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This is ethics and governance module. This assignment requires you to write an essay of 2000 words. Times New Roman with font size of 12. 15 references are required in this essay which harvard referencing style has to be used. The report must consist of the introduction which is whether u agree or disagree with the formal system being the most important factor and also the overview of the essay, body which consist of the arguments of formal and informal. at the same time you need to state how the formal cultural systems attempt to promote ethics eg. rewards and the selection. and the conclusion which summarise the whole essay and what do you think of formal system and is it rationale for everyone to follow the same ethics. You can read up more on trevino if you want to have a better understading of this question. Thanks
Ethics & Governance
Lecture 1: Introduction to Ethics & Governance
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Overview Today
A brief introduction to the course’s management, readings and assessments
Plagiarism – academic integrity
Essay writing – study research techniques
Ethics and morality
Ethics and the law
Ethics in business and corporate governance
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Readings
There is no prescribed textbook for this subject.
There are essential readings on the myRMIT studies website.
A lot of the material in the course has been developed from these two texts which are excellent references:
1. Mallin, C A, 2010. Corporate Governance, Oxford University Press, UK.
2. Trevino, LK & Nelson, KA (2011) Managing Business Ethics: Straight Talk about How to Do It Right (5th Edition), John Wiley, USA.
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Assessment Overview
Research Essay (2000 words) 40%
Due date: TBA.
Exam 60%
Scheduled during examinations period
All assessment tasks must be submitted to pass & 50% must be attained in order to pass
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Assessment 1: Research Essay
(2000 words)
Choose one of the following three topics:
Is the formal cultural system within a firm the most important factor in creating an ethical workplace? How do formal cultural systems attempt to promote ethics?
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For the essay:-
Use at least 15 references:
* eight academic journal articles peer reviewed
&
* six other quality references
Electronic and Hardcopy submission.
Turnitin
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Assessment Criteria for the Essay
Key issues relating to the question have been developed
Original and clear argument
Logical and convincing discussion
Ideas and assertions substantiated through use of high quality reference material and key academic perspectives/views used to develop arguments
Appropriate Harvard style referencing (intext and list of references)
Number and quality of references
Clear and comprehensive written style (spelling, grammar, syntax etc.)
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Harvard referencing style continued
Harvard is an author-date referencing style widely accepted in scholarly circles. Each reference is indicated in the text by the author and date of the publication cited, sometimes with added information such as page numbers. The full details of these references are listed at the end of the text in a Reference list. Please follow this information given to you by us regarding referencing.
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Harvard Referencing continued
Here is another clear guide to show our students and staff how to reference using the Harvard Referencing style.
Harvard Citation Style Examples
Follow this link for a simple and clear way to use Harvard Citation Style Examples –
http://guides.is.uwa.edu.au/content.php?pid=43218&sid=318559
The PDF for the above url is also on the on MyRMIT Learning Hub for this Course – see Assessment
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REFERENCING FROM THE INTERNET
You cannot copy works (text, images, media etc.) off the
Internet without referencing your source.
If you are using text, an image or other media from a webpage, you must reference the material.
Check with your lecturer or course guides for your course requirements.
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Essay assessment criteria
See the Course information Document for assessment criteria for the essay.
12
Ethics vs Morality
Morality reflects a person’s or group’s standards of right and wrong. Moral understanding is usually developed passively.
Ethics is the assessment of moral standards. Ethics is developed actively – through the use of theories and experience.
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reference/12133674
Ethical Behaviours in Organizations:
Directed by the Formal or
Informal Systems?
Loren Falkenberg
Irene Herremans
ABSTRAGT. Past research has focused on individual
culpability with the assumption that individuals
will further their own self interest over that of the
organization, given an appropriate opportunity. In
contrast, this research shifts the focus from individual
motivation to the influence of the formal and
informal control systems of organizations on ethical
behaviours. An open-ended interview approach was
used to collect data. It was found that pressures within
the informal system were the dominant influence in
the resolution of ethical issues. The dominance of the
informal system, however, varies according to the
ecCinomic position of the organization.
A common assumption in the structuring of
organizational control systems is that individuals
are opportunistic; that is, they focus on fur-
thering their own interest over the organization’s.
Organizations support this orientation out of self
interest; it is easier to blame an employee for
wrong doing than to identify problems within an
organization and initiate appropriate adjustments
(Jansen and VonGlinow, 1985). Within academic
circles this negative view of employees has been
perpetuated by the dominance of agency theory,
particularly in the accounting and finance spheres.
In contrast, the premise of this research is the
majority of individuals are honest and moral;
while the control systems within organizations
often encourage unethical behaviours and/or
Loren Falkenberg and Irene Herremans are Associate
Professors in the Faculty of Management at the
University of Calgary. Both have published in a wide
variety of academic journals. Loren Falkenberg teaches
courses in business ethics and management of human
resources while Irene Herremans teaches in the accounting
and tourism areas.
poor decisions. Thus, the focus shifts from indi-
vidual motivation to pressures exerted on the
individual through the formal and informal
control systems. The need to recognize the
pressures exerted in the organization’s formal and
informal systems is noted in Frederick’s (1983)
observation:
Individual actions are often a function of organi-
zational imperatives. The core values of the
business system — economic and organizational
growth, the preservation of power, the quest for
profits, the rational calculation of gain, the expe-
dient and pragmatic perspective and loyalty to the
ideological spirit that pervades the system — drive
all business firms to a social end that is perhaps
not part of the intention of the individual business
person caught in the system’s toils (p. 147)
An interactionist approach is used in this
research. More specifically, it is assumed ethical
situations involve a combination of individual and
situational factors (Trevino, 1986), with the focus
of this paper on situational factors. This research
expands the interactionist approach by including
a second level interaction of situational factors;
this interaction is between the formal and
informal systems of behavioural control within
organizations. Relatively little is know about the
interaction between the formal and informal
control systems, and the impact of this interac-
tion on ethical behaviours; thus this research is
exploratory.
Behavioural control systems
Formal systems
An organization’s formal system of behaviour
Journal of Business Ethics 14: 1 3 3 – 1 4 3 , 1995.
© 1995 Kluwer Academic Publishers. Printed in the Netherlands.
134 L. Falkenberg and L Herremans
control is identified as the written procedures and
policies that direct behaviour so as to achieve the
organization’s goals, and/or detect/deter mis-
conduct (Leatherwood and Spector, 1991;
Ouchi, 1977). Elements of a formal system
include organizational goals, budgets, reward
criteria, performance appraisal standards, and
codes of ethics.
Formal control systems are, totally or partially,
designed to monitor the agency relationships
within business organizations (Jensen and
Meckling, 1976). An agency relationship involves
a contract under which one or more persons (the
principal) engage another person (the agent) to
perform some service on their behalf. If both
parties to this relationship are utility maximizers,
it is probable the agent wiU not always act in the
best interests of the principal. Problems arising
from agency relationships are the conflict
between the desires or goals of the agent and
principal, and the costs absorbed by the principal
in attempting to verify the agent’s behaviour
(Eisenhardt, 1989). Formal control systems are
most effective when the environment is stable,
routine behaviours are required, the transforma-
tion process (or employees behaviour) can be
monitored, and the employees output measured
(Baucus and Near, 1991; Ouchi, 1977, 1980).
Effective formal systems reduce uncertainty for
an organization’s management group in that they
provide a base upon which to predict employee
behaviours.
Informal systems
In contrast to a formal system, an informal system
does not control behaviour through explicit,
verifiable measures. Rather, an informal system
is comprised of common values, beliefs, and
traditions that direct the behaviour of group
members (Ouchi, 1980; White, 1980). Group
members (employees) learn the values, beliefs and
traditions through a subtle reading of signals
relayed by supervisors and co-workers. If they fail
to comprehend and respond appropriately to the
“maze of unspoken rules” they do not survive
in an organization (Jackall, 1988).
The power of the informal system stems from
its control of behaviour in ambiguous and/or
unexpected situations. Controlling behaviour
through formal rules requires the development of
specific rules for specific situations, prior to the
situations occurring. Organizations can never
specify a set of written rules that will cover all
possible contingencies; thus, the formal system
provides limited guidance (Ouchi, 1980). In
contrast, the informal system does not require
specific rules to guide behaviour. The tacit rules
propagated by the informal system produce an
imphcit philosophy or knowledge as to how the
organization works and what it expects. From
this implicit knowledge an employee can deduce
an appropriate rule to govern any specific situa-
tion; thus the informal system provides an elegant
and complete form of control (Ouchi, 1980).
The informal system fluctuates from being the
strongest to the most fragile system for encour-
aging desired behaviours (Noreen, 1988). The
fragility of the informal system develops from its
strength. Depending on the implicit knowledge
generated by the informal system, it will promote
behaviours that are either congruent or incon-
gruent with organizational goals.
Interaction between the formal and informal systems
Within organizations it is difficult to separate the
control of the formal and informal systems on
behaviour. The interaction between the two
systems confuses the roles each system performs.
From a simplistic view, the informal system acts
to support or circumvent the formal system, and
this is where the hypothesized interaction
between the two systems develops. When the
values and norms of the informal system rein-
force behaviours that support the formally iden-
tified organization values and/or goals, the
systems are congruent. When pressures within
the informal system encourage behaviours that
are not aligned with the formally stated values
and goals, the systems are incongruent.
Control of ethical behaviours
The first hypothesis of this paper is the informal
system is the dominate source of control in the
Formal/Informal Systems 135
resolution of ethical issues. When resolving an
ethical dilemma employees are most likely to
attend to the system that provides the most
relevant information for a particular problem.
Moral standards are developed within the
informal system (Riedenbach and Robin, 1991;
Sims, 1992); and the priorities to be used in
resolving ethical issues are discerned from these
moral standards. Thus, because moral standards
provide the information needed to resolve moral
issues, and are an inherent component of the
organization’s informal system, employees are
most likely to respond to forces exerted in the
informal system when resolving ethical issues.
Given its dominant role, the informal system
influences what ethical conflicts are considered
by members of an organization, the process by
which conflicts are resolved, and the character-
istics of the resolution (Victor and Cullen, 1988).
Reliance on formal systems to control
behaviour may have been more appropriate in
the’ past when the major ethical issues involved
misappropriation of funds/assets or fraud.
However, with the increasing complexity of our
society ethical issues in business involve more
than monetary issues (i.e., fraud, misappropria-
tion of funds). Organizations and their employees
must balance a complex series of stakeholder
relationships. These stakeholder relationships go
beyond the basic principal/agent relationship
identified in agency theory to such abstract issues
as “appropriate use of public goods”, “sustain-
able development”, “consumer rights”, and
“social costs of production” (Lodge, 1975).
Unfortunately, the formal system lacks the scope,
flexibility, and sensitivity required to grapple with
the more complicated ethical issues.
Congruent systems
The most effective control of behaviour occurs
when the formal and informal systems are con-
gruent. Unfortunately, congruence between the
two systems does not necessarily produce an
ethical culture. Ethical cultures result when
formal policies and procedures involving ethical
criteria are supported by ethical values and norms
within the informal system.
Unethical cultures can develop when the
formal system encourages employees to focus
solely on the “economic interest” of the
organization, and the norms/expectations of
the informal system revolve around achieving
economic criteria (i.e., the bottom line).
Rewarding employees on the basis of the
“bottom line” can encourage them to inappro-
priately neglect the interests of one or more of
the organization’s stakeholders (Andrews, 1989;
Cooke, 1991). For example, when organizational
objectives only involve profit, competitive
advantage and/or demands of the shareholders,
individuals within the organization experience
more ethical dilemmas than when organizational
goals are associated with being a “socioeconomic
institution with responsibilities to stakeholders”
(Andrews, 1989; Cooke, 1991; Hosmer, 1987).
Less than ethical decisions arise when social
consequences are not considered, and decisions
are rationalized on short term needs, legal
guidelines and/or the role of the invisible hand
in monitoring the pursuit of self interest (Cooke,
1991).
Incongruent systems
Incongruence between the formal and informal
systems will develop when the formal system
identifies ethical values and/or goals while
pressures within the informal system reinforce less
than ethical behaviours or decisions. When
organizational practices reward behaviours that
violate ethical standards, counternorms develop
(Jensen and VonGlinow, 1985; Sims, 1992).
Counternorms are accepted organizational
practices that are contrary to prevailing ethical
standards. Examples of counternorms within
organizations are: (a) be secretive and deceitful as
opposed to being open and honest, (b) do
whatever it takes to get the job done versus
follow the rules at all costs, (c) use it or lose it
instead of be cost effective, or (d) take credit for
your own actions versus be a team player (Simms,
1992, p. 508). Counternorms create situations
of ambiguous priorities, where employees must
discern whether the priorities in the formal or
informal system are relevant for a given situation.
136 L. Falkenberg and I. Herremans
Incongruence between the two systems is most
likely to develop when senior managers of an
organization fail to recognize the role of the
informal system or subtly encourage behaviours
that conflict with the formal guidelines. Some
organizations operate on the belief a well defined
formal system is all that is needed to produce
correct behaviours (White, 1980). This belief
may be appropriate in situations where the
required behaviours and/or decisions are routine
and the operating environment is stable.
Unfortunately, organizations can rarely predict
all the situations or decisions employees will
experience. Often individuals must resolve
ambiguous issues, such as a conflict of rights
between an organization and a stakeholder. It is
impossible for organizations to develop formal
policies and procedures that identify right and
wrong behaviours for these ambiguous situations.
Other organizations hide behind their formal
policies while sanctioning the norms/expecta-
tions within the informal system that lead to
unethical or inappropriate behaviours. For
example, an organization may have a formal code
of ethics yet the employees struggle to meet
unrealistic performance objectives. In order to
achieve the objectives employees engage in less
than ethical behaviours (Mihalek et al, 1990).
When a decision is made because of its ethical
consequences, it is often justified as a public
relations tool rather than on the basis of a moral
imperative (Cooke, 1991). Thus, pressures within
the informal system can lead employees to focus
on the bottom line while ignoring the rights of
various stakeholders.
Role models, particularly those of senior man-
agement, are the most influential force within the
informal system (Andrews, 1989; Waters and
Bird, 1987). Given the proposed dominance of
the informal system in the resolution of ethical
issues, it is hypothesized that when senior
management exhibits behaviours incongruent
with formal goals and policies the employees
will follow the behaviours of management.
When the values and norms of the informal
system are to make the “bottom line at all costs”
(i.e., disregarding ethical issues) employees will
fail to consider the long term and/or social
consequences of their decisions.
Summary of research objectives
The purpose of this research is to examine the
interaction between the formal and informal
systems of organizations, and the impact of this
interaction on encouraging ethical or unethical
behaviours. The interaction between the formal
and informal systems produces conditions of
congruence or incongruence. Ethical decisions/
behaviours are most likely when an organization’s
informal system supports the ethical criteria
identified in the formal policies and procedures
(i.e., congruence). Incongruence between the
two systems is most likely to develop when the
formal system includes ethical considerations, but
senior management of an organization fails to
recognize the role of the informal system or
subtly encourages behaviours that conflict with
the formal guidelines.
The specific hypotheses of this research are:
(a) The informal system is the dominate
source of control in the resolution of
ethical issues.
(b) Incongruence between the formal and
informal systems will occur when an
organization’s formal goals/policies in-
clude ethical concerns; while the values
and norms within the informal system are
dominated by concern for the bottom line
or economic criteria.
(c) Incongruence between the formal and
informal systems is more likely when
senior management demonstrates behav-
iours inconsistent with the formally stated
goals and policies of the organization
Methodology
Data collection
The methodology employed in this paper
addresses a “missing hnk” identified with
previous research in that it “listens to managers/
professionals in order to understand the ethical
issues” (Derry, 1989, p. 856). More specifically
data were gathered through small discussion
groups, with three or four professionals/managers
Formal/Informal Systems 137
in a group. Five discussion groups, with a total
of 17 participants, were held.
The discussion groups were managed in a
similar fashion to the open ended interviews of
Waters et al (1986). Discussions within each
group were initiated by the investigators posing
questions relating to (a) what encouraged ethical
behaviours in organizations and (b) what factors
led to unethical behaviours. These questions
were not used to control or limit the discussion
to a specific issue. As well, questions were used
to direct the group discussion away from a
general, abstract discussion of morality in
business. At no point did the investigators
attempt to define ethics or morals, except to note
they involved notions of right and wrong.
Each discussion group lasted a minimum of
two hours, with some groups lasting two and a
half hours. Each group was structured to include
individuals from different industries and various
sizes of organizations (see Table I), as well as
from various levels within the organizations. The
discussion groups were held in a neutral, acces-
sible location. The location and hours were
chosen to make it easy for participants to meet
after work.
Participants
The Institute of Internal Auditors worked with
the researchers in identifying specific companies
from which participants were drawn. The fol-
lowing criteria were used in selecting companies
and participants: (a) broad representation of
industries, (b) representation of various sizes of
organizations, and (c) representation from dif-
ferent levels within the organizations (see Table
I). Members of the Institute identified personal
contacts within the companies and then asked
these contacts to identify appropriate individuals
to participate in the research.
All organizations contacted were willing to
participate in the research. Each organization
identified a minimum of one individual to
contact for participation in the group discussions.
After an organization provided the name(s) of
potential participant(s) a letter was sent to each
candidate. (The initial contact within the orga-
nization was not aware if the suggested candidate
actually participated.) The letter indicated that as
a volunteer the individual would be participating
in a small group discussion with approximately
four other volunteers. All individuals contacted
TABLE I
Profile of participants (industry, size of organization, organization level)
Industry composition
Industry
Natural
resources
Agriculture
Transportation
Public sector
Not for profit
Retail
Entertainment
Manufacturing
Number of
participants
8
1
1
2
2
1
1
1
Size of organization
Number of
employees
Greater than
than 1500
400-1500
Less than 400
Number of
participants
7
6
4
Organization level of participants
Organizational Number of
level’ participants
Senior 8
management
Middle 4
management
Professional 5
Participants classified themselves into levels.
138 L. Falkenberg and I. Herremans
agreed to participate, with extenuating cir-
cumstances preventing three individuals from
eventually attending a discussion session. The
letter also included the following statement: The
discussion will center around the practices,
procedures, and systems within organizations that
hinder or support ethical decision making.
Data analysis
Given participants might be concerned about any
tape recording of the interviews, two individuals
took extensive notes. These individuals attempted
to write all comments with the exact wording
of the participants. Each set of notes was tran-
scribed and analyzed with the aid of a computer
program.
The participant’s comments were analyzed
with the following steps. First, each investigator
reviewed and sorted all comments according to
topics or themes. Second, together the investi-
gators reviewed the list of topics and/or themes
developed in the first step, and developed a
combined list of categories. Next, each investi-
gator individually reviewed the comments and
sorted them into the identified categories.
Additional categories were created if a comment
did not obviously fall into an identified category.
After the second sort was conducted, the cate-
gorized comments were reviewed a third time
to ensure consistency between investigators.
Across each sort there was approximately 90
percent agreement between the investigators on
identified themes and topics.
Findings
Ceneral impact of formal and informal systems
All the participants believed that “ethical behav-
iour and good business” are not incongruent
concepts. The majority, however, also perceived
that organizations often focus on the bottom line
at the cost of ethical behaviours (see Table II).
A significant number of discussants indicated
formal policies and procedures can play an
important role in guiding the behaviour of
individuals. However, they also recognized that
formal policies and procedures do not create
more ethical behaviour within individuals or
organizations. As well, discussants noted that
when organizations rely on written policies to
control behaviours, employee development (in
particular judgement skills) is blocked and more
dishonesty occurs. Participants indicated the most
important functions of policies should be to (a)
protect employees, (b) develop a sense of fairness
across employees, and (c) create efficiency in the
sense that a manager would not have to address
the same issue repeatedly.
TABLE II
Sample comments on the general impact of formal policies
Policies are viewed as hard and cold that don’t always fit . . . its hard to be flexible.
Normally policies are just passed on on a need to know basis firom superiors to subordinates.
Our company has a policy manual . . . until recently manuals were not available unless you asked for them.
Every area has a policy manual but it is not read very often.
We decide within our group what we are going to do with a policy or procedure – the interpretation is up
to the group.
Gommon sense is required for interpreting policies; the critical word is substantial.
In our organization the conflict of interest guidelines are strict for the staff but ambivalent for management
— there is a major difference in the treatment of lower level and managerial employees.
Once you reach a level of management you are taken care of; there is an inner circle which takes care of its
members.
The further one goes down the ladder the more rigid the enforcement of polcies.
Formal/Informal Systems 139
Dominance of informal system
There was unanimous opinion that even when
policies and procedures are in place, the informal
system is the dominant influence on behaviour.
The dominance of the informal system was
related to two different conditions within an
organization. The first is that formal policies are
developed within higher levels in organizations
and fail to descend to the lower levels (see Table
II). Second, when the policies do descend to
the lower levels they must be interpreted and
implemented by an individual or department
in relation to a given situation. And, it is the
values and expectations ascertained through the
informal system that are used to interpret and
implement formal policies.
Focus on economic criteria
There was complete agreement that organizations
often include ethical criteria within their
formally delineated goals. However, the major
opinion was that in most organizations achieving
the bottom line is more important than any social
considerations (see Table III). Thus, regardless
of the ethical criteria delineated within the
organization’s formal system the implicit under-
standing is that achieving the bottom line is most
important.
Impact of role models
Participants were unanimous in their belief that
role models are the major determinant of the
level of ethical or unethical behaviours in an
organization. However, the comments were
divided in terms of identifying the most influ-
ential role models (see Table III). Although many
of the participants suggested the behaviours of
the CEO/President are the dominate influence
in any organization, the general conclusion was
that the influence of the CEO is related to the
size of the organization. The visibility and
influence of the president’s behaviours in smaller
organizations is greater than the influence of
senior management in larger organizations.
Participants from large organizations suggested
the ethics of the C E O rarely filter down to lower
levels. Rather the most influential role models
are manager/supervisors because of their visi-
bility. The behaviours exhibited by an employee’s
direct supervisor may or may not align with those
of senior management, thus creating a potential
area of incongruence.
Impact of economic position of the organization
An unexpected finding was the identification of
three categories of unethical behaviours and their
relationship to the organization’s economic
TABLE III
Sample comments on elements of the informal systems
Focus on economic criteria
• Our organization is very concerned about its image yet employees see this as a motherhood statement.
• Our organization condemns an activity when it is in the company’s best interests to do so.
• Where there are grey areas we push to the company’s advantage.
• There are ambiguous priorities because of the perception that management’s orientation is to profit.
• Some organizations will not allow stealing from the company but will allow employees to steal from others.
Role models
• GEO has tremendous influence on the culture of the organization.
• The organization’s culture is the overriding factor, not structure . . . now my company has a president who
is more ethical while the previous president was not a people person and was less ethical.
• Management are natural role models therefore they must be perceived as clean.
• Peers/supervisors provide role models as to use of company property or following company policy.
• . . . Management is more influential than the GEO — there are far more individuals in management — ethics
do not filter through the organization.
140 L. Falkenberg and I. Herremans
position. The three classes of unethical behav-
iours are: (a) graft, fraud, or kickbacks, (b)
operating practices and/or product standards, and
(c) level of conformance to laws or regulations.
In relation to graft, fraud or kickbacks there was
unanimity in the conclusion that influences
within the informal system sanction these behav-
iours/activities when profit margins are high or
the economic situation is prosperous (see Table
IV). Under this type of economic situation the
organization is not concerned with reducing
costs, thus formal controls (e.g., audit procedures)
are ignored. As well, the perception is everybody
is “doing it.” Those who do not participate in
these practices lose their competitive position,
and/or employees lose their chance to improve
their own situation.
In contrast, informal norms which support
poor or unsafe operating practices and/or lower
product standards develop when cost reductions
or profit margins are low. In a poor economic
climate it is more acceptable to overlook safety
infractions and cheat on the product specifica-
tions. As well, when organizations experience
uncertainty in terms of economic status or
profitability they are more likely to meet the
minimal regulatory requirements, or even ignore
them. When organizations experience prosperity
they often go beyond the regulatory guidelines
in their operating practices (e.g., environmental
considerations) and/or implement programs that
are not necessarily required by law (e.g., employ-
ment equity).
Participants indicated that in crisis situations
decision criteria identified in formal policies and
procedures are forgotten or lost. Decisions are
based on what is perceived as necessary to
survive, whether ethical or not.
Discussion and conclusions
The overriding conclusion of this research is that
the informal systems within organizations are the
dominant influence on behaviour when ethical
issues are resolved. This conclusion supports the
first hypothesis. It is ironical that while partici-
pants did not recognize formal policies as
adequate mechanisms for encouraging ethical
behaviours, they believed senior management
considers written policies a major influence on
employees’ behaviours. In contrast to agency
theory, participants suggested formal policies and
procedures should protect the employees rather
than the “principal’s assets”, and should create a
perception of fairness within the organization.
The explanations provided by participants for
the dominance of the informal system were
similar to the rationale developed in the intro-
duction. Participants suggested that information
from the informal system is used to interpret and
implement the formal policies and procedures. In
the introduction to the paper it was suggested
that employees would depend on the informal
system to resolve ethical issues as this is where
moral standards and the ensuing priorities
develop.
Participant’s comments provided additional
clarification of the ineffectiveness of formal
policies and procedures in controlling behaviour.
TABLE IV
Sample comments on the impact of economic status on ethical behaviours
Margins are critical . . . with thin margins there are fine tuned controls.
In the boom there were major kickbacks. Once the company started to focus on costs they cleaned house.
In good economic times padded budgets allow “blind eyes”.
When the market gets tight there is motivation to bend to pressure and cheat on the specs . . .
We do not exceed environmental regulations in poor economic times.
In poor economic times safety costs money and there is pressure to cut costs . . .
Rules change when the organization is on the edge of a catastrophe.
Ethical individuals lose sight of their values in a crisis.
What do you do when you are fighting for survivial?
Formal/Informal Systems 141
Unfortunately, formal (i.e., written) policies and
procedures often fail to descend down to the
individuals who should be implementing them.
These explanations highlight the incongruence
that arises when senior management fails to
recognize the role of the informal system and/or
believes the formal system is all that is necessary
to guide employees’ behaviours.
Although the informal system is considered
the dominant influence on behaviour, partici-
pants indicated formal policies and procedures are
important behaviour guides. In other words, a
strong informal system is not sufficient to ensure
ethical decisions or behaviours. Without formal
policies and procedures in place organizations
are more vulnerable to influences encouraging
unethical behaviours. The implication of this
finding is that congruence between the formal
and informal system is the strongest assurance for
an ethical culture.
Incongruence between the formal and
informal systems was found when the formal
system identified ethical criteria while the
values/norms of the informal system focus on
achieving the bottom line. This finding supports
the second hypothesis. In the introduction, it was
suggested that incongruence between the formal
and informal systems and/or the development of
counternorms could produce ambiguous priori-
ties for employees. However, the dominance of
the bottom line orientation in most organizations
suggests that regardless of what is stated in formal
policies or procedures, ethical or social criteria
are acceptable only as long as they do not
interfere with the profitability of the business.
Thus, implicit priorities would be a more appro-
priate term than ambiguous priorities.
The third hypothesis was partially supported
in that role models were perceived as the
dominant influence in the informal system.
When senior managers provide the dominant role
models they must be concerned with potential
interpretations of their behaviours. As one par-
ticipant noted “if senior management steps out
of line by one inch the employees will step out
by a foot.” The findings only partially supported
the third hypothesis, as participants indicated it
is not necessarily senior management that
provides the most influential role model. An
individual’s direct supervisor, particularly in larger
organizations, may be the dominant role model.
An unexpected, but significant finding, is that
the types of unethical behaviours sanctioned
through the informal system are related to the
economic pressures impacting the organization
(see Table V). In particular, participants identi-
fied three types of ethical issues: (a) graft/fraud,
(b) operating practices and/or product standards,
and (c) adherence to legal or regulatory guide-
lines. Graft and fraud are most prevalent and
accepted by organizations when profit margins
and/or the economic environment is munificent.
Lower operating and product standards, and
minimal adherence to legal/regulatory guidelines
are more likely to be considered appropriate
when the organization’s competitiveness is at
issue. The implication of this finding is that
organizations need to recognize the pressures
within the informal system will vary according
to the type of “unethical activity” and the
economic status of the organization. Senior
management will have to reinforce various
components of the formal and informal systems
according to the situation criteria identified.
The impact of an individual’s direct supervisor
provides another potential area of incongruence.
Unfortunately even if formal policies involve
ethical values/goals and senior management
demonstrate behaviours consistent with the
formal policies, incongruence between the two
TABLE V
Dominance of the formal/informal systems
according to type of issue and economic status
Type of ethical
issue
Graft, fraud,
kickbacks
Operating practices/
product standards
Level of conformance
to legal government
guidelines
Economic
High profit
margins
Informal
Formal
Formal
status
Low profit
margins
Formal
Informal
Informal
142 L. Falkenberg and I. Herremans
systems can still develop. This incongruence
could arise if an individual’s direct supervisor
demonstrated unethical behaviours. Rather than
being incongruence between the formal and
informal system, this incongruence is between
different elements of the informal system. It arises
when the behaviours of senior management are
not visible. The implication of this incongruence
is that senior management must ensure their
behaviours are visible and be aware of the
behaviours of their supervisors.
In summary, the informal system is the
dominant influence on the behaviours and deci-
sions of employees in the resolution of ethical
issues. If senior management is concerned about
the level of ethical activities in their organization,
they must address the values and norms of the
informal system. As well, they must be extremely
cautious in terms of their own behaviour, given
their dominating influence as role models. They
must also recognize the need to continually
educate managers/supervisors about the impact
of their behaviours on subordinates. As well,
organizations must be concerned about the
bottom line orientation within the informal
system. This orientation leads to incongruence
between the formal and informal systems.
expressed a concern for improving ethical
behaviour within business organizations.
In order to improve the generalizability of the
findings the researchers attempted to include
representatives from various sizes of organiza-
tions, industries and levels within organizations.
However, the generalizability of the fmdings is
limited due to the sample size, and the lack of
female representatives and lower level employees.
Directions for future research
The impact of incongruence between the formal
and informal control systems within organizations
must be studied further to validate the findings.
Given the limitations of this research additional
data should be gathered through individual
interviews and surveys. Future research should
focus on the dominance of one system over the
other as economic factors vary, and on how
organizations might balance the pressures on
employees to achieve the bottom line with the
inclusion of ethical concerns in decision making.
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reference/37042727_2
Characteristics of Ethical Business Cultures
Alexandre Ardichvili
James A. Mitchell
Douglas Jondle
ABSTRACT. The purpose of this study was to identify
general characteristics attributed to ethical business
cultures by executives from a variety of industries. Our
research identified five clusters of characteristics: Mission-
and Values-Driven, Stakeholder Balance, Leadership
Effectiveness, Process Integrity, and Long-term Perspec-
tive. We propose that these characteristics be used as a
foundation of a comprehensive model that can be
engaged to influence operational practices in creating and
sustaining an ethical business culture.
KEY WORDS: business ethics, business culture, orga-
nizational culture, leadership, value-based management
Problem statement and research question
Research on business ethics, organizational culture,
and organizational leadership suggests that ethical or
unethical behavior in organizations is a function of
both individual characteristics and contextual factors
(Meyers, 2004). Among these contextual factors,
organizational culture is considered to be one of the
most important influences (Cohen, 1993; Meyers,
2004; Trevino, 1986). In recent years, a number of
research studies have attempted to link various
attributes of organizational cultures to ethical
behavior (Frederick, 1995; Trevino and Nelson,
2004). However, to our knowledge, none of the
published studies propose comprehensive models of
characteristics of ethical corporate cultures. There-
fore, the goal of the reported study was to identify
characteristics attributed to ethical business cultures
by business practitioners. In this paper, we first
briefly summarize the results of our review of liter-
ature on ethical corporate cultures and formulate the
research question. Second, the study design, meth-
odology, and sample are explained. Next, we present
and discuss the study findings, including the list of
attributes of ethical corporate cultures. Finally,
implications for further research and business
management practices are discussed.
In anthropological literature, culture is defined as
accepted behavioral standards within the confines of
a specified group as guided by a pattern of shared
learned beliefs, traditions, and principles (Bolman
and Deal, 1997; Trevino, 1990b). Schein defines
organizational culture as learned responses where
‘‘basic assumptions and beliefs that are shared by
members of an organization … define in a basic
‘‘taken-for-granted’’ fashion an organization’s view
of itself and its environment’’ (1985, pp. 5–6). For
the purposes of this article, ethical business culture
encompasses for-profit organizations comprised of
individuals working reciprocally with internal and
external stakeholders. Though the objective of this
study is to identify components of ethical business
culture, from a holistic perspective, an ethical busi-
ness culture fosters an organizational environment
guided by shared values and beliefs (Trevino,
1990b). Furthermore, it is an environment where
employees are not only expected to discern right
from wrong, a basic minimum, but also more
importantly are expected to go beyond the mini-
mum to explore and implement ethical decisions
when all choices seem right.
Organizational cultures are complex combina-
tions of formal and informal systems, processes, and
interactions (Cohen, 1993). Formal organizational
culture components are comprised of leadership,
structure, policies, reward systems, socialization
mechanisms, and decision processes among other
things. Informal culture components include implicit
behavioral norms, role models, rituals, historical
anecdotes, and language (Cohen, 1993; Frederick,
Journal of Business Ethics (2009) 85:445–451 � Springer 2008
DOI 10.1007/s10551-008-9782-4
1995; Schein, 2004; Trevino, 1990a; Trevino and
Nelson, 2004). Organizations possessing ethical
cultures create and maintain a shared pattern of
values, customs, practices, and expectations which
dominate normative behavior in the organization
(Trevino, 1990a).
Leadership is often mentioned as one of the most
important elements of an organization’s ethical
culture (Brown and Trevino, 2006; Trevino, 1990a).
Leaders who are perceived as being able to create and
support an ethical culture in their organizations are
those who represent, communicate, and role model
high ethical standards (Brown et al., 2005), empha-
size attention to goals other than economic, engage in
‘‘ethics talk’’ (Bird and Waters, 1989), and maintain a
long-term view of relationships within and outside
the organization. These top managers create and
maintain an ethical culture by consistently behaving
in an ethical fashion and encouraging others to be-
have in such a manner as well.
An ethical culture is associated with a structure that
provides for equally distributed authority and shared
accountability. It also has policies such as an ethical
code of conduct that is clear, well communicated, is
specific about expected procedures and practices,
thoroughly understood, and enforced (Trevino et al.,
1999). In addition, incentive systems are deliberately
and clearly tied to behaving in concert with the
code of ethics and accomplishment of non-economic
goals in addition to economic outcomes (Trevino and
Weaver, 2001). The socialization process of an orga-
nization with an ethical culture reinforces the practice
of the values in a mission statement on a daily basis; so
behavior is focused on issues of health and safety of
employees, customer and community responsiveness,
and fairness. In fact, employee perceptions of fairness
or justice in an organization have been found to have
central importance in creating an ethical culture
(Trevino and Weaver, 2001). In addition, the deci-
sion-making processes in an ethical culture are de-
signed to consider the ethical ramifications of business
decisions instead of cost-benefit analyses alone.
The informal elements of a cultural system are
less tangible aspects of organizational behavior.
Such aspects include norms for behavior that are
consistent with the ethical standards or the code of
conduct, mission, and decision-making processes
(Trevino and Brown, 2004). Consistent role
modeling of such behavior forms the basis for a
strong culture where everyone understands what is
appropriate for the company. Other elements of the
informal culture include the communication and
belief in heroes and role models, along with myths
and stories about how ethical standards of the
organization have been upheld and revered by
members (Trevino, 1990a). Such heroes and stories
transcend the formal organizational culture and
inspire others to behave in an ethical fashion.
Organizational rituals also help bolster this informal
culture by sustaining the ethical values of the
members over time. Finally, the language used by
organizational members plays a crucial role in
shaping behavior in the informal ethical culture. Use
of moral or ethics ‘‘talk’’ to address problem-solving
and decision-making situations creates an awareness
of the ethical dimension of such processes. Ethical
cultures have leaders and members who engage in
ethics talk regularly in pursuit of organizational
activities.
In summary, various research studies have found
that ethical cultures are based on alignment between
formal structures, processes, and policies, consistent
ethical behavior of top leadership, and informal
recognition of heroes, stories, rituals, and language
that inspire organizational members to behave in a
manner consistent with high ethical standards that
have been set by executive leadership. However, the
above-mentioned studies were exploring only one
or two dimensions of ethical organizational cultures
(e.g., decision making, or leadership), and none of
the studies attempted to create a comprehensive
list of attributes of ethical cultures, based on the
perceptions of business practitioners and/or execu-
tives. Therefore, the main research question driving
the present study is:
What are, as perceived by study participants, the
most important characteristics of ethical business
cultures?
Research design
This study was designed based on the grounded
theory approach (Creswell, 1998). Grounded theory
studies are focused on discovering a theory or a
framework, describing or explaining a phenomenon
under investigation, by analyzing data collected
via field investigations. In the grounded theory
446 Alexandre Ardichvili et al.
approach, researchers are not making an attempt to
develop a set of testable hypotheses or propositions.
Instead, only a general question about the phe-
nomenon is formulated with a goal of leaving suf-
ficient space for the emergence of patterns, which
could be used in formulating a new explanation of
the phenomenon (Grbich, 2007). While grounded
theory provides a general framework for designing
studies, specific data collection and analysis methods
can vary depending on preferences and expertise of
individual researchers.
In this particular study, data collection was based
on qualitative key informant interview method
proposed by Kumar et al. (1993), and the data
analysis was based on qualitative data clustering
method developed by Miles and Huberman (1994).
According to Kumar et al. (1993), key informant
interviews are used when the researchers intend to
obtain the data not from a random sample, but from
a purposefully selected sample of individuals, who
are likely to possess the most relevant information
due to their key positions, experience, or expertise
in industries or organizations of interest to the
researcher. For the purposes of this study, the key
informants were defined as top-level business exec-
utives, who were likely to have in-depth knowledge
of practices (including ethics-related practices) of a
variety of business organizations. A number of
prominent academics, specializing in business ethics
research, were included in the key informant group.
The initial group of key informants for the study was
nominated by members of the Board of Directors of
the Center for Ethical Business Cultures. Subsequent
nominations were obtained through snowballing
technique, when study participants were asked to
provide additional names of qualified individuals. In
addition, some interviews were conducted at a
national business ethics conference by one of the
researchers and several associates of the CEBC.
Overall, 67 individuals participated in the study.
They included 54 business executives, representing
a wide range of industries, and 13 academics (See
Table I for details).
Participants were asked to think about business
organizations they would classify as having exemplary
ethical business practices. Then, participants were
asked to generate a list of statements descriptive of
these organizations’ ethical practices and behaviors.
Overall, participants nominated 86 companies from
nine industry sectors (see Table II) and generated 389
descriptive statements.
Data analysis included clustering of the 389
statements with a goal of generating a short list of
major clusters and representative statements under
each cluster. As suggested by Miles and Huberman
(1994), ‘‘Clustering is a tactic that can be applied at
many levels to qualitative data: at the level of events
or acts, of individual actors, of processes … In all
instances, we are trying to understand a phenome-
non better by grouping and then conceptualizing
objects that have similar patterns or characteristics.’’
(p. 249). In addition to using specific suggestions for
clustering, provided by Miles and Huberman, the
researchers utilized a modified Delphi method to
coordinate their work and to come up with a final
list of clusters and statements. First, each of the three
researchers worked independently and developed
their own clusters and representative statements.
TABLE I
Industry affiliation of study participants
Industry affiliation No. of participants
Consulting & information services 5
Energy sector 7
Finance and insurance 18
Health sector 2
Law firms 3
Manufacturing 8
Non-profits, foundations, churches 6
Retail 5
Academia 13
TABLE II
Nominated companies by industry sectors
Industry sectors No. of nominated
companies
Basic materials and commodity 5
Conglomerates 2
Consumer goods 18
Financial services 12
Health care 6
Manufacturing and technology 18
Service and retail 27
Transportation 4
Utilities 1
Characteristics of Ethical Business Cultures 447
Next, they exchanged their lists, discussed the lists
and rationale for the inclusion of individual items,
and based on this review and discussion, each
developed a next iteration of clusters/lists. This
process was repeated three times.
Results
The final list of clusters and statements, associated
with each of the clusters, is presented in Table III.
The five clusters that have emerged are: Mission-
and Value-Driven, Stakeholder Balance, Leadership
Effectiveness, Process Integrity, and Long-Term
Perspective. Each cluster is represented by five to
seven descriptive statements. Many of these state-
ments are taken verbatim from interviews with
study participants. Others are a result of re-wording
or combining statements made by different partici-
pants, but which had essentially similar meaning.
Discussion and recommendations
for practice
The purpose of this study was to identify general
characteristics attributed to ethical organizational
cultures. Our research identified five clusters of
TABLE III
Characteristics of ethical organizational cultures: clusters and statements
Mission- and Values- Driven:
‘‘Clarity of mission and values, reflected in ethical guidelines and behavior’’
‘‘Institutionalizes ethical values’’
‘‘Build relationships of trust and respect’’
‘‘Strong culture that actively eliminates people who don’t share the values’’
‘‘Corporate values are sustained over long periods of time’’
Stakeholders Balance:
‘‘Balance all stakeholders (e.g., customers, employees, owners and community) in all their decision-making, consistently’’
‘‘Deal with all stakeholders on a consistently ethical and value-oriented basis’’
‘‘Good balance of customer value and profit’’
‘‘Giving back to the community in which the company does business’’
‘‘Work to be a good corporate citizen in a global economy’’
‘‘Respectful treatment and fair compensation for employees at all levels’’
Leadership Effectiveness:
‘‘Ethical culture starts at the top and is conveyed by example’’
‘‘Senior management demands ethical conduct at every level of the company’’
‘‘CEO and senior management live their lives with great personal integrity’’
‘‘When ethical issues arise, CEO does not ‘shoot the messenger,’ but gathers facts and takes action’’
‘‘Do what they say they’re going to do’’
Process Integrity:
‘‘Dedication to Quality and Fairness in its people, processes, and products’’
‘‘Invest in ongoing ethics training and communication throughout the organization’’
‘‘Values are reinforced in performance appraisals and promotions’’
‘‘Values are reinforced in every-day execution’’
‘‘Excellent corporate governance processes, supported by Board quality and independence’’
‘‘Noble mission is internalized in company processes and behavior’’
‘‘Transparent decision-making by the people closest to the question’’
Long-term Perspective:
‘‘Place mission above profit and long-term over short-term’’
‘‘Acting in the best interests of customers, over the longer term’’
‘‘Board takes long view in managing shareholder value’’
‘‘Connect environmental sustainability, social responsibility, and profit’’
‘‘CEO says he’s building an institution that he hopes will be here in 50 years’’
448 Alexandre Ardichvili et al.
characteristics that infer a comprehensive model; a
model that can be engaged to influence operational
practices in creating and sustaining an ‘‘organizational
culture that encourages ethical conduct and a commit-
ment to compliance with the law’’ (United States
Sentencing Commission, 2004). In our opinion, a
business culture with these characteristics will far
exceed the minimal baseline requirements of the law.
The five characteristics of the model (see
Figure 1) identified above are: Mission & Values
Driven, Stakeholder Balance, Leadership Effective-
ness, Process Integrity and Long-term Perspective.
The accompanying descriptive statements bind and
link the model together, add clarity and resilience to
its meaning, and create actionable guidance in its
application.
Based on the study results, the keystone of the
model is the characteristic Mission- & Values- Driven.
It represents the lifeblood of the organization. For
an organization to both survive and thrive, mission
and values must be an integral component of an
organization’s strategic focus. They must be aligned
to foster a high performance culture and flow freely
and systemically throughout the organization to
become the genesis of operational norms (i.e., codes
of conduct and ethics) that drive desired behavior.
Our research demonstrates that respondents place
significant importance on the concept of driven
behavior where ‘‘clarity of mission and values, reflected
in ethical guidelines and behavior’’ is driven by an
organization that ‘‘institutionalizes ethical values’’
and ‘‘build[s] relationships of trust and respect.’’ In a
corporate culture, where core business functions are
aligned with organizational processes, an environ-
ment is nurtured ‘‘that actively eliminates people who
don’t share the values’’ and sustainability over ‘‘long
periods of time.’’ This implies an existence of mech-
anisms that select for fitness between organizational
values and individual values, a form of natural
selection, which gleans deleterious behavior from
the ethical organization.
Repeatability within the dataset of the suggestion
of a relationship between ethical culture and the long-
term led to identification of the Long-term Perspec-
tive as a separate foundational characteristic of ethical
organizational culture. Responses categorized by this
characteristic brought into sharp relief the question,
‘‘what is the purpose of business?’’ Is it to maximize
shareholder value or is it the responsibility of business
to balance the need of various stakeholders? A typical
response elicited was ‘‘[placing] mission above profit, and
long-term over short-term.’’ What was of particular
interest in responses categorizing this characteristic
was the consistency of responses linked to Stakeholder
Balance and Leadership Effectiveness. The linkage
implies model congruency and its iterative cohesive-
ness between characteristics.
Stakeholder Balance and long-term concerns
were addressed by ‘‘acting in the best interests of cus-
tomers’’ and taking the ‘‘long view in managing share-
holder value.’’ Respondents recognized that, because
employees are the ones who deliver service to
customers, all employees need to receive ‘‘respectful
treatment and fair compensation.’’ Respondents also
expressed concern for the environment and the
desired role and responsibility of organizations to its
safeguard. They believe organizations must ‘‘connect
environmental sustainability, social responsibility, and
profit.’’ Linkage with Leadership Effectiveness was
demonstrated by responses focused on survivability
and longevity of the organization (i.e., the ‘‘CEO
says he’s building an institution that he hopes will be here
in 50 years’’). Respondents felt the responsibility
of leadership was to establish a strategy focused on
consistent long-term growth and not be influenced
by short-term growth and gains.
In the stakeholder theory, business and business
managers have a fiduciary responsibility to various
stakeholder groups who, in themselves, have a vested
interest in the success of the organization (Freeman,
1994). The countervailing theory espoused by Milton
Friedman is stockholder centric, where the ‘‘one and
only one responsibility of business [and corporate
executives] is to increase its profits’’ (Friedman, 1970).
Mission
&
Vision
Driven
Stakeholder
Balance
Leadership
Effectiveness
Long-term
Perspective
Process
Integrity
Figure 1. Five clusters of characteristics of ethical
business cultures.
Characteristics of Ethical Business Cultures 449
The stockholders, or owners, are the risk takers.
Therefore, they alone are entitled to benefit from the
returns. Respondents in general did not agree with
this perspective on profit distribution. They consis-
tently referred to the responsibility an organization has
to its numerous stakeholders and their interests in
‘‘respectful treatment and fair compensation.’’ Thus,
Stakeholder Balance was identified as a key charac-
teristic of an ethical culture.
The term Stakeholder Balance suggests that a
tension exists between multiple stakeholders.
Focusing too long and too much on any one
stakeholder has the potential to create an environ-
ment of distortion and imbalance that can lead to
ethical lapses. The model does not suggest that the
tensions between stakeholders will disappear all
together for the ethical organization. It does,
however, create a forum for discussion and con-
sideration of various stakeholder groups of an
organization to work toward maintaining a ‘‘balance
[of] all stakeholders (e.g., customers, employees, owners,
and community) in all [its] decision-making’’ and to
‘‘deal with all stakeholders on a consistently ethical and
value-oriented basis.’’ In addition, an underlining
theme voiced by respondents was a redefining of
the purpose of business. That is, the purpose of
business is not to just make money. Rather, it is to
provide a ‘‘good balance of customer value and profit’’
and ‘‘giving back to the community in which the
company does business.’’ Furthermore, respondents
expanded the definition of community to include
the global community. The expressed belief was
that an organization must ‘‘work to be a good corporate
citizen in a global economy.’’
Effective organizations have effective leaders. In an
ethical business organization, effective leaders ‘‘talk
the talk’’ and ‘‘walk the walk.’’ In describing Lead-
ership Effectiveness, the overarching theme was that
‘‘ethical culture starts at the top and is conveyed by exam-
ple,’’ the ‘‘CEO and senior management live their lives
with great personal integrity’’ and they ‘‘do what they say
they’re going to do.’’ Leadership, most notably senior
management, must embody the organization’s values
in their own behavior and must articulate those values
in a way that is compelling for employees and all other
stakeholders. Ethical organizational culture is a non-
starter if senior management refuses to engage and
function as role models for the rest of the organization.
Another critical aspect of leadership in an ethical
culture is the issue of retaliation. Respondents
expressed a belief that an ethical culture is ‘‘when ethical
issues arise, [the] CEO does not ‘shoot the messenger’, but
gathers facts and takes action.’’ However, building and
sustaining an ethical culture is also a two-way street. It
depends on ‘‘senior management [demanding] ethical
conduct at every level of the [organization].’’ It must
permeate throughout all aspects of the business from
top management to the frontline employee and
throughout all functional systems of the firm.
The characteristic, identified as Process Integrity,
was described as internalizing the company’s mission
‘‘in company processes and behavior.’’ It includes the key
functional units of the business, e.g., recruiting, hir-
ing, firing, evaluating, compensating, promoting, and
communicating. Numerous challenges exist, includ-
ing establishing desired behavior standards and align-
ing the systems to encourage behavior and monitoring
behavior. A key theme emphasized by the data was the
importance of the company’s values reinforced in
‘‘performance appraisals and promotions’’ and ‘‘every-day
execution.’’ This focused the attention on the necessity
for alignment of processes to mediate confusion and
the need for ‘‘transparent decision-making by the people
closest to the [issue].’’ Specific attention was paid to the
‘‘dedication to quality and fairness in its people, processes,
and products’’ and ongoing investment in ‘‘ethics,
training, and communication throughout the organiza-
tions.’’ Beyond management functional areas, the data
emphasized ‘‘excellent corporate governance processes,
supported by Board quality and independence.’’ This
indicates a heightened awareness amongst the
respondents to the importance of governance and its
role and responsibilities in fostering ethical business
cultures.
Future research
The reported findings are based on a limited in size
sample of respondents, identified through a conve-
nience sampling procedure. Therefore, to provide
recommendations applicable to a wide variety of
businesses, the next logical step would be to develop
a survey instrument that can be used in a large-scale
quantitative study. The purpose of this next stage
would be to validate the list of characteristics of
ethical business cultures and to confirm the validity
of five identified clusters. The study would involve a
450 Alexandre Ardichvili et al.
statistically representative sample of business execu-
tives and managers from a cross-section of industries.
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Alexandre Ardichvili
Work and Human Resource Education,
University of Minnesota,
1954 Buford Avenue, Room 425L, St. Paul,
MN 55113, U.S.A.
E-mail: ardic001@umn.edu
James A. Mitchell and Douglas Jondle
Center for Ethical Business Cultures,
1000 LaSalle Avenue, TMH331, Minneapolis,
MN 55403-2005, U.S.A.
Characteristics of Ethical Business Cultures 451
http://www.ussc.gov/2004guid/8b2_1.htm
reference/3903_9781439052242_ch7
Organizational Factors:
The Role of Ethical
Culture and Relationships
C
H
A
P
T
E
R
7
C H A P T E R O B J E C T I V E S
◆ To examine the influence of corporate culture on
business ethics
◆ To determine how leadership, power, and
motivation relate to ethical decision making in
organizations
◆ To assess organizational structure and its
relationship to business ethics
◆ To explore how the work group influences ethical
decisions
◆ To discuss the relationship between individual and
group ethical decision making
C H A P T E R O U T L I N E
The Role of Corporate Culture in Ethical Decision
Making
Ethical Framework and Audit for Corporate Culture
Ethics as a Component of Corporate Culture
Differential Association
Whistle-Blowing
Leaders Influence Corporate Culture
Motivating Ethical Behavior
Organizational Structure and Business Ethics
Group Dimensions of Corporate Structure and Culture
Types of Groups
Group Norms
Variation in Employee Conduct
Can People Control Their Own Actions Within a
Corporate Culture?
6433ch07.qxd_lb 10/19/06 10:19 AM Page 172
Dawn Prarie had been with PCA
Health Care Hospitals for three
years and had been promoted to
marketing director in the Miami area. She had a staff
of ten and a fairly healthy budget. Dawn’s job was to
attract more patients into the HMO while helping
keep costs down. At a meeting with Dawn, Nancy
Belle, the vice president, had explained the ramifica-
tions of the Balanced Budget Act and how it was af-
fecting all HMOs. “Being here in Miami does not
help our division,” she told Dawn. “Because of this
Balanced Budget Act, we have been losing money
on many of our elderly patients. For example, we
used to receive $600 or more a month, per patient,
from Medicare, but now our minimum reimburse-
ment is just $367 a month! I need solutions, and
that’s where you come in. By the end of the month,
I want a list of things that will help us show a profit.
Anything less than a positive balance sheet will be
unacceptable.”
It was obvious that Nancy was serious about cut-
ting costs and increasing revenues within the elderly
market. That’s why Dawn had been promoted to
marketing director. The first thing Dawn did after
the meeting with Nancy was to fire four key people.
She then gave their duties to six who were at lower
salaries and put the hospital staff on notice that
changes would be occurring at the hospital over the
next several months. In about three weeks, Dawn
presented Nancy with an extensive list of ideas. It in-
cluded these suggestions:
1. Trimming some prescription drug benefits
2. Reducing redundant tests for terminal patients
3. Hiring physician assistants to see patients but
billing patients at the physician rate
4. Allowing physicians to buy shares in PCA, thus
providing an incentive for bringing in more
patients
5. Sterilizing and reusing cardiac catheters
6. Instituting a one-vendor policy on hospital
products to gain quantity discounts
7. Prescreening “insurance” patients for probabil-
ity of payment
Dawn’s assistants felt that some of the hospital
staff could be more aggressive in the marketing area.
They urged using more promotional materials, of-
fering incentives for physicians who suggested PCA
or required their patients to be hospitalized, and pre-
screening potential clients into categories. “You see,”
said Ron, one of Dawn’s staff, “we feel that there are
four types of elderly patients. There are the healthy
elderly, whose life expectancies are ten or more years.
There are the fragile elderly, with life expectancies of
two to seven years. Then there are the demented and
dying elderly, who usually have one to three years.
Finally, we have the high-cost or uninsured elderly.
Patients who are designated healthy would get the
most care, including mammograms, prostate-cancer
screening, and cholesterol checks. Patients in the
other categories would get less.”
As she implemented some of the recommenda-
tions on Dawn’s list, Nancy also launched an aggres-
sive plan to destabilize the nurses’ union. As a result,
many nurses began a work slowdown and were filing
internal petitions to upper management. Headquar-
ters told Nancy to give the nurses and other hospital
staff as much overtime as they wanted but not to hire
anyone new. One floor manager suggested splitting
up the staff into work teams, with built-in incentives
for those who worked smarter and/or faster. Nancy
approved the plan, and in three months productivity
jumped 50 percent, with many of the hospital work-
ers making more money. The downside for Nancy
was an increase in worker-related accidents.
When Dawn toured the hospital around this
time, she found that some of the most productive
workers were using substandard procedures and
poorly made products. One nurse said, “Yes, the sur-
gical gloves are somewhat of a problem, but we were
told that the quality met the minimum requirements
and so we have to use them.” Dawn brought this to
Nancy’s attention, whereupon Nancy drafted the fol-
lowing memo:
ATTENTION HOSPITAL STAFF
It has come to management’s attention that mi-
nor injuries to staff and patients are on the rise.
A N E T H I C A L D I L E M M A *
6433ch07.qxd_lb 10/19/06 10:19 AM Page 173
Organizations are much more than structures in which we work. Although they arenot alive, we attribute human characteristics to them. When times are good, wesay the company is “well”; when times are not so good, we may try to “save” the
company. Understandably, people have feelings toward the place that provides them with
income and benefits; challenge, satisfaction, self-esteem, and often lifelong friendships. In
fact, excluding the time spent sleeping, we spend almost 50 percent of our lives in this sec-
ond home with our second “family.” It is important, then, to examine how the culture
and structure of these organizations influence the ethical decisions made within them.
In the ethical decision-making framework described in Chapter 5, we introduced the
idea that organizational factors such as corporate culture and interpersonal relationships in-
fluence the ethical decision-making process. In this chapter, we take a closer look at cor-
porate culture and the way a company’s values and traditions can affect employees’ ethical
behavior. We also discuss the role of leadership in influencing ethical behavior within the
organization. Next we describe two organizational structures and examine how they may
influence ethical decisions. Then we consider the impact of groups within organizations.
Finally, we examine the implications of organizational relationships for ethical decisions.
THE ROLE OF CORPORATE CULTURE
IN ETHICAL DECISION MAKING
Chapter 5 defined the term corporate culture as a set of values, beliefs, goals, norms,
and ways of solving problems shared by the members (employees) of an organiza-
tion of any size (for profit or nonprofit). A founder and his or her values and ex-
174 PART 3 ◆ THE DECISION-MAKING PROCESS
Please review the Occupational Safety and Health
Administration guidelines, as well as the standard
procedures handbook, to make sure you are in
compliance. I also want to thank all those teams
that have been keeping costs down. We have fi-
nally gone into the plus side as far as profitabil-
ity. Hang on and we’ll be able to stabilize the
hospital to make it a better place to care for pa-
tients and to work.
At Nancy’s latest meeting with Dawn, she told
Dawn, “We’ve decided on your staff ’s segmentation
strategy for the elderly market. We want you to de-
velop a questionnaire to prescreen incoming HMO
patients, as well as existing clients, into one of the
four categories so that we can tag their charts and
alert the HMO physicians to the new protocols. Also,
because the recommendations that we’ve put into
practice have worked so well, we’ve decided to use
the rest of your suggestions. The implementation
phase will start next month. I want you, Dawn, to
be the lead person in developing a long-term strat-
egy to break the unions in the hospital. Do whatever
it takes. We just need to do more with less. I’m firm
on this—so you’re either on board or you’re not.
Which is it going to be?”
Q U E S T I O N S • E X E R C I S E S
1. Discuss PCA Health Care Hospitals’ corporate
culture and its ethical implications.
2. What factors are affecting Dawn’s options?
3. Discuss the issue of for-profit versus nonprofit
health-care facilities.
4. If you were Dawn, what information would
you like to have to make your decisions?
*This case is strictly hypothetical; any resemblance to real per-
sons, companies, or situations is coincidental.
6433ch07.qxd_lb 10/19/06 10:19 AM Page 174
CHAPTER 7 ◆ ORGANIZATIONAL FACTORS: THE ROLE OF ETHICAL CULTURE AND RELATIONSHIPS 175
pectations can create corporate culture, as in the case of McDonald’s. The fast-food
giant’s support of and reputation for quality, service, cleanliness, and value derive
from founder Ray Kroc. However, McDonald’s faces problems with customer sat-
isfaction. Over 10 percent of McDonald’s customers are dissatisfied with their visit
and share their complaint with the restaurant. The top-five customer complaints at
McDonald’s include (1) rude employees, (2) being out of Happy Meal toys, (3) slow
service, (4) missing product/wrong order, and (5) unclean restaurants.1 Corporate
culture includes the behavioral patterns, concepts, values, ceremonies, and rituals
that take place in the organization.2 It gives the members of the organization mean-
ing as well as the internal rules of behavior.3 When these values, beliefs, customs,
rules, and ceremonies are accepted, shared, and circulated throughout the organi-
zation, they represent its culture. All organizations, not just corporations, have some
sort of culture, and thus we use the terms organizational culture and corporate cul-
ture interchangeably.
Although corporate culture is a broad and widely used concept, the term has a mul-
titude of definitions, none of which has achieved universal acceptance. These range
from highly specific to generically broad. For example, culture has been defined as
“the way we do things around here,”4 “the collective programming of the mind,”5
and “the social fiber that holds the organization together.”6 Culture is also viewed as
“the shared beliefs top managers in a company have about how they should manage
themselves and other employees, and how they should conduct their business(es).”7
Mutual of Omaha defines corporate culture as the “personality of the organization, the
shared beliefs that determine how its people behave and solve business problems.”8 Mu-
tual of Omaha executives believe that its corporate culture provides the foundation
for the company’s work and objectives, and the company has adopted a set of core
values called “Values for Success” (Table 7–1). The company believes that these val-
ues form the foundation for a corporate culture that will help the organization realize
its vision and achieve its goals.
A company’s history and unwritten rules are a part of its culture. Thus, for many
years, IBM salespeople adhered to a series of unwritten standards for dealing with
clients. The history or stories passed down from generation to generation within an or-
ganization are like the traditions that are propagated within society. Henry Ford, the
founder of Ford Motor Company, left a legacy that emphasized the importance of the
individual employee and the natural environment. Just as Henry Ford pioneered
the then-unheard-of high wage of $5 a day in the early years of the twentieth century,
current chairman William Clay Ford, Jr., continues to affirm that employees represent
the only sustainable advantage of a company. William Ford has maintained his grand-
father’s legacy by taking a leadership role in improving vehicle fuel efficiency while re-
ducing emissions. Ford faces many financial challenges and plans to cut its capacity by
26 percent by 2008. In addition, Ford will reduce their hourly labor force by thirty
thousand over the next several years. William Ford is committed to successfully re-
structuring Ford to more successfully compete in the future.9
Some cultures are so strong that to outsiders they come to represent the charac-
ter of the entire organization. For example, Levi Strauss, Ben & Jerry’s Homemade (the
ice cream company), and Hershey Foods are widely perceived as casual organizations
with strong ethical cultures, whereas Lockheed Martin, Procter & Gamble, and Texas
6433ch07.qxd_lb 10/19/06 10:19 AM Page 175
Instruments are perceived as more formal, ethical ones. The culture of an organization
may be explicitly articulated or left unspoken.
Explicit statements of values, beliefs, and customs usually come from upper man-
agement. Memos, written codes of conduct, handbooks, manuals, forms, and cere-
monies are all formal expressions of an organization’s culture. Many of these statements
can be found on company websites, like Mutual of Omaha’s “Values for Success.”
Corporate culture is often expressed informally—for example, through comments,
both direct and indirect, that communicate the wishes of management. In some compa-
nies, shared values are expressed through informal dress codes, working late, and partic-
ipation in extracurricular activities. Corporate culture can even be expressed through
gestures, looks, labels, promotions, programs, and legends (or the lack of these). South-
west Airlines is involved with more than thirty thousand students nationwide as part of
their “Adopt-a-Pilot” educational program. The program encourages students to research
careers, set personal goals, and realize the importance of succeeding in school. During the
four-week mentorship program, pilots volunteer their time and correspond with their
student, mentor while on the road, and speak in their classes.10 This program reinforces
Southwest’s commitment to its communities and caring organizational culture. The press
generated by community involvement reinforces organizational values and priorities.
The “tone at the top” is often cited as a determining factor in creating a high-
integrity organization. Employees were asked, in a KPMG Forensic Integrity Survey
176 PART 3 ◆ THE DECISION-MAKING PROCESS
T A B L E 7 – 1 Mutual of Omaha’s “Values for Success”
Openness and Trust—We encourage an open sharing of ideas and information, displaying a fundamental
respect for each other as well as our cultural diversity.
Teamwork (Win/Win)—We work together to find solutions that carry positive results for others as well as
ourselves, creating an environment that brings out the best in everyone.
Accountability/Ownership—We take ownership and accept accountability for achieving end results, and
empower team members to do the same.
Sense of Urgency—We set priorities and handle all tasks and assignments in a timely manner.
Honesty and Integrity—We are honest and ethical with others, maintaining the highest standards of
personal and professional conduct.
Customer-Focus—We never lose sight of our customers, and constantly challenge ourselves to meet
their requirements even better.
Innovation and Risk—We question “the old way of doing things” and take prudent risks that can lead to
innovative performance and process improvements.
Caring/Attentive (Be Here Now)—We take time to clear our minds to focus on the present moment,
listening to our teammates and customers, and caring enough to hear their concerns.
Leadership—We provide direction, purpose, support, encouragement, and recognition to achieve our
vision, meet our objectives and our values.
Personal and Professional Growth—We challenge ourselves and look for ways to be even more effective
as a team and as individuals.
SOURCE: “Transforming Our Culture: The Values for Success,” Mutual of Omaha,
www.careerlink.org/emp/mut/corp.htm (accessed March 30, 2006). Reprinted with permission.
6433ch07.qxd_lb 10/19/06 10:19 AM Page 176
(Figure 7–1) whether their CEO and other senior executives exhibited characteristics
attributable to personal integrity and ethical leadership. Nearly two-thirds of employ-
ees believed that their leaders served as positive role models for their organizations.
However, roughly half suggested a lack of confidence (based on “unsure” and “dis-
agree” responses) that their CEOs knew about behaviors further down in the organi-
zation. Nearly half suggested a lack of confidence that their leaders would be
approachable if employees had ethics concerns, and 70 percent agreed that their CEOs
would respond appropriately to matters brought to their attention. Overall, nearly
two-thirds of employees agreed their leaders set the right tone at the top, leaving one-
third unsure or in disagreement.
Ethical Framework and Audit for Corporate Culture
Corporate culture has been conceptualized in many ways. Authors N. K. Sethia and
Mary Ann Von Glinow have proposed two basic dimensions to describe an organiza-
tion’s culture: (1) concern for people—the organization’s efforts to care for its em-
ployees’ well-being; and (2) concern for performance—the organization’s efforts to
focus on output and employee productivity. A two-by-two matrix represents the four
general types of organizational cultures (Figure 7–2).11
As Figure 7–2 shows, the four organizational cultures can be classified as apa-
thetic, caring, exacting, and integrative. The apathetic culture shows minimal concern
for either people or performance. In this culture, individuals focus on their own self-
interests. Apathetic tendencies can occur in almost any organization. Steel companies
CHAPTER 7 ◆ ORGANIZATIONAL FACTORS: THE ROLE OF ETHICAL CULTURE AND RELATIONSHIPS 177
Are Positive Models for the Organization
Know What Type of Behavior Really Goes On Inside the
Organization
Are Approachable if Employees Have Questions About
Ethics or Need to Deliver Bad News
Value Ethics and Integrity over Short-Term Business
Goals
Set Targets That Are Achievable Without Violating My
Organization’s Code of Conduct
Would Respond Appropriately if They Become Aware of
Misconduct
Set the Right “Tone-at-the-top” Importance of Ethics
and Integrity
65 21 15
0 20 40 60 80 100
Percent
65 22 14
70 19 10
67 21 12
57 24 18
55 21 23
48 25 27
Agree
Unsure
Disagree
F I G U R E 7 – 1 Perceived Tone and Culture, Tone at the Top, and Perceptions of the CEO and
Other Senior Executives
SOURCE: “KPMG Forensic Integrity Survey 2005–2006,”
http://www.kpmginsiders.com/display_analysis.asp?cs_id=148597 (accessed March 9, 2006).
6433ch07.qxd_lb 10/19/06 10:19 AM Page 177
and airlines were among the first to freeze employee pensions to keep their businesses
operating, now Fortune 500 companies such as Sears, IBM, and Verizon are engaging
in the same behaviors. Workers can still keep their pensions, but the payout will not
be based on their final, higher paying salary years. A study by Hewitt Associates found
that 21 percent of the nation’s companies plan to freeze employee benefits at their
current levels, and 17 percent will omit them completely for new employees.12 Sweep-
ing changes in corporate America are impacting employee compensation and retirement
plans. Simple gestures of appreciation, such as anniversary watches, rings, dinners, or
birthday cards for family members, are being dropped. Many companies view long-
serving employees as deadwood and do not take into account past performance. This
attitude demonstrates the companies’ apathetic culture.
The caring culture exhibits high concern for people but minimal concern for per-
formance issues. From an ethical standpoint, the caring culture seems to be very ap-
pealing. Southwest Airlines, for example, has a long-standing reputation of concern for
its employees. CEO Herb Kelleher is the purveyor of wit, wisdom, and continuity in
Southwest’s culture. Employees “love the company” because they believe it cares for
and is concerned about them. Employee loyalty and commitment at Southwest are
very high. Kelleher has been known to go into the cargo hold of a plane attired in a
dress and feather boa to assist employees with baggage. Southwest feels that if em-
ployees are well cared for, then customers will be taken care of and the competition will
be surpassed. Customers must indeed feel that they are being taken care of because
Southwest received the fewest customer complaints since 1987, as reported in the De-
partment of Transportation’s Air Travel Consumer Report. Southwest also ranked first
in customer satisfaction.13
In contrast, the exacting culture shows little concern for people but a high con-
cern for performance; it focuses on the interests of the organization. United Parcel
Service (UPS) has always been very exacting. It knows precisely how many workers it
needs to deliver its 14.8 million packages a day. To combat the uncaring, unsympathetic
178 PART 3 ◆ THE DECISION-MAKING PROCESS
Concern for
People
Concern for Performance
Low High
Low
High
Apathetic
Caring
Exacting
Integrative
F I G U R E 7 – 2 A Framework of Organizational Culture Typologies
SOURCE: From Gaining Control of the Corporate Culture, by N.K. Sethia and M.A. Von Glinow, 1985, Jossey-Bass,
Inc. Reprinted with permission of John Wiley & Sons, Inc.
6433ch07.qxd_lb 10/19/06 10:19 AM Page 178
attitude of many of its managers, UPS developed a community service program for its
employees. Global Volunteer Week gives UPS employees around the world the op-
portunity to help paint schools, renovate shelters, and assist with many other needed
projects within their communities. In 2005 more than twenty thousand employees
participated in at least one activity over the “seven days of service.” UPS was also
named in Fortune magazine as “America’s Most Admired Company” in its industry.14
The integrative culture combines high concern for people and for performance. An
organization becomes integrative when superiors recognize that employees are more
than interchangeable parts—that employees have an ineffable quality that helps the firm
meet its performance criteria. Many companies, such as U.S. Foodservice, have such a
culture. U.S. Foodservice is the number-two food service distributor, behind Sysco, serv-
ing over two hundred and fifty thousand customers, including restaurants, hotels, schools,
and other institutions. The company was involved in improper revenue recognition re-
sulting in an $800 million revenue overstatement. Today, U.S. Foodservice operates a
comprehensive ethics and compliance program including training videos featuring Ben
Stein (actor and comedian) and the company’s president and CEO Lawrence Benjamin.15
Companies can classify their corporate culture and identify its specific values, norms,
beliefs, and customs by conducting a cultural audit. A cultural audit is an assessment
of the organization’s values. It is usually conducted by outside consultants but may be
performed internally as well. Table 7–2 illustrates some of the issues that an ethics
CHAPTER 7 ◆ ORGANIZATIONAL FACTORS: THE ROLE OF ETHICAL CULTURE AND RELATIONSHIPS 179
T A B L E 7 – 2 Ethics Related Actions Among Levels of Employees
Statement Describing Ethics Percentage of Employees Strongly
Related Actions Agreeing or Agreeing (2005)
Top management provides information 80
Top management keeps commitments 81
Top management communicates ethics 89
Top management sets a good example of ethics 87
Middle management keeps commitments 85
Middle management communicates ethics 89
Middle management sets good example of ethics 89
Supervisor sets good example of ethics 91
Supervisor keeps commitments 88
Supervisor talks about ethics 90
Supervisor supports standards 93
Coworkers consider ethics in decisions 91
Coworkers support standards 94
Coworkers set good example of ethics 92
Coworkers talk about ethics 80
SOURCE: From 2005 National Business Ethics Survey: How Employees Perceive Ethics at Work, p. 20. Copyright ©
2006, Ethics Resource Center (ERC). Used with permission of the ERC, 1747 Pennsylvania Ave., N.W., Suite 400,
Washington, DC 2006, www.ethics.org.
6433ch07.qxd_lb 10/19/06 10:19 AM Page 179
audit of a corporate culture should address. The table identifies components of an or-
ganizational ethical culture, with the percentage of those employees who strongly
agreed or agreed that the specific action was being displayed in their organizations.
There has been little change since 2000–2005 in the figures. These issues can help
identify a corporate culture that creates ethical conflict.
Ethics as a Component of Corporate Culture
As indicated in the framework presented in Chapter 5, ethical culture, the ethical com-
ponent of corporate culture, is a significant factor in ethical decision making. If a firm’s
culture encourages or rewards unethical behavior, its employees may well act unethi-
cally. If the culture dictates hiring people who have specific, similar values and if those
values are perceived as unethical by society, society will view the organization and its
members as unethical. Such a pattern often occurs in certain areas of marketing. For
instance, salespeople may be seen as unethical because they sometimes use aggressive
selling tactics to get customers to buy things they do not need or want. If a company’s
primary objective is to make as much profit as possible, through whatever means, its
culture may foster behavior that conflicts with stakeholders’ ethical values. For exam-
ple, Boeing general counsel, Doug Bain, noted in an annual leadership meeting that
Boeing operated with a culture of winning at any cost. He continued noting that fif-
teen company vice presidents have been removed for a variety of ethical lapses. Boe-
ing is under investigation by the Justice Department and could face heavy fines.16 The
interests of diverse Boeing stakeholders (shareholders, suppliers, and employees) may
have been ignored in their efforts to boost profits.
On the other hand, if the organization values ethical behaviors, it will reward them.
At Microsoft, for example, the mission is to “help people and businesses throughout
the world realize their potential.” The company values passion for customers, for part-
ners, and for technology.17 This strong corporate culture may help explain the
company’s reputation for corporate citizenship, which is reflected in its position on
such lists as Fortune’s “America’s Most Admired Companies” ranking number ten
overall.”18
An organization’s failure to monitor or manage its culture may foster questionable
behavior. In a patent infringement case brought against Gateway in Utah, a federal
judge reprimanded the company for destroying or losing evidence in “bad faith.” A for-
mer IBM engineer brought the suit against Gateway, indicating that they infringed
upon his patents for addressing defects in floppy-disk drives. The engineer also added
that Gateway lost or destroyed documents that would have helped prove his case. At-
tempts to cover up wrongdoing by destroying documents should not be tolerated.19
Management’s sense of the organization’s culture may be quite different from the
values and ethical beliefs that are actually guiding the firm’s employees. Table 7–3 pro-
vides an example of a corporate culture ethics audit. Companies interested in assess-
ing their culture can use this tool and benchmark against previous years’ results to
measure for organizational improvements. Ethical issues may arise because of conflicts
between the cultural values perceived by management and those actually at work in the
organization. For example, managers may believe that the culture encourages respect
for peers and subordinates. On the basis of the rewards or sanctions associated with var-
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ious behaviors, however, the firm’s employees may believe that the company encour-
ages competition among organizational members. A competitive orientation may re-
sult in a less ethical corporate culture. On the other hand, employees appreciate working
in an environment that is designed to enhance workplace experiences through goals that
encompass more than just maximizing profits.20 Thus, it is very important for top
managers to determine what the organization’s culture is and to monitor its values,
CHAPTER 7 ◆ ORGANIZATIONAL FACTORS: THE ROLE OF ETHICAL CULTURE AND RELATIONSHIPS 181
T A B L E 7 – 3 Corporate Culture Ethics Audit
Answer Yes or No to each of the following questions.*
Yes No Has the founder or top management of the company left an ethical legacy to the organization?
Yes No Does the company have methods for detecting ethical concerns within the organization and outside it?
Yes No Is there a shared value system and understanding of what constitutes appropriate behavior within the organization?
Yes No Are stories and myths embedded in daily conversations about appropriate ethical conduct when confronting ethical
situations?
Yes No Are codes of ethics or ethical policies communicated to employees?
Yes No Are there ethical rules or procedures in training manuals or other company publications?
Yes No Are there penalties that are publicly discussed for ethical transgressions?
Yes No Are there rewards for good ethical decisions even if they don’t always result in a profit?
Yes No Does the company recognize the importance of creating a culture that is concerned about people and their self-
development as members of the business?
Yes No Does the company have a value system of fair play and honesty toward customers?
Yes No Do employees treat each other with respect, honesty, and fairness?
Yes No Do employees spend their time working in a cohesive way on what is valued by the organization?
Yes No Are there ethically based beliefs and values about how to succeed in the company?
Yes No Are there heroes or stars in the organization who communicate a common understanding about what positive ethical
values are important?
Yes No Are there day-to-day rituals or behavior patterns that create direction and prevent confusion or mixed signals on
ethics matters?
Yes No Is the firm more focused on the long run than on the short run?
Yes No Are employees satisfied or happy, and is employee turnover low?
Yes No Do the dress, speech, and physical work setting prevent an environment of fragmentation or inconsistency about
what is right?
Yes No Are emotional outbursts about role conflict and ambiguity very rare?
Yes No Has discrimination and/or sexual harassment been eliminated?
Yes No Is there an absence of open hostility and severe conflict?
Yes No Do people act on the job in a way that is consistent with what they say is ethical?
Yes No Is the firm more externally focused on customers, the environment, and the welfare of society than on its own profits?
Yes No Is there open communication between superiors and subordinates on ethical dilemmas?
Yes No Have employees ever received advice on how to improve ethical behavior or been disciplined for committing
unethical acts?
*Add the number of Yes answers. The greater the number of Yes answers, the less ethical conflict is likely in your organization.
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traditions, and beliefs to ensure that they represent the desired culture. However, the
rewards and punishments imposed by an organization need to be consistent with the
actual corporate culture. As two business ethics experts have observed, “Employees will
value and use as guidelines those activities for which they will be rewarded. When a be-
havior that is rewarded comes into conflict with an unstated and unmonitored ethical
value, usually the rewarded behavior wins out.”21
Differential Association
Differential association refers to the idea that people learn ethical or unethical be-
havior while interacting with others who are part of their role-sets or belong to other
intimate personal groups.22 The learning process is more likely to result in unethical
behavior if the individual associates primarily with persons who behave unethically.
Associating with others who are unethical, combined with the opportunity to act
unethically, is a major influence on ethical decision making, as described in the
decision-making framework in Chapter 5.23
Consider two cashiers working different shifts at the same supermarket. Kevin,
who works in the evenings, has seen his cashier friends take money from the bag con-
taining the soft-drink machine change, which is collected every afternoon but not
counted until closing time. Although Kevin personally believes that stealing is wrong,
he has often heard his friends rationalize that the company owes them free beverages
while they work. During his break one evening, Kevin discovers that he has no money
to buy a soda. Because he has seen his friends take money from the bag and has heard
them justify the practice, Kevin does not feel guilty about taking four quarters. How-
ever, Sally, who works the day shift, has never seen her friends take money from the bag.
When she discovers that she does not have enough money to purchase a beverage for
her break, it does not occur to her to take money from the change bag. Instead, she
borrows from a friend. Although both Sally and Kevin view stealing as wrong, Kevin
has associated with others who say the practice is justified. When the opportunity arose,
Kevin used his friends’ rationalization to justify his theft.
A variety of studies have supported the notion that such differential association in-
fluences ethical decision making. In particular, superiors have a strong influence on the
ethics of their subordinates. Consider the actions of Mark Hernandez, who worked at
NASA’s Michoud Assembly Facility applying insulating foam to the space shuttles’ ex-
ternal fuel tanks. Within a few weeks on the job, coworkers taught him to repair
scratches in the insulation without reporting the repairs. Supervisors encouraged the
workers not to bother filling out the required paperwork on the repairs so they could
meet the space shuttle program’s tight production schedules. After the shuttle Co-
lumbia broke up on reentry, killing all seven astronauts on board, investigators fo-
cused on whether a piece of foam falling off a fuel tank during liftoff may have
irreparably damaged the shuttle. The final determination of the cause of the disaster
may require years of investigation.24
Several research studies have found that employees, especially young managers,
tend to go along with their superiors’ moral judgments to demonstrate loyalty.25 Hope-
fully, we have made it clear that how people typically make ethical decisions is not nec-
essarily the way they should make ethical decisions. But we believe that you will be able
182 PART 3 ◆ THE DECISION-MAKING PROCESS
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to improve your own ethical decision making once you understand the potential in-
fluence of your interaction with others in your intimate work groups.
Whistle-Blowing
Interpersonal conflict ensues when employees think they know the right course of ac-
tion in a situation, yet their work group or company promotes or requires a different,
unethical decision. In such cases, employees may choose to follow their own values and
refuse to participate in the unethical or illegal conduct. If they conclude that they can-
not discuss what they are doing or what should be done with their coworkers or im-
mediate supervisors, these employees may go outside the organization to publicize
and correct the unethical situation.
Whistle-blowing means exposing an employer’s wrongdoing to outsiders (exter-
nal to the company) such as the media or government regulatory agencies. The term
whistle-blowing is also used for internal reporting of misconduct to management,
especially through anonymous reporting mechanisms, often called hot lines. The
Sarbanes–Oxley Act and the Federal Sentencing Guidelines for Organizations (FSGO)
has institutionalized internal whistle-blowing to encourage discovery of internal mis-
conduct.
Whistle-blowers have provided pivotal evidence documenting corporate malfea-
sance at a number of companies. The importance of their role was highlighted when
Time magazine named three whistle-blowers a few years ago as “Persons of the Year”:
Sherron Watkins of Enron, Cynthia Cooper of WorldCom, and Coleen Rowley of the
FBI. Watkins, an Enron vice president, warned Kenneth Lay, the firm’s CEO, that the
company was using improper accounting procedures. “I am incredibly nervous that we
will implode in a wave of accounting scandals,” she told him, and the energy firm did
exactly that within a few short months. Lay seemed skeptical of her concerns because
of approval of Arthur Andersen, their external auditor, and Vinson and Elkins (their
law firm). Lay turned over the case to their law and accounting firms for investiga-
tion, an activity that Watkins referred to as “whitewash” with these firms reviewing their
own work. Soon after, Watkins became an external whistle-blower testifying before
Congress that Enron had concealed billions of dollars in debt through a complex
scheme of off-balance-sheet partnerships.26
Historically, the fortunes of external whistle-blowers have not been as positive:
Most were labeled traitors, and many lost their jobs. Even Watkins was a potential can-
didate for firing as the Enron investigation unfolded with law firms assessing the im-
plications of terminating her in light of her ethical and legal concerns about Enron.27
A study of three hundred whistle-blowers by researchers at the University of Penn-
sylvania found that 69 percent lost their jobs or were forced to retire after exposing their
companies’ misdeeds.28 For example, the whistle-blower who exposed Wal-Mart chair-
man Thomas Coughlin of defrauding the company was terminated about a week af-
ter Coughlin resigned. Jared Bowen, a former vice president for Wal-Mart Stores, Inc.,
claims that he was terminated for his exposure of Coughlin, in violation of a provision
of the Sarbanes–Oxley Act protecting whistle-blowers.29 If an employee provides in-
formation to the government about their company’s wrongdoing, under the Federal
False Claims Act, the whistle-blower is known as a qui tam relator. Upon investigation
CHAPTER 7 ◆ ORGANIZATIONAL FACTORS: THE ROLE OF ETHICAL CULTURE AND RELATIONSHIPS 183
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by the U.S. Department of Justice, the whistle-blower can receive between 15 and 25
percent of the recovered funds, depending upon how instrumental their claims were
in holding the firm accountable for their wrongdoing.30 Although most whistle-
blowers do not receive positive recognition for pointing out corporate misconduct,
some have turned to the courts and obtained substantial settlements. Table 7–4 pro-
vides a checklist of questions an employee should ask before blowing the whistle ex-
ternally. Figure 7–3 shows that nearly one in four employees experience retaliation
after reporting misconduct. Nearly half of all employees who report misconduct re-
ceived positive feedback for having done so.
If whistle-blowers present an accurate picture of organizational misconduct, they
should not fear for their jobs. Indeed, the Sarbanes–Oxley Act makes it illegal to “dis-
charge, demote, suspend, threaten, harass, or in any manner discriminate against” a
whistle-blower and sets penalties of up to ten years in jail for executives who retaliate
against whistle-blowers. The law also requires publicly traded companies to implement
an anonymous reporting mechanism that allows employees to question actions that they
184 PART 3 ◆ THE DECISION-MAKING PROCESS
T A B L E 7 – 4 Questions to Ask Before Engaging in External
Whistle-Blowing
1. Have I exhausted internal anonymous reporting opportunities within the organization?
2. Have I examined company policies and codes that outline acceptable behavior and violations of
standards?
3. Is this a personal issue that should be resolved through other means?
4. Can I manage the stress that may evolve from exposing potential wrongdoing in the organization?
5. Can I deal with the consequences of resolving an ethical or legal conflict within the organization?
80
60
40
20
0
P
e
rc
e
n
t
22
78
48 52
Retaliation Positive
Feedback
Yes
No
F I G U R E 7 – 3 Outcome for Internal Whistle-Blowers Reporting Misconduct
SOURCE: National Business Ethics Survey, How Employees View Ethics in Their Organizations 1994–2005 (Washing-
ton, DC: Ethics Resource Center, 2005), 32.
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believe may indicate fraud or other misconduct.31 Additionally, the FSGO provides
rewards for companies that systematically detect and address unethical or illegal
activities.
Some U.S. companies are setting up computer systems that encourage internal
whistle-blowing. With over fifty-five hundred employees, Marvin Windows (one of
the world’s largest custom manufacturer of wood windows and doors) is concerned
about employees feeling comfortable reporting violations of safety conditions, bad
management, fraud, or theft. The system is anonymous and allows for reporting in
native-country languages. This system is used to alert management to potential prob-
lems in the organization and facilitate an investigation.32
Even before the passage of the Sarbanes–Oxley Act, an increasing number of com-
panies were setting up anonymous reporting services, normally toll-free numbers,
through which employees can report suspected violations or seek input on how to
proceed when encountering ambiguous situations. These internal reporting services are
perceived to be most effective when they are managed by an outside organization that
specializes in maintaining ethics hot lines.
Figure 7–4 indicates the reasons why employees do not report misconduct in the
organization. The extent to which employees feel there will be no corrective action or
there will be retaliation are leading factors influencing their decisions not to report
observed misconduct.
LEADERS INFLUENCE CORPORATE CULTURE
Organizational leaders use their power and influence to shape corporate culture. Power
refers to the influence that leaders and managers have over the behavior and decisions of
subordinates. An individual has power over others when his or her presence causes them
CHAPTER 7 ◆ ORGANIZATIONAL FACTORS: THE ROLE OF ETHICAL CULTURE AND RELATIONSHIPS 185
Who to Contact?
Someone Else Would
Fear No Anonymity
Fear Retaliation
No Corrective Action
0 20 40 60 80
18
39
24
46
59
Percent
F I G U R E 7 – 4 Reasons Why Employees Do Not Report Observed Misconduct
SOURCE: National Business Ethics Survey, How Employees View Ethics in Their Organizations 1994–2005 (Washing-
ton, DC: Ethics Resource Center, 2005), 29.
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to behave differently. Exerting power is one way to influence the ethical decision-making
framework described in Chapter 5 (especially significant others and opportunity).
The status and power of leaders is directly related to the amount of pressure that
they can exert on employees to conform to their expectations. A superior in an authority
position can put strong pressure on employees to comply, even when their personal eth-
ical values conflict with the superior’s wishes. For example, a manager might say to a
subordinate, “I want the confidential data about our competitor’s sales on my desk by
Monday morning, and I don’t care how you get it.” A subordinate who values his or
her job or who does not realize the ethical questions involved may feel pressure to do
something unethical to obtain the data.
There are five power bases from which one person may influence another: (1) re-
ward power, (2) coercive power, (3) legitimate power, (4) expert power, and (5) ref-
erent power.33 These five bases of power can be used to motivate individuals either
ethically or unethically.
REWARD POWER Reward power refers to a person’s ability to influence the be-
havior of others by offering them something desirable. Typical rewards might be money,
status, or promotion. Consider, for example, a retail salesperson who has two watches
(a Timex and a Casio) for sale. Let’s assume that the Timex is of higher quality than
the Casio but is priced about the same. In the absence of any form of reward power,
the salesperson would logically attempt to sell the Timex watch. However, if Casio
gave him an extra 10 percent commission, he would probably focus his efforts on sell-
ing the Casio watch. This “carrot dangling” and incentives have been shown to be
very effective in getting people to change their behavior in the long run. In the short
run, however, it is not as effective as coercive power.
COERCIVE POWER Coercive power is essentially the opposite of reward power. In-
stead of rewarding a person for doing something, coercive power penalizes actions or
behavior. As an example, suppose a valuable client asks an industrial salesperson for a
bribe and insinuates that he will take his business elsewhere if his demands are not
met. Although the salesperson believes bribery is unethical, her boss has told her that
she must keep the client happy or lose her chance at promotion. The boss is imposing
a negative sanction if certain actions are not performed. Every year 20 percent of En-
ron’s workforce was asked to leave as they were ranked as “needs improvement” or
other issues were noted. Employees, not wanting to fall into the bottom 20 percent
went along with the corporate culture, which might include complacency toward
corruption.34
Coercive power relies on fear to change behavior. For this reason, it has been
found to be more effective in changing behavior in the short run than in the long run.
Coercion is often employed in situations where there is an extreme imbalance in power.
However, people who are continually subjected to coercion may seek a counterbalance
by aligning themselves with other, more powerful persons or by simply leaving the or-
ganization. In firms that use coercive power, relationships usually break down in the
long run. Power is an ethical issue not only for individuals but also for work groups
that establish policy for large corporations.
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LEGITIMATE POWER Legitimate power stems from the belief that a certain person
has the right to exert influence and that certain others have an obligation to accept it.
The titles and positions of authority that organizations bestow on individuals appeal
to this traditional view of power. Many people readily acquiesce to those who wield le-
gitimate power, sometimes committing acts that are contrary to their beliefs and val-
ues. Betty Vinson, an accountant at WorldCom, objected to her supervisor’s requests
to produce improper accounting entries in an effort to conceal WorldCom’s deterio-
rating financial condition. She finally gave in to their requests, being told this was the
only way to save the company. She and other WorldCom accountants eventually plead
guilty to conspiracy and fraud charges. She was sentenced to five months in prison and
five months of house arrest.35
Such staunch loyalty to authority figures can also be seen in corporations that have
strong charismatic leaders and centralized structures. In business, if a superior tells an
employee to increase sales “no matter what it takes” and that employee has a strong
affiliation to legitimate power, the employee may try anything to fulfill that order.
EXPERT POWER Expert power is derived from a person’s knowledge (or the per-
ception that the person possesses knowledge). Expert power usually stems from a su-
perior’s credibility with subordinates. Credibility, and thus expert power, is positively
related to the number of years that a person has worked in a firm or industry, the per-
son’s education, or the honors that he or she has received for performance. Others
who perceive a person to be an expert on a specific topic can also confer expert power
on him or her. A relatively low-level secretary may have expert power because he or she
knows specific details about how the business operates and can even make suggestions
on how to inflate revenue through expense reimbursements.
Expert power may cause ethical problems when it is used to manipulate others or
to gain an unfair advantage. Physicians, lawyers, or consultants can take unfair advantage
of unknowing clients, for example. Accounting firms may gain extra income by ignoring
concerns about the accuracy of financial data that they are provided in an audit.
REFERENT POWER Referent power may exist when one person perceives that his
or her goals or objectives are similar to another’s. The second person may attempt to
influence the first to take actions that will lead both to achieve their objectives. Because
they share the same objective, the person influenced by the other will perceive the
other’s use of referent power as beneficial. For this power relationship to be effective,
however, some sort of empathy must exist between the individuals. Identification with
others helps boost the decision maker’s confidence when making a decision, thus in-
creasing his or her referent power.
Consider the following situation: Lisa Jones, a manager in the accounting de-
partment of a manufacturing firm, has asked Michael Wong, a salesperson, to speed up
the delivery of sales contracts, which usually take about one month to process after a
deal is reached. Michael protests that he is not to blame for the slow process. Rather
than threaten to slow delivery of Michael’s commission checks (coercive power), Lisa
makes use of referent power. She invites Michael to lunch, and they discuss some of
their work concerns, including the problem of slow-moving documentation. They
agree that if document processing cannot be speeded up, both will be hurt. Lisa then
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suggests that Michael start faxing contracts instead of mailing them. He agrees to give
it a try, and within several weeks the contracts are moving faster. Lisa’s job is made eas-
ier, and Michael gets his commission checks a little sooner.
The five bases of power are not mutually exclusive. People typically use several
power bases to effect change in others. Although power in itself is neither ethical nor
unethical, its use can raise ethical issues. Sometimes a leader uses power to manipulate
a situation or a person’s values in a way that creates a conflict with the person’s value
structure. For example, a manager who forces an employee to choose between stay-
ing home with his sick child and keeping his job is using coercive power, which cre-
ates a direct conflict with the employee’s values.
MOTIVATING ETHICAL BEHAVIOR
A leader’s ability to motivate subordinates plays a key role in maintaining an ethical or-
ganization. Motivation is a force within the individual that focuses his or her behav-
ior toward achieving a goal. To create motivation, an organization offers incentives to
encourage employees to work toward organizational objectives. Understanding moti-
vation is important to the effective management of people, and it also helps explain their
ethical behavior. For example, a person who aspires to higher positions in an organi-
zation may sabotage a coworker’s project so as to make that person look bad. This
unethical behavior is directly related to the first employee’s ambition (motivation) to
rise in the organization.
As businesspeople move into middle management and beyond, higher-order needs
(social, esteem, and recognition) tend to become more important than lower-order
needs (salary, safety, and job security).36 Research has shown that an individual’s ca-
reer stage, age, organization size, and geographic location affect the relative priority
that he or she gives to satisfying respect, self-esteem, and basic physiological needs.
From an ethics perspective, needs or goals may change as a person progresses
through the ranks of the company. This shift may cause or help solve problems de-
pending on that person’s current ethical status relative to the company or society. For
example, junior executives might inflate purchase or sales orders, overbill time worked
on projects, or accept cash gratuities if they are worried about providing for their fam-
ilies’ basic physical necessities. As they continue up the ladder and are able to fulfill these
needs, such concerns may become less important. Consequently, these managers may
go back to obeying company policy or culture and be more concerned with internal
recognition and achievement than their families’ physical needs.
An individual’s hierarchy of needs may influence his or her motivation and ethi-
cal behavior. After basic needs such as food, working conditions (existence needs), and
survival are satisfied, relatedness needs and growth needs become important. Relat-
edness needs are satisfied by social and interpersonal relationships, and growth needs
are satisfied by creative or productive activities.37 Consider what happens when a new
employee, Jill Taylor, joins a company. At first Jill is concerned about working condi-
tions, pay, and security (existence needs). After some time on the job, she feels she has
satisfied these needs and begins to focus on developing good interpersonal relations
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with coworkers. When these relatedness needs have been satisfied, Jill wants to ad-
vance to a more challenging job. However, she learns that a higher-level job would re-
quire her to travel a lot. She greatly values her family life and feels that travel and nights
away from home would not be good for her. She decides, therefore, not to work to-
ward a promotion (resulting in a “need frustration”). Instead, she decides to focus
on furthering good interpersonal relations with her coworkers. This is termed
frustration-regression because, to reduce her anxiety, Jill is now focusing on an area
(interpersonal relations) not related to her main problem: the need for a more chal-
lenging job. In this example, Jill’s need for promotion has been modified by her val-
ues. To feel productive, she attempts to fill her needs by going back to an earlier stage
in her hierarchy of needs. Whatever her present job is, Jill would continue to empha-
size high performance in it. But this regression creates frustration that may lead Jill to
seek other employment.
Examining the role that motivation plays in ethics offers a way to relate business
ethics to the broader social context in which workers live and the deeper moral as-
sumptions on which society depends. Workers are individuals and they will be moti-
vated by a variety of personal interests. Although we keep emphasizing that managers
are positioned to exert pressure and force individuals’ compliance on ethically related
issues, we also acknowledge that an individual’s personal ethics and needs will signifi-
cantly affect his or her ethical decisions.
ORGANIZATIONAL STRUCTURE
AND BUSINESS ETHICS
An organization’s structure is important to the study of business ethics because the var-
ious roles and job descriptions that comprise that structure may create opportunities
for unethical behavior.38 The structure of organizations can be described in many ways.
For simplicity’s sake, we discuss two broad categories of organizational structures—cen-
tralized and decentralized. Note that these are not mutually exclusive structures; in
the real world, organizational structures exist on a continuum. Table 7–5 compares
some strengths and weaknesses of centralized and decentralized structures.
In a centralized organization, decision-making authority is concentrated in the
hands of top-level managers, and little authority is delegated to lower levels. Respon-
sibility, both internal and external, rests with top-level managers. This structure is es-
pecially suited for organizations that make high-risk decisions and whose lower-level
managers are not highly skilled in decision making. It is also suitable for organizations
in which production processes are routine and efficiency is of primary importance.
These organizations are usually extremely bureaucratic, and the division of labor is
typically very well defined. Each worker knows his or her job and what is specifically
expected, and each has a clear understanding of how to carry out assigned tasks. Cen-
tralized organizations stress formal rules, policies, and procedures, backed up with
elaborate control systems. Their codes of ethics may specify the techniques to be used
for decision making. General Motors, the Internal Revenue Service, and the U.S. Army
are examples of centralized organizations.
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Because of their top-down approach and the distance between employee and de-
cision maker, centralized organizational structures can lead to unethical acts. If the
centralized organization is very bureaucratic, some employees may behave according
to “the letter of the law” rather than the spirit. For example, a centralized organiza-
tion can have a policy about bribes that does not include wording about donating to
a client’s favorite charity before or after a sale. Such donations or gifts can, in some cases,
be construed as a tacit bribe because the employee buyer could be swayed by the do-
nation, or gift, to act in a less than favorable way or not to act in the best interests of
his or her firm.
Other ethical concerns may arise in centralized structures because they typically
have very little upward communication. Top-level managers may not be aware of prob-
lems and unethical activity. Some companies’ use of sweatshop labor may be one man-
ifestation of this lack of upward communication. Sweatshops produce products such
as garments by employing laborers, sometimes forced immigrant labor, who often
work twelve- to sixteen-hour shifts for little or no pay. Many illegal immigrants in Eu-
rope become indentured slaves or earn little more than the food they eat. By out-
sourcing production to such sweatshops, small- and mid-size suppliers are able to offer
products to retailers that beat or match the lowest global market prices. Many of these
products end up in leading retailers’ stores because their suppliers’ top managers claim
they were not aware of how their products were made.39
Another ethical issue that may arise in centralized organizations is blame shifting,
or scapegoating. People may try to transfer blame for their actions to others who are
not responsible. The specialization and significant division of labor in centralized or-
ganizations can also create ethical problems. Employees may not understand how their
actions can affect the overall organization because they work on one piece of a much
190 PART 3 ◆ THE DECISION-MAKING PROCESS
T A B L E 7 – 5 Structural Comparison of Organizational Types
Emphasis
Characteristic Decentralized Centralized
Hierarchy of authority Decentralized Centralized
Flexibility High Low
Adaptability High Low
Problem recognition High Low
Implementation Low High
Dealing with changes in Good Poor
environmental complexity
Rules and procedures Few and informal Many and formal
Division of labor Ambiguous Clear-cut
Span of control Few employees Many employees
Use of managerial techniques Minimal Extensive
Coordination and control Informal and personal Formal and impersonal
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larger puzzle. This lack of connectedness can lead employees to engage in unethical be-
havior because they fail to understand the overall ramifications of their behavior.
In a decentralized organization, decision-making authority is delegated as far
down the chain of command as possible. Such organizations have relatively few formal
rules, and coordination and control are usually informal and personal. They focus in-
stead on increasing the flow of information. As a result, one of the main strengths of
decentralized organizations is their adaptability and early recognition of external change.
With greater flexibility, managers can react quickly to changes in their ethical envi-
ronment. A parallel weakness of decentralized organizations is the difficulty that they
have in responding quickly to changes in policy and procedures established by top
management. In addition, independent profit centers within a decentralized organi-
zation may deviate from organizational objectives. Other decentralized firms may look
no further than the local community for their ethical standards. For example, if a firm
that produces toxic wastes leaves decisions on disposal to lower-level operating units,
the managers of those units may feel that they have solved their waste-disposal prob-
lem as long as they find a way to dump wastes outside their immediate community.
Table 7–6 gives examples of centralized versus decentralized organizations and de-
scribes their corporate culture.
Due to the strict formalization and implementation of ethics policies and proce-
dures in centralized organizations, they tend to be more ethical in their practices than
decentralized organizations. Centralized organizations may also exert more influence
on their employees because they have a central core of policies and codes of ethical con-
duct. Decentralized organizations give employees extensive decision-making auton-
omy because management empowers the employees. However, it is also true that
decentralized organizations may be able to avoid ethical dilemmas by tailoring their de-
cisions to the specific situations, laws, and values of a particular community. If widely
shared values are in place in decentralized organizations, there may be no need for ex-
cessive compliance programs. However, different units in the company may evolve
diverse value systems and approaches to ethical decision making. For example, a high-
tech defense firm like Lockheed Martin, which employs more than two hundred thou-
sand people, might have to cope with many different decisions on the same ethical
issue if it did not have a centralized ethics program. Boeing has become more cen-
tralized since the entrance of CEO W. James McNerney, Jr., and exit of previous CEO
CHAPTER 7 ◆ ORGANIZATIONAL FACTORS: THE ROLE OF ETHICAL CULTURE AND RELATIONSHIPS 191
T A B L E 7 – 6 Examples of Centralized and Decentralized
Corporate Cultures
Company Organizational Culture Characterized by
Nike Decentralized Creativity, freedom, informality
Southwest Airlines Decentralized Fun, teamwork orientation, loyalty
General Motors Centralized Unions, adherence to task assignments, structured
Microsoft Decentralized Creative, investigative, fast paced
Procter & Gamble Centralized Experienced, dependable, a rich history and tradition
of products, powerful
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Harry Stonecipher who carried on a relationship with a female vice president of the
company, resulting in his exit. Boeing had gone through several years of ethics and le-
gal difficulties including the jailing of the former CFO for illegal job negotiations with
Pentagon officials, indictment of a manager for stealing twenty-five thousand pages of
proprietary documents, abuse of attorney–client privilege to cover up internal studies
showing pay inequities, and other scandals.40
Unethical behavior is possible in either centralized or decentralized structures
when specific corporate cultures permit or encourage workers to deviate from accepted
standards or ignore corporate legal and ethical responsibilities. Centralized firms may
have a more difficult time uprooting unethical activity than decentralized organiza-
tions. The latter may have a more fluid history in which changes affect only a small por-
tion of the company. Often, when a centralized firm uncovers unethical activity and it
appears to be pervasive, the leadership is removed so that the old unethical culture can
be uprooted and replaced with a more ethical one. For example, Mitsubishi Motors sug-
gested significant management changes after it was discovered that a cover-up of auto
defects had been going on for more than two decades.
Some centralized organizations are seeking to restructure to become more de-
centralized, flexible, and adaptive to the needs of employees and customers. In other
cases, entire industries are being impacted by a trend of decentralization. For exam-
ple, many software companies, such as Citrix Systems, can cut their employee costs by
decentralizing and operating development centers in Florida, Washington, and Cali-
fornia.41 Decentralized decisions about ethics and social responsibility allow regional
or local operators to set policy and establish conduct requirements.
GROUP DIMENSIONS OF CORPORATE
STRUCTURE AND CULTURE
When discussing corporate culture, we tend to focus on the organization as a whole.
But corporate values, beliefs, patterns, and rules are often expressed through smaller
groups within the organization. Moreover, individual groups within organizations of-
ten adopt their own rules and values.
Types of Groups
Two main categories of groups affect ethical behavior in business. A formal group is
defined as an assembly of individuals that has an organized structure accepted explic-
itly by the group. An informal group is defined as two or more individuals with a
common interest but without an explicit organizational structure.
FORMAL GROUPS Formal groups can be divided into committees and work groups
and teams.
Committees A committee is a formal group of individuals assigned to a specific task.
Often a single manager could not complete the task, or management may believe that
a committee can better represent different constituencies and improve the coordina-
192 PART 3 ◆ THE DECISION-MAKING PROCESS
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tion and implementation of decisions. Committees may meet regularly to review per-
formance, develop plans, or make decisions. Most formal committees in organizations
operate on an ongoing basis, but their membership may change over time. A com-
mittee is an excellent example of a situation in which coworkers and significant others
within the organization can influence ethical decisions. Committee decisions are to
some extent legitimized because of agreement or majority rule. In this respect, mi-
nority views on issues such as ethics can be pushed aside through the majority’s
authority. Committees bring diverse personal moral values into the ethical decision-
making process, which may expand the number of alternatives considered.
The main disadvantage of committees is that they typically take longer to reach a
decision than an individual would. Committee decisions are also generally more con-
servative than those made by individuals and may be based on unnecessary compro-
mise rather than on identifying the best alternative. Also inherent in the committee
structure is a lack of individual responsibility. Because of the diverse composition of the
group, members may not be committed or willing to assume responsibility for the
group decision. Groupthink may emerge and the majority can explain ethical consid-
erations away.
Although many organizations have financial, diversity, personnel, or social re-
sponsibility committees, only a very few organizations have committees that are devoted
exclusively to ethics. An ethics committee might raise ethical concerns, resolve ethical
dilemmas in the organization, and create or update the company’s code of ethics.
Motorola, for example, maintains a Business Ethics Compliance Committee, which
interprets, classifies, communicates, and enforces the company’s code and ethics ini-
tiatives. An ethics committee can gather information on functional areas of the busi-
ness and examine manufacturing practices, personnel policies, dealings with suppliers,
financial reporting, and sales techniques to find out whether the company’s practices
are ethical. Though much of a corporation’s culture operates informally, an ethics com-
mittee would be a highly formalized approach for dealing with ethical issues.
Ethics committees can be misused if they are established for the purpose of legit-
imizing management’s ethical standards on some issue. For example, ethics commit-
tees may be quickly assembled for political purposes—that is, to make a symbolic
decision on some event that has occurred within the company. If the CEO or manager
in charge selects committee members who will produce a predetermined outcome, the
ethics committee may not help the organization resolve its ethical issues in the long run.
For example, organizations have been known to quickly assemble an ethics commit-
tee to fire someone for a minor infraction because they wanted him or her out of the
organization and needed an excuse for termination.
Ethics committee members may also fail to understand their role or function. If
they attempt to apply their own personal ethics to complex business issues, resolving
ethical issues may be difficult. Because most people’s personal ethical perspectives dif-
fer, the committee may experience conflict. Even if the committee members reach a
consensus, they may enforce their personal beliefs rather than the organization’s stan-
dards on certain ethical issues.
Ethics committees should be organized around professional, business-related is-
sues that occur internally. In general, the ethics committee should formulate policy, de-
velop ethical standards, and then assess the organization’s compliance with these
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requirements. Ethics committees should be aware of their industries’ codes of ethics,
community standards, and the organizational culture in which they work. Although
ethics committees do not always succeed, they can provide one of the best organiza-
tional approaches to resolving internal ethical issues fairly. As one of many examples in
the corporate world, Sunstrand Corporation, a Fortune 500 company, has established
employee-managed ethics committees at each of its facilities to stimulate employees’
“ownership” of their ethical conduct and to distribute accountability throughout the
organization.
Work Groups and Teams Work groups are used to subdivide duties within specific func-
tional areas of a company. For example, on an automotive assembly line, one work
group might install the seats and interior design elements of the vehicle while another
group installs all the dashboard instruments. This enables production supervisors to spe-
cialize in a specific area and provide expert advice to work groups.
Whereas work groups operate within a single functional area, teams bring together
the functional expertise of employees from several different areas of the organization—
for example, finance, marketing, and production—on a single project, such as devel-
oping a new product. Many manufacturing firms, including General Motors, West-
inghouse, and Procter & Gamble, are using the team concept to improve participative
management. Ethical conflicts may arise because team members come from different
functional areas. Each member of the team has a particular role to play and has prob-
ably had limited interaction with other members of the team. Members may have en-
countered different ethical issues in their own functional areas and may therefore bring
different viewpoints when the team faces an ethical issue. For example, a production
quality-control employee might believe that side-impact air bags should be standard
equipment on all automobiles for safety reasons. A marketing member of the team
may reply that the cost of adding the air bags would force the company to raise prices
beyond the reach of some consumers. The production employee might then argue
that it is unethical for an automobile maker to fail to include a safety feature that could
save hundreds of lives. Such conflicts often occur when members of different organi-
zational groups must interact. However, airing viewpoints representative of all the
functional areas helps provide more options from which to choose.
Work groups and teams provide the organizational structure for group decision
making. One of the reasons why individuals cannot implement their personal ethical
beliefs in organizations is that so many decisions are reached collectively by work
groups. However, those who have legitimate power are in a position to influence ethics-
related activities. The work group and team often sanction certain activities as ethical
or define others as unethical.
INFORMAL GROUPS In addition to the groups that businesses formally organize and
recognize—such as committees, work groups, and teams—most organizations have a
number of informal groups. These groups are usually composed of individuals, often
from the same department, who have similar interests and band together for com-
panionship or for purposes that may or may not be relevant to the goals of the organ-
ization. For example, four or five people who have similar tastes in outdoor activities
and music may discuss their interests while working, and they may meet outside work
194 PART 3 ◆ THE DECISION-MAKING PROCESS
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for dinner, concerts, sports events, or other activities. Other informal groups may
evolve to form a union, improve working conditions or benefits, get a manager fired,
or protest work practices that they view as unfair. Informal groups may generate dis-
agreement and conflict, or they may enhance morale and job satisfaction.
Informal groups help develop informal channels of communication, sometimes
called the “grapevine,” which are important in every organization. Informal commu-
nication flows up, down, diagonally, and horizontally, not necessarily following the
communication lines on a company’s organization chart. Information passed along
the grapevine may relate to the job, the organization, or an ethical issue, or it may
simply be gossip and rumors. The grapevine can act as an early warning system for
employees. If employees learn informally that their company may be sold or that a par-
ticular action will be condemned as unethical by top management or the community,
they have time to think about what they will do. Because gossip is not uncommon in
an organization, the information passed along the grapevine is not always accurate.
Managers who understand how the grapevine works can use it to reinforce acceptable
values and beliefs.
The grapevine is also an important source of information for individuals to assess
ethical behavior within their organization. One way an employee can determine ac-
ceptable behavior is to ask friends and peers in informal groups about the consequences
of certain actions such as lying to a customer about a product-safety issue. The corporate
culture may provide employees with a general understanding of the patterns and rules
that govern behavior, but informal groups make this culture come alive and provide
direction for employees’ daily choices. For example, if a new employee learns anec-
dotally through the grapevine that the organization does not punish ethical violations,
he or she may seize the next opportunity for unethical behavior if it accomplishes the
organization’s objectives. There is a general tendency to discipline top sales perform-
ers more leniently than poor sales performers for engaging in identical forms of un-
ethical selling behavior. A superior sales record appears to induce more lenient forms
of discipline, despite organizational policies that state otherwise.42 In this case, the
grapevine has clearly communicated that the organization rewards those who break the
ethical rules to achieve desirable objectives.
Group Norms
Group norms are standards of behavior that groups expect of their members. Just
as corporate culture establishes behavior guidelines for an organization’s members,
so group norms help define acceptable and unacceptable behavior within a group.
In particular, group norms define the limit allowed on deviations from group
expectations.
Most work organizations, for example, develop norms that govern groups’ rates
of production and communication with management as well as providing a general
understanding of behavior considered right or wrong, ethical or unethical, within the
group. For example, an employee who reports to a supervisor that a coworker has cov-
ered up a serious production error may be punished by other group members for this
breach of confidence. Other members of the group may glare at the informant, who
has violated a group norm, and refuse to talk to or sit by him or her.
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Norms have the power to enforce a strong degree of conformity among group
members. At the same time, norms define the different roles for various positions
within the organization. Thus, a low-ranking member of a group may be expected to
carry out an unpleasant task such as accepting responsibility for someone else’s ethi-
cal mistake. Abusive behavior toward new or lower-ranking employees could be a norm
in an informal group.
Sometimes group norms conflict with the values and rules prescribed by the or-
ganization’s culture. For example, the organization may have policies about the per-
sonal use of computers during work hours and may use rewards and punishments to
encourage this culture. In a particular informal group, however, norms may encour-
age using computers for personal use during work hours and avoiding management’s
attention. Issues of equity may arise in this situation if other groups believe they are
unfairly forced to follow policies that are not enforced. These other employees may
complain to management or to the offending group. If they believe management is not
taking corrective action, they, too, may use computers for personal use, thus hurting
the whole organization’s productivity. For this reason, management must carefully
monitor not only the corporate culture but also the norms of all the various groups
within the organization. Sanctions may be necessary to bring in line a group whose
norms deviate sharply from the overall culture.
VARIATION IN EMPLOYEE CONDUCT
Although the corporation is required to take responsibility for conducting its business
ethically, a substantial amount of research indicates that significant differences exist in
the values and philosophies that influence how the individuals that comprise corpora-
tions make ethical decisions.43 In other words, because people are culturally diverse and
have different values, they interpret situations differently and will vary in the ethical de-
cisions they make on the same ethical issue.
Table 7–7 shows that approximately 10 percent of employees take advantage of sit-
uations to further their own personal interests. These individuals are more likely to
manipulate, cheat, or be self-serving when the benefits gained from doing so are greater
than the penalties for the misconduct. Such employees may choose to take office sup-
196 PART 3 ◆ THE DECISION-MAKING PROCESS
T A B L E 7 – 7 Variation in Employee Conduct*
10% 40% 40% 10%
Follow their own values and Always try to follow company Go along with the work Take advantage of situations
beliefs; believe that their policies. group. if the penalty is less than the
values are superior to those benefit and the risk of being
of others in the company. caught is low.
*These percentages are based on a number of studies in the popular press and data gathered by the authors. These percentages are not exact and
represent a general typology that may vary by organization.
SOURCE: From John Fraedrich and O.C. Ferrell, “Cognitive Consistency of Marketing Managers in Ethical Situations,” Journal of the Academy of Mar-
keting Science, Summer 1992, Vol. 20, pp. 243–252. Copyright © 1992 by Sage Publications, Inc. Reprinted by permission of Sage Publications, Inc.
6433ch07.qxd_lb 10/19/06 10:19 AM Page 196
plies from work for personal use if the only penalty they may suffer if caught is hav-
ing to pay for the supplies. The lower the risk of being caught, the higher is the like-
lihood that the 10 percent most likely to take advantage will be involved in unethical
activities.
Another 40 percent of workers go along with the work group on most matters.
These employees are most concerned about the social implications of their actions and
want to fit into the organization. Although they have their own personal opinions,
they are easily influenced by what people around them are doing. These individuals may
know that using office supplies for personal use is improper, yet they view it as ac-
ceptable because their coworkers do so. These employees rationalize their action by say-
ing that the use of office supplies is one of the benefits of working at their particular
business and it must be acceptable because the company does not enforce a policy pre-
cluding the behavior. Coupled with this philosophy is the belief that no one will get
into trouble for doing what everybody else is doing, for there is safety in numbers.
About 40 percent of a company’s employees, as shown in Table 7–7, always try to
follow company policies and rules. These workers not only have a strong grasp of their
corporate culture’s definition of acceptable behavior but also attempt to comply with
codes of ethics, ethics training, and other communications about appropriate conduct.
If the company has a policy prohibiting taking office supplies from work, these em-
ployees probably would observe it. However, they likely would not speak out about
the 40 percent who choose to go along with the work group, for these employees pre-
fer to focus on their jobs and steer clear of any organizational misconduct. If the com-
pany fails to communicate standards of appropriate behavior, members of this group
will devise their own.
The final 10 percent of employees try to maintain formal ethical standards that fo-
cus on rights, duties, and rules. They embrace values that assert certain inalienable
rights and actions, which they perceive to be always ethically correct. In general, mem-
bers of this group believe that their values are right and superior to the values of oth-
ers in the company, or even to the company’s value system, when an ethical conflict
arises. These individuals have a tendency to report the misconduct of others or to
speak out when they view activities within the company as unethical. Consequently,
members of this group would probably report colleagues who take office supplies.
The significance of this variation in the way individuals behave ethically is simply
this: Employees use different approaches when making ethical decisions. Because of the
probability that a large percentage of any work group will either take advantage of a
situation or at least go along with the work group, it is vital that companies provide
communication and control mechanisms to maintain an ethical culture. Companies
that fail to monitor activities and enforce ethics policies provide a low-risk environment
for those employees who are inclined to take advantage of situations to accomplish
their personal, and sometimes unethical, objectives.
Good business practice and concern for the law requires organizations to recog-
nize this variation in employees’ desire to be ethical. The percentages cited in Table 7–7
are only estimates, and the actual percentages of each type of employee may vary widely
across organizations based on individuals and corporate culture. The specific percent-
ages are less important than the fact that our research has identified these variations as
existing within most organizations. Organizations should focus particular attention
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on managers who oversee the day-to-day operations of employees within the com-
pany. They should also provide training and communication to ensure that the busi-
ness operates ethically, that it does not become the victim of fraud or theft, and that
employees, customers, and other stakeholders are not abused through the misconduct
of people who have a pattern of unethical behavior.
As we have seen throughout this book, many examples can be cited of employees
and managers who have no concern for ethical conduct but are nonetheless hired and
placed in positions of trust. Some corporations continue to support executives who ig-
nore environmental concerns, poor working conditions, or defective products, or who
engage in accounting fraud. Executives who can get results, regardless of the conse-
quences, are often admired and lauded, especially in the business press. When their
unethical or even illegal actions become public knowledge, however, they risk more
than the loss of their positions. Table 7–8 summarizes the penalties that corporate ex-
ecutives have experienced over the past several years.
CAN PEOPLE CONTROL THEIR OWN ACTIONS
WITHIN A CORPORATE CULTURE?
Many people find it hard to believe that an organization’s culture can exert so strong
an influence on individuals’ behavior within the organization. In our society, we want
to believe that individuals control their own destiny. A popular way of viewing busi-
ness ethics is therefore to see it as a reflection of the alternative moral philosophies
198 PART 3 ◆ THE DECISION-MAKING PROCESS
T A B L E 7 – 8 Penalties for Convictions of Organizational Wrongdoing
Executive/Company Trial Outcome
Franklin Brown, former general counsel, Rite Aid Convicted and sentenced to 10 years in prison.
Bernard Ebbers, former chairman and CEO, Convicted and sentenced to 25 years to life in prison.
WorldCom
Dennis Kozlowski, former CEO, Tyco Mistrial in first trial; in second, convicted and sentenced to 81⁄3 years to 25
years in prison.
Jamie Olis, former vice president of finance, Convicted and sentenced to 24 years in prison without the chance of parole;
Dynegy the sentence was tossed out on appeal.
Frank Quattrone, former investment banker, CSFB Convicted in second trial, but conviction overturned due to error in jury
instructions.
John Rigas, founder, Adelphia Convicted and sentenced to 15 years in prison.
Richard Scrushy, founder, HealthSouth Acquitted by the Justice Department but found guilty by an Alabama jury;
awaits sentencing.
Theodore Sihpol, broker, Bank of America Acquitted on twenty-nine of thirty-three criminal counts; no retrial on remaining
counts.
Martha Stewart, founder, Martha Stewart Convicted and sentenced to 5 months in prison and 5 months of home
Living Omnimedia confinement.
SOURCE: From Wall Street Journal Online, “White-Collar Defendants: Take the Stand, or Not?,” April 2, 2006. Copyright © 2006 by Dow Jones & Com-
pany, Inc. Reproduced with permission of Dow Jones & Company, Inc. via Copyright Clearance Center. http://online.wsj.com (accessed April 6, 2006).
6433ch07.qxd_lb 10/19/06 10:19 AM Page 198
that individuals use to resolve their personal moral dilemmas. As this chapter has shown,
however, ethical decisions within organizations are often made by committees and for-
mal and informal groups, not by individuals. Decisions related to financial reporting,
advertising, product design, sales practices, and pollution-control issues are often be-
yond the influence of individuals alone. In addition, these decisions are frequently
based on business rather than personal goals.
Most new employees in highly bureaucratic organizations have almost no input into
the basic operating rules and procedures for getting things done. Along with learning
sales tactics and accounting procedures, employees may be taught to ignore a design
flaw in a product that could be dangerous to users. Although many personal ethics is-
sues may seem straightforward and easy to resolve, individuals entering business will
usually need several years of experience within a specific industry to understand how
to resolve ethical close calls. For example, what constitutes misleading advertising?
When Corvette introduced the new C-6 design, they wanted to reach a younger
demographic. They hired Madonna’s husband, Guy Richie, and used the Rolling Stones
singing “Jumpin’ Jack Flash” to create a memorable TV commercial showing a young
boy fantasizing about being able to drive the Corvette. General Motors received com-
plaints from parents and organizations indicating that it was inappropriate for GM to
show a clearly underage driver, driving recklessly, even if it was a fantasy. GM responded
quickly by withdrawing the commercial from the airwaves. How could this problem
have been prevented? Perhaps, GM should have screened the ads to a variety of audi-
ences, not just the target audience for the vehicle. The only thing that is certain is that
one person’s opinion or maybe even a work group’s opinion is insufficient in dealing
with complex decisions.
It is not our purpose to suggest that you ought to go along with management or
the group on business ethics issues. Honesty and open discussion of ethical issues are
important to successful ethical decision making. We believe that most companies and
businesspeople try to make ethical decisions. However, because there is so much dif-
ference between individuals, ethical conflict is inevitable. If you manage and supervise
others, it will be necessary to maintain ethical policies for your organization and report
misconduct that occurs. This means that ethics is not just a personal matter.
Regardless of how a person or organization views the acceptability of a particular
activity, if society judges it to be wrong or unethical, then this larger view directly af-
fects the organization’s ability to achieve its goals. Not all activities deemed unethical
by society are illegal. But if public opinion decries or consumers protest against a par-
ticular activity, the result may be legislation that restricts or bans a specific business
practice. For instance, concern about teen smoking prompted the government to reg-
ulate the placement of cigarette advertising and curb the use of characters and ap-
proaches designed to appeal to children. Public concern and outrage at the growth in
cigarette smoking among minors spurred much of this intervention. Besieged by
mounting negative opinion, numerous class-action lawsuits, and a landmark settle-
ment with forty-six states, Philip Morris USA, producer of the world’s best-selling cig-
arette, was forced to modify its marketing strategies, in particular to avoid marketing
its products to minors. The company now uses the Internet, TV commercials, school
publications, and print ads to encourage teenagers not to smoke. Philip Morris has
spent over $600 million on youth smoking-prevention advertising, providing grants to
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youth-development organizations, producing tools and resources to help parents talk
to their children about the hazards of smoking, and supporting youth access preven-
tion initiatives to help keep cigarettes out of children’s hands.44
If a person believes that his or her personal ethics severely conflict with the ethics
of the work group and of superiors in an organization, that individual’s only alterna-
tive may be to leave the organization. In the highly competitive employment market
of the twenty-first century, quitting a job because of an ethical conflict requires courage
and, possibly, the ability to survive without a job. Obviously, there are no easy answers
for resolving ethical conflicts between the organization and the individual. Our goal
is not to tell you what you should do. But we do believe that the more you know
about how ethical decision making occurs within organizations, the more opportunity
you will have to influence decisions positively and resolve ethical conflict more
effectively.
SUMMARY
Corporate culture refers to the set of values, beliefs, goals, norms, and ways of solving
problems that the members (employees) of an organization share. These shared val-
ues may be formally expressed or unspoken. Corporate cultures can be classified in
several ways, and a cultural audit can be conducted to identify an organization’s cul-
ture. If an organization’s culture rewards unethical behavior, people within the com-
pany are more likely to act unethically. A company’s failure to monitor or manage its
culture may foster questionable behavior.
Leadership—the ability or authority to guide others toward achieving goals—has
a significant impact on the ethical decision-making process because leaders have the
power to motivate others and enforce both the organization’s rules and policies and
their own viewpoints. A leader must not only gain the respect of his or her followers
but also provide a standard of ethical conduct. Leaders exert power to influence the
behaviors and decisions of subordinates. There are five power bases from which a leader
may influence ethical behavior: reward power, coercive power, legitimate power, ex-
pert power, and referent power. Leaders also attempt to motivate subordinates; moti-
vation is an internal force that focuses an individual’s behavior toward achieving a goal.
It can be created by the incentives that an organization offers employees.
The structure of an organization may create opportunities to engage in unethical
behavior. In a centralized organization, decision-making authority is concentrated in
the hands of top managers, and little authority is delegated to lower levels. In a de-
centralized organization, decision-making authority is delegated as far down the chain
of command as possible. Centralized organizations tend to be more ethical than de-
centralized ones because they enforce more rigid controls such as codes of ethics and
corporate policies on ethical practices. However, unethical conduct can occur in both
types of structures.
In addition to the values and customs that represent the culture of an organiza-
tion, individual groups within the organization often adopt their own rules and values
and even create subcultures. The main types of groups are formal groups—which in-
clude committees, work groups, and teams—and informal groups. Informal groups
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As Gerard sat down in his expensive
new chair, he was worried. What
had he gotten himself into? How
could things have gone so wrong so fast? It was as if
he’d been walking and some truck had blindsided
him. Gerard had been with Trawlers Accounting, a
medium-size firm, for several years. His wife, Vicky,
had a job in the pharmaceutical industry, and their
first child was due any day now. The doctor had told
her that she would need to stop work early because
hers was a high-risk pregnancy. So three months be-
fore her due date, she asked and received a four-
month leave of absence. This was great, but the leave
was without pay. Luckily, Gerard had received a pro-
motion and now headed a department.
Some interesting activities were going on in the
accounting industry. For example, Gerard’s superior
had decided that all CPAs would take exams to be-
come registered investment advisers. The rationale for
such a new development was simple. The firm could
CHAPTER 7 ◆ ORGANIZATIONAL FACTORS: THE ROLE OF ETHICAL CULTURE AND RELATIONSHIPS 201
IMPORTANT
TERMS
FOR REVIEW
differential association
whistle-blowing
reward power
coercive power
legitimate power
expert power
referent power
motivation
relatedness needs
growth needs
centralized organization
decentralized organization
formal group
informal group
group norm
A R E A L – L I F E S I T U AT I O N *
use its relationships with clients to increase investment
revenues. Because of the long-term nature of these re-
lationships with many firms and individuals as well as
the implicit sense of honesty that CPAs must bring to
their jobs, clients understood that a violation of so high
a trust was unlikely—or so Gerard’s boss argued. Many
of the people in Gerard’s department didn’t like this
new policy; however, some who had passed the exams
increased their pay by 15 percent. During lunch, one
of Gerard’s financial friends engaged him heatedly.
“What you’re doing, Gerard, is called unfair
competition,” the friend accused him. “For exam-
ple, your CPAs have exclusive access to confidential
client taxpayer information, which could give you in-
sight into people’s financial needs. Besides, you could
easily direct clients to mutual funds that you already
own in order to keep your own personal investments
afloat. Also, if your people start chasing commissions
and fees on mutual funds that go bad, your credibil-
ity will become suspect, and you won’t be trusted.
often feed an informal channel of communication called the “grapevine.” Group norms
are standards of behavior that groups expect of their members. They help define ac-
ceptable and unacceptable behavior within a group and especially define the limits on
deviating from group expectations. Sometimes group norms conflict with the values
and rules prescribed by the organization’s culture.
Sometimes an employee’s own personal ethical standards conflict with what is
expected of him or her as a member of an organization and its corporate culture. This
is especially true given that an organization’s ethical decisions are often resolved by
committees, formal groups, and informal groups rather than by individuals. When
such ethical conflict is severe, the individual may have to decide whether to leave the
organization.
6433ch07.qxd_lb 10/19/06 10:19 AM Page 201
202 PART 3 ◆ THE DECISION-MAKING PROCESS
completing the following. Assess your performance to evaluate your overall understanding of
the chapter material.
1. Decentralized organizations tend to put the blame for unethical behavior Yes No
on lower-level personnel.
2. Decentralized organizations give employees extensive decision-making Yes No
autonomy.
3. Corporate culture provides rules for behaving within the organization. Yes No
4. An integrative culture shows high concern for performance and little Yes No
concern for people.
5. Coercive power works in the same manner as reward power. Yes No
✓
ETH
ICS
QUO
TIE
NTETH
ICS
QUO
TIE
NT
Your EQ
Check your EQ, or
ethics quotient, by
ANSWERS: 1. No. That’s more likely to occur in centralized organizations. 2. Yes. This is known as empowerment.
3. Yes. Values, beliefs, customs, and ceremonies represent what is acceptable and unacceptable in the organization.
4. No. That’s an exacting culture. An integrative culture combines high concern for people and production. 5. No.
Coercive power is the opposite of reward power. One offers rewards and the other punishment to encourage
appropriate behavior.
Plus, your people will now have to keep abreast of fi-
nancial, tax, and accounting changes.”
When Gerard got to his office, he found that
some of his people had been recommending a group
of mutual funds that Trawlers had been auditing.
Then someone from another of his company’s ac-
counting clients, CENA Mutual Funds, telephoned.
“What’s the idea of having your people suggest
PPI Mutual Funds when they are in direct competi-
tion with us?” the caller yelled. “We pay you a lot,
Gerard, to do our accounting procedures, and that’s
how you reward us? I want to know by the end of the
day if you are going to continue to push our com-
petitor’s product. I don’t have to tell you that this
will directly affect your department and you. Also,
things like this get around the business circles, if you
know what I mean.”
With these words, the caller hung up on Gerard.
Q U E S T I O N S • E X E R C I S E S
1. Identify any ethical and legal issues of which
Gerard needs to be aware.
2. Discuss the advantages and disadvantages of
each decision Gerard has made and could
make.
3. Discuss the issue of accounting firms going
into the financial services market.
4. Discuss the type of groups that are influencing
Gerard.
*This case is strictly hypothetical; any resemblance to real per-
sons, companies, or situations is coincidental.
Check
6433ch07.qxd_lb 10/19/06 10:19 AM Page 202
reference/4166063
Managing to Be Ethical: Debunking Five Business Ethics Myths [and Executive Commentary]
Author(s): Linda Klebe Treviño, Michael E. Brown and Stephen J. Wall
Source: The Academy of Management Executive (1993-2005), Vol. 18, No. 2 (May, 2004), pp. 69-
83
Published by: Academy of Management
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Academy of Management Executive, 2004, Vol. 18, No. 2
………………………………………………………………………………………………………………………………………………….
Managing to be ethical:
Debunking five business
ethics myths
Linda Klebe Trevinio and Michael E. Brown
Executive Summary
In the aftermath of recent corporate scandals, managers and researchers have turned
their attention to questions of ethics management. We identify five common myths about
business ethics and provide responses that are grounded in theory, research, and
business examples. Although the scientific study of business ethics is relatively new,
theory and research exist that can guide executives who are trying to better manage
their employees’ and their own ethical behavior. We recommend that ethical conduct be
managed proactively via explicit ethical leadership and conscious management of the
organization’s ethical culture.
*.*……………..- .- .- .- .* …- .- .v v v – …- .. ……e – . – . * – .- .. ** .. .. .. . . . . * .v v* vv v* .v .. . . . v . – * . .v * . ee e . – – – e – . – . – . – . – . – . – – – – . . – . .- .- .- -@ – – – . . .
The twenty-first century has brought corporate eth-
ics scandals that have harmed millions of employ-
ees and investors, and sent shock waves through-
out the business world. The scandals have
produced “perp walks” and regulatory backlash,
and business ethics is once again a hot topic. Ac-
ademics and managers are asking: What caused
the recent rash of corporate wrongdoing, and what
can we do, if anything, to prevent similar trans-
gressions in the future? Perhaps because everyone
has opinions about ethics and personal reactions
to the scandals, a number of pat answers have
circulated that perpetuate a mythology of business
ethics management. In this article, we identify sev-
eral of these myths and respond to them based upon
knowledge grounded in research and practice.
Myth 1: It’s Easy to Be Ethical
A 2002 newspaper article was entitled, “Corporate
ethics is simple: If something stinks, don’t do it.”
The article went on to suggest “the smell test” or “If
you don’t want to tell your mom what you’re really
doing … or read about it in the press, don’t do it.”‘
The obvious suggestion is that being ethical in
business is easy if one wants to be ethical. A fur-
ther implication is that if it’s easy, it doesn’t need
to be managed. But that suggestion disregards the
complexity surrounding ethical decision-making,
especially in the context of business organizations.
Ethical Decisions Are Complex
First, ethical decisions aren’t simple. They’re com-
plex by definition. As they have for centuries, phi-
losophers argue about the best approaches to mak-
ing the right ethical decision. Students of business
ethics are taught to apply multiple normative
frameworks to tough dilemmas where values con-
flict. These include consequentialist frameworks
that consider the benefits and harms to society of a
potential decision or action, deontological frame-
works that emphasize the application of ethical
principles such as justice and rights, and virtue
ethics with its emphasis on the integrity of the
moral actor, among other approaches.2 But, in
the most challenging ethical dilemma situations,
the solutions provided by these approaches con-
flict with each other, and the decision maker is left
with little clear guidance. For example, multina-
tional businesses with manufacturing facilities in
developing countries struggle with employment
practice issues. Most Americans believe that it is
harmful and contrary to their rights to employ chil-
dren. But children routinely contribute to family
income in many cultures. If corporations simply
refuse to hire them or fire those who are working,
these children may resort to begging or even more
dangerous employment such as prostitution. Or
they and their families may risk starvation. What if
respecting the rights of children in such situations
69
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70 Academy of Management Executive May
produces the greater harm? Such business deci-
sions are more complex than most media reports
suggest, and deciding on the most ethical action is
far from simple.
Moral Awareness Is Required
Second, the notion that “it’s easy to be ethical”
assumes that individuals automatically know that
they are facing an ethical dilemma and that they
should simply choose to do the right thing. But
decision makers may not always recognize that
they are facing a moral issue. Rarely do decisions
come with waving red flags that say, “Hey, I’m an
ethical issue. Think about me in moral terms!”3
Dennis Gioia was recall coordinator at Ford Motor
Company in the early 1970s when the company
decided not to recall the Pinto despite dangerous
fires that were killing the occupants of vehicles
involved in low-impact rear-end collisions. In his
information-overloaded recall coordinator role,
Gioia saw thousands of accident reports, and he
followed a cognitive “script” that helped him de-
cide which situations represented strong recall
candidates and which did not. The incoming infor-
mation about the Pinto fires did not penetrate a
script designed to surface other issues, and it did
not initially raise ethical concerns. He and his col-
leagues in the recall office didn’t recognize the
recall issue as an ethical issue. In other examples,
students who download their favorite music from
the Internet may not think about the ethical impli-
cations of “stealing” someone else’s copyrighted
work. Or, a worker asked to sign a document for
her boss may not recognize this as a request to
“forge” legal documents.
Rarely do decisions come with waving
red flags that say, “Hey, I’m an ethical
issue. Think about me in moral terms!”
Researchers have begun to study this phenome-
non, and they refer to it as moral awareness, eth-
ical recognition, or ethical sensitivity. The idea is
that moral judgment processes are not initiated
unless the decision-maker recognizes the ethical
nature of an issue. So, recognition of an issue as an
“ethical” issue triggers the moral judgment
process, and understanding this initial step is key
to understanding ethical decision-making more
generally.
T. M. Jones proposed that the moral intensity of
an issue influences moral issue recognition,4 and
this relationship ha?s been supported in research.
Two dimensions of moral intensity-magnitude of
consequences and social consensus-have been
found in multiple studies to influence moral
awareness.5 An individual is more likely to iden-
tify an issue as an ethical issue to the extent that a
particular decision or action is expected to produce
harmful consequences and to the extent that rele-
vant others in the social context view the issue as
ethically problematic. Further, the use of moral
language has been found to influence moral
awareness.6 For example, in the above cases, if the
words “stealing” music (rather than downloading)
or “forging” documents (rather than signing) were
used, the individual would be more likely to think
about these issues in ethical terms.
Ethical Decision-Making Is a Complex, Multi-
Stage Process
Moral awareness represents just the first stage in a
complex, multiple-stage decision-making process7
that moves from moral awareness to moral judg-
ment (deciding that a specific action is morally
justifiable), to moral motivation (the commitment
or intention to take the moral action), and finally to
moral character (persistence or follow-through to
take the action despite challenges).
The second stage, moral judgment, has been
studied within and outside the management liter-
ature.8 Lawrence Kohlberg’s well-known theory of
cognitive moral development has guided most of
the empirical research in this area for the past
thirty years.9 Kohlberg found that people develop
from childhood to adulthood through a sequential
and hierarchical series of cognitive stages that
characterize the way they think about ethical di-
lemmas. Moral reasoning processes become more
complex and sophisticated with development.
Higher stages rely upon cognitive operations that
are not available to individuals at lower stages,
and higher stages are thought to be “morally bet-
ter” because they are consistent with philosophi-
cal theories of justice and rights.
At the lowest levels, termed “preconventional,”
individuals decide what is right based upon pun-
ishment avoidance (at stage 1) and getting a fair
deal for oneself in exchange relationships (at
stage 2). Next, the conventional level of cognitive
moral development includes stages 3 and 4. At
stage 3, the individual is concerned with conform-
ing to the expectations of significant others, and at
stage 4 the perspective broadens to include soci-
ety’s rules and laws as a key influence in deciding
what’s right. Finally, at the highest “principled”
level, stage 5, individuals’ ethical decisions are
guided by principles of justice and rights.
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2004 Treviho and Brown 71
Perhaps most important for our purposes is the
fact that most adults in industrialized societies are
at the “conventional” level of cognitive moral de-
velopment, and less than twenty per cent of adults
ever reach the “principled” level where thinking is
more autonomous and principle-based. In practi-
cal terms, this means that most adults are looking
outside themselves for guidance in ethical
dilemma situations, either to significant others in
the relevant environment (e.g., peers, leaders) or to
society’s rules and laws. It also means that most
people need to be led when it comes to ethics.
The Organizational Context Creates Additional
Pressures and Complexity
Moral judgment focuses on deciding what’s right-
not necessarily doing what is right. Even when
people make the right decision, they may find it
difficult to follow through and do what is right
because of pressures from the work environment.
Research has found that principled individuals are
more likely to behave in a manner consistent with
their moral judgments, and they are more likely to
resist pressures to behave unethically.10 However,
most people never reach the principled level. So,
the notion that being ethical is simple also ignores
the pressures of the organizational context that
influence the relationship between moral judg-
ment and action.
Moral judgment focuses on deciding
what’s right-not necessarily doing what
is right. Even when people make the
right decision, they may find it difficult
to follow through and do what is right.
Consider the following ethical-dilemma situa-
tion. You find yourself in the parking lot, having
just dented the car next to you. The ethical decision
is relatively simple. It’s about you and your behav-
ior. No one else is really involved. You have
harmed someone else’s property, you’re responsi-
ble, and you or your insurance company should
pay for the repairs. It’s pretty clear that you should
leave a note identifying yourself and your insur-
ance company. Certainly, there may be negative
consequences if you leave that note. Your insur-
ance rates may go up. But doing the right thing in
this situation is fairly straightforward.
Contrast that to business-context situations. It is
much harder to “just say no” to a boss who de-
mands making the numbers at all costs. Or to go
above the boss’s head to someone in senior man-
agement with suspicions that “managing earn-
ings” has somehow morphed into “cooking the
books.” Or to walk away from millions of dollars in
business because of concerns about crossing an
ethical line. Or to tell colleagues that the way they
do business seems to have crossed that line. In
these situations, the individual is operating within
the context of the organization’s authority structure
and culture-and would likely be concerned about
the consequences of disobeying a boss’s order,
walking away from millions of dollars in business,
or blowing the whistle on a peer or superior. What
would peers think? How would the leadership re-
act? Would management retaliate? Is one’s job at
risk?
It may seem curious that people often worry about
whether others will think of them as too ethical. But
all of us recognize that “snitches” rarely fit in, on the
playground or in life, and whistleblowers are fre-
quently ostracized or worse.” The reasons for their
ostracism are not fully understood, but they may
have to do with humans’ social nature and the im-
portance of social group maintenance. Research sug-
gests that people who take principled stands, such
as those who are willing to report a peer for unethi-
cal behavior, are seen as highly ethical while, at the
same time, they are thought to be highly unlikable.’2
Nearly a third of respondents to the 2003 National
Business Ethics Survey13 said “their coworkers con-
done questionable ethics practices by showing re-
spect for those who achieve success using them.”
Further, about forty per cent of respondents said that
they would not report misconduct they observed be-
cause of fear of retaliation from management. Al-
most a third said they would not report misconduct
because they feared retaliation from coworkers.
If you think this applies only to the playground
or the factory floor, ask yourself why we haven’t
seen more CEOs proclaiming how appalled they
are at the behavior of some of their peers after
recent ethics scandals. Yes, we heard from a few
retired CEOs. But very few active senior executives
have spoken up. Why not? They’re probably un-
comfortable passing moral judgment on others or
holding themselves up as somehow ethically bet-
ter than their peers. So, social context is important
because people, including senior executives,
look to others for approval of their thinking and
behavior.
In sum, being ethical is not simple. Ethical deci-
sions are ambiguous, and the ethical decision-
making process involves multiple stages that are
fraught with complications and contextual pres-
sures. Individuals may not have the cognitive so-
phistication to make the right decision. And most
people will be influenced by peers’ and leaders’
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72 Academy of Management Executive May
words and actions, and by concerns about the con-
sequences of their behavior in the work environ-
ment.
Myth 2: Unethical Behavior in Business Is Simply
the Result of “Bad Apples”
A recent headline was “How to Spot Bad Apples in
the Corporate Bushel.”14 The bad-apple theory is
pervasive in the media and has been around a
long time. In the 1980s, during a segment of the
McNeil Lehrer Report on PBS television, the host
was interviewing guests about insider trading
scandals. The CEO of a major investment firm and
a business school dean agreed that the problems
with insider trading resulted from bad apples.
They said that educational institutions and busi-
nesses could do little except to find and discard
those bad apples after the fact. So, the first reac-
tion to ethical problems in organizations is gener-
ally to look for a culprit who can be punished and
removed. The idea is that if we rid the organization
of one or more bad apples, all will be well because
the organization will have been cleansed of the
perpetrator.
Certainly there are bad actors who will hurt oth-
ers or feather their own nests at others’ expense-
and they do need to be identified and removed.
But, as suggested above, most people are the prod-
uct of the context they find themselves in. They
tend to “look up and look around,” and they do
what others around them do or expect them to do.’5
They look outside themselves for guidance when
thinking about what is right. What that means is
that most unethical behavior in business is sup-
ported by the context in which it occurs-either
through direct reinforcement of unethical behavior
or through benign neglect.
Most people are the product of the
context they find themselves in. They
tend to “look up and look around,” and
they do what others around them do or
expect them to do.
An example of how much people are influenced
by those around them was in the newspaper in
November, 2002. Police in New Britain, Connecticut
confiscated a 50-ft. long pile of stolen items, the
result of a scavenger hunt held by the “Canettes,”
New Britain high school’s all-girl drill team. Ac-
cording to the Hartford Courant, police, parents,
and school personnel were astonished that 42 nor-
mally law-abiding girls could steal so many items
in a single evening. But the girls had a hard time
believing that they had done anything wrong. One
girl said: “I just thought it was a custom … kind of
like a camaraderie thing, [and] if the seniors said it
was OK and they were in charge, then it was OK!”
In another incident in May 2003, suburban Chicago
high school girls engaged in an aggressive and
brutal “hazing ritual” that landed five girls in the
hospital.’6 We might say that these are teenagers,
and that adults are different. But many of these
teenagers are about to start jobs, and there are
only a few years between these high school stu-
dents and young people graduating from college.
Most adults are more like these teens than most of
us think or would prefer. The influence of peers is
powerful in both cases.
When asked why they engaged in unethical con-
duct, employees will often say, “I had no choice,”
or “My boss told me to do it.” Stanley Milgram’s
obedience-to-authority experiments, probably the
most famous social psychology experiments ever
conducted, support the notion that people obey
authority figures even if that means harming an-
other person.’7 Milgram, a Yale psychologist, con-
ducted his obedience-to-authority experiments in
the Hartford community on normal adults. These
experiments demonstrated that nearly two-thirds
of normal adults will harm another human being
(give them alleged electric shocks of increasing
intensity) if asked to do so by an authority figure as
part of what was billed as a learning experiment.
Were these people bad apples? We don’t think so.
Most of them were not at all comfortable doing
what they were being asked to do, and they ex-
pressed sincere concern for the victim’s fate. But in
the end most of them continued to harm the learner
because the authority figure in a lab coat told them
to do so.
How does this apply to work settings? Consider
the junior member of an audit team who discovers
something problematic when sampling a firm’s fi-
nancials and asks the senior person on the audit
team for advice. When the leader suggests putting
the problematic example back and picking another
one, the young auditor is likely to do just that. The
leader may add words such as the following: “You
don’t understand the big picture” or “Don’t worry,
this is my responsibility.” In this auditing example,
the harm being done is much less obvious than in
the learning experiment and the junior auditor’s
responsibility even less clear, so the unethical con-
duct is probably easier to carry out and more likely
to occur.
The bottom line here is that most people, includ-
ing most adults, are followers when it comes to
ethics. When asked or told to do something uneth-
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2004 Treviho and Brown 73
ical, most will do so. This means that they must be
led toward ethical behavior or be left to flounder.
Bad behavior doesn’t always result from flawed
individuals. Instead, it may result from a system
that encourages or supports flawed behavior.
A corollary of the bad-apples argument is that
ethics can’t be taught or even influenced in adults
because adults are autonomous moral agents
whose ethics are fully formed by the time they join
work organizations, and they can’t be changed.
This is simply not true. We know from many em-
pirical studies’8 that the large majority of adults
are not fully formed when it comes to ethics, and
they are not autonomous moral agents. They look
outside themselves for guidance in ethical-
dilemma situations, and they behave based to a
large extent upon what those around them-leaders
and peers-expect of them. So, we have to look at
the very powerful signals that are being sent about
what is expected. We also know that the develop-
ment of moral reasoning continues into adulthood.
Those who are challenged to wrestle with ethical
dilemmas in their work will develop more sophis-
ticated ways of thinking about such issues, and
their behavior will change as a result.
Myth 3: Ethics Can Be Managed Through Formal
Ethics Codes and Programs
If people in organizations need ethical guidance
and structural support, how can organizations best
provide it? Most large organizations now have for-
mal ethics or legal compliance programs. In 1991
the U.S. Sentencing Commission created sentenc-
ing guidelines for organizations convicted of fed-
eral crimes (see www.ussc.gov for information).
The guidelines removed judicial discretion and re-
quired convicted organizations to pay restitution
and substantial fines depending upon whether the
organization turns itself in, cooperates with au-
thorities, and whether it has established a legal
compliance program that meets seven require-
ments for due diligence and effectiveness. These
formal programs generally include the following
key elements: written standards of conduct that
are communicated and disseminated to all em-
ployees, ethics training, ethics advice lines and
offices, and systems for anonymous reporting of
misconduct. The Sarbanes-Oxley law, passed dur-
ing the summer of 2002, requires corporations to set
up an anonymous system for employees to report
fraud and other unethical activities. Therefore,
companies that did not previously have such re-
porting systems are busy establishing them.
Research suggests that formal ethics and legal
compliance programs can have a positive impact.
For example, the Ethics Resource Center’s Na-
tional Business Ethics Survey19 revealed that in
organizations with all four program elements
(standards, training, advice lines, and reporting
systems) there was a greater likelihood (78 per
cent) that employees would report observed mis-
conduct to management. The likelihood of report-
ing declined with fewer program elements. Only
half as many people in organizations with no for-
mal program said that they would report miscon-
duct to management.
Research suggests that formal ethics and
legal compliance programs can have a
positive impact.
Yet, creating a formal program, by itself, does
not guarantee effective ethics management. Recall
that Enron had an ethics code, and the board voted
to bypass its conflict-of-interest policy.20 Not sur-
prisingly, research suggests that actions speak
louder than words. Employees must perceive that
formal policies go beyond mere window dressing
to represent the real ethical culture of the organi-
zation. For example, the National Business Ethics
Survey reports that when executives and supervi-
sors emphasize ethics, keep promises, and model
ethical conduct, misconduct is much lower than
when employees perceive that the “ethics walk” is
not consistent with the “ethics talk.”21 In another
study22 formal program characteristics were found
to be relatively unimportant compared with more
informal cultural characteristics such as messages
from leadership at both the executive and super-
visory levels. In addition, perceived ethics pro-
gram follow-through was found to be essential.
Organizations demonstrate follow-through by
working hard to detect rule violators, by following
up on ethical concerns raised by employees, and
by demonstrating consistency between ethics and
compliance policies and actual organizational
practices. Further, the perception that ethics is ac-
tually talked about in day-to-day organizational
activities and incorporated into decision-making
was found to be important.
So, for formal systems to influence behavior,
they must be part of a larger, coordinated cultural
system that supports ethical conduct every day.
Ethical culture provides informal systems, along
with formal systems, to support ethical conduct.23
For example, the research cited above found that
ethics-related outcomes (e.g., employee awareness
of ethical issues, amount of observed misconduct,
willingness to report misconduct) were much more
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74 Academy of Management Executive May
positive to the extent that employees perceived
that ethical conduct was rewarded and unethical
conduct was punished in the organization. Further,
a culture that demands unquestioning obedience
to authority was found to be particularly harmful
while a culture in which employees feel fairly
treated was especially helpful.
The Fall of Arthur Andersen
Barbara Toffler’s book Final Accounting: Ambition,
Greed, and the Fall of Arthur Andersen (2003)24 can
help us understand this notion of ethical (or uneth-
ical) organizational culture. Andersen transformed
over a number of years from having a solid ethical
culture to having a strong unethical culture. The
company’s complete demise is a rather dramatic
example of the potential results of such a transfor-
mation.
In the mid-1990s, Arthur Andersen did not have a
formal ethics office, but it did have formal ethical
standards and ethics training. Ironically, it also
established a consulting group whose practice
was aimed at helping other businesses manage
their ethics. Barbara Toffler was hired to run that
practice in 1995 after spending time on the Harvard
Business School faculty and in her own ethics con-
sulting business. After joining Andersen, Toffler
learned quickly that the firm’s own ethical culture
was slipping badly, and she chronicles that slip-
page in her book.
The book opens with the following statement
“The day Arthur Andersen loses the public’s trust
is the day we are out of business.” Steve Samek,
country managing partner, made that statement on
a CD-ROM concerning the firm’s Independence
and Ethical Standards in 1999. It was reminiscent
of the old Arthur Andersen. Andersen’s traditional
management approach had been a top-down, “one
firm” concept. Arthur Andersen had built a strong
ethical culture over the years where all of the
pieces fit together into a seamless whole that sup-
ported ethical conduct. No matter where they were
in the world, if customers were dealing with
Andersen employees, they knew that they could
count on the same high-quality work and the same
integrity. Employees were trained in the “Andersen
Way,” and that way included strong ethics. Training
at their St. Charles, Illinois training facility was sa-
cred. It created a cadre of professionals who spoke
the same language and shared the same “Android”
values.
Founders create culture and Arthur Andersen
was no exception. Toffler says that in the firm’s
early days, the messages from the top about ethi-
cal conduct were strong and clear. Andersen him-
self said, “My own mother told me, ‘Think
straight-talk straight.’ … This challenge will
never fail anyone in a time of trial and temptation.”
“Think straight, talk straight” became a mantra for
decades at Arthur Andersen. Partners said with
pride that integrity mattered more than fees. And
stories about the founder’s ethics became part of
the firm’s lore. At the young age of 28, Andersen
faced down a railway executive who demanded
that his books be approved-or else. Andersen
said, “There’s not enough money in the city of Chi-
cago to induce me to change that report.” Andersen
lost the business, but later the railway company
filed for bankruptcy, and Arthur Andersen became
known as a firm one could trust. In the 1930s
Andersen talked about the special responsibility of
accountants to the public and the importance of
their independence of judgment and action. Arthur
Andersen died in 1947 but was followed by leaders
with similar convictions who ran the firm in the
1950s and 1960s, and the ethical culture continued
for many years. Pretty much through the 1980s,
Andersen was considered a stable and prestigious
place to work. People didn’t expect to get rich-
rather they wanted “a good career at a firm with a
good reputation.”
But, the ethical culture eventually began to un-
ravel, and Toffler attributes much of this to the fact
that the firm’s profits increasingly came from man-
agement consulting rather than auditing. The
leadership’s earlier commitment to ethics came to
be drowned out by the firm’s increasing laser-like
focus on revenues. Auditing and consulting are
very different, and the cultural standards that
worked so well in auditing didn’t fit the needs of
the consulting side of the business. But this mis-
match was never addressed, and the resulting
mixed signals helped precipitate a downward spi-
ral into unethical practices. Serving the client be-
gan to be defined as keeping the client happy and
getting return business. And tradition became
translated into unquestioning obedience to the
partner, no matter what one was asked to do. For
example, managers and partners were expected to
pad their prices. Reasonable estimates for consult-
ing work were simply doubled or more as consult-
ants were told to back into the numbers.
The training also began falling apart when it
came to hiring experienced people from outside
the firm-something that happened more and
more as consulting took over. New employees had
always been required to attend a three-day ses-
sion designed to indoctrinate them into the culture
of the firm, but new consultants were told not to
forego lucrative client work to attend. So, Toffler
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2004 Treviho and Brown 75
never made it to the training, and many other con-
sultants didn’t either.
By the time Toffler arrived at Andersen, the firm
still had a huge maroon ethics binder, but no one
bothered to refer to it. Ethics was never talked about.
And, she says, “when I brought up the subject of
internal ethics, I was looked at as if I had teleported
in from another world.” The assumption, left over
from the old days in auditing, was that “we’re ethical
people; we recruit people who are screened for good
judgment and values. We don’t need to worry about
this stuff.” But, as we all leamed, their failure to
worry about ethics led to the demise of the firm.
Could a formal ethics office have helped Arthur
Andersen? Probably not, unless that office ad-
dressed the shift toward consulting, identified the
unique ethical issues faced in the consulting side
of the business, developed ethical guidelines for
consulting, and so on. It is easy for formal ethics
offices and their programs to be marginalized if
they don’t have the complete support of the or-
ganization’s leadership and if they are inconsis-
tent with the broader culture. In fact, Andersen still
had ethics policies and they still talked about eth-
ics in formal documents. But the business had
changed along with the culture that guided em-
ployee actions every day, while the approach to
ethics management had not kept pace.
Myth 4: Ethical Leadership Is Mostly About
Leader Integrity
In our discussion of Arthur Andersen, we sug-
gested the importance of leadership. But what is
executive ethical leadership? The mythology of
ethical leadership focuses attention narrowly on
individual character and qualities such as integ-
rity, honesty, and fairness. The Wall Street Journal
recently ran a story on its website entitled “Plain
Talk: CEOs Need to Restore Character in Compa-
nies.” It said, “The chief problem affecting corpo-
rate American right now is not the regulatory
environment or snoozing board directors. It’s char-
acter.”25 But as Arthur Andersen demonstrated,
leaders must be more than individuals of high
character. They must “lead” others to behave
ethically.
Recent research has found that certain individ-
ual characteristics are necessary but not sufficient
for effective ethical leadership. Such leadership at
the executive level is a reputational phenomenon.
In most large organizations, employees have few
face-to-face interactions with senior executives.
So, most of what they know about a leader is
gleaned from afar. In order to develop a reputation
for ethical leadership, an executive must be per-
ceived as both a “moral person” and a “moral
manager.”26
Being perceived as a “moral person” is related to
good character. It depends upon employee percep-
tions of the leader’s traits, behaviors, and decision-
making processes. Ethical leaders are thought to
be honest and trustworthy. They show concern for
people and are open to employee input. Ethical
leaders build relationships that are characterized
by trust, respect and support for their employees.
In terms of decision-making, ethical leaders are
seen as fair. They take into account the ethical
impact of their decisions, both short term and long
term, on multiple stakeholders. They also make
decisions based upon ethical values and decision
rules, such as the golden rule.
But being perceived as a “moral person” is not
enough. Being a “moral person” tells followers
what the leader will do. It doesn’t tell them what
the leader expects them to do. Therefore, a reputa-
tion for ethical leadership also depends upon be-
ing perceived as a “moral manager,” one who
leads others on the ethical dimension, lets them
know what is expected, and holds them account-
able. Moral managers set ethical standards, com-
municate ethics messages, role model ethical con-
duct, and use rewards and punishments to guide
ethical behavior in the organization.
Combining the “moral person” and “moral man-
ager” dimensions creates a two-by-two matrix (see
Figure 1). A leader who is strong on both dimen-
sions is perceived to be an ethical leader. We can
point to Arthur Andersen as an exemplar of ethical
leadership. He was known as a strong ethical per-
son who also clearly led his organization on ethics
and values. People knew what they could expect of
him, and they knew what he expected of them from
an ethics perspective. Another example of ethical
leadership is James Burke, CEO of Johnson & John-
son during the early 1980s Tylenol crisis (when
Tylenol was laced with cyanide in the Chicago
area). Burke handled that crisis masterfully, recall-
ing all Tylenol at a huge financial cost to the firm.
But his ethical leadership had begun much earlier
when he first took the CEO helm. He focused the
organization’s attention on the company’s long-
standing credo and its values. He demanded that
senior executives either subscribe to the credo or
remove it from the wall. He didn’t want to run a
hypocritical organization. He also launched the
credo survey, an annual survey that asks employ-
ees how the company is doing relative to each of
the credo values. Bill George, recently retired CEO
of Medtronic, is a more current example of an eth-
ical leader. In his book Authentic Leadership,
George calls for responsible ethical leadership in
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76 Academy of Management Executive May
corporate America while recounting his own strug-
gles to stay true to the company’s mission and to
himself.27
A leader who is neither a moral person nor a
moral manager is an unethical leader. In our re-
search, Al Dunlap was frequently identified as an
unethical leader. Subject of a book entitled Chain-
saw,28 Dunlap was known as an expert turnaround
manager. But while at Sunbeam, he also became
known for “emotional abuse” of employees. As a
result of his demands to make the numbers at all
costs, employees felt pressure to use questionable
accounting and sales techniques, and they did.
Dunlap also lied to Wall Street, assuring them that
the firm would reach its financial projections. In
the end, Dunlap could no longer cover up the sorry
state of affairs, and he left a crippled company
when the board fired him in 1998. In 2002, he paid a
$500,000 fine for financial fraud and agreed never
to serve as an officer or director of a public corpo-
ration. Unfortunately, there are many candidates
for a more current example of unethical leader-
ship: Dennis Kozlowski from Tyco, Bernie Ebbers
from WorldCom, and Richard Scrushy from Health-
South are just a few executive names attached to
recent business scandals.
Leaders who communicate a strong ethics/val-
ues message (who are moral managers), but who
are not perceived to be ethical themselves (they
are not moral persons) can be thought of as hypo-
critical leaders. Nothing makes people more cyni-
cal than a leader who talks incessantly about in-
tegrity, but then engages in unethical conduct
himself and encourages others to do so, either ex-
plicitly or implicitly. Hypocritical leadership is all
about ethical pretense. The problem is that by
spotlighting integrity, the leader raises expecta-
tions and awareness of ethical issues. At the same
time, employees realize that they can’t trust the
leader.
Jim Bakker, the founder of PTL Ministries, is our
favorite example of a hypocritical leader. At its
peak, his television ministry had 2000 employees
and reached more than ten million homes. Bakker
preached about doing the Lord’s work while rais-
ing funds for his Heritage USA Christian theme
park. The problem was that he sold more member-
ships than could ever be honored. He tapped mil-
lions of dollars donated by his followers to support
PTL operating expenses including huge salaries
and bonuses for his family and high ranking PTL
officials. PTL filed for bankruptcy in 1987, and Bak-
ker spent eight years in prison.29
Michael Sears, recently fired from Boeing for of-
fering a job to an Air Force procurement specialist
while she was overseeing negotiations with Boe-
ing, represents a more recent example of a hypo-
critical leader. Sears had played a significant role
at the Boeing Leadership Center which is known
for its programs related to ethics. Also, shortly be-
fore his firing, Sears released advance copies of
his book Soaring Through Turbulence which in-
cluded a section on maintaining high ethical stan-
dards.30
We call the final combination ethically silent
leadership. It applies to executives who are neither
strong ethical nor strong unethical leaders. They
fall into what employees perceive to be an ethi-
cally neutral leadership zone. They may be ethical
persons, but they don’t provide leadership in the
Moral Person
Weak Strong
S rong Hypocritical Leader Ethical Leader Strong Jim Bakker Arthur Andersen
Michael Sears James Burke
Moral Bill George
Manager
Unethical Leader
Weak Al Dunlap
Bemie Ebbers?
_ Ethically Si lent Leader -.. ?
Sandy Weill?
FIGURE 1
Executive Ethical Leadership Reputation Matrix
Figure adapted with permission from Trevinio, L. K., Hartman, L. P., Brown, M. 2000. Moral person and moral manager: How
executives develop a reputation for ethical leadership. California Management Review, 42(4): 128-142.
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2004 Trevifio and Brown 77
crucial area of ethics, and employees aren’t sure
where the leaders stand on ethics or if they care.
The ethically silent leader is not perceived to be
unethical but is seen as focusing intently on the
bottom line without setting complementary ethical
goals. There is little or no ethics message coming
from the top. But silence represents an important
message. In the context of all the other messages
being sent in a highly competitive business envi-
ronment, employees are likely to interpret silence
to mean that the top executive really doesn’t care
how business goals are met, only that they are met,
so employees act on that message. Business lead-
ers don’t like to think that their employees perceive
them as ethically silent. But given the current cli-
mate of cynicism, unless leaders make an effort to
stand out and lead on ethics, they are likely to be
viewed that way.
Sandy Weill, CEO of Citigroup, may fit the ethi-
cally silent leader category. The company has
been playing defense with the media, responding
to ugly headlines about ethics scandals, espe-
cially at its Smith Barney unit where stock analysts
were accused of essentially “selling” their stock
recommendations for banking business. Weill’s
management style is to hire competent people to
run Citigroup’s units and to let them do their jobs.
That may work well for other aspects of the busi-
ness, but ethics must be managed from the top and
center of the organization. According to Fortune
magazine, Weill has now “gotten religion,” if a bit
late. Weill has “told his board that he feels his
most important job from now on is to be sure that
Citigroup operates at the highest level of ethics
and with the utmost integrity.” New procedures
and business standards are being developed at
corporate headquarters, and a new CEO was ap-
pointed at Smith Barney. However, Fortune also
cites cynicism about this recent turnabout, noting
that Weill is often “tone deaf” on ethical issues.3′
So, developing a reputation for ethical leadership
requires more than strong personal character. Em-
ployees must be “led” from the top on ethics just as
they must be led on quality, competitiveness, and a
host of other expected behaviors. In order to be effec-
tive ethical leaders, executives must demonstrate
that they are ethical themselves, they must make
their expectations of others’ ethical conduct explicit,
and they must hold all of their followers accountable
for ethical conduct every day.
Myth 5: People Are Less Ethical Than They Used
To Be
In the opening to this article, we said that business
ethics has once again become a hot topic. The
media have bombarded us with information about
ethics scandals, feeding the perception that mor-
als are declining in business and in society more
generally.
According to a poll released by the PR Newswire
in summer 2002, sixty-eight per cent of those sur-
veyed believe that senior corporate executives are
less honest and trustworthy today than they were a
decade ago.32 But unethical conduct has been with
us as long as human beings have been on the
earth, and business ethics scandals are as old as
business itself. The Talmud, a 1500-year-old text,
includes about 2 million words and 613 direct com-
mandments designed to guide Jewish conduct and
culture. More than one hundred of these concern
business and economics. Why? Because “transact-
ing business, more than any other human activity,
tests our moral mettle and reveals our character”
and because “working, money, and commerce of-
fer … the best opportunities to do good deeds such
as … providing employment and building pros-
perity for our communities and the world.”33
So, unethical behavior is nothing new. It’s diffi-
cult to find solid empirical evidence of changes
over time. But studies of student cheating have
found that the percentage of college students who
admit to cheating has not changed much during
the last thirty years.34 Some types of cheating have
increased (e.g., test cheating, collaboration on in-
dividual assignments). Other types of cheating
have declined (e.g., plagiarism, turning in another
student’s work). Certainly, given new technologies
and learning approaches, students have discov-
ered some clever new ways to cheat, and profes-
sors have their work cut out for them keeping up
with the new methods. But the amount of overall
cheating hasn’t increased that much. Further,
when employees were asked about their own work
organizations, the 2003 National Business Ethics
Survey found that employee perceptions of ethics
are generally quite positive. Interestingly, key in-
dicators have actually improved since the last sur-
vey conducted in 2000.35
Alan Greenspan said it well on July 16, 2002: “It is
not that humans have become any more greedy
than in generations past. It is that the avenues to
express greed [have] grown so enormously.” So,
unethical behavior is nothing new, and people are
probably not less ethical than they used to be. But
the environment has become quite complex and is
rapidly changing, providing all sorts of ethical
challenges and opportunities to express greed.
If ethical misconduct is an ongoing concern, then
organizations must respond with lasting solutions
that embed support for ethics into their cultures
rather than short-term solutions that can easily be
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78 Academy of Management Executive May
undone or dismissed as fads. The risk is that the
current media focus on unethical conduct will re-
sult in “faddish” responses that offer overly sim-
plistic solutions and that result inevitably in disil-
lusionment and abandonment. Faddish solutions
often result from external pressures to “do some-
thing” or at least look like you’re doing something.
The current focus on scandal certainly includes
such pressures.36 But the recognition that unethical
conduct is a continuing organizational problem
may help to convince managers that solutions
should be designed that will outlast the current
intense media focus.
What Executives Can Do: Guidelines for Effective
Ethics Management
Building upon what we have learned, we offer
guidelines for effective ethics management. The
overarching goal should be to create a strong eth-
ical culture supported by strong ethical leader-
ship. Why culture? Because we’ve seen that being
ethical is not simple, and that people in organiza-
tions need ethical guidance and support for doing
the right thing. Executive leaders must provide
that structure and ethical guidance, and they can
do that best by harnessing multiple formal and
informal cultural systems.37 People should respond
positively to the kind of structure that aims to help
them do the right thing. If management says, “We
want you to do the right thing, the ethical thing,
and we’re going to try to create a culture that helps
you to do that,” employee response should be quite
positive so long as employees believe that man-
agement is sincere and they observe consistency
between words and actions.
First: Understand the Existing Ethical Culture
Leaders are responsible for transmitting culture in
their organizations, and the ethical dimension of
organizational culture is no exception. According
to Schein, the most powerful mechanisms for em-
bedding and reinforcing culture are: (1) what lead-
ers pay attention to, measure, and control; (2)
leader reactions to critical incidents and organiza-
tional crises; deliberate role modeling, teaching,
and coaching by leaders; (3) criteria for allocation
of rewards and status; and (4) criteria for recruit-
ment, selection, promotion, retirement, and excom-
munication.38
If leaders wish to create a strong ethical culture,
the first step is to understand the current state:
What are the key cultural messages being sent
about ethics? It’s a rare executive who really un-
derstatnds the ethical culture in an organization.
And the higher you go in the organization, the
rosier the perception of the ethical culture is likely
to be.39 Why? Because information often gets stuck
at lower organizational levels, and executives are
often insulated from “bad news,” especially if em-
ployees perceive that the organization “shoots the
messenger.” Executives need anonymous surveys,
focus groups, and reporting lines, and people need
to believe that the senior leaders really want to
know, if they are to report honestly on the current
state of the ethical culture.
In surveys, ask for employee perceptions of su-
pervisory and executive leadership and the mes-
sages they send by their communications and be-
havior. And listen to what employees say. Ask
employees whether they perceive that they are
treated fairly, and whether the company acts as if
it cares about them, its customers, and other stake-
holders. Find out what messages the reward sys-
tem is sending. Do employees believe that ethical
“good guys” are rewarded and unethical “bad
guys” are punished in the organization? What do
employees think is required in order to succeed or
to be fired? Follow the kinds of calls coming in to
ethics telephone lines. Learn whether employees
are asking questions and reporting problems. Use
this information to identify needs for training and
other interventions. In focus groups, find out who
the organizational heroes are (is it the sales repre-
sentative who steps on peers in order to get ahead
or a manager who is known for the highest integ-
rity?). Ask what stories veterans would tell a new
hire about ethics in your organization.
Second: Communicate the Importance of Ethical
Standards
Employees need clear and consistent messages
that ethics is essential to the business model, not
just a poster or a website. Most businesses send
countless messages about competition and finan-
cial performance, and these easily drown out other
messages. In order to compete with this constant
drumbeat about the short-term bottom line, the
messages about ethical conduct must be just as
strong or stronger and as frequent. Simply telling
people to do the right thing, is not enough. They
must be prepared for the types of issues that arise
in their particular business and position, and they
must know what to do when ethics and the bottom
line appear to be in conflict. Executives should tie
ethics to the long-term success of the business by
providing examples from their own experience or
the experiences of other successful employees.
Make sure that messages coming from executive
and supervisory leaders are clear and consistent.
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2004 Treviho and Brown 79
Train employees to recognize the kinds of ethical
issues that are likely to arise in their work. De-
mand discussion of ethics and values as part of
routine business decision-making. When making
important decisions, ask, “Are we doing the ‘right’
(i.e., ethical) thing? Who could be hurt by this de-
cision? How could this affect our relationships with
stakeholders and our long-term reputation?” Share
those deliberations with employees. Finally, be
sure to let employees know about exemplary ethi-
cal conduct. For example, the famous story about
Arthur Andersen losing the railway business be-
cause he refused to alter the books was recounted
over and over again in the firm and made it abso-
lutely clear that “think straight, talk straight” ac-
tually meant something in the firm.
Third: Focus on the Reward System
The reward system may be the single most impor-
tant way to deliver a message about what behav-
iors are expected. B.F. Skinner knew what he was
talking about. People do what’s rewarded, and
they avoid doing what’s punished.40 Let’s look at
the positive side first-can we really reward ethi-
cal behavior? In the short term, we probably can-
not. For the most part, ethical behavior is simply
expected, and people don’t expect or want to be
rewarded for doing their jobs the right way.41 But in
the longer term, ethical behavior can be rewarded
by promoting and compensating people who are
not only good at what they do, but who have also
developed a reputation with customers, peers, sub-
ordinates, and managers as being of the highest
integrity. The best way to hold employees account-
able for ethical conduct is to incorporate evalua-
tion of it into 360 degree performance management
systems and to make this evaluation an explicit
part of compensation and promotion decisions.
The idea is that the bottom line and ethical perfor-
mance both count; unless individuals have both,
they should not advance in the organization.
Also, exemplary behavior can be rewarded. At
Lockheed Martin, at the annual Chairman’s meet-
ing, a “Chairman’s Award” goes to an employee
who exhibited exemplary ethical conduct in the
previous year. All senior corporate leaders are ex-
pected to expend effort each year to find examples
of exemplary ethical conduct in their own business
units and make nominations. The award cere-
mony, attended by all 250 senior executives, is
exactly the kind of “ritual” that helps to create an
ethical culture. Stories are shared, they become
part of the organization’s lore, the potential impact
growing as the stories accumulate over time.42
Perhaps even more important than rewarding
ethical conduct is taking care not to reward uneth-
ical conduct. That’s what began to happen at
Arthur Andersen as generating revenue became
the only rewarded behavior, and it didn’t matter
how you did it. For example, consultants were re-
warded for making a project last by finding rea-
sons (legitimate or not) to stay on. Toffler says,
“Like the famous Roach Motel, consultants were
taught to check in, but never check out.”43 So, cli-
ents were overcharged, consulting jobs were
dragged out, and colleagues were “screwed” along
the way because the rewards supported such un-
ethical conduct.
And what about discipline? Unethical conduct
should be disciplined swiftly and fairly when it
occurs at any level in the organization. The higher
the level of the person disciplined, the stronger the
message that management takes ethics seriously.
That’s what is behind the “perp walks” we have
observed in the media. The public wants to see
that fraudulent conduct among America’s execu-
tives will not be tolerated. Similarly, inside or-
ganizations, employees want to see misconduct
disciplined, and disciplined harshly.44 Overall,
employees must perceive that good guys get
ahead and bad guys don’t-they get punished.
But, remember, it’s often not enough to punish or
remove a bad guy or a bad apple. The system
should be checked to see if the existing reward
system or other messages contributed to the bad
behavior.
Fourth: Promote Ethical Leadership Throughout
the Firm
Recall that being a “moral person” who is char-
acterized by integrity and fairness, treats people
well, and makes ethical decisions is important.
But those elements deal only with the “ethical”
part of ethical leadership. To be ethical leaders,
executives have to think about the “leadership”
part of the term. Providing ethical “leadership”
means making ethical values visible- communi-
cating about not just the bottom-line goals (the
ends) but also the acceptable and unacceptable
means of getting there (the means). Being an
ethical leader also means asking very publicly
how important decisions will affect multiple
stakeholders-shareholders, employees, custom-
ers, society-and making transparent the strug-
gles about how to balance competing interests. It
means using the reward system to clearly com-
municate what is expected and what is accepted.
That means rewarding ethical conduct and dis-
ciplining unethical conduct, even if the rule vio-
lator is a senior person or a top producer. Find a
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80 Academy of Management Executive May
way to let employees know that the unethical
conduct was taken seriously and the employee
disciplined.
Ethical cultures and ethical leaders go hand in
hand. Building an ethical culture can’t be dele-
gated. The CEO must be the Chief Ethics Officer
of his or her organization.45 Many CEOs may feel
that they would rather pass on this challenge-
that they don’t really know how to do it- or they
may prefer to believe that everyone in their or-
ganization is already ethical. But ethics is being
“managed” in their organizations with or without
their attention to it. Benign neglect of the ethical
culture simply leads to employees reaching the
conclusion, rightly or wrongly, that leaders don’t
care as much about ethics as they do about other
things. Leaders develop a reputation in this
arena. Chances are that if the leader hasn’t
thought much about this reputation or hasn’t
been very proactive about it, people in the orga-
nization will likely label him or her as an ethi-
cally neutral leader. That doesn’t mean that the
leader is ethically neutral or doesn’t take ethics
into account in decision-making. It does mean
that people aren’t sure where the leader stands
on the frequent conflicts between ethics and the
bottom line. Without explicit guidance, they as-
sume that the bottom-line messages are the most
important.
As we’ve said, senior executives are extremely
important. They set the tone at the top and oversee
the ethical culture. But from an everyday imple-
mentation perspective, front-line supervisors are
equally important because of their daily interac-
tions with their direct reports. An ethical culture
ultimately depends upon how supervisors treat
employees, customers, and other stakeholders,
and how they make decisions. Do they treat every-
one honestly, fairly and with care? Do supervisors
point out when their group is facing a decision
with ethical overtones? Do they consider multiple
stakeholder interests and the long-term reputation
of the organization in decision-making? Do they
hold themselves and their people accountable for
ethical conduct? Or, do they focus only on short-
term bottom-line results?
Ethics Isn’t Easy
Unethical conduct in business has been with us as
long as business transactions have occurred. Peo-
ple are not necessarily more unethical today, but
gray areas abound along with many opportunities
to cross into unethical territory. Much unethical
conduct is the result not just of bad apples but of
neglectful leadership and organizationaIl cultures
that send mixed messages about what is important
and what is expected. It isn’t easy to be ethical.
Employees must recognize ethical issues in their
work, develop the cognitive tools to make the right
choices, and then be supported in those choices by
the organizational environment. Executives must
manage the ethical conduct of their employees as
proactively as they manage any important behav-
ior. And the complexity of the management system
should match the complexity of the behavior being
managed.
The best way to manage ethical conduct is by
aligning the multiple formal and informal cultural
systems in support of doing the right thing. Cul-
tural messages about the importance of trust and
long-term relationships with multiple stakeholders
must get at least as much attention as messages
about the short-term bottom line, and employees
must be held accountable for ethical conduct
through performance management and reward
systems.
Endnotes
1 St. Anthony, N. Corporate ethics is simple: If something
stinks, don’t do it. Star Tribune (Minneapolis-Saint Paul) News-
paper of the Twin Cities. 28 June 2002.
2 For a simple overview of these theories, see Trevinio, L. K., &
Nelson, K. 2003. Managing business ethics; Straight talk about
how to do it right. 3d ed. New York: Wiley.
3 Gioia, D. 1992. Pinto fires and personal ethics: A script
analysis of missed opportunities. Journal of Business Ethics,
11(5,6): 379-389; Gioia, D. A. 2003. Personal reflections on the
Pinto Fires case. In Trevifio & Nelson.
4Jones, T. M. 1991. Ethical decision making by individuals in
organizations: An issue-contingent model. Academy of Man-
agement Review, 16: 366-395.
5 May, D. R., & Pauli, K. P. 2000. The role of moral intensity in
ethical decision making: A review and investigation of moral
recognition, evaluation, and intention. Manuscript presented at
the meeting of the National Academy of Management, Toronto,
August, 2000.
6Butterfield, K., Trevinio, L. K., & Weaver, G. 2000. Moral
awareness in business organizations: Influences of issue-
related and social context factors. Human Relations, 53(7): 981-
1018.
7 Rest, M. 1986. Moral development: Advances in research and
theory. New Jersey: Praeger.
8Weber, J. 1990. Managers’ moral reasoning: Assessing their
responses to three moral dilemmas. Human Relations, 43: 687-
702; Weber, J., & Wasieleski, 2001. Investigating influences on
managers’ moral reasoning: The impact of context, personal,
and organizational factors. Business and Society, 40(1): 79-111;
Trevinlo, L. K. 1986. Ethical decision making in organizations: A
person-situation interactionist model. Academy of Manage-
ment Review, 11(3): 601-617; Trevinlo, L. K. 1992. Moral reasoning
and business ethics. Journal of Business Ethics, 11: 445-459.
9Kohlberg, L. 1969. Stage and sequence: The cognitive-
developmental approach to socialization. In Handbook of so-
cialization theory and research. D. A. Goslin, ed. Rand McNally,
347-380.
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2004 Treviho and Brown 81
0 Thoma, S. J. 1994. Moral judgment and moral action. In J.
Rest & D. Narvaez (ed.). Moral development in the professions:
Psychology and applied ethics. Hillsdale, NJ: Erlbaum: 199-211.
l’ Miceli, M., & Near, J. 1992. Blowing the whistle. New York:
Lexington Books.
12 Trevino, L. K., & Victor, B. 2004. Peer reporting of unethical
behavior: A social context perspective. Academy of Manage-
ment Journal, 353: 38-64.
1 Ethics Resource Center. 2003. National Business Ethics Sur-
vey; How employees view ethics in their organizations. Wash-
ington, DC.
14 PR Newswire. How to spot bad apples in the corporate
bushel. 13 January 2003. Ithaca, NY.
5 Trevifio & Nelson; Jackall, R. 1988. Moral mazes: The world
of corporate managers. New York: Oxford University Press.
‘6Drill team benched after scavenger incident, Sleepover
busted.Hartford Courant, 15 November 2002; Paulson, A. Hazing
case highlights girl violence. Christian Science Monitor, 9 May
2003.
7 Milgram, S. 1974. Obedience to authority; An experimental
view. New York: Harper & Row.
18 Rest, J. S. (Ed.). 1986. Moral development: Advances in re-
search and theory. New York: Praeger. Rest, J. S., et al. 1999.
Postconventional moral thinking: A neo-Kohlbergian approach.
Mahwah, NJ: Erlbaum.
9 Ethics Resource Center, 2003. op. cit.
20 Schmitt, R. B. Companies add ethics training: Will it work?
Wall Street Journal (Eastern edition), 4 November 2002: B1.
21 Ethics Resource Center, 2003. op. cit.
22Trevifio, L. K. et al: 1999. Managing ethics and legal com-
pliance: What works and what hurts. California Management
Review, 41(2): 131-151.
23 Trevifno & Nelson.
24 Toffler, B. L., with J. Reingold. 2003. Final accounting: Am-
bition, greed, and the fall of Arthur Andersen. New York: Broad-
way Books. All of the following material on Toffler’s experience
at Arthur Andersen is from this source.
25 Kansas, D. Plain talk: CEOs need to restore character in
companies. WSJ.COM. Dow Jones & Company, Inc., 7 July 2002.
26Trevifio, L. K., Hartman, L. P., & Brown, M. 2000. Moral
person and moral manager: How executives develop a reputa-
tion for ethical leadership. California Management Review,
42(4): 128-142; Trevifio, L. K., Brown, M., & Pincus-Hartman. 2003.
A qualitative investigation of perceived executive ethical lead-
ership: Perceptions from inside and outside the executive suite.
Human Relations, 56(1): 5-37.
27 George, B. 2003. Authentic leadership: Rediscovering the
secrets to creating lasting value. San Francisco: Jossey-Bass.
28 Byrne, J. 1999. Chainsaw: The notorious career of Al Dunlap
in the era of profit-at-any-price. New York: HarperBusiness.
29 Tidwell, G. 1993. Accounting for the PTL scandal. Today’s
CPA. July/August: 29-32.
3 Frieswick, K. Boing. CFO Magazine, 1 January 2004)
www.cfo.com.
31 Trevifio & Nelson; Loomis, C. Whatever it takes. Fortune, 25
November 2002: 76.
32 PR Newswire. Big majority believes tough new laws
needed to address corporate fraud; modest majority at least
somewhat confident that Bush will support such laws. 27 July
2002.
33 Kahaner, L. 2003. Values, prosperity and the Talmud. Busi-
ness lessons from the ancient rabbis. New York: Wiley.
34 McCabe, D., & Trevifio, L. K. 1996. What we know about
cheating in college. Change: The Magazine of Higher Learning.
January/February: 28-33; McCabe, D. L., Trevifio, L. K., & Butter-
field, K. 2001. Cheating in academic institutions: A decade of
research. Ethics and Behavior, 11(3): 219-232.
Ethics Resource Center, 2003. op cit.
36Abrahamson, E. 1991. Managerial fads and fashions. Acad-
emy of Management Review, 16: 586-612; Carson, 1999; Gibson,
J. W., & Tesone, D. V. 2001. Management fads: Emergence, evo-
lution, and implications for managers. The Academy of Man-
agement Executive, 15: 122-133.
37 Treviiio & Nelson, K.
3 Schein, E. H. 1985. Organizational culture and leadership.
San Francisco, CA: Jossey-Bass.
39 Trevifio, L. K., Weaver, G. A., & Brown, M. 2000. Lovely at the
top. Paper presented at the Academy of Management meeting,
Toronto, August.
40 Skinner, B. F. 1972. Beyond freedom and dignity. New York:
Bantam Books.
41Trevifio, L. K., & Youngblood, S. A. 1990. Bad apples in bad
barrels: A causal analysis of ethical decision-making behavior.
Journal of Applied Psychology, 75: 376-385.
42Trevifio & Nelson.
43 Toffler, p. 123.
44 Trevinlo, L. K. 1992. The social implications of punishment
in organizations; A justice perspective. Academy of Manage-
ment Review, 17: 647-676; Trevifio, L. K., & Ball, G. A. 1992. The
social implications of punishing unethical behavior: Observers’
cognitive and affective reactions. Journal of Management, 18:
751-768.
45Trevifio, Hartman, & Brown.
Linda K. Trevinlo is professor of
organizational behavior and
Franklin H. Cook Fellow in
Business Ethics in the Smeal
College of Business Adminis-
tration at The Pennsylvania
State University. She received
her Ph.D. in management from
Texas A&M University. Her re-
search interests focus primarily
on the management of ethics in
organizations. She has co-au-
thored two books and numerous
articles on this topic. Contact:
L.Trevino@psu.edu.
Michael E. Brown is an assis-
tant professor of management
in the Sam and Irene Black
School of Business at Penn
State-Erie. He received his
Ph.D. in management from The
Pennsylvania State University.
His main research interests are
in the areas of ethics and lead-
ership. Contact: mbrown@
psu.edu.
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All use subject to JSTOR Terms and Conditions
http://www.jstor.org/page/info/about/policies/terms.jsp
? Academy of Management Executive, 2004, Vol. 18. No. 2
……………………………………………………………………….
Executive Commentary
…………………………………………………………………………………
Stephen J. Wall
My experience as a consultant confirms the au-
thors’ contention that creating an ethical culture
within an organization is not simply a matter of
establishing formal guidelines or getting rid of a
few “bad apples.” I don’t believe that such a me-
chanical approach to instilling values into a cul-
ture will work no matter what the values are, but
the case seems particularly strong for ethics. If
your aim is to create an ethical company, the eth-
ical dimension must become part of the ongoing
dialogue within the business; it must become an
integral element of decision-making at all levels.
Only when employees know that they are expected
to take ethical considerations into account on a
day-to-day basis, that it’s part of their jobs and that
they will be recognized and rewarded for doing so,
will a genuinely ethical organization emerge.
If your aim is to create an ethical
company, the ethical dimension must
become part of the ongoing dialogue
within the business; it must become an
integral element of decision-making at
all levels.
I remember conducting a large-scale training
program at Drexel Burnham Lambert before its un-
ethical practices involving junk bonds had become
common knowledge and led ultimately to its down-
fall. The program was geared toward familiarizing
younger, high-potential employees with the world
of investment banking, but some more seasoned
players were also in attendance. As part of the
simulation that my company had prepared, partic-
ipants had to evaluate an opportunity to work with
an energy company that operated a nuclear reac-
tor. The numbers looked highly favorable, but we
had deliberately included one memo in the simu-
lation that said the company had been dumping
nuclear waste surreptitiously. This memo was in-
tended to alert the trainees to the fact that they
shouldn’t make the investment.
An experienced investment banker conducted
the simulated evaluation meeting. He initiated the
meeting by asking the participants to identify the
deals that looked good to them. During the meet-
ing, he stated that he personally liked the sound of
the energy company, at which point one of the
trainees mentioned the memo about the nuclear
waste. “What are you bringing that up for?” the
banker asked in an exasperated voice. “We’re here
to do deals.” I thought at the time that he was
sending a very clear signal to all the young train-
ees that they were not going to be rewarded for
making ethics a part of their investment decisions.
(I also decided I didn’t want to do any future work
for DBL.) So, I was hardly surprised when the scan-
dal broke a year or so later. I’m sure DBL had some
kind of ethics code, but I’m also sure it was widely
perceived to be window dressing rather than a
core value pervading the culture as a whole. The
real ethos of the company had been revealed to me
in the scornful dismissal of the trainee’s con-
cerns-especially since none of the other senior
people in attendance objected.
I also agree with the authors that an ethical
culture is a reflection not so much of a single indi-
vidual but of mores that exist in the organization
as a whole. At the same time, as their story of
Arthur Andersen illustrates very well, it is through
a series of individual actions and decisions that a
culture is initially established. A story is told to
new hires at my company-a way of illustrating
how we work-that has to do with a decision I
made some years ago to give back a $100,000 ad-
vance payment for a training program that was
canceled when the person who had contracted
with us to do the job was terminated, along with
her entire department. When I phoned to ask about
returning the payment, her boss said that I could
keep it. At first this sounded like a great idea, but
the thought of it bothered me enough to give me a
more or less sleepless night.
By the next morning, I had decided we had to
return the money. (By the way, in case you should
ever find yourself in a similar position, let me warn
you that it’s extremely hard to give money back to
a business-much harder than getting them to pay
you.) I certainly didn’t think at the time I made that
decision, “I am establishing a culture,” but in my
experience, that really is how cultures get estab-
lished-certain individuals do things that they
feel are appropriate, and others take their clues
from those actions. As noted above, I agree with
the authors’ argument that a culture cannot be
established or changed by writing up a list of
82
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2004 83
guidelines or by executive fiat. It must be born
from genuine conviction. And employees know the
difference.
Finally, although I don’t want to sound Polly-
anna-ish, I’d like to add another observation. It
seems to me that the ethical companies are the
ones more likely to succeed in the long run be-
cause they are much nicer places to work and,
therefore, people wind up working better and
harder. When I’ve consulted with companies who
really were concerned with nothing but the bottom
line, I’ve been struck by how unpleasant their at-
mosphere was. Their people didn’t feel good about
themselves; they didn’t enjoy their work; they
didn’t cooperate with each other; and there was a
lot of tension in the air. Even if most people don’t
make independent moral judgments, as the au-
thors contend, it’s my belief that their self-esteem
is heightened in ethical organizations because
they can feel proud of what they are doing and how
they are doing it. As a result, they work better than
employees who are getting nothing out of their
jobs but a paycheck. That’s a significant by-prod-
uct of an ethical culture.
Stephen J. Wall is Merger Inte-
gration Practice Leader and
Managing Vice President, Right
Management Consultants. He
consults with executives on
shaping business visions to en-
ergize organizational change.
His clients have included GE
Capital, the New York Stock Ex-
change, MetLife, General Mo-
tors, and Xerox, among others.
He is the author of On the Fly:
Executing Strategy in a Chang-
ing World (John Wiley & Sons,
2004). Contact: steve.wall@right.
com.
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Article Contents
p. 69
p. 70
p. 71
p. 72
p. 73
p. 74
p. 75
p. 76
p. 77
p. 78
p. 79
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p. 81
p. 82
p. 83
Issue Table of Contents
The Academy of Management Executive (1993-2005), Vol. 18, No. 2 (May, 2004), pp. 1-168
Front Matter [pp. 1-91]
From the Editor [p. 5]
Managing the Life Cycle of Virtual Teams [pp. 6-20]
The Future Shape of Strategy: Lemmings or Chimeras? [pp. 21-36]
Special Topic: Ethical Behavior in Management
Bringing Ethics into the Mainstream: An Introduction to the Special Topic [pp. 37-38]
Business as Usual: The Acceptance and Perpetuation of Corruption in Organizations [and Executive Commentary] [pp. 39-55]
Strategic Leadership of Ethical Behavior in Business [and Executive Commentary] [pp. 56-68]
Managing to Be Ethical: Debunking Five Business Ethics Myths [and Executive Commentary] [pp. 69-83]
A Survey of the Executive’s “Advisory Panel”: Why Managers Bend Company Rules [pp. 84-90]
Retrospective
Introduction: Rosabeth Moss Kanter’s “Men and Women of the Corporation and the Change Masters” [pp. 92-95]
Changing Organizational Structures: An Interview with Rosabeth Moss Kanter [pp. 96-105]
“Owed” to Rosabeth Moss Kanter: Impact on Management Practice [pp. 106-107]
“Men and Women of the Corporation” and “The Change Masters”: Practical Theories for Changing Times [pp. 108-111]
Executives Ask: Is Ethical Managerial Behavior Good for the Bottom Line?
