Week 4

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Chapter7.OrganizationalFactorsTheRoleofEthicalCultureandRelationships.pptx

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Part Three The Decision Making Process

Chapter 7 Organizational Factors: The Role Of Ethical Culture And Relationships

Learning Objectives

Understand the concept of corporate culture

Examine the influence of corporate culture on business ethics

Determine how leadership, power, and motivation relate to ethical decision making in organizations

Assess organizational structure and its relationship to business ethics

Explore how the work group influences ethical decisions

Discuss the relationship between individual and group ethical decision making

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Corporate Culture

Corporate culture and organizational culture can be used interchangeably.

Shared values, norms, and artifacts that influence employees and determine behavior, including ways of solving problems that members (employees) of an organization share.

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).

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Characteristics of an Ethical Corporate Culture

Sarbanes–Oxley 404 Compliance Section

Requirement that management assess the effectiveness of the organization’s internal controls and commission audits of these controls by an external auditor in conjunction with the audit of its financial statements.

Requires firms to adopt a set of values that forms a portion of the company’s culture.

Mandates an evaluation of corporate culture to provide insight into the character of an organization, its ethics, and transparency.

The intent is to expose mismanagement, fraud, theft, abuse, and to sustain a corporate culture that does not allow these conditions and actions to exist.

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Steps in Measuring an Ethical Corporate Culture (1 of 2)

Management and the board demonstrate their commitment to integrity, core values, and ethics codes through their communications and actions.

Employees are encouraged/required to have hands-on involvement in compliance, especially internal control systems and reporting systems.

Ethical leadership.

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Steps in Measuring an Ethical Corporate Culture (2 of 2)

Employees must receive communication through resolutions and corrective actions related to ethical issues.

Employees must have the ability to report policy exceptions anonymously to any member of the organization, including the CEO, other members of management, and the board of directors.

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The Role of Corporate Culture in Ethical Decision Making (1 of 2)

Some cultures are so strong, they come to represent the character of the entire organization.

Explicit statements of values, beliefs, customs, and expected behavior usually come from upper management. (Memos, written codes of conduct, handbooks, manuals, forms, and ceremonies are formal expressions of an organization’s culture.)

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The Role of Corporate Culture in Ethical Decision Making (2 of 2)

Corporate culture can be expressed through gestures, looks, labels, promotions, programs, and legends (or the lack thereof).

When leaders are perceived as trustworthy, employee trust increases; leaders are seen as ethical and as honoring a higher level of duties.

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Ethical Frameworks and Evaluations of Corporate Culture

Two basic dimensions in an organization’s culture:

Concern for people—the organization’s efforts to care for its employees’ well-being.

Concern for performance—the organization’s efforts to focus on output and employee productivity.

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Figure 7-2 Company Examples of the Four Organizational Cultures

Ben & Jerry’s—A Caring Culture Ben & Jerry’s embraces community causes, treats its employees fairly, and expends numerous resources to enhance the well-being of its customers.	Starbucks—An Integrative Culture Starbucks always looks for ways to expand and improve performance. It also exhibits a high concern for people through community causes, sustainability, and employee health care.
Countrywide Financial—An Apathetic Culture Countrywide seemed to show little concern for employees and customers. The company’s culture appeared to encourage unethical conduct in exchange for profits.	United Parcel Systems—An Exacting Culture Employees are held to high standards to ensure maximum performance, consistency of delivery, and efficiency.

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Example of Four Culture Types (1 of 2)

Apathetic: Minimal concern for either people or performance. Individuals focus on their own self-interest.

Caring: High concern for people but minimal concern for performance issues. It is difficult to find nationally recognizable companies that maintain little or no concern for performance.

Exacting: Little concern for people but a high concern for performance. Focuses on the interests of the organization.

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Example of Four Culture Types (2 of 2)

Integrative: Combines a high concern for people and performance. An organization becomes integrative when superiors recognize employees are more than interchangeable parts—employees have an ineffable quality that helps the firm meet its performance criteria.

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Cultural Audit

Assessment of an organization’s values.

Usually conducted by outside consultants but may be performed internally as well.

Communication about ethical expectations and support from top management help to identify a corporate culture that encourages ethical conduct or leads to ethical conflict.

