Business Ethics And Sustainability

MGMT20134 Week 8.docx

MGMT20134 Business Ethics and Sustainability

Unit 8 Building Sustainable Organisations

Table of Contents Introduction 2 Learning objectives 2 Overview 4 Organisational Ethics? 5 The Compliance Approach 6 Integrity Approaches 7 An Organisational Ethics Framework 11 Strategic Integration 12 Who Should Manage Ethics 13 Does Ethcis Pay? 13 How Organisational Fail to Develop Ethics 15 Guided Readings 17 Journal Readings 11

Introduction

Corporate Social Responsibility is typically viewed as a strategy that seeks to engage with the key external stakeholders that can affect an organization; customers, suppliers, the government, media and interest groups. However to view CSR as purely and external engagement strategy leaves the organisation prone to a potential paradox- the possible ethical engagement with key external stakeholders yet treating its own employees unethically or going about internal decision making and business strategy in an unethical manner. Organisations need to develop strategies that establish and maintain ethical conduct or an effective ethical climate as the starting point for effective CSR.

Perhaps the most common misconception amongst private and public sector Organisations is that the key and sole document that needs to be developed is a code of ethics or conduct. As the CEO of the St James Ethics Centre in Sydney Australia notes, the concept of organisational ethics as an organisational strategy or system encompasses much more than simply the development of a written policy on ethical standards, it must also include: the manner in which the system is developed, the communication strategies which inform employees of the standards, the training of the employees in the use of the ethical codes as decision making tools and the review and evaluation strategies designed to evaluate effectiveness of the system.

Unethical actions and decisions are often attributed to the individual, but Hoffman (cited in Drummond & Bain 1994) makes the point that it is generally the failure of the corporate systems that often provides the opportunity for unethical and immoral actions of its employees.

This Unit in MGMT 20134 seeks to examine the appropriate strategies that organisations need to develop in order to establish and maintain an ethical culture, irrespective of whether they are private profit seeking organisations, public sector or not for profits. It will identify the key components of ethical systems, the importance of leadership within that framework and the benefits that accrue to ethical organisations. Importantly it will demonstrate that just like any other business strategy the ethical system needs to be designed to fit the type of organisation and its environment.

Learning objectives

This unit has the following learning objectives:

· To understand how organisations can develop and sustain ethical culture

· To recognise the two (limited) approaches to the development of organisational ethics

· To understand that organisations have different structures and therefore need to design organisational ethics systems that are aligned to their structure.

· To distinguish between codes of ethics and codes of conduct

· To understand the components of an effective organisational ethics system

· To recognise that the ethics function needs to be managed as part of business strategy

· To identify the benefits of an ethical culture

· To understand how organisations create ineffective ethics systems

1.

Overview

As we identified in Unit 3, an organisation is an artificial or legal person in law and it has a structure with rules and regulations that in effect mimic the moral consciousness of a real person. However organisations tend to rely on an individual's level of moral development and ethical sensitivity, derived from internal values and needs, as the primary factors affecting ethical behaviour of employees.

However, just like any other business or operational strategy, organisations need to develop policies and procedures that would harness an individual’s sense of right and wrong. James (2000) suggests that it is necessary to specify and communicate ethical objectives through codes of ethics, training and other devices so that managers promote ethical behaviour.

As identified by Ferrell, Fraedrich and Ferrell (2015); Weiss (2008); White and Lam (2000) and Vidaver-Cohen (1999) an organisation can enhance the ethical behaviour of its workforce by improving corporate culture, that is, by recognising the influence of significant others and the context in which decisions are made that may provide the opportunity for employees to engage in unethical behaviour. As we have previously identified Ferrell, Fraedrich and Ferrell (2015) describe significant others as colleagues, workmates, immediate supervisors who have a direct relationship with an employee. They consider that the influence of significant others is the one most important factors in determining how an individual responds to ethical issues as it is to these people that an individual will look for guidance and approval of appropriate behaviour.