Introduction: Ethical Behavior in Management [pp. 112-113]
Managing Ethically with Global Stakeholders: A Present and Future Challenge [pp. 114-120]
Ethics and Employees: Making the Connection [pp. 121-125]
Business Ethics and Customer Stakeholders [pp. 126-129]
The Natural Environment: Does It Count? [pp. 130-133]
The Case for Ethical Leadership [pp. 134-138]
Executive Voice
David Neeleman, CEO of JetBlue Airways, on People + Strategy = Growth [pp. 139-143]
Research Briefs
Research Edge: Welcome to the World of Services Management [pp. 144-150]
Are the Great Places to Work Also Great Performers? [pp. 150-152]
Increasing the Rate of New Venture Creation: Does Location Matter? [pp. 152-154]
Book Reviews
Review: untitled [pp. 155-157]
Review: untitled [pp. 157-158]
Review: untitled [pp. 158-160]
Review: untitled [pp. 160-162]
Review: untitled [pp. 162-163]
Review: untitled [pp. 163-165]
Back Matter [pp. 166-168]
reference/55511212
Organizational Ethics, Individual Ethics,
and Ethical Intentions in International
Decision-Making
B. Elango
Karen Paul
Sumit K. Kundu
Shishir K. Paudel
ABSTRACT. This study explores the impact of both
individual ethics (IE) and organizational ethics (OE) on
ethical intention (EI). Ethical intention, or the individ-
ual’s intention to engage in ethical behavior, is useful as a
dependent variable because it relates to behavior which
can be an expression of values, but also is influenced by
organizational and societal variables. The focus is on EI in
international business decision-making, since the inter-
national context provides great latitude in making ethical
decisions. Results demonstrate that both IE and OE
influence EI. Ethical congruence is also discussed as a
positive influence. Younger managers are more influ-
enced by OE than older managers. The findings call for
creating governance mechanisms to enhance ethical
congruence, thereby increasing the likelihood of man-
agers making ethical choices in organizational decision-
making.
KEY WORDS: organizational ethics, individual ethics,
business ethics, ethical intentions, ethical congruence,
corporate governance, international decision-making
Introduction
Corporate governance refers to the ‘‘system by
which companies are directed and controlled’’
(Cadbury, 1992). One of the goals of corporate
governance is to create a set of internal mechanisms
to ensure sound managerial decisions are made,
considering the rights and responsibilities of various
stakeholders, together with the ethical norms and
standards of the firm. Creating and maintaining a
positive ethical climate has been recognized as an
important aspect of corporate governance, reducing
the costs associated with more intrusive, possibly less
effective, means of formal social control, the costs of
damaged reputation, and reduced asset value when
ethical transgressions come to light (Monks, 2002).
Failure to maintain an appropriate ethical culture and
to provide employees with appropriate models of
ethical behavior can have a high cost for the cor-
poration (Monks and Minow, 1989). The ethical
climate is most effective when organizational
members are internally motivated to behave ethi-
cally. Since effective corporate governance is
enhanced by concordance between organizational
and individual ethics (IE), it is important to under-
stand the elements that produce this congruence.
Since both organizational-level variables and indi-
vidual-level variables influence ethical decision-
making, research findings based on studies that focus
on one level to the exclusion of the other need to be
supplemented by studies that consider both types of
variables.
This study contributes to the business ethics liter-
ature in several ways. The emphasis is on ethical
decision-making in international business, an area of
considerable contemporary interest (Bird et al., 2009;
DeGeorge, 1993; Donaldson, 1989; Donaldson
and Dunfee, 1999). Whereas much business ethics
research focuses on values and ethical judgments, this
study follows the example of Valentine and Ritten-
burg (2004), focusing on ethical intentions (EI). By
adapting existing vignettes to explicitly represent
international scenarios, this study provides an instru-
ment that can be used to investigate international
business ethics. While observations of actual behaviors
would be ideal, verbal assessments of EI are a close
measure, falling between the level of values, attitudes,
and moral judgments and the level of actual behavior.
In addition, the study furthers the understanding of
Journal of Business Ethics (2010) 97:543–561 � Springer 2010
DOI 10.1007/s10551-010-0524-z
business ethics by studying organizational ethics (OE)
and IE at the same time rather than separately, as is the
case in many previous studies. The current study
demonstrates the effect of both organizational and
individual ethics on EI and their combined effect,
moderated by some demographic variables. Finally,
these research findings can be used to support the
development of business ethics practices in organiza-
tions to enhance effective corporate governance.
This article consists of five sections, including this
introduction. The next section presents the theo-
retical overview and is followed by a section pro-
viding the research model and hypotheses
development. The following section presents the
research methodology and the results of the study.
The final section discusses the study findings,
directions for future research, and the limitations of
the study, and then concludes with the managerial
implications of the study.
Theoretical overview
Values form an important basis for ethical behavior.
Values may be assessed on both the individual and
the organizational levels. The correspondence
between an individual’s values and the values of an
organization can be called ‘‘person-organizational
fit’’ or ‘‘congruence.’’ In her dissertation, Liedtka
interviewed managers in two organizations, asking
them to identify both personal and organizational
values and then to describe the use of these values in
resolving ethical dilemmas they faced. Liedtka
(1988) used the term ‘‘value congruence’’ to refer to
the degree of internal consistency expressed by
interview subjects to characterize their own values,
and to refer to the degree that the managers viewed
their organizations as having values that were
themselves internally consistent within the organi-
zation. Her emphasis was on the resolution of value
conflict, conflict either internal to the manager or
conflict between the managers and the organization.
Managers with high value congruence resolved
ethical conflicts at a higher ethical level than man-
agers who expressed less value congruence, i.e., less
internally consistent values. Organizations, as per-
ceived by the same managers, also displayed more
consistent or less consistent sets of values. Managers
in organizations with more consistent sets of values,
or higher value congruence, were more likely to
make higher level ethical decisions than managers in
organizations with less consistent sets of values. In a
subsequent article derived from the dissertation,
Liedtka made the point, ‘‘clearly, the organizational
value system plays a critical role in setting the stage
upon which the ethical dilemmas that their managers
face are played out’’ (Liedtka, 1989). Liedtka
contrasted two organizations, one with a ‘‘rich, multi-
dimensional value system’’ and the other which she
characterized as ‘‘strictly utilitarian’’ (1989, p. 808),
analyzing several different sources of value conflict:
conflict within the organization’s values, conflict
within the individual’s values, conflict between the
individual’s values and the organization’s values, and
conflict both within and between the individual’s
values and the organization’s values (1989, p. 812).
Liedtka used the term ‘‘value congruence’’ to
refer to the internal consistency of values within the
organization and also to refer to the internal con-
sistency of values held by the individual. An
important part of her argument was the greater the
degree of value congruence within the organization,
the more influential the organization’s values were in
shaping the responses of individuals to ethical
dilemmas. Additionally, the more congruent the
values of an individual, the more influential those
values were in shaping those same responses. In
other words, when an organization had contradic-
tory or ill-defined values, or when an individual had
contradictory or ill-defined values, those values were
relatively less effective in providing guidance for
ethical decision-making.
Posner and Schmidt (1993) also used the concept of
value congruence to interpret results of a large-scale
survey. They used the concept of value congruence to
capture the degree to which ‘‘consonant values’’
characterized individuals, or characterized organiza-
tions (as reported by the same individuals), but not to
characterize the relationship between individuals and
their organizations. Their conclusion was that value
congruence for individuals and value congruence for
organizations were both positively associated with
ethical decision-making, but that the more significant
influence was individual value congruence. Adkins
et al. (1996) examined value congruence among
co-workers, concluding that positive work outcomes
such as job satisfaction and attendance were associ-
ated with value congruence, especially among
544 B. Elango et al.
lower-ranking employees and when the work re-
quired cooperation.
An interesting question is the degree to which
value congruence in the organization or in the
individual influences the actual behavioral choices
those individuals make when confronting ethical
dilemmas. The studies cited above demonstrate an
association between value congruence and ethical
decision-making. Yet individuals with similar values
can make different behavioral choices in ethical
decision-making due to different cultural or orga-
nizational factors. For example, an organization with
aggressive auditing and accountability systems may
influence individuals to adhere more strictly to the
company’s ethical guidelines simply out of a fear of
getting caught violating ethical expectations. Or, in
an international setting, an individual who might
value diversity or equal opportunity might never-
theless give preference in hiring to some preferred
ethnic category, or to one gender over another,
because of cultural expectations. In addition, the
same behavior in an ethical situation may
be prompted by adherence to widely varying values.
A supervisor may want to be fair in evaluating
employees either on the basis of the value of fairness,
or because she believes that employee productivity
will be enhanced by fairness, or because she has
observed fairness practiced by leaders in the orga-
nization, or because the organization audits and
rewards the practices judged to be fair by experts,
supervisors, or the work unit. The association
between values, organizational culture, and ethical
practices is complex and multi-dimensional. Differ-
ent values may be expressed in similar behavioral
choices, and similar values may be associated with
different behavioral choices. Observing actual
behavioral choices in international business would
be ideal, but difficult to operationalize. However, EI
has been used by Valentine and Rittenburg (2004) to
suggest the behavioral aspect of ethical decision-
making. Their development of a series of vignettes
in which EI can be expressed has facilitated the
development of research connecting values and
behavioral intentions or expectations.
Kuenzi and Schminke (2009), reviewing the
organizational work climate literature, noted the
proliferation of definitions and the overlapping
of many related concepts, including organizational
climate, work climate, psychological climate, and
organizational context. They attempted to distin-
guish organizational climate from culture, suggesting
that organizational climate relates more to ‘‘how
things are done,’’ whereas organizational culture
relates more to ‘‘underlying assumptions’’ … ‘‘at a
higher level of abstraction’’ (Kuenzi and Schminke,
2009, p. 638). This distinction is useful for consid-
eration of ethical climate research. The focus of
ethical climate research has similarly been on ‘‘how
things are done’’ when ethical decision-making
occurs, as distinct from ethical culture, which relates
more to underlying assumptions. One influential
stream of ethical climate research (Victor and
Cullen, 1988) is based on the idea that organizations
may demonstrate ethical dimensions analogous to
the stages of moral development proposed by
Kohlberg (1981) for individual moral development.
Several studies have considered the fit between IE
and organizational climate, observing that higher
congruence is preferred by individuals (Sims and
Keon, 1997; Sims and Kroeck, 1994) and is associ-
ated with higher levels of job satisfaction, greater job
commitment, and reduced turnover intention
(Ambrose et al., 2008). Wyld and Jones (1997),
proposing an agenda for research on ethical decision-
making, postulated the importance of context, sim-
ilar to the idea of ethical work climate, as a backdrop
for the dependent variable ‘‘perception of ethical
matters.’’
Research on ethical climate (Ambrose et al.,
2008; Chatman, 1989; Judge and Bretz, 1992;
Weber, 1995) now considers both organization and
individual variables, generally by means of surveys
designed to elicit attitudes, values, or level of moral
development. Perceptions, values, and attitudes are
important, but the underlying assumption is that
they are important because they lead to certain
behaviors which may or may not conform to the
ethical standards of the corporation (Ostrowsky
et al., 2009; Treviño et al., 2006; Weaver et al.,
1999). Although ethical decision-making is influ-
enced by organizational and individual factors, most
business ethics research focuses on either organiza-
tional or individual factors rather than on the two
types of factors simultaneously, as noted by Ambrose
et al. (2008, p. 323).
As noted above, values congruence consists of
agreement on fundamental values. Ethical congru-
ence consists of agreement on appropriate actions
545International Decision-Making
when faced with ethical dilemmas. Ethical congru-
ence may derive from values congruence, but this is
not always the case. Other factors, as noted above,
such as the example of leaders, the auditing and
accountability practices of the organization, and
the cultural norms prevailing in a given geo-
graphic setting, also affect ethical decision-making.
Thus, ethical congruence is a concept related to, but
not the same as, value congruence. The concept of
ethical congruence has been suggested in the
accounting literature (Sauer and Chao, 2005;
Sullivan, 2004) and demonstrated among accounting
students who took a professional ethics course. In
some respects, the concept of ethical congruence is
similar to person–organization fit. However, the
idea of ethical congruence focuses more on behavior
in situations where ethical issues are involved. The
current study explores the behavioral intentions of
respondents considering what they would do when
confronted with a series of ethical dilemmas. The
focus is on the actions respondents would take to
resolve these issues, along with the corresponding
actions they think their colleagues would take.
‘‘Ethical intention’’ is the term we apply to these
anticipated behaviors.
Complexity arises when the international
dimension is introduced in the study of ethics.
Donaldson (1989) has discussed the co-existence of
hyper-norms observed across cultures along with
variations between cultures on other norms. Cultural
and regional norms persist even as global business
practices grow (DeGeorge, 1993). Trompenaars
(1994) has pointed out the differences, for example,
between universalistic cultures such as the United
States and more particularistic cultures, saying that
adherence to rules is more the norm in the univer-
salistic culture, whereas consideration of exceptional
circumstances is more accepted in the particularistic
culture. International business situations offer the
opportunity to assess how IE and OE influence an
individual’s intentions to behave ethically where
many societal and legal constraints on unethical
behavior are missing, and where corporate gover-
nance mechanisms may be less effective.
The vignettes used in modified form in this study
were developed by Valentine and Rittenburg (2004)
to investigate differences between U.S. and Spanish
business professionals. They found that U.S. respon-
dents were more likely than Spanish respondents to
assert the intention to behave ethically, and also ex-
pressed more teleological assessments (based on out-
come). Their study found that a higher level of ethical
judgment was associated with both EI and teleological
assessment. Managers operating in the international
markets face significant pressure to act unethically due
to tolerance of bribery (Sanyal, 2005; Sanyal and Sa-
manta, 2004), the extent of corruption in society
(Husted, 1999), the degree to which elites are self-
serving (Banfield, 1967), and other societal-level
variables. These situations allow for considerable
variation in managerial judgment for several reasons.
Often there is a lack of congruence between home
country and host country standards in ethical behav-
ior. The manager stationed abroad may feel distant
from organizational and societal resources for resolv-
ing ethical issues. Legal and regulatory controls are
often lax. The scrutiny of consumers, investors,
journalists, or other stakeholders may be less intense,
hence less effective as social control influences. In
addition, the internal mechanisms of social control
important for corporate governance may seem less
salient in a distant location or a different culture. The
autonomy and authority necessary for managerial
effectiveness in an international setting expand the
possibility for decision-making to deviate from cor-
porate expectations. Consequently, international
business ethics vignettes provide wide discretion in
managerial decision-making. Since this study con-
siders both organizational and individual influences, it
is important that the dependent variable, EI, has
considerable variation, in other words, that respon-
dents have wide discretion in choosing their desired
course of action. For these reasons, the emphasis on
ethical decision-making in international business is
appropriate for the current study.
Research model and hypotheses
development
This article’s goal is to test the relationship between IE
and OE on the intention to behave ethically by
respondents (ethical intention or EI). The research
model is based on Treviño’s (1986) ethical decision-
making model in organizations and the model sub-
sequently proposed by Treviño et al. (2006, p. 953). In
this model, Treviño used the interactionist perspec-
tive, stating that individual and situational variables
546 B. Elango et al.
predict ethical decision-making in organizations.
Ferrell and Gresham (1985) presented a similar
framework for understanding ethical decision-
making for the marketing context using variables such
as individual and organizational factors along with
opportunity for action. Raelin (1993) argued that the
factors that influence the consistency of belief and
action (i.e., the Persean ethic) in managerial practice
are individual factors and situational characteristics,
along with their interaction. Strong empirical validity
exists for these individual and situational variables, as
they have been studied in the literature to enable us to
understand their impact on ethical decision-making.
These variables are succinctly summarized in a review
of the literature on ethical decision-making by Ford
and Richardson (1994). More recently, Ibarra-Cola-
do et al. (2006) explained how an individual’s values
and organizational context guide individual decision
choices of managers.
The research model proposed here follows the
design of Valentine and Rittenburg (2004) in using
the intention of the individual to behave ethically, or
EI, as the dependent variable. The two variables
hypothesized to have an impact on the dependent
variable are the respondent’s own IE and the orga-
nization ethics (OE) experienced by the respondent.
Gender, age, and level of management experience are
used as control variables based on extant literature
(e.g., Loe et al., 2000; Ruegger and King, 1992;
Treviño et al., 2006). The emphasis is on EI in the
international context, allowing for the possibility of a
wide range of possible ethical choices to be made
with considerable freedom from social and legal
constraints. The research model used in this article is
presented in Figure 1, where an additional concept is
illustrated. This is the concept of ethical congruence
(EC) or the degree of ‘‘fit’’ between IE and OE.
Research hypotheses
A basic driver of a person’s intention to behave
ethically (EI) is the individual’s own individual val-
ues and ethical standards (IE). The underlying basis
for this argument is based on the theory of reasoned
action (Ajzen and Fishbein, 1974, 1980; Randall,
1989). This theory links individual attitude toward a
behavior to a person’s actual behavior and has been
used to explain behavior. Strong evidence has been
found for the predictive utility of the model within
the boundary conditions in varied business contexts
(Sheppard et al., 1988) as well as in the ethics liter-
ature (e.g., Chen and Tang, 2006). In a study of top
organizational officials in the U.S. service sector,
Murphy et al. (1992) reported that attitudes are one
of the best predictors of ethical behavior. Similarly,
Figure 1. Diagram of research variables.
547International Decision-Making
Berger and Alwitt (1996) reported that people
who have higher convictions in their feeling toward
the protection of the environment also show
environment-friendly behavior. Although direct
observation of ethical behavior would be ideal, this study
uses as a proxy an individual’s stated EI as measured by a
previously validated instrument to measure EI. Conse-
quently, the first hypothesis is the following:
Hypothesis 1: Individual ethics will be positively
related to ethical intentions (EI).
This study aims to examine the impact of the orga-
nization’s ethics on the individual’s intention of
behaving ethically, since organizational norms and
practices may either support or undermine an indi-
vidual’s ethical standards. There is considerable the-
oretical basis for this aspect of the study, although not
a great deal of empirical evidence at this time. Victor
and Cullen (1988) argue that individual characteris-
tics alone do not influence moral behavior
and, therefore, are insufficient to predict moral
behavior. Past research offers support for the assertion
that organizational level predictors have a significant
influence on individual decisions (Forte, 2004a, b).
Organizational cultures, rewards, and belief systems
profoundly influence employee thinking and,
therefore, are important influences on an employee’s
ethical or unethical behavior (Baucus and
Beck-Dudley, 2005). Past research offers support for
the assertion that OE and ethical culture influence an
individual’s attitudes toward ethics (Vitell and
Hidalgo, 2006). According to the Ethics Research
Center (ERC), when top management personnel
show ethical behavior, employees are 50% less likely
to act unethically (Ethics Resource Center, 2005).
Each individual in our sample has an employment
history which has provided the opportunity to
observe and experience at least one organization’s
ethical practices and is currently employed in an
organization whose ethical culture is a constant
presence. Hence, we predict that individuals who
experience an organization behaving ethically will be
more likely to express EI than will those individuals
who report less ethical behavior in their own orga-
nization. This assertion seems particularly appropriate
in the international context where managers may
encounter considerable variation in local ethical
standards and practices. Therefore:
Hypothesis 2: An employee’s perception of high
levels of OE will be positively related to ethical
intentions (EI).
Previous studies have shown age to be a factor in
influencing ethical norms since the pioneering work
of Piaget (1932), followed by Rest (1979), Kohlberg
(1981), and others (Arlow, 1991; Blasi, 1980; Forte,
2004a, b). Older employees are less likely to be
susceptible to influences running counter to previ-
ously internalized moral or ethical standards and are
more likely to make ethical choices than younger
employees (Deshpande, 1997; Ruegger and King,
1992). Several factors contribute to this phenome-
non. Psychological research indicates that young
men are prone to excessive risk-taking generally
(Finucane et al., 2000). Younger employees tend to
have less experience than older employees. Conse-
quently, they may be especially vulnerable to
manipulation by others or to temptation for what
they perceive as their own immediate self-interest.
Empirical support for this view can be found in
several previous studies. Carroll (1975) reports
younger managers go along with their superiors in
matters related to judgments of morality. Similar or
consistent findings are reported by Ford and Richardson
(1994). Therefore, these younger employees will find it
easier to behave unethically due to ‘‘motivated reason-
ing’’ (Bersoff, 1999; Kunda, 1990) in situations involv-
ing individual cost. Following this reasoning, the third
hypothesis is:
Hypothesis 3: The relationship between an employ-
ee’s perception of OE and ethical intentions (EI)
will be moderated by the age of the employee.
Two control variables, gender and managerial
experience, are used in this study. Previous research
on the impact of gender on ethical decision-making
has produced mixed results. Some studies have
shown women to have higher ethical standards than
men, but others indicate no difference between
women and men (McCabe et al., 2006). We are not
aware of any studies showing men to be ethically
superior. Therefore, we control for gender, but
without any specific prediction. The same may be
said for the influence of the level of managerial
experience. One might expect level of responsibility
to be associated with more mature, hence more
ethical, decision-making, but we are unaware of any
548 B. Elango et al.
studies focusing on this aspect. However, age and
managerial experience are often linked, and the
effect of age observed in previous studies might in
reality be the impact of managerial experience.
Thus, the level of managerial experience is used as a
control variable.
Research methodology
Subjects
The sample subjects were graduate students enrolled
in MBA programs at two major state universities in the
United States, working full-time and having at least
2 years of full-time work experience. Appropriate
authorization for human subject research was
obtained from each university. Students in MBA
programs with executive experience have been used
as surrogates to reflect managerial thinking in many
studies (e.g., Beekun et al., 2005; Vitell and Hidalgo,
2006) because they have a certain degree of individual
maturity, life experience, and work experience that
approximates a population of actual managers. Pre-
vious research has demonstrated that graduate students
can serve effectively as surrogates for managers in
business decision-making (Remus, 1986) and that
students can substitute for businessmen in behavioral
research (Khera and Benson, 1970), in marketing
research (Burnett and Dunne, 1986), and in consumer
behavior studies (Enis et al., 1972). In fact, MBA
students often have managerial experience and many
are managers even while they are enrolled as students,
as was the case with this sample. We solicited the
cooperation of MBA students in their final semester of
the program, since they would have the most indi-
vidual maturity and work experience. In order not to
sensitize them to the specific nature of the study topic,
we told the subjects that the goal of the survey was to
seek ‘‘the opinion of executives on business practices
for a research project on managerial decision-
making.’’ The subjects were promised anonymity in
their responses and assured that the survey would be
used solely for academic research. However, the
limitation of such a promise was that we could not
test for non-response bias. Table I provides demo-
graphic data on the sample, which had considerable
international experience and considerable managerial
TABLE I
Profile of respondents (N = 102)
Demographic Percentage
Age
25–30 21.57
30–35 32.35
35–40 32.35
40+ 13.73
Gender
Male 66.67
Female 33.33
Country of birth
United States 45.10
Other 37.25
Unknown 17.65
Education
Masters degree completed 48.04
Undergraduate degree completed 51.96
Management level
Entry level 30.39
Middle level 47.06
Upper level 22.55
Managerial experience (years)
Less than 5 33.33
More than 5 but less than 10 39.22
More than 10 but less than 15 15.69
More than 15 7.84
Missing data 3.92
Functional specialization
Management 36.27
Finance 17.65
Accounting 4.90
Marketing 12.75
Engineering/consulting 15.69
Other 12.75
Number of times travelled abroad
Less than 5 30.39
More than 5 but less than 20 41.18
More than 20 28.43
International work experience
Less than 1 year 48.04
More than 1 but less than 5 22.55
More than 5 years 29.41
Race
Caucasian 32.35
Hispanic 51.96
Black 6.86
Asian 7.84
Native American 0.98
549International Decision-Making
experience. More than half had been born outside the
United States, more than half had at least 1 year of
international work experience, and more than half
were Hispanics. While the high percentage having
international work experience gave some assurance
that they were familiar with ethical issues that can arise
in international business, we wanted to confirm that
these differences did not confound our study findings.
Therefore, we conducted a mean comparison analysis
with likelihood of ethical behavior in international
settings as dependent variable under the following
categorizations: race (Hispanic vs. Non-Hispanic),
international experience (less than 1 year vs. more
than 1 year) and education level (undergraduate
degree completed vs. graduate degree completed).
Statistical results found the mean differences across
these demographic variables to be statistically insignif-
icant, allowing us to proceed with greater confidence.
Measures
Dependent variable
Extensive support exists for the usage of vignettes to
facilitate assessment of an individual’s ethicality
(Weber, 1990). For this study, it was necessary to
identify vignettes with international business ele-
ments. One previously validated set of 10 vignettes
(Valentine and Rittenburg, 2004, pp. 9–10) had 7
vignettes with international elements, so this subset
of 7 was selected to measure the individual’s inten-
tion to behave ethically in international business.
The specific scenarios selected from Valentine and
Rittenburg (2004) were the following: competitor
intelligence (Korean firm in the U.S. and U.S. firm
in Norway), bribery (U.S. firm in Japan and
Argentinean firm in the U.S.), product safety
(Singaporean firm in the U.S. and U.S. firm in
Malaysia), and deceptive advertising (British firm in
the U.S.). Each of these scenarios was approximately
three to five lines in length, concluding with an ac-
tion taken by a particular firm (see Appendix 1).
While the action taken by the firm was unethical
according to the norms prevailing in the culture
where the students were located, this was not
explicitly stated to the subject, nor were they asked to
make a judgment on the rightness or wrongness of
the action. Rather, they were asked to judge their
own likelihood of acting in the way described. After
each vignette, subjects chose a number between 1
and 7, where 1 represented high and 7 low, in
response to the assertion: ‘‘The probability that I would
undertake the same action.’’ This 7-point scale and
particular questions were adapted from Cohen et al.
(2001, p. 333) where they were used to measure EI. The
average value of the Cronbach’s a reliability measure for
this query across the seven scenarios was 0.726.
Independent variables
The scale to measure IE was based on the social
responsibility scale for marketing personnel devel-
oped by Peters (1972) to test attitudes beyond the
need for immediate financial return to his or her
company, and to capture values such as a concern for
social responsibility. This scale, one of the first
developed to measure ethical attitudes, was modified
and used further in studies by Paul et al. (1997) and
Meijer and Schuyt (2005). Peters’ original scale
consisted of 26 items and had a reliability of 0.73.
Since the focus of the current study was toward an
individual’s general orientation toward business
ethics in the international context, several of Peters’
scale items were modified to emphasize the inter-
national business context of this study, resulting in a
scale with 29 items and a reliability coefficient
(Cronbach’s a) of 0.819. The items were scored on a
5-point scale ranging from 1 = ‘‘Disagree Strongly’’
to 5 = ‘‘Agree Strongly,’’ with several of the items
reverse coded. The IE scores were computed as the
sum of the underlying scores of each of these times.
See Appendix 2 for the modified scale.
In order to measure OE, respondents’ perceptions
of their own organizations were used, since for the
purpose of this study the focus was on the ethical
standards and culture of the organization as experi-
enced by the respondent. The instrument used was
the 5-item Corporate Ethics Scale developed by
Hunt et al. (1989) who reported a reliability of 0.78
for their scale based on a sample of 1246 respon-
dents. They conceptualized OE through employee
perceptions of their own managers. See Appendix 3
for the scale. Cronbach’s a for this 5-item scale was
0.814 for this study’s sample. OE values were
computed as summation of the 5-item scores.
Age was assessed by asking subjects to select their
age using specific categories: 20–25; 26–30; 31–35;
36–40, and 40+. The sample was split into two
roughly equal groups (below 35, N = 55) and
550 B. Elango et al.
(above 35, N = 47) and dummy coded 1 and 0,
respectively. Gender also was used as a control var-
iable in our regression model (Chen and Tang, 2006;
Derry, 1989; Deshpande, 1997; Forte, 2004a, b;
Rest, 1979, 1988; Sen et al., 2006; Simga-Mugan
et al., 2005). Given the mixed findings in previous
research on the impact of gender on ethical attitudes
or behaviors, the expected sign of this variable was
not hypothesized. It was dummy coded 1 (male) and
0 (female). Finally, management level was used as a
control variable. Since only two business ethics
studies were found that used this variable (Wiley,
1998; Zabid and Alsagoff, 1993), no specific direc-
tionality was proposed, but it seemed at least possible
that upper level managers would differ from lower
level managers in their intention to behave ethically
(EI) because of their greater experience and matu-
rity. This variable was dummy coded 1 (upper level
managers) and 0 (middle or lower level managers).
Descriptive statistics of the variables along with
correlation values are presented in Table II. The
review of the correlation values between the various
independent variables indicated that the likelihood
of multicollinearity invalidating the study findings
was minor. Additionally, in each of the regression
models, variance inflation factor (VIF) scores were
checked to ensure that assumptions of the models
tested are not violated. The following section pre-
sents the statistical results of this article.
Analysis
The empirical analysis used for testing these hypoth-
eses is based on stepwise hierarchical regression
models and is reported in Table III. In Model 1, age
dummy was negatively related to the likelihood
of ethical behavior in international settings (b =
-0.325, p < 0.01), whereas gender and management
level were insignificant (b = 0.151 and -0.021,
respectively). Three regression models were used to
test the three hypotheses presented in this study.
Model 2 tested Hypothesis 1 wherein IE was regressed
over EI along with the variables in Model 1. This
model explained about 21.6% (p < 0.01) of the vari-
ance, and the IE term was significant with a positive
loading (b = 0.498, p < 0.01), indicating support for
Hypothesis 1. In Model 2, the b loading for age
was reduced but remained statistically significant
(b = -0.232, p < 0.01), while gender, which was
insignificant in the prior model, turned significant
(b = 0.212, p < 0.05) and remained significant in the
subsequent models, suggesting that females were
higher in EI than males. In Model 3, OE was added to
Model 2 to test Hypothesis 2. Statistical support was
found for Hypothesis 2, with a b loading of 0.158
(p < 0.05). Model 3 explained 30.3% (p < 0.01) of
the variance of EI.
Model 4 tests for the moderating relationship
proposed in Hypothesis 3 through the addition of a
new variable (i.e., OE 9 Age Dummy) to Model 3.
In this model, the added term loaded negatively
(b = -0.733, p < 0.01), indicating age to be an
interactive influence as proposed by the hypothesis.
The b loading for OE increased to 0.267 (p < 0.01),
while the loading on IE was reduced to 0.406
(p < 0.01). As argued in the theoretical development
of the hypothesis, findings indicate that OE is more
likely to influence the EI of younger employees than
it is to influence the EI of older employees. Addi-
TABLE II
Means, standard deviations and correlations (N = 102)
Mean SD 1 2 3 4 5 6
1. Individual ethics (IE) 103.77 13.45 1
2. Organizational ethics (OE) 19.46 5.07 0.319** 1
3. Age dummy 0.46 0.50 -0.122 -0.108 1
4. Gender dummy 0.68 0.47 -0.106 -0.003 0.009 1
5. Management level dummy 0.26 0.419 0.073 -0.059 -0.075 0.072 1
7. Ethical intention (EI) 37.71 6.80 0.515** 0.327** -0.215* 0.170 0.034 1
* Correlation is significant at the 0.05 level (two tailed).
** Correlation is significant at the 0.01 level (two tailed).
551International Decision-Making
tionally, the age dummy which loaded negatively in
Model 3, as well in prior models, became positive
(b = 0.482, p < 0.05), indicating that older managers
are likely to express higher EI. This model explained
about 38.5% (p < 0.01) of the variance in EI.
We also tested for the incremental contribution of
each of the variables across the models. As shown in
Table III, for each of the models, the incremental r
2
values were statistically supported, thereby support-
ing the overall rationale of the models tested. These
findings support the overall premise of the frame-
work presented in the article. Table II also shows
that OE was positively related to IE (r = 0.319,
p < 0.01). In order to further validate the notion of
ethical congruence, we used an approach that is
conceptually similar to the methods followed by
Ambrose et al. (2008). First, we determined the
mean of IE and OE scores. Second, we categorized
scores higher than the mean as high IE and high OE,
and scores below the mean as low IE and low OE.
Third, we divided the sample into two groups. The
first group (Group A) consisted of individuals in the
sample with high IE and high OE (high-match),
whereas the second group (Group B) consisted of
individuals of low IE and low OE (low-match), low
IE and high OE (mismatch), and high IE and low
OE (mismatch). Group A had a sample of 41 indi-
viduals and Group B had a sample of 61 individuals.
Fourth, we computed the mean for the likelihood of
ethical behavior in an international setting for both
groups (Group A, mean = 40.658; Group B,
mean = 35.727). Finally, we compared the mean of
both groups. Our ANOVA results support the
notion that when there is congruence (high IE and
high OE), it increases the likelihood of ethical
behavior in an international setting (F = 14.621;
p < 0.000). Both of these findings support the
underlying rationale of the study, the proposition
that ethical congruence, or the congruence of IE and
OE, can be an important element in corporate
governance and can be used as a variable in future
studies. The following section discusses the findings,
limitations, and implications of this study.
Discussion
Extant research tends to focus on either organiza-
tional or individual factors on ethical decision-
making (Ambrose et al., 2008). This study extended
previous ethical decision-making models (Treviño,
1986; Treviño et al., 2006) by considering the impact
of both IE and OE on EI. Overall support was found
for the notion of ‘‘ethical congruence’’ as well as the
theoretical rationalizations made in the article, with
the regression models explaining about 38% of the
variance. Findings indicate that managers use both IE
and OE to guide them in making ethical choices,
consistent with previous findings in the accounting
literature (Sauer and Chao, 2005; Sullivan, 2004).
Put another way, managers come to ethical decision-
making with their own experiences and values, but
they also are influenced by the ethical standards and
practices they observe in the workplace.
TABLE III
Summary of regression results (N = 102)
Variable Hypothesis Model 1 Model 2 Model 3 Model 4
Individual ethics (IE) 1 0.498*** 0.448*** 0.406***
Organizational ethics (OE) 2 0.158** 0.267***
Interaction term (OE 9 age dummy) 3 -0.733***
Age dummy -0.325*** -0.232*** -0.221*** 0.482**
Gender dummy 0.151 0.212** 0.207*** 0.180**
Management level dummy -0.021 -0.049 -0.034 -0.047
R
2
0.106* 0.216*** 0.303*** 0.385***
F value 4.993 14.096 12.256 11.555
Incremental R
2
0.11*** 0.087*** 0.082***
Incremental F value 3.603 4.775 6.292
*** p < 0.01, ** p < 0.05, * p < 0.1. All b values are standardized values.
552 B. Elango et al.
The last hypothesis suggests that the relationship
between an employee’s perception of OE and
intention to behave ethically (EI) was moderated by
the age of the employee. Consistent with this
expectation, findings indicated that younger man-
agers were more likely to be influenced by OE than
older managers, and that older managers were more
likely to make ethical choices. Gender had no sta-
tistically significant relationship in Model I, whereas
in other models (II, III, and IV), females were higher
than males in EI. This finding suggests that gender
differences in ethical decision-making may exist, but
they are not very strong, and that if one gender is
more ethical, it would be the female. The second
control variable, management level, was not signif-
icant in any of the models tested. However, the
relationship between management level and EI was
negative across all four models.
These findings suggest that the concept of ethical
congruence merits further study. There have
been previous studies of value congruence and of
person–organization fit, but the correspondence of
basic values and actual behavioral choices in ethical
issues by individuals in organizations also merits study,
since these are somewhat distinct and discrete phe-
nomena. Individuals make ethical choices on the basis
of values, both their own individual values and the
values of the organization. However, factors such as
the norms observed among other workers, the
examples set by leaders, organizational policies and
practices, and societal influences also influence ethical
choices. Behavior may even be the basis for the
development of attitudes that justify the behavior, as
was demonstrated by Festinger (1957) in his work on
cognitive dissonance and on the body of research that
has followed (Aronson, 1997). Sullivan (2004) used
the concept of ethical congruence to refer to the
acceptance of professional accounting norms by
accounting students. In that study, there was no
evidence of a shift in values as being responsible for
increased ethical congruence. Instead, increased train-
ing communicated how practicing accountants exer-
cise ethical practices accepted in the profession, and the
combination of increased information, persuasive
communication by respected members of the profes-
sion, and the desire to conform inspired acceptance of
prevailing norms by subjects of the study.
Ethical congruence is applicable for a wide range
of organizations and positions within organizations.
While our study’s focus was on the impact of ethical
congruence on EI, the statistically significant rela-
tionship between IE and OE observed in Table II is
an important element for corporate governance in
international settings as well as a useful concept for
future research. This concept gives rise to several
interesting questions having to do with the causality
as well as the effect of ethical congruence. For
example, it would be helpful to know how ethical
congruence is achieved in an organization. Perhaps
organizations are effectively recruiting and retaining
employees whose ethical standards are congruent
with the organization’s ethical standards. In other
words, organizations might be effectively screening
out potential employees whose ethical standards are
either too low or too high for comfort, or such
employees might be effectively de-selected after
hiring. Another possibility is that employees are
making career choices influenced by their own sense
of ethics and seeking organizational cultures where
ethical standards are neither too low nor too high for
their own personal comfort. Another alternative
might be that employees become socialized to pre-
vailing norms in their workplace and come to accept
what exists as what should be. A more psychologi-
cally based explanation could be that employees are
projecting their own sense of ethics onto the orga-
nization as a whole. Longitudinal studies are needed
to determine which of these explanations have
validity, and in-depth studies within organizations
would be useful. This would allow researchers to see
if respondents project their own ethical standards
onto their organization, whether they internalize
organizational norms over time, or whether orga-
nizations are selecting for ethical congruence either
in hiring or retaining employees, all very promising
areas of inquiry and practical application. Monitor-
ing ethical congruence, perhaps using periodic sur-
veys, might be valuable in assessing organizational
culture. On an operational level, it could be that
different types of ethics training programs are
effective according to the degree of ethical congru-
ence among employees. Future studies could assess
the impact of ethical congruence on job satisfaction
and turnover, as well as on the degree of conformity
to corporate norms and expectations.
Furthermore, the relationship of ethical congru-
ence to ethical compliance and, by extension, to the
effectiveness of corporate governance policies and
553International Decision-Making
programs, could be promising areas for future
research. The emphasis on ethical congruence is
consistent with the overall spirit of the requirements
for internal control (Section 302) of the Sarbanes–
Oxley act which seeks to prevent, detect, or report
unethical actions by managers. Thus far, there have
been relatively few studies on the role of boards in
creating ethical climate. This topic also allows for new
theory development, as the link between corporate
governance and ethical congruence can be concep-
tualized as a way to reduce transaction costs and
optimize downside risks for stakeholders of a firm.
Apart from the several issues highlighted above, issues
related to corporate governance which need attention
include the role of internal versus external directors in
facilitating ethical congruence and the development
of reward structures for individuals making ethically
congruent choices.
An additional avenue for scholars working in the
international business ethics area could be to focus
on decision-making in varied international business
contexts. This line of research allows for compari-
sons across a range of contexts (e.g., host country,
home country, industry, and type of decision) and
potentially offers insights on managerial behavior in
ethical decision-making and practice. For example,
it would be interesting to compare the responses of
managers from a single country to an international
business scenario across varied host countries. Earlier
work by Rittenburg and Valentine (2002) has shown
that ethical judgments and intentions in international
settings vary by home country (Spain vs. U.S.) of the
manager. Following this line of thought, there might
be an interaction effect between home country of
the manager and host county where the decision-
making takes place. Another line of study could be
to inquire if EI varies according to the subject’s host
county or home country, or in response to particular
types of unethical international business practices,
such as paying bribes, using unethical accounting
practices, or evading taxes. Similarly, investigations
could also be made to see if managerial choices are
influenced by the industry of the manager, the
degree of internationalization of the company, the
type of ownership, or other organizational variables.
This study used two newly adapted scales to
capture IE (Peters, 1972; Valentine and Rittenburg,
2004) and OE (Hunt, et al. 1989). Both were
derived from scales which are now decades old, but
have been used relatively few times. Both the ori-
ginal scales and the scales as adapted for this study
have desirable reliability characteristics. Replication
of this study and use of these instruments in different
cultures and among different populations would
provide valuable information on the relative impact
of IE versus OE on decision-making and the con-
tribution of ethical congruence to effective corpo-
rate governance. The adaptations made in this study
to focus on specifically international business ethics
decision-making should be especially useful in future
studies since the globalization of business is such a
pervasive phenomenon.
Limitations
This study has limitations due to the nature of its
design. It used executive MBA students with work
experience and considerable international exposure as
a surrogate to capture actual decision-making of
managers. While the usage of MBA students was
consistent with previous practice for exploratory
studies such as this one, there are limitations. Students
in a classroom are likely to reflect on ethical issues
more deliberately than they might in actual managerial
practice or to deliver distorted responses due to social
response bias. This study focused on international
business issues, where the foreign setting, its culture,
its institutions, and its norms have a greater impact
than the classroom setting could ever replicate. Since
this study’s sample size was limited, a parsimonious
research model was required, limiting the inclusion of
possible variables identified in extant literature. For
instance, literature reviews provided by Ford and
Richardson (1994), Loe et al. (2000), O’Fallon and
Butterfield (2005), and Treviño et al. (2006) suggest a
variety of other influences in societal, organizational,
and individual ethical decision-making, while the
corporate governance literature suggests yet another
set of variables which could be considered (Potts and
Matuszewski, 2004; Turnbull, 1997; Weimer and
Pape, 1999). Additional variables that could affect EI,
hence should be considered in future studies, include
size of organization, type of industry, extent of regu-
latory constraints, extent of industry codes of
conduct, degree of internationalization (of employees,
554 B. Elango et al.
investors, and consumers), and type of corporate
governance systems. The measure of OE was based on
the perceptions of respondents as they considered
their respective current employers. For future studies,
a more objective measure would be useful. Moreover,
the degree to which the intention to engage in ethical
behavior corresponds to actual ethical behavior is
difficult to assess. Therefore, studies aimed specifically
at this question are required to advance this topic
further. Finally, the extent to which local environ-
ment pressures a manager to act unethically may vary
from country to country. In an effort to minimize the
impact of such local differences, this study used a
variety of host and home scenarios in the vignettes.
Future replication of this study finding across varied
country samples and managerial settings will lead to
greater confidence in the study’s findings.
Implications for corporate governance
This study offers several implications for companies
seeking to enhance corporate governance through
effective internal mechanisms. Study findings the-
matically support the notion that better governance
can be achieved through a tight coupling of IE and
OE. First, the strong relationship of IE to EI dem-
onstrates the need to recruit managers with high
ethical standards if a company wants to create a
positive ethical culture. Additionally, this study’s
findings highlight the need for a company’s board
members to screen a senior manager’s ethical stan-
dards closely before making international assignment
decisions. Secondly, the strong relationship between
OE and EI shows that companies need to create a
positive ethical culture with programs of ethical
training and monitoring ethical performance.
Articulating core values of the corporation, essential
though it may be, may be inadequate to provide a
firm basis for actually resolving ethical issues in
practice. Training programs should provide case
studies or actual examples of ethical dilemmas that
require behavioral choices by employees. Addi-
tionally, actions in international operations which
deviate from accepted practice in the corporation
should be recognized and used as teaching tools
within the corporation. Employees who have the
inclination to resolve ethical issues properly will be
discouraged from doing so if they see unethical
behaviors go unnoticed in overseas settings. They
may lack confidence in their own decision-making
skills if the prevailing ethical climate does not pro-
vide support. Third, the impact of OE on younger
managers is likely to be especially important. Older
managers may be able to make informed ethical
judgments based on their own experience and
individual maturity, but younger managers require
more direction from the organization if they are to
act ethically. Additionally, younger managers who
have fewer years of experience in the corporate
world may need validation through organization
feedback on their ethical choices.
Finally, a significant relationship exists between IE
and OE, demonstrating an empirical basis for the
concept of ‘‘ethical congruence’’ which would be an
interesting extension of the existing research on value
congruence, ethical climate, and person–organization
fit. For reasons presented in the discussion section, it
may be that these two dimensions (IE and OE)
reinforce each other in organizational settings. For
example, many employees would be hard pressed to
consistently behave ethically in an organization
characterized by a poor ethical climate (or vice versa).
Therefore, to ensure good corporate governance,
organizations should strive to create and reinforce a
good ethical climate through selection and support of
individuals with congruent ethical standards and
ethical decision-making skills. These considerations
are especially important for international business.
Where managerial discretion is high and proximity to
high level corporate decision makers is low, as in an
international posting, the ethical climate of the firm is
particularly vulnerable to forces which can under-
mine standards. In these cases, ethical congruence, the
correspondence between IE and OE, may be an
especially powerful force in ethical decision-making
when employees are posted aboard.
Appendix 1: International vignettes (as
reported in Valentine and Rittenburg, 2004,
pp. 9–10)
Scenario 1
A Korean manufacturer of automobile parts is hav-
ing a difficult time penetrating the U.S. market
for replacement auto parts. The designs of the
555International Decision-Making
U.S.-manufactured parts are superior to those of the
Korean’s.
Action: The Korean firm pays an employee of the
leading U.S. auto parts manufacturer to obtain the
latest design specifications for their products.
Scenario 2
A U.S. project management company is being
systematically outbid on large contracts by an
aggressive Norwegian firm. The Kuwaiti govern-
ment has requested bids on a large harbor project.
Action: Before the U.S. Company submits its bid
on the harbor project, it pays a secretary of the
Norwegian firm for a copy of that firm’s bid.
Scenario 3
Because of a substantial drop in its sales in the
U.S., the C.E.O. of a British auto firm directed its
marketing department to develop a new advertising
campaign. The series of ads that received the most
favorable response from focus groups show the
driver surviving dramatic collisions with a tank, a
locomotive, and an airplane. These results were
achieved only with additional reinforcements to
the door panels, roof, and fire wall.
Action: The C.E.O. decides to run the ads in the
U.S. without disclosing that the autos in the ads have
been altered for dramatic effect.
Scenario 4
Despite a line of superior products, a major U.S.
manufacturer of tools is having an extremely difficult
time gaining a foothold in the Japanese market.
Customs officials arbitrarily reject products and
major distributors are unwilling to enter contracts
with the firm. The Japanese government has let it be
known that a substantial contribution to their
political party could alter the way the manufacturer’s
products are perceived.
Action: The manufacturer decides to make a
contribution of $200,000 to the ruling party.
Scenario 5
A major Argentinean exporter of beef has recently
run into problems with the U.S. government over
beef being shipped to the U.S. which have been
fed an unapproved growth hormone. Future
shipments will be banned unless expensive labo-
ratory tests are run on each animal and each animal
is certified free of this particular growth hormone.
The costs for such tests could run up to $500,000
per shipment.
Action: The exporter finds a U.S. lab willing to
issue a certificate for each animal, although tests are
run on only a limited number. The exporter pays the
lab $100,000.
Scenario 6
A Singaporean drug company produces and markets
in Singapore and the United States a drug that is the
only known cure for glaucoma. Recent research by a
Singaporean government laboratory strongly indi-
cates that the drug produces malignant hypertension
resulting in strokes in a number of cases. The
Singaporean government has banned the drug for
use in Singapore.
Action: The drug company continues to market
the drug in the United States where it is still
legal.
Scenario 7
A U.S. electronics manufacturer uses a chemical
solvent in its production process which results in
birth defects when pregnant workers are exposed to
it. Ban of the use of this chemical in the U.S. is
inevitable. An economic analysis by an outside
consultant indicates that it will cost three times as
much for the manufacturer to convert the produc-
tion process to the use of a non-toxic chemical as to
relocate its plant to Malaysia, where no ban on the
chemical is anticipated.
Action: The electronics manufacturer decides to
relocate the plant in Malaysia.
556 B. Elango et al.
Question Mean Standard
deviation
1. Maximizing profits should be the single most important goal of inter-
national business operations
3.01 1.25
2. I would probably quit a company that I felt was unethical in the way they
sold and promoted their products in international markets
3.26 0.89
3. We have a long way to go before companies routinely take host countries 3.95 1.08
4. I am not concerned about the decisions my company makes in other
countries, when I know that I can do nothing to change them
3.14 0.75
5. The problems of local host countries should be important problems for
business to help solve even if there is no immediate rewards for the business
3.73 1.08
6. Activities of foreign business subsidiaries should be mostly under the
control of headquarters
3.61 0.98
7. One should not be critical of foreign business operations of our home
country companies
2.99 1.12
8. There is no real reason to worry about the social effects on the ‘legitimate
business activities’ by company operations in other countries
3.65 1.09
9. It is the proper role of government to make regulations involving the
operations of foreign plants
3.89 1.11
10. I often wonder if we are treating our stakeholders (e.g., employees, local
citizens) fairly in our overseas factories and plants
3.29 1.25
11. I do not understand people who argue for human rights in other parts of
the world. After all, we are doing them a favor by locating our plant in poor
countries
3.43 1.14
12. It is probably best for our society if human rights organizations take up
the cause of disfranchised people in other countries instead of companies,
governments and the public
3.96 1.23
13. In the long run, there is nothing wrong with using the ‘‘buyer beware’’
concept as a guiding philosophy in one’s operations in other countries
2.63 0.97
14. There is nothing wrong with a company underreporting occasional
‘‘accidental deaths’’ in its overseas factories
3.23 1.03
15. Company product standards in foreign markets can be lower than what
they are in home markets, as long as it does not break the local law
4.57 0.77
16. It is not proper to distort evidence about a company’s operations in
other countries
3.09 1.32
17. Generally speaking, I think consumers who protest and stop buying a
company’s product due to its actions in some other country are not being
fair
4.00 1.30
18. I feel that a company’s only major responsibility is to its shareholders 3.78 1.17
19. I do not feel a company should interfere with human resources practices
in its supplier plants
3.64 1.21
20. Maximizing profits should be the single most important goal of inter-
national business operations
3.64 1.17
21. A good host country government is someone who is on our side 3.36 1.18
22. The main reason a company should actively take care of its image in
other countries is that it allows us to make money in those countries
3.30 1.25
Appendix 2: Descriptive statistics, N = 102. Attitudes toward international business ethics:
modified from Peters (1972)
557International Decision-Making
Appendix 3: Corporate ethics – descriptive
statistics, N = 102 (adapted from Hunt et al.,
1989)
Question Mean Standard
deviation
1. Managers in my company
often engage in behaviors that I
consider to be unethical
3.93 1.38
2. In order to succeed in my
company, it is often necessary to
compromise one’s ethics
4.25 1.14
3. Top management in my
company has let it be known in
no uncertain terms that unethical
behaviors will not be tolerated
3.74 1.33
4. If a manager in my company is
discovered to have engaged in
unethical behavior that results
primarily in personal gain (rather
than corporate gain), he or she
will be promptly reprimanded
3.64 1.48
5. If a manager in my company is
discovered to have engaged in
unethical behavior that results
primarily in corporate gain (ra-
ther than personal gain), he or
she will be promptly repri-
manded
3.90 1.35
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B. Elango
College of Business,
Illinois State University,
Normal, IL, U.S.A.
E-mail: elango@ilstu.edu
Karen Paul and Sumit K. Kundu
College of Business Administration,
Florida International University,
Miami, FL, U.S.A.
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Shishir K. Paudel
School of Management,
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E-mail: spaudel1@binghamton.edu
561International Decision-Making
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reference/87697180
Ethical Organisational Culture as a Context for Managers’
Personal Work Goals
Mari Huhtala • Taru Feldt • Katriina Hyvönen •
Saija Mauno
Received: 25 March 2011 / Accepted: 4 May 2012 / Published online: 19 May 2012
� Springer Science+Business Media B.V. 2012
Abstract The aims of this study were to investigate what
kinds of personal work goals managers have and whether
ethical organisational culture is related to these goals. The
sample consisted of 811 Finnish managers from different
organisations, in middle and upper management levels,
aged 25–68 years. Eight work-related goal content cate-
gories were found based on the managers self-reported
goals: (1) organisational goals (35.4 %), (2) competence
goals (26.1 %), (3) well-being goals (12.1 %), (4) career-
ending goals (7.3 %), (5) progression goals (6.8 %), (6)
prestige/influence goals (4.2 %), (7) job change goals
(4.2 %) and (8) employment contract goals (3.9 %). Ethi-
cal organisational culture operated as a context for personal
goal setting: Those managers who evaluated their organi-
sational culture as more ethical were more likely to report
organisational goals (e.g. goals toward the success or per-
formance of the organisation). However, if managers gave
lower ratings regarding ethical culture, then they named
job change and career-ending goals in more cases. There-
fore, investing into ethical virtues of the organisational
culture can promote managers’ personal work goals, which
also benefit the organisation.
Keywords Corporate ethical virtues � Ethical culture �
Personal work goals � Managers
Introduction
Ethical organisational culture has received growing interest
in business ethics research. It has been recognised that
besides ‘getting the job done’, it is also important how it
gets done and that valuing ethical practices can be a sig-
nificant asset to the organisation. It is also important to
acknowledge that even good employees can make unethi-
cal choices if their environment does not emphasise ethical
values and pressures them to fulfil short-term financial
goals at any cost (Ethics Resource Center 2010). When
ethical values and practices are implemented in the orga-
nisation, employees feel engaged and committed to the
organisation, and they feel less pressure to compromise the
organisation’s standards (Ethics Resource Center 2010;
Huhtala et al. 2011). Ethical culture plays an important role
in directing organisational behaviour (Treviño et al. 1998),
and can influence employees’ self-set aspirations within the
work context (i.e. personal work goals) as we propose in
this present study.
Our objective was to study how ethical organisational
culture is related to managers’ personal work goals.
Drawing from research literature on ethical culture and
personal goals, we examined how the existence of nor-
mative ethical virtues in an organisation is associated with
the contents of personal work goals. As we already know,
ethical culture plays a significant role in supporting well-
being at work (Huhtala et al. 2011). Promoting ethical
virtues in an organisation is associated with lower ethical
strain (less ethical dilemmas and less stress due to these
dilemmas), lower emotional exhaustion (a core dimension
M. Huhtala (&) � T. Feldt � K. Hyvönen � S. Mauno
Department of Psychology, University of Jyväskylä,
P.O. Box 35, 40014 Jyväskylä, Finland
e-mail: mari.huhtala@jyu.fi
T. Feldt
e-mail: taru.feldt@jyu.fi
K. Hyvönen
e-mail: katriina.hyvonen@jyu.fi
S. Mauno
e-mail: saija.mauno@jyu.fi
123
J Bus Ethics (2013) 114:265–282
DOI 10.1007/s10551-012-1346-y
of burnout) and higher work engagement (Huhtala et al.
2011). Therefore, investing into organisational ethics can
be a way of creating better working environments that
support occupational well-being. Personal work goals, in
turn, are of importance both in terms of the well-being of
the individual (Hyvönen et al. 2009) and for organisational
functioning. For example, goal attainability can contribute
to job satisfaction and organisational commitment (Maier
and Brunstein 2001). Organisations may influence the
behaviour of their employees by identifying and appro-
priately supporting their important work goals and can
thereby avoid negative outcomes such as low performance
and low productivity (Harpaz 1990).
We expect that the findings of the present study enrich
the knowledge about the effects of ethical organisational
culture, especially in respect to how ethical virtues may
promote the selection of certain work goals. Even though
business ethics research has studied different connections
between organisational ethics and individual outcomes
(e.g. job satisfaction, stress, job performance), to the best of
our knowledge, there have been no previous studies on the
relationships between managers’ personal work goals and
ethical organisational culture. Moreover, we are using a
multidimensional scale for assessing the ethical culture
(Kaptein 2008), which gives a more wide-ranging under-
standing of the culture–goal connection. One important
contribution of this research stems from the method used to
evaluate the proposed association: We combine qualitative
with quantitative data analysis in examining these con-
nections. This mixed methods approach enables looking at
the contents of work goals in a person-oriented way instead
of solely by considering predefined goal taxonomies or
goal appraisals, which have often been used in goal
research (for a review, see Austin and Vancouver 1996).
Moreover, this study generates new information about what
kinds of goals managers are pursuing at different ages and
managerial levels, utilising a large sample of 811 manag-
ers. As managers are in key position in implementing
ethical culture (Brown and Trevinõ 2006; Huhtala et al., in
press), their personal work goals can have an impact on the
whole organisation. Therefore, the culture–goal connection
among managers is an important area of investigation.
Theoretical Foundation and Hypotheses Development
Ethical Organisational Culture
Research on ethical culture commenced with defining the
construct of ethical culture (Treviño 1986, 1990), which
established it as a phenomenon distinct from ethical cli-
mate (Treviño et al. 1998). Ethical culture can be consid-
ered as a subset of organisational culture, with formal (e.g.
codes of ethics, reward systems) and informal (e.g. peer
behaviour, ethical norms) systems that can promote either
ethical or unethical behaviour (Treviño 1990). The opera-
tionalisation of ethical culture has progressed from a one-
dimensional construct (Treviño et al. 1998) to specifying
its different subdimensions (Kaptein 2008). The latter
model, described more specifically in the following sec-
tion, is applied in the present study.
Kaptein’s (2008) model distinguishes eight normative
virtues that can promote ethical behaviour in an organisa-
tion: (1) clarity, concrete and understandable expectations
regarding the conduct of employees; (2) congruency of
supervisors, the extent to which supervisors show a good
example in terms of ethics; (3) congruency of senior
management, the extent to which the senior management
behaves in accordance with ethical expectations; (4) fea-
sibility, conditions created by the organisation to enable
employees to comply with normative expectations; (5)
supportability, the extent to which the organisation sup-
ports ethical conduct among the management and
employees; (6) transparency, the degree to which mana-
gerial and employee conduct and its consequences are
perceptible; (7) discussability, the opportunity to discuss
ethical issues, such as ethical dilemmas or alleged unethi-
cal behaviour; and (8) sanctionability, the extent of the
enforcement of ethical behaviour through punishment for
behaving unethically and rewards for behaving ethically.
According to this approach, the stronger the presence of
these virtues, the more ethical the organisational culture is
(Kaptein, 2010).
In a previous study (Huhtala et al. 2011), Finnish
managers from technical and commercial business fields
evaluated the culture of their organisations to be quite
ethical (M = 4.37, on a scale ranging from 1 to 6). Of the
eight virtues presented above, clarity received the highest
evaluation (M = 4.68), whereas supportability received the
lowest overall score (M = 3.92). These results show that,
on average, Finnish managers perceived their organisations
to follow ethical virtues; a finding, which could also reflect
the results of a previous study, suggesting that managers
might express a more positive view of the ethical quality of
their organisation and experience fewer perceived failures
of corporate ethics than do non-managers (Kaptein and
Van Dalen 2000).
Several studies have shed light on the impact ethical
culture can have on an organisation. One evident rela-
tionship has been found between ethical culture and
(un)ethical behaviour: The stronger the ethical culture of an
organisation, the lesser the unethical behaviour was
observed within it (Treviño et al. 1998). Ethical culture can
increase positive ethics-related attitudes and behaviours,
and employees’ perception that the company’s actions are
consistent with its policies has been found to be of
266 M. Huhtala et al.
123
importance in supporting ethical behaviour (Treviño et al.
1999). Ethical culture can also influence ethical behaviour
by modifying personal values within the organisation
(Douglas et al. 2001).
Kaptein (2009) studied the relationship between com-
ponents of ethics programmes and ethical culture. Results
showed that the cultural dimension of clarity had the most
positive and significant relationship with the components
of ethics programmes, whereas feasibility and support-
ability showed no significant associations with ethics pro-
grammes. He has also established (Kaptein 2011) that the
ethical culture of an organisation is important in encour-
aging a positive response to observed wrongdoing among
employees, i.e. confronting the wrongdoer(s), reporting to
management or calling an internal hotline instead of
showing inaction or resorting to external whistleblowing.
Especially clarity, supportability, discussability and sanc-
tionability were relevant in supporting positive actions
after observed wrongdoing.
Ethical organisational culture is also found to have an
influence on organisational commitment: if the culture was
perceived as ethical, then employees were more committed
to the organisation (Treviño et al. 1998, 2006; Valentine
et al. 2002). Furthermore, Huhtala et al. (2011) found that
ethical culture was associated with occupational well-
being. If managers evaluated their organisation’s culture as
being ethical, then they reported less experiences of ethical
strain which, in turn, was associated with lower emotional
exhaustion. Ethical culture also directly contributed to
higher work engagement. However, the dimension of fea-
sibility had a distinctive nature compared to the seven other
factors: it had the strongest direct effect on emotional
exhaustion. That is, if feasibility was evaluated as being
lower, then it was associated with higher emotional
exhaustion. Therefore, if the actual possibilities for acting
according to ethical norms and expectations are lacking,
then this can be associated with feelings of being emo-
tionally overextended and exhausted by one’s work.
No studies have, however, investigated the associations
between ethical organisational culture and personal work
goals, which is the main aim of the present study. We
reason that personal work goals may constitute one
mediating mechanism between ethical organisational cul-
ture and employee or organisational outcomes such as
commitment and well-being (see, e.g. Hyvönen et al.
2010). This linkage and its theoretical underpinnings are
described next.
Personal Work Goals
In this study, we apply Little’s (2007) social ecological
model of adaptation and well-being, where goals are rep-
resented as personal projects. Personal projects refer to an
individual’s intentional actions, which can vary from
immediate goals to life-long plans, and which are sensitive
to contextual features (Little 2007). Our focus is on per-
sonal projects in the work domain, specifically work- and
career-related goals among managers. At work, individual
pursuits are directed towards other organisational mem-
bers, groups and the organisation as a whole (Grant et al.
2007), and personal projects are influenced by the contexts
in which they take place (Little 2000). We adopted this
starting point and examined managers’ personal work goals
in the context of ethical organisational culture. Personal
work goals are significant from the perspective of both the
individual and the whole organisation, since personal work
goals guide the behavioural orientations of an individual
(Pomaki et al. 2004). Personal work goals are also asso-
ciated with occupational well-being (Hyvönen et al. 2009,
2010), and employees who perceive their work environ-
ment as being supportive of their goal attainment report
positive job attitudes in more cases (Maier and Brunstein
2001; ter Doest et al. 2006), show more commitment to the
organisation (Meyer and Allen 1997), and report better
well-being (ter Doest et al. 2006).
Personal projects or goals can also be conceptualised
within the life span context (Freund 2007). Looking at the
personal work goals among young managers, Hyvönen
et al. (2009) found seven content categories (in descending
order of size): competence goals, progression goals, well-
being goals, job change goals, job security goals, organi-
sational goals and financial goals. The sample of the study
consisted of 747 young managers (23–35 years of age) who
mostly represented middle and lower management levels,
while only 8.5 % of participants were in upper manage-
ment. As expected, the goals reflected the vocational
development stage relevant to the primary age group,
namely, the career establishment stage (Hyvönen et al.
2009). Particularly, competence goals and progression
goals are related to career establishment tasks; these two
categories together were composed of over half of the
participants (54.2 %). In comparison, only 5.6 % of the
named goals related to the success or performance of the
organisation. A 2-year follow-up study with the same
participants (Hyvönen 2011; Hyvönen et al. 2011) showed
that personal work goals were dynamic, as the majority of
the participants (67 %) had changed their most important
goal during that period. With increasing work experience
and career progression, the number of participants who
mentioned organisational goals almost doubled during the
follow-up period (Hyvönen 2011; Hyvönen et al. 2011).
The result reflects the ongoing negotiation in respect to the
opportunities and demands of life contexts, as well as
changes in goals across the life span reflecting the age-
graded developmental tasks. These results were the starting
point for our analysis, focusing on the contents of personal
Ethical Culture and Work Goals 267
123
work goals as an outcome of organisational ethical culture.
The managers in the current study had more diverse
backgrounds, age distribution was broader, they repre-
sented higher management levels more commonly, and
more had a higher education than the young managers in
the study by Hyvönen et al. (2009). Therefore, also some
divergent goal categories might emerge in this study. In
relation to goal content, we hypothesise:
H1 The categories of competence, progression, well-
being, job change, job security, organisational, and finan-
cial goals will be found from the managers’ personal work
goals. Due to the sample properties, we expect that new
goal categories might also be found.
In the study on young managers (Hyvönen et al. 2009),
upper-level managers were more likely to focus on
organisational goals (i.e. the success and performance of
the organisation), whereas lower-level managers were
more likely to prioritise job security goals (i.e. receiving a
permanent contract and continuation of employment). As
mentioned earlier, we studied a large and heterogeneous
sample of managers representing different ages and man-
agerial levels. Considering these findings, we viewed it as
important to also analyse the potential differences in goal
contents according to age, gender and managerial level.
Only a few studies have looked at the differences in work
goals in relation to individual factors. A comparison study
between Canadian and Chinese business students (Bu and
McKeen 2001) showed some significant gender differ-
ences regarding the importance of work goals, measured
with preset goal taxonomy. Namely, women assigned
more importance to the work goals related to balanced
living, moral congruence and simplicity/routine, than did
men. Another study (Harpaz 1990) investigated differ-
ences in the importance of certain work goals between
three organisational levels, between men and women, and
among three age categories. From the preset goal taxon-
omy, the employees, the supervisors and the managers
ranked ‘interesting work’ to be the most important. ‘Good
pay’ was ranked second highest by employees and
supervisors, but only fifth by managers. Gender differ-
ences emerged to some extent, i.e. men ranked ‘good pay’
higher than women, and a ‘good match between job
requirements and one’s abilities’ was significantly more
important to women. All age groups (B30, 31–50, and
[50) ranked ‘interesting work’ as the most important
goal, and ‘good pay’ as second most important. The facet
of ‘good interpersonal relations’ was more important to
the youngest and oldest age groups, whereas a ‘good
match between job requirements and one’s abilities’ was
more important to the middle age category. In the light of
the previous study results, we posed the following
hypothesis:
H2 Differences in managers’ background factors (age,
gender and managerial level) will emerge in relation to the
personal work goal contents.
Ethical Organisational Culture as a Context
for Personal Work Goals
Several studies have shown that a higher level of organi-
sational ethics is associated positively with different indi-
vidual outcomes, such as job satisfaction and commitment
(see, e.g. Schwepker 2001). These results will be discussed
next, including theoretical frameworks that combine ethi-
cal organisational culture with personal work goals. The
ethical organisational culture can be considered as a
resource for employees and managers. Organisations that
place importance on ethical virtues provide clear norms
and expectations regarding ethical behaviour. This, in turn,
reduces the experiences of psychologically straining con-
flicts, such as ethical dilemmas. Ethical culture has been
found to be associated with less ethical strain, i.e. with a
lower prevalence of ethical dilemmas and less stress caused
by these dilemmas (Huhtala et al. 2011). The same study
showed that ethical culture was related to better occupa-
tional well-being, with higher work engagement and less
emotional exhaustion. It can, therefore, be presumed that
an ethical organisational culture represents a favourable
environment for individual employees, also in regard to
goal setting.
Previous research has shown that the work environment
contributes to the contents of personal work goals (Hyvö-
nen et al. 2010). Hyvönen et al. (2010) analysed the psy-
chosocial demands of the workplace using the effort–
reward imbalance (ERI) model (e.g. Siegrist 1996; Siegrist
et al. 1986, 2004). According to the ERI model (Siegrist
1996), employees invest effort in their work (e.g. overtime
hours, responsibility) and, in turn, expect rewards such as
job security, appreciation, and career opportunities. An
imbalance between efforts spent and rewards received is
seen to represent a straining and even harmful situation for
the employee. In the study by Hyvönen et al. (2010), the
managers who experienced low ERI, having favourable
work conditions, were more likely to have goals geared
towards the performance and success of the organisation.
This could reflect that a reduction of psychosocial stressors
in the workplace leaves resources available that can be
directed towards the managers’ leadership tasks at hand.
On the other hand, managers who experienced their work
environment to be less favourable, with a low rewards and
a high ERI ratio, named well-being goals (e.g. related to
job satisfaction, work stress) and job change goals (e.g.
related to changing job, self-employment) which would
improve their adaptation and occupational well-being
(Hyvönen et al. 2010).
268 M. Huhtala et al.
123
According to the cognitive dissonance theory (first
proposed by Festinger 1942), individuals strive to minimise
dissonance in their environment. An ethical conflict,
resulting from incongruence in ethical values between
employees and their organisation, creates this kind of dis-
sonance, which can cause distress and dissatisfaction with
the situation in the long run (Viswesvaran et al. 1998). This
has a negative effect on job performance (Schwepker 2003)
and is negatively associated with organisational commit-
ment and positively associated with turnover intentions
(Schwepker 1999). Therefore, we hypothesise that man-
agers, who experience their organisation’s culture as
unethical, can experience less commitment to the organi-
sation, which is shown in personal work goals directed
away from the organisation.
Psychological contract offers yet another theoretical
framework, which can be used in explaining the connection
between ethical culture and personal work goals. As
defined by Schein (1980) and Rousseau (1989), psycho-
logical contract is a set of unwritten reciprocal expectations
between an employee and an organisation. Initially, the
theory is based on the social exchange theory (Blau 1964).
As proposed by Sims (1991), ‘if appropriately reinforced
and managed, the ethical requirements of the organisation
can serve as the foundation of a psychological contract
with the organisation providing a culture which encourages
and rewards the ethical behaviour of employees’ (p. 497).
On the other hand, an organisation can be a source of
stress, if the organisation’s code of ethics and conduct
contradict with personal ethical values (Boatright 2003;
Sims and Keon 2000). This discrepancy can lead to a
perceived breach of the psychological contract, which may
result in resigning from the organisation (O’Donohue and
Nelson 2009). In sum, we expect an ethical organisational
culture to promote managers’ psychological contract with
their organisation (i.e. contract fulfilment), which leads to
goals directed towards the organisation, whereas an
unethical culture can associate with job change goals.
Person–Organisation Fit can be defined as ‘the con-
gruency between the norms and values of organisations and
the values of persons’ (Chatman 1989, p. 339). A fit
between personal and organisational ethics is shown to
relate to higher levels of commitment and job satisfaction
and lower levels of turnover intentions (Ambrose et al.
2008). The value congruence between employees and
employers is positively related to job satisfaction, organi-
sational commitment, intent to stay and actual retention
(Chatman 1991; O’Reilly et al. 1991). Corporate ethical
values have been shown to have a positive impact on
person–organisation fit (Andrews et al. 2011), suggesting
that ‘individuals can feel more compatible with organisa-
tions that share their values when these values are ethical’
(p. 13). Coldwell et al. (2008) propose in their exploratory
model that fits between individual ethical orientations and
organisational ethics generate positive attitudes and
behaviours in employees, and vice versa: Misfits between
individual and organisational ethics generate negative
attitudes and behaviours. Accordingly, we assume that
ethical culture promotes goals that are directed towards the
organisation, whereas unethical culture is associated with
non-organisational goals (e.g. job change). Furthermore,
ethics-related actions by senior management and supervi-
sors have a positive bearing on employees’ overall organ-
isational satisfaction (National Business Ethics Survey
2003).
In business ethics research, the ethical work context is
shown to associate with job satisfaction. Koh and Boo
(2001) found that top management support for ethical
behaviour, a favourable ethical climate and a stronger
association between ethical behaviour and career success
were associated with better job satisfaction. Viswesvaran
et al. (1998) showed that if individuals perceive successful
managers in their organisations behave unethically, they
feel less satisfaction in their work. Valentine et al. (2011)
found that perceived corporate ethical values were posi-
tively related with increased job satisfaction, which, in
turn, was associated with decreased turnover intention.
Taken together, these results affirm the notion of ethical
culture as a favourable working environment, which
increases job satisfaction. Therefore, we hypothesise that a
higher ethical culture has a positive connection with
managers’ satisfaction towards their organisation, which is
reflected in personal work goals related to the success of
the organisation.
Based on the above-presented theoretical reasoning, we
represent the following research framework for this study,
suggesting that the ethical culture of an organisation
(measured with the 8D CEV model; Kaptein 2008) is
associated with managers’ personal work goals. If the
organisational culture is unethical, a manager might redi-
rect his/her resources away from the stressful organisation
(which, e.g. can create cognitive dissonance, incongruence
between personal and organisational values, and psycho-
logical contract breach) and pursue goals leading away
from the organisation, such as getting a new job. On the
other hand, ethical culture can promote value congruence
between the individual and the organisation, which has
positive outcomes such as feelings of personal success and
greater concern for stakeholders by managers (Posner et al.
1985). Moreover, compatibility between personal and
organisational values can increase managers’ attachment to
the goals and objectives of their organisation (Posner et al.
1985). Consequently, we expect that the more ethical the
culture of an organisation is, the more likely its managers
are to name organisation-related goals (e.g. goals towards
the success and performance of the organisation) as their
Ethical Culture and Work Goals 269
123
most important personal work goal. In sum, the following
hypotheses are formulated:
H3 An unethical organisational culture is associated with
job change goals.
H4 An unethical organisational culture is associated with
well-being goals.
H5 An ethical organisational culture is associated with
organisational goals.
H6 Congruency of supervisors and of senior management
will be positively related to organisational goals.
Method
Participants and Procedure
The participants in this study consisted of technical and
commercial managers who responded to a questionnaire
study, conducted via post in the autumn of 2009. The
sample (N = 3000) was randomly selected from among the
membership of two Finnish national labour unions (The
Finnish Association of Business School Graduates and The
Finnish Association of Graduate Engineers). In Finland, the
majority of employees (69 %) belong to a labour union
organised on the basis of industry (Ahtiainen 2006) and,
therefore, this sample is relatively representative of the
target group. The surveys, including a postage-paid enve-
lope and covering letter, were sent to home addresses. A
reminder letter was sent to the recipients who did not
respond to the questionnaire after the first contact. Those
recipients who did not belong to the target group (e.g.
unemployed, not in managerial position, retirees) were
asked to send the blank form back with an annotation.
These responses (n = 369) were removed from the original
sample. The attrition analysis showed that the participants
differed only slightly in terms of gender (v2(1) = 6.07,
p \ 0.05) and age (t(1751) = 2.69, p \ 0.01) from the
non-respondents; i.e., there were slightly more women
among the respondents and they were, on average, 1 year
younger than the non-respondents.
Altogether 902 completed questionnaires were returned,
yielding a response rate of 34.3 % (see further sample
details in study by Huhtala et al. 2011). In the present
study, the sample consisted of the managers who responded
to the question about personal work goals (n = 811). The
average age of the participants was 46.32, ranging from 25
to 68 years of age (SD = 9.22), and 69.2 % (n = 561)
were men. Of the participants, 13.8 % were in upper
management, 33.5 % in management, 35.9 % in upper
middle management and 16.8 % in lower middle man-
agement. The majority of the participants were working in
the private sector (81.4 %) and almost all had a permanent
employment contract (98.4 %). The participants repre-
sented different types of business: industry (40.3 %),
information processing (14.8 %), real estate and rentals
(12.1 %), service and trade (7.3 %), financing and insur-
ance (7.2 %), public administration (7.2 %), education
(2.1 %) and others (9.0 %), e.g. health care, public rela-
tions and public transport. The educational level of the
sample was high, since 90 % had an academic degree.
Attrition analyses comparing the participants that
responded to the work goal question (n = 811) with those
who did not mention a personal work goal (n = 91)
showed that there were no differences between them in
terms of age, t(900) = 0.74, ns; gender, v2(1) = 1.20, ns;
managerial level, v2(3) = 0.59, ns; employment contract,
v2(2) = 0.35, ns; line of business, v2(7) = 9.26, ns; or
education level, v2(2) = 0.82, ns.
Measures
Personal work goals were enquired about with an open-
ended request: ‘Write down your most important personal
goal that relates to your work or career’ (see Hyvönen et al.
2009; Salmela-Aro 2002). The request was followed by
four empty rows and the written answers were classified
based on categories from a previous study (Hyvönen et al.
2009) and a data-driven qualitative analysis (Creswell and
Plano Clark 2007) that also allowed new categories to
emerge from the data.
Ethical organisational culture was measured using the
58-item corporate ethical virtues (CEV) questionnaire
(Kaptein 2008). The scale was first translated from Dutch
to Finnish and later back-translated to Dutch by two
independent authorised translators. The back-translation
was revised with minor changes and approved by the ori-
ginal author (see Huhtala et al. 2011). The scale includes
eight dimensions: clarity (10 items, e.g. ‘The organisation
makes it sufficiently clear to me how I should obtain proper
authorisations’); congruency of supervisors (6 items, e.g.
‘My supervisor sets a good example in terms of ethical
behaviour’); congruency of senior management (4 items,
e.g. ‘The conduct of the Board and (senior) management
reflects a shared set of norms and values’); feasibility (6
items, e.g. ‘I have insufficient time at my disposal to carry
out my tasks responsibly’); supportability (6 items, e.g. ‘In
my immediate working environment, an atmosphere of
mutual trust prevails’); transparency (7 items, e.g. ‘If a
colleague does something which is not permitted, my
manager will find out about it’); discussability (10 items,
e.g. ‘In my immediate working environment, there is
adequate scope to discuss unethical conduct’); and sanc-
tionability (9 items, e.g. ‘In my immediate working envi-
ronment, ethical conduct is rewarded’). Participants rated
270 M. Huhtala et al.
123
these items on a Likert scale from 1 (strongly disagree) to 6
(strongly agree). Except for the reversely scored items of
the feasibility dimension, a higher score (from a range of 1
to 6) refers to a higher level of ethicality in each dimension.
In addition, a total score (range 1–6) reflecting the CEV
was formed by summing up all the dimensions as one. The
construct validity of the scale has been found to be reliable
both for Dutch employees (Kaptein 2008) and Finnish
managers (Huhtala et al. 2011). That is, eight correlating
factors representing the dimensions of ethical culture were
found to fit these data.
Background variables included gender (male/female),
age (in years) and managerial level (upper management/
management/upper middle management/lower middle
management). First, differences in the background vari-
ables were investigated in all the goal categories, and in
subsequent analyses they were used as covariates.
The correlations between study variables and the reli-
abilities of the CEV subscales are presented in Table 1. The
negative correlations between the feasibility factor and other
CEV factors are due to the reversed scores of that subscale.
Gender shared significant correlations with all the CEV
factors except for clarity and congruency of supervisors; i.e.
women reported there being a lower ethical culture in their
organisation than men. Age had a significant negative cor-
relation only with feasibility, indicating that younger man-
agers experienced fewer possibilities to act according to
normative expectations. Managerial level associated with
the experienced ethical culture (for all factors except con-
gruency of supervisors). Upper-level managers gave con-
sistently better evaluations of their organisation’s ethical
culture than did middle-level managers. The correlations
between management level, age and gender showed that the
management level was negatively associated with age
(upper-level managers being on average older than middle-
level managers) and positively associated with gender
(upper managers being more often men than women).
Results
Contents of Personal Work Goals
The participants’ responses were approached using cate-
gories from a previous study (Hyvönen et al. 2009) com-
bined with a data-driven qualitative analysis (Creswell and
Plano Clark 2007). The first step in analysing the contents
of the personal work goals was to thematically categorise
the written answers. If the participant mentioned more than
one goal, only the first goal was included in the analysis.
This was done to ensure that each participant could belong
to only one content category. Three coders went through
the data independently, applying the categories by
Hyvönen et al. (2009) and also allowing new themes to
emerge from the data. After the preliminary categorisation,
the coders met and compared their classifications with each
other. As a conclusion of this discussion, the coders agreed
on the thematic categories and coded the participants’
responses according to these classifications. At this point, a
fourth coder, operating as a goal researcher and who was
not included in the previous classification process, classi-
fied the data using the same categories. The inter-rater
reliability between the categories agreed on by the first
three coders and the fourth coder was measured using the
Cohen’s kappa coefficient. The result (j = .83) showed an
excellent strength of agreement (Landis and Koch 1977)
between the coders. Differing categories (goals that resul-
ted in uncertainty as to which would be the most suitable
content category) were specified with an additional coding
by a researcher specialising in goal research. The final
categories were also presented to and validated by two
external auditors who work as adjunct professors of
Occupational Psychology.
The following content categories were found (listed in a
descending order of size): 1. organisational goals; 2.
competence goals; 3. well-being goals; 4. career-ending
goals; 5. progression goals; 6. prestige/influence goals; 7.
job change goals; and 8. employment contract goals (see
Table 2). As expected in hypothesis H1, similar categories
were found as in the study by Hyvönen et al. (2009). In
addition, further supporting H1, two new categories
emerged from the data: career-ending goals, and prestige/
influence goals. The two smallest categories from the
preliminary categorisation, financial goals (e.g. receiving a
pay rise) and job security goals (e.g. receiving a permanent
contract), were combined into the category of employment
contract goals.
We conducted v2 tests to examine the relationships
between the background variables and personal work goal
categories (see Table 3). As hypothesised (H2), differences
in the background variables emerged. Gender differences
were significant in only two of the goal categories. Men
were overrepresented in the career-ending category,
whereas women were overrepresented in the competence
category. Upper-level managers were overrepresented in
the categories including organisational goals and prestige/
influence goals, and underrepresented in the competence
goal category. The participants in upper middle manage-
ment were underrepresented in the category of organisa-
tional goals, and overrepresented in the job change
category. Lower-level managers, in turn, were overrepre-
sented in the competence category. We also looked at the
age differences between the goal categories using analyses
of variance (ANOVAs). The result (Table 4) showed sig-
nificant differences, again supporting the hypothesis H2:
The managers with career-ending goals were the oldest on
Ethical Culture and Work Goals 271
123
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272 M. Huhtala et al.
123
average, whereas managers who named progression goals
were the youngest, both in comparison to managers in all
other goal categories. Thus, taken together, the results
showed that goals varied with gender, age and managerial
level.
Ethical Culture and Personal Work Goals
Analysis of covariance (ANCOVA, univariate general
linear model) was applied to gain descriptive information
about how CEV is evaluated in the goal categories. We
Table 2 The personal work goal categories, descriptions of contents and examples of goals named by the managers (N = 811)
Personal work
goal categories
% (n) Descriptions of contents Examples of personal work goals
1. Organisation 35.4 (287) The success or performance of the organisation
or department
‘To be able to maintain the continuous development and goal
achievement of the organisation’; ‘Organise the assignments
in my own department and increase productivity’; and
‘Stabilise the functioning of a new office’
2. Competence 26.1 (212) Job performance, professional development, and
starting or finishing training
‘Good quality of work’; ‘To improve as a supervisor’; and
‘Take a MBA degree’
3. Well-being 12.1 (98) Health, work satisfaction, and work-life balance ‘What I gain from my work is more than I invest into it’;
‘Work is fun and rewarding’; and ‘To combine work and
free time’
4. Career-
ending
7.3 (59) Finishing off one’s career and retiring ‘To finish off duties at least at 55 years’; ‘To retire healthy and
brisk’; and ‘To have a reasonable job for another ten years
and then retire’
5. Progression 6.8 (55) Advancing to a higher position and promotion ‘To become a shareholder in our company’; ‘Advance into
duties, where I can use all of my skills’; ‘Progress in the
hierarchy to the next level’
6. Prestige/
influence
4.2 (34) Receive appreciation of work and influence in a
societal level
‘To feel that my work is appreciated’; ‘Run the assignment
with success and receive external recognition’; and ‘To get
our way of action universally accepted and respected in our
field = to change the world’
7. Job change 4.2 (34) A change in career either by changing
organisation, position or professional field, or
by setting up a company
‘To find a new assignment or fundamentally change the
present job description’; ‘Move on to completely different
tasks in another organisation’; and ‘Own entrepreneurship’
8. Employment
contract
3.9 (32) Receiving regular salary and pay rise, or
receiving a permanent contract and
continuation of employment
‘Better compensation for the job done’; ‘To get better pay’;
and ‘To maintain my work’
Table 3 Differences in significant background variables between the personal work goal categories (N = 811)
Background
variables
Organisation
(n = 287)
Competence
(n = 212)
Well-
being
(n = 98)
Career-
ending
(n = 59)
Progression
(n = 55)
Prestige/
influence
(n = 34)
Job
change
(n = 34)
Employment
contract
(n = 32)
v2 test
Gender
Male 207 127
AT
65 51
T
38 23 22 28 23.73**
Female 80 85
T
33 8
AT
17 11 12 4
Managerial level
Upper
management
66
T
14
AT
10 6 3 9
T
1 3 66.01***
Management 99 71 36 20 18 13 6
AT
9
Upper
middle
management
87
AT
77 37 26 25 10 18
T
11
Lower
middle
management
35
AT
50
T
15 7 9 2 9 9
T typical, AT atypical, adjusted residual [ |2|
** p \ 0.01, *** p \ 0.001
Ethical Culture and Work Goals 273
123
examined the differences between the categories in regard
to ethical culture and its eight subdimensions (mean sum
scores from all subscales as dependent variables) when the
effects of the background variables (gender, age, and
managerial level as covariates) are removed from the
model. The results from the ANCOVAs, as shown in
Table 5, indicated that the content categories of work goals
had a significant main effect on appraisals of ethical culture
as a whole and on most of its subdimensions (congruency
of supervisors and senior management, supportability,
transparency, and discussability). Pairwise comparisons
showed that both job change goals and career-ending goals
(i.e. goals not related to the organisation) were associated
with lower ethical culture than were organisational goals,
whereas competence goals and prestige/influence goals
were associated with a higher ethical culture than were
career-ending goals.
The results regarding the individual factors of CEV
yielded somewhat similar results. Organisational goals
were associated with a higher congruency of supervisors
than were career-ending goals, job change goals or
employment contract goals. In addition, participants with
competence goals rated the congruency of supervisors
higher than did participants with career-ending goals. The
congruency of senior management got lower evaluations
among the participants with career-ending goals compared
to the participants with organisational, competence, well-
being or prestige/influence goals, as well as among par-
ticipants with employment contract goals compared to
participants with organisational or prestige/influence goals.
Supportability was rated higher by participants with
organisational goals than by those with career-ending,
progression or job change goals. Transparency was per-
ceived to be higher among participants in goal categories
including organisational, competence, well-being and
prestige/influence goals, when compared to job change
goals. Finally, discussability was rated higher among par-
ticipants with organisational, competence and well-being
goals when compared to participants with career-ending
goals, and higher in the prestige/influence goal category
than in any other categories. As these descriptive results
showed that the evaluations of ethical culture vary in the
different goal categories, we proceeded to investigate
whether the membership in each goal category could be
predicted based on the evaluations of the ethical culture.
Ethical Culture as a Predictor of the Membership
in Goal Categories
We conducted a multinomial regression analysis using the
Mplus 5.21 programme (Muthén and Muthén 1998–2007)
to predict the membership in different goal categories
based on the evaluations of ethical culture. To do this, weT
a
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5
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5
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8
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1
[
2
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3
,
5
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1
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–
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1
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8
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o
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p
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ri
so
n
s
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*
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p
\
0
.0
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1
274 M. Huhtala et al.
123
T
a
b
le
5
T
h
e
re
su
lt
s
o
f
A
N
C
O
V
A
a
n
a
ly
se
s
fo
r
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th
ic
a
l
c
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lt
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in
th
e
p
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o
n
a
l
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g
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(g
e
n
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a
g
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a
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m
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g
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ri
a
l
le
v
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c
o
n
tr
o
ll
e
d
fo
r,
N
=
8
1
1
)
E
th
ic
a
l
c
u
lt
u
re
(r
a
n
g
e
1
–
6
)
M
(S
E
)
F
te
st
P
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ir
w
is
e
c
o
m
p
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ri
so
n
sa
P
a
rt
ia
l
g
2
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rg
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n
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ti
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n
(n
=
2
8
7
)
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(n
=
2
1
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ll
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(n
=
9
8
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(n
=
5
9
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ro
g
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ss
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n
(n
=
5
5
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re
st
ig
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/
in
fl
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(n
=
3
4
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b
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=
3
4
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4
\
1
,
2
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3
6
[
1
,
2
,
3
,
4
,
5
,
7
,
8
0
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S
A
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4
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5
(0
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s
0
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C
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c
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rp
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ra
te
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th
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v
ir
tu
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s
(t
o
ta
l
C
E
V
sc
a
le
),
C
L
A
R
c
la
ri
ty
,
C
O
S
U
c
o
n
g
ru
e
n
c
y
o
f
su
p
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rv
is
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rs
,
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c
o
n
g
ru
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n
c
y
o
f
se
n
io
r
m
a
n
a
g
e
m
e
n
t,
F
E
A
S
fe
a
si
b
il
it
y
,
S
U
P
P
su
p
p
o
rt
a
b
il
it
y
,
T
R
A
N
tr
a
n
sp
a
re
n
c
y
,
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IS
C
d
is
c
u
ss
a
b
il
it
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,
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A
N
C
sa
n
c
ti
o
n
a
b
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L
S
D
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ri
so
n
s
*
p
\
0
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5
,
*
*
p
\
0
.0
1
Ethical Culture and Work Goals 275
123
used mixture modelling with known latent classes for the
goal categories, and a maximum likelihood estimator with
a test for robust standard errors (MLR). Background vari-
ables (gender, age and managerial level) were controlled
for in the model. In a previous study (Huhtala et al. 2011),
all the eight factors of the CEV scale were shown to be
highly correlated, and a confirmatory analysis showed that
these correlations can be explained with the higher-order
factor of ethical culture. Therefore, in the present study,
eight individual factors were used to define a second-order
factor of ethical culture, which then predicted the mem-
bership in the eight goal categories of personal work goals.
We used the saved factor scores from the confirmatory
factor analysis of the CEV scale to estimate error-free beta
coefficients between the latent factors in the model, thus
yielding more reliable results than in the case of using
observed variables (i.e. sum scores of the CEV scales).
Missing values were processed with the general missing-
type procedure available in the programme.
We chose two reference groups to represent the antip-
odes of ethical culture, based on the CEV scores that
resulted from the ANCOVAs of the goal categories. First,
we chose the goal category of organisational goals as a
reference group based on a high CEV score and the large
size of that category. The prestige/influence category had
the highest CEV mean score, but as this group had only 34
participants we selected organisational goals with the sec-
ond highest CEV mean score and largest size (n = 287).
Previous studies have also shown that the category com-
posed of organisational goals was the most favourable in
terms of occupational well-being (Hyvönen et al. 2009,
2010). The second reference group, career-ending goals,
was selected based on the lowest CEV score.
The mixture modelling, with the ethical culture of the
organisation as a predictor of participants’ membership in
the goal categories, showed significant associations. When
compared with organisational goals, lower ratings of ethi-
cal culture were associated with an increased likelihood of
naming career-ending goals (b = -0.73, p \ 0.05), pro-
gression goals (b = -0.61, p \ 0.05), and job change
goals (b = -0.71, p \ 0.05). Thus, the last finding gave
support to hypothesis H3, but the hypothesis H4 was
rejected. As can be seen in the odds ratios (Table 6), if
ethical culture decreased by 1 SD, then the participant was
more likely to name career-ending goals (OR 0.48, 95 %
CI 0.27–0.87), progression goals (OR 0.54, 95 % CI
0.32–0.93), and job change goals (OR 0.49, 95 % CI
0.25–0.98) than organisational goals. From the individual
CEV factors, low congruency of supervisors and senior
management, and low supportability predicted naming
career-ending goals and job change goals. In addition, low
discussability was associated with career-ending goals, and
low transparency with job change goals. Congruency ofT
a
b
le
6
T
h
e
re
su
lt
s
o
f
m
u
lt
in
o
m
ia
l
re
g
re
ss
io
n
a
n
a
ly
se
s
(w
it
h
o
rg
a
n
is
a
ti
o
n
a
l
g
o
a
ls
a
s
th
e
re
fe
re
n
c
e
c
a
te
g
o
ry
,
n
=
2
8
7
)
E
th
ic
a
l
c
u
lt
u
re
O
R
(9
5
%
C
I)
C
o
m
p
e
te
n
c
e
(n
=
2
1
2
)
W
e
ll
-b
e
in
g
(n
=
9
8
)
C
a
re
e
r-
e
n
d
in
g
(n
=
5
9
)
P
ro
g
re
ss
io
n
(n
=
5
5
)
P
re
st
ig
e
/i
n
fl
u
e
n
c
e
(n
=
3
4
)
Jo
b
c
h
a
n
g
e
(n
=
3
4
)
E
m
p
lo
y
m
e
n
t
c
o
n
tr
a
c
t
(n
=
3
2
)
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E
V
0
.8
7
(0
.6
0
,
1
.2
5
)
0
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3
(0
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1
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*
(0
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,
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7
)
0
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*
(0
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,
0
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3
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1
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(0
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(0
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(0
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(0
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0
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0
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3
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R
A
N
1
.0
6
(0
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1
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1
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6
(0
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2
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2
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0
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(0
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9
,
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0
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4
(0
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9
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1
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0
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D
IS
C
0
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3
(0
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5
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(0
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1
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4
(0
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A
N
C
0
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7
(0
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1
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1
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(0
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6
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0
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(0
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8
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1
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0
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0
(0
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4
,
1
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0
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O
R
o
d
d
s
ra
ti
o
,
C
I
c
o
n
fi
d
e
n
c
e
in
te
rv
a
l,
C
E
V
c
o
rp
o
ra
te
e
th
ic
a
l
v
ir
tu
e
s
(t
o
ta
l
C
E
V
sc
a
le
),
C
L
A
R
c
la
ri
ty
,
C
O
S
U
c
o
n
g
ru
e
n
c
y
o
f
su
p
e
rv
is
o
rs
,
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O
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M
c
o
n
g
ru
e
n
c
y
o
f
se
n
io
r
m
a
n
a
g
e
m
e
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t,
F
E
A
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fe
a
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it
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tr
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sa
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*
p
\
0
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5
276 M. Huhtala et al.
123
supervisors and senior management predicted progression
goals and employment contract goals, and low sanction-
ability was also associated with progression goals.
When compared with career-ending goals, higher ratings
of ethical culture were associated with an increased like-
lihood of naming organisational goals (b = 0.73, p \ 0.01)
and prestige/influence goals (b = 1.08, p \ 0.01), the first
result supporting our hypothesis H5. The odds ratios for
career-ending goals as a reference group (Table 7) showed
that if ethical culture increased by 1 SD, then the partici-
pant was more likely to name organisational goals (OR
2.08, 95 % CI 1.15–3.76) and prestige/influence goals (OR
2.93, 95 % CI 1.25–6.85). As expected in hypothesis H6,
the individual factors (congruency of supervisors and
senior management) predicted organisational goals, but
with two additional predictors (supportability and dis-
cussability). Only discussability was a significant predictor
of prestige/influence goals. The congruency of senior
management had a small significant association with
competence goals. In summary, ethical culture promoted
organisational and prestige/influence goals, whereas
unethical culture predicted career-ending, progression and
job change goals.
Discussion
The aim of our study was to add to the existing knowledge
related to the effects of ethical organisational culture from
the perspective of personal work goals. The results
regarding ethical organisational culture predicting goal
contents showed that the more ethical the organisational
culture was perceived as being, the more often the man-
agers reported having organisational goals, which were
related to the success and performance of their organisa-
tion. This result is in line with our theoretical model and
supported our hypothesis H5: Ethical organisational culture
seems to represent a favourable working environment that
promotes commitment towards the organisation and is
hence embodied in managers’ organisational goals. This is
also in accord with the result from previous research
involving young managers (Hyvönen et al. 2010); a
reduction of psychosocial stressors (i.e. described as ethical
culture with lower ethical strain in the present study) in the
workplace leaves more resources available, enabling
managers to have more opportunities to focus on leadership
tasks. The individual CEV dimensions showed that the
ethical behaviour of supervisors and senior management in
particular (as stated in hypothesis H6), alongside support-
ability and discussability, characterised a favourable
working environment that promotes organisational goals.
Between the present study and the study by Hyvönen
et al. (2009), there was a substantial difference in the T
a
b
le
7
T
h
e
re
su
lt
s
o
f
m
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in
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se
s
(w
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ls
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s
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fe
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,
n
=
5
9
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(9
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(n
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(n
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Ethical Culture and Work Goals 277
123
number of managers who reported having organisational
goals. While only 5.6 % of young managers in the study by
Hyvönen (2009) chose the success and performance of the
organisation as their most important work goal, organisa-
tional goals represented the largest category (35.4 %,
n = 287) in our study. It seems that organisational goals
are quite specifically linked to higher-level managers, as
indicated by the fact that this goal category was not found
in a study of a range of professionals (Wiese and Salmela-
Aro 2008), and upper-level managers were more likely to
name organisational goals than were managers from lower
levels, as found both in our study and in the study by
Hyvönen et al. (2009).
Ethical culture was also associated with a higher prob-
ability of naming prestige/influence goals. The result gives
reason to assume that a working environment with ethical
virtues can promote goals related to receiving appreciation
from one’s colleagues and gaining influence on a societal
level (e.g. contributing to the society, or helping others to
succeed). Discussability was the most significant dimension
of ethical culture to predict these goals. This indicates that
the possibility to discuss moral dilemmas and unethical
conduct, and opportunities to express one’s opinions at
work, are associated with leaning towards prestige/influ-
ence goals. Upper-level managers were more likely to name
prestige/influence goals than other managers, which might
reflect that higher-level managers have greater responsi-
bility and more possibilities to influence the operations of
their organisation. Therefore, they may expect more
appreciation for their work and strive to gain more far-
reaching influential power also at the societal level.
If the culture of the organisation was perceived as less
ethical, it was related to an increased probability of naming
goals not related to the organisation. The most prominent
connection was between lower evaluations of the ethical
culture and career-ending goals, especially when compared
to organisational goals. One way of interpreting this result
is to see retirement as a form of organisational withdrawal
(Hanisch and Hulin 1990), where individuals may use
retirement as a means to avoid dissatisfying work situa-
tions. Therefore, if the organisational culture does not
embody ethical values, then this can represent an unfa-
vourable work environment and increase the leaning
towards retirement and discontinuing one’s career. Espe-
cially, the congruency of supervisors and senior manage-
ment, together with supportability and discussability,
depicted the most important dimensions of ethical culture
in this respect. A lack of these virtues was related to career-
ending goals, a new category that emerged from the current
data and which was not found among young managers
(Hyvönen et al. 2009), which reflects the life span context
of work goals (Freund 2007). The average age of the
managers in the career-ending category was 54.5 years,
being significantly higher than in any other goal categories.
This shows that the age differences found in adult life goals
(Nurmi 1992) also appear in the work domain and supports
the idea of dynamic and changing goals that differ across
the life span (Freund 2007; Hyvönen 2011; Hyvönen et al.
2011). The result also constitutes a challenge for organi-
sations, as the managers naming career-ending goals
should remain in working life for another 10 years (the
standard age for retirement in Finland is 65 years).
Lower evaluations of ethical culture also predicted the
membership in the job change category, as expected in our
third research hypothesis (H3). Again, an unethical culture
can represent a strainful and undesired working environ-
ment and thereby lead to goals being directed away from
the current organisation towards finding a new job. In
addition to the congruency of supervisors and senior
management, as well as supportability, our results showed
that transparency was also a significant dimension of eth-
ical culture in predicting job change goals. More specifi-
cally, if (un)ethical conduct and its consequences are not
visible, then this can increase the probability of orienting
towards a new job. The job change category (4.2 % in the
present study) was smaller than among young managers
(13.7 % in the study by Hyvönen et al. 2009). This might
reflect that older and higher-level managers are more
committed to their organisation (Allen and Meyer 1993;
Feldt et al. 2009) and, therefore, do not readily pursue a
different job. In the present sample, upper middle-level
managers were more likely to report job change goals and
the mean age in this category was the second lowest
(43.9 years); only managers reporting progression goals
were on average younger. Thus, it is important to take into
account that younger managers in general can be more
prone to search for new job opportunities (Mayer and
Schoorman 1998), not only as a flight-response to unethical
culture.
In addition to our expectations, if ethical culture received
a poor evaluation, then progression goals were also more
likely to be named than organisational goals. Having pro-
gression goals can be a response to an unethical culture, as
an employee may reason that by attaining a higher position
he/she can gain greater influence over the functioning of
their organisation and steer organisational practices into a
more ethical direction. This emerged when we examined
the individual CEV dimensions: low congruency of senior
management and low sanctionability predicted progression
goals, suggesting that if upper management does not show a
good example in terms of ethics, and (un)ethical actions do
not have consequences, then managers want to pursue a
higher position. In addition, a lack of ethicality in the
organisational culture can promote self-interests (Sims and
Brinkmann 2003) and lead to more self-focused goals
(Salmela-Aro et al. 2001), which is thus reflected in striving
278 M. Huhtala et al.
123
towards personal progression in one’s career. Progression
goals were significantly less frequent among the managers
in our study (6.8 %), compared to the young managerial
sample (23.7 %) in the study by Hyvönen et al. (2009).
Again, this might reflect the effect of the managerial level:
in the present study, 14 % of the participants were upper-
level managers, who might have less need to progress
having already attained the highest possible status within
the organisation. The result is also in line with the life span
approach to goal setting (Freund 2007).
All these results fit in with Little’s (2000, 2007) model
of well-being, where goals can reflect the intentions to
improve adjustment capabilities and well-being within the
workplace. If the organisational culture is perceived as
being unethical, then this can lead to pursuing non-organ-
isational goals, more specifically, career-ending, job
change and progression goals. Our results are also in line
with cognitive dissonance theory (Festinger 1942), sug-
gesting that an unethical organisation can cause dissatis-
faction towards the organisation and lead to turnover
intentions (Schwepker 1999). In addition, the connection
between ethical culture and job change goals affirms that a
discrepancy between organisational ethics and personal
values can lead to a breach of the psychological contract,
which may result in resigning from the organisation being
reflected as job change goals (O’Donohue and Nelson
2009). Nevertheless, it is also important to consider that
also the managers who are already pursuing a new job or
are oriented towards retirement could contribute to the
greater number of poor evaluations concerning an organi-
sation’s ethical culture. Being ‘on the way out’ of an
organisation may result in a personal detachment from the
organisation, which can lead to being more critical con-
cerning the existing culture and its ethicality.
Regarding the three remaining personal work goal cat-
egories (competence, well-being and employment contract
goals), the evaluations of the ethical culture did not predict
the membership in these categories. As for competence
goals, it might be that these goals reflect ‘career adapt-
ability’, highlighting the adaptive processes required in
career development (Savickas 1997). These aspirations for
professional development and high quality in one’s work
can be seen as personal duties that are not significantly
affected by the organisational culture. The prevalence of
competence goals (26.1 %, n = 212) is in accord with
previous research (Wiese and Salmela-Aro 2008), where
about a third of working adults reported having goals
related to learning and job performance. However, in the
current study, competence goals were more often named by
female managers. It is possible that women feel more
pressure to prove their competence as managers, since they
may face the prejudice of being seen as possessing less
leadership ability at work than men (Eagly and Karau
2002). This result echoes previous research, wherein a
good match between job requirements and one’s abilities
was more important to women than to men (Harpaz 1990).
Lower-level managers were also more likely to name
competence goals than were other managers, which might
reflect their need to prove their professional ability as
leaders.
In the study by Hyvönen et al. (2010), a less favourable
work environment increased the probability of naming
well-being goals. This connection was not, surprisingly,
found in the current study, as the (un)ethical culture did not
predict naming well-being goals (hypothesis H4 was
rejected). One explanation can be found in the somewhat
different contents of these goal categories. In the current
study, a number of managers in this category named
positive well-being goals, expressed in statements such as
‘I want to enjoy my work’ or ‘I want to have motivating
and challenging tasks’, whereas the young managers (Hy-
vönen et al. 2009) named goals relating to improving their
work–life balance or reducing work-spillover into other
areas of their life. Perhaps the more positive aspirations
regarding well-being at work are less affected by the
organisational culture compared to goal contents such as
self-concerns or work stress. In any case, future studies are
needed to clarify the connections between the work envi-
ronment (e.g. ethical organisational culture) and well-being
goals.
The final category, employment contract goals, included
goals related to job security and finance. It was expected that
these goals would be uncommon among the participants,
almost all of whom had a permanent employment contract
(98.4 %). The small size (n = 32) of this category might
explain why the evaluations of ethical culture did not predict
the membership in this category at a statistically significant
level. However, of the individual CEV factors, lower eval-
uations of the congruency of management were associated
with a higher probability of reporting employment contract
goals. It is, therefore, possible that if the immediate superior
sets an unethical example, one wants to strive for a better pay
for one’s work or for more job security.
Conclusions, Limitations of the Study and Future
Recommendations
The most important contribution of our study was to
establish that ethical organisational culture functions as a
context for setting personal work goals. As we predicted in
our theoretical model, an ethical culture offered a favour-
able working environment, which showed in managers’
organisational goals, depicting their commitment to the
organisation. It seems that when working in an ethical
culture the managers are more willing to go extra mile for
Ethical Culture and Work Goals 279
123
the best of their organisation. Vice versa, a lower ethical
culture was associated with goals directed away from the
organisation, especially with career-ending goals. There-
fore, it is important to consider that investing in the ethi-
cality of organisations can contribute to prolonging
working careers, which is a current issue in many countries
with an ageing workforce (Proper et al. 2009).
Our study showed that leadership and management
practices are especially important in relation to setting
personal work goals. Therefore, organisations should
ensure that their supervisors and senior management show
a good example in ethics and act in a reliable and
responsible manner. Supportability (e.g. mutual trust and
respect towards each other and a shared commitment to
organisational values) and discussability (e.g. the possi-
bility to raise ethical issues, express opinions and report
unethical conduct) are also of importance. As these results
were the first to give evidence on how different dimensions
of ethical culture are connected with personal work goals,
they offer a good foundation for practical implications.
Managers can improve these essential ethical dimensions
by communicating the importance of ethics to the
employees, providing opportunities for discussing moral
dilemmas and encouraging ethical discourse at the work-
place. Furthermore, managers themselves need to ‘talk the
talk and walk the walk’ by being honest and reliable, living
up to promises and commitments, and setting a good
example in terms of ethical behaviour. By attending to
these ethical factors, organisations can support goals that
are advantageous both for the individual and for the
organisation as a whole.
There are some limitations that should be considered
when applying the study results. First, the cross-sectional
study design only gives information about the goals at the
measured time point. As we used self-report measures both
for the predictor variable, i.e. ethical culture, and for the
outcome variable, i.e. personal work goals, a common-
method bias may exist (Podsakoff et al. 2003). Also social
desirability response bias may occur, as we had not
included a measure of social desirability in the survey
(Paulhus 1991). Second, there might be a reciprocal cau-
sality between the personal work goals and the evaluations
of the ethical culture of the organisation. For example,
managers already oriented towards finding a new job may
be more critical in evaluating their current organisation’s
ethicality and subsequently give lower ratings concerning
ethical culture. Therefore, future studies are needed to
establish the causal relationships between these phenom-
ena. Third, the final categories of personal work goals
should be applied with caution. There were some con-
tradictions in the categorisation, especially between the
organisational and the competence goals: It was not always
clear whether the goal was primarily referring to gaining
personal competence or to striving for the success of the
organisation. However, we tried to achieve as reliable a
classification as possible using multiple coders, and the
inter-rater reliability was proven to be high. Fourth, a
limitation concerning the results of the multinomial
regression analyses was the different sizes of the work goal
categories. That is, in smaller groups there may be differ-
ences in the means of the CEV scores, but due to a lack of
statistical power resulting from the small size of the group,
statistical significance was not reached. On the other hand,
this also gives more affirmation to our results. For example,
goals related to job change formed the second smallest goal
category, yet it still reached statistical significance com-
pared to organisational goals, the largest category.
Our results showed that ethical culture is associated with
organisational goals. Thus, it is important to consider that
personal work goals and ethicality can also be positively
intertwined, rather than only being interrelated in a nega-
tive way, such as pursuing the success of the organisation
leading to unethical actions or to a permissive ethical
environment (Barsky 2008). One contribution of our study
was to use a multidimensional measure of ethical culture,
which indicated that different ethical virtues have distinct
connections with personal work goals. Future studies using
the CEV model are needed to bring more insight into these
results. Furthermore, we used a mixed methods approach
(Creswell and Plano Clark 2007) combining an open-ended
question, which produces authentic information about goal
pursuit in the work context, with a quantitative measure for
ethical culture. Business ethics research could benefit from
a broader use of different mixed methods studies. Future
research could further expand knowledge regarding the
associations between ethical culture and goal pursuit by
looking at individual differences between the members of
an organisation using interaction studies. Background
variables, personality traits and personal values may
moderate the effects between ethical culture and personal
work goals. For example, if a person sets great emphasis on
ethical values, then an unethical organisational culture may
make his/her pursuing a new job more likely than would be
the case with someone who places less importance on
ethicality.
Although it was beyond the scope of the present study,
the connections between ethical culture, personal work
goals and occupational well-being are also worth consid-
ering. As we hypothesised in our theoretical framework,
ethical culture itself can present a favourable working
environment for goal setting, with less ethical dilemmas
and strain involved. Our results show that ethical organi-
sational culture promotes organisational goals which, in
turn, are associated with better occupational well-being, as
based on previous study findings (Hyvönen et al. 2009,
2010). In summary, implementing ethical practices within
280 M. Huhtala et al.
123
an organisation can support well-being at work, both by
reducing ethical strain and by promoting personal work
goals that are beneficial to the individual members of the
organisation.
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reference/9101282396
Journal of Applied Psychology
1990, Vol, 75, No. 4, 378-385
Copyright 1990 by the American Psychological Association, Inc,
0O2l-9010/9O/$OO,75
Bad Apples in Bad Barrels: A Causal Analysis
of Ethical Decision-Making Behavior
Linda Klebe Trevino and Stuart A. "Vbungblood
Department of Management, Texas A&M University
This study proposed and tested a multiple-influences causal model of ethical decision-making
behavior. Social learning, stage of cognitive moral development (CMD), and locus of control (LC)
were hypothesized to influence ethical decision making. The mediating influence of outcome
expectancies was also hypothesized. Social learning conditions (vicarious reward, vicarious pun-
ishment, and control) were manipulated with an in-basket exercise. Path analysis revealed that
ethical decision making was influenced directly by CMD, LC influenced ethical decision making
directly and indirectly through outcome expectancies. Vicarious reward influenced ethical deci-
sion making indirectly through outcome expectancies. No support was found for the direct eflects
of vicarious reward or punishment. Future research directions and theoretical and practical impli-
cations are discussed.
Week after week, the American public is treated to vivid
media revelations of wrongdoing in business, government, edu-
cational, and religious institutions. Clearly, ethical and unethi-
cal behavior in organizations is a relevant social issue demand-
ing the attention of organizational scientists. Consistent with
Waterman (1988), we designed this study to investigate two
areas of ethical decision making that are of interest to psycholo-
gists: moral reasoning (the cognitive processes people use in
making ethical decisions) and moral behavior (what individuals
do. in ethical dilemma situations). We proposed and tested a
causal model of the organizational and individual influences
on ethical decision-making behavior in the organization. We
also investigated the mediating role of cognitive processes.
The "bad apples" argument attributes unethical behavior in
the organization to a few unsavory individuals (Simpson, 1987)
lacking in some personal quality, such as moral character. Re-
search based on this individual differences approach has found
such measures as locus of control (LC), economic value orienta-
tion, political value orientation, Machiavellianism, and cogni-
tive moral development (CMD) to be significantly related to
ethical decision-making behavior (Hegarty & Sims, 1978,1979;
Trevino, Sutton, & Woodman, 1985).
According to the "bad barrels" argument, something in the
organizational environment poisons otherwise good apples.
This view, supported by survey research, attributes unethical
This manuscript is based on Linda Klebe Trevino's doctoral disser-
tation, completed at Texas A&M University
We would like to thank committee members Don Hellriegel, Rich-
ard Woodman, Stephen Worchel, and Mary Zey-Ferrell for their help
in the development of this research. Thanks also go to Charlotte Sut-
ton, who contributed to the development of an earlier version of the
in-basket exercise. We would also like to acknowledge the helpful com-
ments of Texas A&M doctoral students in Stuart A, Youngblood's mul-
tivariate research design course during the summer of 1989.
Correspondence concerning this article should be addressed to
Linda Klebe Trevino, who is now at the Department of Management
and Organization, College of Business Administration, Pennsylvania
State University, University Park, Pennsylvania 16802.
behavior to competition, management's results orientation, the
lack of reinforcement of ethical behavior (Baumhart, 1961;
Brenner & Molander, 1977), requests from authority figures to
behave unethically (Ricklees, 1983), and peer behavior (Zey-
Ferrell & Ferrell, 1982; Zey-Ferrell, Weaver, & Ferrell, 1979).
Similarly, laboratory experiments have found that extrinsic re-
wards for unethical behavior and increased competitive pres-
sure significantly increased unethical decision behavior (He-
garty & Sims, 1978), whereas the existence of an organizational
ethics policy, threat of dismissal, and direct punishment of un-
ethical behavior significantly reduced unethical decision behav-
ior (Hegarty & Sims, 1979; Laczniak & Inderrieden, 1986; Tre-
vino etal., 1985).
We used a multiple-influences perspective based on Trevino's
(1986) model of ethical decision making in the organization.
Ethical and unethical behavior in organizations is viewed as a
consequence of both organizational and individual influences.
Previous research has suggested that reward systems can in-
fluence ethical and unethical behavior through direct rewards
and punishments (Hegarty & Sims, 1978; Laczniak & Inderrie-
den, 1986). We took an indirect learning approach based on
social learning theory (Bandura, 1971; Davis & Luthans, 1980;
Manz & Sims, 1981), in which individuals are assumed to learn
vicariously by observing what happens to others in ethical decir
sion-making situations. We focused on the use of vicarious
learning to support ethical behavior in the organization by re-
warding ethical behavior or punishing unethical behavior.
Social learning theory suggests that vicarious learning influ-
ences behavior through its influence on the observer's outcome
expectancies (Bandura, 1986; Manz & Sims, 1981). Seeing
others reinforced for certain behaviors (either ethical or unethi-
cal) arouses observers' expectancies that they will be similarly
reinforced. Thus, we hypothesized that vicarious learning
would influence ethical behavior through outcome expectan-
cies.
The multiple-influences perspective suggests that individual
differences also may influence ethical decision-making behav-
ior. Rotter's (1966) Internal-External Locus of Control Scale
378
BAD APPLES 379
measures an individual's perception of how much control he or
she exerts over events in life. LC has been directly related to
moral behavior, such as whistleblowing (Dozier & Miceli,
1985), resistance to social pressure, cheating, willingness to
harm another individual if told to do so by an authority figure,
and helping behavior (Lefcourt, 1982). The research suggests
that individuals with internal LC are more likely to do what
they think is right and to tolerate discomfort or penalty for
doing so.
LC may also be related to outcome expectancy beliefs in that
individuals with internal LC are more likely than those with
external LC to recognize the contingency relationship between
their behavior and outcomes (Lefcourt & Wine, 1969; Seeman,
1963). Thus, LC was hypothesized to influence ethical deci-
sion-making behavior directly and through its influence on out-
come expectancies.
CMD (Kohlberg, 1969) is another individual difference con-
struct expected to influence ethical decision-making behavior
(Trevino, 1986). Kohlberg's (1969) framework provides a hierar-
chical continuum of six stages of CMD. With each successive
stage, the individual's moral judgment grows less and less de-
pendent on outside influences. In addition, the individual
moves from a self-centered conception of what is right to a
broader understanding of the importance of social contracts
and principles of justice and rights.
Empirical tests of the CMD-behavior relationship have sup-
ported a moderate positive relationship between CMD stage
and moral behavior (Blasi, 1980), including cheating (Grimm,
Kohlberg, & White, 1968; Malinowski, 1979; Malinowski &
Smith, 1985), resistance to pressure from an authority figure
(Kohlberg, 1969), helping behavior (Kohlberg & Candee, 1984),
whistleblowing (Brabeck, 1984), and ethical decisions in busi-
ness situations (Penn & Collier, 1985; Stratton, Flynn, & John-
son, 1981; Trevino et aU 1985). Thus, CMD was hypothesized
to independently and directly influence ethical decision-mak-
ing behavior.
Ethical decision-making behavior has two major compo-
nents. The first is a behavioral choice component. In ethical
dilemma situations, individuals must choose a course of action.
Ethical decisions, however, also have a normative-affective
component (Etzioni, 1988). Individuals often struggle with
their thoughts and feelings about what is right—whether they
did the right thing. In this study, we attempted to capture both
components of ethical decision-making behavior.
The proposed causal model is depicted in Figure 1. Vicarious
reward and punishment were predicted to influence ethical
decision-making behavior directly and indirectly through their
influence on the observer's outcome expectancies. Rewarding
ethical behavior or punishing unethical behavior was expected
to increase outcome expectancies, which in turn were expected
to lead to more ethical behavior. We expected that internal LC
subjects would have higher outcome expectancies and would
behave more ethically than external LC subjects. Subjects at
higher stages of CMD were expected to behave more ethically
Method
Sample and Setting
The subjects for the study were 94 MBA students (72 men and 21
women) enrolled in a course on organizational behavior at Texas A&M
LIniversity. One subject did not provide gender information. Ages
ranged from 22 to 45 years (Af = 26). Years of work experience ranged
from 1 year to 28 years (M= 4.8).
Procedure
In lieu of an announced class on decision making, subjects partici-
pated in a 2-hr management decision-making exercise. Each subject
chose an individual behavioral laboratory room and was provided an
exercise identification number to be used to keep exercise materials
together. Subjects completed an in-basket exercise, a postexercise ques-
tionnaire, and the CMD and LC measures. Finally, each subject was
thanked, told that an explanation would be provided later, and asked
not to discuss the details of the exercise. Later in the semester, Linda
Trevino visited classes to discuss the findings.
An in-basket exercise (available from Linda Trevino) was designed
and pilot tested. It provided the vicarious learning manipulations and
measured the dependent variable, ethical decision-making behavior.
Subjects were instructed to play the role of Pat Sneed, national sales
manager for an electronics corporation.
The in-basket contained 1S items, including an organization chart, a
company newsletter, and 13 letters, memos, or phone messages. Two of
the items were designed to provide the study manipulations. The 13
letters, memos, and phone messages presented the decisions to be
made. Two of these decisions (described in more detail later) involved
ethical concerns. The other 11 decisions were included to mask the
ethics focus of the study.
Subjects were given 15 min to read through the in-basket, ostensibly
for the purpose of setting priorities. This step ensured that subjects
would receive information relevant to the manipulations before mak-
ing decisions. Subjects were then provided with response forms for
recording decisions during the next 30 min.
Independent Variables
Vicarious learning manipulations. Three different in-baskets were
distributed to subjects randomly assigned to the ethical-behavior-re-
warded, unethical-behavior-punished, and control conditions. In each
condition, the in-basket provided information about management's
response to two unethical behavior incidents, thus providing the vicari-
ous learning manipulations. The two incidents were (a) substitution of
potentially hazardous substandard wiring in a product and (b) sexual
harassment.
In the unethical-behavior-punished condition, the individuals who
committed these actions (sexual harassment of a subordinate, substitu-
tion of substandard wiring) were disciplined. In the ethical-behavior-
rewarded condition, the individuals who reported these same actions
(whistleblowers) were rewarded. Whistleblowing was used to represent
ethical behavior because it is a moral action that requires an active
decision and can therefore be reinforced. Many examples of ethical
behavior represent the absence of unethical behavior and are difficult
to reward. In the control condition, the same unethical behavior inci-
dents were presented, but the organization's responses were left ambig-
uous.
Objectively, the vicarious reward and punishment manipulations
were equivalent in strength. For example, in the substandard wiring
situation, the vicarious reward condition provided for a promotion
and salary increase to the manager who reported the problem. In the
vicarious punishment condition, the individual who substituted the
wiring received a demotion and salary decrease. In the sexual harass-
ment situation, 2 weeks vacation was balanced against 2 weeks suspen-
sion without pay Despite this objective equivalence, a given gain is not
necessarily equivalent to a given loss.
In addition to the influence of vicarious reinforcement on behavior.
380 LINDA KLEBE TREVINO AND STUART A. YOUNGBLOOD
we were interested in subjects' perceptions of management's responses.
Therefore, in the postexercise questionnaire, subjects in the vicarious
reward and punishment conditions were asked open-ended questions
about whether they thought management's responses were appropriate
and what management should have done differently, if anything. Re-
sponses to these questions provided an indirect manipulation check.
Outcome expectancy. To measure subjects' outcome expectancies,
the postexercise questionnaire asked subjects to rate management's
probable response to 10 behaviors. Cronbach's alpha for the 10-item
scale was .75. Five of the 10 items dealt with ethical behaviors, and the
other 5 focused on unethical behaviors. The behaviors were taken from
those used in the in-basket (the manipulation behaviors and the ethical
decision situations). For example, subjects were asked to rate manage-
ment's probable response to the following ethical and unethical behav-
iors: (a) "the manager reports sexual harassment to higher authorities,"
or (b) "the manager substitutes a cheaper but potentially unsafe prod-
uct component to cut costs." A 5-point scale ranging from severe pun-
ishment (1) to major reward (5) was used to record the subjects' expec-
tancies for the outcome associated with each behavior. For the unethi-
cal behavior items, the scale was reversed such that a higher number
represented a belief that the organization would punish unethical be-
havior. Thus, on the 10-item outcome expectancy scale, a higher score
represents the expectation that the organization supports ethical be-
havior and discourages unethical behavior, that is, that ethical behav-
ior will be rewarded and unethical behavior will be punished.
CMD, The Defining Issues Test (DIT) (Rest, 1979) was used as a
measure of CMD. The DIT was administered after completion of the
in-basket materials to avoid sensitizing subjects to the experiment's
ethics focus. Subjects were told that the additional questionnaires
(DIT and LC) were unrelated to the in-basket and were advised to
respond as themselves.
The DIT is considered to be the most prominent objective test of
CMD (Gibbs & Widaman, 1982). It presents six hypothetical ethical
dilemmas and, for each, a list of considerations for determining what is
right. Subjects rank the four most important considerations, and these
rankings are used to create the P score. A high P score indicates that the
subject gives more importance to principled (Stage 5 and 6) consider-
ations (i.e., is higher in CMD). Reported test-retest reliabilities have
been in the high .70s or .80s, and Cronbach's alpha index of internal
consistency has been reported to be in the high .70s (Davison & Rob-
bins, 1978; Rest, 1979). In addition, many tests of validity have been
conducted (Rest, 1979). For this sample, Cronbach's alpha was .49.
Because the DIT test items are factorially complex and not parallel to
each other, the alpha should be considered a lower bound to, rather
than an estimate of, reliability (Davison & Robbins, 1978). In addition.
Rest (personal communication, June 1988) suggested that the test's
reported reliabilities have been based on larger, more heterogeneous
samples (Davison & Robbins, 1978). Although from a psychometric
perspective the computed alpha is admittedly low, we included the
measure because of the theoretical importance of the CMD construct.
The DIT provides an internal reliability check for consistency of
responses and social desirability. Rest (1979) recommended eliminat-
ing subjects from the analysis if they exceed the cutoff for these tests.
Thus, 8 subjects were assigned a missing value because of response
inconsistencies, an inappropriate test-taking set, or both.
Locus of control. Rotter's (1966) 29-item forced-choice Social Reac-
tion Inventory was used as a measure of LC. A high score indicates
external LC and a low score, internal LC. For this sample, the alpha
index was .74. Three subjects with incomplete questionnaires were
assigned missing values.
Dependent Variable
The behavioral choice component of the dependent variable, ethical
decision-making behavior, was based on subjects' choice behavior in
Vicarious
Reward
Vicarious
Punisiiment
Outcome
Expectancy
Ethicai Decision
Making Behavior
Locus of Control
Cognitive Moral
Development
Figure I. Proposed model of ethical decision-making behavior in organizations.
BAD APPLES 381
the two in-basket decisions involving ethical concerns. Two different
opportunities to engage in ethical decision-making behavior were pro-
vided because unethical behavior occurs relatively infrequently, and
pretesting suggested that only 20% of subjects would be likely to make
an unethical decision given a single opportunity. Thus, subjects were
considered to be unethical if they made at least one unethical choice,
given the two opportunities. They were considered to be ethical if they
made an ethical choice in both cases.
The first decision opportunity involved kickbacks. In the kickback
decision, a regional sales director informed Sneed that one of his sales
representatives was paying kickbacks, Sneed had to decide whether to
stop the kickbacks or permit them to continue. In the second opportu-
nity, the part decision, subjects had to respond to a memo from Wil-
liam Wyley, vice-president of production, in which he stated that he
had decided to change the material used in a particular product compo-
nent to save on production costs. He advised that customers should not
be informed despite potential problems, Sneed had to decide what to
do, if anything, in response.
For each decision, subjects were provided a response form that listed
a number of options. They were instructed to choose one of the options
or to write in a response. The available options were coded a priori as
ethical or unethical (an equivalent number of each) on the basis of
preestablished criteria. In the kickback situation, a decision to allow
kickbacks to continue was coded as unethical, A decision to stop the
kickbacks was coded as ethical. In the part situation, a decision to not
inform customers was coded as unethical, A decision to inform cus-
tomers, report Wyley, or both was considered ethical. Four members of
Linda Trevino's doctoral committee served as a panel of judges to
verify that the a priori coding met the preestablished criteria.
Of the 188 possible responses (two decisions each for 94 subjects), 29
write-in responses were received. These were evaluated as ethical or
unethical by Linda Trevino and five independent raters on the basis of
the preestablished criteria, (A third option, can't decide, was also possi-
ble, but raters were asked to use it sparingly) For about one third (10) of
the write-in responses, the six raters' categorizations agreed 100%, For
the remaining responses, a majority among those raters who could
decide on a rating permitted the categorization of all but 3 responses.
These 3 decisions were coded as missing data because the criteria
could not be applied. For each write-in decision, percentage of agree-
ment among the six raters was computed. Across all write-in decisions,
the average agreement among raters was 80%,
Cohen's (1960) coefficient k for assessing the proportion of agree-
ment between two judges after chance agreement is removed was used
to assess the reliability of the six judges who made the category deci-
sions. Coefficient k was computed for all 15 possible pairs of raters.
The mean k was ,33 with a high of .55 and a low of ,07,
For descriptive purposes. Table 1 presents crosstabulations of the
number of ethical and unethical decisions subjects made across the
kickback and part situations for each of the reinforcement conditions.
Some subjects engaged in ethical or unethical behavior consistently
across the two trials. For example, 58% of the subjects in the control
group behaved consistently across both trials, 56% of the subjects in
the reward group behaved consistently, and 69% of the subjects in the
punishment group behaved consistently As expected, more consis-
tency was observed for subjects behaving ethically (55% of all experi-
mental subjects) than for subjects behaving unethically (7% of all exper-
imental subjects).
Making an ethical or unethical decision represents the behavioral
choice component of ethical decision making, A normative compo-
nent also exists that involves thoughts and feelings about whether one
did the right thing. This normative-affective dimension (Etzioni,
1988) was tapped by asking subjects to express, on a 5-point scale rang-
ing from not at allcommitted(\) to strongly committed(5), the degree to
which they felt committed to the correctness of each decision or action.
Table 1
A Crosstabulation of Unethical and Ethical Decisions for
Kickback and Part Situations, Broken Down by Group
Part decision
Kickback decision
Unethical
Ethical
Total
Unethical
Ethical
Total
Unethical
Ethical
Total
Unethical
Control group
4
8
12
Ethical
4
13
17
Vicarious reward group
1
9
10
4
16
20
Vicarious punishment group
1
10
11
0
21
21
Total
8
21
29
5
25
30
1
31
32
Subjects' decisions were scored as ethical if they selected an ethical
option for both opportunities. For these subjects, the dependent vari-
able, ethical decision-making behavior, was created by multiplying the
ethical choice code (1) by an equally weighted average of the commit-
ment scores on the two decisions. Thus, a subject who made an ethical
choice in both incidents and was highly committed to both decisions
would receive a maximum score of 5,
Subjects' decisions were scored as unethical if they chose an unethi-
cal option in at least one of the two choice opportunities. For these
subjects, the dependent variable was computed by multiplying the
code for an unethical choice (-1) by the commitment score associated
with the unethical decision. For subjects who selected an unethical
option in both in-basket instances, the dependent variable was com-
puted by multiplying the code for an unethical choice (-1) by an
equally weighted average of the commitment scores for each decision.
Hence, a subject could score a maximum of 5 on the ethical decision-
making dependent variable by choosing an ethical option (1) for both
incidents and expressing strong commitment (5) to both decisions, A
subject could score a minimum o f - 5 by choosing an unethical option
(-1) for one or both incidents and expressing a strong commitment (5)
to either the one unethical choice or both unethical choices. Subjects
who chose the ethical option for both incidents and expressed some
degree of commitment to the ethical decisions would receive scores
varying between 1 and 4, Subjects who made at least one unethical
choice (-1) and expressed some degree of commitment to the unethical
decision(s) would receive scores varying between - 4 and — 1,
Design and Analytical Strategy
To test the causal linkages hypothesized in Figure 1, we performed a
path analysis of the experimental data. To estimate the path coeffi-
cients associated with the hypothesized causal model, we conducted a
series of bivariate and multiple regression analyses. Procedures out-
lined in Cohen and Cohen (1983, pp, 353-378) were followed to pro-
vide estimates of the path coefficients, the decomposition of total
variable effects into direct and indirect effects on the dependent vari-
able, and the degree of spuriousness observed in zero-order correla-
tions among the independent and dependent variables,
A power analysis (Cohen, 1988) of the study design revealed power
382 LINDA KLEBE TREVINO AND STUART A. YOUNGBLOOD
Table 2
Means, Standard Deviations, and Intercorrelations for All Variables
Variable
1. Vicarious reward"
2. Vicarious punishment''
3. Outcome expectancy
4. Locus of control*̂
5. Cognitive moral
development
6. Ethical decision-
making behavior
M
0.34
0.33
36.19
8.48
22.34
0.80
SD
0.48
0.48
4.40
3.92
7.19
4.14
1
.50
.24
-.07
.10
.01
Intercorrelations
2
-.01
-.05
-.08
.16
3
-.29
.12
.30
4
-.14
-.42
5
.24
Note. Means were substituted for missing data. Correlations equal to or greater than .23 and .18 are
significant at the .01 and .05 alpha levels, respectively.
'Subjects in the reward condition were coded as 1, and all others were coded as 0. ""Subjects in the
punishment condition were coded as 1, and all others were coded as 0. ' Higher values indicate a more
external locus of control; lower values indicate a more internal locus of control.
levels of .08, .73, and .99 for correlations of .10, .30, and .50, respec-
tively, with a one-tailed alpha of .01. For an alpha of .05, the power
levels were .24, .90, and .99 for correlations of. 10, .30, and .50, respec-
tively Hence, the study design was adequate to detect effect sizes of
moderate or strong magnitude but was somewhat inadequate for weak
effect sizes. To preserve the sample size, we dummy coded missing
data for all the independent variables and included them in a regres-
sion analysis including the original variables. The dummy variable set
representing missing data was nonsignificant. Therefore, in the subse-
quent regression analyses, mean plugged variables were used (Cohen &
Cohen, 1983, p. 297).
Results
Table 2 reports the tneans, standard deviations, and correla-
tions for the study variables. In general, the zero-order correla-
tions support the predicted relationships. LC and outcome ex-
pectancy exhibited the strongest correlations with ethical deci-
sion making. Subjects with internal LC exhibited more ethical
behavior than subjects with external LC. For outcome expec-
tancy, subjects who perceived that the organizational reward
system supported ethical behavior were more likely to behave
ethically CMD also was significantly related to ethical decision
making. Higher stage individuals were more ethical. No signifi-
cant correlations were observed between the vicarious reward
and punishment dummy variables and ethical decision-making
behavior.
The bivariate correlations do not explicitly control for multi-
ple causation or for potential mediating effects. Therefore, path
coefficients were estimated consistent with the causal model
posited in Figure 1. These results are reported in Figure 2. Path
coefficients are reported above the arrow along with unstan-
dardized regression coefficients (in parentheses). Cohen and
Cohen (1983) recommended reporting both standardized and
unstandardized regression coefficients. Although path coeffi-
cients (betas) are helpful for understanding the relative influ-
ences of the independent variables within a study, they are more
subject to sampling variability The unstandardized regression
coefficient is a more stable estimator of the true effect size and
is useful for between-study comparisons.
In general, the hypothesized path model did a reasonable job
of accounting for the observed correlations among the vari-
ables, as reflected by the number of insignificant paths (three of
eight) and the degree of spuriousness observed between the
exogenous variables and the endogenous variable of ethical de-
cision-making behavior. No support was found for the direct
effect of vicarious reward or punishment on ethical decision-
making behavior, nor did vicarious punishment exhibit an indi-
rect effect by way of outcome expectancy beliefs. Vicarious
reward, however, did exhibit a significant path to outcome ex-
pectancy, which in turn was significantly correlated with ethical
decision-making behavior. Seventy-two percent of the esti-
mated total effect of vicarious reward on ethical decision-mak-
ing behavior was indirect. Subjects in the reward condition,
relative to the control group, exhibited higher outcome expec-
tancy beliefs, which in turn led to more ethical decisions.
The causal effects of the individual difference measures of
LC and CMD were supported. LC exhibited both direct and
indirect effects on ethical decision-making behavior. Eighty-se-
ven percent of the total effect of LC was by way of its direct
effect on ethical decision-making behavior. CMD exhibited a
direct effect on ethical decision making that was of similar
magnitude to that observed for outcome expectancy beliefs. An
important caveat, however, is that whereas causal inferences are
being drawn from the estimated path model, the observed link-
ages between ethical decision-making behavior and LC, CMD,
and outcome expectancy beliefs, respectively, are correlational
and not necessarily causal.
In summary, a comparison of the path coefficients indicates
that LC exhibited the single strongest direct effect on ethical
decision making, nearly double that of all the other effects. Of
the remaining direct effects, outcome expectancy and CMD
exhibited similar and significant magnitudes of effect on ethi-
cal decision making. Vicarious reward exhibited a weaker and
indirect effect on ethical behavior through outcome expectancy
beliefs.
Content analysis was conducted of subjects' responses to
open-ended questions about the appropriateness of the rein-
forcement contingencies. In the vicarious punishment condi-
BAD APPLES 383
r = .01(100%)
Vicarious
Reward
Vicarious
Punishment
.28**(2.63)
I
r = .24
.12(1.14)
r = -.01
Outcome
Expectancy r = .30(37%)
Ethicai Decision
Making Behavior
-.26**(--29)
r = -.29
Locus of Controi
-.34**(--35)
r = -.42(7%)
Cognitive Morai
Deveiopment r = .24(25%)
.14(1.24)
Figure 2. Path analysis results for proposed causal model. (Path coefficients are reported with the appro-
priate unstandardized regression coefficient in parentheses. The zero-order correlation is r, and the
estimated percentage of spuriousness between the exogenous variable and the endogenous variable [ethi-
cal decision-making behavior] is reported in the accompanying parentheses. *p < .05. **p < .01, one-
tailed tests.)
tion, the responses suggested that subjects expected unethical
behavior to be punished and punished harshly Almost half
(47%) of the subjects provided specific reasons why they felt
punishment was appropriate in the two in-basket unethical be-
havior incidents: For example, the manager's actions were
against policy, potentially costly and dangerous; the manager
risked legal liability, customer dissatisfaction, and lost future
business; he should pay the consequences of his actions; man-
agement must set a precedent, send a message to other employ-
ees, and preserve the company image. The open-ended ques-
tions did not specifically ask about severity, yet 75% of the
subjects mentioned it. Although 19% (all but one subject refer-
ring to the part decision) expressed concern that the punish-
ment may have been too harsh for a first offense and that the
manager's intentions to cut costs and make a profit should be
taken into account, 56% of the subjects expressed concern that
the punishment may not have been harsh enough. Two thirds of
these responses referred explicitly to the sexual harassment in-
cident and claimed that an example must be set so that others
would not repeat the behavior. Terminating the manager,
rather than suspension, was deemed the appropriate response.
In the vicarious reward condition, only 15% of subjects ex-
pressed the belief that management should have rewarded the
ethical behavior. Most felt that rewarding ethical behavior was
somehow inappropriate and that the specific in-basket rewards
were too strong. Sixteen percent of the subjects felt that ethical
behavior was expected, a job norm or duty that should not be
rewarded. Two thirds of the subjects perceived one or both of
the in-basket rewards to be too strong. Eleven percent recom-
mended private praise or recognition in place of the public
reward, and 22% worried that such a large reward could encour-
age false accusations or false reporting in the future. Finally,
25% felt that, in addition to any reward, the offender should be
punished.
Discussion
A number of potential study limitations should be noted.
First, social desirability bias, a problem with ethics-related stud-
ies, was minimized by embedding decisions within the larger
in-basket. In response to a postexercise questionnaire item re-
garding the study's perceived purpose, only 6.5%) of the subjects
indicated that they perceived an ethics focus. Most subjects
reported that the exercise was designed to provide general deci-
sion-making experience.
Second, the use of an MBA student sample and a laboratory
setting raises questions about external validity However, study
subjects had, on average, 5 years of relevant work experience.
Moreover, consistent findings from both laboratory and field
settings support external validity (Locke, 1986).
384 LINDA KLEBE TREVINO AND STUART A. YOUNGBLOOD
This research provides partial support for the proposed multi-
ple-influences causal model of ethical decision-making behav-
ior. The findings suggest that individual differences are impor-
tant for understanding ethical decision-making behavior. The
hypothesized influences of individual differences on outcome
expectancies and behaviors were supported. Subjects with in-
ternal LC and at the principled stage of CMD behaved more
ethically The ethical behavior of subjects with internal LC was
due, in part, to the mediating influence of outcome expectan-
cies. These results suggest that individual difference variables
should continue to be incorporated in research on ethical deci-
sion-making behavior.
These findings also have potential implications for the at-
traction, selection, and training of personnel. First, organiza-
tions could attempt to attract individuals of high integrity by
emphasizing the importance of integrity in recruitment mate-
rials. Second, organizations could assess LC, CMD, or both
when selecting managers for positions requiring ethical deci-
sion making. These measures may be difficult to implement for
selection purposes, however. Problems similar to those encoun-
tered in integrity testing can be expected (Sackett, 1985; Sack-
ett, Burris, & Callahan, 1989; Sackett & Harris, 1984). Mea-
sures of LC and CMD may be particularly useful for targeting
training resources. Organizations could attempt to increase
managers' CMD through training. Although CMD level is con-
sidered a relatively stable individual characteristic, it can be
increased through training (Goldman & Arbuthnot, 1979;
Hersh, Miller, & Fielding, 1980; Penn & Collier, 1985).
This study is the first to hypothesize and test outcome expec-
tancies as an intervening cognitive process that influences ethi-
cal decision-making behavior. The results suggest that outcome
expectancies have a direct influence on ethical decision-mak-
ing behavior. In addition, LC influenced ethical behavior
partly through outcome expectancies, and vicarious reward in-
fluenced ethical behavior primarily through the mediating in-
fluence of outcome expectancies. Vicarious punishment, how-
ever, did not significantly influence outcome expectancies or
behavior.
The differences in the findings for vicarious reward and
punishment may be due to people's a priori beliefs. Recall that,
in the vicarious punishment condition, subjects said that they
expected unethical behavior to be punished, but more harshly
than was done in the in-basket scenarios. Here, outcome expec-
tancies were not influenced. In the vicarious reward condition,
however, where subjects did not expect ethical behavior to be
rewarded and they perceived the reward to be too strong, out-
come expectancies were influenced. Bandura (1986) argued
that, for modeling to have an impact on observer behavior, it
must be noticed and remembered. In this study, subjects
seemed to notice, remember, and be influenced only by the
reinforcement that was unexpected or stronger than expected
—rewarding ethical behavior. They were not influenced by re-
inforcement that was expected or weaker than expected—pun-
ishing unethical behavior. Thus, expectancy beliefs and behav-
ior may be significantly influenced only under circumstances
in which the reinforcement is unexpected or powerful (as in the
vicarious reward condition). Given the influence of expectancy
beliefs on ethical decision-making behavior, future research
should explore people's a priori expectancy beliefs and how
they can be influenced.
Although neither the direct nor the indirect influence of
punishment was supported in this study, we are not yet willing
to abandon the notion that vicarious punishment'can influ-
ence ethical decision-making behavior. First, the study design
did not have sufliicient power to detect weak treatment effects.
Second, the qualitative data suggest that stronger effects may be
achieved with harsher punishments. In addition, to be effective,
the punishment of unethical behavior must compete with the
rewards inherent in the unethical behavior (i.e., financial gain).
The specific punishment used in this study may not have been
severe enough to counteract these rewards. Punishment sever-
ity may also explain the failure of vicarious punishment to in-
fluence outcome expectancies. If individuals already believe
that unethical behavior should be punished, relatively severe
punishment may be needed to modify their outcome expectan-
cies.
In sum, ethical decision-making behavior in organizations
appears to be a complex phenomenon influenced by the inter-
play of individual differences, how individuals think about eth-
ical decisions, and how organizations manage rewards and
punishments. Many questions remain about the realities of
managing the reward system to encourage ethical behavior.
Substantial rewards for ethical behavior appeared to influence
observers' outcome expectancies and behavior, but they also
produced discomfort about the idea of rewarding people for
doing the right thing. Future research may wish to explore how
organizations can reward ethical behavior without arousing
this apparent discomfort. Mild punishment did not seem to
influence observers' behavior at all, and thus more severe disci-
pline may need to be considered. The question of severity de-
serves further examination. What level of severity is required to
influence observers' outcome expectancies and behavior and
what side effects, if any, are produced by harsh punishments?
Future research can build on these findings to further investi-
gate the influences of individual differences, cognitions, re-
ward systems, and their relative effects on ethical decision-
making behavior in organizations.
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Received April 24,1989
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reference/Managing_Business_Ethics__Straight_Talk_About_How_To_Do_It_Right
E1FTOC 07/09/2010 Page 4
E1FFIRS 07/09/2010 Page 1
Fifth Edition
LINDA KLEBE TREVIÑO
Distinguished Professor of Organizational Behavior and Ethics
Smeal College of Business
The Pennsylvania State University
KATHERINE A. NELSON
Lecturer
Fox School of Business
Temple University
JOHN WILEY & SONS, INC.
MANAGING BUSINESS ETHICS
Straight Talk About How To Do It Right
E1FFIRS 07/09/2010 Page 2
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Library of Congress Cataloging-in-Publication Data
Treviño, Linda Klebe.
Managing business ethics : straight talk about how to do it right / Linda Klebe Treviño, Katherine
A. Nelson. – 5th ed.
p. cm.
Includes index.
ISBN 978-0-470-34394-4 (pbk.)
1. Business ethics. 2. Business ethics–Case studies. I. Nelson, Katherine A. II. Title.
HF5387.T734 2010
1740.4–dc22
2010020659
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
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E1FTOC 07/09/2010 Page 3
BRIEF CONTENTS
SECTION I INTRODUCTION
CHAPTER 1 INTRODUCING STRAIGHT TALK ABOUT MANAGING
BUSINESS ETHICS: WHERE WE’RE GOING AND WHY 2
SECTION II ETHICS AND THE INDIVIDUAL
CHAPTER 2 DECIDING WHAT’S RIGHT:
A PRESCRIPTIVE APPROACH 38
CHAPTER 3 DECIDING WHAT’S RIGHT:
A PSYCHOLOGICAL APPROACH 71
CHAPTER 4 ADDRESSING INDIVIDUALS’
COMMON ETHICAL PROBLEMS 111
SECTION III MANAGING ETHICS IN THE ORGANIZATION
CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 150
CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 207
CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 255
CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS 292
SECTION IV ORGANIZATIONAL ETHICS AND SOCIAL RESPONSIBILITY
CHAPTER 9 CORPORATE SOCIAL RESPONSIBILITY 322
CHAPTER 10 ETHICAL PROBLEMS OF ORGANIZATIONS 354
CHAPTER 11 MANAGING FOR ETHICS AND SOCIAL RESPONSIBILITY
IN A GLOBAL BUSINESS ENVIRONMENT 399
INDEX 449
iii
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CONTENTS
PREFACE XIII
SECTION I
INTRODUCTION
CHAPTER 1 INTRODUCING STRAIGHT TALK ABOUT MANAGING
BUSINESS ETHICS: WHERE WE’RE GOING AND WHY 2
Introduction 2
The Financial Disaster of 2008 4
Borrowing Was Cheap 4
Real Estate Became the Investment of Choice 5
Mortgage Originators Peddled ‘‘Liar Loans’’ 5
Banks Securitized the Poison and Spread It Around 6
Those Who Were Supposed to Protect Us Didn’t 7
Moving Beyond Cynicism 9
Can Business Ethics Be Taught 13
Aren’t Bad Apples the Cause of Ethical Problems in Organizations? 13
Shouldn’t Employees Already Know the Difference between Right and Wrong? 15
Aren’t Adults’ Ethics Fully Formed and Unchangeable? 16
This Book is about Managing Ethics in Business 19
Ethics and the Law 20
Why Be Ethical? Why Bother? Who Cares? 21
Individuals Care about Ethics: The Motivation to be Ethical 21
Employees Care about Ethics Employee Attraction and Commitment 23
Managers Care about Ethics 23
Executive Leaders Care about Ethics 24
Industries Care about Ethics 26
Society Cares about Ethics: Business and Social Responsibility 27
The Importance of Trust 27
The Importance of Values 29
How the Book is Structured 30
Conclusion 32
Discussion Questions 32
v
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Exercise: Your Cynicism Quotient 33
Notes 34
SECTION II
ETHICS AND THE INDIVIDUAL
CHAPTER 2 DECIDING WHAT’S RIGHT:
A PRESCRIPTIVE APPROACH 38
Introduction 38
Ethical Dilemmas 38
Prescriptive Approaches to Ethical Decision Making in Business 39
Focus on Consequences (Consequentialist Theories) 40
Focus on Duties, Obligations, and Principles (Deontological Theories) 42
Focus on Integrity (Virtue Ethics) 46
Eight Steps to Sound Ethical Decision Making in Business 52
Step One: Gather the Facts 52
Step Two: Define the Ethical Issues 52
Step Three: Identify the Affected Parties (the Stakeholders) 53
Step Four: Identify the Consequences 54
Step Five: Identify the Obligations 56
Step Six: Consider Your Character and Integrity 56
Step Seven: Think Creatively about Potential Actions 57
Step Eight: Check Your Gut 58
Practical Preventive Medicine 58
Doing Your Homework 58
When You’re Asked to Make a Snap Decision 59
Conclusion 61
Discussion Questions 62
Exercise: Clarifying Your Values 63
Case: Pinto Fires 64
Notes 69
CHAPTER 3 DECIDING WHAT’S RIGHT:
A PSYCHOLOGICAL APPROACH 71
Introduction 71
Ethical Awareness and Ethical Judgment 71
Individual Differences, Ethical Judgment, and Ethical Behavior 75
Ethical Decision-Making Style 76
Cognitive Moral Development 77
Locus of Control 84
Machiavellianism 85
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Moral Disengagement 86
Facilitators of and Barriers to Good Ethical Judgment 88
Thinking about Fact Gathering 88
Thinking about Consequences 89
Thinking about Integrity 91
Thinking about Your Gut 93
Unconscious Biases 94
Emotions in Ethical Decision Making 95
Toward Ethical Action 97
Revisiting the Pinto Fires Case: Script Processing and Cost-Benefit Analysis 102
Cost-Benefit Analysis 103
Conclusion 105
Exercise: Understanding Cognitive Moral Development 105
Discussion Questions 106
Notes 107
CHAPTER 4 ADDRESSING INDIVIDUALS’ COMMON
ETHICAL PROBLEMS 111
Introduction 111
Identifying Your Values—and Voicing Them 112
People Issues 114
Discrimination 115
Harassment, Sexual and Otherwise 119
Conflicts of Interest 122
What Is It? 123
How We Can Think about This Issue 125
Why Is It an Ethical Problem? 126
Costs 126
Customer Confidence Issues 127
What Is It? 127
How We Can Think about This Issue 131
Why Is It an Ethical Problem? 131
Costs 131
Use of Corporate Resources 132
What Is It? 132
How We Can Think about This Issue 136
Why Is It an Ethical Problem? 136
Costs 136
When All Else Fails: Blowing the Whistle 137
When Do You Blow the Whistle? 139
How to Blow the Whistle 140
Conclusion 145
Discussion Questions 145
Notes 147
CONTENTS vii
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SECTION III
MANAGING ETHICS IN THE ORGANIZATION
CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 150
Introduction 150
Organizational Ethics as Culture 151
What Is Culture? 151
Strong versus Weak Cultures 151
How Culture Influences Behavior: Socialization and Internalization 152
Ethical Culture: A Multisystem Framework 153
Alignment of Ethical Culture Systems 154
Ethical Leadership 156
Executive Leaders Create Culture 156
Leaders Maintain or Change Organizational Culture 157
Other Formal Cultural Systems 166
Selection Systems 166
Values and Mission Statements 168
Policies and Codes 169
Orientation and Training Programs 171
Performance Management Systems 172
Organizational Authority Structure 175
Decision-Making Processes 178
Informal Cultural Systems 180
Role Models and Heroes 180
Norms: ‘‘The Way We Do Things around Here’’ 182
Rituals 182
Myths and Stories 183
Language 185
Organizational Climates: Fairness, Benevolence, Self-Interest, Principles 187
Developing and Changing the Ethical Culture 188
How an Ethical Culture Can Become an Unethical Culture 189
Becoming a More Ethical Culture 190
A Cultural Approach to Changing Organizational Ethics 192
Audit of the Ethical Culture 193
A Cultural Systems View 193
A Long-Term View 194
Assumptions about People 194
Diagnosis: The Ethical Culture Audit 194
Ethical Culture Change Intervention 196
The Ethics of Managing Organizational Ethics 198
Conclusion 198
Discussion Questions 198
viii CONTENTS
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Case: Culture Change at Texaco 199
Case: An Unethical Culture in Need of Change: Tap Pharmaceuticals 201
Notes 203
CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 207
Introduction 207
Structuring Ethics Management 208
Making Ethics Comprehensive and Holistic 210
Managing Ethics: The Corporate Ethics Office 211
Ethics and Compliance Officers 212
The Ethics Infrastructure 214
The Corporate Ethics Committee 215
Communicating Ethics 215
Basic Communications Principles 216
Evaluating the Current State of Ethics Communications 219
Multiple Communication Channels for Formal Ethics Communication 220
Interactive Approaches to Ethics Communication at USAA 222
Mission or Values Statements 224
Organizational Policy 226
Codes of Conduct 227
Communicating Senior Management Commitment to Ethics 227
Formal and Informal Systems to Resolve Questions and Report Ethical Concerns 235
Using the Reward System to Reinforce the Ethics Message 238
Evaluating the Ethics Program 239
Surveys 240
Values or Compliance Approaches 242
Globalizing An Ethics Program 243
Conclusion 245
Discussion Questions 245
Case: Improving an Ethical Culture at Georgia-Pacific 247
Appendix: How Fines Are Determined under the U.S. Sentencing Guidelines 252
Notes 253
CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 255
Introduction 255
In Business, Ethics Is about Behavior 255
Practical Advice for Managers: Ethical Behavior 256
Our Multiple Ethical Selves 256
The Kenneth Lay Example 257
The Dennis Levine Example 259
Practical Advice for Managers: Multiple Ethical Selves 259
Rewards and Discipline 260
People Do What’s Rewarded and Avoid Doing What’s Punished 260
People Will Go the Extra Mile to Achieve Goals Set by Managers 261
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How Goals Combined with Rewards Can Encourage Unethical Behavior 262
Practical Advice for Managers: Goals, Rewards and Discipline 263
Recognize the Power of Indirect Rewards and Punishments 264
Can Managers Really Reward Ethical Behavior? 266
What about the Role of Discipline? 267
Practical Advice for Managers: Discipline 269
‘‘Everyone’s Doing It’’ 270
People Follow Group Norms 270
Rationalizing Unethical Behavior 270
Pressure to Go Along 271
Practical Advice for Managers: Group Norms 271
People Fulfill Assigned Roles 272
The Zimbardo Prison Experiment 273
Roles at Work 274
Conflicting Roles Can Lead to Unethical Behavior 275
Roles Can Also Support Ethical Behavior 275
Practical Advice for Managers: Roles 276
People Do What They’re Told 276
The Milgram Experiments 277
Obedience to Authority at Work 279
Practical Advice for Managers: Obedience to Authority 279
Responsibility Is Diffused in Organizations 279
‘‘Don’t Worry—We’re Taking Care of Everything’’ 280
Diffusing Responsibility in Groups 280
Diffusing Responsibility by Dividing Responsibility 281
Diffusing Responsibility by Creating Psychological Distance 282
Practical Advice for Managers: Personal Responsibility 283
Conclusion 284
Discussion Questions 285
Case: Sears, Roebuck, and Co.: The Auto Center Scandal 285
Notes 289
CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS 292
Introduction 292
Managers and Employee Engagement 292
Managing the ‘‘Basics’’ 295
Hiring and Work Assignments 295
Performance Evaluation 296
Discipline 299
Terminations 301
Why Are These Ethical Problems? 303
Costs 303
Managing a Diverse Workforce 304
Diversity 305
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Harassment 306
Family and Personal Issues 307
Why Are These Ethical Problems? 309
Costs 309
The Manager as a Lens 310
The Buck Stops with Managers 310
Managers Are Role Models 313
Managing Up and Across 314
Honesty Is Rule One 315
Standards Go Both Ways 315
Conclusion 316
Discussion Questions 317
Notes 318
SECTION IV
ORGANIZATIONAL ETHICS AND SOCIAL RESPONSIBILITY
CHAPTER 9 CORPORATE SOCIAL RESPONSIBILITY 322
Introduction 322
Why Corporate Social Responsibility? 322
Types of Corporate Social Responsibility 329
Economic Responsibilities 329
Legal Responsibilities 330
Ethical Responsibilities 330
Philanthropic Responsibilities 331
Triple Bottom Line and Environmental Sustainability 334
Is Socially Responsible Business Good Business? 337
The Benefit of a Good Reputation 338
Socially Responsible Investors Reward Social Responsibility 338
The Cost of Illegal Conduct 339
The Cost of Government Regulation 340
What the Research Says about Social Responsibility and Firm Performance 343
Being Socially Responsible Because It’s the Right Thing to Do 346
Conclusion 348
Discussion Questions 348
Case: Merck and River Blindness 349
Notes 351
CHAPTER 10 ETHICAL PROBLEMS OF ORGANIZATIONS 354
Introduction 354
Managing Stakeholders 355
CONTENTS xi
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Ethics and Consumers 356
Conflicts of Interest 357
Product Safety 365
Advertising 369
Ethics and Employees 373
Employee Safety 374
Employee Downsizings 378
Ethics and Shareholders 381
Ethics and the Community 386
Why Are These Ethical Issues 388
Costs 388
Conclusion 389
Discussion Questions 389
Notes 394
CHAPTER 11 MANAGING FOR ETHICS AND SOCIAL RESPONSIBILITY
IN A GLOBAL ENVIRONMENT 399
Introduction 399
Focus on the Individual Expatriate Manager 400
The Difficulties of Foreign Business Assignments 400
The Need for Structure, Training, and Guidance 400
Foreign Language Proficiency 401
Learning about the Culture 401
Recognizing the Power of Selective Perception 403
Assumption of Behavioral Consistency 404
Assumption of Cultural Homogeneity 404
Assumption of Similarity 405
Ethics-Related Training and Guidance 405
How Different Are Ethical Standards in Different Cultures—Really? 411
Development of Corporate Guidelines and Policies for Global Business Ethics 413
The Organization in a Global Business Environment 417
Deciding to Do Business in a Foreign Country 417
Development of a Transcultural Corporate Ethic 425
Conclusion 429
Discussion Questions 429
Case: Selling Medical Ultrasound Technology in Asia 431
Case: Google Goes to China 434
Appendix: Caux Round Table Principles for Business 440
Notes 444
INDEX 449
xii CONTENTS
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PREFACE
WHY DOES THE WORLD
NEED ANOTHER BUSINESS
ETHICS TEXT?
The popular business press is replete with feature stories describing ethical melt-
downs and how those corporate misdeeds have eroded the public trust of business
leaders and their organizations. As most of us learned at our parents’ knees, trust and
reputation are built over many years and take but an instant to be destroyed. So here
we stand at a crossroads. Is it going to be business as usual for business? Or are busi-
nesspeople going to commit to regaining the trust of our peers, our families, and our
fellow citizens?
In response to this crisis of trust, universities across the country are scrambling
to design new courses that incorporate leadership, communication skills, the basics of
human resources management, and ethics. That’s why we wrote this book; we want
to make the study of ethics relevant to real-life work situations. We want to help
businesspeople regain the trust that’s been squandered in the last few years.
This book is different from other business ethics texts in several key ways: First,
it was written by an unusual team. Linda Trevi~no is Distinguished Professor of Orga-
nizational Behavior and Ethics in the Management and Organization Department of
the Smeal College of Business at the Pennsylvania State University. Her prolific re-
search on the management of ethical conduct in organizations is published in the
field’s best journals and is internationally known and referenced. She has more than
20 years of experience in teaching students and executives in university and non-
university settings, and she also has experience as a corporate consultant and speaker
on ethics and management issues. Kate Nelson is a full-time faculty member at the
Fox School of Business at Temple University in Philadelphia, where she teaches
management, business ethics, and human resources to undergraduates. Before joining
Temple’s faculty, Kate worked for more than 30 years in strategic organizational
communication and human resources at a variety of companies including Citicorp,
Merrill Lynch, and Mercer HR Consulting. She also has worked as a consultant spe-
cializing in ethics and strategic employee communications and has designed ethics
programs for numerous organizations. We think that bringing together this diverse
mix of theory and practice makes the book unique.
xiii
E1PREF 07/09/2010 Page 14
Second, the approach of this book is pragmatic, and that approach is a di-
rect response to complaints and suggestions we have heard from students,
employees, and corporate executives. ‘‘Make it real,’’ they have said. ‘‘Tell us
what we need to know to effectively manage people. Take the mystery out of
this subject that seems so murky. Get to the point.’’ This book starts with the
assumption that ethics in organizations is about human behavior in those organi-
zations. We believe that behavior results from a number of factors, many of
which can be influenced by managers and the organizations themselves. As a
result, this book is organized into sections about individuals, managing in orga-
nizational context, and organizations in their broader environment, the ethical
dilemmas managers face, and how they might solve them. It also features philo-
sophical and psychological factors of decision making, ethical culture, how man-
agers can influence employees’ behavior through ethical leadership, what
corporations are doing to encourage ethical behavior and corporate social re-
sponsibility, and international business ethics.
Third, we have used a different mix of examples than is found in conventional
business ethics texts. Most texts focus on high-level, corporate dilemmas: ‘‘Should
senior executives be paid at a particular level? Should this industry do business in
China? Should American environmental laws apply to American companies operat-
ing overseas?’’
Although these are interesting issues, the vast majority of students and
employees will never have to face them. However, they will have to hire, man-
age, assess performance, discipline, fire, and provide incentives for staff, as well
as produce quality products and services and deal effectively and fairly with
customers, vendors, and other stakeholders. As a result, although we do feature
some classic corporate ethics cases, many of the cases in this book center on the
kinds of problems that most people will encounter during the course of their
careers. All of the ‘‘hypothetical’’ cases in this text are based on actual incidents
that have happened somewhere—it’s the real stuff that goes on every day in
offices across the country.
Fourth, this book was developed with the help of students at a number of
universities and with guidance from numerous managers and senior executives
from various corporations and organizations. We have incorporated the latest re-
search on ethics and organizational behavior into this text, and much of the ma-
terial that appears within these pages has been tested in both university and
corporate settings.
Fifth, we believe this book is easy to use because it is organized to be flexi-
ble. It can be used alone to teach an ethics course, or it can be used as a supple-
ment to a more conventional, philosophical text. The sections in this book
basically stand alone and can be taught in a different sequence than is presented
here, and the book also has many cases and vignettes you can use for class dis-
cussion. Wiley will create custom versions of the text with selected chapters if
requested to do so. To help teach this course, the instructor’s guide provides
resources such as outlines, overheads, discussion questions, and additional cases
xiv PREFACE
E1PREF 07/09/2010 Page 15
for class discussion; it also supplies references to many other resources that can
be used to teach the course.
A NOTE TO STUDENTS
This book was written for you. We have listened to your complaints and
your wish lists and have tried to pare this complicated subject down to a di-
gestible size. The cases that appear in this book all happened to people just
like you, who were not as prepared to deal with the dilemmas as you will be
after taking this course. Before you get into this book, we have one suggestion:
know that regardless of how large an organization you find yourself in, you’re
not some little cog in a giant wheel. You have the power to change not only
your own behavior and knowledge of ethics but also the behavior and knowl-
edge of the people you work with. Use that power: the job you save may be
your own.
We also want to suggest that when interviewing for your next job, you try to
make sure that you’re joining an organization that values ethics. Are ethics and val-
ues described in the firm’s recruiting materials? Do organizational representatives
talk about ethics and values during their interviews with you? When you ask about
how their organization demonstrates ethics and values, does your interviewer respond
enthusiastically, or does he or she look like a deer caught in headlights so you in-
stantly know that he or she has never even considered this question before? It’s much
easier to get into an ethical organization in the first place than try to get out of an
unethical one later on.
ACKNOWLEDGMENTS
It takes a lot of work by a lot of people to make a project like this come to-
gether. We’ll begin with some joint thank-yous. Then, because this process has
been so meaningful for each of us, we will separately share our more personal
thanks.
We both offer our heartfelt appreciation to current and former executives
who helped us with this and previous editions, in particular, Larry Axline, Jef-
frey Braun, Jacquelyn Brevard, Earnie Broughton, Steve Church, Frank Daly,
Srinivas Dixit, Ray Dravesky, Kent Druyvesteyn, Dennis Jorgensen, John
O’Byrne, Joe Paterno, Robert Paul, Jo Pease, Shirley Peterson, Vin Sarni, Carl
Skooglund, Nan Stout, Phil Tenney, and George Wratney. All shared their valu-
able time and advice, some of them on multiple occasions. Their wisdom can be
found throughout this book, but especially in Chapter 6. They helped bring the
subject of managing business ethics to life.
We also wish to thank Gary Weaver (University of Delaware) for being our
philosophy adviser for the first edition, and Dennis Gioia (Penn State faculty
member and dear friend) for sharing his Pinto fire case and especially his
reflections.
PREFACE xv
E1PREF 07/09/2010 Page 16
John Wiley & Sons, Inc. is a fine publisher with a superb team. These people
encouraged, nudged, nudged, and nudged again. We have many Wiley people to
thank for helping to make this book a success.
The book’s past and present reviewers also contributed significantly to making
this a better book, and we thank them as well. We also thank our students and partic-
ularly Penn State undergraduate, MBA, and Executive MBA students who provide us
with excellent feedback and advice semester after semester.
SPECIAL ACKNOWLEDGMENTS—FROM
LINDA K. TREVIIÑO
I have always wondered what makes people do especially good and bad things.
As the child of Holocaust survivors, I have a unique perspective on and curios-
ity about such issues. My parents and their families escaped Nazi Germany be-
fore Hitler began killing Jews en masse, but not before my maternal grandfather
was severely beaten and not before my fraternal grandfather was taken to a con-
centration camp (euphemistically referred to as a work camp at the time). My
father’s family received papers allowing them to emigrate from Germany to the
United States shortly before the war began (in spring 1939), allowing my grand-
father to be released from the camp where he was being held. Both families
landed in New York, where they survived through sheer grit, perseverance, and
belief in the American dream. Although my family never dwelled on their expe-
riences in Germany, I grew up with a special sensitivity and concern for equality
and fair treatment. I traveled to Germany with my dad and brother about 30
years ago. We visited the tiny towns where Mom and Dad were born and met
some wonderful German people who had helped them or at least tried to. I
walked through a German village holding hands with the elderly woman who
had been my maternal grandmother’s best friend and who urged the family to
leave Germany because she anticipated the worst. I met another elderly woman
who had cared for my father and aunt when they were children and who tried to
take care of their home when they were forced to leave everything behind.
These were special people, and the opportunity to connect with them holds a
special place in my heart. So my family and background influenced me in ways
I can’t fully grasp with my mind but in ways that I feel in my soul. And I know
that my quest to understand what makes people do good and bad things has
something to do with that influence.
Many special people have helped along the path that brought me to the writing of
this book. I’ll begin by thanking my mentors in the doctoral program at Texas A&M
University’s management department. Many thanks to Stuart Youngblood (now at
Texas Christian University), Don Hellriegel, Richard Woodman, Dick Daft (now at
Vanderbilt University), and Mary Zey, who encouraged my early theorizing and re-
search in business ethics. They told me to go with my gut and to do what was impor-
tant, and they supported my every step. My exceptional colleagues in the
xvi PREFACE
E1PREF 07/09/2010 Page 17
Management and Organizational Department at Penn State have also been supportive
all along the way. They have read my papers and challenged me to think harder and
make my work ever better.
My thanks also to the colleagues who have worked with me on ethics-related
research over the years and who have been partners in learning about the manage-
ment of business ethics: particularly Gail Ball, Michael Brown, Ken Butterfield,
James Detert, David Harrison, Laura Hartman, Jennifer Kish Gephart, Don McCabe,
Bart Victor, Gary Weaver, and more. This shared learning has contributed to the
book in important ways.
Shortly after becoming a faculty member at Penn State, I had the good fortune to
meet my friend and coauthor, Kate Nelson. I was intrigued by a brief Wall Street
Journal article about Kate’s work at Citibank (you’ll read more about that later). We
met and became fast friends, who (believe it or not) loved talking about business
ethics. We decided to write an article together, and the rest, as Kate says, is history.
Kate brought the real world into this book. She was also willing to tell me when I was
getting too academic (not her words exactly). It became clearer and clearer to me that
we were supposed to write this book together, and I’m very glad we did. Thanks,
Kate!
The article became a book proposal that we first shared with publishers at the
Academy of Management meeting in 1992 (almost 20 years ago now). Shortly there-
after, Bill Oldsey (formerly publisher at John Wiley & Sons, Inc.) showed up in my
office at Penn State. His enthusiasm for the book was immediate and infectious, and
he talked us into writing a textbook rather than a trade book. I want to thank Bill for
the special part he played.
Over the years, Penn State colleagues, administrators, and donors have contin-
ued to support my efforts in the area of business ethics. I am grateful to the Cook
family, especially the late Ann Cook, for supporting business ethics at Smeal and the
Cook Fellowship that I held for a number of years. My thanks also to Mrs. Mercedes
Shoemaker (and her late husband, Albert) for supporting the Shoemaker program in
Business Ethics that has brought us wonderful speakers on the topic of business
ethics year after year. Finally, I am especially grateful to Dean James Thomas for
naming me Distinguished Professor of Organizational Behavior and Ethics.
My association with the Ethics Resource Center Fellows program (see www.
ethics.org) has connected me with executives who manage ethics in large business
organizations as well as consultants and those in government who are interested in
making the business world (and the rest of the world, for that matter) a more ethical
place. I appreciate the relationships and the learning that have come from this associ-
ation as well as the time these executives have shared with me. In particular, I appre-
ciate the funding that this group has provided for research that has found its way into
this book, especially research on executive ethical leadership.
My heartfelt thanks also go to family members, colleagues, and many dear
friends not only for cheering me on (as usual) but also for their many contributions to
this book. They have served as readers and interviewees. They have provided clip-
ping services, helped me make contacts, and offered ideas for cases. They were there
PREFACE xvii
http://www.ethics.org
http://www.ethics.org
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when I was overwhelmed. I can’t thank them enough. Finally, I thank the light of my
life, Dan, for the inspiration, love, and support he provides every day of my life and
for being one of the most ethical human beings I know.
SPECIAL ACKNOWLEDGMENTS—FROM
KATHERINE A. NELSON
I began to learn about ethics and integrity as a very young child in a family where
‘‘doing it right’’ was the only option. I was blessed to grow up hearing about how
your reputation is priceless and you must always guard it and act in ways that
enhance that reputation. As a result, my biggest debt is to my parents, the late Harry
R. and Bernadette Prendergast Nelson (formerly of New Hartford, New York), and
my brother, James V. Nelson of Pasadena, California. My parents worked tirelessly
to set Jim and me on the right path, and Jim’s generosity and enthusiastic support
encouraged me not only to teach ethics but also to write this book. (Jim proved to me
that one can be an investment banker and have high ethical standards, and I’m very
proud of him.) I’m also grateful to Jim’s wife, Susan, for her many encouraging
words of support and for giving our family its two most precious additions, Conor
Vincent and James Patrick Nelson. Thanks to my dearest friends, for their friendship,
love, and support: Rose Ciotta, Elizabeth Dow, Carol Dygert, Ann Frazier Hedberg,
and Gail Martin. Thanks also to the educational institutions that provided me with a
sound footing in values: Utica Catholic Academy in Utica, New York, and the Col-
lege of Mount St. Vincent in Riverdale, New York.
If I had ever known how much fun it is to teach, I might have made the
transition to academia much earlier. Many thanks to the deans at the Fox School
of Business at Temple University—including Moshe Porat, Rajan Chandran, and
Diana Breslin Knudson, who took a chance on my teaching ability—and thanks
to my many students past and present, who have enriched my life in ways I
could not have imagined. Sincere thanks also to my many colleagues at Temple,
who were so welcoming to this corporate refugee and who made me feel so
much a part of this wonderful institution, especially: Norm Baglini, Gary Blau,
Debbie Campbell, Kathleen Davis, Arlene Dowd, Deanna Geddes, Terry Hal-
bert, John McClendon, and Don Wargo.
Thanks go to the many managers who, each in his or her own way, taught
me that business ethics need not be an oxymoron: Christopher York, Don Armi-
ger, Peter Thorp, Judith Fullmer, Jerry Lieberman, and Jane Shannon—all for-
merly with Citicorp in New York City; and Debra Besch, Charlie Scott, and
Lea Peterson, all currently or formerly with Mercer HR Consulting in Philadel-
phia and Boston. And thank you to Allan Kennedy, the coauthor of the ground-
breaking book from the late 1970s, Corporate Cultures. While working at
Citicorp as a McKinsey consultant back in 1985, Allan was the very first person
who encouraged me to go into ethics by helping me germinate the idea of de-
signing an ethics game for Citicorp.
xviii PREFACE
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The most important thank-you goes to my wonderful husband, Stephen J.
Morgan—an honorable man if there ever was one—who inspires and loves me every
day. This book and my teaching would not be possible without his support, wisdom,
and encouragement.
Of course, a final thank-you goes to my coauthor, Linda Trevi~no, for her dear,
dear friendship and for working with me to produce this book in what, in comparison
to accounts from other writing teams, was an almost painless experience.
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S E C T I O N I
INTRODUCTION
1
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C H A P T E R1
INTRODUCING STRAIGHT
TALK ABOUT MANAGING
BUSINESS ETHICS: WHERE
WE’RE GOING AND WHY
INTRODUCTION
Back in 1993, when we sat down to write the first edition of this book, people won-
dered if business ethics was just a fad. At that point, companies were just beginning
to introduce ethics into orientations and management training programs. In academia,
business ethics was just beginning to gain traction as a subject for serious academic
study and some business schools were going so far as to require a business ethics
course to graduate.
Back then there was still the feeling among many experts that business ethics—
like time management, quality circles, and other management buzzwords of the
day—would soon become a footnote in texts that described business fads of the late
twentieth century. Despite multiple waves of scandal over the years, these have often
been portrayed as temporary blips. For example, one prominent business writer for
Fortune Magazine wrote an article in 2007 entitled ‘‘Business is Back!’’ Here’s a
choice excerpt . . . ‘‘It must be said: The shaming is over. The 51/2 year humiliation
of American business following the tech bubble’s burst and the Lay-Skilling-Fastow-
Ebbers-Kozlowski-Scrushy perp walks that will forever define an era has run its
course. After the pounding and the ridicule, penance has finally been done. No longer
despised by the public, increasingly speaking up and taking stands, beloved again by
investors, chastened and much changed—business is back.’’1 Could he have been
more wrong? Business managed to outdo itself on the shame index yet again just
about a year later. We’ve seen these ethical debacles occur regularly for the past
25 years. As a result, we’re convinced that business ethics is far from a fad. It’s an
ongoing phenomenon that must be better understood and managed and for which
business professionals must be better prepared.
We tell our students that serious ethical scandals often result from multiple parties
contributing in their own small or large ways to the creation of a catastrophe. As you’ll
2
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read later on in this book, Enron’s collapse in 2001 was not just the failure of Enron
executives and employees, but also the failure of Enron’s auditors, the bankers who
loaned the company money, and the lawyers who never blew the whistle on Enron’s
shenanigans. However, no scandal of recent years—not even Enron—matches the
financial industry debacle in 2008. The crisis was unparalleled in its scope and has
fueled public outrage like no other business disaster in our lifetime. The aftermath has
people around the world angry and mistrustful of companies, governments, regulators,
rating agencies, and the people who work in them. If there was ever a crisis of trust and
confidence, this is it. It is also a textbook-perfect example of how numerous people’s
actions (and inactions) can conspire to spawn an almost unimaginable calamity.
Recent business history has proven beyond any doubt that divorcing business
from ethics and values runs huge risks. Rushworth Kidder,
2 the highly regarded
ethics writer and thinker, recently wrote about the financial debacle and the resulting
public anger. He eloquently described how free marketers cite Adam Smith’s Wealth
of Nations to justify a breed of capitalism that abhors regulation and focuses on short-
term profits over long-term stewardship. Kidder wisely noted that 17 years before his
more famous book, Smith wrote another one entitled The Theory of Moral Senti-
ments. Smith’s first book deserves more attention because he always presumed that
the messages from these two books would go hand in hand. Smith’s ‘‘moral senti-
ments’’ work rests on the assumption that human beings are empathetic; they care
about others, and they derive the most joy from human love and friendship. His book
opened with the following statement: ‘‘How selfish soever man may be supposed,
there are evidently some principles in his nature, which interest him in the fortune of
others. . . . ’’3 Smith believed that a good life derives from the expression of ‘‘benefi-
cence,’’ not from material wealth. He acknowledged that self-love (which he also
acknowledged) can spur the individual to better his own condition by besting com-
petitors. But he argued that this must be done in a just manner and in the spirit of fair
play as judged by an informed, ethical, and impartial spectator. We care what others
think of us because we are first and foremost social beings. But we also are moral
beings who want to do the right thing because it is the right thing to do (not just to
win the praise of others). According to Smith, virtuous persons balance prudence
(mature self-love), strict justice, and benevolence, and ideal societies are comprised
of such persons. Finally, a flourishing and happy society is built upon a foundation of
justice and rules of conduct that create social order. Smith was confident that human-
kind would progress toward this positive ethical state; he called on leaders to avoid
the arrogance of power and, instead, to be virtuous statesmen. Kidder’s point was that
capitalism will succeed only when firmly tethered to a moral base, and he reminds us
that Adam Smith—that hero of free marketers—knew that better than anyone.
We completely agree. We began this book almost 20 years ago with the firm
belief that business isn’t just ‘‘better’’ when companies and businesspeople are ethi-
cal, but rather that good ethics is absolutely essential for effective business practice.
This is not just empty rhetoric. Work is essential to life, and most people work for a
business of some kind. How we work and the standards we uphold while we are
working affect much more than just commerce. Our business behavior also affects
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our personal and company reputations, politics, society at large, and even national
reputation. For example, the 2008 financial crisis, while global in scope, had its roots
in the United States, and the nation’s reputation has suffered because of the behavior
of individuals and companies. Similarly, China’s reputation has suffered because
of contaminants found in Chinese exports such as infant formula, drywall (used in
construction), and children’s toys. So, corporate misbehavior does not happen in a
vacuum, and it’s not just corporate reputations that suffer as a result. These scandals
cast long shadows, and they often affect entire industries and countries. In this com-
plex and increasingly transparent world, where reputation influences everything from
who wants to hire you or trade with you to who buys your products to who finances
your debt—and much more—unethical behavior in business is a very big deal
indeed. So, let’s take a closer look at the elephant in the room: the near collapse of
the financial markets in 2008 and what it has to do with business ethics.
THE FINANCIAL DISASTER OF 2008
The implosion of the financial markets in 2008 was largely not the result of illegal
behavior. For the most part, the activities that brought down the U.S. economy and
others around the world were not against the law, at least not yet (government regula-
tors and the legal system often play catch-up after ethical debacles in business).
Many of those activities, however, were unethical in that they ultimately produced
great harm and were contrary to a number of ethical principles such as responsibility,
transparency, and fairness. Let’s start with some of the factors that laid the ground-
work for the disaster in the United States.
Borrowing Was Cheap
First, borrowing money became really cheap. In 2000, stocks in high-technology com-
panies had soared to unsustainable heights and that bubble finally burst. To soften the
effects on the U.S. financial markets, Alan Greenspan, who headed the Federal
Reserve at that time, lowered the Fed Funds rate (the rate at which banks borrow
money from the Federal Reserve) to almost zero. That move, seemingly innocent at
the time, injected huge amounts of money into the U.S. financial system. It made the
cost of borrowing so low that it fueled a glut of consumer borrowing. Suddenly, it was
amazingly cheap to buy a new car, a wide-screen television, a backyard pool, a larger
home, a second home, and all sorts of designer goodies. There was even encourage-
ment to indulge. Following the terrorist attacks in September 2001, President George
W. Bush told people that if they wanted to help the economy they should go shop-
ping. And people did. Household debt levels rose to $13.9 billion in 2008, almost
double what households owed in 2000, and savings dipped into negative territory.
(Since the financial crisis, household savings have risen to 6.9 percent.4) Responsible
borrowers should have thought about what they could afford rather than what bankers
would lend to them. And responsible lenders should have established that borrowers
could actually afford to pay back the loans before lending them money.
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Real Estate Became the Investment of Choice
Of course, people also want to invest in something safe, and what could be safer than
real estate? There had been relatively few instances of real estate values declining,
and when they did the declines were generally shallow and short-lived. A point of
pride in the United States was the high percentage of Americans who owned their
own homes. Investing in a home traditionally had been a very safe investment and
one that was slow to appreciate in value. But suddenly in the early 2000s, real estate
investing became a real moneymaker. With a backdrop of historically low interest
rates, real estate became such a popular way to invest that demand soon outstripped
supply and prices soared. The value of homes skyrocketed—homes that were selling
for $300,000 in one year sold for $450,000 the next. Prices rose so fast that specula-
tion grew tremendously. People bought houses with almost no down payment,
remodeled them or waited a few months, and then resold the houses for a quick profit.
A number of popular television programs showed viewers how to ‘‘flip’’ real estate
properties for profit.
Since the cost of borrowing was so low and home equity had grown so quickly,
many consumers borrowed on the equity in their homes and purchased additional real
estate or a new car or financed a luxury vacation. For example, suppose someone
purchased a house for $500,000 in 2003. By 2005, the home might have been worth
$800,000. The home owner refinanced the mortgage—borrowing as much as the
entire current worth of the house (because its value could only go up, right?), which
resulted in a $300,000 cash infusion for the home owner. This practice was very
popular, and it laid the groundwork for a huge disaster when the housing values fell
off a cliff in 2008 and 2009. Imagine the home owner who refinanced the home
just described. Imagine that he took the $300,000 and purchased a summer home and
a sports car and paid for his children’s college educations. Suddenly, home values
plummeted and his house lost 30 percent of its value, which was common in mar-
kets such as California, Florida, Nevada, or Arizona, where the real estate bubble
was particularly inflated. After the real estate bubble burst, his house was worth
$560,000. Now suppose he loses his job and needs to sell his house because he can’t
afford the mortgage payments. He can’t get $800,000 for his home, which is what he
owes on his mortgage. His only choice is to work with the mortgage holder (probably
a bank) to refinance (unlikely) or declare bankruptcy and walk away from the house.
This is what a lot of home owners have done, and it is one of the factors at the heart
of the current financial crisis. Lots of folks were in on this bubble mentality, getting
what they could in the short term and not thinking very much about the likelihood (or
inevitability) that the bubble would burst.
Mortgage Originators Peddled ‘‘Liar Loans’’
In the early 2000s, as housing investments increased in popularity, more and more
people got involved. Congress urged lenders Freddie Mac and Fannie Mae to expand
home ownership to lower-income Americans. Mortgage lenders began to rethink the
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old rules of financing home ownership. As recently as the late 1990s, potential home
owners not only had to provide solid proof of employment and income to qualify
for a mortgage, but they also had to make a cash down payment of between 5 and
20 percent of the estimated value of the home. But real estate was so hot and returns
on investment were growing so quickly that mortgage lenders decided to loosen those
‘‘old-fashioned’’ credit restrictions. In the early 2000s, the rules for obtaining a mort-
gage became way less restrictive. Suddenly, because real estate values were rising so
quickly, borrowers didn’t have to put any money down on a house. They could bor-
row the entire estimated worth of the house; this is known as 100-percent financing.
Also, borrowers no longer needed to provide proof of employment or income. These
were popularly called ‘‘no doc’’ (no documentation) or ‘‘liar loans’’ because banks
weren’t bothering to verify the ‘‘truth’’ of what borrowers were claiming on their
mortgage applications.
Banks Securitized the Poison and Spread It Around
At about the same time liar loans were becoming popular, another new practice was
introduced to mortgage markets. Investors in developing countries were looking to
the United States and its seemingly ‘‘safe’’ markets for investment opportunities.
Cash poured into the country from abroad—especially from countries like China
and Russia, which were awash in cash from manufacturing and oil respectively.
Wall Street bankers developed new products to provide investment vehicles for
this new cash. One new product involved the securitization of mortgages. (Note:
structured finance began in 1984, when a large number of GMAC auto receivables
were bundled into a single security by First Boston Corporation, now part of Credit
Suisse.) Here’s how it worked: Instead of your bank keeping your mortgage until it
matured, as had traditionally been the case, your bank would sell your mortgage—
usually to a larger bank that would then combine your mortgage with many others
(reducing the bank’s incentive to be sure you would pay it back). Then the bankers
sold these mortgage-backed securities to investors, which seemed like a great idea
at the time. Real estate was traditionally safe, and ‘‘slicing and dicing’’ mortgages
divided the risk into small pieces with different credit ratings and spread the risk
around. Of course, the reverse was also true, as the bankers learned to their horror.
This method of dividing mortgages into little pieces and spreading them around
could also spread the contagion of poor risk. However, starting in 2002 and for
several years thereafter, people couldn’t imagine housing values falling. So much
money poured into the system, and the demand for these mortgage-backed security
products was so great, that bankers demanded more and more mortgages from
mortgage originators. That situation encouraged the traditional barriers to getting a
home mortgage to fall even farther. These investment vehicles were also based
upon extremely complex mathematical formulas (and old numbers) that everyone
took on faith and few attempted to understand. It looks like more people should
have followed Warren Buffett’s sage advice not to invest in anything you don’t
comprehend! Add to that toxic mix the relatively new idea of credit-default swaps
6 SECTION I INTRODUCTION
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(CDS). These complex financial instruments were created to mitigate the risk finan-
cial firms took when peddling products like securitized mortgages. CDS are insur-
ance contracts that protect the holder against an event of default on the part of a
debtor. One need not own the loan or debt instrument to own the protection, and
the amount of capital tied up in trading CDS is very small compared to trading
other debt instruments. That is a very significant part in the increase in popularity
at sell-side and buy-side trading desks. The big insurance company, AIG, was a
huge player in this market, and so were the large banks. The firms that were coun-
terparties to CDS never stepped back from the trading frenzy to imagine what
would happen if both the structured finance market and the real estate bubble burst
(as all bubbles eventually do) at the same time. Both underwriters and investors
would be left holding the bag when the music stopped playing—and the U.S. tax-
payer has had to bail out most of the financially-stressed firms to save the entire
financial system from collapse. Please note that all of this happened in a part of the
market that was virtually unregulated.
Those Who Were Supposed to Protect Us Didn’t
One protection against financial calamity was thought to be the rating agencies such
as Standard and Poor’s and Moody’s. They rate the safety or soundness of securities,
including those securitized mortgage products. A credit opinion is defined as one
which rates the timeliness and ultimate repayment of principal and interest. But, like
everyone else, the rating agencies say they didn’t foresee a decline in housing prices;
and consequently, they rated the mortgage securities as being AAA—the highest
rating possible, which meant that the rating agencies considered these securities to be
highly safe. The agencies are the subject of much criticism for their role in the crisis.
If they had done a better job analyzing the risk (their responsibility), much of the
crisis might have been avoided. But note that these rating agencies are hired and paid
by the companies whose products they rate, thus causing a conflict of interest that
many believe biased their ratings in a positive direction. So, people who thought they
were making responsible investments because they checked the ratings were misled.
Another protection that failed was the network of risk managers and boards of
directors of the financial community. How is it that one 400-person business that was
part of the formerly successful insurance behemoth, AIG, could invest in such a way
that it brought the world’s largest insurance company to its knees? The risk was
underestimated all around by those professionals charged with anticipating such
problems and by the board of directors that didn’t see the problem coming. The U.S.
government (actually taxpayers) ended up bailing out AIG to the tune of $170 billion.
The risk managers and boards of other financial firms such as Citigroup, Merrill
Lynch, Lehman Brothers, Bear Stearns, and Wachovia were similarly blind.
On Wall Street, there were other contributing factors. First, bank CEOs and other
executives were paid huge salaries to keep the price of their firms’ stocks at high
levels. If their institutions lost money, their personal payouts would shrink. So, bank
executives were paid handsomely to bolster short-term profits. The Wall Street
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traders were similarly compensated—they were paid multimillion-dollar bonuses for
taking outsized risks in the market. What seemed to matter most were the short-term
profits of the firm and the short-term compensation of those making risky decisions.
The traders took risks, the bets were at least temporarily successful, and the bankers
walked off with multimillion-dollar bonuses. It didn’t matter that the risk taking was
foolish and completely irresponsible in the long run. The bonus had already been
paid. Consequently, a short-term mentality took firm root among the nation’s bank-
ers, CEOs, and boards of directors.
Finally, we can’t examine the financial crisis without questioning the role of
regulatory agencies and legislators. For example, for a decade, investor Harry
Markopolos tried on numerous occasions to spur the Securities and Exchange
Commission to investigate Bernard L. Madoff. The SEC never did uncover the
largest Ponzi scheme in the history of finance. The $65-billion-dollar swindle
unraveled only when Madoff admitted the fraud to his sons, who alerted the SEC
and the U.S. attorney’s office in New York in December 2008. Others who are
culpable in the financial crisis are members of the U.S. Congress, who deregu-
lated the financial industry, the source of some of their largest campaign contribu-
tions. Among other things, they repealed the Glass-Steagall Act, which had been
passed after the U.S. stock market crash in 1929 to protect commercial banking
customers from the aggression and extreme risk taking of investment bank
cultures. The act created separate institutions for commercial and investment
banks, and they stayed separate until the merger of Citicorp and Travelers to
form Citigroup in 1998. The two companies petitioned Congress to eliminate
Glass-Steagall, claiming that it was an old, restrictive law and that today’s mar-
kets were too modern and sophisticated to need such protection. And Congress
listened. Those 1930s congressmen knew that if two banking cultures tried to
exist in the same company—the staid, conservative culture of commercial bank-
ing (our savings and checking accounts) and the razzle-dazzle, high-risk culture
of investment banking—the ‘‘eat what you kill’’ investment bank culture would
win out. Some said that staid old commercial banks turned into ‘‘casinos.’’ But,
interestingly, casinos are highly regulated and are required to keep funds on hand
to pay winners. In the coming months, we expect to learn more about the behav-
ior that led to this crisis. As we noted earlier, much if not most of it was probably
legal because of the lack of regulation in the mortgage and investment banking
industries. But look at the outcome! If only ethical antennae had been more sensi-
tive, more people might have questioned products they didn’t understand, or spo-
ken out or refused to participate in practices that were clearly questionable. As
just one tiny example, could anyone have thought it was ethical to sell a product
they called a liar loan, knowing that the customer surely would be unable to repay
(even if it was legal to do so)?
You’ll read much more about the crisis and its relationship to ethics in subse-
quent chapters. Right now, let’s delve into the cynicism this and previous scandals
have created and then try to move beyond it so that you can do things differently in
the future.
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MOVING BEYOND CYNICISM
After multiple waves of business scandal, some cynicism (a general distrust) about
business and its role in society is probably healthy. But cynicism about business has
truly become an epidemic in the United States. To be fair, we should note that
although the financial industry screwed up royally, at the same time most other main-
stream American companies were ‘‘running their companies with strong balance
sheets and sensible business models.’’5 Most companies were responsible, profitable,
and prudent. Because they had serious cash reserves, many of them have actually
managed to weather the recent crisis reasonably well. But the attention has not
been on these responsible companies. It’s been on the financial sector and its
irresponsibility. How bad is the cynicism? According to the 2009 Edelman Trust
Barometer6—a survey of almost 4,500 college-educated people around the world—
it’s very bad, especially in the United States. (Edelman is the world’s largest indepen-
dent public relations firm with 53 offices around the world. Its business is helping
companies build and maintain reputation.) Edelman’s study shows that consumer
trust in corporations has declined precipitously. More than half of the respondents
stated that they trust business less than they did one year ago (in 2008). The decrease
is particularly acute in the United States, where citizens have traditionally had higher
opinions of business than they do in Europe. The only part of the world where trust
levels have not declined is in the developing world—the so-called BRIC nations
(Brazil, Russia, India, China). The study also outlines the business case for trust.
Over a one-year period, 91 percent of consumers stated that they purchased a product
of service from a company they trust. Conversely, 77 percent of consumers refused to
purchase a product or service from a company that they mistrusted. This study
suggests that corporate reputation affects consumer buying patterns, and companies
risk harming their bottom line when they do not act to protect their good name.
But, consistent with our idea that business ethics is not a fad, neither is public
cynicism about business ethics new. We have written about it in every edition of our
book (since 1995). Surely, the factor that has contributed the most to cynicism in
recent years is the highly visible behavior of some of the nation’s leading corpora-
tions and executives, whose activities have garnered so much space in the business
press and on the evening news. How do you watch hour after hour of such reporting
and not walk away jaded? In the last few years, all you had to do was read about or
watch the news to feel cynical, and business school students are no exception. We
also note that business is not alone in its scandalous behavior. In recent years, we’ve
learned about government employees who stole or misused funds, academics who
falsified their research results, ministers who stole from their congregations, priests
who abused children, and athletes who took bribes or used performance-enhancing
drugs. It seems that no societal sector is immune.
