Framework For Understanding Organizational Ethics Commerce Essay

Organizational ethics is one of the most important, yet perhaps one of the most overlooked and misunderstood concepts in corporate America and schools of business. Organizational ethics initiatives have not been effectively implemented by many corporations, and there is still much debate concerning the usefulness of such initiatives in preventing ethical and legal misconduct. Simultaneously, business schools are attempting to teach courses and/or integrate organizational ethics into their curricula without general agreement about what should be taught, or how it should be taught.

Societal norms require that businesses assume responsibility and ensure that ethical standards are properly implemented on a daily basis. Such a requirement is not without controversy. Some business leaders believe that personal moral development and character are all that are needed for effective organizational ethics. These business leaders are supported by certain business educators who believe ethics initiatives should arise inherently from corporate culture and that hiring ethical employees will limit unethical behavior within the organization. A contrary position, and the one espoused here, is that effective organizational ethics can only be achieved by proactive leadership whereby employees from diverse backgrounds are provided a common understanding of what is defined as ethical behavior through formal training, thus creating an ethical organizational climate. In addition, changes are needed in the regulatory system, in the organizational ethics initiatives of business schools, and in societal approaches to the development and implementation of organizational ethics in corporate America. According to Richard L. Schmalensee, Dean of the MIT Sloan School of Management, the question is, “How can we produce graduates who are more conscious of their potential . . . and their obligation as professionals to make a positive contribution to society?” He stated that business schools should be held partly responsible for the cadre of managers more focused on short-term games to beat the market rather than building lasting value for shareholders and society (Schmalensee 2003).

This introductory chapter provides an overview of the organizational ethical decision making process. It begins with a discussion of how ethical decisions are made and then offers a framework for understanding organizational ethics that is consistent with research, best practices, and regulatory developments.Using this framework, the chapter then discusses how ethical decisions are made in the context of an organization and poses some illustrative ethical issues that need to be addressed in organizational ethics.

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Defining Organizational Ethics

Ethics has been termed the study and philosophy of human conduct, with an emphasis on the determination of right and wrong. For managers, ethics in the workplace refers to rules (standards, principles) governing the conduct of organization members. Most definitions of ethics relate rules to what is right or wrong in specific situations. For present purposes, and in simple terms, organizational ethics refers to generally accepted

standards that guide behavior in business and other organizational contexts (LeClair, Ferrell, and Fraedrich 1998).1

One difference between an ordinary decision and an ethical one is that accepted rules may not apply and the decision maker must weigh values in a situation that he or she may not have faced before. Another difference is the amount of emphasis placed on a person’s values when making an ethical decision. Whether a specific behavior is judged right or wrong, ethical or unethical, is often determined by the mass media, interest groups, the legal system, and individuals’ personal morals. While these groups are not necessarily “right,” their judgments influence society’s acceptance or rejection of an organization and its activities. Consequently, values and judgments play a critical role in ethical decision making, and society may institutionalize them through legislation and social sanctions or approval.

Individual vs. Organization

Most people would agree that high ethical standards require both organizations and individuals to conform to sound moral principles. However, special factors must be considered when applying ethics to business organizations. First, to survive, businesses must obviously make a profit. Second, businesses must balance their desire for profits against the needs and desires of society. Maintaining this balance often requires compromises or tradeoffs. To address these unique aspects of organizational ethics, society has developed rules-both explicit (legal) and implicit-to guide owners, managers, and employees in their efforts to earn profits in ways that do not harm individuals or society as a whole. Addressing organizational ethics must acknowledge its existence in a complex system that includes many stakeholders that cooperate, provide resources, often demand changes to encourage or discourage certain ethical conduct, and frequently question the balancing of business and social interests. Unfortunately, the ethical standards learned at home, in school, through religion, and in the community are not always adequate preparation for ethical pressures found in the workplace.