Solomon (2005) goes further identifying that corporate culture is a primary determinant of ethical or unethical behaviour. Based on this view it is clear that not only does behaviour need to be altered, but also the culture of the organisation so as to encourage the actions of staff to be ethical at all times. Ethical behaviour needs to be developed into an organisational norm or standard. Michael Hoffman from the Center of Business Ethics at Bentley in Massachusetts has put forward that the institutionalisation of ethics within an organisation must be built around a proactive strategy that includes formulation of policy that clarifies acceptable behaviour. Management must provide clear leadership for the ethical system including public statements that ethical behaviour is a top priority. In order for this to occur all job classifications and all levels within the organisational hierarchy should be part of the policy formulation on ethical behaviour.

Organisational ethics

Who do you want to work for?

Think about the way you like to be treated and the sort of organisation you would like to work for?

· One that values you as a person?

· One that treats people fairly?

· One that supports people?

· One that clarifies standards and manages performance issues?

· One that is lead by people who you respect

· One that if you see something wrong- encourages you to discuss and address before it becomes a major problem?

Do these type of organisations actually exist?

They can- they are called ethical organisations!

Much of the business ethics literature acknowledges that developing an ethical system requires more than simply writing a code of ethics or a code of conduct (and they are different) and that the issues identified above also need be part of the planning process. Whilst various authors have developed classifications systems, one of the most widely accepted methods of describing organisational ethics was proposed by Sharp Paine (1994) in her well-known article "Managing with Integrity". She identifies two categories of ethical systems: the compliance approach, which relies on the use of rules and regulations and strategies designed to foster compliance; and the integrity approach, which uses more general guidelines and aspirational values designed to guide decision making as the basis for more ethical outcomes in organisations. Hoffman, Driscoll and Painter-Morland (in Moon and Bonny 2001) also suggest that organisational ethics can be categorised as either value based or prescriptive approaches. Ferrell, Fraedrich and Ferrell (2015) propose a typology of aspirational and compliance approaches. Trevino and Nelson (2011) describe prescriptive versus psychological approaches. Hosmer (1987) distinguishes between approaches based on codes of ethics, which he describes as the norms and beliefs of the organisation, as against an approach based on ethical rules that he describes as consisting of requirements to act in a particular way.

Sharp Paine’s taxonomy has the advantage of succinctly describing these approaches using terminology that is consistent with both business ethics and management and organisational theory literature. Moreover, she identifies that irrespective of which approach is used, it must be a holistic one which includes; the establishment of clear ethical values as part of an organization’s purpose, that the leaders of an organisation are critical in establishing appropriate standards and modelling behaviours, that written policies need to be determined and these must be communicated and reinforced through training and finally that the ethical approaches need to be evaluated.

As McDonald (1999) identifies, much of the theoretical frameworks for developing ethical cultures have not served the business community well in their efforts to raise ethical awareness and to establish ethical climates in organisations. Without adequate guidance and direction it is understandable why the adoption rate of new practices for promoting ethics has been slow.

If organisations are to be concerned with creating or fostering an ethical culture then it stands to reason that different organisational types require different types of ethical systems as reflected by different levels of formalisation and enculturation or institutionalisation strategies so as to be consistent with their organisational type. Hoffman and Fredrick (1996) suggest that corporations need to examine themselves to determine if their structures, policies and processes are compatible with ethical behaviour. If they are not, steps need to be taken to change or supplement them.

The compliance approach

According to Sharp Paine (1994) the compliance approach, which can also be described as a formalised or prescriptive approach, has an underlying ethos of conformity with a set of imposed standards. The compliance approach can be seen as focusing on managerial measures designed to minimise or prevent misconduct and centres on standards that Sharp Paine (1994) describes as external and not self-imposed by the organisation. In other words the organisation specifies precise behavioural standards based on accepted external standards such as law, or industry agreed codes, then the organisation utilises basic positive and negative reinforcement techniques such as the application of reward and punishment, to ensure compliance with the standards. The compliance approach’s primary objective is to prevent misconduct within the organisation. This is primarily directed at criminal conduct such as fraud bribery and corruption within the organisation. The organisational standards are guided by external standards primarily, societal, criminal and regulatory law. Hoffman, Driscoll and Painter-Morland (in Moon and Bonny 2001) suggest that prescriptive approaches are characterised by specific statements predominantly referring to types of behaviour that the organisation has deemed unacceptable. Thus, accepted organisational behaviour would be prescribed in a formal organisational document that clearly identifies standards through statements of acceptable and unacceptable actions or behaviours. A code of conduct, as the basis of the ethics policy, is the main feature of such systems (Sampford, 1994 in Preston 1994).