Many of our readers are business school students, the current or future managers
of business enterprises. Surveys suggest that many business students are themselves
surprisingly cynical about business (given that they’ve chosen it as their future pro-
fession). They believe that they’ll be expected to check their ethics at the corporate
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door or that they will be pressured to compromise their own ethical standards in order
to succeed.7 Consider this scenario that took place at a large university: A professor
asked his class to name management behaviors that are morally repugnant. His class
struggled to name one! In another of his classes, the professor asked if the students
would dump carcinogens in a river. This time the class agreed that they would do so
because if they didn’t, someone else would. When the professor asked if they really
wanted to live in such a cynical environment, the class insisted that they already did.
The dismayed professor believed that the attitudes of his students were formed long
before they landed in his classroom. He agreed with other observers that the problem
goes way beyond business and business schools and that our society, with its empha-
sis on money and material success, is rearing young people who strive for achieve-
ment at any cost. One symptom: cheating is pervasive in many high schools and
colleges.8 This scenario is enough to make anyone wonder about today’s business
students. But at the same time, we know that students at many colleges and univer-
sities, including business schools, are encouraging their own faculty and administra-
tors to establish newly invigorated academic integrity policies and honor codes. In an
honor code community, students take responsibility for implementing the academic
integrity policy and for holding each other accountable to it. They manage study-run
judiciaries that mete out serious discipline to their fellow students who tarnish the
community by cheating. These efforts, which are gaining real traction at many
schools, suggest that at least some students have had enough and are willing turn
from cynicism toward a proactive approach to change things.
A 2008 Aspen Institute study of nearly 2,000 MBA students from 15 leading
international business schools provides some insight into MBA students’ attitudes,
which appear to be moving in a less cynical direction. Similar to the findings of
Aspen’s 2002 survey, the 2008 survey of MBA students indicates that they anticipate
facing difficult values conflicts in their jobs and suggests some cynicism about ethics
in the workplace. However, about 40 percent of these students believe that their busi-
ness education is preparing them to manage values conflicts ‘‘a lot,’’ and another
50 percent believe that they’re being prepared somewhat. Also, more than a quarter
of the respondents said they are interested in finding a job that gives them the oppor-
tunity to contribute to society (compared to only 15 percent in 2002). More than half
believe that safe, high-quality products and responsible governance and transparent
business practices are very important for a potential employer. In addition, more than
half said they would advocate alternative values or approaches in response to values
conflicts at work (many more than in 2002).
9
The media may be largely responsible for students’ cynical attitudes. Think
about the depiction of business and its leaders in movies and on television. The
Media Research Center conducted a survey of 863 network TV sitcoms, dramas, and
movies in the mid-1990s. Nearly 30 percent of the criminal characters in these pro-
grams were business owners or corporate executives. Entrepreneurs were represented
as drug dealers, kidnappers, or sellers of defective gear to the military.10Fortune
magazine called this ‘‘the rise of corporate villainy in prime time.’’11 Movies have
abounded with negative messages about corporate America. Think Wall Street,
10 SECTION I INTRODUCTION
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Boiler Room, Civil Action, Glengarry Glen Ross, The Insider, Erin Brockovich,
Supersize Me, The Corporation, Enron: The Smartest Guys in the Room, Michael
Clayton, The International, Quiz Show, The Insider, and Bowling for Columbine.
And there are more such movies every year; we’re sure you can add to the list. A
much tougher exercise is to generate a list of movies that actually create a positive
ethical impression of business. Can you think of any? Consistent negative representa-
tion of business in the media has its effects. Academic research suggests that cyni-
cism toward American business increased after study participants viewed the film
Roger & Me, which depicted ruthless plant closings and layoffs at General Motors.12
Imagine the cumulative, daunting effect of viewing countless movies and television
programs that portray business as corrupt and business leaders as ruthless and
unethical.
To counter that media-fueled cynicism at least somewhat, we encourage you to
think about your own life and the hundreds of reliable products and services you trust
and depend on every day as well as the people and businesses that produce them.
These good folks are businesspeople too, but it isn’t nearly as exciting or sexy for the
media to portray businesspeople who do the right thing every day. We also encourage
you to talk with businesspeople you know, perhaps people in your own family who
work for businesses. Do they feel pressured to compromise their ethical standards, or
do they see their employer in a more positive light? Interestingly, the Ethics Resource
Center’s 2009 National Business Ethics Survey found that only 8 percent of employ-
ees of for-profit enterprises report feeling pressured to compromise their ethical stan-
dards. That means that more than 90 percent say that they’re not feeling such
pressure. Also, nearly two thirds of these employees said that their own company has
a strong or strong-leaning ethical culture. What does that mean? To us, it means that
most Americans who work in business think that their own company and coworkers
are pretty ethical. Still, they read the same media accounts and see the same movies
and TV programs as everyone else, and these offerings influence cynicism about
American business in general.13
Finally, we won’t leave a discussion of cynicism without talking about the
events of September 11, 2001. While the business scandals of 2001–02 left many
cynical, the events of September 11, 2001, showed us some of the best in many indi-
viduals and businesses. We have read about the care, compassion, and assistance that
countless American firms gave to those who were harmed by the terrorist attacks.
Few firms were hit as hard as Sandler O’Neill & Partners, a small but profitable Wall
Street investment bank that lost 66 of its 171 employees—including two of the firm’s
leading partners—on September 11. The firm’s offices had been on the 104th floor of
the World Trade Center. Despite its dire financial straits, the firm sent every deceased
employee’s family a check in the amount of the employee’s salary through the end of
the year and extended health-care benefits for five years. Bank of America quickly
donated office space for the firm to use. Competitors sent commissions their way and
freely gave the company essential information that was lost with the traders who had
died. Larger Wall Street firms took it upon themselves to include Sandler in their
deals. The goal was simply to help Sandler earn some money and get back on its
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feet.14 This is only one of the many stories that point to the good that exists in the
heart of American business. In this book, we offer a number of positive stories to
counterbalance the mostly negative stories portrayed in the media.
The bottom line is this. We’re as frustrated as you are about the media portrayal
of business and the very real, unethical behavior that regularly occurs in the business
community. But, we also know that the business landscape is a varied one that is
actually dominated by good, solid businesses and people who are even heroic and
extraordinarily giving at times. So, for our cynical readers, we want to help by doing
two things in this book: (1) empowering managers with the tools they need to address
ethical problems and manage for ethical behavior, and (2) providing positive exam-
ples of people and organizations who are ‘‘doing things right’’ to offset some of the
media-fueled negativity. We agree with Coach Joe Paterno, Penn State’s legendary
football coach, whose program has always been known for integrity. He said this in
response to our questions about cynicism: ‘‘I don’t care what cynical people say. I
don’t really pay attention. These are small people who . . . don’t have the confidence
or courage to do it the right way. And when they see someone doing it the right way,
deep down they feel guilty. They’d rather say that it can’t be done . . . that every-
body cheats. I hear that all the time. ‘Fine,’ I say. ‘You think what you want.’ I know
what I do. People around me know. You’ve got to just run your organization. You
can’t worry about what these cynical people say.’’
Some business school students seem to agree with Joe. In May 2009, something
notable and quite positive happened. A group of 20 second-year students at Harvard
Business School created The MBA Oath in an attempt to articulate the values they felt
their MBA degree ought to stand for:
The MBA Oath
As a business leader I recognize my role in society.
& My purpose is to lead people and manage resources to create
value that no single individual can create alone.
& My decisions affect the well-being of individuals inside and
outside my enterprise, today and tomorrow.
Therefore I promise:
& I will manage my enterprise with loyalty and care, and will not
advance my personal interests at the expense of my enterprise or
society.
& I will understand and uphold, in letter and spirit, the laws and
contracts governing my conduct and that of my enterprise.
& I will refrain from corruption, unfair competition, or business
practices harmful to society.
12 SECTION I INTRODUCTION
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& I will protect the human rights and dignity of all people affected by
my enterprise, and I will oppose discrimination and exploitation.
& I will protect the right of future generations to advance their stan-
dard of living and enjoy a healthy planet.
& I will report the performance and risks of my enterprise accu-
rately and honestly.
& I will invest in developing myself and others, helping the man-
agement profession continue to advance and create sustainable
and inclusive prosperity.
In exercising my professional duties according to these principles, I
recognize that my behavior must set an example of integrity, eliciting
trust and esteem from those I serve. I will remain accountable to my
peers and to society for my actions and for upholding these standards.
This oath I make freely, and upon my honor.
This focus on positive values among business students and business in general
received significant publicity and turned into something of a movement. More than
400 graduates of Harvard Business School signed the oath, and they were joined by
business students from 119 other colleges and universities globally. For more infor-
mation, go to www.mbaoath.org.
CAN BUSINESS ETHICS BE TAUGHT?
Given all that has happened, you may be wondering whether business ethics can be
taught. Perhaps all of the bad behavior we outlined earlier results from a relatively few
‘‘bad apples’’ who never learned ethics from their families, clergy, previous schools, or
employers.15 If this were so, ethics education would be a waste of time and money, and
resources should be devoted to identifying and discarding bad apples, not trying to
educate them. We strongly disagree, and the evidence is on our side.
Aren’t Bad Apples the Cause of Ethical Problems
in Organizations?
According to the bad apple theory, people are good or bad and organizations are
powerless to change these folks. This bad apple idea16 is appealing in part because
unethical behavior can then be blamed on a few individuals with poor character.
Although it’s unpleasant to fire people, it’s relatively easier for organizations to
search for and discard a few bad apples than to search for some organizational
problem that caused the apple to rot.
Despite the appeal of the bad apple idea, ‘‘character’’ is a poorly defined con-
cept, and when people talk about it, they rarely define what they mean. They’re prob-
ably referring to a complex combination of traits that are thought to guide individual
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http://www.mbaoath.org
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behavior in ethical dilemma situations. If character guides ethical conduct, training
shouldn’t make much difference because character is thought to be relatively stable:
it’s difficult to change, persists over time, and guides behavior across different con-
texts. Character develops slowly as a result of upbringing and the accumulation of
values that are transmitted by schools, families, friends, and religious organizations.
Therefore, people come to educational institutions or work organizations with an
already defined good or poor character. Good apples will be good and bad apples
will be bad.
In fact, people do have predispositions to behave ethically or unethically (we talk
about this in Chapter 3). And sociopaths can certainly slip into organizations with the
sole intent of helping themselves to the organization’s resources, cheating customers,
and feathering their own nests at the expense of others. Famous scoundrels like
Bernie Madoff definitely come to mind. Such individuals have little interest in
‘‘doing the right thing,’’ and when this type of individual shows up in your organiza-
tion, the best thing to do is discard the bad apple and make an example of the incident
to those who remain.
But discarding bad apples generally won’t solve an organization’s problem with
unethical behavior. The organization must scrutinize itself to determine if something
rotten inside the organization is spoiling the apples. For example, Enron encouraged
a kind of devil-may-care, unethical culture that is captured in the film, Enron: The
Smartest Guys in the Room. Arthur Andersen’s culture morphed from a focus on the
integrity of audits to a consulting culture that focused almost exclusively on feeding
the bottom line (you’ll read more about that in Chapter 5). In this book you’ll learn
that most people are not guided by a strict internal moral compass. Rather, they look
outside themselves—to their environment—for cues about how to think and behave.
This was certainly true in the financial crisis when the mantra became ‘‘everyone is
doing it’’ (and making a lot of money besides). At work, managers and the organiza-
tional culture transmit many cues about how employees should think and act. For
example, reward systems play a huge role by rewarding short-term thinking and
profits, as they did in the recent financial crisis. In this book, you’ll learn about the
importance of these organizational influences and how to harness them to support
ethical behavior and avoid unethical behavior.
So, apples often turn bad because they’re spoiled by ‘‘bad barrels’’—bad work
environments that not only condone, but may even expect unethical behavior. Most
employees are not bad folks to begin with. But their behavior can easily turn bad if
they believe that their boss or their organization expects them to behave unethically
or if everyone else appears to be engaging in a particular practice. In this view, an
organization that’s serious about supporting ethical behavior and preventing mis-
conduct must delve deeply into its own management systems and cultural norms and
practices to search for systemic causes of unethical behavior. Management must take
responsibility for the messages it sends or fails to send about what’s expected. If
ethics problems are rooted in the organization’s culture, discarding a few bad apples
without changing that culture isn’t going to solve the problem. An effective and last-
ing solution will rely on management’s systematic attention to all aspects of the
14 SECTION I INTRODUCTION
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organization’s culture and what it is explicitly or implicitly ‘‘teaching’’ organiza-
tional members (see Chapter 5).
This question about the source of ethical and unethical behavior reflects the
broader ‘‘nature/nurture’’ debate in psychology. Are we more the result of our genes
(nature) or our environments (nurture)? Most studies find that behavior results from
both nature and nurture. So, when it comes to ethical conduct, the answer is not
either/or, but and. Individuals do come to work with predispositions that influence
their behavior, and they should take responsibility for their own actions. But the
work environment can also have a large impact. In this book, you’ll learn a lot about
how that work environment can be managed to produce ethical rather than unethical
conduct.
Shouldn’t Employees Already Know the Difference
between Right and Wrong?
A belief associated with the good/bad apple idea is that any individual of good char-
acter should already know right from wrong and can be ethical without special train-
ing—that a lifetime of socialization from parents and religious institutions should
prepare people to be ethical at work. You probably think of yourself as an individual
of good character, but does your life experience to date prepare you to make a com-
plex business ethics decision? Did your parents, coaches, and other influential people
in your life ever discuss situations like the one that follows? Think about this real
dilemma.
You’re the VP of a medium-sized organization that uses chemicals in its produc-
tion processes. In good faith, you’ve hired a highly competent scientist to ensure that
your company complies with all environmental laws and safety regulations. This
individual informs you that a chemical the company now uses in some quantity is not
yet on the approved Environmental Protection Agency (EPA) list. However, it has
been found to be safe and is scheduled to be placed on the list in about three months.
You can’t produce your product without this chemical, yet regulations say that you’re
not supposed to use the chemical until it’s officially approved. Waiting for approval
would require shutting down the plant for three months, putting hundreds of people
out of work, and threatening the company’s very survival. What should you do?
The solution isn’t clear, and good character isn’t enough to guide decision mak-
ing in this case. As with all ethical dilemmas, values are in conflict here—obeying
the letter of the law versus keeping the plant open and saving jobs. The decision is
complicated because the chemical has been found to be safe and is expected to be
approved in a matter of months. As in many of today’s business decisions, this com-
plex issue requires the development of occupation-specific skills and abilities. For
example, some knowledge in the area of chemistry, worker safety, and environmental
laws and regulations would be essential. Basic good intentions and a good upbringing
aren’t enough.
James Rest, a scholar in the areas of professional ethics and ethics education,
argued convincingly that ‘‘to assume that any 20-year-old of good general character
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can function ethically in professional situations is no more warranted than assuming
that any logical 20-year-old can function as a lawyer without special education.’’17
Good general character (whatever that means) doesn’t prepare an individual to deal
with the special ethical problems that are likely to arise in a career. Individuals must
be trained to recognize and solve the unique ethical problems of their particular occu-
pation. That’s why many professional schools (business, law, medicine, and others)
have added ethics courses to their curricula, and it’s why most large business organi-
zations now conduct ethics training for their employees.
So, although individual characteristics are a factor in determining ethical behav-
ior, good character alone simply doesn’t prepare people for the special ethical prob-
lems they’re likely to face in their jobs or professions. Special training can prepare
them to anticipate these problems, recognize ethical dilemmas when they see them,
and provide them with frameworks for thinking about ethical issues in the context of
their unique jobs and organizations.
Aren’t Adults’ Ethics Fully Formed and Unchangeable?
Another false assumption guiding the view that business ethics can’t be taught is the
belief that one’s ethics are fully formed and unchangeable by the time one is old
enough to enter college or a job. However, this is definitely not the case. Research
has found that through a complex process of social interaction with peers, parents,
and other significant persons, children and young adults develop in their ability to
make ethical judgments. This development continues at least through young adult-
hood. In fact, young adults in their twenties and thirties who attend moral develop-
ment educational programs have been found to advance in moral reasoning even
more than younger individuals do.18 Given that most people enter professional edu-
cation programs and corporations as young adults, the opportunity to influence their
moral reasoning clearly exists.
Business school students may need ethics training more than most because
research has shown they have ranked lower in moral reasoning than students in
philosophy, political science, law, medicine, and dentistry.19 Also, undergraduate
business students and those aiming for a business career were found to be more likely
to engage in academic cheating (test cheating, plagiarism, etc.) than were students in
other majors or those headed toward other careers.20 At a minimum, professional
ethics education can direct attention to the ambiguities and ethical gray areas that are
easily overlooked without it. Consider this comment from a 27-year-old Harvard stu-
dent after a required nine-session module in decision making and ethical values at the
beginning of the Harvard MBA program.
Before, [when] I looked at a problem in the business world, I never con-
sciously examined the ethical issues in play. It was always subconscious
and I hope that I somewhat got it. But that [ethics] was never even a
consideration. But now, when I look at a problem, I have to look at the
impact. I’m going to put in this new ten-million-dollar project. What’s
16 SECTION I INTRODUCTION
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going to be the impact on the people that live in the area and the environ-
ment. . . . It’s opened my mind up on those things. It’s also made me
more aware of situations where I might be walking down the wrong path
and getting in deeper and deeper, to where I can’t pull back.21
In 2004, Harvard’s MBA class of 1979 met for its 25-year reunion. The alumni
gave the dean a standing ovation when he said that a new required course on values
and leadership was his highest priority and then pledged to ‘‘live my life and lead the
school in a way that will earn your trust.’’22
It should be clear from the above arguments that ethics can indeed be taught.
Ethical behavior relies on more than good character. Although good upbringing may
provide a kind of moral compass that can help the individual determine the right
direction and then follow through on a decision to do the right thing, it’s certainly
not the only factor determining ethical conduct. In today’s highly complex organiza-
tions, individuals need additional guidance. They can be trained to recognize the
ethical dilemmas that are likely to arise in their jobs; the rules, laws, and norms that
apply in that context; reasoning strategies that can be used to arrive at the best ethical
decision; and the complexities of organizational life that can conflict with one’s
desire to do the right thing. For example, businesses that do defense-related work are
expected to comply with a multitude of laws and regulations that go far beyond what
the average person can be expected to know.
The question of whether ethics should be taught remains. Many still believe that
ethics is a personal issue best left to individuals. They believe that much like prose-
lytizing about religion, teaching ethics involves inappropriate efforts to impose
certain values and control behavior. But we believe that employers have a real
responsibility to teach employees what they need to know to recognize and deal with
ethical issues they are likely to face at work. Failing to help employees recognize the
risks in their jobs is like failing to teach a machinist how to operate a machine safely.
Both situations can result in harm, and that’s just poor management. Similarly, we
believe that, as business educators, we have a responsibility to prepare you for the
complex ethical issues you’re going to face and to help you think about what you can
do to lead others in an ethical direction.
DEFINING ETHICS Some of the controversy about whether ethics can or should be
taught may stem from disagreement about what we mean by ethics. Ethics can be
defined as ‘‘a set of moral principles or values’’—a definition that portrays ethics as
highly personal and relative. I have my moral principles, you have yours, and neither
of us should try to impose our ethics on the other.
But our definition of ethics—‘‘the principles, norms, and standards of conduct
governing an individual or group’’—focuses on conduct. We expect employers to
establish guidelines for work-related conduct, including what time to arrive and leave
the workplace, whether smoking is allowed on the premises, how customers are to be
treated, and how quickly work should be done. Guidelines about ethical conduct
aren’t much different. Many employers spend a lot of time and money developing
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policies for employee activities that range from how to fill out expense reports to
what kinds of client gifts are acceptable to what constitutes a conflict of interest or
bribe. If we focus on conduct, ethics becomes an extension of good management.
Leaders identify appropriate and inappropriate conduct, and they communicate their
expectations to employees through ethics codes, training programs, and other com-
munication channels.
In most cases, individual employees agree with their company’s expectations
and policies. For example, who would disagree that it’s wrong to steal company
property, lie to customers, dump cancerous chemicals in the local stream, or comply
with regulations on defense contracts? At times, however, an employee may find the
organization’s standards inconsistent with his or her own moral values or principles.
For example, a highly religious employee of a health maintenance organization may
object to offering abortion as an alternative when providing genetic counseling to
pregnant women. Or a highly devoted environmentalist may believe that his or her
organization should go beyond the minimum standards of environmental law when
making decisions about how much to spend on new technology or on environmental
cleanup efforts. These individuals may be able to influence their employers’ policies.
Otherwise, the person’s only recourse may be to leave the organization for one that is
a better values match.
GOOD CONTROL OR BAD CONTROL? Whether or not we prefer to admit it, our
ethical conduct is influenced (and to a large degree controlled) by our environment.
In work settings, leaders, managers, and the entire cultural context are an important
source of this influence and guidance. If, as managers, we allow employees to drift
along without our guidance, we’re unintentionally allowing them to be ‘‘controlled’’
by others. If this happens, we’re contributing to the creation of ‘‘loose cannons’’ who
can put the entire organization at risk. Guidance regarding ethical conduct is an im-
portant aspect of controlling employee behavior. It can provide essential information
about organizational rules and policies, and it can give guidance about behavior that
is considered to be appropriate or inappropriate in a variety of situations.
But should organizations be ‘‘controlling’’ their employees in this way? B. F.
Skinner,23 the renowned psychologist, argued that it’s all right, even preferable, to
intentionally control behavior. He believed that all behavior is controlled, either
intentionally or unintentionally. Therefore what was needed was more intentional
control, not less. Similarly, ethical and unethical behavior in organizations is already
being controlled explicitly or implicitly by the existing organizational culture (see
Chapter 5). Thus organizations that neglect to teach their members ‘‘ethical’’ behav-
ior may be tacitly encouraging ‘‘unethical behavior’’ through benign neglect. It’s
management’s responsibility to provide explicit guidance through direct manage-
ment and through the organization’s culture. The supervisor who attempts to influ-
ence the ethical behavior of subordinates should be viewed not as a meddler but as a
part of the natural management process.
To summarize, we believe that educational institutions and work organizations
should teach people about ethics and guide them in an ethical direction. Adults are
18 SECTION I INTRODUCTION
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open to, and generally welcome, this type of guidance. Ethical problems are not
caused entirely by bad apples. They’re also the product of bad barrels—work envi-
ronments that either encourage unethical behavior or merely allow it to occur.
Making ethical decisions in today’s complex organizations isn’t easy. Good inten-
tions and a good upbringing aren’t enough. The special knowledge and skill required
to make good ethical decisions in a particular job and organizational setting may
be different from what’s needed to resolve personal ethical dilemmas, and this
knowledge and skill must be taught and cultivated.
THIS BOOK IS ABOUT MANAGING ETHICS
IN BUSINESS
This book offers a somewhat unique approach to teaching business ethics. Instead of
the traditional philosophical or legalistic approach, we take a managerial approach.
Between us, we have many years of experience in management, in consulting, and in
management teaching and research. Based on this experience, we begin with the
assumption that business ethics is essentially about human behavior. We believe that
by understanding human behavior in an organizational context, we can better under-
stand and manage our own and others’ ethical conduct. Kent Druyvesteyn was vice
president for ethics at General Dynamics from 1985 to 1993 and one of the first
‘‘ethics officers’’ in an American company. He made a clear distinction between
philosophy and management in his many talks with students and executives over the
years. As he put it, ‘‘I am not a philosopher and I am not here to talk about philoso-
phy. Ethics is about conduct.’’
We agree with Mr. Druyvesteyn. After years of study and experience, we’re con-
vinced that a management approach to organizational ethics is needed. As with any
other management problem, managers need to understand why people behave the
way they do so that they can influence this behavior. Most managers want the people
they work with to be productive, to produce high-quality products, to treat customers
well, and to do all of this in a highly ethical manner. They also want and need help
accomplishing these goals.
Therefore we rely on a managerial approach to understanding business ethics.
We introduce concepts that can be used to guide managers who want to understand
their own ethical behavior and the behavior of others in the organization. And we
provide practical guidance to those who wish to lead their department or organization
in an ethical direction.
We define ethical behavior in business as ‘‘behavior that is consistent with the
principles, norms, and standards of business practice that have been agreed upon by
society.’’ Although some disagreement exists about what these principles, norms, and
standards should be, we believe there is more agreement than disagreement. Many
of the standards have been codified into law. Others can be found in company and
industry codes of conduct and international trade agreements.
Importantly, we treat the decisions of people in work organizations as being
influenced by characteristics of individuals and organizations. We also recognize
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that work organizations operate within a broad and complex global business context.
We will cover individual decision making, group and organizational influences, and
the social and global environment of business. The first part of this perspective, the
influences on individual decision making, is represented in Figure 1.1.
ETHICS AND THE LAW
It’s important to think about the relationship between the law and business ethics
because if one could just follow the law, a business ethics book wouldn’t be neces-
sary. Perhaps the easiest way to visualize the relationship between business ethics
and the law is in terms of a Venn diagram (Figure 1.2). If we think of the law as
reflecting society’s minimum norms and standards of business conduct, we can see a
great deal of overlap between what’s legal and what’s ethical. Therefore most people
believe that law-abiding behavior is also ethical behavior. But many standards of
conduct are agreed upon by society and not codified in law. For example, some con-
flicts of interest may be legal, but they are generally considered unethical in our
society and are commonly prohibited in codes of ethics. Having an affair with some-
one who reports to you may be legal, but it is considered unethical in most corporate
contexts. As we said earlier, much of the behavior leading to the 2008 financial crisis
was legal, but unethical. So the domain of ethics includes the law but extends well
beyond it to include ethical standards and issues that the law does not address.
Finally, there are times when you might encounter a law that you believe is unethical.
For example, racial discrimination was legal in the United States for a long time. But
racial discrimination was and is highly unethical. Similarly, many companies do
business in developing countries with few, if any, laws regulating environmental
pollution or labor conditions. They can ‘‘legally’’ pollute the air and water in these
countries. Such companies have to choose between adhering to ethical standards that
are higher than the legal standards in those countries and deciding that it’s okay to
CHARACTERISTICS OF INDIVIDUALS
Individual differences
Cognitive biases
Group and organizational pressures
Organizational culture
CHARACTERISTICS OF ORGANIZATIONS
ETHICAL
AWARENESS
ETHICAL
BEHAVIOR
ETHICAL
JUDGMENT
Process of Individual Ethical Decision Making
FIGURE 1.1 The Ethical Decision-Making Process
20 SECTION I INTRODUCTION
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harm the well-being of these people and communities. So the legal and ethical do-
mains certainly overlap, but the overlap is far from complete.
WHY BE ETHICAL? WHY BOTHER? WHO CARES?
Assuming that you ‘‘buy’’ the notion that business ethics can be taught, and that as
current or future managers you have a role to play in creating an environment sup-
portive of ethical conduct, you may still wonder why you should care about being
ethical. As workers, we should care about ethics because most of us prefer to work
for ethical organizations. We want to feel good about ourselves and the work we do.
As responsible citizens, we must care about the millions of people who lost retire-
ment savings because of the greed of those at AIG, Citigroup, Lehman Brothers,
Merrill Lynch, and other financial firms that brought down the global economy in
2008. These people are our parents, spouses, siblings, children, and friends—they’re
us! We live in a world community, and we’re all inextricably connected to each other
and to the environment that surrounds us. Our future depends on our caring enough.
Above all, it is the right thing to do.
Individuals Care about Ethics: The Motivation To Be Ethical
Classical economists assume that practically all human behavior, including altruism,
is motivated solely by self-interest—that humans are purely rational economic actors
who make choices solely on the basis of cold cost-benefit analyses. But a new group
of economists who call themselves behavioral economists have found that people are
not only less rational than classical economists assumed, but more moral. Much evi-
dence suggests that people act for altruistic or moral purposes that seemingly have
little to do with cost-benefit analyses.24 For example, people will mail back lost wal-
lets to strangers, cash and all; help strangers in distress; and donate blood marrow for
strangers or a kidney to a family member. Also, the large majority of people will
refrain from stealing even if it’s easy to do so.
Ethics
Law
FIGURE 1.2 Relationship between Ethics and Law
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In his book The Moral Dimension, Amitai Etzioni25 cited many more examples
and research evidence to document his claim that human action has two distinct sour-
ces: the pursuit of self-interest and moral commitments. Accordingly, most human
decisions are based on ethical and emotional considerations as well as rational eco-
nomic self-interest. People are motivated by both economic and moral concerns.
In a typical behavioral economics experiment called ‘‘the ultimatum game,’’
subject A in the experiment receives 10 one-dollar bills and can give subject B any
number of them. Subject B can choose to accept or reject A’s offer. If B accepts, they
each get what was offered. If B rejects the offer, each gets nothing. From a pure
economics perspective, A would do best offering B one dollar and keeping the rest.
B should accept that offer because, in economic terms, getting one dollar is better
than nothing. But most A subjects offer B close to half the total, an average of about
four dollars. B subjects who are offered one or two dollars generally reject the offer.
Economists can’t explain this result based upon rational self-interest. People’s sense
of fairness seems to be driving both subjects’ behavior. Interestingly, when people
play the game with a machine, they are more likely to play as classical economics
would predict because they don’t expect a machine to be ‘‘fair.’’ Autistic A players
(whose autism means that they don’t take others’ feelings into account) also play as
the theory would predict. So most people expect fair play in their interactions with
other human beings, and they will even forgo economic benefits in order to maintain
a fair system.
Neuroscience is also beginning to substantiate the moral sense that develops
in humans. New imaging technologies have allowed scientists to locate a unique
type of neuron in the brain—spindle cells—that light up when people perceive
unfairness or deception. Only humans and African apes have these cells. But an
adult human has over 82,000 of them, whereas a gorilla has around 16,000 (perhaps
explaining why a gorilla might save a human child). A chimp has less than 2,000.
In humans, these cells appear at around 4 months of age and gradually increase
with moral development.
26
In 2003, neuroscientists looked inside the brains of people playing the ultimatum
game using functional magnetic resonance imaging (fMRI) scans. They found that
unfair offers were associated with heightened activity in parts of the brain associated
with strong negative emotions as well as in other parts of the brain associated with
long-term planning. Those who rejected the unfair offers had more activity in the
emotional part of the brain, which is the part that usually wins out.27
Given these research findings, we begin this book with an important assump-
tion—that, as human beings and members of society, all of us are hardwired with a
moral and ethical dimension as well as self-interested concerns. People care about
ethics for reasons that stem from both of these sources.
Beyond being hardwired for fairness and altruism, employees are also concerned
about their personal reputations. In today’s work environment, success depends on an
individual’s ability to work effectively with others. Trust greases the wheels of work-
ing relationships with peers across departments and on project teams. We disagree with
the old adage that ‘‘nice guys (or gals) finish last.’’ If it looks like bad guys (or gals)
22 SECTION I INTRODUCTION
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come out ahead, this is generally a short-run result. A reputation for being difficult to
work with, dishonest, or mean often catches up with you as coworkers withhold impor-
tant information and promotions go to others. Given the importance of relationships to
effectiveness in business today, your reputation for integrity is an essential ingredient
for success and personal satisfaction. This is even truer in an age of social networking
that can send news of bad behavior to a broad audience in seconds.
Employees Care about Ethics: Employee Attraction
and Commitment
Organizations are concerned about their ability to hire and retain the best workers.
The evidence suggests that employees are more attracted to and more committed to
ethical organizations. ‘‘People who know that they are working for something larger
with a more noble purpose can be expected to be loyal and dependable, and, at a
minimum, more inspired.’’28
Graduating students at nearly 150 colleges and universities now sign or recite the
‘‘Graduation Pledge,’’ in which they promise to ‘‘take into account the social and
environmental consequences of any job’’ they consider. They also pledge to ‘‘try to
improve these aspects of any organizations’’ where they work. Elite universities such
as Harvard and Cornell are participating. Prospective employers should be very inter-
ested in these graduates and their concerns that go beyond just making a living.29
(Go to www.graduationpledge.org for more information.)
Recent surveys confirm that it may be important to consider how potential and
current employees are affected by an organization’s ethics. In a survey conducted by
Working Woman magazine, ‘‘a strong majority of those polled said that they would
not work for a company with a history of environmental accidents, insider trading or
worker accidents, or a law firm that defends known racketeers.’’30 In another survey
conducted by a national opinion research firm, ethical corporate behavior, honest
company communications, and respectful treatment ranked among employees’ five
top-ranked goals—before good pay, which was 11th on the list, and job security,
which ranked 14th. Ethical corporate behavior was ranked so high because ‘‘workers
translate the ethics of the company into how they’re personally treated.’’ People
‘‘want to be proud of where they work.’’ They ‘‘don’t want to work for bandits, and
when companies get negative publicity for their activities, workers suffer.’’31
Managers Care about Ethics
Managers care about ethics in part because they face the thorny problem of how to
prevent and manage unethical behavior in their ranks. Ask any manager for exam-
ples, and be prepared to spend the day listening. More than their jobs depend on this
concern—managers can be held legally liable for the criminal activities of their sub-
ordinates. Further, the U.S. Chamber of Commerce estimates that workplace theft
costs U.S. businesses between $20 billion and $40 billion each year, and employees
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http://www.graduationpledge.org
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are thought to be responsible for much of it.32 In addition to self-interested behavior,
employees may engage in unethical behavior because they think (rightly or wrongly)
that it’s expected or that their behavior is justified because they’ve been treated un-
fairly. Or they simply may not know they are doing something that’s considered to be
unethical.33
Whatever its source, subordinates’ unethical behavior is a management problem
that won’t go away. It becomes even more of a challenge as restructuring continues
to reduce management layers, thus leaving fewer managers to supervise more work-
ers. With more workers to supervise, the manager can’t directly observe behavior.
Restructuring also increases the number of part-time or contingency workers. These
workers are likely to feel less loyalty to the organization and may be more prone to
engage in unethical behaviors such as theft.
Furthermore, more workers may cross the line between ethical and unethical be-
havior in response to fierce business competition and strict focus on the bottom line.
Employees may believe that they can help the company succeed (at least in the short
term) by fudging sales figures, abusing competitors, or shortchanging customers.
Those who are potential layoff candidates are also more likely to flirt with im-
propriety.34 Many perceive the message to be: ‘‘reaching objectives is what matters
and how you get there isn’t that important.’’35 Therefore today’s managers may have
to work even harder to communicate the idea that ethical conduct is expected, even in
the midst of aggressive competition.
Finally, many managers understand the positive long-term benefit a reputation
for ethics can bring to business dealings. Carl Skooglund, former ethics officer at
Texas Instruments, had this to say:
There are very positive, even competitive, reasons to be ethical. If you
walk into a relationship and somebody says, ‘‘I know you, I know your
track record, I can trust you,’’ that’s important. Two years ago, in a sur-
vey that we sent out to employees, I received an anonymous comment
from somebody who said, ‘‘A reputation for ethics which is beyond
reproach is a silent partner in all business negotiations.’’ I agree and it
works in all personal and business relationships. An unethical company is
very difficult to do business with. You can’t trust them. You’re never sure
if a commitment’s a commitment. At TI, our customers have told us that
they can be sure of one thing: Once TI commits, we’re going to break our
tail to make it happen. That’s an easy company to do business with.
Executive Leaders Care about Ethics
Some of us are understandably cynical about CEO ethics after the widely publicized
scandals, huge compensation packages, and CEO ‘‘perp walks’’ of recent years. But
many business executives do care about ethics in their own organizations and about
business’s image in society.
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John Akers, former chairman of the board of IBM, wrote: ‘‘No society anywhere
will compete very long or successfully with people stabbing each other in the back;
with people trying to steal from each other; with everything requiring notarized con-
firmation because you can’t trust the other fellow; with every little squabble ending
in litigation; and with government writing reams of regulatory legislation, tying busi-
ness hand and foot to keep it honest. . . . There is no escaping this fact; the greater
the measure of mutual trust and confidence in the ethics of a society, the greater its
economic strength.’’36
Jeffrey Immelt, the CEO of General Electric, spoke powerfully about ethics at
Columbia University in October 2008 (available for viewing on YouTube). Immelt
described how, above all else, leaders had to consider their organizations and protect
their organizations for shareholders, employees, and the greater good. ‘‘I believe that
ethical behavior in 2008 starts first and foremost, as always, with a real sense of per-
manence, excellence, accountability, and safety, making sure that the enterprise
endures no matter how tough the situation becomes.’’
Jamie Dimon, CEO and chairman of JPMorgan Chase, talked about the impor-
tance of reputation in a June 2009 talk at Harvard Business School, his alma mater.
He said, ‘‘There is a book on each of you. It’s already being written. If I spoke to your
teachers, your friends, your professionals, your parents, I would know whether you’re
trusted, how hard you work, whether you’re ethical. . . . That book is already grow-
ing. Write it the way you want it to be written. . . . When you’re caught in situations
that are uncomfortable—you can always make the right decision. It’s your responsi-
bility whether you accept to do something or not, and it will be in that book written
on you.’’ Later in that same speech, he said, ‘‘Standards are not set by Harvard Busi-
ness School or the federal governments of the world; they are set by you. You have to
set high standards for performance. . . . You also have to set high standards of integ-
rity. At a lot of companies, you’ll hear, ‘‘Don’t worry about it, everyone does it that
way.’’ No, they don’t. And that standard’s got to be set across the board at all levels,
from little things to big things. I’ve been with kids who lied on T&Es [travel and
entertainment expenses]—they shared a cab and both put in 100% of the cab bill. . . .
That’s stealing. If I caught you doing that, I’d fire you. And everyone in the com-
pany knows that.’’ He also said, ‘‘surround yourself with truth tellers. . . . Every
leader needs at least one person around who tells them the truth. One is not
enough. If you are a leader and you have seven or eight people reporting to you
and one is a truth teller, you have a problem. Every single one of them should be
a truth teller. Dimon ended with this: ‘‘You will have awesome power that affects
people’s lives. Use it wisely and be just with it. . . . If you want to be a leader, it
can’t be about money. And, it can’t be about you. It’s about what you will even-
tually leave behind. What would you want on your tombstone? . . . For mine, I
just hope they say, ‘‘We miss him, and the world is a better place for him having
been here.’’
37 Interestingly, Dimon and his team recognized the problems with
subprime mortgages early, and JPMorgan Chase ended up virtually alone among
the big banks in avoiding the worst fallout from the financial crisis. They exited
the business of securitizing mortgages when business was still booming and their
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competitors (e.g., Citigroup, Merrill Lynch) were making bundles of cash. Perhaps
those truth tellers had something to do with this wise action. Dimon is known as
being vigilant about controlling risk even when that means short-term losses.38 It
paid off big this time.
Warren Buffett, the legendary investor and CEO of Berkshire Hathaway, had
perhaps the best idea about ethics and integrity when he said, ‘‘Somebody once said
that in looking for people to hire, you look for three qualities: integrity, intelligence,
and energy. And if they don’t have the first, the other two will kill you. You think
about it; it’s true. If you hire somebody without the first, you really want them to be
dumb and lazy.’’39
We believe that organizational ethics is a distinct managerial concern that must
be addressed by management at all levels of the organization.
Industries Care about Ethics
When companies get bad publicity for ethical scandals, whole industries suffer. So,
in some industries, companies have joined together in voluntary efforts to promote
ethical conduct among organizations in the industry. Prominent among these efforts
is the Defense Industry Initiative. A cynic might say that these initiatives are aimed
solely at preventing more intrusive government regulation and that companies in
these industries don’t truly ‘‘care’’ about ethics. Certainly, these types of initiatives
have generally begun in response to a scandal or crisis. But over the years, they tend
to take on a life of their own. Members internalize beliefs about appropriate conduct,
hire support staff, and develop structures for enforcement that become institutional-
ized among member organizations. The Defense Industry Initiative on Business Con-
duct and Ethics (DII) is a major voluntary industry initiative. It is described on the
organization’s website (www.dii.org) as ‘‘a consortium of U.S. defense industry con-
tractors which subscribes to a set of principles for achieving high standards of busi-
ness ethics and conduct.’’ It developed out of the President’s Blue Ribbon
Commission on Defense Management (the Packard Commission), which was con-
vened after a number of defense-industry scandals in the early 1980s. In 1986, the
commission concluded that the industry could be improved by focusing on corporate
self-governance. A number of companies voluntarily joined forces to ‘‘embrace and
promote ethical business conduct,’’ and their work together continues today. As of
July 2009, over 80 companies were signatories; as such, they have agreed to live
according to the following obligations:
& Adopt a written code of conduct.
& Conduct employees’ orientation and training with respect to the code.
& Provide employees a mechanism to express concerns about corporate com-
pliance with procurement laws and regulations.
& Adopt procedures for voluntary disclosure of violations of federal procure-
ment laws.
26 SECTION I INTRODUCTION
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& Participate in Best Practices Forums.
& Publish information that shows each signatory’s commitment to the above.
The organization hosts a two-day Best Practices Forum each year, in which the
industry’s prime customer, the Department of Defense, participates. It also hosts
workshops on specific topics, including an annual one-day workshop to train ethics
professionals, and publishes an annual report to the public and government summa-
rizing DII activities.
Society Cares about Ethics: Business and Social
Responsibility
Business ethics also matters because society cares. From an economic perspective,
businesses are powerful. Wal-Mart’s size and profits make it a more powerful eco-
nomic force than most countries. Business is learning that it must use its power
responsibly or risk losing it. Using power responsibly means being concerned for the
interests of multiple stakeholders—parties who are affected by the business and its
actions and who have an interest in what the business does and how it performs.40
These stakeholders include many constituencies: shareholders, employees, suppliers,
the government, the media, activists, and many more. And these stakeholders have
the power to interfere with a firm’s activities. For example, employees can strike,
customers can stop buying products, protesters can bring bad publicity, and the gov-
ernment can act to regulate a firm’s activities. Consequently, it’s a matter of para-
mount importance for organizations to consider all of their various stakeholders and
what those stakeholders expect and require before they make decisions that will
affect those various audiences. Increased regulation is almost a certain societal
response to business scandal, and with new regulation come increased costs and
reduced power for business. In addition, organizations that do not act responsibly
risk criminal liability and the resulting financial damage. Even without criminal
liability, businesses that don’t act responsibly risk their reputations, and a lost reputa-
tion is tough to rebuild. As business becomes more global and business practices
more transparent, it’s almost impossible to hide bad behavior. There is a growing
emphasis worldwide on corporate social responsibility (CSR), and this emphasis and
the reasons for it are covered in much more detail in Chapter 9.
THE IMPORTANCE OF TRUST
A more elusive benefit of ethics is trust. Although difficult to document, trust has
both economic and moral value. Scientists are beginning to understand the ‘‘biology
of trust.’’ In trusting relationships, neuroscientists have found that the brain releases a
hormone, oxytocin, that makes cooperation ‘‘feel good.’’
Trust is essential in a service economy, where all a firm has is its reputation for
dependability and good service. Individuals and organizations build trust accounts
that work something like a bank account.
41 You make deposits and build your trust
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reserve by being honest and by keeping commitments. You can draw on this account
and even make mistakes as long as the reserve is maintained. Having a trust reserve
allows the individual or organization the flexibility and freedom to act without scru-
tiny, thus saving a great deal of time and energy in all types of relationships. Imagine
a marriage that is based on trust. The partners go about their daily business without
feeling any need to check up on each other or to hire private detectives to confirm the
other’s whereabouts. The same is true of trust-based business relationships, where a
handshake seals a deal and a business partner’s word is considered to be a contract.
Corporations also build trust with their customers.
Johnson & Johnson made a huge contribution to its trust account when it recalled
all Tylenol from store shelves after the poisoning crisis in 1982 (a situation discussed
in more detail in Chapter 10). Despite no recall requirement and huge recall costs, the
company put its customers first. Trust may be even more important in efforts at
global collaboration and alliances, and in cross-cultural management teams. Trust
encourages open exchange of ideas and information, reduces the need for costly con-
trols, allows for rapid adjustment to change, and is associated with willingness to
work through cultural differences and difficulties.42
Trust accounts are easily overdrawn, however. And when they are, all flexibility
disappears. Every word and action is carefully checked and double-checked for signs
of dishonesty. In organizations, lawyers are hired, contracts are drawn up and signed,
and CYA (cover your you-know-what) memos fly. Recent corporate ethics scandals
have created a huge gap in the public’s trust. In an essay for Business Week titled
‘‘Can You Trust Anybody Anymore?’’ Bruce Nussbaum wrote:
There are business scandals that are so vast and so penetrating that they
profoundly shock our most deeply held beliefs about the honesty and in-
tegrity of our corporate culture. Enron Corp. is one of them. This financial
disaster goes far beyond the failure of one big company. This is corrup-
tion on a massive scale. Tremendous harm has befallen innocent employ-
ees who have seen their retirement savings disappear as a few at the top
cashed out. Terrible things have happened to the way business is con-
ducted under the cloak of deregulation. Serious damage has been done to
ethical codes of conduct held by once-trusted business professionals. . . .
Investor confidence is critical to the success of our economic system. . . .
People increasingly feel the game is rigged. . . . Who can come to the
rescue? The reputations of many of the professionals who were counted
on to safeguard the economic system lie in tatters. . . . What’s to be
done? . . . The lesson from the Enron debacle should be to restore basic
integrity to the bottom line, ethics to business professionals, and clout to
overseers that even a deregulated economy need.43
The entire American business system relies on the public’s faith and trust. That
trust has been shattered in a manner that could be extremely costly to society. A dec-
ade ago, the public considered the debacles at companies such as Enron, Arthur
28 SECTION I INTRODUCTION
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Andersen, WorldCom, Tyco, and Adelphia not as an anomaly, but as an example of
the workings of a business culture that has lost its way. Although some strides were
made to correct that not-very-flattering image of business, the financial crisis of 2008
was truly devastating to public trust in business, government, finance, and the econ-
omy. Harris Interactive, a polling company that regularly surveys the public to deter-
mine trust levels, uncovered astoundingly low levels of trust following the financial
scandals of 2008. In a survey conducted in May 2009, Harris Interactive found that
only 4 percent of the respondents said that Wall Street firms are honest and trustwor-
thy. The percentage is higher, but still dismal, for banks in general; 25 percent of
those surveyed would believe a statement made by someone who works for a bank.44
Unfortunately, all companies have been tainted by the scandals. Blue-chip companies
now face even closer scrutiny and skepticism of shareholders as they are being asked
to open their books and reveal much more information than has been recent prac-
tice.45 Meeting profit projections or beating them by a penny is being viewed suspi-
ciously as evidence of accounting chicanery rather than reliability.46 Confidence and
trust in the system must be restored, or access to capital (the engine of the entire
system) could be cut off. The good news is that many corporations are responding.
Boards of directors are replacing inside members with outsiders who are seen as
more independent. Stock options are being expensed. CEO compensation packages
that are seen as excessive are being cut. And executives are asking their people
whether they are living by the ‘‘spirit of the law’’ as well as the letter of the law.47
THE IMPORTANCE OF VALUES
As a theme even broader than trust, you can think of values as a kind of ‘‘glue’’ that
guides our thinking across the book. Values are relevant to individuals, to organiza-
tions, and to societies. For individuals, values can be defined as ‘‘one’s core beliefs
about what is important, what is valued, and how one should behave across a wide
variety of situations.’’ For example, most of us agree that honesty, fairness, and re-
spect for others are important values. Where individuals differ is in how they priori-
tize their values. For example, some people may believe that ambition is more
important than other values. Others may feel that helpfulness predominates. Strongly
held values influence important decisions such as career choice as well as decisions
in particular situations. For example, someone for whom helpfulness is most impor-
tant is more likely to choose a ‘‘helping’’ profession such as social work, while some-
one for whom ambition is most important may be more likely to choose a business
career. In Chapter 2, you’ll have the opportunity to think about your own values and
how they influence your ethical decision making.
Values are also relevant at the organizational level. Many of you have seen orga-
nizational values statements that aim to create a shared sense of purpose among
employees and to convey something about the organization’s identity to outsiders. If
you haven’t, just look at company websites and you’ll see that most of them include
values statements. Values lists often include respect, integrity, diversity, innovation,
teamwork, and the like. Just as individual values guide individual thinking and action,
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organizational values guide organizational thinking and action. And, just as with indi-
viduals, the key question is how the organization prioritizes its values. For example, at
3M Corporation, no value is more important and more ingrained in the culture than
innovation. Innovation is encouraged in myriad ways and has been ‘‘baked’’ into the
culture through the commitment of senior executives, thus creating a culture that
rewards collaboration and teamwork and that views mistakes as opportunities to
learn.48 You’ll see in Chapter 5 that organizational values undergird the ethical culture
of an organization and influence how its managers and employees behave. So an orga-
nization that highly values diversity and respect is more likely to make efforts to hire
and retain a diverse workforce and to take diversity into consideration when making
supplier choices and other decisions. We know of an organization with a strong value
for diversity that walked away from business when a customer insisted on dealing only
with white males. However, organizations don’t always ‘‘really’’ value what they say
they value. That’s why values statements are often the butt of Dilbert jokes. For exam-
ple, in Enron’s values statement, the verbiage described an organization where excel-
lence and respect and integrity were key values. The scandal at Enron showed that
what Enron really cared about—maximizing profits at any cost—was a far cry from
what appeared in print on its values statement. For organizational values to work in a
positive way, the organization must live those values every day.
Societies and cultures also have shared values, and these are an important part of
the business environment and expectations of business and businesspeople. When we
talk about cross-cultural values, we often focus on the differences. But, as you’ll see
in Chapter 11, values across cultures are often more similar than different. Even in
corrupt cultures, if you ask people what they value, they’ll tell you that they would
prefer to live in an environment where everyone can be trusted to do business
honestly and fairly. We’ll return to a discussion of values again and again as a kind
of touchstone for ethical business practice.
HOW THE BOOK IS STRUCTURED
Section II of this book deals with ethics and the individual. Chapter 2 presents the
reader with an overview of some basic philosophical theories that have formed the
underpinning for the traditional study of individual ethical decision making from a
prescriptive viewpoint. Chapter 3 presents a more psychological approach to individ-
ual ethical decision making. It provides a kind of ‘‘reality check’’ for Chapter 2 by
suggesting that managers need to understand the individual characteristics that can
influence employees’ ethical decision making and the human cognitive biases that
can interfere with the ideal decision-making process (see Figure 1.1). Chapter 4 cate-
gorizes the common ethical problems individuals face at work and provides an
opportunity for you to apply learning. Chapter 4 is also about finding your moral
voice to raise or report ethical issues or to stand up for what you value. Despite the
best of intentions, and the most carefully reasoned ethical judgments, doing the right
thing can be difficult.
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Section III of the book focuses on the internal life of organizations, how they
develop ethical (or unethical) cultures, and how culture influences employee behav-
ior. Chapter 5 focuses on business ethics as a phenomenon of organizational culture.
It provides a comprehensive overview of how an organization can build a culture that
reflects a concern for ethics, and how it can change its culture to be more supportive
of ethical conduct. This chapter also emphasizes the importance of executive ethical
leadership in creating a strong ethical culture. Chapter 6 follows with more practical
and specific advice on how organizations can design an ethics infrastructure as well
as effective communications and training programs. It also includes examples of the
programs various companies have implemented to encourage ethical conduct among
their employees. Many of these examples resulted from interviews we conducted
with top managers in these companies. Chapter 7, ‘‘Managing for Ethical Conduct,’’
introduces management concepts that can help explain the group and organizational
pressures that influence people to behave ethically or unethically. We also provide
practical advice for managers about how to use these management concepts to
encourage ethical conduct and discourage unethical conduct in their employees.
Finally, Chapter 8 explores how culture plays out at the manager’s level and features
a series of cases to test your knowledge of ethics and management skills.
After considering individuals and organizations, Section IV of this book looks at
organizations in the broader social environment (see Figure 1.3). Chapter 9 focuses
FIGURE 1.3 From Individuals to Organizations to Environments
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on corporate social responsibility and discusses the environment that organizations
are part of—and what they must do to be considered ‘‘good citizens’’ of the broader
world. Chapter 10 examines some of the classical organizational ethics cases using a
stakeholder framework. Finally, Chapter 11 extends our discussion of business ethics
to the global business environment. Although global examples appear throughout the
book, this issue is important enough to warrant its own chapter.
CONCLUSION
This chapter was designed to pique your interest in business ethics. We hope we have
done that. We also hope that reading this book gives you a better understanding of
ethics from a managerial perspective, and of how you can encourage ethical business
behavior in yourself and others. We aim to help you understand how this aspect of
the organizational world actually works and what you can do to manage it. We also
provide practical decision-making guidance for facing your own ethical decisions
and for helping others do the same. It’s critically important that we all understand
ethics, because good ethics represents the very essence of a civilized society. Ethics
is the bedrock for all of our relationships; it’s about how we relate to our employers,
our employees, our coworkers, our customers, our communities, our suppliers,
and one another. Ethics is not just about the connection we have to other beings—we
are all connected; rather, it’s about the quality of that connection. That’s the real
bottom line.
DISCUSSION QUESTIONS
1. Before reading this chapter, did you think of ethics as ‘‘just a fad’’? Why or why
not? What do you think now? Why?
2. Have you been cynical about business and its leaders? Why or why not? (See the
following cynicism exercise.) How does cynicism affect you, as a business stu-
dent or as a manager?
3. Can you think of something that is legal but unethical, or something that is ethi-
cal but illegal?
4. Do you think business ethics is important? Why or why not?
5. Identify reasons why a person would be interested in being ethical, and classify
those reasons in terms of whether they represent moral motivation or economic
motivation.
6. Think about the television programs and films you’ve seen recently that depicted
business in some way. How were business and businesspeople portrayed? Is
there anything business could or should do to improve its media image? Some
businesses try to stay out of the limelight. Why might that be? What do you think
of that strategy?
32 SECTION I INTRODUCTION
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7. Do you believe that employees are more attracted and committed to ethical orga-
nizations? Are you? Why or why not? Make a list of the companies you would
prefer to work for, and state the reasons why. Are there also companies that you
would refuse to work for? Why? Are there ethically ‘‘neutral’’ companies that
don’t belong on either list?
8. Discuss the importance of trust in business. Can you cite examples? What hap-
pens when trust is lost?
9. What can we learn about business ethics from the recent financial crisis?
EXERCISE
Your Cynicism Quotient
Answer the following questions as honestly as you can. Circle the number between 1
and 5 that best represents your own beliefs about business.
Strongly
Disagree
Strongly
Agree
1. Financial gain is all that counts
in business.
1 2 3 4 5
2. Ethical standards must be
compromised in business practice.
1 2 3 4 5
3. The more financially successful the
businessperson, the more unethical the
behavior.
1 2 3 4 5
4. Moral values are irrelevant in business. 1 2 3 4 5
5. The business world has its own rules. 1 2 3 4 5
6. Businesspeople care only about
making profit.
1 2 3 4 5
7. Business is like a game one plays
to win.
1 2 3 4 5
8. In business, people will do anything to
further their own interest.
1 2 3 4 5
9. Competition forces business managers
to resort to shady practices.
1 2 3 4 5
10. The profit motive pressures managers
to compromise their ethical concerns.
1 2 3 4 5
Strongly
Disagree
Strongly
Agree
Add the total number of points. The maximum is 50 points. Total ___.
CHAPTER 1 INTRODUCING STRAIGHT TALK ABOUT MANAGING BUSINESS ETHICS 33
E1C01 07/09/2010 Page 34
The higher your score, the more cynical you are about ethical business practice.
Think about the reasons for your responses. Be prepared to discuss them in class.
NOTES
1. G. Colvin, ‘‘Business Is Back!’’ Fortune, 14 May 2007, 40–48.
2. Rushworth M. Kidder, ‘‘Must Capitalism Be Moral?’’ Commentary on Ethics Newsline, on Institute
for Global Ethics website (www.globalethics.org), May 4, 2009.
3. Adam Smith, The Theory of Moral Sentiments, eds. D. D. Raphael & A. L. Macfie, based on 1790
edition in The Glasgow Edition of the Works and Correspondence of Adam Smith, (Vol. 1), eds. D.
D. Raphael and Andrew Skinner (Oxford: Clarendon Press, 1790 [1976]).
4. David Lynch, ‘‘U.S. Debt Shrinking at Glacial Pace,’’ USA Today, 7 July 2009; available at www.
usatoday.com.
5. F. Zakariah, ‘‘Greed is good (to a point),’’ Newsweek, 22 June 2009, 41–45.
6. 2009 Edelman Trust Barometer, www.edelman.com.
7. J. A. Wood, J. G. Longenecker, J. A. McKinney, and C. W. Moore, ‘‘Ethical Attitudes of Students
and Business Professionals: A Study of Moral Reasoning,’’ Journal of Business Ethics 7 (1988):
249–57; D. N. DeSalvia and G. R. Gemmill, ‘‘An Exploratory Study of the Personal Value Systems
of College Students and Managers,’’ Academy of Management Journal 14 (1971): 227–38; M. S.
Lane, D. Schaupp, and B. Parsons, ‘‘Pygmalion Effect,’’ Journal of Business Ethics 7 (1988): 223–
29; R. M. Fulmer, ‘‘Business Ethics: A View from the Campus,’’ Personnel Administrator 45, no. 2
(1968): 31–39; T. M. Jones and F. H. Gautschi, ‘‘Will the Ethics of Business Change? A Survey of
Future Executives,’’ Journal of Business Ethics 7 (1988): 231–48.
8. Michael Skapinker, ‘‘Business Schools Focus on Making Money, Not Martyrs,’’ Financial Times,
5 January 2005, 10.
9. ‘‘Where Will They Lead? 2008 MBA Student Attitudes about Business & Society’’ (Washington,
D.C.: The Aspen Institute Center for Business Education, 2008).
10. L. Elber, ‘‘Bad Guys Wear Business Suits: Businessmen and Women Get a Bad Rap on Television,’’
(State College, PA) Centre Daily Times, 27 June 1997, 22C.
11. ‘‘Villains of Prime Time: Business Is TV’s Newest Bad Guy,’’ Fortune, 7 July 1997, 32.
12. T. S. Bateman, T. Sakano, and M. Fujita, ‘‘Roger, Me, and My Attitude: Film Propaganda and
Cynicism toward Corporate Leadership,’’ Journal of Applied Psychology 77 (1992): 768–71.
13. Ethics Resource Center, 2009 National Business Ethics Survey.
14. K. Brooker, ‘‘Starting Over,’’ Fortune, 21 January 2002, 50–68.
15. L. K. Trevi~no and A. Youngblood, ‘‘Bad Apples in Bad Barrels: A Causal Analysis of Ethical
Decision-Making Behavior,’’ Journal of Applied Psychology 75, no. 4 (1990): 378–85.
16. Ibid.
17. J. R. Rest and S. J. Thoma, ‘‘Educational Programs and Interventions,’’ In Moral Development:
Advances in Research and Theory, ed. J. Rest (New York: Praeger, 1986), 59–88.
18. J. R. Rest, ‘‘Moral Judgment: An Interesting Variable for Higher Education Research,’’ Paper for the
Annual Convention for the Association for the Study of Higher Education, Baltimore, Maryland,
November 21, 1987.
19. D. McCabe, and L. K. Trevi~no, ‘‘Academic Dishonesty: Honor Codes and Other Situational
Influences,’’ Journal of Higher Education 64 (1993): 522–38.
20. D. McCabe and L. K. Trevi~no, ‘‘Cheating among Business Students: A Challenge for Business
Leaders and Educators,’’ Journal of Management Education 19, no. 2 (1995): 205–18.
21. T. R. Piper, M. C. Gentile, and S. D. Parks, Can Ethics Be Taught? (Boston: Harvard Business
School, 1993).
22. O. Ryan, ‘‘Class of ’79: God and Man at Harvard Business School,’’ Fortune, 1 November 2004, 52.
23. B. F. Skinner, Beyond Freedom and Dignity (New York: Knopf, 1971).
24. A. Etzioni, The Moral Dimension: Toward a New Economics (New York: Free Press, 1988).
25. Ibid.
34 SECTION I INTRODUCTION
http://www.globalethics.org
http://www.usatoday.com
http://www.usatoday.com
http://www.edelman.com
E1C01 07/09/2010 Page 35
26. S. Blakeslee, ‘‘Humanity? Maybe It’s in the Wiring,’’ New York Times, 9 December 2003, D1.
27. J. Lehrer, ‘‘Driven to Market,’’ Nature 443 (2006): 502–04.
28. J. Channon, ‘‘Creating Esprit de Corps,’’ In New Traditions in Business, ed. J. Renesch (San
Francisco: Berrett-Koehler Publishers, 1992), 53–68.
29. ‘‘Get a Job, Save the Planet,’’ Business Week, 6 May 2002, 10.
30. R. Sandroff, ‘‘How Ethical Is American Business?’’ Working Woman, September 1990, 113–16.
31. C. Kleiman, ‘‘Heading the List of Worker Wishes Isn’t More Money!’’ (Allentown, PA) Morning
Call, 2 October 1989, B10.
32. R. Zemke, ‘‘Employee Theft: How to Cut Your Losses,’’ Training, May 1986, 74–78.
33. J. Collins, ‘‘Why Bad Things Happen to Good Companies and What Can Be Done,’’ Business
Horizons, November–December 1990, 18–22.
34. B. Hager, ‘‘What’s Behind Business’ Sudden Fervor for Ethics,’’ Business Week, 23 September
1991, 65.
35. K. Labich, ‘‘The New Crisis in Business Ethics,’’ Fortune, 20 April 1992, 167–76.
36. J. F. Akers, ‘‘Ethics and Competitiveness: Putting First Things First,’’ Sloan Management Review,
Winter 1989, 69–71.
37. J. Dimon, ‘‘Leadership Qualities,’’ Speech given at Harvard Business School, June 24, 2009; availa-
ble at http://giveitaway.jpmorgan.com/cm/cs?pagename=JPM_redesign/JPM_Content_C/Generic_
Detail_Page_Template&cid=1159391608440&c=JPM_Content_C.
38. S. Tully, ‘‘Jamie Dimon’s Swat Team,’’ CNNMoney.com, September 2, 2008.
39. Warren Buffett and Bill Gates at Columbia Business School, CNBC, Summer 2009; available at
www.youtube.com/watch?v=tgbZzgyHZgI.
40. E. Freeman, Strategic Management: A Stakeholder Approach (Boston: Pitman/Ballinger, 1984).
41. S. R. Covey, The 7 Habits of Highly Effective People (New York: Simon & Schuster, 1989).
42. J. Child, ‘‘Trust—the Fundamental Bond in Global Collaboration,’’ Organizational Dynamics 29,
no. 4 (2001): 274–88.
43. B. Nussbaum, ‘‘Can You Trust Anybody Anymore?’’ Business Week, 28 January 2002, 31–32.
44. Harris Interactive, ‘‘Ethics Newsline,’’ July 6, 2009; available at http://www.globalethics.org/news-
line/2009/07/06/banks-honesty-poll/.
45. J. A. Byrne, ‘‘How to Fix Corporate Governance,’’ Business Week, 6 May 2002, 69–78.
46. J. Useem, ‘‘In Corporate America, It’s Cleanup Time,’’ Fortune, 16 September 2002, 62–72.
47. Ibid.
48. ‘‘3M’s Seven Pillars of Innovation,’’ Business Week, 10 May 2006.
CHAPTER 1 INTRODUCING STRAIGHT TALK ABOUT MANAGING BUSINESS ETHICS 35
http://giveitaway.jpmorgan.com/cm/cs?pagename=JPM_redesign/JPM_Content_C/Generic_
http://www.youtube.com/watch?v=tgbZzgyHZgI
http://www.globalethics.org/news-line/2009/07/06/banks-honesty-poll/
http://www.globalethics.org/news-line/2009/07/06/banks-honesty-poll/
http://www.globalethics.org/news-line/2009/07/06/banks-honesty-poll/
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S E C T I O N II
ETHICS AND THE INDIVIDUAL
37
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C H A P T E R2
DECIDING WHAT’S RIGHT:
A PRESCRIPTIVE APPROACH
INTRODUCTION
This chapter begins the part of the book that focuses on ethical decision making as
something that individuals do. Many, if not most ethical decisions in business organi-
zations are made by individuals like you. In later chapters, we will address how the
organizational context and the broader business environment also affect individual
ethical decision making.
There are two ways to think about individual ethical decision making—the pre-
scriptive approach and the descriptive approach. This chapter covers the prescriptive
approach. It is derived from ethical theories in philosophy and offers decision-
making tools (ways of thinking about ethical choices) that help you decide what deci-
sion you should make as a ‘‘conscientious moral agent’’ who thinks carefully about
ethical choices1 and who wants to make the ethically ‘‘right’’ decision. Our assump-
tion is that your intentions are good and that your goal is to do the right thing. So in
this chapter we introduce ethical decision-making tools that can help you do just that,
and we’ll explain how you can integrate them and use them in a practical way.
We know, however, that people don’t always make the best decision. Prescrip-
tions aren’t always followed. So it’s helpful to understand how people’s minds
work— how people really make decisions. The descriptive approach, discussed in
Chapter 3, relies on psychological research to describe how people actually make
ethical decisions (rather than how they should make them). It focuses in particular on
individual characteristics that influence how individuals think and on cognitive limi-
tations that often keep people from making the best possible ethical decisions. Hope-
fully, if we understand both approaches, we can improve our ethical decision making.
Now let’s learn about the prescriptive approach.
ETHICAL DILEMMAS
Many ethical choices are clear-cut enough that we can decide what to do rather easily
because they pit ‘‘right’’ against ‘‘wrong.’’ Is deciding whether to embezzle corporate
funds a tough ethical dilemma? Not really, because embezzling is stealing and it’s
38
E1C02 07/09/2010 Page 39
wrong, period. There’s not much of a ‘‘dilemma’’ there. But things can get pretty
murky in situations where two or more important values, rights, or responsibilities
conflict and we have to choose between equally unpleasant alternatives. We define
an ethical dilemma as a situation where two or more ‘‘right’’ values are in conflict.
Consider the following ethical dilemma.
THE LAYOFF
Pat is the plant manager in one of ABC Company’s five plants. She’s worked
for the company for 15 years, working her way up from the factory floor after
the company sent her to college. Her boss just told her in complete confi-
dence that the company will have to lay off 200 workers. Luckily, her job
won’t be affected. But a rumor is now circulating in the plant, and one of her
workers (an old friend who now works for her) asks the question, ‘‘Well, Pat,
what’s the word? Is the plant closing? Am I going to lose my job? The clos-
ing on our new house is scheduled for next week. I need to know!’’ What
should she say? What would you say?
This is a true ethical dilemma because two values are in conflict. Two ‘‘right’’
values that can create significant conflict are truthfulness and loyalty. As illustrated
in the case, telling the truth to your friend would mean being disloyal to the com-
pany that has treated you so well. The value of loyalty can even be in conflict with
itself as you weigh loyalty to your friend against loyalty to your boss and company.
In this chapter, we introduce conceptual tools drawn from philosophical
approaches to ethical decision making that are designed to help you think through
these tough ethical dilemmas from multiple perspectives. None of the approaches
are perfect. In fact, they may lead to different conclusions. The point of using mul-
tiple ones is to get you to think carefully and comprehensively about ethical dilem-
mas and to avoid falling into a solution by accident. At the very least, you can feel
good because you’ve thought about the issue thoroughly, you’ve analyzed it from
every available angle, and you can explain your decision-making process to others
if asked to do so.
PRESCRIPTIVE APPROACHES TO ETHICAL DECISION
MAKING IN BUSINESS
Philosophers have been wrestling with ethical decision making for centuries. We
certainly don’t intend to provide a philosophy course here, but we can distill
some important and practical principles that can guide you toward making the
best ethical decisions. In this section, we outline some of the major contempo-
rary approaches that we think can provide you with the most practical assist-
ance.
2 We then incorporate them into a series of steps that you can use to
CHAPTER 2 DECIDING WHAT’S RIGHT: A PRESCRIPTIVE APPROACH 39
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evaluate ethical dilemmas, and along the way, we apply these steps to the short
layoff case as well as other examples.
Focus on Consequences (Consequentialist Theories)
One set of philosophical theories is categorized as consequentialist (sometimes
referred to as teleological, from the Greek telos). When you’re attempting to decide
what’s right or wrong, consequentialist theories focus attention on the results or con-
sequences of the decision or action.
Utilitarianism is probably the best-known consequentialist theory. According to
the principle of utility, an ethical decision should maximize benefits to society and
minimize harms. What matters is the net balance of good consequences over bad for
society overall.
A utilitarian would approach an ethical dilemma by systematically identifying
the stakeholders in a particular situation as well as the alternative actions and their
consequences (harms and/or benefits) for each. A stakeholder is any person or group
with a stake in the issue at hand. So who are the stakeholders in the layoff situation?
Key stakeholders would include Pat’s friend, her friend’s family, Pat’s boss, Pat, her
family, other workers, and the company—quite a list! And, what would be the conse-
quences (societal harms and benefits) for each stakeholder of a decision to tell or
not tell? The consequentialist approach requires you to do a mental calculation of all
the harms and benefits of these consequences, stakeholder by stakeholder. What
would be the consequences if Pat tells her friend what she knows about the layoff?
What would be the consequences (societal harms and benefits) if Pat doesn’t share
what she knows? A potential harm of telling her friend would be that he or she might
tell other workers and send the plant into chaos. Perhaps more people would lose
their jobs as a result. Another potential harm might be that Pat could lose the trust of
her boss (another stakeholder), who provided information to her in confidence.
Pat might even lose her job, which has consequences for her family. A potential ben-
efit might be that Pat would retain the trust of a valued friend. Another potential
benefit might be that her friend could use the information to make a decision about
going through with buying the new house. After Pat conducts a thorough analysis that
estimates these harms and benefits, the ‘‘best’’ ethical decision is the one that yields
the greatest net benefits for society, and the ‘‘worst’’ decision is the one that yields
the greatest net harms for society. So if more people would be ultimately hurt than
helped if Pat were to inform her friend of the impending layoff, a utilitarian would
conclude that Pat shouldn’t tell. Keep in mind that this perspective requires you to
think broadly about the consequences for ‘‘society,’’ not just for yourself and those
close to you, as we are often inclined to do. When conducting such an analysis, you
may want to create a table for yourself like the one below that can help you sort out
the complexities by identifying the stakeholders and the anticipated harms and bene-
fits. But arriving at a bottom-line conclusion about the action that will serve the
greater good of society is easier said than done.
40 SECTION II ETHICS AND THE INDIVIDUAL
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Consequentialist Analysis
Stakeholder Tell—Harms Tell—Benefits Don’t Tell—Harms Don’t Tell—Benefits
1
2
3
4
etc.
Bottom line: best decision or action is the one that produces the greatest net good and the least net harm for
society overall.
In 2005, Mark Felt, also known as ‘‘Deep Throat,’’ revealed his identity as the
source who secretly fed information to Washington Post investigative reporters Bob
Woodward and Carl Bernstein. The information ultimately led to the 1974 resigna-
tion of President Richard Nixon over his involvement in the cover-up of the 1972
burglary at Democratic headquarters in the Watergate building. Woodward and Bern-
stein turned the story into a book and later a film, All the President’s Men. We can’t
get inside Felt’s head to understand his ethical decision-making process at the time.
We will never know his true motivation, because Felt became cognitively impaired in
his later years. But we can imagine that, as the number two person at the FBI, he may
have weighed the harms and benefits of leaking information about the Watergate
break-in and the involvement of Nixon and his aides in criminal wrongdoing. Felt
certainly took a huge personal risk and may have considered the costs to others. Sev-
eral individuals went to prison as a result of the investigation, and their families suf-
fered as a result. A president also resigned in disgrace. If Felt had been discovered,
his career would probably have been ruined, and his family would have experienced
the rippling effects. But those who believe that he did the right thing would say that
Felt’s decision served the long-term greater good of American society and ultimately
helped preserve democracy in the United States.
The consequentialist approach can be extremely practical and helpful in thinking
through an ethical dilemma. Don’t we generally look at the consequences of our own
and others’ actions in trying to decide what’s right? And don’t we consider who will
benefit and who will be harmed? When the state decides to build a new highway
through your property, aren’t they using a utilitarian rationale when they argue that
the benefits to the greater community (increased development and jobs, reduced traf-
fic, fewer accidents, etc.) outweigh the harm to the few property holders who will be
inconvenienced by an eyesore in their backyard?
However, a challenge involved in using a strictly consequentialist approach is
that it is often difficult to obtain the information required to evaluate all of the conse-
quences for all stakeholders who may be directly or indirectly affected by an action
or decision. In business (or in life for that matter), when do you have all of the facts?
Could Deep Throat have known what the outcomes of his decision would be? And
even if you have all of the information, it can be extremely cumbersome to calculate
CHAPTER 2 DECIDING WHAT’S RIGHT: A PRESCRIPTIVE APPROACH 41
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all of the harms and benefits every time you encounter a new ethical dilemma. Try it.
Can you list all of the potential harms and benefits for everyone who may be directly
or indirectly involved in the layoff situation described above? It’s relatively easy for
Pat to list the potential harms and benefits to herself and those close to her. But can
you envision all of the potential harms and benefits to all of the other people who
may be involved? If you don’t have a crystal ball that allows you to foretell the future
(and most of us don’t), you’re unlikely to arrive at a completely accurate assessment
of all future consequences. Nevertheless, with this approach, it’s important to do your
best to accurately assess the potential consequences. You have a responsibility to
gather and use the best, most up-to-date information available. Remember, according
to this approach, the most ethical decision maximizes benefits and minimizes harm
to society. The challenge of making the best ethical decision is to step outside of
oneself and think as broadly as possible about all of the consequences for all of those
affected. Taking this step is guaranteed to widen your decision making lens and allow
you to take into account consequences that you otherwise might not consider.
Another difficulty with this type of approach is that the rights of a minority group
can easily be sacrificed for the benefit of the majority. For example, slaveholders in
the Old South argued that the greatest good for the greatest number would be served
by maintaining the system of slavery. But hopefully we all agree that such a system
did not respect the rights of the human beings who were enslaved (a deontological
perspective we discuss next).
The consequentialist approach remains particularly important to ethical decision
making in business for a variety of reasons. First, utilitarian thinking—through its
descendant, utility theory—underlies much of the business and economics literature.
Second, on the face of it, most of us would admit that considering the consequences
of one’s decisions or actions for society is extremely important to good ethical deci-
sion making. In fact, studies of ethical decision making in business have found that
business managers generally rely on such an approach.
3 As we’ll see, though, other
kinds of considerations are also important.
Focus on Duties, Obligations, and Principles
(Deontological Theories)
The word deontological comes from the Greek deon, meaning ‘‘duty.’’ Rather than
focusing on consequences, a deontological approach would ask, ‘‘What is Pat’s ethi-
cal duty now that she knows about the layoff?’’ Deontologists base their decisions
about what’s right on broad, abstract universal ethical principles or values such as
honesty, promise keeping, fairness, loyalty, rights (to safety, privacy, etc.), justice,
responsibility, compassion, and respect for human beings and property.
According to some deontological approaches, certain moral principles are
binding, regardless of the consequences. Therefore some actions would be consid-
ered wrong even if the consequences of the actions were good. In other words, a
deontologist focuses on doing what is ‘‘right’’ (based on moral principles or
values such as honesty), whereas a consequentialist focuses on doing what will
42 SECTION II ETHICS AND THE INDIVIDUAL
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maximize societal welfare. An auditor taking a deontological approach would
likely insist on telling the truth about a company’s financial difficulties even if
doing so might risk putting the company out of business and many people out
of work. A consequentialist auditor would weigh the societal harms and benefits
before deciding what to do. If convinced that by lying now he or she could save a
good company in the long term, the consequentialist auditor would be more will-
ing to compromise the truth.
Knowing what values are important to you and how you prioritize them is an
important first step toward understanding and applying this approach in your own life
(now is a good time to complete the end-of-chapter exercise, ‘‘Clarifying Your Val-
ues’’). Which values are most important to you? Which ones are you willing to adhere
to consistently, and how do you prioritize them if they conflict? Try to keep your list
of values to just a few that you believe are truly the most important ones. In attempting
to decide which values are most important to you, it’s helpful to think back to recent
ethical dilemmas you have faced. Which ones guided your behavior? Which ones
trumped other conflicting values? Think carefully when selecting your ethical values.
For example, students often select promise keeping as a value. But what if keeping a
promise requires you to breach another more important value such as honesty or jus-
tice? If promise keeping is important to you, be careful what you promise. Should you
promise to lie to authorities for a friend who has broken the law and harmed others? If
you select loyalty, you’ll need to think about ‘‘loyalty to whom,’’ because multiple
loyalties can conflict as they do in the layoff situation we’ve been discussing.
Some deontological theories focus on rights rather than duties, values, or princi-
ples. The concept of rights goes back to classical Greek notions of ‘‘natural rights’’
that emerge from ‘‘natural law.’’ Rights can be thought of as ‘‘negative rights,’’ such
as the limits on government interference with citizens’ right to privacy or the pursuit
of happiness. Or rights can be thought of in more positive terms, such as the individ-
ual’s rights to health and safety. The rights of one party can conflict with the rights of
another party, as when the rights of a company to seek profits for its shareholders
conflict with the rights of a community to clean air or water or the rights of a con-
sumer to buy a safe product. Furthermore, the rights of one party are generally related
to the duties of another. So, if we agreed that communities have the right to clean
water, businesses would have the duty to protect that right.
How does a deontologist determine what rule, principle, or right to follow? One
way is to rely on moral rules that have their roots in Western biblical tradition. For
example, the Golden Rule, a basic moral rule found in every major religion, is famil-
iar to most of us and provides an important deontological guide: The most familiar
version tells us to ‘‘Do unto others as you would have them do unto you.’’ In our
layoff situation, the Golden Rule would suggest that Pat should tell her friend what
she knows because she would want her friend to do the same for her if the situation
were reversed. But note that the Golden Rule leads you to the best decision only if
you’re highly ethical. For example, do you think that the Golden Rule would expect
you to lie for a friend who has broken the law because you would want the friend to
do that for you? No, because a highly ethical person wouldn’t ask a friend to lie. The
CHAPTER 2 DECIDING WHAT’S RIGHT: A PRESCRIPTIVE APPROACH 43
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ethical person would be responsible and would accept the consequences of his or her
illegal actions.
The German philosopher Emmanuel Kant provided another useful moral rule
with his categorical imperative: ‘‘Act as if the maxim of thy action were to become
by thy will a universal law of nature.’’ This rule asks you to consider whether the
rationale for your action is suitable to become a universal law or principle for every-
one to follow. For example, if you break a promise, the categorical imperative asks,
‘‘Is promise breaking a principle everyone should follow?’’ The answer is no; if
everyone did this, promises would become meaningless. In fact, they would cease
to exist.
A practical deontological question to ask might be, ‘‘What kind of world would
this be if everyone behaved this way or made this kind of decision in this type of
situation?’’ What kind of world would this be if everyone broke promises at will?
Consider the following example:
A DRUG STUDY
A number of physicians are recruited to participate in a large-scale, multi-
center study to investigate the survival rates of breast cancer victims who are
being treated with a new drug. Strict rules are developed regarding inclusion
of patients in the study. Only those who have had surgery within the last three
months can be included. Dr. Smith has a patient who hears about the study
and wants very much to participate. Because Dr. Smith thinks the drug could
really help this patient, he agrees to include her even though her surgery took
place six months ago. He changes the dates on her charts to conform with the
study requirements and reasons that this one little change shouldn’t affect the
study results.
According to the categorical imperative, we must ask whether the rationale for
Dr. Smith’s action (helping his patient by breaking the study rules) is suitable to
become a principle for all to follow. The answer is clearly no. What if other doctors
did the same thing as Dr. Smith? What if those involved in medical research followed
their own preferences or motives rather than the rules guiding the study? Society
would be unable to rely on the results of medical research. What kind of a world
would it be if researchers were routinely dishonest? It would be one where we simply
couldn’t depend on the integrity of scientific research, and most of us would deem
that kind of world unacceptable. Interestingly, given the potential for societal harm
of a decision to be dishonest and enroll the patient in the study, consequentialist
thinking would lead to the same decision. Only the patient would potentially benefit,
and society as a whole would be harmed.
Additional moral rules come from the work of the highly regarded American
political philosopher John Rawls. Rawls proposed that decision makers use a veil of
ignorance exercise to arrive at fundamental principles of justice that should guide
ethical decision making. In his approach, imaginary people come together behind a
44 SECTION II ETHICS AND THE INDIVIDUAL
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hypothetical veil of ignorance. These imaginary people do not know anything about
themselves, their identities, or their status. They don’t know if they are male or
female, young or old, rich or poor, black or white, the CEO or a janitor, intelligent
or mentally retarded, physically fit or disabled, sick or healthy, patient or doctor.
According to Rawls, rational people who use this veil of ignorance principle will be
more likely to develop ethical rules that do not unfairly advantage or disadvantage
any particular group.4 Because humans are fundamentally risk averse and wary of
being the worst off, such neutral people would arrive at fair principles that grant all
individuals equal rights to basic liberties and equality of opportunity and that benefit
the least advantaged in society. This approach was designed to be used as a guide in
any ethical decision, but it may be most useful when fairness concerns are central to
the decision at hand. It offers yet another way to broaden your view and urges you to
consider the needs of those who are less advantaged than yourself. So, following
Rawls, if a business needs to downsize, what kind of process would the group of
imaginary people behind the veil of ignorance devise for deciding whom to lay off
and when to tell employees? How should doctors decide who will be included in
drug studies? How should lifesaving prescription drugs be priced? Would sweatshop
working conditions ever be acceptable?
A major challenge of deontological approaches is deciding which duty, obliga-
tion, right, or principle takes precedence because, as we said earlier, ethical dilem-
mas often pit these against each other. What does the deontologist do if one binding
moral rule clashes with another? Can it be determined which is the more important
right or principle? Because the U.S. Constitution is based on a rights approach,
many U.S. public policy debates revolve around questions such as these. For exam-
ple, the abortion debate rests on the question of whether the rights of the mother or
the fetus should take precedence. In ethical dilemmas at work, loyalty to your boss
or organization can easily clash with other strongly held values such as compassion
or fairness. What if your boss tells you that you must lay off a subordinate—an
excellent performer—because he was hired last, and the principle guiding the
layoff is ‘‘the last hired is the first fired’’? But imagine that this subordinate will
lose his health insurance with the layoff, and you know that his child is seriously
ill. Another subordinate who has been with the company somewhat longer is also
a good performer but is single and has no family obligations. What is the most
ethical decision here?
Another difficulty of deontological approaches arises when they conflict with
consequentialist reasoning. First, what happens when following a rule will have dev-
astating consequences? For example, in World War II Germany, telling the truth
to the Nazis about whether Jews were hiding in your attic would have devastating
consequences—the Jews would be taken and killed. In response to such concerns,
some philosophers argue that deontological principles (i.e., truth telling, promise
keeping) don’t have to be regarded as absolute. For example, one could violate a rule
or principle for a good reason (according to Kant, a reason that you would be willing
to accept for anyone in the same position).
5 In the Nazi scenario, Kant’s categorical
imperative would be helpful because most of us would not want to live in a world
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where people are expected to tell the truth when doing so means the death of an inno-
cent human being. Respect for human life trumps honesty.
Consider yet another example of conflict between a consequences and a princi-
ples approach. In 2009, the owner of a shipping company had to decide whether to
pay ransom to pirates who were holding his ship and its crew hostage and who threat-
ened to kill everyone if the ransom were not paid. This business owner acknowledged
that paying the ransom would reinforce the pirates’ behavior and would likely lead to
more kidnappings and hostage takings, an outcome that is clearly to the detriment of
society overall. However, having considered this, he nevertheless concluded that he
would pay the ransom because he felt strongly that his primary responsibility as an
employer was to his people. His values of respect for human life and compassion for
the employees’ families were more important to him in this situation than the poten-
tial longer-term broader harm.
Sometimes, a decision with good consequences contradicts an important ethical
principle. For example, the state of Virginia developed a method for sentencing crim-
inals that incorporates risk of recidivism. Using factors such as gender, age, employ-
ment status, and prior criminal record, the state learned that it can predict the
likelihood of an individual’s committing another crime. This calculation is designed
to protect the public and save taxpayer money, and many felons are being released
from jail and returned to the community successfully. The system works; and one
could argue, based on consequentialist thinking, that it benefits most people. But
some argue, based on principle, that those who commit crime deserve to be punished
and that it is unfair to treat offenders who committed the same crime differently.
Under the system, a young, unemployed male is more likely to go to jail than an older
woman who has a job.6 The consequences are good for society, but is the system fair?
Focus on Integrity (Virtue Ethics)
The virtue ethics approach focuses more on the integrity of the moral actor (the per-
son) than on the moral act itself (the decision or behavior). The goal here is to be a
good person because that is the type of person you wish to be. Although virtue ethics
as a philosophical tradition began with Aristotle, a number of contemporary ethicists
(including business ethicists) have returned it to the forefront of ethical thinking.7
A virtue ethics perspective considers the actor’s character, motivations, and
intentions (something we didn’t discuss at all under the other two perspectives).
According to virtue ethics, it is important that the individual intends to be a good
person and exerts effort to develop him or herself as a moral agent, to associate with
others who do the same, and to contribute to creating an organizational context that
supports ethical behavior.8 This doesn’t mean that principles, rules, or consequences
aren’t considered, just that they’re considered in the context of assessing the actor’s
character and integrity. One’s character may be assessed in terms of principles such
as honesty, in terms of rule following (did this actor follow his profession’s ethics
code?) or in terms of consequences (as in the physician’s agreement to, above all, do
no harm).
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Motivations and intentions are important to ethical decision making, as the law
acknowledges. If a person harms another, society judges that person less harshly if he
or she did not intend to do so, if it was an accident. In thinking about Mark Felt’s deci-
sion to provide information to Woodward and Bernstein in the Watergate affair, virtue
ethics would ask us to think about his intentions and motivation. Was he motivated by
revenge because he was passed over for the top job at the FBI (as some have suggested),
or was he guided by broader concerns about doing the right thing as a conscientious
moral agent who was concerned about sustaining the American system of government?
In virtue ethics, one’s character may be defined by a relevant moral community,
a community that holds you to the highest ethical standards. Therefore it’s important
to think about the community or communities the decision maker operates within.
Mark Felt was an FBI man who was sworn to keep confidences. That makes it hard
for some in the FBI community to accept his talking to journalists, even if the long-
term consequences contributed to the greater good of the country. But the broader
community, the U.S. public at large, likely judges Felt more kindly if they think of
him as someone who took a great personal risk to do what he thought was right.
Think about yourself. What community or communities do you look to for guidance
in deciding whether you acted as a person of integrity? Are you guided by the stan-
dards of your professional association, the regulatory community, your religious
community, your family, your company’s ethics office, the broader public? Note that
unless you work in a highly ethical organizational context, the relevant moral com-
munity is not your own work group or your organization. A virtue ethics perspective
requires that you look to the community that will hold you to the highest ethical stan-
dard and support your intention to be a virtuous person.
A virtue ethics approach is particularly useful for individuals who work within a
professional community that has developed high standards of ethical conduct for
community members. For example, the accounting profession has developed a code
of conduct for professional accountants. Being a virtuous accountant would mean
abiding by that code of professional responsibility. The same goes for certified finan-
cial consultants, engineers, lawyers, physicians, and psychologists who all agree to
abide by their profession’s rules and standards. Such professional codes are generally
living documents that evolve with changing times. For example, building on 20 years
of thinking about ethics and torture, a committee of the American Psychological
Association (APA) developed new standards in 2009, consistent with its ‘‘do no
harm’’ principle: without exception, the new APA standards prohibit professional
psychologists from participating in torture. Psychologists are required to disobey
orders to torture, intervene to stop torture, and report torture if they become aware
of it.
9 A decision maker can often rely on such relevant community standards to
guide decisions and actions. The assumption is that the professional community has
already done this type of thinking and has done it carefully.
Consider this fascinating example from the U.S. legal profession. The rule of
attorney-client privilege requires criminal defense lawyers to keep information
shared by their clients completely confidential. This rule is based on the idea that,
in order for defendants to get the best possible defense, they must feel free to be
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completely truthful with their lawyers. The underlying principle of the U.S. system of
justice says that everyone deserves a vigorous defense and that defense lawyers must
act in the interests of their clients. Then it is up to judges and juries to decide guilt
and innocence. That all makes a lot of sense in the abstract. But a recent case
in Illinois (profiled on 60 Minutes)10 was particularly challenging for nonlawyers to
understand. Here’s what happened. Two criminal defense lawyers went public
to share information that their client had committed a murder for which another man,
Alton Logan, was erroneously convicted. When the lawyers went public, Logan had
already served 26 years in prison for a crime he did not commit! Most observers’
immediate reaction was to say that the lawyers should have spoken up right away
because it just isn’t fair for someone to go to jail for a crime he didn’t commit, and
they could and should have stopped it. But because of attorney-client privilege, a
central ethical principle in the legal profession, the lawyers were not allowed to share
this private information. As lawyers, they understand that the larger system of justice
depends on that principle, even if some individuals are harmed in the process of
upholding it. Interestingly, they also noted that if they had shared the information, it
would not have been admissible in court and could not have helped Alton Logan. The
lawyers were able to finally come forward only because, years before, they had con-
vinced their client to sign an affidavit saying that they could share the information
about his admission of guilt after he died. That’s what they did when their client died
in prison (where he was serving a life sentence for committing a different crime), and
Alton Logan was finally released. Interviews with the lawyers suggested that they
understood and were guided by the ethics of the legal profession. However, impor-
tantly, they also went beyond professional community expectations when they asked
their client to sign the affidavit that ultimately allowed them to share the information.
So from a virtue ethics perspective, they followed their community’s guidance. But
as thoughtful moral agents who were motivated to do the right thing, they didn’t
completely surrender to legal community standards. They used their own thinking to
devise a plan that ultimately resulted in Logan’s release (although a deontologist
might say that it was 26 years too late).
It’s important to do your own thinking because some professional communities pro-
vide limited guidance or none at all. For example, management is not a ‘‘profession’’
with explicit ethical standards and acknowledged responsibilities to society (although
some influential thinkers believe and argue that it could and should be).
11 In fact, the
authors of a 2008 Harvard Business Review article12 offer ‘‘A Hippocratic Oath for Man-
agers’’ that calls on managers to commit to the following (adapted from the original):
1. Service to the Public and Society. Recognize the manager’s responsibility
to serve the public interest by creating sustainable value for society in the
long term.
2. Balance Multiple Stakeholders’ Interests. Recognize that managers must
balance the often-conflicting needs of many stakeholders to enhance enter-
prise value in a way that is consistent with societal well-being. The authors
48 SECTION II ETHICS AND THE INDIVIDUAL
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note that ‘‘this may not always mean growing or preserving the enterprise
and may include such painful actions as its restructuring, discontinuation, or
sale if these actions preserve or increase value.’’
3. Acting with Integrity in the Enterprise’s Interest. Put the interests of the
enterprise ahead of personal interests while behaving as a person of integ-
rity, consistent with personal values, and leading others to do the same. This
means avoiding behavior that advances personal ambitions that harm either
the business or society. It also means reporting the ethical or legal violations
of others.
4. Adherence to the Law. Make a commitment to adhere to the spirit and the
letter of the law and contracts in personal and enterprise action.
5. Accurate and Transparent Reporting. Report enterprise performance accu-
rately and transparently to all relevant stakeholders (e.g., investors, consum-
ers, the public, etc.) so that they can make informed decisions.
6. Respectful and Unbiased Decision Making. Make decisions in an unbiased
and respectful manner without considering race, gender, sexual orientation,
religion, nationality, politics, or social status. The goal is to protect the inter-
ests of the less powerful who are affected by these decisions.
7. Professional Development. Commit to continuous professional develop-
ment for the self and others with the goal of always using the best and most
current available knowledge to make informed decisions.
8. Responsibility to Protect the Profession. Recognize that being considered
a professional has privileges that come with responsibilities to uphold
and protect the standards, and continue to develop them in a way that
contributes to the trust, respect, and honor associated with them and
with the profession.
Interestingly, if you study these principles carefully, you can find evidence of all
three ethical decision-making approaches. Can you identify consequentialist think-
ing, deontological thinking, or virtue ethics thinking? Do you think management is
ready to become a profession that requires its members to adhere to such a code?
Should it?
Whether or not your own professional community provides guidance, it remains
essential that you think for yourself because a professional community can be wrong.
For example, auditors are professional accountants with a fiduciary responsibility to
the public. Their audits provide investors with assurance that public companies’
financial statements can be trusted. The American Institute of Certified Public
Accountants (AICPA) is the national, professional organization for all certified pub-
lic accountants (www.aicpa.org). It has a code of conduct for members and a mission
that includes establishing and enforcing conduct standards. But the institute also acts
as a lobbying organization. During the 1990s, auditing firms got into the business of
providing consulting to their audit clients; this was an ethically dangerous practice
CHAPTER 2 DECIDING WHAT’S RIGHT: A PRESCRIPTIVE APPROACH 49
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because of its potential for conflict of interest. However, because consulting was
more lucrative than auditing, firms lobbied hard to protect their relationships with
these clients and their rights to both consult and provide audit services to the same
firms. As a result, the AICPA was blamed for contributing to an environment that led
to financial scandals at Enron, WorldCom, and other companies.13 So if you’re look-
ing for solid ethical guidance, it’s important to scrutinize the source and make sure
that it is free of conflicts of interest.
When a professional community isn’t available, doesn’t provide good guidance,
or seems wrong, it can be wise to turn to the broader community and societal stan-
dards for guidance. A useful decision-making shortcut based on the broader commu-
nity as a guide is known as the disclosure rule. This practical shortcut is widely used
by managers and executives. The disclosure rule asks, ‘‘How would you feel if your
behavior appeared on ___? You fill in the blank of a particular media outlet. Is it the
front page of the New York Times, the Wall Street Journal, your hometown news-
paper, 60 Minutes, CNN? The assumption behind the disclosure rule is that commu-
nity standards do exist for most situations, and at a gut level, most of us know what
those are. If our gut tells us it wouldn’t look good to have our behavior appear in one
of these media outlets, we simply shouldn’t be doing it because it means that if we
did, we wouldn’t be considered persons of integrity in society’s view.
If your goal is to be considered a person of integrity, another useful question to
ask yourself is how your harshest moral critic or ethical role model would advise you.
Who serves in that role for you? Is it someone in your family or a respected teacher,
coach, or spiritual adviser? Identify your strongest ethical role model or harshest
moral critic and consider what this individual would think of the behavior you’re
contemplating. Most of us have people in our lives whose integrity we respect and
whose moral judgment of us we value.
Finally, a virtue ethics perspective assumes that your identity as a moral actor is
important to you and that you are devoted to continuously developing that aspect of
yourself. Being an ethical person is just an important part of who you are. Those of us
who have made such a commitment know that life and career present ongoing ethical
challenges and opportunities to work on the ethical aspect of ourselves. Are you
following an ethical fitness program by practicing good behavior over time and
developing good habits? Just as an exercise program challenges your muscles,
balance, and coordination, an ethical fitness program challenges your ethical thinking
and leads to improvement. Such an ethical fitness program can help you develop your
comfort with speaking up on behalf of your values. It can also reinforce your view of
yourself as a person of integrity and contribute to improving your ethical fitness over
time. Identifying ethical role models in your life, choosing to interact with people of
integrity, and choosing to work in an ethical environment can all be ways to support
this aspect of your personal development.
14
We’ve now considered consequentialist, deontological, and virtue ethics
approaches. These are just a few of the philosophical approaches that may be applied
in ethical dilemma situations. We’ve introduced the approaches we believe have the
most practical benefit to business managers, and, admittedly, we’ve introduced them
50 SECTION II ETHICS AND THE INDIVIDUAL
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in a rather general way, without many of the nuances developed by philosophers over
the years. We’ve suggested that all of the approaches have limitations. No one of
them, by itself, provides perfect guidance in every situation. Obviously, if all of the
approaches lead to the same solution, the decision is a relatively easy one. The tough
ones arise when the approaches conflict. When that happens, it will be up to you to
consider the situation as comprehensively as possible and make the best decision you
can based upon societal good, your most important values and principles, and consid-
erations of what a person of integrity would do. Stuart Youngblood, professor of
management at Texas Christian University in Fort Worth, suggested the following
example that he has used in his business ethics class:
THE BURNING BUILDING
Assume you approach a burning building and hear voices coming from both
ends, each seeking help. Assume the fire is burning so rapidly you only have
time to go to one or the other end of the building. Initially, you hear multiple
voices at one end and a sole voice at the other end. Which way do you go?
Why? Now include some additional information. The sole voice is that of
your daughter (father, mother, etc.). Do you still choose to go to the end with
multiple voices (to do the greatest good for society)? If not, why not? What
has changed? What will the different approaches advise?
We certainly won’t resolve the academic controversies over the ‘‘best’’ philo-
sophical approach here. Even so, we believe that the approaches we’ve presented
incorporate important factors that should guide ethical business decisions. All of
them would have provided excellent ethical guidance to those whose actions contrib-
uted to the recent U.S. financial crisis, during which mortgage brokers sold NINJA
(no income, no job or assets) loans to people who clearly couldn’t afford the homes
they were buying, investment bankers packaged these risky mortgages into securities
they touted as safe, and rating agency employees rated the securities AAA (without
fully addressing the underlying risks). A consequentialist perspective would have
focused attention on the potential harms to multiple stakeholders (customers, society)
of these risky mortgages and mortgage-backed securities. A deontological approach
would have focused attention on the importance of responsibility, honesty, and trans-
parency with customers about these products. A virtue ethics approach would have
asked whether a person of integrity would sell mortgages to people with little or no
income or rate these securities highly despite the lack of experience with them. A
serious consideration of these factors by the actors involved could have averted a
systemic crisis that has harmed all of us.
Next, we offer eight steps that aim to integrate the three types of analysis just
discussed.
15 Before presenting them, we’d like to offer a caveat. The eight steps sug-
gest a linear decision-making process that is necessarily inaccurate. Ethical decision
making is often not linear. Still, it’s helpful to cover all of these points, even if they
don’t always occur in this particular sequence.
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EIGHT STEPS TO SOUND ETHICAL DECISION MAKING
IN BUSINESS
Step One: Gather the Facts
The philosophical approaches don’t tell us explicitly to gather the facts. But they
seem to assume that we’ll complete this important step. You might be surprised at
how many people jump to solutions without having the facts. Ask yourself, ‘‘How
did the situation occur? Are there historical facts that I should know? Are there facts
concerning the current situation that I should know?’’16
Fact gathering is often easier said than done. Many ethical choices are particu-
larly difficult because of the uncertainty involved in them. Facts may simply be un-
available. For example, in our layoff case, Pat may not have good information about
the legal requirements on informing workers about layoffs. Also, she may not have
enough information to determine how long it would take these 200 workers to find
new jobs. It’s important to recognize these limitations as you do your best to assem-
ble the facts that are available to you.
In the financial crisis, decision makers not only failed to gather good informa-
tion, but it appears that they may have explicitly avoided getting the facts. For exam-
ple, mortgage lenders processed mortgages for unemployed people because they
required no documentation to prove employment (as lenders had always done in the
past). All the person had to do was claim to have a job, and the mortgage would be
processed. The mortgage lender earned fees for creating and processing the loan and
then sold it off in the secondary mortgage market, where it was packaged with other
mortgages and sold to investors. The ‘‘fact’’ that the person with the mortgage was
unemployed and would likely not be able to sustain payments was first ignored and
then lost as the mortgage made its way through the mortgage market system.
Step Two: Define the Ethical Issues
Many of us have knee-jerk responses to ethical dilemmas. We jump to a solution
without really thinking through the ethical issues and the reasons for our response.
For example, in the layoff case, one person might say, ‘‘Oh, that’s easy; promise
keeping is the ethical issue. Pat has to keep her promise to her boss and protect her
job.’’ Another person might say that honesty is the key ethical issue: ‘‘Pat just has to
tell the truth to her friend.’’
Don’t jump to solutions without first identifying the ethical issues or points of
values conflict in the dilemma. Also recognize that the toughest situations usually
involve multiple ethical issues that go back to the philosophical approaches we just
discussed. For example, in the layoff case, one ethical issue has to do with the rights
of both the workers and the company. How would you define the workers’ right to
know about the plant closing in advance? How much advance notice is appropriate?
What does the law say? Another ethical issue has to do with the company’s right to
52 SECTION II ETHICS AND THE INDIVIDUAL
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keep the information private. Furthermore, what is the company’s obligation to its
workers in this regard? At a more personal level, there are the ethical issues related
to principles such as honesty, loyalty, and promise keeping. Is it more important to be
honest with a friend or to keep a promise to one’s boss? Who is owed more loyalty?
Think about the situation from a justice or fairness perspective: What would be fair to
the company and to those who would be laid off?
Points of ethical conflict may go back to the conflict between consequentialist
and deontological approaches. For example, if I tell the truth (consistent with the
principle of promise keeping), bad things may happen (negative consequences). A
consequentialist would think about the ethical issues in terms of harms or benefits.
Who is likely to be harmed? Who is likely to benefit from a particular decision or
action? And what is the bottom line for society overall? A virtue ethics approach
would suggest thinking about the ethical issues in terms of community standards.
Does your relevant moral community (the one that would hold you to the highest
ethical standards) identify a particular action as wrong? Why or why not?
Especially when we’re under pressure or in a rush, our inclination is to stop with
the first ethical issue that comes to mind. For example, in our layoff case, we might
be inclined to stop with the issue of loyalty to a friend. Challenge yourself to think of
as many issues as you possibly can. Here’s where talking about the problem with
others can help. Present the dilemma to coworkers, to your spouse, or to friends you
respect. Ask them whether they see other issues that you may have missed.
Step Three: Identify the Affected Parties (the Stakeholders)
Both consequentialist and deontological thinking involve the ability to identify the
parties affected by the decision. The consequentialist will want to identify all those
stakeholders who are going to experience harm and benefits. The deontologist might
want to know whose rights are involved and who has a duty to act in the situation.
Being able to see the situation through others’ eyes is a key moral reasoning
skill. Lawrence Kohlberg, developer of a key theory of moral reasoning, called this
skill role taking. It means putting yourself in others’ shoes and being sensitive to their
needs and concerns. Rawls’s veil of ignorance exercise asks you to do this as well.
Frequently, you have to think beyond the facts provided in a case in order to identify
all affected parties. It often helps to begin with the individuals in the case who are
immediately affected (e.g., in the layoff case, it would be Pat, the worker, Pat’s boss)
and then progressively broaden your thinking to incorporate larger groups. For exam-
ple, in this case, you might include the other workers, the rest of the company, the
local community, and society in general. As you think of more and more affected
parties, additional issues will probably come to mind. For example, think about the
local community. If this is a small town with few other employers, fairness to the
entire community becomes an important issue. Shouldn’t they have as much time as
possible to plan for the impact of this plant closing? Try to put yourself in their shoes.
How would they argue their case? How would they feel?
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Earlier, we introduced the concept of stakeholders, all of those individuals or
groups who have a stake in the particular decision or action. In the context of
ethical decision making in business, we should identify the stakeholders affected
by the decision and ask how they are affected. Try to make your thinking as broad
as possible here. Some of the stakeholders affected by the decision may not even
be born yet. The best concrete example of unborn stakeholders might be ‘‘DES
daughters.’’ In the 1940s, DES, a synthetic estrogen, was prescribed for pregnant
women who seemed to be in danger of miscarrying. By 1971, it became clear that
DES produced a birth defect in the daughters of these women. Because of the
birth defect, DES daughters were more likely to develop vaginal cancer, espe-
cially between the ages of 15 and 22. They also had a higher than normal rate of
cervical cancer.
17
Once stakeholders are identified, role-playing can help you see the issue from
different stakeholder perspectives. In your classroom or your department, get individ-
uals to seriously play the relevant roles. You may be surprised at how perspectives
change based on this simple exercise. What decision would you reach if you were
someone else in the situation? This step incorporates the Golden Rule to treat others
as you would like others to treat you. Imagine yourself as each of the players in a
decision situation. What decision would they reach, and why?
Another consideration may be to ask whether you can ‘‘test’’ a potential decision
with affected parties before your prospective course of action is made final. The
objective is to gauge how various audiences will react, so that you can adjust or fine-
tune a decision along the way.18 One question you could ask yourself is, how would
this or that stakeholder react if this decision were made public? For example, imagine
that ABC Co. (in our layoff case) had another thriving plant in another location.
However, in the decision-making process, it was assumed that employees wouldn’t
want to relocate because of their ties to the local community. Wouldn’t it be better to
ask them their preferences than to assume what they would want to do?
Step Four: Identify the Consequences
After identifying the affected parties, think about the potential consequences for
each party. This step is obviously derived from the consequentialist approaches. It
isn’t necessary to identify every possible consequence. You should, however, try
to identify consequences that have a relatively high probability of occurring and
those that would have particularly negative consequences if they did occur (even
if the probability of occurrence is low). Who would be harmed by a particular
decision or action? For example, in our layoff case, telling the truth to the worker
might cause Pat to lose her job, which would have negative consequences for Pat
and her entire family (especially if she’s a major breadwinner in her family).
However, it would give her worker (and presumably others who would be told)
the benefit of more time to look for a new job and perhaps save many families
from negative financial consequences. Can you determine which solution would
accomplish the most net good and the least net harm for society?
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Think about the drug thalidomide. It was prescribed to women in the late 1950s
to treat morning sickness and produced devastating birth defects in 12,000 babies in
Europe, Canada, Australia, and Japan (the Food and Drug Administration never
approved it for use in the United States). Many of the babies died, but others were
left to live with severe deformities. Randy Warren, a Canadian born in 1961, is the
founder of the Thalidomide Victims Association of Canada. His mother took just two
doses of thalidomide, but Warren is only a little over 3 feet tall and has no thumbs,
arms that are 2 inches too short, and stumps for legs. The consequences of this drug
when prescribed to pregnant women were obviously devastating; and shortly after
Warren was born, the drug was banned in most places. But continued research pro-
duced renewed interest in thalidomide as an effective treatment for Hansen’s disease
(a painful skin condition associated with leprosy) as well as for ‘‘wasting’’ disease in
AIDS patients, arthritis, blindness, leukemia, and other forms of cancer. This drug
that had such terrible consequences for so many was being considered for approval
because it also had the potential to help many people who were dealing with other
devastating illnesses. As Warren put it, ‘‘When I heard . . . that thalidomide takes
people out of wheelchairs and I think of myself and others that were put in wheel-
chairs . . . tell me we don’t have the moral quandary of the century.’’
In the end, Warren was consulted and became involved in the decision to return
the drug to the marketplace. In 1998, the FDA approved the drug to treat Hansen’s
disease under the highest level of restriction ever given to a drug. Doctors, pharma-
cists, and patients all must be registered with the manufacturer, Celgene. Two forms
of birth control are required to prevent the possibility of pregnancy and resulting birth
defects. Male patients are required to use condoms. No automatic refills of the drug
are allowed. And Warren has become ‘‘something of a company conscience.’’
Although extremely difficult, the decision to market thalidomide in the United States
was made with input from those stakeholders most familiar with its potential for both
devastating consequences and remarkable benefits. Regulators at the FDA and com-
pany officials got to know Randy Warren as a real person who continues to suffer
consequences that they might not have been able to imagine just by reading reports
and statistics.
19
LONG-TERM VERSUS SHORT-TERM CONSEQUENCES In business decisions,
it’s particularly important to think about short-term and long-term consequences.
Are you confident that your behavior will be considered ethical over a long period of
time, even if circumstances or people change? In the layoff case, is the long-term
health of the company and the people who will remain employed more important
than the short-term consequences to the 200 workers who will be laid off? In the
U.S. financial crisis, if people had been thinking about long-term consequences, they
would have been much more likely to question behaviors that focused primarily on
short-term profits.
SYMBOLIC CONSEQUENCES In business, it’s also extremely important to think
about the potential symbolic consequences of an action. Every decision and action
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sends a message; it stands for something. What message will a particular decision or
action send? What will it mean if it is misunderstood? For example, if Pat doesn’t tell
her worker the truth, and he finds out later that she knew, what will the symbolic
message be to this worker and the others who work for Pat—that she’s more inter-
ested in saving her own hide than in taking care of them? From a leader’s perspective,
what are the symbolic consequences of accepting tickets to a football game from a
valued client when your organization has a rule against accepting gifts from clients?
Although the leader may see going to the game as important for getting the big sale,
the symbolic message it will likely convey to employees is that the rule doesn’t apply
to senior leaders. Such a symbolic message can have dire consequences for the orga-
nization because employees may then feel that the rule shouldn’t apply to them either.
CONSEQUENCES OF SECRECY If a decision is made in private in order to avoid
some negative reaction, think about the potential consequences if the decision were
to become public. Think about the disclosure rule here. If you’re inclined to keep it a
secret, that should be a clue that something isn’t right. For example, the public has
been outraged by the fact that tobacco executives secretly knew about the negative
health effects of cigarette smoking and lied about it to the American people in testi-
mony before Congress.20
Step Five: Identify the Obligations
Identify the obligations involved and the reasons for each one. For example, in the
layoff case, consider Pat’s obligations toward the affected parties. When identifying
Pat’s various obligations, be sure to state the reasons why she has this duty or obliga-
tion. Think in terms of values, principles, character, or outcomes. For example, if
you’re considering Pat’s obligation to keep her promise to her boss, your reasoning
might go like this: ‘‘Pat shouldn’t break her promise to her boss. If she does, the trust
between them will be broken. Promise keeping and trust are important values in
superior-subordinate relationships.’’
The obligations you identify will vary depending on the people involved and the
roles they play. For example, our faith in our financial system depends in part on
auditors’ obligation to tell the truth about a company’s financial difficulties and our
faith in rating agencies to accurately grade financial instruments. Similarly, our faith in
science as an institution depends on the integrity of the scientific data and how scien-
tists report it. Individuals in these roles have a particularly strong obligation to tell the
truth; and if they see themselves as moral actors, they will be motivated to do so.
Step Six: Consider Your Character and Integrity
Here, think about yourself as a person of integrity. Ask yourself what a person of
integrity would do in this situation. In attempting to answer this question, you may
find it useful to identify the relevant moral community and consider what that com-
munity would advise. Begin by identifying the relevant professional or societal
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community. Then, determine how community members would evaluate the decision
or action you’re considering.
Remember the disclosure rule. It asks whether you would feel comfortable if
your activities were disclosed in the light of day in a public forum like the New York
Times or some other news media. In general, if you don’t want to read about it in the
New York Times, you shouldn’t be doing it. If you would be uncomfortable telling
your parents, children, spouse, clergy, or ethical role model about your decision, you
should rethink it.
Boris Yavitz, the former dean of Columbia University’s Graduate School of
Business, offered another version of the test for New Yorkers: ‘‘Unless you would do
it in Macy’s department store window at high noon, don’t do it.’’ And Thomas Jeffer-
son expressed it like this: ‘‘Never suffer a thought to be harbored in your mind which
you would not avow openly. When tempted to do anything in secret, ask yourself if
you would do it in public. If you would not, be sure it is wrong.’’
This kind of approach can be especially valuable when a decision needs to be
made quickly. Suppose someone in your organization asks you to misrepresent the
effectiveness of one of your company’s products to a customer. You can immediately
imagine how a story reporting the details of your conversation with the customer
would appear in tomorrow’s paper. Would you be comfortable having others read the
details of that conversation? The ideal is to conduct business in such a way that your
activities and conversations could be disclosed without your feeling embarrassed.
Another method might be to ask a question asked by the Seneca people (one of
the five original nations of the great Iroquois Confederacy located in the northeastern
United States and southeastern Canada) in their guidelines for self-discipline: ‘‘How
will I be remembered when I’m gone?’’21 Many people don’t often think about this
question, but it’s a good one. Will you be remembered as an individual of integrity?
Students often don’t realize how small professional communities can be. This is
especially true in today’s world of social networking. Although you’ll likely change
jobs and organizations multiple times over the years, many people remain in a single
industry where they have developed industry-specific expertise. A reputation for
trustworthiness, respectful interaction, and integrity will open doors to new clients
and career opportunities. But the opposite is true as well. A stained reputation is
extremely difficult to overcome.
Step Seven: Think Creatively about Potential Actions
Perhaps this should be Step One. Before making any decision, be sure that you
haven’t unnecessarily forced yourself into a corner. Are you assuming that you have
only two choices, either A or B? It’s important to look for creative alternatives. Per-
haps if you’ve been focusing on A or B, there’s another answer: C. In our layoff case,
perhaps Pat could work with management to devise a fair system for alerting employ-
ees sooner; or at least she could advise them that information is forthcoming soon,
and they should not make big financial commitments until the announcement is
made. As another example, what if you received an extravagant gift from a foreign
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supplier? This situation could easily be conceptualized as an A or B quandary.
Should you accept the gift (which is against company policy), or should you refuse it
(which could be interpreted as a slap in the face by this important supplier, who is
from a culture where gift giving is a valued part of business relationships)? A poten-
tial C solution might be to accept the item as a gift to the company that would be
displayed in the headquarters entrance, explaining that large personal gifts are against
company policy. Obviously, you would have to check with your company about the
acceptability of this C solution. The idea here is to think outside the box.
Here is yet another example. In an overseas location, Cummins Engine Company
was having difficulty with local children cutting through a wire fence and stealing
valuable electronic components. The A or B solution was to arrest or not arrest these
young children when they were caught. After involving the community, the managers
were able to arrive at a C solution. They discovered that the children were stealing
because there weren’t enough classrooms at the local school, thus leaving the chil-
dren with little to do but get into trouble. Cummins made classrooms available on
their site. The mayor provided accreditation, books, and teachers. This C solution
cost the company very little and accomplished a great deal. A total of 350 students
were accommodated, the stealing problem disappeared, and Cummins became a
valued corporate citizen.
Step Eight: Check Your Gut
The emphasis in these steps has been on using a highly rational fact-gathering and
evaluation process once you know that you’re faced with an ethical dilemma. But
don’t forget your gut. We are all hardwired to be empathetic and to desire fairness
Empathy is an important emotion that can signal awareness that someone might be
harmed. And intuition is gaining credibility as a source for good business decision
making. We can’t always say exactly why we’re uncomfortable in a situation. But
years of socialization have likely made us sensitive to situations where something
just doesn’t feel quite right. So if your gut is sending up red flags, give the situation
more thought. In fact, this may be your only clue that you’re facing an ethical
dilemma to begin with. Pay attention to your gut, but don’t let it make your decision
for you. Once you recognize that you’re facing an ethical dilemma, use the rational
decision-making tools developed here to help guide your decision making.
PRACTICAL PREVENTIVE MEDICINE
Doing Your Homework
There’s no doubt that you’ll encounter ethical dilemmas—every employee probably
encounters hundreds of them during a career; the only thing in doubt is when. Your
mission is to be as prepared as possible before you run into a problem. The more
informed you are, the more effective you’ll be in protecting yourself and your
employer. The best ways to do that are to learn the rules of your organization
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and your profession, and to develop relationships that can help you if and when the
need arises.
You can learn the rules in various ways. First, read your company’s code of
ethics (if it has one) and policy manual. Since most policy manuals are huge, you
obviously can’t memorize one. If you skim the contents, some of the rules will sink
in—you may not remember the exact policy, but at least you’ll probably remember
that one exists and where to find it.
Second, ask questions. Managers, executives, and peers will admire your initia-
tive when you ask what they think is ‘‘important around here.’’ Since many organiza-
tional standards are unwritten, and they differ from company to company, the best
way to find out about them is by asking. Query your coworkers (including manage-
ment) about what kinds of ethical situations are most common in your organization
and how your organization generally handles those issues. Ask your manager how to
raise ethical issues within your organization. Since he or she will certainly tell you to
raise an issue with him or her first, be sure to find out how you raise an issue in your
manager’s absence. This not only gives you a road map for raising issues, but it also
sends a signal to your manager that ethics are important to you.
Finally, develop relationships with people outside of your chain of command.
Get to know people in human resources, legal, audit, and other departments; they
might be able to provide information, help you raise an issue or determine if some-
thing even is an issue, or vouch for your credibility in a crisis. You might also want to
join a professional group or association. Many professions have developed ethical
standards apart from those that may exist in your company, and it can be helpful to
know other people in your profession who can advise you if a crisis arises in your
company. Some may say this is being political, but we think it’s just plain smart to
network with people outside of your immediate job and company. It’s the difference
between being a victim of circumstance and having the power, the knowledge, and
the network to help manage circumstances.
After you’ve done your homework and learned about your company’s standards
and values, you may find that your values and your employer’s values are in conflict.
If the conflict is substantial, you may have no choice but to look for work in another
organization. We’ll be addressing issues of company values and codes more in Chap-
ters 5 and 6.
When You’re Asked to Make a Snap Decision
Many businesspeople place value on the ability to make decisions quickly; and, as a
result, many of us can feel pressure to make up our minds in a hurry. This can be a
particular issue when people are inexperienced for whatever reason—this may be
their first job or a new company or industry—and they may feel a need to prove their
competence by making decisions quickly. Obviously, that can be dangerous. The
ethical decision-making tools described earlier in the chapter assume that you’ll have
some time to devote to the decision—to consider multiple sides of the issue and
the inherent conflicts with any one course of action. Do your best to get the time to
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assess, think through, and gather more information. Also consider the following
guidelines when a quick decision seems called for:
1. Don’t underestimate the importance of a hunch to alert you that you’re
facing an ethical dilemma. Your gut is your internal warning system. As
one senior executive at a multinational computer company said, ‘‘The gut
never lies.’’ When your gut tells you something’s wrong, consider it a
warning siren.
2. Ask for time to think it over. Most snap decisions don’t have to be that way.
Say something like, ‘‘Let me think about it, and I’ll get back to you soon.’’
Bargaining for time is a smart way to give yourself a break—then you can
really think about the decision and consult with others. It’s better to take the
time to make a good decision than it is to make a bad decision quickly and
have lots of time to regret it. Would you rather be known as cautious or
reckless?
3. Find out quickly if your organization has a policy that applies to your
decision.
4. Ask your manager or your peers for advice. You should consider your man-
ager the first line of defense when you encounter an ethical dilemma.
Regardless of your level within the organization, never hesitate to ask for
another opinion. This is where a trusted network comes in handy. If you
have friends in human resources or the legal department, you can float the
issue with them on a casual basis to see if there even is an issue.
5. Use the quick-check New York Times test (the disclosure rule). If you’d be
embarrassed to have your decision disclosed in the media or to your family,
don’t do it.
SHOULD JORDAN ACCEPT THE PRINTER DISCOUNT?
Jordan is upgrading his department’s data processing capabilities and has just
placed an order for four personal computers and two laser printers with a
computer company representative. When he mentions that he wishes he had
a printer at home like the ones he just ordered, the representative tells him
that because of his large order, she can give him a 50 percent discount on a
printer for his home. Jordan feels that this is not quite right, but he’s not sure
why and would like some time to think about her offer.
In this case, Jordan could have real doubt about whether or not to accept a
50 percent discount on a printer for his home. Even though he feels funny about the
offer, he might be thinking that he does a lot of work at home, so accepting a discount
on a personal printer could be justified. And since the computer representative made
the offer after the order was placed, there’s no conflict of interest—Jordan’s decision
to purchase obviously wasn’t influenced by the offer of a discount.
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But he should listen to his gut, which is feeling that this isn’t quite right. He can
first stall the computer representative by telling her he’ll get back to her later in the
day or tomorrow. He can find out what his company policy says about making pur-
chases. (Many companies would equate the discount with a gift and forbid accepting
it unless it’s available to all employees.)
Suppose he finds nothing in the policy manual to prohibit the discount, and other
workers have said ‘‘go for it.’’ Then he can use the New York Times test. How would
the public react to his decision? Some people would probably think that his order
was influenced by the offer of a discount. He knows that’s not true, but it might
be difficult to convince other people of that. This is called an appearance of a conflict
of interest, an appearance can be as damaging as an actual conflict. If someone
could think your judgment has been affected by a relationship—or in this case, a
discount—it could be viewed as the appearance of a conflict and should be avoided.
Appearances are extremely important in business and may not be accounted for by
the philosophical tools provided earlier in the chapter. Whether you appear to be fair
may be as important as whether you’re really fair.
Here’s the bottom line: If you think that your decision could be misinterpreted
or if someone could think the objectivity of your decision has been compromised,
rethink the decision. In the example, Jordan can politely refuse the representative’s
offer by saying something like, ‘‘My company doesn’t allow personal discounts,’’ or
‘‘I just don’t feel right about it.’’
If you ever feel that accepting a favor from a vendor will place you under an
obligation to the vendor in the future, be very careful. For example, a public relations
manager, Mary, described an incident with a printing company (we’ll call it Type
Co.) sales representative who was trying to get her business. Type Co. already did
business with a number of departments within her company, but Mary was satisfied
with her current printer and saw no reason to switch. Just before the holidays, Type
Co. sent a popular electronic device (worth about $250) to Mary and to all of its
customers in her company. Mary immediately felt that the gift was inappropriate; but
to check out her judgment, she called one of Type Co.’s other customers in her com-
pany. Mary’s colleague assured her that there was nothing wrong with accepting
the gift and that it was simply a token of good will. (If Mary had been friendly with
one of her company’s lawyers or human resources managers, she probably would
have received very different advice.) Mary listened to her internal warning system,
despite what her colleague said. She sent back the gift.
When asked why she returned the gift, Mary said, ‘‘I felt like I was being
bribed to do business with Type Co.’’ A reader of the New York Times would
probably agree.
CONCLUSION
This chapter has presented a prescriptive approach to individual ethical decision
making. When you’re confronted with an ethical dilemma, you should find it helpful
to inform your choice by considering the ideas and steps offered in this chapter. The
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end-of-chapter questions and case should give you some practice in applying these
ideas and steps to real ethical dilemmas.
DISCUSSION QUESTIONS
1. If you had to choose just one of the philosophical approaches discussed in this
chapter to guide your decision making, which would you choose? Why? Or, if
you had to rank them from most to least helpful, how would you rank them?
2. Some of the steps in the eight-step model might suggest very different courses
of action for resolving your dilemma. How would you choose among these dis-
tinct courses of action? Why?
3. Think about situations where your values have been in conflict. How have you
resolved those conflicts? Now that you have studied the ethical decision-mak-
ing frameworks in this chapter, what should you have done?
4. Think about an ethical dilemma situation that you’ve faced. Apply the three
approaches and the eight steps recommended in this chapter. Does it change
your thinking about the situation? Would it change your action?
5. Some corporations and other organizations have designed ethical decision-
making tests that incorporate some of the principles and systems described in
this chapter. For example, Carl Skooglund, former vice president and ethics
director at Texas Instruments, outlined the following Ethics Quick Test recom-
mended for use by Texas Instrument employees:22
& Is the action legal?
& Does it comply with your best understanding of our values and principles?
& If you do it, will you feel bad?
& How will it look in the newspaper?
& If you know it’s wrong, don’t do it, period!
& If you’re not sure, ask.
& Keep asking until you get an answer.
Think about this list in terms of the decision-making guides discussed in the chapter.
Which ones are being used here? Which are not? What recommendations, if any,
would you make to alter this list? If you had to make up a list for your company,
what would be on it? Why?
Do the same with the Rotary International Four-Way Test:
& Is it the truth?
& Is it fair to all concerned?
& Will it build goodwill and better relationships?
& Will it be beneficial to all concerned?
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The Seneca (one of the five tribes of the Iroquois Nation) people’s guidelines for self-
discipline also include these questions:23
& Am I happy in what I’m doing?
& Is what I’m doing adding to the confusion?
& What am I doing to bring about peace and contentment?
& How will I be remembered when I am gone?
Could these tests serve as guides for ethical decision making in business? Why or
why not?
6. The last question leads us to a useful exercise. If you had to write your own
epitaph, what would it say? How would you like to be remembered? What kind
of life do you hope to lead?
7. Albert Schweitzer (the philosopher and mission doctor) said, ‘‘Success is not
the key to happiness. Happiness is the key to success. If you love what you are
doing, you will be successful.’’ What do you think? How does this relate to the
prescriptive approaches discussed in the chapter?
8. What do you think of the proposed Hippocratic oath for managers?24
9. What limitations, if any, can you think of to the prescriptions provided in this
chapter? Can you think of reasons why they might not work?
10. If you were to design an ethical fitness program for yourself, what would you
include?
EXERCISE
Clarifying Your Values
If you wish to be better prepared to make tough ethical decisions at work or else-
where in your life, it can be extremely helpful to clarify your personal ethical
values before they’re seriously challenged. Following is a selected list of values
(in alphabetical order). Feel free to add one or more if you have a deeply held
value that is not represented on this list (it is not meant to be exhaustive). In
priority order (with 1 being the most important value), list from three to six val-
ues that are most important to you personally in making decisions. That’s the
easy part. Next, think seriously about what happens when two or more of these
values conflict. For example, what happens if you value both honesty and success
and they come into conflict? Are you willing to forgo financial success in order to
be completely honest with customers or suppliers? Next, if you’re working, think
about the values of your organization and how those are prioritized. Are there
serious conflicts between your personal values and the organization’s values?
Finally, list those values that you would choose to serve as the basis for business
dealings in an ideal society. Be prepared to discuss.
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Action orientation Freedom
Altruism Harmony
Responsibility
Authority Helpfulness
Risk taking
Compassion Honesty/Integrity
Security
Competence Honor
Self-discipline
Conformity Humility
Status
Creativity Initiative
Success
Customer satisfaction Innovation
Teamwork
Diversity Moderation
Tradition
Equality Novelty
Wealth
Excitement Obedience
Winning
Experimentation Order
Fairness/Justice Power
Family well-being Promise keeping
Flexibility/adaptability Respect
Introducing the Pinto Fires Case. Next, you’re going to read a case that chronicles an
event that took place over 30 years ago. You may ask, why study such an old case?
We study this case because it is extremely important in American business history. In
2005, Fortune Magazine called it one of the 20 business decisions that ‘‘helped create
the business world as it is today’’25 According to Fortune, the case and ensuing legal
battles contributed to the development of consumer activism as well as to the con-
sumer protections and class action lawsuits that we now take for granted. We have
also seen aspects of the case play out in product safety cases that have arisen more
recently, including Ford Explorer rollovers after Firestone tire failures, a case that
was settled in 2001.
CASE
PINTO FIRES
by Dennis A. Gioia (used with permission)
On August 10, 1978, three teenage girls died horribly in an automobile accident.
Driving a 1973 Ford Pinto to their church volleyball practice in Goshen, Indiana,
they were struck from behind by a Chevrolet van. The Pinto’s fuel tank ruptured and
the car exploded in flames. Two passengers, Lynn Marie Ulrich, 16, and her cousin,
Donna Ulrich, 18, were trapped inside the inferno and burned to death. After three
attempts, Lynn Marie’s sister, 18-year-old Judy Ann, was dragged out alive from the
driver’s seat, but died in agony hours later in the hospital.
They were merely the latest in a long list of people to burn to death in accidents
involving the Pinto, which Ford had begun selling in 1970. By the time of the acci-
dent, the car had been the subject of a great deal of public outcry and debate about its
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safety, especially its susceptibility to fire in low-speed rear-end collisions. This par-
ticular accident, however, resulted in more media attention than any other auto acci-
dent in U.S. history. Why? Because it led to an unprecedented court case in which the
prosecution brought charges of reckless homicide against the Ford Motor Co.—the
first time that a corporation had been charged with criminal conduct, and the charge
was not negligence but murder. At stake was much more than the maximum penalty
of $30,000 in fines. Of immediate concern, a guilty verdict could have affected 40
pending civil cases nationwide and resulted in hundreds of millions of dollars in
punitive damage awards. Of perhaps greater concern, however, were larger issues
involving corporate social responsibility, ethical decision making by individuals
within corporations, and ultimately, the proper conduct of business in the modern era.
How did Ford get into this situation? The chronology begins in early 1968 when
the decision was made to battle the foreign competition in the small car market, spe-
cifically the Germans, but also the growing threat from the Japanese. This decision
came after a hard-fought, two-year internal struggle between then-president Semon
‘‘Bunky’’ Knudsen and Lee Iacocca, who had risen quickly within the company
because of his success with the Mustang. Iacocca strongly supported fighting the
competition at their own game, while Knudsen argued instead for letting them have
the small car market so Ford could concentrate on the more profitable medium and
large models. The final decision ultimately was in the hands of then-CEO Henry
Ford II, who not only agreed with Iacocca but also promoted him to president after
Knudsen’s subsequent forced resignation.
Iacocca wanted the Pinto in the showrooms by the 1971 model introductions,
which would require the shortest production planning period in automotive history to
that time. The typical time span from conception to production of a new car was more
than three and a half years; Iacocca, however, wanted to launch the Pinto in just
over two years. Under normal conditions, chassis design, styling, product planning,
advance engineering, component testing, and so on were all either completed or
nearly completed prior to tooling of the production factories. Yet, because tooling
had a fixed time frame of about 18 months, some of these other processes were done
more or less concurrently. As a consequence, when it was discovered through crash
testing that the Pinto’s fuel tank often ruptured during rear-end impact, it was too late
(in other words, too costly) to do much about it in terms of redesign.
A closer look at the crash-test reports reveals that Ford was aware of faulty fuel
tank design. Eleven Pintos were subjected to rear-end collisions with a barrier at av-
erage speeds of 31 miles per hour to determine if any fuel would be lost after impact.
All eight of the Pintos equipped with the standard fuel tank failed. The three remain-
ing cars, however, survived the test because special measures had been taken to pre-
vent tank rupture or fuel leakage. These measures included a plastic baffle placed
between the axle housing and the gas tank, a steel plate between the tank and the rear
bumper, and a rubber lining in the gas tank.
It should be noted that these tests were done under guidelines established by
Federal Motor Vehicle Safety Standard 301, which was proposed in 1968 by the
National Highway Traffic Safety Administration (NHTSA), but not officially adopted
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until the 1977 model year. Therefore, at the time of the tests, the Pinto met the
required standards. Standard 301 had been strenuously opposed by the auto industry,
and specifically Ford Motor Co. In fact, the lobbying efforts were so strong that nego-
tiations continued until 1976, despite studies showing that hundreds of thousands of
cars burned every year, taking 3,000 lives annually; the adoption of the standard was
projected to reduce the death rate by 40 percent. Upon approval of Standard 301 in
1977, all Pintos were provided with a rupture-proof fuel tank design.
But for the Pinto’s 1971 debut, Ford decided to go with its original gas tank
design despite the crash-test results. Because the typical Pinto buyer was assumed to
be extremely price conscious, Iacocca set an important goal known as ‘‘the limits of
2,000’’: the Pinto could not cost more than $2,000 and could not weigh more than
2,000 pounds. Thus, to be competitive with foreign manufacturers, Ford felt it could
not spend any money on improving the gas tank. Besides, during the late 1960s and
early 1970s, American consumers demonstrated little concern for safety, so it was not
considered good business sense to promote it. Iacocca echoed these sentiments when
he said time and time again ‘‘Safety doesn’t sell,’’ a lesson he had learned after a
failed attempt to add costly safety features to 1950s Fords.
Ford had experimented with placing the gas tank in different locations, but all
alternatives reduced usable trunk space. A design similar to that of the Ford Capri
was successful in many crash tests at speeds over 50 miles per hour, but Ford felt
that lost trunk space would hurt sales too much. One Ford engineer, when asked
about the dangerous gas tank said, ‘‘Safety isn’t the issue, trunk space is. You have
no idea how stiff the competition is over trunk space. Do you realize that if we put a
Capri-type tank in the Pinto, you could only get one set of golf clubs in the trunk?’’
The last of Ford’s reasons for not making adjustments to the fuel tank design, how-
ever, was unquestionably the most controversial. After strong lobbying efforts, Ford and
the auto industry in general convinced NHTSA regulators that cost/benefit analysis
would be an appropriate basis for determining the feasibility of safety design standards.
Such an analysis, however, required the assignment of a value for a human life. A prior
study had concluded that every time someone died in an auto accident there was an esti-
mated ‘‘cost to society’’ of $200,725 (detailed in Table 1: What’s Your Life Worth?).
1
Having this value in hand, Ford calculated the cost of adding an $11 gas tank
improvement versus the benefits of the projected 180 lives that would be saved (via
an internal memo entitled ‘‘Fatalities Associated with Crash-Induced Fuel Leakage
and Fires’’). This is presented in Table 2: The Cost of Dying in a Pinto.2 As is dem-
onstrated, the costs outweigh the benefits by almost three times. Thus, the cost/bene-
fit analysis indicated that no improvements to the gas tanks were warranted.
Ford decided to go ahead with normal production plans, but the Pinto’s problems
soon surfaced. By early 1973, Ford’s recall coordinator received field reports
1 M. Dowie, ‘‘How Ford Put Two Million Fire Traps on Wheels,’’ Business and Society
Review 23 (1977): 51–55.
2
Ibid.
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suggesting that Pintos were susceptible to ‘‘exploding’’ in rear-end collisions at very
low speeds (under 25 miles per hour). Reports continued to indicate a similar trend in
subsequent years, but no recall was initiated despite the mounting evidence. At every
internal review, those responsible decided not to recall the Pinto.
Prior to the Indiana accident, the most publicized case concerning the Pinto’s gas
tank was that of Richard Grimshaw. In 1972, Richard, then 13, was riding with a
Table 1 What’s Your Life Worth?
The chart below, from a 1971 study by the National Highway Traffic Safety
Administration, is a breakdown of the estimated cost to society every time someone is
killed in a car accident. The Ford Motor Company used the $200,725 total figure in its
own cost-benefit analysis.
Component 1971 Costs
Future productivity losses
Direct $132,300
Indirect 41,000
Medical costs
Hospital 700
Other 425
Property damage 1,500
Insurance administration 4,700
Legal and court 3,000
Employer losses 1,000
Victim’s pain and suffering 10,000
Funeral 900
Assets (lost consumption) 5,000
Miscellaneous accident cost 200
Total per fatality $200,725
Table 2 The Cost of Dying in a Pinto
These figures are from a Ford Motor Co. internal memorandum on the benefits and costs
of an $11 safety improvement (applicable to all vehicles with similar gas tank designs)
that would have made the Pinto less likely to burn.
Benefits
Savings: 180 burn deaths, 180 serious burn injuries, 2,100 burned vehicles
Unit Cost: $200,000 per death, $67,000 per injury, $700 per vehicle
Total Benefit: (180 ! $200,000) + (180 ! $67,000) + (2,100 ! $700) = $49.5 million
Costs
Sales: 11 million cars, 1.5 million light trucks
Unit Cost: $11 per car, $11 per truck
Total Cost: (11,000,000 ! $11) + (1,500,000 ! $11) = $137.5 million
CHAPTER 2 DECIDING WHAT’S RIGHT: A PRESCRIPTIVE APPROACH 67
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neighbor on a road near San Bernardino, California, when they were hit from the rear.
The Pinto’s gas tank ruptured, causing the car to burst into flames. The neighbor was
burned to death in a crash that would have been survivable if there had been no fire.
Richard suffered third-degree burns over 90 percent of his body and subsequently
underwent more than 60 operations, with only limited success. A civil suit was settled
in February 1978, when a jury awarded a judgment of over $125 million against Ford,
most of which consisted of punitive damages (later reduced to $6 million by a judge
who nonetheless accused Ford of ‘‘callous indifference to human life’’). This judgment
was based on convincing evidence that Ford chose not to spend the $11 per car to
correct the faults in the Pinto gas tanks that its own crash testing had revealed.
The Pinto sold well until the media called special attention to the Pinto fuel tank
story. As a consequence, in June 1978, in the face of pressure from the media, the gov-
ernment, pending court cases, and the potential loss of future sales, Ford ordered a com-
plete recall of all 1.5 million Pintos built between 1970 and 1976. During the 1980
Indiana trial that resulted from the fatal accident of 1978, differing views continued to
be expressed about the Pinto fires case. Ford representatives argued that companies must
make cost/benefit decisions all the time. They claimed that it is an essential part of busi-
ness, and even though everyone knows that some people will die in auto accidents, buy-
ers want costs held down; therefore, people implicitly accept risks when buying cars.
In a scathing article accusing Ford of criminally mismanaging the Pinto problem,
investigative reporter Mark Dowie framed the case in a different and rather more
sensational way, with this often-quoted speculation: ‘‘One wonders how long the
Ford Motor Company would continue to market lethal cars were Henry Ford II and
Lee Iacocca serving twenty-year terms in Leavenworth for consumer homicide.’’3
Case Questions
1. Put yourself in the role of the recall coordinator for Ford Motor Co. It’s 1973,
and field reports have been coming in about rear-end collisions, fires, and fatali-
ties. You must decide whether to recall the automobile.
a. Identify the relevant facts.
b. Identify the pertinent ethical issues and points of ethical conflict.
c. Identify the relevant affected parties.
d. Identify the possible consequences of alternative courses of action.
e. Identify relevant obligations.
f. Identify your relevant community standards that should guide you as a person
of integrity.
g. Check your gut.
What will you decide?
3 M. Dowie, ‘‘How Ford Put Two Million Fire Traps on Wheels,’’ Business and Society Review
23 (1977): 51–55.
68 SECTION II ETHICS AND THE INDIVIDUAL
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NOTES
1. J. Rachels, The Elements of Moral Philosophy (New York: McGraw-Hill, 1983).
2. L. Peach, ‘‘An Introduction to Ethical Theory,’’ in Research Ethics: Cases and Materials, ed. R. L.
Penslar (Bloomington: Indiana University Press, 1994).
3. D. J. Fritsche and H. Becke, ‘‘Linking Management Behavior to Ethical Philosophy: An Empirical
Investigation,’’ Academy of Management Journal 27 (1984): 166–75.
4. J. Rawls, A Theory of Justice (Cambridge, MA: Harvard University Press, 1971).
5. Rachels, The Elements of Moral Philosophy.
6. E. Bazelon, ‘‘Sentencing by the Numbers,’’ New York Times Magazine, 2 January 2005, 18.
7. R. C. Solomon, Ethics and Excellence (New York: Oxford University Press, 1988).
8. G. R. Weaver, ‘‘Virtue in Organizations: Moral Identity as a Foundation for Moral Agency,’’ Organi-
zation Studies 17 (2006): 341–68.
SHORT CASES
As a counselor in an outplacement firm, you’ve been working with Irwin for six
months to find him a new position. During that time, he has completed extensive
assessment work to determine if he’s in an appropriate profession or if he might ben-
efit from a career change. The results of the assessment indicate that Irwin has low
self-esteem, probably could benefit from psychotherapy, and is most likely ill suited
for his current profession. Irwin has been actively interviewing for a position that’s
very similar to two others he has held and lost. He desperately wants and needs this
job. The company where he’s interviewing happens to be one of your most important
clients. You receive a call from the head of human resources at the company, who
tells you that Irwin suggested she call you for information about his abilities, inter-
ests, and personality style as measured by the assessment process. She also asks you
for a reference for Irwin. Since he has, in effect, asked that you share information
with this woman, is it okay for you to give her an honest assessment of Irwin? What
are your obligations to Irwin, who is your client in this case? Is there a way for you to
be honest, yet not hurt Irwin’s chances to obtain this job? Or is that important? What
will you do?
You have worked in business for several years and you’re now ready for some further
education. You have applied to multiple prestigious MBA programs via a website
called ApplyYourself.com that handles the application process for many of these pro-
grams. You’re anxiously awaiting replies and expect to receive them in about a
month. You’re up late one night and, while surfing the Web, you discover instruc-
tions for a ‘‘back door’’ way to take advantage of a technical glitch on the website
that would allow you to check the status of your application and find out if you’ve
been accepted or rejected. Multiple steps are involved, but the instructions provide
clear guidance. Would it be right to take advantage of this information? Why or why
not? If you were the admissions director or dean of one of these schools and you
learned that some applicants had taken advantage of the glitch, what would be the
right thing to do?
CHAPTER 2 DECIDING WHAT’S RIGHT: A PRESCRIPTIVE APPROACH 69
E1C02 07/09/2010 Page 70
9. ‘‘Saying It Again: Psychologists May Never Participate in Torture,’’ American Psychological Associ-
ation (APA) Press Release, 22 April 2009.
10. ‘‘26-Year Secret,’’ CBS News.com (June 16, 2009), at www.cbsnews.com.
11. R. Khurana, From Higher Aims to Hired Hands (Cambridge, MA: Princeton University Press, 2007).
12. R. Khurana and N. Nohria, ‘‘It’s Time to Make Management a True Profession,’’ Harvard Business
Review 86, no. 10 (2008): 1–8.
13. ‘‘Bloodied and Bowed,’’ Business Week, 20 January 2003, 56–57.
14. Weaver, ‘‘Virtue in Organizations.’’
15. M. Bebeau, ‘‘Developing a Well-Reasoned Moral Response to a Moral Problem in Scientific
Research Ethics,’’ Paper distributed at the Teaching Research Ethics conference, Poynter Research
Center for the Study of Ethics and American Institutions at Indiana University, Bloomington, Indiana,
May 1994.
16. L. Nash, ‘‘Ethics without the Sermon,’’ in Ethics in Practice, ed. K. R. Andres (Boston: Harvard
Business School Press, 1989).
17. D. E. Larson, Mayo Clinic Family Health Book (New York: William Morrow, 1990).
18. Nash, ‘‘Ethics without the Sermon.’’
19. S. G. Stolberg, ‘‘Their Devil’s Advocates: Thalidomide Returns with an Unlikely Ally: A Group of
Its Original Victims.’’ New York Times Magazine, 25 January 1998, 20–25.
20. D. M. Messick and B. Bazerman, Ethics for the 21st Century: A Decision Making Perspective.
Unpublished manuscript.
21. B. Steiger, Indian Medicine Power (Atglen, PA: Whitford Press, 1984), 92.
22. C. Skooglund, ‘‘Ethics in the Face of Competitive Pressures,’’ Business Ethics Resource (Fall
1992): 4.
23. Steiger, Indian Medicine Power.
24. Khurana and Nohria, ‘‘It’s Time to Make Management a True Profession.’’
25. J. Useem, K. Bonamici, N. D. Schwartz, and C. Murphy, ‘‘20 That Made History,’’ Fortune, 27 June
2005, 58 (14 pages).
70 SECTION II ETHICS AND THE INDIVIDUAL
http://www.cbsnews.com
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C H A P T E R3
DECIDING WHAT’S RIGHT: A
PSYCHOLOGICAL APPROACH
INTRODUCTION
Chapter 2 introduced prescriptive ethical theories, developed by philosophers, that
are designed to help individuals decide what they should do in response to ethical
dilemmas. But psychology teaches us that people often don’t even recognize the
ethical dimensions of the situation at hand. And, when they do, they often don’t think
about it in expected ways. So, this chapter is designed to help you understand how
people actually think and what people actually do by introducing the psychological
factors—the individual differences and mental processes that influence how people
think and behave. It also explains some factors that can keep well-intentioned people
from making good ethical decisions and suggests some ways to overcome them.
Finally, this chapter introduces relevant new neuroscience research and research on
the role of emotions in ethical decision making.
ETHICAL AWARENESS AND ETHICAL JUDGMENT
If a decision maker is to engage in ethical judgment processes (like those discussed in
Chapter 2) that will eventually lead to ethical action, she or he must first recognize
the ethical nature of the situation at hand.
Ethical Awareness ! Ethical Judgment ! Ethical Action
We refer to this initial step in the ethical decision-making process as ethical aware-
ness. With ethical awareness, a person recognizes that a situation or issue is one that
raises ethical concerns and must be thought about in ethical terms. It is an important
step that shouldn’t be taken for granted. Sometimes people are simply unaware that
they are facing an issue with ethical overtones. And, if they don’t recognize and label
the issue as an ethical one, ethical judgment processes (like those we studied in Chap-
ter 2) will not be engaged. In fascinating new research, parts of the brain that are
associated with recognizing the ethical nature of an issue were differentiated from
those involved in other kinds of thinking. Researchers used functional magnetic
71
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resonance imaging (fMRI) in a study showing that when Executive MBA students
identified ‘‘an important point or issue’’ in scenarios, a different part of the brain was
more active when the issue had ethical overtones compared to more neutral issues.1
In a different study, a part of the brain associated with emotional processing was
activated when participants viewed morally relevant pictures compared to more neu-
tral ones.2 So, it seems that something different happens in our brains when we begin
thinking about an issue we recognize as having ethical overtones.
Consider the following ethical awareness example. Students are doing more
online research for classroom assignments. The technology makes it easy to find
up-to-date information, download it, and cut and paste it right into a paper that
then gets submitted to a professor for a grade. Perhaps you have done this without
thinking too much about it. However, in this process, students often overlook the
fact that they may be plagiarizing—‘‘stealing’’ someone else’s intellectual prop-
erty. Intellectual property is protected by copyright and patent laws in the United
States. These laws are important because there would simply be no incentive to
write a book, publish a magazine, or develop a new product if anyone could sim-
ply reproduce it freely without any attention to the rights of the person or com-
pany that invested time and resources to create it. The education community has
adopted academic integrity rules that guide how students can fairly use intellec-
tual property. In keeping with those rules, students are expected to paraphrase and
then carefully reference all sources of information. When you’re quoting someone
else’s words, these words must be put in quotation marks, and the exact citation
to the source must be provided. In the pre-Internet days, this kind of research
meant physically going to the library, searching the shelves for information, copy-
ing pertinent information by hand, making careful notes about the sources, and
then organizing the information into a paper that had to be typed from scratch.
Plagiarism actually required conscious effort in those days. Now, information is
so accessible and it’s so easy to simply cut and paste that it can be harder to
recognize the ethical issues involved. But if your college has an academic integ-
rity policy or honor code, your professor takes the time to explain the importance
of academic integrity, the role of intellectual property in our society, the defini-
tion of plagiarism, and your responsibilities as a member of the higher education
community, you should be more aware of the ethical issues involved. Under those
circumstances, when you’re tempted to just cut and paste, you’ll be more likely to
think about the ethical dimensions of your actions—the rights of the intellectual
property owner, and whether your actions would be considered plagiarism by
your professor and others in your academic community.
Now for a work-related example.
You’ve just started a new job in the financial services industry. One after-
noon, your manager tells you that he has to leave early to attend his son’s
softball game, and he asks you to be on the lookout for an important check
that his boss wants signed before the end of the day. He tells you to do him a
favor—simply sign his name and forward the check to his boss.
72 SECTION II ETHICS AND THE INDIVIDUAL
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To a naive employee, this may seem like a straightforward and easily
accommodated request. But if the company trained you well, you would
immediately be aware of the ethical nature of the situation. Your manager
has asked you to engage in forgery, a serious ethical lapse, especially in the
financial services industry where the validity of signatures is essential to
system functioning and trust. Recognizing the ethical nature of the situation
would likely lead to some very different thinking about how to respond.
Research has found that people are more likely to be ethically aware, to recog-
nize the ethical nature of an issue or decision, if three things happen: (1) if they
believe that their peers will consider it to be ethically problematic; (2) if ethical
language is used to present the situation to the decision maker; and (3) if the decision
is seen as having the potential to produce serious harm to others.3
Let’s take these factors one at a time. First, as we’ll see later, most people look to
others in their social environment for guidance in ethical dilemma situations. So, if
you believe that your coworkers and others around you are likely to see a decision as
ethically problematic, it probably means that the issue has been discussed, perhaps in
a company-sponsored ethics training program or informally among coworkers or
with your manager. Such discussions prime you to think about situations in a particu-
lar way. When a similar situation arises, it triggers memories of the previous ethics-
related discussion, and you are more likely to categorize and think about the situation
in ethical terms.4 Using the forgery example, perhaps a company training program
provided instruction on the importance of signatures in the financial industry and
labeled signing for someone else as forgery. Perhaps the company even presented a
similar problem to trainees and you all agreed that signing someone else’s name to
the check would be wrong. Having participated in such a discussion, you would rec-
ognize that signing the check would be ethically problematic and you would be more
likely to see your boss’s request as an ethical problem.
Second, situations can be represented or ‘‘framed’’ in different ways—using eth-
ical language or more neutral language. Using ethical language (positive words like
integrity, honesty, fairness, and propriety, or negative words such as lying, cheating,
and stealing) will trigger ethical thinking because these terms are attached to existing
cognitive categories that have ethical content. For example, if the manager in the
example above had asked you to forge the check for him, the word forge would be
more likely to trigger legal or ethics-related concerns than if he simply asked you to
sign the check (more neutral language). In response to the term forgery, you would
more likely wonder if signing the check was ethically wrong, if anyone was being
hurt, and what the consequences would be if you did or didn’t do it. The term plagia-
rism would likely trigger similar thinking.
Think about the power of the word genocide. If you’ve seen the film Hotel
Rwanda, you know about the horrible killing in 1994 of some 800,000 Tutsi men,
women, and children by Hutu extremists while the rest of the world, including the
United States, did nothing to help. According to President Clinton’s national security
advisor, the administration refused to allow use of the word genocide for six weeks
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because ‘‘if you used the word, then you’re required to take action.’’5 Former Presi-
dent Clinton has said that failing to help in Rwanda is one of his ‘‘greatest regrets.’’6
Avoidance of the morally powerful term genocide likely contributed to the adminis-
tration’s inaction and the public’s lack of support.
Neutral language can be used to make an unethical action seem less problematic.
The use of such euphemistic language can easily keep individuals from thinking
about the ethical implications of a decision or action. With euphemistic language, we
name or label actions in ways that minimize their ethical overtones. For example,
troubled assets don’t seem nearly as problematic as ‘‘toxic’’ assets. And the term no-
doc loans (used to describe new high-risk loans that were made to mortgage
customers who were not required to provide documentary evidence of their job secu-
rity or income) raises ethical antennae much less than does the term liars’ loans. The
latter term (actually used by some in the mortgage industry before the meltdown),
acknowledges that borrowers were lying about their incomes on their loan applica-
tions. The use of euphemistic language may not be intentionally unethical, but it
certainly has the effect of allowing us to feel okay about what we’re doing when
perhaps we should be thinking much harder about the ethical overtones.
Here is a great business example of euphemistic language. In 2006, Hewlett-
Packard’s (HP) then chairwoman of the board of directors, Patricia Dunn, was upset
about boardroom leaks to the press about HP’s strategy. In an attempt to learn the
leaker’s identity, the company hired investigators who were allowed to misrepresent
their identities to the phone company (they lied) in order to obtain cell phone records
of board members and a journalist; they referred to this behavior as ‘‘pretexting.’’
When the press learned about it, they (perhaps more properly) used ethically charged
language to label the behavior as spying, and a high-profile scandal ensued. Dunn
was replaced, along with two other board members and the executive heading the
company ethics program (who knew about the investigation). The CEO testified in
congressional hearings, and HP (a company that had long claimed privacy as a core
value) had to scurry to try to overcome the company’s association with spying, lying,
and invasion of privacy.7 If someone involved in approving this investigation had
labeled the behavior using ethical language (lying, spying, invasion of privacy)
instead of the more neutral-sounding pretexting, red flags would have more likely
gone up to stop the investigators’ behavior.
Finally, and perhaps most important, an issue or situation that has the potential to
produce serious harm to others is more likely to be seen as an ethical issue. If HP
executives could have imagined the potential damage to board members or the jour-
nalist, or the resulting scandal and implications for the company’s reputation, they
would have been more likely to raise ethical concerns. In the forgery example, if you
see that forging the check could result in serious harm to customers, you would more
likely see it as a serious issue than if no one would be harmed. Thomas Jones pro-
posed that individuals are more likely to recognize the ethical nature of issues that
are morally intense.8 The moral intensity of an issue is higher when the consequences
for others are potentially large, these consequences are relatively immediate and
likely to occur, and the potential victims are psychologically or physically close to
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the decision maker. For example, a decision to allow toxic chemicals to leak into
the local water supply is very likely to harm many people in one’s own community.
Such a decision is ‘‘morally intense,’’ and therefore the decision maker is more likely
to see it as an ethical issue. In contrast, a decision that might require laying off a
few individuals in a foreign subsidiary would be less likely to trigger ethical aware-
ness. Only a few people will be affected, the consequences will occur in the future,
and these individuals are both psychologically and physically distant from the
decision maker.
So managers can encourage employees to be ethically aware by providing train-
ing and by talking with employees about the types of ethical issues they’re likely to
face and why these issues are ethically problematic. They can also encourage
employees to have these discussions themselves, to use ethical language in such
interactions, and to think about the consequences of their actions and take responsi-
bility for the consequences of the decisions they make.
On the other hand, all of us should be on the lookout for situations that are likely
to reduce our chances of seeing the ethical overtones in a situation. For example,
downloading music from the Internet may seem benign if one doesn’t recognize that
the American economy loses an estimated $12.5 billion dollars a year from it. That
includes jobs and tax revenues that are lost because of what the industry has termed
‘‘music piracy.’’
9 Investment bankers who pay for mutual fund managers to go to the
Super Bowl and lavishly entertain clients are not likely to think that they are engaged
in ‘‘bribery’’ or that their behavior is anything more than what ‘‘every one else does.’’
Never mind that the average investor is likely disadvantaged by the wining and
dining. If we think about issues in ethical terms, the ethical judgment processes we
discuss next are more likely to be triggered.
INDIVIDUAL DIFFERENCES, ETHICAL JUDGMENT,
AND ETHICAL BEHAVIOR
Once people are aware of the ethical dimensions of a situation or decision, they
engage in ethical judgment processes that can contribute to ethical (or unethical) con-
duct. By ethical judgment, we mean making a decision about what is the right thing
to do. As with ethical awareness, neuroscience (fMRI) research is finding that certain
parts of the brain are activated more during ethical decision making compared to
when the same individuals are making other kinds of decisions.10 These findings sug-
gest that ethical judgment is truly a unique form of decision making.
The next part of this chapter focuses on individual differences that influence
ethical judgment and action. Much of this book will focus on situational pushes and
pulls. For example, people follow leaders or their peers. They tend to do what’s
rewarded. Yet, despite these powerful pushes and pulls, people do bring something
of their unique selves to situations. Heroes emerge when you least expect it. People
blow the whistle despite fear of retaliation. Others embezzle funds or lie to customers
despite all of management’s efforts to support good conduct. One way to explain
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these ethical and unethical behaviors is to focus on characteristics of individuals that
differentiate one person from another, making one person more predisposed to think
and behave ethically while another is predisposed to think and behave unethically.
Research has uncovered a number of individual differences that influence the
way people think and behave in response to ethical dilemma situations. In this sec-
tion, we discuss several of these differences and how they influence ethical judgment
and/or ethical action. They’re illustrated below:
Individual Differences
Ethical decision-making style
Cognitive moral development
Locus of control
Machiavellianism
Moral disengagement
Ethical Awareness ! Ethical Judgment ! Ethical Action
Ethical Decision-Making Style
In Chapter 2, we introduced different frameworks for making ethical decisions and
advised that individual decision makers should use these in combination if they wish
to make the best decisions. But research suggests that individuals have preferences
for particular prescriptive ethical theories. Forsyth proposed that we think about these
individual preferences in terms of two factors: (1) idealism or the person’s concern
for the welfare of others; and (2) relativism or the person’s emphasis on ethical prin-
ciples being dependent on the situation rather than being applicable to all situa-
tions.11 Idealism is related to what we referred to as thinking about consequences in
Chapter 2. For example, individuals high on idealism believe that one should always
avoid harming other people in ethical dilemma situations, while non-idealists believe
that ‘‘it depends’’ because ‘‘harm is sometimes . . . necessary to produce good’’12
Relativism is more related to deontological theories and our focus on principles in
Chapter 2. For example, individuals who are low on relativism believe that all situa-
tions are subject to universal ethical principles (such as honesty). On the other hand,
individuals who are high on relativism believe that people should weigh the particu-
lar circumstances in a situation when making decisions, because there are no univer-
sal ethical principles that determine right action in every situation. Research suggests
that those high on idealism are more likely to have ethical intentions and to be critical
of unethical behavior.13 This is probably because idealists are more concerned about
anything they might do that would harm others.14 By contrast, high relativism has
been found to be associated with unethical intentions, perhaps because relativists
who do not follow clear ethical principles find it easier to rationalize unethical behav-
ior.15 You can discover your own style by taking a survey that your professor may
make available to you. The relationship between ethical decision style and ethical
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action has not yet been tested, but it seems logical that the way an individual thinks
about a situation and that person’s ethical or unethical intentions will influence the
action he or she takes. As we did in Chapter 2, we continue to strongly recommend
systematically considering ethical dilemma situations from multiple perspectives.
Still, it can be useful to understand that you (or the people who work with you or for
you) likely have a preference for one approach over another. If so, you may be able
to improve your own ethical decision making by forcing yourself to consciously con-
sider all angles. You may also be able to influence ethical decision making in discus-
sions with others by pointing them to these alternative perspectives.
Cognitive Moral Development
One important explanation for both ethical judgment and action based on individual
characteristics comes from the moral reasoning research of Lawrence Kohlberg.16
When people respond to ethical dilemma situations, they must, among other things,
decide what course of action is ethically right (as we discussed in Chapter 2), and
they must choose the ethically right path over others.17 In other words, if they decide
that blowing the whistle is the ethically right path, they must follow through and do it
(take the ethical action).
Kohlberg’s moral reasoning theory is a cognitive developmental theory that
focuses primarily on how people think about and decide what course of action is
ethically right. His research began by following 58 American boys ranging in age
from 10 to 16 years old. He interviewed them regularly, asking for their open-ended
responses to hypothetical moral dilemmas. Their responses were analyzed and
resulted in new understanding of how moral reasoning in human beings gradually
develops over time through brain development and life experience.
Kohlberg’s cognitive moral development theory proposes that moral reasoning
develops sequentially through three broad levels, each composed of two stages. As
individuals move forward through the sequence of stages, they are cognitively capa-
ble of comprehending all reasoning at stages below their own, but they cannot com-
prehend reasoning more than one stage above their own. Development through the
stages results from the cognitive disequilibrium that occurs when an individual
perceives a contradiction between his or her own reasoning level and the next higher
one. This kind of development can occur through training, but it generally occurs
through interaction with peers and life situations that challenge the individual’s
current way of thinking. You can think of those conversations parents sometimes
have with children at the dinner table as attempts to challenge the child’s thinking
and influence moral reasoning and moral development. According to Kohlberg, the
actual decision an individual makes isn’t as important as the reasoning process used
to arrive at it. However, he argued—and this is an important concept—that the higher
the reasoning stage, the more ethical the decision, because the higher stages are more
consistent with prescriptive ethical principles of justice and rights (like those dis-
cussed in the deontological approach in Chapter 2).
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Kohlberg’s theory has been successfully applied to studies of adults in business
settings.18 For example, James Weber interviewed business managers about their
responses to the following hypothetical dilemma:
Evelyn worked for an automotive steel casting company. She was part of
a small group asked to investigate the cause of an operating problem
that had developed in the wheel castings of a new luxury automobile and
to make recommendations for its improvement. The problem did not
directly create an unsafe condition, but it did lead to irritating sounds.
The vice-president of engineering told the group that he was certain that
the problem was due to tensile stress in the castings. Evelyn and a lab
technician conducted tests and found conclusive evidence that the prob-
lem was not tensile stress. As Evelyn began work on other possible
explanations of the problem, she was told that the problem had been
solved. A report prepared by Evelyn’s boss strongly supported the tensile
stress hypothesis. All of the data points from Evelyn’s experiments had
been changed to fit the curves, and some of the points that were far from
where the theory would predict had been omitted. The report ‘‘proved’’
that tensile stress was responsible for the problem.19
A number of questions were presented to the interviewees. For example, they
were asked whether Evelyn should contradict her boss’s report and why. We will
use this hypothetical dilemma to understand the theory and how responses to the
above question (along with others) help identify an individual’s placement in
Kohlberg’s moral reasoning stage framework. Table 3.1 outlines the levels and
stages involved.
LEVEL I: PRECONVENTIONAL A level I individual (labeled the preconventional
level and including stages 1 and 2) is very self-centered and views ethical rules as
imposed from outside the self. Unfortunately, a small percentage of adults never
advance beyond this stage, and managers must be ready for that possibility. As you
read the following descriptions, see if you know anyone who thinks this way.
Stage 1 individuals are limited to thinking about obedience to authority for its
own sake. Avoiding punishment by authority figures is the key consideration. It’s
easy to imagine a child thinking, ‘‘I should share my toy because, if I don’t, Mom
will yell at me’’ (i.e., I’ll be punished). A stage 1 response to the Evelyn situation
might argue that it would be wrong to contradict her boss because she must obey her
superiors, and she would certainly be punished if she disobeyed.
At stage 2, concern for personal reward and satisfaction become considerations
in addition to a kind of market reciprocity. What is right is judged in terms of a ‘‘you
scratch my back, I’ll scratch yours’’ reciprocal relationship. A stage 2 child might
think, ‘‘If I share my toy with my brother, he might share his with me later.’’ A stage 2
response in the Evelyn situation might argue that Evelyn should support her boss
because he is responsible for her performance appraisals; and, if she lets this one go,
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he might overlook some of her problems from the past. Also, if her boss has been
kind or helpful to her in the past, she may consider her obligation to repay the favor.
In general, a level I person can be expected to consider questions like ‘‘What’s in
it for me?’’ At stage 1, the questions might be ‘‘Can I get away with it?’’ or ‘‘Will I
get caught, punished?’’ At stage 2, the questions might be ‘‘How will I benefit or
what will I get in return if I do this?’’
LEVEL II: CONVENTIONAL At level II (labeled the conventional level and includ-
ing stages 3 and 4), the individual is still externally focused on others but is less self-
centered and has internalized the shared moral norms of society or some segment like
a family or work group. What’s ethically right is explained in terms of living up to
roles and the expectations of relevant others, fulfilling duties and obligations, and
following rules and laws.
At stage 3, what’s right is thought to be that which pleases or helps others or is
approved by those close to you. Interpersonal trust and social approval are important.
Table 3.1 Levels of Cognitive Moral Development According to Kohlberg
Stage What Is Considered to Be Right
Level I: Preconventional
Stage 1: Obedience and
Punishment Orientation
Obedience to authority for its own sake.
Sticking to rules to avoid punishment.
Stage 2: Instrumental Purpose and
Exchange
Following rules only when it is in one’s
immediate interest. Right is an equal exchange,
getting a good deal.
Level II: Conventional
Stage 3: Interpersonal Accord,
Conformity, Mutual Expectations
Stereotypical ‘‘good’’ behavior. Living up to what
is expected by peers and people close to you.
Stage 4: Social Accord and System
Maintenance
Fulfilling duties and obligations of the social
system.
Upholding laws and rules except in extreme
cases where they conflict with social duties.
Level III: Postconventional or Principled
Stage 5: Social Contract and
Individual Rights
Upholding rules because they are the social
contract if they are consistent with values such as
fairness and rights and the greater good (not
because of the majority opinion).
Stage 6: Universal Ethical
Principles
Following ethical principles of justice and rights.
Acting in accord with principles when laws violate
principles.
Source: Adapted from L. Kohlberg, ‘‘Moral Stages and Moralization: The Cognitive-
Developmental Approach,’’ in Moral Development and Behavior: Theory, Research, and
Social Issues, ed. T. Lickona (New York: Holt, Rinehart and Winston), 34–35.
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For example, a stage 3 response to the Evelyn dilemma might say that Evelyn
shouldn’t contradict her boss because he would perceive her as disloyal, and she
might lose the social approval and trust of her boss and peers. On the other hand,
what if Evelyn shares her dilemma with close family members whose opinions are
important to her, and they feel strongly that she must contradict her boss? In this
case, she would likely reason that she should contradict her boss because the people
she trusts and whose approval she values say that it’s the right thing to do.
At stage 4, the perspective broadens to consider society. The individual is con-
cerned about fulfilling agreed-upon duties and following rules or laws that are
designed to promote the common good. A stage 4 person recognizes that rules and
laws often exist for good reason, and she follows them because the social system
works better when everyone does that. Therefore, a stage 4 response might say that
Evelyn should contradict her boss because of her duty to society. What if the noises
do represent a safety problem? She has a responsibility as a good member of society
to report it. She would feel particularly strongly about this if she were aware of
product safety laws that required her to report the problem.
So, a level II person is looking outside the self for guidance when deciding what
to do. A stage 3 person would likely ask, ‘‘What would my peers do?’’ or ‘‘What
would my trusted supervisor advise?’’ At stage 4, the considerations would be broader,
such as ‘‘What do the rules or laws prescribe?’’ Kohlberg’s research placed most
American adults at this conventional level, and Weber’s research found that most
managers’ responses to the Evelyn dilemma were at the conventional level as well.
LEVEL III: POSTCONVENTIONAL A level III (postconventional, sometimes called
principled reasoning—stages 5 and 6) principled individual has developed beyond
identification with others’ expectations, rules, and laws to make decisions more
autonomously. Such an individual looks to ethical principles of justice and rights
(similar to the deontological principles we discussed in Chapter 2). Note that stage 6
is thought to be a theoretical stage only, so we focus below only on stage 5.
At stage 5, the emphasis is still on rules and laws because these represent the
recognized social contract, but stage 5 thinkers are willing to question the law and to
consider changing the law for socially useful purposes. A stage 5 individual would
take into account moral laws above society’s laws, such as considering what decision
would create the greatest societal good. A stage 5 Evelyn might reason that she
should contradict her boss because doing so would be consistent with the ethical prin-
ciple of the greatest societal good, particularly if she considered safety of the automo-
biles to be a potential problem. Her responsibility goes beyond that of a good law-
abiding member of society and certainly beyond doing what her boss thinks is right.
A stage 5 Evelyn is also responsible to principles of justice and rights. So, even if
no law requires her to report what she knows, a stage 5 Evelyn would consider the
automobile consumers’ rights to safety as an important reason for her to tell. When
deciding what to do, a stage 5 person would likely ask, ‘‘What does the law say?’’
and then ‘‘Is the law consistent with principles of justice and rights? and ‘‘What’s
best for society?’’
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Students sometimes get confused by this idea of what it means to be principled
according to Kohlberg. We’re often asked questions such as, weren’t the 9/11 hijack-
ers principled? Although a definitive answer would require probing interviews with
the hijackers to determine the reasoning for their behavior (not possible now), the
answer is that their thinking likely represented lower-level reasoning (e.g., the leader
told me to do it; I did it to receive a reward in heaven; etc.). So, it’s important to note
that Kohlberg is quite precise about the kinds of principles that qualify as principled
thinking. Broadly defined, level III principles are principles of justice and rights
similar to the principles introduced in Chapter 2 under deontological theories.
Wrongdoers often appeal to what they call principles, such as when the members of
a violent Mexican drug cartel claimed to train its members in ethical principles. But
the purpose of these principles (e.g., sobriety) was to keep members in line and
obedient to cartel authorities. The ethical trainer in this case is accused of ordering
murders and running prostitution rings with young girls; such behavior is not
supported by principles of justice and rights.20
Finally, the principle ‘‘I always do what my religion tells me to do because
the deity will punish me if I don’t’’ would not qualify as principled thinking. In
Kohlberg’s model, this type of thinking actually represents a low level of cognitive
moral development because it is based on unquestioning obedience and fear of pun-
ishment. Often religious prescriptions such as the golden rule are consistent with
theories of justice and rights. To be considered a principled decision maker, an indi-
vidual would have to be capable of thinking through the ethical situation on his or her
own (reasoning according to principles of justice and rights), and not just blindly
follow a particular religious authority.
So don’t be confused just because someone uses the term principled. To be
principled in terms of cognitive moral development theory, one must have arrived at
the decision autonomously based on principles of justice, rights, and the greater good.
To understand Kohlberg’s theory, you must also remember that it is a cognitive
theory. What matters are the reasoning processes and considerations involved in a
decision. Although these considerations are likely to affect the decision made, it is
the reasoning process that counts.
The cognitive moral development exercise at the end of the chapter will test your
understanding of cognitive moral development. You may want to try it now.
ARE WOMEN AND MEN DIFFERENT? In 1982, the psychologist Carol Gilligan
published In a Different Voice, a book about women’s cognitive moral development.
Gilligan claimed that Kohlberg’s theory was flawed because he had studied only
boys. Her research led Gilligan to question the almost exclusive focus on justice in
Kohlberg’s higher moral reasoning stages. She argued that females were more likely
to use a ‘‘morality of care’’ that emphasized relationships—raising issues related to
caring for others, responsibility to others, and the continuity of interdependent
relationships.21
Gilligan’s claims received a great deal of attention. But the applicability of her
ideas to adults working in business organizations is quite limited. Gilligan’s own
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research comparing the moral reasoning of male and female medical students found
no significant difference between the genders, suggesting that both men and women
are strongly influenced by the powerful socialization and cultural norms of medical
practice.22 Similarly, an interview study of business managers based on Gilligan’s
theory found no gender differences.23 All but one of the managers (male and female)
who described a moral conflict at work based their moral reasoning on rights, not
care. Finally, many cognitive moral development studies based on Kohlberg’s theory
have found only trivial, if any, gender differences. Interestingly, when differences
have been found, females generally have scored higher than men in justice-based
reasoning.24 Business ethics researchers now agree that additional research on the
question of gender differences is unnecessary and likely to be fruitless.25
We can now begin to address the second requirement for ethical behavior: doing
what’s right, or ethical action. Recall that to behave ethically, people must first
decide what course of action is ethically right (probably depending to a large degree
on their ethical awareness and ethical judgment (stage of cognitive moral develop-
ment). Then they must choose the ethically right path over others.26
LOOKING UP AND LOOKING AROUND One reason understanding cognitive
moral development is so important is that most adults are at the conventional level
of cognitive moral development (level II). This means they’re highly susceptible to
external influences on their judgment about what is ethically right and their subse-
quent action. Their decision about what’s ethically right, and therefore their likely
action, is inextricably linked with what others think, say, and do. We call this ‘‘look-
ing up and looking around’’ for ethical guidance.27
These individuals aren’t autonomous decision makers who strictly follow an
internal moral compass. They look up and around to see what their superiors and
their peers are doing and saying, and they use these cues as a guide to action. There-
fore most people are likely to do what’s expected of them as a result of the reward
system, role expectations, authority figure demands, and group norms. That’s why
the remainder of this book focuses so heavily on these external influences on ethical
action and why it’s so important that managers structure the work environment to
support ethical conduct and lead followers in the right direction. The large majority
of employees will be looking for guidance, and they’ll do what’s right if guided and
supported along those lines by managers and peers.
AUTONOMOUS PRINCIPLED THINKING AND ACTION Higher-stage thinking is
more independent of these external influences. The postconventional principled thinker
looks to justice and rights-based principles to guide ethical decision making. Research
has demonstrated that these people are also more likely to behave consistently with
their principle-based decisions—they’re more likely to carry through and do what they
think is right. More principled individuals also have been found to be less likely to
cheat, more likely to resist pressure from authority figures, more likely to help some-
one in need, and more likely to blow the whistle on misconduct.
28 So the theory
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suggests that whistle-blowers such as Sherron Watkins, who tried to convince Kenneth
Lay (Enron’s CEO) to address the company’s financial shenanigans before it was too
late, are likely principled thinkers. But it’s important for managers to remember that
level III individuals are in the minority in most organizations. Autonomous decision
making based on principles of justice and rights is the exception rather than the rule.
Also keep in mind that cognitive moral development represents a cognitive
‘‘capacity’’ to reason about ethical dilemmas at a particular level and that it is possi-
ble to act below one’s capacity. However, cognitive moral development theory
argues that this inconsistency would be difficult to sustain over time because of the
cognitive strain that would come from thinking at one level and acting at another.29
Such a person might think, ‘‘I know this is wrong—why am I doing it?’’ So a
principled-level individual who found himself or herself in a situation that required
unethical action would be more likely to try to change that situation or leave.
The bottom line for managers is this: Cognitive moral development theory and
research tell us that most of the people you manage are going to be strongly influenced
by what you do, say, and reward. They can be thought of as ‘‘good soldiers’’ who are
looking up and looking around for guidance from you and their peers, and they’re
likely to mimic what they see around them. Therefore, it’s the manager’s responsibil-
ity to structure the work environment in a way that supports ethical conduct. If you
avoid this responsibility, these people will look elsewhere for guidance, probably to
their peers, and the guidance they receive may not support ethical conduct at all.
A small percentage of individuals may never advance beyond preconventional
thinking. Such individuals can be thought of as ‘‘loose cannons.’’ They will do what-
ever they can get away with. People like this require close supervision and clear dis-
cipline when they get out of line.
Those individuals who have reached principled levels of moral reasoning
should be singled out to lead key decision-making groups, to manage situations
where ethical ambiguities are likely to arise, and to lead organizations. Research
on ethical decision making in groups has found that when less-principled individu-
als lead a group, the group’s ethical decision-making performance decreases. On
the other hand, groups with leaders higher in moral reasoning either improve or
stay the same.30 Also, when an organization’s leader is high in cognitive moral
development, the entire ethical climate of the organization is stronger. This is par-
ticularly true for leaders whose choices are consistent with their ethical reasoning
capacity and for leaders who run young organizations that are more open to their
influence. Finally, when employees and the organization’s leader are similar in
their level of cognitive moral development, the employees are more satisfied and
more committed to the organization. Employee satisfaction and commitment are
especially negative when the leader’s cognitive moral development is lower than
the moral development of employees.31
Cognitive moral development can be assessed by using instruments designed by
cognitive moral development researchers. Moral reasoning can also be increased
through training. Over the years, Kohlberg and his students and colleagues have
designed training approaches based on cognitive moral development theory. In this
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type of training, facilitators give participants hypothetical ethical dilemmas for dis-
cussion. The facilitator promotes movement through ethical reasoning stages by chal-
lenging participants’ thinking and by exposing individuals to reasoning higher than
their own. This approach creates cognitive conflict, leading the participant to ques-
tion and eventually revise his or her own reasoning upward. Research has supported
the effectiveness of this type of training with adults in dental, medical, and business
schools.32 Managers may want to consider incorporating these ideas into their firms’
ethics training.
Locus of Control
Another individual characteristic that has been found to influence ethical action is
locus of control.33Locus of control refers to an individual’s perception of how much
control he or she exerts over life events. Locus of control can be thought of as a
single continuum from a high internal locus of control to a high external locus of
control. An individual with a high internal locus of control believes that outcomes
are primarily the result of his or her own efforts, whereas an individual with a high
external locus of control believes that life events are determined primarily by fate,
luck, or powerful others.
External Locus of Control Internal Locus of Control
Locus of control develops over a long period of time through interaction with
other people and the social environment. At any particular time, however, locus of
control can be thought of as a stable individual characteristic that differentiates peo-
ple from each other. Some individuals are more internal and others are more external
in their locus of control. In that way, locus of control is similar to a personality trait
that characterizes a person’s thinking and action across situations. It does not shift
from one situation to another. Therefore it’s not appropriate to say, ‘‘My locus of
control was external in this situation because my boss made me fudge the numbers.’’
What has shifted in this situation is the control exerted by the boss, not the employ-
ee’s locus of control. An employee with an internal locus of control who has a con-
trolling boss will be uncomfortable with the boss’s request to do something
inappropriate. So, due to that high internal locus of control, this employee will be
more likely to resist the boss’s influence and more likely to look for an opportunity
to leave and find a more compatible boss and work situation. An employee with an
external locus of control is more likely to see his or her fate in the boss’ hands and
simply do what the boss asks. You can test your own locus of control through a
survey measure that your professor may make available to you.
A caveat—although locus of control does not shift easily, it can change over
time due to strong life interventions or compelling situations. For example, if some-
one with a very high internal locus of control became a prisoner of war with little
chance of escape, he or she would likely develop a more external locus of control
over time.
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RELATIONSHIP TO ETHICAL JUDGMENT AND ACTION How is locus of control
related to ethical judgment and action? It likely has a lot to do with taking responsi-
bility for one’s behavior. First, in their judgment, individuals with a high internal
locus of control see the relationship between their behavior and its outcomes more
clearly than do those with an external locus of control. Internals see themselves as
being in control of things that happen in their lives. Thus they’re more likely to take
responsibility for the consequences of their actions. It would be more difficult for
such an individual to say, ‘‘Well, it’s not my responsibility; I just work here,’’ or
‘‘I’m just following orders.’’ If an individual takes personal responsibility for his
or her behavior, it seems likely that person will also behave more ethically. For
example, studies have found that internals are more likely to help another person,
even if there’s a penalty for doing so.
34
Internals see themselves as being in charge of their own fates. Therefore, they
should also be less willing to be pressured by others to do things they believe to be
wrong. One interesting study asked subjects to complete a story in which the main
character was pressured to violate a social norm.35 The more internal the subject’s
locus of control, the more likely the story completion had the hero resisting the
pressure. In an obedience-to-authority experiment (explained in more detail in
Chapter 7), externals were more likely than internals to give apparently (but not
really) harmful electric shocks to someone if told to do so by the experimenter.
36
For managers, it may be helpful to know where you stand and where your work-
ers fit on the locus of control continuum. It can help you understand how they think
and how they might react in a variety of situations, including ethical situations. For
example, workers who constantly blame bad luck and other external factors for per-
formance failures or ethical lapses may be doing so because of an external locus of
control—that’s the way they view the world. Managers can work with such individu-
als to help them see the relationship between their actions and the outcomes by con-
sistently holding them responsible and accountable for what they do. As a result, their
locus of control may shift over time, and they will take more responsibility for the
consequences of their actions.
Machiavellianism
Whereas internal locus of control and more principled thinking are generally associ-
ated with ethical action, another individual difference, Machiavellianism, has been
associated with unethical action. Perhaps you have heard the term Machiavellian
used to describe individuals who act in self-interested, opportunistic, deceptive, and
manipulative ways to win no matter what the cost or how it affects other people. The
personality trait known as Machiavellianism was named after Niccol!o Machiavelli, a
sixteenth-century philosopher, statesman, and political theorist who is associated
with promoting a pragmatic leadership style that included amoral, if not clearly un-
ethical, behavior with the aim of achieving self-interested outcomes. The idea that
‘‘the ends justify the means’’ is often associated with Machiavelli. In his most famous
publication, The Prince, Machiavelli famously said that a ruler should ‘‘do good if he
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can, but . . . commit evil if he must.’’37 Research using a survey that assesses an
individual’s Machiavellianism has found that individuals high on Machiavellianism
are significantly more likely to have unethical intentions and to engage in unethical
action such as lying, cheating, and accepting kickbacks.38 Managers should be on the
lookout for employees who they think might be high on Machiavellianism because
they are likely to engage in self-interested action that can put the entire organization
at risk. Organizations may also want to consider including Machiavellianism among
other personality characteristics when assessing job applicants.
Moral Disengagement
The idea behind moral disengagement39 is that most of us behave ethically most of
the time because we’ve internalized standards of good conduct and judge our behav-
ior against these standards. If we consider behaving unethically, we feel guilty and
stop ourselves. All of us probably recognize that process. But research has found that
individual people have a higher (or lower) propensity to deactivate that self-control
system through eight moral disengagement mechanisms. These moral disengagement
mechanisms allow individuals to engage in unethical behavior without feeling bad
about it.
Moral disengagement mechanisms can be organized into three categories. One
of these categories involves ways of thinking about our behavior that makes bad be-
havior seem more acceptable. A mechanism in this category is the use of euphemistic
language (discussed earlier in relation to ethical awareness). Another is called moral
justification, whereby unethical behavior is thought to be okay because it contributes
to some socially valued outcome. For example, mortgage lenders may have believed
that it was okay to sell those no-doc loans to people because they were helping indi-
viduals who would otherwise not be able to purchase a home to take part in the
‘‘American dream.’’ A related moral disengagement tactic is called advantageous
comparison, whereby people compare their own behavior to more reprehensible be-
havior and thus make their own behavior seem more okay. For example, the same
mortgage lender may feel okay about selling these loans because she counsels clients
to be sure to pay the mortgage every month and avoid credit card debt, while col-
leagues in her office don’t bother to do any counseling and care only about making
their commissions.
A second category of moral disengagement mechanisms has to do with distorting
consequences or reducing personal responsibility for bad outcomes. For example,
with displacement of responsibility, individuals will reduce personal accountability
by thinking of their actions as resulting from an authority figure’s dictates (‘‘my boss
made me do it’’). With diffusion of responsibility, individuals will reduce personal
accountability by looking to others or the group (‘‘it’s not my job,’’ or ‘‘my team
made the decision’’). With distorting consequences, individuals will think of nega-
tive consequences as less serious than they are (it’s ‘‘no big deal’’ to fudge the num-
bers on my expense report).
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The third category of moral disengagement mechanisms reduces the person’s
identification with the victims of unethical behavior. With dehumanization, individu-
als make those who would be harmed less worthy of ethical consideration because
they’re thought to be different, stupid, or not even human. This mechanism character-
izes thinking among those who commit genocide. One can also imagine mortgage
lenders thinking that people who took out loans they clearly couldn’t afford were just
dumb and not worthy of concern. Attribution of blame lays blame on the victims of
harm for a variety of reasons (‘‘it’s their own fault’’).
Some of these mechanisms lend themselves to certain situations more than
others. So if you have an authoritarian and unethical boss, displacement of
responsibility (‘‘my boss made me do it’’) may be used more than other tactics.
Still, research does show that some individuals are more likely to engage in this
kind of thinking overall, regardless of the situation. And those individuals with a
high propensity to morally disengage have been found to have reduced empathy
for other people, to be more cynical, to see their behavior as resulting from
chance or fate (more external locus of control), and to have a reduced moral iden-
tity relative to their other identities—a weaker sense of themselves as ethical
beings. Most important, these individuals are more likely to behave unethically.40
You can test your own propensity to morally disengage with a short survey that
your professor may make available to you. And you can reduce that propensity by
being on the lookout for certain justifications that come up in your own mind or in
discussions with others. When you find yourself thinking the following (or hear
something like this in a meeting), ‘‘stop and think’’ about whether what you’re doing
is right:
STOP
AND
THINK
STOP
AND
THINK
It’s not my responsibility—my boss told me to do it.
It’s not my responsibility—my team decided this.
It’s no big deal.
It’s not as bad as (what someone else) is doing.
They deserve whatever they get.
They brought this on themselves.
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FACILITATORS OF AND BARRIERS TO GOOD
ETHICAL JUDGMENT
In the previous section, we discussed characteristics that distinguish individuals from
each other. But individual differences aside, as human beings, we all share ways
of thinking about the world that can facilitate or interfere with good ethical judgment.
The steps offered in Chapter 2 assume a rational and ethical decision-making pro-
cess that prescribes how an ethical decision should be made. However, studies have
found that actual human decision making doesn’t match this rational ideal. Although
people generally intend to be rational in their decision making, they’re often not.
In recent years, psychologists have discovered a number of weaknesses and
biases in how human beings make decisions.41 Some of these decision-making weak-
nesses have direct implications for ethical decision making in organizations and for
the advice given in Chapter 2.42 So think of this part of the chapter as a kind of reality
check. If you’re going to manage your own and others’ ethical behavior, you need to
understand how people really think in addition to how they should think.
As a backdrop, recognize that the cognitive weaknesses and biases we will be
discussing operate primarily because people try to reduce uncertainty and simplify
their world. Although uncertainty is a fact of organizational life, businesspeople
want very much to deny the uncertainty they face. Therefore they tend to act as if the
world is rational and they’re in control. Being ‘‘in charge’’ and able to predict events
is a highly valued characteristic, especially in business. But this focus on being in
charge is an illusion that can get managers into trouble. What if you really don’t
know all of the facts about the risks, the potential affected parties, and all the conse-
quences of your decisions? You’ll see below that the best way to avoid decision-
making weaknesses and biases is to become aware of them and to incorporate steps
into your decision making that are explicitly aimed at reducing their impact.
Thinking about Fact Gathering
In Chapter 2, we advised you to ‘‘get the facts’’ as an important first step in good
ethical decision making. Be aware, though, that your thinking about the facts is likely
to be biased. Research evidence suggests that you may look for the wrong ones or
stop looking too soon because you think you already have all the facts you need.
We know that most people, including business students and business executives,
are overconfident about their knowledge of the facts. For example, in research stud-
ies, people were asked factual questions. Then they were asked to judge the probable
truth of their answers. For example, in response to the question, ‘‘Is Rome or New
York farther north?’’ most people chose New York, and they believed that the proba-
bility was about 90 percent that they were right. Actually, they were wrong. Rome is
slightly north of New York. Being overconfident can make you fail to search for
additional facts or for support for the facts you have.43
Even if you gather additional facts or support, another cognitive bias termed the
confirmation trap may influence your choice of which facts to gather and where to
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look.44 All of us have the tendency to look for information that will confirm our pre-
ferred answer or choice and to neglect to search for evidence that might prove us
wrong. If you were an investment banker who wanted to believe that mortgage-
backed securities were safe (because they were so profitable at the time), you were
more likely to look for supportive information and ask a question like, ‘‘Historically,
what percentage of mortgages have defaulted?’’ Given that question, the banker will
probably underestimate the risk involved. Because of no-doc loans and other new and
riskier subprime mortgages, relying on historical default patterns no longer made
sense. The meeting might take a very different turn if the banker were to ask, ‘‘What
future problems are possible with this type of new product? What has changed? What
haven’t we thought of?’’45
In an attempt to overcome the confirmation trap, it’s important that you con-
sciously try to think of ways you could be wrong. Incorporate questions in your indi-
vidual and group decision-making processes such as, ‘‘How could I/we be wrong?’’
‘‘What facts are still missing?’’ and ‘‘What facts exist that might prove me/us to be
wrong?’’ You may still miss some important facts, but you’ll miss less of them than if
you didn’t ask these questions at all.
Thinking about Consequences
In Chapter 2, we also advised you to think about all the potential consequences of
your decision for a wide variety of stakeholders. Who can argue with such sage
advice? But psychologists have found a number of problems with how people think
about consequences.
REDUCED NUMBER OF CONSEQUENCES One way people simplify their deci-
sions and make them more manageable is to reduce the number of consequences
they consider. They’re especially likely to ignore consequences that are thought to
affect only a few people. But consequences that affect only a few people can be seri-
ous. For example, a highly beneficial drug may have positive consequences for many
and adverse consequences for only a few people. But what if those few people could
die from side effects of the drug?46 Obviously, you wouldn’t want to ignore such
serious consequences no matter how few people are affected. In attempting to con-
sciously deal with this situation, it helps to consult a broad range of people who have
a stake in the decision you’re making. Invite input from all interested parties, espe-
cially those who disagree with you and those with the most to lose. Ask them what
consequences they’re concerned about and why. Then, incorporate these conse-
quences in your decision making.
CONSEQUENCES FOR THE SELF VERSUS CONSEQUENCES FOR OTHERS
Consequentialist theories require us to think about costs and benefits for society—for
multiple stakeholders. But psychological research suggests people tend to make deci-
sions in a self-interested manner. For example, they’re inclined to give more weight
to the consequences of a decision or action for themselves (or those close to them)
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than for others. That may be because consequences to the self are more immediate or
more imminent. In addition, when the consequences of multiple alternatives are
ambiguous, people tend to choose the alternative they personally prefer rather than
the one that is more just. To make matters worse (from an ethics perspective), people
underestimate the extent to which they are self-interested and the extent to which
they rationalize their own behavior. They just aren’t aware of their own cognitive
biases. Again, it can help to consciously consider those outside of yourself who are
going to be affected by a decision or action. As a manager, you can ask your people
to make a list of those individuals or groups who might be affected and seek their
input, or have your employees try to imagine themselves in the shoes of those stake-
holders. How would they react?47
CONSEQUENCES AS RISK One way to think about consequences is to think in
terms of decision making about risk. Managers are in the business of assessing risk.
But, research suggests that people tend to underestimate potential risks because of an
illusion of optimism. They overestimate the likelihood of good future events and
underestimate the bad. For example, even though around one-half of marriages end
in divorce, newlyweds are highly optimistic that their own new marriages will be
everlasting. And, although some analysts may knowingly have lied about the future
prospects of mortgage-backed securities, it’s likely that many were simply overly
optimistic and believed that the housing market would never simultaneously crash
everywhere in the country, bringing down an entire market and the U.S. economy
with it.
People also generally believe that they’re less susceptible to risks than other
people are. This belief is supported by the illusion of control, the general belief that
we really are in charge of what happens. And if we think we can control events, we
also think bad things are less likely to happen. This illusion of control has been dem-
onstrated to exist in MBA students from top U.S. business schools, suggesting that
managers are certainly vulnerable.48 Managers whose judgment is influenced by
these cognitive biases are likely to underestimate the risk facing the firm as a result
of a particular decision. But if managers ignore risks, they’re also ignoring important
consequences. So it’s important to recognize this tendency to ignore risk, and design
risk analysis into your decision-making processes.
Even if we attend to risks, we still have difficulty thinking about them in a com-
pletely rational way. One tendency that can contribute to downplaying risk was already
discussed—the tendency to attend to information that will help confirm the decision
we would prefer to make (confirmation bias). In the famous space shuttle Challenger
disaster that killed all the astronauts on board, everyone knew that risk existed. The
question was how much, and was it too much? Many economic and political factors
were pushing NASA to launch this shuttle. The media were paying more attention to
the launch than they usually would because a schoolteacher was on board. Researchers
now believe that confirmation bias may have influenced decision makers to focus on
the information that confirmed their preference, which was to launch, and to discount
available information about risks that would have supported a delay.
49
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CONSEQUENCES OVER TIME: ESCALATION OF COMMITMENT The prescrip-
tion to think about consequences also fails to account for the fact that decisions are
not isolated choices, but often become part of a series of choices within the context of
a larger decision or project. Consider the following scenario:
You finally graduated from college and landed a great job, and you’ve
invested most of your savings in the car of your dreams—a used BMW. But
in a short time, the car begins having mechanical problems. Every time you
bring it to the mechanic, he claims that it is fixed for good; but the problems
continue and your bank account is being drained. Should you quit trying to
fix the car?
Because you’ve already made the decision to buy the car, and you’ve already in-
vested a lot of money in it, your tendency will be to continue your commitment to
this previously selected investment. This tendency has been called ‘‘escalation of
commitment to a losing course of action’’ or ‘‘throwing good money after bad.’’50 A
perfectly rational decision maker would consider the time and expenses already
invested as ‘‘sunk costs.’’ They aren’t recoverable and shouldn’t be considered in a
decision about what to do. Only future costs and benefits should be considered. But
this is difficult. Norms in our society and in our organizations support trying, persist-
ing, and sticking with a course of action. Also, if others are involved, we’re likely to
feel the need to justify our original decision—whether it was to buy a car, a piece of
equipment, or land.