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TABLE 7-2 Corporate Culture Ethics Audit (1 of 3)

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 both 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?
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 penalties for ethical transgressions publicly discussed?
Yes	No	Are there rewards for good ethical decisions even if they don’t always result in a profit?

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TABLE 7-2 Corporate Culture Ethics Audit (2 of 3)

Yes	No	Does the company recognize the importance of creating a culture concerned about people and their investment in 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 which 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	Do the dress, speech, and physical aspects of the work setting contribute to a sense of consistency about what is right?

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TABLE 7-2 Corporate Culture Ethics Audit (3 of 3)

Yes	No	Are emotional outbursts about role conflict and ambiguity 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 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 about ethical dilemmas?
Yes	No	Have employees ever received advice on how to improve ethical behavior or been disciplined for committing unethical acts?

*Add up the number of “Yes” answers. The greater the number of “Yes” answers, the less likely ethical conflict is in your organization.

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Ethics and Corporate Culture (1 of 2)

A significant factor in ethical decision making.

Culture dictates hiring people with specific, similar values. If those values are perceived as unethical by society, society will view the organization and its members as unethical.

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.

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Ethics and Corporate Culture (2 of 2)

If an organization values ethical behavior, it rewards them thru recognition and awards in a consistent and balanced manner.

All performance at the threshold level should be acknowledged, and praise or rewards given as close to the performance as possible.

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Compliance versus Values-Based Ethical Cultures (1 of 4)

Compliance-based: The accounting professional model.

Rules create a compliance culture organized around risk.

Compliance-based cultures use a legalistic approach to ethics.

Codes of conduct are established with compliance as their focus, with rules and policies enforced by management.

Instead of revolving around an ethical culture, the company revolves around risk management.

The approach is good in the short term because it helps management, stakeholders, and legal agencies ensure laws, rules, and the intent of compliance are fulfilled.

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Compliance versus Values-Based Ethical Cultures (2 of 4)

Compliance-based: The accounting professional model.

Problem 1: Its lack of long-term focus on values and integrity.

Problem 2: Does not teach employees to navigate ethical gray areas.

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Compliance versus Values-Based Ethical Cultures (3 of 4)

Values-based

Relies on an explicit mission statement that defines the core values of the firm and how customers and employees should be treated.

Board of directors/upper management should add to value statements by formulating specific value statements for its strategic business units (SBU).

Certain areas may have rules associated with stated values, enabling employees to understand the relationship between the two.

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Compliance versus Values-Based Ethical Cultures (4 of 4)

Values-based

The focus is on values such as trust, transparency, and respect to help employees identify and deal with ethical issues.

When using this approach, explain why rules exist, what the penalties are if rules are violated, and how employees can help improve the ethics of the company.

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Differential Association (1 of 2)

People learn ethical or unethical behavior while interacting with others.

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.

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Differential Association (2 of 2)

Differential association influences ethical decision making, and superiors in particular have a strong influence on the ethics of their subordinates.

Employees, especially young managers, tend to go along with their superiors’ moral judgments to demonstrate loyalty.

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Whistle-Blowing and Legal Protection (1 of 2)

Whistle-blowing: Exposing an employer’s wrongdoing to outsiders such as the media or government regulatory agencies.

Sometimes used to refer to internal reporting of misconduct to management, especially through anonymous reporting mechanisms often called hotlines.

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Whistle-Blowing and Legal Protection (2 of 2)

Legal Protection

Sarbanes–Oxley Act

The Federal Sentencing Guidelines for Organizations (FSGO)

The U.S. Department of Labor (DOL)

The Corporate and Criminal Fraud Accountability Act (CCFA)

Securities and Exchange Commission

The Dodd–Frank Act

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Explanation of Legal Protection (1 of 3)

CCFA: Protects employees of publicly traded firms from retaliation if they report violations of any rule or regulation to the Securities and Exchange Commission, or any provision of federal law relating to fraud against shareholders.

Requires attorneys to become internal whistle-blowers.

The Dodd–Frank Act: Additional incentives for whistle-blowers (> $1 million = 10-30%).

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Explanation of Legal Protection (2 of 3)

The Sarbanes–Oxley Act and the Federal Sentencing Guidelines for Organizations (FSGO):

If an employee provides information to the government about a company’s wrongdoing under the Federal False Claims Act, the whistle-blower is known as a qui tam relator.

Can receive between 15 and 25 percent of the recovered funds.