The compliance approach is identified by numerous authors as a more formalised or structured strategy. Hoffman, Driscoll and Painter-Morland also refer to compliance-based approaches (in Moon et al. 2001). They identify similar characteristics of a company's ethics strategy being built around not only written standards through a prescriptive code of conduct that stipulates behaviour and actions that are acceptable or unacceptable, but that this should also be underpinned by a code of ethics espousing the values of the organisation. They argue that appropriate strategies to monitor compliance with the code of conduct must also be developed. Such an approach is often referred to as a disciplinary code (Sampford in Preston 1994). This approach would be appropriate in organisations that utilised high levels of formalisation and standardises work through rules regulation and procedures, in other words, large bureaucratic structures.

Integrated or decoupled?

Linda K Trevino discusses the different types of approaches to organisational ethics, integrated or decoupled. How different is the new terminology is describing the approaches discussed so far?

http :// www.youtube.com/watch?v=BmAlKP3SNSk

Integrity approaches

The integrity approach, by contrast to the compliance approach, tends to be an organic and more flexible focusing on providing guidance through a series of general statements. Sharp Paine describes the necessities of “guiding values and commitments that makes sense and are clearly communicated to employees” (Sharp Paine, 1994, p112). She emphasises that organisational leaders need to be personally committed, credible, and willing to take action on the values they espouse. She also emphasises that espoused values need to be integrated into the formal channels of organisational decision-making and that the company's structure and support systems reinforce these values. Importantly, Sharp Paine identifies that managers throughout the organisation must have the necessary decision-making skills, knowledge, and competencies to make ethically sound decisions on a day-to-day basis (Sharp Paine 1994; Donaldson and Werhane 1999).

Hoffman, Driscoll and Painter-Morland (in Moon et al. 2001) suggest that the aspirational or value led framework, makes broad pronouncements regarding ethical standards in a code of ethics. They distinguish such codes of ethics as containing broad principles that allow individuals with an organisation to determine the action or decision that would be seen as ethical. In this way behaviour would be guided rather than prescribed as with a code of conduct featured in the compliance approach. Sampford (1994) suggests a code of ethics is generally based on the principles of virtue ethics that can be interpreted as the notion of what is virtuous or the moral concepts that society itself would espouse (in Preston 1994). This is consistent with the professional organisation as described by Mintzberg (1984, 1985) that standardises behaviour via the skills of the professionals.

Codes of ethics conduct and practice

Many organisations, particularly in Australia and New Zealand, confuse the concepts of codes of ethics, conduct and practice assuming that they are same Shaw and Barry (2013) identify that the purpose of codes is to improve the organisational climate so that employees can behave ethically. Adams and Tashchian (2001) cite both Arrow (1974) and Stone (1975) who suggest that ethical controls, such as codes, are necessary in organisations because legal systems and market conditions do not necessarily lead to behaviour and decisions in organisations which take into account the moral impacts of business action. According to Weiss (2008) codes can also be viewed as attempts to institutionalise the morals and values of the founders of an organisation so that they become part of the organisational culture, thus assisting new employees to understand company values and purpose. In this way codes may be seen as attempts to articulate the moral climate of an organisation.

Codes of ethics are statements of principles that provide guidance to individuals. They are not prescriptive in nature but typically provide statements that outline a series of principles or characteristics that people need to incorporate into their decision-making. More often than not code of ethics will be based on process and virtue ethics approaches.

Codes of conduct are specific statements of what is and not acceptable in terms of behaviour and typically specific to particular ethical risks. Codes of conduct are usually informed by codes of ethics. Because codes of conduct must address specific behaviour, it is typically not possible to have one code of conduct for an entire organisation, rather are it should have one code of ethics and multiple codes of conduct.

What code is that?

If you are working for a large organisation, it most likely has a code of some kind.

If you are not working just log on to any large organisation such as Exxon, Starbucks or Telstra and do a search for their code of ethics or code of conduct.

Once you have your code examine the language of the document

Does it proscribe behavior through words such as – “must”, “must not”, “always”, “never” or does it guide behaviour through aspirational statements?

What is the document called?

Have they labeled it correctly?