So when you’re in a situation that involves decisions about whether to continue
to invest in an ongoing project, be careful! One way to overcome escalation of com-
mitment is, as with many biases, to recognize that it exists and try to adjust for it. Ask
yourself explicit questions about whether you’re committed to a decision just because
failure would make your original decision look bad. Ask yourself, ‘‘If I took over the
project today, with no personal investment, would I support the project?’’ Another
approach is to bring in outsiders and ask for their opinions, or turn the project over to
them completely. That gets your own ego out of the decision-making process.
Thinking about Integrity
In Chapter 2, you were also advised to think about your own character and integrity—
to ask yourself what a person of integrity in a highly ethical community would do in
the particular situation. But cognitive biases can get in the way here too. First, if your
thoughts about yourself are controlled by illusion rather than reality, how can you
make a good decision about your integrity? The basic idea here is that individuals
are likely to think positively about their own ethics. They will unconsciously filter
and distort information in order to maintain a positive self image. Psychologists
know that people have an illusion of superiority or illusion of morality. Surveys have
found that people tend to think of themselves as more ethical, fair, and honest than
most other people.
51 It’s obviously an illusion when the large majority of individuals
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claim to be more honest than the average person, or more ethical than their peers. It’s
a little like Garrison Keillor’s mythical Lake Wobegon, where all the children are
above average. There isn’t a whole lot you can do here except try to be honest with
yourself. But this kind of illusion can lead to bad decisions—when physicians take
gifts from salespeople because they’re sure they’re ethical and their decisions won’t
be affected,52 or when mortgage lenders selling subprime loans convince themselves
that what they’re doing is contributing to the American dream.
Second, the virtue ethics approach suggests that you rely on the ethics of your
profession (or other relevant moral community) to guide you. But consider the
accounting professionals in recent cases, as when Arthur Andersen auditors signed
off on audits that misrepresented the finances of companies such as Waste Manage-
ment, Enron, and Adelphia Communications.
Certified public accountants are supposed to be guided by the AICPA code of
professional ethics. The code says that, as professionals, auditors have a responsibil-
ity to act in the public interest to provide objective opinions about the financial state
of the organization—be free of conflicts of interest, not misrepresent facts, or subor-
dinate professional judgment to others. Given human cognitive limitations, however,
this expectation is probably unrealistic. Consider what is likely to go through an audi-
tor’s mind when deciding whether to provide a negative audit opinion on the financial
statements of a big client. Auditors work closely with their audit clients, often over a
long period of time. By contrast, auditors have no personal relationship with the
‘‘public’’ they are supposed to represent. Therefore, as biased information processors,
their thinking is likely to emphasize the potential negative consequences of a quali-
fied (or negative) audit opinion for themselves and the client—not for the public. The
negative consequences for themselves and the client are clearer and more immediate.
The auditor who offers a qualified audit may very well lose the client (and the money
associated with that client) as well as the personal relationships forged over time. On
the other hand, the consequences for the public of a qualified audit opinion are more
ambiguous and likely spread over more people and time. It isn’t clear how much
specific members of the public will gain or lose, especially if the misrepresentation is
deemed to be small or unclear. So auditors can easily rationalize a decision that is
consistent with their own and their company’s self-interest and downplay the poten-
tial consequences to an ambiguous, unknown public.
53
What is a professional organization to do? It is important to recognize that audi-
tors (and other professionals) are human beings who are affected by cognitive limita-
tions and biases. Given what we know about these biases, here are some potential
solutions. First, auditors should be discouraged from developing personal relation-
ships or socializing with their clients. Companies should change auditors every few
years to avoid forging such personal ties. Second, audit firms should work hard to
sensitize auditors to the likely negative consequences of financial misrepresenta-
tion for their own firms and the public. The Enron bankruptcy contributed to huge
financial losses to its employees and investors and to the ultimate demise of Arthur
Andersen. Regular attention to the importance of maintaining the integrity and long-
term reputation of the audit firm is essential, as is the leader’s role in creating a strong
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ethical climate. The reward system (discussed more fully in later chapters) can be
used to send important signals about what’s expected. For example, auditors who
turn down client business or risk losing a client by providing a negative audit opinion
should be supported and reinforced for doing so. Those auditors who risk the reputa-
tion of the firm should be disciplined.
STOP
AND
THINK
STOP
AND
THINK
Given the above discussion, we might suggest other ‘‘red flags’’ for you to be on
the lookout for. If you find yourself thinking (or others saying) the follow-
ing, consider whether your biases are showing!
The facts support our decision.
Nothing bad will happen.
We’re ethical—we wouldn’t do anything bad.
We’ve already invested so much—we can’t afford to quit now.
Thinking about Your Gut
Our last piece of advice in Chapter 2 was to listen to your gut. But in this chapter,
we’ve spent a great deal of time telling you that your gut may well be wrong—led by
cognitive limitations and biased thinking.
Yet, your gut can still be useful in alerting you that something might be wrong—
that you’re facing an ethical dilemma—in the first place. But once that decision is
made, you should temper your gut with careful analysis guided by the knowledge
gained in this chapter and the rest of the book. Hopefully, the combination of your
gut and an informed brain will help you make better decisions.
YOUR GUT—‘‘AUTOMATIC’’ ETHICAL DECISION MAKING In Chapter 2, we
treated ethical decision making mostly as a systematic and rational step-by-step
process. Even in this chapter, we have thus far discussed how ethical awareness leads
to ethical judgment, which then leads to ethical action in a seemingly systematic and
deliberative way. But new research from moral psychology, which is often backed
up by neuroscience and brain imaging studies, finds that ethical judgments are
often more intuitive, impulsive, and automatic. Jonathan Haidt, a psychologist at the
University of Virginia, has argued that much ethical judgment occurs ‘‘quickly,
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effortlessly, and automatically,’’54 often operating below conscious awareness. Haidt
has been particularly interested in people’s automatic reactions of disgust. For exam-
ple, in his research, he has used a vignette about a family that accidentally runs over
and kills the family dog and then reacts by cooking and eating it! Most of us recoil
instantly at the thought. It seems disgusting to us and wrong to eat the family dog.
When asked why, however, we can’t explain our very strong gut reactions. After all,
most of us eat other animals. So, clearly, something besides a purely rational process
is at work—something that’s more intuitive and emotional. (You can learn more
about Haidt’s research and even participate yourself at www.yourmorals.org).
Even more intriguing is research suggesting that individuals who rely only
on more conscious, deliberative approaches to ethical decision making may ar-
rive at worse ethical decisions than do those who use moral intuition and who
have strong emotional responses to ethical situations.55 Much more research will
be required to fully understand these important processes, when they operate,
and when they interfere with good ethical decision making rather than actually
improve it.
Unconscious Biases
One relatively new research tool that can help us understand the potential (often
negative) role of the unconscious in a certain type of ethical thinking is the
Implicit Association Test (IAT). Results reveal most people’s preferences for
young people over old, straight people over gay, able people over disabled, and a
variety of other categories. For example, hundreds of studies with the ‘‘race IAT’’
lead to the conclusion that the large majority of us have an unconscious tendency
to value white people more than black people even if we consciously disavow
such views and truly believe that we have no racial bias. Here’s how the race
IAT works. Participants are asked to press a key on the computer keyboard when
they see a black person’s face or a word that has negative connotations (e.g., rot-
ten, bad) and to press another key when they see a white person’s face or a word
with positive connotations (love, good). Then the task is reversed, and participants
are told to press the same keyboard key in response to black faces and pleasant
words or white faces and unpleasant words. It turns out that most of us respond
more quickly when we’re linking the black faces with negative words and white
faces with positive words because such links are cognitively easier for us—they
fit with our unconscious, implicit attitudes. Although some have criticized these
studies as simply representing higher familiarity with some groups than others,
and as unable to predict behavior in real-life situations, research has found that
the IAT results can predict troubling behavior in experiments. For example, a per-
son with a strong implicit bias against blacks is more likely to be rude in
an encounter with a black person, and white physicians with a strong implicit
bias against blacks were found to prescribe the latest heart treatment less often
for blacks than for whites. Our goal is not to defend or criticize the IAT. Rather,
we use it to point out that unconscious attitudes probably influence our behavior
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more than we think. Given the importance of fair treatment in all kinds of ethical
decisions at work (hiring, performance appraisal, layoffs, compensation, etc.),
understanding the potential impact of such unconscious bias should help us under-
stand why we need to put organizational procedures in place that provide less
opportunity for these unconscious biases to influence our decisions.56 (To experi-
ence the IAT for yourself, go to https://implicit.harvard.edu/implicit/.)
Emotions In Ethical Decision Making
Age-old philosophical prescriptions assume cool, rational, ethical decisions. But we
are also beginning to understand how important emotions are to the ethical decision-
making process.57 Importantly, emotions are not just an interference to good ethical
judgment, as many used to believe. Instead, emotions often lead to right action.’’58
For example, when we consider hurting someone, our brain reacts with a visceral
negative emotion (‘‘an internal alarm’’) that keeps violence in check.59 And these
reactions tend to happen very quickly, before we even have time to engage in rational
thought.
Consider two classic philosophical dilemmas. In one, a runaway train is headed
for five people who will die if nothing is done. You can save the five by diverting the
train to a different track, where it would kill only one person. Should you divert
the train?
In the second dilemma, you’re standing next to a stranger on a bridge over the
tracks. The only way to save the five people is to push the stranger onto the tracks,
where his body would stop the train. Should you push the stranger?
To philosophers, the rational logic in these scenarios is similar; in both cases,
you would be intentionally sacrificing one person in order to save five people.
But, when asked, most people say that you should divert the train in the first
dilemma but not push the stranger onto the tracks in the second. Psychologists
now tell us that emotions explain the difference between the scenarios because
the second scenario engages emotions more than the first. This hypothesis was
supported in an experiment that used brain scans to track brain activity during
decision making. In dilemmas like the second one, parts of the brain associated
with emotional processing were more active, and those who decided that pushing
the stranger would be right took longer to make a decision because emotions
slowed down their thought processes.60 Most normal people would find it diffi-
cult, if not impossible, to actually take another’s life in such a situation. This
reluctance is attributed to the strong feelings of revulsion that come up from just
thinking about taking a human life. These reactions are likely hardwired into hu-
man beings through evolution because they aid our survival. Interestingly though,
people who have damage to the prefrontal cortex of the brain have no such re-
action. They are much more likely to simply make the utilitarian analysis and say
they would kill one person to save the others.61 (If you want to get a ‘‘feel’’ for
this type of exercise, try taking the moral sense test at http://moral.wjh.harvard.
edu. It presents complex ethical dilemmas that have no clearly right answer.)
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So emotions are clearly important in ethical decision making, and continuing
research will help us more fully understand the process. It seems clear that emo-
tions can aid us in doing the right thing when they alert us to ethical concerns,
cause us to act to help others in need, or keep us from violent reactions (because
of sympathy for another, pangs of guilt, or automatically triggered negative feel-
ings).62 Feelings of betrayal or moral outrage can also cause people to act in the
interest of fairness.63 For example, people may be more willing to speak up about
the unfair treatment of a coworker if they feel moral outrage about it.64 Interest-
ingly, research has found that people will even forgo financial benefits if they feel
they’re being unfairly treated. In some fascinating experiments, researchers have
demonstrated that individuals will punish another individual they perceive to be
unethical even if there is nothing for them to gain and something to lose. They
will do this even if they don’t know the person who has been offended.65 Accord-
ingly, research has shown that the parts of our brains associated with feeling
satisfaction are activated when we consider retaliating against someone who
has unfairly harmed us.66 The bottom line here is that we often act not because
we have coolly and rationally decided on the best course of action, but rather
because it ‘‘feels’’ like the right thing to do at the time. Often, such emotions can
lead us to act ethically. But emotions can also interfere with good decision mak-
ing when they lead to a (perhaps irrational) desire for revenge. For example,
when a competitor ‘‘poaches’’ one of your best people, do you try to recruit
someone away from the competitor just to get even or to do damage to the com-
petitor when you should be focusing more rationally on who is best prepared to
do the job?67
Consider how General Motors managers handled a four-year legal battle with
VW over their allegation that a 56-year-old GM executive, Jose Lopez, took 20 boxes
of GM proprietary documents when he left GM to join Volkswagen in 1993. In 1992,
Lopez was GM’s worldwide purchasing czar, known for his ability to cut costs ruth-
lessly. The missing documents included information about GM’s suppliers and their
prices for auto parts, as well as information about upcoming Opel car models in the
GM Europe division. Fortune magazine referred to the four-year legal battle that
ensued as a tale of ‘‘betrayal’’ and ‘‘revenge.’’ Lou Hughes, head of GM Europe, was
furious that Lopez would take proprietary documents to its fiercest competitor. He
insisted that there would be no settlement with VW as long as Lopez remained there.
When asked what he hoped to gain from the litigation, Hughes replied, ‘‘Look, this is
not a question of business. This is a question of ethics.’’
68 Years of investigation
yielded no hard evidence to suggest that anyone at VW had actually used the secret
GM information. Fortune suggested that at the time, ‘‘one might have expected GM
to act pragmatically, find some face-saving exit, and return its attention to the car
business.’’69 That might have been the ‘‘rational,’’ coolheaded thing to do. Instead,
GM escalated the fight, bringing a racketeering suit that was expected to drag on for
years and cost tens of millions of dollars. When pragmatic board members ques-
tioned the action, the board chairman insisted that the company had to pursue the suit
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because it ‘‘had been terribly wronged.’’ ‘‘Some things aren’t measured in time and
money. They’re just who we are.’’70 Finally, in January 1997, the two companies
settled the case. Lopez, who had already resigned from Volkswagen, was barred
from doing any work for VW through the year 2000. Volkswagen paid GM $100
million and agreed to buy $1 billion worth of GM parts over seven years. Fortune
asked, ‘‘But what, in the end did the long, bitter, and costly struggle accomplish?
In the cold light of day, the answer seems simple and shocking: not much.’’71 A
huge company devoted years of attention and spent millions of dollars because its
managers were morally outraged that their former friend had betrayed them. It was
obviously an emotional reaction.
Clearly, anger and other emotions can influence thoughts and actions. Whether
that is good or bad depends on whether the emotion leads to ‘‘right’’ or ‘‘wrong’’
action. If empathy or guilt lead you to recognize an ethical issue or think about the
consequences of your actions for others, that’s a good thing. If moral outrage leads
you to seek justice, that’s good as well. But moral outrage can also lead to a desire
for revenge, and that may be the time to bring cooler heads to the decision to deter-
mine whether action based upon revenge is a good ethical (and business) decision.
Those who are not as emotionally involved in the interpersonal issues may be able
to offer a more rational and balanced assessment of the situation. In the GM–
Volkswagen case, those pragmatic board members may have been right to support
a quick settlement.
TOWARD ETHICAL ACTION
Most of this chapter has focused on ethical awareness and ethical judgment pro-
cesses. We’ve seen that these also influence ethical action. For example, those who
are higher in ethical awareness are more likely to make ethical choices because they
think about the harm they’re doing, they use ethical language to label the situation, or
they recognize that others would see an action as ethically problematic. Also, we
know that some individuals are more prone to think in ways that make ethical action
more likely. Individuals who are higher in cognitive moral development, internal
locus of control, and idealistic decision-making style, and those who are lower in
Machiavellianism and less prone to use morally disengaged thinking, are all more
likely to behave ethically.
But we’ve also seen that, as human beings, we’re all prone to cognitive biases
that can get in the way of good thinking and interfere with ethical action. Beyond
that, it’s sometimes hard to do what’s right even for those of us with the best thinking
and intentions. We may have an unethical boss who insists that we do inappropriate
things, we may find ourselves in an unethical culture, or we may fear repercussions
for speaking the truth. Next, you’ll read an article that addresses some of these issues:
Dennis Gioia’s reflections on his involvement in the Pinto Fires case. In future chap-
ters, we’ll focus more on how you can find your moral voice and do what’s right
despite the challenges.
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REFLECTIONS ON THE PINTO FIRES CASE
(SEE CHAPTER 2)
by Dennis A. Gioia (used with permission)
Chapter 2 ended with the provocative Pinto Fires case, highlighting some of the sordid events
in the history of the Pinto fires problem. As the authors indicate later in this chapter, I was
involved with this infamous case in the early 1970s. They have asked me to reflect on lessons
learned from my experience.
I take this case very personally, even though my name seldom comes up in its many
recountings. I was one of those ‘‘faceless bureaucrats’’ who is often portrayed as making
decisions without accountability and then walking away from them—even decisions with
life-and-death implications. That characterization is, of course, far too stark and superficial.
I certainly don’t consider myself faceless, and I have always chafed at the label of bureau-
crat as applied to me, even though I have found myself unfairly applying it to others.
Furthermore, I have been unable to walk away from my decisions in this case. They have a
tendency to haunt—especially when they have such public airings as those involved in the
Pinto fires debacle have had.
But why revisit 20-year-old decisions, and why take them so personally? Here’s why:
because I was in a position to do something about a serious problem—and didn’t. That simple
observation gives me pause for personal reflection and also makes me think about the many
difficulties people face in trying to be ethical decision makers in organizations. It also helps
me to keep in mind the features of modern business and organizational life that would influ-
ence someone like me (me, of all people, who purposefully set out to be an ethical decision
maker) to overlook basic moral issues in arriving at decisions that, when viewed retrospec-
tively, look absurdly easy to make. But they are not easy to make, and that is perhaps the most
important lesson of all.
The Personal Aspect
I would like to reflect on my own experience mainly to emphasize the personal dimensions
involved in ethical decision making. Although I recognize that there are strong organizational
influences at work as well, I would like to keep the critical lens focused for a moment on me
(and you) as individuals. I believe that there are insights and lessons from my experience that
can help you think about your own likely involvement in issues with ethical overtones.
First, however, a little personal background. In the late 1960s and early 1970s, I was an
engineering/MBA student; I also was an ‘‘activist,’’ engaged in protests of social injustice and
the social irresponsibility of business, among other things. I held some pretty strong values that
I thought would stand up to virtually any challenge and enable me to ‘‘do the right thing’’ when
I took a career job. I suspect that most of you feel that you also have developed a strongly held
value system that will enable you to resist organizational inducements to do something
unethical. Perhaps. Unfortunately, the challenges do not often come in overt forms that shout
the need for resistance or ethical righteousness. They are much more subtle than that, and thus
doubly difficult to deal with because they do not make it easy to see that a situation you are
confronting might actually involve an ethical dilemma.
After school, I got the job of my dreams with Ford and, predictably enough, ended up on
the fast track to promotion. That fast track enabled me to progress quickly into positions
of some notable responsibility. Within two years I became Ford’s vehicle recall coordinator,
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with first-level responsibility for tracking field safety problems. It was the most intense, infor-
mation-overloaded job you can imagine, frequently dealing with some of the most serious
problems in the company. Disasters were a phone call away, and action was the hallmark of
the office where I worked. We all knew we were engaged in serious business, and we all took
the job seriously. There were no irresponsible bureaucratic ogres there, contrary to popular
portrayal.
In this context, I first encountered the neophyte Pinto fires problem in the form of
infrequent reports of cars erupting into horrendous fireballs in very low-speed crashes and the
shuddering personal experience of inspecting a car that had burned, killing its trapped occupants.
Over the space of a year, I had two distinct opportunities to initiate recall activities concerning
the fuel tank problems, but on both occasions I voted not to recall, despite my activist history
and advocacy of business social responsibility.
The key question is how, in the space of two short years, I could have engaged in a deci-
sion process that appeared to violate my own strong values—a decision process whose subse-
quent manifestations continue to be cited by many observers as a supposedly definitive study
of corporate unethical behavior. I tend to discount the obvious accusations: that my values
weren’t really strongly held; that I had turned my back on my values in the interest of loyalty
to Ford; that I was somehow intimidated into making decisions in the best interests of the com-
pany; that despite my principled statements I had not actually achieved a high stage of moral
development, and so on. Instead, I believe a more plausible explanation for my own actions
looks to the foibles of normal human information processing.
I would argue that the complexity and intensity of the recall coordinator’s job required
that I develop cognitive strategies for simplifying the overwhelming amount of information
I had to deal with. The best way to do that is to structure the information into cognitive
‘‘schemas,’’ or more specifically ‘‘script schemas,’’ that guide understanding and action
when facing common or repetitive situations. Scripts offer marvelous cognitive shortcuts
because they allow you to act virtually unconsciously and automatically, and thus permit
handling complicated situations without being paralyzed by needing to think consciously
about every little thing. Such scripts enabled me to discern the characteristic hallmarks of
problem cases likely to result in recall and to execute a complicated series of steps required
to initiate a recall.
All of us structure information all of the time; we could hardly get through the workday
without doing so. But there is a penalty to be paid for this wonderful cognitive efficiency: We
do not give sufficient attention to important information that requires special treatment,
because the general information pattern has surface appearances indicating that automatic
processing will suffice. That, I think, is what happened to me. The beginning stages of the
Pinto case looked for all the world like a normal sort of problem. Lurking beneath the cognitive
veneer, however, was a nasty set of circumstances waiting to conspire into a dangerous situa-
tion. Despite the awful nature of the accidents, the Pinto problem did not fit an existing script;
the accidents were relatively rare by recall standards, and the accidents were not initially trace-
able to a specific component failure. Even when a failure mode suggesting a design flaw was
identified, the cars did not perform significantly worse in crash tests than competitor vehicles.
One might easily argue that I should have been jolted out of my script by the unusual nature of
the accidents (very low speed, otherwise unharmed passengers trapped in a horrific fire), but
those facts did not penetrate a script cued for other features. (It also is difficult to convey to the
layperson that bad accidents are not a particularly unusual feature of the recall coordinator’s
information field. Accident severity is not necessarily a recall cue; frequently repeated patterns
and identifiable causes are.)
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The Corporate Milieu
In addition to the personalized scripting of information processing, there is another important
influence on the decisions that led to the Pinto fires mess: the fact that decisions are made by
individuals working within a corporate context. It has escaped almost no one’s notice that the
decisions made by corporate employees tend to be in the best interest of the corporation, even
by people who mean to do better. Why? Because socialization processes and the overriding
influence of organizational culture provide a strong, if generally subtle, context for defining
appropriate ways of seeing and understanding. Because organizational culture can be viewed
as a collection of scripts, scripted information processing relates even to organizational-level
considerations. Scripts are context bound; they are not free-floating general cognitive struc-
tures that apply universally. They are tailored to specific contexts. And there are few more
potent contexts than organizational settings.
There is no question that my perspective changed after joining Ford. In retrospect, I would
be very surprised if it hadn’t. In my former incarnation as a social activist, I had internalized
values for doing what was right, as I understood rightness in grand terms; but I had not inter-
nalized a script for applying my values in a pragmatic business context. Ford and the recall
coordinator role provided a powerful context for developing scripts—scripts that were inevita-
bly and undeniably oriented toward ways of making sense that were influenced by the corpo-
rate and industry culture.
I wanted to do a good job, and I wanted to do what was right. Those are not mutually
exclusive desires, but the corporate context affects their synthesis. I came to accept the idea
that it was not feasible to fix everything that someone might construe as a problem. I therefore
shifted to a value of wanting to do the greatest good for the greatest number (an ethical value
tempered by the practical constraints of an economic enterprise). Doing the greatest good for
the greatest number meant working with intensity and responsibility on those problems that
would spare the most people from injury. It also meant developing scripts that responded to
typical problems, not odd patterns like those presented by the Pinto.
Another way of noting how the organizational context so strongly affects individuals is to
recognize that one’s personal identity becomes heavily influenced by corporate identity. As a
student, my identity centered on being a ‘‘good person’’ (with a certain dose of moral righ-
teousness associated with it). As recall coordinator, my identity shifted to a more corporate
definition. This is an extraordinarily important point, especially for students who have not yet
held a permanent job role, and I would like to emphasize it. Before assuming your career role,
identity derives mainly from social relationships. Upon putting on the mantle of a profession or
a responsible position, identity begins to align with your role. And information processing per-
spective follows from that identity.
I remember accepting the portrayal of the auto industry and Ford as ‘‘under attack’’ from
many quarters (oil crises, burgeoning government regulation, inflation, litigious customers,
etc). As we know, groups under assault develop into more cohesive communities that empha-
size commonalities and shared identities. I was by then an insider in the industry and the com-
pany, sharing some of their beleaguered perceptions that there were significant forces arrayed
against us and that the well-being of the company might be threatened.
What happened to the original perception that Ford was a socially irresponsible giant that
needed a comeuppance? Well, it looks different from the inside. Over time, a reasonable value
for action against corporate dominance became tempered by another reasonable value that cor-
porations serve social needs and are not automatically the villains of society. I saw a need for
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balance among multiple values, and, as a result, my identity shifted in degrees toward a more
corporate identity.
The Torch Passes to You
So, given my experiences, what would I recommend to you, as a budding organizational
decision maker? I have some strong opinions. First, develop your ethical base now! Too many
people do not give serious attention to assessing and articulating their own values. People
simply do not know what they stand for because they haven’t thought about it seriously. Even
the ethical scenarios presented in classes or executive programs are treated as interesting little
games without apparent implications for deciding how you intend to think or act. These
exercises should be used to develop a principled, personal code that you will try to live by.
Consciously decide your values. If you don’t decide your values now, you are easy prey for
others who will gladly decide them for you or influence you implicitly to accept theirs.
Second, recognize that everyone, including you, is an unwitting victim of his or her
own cognitive structuring. Many people are surprised and fascinated to learn that they
use schemas and scripts to understand and act in the organizational world. The idea that
we automatically process so much information so much of the time intrigues us. Indeed,
we would all turn into blithering idiots if we did not structure information and expect-
ations, but that very structuring hides information that might be important—information
that could require you to confront your values. We get lulled into thinking that automatic
information processing is great stuff that obviates the necessity for trying to resolve so
many frustrating decisional dilemmas.
Actually, I think too much ethical training focuses on supplying standards for contemplat-
ing dilemmas. The far greater problem, as I see it, is recognizing that a dilemma exists in the
first place. The insidious problem of people not being aware that they are dealing with a situa-
tion that might have ethical overtones is another consequence of schema usage. I would ven-
ture that scripted routines seldom include ethical dimensions. Is a person behaving unethically
if the situation is not even construed as having ethical implications? People are not necessarily
stupid, ill-intentioned, or Machiavellian, but they are often unaware. They do indeed spend
much of their time cruising on automatic, but the true hallmark of human information process-
ing is the ability to switch from automatic to controlled information processing. What we really
need to do is to encourage people to recognize cues that build a ‘‘Now Think!’’ step into their
scripts—waving red flags at yourself, so to speak—even though you are engaged in essentially
automatic cognition and action.
Third, because scripts are context-bound and organizations are potent contexts, be aware
of how strongly, yet how subtly, your job role and your organizational culture affect the ways
you interpret and make sense of information (and thus affect the ways you develop the scripts
that will guide you in unguarded moments). Organizational culture has a much greater effect
on individual cognition than you would ever suspect (see Chapter 5).
Last, be prepared to face critical responsibility at a relatively young age, as I did. You
need to know what your values are, and you need to know how you think so that you can know
how to make a good decision. Before you can do that, you need to articulate and affirm your
values now, before you enter the fray. I wasn’t really ready. Are you?
For a more thorough description and analysis of Dennis Gioia’s experiences, see his article, ‘‘Pinto Fires
and Personal Ethics: A Script Analysis of Missed Opportunities,’’ Journal of Business Ethics 11, nos. 5, 6
(1992): 379–89.
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Revisiting the Pinto Fires Case: Script Processing and
Cost-Benefit Analysis
Dennis Gioia, management scholar and expert on social cognition, has provided us
with a rare opportunity to look inside the head of someone who was involved in a
widely publicized business ethics situation. He has analyzed his own thoughts and
behavior as vehicle recall coordinator at Ford Motor Company shortly after the Ford
Pinto was introduced in both an article in the Journal of Business Ethics72 and in his
‘‘Reflections’’ that you just read.
In 1972, Gioia graduated with an MBA. His value system included opposition to
the Vietnam War and deep concerns about the ethical conduct of business. ‘‘I culti-
vated my social awareness; I held my principles high; I espoused my intention to help
a troubled world; and I wore my hair long. By any measure I was a prototypical
‘Child of the ’60s.’’’73 A car enthusiast, Gioia was hired by the Ford Motor Company
as a ‘‘problem analyst.’’ Within two years he became Ford’s field recall coordinator,
in charge of organizing current recall campaigns and identifying developing problems.
SCRIPT PROCESSING In analyzing his participation in the decision not to recall the
Pinto, Gioia suggests that his behavior was highly influenced by script processing.
Scripts are cognitive frameworks that guide human thought and action. Although they
are generally not written down, scripts contain information about the appropriate
sequence of events in routine situations. For example, most of us have a fairly complex
script for how to behave in a fancy restaurant, from approaching the maı̂tre d’ to tasting
the wine to choosing a fork to use to leaving the appropriate tip. Information processing
is made much more efficient because a cognitive script allows the individual to call on
an established behavior pattern and act automatically without contemplating every
decision or action in great detail. Active thinking is not required, because the situation
fits the mental prototype, which in turn triggers the script and the prescribed behaviors.
According to Gioia, this is something like ‘‘cruising on automatic pilot.’’ Many of us
discover that we have been cruising on automatic pilot when we drive to a familiar
destination, but we can’t recall how we got there. We were following an established
behavior pattern. The route was so familiar that we didn’t have to think about it any-
more. Somehow we were magically there. Similar things happen at work. Behaviors
become routine or ‘‘scripted,’’ and we do them pretty much without thinking. Many
jobs have scripts associated with them. For example, insurance claims adjusters have a
set of criteria they use to make decisions about claims, and emergency medical person-
nel have a script for deciding which medical problems require the most immediate
attention. If a symptom is not a part of the accepted script, it is likely to be overlooked.
Given the huge information load expected of someone who was simultaneously
managing hundreds of files on potential safety problems, scripts provided a great
information processing advantage to the Ford recall coordinator. Rather than treating
every potential problem situation as unique, Gioia could save time and mental energy
by making quick and efficient decisions about problems as they arose. As early
reports about the Pinto began to trickle in, they didn’t raise any red flags because
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they fit the scripted criteria for a ‘‘normal’’ accident and didn’t fit the scripted criteria
for a recall. Among other criteria, Gioia was taught to look for a large number of
cases, a pattern of component failure, and a traceable cause to a design or manufac-
turing problem before proposing a recall. Therefore, he filed the claims automatically
and gave seemingly more important problems his active attention.
Besides contributing to information processing efficiency, however, script pro-
cessing clearly has some disadvantages. Gioia admittedly ‘‘looked right past’’ poten-
tial problems because he had seen similar information patterns hundreds of times
before. The scripted definition of a crisis case was not met by the information he
received, so the Pinto wasn’t singled out for attention. Consistent with research on
script processing, he selectively perceived information that was consistent with the
script and ignored information that didn’t fit the pattern.
Muffled emotions can also become part of a script. Many jobs require the control
of emotions, particularly negative emotions. The recall coordinator’s job fit this cate-
gory, as would the job of a health professional in the emergency room or an insurance
claims handler who reads constantly about terrible accidents and the disabilities that
result. For Gioia to function in his job every day, his emotions had to be squelched to
some degree. Even when one event penetrated his script, it didn’t lead to recall of the
Pinto. He had received a photograph of a burned Pinto and subsequently saw in person
the burned hulk of an actual automobile. These powerful visual images triggered an
emotional response and moved him to bring the case before members of the field recall
office. However, at the meeting, it became clear that the characteristics of the Pinto
problem didn’t meet the group’s shared scripted criteria for a recall. For example, only
a few field reports had come in about the Pinto, much fewer than the number that would
generally support a recall decision. All members, including Gioia, voted not to recall.
Script processing can be particularly problematic for ethical decision making.
First, ethical decision making requires active consideration of the moral dimensions
of the situation and a ‘‘custom’’ decision, tailored to the complexities of that particu-
lar case. Yet, Gioia argues, in many situations organizational members are not even
aware they are dealing with an ethical dilemma. In terms of our previous discussion,
they are ethically unaware. They handle situations by following scripts that are likely
to exclude ethical considerations. In other words, ethical dilemmas do not lend them-
selves to ‘‘automatic pilot’’ decisions. But the realities of our hectic work lives make
this sort of default decision making very common.
Cost-Benefit Analysis
Frequently, in addition to the cognitive processing limitations of individual deci-
sion makers, institutionalized decision-making processes can powerfully influence
the decisions made by individuals or groups. In the Pinto fires case, a controver-
sial decision-making process was used to justify the decision not to change the
gas tank design. The National Traffic Safety Association had approved the use of
cost-benefit analysis to establish automotive safety design standards. This process
involved the assignment of a dollar value for a human life—in 1970, the value
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was deemed to be approximately $200,000 (it’s over 3 million dollars today) As
an internal memo revealed, Ford had tabulated the costs of altering the tank
design (for all similarly designed vehicles) to be $137 million, or $11 per vehicle.
The benefits were calculated to be $49,530,000. These included the savings to
society that would be accrued by preventing 180 deaths at $200,000 each, plus
180 projected burn injuries at $67,000 per injury and 2,100 burned cars at $700
per car. Using the cost-benefit analysis made the decision seem straightforward.
The costs of redesign outweighed the benefits and would therefore not be under-
taken. Ethical considerations didn’t figure into the equation.
Attempts to reduce complex decision making to quantitative terms aren’t un-
common, especially in a highly competitive business environment. In this way, com-
plex decisions can be simplified—apparently, an advantage. Today, insurance
companies and many government agencies still assign a value to human life as they
attempt to calculate the costs and benefits of new regulations. And those managing
relief efforts after the World Trade Center terrorist attack had to decide how much
money should be given to families who lost loved ones. What is a life worth? Are
some people’s lives ‘‘worth’’ more than others because they would have had more
earning potential had they lived? Unfortunately, this kind of decision making is a
part of our modern lives. Decisions like this are made in courtrooms and by insurance
companies every day. But the potential disadvantages of reducing the value of human
life to quantitative terms should be clear. Such simplification can remove moral crite-
ria from the decision-making process and reduce ethical awareness.
The Pinto fires example also points to the importance of multiple ethical selves
and role behavior that will be discussed further in Chapter 7. Gioia was an idealistic
young student, but he admittedly dropped his idealism at the corporation door. In
performing his job of recall coordinator, Gioia was heavily influenced by the role
expectations and guiding scripts. As he says:
The recall coordinator’s job was serious business. The scripts associated
with it influenced me more than I influenced [them]. Before I went to
Ford I would have argued strongly that Ford had an ethical obligation to
recall. After I left Ford, I now argue and teach that Ford had an ethical
obligation to recall. But, while I was there, I perceived no obligation to
recall and I remember no strong ethical overtones to the case whatsoever.
It was a very straightforward decision, driven by dominant scripts for the
time, place, and context.
74
Clearly, these processes that individuals and organizations use to simplify complex
decisions can have significant implications for the ethical decisions managers make.
Although script processing and quantitative decision-making criteria clearly help us
do our jobs more efficiently, they can also strip ethical considerations from the deci-
sion-making process.
One way to address this problem is to make ethical considerations part of the
script. Gioia suggests that this may be possible, although he warns that ‘‘it will take
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substantial concentration on the ethical dimension of the corporate culture (see Chap-
ter 5), as well as overt attempts to emphasize ethics in education, training, and deci-
sion making before typical organizational scripts are likely to be modified to include
the crucial ethical component.’’75 You can help your subordinates by working with
them to make the scripts explicit and to analyze them for their ethical components.
You can also require decision-making groups to analyze the ethical aspects of
their decisions and to include this analysis in their reports. Just as environmental
impact statements are now a routine part of many business decisions, an ethical
analysis could require that managers focus on the influence of a particular decision
on stakeholders’ rights and consequences for the community or communities affected
by the decision. You can also require groups to justify their decision-making process
(e.g., decision-making criteria and weighting) in moral as well as quantitative terms.
CONCLUSION
This chapter has introduced you to individual differences that can influence ethical
decision making. It has also outlined the cognitive limitations and biases that can
interfere with good ethical decision making. Hopefully, knowing about these and
how they can be overcome will help you be a better individual decision maker. Chap-
ter 4 provides some guidance regarding how you can find your moral voice and actu-
ally do what you think is right. Much of the remainder of the book moves beyond the
individual focus to look at the group and organizational influences that can have a
profound influence on your decisions and actions, sometimes making it difficult to
do the right thing.
EXERCISE
Understanding Cognitive Moral Development
Molly has been a local newspaper reporter for over 10 years. She learned that Joe
Thompson, a candidate for governor, had been arrested for shoplifting 20 years
earlier. She also learned that early in his life, Thompson went through a confused
period when he did things he later regretted. The shoplifting was treated as a minor
offense and removed from his record. Since then, Thompson has had a distinguished
career helping people and leading important community projects. Many people con-
sider him to be the best candidate who will likely go on to other important leadership
positions. Molly wonders whether she should write a story about Joe’s earlier trou-
bles that could ruin his chance to win.
Can you characterize Molly’s thinking in terms of cognitive moral development
levels? Which of these questions represents preconventional, conventional, or princi-
pled thinking?
& Are there any laws against writing the story?
& Would getting ‘‘the scoop’’ help or hurt my career?
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& If I don’t publish the story, wouldn’t another reporter write the story anyway?
& What action would best serve society in the long term?
& How would my boss react if I wrote, or didn’t write, the story?
& Aren’t reporters expected to report all the news regardless of the
circumstances?
& Would Thompson pay me not to write the story?
& Would the election process be more just with or without reporting the story?
DISCUSSION QUESTIONS
Note that these questions apply to Gioia’s ‘‘Reflections’’ as
well as the rest of the chapter.
1. Steven F. Goldstone, chairman and CEO of RJR Nabisco (one of the four
biggest U.S. cigarette manufacturers), said in a magazine interview, ‘‘I have no
moral view of this business . . . I viewed it as a legal business. You shouldn’t
be drawing a moral judgment about a business our country says is perfectly
legal and is taxed like crazy by it.’’76 Think about Goldstone’s statement in
terms of ethical awareness. What might happen if he began thinking about his
business in ethical, and not just legal, terms?
2. Evaluate yourself in terms of cognitive moral development, locus of control,
ethical decision-making style, moral disengagement, and Machiavellianism.
What does this evaluation tell you about your own ethical decision making? Do
the same for someone you know well.
3. Can you think of times when you have used morally disengaged thinking?
4. Identify a situation in which you have used script processing in a work or other
life situation.
5. Do you believe that scripts can override an individual’s value system?
6. Answer the question posed in Gioia’s ‘‘Reflections’’: Is a person behaving
unethically if the situation was not even construed in ethical terms—if there
was no ethical awareness?
7. Who should make the decision about taking risks with others’ lives in designing
products?
8. Should a person be permitted to place a value on a human life? Should a com-
pany? Should the government? If not, how would decisions be made about
whether to market certain products (that might be risky for some, but helpful
for others), how much those who have lost family members in disasters should
be compensated, and so on?
9. How do you feel about the use of cost-benefit analysis where human life is part
of the cost calculation? Might the infusion of moral language have changed the
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decision makers’ thinking? For example, what if decision makers had talked
about their responsibility for killing 180 human beings?
10. Given that all automobiles are unsafe to some degree, where do you draw the
line on product safety? How safe is safe enough—and who decides?
NOTES
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SHORT CASE
Mary, the director of nursing at a regional blood bank, is concerned about the declin-
ing number of blood donors. It’s May, and Mary knows that the approaching summer
will mean increased demands for blood and decreased supplies, especially of rare
blood types. She is excited, therefore, when a large corporation offers to host a series
of blood drives at all of its locations, beginning at corporate headquarters. Soon after
Mary and her staff arrive at the corporate site, Mary hears a disturbance. Apparently,
a nurse named Peggy was drawing blood from a male donor with a very rare blood
type when the donor fondled her breast. Peggy jumped back and began to cry. Joe, a
male colleague, sprang to Peggy’s defense and told the donor to leave the premises.
To Mary’s horror, the male donor was a senior manager with the corporation. What is
the ethical dilemma in this case, and what values are in conflict? How should Mary
deal with Peggy, Joe, the donor, and representatives of the corporation?
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‘‘Cheating as a Function of Task Outcome and Machiavellianism,’’ Journal of Psychology 121
(1987): 423–27; G. E. Jones and M. J. Kavanagh, ‘‘An Experimental Examination of the Effects of
Individual and Situational Factors on Unethical Intentions in the Workplace,’’ Journal of Business
Ethics 15 (1996): 511–23.
39. A. Bandura, Social Foundations of Thought and Action: A Social Cognitive Theory (Englewood
Cliffs, NJ: Prentice Hall, 1986).
40. J. R. Detert, L. K. Trevi~no, and V. L. Sweitzer, ‘‘Moral Disengagement in Ethical Decision Making:
A Study of Antecedents and Outcomes,’’ Journal of Applied Psychology 93 (2008): 374–91.
41. M. H. Bazerman, Judgment in Managerial Decision Making (New York: Wiley & Sons, 1994).
42. D. M. Messick and M. Bazerman, ‘‘Ethical Leadership and the Psychology of Decision-Making,’’
Sloan Management Review (Winter 1996): 9–22.
43. Ibid.
44. Bazerman, Judgment in Managerial Decision Making.
45. Messick and Bazerman, ‘‘Ethical Leadership.’’
46. Ibid.
47. G. Loewenstein, ‘‘Behavioral Decision Theory and Business Ethics: Skewed Trade-offs between Self
and Other,’’ in Codes of Conduct: Behavioral Research into Business Ethics, eds. D. M. Messick and
A. E. Tenbrunsel (New York: Russell Sage, 1996).
48. Messick and Bazerman, ‘‘Ethical Leadership.’’
49. Ibid.
50. B. M. Staw and I. Ross, ‘‘Understanding Escalation Situations,’’ in Research in Organizational
Behavior, Vol. 9, eds. B. M. Staw and L. L. Cummings (Greenwich, CT: JAI Press, 1987).
51. Messick and Bazerman, ‘‘Ethical Leadership.’’
52. R. A. Prentice, ‘‘Ethical Decision Making: More Needed than Good Intentions,’’ Financial Analysts
Journal 63, no. 6 (2007): 17–30.
53. Loewenstein, ‘‘Behavioral Decision Theory and Business Ethics.’’
54. J. Haidt, ‘‘The Emotional Dog and Its Rational Tail: A Social Intuitionist Approach to Moral Judg-
ment,’’ Psychological Review 108, no. 4 (2001): 814–34.
55. Rommel and Folger, ‘‘Business Ethics and the Brain.’’
56. B. Bower, ‘‘The Bias Finders,’’ Science News, 22 April 2006, 250–51, 253.
57. N. Eisenberg, ‘‘Emotion, Regulation, and Moral Development,’’ Annual Review of Psychology 51
(2000): 665–97; A. Gaudine and L. Thorne, ‘‘Emotion and Ethical Decision Making in Organiza-
tions,’’ Journal of Business Ethics 31, no. 2 (2001): 175–87.
58. S. Rommel, and R. G. Folger, ‘‘Business Ethics and the Brain.’’ Business Ethics Quarterly 19: 1.
59. J. Lehrer, ‘‘Hearts and Minds,’’ Boston Globe, 29 April 2007; available at www.boston.com; Rommel
and Folger, ‘‘Business Ethics and the Brain.’’
60. J. D. Greene, R. B. Sommerville, L. E. Nystrom, J. M. Darley, and J. D. Cohen, ‘‘An fMRI Investiga-
tion of Emotional Engagement in Moral Judgment,’’ Science 293 (2001): 2105–8.
61. R. L. Hotz, ‘‘Scientists Draw Link between Morality and Brain’s Wiring’’ (May 11, 2007), Science
Journal at WallStreetJournal.com; available at http://online.wsj.com/article/SB117884235401499300
.html.
62. Eisenberg, ‘‘Emotion, Regulation, and Moral Development’’; Gaudine and Thorne, ‘‘Emotion and
Ethical Decision Making in Organizations.’’
63. R. Folger, R. Cropanzano, and B. Goldman, ‘‘What Is the Relationship between Justice and Moral-
ity?’’ in Handbook of Organizational Justice, eds. J. Greenberg and J. A. Colquitt (Mahwah, NJ:
Erlbaum, 2005), 215–46.
64. J. Kish-Gephart, J. Detert, L. K. Trevi~no, and A. Edmondson, ‘‘Silenced by Fear: The Nature, Sour-
ces, and Consequences of Fear at Work,’’ Research in Organizational Behavior 29 (2010), 163–193.
CHAPTER 3 DECIDING WHAT’S RIGHT: A PSYCHOLOGICAL APPROACH 109
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http://online.wsj.com/article/SB117884235401499300
E1C03 07/09/2010 Page 110
65. C. J. Turillo, R. Folger, J. J. Lavelle, E. E. Umphress, and J. O. Gee, ‘‘Is Virtue Its Own Reward?
Self-Sacrificial Decisions for the Sake of Fairness,’’ Organizational Behavior and Human Decision
Processes 89 (2002): 839–65.
66. J. McGregor, ‘‘Sweet Revenge,’’ Business Week, 22 January 2007, 62–70.
67. Ibid.
68. P. Elkind, ‘‘Blood Feud,’’ Fortune, 14 April 1997, 90–102.
69. Ibid.
70. Ibid.
71. Ibid.
72. D. Gioia, ‘‘Pinto Fires and Personal Ethics: A Script Analysis of Missed Opportunities,’’ Journal of
Business Ethics 11, nos. 5, 6 (1992): 379–89.
73. Ibid.
74. Ibid.
75. Ibid.
76. J. Goldberg, ‘‘Big Tobacco’s Endgame,’’ New York Times Magazine, 21 June 1998, 36–42, 58–60.
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C H A P T E R4
ADDRESSING INDIVIDUALS’
COMMON ETHICAL PROBLEMS
INTRODUCTION
Here’s the bad news about business ethics: your career can be irrevocably damaged if
you mishandle an ethical issue. But there’s also good news: many ethical issues in
business are quite predictable. You can be fairly certain that during the course of
your career, you’ll run into myriad ethical problems such as a customer who asks for
a special deal or terms in order to make the sale, or questions about the appropriate
use of corporate resources, or discrimination of one sort or another. Since many
ethical issues are somewhat predictable, you have a better chance of dealing appro-
priately with ethical problems if you think about what’s likely to happen before it
occurs. And you should now have tools to help you make better decisions.
Before we get into a discussion of ethical issues, however, it’s important to look
at the relationship that exists between you and your employer. Although most people
don’t sign a written contract on the day they join a company or organization, there is
an implied contractual relationship of sorts between workers and employers. Both
parties have expectations, and rights, and offer consideration to the other—all are
characteristics of a contractual relationship. Your employer pays you in salary and
benefits to perform a job, and your organization expects you to behave in a certain
way; you have a responsibility to be ‘‘part of the family’’ and exhibit loyalty and
other corporate ‘‘virtues’’ and to refrain from other, less desirable behaviors. On the
other hand, you expect not only a salary for the work you perform but also a modi-
cum of fairness. Most people expect employers to treat them decently and to provide
an appropriate work environment. Whenever we discuss the employer-employee con-
tract in this chapter, it’s this complicated set of expectations that we’re referring to.
So what are some typical ethical problems individuals face at work? We’ve com-
piled some of the more obvious ones and divided them into broad categories, includ-
ing human resources issues, conflicts of interest, customer confidence issues, and the
use of corporate resources. We address a number of specific topics under each broad
category. To make it easy to follow, each topic contains the following information:
& What it is (a definition of the issue)
& Why it is an ethical problem
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& How we can think about the issue
& Professional costs and possible penalties for ethical or legal transgressions
& Special notes and some topics that may include important information
related to the topic
Identifying Your Values—and Voicing Them
Before we explore the various types of ethical problems covered in this chapter, we
would like you to think again about what’s important to you—in other words, what
do you value? In Chapter 2, we discussed the various philosophical approaches
to ethics, all of which can help you think through a dilemma. The principle-based
approach encouraged you to think about your most cherished values. So, what
happens if you think through a situation, figure out what to do based upon those
values, and then hesitate to say or do what you believe to be ethical because of pres-
sure that you feel from your organization’s reward system or your boss or your peers?
Once you’ve determined the right thing, how do you then do it? Well, according to
some ethics experts at the Aspen Institute, it helps to practice.1
After World War II, researchers found that many of the people in Europe who
had risked their own well-being to help others who were threatened by the Nazis did
so because they had ‘‘practiced’’ making ethical decisions earlier in their lives by
imagining themselves in hypothetical situations that challenged their values. They
not only imagined these situations, but they also discussed their potential actions
with others—what they might actually do if they encountered such a situation.
Researchers theorize that this was a kind of ‘‘pre-scripting’’ that laid the groundwork
for these people’s later heroic actions. It was as if thinking about ethical issues long
before they were actually confronted by the issues gave people a sort of head start in
the moral courage department. The ‘‘Giving Voice to Values’’ program at the Aspen
Institute is rooted in this interesting, worthwhile premise. Mary C. Gentile, the pro-
gram director, writes that the approach starts with ‘‘the assumption that we know
what we want to do and then figuring out how we might make that happen—and then
practicing our voice.’’
The program encourages students of all ages to first consider their values (as we
encouraged you to do in Chapter 2). What do you care about? When you think deeply
about your life, what are the values that attract you or stir deep feelings within you?
Most people, for example, gravitate toward honesty, respect, responsibility, compas-
sion, fairness, and other similar values.
In addition to values, we all have a personal narrative, a self-story that can help
us when we face tough ethical issues. As you think about your life story, it can be
helpful to look back on your life and search for experiences that might provide a
source of passion or strength in difficult times. We often think of these as life situa-
tions that build character. Many of the best leaders say that difficult life experiences
were transformative and provided new meaning and direction to their lives. For exam-
ple, surviving a life-threatening illness can make other workplace threats seem much
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less dire. You might say to yourself, ‘‘Speaking up to my boss in a respectful way
isn’t going to kill me,’’ so why not? Daniel Vasella, CEO and chairman of the phar-
maceutical company Novartis, had his first hospital experience at age 4 as a result of
food poisoning. He contracted tuberculosis and then meningitis at age 8 and spent a
year in a sanatorium. At age 10, he lost his older sister. These are just a few of the
challenges Vasella faced as a boy. He vividly recalls the loneliness and pain of these
experiences, but he also remembers the powerful impact of a few special people who
treated him with care and compassion and who fueled his desire to help other people,
ultimately by becoming a physician. He later decided that by becoming a leader in a
health-care business, he could have even more impact and help more people than he
could as a single practitioner.2 So think about what your personal narrative is. What
aspects of it might help give you the courage to do the right thing in tough situations?
Here’s an abbreviated list of other self-assessment questions students are encour-
aged to consider as part of the Giving Voice to Values program:
1. Questions of purpose. What are your personal and professional goals? What
do you hope to accomplish? What would make your professional life
worthwhile?
2. Questions of risk. What is your risk profile? Are you a risk taker, or are you
risk averse? What are the greatest risks you face in your line of work? What
levels of risk can you live with, and which ones can’t you live with?
3. Questions of personal communication style or preference. Do you deal well
with conflict, or are you nonconfrontational? Do you prefer communicating
in person or in writing? Do you think best from the gut and in the moment,
or do you need time to reflect on and craft your communication?
4. Questions of loyalty. Do you tend to feel the greatest loyalty to family, work
colleagues, your firm/employer, or other stakeholders, such as customers?
5. Questions of self-image. Do you identify yourself as being shrewd or naive?
As idealistic or pragmatic? As a learner or as a teacher?
The point of this self-analysis is to first identify your own ‘‘self-story’’ or narrative—
we all have one or are able to build one. Then, consider other personal character-
istics that will help you find ways of behaving that align with your image of your-
self. For example, if your own image of yourself is one of a bold, courageous
character, you might be able to find a brave way of reacting to a situation—one that
is aligned with the bold person you believe you are. And the converse is also true.
If you are risk averse and timid, you may be able to find a way of reacting to a
situation that is more ‘‘compliant’’ and that aligns with who you really are. The
objective here, as you have probably already guessed, is to make it easier for you to
voice your values and beliefs by creating a response and behavior that reflects your
unique personality. Evaluating a dilemma through the lens of your own story makes
it more likely that you will voice your values, and playing to your strengths makes it
more likely that you’ll stand up for what you believe.
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The Giving Voice to Values program also encourages students to understand that
values conflicts are absolutely normal. Far from being unusual or rare, ethical dilem-
mas happen all the time to everyone. The ethical dilemmas that we face every day
test our ability to make good choices. If we anticipate the need to take risks—to
make decisions that might turn out to be good ones or not—we will prepare our-
selves. We’ll internalize the idea that these situations are normal and survivable and
that others are experiencing the same thing. These situations won’t paralyze us.
Another important element of the program is to understand various communica-
tion techniques. Voice can mean dialogue or listening or other communication tech-
niques such as researching and providing new data, questioning, negotiating, leading
by example, identifying allies, and so forth. The point is that voice is not always
about sounding off. In fact, it’s more often about analyzing the situation, your audi-
ence, your own motivations and style, and then figuring out the best way to get your
point across to others. In organizations, it can help greatly to find allies to support
your viewpoint instead of being a lone voice, especially if you’re bucking the system.
Taking the time to convince allies to stand up with you for what you think is right can
increase the chance that your viewpoint will prevail in the end.
The program also addresses the barriers we encounter in making decisions and
voicing our beliefs—the reasons and rationalizations that can short-circuit our
resolve. This part of the program asks us to identify the arguments that we’re trying
to counter, what’s at stake for the various participants in the situation, how we might
influence those we disagree with, and what is our most powerful argument. Some of
these arguments are likely influenced by the barriers to good ethical judgment we
discussed in Chapter 3.
Finally, the Giving Voice to Values program encourages students to consider
choice: we all are capable of acting on our values, but sometimes we don’t. The point
of thinking about the issue of choice is to ensure that we understand that even the most
ethical person may not always do the right thing. We make choices all the time that can
reinforce our decision-making patterns or change them. If and when we make a mis-
take, we are capable of redefining ourselves the next time. The important point is to be
self-aware, to acknowledge mistakes, and to be able to learn from them. To find out
more about this impressive program, go to www.aspencbe.org/teaching/gvv/index.html.
Sometimes, voicing your values at work takes significant courage because of the
risks involved. We’ll talk later in this chapter about some of the potentially riskiest
situations, where whistle-blowing (on your boss or your organization) becomes a
possibility.
PEOPLE ISSUES
We use the term people issues to describe the ethical problems that occur when peo-
ple work together. They can include privacy, discrimination, sexual and other types
of harassment, or simply how people get along.
The word to remember when considering these issues is fairness. When most
people think about fairness, they mean equity, reciprocity, and impartiality.
3 A
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situation is said to be equitable when something is divided between two people
according to the worth and inputs of the two individuals. For example, in a situation
where two people have shared responsibility for a project, one might ask: ‘‘Did we
work equally hard? Did we receive equal shares? Most people think it’s unfair when
two people have performed the same duty but receive a different share of the reward.
Another measure of fairness is reciprocity, or the fairness of exchanges: ‘‘You did
this for me and I’ll do that for you.’’ Most people perceive a situation as being unfair
if one person fails to hold up his or her part of a bargain. A third measure of fairness
is impartiality: ‘‘Is the person who’s going to listen to my story biased in some way,
or has he or she prejudged the situation?’’ Most people think of fairness as being
inconsistent with prejudice and bias.
Most protective legislation and corporate human resources policies also try to
incorporate those elements. The goal is to hire, treat, promote, appraise, and lay off
or fire employees based on their qualifications and not on factors like sex, race, or
age. The goal is to level the playing field and create a fair environment where per-
formance is the only factor that counts (equity), where employer-employee expect-
ations are understood and met (reciprocity), and where prejudice and bias are not
factors (impartiality).
It’s important to remember that, to employees, fairness is not just about the out-
comes they receive (pay, promotion, etc.). Employees care at least as much about the
fairness of decision-making procedures and about the interpersonal treatment they
receive when results are communicated. People are more likely to accept bad news if
they believe the decision was made fairly and if the supervisor or organization
explains the decision with sensitivity and care. An organization that uses fair proce-
dures and treats employees with sensitivity sends a powerful message to all employ-
ees that it values them as important members of the community.4
Discrimination
You and Lisa met five years ago when you were hired into the management
training program of a large utility. Although you’re now in different parts
of the organization, you have managed to stay close over the years. Lisa
recently had a baby and plans to take advantage of the full six months of
maternity leave the company offers. She told you that she’s definitely coming
back to work after her leave and that her department has promised to hold her
job for her. Meanwhile, you’ve seen a posting for her job on the company’s
website. You run into one of Lisa’s colleagues in the hall and ask about the
posting. He says, ‘‘Oh yeah, they’re going to fill that job. But don’t tell Lisa.
She’s got five more months to be a happy mom. Besides, they’ll find some-
thing for her to do if she decides to come back.’’
Since discrimination by race, religion, national origin, sex, disability, and age is
prohibited by federal law in the United States, many companies have defined policies
prohibiting any kind of discrimination. Unfortunately, there can be quite a gulf
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between where corporate policy leaves off and reality begins. When people from var-
ious backgrounds get together to provide a service or manufacture a product, there
surely will be people who have conscious or unconscious biases toward various
groups, and there will be others who are simply ignorant of the effect their behavior
has on others.
WHAT IS IT? Discrimination occurs whenever something other than qualifications
affects how an employee is treated. Unequal treatment, usually unfavorable, can take
many forms. Older workers who suddenly find themselves reporting to younger ones
can be resentful since they feel younger workers lack experience. Younger employ-
ees can be tempted to ignore advice from older workers, who they feel are out of
touch. The attitudes toward age will most likely become increasingly important over
the next decade as the general population grows older.
Racial, ethnic, religious, or sexual stereotypes can creep into the behavior of
even the most sophisticated individuals, even without their conscious awareness. The
importance of being able to manage different types of people can’t be overstated. In
the United States, ethnic and racial minorities are growing faster than the population
as a whole, and the U.S. workforce is becoming increasingly diverse.
In the case involving Lisa, the new mother, her maternity leave could result in
discrimination. Although pregnant employees are protected by law (see ‘‘Why Is It
an Ethical Problem?’’ which follows), in this case her time away from her job is
clearly being viewed as a liability. Of course, employers have the right to replace
workers who are on extended leave because of illness, disability, or other reasons
such as finishing an education. The problem in Lisa’s case is that her department
seems to be doing an end run around her by keeping her in the dark while her job is
filled. If Lisa knew what the department’s plans were, she might shorten her leave or
arrange a part-time working situation for a few months. But unless you, her col-
league, tell her what you have found out, the job she left won’t be the one she comes
back to. It seems unfair to keep Lisa in the dark.
Discrimination can be a subtle or not-so-subtle factor not only in working rela-
tionships but also in hiring, promotions, and layoff decisions. People who don’t fit a
‘‘corporate profile’’ may be passed over for advancement because they’re female, or
a member of a minority group, or too old, or for other reasons that may or may not be
covered in protectionist legislation. Surely there are many barriers in the workplace,
not just the glass ceiling that refers to barriers to female advancement. There proba-
bly are also barriers for people who are over 50 years old, or who have medical prob-
lems, or who are short, disabled, overweight, bearded, balding, or homosexual—any
quality that varies from the ‘‘norm.’’ And some employers create job requirements
that could automatically eliminate certain employees, not because of their qualifica-
tions, but because of personal circumstances.
HOW CAN WE THINK ABOUT THIS ISSUE We can use the various theories
described in Chapter 2 to analyze the situation. These theories can serve as various
‘‘lenses’’ that we can use in viewing a problem. None of these theories are likely to
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give us the perfect answer, but they’ll help us think through the implications of an
issue so that we can make a good decision.
Suppose we look though the consequentialist lens? Who are the stakeholders,
and what are the harms and benefits to each? What could we do in this situation that
would benefit the most people? If we think about it in that way, we might conclude
that it’s better to say nothing to Lisa. We might imagine that more people would
benefit (at least in the short term) by Lisa’s manager filling her old job right away.
After all, Lisa’s being away could cause problems for her coworkers. However, a
longer-term perspective might cause us to ask how other women employees would
respond to Lisa’s seemingly unfair treatment. Their dissatisfaction could seriously
harm the company. So, what is the best decision for society overall?
Looking through a deonotological lens would cause us to ask whether we have a
duty or obligation to Lisa, our employer, or both. What values or principles are
involved in this case? Using the Golden Rule, think of how you would want Lisa or
your colleague to behave if the situation was reversed. Following Kant’s categorical
imperative, what kind of world would it be if employers routinely treated employees
in this way? And, using Rawls’s veil of ignorance, how would you make this decision
if you had no idea if Lisa was a man or a woman?
Finally, if we think about virtue ethics and our own character, we would consider
our intentions and motivations. We would also consider how professional human
resources managers would think about this decision. We would ask ourselves how
our decision would look to others if it were made public. What would our ethical role
model or harshest moral critic think? If you consider your own character and what
you value, what decision feels best? We might also consider some of the psychologi-
cal issues described in Chapter 3. Are we considering all of the consequences of tell-
ing Lisa, or not? What could happen to her and you if you tell, or if you don’t tell?
This situation could test what you as an individual really care about, which is
important if you’re going to lead an ethical life. It’s also a way to begin assessing your
own values and asking how you can act more consistently with those values, as we
suggested earlier in this chapter when discussing the Giving Voice to Values program.
If you decided that the right thing to do was to take action on Lisa’s behalf, how
might you go about it? Whom would you approach, and what would you say? Or,
would you consider providing Lisa with information so that she could act on her
own behalf?
WHY IS IT AN ETHICAL PROBLEM? Discrimination is an ethical issue—beyond
any legal protections—because it’s at the core of fairness in the workplace. While
concepts of fairness are incorporated in business law around the world, in the United
States fairness is considered to be an inalienable right.5 The U.S. government has
attempted to ensure fairness and justice; the word trust is on every piece of currency,
and the Pledge of Allegiance declares ‘‘with liberty and justice for all.’’ In addition,
the entire U.S. legal system has justice and the protection of individual rights as its
cornerstone. Consequently, people expect fairness from organizations in general and
specifically from their employers.
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COSTS While laws and regulations governing fairness differ around the world, in
the United States victims of discrimination can file under Title VII of the Civil Rights
Act of 1964 with the Equal Employment Opportunity Commission (EEOC) or bring
suit under tort or contract law. This legislation specifically prohibits discrimination
based on race, religion, sex, color, and national origin. Groups specifically protected
by Title VII include women, African Americans, Hispanics, Native Americans, and
Asian Pacific Islanders. (Some states and local communities have added more protec-
tions, like sexual orientation and marital status, to that list.) The Pregnancy Discrimi-
nation Act of 1978 prohibits discrimination against pregnant women. The 1967 Age
Discrimination in Employment Act extends protection to people 40 years of age and
older. The 1973 Rehabilitation Act was the first federal legislation to protect disabled
Americans against discrimination by federal, state, and local governments, agencies,
and contractors. The Americans with Disabilities Act (ADA) of 1990 extended pro-
tection to the private sector by requiring all companies with more than 15 employees
to make reasonable accommodations to employ workers with disabilities. Although
the law doesn’t list conditions or diseases that are protected—since people react dif-
ferently to disease, some may be disabled and some may not be—some conditions
are specifically included or excluded. HIV infection, for example, is considered a
disability; people who have it are protected by the ADA law. Indications of how
costly bias suits can be for corporations are evident in several recent judgments: in
2005, UBS (Europe’s largest bank) was ordered to pay damages of $29 million to a
single plaintiff—a woman who complained of unequal treatment.6 In other cases, a
judge awarded $70 million for gender discrimination to 2,800 female employees of
Morgan Stanley who were registered financial advisors,7 and an arbitration panel in
New York ordered Merrill Lynch to pay more than $100 million to a group of women
who were found to have been discriminated against.8
Discrimination lawsuits can be costly for employers not simply in terms of legal
fees and damages and media coverage. The morale of victims certainly suffers as
they endure discrimination lawsuits, but the morale of other employees can also
suffer. Imagine how the thousands of employees of Texaco must have felt when their
company was under siege for a discrimination lawsuit. It’s embarrassing for employ-
ees when the company they work for is publicly accused of wrongdoing.
If you’re an individual accused of discriminating against another employee,
the least you’ll endure is an investigation. If you’re found guilty, you’ll probably
be penalized or even fired. If you’re found innocent, you or your accuser will
most likely be counseled about your behavior and its effects, and one or both of you
may be transferred to another area. If you manage someone who has been accused of
discrimination, expect a lot of questions concerning why you were unaware of it or
tolerated it. If you were aware of it and didn’t do anything about it, be prepared for
disciplinary action, particularly if a lawsuit results.
SPECIAL NOTE The many programs that train employees to ‘‘value diversity’’ can
seem at odds with the efforts to assimilate various groups and especially with the
laws and policies that prohibit discrimination. Learning to appreciate differences flies
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in the face of what many of us are taught from the time we’re children—that we
should ‘‘fit in.’’ Many of us are taught not only to downplay our own uniqueness in
an effort to blend in but also to ignore differences in other people. We usually are
taught ‘‘not to notice’’ different colors, religions, accents, ways of dressing, and
physical disabilities or abilities. Even sexual differences, which can be hard to
ignore, have been played down in the not-too-distant past.
Valuing diversity means treating people equally while incorporating their
diverse ideas. Discrimination means treating people unequally because they are, or
appear to be, different. Valuing diversity is a positive action, while discrimination is
a negative action. Valuing diversity tries to incorporate more fairness into the system,
while discrimination incorporates unfairness into the system. The key to valuing
diversity is understanding that different doesn’t mean deficient, and it doesn’t mean
less. Different means different.
Harassment, Sexual and Otherwise
As women began to enter the workforce in great numbers in the 1970s and 1980s, and
as social and business mores began to change, sexual harassment became an issue in
the workplace. Forty years later, it is still an issue and many companies have paid
huge fines in sexual harassment lawsuits. As a result, the EEOC now requires all
organizations with more than 15 employees to have a sexual harassment policy and
to train employees in these issues. Another result was a growing apprehension by
employees, especially men, toward workers of the opposite sex. Sometimes the line
between friendly and offensive is blurry.
One of your coworkers is Joanne, a computer whiz with an offbeat style and a
great sense of humor. Two of Joanne’s favorite ‘‘targets’’ are you and Bill,
another coworker who tends to be quite standoffish in his business relation-
ships. Joanne is the department clown and is forever goading you and Bill;
you, because you’re a great audience and clearly think she’s hilarious;
Bill, because she likes to try to get him to be more approachable. Joanne
frequently alludes to sexual subjects and has called both you and Bill ‘‘little
alley cats’’ and ‘‘studs.’’ While Joanne’s behavior doesn’t offend you at all,
you’re surprised when Bill approaches you in the men’s room and bitterly
complains about Joanne’s constant teasing.
WHAT IS IT? Sexual harassment is defined as unwelcome sexually oriented behav-
ior that makes someone feel uncomfortable at work. It usually involves behavior by
someone of higher status toward someone of lower status or power. Sexual harass-
ment claims are not limited to women either. The EEOC (www.eeoc.gov), reported
receiving 11,731 sexual harassment charges in 2008, and almost 16 percent of sexual
harassment claims were made by men.
Federal law has defined two types of sexual harassment: quid pro quo and hostile
work environment. Quid pro quo harassment means that sexual favors are a
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requirement—or appear to be a requirement—for advancement in the workplace.
Hostile work environment means that a worker has been made to feel uncomfortable
because of unwelcome actions or comments relating to sexuality. This type of sexual
harassment is especially murky because it is like beauty: it’s in the eye of the
beholder. What constitutes sexual harassment for one person may not be so for
another. Putting an arm around a person’s shoulder may feel like harassment to one
individual, and someone else may be comfortable with such a gesture. This type of
sexual harassment includes not only physical gestures but also remarks of a sexual
nature—even compliments—and displays of sexually provocative material, like
nude or revealing photographs, in an office.
In both types of sexual harassment, the decision about whether the behavior con-
stitutes harassment is determined from the viewpoint of a ‘‘reasonable’’ person, and
the harasser’s intentions aren’t considered. This is why sexual harassment issues can
be confusing. Since sexual harassment is determined by the reaction of the victim,
you have to consider not what you mean by your comments or actions, but how they
might be interpreted by the other person.
Most people will readily agree that patting a coworker on the rear end is sexual
harassment. But are you sexually harassing someone if you compliment her appear-
ance, or touch his arm, or make jokes of a sexual nature? In Joanne’s case, she hasn’t
done a very good job of considering exactly who her audience is and how each of her
two coworkers might react to her jokes. While you might think it’s funny to be called
a little stud, Joanne probably should think more carefully about how someone like
Bill might react to being called a name with sexual connotations. Is Joanne out of
line? Is Bill overreacting? According to the law, it doesn’t matter if you and Joanne
think Bill is overreacting. The yardstick for determining whether sexual harassment
occurred will be how uncomfortable a reasonable person would be with Joanne’s
comments, and not what Joanne intended with her remarks. How Bill felt will be
considered more than what Joanne intended.
HOW WE CAN THINK ABOUT THIS ISSUE Consider how a consequentialist might
think about this situation. Can you identify all of the stakeholders and the harms and
benefits to each? What are your options? What action on your part would benefit the
most people and harm the least, thus contributing the most to societal good? Now use
another lens: Do you have ethical duties or obligations here? What are those and to
whom? What ethical principles apply to this situation, and what rules would help you
decide what’s right? For example, if the situation was reversed and you were in either
Bill’s or Joanne’s shoes, how would you like them to help you?
You might think about the ‘‘reasonable person standard’’ as providing insight
into the relevant ethical community. How would a reasonable person assess the situa-
tion and determine the right thing to do? How would you feel if Bill spoke to a
reporter and this situation appeared in the local newspaper? If you do nothing in this
case, would you be chagrined to read about it in the newspaper? Could you proudly
describe your actions to your mother or your priest (or minister, rabbi, imam, etc.)
without embarrassment?
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Think about your organization’s culture. What values does your organization
hold dear? Most companies pride themselves on being places where all employees
can feel respected. If you look at your company’s values statement, you’ll likely find
verbiage about respect. Given that value of respect, what would your manager and
others in positions of authority in your organization want you to do?
If you decide to act on your values, you have quite a few options. One option is
to nip this issue in the bud by helping Bill address it with Joanne. Perhaps Joanne is
unaware of the effect her comments are having on Bill. You could encourage Bill to
talk with her, explain his reaction, and request that she stop. You could role-play
Joanne to give Bill the opportunity to practice what he is going to say. What could
Bill say to Joanne, and how could he say it in a way that will likely achieve his
intended result and allow the parties to continue working together in the future? If
Bill is unwilling to do this, what other options do you have? You could report the
issue to the organization’s ethics help line, but would it be appropriate to do that
without Bill’s permission? Under what circumstances would you report something
that affected a coworker without that person’s permission?
WHY IS IT AN ETHICAL PROBLEM? Harassment (sexual or otherwise) is consid-
ered to be a form of discrimination. It is therefore an ethical issue because it unfairly
focuses job satisfaction, advancement, or retention on a factor other than the employ-
ee’s ability to do the job. Most instances of sexual harassment have nothing to do
with romance and everything to do with power and fairness.
COSTS Victims of sexual harassment can file under Title VII of the Civil Rights
Act of 1964 with the EEOC, or they can bring suit under tort or contract law. An
employer can be held liable for an employee’s sexual harassment activities if the
employer had knowledge of the conduct and did nothing to correct it. As a result,
most companies take a sexual harassment charge very seriously.
Responsible companies will launch an immediate investigation if someone is
accused of sexually harassing another employee. If this is a first-time event and
the incident that prompted it is not determined to be lewd or violent—think of the
scenario featuring Joanne, discussed earlier—the employee may be warned, disci-
plined, or transferred to another area. (However, in some major companies a first-
time offense is enough to get someone fired.) If the behavior is judged to be lewd
or forceful, or if there’s evidence that the employee has demonstrated a pattern of
behavior, the employee will most likely be fired—and often very quickly. (One
corporation was able to conduct an investigation, find evidence of a pattern, and
terminate the harasser in less than 48 hours.) If the accused is found innocent, or if
it’s determined that a misunderstanding exists between the two parties, the accused
and the accuser will probably be counseled by human resources professionals. If
necessary, one of the parties may be transferred to another area. The manager of a
sexual harasser can expect a lot of questions. If the manager was aware of harassment
and did nothing about it, he or she should be prepared for disciplinary action, particu-
larly if a lawsuit results.
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Nearly a third of the claims filed with the EEOC are sexual harassment claims.
And sexual harassment lawsuits are very expensive for corporations. Awards to vic-
tims have been substantial, as is the toll such charges can take on coworker’s morale
and on the firm’s ability to hire qualified candidates. For example, in June 1998,
Mitsubishi Motors’ North American division agreed to pay $34 million to settle its
sexual harassment case. The settlement was based on charges brought by 350 female
factory workers at an Illinois factory. The women alleged that coworkers and super-
visors kissed and fondled them, called them ‘‘whores’’ and ‘‘bitches,’’ posted sexual
graffiti and pornography, demanded sex, and retaliated if they refused. They also
complained that managers did nothing to stop the harassment. Besides paying the
fine, Mitsubishi fired 20 workers and disciplined others. The company also agreed
to provide mandatory sexual harassment training, revise its sexual harassment policy,
and investigate future sexual harassment allegations within three weeks of a
complaint.9
A NOTE ABOUT OFFICE ROMANCE Flirtations and office romance are a part of
work life. After all, we spend most of our time at work, interacting with people
who share our interests, and we have an opportunity to really get to know them.
So why not engage in a consensual relationship with a coworker? Well, it’s true
that most office romances are benign, and quite a few of them either end quietly or
may even lead to happy marriages. But such relationships can also be dangerous;
in fact, these are the stories we end up hearing about. For example, if a relationship
ends badly, one party may accuse the other of sexual harassment or retaliation,
thus requiring the company to get involved after the fact. From an ethics perspec-
tive, it’s most important to avoid romance with anyone you supervise or who
supervises you because of the conflict of interest involved and the potential for
unfair treatment of other direct reports (most companies have antinepotism polic-
ies). The supervisor’s judgment is likely to be compromised by the relationship,
and others in the work group are likely to lose respect for both parties and be con-
cerned about preferential treatment. Honesty is another ethical issue that emerges.
Because you don’t know where the relationship is going, it’s tempting to keep it to
yourselves at first. Even if you’re discreet, word travels fast in work groups, and
others are likely to find out via the grapevine. It’s best to be honest and keep
your supervisor in the loop. If you work in the same department, the organization
may want to move one of you to avoid any negative repercussions. And finally,
remember—if you don’t think your behavior would look good on the front page,
it’s best not to engage in it.10
CONFLICTS OF INTEREST
People and corporations are naturally involved in a tangle of relationships, both per-
sonal and professional. Your personal reputation and the reputation of your company
are inextricably tied to how well you handle relationships with other employees, cus-
tomers, consultants, vendors, family, and friends. Your ability to act impartially, and
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look as if you are acting impartially, is key to your fulfilling your end of the
employer-employee contract.
Your daughter is applying to a prestigious university. Since admission to the
school is difficult, your daughter has planned the process carefully. She has
consistently achieved high marks, taken preparatory courses for entrance
exams, and participated in various extracurricular activities. When you tell
one of your best customers about her activities, he offers to write her a letter
of recommendation. He’s an alumnus of the school and is one of its most
active fund-raisers. Although he’s a customer, you also regularly play golf
together, and your families have socialized together on occasion.
What Is It?
A conflict of interest occurs when your judgment or objectivity is compromised. The
appearance of a conflict of interest—when a third party could think your judgment
has been compromised—is generally considered just as damaging as an actual
conflict.
A recent example of a conflict of interest likely contributed significantly to our
financial crisis. Rating agencies such as Standard & Poor’s rated the complex mort-
gage-backed securities we described in Chapter 1. A triple-A rating made investors
feel secure about buying these securities. As Americans learned the hard way, how-
ever, many of these securities were not deserving of anything near such a high rating.
Many factors contributed to the debacle (including the fact that rating agencies were
using old methods to rate these newfangled products). A major contributor was a
serious conflict of interest—the rating agencies are paid by the companies whose
securities they rate, thus making it difficult or impossible to assign truly objective
and unbiased ratings.
Another example might be of particular interest to college students. In 2007, the
University of Texas fired its director of financial aid when it learned that he had finan-
cial ties to particular student loan companies that he then touted to students and peers.
Students were not steered toward companies that provided the best loans or service, but
toward those that provided gifts (including stock) to the director of financial aid.11
If a customer offers to do a favor for you—or your daughter or another family
member—here are some of the questions you’ll need to ask yourself: Would your
customer’s offer influence your business relationship? Would someone think your
business judgment had been compromised by accepting your customer’s offer? Is
your relationship more than just a business one, so that accepting an offer could be
interpreted as a simple act of friendship?
Some corporations have a policy that permits the acceptance of favors from cus-
tomers or vendors if there’s also a ‘‘friendship’’ present; and these companies usually
define friendship as a long-standing relationship that’s well known in the community.
For example, in small towns where everyone knows everyone else, many of a busi-
ness owner’s customers are also his or her friends; it’s unrealistic to expect anything
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else. Other organizations (including government agencies) would discourage accept-
ing a favor like this one under any circumstances. Here are some things to consider
when making your decision in this case: How long have you been friends with your
customer? How well known is the relationship in your community? What is his
knowledge of your daughter’s qualifications? Does your customer expect anything in
return for his recommendation, or is the letter simply a gesture of friendship with no
strings attached? How would others perceive his recommendation?
Almost every business situation can involve conflicts of interest. A conflict can
occur when a vendor lavishly entertains you or when you entertain a customer—if the
object is influence. Both situations could prompt an observer to think that a special
deal or advantageous terms are part of the relationship. Conflicts of interest can occur
when people who report to you observe that you have an especially close friendship
with one of their coworkers. Conflicts can occur when you’re asked to judge the
creditworthiness of your neighbor or if you perform consulting work for your
employer’s competitor. They can involve accepting handtooled cowboy boots from
an advertising agency, being sponsored for membership in an exclusive private club
by a consulting company, or allowing a supplier to give you a discount on equipment
for your home when you place an order for your office.
Common conflicts of interest include overt or covert bribes and the trading of
influence or privileged information.
OVERT BRIBES OR KICKBACKS Anything that could be considered a bribe or
kickback is a clear conflict of interest. It doesn’t matter whether the bribe or kickback
is in the form of money or something else of substantial value that is offered in
exchange for access to specific products, services, or influence.
SUBTLE ‘‘BRIBES’’ Bribes can be interpreted to include gifts and entertainment.
Some organizations have instituted policies that allow no gifts at all, even gifts of
nominal value. For example, we know of one teaching hospital that does not allow
its employees to accept even a notepad or pen from pharmaceutical company repre-
sentatives. They asked themselves, how will patients feel when we write a prescrip-
tion for a product with a pen from the manufacturer? Won’t the patient wonder if
we’re writing that prescription because it’s really needed or because we’ve accepted
such gifts? Many organizations have a policy that allows gifts of small value and
places a ceiling of $25 to $100 on the value of gifts employees can accept from, or
give to, customers or vendors. Reciprocity is one yardstick often used for determin-
ing whether a gift or entertainment is acceptable. If you can’t reciprocate with the
same kind of gift or entertainment being offered to you, it’s probably inappropriate
to accept it. For example, if a supplier offers you tickets to the Super Bowl, or a
weekend of golf, or dinner for four at a $200-per-person restaurant, it’s probably
inappropriate for you to accept under any circumstances. The emphasis on reci-
procity is to maintain a fair, even playing field for all suppliers, so that you (as a
purchaser) will be unbiased when making a decision about a supplier. As mentioned
earlier, both reciprocity and impartiality are elements of fairness.
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Accepting discounts on personal items from a vendor will also be interpreted as a
conflict. The formula to use when determining whether to accept a discount is simple:
if it’s a formal arrangement between your company and a supplier and it’s offered to
all employees, it’s probably acceptable; if the discount is being extended only to you,
it’s generally not considered acceptable.
INFLUENCE Your relationship with someone in itself can constitute a conflict of
interest. For example, if you’re in charge of purchasing corporate advertising and
your cousin or neighbor or college friend owns an advertising agency, it will be con-
sidered a conflict if you make the decision to hire that firm. That doesn’t preclude the
firm from bidding, but it does preclude you from making the decision. If a decision
involves anyone you have a personal relationship with, you should recuse yourself
from the decision making. Another way to avoid the appearance of a conflict in a
situation like this one, which is charged with issues of partiality, is to arrange for a
‘‘blind’’ competition, where the identity of various bidders is known only by some-
one not involved in the decision-making process. However, since any decision made
by you in such a case will be suspect—even in blind evaluations—you should include
other employees in the decision-making process.
PRIVILEGED INFORMATION As an employee, you’re naturally privy to information
that would be valuable to your employer’s competitors. That’s why it’s generally con-
sidered a conflict of interest if you hold a full-time job for ABC Insurance Company
and decide to do some consulting work for XYZ Insurance Company. There are cer-
tainly exceptions to this rule of thumb. If you’re a computer programmer at Green’s
Restaurant, for example, it probably isn’t a conflict to wait on tables at Red’s Restau-
rant. Two factors could make such a situation acceptable: if the work you perform at
your second job doesn’t compromise the work you do at your first one, and if both
employers are aware of your activities. Transparency is the best policy.
In addition, it can appear as if you’re involved in a conflict if you and a close
relative or friend work for competitors, or if one of you works for an organization—
such as a media company—that might have a particular interest in your company’s
activities. For example, if you work as an investment banker for Goldman Sachs and
your sister holds the same position at Morgan Stanley, you both should alert your
managers to the situation. These are potential problems that can be defused when
your manager knows about the relationship. Full disclosure removes substantial risk.
How We Can Think about This Issue
The prescriptive ethical decision-making lenses can be helpful when considering
conflicts of interest. For example, using a consequentialist approach encourages us
to think about what would benefit the most people. Suppose that your brother owns
an advertising agency, and you have to place ads as part of your job at another firm.
Will hiring your brother benefit anyone other than your brother? Might it not harm
your organization’s reputation if others learn about the relationship? Using the
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deontological approach raises other issues. It’s probably most relevant to consider
what’s fair. What decision would place all bidders on a level playing field? What
could you do that would make the bidding absolutely fair and unbiased? Isn’t that the
kind of world you would most like to live in? In fact, the veil of ignorance would ask
you to act as if you didn’t know that the person leading the advertising agency was
your brother. What if you were the CEO of a competing advertising firm? Wouldn’t
you want a shot at the business? Think about looking at this issue through the lens of
virtue ethics. What could you do that you wouldn’t mind reading about in your local
newspaper? You probably would want to read about your impartiality as a purchaser
and as a representative of your company. You would not want to read that the con-
tracts you enter into are rigged to benefit your family and friends.
This is also a good place to think about how you might handle these issues and to
discuss your ideas out loud and with others. You will absolutely experience some of
these conflicts—everyone does—and just as ‘‘rehearsals’’ helped the World War II
rescuers, thinking about these situations in advance could greatly help you when the
time comes—as it surely will. Imagine that your brother’s company is experiencing
rough times, and he tells you that he expects you to help. Once you have decided that
it is unethical to do so, what will you say to him to explain your decision? Do you
think you can do it in a way that will preserve your relationship? Here is where com-
pany policy can actually help employees a great deal. If you work for a company with
a clear policy regarding conflict of interest, you could point to that and explain to
your brother that you’re obligated to abide by the policy and remove yourself from
the decision making.
Why Is It an Ethical Problem?
The basis of every personal and corporate relationship is trust, and it exists only when
individuals and corporations feel they’re being treated fairly, openly, and on the same
terms as everyone else. Conflicts of interest erode trust by making it look as if special
favors will be extended for special friends; that attitude can enhance one relationship,
but at the expense of all others.
Costs
Depending on the offense, myriad federal and state laws cover conflicts of interest.
Certain professions, such as banking, accounting, law, religion, and medicine, have
special obligations—often spelled out in professional codes of ethics—commonly
referred to as fiduciary responsibilities. These professions are widely known as the trust
professions, meaning that these practitioners have been entrusted with sensitive, confi-
dential information about their clients. Fiduciary responsibilities concern the obligations
resulting from relationships that have their basis in faith, trust, and confidence. After the
financial debacle of 2008, much attention is being paid to fiduciary responsibilities. A
recent survey of private banks and wealth management companies by the accounting
firm PricewaterhouseCoopers (PWC) indicated that the ‘‘economic crisis has presented
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client relationship managers with challenges that they have neither the experience nor
the skills to deal with.’’ In the survey, only 7 percent of the relationship managers felt
they had enough training to meet the highest standards expected of them. The PWC
survey noted that the old model for managers, which focused on sales, was being
replaced by a model that focuses on fiduciary responsibilities.12
If you’re suspected of a conflict of interest, the least you can expect is an investi-
gation by your company. If it determines that your behavior demonstrates a conflict
or the appearance of a conflict, you may be warned, disciplined, or even fired depend-
ing on the nature of your behavior. If you’ve accepted a bribe or kickback, you could
face termination and even arrest. Being involved in a conflict of interest means that
your judgment has been compromised, and this can severely damage your profes-
sional reputation. Consider that in 2006, the Jeffries Group was fined $5.5 million by
the National Association of Securities Dealers (NASD) for conflicts of interest con-
cerning Fidelity Investments. A Jeffries trader with a $1.5 million expense account
lavished gifts and entertainment on Fidelity traders, including trips to Las Vegas and
Palm Beach, cases of wine, and custom golf clubs. Throwing money at Fidelity
apparently worked: Jeffries ranked 50th in 2002 in brokerage commissions received
from Fidelity. By 2005, Jeffries had moved up to 15th place. As a result of this activ-
ity, the Jeffries broker was fired, the firm and the industry were investigated, the firm
was fined, and the practice has received reams of negative press.
13
CUSTOMER CONFIDENCE ISSUES
We’ve all heard the saying, ‘‘The customer is always right,’’ and companies like L.L.
Bean and Sears have benefited by weaving that slogan into the fabric of their corporate
cultures. But excellent customer service is more than being able to return a defective
refrigerator or having cheerful customer service representatives (although that helps).
Excellent customer service also means providing a quality product or service at a fair
price, honestly representing the product or service, and protecting the customer’s privacy.
What Is It?
Customer confidence issues include a range of topics such as confidentiality, product
safety and effectiveness, truth in advertising, and special fiduciary responsibilities.
You work for a consulting company in Atlanta. Your team has recently com-
pleted an analysis of Big Co., including sales projections for the next five years.
You’re working late one night when you receive a call from an executive vice
president at Big Co. in Los Angeles, who asks you to immediately fax to her a
summary of your team’s report. When you locate the report, you discover that
your team leader has stamped ‘‘For internal use only’’ on the report cover.
Your team leader is on a hiking vacation, and you know it would be impossible
to locate him. Big Co. has a long-standing relationship with your company and
has paid substantial fees for your company’s services.
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CONFIDENTIALITY Privacy is a basic customer right. Privacy and the obligation to
keep customer information in confidence often go beyond protecting sales projec-
tions or financial information. It can also mean keeping in strict confidence informa-
tion concerning acquisitions, mergers, relocations, layoffs, or an executive’s health or
marital problems. In some industries, confidentiality is so important an issue that
companies prohibit their employees from publicly acknowledging a customer rela-
tionship. In the financial services industry, for example, it’s common practice to
refuse to divulge that XYZ Company is even a customer.
In the case involving Big Co., an executive is demanding access to a confiden-
tial report. First, are you absolutely certain that the caller is indeed a Big Co. exec-
utive? Competitive intelligence work often involves deceptively impersonating a
client or someone else. If you have conclusively verified her identity, do you know
whether she has clearance from Big Co. to examine your team’s report? If she
does have clearance, is your team’s report in a format that your company wants
to share with Big Co., or does it need revision? Think about what you read in
Chapter 2—how would you feel if your actions in this case were reported on the
front page of your local newspaper? Do you think readers would be critical of
what you plan to do? What would they say? Whenever you see ‘‘For internal use
only,’’ that’s what it means, and it can be enormously risky to release the report to
anyone—including the customer—without permission from someone within your
company who has responsibility for that client. In a case like this one, you should
track down someone who’s in a position of authority in your company—your man-
ager’s manager, perhaps—before you override the warning on the report and
release any information.
On occasion, third parties may ask for customer information. For example, a
reporter or a client may ask you about customer trends. It’s never acceptable to dis-
cuss specific companies or individuals with a third party or provide any information
that might enable a third party to identify a specific customer. If you want to provide
information, you can offer aggregate data from a number of companies, as long as the
data doesn’t allow any one customer to be identified.
You’re the head of marketing for a small pharmaceutical company that has
just discovered a very promising drug for the treatment of Alzheimer’s dis-
ease. You have spent months designing a marketing campaign that contains
printed materials and medication sample kits for distribution to almost every
family physician and gerontologist in the country. As the materials are being
loaded into cartons for delivery to your company’s representatives, your
assistant tells you that she has noticed a typographical error in the literature
that could mislead physicians and their patients. In the section that discusses
side effects, diarrhea and gastrointestinal problems are listed as having a
probability of 2 percent. It should have read 20 percent. This error appears
on virtually every piece of the literature and kits, and ads containing the
mistake are already on press in several consumer magazines.
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PERSONAL RESPONSIBILITY Another basic customer right involves our taking
personal honesty and responsibility for the products and services that we offer.
There’s probably no issue that will more seriously affect our reputation than a failure
of responsibility. Many ethical disasters have started out as small problems that
mushroomed. Especially in service businesses, where the ‘‘products’’ are delivered
by individuals to other individuals, personal responsibility is a critical issue.
In the case concerning the typographical error about a new drug’s side effects,
the head of marketing faces a nasty dilemma. If she reproduces all of the printed
material, it could be at a very great cost to this small company, and it may result in a
significant delay in getting the drug to physicians. However, since many elderly peo-
ple are prone to gastrointestinal upsets and can become very ill and even die as a
result, this typo is a significant one. The material cannot go out as is. Certainly the
ideal solution would be to redo all of the marketing materials. However, if time and
financial considerations prohibit that, there are other solutions. One solution might be
to quickly produce a ‘‘correction’’ to be inserted into every kit. Also, a letter could be
distributed to every physician to explain the correction as well as emphasize your
company’s commitment to quality and full disclosure. This solution will still be
costly, but not nearly as costly as doing nothing and letting the kits go out with an
error. What do you suppose would be the cost of even one wrongful death lawsuit?
How about a class action? How about the accompanying publicity?
TELLING THE TRUTH Many salespeople simply exaggerate their product’s (or
service’s) benefits to consumers. Do fast sports cars automatically turn every young
man into a James Dean? Will investing in a certain bond ensure you a safe retire-
ment? Hype is generally a part of most sales pitches, and most consumers expect a
certain amount of hype. In other cases, however, fudging the truth about a product is
more than just hype—it’s unfair.
Imagine that your financial firm is offering a new issue—a corporate bond with
an expected yield of 7 to 7.5 percent. In the past, offerings like this one have gener-
ally been good investments for clients, and you have sold the issue to dozens of large
and small clients. You’re leaving on a two-week vacation and have only a few hours
left in the office when your firm announces that the yield for the bond has been
reduced; the high end will now be no more than 7 percent. The last day of the issue
will be next week, while you’re away on vacation. What should you do?
The fact is that your customers have been misled (albeit unintentionally) about the
yield on that particular bond, and now you are under an obligation to tell the truth about
the instrument before the issue closes. Why? Because another basic consumer right is to
be told the truth about the products and services purchased. Failure to tell the truth about
a product can be devastating for an organization, and it also can cause big problems for
the company employees who are involved in perpetuating the false information.
SPECIAL FIDUCIARY RESPONSIBILITIES As discussed earlier in this chapter,
certain professions, such as banking, accounting, law, religion, and medicine, have
special obligations to customers. These obligations are commonly referred to as
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fiduciary responsibilities. The law and the judicial system have recognized these spe-
cial obligations, and they are spelled out in the codes of ethics for those professions.
Fiduciary responsibilities hold these professionals to a high standard, and when they
violate those responsibilities, the punishment is often harsh. For example, some
employees of Arthur Andersen’s Houston office failed Enron shareholders when they
allowed the high-risk accounting practices used by Enron to continue. Although
David Duncan, leader of the Andersen auditing team at Enron, warned the Enron
board of directors in 1999 that the firm’s accounting practices were ‘‘high risk,’’ he
apparently did not take the extra steps that would have been required to get the board
to take action (in fact, the board did nothing in response to his warning).14 For exam-
ple, Duncan could have threatened to withdraw Andersen’s services or to turn the
company in. At the time this would have looked risky because Enron might simply
have fired the auditors, and Andersen would have lost a huge client. But in hindsight,
exercising appropriate fiduciary responsibility could have saved two companies,
thousands of jobs, and a huge amount of shareholder wealth. Al Bows, an accountant
who helped open the Arthur Andersen office in Atlanta in 1941, said that the founder
of his old company, the original Arthur Andersen, would be ‘‘disgusted with what
these guys did to his company.’’ Bows went on to tell a story about a big juice com-
pany in Atlanta. He discovered that ‘‘the CEO was starting another juice company on
the side to profit for himself. I told him he’d better cut it out or I’d turn him in. He
stopped. But he was mad.’’15 Of course, Bows is describing the fiduciary responsibil-
ities of accountants—one of which is to ensure the financial integrity of publicly
traded companies. When Arthur Andersen employees breached their fiduciary
responsibilities in 2001, they contributed to the collapse of a major company.
Here’s another case:
For 12 years, you’ve been the financial advisor for an elderly man in his late
70s who is an active investor of his own portfolio and for a trust that will benefit
his two children. In the last few months, you’ve noticed a subtle, yet marked
change in his behavior. He has become increasingly forgetful, has become un-
characteristically argumentative, and seems to have difficulty understanding
some very basic aspects of his transactions. He has asked you to invest a sizable
portion of his portfolio and the trust in what you consider to be a very risky
bond offering. You are frank about your misgivings. He blasts you and says
that if you don’t buy the bonds, he’ll take his business elsewhere.
If you work for a large electronics chain, it’s not your responsibility to assess the
mental stability of a customer who’s purchasing a new television. You’re selling;
he’s buying. However, individuals in fiduciary professions have a responsibility to
protect their customer’s assets—and that entails ‘‘knowing’’ their customers; fre-
quently, that can mean assessing behavior and saving customers from themselves. In
this case, if a customer wants to make a risky investment against your advice, there’s
little you can do but wish him or her well. Who knows? You might be wrong, and the
customer might make a fortune. However, if a financial professional sees clear signs
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of incompetence in a longtime customer who’s suddenly interested in making a risky
bet, he or she is under some obligation to seek help. The case involving the mental
stability of a longtime customer is one of the most common dilemmas encountered
by financial advisors. As his advisor, you could try again to dissuade the client from
making the investment, or you could involve the firm’s senior management in negoti-
ations with the client. You could contact a member of the client’s family—one of the
children perhaps—and explain your reservations. You could also possibly contact the
client’s lawyer or accountant, who also would be bound by confidentiality constraints
because of the fiduciary nature of their professions. However, most financial execu-
tives will agree that something must be done to help this long-time customer.
How We Can Think about This Issue
It’s hard to imagine that any of us would find encouragement to ignore product safety
or fiduciary responsibilities in any of the ethical theories. Producing safe products
clearly benefits the most and harms the fewest. Customer confidence is rooted in
trust. Trust is very much built slowly, over time, experience by experience. We can’t
trust something that we don’t know or that we lack confidence in. Again, this is an
area where you will no doubt experience difficulties and conflicts as you go out into
the business world. It’s another great area to discuss out loud and ahead of time—to
practice making your decisions now, and voicing your arguments aloud, as a way
to prepare for challenges you may face in the future.
Why Is It an Ethical Problem?
We use the term customer confidence issues as an umbrella to address the wide range
of topics that can affect your relationship with your customer. These are ethical
issues because they revolve around fairness, honesty, responsibility, truth, and
respect for others. Customer relationships can’t survive without those basics of trust.
Costs
On the organizational level, there are severe penalties for being dishonest in advertis-
ing or for misleading the public about the effectiveness or safety of a product or
service. While individual failures in the area of trust usually don’t warrant a lot of
publicity (although sometimes they do—think about Bernie Madoff), nothing can
destroy an individual’s reputation as much as dishonesty. When you’re a student
who hasn’t entered the workforce yet, it’s difficult to imagine that the world of work
is small, but it is. In some industries—like banking and biotech—it’s a very small
world indeed, and your reputation will follow you around like your shadow. Anyone
who has been in business for even a few years can regale you with stories of col-
leagues who are as ‘‘honest as the day is long’’ or, conversely, ‘‘can’t be trusted as
far as you can throw them.’’ Your reputation is built slowly with countless gestures,
actions, and conversations over time, but it can be destroyed in an instant by one
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foolish mistake. You need to safeguard your reputation carefully—it is without ques-
tion the most valuable thing you have in business.
USE OF CORPORATE RESOURCES
As discussed in the introduction, you and your employer have a special relationship,
and each owes the other a modicum of loyalty based on that relationship. In addition,
since you’re a corporate representative, you’re considered an ‘‘agent’’ of your com-
pany. This means that your actions can be considered as the actions of the corpora-
tion. This section of the chapter presents the flip side of the above section on human
resources issues—your employer’s responsibilities to you are described in that
section, and your responsibilities to your employer are described here.
What Is It?
The use of corporate resources involves your fulfilling your end of the employer-
employee ‘‘contract.’’ It means being truthful with your employer and management and
being responsible in the use of corporate resources, including its finances and reputation.
A young woman who works for you is moving with her husband to another
city, where she’ll be looking for a new job. She’s an excellent worker and
when she asks you for a reference, you’re glad to do it for her. She specifi-
cally asks for a written recommendation on your corporate letterhead.
USE OF CORPORATE REPUTATION Whenever you identify yourself as an
employee of your company, people can infer that you are speaking on behalf of it,
which is why you have to be careful how you link yourself to your company. For exam-
ple, if you use corporate letterhead to write a recommendation for someone or simply
to complain to the telephone company, it can be construed as a ‘‘corporate’’ position.
Consequently, corporate letterhead should be used only for corporate business. If, as in
the case of the recommendation, you need to identify yourself as an employee, use your
personal stationery and attach your business card. The objective is to differentiate
between your personal opinions and any official stance of your organization.
Recommendations, in particular, present a challenge for employers and individ-
uals. Many companies attempt to check with former employers when hiring some-
one. This can present a problem since most companies prohibit their personnel from
officially supplying this type of information because of lawsuits that have resulted
from employer-supplied recommendations. Today, some social networking sites
allow people to write posts about others in their professional network. But be careful,
especially if writing about someone you supervise. What if your flattering post online
differs from the more critical performance evaluation that’s on file, and what if the
employee is subsequently let go? The person’s lawyer could use the post in an unjust
termination lawsuit. (To protect themselves, many employers supply only the follow-
ing information concerning former employees: name, date of employment, and job
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title. Most employers also require the former employee’s written consent before they
supply any salary information to a third party. That raises another ethical issue: If one
can’t get good, honest recommendation information about prospective employees
from their former employers and supervisors, poor employees can just be passed off
to other unsuspecting organizations. Is that right?)
Similarly, if you’re asked to make a speech, write an article, serve on the board
of a nonprofit organization, or participate in any activity that would identify you (and
your personal opinions) with your company, be sure to get permission from your
manager, the legal department, or human resources. You may unwittingly be support-
ing a position or organization your company may not wish to be associated with. For
example, while it might seem like a great idea for you to serve on the board of your
local Society for the Prevention of Cruelty to Animals (SPCA), if you work for a
pharmaceutical company that tests drugs on animals, you may be placing your
employer in an embarrassing position. Of course, you can serve on the board as a
private citizen, but not as an employee of XYZ Drug Company unless you’ve re-
ceived corporate authorization. Social networking, blogging, and twittering are all
adding complexity to such issues, and more and more organizations are developing
policies to guide appropriate employee conduct in these new arenas.
You joined one of the country’s largest retail chains, and already you’ve been
promoted to department manager in one of your employer’s largest stores in an
upscale shopping mall. Imagine your surprise when you log on to Facebook and
see that one of your ‘‘friends’’—a young woman who heads one of the other
departments in your store—has posted confidential store sales on her wall and
has also posted sexual comments about a young man who reports to her.
Social networking sites and other social media present new and thorny problems.
What happens when an employee posts confidential company information on a pubic
site? Is it okay to post sexual comments about a coworker or your boss on a public
site? This kind of behavior can reflect poorly on an employer as well as make the
author of such comments look like an idiot or worse. The scariest part of this scenario
is that items posted on the Internet last forever. You can’t just ‘‘erase’’ them and
ensure that they’re really obliterated forever. Organizations take this behavior very
seriously. One recent college graduate hired into a plum job by a national retailer
was fired for posting inappropriate content about his employer on his Facebook wall.
Here’s another thorny case:
You’re an employment counselor at a large outplacement firm. Your com-
pany is currently negotiating with Black Company to provide outplacement
services to 500 employees who are about to lose their jobs as the result of a
layoff. Your neighbor and good friend is a reporter for the local newspaper,
who mentions to you over coffee one Saturday that she’s writing a story
about Black Company. According to her sources, 1,500 employees are about
to lose their jobs. You know her numbers are incorrect. Should you tell her?
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Dealing with the press—even when the reporter is a friend or relative—is a
tricky business that shouldn’t be attempted by a novice. In a case like the one above,
where you may think your friendly reporter might have incorrect numbers, silence is
truly the best policy. Her numbers may in fact be correct, and your numbers may
represent only the employees who are eligible for outplacement services, not the total
number who are losing their jobs.
Another issue that can be confusing to businesspeople is what ‘‘off the record’’
means. For the most part, off the record means that a reporter won’t quote you
directly or attribute any remarks to you. You can’t, however, tell a reporter that your
remarks are off the record after the fact. The way to tell a reporter that remarks are off
the record is to inform him or her before offering your information. But the very best
way to make sure something is off the record is to keep your mouth shut in the first
place. Reporters with the best of intentions can very innocently get their sources into
trouble by providing information that only the source would know, thereby identify-
ing the source.
If you are contacted by the press, immediately alert your company’s public rela-
tions department. Unless you’re trained to answer press inquiries and receive authori-
zation to do it, you should not comment to the press. It’s easy to innocently supply
confidential information or cast a negative light on your company when you’re
untrained to deal with probing or ambiguous questions posed by a skilled journalist.
You’ve been working very long hours on a special project for the chairman of
your company. Your company policy states that employees who work more
than 12 hours in one day may be driven home by a company car at company
expense. Policy also states that employees who work longer than two hours
past the regular end of their day can have a meal delivered to the office at
company expense. You and your colleagues who are also working on the
project are arriving at the office at 8:00 a.m. and order dinner at 7:00 p.m.;
then you enjoy dinner and conversation for an hour and are driven home by
company cars. Is this okay?
CORPORATE FINANCIAL RESOURCES In a game entitled ‘‘Where Do You Draw
the Line: An Ethics Game,’’ produced by Simile II, players explore the differences
between taking $10 worth of pencils from their company and distributing them to
poor children, making $10 worth of personal long-distance calls at work, and taking
$10 from their company’s petty cash drawer. Do you think these scenarios are differ-
ent, or pretty much the same thing? Most people eventually conclude that all of them,
regardless of the employee’s intentions, involve stealing $10 worth of corporate
resources. The bottom line is that corporate equipment and services should be used
only for company business. Whether it involves making personal phone calls,
padding expense reports, appropriating office supplies, sending personal mail
through the company mail room, or using copy equipment to print a flyer for your
scout troop, personal or inappropriate use of corporate resources is unethical and
violates most corporate policy.
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In a case like the one above, where you and colleagues are working long hours to
complete a special project for the company’s chairman, you are following corporate
policy to the letter; so your actions are probably acceptable to most organizations.
However, if you and your coworkers are stretching out the last hour of dinner so that
you can take a company car home, you’re getting into ethical hot water. Are you also
stretching out the work in order to have a free meal? If you would have no problem
explaining your actions to the chairman, or if you wouldn’t mind if he or she sat in on
one of those dinner hours, then the meals and the cars are perfectly acceptable. The
important thing is to treat your company’s resources with as much care as you would
your own.
Your manager is being transferred to another division of the company in
early January. He calls a meeting in early November and asks that every
department head delay processing all invoices until after January 1. He wants
to keep expenses low and revenues high so that his last quarter in your area
shows maximum revenue.
PROVIDING HONEST INFORMATION Another key issue concerns truth. We dis-
cussed truth with customers earlier in this chapter, but now we’re talking about tell-
ing the truth within your organization and providing honest information to others
within your company. Although everyone will agree that telling the truth is impor-
tant, someday you may have a manager who says something like, ‘‘These numbers
look too negative—let’s readjust them so it looks better to senior management. We’ll
make up the difference in the next quarter.’’ Many managers feel it necessary to put a
positive spin on financial reports before submitting them up through the ranks. As a
result, some companies have suffered serious financial penalties because their num-
bers have been positively spun on so many succeeding levels, they bear no resem-
blance to reality by the time they reach the top. ‘‘Fudging’’ numbers can have serious
consequences since senior management may make crucial decisions based on flawed
data. (Corporations are fined by regulators if inaccurate financial information is sub-
mitted to regulators or incorporated into formal financial statements.) If you’re asked
to skew any kind of corporate information, you should consult with someone outside
your chain of command—such as the legal, human resources, or audit department—
and then decide whether it’s time to move on. Serious corporate scandals, sometimes
leading to jail terms for those involved, often begin with these ‘‘one-time’’ requests.
Once you’re involved, it’s almost impossible to extricate yourself from an almost
inevitable downward spiral. Ask employees at HealthSouth and WorldCom; some of
them spent years in prison for going along with such requests.
In the case about a manager wishing to delay paying expenses until after he leaves
the area, think about it from a consequentialist perspective. Such creative bookkeeping
harms not only the person who is taking his place in January, but also the suppliers
who are relying on prompt payment of their invoices. It’s grossly unfair to ask suppliers
to wait almost 60 extra days before getting paid. One solution might be to approach the
other department heads and gain their cooperation in refusing to follow your manager’s
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request. Another course of action would be to relate the incident to the audit depart-
ment, which would surely be interested in your manager’s shenanigans.
How We Can Think about This Issue
Once again, using the various theoretical approaches can be extremely helpful.
Thinking broadly about potential harms and benefits for all stakeholders will inevita-
bly lead you to be honest in your dealings. From a deontological perspective, most of
us put honesty and integrity at or near the top of our values lists. We would certainly
want to be treated that way if the tables were reversed. And that’s certainly the ethical
standard we would want to guide our world.
Even more important, however, may be thinking about how to live your values in
this particular area. If you seriously consider who you are and what you want to be
known for, your decision making in this area will be much easier. For example, if you
want to be known as a straight shooter who can be trusted at high levels and with
delicate customer accounts, would you ever consider misusing corporate resources or
fudging the numbers? What would that say about you, and how would it affect your
reputation? It would undermine everything else you were trying to do in your profes-
sional life. In this arena, doing the right thing often requires standing up for your
values—especially standing up to those at higher levels who might be requesting or
even demanding that you go along. In such cases, you’ll need to summon up courage
to stand up for what you believe. You have a better chance of doing that if you prac-
tice what you’re going to say. Find a coworker who agrees with you and practice.
You may be surprised to find that once you get clear about your ethical stance and
can express it in a clear and nonaccusatory way, you won’t get such a request again.
If you fear for your job because you won’t go along, that’s the time to polish your
r!esum!e and begin looking elsewhere.
Why Is It an Ethical Problem?
Your use of corporate resources is an ethical issue because it represents fulfilling
your end of the employer-employee contract. Its roots are in fairness and honesty.
Costs
Obviously, if you’ve stolen corporate assets or filed an inflated expense report, you’ll
almost certainly be fired—and you may be arrested. If you have divulged confidential
information to another corporation (as in supplying a recommendation for a former
employee), your company may be placed at risk for a lawsuit. If you’ve posted derog-
atory remarks about your boss, coworkers, or company on a social networking site,
you may short-circuit your career and cause people around you to mistrust you.
If you fail to uphold your end of the employer-employee loyalty contract, your
career at your company can be damaged. Ethical corporate cultures place tremendous
importance on honesty, loyalty, and teamwork. Generally, successful corporations
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are communities where a sense of family has been encouraged. Just as family mem-
bers try to protect one another and keep family information private, the company
community tries to encourage the same behavior. Individuals who violate the corpo-
rate ‘‘family’’ trust by squandering resources, being dishonest, or misusing the family
reputation are frequently isolated or fired.
WHEN ALL ELSE FAILS: BLOWING THE WHISTLE
A section on ethics and the individual wouldn’t be complete without a discussion of
what happens when you suspect serious wrongdoing within your organization If your
observations are serious and keeping you awake at night, you may have to report the
problem—blow the whistle—and you need to proceed with great caution. This also is
why understanding what you value and practicing living your values is so important.
If you haven’t practiced living your values by the time you get embroiled in a sticky
dilemma at work, the situation will be much more difficult for you to handle. With
practice (and a bit of luck), you may have been able to stop the problem from devel-
oping into a serious one. We hope so. But occasionally you will find yourself with
knowledge about serious wrongdoing, and blowing the whistle (either internally or
externally) may seem like your only option.
In these really tough situations, voicing your values at work takes significant
courage because of the increased risks involved. Kathleen Reardon encourages us to
think about courage at work as ‘‘calculated risk taking.’’16 She recommends that you
do the following:
1. Ask yourself how strongly you feel about the particular issue. When people
are asked, ‘‘where do you draw the ethical line?’’ the most important issues
are clearly over the line either because acting in a certain way or not acting
at all is likely to cause great harm or breach our most cherished values.
According to Reardon, these are ‘‘spear in the sand’’ issues that compel
action. So, ask yourself which kind of issue you’re facing.
2. Ask yourself about your intentions. Are you just advancing a personal
agenda, or do your goals serve the greater good? If you see a coworker being
treated unfairly by an abusive supervisor, what should you do? For example,
will rescuing your coworker by reporting the abusive supervisor serve the
greater good?
3. Consider power and influence. As we noted above, unless you’re the CEO,
you’re rarely in a position to make a decision for the organization. If you
feel strongly about something, you’re likely going to have to convince
others. So think about how your social network might help convince your
manager or organization to do the right thing. This usually isn’t about
following the organization chart. Rather, it’s about knowing where the
power rests and developing good, trusting relationships with those people.
But you can’t do this at the last minute. Trusting relationships are developed
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over time. If you have developed these, you should be able to address the
issue before it becomes a whistle-blowing possibility.
4. Weigh the risks and benefits of action. This isn’t quite the same as the conse-
quentialist analysis of harms and benefits to multiple stakeholders (discussed
in Chapter 2). That analysis is more wide-ranging and focuses on societal
good. Here, you’re looking more pragmatically at the people involved, at
whether reputations or standing in the organization (yours or others’) will be
tarnished by taking action. Perhaps you can reduce the risks and increase the
potential benefits by finding a creative way to address the issue. For example,
can you report an incident anonymously rather than confronting someone
directly? Can you offer apologies for something you have done in the past, in
hopes that the person at fault in this situation is inspired to do the same?
5. Think about timing. If the issue isn’t urgent, and especially if it isn’t a spear-
in-the-sand issue, ask yourself whether you can put off action a bit to better
prepare and to ensure that you’ve reflected on the risks and what you’re con-
sidering doing. Have you given yourself the opportunity to practice what
you would say in a meeting with your boss, for example?
6. Develop alternatives. In dicey situations, it’s extremely helpful to have alter-
natives in mind. What will you do if you don’t get your desired outcome?
Do you have an alternative in mind? For a spear-in-the-sand issue, are you
willing to either lose your job or leave it, if it comes to that?
Once you decide to blow the whistle, you need to think carefully about how to go
about it. How not to blow the whistle might be best illustrated by a case that involves
a high-level investment banker who discovered that some of his colleagues were
engaged in unethical dealings with several customers. The investment banker
brought the situation to the attention of his manager, who told him to forget it. Deter-
mined to raise the issue, the banker wrote an irate memo to his company’s CEO
outlining the situation and naming names. The banker copied the memo to several
other top managers. Even though there were only three levels of management
between the banker and the CEO, and even though the banker was right about his
colleagues and they were eventually fired, the banker was also fired.
In another large, multinational company, a young trainee in an Asian country felt
he was being treated unfairly by his local management. In a fit of anger, he wrote a
long message outlining his grievances on his company’s e-mail system (today, he
might have posted something on his blog or sent a Twitter message about his situa-
tion). Although he addressed his message to the company CEO, president, and head of
human resources (all three senior managers were based in New York), he copied
everyone else on the system—approximately 30,000 managers worldwide. The trainee
was fired not because of the message, but because of how he communicated it. The
head of human resources commented, ‘‘He was being groomed for management, and
we couldn’t have someone with such poor judgment in that role. If he had complained
only to senior management, he would have been heard, he would have been protected,
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and we would have corrected the situation. After copying the world with his complaint,
we felt he was a loose cannon and we had no choice but to get him out.’’
Unless you want to be branded as someone with poor judgment, you have to be
very careful about how you raise ethical concerns. Usually, the CEO is one of your
last resorts, to be approached only after you’ve exhausted every other internal
resource. There are exceptions to this guideline. A notable exception occurred at
PPG Industries, where former CEO Vince Sarni asked and encouraged employees
to contact him directly with issues. A hotline for that purpose sat on his desk, and he
personally answered that phone. Warren Buffett, the CEO of Berkshire Hathaway,
also used the ‘‘call me’’ approach when he served as a director of Salomon Brothers
back in 1991. As the company became embroiled in a bid-rigging scandal (see
Chapter 10 for the details), Buffett stepped in as interim CEO. He wrote a letter to
Salomon Brothers managers that said, ‘‘Here’s my home phone number in Omaha. If
you see anything unethical, give me a call.’’ Managers did call him, and they were
able to devise a plan to save Salomon Brothers from Andersen’s fate.17
So how do you blow the whistle? First, let’s talk about when.
A long-time customer approaches you for financing for a new business ven-
ture. The customer offers as collateral a piece of property he has purchased in
a rural location for the purpose of building a housing development. You send
an appraiser to the property, and he accidentally discovers that this property
holds toxic waste. You’re sure this customer is unaware of the waste; in fact,
the waste is migrating and in a few years will invade the water table under
a nearby farmer’s fields. You explain the situation to your manager, who
naturally instructs you to refuse to accept the property as collateral, but he
also forbids you to mention the toxic waste to the customer. ‘‘Let them find
out about it themselves,’’ he says. Do you alert the customer to the toxic
waste? Do you alert government regulators?
When Do You Blow the Whistle?
Let’s assume first that your concern involves a serious issue. Reporting toxic materials,
for example, is a serious issue, because of the potential for serious harm. Recall that
serious harm raises the moral intensity of an issue. So your ethical antennae are likely
to be highly sensitized in this situation, and you’re going to feel more compelled to do
something. A colleague padding an expense report a bit on one occasion isn’t quite
as serious. Once you’ve informed your manager about a fudged expense report, your
responsibility is probably fulfilled. However, one colleague fudging an expense report
one time is a far cry from a group of employees systematically altering all of their
expense reports with their manager’s knowledge. If you suspect something of that
magnitude, of course you should report it to someone outside your chain of command,
such as the ethics office or your organization’s internal auditor.
Many might disagree with this approach, but few people in business have the time
to be ‘‘on patrol.’’ Once a manager is alerted, it’s his or her responsibility to deal with
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issues like expense reports, except in extraordinary circumstances. This could be
termed ‘‘picking your battles’’ and responding appropriately to your gut feelings. Obvi-
ously, you should use the prescriptive frameworks to help you decide what to do. But
let’s also consider a number of simple triggers that can help you determine if an issue
is serious.
Some of the triggers to help you determine if an issue is serious enough to be
raised beyond your immediate manager include an issue that involves values such as
truth, employee or customer (or other stakeholder) rights, trust, fairness, harm, your
personal reputation or the reputation of your organization, and whether the law is being
broken or compromised. In the toxic dump case, for example, serious harm could
certainly result; customer (and other stakeholder) rights are involved; your organiza-
tion’s reputation is at risk; a public trust may be violated; and the law may very well
be compromised or broken if you keep quiet about toxic wastes under a proposed hous-
ing development, because the toxic wastes could ultimately affect the food supply. A
situation like this has all the earmarks of a serious ethical dilemma that requires action.
Suppose your manager asks you to supply inaccurate numbers in a financial
report to another level of management. That situation involves not only a breach of
truth but also potential harm; it could damage your reputation and ultimately your
company’s reputation. It’s a serious issue that you’ll probably want to report.
How to Blow the Whistle
Let’s assume that you’re dealing with a serious issue, you’ve assembled the facts,
they’re accurate to the best of your knowledge, you’ve asked your peers or your
manager for advice, and there’s a law or company policy about to be violated, or one
of the other triggers discussed earlier indicates a serious problem. Now what?
1. Approach Your Immediate Manager First. If your manager tells you to
ignore a situation or belittles your concern, approach him or her again. The
second time you approach your manager, you may want to write a memo and
spell out your concerns in black and white so it’s more difficult for your
manager to ignore or dismiss them. Writing a memo is frequently enough to
convince your manager that this is serious, and so you’ll get a more favor-
able response. You should also do some soul searching to make sure your
decision to pursue this issue is an objective one, and not based in any feeling
of revenge you might have for your manager, coworkers, or company. This
is also a good time to rehearse out loud and to others (maybe a trusted cow-
orker, your parents, or your spouse) what you want to say. Also, you should
find out exactly how your company wants issues raised and if there is a
special process for doing it. If there is, follow the process to the letter.18
2. Discuss the Issue with Your Family. Since any whistle-blowing activity
can affect your family as well as yourself, it’s imperative that they know
what’s going on. It’s also the time to document your activities. Obtain copies
of correspondence that relate to the issue and any memos you’ve written in
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an attempt to alert management. Keep a diary to track activities related to
the issue and describe any conversations you’ve had concerning the issue.19
3. Take It to the Next Level. If you receive no satisfaction from your man-
ager, it’s time to go to the next level of management. The most diplomatic
way of going around your manager is to say to your manager something like,
‘‘I feel so strongly about this that I’d like a meeting with you and your man-
ager to discuss it.’’ The positive aspect of asking your manager to go with
you to the next level is that he or she will be less likely to feel betrayed, and
you’ll appear to be a team player. The negative aspect is that your manager
may forbid you to approach his or her manager. If that happens, or if you’re
still not satisfied after meeting with the next level of management, you’ll
need to consider going outside your chain of command.
4. Contact Your Company’s Ethics Officer or Ombudsman. Find out if
your state has any special legislation regarding whistle-blowing. Your
state may have legislative protection for whistle-blowers, but it may
require you to follow certain procedures to protect yourself.20 You may
choose to go to these officials first, especially if your manager is part of
the problem. As a result of the U.S. Federal Sentencing Commission
Guidelines (see Chapter 6) and Sarbanes-Oxley legislation, most large
organizations now have reporting systems that allow you to report prob-
lems and to do so anonymously.
5. Consider Going Outside Your Chain of Command. If your company
has no formal department or process for handling such complaints, think
about other areas that would be receptive to your concerns. If your issue is
human resources related—if it involves relationships or activities within
your company like discrimination or sexual harassment—you may be able
to approach your human resources officer or department. If the issue is busi-
ness related—if it involves external relationships such as those with custom-
ers, suppliers, regulators—you can still approach human resources, but a
better choice would probably be the legal department or your company’s
internal auditors. Obviously, if the issue involves the law or an actual or
potential legal issue, you should contact the legal department. And if the
issue concerns a financial matter, it’s probably better to approach your orga-
nization’s auditors. Most auditors have a system of internal checks they can
trigger that will confirm or refute your suspicions and even protect you.
Also, some auditors in some industries have an underground network of
sorts; there are relationships that exist among auditors from various organi-
zations. They can quietly investigate situations and keep them from blowing
out of proportion if that’s indicated and appropriate.
Since the role of human resources, legal, and audit departments is to
protect the corporation, they should be receptive to any concerns that could
put the company at risk. If, however, the activity you’re concerned about has
been approved or condoned by the highest levels of management, these
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internal departments may be inclined to go along with ‘‘business as usual.’’
And since their role is to protect the company, you’re likely to find that their
first allegiance is to the company, and not to you.
It’s usually safe to approach these departments, but it’s not completely
without risk. You can reduce the risk if you can persuade one or more of
your colleagues to join you in the process. Having an ally can encourage
lawyers and auditors to take you more seriously. It also may be wise to con-
sult your personal lawyer at this point in the process. According to Hoffman
and Moore, your attorney can ‘‘help you determine if the wrongdoing
violates the law, aid you in documenting information about it, inform you of
any laws you might be breaking in documenting it, assist you in deciding to
whom to report it, make sure reports are filed on time, and help you protect
yourself against retaliation.’’21
Once you’ve approached your management, the ethics or compliance
office (if your company has one), and human resources, legal, or audit, you
should have received some satisfaction. The vast majority of whistle-
blowing cases are resolved at one of those levels. However, if you’re still
concerned, the risks to you personally escalate significantly from this point
on. Your last resort within your company is your organization’s senior man-
agement, including the CEO, president, or board of directors. Obviously,
you should contact whoever has a reputation for being most approachable.
Understand that your immediate management will most likely be irate if you
approach senior management. However, if you’re right about your concerns,
you may end up a hero if the issue you’re raising is a localized problem and
senior management is unaware of what’s going on.
Before contacting your senior management, be sure to have your facts
straight and documented. (This is where a diary and copies of correspondence
are useful.) If you’re wrong, few people are going to understand or forgive
you. You may be harassed, reprimanded, or penalized, or some pretext may
be found to fire you. However, there is evidence that you can contact the
CEO and keep your job. For example, Sherron Watkins, vice president of cor-
porate development at Enron, still had her job at Enron one year after CEO
Ken Lay received her fearful letter about accounting irregularities and months
after the executive team resigned. However, she wrote her letter to the CEO
and not to the local newspapers.22 Like many other whistle-blowers, Sherron
Watkins is now making her living as a public speaker and consultant.
6. Go Outside of the Company. If you’ve raised the concern all the way to
the top of your company, still have a job, and are still unsatisfied, your only
choice now is to go outside. If your company is part of a regulated industry,
like defense contractors and commercial banks, you can contact the regula-
tors who are charged with overseeing your industry. Or you can contact the
press. However, if you’ve already contacted numerous individuals in your
company about the issue, it won’t take a genius to figure out who is talking
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outside of the company. Even if you contact the press or the regulators anon-
ymously, your coworkers and management probably will know it’s you.
Recent legislation has made it easier and more lucrative for employees
to blow the whistle to regulators when companies are government contractors
or when the federal government has somehow been defrauded. Under the
False Claims Act, whistle-blowers who report corporate wrongdoing against
the government to prosecutors can be awarded 15 to 30 percent of whatever
damages the federal government recovers, which are to be three times the
damages the government has sustained. Because the government has recov-
ered more than $10 billion since the law’s inception, this has become a
powerful incentive for some employees to tell all to prosecutors. For exam-
ple, Jim Alderson was fired from his accounting job at Quorum Health
Group when he refused to go along with the company practice of keeping
two sets of books for Medicare reimbursements, one for the government and
one marked ‘‘confidential.’’ He filed a wrongful termination lawsuit that
developed into False Claims Act lawsuits against his employer and its parent
company for overbilling the government. The government recovered almost
$2 billion, and Alderson received $20 million. The number of such lawsuits
has grown significantly in recent years. In one of the biggest suits ever, TAP
Pharmaceuticals paid $875 million to the government for engaging in illegal
pricing and marketing practices with a cancer drug (you’ll read more about
TAP Pharmaceuticals in the end-of-chapter case for Chapter 5).23
In 2002 Congress passed the Sarbanes-Oxley Act, which, among other
things, provides whistle-blowers in publicly traded companies with revolu-
tionary new protections if they ‘‘make a disclosure to a supervisor, law-
enforcement agency, or congressional investigator that could have a ‘material
impact’ on the value of a company’s shares.’’24 Under the law, board commit-
tees must set up procedures for hearing whistle-blower concerns; executives
who retaliate can be held criminally liable and can go to prison for up to
10 years; the Labor Department can force a company to rehire a whistle-
blower who has been fired; and workers who have been fired can request a
jury trial after six months. Corporate attorneys are now required to report
misconduct to top management and to the board if executives don’t respond.
But, unlike the False Claims Act, the new law does not provide for financial
incentives. And it does not protect employees at private companies.
For additional guidance about whistle-blowing, several websites can
answer myriad questions; just type the keyword whistle-blower in your
Internet search engine. Probably the most comprehensive website for
whistle-blowers is the National Whistleblower’s Center, a nonprofit, tax-
exempt organization that is dedicated to providing educational and advocacy
services to whistle-blowers (www.whistleblowers.org).
7. Leave the Company. Some situations might be so disturbing to you that you
have no alternative but to quit your job. The toxic dump situation described
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http://www.whistleblowers.org
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earlier might be one of those situations. Frankly, the stress involved in blowing
the whistle is so intense that you might consider quitting your job after step 3 or
4, and you’ll need all of the prescriptive ethical decision-making frameworks
to help you decide whether you are ethically obligated to report the problem to
someone or whether simply leaving is okay.
Whistle-blowing is so stressful that in one study, one-third of the whistle-
blowers surveyed would advise other people not to blow the whistle at all.25
Senator Charles Grassley likened whistle-blowers to ‘‘a skunk at a pic-
nic.’’26 Many people, however, would find it extremely difficult—perhaps
impossible—to live with certain situations on their conscience. The know-
ledge of a toxic dump about to poison private wells would probably be
almost impossible for most people to live with without reporting. When
knowledge becomes unbearable, blowing the whistle and ultimately quitting
your job may be the only solution (or the other way around—quit first and
then blow the whistle).
Unfortunately, 2002 provided lots of opportunities for whistle-blowing.
Business Week called 2002 the ‘‘Year of the Whistleblower,’’ highlighting
the role of Joe Speaker, a manager at Rite-Aid (and son of a former Pennsyl-
vania attorney general) who alerted the audit committee of the board to
accounting chicanery at the firm. Martin Grass, the former CEO and chair-
man, was later found guilty and is serving a jail sentence.27Time magazine
named Cynthia Cooper, Coleen Rowley, and Sherron Watkins ‘‘persons of
the year’’ for their ‘‘exceptional guts and sense.’’ Watkins was the vice pres-
ident at Enron who first brought improper accounting methods to the atten-
tion of chairman Kenneth Lay and later testified before Congress where, she
says, she ‘‘broke out in a cold sweat.’’ Coleen Rowley is the FBI attorney at
the Minneapolis office who alerted FBI Director Robert Mueller to the fact
that the FBI had brushed off pleas to investigate Zacarias Moussaoui, now
convicted as a September 11 co-conspirator. Cynthia Cooper informed the
board at WorldCom about phony bookkeeping and the attempt to cover up
$3.8 billion losses. According to Time, ‘‘Democratic capitalism requires that
people trust in the integrity of public and private institutions alike. As
whistleblowers, these three became fail-safe systems that did not fail. For
believing—really believing—that the truth is one thing that must not be
moved off the books, and for stepping in to make sure that it wasn’t, they
have been chosen by Time as its Persons of the Year for 2002.’’ In its
attempt to identify the characteristics these three women shared, Time noted
that all three grew up in small towns and all were firstborns. All are married
and serve as chief breadwinners in their families. None of this, however,
explains why they were willing to risk so much to reveal the truth. At the
end of 2002, Watkins left Enron voluntarily to start her own consulting firm.
The other two were still employed by their organizations. That doesn’t mean
they haven’t paid a price. They claim to be hated by some colleagues, and
they laughed when asked if executives at their organizations had thanked
144 SECTION II ETHICS AND THE INDIVIDUAL
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them. Time quoted Ibsen’s play, An Enemy of the People, in its tribute to the
three women: ‘‘A community is like a ship. Everyone ought to be prepared
to take the helm.’’ These women ‘‘stepped up to the wheel.’’28
CONCLUSION
This chapter highlights some of the most common ethical problems you might
encounter during your career and provides some advice on raising issues if you feel
the need. Although ethical problems can be difficult to evaluate, it can be easier to
decide what to do when you’ve spent some time thinking about them ahead of
time—before they happen. We also strongly believe that identifying what you value,
thinking about various ethical situations, and practicing your responses in advance
are effective ways to prepare you to live an ethical professional life.
DISCUSSION QUESTIONS
1. What do you value? Can you make a list of the three or four values you would
stand up for? How will you explain to others what your values are and why?
2. Have you ever practiced raising an ethical issue to a professor or to your
manager? What did you do? What were the results?
3. Have antidiscrimination laws helped or hurt the fair treatment of workers?
4. Is diversity management an ethical issue?
5. Is sexual harassment as important an issue for men as it is for women?
6. What conditions would make accepting a gift from a vendor or a client
acceptable?
7. Describe the conditions under which you could hire a college friend.
8. Why do certain professionals—bankers, accountants, lawyers, physicians,
clergy—have fiduciary responsibilities?
9. What would you do if a former subordinate asked you to write him or her a
letter of reference on corporate letterhead?
10. Do employers have a responsibility to alert other employers to an employee’s
wrongdoing by supplying an unfavorable reference? Why or why not? Discuss
the conflict between community responsibility and self-protection.
11. What conditions would have to be present for you to blow the whistle about
unethical conduct you observed at work? How would you go about it?
12. If Sherron Watkins had blown the whistle to the Houston Chronicle and not to
Enron’s CEO Ken Lay, do you think she would have kept her job at Enron?
13. Research a story of whistle-blowing. Relate what ‘‘your’’ whistle-blower did
with the seven steps recommended in the chapter. What have you learned from
the comparison?
CHAPTER 4 ADDRESSING INDIVIDUALS’ COMMON ETHICAL PROBLEMS 145
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SHORT CASES
Think about what you most value. For each of the ethical dilemmas below, describe
at least two courses of action you might take and state the pros and cons of each
course. Describe your actions out loud to someone else in class or to a friend. What
can you say or do that would be consistent with your personal values?
VOICING YOUR VALUES
You’re a trader who joined a large investment bank two years ago. Pat, one of your
fellow traders, is well known on the Street for being a big risk taker and a big money
maker for the firm. Consequently, he is popular among your firm’s senior manage-
ment. You see him at a party one night and notice that he surreptitiously used cocaine
several times. Several weeks later in the office, you notice that he seems exception-
ally high-spirited and that his pupils are extremely dilated—you know that both are
signs of drug use. You’re thinking of mentioning something about it to his managing
director, Bob, when Pat makes a particularly impressive killing in the market for your
firm’s own account. Bob jokes that he doesn’t know how Pat does it, but he doesn’t
care. ‘‘However he is pulling this off, it’s great for the firm,’’ Bob laughs. You feel
strongly that this is a problem and that it places your firm at risk. You’ve already
raised the issue to Pat’s manager, Bob, who ignored the issue. Do you raise it further?
How can you voice your values in this case?
PEOPLE ISSUE
Your division has formed a committee of employees to examine suggestions and
create a strategy for how to reward good employee ideas. The committee has five
members, but you are the only one who is a member of a minority group. You’re
pleased to be part of this effort since appointments to committees such as this
one are viewed generally as a positive reflection on job performance. At the first
meeting, tasks are assigned, and all the other committee members think you should
survey minority members for their input. Over the next few weeks, you discover that
several committee meetings have been held without your knowledge. When you ask
why you weren’t notified, two committee members tell you that survey information
wasn’t needed at the meetings and you’d be notified when a general meeting was
scheduled. When you visit one committee member in his office, you spot a report on
the suggestion program that you’ve never seen before. When you ask about it, he says
it’s just a draft he and two others have produced.
CONFLICT OF INTEREST ISSUE
You’ve just cemented a deal between a $100 million pension fund and Green Com-
pany, a large regional money manager. You and your staff put in long hours and a lot
of effort to close the deal and are feeling very good about it. As you and three of your
direct reports are having lunch in a fancy restaurant to celebrate a promotion, the
146 SECTION II ETHICS AND THE INDIVIDUAL
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NOTES
1. Mary C. Gentile, ‘‘Giving Voice to Values,’’ The Aspen Institute, www.aspencbe.org/teaching/gvv/
index.html.
2. B. George, P. Sims, A. N. McLean, and D. Mayer, ‘‘Discovering Your Authentic Leadership,’’
Harvard Business Review 85, no. 2 (2007): 1–8.
3. J. Q. Wilson, The Moral Sense (New York: Free Press, 1993), 55–78.
waiter brings you a phone. A senior account executive from Green is calling and
wants to buy you lunch in gratitude for all your efforts. ‘‘I’ll leave my credit card
number with the restaurant owner,’’ he says. ‘‘You and your team have a great time
on me.’’
CUSTOMER CONFIDENCE ISSUE
You’re working the breakfast shift at a fast-food restaurant when a delivery of milk,
eggs, and other dairy products arrives. There’s a story in the local newspaper about
contaminated milk distributed by the dairy that delivers to your restaurant. Upon
reading the article more closely, you discover that only a small portion of the dairy’s
milk is contaminated, and the newspaper lists the serial numbers of the affected con-
tainers. When you point out the article to your manager, he tells you to forget it. ‘‘If
you think we’ve got time to go through every carton of milk to check serial numbers,
you’re crazy,’’ he says. ‘‘The article says right here that the chances are minuscule
that anyone has a contaminated carton.’’ He also explains that he doesn’t have the
workers to check the milk, and what’s more, destroying the milk would require him
to buy emergency milk supplies at the retail price. So he tells you to get back to work
and forget about the milk. He says, ‘‘I don’t have the time or the money to worry
about such minor details.’’
USE OF CORPORATE RESOURCES ISSUE
You work for Red Company. You and a colleague, Pat Brown, are asked by your
manager to attend a weeklong conference in Los Angeles. At least 25 other employ-
ees from Red Co. are attending, as well as many customers and competitors from
other institutions. At the conference, you attend every session and see many of the
Red Co. people, but you never run into Pat. Although you’ve left several phone mes-
sages for her, her schedule doesn’t appear to allow room for a meeting. However,
when you get back to the office, the department secretary, who is coordinating
expense reports, mentions to you that your dinner in L.A. must have been quite the
affair. When you ask, ‘‘What dinner?’’ she describes a dinner with 20 customers and
Red Co. employees that Pat paid for at a posh L.A. restaurant. When you explain that
you didn’t attend, she shows you the expense report with your name listed as one of
the attendees.
CHAPTER 4 ADDRESSING INDIVIDUALS’ COMMON ETHICAL PROBLEMS 147
http://www.aspencbe.org/teaching/gvv/
E1C04 07/09/2010 Page 148
4. E. A. Lind and T. R. Tyler, The Social Psychology of Procedural Justice (New York: Plenum Press,
1988).
5. B. Sheppard, R. Lewicki, and J. W. Minton, Organizational Justice: The Search for Fairness in the
Workplace (New York: Lexington Books, 1992).
6. Eduardo Porter, ‘‘UBS Ordered to Pay $29 Million in Sex Bias Lawsuit,’’ New York Times, 7 April
2005, www.nytimes.com.
7. Sprenger & Lang (attorneys), ‘‘Morgan Stanley Sex Discrimination’’ (2008), at www.morganstanley
sexdiscrimination.com.
8. Jenny Anderson, ‘‘After She Sued Merrill, It’s Back on the Job,’’ New York Times, 22 July 2005,
www.nytimes.com.
9. E. Warren and N. Millman, ‘‘Abuse on the Line for Years, Women at Mitsubishi Say They’ve
Endured the Degrading Deeds and Words of Co-workers. Now They’re Doing the Talking,’’ February
15 (1998).
10. J. Lever, G. Zellman, and S. J. Hirschfeld, ‘‘Office Romance: Are the Rules Changing?’’ Across the
Board, March–April 2006, 33–37.
11. J. D. Glater, ‘‘University of Texas Fires Director of Financial Aid,’’ New York Times, 14 May 2007.
12. Paul Sullivan, ‘‘In Search of Competent (and Honest) Advisers,’’ New York Times, 1 August 2009,
www.nytimes.com.
13. J. Hechinger and S. Craig, ‘‘SEC Tells Fidelity Probe May Yield Civil Complaint,’’ Wall Street
Journal, 26 July 2005, A3.
14. J. A. Byrne, ‘‘No Excuses for Enron’s Board,’’ Business Week, 29 July 2002, 50.
15. I. J. Dugan, ‘‘Auditing Old-Timers Recall when Prestige Was the Bottom Line,’’ Wall Street Journal,
15 July 2002.
16. K. Reardon, ‘‘Courage as a Skill,’’ Harvard Business Review, January 2007, 2–7.
17. H. Wee, ‘‘Corporate Ethics: Right Makes Might,’’ Business Week, 11 April 2002.
18. R. Webber, ‘‘Whistle Blowing,’’ Executive Excellence, July 1989, 9–10.
19. Ibid.
20. A. Dunkin, ‘‘Blowing the Whistle without Paying the Piper,’’ Business Week, 3 June 1991, 138–39.
21. W. M. Hoffman and J. M. Moore, Business Ethics: Readings and Cases in Corporate Morality (New
York: McGraw-Hill, 1984), 257.
22. F. Pellegrini, ‘‘Person of the Week: ‘Enron Whistleblower’ Sherron Watkins,’’ Time, 18 January
2002.
23. T. Wilkinson, ‘‘After Eight Years, An Insider Gets His Reward Thanks to Whistleblower’s Efforts,
U.S. Government Reaps Largest Single Cash Award Under False Claims Act,’’ Todd Wilkinson
Special to the Christian Science Monitor. The Christian Science Monitor. Boston, Mass.: 24 July
2001, 4.
24. P. Dryer, and D. Carney, ‘‘Year of the Whistleblower,’’ Business Week, 16 December 2002, 107–10.
25. K. L. Soeken and D. R. Soeken, ‘‘A Survey of Whistleblowers: Their Stressors and Coping
Strategies,’’ Proceedings of the Hearing on H.R. 25 (Washington, D.C.: U.S. Government Printing
Office, 1987), 156–66; M. Miceli and J. Near, Blowing the Whistle (New York: Lexington Books,
1992), 303.
26. Dryer and Carney, ‘‘Year of the Whistleblower.’’
27. Ibid.
28. R. Lacayo and A. Ripley, ‘‘Persons of the Year 2002: Cynthia Cooper, Coleen Rowley, and Sherron
Watkins,’’ Time, 22 December 2002, www.time.com/time/personoftheyear/2002/.
148 SECTION II ETHICS AND THE INDIVIDUAL
http://www.nytimes.com
http://www.morganstanley
http://www.nytimes.com
http://www.nytimes.com
http://www.time.com/time/personoftheyear/2002/
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S E C T I O N III
MANAGING ETHICS
IN THE ORGANIZATION
149
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C H A P T E R5
ETHICS AS ORGANIZATIONAL
CULTURE
INTRODUCTION
Thus far, we have discussed business ethics primarily in terms of how individual
employees think and respond. But anyone who has ever worked knows that employ-
ees are not ‘‘just’’ individuals. They become part of something larger; they’re mem-
bers of an organizational culture that affects how they think and behave. Here, we
apply this culture concept to organizational ethics. You can think about the ethical
culture of an organization as a ‘‘slice’’ of the larger organizational culture that repre-
sents the aspects of organizational culture that affect the way employees think and act
in ethics-related situations.
In terms of how we’ve been thinking about ethical decision making, you can
consider ethical culture to be a significant organizational influence on individuals’
ethical awareness, judgment, and action, along with the individual differences and
other influences already discussed in Chapter 3. Recall that most employees are at
the conventional level of cognitive moral development, meaning that they are look-
ing outside themselves for guidance about how to think and act. Ethical culture is a
source of a good bit of that guidance and can influence employees to do either the
right thing or the wrong thing.
Individual Differences
Ethical Awareness ! Ethical Judgment ! Ethical Action
Ethical Culture
150
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ORGANIZATIONAL ETHICS AS CULTURE
What Is Culture?
Anthropologists define culture as a body of learned beliefs, traditions, and guides for
behavior shared among members of a group.1 This idea of culture has been particu-
larly useful for understanding and differentiating among work organizations and the
behavior of people in them.2 It’s a way of differentiating one organization’s ‘‘person-
ality’’ from another. The organizational culture expresses shared assumptions, val-
ues, and beliefs3 and is manifested in many ways, including formal rules and
policies, norms of daily behavior, physical settings, modes of dress, special language,
myths, rituals, heroes, and stories.4 To assess and understand an organization’s
culture requires knowledge of the organization’s history and values, along with a
systematic analysis of multiple formal and informal organizational systems.
Organizational cultures can vary widely, even within the same industry (consider
Wal-Mart, Target, and Costco—all big-box retailers that have very different cul-
tures). In the computer industry, IBM was known for many years for its relative for-
mality, exemplified by a dress code that mandated dark suits, white shirts, and
polished shoes. Apple Computer, on the other hand, was known for its informality.
Particularly in its early days, T-shirts, jeans, and tennis shoes were the expected
Apple ‘‘costume.’’ Fortune magazine described IBM as ‘‘the sensible, wingtip,
Armonk, New York computer company, not part of that sneaker-wearing, tofu-eating
Silicon Valley crowd.’’
5 Although that characterization was made a long time ago,
it’s still pretty applicable today.
Strong versus Weak Cultures
Organizational cultures can be strong or weak.6 In a strong culture, standards and
guidelines are widely shared within the organization, providing common direction for
day-to-day behavior. This is likely because all cultural systems, formal and informal,
are aligned to provide consistent direction and to point behavior in the same direction.
In the 1980s, Citicorp’s culture was so strong that when Katherine Nelson, a coauthor
of this text and former vice president and head of human resources communications at
Citicorp, traveled to the firm’s offices in the Far East to deliver ethics training, she felt
right at home (despite huge differences in national culture). ‘‘You could tell that you
were in a Citicorp facility,’’ she said, ‘‘whether you were in London, Tokyo, or New
York.’’ When Nelson facilitated an ethics training session for Japanese managers, she
presented them with a common ethical dilemma—what do you do if you have raised
an important ethical issue with your manager and nothing is done? Moreover, the
manager discourages you from pursuing the issue. The potential answers included do
nothing, go around the manager to the next level, raise the issue in writing to the
manager, or take the issue to a staff department such as human resources.
The Japanese managers unanimously gave the ‘‘correct’’ answer according to
Citicorp culture and policies at the time. They said they would go around their
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manager and take the issue to the next level. Nelson was surprised at their response,
thinking that it conflicted with the wider Japanese culture’s deference to authority
and seniority. So she asked these managers, ‘‘Doesn’t this conflict with Japanese cul-
ture?’’ To which they responded, ‘‘You forget—we are much more Citicorp than we
are Japanese.’’ Citicorp’s culture proved to be so strong that standards and guidelines
spanned continents and superseded national culture. (Citicorp merged with Travelers
in 1998 to form Citigroup, and its culture has changed significantly since then.) This
type of experience has since been verified by some of our international students who
worked for U.S.-based multinationals before returning to school for their MBA
degree. For example, one student worked for Baxter Healthcare in a country known
for corruption and bribery. Baxter’s strong ethical culture didn’t allow such conduct,
and employees were proud to be a part of such an organization and happy to comply
(even or perhaps especially in the midst of a corrupt business culture).
In a weak organizational culture, strong subcultures exist and guide behavior that
differs from one subculture to another. Many large public universities can be thought
of as having weak cultures. For example, for faculty, departmental subcultures are
often stronger than the overall university culture; the romance languages department
differs from the accounting department. Among students at a large state university,
the fraternity-sorority subculture coexists with the political activist subculture, the
devout Christian subculture, the jock subculture, and many other subcultures, and
behavior is quite different within each. It’s important to note that weak doesn’t nec-
essarily mean bad. In some situations, weak cultures are desirable. They allow for
strong subcultures featuring diversity of thought and action. However, in a weak cul-
ture, behavioral consistency across the organization is tough to achieve. Look around
your own school or work organization. Would you characterize its culture as strong
or weak?
How Culture Influences Behavior:
Socialization and Internalization
Employees are brought into the organization’s culture through a process called encul-
turation, or socialization.7 Through socialization, employees learn ‘‘the ropes.’’
Socialization can occur through formal training or mentoring, or through more
informal transmission of norms of daily behavior by peers and superiors. New
members learn from observing how others behave or through informally transmitted
messages. When effectively socialized into a strong culture, employees behave in
ways that are consistent with expectations of the culture (or subculture). They know
how to dress, what to say, and what to do.
With socialization, people behave in ways that are consistent with the culture
because they feel they are expected to do so. Their behavior may have nothing to do
with their personal beliefs, but they behave as they are expected to behave in order to
fit into the context and to be approved by peers and superiors.8 As an example, the
president of a huge financial firm once took a young, high-potential manager out to
lunch and walked him right over to Brooks Brothers for a new suit. ‘‘You can’t get
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where you’re going in a cheap suit,’’ the president told the young man, who contin-
ued to buy his suits at Brooks Brothers.
But individuals may behave according to the culture for another reason—
because they have internalized cultural expectations. With internalization, individu-
als have adopted the external cultural standards as their own. Their behavior, though
consistent with the culture, also accords with their own beliefs. They may come into
the organization sharing its values and expectations, thus making for a very smooth
transition. Or, they may internalize cultural expectations over time. In the above
example, the young manager may have initially bought the Brooks Brothers suit
because he felt compelled to; but over time, he continued to buy those suits perhaps
because he had internalized the expectation and wanted to do so.
The concepts of socialization and internalization apply to understanding why
employees behave ethically or unethically in an organization. Most people prefer to
behave ethically. When they join an organization with a strong ethical culture, the
messages about honesty and respect resonate with their personal beliefs and are eas-
ily internalized. They act ethically because it’s natural for them to do so and consist-
ent with the cultural messages they’re receiving. But unfortunately, most employees
can be socialized into behaving unethically, especially if they have little work experi-
ence to contrast with the messages being sent by the current unethical culture. If
everyone around them is lying to customers, they’re likely to do the same as long as
they remain a member of the organization.
ETHICAL CULTURE: A MULTISYSTEM FRAMEWORK
We said earlier that ethical culture can be conceptualized as representing a slice of
the organization’s broader culture. Ethical culture is created and maintained through
a complex interplay of formal and informal organizational systems (Figure 5.1). For-
mally, executive leader communications, selection systems, orientation and training
FORMAL SYSTEMS INFORMAL SYSTEMS
Executive Leadership
Selection system
Policies/Codes
Orientation/Training
Performance
management
Authority structure
Decision processes
Role Models/Heroes
Norms
Rituals
Myths/Stories
Language
Ethical and
Unethical
Behavior
Alignment?
FIGURE 5.1 A Multisystem Ethical Culture Framework
CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 153
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programs, rules, policies and codes, performance management systems, organiza-
tional structures, and formal decision-making processes all contribute to creating and
maintaining ethical culture. Informally, heroes and role models; norms of daily
behavior; rituals, myths, and stories; and language indicate whether the formal
ethics-related systems represent reality or facade. The next section provides exam-
ples of each of these important ethical culture systems. Although we discuss these
systems separately, keep in mind that they are all interconnected.
Alignment of Ethical Culture Systems
To create a consistent ethical culture message, the formal and informal systems must
be aligned (work together) to support ethical behavior. To have a fully aligned ethical
culture, the multiple formal and informal systems must all be sending employees
consistent messages that point in the direction of ethical behavior. For example,
imagine a company whose formal corporate values statement and ethics code tell
employees that honesty is highly valued in the organization and that employees
should always be truthful with customers and each other. Consistent with that values
statement, the selection system does background checks on potential employees,
incorporates ethics-related questions in interviews, and highlights the company’s val-
ues to recruits. Once hired, new employees are further oriented into the ethical
culture by learning about the values of the founder, how the history of the company
supports those values, and how the current executive team is carrying on that tradi-
tion. They’re also trained in the specific kinds of ethical issues they could face in
their jobs and how to handle them ethically. They learn that the performance manage-
ment system will assess them on values-related criteria, including honest and trust-
worthy interactions, and that these assessments will be important to decisions about
compensation and promotion. They are also encouraged to take personal responsibil-
ity and speak up about any ethical concerns. On the informal side, they learn that
high-level managers routinely tell customers the truth about the company’s ability to
meet their needs and that the company celebrates employees of exemplary integrity
at an annual awards dinner. Employees in such an organization receive a consistent
message about the organization’s commitment to honesty, and their behavior is likely
to be honest as well because these formal and informal systems are aligned and sup-
porting their ethical behavior.
But opportunities for misalignment abound in these complex systems. For exam-
ple, if the same organization touts its honesty in its values statement but regularly
deceives customers in order to land a sale, and the organization gives a highly ‘‘suc-
cessful’’ but highly deceptive sales representative the firm’s sales award, the organi-
zation’s formal and informal systems are out of alignment. The formal statements say
one thing while company actions and rituals say quite another. Employees perceive
that deceit is what the organization is really about, despite what the ethics code says.
Cultures can range from strongly aligned ethical cultures (where all systems are
aligned to support ethical behavior) to strongly aligned unethical cultures (where all
systems are aligned to support unethical behavior) to those that are misaligned
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because employees get somewhat mixed messages due to conflicts between the for-
mal and informal systems.
DOW CORNING: AN ETHICAL CULTURE OUT OF ALIGNMENT? Developing a
strongly aligned ethical culture is easier said than done. Managers need to be careful
because an organization may easily be lulled into thinking that its ethical house is
soundly constructed, only to find that the roof has been leaking and it’s about to cave
in. This may be what happened to Dow Corning.
Dow Corning had been recognized as a corporate ethics pioneer. It was among
the first, in 1976, to establish an elaborate formal ethics program and structure. Then
chairman John S. Ludington set up a Business Conduct Committee comprised of six
company executives, each of whom devoted up to six weeks a year to the commit-
tee’s work and reported directly to the board of directors. Two of these members
were given responsibility for auditing every business operation every three years. In
addition, three-hour reviews were held with up to 35 employees who were encour-
aged to raise ethical issues. The results of these audits were reported to the Audit and
Social Responsibility Committee of the board of directors. John Swanson, manager
of corporate internal and management communication at the time, headed this effort
and was quoted as saying that the audit approach ‘‘makes it virtually impossible for
employees to consciously make an unethical decision.’’
9
This apparently impressive formal program failed to help the organization avoid
its problem with breast-implant safety, however, despite documented warnings from
a company engineer in 1976 that suggested that the implants could rupture and cause
medical problems. It isn’t entirely clear why this well-intentioned ethics program
failed. It’s likely that, although it was designed to cultivate an overall environment of
ethical conduct, aspects of the ethical culture were out of alignment—sending
employees different messages.10 ‘‘Layering in a bureaucracy is no substitute for a
true corporate culture. Workers have a genius for discovering the real reason for a
system and learn quickly how to satisfy its minimum requirements.’’11 The system
relied on managers to identify the key ethical issues covered by the auditors. Were
these managers likely to alert the auditors to their most serious ethical problems?
What would the consequences be? The system also relied on periodic planned audits.
Did commitment to ethics peak during the planned audit sessions, only to disappear
into the woodwork after the auditors left?12 We don’t know, but a comprehensive
multisystem audit of the ethical culture might have provided the answer.
Leaders should be interested in creating a strongly aligned ethical culture
because American employees strongly prefer working for such an organization.
A 2006 study found that 82 percent of Americans would actually prefer to be paid
less but work for an ethical company than be paid more but work for an unethical
company. Importantly, more than a third of people say that they’ve left a job because
they disagreed with the company’s ethical standards. So having a strong ethical
culture is an important way to retain the best employees.13
Another reason leaders need to create and maintain a strongly aligned ethical
culture is that the U.S. Sentencing Commission revised its guidelines for sentencing
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organizational defendants in 2004 (see www.ussc.gov and Chapter 6 for more infor-
mation about these guidelines). When the U.S. Sentencing Commission (www.ussc.
gov) evaluated the effect of the original 1991 guidelines, it noted that many organiza-
tions seemed to be engaging in a kind of ‘‘check-off approach’’ to the guidelines. In
responding to guideline requirements to qualify for reduced sentencing and fines, these
organizations would establish formal ethics and/or legal compliance programs, includ-
ing ethics offices, codes of conduct, training programs, and reporting systems. But the
commission learned that many of these formal programs were perceived to be only
‘‘window dressing’’ by employees because they were inconsistent with the employees’
day-to-day organizational experiences. The commission subsequently revised its
guidelines to call for developing and maintaining a strong ethical culture. As a result,
many companies are now assessing their cultures to determine how they’re doing in
relation to ethics so if they do get into legal trouble, they can demonstrate that they
have been making sincere efforts to guide their employees toward ethical conduct.
ETHICAL LEADERSHIP
Executive Leaders Create Culture
Executive leaders affect culture in both formal and informal ways. Senior leaders can
create, maintain, or change formal and informal cultural systems by what they say,
do, or support.14 Formally, their communications send a powerful message about
what’s important in the organization. They influence a number of other formal cul-
ture dimensions by creating and supporting formal policies and programs, and they
influence informal culture by role modeling, the language they use, and the norms
their messages and actions appear to support.
The founder of a new organization is thought to play a particularly important
culture-creating role.15 Often, the founder has a vision for what the new organization
should be. He or she often personifies the culture’s values, providing a role model for
others to observe and follow, and guides decision making at all organizational levels.
For example, Thomas Jefferson founded the University of Virginia. Although he’s
long gone, it’s said even today that when the governing board of the university is
faced with a difficult decision, they’re still guided by ‘‘what Mr. Jefferson would
do.’’ Founders of small businesses frequently play this culture-creating role.
Herb Kelleher is the legendary founder of Southwest Airlines, often cited as the
best-run U.S. airline. The no-frills airline started in 1971 and has been growing and
flying pretty high ever since, despite many difficulties in its industry. Southwest
Airlines has never served a meal, and its planes are in and out of the gate in 20 min-
utes. During Kelleher’s tenure as CEO and chairman, other airlines went bankrupt,
suffered strikes, or disappeared. But Southwest continued to succeed even after the
terrorist attacks of September 11, 2001, that sent the entire industry reeling. The
secret is thought to be the company’s culture and an esprit de corps inspired by
Kelleher—he believes in serving the needs of employees, who then take great care of
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http://www.ussc.gov
http://www.ussc.gov
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customers and ultimately provide shareholder returns. The culture combines effi-
ciency, a family feeling, and an emphasis on fun. In support of efficiency, pilots have
been known to load luggage or even clean planes if necessary. During a fuel crisis,
Kelleher asked employees to help by providing money-saving ideas. The response
was immediate: within only six weeks after Kelleher’s request, employees had saved
the company more than $2 million. In the area of fun, Kelleher has always been
known for his crazy antics, jokes, and pranks. He settled business disputes by arm
wrestling; and when a fellow airline CEO criticized Southwest’s promotion that fea-
tured Shamu, the killer whale, Kelleher sent him a huge bowl of chocolate pudding
(meant to resemble whale poop) with a note reading, ‘‘With love, from Shamu.’’16
Employees are encouraged to make flying fun, so that customers leave every South-
west flight with a smile, and they’re encouraged to do that in a way that’s spontane-
ous, emotional, and from the heart.17 Southwest is seen as a leader in its industry and
regularly shows up near the top of Fortune magazine’s most admired companies. It
continues to perform well even after Kelleher stepped down as CEO in 2001. In
explaining how they have remained so successful, Colleen Barrett (who stepped
down as president in 2008) referred to the culture, saying that Southwest does
‘‘everything with passion. We scream at each other and we hug each other . . . we
celebrate everything.’’18 The walls at Southwest’s headquarters are literally covered
with photos of employees dressed in crazy outfits or with their pets. But the company
is also financially conservative and cost conscious, and these cultural attributes con-
tribute to their ongoing success.
Leaders Maintain or Change Organizational Culture
Current executive leaders can also influence culture in a number of ways.19 They can
help maintain the current culture, or they can change it by articulating a new vision
and values; by paying attention to, measuring, and controlling certain things; by
making critical policy decisions; by recruiting and hiring personnel who fit their
vision of the organization; and by holding people accountable for their actions.
Sometimes new leaders significantly change long-standing corporate culture.
Jack Welch, retired CEO of General Electric Company, radically changed the for-
merly staid bureaucratic culture of GE into a lean and highly competitive organiza-
tion during his leadership tenure. Welch began the culture change effort by clearly
articulating his vision that the new GE would be number one or number two in the
world in each of its businesses. Businesses that could not measure up would be sold.
Traditional GE employees had been attracted to the job security of the old
GE. But Welch wanted to encourage competitiveness, risk taking, creativity, self-
confidence, and dynamism. He recruited managers who were interested in doing
a great job and then moving on, if GE no longer needed them. Many of the old-line
GE employees found themselves unhappy, out of sync—and, frequently, out of a job.
Welch also focused on identifying and eliminating unproductive work in the
organization. He told managers to eliminate reports, reviews, and forecasts; to speed
decision cycles; and to move information more quickly through the organization by
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eliminating unnecessary bureaucratic layers. All of this contributed to the ‘‘leaner
and meaner’’ GE culture he created.
Welch’s successor, Jeff Immelt (who became CEO in 2001), has changed the GE
culture yet again. He announced in 2004 that four things would be required to keep
the company on top: execution, growth, great people, and virtue. The first three were
consistent with the GE everyone knew. However, most people don’t expect the word
virtue to be associated with a company that earns billions in revenue. But Immelt had
learned that people perceived GE to be ‘‘a laggard’’ on the social responsibility front,
and he vowed to change that. He has said that, in a world of business ethics scandals,
people don’t admire business as they used to and that the gulf between rich and poor
is growing. As a result, he believes that companies are obligated to provide solutions
to the world’s problems—not to just make money for shareholders and obey the law.
‘‘Good leaders give back. . . . It’s up to us to use our platform to be a good citi-
zen.’’20 In line with this new focus on virtue, Immelt appointed GE’s first vice presi-
dent for corporate citizenship and has been publishing corporate citizenship annual
reports. The company is committing itself to becoming a leader in environmental
cleanup and a catalyst for change. You’re probably familiar with its ‘‘Ecoimagina-
tion’’ initiative that focuses on green initiatives and concern about climate change.
This initiative even has its own devoted website (www.ecoimagination.com), as does
the GE Citizenship initiative more generally (www.ge.com/citizenship). The com-
pany also now audits suppliers in developing countries to ensure compliance with
labor, environmental, and health and safety standards. And the company has
increased its focus on diversity, including granting domestic partner health benefits
to employees, and has entered into dialogue with socially responsible mutual funds.
In response to a request from African American employees to do more in Africa, GE
is working with the public health service in Ghana, where it has provided equipment,
water treatment, and leadership training. In the last edition of this book, we noted that
GE’s foreign subsidiaries were still doing business with Iran.
21 But in 2008, the com-
pany decided it would not do business in any of the countries that the U.S. State
Department designates as sponsors of terrorism (including Iran). This move suggests
that the company is engaged in ongoing evaluations about where it should be doing
business, based upon its values and concern about its reputation.
ETHICAL LEADERSHIP AND ETHICAL CULTURE Clearly, employees take their
cues from the messages sent by those in formal leadership roles. But most employees
don’t know the senior executives of their organization personally. They only know
what they can make sense of from afar. Therefore senior executives must develop a
‘‘reputation’’ for ethical leadership by being visible on ethics issues and communicat-
ing a strong ethics message. A recent study22 found that such a reputation rests upon
dual dimensions that work together: a moral person dimension and a moral manager
dimension (see Figures 5.1 and 5.2). In this section, first we explain what each di-
mension represents and then we combine these dimensions into a matrix that shows
how leaders can develop a reputation for ethical leadership, unethical leadership,
hypocritical leadership, or ethically neutral leadership.
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The moral person dimension represents the ‘‘ethical’’ part of the term ethical
leadership and is vital to developing a reputation for ethical leadership among
employees. As a moral person, the executive is seen first as demonstrating certain
individual traits (integrity, honesty, and trustworthiness). For example, one executive
described ethical leaders as ‘‘squeaky clean.’’ But probably more important are visi-
ble behaviors.
These include doing the right thing, showing concern for people and treating
them with dignity and respect, being open and listening, and living a personally
moral life. To some extent, senior executives live in glass houses. They are often
public figures who are active in their communities. So they need to be particularly
careful about their private behavior. Rumors can begin quickly and taint an otherwise
solid reputation. Finally, an important contributor to being perceived as a moral per-
son is to make decisions in a particular way—decisions that are explicitly based on
values, fairness, concern for society, and other ethical decision rules.
But being a moral person is not in itself enough to be perceived as an ethical
leader. Being a moral person tells employees how the leader is likely to behave, but
it doesn’t tell them how the leader expects them to behave. So to complete the ethical
leadership picture, executives must also act as ‘‘moral managers’’—they must focus
on the ‘‘leadership’’ part of the term ethical leadership by making ethics and values
Hypocritical
leader
Weak Strong
Moral Person
Executive Ethical Leadership
Reputation Matrix
Executive Ethical Leadership
Is about Reputation, Which Rests
on These Two Pillars
Moral Person
Traits
Behaviors Rewards/Discipline
Decision making Communicating
Tells followers
how leader
behaves
• Honesty
• Openness
• Values-based
• Fair
Sends an “ethics
and values”
message
Holds people
accountable for
ethical conduct
• Concern for
people
• Personal
morality
• Integrity
• Trust
Role Modeling
Takes visible
ethical action
Tells followers
how they should
behave and holds
them accountable
Moral Manager
W
ea
k
M
or
al
M
an
ag
er
S
tr
on
g
Unethical
leader
?
Ethical
leader
Ethically neutral leader
FIGURE 5.2 Executive Ethical Leadership
CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 159
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an important part of their leadership message and by shaping the firm’s ethical cul-
ture. They do that by conveying the importance of ethical conduct in a variety of
ways. Most of the messages employees receive in business are about bottom-line
goals. Therefore, senior executives must make ethics a priority of their leadership if
ethics is to get attention from employees. Moral managers do this by being visible
role models of ethical conduct, by communicating openly and regularly with employ-
ees about ethics and values, and by using the reward system to hold everyone
accountable to the standards. This ‘‘moral person/moral manager’’ approach is
similar to what executive headhunters Thomas Neff and James Citrin list as
their number one strategy (of six) of corporate stars: ‘‘Live with Integrity, Lead by
Example.’’ They say, ‘‘Integrity builds the trust in senior management that is critical
for high-performing organizations.’’
23
James Burke, former CEO of Johnson & Johnson, is probably the best-known
example of a highly visible ethical leader. Soon after being appointed CEO in the
late 1970s, he challenged his senior managers to revisit and update the company’s
age-old credo (discussed later in more detail). He wasn’t willing to have it hanging
on the wall unless his senior managers were committed to living it. After much dis-
agreement, discussion, and input from J&J sites around the world, the credo was re-
vised and its commitment to customers first and foremost was intact. Less than three
years later, the Tylenol poisoning occurred (described in Chapter 10), and the credo
guided corporate decision making successfully through the crisis. Following that cri-
sis, Burke initiated a regular credo survey process in which employees were asked
about the company’s performance regarding the credo—and that process continues
to this day.24 It was clear to employees that Burke really cared about the credo and
the values it represented.
When Paul O’Neill first became CEO at Alcoa, he brought with him a profound
concern for worker safety. Although Alcoa already had an enviable safety record at
the time based on industry standards, O’Neill created a goal of zero lost work days
from accidents—a goal that flabbergasted even the safety director. When O’Neill
visited plants, he told employees that the company was no longer going to budget for
safety—if a hazard was fixable, they should do it and the company would pay for it,
no questions asked. Then he gave the hourly workforce his telephone number at
home and told them to call him directly about safety problems. He created an acci-
dent reporting system that required reporting within 24 hours of any accident, no
matter how small, and he used the reports as an opportunity for learning so that future
accidents could be avoided. He also got on an airplane and visited employees who
had been seriously hurt, no matter where in the world they were. Safety messages
were everywhere, including woven into the carpets at some Alcoa sites. And when
employees in the Pittsburgh headquarters crossed the street, they were careful not to
jaywalk because it was ‘‘unsafe.’’ Years after O’Neill retired, Alcoa continued to
improve until it became the safest company in the world.
In the completely different arena of diversity, O’Neill again stood out for his
principled leadership. In his first week on the job, his secretary asked him to sign
papers to join a country club. This had been standard procedure in the past because
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CEO membership was required in order for other Alcoa executives to join and use the
club. Upon asking for certification that the club did not discriminate, he learned that
the club did not have an open membership policy. O’Neill refused to sign the papers
and developed a new policy saying that Alcoa would not reimburse any employee
expenses at a place that did not allow admission to anyone who wanted it. O’Neill
was encouraged not to rock the boat and to wait before making such a huge change.
His response was, ‘‘What excuse am I going to use six or twelve months from now?
I’ve just discovered my principles? They were on vacation . . . when I first came?’’
He explained that you have to have the courage of your convictions and insist on
them all of the time, not just when it’s convenient.25
Similar to business leaders, coaches of college sports are expected to set and
enforce ethical standards. Joe Paterno, the legendary Penn State football coach, and
Dean Smith, former coach of the University of North Carolina basketball team,
are coaches who exemplify moral management. They set high expectations (for
performance and ethics), create rules and policies for appropriate behavior, and
enforce them.26
Coaches are also held responsible when ethical violations are discovered among
players, assistants, and boosters. A number of coaches have lost their jobs or resigned
because of such violations.27 When wrongdoing occurs in any type of organization,
top managers are frequently held accountable even if they weren’t personally
involved. For example, the executives of Arthur Andersen, Enron, WorldCom,
Adelphia, Boeing, and AIG Insurance were all replaced soon after ethical scandals
came to light.
Coaches and business leaders are subject to immense pressure to win, and it can
be tempting to put intense pressure on their people to bend or even break the rules.
Ethical leaders maintain their principles through good times and bad. Bill George,
retired CEO of Medtronic, a maker of medical devices, recounts a story about the
time he had to tell analysts that, despite growing 15 percent for the quarter, the com-
pany’s earnings would fall short of analysts’ expectations. The analysts berated him
and called him a liar. Such experiences drive some executives to fudge the numbers
to meet Wall Street expectations. But true ethical leaders are not dominated by this
pressure. They learn to ignore these outside voices and begin to listen more to their
own inner voice and values. In George’s case, he learned an important lesson when
he visited a doctor who was performing an angioplasty with one of the company’s
balloon catheters that literally fell apart during the procedure. The doctor was so
angry that he took the blood-covered catheter and threw it at George. What was the
lesson for this ethical leader? Medtronic workers don’t make pacemakers to please
Wall Street. Their goal is to save lives. According to George, ‘‘the CEO can’t have
the shareholder centrally in mind when making decisions. . . . America’s leading
corporations became great not by getting their share prices up but by doing what they
were set up to do incredibly well.’’28
UNETHICAL LEADERSHIP Unfortunately, unethical leaders can just as strongly
influence the development of an unethical culture. In terms of our matrix, unethical
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leaders have reputations as weak moral persons and weak moral managers. In inter-
views, senior executives cited Al Dunlap as a senior executive with a reputation for
unethical leadership. John Byrne of Business Week wrote a book about Dunlap (Mean
Business, 1997) and published excerpts in the magazine. According to Byrne, Dunlap
became famous for turning struggling companies around. When hired at Sunbeam,
he was considered such a celebrity CEO that the stock price spiked 49 percent in
one day. But while at Sunbeam, he was also known for ‘‘emotional abuse’’ of
employees—being ‘‘condescending, belligerent and disrespectful.’’ ‘‘At his worst, he
became viciously profane, even violent. Executives said he would throw papers or
furniture, bang his hands on his desk, and shout so ferociously that a manager’s hair
would be blown back by the stream of air that rushed from Dunlap’s mouth.’’ Dunlap
also demanded that employees make the numbers at all costs, and he rewarded them
handsomely for doing so. As a result, they felt pressure to use questionable account-
ing and sales techniques. Dunlap also lied to Wall Street, assuring them that the firm
was making its projections and would continue to reach even higher. After just a
couple of years, Dunlap couldn’t cover up the real state of affairs, and Sunbeam’s
board fired him in 1998. But he left the company crippled.29 In 2002, Dunlap settled
a civil suit filed by the Securities and Exchange Commission (SEC). He paid a
$500,000 fine and agreed that never again would he be an officer or a director of a
public company. Investigators learned that allegations of accounting fraud on
Dunlap’s watch go back to the 1970s and follow him through a number of companies.
HYPOCRITICAL LEADERSHIP Perhaps nothing can make us more cynical than a
leader who talks incessantly about integrity and ethical values but then engages in
unethical conduct, encourages others to do so either explicitly or implicitly, rewards
only bottom-line results, and fails to discipline misconduct. This leader is strong on
the communication aspect of moral management but clearly isn’t an ethical person—
doesn’t ‘‘walk the talk.’’ It’s a ‘‘do as I say, not as I do’’ approach. Al Dunlap made
no pretense about ethics. All that mattered was the bottom line, and he didn’t pretend
to be a nice guy. But hypocritical leadership is all about ethical pretense. The prob-
lem is that by putting the spotlight on integrity, the leader raises expectations and
awareness of ethical issues. At the same time, employees realize that they can’t trust
anything the leader says. That leads to cynicism, and employees are likely to dis-
regard ethical standards themselves if they see the leader doing so.
Jim Bakker remains the best public example of hypocritical leadership. In the
late 1970s and early 1980s, Bakker built Praise the Lord (PTL) ministry into one of
the world’s biggest religious broadcasting empires. At its peak, Bakker’s television
ministry reached more than 10 million homes and had 2,000 employees. Bakker,
along with his wife, Tammy Faye, claimed to be doing ‘‘the Lord’s work’’ as he
raked in millions of dollars, convincing the faithful to purchase a limited number of
lifetime memberships in two hotels he claimed would be built at the PTL’s Heritage
USA Christian theme park. The problem was that the 25,000 lifetime memberships
(promising a free annual family stay for four days and three nights) in the Heritage
Grand Hotel morphed into 66,683 memberships. And, instead of the limited 30,000
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memberships at the proposed Heritage Towers, PTL sold 68,755 memberships. You
do the math. It would be impossible to provide promised services to this many peo-
ple. On top of that, the second hotel was never completed. The funds donated for
these projects were being tapped to support PTL operating expenses, including huge
salaries and bonuses for the Bakkers and other top PTL officials. When questioned at
times about PTL’s finances, Bakker referred to the organization’s annual audits con-
ducted by big auditing firms such as Deloitte and Laventhol. Unfortunately, PTL filed
for bankruptcy in 1987, three months after Bakker resigned in disgrace. The IRS
revoked PTL’s tax-exempt status, and in 1989 Bakker was convicted on fraud and
conspiracy charges. He spent eight years in prison.30
A more recent example of hypocritical leadership is Lord John Browne, formerly
the CEO of BP. Under Browne’s leadership, the company launched a $200 million
‘‘Beyond Petroleum’’ campaign to promote its image as a highly socially responsible
company that would deliver performance without trading off worker safety or envi-
ronmental concerns. But when BP’s Texas City plant exploded (killing 15 workers
and injuring many more) and two big oil spills occurred in Alaska, regulators and
employees cited cost cutting on safety and negligence in pipeline corrosion preven-
tion as causes. It seemed that the Beyond Petroleum campaign was more about words
than action. Greenpeace awarded Browne the ‘‘Best Impression of an Environmental-
ist’’ award in 2005, and the CEO was finally asked to resign in 2007 after a scandal in
his personal life surfaced.31 The lesson is pretty clear. If leaders are going to talk
ethics and social responsibility (as they should), they had better ‘‘walk the talk’’ or
risk cynicism or worse.
ETHICALLY NEUTRAL OR ‘‘SILENT’’ LEADERSHIP The fact is that many top man-
agers are not strong leaders either ethically or unethically. They fall into what
employees perceive to be an ethically ‘‘neutral’’ or ethically ‘‘silent’’ leadership
zone. They simply don’t provide explicit leadership in the crucial area of ethics.
They are perceived to be silent on this issue, and employees aren’t sure what the
leaders think about ethics, if anything. This may be because the leader doesn’t realize
how important executive ethical leadership is to the organization’s ethical culture,
isn’t comfortable with talking about ethics issues, or just doesn’t care that much. On
the moral person dimension, the ethically neutral leader is not clearly unethical but is
perceived to be more self-centered than people-oriented. On the moral manager di-
mension, the ethically neutral leader is thought to focus on the bottom line without
setting complementary ethical goals. Little or no ethics message is coming from the
top. But it turns out that silence represents an important message. In the context of all
the other bottom-line-oriented messages being sent in a highly competitive business
environment, employees are likely to interpret silence to mean that the top executive
really doesn’t care how business goals are met (only that they are met), and they’ll
act on that message.32
Consider Sandy Weill, former charismatic CEO of Citigroup. Well before the
current financial crisis, a Fortune magazine article described the firm as a ‘‘block-
buster money machine.’’ But the article also recounted scandalous allegations about
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Citigroup and its Salomon Smith Barney unit (now sold off). ‘‘Citi helped Enron hide
debt; Salomon peddled worthless WorldCom debt; Star analyst Jack Grubman rec-
ommended Winstar as it was heading for bankruptcy; Salomon rewarded telecom
execs with hot IPOs,’’ and more.33 In 2004, Japan shut down Citigroup’s private
bank in Japan that had made $84 million for the company in 2003. Regulators listed
a long series of transgressions including money laundering, sales of unsuitable prod-
ucts to customers, and generally sloppy business practices.34 The company spent lots
of time and money playing defense with the media, responding to ugly headlines on a
regular basis. According to Fortune, Weill eventually became contrite and ‘‘got reli-
gion,’’ if a bit late. Weill told his board that . . . his most important job . . . was ‘‘to
be sure that Citigroup operates at the highest level of ethics and with the utmost
integrity.’’
35 However, the article also cited widespread cynicism about that state-
ment, noting that Weill was often ‘‘tone deaf’’ on these ethics issues.
At least from the perspective of outside observers, Weill exemplified ‘‘ethically
neutral’’ leadership. Being tone deaf on ethics issues is exactly what ethically neutral
leadership is about. Weill’s public statement that the ‘‘company is too big to micro-
manage’’ applies to his approach to managing ethics. He said a CEO relies on ‘‘very
competent people’’ and trusts them to do a good job. In the case of ethics manage-
ment, that meant leaving it to the executives running Citi’s various businesses. If the
head of a division thought ethics was important, ethics got resources and attention. If
the head didn’t promote ethics, attention turned elsewhere, and most likely to financial
performance goals. So, with a kind of benign neglect, Weill sat on the sidelines and
provided little ethical leadership. And with corporate rewards focused on the bottom
line, managers had little motivation to attend to other issues. As a result, employees
didn’t know for sure where Weill stood. But the intense focus on the bottom line
suggested that profits were most important, and many employees probably acted
accordingly. This approach to ethics is in sharp contrast to prior CEO John Reed’s
leadership on ethics issues. Reed spent almost his entire career at Citicorp and was its
CEO when the huge American financial powerhouse merged with Weill’s Travelers
organization to form Citigroup. Reed, who was a banker his entire life, understood in
his gut how important reputation is to a financial institution. As a result, he encour-
aged and supported the development of a strong, centralized corporate ethics program
with global reach. Interestingly, the people associated with that program were quickly
gone, and much of the program itself was dismantled after Weill took over.
Weill stepped down in 2003 and handed the CEO reins to Chuck Prince, who
continued to address the scandals that Weill left behind—including $8 billion in
scandal-related charges that had to be absorbed. Prince fired high-level people
involved in scandals, including the chairman of Citigroup International who had
been credited with a 30 percent increase in international earnings in 2003. In an
interview with Fortune magazine, Prince said:
John Reed [CEO before Weill] told me once that culture is a set of
shared, unspoken assumptions. . . . I think the larger the company has
become, the more we need to speak about those unspoken assumptions.
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We need to add to our celebration of financial performance a focus on
long-term compliance activities, long-term franchise building, being in
it for the long term. So one of the things we’re going to put into place,
starting in 2005, is a series of activities—training, communications,
performance appraisals—that will lend a little more balance to the
aggressive financial culture that we have always celebrated, and that
I still do.
Short-term growth at the cost of long-term growth is a very bad
trade. Some people make that bad trade when they only hear one instru-
ment in the orchestra. If they hear the full orchestra, the full panoply of
messages, then people have ‘‘no excuses’’—that’s the sign on my desk—
no excuses.
36
The more Prince scrutinized the organization, the more concerned he became
about loose internal controls. He began to add resources to legal compliance. He
even moved his office, from next to Weill’s to the floor below, and began consulting
more with John Reed.37 But Prince seemed to feel powerless to really change the
culture that Weill had planted and that had taken root. Prince once confessed that he
knew the bank’s aggressive deal making could mean big trouble if the easy money
stopped flowing. ‘‘As long as the music is playing, you’ve got to get up and dance,’’
he told the Financial Times in summer 2007, even as credit markets began to shud-
der. ‘‘We’re still dancing.’’38
The firm suffered severe performance problems under Prince’s leadership, and
he was replaced by Vikram Pandit in late 2007. Citigroup, along with several other
financial institutions considered ‘‘too large to fail,’’ was rescued in the fall 2008 U.S.
government bailout of financial institutions. The firm was in trouble because of losses
related to risky mortgage-backed securities, which we speculate may have something
to do with the laxity around ethical standards created under Weill. Experts conclude
that Citigroup failed to integrate its varied businesses and failed in monitoring its
risky investments and freewheeling operations. Many point to the repeal of the
Glass-Steagall Act, which separated commercial banks from investment banks and
insurance, as one of the root causes of the 2008–2009 financial crisis. Weill had
championed this deregulation, and it made Citigroup possible. Recently, John Reed
expressed regret at his role in urging repeal of Glass-Steagall, but Weill would have
none of it. ‘‘When asked about Reed’s apology, Mr. Weill says, ‘I don’t agree at all.’
Such differences, he says, were ‘part of our problem.’’’39
Research has found that executive ethical leadership is critical to employees.
Unethical behavior is lower, and employees are more committed to their organiza-
tion, more ethically aware, and more likely to engage in positive helping behaviors
(including reporting problems to management) in firms that have an ethical culture
characterized by top executives who are strong ethical leaders.40 Research has also
found evidence that executive ethical leadership flows down through the organiza-
tion, affecting supervisors’ ethical leadership behavior and finally employee
behavior.41 But interestingly, senior executives are often not aware of how important
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their ethical leadership is. Many believe that being an ethical person who makes eth-
ical decisions is enough. But it isn’t enough. Executives must lead on this issue (be
moral managers) if it is to register with employees. In a highly competitive environ-
ment of intense focus on the bottom line, employees need to know that the executive
leaders in their organization care about ethics at least as much as financial perform-
ance. An ethical leader makes it clear that strong bottom-line results are expected, but
only if they can be delivered in a highly ethical manner. Leaders may talk in terms of
reputation or use other language they find comfortable. But the message must be that
the firm’s long-term reputation is an asset that everyone must protect.
OTHER FORMAL CULTURAL SYSTEMS
Selection Systems
Selection systems are the formal systems that are in place for recruiting and hiring
new employees. Selection systems are vital to hiring people who fit the culture of the
firm. For example, all employees at Southwest Airlines (including pilots) are selected
based on their personalities (traits that include cheerfulness, optimism, and team
spirit) among other credentials. So it’s not surprising to find pilots helping to clean
the cabin when time is short, and flight attendants throwing gate parties on Hallow-
een and telling jokes to passengers over the plane’s loudspeakers.
42
When considering the ethical culture, organizations can avoid ethical problems
by recruiting the right people and by building a reputation that precedes the organiza-
tion’s representatives wherever they go. Companies can conduct background checks,
check references, administer integrity tests, and survey applicants using some of the
individual differences discussed in earlier chapters. For example, they might be wary
of hiring someone high on Machiavellianism if they’re trying to create a cooperative
culture where people help and support each other. Interviewers can also ask ethics-
related questions in interviews, for example, by asking candidates about ethical
issues they’ve confronted in the past and how they’ve handled them.
In an article entitled, ‘‘Can You Interview for Integrity?’’ William Byham43
offered a series of questions an interviewer concerned about ethics might ask a
recruit. Here are adaptations of some of them:
1. We sometimes have to choose between what we think is right and what’s best
for the company. Can you give an example of such a time and tell how you
handled it?
2. Can you describe your current employer’s ethics? Are there things you feel
good about? bad about?
3. Please provide an example of an ethical decision you’ve made at work and tell
how you handled it. What factors did you consider?
4. Can you provide an example of some past work behavior that you’ve regretted?
How would you behave differently today?
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5. Have you ever felt the need to exaggerate or bend the truth to make a sale?
6. Have you ever observed someone else stretching the rules at work? What did
you do, if anything?
7. People are often tempted to make something seem better than it is. Have you
ever been in such a situation?
8. Have you ever had to go against company policies in order to accomplish
something?
9. Have you ever managed someone who misled a client? How did you handle it?
10. What’s your philosophy of how to think about policies? Are they guidelines, to
be followed to the letter?
Our students have been asked similar types of questions in interviews with the
best companies. Are you prepared to answer questions like these?
Recruiters can also inform prospective employees about the importance of integ-
rity in their organization and what happens to those who break the rules. Companies
that are serious about integrity can include statements about their values and expect-
ations in recruiting literature, in the scripts recruiters use when interviewing job
candidates, in offer letters to candidates, and in new-hire orientation programs.
Coach Joe Paterno was outspoken on this topic in our interview with him. He
claimed that the Penn State football program avoids lots of problems faced by other
college sports organizations by being absolutely clear up front about its commitment
to education for its athletes and to doing things ‘‘by the [NCAA] book’’:
I think our reputation eliminates most problems before we start. Because
we do have a reputation. If a kid is looking for some kind of a deal, he
generally won’t fool around with us. But, I remember one kid whose dad
openly said, ‘‘He can’t live on that. He’s gotta have more money than
that.’’ I said, ‘‘That’s all we can do.’’ He said, ‘‘Well, somebody will
give it to us.’’ I wished the kid luck and walked out of the house.
Because the Penn State football program has a reputation for integrity, Coach
Paterno and his staff rarely face such requests. Those who are looking for money
under the table know to look elsewhere. And athletes who break the rules know in
advance that they’ll be disciplined.
These days, companies also need to be very selective when recruiting leaders
who are being considered for important decision-making roles in the firm. Many
recent business scandals have zeroed in on company chief financial officers (CFOs)
who played with the numbers to make it look as if profit goals expected by Wall
Street had been achieved when, in reality, they had not. Such individuals must dis-
play the strongest moral character in order to withstand marketplace pressures
to make the numbers look good. Questions about how they would respond to such
pressures and how they have handled them in the past can be useful in selecting these
key players.
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Values and Mission Statements
Once employees are on board, many organizations aim to guide employees’ behavior
through formal organizational value statements, mission statements, credos, policies,
and formal codes of ethical conduct. Value and mission statements and credos are
general statements of guiding beliefs. Most companies have them, but it’s important
that the values and mission statement be closely aligned with other dimensions of the
culture. According to James Collins, coauthor of Built to Last: Successful Habits of
Visionary Companies, ‘‘the words matter far less than how they are brought to life.
The mistake most companies make . . . is not setting up procedures to make sure the
mission is carried out.’’ If the policies and codes are followed in daily behavior
and people are held accountable to them, this is another example of a strong ethical
culture in alignment.
In the year 2000, Verizon’s published core values were integrity, respect, imagi-
nation, passion, and service. But consider this. Customer service representatives were
expected to finish each call with the following question (in precisely these words) to
the customer: ‘‘Did I provide you with outstanding service today?’’ During a strike in
the fall of 2000, workers cited this disconnect between values and operating proce-
dures as a source of stress and cynicism. Asking customer service representatives to
follow a specific ‘‘script’’ (that sometimes led to irate customers becoming even more
irate) did not respect the individual customer service representative’s ability to serve
the customer in a more natural way, and it certainly didn’t allow the employee to use
imagination or passion in providing customer service. The script may have been well
intentioned, but it conflicted with several of the core values professed by the com-
pany and appeared hypocritical to employees. Stated values that are inconsistent
with management practice can quickly generate employee cynicism.44 Wouldn’t it
be better and more consistent with the value of respect to simply ask service repre-
sentatives to end their calls with a question about whether the customer was satisfied
with the quality of service, but let the representatives choose their own words?
Probably the most famous example of an effective mission and values statement
that is aligned with other cultural systems is the Johnson & Johnson credo, which
outlines the pharmaceutical company’s commitments. Probably most important is
the statement that the company’s ‘‘first responsibility is to the doctors, nurses and
patients, to the mothers and fathers and all others who use our products and ser-
vices.’’ Other responsibilities follow, for example, to employees, suppliers, commu-
nities, and finally stockholders. Notably, stockholders are listed last under the
assumption that if the other responsibilities are taken care of, stockholders will do
well. On its website (www.jnj.com), the company includes a video about the credo
and ‘‘how it lives in the Johnson & Johnson family,’’:
The values that guide our decision making are spelled out in our Credo.
Put simply, Our Credo challenges us to put the needs and well-being of
the people we serve first. Robert Wood Johnson [founder] . . . crafted
Our Credo himself in 1943. . . . This was long before anyone ever heard
168 SECTION III MANAGING ETHICS IN THE ORGANIZATION
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the term ‘‘corporate social responsibility.’’ Our Credo is more than just a
moral compass. We believe it’s a recipe for business success.
Most famously, the corporation drew on its credo for guidance during the
Tylenol crises of the 1980s, when the company’s product was adulterated with cya-
nide. Company managers and employees made countless decisions (including
recalling all Tylenol at huge cost) that were inspired by and consistent with the
credo’s guidance. Today, company employees participate in a periodic survey and
evaluation of how well the company performs its credo responsibilities. Survey
results are then fed back to the senior management, and corrective action is taken to
correct any shortcomings. The current CEO, Bill Weldon, also makes a point of visit-
ing employees who are moving into leadership positions around the world to discuss
real problems and how the credo applies to them. As one recent example, in 2007, the
company reported itself to the SEC and Justice Department when it discovered possi-
ble violations of the Foreign Corrupt Practices Act (discussed further in Chapter 11).
It takes little for a company to make a formal statement like the J&J Credo, but it
takes quite an ongoing commitment to actually follow it.45 Certainly, Johnson &
Johnson has had its share of ethical problems. But when you talk to current J&J
employees, they talk easily about the credo, its importance in the J&J culture, and
how it guides ethical conduct in the organization.
When you are considering joining an organization, look for the organization’s
values statement and ask employees for examples of how the organization lives its
values (or doesn’t). Such a question can provide useful insight into cultural alignment
and misalignment by making clear whether the values statement represents lofty for-
mal statements with little basis in reality or ‘‘values in use’’ that represent how peo-
ple really behave every day. It’s important to ask yourself whether your own stated
values (you should have assessed them in Chapter 2) match up with the organiza-
tion’s values. If they do, and you have evidence that this is an organization that lives
its values, you’re on your way to a job you’ll find satisfying.
Policies and Codes
Formal ethics policies (often called codes of ethics or codes of conduct) are longer
and more detailed than broad values and mission statements. They provide guidance
about behavior in multiple specific areas. For example, most ethics codes address
issues of respectful treatment of others, conflicts of interest, expense reporting, and
the appropriateness of giving and receiving gifts. Policy manuals are even lengthier
than codes and include more detailed lists of rules covering a multitude of job situa-
tions that are specific to the industry, organization, and type of job. An extended dis-
cussion of policies and codes follows in Chapter 6.
Most ethics codes were introduced within the past 30 years. A mid-1990s study
of the Fortune 1000 found that 98 percent of these large firms reported addressing
ethics and conduct issues in formal documents. Of those 98 percent, 78 percent had
codes of ethics.
46 In a 2005 Ethics Resource Center study, 86 percent of respondents
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from a wide variety of employers across the United States reported that the private
sector, public sector, and not-for-profit organizations they work for have formal
ethics policy standards.47 So it’s fair to say that most employers are making an effort
to provide formal guidance to their employees regarding ethical and legal conduct.
It’s also important to note that these codes are living documents that are revised regu-
larly in response to changing conditions. For example, early ethics codes said nothing
about Internet privacy or social networking guidelines, but these topics are much
more common in today’s codes.
Most companies with codes now distribute them quite widely. A 1995 survey of
Fortune 1000 firms found that 75 percent of responding companies reported distrib-
uting their code or policy to at least 80 percent of their employees.48 This finding
may be a by-product of the U.S. Sentencing Guidelines (discussed in Chapter 6),
which specify communication of compliance standards to all employees as a guiding
principle. Research has found that when employees are familiar with the code and
refer to it for guidance, they are less likely to engage in unethical behavior, more
likely to seek advice about ethical issues, and more likely to report ethical rule viola-
tions.49 But, to have real influence on behavior, a code must be enforced.50 Other-
wise, codes of conduct are more likely to be viewed as mere ‘‘window dressing’’
rather than guides for actual behavior.
Many firms post their codes on their websites. Some firms also distribute their
codes beyond their own employees to vendors and suppliers who are explicitly asked
to comply. For example, a supermarket company distributed its code to its suppliers
along with a letter, signed by the president:
Dear Business Associate:
As the holidays draw near, we are mindful of the mutually satisfying and
mutually profitable relationship which exists between our company and
our suppliers. We look forward to many more years of successful growth
together through our joint efforts to provide our customers with quality
products, excellent service and low price.
In recent years, we have found many of our staff members embar-
rassed by well-intentioned gifts from those with whom we do business.
Our Board of Directors approved the enclosed Code of Ethics which
clearly states our policy prohibiting our Associates from accepting gifts
from our suppliers and customers. We feel that this policy should apply
during the holidays as well as throughout the year.
With so much attention being given to practices which bring the
business community’s ethics into question, we urge your support of our
efforts to maintain the respect and confidence of the industry for the ob-
jectivity of our dealings with suppliers.
Since failure to comply with our policy will result in disqualification
from further business dealings with us, we request that you distribute this
letter to those in your company who have business dealings with our
corporation and its subsidiaries.