Organizational practices and policies often create pressures, opportunities, and incentives that may sway employees to make unethical decisions. We have all seen news articles describing some “decent, hard-working family person” who engaged in illegal or unethical activities. The Wall Street Journal (Pullman 2003) reported that Betty Vinson, a midlevel accountant for WorldCom, Inc., was asked by her superiors to make false accounting entries. Ms. Vinson balked a number of times but then caved in to management and made illegal entries to bolster WorldCom’s profits. At the end of 18 months she had helped falsify at least $3.7 billion in profits. When an employee’s livelihood is on the line, it is difficult to say “no” to a powerful boss. At the time this chapter was written, Ms. Vinson was awaiting sentencing on conspiracy and securities fraud and preparing her 12 year old daughter for the possibility that she will be incarcerated.

Importance of Understanding Organization Ethics

Understanding organizational ethics is important in developing ethical leadership. An individual’s personal values and moral philosophies are but one factor in decision-making processes involving potential legal and ethical problems. True, moral rules can be related to a variety of situations in life, and some people do not distinguish everyday ethical issues from those that occur on the job. Of concern, however, is the application of rules in a work environment.

Just being a good person and, in your own view, having sound personal ethics may not be sufficient to handle the ethical issues that arise in the workplace. It is important to recognize the relationship between legal and ethical decisions. While abstract virtues such as honesty, fairness, and openness are often assumed to be self-evident and accepted by all employees, a high level of personal, moral development may not prevent an individual from violating the law in an organizational context, where even experienced lawyers debate the exact meaning of the law. Some organizational ethics perspectives assume that ethics training is for people who have unacceptable personal moral development, but that is not necessarily the case. Because organizations are comprised of diverse individuals whose personal values should be respected, agreement regarding workplace ethics is as vital as other managerial decisions. For example, would an organization expect to achieve its strategic mission without communicating the mission to employees? Would a firm expect to implement a customer relationship management system without educating every employee on his or her role in the system? Workplace ethics needs to be treated similarly-with clear expectations as to what comprises legal and ethical conduct.

Employees with only limited work experience sometimes find themselves making decisions about product quality, advertising, pricing, hiring practices, and pollution control. The values that they bring to the organization may not provide specific guidelines for these complex decisions, especially when the realities of work objectives, group decision making, and legal issues come into play. Many ethics decisions are close calls.Years of experience in a particular industry may be required to know what is acceptable, and what is not acceptable.

Even experienced managers need formal training about workplace ethics to help identify legal and ethical issues. Changing regulatory requirements and ethical concerns, such as workplace privacy issues, make the ethical decision-making process very dynamic. With the establishment of values and training, a manager will be in a better position to assist employees and provide ethical leadership.

Understanding Ethical Decision Making

It is helpful to consider the question of why and how people make ethical decisions. Typically it is assumed that people make difficult decisions within an organization in the same way they resolve difficult issues in their personal lives. Within the context of organizations, however, few managers or employees have the freedom to decide ethical issues independently of workplace pressures. Philosophers, social scientists, and various academics have attempted to explain the ethical decision-making process in organizations by examining pressures such as the influence of coworkers and organizational culture, and individual-level factors such as personal moral philosophy.

Figure 1.1 presents a model of decision making. This model synthesizes current knowledge of ethical decision making in the workplace within a framework that has strong support in the literature (e.g., Ferrell and Gresham 1985; Ferrell, Gresham, and Fraedrich 1989; Hunt and Vitell 1986; Jones 1991; Trevino 1986). The model shows that the perceived intensity of ethical and legal issues, individual factors (e.g., moral development and personal moral philosophy), and organizational factors (e.g., organizational culture and coworkers) collectively influence whether a person will make an unethical decision at work. While it is impossible to describe precisely how or why an individual or work group might make such a decision, it is possible to generalize about average or typical behavior patterns within organizations. Each of the model’s components is briefly described below; note that the model is practical because it describes the elements of the decision-making process over which organizations have some control.