Organisational ethics.

Farrell, Fraedrich and Farrell (2015) identify organisations can use cultural techniques, hiring training etc. as methods of developing appropriate ethical corporate culture, but this needs to be supported through specific control strategies, such as the development of codes.

Importantly they suggest that the implementation of strategies to make employees make more ethical decision is no different from implementing other types of business strategies. However the CEO of the St James Ethics Centre in Sydney Australia, Simon Longstaff (1996) correctly states that simply introducing a code of ethics or making public statement around the ethical outlook of an organisation is no guarantee that individuals within the company will in fact behave ethically. Organisations need to tackle the development and implementation of ethical programmes in the same manner as other corporate strategic plans. This means an informed and adequately researched approach. The development of a corporate ethical program will require institutional changes to the organisation. In order or programmes to function effectively, the creation of committees, avenues of communication, liaison devices and the crossing of hierarchical levels suggest that structural considerations if not structural changes need to be considered

Developing Business Cultures

In this 2010 video, Michael Hoffman of the Center for Business Ethics at Bentley in Massachusetts discuses the key aspects that organisations need to address so as to develop an ethical culture

<http://www.youtube.com/watch?v=k9o6IgBXZqQ>.

At the Center for Business Ethics, USA, Driscoll and Hoffman (2000) argue for ten basic steps that organisations could take when designing an ethical framework that includes:

1. Self-assessment: Hoffman and Driscoll as a credible starting point define an analysis of the organisation. They advocate a review of existing policies structures and a comprehensive risk assessment in order to establish if and where it sensitive problems may be a rising within the organisation (in Moon and Bonny 2001). This approach is generally referred to as ethical auditing and needs to review systems, processes, behaviour and environment to identify the areas of ethical sensitivity and risk that the organisation may face.

2. Commitment from the top: a common feature of most ethical frameworks is the emphasis on senior management support both visible and through ensuring that sufficient resources are made available (in Moon and Bonny 2001). Much the ethics literature recognises the importance of the leadership function and its relationship to strategic planning. Sims and Brinkmann (2002 pp 327-339) cite the report from the Business Roundtable, made up by a executives from major American corporations, as identifying leadership as crucial to the establishment of organisational ethics "to achieve results, the chief executive officer and those around the CEO need it to be openly and strongly committed to ethical conduct, and it constant leadership in tingling and renewing the that news of the organisation" (Business Roundtable, 1988). Hoffman, Driscoll and Painter-Morland (in Moon and Bonney 2001) identify that the ethics initiative could be deemed to start with senior managers making an explicit commitment to long-term success. They stress that the executive level of an organisation needs to assume responsibility for ethics and ensuring appropriate resources and clear responsibility be established. They suggest that the ethics must be managed like any other internal functions. Just as the financial integrity of an organisation is established through the appointment of financial officer, and with larger sized organisations finance sections and divisions, so too must the ethical system be characterised by a structured approach which would increase in importance as organisational size and increases. Lagan (2000) concurs saying that management vision and commitment is the most vital ingredient in any successful ethical programme. Verschoor (2000 p22-24) identifies a survey by the Ethics Research Centre in Washington DC, that employee perceptions and outcomes regarding organisational ethics are more positive when: an ethics programme is in place, employees see ethical values such as honesty, integrity and loyality, applied frequently in the workplace, and when organisational leaders model ethical behaviour.

3. Formal written policies (codes): a formal policy which outlines either ethical values or accepted behaviours is a feature of virtually all ethical frameworks (in Moon and Bonny 2001). Drummand and Bain (1994) and Harrison (2000) outline both the advantages and disadvantages of codes. Both group of authors suggest that codes can serve several functions including: clarity on the thoughts of management as regards what constitutes ethical behaviour, provide a mechanism for communication, raise employee awareness, define behavioural boundaries and assist in induction and training of employees. However, like Longstaff (1996) they also identify that codes cannot be seen as a means to an end and they require internalisation through other supportive mechanisms.