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The most significant means of expressing your appreciation to our
staff continues to be your efforts to help us grow together by anticipating
and meeting the changing consumers’ needs and wants.
If you have any questions regarding this policy, please contact. . . .
With our best wishes for happy holidays and a healthy and prosper-
ous New Year.
Companies are also taking more responsibility for the behavior of suppliers,
even if those suppliers are in foreign countries. If Nike or Wal-Mart buys shoes or
clothes from a factory in Asia, these firms are increasingly aware that the supplier’s
actions are their responsibility. As an example, Wal-Mart requires its suppliers to
agree to comply with its code of ethical conduct and requires that suppliers post its
free 1-800 reporting telephone number at work sites. We’ll discuss this topic further
in Chapter 11.
The idea of guiding behavior with codes of conduct extends to higher education
institutions, where many colleges have honor codes that apply to academic (e.g., test
cheating, plagiarism) and sometimes even nonacademic (job search) behavior.
Research on honor codes in colleges and universities suggests that students cheat less
in institutions that have honor codes.51 However, students’ perceptions of their peers’
cheating has an even stronger influence on cheating behavior than the existence of
a code. In addition, the certainty of being reported and the severity of penalties
are important because they support the idea that the code alone is not the most impor-
tant influence.52
Managers, especially middle managers, want to have a stated organizational pol-
icy or code when it comes to serious ethical matters. Remember, cognitive moral
development research tells us that most people are looking outside themselves for
guidance, and stated organizational policy can be an important source of that guid-
ance. To determine where policy is needed, the organization can survey managers
about areas of ethical concern and their perception of the need for policy in each
area. In one study, managers made it clear that policy was needed in such areas as
expense claims, gifts and bribes, and treatment of competitor information.53
Orientation and Training Programs
Socialization into the ethical culture is often begun through formal orientation pro-
grams for new employees and is reinforced through ongoing training. The organiza-
tion’s cultural values and guiding principles can be communicated in orientation
programs. Employees often receive an introduction to the values and mission state-
ments as well as the company’s history and current code of conduct. But new
employees are so overwhelmed with information that it’s important to follow up
with training programs that offer more specific guidance. An increasing number of
firms have added ethics to their list of training programs. Some have done so as
a result of the revision of the U.S. Sentencing Commission Guidelines and the
Sarbanes-Oxley legislation that requires public companies to conduct compliance
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training at all levels, including senior executives and the board of directors. Most
Fortune 1000 firms provide some ethics training,54 and many of them do so annually.
In the 2005 Ethics Resource Center study,55 69 percent of people surveyed said that
their employers provide ethics training and that this training is generally mandatory.
Some companies use online ethics training; others use classroom face-to-face train-
ing. In Chapter 6, we’ll present more specifics about how different firms conduct
ethics training.
It’s important to note that the ethics training must be consistent with other ethical
culture systems, because a training program that is out of alignment with other cul-
ture systems is thought of, at best, as a pleasant day away from the office. At its
worst, the ethics training is seen as an obstacle to getting ‘‘real’’ work done—or even
as a joke. For example, a young man who worked in mortgage lending in 2006 said
that his company had provided a high-quality weeklong training program to prepare
him for his job. Among other more technical aspects of his job, he was taught to
advise clients to be sure that they could afford their payments and to avoid incurring
additional credit card debt. He felt that this was smart and caring advice, and he felt
good about his new role. But when he returned to the office, his ‘‘mentor’’ (who had
been in the job only six months longer than he had) told him that all that mattered
was closing the deal and making money for himself and the company, and that
‘‘advising’’ clients was a waste of time. If his ‘‘advisor’’ role had been reinforced by
his mentor, the cultural message would have been entirely different. Perhaps the
company’s fate would have been different as well—it no longer exists.
Performance Management Systems
Performance management systems involve the formal process of articulating
employee goals, identifying performance metrics, and then providing a compensation
structure that rewards individual—and frequently team—effort in relation to those
goals. Performance management systems also include formal disciplinary systems
that are designed to address performance problems when they arise. An effective per-
formance management system is a key component of the ethical culture. The system
plays an essential role in alignment or misalignment of the ethical culture because
people pay attention to what is measured, rewarded, and disciplined. So if employees
with integrity are the ones who get ahead, and unethical behavior is disciplined, that
process goes a long way toward promoting an ethical culture.
DESIGNING A PERFORMANCE MANAGEMENT PROCESS THAT SUPPORTS
ETHICAL CONDUCT Because people ‘‘do what’s measured and rewarded,’’ the
best way for an organization to design a comprehensive performance management
system is to spend time identifying which factors drive the results the organization
strives to achieve. This type of corporate soul-searching generally results in a list of
these factors, both financial and nonfinancial. Just as Fortune magazine considers
reputation when designing its famed ‘‘lists’’ of admired companies, many sophisti-
cated companies understand that reputation, in many cases, drives long-term financial
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results. However, many companies continue to design performance management pro-
grams that consider only financial results. They ignore the nonfinancial drivers that
can actually serve as the underpinning of the numbers. These companies focus on
what business results are delivered, and they ignore how those results were achieved.
That is probably the fastest way for an organization’s ethical culture to get out
of alignment.
Here’s how performance management systems can be designed to get great
results the right way. First, an organization needs to focus on the mechanics. For
example, once an organization understands what is necessary to drive results, it needs
to set goals to achieve those desired results and metrics to determine whether the
goals are being met. Real success in this area comes when organizations effectively
communicate those goals to every employee, helping employees identify how each
person can create value for the organization and then rewarding employees fairly for
their contribution to achieving those corporate goals. Once the mechanics are in
place, the next challenge is to marry the what with the how, and that’s where an
organization’s articulated values come in. Those values—probably concerning the
importance of people, integrity, diversity, customer service, and so forth—need to be
translated into behavior metrics that every employee is held accountable for. When
such a process is in place, high fliers who exceed all of their numbers can be held
accountable for how they met those numbers because this step is built right into their
performance expectations and rewards process. A good example is an account execu-
tive with a leading consulting company who managed her firm’s relationship with
many of the largest companies in New York City. Her clients generated revenues in
the millions for her firm, and that fact alone would ordinarily be enough to ensure
that she was named a partner in the firm. However, the senior management team was
so upset at how she trounced the firm’s stated value of ‘‘treating people with
respect’’—she was extremely abusive to her coworkers—that they repeatedly denied
her promotion. Of course, one could argue that she shouldn’t have a job at all. But at
least her behavior—the how involved in attaining her huge results—prevented her
from being promoted and esteemed as a partner.
American Express has tied its performance appraisal system directly to its values
and code of conduct. The values are associated with a culture that focuses on long-
term results as well as the desire to be an ‘‘employer of choice.’’ The company’s
ethics code states the expectation that leaders will be ethical role models who exhibit
the highest standards of integrity, develop employees, communicate the company’s
ethical expectations and their own support for those expectations, and create an open
environment so that employees feel free to express their concerns. The company’s
360-degree performance management process for senior leaders then identifies a
number of leadership competencies, including explicit examples of high performance
such as the following:
& Treats others with respect at all times; is fair and objective
& Actively listens and incorporates input from others
& Acts with integrity
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& Inspires the trust of the team, is reliable and consistent
& Talks openly and honestly—says it as it is
Examples of poor performance are also part of the system (e.g., ‘‘breaks promises, is
inconsistent, fails to show respect for others’’).
The ratings of these competencies are weighted substantially in promotion and
compensation decisions, thus making it difficult to get promoted if one is rated poorly
on these ethical leadership competencies and important to be rated highly if an
employee wants to advance. Finally, the company is investing resources in providing
leaders with the necessary skills so that they can effectively fulfill the company’s
expectations consistent with its values.56
Alignment of the goals and rewards with the organization’s values is essential
because employees will generally do what’s measured and rewarded, and they’ll
assume that the behaviors that are rewarded represent the ‘‘real’’ ethical culture. So,
in the American Express example, behavior consistent with the company’s stated
values is measured and rewarded with promotions and compensation. This is a great
example of ethical culture alignment.
But misalignment of rewards with other aspects of the ethical culture is quite
common. For example, imagine an organization where everyone knows that the top
sales representative’s sales depend on lying to customers about delivery dates despite
an ethics code that talks about customer satisfaction as a key value. Not only does the
unethical conduct go undisciplined, but the sales representative receives large
bonuses, expensive vacations, and recognition at annual sales meetings. Members of
the sales force recognize that information about what is rewarded carries the ‘‘real’’
cultural message, and so the code becomes meaningless—or worse yet, an example
of top management’s hypocrisy.
For an ethical culture to be in alignment, poor performance against stated ethical
goals must also be addressed quickly and fairly. For example, dishonest or dis-
respectful behavior (or any behavior inconsistent with ethical values) should be dis-
ciplined using a progressive disciplinary system that employees perceive to be fair.
For example, a first offense (unless it is particularly serious) is usually addressed in a
constructive manner that gives the employee the opportunity to provide input and to
change the behavior. Subsequent misconduct is addressed more severely, and dismis-
sal is the ultimate outcome for repeat or serious offenses. It’s also important that
employees be disciplined equally across organizational and performance levels. That
means the successful star executive as well as the lower-level employee must be dis-
ciplined for knowingly breaking the rules. In fact, at that higher level, the discipline
should probably be quicker and harsher because the higher in the organization one
goes, the more responsibility one holds, and the more one is a role model for others.
As a result of recent scandals and increased scrutiny by regulators, companies are
taking discipline more seriously. Even the perception of unethical behavior can lead
companies to dismiss high-level executives in the current environment.
Penn State football coach Paterno, in our interview with him, was clear about the
importance of rules and their enforcement with every player. ‘‘The players know
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what the penalties are. They have a pretty good idea of what’s going to happen to
them if they break the rules. . . . If I tell the players we have a rule, we have to
enforce it and apply it to everyone. You can’t say this is the rule and it’s for every-
body but your top quarterback.’’ Paterno showed how he held players accountable
when the Penn State team played its 1998 bowl game without two star players. One
had academic problems, and the other had been accused of taking a gift from a sports
agent. The team lost, but the program’s integrity was intact. Interestingly, Paterno’s
rule enforcement extends to alumni and boosters who have gotten other football pro-
grams in big trouble with the NCAA. Penn State regularly sends letters reminding
football game ticket holders about their responsibility to uphold the integrity of the
football program. And, according to Paterno, some alumni have lost their rights to
buy tickets because of past violations.
The bottom line is that performance management systems are important in them-
selves because they provide guidance about expected behavior, but they’re particu-
larly important in the sense that people look to them to reflect the ‘‘real’’ message
about what is valued in the organization. The essential question is whether consist-
ency exists between what the organization says (e.g., values statements, codes) and
what it actually measures, rewards, and punishes.
Organizational Authority Structure
Ethical cultures should guide individuals to take responsibility for their own behavior,
question orders to behave unethically, and report misconduct or problems. A strong
ethical culture incorporates a structure that emphasizes and supports individual respon-
sibility and accountability at every level. Employees are encouraged to take responsi-
bility for their own actions and to question authority figures if they have concerns. And
individuals are held accountable for negative consequences when they occur and for
reporting problems they observe. One manager we know created the idea of ‘‘Velcro’’
to convey the importance of responsibility to her direct reports. She tells them, if you
know about a problem, it’s yours until you address it. It’s stuck to you like Velcro!
Most modern organizations are bureaucratic,57 meaning that they have a hierar-
chy of authority, a division of labor or specialization, standardization of activities,
and a stress on competence and efficiency. Bureaucracy provides many advantages,
and large organizations require a certain amount of bureaucracy in order to function.
The bureaucracy can also be used to create a structure that supports ethics, and you’ll
learn more about these in Chapter 6. For example, ethics and legal compliance offices
in organizations signal to everyone that these are important issues worthy of re-
sources, expertise, and staff. However, certain characteristics of bureau-cracy—such
as specialization, division of labor, and hierarchy of authority—can present problems
for the organization’s ethical culture.
AUTHORITY, RESPONSIBILITY, AND ETHICAL CULTURE With bureaucracy
comes the idea of legitimate authority. Look at any organizational chart. It will tell
you who supervises whom—who has authority over whom. These authority figures
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serve important bureaucratic roles. They direct work, delegate responsibility, conduct
performance appraisals, and make decisions about promotions and raises.58
But the idea of legitimate authority can present problems for the ethical culture.
First, as you’ll learn in Chapter 7, people tend to obey authority figures no matter
what they are ordered to do.59 This natural tendency toward unquestioning obedience
can be a real threat to the organization’s attempt to build individual responsibility
into its ethical culture. In attempting to control employee behavior, many firms
expect loyalty; and some demand unquestioning obedience from their employees.
You might think that’s a good idea—that authority figures have more experience and
should know what’s right, and employees should follow their orders. But even the
military with its authoritarian structure expects soldiers to question unethical orders.
Loyalty is generally a good thing, but you shouldn’t be expected to be loyal or obedi-
ent to an unethical boss or organization. Unquestioning obedience to authority means
that employees are not expected to think for themselves, to question bad orders, or to
take responsibility for problems they observe. Therefore, a ‘‘do as you’re told’’ and
‘‘don’t ask any questions’’ culture that expects unquestioning obedience from
employees can become involved in serious ethical problems. Research has found that
the more a firm demands unquestioning obedience to authority, the higher the
unethical conduct among employees, the lower their tendency to seek advice about
ethical issues, and the lower the likelihood that employees would report ethical
violations or deliver ‘‘bad news’’ to management.60
Some managers create a structure designed to help them avoid blame.61 Their
greatest fear is that when it comes time to blame someone, the finger will point their
way, and their job will be at risk. By delegating responsibility to those at lower levels
in the organization, the authority figure can often avoid personal blame for mistakes
or ethical blunders. When it comes time to blame someone, the finger of blame fre-
quently points down. Underlings, in particular, fear becoming the scapegoat for mis-
takes made at higher levels. CYA (cover your a—) memos proliferate as managers
look to blame someone in a relatively powerless position who is considered to
be expendable.
The structure of an organization can also fragment jobs and roles.62 It isn’t nec-
essarily that individuals don’t want to take responsibility. But jobs and roles get so
divided up that they simply can’t see the big picture.63 We’ll see in Chapter 7 how
military bureaucrats passed the buck for responsibility during an investigation of the
My Lai massacre in Vietnam. Those involved saw themselves only as cogs in a
machine. No one felt responsible for the larger outcomes of their actions.
NEW ORGANIZATIONAL STRUCTURES Organizations today are developing
structures designed to remove bureaucratic layers, push responsibility down, and
empower individuals to make decisions at every organizational level. Take the exam-
ple of office furniture manufacturer Herman Miller, Inc. (HMI), which is committed
to the values of ‘‘open communication,’’ ‘‘the dignity of each individual,’’ and ‘‘qual-
ity relationships based on mutual trust and integrity.’’ Kevin Knowles, a crew leader
for six years, said, ‘‘What always surprises me is that everyone in the company . . . is
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free to talk with anyone in management about whatever they’d like to talk about.’’
Managers at HMI cite workers’ ability to go over their managers’ heads as a major
reason for the company’s success. ‘‘There’s no fear of retribution if you call someone
three levels above.’’ HMI touts a process its chairman calls ‘‘roving leadership’’ that
allows anyone to be a leader on a particular issue.
Here is an example of how roving leadership was tested successfully. An
employee with AIDS decided that he should let others know about his illness. A cow-
orker took the roving leader responsibility and informed the human resources man-
ager. Quickly, the entire plant was informed, and a physician from headquarters flew
in with a training videotape and a question-and-answer session. According to the rov-
ing leader, what’s important is that HMI’s value system ‘‘allows us to act on our
instincts and know the company will support us. Because the value of each individual
is important to us, we were able to stop the manufacture of furniture for one day to
take care of Peter.’’64 Such a culture likely contributes to the success of a company
that was named in 2002 by Forbes magazine as among the 400 best-performing large
American corporations. Business Ethics magazine also ranked HMI in the top 10
among the ‘‘100 Best Corporate Citizens.’’
These recent changes in organizational structure have powerful implications for
taking responsibility and for ethical decision making, and they increase the impor-
tance of having a strongly aligned ethical culture. When individuals are indepen-
dently making decisions, with less direct supervision, they need a strongly aligned
ethical culture to guide them. An important part of this picture is a structure that
supports taking individual responsibility for ethical action.
STRUCTURES TO SUPPORT REPORTING OF PROBLEMS In today’s organiza-
tions, fewer employees are directly supervised and organizations rely increasingly on
employees to alert them to problems or report misconduct. Yet employees are often
reluctant to do so. Therefore most large organizations have set up formal structures
and systems for making suggestions and for reporting misconduct internally. These
systems use intranets and phone systems to answer employees’ concerns and take
complaints and reports about observed wrongdoing.
As we all know, powerful norms exist against reporting on peers or superiors (in-
ternal whistle-blowing). The words we use to describe this behavior—tattling, squeal-
ing, snitching, informing, and ratting—all have negative connotations. In fact, there
isn’t a nice or even a neutral word to describe it. Can you come up with one? As sug-
gested in Chapter 4, whistle-blowers frequently suffer retaliation, particularly when
they report managerial or organizational misconduct.65 They perceive that they are
punished rather than rewarded for doing what they think is right. Therefore employee
fear of reporting misconduct is widespread. If an organization claims that it’s attempt-
ing to develop a strongly aligned ethical culture, retaliation against a whistle-blower is
a powerful example of misalignment. Again, the workers view this ‘‘punishment’’ of
the whistle-blower as an example of the organization’s ‘‘real’’ ethical beliefs.
The ethical organization, however, should view an employee who takes respon-
sibility for reporting a problem or misconduct as important to an effective control
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system and must find ways to make such activity safe and encouraged. Some organi-
zations have even rewarded whistle-blowing. For example, in 1996, Fortune maga-
zine published memos from the chairman of a Wall Street financial services firm.
The following memo was addressed to senior managing directors, managing direc-
tors, and associate directors.
We need your help. Please help us get a message out to every associate. It
is essential that once again we stress that we welcome every suspicion or
feeling that our co-workers might have about something they see or hear
that is going on . . . that might not measure up to our standards of
honesty and integrity. . . .
We want people . . . to cry wolf. If the doubt is justified, the reporter
will be handsomely rewarded. If the suspicion proves unfounded, the per-
son who brought it to our attention will be thanked for their vigilance and
told to keep it up.
Forget the chain of command! That is not the way [the company]
was built. If you think somebody is doing something off the wall or his/
her decision making stinks, go around the person, and that includes
me. . . .
Get these messages out loud and clear.
We have had some senior people who resented ‘‘end runs.’’ They
quickly became associated with more conventional firms—you can draw
your own conclusions about whether their career change worked out for
the best.66
This leader sent a clear message that whistle-blowing was encouraged and
rewarded. In the second memo, he shared information about a specific instance in
which two administrative assistants detected that fictitious taxicab vouchers were
being submitted by an employee. The employee was terminated, and the administra-
tive assistants were provided a cash award.
Decision-Making Processes
The organization’s formal decision-making processes are another important part of
the ethical culture. In an aligned ethical culture, leaders make ethical concerns a for-
mal part of all decision making. This emphasis on ethics in decision making can be
reinforced by regularly addressing ethical concerns in meetings and by making them
an expected part of managers’ reports regarding new products or new business ven-
tures. For example, managers may be asked to consider potential harm to multiple
stakeholders when proposing a new product or process. As one example, environ-
mental impact is now an expected and routine part of corporate decision making in
many firms. Some organizations are also creating special high-level ‘‘ethics’’ com-
mittees charged with reviewing major organizational level decisions from an ethical
perspective.
67 For example, one can imagine a responsible pharmaceutical company
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making such assessments about whether to launch a new drug that has serious side
effects even after the FDA has approved it. Others have advocated the implementa-
tion of moral quality circles, groups set up to assess the morality of business
decisions.68
OVERRELIANCE ON QUANTITATIVE ANALYSIS Decision-making processes can
contribute to unethical behavior by relying exclusively on quantitative analysis and
focusing only on financial outcomes. For example, in Chapter 3 we discussed the
decision-making process that kept the Ford Pinto from being recalled. In that situa-
tion, exclusive reliance on a quantitative cost-benefit analysis to the exclusion of
ethical considerations had disastrous consequences. In another example, Johns
Manville, the former corporate giant and producer of asbestos, was brought down
by decision-making processes that focused on the bottom line to the exclusion of
worker health. More than 40 years ago, top management began to receive informa-
tion implicating asbestos inhalation as a cause of severe lung disease in workers.
Managers and medical staff suppressed the research and concealed the information
from employees. During testimony, a lawyer reported on a confrontation with the
corporate counsel about the failure to share X-ray results with employees. The law-
yer reported asking, ‘‘You mean to tell me you would let them work until they
dropped dead?’’ The Johns Manville lawyer replied, ‘‘Yes, we save a lot of money
that way.’’ It was apparently cheaper to pay workers’ compensation claims than to
develop safer working conditions. A New Jersey court found that the company had
made a ‘‘conscious, cold-blooded business decision to take no protective or reme-
dial action.’’69 Obviously, organizational decision makers must rely on quantitative
analysis in making business decisions. But their reliance on numbers, to the exclu-
sion of ethical considerations, is problematic and contributes to an unethical cul-
ture. Discussions about whether the decision is the ‘‘right’’ thing to do must
accompany discussions about the effect of a particular decision on the bottom line.
Important decisions should be subjected to a discussion of ethical concerns, espe-
cially potential impacts on stakeholders.
BURDEN OF PROOF In 1986, Beech-Nut Nutrition Corporation, the second-largest
U.S. baby food manufacturer, pleaded guilty to 215 felony counts and admitted to
selling apple products that were a blend of synthetic ingredients. How did this hap-
pen? There were many causes, among them the company’s financial difficulties, the
belief that other companies were selling fake juice (industry norms), and the belief
that the juice was perfectly safe.
A chief cause may also have been the decision-making processes that were used.
When Jerome LiCari, director of research and development, recommended changing
suppliers in 1981 (because he suspected adulteration), Operations Head John Lavery
turned the traditional burden of proof around. Generally, baby food manufacturers
would switch suppliers if the supplier couldn’t demonstrate that the product was gen-
uine. In this case, Lavery said that if LiCari wanted to go with a more expensive
supplier, he would have to prove that the concentrate they were buying was
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adulterated (rather than genuine). Given the technology available at the time, this was
difficult, and the supplier was retained.70
A similar decision-making criterion was used in the decision to launch the space
shuttle Challenger despite engineers’ concerns about O-ring failure in cold weather.
In previous launches, engineers had been required to show evidence that the launch
was safe (which would have been difficult, if not impossible). In the case of the
Challenger, the burden of proof was changed. Engineers who balked at the
impending launch decision were asked to prove that it was unsafe.
These examples suggest that it’s relatively easy to alter decision-making pro-
cesses to support whatever decision managers have already made. That’s why it’s
extremely important that organizations design formal decision-making processes in
good financial times and before a crisis occurs. Then, when trouble strikes, they can
rely on these effective decision-making processes to guide them. The space shuttle
Challenger might never have been launched if engineers had been required to prove
that the launch would be safe, rather than unsafe. Managers must be particularly alert
to changes in traditional decision-making criteria, especially in times of crisis.
INFORMAL CULTURAL SYSTEMS
In addition to the formal systems described previously, ethical culture is kept alive
informally and symbolically through informal norms, heroes, rituals, myths, and
stories. Employees experience the ‘‘real’’ organization through these informal sys-
tems, and information about them is carried through informal communication systems
such as the grapevine and water cooler gatherings. In this way, people come to know
what behaviors are ‘‘really’’ rewarded, how decisions are ‘‘really’’ made, and what
organizational leaders ‘‘really’’ care about and expect. If messages from the formal
and informal cultural systems differ, the ethical culture is out of alignment. It’s impor-
tant to note that employees are more likely to believe the messages carried by the
informal system. Recent research has found that employees’ perceptions of informal
cultural systems influence their ethics-related behavior more than the formal systems
do.71 Therefore management of these informal systems is extremely important.
Role Models and Heroes
Much socialization about ethics is informally conducted by role models and mentors.
Role models may be senior managers, immediate superiors, or just more experienced
coworkers. Kent Druyvesteyn, former staff vice president of ethics, General Dynam-
ics Corporation, made an important point about senior leaders as ethical role models.
‘‘People in leadership need to . . . set the tone by the example of their own conduct.
We could have had all the workshops in the world. We could have even had Jesus
and Moses and Mohammed and Buddha come and speak at our workshops. But, if
after all of that, someone in a leadership position then behaved in a way which was
contrary to the standards, that instance of misconduct by a person in a leadership
position would teach more than all the experts in the world.’’ By contrast, if senior
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leaders consistently model behavior of the highest integrity, employees learn that the
formal messages about ethics are real.
Mentoring occurs at all levels in the organization and is an informal process of
socialization whereby a more senior person takes a junior person under wing, provid-
ing information, career strategies, rules of the road, and so on. Individuals who are
passing through organizational ‘‘boundaries,’’ such as new hires, or those who are
transferring from one part of the organization to another are most affected by these
socialization influences.72 In an ethical culture, the mentor emphasizes the impor-
tance of integrity and resistance to pressure to behave unethically. In an unethical
culture, the mentor may indoctrinate the individual into accepted unethical practices,
making it difficult for the individual not to go along.73 The new accounting graduate
who was told by his superior in a public accounting firm, ‘‘You’re too honest to be an
auditor,’’ received a powerful message about ethics (or, actually, the lack thereof) in
that organization. When looking for evidence of ethical culture alignment and mis-
alignment, ask whether the organization’s role models behave consistently with the
organization’s espoused values and codes.
In an ethical culture, heroes should personify the organization’s values.74 Heroes
are symbolic figures who set standards of performance by modeling certain behav-
iors, and they can be the organization’s formal leaders. Heroes can also be founders
who are no longer even present in the organization. As we noted earlier, Thomas
Jefferson is still very much alive at the University of Virginia. Stories about the
values of these heroes continue to influence decision making. Thus, a hero who
champions integrity and stands up for what is right may influence the behavior of
many in the organization.
The organization’s hero can also be someone who is not the president or chief
executive officer. When asked to identify their organization’s hero, Penn State stu-
dents inevitably name football coach Joe Paterno. ‘‘Joepa’’ as he is affectionately
known around campus, is not only the formal leader of the football team, but a cul-
tural hero as well. His values, including education first for college athletes and win-
ning by sticking to the rules of the game,75 are considered by many to extend far
beyond the football program to permeate Penn State’s culture. On campus, Joepa and
his wife are also known for their philanthropy. For example, they showed their lead-
ership in the fund-raising campaign for a much-needed university library addition,
now known as the Paterno Library addition. Some say that Penn State is the only
university whose sports arena is named after a former president while the library
addition is named after its football coach.
Savvy executives understand the role that heroes play in forming or changing a
culture. One CEO of a financial services firm was very serious about identifying and
rewarding people who lived his organization’s values. He challenged his executives
to bring him stories of employees who were doing the right things in the right way,
who were models of the culture. He collected these stories and sent personal, hand-
written thank-you notes to those model employees. While a phone call might have
sufficed, employees were so thrilled with his written recognition and praise that they
displayed his notes in their offices. Those framed notes sent a rather loud message to
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other employees about what kind of behavior was valued at high levels. Of course,
they also helped spread word of the ‘‘heroes’’ and their deeds. In a similar example,
Southwest Airlines publishes letters from customers in its monthly newsletter about
employees who provided outstanding customer service. They publish the employees’
pictures in the newsletter and post them on the wall in the headquarters.
Norms: ‘‘The Way We Do Things around Here’’
Norms are standards of daily behavior that are accepted as appropriate by members
of a group. They exert a powerful influence on individual behavior in organizations,
and they can serve to support an ethical or unethical culture. For example, imagine an
individual entering a computer software sales job who is told immediately by peers in
the sales force that customers should always be dealt with honestly because long-
term customer relations are so important to the firm. Here, the norm of honesty with
customers supports ethical conduct and an ethical culture. On the other hand, con-
sider the individual who begins a new job and is told by his or her colleagues that
making the sale is all that counts, even if you have to lie to the customer about the
capabilities of the software or delivery dates. This norm supports unethical conduct
and contributes to an unethical culture. Either kind of norm (ethical or unethical) can
become ‘‘the way we do things around here’’ in the organization.
Formal rules are often inconsistent with the informal norms that develop. For
example, the salesperson described previously may have attended a mandatory ethics
training session that taught rules of honesty in customer relationships. But if the mes-
sage being sent on the job is to make the sale no matter what, the formal rule is over-
ridden. Similarly, at a fast-food restaurant, new employees may be told about a rule
against eating food without paying for it. However, once on the job, they may see
coworkers eating while the supervisor looks the other way. These coworkers may
rationalize their behavior because of their low pay or poor working conditions, or
because the supervisor doesn’t seem to care or eats food himself or herself. Encour-
aged to join in, the new employee is likely to do so, having learned the ‘‘real’’ rules.
Thus, despite formal rules, regulations, codes, and credos, informal norms are fre-
quently the most influential behavior guides and clues to the culture. When the for-
mal messages are consistent with the informal norms, this contributes to an ethical
culture in alignment. And when informal norms are inconsistent with formal rules
and codes, the culture is clearly out of alignment.
Rituals
Rituals are an important part of an ethical culture. They tell people symbolically what
the organization wants them to do and how it expects them to do it.76 Rituals are a
way of affirming and communicating culture in a very tangible way.77 Organizations
have meetings, parties, banquets, barbecues, and awards ceremonies that all convey
messages about what’s valued in the organization, Years ago, General Motors of
Canada introduced a new vision and values by asking each manufacturing unit to
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create a small float representing one of the key values. These floats were part of a
parade that kicked off a full day of culture-building ritual surrounding the theme
‘‘Customers for Life’’ and the motto ‘‘I Am GM.’’ During the day, the CEO unveiled
a large painting of the group vision and told a story about the company’s future. To
reinforce the ‘‘I Am GM’’ motto, employees were asked to see themselves as being
responsible, at any moment, for the company, its products, and services. The day
ended with the ‘‘GM Acceleration Song’’ performed by the 100-person Up With
People singing and dancing group. The song had been revised to incorporate the new
values created by the leadership team.78
Some companies have annual family picnics and ‘‘bring your child to work
days’’ that encourage employees to value time with their families. Some have on-site
child care so that having lunch with your preschool child in the company cafeteria
becomes a valued daily ritual and symbol of the extent to which the organization
values family. Others have awards ceremonies that convey the values of the organi-
zation, including awards for exemplary ethical conduct (see the discussion of
Lockheed Martin’s Chairman’s Award in Chapter 6). It’s important to ask what val-
ues are celebrated at these rituals and ceremonies because they can easily support
unethical behavior, such as making the numbers no matter how. For example, sales
meetings occur in most organizations. So is success with integrity being touted and
celebrated at these meetings, or are only those who make their numbers celebrated at
these events? Look for whether the rituals are consistent with the company’s stated
values, formal rules, and reward systems to help determine whether the culture is
in alignment.
Myths and Stories
Another extremely important way organizational culture is communicated and kept
alive is through the informal communication network. People tell stories to give
meaning to their world and life.79 Organizational myths and stories explain and give
meaning to the organizational culture. They may be anecdotes about a sequence of
events drawn from the organization’s history. The story’s characters are employees,
perhaps company heroes, and the moral of the story expresses the organization’s
values.80
At IBM, a story that has been told and retold describes how a low-level
employee denied Tom Watson, then IBM president, entry into a restricted area of the
company because Watson was not wearing his IBM identification badge. Watson
praised the employee, suggesting the importance of upholding company rules and
applying them to everyone.
In Paterno by the Book,81 Joe Paterno recounted a powerful story from the Penn
State football program’s history about a leader standing up for what he believes at a
critical moment.
The Miami game was a turning point for me. . . . Late that night, as we
waited to board our charter plane, I strolled around the terminal replaying
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the joys of our victory when I saw something. . . . I looked again and
sure enough two of our best players were standing at a not-too-visible
spot of the airport bar, each fingering a glass of beer. . . . ‘‘You’re in
trouble,’’ I told them. ‘‘You know that you’re never to be seen standing
at a bar.’’ Naturally they protested that they were having only one, that
they were coming down after the great game, that nobody around here
knew them. ‘‘Never means never,’’ I said. Nobody on the squad could
possibly have the faintest doubt about my rule: We don’t want a
Penn State football player to drink in a public place. . . . He throws a
bad light on the entire team, putting every member under suspicion. Fur-
thermore, . . . football players are public figures, watched and talked
about. Also they’re role models. I reminded the two guys of the one loop-
hole in my rule: You can sit down with your folks privately and have a
glass of wine. You can even have a couple of beers on a Saturday night—
in private, with personal friends. That won’t make you victims of hear-
say. But if I see you standing at a public bar, you’re in trouble.
So now these two kids had forced the decision on me. One of them
had previously got himself in a minor jam with the police. It made a men-
tion in the paper. ‘‘You’re gone,’’ I said. That meant for good. Off the
team. To the other I said, ‘‘This is the first trouble I know about. You get
one more chance, but you’re suspended for the next two games.’’ On
Monday evening the captains . . . came to see me. The whole squad was
meeting at that moment, they said, and had sent the captains to tell me
that they felt the penalties were too harsh. They wanted me to take the
first guy back and lift the suspension on the second—and they wanted to
return to the meeting with my changed decision.
There are moments in the life of a manager when his ability to main-
tain control teeters on a hair. He can only manage with the consent of the
managed, unless he’s a prison warden. On the other hand, he can only
manage by unambiguous assertion of authority. Those are opposites, in a
sense. If the manager, who sometimes has to choose in a split second,
chooses the wrong one of those two, his effectiveness is finished.
‘‘Go back to your meeting and I’ll be there myself in five minutes,’’ I
said. The sentence was harsh, I said to myself, but the rule they had bro-
ken was perfectly clear, defensible, and necessary. The morale and sup-
port of the entire squad hung in the air. If I backed off, the message was
clear as a bell: I’m afraid of you guys. Ignore this rule. Ignore any rule
that itches as much as this one does. And if there’s a rule that itches less,
try me on that, too.
Five minutes later, that squad room was a tableau of sullen, hard
faces. I looked around, eye to eye, then talked. ‘‘A rule that protects us
all was broken. The decision I made was the best one for all of us. I have
no choice but to stand with it.’’ Faces stayed frozen, waiting. I couldn’t
read them. ‘‘If anybody here can’t live with it, go. Right now. If you stay,
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you do it my way, the right way, living by the rules. If you decide to stay
and do it that way, we’ll have a great football team. I’m going to walk out
of here right now. A minute later I’m coming back in. Whoever’s here,
that’s who we’re going to play with.’’
As I walked bravely out of there, imitating John Wayne the best I
could, my knees were shaking. In the promised minute, I returned. Every
frozen face that was there during my first visit was still there, although
still frozen.82
This story represents a critical event in the history of Paterno’s tenure as Penn
State’s football coach. It symbolizes the idea that rules are valued and enforced in a
culture of high integrity and accountability. To the extent that the story has become a
part of the organization’s culture, it serves to reinforce the culture’s emphasis on the
value of rules and represents alignment between the informal and formal cultures.
Similarly, in other ethical organizations, many of the stories that convey the impor-
tance of the ethical culture refer to rule violators being disciplined harshly or fired.
Organization members remember these stories, and they serve to reinforce the value
of doing the right thing. But note that stories can easily reinforce an unethical culture
if they’re about rule violators succeeding despite their unethical behavior.
Organizations can create stories to enhance the ethical culture. Medtronic, a
medical technology firm, has embraced storytelling as a way to do just that. At their
annual holiday party, the company invites several patients and their doctors to share
their stories of how the company’s products helped them. For example, one patient
with a long history of Parkinson’s disease told a story about how his life had become
uncontrollable until his doctor suggested trying a new Medtronic device for deep-
brain stimulation that gave him his life and his smile back. The CEO noted how these
stories help reinforce the company’s mission of serving others.83
The best stories are simple ones based on real people and experiences that tap
into the company’s values and employees’ pride. Leaders interested in creating an
ethical culture should be on the lookout for examples of exemplary ethical behavior
to celebrate and find ways to communicate those stories on corporate websites and in
newsletters and award ceremonies. If you want to learn about an organization’s cul-
ture, ask an employee to tell you a story that exemplifies the culture. Then just sit
back and listen.
Language
Cultures develop and use language to communicate values to employees. The old
joke that business ethics is an oxymoron suggests the conventional wisdom that the
language of ethics is out of place in the business context. But in a strong ethical cul-
ture, ethics becomes a natural part of the daily conversation in the organization.
Employees feel comfortable talking ethics with each other and with their managers.
Organizational values are invoked in decision making. And managers routinely talk
ethics with their direct reports. It could be as simple as asking whether the decision is
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the right one, in an ethical as well as a business sense. Is this the ‘‘proper’’ thing to do
for customers, suppliers, the community? What is the potential harm to all
stakeholders?
The use of ethical language is likely related to decision-making behavior. In one
study, individuals who discussed their decision-making using ethical language were
more likely to have actually made an ethical decision.84 These people talked about
ethics, morals, honesty, integrity, values, and good character. Those who had made
the unethical decision were more likely to recount the decision in the more traditional
business language of costs and benefits.
But, without cultural support for the use of ethical language, business managers
are reluctant to describe their actions in ethical terms even when they are acting for
ethical reasons. This reluctance, referred to as moral muteness, can be attributed to
the value placed on ‘‘efficient’’ decision making such that ethics talk can be thought
of as a distraction as well as to the desire to appear powerful and effective. Ethics talk
can also appear overly idealistic and utopian and inconsistent with the expectation
that managers can solve their own problems.85
Interestingly, getting managers to talk with their employees about ethics has
been likened to parents discussing sex with their children. Although parents agree
that sex education is a good thing, they often find it difficult to broach the subject
with their children. Similarly, managers may find it difficult to begin a conversation
about ethics with other managers or with their subordinates. If these topics are typi-
cally not discussed, the manager who brings it up may feel like a goody-goody or a
spoilsport.86 But managers who become comfortable talking about ethics will be role
models of important behaviors for their subordinates.
Kent Druyvesteyn, one of the first corporate ethics officers, told us an anecdote
about the early development of ethics training at General Dynamics.
Early on, at General Dynamics, we declared that our ethics training
workshops were to be small and interactive, and that they were to be led
by managers. And, we heard some complaints from managers who said,
‘‘We don’t know anything about this.’’ They thought we were going to
have them teach Aristotle and Kant, but that’s not what we were trying to
do. We also had people in training say, ‘‘We can’t have people in man-
agement do this. There won’t be any quality control.’’
At that point I said, ‘‘Let’s consider what it is we’re trying to do
here. What we are trying to do is raise awareness, to increase knowl-
edge of company standards and stimulate commitment to those stan-
dards. That’s the most important thing.’’ Here’s an analogy I’d like
you to consider. You have some small children and you decide that
you want to teach them about sex. There are a number of ways that
you could do this. You could hire an expert—someone who knows all
about sex, who knows the right words to use, who knows all the latest
terminology, who is pedagogically very skilled. You could hire this
person to come into your home, sit down in your living room with
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your children, and teach them about sex. I mean, isn’t that good man-
agement technique—to delegate it to someone? On the other hand,
you could do it yourself. You may have limitations. You don’t know
everything. You might be embarrassed or tongue-tied. In the end
though, who do you think would be more effective? To have the
expert do it or for you to do it yourself? I have never had a person say
that the expert would be more effective.
Top managers can also make ethics an acceptable topic of conversation by sending a
message that it’s not only okay, but expected, to talk about one’s ethical concerns.
They can do this by leading discussions about ethics, discussing the ethics code and
its application in a video that is shown to employees, and otherwise openly discuss-
ing ethical problems with managers and employees. Senior managers can also build
‘‘ethical talk’’ into the fabric of the organization by requiring routine discussion of
ethical issues when important decisions are made.87
In unethical cultures, ethical language is mostly absent or unethical language
may be used (as when employees talk about ‘‘screwing’’ customers). But, as we
noted in our discussion of euphemistic language in Chapter 3, organizational lan-
guage can also be used to avoid the ethical implications of actions. This can
happen either by design or inadvertently. For example, in Nazi Germany, the
code names for killing and genocide were final solution, evacuation, and special
treatment. This use of euphemisms allowed people to avoid confronting the true
meaning of their behavior.88 Similarly, companies use euphemisms to avoid the
pain of decisions to lay off employees. Downsizing, rightsizing, restructuring,
and targeted outplacement are just a few terms we’ve encountered. It may be
easier to impose a targeted outplacement than a layoff, but are the ethical consid-
erations as obvious for targeted outplacement as they are for layoffs? Recall
from Chapter 3 that using ethical language increases individuals’ ethical aware-
ness. So, it’s essential that ethical language become a part of the organization’s
ethical culture.
ORGANIZATIONAL CLIMATES: FAIRNESS,
BENEVOLENCE, SELF-INTEREST, PRINCIPLES
Beyond these specific systems, we have learned that employees’ perceptions of broad
climates within the organization are extremely fundamental and influential. These
climates tend to cross cultural systems. For example, when employees think about
ethical culture, they tend to think first about the climate for fairness in the organiza-
tion. This refers to whether they believe employees are treated fairly every day, in
terms of outcomes (pay, promotions, termination), processes (are processes for mak-
ing these important decisions about employees fair, nonarbitrary, and unbiased?) and
interactions (are employees treated every day with dignity and respect?). It makes
sense that it would be hard to talk seriously with employees about their ethical behav-
ior if they believe that the organization isn’t behaving fairly toward them. Research
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has demonstrated that these very general perceptions of fair treatment can be as pow-
erful an influence on employees’ ethical conduct as just about any of the formal or
informal cultural systems just described. Employees appear to reciprocate the organi-
zation’s fair treatment with their own ethical behavior.89
Consistent with these findings about fairness climate, employees’ behavior is
also influenced by their general perceptions related to whether the organization is
characterized by a benevolence climate—meaning the organization is one that
‘‘cares’’ about multiple stakeholders, including employees, customers, and the
broader community and public. So employees are much more likely to demonstrate
ethical behavior in an organization they see as one that cares.
By contrast, employees in some organizations see their firm as promoting a very
instrumental self-interest climate, in which people protect their own interests above
all and everyone is essentially out for him or herself. Little attention is given to the
social consequences of one’s actions. You can imagine that an organization that
focuses exclusively on financial outcomes would create such a climate; and, logi-
cally, employee unethical behavior is higher in such organizations.
Finally, in a rule-based climate, employees perceive that the organization is
one where employees follow both laws and the organization’s rules when making
decisions. One can imagine that organizations in highly regulated industries that
take their codes, rules, and policies quite seriously would be rated highly on this
climate dimension, which has the largest impact on reducing unethical behavior.
This may be because this climate taps into perceptions of ethical culture align-
ment. An organization in which employees follow the rules is more likely to be
one whose formal (codes, policies) and informal systems (norms of daily behav-
ior) are aligned.90
DEVELOPING AND CHANGING
THE ETHICAL CULTURE
We can conclude from this cultural analysis that ethics at work is greatly influ-
enced by the organization’s ethical culture. Both formal and informal systems
and processes channel and reinforce certain kinds of behavior. Each of the sys-
tems on its own can support either ethical or unethical conduct. In addition, these
multiple systems can work together or at cross purposes, thus leading to an orga-
nization that is aligned to support ethical (or unethical) conduct or one that is
misaligned and creating mixed messages. Imagine an organization with an ethics
code that forbids employees from accepting gifts of any kind, but a senior execu-
tive is known to have accepted box seats at the ball game from a client. This ‘‘we
say one thing, but do another’’ approach leads to widespread cynicism. The code
loses all credibility as workers pay more attention to what’s done than to what’s
said. On the other hand, when the organization disciplines that executive, this
action visibly reinforces the code and supports the firm’s ethical stance with
all workers.
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How an Ethical Culture Can Become an Unethical Culture
The story of Arthur Andersen, the now defunct auditing company, provides a sad
example. It demonstrates how a solidly ethical culture can be transformed into an
unethical culture and lead to the demise of an 88-year-old firm.
Founder Arthur Andersen created the company when he was in his twenties. As
chief executive, the messages he conveyed about ethical conduct were strong, con-
sistent, and clear. Andersen’s mantra, ‘‘Think straight—talk straight,’’ guided
employee behavior in an organization where ‘‘integrity mattered more than fees.’’
Stories about the founder’s ethics quickly became part of the firm’s mythology and
lore. For example, at the age of 28, Andersen confronted a railway executive who
insisted that the accounting firm approve his company’s books. Andersen said,
‘‘There’s not enough money in the city of Chicago to induce me to change that
report.’’91 Andersen lost the railway company’s business, but when that company
later went bankrupt, Arthur Andersen became known as an organization people could
trust to be honest and to stand up for what was right. In the 1930s, Arthur Andersen
emphasized accountants’ special responsibility to the public. The founder died in
1974; but he was followed by leaders with similar beliefs, and the strong ethical cul-
ture continued for decades. The management style Andersen initiated was a central-
ized, top-down approach that produced employees who were systematically trained
in the ‘‘Andersen Way.’’ Customers around the world knew they could expect quality
work and integrity from Andersen employees, who were all carefully socialized to
speak the same language and to share ‘‘Android’’ values. Through the 1980s, people
were proud to say they worked for Arthur Andersen, which would provide a good
career within a respected company.
In the mid-1990s, Arthur Andersen still provided formal ethical standards and
ethics training. In 1995 it even established a consulting group, led by Barbara Toffler,
to help other businesses manage their ethics. But Toffler quickly became concerned
about the ethics of her own employer, which she chronicled in her book Final
Accounting: Ambition, Greed, and the Fall of Arthur Andersen.92 Toffler attributes
much of the change from ethical culture to unethical culture to the fact that the firm’s
profits increasingly came from management consulting rather than auditing. Auditing
and consulting are very different undertakings, and the cultural standards that worked
so well in auditing were inconsistent with the needs of the consulting business. Under
the new business realities, rather than standing for principles of honesty and integrity,
consultants were encouraged to keep clients happy and to concentrate on getting
return business because only revenues mattered. They were even expected to pad
prices or create work to increase profits.
Even the training that had always been so important to Andersen’s culture wasn’t
immune from change. Traditionally, new employees (recent college graduates) had
been required to attend a three-day enculturation session, but now new consultants
(often hired with experience outside the firm) were told not to forgo lucrative client
work to attend the training. So Toffler and lots of other consultants never got the
cultural training.
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By the time Toffler arrived at Andersen, no one referred to the ethical standards,
although they still existed in a big maroon binder. Toffler says, ‘‘When I brought up
the subject of internal ethics, I was looked at as if I had teleported in from another
world.’’ So Andersen still had ethics policies, and they still talked about ethics in
formal documents, but the business had changed dramatically and the approach to
ethics management had not kept pace.93
Andersen was convicted of obstruction of justice for shredding documents asso-
ciated with its role as Enron’s auditing firm and quickly went out of business. The
Supreme Court reversed the decision in 2005, ruling that the jury had not been
advised that conviction in a white-collar crime case requires evidence of criminal
intent. However, the Supreme Court reversal did not clear Andersen of wrongdoing.
In fact, prosecutors provided evidence of criminal intent.
94 In the end, even if
someone had wanted to, there was no firm left to resurrect.
Was Andersen’s transformation from ethical culture to unethical culture a con-
scious process? Did anyone ever say, ‘‘Now we’re going to create an unethical cul-
ture at Arthur Andersen’’? We doubt that. But leaders’ lack of attention to the ethical
culture as the organization was undergoing a significant business transformation
practically guaranteed that the messages sent by the informal culture (revenues, reve-
nues, revenues) would begin to contradict those sent by the formal culture (ethics
standards) and lead to a culture that was seriously out of alignment as well as one
that increasingly sent messages suggesting only the bottom line mattered.
Becoming a More Ethical Culture
What should an organization do if it wants to transform itself into a more ethical
culture? Given our multisystem perspective on ethical culture, changing organiza-
tional ethics in a positive direction involves simultaneously developing or changing
multiple aspects of the organization’s ethical culture. If the effort is to be successful,
this ethical culture development or change should involve the alignment of all
relevant formal and informal organizational systems to focus on ethics. Obviously,
this requires a major commitment from the most senior levels in the organization.
Culture change attempted at lower levels is likely to be ineffective unless it is fully
supported and modeled by senior management. Unfortunately, some companies (e.g.,
Arthur Andersen) go out of business before they have this opportunity.
Changing organizational culture is more difficult than developing it. In a new
organization, workers are quite open to learning and accepting the culture of their
new organizational home, especially if it fits with their own values. However, anthro-
pologists and organizational scientists agree that changing an existing culture is an
extremely difficult process.95 This view is consistent with an idea basic to all organi-
zational change and development efforts—that changing individual and group behav-
ior is both difficult and time-consuming. The human tendency to want to conserve the
existing culture is referred to as cultural persistence, or inertia. Culture has an addict-
ive quality, perhaps because culture members are aware that culture components can-
not be altered without affecting other cherished values and institutions.
96 Also, an
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unethical culture tends to feed on itself. Why would successful (but unethical) man-
agers want to change? They wouldn’t. They would tend to hire people like them-
selves and perpetuate the culture that exists.
Most often, pressure for culture change comes from outside—from stockholders,
the government, regulators, and other outside stakeholders. The public’s general mis-
trust of business executives97 and the threat of increased government regulation may
encourage leaders to look more closely at their ethical cultures. In addition, organiza-
tions whose members have been ‘‘caught’’ engaging in unethical behavior, or those
faced with costly lawsuits, are prime candidates for such ethical culture change
attempts. Finally, the government’s sentencing guidelines for corporate crime turned
the attention of many organizations to an evaluation of their ethical cultures during
the 1990s.
The influence of bad publicity and costly lawsuits extends beyond the targeted
organization. Organizations scan the environment for information that is relevant to
their concerns. When one organization in an industry is called on the carpet for a
legal or ethical violation, other organizations in the industry take notice and act.
Arthur Andersen’s indictment for document shredding in the Enron case, as well as
its mishandling of multiple audits over a number of years, sullied the reputation of
the entire auditing industry. Thus any organization that senses increased vulnerability
to external pressure is also more likely to consider the need for attention to the
management of its ethical culture.
The pressure to change organizational ethics can also come from within, but it is
not likely to occur unless the CEO decides that change is required. Often a new CEO
is brought in to lead the charge when serious culture change is needed, because only
the CEO has the clout and resources to make such significant changes. John A.
Swainson was brought in after a nearly 30-year career at staid and solid IBM to lead
Computer Associates (CA) in 2004. CA provides IT management software to large
users and generates over $4 billion in annual revenue. According to Swainson, the
‘‘tipping point’’ for the company occurred when its board instituted a new stock
option plan for senior executives in the 1990s. Executives had to hit stock price num-
bers and keep them up over a period of time if they were to get payouts of more than
$1 billion (you read that right—it’s a b). These senior managers started breaching
accounting rules in order to adjust revenues, and they started down a slippery slope
of accounting malfeasance. Over time, they became desperate to cover themselves
and engaged in ever more illegal acts. To make matters even worse, when the
government started investigating, the senior managers engaged in a cover-up. The
government’s investigation resulted in a huge fine and the firing of more than 15 exec-
utives including the CEO, who is now serving a 12-year prison sentence.
Swainson was brought in under a deferred prosecution agreement (DPA) with
the government. With a DPA, the government sets aside prosecution because prose-
cuting the company would likely put it out of business and its employees (most of
them innocent) out of a job. The company accepts a full-time government overseer
on the premises and agrees to all sorts of actions aimed at righting the ship. Perhaps
the most important requirement was to institute a new ethical ‘‘tone at the top.’’ As
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part of that effort, Swainson held hundreds of town hall meetings and began an inter-
nal blog where he communicates with employees about what he’s thinking or what
they’re thinking. He also answers ‘‘ask John’’ questions in a question-and-answer
forum where employees write him directly and he answers. He hired a highly experi-
enced senior-level legal compliance officer with access to the senior executive team,
set up an ethics training program and a hotline, and improved investigation capabili-
ties. In regard to the basic business, Swainson visited major customers and learned
that the sales force needed to be reorganized and their performance management sys-
tem changed to support building relationships rather than just making transactions.
Also, employees had to be brought into ‘‘a single, cohesive, ethics-based culture.’’
Because CA had grown so rapidly through acquisition, employees identified more
with their previous companies than with CA. Employees are now surveyed annually.
Morale and trust in management are improving, and just about everyone says they
understand the importance of the CA’s core values and ethical behavior. At the end
of his talk to students, Swainson said, ‘‘Today we are back on track. Employees are
proud of where they work. Customers want to do business with us. . . . Regaining
our reputation and our credibility has been a long and arduous process. We can’t and
won’t go back.’’98
A CULTURAL APPROACH TO CHANGING
ORGANIZATIONAL ETHICS
Hopefully, we have made it very clear that changing the ethical culture requires
simultaneous and systematic attention to all cultural systems, with the goal of making
changes aimed at aligning all of these systems to support ethical conduct.
This is a huge job, so many companies employ consultants to help them design
their ethics initiatives. That may be appropriate, especially if the firm doesn’t have
the expertise in-house. But for these initiatives to go beyond superficial cookie-cutter
prescriptions, they need to be based on an in-depth analysis of the company and its
current ethical culture. Many consultants provide this kind of service. Unfortunately,
what firms sometimes receive is an off-the-shelf report with standard prescriptions
that could apply to any firm in what has sometimes been referred to as ‘‘spray and
pray.’’ ‘‘Consultants sprayed some ethics over [big companies] and prayed that some-
thing happened.’’99 These spray-and-pray programs can breed cynicism because they
raise employees’ awareness of ethics problems while simultaneously suggesting, in
many cases, how little the organization is doing about them. Employees are likely to
say, ‘‘We had our ethics-for-a-day training program. Now we’re back to doing things
the way we’ve always done them.’’
Companies that are looking for advice from consultants need a unique plan, one
designed to fit their firm’s needs and culture. Obviously, a unique plan takes more
resources to develop than the off-the-shelf variety. It requires the consultants to get
to know the firm, its people, and its operations. They must interview and survey
employees, managers, and executives to learn about the current state of affairs. Such
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knowledge will allow the consultants to propose a culture shift that addresses the
firm’s unique needs.
Audit of the Ethical Culture
The only way to determine if the culture is aligned to support ethical behavior is to
conduct regular, comprehensive audits of all relevant cultural systems, both formal
and informal. If the ethical culture audit determines that aspects of the current culture
are not aligned to support ethical behavior, and the goal is to produce consistent eth-
ical conduct, then the culture must change.
Any attempt to develop or change organizational ethics can benefit from an orga-
nizational change approach that includes a system-wide, long-term view. In addition,
the approach should be based on the assumption that human beings are essentially
good and capable of development and change.
A Cultural Systems View
The cultural approach relies on the idea that to be successful, any attempt to develop
or change the organization’s ethics must take the entire cultural system into ac-
count.100 The change effort must target multiple formal and informal organizational
subsystems. All of these subsystems must work together to create clear, consistent
messages about what is and is not appropriate behavior in the organization. If subsys-
tems conflict, confusion and mixed messages will result. Thus, the entire range of
formal and informal subsystems must be analyzed and targeted for development
and change.
This complex, multisystem approach to managing organizational ethics argues
against any short-term, quick-fix solutions that target only one system. The idea that
an organization could solve its ethics problem simply by establishing a code of ethics
or by hiring a consultant to deliver a one-hour ethics training program becomes ludi-
crous when the complexity of the ethics culture is understood. The management of
ethical conduct must be complex because it is influenced by multiple systems, each
of them complex in itself. Thus the complexity of the solution must match the com-
plexity of the problem. A solution that isn’t sufficiently complex will miss important
information, make incomplete diagnoses, and produce overly simple and short-
sighted solutions. The organization that creates a code of ethics in response to exter-
nal pressure and files it away without making changes in other systems such as the
reward system and decision-making processes is more likely making a negative state-
ment about organizational ethics rather than a positive one. The informal message is
that management is hypocritical and that the code of ethics serves no useful purpose
beyond creating a facade. The same can be said of lofty values statements. For exam-
ple, many of these statements talk about valuing diversity. But what happens when
people look around the organization and see few minority managers? Executives
need to understand that when they put a values statement in writing, employees
expect a commitment to follow through. The bottom line about systems thinking is
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understanding that if an organization decides to get into the ‘‘ethics business’’ with a
values statement, code, or training program, employees expect follow-through in
other parts of the organization. A failure to follow through will be interpreted
as hypocrisy.
A Long-Term View
The development of organizational culture takes place over a number of years; effec-
tive culture change may take even longer, as much as 6 to 15 years.101 It requires
alterations in both formal and informal organizational systems that take time to
implement and take hold. Resistances must be overcome. New rules and values must
be reinforced via training programs, rites and rituals, and reward systems. Although
not all organizational change efforts take this long, deep interventions in the organi-
zational culture should be considered long-term projects.
Assumptions about People
Mainstream economics rests on the assumption that human beings are driven by self-
interest and opportunism and are likely to shirk responsibility.102 Acceptance of this
assumption logically leads to change efforts focused almost exclusively on behav-
ioral control.
We believe, however, that human beings are essentially good and open to growth
and change. Most employees prefer being associated with a fair organization that
supports ethical behavior and disciplines unethical behavior. Given this type of envi-
ronment, most individuals can be expected to choose ethical behavior. Individuals
who engage in unethical behavior should not simply be labeled ‘‘bad’’ people. They
are often responding to external pressures or behaving according to organizationally
sanctioned definitions of what’s appropriate. Although unethical behaviors must be
disciplined, the organization should also treat unethical behavior as a signal to inves-
tigate itself and the cultural context in which the behavior occurred. Through culture,
the organization can change definitions of what is appropriate and inappropriate and
can relieve pressures to behave unethically.
Diagnosis: The Ethical Culture Audit
Formal attempts to develop or change organizational ethics should begin with diag-
nosis. Diagnosing culture calls for time-consuming techniques, such as auditing the
content of decision making, coding the content of organizational stories and anec-
dotes, and holding open-ended interviews with employees at all levels.103 It also re-
quires systematic analysis of formal organizational systems, such as the structure and
criteria for rewards and promotion.
The framework presented in this chapter can provide guidance for an audit of the
organization’s ethical culture.104 The audit should include probes into the formal and
informal organizational systems that are maintaining the ethics culture in its current
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state. First, formal organizational systems can be analyzed in a number of ways.
Through surveys, interviews, observation at meetings, orientation and training ses-
sions, and analysis of organizational documents, perceptions of how formal organiza-
tional systems either encourage or discourage ethical behavior can be identified. The
kinds of questions that can be asked are listed in Table 5.1.
Auditing informal systems is equally important. In small organizations that don’t
have formal policies and decision processes, the informal systems are often more
important than the formal ones. The culture can be analyzed to identify the organiza-
tion’s heroes as well as the daily behaviors that are reinforced through stories, rituals,
and language. This can be accomplished through open-ended interviews, observation
of organizational rituals, and analysis of the organization’s stories. Some questions
that might be asked in an audit of the informal system are offered in Table 5.2. The
questions in Tables 5.1 and 5.2 are designed to suggest the general direction of an
ethical culture audit. Specific questions that arise out of the particular system being
analyzed must be developed to tap that system’s unique problems and needs. Canned
approaches to discovering culture that assume they can identify the relevant dimen-
sions in advance are bound to fail.105 In addition, the multisystem nature of organiza-
tional culture suggests that responses must be compared within and across systems to
Table 5.1 Selected Questions for Auditing the Formal System
1. Do organizational leaders send a clear ethics message? Is ethics part of their
‘‘leadership’’ agenda?
2. Does the organization incorporate ethics into its selection procedures? Is integrity
emphasized in orienting new employees and training existing ones?
3. Does a formal code of ethics and/or values exist? Is it distributed? How widely? Is it
used? Is it reinforced in other formal systems, such as performance management
and decision-making systems?
4. Does the performance management system support ethical conduct? Are only
people of integrity promoted? Are ethical means as well as ends important in
performance management systems?
5. Is misconduct disciplined swiftly and justly in the organization, no matter what the
organizational level?
6. Are workers at all levels encouraged to take responsibility for the consequences of
their behavior? To question authority when they are asked to do something that they
consider to be wrong? How?
7. Are employees encouraged to report problems, and are formal channels available
for them to make their concerns known confidentially?
8. Are ethical concerns incorporated into formal decision-making processes? How? Or,
are only financial concerns taken into account?
9. Are managers oriented to the values of the organization in orientation programs?
Are they trained in ethical decision making?
10. Are ethical considerations a routine part of planning and policy meetings and new
venture reports? Does a formal committee exist high in the organization for
considering ethical issues?
CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 195
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answer the key question of whether formal and informal systems are aligned within
themselves and with each other.
As you may have determined by now, a full-fledged ethical culture audit is a
complex process that the average manager is probably not prepared to conduct.
Many large organizations will have human resources staff with the required exper-
tise, and conducting such an audit within the firm can send a powerful message that
the firm cares about ethics (assuming that the audit is followed up with action). But
other organizations that do not have the expertise in-house will need assistance with
these diagnoses and intervention efforts. And in some firms, employees may be more
willing to discuss sensitive ethical issues with a trusted outsider.
Understanding the cultural issues addressed in this chapter can help any manager
become more sensitive to the complex nature of organizational ethics and the impor-
tance of cultural alignment. In fact, with a few changes, the questions in Tables 5.1
and 5.2 could be used to assess the ethics of an organization you’re considering join-
ing. You can ask your prospective manager or peers relevant questions and see how
they respond. If they welcome such questions, and respond to them easily, that’s a
good sign that people in the organization are comfortable talking about ethical issues.
Ethical Culture Change Intervention
Once the audit is complete, the data should be discussed with employees, who can
then be enlisted in developing a culture change intervention plan. The plan will be
guided by the diagnosis and the cultural, multisystem framework shown earlier in
Figure 5.1. Complementary changes in both the formal and informal organizational
systems should be a part of any recommended change effort.
Though difficult, changing formal systems is a more straightforward process
than changing informal systems. Gaps and problems identified in the diagnosis can
Table 5.2 Selected Questions for Auditing the Informal System
1. Identify the organization’s role models and heroes. What values do they represent?
What advice do mentors give?
2. What informal socialization processes exist, and what norms for ethical/unethical
behavior do they promote? Are these different for different organizational
subgroups?
3. What are some important organizational rituals? How do they encourage or
discourage ethical behavior? Who gets the awards—people of integrity who are
successful, or individuals who use unethical methods to attain success?
4. What are the messages sent by organizational stories and myths? Do they reveal
individuals who stand up for what’s right despite pressure, or is conformity the
valued characteristic? Do people get fired or promoted in these stories?
5. Does acceptable language exist for discussing ethical concerns? Is ‘‘ethics talk’’ part
of the daily conversation?
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be addressed in a number of ways. Structure can be altered to encourage individuals
to take responsibility for their behavior and to discourage unquestioning deference to
authority. Codes of ethics can be designed participatively, distributed, and enforced.
Performance management systems can be designed with an emphasis on what people
do as well as on how they do it. Reporting misconduct can be encouraged by provid-
ing formal communication channels and confidentiality.106 Orientation programs can
be designed to incorporate the organization’s values, and training programs can be
set up to prepare individuals to handle the ethical dilemmas they are most likely to
face in their work. Integrity can be emphasized in selection and promotion decisions.
Decision-making processes can incorporate attention to ethical issues by devoting
time at meetings and space in reports.
It’s more difficult to change the informal systems, particularly those that
have been found to maintain unethical behavior in the organization. However, these
changes must be undertaken if the total change effort is to be effective. These
changes require attention to the ‘‘art’’ rather than the science of management and
are consistent with ideas about the importance of ‘‘symbolic management.’’ With
symbolic management, organizational leaders and managers are encouraged to create
rituals, symbols, and stories that will influence those they manage.107
The organization may have to be ‘‘remythologized’’ by reviving myths and
stories of its founding and resurrecting related tales that can guide organizational
behavior in the desired direction.108 For example, Alexander Graham Bell’s com-
ment, ‘‘Come here, Watson, I need your help,’’ set up Bell’s concept of service that
was so important to AT&T’s success for many years. However, myths must also be
frequently evaluated for their continuing usefulness. New ones may have to be found
or developed to fit the organization’s current needs and goals. Remythologizing
should be done carefully and infrequently. Employees generally know what’s ‘‘really
going on’’ in the organization. If the revived myth doesn’t fit with organizational
reality, it will only increase their cynicism. Also, myths can’t be changed frequently.
Their strength and value in the culture come from their stability across time.
ETHICAL CULTURE CHANGE EVALUATION As with any organizational change
and development effort, results should be evaluated over an extended period of time.
Evaluation, like diagnosis and intervention, should be guided by the multisystem
framework. Surveys and interviews can be repeated regularly to determine if norms
have changed and to pinpoint potential problem areas. Documents can be analyzed to
determine if ethical issues are being consistently considered. Other outcomes, such as
number of lawsuits or reports of unethical behavior, can also be tracked. However,
interpretation may need to go beyond simply analyzing the numbers. Increased
reporting to a hotline, for example, may mean only that ethical sensitivity has been
raised and can be viewed as a positive outcome rather than a negative one. This part
of culture building is probably the most neglected. Most organizations are unwilling
to make the investment in evaluation, and therefore they really can’t calculate the
effectiveness of their efforts.
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THE ETHICS OF MANAGING
ORGANIZATIONAL ETHICS
An effort aimed at changing organizational ethics requires us to face a particularly
knotty ethical dilemma: whose values or ethics are to prevail? We believe that a change
effort that involves employees is not manipulative or coercive and is most consistent
with a concern for the ethics of the change effort itself. Employees should participate
in the problem diagnosis and planning process. They should be aware of what’s hap-
pening and should take part in identifying problems and recommending solutions.
CONCLUSION
This chapter has proposed a cultural framework for thinking about ethical and
unethical behavior in the organizational context. Although individual character traits
may predispose a person to ethical or unethical behavior (as we learned in Chapter 3),
the cultural context in the organization also has a powerful influence on the behavior
of most employees. An organization that wishes to develop or change its ethical cul-
ture must attend to the complex interplay of formal and informal systems that can
support either ethical or unethical behavior. Quick-fix solutions are not likely to suc-
ceed. A broad, multisystem approach to developing and changing organizational
ethics was outlined to guide organizations in diagnosing and, if necessary, changing
their ethical culture.
Although most managers are not prepared to conduct a broad culture change
effort themselves, we hope this chapter has helped them understand that organiza-
tional ethics is a complex cultural phenomenon. With this knowledge, the manager
can begin to assess the ethical culture of his or her organization and will know what
questions to ask the consultant who is brought in to help with a culture change effort.
Individuals can also use these questions to help them assess their own organization
and their fit within it.
DISCUSSION QUESTIONS
For the following questions, focus on an organization you are familiar with. If you do
not have significant organizational experience, discuss the questions with someone
who is currently in a managerial role.
1. Does your organization address ethical issues in a formal, systematic way? How
has the organization customized an ethical culture to match its unique needs?
2. To the best of your ability, use Figure 5.1 and the questions in Tables 5.1 and 5.2
to conduct an ethics audit of the formal and informal systems in your
organization.
3. Having conducted the ethics audit, identify the formal and informal systems that
are in need of attention. Where is the culture out of alignment (if it is)? Design a
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change program to address weaknesses and to align formal and informal systems
into a strong ethical culture.
4. How would you change the culture audit questions if you were planning to use
them to conduct an ethics culture audit of a firm you were considering joining?
CASE
CULTURE CHANGE AT TEXACO
In 1999, Texaco settled a lawsuit that charged the firm with discriminating against
African American employees. Texaco paid $175 million, the largest settlement of
this kind ever. The stock had fallen $3 per share after damning audiotapes became
available to the public. Peter Bijur, then CEO, decided to stop fighting the lawsuit
and settle. Minority employees received $140 million in damages and back pay, and
$35 million was used to establish an independent task force to evaluate the firm’s
diversity efforts for the next five years.
Apparently, there had been very real problems throughout the Texaco organiza-
tion. These included blatant racist language and behavior on the part of Texaco
employees and managers, documented lower pay for minority employees (in some
cases lower than the minimum for the job category), and comments such as the fol-
lowing overheard from a white manager: ‘‘I never thought I’d live to see the day
when a black woman had an office at Texaco.’’ Unfortunately for Texaco, and fortu-
nately for minority employees, a Texaco official taped meetings about the lawsuit in
which executives used racial epithets and discussed disposing of incriminating docu-
ments. The tapes were made available to the New York Times and, through it, to the
public. To make matters worse for Texaco, a former senior financial analyst, Bari-
Ellen Roberts, wrote a book detailing the humiliating experiences faced by many
minority employees, including herself. One time, a white official referred to Roberts
publicly as a ‘‘little colored girl.’’ She also detailed how the organization regularly
ignored grievance claims from minorities.
Bijur’s unusual solution to the problem was to launch a complete culture change
effort. During 1998 and early 1999, the company was in difficult financial straits due
to low crude oil and natural gas prices. Revenues and earnings dropped precipitously,
and the number of employees was reduced from 27,000 to 18,500. At a time like that,
another CEO might have put diversity issues aside in favor of a focus on the bottom
line. But Bijur took advantage of the opportunity to ‘‘make us a better company.’’
First, as leader, he made it clear that he would simply not tolerate disrespect and that
those who didn’t go along with the culture change would be dismissed. He even went
outside the company, speaking to groups such as the Urban League, saying that ‘‘a
real commitment must be more than a diversity checklist. It must be integrated into a
company’s business plan. It must guide our strategies for hiring, developing, promot-
ing and retaining a diverse workforce. And it must extend beyond our corporate
boundaries—not only to our customers and suppliers, but also to the communities in
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which we work and live.’’109 Bijur hired African Americans in key positions such as
director of global business development, general counsel, and head of diversity for
the company. All of these individuals said that they agreed to join the company
because they were convinced of Bijur’s personal commitment to real culture change.
New recruiting systems were set up to increase the pool of minority candidates for
every position. Women and minorities were included on all human resources com-
mittees. Search firms with success in minority hiring were brought in to help in the
effort. For a longer-term solution, the company set up scholarship and internship pro-
grams to interest minorities in areas of study of importance to the firm. Next, Bijur set
specific diversity goals and timetables and linked managers’ career success and
bonus compensation to their implementation of the initiatives. For all supervisors, he
instituted 360-degree feedback that included performance on diversity issues in eval-
uation criteria. He also established formal mentoring and leadership development
programs to ensure that the company was preparing minorities for leadership posi-
tions. All employees were required to attend diversity training, and such training is
now being incorporated into more general management training. And multiple meth-
ods were set up for filing grievances. These included hotlines, an alternative dispute
resolution process with independent arbitration and mediation, and a confidential out-
side ombudsman. Finally, the company set up a Minority and Women Business
Development Program to increase the number of minority wholesalers it works with.
This entire change effort is overseen by the independent task force set up as part of
the settlement. The task force meets frequently with employee groups and monitors
the firm’s progress.
How is Texaco doing? Angela Vallot, director of corporate diversity initiatives,
says, ‘‘You’re not going to change the way people think, but you can change the way
people behave.’’ Evidence suggests that changes in behavior are real. The new gen-
eral counsel has few discrimination lawsuits to work on. In 1999, a total of 44 percent
of new hires and 22 percent of promotions went to minorities. The company spent
over $1 billion with minority and women-owned vendors in 1997 and 1998 and
exceeded a goal set in 1996. Texaco even applied for inclusion in Fortune maga-
zine’s 1999 list of America’s 50 Best Companies for minorities. It didn’t make the
list, but the application suggests that company officials were feeling pretty good
about their progress. Weldon Latham, diversity expert at a Washington, D.C., law
firm, says, ‘‘They are absolutely a model for how to approach one of the biggest
problems facing this country.’’
110 Reports of the monitoring task force were posted
on Texaco’s website. In a report, released in July 2000, the task force acknowledged
the commitment of Texaco’s leadership. ‘‘Through the values espoused by its leader-
ship and its efforts to improve its employment practices, the Company continues to
communicate effectively the message that it will not tolerate discrimination, harass-
ment, or retaliation in its workplace and that equality and fairness for all employees
are central to its mission as a highly competitive business enterprise.’’ The report also
cited the ombudsman program as employees’ preferred way to resolve grievances
that might otherwise have become serious problems.111 The task force’s subsequent
report cited more mixed results. Although the overall percentage of women and
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minority employees increased slightly, the percentage of new hires and promotions in
both categories declined, and the representation of women and minorities in execu-
tive positions fell slightly as well. Nevertheless, the percentage of promotions in
these groups exceeded the percentage represented in the overall Texaco workforce,
and this was viewed as a sign of continuing progress.112 These reports noted that
there was much more work to be done, particularly after the firm became part of
Chevron in 2001. On its website, Chevron says that it values diversity and runs the
business ‘‘in a way that respects our employees and the world community.’’ The
company has recently received awards for its treatment of women and of gay, les-
bian, and transgender employees and was named a 1008 Best Diversity Company by
Diversity/Careers in Engineering & Information Technology magazine.
Case Questions
1. Identify the ethical culture problem at Texaco in the mid-1990s.
2. Based on the facts in the case and what you have learned in this chapter, evaluate
the culture change effort that is under way. What cultural systems have been tar-
geted in the culture change effort? What systems are missing, if any? Does the
culture appear to be in alignment? Misalignment? What else might management
do that it hasn’t already done to make the culture change successful?
3. How long might such a culture change take?
CASE
AN UNETHICAL CULTURE IN NEED OF CHANGE:
TAP PHARMACEUTICALS
In 1995, Douglas Durand was offered the position of vice president for sales at TAP
Pharmaceuticals. TAP had been formed 25 years before by Takeda Chemical Indus-
tries of Japan and Abbott Laboratories. Durand, 50 years old at the time, had married
his high school sweetheart and worked for Merck & Co. for 20 years, during which
he moved up in the sales organization to senior regional director. TAP offered him
the opportunity to earn 40 percent more per year (in addition to a $50,000 signing
bonus) and help the company move from niche player to mass-market purveyor of
ulcer and prostate cancer medicine. He took advantage of the opportunity and looked
forward to the challenge.
But only a few months after arriving at TAP, he was shocked to find a very dif-
ferent culture from the one he had become accustomed to at Merck. Merck has long
had a reputation for ethics and social responsibility, and these qualities had been
borne out in Durand’s two decades of experience. For example, at Merck, every new
marketing campaign was evaluated by a legal and regulatory team before being
launched, and drugs were pulled back if necessary. But TAP turned out to be very
different. It quickly became clear that this was a culture where only numbers
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mattered. On his very first day on the job, Durand learned that TAP had no in-house
legal counsel. The legal counsel was considered a ‘‘sales prevention department.’’ At
one point, Durand found himself listening in on a conference call where sales repre-
sentatives were openly discussing bribing urologists with an up-front ‘‘administration
fee’’ to doctors who prescribed Lupron, the company’s new drug for prostate cancer.
TAP sales representatives also gave doctors Lupron samples at a discount or for free;
then they encouraged the doctors to charge Medicare full price and keep the differ-
ence. Durand overheard doctors boasting about their Lupron purchases of boats
and second homes. TAP offered a big-screen TV to every urologist in the coun-
try (10,000!), along with offers of office equipment and golf vacations. And reps
weren’t accounting for the free samples they gave away—as required by law. Durand
knew that failure to account for a single dose can lead to a fine of as much as
$1 million. Finally, rather than selling drugs based on good science, TAP held parties
for doctors. One such party for a new ulcer drug featured ‘‘Tummy,’’ a giant fire-
belching stomach.
Durand soon became frantic and worried about his own guilt by association. Ini-
tially, he tried to change the culture. After all, he had been hired as a vice president.
But everything he tried was resisted. He was told that he just didn’t understand the
culture at TAP. When he talked about the importance of earning physicians’ trust,
the sales reps just rolled their eyes. He then tried to influence change ‘‘the TAP way’’
by offering a bonus to reps who kept accurate records of their samples. The program
actually worked, but then senior management discontinued the bonus—and, of
course, the reps stopped keeping track. Over time, Durand began finding himself
excluded from meetings, and he felt trapped. What would happen to him if he left
this new job in less than a year? He wouldn’t collect his bonus, and he wondered if
anyone else would hire him. What would happen to his family? But he also worried
about becoming the corporate scapegoat.
In desperation, Durand turned to an old friend he knew from Merck—
Glenna Crooks, now president of Strategic Health Policy International. Appalled
by what she heard, Crooks encouraged him to document the abuses he had ob-
served and share the information with Elizabeth Ainslie, a Philadelphia attorney.
Given the documented fraud against the U.S. government, Ainslie encouraged
Durand to sue TAP under the federal whistle-blower program. Armed with doc-
uments, he filed the suit and federal prosecutors ran with it. Durand left TAP for
Astra Merck in 1996. But under the whistle-blower program, investigations are
conducted in secret. Neither TAP nor Astra Merck was supposed to know about
it. The investigation took years, and, when called to testify, Durand had to make
excuses to take time off from his new job. He was uncomfortable living as a
‘‘double agent.’’ In the end, TAP pleaded guilty to conspiracy to cheat the fed-
eral government and agreed to pay a record $875 million fine. In October 2001,
Durand collected $77 million ($28 million went to taxes), his 14 percent share
of the fine paid under the federal whistle-blower statute. He retired to Florida to
be closer to his parents, but he had yet to face the unpleasant task of testifying
against six TAP executives, some of whom had worked for him.
202 SECTION III MANAGING ETHICS IN THE ORGANIZATION
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NOTES
1. R. A. Barrett, Culture and Conduct: An Excursion in Anthropology (Belmont, CA: Wadsworth,
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2. T. E. Deal and A. A. Kennedy, Corporate Cultures (Reading, MA: Addison-Wesley, 1982); M. R.
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Martin and C. Siehl, ‘‘Organizational Culture and Counterculture: An Uneasy Symbiosis,’’
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Cultures,’’ Administrative Science Quarterly 24 (1979): 570–80; E. H. Schein, Organizational
Culture and Leadership (San Francisco: Jossey-Bass, 1985); L. Smircich, ‘‘Concepts of Culture
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3. Smircich, ‘‘Concepts of Culture and Organizational Analysis.’’
4. Deal and Kennedy, Corporate Cultures.
5. B. Morris, ‘‘He’s Smart. He’s Not Nice. He’s Saving Big Blue,’’ Fortune, 14 April 1997, 68–81.
6. Deal and Kennedy, Corporate Cultures.
7. J. Van Maanen and E. H. Schein, ‘‘Toward a Theory of Organizational Socialization,’’ in Research
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8. Barrett, Culture and Conduct.
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10. Ibid.
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13. ‘‘The Business Effect of Ethics on Employee Engagement,’’ LRN Ethics Study, 2006, www.lrn
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14. Schein, Organizational Culture and Leadership.
15. Pettigrew, ‘‘On Studying Organizational Cultures’’; E. H. Schein, ‘‘How Culture Forms, Develops,
and Changes,’’ in Gaining Control of the Corporate Culture, eds. R. H. Kilmann, M. J. Saxtion, and
R. Serpa (San Francisco: Jossey-Bass, 1985), 17–43; P. Selznick, Leadership in Administration
(New York: Harper & Row, 1957).
16. K. Brooker, ‘‘Can Anyone Replace Herb?’’ Fortune, 17 April 2000, 186–92.
17. J. Guinto, ‘‘Wheels Up,’’ Southwest Airlines Spirit, June 2006, 109–17.
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Case Questions
1. Analyze the ethical culture at TAP. Does the culture appear to be in alignment?
Misalignment?
2. Based on the facts in the case and what you have learned in this chapter, evaluate
the culture change effort that Douglas Durand undertook. What cultural systems
did he target in the culture change effort? What systems were missing, if any?
3. Why did his culture change effort fail? What would it take for it to succeed?
Source: C. Haddad. and A. Barrett, ‘‘A Whistle-Blower Rocks an Industry,’’ Business Week, 24 June 2002,
126–30.
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20. M. Gunther, ‘‘Money and Morals at GE,’’ Fortune, 15 November 2004, 177–78.
21. Ibid.
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Moral Manager: How Executives Develop a Reputation for Ethical Leadership,’’ California
Management Review 42, no. 4 (2000): 128–42.
23. T. J. Neff and J. M. Citrin, Lessons from the Top: The Search for America’s Best Leaders (New
York: Doubleday, 1999).
24. Trevi~no et al., ‘‘Moral Person and Moral Manager.’’
25. P. O’Neill, ‘‘O’Neill on Ethics and Leadership,’’ Speech at the Berg Center for Ethics and
Leadership, Katz Graduate School of Business, University of Pittsburgh, 2002.
26. Joe Paterno, Paterno by the Book (New York: Random House, 1989).
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Hamilton, ‘‘Switzer Resigns,’’ (State College, PA) Centre Daily Times, 20 June 1989, D1; ‘‘Status
of Sports Investigations on College Campuses,’’ Chronicle of Higher Education, 7 June 1989, A34.
28. B. George, ‘‘Why It’s Hard to Do What’s Right,’’ Fortune, 29 September 2003, 98.
29. J. A. Byrne, ‘‘Chainsaw,’’ Business Week, 18 October 1999, 128–49.
30. G. Tidwell, ‘‘Accounting for the PTL Scandal,’’ Today’s CPA, July–August 1993, 29–32.
31. J. Sonnenfeld, ‘‘The Real Scandal at BP,’’ Business Week, 14 May 2007, 98.
32. L. K. Trevi~no, G. R. Weaver, D. G. Gibson, and B. L. Toffler, ‘‘Managing Ethics and Legal
Compliance: What Works and What Hurts,’’ California Management Review 41, no. 2 (1999):
131–51.
33. C. Loomis, ‘‘Whatever It Takes,’’ Fortune, 25 November 2002, 74–75.
34. C. Loomis, ‘‘Tough Questions for Citigroup’s CEO,’’ Fortune, 29 November 2004, 115–22.
35. Loomis, ‘‘Whatever It Takes,’’ 75.
36. Loomis, ‘‘Tough Questions for Citigroup’s CEO,’’ 118.
37. M. Vickers, ‘‘The Unlikely Revolutionary,’’ Fortune, 6 March 2006, 132–44.
38. Peter S. Goodman, ‘‘Sluggers and Bankers in the Strikeout Era,’’ New York Times, 16 January 2010,
www.nyt.com.
39. Katrina Brooker, ‘‘Citi’s Creator, Alone with His Regrets,’’ New York Times, 3 January 2010,
www.nyt.com.
40. Trevi~no et al., ‘‘Managing Ethics and Legal Compliance.’’
41. D. Mayer, M. Kuenzi, R. Greenbaum, M. Bardes, and R. Salvador, ‘‘How Does Ethical Leadership
Flow? Test of a Trickle-Down Model,’’ Organizational Behavior and Human Decision Processes
108 (2008): 1–13.
42. Brooker, ‘‘Can Anyone Replace Herb?’’
43. W. C. Byham, ‘‘Can You Interview for Integrity?’’ Across the Board, March–April 2004, 34–38.
44. J. L. Seglin, ‘‘The Values Statement vs. Corporate Reality,’’ New York Times, 17 September 2000,
www.nytimes.com.
45. G. Colvin and J. Shambora, ‘‘J&J: Secrets of Success,’’ Fortune, 4 May 2009, 117–21.
46. G. R. Weaver, L. K. Trevi~no, and P. L. Cochran, ‘‘Corporate Ethics Practices in the Mid-1990s: An
Empirical Study of the Fortune 1000,’’ Journal of Business Ethics 18, no. 3 (1999): 283–94.
47. 2005 National Business Ethics Survey (Washington, D. C.: Ethics Resource Center, 2005).
48. Weaver et al., ‘‘Corporate Ethics Practices in the Mid-1990s.’’
49. Trevi~no et al., ‘‘Managing Ethics and Legal Compliance.’’
50. J. Kish-Gephart, D. Harrison, and L. K. Trevi~no, ‘‘Bad Apples, Bad Cases, and Bad Barrels: Meta-
analytic Evidence about Sources of Unethical Decisions at Work: Understanding Calculated and
Impulsive Pathways,’’ Journal of Applied Psychology 95 (2010):1–31.
51. W. J. Bowers, Student Dishonesty and Its Control in College (New York: Bureau of Applied Social
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under an Honor System and a Proctor System in the Same University (Los Angeles: University of
Southern California Press, 1935); R. Canning, ‘‘Does an Honor System Reduce Classroom
Cheating? An Experimental Answer,’’ Journal of Experimental Education 24 (1956): 291–96.
52. D. L. McCabe and L. K. Trevi~no, ‘‘Academic Dishonesty: Honor Codes and Other Situational
Influences,’’ Journal of Higher Education 64, no. 5 (1993): 522–28.
53. D. Nel, L. Pitt, and R. Watson, ‘‘Business Ethics: Defining the Twilight Zone,’’ Journal of Business
Ethics 8 (1989): 781–91.
54. Weaver et al., ‘‘Corporate Ethics Practices in the Mid-1990s.’’
55. Ethics Resource Center, 2005 National Business Ethics Survey.
56. G. Weaver, L. K. Trevi~no, and B. Agle, ‘‘Somebody I Look Up To: Ethical Role Models in
Organizations,’’ Organizational Dynamics 34, no. 4 (2005): 313–30.
57. M. Weber, The Theory of Social and Economic Organizations, trans. A. M. Henderson and
T. Parsons (New York: Free Press, 1947).
58. G. Sjoberg, T. R. Vaughan, and N. Williams, ‘‘Bureaucracy as a Moral Issue,’’ Journal of Applied
Behavioral Science 20, no. 4 (1984): 441–53.
59. S. Milgram, Obedience to Authority: An Experimental View (New York: Harper & Row, 1974).
60. Trevi~no et al., ‘‘Managing Ethics and Legal Compliance.’’
61. R. Jackall, Moral Mazes: The World of Corporate Managers (New York: Oxford University Press,
1988).
62. R. M. Kanter, The Changemasters (New York: Simon & Schuster, 1983).
63. H. C. Kelman and V. L. Hamilton, Crimes of Obedience: Toward a Social Psychology of Authority
and Responsibility (New Haven, CT: Yale University, 1989).
64. Joani Nelson-Horchler, ‘‘The Magic of Herman Miller,’’ Industry Week, 18 February 1991, 11–12,
14, 17.
65. M. P. Glazer and P. M. Glazer, ‘‘Whistleblowing,’’ Psychology Today, August 1986, 36.
66. A. C. Greenberg, ‘‘Memos from the Chairman,’’ Fortune, 29 April 1996, 173–75.
67. H. Schwartz and S. M. Davis, ‘‘Matching Corporate Culture and Business Strategy,’’
Organizational Dynamics, Summer 1981, 30–48.
68. L. Tiger, ‘‘Stone Age Provides Model for Instilling Business Ethics,’’ Wall Street Journal,
11 January 1988, 18.
69. S. Gellerman, ‘‘Why ‘Good’ Managers Make Bad Ethical Choices,’’ Harvard Business Review 64,
no. 4 (1986): 85–97.
70. C. Welles, ‘‘What Led Beech-Nut Down the Road to Disgrace?’’ Business Week, 22 February 1988,
124–37.
71. Trevi~no et al., ‘‘Managing Ethics and Legal Compliance.’’
72. Van Maanen and Schein, ‘‘Toward a Theory of Organizational Socialization.’’
73. J. A. Waters, ‘‘Catch 20.5: Corporate Morality as an Organizational Phenomenon,’’ Organizational
Dynamics, Spring 1978, 319.
74. Deal and Kennedy, Corporate Cultures.
75. Paterno, Paterno by the Book.
76. Deal and Kennedy, Corporate Cultures.
77. J. M. Beyer and H. M. Trice, ‘‘How an Organization’s Rites Reveal Its Culture,’’ Organizational
Dynamics 15, no. 4 (1987): 524.
78. J. Channon, ‘‘Creating Esprit de Corps,’’ in New Traditions in Business: Spirit and Leadership in
the 21st Century (San Francisco: Berrett-Koehler, 1992) 53–66.
79. I. Mitroff and R. H. Kilmann, ‘‘On Organizational Stories: An Approach to the Design and
Analysis of Organization through Myths and Stories,’’ in The Management of Organization
Design: Strategies and Implications, eds. R. Kilmann, L. Pondy, and D. P. Slevin (New York:
North-Holland, 1976).
80. J. Martin and C. Siehl, ‘‘Organizational Culture and Counterculture: An Uneasy Symbiosis,’’
Organizational Dynamics, Autumn 1983, 52–64.
81. Paterno, Paterno by the Book.
CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE 205
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82. Ibid.
83. S. Fisher, ‘‘Telling Tales: The Art of Corporate Storytelling,’’ Costco Connection, October 2007,
22–23.
84. L. K. Trevi~no, ‘‘The Influences of Vicarious Learning and Individual Differences on Ethical
Decision Making in the Organization: An Experiment,’’ Unpublished doctoral dissertation, Texas
A & M University, College Station, Texas.
85. F. B. Bird and J. A. Waters, ‘‘The Moral Muteness of Managers,’’ California Management Review,
Fall 1989, 73–88.
86. K. Berney, ‘‘Finding the Ethical Edge,’’ Nation’s Business, August 1987, 18–24.
87. Bird and Waters, ‘‘The Moral Muteness of Managers.’’
88. Kelman and Hamilton, Crimes of Obedience.
89. Trevi~no et al., ‘‘Managing Ethics and Legal Compliance.’’
90. K. D. Martin and J. B. Cullen, ‘‘Continuities and Extensions of Ethical Climate Theory: A Meta-
analytic Review,’’ Journal of Business Ethics 69 (2006): 175–94.
91. B. Toffler, Final Accounting: Ambition, Greed, and the Fall of Arthur Andersen (New York:
Broadway Books, 2003).
92. Ibid.
93. Toffler, Final Accounting; L. K. Trevi~no and M. E. Brown, ‘‘Managing to Be Ethical: Debunking
Five Business Ethics Myths,’’ Academy of Management Executive 18, no. 2 (2004): 69–81.
94. K. Eichenwald, ‘‘Reversal of Andersen Conviction Not a Declaration of Innocence,’’ New York
Times, 1 June 2005, C6.
95. Barrett, Culture and Conduct; B. Uttal, ‘‘The Corporate Culture Vultures,’’ Fortune, 17 October
1983, 66–71.
96. Ibid.
97. R. Ricklees, ‘‘Ethics in America Series,’’ Wall Street Journal, 31 October–3 November 1983, 33.
98. J. A. Swainson, ‘‘Back from the Brink: Rebuilding a Company after a Near-Fatal Ethics
Breakdown,’’ Raytheon lectureship in Business Ethics at Bentley University, Waltham, MA, 2008.
99. J. Byrne, ‘‘The Best-Laid Ethics Programs,’’ Business Week, 9 March 1992, 67–69.
100. N. Tichy, Managing Strategic Change (New York: Wiley & Sons, 1983).
101. Uttal, ‘‘The Corporate Culture Vultures.’’
102. W. R. Nord, ‘‘OD’s Unfulfilled Visions: Some Lessons from Economics,’’ in Research in
Organizational Change and Development, eds. R. W. Woodman and W. A. Pasmore (Greenwich,
CT: JAI Press, 1989), 39–60.
103. Uttal, ‘‘The Corporate Culture Vultures.’’
104. A. L. Wilkins, ‘‘The Culture Audit: A Tool for Understanding Organizations,’’ Organizational
Dynamics 12 (1983): 24–38.
105. F. Luthans, ‘‘Conversation with Edgar H. Schein,’’ Organizational Dynamics 17, no. 4 (1989):
60–76.
106. J. P. Near and M. P. Miceli, ‘‘Whistleblowers in Organizations: Dissidents or Reformers?’’ in
Research in Organizational Behavior, eds. Cummings and Staw, 321–68.
107. T. Peters, ‘‘Symbols, Patterns, and Settings: An Optimistic Case of Getting Things Done,’’
Organizational Dynamics 7 (1978): 3–23.
108. W. McWhinney and J. Batista, ‘‘How Remythologizing Can Revitalize Organizations,’’
Organizational Dynamics 17, no. 2 (1988): 46–79.
109. ‘‘Texaco Chairman and CEO Tells National Urban League that Diversity Commitment Must Be
Worked on Daily,’’ Press Release (August 4, 1998), Chevron Texaco Corporation.
110. K. Labich, ‘‘No More Crude at Texaco,’’ Fortune, 16 September 1999, 205–12.
111. ‘‘Fourth Annual Report of the Equality and Fairness Task Force for the Year ending June 30,
2001,’’ Chevron Texaco Corporation, 2001.
112. Ibid.
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C H A P T E R6
MANAGING ETHICS AND LEGAL
COMPLIANCE
INTRODUCTION
Chapter 5 presented ethics as organizational culture. But it may have raised as many
questions as it answered, such as ‘‘What are real organizations doing to create and
communicate an ethical organizational culture?’’ This chapter is designed to help
answer that question by focusing more narrowly on ethics and legal compliance pro-
grams in multiple large American corporations. These programs are designed to
manage and communicate ethics in a variety of ways.
Whatever your organizational level, you should find the information in this chapter
helpful. If you’re at a high organization level, it should give you ideas about how to
manage ethics and legal compliance in your firm. If you’re at a lower or middle manage-
ment level, it should help you understand your own organization’s approach to ethics
management and how it compares to what other organizations are currently doing. If
you’re a student, it will help you think about what to look for during the job search.
In preparing this chapter, we spoke with executives from six companies in a
variety of industries: Lockheed Martin Corporation (global security); United Tech-
nologies (Otis elevators, Carrier air conditioners, Pratt & Whitney engines, Sikorsky
helicopters); Merck & Co., Inc. (medicines, vaccines, and consumer health and ani-
mal health products); Adelphia (telecommunications/cable); Staples (office sup-
plies); and USAA (insurance and financial services). We are grateful to these
executives for their time and contributions to this book. These companies range in
size and ownership from USAA, an insurance and financial services company with
22,000 employees at four U.S. locations and two overseas offices, to United Technol-
ogies, which has over 200,000 employees (more than half outside the United States)
and a presence in more than 180 countries. Staples has more than 91,000 associates in
27 countries. Merck has 106,000 employees in 140 countries. Adelphia had 14,000
employees across the United States when its assets were purchased in 2005 by Com-
cast and Time Warner. Lockheed Martin has 140,000 employees and operates in 600
locations across all 50 U.S. states and internationally in 75 nations and territories.
Think about the challenge of managing ethics and legal compliance in these firms,
many with employees at locations around the globe. All of the companies are
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engaged in a variety of efforts, but their approaches differ somewhat due to differ-
ences in industries and organizational cultures. For example, some industries (e.g.,
defense and chemicals) are more highly regulated than others. So compliance with
laws and regulations is an important goal, and it must be managed. For many of these
companies, ethics and legal compliance are closely tied to maintenance of the firm’s
reputation and brand value. In such an environment, integrity becomes a key driver of
corporate action.
STRUCTURING ETHICS MANAGEMENT
Many businesses are allocating significant resources to formal ethics and legal com-
pliance programs. The increasing attention to formal ethics management programs
has come about partially because of media attention to scandals in American business
and management’s awareness of the U.S. Sentencing Guidelines (see more about the
guidelines at the end of this chapter); because for a number of years, organizations
such as the Conference Board have held business ethics conferences at which formal
ethics management systems are encouraged; and because some corporate leaders are
simply committed to the importance of ethics in their organizations.1
Perhaps nothing, however, has influenced corporate ethics programs in the
United States more than the U.S. Sentencing Guidelines, which took effect in the
early 1990s. Until the mid-1980s, criminal law focused on the individual defendant
rather than the corporation, and fines on corporations were relatively modest. In 1984
Congress created the U.S. Sentencing Commission in response to criticism of judicial
discretion in sentencing and perceived disparities between sentences for ‘‘white-
collar’’ and other types of crimes. In 1987, the Commission imposed federal sentenc-
ing guidelines for individual offenders, and as a result the trend has been toward
increasing fines for both individuals and organizations convicted of felony crimes.
The guidelines limited judicial sentencing discretion and mandated some incarcera-
tion for virtually every felony offender.
In 1991, the Commission issued new sentencing guidelines for organizations
convicted of federal crimes. The organization can be convicted even if only one
employee is caught breaking the law. The guidelines cover most federal crimes,
including fraud, antitrust, securities, tax, bribery, and money-laundering offenses,
and they impose a schedule of mandatory fines. ‘‘Virtually without exception, the
Guidelines require a convicted organization to make restitution and to pay a substan-
tial fine (which is not tax deductible).’’
2 The guidelines even include a provision call-
ing for a ‘‘corporate death penalty.’’ The provision was used by federal prosecutors in
the case of American Precision Components Inc., a Farmingdale, New York, com-
pany that sold ordinary nuts and bolts to government contractors as highly tested
space components.3 The company agreed to divest all of its assets. Arthur Andersen,
the former auditing firm that once ‘‘stood for integrity,’’ put its stamp of approval on
a long list of dirty books (e.g., Sunbeam, Waste Management, Enron, Global Cross-
ing, Qwest, and WorldCom) and has now become the biggest case ever of corporate
capital punishment.
4
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The sentencing guidelines were designed to use a ‘‘carrot and stick’’ approach to
managing corporate crime. The carrot provides incentives to organizations to develop
a strong internal control system to detect and manage illegal behavior. The guidelines
list seven requirements (outlined in detail in Table 6.1) for due diligence and an ef-
fective compliance program. For example, the guidelines propose that organizations
establish and communicate compliance standards and set up communication, moni-
toring, reporting, and accountability systems. In this approach, the stick provides for
severe punishment for organizations that are convicted of crimes and were not pro-
actively managing legal compliance within the organization. Fines and other sanc-
tions vary widely depending on prior violations, whether management reports itself
and cooperates with investigative authorities, and depending on whether the com-
pany has an effective program in place to prevent and detect illegal behavior. The
1991 guidelines listed the following seven specific requirements for an effective legal
compliance program.
Therefore, the same crime can be subject to a wide range of penalties. The mini-
mum fine under the guidelines is $250, and the maximum is $290 million or even
more if the crime meets certain criteria. (For more specific information about how
fines are determined, see the appendix, ‘‘How Fines Are Determined under the U.S.
Sentencing Guidelines,’’ at the end of this chapter.) The guidelines also provide that a
defendant organization that does not have an effective legal compliance program
should be put on corporate probation. Some of the recommended conditions of pro-
bation include requiring that the organization publicize (at its own expense and as
directed by the court) the fact of its conviction and the nature of the punishment;
Table 6.1 Seven Requirements for Due Diligence and an Effective Compliance
Program!
1. Establishing compliance standards reasonably capable of preventing criminal
conduct
2. Assigning specific high-level individuals with responsibility to oversee those
compliance standards
3. Exercising due care to ensure that discretionary authority is not delegated to
individuals with a propensity to engage in illegality
4. Taking necessary steps to communicate compliance standards and procedures to all
employees, with a special emphasis on training and the dissemination of manuals
5. Taking reasonable steps to achieve compliance with written standards through
monitoring, auditing, and other systems designed to detect criminal conduct, including
a reporting system free of retribution to employees who report criminal conduct
6. Consistently enforcing the organization’s written standards through appropriate
disciplinary mechanism, including, as appropriate, discipline of individuals
responsible for failure to detect an offense
7. After an offense is detected, taking all reasonable steps to respond and to prevent
future similar conduct
! These requirements are from the U.S. Sentencing Guidelines of 1991
(see www.ussc.gov for more information).
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periodically report to the court regarding financial condition and operating results;
submit to periodic, unannounced reviews of books and records, and interrogation of
employees by court-appointed experts (paid by the organization); and inform the
court of any material adverse change in business conditions or prospects.
According to the U.S. Sentencing Commission’s reports (found at www.ussc.
gov), more and more firms are being sentenced under the guidelines. Because the
guidelines were not applied retroactively, they remained under the radar for a number
of years. However, their impact has steadily increased and companies are paying
attention. For example, in 1995, Con Edison was convicted of an environmental
offense and was subject to probation that included onerous compliance requirements.
In 1996, in what has come to be known as the Caremark decision, corporate boards of
directors were put on notice to take the guidelines into account as part of their corpo-
rate governance responsibilities or face personal liability. In 1999, Hoffman-LaRoche
was convicted of antitrust conspiracy charges and was fined $500 million, the largest
criminal fine imposed to that point in the United States, and Rhone Poulenc was
granted amnesty because it reported the offense. In 2001, TAP Pharmaceuticals
received the third largest fine ever imposed to that date under the guidelines—$290
million.5 (See Chapter 5 for a case study about TAP Pharmaceuticals.) A review of
sentencing over 10 years found that although the number of organizations sentenced
remained stable, fine amounts increased substantially. For example, in 1990, the aver-
age fine was $167,214. In 2000, the average fine had risen to $3,225,462.6
In 2004, the U.S. Sentencing Commission released revisions to the guidelines,
including the expectation that the board of directors will oversee the compliance and
ethics program, that senior management will ensure its effectiveness, and that the com-
pliance officer will have adequate authority and access to senior management. In addi-
tion, organizations must train employees and conduct risk assessments to identify
potential areas of concern. The revision also ensures that organizations cannot just
‘‘check off’’ the list of guidelines (for example, with a code of conduct that just sits on
the shelf). Rather, the program in place must be seen as an integral part of the organi-
zation’s culture (see Chapter 5 for more on ethical culture). With the Supreme Court’s
2005 United States v. Booker decision, judges are no longer required to follow the
guidelines strictly. But the guidelines remain advisory, and federal prosecutors have
been told they are expected to take steps to ensure adherence to them. Therefore, most
observers now expect that the guidelines will continue to be followed in most cases.7
As you’ll see in the material that follows, most of the elements of the sentencing
guidelines have become integral parts of organizational ethics programs throughout
the United States. While most companies make a real effort to meet the ‘‘letter’’ of
the guidelines, others go much further to incorporate the ‘‘spirit’’ of the guidelines.
We discuss some of those efforts in this chapter.
Making Ethics Comprehensive and Holistic
The U.S. Sentencing Guidelines very clearly aim to encourage organizations to
create ethics programs that drive integrity and ethical behavior in their business
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operations. As the guidelines have become more refined and sophisticated over
time, responsible organizations have found numerous ways of making ethics and
values central to how they do business. As we read in the last chapter, values
like ethics and integrity become part of an organization’s culture by aligning various
elements throughout the organization. Integrating any corporate value into the orga-
nizational culture starts with strong executive commitment. Once executives
are clearly behind the effort, then the effort must be communicated to every
employee and compliance must be measured and rewarded for the value to become
part of the culture.
At Staples, the office supply giant, executives tried to capture the sentiment
underpinning their ethics program by calling it ‘‘Staples Soul.’’ The Staples Soul pro-
gram brings together a number of ethics and social responsibility efforts under one
umbrella, including the company’s concern for ethics, the environment, its commu-
nity activities, and diversity. The Staples Soul symbol is appropriately a paper clip
bent into the shape of a heart. According to company documents, ‘‘Staples Soul
reflects our commitment to corporate responsibility. It’s what moves us to embrace
diversity, sustain the environment, give back to our communities, and practice sound
ethics. Linking all of these values with our global business strategy and operations
contributes to our financial success and helps us become a great employer, corporate
citizen and neighbor.’’
8
Managing Ethics: The Corporate Ethics Office
Some organizations delegate ethics management responsibilities widely, finding that
a strong statement of values and a strong ethical culture can keep the ethics manage-
ment effort together. This approach may be particularly effective in smaller firms.
However, most large firms find that ethics initiatives need to be coordinated from a
single office to ensure that all of the program’s pieces fit together and that all of the
U.S. Sentencing Guideline requirements are being met.
The corporate ethics office concept can be traced to 1985 and General Dynamics,
then the second-largest U.S. defense contractor. The secretary of the Navy, out of
concern about the appropriateness of certain indirect expenses that had been billed to
the government, directed General Dynamics to establish and enforce a rigorous code
of ethics for all employees that included sanctions for violators. The company turned
to a nonprofit consulting firm in Washington, D.C., the Ethics Resource Center, for
help in developing the code. As part of this process, an ethics office was also set up
and an ethics officer was hired.9 In 1986, General Dynamics joined with other
defense industry companies in the Defense Industry Initiative (see www.dii.org) to
‘‘embrace and promote ethical business conduct.’’ The companies shared best prac-
tices, and these best practices provided much of the foundation for the U.S. Sentenc-
ing Commission requirements.
The 1991 U.S. Federal Sentencing Guidelines gave impetus to the move toward
establishing formal ethics programs in firms outside the defense industry. The guide-
lines also called for the assignment of specific high-level individuals with
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responsibility to oversee legal compliance standards. This requirement led to the
development of a brand new role—that of the corporate ethics officer.
Ethics and Compliance Officers
Until the mid-1980s, the title ‘‘ethics and compliance officer’’ didn’t exist in Ameri-
can business. Today, with a growing number of ethics and compliance practitioners
worldwide, these high-level executives have their own professional organization, the
Ethics and Compliance Officer Association (ECOA—see www.theecoa.org). The
association’s stated mission is ‘‘to promote ethical business practices, serving as a
forum for the exchange of information and strategies.’’ The organization began in
1991 when over 40 ethics and compliance officers met at the Center for Business
Ethics at Bentley University in Waltham, Massachusetts. The organization was offi-
cially launched later that year and began holding annual meetings in 1993. As of
2009, the ECOA has more than 1,300 members representing more than half of For-
tune 100 companies, nonprofits, municipalities, and international members from over
30 countries. The organization holds regular conferences, workshops, and webcasts
and provides a variety of classroom and distance learning opportunities for ethics
and compliance officers and their staff.
Many firms designate their legal counsel as the ethics officer. Others create a title
such as vice president or director of ethics, compliance, or business practices, direc-
tor of internal audit, ethics program coordinator, or just plain ethics officer. Most
firms locate the ethics officer at the corporate level, and these high-level executives
generally report to a senior executive, the CEO, the board of directors, the audit com-
mittee of the board, or some combination. These individuals are expected to provide
leadership and strategies for ensuring that the firm’s standards of business conduct
are communicated and upheld throughout the organization. At the time this book
went to press in early 2010, the U.S. Sentencing Commission had just proposed (for
public comment) the idea that the compliance officer should report directly to the
board of directors. If adopted, such a reporting structure would contribute to mitiga-
tion of a firm’s culpability at sentencing even if high-level executives were involved
in the illegal conduct.
INSIDERS VERSUS OUTSIDERS An ethics or compliance officer may be an
insider or someone brought in from the outside. We talked to past and present ethics
officers who represent both categories. It can sometimes be more difficult for an out-
sider to achieve credibility in the ethics or compliance role. But someone brought in
from outside the company has the advantage of being able to evaluate the situation
with a fresh eye. If change is needed, that person may be better able to guide the
organization through the change process. Most of those we interviewed believe
that, if available, a respected and trusted insider who knows the company’s culture
and people is usually the best choice. Results of a 1995 survey support the insider
preference.10 Eighty-two percent of the firms responding to the question hired their
ethics officer from inside the firm. The very best situation may be when the ethics
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officer is also a part of the senior management team or being groomed for an execu-
tive position.
At Lockheed Martin, ethics is taken so seriously that an assignment managing
an ethics office is part of the grooming process for executive positions that high-
potential employees receive. Lockheed has a vice president of ethics for the entire
corporation and five ethics directors—one for each of Lockheed’s five huge business
units. These positions report to the senior business and ethics executives in the busi-
ness units and are rotational. High-potential executives are recruited into these jobs
as a development experience; they serve for two to three years and then go back to
the businesses. Other high-potential employees replace them as ethics directors, and
the process continues. This is a novel approach to enhancing an ethics program and
grooming executives, and it should go a long way toward truly integrating ethics and
integrity into how the business is run. Lockheed will soon have a full cadre of execu-
tive-level employees who have served the company as ethics officers. One employee
involved in this process is Srinivas Dixit, who currently (2010) is the director of
ethics and business conduct for Lockheed Martin Electronic Systems in Bethesda,
Maryland. Dixit holds an undergraduate degree in engineering and an MBA, and
he was working in business operations in Lockheed’s finance area when he was
tapped for the ethics director job in late 2008. Now he is managing investigations,
overseeing ethics and compliance training, tracking metrics through surveys and
other studies, and looking for trends in this area. He is also talking to leaders, work-
ing with them to integrate ethics and compliance into the business by creating a
‘‘culture of trust’’ throughout the organization. What has Dixit learned in his new
job? ‘‘I’ve learned how seriously Lockheed integrates ethics into the business. Ethics
is fundamental to who we are and what we do. Integrity is at the beginning, middle,
and end of every message our senior leaders send. This job has shown me how seri-
ously we take ethics—how much we respect people, and how much time and care we
take in reaching decisions.’’
ETHICS OFFICER BACKGROUND The job of ethics officer has been called ‘‘the
newest profession in American business.’’11 Individuals holding this position come
from many backgrounds. With insiders, the job is often assigned to someone in a staff
function (e.g., someone in the corporate secretary’s office, office of the legal counsel,
audit, or human resources). According to past ethics officer surveys, law was the
most common background. That is true of most of our interviewees as well. Interest-
ingly, some people believe that lawyers shouldn’t be considered for the job, because
corporate lawyers are hired to defend the corporation and can’t objectively handle an
ethical issue that calls the corporation’s own behavior into question. But the ethics
officers we interviewed agreed that the most important thing is earning other employ-
ees’ respect as being fair, trustworthy, credible, and discreet. The ethics program co-
ordinator at USAA, Earnie Broughton, has training in industrial/organizational
psychology and experience as a human resources generalist and line executive. Such
a background is less common among ethics officers. But it’s useful in an organization
that is committed to making ethics management the responsibility of everyone from
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the CEO down. In fact, as a statement of commitment and accountability that any
ethics officer would welcome, USAA’s CEO identifies himself as the chief ethics
officer. Broughton’s office oversees the code and conflict of interest policy, ethics
training, communication, and support. But at USAA, every executive, manager, and
supervisor is assigned responsibility for ethics within his or her own area. Broughton
works closely with the ‘‘Ethics Council,’’ a group of senior executives who meet
regularly to talk about the ethics program and provide company-wide guidance on
ethics issues.
The Ethics Infrastructure
Ethics offices can be centralized, decentralized, or some combination of both. The
decision to centralize or decentralize may depend on the overall structure of the firm.
For example, if the firm’s other staff functions are highly decentralized, it may be
difficult to centralize the ethics function. The structuring decision may also depend
on whether different business units have very different ethics management needs.
For example, if one division of a firm deals in government contracts and others do
not, that division may need a different approach that emphasizes compliance with
government contracting regulations. So local ethics offices might better meet the
needs of different units that are in different businesses. However, decentralized ethics
offices can be difficult to manage effectively because they must communicate with
each other constantly to ensure consistency and commitment to the organization’s
key values.
Even where different units have different requirements, it’s usually helpful to have
a central office that coordinates ethics and compliance activities and ensures manage-
ment support for those activities. Most large organizations, such as the ones we talked
with, have a headquarters ethics office that functions as the central point of communi-
cations for ethics and compliance activities. For example, the corporate ethics office at
Lockheed Martin has a staff of approximately nine people, led by Alice Eldridge, the
vice president of ethics and business conduct. In addition, each of the four large busi-
ness areas and corporate enterprise operations has a full-time ethics director who has
responsibility for overseeing ethics and business conduct in his or her business areas.
These ethics directors, following a matrix reporting structure, report to Eldridge as well
as to an executive vice president for their business area. Eldridge reports directly to the
chairman and chief executive officer. In addition, Eldridge reports (in written and oral
form) to the Ethics and Corporate Responsibilities Committee of the corporation’s
board of directors at certain intervals during the year.
Ethics officers seem to agree that, whatever other reporting relationships exist,
the ethics officer should have a direct reporting relationship to the CEO. They were
particularly concerned about the ethics function being ‘‘stuck’’ under law, human re-
sources, audit, or finance, where it would be just another part of the ‘‘silo mentality’’
that still exists in many organizations. Ethics would then be perceived as audit’s job
or HR’s job rather than as part of the total culture. The person who leads the ethics
office is in a much better position to ‘‘press the envelope’’ if he or she reports directly
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to the CEO. In fact, as with USAA, the best situation is likely when the CEO thinks
those letters stand for the ‘‘chief ethics officer’’ as well as chief executive officer. In
that situation the CEO, with assistance from other individuals, takes responsibility for
managing ethics.
The Corporate Ethics Committee
In some organizations, ethics is managed by a corporate committee staffed by senior-
level managers from a variety of functional areas. This committee is set up to provide
ethical oversight and policy guidance for CEO and management decisions.12 It also
represents an affirmation that top management really cares about ethics.
At Lockheed Martin, the Ethics and Business Conduct Steering Committee
meets once every quarter and has done so since 1995. The committee provides the
organization with strategic direction and oversight on matters of ethics and business
conduct. Each business area and business unit has also established a steering commit-
tee to oversee its ethics and business conduct operations. Members of the corporate
committee include the general counsel (committee chairman), executives of large
operating entities, and vice presidents from functional areas such as human resources,
finance, audit, and communications. The two-way communication between the ethics
office and these senior executives is essential. It gives the ethics office information
about what concerns senior-level management, and it gives the firm’s leadership
information about the types of issues that are coming into the ethics office from
employees. The group’s role is viewed as strategic. The steering committees at all
levels of the corporation review the ethics awareness training and business conduct
compliance training programs, metrics on investigations and requests for guidance,
trends, employee survey results, and matters referred by the business areas and busi-
ness units.
COMMUNICATING ETHICS
Within the ethics infrastructure, good communication—downward, upward, and two-
way—is essential if an organization is to have a strong, aligned ethics culture. The
organization must evaluate the current state of ethics communication and initiatives.
It must communicate its values, standards, and policies in a variety of formal and
informal ways that meet its employees’ needs. These communication efforts should
be synergistic, clear, consistent, and credible. They also need to be executed in a
variety of media, because people learn things in different ways. In general, the old
advice to speechwriters still holds. ‘‘Tell ’em what you’re going to tell ’em, then tell
’em, then tell ’em what you told ’em.’’ In addition to receiving downward communi-
cation from management, employees must also have opportunities to communicate
their ethical concerns upward. Finally, an open communication environment must be
created that says it’s okay to ask questions, and it’s okay to talk about ethics. In the
following section, we begin with some corporate communications basics—principles
that should guide all ethics communication initiatives.
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A number of the ethics officers we interviewed were sensitive to the negativity
sometimes attached to the word ethics. Employees can get defensive when they hear
this word. They think to themselves, ‘‘Why are you here talking to me about ethics?
Mine are fine.’’ Kent Druyvesteyn, former ethics officer at General Dynamics, put it
this way. ‘‘Using the word ‘ethics’ unfortunately implies that somebody has a defi-
ciency. So, I would urge you not to use that word at least until you can make clear
what you mean by it.’’ This negative reaction to the word ethics may be more of a
problem at some organizations than at others. Again, it depends on the culture of the
firm. Companies have used the term values or business conduct or business practices
successfully. The key is to know your own company and use terminology that sounds
authentic within your organization’s culture.
Basic Communications Principles
ALIGN THE FORMAL AND INFORMAL COMMUNICATION SYSTEMS When
most people think of a corporate communication system, they think of the obvious—
the company newspaper, website, and annual report. However, like culture, a corpo-
rate communication system consists of formal and informal components. Formal
communications include all formal written and electronic communication—newspa-
pers, magazines, memos, recruiting literature, policy manuals, annual reports, web-
sites, and advertising—as well as formalized oral communication such as meetings
and speeches. But perhaps the most powerful component in a corporation’s commu-
nication system is an informal one known as the grapevine.
The grapevine—a continual stream of information among employees about
‘‘what’s really going on’’—exists in every organization. It contains news, rumors,
impressions, and perceptions. Surprisingly, research has shown that from 70 to 90
percent of the information that passes through the grapevine is accurate.13 In survey
after survey of employees in numerous and varied businesses, the grapevine is where
they said they received most of their information about their employer. (In those
same surveys, most people said they would rather receive information from their
managers.) The grapevine can be examined to shed light on a corporation’s credibil-
ity since most employees are plugged into it, it provides information fast and contin-
ually, and it contains the ‘‘inside’’ scoop on corporate events.
One way to determine corporate credibility on various issues—especially
ethics—is to compare the messages on the formal and informal communications sys-
tems. For example, suppose that BIG Company has a policy prohibiting employees
from entertaining customers excessively. The policy is spelled out in a manual, and
the president of BIG has reinforced the policy in speeches to employees. Now imag-
ine that BIG’s head of marketing repeatedly wines and dines clients. The costs of the
lavish entertainment are detailed in expense reports that are approved by manage-
ment and processed by clerical and financial control employees. In addition, other
employees are invited along when the clients are entertained, and still more employ-
ees observe the head of marketing entertaining guests in expensive restaurants.
Regardless of how strongly BIG’s formal communication system states the official
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policy, the informal communication system—the grapevine—will communicate
what’s really going on: BIG is saying one thing and doing another. The company
says it prohibits lavish entertainment, yet it condones that forbidden behavior in at
least one high-level employee. As a result, BIG’s ethics culture is out of alignment
and it has no corporate credibility on the subject of customer entertainment. Further-
more, its credibility on other ethical issues is probably suspect.
Now imagine another situation. LITTLE Company has a strongly worded policy
regarding sexual harassment. Moreover, LITTLE’s senior executives have frequently
stated that sexual harassment will not be tolerated. Suppose a manager, Pat, is
accused of sexual harassment. The charge is investigated, found to be accurate, and
Pat is fired. The exact details of the incident may not be on the grapevine, but in
most cases, just the bare bones of that story will send a strong message. The messages
on the grapevine will match what’s said by LITTLE’s formal communication system.
Employees will get the word very quickly that LITTLE means business on the issue
of sexual harassment, and the corporation will have increased its credibility by
‘‘walking the ethics talk.’’
The importance of informal communications can’t be overstated. Since truth and
honesty are at the core of any ethics effort, if a company is saying one thing and
doing another—if the messages on its formal communication system and its grape-
vine don’t match—it has little or no credibility and probably shouldn’t attempt a for-
mal ethics communication effort until it has regained its credibility. How can you
compare the formal and informal messages? Ask employees. Employee surveys and
focus groups can provide feedback that will serve as the beginning of an effective
comparison. How does an organization establish or regain credibility? Designing
consistent policies and enforcing those policies are the only route an organization
can take to gain credibility on ethics issues. If policies are enforced for only part of
the employee population, or if there are different rules and treatment for different
employees, there’s little an organization can do to gain credibility until consistency
is established.
ANALYZE THE AUDIENCE The first thing to do when designing a communication
program is to analyze the needs of your audience. Consider what employees already
know, what they need to know, what biases and abilities they have, what the desired
and required behaviors look like, when they should be asking questions, and where
they can go to report their concerns and to ask for help.
When designing ethics communication for a typical employee population, orga-
nizations need to consider three kinds of people. (Because the terms are easy to visu-
alize and remember, we use military jargon to describe the three types.)
Good Soldiers Group I includes the ‘‘good soldiers.’’ These people understand
and follow the rules and policies of the organization, and they have good ethical com-
passes. They have the judgment or experience required to discern the difference
between right and wrong, and they have the moral grounding to do the right thing.
Be careful to note that these aren’t just soldiers who follow orders, right or wrong.
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They know that good soldiers are expected to question an order they believe to be
illegal or morally wrong, and they would do so.
Loose Cannons In Group II are the ‘‘loose cannons’’—these people may have
good ethical compasses, but they don’t know their corporation’s policies. They may
not even be familiar with general ethical standards in business. Loose cannons may
be inexperienced; or they may have transferred from another, unrelated industry with
very different norms; or they may never have read a policy manual. Whatever the
reason, loose cannons may be well meaning, but they’re naive. Without guidance,
loose cannons may not even consider ethics in the business environment.
Grenades People in Group III are ‘‘grenades,’’ and they’re neither ignorant nor
benign. These employees may or may not know the rules, but they don’t care either
way. They have their own agenda, and they lack any company or professional
loyalty. We call them grenades because their activities can blow up suddenly and
severely damage the organization.
Although the communication needs of the three groups overlap, the emphasis for
each specific group is clear. Good soldiers need support because good people often feel
pressured to compromise in order to ‘‘fit in.’’ Good soldiers need to know that their
instincts are right and their behavior is not the exception; in fact, it represents the organi-
zational model. Loose cannons need to be educated; they need to know and understand
basic norms of ethical conduct and specific company policy and standards. Grenades
need to know unequivocally that ethical lapses will not be tolerated. They need to see
good behavior rewarded and ethical lapses dealt with swiftly, consistently, and firmly.
There are probably only a few grenades in any organization. But they surely
exist everywhere, and the system must be prepared to deal with them. Good soldiers
may account for a substantial portion of employees, but perhaps not the majority.
Since very few employees ever read a policy manual cover to cover, most people
learn policy on a need-to-know basis. It’s safest to assume that most employees fit
into the loose cannon category. The challenge in designing effective ethics communi-
cation programs is meeting the needs of all types of employees.
This focus on the ethics audience assumes that most employees don’t come to
the organization perfectly principled and completely prepared to make the right deci-
sion in every situation. Recall from earlier chapters that most employees are highly
susceptible to influence from outside themselves, so the organization has to provide
guidance—and, despite advances, the perfect integrity test hasn’t been invented.
Since polygraphs were outlawed for most types of employee screening in the United
States, more organizations have turned to paper-and-pencil honesty or integrity tests
to screen prospective employees. Most of these tests attempt to predict the prospec-
tive employee’s inclination to steal from the organization, although others have a
more general focus on workplace deviance. Integrity tests have been evaluated by
the American Psychological Association and the government’s Office of Technology
Assessment. The two organizations’ reports generally agree that research on integrity
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tests is improving and that evidence supporting the tests’ ability to predict dishonest
behavior has increased.14 Nevertheless, many problems remain, and organizations
will continue to have imperfect employees who need guidance on ethical issues.
Evaluating the Current State of Ethics Communications
Before beginning the actual design of an ethics communication program, it’s essen-
tial to conduct an evaluation that asks the following questions.
WHAT KINDS OF ETHICAL DILEMMAS ARE EMPLOYEES LIKELY TO ENCOUNTER?
In addition to common ethical dilemmas faced by employees everywhere, organiza-
tions need to identify the kinds of issues and dilemmas that might be unique to their
particular industry. For example, a chemical company needs to pay special attention to
environmental and safety dilemmas. A financial firm should pay extremely close atten-
tion to fiduciary, confidentiality, and conflict-of-interest issues. A manufacturing com-
pany may have to look at the ethical issues involved in worker safety, product quality,
product liability, and labor relations. Along with identifying issues specific to their
industry, companies need to examine the various jobs within their organization to un-
cover what specific professional dilemmas their communication program will have to
address. For example, an internal auditor faces one set of dilemmas, whereas a manu-
facturing supervisor faces an entirely different set. Once these dilemmas are identified,
an organization can develop a program that’s useful for employees—one that shows
them how to deal with their own most common dilemmas.
WHAT DON’T EMPLOYEES KNOW? Is the company hiring numerous midcareer
hires who may come from other industries with different standards of conduct? Does
the company regularly hire large numbers of recent college or business school gradu-
ates who may have little knowledge of business standards, much less specific corpo-
rate policy or industry standards? The communication program needs to target the
specific needs of these different groups.
HOW ARE POLICIES CURRENTLY COMMUNICATED? How is policy communi-
cated now? Does the policy manual weigh in at 40 pounds, or is it online and easy to
search? When a manager has a policy question, what does he or she do—look it up in
the manual, ask human resources, ask a colleague, search online resources, or guess?
Is corporate policy ever discussed in orientation or training programs? No one is ever
going to memorize a policy manual. Therefore, an ethics communication program
needs to take a ‘‘snapshot’’ of key policies and concentrate on communicating them.
Organizations also need to send a clear message that employees need to know when
to ask questions and that the organization encourages employees to inquire. Compa-
nies generally do a very good job of telling new hires how to succeed; what they
usually don’t do nearly as well is telling new hires how they’re going to fail or get
fired or worse. It’s vital for new employees to understand their employer’s standards.
What does the company expect from them?
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WHAT COMMUNICATION CHANNELS EXIST? How do employees receive mes-
sages from management? How does management receive messages from employees?
Is ‘‘management by walking around’’ a common practice, or is senior management
isolated from most employees? Is there a suggestion program? If so, do suggestions
get responses? Are employees generally comfortable approaching their managers
with problems, concerns, and questions? Is there a grievance process or a whistle-
blowing procedure? Do most employees know where to go for help if their managers
are unavailable or if their manager is part of the problem? Are human resources,
legal, and audit professionals accessible to most employees? Analyzing the answers
to these questions will give an organization a good idea of where effective communi-
cation channels exist, where they don’t, and where to build new ones.
Multiple Communication Channels for Formal Ethics
Communication
The company’s ethics message can and should be communicated in a variety of
ways. The most obvious ethics communication channels include a mission or values
statement, a code of conduct, policy statements, a formal process for reporting con-
cerns or observed misconduct, and communications from leaders. In addition to these
channels, the ethics message needs to be reinforced in all formal communication
materials, including recruiting and orientation materials, newsletters, magazines,
annual reports, and websites. The following are some types of communication mate-
rials that can be used to send an ethics message.
WEBSITES The company’s website is an important source of information about the
company and its values and policies. Many companies are hesitant to include ethics
information on their external website and instead use their firm’s intranet to convey
the information. But stakeholders such as investors, potential employees, customers,
and suppliers are likely to use the company’s website to gather information about the
company. So, if ethics is important to these relationships, it should be included on the
external site. For example, Lockheed Martin provides a large amount of information
about ethics on its external website (www.lockheedmartin.com): its ethical princi-
ples, code of conduct, annual ethics awareness training, information about compli-
ance training, information about how the ethics process works, and information for
suppliers and other business partners who are asked to be guided by high ethical stan-
dards and to respect the restrictions the firm places on its employees with regard to
such issues as giving and receiving gifts. The code, ‘‘Setting the Standard,’’ is trans-
lated into 21 languages. United Technologies (www.utc.com) also provides informa-
tion about ethics on its website, including the code and other brochures in portable
document format (PDF). The information is also available in multiple languages.
RECRUITING BROCHURES These can include the mission or values statement, a
discussion of corporate values, and a description of how people in the organization
succeed and fail. Ethical conduct can be highlighted. Many organizations also have a
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website for those interested in finding out about careers within the firm and applying
for jobs.
CAMPUS RECRUITING At Lockheed Martin the ethics office participates with uni-
versity relations for on-campus recruiting. Ethics officers travel to college and
university campuses across the country to assist in recruiting and to speak about the
Lockheed Martin ethics program. In addition, ethics blogs are posted twice a month
on the ‘‘LMCampus ConX’’ social networking site to raise awareness about corpo-
rate ethics so that students can better understand the importance of business ethics
and be better prepared to enter the workforce.
ORIENTATION MEETINGS AND MATERIALS Orientation materials can include
the mission or values statement, descriptions of common ethical dilemmas and ad-
vice for handling them, explanations of resources to help employees make ethical
decisions, and instructions on how to raise an ethical issue or report an ethical con-
cern. Organizations should pay particular attention to how their orientation meetings
communicate values and expectations. New employees are eager to learn about their
new employer, and orientations are a wonderful venue for communicating what an
organization stands for and what it expects of employees. How not to introduce val-
ues and ethics during an orientation might best be illustrated by the manufacturing
company’s general counsel we heard about who, when asked to address new hires on
the company’s ethics and compliance program, simply read the code of conduct
aloud to a group of new employees. (Yawn.)
NEWSLETTERS AND MAGAZINES These materials can be print based or web
based. They may include the mission statement, stories about corporate ‘‘heroes’’—
employees who illustrate the corporate values—and features that describe ethical
dilemmas and include comments from employees and managers about how they
would deal with the problems. Some companies regularly publish lists of the types of
ethical or legal violations they have addressed and how they addressed them. For
example, the communication may say that, in the last six months, the company dealt
with a particular number of reports of Internet pornography, bribery, time reporting,
travel charge reporting, lying to customers, or abusive supervision. They may say
how many of these resulted in a variety of actions ranging from warnings to termina-
tions. Such communication helps keep the ethical culture alive and lets employees
know that the company means what it says about the importance of ethics. These
kinds of regular communications can also be targeted to specific groups of employees
with specific needs.
BOOKLETS These materials can vary given employees’ need for information in
particular areas of the business. The brief brochures can also be easily updated
or added to, thus making the program adaptable to the dynamic business
environment.
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Interactive Approaches to Ethics Communication at USAA
USAA has developed a novel approach to ethics communication based on a ‘‘mini–
case study’’ approach. It gives employees an opportunity to learn about ‘‘real’’ ethics
cases in an ongoing manner, and it sustains the focus on ethics in the organization.
The ethics office relates an ethics case gleaned from news and media and presents
it on the corporate intranet in a ‘‘case file format.’’ Each story includes a ‘‘subject,’’ the
facts of the case, and the outcome. Employees comment on the story and reflect on its
meaning and relevance within the context of USAA’s culture and values.
Consider what this kind of communication tool can accomplish. Reading
employee comments could help establish a new norm or standard of behavior in the
organization. Reading the replies also offers rationales that individual employees
may not have thought about on their own and creates expectations about role respon-
sibilities. So, by printing the appropriate replies and supplementing them with good
information about expectations and available resources, the ethics office can
reinforce many important messages on an ongoing basis.
A similar system was introduced in the early 1990s at Texas Instruments, but in this
system, employees were encouraged to send in questions. This internal corporate com-
munication tool, called ‘‘Instant Experience,’’ allowed employees to raise timely issues
quickly and without a lot of bureaucracy, and it provided the ethics office with a constant
line to the ethical pulse of the organization. The idea was the brainchild of Glen
Coleman, a retired Air Force helicopter pilot and an aerospace engineer who worked for
TI’s ethics office at the time. Coleman admitted that while in Vietnam, he and his fellow
helicopter pilots sometimes made potentially life-threatening mistakes. On their return,
they freely entered their ‘‘stupid mistakes’’ into a book they called ‘‘Instant Experi-
ence,’’ so that their buddies wouldn’t make the same mistakes and lives could be saved.
In a variation of the idea that not everyone should have to get burned to find out
that the stove is hot, Coleman reasoned that the ethics office could be a clearinghouse
for ethical experiences that members of the organization were willing to share with
others. As a result, these ‘‘instant experiences’’ were regularly transmitted to all
employees via an e-mail communication system. The experiences were retained on
the system so that new employees could get up to speed and ongoing employees
could check the system whenever they wished.
Here’s an example of an anonymous question posed by a TI employee and then
posted on the communication system.
Suppose I’m in a restaurant and I happen to overhear a conversation from
behind me. It’s two TI competitors discussing sensitive, competitive
information that would be very valuable to TI. What do I do? Continue
to listen? Put my fingers in my ears? Tell them to stop? And what should
I do with the information that I’ve already heard? Forget it and pretend it
never happened? Mark it TI STRICTLY PRIVATE and distribute it?
I didn’t go out looking for the information and I couldn’t change my
table location to get away from the conversation. It seems a little ridicu-
lous to just throw away an opportunity to use valuable information that
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I’ve acquired but didn’t solicit in any way. What’s the right course
of action?
And, here’s how Carl Skooglund, TI’s ethics director at the time, responded:
There is nothing illegal or unethical about accidentally being in the right
place at the right time and overhearing a competitor’s conversation. They
must accept the responsibility for irresponsibly discussing sensitive infor-
mation in a public place. If you have overheard the conversation, your best
course of action is to document to your best ability what you heard and
notify TI Legal, telling them how you acquired it. The TI employee who
raised this question is correct. It would be ridiculous to pretend that you
never heard the information. Under these circumstances you can share the
information with TI. The competitor must accept responsibility for his
carelessness. Our ethical principles do not exclude common sense.
Skooglund’s response then took the issue a step further, inviting dialogue by ask-
ing TI employees if the response should be different if the TI employee had inten-
tionally sat at a table adjacent to known competitors. Many employees responded,
and over 95 percent of the responses agreed that intentional eavesdropping was
clearly unethical. Here are some of their responses:
‘‘We are not in the spy business. It’s totally unethical.’’
‘‘I was disappointed that you would even ask us this.’’
‘‘Spying is spying.’’
‘‘What happened to the golden rule?’’
‘‘My grandmother told me that if something makes you feel guilty, don’t do it.’’
‘‘If our customers knew about this, would their opinion of us suffer?’’
‘‘I would be ashamed.’’
‘‘It’s unmitigatedly unethical.’’
‘‘Would I be proud to have my TI badge on?’’
‘‘Let’s leave trickery to magicians.’’
‘‘Stay far enough away from legal limits so that TI’s character is never
questioned.’’
Skooglund agreed with the large majority of responses and assured the respon-
dents that their ethical compasses were pointing in the right direction. This Instant
Experience system allowed employees to openly share their ethics-related questions
and experiences, and everyone in the organization learned from the open exchange.
In an organization without such a system, this individual may have struggled silently
with the issue or may have asked a few peers or a manager for advice. But with the
system, the entire organization can learn from one employee’s experience.
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In addition to the weekly transmissions and interactions, a collection of the weekly
articles was retained on the Instant Experience system as an archive with a chronologi-
cal and a subject index. A survey of TI employees found that 30 to 40 percent were
reading it every week, and 70 to 80 percent read it at least monthly. Supervisors were
also encouraged to print the messages and post them on a bulletin board.
This system was particularly effective because it fit TI’s culture and was based
on sound communication principles. First, electronic communication was an essential
part of the high-tech TI culture, so e-mail ethics discussions were a natural extension
of that culture. Second, e-mail is appropriate for ‘‘ethics’’ discussions because it
allows for interaction with reflection. Ethical issues generally require some introspec-
tion, perhaps even a trip to the file cabinet to check the code of conduct. The Instant
Experience system allowed employees to think about the issue and then participate in
relatively informal discussions with other employees. Finally, research suggests that
people are less inhibited when communicating electronically. They may be more
willing to discuss sensitive ethical issues electronically than they would be face-to-
face, thus contributing to the ‘‘it’s okay to talk about ethics’’ atmosphere.
Mission or Values Statements
In recent years, many corporations have developed mission or values statements. A
mission statement, values statement, or credo is a succinct description of ‘‘how we do
business’’—the corporate principles and values that guide how business is to be con-
ducted in an organization. A mission statement is a short description of the organiza-
tion’s reason for existence—a sort of ‘‘here’s what we do.’’ Values statements are the
next step in the process of explaining an organization to the world—‘‘and here’s how
we do it’’—a codification of essential corporate behavior. It’s a sort of ‘‘Ten Com-
mandments’’ for an organization. If it’s to be effective, it should be short, memora-
ble, and in plain language so that everyone can be clear about its message. It’s also
essential that the organization’s own employees have input because a mission state-
ment and values statement must accurately reflect the organizational culture. Some-
thing scribed by outsiders just won’t ring true and is likely to end up as the subject of
a Dilbert cartoon. But statements that develop out of the firm’s true values and his-
tory can be mainstays of the corporate culture. Merck posts its values statement
prominently on its website (www.merck.com):
Our Values
Our business is preserving and improving human life. We also work to
improve animal health. All of our actions must be measured by our suc-
cess in achieving these goals. We value, above all, our ability to serve
everyone who can benefit from the appropriate use of our products and
services, thereby providing lasting consumer satisfaction.
We are committed to the highest standards of ethics and integrity.
We are responsible to our customers, to Merck employees and their
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families, to the environments we inhabit, and to the societies we serve
worldwide. In discharging our responsibilities, we do not take profes-
sional or ethical shortcuts. Our interactions with all segments of society
must be transparent and reflect the high standards we profess.
We are dedicated to the highest level of scientific excellence and
commit our research to improving human and animal health and the
quality of life. We strive to identify the most critical needs of con-
sumers and customers, and we devote our resources to meeting those
needs.
We expect profits, but only from work that satisfies customer needs
and benefits humanity. This depends on maintaining a financial position
that invites investment in leading-edge research and that makes it possi-
ble to effectively deliver the results of that research.
Our ability to excel depends on the integrity, knowledge, imagina-
tion, skill, diversity and teamwork of our employees. To this end, we
strive to create an environment of mutual respect, encouragement and
teamwork. We also strive to reward commitment and performance and
be responsive to the needs of our employees and their families.
Obviously, it’s possible to have meaningless values statements when the words
are posted on websites and bulletin boards but aren’t really a part of the organiza-
tional culture. To be meaningful, corporate values must guide corporate and individ-
ual decision making on a regular basis. But Merck employees tell us that these values
are ‘‘drilled into them’’ and used on a regular basis. Also, the role of the ‘‘customer
first’’ value that guided Johnson & Johnson’s decision making in the Tylenol crisis
(see Chapter 10) is perhaps the most famous single example of a corporate value
being meaningfully applied.
What happens when a company ignores the importance of having in place a mis-
sion and vision and values? That was the situation at Adelphia, the telecommunica-
tions/cable company that imploded in 2002. The Rigas family, who founded and
managed the organization, ran the company like a mom-and-mop corner store, even
after the company—mainly through a series of acquisitions—grew to 15,000 employ-
ees. In 2002, the founder and CEO, John Rigas, and his sons were indicted for looting
hundreds of millions of dollars from the company’s coffers and concealing the true
debt load from investors.
15 When the new management team took over, they were
surprised to find that Adelphia had no guiding principles, no mission, no vision, no
ethics, no code—nothing! Ray Dravesky was soon hired to head communication at
Adelphia, and his first project was to get the company back on track by helping the
executive team to create and communicate a new mission, vision, and code of con-
duct. Because the company had filed for bankruptcy, the ethics project had to be cre-
ated on a shoestring. Within weeks, however, the company launched its new vision
and code of conduct and installed an employee ethics hotline. Employee satisfaction
scores later indicated that employees—after living in an ethics vacuum for years—
were pleased to receive this kind of direction from the top of the company. Although
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the company was purchased shortly after, employees throughout the company were
pleased with the new direction these formal statements had established.
Organizational Policy
Policy—the ‘‘rules of the organization’’—is critical to any company, and most orga-
nizations create a policy manual or an intranet site to house all relevant company
rules. Generally, policy manuals and websites describe not only laws and regulations
pertaining to the company and its industry but also all company policy, including
human resources policy. Although it’s critical for a corporation to define its policies
and communicate them—it’s a stipulation of the U.S. Sentencing Guidelines—most
employees don’t read every page of a manual or website. Employees consider policy
manuals and websites to be for reference purposes only. As a result, employees con-
sult policy manuals in the same way they use a dictionary—periodically and on a
need-to-know basis. Many managers never consult a policy manual, however—it’s
much easier to ask someone than to look up the rules in a voluminous book or
website—and, depending on whom they ask, they may or may not get the right answer.
The very nature of policy—it’s usually voluminous and written in legalese—
makes it a poor way to communicate important rules. Also, since all policy is
detailed, all policy may be viewed as having the same importance. Obviously, some
policies are much more important than others and should receive special emphasis.
When you’re designing policy communication, first analyze the audience. Who
needs to know all the policy? Does some corporate policy apply only to certain
employees? What do employees really need to know, and what’s nice for them to
know? Here are some guidelines to follow.
COMMUNICATE RELEVANT RULES TO THE PEOPLE WHO NEED THEM
Although much of a firm’s policy applies to everyone, surely some policy applies
only to specific employee groups. For example, if accountants in the organization
need specific policy, either separate it from the main manual or site under a specific
heading, or leave it out and distribute accounting policy only to accountants. If some
policy applies to all employees, it can be incorporated into the code of conduct.
PRIORITIZE POLICY The material describing confidentiality is more important than
a description of how to code a time sheet for sick time. Policy should be presented in
a way that lets employees see, at a glance, what the most important rules are.
MAKE IT UNDERSTANDABLE First, eliminate the legalese—only lawyers like
legalese; the rest of us like simple English. Second, tell employees what the policy
means. Most policy prohibits conflicts of interest, yet few employees can define what
a conflict is. Give examples of conflicts, and tell employees what a conflict looks like.
If people can’t tell you what a conflict is, it will be difficult for them to avoid one.
MAKE POLICY COME ALIVE Effective communication occurs not when you send
the message, but when people receive it and understand it. Important policy needs to
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be communicated in creative ways that highlight important rules. Policy also needs
to be communicated in a variety of venues: in person, in staff meetings, in orientation
programs, in training sessions—wherever there’s an opportunity.
Codes of Conduct
A code of conduct is not a substitute for an ethics program; a code is only the start of
an ethics effort. Codes come up frequently because most ethics programs, good or
bad, have them. Codes vary substantially in length, content, and readability; but
they’re generally designed to be the main road map, the ground rules for ethical con-
duct within the organization.
It’s probably fair to say that the longer the code, the less likely employees are to
read it. On the other hand, the shorter the code, the broader and more abstract the
guidelines will be. Reducing the number of pages represents acknowledgment that
the company can’t have rules to cover the hundreds of choices employees make every
day. Rather, a focus on the values that should guide decision making can help
employees make the best decisions in a wide variety of situations.
Many organizations deal with a longer code by dividing it into parts. The first
part provides the broad guiding principles. These are followed by a more detailed
section that includes more specific application to cases, answers to commonly asked
questions, and reference to more detailed policy manuals. Some organizations create
separate booklets, as supplements to a more general code, for workers in particular
functions such as purchasing or human resources management. These booklets can
provide details and answers to the questions likely to arise in that particular type of
job, and the individuals in that job are more likely to read those details.
Code content may vary depending on the industry and the degree to which the
firm has entered the global marketplace. Specific issues are addressed depending on
the industry. Firms in the defense industry carefully outline the guidelines for charg-
ing one’s time to particular government projects. If the firm is global, the code almost
certainly deals with issues such as bribery. We’ll talk more about this in the next
chapter.
If the code is to be taken seriously, it should be updated regularly and redistrib-
uted throughout the organization, and many companies circulate such a code every
year or two. Also, many organizations ask employees to sign a statement acknowl-
edging that they have read the company code and abided by it during the previous
year. The real test is whether it is regularly used. For example, in decision-making
meetings, if managers regularly refer to the code’s guidelines, employees will learn
that the code is vital to how important decisions are made.
Communicating Senior Management
Commitment to Ethics
In Corporate Culture and Performance, Kotter and Heskett16 pointed to one factor
that could turn around a company that was heading in the wrong direction—a strong
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leader who could communicate the culture. They explained how the top managers of
great companies lead.
Visions and strategies were communicated with words—spoken simply,
directly, and often—and with deeds . . . they encouraged people to
engage in a dialogue with them, not allowing the communication to flow
in one direction only. In almost all cases, the leaders became living
embodiments of the cultures they desired. The values and practices they
wanted infused into their firms were on display in their daily behavior; in
the questions they asked at meetings, in how they spent their time, in the
decisions they made. These actions gave credibility to their words. The
behavior made it clear to others that their speeches were serious. And
successes, which seemed to result from that behavior, made it clear that
the practices were sensible.
Without the buy-in and active support of senior management, ethics initiatives are
doomed. But senior managers don’t have a great track record in communicating a
vision, ethical or otherwise. In a survey of professional and management employees,
respondents revealed a lack of trust in their senior executives.
17 Most said that their
company’s leaders failed to communicate a ‘‘clear understanding of a corporate
vision, mission, and goals.’’ They also said that they trust their top management only
about 55 percent of the time.18 We suspect that the number may be even lower today,
given recent corporate scandals. An indication of falling trust levels comes from a
2002 Watson Wyatt survey that reported just 39 percent of employees trust their sen-
ior leaders. The study also found that employee trust and financial performance are
closely linked. Companies with high trust levels have three times the rate of share-
holder returns as compared to companies with low trust levels, measured over a
three-year period.19
Nevertheless, most employees want to hear from senior executives. Another
study of 14,250 employees in 17 companies in the United States and Canada found
that ‘‘62 percent of employees list top executives as their preferred source of infor-
mation, but only 15 percent say they actually get their company news from this
source.’’20
What can senior managers do to establish better communication and more trust
with employees? How can they begin to build an organization in which ethics are
valued? They can take a look at the advice that Peters and Waterman21 offered in
their classic book, In Search of Excellence. ‘‘An effective leader must be the master
of two ends of the spectrum: ideas at the highest level of abstraction and actions at
the most mundane level of detail. The value-shaping leader is concerned, on the one
hand, with soaring, lofty visions that will generate excitement and enthusiasm. . . .
On the other hand, it seems the only way to instill enthusiasm is through scores
of daily events.’’ With this advice in mind, here are some concrete steps senior
managers can take:
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& Set high standards and communicate them loudly and repeatedly in public
and in private. Be known for the consistency of your standards. Never let
your standards be a mystery.
& Act swiftly and firmly when someone violates the standards. Be consistent—
don’t have special rules for special people.
& Insist on complete candor from your direct reports. Tell them that you don’t
want to be protected from bad news.
& Never, never shoot the messenger of ‘‘bad news,’’ or it will be the last one
who reports problems to you. And if you don’t know about problems, you
can’t fix them.
& Talk to a wide variety of employees on different levels and in different loca-
tions. Get out there and find out what’s really going on. Don’t be satisfied
with others’ interpretations.
& In a crisis, take responsibility, be accessible, and be honest. Take the high
road. If you do, the company will probably pull through the crisis with a
minimum of damage. This is one reason why Johnson & Johnson received
such high marks for its handling of the Tylenol crisis and why Exxon
received bad marks for its handling of the Valdez oil spill (CEO Lawrence
Rawls didn’t visit Alaska until three weeks after the incident). You’ll read
more about these two crises in Chapter 10.
& Finally, put your money where your mouth is—fund and support ethics ini-
tiatives. Without supporting systems, most corporate value statements are
collections of empty platitudes that only increase organizational cynicism.22
To develop ethics initiatives, get help from your communications and train-
ing professionals. Don’t leave your ethics strategy just to the lawyers.
At Merck, the CEO, Dick Clark, is very vocal about the ethics program and very
supportive of its efforts. In frequent face-to-face meetings with employees in the
United States and overseas, he routinely weaves in messages about ethics—that re-
sults are important, but how the results are obtained is equally important.
At many firms, the code of conduct is introduced with a message from the senior
executive. At UTC, Louis Chênevert, president and chief executive officer, intro-
duces the company code with the following message:
Dear UTC Colleague: The UTC Code of Ethics does not merely require
compliance with laws. It embodies a commitment to positive behaviors
that build trust, promote respect, and demonstrate integrity . . . Working
together, we can assure that ethics are at the foundation of our perform-
ance culture.
The message goes on to introduce the code and the business practices/compliance
infrastructure.
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At Lockheed Martin, the corporation has instituted the annual Chairman’s
Award. The Chairman’s Award recognizes a single employee or a group of Lockheed
Martin employees for extraordinary actions or behavior that exemplify the corpora-
tion’s commitment to ethical business conduct and integrity. The award is presented
at the annual senior leadership meeting of the top 250 executives in the corporation.
Nominations come from these senior leaders, who are encouraged to designate some-
one from their organization each year. The first winner in 2002 was Ron Covais, a
vice president in business development. He was recognized for demonstrating the
highest standards for integrity and ethical business conduct during the bidding phase
of a significant new business opportunity with a foreign customer. Covais demon-
strated the corporation’s values and set the standards with an international customer
and the U.S. government by his willingness to walk away from an important contract.
Covais had received an inappropriate ‘‘request for payment’’ by a foreign official.
Lockheed Martin employees are expected to reject such bribes, and Covais did. By
itself, rejecting the bribe was considered routine and would not have merited the
award. But Covais halted the bidding process (placing at risk an important contract),
reported the problem to senior officials, and worked with both U.S. government
officials and the foreign government to have the foreign official removed from the
decision-making process. The customer subsequently agreed to conduct a new bid-
ding process on ethical terms. Covais’s action and his award were publicized, color
photos and all, in Lockheed Martin Today, the company newspaper that goes to every
employee. The other nominees, one from each business area and from corporate
organizations, were also named in the story. And every top corporate executive
witnessed the chairman giving the award. The tradition of honoring commitment to
the highest level of integrity has continued since that time.
Think about the impact of such an event on the ethical culture. Every senior
leader must expend effort each year to find employees who demonstrate exemplary
ethical conduct. The award ceremony itself is exactly the kind of ‘‘ritual’’ that helps
create an ethical culture. As the stories become part of the organization’s cultural
lore, its impact grows as the stories accumulate over time. This impact is particularly
important to a company like Lockheed Martin, which has scandal in its past.
Misconduct by one of Lockheed Martin’s predecessor companies contributed to pas-
sage of the antibribery Foreign Corrupt Practices Act (discussed in Chapter 11). It has
become very important to the senior leadership of the firm to counteract any percep-
tion that the organization is unethical.
ETHICS TRAINING PROGRAMS Values statements, policy manuals, and conduct
codes aren’t enough. Organizations that are serious about ethics distribute these
materials widely and then provide training in their meaning and application. Effec-
tive training programs are ongoing efforts to teach everyone from new recruits to
high-level managers. In Chapter 1 we discussed whether ethics can be taught; we
hope that by now, you’re quite convinced that it can. Ethics in organizations is about
awareness of ethical issues and knowledge of appropriate conduct, and these ideas
can and must be taught to employees at all levels.
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Training should be designed to suit the group of individuals being trained. A new
employee needs different training than a manager who has been with the firm for 10
years. An assembly-line worker might require only an hour of training, with regular
refresher sessions, whereas a manager might require several days of training that ad-
dress a variety of issues. Furthermore, training needs to be based on program goals. Is
the training supposed to increase awareness of ethical issues, convey knowledge of
laws and policies, change attitudes or behaviors? Finally, ethics training need not—
and probably should not—be solely the province of the ethics office. Ethics training
should be incorporated into leadership development and other programs so that it
becomes integrated more fully into the culture of the organization.
TRAINING NEW RECRUITS Many firms provide ethics training through new
employee orientation. For example, to set the stage properly, every new Lockheed
Martin employee gets a briefing on ethical and legal issues as part of the first day on
the job. This training is complemented throughout each year of employment, with the
intent of setting the stage properly from the first day.
TRAINING EXISTING EMPLOYEES Training is also provided to existing employ-
ees and takes a variety of forms. Some companies provide a basic ethics training
module to all employees. For example, Staples provides all employees with case-
based, online ethics training (developed by Staples ethics professionals and availa-
ble in 14 languages). At Lockheed Martin, every employee participates in annual
awareness training. This training focuses on the firm’s ethics, diversity, and
leadership values and how employees can and should apply these values to their
work. Each year, the ethics office staff is challenged to make the training different
and memorable—something that employees will discuss with each other after
leaving the training session.
The 2009 training, entitled ‘‘A Culture of Trust,’’ focuses on the corporation’s
values, commitment to diversity, and leadership imperatives. The session begins with
an introductory video in which the chairman and chief executive officer emphasizes
the Lockheed Martin vision and how ethics and business conduct is integral to the
company’s success. The training is video based and contains nine case scenarios, each
one highlighting different ethical dilemmas including records falsification, time-card
fraud, and intercompany relationships. Not all of the scenarios have clear-cut answers,
because the intent is to stimulate conversation during and after the session. Each train-
ing session contains from 5 to 25 people and is led by the department manager or an
ethics officer. The annual training kicks off in early May, when chairman and chief
executive officer Robert J. Stevens trains his staff. Each member of the executive staff
then trains her or his employees, and the process continues until October, by which
time all 140,000 employees will have been trained. This annual ethics awareness train-
ing has become integral to the Lockheed Martin culture. People expect it and look
forward to what the ethics staff will create each year. One limitation of this training is
that, depending on the length of the dialogue regarding the cases, teams can get
through only three or four of the case scenarios in a single training session.
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To complement its annual ethics awareness training, Lockheed Martin launched
an initiative called ‘‘The Integrity Minute,’’ a series of short (about one minute) video
messages sent to employees via e-mail. Each series contains three or four episodes on
a central ethics theme. The episodes, which are sent in consecutive weeks, contain a
cliff-hanger to maintain employee interest in the series.
Another awareness initiative at Lockheed Martin is the Ethics Arts and Film
Festival. All employees are invited to participate in a celebration of the creative arts
to promote ethics, diversity, and good leadership. The entries come from across all
business areas, both domestically and internationally. Participants use a variety
of creative media to produce posters, videos, photographs, poems and other works of
art with a focus on ethics, diversity, and leadership. Employees use their own
resources, on their own time and away from the office, to prepare their submissions.
Most of the submissions are team entries that provide work groups with a team-
building opportunity. An independent panel of judges selects the top entries, and the
winners are invited to a recognition event.
USAA has used an employee training approach called facilitated dialogue. The
approach is best used in groups of 12 to 15 people, but it can be effective in groups as
large as 30 to 50. In these training sessions, employees are first given a virtual tour of
the company’s intranet website and an introduction to the code of conduct. Then,
participants are given customized scenarios that are relevant to their own work area.
The groups discuss each scenario and refer to the website when they have questions.
The purpose is to familiarize them with the website and how it can be used to answer
questions that arise in their work as well as to promote other ethics resources.
Staples created ‘‘meetings to go’’ for its managers to use in spreading the ethics
message across the organization. The meeting-to-go kit contains PowerPoint presen-
tations, talking points, interactive exercises, and more. This approach has proven
effective in training employees because it brings the ethics message close to home,
and it’s delivered by someone the employees trust—their manager, who can answer
questions about how corporate policy and values apply in their unique corner of the
company. In addition to this training, Staples is introducing anticorruption workshops
globally in 2010. These workshops are tailored to various parts of the world and their
unique ethical challenges.
TOP MANAGEMENT INVOLVEMENT IN TRAINING When organizations conduct
ethics training for the first time, many of them begin the training at the top of the
organization. Cascading is a term frequently used to describe ethics initiatives that
begin at the top of the organization and work their way down, level by level. This
technique is often used because of the importance of leadership to the credibility of
ethics training. Each leader trains his or her direct reports, modeling the expected
training behavior and the necessary commitment to integrity.
LOCAL MANAGEMENT INVOLVEMENT IN TRAINING Many organizations rec-
ommend having local management conduct the ethics training, using common every-
day ethical dilemmas as the basis for discussion. Training sessions are thought to be
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more useful and effective if they address real ethical issues that people face every day
in their own work setting. Examples of calls that have come in to the ethics office can
be used as the basis for training. Employees make ethical decisions every day. Any-
body who reports the time that they work—or decides how to divide their time across
different government contracts, or decides whether they are going to engage in some
kind of an outside business activity that might be in conflict with their job, or has to
decide what to tell a customer about a delayed order—is making an ethical decision.
Using common everyday issues in training gives employees a feeling of comfort that
the issue they’ve faced has been a problem for others and that they’re not some
screwball who is worrying about something that doesn’t matter.
CREATING A DIALOGUE At USAA, the ethics office held an annual strategic plan-
ning conference with 30 to 35 ethics facilitators and other invited guests from across
the enterprise. The session was modeled on a large group dialogue technique known
as Appreciative Inquiry (developed by David Cooperrider and Suresh Srivastva at
Case Western’s Weatherhead School of Management). The session facilitator asked
the participants to pair up and think about and share with their partner some positive,
memorable, peak ethics experiences they have had in their lives with their interview
partner. Then, in groups, the participants thought about the conditions under which
these kinds of peak experiences might happen more regularly. Finally, they consid-
ered what USAA might do to make such experiences even more the norm in the
organization than they are today. Participants found the focus on the positive (rather
than problems and deficiencies) particularly energizing. And their discussions led to
some very specific suggestions that have been implemented.
USAA has also applied other large group dialogue methods, such as ‘‘World
Caf!e,’’ to ethics training. World Caf!e was developed by Juanita Brown and David
Isaacs in 1995. It involves developing provocative questions about topics that matter
to people and establishing a relaxed, coffee-shop-like environment to contain and
focus the conversations. The best questions promote accountability; for example,
‘‘What is the one thing I could do tomorrow that would promote ethics in the area I
work?’’ Employees talk about ethics in small groups and then reconvene in a larger
group to process and apply insights. Participants find the dialogue both empowering
and transforming.
A TRAINING MODEL: THE ETHICS GAME A powerful method of communicating
a corporate ethics message is through an ethics game. Katherine Nelson, coauthor of
this book, created the first corporate ethics game, ‘‘The Work Ethic: An Exercise in
Integrity,’’ when she was head of human resources communication at Citicorp in the
late 1980s.
The game worked like this: A group of employees were divided into teams; a
facilitator then positioned the exercise with the following messages:
‘‘We’re playing a game about ethics because we want to make sure we
get your attention. Integrity is critical here.’’
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‘‘This is an opportunity for you to practice making ethical decisions
in a risk-free environment.’’
‘‘We’re doing this to give you an overview of corporate policy and
how things are done here. We’re also going to outline all of the resources
available to you if you think you’d like some help or advice if you’re
faced with an ethical dilemma.’’
A facilitator presented the teams with a series of ethical dilemmas related to such
topics as sexual harassment, reporting ethical concerns, responsibilities of customers,
the need for confidentiality, and conflicts of interest. The ethical dilemmas were writ-
ten so that there was no clearly right answer.
For each issue, the teams took a few minutes to discuss what they considered to be
appropriate action. Then, based on a consensus among team members, they chose one
of four possible courses of action. Once the teams decided, the facilitator played
devil’s advocate and questioned the entire group about why they voted the way they
did. The discussions could get very heated, as participants and teams loudly defended
their positions. The facilitator then revealed the scores for each course of action (scores
are predetermined, preferably by the management of the organization where the game
is being played). If the participants disagreed with the scores, they could take them to
an appeals board of senior managers. Again, the discussions could get quite impas-
sioned and lively. And the competition for the best scores kept interest high.
The senior management appeals board was one of the most important aspects of
the ethics game. The very presence of senior managers for 90 minutes or so sent a
strong message that integrity and ethics must be important in this company, or all
these executives wouldn’t be spending so much time talking about it. In addition,
when discussing an appeal, the appeals board often communicated the ethics message
about company standards and expectations more powerfully than any other element
of the ethics program.. Along the way, employees could see how senior managers
worked through an ethical dilemma and what factors they considered important in
making decisions.
Groups could disagree with the scoring of a question and appeal to the senior
managers, who had the power to change scores if they heard a good argument for
that. This process somehow ‘‘stamped’’ participating managers as approachable.
Managers who participated in appeals boards frequently reported a marked increase
in the number of employees seeking them out and asking for advice. One manager
described how he had been stopped in hallways, restrooms, cafeterias, and even on
the street to be asked advice by employees who had seen him as a judge on an ethics
game appeals board. Most companies would do just about anything to have their
employees seek advice from managers on ethical issues.
Senior managers also learned a lot by participating in the game, which gave
employees an opportunity to raise issues directly to management. In one session, sev-
eral male managers were made aware of how offensive young female trainees found
any kind of sexual stereotyping. The young women were so determined to let
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management know how strongly they felt on this issue that the women continued the
discussion face-to-face with the executives at a reception after the game had offi-
cially ended.
Since the game usually raised more questions than it answered, it was crucial to
debrief the group. At the end of the game, the facilitator gave advice on how to solve
ethical dilemmas and outlined the resources available to help employees if they
found themselves in need of advice.
The ethics game met many communication and training goals, but it was
especially effective in raising awareness, creating a dialogue, and describing
expected dilemmas and how employees might handle them. However, for an ethics
program to be effective over the long term, training and communications should
continue over time. A game is an excellent beginning and can be used repeatedly
with different dilemmas. However, it can’t exist in a vacuum or be all things to all
people. It needs to be part of an integrated ethics program with other media and
complementary messages.
Although some may view an ethics game as heresy, those who have seen this type
of training program in action are quickly convinced of its effectiveness. Other compa-
nies have developed their own versions of the game and have used them successfully.
For example, years ago, Lockheed Martin developed an ethics game modeled after
the Citicorp game, but with a twist. At the time, the company received permission
from Scott Adams, author of the Dilbert cartoons (popular with employees), to use the
Dilbert character in their game. Then Chairman of the Board Norm Augustine
appeared with Dilbert in an introductory video, and the game included a humorous
‘‘Dogbert answer’’ to each ethical question. With the introduction several years ago of
online ethics training, the Citicorp format featuring a series of scenarios with scored
answers has become increasingly popular with a wide range of companies.
Formal and Informal Systems to Resolve Questions and
Report Ethical Concerns
An organization with a strong ethical culture is one where employees feel free to
speak openly about ethical issues, question authority figures, and report concerns,
and where managers are approachable and listen to their people. This may be the
most important thing an organization can do to open up the communication lines and
set up an environment of candor. Make sure people feel they can discuss their opin-
ions, their ideas, and their thoughts openly. Most important, set up an environment
where people feel they can sincerely bring up and resolve problems without being
embarrassed or fearing retribution. The first time you shoot the messenger who brings
you bad news, you’ve taken the first step toward squelching ethics in the organiza-
tion. News of the ‘‘dead messenger’’ will spread like wildfire on your organization’s
grapevine.
Although most organizations encourage employees to bring their concerns to
their immediate supervisor first, employees sometimes want to ask a question anony-
mously, or they may have a concern about their supervisor’s behavior. Also, the U.S.
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Sentencing Guidelines require that organizations ‘‘take reasonable steps to achieve
compliance with written standards through monitoring, auditing, and other systems
designed to detect criminal conduct, including a reporting system free of retribution
to employees who report criminal conduct.’’ As a result, many firms have established
a more formal system for raising concerns. This generally takes the form of a tele-
phone line employees can call to ask for help in resolving an ethical dilemma or to
report an ethical problem or behavior they’ve observed in the organization. A number
of names have emerged for these reporting systems—‘‘Communication Lines,’’
‘‘Guideline,’’ ‘‘Open Line,’’ ‘‘Helpline,’’ ‘‘Hotline,’’ and ‘‘Ethics Action Line.’’
These phone lines generally ring in the ethics office if there is one. For example, at
Lockheed Martin, the Corporate Ethics helpline is available during regular working
hours, and employees can leave a voice message 24 hours a day. In addition to the
helpline, Lockheed Martin provides an e-mail option, a web-based ‘‘Ask-Us’’ chan-
nel, a fax number, and a postal address that employees may use to submit ethical
concerns. Each business unit advertises the local ethics program on posters that
include a photo of the site ethics officer and the phone number for the ethics helpline.
Lockheed Martin also recently introduced its Planet Ethics Blog, which encourages
employees to engage in a dialogue about ethics. Some large organizations provide
separate reporting lines for each business unit. In a few firms, the line actually rings
on the chairman’s desk. Other firms have hired an outside consulting firm or law firm
to take the calls at a toll-free number and then transfer the information to the com-
pany.23 That system is especially prevalent in many global firms, where a call can
come at any time of the day or night because of time zone differences.
We believe that, where possible, it’s best for ethics office staff to talk with call-
ers directly. As ethics office staff, they need to be in touch with what’s going on in
the organization. If they delegate the task, they lose the tone and perspective of the
callers. For example, the nonverbal clues that come through on the phone can easily
get lost in a paper report. One way to handle this is to answer calls during business
hours and then contract with an outside firm for after-hours capability. Around-the-
clock answering capability is essential for a global business. The ethics office can
explain the decision to hire an outside contractor to employees as its solution to han-
dling calls from around the globe. Organizations that have experience with telephone
reporting lines find that most of the calls represent requests for clarification. The indi-
vidual says, ‘‘Here’s what I want to do. Is it okay? Does it follow procedure?’’ Most
of the calls in many organizations represent HR-related issues, such as fairness con-
cerns. Some are relatively routine. But occasionally calls come in that represent seri-
ous breaches of the code of conduct or even illegal conduct. Managing these lines is
no small feat. It’s not unusual for a company hotline to receive thousands of calls per
year. One ethics officer reported that 90 percent of the calls to his company’s hotline
were to report HR-related issues. ‘‘But many of the other 10 percent were issues of
great interest to us and it’s well worth dealing with all of the HR issues to get to the
others,’’ he said.
One concern often raised about these reporting lines is that individuals will make
invalid reports—‘‘tattling’’ on people they don’t like. But that’s not the experience of
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the ethics officers we interviewed. Most people call about valid issues. Although
their motives may not always be noble, the content is usually correct. Most of the
people who use the communication line are using it because they sincerely have a
question or concern about something they think is wrong. It’s one reason that confi-
dentiality is so important within the entire reporting and investigative system. The
identity of both the reporter and the alleged violator must be protected throughout
the process. The alleged violator must be protected because allegations can result
from simple misunderstandings. The reporter must be protected from any retaliation
from the accused.
Another relevant question concerns how to interpret the meaning of the number
of calls and letters. Obviously, if an organization institutes and promotes an easy way
to ask questions, express concerns, and report violations, the number of calls should
increase dramatically. Does this mean that there are more ethical problems? Probably
not. The executives who run these programs generally interpret such increases as
evidence that their programs are working. However, in an ideal world, the ethics
office should aim to put itself out of business. In other words, ethical conduct should
become so institutionalized that there would be no reason for people to call. They
would handle issues locally, with their managers. Like the old ad about a Maytag
repairman, the ethics officer would have a very boring job. On the other hand, a quiet
telephone may also signal a number of other positive or negative conditions:
& Lack of concern or recognition of ethical problems (negative)
& An intimidating environment where people fear retribution (negative)
& Good problem solving at the local level (positive)
& No one knowing the ethics office exists (negative)
Ultimately, it’s up to the ethics office to devise ways to determine what the numbers
and changes in the numbers mean.
At USAA, Earnie Broughton monitors the Helpline for information about pro-
gram effectiveness. He prefers to see a relatively low and stable level of allegations of
misconduct and a higher level of advisory questions. That means that people are call-
ing the Helpline for advice—which is a good thing. The question remaining is whether
employees are aware of and willing to use the resources that are made available to
them. USAA conducts a periodic Intranet survey of randomly selected employees in
order to determine their awareness of the ethics office and related resources, their like-
lihood to use those services, and if they are not likely to use them, why not.
Confidentiality and protection of reporters remains an important issue. Some
firms use outside individuals, often called ombudspersons, who may answer the
reporting line, provide information, investigate complaints, serve in an alternative
dispute resolution role, and report problems to a corporate compliance or audit com-
mittee while maintaining the confidentiality of the reporter.24
Whether a telephone line, an ombudsperson, or some other formal procedure is
most appropriate for a particular corporate culture, the important thing is to have
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some way for employees to raise issues without fear of retribution. If there’s no way
for employees to raise issues without such fear, the first time an executive hears about
a problem may be from a district attorney, a regulator, or a newspaper reporter.
Finally, each of the firms we talked with has a system for investigating reports of
misconduct. These are multistage processes that can be quite complex, depending on
the seriousness of the allegation. Obviously, facts must be gathered to determine
whether the allegation can be verified. Confidentiality must be maintained throughout
these investigations, and they must be coordinated with other parts of the organiza-
tion such as the legal, audit, security, or human resources department, depending on
the problem. Then, based on a thorough analysis of the findings, recommendations
must be made and actions taken to discipline employees and/or correct systemic
problems in the organization.
USING THE REWARD SYSTEM TO REINFORCE THE
ETHICS MESSAGE
Recall from Chapter 5 that the reward system is vital to alignment in an ethical cul-
ture. At Lockheed Martin, the Performance Management Process rates employees not
just on results of the job such as increased sales or profits. Employees are also rated
on how you got there through attributes that include ethics, excellence, integrity, and
people and teamwork. Each of these attributes is explicitly defined. For example,
ethics is defined as: ‘‘Is honest and forthright; Embraces truthfulness; Knows regula-
tions, rules, policies, and compliance requirements, and actively demonstrates com-
pliance; Always does the right thing.’’ Integrity is defined as ‘‘Acts with integrity;
Walks the talk; Is reliable, and holds self accountable for actions and results; Is a
good steward of Lockheed Martin resources; Credits others’ contributions as appro-
priate.’’ The People and Teamwork attribute is defined as ‘‘Treats others with respect
and dignity; Values and encourages diverse perspectives; Consistently professional
in all dealings with others, and demonstrates good interpersonal skills; Builds trust
through interactions; Partners with others in setting priorities, solving problems, and
improving quality; Demonstrates continuous, consistent, and clear communications;
Actively listens.’’
Managers are asked to provide specific behavioral examples of each attribute.
They are required to base their salary increase recommendations on these attributes
(along with bottom-line performance expectations) and to put those recommenda-
tions in writing.
At Staples, 40 percent of every employees’ performance appraisal is devoted to
how an employee did his or her job. Measuring the how and not just the what (results
achieved) is an excellent and proven way to drive desired behavior and discourage
unethical behavior.
At Otis Elevator Company (a subsidiary of United Technologies Corporation),
Stephen Page, then president and now retired as UTC’s vice chairman, wrote a letter
to employees making it clear that Otis seriously disciplines breaches of integrity. In
his words:
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Our company is making substantial changes in the way we do business.
I am writing today to highlight what has not changed, and never will
change: our commitment to the highest ethical standards and business
practices.
We know that Otis employees are honest, mature, independent, and
scrupulous in their conduct at work. We know that Otis employees care
about ethics and our company’s reputation. And we know that employees
support sanctions for any colleague whose behavior shows he or she does
not hold these fundamental Otis values.
Our ethics program grows out of this knowledge. We provide train-
ing and communications programs to all employees in our Code of
Ethics, which offers guidance in how to behave in specific business situa-
tions. Through our worldwide network of business practices officers
(BPOs), we also provide expert advice to employees who have questions
or who face ethical dilemmas.
But for those few who do not care about ethics; who think they can
cut corners; who violate the law, our policies or our standards, there is no
place in Otis. To our regret, we have had to terminate the employment
of nearly a dozen colleagues this year alone for violations of our Code of
Ethics—a record that is simply unacceptable. Unlawful or unethical con-
duct can only harm our company and we will take whatever actions are
necessary to prevent that from happening.
Our actions reflect our fundamental belief: Otis would rather lose
business than compromise our standards of conduct.
Please take this opportunity to refresh your knowledge of our Code
of Ethics, and to recommit yourself to its guidelines and principles. We
have so much to be proud of at Otis, and our reputation as an ethical
company stands in the first rank of our accomplishments. We are deter-
mined to protect this priceless asset.
Thank you for your continued support.
This letter confirms the company’s willingness to take firm action to uphold
standards through discipline when necessary, and it is likely welcomed by the com-
pany’s many ethical employees (see Chapters 7 and 8 for information about the
appropriate use of discipline).
EVALUATING THE ETHICS PROGRAM
Many organizations have committed significant resources to their ethics efforts—
hiring high-level executives, developing values statements and codes, designing
and implementing training programs, and more. But few organizations have system-
atically evaluated these efforts, because doing so presents many challenges. For
example, as suggested earlier, more calls to the telephone line can mean different
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things and can be interpreted in a variety of ways. And asking employees at an ethics
training program whether they ‘‘liked’’ it or not doesn’t tell you much about the qual-
ity of the ethics program. Many employees will respond affirmatively just because
they liked the idea of a few hours or a day away from the office. Whether or not they
liked it should be secondary. The most important question should be whether the
program is accomplishing its goals.
Otis has gone the extra mile in the area of evaluation. It has over a million
elevators in operation in more than 200 countries around the world! You may not
have thought much about it, but all of us depend on the integrity of a company that
provides many of the elevators we ride daily. As part of a toolkit provided to each of
its companies, Otis requires a self-assessment process that involves regular evalua-
tions of program effectiveness including training, communication, work practices
reviews, instances of misconduct, corrective actions, reports, and records. Companies
are also asked to identify the strengths and weaknesses of their programs and to im-
plement changes to overcome weaknesses. Finally, they are asked to share their suc-
cesses, program strengths, and lessons learned with the rest of Otis.
Organizations that are members of the Defense Industry Initiative (DII) are often
at the forefront on evaluation because the DII asks each of its member organizations
each year to certify that the firm is complying with the six DII principles. These self-
certifications are available to all members, and a report is published and sent to the
U.S. Congress annually.
Surveys
Surveys are probably the most common approach to evaluation. Many organizations
already conduct regular employee attitude surveys; some have added ethics to the list
of survey topics, and some conduct separate ethics surveys. Surveys can target
knowledge, attitudes, skills, and behaviors. For example, if ethics training has been
recently required of all employees, surveys can evaluate the extent to which employ-
ees understand the company’s expectations and standards. Baseline data can be col-
lected before ethics training is begun, and then again several months after it’s
completed, to analyze whether positive change has occurred. Surveys can help
evaluate employees’ skill at recognizing and resolving ethical issues, and they can
measure the extent to which employees observe unethical conduct in the organiza-
tion. Finally, attitudes toward ethics management programs and processes can be
evaluated. It’s important to survey regularly so that changes and progress can
be evaluated. A final suggestion about surveys—don’t ask questions if you’re not
willing to accept the answer. Employees will expect action based on survey results.
If you’ve asked them to take the time to complete a survey, you should communicate
the results and planned action.
The most famous ethics-related survey is likely Johnson & Johnson’s Credo
survey. Then Chairman James Burke had been on the board of IBM Corporation in
the 1980s and became impressed with IBM’s employee survey program. He decided
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that one way to keep the Johnson & Johnson Credo alive would be to survey employ-
ees about how the company was doing relative to the Credo. The survey went
through a number of iterations after being tested on employees at a variety of loca-
tions. The first survey was conducted in the United States in 1986–87. The first
international survey was conducted the following year. The first part of the survey
contains 118 items and takes about 25 minutes to complete. It asks employees to
rate things such as the company’s ‘‘customer orientation’’ on five-point scales.
The second section is open-ended for written comments. One of the findings
has been the impact of top leadership and corporate culture on survey results.
For example, former Chairman Burke had emphasized the customer above all. Presi-
dent David Clare emphasized safety first. In an analysis of the survey results, ratings
on these two survey dimensions were highest. Most of all, the survey is viewed as
a way to keep the Credo alive, a way of ‘‘closing the loop on this thing called
the Credo.’’25
Lockheed Martin conducts an employee survey every two years, so that the firm
can gauge whether ethical principles are being applied and whether employees have
observed wrongdoing—and, if so, whether they have reported it. The survey is
moving to an annual basis and has been combined with the company’s employee
perspectives and diversity survey. The survey allows the firm to assess its culture,
determine the impact of ethics programs, and point out areas in need of attention. All
140,000 employees are asked to participate in the voluntary survey, for which the
participation rate has increased over the years. Results of the survey are shared with
employees, and in many instances it is used to gauge the health of departments down
to the first-line managers.
In 2007, the ethics and employee perspectives surveys were combined for the
first time and results were benchmarked with data from the DII and the Mayflower
Group, a consortium of blue-chip companies. More than 80 percent of the
Mayflower Group’s member companies are included in the Fortune magazine list of
the most admired companies in America. The ethics survey measurements include
pressure to compromise standards, observed/reported misconduct, and commitment
to ethics. Most survey results were positive and consistent with favorable results
from the 2005 survey. For example, a high percentage of employees reported that
they know what constitutes ethical business conduct, how to obtain guidance on eth-
ical issues, and how to report misconduct.
The 2007 results demonstrated that Lockheed Martin continued to progress on
key metrics. Specifically, the percentage of people who believe they observed mis-
conduct reduced by three percentage points, and perceived pressure to commit
misconduct was down to two percent of the total surveyed population. In general,
employees indicated that management will act on reports, and managers are held
accountable for their conduct. Where areas of concern were noted, action plans
were developed by the business unit leadership; where particular business units
showed strong positive results, they were studied for best practices that contributed
to the results.
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VALUES OR COMPLIANCE APPROACHES
Formal corporate ethics initiatives can be categorized as emphasizing either a values or
a compliance approach to managing ethics. The values approach is proactive and aspi-
rational. It emphasizes expected behavior and an effort to achieve high standards repre-
sented by the spirit of the law and organizational values. It relies on such techniques as
leader communication and role modeling to affirm the organization’s commitment to
its stated ethical values and goals. Employees learn that these are not empty words, but
words that organizational leaders believe and live by. Ethics becomes a point of pride
in the organization: ‘‘We’re so good we don’t have to cheat!’’ The response to a values-
oriented program is generally good until violations occur. Then, employees expect that
commitment to be backed up with sanctions against the violators.
With a compliance emphasis, the focus is more on required behavior—obeying
the letter of the law rather than aspiring to lofty ethical principles. Disciplinary pro-
cedures for violators are also important to compliance efforts. Many organizations
that are motivated by the U.S. Sentencing Guidelines and Sarbanes-Oxley legislation
mandate a compliance approach. Employees are told that compliance with the law
is essential and that employees who break the law will be punished. The danger with
a compliance-only focus is the possibility that employees will believe anything
goes as long as there isn’t a rule against it, or that the company is interested only in
protecting itself, not in helping them.
An effective program should have both values and compliance components.
By themselves, abstract values statements can appear hypocritical to employees.
‘‘Management makes these lofty statements, but they don’t tell us what we
should do.’’ Values must be translated into rules for behavior; and to give the rules
meaning, violators must be disciplined. Employees welcome information that
reduces ambiguity about what they can and can’t do. And if enforcement is applied
consistently across all organizational levels, they are likely to perceive the system as
fair and just.
On the other hand, employees often view a strictly compliance-oriented pro-
gram with cynicism. Without a strong values base, compliance programs seem to
focus on catching employees doing something wrong rather than on aspiring
to do things right. Employees translate this emphasis into mistrust and a CYA
approach. Either ‘‘the organization doesn’t trust its employees,’’ or ‘‘the organi-
zation is just out to protect its own behind.’’ The best programs aim to focus on
aspiring to a set of values first and foremost, supported by just and fair enforce-
ment of the rules.
At Merck, development of a formal ethics program was driven by its long-
standing values-based culture. Interestingly, Merck did not have a formal ethics
code until 1999. In rolling out the code initiative, the firm was careful to posi-
tion it as simply a continuation of the good things the company was already
doing. It also worked hard to get participation and buy-in through focus groups
and surveys. This is typical of values-based programs where employee buy-in
and support are essential.
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GLOBALIZING AN ETHICS PROGRAM
In Chapter 11, we’ll talk about business ethics in a global environment. What sets
United Technologies Corporation (UTC) apart is the truly global extent of its ethics
and compliance efforts. Recall that UTC has over 200,000 employees, more than half
outside the United States, and a presence in more than 180 countries. Imagine how
difficult it must be to design systems and programs to effectively reach such a wide
audience across multiple cultures. UTC’s program rests on three coordinated efforts:
management engagement, the Ombudsman/DIALOG program, and a worldwide
business practices organization.
Management engagement is the keystone, because no ‘‘program’’ succeeds with-
out direct management support. At UTC, managers are evaluated on an ‘‘ethics com-
petency’’ that is based on behaviors identified by the research of the Ethics Resource
Center as well as on a complementary set of ethics objectives. The ethics objectives
cascade through management from the CEO and require ongoing communications,
training of employees, continuous improvements in control systems, and efforts to
improve the ethics score on the biennial employee survey. UTC policy states speci-
fically that the business leaders are responsible for fostering a culture of ethical
conduct, encouraging open communications, and instilling a commitment to the
code of ethics. Both the competency and the objectives are evaluated through
the company’s ‘‘Performance Feedback Tool,’’ which was developed by the human
resources department.
The Ombudsman/DIALOG program at UTC is an alternative communications
channel for raising issues to management. Created in 1986, it fields questions or con-
cerns on essentially any subject. Ombudsman/DIALOG is a confidential channel that
does not reveal the user’s identity; it serves as a neutral intermediary between
employees and management by advocating only for clear communication, it works
independently of management, and it performs under the standards of the Interna-
tional Ombudsman Association. Inquiries come via phone contacts through toll-free
calling, or via written contacts, through either postage-paid mailers or an encrypted,
web-based system. UTC has three ombudsmen who handle more complex issues,
including those with legal implications. Less complex issues are managed by
DIALOG coordinators who work directly under the supervision of the ombudsmen.
Users of Ombudsman/DIALOG can choose to remain completely anonymous to the
organization, and the company goes to great lengths to keep this commitment. For
example, an assistant to a senior business-unit executive called with concerns about
expense report behavior. If investigated openly, the source of the information would
have been identifiable. Instead, the company audited all expense reports of people
at the same level, as a routine review. In that way, they protected the reporter’s iden-
tity. They found the problem, fired the executive, and no one was the wiser. However,
the ombudsmen do not conduct investigations. If the issue requires investigation
or intervention, it is turned over to people in other areas (e.g., human resources,
business practices) for further action. Ultimately, the ombudsman or DIALOG
coordinator reviews the answer from the company. If it doesn’t completely and
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fairly address all of the issues raised by the employee, it goes back to management
with the suggestion that it be fixed. Ombudsman/DIALOG receives more than
3,500 inquiries per year, from around the world, and makes translators readily
available. Over the past five years, with respect to those Ombudsman/DIALOG
inquiries requesting change, about half resulted in change. Moreover, in recent
years, more than half of all Ombudsman/DIALOG inquiries came from outside the
United States.
The business practices organization is led by Michael Monts, a lawyer who was
an attorney for the U.S. Navy and the Department of Defense and who then held a
variety of significant positions at UTC before becoming vice president for business
practices in early 2005. Monts is one of the company’s top executives. He reports to
the senior vice president and general counsel as well as to the audit committee of the
board of directors, with whom he meets four times per year. He has a small staff at
headquarters, and he supervises a network of more than 400 business practices offi-
cers (BPOs), who are embedded in UTC businesses around the globe. Overall, about
30 BPOs are full-time. Three of those are area BPOs reporting to headquarters, one
each located in Europe, Asia-Pacific, and the Americas, and six serve as the business
practices leaders at UTC’s major businesses. Monts participates in selecting and
appointing the BPOs as well as in evaluating their performance, and he can veto
appointments. Most have at least several years of experience in the company and are
familiar with internal controls and the company culture. They are considered high-
potential people who generally come from staff functions such as finance or safety.
Good communication skills are considered a must for business practices staff, along
with the ability to take the ball and run with it when a problem arises. UTC has a
BPO Handbook, an investigations handbook, standard work for case management,
an online case management system, toolkits for communications and risk manage-
ment, and an online knowledge management system. In addition, UTC has a standard
curriculum for training BPOs, which includes written materials, online modules,
WebEx meetings, and regional conferences. BPOs serve for about two or three years,
a turnover rate that is considered to be both a boon and a bane. It’s a boon because
these individuals bring fresh ideas and energy to the function, and they take their
business practices experience with them to their future roles, becoming continuing
champions for the business practices organization. It’s a bane because training new
people is a constant challenge.
The business practices unit manages UTC’s code of ethics (in place since 1990),
a companion policy statement on doing business with the U.S. government, and the
corporate policy manual. The code applies to UTC employees worldwide and
includes sections that specifically address ethical issues relating to doing business
abroad. But the code is not ethnocentric, so it allows for some adaptation to the
cultural mores of different cultures. It is made clear, however, that this flexibility
does not permit violations of U.S. or local laws, and the code states that UTC will
not facilitate illegal conduct or fraud by others, regardless of local norms. In 2008, a
total of 357 employees were discharged for violations of the code of ethics.
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CONCLUSION
This chapter has offered specifics about how ethics is managed in large business
organizations. Large businesses that are committed to ethics are likely to have formal
ethics management systems such as an ethics office, ethics officer, explicit ethics
training, a telephone counseling/reporting line, and a system for investigating and
following up on reports of misconduct. However, the specifics of these systems vary
with the context and culture of the firm. Some companies in highly regulated indus-
tries may focus more on legal compliance. Others that have a long-standing values-
based culture will want to make sure that the ethics management system is designed
with a heavy emphasis on values and aspirations. Research has found that the best
of these formal ethics management programs have an overarching values-based
approach that incorporates legal compliance within the framework of a broader set of
company values. Smaller firms with a strong commitment to ethics are less likely to
have separate formal ethics management structures and systems. Whether an organi-
zation is large or small, the keys to effective ethics management are commitment to
ethics from the very top, involvement of leaders and employees at every level, and
recognition that ethics management is an ongoing effort requiring continuous
reinforcement and integration into the larger corporate culture.
DISCUSSION QUESTIONS
1. Think about the impact of the U.S. Sentencing Guidelines. Would organizations
have tried to drive ethical behavior among employees without government
encouragement?
2. After reading about how a number of large companies try to encourage ethical
behavior, what stands out? What approach is most unique? Which one do you
think is most effective? Which one would make the biggest impression on you
if you were an employee?
3. Imagine that it’s your responsibility to select an ethics officer for your organiza-
tion. What qualities, background, and experience would you look for? Would
you ever be interested in such a position? Why or why not?
4. What are the advantages of having an ethics office or officer report to a com-
pany’s chief executive officer, the legal department, human resources, or audit?
What are the disadvantages?
5. Think about an organization where you’ve worked. What kinds of ethical di-
lemmas are unique to that organization? To that industry? What might be the
best way to prepare employees to deal with those dilemmas?
6. Think about all of the communication opportunities provided by social media.
How could an organization use social media like Facebook, Twitter, and the
like to promote ethical behavior and communicate the organization’s values?
What are the advantages and dangers of those media?
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7. Which of the following exist in an organization where you’ve worked: mission
or values statement, policy manual, code of conduct, ethics training (who con-
ducts it), hotline? Were they consistent and credible?
8. Is senior management committed to ethics? How do you know? What could
they do differently or better?
9. Are leaders at all levels held accountable for their ethical conduct? If so, how?
If not, why not? What would you recommend?
10. What recommendations would you make for handling frivolous calls to the
hotline?
11. Does the organization evaluate its ethics initiatives? How? If not, why not?
12. Would you characterize the ethics efforts in this organization as taking a values,
compliance, or combination approach? Is it effective? How could it be improved?
13. How would you raise an ethical concern in this organization? List all of the
resources available to you. Which ones would you be likely to use? Why or
why not?
14. Imagine that you’re the CEO of a small manufacturing company. An employee
has dumped toxic waste in a nearby stream. Who would you call into your office,
and what would you want to know? Develop a short-term and long-term action
plan for dealing with the crisis. Who would you communicate with and why?
15. Evaluate the ethics program at your organization from the perspective of ‘‘fit.’’
Has the ethics program been designed to fit the organization’s overall culture?
If so, how? If not, what could be done to make the program a better fit?
16. Think about your own positive, memorable, ‘‘peak experiences’’ when it comes
to ethics. Be prepared to discuss them with others in your class and to think
about the conditions that would make it possible for such experiences to happen
more regularly at work. Or, if you don’t have much work experience yourself,
interview someone who has, and ask these questions. Be prepared to report on
what you learned from the interview.
SHORT CASE
WHAT’S WRONG WITH THIS PICTURE?
You’re a management consultant who has been asked by Green Company to help
design an ethics communication and training program for all Green Company
employees. Your meetings to date have been with the head of human resources, and
your contract with the company has been negotiated with him. Once the papers have
been signed, you begin your research and are quickly stymied by Green’s corporate
counsel. He says you will not be allowed to ask employees about ethical dilemmas
that have occurred at Green. He specifically asks you to get your information from
other sources such as press accounts of problems in the industry, or from other
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organizations you’ve worked with. In addition, the head of human resources has told
you that you’ll be unable to meet the three most senior executives because they’re
busy negotiating a large acquisition. You will have access to other high-level manag-
ers who can tell you what they think the seniors want. You’re instructed to write a
code of conduct for the company and a mission statement, and to prepare presenta-
tions for the senior managers to give to employees sometime next month on corporate
expectations and values.
Case Questions
1. Based on what you know about developing ethical cultures and programs,
identify the problems presented by this case.
2. Why do you think the corporate counsel has responded in this way? What
will be your response to him, if any?
3. As a consultant, what are your ethical obligations, if any?
4. How will you proceed?
CASE
IMPROVING AN ETHICAL CULTURE AT GEORGIA-PACIFIC
Integrating an acquired company into an existing organization is one of the most
challenging tasks any company faces. Read about the AOL/Time Warner marriage
to learn how a merger or acquisition can go wrong. Read the following to learn about
a successful integration. This is a fascinating case of how privately held Koch Indus-
tries acquired Georgia-Pacific, a public company, and how Koch immediately took
steps to transfer its unique and highly ethical culture to its newest ‘‘family member.’’
When privately held Koch Industries acquired Georgia-Pacific—a large con-
sumer products, building products, and packaging company—in 2005, the job of
transitioning the company to the Koch compliance and ethics focus was led by Tom
Butz, one of a small number of executives Koch sent to the newly acquired company.
Butz is quick to say that he wasn’t the key to the transition. Nor was the expert team
he assembled to help with the efforts—some team members were brought in from
other Koch companies, and some of them were Georgia-Pacific leaders in compli-
ance and ethics who stayed and/or were promoted into key positions. ‘‘The key,’’
Butz says, ‘‘was the commitment from leadership across the company to our vision
for compliance and to building the desired culture.’’ That’s in sharp contrast to the
historic practices of many companies: first focus only on building the guidelines,
training tools, and related efforts for a compliance and ethics program, and then turn
to ‘‘rolling out’’ all of those pieces to the company. Instead, for Georgia-Pacific, the
highest priority was to build understanding of, and commitment to, the vision and
necessary culture for compliance and ethics—first among that senior leadership team
and then the entire organization. Butz adds, ‘‘Proactively advancing vision and
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culture in an organization is very difficult. It is a job that is never really done, and
since even a single decision can be problematic it is not a guarantee that you’ll never
have issues. That said, we believe these critical elements are essential to long-term
success.’’
At Georgia-Pacific and other Koch companies, that focus on compliance and
ethics (which includes environmental, health, and safety issues) is fundamental to
how the company is run. Few companies integrate compliance and ethics into day-
to-day operations and the very culture of the company as Georgia-Pacific has done.
The efforts of Georgia-Pacific and other Koch companies stem from the very core
of the companies’ philosophy—Market-Based Managementj. MBMj is a holistic
approach to management that enables organizations to succeed long term by applying
the same principles inside the company that allow free societies to prosper.
In this philosophy, successful companies create value by providing products or
services that customers value more highly than available alternatives, and they do
this while consuming fewer resources, leaving more resources available to satisfy
other needs in society. Value creation involves making people’s lives better. It is con-
tributing to prosperity in society.
In short, MBM focuses not on short-term profit as many other companies are
forced to do (although it is considered one strong indicator of success) but on long-
term value creation.
With that mindset, it is easy to see why compliance and ethics is so integral to
Georgia-Pacific and other Koch companies. It is far from just a necessary expense of
doing business as other companies might view it. Instead, excellent performance
across the range of compliance and ethics is an advantage that actually helps drive
greater long-term value for the company and for society.