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Figure 1.1

Framework for Understanding Ethical Decision Making in the Workplace

Individual Personal moral

factors philosophy

Stage of moral

development

factors

Ethical issue intensity

Organizational

factors

Organizational

culture

Coworkers and

superiors

Opportunity

Ethical/Unethical,

Decision

________________________________________________________________________

Ethical Issue Intensity

One of the first factors to influence the decision-making process is how important or relevant a decision maker perceives an issue to be, that is, the intensity of the issue (Jones 1991). The intensity of a particular issue is likely to vary over time and among individuals and is influenced by the values, beliefs, needs, and perceptions of the decision maker; the special characteristics of the situation; and the personal pressures weighing on the decision. All of the factors explored in this chapter, including personal moral development and philosophy, organizational culture, and coworkers, determine why different people perceive issues with varying intensity (Robin, Reidenbach, and Forrest 1996). Unless individuals in an organization share some common concerns about specific ethical issues, the stage is set for conflict. Ethical issue intensity reflects the sensitivity of the individual, work group, or organization, and triggers the ethical decision-making process.

Management can influence ethical issue intensity through rewards and punishments, codes of conduct, and organizational values. In other words, managers can affect the perceived importance of ethical issues through positive and negative incentives (Robin, Reidenbach, and Forrest 1996). If management fails to identify and educate employees about problem areas, these issues may not reach the critical awareness level of some employees. New employees who lack experience in a particular industry, for example, may have trouble identifying both ethical and legal issues. Employees therefore need to be trained as to how the organization wants specific ethical issues handled.

Identifying ethical issues that employees might encounter is a significant step in

developing employees’ ability to make decisions that enhance organizational ethics.

New federal regulations that hold both organizations and their employees responsible for misconduct require organizations to assess areas of ethical and legal risk. Based on both the 2002 Sarbanes-Oxley Act and the United States Sentencing Commission guidelines, there are strong directives to encourage ethical leadership. If ethical leadership fails, especially in corporate governance, there are significant penalties. When organizations communicate to employees that certain issues are important, the intensity of the issues is elevated. The more employees appreciate the importance of an issue, the less likely they are to engage in questionable behavior associated with the issue. Therefore, ethical issue intensity should be considered a key factor in the decision-making process because there are many opportunities for an organization to influence and educate employees on the importance of high risk issues.

Under the Sarbanes-Oxley Act, boards of directors are required to provide oversight for all auditing activities and are responsible for developing ethical leadership. In addition, court decisions related to the Federal Sentencing Guidelines for Organizations hold board members responsible for the ethical and legal compliance programs of the firms they oversee. New rules and regulations associated with Sarbanes-Oxley require that boards include members who are knowledgeable and qualified to oversee accounting and other types of audits to ensure that these reports are accurate and include all information material to ethics issues. A board’s financial audit committee is required to implement codes of ethics for top financial officers. Many of the codes relate to corporate governance, such as compensation, stock options, and conflicts of interest.

Individual Factors

One of the greatest challenges facing the study of organizational ethics involves the role of individuals and their values. Although most of us would like to place the primary responsibility for decisions with individuals, years of research point to the primacy of organizational factors in determining ethics at work (e.g., Ferrell and Gresham 1985). However, individual factors are obviously important in the evaluation and resolution of ethical issues. Two significant factors in workplace integrity are an individual’s personal moral philosophy and stage of moral development.

Personal Moral Philosophy

Ethical conflict occurs when people encounter situations that they cannot easily control or resolve. In such situations, people tend to base their decisions on their own principles of right or wrong and act accordingly in their daily lives. Moral philosophies-the principles or rules that individuals use to decide what is right or wrong-are often cited to justify decisions or explain behavior. People learn these principles and rules through socialization by family members, social groups, religion, and formal education.

