 percent of annual revenues to fraud. For instance, one 71-year-old former business owner was found guilty of making false statements on his inventory reports so he could obtain credit for his business—a type of misconduct known as loan-application fraud. Figure 3-1 indicates some of the major ways fraud is detected. Note the majority of fraud detection occurs due to tips, thereby making reporting an important way of preventing and detecting wide-scale fraud. In recent years, accounting fraud has become a major ethical issue, but as we will see, fraud can also relate to marketing and consumer issues.
Figure 3-1Initial Detection of Occupational Frauds
Source: Association of Certified Fraud Examiners, Report to the Nations on Occupational Fraud and Abuse: 2016 Global Fraud Study, 21.
Accounting fraud usually involves a corporation’s financial reports, in which companies provide important information on which investors and others base decisions involving millions of dollars. If the documents contain inaccurate information, intentional or not, lawsuits and criminal penalties may result. Diamond Foods paid $5 million to settle SEC charges that former executives had knowingly misled investors by manipulating walnut costs. This manipulation caused the financials to appear better than they were in reality. Research has shown that chief financial officers are more likely to manipulate accounting statements because of pressure from the CEO than from personal gain. Three factors, known as the fraud triangle, seem to predict why people commit fraud: pressure, opportunity, and rationalization.
The field of accounting has changed dramatically over the last decade. Ethical issues for accountants today include time, reduced fees, client requests to alter opinions concerning financial conditions or lower tax payments, and increased competition. Other issues accountants face daily involve compliance with complex rules and regulations, data overload, contingent fees, and commissions. An accountant’s life is filled with rules and data that must be interpreted correctly, and because of these pressures and the ethical predicaments they spawn, problems within the accounting industry are on the rise. As an example of a possible ethical issue, accountants are permitted to charge performance-based fees rather than hourly rates, a rule change that encouraged some large accounting firms to promote tax-avoidance strategies for high-income individuals because the firms can charge 10 to 40 percent of the amount of taxes saved.
As a result, accountants must abide by a strict code of ethics that defines their responsibilities to their clients and to the public interest. The code also discusses the concepts of integrity, objectivity, independence, and due care. Despite the standards the code provides, the accounting industry has been the source of numerous fraud investigations in recent years. Congress passed the Sarbanes–Oxley Act in 2002 to address many of the issues that create conflicts of interest for accounting firms auditing public corporations. The law generally prohibits accounting firms from providing both auditing and consulting services to the same firm. Additionally, the law specifies corporate boards of directors must include outside directors with financial knowledge on the company’s audit committee.
One of the results of Sarbanes–Oxley was the establishment of the Public Company Accounting Oversight Board (PCAOB). This nonprofit organization oversees the audits of public companies. The intent of the PCAOB is to protect investors and ensure that the public is receiving accurate audit reports. The PCAOB therefore has the authority to audit public accounting firms; investigate accounting firms for compliance; establish disciplinary proceedings for noncompliance; establish ethics, auditing, quality control, and other standards for auditing public companies; and enforce compliance with Sarbanes–Oxley. We discuss the PCAOB more in the next chapter.
Marketing fraud —the process of dishonestly creating, distributing, promoting, and pricing products—is another business area that generates potential ethical issues. False or misleading marketing communications destroy customers’ trust in a company. Lying, a major ethical issue involving communication, is a potentially significant problem. In both external and internal communications, it causes ethical predicaments because it destroys trust. T-Mobile paid $90 million to settle charges that it had billed customers millions of dollars for unwanted text messages such as horoscopes. Misleading marketing can also cost consumers hard-earned money.
False or deceptive advertising is a key issue in marketing communications. One set of laws common to many countries concerns deceptive advertising—that is, advertisements not clearly labeled as advertisements. In the United States, Section 5 of the Federal Trade Commission (FTC) Act addresses deceptive advertising. Abuses in advertising range from exaggerated claims and concealed facts to outright lying, although improper categorization of advertising claims is the critical point. Courts place false or misleading advertisements into three categories: puffery, implied falsity, and literal falsity.
Puffery can be defined as exaggerated advertising, blustering, and boasting upon which no reasonable buyer would rely upon and is not actionable under the Lanham Act. For example, the National Advertising Division ruled that Tropicana’s promotional claims to be the “world’s best fruit and vegetable juice” is an example of puffery rather than misleading advertising. However, the lines between puffery and deceptive advertising can be murky. The FTC settled with four weight-loss companies for deceptive advertising after determining that their weight-loss claims were unsubstantiated and that the companies made it appear easy to lose weight when in fact it is not.
Implied falsity means the message has a tendency to mislead, confuse, or deceive the public. Advertising claims that use implied falsity are those that are literally true but imply another message that is false. In most cases, accusations of implied falsity can be proved only through time-consuming and expensive consumer surveys, the results of which are often inconclusive. An example of implied falsity might be a company’s claim that its product has twice as much of an ingredient, implying that it works twice as well, when in reality the extra quantity of the ingredient has no effect over performance.
The characterization of an advertising claim as literally false can be divided into two subcategories: tests prove (establishment claims), when the advertisement cites a study or test that establishes the claim; and bald assertions (nonestablishment claims), when 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. Kellogg paid $5 million to settle false advertising claims that its Rice Krispies cereal helped children’s immune systems. A class-action lawsuit was later filed against Kellogg for marketing its Kashi as “All Natural” or “Nothing Artificial” when it contained some synthetic and artificial ingredients. Kellogg paid $5 million to settle the suit and agreed to no longer use this labeling.
Another form of advertising abuse involves making ambiguous statements—when the words are so weak or general that the viewer, reader, or listener must infer the advertiser’s intended message. These “weasel words” are inherently vague and enable the advertiser to deny any intent to deceive. The verb help is a good example (as in expressions such as “helps prevent,” “helps fight,” “helps make you feel”). Consumers may view such advertisements as unethical because they fail to communicate all the information needed to make a good purchasing decision or because they deceive the consumer outright.
Labeling issues are even murkier. For example, Kroger agreed to remove the term “raised in a humane environment” from its packages of Simple Truth chicken when it was discovered that the chickens, supplied by Perdue Farms, were raised in traditional factory farm environments. Additionally, marketers of chia seeds are focused on making accurate claims about the nutritional characteristics of chia seeds on their labeling but are careful not to make claims about their impact on health. Despite their nutritional benefits, the body only processes a small amount of the nutrients. This makes it more complex to tie actual health benefits to consumption of chia seeds.
Advertising and direct sales communication can also mislead consumers by concealing the facts within the message. For instance, a salesperson anxious to sell a medical insurance policy might list a large number of illnesses covered by the policy but fail to mention it does not include some commonly covered illnesses. Indeed, the fastest-growing area of fraudulent activity is in direct marketing, which uses the telephone and digital media to communicate information to customers, who then purchase products via mail, telephone, or the Internet. For instance, CEO Shawn Hogan of Digital Point Solutions was arrested and charged with defrauding eBay of $28 million in online marketing fees. Hogan was hired to place eBay links and advertisements on different websites to generate traffic for eBay, receiving a cut of sales generated from his marketing efforts. However, Hogan had distributed thousands of tracking codes, or cookies, among unknowing users so that if the user later made a sale on eBay, Hogan would get a cut of the sale without actually promoting the site.
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