Inside the company, MBM is applied through five dimensions:
Vision: Determining where and how the organization can create the greatest
long-term value.
Virtue and Talents: Helping ensure that people with the right values, skills,
diverse backgrounds and capabilities are hired, retained, and developed.
Knowledge Processes: Creating, acquiring, sharing, and applying relevant
knowledge, challenging the status quo, and measuring and tracking profitability.
Decision Rights: Ensuring the right people are in the right roles with the right
authority to make decisions, and holding them accountable.
Incentives: Rewarding people according to the value they create for the
organization.
MBM, in turn, requires a culture centered on specific attributes. These attributes set
the standards for evaluating policies, practices, and conduct; establishing norms of
behavior; and building the shared values that guide individual actions. These MBM
Guiding Principles are as follows.
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Integrity: Conduct all affairs lawfully and with integrity.
Compliance: Strive for 10,000 percent compliance, with 100 percent of employ-
ees fully complying 100 percent of the time. Ensure excellence in environmen-
tal, safety, and all other areas of compliance. Stop, think, and ask.
Value Creation: Create real, long-term value by the economic means. Under-
stand, develop, and apply MBM to achieve superior results. Eliminate waste.
Principled EntrepreneurshipTM: Demonstrate the sense of urgency, discipline,
accountability, judgment, initiative, economic and critical thinking skills, and
the risk-taking mentality necessary to generate the greatest contribution to the
company and society.
Customer Focus: Understand and develop relationships with customers to prof-
itably anticipate and satisfy their needs.
Knowledge: Seek and use the best knowledge and proactively share your knowl-
edge while embracing a challenge process. Measure profitability wherever
practical.
Change: Embrace change. Envision what could be, challenge the status quo, and
drive creative destruction.
Humility: Practice humility and intellectual honesty. Constantly seek to under-
stand and constructively deal with reality to create real value and achieve per-
sonal improvement.
Respect: Treat others with dignity, respect, honesty, and sensitivity. Appreciate
the value of diversity. Encourage and practice teamwork.
Fulfillment: Produce results that create value to realize your full potential and
find fulfillment in your work.
Company executives quickly point out the importance of the guiding principles, start-
ing with integrity and compliance. These are considered necessary, but not sufficient,
conditions for long-term success (which requires creating true value). In other words,
Georgia-Pacific and other Koch companies are not interested in profits or growth
obtained without integrity, full compliance, and excellence in all aspects of managing
the environment, health, and safety (EHS). Georgia-Pacific and Koch executives
readily admit that lots of companies have similar guiding principles. The difference
is how those principles are integrated into running the company and the unwavering
commitment to those principles. For example, at Georgia-Pacific and Koch compa-
nies, adherence to the guiding principles begins at the recruitment and hiring process.
Hiring managers are trained on a selection process that focuses on finding people
who have the skills and knowledge to do the job and, more importantly, share a set
of values and beliefs consistent with the company principles. And it doesn’t stop at
the hiring process. Performance on those principles is also a key part of every per-
son’s performance reviews and compensation. In other words, it’s not just what you
accomplish but how that matters.
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What does all this mean? To use our earlier analogy about bad apples and bad
barrels, Georgia-Pacific and Koch companies believe strongly that you need both: a
focus on finding and retaining the good apples and building systems, tools, and pro-
cesses—the good barrels—to make sure these employees can contribute at their full-
est potential to create real, long-term value. At the same time, managers must focus
on the inevitable—that there may be a few bad apples who choose to conduct busi-
ness inconsistent with the company’s principles, in spite of best efforts with training
and tools provided, and therefore must be dismissed. That, of course is easier said
than done. Early on in the transition with Georgia-Pacific, the new leadership had to
deal with a few employees and managers, and even some executives, whose deliber-
ate actions were inconsistent with the company’s principles and philosophy. A few
ultimately were let go, and the company grapevine became ripe with discussion of
dismissals that were not understood.
‘‘Frankly, we got behind in efforts to communicate with senior leaders about these
situations and how they were consistent with our philosophy and focus,’’ Butz says.
Working with the communications team at the company, Butz scheduled a series of
meetings with company leaders to better articulate expectations and the desired cul-
ture. Butz spoke to each group using real-life examples (without names, of course) to
help illustrate the practical application of MBM and the guiding principles. ‘‘We pro-
vided a series of SBOs (situations, behaviors and outcomes),’’ Butz explains. Bad deci-
sions, he continues, come from either gaps in knowledge and skills or gaps in values
and beliefs. For knowledge and skills gaps, employees may get more training or better
tools. For values and beliefs gaps, employees may be dismissed—even top-performing
employees. ‘‘When these leaders understood the details in each situation, not only did
they agree we were consistently applying our principles, but also believed that we can
get real results if we drive behavior consistent with those principles,’’ Butz says.
‘‘One manager even told me that after he had to dismiss one of his top-perform-
ing employees for making a decision the employee knew was wrong, an example of a
values and beliefs gap, the manager had a few sleepless nights wondering if he
wanted to stay at the company. In the end, he decided that this was exactly the kind
of company he wanted to work for—one that said integrity was the most important
thing and acted that way.’’
Truly, compliance with the law, ethical behavior, and superior EHS performance
are fundamental expectations of all Georgia-Pacific employees. Leaders must com-
mit to this compliance priority and lead through actions, not just words. The company
sets very clear and demanding expectations on leaders. They must use MBM to
establish a vision for the compliance and ethics expectations for their group, address
gaps to develop the MBM culture, identify and manage risk relevant to their busi-
nesses, and work on continuous improvement. Once the culture—as part of the larger
MBM culture—begins to take hold, the compliance systems, standards, and programs
designed to help leaders and employees achieve and sustain compliance excellence
are used to obtain real results, becoming effective perhaps for the first time.
These begin with the Georgia-Pacific Code of Conduct handbook for all employ-
ees, but don’t end there. The company has more than 50 specific corporate
250 SECTION III MANAGING ETHICS IN THE ORGANIZATION
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compliance standards that are translated into multiple languages to support employ-
ees around the world. These standards address commercial, environmental, and
health and safety areas. Each standard is designed as a tool to help employees iden-
tify and manage risk and make the right decision. Each standard has an assigned
owner who is responsible for a structured process that includes periodic risk assess-
ment, training delivery, implementation and tracking, audits, and self-assessment
within the business and functional unit. Taken together, these compliance systems,
standards and programs are all tools that help reinforce the culture and support
Georgia-Pacific business units in achieving the vision of compliance and ethics
excellence. Simply put, they are incorporated into how the company is run.
A comprehensive, strategic communications plan helps drive understanding and
commitment to compliance and ethics efforts across the company. Key messages are
echoed in town hall meetings, company television broadcasts, intranet videos,
e-mails to employees, and newsletter articles. Among other issues, those communica-
tions stress that Georgia-Pacific employees who encounter an issue or decision that
does not feel right are expected to discuss and challenge the situation—to ‘‘stop,
think and ask’’—in order to make the right decision that supports the values and prin-
ciples of the company. Most important, Georgia-Pacific’s program strives for contin-
uous improvement through the use of a risk management system that leverages the
skills and knowledge of people across the company to improve in all areas. The
process facilitates continuous improvement, through a plan-do-check-adjust model,
to achieve the goal of superior performance.
Ultimately, the vision, culture development, and management system help
Georgia-Pacific employees achieve compliance and ethics excellence. This means the
company strives not only to meet legal requirements and company standards but also to
go beyond those levels. For example, the Georgia-Pacific code of conduct not only
prohibits unethical behaviors but also cautions employees to avoid activities that could
have just the appearance of illegal or unethical conduct. These are not easy standards,
and they aren’t meant to be, but they are standards that Georgia-Pacific and other Koch
companies believe are essential to creating real, long-term value for consumers, cus-
tomers, employees, and the communities where the company operates.
Case Study Questions
1. What behavior do you think a system such as Market-Based Management
might drive?
2. The case describes how a number of senior managers were dismissed after
the acquisition. How could employees interpret this? Does this help drive
ethical culture?
3. What is more challenging to fix: a knowledge gap or a values gap?
4. What could a hiring manager ask a candidate to determine if there’s a good
fit between the values of the organization and the candidate?
5. What do you think are the strongest benefits of this approach?
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APPENDIX
How Fines Are Determined under the U.S. Sentencing
Guidelines
For more details, see www.ussc.gov.
Part 8C1.1 of the guidelines states that ‘‘If, upon consideration of the nature and
circumstances of the offense and the history and characteristics of the organization,
the court determines that the organization operated primarily for a criminal purpose
or primarily by criminal means, the fine shall be set at an amount (subject to the
statutory maximum) sufficient to divest the organization of all its net assets.’’
Factors That Can Increase or Decrease Culpability Scores
Aggravating Factors: Result in an increase to the base level of 5
" The size of the organization coupled with the degree of participation, tolerance, or
disregard for the criminal conduct by ‘‘high level personnel’’ or ‘‘substantial authority
personnel.’’ In a firm with greater than 5,000 employees, this factor can result in an
increase of as much as 5 points.
" Prior history: Organizations that have been either civilly or criminally adjudicated to
have committed similar conduct within the past five years can have up to 2 points
added.
" Obstructing, impeding, (or attempting to obstruct or impede) during the investiga-
tion, prosecution, or something can result in 3 points added.
Mitigating Factors: Result in decreases from the base level of 5
" Having an effective program to prevent and detect violations of the law can result in
a downward departure of 3 points.
" Self-reporting, cooperating, and accepting responsibility for the criminal conduct
can result in a downward departure of 5 points.
Table A.1 Method for Determining Minimum and Maximum Fines
Culpability Score Minimum Multiplier Maximum Multiplier
10 or more 2.00 4.00
9 1.80 3.60
8 1.60 3.20
7 1.40 2.80
6 1.20 2.40
5 1.00 2.00
4 0.80 1.60
3 0.60 1.20
2 0.40 0.80
1 0.20 0.40
0 or less 0.05 0.20
252 SECTION III MANAGING ETHICS IN THE ORGANIZATION
http://www.ussc.gov
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If that is not the case, penalties are based on a base fine and the ‘‘culpability
score’’ assigned by the court. The base fine is the greatest of the following: the pretax
gain from the crime, the amount of intentional loss inflicted on the victims, and an
amount based on the Sentencing Commission’s ranking of the seriousness of the
crime (ranging from $5,000 to $72.5 million). This amount is then multiplied by a
number that depends on the culpability score. The culpability score ranges from 0 to
10, and the multipliers range from 0.05 to 4.
Every defendant starts at a culpability score of 5 and can move up or down
depending on aggravating or mitigating factors (see Table A.1). The presence of
aggravating factors can cause the culpability score to increase. These aggravating
factors include (1) organizational size, combined with the degree of participation,
tolerance, or disregard for the criminal conduct by high-level personnel or substantial
authority personnel in the firm; (2) prior history of similar criminal conduct; and
(3) role in obstructing or impeding an investigation.
The presence of mitigating factors, however, can cause the culpability score to
drop. To decrease the culpability score, the organization must have in place an
‘‘effective program to prevent and detect violations of the law.’’ If the court deter-
mines that the organization has such a program, 3 points can be removed from the
base culpability score of 5. Besides having an effective compliance program in place,
the culpability score can be substantially reduced if the organization reports the
criminal conduct promptly after becoming aware of the offense and before govern-
ment investigation. According to the guidelines, an organization that reports its own
misconduct, cooperates with authorities, and accepts responsibility can have as many
as 5 points subtracted from the base culpability level of 5.
The mitigating factors that reduce the culpability score have important implica-
tions for the way companies manage ethical conduct. For example, many believe that
overseeing an ‘‘effective’’ program for preventing and detecting legal violations is a
full-time job for at least one person. It would likely involve the development of a
conduct code, training programs, scrutiny of performance management systems, the
development of communication systems, detection systems, and so on. Many of these
elements have been described in this chapter.
NOTES
1. G. Weaver, L. K. Trevi~no, and P. Cochran, ‘‘Corporate Ethics Programs as Control Systems:
Managerial and Institutional Influences,’’ Unpublished working paper, 1998.
2. S. A. Reiss, Speech given at the Conference Board meeting on business ethics, 1992.
3. United States of America v. David D’Lorenzo, 96-CV-1203, U.S. Dist. Ct., 1996.
4. J. A. Byrne, ‘‘Fall from Grace,’’ Business Week, 12 August 2002, 50–56.
5. J. M. Kaplan, ‘‘The Sentencing Guidelines: The First Ten Years,’’ Ethikos and Corporate Conduct
Quarterly 15, no. 3 (2001): 1–4.
6. D. Murphy, ‘‘The Federal Sentencing Guidelines for Organizations: A Decade of Promoting
Compliance and Ethics,’’ Iowa Law Review 87 (2002): 697–719.
7. Governance, Ethics, and the Sentencing Guidelines: A Call for Self-Governing Cultures (Los
Angeles: LRN, 2004).
CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE 253
E1C06 07/09/2010 Page 254
8. Staples Corporate Soul Report, 2007, 2. http://www.staples.com/sbd/img/content/soul/pdf/2007_
staples_soul_report .
9. Personal communication, Kent Druyvesteyn, 1994.
10. G. Weaver, L. K. Trevi~no, and P. Cochran, ‘‘Corporate Ethics Practices in the Mid-1990s: An
Empirical Study of the Fortune 1000,’’ Journal of Business Ethics 18, no. 3 (1999): 283–94.
11. N. K. Austin, ‘‘The New Corporate Watchdogs,’’ Working Woman, January 1994, 19–20.
12. P. L. Towne, ‘‘Training Employees and Communicating Ethical Standards,’’ in Corporate Ethics:
Developing New Standards of Accountability, Conference Board Report No. 980 (New York: The
Conference Board, 1991), 25–26.
13. D. G. Simmons, ‘‘The Nature of the Organizational Grapevine,’’ Supervisory Management, Novem-
ber 1985, 39–42.
14. T. DeAngelis, ‘‘Honesty Tests Weigh in with Improved Ratings,’’ APA Monitor 7 (1991); D. S. Ones,
C. Ziswesvaran, and F. Schmidt, ‘‘Comprehensive Meta-analysis of Integrity Test Validities:
Findings and Implications for Personal Selection and Theories of Job Performance,’’ Journal of
Applied Psychology 78 (1993): 679–703; P. R. Sackett, L. R. Burris, and C. Callahan, ‘‘Integrity
Testing for Personal Selection: An Update,’’ Personal Psychology 42 (1989): 491–529.
15. R. Farzad, ‘‘Jail Terms for 2 at Top of Adelphia,’’ New York Times, 21 June 2005, C1.
16. J. P. Kotter and J. L. Heskett, Corporate Culture and Performance (New York: Free Press, 1992).
17. A. L. Smith, Innovative Employee Communication: A New Approach to Improving Trust, Teamwork
and Performance (Englewood Cliffs, NJ: Prentice-Hall, 1991).
18. Ibid.
19. ‘‘CEOs Are Getting Younger but Employees Don’t Trust Them,’’ HRM Guide Network, Human
Resource Management, March 5, 2003, www.hrmguide.com.
20. A. L. Smith, Innovative Employee Communication: A New Approach to Improving Trust, Teamwork
and Performance (Englewood Cliffs, NJ: Prentice-Hall, 1991).
21. T. J. Peters and R. H. Waterman Jr., In Search of Excellence: Lessons from America’s Best-Run
Companies (New York: Harper & Row, 1982).
22. M. Hammer and J. Champy, Reengineering the Corporation: A Manifesto for Corporate Revolution
(New York: HarperCollins, 1993).
23. J. M. Powell, ‘‘Pinkerton Responds to the Federal Sentencing Guidelines,’’ Corporate Conduct
Quarterly 3, no. 1 (1994): 10.
24. S. S. Miller, ‘‘The Ombudsperson,’’ in Corporate Ethics: Developing New Standards of
Accountability, Conference Board Report No. 980 (New York: The Conference Board, 1991), 29–30.
25. ‘‘Johnson & Johnson’s Credo Survey: Genesis and Evolution,’’ Ethikos 7, no. 2 (1993): 2.
254 SECTION III MANAGING ETHICS IN THE ORGANIZATION
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http://www.hrmguide.com
E1C07 07/09/2010 Page 255
C H A P T E R7
MANAGING FOR ETHICAL
CONDUCT
INTRODUCTION
We talked (in Chapter 3) about how most employees look outside themselves
(to leaders and others) for guidance about how to behave. We have also discussed
ethical culture and how organizations, especially large ones, manage ethics and legal
compliance. Within this broad organizational context, managers oversee employee
behavior every day, and they can have enormous influence on employee behavior.
Therefore managers need simple and practical tools for managing the ethical conduct
of their direct reports in the context of the broader organizational culture. This chap-
ter introduces some basic management concepts that provide a foundation for under-
standing how to manage in a way that increases the probability that employees will
behave ethically. These principles can be applied at the department level or at the
level of the entire organization. Consistent with the focus of the book, each section
concludes with practical implications for managers. Underlying our recommenda-
tions to managers are three key assumptions:
1. Managers want to be ethical.
2. Managers want their subordinates to be ethical.
3. Based on their experience, managers will have insight into the unique ethical
requirements of the job.
IN BUSINESS, ETHICS IS ABOUT BEHAVIOR
In business, when people talk about ethics, they’re talking about behavior. In this con-
text, ethics isn’t mysterious or unusual, nor does it depend on the individual’s innate
goodness, religious conviction, or philosophical understanding (or lack of these qualit-
ies). In work situations every day, people face ethical dilemmas—questions of right
and wrong where values are in conflict. Should I hire, fire, promote, or demote this
individual? Should I offer or accept a gift in this or that situation? How should I
respond when my supervisor asks me to act against my own beliefs?1
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The study of ethical behavior in business involves understanding the factors that
influence how people behave in these situations. Although we’ve seen (in Chapter 3)
that internal factors such as individual moral development are important, we know
that for most people ethical conduct depends largely on external factors such as the
rules of the work context, rewards and punishments, what peers are doing, what
authority figures expect, the roles people are asked to play, and more. In this chapter,
we’re focusing on these factors because they’re the ones managers can have the most
influence on. Once managers understand how management principles apply to ethical
conduct, they can manage ethical behavior more proactively and effectively. On the
other hand, if managers fool themselves into thinking that ethical conduct is deter-
mined exclusively by some mysterious character trait, they’ll throw up their hands
and walk away from situations they could proactively manage. Or they’ll think that
simply getting rid of a ‘‘bad apple’’ will make unethical conduct stop. This kind of
thinking is a cop-out. Unethical behavior is rarely as simple as a bad apple. It’s often
something about the work environment that allows the bad apple to behave badly.
And the work environment is managers’ responsibility. Top managers are responsible
for the broad organizational culture (as we saw in Chapter 5). In most cases, though,
lower-level managers can do a lot to influence the subordinates in their own depart-
ments—and that’s what this chapter is about.
Practical Advice for Managers: Ethical Behavior
What are the practical implications for managers? First, think of ethics in concrete
behavioral terms. Specifically, what kind of behavior are you looking for in your sub-
ordinates, and how can you create a departmental work context that will support that
behavior? Specifying concrete expectations for ethical behavior means going beyond
abstract statements, such as ‘‘integrity is important here’’ to more concrete state-
ments, such as ‘‘I expect sales representatives to be absolutely honest with our cus-
tomers about such things as the characteristics of our products and our ability to
deliver by a certain date.’’ Providing a reason for these expectations is also important.
‘‘We’re interested in building long-term relationships with our customers. We want
them to think of us as their most trusted supplier.’’ Finally, it’s the manager’s respon-
sibility to create a work environment that supports ethical behavior and discourages
unethical behavior just as much as it’s the manager’s responsibility to manage for
productivity or quality. Don’t just set ethical behavior goals. Follow up to make sure
that they’re achievable and that they’re being met, and model ethical conduct your-
self. Your people will pay more attention to what you do than to what you say. Take
advantage of opportunities to demonstrate the ethical conduct you expect.
OUR MULTIPLE ETHICAL SELVES
To understand ethics at work, we must understand that people are socialized to accept
different behavior depending on the context. Cultural anthropologists have known for
years that we have multiple selves and that we behave differently depending on the
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situation we confront.2 Children in our society are taught very early that it’s all right
to be loud and boisterous on the playground, but they must be reverent at the church,
synagogue, temple, or mosque. Table manners are important when visiting, but eat-
ing with one’s fingers may be acceptable at home. As adults, we play highly differen-
tiated roles, and we assume that each social context presents different behavioral
expectations. Football players are expected to tackle each other deliberately and
aggressively on the playing field, but they would be arrested for such behavior on the
street. Businesspeople are expected to be aggressive against competitors but gentle
with their spouses and children. Game jargon is often applied to business dealings—
like the term playing field, which makes the business dealings seem like a game and
therefore less subject to moral scrutiny. One ‘‘bluffs’’ and conceals information in
business negotiations the same way one bluffs in a poker game. Bluffing sounds a
lot better than lying (the word lying would raise ethical awareness, as discussed in
Chapter 3), and the game analogy helps distinguish business behavior from morality
in other situations. Although we might prefer to think that we take a single ethical
self from situation to situation, reality suggests that most people behave differently in
different contexts. This means that we can and often do have multiple ethical selves.
The Kenneth Lay Example
Kenneth Lay, former chairman of Enron Corporation (until he was forced out by
the firm’s creditors in 2002), exemplifies the concept of multiple ethical selves. A
Newsweek article written after Enron’s bankruptcy described the paradox that was
Ken Lay.3 First, we see the affable leader who was loved and admired by Enron
employees. Even Sherron Watkins, the Enron whistle-blower who brought Lay her
concerns about the accounting problems and was rebuffed, described Lay as a man
of integrity. He grew up a poor preacher’s son who pulled himself up by his boot-
straps and eventually won the Horatio Alger Award (designed to foster entrepreneur-
ship and honor the American dream of success through hard work). At the University
of Missouri, he was president of a dry fraternity and went on to earn a Ph.D. in
economics. He created Enron, and by 2000 it was the seventh largest company in the
United States in terms of revenue. Despite becoming quite rich, he never flaunted his
wealth. He drove an old Cadillac and used rental cars rather than limos when travel-
ing. He was highly philanthropic in the Houston community. He talked about making
Houston a world-class city and worked to make that happen, spreading his largesse to
the ballet, symphony, museums, the United Way, the NAACP—you name it. He was
even discussed as a possible mayoral candidate.
But Lay had another side. He has been described as an arrogant gambler who
valued risk taking and boosting the firm’s stock price above all. He transformed
Enron from the 1980s merger of two old-fashioned pipeline companies into a huge
energy trader. Enron ‘‘became a giant casino, taking positions, hedging, betting
on winners and losers.’’4 Interestingly, the merger deal was financed by Michael
Milliken, 1980s junk-bond trader and one of Lay’s heroes (even though Milliken had
done jail time for financial fraud). Lay fired Enron’s conservative accounting firm,
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Deloitte Haskins Sells, early on because they were ‘‘not as creative and imaginative’’
as he wished, and he replaced them with Arthur Andersen. He created a corporate
culture that was described by insiders as ‘‘cutthroat’’ and ‘‘vicious,’’ and hired Ivy
League ‘‘hot shot risk takers’’ like Jeff Skilling (CEO) and Andrew Fastow (CFO) to
run it. People who didn’t make their numbers were quickly fired, and a large internal
security force came to be feared by employees. Lay was also a political pro. He
gave generously to political candidates and received favors in return, including
exemptions from a variety of local and state regulations; his reach extended all
the way to the White House. As the largest single contributor to George W. Bush’s
presidential campaign, Lay and other Enron officials met at least six times with
Vice President Richard Cheney and his aides while the vice president headed the
National Energy Policy Development Group and formulated the Bush administra-
tion’s energy policy.5
After CEO Jeff Skilling resigned in August 2001, Lay told employees that the
company’s upcoming financials looked fine and encouraged them to ‘‘talk up the
stock and talk positively about Enron to your family and friends.’’ In an online dis-
cussion, he told employees that he had been buying stock himself. In fact, he had
bought about $4 million worth, but what he failed to mention was that he had sold
$24 million worth in the previous few months. Those who heeded his suggestion to
buy or hold saw their retirement plans wiped out and were furious when they learned
that Lay had been unloading his own stock for years. According to Newsweek,
although he claims that he was deceived by unscrupulous subordinates,6 Lay had to
know about Enron’s ‘‘elaborate schemes to hide losses and debts’’—the off-the-
books partnerships that no one, including stock analysts, really understood.
‘‘The difference between ‘‘lie’’ and ‘‘lay’’
Has fallen into deep decay.
But now we know from Enron’s shame
That Lay and ‘‘lie’’ are just the same’’7
So was Kenneth Lay ethical or unethical? Had he lived (in 2006 he died of a
heart attack at age 64—after being found guilty, but before being sentenced), perhaps
he would have written a book that would have helped us understand his motivations
and behaviors. But we’ll never know. We suspect the answer is that, like many peo-
ple, he had multiple ethical selves. In some areas of his life he did good, ethical
things, including his many philanthropic efforts. But philanthropy shouldn’t be equa-
ted with ethical conduct in daily business dealings. In fact, if he felt responsibility for
what happened, wouldn’t he have turned over at least some of his estimated $20 mil-
lion net worth to help those who lost so much?
A prominent victim of the Enron bankruptcy was Cliff Baxter, Enron’s 43-year-
old former vice chairman, who committed suicide following Enron’s collapse. We
can only speculate about the reason, but a clash of his multiple ethical selves may
have played a role. Those who knew him described Baxter as a family man who bal-
anced his home and work lives. He was certainly instrumental in creating the massive
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Enron fortune in the 1990s. Over time, however, he clashed with Andrew Fastow and
openly criticized the firm’s involvement in financial deals he considered to be ques-
tionable and inappropriate. Upon realizing he couldn’t influence what was happen-
ing, Baxter left the company in May 2001 (citing a desire to spend more time with
his family). We will likely never know for sure why he committed suicide. Friends
said he was ‘‘devastated by the company’s demise.’’ He may have felt responsible
for the many employees who lost their life savings in the collapse that could have
been prevented. It’s possible that the ethical self who cared about those employees
could no longer live with the self who contributed to their pain.8
The Dennis Levine Example
Now for an example of someone lower in the organizational hierarchy. Dennis
Levine’s personal account of his insider trading activities, which resulted in his arrest
and imprisonment in the 1980s, also suggests multiple ethical selves. He described
himself as a good son, husband, and father, and a man who had been encouraged by
his parents to ‘‘play straight.’’ ‘‘I come from a strong, old-fashioned family . . . [my
father] taught me to work hard, believe in myself, and persevere . . . as a kid I
always worked.’’9 Levine’s wife, Laurie, had no idea that he had been secretly and
illegally trading in stocks for years. In fact, the family lived in a cramped one-
bedroom apartment for nearly three years after their son was born despite Levine’s
huge insider trading profits. That someone is ‘‘from a good family’’ or is ‘‘a family
man or woman’’ is no guarantee of ethical behavior in the office. At the office, the
manager is dealing with the ‘‘office self,’’ who may be very different from the
‘‘family self’’ or the ‘‘religious self.’’
Levine was a good son, husband, and father. But he separated his family self
from his insider trading self. Why was his insider trading self allowed to exist? We
can only speculate that this office self fit into an environment where peers were cross-
ing the ethical line and not getting caught. Most important, his continuing huge prof-
its led Levine into a downward spiral of unethical behavior that he found difficult to
stop despite his recognition that it was illegal.
Practical Advice for Managers: Multiple Ethical Selves
So what should managers do? First, it’s important to evaluate the organizational envi-
ronment. As a lower- or middle-level manager, you can do little to influence that
environment. If senior executives are creating a cutthroat, Darwinian culture where only
bottom-line results count, it’s probably time to look elsewhere for a job. Chapter 5 pro-
vides information about how to conduct an ‘‘ethical culture audit’’ that can help you
make that tough decision. But let’s assume that senior management is supportive. It is
then up to you to contribute to the larger organizational culture by creating a work envi-
ronment that supports ethical conduct and integrity for the people you manage. Integrity
is defined as ‘‘that quality or state of being complete, whole, or undivided.’’ Individuals
of strong character and high integrity are thought to be consistent and ethical across
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contexts. So the ultimate goal is to bring these multiple ethical selves together—to sup-
port the idea that an individual can be consistent—and make the individual as ethical at
the office as he or she is at home. Managers should pursue that goal with the practical
understanding that many people find it quite possible to divide themselves into multiple
ethical selves and to behave differently in different life contexts.
Begin by analyzing yourself. Is your office self consistent with your personal
ethical self? If not, what will be required to bring the two together? Again, you’re an
important role model for your subordinates. If you’re clearly a ‘‘whole’’ person of
integrity, they’re more likely to aspire to ‘‘wholeness’’ themselves.
Next, think about those who report to you. Make no assumptions about ethics at
work based on a person’s background, religious affiliation, family life, or good deeds in
the community. Instead, find out what norms and expectations guide their work selves,
and make sure that these influences support ethical behavior. You can learn a great deal
simply by keeping your eyes and ears wide open. Of course, the best way to find out
how your people think about these issues is to ask them, either in person or in survey
form. You may be surprised what they’ll tell you. And you’re sending an important
symbolic message about what concerns you just by asking. Do employees feel, as many
surveys have suggested, that they must compromise their personal ethics to get ahead in
your organization? If so, what do they think can be done about it?
Find out what influences their thoughts and behavior in ethical dilemma
situations. Find out what inhibits them from being the best they can be, from doing
the right thing. You can base your questions on real or hypothetical situations. Most
supervisors have never bothered to ask such questions. Is it any wonder then that
most subordinates end up believing that their managers don’t really care about
ethics? Once you’ve had this type of discussion, it’s essential for you to follow
up in ways that support ethical conduct. A number of practical ideas for how to do
that follow.
REWARDS AND DISCIPLINE
People Do What’s Rewarded and Avoid Doing
What’s Punished
In Chapter 5 and our discussion of ethical culture, we discussed the importance of per-
formance management systems and the signals they send about what the organization
cares about (because it signals what the organization measures, rewards, and disci-
plines). Managers implement those systems through their application of rewards and
discipline every day. Rewards and discipline are probably the most important influences
on people’s behavior at work. Most managers can probably recite a few basics recalled
from a college psychology or management class. For example, most of us remember
something about reinforcement theory—people are more likely to behave in ways
that are rewarded, and they’re less likely to do what’s punished. In fact, people in
work organizations are constantly on the lookout for information about rewards and
punishments—especially if this information isn’t explicit. In fact, the more ambiguous
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the situation, the more people search for clues. They know that to be successful at work,
they’ll have to determine what’s rewarded and do those things while avoiding behaviors
that are punished. Remember this simple adage: what gets rewarded gets done! Finan-
cial industry employees were rewarded handsomely for creating and selling risky mort-
gages and mortgage-backed securities. They did this without much attention to the risks
to customers or the system as a whole.
People Will Go the Extra Mile to Achieve
Goals Set by Managers
In combination with rewards, goal setting is a powerful motivational tool. Rewards
are often tied to explicit goals (Sandy will win a trip to the Caribbean if she hits a
particular sales target within a particular period of time). Goals focus attention on the
desired outcome (the sales target and vacation), and they lead individuals to strate-
gize about how to achieve the goals that have been set. That is generally considered
to be a good thing. Meeting the goal makes Sandy feel good (providing psychological
benefits), and it results in a significant valued reward.
Researchers are beginning to understand more about how people think about
goals, what they will do to achieve goals, and what happens when they fall short of
achieving a goal.
For example, intense focus on attaining a task goal can distract people from other
goals, such as ethical goals. Consider the goals that Lee Iacocca set for design and
production of the Ford Pinto—recall from the Pinto fires case (Chapter 2) that goals
were set—the car had to weigh less than 2,000 pounds and cost less than $2,000. An
intense organizational focus on striving for those goals may have contributed to
shortcuts and safety problems. Apparently, Iacocca had not set explicit safety goals
to accompany these challenging production goals. Thus the employees involved
focused on achieving the stated weight and price goals without giving equivalent
attention to safety. Researchers have found that employees may be less likely to
report problems to management if they are intently focused on achieving a task.10 In
addition, attempting to achieve a task goal increases risky behavior while falling short
of the goal can lead to increased lying about performance.11 Imagine that a claims
handler at an insurance company is assigned an explicit goal to close a certain num-
ber of claims within a particular period of time and is offered a financial reward for
doing so. He’s likely to find ways to reach that goal even if it means denying some
legitimate claims, and he’ll be less likely to report concerns about legitimate claims
being denied. On the other hand, setting goals for ethical performance can make a
difference. For example, one study found that participants who were given a goal to
revise a paragraph from their boss were more likely to correct misinformation if they
were given an explicit goal to ensure the accuracy and truth of the information.12
Incentives and goals are popular with managers because they work well to moti-
vate behavior. But managers often fail to recognize the potential of goals and incen-
tives to motivate unethical behavior if not used thoughtfully. Let’s look at a more
specific example.
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How Goals Combined With Rewards Can Encourage
Unethical Behavior
THE ELECTRONICS APPLIANCE SALES EXAMPLE Suppose an electronic appli-
ance store has a sales force that is paid on the basis of a modest salary plus commis-
sion. In other words, the salespeople are paid a percentage of the items they sell. The
company frequently advertises specials on certain television models in the local
newspaper—and, of course, people come into the store asking about those models.
But because of the lower profit margin on these sale items, the company also lowers
its salespeople’s commission on these models. The higher rewards (i.e., higher com-
missions) come with sales of models that aren’t on special. The company prefers to
sell the higher-priced models but advertises the lower-priced ones to get customers
into the store. The company has set sales goals for each salesperson, and the goals
are higher for the higher-priced models. The company offers little sales training.
New salespeople spend a day or so working with the store manager and then are
pretty much on their own. The manager doesn’t seem to care how sales are made—
just that they are made. The manager’s own commissions are based on store sales.
If the salespeople value money (and their jobs), and let’s assume that they do,
they’ll be motivated to sell more of the higher-priced models. They can do this in a
variety of ways. For example, they might point out that some of these models have
features that the sale models don’t have. Some customers will probably listen to the
advice and buy the more expensive models. As buyers listen and go through with the
purchase, the connection between selling higher-priced items and positive outcomes
(commissions, praise from the manager) becomes stronger for salespeople, and their
motivation to sell more of these items grows.
Still, lots of folks will probably insist on buying the sale models. To sell more of
the higher-priced models, a salesperson might try stressing the advantages of the
high-priced model’s features even when the customer doesn’t need them. The sales-
person may find that a good number of people go along with this sales tactic. The
salesperson then receives more rewards—higher commissions, more praise from the
manager—and no obvious negative outcomes. This behavior can even be justified, or
at least rationalized. These customers are getting features they wouldn’t otherwise
get, right? And the salesperson doesn’t know much about their finances or personal
life, so there would be no way to know (without asking) if spending more money
really had negative consequences for the customer.
Things are going so well that the salesperson might now be tempted to go a bit
further—perhaps playing with the controls to make it look as if the picture on the sale
TV is a bit fuzzier than the picture on the more expensive models. That makes it even
easier to sell the more expensive models.
Explained this way, the connection between goals, rewards, and unethical behav-
ior seems pretty clear. Although no one was explicitly telling salespeople to be un-
ethical, the motivating factors were there: management set higher sales goals for
higher-priced models and rewarded the sale of these models with higher commis-
sions. The store manager didn’t seem to care how the sales got made and may not
have objected to the salesperson playing with the controls to deceive customers.
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Management wanted to sell higher-priced models and set higher sales goals for
those models. But the exclusive focus on goals frequently obscures the method of
reaching a goal. If managers are concerned about ethical conduct, it’s essential that
they focus at least as much on how the goal is being achieved. They must let their
workers know that they’re interested in ethical means as well as ends and that they
plan to evaluate both. If individuals are rewarded for meeting goals no matter what
methods are used, they’re much more likely to try methods that cross the line
between ethical and unethical behavior.
Many people have told us of their experience with managers who say something
like this: ‘‘I don’t care how you do it, just do it.’’ Or ‘‘I don’t want to know how you
meet the goal, just meet it.’’ These statements are clearly giving permission to use
any means necessary (ethical or unethical) to meet the goal. Managers who have
uttered these words shouldn’t be surprised to find that unethical behavior is often the
result. Goal setting and incentives combine to create the most effective motivational
method available to managers. Set challenging and achievable goals, reward people
for meeting them, and people will go to great lengths to achieve the goals that have
been set. That’s why responsible managers need to be clear about the importance of
using only ethical means to achieve the goals they have set for their employees. The
statement, ‘‘I don’t care how you do it, just get it done,’’ should send up a huge red
flag that triggers ethical awareness. Managers shouldn’t say it, and workers should
beware of ethical land mines if they hear it.
Practical Advice for Managers:
Goals, Rewards and Discipline
First, remember that people do what’s rewarded. And these rewards don’t have to be
explicit. The electronics store in our example would probably never have dreamed of
saying that it was rewarding salespersons for being unethical. In fact, they weren’t
doing this explicitly. But if the designers of the motivational plan had thought care-
fully about the plan’s potential effects (and it’s their responsibility to do so), they
might very well have identified its fatal flaw—it focuses on ends only and leaves it to
the salespeople to figure out the means (how to accomplish the goals). Managers are
more likely to identify these flaws in advance if they put themselves in their employ-
ees’ shoes. Think about what the average individual would be likely to do given
the rewards. What kinds of attitudes and behaviors are being rewarded explicitly or
implicitly? How can you find out? Ask your staff. If you have good, open communi-
cation with them, they’ll tell you.
Second, think carefully about the goals you’ve set for your employees. Combin-
ing specific, challenging, and achievable goals with rewards for achieving them is a
powerful motivational tool. People set their sights on those goals and work hard to
reach them. It’s up to the manager to think about the likely behavioral outcomes and
potential unintended consequences. Again, put yourself in employees’ shoes and ask
yourself what those consequences might be. Also ask yourself whether you have set
goals for ethical conduct (e.g., safety, honesty with customers) as well as for bottom-
line performance (e.g., number of TVs sold) that focuses on means (building trusting
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customer relationships) as well as ends. Are you measuring and rewarding both? We
believe in an ethical ‘‘Pygmalion effect.’’ In tests of the more general Pygmalion
effect, researchers have found that people in school and work settings generally live
up to the expectations that are set for them, whether they’re high or low.13 Students
and workers perform better in response to a teacher’s or supervisor’s high expect-
ations, but they fall behind if they’re expected to fail. With the ethical Pygmalion
effect, expectations for ethical behavior (as well as performance) are set high, and
people are expected to fulfill them. This ethical Pygmalion effect appeals to people’s
desire to do what’s right. It is also likely to get people to think about how they
achieve their goals, not just whether they’ve achieved them.
Recognize the Power of Indirect Rewards and Punishments
It’s important to recognize that workers don’t have to be personally rewarded (or
punished) for the message to have an impact. A powerful extension of reinforcement
theory is social learning theory.14 According to social learning theory, people learn
from observing the rewards and punishments of others. Imagine if we had to touch a
hot stove to learn that we’ll get burned if we do so! Luckily, we can observe others to
learn most of what we need to know about what works and what doesn’t in life and at
work. So workers’ behavior is influenced even when they don’t experience a reward
or punishment themselves. If they see that others get away with lying, cheating, or
stealing—or worse yet, if they see those individuals getting promotions or big
bonuses—they’re much more likely to try such behaviors themselves. On the other
hand, if they see that someone is quickly dismissed for lying to a customer, they learn
that such behavior is unacceptable.
THE TAILHOOK EXAMPLE As an example of how people learn about rewards and
punishments by observing others, consider the 1991 Tailhook scandal. The Tailhook
Association is a nonprofit organization of naval aviators that, in 1991, had formal ties
with the U.S. Navy. According to many insiders, the type of sexual harassment (of
some 90 women) that occurred at the annual Tailhook Association meeting held in
the Las Vegas Hilton in 1991 had been implicitly rewarded (or at least not punished)
in the Navy for some time. These sexual harassment rituals were regular events that
the male participants experienced as fun (rewarding). The Navy brass was known to
turn a blind eye to reports, responding with a ‘‘boys will be boys’’ attitude. Investiga-
tions were torturously slow and resulted in little, if any, punishment. The reward sys-
tem became well known, and therefore the men continued to engage in these
‘‘rewarding’’ behaviors that weren’t punished.
Many people (especially women) looked to the Navy’s reaction to the Tailhook
scandal as an opportunity to change the messages being sent about the acceptability
or unacceptability of such conduct. Some early signs were encouraging, but the
longer-term results disappointed many women. The secretary of the Navy resigned
his post at the outset of the scandal, and the Navy severed ties with the Tailhook
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Association in late 1991. Investigations of potential criminal misconduct were also
launched. However, the Navy’s discussions with 1,500 men resulted in only two sus-
pects. When the Pentagon took over, 140 aviators were accused of indecent exposure,
assault, or lying under oath. However, only 80 of these individuals were ever fined or
even moderately disciplined. None of those involved in the assault of the 90 women
was court-martialed or seriously disciplined. Perhaps most significant, in early 1994
the young woman who filed the first complaint, Lieutenant Paula Coughlin, resigned
from the Navy, explaining that Tailhook ‘‘and the covert attacks on me that followed
have stripped me of my ability to serve.’’15 Lieutenant Coughlin left amid ‘‘rumor
mongering by officers trying to impugn her credibility’’ and with a ‘‘stack of hate
mail.’’ However, also in 1994, a federal jury awarded Lieutenant Coughlin $1.7 mil-
lion in compensatory damages and $5 million in punitive damages and held the
Hilton Hotel responsible.16 The Navy’s top admiral, Frank B. Kelso, retired two
months early to praise from the Defense Secretary for being a man of the highest
integrity. The Tailhook Association continues to hold an annual convention, but it is
now a much tamer affair. In 1999, after an investigation of the Tailhook Association
and its 1999 convention in Reno, the Navy restored its ties with the organization. Sec-
retary of the Navy Richard Danzig said, ‘‘The shameful events of the Tailhook Con-
vention in 1991 led to a withdrawal of our support for the Association. Over the past
eight years, however, the Association took a number of constructive steps that war-
ranted a review of its status . . . [and] we’ve concluded that the time is right to restore
ties.’’ The association has committed itself to prevent the type of misconduct that
occurred in 1991. (See www.tailhook.org for more information on the association.)
The message to Navy men (and women) has clearly been mixed. Yes, the event
caused a lot of turmoil, probably enough to suggest to Navy men that assaulting their
female colleagues was not going to be as ‘‘rewarding’’ as it used to be. In fact, mem-
bership in the Tailhook Association dropped dramatically after the incident, espe-
cially among younger members.
17 Moreover, several admirals have been discharged
for inappropriate sexual behavior committed since Tailhook. Sexual harassment sen-
sitivity training is now required in the Navy. But in 1996 Newsweek reported that in
the four years after Tailhook, the Navy received more than 1,000 harassment com-
plaints and more than 3,500 charges of indecent assault. Women still complained
that they faced reprisals for filing complaints.18 To sum up, organizations send
a powerful message to all personnel every time a decision is made to respond to a
sexual harassment complaint. Everyone watches and learns from what happens to the
perpetrators and to the victims.
The problem with sexual harassment goes beyond the Navy. In 2005, the Washing-
ton Post reported results of a survey that found more than half of the women studying
at all three military academies had experienced sexual harassment of some kind. One in
seven reported being sexually assaulted, but few had reported any of the incidents. Rea-
sons included fear of retaliation, privacy concerns, loyalty to classmates, and concern
about being punished for their own behavior (such as underage drinking).19
Managers, take note of the messages you’re implicitly sending to all of your work-
ers by what you reward and punish (or fail to punish). Employees are constantly on the
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lookout for these cues. They want to know what’s okay and not okay in your work
environment. If they observe that people advance by stepping on others, lying to cus-
tomers, and falsifying reports, they’ll be more inclined to do so because they will have
learned that such behavior is rewarded. If they see sexual harassment go undisciplined,
they may feel free to engage in it themselves. If they see those who report misconduct
suffering reprisal, they won’t risk reporting problem behavior. So if you become aware
of unethical behavior in your group, chances are that it’s being rewarded somehow. Ask
yourself how the system might be intentionally or unintentionally rewarding the un-
desired behavior, and take responsibility for changing it. On the other hand, if unethical
individuals are dismissed, and persons of integrity advance, the ethical lesson is also
clear. Integrity is valued and unethical behavior won’t be tolerated.
Can Managers Really Reward Ethical Behavior?
For years, management writers have preached that whenever possible, managers
should use rewards instead of punishment—that punishment is inherently a bad man-
agement practice. This idea, good as it sounds, may be impractical when the goal is to
encourage ethical behavior and discourage unethical behavior. Relying on rewards
means rewarding ethical behavior. So let’s think about how a manager might regu-
larly reward routine ethical behavior. Perhaps he or she could give awards or bonuses
to those whose expense reports were honest and accurate or to those managers who
didn’t harass their secretaries. Does this seem ridiculous to you? Of course it does.
Workers don’t expect to be rewarded for behaviors that are expected of everyone—
for simply doing the right thing every day. So in the short term, it’s quite difficult to
reward routine ethical behavior. However, as we noted in Chapter 6, some organiza-
tions do reward extraordinary ethical behavior that goes above and beyond the rou-
tine. Doing so sends a powerful message to everyone that such extraordinary
behavior is highly valued in the organization.
If we switch to longer-term thinking, there should be rewards for doing the right
thing. For example, most people know how to get ahead in their own organization. As
we noted in our discussion of ethical culture, large organizations have performance
management systems that provide regular feedback to employees about their per-
formance. This information is used to make important decisions about pay and pro-
motion. Is information about integrity incorporated into those systems? Is it weighted
heavily enough to make the point that integrity matters at least as much as bottom-
line performance if an employee wants to advance in the organization? Or do people
get highly compensated and promoted despite ethical lapses? If so, the message is
clear. If you want to get ahead around here, you have to do whatever it takes. People
who advance are likely the ones who have decided to go along to get along or, worse
yet, the ones who stepped on others along the way. On the other hand, are those who
have advanced to the highest levels known for their integrity? If so, the organization
is sending a message about the importance of integrity. Rewards may be a limited
tool for influencing specific ethical behaviors today or tomorrow, but they should be
used to set the tone for what’s expected and rewarded in the long term.
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What about the Role of Discipline?
As for discipline, we all know that managers sometimes have to discipline errant
subordinates, just as responsible parents are expected to discipline unruly children.
It’s an essential part of the manager’s job to step in when an employee is headed
down the wrong path. In fact, it can be a real gift to give an employee a heads-up and
the opportunity to correct bad behavior and avoid severe negative consequences later.
We also know that discipline works. If people expect their misconduct to be detected
and punished, they’re less likely to engage in it. So if it works, why not use it? Well,
it turns out that managers are often told to avoid punishment and to rely on rewards as
much as possible because of a belief that employees will automatically react badly to
punishment. They’ll dislike the supervisor or engage in sabotage to retaliate. But we
now know that discipline can produce good results when it’s carried out in a particu-
lar way—when workers perceive it as fair.
If we examine the idea that punishment should be avoided, we find that it’s based
on old psychological research that was conducted on rats and small children. It has
little to do with adults in work settings who can distinguish discipline that’s fair (i.e.,
punishment that is deserved and fairly administered) from discipline that’s unfair.
Have you ever heard an adult say, ‘‘I had it coming; I deserved it’’? As Dennis Lev-
ine said of his arrest and imprisonment for insider trading, ‘‘I’ve gained an abiding
respect for the fairness of our system of justice. . . . When I broke the law, I was
punished. The system works.’’ He also said, ‘‘My former life was destroyed because
I figured the odds were a thousand to one against my getting caught.’’20 If he had
thought he would be caught and punished, the odds would have been reversed,
and he may never have cut an insider trading deal. Once caught and punished, he
acknowledged that the punishment was just.
Discipline should be administered fairly. Research evidence suggests that pun-
ishment results in more positive outcomes (e.g., the behavior improves and the
employee becomes a better corporate citizen) if the recipient perceives it to be fair.21
These positive outcomes are linked primarily to the appropriate severity of the pun-
ishment and employee input. The punishment should ‘‘fit the crime,’’ and it should be
consistent with what others have received for similar infractions. It’s also important
that you give the employee an opportunity for input—to explain his or her side of the
story. In addition, the disciplined worker is more likely to respond positively to the
punishment if you approach it in a constructive fashion and carefully explain the rea-
sons for the punishment. Finally, if you punish, do it in private. Punishment can be a
humiliating experience, and public punishment adds insult to injury.
Recognize the indirect effects of punishment. The punished employee should not
be the manager’s only concern. Social learning theory suggests that other workers
will be affected as well. Remember, we learn a great deal from observing the rewards
and punishments of others. But if the punishment occurs in private, how will others
know about it? Anyone who has worked in a real organization knows about the
grapevine, the communication network that flashes organizational news throughout a
department or company. Good managers are aware of the power of the grapevine and
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rely on it to transmit important information. Research has discovered that when peo-
ple are aware that unethical behavior has taken place, they want the violators to be
punished.22 People want to believe that their workplace is ‘‘just’’—that the organiza-
tion rewards good guys and punishes bad guys. They also want to feel that they aren’t
suckers who, in a sense, are being punished for following the rules when others get
away with breaking them. This is an important reason that managers must discipline
unethical behavior when it occurs. There must be no exceptions. High-level rule vio-
lators must be held to the same standards. By clearly disciplining all rule violators,
managers send an unequivocal message to the violator and all observers that this be-
havior won’t be tolerated. They also support the notion that the company is a just
place to work, where the rules are enforced fairly and consistently.
Imagine how the honest employees at Enron must have felt—long before the
public implosion of the company in 2001—when two Enron energy traders in New
York made massive fraudulent energy trades and siphoned off company money into
their own personal accounts in the mid-1980s. In short, the traders had kept two sets
of books and had routinely destroyed records to obliterate any paper trail. When
Enron’s board heard of these shenanigans, CEO Ken Lay said openly at a board
meeting that the two traders ‘‘made too much money to let them go.’’ So the trading
crooks were allowed to stay on, until an internal investigator discovered the magni-
tude of the fraud and the company took an $85 million charge to after-tax earnings to
cover losses. Lay complained at an all-employee meeting that he never knew about
these activities. Later, a lawyer involved in a lawsuit against the company said, ‘‘Any
honest competent management, confronted with the conduct of Borget and Mas-
troeni, as revealed to Enron’s senior management in January 1987, would have fired
these gentlemen without delay.’’23 It makes us wonder if Enron’s later difficulties
could have been avoided if only the executive team had regularly disciplined the
company’s rogue employees.
In his book Father Son & Co.; My Life at IBM and Beyond (1990), Thomas
Watson Jr., the son of IBM’s founder, described his experiences in running the
company for almost 20 years at a time when IBM dominated the computer industry.
Watson also discussed the importance of imposing swift, severe punishment for
breaches of integrity as well as the indirect effects of punishing or not punishing. He
said, ‘‘If a manager does something unethical, he should be fired just as surely as a
factory worker. This is the wholesome use of the boss’s power.’’ But, as he explains
in the following excerpt, his managers didn’t always follow his advice.
On one occasion some managers in one of our plants started a chain letter
involving U.S. savings bonds. The idea was that one manager would
write to five other managers, and each of those would write to five more,
who would each send some bonds back to the first guy and write to five
more, and so on. Pretty soon they ran out of managers and got down to
employees. It ended up that the employees felt pressure to join the chain
letter and pay off the managers. I got a complaint about this and brought
it to the attention of the head of the division. I expected him to say, at a
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minimum, ‘‘We’ve got to fire a couple of guys, I’ll handle it.’’ Instead, he
simply said, ‘‘Well, it was a mistake.’’ I couldn’t convince him to fire
anybody. Now, you could admire him for defending the team, but I think
there is a time when integrity should take the rudder from team loyalty.
All the same, I didn’t pursue the matter any further, and my failure to act
came back to haunt me.
A couple of years later in that same division, a manager fired a low-
level employee who had been stealing engineering diagrams and selling
them to a competitor. Firing him would have been fine, except that the
manager handled it in a brutal way. The employee in question had one
thing in his life that he was proud of—his commission in the U.S. Army
Reserve, where he held the rank of major. Instead of simply going to the
man’s house and telling him, ‘‘You swiped the drawings and we’re going
to fire you,’’ the manager picked a week when the fellow was in military
camp to lower the boom. Somehow the military authorities got involved
as well, and the man was stripped of his commission. The humiliation
caused him to become insanely angry, and for the next few years he
devoted himself to making me uncomfortable. He sent pictures of Tom
Watson Jr. behind bars to his senators and his congressman and to every
justice of the Supreme Court. And he kept harking back to that chain
letter, because he knew we had tolerated the men responsible for it. Even-
tually he simmered down, but the incident really taught me a lesson.
After that I simply fired managers when they broke rules of integrity. I
did it in perhaps a dozen cases, including a couple involving senior
executives. I had to overrule a lot of people each time, who would argue
that we should merely demote the man, or transfer him, or that the
business would fall apart without him. But the company was invariably
better off for the decision and the example.
24
Sometimes employees are punished for trying to do the right thing. For example,
Owen Cheevers was an experienced researcher at the Bank of Montreal who wrote an
honest report expressing his concerns about the radio industry. Investment bankers at
the firm asked him to make his report more positive. When he refused to write a more
glowing report, Cheevers was fired. Obviously, such punishment sends a powerful
message to all other employees who are aware of it—go along or be fired.25
Practical Advice for Managers: Discipline
Tom Watson learned the hard way what can happen when breaches of integrity aren’t
disciplined swiftly and severely. Workers have long memories about incidents such
as the chain letter and how management handles them. They tuck that sort of infor-
mation away for later use. When the IBM employee who stole the engineering draw-
ings was fired in a particularly humiliating way, he was outraged. His severe and
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public punishment seemed particularly unfair when compared with the way others
had been treated. And he reacted in ways that managers are told to expect from pun-
ished employees. He was angry at the punisher and the organization.
The important point about discipline is that adults differentiate between fair and
unfair punishment. If you use punishment consistently to enforce the rules, employ-
ees will expect to be punished when they break them. However, they expect punish-
ment that fits the crime and that is consistent with how others have been treated. In
most cases, if you impose discipline fairly, the problem behavior improves and the
subordinate goes on to be a productive organizational citizen.
Remember that you should be concerned about observers who pay a great deal of
attention to how rule violations are handled. When the chain letter offenders weren’t
severely disciplined, an implicit message was sent to all who were aware of the
scheme, and expectations were set up for how management would respond to future
breaches of integrity. A just organization is one that disciplines rule violations fairly
and consistently and doesn’t punish people who try to do the right thing. Workers
expect managers to discipline fairly, and they’re morally outraged when management
doesn’t do its job.
‘‘EVERYONE’S DOING IT’’
People Follow Group Norms
‘‘Everyone’s doing it’’ is the refrain so frequently used to encourage (and rationalize or
justify) unethical behavior. We’ve all heard it. From fraternity brothers who are
expected to advise their peers about the content of exams to college football players
who accept booster money to waiters and waitresses who don’t claim all of their tip
income for tax purposes to auditors who sign off on financial statements that haven’t
been thoroughly checked to insider traders who share secrets about upcoming financial
deals, individuals are much more likely to engage in unethical behavior if they’re con-
vinced that others are doing it too. It lets them off the hook by providing an acceptable
justification and rationale for the behavior. Also, recall what you learned about ethical
awareness in Chapter 3. People are more likely to recognize issues as being ethical ones
if there is social consensus in the group that the issue raises ethical concerns. But if
‘‘everyone is doing it,’’ social consensus is low (everyone seems to agree that the
behavior is not a problem) and it’s more likely that ethical concerns just won’t come up.
Rationalizing Unethical Behavior
For some behaviors, the refrain ‘‘everyone is doing it’’ is used primarily to rationalize
behavior that’s guided by unethical norms. The employee who inflates his or her
expense reports believes that it’s justified first because everyone else is doing it (and
getting away with it, too). Within the group, inflating expenses may also be explained
as a way of compensating for the extra hours spent away from home, to pay for the
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drink at the bar or a movie, or to cover other expenses that aren’t deductible under the
organization’s formal travel cost reimbursement policy. These rationalizations are often
explicitly or implicitly supported by the boss, who suggests the behavior or engages in
it himself or herself. Either way, the manager sends a powerful message that it’s okay
to bend the rules, and that message can easily be generalized to other rules in the
organization.
A better way to manage the process is to state the rules clearly and then enforce
them. In other words, if it seems reasonable to reimburse a traveling employee for a
drink at the bar, a movie, or a telephone call home, then change the rules so that these
expenses can be legally reimbursed under the organization’s formal travel policy.
Then abuses of the system can be disciplined.
Pressure to Go Along
For other behaviors, the ‘‘everyone is doing it’’ refrain represents not just a rational-
ization but actual pressure to go along with the crowd. The argument is used to
encourage those who are reluctant. ‘‘Aw, c’mon, everybody does it!’’ Not going
along puts the individual in the uncomfortable spot of being perceived as some sort
of goody-goody who is highly ethical but also unlikable, and certainly not someone
who can be trusted. The result can be ostracism from the group, and most of us would
rather go along than be ostracized.26 Many individuals will go along with unethical
behavior because of their strong need to be accepted. If left to their own devices, they
might very well follow the rules. But in the group situation, they feel that they have
no choice but to comply, or at least to remain silent about what others are doing.
Practical Advice for Managers: Group Norms
So what does the notion of group norms mean for the manager? Above all, you must
be acutely aware of the power of group norms (informal standards of behavior),
which aren’t always consistent with the formal, written rules.
Group norms represent what’s really happening in the group, and you must be in
touch with this reality. Any new employee will be quickly schooled in ‘‘the way we do
things in this group’’ and will be expected to go along. Loyalty to the group may be the
most powerful norm and one that’s extremely difficult to counteract. If the group norms
support ethical behavior, you have no problem; but if they don’t, you face a particularly
tough situation. If the group is strong and cohesive, one approach you can use is to
identify the informal group leader and attempt to influence that individual, hoping she
or he will influence the others. It’s also important to consider the reward system. Norms
often arise to support behaviors that are implicitly rewarded. If people are doing some-
thing, it’s usually because they find it rewarding and the system somehow encourages
it. Changes in the reward system can lead to changes in group norms.
THE SLADE COMPANY CASE EXAMPLE A classic organizational behavior case
explains how a highly productive manufacturing work group with a strong informal
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leader has created a problematic group norm for punching in and out at the time
clock. After the foreman leaves, all but one of the group members goes home. The
one person remaining behind punches out all of the other group members. The result
is that group members are paid for more hours than they actually work. On occasion,
when a group member is delayed in the morning, the group punches him in. But this
practice is carefully controlled, and the group has developed norms so that it is not
abused. Although the punch-out system seems to be clearly wrong, the case is com-
plicated because management admits that although pay is low, productivity in the
group is high. What’s more, the group is highly cohesive and very willing to work
hard when necessary to fulfill last-minute orders or solve unusual production prob-
lems. The workers also value the ability to have some control over the workday.
Finally, management has known about the practice for some time and has ignored it.
The solution to the case isn’t clear-cut. The case writers have suggested that
management might be better off leaving well enough alone. ‘‘If it ain’t broke, don’t
fix it.’’ However, we believe that this is impossible if the ethical dimensions of the
case are brought into focus. Leaving it alone implies tacit acceptance and approval of
rule breaking and sends that message not only to this work group but to all of the
others as well. Other groups that, for some reason, can’t manage to do the same (per-
haps because of less cohesion or because their supervisor stays later) will no doubt
resent the injustice. Management must also accept some responsibility for tacitly
approving this practice over a long period of time.
Remembering that people do what’s rewarded, we believe that the norm is most
likely to change via adjustments in the reward system. For example, moving to a five-
day salary (somewhat higher than their current average take-home pay) rather than
hourly pay would reward people for getting the job done rather than staying a certain
number of hours on weekdays. Group members could still be paid extra for weekend
overtime work when it’s available. If the late-arrival norm isn’t being abused, it
could be institutionalized. If someone must be late, a new rule could state that he or
she must inform someone in the work group by a certain time. As with absences, a
certain number of late arrivals would be allowed within a specified period. The
informal group leader should be involved in devising the solution through an appeal
to his or her concern for fairness to other workers in the organization.
PEOPLE FULFILL ASSIGNED ROLES
Roles are strong forces for guiding behavior, and workers are assigned roles that can
powerfully influence their behavior in ethical dilemma situations. Roles can reduce a
person’s sense of his or her individuality by focusing attention on the role and the
expectations that accompany it. It doesn’t really matter who fills the role. It’s the role
requirements that are important. This focus on the role reduces the individual’s
awareness of the self as an independent individual who is personally responsible for
an outcome. This psychological process is called deindividuation.27
So the individual acts ‘‘in role’’ and does what’s expected. This is fine when
behaving in role means doing the right thing. But what happens when in-role
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behavior involves behaving illegally or unethically? For example, aggression is part
of the police officer’s role. Sometimes, though, police officers step over the ethical
line; they become overly aggressive and assault suspects without cause. Several such
incidents have been videotaped by bystanders in recent years. Another important part
of the police officer role is loyalty to other police officers and protection of his or her
peers. Police officers often travel in pairs and must rely on each other in difficult, life-
threatening situations. Loyalty, protection, and trust within the ranks thus serve an
important, positive purpose. But loyalty can also end up supporting unethical behav-
ior when, for example, a fellow police officer is overly aggressive and a peer who
observes the conduct doesn’t report it.
Consider this example from an old television series. Two female police detec-
tives were part of a stakeout intended to catch one of their fellow police officers
stealing heroin. The detectives realized they were facing a complex moral dilemma
when the officer told them he was stealing the heroin for his mother, who was dying
of cancer and in severe pain. He had clearly broken the law, and the rules clearly said
that they must turn him in. But loyalty and protection were important parts of their
police role. Their colleague had good intentions—to help his dying mother. After
much discussion and individual soul searching, they decided to protect their col-
league and keep silent about what they knew. Although we may disagree about
whether they made the right decision, the point here is that the peer protection and
loyalty aspects of the police officer role were an important part of that decision.
The Zimbardo Prison Experiment
A powerful and widely cited social-psychological study illustrates the power of roles
to influence behavior.28 The researchers created a prison environment in the base-
ment of the psychology building at Stanford University. Twenty-four psychologically
healthy subjects (people like us) were recruited and randomly assigned to play the
roles of prisoners or guards. General rules were provided regarding how to fulfill the
role, but subjects were left free to interact within those general guidelines. With the
cooperation of the local police, the guards were actually sent out to arrest the prison-
ers, book them, and transport them to their simulated cells. The prisoners were given
uniforms and were referred to by identification numbers. The guards were given
comfortable quarters and a recreation area. The guards wore uniforms and mirrored
sunglasses, and they worked standard eight-hour shifts during which they were given
a great deal of control over the prisoners (physical abuse was not allowed). With rare
exceptions, the guards enjoyed the social power and status of the guard role. Some
‘‘guards’’ were exhilarated by the experience and reinforced their guard role with
aggression, threats, and insults. The ‘‘prisoners’’ quickly began to show dramatic
signs of emotional change, including acute anxiety, helplessness, and passivity
verging on complete servility. Some became severely distressed and physically ill.
Although the experiment was originally scheduled to last two weeks, it was halted
after only six days due to concern about the prisoners’ well-being. ‘‘At the end of only
six days . . . it was no longer apparent to most of the subjects (or to us) where reality
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ended and their roles began. The majority had indeed become prisoners or guards, no
longer able to clearly differentiate between role playing and the real self. There were
dramatic changes in virtually every aspect of their behavior, thinking, and feeling.’’29
After the experiment ended, guards expressed a combination of excitement and
dismay at the darker side of themselves that had emerged. The simulated situation
had become real very quickly, and both sides had readily assumed the roles expected
of them as members of their respective groups (prisoner or guard). This occurred
despite the other roles these individuals may have played in their ‘‘normal’’ lives just
days before. Finally, when individuals attempted to deviate from the role behavior,
the deviation was quickly suppressed by pressure to conform as expressed by other
group members. The experimental results were used to support the ‘‘situational’’
explanation for prison behavior. In other words, perfectly normal people behaved
cruelly and aggressively when placed in a role where these behaviors were either
expected or allowed.
The Zimbardo experiment can help us better understand the 2004 Abu Ghraib
prison scandal in Iraq. At Abu Ghraib, beginning in 2003, poorly trained American mili-
tary police officers (MPs) and civilian contractors tortured Iraqi captives in what had
ironically been one of Saddam Hussein’s most infamous prisons. The brutal torture
ranged from physical violence to verbal, psychological, and sexual abuse. The American
public became incensed when photographs of the abuse showed up on the Internet
thanks to one young military policeman, Joseph Darby. The most famous photos include
one of a supervisor giving a thumbs-up sign while standing next to a pyramid of hooded,
naked Iraqis. Another shows female Private Lyndie England leading a naked Iraqi
around on a leash. According to the Red Cross, most of the prisoners at Abu Ghraib had
committed no crime. They had just managed to be in the wrong place at the wrong time.
So what drove these Americans, men and women, to engage in such horrific behavior
and to laugh at the humiliation of other human beings? What happened at Abu Ghraib
was complex and likely caused by many factors. But at least some of them seem haunt-
ingly reminiscent of the Zimbardo experiment. The Abu Ghraib guards quickly donned
the role of prison police, and they relished the power over prisoners that accompanied
the role. This in-role behavior was likely enhanced further by intelligence officers’
encouragement to use more aggressive techniques to soften up the prisoners for interro-
gation and by praise when such techniques ‘‘worked.’’
30
Roles at Work
But prisons aren’t your average work setting. How do the results of this experiment
apply to work organizations? People enter work organizations in a state of ‘‘role
readiness.’’31 In this state, they’re likely to engage in behaviors that are consistent
with their organizationally prescribed role, even if those behaviors violate other val-
ues they hold (another example of multiple ethical selves). A particularly interesting
example is provided by corporate professionals such as lawyers, physicians, and
accountants. Professionals are thought to adhere most closely to their professional
roles. In fact, this is part of the definition of a professional. Although there’s little
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research evidence, much anecdotal evidence suggests that many corporate physi-
cians, lawyers, and accountants identify more closely with their organizational role.
For example, Johns Manville medical personnel conformed to corporate policy and
remained silent about asbestos exposure, despite the known medical dangers.32 In
their dual roles of physician and organizational member, the latter took precedence.
The same can be said of auditors who are supposed to adhere to the ethical guidelines
of their professional organization, the American Institute of Certified Public
Accountants (AICPA). They are supposed to protect the public interest and report
financial irregularities they find. As we have learned from auditing scandals, how-
ever, the corporate organizational role seems to take over for many.
Conflicting Roles Can Lead to Unethical Behavior
In their jobs, people are sometimes expected to play different roles that may make
competing demands on them, causing internal conflict and stress that may be
resolved via unethical behavior such as lying. For example, professional nurses are
taught that patient education and patient advocacy are important aspects of the nurs-
ing role. Yet these nursing role expectations may conflict with physicians’ orders, or
they may be difficult to implement because of time pressures and paperwork that take
nurses away from patients. In a research study, nurses responded to various scenarios,
some of which placed them in role-conflict situations.33 Those nurses who were in
role-conflict situations said they would be more likely to lie by misreporting their
behavior on the patient’s chart.
Managers must be aware that conflicting role demands can pressure workers to
be dishonest. The best way to avoid this type of dishonesty is to minimize conflicting
role demands. Ask your staff to analyze their jobs and to identify sources of conflict
that could cause them to feel they have to lie to you or someone else in order
to successfully accomplish some aspect of their job. Then, see if the job can be
redesigned to minimize these conflicts.
Roles Can Also Support Ethical Behavior
Roles can also work to support ethical behavior. For example, whistle-blowing
(reporting the misconduct of others) is sometimes prescribed for individuals in cer-
tain jobs. This makes a difficult behavior easier to carry out. A survey of internal
auditors found that whistle-blowing was more likely when the auditors saw reporting
as a prescribed job requirement.34 Managers should consider the extent to which or-
ganizational roles encourage either ethical or unethical behavior. Obviously, those
that support and encourage unethical behavior should be changed. Those that encour-
age ethical behavior (e.g., whistle-blowing) should be bolstered. For example,
research has found that although reporting a peer’s misconduct is a distasteful and
difficult act, people are more likely to report a peer if doing so is explicitly made a
part of their role via an honor code or code of conduct.35 In other words, if their role
requires them to report misconduct when they see it, they’re more likely to do so.
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Many colleges and universities have honor codes that require students to report any
cheating they observe. The requirement makes it easier for the reporter because the
behavior becomes a duty, a role responsibility rather than a voluntary ethical act.
Practical Advice for Managers: Roles
The key concept for managers to understand is that roles influence behavior. Think
about the roles people play in your department or organization. What are the implica-
tions of their role expectations for ethical and unethical behavior? Do some individuals
experience conflicts between their roles? For example, are professionals torn between
their organizational and professional roles? Or do employees experience conflicts within
a role—for example, like nurses, who are supposed to play the conflicting roles of
patient advocate and subordinate to the physician? Again, the individuals who hold the
jobs are probably the best source of information about their role expectations and poten-
tial conflicts. Once you’ve analyzed roles and role conflicts, determine whether jobs
need to be altered to reduce conflict. If change isn’t possible, at least you can anticipate
the problems that are likely to arise for people in these jobs.
PEOPLE DO WHAT THEY’RE TOLD
In a 60 Minutes segment, Americans working for a Japanese company in the United
States reported that their supervisor told them to unpack machine tools manufactured
in and shipped from Japan, remove the ‘‘Manufactured in Japan’’ label, change a few
things, replace the label with a ‘‘Manufactured in the U.S.’’ label, and repack the
machine tools for shipping. These products were then shipped as if they had been
manufactured in the United States to, of all places, the American military (where
U.S. manufacture of machine tools was a requirement). An American accountant at
the firm finally blew the whistle; but when the workers who had been doing the
unpacking and repacking were asked why they did it, they replied that they were
doing what their supervisor had told them to do. One of the men who had attempted
to protest was told that he could find another job if he didn’t like it, so he continued
doing what he was told to do.
This is just one of many examples we could cite of workers at all levels doing
what they’re told by managers. Participants in the famous 1972 Watergate break-in
referred to their unquestioning obedience to superior orders in testimony before the
Senate investigating committee, as did Nazi SS officers in war crimes trials and par-
ticipants in the Iran-Contra affair.36 Organizations (corporate, political, or military)
are authority structures whose members accept the idea that, to be members in good
standing, they must give up a certain amount of independence and autonomy. They
expect that managers will tell them what to do. That’s the managerial role. They also
assume that they should do what’s expected of them. That’s the subordinate role.
These assumptions and expectations allow organizations to avoid chaos and function
in an orderly way. In addition, individuals often feel that they owe the organization
and their manager their loyalty, thus further reinforcing the pressure to comply.
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The Milgram Experiments
Probably the most famous social-psychological studies of all time were conducted by
Stanley Milgram in the 1960s. They provide uncomfortable insights into how normal
adults behave in authority situations.37 Most adults will carry out the authority fig-
ure’s orders even if these orders are contrary to their personal beliefs about what’s
right and lead to harm of other human beings.
In a number of laboratory experiments, Milgram paid subjects recruited from the
New Haven, Connecticut, area to participate in a one-hour study on the effects of
punishment on learning. The subject was asked to play ‘‘teacher’’ in a learning
experiment; the ‘‘learner,’’ unbeknownst to the teacher/subject, was a member of the
research team. The learner was strapped into a chair with an electrode attached to his
or her wrist. The teacher/subject was seated at a shock generator and was told to pose
questions to the learner. Each time the learner provided an incorrect response to a
question, the teacher/subject was told to turn a dial to administer an increasingly
severe shock—though in fact no shocks were actually given. As the apparent
‘‘shocks’’ intensified, the learner verbally expressed scripted responses representing
increasing discomfort, finally screaming and then going silent. During the experi-
ments, many teacher/subjects would question the experimenter and express the desire
to stop. The experimenter, dressed in a white lab coat, would provide the following
scripted response, ‘‘Although the shocks may be painful, there is no permanent tissue
damage, so please go on.’’ If the teacher/subject continued to resist, the experimenter
would respond with three successive prods: ‘‘The experiment requires that you con-
tinue’’; ‘‘It is absolutely essential that you continue’’; ‘‘You have no choice, you must
go on.’’ If the teacher continued to resist, the experiment was finally terminated.
To the surprise of Milgram and other observers, about 60 percent of the
teacher/subjects in these experiments continued to the end, obeying the authority
figure’s instructions despite the conflict they felt and expressed. It’s not that they
felt okay about what they were doing. In fact, their emotional appeals to the experi-
menter suggested that they very much wanted to stop. But most of them didn’t.
They may have felt that refusing to continue would challenge the experimenter’s
authority, affect the legitimacy of the experiment, and cause embarrassment for
themselves.
38 They acted as if they were constrained to do as they were told by the
authority figure, rather than as independent adults who could end the experiment at
any time. We should also note that teacher/subjects who were at the principled
level of cognitive moral development (see Chapter 3) were more likely to chal-
lenge the experimenter’s authority as well as more likely to stop giving the electric
shocks. So, although some participants did resist the authority figure’s commands
to continue, most of them did not.
Do you think that people today are different somehow—that they would be less
susceptible to authority figure dictates? Jerry Burger, a psychology professor at Santa
Clara University carried out a partial replication of the original Milgram experiment
and published the results in 2009.39 Much like Milgram had done, he recruited people
from the community. The recruitment process screened out individuals who might
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have been familiar with the original Milgram experiments or whose screening sug-
gested that they might have a negative reaction to participating. In its design, the
study closely followed the original. The main difference was that, in keeping with
modern-day ethics rules about protecting human subjects in research, the experiment
was stopped when the ‘‘teacher’’ thought she or he had administered a 150-volt shock
(rather than continuing all the way to 450 volts, as in the original version). In the
original experiment, 150 volts appeared to be a turning point. Most subjects who
passed that point continued all the way up the shock generator. In the replication,
subjects were also told multiple times that they could leave at any time and keep the
$50 they were being paid. Once the experiment was completed, the ‘‘learner’’ imme-
diately entered the room and told the ‘‘teacher’’ that he or she was feeling fine.
Finally, the experimenter was a trained clinical psychologist who stopped the experi-
ment immediately at any sign of serious stress. Even with all of these changes, the
results were quite similar to those Milgram found more than 40 years ago. About
two-thirds of the ‘‘teacher’’ subjects continued to deliver shocks up to 150 volts.
No matter what the results, this is still an experiment that took place in a behav-
ioral laboratory. Do the findings apply in the real world? Apparently, yes. A few
years ago, ABC TV showcased a horrifying ‘‘real-world’’ version of the Milgram
experiment. A person posing as a police officer telephoned a McDonald’s in
2004 and told the assistant manager, Donna Summers, that a young woman employee
(whom he described) had stolen a purse and should be brought into the office. He also
claimed that he had Donna’s boss on another phone line. Once the employee was in
the office, the caller instructed the manager to take the employee’s cell phone and car
keys and have her remove her clothes and do jumping jacks in the nude. The manager
said that she needed to get back to the busy restaurant so the caller suggested that she
tap her middle-aged fianc!e, Walter Nix, to watch the employee. Nix followed further
phone instructions from the alleged police officer and ultimately, sexually abused the
young woman employee. The entire event was recorded on the restaurant’s surveil-
lance camera, and much of it was broadcast in the ABC special report. Nix was sen-
tenced to several years in prison for sexual assault. The caller was caught when
police discovered that he had used a telephone card bought at a Wal-Mart in Florida.
They identified the man using Wal-Mart’s surveillance cameras (he was a corrections
officer and the married father of five!) and he was arrested—but surprisingly, not
convicted. Donna Summers was fired and received probation. The victim also
brought a civil suit against McDonald’s which she won in late 2008 (the case is under
appeal). We share this story with you because it provides a too real (some might say
surreal) example of obedience to authority at two levels. First, the young woman
employee obeyed her boss’s instruction to hand over her keys, cell phone, and
clothes. It didn’t occur to her to resist these extraordinary requests, because they
were coming from an adult authority figure. Even more outrageous is the willingness
of Summers and Nix to harm another person simply because someone posing as a
police officer told them to do so. In the broadcast interview, Summers convincingly
claimed that she believed he was a police officer and that she was doing the
right thing.
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Obedience to Authority at Work
The obedient behavior seen in the Milgram experiments and their modern counterparts
is similar to behavior observed again and again in work organizations. The notion of
legitimate authority is an accepted tenet of organizational life. In 1968, American mili-
tary men massacred hundreds of innocent civilians at My Lai, Vietnam. They didn’t ask
questions. They did what they were told to do despite the military’s efforts in training
soldiers to believe that it is their duty to disobey unjust authority.
More recently, Lyndie England, who was found guilty of prisoner abuse at Abu
Ghraib prison in Iraq, claimed that she and others were following orders of authori-
ties above her. In addition, such behavior is not limited to organizations we think of
as authoritarian such as the military. Individuals who testified to the U.S. Congress
about price-fixing practices in the electrical industry were asked why they didn’t
report these practices to higher authorities. They responded that they felt they
couldn’t because they reported to a prescribed superior only.40 Roger Boisjoly, who
questioned the safety of the O-rings and attempted to convince managers to cancel
the launch of the space shuttle Challenger, never went outside the chain of command
at his company to protest.41 So, as current or future work organization members, we
encourage you to stop and think hard when an authority figure asks you to do some-
thing that could harm another person or seems wrong in some other way. Think for
yourself—and as difficult as it might seem at the time, say no.
Practical Advice for Managers: Obedience to Authority
Managers must also realize the power they hold as authority figures in work organi-
zations. Old concepts die hard. And even today in team-oriented organizations, most
people will do as they’re told. Authority figures therefore must exhibit ethical behav-
ior, and they must send powerful signals that high ethical standards are expected of
everyone and that employees are expected to question authority figures if they
believe they are being asked to do something that is wrong. This message should
begin at the top of the organization and work its way down through every level.
Moreover, when unethical behavior is uncovered, the investigation must consider the
explicit or implicit messages being sent by authority figures. Don’t assume that the
individual acted alone and without influence. Our tendency is to try to isolate the
problem, find the one ‘‘culprit’’ (bad apple), and get on with our lives. But the culprit
may have been explicitly or implicitly encouraged by a superior, and this possibility
should be investigated and taken into account.
RESPONSIBILITY IS DIFFUSED IN ORGANIZATIONS
For a relationship to exist between what people think is right and what they do, they
must feel responsible for the consequences of their actions.42 Therefore the sense of
personal responsibility is a prerequisite for moral action. If you yourself decided to
market a certain product that might hurt small children or the environment, you
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would be much more likely to seriously consider the moral implications of the deci-
sion. But in organizations, the individual often becomes disconnected from the con-
sequences of his or her actions and doesn’t feel personally responsible for them.
Responsibility becomes diffused. No individual feels the need to take responsibility,
so in the end, no one does; and unethical behavior is more likely.
For at least four reasons, individuals may not feel personally responsible for their
organizational actions. Responsibility is diffused because it is taken away, shared
with others in decision-making groups, obscured by the organizational hierarchy, or
diluted by psychological distance to potential victims.
‘‘Don’t Worry—We’re Taking Care of Everything’’
At work, individuals are often encouraged to turn responsibility over to those at
higher levels. This behavior is related to our earlier discussion of obedience to
authority. But in this case, the individual is simply told not to worry—that the
problem or decision is someone else’s responsibility. For example, an individual
who expresses concern about a safety or environmental problem may be told, ‘‘We
appreciate your concern, but you don’t need to worry about it. We’re taking care of
everything.’’ This type of response absolves the subordinate of feelings of respon-
sibility for the consequences of the organization’s action. Someone, particularly
someone at a higher level, has taken the responsibility.
Even if the superiors are highly responsible and highly ethical, however, the act
of absolving subordinates of responsibility may have significant implications for their
subsequent ethical behavior. Because of the feeling that they must do as they’re told
by authority figures, most people feel they have no choice but to follow superiors’
orders. In this case, the orders are to hand over responsibility for decision making,
and the individual feels that she or he has no choice but to give it up. If this sort of
response becomes routine, individuals will come to believe that it isn’t their responsi-
bility to be on the lookout for ethical violations, and they may stop bringing potential
problems to the attention of superiors.
Diffusing Responsibility in Groups
Because important organizational decisions are often made in groups, responsibility
for the decision becomes diffused among all group members. No single individual
feels responsible. Diffusion of responsibility in groups is used to explain the results
of classic research on the likelihood that bystanders will help a seizure victim.43 This
research suggests that when others are present, responsibility is diffused among all of
the bystanders and individuals are less likely to help.
Diffusion of responsibility also operates in group decision making through a pro-
cess known as groupthink,44 which has been used to explain a number of historical
group decision-making disasters such as the Bay of Pigs fiasco in John F. Kennedy’s
presidential administration. Groupthink can occur in cohesive groups whose mem-
bers are committed to the group and have a strong desire to remain group members.
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A major characteristic of groupthink is individual group members’ tendency to con-
form to the decision they think most of the group’s members prefer. Individual group
members may find it difficult to express disagreement and tend to censor themselves
even if they disagree with the group decision.
One important symptom of groupthink is the group’s ‘‘illusion of morality,’’ the
sense that the group simply wouldn’t do anything wrong. In a classic instructional
film on groupthink, a group of managers makes a decision to market a new drug
despite disturbing evidence that it may cause dangerous side effects. The illusion of
morality is expressed by a group member who states that the company has a well-
earned good reputation and would never do anything to hurt its customers.
Clearly, decisions with ethical overtones that are made in a group setting require
special attention. The manager must make sure that the ethical implications are identi-
fied and carefully analyzed. The group leader should be careful not to state his or her
preference up front, because group members will tend to censor their own beliefs to
conform with those of the leader. Other techniques can be used to make sure that alter-
native viewpoints are aired. For example, group members can be asked to provide
anonymous criticism of the decision being considered. Computer-based group decision
support systems often provide such a feature. An individual can be appointed to the role
of devil’s advocate, or multiple individuals can be appointed to voice multiple alterna-
tive perspectives. It’s easier for these individuals to take an alternative stance when it’s
their role to do so. Another alternative is to open the group to outside stakeholders who
would come in to present their concerns and perspectives.
Diffusing Responsibility by Dividing Responsibility
Responsibility in organizations is often so divided that individuals see themselves as
only a small cog in a large machine. Or they simply don’t have vital information that
would be required to make a good decision. Division of responsibility is essential for
the kind of specialization required in modern jobs. But this means that organizational
members often do their jobs with blinders on; they see only what’s directly ahead of
them, and no one sees (or takes responsibility for) the whole picture.
Scott Peck is a psychiatrist and author of the best-selling book, The Road Less
Traveled (1978). He was part of a group dispatched to study the 1968 My Lai massacre
in South Vietnam. At My Lai, American troops slaughtered a village of unarmed
women, children, and elderly men. The killing took all morning, and only one person,
an observant helicopter pilot, tried to stop it. Peck’s interviews with military people
revealed a bureaucratic organizational structure that allowed individuals to see only
their own narrow part of the problem, thereby allowing them to avoid feelings of
responsibility. When Peck wandered the halls of the Pentagon, questioning those involved
in directing the manufacture of napalm and its transportation to Vietnam as bombs, the
replies he received were something like the following: ‘‘We appreciate your problem
and your concerns, but we are not the department you want. We are in ordnance. We
supply the weapons, but we don’t determine how they’re used.’’ Down the hall, another
group suggested that the broad issues were also beyond their purview. ‘‘We simply
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determine how the war will be conducted—not whether it will be conducted.’’45 Peck
termed this process ‘‘the fragmentation of conscience.’’ ‘‘Any group will remain inevi-
tably potentially conscienceless and evil until such time as each and every individual
holds himself or herself directly responsible for the behavior of the whole group—the
organism of which he or she is a part. We have not yet begun to arrive at that point.’’46
Research has documented the process of diffusing responsibility. In a variation on
the Milgram obedience-to-authority experiments discussed earlier, diffusion of responsi-
bility was simulated by dividing the teacher’s role between two people, a ‘‘transmitter’’
and an ‘‘executant.’’ The transmitter would inform the executant when a shock had to
be administered and at what level. The experiment found that transmitters were signifi-
cantly more likely to obey than executants.47 One can imagine that it was easier for the
transmitter to rationalize his or her actions. ‘‘I didn’t actually do the harm—someone
else did.’’ This rationalization should become easier and easier, the greater the distance
between the individual decision maker and the actual outcome.
Diffusion of responsibility also occurs at a broader system level. Think about
September 11, 2001, and the discussions about whether the government should have
been able to ‘‘connect the dots’’ and anticipate the terrorist attacks. Different people
in different government agencies had extremely relevant information (about specific
terrorists, their activities in the United States such as flight training, and plans to fly
planes into other key structures such as the Eiffel Tower). But these agencies were
not set up to communicate with each other on a regular basis. In fact, some of them
(the CIA and FBI) were explicitly designed to operate independently because of con-
cerns about the power of an integrated agency. So the design of an organization (and
decisions about who communicates with whom) influences the nature of information
individuals receive in organizations and whether they can be held responsible.
Similarly, many individuals at multiple financial industry organizations contrib-
uted to the recent financial crisis. Realtors sold houses to people who couldn’t afford
them. Mortgage lenders created risky loans for these buyers. Investment bankers
securitized those loans. Ratings agencies scored the securities highly based upon past
performance. No one stepped back to consider that the system of continuously
increasing real estate prices was unsustainable and would eventually self-correct, if
not crash. So responsibility was widely diffused. The actions of single individuals
did not create the crisis, but the combined actions of many did. Therefore it is impor-
tant to consider how we can get individuals to think more broadly about the potential
consequences of their individual actions when combined with the actions of others.
Diffusing Responsibility by Creating
Psychological Distance
Responsibility can also be diffused because of the psychological distance between
the decision maker and potential victims.48 When potential victims are psychologi-
cally distant or out of sight, it’s more difficult to see oneself as responsible for any
negative outcomes. This principle was exemplified in further variations on the studies
of obedience to authority; in those studies, Milgram varied the closeness of the
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learner ‘‘victim’’ to the teacher.49 For example, when the learner was placed in the
same room with the teacher, the level of obedience dropped more than 20 percent (to
40 percent). In another variation, when the teacher was asked to physically force the
learner’s hand onto the shock plate, the obedience level dropped another 10 percent.
In these situations, as psychological distance decreased, the teacher felt personal
responsibility more strongly and was less likely to comply with the authority figure’s
demands to harm the learner.
In yet another variation on the obedience experiments, Milgram posed as an
ordinary man—not as a scientist in a white lab coat. When Milgram, dressed like an
ordinary man, conducted the experiments, obedience by the subjects dropped from 60
percent to 20 percent. The influence of a uniform (like a lab coat) on obedience is
startling. Brigadier General S.L.A. Marshall, a World War II combat historian,
described how soldiers in battle would, almost to a person, obey an order from a
commanding officer on the field to fire their weapons. When there was no leader
present on the field of battle, obedience to fire weapons fell to between 15 and 20
percent. Former U.S. Army Ranger, Lieutenant Colonel Dave Grossman, in his book
The Psychological Cost of Learning to Kill in War and Society (1995), wrote that to
persuade soldiers to overcome their consciences and their natural resistance to kill-
ing, ‘‘normal human beings had to be carefully taught, psychologically conditioned,
and commanded by authorities on the battlefield.’’ In other words, responsibility had
be diffused to authority figures, and people had to be made to feel psychologically
distant from their actions.50
This research suggests that personal responsibility for the outcomes of our orga-
nizational decisions will be less clear in situations where the potential harm is far
removed or when an authority figure commands us to do something. For example,
when the plant is not in our community, but in Mexico or somewhere in Asia, poten-
tial negative consequences are more distant; we may feel less personal responsibility,
and we may be more willing to make decisions that would harm other people. Simi-
larly, when we see a decision as someone else’s responsibility (not my job), we are
more likely to go along with decisions that harm others.
Practical Advice for Managers: Personal Responsibility
People are much more likely to act ethically if they perceive themselves as personally
responsible for the outcomes of their decisions and actions. That means they also
need to have the relevant information. As a manager, you should make individual
responsibility a highly salient issue for yourself and others. Spell out the responsibili-
ties associated with specific positions, and hold individuals to those expectations.
When a worker brings up an ethical concern, don’t take it completely off his or her
hands. And don’t say that it’s someone else’s responsibility. If it becomes necessary
to do so, be sure to keep the concerned individual informed of the progress and out-
come of the decision.
When it comes to groups, make it clear that every group member will be held
personally responsible for the outcome of group decisions. Ask groups to present
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minority reports or recommendations so that a communication mechanism exists for
those who don’t agree with the group. Appoint a devil’s advocate or multiple advo-
cates to question the assumptions of the group and the group’s decision.
Don’t forget to think about the design of your organization. How is the work
divided? Does the division of labor contribute to diffusion of responsibility by keep-
ing people in the dark about relevant facts? Does the organizational structure make
people feel like they’re just cogs in a bigger wheel? Encourage information and
responsibility sharing across bureaucratic divides.
The current movement to decrease levels in the organizational hierarchy may have
a positive side benefit. People find that they have to communicate more laterally—
across the organization. Also, with fewer levels, it should become more difficult for
organizational members to rationalize that higher-ups were responsible. Finally, per-
sonal visits to geographically distant work sites and personal contact with customers
should decrease psychological distance and increase the manager’s felt responsibility
for the outcomes of any decisions or actions that impact people in these locations.
CONCLUSION
You now have some important management concepts that can be applied to the man-
agement of ethical and unethical conduct. The remaining challenge is to analyze
yourself (or your manager) in relation to these ideas.
Am I Walking My Ethical Talk?
A common phrase used by today’s managers is ‘‘walking the talk.’’ If your intention
is to be an ethical manager, here are some questions to ask yourself to see if you’re
walking your ethical talk.
1. Do I talk about the ethical implications of decisions with the people who
report to me as well as with the job candidates I’m interested in hiring?
With my peers? With my manager?
2. Have I made it clear to the people who report to me that I don’t want to be
protected from bad news? Do they understand that they can tell me anything
without fear of retribution? Do my reports come to me with ethical
concerns?
3. Do I provide guidance on ethical decision making, and have I participated in
the ethics training of those who report to me?
4. When evaluating the performance of my staff, do I weight ethical goals at
least as highly as performance and quality goals? Do I focus on the means as
well as the ends in decision making and performance appraisals?
5. Do I reward ethical conduct and discipline unethical conduct?
6. Do I require my people to take responsibility for their decisions?
7. Do I support employees who challenge unjust authority?
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8. What are the informal norms in my department? If my employees were
asked to list the ‘‘rules’’ of working for me, what would they say? Are any
of these problematic if ethical conduct is the goal?
9. If I were to die tomorrow, would the people who report to me say that I
had integrity? How would my peers describe me? And what would my man-
ager say?
The answers to these questions should form a sound beginning for understanding
and managing ethical behavior in your work group and within the broader ethical
culture.
DISCUSSION QUESTIONS
For the following questions, if you don’t have work experience, interview someone
who does and ask them these questions. Otherwise, ask them of yourself.
1. Have you ever been in a situation—especially a work situation—where the
norms supported a particular behavior, ethical or unethical, that you felt pres-
sured to go along with? Explain.
2. Have you ever been in a situation where the rewards explicitly or implicitly sup-
ported unethical conduct? Explain.
3. Can you think of situations in which unethical behavior was dealt with appropri-
ately (punished justly) or inappropriately? What were the reactions of others in
the organization?
4. What do you think would be appropriate punishment for those found guilty of
assault or indecent exposure in the Tailhook situation? Why?
5. Have you ever felt obligated to do something you felt was wrong because a per-
son in a position of authority told you to do it?
6. Think about how you might design work to maximize workers’ taking responsi-
bility for the consequences of their actions.
7. Evaluate yourself or a manager you know using the ‘‘do you walk your talk’’
questions above.
CASE
SEARS, ROEBUCK, AND CO.: THE AUTO CENTER SCANDAL
Sears, Roebuck, and Co. began in the late 1800s as a mail-order company that sold
farm supplies and other consumer items. Its first retail store opened in the mid-1920s.
Responding to changes in American society, such as the move from farms to facto-
ries and the presence of the automobile in many homes, hundreds of retail stores
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opened over the years. The company expanded rapidly, and eventually it diversified
to include other businesses: insurance (Allstate Insurance), real estate (Coldwell
Banker), securities (Dean Witter Reynolds), and credit cards (Discover). Each of
these other businesses became its own division, in addition to the merchandising
group that included retail stores, appliances, and auto service centers. By the early
1990s, the company was reporting revenues and earnings in the billions of dollars.51
Despite its long history of high earnings and its penetration into the U.S. market,
the Sears retail business began to experience serious financial difficulties in the
1980s. Discount retailers such as Wal-Mart were pulling ahead in market share, leav-
ing Sears lagging. Sears responded by adding non-Sears name brands and an ‘‘every-
day low price’’ policy. But despite these efforts, in 1990 Sears reported a 40 percent
decline in earnings, and its merchandising group dropped a whopping 60 percent!
Cost-cutting measures were planned, including the elimination of jobs and a focus on
profits at every level.52
In 1991, Sears unveiled a productivity incentive plan to increase profits in its
auto centers nationwide. Auto mechanics had traditionally been paid an hourly wage
and were expected to meet production quotas. In 1991, the compensation plan was
changed to include a commission component. Mechanics were paid a base salary
plus a fixed dollar amount for meeting hourly production quotas. Auto service advi-
sors (the counter people who take orders, consult with mechanics, and advise custom-
ers) had traditionally been paid a salary. To increase sales, however, commissions
and product-specific sales quotas were introduced for them as well. For example, a
service advisor might be given the goal of selling a certain number of front-end align-
ments or brake repairs during each shift.53
In June 1992, the California Department of Consumer Affairs accused Sears,
Roebuck, and Co. of violating the state’s Auto Repair Act and sought to revoke the
licenses of all Sears auto centers in California. The allegation resulted from an
increasing number of consumer complaints and an undercover investigation of brake
repairs. Other states quickly followed suit. Essentially, the charges alleged that Sears
Auto Centers had been systematically misleading customers and charging them for
unnecessary repairs. The California investigation attributed the problems to Sears
Auto Centers’ compensation system.54
In response to the charges, Sears CEO and Chairman Edward A. Brennan called
a news conference to deny that any fraud had occurred, and he defended Sears’ focus
on preventive maintenance for older cars. He admitted to isolated errors, accepted
personal responsibility for creating an environment where ‘‘mistakes’’ had occurred,
and outlined the actions the company planned to take to resolve the issue. These
included
& Eliminating the incentive compensation program for service advisors
& Substituting commissions based on customer satisfaction
& Eliminating sales quotas for specific parts and repairs
& Substituting sales volume quotas
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According to Brennan, ‘‘We have to have some way to measure performance.’’55
Sears also introduced ‘‘shopping audits’’ of its auto centers, during which
employees would pose as customers, and Brennan published a letter of explanation
to the company’s customers in the Wall Street Journal and USA Today on June 25,
1992.
Note that the compensation system for mechanics, based on number of tasks per-
formed and parts replaced, was maintained. In the summer of 1992, Chuck Fabbri, a
Sears mechanic from California, sent a letter about Sears’ wage policy for mechanics
to U.S. Senator Richard Bryan. Fabbri said:
It is my understanding that Sears is attempting to convince your commit-
tee that all inspections in their auto centers are now performed by
employees who are paid hourly and not on commission. This is not the
case. The truth is that the majority of employees performing inspections
are still on commission. . . .
The Service Advisors . . . sell the repair work to the customer. . . .
The repairs that they sell are not only based on their inspections, but to a
larger degree based on the recommendations of mechanics who are on
commission. . . .
On January 1, 1991, the mechanics, installers and tire changers had
their hourly wages cut to what Sears termed a fixed dollar amount, or
FDA per hour which varied depending on the classification. At present
the mechanic’s FDA amount is $3.25 which, based on current Sears
minimum production quotas, is 17% of my earnings. What this means is
that for every hour of work, as defined by Sears, that I complete, I receive
$3.25 plus my hourly base pay. If I do two hours worth of work in one
hour I receive an additional $3.25 therefore increasing my earnings.
Sears calls this type of compensation incentive pay or piecework;
however, a rose by any other name is still a rose. This is commission
plain and simple. The faster I get the work done the more money I make,
and as intended, Sears’ profits increase. It is therefore obvious to increase
his earnings, a mechanic might cut corners on, or eliminate altogether,
procedures required to complete the repair correction. In addition to this,
since the mechanic often inspects or performs the diagnosis, he has the
ideal opportunity to oversell or recommend more repair work than is
needed. This would be especially tempting if it has been a slow day or
week. In part greed may create this less than ethical situation, but high
pressure to meet quotas by Sears’ management also presents a significant
contribution. I have recently been threatened with termination if my pro-
duction didn’t at least equal Sears’ minimum quotas. I might add that
prior to this new wage policy, management had only positive response to
my production, and my record proves this. . . .
There is no doubt in my mind that before their auto center employees
were put on commission Sears enjoyed the trust of its customers. Today
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presents a different story. The solution is obvious not only for Sears, but
for the industry.56
Sears agreed to a multimillion-dollar settlement with the state of California and
the 41 other states that had filed similar charges. The company was placed on three-
year probation in California. It also settled a number of consumer class-action suits.
In July 1992, the U.S. Congress held hearings on fraud in the auto repair industry.
The long-term impact of the scandal is unclear. Sears has now sold off its securi-
ties firm, the Discover card, most of its real estate and mortgage business, and
20 percent of Allstate Insurance. At the end of 1992, auto center sales lagged behind
prior levels.57 Also in 1992, Business Week reported that employees in other areas of
Sears’ business, such as insurance and appliance sales, were feeling the same kinds of
pressures from sales quotas.58
Case Questions
1. Identify the ethical issues involved in the case from a consequentialist and deon-
tological perspective (refer to Chapter 2).
2. Identify the management issues involved in the case. For example, think about
the case in terms of multiple ethical selves, norms, reward systems, diffusion of
responsibility, obedience to authority. What factors contributed the most to the
alleged unethical conduct on the part of service advisors and mechanics?
3. How would you evaluate Sears’ response to the allegations and the changes the
company made? Has Sears resolved its problem? Why or why not?
4. What do you think is the impact of the scandal on Sears’ reputation for quality
and service?
5. Respond to Brennan’s comment, ‘‘We have to have some way to measure per-
formance.’’ What can management do to prevent employees from overselling?
Propose a management plan (including a compensation system) that allows man-
agement to measure performance and encourages auto center employees to
behave ethically. Be specific.
6. Should anyone be disciplined? If so, who, and when? What should the discipline
be?
7. Think more generally about Sears management’s response to the firm’s financial
problems. How else could they have increased auto center sales without provid-
ing incentives to employees to sell specific products?
SHORT CASE
You’ve recently been promoted into the position of marketing manager in the com-
munications division of your company. Your new job involves managing a staff and
creating the publications and marketing materials for insurance sales professionals in
three regions.
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NOTES
1. B. Toffler, Tough Choices (New York: Wiley & Sons, 1986).
2. R. A. Barrett, Culture and Conduct: An Excursion in Anthropology (Belmont, CA: Wadsworth,
1986).
3. E. Thomas and A. Murr, ‘‘The Gambler Who Blew It All,’’ Newsweek, 4 February 2002, 18–24.
4. Ibid.
5. J. Nichols, ‘‘Enron: What Dick Cheney Knew,’’ The Nation, 15 April 2002, 14–16, at www.thenation.
com/doc/20020415/nichols.
6. A. Sloan, ‘‘Lay’s a Victim? Not a Chance,’’ Newsweek, 19 July 2004, 50.
7. R. Lederer, ‘‘Take the Money Enron,’’ Across the Board, November–December 2003, 9.
8. A. B. Gesalman, ‘‘Cliff Was Climbing the Walls,’’ Newsweek, 4 February 2002, 24.
9. D. B. Levine, ‘‘The Inside Story of an Inside Trader,’’ Fortune, 21 May 1990, 80–89.
10. E. E. Umphress, A. Barsky, and K. See, ‘‘Be Careful What You Wish For: Goal Setting, Procedural
Justice, and Ethical Behavior at Work,’’ Paper presented at the Academy of Management meeting,
Honolulu, Hawaii, 2005.
11. D. Knight, C. C. Durham, and E. A. Locke, ‘‘The Relationship of Team Goals, Incentives, and Efficacy
to Strategic Risk, Tactical Implementation, and Performance,’’ Academy of Management Journal 44
(2001): 326–38; M. W. Schweitzer, L. Ordo~nez, and B. Douma, ‘‘Goal Setting as a Motivator of
Unethical Behavior,’’ Academy of Management Journal 47 (2004): 422–32.
12. E. Umphress, K. See, A. Barsky, C. Gogus, L. Ren, and A. Coleman, ‘‘Be Careful What You Wish
For: Goals Influencing Ethical Behavior in Organizations,’’ Symposium presented at the 65th annual
conference of the Academy of Management, Honolulu, Hawaii, 2005.
You have met the directors of the three regional sales forces before, and now you
ask each one for a meeting to discuss in depth how your team can best meet their
needs. Two of the sales directors were very cordial, and each explained what the
technical demands of their areas are and how your department can best meet their
needs.
However, during your meeting with Bill—the sales director of the third region
and one of your firm’s biggest moneymakers—he lays down the law. He says that his
area is the largest of the three regions, and it produces significantly more revenue for
your company than the other two regions combined. ‘‘You and your people need to
know that when I say, ‘Jump,’’’ he says, ‘‘they need to ask, ‘How high?’’’
In return, he says, he’ll recommend you and your people for every award the
company has to offer. In addition, he says he’ll personally give you a monetary
bonus, based on your team’s performance, at the end of the year. Although you have
never heard of a manager giving someone a bonus out of his own pocket, you suspect
that your company would frown on such a practice.
Case Questions
1. What are the ethical issues in this case?
2. What are some reasons the decision maker in this case might be inclined to go
along? Not go along?
3. If you were the decision maker, how would you handle the situation?
4. Would you report the conversation to your manager? Why or why not?
CHAPTER 7 MANAGING FOR ETHICAL CONDUCT 289
http://www.thenation
E1C07 07/09/2010 Page 290
13. D. Eden, ‘‘Self-fulfilling Prophecy as a Management Tool: Harnessing Pygmalion,’’ Academy of
Management Review 9 (1984): 64–73.
14. A. Bandura, Social Foundations of Thought and Action: A Social-Cognitive Theory (Englewood
Cliffs, NJ: Prentice-Hall, 1986).
15. E. Goodman, ‘‘Nobody Deemed Accountable for Tailhook,’’ (State College, PA) Centre Daily Times,
15 February 1994, 6A.
16. D. C. Waller, ‘‘Tailhook’s Lightning Rod,’’ Newsweek, 28 February 1994, 31.
17. A. Marshall, ‘‘Knowing What’s Ahead Can Prevent Looking Back with Regret,’’ Hotel and Motel
Management, 6 March 2000, 10.
18. G. L. Vistica, ‘‘Anchors Aweigh,’’ Newsweek, 5 February 1996, 69–71.
19. D. De Vise, ‘‘Defense Department Surveys Academy Sex Assaults; 1 Woman in 7 Reports Being
Attacked,’’ Washington Post, 19 March 2005, A01.
20. Levine, ‘‘The Inside Story of an Inside Trader.’’
21. G. Ball, L. K. Trevi~no, and H. P. Sims Jr., ‘‘Just and Unjust Punishment Incidents,’’ Academy of
Management Journal 37 (1994): 299–322.
22. L. K. Trevi~no and G. A. Ball, ‘‘The Social Implications of Punishing Unethical Behavior: Observers’
Cognitive and Affective Reactions,’’ Journal of Management 18 (1992): 751–68.
23. B. McLean and P. Elkind, The Smartest Guys in the Room (New York: Portfolio, 2003), 21–24.
24. Thomas J. Watson Jr., Father, Son & Co.: My Life at IBM and Beyond (New York: Bantam, 1990).
25. G. Morgenson, ‘‘The Enforcers of Wall St.? Then Again, Maybe Not,’’ New York Times, 20 June
2002, C1–C2.
26. L. K. Trevi~no and B. Victor, ‘‘Peer Reporting of Unethical Behavior: A Social Context Perspective,’’
Academy of Management Journal 353 (1992): 38–64.
27. P. G. Zimbardo, ‘‘The Human Choice: Individuation, Reason, and Order versus Deindividuation,
Impulse, and Chaos,’’ In Nebraska Symposium on Motivation, eds. W. J. Arnold and D. Levine
(Lincoln: University of Nebraska Press, 1969), 237–307.
28. C. Haney, C. Banks, and P. Zimbardo, ‘‘Interpersonal Dynamics in a Simulated Prison,’’ Interna-
tional Journal of Criminology and Penology 1 (1973): 69–97.
29. P. Zimbardo, ‘‘Pathology of Imprisonment,’’ in Readings in Social Psychology: Contemporary
Perspectives (2nd ed.), ed. D. Krebs (New York: Harper & Row, 1982).
30. J. Barry, M. Hosenball, and B. Dehghanpisheh, ‘‘Abu Ghraib and Beyond,’’ Newsweek, 17 May 2004,
32–38; D. Jehl and E. Schmitt, ‘‘Dogs and Other Harsh Tactics Linked to Military Intelligence,’’
New York Times, 22 May 2004, A1; S. Sontag, ‘‘Regarding the Torture of Others,’’ New York Times
Magazine, 23 May 2004, 24–41; P. V. Zelbauer and J. Dao, ‘‘Guard Left Troubled Life for Duty in
Iraq,’’ New York Times, 14 May 2004, A11.
31. D. Katz and R. Kahn, The Social Psychology of Organizations, 2nd ed. (New York: Wiley & Sons,
1978).
32. F. N. Brady and J. M. Logsdon, ‘‘Zimbardo’s ‘Stanford prison experiment’ and the Relevance of
Social Psychology for Teaching Business Ethics,’’ Journal of Business Ethics 7 (1988): 703–10;
P. Brodeur, Outrageous Misconduct: The Asbestos Industry on Trial (New York: Pantheon, 1985).
33. S. Grover, ‘‘Why Professionals Lie: The Impact of Professional Role Conflict on Reporting
Accuracy,’’ Organizational Behavior and Human Decision Processes 55 (1993): 251–72.
34. M. P. Miceli and J. P. Near, ‘‘The Relationships among Beliefs, Organizational Position, and Whistle-
Blowing Status: A Discriminant Analysis,’’ Academy of Management Journal 27 (1984): 687–705.
35. Trevi~no and Victor, ‘‘Peer Reporting of Unethical Behavior.’’
36. H. C. Kelman and V. L. Hamilton, Crimes of Obedience (New Haven, CT: Yale University Press, 1989).
37. S. Milgram, Obedience to Authority: An Experimental View (New York: Harper & Row, 1974).
38. Kelman and Hamilton, Crimes of Obedience.
39. J. M. Burger, ‘‘Replicating Milgram: Would People Still Obey Today?’’ American Psychologist 64,
no. 1 (2009): 1–11.
40. J. A. Waters, ‘‘Catch 20.5: Corporate Morality as an Organizational Phenomenon,’’ Organizational
Dynamics (Spring 1978): 319.
290 SECTION III MANAGING ETHICS IN THE ORGANIZATION
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41. Kelman and Hamilton, Crimes of Obedience.
42. S. H. Schwartz, ‘‘Words, Deeds, and the Perception of Consequences and Responsibility in Action
Situations,’’ Journal of Personality and Social Psychology 10 (1968): 232–42; S. H. Schwartz,
‘‘Awareness of Consequences and the Influence of Moral Norms on Interpersonal Behavior,’’
Sociometry 31 (1968): 355–69.
43. J. M. Darley and B. Latane, ‘‘Bystanders’ Intervention in Emergencies: Diffusion of Responsibility,’’
Journal of Personality and Social Psychology 8 (1968): 373–83.
44. I. Janis, Groupthink, 2nd ed. (Boston: Houghton Mifflin, 1982).
45. M. S. Peck, M. D., People of the Lie: The Hope for Healing Human Evil (New York: Simon &
Schuster, 1983).
46. Ibid.
47. W. Kilham and L. Mann, ‘‘Level of Destructive Obedience as a Function of Transmitter and Execu-
tant Roles in the Milgram Obedience Paradigm,’’ Journal of Personality and Social Psychology 29
(1974): 696–702.
48. Kelman and Hamilton, Crimes of Obedience.
49. Milgram. Obedience to Authority.
50. M. Stout, The Sociopath Next Door (New York: Broadway Books, 2005), 64–66.
51. M. A. Santoro, Sears Auto Centers (Boston: Harvard Business School, 1993).
52. Ibid.; K. Kelly, ‘‘How Did Sears Blow This Gasket?’’ Business Week, 29 June 1992, 38.
53. Santoro, Sears Auto Centers.
54. Kelly, ‘‘How Did Sears Blow This Gasket?’’
55. D. Gellene, ‘‘New State Probe of Sears Could Lead to Suit,’’ Los Angeles Times, 12 June 1992,
part D: 1.
56. Hearing before Subcommittee on Consumer of the Senate Committee on Commerce, Science, and
Transportation, 102nd Congress, 2nd Sess., July 21, 1992 (Sen. Hearing 102972), 83.
57. Santoro, Sears Auto Centers.
58. J. Flynn, ‘‘Did Sears Take Other Customers for a Ride?’’ Business Week, 3 August 1992, 24–25.
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C H A P T E R8
ETHICAL PROBLEMS OF
MANAGERS
INTRODUCTION
Good managers do four things really well: hire good people, define clear expectations
(including ethical expectations), recognize excellence and praise it, and finally, show
their people that they care.1 We’re going to focus on those managerial ‘‘basics’’ in
this chapter, since managers are responsible for the entire range of human resources
activities such as hiring, firing, disciplining, and evaluating performance. Conse-
quently, some of the ethical responsibilities of managers and employees are different
and require special thought and preparation. Also, since managers are responsible for
employee supervision, the courts can hold them accountable for the activities and
behavior of the people who report to them. Finally, because managers are role models
for the workers in their department, it’s critical that managers be able to discuss the
ethical implications of decision making and provide advice to employees who find
themselves in an ethical quandary. These facts of corporate life have frustrated many
managers. ‘‘How can I possibly manage the ethics or morality of the people I man-
age? Is it even possible to manage ethics? Where are the special pitfalls for me as a
manager?’’ In this chapter, we examine what responsibilities managers have and how
you as a manager can encourage employee engagement and influence your direct
reports to make ethical decisions. We also explore how organizational culture influ-
ences manager decisions and how managers can help reinforce the ethical culture of
their organization.
Managers and Employee Engagement
An extremely important element in any corporate endeavor—whether it’s an ethics
program, productivity effort, employee engagement initiative, or anything else—is
the quality of an organization’s managers. To employees, managers are the company,
and if managers are not able to manage the basics well, it will be extremely difficult
to inspire people to meet business goals or live organizational values.
As more companies study how people work and what makes employees most
productive, a clearer picture is emerging of exactly what motivates employees and
encourages ethical behavior at the same time. We believe that those seemingly
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unconnected activities—encouraging employee engagement and ethical behavior—
are actually intertwined. Research indicates that perhaps the best way to encourage
ethical behavior is to create an organizational culture that is built to enhance
employee engagement and that uses as its linchpin the quality of managers.
What do we mean by ‘‘employee engagement?’’ In short, it is discretionary ef-
fort, or how committed employees are to their work. Are they willing to provide
excellent customer service? Are they willing to work overtime if needed to meet a
deadline? Are they willing to go the extra mile in providing solutions? We can divide
employees into three groups along an engagement continuum. For our purposes, let’s
just call them actively engaged, not engaged, and actively disengaged. Here’s how
we might describe the characteristics of each of the three groups:
Actively Engaged 3————— Not Engaged 3————— Actively Disengaged
! Passionate and
enthusiastic
! Feel profoundly
connected to the
company
! Drive innovation
! Move the company
forward
! Eagerly go the
‘‘extra mile’’
! ‘‘Checked out’’
! Sleepwalking
! Put time—but not
passion or energy—
into their work
! May or may not go the
extra mile
! ‘‘It’s not my job.’’
! Negative drag on the culture
! Little or no company loyalty
! Undermine what engaged
coworkers accomplish
! May well sabotage company
initiatives and employee
goodwill
It’s hard to overstate the importance of increasing an organization’s levels of
employee engagement. Gallup, one of the first companies to put employee engagement
research on the map, claims that actively disengaged employees cost world economies
billions of dollars each year.2 On the positive side, however, actively engaged employ-
ees help an organization through such benefits as lower turnover and absenteeism,
higher customer loyalty, higher profits per employee, and fewer accidents.3
Although the connection between employee engagement and productivity is
easy to see, the connection between engagement and ethical behavior may be less
obvious. Take just a moment and think about the characteristics that describe each
group along the engagement continuum. Which group do you suppose is most likely
to engage in unethical behavior? Which group is more likely to misuse corporate
resources? Which group is more likely to serve as role models for ethical behavior?
Which group is more likely to include mavericks who have their own (not a corpo-
rate) agenda? Which group is more likely to raise an issue about suspected wrong-
doing? Which group might tend to go to a regulator or newspaper reporter or some
other external source if they perceive wrongdoing?
We think it’s evident that improving levels of employee engagement can also
improve an organization’s ethical culture (see Chapter 5). But how does a company
begin to do that? First, it needs to focus on the four drivers of engagement; second, it
needs to identify and develop great managers. According to James Shaffer, an expert
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in communication and employee engagement, the four drivers of engagement are
as follows:
1. Line of sight. Employees understand the company’s strategic direction, how
the company makes money, and how their individual efforts play a role in
that revenue-generating enterprise. Note: Business goals and ethical values
are important elements in an organization’s strategic direction.
2. Involvement. Employees are involved in the enterprise; they actively parti-
cipate, and their ideas are heard. Note: This kind of employee involvement
encourages the two-way communication that is critical for ethical issues to
be identified and resolved.
3. Information sharing. People get the information they need to be effective,
when they need it, and information goes in all directions—up, down, and
across the organization as needed. Note: Cultures that encourage informa-
tion sharing are more likely to be open organizations that identify and
resolve ethical issues rather than sweeping them under the rug.
4. Rewards and recognition. Business goals and values are clearly spelled out,
and employees know what they need to do and how they need to behave to
get rewarded. Note: It is critical for companies to pay close attention to the
incentives that goals and values will provide for ethical (or unethical)
behavior.4
While there are a number of employee engagement models, we think this one
makes a lot of sense and that the four drivers of employee engagement are critical
building blocks of an ethical culture.
In addition to focusing on the four drivers of engagement, organizations need to
recognize on a fundamental level the critical role that managers play in increasing
engagement and building an ethical culture. According to Towers Watson, the inter-
national human resources consulting firm, the following key senior manager behav-
iors influence employee engagement (and we believe these behaviors, when modeled
and endorsed by senior managers, trickle down to lower-level managers and supervi-
sors and can greatly influence employees’ ethical behavior).
& Senior management is sincerely interested in employee well-being.
& Senior management communicates openly and honestly.
& Senior management is visible and accessible.
& Senior management effectively communicates the reasons for key business
decisions.
& Senior management’s actions are consistent with stated values.5
Think about these manager behaviors. Which do you think play a direct or an indirect
role in building an ethical culture? Which might build engagement but not influence
ethical culture? Which do both?
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MANAGING THE ‘‘BASICS’’
A manager’s most important responsibility is to bring good people into the organiza-
tion and then manage in a way that makes those good people want to stay. The new
people may be permanent employees, or they may be part-time employees, tempo-
rary workers, or consultants. Effective managers need to be proficient at hiring the
best people who fit the organizational culture, evaluating their performance, recog-
nizing and praising excellence, and disciplining or even terminating poor performers.
Hiring and Work Assignments
HIRING CASE
You’re planning to hire a new sales manager, and the most promising candi-
date is really homely. You are concerned about how your customers—and
even his colleagues—would react to him. The specific job he’s applying for
requires extensive customer contact, and his appearance is frankly discon-
certing. On the other hand, his credentials are excellent, and he’s certainly
qualified for the job.
Federal law prohibits discrimination based on race, religion, sex, color, ethnic
background, and age, and it protects those who are pregnant or disabled.
In this case of a homely candidate, the solution is ambiguous. He is certainly
qualified for the job, and unattractive looks are not included in protectionist handi-
capped legislation, so the law isn’t helpful. But the larger issues are what qualities
should determine whether or not an individual should be hired, and is it ethical to
consider a prospective employee’s attractiveness?
All protectionist legislation points to the answer, as does the concept of fairness.
Hiring, promotions, and terminations should be based on qualifications, period. How-
ever, it’s one thing to ignore someone because of your own prejudice and quite
another to hesitate to put someone in a situation where he or she might suffer
discrimination from an external audience, such as your customers, that’s out of your
control. It’s difficult to say whether you’re doing someone a favor by setting him or
her up for possible failure in an environment that’s hostile.
Prejudice is difficult to overcome. As we’ve noted in earlier chapters, everyone
has biases. Some people don’t like very tall people, or very short people, or fat ones,
or skinny ones, or old ones, or young ones. Others have biases against brown eyes, or
blue eyes, or eyes with wrinkles, or big noses, or aquiline noses, or balding heads, or
hair that looks too long. Some people favor individuals from certain schools or from
particular parts of the country. What if someone interviews for a job and, as in this
case, he is just plain unattractive; or she’s deaf; or he had cancer three years ago; or
she speaks English with an accent? Do those qualities have anything to do with an
ability to do the job or with talent? What kind of response would the Golden Rule
prescribe? Kant’s categorical imperative? How about Rawls’s veil of ignorance?
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Some employers have a ‘‘corporate profile’’ in mind when they hire, especially
when they’re trying to fill positions with ‘‘extensive public contact.’’ Some large
Fortune 100 companies are well known for their penchant for hiring certain types of
employees. They look for healthy young people with regular features, moderate
height, a medium build, and no discernible accent. Do employers with a conscious or
subconscious ‘‘corporate profile’’ think that the public or their customers are somehow
homogeneous? If history had used a corporate profile as a yardstick, Abraham
Lincoln, Benjamin Franklin, Marian Anderson, Albert Einstein, Sammy Davis Jr., and
Franklin Roosevelt may have been relegated to positions with ‘‘no public contact.’’
Talent and ability come in a variety of packages. When managers use anything
other than those two factors to evaluate qualifications for hiring, promotions, or work
assignments, they shortchange not only the individual but also their employer and their
customers (who surely come in a variety of packages). They also help perpetuate
stereotypes, instead of trying to build a workforce that reflects real life. One way to
hire is to deeply understand your own organizational culture and to hire based on how
well a candidate will ‘‘fit’’ into the existing culture. Both the organization and the
employee are likely to be more satisfied when a good fit is achieved. For example,
think about a family-oriented organization, like Starbucks, that tries to demonstrate
great care for its employees. What would happen if a manager hired an edgy, highly
competitive person who doesn’t care about relationships? How would that type of
person fare in a touchy-feely company? It would be far smarter for a manager to
look for candidates who demonstrate the same qualities that the company values,
because those are the people who will succeed in the company culture. On the other
hand, companies that stick too closely to a corporate profile can risk being accused
of discrimination (as happened to Abercrombie & Fitch when the ‘‘look’’ the com-
pany was attempting to achieve seemed to exclude qualified individuals from certain
minority groups). Or, they risk becoming too homogeneous and therefore resistant to
needed change. So managers must strike a delicate balance. They need to hire peo-
ple who fit the current culture, but also they need to be open to people who fit, but
may be different. To be successful, organizations need to nurture strong cultures that
have enough differences to encourage innovation and balance and that counter the
tendency to hire to a ‘‘profile.’’
Performance Evaluation
You were recently promoted to manager of a department with five profession-
als and two clerical staff. One of the professionals, Joe, is a nice guy; but he
simply hasn’t been able to match the performance of the others in the depart-
ment. When he tells you he has been interviewing for another job in a differ-
ent part of your company, you pull his personnel file and see that your
predecessor had rated Joe’s performance as ‘‘good to excellent.’’ You frankly
disagree. Joe has asked you for a recommendation. Based on the written
appraisals, you could give him a good one—but your personal observation is
at odds with the written evaluations. Joe’s prospective manager—your peer in
another department—asks for your opinion. What do you say?
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When we talk about performance evaluation, we’re really talking about two things.
First, there’s a written assessment of an employee’s performance. Most large compa-
nies have a formal performance management system, with forms to standardize the
process, and a mandate to complete a written evaluation on every employee (usually
once each year). These written appraisals usually have some influence on any salary
adjustments, and they usually become part of the employee’s permanent personnel
file. Second, there’s the informal process of performance evaluation that ideally is an
ongoing process throughout the year. When a manager gives continuous feedback—
when objectives are stated and then performance against those objectives is meas-
ured—employees generally aren’t surprised by the annual written performance
appraisal.
Why is continuous evaluation important? First, rewards and recognition are one
of the four drivers of employee engagement. Excellent managers recognize and
reward excellence as well as manage and improve the performance of workers who
are at a lower rung on the performance ladder. A training manager in New York City
tells a story about the importance of accurately and continuously appraising perform-
ance. ‘‘Imagine you’re bowling,’’ he says. ‘‘A bed sheet is stretched across the lane
and you can’t see what you’re doing. Your manager is the only person who can tell
you how you’re doing. What would happen if your manager told you how you were
doing only occasionally or once a year? How would your performance be affected if
he or she told you about your performance only when you got gutter balls? What
would happen if he or she commented just when you did well?’’ It’s only when your
manager gives you consistent feedback—reflecting the complete range of your
behavior—that you can improve your performance.
As we noted in Chapter 5, performance management systems do more than
almost anything else to signal what the organization cares about (including whether
ethics-related behaviors really matter) and to bake desired behaviors into the organi-
zational culture. If managers don’t do a good job at coaching employees and influ-
encing their performance, this valuable tool to drive culture and performance is
undermined. And if managers don’t communicate clearly that ethics-related perform-
ance matters, employees will focus on what does.
The practical problem with performance evaluation is that most managers hate to
do it. They especially hate to deliver negative feedback. It’s certainly easier to recog-
nize an employee’s achievements than his or her shortcomings. In any case, many
managers are so busy that they fail to recognize either. Pointing out an employee’s
deficient performance is extremely difficult for most managers. It’s such a thorny
issue that in a survey of 4,000 Fortune 500 executives, five out of seven executives
said that they would rather lie to employees about performance than confront them
about performance problems.
6 We even know of managers who have attempted to
conduct performance appraisals via e-mail in order to avoid their discomfort. But
performance evaluation is one of the most important activities managers do, and it
should be conducted regularly and in person. Most employees can and will accept
honest feedback if it is delivered in a clear, honest, and sensitive manner and if
expectations were clear in the first place. It is especially important to provide the
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employee with the specifics of any problem behavior, explicit goals for improvement
including a timeline, and follow-up.
In the last example, you as the manager think Joe has been inaccurately (and per-
haps even dishonestly) evaluated in the past. Since most employers require a rating of
‘‘good’’ or ‘‘satisfactory’’ before an employee can transfer to another job, you will
probably feel pressure to supply such a recommendation so Joe can qualify for the
transfer. This is a common problem. Many organizations have employees like Joe,
who are less than stellar performers but who are never confronted with their poor per-
formance and given guidance to improve. In Joe’s company, no manager has been
brave enough to bite the bullet and either try to get Joe to improve his performance or
initiate the termination process. It’s easier to pass Joe along to someone else—to turn
him into a Ping-Pong ball, bouncing from department to department, never really
improving his performance because no one will confront him with the truth. (In some
organizations, passing poor performers around the organization is called ‘‘turkey farm-
ing.’’) Because his previous written appraisals have been less than honest, prospective
managers get buffaloed into thinking Joe’s performance is adequate. It’s a vicious
cycle and a real disservice to the employee, his or her coworkers, and the organization.
Coworkers who are doing a good job will perceive the system to be unfair if someone
like Joe is getting a rating similar to theirs for his inferior work. They may even find
themselves picking up the slack for Joe. Perhaps the party most disadvantaged by this
kind of problem is the organization and its culture. Joe’s manager has sent the message
that ‘‘not very good’’ or ‘‘just OK’’ is good enough. It’s a dishonest message that
erodes organizational efforts regarding quality, integrity, and ethics.
One good way to ensure continuous performance evaluation is to establish a for-
mal system with the employees who report to you—whether or not your company
requires it—and certainly use it more than once each year. Meet regularly with every
employee and jointly agree to job objectives and how to measure success for each
objective. Make sure that your department goals are directly linked to corporate goals
and that the individual goals of the people who report to you are directly linked to
your department goals. Also ensure that ethics-related performance expectations
are included in goals and evaluation discussions. For example, have you talked
about your expectations for respectful interactions with coworkers, trusting relation-
ships with customers, fair treatment of subordinates, honesty and integrity in all busi-
ness dealings?
Remember the importance of driving employee engagement: establish a clear
line of sight between the goals of individuals and the organization and between the
results of the organization and the individual. Then meet weekly or monthly with
each employee and discuss how the employee is meeting his or her objectives. When
objectives and measurement standards are established in advance and progress is
tracked, it’s much easier for employees to perform. They know what the target looks
like, how to get there, and how they’ll know when they’ve met it. They will under-
stand and internalize what it means to create value. An ongoing process eliminates
the need to blast a nonperformer once a year and can greatly reduce misunderstand-
ing, resentment, and charges of discrimination or bias.
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Probably the best way to handle the situation with Joe is to meet with him and be
completely honest. ‘‘I can’t write you the kind of letter you want for the following
reasons. [Spell out the performance problems.] We can either wait until you get your
performance on track, or I can write you a letter that reflects my honest evaluation of
your work at this time. It’s your decision.’’ This approach will obviously be much
easier if you’ve been providing Joe with honest appraisal of his performance all along.
Discipline
Most managers view disciplining employees as something to be postponed for as
long as possible. Many people in a work environment simply ignore a worker’s short-
comings and hope the situation will improve. Discipline, however, is important not
only to ensure worker productivity but also to set the standard that certain behaviors
are expected from all employees, and to meet the requirements of the U.S. Sentenc-
ing Guidelines. As we discussed in Chapter 6, the Sentencing Guidelines specify that
all employees in an organization must receive consistent discipline for similar infrac-
tions. For example, in the case of employee theft, a secretary and a senior vice presi-
dent must be treated in the same way. The guidelines are violated if people in
different job classifications are treated differently—if one receives a slap on the wrist
and the other is suspended or fired.
In the case of Steven, the salesman who is always late, you as a manager could
be tempted to view disciplining his lateness as nitpicking. He’s a star after all, right?
However, it’s unrealistic and unfair to expect promptness from all of your other
employees and not from Steven.
As we noted in Chapter 7, research has given us clues about the most effective
ways to discipline employees. First, the discipline must be constructive and done in a
professional manner. For example, although you might be tempted to scream at
Steven and call him a jerk, that’s not going to change his behavior. It’s much more
effective to meet with him, explain the consequences of his lateness, and focus the
discussion on his behavior, not on him personally.
Second, the discipline should be done privately. Employees should never be crit-
icized in front of other employees. It’s just as embarrassing as being criticized in
Steven is a salesman who reports to you, the regional director of sales for an
office supply company. He has a great track record and has consistently sur-
passed his sales targets, but he has one terrible flaw: He’s not on time for any-
thing. He’s late both for meetings with you and for lunches with clients, and
the problem extends to his paperwork. His expense reports, sales reports—
everything is handed in a week late. As his manager, you’ve counseled him
about his tardiness, and he has improved. Now instead of being 15 minutes
late for a meeting, he’s only 5 minutes late. And instead of submitting his
expenses a week late, they’re only two days late. His lateness seems minor in
view of his achievements, but it’s driving you and his coworkers crazy.
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public by your parent or your spouse, and it encourages nothing but hard feelings.
Those discussions should always be held behind closed doors.
Third, employees should have input into the process and be encouraged to
explain their side of the story. The entire idea of ‘‘team’’ management revolves
around individuals being encouraged to share their view of a situation. The real prob-
lem may not be with the particular employee you want to discipline. Steven, for
example, may be late with reports because people are late in submitting data to him.
To solve problems at the simplest point, it’s wise to ask for an employee’s
explanation.
Finally, discipline should be appropriately harsh and consistent with what other
employees have received for similar offenses. This aspect of discipline is perhaps the
most important in ensuring good performance in the future.
7
For example, a highly respected financial professional (let’s call her Beth) was
fired from her position at a large financial services company for providing an
inaccurate calculation in a report to senior management. The director of human
resources had given Beth an almost impossible assignment: use a new formula to
calculate the company’s pension obligations to all current employees. The assign-
ment was given at 6:00 p.m. on a Tuesday, and the report needed to be written, typed,
and copied for a senior management meeting the next morning at 9:00 a.m. Beth and
her secretary stayed at the office all night long, doing calculations, writing the report,
and finally preparing it for the meeting the next morning. When one of the senior
managers discovered an error in one of the complex calculations, Beth was summar-
ily fired by the human resources director. It sent a huge message not only to Beth, but
to the entire human resources department. Other mistakes had been made—even by
the director—and if those errors had been punished, it had been with a reprimand,
certainly not a firing. And, of course, the impossible deadline constituted an extenuat-
ing circumstance in everyone’s opinion except the director. The effects of
unreasonable discipline are far reaching, and that’s why discipline needs to be
appropriate to the offense and consistent with what others have received. In the case
of Steven, the tardy salesman, unless you’re willing to be consistent and accept tardi-
ness in all other employees, his behavior needs to be addressed. Just don’t follow the
example of the human resources director—she had been placed in the role as part of
her company’s grooming process of high-potential executives. If she had succeeded,
she surely would have moved on to bigger and better things. However, the executive
team viewed her behavior with Beth and others as erratic and ill advised. She left
human resources after a few years and ended up in a senior marketing role some-
where in one of the company’s subsidiaries—not in the enterprise-wide role she had
been on track for before the debacle.
How companies manage ‘‘star’’ employees is one of the most telling character-
istics of their ethical cultures. If an organization treats stars in a way that is consistent
with their organizational values, the culture of the organization will be strengthened.
On the other hand, if an organization states one thing in its values statement and
permits star behavior to deviate from the organization’s stated values, the entire cul-
ture can be undermined. For example, if a star employee is allowed to be abusive to
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coworkers in an organization that has stated that people management and respect are
core values, those values will be suspect. Employees will instead look to the very
visible star and perceive that his or her attributes are the ones that are really valued
by the organization (regardless of what appears on its values statement). Perhaps the
biggest cultural question is who gets to be considered a star in the first place. Does
only quantitative performance matter, or does performance based upon ethical values
also figure in (as we recommend)? In a strong ethical culture, a star would be some-
one who not only performs well in terms of the bottom line but also achieves that
bottom-line performance in a way that is consistent with other values such as respect
for people and integrity.
Terminations
You’re a manager in a large commercial bank. You discover that Patricia, a
loan officer who reports to you, has forged an approval signature on a cus-
tomer loan that requires signatures from two loan officers. When you con-
front Pat with the forgery, she apologizes profusely and says that her
husband has been very ill. The day she forged the signature, he was going
into surgery and she just didn’t have time to find another loan officer to sign
the authorization for the loan. Pat has been with your bank for 15 years and
has a spotless record.
Terminations come in many varieties, none of them pleasant. There are termina-
tions for cause—meaning that an individual has committed an offense that can
result in instant dismissal. ‘‘Cause’’ can represent different things to different
companies, but generally theft, assault, cheating on expense reports, forgery,
fraud, and gross insubordination (including lying about a business matter) are
considered as cause in most organizations. Many companies define cause in their
employee handbooks.
In the case above, Patricia will most likely be fired for cause. In banking, few
things are as sacred as a signature, and a professional with 15 years of banking expe-
rience would certainly be expected to know this. Forgery of any kind cannot be toler-
ated in a financial institution. It’s a sad case, and any manager would feel compassion
for Patricia. However, some offenses are unpardonable in a financial institution, and
this is probably one of them.
There are also terminations for poor performance. This type of firing is most
often based on written documentation such as performance appraisals and attendance
records. Many employers have a formal system of warnings that will occur before
someone is actually terminated for poor performance. A verbal warning is usually
the first step in the process, followed by a written warning and then termination. The
process can differ from company to company.
Then there are downsizings or layoffs. Layoffs can result from many kinds
of reorganizations, such as mergers, acquisitions, and relocations, or they can be
the result of economic reasons or changes in business strategy. A layoff can
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result from a decision to trim staff in one department or from a decision to
reduce head count across the company. Whatever the reason, layoffs are painful
not only for the person losing his or her job but also for the coworkers who’ll
be left behind. Coworkers tend to display several reactions: they exhibit low
morale; they become less productive; they distrust management; and they
become extremely cautious.8
In addition, layoff survivors are generally very concerned about the fairness of
the layoff. They need to feel that the downsizing was necessary for legitimate busi-
ness reasons; that it was conducted in a way that was consistent with the corporate
culture; that layoff victims received ample notice; and that the victims were treated
with dignity and respect. If management provided ‘‘a clear and adequate explanation
of the reasons for the layoffs,’’ survivors are more likely to view the layoffs as being
fair.9 Once again, if a company espouses respect and concern for employees in its
values statements or executive speeches and then lays off employees in a particularly
brutal way, it undermines employee confidence in the organization. Layoffs and other
terminations speak volumes about what a culture truly values. Smart companies
make sure that their actions are aligned with their values. These are just a few reasons
that layoffs have to be handled well.
Whatever the reason for a termination, you can take certain steps as a manager to
make it easier for the employee being terminated and for yourself.
10 Again, the main
goals are to be fair, to deliver the news in a way that is aligned with your organiza-
tion’s values, and to allow the employee to maintain personal dignity.
1. Do your homework before you meet with the employee. Prepare a brief
explanation of why this termination is necessary, and have ready an explan-
ation of the severance package being offered to this employee, including fi-
nancial and benefits arrangements. It’s also helpful to check the calendar and
consult with your company’s public relations department to ensure you’re
not firing someone on his birthday or on the day she receives recognition
from an industry group or professional association.
2. If at all possible, you should arrange to have an outplacement counselor or
human resources professional on hand to meet with the employee after you
have spoken to him or her. Most outplacement counselors advise managers
to give the bad news to terminated employees early in the day and early in
the week, if possible. This gives the employee time to meet with a counselor
if necessary. (Obviously, this advice doesn’t apply to employees who are
fired for cause.)
3. It’s generally a good idea to terminate someone on neutral ground—in a
conference room, for example, rather than in your office. In that way, you
can leave if the situation becomes confrontational. If possible, try to assess
what the employee’s reaction might be. If you’re about to fire a violent per-
son for cause (like assaulting a coworker), you might want to have security
nearby when you deliver the news.
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4. Speak privately with each individual and deliver the news face-to-face, not
by e-mail, telephone, or in a meeting or other kind of public forum. When
you deliver the news, be objective, don’t be abusive in any way, be com-
passionate, do it quickly (if possible), and never, never get personal.
5. Finally, keep all information about the termination private. Never discuss
the reasons for a firing with anyone who doesn’t have a need to know. The
exception to this advice is when numerous layoffs occur. Survivors—
coworkers who are left behind—will require some explanation of why lay-
offs were needed. In this case, you will want to speak about the business
reasons that made the layoff necessary. Never explain why particular
individuals were involved and others weren’t. (For more information on
downsizing, see Chapter 10.)
Terminations for cause don’t go unnoticed, and the employee grapevine will as-
suredly carry the news of a termination around your organization. That’s a good thing
because it’s important for employees to understand that bad acts get punished. How-
ever, it’s generally improper to publicly explain why an individual has been pun-
ished; the primary objective is to protect the dignity and privacy of the person who
has been punished.
Why Are These Ethical Problems?
Hiring, performance evaluation, discipline, and terminations can be ethical issues
because they all involve honesty, fairness, and the dignity of the individual. Rice and
Dreilinger11 say that the desire for justice is a ‘‘fundamental human characteristic.
People want to believe that the world operates on the principles of fairness; they react
strongly when that belief is violated.’’ In fact, most calls to corporate ethics hotlines
(discussed more fully in Chapter 6) relate to precisely these types of human resources
issues.
Costs
Much federal legislation exists to protect the rights of individuals in situations that
involve hiring, performance evaluation, discipline, and terminations. There are myriad
legal remedies for employees who feel they have suffered discrimination (see discrimi-
nation costs in Chapter 4 for more details). In response to increased litigation, employ-
ment practice liability insurance is a hot product among corporations. This insurance
covers organizations that are sued by employees over charges such as harassment, dis-
crimination, or wrongful discharge. The insurance, which was virtually unheard of
10 years ago, has been purchased by many Fortune 500 companies. This is surely the
result of the huge increase in litigation and in settlements. The Equal Employment
Opportunity Commission received more than 93,000 workplace discrimination
complaints in 2009, and monetary relief for victims totaled more than $376 million.12
Besides perhaps paying legal costs and fines, organizations that are charged with
discrimination can expect to pay a price in terms of employee morale and
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organizational reputation. Research evidence indicates that employees who perceive
that they have been unfairly treated are less satisfied, less likely to go the extra mile,
and more likely to steal from the organization.13
But smart organizations look beyond monetary costs when it comes to training
managers to manage the ‘‘basics’’ of the employer-employee relationship. Savvy
companies understand that managing the basics is the aspect of organizational culture
that’s probably most visible to employees. Those day-to-day activities—hiring, fir-
ing, discipline, rewards, praise, and so on—are concrete signals to employees about
how an organization really values its workers. If an organization pays no attention to
those basics and does not identify and train managers to perform those basics well, it
will be an uphill struggle to inspire workers to produce excellent results and to con-
vince them that the culture values employees and their efforts.
MANAGING A DIVERSE WORKFORCE
Experts predict that the workforce is becoming more diverse and that the key to many
managers’ success will be how well they can persuade diverse groups to sing together
as a well-tuned chorus. Companies that best address the needs of a diverse population
will probably be in a better position to succeed than companies that ignore this new
reality. Managers must be able to deal with individuals of both sexes and all ages,
races, religions, and ethnic groups. Managers need to have this ability themselves,
and they need to encourage this ability in team members. Managers must become
‘‘conductors’’ who orchestrate team performance—sometimes teaching, sometimes
coaching, always communicating with employees and empowering them to learn and
make good decisions.
The second skill set required of the new manager involves positively influencing
the relationships among other team members and creating an ethical work environ-
ment that enhances individual productivity. Everyone we work with has a range of
issues that could affect the ability to perform well. Many people are responsible for
children, parents, or other relatives. Many workers have chronic illnesses or condi-
tions or allergies, and those workers who are lucky not to have a chronic condition
can suddenly become ill or injured. Other employees have chemical dependencies,
such as an addiction to drugs or alcohol. Managers must be able to accomplish tasks
and the mission of a department or team despite the often painful events and condi-
tions that can distract team members.
Since a bias-free person hasn’t been born yet, managers also must be able to coun-
sel team members in their relationships with one another. Because every team will
include a wide range of personalities, a manager frequently needs to be a referee who
mediates and resolves disputes, assigns tasks to the workers who can best accomplish
them, and ensures that fairness is built into the working relationships of team members.
The examples that follow are similar to those in Chapter 4 but are presented from
the perspective of the manager rather than the individual. And, as we said earlier in
this chapter, managers have a different level of responsibility.
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Diversity
One of your best customers is a very conservative organization—a real
‘‘white-shirt’’ company. Reporting to you is David, a very talented African
American who could benefit greatly from working with this customer
account—and the customer account would benefit greatly from David’s
expertise and creativity. The issue is that David dresses in vibrant colors and
wears a kufi, an African skullcap. Your company long ago recognized
David’s brilliance, and his dress within the company isn’t an issue. But you
know your customer would react to David’s attire with raised eyebrows.
A diverse workforce consists of individuals of both sexes and myriad races, ethnic
groups, religions, and sexual orientations. The role of a manager is to create an envi-
ronment that maximizes the contribution of each individual. Since the population of
the United States is remarkably diverse, it makes perfect sense to believe that prod-
ucts and services offered to this population should be developed, produced, and mar-
keted by a diverse workforce.
The danger of ignoring this diversity was illustrated during an interview with a
chemical company executive. One of the company’s products is wallpaper. Even
though the wallpaper was of a very high quality and priced competitively, sales were
down. This was even more of a mystery since home repairs and renovations, espe-
cially by do-it-yourself decorators, were at record numbers.
Baffled by the problem, several senior marketing managers conducted cus-
tomer surveys and found that the company’s wallpaper patterns were the prob-
lem. Consumers viewed the patterns and styles as being outdated and
old-fashioned. The managers then investigated the process the company used to
select patterns and styles. What kind of market research was performed before
selecting patterns for the next season?
They discovered that even though female consumers made more than 90 percent
of all wallpaper purchases, no women were on the team of chemical company
employees who selected patterns for production. Male employees were making all
style decisions. The marketing managers and other executives insisted that women
and other diverse voices be included on the selection committee. The results were
immediate. As soon as the new styles of wallpaper appeared in stores, sales increased
substantially.
In the example at the beginning of this section, David’s attire could be viewed as
problematic by some managers. In this case, and others like it, honesty is the best
policy. You may want to tell David frankly that you want him to work on this account
because his ability would benefit the customer. You may perhaps say that the cus-
tomer is conservative and that his attire may distract the customer from his ability.
Let David decide how he wants to dress when meeting with the customer.
You may also be frank with your customer: Tell him or her that David is extra-
ordinarily talented and is the best person to add value to your relationship. To lessen
the surprise of the initial meeting, mention in advance that David often wears ethnic
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garb. This approach lets David know how the client might interpret his clothing, but
it doesn’t force him into some narrow corporate box. It also prepares the client to deal
with diversity. The point is to balance your interpretation of what a customer might
appreciate with David’s individuality and diverse voice.
Dress codes tend to raise some people’s hackles. The intention of most dress
codes is not to restrict individuality, but to ensure a professional appearance in the
workplace. Ethnic garb shouldn’t really be an issue, as long as it’s modest. The aim
of most dress codes is to eliminate clothing that could be viewed as immodest or too
casual to a customer. Dress codes are also a very visible manifestation of your orga-
nization’s culture, and how employees are advised to dress should be aligned with
other elements of culture. For example, if a company is casual and egalitarian, in-
formal dress is part of that. Managers may encourage formal dress in certain situa-
tions (such as when employees meet with conservative clients), but the reason should
be explained. This issue is all about having words match actions.
Harassment
Your profession has been traditionally a male-dominated one, and Marcia is
the only woman in your department. Whenever Sam, your senior engineer,
holds staff meetings, he and the other males in the department compliment
Marcia profusely. They say things like, ‘‘It’s hard for us to concentrate with a
gorgeous woman like you in the room,’’ or ‘‘You’ve got to stop batting your
eyelashes at us or the temperature in this room will trigger the air condition-
ing.’’ They compliment her apparel, her figure, her legs, and her manner of
speaking. Although flattering, their remarks make her feel uncomfortable.
She has mentioned her discomfort to you on several occasions, and you’ve
told Sam and the others to cut it out. They just laughed and told you that
Marcia was too sensitive. You think that while Marcia was being sensitive,
she did have justification for being upset about her coworkers’ remarks. (For
a review of the legal definitions of sexual harassment, see Chapter 4.)
Do compliments constitute harassment? They do when they embarrass someone and
serve to undermine an individual’s professional standing in front of coworkers. If
Marcia is disturbed by the remarks of her coworkers, it’s your responsibility as her
manager to do something about it. In cases like these, it’s sometimes helpful to reverse
the situation. Imagine that your department was predominantly female and that the
women continually said to the lone male, ‘‘You’re just a hunk.’’ ‘‘We all get aroused
when you bat your eyelashes at us.’’ ‘‘That’s a great suit you’re wearing; those slacks
really show off your gorgeous thighs.’’ How ridiculous does that banter sound?
In this case, Marcia’s discomfort is the issue, and it’s irrelevant whether you or
others think she’s being a ‘‘little too sensitive.’’ She has already taken the appropriate
steps, first by telling her coworkers to stop and then by approaching you when they
didn’t. You should meet immediately with the members of your department, either
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individually or as a group. To show the men how ridiculous their comments would
sound if women were saying such things to men, you could reverse the situation.
Explain to them that inappropriate compliments are not acceptable and that anyone
who behaves inappropriately in the future will be disciplined. Make it clear that every
member of the team has the right to feel comfortable on the team and to be treated
with respect. If you don’t act swiftly and firmly, and then back up future offenses
with disciplinary action, you may be inviting a lawsuit.
Here’s another kind of harassment:
One of your direct reports, Robert, belongs to an activist church. Although
you have no problems with anyone’s religious beliefs, Robert is so vocal
about his religion that it’s becoming a problem with other employees in your
department. He not only preaches to his fellow employees, but criticizes
the attire of some of his female coworkers and continually quotes religious
verse in staff meetings. You’ve received complaints about his behavior
from several employees. A few weeks ago, you suggested to Robert that he
tone down his preaching, and he reacted as if you were a heathen about to
persecute him for his beliefs. His behavior has since escalated.
It’s the manager’s job to maintain a balance between the rights of the individual and
the rights of the group—in this case, the attempt by one individual to impose his or
her opinions or behavior on other team members. The objectives are fairness and
respect for each individual.
It appears that Robert has crossed the line from expressing diverse views to
harassment. Although it’s important to recognize the value of diverse backgrounds,
it’s just as important to have an environment where one individual can’t constantly
attempt to impose his beliefs on other team members. Robert has ignored your re-
quests and those of his coworkers, and he continues to preach. This kind of behavior
will no doubt disrupt the team’s performance and the relationships among team
members. In this case, it’s probably reasonable to begin documenting Robert’s per-
formance since you’ve already verbally warned him. His hostility and his refusal to
respect the opinions of his coworkers and his manager can be viewed as
insubordination. In organizations that have a due process approach to discipline, the
next step might be a written warning to curb his attempts to influence the religion of
his coworkers, or termination will result. Then, if Robert’s harassment of his
coworkers doesn’t stop, he could be fired.
Family and Personal Issues
One of your direct reports is Ellen, who just returned from maternity leave.
She now has two children; her infant is four months old, and her older child is
three years old. Ellen is not only a talented worker but also a wonderful
person.
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Before the birth of her second child, she had no problem handling the
workload and the demands on her time; she had a live-in nanny who could
care for her child regardless of when she returned home. Recently, however,
her live-in left, and Ellen is now sending her children to a day-care facility
with strict opening and closing times. Although Ellen is very productive
when she’s in the office, her schedule is no longer flexible—she must leave
the office no later than 5:00 p.m. This has caused a hardship for all of her
peers, who must complete team assignments whether or not she’s present.
Although you don’t want to cause problems for her, the situation doesn’t
seem fair to her coworkers.
Family and personal issues are those situations and conditions that, though not di-
rectly related to work, can affect someone’s ability to perform. People simply can’t
leave their personal and family problems at home. The difficulty in situations like
these is achieving a balance between maintaining a worker’s right to privacy and
ensuring fairness to coworkers. The yardstick is that if someone is performing well,
and his or her attendance is satisfactory, there’s probably no cause for action by the
manager, beyond offering assistance if the worker wants it.
In Ellen’s case, she has a temporary inability to match her coworkers’ schedules.
Sooner or later, every worker must deal with situations that place limitations on the
ability to maintain certain working hours. Similar situations could result from a vari-
ety of other causes, including illness, family responsibilities, home construction, and
commuting schedules. The issue here is fairness in attendance, not in performance or
productivity. The ideal solution may be to build more flexibility into the working
hours, not just for Ellen but for the entire team. The ideal solution would involve
confronting the problem head-on by asking the people in your area to collaborate and
find a solution. For example, you could make an attempt to hold all team meetings in
the middle of the day, when everyone can attend. Individual activities could be rele-
gated to the afternoon, so that it would not be essential for Ellen—or anyone else—to
stay late and work as a group. If your organization has flexible work hours, you could
talk to your manager about the possibility of your area incorporating flexible work
schedules that allow people to arrive and leave at varying times, but ensure that the
office and department are always covered. The objective is to make life easier for
individual employees and fair for the entire group, and as a result enhance the team’s
overall productivity.
Personal illnesses and chemical dependencies of employees present a different
set of issues. These situations can affect work schedules as well as an individual’s
ability to perform. Most corporations have explicit policies for managing employee
illness. Generally, employees are guaranteed a specific number of sick days and then
must go on some sort of disability program. If, however, an employee hasn’t received
a formal diagnosis and is simply taking sick days, acting erratically, or showing a
change in his or her performance, you might suspect a physical or mental illness.
Encourage the employee to see a doctor, and consult with the company medical
department (if you have one) if you continue to be concerned about an employee’s
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health. It’s important to remember that illnesses of any kind—depression, cancer,
AIDS—are private and should be kept confidential. These conditions cause no danger
to coworkers, and many people who suffer from them can resume normal or modified
work schedules. Managers can help these employees by protecting their privacy and
by being fair and compassionate.
Drug or alcohol abuse is a different matter. Most corporations have policies that
prohibit any kind of drug or alcohol use on company premises, and many companies
have severe penalties for employees who are caught working under the influence of
alcohol or drugs. Both alcoholism and drug addiction are costly in terms of the abus-
er’s health, and they can both cause extreme danger in the workplace. A corporate
bond trader who’s high on cocaine can wreak havoc on himself, his employer, and
his customers. A pilot who’s drunk poses obvious risks to an airline and its passen-
gers. Would you like to ride with a railroad engineer who just smoked a few joints, or
have the sale of your home negotiated by a real estate broker who’s inebriated, or
have your child’s broken leg set by a doctor who’s high on amphetamines?
If you suspect that one of your employees is abusing drugs on or off the job, keep
track of any changes in behavior and performance, in writing. (Even if an employee
uses drugs or alcohol only off company premises, the residual effects of the substance
may affect job performance.) This is an important step because some medications
smell like alcohol on the breath, so it’s important to be sure that you’re dealing with
abuse and not a medical condition. Once you’re fairly certain that abuse is the problem,
contact your human resources department. Substance abuse is considered an illness
(and generally not an offense that will get the employee fired—at least in many large
corporations), and the employee usually will be counseled by human resources. If
abuse is present, most large employers offer substance abuse programs for employees
and will probably insist that your employee participate in such a program. In most large
companies, employees are given one or two chances to get clean. If the problem recurs,
substance abusers can be terminated. The important issue here is to get fast help for the
employee—for the sake of the employee, the company, and your customers.
Why Are These Ethical Problems?
These are all ethical issues because they concern fairness and respect for the individ-
ual. A large percentage of the ethical issues that arise in business are related to human
resources, and they can usually be addressed by local managers who act quickly,
fairly, and compassionately.
Costs
The personal, professional, and corporate costs of discrimination and sexual harass-
ment are described earlier in this chapter and in Chapter 4. The costs for mishandling
most issues connected to diversity are not clear-cut, and they’re often difficult to
quantify.
To glimpse how costly the publicity associated with such cases can be, we have
to look no further than the now infamous Texaco case, which is described in detail at
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the end of Chapter 5. Texaco executives were heard on tape complaining about
Hanukkah and Kwanzaa interfering with the celebration of Christmas, and recount-
ing the destruction of documents connected to a pending discrimination case.14 In the
wake of a firestorm of bad publicity, Texaco was forced to settle the case for $176
million. Obviously, the costs to Texaco—both financially and in damaged reputa-
tion—were significant. Yet those costs are just the tip of a giant iceberg. If we could
combine all of the fairness issues—performance evaluation systems, harassment,
subtle and not-so-subtle discrimination, and how managers handle family, substance,
and illness issues—and figure out how much it costs businesses when employees are
treated unfairly, the result would probably be astronomical, and not just in terms of
financial costs and damaged reputations. How many people leave a job because of
unresolved problems with a coworker? How many people choose not to go the extra
mile because the organization doesn’t treat its employees fairly? How many of the
best performers choose to work for a company that allows them flexible hours to care
for a child or an aging parent? How many people are depressed and frustrated be-
cause they’re picking up the slack for a coworker who’s a chronic alcoholic? The toll
in human suffering, morale, loyalty, productivity, and lost opportunity is inestimable.
THE MANAGER AS A LENS
Managers perform a crucial role in organizations because they interpret company
policy, execute corporate directives, fulfill all of the people management needs in
their particular area of responsibility, cascade senior management messages down
the chain of command, and communicate employee feedback up the chain. More
than almost anything else, managers communicate the culture of the organization up
close and on the ground to everyone who reports to them. Managers are probably the
most important ingredient in an organization’s success, and they are frequently the
most overlooked. But make no mistake—managers are the lens through which
employees view the company as well as the filter through which senior executives
view employees. As we noted earlier in this chapter, managers are the critical ingre-
dient in growing employee engagement: to many employees, managers are the com-
pany. Managers can be the inspiration for someone to stay with an organization or the
impetus for someone to leave. As a result, managers have more influence and need
more senior management attention, more training, and more communication skills
than any other employee group.
The Buck Stops with Managers
If we could take a peek at the innermost thoughts of managers, we might very well
encounter this sentiment: ‘‘I hope we do good work and get recognized for it. But most
of all, I hope there’s nothing going on that I don’t know about that could hit the fan.’’
As a manager, you’ll soon discover that your employees can bring you glory as
well as get you into big trouble. But the good news is that you can make investments
over time to help ensure that nothing hits the fan; or if it does, that you find out about
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it before it mushrooms out of control. As a manager, you can design your own little
insurance policy to help protect you and your organization from employees who
might cause problems.
You can begin to protect yourself by understanding and internalizing the idea
that the people who report to you are looking to you for guidance and approval. That
means that you need to actively manage ethics. Your employees want to know what
your rules are, so you need to think carefully about your standards and consciously
try to communicate and enforce them. Most important, you need to understand that
you are a role model and your employees will follow your example. (Read more
about the importance of ethical leadership in Chapter 5.)
Boris Yavitz, former dean of Columbia University’s Graduate School of Busi-
ness and a member of several large corporate boards, had sage advice for managers.
First, communicate your expectations and standards publicly and privately. Employ-
ees are more likely to respond to a direct verbal challenge from you—‘‘Are we doing
it right?’’—than they are to an expectation that’s expressed only in a policy manual.
Second, managers should prove their commitment through personal example. They
need to ‘‘walk the talk,’’ or no one will take their expectations seriously. Finally,
since employees are naturally inclined to protect managers from bad news, managers
need to explicitly tell employees that they don’t want that kind of protection. ‘‘Tell
me everything.’’ The best policy is to communicate loudly and clearly that you don’t
want protection. Of course, that also means that you can’t shoot the messenger who
brings you bad news, or it will be the last time you ever hear from a messenger.
BEGIN WITH CLEAR STANDARDS All organizations have standards, and many
organizations even have written standards. Written standards—usually in the form of
a mission statement or guiding principles—can be a double-edged sword. It’s great if
an organization has written standards that actually guide how it does business. It’s a
huge problem if those written standards are just window dressing, and the real stan-
dards have nothing to do with the ones that are printed up and hanging on the wall.
The disconnect between written standards and reality (referred to as cultural mis-
alignment in Chapter 5) destroys credibility, and a company can’t be effective over
the long term without credibility.
The same is true for managers. Any employee can tell you what the rules are for
working for a particular manager. ‘‘You must tell the truth here or you’ll be fired,’’
might be a rule, or ‘‘Don’t rock the boat,’’ or ‘‘Don’t tell me how you do it, just do
it.’’ The very best way for managers to gain credibility among employees (as well as
their respect) is to set clear standards, live by those standards, very deliberately com-
municate them, and insist that everyone adhere to them.
The truth is that employees are always trying to figure out if managers mean
what they say and if they support the values that the company has communicated so
well. Think about this case: The manager of a food processing plant consistently talks
about the importance of quality. ‘‘The consumer should always come first,’’ he says.
Then one day, a shipment of food is delivered for processing. The factory equipment
is ready to go, the employees have been waiting for this huge delivery—and the food
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is just on the wrong side of spoiled. ‘‘It’s good enough,’’ the manager says. ‘‘The
processing will kill any contaminants and the consumer will never know the differ-
ence because this will be flash-frozen after the processing. We’ll lose a lot of money
if we don’t process something now.’’ What message has he just sent to his employ-
ees? Suppose that a month later, an employee finds a few rodent droppings in a food
processing unit. It’ll cost a lot of money to stop the machinery and clean it, plus the
food already in the hopper would have to be destroyed. What do you think the
employee would do? Would he or she believe that the consumer comes first? Or
would the employee decide that it’s okay to cut a corner to save money?
It’s important to understand that, as a manager, you are setting standards and com-
municating organizational culture all the time. In fact, failing to deliberately set ethical
standards is a standard in itself, since your employees may very well interpret it as
meaning you have no standards. In this era of teams and empowered employees, man-
agers need to be very deliberate in spelling out what they stand for and ‘‘how things are
going to be done around here.’’ Those ethical standards have to be demonstrated by the
manager and enforced, or people won’t believe them. It’s what ‘‘walking the talk’’
really means. Plus, employees figure out what really matters to an organization by
observing manager behavior. This is how culture gets baked into an organization (and
once employee perceptions are baked in, they are very difficult to change).
DESIGN A PLAN TO CONTINUALLY COMMUNICATE YOUR STANDARDS Good
communication skills are at the very heart of effective ethics management. Without
them, it’s virtually impossible to encourage ethical behavior. Regardless of where
you are in the management hierarchy, if you haven’t made effective communication
your top priority, you had better get ready for some big surprises. Here’s a Big Truth:
If you don’t communicate with your employees, they won’t communicate with you.
You won’t know what’s going on; you’ll be out of the loop; you’ll be ignorant; you’ll
be inviting ethical transgressions. And in business, ignorance is definitely not bliss.
Communicating with one group of employees is not enough, because you’ll
know what’s going on only with them. You’ll see information about other employee
groups only through the filter of that one group. That’s why ‘‘management by walk-
ing around’’ always gets such high marks from management experts. Managers can
be knowledgeable only when they regularly interact with and listen to many different
people on many different levels. (You may think this is simplistic, but think about
how many top executives think they are communicating when they do it just with the
executives who report to them.)
Consider this example. A young, newly named CEO decided to create an execu-
tive floor and bring all of his most senior people together to improve communication
within the group and make it easy to work together. It happens all the time in compa-
nies around the world. Is it a good idea? Maybe not, since he effectively isolated not
only himself but also the rest of the executive team. He also created an atmosphere of
elitism within the organization.
You can improve the communication within your department by holding regular
staff meetings where you discuss the company mission, business results, and the way
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you want things done. Talk about what you stand for and what you want your depart-
ment to stand for. Use ethical language—for example, when employees are designing
a new program or product, ask them in a staff meeting if they have considered every-
one who could be affected by their plans. Ask them if they think they’re doing the
right thing. Framing business decisions in ethical terms goes a long way toward
increasing moral awareness, communicating your standards, and emphasizing the
importance of ethical behavior. It also helps reinforce ethical culture.
Once you have deliberately articulated and communicated your standards
both privately to individuals and publicly in front of your team, you need to
think about how approachable you are. You need to think long and hard about
how you react when people raise issues or ask questions or deliver criticism. If
you kill the messenger or react with hostility if someone asks a question, or if
you seem too busy to clarify directions, you are asking for trouble. Your people
may well consider you unapproachable, and managers who aren’t approachable
lay the groundwork for being blindsided. The first time they hear about a prob-
lem may not be from an employee, but from a lawyer, a newspaper reporter, or
a regulator. So, if you are a manager, work hard at being approachable. Drop in
on people who work in your area and shoot the breeze. Ask them what they’re
doing in and out of the office. Take your people out to lunch, and stay interested
in what they are thinking and feeling. Get to know one another. Build a relation-
ship. Learn to trust one another. Those relationships will be invaluable when
problems occur, as they surely will.
Managers Are Role Models
A number of years ago, then famous professional basketball player Charles Barkley
made sports headlines when he proclaimed, ‘‘I’m not paid to be a role model.’’15 A
colleague on the courts, Karl Malone, responded in an issue of Sports Illustrated,
‘‘Charles, you can deny being a role model all you want, but I don’t think it’s your
decision to make. We don’t choose to be role models; we’re chosen. Our only choice
is whether to be a good role model or a bad one.’’ Like Barkley, some managers may
not want to be role models. But Barkley and managers are indeed role models—not
because they want to be, but because of the positions they hold. Being a manager and
a good role model means more than just doing the right thing; it means helping your
employees do the right thing. A manager who is a good role model inspires employ-
ees, helps them define gray areas, and respects their concerns.
Managers can provide guidance to employees who encounter ethical dilemmas
by encouraging them to gather all of the facts and then evaluate the situation using
some of the advice detailed in Chapter 2. And after that, managers need to go further.
What happens if one of your employees raises an issue with you, and you don’t see
where there’s a problem? The employee goes away, satisfied for the moment with
your response that nothing’s wrong. But soon she is back because she still doesn’t
feel right about the situation. What do you do now? Probably the most responsible
thing you can do at that point is to offer to pursue it with her to make sure there is no
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problem. This sends a huge message to the employee and to her colleagues. First,
you’re saying that you’re glad she brought this to your attention. Second, you’re tak-
ing her seriously even if you don’t particularly agree with her. Third, you’re saying
that you trust her instincts and that she should, too. Fourth, you’re declaring that
ethics are important to you and to your organization—so important that you’re will-
ing to pursue this issue, even though you don’t agree, in an effort to make her feel
more comfortable. These are all critical messages to send to employees. (You also
may find that she is right in her suspicions.)
The most important thing for managers to remember about their job as role
model is that what they do is infinitely more important than what they say. They can
preach ethics all they want; but unless they live that message, their people won’t. As
a manager, all eyes are upon you and what you’re doing. Your actions will speak
much louder than your words, and if there is a disconnect between the two, you will
have no credibility—and employees may even question the credibility of your
organization.
MANAGING UP AND ACROSS
Gone are the days when a person could advance in an organization by impressing
only the next level of management. The new team structures mandate that workers
treat everyone well. An example of how some corporations are institutionalizing this
approach is an increasingly popular method of performance appraisal that some com-
panies call 360-degree feedback. This means that when reviewing an employee’s per-
formance, a manager asks for input from the employee’s coworkers and subordinates.
Feedback of this sort, which comes from all directions, is probably a much more
effective barometer of performance than old methods that measure only how well
people manage up. Of course, it means that workers need to carefully consider all of
their work relationships: up, down, and across. It’s also an indicator of what astute
workers have always known: since you never know who you might end up reporting
to, or who is going to be crucial to your success in the future, it’s critical to effec-
tively manage all of your work relationships.
In team situations, managers can still profoundly affect your future. They sign
off on or approve performance appraisals, pay raises, transfers, and generally are a
primary influence on your career mobility and trajectory. It can be difficult to over-
come a poor relationship with a manager unless you have solid relationships with
individuals on or above your manager’s level. That’s why it’s important for you to
cultivate your manager’s respect.
Although it may appear that your peers don’t have as direct an impact on your
career as your manager does, they nevertheless can significantly affect your future
success. Since you generally ‘‘get as good as you give,’’ if you don’t cooperate with
your peers, they’ll probably refuse to cooperate with you—perhaps even sabotage
you behind the scenes—and that lack of cooperation could cripple you. In addition,
peers can be promoted to management positions; this outcome can be truly
unfortunate if you haven’t developed good relationships with them.
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Honesty Is Rule One
Michael is a lawyer who reports to Paula, the corporate counsel for a chemical
company. During one particularly busy period, Paula asks Michael to prepare a
summary of all pending lawsuits and other legal activity for the company’s
senior management. Michael has several court appearances and depositions
cluttering his schedule, so he assigns the report to one of his paralegals, who
completes the report in several days. Since he’s so busy, Michael simply sub-
mits the report to Paula without reviewing it. When Paula asks him what he
thinks of the report, he assures her that it’s fine. The next day, Paula asks Mi-
chael into her office and says that she has found a major omission in the report.
Michael has no choice but to admit that he didn’t have time to review it.
Probably nothing trips up more people than the temptation to lie or stretch the truth.
And probably nothing will trip up your career faster than a lie or an exaggeration. In
business, your reputation is everything, and lying or exaggerating can quickly under-
mine it.
Michael has basically lied to his manager. Even if he can weasel his way out of
the hot seat by saying he didn’t have time to thoroughly review the report, he has
created an indelible impression on Paula. She may question not only his future
reports but also his activities in general. Michael could have told Paula up front that
he didn’t have time to prepare a report. He could have suggested that one of the para-
legals prepare it. He could have asked for more time so that he could carefully review
it. Paula may not have been thrilled with his analysis of the situation, but she proba-
bly would have understood and helped him look for another solution. However, by
implying that he had completed and reviewed the report when in fact he hadn’t
looked at it, Michael has severely damaged his reputation with his manager. A work-
er’s responsibility includes identifying a problem and then proposing a solution. If
you provide a solution when you report a concern, you stand a good chance of having
your idea implemented. If you just report an issue with no solution, you’ll probably
have a solution imposed on you.
Managers and peers rely on the information they receive from the people who
report to them and who work with them. Obviously, that information must be truthful
and accurate, or someone else’s work will be skewed. Once someone has reason to
doubt your veracity, it may be impossible for you to recover. As one executive said,
‘‘Lying will end someone’s relationship with me, period.’’ The message: Be com-
pletely honest about all aspects of your work, including your ability, the information
you provide, and your ability to meet deadlines. Keep your promises.
Standards Go Both Ways
It began when Bruce asked Andy to lie to his wife about his whereabouts. ‘‘If
Marcia calls, tell her I’m in Phoenix on a business trip,’’ he told Andy. Of
course, he had also confided to Andy that in case of an office emergency, he
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could be reached at a local golf tournament or at a nearby hotel where he was
staying with another woman. Since Bruce was senior to Andy and was a pow-
erful contributor in the department, Andy went along with his request. When
Marcia called, Andy told the lie about Bruce being in Phoenix. Bruce asked
several more ‘‘favors’’ of Andy, and Andy complied. Then Bruce asked for a
big favor: he instructed Andy to inflate monthly sales figures for a report
going to senior management. When Andy objected, Bruce said, ‘‘Oh, come
on, Andy, we all know how high your standards are.’’
Just as it’s important for managers to set standards within their departments, it’s
equally important for workers to set ethical standards with their managers and peers
and stick to them. The best way to ensure that you’re not going to be asked to com-
promise your values is to clearly communicate what people can expect from you.
In Andy’s case, he made his first mistake by going along with Bruce’s lie to
his wife. Although it’s tempting to help out a colleague—especially one who’s pow-
erful and senior to you—you’re sliding down a slippery slope when it involves a
lie. The chances are excellent that Bruce would not have asked Andy to lie about
the monthly sales figures if he hadn’t already known that he could manipulate
Andy. If Andy had refused to lie for Bruce on that first occasion, Bruce would proba-
bly have vastly different expectations of him. When Bruce asked Andy to lie to
his wife, Andy could have replied, ‘‘Hey, Bruce, don’t drag me into that one! I’ll
tell her you’re not in the office, but I’m not going to outright lie to her.’’ Andy
could have said it in an unthreatening way and Bruce probably would have under-
stood. Bruce might even have been embarrassed. But once Andy got caught up
in Bruce’s conspiracy, Bruce felt he would probably go along with other untruths.
The message: Say it politely, but say it firmly and unequivocally. If a coworker or
manager asks you to betray your standards—even in the tiniest of ways—refuse to
compromise your standards, or you’ll end up being confronted with increasingly
thorny dilemmas.
CONCLUSION
Employees are strongly influenced by the conduct of management, and managers
build and reinforce organizational culture with everything they say and do. That’s
why it’s so critical that individual managers understand how they are viewed by
employees. It’s also critical that managers understand that if they set high standards,
foster good communications, and act as ethical role models, they will have the power
to create an environment that encourages employees to behave ethically. Good man-
agers also understand their pivotal role in influencing subordinates, building ethical
culture, growing employee engagement, and inspiring people to do their best work.
It’s equally important that workers appreciate the importance of managing their rela-
tionships with the manager and their peers and know how to alert the company’s
senior executives to wrongdoing in the safest way possible.
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DISCUSSION QUESTIONS
1. Why is employee engagement important, and what is its relationship to ethics?
2. How does employee engagement relate to organizational culture? How do man-
agers contribute to the ethical culture?
3. In addition to identifying and training good managers, what else could an orga-
nization do to increase levels of employee engagement?
4. What specific action could a manager take to help move employees up the
employee engagement continuum—for example, from not engaged to actively
engaged?
5. Why should performance be measured as an ongoing process, and not just as a
once-a-year event?
6. Should high performers be allowed to work by rules that are different from
those that apply to other workers? Why or why not?
7. Imagine that you’re the manager of a facility where 200 layoffs are scheduled.
Design an action plan for how the layoffs would occur. How would you handle
both those being laid off and the survivors?
8. Are there ways in which managers can avoid harassment issues among employ-
ees who report to them? What would your strategy be?
9. Imagine that someone who reports to you is on a prescription medication that
makes his breath smell like alcohol. How would you handle this situation?
10. Imagine that one of your employees complained about being harassed by a
coworker. Also imagine that you suspect the motives of the person who is com-
plaining to you. How would you handle this situation? Is there a way you could
discern motivation, or does it matter? When would you involve your company’s
human resources department?
11. As a manager, how would you respond when a worker’s performance has de-
clined and you suspect a problem at home is the cause?
12. List some ways you can communicate your ethical standards to your employees
and to your peers.
SHORT CASES
EMPLOYMENT BASICS
You’ve recently been promoted to a supervisory position and are now responsible for
coordinating the work of four other employees. Two of these workers are more than
20 years older than you are, and both have been with the company much longer than
you have. Although you’ve tried to be supportive of them and have gone out of your
way to praise their work, whenever there is some kind of disagreement, they go to
your boss with the problem. You’ve asked them repeatedly to come to you with
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NOTES
1. M. Buckingham, The One Thing You Need to Know (New York: Free Press, 2005), 73–85.
2. A. Gopal, ‘‘Disengaged Employees Cost Singapore $4.9 Billion,’’ Gallup Management Journal
(October 9, 2003), www.gallup.com.
3. J. Shaffer, ‘‘Communicating for Business Results: How to Choose and Execute Communication
Projects That Dramatically Help the Company,’’ Journal of Employee Communication Management
(March–April, 2003), www.ragan.com.
4. Ibid.
5. Towers Perrin, ‘‘Global Workforce Report’’ (2008), www.towersperrin.com.
6. J. Halper, Quiet Desperation: The Truth about Successful Men (New York: Warner Books, 1988).
7. G. Ball, L. Treo, and H. P. Sims Jr., ‘‘Just and Unjust Punishment Incidents: Influence on Subordinate
Performance and Citizenship,’’ Academy of Management Journal 37 (1994): 299–332.
whatever issues they have; they just ignore you and complain to other workers about
reporting to someone your age. Design a strategy for dealing with these workers and
your manager.
MANAGING A DIVERSE WORKFORCE
After two years of sales calls and persuasion, a large, multinational petroleum com-
pany—Big Oil Ltd.—decides to sign with your employer, Secure Bank. Since Big
Oil is headquartered in Saudi Arabia and most of the meetings with the client have
been in the Middle East, Secure Bank’s senior executive in charge of oil and oil prod-
ucts companies, Julie, has not attended. Although the Secure Bank employees who
have met with the company have told the Big Oil executives that the lead on their
account will be a woman, the news must not have registered, perhaps because of
language difficulties. Today, the Big Oil reps are in Chicago to sign on the dotted
line and meet with Secure Bank’s senior managers; and of course, they’ve met with
Julie. A member of your sales team calls you to say that Big Oil’s senior team mem-
ber has told him he does not want Julie to work on their account, period. Because of
cultural issues, Big Oil execs are uncomfortable dealing with women from any coun-
try. As Julie’s manager, what do you do?
MANAGING UP AND ACROSS
As an operations professional, you need to be able to interact effectively with many
internal customers—from corporate managers to field representatives. One of your
peers is Jessica, who is a talented operations professional but who is downright rude
to her internal customers. Her attitude is so bad that people around your company ask
specifically to deal with you instead of Jessica. You’ve heard many tales about her
sarcasm and her unwillingness to deliver anything other than the absolute minimum
to other employees. You’ve thought about talking to Bruce, the manager to whom
both you and Jessica report, but you and everyone else knows that they’re dating. In
the meantime, your workload is increasing because of Jessica’s reputation. How do
you handle Jessica and Bruce?
318 SECTION III MANAGING ETHICS IN THE ORGANIZATION
http://www.gallup.com
http://www.ragan.com
http://www.towersperrin.com
E1C08 07/09/2010 Page 319
8. D. Rice and C. Dreilinger, ‘‘After Downsizing,’’ Training and Development Journal (May 1991): 41–
44.
9. J. Brockner, ‘‘Managing the Effects of Layoffs on Survivors,’’ California Management Review,
Winter 1992: 928.
10. Kenneth Labich, ‘‘How to Fire People and Still Sleep at Night,’’ Fortune, 10 June 1996, 65–71.
11. Rice and Dreilinger, ‘‘After Downsizing.’’
12. Equal Employment Opportunity Commission website (2010), http://www.eeoc.gov/eeoc/newsroom/
release/1-6-10.cfm.
13. J. Greenberg, ‘‘Employee Theft as a Reaction to Underpayment Inequity: The Hidden Cost of Pay
Cuts,’’ Journal of Applied Psychology 75 (1990): 56–64.
14. J. Leo, ‘‘Jellybean: The Sequel,’’ U.S. News & World Report, 10 February 1997, 20.
15. D. Gelman, ‘‘I’m Not a Role Model,’’ Newsweek, 28 June 1993, 56.
CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS 319
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S E C T I O N IV
ORGANIZATIONAL ETHICS AND
SOCIAL RESPONSIBILITY
321
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C H A P T E R9
CORPORATE SOCIAL
RESPONSIBILITY
INTRODUCTION
Thus far, we have emphasized ethical behavior ‘‘inside’’ the organization. We have
discussed why ethical behavior is important at work and how individuals who aim to
be ethical can make good ethical decisions. We have also discussed the psychology of
ethical decision making, including why individuals with the best of intentions can find
it difficult to do what’s right. We have outlined what organizations can and should do
to create strong ethical cultures that support employee ethics and what managers can
and should do, within those cultures, to lead their employees in an ethical direction.
These discussions about individual ethical decision making and behavior have some-
times taken us outside the organization because ethical decision making requires taking
into account harms and benefits to those outside the organization’s boundaries—such as
customers. But in this chapter’s discussion of corporate social responsibility (CSR), we
focus more explicitly on the relationship between the organization and its external
stakeholders. In today’s highly interconnected, global, and transparent world, corpora-
tions are finding that social responsibility is essential to fundamental business strategy.
They are also discovering that it is difficult to separate ‘‘internal’’ organizational ethics
from ‘‘external’’ social responsibility. Although most large companies have separate
people and structures to deal with internal ethics and external social responsibility
issues, these efforts are overlapping more and more because both depend on a solid set
of ethical values and an organizational culture that supports doing the right thing. So
values are the glue that holds the ethics and social responsibility enterprise together.
For example, making business decisions today to invest in environmentally sustainable
business practices is a strategy that is consistent with the organization’s value of respect
for the community and the natural environment while also signaling to employees that
the organization cares about people, the community, and its longer-term legacy.
Because many corporate social responsibility issues stem from the global nature of
business today, we will focus more extensively on global CSR issues in Chapter 11.
WHY CORPORATE SOCIAL RESPONSIBILITY?
A rich literature on corporate social performance suggests three reasons that corpora-
tions should care about social responsibility.1 We have divided these into a pragmatic
reason, an ethical reason, and a strategic reason.
322
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The pragmatic reason is that business must use its power responsibly in society
or risk losing it. Corporations exist as legal entities with certain advantages (such as
limited liability) because society allows them to do so, and these corporate rights and
advantages can be taken away from firms that are perceived to be irresponsible.
That’s exactly what happened to Arthur Andersen, formerly one of the ‘‘Big Five’’
auditing firms, when it lost its license to operate after being involved in the Enron
scandal. The perception of the corporation as a responsible societal actor is depen-
dent on multiple stakeholders’ views. Recall that we defined a stakeholder in Chap-
ter 1 as ‘‘any party (e.g., customers, employees, suppliers, the government,
stockholders, the community) who is affected by the business and its actions and
who has a stake in what the organization does and how it performs.’’2 In Chapter 2,
we used the concept of stakeholders a bit differently to refer to the people or groups
affected by a particular ethical decision. There, we said that a good ethical decision
considers harms and benefits to multiple stakeholders, and the best ethical decision is
one that creates the greatest societal good. Here, at the level of the corporation, the
stakeholder perspective places the corporation at the center of a web of constituents
(or stakeholders; Figure 9.1) who are affected by the actions of the business but who
can also affect the business in dramatic ways that can interfere with a firm’s auto-
nomy, economic success, and license to operate. Maltreated employees can strike,
dissatisfied customers can boycott products, interest groups can create harmful
publicity, owners can bring shareholder resolutions, and the government can pass
laws and regulations that limit a firm’s activities or even put the firm out of business.
Therefore the pragmatic reason for being responsible is that corporations must antici-
pate stakeholder concerns and act defensively to protect their reputation and viability.
It clearly can be costly not to anticipate stakeholder concerns. With the power of
instantaneous electronic communication, social networking, cell phone cameras,
Twitter, and YouTube videos, even relatively small stakeholder groups can get the
word out quickly about their concerns and have a huge, usually negative, impact on
very large companies. For example, when the organization People for the Ethical
Treatment of Animals released a hidden camera videotape from a West Virginia
Organization
Owners
Employees
CustomersSuppliers
CompetitorsGovernment
Community/
Interest groups/
Media
Financial
institutions/
Analysts
FIGURE 9.1 Stakeholder Perspective on the Firm
CHAPTER 9 CORPORATE SOCIAL RESPONSIBILITY 323
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chicken slaughterhouse showing workers stomping on chickens, squeezing them to
death, and flinging them against the wall (among other cruel acts), the company acted
quickly, sent in inspectors, and told the contractor that owned the plant to fix the
problems or lose its contract. The contractor fired 11 employees and made every
remaining employee at its 25 plants pledge to treat animals humanely. Although a
frequent corporate response to such a charge is denial or resistance, KFC and its
parent Yum Brands responded quickly to the challenge from an important stake-
holder group.3 Taco Bell, a fast-food restaurant selling Mexican food, is also a Yum
Brands company. After Mexican tomato pickers led a boycott, hunger strike, and
protest against the chain, the company agreed to pay a penny more per pound of
Florida tomatoes, to monitor suppliers, and to adopt a code of conduct that would
allow the company to drop suppliers who abuse farmworkers.
4
Another case in point is the environmental organization Rainforest Action Net-
work (RAN; www.RAN.org), which has influenced well-known companies such as
Citigroup, Home Depot, Lowe’s, Staples, Office Depot, and Boise Cascade. In the
short term, it may be hard to make the business case for the ‘‘green’’ practices that
RAN promotes. But when companies believe that their reputations as good corporate
citizens are at risk, the calculation quickly changes. And once they seriously consider
the organization’s environmental concerns, executives often adopt them as their own.
For example, RAN targeted Home Depot for sourcing wood from endangered forests.
In fact, the company realized that it didn’t even know where its wood came from at
the time.5 Now, the company knows the source of all of its wood; on its website
(www.homedepot.com), it claims to be integrating environmental planning into its
business and ‘‘taking the lead to preserve and protect our global resources,’’ includ-
ing ‘‘sustainable forestry practices.’’ Smart CEOs have benefited from opening a dia-
logue with reasonable reform groups. They cite Home Depot’s eco-friendly lumber
supply program, developed with RAN, and Starbucks’ work with Conservation Inter-
national to purchase coffee from farmers who preserve forests.
6
So under the pragmatic approach to corporate social responsibility, a firm’s manag-
ers scan the environment and are on alert to act in ways that avoid economic harm,
maintain legitimacy, and ensure a good corporate reputation.7 But this approach can be
risky if it is mostly reactive, acting on stakeholder concerns only after they are voiced.
For example, some stakeholders may not be deemed worthy of attention until after nega-
tive publicity has already substantially damaged the firm and its reputation. Then, the
firm has to play catch-up to repair the damage. Constructive engagement with stakehold-
ers, including a company’s critics, offers a new and increasingly popular approach.
Executives are learning that the plea to ‘‘just trust us’’ rarely works in a world plagued
by regular corporate scandals. Rather, a better approach is proactively analyzing the
stakeholder landscape and working with selected stakeholders who are willing to engage
in constructive dialogue. Goldman Sachs actually brought Rainforest Action Network
into the company to help draft its plan to become more environmentally responsible,
and Dell included environmentalists on a task force to craft a recycling strategy.
A more proactive, ethical reason for corporate social responsibility argues that
businesses, as part of society, have a responsibility to behave ethically. In this view,
324 SECTION IV ORGANIZATIONAL ETHICS AND SOCIAL RESPONSIBILITY
http://www.RAN.org
http://www.homedepot.com
E1C09 07/09/2010 Page 325
responsible executives have an ethical duty to care about multiple stakeholders
because it is simply the right thing to do. Social responsibility is as integral to the
business as is economic performance. With this perspective, deciding which issues
and stakeholders a firm should prioritize is an ongoing process of executive ethical
decision making. Consistent with our earlier discussions about how ethical decisions
should be made, executives weigh the harms and benefits to multiple stakeholders
(including shareholders) of the firm’s activities, and they aim to make decisions that
benefit the societal greater good. They prioritize their organization’s ethical values
and apply moral rules. And they consider their intentions, how the broader society
would react to a contemplated behavior, and what a ‘‘virtuous firm’’ would do. This
ethical perspective is more likely to support proactive corporate policies and prac-
tices that extend beyond current legal or regulatory requirements, such as the devel-
opment of quality products that contribute to societal welfare (whether or not these
are the most profitable), human resources practices that treat all employees fairly and
respect human rights everywhere, business processes that protect the environment
beyond current government regulations, and philanthropic contributions that help the
community. It also supports constructive engagement with stakeholders. As we’ll
discuss later, these proactive policies and practices may ‘‘pay’’ in the long term. For
example, the very best employees may be attracted and committed to firms that treat
people well. In addition, organizations that act in values-based ways often avoid legal
costs and other negative outcomes. But those who argue for the duty-based perspec-
tive argue that the positive ethical duty exists whether or not an economic payoff is
likely to result.8
In an interview in 2009, John Allison, Chairman of Branch Banking and Trust Cor-
poration (BB&T) talked of how values affect his business. Along with others, BB&T’s
values include honesty, integrity, and justice. Allison said that the company decided not
to be in the business of negative amortization mortgages. These mortgages (where the
payment is less than the interest and the mortgage balance actually increases) became
popular for a while, and they were highly profitable. But BB&T avoided the business
because they didn’t think it would be right for customers. According to Allison, ‘‘we
got beat up in the market. We also lost a number of mortgage producers who could
make more money working for Countrywide. . . . We believe that doing our best to
help our clients make the right financial decisions is good for BB&T. I believe that
while there may be short-term trade-offs by sticking to your values, you are never mak-
ing a sacrifice in the long run.’’9 By sticking to its values, the company not only pro-
tected its clients, it avoided contributing to the broader financial crisis as well.
Honda provides another excellent example of a company with strong ethical val-
ues that drive its business. The company is guided by its founder’s visionary princi-
ples, called ‘‘the Power of Dreams.’’ On the company website (http://corporate.
honda.com), ‘‘The Honda Philosophy’’ says: ‘‘We see things from a global perspec-
tive, always striving to create and produce products of the highest quality at a reason-
able price for worldwide customer satisfaction. . . . We see it as our responsibility to
serve humanity through our global commitments to helping protect the environment
and enhancing safety. . . . In every endeavor we pursue, we strive to be a company
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that people all over the world want to exist.’’ In an interview in 2005, Honda’s chief
engineer said, ‘‘everybody at Honda is fired by the dream of creating great products
that are the most fuel efficient in their class.’’10 So, even when SUV sales were
booming, the company was committed to fuel economy. That meant that Honda was
late getting into the truck market; and when they eventually did, they aimed to do it
with better fuel economy. Certainly, the company lost out on potential profit. But,
according to the chief engineer, ‘‘The point is not that customers demand it [fuel
economy] or don’t demand it, because that’s absolutely not the viewpoint of Honda.
When you are a philosophy-driven company, you don’t ask the customer if they
agree with your philosophy. . . . [At Honda] you are never going to get anything
approved by the board . . . without proving you have the best fuel economy in class.
That’s it.’’
11 So, at Honda, protecting the natural environment is a core principle
guiding business decisions—one that has proven to be costly in the short run but is
likely to pay off in the longer term.
A third reason to be socially responsible is a strategic one. Because Michael
Porter is a world-renowned business strategy scholar, writer, and consultant, many
observers were surprised to find him writing a major Harvard Business Review article
about corporate social responsibility in 2006. But, with coauthor Mark Kramer, he
outlined a strategic approach to CSR that begins by acknowledging the inter-
dependence of business and society. The authors rely on the premise that business
needs a healthy society because only a healthy society can produce a productive
workforce and the rules of the road that make business transactions possible. A
healthy society also needs business to innovate, create jobs, goods, and services, and
pay the taxes that support societal activities. Therefore the best CSR initiatives will
be simultaneously good for the business and for society. Importantly, the authors also
argued that the strategic approach to CSR offers managers a stronger basis for mak-
ing decisions about which stakeholders and social responsibility issues should garner
their attention and resources given the multitude of options available. They proposed
that each firm should carefully analyze its own business in search of those initiatives
that will provide opportunities to create shared value—value for the business and for
society simultaneously. They propose that companies should begin this analysis by
scrutinizing the social impacts of the company’s value chain. The value chain, a con-
cept Porter introduced earlier to strategic management, describes all the normal busi-
ness activities of a firm that add value as a product or service passes from one part of
the business to another. For example, in a manufacturing operation, one would con-
sider inbound logistics (e.g., raw material acquisition and transportation), manufac-
turing operations, outbound logistics, marketing and sales activities, and post-sales
support. Support functions such as human resources management and firm infra-
structure undergird the entire value chain and should also be considered. Managers
involved in the firm’s daily operations are asked to look carefully at the value chain
and consider where in the chain the firm creates harm or has the potential to do so,
with an eye toward reducing such harm. Therefore a natural resources company
would focus more on environmental issues while a company that sells toys might
need to focus more on child safety issues. We would add that this kind of analysis is
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also an opportunity to identify where the company has the potential to do social good
because of its unique knowledge and expertise. For example, one could say that
FedEx is in the dependability business. Packages need to arrive at their destination
no matter what the weather or other contingency, so the company prepares itself to
handle these contingencies. Such preparation made the company invaluable after
Hurricane Katrina. It had prepared by positioning ice, water, generators, and facility
repair kits in key locations. The company was also ready with 60 tons of Red Cross
provisions, something it does routinely in advance of such disasters. The company
was able to repair a FedEx radio antenna in New Orleans, thus providing rescuers
with reliable radio communications that had been lacking for days.12
Value chain activities should be considered prime candidates for corporate social
responsibility initiatives because they benefit society by reducing harm (or doing
social good) and can also help the company by reducing costs or by improving its
reputation. According to Porter and Kramer, the firm should study best practices for
addressing these issues, create clear goals and evaluation criteria, and implement the
initiatives. The authors call this approach ‘‘responsive CSR.’’
But, to make the approach truly strategic, Porter and Kramer argue that firms
should also consider how they can leverage potential CSR initiatives in a unique way
that also helps the company succeed in its competitive environment. Such initiatives
contribute to societal good while strengthening the company’s competitive position.
The most strategic CSR initiatives are those that actually add a social dimension to
the firm’s overall competitive strategy. For example, Porter and Kramer note that
Toyota did this quite successfully by devoting significant resources to developing its
Prius hybrid car. Given societal need for more fuel-efficient cars and reduced carbon
emissions, it made a lot of sense for a car company to focus resources on developing
a more environmentally sustainable automobile and to do so in a way that enhanced
its reputation with customers as an innovator. Not only does Toyota have the exper-
tise to do this work, but being among the first to offer affordable hybrid cars helped
the company’s competitive position and its bottom line. Toyota’s CSR situation is
now complicated by the number of safety problems with its vehicles that have
received much attention from multiple stakeholders such as the government and
media (case to be discussed more in Chapter 10). So, although the Prius may remain
a good example of strategic CSR, Toyota appears to have dropped the ball from a
more pragmatic and ethical CSR perspective.
The strategic approach is more proactive and affirmative than the pragmatic
approach because it asks companies to identify and acknowledge company activities
that can do harm (or that can be particularly helpful) and encourages firms to scruti-
nize their practices and address potential harms by focusing on their own value-chain
activities. In this way, companies need not wait for stakeholders to identify issues for
them and then react. They are proactively out in front of the issues, dealing with them
before they become problems. Perhaps this is where Toyota fell short. This approach
also provides guidance for how an organization can make the tough choices about
where to focus resources, thus targeting social responsibility issues that they can and
should do something about given their expertise rather than just following the crowd.
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Companies that follow this strategic approach will also not limit their CSR efforts to
only those that will enhance their bottom line, because focusing on the value chain
requires firms to address the harms they cause. This approach also challenges busi-
nesses to be innovative, to think about how they can be socially responsible in ways
that help the business and society simultaneously, and it encourages business to actu-
ally measure the social impacts of their efforts. But we would like to offer a caveat:
This approach can give the false impression that social responsibility always has the
potential to be profitable. In a book about managing ‘‘ethics,’’ it’s important to
acknowledge that socially responsible business practices are sometimes costly; but
for ethical reasons, companies must do them anyway. Students are often surprised to
learn that many companies make decisions that they know, at least in the short term,
will reduce their financial bottom line—and they do it simply because it is consistent
with their values and because they have decided that it’s the right thing to do.
BB&T’s decision to forgo the negative amortization mortgage business is one exam-
ple. Many more such examples come from the overseas business environment. For
example, a company may decide not to venture into a potentially profitable overseas
market (say Russia or Nigeria) because it would have to engage in corruption in order
to do so, and such behavior goes against its corporate values of honesty and transpar-
ency. Or, a company that has committed itself to sustainable business practices will
adhere to its more expensive U.S. guidelines when disposing of toxic wastes in devel-
oping countries despite little in the way of local regulation or oversight. They do this
because respect for human health is a fundamental value that has no national bounda-
ries. Therefore we believe that, in addition to assessing the company’s value chain
and the competitive environment, companies need to identify the core values that
will help them make tough ethical decisions about what they will and will not do,
and where to focus social responsibility resources.