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Explanation of Legal Protection (3 of 3)

The Sarbanes–Oxley Act and FSGO:

Must have adequate knowledge of wrongdoing that could damage society.

Illegal to “discharge, demote, suspend, threaten, harass, or in any manner discriminate against” a whistle-blower and set penalties of up to 10 years in jail for executives who retaliate against whistle-blowers.

Specific protections including the right to seek investigation and review by federal Inspectors General for “adverse actions” such as termination or demotions.

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Table 7-3 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 result from exposing potential wrongdoing in the organization?
5.	Can I deal with the consequences of resolving an ethical or legal conflict within the organization?

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Table 7-4 Receiver of Reports of Misconduct

Reporting Location

Immediate supervisor

Top management

Human resource management

Hotline/Help Line

Ethics officer

Outside the company (not governmental or regulatory authority)

Legal

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Power Shapes Corporate Culture: Five Power Bases (1 of 3)

Reward: Ability to influence the behavior of others by offering them something desirable (money, status, or promotion).

Coercive: Penalizes actions or behavior and relies on fear to change behavior. More effective in changing behavior in short versus long run. Often employed where there is an extreme imbalance of power. People continually subjected to coercion may seek a counterbalance and align themselves with other, more powerful persons or leave the organization.

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Power Shapes Corporate Culture: Five Power Bases (2 of 3)

Legitimate: Stems from the belief that a certain person has the right to exert influence and certain others have an obligation to accept it (titles and positions of authority).

Expert: Derived from a person’s knowledge (or a perception that a person possesses knowledge). Usually stems from a superior’s credibility with subordinates. Credibility (expert power), is positively correlated to the number of years a person worked in a firm or industry, education, and honors he/she has received for performance.

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Power Shapes Corporate Culture: Five Power Bases (3 of 3)

Referent: Exists when one person perceives that his/her goals or objectives are similar to another’s with an attempt to influence the first to take actions that allows both to achieve their objectives. Identification with others helps boost the decision maker’s confidence, thus increasing the referent power.

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Motivating Ethical Behavior (1 of 2)

Motivation: A force within that focuses behavior toward achieving a goal.

Job performance is considered to be a function of ability and motivation [job performance = ability × motivation].

An increase in promotion touches higher-order needs (social connections, esteem, and recognition) rather than lower-order (salary, safety, and job security).

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Motivating Ethical Behavior (2 of 2)

Research shows an individual’s career stage, age, organization size, and geographic location affect the relative priority given to satisfying respect, self-esteem, and basic physiological needs.

An individual’s hierarchy of needs may influence his or her motivation and ethical behavior.

Relatedness needs are satisfied by social and interpersonal relationships.

Growth needs are satisfied by creative or productive activities.

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Organizational Structure (1 of 2)

Decision making authority is concentrated in the hands of top-level managers, and little authority is delegated to lower levels.

Responsibility, both internal and external, rests with top-level managers.

Structure especially suited to organizations that make high-risk decisions and have lower-level managers are not highly skilled in decision making.

Suitable for organizations when production processes are routine and efficiency is of primary importance.

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Organizational Structure (2 of 2)

Decision making authority is concentrated in the hands of top-level managers, and little authority is delegated to lower levels.

Division of labor is typically well defined and a clear understanding of how to carry out assigned tasks.

Stress formal rules, policies, and procedures backed up with elaborate control systems.

Codes of ethics may specify the techniques used for decision making.

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Table 7-5 Structural Comparison of Organizational Types (1 of 2)

Characteristic	Centralized	Decentralized
Hierarchy of authority	Centralized	Decentralized
Flexibility	Low	High
Adaptability	Low	High
Problem recognition	Low	High
Implementation	High	Low
Dealing with changes	Poor environmental complexity	Good
Rules and procedures	Many and formal	Few and informal

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Table 7-5 Structural Comparison of Organizational Types (2 of 2)

Characteristic	Centralized	Decentralized
Division of labor	Clear-cut	Ambiguous
Span of control	Many employees	Few employees
Use of managerial techniques	Extensive	Minimal
Coordination and control	Formal and impersonal	Informal and personal

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Decentralized Organization (1 of 2)

Decision making authority is delegated as far down the chain of command as possible.

Relatively few formal rules, and coordination and control are usually informal and personal.

Focus on increasing the flow of information.