There is no universal agreement on the correct moral philosophy to use in resolving ethical and legal issues in the workplace. Moreover, research suggests that employees may apply different moral philosophies in different decision situations (Fraedrich and Ferrell 1992). And, depending on the situation, people may even change their value structure or moral philosophy when making decisions. Individuals make decisions under pressure and may later feel their decisions were less than acceptable, but they may not be able to change the consequences of their decisions.

Stage of Moral Development

One reason people may change their moral philosophy has been proposed by Lawrence Kohlberg, who suggested that people progress through stages in their development of moral reasoning. Kohlberg contended that different people make different decisions when confronted with similar ethical situations because they are at different stages of what he termed cognitive moral development (Kohlberg 1969). He believed that people progress through the following three stages:

The pre-conventional stage of moral development, in which individuals focus on their own needs and desires.

The conventional stage of moral development, in which individuals focus on group-centered values and conforming to expectations.

The principled stage of moral development, in which individuals are concerned with upholding the basic rights, values, and rules of society.

Obviously there is some overlap among these stages, such that cognitive moral development should probably be viewed as more of a continuum than a series of discrete stages. Although Kohlberg did not specifically apply his theory of cognitive moral development to organizations, its application helps in explaining how employees may reason when confronted with an ethical dilemma. Kohlberg’s theory suggests that people may change their moral beliefs and behavior as they gain education and experience in resolving conflicts, which in turn accelerates their moral development.

A question that arises is whether moral philosophy and moral development can predict ethical behavior in businesses and other organizations. Fraedrich and Ferrell (1992) found that only 15 percent of a sample of businesspersons maintained the same moral philosophy across both work and nonwork ethical decision-making situations. One explanation may be that cognitive moral development issues that relate to a person’s nonwork (e.g., home, family) experiences are not the most significant factors in resolving ethical issues within an organization. The ethics and values of an individual’s immediate work group, rather than his or her moral development, may be the most important consideration in determining ethical conduct in organizations.

Nevertheless, most experts agree that a person’s stage of moral development and personal moral philosophy play a role in how values and actions are shaped in the workplace. This may be especially true for top managers, who usually set the formal values of an organization. However, the informal use of these values and expectations plays a major role in the daily decisions that employees make. Many of these informal rules comprise the organization’s ethical climate in the context of its corporate culture.

Former Tyco International CEO Dennis Kozlowski set the leadership tone at his company and stood trial for allegedly taking $600 million in unauthorized bonuses, loans, stock sales, and other payments from the company. In his trial, the court wanted to know what the board of directors was doing while Kozlowski furnished his luxury Manhattan duplex with millions of dollars in rugs, china, and bookcases, and spent $1 million for his wife’s birthday party-all billed to the company. Kozlowski’s personal ethics were on trial, but his ethical leadership influenced everyone in the organization (McCoy 2003).

Organizational Factors

Although individuals must make ethical and legal decisions at work, it is also true that they often make these decisions in the context of committees and group meetings, and through discussions with colleagues. Decisions in the workplace are guided by an organization’s culture and the influence of others-coworkers, supervisors, and subordinates.

Organizational Culture

Organizations, like societies, have cultures that include a shared set of values, beliefs, goals, norms, and ways to solve problems. As time passes, an organization comes to be seen as a living organism, with a mind and will of its own. Although most organizational cultures reinforce ethics, some organizations, like Tyco, create a culture that supports unethical decisions. If a company derives most of its profits from unethical or illegal activities, individuals who join this organization will have a difficult time surviving unless they too participate in these activities.

For example, even though Enron had a code of ethics and was a member of the Better Business Bureau, the company was devastated by unethical activities and corporate scandal. According to Lynn Brewer, former Enron executive and author of House of Cards: Confessions of an Enron Executive, many Enron managers and employees knew the company was involved in illegal and unethical activities. Many executives and board members at Enron did not understand how organizational ethical decisions are made and how to develop an ethical corporate climate. They did not realize that top executives and boards of directors must provide ethical leadership and a system to resolve ethical issues. In the case of Enron, managers eventually paid for these ethical lapses through fines and imprisonment.