Robert D. Haas, former chairman of the board of Levi Strauss & Co., discussed
the importance of company values this way:
Levi has always treated people fairly and cared about their welfare. The
usual term is ‘‘paternalism.’’ But it is more than paternalism, really—a
genuine concern for people and a recognition that people make this busi-
ness successful.
In the past, however, that tradition was viewed as something separate
from how we ran the business. We always talked about the ‘‘hard stuff’’
and the ‘‘soft stuff.’’ The soft stuff was the company’s commitment to
our work force. And the hard stuff was what really mattered; getting
pants out the door.
What we’ve learned is that the soft stuff and the hard stuff are
becoming increasingly intertwined. A company’s values—what it stands
for, what its people believe in—are crucial to its competitive success.
Indeed, values drive the business. . . . Values are where the hard stuff
and the soft stuff come together.
13
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We’ll offer one final caveat about the strategic approach. Social responsibility
efforts can backfire if the public perceives that the company engages in CSR pro-
grams only if and when it can profit from doing so. We routinely find students are
cynical in reaction to efforts that are perceived in this way. An interesting question to
ask yourself (and to discuss in class) is how you perceive such corporate efforts and
what influences your perceptions and those of your classmates. Understanding your
own and others’ perceptions can yield important insights that can help you later when
you’re in a position to make these kinds of management decisions.
TYPES OF CORPORATE SOCIAL RESPONSIBILITY
Another way to think about corporate social responsibility is to think of it in terms of
multiple types of responsibility. CSR has been conceptualized as a pyramid constitut-
ing four kinds of responsibility that must be considered simultaneously: economic,
legal, ethical, and philanthropic (Figure 9.2).14
Economic Responsibilities
The economic responsibilities of a business involve its primary function of producing
goods and services that consumers need and want, while making an acceptable profit.
This responsibility is considered to be primary and the bedrock of corporate social
responsibility because without financial viability, the other responsibilities become
moot issues. Fulfilling this responsibility effectively is considered to represent an
important ethical purpose of business because it provides good jobs, important
products and services, and contributes to a vibrant economy.
The late economist Milton Friedman is the best-known proponent of the 40-year-
old argument that management’s sole responsibility is to maximize profits for share-
holders. Yet people often forget what Friedman actually said—that management
should ‘‘make as much money as possible while conforming to the basic rules of
society, both those embodied in the law and those embodied in ethical custom.’’15 So
Philanthropic Responsibilities
Ethical Responsibilities
Legal Responsibilities
Economic Responsibilities
FIGURE 9.2 Corporate Social Responsibility Pyramid
Source: Reprinted with permission from the Foundation for the School of Business at Indiana
University, Business Horizons, July–August 1991.
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maximizing profits is not the sole responsibility after all, even for a staunch free-
market economist like Friedman. Interestingly, the statement above tacitly embraces
two of the three other components of the CSR pyramid: legal responsibility and ethi-
cal responsibility. This statement also means that some businesses simply should not
exist, because society has deemed them to be harmful no matter what their potential
for profit. An example might be child pornography, which is illegal in the United
States and many other countries. Most of us agree that no matter how many people it
might employ, or how much potential profit exists, child pornography is not a
socially responsible activity and organizations that engage in it should not be allowed
to exist.
Legal Responsibilities
Beyond its economic responsibilities, the pyramid shows that business is expected to
carry out its work in accordance with the current law and government regulations.
The law guiding business practice can be viewed as a fundamental precept of the free
enterprise system and as coexisting with economic responsibilities. As we said in
Chapter 1, the law can also be viewed as representing the minimum norms and stan-
dards of business conduct agreed upon within a society. But not every societal
expectation has been codified into law, and laws vary from state to state in the United
States and even more from country to country.
Ethical Responsibilities
Ethical responsibilities go beyond legal responsibilities to encompass the more
general responsibility to avoid harm and do what’s right, again relying on ethical
decision-making processes to make these decisions. It’s illegal to advertise or sell
cigarettes to minors in the United States. But a firm can continue to do so in countries
that have no such legal restrictions. In fact, that is what tobacco companies do in
many parts of Asia. Still, a tobacco company taking its ethical responsibility seri-
ously would cease advertising to minors everywhere because of the long-term harm
to health caused by tobacco addiction.
There are many good examples of companies going beyond legal require-
ments to fulfill what they perceive to be their ethical responsibilities. Johns
Manville, a manufacturer of specialty building products, goes beyond its legal
responsibilities regarding product safety—perhaps not surprisingly, given its
problematic history (more than 150,000 lawsuits alleging health problems from
exposure to asbestos). In addition to complying with U.S. law by placing warning
labels on all of its fiberglass products, the company also places warning labels on
fiberglass products being shipped to Japan. Such warnings are not required by
local law, and the company was even advised against it by the Japanese govern-
ment because the warnings might result in cancer fears. Tom Stephens, former
chairman, president, and chief executive officer, said, ‘‘But a human being in
Japan is no different from a human being in the U.S. We told them we had a
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policy. We had to have a label.’’ Although the company lost 40 percent of its
sales to Japan in one year, it was later able to rebuild its Japanese business.16
Thus the ethical responsibility category frequently intersects with the legal cate-
gory, pushing the expansion of legal responsibilities and placing expectations on
businesspersons to function at a level above the law.
Levi Strauss invokes its values when it says on its website (www.levistrauss.
com) that ‘‘Our values are fundamental to our success. They are the foundation of
our company, define who we are and set us apart from the competition. They underlie
our vision of the future, our business strategies and our decisions, actions and behav-
iors. We live by them. They endure.’’ Its four core values are empathy, originality,
integrity, and courage. In keeping with the values of empathy and integrity, Levi
Strauss was the ‘‘first multinational company to develop a comprehensive code of
conduct’’ designed to ensure that the company’s workers ‘‘anywhere in the world are
safe, and treated with dignity and respect.’’ Further, the company’s commitment to
diversity began in the 1940s, well before the U.S. Civil Rights Act of 1964. As an
example of courage (a value not commonly found on corporate lists), the company
notes that it became the first Fortune 500 company to extend full medical benefits to
employees’ domestic partners. That benefit was controversial at the time, but the
company believed it was the right thing to do.
Philanthropic Responsibilities
Philanthropic responsibilities center on the corporation’s participation in activities
that promote human welfare or goodwill generally through donations of time and
money or products and services. Because many people consider philanthropy to be a
completely voluntary or discretionary aspect of corporate social responsibility, fail-
ure to be philanthropic is generally not considered as unethical; some may question
whether it is a corporate ‘‘responsibility’’ at all. But, at least in the United States,
those with wealth (including wealthy businesses) are expected to share their good
fortune and are offered tax incentives for doing so. Andrew Carnegie, the nineteenth-
century steel baron who gave millions to charity (it would be over $7 billion today),
said, ‘‘He who dies rich dies thus disgraced.’’ He believed that the rich were morally
obligated to give their riches to the community and should do so during their life-
time.17 In a more recent version of the same belief, Bill Gates (the cofounder of
Microsoft) and his wife, Melinda, created the world’s largest (multibillion-dollar)
endowment. Gates stepped away from playing a day-to-day management role at
Microsoft in 2008 to focus full-time on philanthropy. The Gateses have decided to
give away 95 percent of their wealth. They are particularly interested in health
(AIDS, malaria, tuberculosis), agricultural development, and education. The founda-
tion has been credited with much of the progress in research on malaria, one of the
world’s worst killers. The Gates endowment is now supplemented by many more
billions pledged to the foundation by Warren Buffett, who decided to speed up his
own philanthropy when he learned that Gates was going to focus on the foundation
full-time
18 (see www.gatesfoundation.org). It took a while for Gates to join the ranks
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http://www.levistrauss.com
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of philanthropists, but now that he’s jumped on board, he hasn’t looked back. These
modern-day philanthropists are actively involved in tackling huge global ills, and
they demand accountability and results.19
Many companies engage in philanthropy routinely, often through foundations
that they create. It is difficult to know how much companies actually give, because
public disclosure is not required. Many firms now voluntarily disclose this informa-
tion in their CSR reports, and Business Week and Fortune both publish annual lists of
corporate giving. Some companies, such as Target and Whole Foods, regularly
donate a set portion of their profits to charity. Whole Foods stated in its mission state-
ment that it would donate 5 percent of its net profits, something it has done annually
since 1985. Target has been doing the same since 1962 and, interestingly, it surveys
customers to find out where it should give. Many companies will also match
employee giving or give employees time off to contribute in their communities.
Corporate philanthropy is sometimes aimed at generic causes, but it can also be
aimed at causes that are strategically tied to a company’s business (as Porter and
Kramer would recommend). As an example of a philanthropic effort tied to its busi-
ness, Boston’s Bain & Company provides heavily discounted management consult-
ing to charities through a nonprofit it created. Similarly, many pharmaceutical
companies either give drugs away to those who can’t afford them or slash prices to
make them more affordable. Abbott Laboratories (www.abbott.com), a pharmaceuti-
cal firm, provides its AIDS tests and protease inhibitor drugs at no profit in 35
African countries. In a speech to the 2002 Conference Board (a global membership
organization that brings executives together and disseminates knowledge about man-
agement) meeting on ethics, Abbott CEO Miles D. White talked about his recent visit
to Africa and his concern that providing these drugs at cost was still too expensive for
the AIDS victims who desperately need them to survive. He also discussed the chal-
lenge of balancing the demands of multiple stakeholders, who range from some
stockholders who believe that ‘‘their’’ money should not be spent on such philan-
thropic endeavors to activist groups and other stockholders who believe that the com-
pany, because of its knowledge and wealth, has special obligations to help those in
need of its medicines.
When the tsunami of 2004 hit Southeast Asia, FedEx jumped in to help. Vice
President Jack Muhs quickly chartered a plan at company expense to send 344,000
pounds of Pedialyte (made by Abbott Laboratories) to rehydrate children in need.
Over 100 companies (mostly in the United States) sent an estimated $178 million in
cash and medicine. Companies also used their distinctive competencies to help. For
example, Coca-Cola offered the use of bottling facilities and pledged to deliver
500,000 bottles of water in Thailand. Colin Powell said of the aid that it gave the
Muslim world the ‘‘opportunity to see American generosity, American values in
action.’’ Many of these companies helped quietly, not announcing or commenting on
their contributions.
20
In September 2005, corporations responded similarly to Hurricane Katrina vic-
tims in Louisiana, Mississippi, and Alabama. In fact, Wal-Mart responded so quickly,
efficiently, and generously to hurricane victims that many observers felt the company
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should play an official role in U.S. federal emergency management response efforts
because of its logistics expertise. Wal-Mart donated over $20 million in cash to
Hurricane Katrina relief and donated 1,500 truckloads of free merchandise, food
for 100,000 meals, and the promise of a job for all of its displaced workers. The
company’s response was so unparalleled that one observer said, ‘‘Wal-Mart has
raised the ante for every company in the country. This is going to change the face of
corporate giving.’’21
An interesting question is whether corporations that engage in philanthropy
should publicize their philanthropic efforts. For example, Berkeley business school
students advised Birkenstock to stop giving quietly to a pediatric AIDS foundation as
the company had done for years and instead to sponsor walks for causes that could be
publicized to advance the shoe company’s image. But CEO Matt Endriss rejected this
advice, suggesting that the meaning of the word responsibility is lost if social respon-
sibility is just about making money.22 Similarly, we heard the CEO of Lens Crafters
speak about the company’s efforts to collect customers’ old eyeglasses and fit them
on needy individuals in the United States and overseas. He showed a heartwarming
video about the work and its meaning to employees, the company, and most of all to
the recipients (many of whom could see well for the first time). When asked if the
company would be willing to share the video for use in business ethics classes, he
was clearly uncomfortable, saying that he would prefer not to do so because the com-
pany doesn’t engage in this work for publicity purposes. On the other hand, the phi-
lanthropy is an important part of the organization’s culture and, in his view, creates
an important sense of unity and employee commitment.
In our teaching, we often encounter student cynicism in response to corporate
philanthropy efforts, especially when students perceive that companies are engaging
in philanthropy in an attempt to compensate for other clearly harmful activities. For
example, people know that Enron was very philanthropic in the Houston community
and that Philip Morris touts its philanthropic activities while avoiding the fact that its
product, cigarettes, kills millions. If observers perceive that a company is simply
attempting to polish its image, cynicism is likely to result. Therefore the decision to
engage in corporate philanthropy should be separate from management decisions
about whether and how to publicize such giving. What do you think? Should compa-
nies publicize their philanthropic efforts externally? Or, should they treat philan-
thropy as a more internal matter?
If one believes that philanthropy is a responsibility for corporations, many other
questions remain about what types of initiatives make most sense (how closely they
should be tied to the company’s business, for example), how much to invest in them,
how to monitor and evaluate them, and whether to pay for philanthropic initiatives
through a firm’s operating budget or a foundation. Unfortunately, little research
exists to help us answer these questions.23Fortune magazine reports corporate gifts
as a percentage of revenue. Others suggest that a better measure would be donations
as a percentage of pretax or after-tax income or net earnings. Whatever the best mea-
sure, it is clear that most U.S. businesses are serious about their responsibility to give
back to the community through philanthropy.
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TRIPLE BOTTOM LINE AND ENVIRONMENTAL
SUSTAINABILITY
Yet another way to think about corporate social responsibility is in terms of what has
been referred to as the triple bottom line—a firm’s economic, social, and environ-
mental impacts. We have already discussed the economic bottom line, which refers
to the economic impacts of a firm. The social dimension refers to a firm’s impacts on
multiple stakeholders such as employees, customers, suppliers, and the broader com-
munity. The third dimension of the triple bottom line is the environmental dimension.
It recognizes the impact of business on the natural environment. The term sustain-
ability has sometimes been used to represent harmony among these three dimensions.
At other times, sustainability has come to be associated with environmental impact—
‘‘long-term growth that doesn’t deplete natural resources and lowers emissions of
greenhouse gases.’’24Sustainable development has been defined as ‘‘meeting the
needs of the present without compromising the ability of future generations to meet
their needs.’’25
Some companies are using sustainability as an umbrella term to encompass all
CSR efforts that make business more sustainable in the long term, including environ-
mental efforts. Others use corporate social responsibility as the umbrella term (as we
do) and sustainability to represent their social responsibility efforts aimed at preserv-
ing the natural environment. Whatever the terminology, it’s clear that more and more
attention is being paid to this type of corporate effort. In 2008, Fast Company pub-
lished a list of 50 ways companies are greening their businesses—everything from
Ford’s process for applying three coats of paint at one time to Enterprise Rent-A-
Car’s increasing the miles per gallon of its fleet to Staples’ modifying thousands of
its private label products to be more eco-friendly.26 In September 2009, Newsweek
published an article ranking the 500 largest U.S. companies based on environmental
performance and reputation. The top companies represent a wide variety of indus-
tries, including information technology, consumer products, retail, financial services,
and pharmaceuticals; the list also includes some surprises, such as an oil company
(Marathon Oil). The article noted that Wal-Mart (number 59 on the Newsweek list) is
working to create a ‘‘Sustainability Index’’ that will help its customers evaluate prod-
ucts based on their sustainability. And Intel (number 4 on the list) recently began
tying every employee’s annual bonus to the company’s sustainability performance.
As we noted in our earlier discussion of culture, this is a sure-fire way to get employ-
ees to focus on particular ethics-related goals.27
Early environmental efforts date back to concerns about air and water pollution
reduction that began in the 1960s and then to concerns in the 1970s about chemicals
called chlorofluorocarbons (CFCs) that, when released into the environment, were
eating away the earth’s ozone layer. Although ongoing concerns remain, efforts to
reduce pollution have been quite successful, particularly in Western countries. More
recent attention has focused on global climate change. Much credit for this recent
interest goes to former U.S. Vice President Al Gore’s movie, An Inconvenient Truth,
and the growing consensus among the most respected scientists around the world
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(including those at the first author’s institution, Penn State University) that global
climate change is real and is influenced by human-generated emissions of greenhouse
gases. In early 2007 the UN Intergovernmental Panel on Climate Change, including
the world’s leading scientists on the subject, issued a report documenting that climate
change exists, that human activity is a key driver, and that the many resulting likely
threats to humans include water shortages, dropping crop yields, and rising sea levels.
The report resulted from a review of hundreds of scientific studies and complex
supercomputer simulations.
Many American companies, including General Electric, Wal-Mart, and DuPont
Chemical, are making sustainability an essential part of their business strategy. This
is largely because executives of these companies agree with the scientific consensus.
But it is also a response to stakeholder expectations that companies will use resources
responsibly, recycle and reuse when possible, eliminate harmful toxins, and reduce
greenhouse gas emission.28 In addition, executives are rightly concerned because
energy costs are likely to continue increasing in this environment. Further, many
companies also operate in multiple markets, many of which (e.g., the European
Union) are increasing government regulation of carbon emissions. Therefore it
makes sense to operate according to the most stringent requirements. Savvy business
executives also see the call for change as a grand opportunity for business to innovate
and create the businesses and jobs of the future that provide solutions to climate
change problems. Following Porter and Kramer’s recommendations, some firms are
making environmental sustainability a cornerstone of their broader strategy and an
opportunity to achieve competitive advantage.
This attention to the natural environment represents quite a change from earlier
days when General Electric dumped toxic chemicals into New York’s Hudson River
and fought efforts to clean it up, DuPont was considered the country’s worst polluter,
and Wal-Mart was known for bulldozing its way across the country. In 2007, Fortune
magazine highlighted a number of companies that are seen as leaders in environmen-
tal sustainability efforts. One somewhat surprising entry on the list was DuPont,
which has gone from being known as a corporate polluter to a sustainability leader.
DuPont learned a great deal from its earlier experience with CFCs. Initially, it
resisted efforts to reduce them and suffered a battering of its reputation as a result.
Once it was forced to replace CFCs, the firm developed a highly profitable and envi-
ronmentally friendly substitute. Beginning in the 1990s, the company’s efforts really
intensified when a new CEO focused attention on these issues. Since then, DuPont
has substantially cut greenhouse gases, carcinogens, and hazardous wastes of all
kinds. It tries to do this by fundamentally changing (rather than tweaking) its pro-
cesses. Now, when managers are considering new products, they are required to
address the product’s environmental footprint as part of the business evaluation.
Another of the leading companies identified by Fortune is Hewlett-Packard, which
outlines its sustainability efforts in a detailed Global Citizenship Report. Although
high-tech companies tend to be particularly sensitive to these issues, Hewlett-
Packard is seen as one of the best. For example, the company’s own machines are
now completely recyclable, and HP makes huge efforts to mitigate the deleterious
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impacts of ‘‘e-waste.’’29 Yet another way companies are ‘‘going green’’ is through
their buildings. Adobe, the software maker, became the first company to receive the
U.S. Green Building Council’s platinum award for its headquarters in San Jose,
California, in 2006. This achievement is especially impressive because the company
did it not by building a new structure, but by overhauling an existing one. An invest-
ment of over $1 million is yielding nearly $1 million in annual savings, including
substantial reductions in electricity and gas usage.30
William McDonough and Michael Braungart’s book, Cradle to Cradle: Remak-
ing the Way We Make Things (2002), is causing many organizations to adopt a new
way of thinking about how to make their business more sustainable. The authors offer
a manifesto for transforming industry through what they call intelligent design and a
concept called ‘‘waste equals food,’’ in which no material is actually wasted but is
either used by another organism or returned to the earth through biodegradation. The
entire process is patterned after natural ecosystems. You can learn more about it at
the authors’ website (www.mcdonough.com).
A particularly stellar example of sustainability in action is Interface Carpets,
founded by Ray Andersen in 1973 to produce carpet tiles. Although you may not
have heard of this company, you have likely walked on its ubiquitous carpet tiles.
Interface Carpets is a billion-dollar global firm with sales in over 100 countries.
Andersen had a personal epiphany after reading Paul Hawken’s book, The Ecology
of Commerce (1994). He set the company on a new course to become a restorative
enterprise with a long-term commitment to sustainability and the goal of demonstrat-
ing to others that the company could operate in such as way as to ‘‘take nothing from
the earth that is not naturally and rapidly renewable, and to do no harm to the bio-
sphere.’’31 This goal is summed up in the company’s Mission Zero promise and its
pledge to climb ‘‘Mount Sustainability.’’ The company aims to be restorative not just
through its own efforts but by helping others do the same. The company’s website
(www.interfaceglobal.com) lists the seven fronts of Mount Sustainability: eliminat-
ing waste, ensuring benign emissions, using renewable energy, closing the loop,
achieving resource-efficient transportation, sensitizing stakeholders (including sup-
pliers and investors), and redesigning commerce. It lists milestone markers and what
it considers to be its greatest achievements. Here are just a few. The company has
planted almost 87,000 trees since 1997 to reduce the environmental impact of nearly
200 million miles of business travel. Over a quarter of the raw materials the company
now uses are biobased or recycled materials. Since 1996, water intake in manufactur-
ing is down 75 percent and energy intensity is down 45 percent. Seven of the com-
pany’s facilities operate completely on renewable electricity. The company refers to
its efforts as a long-term journey that continues. We encourage you to check out the
company’s website to learn more about its admirable accomplishments.
We’ll say more later about how corporate executives often have a knee-jerk
reaction to any additional government regulation. Interestingly, though, many execu-
tives are actually supporting increased government regulation in the environmental
arena as a way to reduce uncertainty about the future and level the playing field. For
example, influential CEOs from America’s carmakers and utilities have stated
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publicly that the climate change threat requires national legislative action to reduce
greenhouse gas emissions. In January 2009, executives from more than a dozen com-
panies (including General Electric, Xerox, ConcoPhillips, Caterpillar, and Duke
Energy) joined together to encourage the U.S. Congress to pass climate legislation
and offered their own policy recommendations. The legislation is expected to include
some kind of ‘‘cap and trade’’ system where the government limits emissions and
companies must purchase permits based on the amount of their emissions. Most
observers expect some sort of legislation to pass in 2010. In another surprising turn
of events, in 2009, a number of companies (including Apple Computer and public
utilities PG&E, Exelon, and PNM Resources) resigned from the U.S. Chamber of
Commerce because of disagreements over the Chamber’s fierce resistance to climate
change legislation.
As with other social responsibility efforts, there are often cynical reactions to
firms’ environmental initiatives. Terms like greenwashing have been used to describe
corporate efforts that are seen as disingenuous attempts at public relations rather than
sincere efforts to reduce environmental harm or to do good. So, once again, firms
need to think hard about how to represent their efforts publicly. Interested stakehold-
ers are quick to target insincere attempts to use the public’s interest in the environ-
ment to advance corporate interests.
On a more positive note, we’ve also found a great deal of interest in sustainabil-
ity initiatives among our students. In fact, many are beginning to see the sustainabil-
ity movement as a career opportunity that aligns with their own values. Students with
such an interest are finding more colleges and universities developing sustainability
training programs, including MBA programs that prepare students to operate sustain-
able businesses or to help traditional business become more environmentally respon-
sible. At Boston College’s Carroll School of Management, teams of students are
competing to give companies ideas that do good while creating unique business
opportunities. The winners of a 2009 competition created a program called ‘‘Green
with Envy’’ that offered green products and services including a recyclable telephone
and a program customers can use to reduce their carbon footprint and stay aware of
environmental issues.
32 We expect to see more of such programs in coming years.
IS SOCIALLY RESPONSIBLE BUSINESS
GOOD BUSINESS?
This is an age-old question to which we don’t have a perfect answer, although we
know a lot more about it than we used to. Anecdotes abound. We can probably all
name companies that appear to have ‘‘gotten ahead’’ in irresponsible ways, at least in
the short term. The financial companies that helped precipitate the recent financial
crisis come to mind. On the other hand, we can also identify companies that have
paid dearly for their irresponsible behavior; and finally, we can point to many suc-
cessful companies that are based on a foundation of social responsibility. Let’s see if
we can get beyond the anecdotes and look to the evidence.
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The Benefit of a Good Reputation
One argument that social responsibility does ‘‘pay’’ focuses on the value of a com-
pany’s reputation with key stakeholders. Norman Augustine, retired chairman of
Lockheed Martin, one of the largest defense contractors, recounted a situation when
the company’s ethics and social responsibility were on the line. When competing on
a government contract, the company received a brown paper bag containing their
competitor’s bid. They immediately turned it over to the U.S. government and told
the competitor about it. Lockheed lost the contract, employees lost jobs, and share-
holders lost money—huge short-term losses. But Augustine is convinced that the loss
was only short term. ‘‘We helped establish a reputation that, in the long run, will
draw us business . . . it always pays off in the long term.’’
But does reputation really matter? According to Business Week, ‘‘business has a
huge stake in the way the rest of society perceives its ethical standards.’’ On the neg-
ative side, scandals give business ‘‘a black eye’’33 and cost money. For example,
Exxon faced years of negative media scrutiny after the Exxon Valdez oil spill. On a
more positive note, a favorable corporate reputation ‘‘may enable firms to charge
premium prices, attract better applicants, enhance their access to capital markets, and
attract investors.’’34 In its 2 March 1998 issue, Fortune reported that if an investor
had bought $1,000 worth of stock in its top 10 most admired companies and rein-
vested the dividends, the investment would have compounded to $146,419—three
times more than a similar investment in the Standard & Poor’s (S&P) 500 would
have produced over the same time period. In general, research has supported the idea
that having a good reputation pays off in lower costs, higher sales, and the ability to
charge higher prices than firms with poor reputations can.
35 Studies have also found
that workers are more attracted to firms with a reputation for social responsibility.36
In a Stanford University study of 800 MBA graduates from 11 leading European and
North American business schools, 94 percent of the students said they would be will-
ing to forgo financial benefits to work for an organization with a better reputation for
ethics and corporate social responsibility.37 Once employed, people are also more
committed to organizations that have a ‘‘benevolent climate’’—one that focuses on
the welfare of employees and the community, while organizational commitment is
lower in ‘‘egoistic’’ climates (based on self-interest and people being out for
themselves).
Socially Responsible Investors Reward
Social Responsibility
Another way to think about this question is to focus on shareholders as a particularly
important stakeholder group and ask whether shareholders reward social responsibility.
We focus here on a particular group of shareholders who do—socially responsible
investors. It’s important to note that shareholders are not a unified group. Socially
responsible investors are those shareholders who clearly care about the financial and
the social bottom line of a business. Socially responsible investors insist that their
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investments meet ethical as well as financial criteria. They ‘‘put their cash where their
conscience is.’’ Although the social criteria vary, many of these investors shun certain
types of industries, such as nuclear energy, weapons, and tobacco, while supporting
companies that use energy wisely, protect the environment, and market safe products
and services. They may also consider the firm’s human resource practices, such as
female and minority advancement, day care, or profit sharing. Several socially respon-
sible stock indexes have emerged (e.g., KLD, FTSE4Good, Dow Jones Sustainability
Group Index, Domini Social Index 400), and being listed on one of those has value in
terms of corporate reputation. A number of brokers, financial planners, and mutual
funds also serve these investors’ needs in the United States and internationally where
socially responsible investing is also growing. A nonprofit trade association, the Social
Investment Forum (www.socialinvest.org), reported that socially responsible investing
grew from $40 billion in 1984 to nearly $3 trillion in 2007 (out of $25 trillion in the
U.S. marketplace). The association provides a long list of 173 different socially respon-
sible mutual funds, and these funds have managed to keep investors better than other
funds have.38 Growth in socially responsible investing is attributed to demand for such
products from both institutional and individual investors and growing concern about
the natural environment, among other forces. Institutional investors’ concern about
social responsibility has also grown. For example, CalPERS (the huge California
Public Employees’ Retirement System) pressures the companies it invests in to engage
in good corporate governance and socially responsible practices in areas such as human
rights and environmental responsibility (see www.calpers.ca.gov). What does this mean
for ethics and social responsibility? At least for this group of investors, shareholders’
interests are not distinct from employee, customer, and community interests; they’re all
interconnected.39
The Cost of Illegal Conduct
We said earlier that fulfilling legal responsibilities is one type of corporate social
responsibility. Failing to fulfill those responsibilities results in criminal conduct that
is extremely costly to the individuals and firms convicted.40 Since passage of
Sarbanes-Oxley, hundreds of corporate fraud cases have been brought to trial. Senior
executives have been sentenced to lengthy prison terms, such as Bernie Ebbers’
25-year prison sentence for his involvement in cooking the books at MCI and Walter
Forbes’ 2007 sentence to 12 years and 7 months in prison and $3.275 billion in resti-
tution for accounting fraud at Cendant. Despite the myth that white-collar criminals
go to a summer-camp-like ‘‘Club Fed,’’ that is simply not the case. Some who com-
mit financial crimes serve their time in higher-level prisons along with rapists, pedo-
philes, and drug dealers. For example, Dennis Kozlowski, the former CEO of Tyco,
and Mark Swartz, the former CFO, were sentenced in September 2005 in a New York
State court (not a federal court) to 8 to 25 years and will have to serve their terms in a
maximum-security state prison such as Attica—not a ‘‘Club Fed,’’ by any means.41
Even the minimum-security federal prisons are not pleasant places. Although there is
no razor wire, inmates have no privacy, are subject to body cavity strip searches, and
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eat prison food.42 Just ask Charles Gile, a former energy derivatives trader for
Citigroup who left behind his degrees from Vanderbilt and Wharton, medals from
Desert Storm, a home on the Connecticut coast, and a lovely wife and three children
to become inmate No. 59449-054 at a federal prison camp in Jesup, Georgia. He was
charged with overstating the value of energy-based derivatives and understating their
risk as a way to boost bonuses. He said, ‘‘This notion of Club Fed is terribly
inaccurate. . . . That place doesn’t exist. No nice meals—unless you consider the
bologna soup we had a couple of weeks ago a nice meal. I live in an open-air cinder-
block building. Sleep in a triple-decker bunk bed. There are six toilets. Seven show-
ers for 75 men.’’ He was allowed two possessions, eyeglasses and his wedding ring.43
Most inmates say that even worse than prison is the shame that a criminal investiga-
tion and conviction bring to one’s family. Criminals often lose their families as a
result. Finally, many of these executives, even if not convicted of a criminal offense,
will likely lose their personal fortunes as a result of other lawsuits. As one former
CEO inmate put it, ‘‘Life as you know it is over.’’44
From the firm’s perspective, stock prices also drop in the short term in response
to announcements of allegations of corporate crime and in response to announced
penalties.45 Financial performance suffers significantly over the five years following
a conviction.46 Companies often settle with prosecutors to avoid lengthy litigation.
For example, in late 2002, the top 10 U.S. brokerage firms agreed to pay $1.44 billion
in fines, completely separate their stock research from their investment banking oper-
ations, and pay for independent stock research. Merrill Lynch agreed to pay a $100
million fine earlier in 2002. The conventional wisdom says that firms don’t suffer
enough for illegal behavior. But one academic study examined the penalties imposed
on nearly 600 firms for financial misrepresentation over more than two decades.
Beyond the monetary penalties, which averaged $23.5 million, the researchers found
a much larger reputational penalty imposed by the market that was felt only after the
legal penalty was revealed. Firms lost 41 percent of market value on news of the
misconduct, and most of that decrease can be attributed to lost reputation.47
Interestingly, punishment comes from business partners as well. When illegal or
unethical conduct is revealed via the media, firms lose legitimacy with business part-
ners such that, after the illegal conduct is revealed, their executives are more likely to
serve on the boards of firms with lower reputations and profitability than before, and
the company’s own board members are more likely to come from firms with lower
reputations and profitability. More serious illegal or unethical conduct is associated
with even stronger effects. So firms that engage in illegal or unethical conduct find
that high-quality network connections are severed as those associated with more
profitable and reputable firms distance themselves.48
The Cost of Government Regulation
Another huge cost of irresponsible business behavior is increased government regula-
tion. Government is responsible for preventing serious risks to our system (for exam-
ple, by regulating industries such as financial services and electricity) and for holding
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companies accountable for the ‘‘externalities’’ they create. Externalities are costs to
society, such as environmental damage, that are produced by companies but not
reflected in the company’s cost structure.49 As consumers, we rely on the government
to hold companies accountable for their actions. We want to be sure that our air, food,
and water are safe; that airlines don’t skimp on maintenance, security, or pilot train-
ing; that physicians who work for managed care companies put patient care ahead of
profits; and that large financial institutions don’t take huge risks that can bring down
the entire economy.
After so many business scandals, business has experienced a regulatory back-
lash. You may have noticed that deregulated businesses (e.g., energy, telecommuni-
cations, and financial services) have been at the forefront of recent business scandals.
The lack of regulation of the mortgage-backed securities business contributed to the
recent financial crisis. In earlier scandals, Enron clearly took advantage of the lack of
regulation of its energy trading business to influence government officials and play
games with the numbers.50 And companies like WorldCom took advantage of de-
regulation in the telecommunications industry. As a result of these scandals, people
lose trust in business and demand more regulation.
When this book went to print in 2010, Congress was working on new regulations
for the financial industry aimed at avoiding another financial crisis and protecting
consumers in the financial services marketplace. In fact, a new consumer protection
agency, the Consumer Financial Protection Agency (CFPA), has been proposed to
promote financial product safety. It isn’t clear how much steam the move to increase
regulation will maintain—memories can be short in Washington, D.C. It is clear that
these regulatory movements receive a significant shot in the arm from scandals that
reduce public confidence in the ability of business to self-regulate.
The 1990s financial reporting scandals led the New York Stock Exchange to call
for reform. The reforms, passed in August 2002, enforce corporate board and audit
independence and require members to have codes of conduct. Congress passed the
Sarbanes-Oxley Act (commonly referred to as SOX) legislating corporate govern-
ance and accounting reform in July 2002. Among other things, the law sets up a new
oversight board for the accounting industry, requires that companies change their
lead auditor or coordinating partner every five years, reduces the range of services
auditors can offer, and bars senior executives from selling stock during certain
periods.51 In addition, CEOs and CFOs of public companies are required to certify
the accuracy of their financial statements, which they did for the first time in August
2002. A false certification can get the executive a $5 million fine and up to 20 years
in prison. Securities fraud is punishable with up to 25 years in jail, and shredding or
destroying documents in federal investigations can get the perpetrator up to
20 years.52 Section 404 of the Sarbanes-Oxley Act is considered the most burden-
some for companies. It requires firms to be able to show that their internal financial
control systems are sound and can prevent fraud. This requirement is difficult at best
and, according to the Wall Street Journal, has enriched the firms that conduct audits
while taking attention away from innovation and day-to-day business.53 So, although
some executives have acknowledged that the law has resulted in worthwhile
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improvements in their internal control systems (e.g., GE, United Technologies), other
business leaders have complained that the regulation is too costly—especially for
smaller businesses—and has driven companies away from U.S. stock exchanges. But
Business Week writes that the reforms have been successful because they have
increased the credibility of the markets and have caught a lot of real problems before
they became serious.54 Further, costs have decreased over time as companies
have streamlined their processes and become more efficient, and other countries
(e.g., France, Japan, China, Canada) have adopted similar rules. Finally, according to
Business Week, non-U.S. companies continue to flock to U.S. stock exchanges. Some
analysts say that the more stringent regulatory environment actually helps companies
by increasing shareholder confidence in financial reporting.55
Boards of directors of public companies are taking their oversight responsibili-
ties more seriously because of the new regulations as well, largely out of concern for
their own personal liability. Boards have fired a number of CEOs as a result (Harry
Stonecipher at Boeing, Hank Greenberg at the insurance company AIG, and many
more). At MCI (formerly WorldCom, of scandal fame), the board has taken a broad
stakeholder perspective on its duties. Its governance guidelines say that the board
should ‘‘maximize the long-term value of the company for its shareholders’’ by ‘‘re-
sponsibly addressing the concerns of other interested parties including employees,
customers, suppliers, government and regulatory officials, communities and the pub-
lic at large.’’ Those guidelines came into play when MCI’s board rejected a higher
takeover bid from Qwest in 2005 in favor of one from Verizon—leaving over
$1 billion on the table and angering short-term investors. The board looked ahead
and concluded that, in the long term, the Verizon bid would be worth more.56 As this
story points out, those who argue that a public company owes responsibility first to its
shareholders must answer a very important question—which shareholders? Day trad-
ers have very different interests than do those who plan to hold a stock long term.
In some cases, probably in attempts to stave off further government regulation,
companies in specific industries come together to self-regulate. In July 2002 the
Pharmaceutical Research and Manufacturers of America (PhRMA) embraced new
voluntary guidelines for how pharmaceutical sales representatives can market to phy-
sicians. For decades this has been fertile territory for conflicts of interest, and
PhRMA’s guidelines are the beginning of a cleanup. The code, an updated version of
which took effect in 2009, is posted on the organization’s website and specifically
prohibits pharmaceutical sales reps from paying for a range of perks they had
employed in the past to get access to physicians who make the decisions about which
drugs to prescribe. The perks ranged from dinners to ski vacations, sporting events,
and cruises, and even to paying for a physician to fill up his car at a service station—
all in an attempt to get air time with the doctors. Although PhRMA has no enforce-
ment provisions, many of the pharmaceutical companies are expected to take the new
guidelines seriously. Executives from Merck, GlaxoSmithKlein, Wyeth Ayerst, and
others have spoken publicly in support of the guidelines,57 and a long list of compa-
nies have now stated publicly that they intend to abide by the code. But the govern-
ment was not content to leave the companies to regulate themselves on this issue. In
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September 2002, the Department of Health and Human Services issued similar
guidelines prohibiting pharmaceutical companies from offering incentive payments
or any other ‘‘tangible benefits’’ to reward the prescribing or purchasing of their
drugs. Companies that flout the new standards can be investigated and prosecuted
under federal fraud and kickback statutes.58 In 2005, PhRMA also released a volun-
tary conduct code for print and television advertising of prescription drugs. Among
other principles, the companies pledge to educate doctors before beginning consumer
advertising campaigns (see www.phrma.org).
Responsible Care, a voluntary initiative of the chemical industry, was launched
in the United States in 1988 in response to major accidents such as the 1984 disaster
at a Union Carbide plant in Bhopal, India. The aim of this program is to secure the
public’s trust in the chemical industry by demonstrating responsible corporate citi-
zenship. Members subscribe to a voluntary code of conduct that is monitored and
enforced by the Chemical Manufacturers Association. The codes cover the following
areas: community awareness and emergency response, pollution prevention, safe dis-
tribution of chemicals in transit, employee health and safety, and safe handling of
chemicals from manufacture through disposal. The codes and policies extend beyond
legal compliance and focus on continuous improvement, communication with exter-
nal stakeholders, and training of suppliers on the standards.59
What the Research Says about Social
Responsibility and Firm Performance
In academic circles, arguments are made on both sides about whether corporate
social responsibility is related to financial performance. Some argue that CSR should
contribute positively to the bottom line by making multiple important stakeholders
more positively disposed toward the firm. Others argue that social responsibility is a
cost that robs resources from profits. Although difficult to research, studies on this
question have become more sophisticated over the years.
In an early and simple attempt to demonstrate a positive link between good
ethics and firm financial performance, James Burke, former CEO of Johnson &
Johnson, compiled a list of major companies with a reputation for ethics and social
responsibility. The group, including such recognized names as Johnson & Johnson,
Coca-Cola, Gerber, IBM, Deere, 3M, Xerox, J.C. Penney, and Pitney Bowes, grew at
a rate of 11.3 percent annually from 1950 to 1990, while the growth rate for Dow
Jones industrials as a whole was only 6.2 percent for the same period.
60
In a similar study, researchers compared the 2001 ‘‘100 Best Corporate
Citizens’’—as measured by a synthesis of the rankings by Kinder, Lydenberg,
Domini (KLD) an independent service that assesses corporate social performance of
companies in the S&P 500, based on firms’ responses to key stakeholder interests—
with Business Week’s financial rankings. Average financial performance of the
100 best corporate citizen firms was significantly better (more than 10 percentage
points higher) than the average financial performance of the rest of the S&P 500.61
These firms also had higher rankings in Fortune magazine’s 2001 reputation survey.
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Corporate citizenship was measured by rating companies’ service to seven different
stakeholder groups: stockholders, community, minorities and women, employees,
environment, non-U.S. stakeholders, and customers.62
Over the last 30 years or so, a growing number of academic studies have
attempted to document the relationship between social responsibility and financial
performance more rigorously.63 A recent statistical review (a meta-analysis) of 52
such studies found a positive relationship between CSR and financial performance,
especially when reputation-based measures of corporate social performance and
accounting-based measures of financial performance were used. In addition,
researchers have found that a reputation for higher corporate social performance is
associated with decreased firm financial risk.64 Finally, research has demonstrated
that companies with good corporate governance structures and policies (such as
strong shareholder rights provisions) have higher profitability, sales growth, and
market values as well as higher stock prices than do companies without such struc-
tures and policies. Gavin Anderson at GovernanceMetrics International (a firm that
evaluates corporate governance practices) suggests that, before investing in a com-
pany, wary investors should search for a pattern of previous litigation and regulatory
problems (available through the Securities and Exchange Commission and other
public data sources). Such a pattern suggests that the firm has a culture that tolerates
unethical and illegal behavior and should be avoided.
65
Research also suggests a reciprocal relationship, meaning that social responsibility
leads to increased financial performance and financial performance provides firms with
more slack resources that they can then devote to future social responsibility efforts.66
The study used an index of eight attributes of CSR as rated by KLD. Firms with
strong financial performance were rated higher on corporate social performance, sug-
gesting that companies that do well financially also allocate more resources to social
concerns—they ‘‘do good by doing well.’’ Those that are not in good financial health
may not have the funds to engage in philanthropy or other discretionary social per-
formance activities. The study also found that financial performance depends on good
social performance, suggesting that firms also ‘‘do well by doing good.’’ The authors
termed this the ‘‘good management theory,’’ arguing that good social performance is
related to other good managerial practices. It’s likely that these relationships are linked
in what the authors termed a ‘‘virtuous circle’’ in which good corporate social perform-
ance feeds financial performance and good financial performance makes it possible to
continue good corporate social performance. Clearly, being socially responsible doesn’t
harm the firm’s bottom line as some economists have suggested in the past. In fact, the
study’s findings suggest that a firm’s relationships with key stakeholders (e.g., employ-
ees, community, natural environment) are important to its financial performance.67
One difficulty of understanding the relationship between CSR and financial per-
formance is that most studies combine all types of social responsibility into one com-
posite. But different types of initiatives may have different effects. For example,
firms that made Working Mother magazine’s list of ‘‘Most Family Friendly Compa-
nies’’ for the first time experienced significant, positive, abnormal stock market
returns following the announcement that they were on the list.
68
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Further, many corporate executives believe that philanthropy contributes to the
bottom line, helping to attract and retain the best employees and helping to create a
brand that consumers will associate with caring and generosity. But previous research
had found mixed results. A recent study argued that these mixed results may occur
because the relationship is not a simple linear one. Interestingly, this study found an
inverted U-shaped relationship between corporate philanthropy and financial perform-
ance. The authors found that firms can benefit from philanthropy up to a point, argua-
bly because key stakeholders will be more cooperative and supportive of the firm as
theory suggests. The authors used the term excessive philanthropy to explain that,
beyond some optimal point, philanthropy becomes more of a cost and may raise con-
cerns among wary stakeholders who worry that too many resources are being
expended. The study also found that firms operating in more dynamic business envi-
ronments, where corporate reputation and image are likely most important, benefit the
most from corporate philanthropy.69 Therefore, although it’s clear that some philan-
thropy can be beneficial, research suggests that executives must work hard to find the
optimal point beyond which additional philanthropy is likely to be counterproductive.
In yet another attempt to look at specific types of initiatives, a recent study inves-
tigated the relationship between ‘‘green’’ initiatives (in particular, strategic invest-
ments to reduce emissions and pollution) and financial performance. Previous
research has generally found a positive relationship between environmental perform-
ance and financial performance and has credited that relationship to more efficient
utilization of resources. In this study of 267 firms, the authors argued that such in-
vestments reduce the risk of litigation, allowing the firm to direct resources more
strategically and ultimately improving investors’ perceptions of the company’s risk
profile. As a result, the authors argued, the firm’s cost of debt and equity capital
should be reduced; and they found support for these relationships. Therefore, in addi-
tion to improving internal efficiencies, external stakeholders respond positively to
environmental initiatives by reducing the firm’s cost of capital.
70
Research has also found that failure to be socially responsible is costly. One
study synthesized the results of 27 studies that covered over 2,000 incidents of so-
cially irresponsible or illegal behavior. Across these studies, stock prices decreased
significantly in response to socially irresponsible or illegal acts, thereby decreasing
shareholder wealth.71 These results suggest that there are definitely costs to being
socially irresponsible.
It is important to remember, however, that stellar social responsibility cannot
compensate for a poor business strategy. As suggested earlier, Levi Strauss has long
been known for its values and CSR initiatives (www.levistrauss.com). The company
is proud of its commitment to diversity, philanthropy, and its early establishment of
an ethical code for overseas manufacturers. But in the late 1990s, the company expe-
rienced a slide in revenue that took quite some time to turn around. A new CEO was
hired in 1999. He initiated a turnaround strategy aimed at product innovation, the
system of styles and sizes, and information technology initiatives. Over the long
term, it is clear that, to be successful, companies must have both excellent business
strategies and socially responsible business practices.
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Being Socially Responsible Because
It’s the Right Thing to Do
Finally, we propose that businesspeople may have another reason (besides the finan-
cial bottom line) to practice ‘‘good ethics’’ and social responsibility—because
they’re people first, who value their good reputations and the opinion of their friends,
family, and community. They’re guided by a moral compass that points them in an
ethical direction as well as a financial compass that points them toward considering
the costs and benefits of a decision. As one businessperson put it, ‘‘I can only really
speak for myself, and to me, my word is the most important thing in my life and my
credibility as an individual is paramount. All the other success we have had is
secondary.’’72
Ethicist Michael Josephson clearly separated good ethics from good business
when he said:
Goodness does not guarantee winning. And unless we can teach that to
people, they are always going to look for the angle . . . ethics [is a] sepa-
rate, independent evaluation of conduct. . . . Ethics is like your skin—it
goes with you everywhere. Ethics is a moral perspective that asks you to
judge your conduct in terms of what’s right and wrong, what’s decent,
what’s good, what’s honest, what’s honorable. The reason to be ethical is
simply that it’s the right thing to do.73
Consider Malden Mills, the Massachusetts manufacturer of Polarfleece and
Polartec fabrics. On December 11, 1995, while the CEO was celebrating his seventi-
eth birthday, the company experienced a catastrophic industrial fire that wiped out
three of four factories in Lawrence, Massachusetts. The fourth building was saved
through the heroic efforts of 27 union employees who fought the fire all night. No
one was killed in the fire, thanks to the efforts of employees who checked attendance
sheets, made a human chain, and dragged their fellow employees to safety. After the
fire, CEO Aaron Feuerstein carried the welfare of his employees, customers, and the
Lawrence community on his shoulders. ‘‘There is no way I would throw 3,000 work-
ers into the street—no way I would take Lawrence, Massachusetts, and condemn
them to economic oblivion.’’74 He quickly announced that he would keep his 3,000
jobless employees on the payroll for a month, which he extended to two months, and
then three months, while the factory was being rebuilt. Feuerstein paid out a total of
more than $15 million in wages and benefits to jobless employees after the fire.
Employees jumped to the challenge. Just a few weeks after the fire, productivity was
higher than it had been before the fire because of employees’ creativity and willing-
ness to work ‘‘25 hours a day.’’75 By summer, almost all of the employees had
returned to work, and the 400 unemployed got extended health benefits, help finding
work, and a promise of a job when the new plant opened. Feuerstein received acco-
lades from the workforce and the media, and President Bill Clinton invited him to
attend the State of the Union Address in 1996.
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Many in the business community thought Feuerstein should have pocketed the
insurance money and moved the company somewhere with lower labor costs, per-
haps overseas. But Fortune magazine later praised Feuerstein as an astute business-
man in his handling of the disaster. He treated his employees as an asset rather than
an expense, cultivated their loyalty, and bet on the company’s future. The decision to
rebuild the factory was also a rational one because insurance covers the replacement
cost of a factory only if it is rebuilt. If he hadn’t replaced the factory, Feuerstein
might have had to settle for the depreciated value of the burned building and its con-
tents. And moving the factory overseas would have risked losing the quality advan-
tage. Finally, Feuerstein took advantage of a mountain of free media attention from
People and Parade magazines, TV newsmagazines such as Dateline, and more.76
According to Fortune, ‘‘Any idiot with a strong enough stomach can make quick
money, sometimes a lot of it, by slashing costs and milking customers, employees, or
a company’s reputation. But clearly that’s not the way to make a lot of money for a
long time. The way to do that is to create so much value that your customers wouldn’t
dream of looking for another supplier. Indeed, the idea is to build a value creation
system of superior products, service, teamwork, productivity, and cooperation with
the buyer.’’77 This view jibes with Feuerstein’s philosophy. In a 1997 talk to manage-
ment professors at their annual Academy of Management meeting, Feuerstein said
his business objective is to win by creating a better-performing, higher-quality prod-
uct that is different from what competitors are making. To do that, you have to have
the right people, trust, and understanding. You have to extend to your people the
loyalty you want them to extend to you. Clearly, Feuerstein is an accomplished busi-
nessman. But he is also driven by deeply held moral beliefs. In that talk to business
professors, he quoted the Bible (in Hebrew!) on the responsibility of a rich man not to
praise himself for his riches, and to do kindness, justice, and charity in the commu-
nity. Given his moral beliefs, he believed that he had no choice but to rebuild his
factories.
In an unfortunate turn of events, Malden Mills was forced to file for bankruptcy
when it ran short of cash in late 2001 due to the cost of rebuilding after the devastat-
ing fire. However, Feuerstein remained optimistic because key customers remained
loyal (L.L. Bean, Patagonia, North Face, the U.S. Military), union employees volun-
teered major concessions, and members of the general public (including local towns-
people) sent notes of encouragement and sometimes checks! 60 Minutes aired a
laudatory segment about Feuerstein and the company on March 24, 2002, and the
company worked hard to develop new specialty products for growing markets includ-
ing the American military. The company emerged from bankruptcy protection in
2003. Michael Spillane, a Tommy Hilfiger executive, was named CEO in August
2004 about the same time the company announced that the U.S. Congress had
approved $21 million to purchase Polartec garments for the military and to support
continued research and development of electronic textiles that can remotely monitor
the physiology of soldiers in combat. The new corporate strategy includes expansion
into Asia, but research and manufacturing in the United States are also expected
to continue.
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Feuerstein lost control of his former company in June 2004.78 But he has said
that he didn’t expect anything in return for his magnanimous behavior in 1995. He
did it because it was right, not because there would be a financial payoff.79 ‘‘There
are times in business when you don’t think of the financial consequences but of
the human consequences.’’80 So to Feuerstein, the question, ‘‘Is socially responsible
business good business?’’ is the wrong question. Good business doesn’t refer to
just the financial bottom line. Good business is business that does well financially by
producing products that meet customers’ needs and by being responsible to employ-
ees and the broader community.
CONCLUSION
This chapter was designed to introduce the concept of corporate social responsibility
(CSR). Hopefully, we have convinced you that it’s good for business and that it’s
worth bothering about. The next chapter provides both classic and more recent exam-
ples of corporate social responsibility and irresponsibility. And the final chapter pro-
vides examples from the global business environment.
DISCUSSION QUESTIONS
1. Do you think corporate social responsibility is important? Why or why not?
2. Choose a company and analyze its CSR report. In doing so, think about what
seem to be its reasons for being socially responsible. Is it pragmatic, ethical,
strategic, or some combination? Can you identify its key stakeholders?
3. Using the same company as an example, think about the four types of corporate
social responsibility. What is your assessment of how the company is doing?
4. With reference to the CSR pyramid, what are the implications of stopping at a
particular pyramid level? For example, would it be all right if a company took its
sole responsibility to be financial responsibility to its shareholders? financial re-
sponsibility and legal responsibility? Do you agree that CSR is best represented
by a pyramid? Why or why not? Can you think of a better way to graphically
represent a company’s social responsibility?
5. Think about the television programs and films you’ve seen recently in which
business’ social responsibility (or lack thereof) was portrayed in some way. How
were business and businesspeople portrayed? Is there anything business could or
should do to improve its media image? Some businesses try to stay out of the
limelight. Why might that be? What do you think of that strategy?
6. Do you believe that employees are more attracted and committed to socially
responsible companies? Why or why not? Are you? Why or why not?
7. If you were running your own company, how would you communicate your CSR
strategy with employees, with external stakeholders, and why?
348 SECTION IV ORGANIZATIONAL ETHICS AND SOCIAL RESPONSIBILITY
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CASE
MERCK AND RIVER BLINDNESS
Headquartered in New Jersey, Merck & Co. is one of the largest pharmaceutical com-
panies in the world. In 1978, Merck was about to lose patent protection on its two
best-selling prescription drugs. These medications had provided a significant part of
Merck’s $2 billion in annual sales. Because of imminent loss, Merck decided to pour
millions into research to develop new medications. During just three years in the
1970s, the company invested over $1 billion in research and was rewarded with the
discovery of four powerful medications. Profits, however, were never all that Merck
cared about. In 1950, George W. Merck, then chairman of the company his father
founded, said, ‘‘We try never to forget that medicine is for people. It is not for the
profits. The profits follow, and if we have remembered that, they have never failed to
appear. The better we have remembered that, the larger they have been.’’ This philos-
ophy was at the core of Merck & Co.’s value system.
River Blindness
The disease onchocerciasis, known as river blindness, is caused by parasitic worms that
live in the small black flies that breed in and about fast-moving rivers in developing
countries in the Middle East, Africa, and Latin America. When a person is bitten by a
fly (and some people are bitten thousands of times a day), the larvae of the worm can
enter the person’s body. The worms can grow to almost two feet long and can cause
grotesque growths on an infected person. The real trouble comes, however, when the
worms begin to reproduce and release millions of microscopic baby worms into a per-
son’s system. The itching is so intense that some infected persons have committed
suicide. As time passes, the larvae continue to cause severe problems, including blind-
ness. In 1978, the World Health Organization estimated that more than 300,000 people
were blind because of the disease, and another 18 million were infected. In 1978, the
disease had no safe cure. Only two drugs could kill the parasite, but both had serious,
even fatal, side effects. The only measure being taken to combat river blindness was
the spraying of infected rivers with insecticides in the hope of killing the flies. How-
ever, even this wasn’t effective since the flies had built up immunity to the chemicals.
Merck’s Ethical Quandary
Since it takes $200 million in research and 12 years to bring the average drug to
market, the decision to pursue research is a complex one. Resources are finite, so
dollars and time have to go to projects that hold the most promise in terms of making
money to ensure the company continues to exist as well as of alleviating human suf-
fering. This is an especially delicate issue when it comes to rare diseases, when a
drug company’s investment could probably never be recouped because the number
of people who would buy the drug is so small. The problem with developing a drug
CHAPTER 9 CORPORATE SOCIAL RESPONSIBILITY 349
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to combat river blindness was the flip side of the ‘‘orphan’’ drug dilemma. There
were certainly enough people suffering from the disease to justify the research, but
since it was a disease afflicting people in some of the poorest parts of the world, those
suffering from the disease could not pay for the medication.
In 1978, Merck was testing ivermectin, a drug for animals, to see if it could
effectively kill parasites and worms. During this clinical testing, Merck discovered
that the drug killed a parasite in horses that was very similar to the worm that caused
river blindness in humans. This, therefore, was Merck’s dilemma: company scientists
were encouraging the firm to invest in further research to determine if the drug could
be adapted for safe use with humans, but Merck knew it would likely never be a
profitable product.
Source: D. Bollier, Merck & Company (Stanford, CA: The Business Enterprise Trust, 1991).
Case Questions
1. Think about the definition of stakeholders—any parties with a stake in the orga-
nization’s actions or performance. Who are the stakeholders in this situation?
How many can you list? On what basis would you rank them in importance?
2. What are the potential costs and benefits of such an investment?
3. If a safe and effective drug could be developed, the prospect of Merck’s recoup-
ing its investment was almost zero. Could Merck justify such an investment to
shareholders and the financial community? What criteria would be needed to
help them make such a decision?
4. If Merck decided not to conduct further research, how would it justify such a
decision to its scientists? How might the decision to develop the drug, or not to
develop the drug, affect employee loyalty?
5. How would the media treat a decision to develop the drug? Not to develop the
drug? How might either decision affect Merck’s reputation?
6. Think about the decision in terms of the CSR pyramid. Did Merck have an ethi-
cal obligation to proceed with development of the drug? Would it matter if the
drug had only a small chance to cure river blindness? Does it depend on how
close the company was to achieving a cure, or how sure they were that they could
achieve it? Or does this decision become a question of philanthropy only?
7. How does Merck’s value system fit into this decision?
8. If you were the senior executive of Merck, what would you do?
SHORT CASE
You have a long-standing consulting relationship with a large consumer products
company. This company represents 50 percent of your consulting revenues and is
clearly your most important client. The CEO has called to ask you to commit a
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NOTES
1. D. Swanson, ‘‘Addressing a Theoretical Problem by Reorienting the Corporate Social Performance
Model,’’ Academy of Management Review 20 (1995): 43–64.
2. E. Freeman, Strategic Management: A Stakeholder Approach (Boston: Pitman/Ballinger, 1984).
3. D. G. McNeil, ‘‘At Last, a Company Takes PETA Seriously,’’ New York Times, 25 July 2004, 4.
4. ‘‘First, They Took on Taco Bell. Now, the Fast Food World,’’ New York Times, 22 May 2005, 30.
5. M. Gunther, ‘‘The Mosquito in the Tent,’’ Fortune, 31 May 2004, 158–63.
6. ‘‘Confronting Anti-globalism,’’ Business Week, 6 August 2001, 92.
7. K. Davis, ‘‘The Case For and Against Business Assumption of Social Responsibilities,’’ Academy of
Management Journal 16 (1973): 312–22; D. J. Wood, ‘‘Corporate Social Performance Revisited,’’
Academy of Management Review 16 (1991): 691–718.
8. Swanson, ‘‘Addressing a Theoretical Problem.’’
9. J. A. Parnell and E. B. Dent, ‘‘Philosophy, Ethics, and Capitalism: An Interview with BB&T
Chairman John Allison,’’ Academy of Management Learning and Education 8 (2009): 587–96.
10. ‘‘Counting the Miles,’’ Newsweek, 27 June 2005, 40–42.
11. Ibid.
12. E. F. Kratz, ‘‘For FedEx It Was Time to Deliver,’’ Fortune, 3 October 2005, 83–84.
13. R. Howard, ‘‘Values Make the Company: An Interview with Robert Haas,’’ in Leaders on
Leadership, ed. W. Bennis (Boston: Harvard Business School, 1987), 33–54.
14. A. B. Carroll, ‘‘The Pyramid of Corporate Social Responsibility: Toward the Moral Management of
Organizational Stakeholders,’’ Business Horizons 34, no. 4 (1991): 39–48.
15. M. Friedman, ‘‘The Social Responsibility of Business Is to Increase Its Profits,’’ New York Times,
13 September 1970, 122–26.
16. C. Hess and K. Hey, ‘‘‘Good’ Doesn’t Always Mean ‘Right’.’’ Across the Board 38, no. 4 (2001): 61–65.
17. J. A. Byrne, ‘‘The New Face of Philanthropy,’’ Business Week, 2 December 2002, 82–86.
18. P. Sellers, ‘‘Melinda Gates Goes Public,’’ Fortune, 21 January 2008, 44–56.
19. Byrne, ‘‘The New Face of Philanthropy.’’
20. C. Chandler, ‘‘A Wave of Corporate Charity,’’ Fortune, 24 January 2005, 21–22.
21. M. Barbaro and J. Gillis, ‘‘Wal-Mart at Forefront of Hurricane Relief,’’ Washington Post, 6 September
2005, www.washingtonpost.com/wp–dyn/content/article/2005/09/05/AR2005090501598_pf.html.
22. M. Lewis, ‘‘The Irresponsible Investor,’’ New York Times Magazine, 6 June 2004, 68–71.
23. J. D. Margolis and J. P. Walsh, ‘‘Misery Loves Companies: Rethinking Social Initiatives by
Business?’’ Administrative Science Quarterly 48, no. 2 (2003): 268.
24. Z. Karabell, ‘‘Green Really Means Business,’’ Newsweek, 22 September 2008, E6.
25. Brundtland Commission, Our Common Future: Report by the World Commission on Environment
and Development (Oxford: Oxford University Press, 1987).
26. M. Borden, J. Chu, C. Fishman, M. A. Prospero, and D. Sacks, ‘‘50 Ways to Green Your Business,’’
Fast Company, November 2007, 90–99.
27. D. McGinn, ‘‘The Greenest Big Companies in America,’’ Newsweek, 28 September 2009, 35–56.
significant amount of time over the next couple of months to assist with a large
merger project. The company is merging with a large conglomerate whose primary
business is the sale and distribution of tobacco products. The CEO is relying on you
to assist in facilitating a smooth integration of the two companies. You promised
yourself that because your father died of lung cancer, you would never work for a
tobacco company. Is there a way that you can accept the consulting assignment and
still keep your promise to yourself? How will you handle this dilemma if you decide
that you cannot work for the tobacco company?
CHAPTER 9 CORPORATE SOCIAL RESPONSIBILITY 351
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28. A. A. Marcus and A. R. Fremeth, ‘‘Green Management Matters Regardless,’’ Academy of Management
Perspectives 23 (2009): 17–26.
29. ‘‘Green Is Good,’’ Fortune, 2 April 2007, 43.
30. ‘‘It’s Easy and Cheap Being Green,’’ Fortune, 16 October 2006, 53.
31. R. C. Anderson, ‘‘Doing Everything Right the First Time, Every Time,’’ American Way, 1 October
2007, 53–56.
32. ‘‘Boston College MBA Students Compete to Propose Socially Responsible Business for Verizon,’’
The Corporate Social Responsibility Newswire (January 6, 2010), at www.csrwire.com.
33. ‘‘Yes, Business and Ethics Do Go Together,’’ Business Week, 15 February 1988, 118.
34. C. Fombrun and M. Shanley, ‘‘What’s in a Name? Reputation Building and Corporate Strategy,’’
Academy of Management Journal 333 (1990): 233–56.
35. M. Rhee and P. R. Haunschild, ‘‘The Liability of Good Reputation: A Study of Product Recalls,’’
Organization Science 17 (2006): 101–20.
36. D. W. Greening and D. B. Turban, ‘‘Corporate Social Performance as a Competitive Advantage in
Attracting a Quality Workforce,’’ Business & Society 39, no. 3 (2000): 254–80.
37. D. B. Montgomery and C. A. Ramus, ‘‘MBA Graduates Want to Work for Caring and Ethical
Employers’’ (January 2004), at www.gsb.stanford.edu/news/research/hr_mbajobchoice.shtml.
38. S. Scherreik, ‘‘Following Your Conscience Is Just a Few Clicks Away,’’ Business Week, 13 May
2002, 116–18.
39. J. Melton, ‘‘Responsible Investing: $639 Billion and Counting,’’ Co-Op America Quarterly, Spring
1996, 13.
40. Adapted from a speech given by attorney Steven Alan Reiss at the Conference Board meeting on
business ethics, New York, 1992.
41. A. R. Sorkin, ‘‘Ex-Tyco Executives Get 8 to 25 Years in Prison,’’ New York Times, 20 September
2005, www.nytimes.com/2005/09/20/business/20tyco.html.
42. G. Colvin, ‘‘White-Collar Crooks Have No Idea What They’re in For,’’ Fortune, 26 July 2004, 60.
43. ‘‘Trader, Father, Veteran, Convict,’’ Fortune, 9 June 2008, 92–102.
44. G. Burns, ‘‘White Collars, Prison Blues,’’ (State College, PA) Centre Daily Times, 18 January 2004,
E1, E6.
45. J. L. Strachan, D. G. Smith, and W. L. Beedles, ‘‘The Price Reaction to (Alleged) Corporate Crime,’’
Financial Review 18, no. 2 (1983): 121–32.
46. M. S. Baucus and D. Baucus, ‘‘Paying the Piper: An Empirical Examination of Longer-Term Financial
Consequences of Illegal Corporate Behavior,’’ Academy of Management Journal 40 (1997): 129–51.
47. J. M. Karpoff, D. S. Lee, and G. S. Martin, ‘‘The Cost to Firms of Cooking the Books,’’ Journal of
Financial and Quantitative Analysis 43, no. 3 (2008): 581–611.
48. B. N. Sullivan, P. Haunschild, and K. Page, ‘‘Organizations Non Gratae? The Impact of Unethical
Corporate Acts on Interorganizational Networks,’’ Organization Science 18 (2007): 55–70.
49. R. Kuttner, ‘‘Everything for Sale,’’ Fortune, 17 March 1997, 92–94.
50. B. Nussbaum, ‘‘Can You Trust Anybody Anymore?’’ Business Week, 28 January 2002, 31–32.
51. C. Murphy, ‘‘D.C. Gets It Right,’’ Fortune, 2 September 2002, 38.
52. H. Fineman and M. Isikoff, ‘‘Laying Down the Law,’’ Newsweek, 5 August 2002, 20–25.
53. ‘‘Sox and Stocks,’’ Wall Street Journal, 19 April 2005, A20.
54. D. Henry and A. Borrus, ‘‘Governance: Death, Taxes & Sarbanes-Oxley?’’ Business Week, 17 January
2005, 28–31.
55. J. Weber, ‘‘SarbOx Isn’t Really Driving Stocks Away,’’ Business Week, 2 July 2007, 87.
56. K. Belson, ‘‘Why MCI Is Turning Up Its Nose at $1.3 Billion,’’ New York Times, 10 April 2005, 3.
57. J. George, ‘‘Big Pharma Kills Doc Giveaways,’’ Philadelphia Business Journal 21, no. 19 (2002), 1.
58. R. Pear, ‘‘Drug Industry Is Told to Stop Gifts to Doctors,’’ New York Times, 1 October 2002, A1.
59. A. Prakash, ‘‘Responsible Care: An Assessment,’’ Business & Society 39, no. 2 (2000): 183–209.
60. K. Labich, ‘‘The New Crisis in Business Ethics,’’ Fortune, 20 April 1992, 167–76.
61. C. Verschoor and E. Murphy, ‘‘Best Corporate Citizens Have Better Financial Performance,’’
Strategic Finance 83, no. 7 (2002): 20.
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63. K. E. Aupperle, A. B. Carroll, and J. D. Hatfield, ‘‘An Empirical Examination of the Relationship
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and Firm Financial Performance,’’ Academy of Management Journal 31 (1988): 854–87; A. H.
Ullman, ‘‘Data in Search of a Theory: A Critical Examination of the Relationships among Social
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2001); Margolis and Walsh, ‘‘Misery Loves Companies.’’
64. M. Orlitzky and J. D. Benjamin, ‘‘Corporate Social Performance and Firm Risk: A Meta-analytic
Review,’’ Business & Society 40, no. 4 (2001): 369–96.
65. P. J. Lim, ‘‘Gauging That Other Company Asset: Its Reputation,’’ New York Times, 10 April 2005, 6.
66. Margolis and Walsh, ‘‘People and Profits?’’; Margolis and Walsh, ‘‘Misery Loves Companies’’;
M. Orlitzky, F. L. Schmidt, and S. L. Rynes, ‘‘Corporate Social and Financial Performance: A Meta-
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Link,’’ Strategic Management Journal 18 (1997): 303–19.
68. R. Jones and A. J. Murrell, ‘‘Signaling Positive Corporate Social Performance: An Event Study of
Family-Friendly Firms,’’ Business & Society 40, no. 1 (2001): 59–78.
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Strategic Management Journal 29 (2008): 569–92.
71. J. Frooman, ‘‘Socially Irresponsible and Illegal Behavior and Shareholder Wealth,’’ Business &
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72. A. Bhide and H. H. Stevenson, ‘‘Why Be Honest If Honesty Doesn’t Pay?’’ Harvard Business Review,
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74. A. Feuerstein, Presentation at the Academy of Management annual meeting, Boston, 1997.
75. M. Ryan, ‘‘They Call Their Boss a Hero,’’ Parade, 8 September 1996, 4–5.
76. T. Teal, ‘‘Not a Fool, Not a Saint,’’ Fortune, 11 November 1996, 201–4.
77. Ibid.
78. S. Malone, ‘‘Spillane: Malden’s Next Chapter,’’ New York Magazine, 18 April 2005, 24.
79. J. Seglin, ‘‘The Right Thing: A Boss Saved Them. Should They Save Him?’’ New York Times,
20 January 2002, Section 3, p. 4.
80. L. Browning, ‘‘Fire Could Not Stop a Mill, but Debts May,’’ New York Times, 28 November 2001,
C1, C5.
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C H A P T E R10
ETHICAL PROBLEMS
OF ORGANIZATIONS
INTRODUCTION
In August 2009, the International Monetary Fund estimated that the global financial
crisis of 2008–09 would cost the world an estimated $11.9 trillion—enough to pro-
vide a gift of $2,880 to every man, woman, and child on the planet.1 It is, in a word,
staggering.
Long before this recent financial crisis or the collapse of Enron in 2001, a num-
ber of business ethicists and business professionals watched with concern as Wall
Street analysts demanded increasingly strong corporate financial performance to sup-
port rising corporate stock prices. At the same time, the gargantuan compensation
packages (including stock options) of the top executives running these companies
became inextricably linked to their companies’ stock prices. In 1973, average CEO
pay at major corporations was 27 times the pay of the average worker. By 2007, that
ratio had increased to $275 to $1—so the average CEO was earning 275 times what
the average worker earned.2 Experts warned of a bubble—even Alan Greenspan,
head of the Federal Reserve, cautioned against ‘‘irrational exuberance’’ in the mar-
kets.3 But few predicted how bad things would get.
In a June 2002 interview on PBS’s Frontline, Arthur Levitt, former head of the
Securities and Exchange Commission (SEC), explained how stock prices influence
executives and their ethical decision making (or lack thereof): ‘‘There is an obsession
with short-term earnings and short-term results, and our stock markets reflect that
obsession. . . . We’ve developed a short-term culture in American business, where
executives have become obsessed with the selling price of their stock. They drive
earnings in whatever way they possibly can to meet the expectations of analysts,
rather than presenting a picture that is totally accurate.’’4
In the first decade of the new century, with news of unfathomable greed and
misdeeds and just plain stupidity at the banks and other companies such as Enron,
Arthur Andersen, WorldCom, Adelphia, Citigroup, and Tyco, it’s easy to wonder if
any organization is doing the right thing. Well, wonder no more. As we’ve noted in
other chapters, thousands of organizations are working every day to uphold ethical
standards and train employees in what those standards mean. If you try to imagine
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the hundreds of thousands of transactions that occur every day and then think about
how many you hear about as being illegal or unethical—even with all of the bad news
in the years since the turn of the new century—the real proportion of wrongdoers is
probably quite small. However, as small as the actual number of wrongdoers might
be, they can have an outsized effect on the economy—as we’ve seen with the finan-
cial crisis. As these crises have made clear, the need for ethical behavior and manag-
ing for the long term could not be more necessary.
In this chapter, we’ll look at a series of business ethics and social responsibility
cases within the framework of stakeholders—those individuals or groups who have a
stake in what the organization does or how it performs. Many of the cases you’ll read
about here are well known as major business disasters. You might wonder why we’re
focusing on disasters instead of typical ethical issues within corporations. Here’s
why: if you read these cases carefully, you’ll discover that many of them started as
small issues until mismanagement, denial, or other more malevolent motives caused
these seemingly minor situations to mushroom into huge legal, ethical, and public
relations nightmares. We also believe that there is much to be learned from studying
others’ mistakes.
Some of the issues we look at in this chapter are similar to the issues we explored
in Chapters 4 and 8. But now we’re focused on the organizational level, where the
stakes are much higher and events can escalate into disaster much faster. In addition
to the business ethics nightmares, we’ll look at a few positive examples and at some
hypothetical cases that we hope will get you thinking.
MANAGING STAKEHOLDERS
Business wasn’t always as complex as it is today. At the end of the nineteenth cen-
tury, many of the country’s largest corporations were privately held; consequently,
their owners had very few constituencies to answer to. The magnates and robber bar-
ons of a century ago ruled their companies with an iron hand. There were no unions
or laws to protect workers, and the sporadic media attention of the era left the public
largely unaware of most corporate abuses. Also, most average, middle-class citizens
did not invest in stocks and bonds. Investing in those days was largely a rich person’s
game. Of course, all of that has changed.
As we’ve explained in earlier chapters (especially Chapter 9), modern cor-
porations have multiple stakeholders with myriad and often conflicting interests
and expectations. Few corporations today are run unilaterally by one individual,
as they well might have been 100 years ago. Even in the handful of companies
where an individual founder or owner has a looming presence—like Bill Gates
at Microsoft or Steve Jobs at Apple—there are boards of directors, regulatory
agencies, and consumer groups that dramatically influence how an organization
is managed. Public corporations are traded on the various stock exchanges and
have numerous taskmasters—institutional and individual—in the investor com-
munity. In addition, because individuals have invested in money market funds
and the stock market in numbers unprecedented even a decade ago, the press is
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vigilant in its coverage of corporate misdeeds or any other factor that could
influence corporate earnings.
What do businesses owe their stakeholders? Once we have determined who the
stakeholders in a situation are, how do we determine our organization’s obligations to
them? And if those obligations conflict, how does an organization resolve those con-
flicts? There is no simple answer to these questions, but it’s the task of senior execu-
tives to resolve them. To a large extent, thinking through these obligations requires
use of the ethical decision-making frameworks studied in Chapter 2. It also requires
careful thinking about how one might balance multiple and often competing stake-
holder interests.
Perhaps the easiest way to think about multiple stakeholders is to divide them
into primary and secondary groups.
5 Primary stakeholders are those groups or indi-
viduals with whom the organization has a formal, contractual relationship. In most
cases this means customers, employees, shareholders or owners, suppliers, and per-
haps even the government. Secondary stakeholders are other individuals or groups to
whom the organization has obligations, but who are not formal, contractual partners.
Obviously, organizations should strive to satisfy their obligations to their primary
stakeholders while also trying to keep their secondary stakeholders satisfied. It’s a
difficult balancing act, but a helpful exercise if companies are to take into account
and be fair to the people and groups they can affect.
This approach is so useful that David Abrahams, a managing consultant with
Marsh Ltd. in London, designed a similar stakeholder model to help his corporate
clients identify and quantify risk to their brand. As one of the largest insurers in
the world, Marsh has great interest in developing tools to help companies mitigate
reputation and other kinds of risk. Abrahams’ model identifies three primary
stakeholders—business partners, customers, and employees—and three secondary
stakeholders—opinion formers, community, and authorities. He maintains that by an-
alyzing a company and its business using those six groups as a guide, one can begin
to identify how a variety of calamities might affect a company’s reputation and the
value of its brand, and how much those calamities might cost.6
The cases that follow are divided into categories representing four of the major
stakeholder groups in many business decisions: consumers or customers, employees,
shareholders, and the community. In all the cases, more than one stakeholder group is
affected; we have categorized the cases under headings that represent the stakeholder
group that we feel is most affected. However, as you read through the cases, we urge
you to identify all of the stakeholders in each case and try to discern each organiza-
tion’s obligations to all of its various stakeholders.
ETHICS AND CONSUMERS
It might surprise many people to learn that there were few laws protecting consumers
before the 1960s. At the turn of the last century, consumers didn’t even have the right
to sue a manufacturer for a defective product. The first real consumer law took effect
early in the twentieth century when, in McPherson v. General Motors, a consumer
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was given the right to sue the auto manufacturer for a defective vehicle. Until then,
the only recourse for the owner of an auto was to go after the dealer who sold the
vehicle. Another landmark law was the Pure Food and Drug Act, which was passed
in 1906 to prohibit adulteration in food and drugs.7
Although more consumer laws were passed in the first half of this century, con-
sumers had to wait until the early 1960s for any real protectionist legislation that
positioned consumers as a major stakeholder group. The framework of consumer pro-
tection as we know it today was constructed during the Kennedy administration. In
his speech to Congress on consumers in 1962, President John F. Kennedy outlined
four consumer ‘‘rights’’: the right to safety, the right to be heard, the right to choose,
and the right to be informed.8 This message and the legislation that resulted laid the
groundwork for today’s consumer movement.
Exactly what do companies and organizations owe their customers? According
to some observers, products and services should be produced and delivered according
to the ‘‘due care’’ theory.9 This theory stipulates that due care involves these
elements:
& Design. Products and services should meet all government regulations and
specifications and be safe under all foreseeable conditions, including misuse
by the consumer.
& Materials. Materials should meet government regulations and be durable
enough to withstand reasonable use.
& Production. Products should be made without defects.
& Quality control. Products should be inspected regularly for quality.
& Packaging, labeling, and warnings. Products should be safely packaged,
should include clear, easily understood directions for use, and should clearly
describe any hazards.
& Notification. Manufacturers should have a system in place to recall products
that prove to be dangerous at some time after manufacture and distribution.
Although we’ve certainly alluded to some organizational responsibilities in earlier
chapters, we’re going to concentrate on three duties in this chapter: to respect the
customer and not engage in activities that conflict with the interests of an established
customer base, to produce a safe product that is free from any known defects, and to
honestly advertise a product or service.
Conflicts of Interest
Although we usually think of conflicts of interest as situations involving individuals,
they can also involve organizations. As we’ve seen over the last few years, conflicts
involving organizations are even more damaging than those that involve individuals.
Many people think the poster child for corporate conflicts is Arthur Andersen and
other large accounting firms that at one time offered both auditing and consulting
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services to clients. It’s hard to believe that the company executives didn’t see how
gargantuan consulting fees might color the judgment of auditors. However damaging
those accounting firm conflicts were, they are dwarfed by what happened at Enron.
(Please note that although this case appears under ‘‘Ethics and Consumers,’’ it could
just as easily appear under ‘‘Ethics and Employees’’ or ‘‘Ethics and Shareholders’’
because its effects were so far reaching. And evidence also clearly suggests that
Enron’s manipulation of the energy markets harmed energy consumers in California,
so the company could appear under ‘‘Ethics and the Community’’ as well. It seems
that when an ethical debacle is big enough, a range of stakeholders are affected.)
COMPANY: Enron
INDUSTRY: Energy
SITUATION
In 2002, Fortune magazine still ranked Enron as the fifth-largest company in
the United States, although by the time the magazine was published, Enron
had already filed for Chapter 11 bankruptcy protection.10 It was quite a ride:
from a regional gas pipeline trader to the largest energy trader in the world,
and then back down the hill into bankruptcy and disgrace. With the help of its
investment bankers, accountants, and others, Enron constructed a series of
off-the-books partnerships that were used to hide the company’s massive
debt and inflate its stock price. These partnerships were managed by Enron
executives—a clear conflict of interest—who stood to benefit financially
from the deals. Enron also used very aggressive accounting practices to bol-
ster the bottom line. A particularly sad aspect of this debacle was how much
Enron employees lost in their 401(k) plans as the stock price plummeted. In
the fall of 2000, Enron changed administrators for its 401(k) plan and, as is
typical, the plan was ‘‘closed’’ while that transfer took place. When a plan is
closed, no one can buy, sell, or trade in his or her 401(k) until the moratorium
is over. Sadly, this moratorium began just as the company’s stock really be-
gan to tank, and by the time Enron employees could once again make
changes in their 401(k) elections, the stock price had dramatically decreased
and the retirement savings of many average employees were wiped out.
HOW THE COMPANY HANDLED IT
Executives denied there was trouble for as long as they could, but the fall
from grace was swift and dramatic. Top executives resigned in disgrace, and
one committed suicide. The company filed for Chapter 11 bankruptcy in De-
cember 2001 and later sold its primary energy-trading unit.11
RESULTS
Andrew Fastow, Enron’s former CFO, settled civil and criminal lawsuits in
2004. The complaint by the SEC charged that he ‘‘defrauded Enron’s
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shareholders and enriched himself and others by, among other things, enter-
ing into undisclosed side deals, manufacturing earnings for Enron through
sham transactions, and inflating the value of Enron’s investments.’’ Fastow
agreed to serve a six-year prison sentence, pay a fine of more than $23 mil-
lion, cooperate with the government’s ongoing investigation into Enron, and
be permanently barred from acting as a director or officer in a public com-
pany.12 In addition, Lea Fastow, Andrew Fastow’s wife and a former assist-
ant treasurer of Enron, was sentenced to serve a year in prison for pleading
guilty to charges relating to the Enron mess.13 In May 2006, former CEO
Kenneth Lay and former president Jeffrey Skilling were convicted of multi-
ple counts of fraud and conspiracy and were sentenced to 24 years in prison.
Ken Lay died of a massive heart attack in July 2006, before he began to serve
his sentence. Jeff Skilling is currently in jail, although he is still appealing the
verdict and the sentence. He was also ordered to pay restitution of $45 mil-
lion.14 Matthew Kopper, a former managing director, pleaded guilty to
money laundering and conspiracy to commit wire fraud, and he forfeited $8
million to settle an SEC civil fraud case. The accounting firm, Arthur Ander-
sen, was convicted in a federal court of obstruction of justice and relinquished
its license to practice public accountancy.15
Finally, the fines paid by various other players in the Enron collapse are
startling. Enron itself paid over $2 billion in fines, including $1.5 billion for
manipulating energy markets in California. And financial services corpora-
tions paid huge sums to settle investor lawsuits connected to Enron: Citigroup
paid $2.4 billion; JPMorgan Chase paid $2.2 billion; and other banks paid
fines in the hundreds of millions to settle similar suits.16
COMMENTS
Former SEC chairman Arthur Levitt aptly described the scope of the prob-
lems at Enron:
I think the Enron story was a story, not just of the failure of the
firm but also the traditional gatekeepers: the board, the audit
committee, the lawyers, the investment bankers, the rating agen-
cies. All of them had a part in this.
Take the rating agencies, for instance. They deferred downgrad-
ing Enron, pending a merger which they knew very well might
never have taken place.
Take the investment bankers, who developed the elaborate
scheme that Enron used to hide the obligations of the parent com-
pany in subsidiaries. That didn’t come out of the blue; that was a
scheme concocted between the investment bankers and the chief
financial officer of Enron.
Take the accounting firm. . . . Enron was the most important
audit client that they had, and Enron was also the largest
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It appears that Enron had plenty of help in constructing its massive fraud from pro-
fessionals (such as auditors) who were supposed to be protecting the public interest.
Its true financial performance was shrouded in partnerships that hid debt from its
books and, as a result, from investors and from rank-and-file employees.
Enron was not alone, however, in its involvement in corporate conflicts of inter-
est. The investment banking community has also been embroiled in myriad conflicts
in recent years. In fact, investment banking firms—by their very nature—face a huge
potential conflict of interest. They are in the business of helping corporations raise
money in the markets and are consequently focused on keeping a client company’s
stock price as high as possible. Yet these same investment banks also serve investors,
who are interested in buying stocks at as low a price as they can.18 Talk about ten-
sion! And that tension spilled over for several big firms in the late 1990s and early
2000s. Merrill Lynch was fined $100 million when its analysts—in e-mails to one
another— privately trashed the stocks of the companies they were publicly touting to
investors.19 That case and others like it were later parodied in a television commer-
cial by investment firm Charles Schwab & Co. In the commercial, a Wall Street man-
ager is seen urging his brokers to push an unfavorable stock. He tells them, ‘‘Let’s put
some lipstick on this pig.’’ (Schwab does not underwrite stocks and consequently
does not face the same conflict that other brokerage firms do.) James P. Gorman, a
Merrill Lynch executive, called Schwab’s commercial a ‘‘cheap shot’’ for ‘‘kicking
someone when they’re down.’’20 We wonder whether investors thought Schwab’s
consulting client that they had—a client that paid them over a
million dollars a week in fees. In my judgment, that accounting
firm was compromised. Their audit was compromised. Putting
aside any fraudulent activity that may have been part of this, they
were clearly compromised by the nexus of consulting with
auditing.
Take the lawyers that were paid vast fees. I think here you have a
very interesting case where the American Bar Association pre-
vents lawyers from revealing financial fraud of clients to regula-
tors. And here we had a case in point where a major client of the
law firm was obviously involved in practices that may well prove
to have been fraudulent, and they didn’t blow the whistle.
And [take] the analysts, who were claiming that Enron was a buy
even after this story had broken and Enron had declared bank-
ruptcy. These are analysts that were being paid by investment
bankers that were receiving large fees from Enron for performing
a variety of services. How independent could their research have
been? And what could an investor have expected from an analyst
who was recommending the purchase of Enron, while at the same
time his employer was receiving millions of dollars in fees from
that company? How likely was it that the analysts would tell it as
it was? Very unlikely, in my judgment.17
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commercial was a cheap shot or a pretty accurate portrayal of some Wall Street
bankers.
Investment bankers were investigated for another major conflict—how much
they knew about the alleged frauds committed at Enron, WorldCom, Adelphia, and
other companies. At Enron, for example, banks such as Credit Suisse First Boston,
Citigroup, and JPMorgan Chase helped Enron structure the secret partnerships that
hid Enron’s debt and kept Enron’s stock price high. Then these investment banks not
only received fees for helping to structure debt but also made money from their
investments in Enron stock.21 And as we’ve seen, those firms paid enormous fines
for assisting Enron with its shenanigans.
But perhaps no conflict in investment banking is as egregious as what happened
during the housing bubble of the last decade. Investment banks were furiously creat-
ing and selling bundled mortgage products, many of which represented subprime
mortgages—in other words, the mortgages faced a higher risk of default and were
riskier than other mortgages. Firms like Goldman Sachs eagerly sold these funds to
their clients, all the while buying insurance on those same funds (in the form of credit
default swaps (CDSs). In other words, the investment banks felt that the mortgage
products they were selling to clients were so risky that they bet against the products
at the same time they were advising clients to buy the products. Also, while pushing
these products to their clients, the investment banks encouraged rating agencies to
give the products high ratings that would signal to investors that the mortgage prod-
ucts were safe. And, of course, they were anything but safe investments and the banks
knew that. It’s a colossal conflict of interest and hopefully one of the things that new
government regulation will address.22
Here’s another very public conflict of interest involving Marsh & McLennan, the
insurance conglomerate that ran afoul of New York State’s former attorney general,
Eliot Spitzer.
COMPANY: Marsh & McLennan (Marsh, Inc., Putnam Funds, and Mercer
Consulting)
INDUSTRY: Insurance (Marsh, Inc.); Mutual Funds (Putnam Funds); and
Consulting (Mercer)
SITUATION
Starting in late 2003, Marsh & McLennan (MMC), with a reputation as one of
the most staid and well-managed companies in the United States, became
embroiled in a series of ethical scandals. The first involved Putnam Funds, a
mutual fund company in Boston and traditionally the cash cow of MMC.
Putnam first lost huge bets on technology and growth stocks when the stock
market imploded in 2000. Then it was the first mutual fund company named
in the market-timing scandal that involved mutual fund companies across the
industry. (Market timing is shifting money in and out of mutual funds based
on the performance of one or more market indicators. In the recent scandal,
large investors were allowed to ‘‘time the market’’ by trading late—after the
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markets had closed—which provided a clear advantage for the big guys and a
clear disadvantage for the little guys.) There is no doubt that of all the mutual
fund companies, Putnam took the biggest hit for the scandal, and it continues
to struggle to make its way back. Its assets under management—the major
measure of stability and heft in the industry—fell from $370 billion in late
2000 to $194 billion during the first quarter of 2005.23 But Putnam was only
the beginning of trouble at MMC.
In October 2004, New York State Attorney General Eliot Spitzer filed a
civil complaint against MMC, the parent company of Marsh, Inc., the world’s
largest insurance broker. In the suit, Spitzer charged that Marsh betrayed
clients by steering business to underwriters with whom it had cozy relation-
ships in exchange for millions in backdoor payoffs. As one Marsh executive
said, ‘‘We need to place our business in 2004 with those that have superior
financials, broad coverage, and pay us the most.’’ Spitzer’s complaint un-
covered a broad mosaic of industry-wide bid rigging for which Marsh served
as the chief architect. Other companies such as AIG, Hartford, and ACE were
involved, but Marsh was the big player in the arrangement.24 (At the time of
Spitzer’s suit, Jeffrey Greenberg was CEO of MMC; his brother, Evan
Greenberg, was CEO of ACE; and the legendary Maurice ‘‘Hank’’
Greenberg, father of Jeffrey and Evan, was CEO of AIG and would later face
enormous troubles of his own.)
HOW THE COMPANY HANDLED IT
To staunch the bleeding at Putnam, MMC forced out Putnam’s CEO, the im-
perious Lawrence Lasser, who took a $78 million severance payout and left
the company that he had captained for years.25 MMC quickly hired squeaky-
clean Charles ‘‘Ed’’ Haldeman as the new CEO to lead Putnam out of the
swamp. In April 2004, Putnam settled with the SEC and agreed to accept
new employee trading restrictions and to conduct and provide regular compli-
ance reviews. The company also paid $110 million in various fines. (There
were additional charges, settlements, and fines from a variety of sources,
including the Commonwealth of Massachusetts.)26 Haldeman brought in a
new management team and made other changes, but the company continues
to struggle to regain its former position as a leader in the industry.
Its parent, MMC, had a more difficult time with its woes. In a highly
unusual move, Spitzer refused to negotiate with the company as long as its
executive team was in place. Soon after, CEO Jeffrey Greenberg and the top
company lawyer resigned and Michael Cherkasky took the helm. Cherkasky
was Spitzer’s former boss in Manhattan’s district attorney’s office and the
CEO of Kroll, Inc., a leading risk consulting company acquired by MMC
shortly before its legal woes began. Cherkasky’s relationship with Spitzer
proved very helpful for MMC—the company quickly agreed to a settlement
of $850 million and also agreed to lead the insurance industry in reforming
industry practices.
27
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A note: Mercer HR Consulting, the other third of the MMC business,
also had its own troubles. It disgorged more than $440,000 in fees from the
New York Stock Exchange (NYSE) after admitting that it misled the NYSE
board of directors regarding the $140 million pay package of Richard Grasso,
then CEO of the NYSE.28
RESULTS
In 2004, MMC’s stock price fell from a 52-week high of $47.35 to a low of
$22.75—an incredible fall from grace for a company that had performed so
well and so predictably for decades.29 In a mere four days of trading, the com-
pany lost $11.5 billion in market value.30 That plunge hurt MMC employees
more than most investors because, until shortly before these problems, MMC
employees could invest their MMC retirement savings only in MMC stock.
The thinking among MMC senior executives was that people would be more
motivated to produce excellent results if their entire retirement savings were
tied up in MMC stock. In a real ethical lapse, senior executives had other
investment options—it was only rank-and-file employees who were restricted
to MMC stock. MMC’s strategy was particularly unfathomable when you con-
sider that MMC’s Mercer HR Consulting employed numerous retirement
experts who routinely advised their clients about the importance of providing
employees with diversified options for retirement investments. After years of
listening to employees plead to be allowed to diversify and after watching
Enron’s employees lose their shirts when their company’s stock plunged,
MMC executives finally allowed for limited diversification. Beginning in
2003, MMC employees could diversify part of their retirement investments
into a few Putnam funds— nowhere near the number or range of options pro-
vided by other large corporations to their employees. Many MMC employees,
who did not move quickly enough to diversify, lost much of their retirement
investments after MMC stock plummeted. Note to students—diversify your
investments, and never put all your investments in company stock! (Also, in
the interest of full disclosure, please note that one of this book’s authors,
Katherine Nelson, was employed as a principal at Mercer HR Consulting from
1998 to 2001 and was an ‘‘employee investor’’ of MMC.)
In addition to the substantial settlements, the financial losses, the pessi-
mism of financial analysts, and the enormous hit taken by MMC investors
and employees, 5,000 jobs were lost and the company’s reputation remains
tattered.31
COMMENTS
One of the wisest comments about the crisis at MMC comes from the former
CEO of Putnam Funds, Charles Haldeman, who said, ‘‘What our parents told
us about protecting our reputation is true. If you lose it, it’s hard to win it
back again.’’ Haldeman also talked about the isolation that existed in Putnam
before his arrival. Apparently, Putnam had a history of not cultivating
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The results of these very public conflicts of interest will be felt for years. Various
regulators and attorneys general from a number of states are still investigating the
banks and their business practices. As a result of the various debacles in the banking
industry, Citigroup has been fined more than $5.5 billion since 2003, and JPMorgan
Chase has been fined more than $4 billion.36 Other financial institutions have also
been fined sums totaling in the billions, and numerous corporate brands have been
muddied. However, all of that ‘‘justice’’ has not yet restored the faith of the public in
the markets, nor will it help the hundreds of thousands of individual investors who
have lost their shirts because of these shenanigans. In a 2002 Business Week poll of
its readers, 93 percent said they had ‘‘only some’’ or ‘‘hardly any’’ trust in the execu-
tives who run big companies, and 95 percent felt that way about big auditing compa-
nies.37 More recently, a 2010 survey indicated that 70 percent of the public believes
that businesses and financial companies will go back to ‘‘business as usual’’ after the
2008–09 recession. In the same survey, only 29 percent of respondents in the United
States thought that they could trust banks ‘‘to do the right thing.’’ That’s down from
68 percent in 2007.38 It is a sad commentary.
In Chapter 4, we defined a conflict of interest as occurring when someone could
think that your judgment might be clouded because of a relationship you have. The
definition is the same for organizations: if an organization’s customers or other stake-
holder group think that an organization’s judgment is biased because of a relationship
it has with another company or firm, a conflict could exist. Corporate or
relationships with the press or the government, and when the scandal broke, it
had no friends to turn to. Haldeman also vowed to change that. ‘‘At the time
of our problems,’’ he said, ‘‘We didn’t have those relationships and it was
difficult for us. At a time of need we didn’t have too many friends or support-
ers. We don’t want to be in that position again.’’32 Haldeman served as CEO
of Putnam from the time the crisis broke in 2004 until 2008, when MMC sold
Putnam to Power Corporation and replaced Haldeman.33
The scandal that rocked MMC was an example of how former New York
State Attorney General Eliot Spitzer liked to turn an industry upside down.
Writer Peter Elkind wrote of Spitzer’s strategy in Fortune magazine: ‘‘The
strategy has been remarkably consistent. Step one: Wade broadly into a gray
area of odorous but long-accepted industry practices. Step two: Seize on evi-
dence of black-and-white outrageous conduct—typically in email form—and
use it to marshal public outrage. Step three: In the resulting tsunami of scan-
dal, swiftly exact reform of the whole industry, including gray-area behav-
ior.’’ Within two weeks of filing charges, Marsh and its largest competitors
had agreed to stop bid rigging. Similarly, industry-wide mutual fund abuses
stopped within weeks of Spitzer filing charges against Putnam.34 Please note
that Eliot Spitzer has had his own ethical lapses. A little over a year after
being elected governor of New York State, he was caught up in a federal
wiretap of a prostitution ring (he was found to be a client) and resigned in
disgrace in early 2008.35
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organizational conflicts are just as risky as those that exist between individuals, and
they should be avoided at all costs.
Product Safety
Obviously, a major ethical obligation of any organization is to produce a quality
product or service. Just as obviously, nothing will put a company out of business
faster than offering a product that is dangerous, poorly produced, or of inferior qual-
ity. Competition in the marketplace generally helps ensure that goods and services
will be of a quality that is acceptable to consumers. However, sometimes a company
becomes the victim of external sabotage (like Johnson & Johnson), and sometimes a
company makes a foolhardy decision, and the result is a product that is not safe. Let’s
look at these classic cases.
COMPANY: Johnson & Johnson
INDUSTRY: Pharmaceuticals
SITUATION
In September 1982, seven people in the Chicago area were killed when they
ingested Tylenol, a painkiller produced by McNeil Labs, a division of John-
son & Johnson. The Tylenol in question was found to have been laced with
cyanide, and it was not known for several weeks whether the contamination
was the result of internal or external sabotage. A thorough investigation later
proved that the poisonings were the result of external sabotage, although the
culprit has never been found.
HOW THE COMPANY HANDLED IT
First, the company pulled all Tylenol from shelves in the Chicago area. That
was quickly followed by a nationwide recall of all Tylenol—31 million bot-
tles with a retail value of over $100 million. Johnson & Johnson sent Mail-
gram messages explaining the situation and the recall to over 500,000
doctors, hospitals, and distributors of Tylenol. It also established a toll-free
crisis phone line so that consumers could ask questions about the product. In
addition, its CEO, James Burke, and other executives were accessible to the
press and were interviewed by a variety of media.
Before the poisoning, Tylenol had captured over a third of the painkiller
market, so Johnson & Johnson decided to rebuild the brand and its franchise.
That wasn’t going to be easy, since consumer fear ran high immediately after
the poisoning. In one survey conducted a month after the incident, 87 percent
of the respondents understood that Johnson & Johnson was not to blame for
the Tylenol deaths, yet 61 percent declared they would be unlikely to buy
Tylenol in the future. So even though most consumers knew the poisonings
were not the fault of Johnson & Johnson, most of them wouldn’t buy the
product again. Johnson & Johnson tackled this problem head-on by offering
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coupons to entice consumers back to Tylenol and, ultimately, by redesigning
Tylenol’s packaging to be tamper resistant.
RESULTS
Johnson & Johnson’s reaction to the Tylenol poisoning has been hailed as the
benchmark for how organizations should react to a crisis. As we’ve men-
tioned in other chapters, the firm’s reaction to the Tylenol crisis proved that
its famous Credo, in which it outlines its responsibilities to its consumers,
employees, community, and stockholders, wasn’t hollow. It was that concern
for the customer—its primary stakeholder—that drove its response to the
crisis. By being accessible to the press, which is yet another important stake-
holder in a crisis, Johnson & Johnson’s executives displayed concern for the
consumer by refusing to dodge responsibility or blame any other party for
their difficulties.
The results of the crisis were far reaching. The tamper-resistant packaging
pioneered by Johnson & Johnson after the crisis has become commonplace in a
wide variety of products, from food to pharmaceuticals. Two decades after the
crisis, Johnson & Johnson’s reputation as a quality producer of pharmaceuti-
cals and as a company that cares about its customers is still strong. Its former
chairman, James Burke, is renowned for his concern about ethical issues and
became a sought-after speaker on a wide variety of topics related to ethics.
Also, by the mid-1980s, Tylenol had regained almost all of its market share.
COMMENTS
The background of former Johnson & Johnson CEO James Burke was proba-
bly critical to the company’s behavior during the Tylenol crisis. Burke was a
marketing man who knew and understood the importance of public percep-
tion and the value of timely, accurate communication. Not many executives
are comfortable with open communication, and their natural reticence can be
enormously harmful to their organizations when a crisis strikes.39 Burke was
open with the public, but he was also extremely open with the press and cre-
ated a relationship of trust with them. It came in handy when, several weeks
into the investigation, a small amount of cyanide was found in a company
plant. It was also learned that it could in no way have been involved in the
Tylenol contamination. The press was told and asked not to reveal the infor-
mation, and they didn’t! We know about this only because the story was
relayed by Lawrence Foster, then head of company communications, in a
talk with our students. Burke also took the long-term view, believing that a
recall would be costly in the short term but would help rebuild brand loyalty
and trust in the long term.
UPDATE
While Johnson & Johnson has long been admired for its handling of the Tyle-
nol crisis, in recent years it has stumbled. For example, J&J’s LifeScan
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division pleaded guilty to criminal charges in 2000 and paid $60 million in
fines for selling defective glucose-monitoring devices to diabetics and for
later submitting false information about the problem to federal regulators.
Lawyers who filed the class-action suit against LifeScan estimated that at
least three diabetics had died because of the faulty readings they obtained
from LifeScan’s SureStep monitoring device. LifeScan, in court documents,
admitted that it had not adequately described the product’s defects to the
Food and Drug Administration (FDA), failed to disclose the problem to
patients, and then failed to notify the FDA once problems began to occur. It’s
difficult to reconcile this image of Johnson & Johnson with the Tylenol one.
The chairman of Johnson & Johnson, Ralph S. Larsen, wrote in a statement,
‘‘Mistakes and misjudgments were made. We fully acknowledge those errors
and sincerely apologize for them. We are committed to learning from this
experience.’’40 More recently, the company has been criticized for not
launching a recall earlier of many of its over-the-counter medications that
had a moldy odor that made consumers ill.41 Also, as this book goes to press,
Johnson & Johnson has been accused of paying kickbacks to a large nursing
home chain to use its antipsychotic medications on elderly patients.42 Yet, it
is important to note that in an annual survey of reputation among U.S. compa-
nies conducted in 2009, the Johnson & Johnson brand ranked number one in
reputation for the tenth consecutive year.43 And our former students who
have worked for the company continue to rate it a highly ethical company
that is guided by its Credo.
COMPANY: Toyota
INDUSTRY: Automobiles and trucks
SITUATION
When Toyota first entered the U.S. market in 1957, the automotive landscape
was dominated by the Big Three American automakers—Chrysler, Ford, and
General Motors. In 1961, the Big Three sold 85 percent of the cars purchased
in the United States, and the remaining 15 percent were sold by a number of
smaller foreign (mostly European) companies such as Volkswagen, BMW,
and Mercedes Benz.44 Toyota, one of Japan’s leading auto companies, didn’t
gain a significant U.S. market share until the price of oil became an issue for
Americans in the 1970s. Toyota made small, fuel-efficient cars, and Ameri-
cans began to turn from large Detroit gas guzzlers to cars that got higher gas
mileage. Then, for several years in the late 1970s to mid-1980s, the Big Three
suffered severe quality issues. Consumers were frustrated and turned even
more attention to those fuel-efficient Toyota models with a reputation for
high quality. This shift revolutionized the nation’s car buying; by 2008,
Toyota had become the largest automaker in the United States.45 However, a
problem loomed on the horizon. Beginning in 2002, consumer complaints
began pouring in to Toyota and to the National Highway Traffic Safety
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Administration (NHTSA), the U.S. regulatory body overseeing auto safety.
More than 2,000 consumers reported that the accelerators in their Toyotas
were sticking. Suddenly and without warning, the cars would accelerate and
drivers found it almost impossible to stop their cars.46
HOW THE COMPANY HANDLED IT
Although the complaints began in 2002, the company was slow to respond.
Toyota was so confident of its product quality that the firm repeatedly under-
estimated the severity of the problem and reacted by either discounting early
problems altogether or announcing diagnoses and solutions that proved to be
insufficient. When the company did start to recognize the problem, its engi-
neers blamed floor mats. They believed that floor mats were bunching up and
creating a wedge under the accelerator, thus causing the car to speed up
inadvertently. In the fall of 2009, Toyota sent an advisory to millions of
Toyota owners to remove the floor mats on the driver’s side and stated that,
‘‘there is no evidence to support’’ any other cause of the sudden acceleration.
The company added that the NHTSA agreed with this conclusion. The
NHTSA, in fact, did not agree and responded with a sharp rebuke to Toyota.
The event that truly altered the debate was a crash of a Toyota Lexus on a
California highway in August 2009. An off-duty California highway patrol
officer (who should know how to stop a speeding car) called 911 in a total
panic. His Lexus was hurtling down the highway with its accelerator stuck
and with no brakes. The 911 system recorded the call and the subsequent
crash, which killed the driver and three passengers. Another crash—this one
involving a Toyota Avalon outside of Dallas, Texas—again resulted in four
deaths. After that accident, investigators found the floor mats in the trunk of
the car.47 In January 2010, Toyota ordered a massive recall of more than 7.7
million vehicles.48 The company also suspended sales of eight of its most
popular models (including the Camry, the best-selling passenger car in the
United States for the last 10 out of 11 years.) and even stopped making those
models until the problem was solved. It’s important to note that Toyota halted
production because the NHSTA ordered it to stop.49
RESULTS
According to some analysts, the accelerator problem is the result of Toyota
trying to grow too fast—so fast that its quality slipped, which is a particularly
thorny problem for the company.50 Toyota has made huge gains globally
based on its quality pledge. The entire Toyota brand is tied to quality; for
example, its corporate slogan is ‘‘The Relentless Pursuit of Perfection,’’ and
its manufacturing methods have long been the envy of other automakers.51
As this book goes to press, the Toyota story is still evolving and the full
results of this ethical crisis are still unknown. It is estimated that the quality
problem has caused at least 275 crashes and 18 deaths over the last few
years.52 In the meantime, Ford and others are expected to benefit from
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As we saw in Chapters 2 and 3, one of the most common faults in ethical deci-
sion making is to ignore the long-term consequences of a decision. Although most
organizations try hard to produce a product or service of high quality (to stay in busi-
ness, if for no other reason), many don’t take the time to identify all stakeholders and
think long term about the consequences of their decisions. In issues that involve
product safety and possible harm to consumers, thinking long term is critical. Is this
product going to harm someone? How serious is the potential harm? Even if it might
harm only one person, is there a way that can be avoided? Is there a way we can warn
against possible harm? What can we do to ensure this product’s safety? Other cogni-
tive barriers to good ethical decision making also may have affected the thinking of
Toyota’s managers. For example, consider the possible effects of confirmation bias,
the consideration of too few consequences, or an illusion of superiority,
How quickly do you think companies need to initiate a recall? If the product is
sabotaged by angry insiders or outsiders, or if problems with this product or service
are discovered at a later date, how can a company protect the public, consumers, and
itself? Does the company have a crisis management plan? How closely do you
think the companies involved in the classic cases adhered to the due care theory
described earlier?
Advertising
The subject of ethics in advertising is a murky one, simply because there are varying
opinions of exactly what truth is, and furthermore, what responsible is. Does a certain
moisturizer really make skin look younger, or is it the 20-year-old model who has a
Toyota’s woes.53 Already, some automakers are offering rebates to Toyota
owners who trade in their cars,54 and car rental companies, such as Avis,
have scaled back rentals of Toyota models or halted them altogether.55
COMMENTS
A number of media stories have called this ‘‘Toyota’s Tylenol Moment,’’
comparing the crisis directly to the famous Johnson & Johnson crisis
described earlier in this chapter.56 A number of analysts point to Toyota’s
cost cutting over the last few years as the likely culprit behind the crisis, and
some lawsuits claim that this issue is larger than a faulty accelerator and in-
volves the electronics of the car, which is a much bigger issue.57 It appears
that the company has not completely identified the problem or an adequate
solution. One dealer has called the current accelerator fix ‘‘a Rube Goldberg
solution that is hardly representative of the kind of work usually done by
Japanese engineers.’’58 Erich Merkle, president of Autoconomy.com (an in-
dustry analysis company), predicted that Toyota would be hard hit by this
crisis because so much of its sales strength was rooted in an untarnished repu-
tation for quality and reliability. He speculated, ‘‘They’ll get through this, but
I don’t think it’s anything they’ll recover from quickly.’’59
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young, dewy complexion? How would that moisturizer work for a 50-year-old? Do
automakers and beer makers really need young women in skimpy bathing suits to sell
their products? Do companies have a responsibility to respect all consumers? Are
certain segments of the population fair game when it comes to the art of selling?
Should we protect children from sugary cereal ads or teenagers from ads for expen-
sive athletic shoes? How truthful or responsible does advertising have to be to qualify
as ethical? Let’s take a look at a few cases that point out some ethical issues in the
marketing of pharmaceuticals to consumers.
INDUSTRY: Pharmaceuticals
SITUATION 1
Novartis, the large Swiss drug company, paid actress Lauren Bacall to men-
tion one of its products, Visudyne, during an interview with Matt Lauer on
NBC’s Today show. Visudyne is a drug used to treat macular degeneration,
an eye condition that strikes many people beginning in middle age. Bacall
described how macular degeneration had caused a friend to go blind, urged
viewers to get tested for the condition, and then plugged Visudyne.60 What’s
the problem? Remember, this was not a commercial but an interview. The
viewing public had no idea that Bacall was a paid Novartis spokesperson.
Bacall is not alone, nor is Novartis. Actors Kathleen Turner and Rob Lowe
have also pitched drugs, and other drugs have been mentioned by name on
shows such as Law and Order, West Wing, ER, and on the other morning
shows such as Good Morning America by drug firms such as Amgen, Scher-
ing Plough, and Pfizer. Is marketing drugs the same as marketing breakfast
cereal or deodorant? Should there be a higher standard for health-care prod-
ucts in general? Should television viewers be informed when a celebrity or a
sitcom is being paid by a drug company to talk about or display its products?
SITUATION 2
A few years ago, investigators for the U.S. government’s General Accounting
Office (GAO) claimed that several drug companies had repeatedly made mis-
leading claims about prescription drugs in their advertising on TV and in
print, even after being cited for violations. The reason is not surprising:
advertising results in significant increases in the use of prescription drugs and
in higher drug spending. The GAO study estimates that 8.5 million Ameri-
cans each year ask their doctors for specific drugs that they have seen adver-
tised, and their doctors prescribe the desired drugs.61 The numbers continue
to increase. In 2008 a study of data supplied by doctors and the pharmaceuti-
cal industry shows that pharmas spend 24.4 percent of every dollar for adver-
tising versus 13.4 percent for research and development.62 The cost and use
of prescription drugs is one of the engines that has driven the astronomical
increases in health-care costs in recent years. Why have pharmaceutical
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companies spent so much money marketing to patients as well as to physi-
cians? What are the advantages of direct marketing to consumers? What are
the disadvantages?
SITUATION 3
In 2002, drugstore chain Walgreens and pharmaceutical company Eli Lilly
were sued after a Florida consumer received an unsolicited free sample of the
antidepressant drug Prozac Weekly in the mail. The recipient had kept her
depression secret for many years—from her employers, family, and friends—
fearing that she would suffer repercussions if her mental condition was
known. Imagine her surprise when she received Prozac Weekly in the mail,
along with a letter from Walgreens and her doctors. The sample itself was
supplied free by the manufacturer, Eli Lilly. She filed a class-action suit
alleging invasion of privacy, unfair trade practices, and commercial exploita-
tion of confidential medical information by all parties.63 Is it acceptable for
drug makers to market products directly to drugstore customers, using past
patient records as indicators of the drugs they might need? Are patients
helped by this practice? Are they harmed? What about their rights to privacy?
What are the dangers of drug companies being closely aligned with drugstore
chains?
SITUATION 4
Beginning in 2002, prescription Prilosec (a drug to combat acid reflux dis-
ease) lost patent protection and was marketed over the counter as Prilosec
OTC to consumers. This was great news to consumers because a monthly
supply of Prilosec OTC cost only 7 cents per pill versus several dollars a pill
for similar prescription medications. Imagine consumers’ surprise, however,
when they couldn’t find Prilosec OTC on their pharmacy shelves for more
than a year in 2004. Procter & Gamble (the maker of Prilosec OTC) and its
partner, the huge drug company AstraZeneca, claimed that they underesti-
mated demand for the drug and were working hard to ramp up production.
The shortage was so acute that an executive for a large drug distributor in the
Northeast contacted Procter & Gamble every day to ask for more Prilosec
OTC, but rarely received any. The dearth of Prilosec OTC was a good thing
for AstraZeneca, however, because the shortage vastly increased sales of
Nexium, its prescription medication for acid reflux. While AstraZeneca and
Procter & Gamble maintained that they did not manufacture the shortage,
Wall Street analysts, academic researchers, and consumer advocates all
argued that the companies could meet demand for the cheaper over-the-
counter medication if they wanted to.64 Do companies have an obligation to
keep supplies of less-expensive medications available to consumers? Do you
think it is reasonable to imagine that huge companies would create a shortage
of a particular product in an effort to steer consumers toward a more costly
alternative?
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HOW THE COMPANIES HANDLED IT
The pharmaceutical companies argue persuasively that their marketing tactics
do nothing but help educate the consumer. No doubt many consumers now
are much more aware of prescription medications than they were before
advertising such medications became common. But we also have to wonder
how the cost of these drugs have driven up the cost of health care as a
whole and how the relationship among doctors, patients, and the pharmaceu-
tical companies has changed as a result of the industry’s advertising and mar-
keting tactics.
RESULTS
If you look at the lawsuits that have been filed against drug companies over
the last 20 years, many deal with advertising and marketing issues. It’s clear
that the system for advertising drugs and bringing them to market poses huge
ethical issues for the drug companies, many of which have been admired for
their ethical reputations. Lawsuits centering around the marketing tactics of
the drug companies continue to pile up, and they have tarnished some of the
most sterling corporate reputations in the world. How big is the problem? In
2004, Time magazine estimated that since 2001, the drug companies had paid
$2 billion in fines in the United States to settle allegations of illegal sales and
marketing practices.65 The Op-Ed page of the Wall Street Journal—not
exactly a bastion of company-bashing—featured an article a few years ago
profiling the pharmaceutical industry and entitled, ‘‘The Companies Every-
one Loves to Hate.’’ The writer described how a movie (The Constant
Gardener) portrayed the drug industry as rigging drug trials and as being no
better than the illegal arms trade. The writer also described how in a recent
poll, only the oil and gas industry ranked lower than the pharmaceutical com-
panies. According to the poll, the percentage of adults who say they can trust
what drug companies say in advertising dropped by almost half in the last
seven years.66 It is also interesting to note that this drop of consumer confi-
dence in the pharmaceutical industry corresponds exactly with the
deregulation that allowed the industry to advertise directly to consumers in
1997. It seems as if direct advertising has harmed the companies’ reputations.
Of course, none of this is good news for the industry.
Recently, however, some drug companies are beginning to rethink how
they advertise to consumers. For example, Johnson & Johnson began a new
advertising approach in 2005 that devoted as much space to describing drug
risks as drug benefits. Furthermore, Johnson & Johnson has challenged its
competitors to follow its lead in being more forthright and direct about the
risks of prescription drugs.67 And Pfizer, in its 2004 annual report to share-
holders, included a 36-page booklet, ‘‘Ten Questions: An Open Dialogue,’’
that answered consumer questions head-on. Here are some of the questions
Pfizer tackled: ‘‘Why does a little pill cost me so much?’’ ‘‘If Pfizer medi-
cines are cheaper overseas, why not have them shipped in from outside the
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In advertising, there’s a thin line between enthusiasm for a product and high-
pressure sales tactics, between optimism and truth, and between focusing on a target
market and perhaps tempting that market into unfortunate activities. A classic exam-
ple of a company tempting consumers into unhealthy activities is, of course, the
tobacco industry. Although the hazards of smoking have been well documented for
over two decades, tobacco companies spent most of that time denying the health risks
of smoking and used ‘‘benign’’ advertising devices, such as Joe Camel, to market
their very dangerous products. Another example is gambling casinos, where consum-
ers are urged to have a good time playing roulette, blackjack, or slot machines. Are
there ethical obligations for casinos, which know that they may be tempting compul-
sive gamblers into a binge? Who are the stakeholders for the tobacco industry and the
casino industry? And what are the companies’ ethical responsibilities? Does the fact
that tobacco is physically addictive and the knowledge that most people begin smok-
ing as children change our expectations of the tobacco industry and make our assess-
ment of its obligations different?
Another case involves various brands of bottled water, which most consumers
believe come from freshwater springs in Maine, Minnesota, or some other location
with a reputation for a clean environment. In fact, despite the picture of the mountain
on the label, some bottlers package filtered water from the municipal water supplies
of several American cities. Is it up to consumers to read labels closely, or are compa-
nies obligated to represent their products honestly on all labels and in
advertisements?
Can you think of any products for which outrageous claims have been made? Is
it fair to appeal to the emotions of a particular market segment? Why not? Can you
think of particular advertising devices or symbols that are used to appeal to a specific
group of consumers? How far is ‘‘too far’’ in advertising?
ETHICS AND EMPLOYEES
Certainly, one of the key stakeholder groups in any corporate situation should be the
employees of the organizations involved in the case. Organizations have myriad
ethical obligations to their employees. Some of these could include the right to pri-
vacy, the right not to be fired without just cause, the right to a safe workplace, the
right to due process and fair treatment, the right to freedom of speech (whistle-
U.S.? And just why are they cheaper overseas?’’ And ‘‘I can’t write my own
prescriptions. Why spend any money advertising to me?’’68 These recent
moves by Pfizer and Johnson & Johnson are important signals that the phar-
maceutical may be indeed pursuing a new marketing direction. Also, the
pharmaceutical industry group, Pharmaceutical Research and Manufacturers
of America (PhRMA, discussed in Chapter 9), has established guidelines that
if followed should eliminate many of the industry’s questionable practices in
the future. Companies are joining forces because they recognize that bad
press about practices in the industry can harm all of them.
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blowing), and the right to work in an environment that is free of bias.69 We’ve
addressed a number of these rights in other chapters. In this section, we focus on two
specific rights: a safe workplace and the right to keep a job unless just cause can be
found for a firing.
Employee Safety
The most basic of employee rights is the right to work without being maimed or even
killed on the job. In 1970, the Occupational Safety and Health Administration
(OSHA) was created in an attempt to protect workers from hazards in the workplace.
OSHA’s mission is not only to protect workers against possible harm but also to
ensure that employees are informed of the hazards of their particular industry and
job. Let’s look at a classic employee safety case.
COMPANY: Johns Manville
INDUSTRY: Asbestos
SITUATION
For decades, asbestos was the favorite insulator in myriad construction prod-
ucts. Some estimate that over 3,000 products contained some kind of asbestos
component. Millions of homes, schools, and other buildings contained asbes-
tos insulation; thousands of ship workers in World War II installed asbestos
in battleships and other watercraft; and thousands of auto mechanics had
fixed innumerable automobile brakes lined with asbestos. The danger of
inhaling even minute amounts of asbestos was not publicly known until the
1970s, mainly because the incubation period for many of the asbestos-related
lung diseases and cancers is anywhere from 10 to 40 years. However, by the
mid-1970s tens of thousands of people who worked with asbestos were
beginning to suffer from the fatal diseases we now know are characteristic of
asbestos exposure.
HOW THE COMPANY HANDLED IT
According to company documents, Johns Manville became aware of the
adverse health effects of asbestos exposure as early as the mid-1930s. (In
fact, Prudential Insurance stopped insuring asbestos workers’ lives in 1928.)
Although some executives were disturbed by the connection between their
product and workers’ illnesses, the sentiments of the stonewallers prevailed.
Warning labels were not placed on asbestos packaging until 1964. In addi-
tion, company doctors lied to asbestos workers at Manville facilities and told
them they had no health problems. Johns Manville executives hid scientific
data; lied to the public, the government, and their employees; and kept quiet
about the danger to which tens of thousands of workers were being exposed.
The only stakeholder groups considered by Johns Manville during this period
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seem to have been the senior executives and the shareholders. The company
appeared to totally ignore the obligations it had to other stakeholder groups.
RESULTS
By 1982, more than 17,000 lawsuits had been filed against Johns Manville.
That was the tip of the iceberg. Many more thousands are expected to be filed
as more workers develop fatal diseases that were the result of exposure during
World War II. Many of these deaths are lingering ones in which the quality of
life diminishes greatly over many years. As a result of the massive litigation,
Johns Manville established a fund containing hundreds of millions of dollars
to settle claims. The company filed for Chapter 11 bankruptcy protection in
1982, has been reorganized, and has been renamed the Manville Corporation.
The new corporation has a strong commitment to funding the costs of the
claims filed against its former self, and Manville executives have voiced
what appears to be a real commitment to ethics within the corporation in an
effort to prevent what happened from happening again.70
COMMENTS
One of the real mysteries surrounding this case is how so many senior execu-
tives over so many years could manage to live with themselves while keeping
the awful secret of asbestos-related illness. It’s one thing to hide something
for a few years. But to keep this devastating secret for more than 40 years,
throughout many changes in management, is a staggering notion to contem-
plate. Bill Sells, a manager with Johns Manville and the Manville Corpora-
tion for more than 30 years, wrote a Harvard Business Review article in
which he analyzed what happened.71 He contends that management was in
denial. ‘‘Manville managers at every level were unwilling or unable to
believe in the long-term consequences of these known hazards. . . . Had the
company responded to the dangers of asbestosis and lung cancer with exten-
sive medical research, assiduous communication, insistent warnings, and a
rigorous dust-reduction program, it could have saved lives and would proba-
bly have saved the stockholders, the industry, and, for that matter, the prod-
uct. . . . But Manville and the rest of the asbestos industry did almost
nothing of significance—some medical studies but no follow through, safety
bulletins and dust-abatement policies but no enforcement, acknowledgment
of hazards but no direct warnings to downstream customers—and their col-
lective inaction was ruinous.’’72
According to Sells, the denial was fed by the conviction that asbestos
was an essential product that the world couldn’t get along without. Managers
also believed they were doing enough because Manville’s air quality stan-
dards were higher than the allowable limit set by the American Conference
of Governmental Industrial Hygienists. But how did the company know
whether the standard was really safe? They did little to find out. And what
about the need for standards to protect those working with asbestos products,
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Let’s look at another particularly egregious case that was profiled in the New
York Times and on public television in January 2003.
such as brake shoe installers? Nothing was being done to protect them.
Another factor feeding the denial was the fact that asbestos workers who
were also smokers were much more likely to get sick. Managers could blame
the tobacco industry and avoid self-blame. In addition, short-term financial
consequences took precedence in managerial decision making. And, finally,
managers sent a ‘‘don’t tell me what I don’t want to hear’’ message. Top
managers actually may have been unaware of some of the problems. As Sells
points out, however, juries convict companies based on what they ‘‘should
have known,’’73 not necessarily what they did know.
COMPANY: McWane, Inc.
INDUSTRY: Manufacturer of water and sewer pipes
SITUATION
McWane, Inc., in Birmingham, Alabama, is a privately held pipe manufac-
turer that has expanded aggressively over the last 30 years—mainly by pur-
chasing antiquated plants and increasing profitability through what the
company calls ‘‘disciplined management practices.’’ Although the industry—
melting metal and casting pipe—is inherently dangerous, McWane’s drive
for profits was so relentless that worker safety was sacrificed in the name of
profits for the McWane family, who own the company and answer to no
shareholders. For a number of years after 1995, McWane accumulated four
times more safety violations than its six major competitors combined! From
1995 to 2002, nine McWane workers were killed and more than 4,600 work-
ers were injured (out of a total of 5,000), many in particularly gruesome,
maiming accidents. At one acquisition—Tyler Pipe Company in Tyler,
Texas—McWane reduced the workforce by almost two-thirds and demanded
increased productivity from the remaining workforce. An inspector from
OSHA, the federal regulator charged with guarding worker safety, described
what was found at Tyler Pipe: ‘‘Many workers have scars or disfigurations
which are noticeable from several feet away. Burns and amputations are fre-
quent. Throughout the plant, in supervisors’ offices and on bulletin boards,
next to production charts and union memos, is posted in big orange letters:
‘‘REDUCE MAN HOURS PER TON.’’
74
HOW THE COMPANY HANDLED IT
After the New York Times and Frontline (a production of PBS) investigated
and produced a shocking series—in the newspaper and on PBS stations—that
exposed the horrific conditions at McWane, the company responded with a
written statement denying allegations about its safety record. ‘‘We do not put
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production concerns ahead of safety and environmental compliance,’’ said
company officials in a written statement to the New York Times and Front-
line. That publicity prompted a series of federal investigations, which led to
myriad indictments in several states (including Alabama, New York, New
Jersey, Texas, and Utah). Among them was a 25-count indictment charging
the company with illegal dumping and other environmental crimes; other
counts charged the company with conspiring to violate workplace safety and
environmental laws, obstructing government investigations by lying, intimi-
dating workers, and altering accident sites.75
RESULTS
In March 2005, McWane pleaded guilty to environmental crimes committed
at its Tyler Pipe operation in Texas and was fined $4.5 million. In June 2005,
McWane was found guilty of 20 environmental crimes at one of its factories
in Alabama. In August 2005, the company pleaded guilty to federal safety
and environmental crimes in one of its Alabama plants. In that incident,
McWane admitted that it willfully violated federal safety rules by failing to
install a required safety guard on a conveyor belt and that a young worker
was crushed to death. A McWane employee in Texas had been killed two
months earlier by another unguarded conveyor belt.
76 The New York Times
and PBS won the 2004 Goldsmith Prize for Investigative Reporting for their
series of articles and programs on McWane.77
COMMENTS
Few investigations have yielded more gruesome or tragic stories than the
New York Times/PBS series on McWane. If the company was concerned with
safety and the environment before this series, its concern certainly was not
evident. Would this company have been more responsible if there had been
shareholders to report to? As this book went to press, the McWane website
(www.mcwane.com) contained various statements regarding safety and the
environment. ‘‘Do It Safely or Not At All’’ is the slogan displayed in a sec-
tion devoted to health and safety. And in a section devoted to the environ-
ment, McWane states that its goal is ‘‘Protecting the Environment for
Generations to Come.’’ Press releases on the site describe various awards for
safety that the company has received from organizations in various states. So
it appears that McWane is cleaning up its act—literally and figuratively. That
said, on the PBS Frontline website (www.pbs.org/wgbh/pages/frontline/
shows/workplace/mcwane) for ‘‘The McWane Story,’’ there is a section enti-
tled ‘‘Two Companies, Two Visions.’’ It describes the McWane vision of
driving profitability regardless of safety or environmental concerns and con-
trasts it with the vision of another pipe company in Birmingham called Amer-
ican Cast Iron Pipe Company (ACIPCO). At the time of the series, McWane
had employee turnover rates of almost 100 percent. ACIPCO had turnover
rates of less than 1 percent, and its rate of injuries at the time was a fraction
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http://www.mcwane.com
http://www.pbs.org/wgbh/pages/frontline/shows/workplace/mcwane
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Can you think of examples in other industries where employee safety and health
are major issues? Are there health and safety issues in service (nonmanufacturing)
industries? Are employers responsible for conditions such as carpal tunnel syndrome,
in which the wrist is injured as a result of repeated movements like entering data into
a computer? What recourse do employers have in situations where the performance
of a job, in itself, can cause injury? If a company discovers that its employees are at
risk for injury, is it under any obligation to inform the public?
Employee Downsizings
Employee downsizings or layoffs can result from many business conditions, includ-
ing economic depressions, the desire to consolidate operations and decrease labor
costs, and increased competition and unmet corporate objectives, to list just a few.79
However justifiable the reason may be, the result always involves human misery.
Organizations may not have an ethical obligation to keep labor forces at a specific
number. They do, however, have an obligation to hire and fire responsibly.
One of the most contentious downsizing cases in recent years involved a major
employer in the Northeast.
of McWane’s. While McWane rationed ice cubes to its employees, ACIPCO
provided individual air conditioners to its workers. At the time of the series,
ACIPCO ranked sixth on Fortune magazine’s ‘‘100 Best Companies to Work
For.’’ The interesting irony of the story is that when John Eagan founded
ACIPCO in 1905, he promised to run the business based on the Golden Rule.
Only one employee dissented— the president of ACIPCO, who would soon
leave and cross town to start his own pipe business, J. R. McWane.78
COMPANY: Scott Paper Company
INDUSTRY: Consumer Paper Products
SITUATION
In late 1993, Scott Paper had tired product lines, some extraneous business
ventures, and a lagging revenue stream and stock price. Scott’s board of di-
rectors wanted to breathe some life into the slumbering giant. In April 1994,
Albert J. Dunlap, a self-proclaimed ‘‘Rambo in pinstripes,’’ was named CEO
of Scott Paper. Dunlap immediately created his very own crisis to get the
company moving. It was as if he’d lobbed a fire bomb through the doors of
corporate headquarters.
HOW THE COMPANY HANDLED IT
Dunlap began by quickly selling off $2 billion worth of nonessential busi-
nesses.80 He also quickly terminated one-third of the total workforce of
Scott—over 11,000 workers lost their jobs. But perhaps the most painful
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blow to the Philadelphia area was Dunlap’s decision to move Scott’s corporate
headquarters out of the city where it had been founded 116 years earlier to
Boca Raton, Florida, where Dunlap had a home. According to some sources,
the move was prompted by Philadelphia’s climate, which Dunlap didn’t like.
RESULTS
Scott’s stock price increased 146 percent in 14 months, and its profits doubled
after one year of Dunlap’s management. The company was sold in mid-1995
to Kimberly-Clark Corporation for $6.8 billion in stock.81 Some stakeholders
were delirious. Scott shareholders made out like bandits. Wall Street financial
types did a jig. But no one was more gleeful than Dunlap, who pocketed $100
million in salary, stock profits, and other perks. Not bad for 15 months of his
time.
COMMENTS
Many people thought of Dunlap as a hero, including Dunlap himself. Many
others, however, considered him to be the worst kind of villain—‘‘Chainsaw
Al,’’ as some of his detractors called him. Though downsizing and restructur-
ing measures are painful, many people can understand why they might be
necessary to turn around a company that can no longer compete. What infuri-
ated everyone in the Philadelphia area, however, was Dunlap’s moving
Scott’s corporate headquarters because he didn’t like the weather in Philadel-
phia. Certainly, it is a capricious reason to move an organization that was an
institution in the area for over a century. Scott was not just some company.
Rather, it had been an exemplary corporate citizen, providing talent and
financing for local cultural and civic organizations. In addition, Dunlap’s
manner was arrogant, and he showed little or no sympathy either toward the
long-term employees who had been axed or to the area he gutted.
UPDATE
After selling Scott Paper Company, Al Dunlap went on to become CEO of
Sunbeam (maker of electric blankets and outdoor grills) in 1996. In typical
Al Dunlap fashion, he quickly announced the closing or sale of two-thirds of
the company’s factories and the firing of half of its 12,000 employees. The
stock rose and Wall Street applauded. In March of 1997, Sunbeam bought
three companies: Coleman (camping equipment), First Alert (smoke alarms),
and Signature Brands (Mr. Coffee). A year later, it became clear to Sun-
beam’s board that the acquisitions had not been well managed and that the
company was in financial trouble. The board also discovered that the com-
pany was using highly aggressive sales tactics and accounting practices that
inflated revenues and profits.82 In June 1998, Chainsaw Al got the ax himself.
In 2002, Dunlap settled charges with the SEC, paid a fine of $500,000, and
neither admitted nor denied that he presided over accounting practices that
resulted in Sunbeam overstating its profits in 1997 and 1998. And his legal
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Contrast what happened to Scott Paper with the philosophy of Lincoln Electric Com-
pany in Cleveland, Ohio.
woes did not end there. The Justice Department began an investigation of
Sunbeam for the period it was managed by Dunlap.83 Even more interesting
was the disclosure that, early in his career, Dunlap was fired twice—once
when the company’s board accused him of overseeing a huge accounting
fraud. Dunlap erased these two firings from his official employment history,
and news of them surfaced only recently. Another interesting tidbit: in one of
those companies that fired him, his relationships with his colleagues were so
fractured that the entire senior team below Dunlap threatened to resign as a
group unless he was canned.84
COMPANY: Lincoln Electric Company
INDUSTRY: Electrical Components
SITUATION
Lincoln Electric has had an unusual relationship with its employees since it
was founded by John C. Lincoln in 1895.85 The company has been on the
cutting edge of worker-friendly efforts. In 1923, it was among the first firms
to offer company-paid vacation; in 1925, it was among the first to offer
employee stock ownership plans; the first employee suggestion program was
implemented in 1929; and Lincoln employees received incentive bonuses
beginning in 1934. Perhaps the most controversial of its programs, however,
is its guaranteed employment plan: after three years of continuous employ-
ment with Lincoln Electric, workers are guaranteed their jobs. In the early
1980s, however, the company experienced tremendous hardship. As a result
of inflation, higher energy costs, and a recession in the United States,
Lincoln’s sales plummeted 40 percent. Company managers didn’t know if
they would be able to keep their promise of guaranteed employment.
HOW THE COMPANY HANDLED IT
The company was severely tested. However, not one Lincoln employee was
laid off for lack of work. The company’s loyalty to its employees was
returned in 1993, when Lincoln urged its employees to attain record levels of
sales and production. Employees voluntarily postponed 614 weeks of vaca-
tion in order to meet customer demands. Layoffs are extremely rare at
Lincoln; between 1948 and 2008, there were none. The global financial crisis
of 2008–09 created great hardship for the company, and 10 percent of its
global workforce was laid off as part of a company-wide effort to reduce
costs in early 2009. In addition, Lincoln offered buyouts to employees,
reduced work hours, cut management salaries by 20–45 percent, and elimi-
nated merit raises and all outside hiring. Even in the current economic
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As we mentioned in Chapter 8, employees have the right to be treated fairly,
without bias, and on the basis of their ability to perform a specific job. If a layoff or
downsizing is necessary—if it involves one person or many—the layoff should be
done with respect, dignity, and compassion. In the two cases we just outlined, what
do you imagine are the key differences in philosophy? How could companies become
more like Lincoln Electric? What are the pitfalls of Lincoln’s approach? What are the
pitfalls of Dunlap’s? If you had to lay off employees, what factors would you con-
sider in structuring a plan that would be as fair as possible to all involved?
Suppose the country experiences a recession. Should companies begin to lay off
employees in order to maintain expected growth rates? to satisfy Wall Street’s profit
and growth expectations? What other stakeholder groups are affected? Are compa-
nies in business only to make a profit for shareholders? Are employee stakeholder
groups more expendable than customer stakeholders? How can a company reconcile
long-term obligations to all stakeholders with short-term financial crises?
ETHICS AND SHAREHOLDERS
Organizations also have a clear ethical obligation to shareholders and other ‘‘own-
ers.’’ This ethical obligation includes serving the interests of owners and trying to
perform well in the short term as well as the long term. It also means not engaging in
activities that could put the organization out of business and not making short-term
decisions that might jeopardize the company’s health in the future. As Kotter and
Heskett say in their book, Corporate Culture and Performance (1992), ‘‘only when
managers care about the legitimate interests of stockholders do they strive to perform
well economically over time, and in a competitive industry that is only possible when
they take care of their customers, and in a competitive labor market, that is only pos-
sible when they take care of those who serve customers—employees.’’87 Thus taking
climate, Lincoln seemed to be able to spread the pain across all ranks in an
effort to survive the horrible economic conditions.86
RESULTS
Incentive management is a cornerstone of Lincoln’s culture. Having devel-
oped one of the first pay-for-performance systems in the country, this com-
pany is frequently a subject of research by academics and other companies.
Lincoln also has an elected employee advisory board for direct and open
communications between employees and senior managers. The board was
established in 1914 and has met every two weeks ever since. So loyalty at
Lincoln is nothing new. Lincoln’s website (www.lincolnelectric.com) clearly
describes the company’s commitment to integrity: ‘‘More than 100 years
ago, the founders of Lincoln Electric adopted a policy of absolute integrity—
doing the right thing rather than what was expedient, popular or in vogue at
the time. Today, that solid ethical heritage remains the foundation of Lincoln
Electric’s corporate governance practices.’’
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care of shareholders also means ultimately taking care of other key stakeholder
groups. Let’s examine how the ethics of the investment banking giant Salomon
Brothers affected its shareholders.
COMPANY: Salomon Brothers
INDUSTRY: Investment Banking
SITUATION
In December 1990, the head of Salomon’s government bond trading desk, Paul
Mozer, decided to test the regulatory resolve of the U.S. Treasury. Annoyed by
the federal limits on the percentage of Treasury bonds any one firm could bid for
in Treasury auctions—the ceiling was 35 percent—Mozer devised a plan to
evade the regulation. He submitted a bid for Salomon Brothers, and he submitted
an unauthorized bid in the name of one of his customers. The two bids combined
represented 46 percent of the auction—a clear violation of the rules. Mozer got
his bonds and repeated this maneuver in February, April, and May 1991.
HOW THE COMPANY HANDLED IT
In April 1991, Mozer described the tactic to four Salomon executives: Chair-
man John Gutfreund, President Thomas W. Strauss, Vice Chairman John W.
Meriwether, and General Counsel Donald M. Feuerstein. These executives
told Mozer to stop his scheme but did not report Mozer’s activities to the
Securities and Exchange Commission at that time. (In May, Mozer rigged the
bidding again.) In June, the SEC subpoenaed Salomon for its auction records.
In August, Salomon finally alerted the SEC to Mozer’s activities. Immedi-
ately following the disclosure to the SEC, Mozer was suspended from his
job; shortly afterward, the board of directors asked the four Salomon execu-
tives to resign from the firm and fired Salomon’s outside law firm. The board
named one of its own members, Warren Buffett, as interim chairman.
RESULTS
The publicity generated by the Salomon scandal was devastating to the firm
and its shareholders. Its market value dropped by over one-third—$1.5
billion—in the week following the disclosure. Its debt was downgraded by
various rating agencies, and major banks reevaluated Salomon’s loan terms.
Because of the firm’s decreased liquidity, its ability to trade was dramatically
reduced. In addition to the immediate financial debacle, teams of Salomon
Brothers personnel left the firm. For a year after the crisis, the financial press
was awash in reports of high-level Salomon employees joining other firms.
The defections no doubt damaged the firm for many years. In addition, at a
time when the profits of other investment banks were soaring by as much
as 50 percent over previous years, Salomon’s underwriting revenues were
down 26 percent—a huge and humbling disparity. Their profits were off
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substantially, customers left, and they were barred from some kinds of trans-
actions or were rendered ineffective because of their weakened financial posi-
tion. It took years for the firm to recover.88
COMMENTS
In the investment banking industry, reputation is everything. It’s the yardstick
customers use to evaluate quality and a firm’s ability to do business. Nothing
is more devastating for a financial services firm than the loss of reputation.
Salomon is lucky it survived. It very well could have gone the way of E. F.
Hutton and Drexel Burnham Lambert. E. F. Hutton was acquired by another
financial firm after it could not survive pleading guilty to 2,000 felony counts
of fraud in a check-kiting case. (Check kiting is a type of fraud that involves
moving money in and out of accounts with insufficient funds to cover the
withdrawals. This usually involves multiple accounts.) Drexel closed its
doors after charges of wrongdoing in the high-yield market effectively
crippled its ability to do business. In all cases, the firms put their own inter-
ests ahead of the interests of their primary stakeholders: their customers.
UPDATE
Salomon Brothers remained independent until 1998, when it was acquired by
the Travelers Group, and eventually became part of Citigroup. For more than
a decade it was known as Salomon Smith Barney, which was the investment
banking arm of Citigroup. Former New York State Attorney General Eliot
Spitzer investigated the company and its former star telecom analyst, Jack
Grubman, who were named in approximately 62 class-action lawsuits.89 The
plaintiffs accused Salomon and Grubman of issuing unreasonable research
reports and of failing to disclose conflicts of interest with companies profiled
in those research reports, including WorldCom, AT&T, Global Crossing,
Winstar, and others.90
It turns out that this was an industry-wide practice. In late 2002, the
Spitzer probe was resolved when Wall Street investment banks agreed to
change their research practices to eliminate conflicts of interests like the ones
exhibited by Grubman. Conflicts of interest were so rampant at the time that
in a truly outrageous move, Sanford Weill (then CEO of Citigroup) asked
Grubman to review his rating of AT&T in order to help win favor with
Michael Armstrong, who at the time was CEO of AT&T and a board member
of Citigroup. The point was to persuade Armstrong to side with Weill in a
boardroom struggle. Weill later denied the charge. However, Weill,
Citigroup, and other investment firms agreed to settle the conflict-of-interest
suits and pay $1.44 billion in fines as well as to reform their practices. Cit-
igroup paid $300 million of the fine, and the rest of it was divided among
nine other banks including Credit Suisse First Boston, Morgan Stanley, and
Merrill Lynch.91 Salomon Smith Barney also admitted to failing to manage
conflicts of interest, publishing fraudulent and misleading research, ignoring
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internal warnings, and engaging in improper spinning and public offering
stock distribution practices. In addition to the fines imposed, Salomon Smith
Barney was ordered to report regularly on its compliance activities to Cit-
igroup’s board of directors; Citigroup was ordered to make a pubic statement
of contrition for failing to address conflicts of interest; and Citigroup was
ordered to prohibit senior executives who function as investment bankers
from communicating directly with analysts who cover those companies. In
addition, Grubman was fined $15 million and received a lifetime ban on func-
tioning as a broker, dealer, investment advisor, or an employee of an invest-
ment company or municipal securities dealer.92 The good news for Citigroup
is that after an incredible spate of ethical lapses, high-profile investigations,
horrendous publicity, almost $6 billion in fines, and truly mortifying behavior
by a host of employees (including some at the very highest levels), the ‘‘take-
no-prisoners’’ CEO Sandy Weill finally handed over the reins of the day-to-
day management of the company to Charles Prince, former corporate coun-
sel, in July 2003. (In March 2006, Prince became chairman and CEO of Citi-
group.)93 It appears, however, that the seeds of unethical behavior had been
sown and even though Prince, a lawyer, headed the firm from 2006 to 2008,
he could do little to change the culture of the giant company. The risk-taking
culture that had been encouraged by Weill continued unabated. The current
CEO, Vikram Pandit, is struggling to right the huge ship94 by shrinking Citi-
group into a global bank modeled after the original Citicorp. He told the Con-
gressional Oversight Panel in early 2010 that he was trying to ‘‘break it up’’
in order to return the organization to profitability, and Salomon Smith Barney
was among the many businesses sold.95 It is now Morgan Stanley Smith
Barney. As this book goes to press, Citigroup remains on government life
support, and its stock price is still languishing at around $4.25 per share,
down from almost $60 per share in late 2006. Perhaps no bank was more
vilified by the press during the 2008–09 financial crisis than Citigroup—and
with good reason.
COMPANY: AIG (American International Group)
INDUSTRY: Insurance and Financial Services
SITUATION:
For many years, AIG was the picture of financial stability. Before the finan-
cial crisis of 2008–09, AIG held 81 million life insurance policies worth
almost $2 trillion. It insured approximately 180,000 businesses around the
world, which employed around 106 million people. It owned fleets of jet
planes that it leased to airlines and other businesses, provided insurance to
U.S. cities and municipalities and pension funds, and guaranteed investment
contracts and products that protected 401(k) participants. Before the crisis,
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AIG was the largest health and life insurer in the United States and the
second-largest property and casualty insurer. However, it was a classic ‘‘too-
big-to-fail’’ company because its operations touched so many individuals,
companies, and governments worldwide.96 Letting AIG fail would be like
pulling the rug out from under the global economy; its effects would rever-
berate throughout the world. AIG unwittingly began a downward spiral by
getting deeply into the business of selling credit default swaps (CDSs) and
collaterized debt obligations (CDOs). Nearly all of the company’s losses
stem from one very small business unit—a 400-employee business with of-
fices in London and Greenwich (Connecticut) called AIG Financial Products
(AIGFP). The current chairman of the Federal Reserve, Ben Bernanke, said
that AIGFP was in essence a hedge fund, completely unregulated, that was
attached to a very large and stable insurance company. AIGFP exploited a
huge gap in the regulatory system and built up a $2.7 trillion portfolio of
derivatives.97 (Famed investor Warren Buffett once called derivatives
‘‘weapons of mass destruction.’’ Long before the crisis, Buffett claimed that
derivatives posed a ‘‘mega-catastrophic risk’’ for the economy and stated that
the products were designed by ‘‘madmen.’’)98 AIG got into trouble when fi-
nancial companies bought increasingly risky investments (subprime mort-
gages) and went to AIG to insure that risk. When those securities were
downgraded in value during the financial crisis in 2008, the firms that pur-
chased the insurance demanded payment from AIG on their policies. Sud-
denly AIG needed collateral that it didn’t have. It faced bankruptcy—a
catastrophe for the company and the economy.
HOW THE COMPANY HANDLED IT
Actually, the company didn’t handle it—it couldn’t handle it. The problem
was so enormous that the U.S. government had to step in and bail out AIG, to
the tune of $180 billion.99 U.S. taxpayer money kept the company in busi-
ness, although it is currently a shadow of its former self and the bleeding is
by no means over. It may need more bailouts in the future.
RESULTS
To stay afloat, AIG has desperately tried to raise capital and cut expenses.
Layoffs have occurred in some of its businesses, and other businesses have
been sold to competitors to raise capital. The financial mastermind of AIGFP,
Joe Cassano, was paid $280 million in the eight-year run-up of his hedge
fund. He is now retired and living in a London townhouse, trying to avoid the
press who stalk him. A subsequent scandal that has dogged the company in-
volves the AIGFP traders who had contractual bonus payments worth $165
million owed to them to clean up the mess they created. Their bonuses—in
some cases paid to the very people who created the crisis for AIG—were the
subject of endless press speculation and resulted in public fury over the
unfairness of paying people millions to correct their mistakes.100
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Shareholders—in particular, individual investors—have been abused in recent years
as numerous ethical lapses have driven a collapse in the stock market. Several of the
cases described earlier in ‘‘Ethics and Consumers’’ are also relevant here.
ETHICS AND THE COMMUNITY
As many people have discovered, companies don’t exist in a vacuum. Companies are
citizens in their communities, just as individuals are; and because of their size, com-
panies can have an outsized impact on their communities. Therefore a major stake-
holder in business must be the communities of which corporations and other
organizations are a part. Perhaps the most obvious way a company can affect its com-
munity is through its approach to the environment.
The public’s concern with the effect of business on the environment began in
earnest with the publication of Rachel Carson’s Silent Spring (1962).102 In her book,
Carson outlined the hazards of pesticides, and DDT in particular, to the environment.
The resulting public outcry resulted in the Environmental Protection Act in 1969 and
the creation of the Environmental Protection Agency (EPA) in 1970. The goal of
both the act and the agency is to protect the environment—air, water, earth—from
the activities of businesses and individuals. Of course, the ethical obligation implicit
for all of us is to think long term about the health of the planet and its environs for
ourselves, our children, and other generations to follow. Let’s look at a classic envi-
ronmental case.
COMMENTS
Frankly, AIG’s future is questionable. It’s uncertain whether it will be able to
repay its huge debt to the federal government and whether it will regain the
reputation for stability that it needs to be successful in the insurance industry.
Many employees are looking to leave the company, and they would have by
now if the economy were in better shape. Likewise, students are looking else-
where for employment. It is extremely difficult to keep and attract the best
people when you’re dealing with a scandal of this magnitude. The company
brand has suffered so much that various parts of the organization have
changed their names. For example, the property and casualty business is now
known as American International Underwriters, which was the original name
of the company when it was founded in Shanghai in 1919.
101 As this book
goes to press, the AIG story is still evolving and investigations into its activi-
ties continue.
COMPANY: Exxon
INDUSTRY: Petroleum
SITUATION
In 1989, the Exxon Valdez, an oil tanker bound for Long Beach, California
from the Port of Valdez in Alaska, ran aground in Prince William Sound. The
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Valdez contained 52 million gallons of crude oil, 10 million gallons of which
quickly began to leak into the pristine Alaskan waters. The captain of the
tanker, Joseph Hazelwood, was later tested for alcohol consumption and
showed an increased blood alcohol level. Although it was never proven that
Hazelwood was drunk at the time of the accident, he did violate company regu-
lations by not being on the bridge of the tanker when navigating in those waters.
In addition, Alyeska, the consortium of seven oil companies that origi-
nally established Alaska as an oil capital with the construction of the Trans
Alaska pipeline, was charged with safeguarding Alaska from just such an ac-
cident and with providing immediate help should such a catastrophe occur.
HOW THE COMPANY HANDLED IT
Although Exxon immediately began cleanup efforts, critical equipment was
either damaged and in the process of being repaired, or not on the scene.
CEO Lawrence Rawls did place full-page apology ads in various newspapers
one week after the accident, but he did not visit Alaska and was roundly criti-
cized for that seeming insensitivity. In addition, Exxon appeared to blame
everyone but itself for its problem. And Alyeska was not much help. Like
Exxon, it was unprepared for a crisis of the magnitude of the Exxon Valdez
spill. As a result, Exxon seemingly dropped the ball with this oil spill. It
looked as if the firm denied responsibility.
RESULTS
Although over 800 miles of Alaskan beaches were initially covered with oil,
85 percent of them had been cleaned by 1990. Wildlife in the area was not so
lucky—more than 30,000 birds and at least 2,000 sea otters died. In addition,
the fish population was contaminated. Exxon spent more than $2 billion on
the cleanup and paid additional hundreds of millions to the city of Valdez
and Alaskan fishermen. Captain Joseph Hazelwood was fired for not follow-
ing the regulation about being on the bridge of the tanker.103
What really took a beating, however, was Exxon’s image. Environmen-
talists publicly hammered the company, and some 40,000 consumers de-
stroyed their Exxon credit cards in protest.
COMMENTS
The difference between the personality of Exxon CEO Lawrence Rawls and
Johnson & Johnson CEO James Burke could be why Exxon received such
poor marks on its handling of the Valdez crisis. Rawls was an engineer and
uncomfortable with the media. His reaction appeared slow and seemingly dis-
passionate, and the lemon he was handed remained a lemon. Burke, on the
other hand, knew how to make lemonade.
UPDATE
In 2004, after years of civil litigation, Exxon was ordered to pay $4.5 billion
in punitive damages to those affected by the oil spill from the Valdez incident
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WHY ARE THESE ETHICAL ISSUES?
These are all ethical issues because they involve obligations to primary or key stake-
holder groups. Consumers, shareholders, employees, and the community are proba-
bly the major constituencies of any organization that is not operating in a vacuum.
What groups are more important to a company than the people who pay to have
goods made, the people who make them, the people who buy them, and the place
where the goods are made? These ethical obligations all involve fairness, safety, and
honesty to the four main stakeholders of most organizations.
COSTS
As we’ve seen in the classic cases described in this chapter, the costs of bungling
an ethical obligation to any of the four primary stakeholder groups can be not
only crippling, but fatal. Just as individuals who cross the line can short-circuit
their careers or end up fired or prosecuted, organizations pay the same kind of
price: Their ability to function can be severely limited, and they can even be
forced out of business. At the very least, if a company’s misdeeds are discovered,
they will most certainly be excoriated by the press and the public. Their reputa-
tion can suffer long-term damage that may be difficult to repair. The organiza-
tional costs are horrific, but the personal tragedies are particularly sad because
they were so preventable. Just think of the individuals who’ve received lengthy
jail sentences and of how they and their families have suffered because of ethical
misjudgments (or worse).
It’s impossible to list here all of the regulatory bodies that watch over the
rights of these four stakeholder groups. Certainly, as you enter a particular
industry or company, you will need to learn what laws and which bodies govern
compliance. In the United States, there are, federal, state, and local governments
agencies that are charged with protecting the rights of stakeholder groups. Regu-
latory bodies like the Securities and Exchange Commission, the Comptroller of
the Currency, and the Federal Reserve Board guard the rights of shareholders.
The Food and Drug Administration, the Federal Trade Commission, and the
Federal Communications Commission are federal watchdog agencies for con-
sumer rights. Employee rights are protected by a wide range of agencies includ-
ing the Equal Employment and Opportunity Commission, the Labor Board, and
the Occupational Safety and Health Administration. The Environmental Protec-
tion Agency is the primary protector of the environment.
by the U.S. District Court of Alaska.104 In 2006, Representative Dave Reich-
ert asked Congress to pressure Exxon to pay the $4.5 billion in punitive dam-
ages that it has owed Alaskan citizens for many years. After years of legal
wrangling and countless appeals, in 2008 the U.S. Supreme Court reduced
Exxon’s fine of $5 billion to $500 million.105
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CONCLUSION
In this chapter we’ve described a few of the more memorable business ethics cases. No
industry, and really no company, has been immune from ethical problems and un-
ethical employees. Even Johnson & Johnson has taken its licks in recent years because
of the LifeScan lawsuits as well as other alleged wrongdoing. The point of examining
these cases is that truly smart managers should learn from the mistakes of others.
We hope it’s obvious that all stakeholders are connected and that their interests
frequently overlap. In a recent study, 52 percent of respondents believed that all stake-
holders—investors, employees, customers, the government, and society at large—are
equally important.106 For example, the Enron and AIG debacles harmed not only con-
sumers but also employees, shareholders, and the communities where those companies
had facilities. It’s also obvious that some senior executives need a hefty injection of
morality. The lack of trust has become so acute that only 26 percent of respondents in
a recent study believed that CEOs were credible.107 A shocking reminder of that is
contained in What Went Wrong at Enron (2002), a recent book on Enron’s demise by
Peter Fusaro and Ross Miller. These authors claim that while at Harvard Business
School, Jeff Skilling, later president of Enron, was asked how he would handle a situa-
tion where his company was producing a product that might harm or even kill the
consumers who used it. He allegedly replied, ‘‘I’d keep making and selling the prod-
uct. My job as a businessman is to be a profit center and to maximize return to the
shareholders. It’s the government’s job to step in if a product is dangerous.’’
108
It’s also clear that at the turn of the twenty-first century, businesspeople are at a
crossroads. We need to decide what kind of professionals we are going to be. Are we
going to be honest and fair and deserving of the public’s trust? Or are we going to
push our own agendas and expect the government to make us behave, !a la Jeff
Skilling or bail us out like Citigroup and AIG? A recent study identified the top three
factors in corporate reputation with the public as being (1) transparent and honest
practices; (2) a company I can trust; and (3) high-quality products and services.109 If
businesspeople are going to regain the public’s trust, they will need to focus on integ-
rity, openness, and quality. They also have to understand that this trust effort will
take a very long time.
The last decade has been painful to endure for businesspeople, and you’ve read
about many of the most embarrassing episodes in this chapter—bad news always gets
lots of publicity. The good news is that the vast majority of companies are committed
to doing business in an honorable way, and most of them have long histories of doing
just that. More and more companies are finding more and better ways to weave their
values throughout their cultures, inspiring managers and employees alike to innova-
tion, excellent service, and integrity.
DISCUSSION QUESTIONS
1. What factors contributed to Johns Manville’s long silence on the dangers of
asbestos?
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2. What role do you think the personality of a CEO plays in the handling of an
ethical problem?
3. When other firms in your industry are behaving unethically, how can you buck
the trend and position your company to value ethical behavior? Why is that
important? Will it damage your company’s competitiveness?
4. Imagine that you’re the CEO of a large firm like any of the ones described in this
chapter. What concrete steps would you take to restore your company’s reputation?
5. How much testing is enough when launching a new product?
6. How can the interests of multiple stakeholders be balanced?
7. Do long prison sentences really help deter corporate criminals?
8. How does a company’s reputation play a role in your purchasing decisions?
SHORT CASES
CONFLICT OF INTEREST
Big Company is a large manufacturer of healthcare products that is under fire from
the government to lower costs. Big Company has an excellent reputation and is
widely acknowledged as one of the best-managed companies in the country. Despite
the firm’s reputation, however, Wall Street has reacted negatively to government
efforts to reform the healthcare industry as a whole, and Big Company’s stock price
has lost 30 percent of its value in the last year. To counter the effect of possible gov-
ernment intervention, Big Company has just purchased Little Company, a discount
healthcare supplier. Wall Street has greeted the acquisition with enthusiasm, and Big
Company’s stock price has rebounded by more than 10 percent since news of the
acquisition was made public.
While this acquisition could give Big Company a foothold in a growing part of
the healthcare industry, a real problem lies in the mission of Little Company. Little
has made its reputation by providing objective healthcare advice to its customers.
Now that it’s owned by Big Company, Little Company’s customers have expressed
doubts about how objective it can be in recommending healthcare products if it’s
owned by a healthcare giant. Will Little Company be pressured to recommend the
products offered by Big Company, its parent? Or will Little Company’s advice
remain objective?
As the senior executive charged with bringing Little Company into the corporate
fold, how do you proceed? What are your obligations to Big Company, Little Com-
pany, and the customers of both? What do you owe to shareholders and the financial
community? Are there other stakeholders, and what do you owe to them? What pro-
visions would you include in an ethics code for Little Company?
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PRODUCT SAFETY
As a brand manager at a large food manufacturer, you’re positioning a new product
for entry into the highly competitive snack food market. This product is low in fat
and calories, and it should be unusually successful, especially against the rapidly
growing pretzel market. You know that one of your leading competitors is preparing
to launch a similar product at about the same time. Since market research suggests
that the two products will be perceived as identical, the first product to be released
should gain significant market share.
A research report from a small, independent lab—Green Lab—indicates that
your product causes dizziness in a small group of individuals. Green has an impres-
sive reputation, and its research has always been reliable in the past. However, the
research reports from two other independent labs don’t support Green’s conclusion.
Your director of research assures you that any claims of adverse effects are un-
founded and that the indication of dizziness is either extremely rare or the result of
faulty research by Green Lab. Since your division has been losing revenue because of
its emphasis on potato chips and other high-fat snack food, it desperately needs a
low-fat moneymaker. You were brought in to turn the division around, so your career
at the company could depend on the success of this product.
What are your alternatives? What is your obligation to consumers? Who are your
other stakeholders, and what do you owe them? What is your obligation to your
employer and to other employees at your company? What should your course of ac-
tion be? How can you apply the due care theory to this case?
ADVERTISING
At your company, a bottler of natural spring water, the advertising department has
recently launched a campaign that emphasizes the purity of your product. The indus-
try is highly competitive, and your organization has been badly hurt by a lengthy
strike of unionized employees. The strike seriously disrupted production and distribu-
tion, and it caused your company to lose significant revenues and market share. Now
that the strike is over, your company will have to struggle to recoup lost customers
and will have to pay for the increased wages and benefits called for in the new union
contract. The company’s financial situation is precarious to say the least.
You and the entire senior management team have high hopes for the new ad
campaign, and initial consumer response has been positive. You are shocked, then,
when your head of operations reports to you that an angry worker has sabotaged one
of your bottling plants. The worker introduced a chemical into one of the machines,
which in turn contaminated 120,000 bottles of the spring water. Fortunately, the
chemical is present in extremely minute amounts—no consumer could possibly suf-
fer harm unless he or she drank in excess of 10 gallons of the water per day over a
long period of time. Since the machine has already been sterilized, any risk of long-
term exposure has been virtually eliminated. But, of course, the claims made by your
new ad campaign could not be more false.
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List all of the stakeholders involved in this situation. Do any stakeholder groups
have more to gain or lose than others? Develop a strategy for dealing with the con-
tamination. How much does a company’s financial situation determine how ethical
dilemmas are handled?
PRODUCT SAFETY AND ADVERTISING
For years, arthritis sufferers have risked intestinal bleeding from consistently taking
nonsteroidal anti-inflammatory drugs (NSAIDs) like Advil, which are used to ease
chronic joint pain. Your company, Big Pharma, introduced a new type of painkiller,
a COX-2 inhibitor that addresses the pain without these gastrointestinal effects. To
get the word out to consumers, Big Pharma decided to market the new painkiller
directly to consumers so that they could ask their doctors about it. The marketing
was extraordinarily successful, ultimately creating a multibillion-dollar market. Over
100 million prescriptions were written in just five years, and the drug was a big con-
tributor to your company’s bottom line. Patients and doctors seemed grateful for the
alternative, and doctors began using it to treat all kinds of pain. Then, complaints
began coming in about cardiovascular events (heart attacks) associated with taking
the new drug. Early scientific studies suggested that there might be a problem, but
the science remained inconclusive. It appeared that many of these patients had other
health problems that may have caused their heart attacks. So your company under-
took a more definitive double-blind placebo controlled study (the only kind that can
truly demonstrate cause and effect), which eventually showed a link between your
drug and increased risk of cardiovascular events if the drug was taken consistently
for more than 18 months. The Food and Drug Administration suggested a stronger
black-box warning on the drug packaging to warn of potential cardiovascular side
effects from prolonged use. Your senior management team met to discuss what to
do. Should you follow the FDA’s advice or do something else? The discussion
included reference to your company’s values and strong commitment to integrity and
human welfare. You also referred to the famous Johnson & Johnson Tylenol incident
and the success of that recall effort. After much discussion, you decided to recall the
drug and cease manufacturing it. The negative reactions were instantaneous. In sting-
ing press reports and congressional hearings at which your CEO had to appear, your
company was criticized for not recalling sooner based on the earlier evidence. And,
the lawsuits began. It seemed that anyone who had ever taken your company’s drug
and then had a heart attack was bringing suit. Ironically, on the other side, patients
and doctors who had been using the drug successfully also complained. They thought
you should return the drug to the market with a stronger warning, so that they could
do their own risk assessment. Nothing else worked for some patients, and they were
suffering. But, after careful deliberation, you decided to stick to the recall decision
and fight (rather than settle) the lawsuits. Early in the fight, your company won some
lawsuits and lost some, but vowed to continue fighting them all because you were
convinced that you had done nothing wrong. The fight was costly in dollars and repu-
tation. Eventually, after several years and winning more lawsuits than you lost, you
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decided to settle all remaining lawsuits and move on, a decision that was considered
to be wise in the business community. Your company’s financial performance took a
big hit, but it is now rebounding and the future looks more hopeful as some promising
new treatments appear on the horizon.
Who are the stakeholders in this situation? Experts claim there’s always a risk
when people take prescription drugs. How much risk is too much? How widely do
drug companies need to publicize the risks of prescription medications? Or, is that
the doctor’s responsibility? Do consumers really understand these risks? Do drug
companies have an obligation to ensure that doctors don’t overprescribe their drugs?
Is that a reasonable expectation? Was direct-to-consumer marketing appropriate for
this type of drug? When is it appropriate, and when is it not? Do drug companies
have a bigger obligation to explain the risks of the drugs that they heavily market
directly to consumers because such consumers are more likely to ask their doctors
for these drugs? Why do you think the reaction to the decision to recall in this
case was so different compared to the Tylenol situation? Should senior management
have expected the reactions they got? Was there anything they could have done to
change them?
SHAREHOLDERS
You work for an investment bank that provides advice to corporate clients. The deal
team you work on also includes Pat, a marketing manager, Joe, the credit manager for
the team, and several other professionals. Just before your team is scheduled to pres-
ent details of a new deal to senior management, Pat suggests to Joe that the deal
would have a better chance of being approved if he withheld certain financials. ‘‘If
you can’t leave out this information,’’ Pat says, ‘‘at least put a positive spin on it so
they don’t trash the whole deal.’’
The other team members agree that the deal has tremendous potential, not only
for the two clients but also for your company. The financial information Pat objects
to—though disturbing at first glance—would most likely not seriously jeopardize the
interest of any party involved. Joe objects and says that full disclosure is the right
way to proceed, but he adds that if all team members agree to the ‘‘positive spin,’’
he’ll go along with the decision. Team members vote and all agree to go along with
Pat’s suggestion—you have the last vote. What do you do?
In this hypothetical case, what is your obligation to the shareholders of your
organization and to the shareholders of the two organizations that are considering a
deal? Are shareholders a consideration in this case? Are customers? Are employees?
Could the survival of any of the three companies be at stake in this case? In a situa-
tion like this one, how could you best protect the interests of key stakeholder groups?
COMMUNITY
You have just been named CEO of a small chemical refinery in the Northeast. Shortly
after assuming your new position, you discover that your three predecessors have
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NOTES
1. E. Conway, ‘‘IMF Puts Total Cost of Crisis at £7.1 Trillion,’’ Telegraph, 8 August 2009,
www.telegraph.co.uk.
2. L. Mishel, The State of Working America 2008/2009, Economic Policy Institute (2009), at
www.stateofworkingamerica.org.
3. A. Greenspan, ‘‘Remarks by Chairman Alan Greenspan at the Annual Dinner and Francis Boyer
Lecture of the American Enterprise Institute for Public Policy,’’ Washington, D.C. (December 5,
1996), at www.federalreserve.gov.
4. Arthur Levitt, ‘‘Bigger than Enron,’’ PBS Frontline (June 20, 2002), www.pbs.org.
5. R. E. Freeman, Strategic Management: A Stakeholder Approach (Boston: Pitman, 1984).
kept a horrifying secret. Your headquarters location sits atop thirty 5,000-gallon
tanks that have held a variety of chemicals—from simple oil to highly toxic chem-
icals. Although the tanks were drained over 20 years ago, there’s ample evidence
that the tanks themselves have begun to rust and leach sludge from the various chem-
icals into the ground. Because your company is located in an area that supplies water
to a large city over 100 miles away, the leaching sludge could already be causing
major problems. The costs involved in a cleanup are estimated to be astronomical.
Because the tanks are under the four-story headquarters building, the structure will
have to be demolished before cleanup can begin. Then, all 30 tanks will have to be
dug up and disposed of, and all of the soil around the area cleaned.
You’re frankly appalled that the last three CEOs didn’t try to correct this situation
when they were in charge. If the problem had been corrected 15 years ago before the
building had been erected, the costs would be substantially less than they will be now.
However, as frustrated as you are, you’re also committed to rectifying the situation.
After lengthy discussions with your technical and financial people, you decide
that a cleanup can begin in two years. Obviously, the longer you wait to begin a
cleanup, the riskier it becomes to the water supply. Before you begin the cleanup, it’s
imperative that you raise capital, and a stock offering seems to be the best way to do
it. However, if you disclose news of the dump problem now, the offering will likely
be jeopardized. But the prospect of holding a news conference and explaining your
role in keeping the dump a secret keeps you up at night.
Who are the stakeholders in this situation? What strategy would you develop for
dealing with the dump and its disclosure? Are you morally obligated to disclose the
dump right away? How will Wall Street react to this news? Does your desire to cor-
rect the situation justify keeping it a secret for another two years?
Think about the due care theory presented earlier in this chapter. Can we draw
parallels between due care for the consumer and due care for the environment? What
if the oil tank dump mentioned in the hypothetical case was located in a foreign sub-
sidiary of a U.S. company, and the country where it was located had no laws against
such a dump? Would the CEO be under any obligation to clean it up? Should Ameri-
can companies uphold U.S. laws concerning the environment in non-U.S. locations?
How much protection is enough?
394 SECTION IV ORGANIZATIONAL ETHICS AND SOCIAL RESPONSIBILITY
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E1C10 07/09/2010 Page 395
6. Investing in Social Responsibility, Risks and Opportunities (London: Association of British
Insurers, 2001), 41.
7. O. C. Ferrell and J. Fraedrich, Business Ethics: Ethical Decision Making and Cases (New York:
Houghton Mifflin, 1994), 76.
8. R. D. Hay, E. R. Gary, and P. H. Smith, Business and Society: Perspectives on Ethics and Social
Responsibility (Cincinnati, OH: South-Western Publishing, 1989), 288.
9. J. R. Boatright, Ethics and the Conduct of Business (Englewood Cliffs, NJ: Prentice-Hall, 1993),
332–35.
10. ‘‘Fortune 500 List,’’ Fortune online (2002), www.fortune.com.
11. ‘‘Enron Corporate Profile’’ (2002), at www.hoovers.com.
12. ‘‘Andrew S. Fastow, Former Enron Chief Financial Officer, Pleads Guilty, Settles Fraud Charges
and Agrees to Cooperate with Ongoing Investigation,’’ U.S. Securities and Exchange Commission
(2004), www.sec.gov.
13. ‘‘Lea Fastow Arrives Early for Prison,’’ USA Today (July 12, 2004), www.usatoday.com/money/
industries/energy/2004-07-12-lea-fastow_x.htm.
14. A. Barrionuevo, ‘‘Judge Sentences Former Enron Chief to 24 Years in Prison,’’ New York Times
(October 23, 2006), www.nytimes.com.
15. ‘‘Called to Account: The Enron Saga. Scandal Scorecard,’’ Wall Street Journal (2002), www.wsj.com.
16. G. Draffan, ‘‘Multimillion Dollar Fines & Settlements Paid by Corporations’’ (2005), at
www.endgame.org.
17. Levitt, ‘‘Bigger than Enron.’’
18. ‘‘Who Dropped the Ball?’’ PBS Frontline (June 20, 2002), www.pbs.org.
19. G. Morgenson, ‘‘Settlement Is a Good Deal for Merrill. How about Investors?’’ New York Times
(May 22, 2002), www.nytimes.com.
20. P. McGeehan, ‘‘Washington Insider, but Wall Street Pariah,’’ New York Times (November 24,
2002), www.nytimes.com.
21. A. R. Sorkin, ‘‘What the Financial Crisis Commission Should Ask,’’ New York Times (January 10,
2010), www.nytimes.com.
22. Ibid.
23. E. Mason, ‘‘Putnam Chief Holds Out Hope for Solid, If Slow, Recovery,’’ Boston Business Journal
(June 17, 2005), www.bizjournals.com/boston.
24. P. Elkind, ‘‘Spitzer’s Crusade: Inside the Muckraker-in-Chief’s Campaign against Insurance
Companies and Why—Surprise, Surprise—This Investigation Is Just Getting Started,’’ Fortune
(November 1, 2004), www.fortune.com.
25. M. Goldstein, ‘‘Putnam’s Lasser Gets $78 million Good-Bye Kiss’’ (June 10, 2004), at www.the
street.com.
26. Marsh & McLennan, 2004 Annual Report, 62.
27. Elkind, ‘‘Spitzer’s Crusade.’’
28. Ibid.
29. Argus Analyst Report (Marsh & McLennan Companies, Inc., Argus Research Company, 2005).
30. Elkind, ‘‘Spitzer’s Crusade.’’
31. ‘‘Sentencing in Spitzer Insurance Probe Delayed’’ (September 29, 2005), at www.reuters.com.
32. Mason, ‘‘Putnam Chief Holds Out Hope.’’
33. ‘‘Ex-Fidelity Head Reynolds Becomes New Putnam CEO,’’ Boston Business Journal (June 12,
2008), http://boston.bizjournals.com.
34. Elkind, ‘‘Spitzer’s Crusade.’’
35. D. Hakim and W. Rashbaum, ‘‘Spitzer Is Linked to Prostitution Ring,’’ New York Times (March 8,
2008), www.nytimes.com.
36. Draffan, ‘‘Multimillion Dollar Fines.’’
37. ‘‘Do You Trust Corporate America?’’ Business Week online (June 21, 2002), www.businessweek.
com.
38. 2010 Edelman Trust Barometer, Edelman Public Relations (2010), www.edelman.com/trust.
CHAPTER 10 ETHICAL PROBLEMS OF ORGANIZATIONS 395
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39. T. Donaldson and P. H. Werhane, Ethical Issues in Business: A Philosophical Approach
(Englewood Cliffs, NJ: Prentice-Hall, 1988), 89–100, 414–24; R. R. Hartley, Business Ethics:
Violations of the Public Trust (New York: Wiley & Sons, 1993), 295–305.
40. M. Petersen, ‘‘Guilty Plea by Division of Drug Giant,’’ New York Times, 12 December 2000, C1.
41. ‘‘Johnson & Johnson Widens Recall of Smelly Over-the-Counter Drugs,’’ New York Times (January
16, 2010), www.nytimes.com.
42. N. Singer, ‘‘Johnson & Johnson Accused of Drug Kickbacks,’’ New York Times (January 16, 2010),
www.nytimes.com.
43. ‘‘Best Corporate Reputations in the United States 2009,’’ Reputation Institute (2009),
www.reputationinstitute.com.
44. ‘‘U.S. Vehicle Sales Market Share by Company, 1961–2009,’’ Ward’s Auto Data (2010),
http://wardsauto.com/keydata.
45. ‘‘World Ranking of Motor Vehicles 2008 by Manufacturers,’’ OICA (July 2009), www.oica.net.
46. Bill Vlasic, ‘‘Toyota’s Slow Awakening to a Deadly Problem,’’ New York Times (February 1,
2010), www.nytimes.com.
47. Ibid.
48. M. Chrysler, ‘‘Toyota Down but Not Out, Japan Analysts Say,’’ Ward’s Auto Data (January 29,
2010), www.wardsauto.com.
49. Vlasic, ‘‘Toyota’s Slow Awakening to a Deadly Problem.’’
50. P. Ingrassia, ‘‘Toyota: Too Big, Too Fast,’’ Wall Street Journal (January 28, 2010), www.wsj.com.
51. ‘‘Toyota History,’’ Official Toyota website (2010), www.toyota.com.
52. Chrysler, ‘‘Toyota Down but Not Out, Japan Analysts Say.’’
53. L. Denning, ‘‘Ford Could Win from Toyota’s Lack of Focus,’’ Wall Street Journal (January 28,
2010), www.wsj.com.
54. M. Ramsey and K. Merx, ‘‘Toyota U.S. Sales Halt May Have Sent Buyers to GM, Ford, Honda,’’
Business Week (February 1, 2010), www.businessweek.com.
55. B. Conway, ‘‘Avis Stops Renting Out Some Toyotas,’’ Wall Street Journal (January 27, 2010),
www.wsj.com.
56. A. Taylor, ‘‘Toyota’s Tylenol Moment,’’ CNN Money (January 28, 2010), www.cnnmoney.com.
57. Vlasic, ‘‘Toyota’s Slow Awakening to a Deadly Problem.’’
58. Taylor, ‘‘Toyota’s Tylenol Moment.’’
59. C. Isidore, ‘‘Toyota’s Reputation Takes a Huge Hit,’’ CNN Money (January 27, 2010),
www.cnnmoney.com.
60. M. Petersen, ‘‘Heartfelt Advice, Hefty Fees,’’ New York Times (August 11, 2002), www.nytimes.com.
61. R. Pear, ‘‘Investigators Find Repeated Deception in Ads for Drugs,’’ New York Times (December 4,
2002), www.nytimes.com.
62. ‘‘Big Pharma Spends More on Advertising than It Does on Research and Development,’’ Science
Daily (January 7, 2008), www.sciencedaily.com.
63. V. S. Elliott, ‘‘Patient-Focused Drug Campaigns May Exploit Data, Invade Privacy,’’ Amednews
(American Medical News; July 29, 2002), www.amednews.com.
64. A. Berenson, ‘‘Where Has All the Prilosec Gone?’’ New York Times (March 2, 2005),
www.nytimes.com.
65. D. Fonda and B. Kiviat, ‘‘Curbing the Drug Marketers,’’ Time, 5 July 2004, 41.
66. R. Bate, ‘‘The Companies Everyone Loves to Hate,’’ Wall Street Journal (September 16, 2005),
http://online.wsj.com.
67. S. Hensley, ‘‘In Switch, J&J Gives Straight Talk on Drug Risks in New Ads,’’ Wall Street Journal,
21 March 2005, B1.
68. ‘‘Ten Questions: An Open Dialogue,’’ Pfizer 2004 Annual Review, 2005: 4, 8, 28.
69. Carroll, Business and Society.
70. Donaldson and Werhane, ‘‘Ethical Issues in Business.’’
71. B. Sells, ‘‘What Asbestos Taught Me about Risk,’’ Harvard Business Review (March–April 1994):
76–90.
396 SECTION IV ORGANIZATIONAL ETHICS AND SOCIAL RESPONSIBILITY
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72. Ibid., 76.
73. Ibid., 84.
74. ‘‘A Dangerous Business: Two Companies, Two Visions,’’ PBS Frontline (2003), www.pbs.org.
75. D. Barstow, ‘‘U.S. Brings New Set of Charges against Pipe Manufacturer,’’ (May 26, 2004),
www.nytimes.com.
76. D. Barstow, ‘‘Pipe Maker Will Admit to Violations of Safety Law,’’ New York Times (August 30,
2005), www.nytimes.com.
77. ‘‘Times and PBS Win a Reporting Prize,’’ New York Times Business Financial Desk (March 19,
2004), www.nytimes.com.
78. PBS Frontline, ‘‘A Dangerous Business.’’
79. Carroll, Business and Society.
80. A. Knox, ‘‘What Will Albert Dunlap Do Next at Scott?’’ Philadelphia Inquirer, 16 May 1995, E4.
81. N. Gorenstein and C. Mayer, ‘‘Scott, Kimberly-Clark to Merge,’’ Philadelphia Inquirer, 18 July
1995, C1.
82. J. A. Byrne, ‘‘How Al Dunlap Self-Destructed,’’ Business Week, 6 July 1998, 58–65.
83. F. Norris, ‘‘Justice Department Starts Inquiry at Sunbeam,’’ New York Times (September 9, 2002),
www.nytimes.com.
84. F. Norris, ‘‘An Executive’s Missing Years: Papering over Past Problems,’’ New York Times (July
16, 2001), www.nytimes.com.
85. Lincoln Electric Company, www.lincolnelectric.com.
86. ‘‘Lincoln Electric Cuts Jobs, Salaries,’’ Layoff Tracker (February 3, 2009), http://layofftracker.blog-
spot.com.
87. J. P. Kotter and J. L. Heskett, Corporate Culture and Performance (New York: Free Press, 1992), 46.
88. C. W. Smith, Ethics and Markets: Restructuring Japan’s Financial Markets (Homewood, IL: Busi-
ness One Irwin, 1993), 335–45.
89. M. Gimein, ‘‘The Enforcer,’’ Fortune, September 2, 2002, 77–78.
90. ‘‘Citigroup: Salomon, Grubman Face 62 Suits over Research,’’ Dow Jones Newswire, Wall Street
Journal (November 13, 2002), www.wsj.com.
91. A. Geller, ‘‘Wall Street Firms Agree to Pay $1.44 Billion to Settle Conflicts of Interest,’’ Detroit
News Business (December 21, 2002), www.detnews.com.
92. ‘‘Conflict Probes Resolved at Citigroup and Morgan Stanley,’’ New York State Office of the Attor-
ney General (April 28, 2003), www.oag.state.ny.us.
93. M. Der Hovanesian, P. Dwyer, and S. Reed, ‘‘Can Chuck Prince Clean Up Citi?’’ Business Week,
October 4, 2004, 35.
94. K. Booker, ‘‘Citi’s Creator—Alone with His Regrets,’’ New York Times (January 2, 2010),
www.nytimes.com.
95. E. Dash, ‘‘Citigroup’s Chief Shrinks Company, Eyeing Growth,’’ New York Times (April 5, 2010),
www.nytimes.com.
96. B. Saporito, ‘‘How AIG Became Too Big to Fail,’’ Time (March 19, 2009), www.time.com.
97. Ibid.
98. ‘‘Buffett Warns on Investment ‘Time Bomb,’’’ BBC Business News (March 4, 2003), http://news.
bbc.co.uk.
99. L. Laughlin and R. Beales, ‘‘AIG’s Big Debt to U.S. Taxpayers,’’ New York Times (January 27,
2010), www.nytimes.com.
100. Saporito, ‘‘How AIG Became Too Big to Fail.’’
101. M. Walsh, ‘‘At AIG, the Brand Is Tarnished,’’ New York Times (March 23, 2009), www.nytimes.
com.
102. D. J. Wood, Business and Society (New York: HarperCollins, 1994), 664.
103. R. F. Hartley, Business Ethics: Violations of the Public Trust (New York: Wiley & Sons, 1993),
220–29.
104. ‘‘Re: the Exxon Valdez,’’ #A89-0095CV, U.S. District Court for the District of Alaska (January 28,
2004), at www.seattleclassaction.com.
CHAPTER 10 ETHICAL PROBLEMS OF ORGANIZATIONS 397
http://www.pbs.org
http://www.nytimes.com
http://www.nytimes.com
http://www.nytimes.com
http://www.nytimes.com
http://www.nytimes.com
http://www.lincolnelectric.com
http://layofftracker.blog-spot.com
http://layofftracker.blog-spot.com
http://layofftracker.blog-spot.com
http://www.wsj.com
http://www.detnews.com
http://www.oag.state.ny.us
http://www.nytimes.com
http://www.nytimes.com
http://www.time.com
http://news
http://www.nytimes.com
http://www.nytimes
http://www.seattleclassaction.com
E1C10 07/09/2010 Page 398
105. A. Liptak, ‘‘Damages Cut Against Exxon in Valdez Case,’’ New York Times (June 26, 2008),
www.nytimes.com.
106. 2010 Edelman Trust Barometer, Edelman Public Relations (2010), www.edelman.com/trust.
107. Ibid.
108. J. Plender, ‘‘Inside Track: Morals Pay Dividends,’’ Financial Times (September 18, 2002),
www.ft.com.
109. 2010 Edelman Trust Barometer.
398 SECTION IV ORGANIZATIONAL ETHICS AND SOCIAL RESPONSIBILITY
http://www.nytimes.com
http://www.edelman.com/trust
http://www.ft.com
E1C11 07/09/2010 Page 399
C H A P T E R11
MANAGING FOR ETHICS
AND SOCIAL RESPONSIBILITY
IN A GLOBAL ENVIRONMENT
INTRODUCTION
With the increasing globalization of business, more managers are finding themselves
in an international environment full of ethical challenges. If managing for ethics and
social responsibility is a challenge in one’s own culture, imagine how the difficulties
multiply when the culture and language are foreign, the manager is under increased
stress, and the number of stakeholders grows enormously. The major stakeholders
include multiple governments with their differing laws, regulations, and policies;
business partners that may be incorporated in the United States or elsewhere;
employees and customers from different cultures; and civil society, a large umbrella
term that includes the media, academic institutions, not-for-profit organizations, and
religious, political, and other groups with an interest in global business ethics. The
simple fact that managers have to deal with so many different stakeholders makes
decision making extremely complex. And the issues global managers face may be
completely new to them. These include corruption and money laundering, human
rights under totalitarian regimes, workplace conditions, environmental issues, respect
for local customs and cultures, and more.
Particularly in developing nations, businesspeople face conditions, cultures, cus-
toms, and norms that may conflict with their own ethical standards and challenge
them to consider which values they’ll uphold no matter what the locale. In this chap-
ter, we address the difficulties of foreign assignments in general terms. We also focus
on the specific challenges of dealing with key ethical issues that arise in the context
of international business. These issues include individual decision making about the
conduct of business in different cultures, and organizational decision making about
ethical and social responsibility issues such as whether and how to conduct business
in foreign nations and how to guide employees working in a global business
environment.
399
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FOCUS ON THE INDIVIDUAL EXPATRIATE MANAGER
We begin by focusing on the individual expatriate manager, the difficulties inherent
in foreign business assignments, and the importance of cultural understanding, sensi-
tivity, and openness.
The Difficulties of Foreign Business Assignments
The globalization of business has contributed to a huge increase in interactions between
people from different cultural backgrounds. These interactions may occur during brief
business trips or in lengthy overseas assignments that last years. Unfortunately, many
overseas assignments end early and unsuccessfully because of the expatriate manager’s
(and his or her family’s) inability to adjust to the foreign work environment. Recent
research has demonstrated that the expatriate manager’s adjustment impacts satisfac-
tion, willingness to stay in the assignment, and job performance.1
The Need for Structure, Training, and Guidance
Studies show that American businesses often don’t provide adequate support and
cross-cultural training to their managers who are assigned to work overseas. Research
has found that expatriates need clear guidance about goals and the expectations asso-
ciated with their jobs2 as well as a realistic preview of the living conditions in the
new location.3 Guidance and support should extend to the ethical issues that are
likely to arise because these contribute to ambiguity and confusion about appropriate
behavior. Studies have also found that cross-cultural training can be highly effective.
For example, training contributes to:
& Greater feelings of well-being and self-confidence for the American manager
& Improvement in relationships with host nationals
& The development of correct perceptions of host culture members
& Better adjustment to the new culture
& Higher performance4
In addition to training for the expatriate manager, recent studies have suggested
the critical importance of providing training and support for the manager’s spouse
because families generally accompany the expatriate. The well-being of the spouse
and family seriously affects the expatriate’s adjustment and willingness to stick with
an overseas assignment.5 Also, the higher the level of the manager, the more likely it
is that the spouse will serve in a corporate ‘‘ambassador’’ role.6 So the spouse’s suc-
cessful adaptation to the new environment is critical.
Research suggests that some people adapt to other cultures more successfully
than others. The term cultural intelligence (CQ) has been used to describe an individ-
ual’s ability to be effective in cross-cultural situations.
7 EQ involves a knowledge
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component (what the person knows about the new culture and his or her approach to
learning), a motivational component (the person’s confidence and motivation to
adapt to the new culture), and an action component (the ability to translate know-
ledge and motivation into action). The rare individuals who are high on all three
components are referred to as ‘‘cultural chameleons’’ because of their unique ability
to adapt easily to new cultural environments.8 Certainly, companies can help with the
first part by providing information about the new culture. Research has found that
employees who are higher on the motivational aspect of CQ, who are more motivated
to explore different cultures and more confident in their ability to adapt to new envi-
ronments, adjust better to the demands of foreign assignments.9 So, before sending
them overseas, companies should assess employees for their CQ level.
Foreign Language Proficiency
One kind of training that can improve one’s international business experience is for-
eign language training. Language is an essential part of cultural learning that can
contribute to productive international business relationships. Interestingly, this is par-
ticularly important for non-English speakers doing business in English-speaking
countries. Other countries seem to be more accommodating of native English speak-
ers who do not learn their language than the reverse. Nevertheless, the expatriate
manager’s effort to learn the language is generally taken as a symbol of his or her
interest and commitment to understanding. Yet Americans speak fewer foreign lan-
guages than their trading partners do,10 and some have argued that Americans pay a
high price for this ‘‘monolingual arrogance.’’11
Language fluency isn’t a matter of just knowing the words, but knowing how
they are used within the particular cultural context. For example, an old story goes
that a Scottish visitor to Japan had worked hard to develop a good relationship with
his Japanese host. After several weeks, the Japanese host asked (in Japanese), ‘‘Can I
sleep with you?’’ Luckily, the Scot was sophisticated in cross-cultural communica-
tion and didn’t react negatively or dismiss the question while his mind raced to
attempt to understand its meaning. Despite his confusion, he agreed to the apparently
odd request. The Japanese host had a second mattress brought to the visitor’s room,
and the two slept through the night, comfortably and without incident. He later dis-
covered that his Japanese host had paid him the highest compliment. The Japanese
believe that an individual can easily be killed in his sleep. Therefore the request indi-
cated a relationship of total trust.
12 A note of caution—you might not want to try this
one today. Our students tell us that ‘‘Can I sleep with you?’’ now carries the same
meaning in Japan as it does in the United States.
Learning about the Culture
Earlier in the book, we talked about organizational culture. Here, we focus on
national culture—defined as ‘‘collective mental programming.’’13 This definition of
culture suggests that patterns of believing differ across national cultures and that
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individuals use these patterns to interpret the world and to guide action. If an individ-
ual operating in a foreign culture doesn’t understand its particular patterns of believ-
ing and behaving, the individual will interpret experience purely in terms of his or her
own culture and thus inevitably misinterprets and misunderstands.
To understand how this collective mental programming can lead to misunder-
standing, we’ll focus on two cultural dimensions, developed by Geert Hofstede,14
that are relevant for understanding international business ethics.15 Readers who are
heading overseas are encouraged to learn about the additional cultural dimensions
that are more relevant for other aspects of the overseas business experience.
INDIVIDUALISM/COLLECTIVISM Individualism represents the extent to which
people in a society think of themselves as autonomous individuals who are responsi-
ble primarily to themselves and their immediate families. This contrasts with collec-
tivism, which emphasizes collective purposes over personal goals and group
harmony over individual achievement. Americans, Canadians, Australians, and most
Northern Europeans are individualists. They define themselves in terms of personal
characteristics and achievements, and they generally value personal welfare over
group harmony. For example, Americans are quick to praise individual accomplish-
ment and individuals’ ability to make good decisions independently. They aim to hire
people with the highest educational and professional achievements.
Most Asian and Latin American countries represent collectivist societies. They
value conformity to the group and define themselves in terms of their group member-
ships and their contributions to the success of those groups. A common Japanese say-
ing reflects this collectivist orientation—the nail that sticks out will be pounded down.
Hiring in collectivist cultures is certainly based on qualifications, but a person’s ability
to work well with coworkers and to make collaborative decisions is as important as
individual technical proficiency. Knowing an applicant or his or her family is consid-
ered an important ‘‘qualification,’’ and the hiring of family members is common and
expected. An American without cultural knowledge would probably consider this
approach to hiring to be wrong—biased and discriminatory. Indeed, many American
firms have rules against nepotism. But a collectivist would consider the Americans’
individualistic approach to hiring to be wrong—disloyal to friends and family as well
as ineffective. To a collectivist, knowing someone is the best way to ensure that the
person will work well with others in the group. Furthermore, in a collectivist culture
such as Japan, giving gifts is considered to be an important part of relationship build-
ing. Giving a gift can also be an important step toward acceptance and becoming a
member of the group.16 In individualistic cultures, gift giving is more likely to be con-
sidered to be a bribe—an attempt to influence an individual’s business decisions.
Consider how the differences between individualism and collectivism might in-
fluence ethics management. In their attempts to manage ethics and legal compliance,
many companies have formal reporting systems (hotlines or help lines) that encour-
age employees to report misconduct they observe. Such a system is likely to be dis-
tasteful to collectivists, who may see it as too impersonal and too focused on singling
out and blaming a single individual who would be shamed as a result. A more
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informal system that aims to help the rule breaker mend his or her ways and return as
a productive member of the group may work better in a collectivist culture.17
POWER DISTANCE Power distance represents the extent to which people in the
society accept a hierarchical or unequal distribution of power in their organizations
and in society. High power distance in a culture reflects acceptance of inequality and
respect for social status or class boundaries. In these cultures, employees are more
likely to accept the idea that the boss has power simply because she or he is the boss,
and bypassing the boss is considered insubordination. Titles, status, and formality are
important in these societies, and those with high status are given much leeway in
their behavior. For example, when President Richard Nixon was forced to resign,
members of cultures with high power distance found it hard to understand. They
focused on the fact that he was president—which, after all, is a high-status position.18
Americans, on the other hand, were more likely to focus on Nixon’s misconduct
associated with Watergate, regardless of his position or title. Some countries having
the highest power distance are India, the Philippines, Mexico, and Venezuela.
Cultures with low power distance are more likely to deemphasize status and
class distinctions. The United States, Israel, and most Northern European countries
(with the exception of France and Belgium) are lower on power distance. In these
cultures, employees accept a boss’s power because he or she has knowledge, not just
because he or she is the boss. Therefore workers in a culture of low power distance
may be more willing to question the boss’s authority or even blow the whistle on an
unethical manager.