Strength: Adaptability and early recognition of external change. With greater flexibility, managers can react quickly to changes in their ethical environment.

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Decentralized Organization (2 of 2)

Weakness: Difficult to respond quickly to changes in policy and procedures established by top management.

Independent profit centers may deviate from organizational objectives.

May have fewer internal controls and use shared values for their ethical standards.

May have more variation in behavior.

May be harder to control rogue employees engaging in misconduct.

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Corporate Structure, Culture, and Types of Groups (1 of 2)

Formal group: An assembly of individuals with an organized structure that is explicitly accepted by the group.

Committee: Group assigned to a specific task, represent different constituencies, meet regularly to review performance, develop plans, or make decisions.

Weaknesses—lack of individual responsibility and Groupthink mentality.

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Corporate Structure, Culture, and Types of Groups (2 of 2)

Work groups: Used to subdivide duties within specific functional areas of a company.

Enables specialization.

Ethical conflicts may arise because team members come from different functional areas.

Conflicts when members of different organizational groups interact.

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Informal Groups (1 of 2)

May generate disagreement and conflict, or enhance morale and job satisfaction.

Can help develop informal channels of communication, sometimes called the grapevine.

The grapevine: Information passed along the grapevine may relate to the job, the organization, an ethical issue, or it may simply be gossip and rumors.

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Informal Groups (2 of 2)

The grapevine

Can act as an early warning system for employees.

Can be an important source of information for individuals to assess ethical behavior within their organization.

Corporate culture may provide a general understanding of rules, but informal groups make this come alive and provide direction for employees’ daily choices.

Information passed along the grapevine is not always accurate, but managers who understand how the grapevine works can use it to reinforce acceptable values and beliefs.

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Group Norms

Help define acceptable and unacceptable behavior within a group.

Define the limit allowed on deviations from group expectations.

Provide explicit ethical directions.

Can relate directly to managerial decisions.

Have the power to enforce a strong degree of conformity among group members.

Can define the different roles for various positions within the organization.

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TABLE 7-7 Variation in Employee Conduct

10%	40%	40%	10%
Follow their own values and beliefs; believe that their values are superior to those of others in the company	Always try to follow company policies	Go along with the work group	Take advantage of situations if the penalty is less than the benefit and the risk of being caught is low

*Estimates based on the author’s research and reports from ethics and compliance officers from many industries.

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Variation in Employee Conduct: Bottom 10%

Take advantage of situations to further their own personal interests.

More likely to manipulate, cheat, or act in a self-serving manner.

May choose to take office supplies from work for personal use if the only penalty they suffer is paying for the supplies.

The lower the risk of being caught, the higher the likelihood that the 10 percent most likely to take advantage of the company will be involved in unethical activities.

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Variation in Employee Conduct: Middle 40% (1 of 2)

Go along on most matters.

Most concerned about the social implications of their actions and want to fit into the organization.

Easily influenced by what the people around them are doing.

May know using office supplies for personal use is improper, yet they view it as acceptable because their coworkers do so.

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Variation in Employee Conduct: Middle 40% (2 of 2)

Rationalize their actions by saying the use of office supplies is a benefit of working at their particular company and it must be acceptable because the company does not enforce a policy prohibiting the behavior.

Rationalize that no one will get into trouble for doing what everybody else is doing.

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Variation in Employee Conduct: Top 40% (1 of 2)

Always try to follow company policies and rules.

Have a strong grasp of acceptable behavior and attempt to comply with codes of ethics, ethics training, and other communications about appropriate conduct.

If a policy prohibiting taking office supplies from work, these employees probably will observe it.

Not likely to speak out about the 40 percent who choose to go along with the work group.

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Variation in Employee Conduct: Top 40% (2 of 2)

Prefer to focus on their jobs and steer clear of any organizational misconduct.

If the company fails to communicate standards of appropriate behavior, members of this group will devise their own.

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Variation in Employee Conduct: Top 10% (1 of 2)

Maintain formal ethical standards that focus on rights, duties, and rules.

Embrace values that assert certain inalienable rights and actions, which they perceive to be always ethically correct.

Believe their values are right and superior to the values of others or even to the company’s value system.

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Variation in Employee Conduct: Top 10% (2 of 2)

Have a tendency to report or speak out about employee or firm misconduct even if the company defines it as ethical.

Members of this group will probably report colleagues who take office supplies.

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