The ethical climate of an organization is a significant element of organizational culture. Whereas an organization’s overall culture establishes ideals that guide a wide range of member behaviors, the ethical climate focuses specifically on issues of right and wrong. The ethical climate of an organization is its character or conscience. Codes of conduct and ethics policies, top management’s actions on ethical issues, the values and moral development and personal moral philosophies of coworkers, and the opportunity for misconduct all contribute to an organization’s ethical climate. In fact, the ethical climate actually determines whether certain issues and decisions are perceived as having an ethical component.

Organizations can manage their culture and ethical climate by trying to hire employees whose values match their own. Some organizations even measure potential employees’ values during the hiring process and strive to hire individuals who “fit” within the ethical climate rather than those whose beliefs and values differ significantly.

As previously mentioned, some business leaders believe that hiring or promoting ethical managers will automatically produce an ethical organizational climate. However, individuals may have limited opportunity to apply their own personal ethics to management systems and decision making that occurs in the organization. Ethical leadership requires understanding best practices for organizational ethical compliance and a commitment to build an ethical climate. Over time, an organization’s failure to monitor or manage its culture may foster questionable behavior. Sometimes entire industries develop a culture of preferential treatment and self- centered greed. The once conservative mutual fund industry found itself in a major scandal in 2003 related to allowing large customers to engage in short-term and after-hours trading, in violation of their own organizations’ rules. The mutual fund organizations gave hedge fund customers the right to make frequent trades in and out of funds, a practice not accorded ordinary investors. Firms such as Janus, Alliance Capital, and Pilgrim violated their own rules and now have legal problems. Another example of an unethical industry culture is reflected in New York Attorney General Eliot Spitzer’s settlement in which 10 major Wall Street firms were collectively fined a total of $1.4 billion because their investment bankers had exerted undue influence on securities research to enhance relationships with their investment banking customers (Anonymous 2004). Small investors were the victims of these unethical and illegal cultures of preferential relationships with certain customers.

The Influence of Coworkers and Supervisors

Just as employees look for certain types of employers, they are also particular about the people with whom they work. Managers and coworkers within an organization help people deal with unfamiliar tasks and provide advice and information in both formal and informal contexts on a daily basis. A manager may, for example, provide direction regarding certain workplace activities to be performed. Coworkers offer help in the form of discussions over lunch or when a supervisor is absent. In fact, one often hears new or younger employees discussing some fear about approaching “the boss” on a tough ethical issue. Thus, the role of informal culture cannot be underestimated. Numerous studies (e.g., Ferrell and Grisham 1985) confirm that coworkers and supervisors have more impact on an employee’s daily decisions than any other factor.

In a work group environment, employees may be subject to the phenomenon of “groupthink,” where they go along with group decisions even when those decisions run counter to their own values. They may take refuge in the notion of “safety in numbers,” when everyone else appears to back a particular decision. Indeed, coworker peers can even change a person’s original value system. This value change, whether temporary or permanent, is likely to be greater when a coworker is a supervisor, especially if the decision-maker is new to the organization.

Employees may also resolve workplace issues by unquestionably following the directives of a supervisor. In a company that emphasizes respect for authority, an employee may feel obligated to carry out the orders of a superior even if those orders conflict with the employee’s values of right and wrong. Later, if a decision is judged to have been wrong, the employee is likely to say, “I was only carrying out orders,” or “My boss told me to do it this way.”

Supervisors can also have a negative effect on conduct by setting a bad example or failing to supervise subordinates. ClearOne Communications Inc. relieved its CEO and CFO of their respective responsibilities after they were named as defendants in a complaint from the Securities and Exchange Commission (Wetzel 2003). A civil complaint alleged that they directed sales personnel to push extra products to customers beyond their orders to inflate sales and earnings. Eliminating such unethical managers within an organization can help improve its overall ethical conduct. In this case, it was alleged that the CEO and CFO not only directed unethical actions but also contributed to an unethical corporate climate.