Recognizing the Power of Selective Perception
Human beings are constantly bombarded with information. They must therefore per-
ceive selectively, or they would be totally overwhelmed. This selective perception
process is influenced by culture. For example, in collectivist cultures, people pay
more attention to social relationships than to behavior. And in Confucian philosophy,
putting family first is praised above all. So what should one do if a close relative
commits a crime? A federal prison camp inmate spoke with Penn State students about
the reason for his imprisonment. The man, who was well-educated and well-spoken,
had been a successful New York executive. He and his wife had helped the wife’s
nephew by providing a place for him to stay when he was having difficulties in his
life, including drug use. But it turned out that the nephew was using their telephone to
sell drugs right out of their home! The couple was accused of knowing about and
supporting the drug dealing, and they were charged with conspiracy. Both were con-
victed and sentenced to many years in prison. Asian students in the audience were
horrified that this man landed in prison for helping his nephew. To them, the familial
relationship was more important than the crime, and that influenced how they per-
ceived his story. So it is essential to recognize that the visitor to another culture will
notice things that are important at home but may not be important in the target cul-
ture. The visitor is also likely to overlook important behaviors, roles, and values
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because of selective perception. These aren’t important at home, so they aren’t even
noticed. Furthermore, members of the target culture are equally selective, perhaps not
noticing things that seem crucial to the visitor.19
With effective cross-cultural training, managers can be prepared to be on the
lookout for things that would otherwise be ignored, and they will be more able to
interpret their international business experiences in light of the belief patterns of the
particular culture. These interpretations are extremely important because actions are
likely to vary depending on the interpretation.20
Assumption of Behavioral Consistency
Understanding culture doesn’t guarantee success, however. Much of the theory and
research on international business conduct is grounded in an inaccurate key assump-
tion—that if we understand cultural behavior (how people think and behave in their
native environment), we’ll understand how members of a particular group will
behave in relation to cultural outsiders. In other words, if I understand the Japanese
culture better, I can predict how my Japanese counterparts will behave toward me,
what their expectations will be, and so on. And if I understand all of that, I’ll know
how to behave with them.
But people are amazingly adaptable, and just when you think you have them
figured out, they change their behavior. Individuals from a different culture are likely
trying to figure out how to behave with you as much as you’re trying to figure out
how to behave with them, and they may change their behavior as a result. A col-
league related a story about a meeting between business and philosophy professors
on his campus. Recognizing the cultural differences between the two departments,
the philosophy professors decided to leave their khakis at home and dress up for the
occasion—sporting crisp shirts and ties. The business professors all showed up in
jeans. The moral of this story is that behavior is difficult to predict because people
adapt their behaviors to what they believe others expect of them.
What can we glean from these studies? Don’t assume that simply learning about
another culture is enough. The foreign nationals you deal with in business interac-
tions may behave differently with you than they would with individuals from their
own culture, so understanding their cultural norms and behaviors is only a starting
point. The foreign individuals you deal with may adapt their behavior based on what
they expect you to do. Therefore you must be flexible and open to learning from the
situation at hand. Perhaps one of the most important things to learn in preparation for
a cross-cultural experience is that you can’t be fully prepared—there will be surprises
and daily opportunities for further learning and understanding.21 The successful in-
ternational businessperson will be open, flexible, and tolerant of ambiguity.
Assumption of Cultural Homogeneity
We should also not assume homogeneity within a culture—that individuals within a
culture are all the same. Imagine if someone assumed that all Americans were like
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the characters in American films. Obviously, this kind of simplistic thinking and
stereotyping leads to grossly inaccurate expectations. Individual personalities and
experiences vary widely within any culture, leading to behavioral differences. For
example, a Japanese businessperson with an American MBA may behave quite dif-
ferently from a Japanese businessperson who has never left the country.22 Be open to
learning as much as possible about the individuals you are going to be dealing with.
The most effective international managers are those who modify stereotypes or dis-
card them completely in the light of contradictory evidence.
Assumption of Similarity
Another problematic assumption is the assumption of cultural similarity. Many com-
panies begin the internationalization process in countries that they believe to be more
similar to their own because they believe that success will come easier in a more famil-
iar culture. But research suggests that this perceived similarity can cause performance
failures because managers are less likely to prepare for the cultural differences that do
exist.23 Researchers call this the psychic distance paradox. It may actually be quite
difficult to do business in a country that is ‘‘psychically close.’’ A study of Canadian
retailers entering the American retail market found that familiarity often led to care-
lessness. Decision makers at Canadian retail companies had preconceived notions that
the U.S. market was quite similar to the Canadian market and that what had worked for
them in Canada would work in the United States. Therefore they didn’t work as hard at
understanding the American retail culture, and they tended to misinterpret informa-
tion. So, if you’re being sent to a country that you perceive to be similar to your own,
don’t assume similarity. Find out as much as you can about doing business in that
country, just as you would for countries that you perceive to be more different.
Ethics-Related Training and Guidance
International business assignments require training that is more specifically related to
ethics. Training should cover such topics as how to recognize the ethical issues likely
to arise in a particular environment, how to negotiate in a particular culture, and how
to handle requests for payoffs and bribes.
RECOGNIZING AND DEALING WITH ETHICAL ISSUES Beyond general training
in the culture, training with respect to business ethics beliefs and practices is essen-
tial. First, the expatriate manager must be prepared to recognize the ethical issues
likely to arise in a particular business setting. Just as ethical issues at home vary
somewhat from industry to industry (e.g., manufacturing versus banking versus
defense) and profession to profession (e.g., marketing versus accounting), the ethical
issues that are likely to arise vary from culture to culture. The treatment of employees
(e.g., child labor, worker safety) may be more of a problem in one culture, whereas
the disposal of toxic wastes may be more likely to arise in another, and bribes may be
more problematic in yet another culture.
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Second, the expatriate manager needs help making ethical decisions in the more
ambiguous international business context. At home, where we are familiar with com-
munity standards, it’s easier to rely on simple guidelines such as the New York Times
test (remember the disclosure rule from Chapter 2?). But simple guidelines often fall
short when norms of the home culture conflict with those of the host country.24 Indi-
vidual expatriate managers shouldn’t be left to fend for themselves in these un-
familiar circumstances. The organization owes it to them to provide guidance and
help them navigate these unknown ethical waters.
NEGOTIATING ACROSS CULTURES The frequency of business negotiations is
increasing with growth in foreign trade, joint ventures, and other interorganizational
agreements. When working within one’s own language and culture, being an effec-
tive negotiator requires the utmost in sensitivity, understanding, and communications
skills. These requirements multiply when negotiating in an international business
environment.
Cultural differences can influence the perceived purpose of the negotiation,
negotiating styles, and preferences for conflict resolution approaches. For example,
in collectivist cultures, people may see the purpose of the negotiation as the creation
of a relationship. And in collectivist cultures, negotiators may avoid direct manifesta-
tions of conflict. So to avoid even the appearance of conflict, a negotiator in Japan
who finds a request unacceptable might say, ‘‘I’ll give your request careful consider-
ation.’’ Another collectivist is likely to recognize such a statement as meaning ‘‘no,’’
while an American might interpret it to mean that we should return to discussing the
issue later. When the American brings it up later and finds out that the negotiation
partner really meant ‘‘no,’’ the American is likely to perceive the negotiation tactic
to be unfair. Similarly, when conflicts arise, preferences differ regarding how those
conflicts should be resolved. For example, collectivists tend to prefer methods such
as mediation, which involves compromise, because these approaches are more likely
to result in harmonious relationships. Individualists like Americans prefer adjudica-
tion because they perceive it to be more fair.25
A number of research studies detail differences in negotiation styles and tactics
across cultures.26 Most relevant, given our focus on ethics, is an understanding of the
use of ‘‘dirty tricks’’ and ‘‘psychological warfare’’ negotiation ‘‘tactics designed to
pressure opponents into undesirable concessions and agreements.’’27
The use of dirty tricks is possible in any negotiation, but it becomes more com-
plex in an international negotiation because of possible misinterpretation. For exam-
ple, Brazilians expect deception among negotiators who are not well acquainted, so
they’re more likely to use deception during early negotiation stages than are Ameri-
cans. Consequently, it may be wise for an American negotiator to expect phony facts
to be a part of the initial negotiation stage with a Brazilian counterpart.
It’s also important to recognize that what seems like deliberate deception may
not be. Eastern Europeans have limited authority to finalize agreements and are
expected to check with their superiors about any changes. However, Americans often
have wide authority to make important decisions at the negotiation table. Without
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this cultural knowledge, an American might interpret the Eastern European’s claims
about limited authority to be an attempt at deception when it isn’t.
Psychological warfare—‘‘tactics designed to make the other person feel
uncomfortable’’28 and want to conclude the negotiation quickly—also has different
meanings in different cultures. For example, too much touching or too much eye con-
tact may make Americans extremely uncomfortable. Again, it’s important to be able
to distinguish real attempts at psychological warfare from the expression of typical
cultural behavior. For example, Latins tend to touch more than Americans or Cana-
dians, who touch more than Scandinavians. Arabs maintain greater eye contact than
Americans, who use eye contact more than the Japanese. An understanding of the
culture one is dealing with can help prepare the negotiator to correctly interpret these
types of behaviors. The more knowledge each side has of the other’s culture, the
more options are available in terms of negotiation styles and strategies. But if negoti-
ators are totally unfamiliar with each other’s cultures, it is likely best to hire agents to
represent each side.29
DEALING WITH PAYOFFS AND BRIBES Probably the most frequent source of anx-
iety for American businesspersons operating abroad is the expectation of payoffs and
bribes. A bribe is a payment to someone to secure a sale or to obtain approval or
assistance from an individual or organization (often a government bureaucrat).
Although bribing is routine during commercial transactions in many Asian, African,
Latin American, and Middle Eastern cultures, it’s important to note that this practice
is usually against the law in these very same countries.
On arrival in a foreign airport, many a businessperson has faced a government
official’s extended hand and the suggestion that payment was needed to facilitate the
delivery of product samples to the hotel—no payment, no product. Without previous
preparation, the expatriate is at a loss to know what to do. What is the meaning of this
request in the context of the culture? Is making the payoff against U.S. or local law?
What exactly is local custom? How much is expected? What’s likely to happen if I
don’t pay? Will payment really expedite matters? Is it legal to hire an intermediary to
handle this? What are my options? How will my company respond if my work is
delayed?
In the 1970s, the practice of bribing foreign officials with huge payoffs was
found to be rampant among U.S. multinational corporations. For example, in the
mid-1960s, a major Korean political party asked Gulf Oil for a $10 million donation.
The CEO personally negotiated it down to $4 million—still a huge sum.
30 As a
response to the scandals, the U.S. Congress passed the Foreign Corrupt Practices Act
(FCPA) in 1977.31 The act prohibits representatives of U.S. corporations from offer-
ing or providing significant payments to foreign political parties, candidates, or gov-
ernment officials for the purpose of inducing the recipients to misuse their powerful
positions to assist the company to obtain, maintain, or retain business ‘‘to make a
decision or take an action that he/she otherwise might not take.’’32
The law does allow for small payments to lower-level figures. These so-called
facilitating payments might be needed to persuade officials to perform their normal
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clerical or ministerial duties faster or better. Americans might think of these facilitat-
ing payments as tips, a little extra for the individual involved, to assure courteous or
efficient service. To be classified as a facilitating payment, the offer must not signifi-
cantly change the final decision or result. It is against the law and considered subver-
sion of the free-market system if the money is paid to sway high-level people to make
decisions they would not otherwise make. Companies are required to keep records of
all such transactions, and these transactions are not tax deductible. Note that the law
also applies to any intermediary who might make a payment for you. So you can’t
just hire an agent to make these payments. An exception is made for extortion pay-
ments, which are not prohibited under the law. For example, if a company official
is abducted by Somali pirates and held for ransom, a company can legally pay
the ransom.
33
Enforcement of the FCPA has increased in recent years. Most corporations work
hard to avoid even the appearance of impropriety, because Justice Department inves-
tigations are costly and time consuming. A guilty verdict is usually devastating. For
example, in 1995 Lockheed Corporation pleaded guilty to conspiring to pay a
$1 million bribe to a member of the Egyptian parliament. Fines and penalties to the
company totaled $24.8 million. In addition, a former Lockheed executive was sen-
tenced to 18 months in prison.34
Companies with long-standing good corporate reputations are not immune to the
bribery problem. In an attempt to avoid prosecution, more of them are self-reporting
to the authorities when they learn of a problem. For example, in 2007 Johnson &
Johnson, generally considered an ethical corporate actor, voluntarily notified the
U.S. Department of Justice of payments made to foreign officials in its medical
device business, and a senior executive was forced to step down.35
American businesspeople generally prefer to conduct business in a way that’s
consistent with U.S. and local law and not to make illegal payments to anyone. But
despite local laws, the centuries-old custom of bribes and payoffs continues in many
cultures.36 American businesspeople thus often feel that they are at a competitive
disadvantage if they don’t make such payments, especially if competitors make
them. Some have argued that U.S. firms cannot compete effectively when they are
constrained by the FCPA while companies in other countries are not.37 For example,
one study found that U.S. direct investment and exports declined in so-called corrupt
countries after the FCPA was passed, whereas investments and exports in these same
countries increased for non-U.S. competitor companies.38 After lobbying by U.S.
multinational companies, the FCPA was amended in 1988 to include a provision
requiring U.S. presidents to seek international cooperation in reducing corruption. As
a result, a number of international efforts have been undertaken to level the playing
field (these will be discussed more below).
Other countries, especially in Europe, are passing anticorruption laws. For exam-
ple, Great Britain has made it a crime to pay incentives to win overseas contracts.
The Anti-Terrorism, Crime, and Security Act makes it unlawful to bribe foreign offi-
cials, including government officials. In 1999, Germany joined the international con-
vention banning bribery. In addition, both France and Germany now prohibit tax
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deductions for ‘‘commissions’’ paid to foreign officials or executives to win business,
a formerly legal and common practice. Despite changes to these laws, some compa-
nies didn’t change their ways. In 2008, Germany’s Siemens paid $1.6 billion, the
largest fine ever for corporate bribery. A high-level executive testified that he over-
saw an annual bribery budget of $40 to $50 million from 2002 to 2006. The case was
pursued by both German prosecutors and American authorities because the company
trades on the New York Stock Exchange. The total cost to Siemens is estimated at
$2.6 billion to account for the costs of internal investigations and reforms in addition
to the fine.39
Where governments have been slow to respond, multinational companies often
take matters into their own hands, creating strong codes of conduct, compliance pro-
grams to guide their employees, and strong internal financial controls. The companies
do this largely because they recognize the potential damage bribery scandals can bring
to their company’s brand image and reputation in today’s highly transparent world.40
A Conference Board report recommends that companies wishing to successfully
avoid problems with corruption adopt a strategy to do the following: clearly prohibit
FCPA violations, assign senior executives responsibility for oversight, train employ-
ees in FCPA requirements, establish a safe reporting system for suspected violations,
discipline violators, conduct due diligence to ensure that joint venture partners, con-
sultants, or any other agents employed by the company are following the rules, in-
clude such rules in contracts with partners, and make it clear that business partners
are not to employ subcontractors without the company’s permission.41
Some American companies have actually contended that the FCPA helps them
because if they come under pressure for kickbacks or bribes, they can cite the law.
And more companies have been working to convince locals of the benefits of playing
by the rules. One clear benefit is that business flows to places that have controlled
corruption. For example, a study by the International Monetary Fund found that the
higher the level of corruption, the lower the level of direct foreign investment.
42
Hong Kong became a leading international financial center largely because of its rep-
utation for rules and integrity. Corruption has been kept in check by a powerful local
law enforcement agency called the Independent Commission Against Corruption
(ICAC) that was given broad powers to control corruption and white-collar crime.
The ICAC established the nonprofit Hong Kong Ethics Development Center in 1995.
The center provides a number of services to businesses, including consultation on
developing codes of conduct, training for staff, and seminars on ethics (see http://
www.icac.org.hk/en/home/index.html for more information).
43 The World Bank
reported in 2004 that more than $1 trillion dollars is actually paid in bribes annually
worldwide. But they noted that countries that reduce corruption (Botswana, Chile,
Costa Rica, and Slovenia are recent examples) significantly increase per capita
income (see www.worldbank.org).
Corruption can add huge costs to an international project. In a survey conducted
by a London international business risk consultancy, almost 10 percent of respon-
dents said that corruption could account for between 25 and 50 percent of the total
cost of a project, and some said that figure could be even higher.
44
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Increasing attention has been focused on corruption by Transparency Interna-
tional (TI), a nongovernmental international organization founded in 1993 (see
www.transparency.org). TI aims to ‘‘support global integrity systems both nationally
and on the international level.’’ Since 1995, the organization has published an annual
Corruption Perception Index (CPI), based on multiple international surveys of busi-
nesspeople, political analysts, and the general public, that measures perceptions of
corruption in the public sector. The 2009 index includes 180 countries for which data
were available (Table 11.1 is a selected list of the least and most corrupt countries).
New Zealand, Denmark, and Singapore were at the top of the list, perceived as
being the least corrupt. The United States was listed as the 19th least corrupt nation,
just after the United Kingdom and Japan. The nations perceived to be most corrupt
were Somalia, Afghanistan, and Myanmar.
Publication of the CPI has had a profound political impact in countries listed as
highly corrupt, because government leaders react strongly to the results. These lead-
ers are aware of the relationship between perceived corruption and direct foreign
investment. They know that investors are less likely to invest in countries with poor
governance and high corruption. Imagine trying to do business in a country where
bribery is required to get goods off the dock, contracts are not honored, and intellec-
tual property is routinely stolen. Some of these leaders are taking action, working
with national chapters of Transparency International to reduce corruption levels.45
Table 11.1 Transparency International Corruption Index, 2009
The least and most corrupt countries (see www.transparency.org for
complete list)
Least Corrupt Most Corrupt
Country 2009 Score Country 2009 Score
New Zealand 9.4 Somalia 1.1
Denmark 9.3 Afghanistan 1.3
Singapore 9.2 Myanmar 1.4
Sweden 9.2 Sudan 1.5
Switzerland 9.0 Iraq 1.5
Finland 8.9 Chad 1.6
Netherlands 8.9 Uzbekistan 1.7
Australia 8.7 Turkmenistan 1.8
Canada 8.7 Iran 1.8
Iceland 8.7 Haiti 1.8
Norway 8.6 Guinea 1.8
Hong Kong 8.2 Equatorial Guinea 1.8
Luxembourg 8.2 Burundi 1.8
Germany 8.0 Venezuela 1.9
Ireland 8.0 Kyrgyzstan 1.9
Austria 7.9 Guinea-Bissau 1.9
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Some really interesting initiatives have emerged in some of the most corrupt
countries. Indonesia has traditionally not fared well on the CPI, and it has undertaken
a number of anticorruption initiatives. For example, it has opened thousands of
cashier-free ‘‘honesty cafes’’ in schools and government offices, and more are
planned for the private sector. These cafes work on the honor system with the goal of
motivating honesty in participants. Customers take drinks and foods from the shelves
and deposit money into a clear box. The cafes are reportedly working quite well in
most locations. Teachers are even reporting less cheating in classes at the schools
involved.46
In response to the CPI, observers noted that ‘‘it takes two parties for bribes to
occur,’’ suggesting that those who pay bribes should be considered corrupt as well.
As a result, Transparency International began to publish the Bribe Payers Index
(BPI) that ranks 22 leading exporters by the perception that their firms engage in
bribery when doing business overseas. In its BPI 2008, TI cited particularly high lev-
els of perceived bribery by companies from Russia, China, Mexico, and India. The
United States was right in the middle of the pack (www.transparency.org). Impor-
tantly, bribe paying was seen as most problematic in certain industries such as public
works contracts and construction, real estate, oil and gas, heavy manufacturing,
and mining.
Transparency International also now publishes a report called the Global Corrup-
tion Barometer (also on its website), which is a public opinion survey of respondents
across 69 countries and their perceptions about whether the private sector uses bribes
to influence public sector decision making. Over half of the more than 70,000 respon-
dents in 2009 perceived the private sector as corrupt. In addition, many see govern-
ment efforts to reduce corruption as ineffective. They said they would be willing to
pay more for products and services from companies that are corruption free.
How Different Are Ethical Standards in Different
Cultures—Really?
As we’ve just seen from our discussion of bribery, business ‘‘practices’’ certainly dif-
fer from culture to culture. There’s no denying that bribery is more rampant in some
places than others. But that doesn’t mean ethical values and standards differ. Even in
the most corrupt environments, if you ask people what they value, they’ll say that they
value honesty and would prefer to live in a less corrupt environment. The honesty
cafes discussed earlier are a good example of that. Our international MBA students
have also told us about strong ethical cultures that exist in the midst of corrupt sur-
roundings. These individuals talk with pride about having worked in a corporate envi-
ronment that supported honest business dealings. So we think it’s important to
distinguish between common practices and values because if you, as a manager,
understand that most people share such values as honesty, respect, and fairness, you
can appeal to those values and aspirations in managing business ethics overseas.
Certain ethical standards and values are accepted in all human societies. For
example, the prescriptions ‘‘thou shalt not kill’’ and ‘‘thou shalt not steal’’ are
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universal. Furthermore, the Golden Rule, ‘‘do unto others as you would have them do
unto you,’’ appears in the teachings of every major religion from Judaism to
Buddhism.
Buddhism: ‘‘Hurt not others in ways that you yourself would find hurtful.’’
Christianity: ‘‘Whatsoever you wish that men would do to you, do so to them,
for this is the law of the prophets.’’
Confucianism: Tsze-Kung asked, saying, ‘‘Is there one word which may serve
as a rule of practice for all one’s life?’’ The Master said: ‘‘Is not reciprocity
such a word? What you do not want done to yourself, do not do to others.’’
Hinduism: ‘‘This is the sum of duty: Do naught to others which would cause
pain if done to you.’’
Islam: ‘‘No one of you is a believer until he desires for his brother that which
he desires for himself.’’
Judaism: ‘‘What is hateful to you, do not to your fellow man. This is the entire
Law: all the rest is commentary.’’47
These commonalities suggest a basis for common understanding across cul-
tures. But it’s important to recognize that values may also be interpreted differently
in different cultures. For example, most cultures value honesty, but its meaning may
differ from culture to culture. The notion of caveat emptor (‘‘buyer beware’’) is
considered dishonest and therefore wrong in the United States, but it may simply be
considered good business in other cultures. Furthermore, to maintain harmony an
individual from a collectivist culture may deceive a business partner by saying
‘‘maybe’’ when the answer is ‘‘no.’’ Justice and fairness are also universal human
values. But specific beliefs and preferences about what is fair vary widely. For
example, people in some cultures follow an equity rule (outcomes should depend
on performance inputs), while others prefer an equality rule (equal shares should be
distributed). Still others believe resources should be distributed based on need. So it
is essential to understand the meaning of values and how they are interpreted within
the culture.48
In 1992, David Vogel argued that a substantial ‘‘ethics gap’’ existed and that
U.S. companies were more interested in ethics than firms from the rest of the devel-
oped world.49 Recent developments, however, suggest increasing interest in business
ethics in many other countries and increasing similarities across countries in terms
of enacting anti-bribery, environmental, and sexual harassment legislation and prose-
cuting illegal conduct. For example, in Great Britain, reports on British business
practice identify business ethics as important, and a number of organizations and
interest groups are raising and investigating business ethics issue.50 In Europe and
Scandinavia, many companies are regularly reporting on their environmental and
sustainability practices.51 In addition, the European Business Ethics Network
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(EBEN, www.eben.org), established in 1987, now has multiple chapters in different
areas of Europe and members representing 42 countries. EBEN members focus on
promoting ethical awareness and business ethics education and training as well as
improving business practice. In 1999, the Business Ethics Network of Africa (BEN-
Africa, www.benafrica.org) was launched and now has a number of national chapters
and members in 25 African countries. The organization is committed to sharing
information and expertise on business ethics among its members.
European firms also tend to take social responsibility, and especially sustainabil-
ity, very seriously. But concern for the environment has increased in Asia as well.
Because of its huge environmental problems and their increasingly negative impact,
China has become particularly interested in environmental issues in recent years. It is
investing in wind turbines and fuel cell technology and has adopted stringent fuel
economy standards for automobiles. Companies selling cars there are figuring out
how to profit from producing and selling fuel-efficient vehicles, and China’s BYD
car company is talking about introducing an electric car to the American market.
Other companies are counting on China as a huge new customer for technologies
such as clean coal technology and energy-saving building materials.52 As interest in
business ethics and social responsibility increase internationally, the message seems
to be that those involved in international business need to stay informed about the
rapidly changing sociopolitical, legal, and ethical landscapes in the countries where
they work.
Development of Corporate Guidelines and Policies for
Global Business Ethics
Given the wide diversity of legal requirements and the continued existence of cul-
tural differences and corruption, firms doing business abroad have a responsibility to
develop guidelines and policies to guide their employees’ ethical conduct.
ETHICAL IMPERIALISM OR ETHICAL RELATIVISM We learned in Chapter 7 about
our ‘‘multiple ethical selves’’—the idea that people are frequently willing to accept
different rules for different contexts. When applied to the international business
ethics environment, the concept becomes ethical relativism. ‘‘When in Rome, do as
the Romans do’’ is the guiding slogan of ethical relativists, who claim that ‘‘no cul-
ture has a better ethics than any other’’53 and we shouldn’t impose our standards on
others. Tom Donaldson, a leading business ethicist and an expert in international
business ethics, argues convincingly that ethical relativism must be rejected because,
at the extreme, relativists would have to honor any practice that is accepted within
another culture.54 A pure ethical relativist would have to accept slave labor, the
dumping of toxic wastes, and even murder if local customs called for those practices.
But Donaldson also rejects the opposite of ethical relativism—ethical imperial-
ism.55 Ethical imperialism assumes absolute truths that would require exactly the
same standards and behavior in every culture. An absolutist would have to choose a
single standard as the best for all situations. However, how would one choose
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between the American belief that individual liberty is a more important value than
loyalty to a community and the Japanese belief that loyalty comes before liberty?
Donaldson also points out that ethical imperialism can lead to disastrous mistakes.
He offers the example of a large U.S. firm operating in China. When an employee
was caught stealing, the manager followed company policy and turned the employee
over to provincial authorities, who immediately executed the employee.
So how can companies help their employees to balance these extremes of ethical
relativism and absolutism? First, Donaldson proposes that firms develop an ‘‘ethical
threshold’’ for corporate behavior abroad based on a few core values—for example,
the Golden Rule, respect for human dignity, respect for basic human rights, and good
citizenship—that will guide its behavior everywhere.56 These generalities then must
be translated into more specific guidelines. For example, companies can respect
human dignity by treating employees, customers, and suppliers as persons with
intrinsic value and by creating safe products and a safe workplace. They can respect
human rights by protecting employees’ and customers’ rights. And they can be good
citizens by avoiding corruption and protecting the natural environment.
Some activities would not be allowed, because they cross the ethical threshold.
Levi Strauss’s global sourcing guidelines are a good example. They were adopted in
1992 to ensure that products were being produced in a manner consistent with the
corporation’s values. The first guideline bans the use of child labor. Others limit
working hours and mandate safe working conditions and environmental responsibil-
ity. Implementing a company’s standards, such as a ban on child labor, can be quite
complicated, however. For example, Levi Strauss found that two contractors in
Bangladesh used workers who appeared to be under the age of 14, the age set as
reasonable by international standards. In analyzing the situation, the firm realized
that there was no proof of age for these children and that the children contributed
substantially to their families’ income. Firing them might push them into more
inhumane work such as begging or prostitution and create hardship for their families.
To comply with Levi’s standards, the contractor hired a physician who used growth
charts to identify the underage children, and they were removed from the factory.
The contractor continued to pay these children wages as if they were still working,
and Levi Strauss paid for uniforms, tuition, and books so that they could attend
school. At the age of 14, they would be rehired. The contractor also agreed not to
hire additional underage workers. The contractor was willing to comply with Levi
Strauss’s standards in order to continue doing business with the firm.
Certainly, adhering to standards higher than those of competitors increases costs.
Contractors have to add emergency exits and staircases, improve ventilation or bath-
room facilities, and install water treatment systems. These costs are passed along to
the firm and, ultimately, to consumers. Management therefore must believe that deci-
sions focused only on costs will not serve the company’s long-term interests.
57
In other kinds of situations, values may be in conflict, but cultural traditions do
not violate any of the core human values. In those situations, Donaldson proposes
that managers respect cultural traditions and take the context into account when de-
ciding what is right and wrong.58 For example, gift giving is an important part of the
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Japanese culture. An absolutist might judge gift giving to be wrong. However, a cor-
porate ethics code that respects local traditions would likely allow some forms of gift
giving and receiving and would provide managers with specific guidance to help
them differentiate between acceptable and unacceptable gift-giving situations. Gift
giving does not violate a core value as long as there are limits on its scope and inten-
tion, and it remains within legal guidelines. For example, many firms allow employ-
ees to receive gifts of nominal value but require them to explain that the gift will be
accepted on behalf of the organization and will be displayed for all employees to see.
Similarly, many U.S. firms have rules against nepotism because they believe that
the act of hiring and supervising one’s family members presents an inappropriate
conflict of interest. However, in cultures that have a deeper tradition of extended
family and clan loyalty (collectivistic cultures), nepotism is not only approved, but
expected. Companies are expected to hire employees’ children, for example. Donald-
son argues that although nepotism conflicts with Western concepts of equal employ-
ment opportunity, it is not necessarily wrong when viewed from the perspective of a
culture that values family relationships and has high unemployment. Therefore it
may be appropriate to hire family members as long as they are not in supervisory
relationships with each other that would generate conflicts of interest.
A recent study found support for Donaldson’s proposals. The study compared
the ethical attitudes and intentions of American businesspeople working in the United
States with the attitudes and intentions of American expatriates in Russia. Partici-
pants were given three scenarios that reflected core human values and three that
reflected the local country’s business norms (that did not challenge core values). The
Russians and Americans did not differ in their attitudes and intentions for scenarios
where core values were at stake (e.g., employee exposure to toxic chemicals), but
they did differ in their attitudes and intentions for the local scenarios (e.g., making
facilitating payments).
59 The findings suggest that companies can develop rules and
codes for their international operations based on universal core human values.
Donaldson offered Motorola’s code of conduct as a model global code. The
company continues to be a leader in corporate citizenship and sustainability and is
being recognized for its commitment to ethical conduct (including the prohibition of
bribery), stakeholder engagement, supply chain standards, labor standards, and more.
The company’s code states the company’s core value of ‘‘doing the right thing.’’ It
then goes on to say, ‘‘we operate with transparency and according to high standards
of ethics and law in directing and managing the company for all stakeholders.’’ The
firm’s human rights policy is based on ‘‘beliefs of uncompromising integrity and con-
stant respect for people, and is consistent with the core tenets of the International
Labour Organization’s convention and the UN Universal Declaration of Human
Rights’’ (see www.Motorola.com for more details).
Companies will continue the struggle to create codes and ethics management
systems that are truly global or adaptable to the cultures in which they operate. In
managing ethics across cultures, one area of challenge concerns hotlines for reporting
misconduct. U.S. employees are often reluctant to report misconduct using such a
reporting system because they fear negative consequences such as retaliation, but
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overseas employees are often even more reluctant to report. We suggested earlier that
collectivists may find such systems too impersonal. In addition, in a number of coun-
tries (China, Germany, France, South Africa), whistle-blowers are associated with
historical horrors that led individuals to resist the introduction of corporate reporting
systems. And in countries with little job mobility, employees are likely to fear retali-
ation for questioning management decisions. Beyond protecting employees from
retaliation (as important in the United States as it is overseas), international business
ethics experts recommend introducing help lines that are oriented more toward pro-
viding guidance (rather than reporting misconduct) so that employees can develop
trust in the system and the people who run it. They also recommend tailoring the
message about reporting to the particular culture and history, providing local
resources for training, guidance, and reporting rather than a single headquarters sys-
tem. Finally, they recommend involving senior international managers in the design
of these systems so that they can be designed to fit the culture and local needs.60
Finally, and perhaps most important, organizations must take care to match their
performance appraisal and reward systems to ethical goals. If ethical conduct is
the goal, the organization must make it clear that the expatriate manager will not
be punished, either explicitly or implicitly, for upholding the organization’s ethical
standards—even if it costs the organization business. Because it’s difficult if not
impossible to monitor expatriate managers or representatives’ behavior from afar,
organizations tend to focus on outcomes (the bottom line) to evaluate the expatriate’s
performance. For example, they set sales or production goals and evaluate perform-
ance in light of goal achievement. However, if the organization focuses only on out-
comes and pays no attention to how those outcomes are achieved, the expatriate
manager is likely to do the same, and ethical goals are more likely to be compro-
mised. A recent study found that individuals are more likely to say that their firm is
involved in bribery when they perceive financial constraints and an intensely compet-
itive business environment.
61 In such environments, it is even more important for the
organization to recognize the ethical dilemmas employees are likely to face, openly
acknowledge that lost business is a possibility if the employee rejects bribery
requests, and reward employees for conducting business within ethical guidelines (or
at least not punish them for doing so). Such a message was sent loudly and clearly in
the case of the Lockheed Martin manager who received the first annual Chairman’s
Award for exemplary integrity. As you will recall from Chapter 6, a manager who
received an inappropriate ‘‘request for payment’’ from a foreign official not only
rejected the request, but removed Lockheed Martin from the bidding process (walk-
ing away from an important contract), reported the problem to senior officials, and
worked with both U.S. government officials and the foreign government to have the
foreign official removed from the decision-making process. Instead of being pun-
ished for potentially losing an important contract, this manager was rewarded pub-
licly by the chairman of the board.
By talking about aligning global codes and reward systems, we are essentially
recommending that companies develop a global ethical culture that will guide
employee behavior. They should first establish their core values and then take
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cultural differences into account in prescribing specific behavior in areas of cultural
difference such as gift giving and nepotism.
In addition to providing guidance to employees through a code, a help line, and
performance management, one U.S. executive who talked with us about these issues
emphasized the importance of explaining to overseas business partners why you’re
required to behave in a particular way. Make it clear that this behavior is required by
your home culture and laws and your company’s values and code of conduct, and
request your business partners’ respect and cooperation.
THE ORGANIZATION IN A GLOBAL BUSINESS
ENVIRONMENT
Although more small businesses are venturing into the global marketplace, large multi-
national corporations still represent much of international business, and the ethical
expectations of them are often greater because of their size and visibility. These corpo-
rations face complex business ethics environments that vary widely from country to
country. In addition to the stakeholders normally considered in any ethical business
decision, the number of stakeholders grows to include host governments, foreign sup-
pliers, agents, and other organizations. International law is often not particularly help-
ful in guiding business conduct, and it is often unclear whether a particular country’s
legal system has regulatory authority over global transactions.
62 Therefore a firm’s
own ethical standards become an important guide for its workers. Multinational corpo-
rations also face questions of legitimacy that may cause them to consider whether they
should even involve themselves in a foreign culture. If they do decide to do business in
a particular foreign environment, what are their responsibilities?
Deciding to Do Business in a Foreign Country
American businesses are aggressively pursuing foreign markets. They face increased
competition in the global marketplace, thus requiring them to become cost effective
in a variety of ways that include manufacturing goods abroad or buying from foreign
suppliers who can often produce goods more cheaply.
THE CHALLENGE TO LEGITIMACY Numerous ethical challenges accompany these
forays into the international business environment. For example, in some environ-
ments, the very legitimacy of a company may be challenged by deciding to do busi-
ness in a certain country. Particularly in developing countries, the company’s motives
may be questioned as follows:
& Managerial lifestyles are perceived as overly materialistic.
& Labor-saving technology conflicts with the perceived need for jobs.
& Paying local market wages is viewed as exploitation.
& Expanding locally is perceived as furthering control and dependence.63
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Sometimes companies with good intentions get tripped up doing business over-
seas because they simply don’t understand the perceptions and concerns of their
overseas stakeholders. Consider the case of Monsanto and its promotion of geneti-
cally modified foods in Europe. The company developed these foods believing that
they were good for the environment—they reduce pesticide use, increase crop yields,
and promote efficient land use. Although the seeds are more expensive, yields are
greater and farmers save on insecticides and herbicides. The company had experi-
enced great success in the United States, easily winning regulatory approval for these
products and increasing sales. Science was supportive, showing that genetically
modified food was safe, and the World Health Organization agreed. Taking the prod-
ucts to Europe seemed the obvious thing to do. But the introduction of genetically
modified foods in Europe was initially a disaster, and the company paid dearly for its
failure to anticipate stakeholder reactions abroad. Fears about possible long-term
health effects drew strong negative reactions and protests from a variety of vocal
activist nongovernmental organizations (NGOs), such as Greenpeace, as well as indi-
vidual critics including Prince Charles and Paul McCartney, who told the world to
‘‘say no to GMO’’ (genetically modified organisms). The European public supported
the environmental movement’s call to prohibit these products. Supermarkets banned
the resulting products and the European Union issued a moratorium on planting the
seeds. For years, huge financial losses and a falling stock price were attributed to this
negative stakeholder reaction and the company’s failure to respond effectively. The
situation has since turned around, in part because the company began to soften its
stance and engage its critics more, including publishing formerly secret research in
peer-reviewed journals where scientists could evaluate the work. So, like other smart
companies, Monsanto is now working with its critics, finding common ground and
more acceptance of its products overseas. It also helped that the company began to
focus on commodity products (corn, soybeans, cotton, canola) that are sold to other
businesses rather than directly to the consumer and that none of the feared health
disasters has yet occurred.
64
What happened? First, Monsanto didn’t understand the European environment
and the fact that Europeans don’t trust their regulators the way Americans do (or
did). Europe had recently experienced the ‘‘mad cow disease’’ crisis that raised ques-
tions about the adequacy of food safety regulation. Second, Monsanto didn’t educate
the European public or consult with activists in advance. Europeans heard about ge-
netically modified foods first from Greenpeace, an environmental organization that
opposed these products. The Europeans reacted with anger, believing that these
products were being imposed upon them by a powerful American corporation.65
Monsanto was initially tone deaf to these concerns, relying on the science rather than
understanding and taking seriously Europeans’ fears and concerns.
Differences in sociopolitical environments also raise a host of ethical questions.
Should American companies invest in, or do business in, countries with corrupt pub-
lic officials or companies that practice racial discrimination, allow gender discrimina-
tion, pollute the environment, or violate the human rights of their citizens through
slave or child labor or inhumane working conditions? Does doing business in these
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countries or with these organizations tarnish a company’s ethical reputation simply
by association? Is it all right to do business in the country as long as the company
avoids engaging in the unethical practices itself? Furthermore, is it all right to do
business in a country if the company creates and sticks to its own standards regarding
issues such as discrimination, pollution, or safety? For example, should a company
that manufactures children’s sleepwear meet U.S. safety (fire hazard) standards when
selling this product in countries that do not have such strict standards? Some firms
routinely go beyond required local standards. But other firms take the absence of
standards as license to behave unethically. For example, most developing countries
require no health warnings on packages of cigarettes. As more and more restrictions
have been placed on tobacco companies in the United States and other developed
countries, firms such as Philip Morris have increased their marketing efforts in the
developing world, often targeting women and young people in these efforts. This has
been especially true since Philip Morris International (PMI) was spun off from its
U.S. parent, Altria.
Companies should also consider consumers’ concerns. Concerned citizens and
organizations have put the plight of farmers in developing countries on the radar
screen (see http://transfairusa.org). For example, they are promoting coffee that has
earned the ‘‘fair trade’’ label, meaning that farmers who produced the beans were
fairly compensated. Sales of fair trade coffee such as the Green Mountain brand have
grown substantially in the last few years but remain a small percentage of the overall
market. Increasingly, consumers say that corporate citizenship influences their buy-
ing habits. But the fair trade movement depends on people being willing to pay more
for a product in order to feel good about not contributing to the misery of other hu-
man beings. The jury is still out on the long-term impact of such movements, but they
do appear to be growing.66
Many firms are moved to reconsider their overseas ethical standards when media
attention turns their way. For example, media attention to sweatshop conditions in
overseas factories raised legitimacy questions about a number of large corporations.
As globalization continues to expand and the world continues to shrink, companies
that ignore working conditions in their own factories or in suppliers’ factories risk
their valuable reputations. In fact, one of the biggest changes in this arena involves
companies’ attention to ethical issues in their extended supply chains. Companies
know they can no longer get away with saying that they didn’t know what was going
on or that they aren’t responsible for what suppliers do.67 Video cameras take con-
sumers inside factories that for many years were out of sight and out of mind. And
the Internet quickly spreads the news that often is then picked up by activist groups
and media organizations.
When consumers learn about the working conditions, they demand change. But
deciding how to handle issues such as labor conditions in foreign facilities, especially
those that a company doesn’t own, is not a simple matter. For example, consider the
question of wages. Many well-intentioned protestors argue that U.S. firms should pay
‘‘first world’’ wages to employees in developing countries. But the developing coun-
tries themselves often oppose this stance because they know that their competitive
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advantage depends on the lower costs multinational companies can achieve by hiring
their workers. So extending U.S. or European pay levels to these settings could result
in shutting down factories, and that would hurt people rather than help them. Simi-
larly, migrant workers in China have complained about codes that don’t allow them
to work as many hours as they would like. They want to work more so that they can
save enough money to return to their villages.68 Finally, child labor is an important
source of income for many families in developing countries and can help keep fami-
lies together as well as keep children from begging or young girls from resorting to
prostitution. We are certainly not endorsing child labor or slave wages. But we do
want to note that these are complex issues requiring careful thought.
Companies are increasingly aware that they need to evaluate ethical issues and
risks before deciding to do business in a country or linking with a supplier or agent.
Some companies, such as Hewlett-Packard, are developing supplier codes of con-
duct.69 Other companies are combining forces with others in their industry to address
common problems and reduce the cost of doing so. For example, Nike, Gap, Patago-
nia, and other companies and nonprofits have worked together to develop safety stan-
dards and an inspection system. Dell, IBM, and Hewlett-Packard are working
together to develop a code for their industry.70
HISTORICAL EXAMPLE: DOING BUSINESS IN SOUTH AFRICA Before South
Africa dismantled its long-standing policies of strict racial segregation (apartheid)
about two decades ago, the question of whether to do business in that country was a
prominent ethical issue for multinational businesses. Some U.S. firms chose to stay
out of South Africa completely during the apartheid years. Many companies felt pres-
sured to do so by institutional investors, such as pension funds, that prohibited invest-
ment in companies doing business in South Africa. Others elected to do business
there while adhering to the Sullivan Principles, a list of standards for U.S. multi-
nationals doing business in South Africa that was drafted by Leon Sullivan, an
African American minister. These principles called for integration of the races in
work facilities, equal and fair employment practices, equal pay for equal work, train-
ing programs to prepare nonwhites for higher-level jobs, the movement of nonwhites
into those jobs, and contribution to the quality of employees’ life outside of work.71
Levi Strauss, as part of global training on ethics, taught managers how to use a
decision tool called the principled reasoning approach. A cross-functional and multi-
national task force that met over several months used the approach to decide whether
to enter the South African marketplace. Members conducted research on the history
of apartheid, identified stakeholders, visited South Africa, and interviewed members
of the government and community organizations. The task force recommended that it
would be appropriate to enter the South African marketplace under certain condi-
tions, including free elections.72
Such decisions can have long-term implications, however. In 2002, long after
apartheid was dismantled, apartheid victims in South Africa began suing U.S.-based
banks and other companies that conducted business in South Africa under the apart-
heid system. The lawsuits charge that the companies helped the South African
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government commit crimes against South African citizens. The lawsuits are based on
a precedent established by lawsuits brought on behalf of Holocaust victims against
Swiss companies and resulting in a $1.25 billion settlement. Similar lawsuits charge
companies with liability for a number of human rights abuses in the developing
world. For example, victim advocates claim that Unocal was aware that peasants
were forced at gunpoint to help build a pipeline in Burma and that those who resisted
were tortured or killed. Unocal denies the claim.73 Whether or not the companies
are ‘‘guilty,’’ they will be expending significant resources fighting such lawsuits for
years to come.
HISTORICAL EXAMPLE: MARKETING INFANT FORMULA IN THE DEVELOPING
WORLD Once engaged in business in a foreign country, companies must also con-
sider whether practices that are perfectly acceptable at home are appropriate in the
foreign environment. This is perhaps best exemplified in the now classic case of mar-
keting infant formula in developing countries, particularly in the 1970s and early
1980s. The Swiss conglomerate Nestl!e was singled out among companies that were
engaging in practices that encouraged new mothers in these countries to give up
breastfeeding and switch to formula.74
In addition to more routine advertising that inaccurately suggested that bottle-fed
babies would be healthier, companies used so-called milk nurses to promote their
products in maternity wards. These women, though dressed as nurses, were actually
sales representatives who received a commission for selling formula.
Unfortunately, the switch to formula posed a serious health risk to the infants—
for three reasons. First, the formula must be mixed with water, which is contaminated
in many of these areas. Infants fed the formula were thus at high risk for infections
and diarrhea. Second, mothers in these areas often cannot afford to continue buying
formula. Therefore, they dilute it or substitute cheaper products that contribute to
health problems such as malnourishment for their babies. Finally, and perhaps most
important, women who give up breastfeeding cannot simply change their minds and
return to it. After a short time, their own milk production diminishes, and they are no
longer able to feed their babies themselves. They are forced to rely on formula. In
response to organized protests and boycotts from numerous activist groups, the com-
pany finally agreed to alter its marketing practices.
Although some might argue that the marketing practices just described would be
questionable even at home (given the known health benefits of breast milk), they
would not as seriously compromise babies’ health here as they would in a developing
country. Thus the very same practice could be considered ethical in one setting
(assuming that consumers had solid information to inform their choice) but highly
unethical in another.
CURRENT EXAMPLES: WHAT TO DO ABOUT HUMAN RIGHTS Once a firm
decides to do business in a developing country, human rights issues should be on the
radar screen. Worldwide, companies seem to be converging to prohibit forced or
child labor (especially bonded labor, in which small children are required to work to
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pay off family debts) and to address other issues such as worker safety. But a com-
pany that decides to hold itself accountable for protecting human rights in its over-
seas operations (including those of its suppliers) is taking on a tough task with no
easy answers.
Nike has about 28,000 employees globally and over 800,000 workers who are
employed by its suppliers in 52 countries and create sports and fitness footwear,
apparel, equipment, and accessories for worldwide distribution. In the 1990s, the
firm was the target of Internet and media campaigns, boycotts on college campuses,
and protests outside its stores because of sweatshop conditions in suppliers’ overseas
factories. In 1998, the founder and CEO, Phil Knight, acknowledged the problem and
decided to take it on. The company published its first corporate responsibility report
in October 2001. In its discussion of the efforts it was taking to ameliorate current
working conditions, the company criticized itself, acknowledging that work in its
factories was hard, workers were sometimes harassed, and the company’s monitoring
system needed improvement. The company continued to work at it, sending auditors
to evaluate conditions and enforce the company code. In 2005, in the interest of full
transparency, Nike released factory names and locations—and was the first in its
industry to do so. It also brought in an MIT professor to assess its audit data. The
results were disappointing. Most suppliers’ factories had not improved, and some
had even gotten worse. So, by itself, monitoring wasn’t working. Along the same
lines, a 2008 report in Fortune magazine highlighted a Malaysian T-shirt factory
where, it seemed, little had changed. Migrant workers were housed in crowded,
dirty conditions and had been required to turn over their passports until recruiting
fees (subtracted from their wages) were paid off. But this time Nike responded
quickly, admitting publicly that a serious breach of its conduct code had occurred. It
reimbursed workers and paid to relocate them. It then held a meeting with representa-
tives from 30 Malaysian contract factories to engage in tough talk about enforcing its
standards. When the company drops a supplier, it recognizes that local jobs are lost,
perhaps harming employees even more. The current CEO, Mark Parker, said ‘‘I’m
proud of what we’ve accomplished, but we’re still not where we need to be. This is a
never-ending challenge.’’ According to Fortune, Nike’s slogan, ‘‘Just Do It,’’ applies.75
In its ongoing attempts to address the labor problem, Nike has its social responsi-
bility staff searching for the root causes of problems. In doing so, Nike learned that it
had more leverage with long-term suppliers and suppliers that depended largely on
Nike for their revenue. This meant that leverage was higher in the shoe business than
in the apparel business, where the company tends to have shorter-term contracts.
Nike is trying some unique approaches that completely change its outsourcing model.
One goal is to convert suppliers to team-based, lean manufacturing that requires a
higher-skilled labor force that the supplier will want to care for. Another is to avoid
last-minute design changes that pressure suppliers toward violations like requiring
excessive overtime. The company aims to eliminate all excessive overtime in its sup-
pliers’ factories by 2011. Nike also aims to partner more with other brands to address
these issues. In addition to efforts to fight labor abuses, Fortune reports that Nike has
made big strides in sustainability, enlisting its shoe designers and challenging them to
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reduce waste and use greener materials. You can learn much more about Nike’s efforts
by reading its corporate social responsibility report online at www.nikebiz.com.
Research has highlighted model programs that companies have put into place
over the past few years to respond to the challenges they recognize as resulting from
the globalization process. For example, Reebok (now part of the Adidas group)
implemented a program to ensure that Pakistani children are not involved in the man-
ufacture of its soccer balls in Sialkot, Pakistan. Instead of having the panels stitched
in villages (where children were often involved), the company set up factories where
production could be monitored. The company also created a program that works
toward placing children in schools so that they are kept out of the labor pool (see
www.adidas-group.com). Sounds good, right? It is. But consider the complexities.
These families have now lost the income that the children would have generated by
working. Many firms are recognizing this challenge and are requiring suppliers who
hire children not only to place them in educational programs but also to continue
paying the youths their average daily wage while they are in school. Adidas has also
been successful in doing this with its suppliers in Vietnam.76
Companies concerned about workplace conditions in their manufacturing facili-
ties realize that they cannot solve these problems alone. For help, they can refer to the
Universal Declaration of Human Rights and can get assistance from a number of
organizations including the Fair Labor Association and Social Accountability
International (SAI). A number of high-profile companies are members of the Fair
Labor Association (FLA), including Adidas-Salomon, Liz Claiborne, Levi Strauss &
Co., Nike, Reebok, Eddie Bauer, and Polo Ralph Lauren. By joining the association,
companies subscribe to its code of conduct and commit to compliance with interna-
tional labor standards in their supply chains. A large number of colleges and univer-
sities have also signed on with the FLA to promote fair working conditions in the
production of collegiate apparel that bears their logo. They do this to ensure that their
apparel is not being produced under sweatshop conditions. If you’re a college
student, check to see if your college or university is listed (www.fairlabor.org) and
explore what is required of licensees.
Social Accountability International (see www.cepaa.org) was founded in 1997 to
help organizations be socially accountable in the arena of workplace conditions (e.g.,
child labor, forced labor, health and safety, discrimination, etc.). The organization
developed a standard called Social Accountability 8000 (SA8000) and a social audit-
ing system for verifying compliance with these objective standards. The system,
modeled after the well-known ISO 9000 quality initiative, was developed with input
from an international advisory board that included experts from multiple sectors of
society, including unions, businesses, and nongovernmental organizations. Its stan-
dards are based on shared norms regarding international human rights. Facilities can
be ‘‘certified’’ as being in compliance with SA8000, meaning that the facility has
been audited and found to conform to the standards.
CURRENT EXAMPLE: CLEANING UP THE JEWELRY BUSINESS Tiffany’s, the
upscale jewelry retailer, had been concerned about its supply chain since the late
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http://www.adidas-group.com
http://www.fairlabor.org
http://www.cepaa.org
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1990s, when human rights groups accused the company of selling ‘‘blood diamonds’’
thought to be traded by African rebel groups to finance their civil wars. Turning its
attention to gold, the company learned that attempting to ferret out where gold comes
from is extremely difficult. It is mined in more than 60 countries in a very fragmented
industry. Suppliers were simply unable to tell Tiffany where the gold was coming
from, so the company decided to purchase all of its gold from a single mine.
Tiffany’s CEO didn’t stop there. He has worked to bring activists and jewelers to-
gether, supported studies of mining practices, and expressed opposition to new mines
in environmentally sensitive places. Two new organizations have emerged to help
jewelers deal with the issue: the Council for Responsible Jewelry Practices and the
Initiative for Responsible Mining Assurance.
The problem is more challenging for companies that don’t produce their own
jewelry. But they’re getting on board too. For example, Wal-Mart is pressuring min-
ers to follow strict environmental and social standards that can be verified, and the
firm is tracking its gold through the supply chain with the help of a British company
that specializes in supply chain traceability. Wal-Mart is beginning with modest
goals of buying 10 percent of gold, silver, and diamonds from responsible sources in
2010. According to Pam Mortensen, who is in charge of jewelry buying at Wal-Mart,
‘‘We realize that it’s not a perfect world, but if we don’t start somewhere, we won’t
get anywhere.’’
77
Whatever the ethics or corporate social responsibility issue, companies large and
small are finding that they must take responsibility for their extended supply chains
and engage more with the links in the chain, including those they never would have
interacted with before. In the last few years, safety of imported products (especially
from China) has become a huge issue in the United States. We’ve experienced pet
food with deadly melamine, lead and cadmium-tainted toys, unsafe tires, contami-
nated seafood, antifreeze-laced toothpaste, and drywall that made houses inhabitable.
The list goes on. Mattel was forced to recall almost a million lead-tainted toys in
2007. Importers that care about their reputations can no longer afford to think about
these as arms-length relationships. They certainly can’t wait for someone to die
before they act. They must be increasingly vigilant, including drawing up detailed
contracts, monitoring suppliers (and their suppliers), and conducting testing on prod-
ucts before selling them.78
CURRENT EXAMPLE: HELP FOR THE DEVELOPING WORLD The World Bank
estimates that nearly half the world’s population survives (barely) on $2 per day or
less. These people live at what is called ‘‘the bottom of the wealth pyramid,’’ and
their plight has proven difficult to overcome. Muhammad Yunus, a Bangladeshi and
an economics professor, won the Nobel Peace Prize in 2006 for inventing the idea of
using microcredit to spur economic development in a way that helps those at the base
of the pyramid become self-sufficient. He also received the Presidential Medal of
Freedom from Barack Obama in 2009 for being an international agent of change.
The idea is to give small loans to entrepreneurs, especially the poorest women, for
the purpose of starting small businesses. Yunus founded Grameen Bank in 1976 and
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got the idea started by lending $27 of his own money. The idea has been extraordi-
narily successful. There are now over 2,000 Grameen Bank branches in rural
Bangladesh, nearly 8 million borrowers (97 percent of them women), a loan repay-
ment rate of 98 percent (and that’s without collateral), and a profitable bank that
actually pays dividends. Borrowers join a five-member group that oversees the loan
(although there is no joint liability). The idea has spread to many other developing
countries. Companies such as Citigroup and organizations such as the Gates Founda-
tion have gotten involved, and microlending is now a multibillion-dollar industry.
For more information, go to www.grameen-info.org.
Building on his original idea, Yunus developed the notion of social business
enterprise, an idea that combines corporate interests with microfinance and economic
development. He enlisted Danone, the yogurt maker, to give it a try in Bangladesh.
The company created a yogurt that was fortified to guard against malnutrition and
was affordably priced (only 7 cents each). The factory depends on Grameen micro-
borrowers, who buy cows to sell the factory milk and sell the yogurt door-to-door.
Danone agreed to reinvest revenue and take only its initial cost of capital after three
years. The enterprise employs many people, thus contributing enormously to the
local economy. Organizations such as UNICEF see this as a wonderful way to im-
prove nutrition in the developing world. Danone sees it as an opportunity to do good
while exploring a sustainable business model for the future and a way to integrate
social responsibility into the global business.79
Development of a Transcultural Corporate Ethic
Many businesspeople hope for the day when there will be wide agreement about
appropriate business conduct in the global arena. Progress has been made in that di-
rection through the efforts of government organizations, multinational companies,
and private organizations interested in international business ethics. But the prolifer-
ation of these efforts just increases the complexity and the difficulty of deciding
where to turn one’s attention.
Movement toward ‘‘a transcultural corporate ethic’’
80 has occurred as a result of
a number of intergovernmental agreements reached during the last 50 years. These
agreements set out normative guidelines for the business conduct of multinational
corporations. The guidelines that emerge from these agreements cover the areas of
employment practices and policies, consumer protection, environmental protection,
political payments and involvement, and basic human rights and fundamental free-
doms. They are based on four principles:
1. The inviolability of national sovereignty. Multinationals are expected to
respect the ‘‘host country’s economic and social development and its cul-
tural and historical traditions.’’81
2. Social equity. Pay scales are expected to ensure equity between genders as
well as racial and ethnic groups.
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3. Market integrity in business transactions. Restrictions on political payments
and bribes assume that these ‘‘inject non-market considerations into business
transactions.’’82
4. Human rights and fundamental freedoms. This principle is based on belief in
the inherent worth and dignity of every individual and the equality of rights
of all human beings. However, this principle often competes with other prin-
ciples, especially the first—national sovereignty. For example, South Afri-
ca’s apartheid system was based on the denial of human rights to its black
citizens, and women continue to be denied rights in many cultures and gov-
ernment systems.
As noted earlier, a number of efforts have also been under way to battle bribery
and corruption on a global scale. Perhaps the most important is the Organization for
Economic Cooperation and Development (OECD) Anti-Bribery Convention. Negoti-
ators from 33 countries worked together to pass the convention in late 1997. Partici-
pating countries included members of the OECD (including nations of North
America, Western Europe, and the industrialized democracies of the Pacific) plus
Argentina, Brazil, Bulgaria, Chile, and the Slovak Republic. The convention requires
signatories to make it a crime to bribe foreign public officials, and it includes the
application of criminal penalties. In October, 2002, the OECD reported that 34 coun-
tries had already filed their ‘‘instrument of ratification’’ with the secretary-general of
the OECD. By 2005, thirty-six countries had passed anti-bribery laws that make it a
crime to bribe a foreign public official. Information about each country’s efforts is
available on the OECD website (www.oecd.org). An OECD report, also available on
the website, cites the convention as ‘‘one of the most effective tools against foreign
bribery.’’ But the report recognizes that the credibility of the convention depends on
rigorous monitoring of the legislation across countries to ensure that it is ‘‘adequate
and effectively applied.’’ Some argue that the treaty is weak because it does not
require minimum penalties, does not ban gifts to political parties, and does not
outlaw tax deductibility for bribes. However, it is clearly a step in the right direc-
tion.83 The trend in many multinational companies is to prohibit all types of bribery.
For example, BP’s policy exceeds the U.S. Foreign Corrupt Practices Act standard.
The company considers even small facilitating payments to be bribes and will not
pay them.84 This approach certainly makes the rules clearer for employees and those
seeking bribes.
The Organization of American States (OAS) has 35 members, which include all
the independent republics of the Americas except Cuba. Most of these members
signed the Inter-American Convention Against Corruption, which took force in 1997
(see www.oas.org). This binding treaty does not outlaw bribery, but it does require
members to develop policies and practices that aim to reduce corruption.85
An important question remains: do these agreements influence multinationals to
behave differently? Multinational corporations are not directly bound by these inter-
governmental agreements. However, they are indirectly affected to the extent that
countries enact laws requiring companies to comply. The agreements may also be
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http://www.oas.org
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contributing to a more informal type of compliance as they contribute to the develop-
ment of accepted cross-cultural moral standards. The more multinationals become
aware of these standards, the more likely they will be to comply.
Business leaders have also been working to develop their own worldwide corpo-
rate responsibility standards. The Caux Round Table, a group representing American,
European, and Japanese multinationals, began meeting in Caux, Switzerland, in
1986. The group’s mission was to focus attention on global corporate responsibility.
They developed a set of standards for global business behavior that is based on two
principles: human dignity and the Japanese concept of kyosei, ‘‘the ideal of living and
working together for the common good to enable mutual prosperity.’’ Although,
again, the standards are not binding, it is hoped that businesses around the world will
rely on them to develop their own standards.
86 See the appendix at the end of this
chapter for the full text of these principles, and see www.cauxroundtable.org for
more information about the group.
In an early 1999 speech at the World Economic Forum, UN Secretary-General
Kofi Annan proposed the United Nations Global Compact (see www.unglobalcom-
pact.org). He asked the leaders of multinational corporations to join this international
initiative, along with UN agencies and other organizations interested in promoting
global, values-based management. Annan suggested that an international framework
that was built on internationally accepted principles could assist companies in their
desire to practice voluntary corporate citizenship in a global economy. The initiative
was formally launched in July 2000 in a meeting of senior executives from about 50
large corporations and other leaders from governments and civil society. The United
Nations plays the role of convener and facilitator of dialogue and information sharing
among these organizations. Membership is open to any organization that is serious
about its commitment to the principles. In early 2010, the website (unglobalcompact.
org) said that participants from over 5,000 business in 130 countries were involved.
Interestingly, tobacco companies are discouraged from participation because of the
negative health effects of tobacco. The primary objective of the compact is to embed
good corporate citizenship into corporate-management strategy and decision making
and to complement regulatory approaches. The compact uses the power of transpar-
ency and dialogue to identify and disseminate good business practices based on nine
shared principles in human rights, labor, and the environment. These principles are
drawn from the UN Universal Declaration of Human Rights, the International Labor
Organization’s Fundamental Principles on Rights at Work, and the Rio Principles on
Environment and Development:
1. Protection of internationally proclaimed human rights
2. Noncomplicity in human rights abuses
3. Support for freedom of association
4. Elimination of forced and compulsory labor
5. Effective abolition of child labor
6. Elimination of employment and workplace discrimination
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http://www.cauxroundtable.org
http://www.unglobalcom-pact.org
http://www.unglobalcom-pact.org
http://www.unglobalcom-pact.org
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7. Support for a precautionary approach to environmental challenges
8. Initiatives to promote greater environmental responsibility
9. Development and diffusion of environmentally friendly technologies
To participate in the compact, company CEOs send a letter of commitment to the
United Nations secretary-general and agree to (1) take concrete steps within their
organization to act on these principles, (2) share their experiences on the Global
Compact website, and (3) advocate publicly for the Global Compact.
Another United Nations initiative, the United Nations Convention against
Corruption, was signed in Mexico in December 2003 and took force in December
2005. Preventing corruption is an important goal of the convention. Countries that
sign must work to increase transparency in elections and in public service. Public
servants must be governed by codes of conduct and must be disciplined for mis-
conduct. Countries also must criminalize various types of corruption, including brib-
ery, money laundering, and embezzlement of public funds. Signatories also agree to
cooperate with each other in anticorruption activities and to provide legal assistance
on the return of assets.
Companies are taking these international agreements into account in designing
codes of conduct for the twenty-first century. A group of Harvard researchers studied
the business codes of multinational organizations (i.e., company codes and multi-
national efforts such as the Caux principles, the OECD guidelines, the UN Global
Compact, and the Global Reporting Initiative, among others) in an attempt to deter-
mine what it takes for these codes to meet what they called world-class standards.
The researchers found that these codes address eight principles:
1. Fiduciary principle. This principle addresses managers’ responsibility to act
in the best interest of shareholders rather than themselves. Accordingly,
codes prohibit behaviors such as conflicts of interest and self-dealing at the
organization’s expense.
2. Property principle. This principle addresses respect for property. Accord-
ingly, codes prohibit behaviors such as theft (including theft of intellectual
property) and waste.
3. Reliability principle. This principle addresses trust and promise-keeping
behaviors that are required for cooperation to occur. Codes call for employ-
ees to abide by contracts, and they prohibit breaches of contract and trust.
4. Transparency principle. This principle addresses the importance of honesty
and respect for truth and openness. Codes call for the accurate representation
of information and prohibit behaviors such as misleading stakeholders (e.g.,
customers, suppliers, etc.).
5. Dignity principle. This principle addresses respect for people. Codes call for
protection of people’s health, safety, and privacy and prohibit human rights
abuses.
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6. Fairness principle. This principle addresses the fair distribution of rewards
and burdens. Codes call for fair treatment (including ideas such as equal pay
for equal work) and prohibit discrimination.
7. Citizenship principle. This principle addresses respect for the law, respect
for ‘‘the commons’’ (shared resources, such as the natural environment), and
contribution to society overall. Codes call for law-abiding behavior and con-
tributions to society through behaviors such as care for the environment and
philanthropy. Prohibited behaviors include bribery, despoiling the natural
environment, and improper political activity.
8. Responsiveness principle. This principle calls for the organization’s respon-
siveness to its stakeholders that are affected by a company’s actions. This
includes such behaviors as responding to stakeholder concerns and engaging
with stakeholders such as suppliers.
The authors see these principles as representing an emerging consensus about a
‘‘core of global standards of conduct’’ being used by modern corporations to address
concerns that arise when doing business in today’s global business environment. They
recommend that companies use the principles as a starting point for assessing their cur-
rent code or for developing a new one. They also encourage firms to supplement these
principles with material that has its source in the company’s own unique values.87
CONCLUSION
From the individual’s perspective, a foreign assignment is full of ethical challenges.
Training and guidance, along with openness and flexibility, can go a long way toward
preparing the expatriate manager to survive with integrity and sanity intact—and
hopefully to enjoy the richness of the international business experience. Organizations
can help their expatriate employees by developing a set of broad core values, as well
as specific guidelines and support systems for ethical business practice at home and
abroad. Multinational companies are gaining experience in managing these complex
issues in a complex, transparent, but shrinking world. The expanding interest in busi-
ness ethics and social responsibility and the development of international guidelines to
guide business behavior across cultural boundaries will help level the playing field and
contribute to making the international business experience richer and more satisfying.
In the meantime, keeping up with all of the changes can be daunting. That’s why we
have provided information about a number of useful websites that can help you stay
abreast of the complex and dynamic global business ethics environment.
DISCUSSION QUESTIONS
1. If you were going on your first overseas business assignment, what would you
do to ensure that you were prepared to deal with ethical dilemmas you would
face? What questions would you ask your superiors in preparation for the trip?
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2. Your firm is expanding globally and is sending executives overseas for the first
time. What will you do to be sure these individuals are prepared to deal with the
ethical dilemmas they will face?
3. Imagine that someone from another culture asked you to provide information
about business ethics when dealing with American managers. What would you
say?
4. Talk with someone from another culture. Ask for information that would be
helpful to you if you had to do business in their culture. What did you learn that
you didn’t know before? How might you behave differently because of what
you know?
5. If you were planning to do business in a culture that was opposite from your
own on the cultural dimensions of ‘‘power distance’’ and ‘‘individualism/
collectivism,’’ what challenges would you expect to face? How would you
prepare?
6. Imagine yourself in a situation where you had to bribe someone or lose the deal.
How would you think about it? What do you think you would do? Why? What
would you hope for from your employer?
7. Assume the role of corporate decision maker in a decision about whether to do
business in a particular foreign country in the developing world. What criteria
will you establish for making the decision from an ethics and social responsibil-
ity perspective? Why are these the most important criteria? What information
will you use to help you make the decision?
8. What are the costs and benefits of developing a transcultural corporate ethic?
Whose responsibility should it be to develop such an ethic—governments, cor-
porations, intergovernmental organizations, all of these?
9. Choose a multinational company. Study its website to see what you can learn
about its approach to global business ethics and social responsibility.
10. If you had to create a global code of conduct for your company, what would
you include? Which core values would you state? How would you treat behav-
iors such as gift giving and nepotism?
SHORT CASE
THE GIFT
You’re an account executive with a multinational financial firm, and one of your big-
gest accounts is that of a shipping magnate in Greece. Several months after you’ve
arranged very complex financing to build a new fleet of oil tankers for this customer,
he asks if you and your wife would attend the christening of the first tanker. You, of
course, agree to attend—it would be an insult to him if you didn’t. When you arrive,
he asks your wife to break the traditional champagne bottle over the bow of the
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tanker. Two weeks after the christening, your wife receives a package from your cus-
tomer. In it is a gold bracelet with her initials and the date of the christening set in
diamonds. To return the gift would insult your customer, but accepting it would
clearly violate your company’s policy. What should you do?
Case Questions
1. What kind of an ethical issue is this?
2. Why would it be against corporate policy to accept such a gift? Do you agree
with the policy? Why or why not?
3. Put yourself in the ‘‘shoes’’ of each of the parties. How might they think about
the issue?
4. Imagine that you are the corporate vice president in charge of business ethics
and conduct for your firm. Would you be willing to change this policy? Why or
why not?
CASE
SELLING MEDICAL ULTRASOUND TECHNOLOGY IN ASIA
Linda Trevi~no and Alessandro Gubbini
A surprising ethical dilemma arose for a young engineer during his first business trip
to Asia to work with customers of his company’s ultrasound imaging technology. On
the long airplane ride, Pat was dutifully reading a travel book to learn more about
Korean and Chinese cultures when he was shocked to learn how ultrasound technolo-
gies were being used in these countries. A technology that he had always considered
to be a way to help people by diagnosing disease was being commonly used to inten-
tionally identify and interrupt pregnancies when the fetus was female. As an engi-
neer, Pat had been trained to be passionate about innovation and problem solving. He
was used to thinking about these technologies as innovative high-tech solutions to
serious health problems. He was also committed to developing higher-quality, more
efficient, affordable devices so that they could be used more widely. It had never
occurred to him that in some Asian cultures, where overpopulation combined with a
strong patriarchal culture led to a preference for sons over daughters, this technology
that he considered to be innovative, helpful, and supportive of people’s well-being
might be used to eliminate female lives.
As ultrasound technology has advanced and become more available, it has been
used more widely in decisions to abort female fetuses in favor of sons. After some
more research, Pat learned that this practice has become quite common in China,
which controls population growth by allowing families to have only one child. In
India, female children are more costly to families because the culture requires the
family to bear the expenses of their daughters’ weddings and dowries. By compari-
son, an ultrasound exam is a small expense even for these poor families. Pat was
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further surprised to learn that using ultrasound technology to identify fetus gender
and abort the fetus based upon gender information is unlawful in most of these coun-
tries (for example, in India doctors are forbidden from disclosing the sex of fetuses).
However, the enforcement of such laws is difficult and spotty, especially in clinics
that are far away from cities and regulators. The problem is being exacerbated
because many ultrasound machines are being sold on the second-hand market, thus
making ultrasound more available and more affordable to these clinics. The increas-
ing use of the technology to abort female fetuses is beginning to create a huge socie-
tal problem because males are outnumbering females, distorting nature’s careful
gender balance. There are estimates that more than 150 million women are ‘‘miss-
ing’’ from the world as a result of sex-selective abortions and female infanticide.
That’s equivalent to missing every woman in America! The 2001 Indian census dem-
onstrated a huge drop in the number of young girls relative to boys (927 girls for
every 1,000 boys compared to 945 to 100 a decade earlier), and the problem contin-
ues to worsen as the use of ultrasound technology increases. According to UNICEF,
China now has only 832 girls for every 1,000 boys aged 0–4. Looking to the future as
these children grow up, some have predicted increasing trafficking of women for
prostitution and violent crime as young males compete for the smaller number of
available females.
In thinking through what he had learned, Pat found himself considering the
patients, the health-care practitioners, and the health-care industry as well as his
company, other technology developers, and the broader cultures involved. Patients
benefit from access to life-saving technologies that can identify diseases at an early
stage so that they can be treated more successfully. But patients can also be
harmed if, due to early identification of their child’s gender, mothers feel forced
into abortions against their will. In these cultures, many mothers apparently do feel
compelled by cultural or family pressures to abort female fetuses. Medical practi-
tioners benefit from the ability to do faster and more accurate diagnoses, but they
too can be pressured to use these systems for unethical purposes. The industry and
the developers (including Pat’s company) certainly profit from the production and
sale of more of these products. But the company and industry risk sullying their
reputations if they are found responsible for selling these systems to unauthorized
users for unlawful purposes. Imagine what the media could make of that story.
According to a prestigious British medical journal, The Lancet (2006), the unlawful
use of diagnostic ultrasound technologies is contributing to an estimated 1 million
abortions of female fetuses every year. Yet, these diagnostic technologies still
greatly benefit society worldwide in saving and improving the lives of many mil-
lions of patients.
How should Pat think about this? Do the benefits to society of the technology
outweigh the harms? Even if they do, does the company want to be connected to a
practice that many people find immoral and that is illegal in many countries? Pat
found this practice particularly distasteful when looking at it from the perspective of
the females who would not be born simply because of their gender. Pat wondered, Is
this practice fair to them? And aren’t we all facilitating the practice by looking the
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other way? What would happen if such gender discrimination were globally accepted
as normal practice? Could that ever be the right thing to do?’’ What would interna-
tional health organizations such as the World Federation for Ultrasound in Medicine
and Biology (WFUMB), which provides training and education to doctors world-
wide, have to say about such practices? Pat wondered what his wife would think if
she knew that his work involved this unexpected result? Would she expect him to do
something? What is his individual responsibility here? What is his company’s
responsibility?
Because Pat felt so confused by what he had read, and he didn’t fully understand
the legal or cultural environment, he never mentioned the subject to his Asian clients.
But it remained in the back of his mind. When he returned home, he kept thinking
about it. There was no formal structure for him to surface the issue within the com-
pany, so he decided to discuss the subject with some trusted colleagues. He wondered
whether they were aware of the issue and what they might think about it. Were they
as bothered as he was? It turns out that they were as unaware of these practices as he
had been. It also seemed more distant to them because they had not traveled to Asia
as he had, and there was no agreement about what to do. Engineers tend to think
about products only in technical terms—the potential for technical flaws and dangers
that might harm patients. They rarely encounter the ultimate end users, and they’re
not trained to think about cultural implications.
As a Westerner, all of this was particularly hard for Pat to deal with. He was
caught completely off guard. He asked himself: What do I need to do, if anything?
I’m scheduled to return to these countries to support our clients’ use of our technol-
ogy, so I won’t be able to avoid the issue for long. It seems almost ridiculous that I
became aware of this issue through a travel book. If it hadn’t been for that book,
I probably never would have thought about the issue at all. My company had not
prepared me. It offered no special training on cultural or ethical issues for employees
they send to work overseas. It seemed like the company’s values of providing people
with the opportunity for earlier diagnoses prevented us from exploring the potential
misuse of our product. The company and industry focus on how to develop technolo-
gies to identify life-threatening conditions earlier, better, and faster. We like to think
of ourselves and our technologies as saving lives, not risking them. The company’s
stated value is to provide health-care solutions to patients worldwide. But, in this
case, our technology was being used to both save and end lives. Do our values need
to change? I think of our company as being good and ethical, but we were obviously
unprepared in this case. We had not done our homework.
Even if the company wanted to do something, Pat wondered what they could do.
The company is an original equipment manufacturer (OEM), meaning that it doesn’t
sell directly to the end users. Therefore the responsibility for putting these technolo-
gies into the wrong hands is widely dispersed across different manufacturers, distrib-
utors and local institutions. Pat also wondered whether and how the company could
influence these different parties to take action even if it decided it was right to do so.
On top of that, the company is in the United States, and these end users are halfway
across the world.
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Case Questions
1. Should Pat raise this issue with management? If so, what should he say?
2. What if he does raise the issue and the company does nothing? What should he
do then?
3. Does this use of our technology breach a core value? Or is this a case where we
should respect local cultural practice? Is there some compromise position in
between?
4. Should the company be anticipating additional government regulation?
5. What is the risk to the company’s reputation of doing nothing? Of doing
something?
6. How might the company think about our responsibility from a supply-chain
perspective? Might they learn anything from companies in other industries that
have had to deal with this issue? For example, would it be appropriate to initiate
a policy to engage with customers who certify that they will sell exclusively to
authorized users? Even if the company did that, how could they be sure custom-
ers were complying?
7. Should the company also be educating and training employees and clients on
ethical uses of our products? Or, would that be seen as ethical imperialism?
8. What should a sales representative do if he or she suspects that a client will be
using the ultrasound equipment for sex-selective purposes?
9. The company provides service for these machines. Might that be a way to
monitor use?
10. Can the company do anything to better understand the root cause of the prob-
lem and tackle that?
CASE
GOOGLE GOES TO CHINA
Renee Flemish and Linda Trevi~no
Gu Ge (roughly translated as ‘‘harvesting song’’) is the name Google gave to the
mainland Chinese version of its Internet search service. Mainland China boasts a
huge and growing market of Internet users (the biggest in the world and now ahead
of the United States). But China also has arguably the most sophisticated government
censorship in the world. The same Chinese government that censors films and bans
television programs and rock bands is now sanitizing search pages by systematically
filtering out keywords, pictures, and news accounts. The government also records
every keystroke, records sites that individuals surf, and searches for any material that
government authorities find offensive. Guards are also posted at Internet cafes to
ensure that no one is looking at banned content.
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In 2006, Google decided that to retain access to China’s huge and growing mar-
ket of internet users (it then had 26 percent of the market, compared to 60 percent
for Beijing-based rival Baidu.com), the company would cooperate with the Chinese
government’s demand to block Chinese customers’ access to Internet sites that
include information about topics the government deems off limits to its citizens—
such as democracy, human rights, Tibet, Taiwanese independence, the meditation
technique Falun Gong, or information about the Dalai Lama.88 Searches either
turn up ‘‘acceptable’’ information or no information and a message saying, ‘‘opera-
tion timed out.’’
Here are a few examples of ‘‘scrubbed’’ searches on Gu Ge:
Searches of ‘‘Tiananmen Square’’ produce some 400 photos, all depicting an empty
square or one filled with tourists—Search on Google in the United States, and you
find 22,000 photos, many of them of bloody protests. In 1989 Tiananmen Square was
the site of student-led demonstrations against government corruption that culminated
in a bloody standoff. Protestors defied orders to disperse, and tanks and infantry
were sent in, subsequently killing 2,600 civilians and injuring another 7,000–10,000.
Widespread arrests followed and press coverage was strictly controlled.
Searches of ‘‘Falun Dafa’’ (also known as Falun Gong) find only a series of websites
that condemn the practice—search on Google U.S., and you will learn that Falun
Dafa is a system of New Age style meditation practiced by some 100 million mem-
bers. It has been suppressed in China since 1999, when 10,000 members staged a
peaceful meditational protest outside China’s Central Appeal Office.
The Dalai Lama, often called ‘‘his Holiness,’’ is considered by Tibetan Buddhists to
be the current incarnation of Buddha, the latest in a lineage that dates back to 1391.
However, searches of ‘‘Dalai Lama’’ produce only pictures of a young man that were
taken before 1959 when China invaded and took over Tibet and the Dalai Lama was
forced to flee to India, where he continues to lead the Tibetan government in exile.
The Dalai Lama has been credited with preserving Tibetan culture and education
and was awarded the Nobel Peace Prize in 1989 for his leadership of the global
movement for a Free Tibet.
Google was criticized for its decision by U.S. Congress members, who accused
the company of ‘‘decapitating the voice of dissidents in China,’’ ‘‘enabling evil,’’ and
facilitating the oppression of Chinese citizens via ‘‘sickening collaboration’’ with
Beijing. Google was also said to be violating the UN Declaration of Human Rights,
which says, ‘‘Everyone shall have the right to hold opinions without interference’’
and ‘‘Everyone shall have the right to freedom of expression; this right shall include
freedom to seek, receive, and impart information and ideas of all kinds. . . . ’’ Some
critics even introduced legislation that would require U.S. companies to locate their
computer hardware outside China, create a code for all U.S. Internet companies do-
ing business in repressive countries, curtail technology exports to countries with cen-
sorship policies, and create a State Department office of internet freedom.
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Bloggers argued that Google had a ‘‘moral duty not to bow to China’s wishes.’’89
The Reporters Without Borders group said that Google’s decision to ‘‘collaborate’’
with the Chinese government was a ‘‘real shame.’’ And, Amnesty International con-
demned Google’s self-censorship policy. The Electronic Frontier Foundation argued
that if these companies are going to negotiate away users’ rights, the companies
should at least work together to form a code of practice.
On the other hand, the Chinese allege that they are no different from Western coun-
tries, like France and Germany, that restrict Nazi-related content. And company defend-
ers say that these companies are helping to open up Chinese society in the long run.
Google’s Position in 2006
& Despite admitting to compromising its values, Google maintained that the
company would serve a more useful role in China through participation.
Withdrawing the service would be ‘‘a greater evil,’’ the company said.90
Although the decision to go into China ‘‘involved a lot of hand-wringing and
weighing the consequences of censoring results . . . providing some infor-
mation to Chinese users is better than none at all.’’91 The CEO called the
choice a ‘‘difficult but principled decision.’’92
& Google’s chief executive, Eric Schmidt, said that Google had a responsibility
to abide by the law in every country where it does business.93 ‘‘We had a
choice to enter the country and follow the law, or we had a choice not to enter
the country . . . I think it’s arrogant for us to walk into a country where we
are just beginning operations and tell that country how to run itself.’’
& The company decided to disclose censorship at the bottom of Web pages by
saying, ‘‘In order to follow local laws, some search results are not dis-
played’’94 In addition, Google chat, e-mail, and blogs were not included in
the company’s service offering in China. Google did not wish to find itself in
a position of having to turn over e-mail files to the government. (The com-
pany recently resisted U.S. government requests for data on what people
were searching for).
Google’s Stated Goals and Values
‘‘Never settle for the best.’’ The perfect search engine would understand exactly what
you mean and give back exactly what you want. . . .
Google’s goal is to provide a much higher level of service to all those who seek
information, whether they’re at a desk in Boston, driving through Bonn, or strolling
in Bangkok.
Following is a list of Google’s stated goals and values:
1. Focus on the user and all else will follow.
Google has refused to make any change that does not offer a benefit to the
users who come to the site . . .
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2. It’s best to do one thing really, really well.
3. Fast is better than slow.
4. Democracy on the web works.
Google works because it relies on the millions of individuals posting web-
sites to determine which other sites offer content of value.
5. You don’t need to be at your desk to need an answer.
The world is increasingly mobile and unwilling to be constrained to a fixed
location.
6. You can make money without doing evil.
7. There’s always more information out there.
8. The need for information crosses all borders.
. . . Our mission is to facilitate access to information for the entire world.
9. You can be serious without a suit.
Google’s founders have often stated that the company is not serious about
anything but search . . .
10. Great just isn’t good enough.
Always deliver more than expected.
How Do Other Tech Companies Compare?
Here are a few examples of how other tech companies have handled similar issues:
& Yahoo handed over e-mail files to the Chinese government to aid in the arrest
of two ‘‘dissident’’ journalists who were using their e-mail system to spread
news. The reporters are in a Chinese jail.
& MSN, acting on Chinese government orders, shut down a blog critical of
local politicians. MSN has a clear policy (now) of taking down websites only
when served with a legal order to do so, and of publicly stating why the site
was taken down rather than merely deleting it.
& Cisco has been accused of helping the Chinese government build its censor-
ship-heavy Internet system by providing the hardware to block Internet sites.
& MSN, Yahoo, Cisco, and Google made a statement asking the U.S. govern-
ment to pressure the Chinese to abandon its efforts to censor expression on
the Internet.
& Skype similarly agreed to filter phrases such as ‘‘Falun Gong’’ and ‘‘Dalai
Lama.’’
Recent Developments
In January 2010, Google threatened to end its business in China. This was a poten-
tially expensive decision to pull out of the world’s largest and most rapidly growing
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Internet marketplace. Although Google has lost market share and remains a distant
second to Baidu.com (China’s own Internet search service), estimates say that a deci-
sion to leave China would mean passing up between $250 million and $600 million
in revenue in 2010. That’s a small chunk of the firm’s $22 billion in total revenue.
But Internet access in China is expected to continue to grow from the current 300 to
400 million regular users to about 840 million by 2013. The company would thus be
deciding to forgo an enormous future market.
Google’s decision was precipitated by the actions of sophisticated hackers, origi-
nating in China, when they broke into the e-mail accounts of Chinese human rights
activists. At least 20 large companies in multiple sectors were affected. Google
released a statement that linked the cyberattacks with government censorship, saying,
‘‘These attacks and the surveillance they have uncovered—combined with attempts
of the past year to limit free speech on the Web—have led us to conclude that we
should review the feasibility of our business operations in China.’’
The topic immediately increased traffic on Twitter. China began blocking
Twitter in June, 2009 along with Flickr (the photo editing site) and Microsoft’s Bing
(Internet search).95
Google said it would try to work with the Chinese government in arranging to
conduct censorship-free searches, but that it was no longer willing to continue
censoring results on Google.cn. If an agreement could not be reached, it would end
Google.cn.
Given the financial loss to shareholders, some wondered whether the executives
had the right to make this decision. Sergey Brin and Larry Page, Google’s founders,
have that right because Google has two classes of stock—and Page and Brin, who
hold 58 percent of the stock, have veto power over everyone, including the com-
pany’s CEO.
A National Public Radio report suggested that for Brin, misgivings about the
company’s original 2006 decision trace back to his family history. He was born in
Russia, under Communist rule, and has strong negative reactions to governments
with oppressive policies.96
In an interview with NPR on January 14, 2010, the firm’s chief legal officer,
David Drummond, defended Google’s initial decision to accept some censorship. He
said the company felt a responsibility to serve the Chinese market and felt that it
could be a force for opening up that market. He noted that the company has been ‘‘a
thorn in the government’s side’’ since entering the market and has ‘‘pushed back at
every opportunity.’’
Experts suggested that the company’s response was a way of saying, ‘‘enough is
enough.’’ The company decided it could no longer protect the security of its users in
China. The firm’s new stance has been praised by human rights activists and Internet
civil liberties specialists, one of whom said, ‘‘It helps realign Google’s business with
its ethos.’’97 Another said, ‘‘No company should be forced to operate under govern-
ment threat to its core values or to the rights and safety of its users.’’98
China’s response was that firms doing business in China must obey its laws and
it did not back down. In March, 2010, while maintaining R&D work in China and a
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sales force, Google decided to close Google.cn and direct its Chinese users to its
uncensored Hong Kong website, hoping to make uncensored information more avail-
able. When Hong Kong was set up by international treaty, China agreed to allow it to
operate free from most Chinese laws. But, Chinese users quickly reported that
searches for politically sensitive information on the Hong Kong website produced
blank pages.
Case Questions
1. Why do you think so many American citizens and lawmakers reacted nega-
tively to Google’s decision in 2006?
2. Does the fact that Google is an Internet company change societal expectations
of it regarding information openness?
3. Was Google facing an ethical dilemma (values in conflict) in 2006?
4. Analyze the dilemma from consequentialist, deontological, and virtue ethics
perspectives. Based on your analysis, what do you think is the right thing to
do? Do you agree with Google’s CEO that the company made ‘‘a principled
decision?’’ Why or why not?
5. Google’s motto is ‘‘Don’t Be Evil.’’ What does that mean? And how does it
apply in this situation? Is the company living up to its motto? Is it a good motto?
6. Consider Google’s other values related to democracy, not doing evil, focusing
on the user, providing information, and so on. Can Google do business in China
and maintain these ideals? If so, how? If not, why not?
7. In defense of its 2006 decision, Google said that it complies with the law in coun-
tries where it does business. But the author of a book on IBM and the Holocaust
says that IBM used the same defense in the 1930s when it provided Adolf Hitler
with the tools to keep ‘‘the wheels of the Holocaust running on time.’’ The author
says, ‘‘[they] want to be good Americans in the U.S. and good collaborators
in China. They want it both ways but there are certain things we must not do.’’
99
Do you agree with the company’s stance? If so, what changed in 2010?
8. Google and other companies routinely comply with government rules to censor
other types of material—especially pornography, but also hate speech and other
moral matters such as sexual images in Islamic countries. Are some forms of
censorship acceptable? If so, where and how would you draw the line?
9. Tom Donaldson rejects ethical relativism (‘‘when in Rome’’) and ethical abso-
lutism (insisting on exactly the same standards everywhere for every situation).
Instead, he recommends that companies operating overseas adopt an ethical
threshold based upon core values such as the Golden Rule and respect for
human rights. Those must then be translated into specific guidelines. Do you
think Google’s 2006 operating standards were consistent or inconsistent with
Donaldson’s recommendations? If you were going to recommend a set of stan-
dards for Google, what would they say and why?
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APPENDIX CAUX ROUND TABLE PRINCIPLES
FOR BUSINESS
SECTION 1: PREAMBLE
The mobility of employment, capital, products, and technology is making business
increasingly global in its transactions and its effects.
& Laws and market forces are necessary but insufficient guides for conduct.
& Responsibility for the policies and actions of business and respect for the
dignity and interests of its stakeholders are fundamental.
& Shared values, including a commitment to shared prosperity, are as impor-
tant for a global community as for communities of smaller scale.
For these reasons, and because business can be a powerful agent of positive so-
cial change, we offer the following principles as a foundation for dialogue and action
by business leaders in search of business responsibility. In so doing, we affirm the
necessity for moral values in business decision making. Without them, the stable
business relationships and a sustainable world community are impossible.
SECTION 2: GENERAL PRINCIPLES
Principle 1: The Responsibilities of Businesses—Beyond
Shareholders Toward Stakeholders
The value of a business to society is the wealth and employment it creates and the
marketable products and services it provides to consumers at a reasonable price com-
mensurate with quality. To create such value, a business must maintain its own eco-
nomic health and viability, but survival is not a sufficient goal.
10. Every transcultural set of ethics standards for global business practice includes
the principle of human rights. For example, the UN Global Compact says that
companies should protect internationally proclaimed human rights and not be
complicit in human rights abuses. The Caux Roundtable Principles state that
businesses should contribute to human rights in the countries where they oper-
ate. Is Google’s behavior consistent with these expectations? Do you agree that
the company ‘‘negotiated away users’ human rights’’ in 2006?
11. What about the company’s decision to pull out of China in 2010? Do you agree
with it? How might it affect other companies doing business in China? Does it
change how you think about the company’s original decision?
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Businesses have a role to play in improving the lives of all their customers,
employees, and shareholders by sharing with them the wealth they have created. Sup-
pliers and competitors as well should expect businesses to honor their obligations in a
spirit of honesty and fairness. As responsible citizens of the local, national, regional,
and global communities in which they operate, businesses share a part in shaping the
future of those communities.
Principle 2: The Economic and Social Impact of Business—
Toward Innovation, Justice, and World Community
Businesses established in foreign countries to develop, produce, or sell should also
contribute to the social advancement of those countries by creating productive
employment and helping to raise the purchasing power of their citizens. Businesses
also should contribute to human rights, education, welfare, and vitalization of the
countries in which they operate.
Businesses should contribute to economic and social development not only in the
countries in which they operate, but also in the world community at large, through
effective and prudent use of resources, free and fair competition, and emphasis upon
innovation in technology, production methods, marketing, and communications.
Principle 3: Business Behavior—Beyond The Letter of Law
Toward a Spirit of Trust
While accepting the legitimacy of trade secrets, businesses should recognize that sin-
cerity, candor, truthfulness, the keeping of promises, and transparency contribute not
only to their own credibility and stability but also to the smoothness and efficiency of
business transactions, particularly on the international level.
Principle 4: Respect for Rules
To avoid trade frictions and to promote freer trade, equal conditions for competition,
and fair and equitable treatment for all participants, businesses should respect inter-
national and domestic rules. In addition, they should recognize that some behavior,
although legal, may still have adverse consequences.
Principle 5: Support for Multinational Trade
Businesses should support the multilateral trade systems of the GATT/World Trade
Organization and similar international agreements. They should cooperate in efforts
to promote the progressive and judicious liberalization of trade, and to relax those
domestic measures that unreasonably hinder global commerce, while giving due re-
spect to national policy objectives.
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Principle 6: Respect for The Environment
A business should protect and, where possible, improve the environment, promote
sustainable development, and prevent the wasteful use of natural resources.
Principle 7: Avoidance of Illicit Operations
A business should not participate in or condone bribery, money laundering, or other
corrupt practices: indeed, it should seek cooperation with others, to eliminate them. It
should not trade in arms or other materials used for terrorist activities, drug traffic, or
other organized crime.
SECTION 3: STAKEHOLDER PRINCIPLES
Customers
We believe in treating all customers with dignity, irrespective of whether they pur-
chase our products and services directly from us, or otherwise acquire them in the
market. We therefore have a responsibility to:
& Provide our customers with the highest quality products and services consist-
ent with their requirements.
& Treat our customers fairly in all aspects of our business transactions, includ-
ing a high level of service and remedies for their dissatisfaction.
& Make every effort to ensure that the health and safety of our customers, as
well as the quality of their environment, will be sustained or enhanced by
our products and services.
& Assure respect for human dignity in products offered, marketing, and
advertising.
& Respect the integrity of the culture of our customers.
Employees
We believe in the dignity of every employee and in taking employee interests seri-
ously. We therefore have the responsibility to:
& Provide jobs and compensation that improve workers’ living conditions.
& Provide working conditions that respect each employee’s health and dignity.
& Be honest in communications with employees and open in sharing informa-
tion, limited only by legal and competitive restraints.
& Listen to, and where possible, act on employee suggestions, ideas, requests,
and complaints.
442 SECTION IV ORGANIZATIONAL ETHICS AND SOCIAL RESPONSIBILITY
E1C11 07/09/2010 Page 443
& Engage in good faith negotiations when conflict arises.
& Avoid discriminatory practices and guarantee equal treatment and opportu-
nity in areas such as gender, age, race, and religion.
& Promote in the business itself the employment of differently-abled people in
places of work where they can be genuinely useful.
& Protect employees from avoidable injury and illness in the workplace.
& Encourage and assist employees in developing relevant and transferable
skills and knowledge.
& Be sensitive to serious unemployment problems frequently associated with
business decisions, and work with governments, employee groups, other
agencies and each other in addressing these dislocations.
Owners/Investors
We believe in honoring the trust our investors place in us. We therefore have a re-
sponsibility to:
& Apply professional and diligent management in order to secure a fair and
competitive return on our owners’ investment.
& Disclose relevant information to owners/investors subject only to legal
requirements and competitive constraints.
& Conserve, protect, and increase the owners/investors’ assets.
& Respect owners/investors’ requests, suggestions, complaints, and formal
resolutions.
Suppliers
Our relationship with suppliers and subcontractors must be based on mutual respect.
We therefore have a responsibility to:
& Seek fairness and truthfulness in all of our activities, including pricing,
licensing, and rights to sell.
& Ensure that our business activities are free from coercion and unnecessary
litigation.
& Foster long-term stability in the supplier relationship in return for value,
quality, competitiveness, and reliability.
& Share information with suppliers and integrate them into our planning
processes.
& Pay suppliers on time and in accordance with agreed terms of trade.
& Seek, encourage, and prefer suppliers and subcontractors whose employment
practices respect human dignity.
CHAPTER 11 MANAGING FOR ETHICS AND SOCIAL RESPONSIBILITY 443
E1C11 07/09/2010 Page 444
Competitors
We believe that fair economic competition is one of the basic requirements for
increasing the wealth of nations and, ultimately, for making possible the just distribu-
tion of goods and services. We therefore have a responsibility to:
& Foster open markets for trade and investment.
& Promote competitive behavior that is socially and environmentally beneficial
and demonstrates mutual respect among competitors.
& Refrain from either seeking or participating in questionable payments or
favors to secure competitive advantages.
& Respect both tangible and intellectual property rights.
& Refuse to acquire commercial information by dishonest or unethical means,
such as industrial espionage.
Communities
We believe that as global corporate citizens, we can contribute to such forces of
reform and human rights as are at work in the communities in which we operate. We
therefore have a responsibility in those communities to:
& Respect human rights and democratic institutions, and promote them wher-
ever practicable.
& Recognize government’s legitimate obligation to the society at large and
support public policies and practices that promote human development
through harmonious relations between business and other segments of
society.
& Collaborate with those forces in the community dedicated to raising stan-
dards of health, education, workplace safety, and economic well-being.
& Promote and stimulate sustainable development and play a leading role in
preserving and enhancing the physical environment and conserving the
earth’s resources.
& Support peace, security, diversity, and social integration.
& Be a good corporate citizen through charitable donations, educational and
cultural contributions, and employee participation in community and civic
affairs.
NOTES
1. P. Bhaskar-Shrinivas, D. Harrison, M. A. Shaffer, and D. M. Luk, ‘‘Input-Based and Time-Based
Models of International Adjustment: Meta-analytic Evidence and Theoretical Extensions,’’ Academy
of Management Journal 48 (2005): 257.
2. Ibid.
444 SECTION IV ORGANIZATIONAL ETHICS AND SOCIAL RESPONSIBILITY
E1C11 07/09/2010 Page 445
3. K. J. Templer, C. Tay, and N. A. Chandrasekar, ‘‘Motivational Cultural Intelligence, Realistic Job
Preview, Realistic Living Conditions Preview, and Cross-Cultural Adjustment,’’ Group and
Organization Management 31 (2006): 154–73.
4. J. S. Black and M. Mendenhall, ‘‘Cross-Cultural Training Effectiveness: A Review and a Theoretical
Framework for Future Research,’’ Academy of Management Review 15, no. 1 (1990): 113–36.
5. M. A. Shaffer and D. Harrison, ‘‘Expatriates’ Psychological Withdrawal from International
Assignments: Work, Nonwork, and Family Influences,’’ Personnel Psychology 51 (1998): 87–118.
6. M. A. Shaffer, D. A. Harrison, K. M. Gilley, and D. M. Luk, ‘‘Struggling for Balance and Turbulence
on International Assignments: Work-Family Conflict, Support, and Commitment,’’ Journal of
Management 27, no. 1 (2001): 99–121.
7. P. C. Earley, and S. Ang, Cultural Intelligence: Individual Interactions across Cultures (Stanford,
CA: Stanford University Press, 2003).
8. P. C. Earley and E. Mosakowski, ‘‘Toward Cultural Intelligence: Turning Cultural Differences into a
Workplace Advantage,’’ Academy of Management Executive 18 (2004): 151–57.
9. Templer et al., ‘‘Motivational Cultural Intelligence, Realistic Job Preview.’’
10. N. Adler, International Dimensions of Organizational Behavior (Boston: PWS Kent, 1992).
11. P. Simon, The Tongue-Tied American: Confronting the Foreign Language Crisis (New York:
Continuum Publishing, 1980).
12. H. C. Triandis, R. Brislin, and C. H. Hui, ‘‘Cross-Cultural Training across the Individualism-
Collectivism Divide,’’ International Journal of Intercultural Relations 12 (1988): 269–89.
13. G. Hofstede, Culture’s Consequences: International Differences in Work-Related Values (Beverly
Hills, CA: Sage, 1980).
14. Ibid.
15. N. Adler, International Dimensions of Organizational Behavior (Cincinnati, OH: South-Western
College Publishing, 1997); S. J. Carroll and M. J. Gannon, Ethical Dimensions of International
Management (Thousand Oaks, CA: Sage, 1997).
16. Triandis et al., ‘‘Cross-Cultural Training across the Individualism-Collectivism Divide.’’
17. G. Weaver, ‘‘Ethics Management in Multinational Firms: Culture-Structure Contingencies,’’ Paper
presented at the Academy of Management meeting, Atlanta, Georgia, 1993.
18. H. C. Triandis, ‘‘A Theoretical Framework for the More Efficient Construction of Culture
Assimilators,’’ International Journal of Intercultural Relations 8 (1984): 301–30.
19. R. D. Albert, ‘‘Conceptual Framework for the Development and Evaluation of Cross-Cultural
Orientation Programs,’’ International Journal of Intercultural Relations 10 (1986): 197–213.
20. Ibid.
21. Ibid.
22. Ibid.
23. S. O. O’Grady and H. W. Lane, ‘‘The Psychic Distance Paradox,’’ Journal of International Business
Studies 27 (1996): 309–33.
24. T. Donaldson, ‘‘When in Rome, Do . . . What? International Business and Cultural Relativism,’’ in
The Ethics of Business in a Global Economy, ed. P. M. Minus (Boston: Kluwer, 1992), 67–78.
25. R. Cropanzano (ed.), Justice in the Workplace: From Theory to Practice (Mahwah, NJ:
Erlbaum, 2001); K. Leung, ‘‘Some Determinants of Reaction to Procedural Models for Conflict
Resolution: A Crossnational Study,’’ Journal of Personality and Social Psychology 53 (1987):
898–908.
26. Adler, 1992. International Dimensions of Organizational Behavior.
27. Ibid, 219.
28. Ibid.
29. Ibid.
30. H. M. Tong and P. Welling, ‘‘What American Business Managers Should Know and Do about
International Bribery,’’ Baylor Business Review, November–December 1981, 8.
31. Report to Congress: Impact of Foreign Corrupt Practices Act on U.S. Business, March 4, 1981
(Washington, D.C.: U.S. Government Accounting Office, 1981).
CHAPTER 11 MANAGING FOR ETHICS AND SOCIAL RESPONSIBILITY 445
E1C11 07/09/2010 Page 446
32. J. Behrman, Essays on Ethics in Business and the Professions (Englewood Cliffs, NJ: Prentice-Hall,
1988); R. Grosse and D. Kujawa, International Business (Boston: Irwin, 1992); A. W. Singer,
‘‘Ethics: Are Standards Lower Overseas?’’ Across the Board, September 1991, 31–34.
33. J. Nelson, ‘‘29 Countries Commit to Pact against Bribery,’’ Los Angeles Times, 21 November 1997, 1.
34. A. Carroll, Business and Society: Ethics and Stakeholder Management (Cincinnati, OH: South-West-
ern Publishing, 1989).
35. C. Bowe, S. Davoudi, and S. Kirchgaesner, ‘‘J&J Acts to Push Its Reputation Back into Joint,’’
Financial Times, 15 February 2007, 22.
36. J. A. Fadiman, ‘‘A Traveler’s Guide to Gifts and Bribes,’’ Harvard Business Review, July–August
1986, 122–34.
37. G. Koretz, ‘‘Bribes Can Cost the U.S. an Edge,’’ Business Week, 15 April 1996, 30.
38. Ibid.
39. S. Schubert and T. C. Miller, ‘‘At Siemens, Bribery Was Just a Line Item,’’ New York Times,
21 December 2008, www.nytimes.com.
40. N. Clark, ‘‘In Europe, Sharper Scrutiny of Ethical Standards,’’ New York Times, 7 May 2008, C8.
41. R. Berenbeim, Company Programs for Resisting Corrupt Practices: A Global Study, Research Report
1279-00-RR (New York: The Conference Board, 2000).
42. J. G. Kaikat, G. M. Sullivan, J. M. Virgo, and K. S. Virgo, ‘‘The Price of International Business
Morality: Twenty Years under the Foreign Corrupt Practices Act,’’ Journal of Business Ethics 26
(2000): 213–22.
43. K. Schoenberger, ‘‘Hong Kong’s Secret Weapon,’’ Fortune, 25 November 1997, 141–42.
44. ‘‘The High Cost of International Bribery,’’ Business Finance, 7–8 January, 2007.
45. Transparency International, ‘‘Corruption Perception Index,’’ Press Release, Berlin, July 31, 1997.
46. N. Onishi, ‘‘Making Honesty a Customer Policy in Indonesia Cafes,’’ New York Times, 16 June 2009, A6.
47. J. A. Barach, ‘‘The Ethics of Hardball,’’ California Management Review 27 (1985): 2.
48. K. Leung and K. Tong, ‘‘Justice across Cultures: A Three-Stage Model for Intercultural
Negotiation,’’ in The Handbook of Negotiation and Culture (Chap. 15), eds. M. J. Gelfand and J. M.
Brett (Stanford, CA: Stanford Business Books, 2004).
49. D. Vogel, ‘‘The Globalization of Business Ethics: Why America Remains Distinctive,’’ California
Management Review (Fall 1992): 30–48.
50. J. Mahoney, ‘‘An International Look at Business Ethics: Britain,’’ Journal of Business Ethics 9
(1990): 545–50.
51. L. Nash, ‘‘The New Realities of International Business Ethics,’’ in The Accountable Corporation, eds.
M. J. Epstein and K. O. Hanson (Westport, CT: Praeger, 2006).
52. M. Gunther, ‘‘Cops of the Global Village,’’ Fortune, 27 June 2005, 158–66.
53. Donaldson, ‘‘When in Rome, Do . . . What?’’
54. T. Donaldson, ‘‘Values in Tension: Ethics Away from Home,’’ Harvard Business Review (September–
October 1996): 48–62.
55. Ibid.
56. Ibid.
57. R. Haas, ‘‘Ethics in the Trenches,’’ Across the Board, May 1994, 12–13.
58. Donaldson, ‘‘Values in Tension.’’
59. A. Spicer, T. W. Dunfee, and W. J. Bailey, ‘‘Does National Context Matter in Ethical Decision
Making? An Empirical Test of Integrative Social Contracts Theory,’’ Academy of Management
Journal 47, no. 4 (2004): 610–20.
60. L. T. Martens and A. Kelleher, ‘‘A Global Perspective on Whistleblowing,’’ International Business
Ethics Review 7, no. 2 (2004), http://www.business-ethics.org/iberpubback.asp; L. P. Hartman, D. R.
Elm, T. J. Radin, and K. R. Pope, ‘‘Translating Corporate Culture around the World: A Cross-
Cultural Analysis of Whistleblowing as an Example of How to Say and Do the Right Thing,’’
Politeiia 25, no. 93 (2009): 255–72.
61. K. D. Martin, J. B. Cullen, J. L. Johnson, and K. P. Parboteeah, ‘‘Deciding to Bribe: A Cross-Level
Analysis of Firm and Home Country Influences on Bribery Activity,’’ Academy of Management
Journal 50 (2007): 1401–22.
446 SECTION IV ORGANIZATIONAL ETHICS AND SOCIAL RESPONSIBILITY
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62. T. Dunfee and R. C. Holland, ‘‘Viable Ethical Standards for Global Corporations: A Glimpse of What
Might Emerge,’’ Unpublished paper (Philadelphia: Wharton School, 1993).
63. Carroll, Business and Society.
64. B. Hindo, ‘‘Monsanto: Winning the Ground War,’’ Business Week, 17 December 2007, 35–41.
65. M. Skapinker, ‘‘How Monsanto Got Bruised in a Food Fight,’’ Financial Times, 8 March 2002, 13.
66. R. Walker, ‘‘Brewed Awakening? Coffee Beans, Globalization and the Branding of Ethics,’’
New York Times Magazine, 6 June 2004, 38.
67. D. Neef, The Supply Chain Imperative: How to Ensure Ethical Behavior in Your Global Suppliers
(New York: AMACOM, 2004).
68. M. Gunther, ‘‘Cops of the Global Village,’’ Fortune, 27 June 2005, 158–66.
69. Neef, The Supply Chain Imperative.
70. Gunther, ‘‘Cops of the Global Village.’’
71. Carroll, Business and Society.
72. C. M. Solomon, ‘‘Put Your Ethics to a Global Test,’’ Personnel Journal, January 1996, 66–74.
73. P. Magnusson, ‘‘Making a Federal Case Out of Overseas Abuses,’’ Business Week, 25 November
2002, 78.
74. J. E. Post, ‘‘Assessing the Nestle Boycott: Corporate Accountability and Human Rights,’’ California
Management Review (Winter 1985): 115–16.
75. E. Levenson, ‘‘Citizen Nike,’’ Fortune, 24 November 2008, 165–70.
76. L. Hartman, ‘‘Innovative Solutions to the Global Labor Challenge,’’ Presentation at the Ethics
Officers Association meeting, Boston, October 2002, and personal communication.
77. M. Gunther, ‘‘Green Gold?’’ Fortune, 15 September 2008, 106–112.
78. J. Quittner, ‘‘The China Code,’’ Business Week SmallBiz, August–September 2007, 40–46.
79. S. Prasso, ‘‘Saving the World One Cup of Yogurt at a Time,’’ Fortune, 19 February 2007, 97–101;
C. Seelos and J. Mair, ‘‘Social Entrepreneurship: Creating New Business Models to Serve the Poor,’’
Business Horizons, May–June 2005, 241–46.
80. W. C. Frederick, ‘‘The Moral Authority of Transnational Corporate Codes,’’ Journal of Business
Ethics 10 (1991): 165–77.
81. Ibid.
82. Ibid, 168.
83. ‘‘Report by the Committee on International Investment and Multinational Enterprise: Implementation
of the Convention on Combating Bribery of Foreign Public Officials in International Business
Transactions and the 1997 Recommendation’’ (Paris: OECD, 2002).
84. A. B. Baker, ‘‘Are Standards Becoming Standard Operating Procedures?’’ International Business
Ethics Review 8, no. 1 (2005): 1, 3–7.
85. F. Coleman, ‘‘World Leaders Try to Ban Business Bribery,’’ USA Today, 24 November 1997, 23B.
86. K. A. Getz, ‘‘International Instruments on Bribery and Corruption,’’ Unpublished paper presented at
the Conference on Global Codes of Conduct: An Idea Whose Time Has Come, South Bend, Indiana,
University of Notre Dame, 1997.
87. L. Paine, R. Deshpande, J. Margolis, and K. E. Bettcher, ‘‘Up to Code: Does Your Company’s
Conduct Meet World-Class Standards?’’ Harvard Business Review (December 2005): 1–12.
88. C. Chandler, ‘‘Inside the Great Firewall of China,’’ Fortune, 20 March 2006, 149–58.
89. H. Bray, ‘‘Google China Censorship Fuels Calls for U.S. Boycott,’’ Knight Ridder Tribune Business
News, 28 January 2006, 1.
90. ‘‘Internet Giants Try to Find a Way to Live and Grow in China,’’ South China Morning Post, 7 Febru-
ary 2006.
91. V. Koptyoff, ‘‘Google Defends Its China Policy: Decision to Comply with Government Censorship
Was ‘the Right One’ says CEO,’’ San Francisco Chronicle, 13 April 2006, C1.
92. J. Yardley, ‘‘Google Chief Rejects Putting Pressure on China,’’ New York Times, 13 April 2006.
93. K. Chien, ‘‘Update 2: Google Sees Substantial Revenue Growth in China,’’ New York Times, 12 April
2006.
94. H. W. French, ‘‘Google’s China Problem,’’ New York Times Upfront, 3 April 2006, 10–11.
CHAPTER 11 MANAGING FOR ETHICS AND SOCIAL RESPONSIBILITY 447
E1C11 07/09/2010 Page 448
95. B. Acohido and J. Swartz, ‘‘Censorship May Spur Google to Exit China,’’ USA Today, 13 January
2010, B1.
96. ‘‘Google’s Decision on China Traces Back to Founders,’’ NPR.org (January 14, 2010), www.npr.org.
97. A. Jacobs, and M. Helft, ‘‘Google May End China Operation over Censorship,’’ New York Times,
13 January 2010, 1, 3.
98. Acohido and Swartz, ‘‘Censorship May Spur Google to Exit China.’’
99. C. Page, ‘‘China’s Firewall Should Be Broken,’’ Philadelphia Tribune, 24 February 2006, 7A.
448 SECTION IV ORGANIZATIONAL ETHICS AND SOCIAL RESPONSIBILITY
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E1BINDEX 07/09/2010 Page 449
INDEX
Abbott Laboratories, 201, 332
Abrahams, David, 356
Abu Ghraib prison scandal, 274
Action, ethical, 85, 97–105
Pinto Fires case, 98–103
Adelphia, 207, 354
Adults’ ethics, 16–19
ethical conduct, 18
Advantageous comparison, 86
Advertising, 369–373
AIDS epidemic, 34, 37
Akers, John, 25
A.H. Robbins company, 226–228
Alcoa, 160–161
Alcohol abuse, 309
Alderson, Jim, 143
Alignment of ethical culture
systems, 154–156
Allison, John, 325
Altruism, 21–22, 64
American Cast Iron Pipe
Company (ACIPCO), 377
American Express, 173–174
American Institute of Certified
Public Accountants
(AICPA), 49–50, 275
American International Group
(AIG), 384–386
American Psychological
Association (APA), 47
Americans with Disabilities
ACT (ADA), 118
Andersen, Arthur, 189
Anderson, Gavin, 344
Annan, Kofi, 427
Anti-Bribery Convention
(OECD), 426
Anti-Terrorism, Crime, and
Security Act, 408
Appreciative Inquiry technique,
233
Arthur Andersen LLP, 14, 92,
130, 161, 189, 208, 258,
323, 357, 359
Aspen Institute study, 10
Assigned roles, 272–276
Attitude of students, 10–11
Audience, analyzing, 217–219
good soldiers, 217–218
grenades, 218
loose cannons, 218
Audit of ethical culture, 193
questions for formal systems,
195
questions for informal
systems, 196
Augustine, Norman, 235, 338
Authority, legitimate, 175–176,
279
Automatic ethical decision
making, 93
Autonomous decision making,
82–84
Autonomous principled thinking
and action, 82–84
Awareness, ethical,
psychological approach
to, 71–75
euphemistic language use, 74
language use, 73
peers guidance in, 73
Bad apple theory, 13–15
‘character’ concept, 13–14
Bad publicity, 26–27, 191,
310
Bakker, Jim, 162
Barkley, Charles, 313
Baxter, Cliff, 258–259
Beech-Nut Nutrition
Corporation, 179
Behavior, ethical, 255–256
managers rewarding, 266
practical advice for managers,
256
psychological approach to,
75–87
Behavioral consistency, 404
Bell, Alexander Graham, 197
Benevolence climate, 187–188,
338
Best Practices Forum, 27
Bhopal disaster, 343
Boisjoly, Roger, 279
Booklets, 221
Bottom of the wealth pyramid,
424
Bows, Al, 130
Braungart, Michael, 336
Bribe Payers Index (BPI), 411
Bribes, 9, 124, 405, 407–411
Broughton, Earnie, 213, 237
Buck stops with managers,
310–313
continually communicating
standards, 312–313
standards, 311–312
Buckingham, Marcus, 318n1
Buffett, Warren, 6, 26, 35n39,
139, 331, 382, 385,
397n98
Built to Last: Successful Habits
of Visionary Companies,
168
Burden of proof, 179–180
Bureaucracy, 175
Burke, James, 160, 240, 343,
365–366, 387
Bush, George W., 4
Business Ethics Network of
Africa (BEN-Africa),
413
Byham, William, 166
Byrne, John, 162, 206n99
Campus recruiting, 221
Caremark decision, 210
Carnegie, Andrew, 331
Carrot and stick approaches, 209
Carson, Rachel, 386
Cascading, 232
Casino industry, 373
449
E1BINDEX 07/09/2010 Page 450
Caux round table principles for
business, 427,
440–444
general principles, 440
preamble, 440
stakeholder principles,
442–444
communities, 444
competitors, 444
customers, 442
employees, 442–443
owners/investors, 443
suppliers, 443
Caveat emptor notion, 412
Celebrity endorsements,
228–229
CEO compensation packages, 29
Challenger tragedy, 90, 180, 279
Character, 13–14, 46
determination in virtue ethics,
47
Cheating
perception of peers and, 171
pervasiveness of, 10
Cheevers, Owen, 269
Chemical dependencies, 301,
308
Cherkasky, Michael, 362
Child labor, 405, 414, 420, 423,
427
Citicorp, 151–152
Citigroup, 21, 354, 361, 364,
383–384, 389
Citizenship principle, 429
Citrin, James, 160
Clark, Dick, 229
Clinical trials, 278
Codes, 169–171
Codes of conduct, 19, 109n47,
156, 169, 171, 227, 409,
428
in communicating ethics, 227
Cognitive barriers, 88–97, 369
consequences and, 89–91
fact gathering and, 88–89
gut reactions and, 93–94
integrity and, 91–93
Cognitive moral development,
77–84
autonomous decision making,
82–84
conventional (Level II),
79–80
gender differences and,
81–82
Kohlberg’s, 77–78
looking up and looking
around, 82
postconventional (Level II),
80–81
preconventional (Level I),
78–79
Collaterized debt obligations
(CDOs), 385
‘Collective mental
programming’, 401
Collectivism, 402–403
Collins, James, 35n33, 168
Communicating ethics, 215–238.
See also Training
programs
audience, analyzing, 217–219
good soldiers, 217–218
grenades, 218
loose cannons, 218
basic principles, 216–219
booklets, 221
brochures, 220–221
codes of conduct, 227
current state, evaluating, 219–
220
communicating policies,
219
communication channels,
220
ethical dilemmas among
employees, 219
downward, 215
e-mail discussions, 224
ethical dilemmas and, 221
existing channels, 231–232
formal and informal system
alignment, 235–238
formal systems, 235–238
aligning, 216–217
good soldiers, 217–218
grenades, 218–219
informal systems, 235–238
aligning, 216–217
loose cannons, 218
mission or values statements,
224–226
multiple communication
channels for, 220–221
newsletters and magazines,
221
organizational policy,
226–227
orientation materials, 221
policy communication, 226
policy manuals, 226–227
resolving questions and
reporting concerns,
235–238
reward systems, 238–239
senior management
commitment to ethics,
227–235
specific needs and, 219
training programs, 230–231
upward, 215
USAA example, 222–224
websites, 220
Community ethics, 386–388
Compliance approaches,
242
Compliance officers, 212–214
Compliance programs, 156,
207–208, 242
Conduct, ethical, 18, 255–291.
See also Managing for
ethical conduct
Confidentiality, 128
Confirmation traps, 88–89
Conflicting roles, 275
Conflicts of interest, 122–127,
357–365
costs, 126–127
description, 123–125
Enron, 358–361
as an ethical problem, 126
fiduciary responsibilities,
126
friendship, 123–124
influence, 125
Johnson & Johnson,
365–367
kickbacks, 124
Marsh & McLennan (MMC),
361–365
overt bribes, 124
pharmaceuticals, 370–373
privileged information, 125
subtle ‘bribes’, 124
Toyota, 367–370
Consequences
identification of, 54–56
in larger context, 91
long term vs. short term,
55
of secrecy, 56
over time, 91
reduced number of, 89
as risk, 90
for self versus others, 89–90
450 INDEX
E1BINDEX 07/09/2010 Page 451
symbolic consequences,
55–56
thinking about, 89–91
Consequentialist theories,
40–42, 45
drawbacks, 42
importance, 42
utilitarianism, 40
Consultants, 192, 409
Consumer ethics, 356–373. See
also ‘Due care’ theory
advertising, 369–373
conflicts of interest,
357–365
product safety, 365–369
Consumer Financial Protection
Agency (CFPA), 341
Control
of behavior, 17–18
illusion of, 90
Cookie-cutter approach to ethics,
192–197
Cooking the books, 339
Cooper, Cynthia, 144
Corning, Dow, 155
Corporate Culture and
Performance, 227, 381
Corporate Ethics Committee,
215
Corporate ethics office concept,
211–212
Corporate guidelines
development, 413–417
Corporate resources, 132–137
corporate financial resources,
134–135
corporate reputation, 132
costs, 136–137
description, 132–136
as an ethical problem, 136
honest information, providing,
135–136
Corporate social responsibility
(CSR), 27, 322–353
corporate philanthropy,
332
environmental sustainability,
334–337
ethical reason for, 324–325
importance, 322–329
ethical reason, 324–326
pragmatic reason,
323–324
strategic reason, 326–327
pragmatic reason for, 323
stakeholder perspective on the
firm, 323
strategic reason for, 326
triple bottom line, 334–337
types of, 329–333
economic responsibilities,
329–330
legal responsibilities, 330
philanthropic
responsibilities,
331–333
Corporate social responsibility
pyramid, 329
Corruption, 407–409
Corruption Perception Index
(CPI), 410–411, 446n45
Cost/benefit analysis, 66,
102–105
Costs, in discrimination, 118
Cradle to Cradle: Remaking the
Way We Make Things,
336
Credit default swaps (CDSs), 6,
361, 385
Criminal liability costs, 27
Cross-cultural training. See
Foreign business
assignments; Global
business environment
Cultural homogeneity,
404–405
Cultural intelligence (CQ),
400–401
Cultural persistence, 190
Cultural systems approach,
193–194
Culture, ethical, 151, 153–156,
188–192. See also
Formal cultural systems;
Informal cultural systems
bad publicity influence, 191
change intervention,
196–197
changing, 188–192
Citicorp’s culture, 151
costly lawsuits influence, 191
deferred prosecution
agreement (DPA), 191
definition of, 401
developing, 188–192
ethical cultural evaluation,
190–192
ethical culture audit, 193–196
executive leaders creating,
156–157
influencing behavior,
152–153
internalization, 152–153
pressure for changing, 191
social responsibility and,
401–403
socialization, 152–153
strong versus weak,
151–152
to unethical culture, 189–190
Customer confidence issues,
127–132
confidentiality, 128
privacy, 128
costs, 131–132
description, 127–131
as an ethical problem, 131
fiduciary responsibilities,
129–130
personal responsibility, 129
telling the truth, 129
Cynicism, 9–13
attitude of students, 10–11
drawbacks, 9
MBA Oath, 12
media-fueled cynicism,
10–12
Decision making, 20, 38–70,
178–180. See also
Psychological approach
to decision making
descriptive approach, 38
individual differences and, 76
prescriptive approaches to,
39–51
consequentialist theories,
40–42
deontological theories,
42–46. See also
individual entry
virtue ethics, 46–51
using ethical language, 186
Decision making, steps to,
52–58
actions, creative thinking
about (step 7), 57–58
character and integrity,
considering (step 6),
56–57
consequences, identifying
(step 4), 54–56
consequences of secrecy, 56
long-term versus short-term
consequences, 55
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Decision making (Continued )
symbolic consequences,
55–56
ethical issues, defining
(step 2), 52–53
fact gathering (step 1), 52
obligations, identifying (step
5), 56
self gut, checking (step 8), 58
stakeholders, identifying (step
3), 53–54
Decision making processes in
organizations, 178
‘Deep Throat’, 41
Defense Industry Initiative (DII),
26, 240
Deferred prosecution agreement
(DPA), 191
Defining ethics, 17–18
Dehumanization, 87
Deindividuation, 272
Deontological theories, 42–46
challenge of, 45
drawbacks, 45
duties, obligations, and
principles, focus on,
42–46
moral rules, 44
promise keeping, 43
Descriptive approach, in
decision making, 38
Diffusion of responsibility. See
Organizations,
responsibility diffused in
Dignity principle, 428
Dilemmas, ethical, 38–39
layoff, 39
loyalty, 39
truthfulness, 39
Dimon, Jamie, 25
Dirty tricks, 406
Discipline, 260–270, 299–301
role of, 267–269
Disclosure rule, 56–57
Discrimination, 115–119
costs, 118
description, 116
as an ethical problem,
117–118
value diversity, 118
Distorting consequences, 86
Diverse workforce, managing,
304–310
Diversity, 305–306. See also
Discrimination
valuing, 119
workforce, 304–314
Dividing responsibility,
diffusing responsibility
by, 281–282
Division of responsibility, 281
Donaldson, Tom, 396n39,
413–415, 445n24
Dow Corning, 155–156
Downsizings, employee,
378–381
Drug abuse, 309
Druyvesteyn, Kent, 19, 180, 186,
216
‘Due care’ theory, 357
design, 357
labeling, 357
materials, 357
notification, 357
packaging, 357
production, 357
quality control, 357
warnings, 357
Due diligence, 209, 409
Dunlap, Al, 162, 378–380
DuPont, 335
Ebbers, Bernie, 339
Ecology of Commerce, The, 336
Economic responsibilities,
329–330
Edelman Trust Barometer, 9
Egoistic climates, 338
Eldridge reports, 214
Emotions, in ethical decision
making, 95–97
Employee engagement,
managers and, 292–294
information sharing, 294
involvement, 294
line of sight, 294
rewards and recognition, 294
Employees
care about ethics, 23
controlling of, 18
ethical problems of, 373–381
downsizings, 378–381
safety, 374–378
Endriss, Matt, 333
Enron collapse/bankruptcy, 3,
11, 14, 28, 30, 50, 83, 92,
130, 142, 144, 161, 164,
190–191, 208, 257–259,
268, 323, 333, 341, 354,
358–361
Enron: The Smartest Guys in
the Room, 14
Entertainment industry, 25
Environmental Protection
Agency (EPA), 15, 386
Environmental sustainability,
334–337
Equal Employment Opportunity
Commission (EEOC),
118–119, 121–122, 303,
319n12
Escalation of commitment, 91
Ethical awareness, 71–75
Ethical culture, 153–156
Ethical imperialism, 413
Ethical judgment, 75–85
Ethical leadership. See
Leadership
Ethical reason for CSR, 324–326
Ethical relativism, 413
Ethical responsibilities beyond
legalities, 330–331
Ethically neutral leadership, 163
Ethics and Compliance Officer
Association (ECOA), 212
Ethics game, 233–235
Ethics officers, 212–214
backgrounds of, 213–214
insiders vs. outsiders, 212–213
Ethics Resource Center, 11, 169,
172, 211, 243
Etzioni, Amitai, 22
Euphemistic language use, 74,
86
European Business Ethics
Network (EBEN),
412–413
Evaluation
ethical culture changing, 197
ethics program, 239–241
Johnson & Johnson’s Credo
survey, 240
surveys, 240–241
‘Everyone’s doing it’, 270–272
people follow group norms,
270
pressure to go along, 271
unethical behavior,
rationalizing, 270–271
Excessive philanthropy, 345
Executive ethical leadership, 159
Executive leaders care about
ethics, 24–26, 156–157
Existing employees, training,
231–232
452 INDEX
E1BINDEX 07/09/2010 Page 453
Expatriate manager. See Foreign
business assignments
External locus of control, 84–85
Extortion payments, 408
Exxon Valdez oil spill, 336, 338,
386–387
Fact gathering, 58, 88–89
Fair Labor Association (FLA),
423
Fairness principle, 114, 429
human resources issues and,
303
in organizational climate,
187–188
measure, 115
reciprocity, 115
False Claims Act, 143
Family issues, 140–141
Family, managing, 307–309
Fastow, Andrew, 258–259,
358–359
Fastow, Lea, 359
Father Son & Co.; My Life at
IBM and Beyond, 268
Felt, Mark, 41, 47
Feuerstein, Aaron, 346–348, 382
Fidelity Investments, 127
Fiduciary principle, 428
Fiduciary responsibilities,
129–130
Film festivals, 232
Final Accounting: Ambition,
Greed, and the Fall of
Arthur Andersen, 189
Financial disaster of 2008, 4–8
legislators role, 8
protection against, failure of, 7
regulatory agencies role, 8
Wall Street, 7
Financial resources, corporate,
134–135
Fine determination, under U.S.
Sentencing Guidelines,
209, 252–253
Firing, 301
Firm performance, social
responsibility and, 343
Flemish, Renee, 434
Flirtations, 122
Ford Motor Company, 67–68,
102
Foreign business assignments.
See also Global business
environment
behavioral consistency and,
404
corporate guidelines and,
413–417
cultural homogeneity and,
404–405
difficulties of, 400
ethical standard differences,
411–413
ethics-related training, 405–411
foreign language proficiency,
401
individualism/collectivism,
402–403
learning the culture, 401–403
need for structure, training,
guidance, 400–401
negotiating across cultures,
406–407
payoffs and bribes, 407–411
power distance, 403
recognizing ethical issues,
405–406
selective perception and,
403–404
similarity assumptions and,
405
Foreign Corrupt Practices Act
(FCPA), 407
Foreign country, doing business
in, 417–425
developing world, 421
human rights issues, 421–423
jewelry business, 423–424
legitimacy challenge,
417–420
South Africa, 420–421
Foreign language proficiency,
401
Formal communication system,
aligning, 216–217
Formal cultural systems,
166–180. See also
Informal cultural systems
chief financial officers
(CFOs), 167
decision-making processes,
178–180
burden of proof, 179–180
quantitative analysis, 179
organizational authority
structure, 175–178. See
also individual entry
organizational structure and,
175–178
orientation and training
programs, 171–172
performance management
systems, 172–175. See
also individual entry
policies and codes, 169–171
selection systems, 166–167
values and mission
statements, 168–169
whistle-blowers and, 177–178
Formal ethics communication,
220–221
Formal ethics policies, 169
Formal system to resolve
questions and report
ethical concerns,
235–238
Fragmentation of conscience,
282
Friedman, Milton, 329–330
Fudging numbers, 135
Game jargon, in business
dealings, 257
Gates, Bill, 331, 355
Gender differences and cognitive
moral development,
81–82
General Dynamics Corporation,
19, 180, 186, 216
General Electric, 25, 157, 335,
337
General Motors, 11, 96, 182,
356, 367
Gift giving, 415
Gilligan, Carol, 81–82
Gioia, Dennis, 64, 97–98,
101–106
‘Giving Voice to Values’
program, 112–114
Glass-Steagall Act, 8, 165
Global business environment.
See also Foreign business
assignments;
Transcultural corporate
ethic, development
challenge to legitimacy,
417–420
decision to globalize, 400
globalization, 400
human rights example,
421–423
marketing in developing
world example, 421
organization in, 417–429
INDEX 453
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Global business environment
(Continued )
South Africa example,
420–421
transcultural corporate ethics
development, 425–429
Global business ethics policies,
development, 413–417
Global Compact, 427–428
Global Reporting Initiative,
428
Globalizing ethics program,
243–244
Goals, 263–264
goal setting, 261
reward systems and, 416
Golden Rule, 43–44, 414
Good soldiers, 217–218
Google, 434–439
Gorman, James P., 360
GovernanceMetrics
International, 344
Government regulation, 340–343
Government regulation, cost of,
340–343
Grameen bank, 425
Grapevines, 216–217
Grass, Martin, 144
Grease payments, 22
‘‘Grenades’’ as audience group,
218–219
Greenspan, Alan, 4
Grenades, 218
Grossman, Dave, 283
Group norms, 271–272
Group pressure, 31
Groups, diffusing responsibility
in, 280–281
Groupthink, 280–281
Grubman, Jack, 164, 383
Gut reactions, 94
Haas, Robert D., 328
Haidt, Jonathan, 93
Haldman, Charles ‘‘Ed,’’
362–363
Harassment, 119–122, 306–307.
See also Discrimination;
Sexual harassment
Hawken, Paul, 336
Help lines, 402, 416
Herman Miller, Inc. (HMI),
176–177
Heroes, 180–182
Heskett, 227
Hippocratic Oath for Managers,
A, 48–49
accurate and transparent
reporting, 49
acting with integrity in the
enterprise’s interest, 49
adherence to the law, 49
balance multiple stakeholders’
interests, 48
professional development, 49
respectful and unbiased
decision making, 49
responsibility to protect the
profession, 49
service to the public and
society, 48
Hiring, 295–296
Homogeneity within a culture,
404–405
Honesty, 315
Horatio Alger Award, 257
Hostile work environments,
119–120
Human resources issues, 111,
132, 303
Human rights, 399, 414,
421–423, 426, 440
Hurricane Katrina, 327, 332–333
Hypocritical leadership, 162–163
IBM, 25, 151, 268, 343, 420
Idealism, 76
Illegal conduct, cost of, 339–340
Illusion of control, 90
Illusion of morality, 91, 281
Illusion of optimism, 90
Illusion of superiority, 91, 369
Immelt, Jeffrey, 25
Imperialism, ethical, 413
Implicit Association Test (IAT),
94
In a Different Voice, 81
In Search of Excellence, 228
Incentives, 261
Inconvenient Truth, An, 334
Independent Commission
Against Corruption
(ICAC), 409
Indirect rewards, 264–266
Individual differences,
psychological approach
to, 75–87
cognitive moral development,
77–84. See also
individual entry
ethical decision-making style,
76
idealism, 76
relativism, 76
ethical judgment and action,
relationship to, 85
locus of control, 84–85
Machiavellianism, 85–86
moral disengagement, 86–87
Individual expatriate manager,
400–417
behavioral consistency, 404
corporate guidelines
development, 413–417
cross-cultural training, 400
cultural homogeneity,
404–405
ethical standards in different
cultures, 411–413
foreign business assignments,
difficulties of, 400
foreign language proficiency,
401
global business ethics
policies, development,
413–417
imperialism, ethical, 413
learning about culture,
401–403
individualism/collectivism,
402
power distance, 403
power of selective perception,
recognizing, 403–404
relativism, ethical, 413
similarity, 405
structure, training, and
guidance, need for,
400–401
training and guidance, ethics-
related, 405–411
Individual responsibility,
175–177
Individualism/collectivism,
402–403
Individuals care about ethics,
21–23
Individuals’ ethical problems,
111–148. See also
Conflicts of interest;
Corporate resources;
Customer confidence
issues; People issues
addressing, 111–148
people issues, 114–122
454 INDEX
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personal values, identifying
and voicing, 112–114
tight situations, 134–145. See
also Whistle-blowing
activity
Industries care about ethics,
26–29
Industries focus on ethics, 26–27
Infant formula, 421
Influence, 125, 137
Informal communication
systems, aligning,
216–217
Informal cultural systems,
180–187
heroes, 180–182
heroes and role models,
180–182
language and, 185–187
mentoring, 180–181
myths, 183–185
norms, 182
rituals, 182–183
role models, 180–182
stories, 183–185
Informal systems to resolve
questions and report
ethical concerns,
235–238
Infrastructure, ethics, 214–215
Initial public offerings (IPOs),
164
‘Instant Experience’, 222
Instructions, people following,
276–278
Milgram experiments,
277–278
Integrity, 26–29, 46–51, 56–57,
91–93, 238, 249, 259
Intentions, importance, 47
Internal locus of control, 84–85
Internalization, 152–153
Internals, 85
Intervention and cultural change,
196–197
Investors, social responsibility
and, 338–339
Iran-Contra affair, 276
Jefferson, Thomas, 156
Jewelry business, 423–424
Johns Manville, 179, 275, 330,
374–376
Johnson & Johnson, 28, 160,
168–169, 229, 240–241,
343, 365–367, 369,
372–373, 408
Jones, Thomas, 74
Josephson, Michael, 346, 353n73
Judgment, ethical, 85
barriers to, 88–97
consequences, 89–91
as risk, 90
for self versus others, 89
facilitators of, 88–97
fact gathering, 88–89
psychological approach to,
71–75
reduced number of
consequences, 89
Kant, Emmanuel, 44
Kelleher, Herb, 156–157
Kentucky Fried Chicken (KFC),
324
Kickbacks, 124
Kidder, Rushworth, 3
Kinder, Lydenberg, Domini
(KLD), 343
Knight, Phil, 422
Knowles, Kevin, 176
Kohlberg, Lawrence, 53, 77–82
moral reasoning theory, 77
Kopper, Matthew, 359
Kotter, 227
Kozlowski, Dennis, 339
Kuttner, Robert, 352n49
Kyosei concept, 427
Language, 185–187, 401
foreign language proficiency,
401
and informal cultural systems,
185–187
decision-making using, 186
Law, ethics and, 20–21
Lawsuits, 118–119, 358–359,
383, 393, 428
Lay, Kenneth, 83, 144, 257–259,
359
Layoffs, 52, 95, 128, 301–303
Leadership, ethical, 156–166
Citrin, James, 160
coaches, 161
creation of culture, 156–157
and culture, 158
executive ethical leadership,
158–161
executive leaders create
culture, 156–157
hypocritical, 162–163
hypocritical leadership,
162
moral person dimension,
159–160
Neff, Thomas, 160
neutral leadership, 163
neutral or silent, 163–166
organizational culture,
maintaining or changing,
157–166
silent leadership, 163
unethical leadership, 161–162
Legal compliance, managing,
207–254
Legal responsibilities, 330
Legal standards, 20
Legislators role in financial
calamity, 8
Legitimacy challenge, 417–420
Legitimate authority, 175–176,
279
Levi Strauss, 328, 331, 345, 414,
420, 423
Levine, Dennis, 259, 267
Levitt, Arthur, 354, 359
Liar loans, 5–6
Lincoln Electric Company,
380–381
LITTLE Company, 217
Local management in training,
232–233
Lockheed Martin Corporation
(global security), 183,
207, 213–214, 220–221,
230–232, 235, 338, 416
Locus of control, 84–85
external, 84
internal, 84
Long-term consequences, in
decision making, 55
Long-term ethical views, 194
Loose cannons, 83, 218
Loyalty, 136
Ludington, John, 155
Mac, Freddie, 5
Machiavellianism, 85–86
Madoff, Bernard L., 8
Mae, Fannie, 5
Magazines, company, 221
Malden Mills, 346–347
Malone, Karl, 313
Management focus on ethics,
18
INDEX 455
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Manager as a lens, 310–314
buck stops with managers,
310–313
continually communicating
standards, 312–313
standards, 311–312
managers as role models,
313–314
Managers, ethical problems of,
292–319
care about ethics, 23–24
costs, 303–304, 309–310
diverse workforce, managing,
304–310
chemical dependencies of
employees, 308
diversity, 305–306
family, 307–309
harassment, 306–307
personal illnesses, 308
personal issues, 307–309
managers and employee
engagement, 292–294
actively disengaged, 293
actively engaged, 293
not engaged, 293
managing ‘basics’, 295–304
continuous evaluation,
297–298
discipline, 299–301
hiring, 295–296
performance evaluation,
296–299
terminations, 301–303
work assignments, 295–296
managing up and across, 314–
316
honesty, 315
standards go both ways,
315–316
reasons for, 303, 309
Managing ethics, 2–35, 207–254
compliance officers, 212–214
ethics officer background,
213
insiders versus outsiders,
212–213
corporate ethics office,
211–212
directions, 2–35
ethics infrastructure, 214–215
globalizing ethics program,
243–244
making ethics comprehensive
and holistic, 210–211
structuring, 208–215
compliance program, 209
corporate ethics programs
in U.S., 208
due diligence, 209
U.S. Sentencing
Commission in, 208–210
values or compliance
approaches, 242
Managing for ethical conduct,
255–291
advice for managers, 263–264
discipline, 263–264,
269–270
goals, 263–264
group norms, 271–272
obedience to authority, 279
personal responsibility,
283–284
rewards, 263–264
behavior, 255–256
Dennis Levine example, 259
discipline, 260–270
‘everyone’s doing it’,
270–272
goals combined with rewards
encouraging unethical
behavior, 262–263
electronics appliance sales
example, 262
indirect rewards, 264–266
instructions, people following,
276–278
Kenneth Lay example, 257–
259
managers rewarding ethical
behavior, 266
multiple ethical selves,
256–260
obedience to authority at
work, 279
punishments, 264–266
rewards, 260–270
Tailhook example, 264–265
Zimbardo prison experiment,
273–274
Manville, Johns, 330
Markopolos, Harry, 8
Marsh & McLennan (MMC),
361–365
Marshall, S.L.A., 283
McDonough, William, 336
McPherson v. General Motors,
356
McWane, Inc., 376–377
Media focus on ethics, 222
Media-fueled cynicism, 10–12
Medtronic, 161, 185
Mentoring, 180–181
Merck & Co., Inc., 201, 207, 349
Merrill Lynch, 7, 21, 26, 118,
340, 360, 383
Milgram experiments, 277–278
Milgram, Stanley, 277
Milliken, Michael, 257
Misalignment of rewards, 174
Misleading claims, 370
Mission statements, 168–169,
221, 224–226, 332
Mitsubishi Motor’s, 122
Monsanto, 418–419
Moral Dimension, The, 22
Moral disengagement, 86–87
categories, 86
attribution of blame, 87
dehumanization, 87
diffusion of responsibility,
86
displacement of
responsibility, 86
euphemistic language use,
86
Moral justification, 86
Moral managers, 159–160, 162
Moral psychology research, 93
Moral reasoning, 83. See also
Cognitive moral
development
Moral rules, 44
‘Moral sentiments’, 3
Mortgages, 5
Motivation, ethical, 21–23, 47
Motorola, 415
Mozer, Paul, 382
Multinational corporations. See
Foreign business
assignments; Global
business environment
Multiple communication
channels, 220–221
for formal ethics
communication, 220–221
booklets, 221
campus recruiting, 221
magazines, 221
newsletters, 221
orientation meetings and
materials, 221
recruiting brochures,
220–221
456 INDEX
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websites, 220
Multiple ethical selves, 256–260
Multiple stakeholders, 355–356
primary, 356
secondary, 356
Multisystem ethical culture
framework, 153–156
alignment of, 154–156
Corning, Dow, 155
formal systems, 153
informal systems, 153
My Lai massacre, 176, 281
Myths, in informal cultural
systems, 183–185
National Business Ethics Survey,
11
National Whistleblower’s
Center, 143
Nature/Nurture debate, 15
‘Natural rights’, 43
Nazi war crimes, 276
Neff, Thomas, 160
Negative assumptions about
people, 194
‘Negative rights’, 43
Negotiating across cultures,
406–407
Nelson, Katherine, 151, 233,
363
Nepotism, 415
Nestle, 424
Neuroscience, 22, 93
Neutral leadership, 158–164
New recruit training, 231
Newsletters, company, 185, 221
Nike, 171, 420
Nixon, Richard, 41, 403
Nonprofit organizations, 133
Nonsteroidal anti-inflammatory
drugs (NSAIDs), 392
Norms, in informal cultural
systems, 182
Nussbaum, Bruce, 28
O’Neill, Paul, 160
Obedience to authority, 78, 85,
176, 279
Occupational Safety and Health
Administration (OSHA),
374
Off the record conversations, 134
Office romance, 122
Officer background, in ethics
management, 213
Ombudsman/DIALOG program,
243–244
Optimism, illusion of, 94
Organization for Economic
Cooperation and
Development (OECD),
426
Organization of American States
(OAS), 426
Organizational authority
structure, 175–178
authority, 175–176
ethical culture, 175–176
legitimate authority, 176
new organizational structures,
176
reporting problems, structures
to support, 177
responsibility, 175–176
Organizational climates,
187–188
benevolence, 187–188
fairness, 187–188
principles, 187–188
rule-based climate, 188
self-interest, 187–188
Organizational culture,
150–206
cookie-cutter approach, 192
developing and changing,
188–192
ethical leadership, 156–166
ethics as cultural
phenomenon, 198
formal cultural systems,
166–180
informal cultural systems,
180–187
organizational change
approach, 192–197
Organizational ethics as culture,
151–153
Organizational ethics, cultural
approach to changing,
192–197
assumptions about people,
194
audit of ethical culture,
193–195
changing evaluation, 197
changing intervention,
196–197
cultural systems view,
193–194
ethical culture audit, 194–196
long-term view, 194
managing, 198
Organizational policy
in communicating ethics,
226–227
make it understandable,
226
make policy come alive,
226–227
policy, prioritizing, 226
relevant rules,
communicating, 226
Organizational structure, 176–177
Organizations, ethical problems
in, 13–15, 354–398.
See also Conflicts of
interest
bad apples causing, question
of, 13–15
consumers and ethics,
356–373. See also under
Consumer ethics
controlling employees, 18
costs, 388
managing stakeholders,
355–356
nature of, 388
Organizations, responsibility
diffused in, 279–284
by dividing responsibility,
281–282
in groups, 280–281
by psychological distance
creation, 282–283
Orientation
meetings and materials, 221
and training programs,
171–172
Otis, 240
Otis Elevator Company, 238
Overt bribes, 124
Parker, Mark, 422
Paterno, Joe, 12, 161, 167, 181,
183
Paterno by the Book, 183
Payoffs, 407–411
Peck, Scott, 281
People for the Ethical Treatment
of Animals, 323
People issues, 114–122
discrimination, 115–119
harassment, sexual and
otherwise, 119–122. See
also Sexual harassment
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Performance evaluation,
296–299
Performance management
systems, 172–175
designing, 172–173
dishonest or disrespectful
behavior, 174
rewards, 174
Personal illnesses, 308
Personal issues, managing,
307–309
Personal responsibility, 129
Pfizer, 370–373
Pharmaceutical industry,
370–372
Pharmaceutical Research and
Manufacturers of
America (PhRMA),
342, 373
Philanthropic responsibilities,
331–333
Philip Morris International
(PMI), 419
Pinto fires case, 64, 68, 98–103
Corporate Milieu, 100
cost-benefit analysis,
102–103
personal aspect, 98–99
script processing, 102–103
Torch Passes to You, 101
Plagiarism, 72
Playing field, 257
Policies, 169–171
Policy manuals, 59, 169,
226–227
Portal, Michael, 326
Potential actions, thinking
creatively about, 57–58
Powell, Colin, 332
Power distance, 403
Practical preventive medicine,
58–61
learning, 58–59
snap decision, 59–61
Pragmatic reason for CSR,
323–324
Praise the Lord (PTL) ministry,
162–163
Pregnancy Discrimination Act,
118
Prejudice, 115, 295. See also
Discrimination
Prescription drug risk, 372
Prescriptive approach
in decision making, 38
to ethical decision making,
39–51. See also under
Decision making
Prevention, 133
Primary stakeholders, 356
Prince, Charles, 164, 384, 418
Privacy, 128
Privileged information, 125
Product safety, 365–369
Property principle, 428
Psychic distance paradox, 405
Psychological approach to
decision making, 71–110
cost-benefit analysis, 103–105
emotions in, 95–97
ethical awareness, 71–75
ethical behavior, 75–87
ethical judgment, 71–87
individual differences, 75–87.
See also individual entry
integrity, thinking about,
91–93
self gut, 93–94
unconscious biases, 94–95
Psychological Cost of Learning
to Kill in War and
Society, The, 283
Psychological distance creation,
diffusing responsibility
by, 282–283
Psychological warfare, 406–407
Punishments, 264–267
administration of, 258
indirect effects of, 267–268
indirect, 264–266
practical advice on, 269–270
Pygmalion effect, 264
Quantitative analysis, decision
making, 179
Quid pro quo harassment,
119–120
Rainforest Action Network
(RAN), 324
Rawls, John, 44
Real estate business, 5
mortgages, 5
securitization of, 6
Reardon, Kathleen, 137
Recruiting brochures, 220–221
Reebok Corporation, 423
Reed, John, 164–165
Regulatory agencies role in
financial calamity, 8
Regulatory backlash, 341
Relativism, ethical, 76, 413
Relevant moral community, 47
Reliability principle, 428
Reporting ethical concern
systems, 234
Reputation, corporate, 132–134
benefit of, 338
Resolution of questions systems,
235–238
Resources, corporate, 132–137
Responsibility, 175–176
diffused in organizations,
279–284. See also under
Organizations
Responsible Care, 343
Responsiveness principle, 429
Rest, James, 15
Rewards systems, 260–270
effectiveness of and ethical
behavior, 263
goals and, 261
indirect rewards and
punishments, 264–266
people’s attitude, 260–261
practical advice regarding,
263–264
to reinforce ethics message,
238–239
integrity, 238
people and teamwork,
238
rewarding behavior, 266
unethical behavior and,
262–263
Rights concept, 43
‘natural rights’, 43
‘negative rights’, 43
Rituals, in informal cultural
systems, 182–183
Road Less Traveled, The, 281
Roles, 272–276
advice for managers,
276
assigned, 272–276
conflicting, 275
practical advice on, 276
role readiness, 274
supporting ethical behavior,
275–276
at work, 274–275
Role models, 180–182
managers as, 313–314
Rowley, Coleen, 144
Rule-based climate, 188
458 INDEX
E1BINDEX 07/09/2010 Page 459
Safety, employee, 374–378
Salomon Brothers, 139, 382–384
Sarbanes-Oxley Act (SOX), 143,
341
Sarni, Vince, 139
Scott Paper Company, 378–380
Script processing, 102–103
Sears, Roebuck, and Co., 285–288
Secondary stakeholders, 356
Secrecy, consequences of, 56
Securities and Exchange
Commission (SEC), 354
Selection systems, 166–167
Selective perception,
recognizing, 403–404
Self gut, 93–94
automatic ethical decision
making, 93
Self-interest climate, 187–188
Self-love, 3
Senior management
communicating commitment
to ethics, 227–235
involvement in training,
232–233
Sentencing guidelines in
managing ethics, 208–209
September 11 terrorist attacks,
11, 144, 156
Sexual harassment, 26, 119–122
costs, 121
as an ethical problem, 121
flirtations, 122
hostile work environment,
119–120
office romance, 122
quid pro quo harassment,
119–120
Shaffer, James, 293
Shareholders, ethics and, 381–386
Short-term consequences, in
decision making, 55
Silent leadership, 163–166
Silent Spring, 386
Similarity, assumptions of, 405
Skilling, Jeffrey, 359
Skooglund, Carl, 24, 62, 223
Slade Company case, 271–272
Smith, Adam, 3
Snap decisions, 60
Social Accountability
International (SAI), 423
Social Investment Forum, 339
Social responsibility and ethics,
managing for, 399–448
individual expatriate manager,
400–417. See also
individual entry
Socialization, 15, 58, 152–153,
180–181
Socially responsible business,
337–348. See also
Corporate social
responsibility (CSR)
excessive philanthropy, 345
goodness of, 337–348
benefit of a good reputation,
338
investors, 338–339
government regulation, cost
of, 340–343
illegal conduct, cost of,
339–340
research results, 343–345
as the right thing, 346–348
Socially responsible investors,
338
Society cares about Ethics,
business and social
responsibility, 27
South Africa, doing business in,
420–421
Southwest Airlines, 156, 166, 182
Speaker, Joe, 144
Spitzer, Eliot, 361–362, 364
Stakeholders, 40, 323
identifying, 53–54
managing, 355–356
multiple stakeholders,
355–356
primary, 356
secondary, 356
perspective on the firm, 323
Standards
clear, 311–312
communication of, 312–313
going both ways, 315–316
Staples, 207
Starbucks, 296, 324
Stephens, Tom, 330
Stories, in informal cultural
systems, 183–185
Strategic reason for CSR,
326–327
Substance abuse, 309
Subtle bribes, 124–125
Superiority, illusion of, 91
Surveys, 240–241
Johnson & Johnson’s Credo
survey, 240
Sustainability, environmental,
334–337
Swanson, John, 155
Swartz, Mark, 339
Symbolic consequences, in
decision making, 55–56
Systems to support international
reporting, 177
Tailhook scandal, 264–265
Tap Pharmaceuticals, 143,
201–203
Task goal, 261
Teaching business ethics, 13–19
bad apple theory, 13–15
controlling, 18
possibility of, 13–19
Teaching ethics, 17
Terminations, 301–303
Thalidomide cases, 55
Theory of Moral Sentiments,
The, 3
Three hundred sixty degree
(360!) feedback, 314
Tiffany’s, 423–424
Tobacco industry, 373
Toffler, Barbara, 189
Top management involvement in
training, 232
Towers Perrin, 318n5
Toyota, 367–370
Training and guidance, ethics-
related, 405–411
American businesspeople, 408
bribes, 407
dealing with ethical issues,
405–406
Independent Commission
Against Corruption
(ICAC), 409
negotiating across cultures,
406–407
payoffs, 407
recognizing ethical issues,
405–406
Training programs, 171–172,
230–231
creating a dialogue, 233
existing employees, 231–232
local management in,
232–233
new recruits, 231
top management in, 232
training model, ethics game,
233–235
INDEX 459
E1BINDEX 07/09/2010 Page 460
Transcultural corporate ethic,
development, 425–429
citizenship principle, 429
dignity principle, 428
fairness principle, 429
fiduciary principle, 428
Google, 434–440
human rights and fundamental
freedoms, 426
inviolability of national
sovereignty, 425
Japan, 427
Kyosei concept, 427
market integrity in, 426
principles, 425
property principle, 428
reliability principle, 428
responsiveness principle, 429
social equity, 425
transparency principle, 428
Transmitters and executants, 282
Transparency International (TI),
410
Transparency principle, 428
Triple bottom line, 334–337
Trust, 117
importance of, 27–29
professions, 126
Truth in advertising, 127
Tsunami, 364, 332
Tylenol poisoning, 160, 366
U.S. Federal Sentencing
Guidelines, 141, 211
U.S. Sentencing Commission,
155–156, 171, 208–212
Ultimatum game, 22
Ultrasound technology, 431–433
Unconscious biases, 94–95
Unethical behavior
conflicting roles leading to, 275
goals combined with rewards
encouraging, 262–263
rationalizing, 270–271
Unethical culture, 189–190
Unethical leadership, 161–162
Union Carbide, 343
United Nations Global Compact,
427
United States v. Booker, 210
United Technologies (Otis
elevators, Carrier air
conditioners, Pratt &
Whitney engines,
Sikorsky helicopters),
207
United Technologies, 207, 220,
238, 243, 342
United Way, 257
Universal declaration of human
rights, 423
Unsolicited mail, 371
USAA (insurance and financial
services), 207, 213–214
communication at, interactive
approaches to, 222–224
Utilitarianism, 40
Values, 242
importance of, 29–30
and mission statements,
168–169
statements, 168–169, 224–226
Valuing diversity, 118–119
Veil of ignorance, 44–45
Verizon, 168, 342
Virtue ethics approach, 46–51
character determination,
47
focus on integrity, 46–51
intentions, importance, 47
motivations, importance, 47
U.S.legal profession, 47–48
Vogel, David, 412
Voicing personal values,
112–114
Wal-Mart, 27, 151, 171, 278,
286, 333, 334–335, 424
Warren, Randy, 55
Watergate break-in, 41, 276
Watkins, Sherron, 83, 142, 144,
257
Watson, Thomas, Jr., 268–269
Watson, Tom, 269
Watson, Towers, 294
Wealth of Nations, 3
Weber, James, 78
Websites, 220, 225–226
Weill, Sandy, 163, 384
Welch, Jack, 157
Weldon, Bill, 169
What Went Wrong at Enron,
389
Whistle-blowing activity,
137–145
company’s ethics officer or
ombudsman, contacting,
141
going outside the chain of
command, 141–142
going outside the company,
142–143
how to, 140–145
approaching immediate
manager, 140
discussing with family, 140
leaving the company,
143–144
taking it to next level, 141
when to, 139–140
Women and cognitive moral
development, 81–82
Work assignments, 295–296
Yavitz, Boris, 57, 311
Yunus, Muhammad, 424–425
Zimbardo prison experiment,
273–274
460 INDEX
Cover Page
Title Page
Copyright Page
BRIEF CONTENTS
CONTENTS
PREFACE
SECTION I INTRODUCTION
CHAPTER 1 INTRODUCING STRAIGHT TALK ABOUT MANAGING BUSINESS ETHICS: WHERE WE’RE GOING AND WHY
Introduction
The Financial Disaster of 2008
Moving Beyond Cynicism
Can Business Ethics Be Taught?
This Book is about Managing Ethics in Business
Ethics and the Law
Why Be Ethical? Why Bother? Who Cares?
The Importance of Trust
The Importance of Values
How the Book is Structured
Conclusion
Discussion Questions
Exercise: Your Cynicism Quotient
Notes
SECTION II ETHICS AND THE INDIVIDUAL
CHAPTER 2 DECIDING WHAT’S RIGHT: A PRESCRIPTIVE APPROACH
Introduction
Ethical Dilemmas
Prescriptive Approaches to Ethical Decision Making in Business
Eight Steps to Sound Ethical Decision Making in Business
Practical Preventive Medicine
Conclusion
Discussion Questions
Exercise: Clarifying Your Values
Case: Pinto Fires
Notes
CHAPTER 3 DECIDING WHAT’S RIGHT: A PSYCHOLOGICAL APPROACH
Introduction
Ethical Awareness and Ethical Judgment
Individual Differences, Ethical Judgment, and Ethical Behavior
Facilitators of and Barriers to Good Ethical Judgment
Toward Ethical Action
Conclusion
Exercise: Understanding Cognitive Moral Development
Discussion Questions
Notes
CHAPTER 4 ADDRESSING INDIVIDUALS’ COMMON ETHICAL PROBLEMS
Introduction
People Issues
Conflicts of Interest
Customer Confidence Issues
Use of Corporate Resources
When All Else Fails: Blowing the Whistle
Conclusion
Discussion Questions
Notes
SECTION III MANAGING ETHICS IN THE ORGANIZATION
CHAPTER 5 ETHICS AS ORGANIZATIONAL CULTURE
Introduction
Organizational Ethics as Culture
Ethical Culture: A Multisystem Framework
Ethical Leadership
Other Formal Cultural Systems
Informal Cultural Systems
Organizational Climates: Fairness, Benevolence, Self-Interest, Principles
Developing and Changing the Ethical Culture
A Cultural Approach to Changing Organizational Ethics
The Ethics of Managing Organizational Ethics
Conclusion
Discussion Questions
Case: Culture Change at Texaco
Case: An Unethical Culture in Need of Change: Tap Pharmaceuticals
Notes
CHAPTER 6 MANAGING ETHICS AND LEGAL COMPLIANCE
Introduction
Structuring Ethics Management
Communicating Ethics
Using the Reward System to Reinforce the Ethics Message
Evaluating the Ethics Program
Values or Compliance Approaches
Globalizing An Ethics Program
Conclusion
Discussion Questions
Case: Improving an Ethical Culture at Georgia-Pacific
Appendix: How Fines Are Determined under the U.S. Sentencing Guidelines
Notes
CHAPTER 7 MANAGING FOR ETHICAL CONDUCT
Introduction
In Business, Ethics Is about Behavior
Our Multiple Ethical Selves
Rewards and Discipline
‘‘Everyone’s Doing It’’
People Fulfill Assigned Roles
People Do What They’re Told
Responsibility Is Diffused in Organizations
Conclusion
Discussion Questions
Case: Sears, Roebuck, and Co.: The Auto Center Scandal
Notes
CHAPTER 8 ETHICAL PROBLEMS OF MANAGERS
Introduction
Managing the ‘‘Basics’’
Managing a Diverse Workforce
The Manager as a Lens
Managing Up and Across
Conclusion
Discussion Questions
Notes
SECTION IV ORGANIZATIONAL ETHICS AND SOCIAL RESPONSIBILITY
CHAPTER 9 CORPORATE SOCIAL RESPONSIBILITY
Introduction
Why Corporate Social Responsibility?
Types of Corporate Social Responsibility
Triple Bottom Line and Environmental Sustainability
Is Socially Responsible Business Good Business?
Conclusion
Discussion Questions
Case: Merck and River Blindness
Notes
CHAPTER 10 ETHICAL PROBLEMS OF ORGANIZATIONS
Introduction
Managing Stakeholders
Ethics and Consumers
Ethics and Employees
Ethics and Shareholders
Ethics and the Community
Why Are These Ethical Issues?
Costs
Conclusion
Discussion Questions
Notes
CHAPTER 11 MANAGING FOR ETHICS AND SOCIAL RESPONSIBILITY IN A GLOBAL ENVIRONMENT
Introduction
Focus on the Individual Expatriate Manager
The Organization in a Global Business Environment
Conclusion
Discussion Questions
Case: Selling Medical Ultrasound Technology in Asia
Case: Google Goes to China
Appendix: Caux Round Table Principles for Business
Notes
INDEX
reference/Segon
International Review of Business Research Papers
Vol. 3 No.5 November 2007 Pp.362-381
The Concept of Ethical Leadership in Organisations
Michael Segon * and Christopher Booth**
The ethics of business practice and leadership in organizations has once
again fallen under the spotlight in organisational practices. Over the past
decade the spectacular collapses of Enron, WorldCom in the United States
and HIH Insurance in Australia have raised questions of not only
governance practices in corporations but also the notion of ethical
leadership. The business leadership practices of corporate high fliers such
as Kenneth Lay and Jeffrey Skilling of Enron, and Bernard Ebbers of
WorldCom as well as Ray Williams and Rodney Adler who were involved in
Australia’s largest corporate collapse of the HIH group, once again put into
question the concept of ethics in leadership, particularly in regard to
unethical business practices and narcissistic leadership approaches (De
Vries, 2004, 1985; Maccoby, 2004, 2000). The contention of this paper is
that ethical leadership practices are a foundation stone for developing sound
leadership practices aimed at building enduring organizations and
businesses. The paper will identify a concepts of contemporary leadership
practice, the nature of ethical leadership, the nature and stages of
development of ethical decision making – the prime arena of ethical
leadership within the organisational context, and finally the paper will outline
the principles that support ethical leadership as well as final conclusions to
be drawn.
Field of Research: Ethics; Leadership; Organisation Behaviour
1. Ethical Leadership
Ethical behaviour and effective leadership are intertwined and inseparable. In
fact, meaningful leadership that in the long run counts for something - must
be accompanied by character. Recent research by Goffee and Jones (2000)
highlights effective leaders selectively show weaknesses and reveal their
differences, use intuition well, practice tough empathy in connecting and truly
caring about employees. Collins’ (2001) research identifies humility,
professional behaviour and drive as characteristics of leadership in high
performing corporations. Empirical research appears to confirm that the
leader who acts ethically and professionally will ultimately succeed and the
leader who lacks an ethical foundation will ultimately fail (Butcher 1997).
*Dr Michael Segon. Senior Lecturer, Graduate School of Business, RMIT, Australia
E mail: michael.segon@rmit.edu.au
** Christopher Booth, Lecturer, Graduate School of Business, RMIT, Australia
Email: chris.booth@rmit.edu.au
Segon & Booth 363
1.1 What is Leadership?
Leadership can be considered as influence directed towards others, in a
given situation, in order to obtain specific goals. Leadership is a dynamic
relationship between leaders and followers, and affects a work group’s
activities towards goal setting and achievement (Robbins et al. 2004).
Leadership can also to be interpreted at two levels. The first is the locus of
those decisions that determine the basic direction of an enterprise. Such
authority may be vested in a top individual, a dominant group or the board of
directors. The second is that leadership may be exercised at functional,
departmental, or divisional levels. In other words, leadership is not
necessarily a concept that is limited to the manager or owner of the business.
Leadership as a concept is therefore intimately bound up with ideas of
responsibility and accountability of behaviour. However the focus of literature
surrounding leadership is normative in nature- addressing what leaders do
rather than who they should be. Such literature reflects the dichotomy
between the between the political (power) aspect of leadership and its clear
moralism. Much of the organisational behaviour literature on leadership
seems to focus upon the tactical and personality dimensions of successful
leadership i.e. Hersey and Blanchard's situational theory, Vroom contingency
approach etc., (Robbins et al. 2004; McKenna, 1999).
These approaches are usually concerned with ways in which the individual
can increase their power bases and influence so as to control the actions of
others, thus then often made link to French and Raven’s power bases
typology (Minkes, Small and Chatterjee, 1999, p. 327). Freeman (1991)
suggests that a problem with this traditional leadership literature is that is
focuses on power relationships- how to acquire more and to exert influence-
rather than attention to moral relationship that exists between leader and
follower. Sergiovanni (2001) establishes a relationship between the concept
of leadership, followership and power and morality. He suggests that
whenever there is an unequal; distribution of power between two people, the
relationship becomes a moral one. Leadership involves an offer to control.
The follower accepts this offer on the assumption that the control will not be
exploited. In this sense leadership is not a right but a responsibility
1.2 Ethical Leadership
Ethical leadership relates to the clarity of vision and long-term consistency in
pursuing the vision. Strategy and ethics therefore go hand in hand. “Strategy
is concerned with purpose and values and so is ethics" (Connock and Johns,
1995, p.3). Ethical leadership is the first and foremost in influencing ethical
organisational behaviour; it is not the corporation itself that exerts moral
responsibility but rather the individual members of the corporation (Ritchie,
Segon & Booth 364
1996). Brown et al. 2005,p.120) define ethical leadership as “the
demonstration of normatively appropriate conduct through personal actions
and interpersonal relationships, and the promotion of such conduct to
followers through two-way communication, reinforcement, and decision-
making” Lucas and Anello (1995) suggest that ethical leadership involves a
connection between ethical thought and action. Linking moral reasoning to
action is an imperative in leadership. Leaders’ and followers’ character is
defined by actions and behaviours, not simply the values that are espoused.
McCoy (1985) suggests that leadership is vital to breakthrough ethical
cynicism and is the most essential element of a successful development of an
ethical culture. Thus ethical behaviour must begin at the strategic level, a
point emphasised by Trevino and Nelson (1999) who identify that leadership
is crucial to the ethical behaviour and culture of an organisation as integrity or
the lack of it, flows from the top down.
The inclusion of ethics as part of the leadership function is often criticised,
from the view that the business of managers and business leaders is to
maximise returns to shareholders and not to impose their ethical values on
the company at its commercial expense (Friedman, 1970). This is akin to the
notion of agency theory that employees and managers are limited to actions
and decisions that are goal directed (Dellaportas et al. 2004). This is also
consistent with the notion of bounded rationality which suggests managers
and leaders are restricted in their attempts to make rational decisions by the
complexity associated with a decision (Child, 1986; Daft, 2005) Some
business analysts argue that ethics or more principled approaches to
leadership is not sustainable due to global competition and the need for
flexibility leaders and that such ethical strategies reduce business
opportunities.
This competes with an alternative moral view of leadership from the
perspective of natural law and the Kantian traditions, which argues that
leaders should follow the requirements of ethics (Minkes, Small and
Chatterjee, 1999, p. 327). As Moss Kanter (1989) has identified managers
and leaders do in fact have standards, both explicit and implicit, of what is
appropriate to do or not to do. In addition while business ethics has always
been important from a social and moral point of view, it has also become a
pragmatic requirement in the corporate sector. The high concern with
efficiency strategies place an even greater emphasis on trust than did the
adversarial-protection business practices of the traditional corporation
(Minkes, Small and Chatterjee, 1999).
Trust is key factor in the development of the leader follower relationship as
evidenced by research on leader follower relations by Goffee and Jones
(2002) and also supported in the concept trustworthiness and empathy
competences in the Emotional Intelligence competence framework of
Goleman, Boyatzis and McKee (2002). Northhouse (2001) further identified
that ethical practice is central to leadership due to the nature of the
Segon & Booth 365
relationship between follower and leader challenging the argument of agency.
A leader must influence and engage with followers to accomplish
organisational goals, and it is often the way in which that engagement occurs
as to the level of trust that develops, hence the importance of role modelling.
1.3 Leadership and Ethics
Recent theorists have suggested that a virtue based approach focuses upon
the moral quality of the person and can inform an ethic of leadership. From
the time of Aristotle, theorists have argued that of all the virtues, prudence
represents the linchpin of political judgment and that any theory of leadership
needs to develop an account of prudence (Minkes, Small and Chatterjee,
1999, p.327).
Leadership entails ethics because leaders have responsibilities. Persons in
positions of leadership make a difference. They are able to bring about
changes in behaviour through their influence, which would not have occurred
without their presence and actions (Dobel,1998). According to Francis (2000)
leadership is crucial to ethical behaviour. Being in a position of power, a
leader is able to have influence out of proportion with their individual worth.
The ethics of responsibility requires leaders to attend to the consequences of
their actions (Weber, cited in Minkes, Small and Chatterjee, 1999, p. 327).
Their first responsibility, however, resides in what Adam Smith called self-
mastery. All virtues and the personal capacity to live up to promises, obey the
law, and follow directives depend upon this primary moral capacity (Smith,
cited in Minkes, Small and Chatterjee, 1999, p. 327). This suggests that
people in positions of responsibility, such as leaders of organisations, have an
obligation to control their passions and overcome temptations. Without this
basic self-discipline they could abuse their power for their own purposes.
Thoughtless, rash, or impulsive actions could harm or exploit those who
depend on the leader or cause the leader to fail in performing vital
responsibilities.
As Mintzberg (1990) has identified, the actions of effective managers and
leaders should be based on reflection, not driven by reactive emotions. When
internal or external stimuli affect leaders, they should have the self-control not
to react instantly. Without self-command moral life remains impossible (Smith,
cited in Minkes, Small and Chatterjee, 1999, p. 327). Lucas and Anello
(1995) suggest that the journey of ethical leadership begins with an
examination of personal values and an ongoing reflection of personal core
values. Self-mastery, however, only lays the groundwork for ethical
leadership.
Segon & Booth 366
2. Ethical Leadership and Organisations.
Many leaders in organisations espouse ethical values and, on occasion,
ensure that significant resources are allocated to the development of integrity
systems, typified by the introduction of corporate codes of ethics.
Unfortunately this can often have little impact on the behaviour of individuals
within the business. We can identify many reasons why attempts to develop
ethical culture fails. According to Newton (1995) it is often the senior levels of
the organisations that also need to accept responsibility for this failure. Weiss
(1994, 268-269) suggests that it is a responsibility of the executives to
develop an appropriate ethical culture within an organisation. They have the
responsibility to start the process, ensure that it is adequately resourced and
that it supported and maintained. Ferrell, Fraedrich and Ferrell (2005) and
Trevino and Nelson (1999) concur identifying that leadership, structure,
selection systems, orientation and training programs, rules, policies, reward
systems and decision making processes all contribute to culture creation and
maintenance of an organisation's culture.
2.1 Leaders and the Establishment of Corporate Values
According to Weiss (1995) ethical principles and practices in business start
with top leader’s expressed, shared and implemented values. The corporate
culture then embodies these values and practices. Hosmer (1987) contends
that it is the senior executives of the organisation, which define and espouse
the organisation’s beliefs and norms. This is consistent with most
organisational behaviour theory, which identifies that one of the sources of
organisational culture is the beliefs/values of the founders/leaders of an
organisation (Robbins et al. 2004). In the case of large companies this could
be identified as the Board of Directors. This seems to emphasise the
responsibility of the Board with respect to the development of ethical culture.
According to Campbell and Tawadey (1992) the leader moulds the
organisation's value system through the creation of a philosophy. Trevino
and Nelson (1999) highlight that in surveys of practising managers, honesty
and competence emerge as the most important qualities identified as
essential to good leadership. Kouzes and Posner (2002) in a similar
examination of most respected capabilities of leaders in the US, identified
honesty as the most valued leadership characteristic. Leadership is crucial to
the organisation's ethical culture, as integrity flows from the top, down.
A consistent theme, which emerges in virtually all writings on institutionalising
ethics, is the importance of ethical principles and support at the strategic
level. Powers and Vogel (1980) point out that management finds it raison
d'etre in organisational purpose and that corporate goals determine the
Segon & Booth 367
general direction and criteria of business judgments, hence the importance of
the corporate ethos (Hoffman and Fredrick, 1995).
2.2 Leaders as Ethical Role Models
What is important is what top managers are seen to do, more important than
what they may actually do. What top managers are seen to do will reinforce a
particular corporate culture. This in turn will determine the way lower level
personnel act and the way the organisation as a whole responds when ethical
dilemmas occur.
According to Goodpaster (Freeman, 1984 p. 103) the institutionalisation of
ethics depends first and foremost on leadership conviction expressed in
action. Petrick and Quinn (1997, p. 28-29) identify that managers and leaders
can unwittingly engage in a variety of role related acts that either enhance or
diminish ethical climate. These include:
a) non-managerial role- actions of personal gain or self interest outside the
interests of the firm,
b) managerial role failure relates to degrees of competence
c) managerial role distortion which are identified as unethical acts which give
the firm short term advantage but displaces direct cost and responsibility to
those outside the firm and
d) managerial overexertion, which include strict adherence to the letter of the
current law (internal organisational and societal), which violate the spirit of the
law.
Ethical leaders must model desired behaviour. Policies must be enforced
consistently for them to mean anything to the organization and its individuals.
When unacceptable behaviour occurs, regardless of what policy may have
been in the past, the present policy must be applied to take action,
investigate, document facts, pursue the case to its conclusion, and follow up
on the situation to be sure it is not recurring. There is another, very practical
reason why ethics are essential to strong leadership. That is because ethical
behaviour is key to establishing the trust and loyalty that are at the base of all
effective leader follower relationships (Bethel, 1999, p. 36).
Bethel, (1999) states that a leader who combines high ethics with a genuine
concern for others, personal competence and fairness in the exercise of
power, sends a clear message to others, and in doing so establish trust. But
when professed standards and actual performance do not match, when they
do not send a "clear sound," they lack authenticity, confuse our followers and
set bad examples. Without trust, the contract between leaders and followers
collapses and the ability to lead, to inspire, to make a difference, is
diminished. But a long-term investment in high ethics builds and reinforces
the foundation on which an organization is built.
Segon & Booth 368
Ethical leaders have a significant role to play in implementing an ethical
culture that is referred to as clarifying the values. The leader's challenge is to
ensure a high degree of congruence between an organisation's guiding
beliefs and the employee's daily beliefs, ie. changing rules and feelings about
everyday behaviour. Furthermore, leaders should be able to persuade an
organisation to change and adopt the new ethical culture. Consequently,
empowerment of employees is a major requirement of modern business
leaders. Kouzes and Posner (1987, p. 302) explained this by saying that
leaders who could not personally adhere to a firm set of values, could not
convince others of the worthiness of those values. They argued that leaders
demonstrate their commitment to a consistent set of expectations by clarifying
meaning, unifying constituents and intensifying actions. This process,
repeatedly followed, earns and sustains credibility over time (Minkes, Small
and Chatterjee, 1999, p.327).
2.3 Ethical Cynicism and Leadership
McCoy (1985) suggests that leadership is vital to breakthrough ethical
cynicism and is the most essential element of a successful adoption of a
Code of Ethics. If employees do not perceive senior managers to be
complying with ethical policy, they may tend not to comply themselves.
The key to being an effective ethical role model for employees is to
demonstrate consistency between one's ethical philosophy and ethical
behaviour. The dominant core values of the firm's culture are formulated at
the top and the authority structure of the firm begins at the top. Thus ethical
behaviour must begin at the strategic level. This point is emphasised by
Trevino and Nelson (1999) who identify that leadership is crucial to the ethical
behaviour and culture of an organisation as integrity or the lack of it, of flows
from the top down. A truly profound statement as history has shown that
employees of an organisation will follow the actions of senior management,
irrespective of the existence of a code of ethics or a code of conduct.
According to Petrick and Quinn (1995) when considering leaders in relation to
followers, emphasis is placed on five variables:
(i) follower behaviour
(ii) power relations
(iii) leader member exchange
(iv) transactional interactions and
(v) transformational interactions
With regards to the first relationship, leaders influence the behaviour of
followers by communicating what needs to be done, providing feedback on
performance and acting as role models for followers (Petrick and Quinn,
1995, p.215).
Segon & Booth 369
Organisational cynicism is a negative attitude towards an organisation’s
management and to the organisation itself based on the belief that
management will consistently fail to meet employee expectations.
Organisational cynicism incorporates employee expectations about
managerial competence in running the business and dealing with people and
management with integrity. When managers fail to uncover, meet and or
exceed employee expectations, alienated followers become organisational
critics. The consequence can include the constrained use of legitimate power
because of discredited authority; reduced commitment to organisational
change, reduced organisational citizenship behaviour and increased
behavioural hostility at work (Petrick and Quinn, 1995).
Instrumentality is the subjective belief a person has about the relationship
between performing an act and receiving an outcome. A variety of learning
theories including classical conditioning, reinforcement theory and Bandara’s
social learning theory explain what people will lead people to the attainment
of desired behaviours. Bandara’s social learning theory suggests that
behaviour to achieve desired outcomes is driven by the desire of an observer
to model the behaviour of persons deemed worthwhile, even to the extent of
self-reinforcement in line with the learning role model. For leaders this
provides the challenge to identify, develop and broadcast role model
behaviours that enable persons to emulate desirable behaviour (Petrick and
Quinn 1995, pp 216).
2.3.1 Equity theory and expected behaviour
Equity is the perceived standard whereby groups and individuals ought to
receive rewards consistent with the effort, quality and quantity of the effort
they produce. The ratio relationship between a key reference person's inputs
and outputs should approximate one’s own ratio relationship in order to
promote satisfaction. If these ratios are not equal, the reward structure is
perceived unfair. In the face of perceived inequity employees may alter their
inputs, engage in sabotage, withhold information defy management directives
(Petrick and Quinn 1995, pp 218).
Ethical leaders need to ensure outcome, procedural and systematic justice in
all reward decisions is crucial to achieving work satisfaction and
organisational commitment (Petrick and Furr, 1995 cited in Petrick and Quinn
1997). If the leaders want to build a high-performance community at work, he
or she must ensure organisational justice (Lindsay and Petrick 1997 cited in
Petrick and Quinn,1997).
Connock and Johns suggest that driving benefit from ethical leadership will
only happen if words and deeds are integrated. Dissonance generates
disillusionment, cynicism and alienation. Worse it encourages short-term
calculative responses conveying no ethical consistency but rather focusing on
Segon & Booth 370
values such as personal survival, political ascendancy and tactical teamwork
(1995, p.184).
2.4 Ethical Perception by Leaders
A crucial factor in determining the impact of ethics in an organisation is the
perception of the leaders with respect to two issues. a) the purpose of
organisations and b) the awareness and understanding of ethics and morality.
The first point is important because it suggests that some leaders see
organisations as nothing more than rational entities set up to achieve
declared goals. They will tend to see values, ethics and any structured
approach to the creation of ethical culture, only in terms of the benefits they
can generate in the achievement of the stated goals. This is consistent with
the content of the amoral leader as proposed by Freeman (1991) in which he
proposes that some leaders are only focused on outcomes and results with
an emphasis on efficiencies. This establishes a means orientation, were
followers are seen as resources or objects to be manipulated so as to drive
goal related behaviour. Freeman continues that the emphasis on position
and personal power means that such leaders are in effect unconcerned about
choices for followers resulting in a high human cost for followers. This
parallels deVries (2004) concept of the narcissistic leader who is more
concerned with the accumulation of power than the impact on followers.
Because of the emphasis on outcome, a further link can be made between
the concept of the amoral leader and that of charismatic leadership. Howell
and Avolio (1992) refer to the possibility of the unethical charismatic leader
highlighting that these individuals often have a greater view of their own self
worth and use manipulation and control mechanisms as a means of ensuring
compliance to their vision. Post (1986, p 679) emphasises that the
charismatic leader “requires a continuing flow of admiration from his audience
in order to nourish his famished self. Central to his ability to elicit that
admiration is his ability to convey a sense of grandeur, omnipotence, and
strength”. Conger (1996) concurs and suggests that the traditional leader
roles and advocated characteristics, such as the ability to convey a vision,
use effective verbal communication and building commitment could lead to
negative outcomes.
In terms of the second issue, studies in organisational behaviour suggest that
an individuals understanding of the complexities of a decision and its
environment will impact on the quality of the decision (Robbins et al. 2004). It
therefore can be construed that the level of moral understanding of a leader
will directly affect the way in which they influence followers and the rest of the
organisation. In effect the level of understanding of ethics as conceptual
knowledge, would impact on the extent of ethical leadership displayed by the
leader. Without this knowledge any behaviour exhibited by a leader, which
appear to be ethical, are a result of happenstance rather than informed and
Segon & Booth 371
considered action. The later being a fundamental requirement for moral
praise or blame to be afforded to an individual in relation to a specific action
(Buchholz, 1989).
3. Explaining Ethical Behaviour
One of the best explanations for how people make ethical decisions is
probably that developed by Lawrence Kohlberg. He found that in order for
people to behave morally they must, among other things decide what course
of action is morally right and then they must choose the morally right path
over others. Kohlberg’s theory primarily focuses on the first process, the
process by which people decide what is morally right (French and Granose,
1996).
According to Kohlberg (1984) as individuals mature and move forward
through his defined stages, they can comprehend all reasoning at stages
below them, but cannot comprehend the reasoning of stages any more than
one above there own. He suggests that we gain maturity and move through
the stages when a dilemma presents itself, which cannot be resolved,
explained, or seems to contradict our own current level reasoning. This can
occur through general interaction with others, peers, colleagues or through
more formal methods such as education and training (Ferrell, Fraedrich and
Ferrell, 2005). According to Kohlberg, the actual decision isn’t as important as
the process used to arrive at it. However, he argued that leaders at the higher
stages of development make more ethical the decisions because they are
more consistent with the normative ethical principles of justice and rights
(French and Granose, 1995).
There are clear implications for leadership in that a leader's ability to
understand ethical reasoning, will have a direct impact on the type of ethical
strategy they support and the behaviour which they model to the rest of the
organisation. The six stages of cognitive moral development can be
summarised as three levels: the preconventional, conventional and post
conventional level.
The preconventional level suggests that the decision as to what behaviour is
right is largely determined by the rewards, punishments and favours
associated with the action and later linked to reciprocity. This suggests people
follow laws and rules automatically because they do not want the negative
consequences, eg reprimands, fines etc., or because they are rewarded
through prizes, salaries etc., (French and Granose, 1995). According to
Petrick and Quinn (1997, p.235) the typical leadership styles reflected include
autocratic and coercive power leadership, path goal and transactional
leadership. The likely outcomes for organisations would be a strong focus on
task accomplishment. The use or rules and regulations act as a means of
ensuring compliance.
Segon & Booth 372
At the conventional level what is determined as right is generally living up to
the roles and expectations others, fulfilling duties and obligations and
following rules and laws. The important concepts are those of trust and
loyalty, so people may do what a leader or managers ask of them because
they want to please them or because others whom we respect say it's
important to follow the directions of our leaders (French and Granose, 1995).
The implication for leadership is clear. According to Petrick (1997, p.235) and
Quinn, the typical leadership revolve around situational leadership styles, with
transactional leader-follower exchange at the later stage. The likely outcomes
for organisations would be developing group cohesiveness and competence.
The culture would emphasise teamwork and assisting individuals to become
part of the team. At the later stages, the emphasis would shift to respecting
internal authority and authority figures. Ensuring compliance with legal and
regulatory frameworks and enhancing the authority of leadership.
Lastly at the post conventional level, people have gone beyond notions of self
interest or referent groups, rather they make decisions based on more
principled notions such consistent with justice and rights. In addition people
consider the concept of moral law, that which exist beyond the written law as
contributing toward societal well being (French and Granose, 1995).
According to Petrick and Quinn, (1997, p.235) the typical leadership styles
reflected include participative and servant-follower styles before moving on to
transformational and empowered team leadership at the later stage. The
likely outcomes for organisations would be an emphasis on serving
constituency needs, democratic decision making with an emphasis on
communication of information and the ethical implications of such. In the later
stage Petrick and Quinn (1997, p.237), suggest that consensual decision
Turner et al. (2002) identified that leaders operating at higher levels of
cognitive moral development were more likely to make decisions based on
principled approaches and take into account the rights of others and use
concepts of justice and fairness in their decision making. This suggests that
there is a relationship between levels of cognitive moral development and
ethical leadership- the more sophisticated the moral reasoning the greater the
likelihood of ethical leadership. According to Turner et al. (2002, p. 305)
“leaders with more complex moral reasoning will be able to draw on more
sophisticated conceptualisations of interpersonal situations, are more likely to
think about problems in different ways, and are cognizant of a larger number
of behavioural options”.
A more contemporary view of the leader follower compact by Cialdini (2001),
emphasises liking, reciprocity, social proof, (modelling behaviours), and
consistency, amongst others as hallmarks of effective and ethical persuasion
practices and as such would fit with the principled level of leader behaviour.
Segon & Booth 373
4. The Unethical Organisation and Leadership
The extent to which an organisation is prepared to act (un)ethically to achieve
its stated outcomes can more often than not be traced to its executives.
Similarly, competition relating to incentives such as promotion, pay increases
and recognition between individuals within and between organisational levels
is part of modern corporate life. Mitchell (1987) reframed this individual
competition as the ethic of personal advantage.
In addition to the identified responsibilities of ethical leadership to establish
values and based on clear understanding of ethics and to recognise the
importance of role modelling, ethical leadership also entails ensuring that a
process for enculturating the values is established, that it is adequately
resourced and delegated appropriately. Such systems typically involve the
use of formal written policies in ethics, usually a codified set of standards,
supported by reporting systems and employee training (Hoffman, 1995).
Unfortunately the primary reasons why codes and their related systems fail
also rest with senior executives (Newton, 1995).
Longstaff (1994) suggests that the development of a code as an alternative to
active and creative management of an organisation's culture is an act of folly.
When it comes to addressing the problem of ethics, most companies look for
cheap “off the shelf" solutions. Whilst this may appear superficially efficient,
they prove almost totally ineffective. He argues that there needs to be a
climate of trust within an organisation sufficient for employees to believe that
claims of management, and those who advocate ethics, that the rules or
guidelines are designed to prevent mischief, or promote a worthwhile good.
Clearly this is based on the fact that the range and quality of the relationship
that underpins an organisation's culture need to be such that a sufficient
degree of loyalty is felt to be owed to the institution and its defining end.
A code of ethics should be a document that expresses an organisation's
underlying values. It is therefore essential that the document ring true for
those to whom it applies. This means that codes of ethics need to be devised
in consultation with people most directly affected by its application, its
employees. The very process of developing the code can have a profound
effect on the culture of an enterprise.
Newton (1995) has identified three leadership principles that if broken
undermine any attempt to develop ethical cultures.
4.1 The Principle of Participation
Studies in organisational behaviour suggest that greater commitment to a
decision flows from the opportunity to participate in the process. This creates
a sense of ownership and commitment. The opportunity to participate
strengthens the likelihood of a successful program, (McEwan 2001).
Segon & Booth 374
Codes are often conceived subjectively, by executives or there nominees, to
be applied coercively - being devised by a more powerful group applying to a
less powerful group (but not necessarily to themselves) Such programs are
often devised with little or no consultation with those to whom it will apply.
(Newton, 1996) Codes, which are developed by few people and imposed on
others, are at greater likelihood to fail, for it fails any measure of democracy,
the understanding of governance that holds participation in policy formulation
to be part of justice and it also fails on any likely relevance to the situation of
those excluded employees (De George, 1997).
Unless ethical values are generated in a climate of imminent organisational
death, then providing time to adjust is not an outrageous luxury. People need
to disengage from existing way of doing things. The process of
disengagement depends on a strong communication about the importance of
the new ethical values and any associated code of conduct, why the
organisation has chosen this moment to make things explicit and the
implications of the ethical values for managerial and employee actions. As
DeGeorge (1997) points out we are willing to allow short lists of rules to be
simply imposed on us, so long as the author is reliably known to be God.
Senior officers, even CEOs are not God.
Longstaff (1994) suggests that it is important to observe that people are
more likely to apply rules that they have had a hand in developing rather than
those, which have been handed down. A degree of ownership of a process
can create an acknowledged prima facie obligation. Another reason for
involvement is that it increases the likelihood that the documents will have
direct relevance to the daily activities and experiences of those to whom they
apply. It will also assist in mitigating the problems of codes calling for on set
of behaviours whilst custom and practice demand another.
Longstaff (1994) highlights more important reasons for involving everyone.
The foremost of these is that the development of the ethics policy can be an
expression of the principle that people are owed respect. The fact that an
organisation chooses to involve people in the process of defining its ethos,
gives credence to the fact that the organisation sees its employees are more
than resources or means to its stated end.
An open culture such as the one identified above is likely to be one where
trust can be engendered and one, which is typified by resilience, being able to
cope with change. When value questions are reserved for judgement of few,
then pockets of unresolved differences can undermine the foundations of the
organisation (Newton, 1995).
Segon & Booth 375
4.2 The Principle of Validity
Newton (1995) identifies the second principle as the clear requirement that
codes need to have a basis that is reasoned, supported by logic, is coherent,
includes a commitment to justice and process etc. In other words the code
must be designed using accepted ethics principles. Rather than develop
codes of ethics correctly it is often done subjectively based on individual's
perceptions about what one should or should not do. As previously identified,
the responsibly for ethics is with the senior executives, however, most people
do not necessarily have the required knowledge and expertise to develop
these programs. The development of such systems needs to be based on
solid information, taking into account existing literature and research in this
field. As identified earlier, the leader understanding and ability to distinguish
ethical complexity is crucial.
4.3 The Principle of Authenticity
McCoy (1985), Lagan, (2000) and Sims and Brinkmann (2002) argued that
one of the most critical aspects of corporate culture is the moral tone and
example set by top leadership, irrespective of whether compliance based or
integrity systems are used in an organisation. The dominant core values of
the firm's culture are formulated at the top and its authority structure begins
there. Thus ethical behaviour must begin at the strategic level (Lagan, 2000).
This point is emphasised by Trevino and Nelson (1995, 1999) who identified
that leadership is crucial to the ethical behaviour and culture of an
organisation, as integrity--or the lack of it --flows from the top down. They
suggested that this is a truly profound statement as history has shown that
employees of an organisation will follow the actions of senior management,
irrespective of the existence of a code of ethics or a code of conduct. Sims
and Brinkmann (2002) identified that the relationship between leadership and
ethical culture or climate determines the level of behavioural consistency, that
unethical leaders tend to attract more attention than ethical ones, and they
have greater potential to influence employee behaviour. The personal values
of senior executives, reinforced by their authority, set the ethical tone of the
organisation. They suggested that leaders who failed to identify key
organisational values, and failed to demonstrate these to organisational
members through examples and role modelling and also failed to ensure
reinforcement through organisational policies, demonstrated a clear lack of
ethical leadership and fostered unethical organisational culture. If employees
do not perceive senior managers to be complying with ethical policy, they
may tend not to comply themselves.
Schein (1997) suggested that leadership is a crucial component in the
establishment of organisational culture because it is the leaders who create,
maintain or change that culture. The notion that corporate leaders are
responsible for ethical culture has also been identified by a number of
theorists including Barnard (cited in Robbins and Barnwell 1998), Paine
Segon & Booth 376
(1994), and Trevino and Nelson (1999), who describe the executive's role of
creating the morals or values of an organisation, as a characteristic of
executive work distinct from that of other organisational members. Hosmer
(1991) contended that it is the senior executives of the organisation who
define and espouse the organisation’s beliefs and norms. This is consistent
with most organisational behaviour theory, which identifies that one of the
sources of organisational culture is the beliefs or values of the founders and
or leaders of an organisation.
Schein (1985, 1997) described the process of role modelling as the
messages communicated to employees by the actions of leaders. Employees
look to leaders for clues about appropriate behaviour and then will emulate
the leader's behaviour. Sims and Brinkmann (2002) suggested that is the
case with any cultural value, as employees look to the behaviour of the
leaders to find out what is valued in the organisation. Schein (1985, 1997)
also linked the rewards conferred by leaders as a significant signal to
organisational members as to the type of behaviour that is expected in the
organisation. He argues that these rewards must be consistent with the
values espoused by the leaders. A further link is made by Schein (1985,
1997) with respect to the way organisational leaders employ and dismiss
individuals. He argued that leaders shake up corporate culture by establishing
the criteria for selection and dismissal of employees. These processes send
clear values to the rest of the organisation about the type of culture that is
preferred by the leader. Sims and Brinkman (2002) concluded that the lack of
ethical leadership puts an organisation at risk because these leaders will
cause potential ethical problems when they do not take steps to establish
systems to minimise unethical behaviour. They argued that ethical leadership
is not just about having personal values but also the willingness to put these
into action.
5. Conclusion
As Weiss (1996) has identified, Ethical conduct within organisations must be
a shared vision and proactive that is actively communicated and modelled by
executive and managers and employees on an on going basis. As
shareholders become more informed and involved in the moral management
of organisations, the ethical leaders must also work cooperatively and
responsively as partners with the firm’s stakeholders to ensure that justice
and fairness are exemplified by the firm’s leadership and integrated into
everyday operations of the organisation.
Ethical leadership is a concept that involves the traditional aspects of
leadership and recognition of the moral nature that such action has on the
organisation and its stakeholders. It requires that leaders develop and foster
values, which are enculturated throughout the organisation. Ethical leadership
recognises that the leader perception of ethics and the moral responsibility of
Segon & Booth 377
organisations will impact on the nature of these values and strategies by
which they are institutionalised.
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