Finally, it should be mentioned in passing that individuals also learn ethical or

unethical conduct from close colleagues and others with whom they interact regularly. Consequently, a decision maker who associates with others who behave unethically will be more likely to behave unethically as well.

Opportunity

Together, organizational culture and the influence of coworkers may foster conditions that limit or permit misconduct. When these conditions provide rewards for financial gain, recognition, promotion, or simply the good feeling from a job well done, the opportunity for unethical conduct may be encouraged or discouraged. For example, a company policy that does not provide for punishment of employees who violate a rule (e.g., not to accept large gifts from clients) provides an opportunity for unethical behavior.

Bellizzi and Hasty (2003) found there is a general tendency to discipline top sales performers more leniently than poor sales performers for engaging in identical forms of unethical selling behavior. Neither a company policy stating that the behavior in question was unacceptable nor a repeated pattern of unethical behavior offset the general tendency to treat top sales performers more leniently than poor sales performers. A superior sales performance record appears to induce more lenient forms of discipline, despite the presence of other factors and managerial actions that are specifically instituted to produce more equal forms of discipline. Based on their research, Bellizzi and Hasty concluded that an opportunity exists for top sales performers to be more unethical than poor sales performers.

Opportunity usually relates to employees’ immediate work situation-where they work, with whom they work, and the nature of the work. The specific work situation includes the motivational “carrots and sticks” that supervisors can use to influence employee behavior. Organizations can improve the likelihood of compliance with ethics policies by eliminating opportunities to engage in misconduct through the establishment of formal codes and rules that are adequately enforced. However, in the sales person example, it is possible that the codes and rules were not adequately implemented. It is important to note that opportunities for ethical misconduct cannot be eliminated without aggressive enforcement of codes and rules.

One important conclusion that should be drawn from the framework presented here is that ethical decision making within an organization does not depend solely on individuals’ personal values and moral philosophies. Employees do not operate in a vacuum, and their decisions are strongly affected by the culture and ethical climate of the organization in which they work, pressures to perform, examples set by their supervisors and peers, and opportunities created by the presence or absence of ethics-related policies. Organizations take on an ethical climate of their own and have a significant influence on ethics among employees and within their industry and community.

Ethical Issues

This section briefly describes three highly visible ethical issues facing corporate America. The issues are presented to provide concrete examples of the types of misconduct that should be identified and prevented through organizational ethics programs and ethical leadership. An ethical decision is a problem situation requiring an organization or individual to choose among several actions that must be evaluated as right or wrong, ethical or unethical. Ethical issues are presented that have been associated with the major ethical scandals of the early 21st century.2

Conflict of Interest

A conflict of interest exists when individuals must choose whether to advance their own interests, the interests of their organization, or the interests of some other group or individual. An illustrative alleged conflict of interest is when Citigroup made a $1 million donation to the 92nd Street YMCA nursery school as an alleged quid pro quo so that financial analyst Jack Grubman’s children could attend the exclusive nursery. Grubman, an analyst for Salomon Smith Barney, supposedly upgraded his rating for AT&T stock after Sanford Weill, CEO of Citigroup, the parent company of Salomon Smith Barney, agreed to use his influence with the nursery to gain admission for Grubman’s children. Although Grubman denied elevating his rating for AT&T to gain his children’s admission, they were in fact enrolled (Nelson and Cohen 2003). To avoid conflicts of interest, employees must be able to separate their private interests from their business dealings.

Likewise, organizations must avoid conflicts of interest when providing goods and services. Arthur Andersen served as the outside auditor for Waste Management, Inc. while simultaneously providing consulting services to the firm. This led the Sec