4. Communication vehicles: Driscoll and Hoffman identified that the ethical standards must be communicated to all members of the organisation (in Moon and Bonny 2001). ), Ferrell, Fraedrich and Ferrell (2015) suggest that a company’s communication strategies should reflect the unique characteristics of the organisation, it culture, values, management style and employee base. Connock et al. (1995) link the communication process to a broader foundation of managing change, in particular the transition between the old values of an organisation and the new ethical ones. Lagan (2000) outlines two aspects that should feature as part of a broader information strategy: embeddedness and communication. She identifies that clear support by existing management is an effective way to communicate the importance of ethics and she stresses the importance of public endorsement by the Board and Chief Executive of the organisation. This would be followed by a demonstrable commitment by senior managers through role modeling establishing the links to the early characteristic discussed in section 2 above.

5. Training: employees need to be equipped with skills and knowledge to enable them to act ethically (in Moon and Bonny 2001). Connock et al. (1995) suggest that the implementation of any ethical system presupposes congruence between the standards enshrined within the values of an organisations and the actual behaviour of the employees. As they point out this can only be assured when employees are educated about the ethical values, the required actions, the implications concerning punishment and rewards based on that behaviour. As Vallance (1995) clearly states the aim of training is to give employees the requisite skills and experience so as to do the work that organisation asks them to do. She suggests that for many organisations the important point of differentiation from competitors is the quality of staff that in turn depends heavily on the quality of their training.

6. Reporting systems: Driscoll and Hoffman specifically refer to the use of support systems such as hot lines, decision-making guidance and reporting systems as necessary to enable people to actually use the ethical system (in Moon and Bonny 2001). Within the Australian and New Zealand setting the existing of a reporting hotline is an extremely contentious issue, with many holding the view that it is against cultural practice to inform on co-workers activities. Ferrell Fraedrich and Ferrell (2015) suggest that where organisations have established ethical systems with reporting lines or internal systems such as hot lines, recording the volume and nature of the usage will provide important information as to the ethical climate within the organisation. Trevino and Nelson (2011) suggest that unless employees believe they can deliver bad news to management without fear of repercussion they are unlikely to inform the organisation of developing ethical risks or problems until it is too late. Related to this issue they further suggest that unless employees believe their identities will be protected when reporting violations, they are unlikely to bring such matters to the attention of management. This emphasises the importance of an anonymous reporting system.

7. Organisational ownership: the use of participative approaches and the involvement of those to be affected by the ethical system is a basic tenet of management theory (Robbins et al. 2008, McKenna, 1999). By involving people in decisions it is more likely that they will be more committed to it (in Moon and Bonny 2001).

8. Consistent response and enforcement: Driscoll and Hoffman (2000), advocate the use of a positive and negative motivational techniques such as rewards and punishments as a means of maintaining an encouraging desired behaviours (in Moon and Bonny 2001). Francis (1994, 2002); Ferrell Fraedrich and Farrell (2015); Hoffman et al (1990); Ritchie (1996) and Lagan (2000) identify that employees need to be motivated to behave in a manner consistent with the ethical objectives of the organisation. This can occur at a corporate level by linking ethical management to key performance indicators and at lower levels through employee performance appraisal. In particular, managers may have aspects of implementation linked to annual performance plans. James (2000) highlights that remuneration, i.e. monetary and non-monetary rewards, along with performance appraisals and management control processes are the formal mechanisms that organisations can use to reinforce ethical systems.

9. Audits and measurement: Driscoll and Hoffman (2000) argue that as with any organisational strategy a system of measurement must be introduced to determine whether the ethical framework is meeting its stated goals and objectives (in Moon and Bonny 2001). The most common approaches recommended are that of the social or ethics audit and disclosure of the findings. Schaefer and Zaller (1999) identify that many organisations have introduced ethical systems based around codes or ethical policies yet few establish evaluation systems to ascertain whether these systems are proving to be effective. They suggest that what is needed is a new kind of ethics audit, broad-based and allowing the organisation to consistently focus and refocus on whether it embodies the values it professes.

10. Revision and refinement, clearly having undertaken review any required changes should be introduced which improve the performance of the system. The final stage of any organisational change program and a consistent theme amongst the approaches is the need for constant review and monitoring of the implementation program. Hoffman and Fredrick (1995) suggest that the degree of effectiveness of an ethics program must be constantly evaluated and updated.

The ten steps identified by Hoffman et al. (in Moon and Bonny 2001) can essentially be summarised as several critical characteristics: firstly, that a strategic framework with senior executive leadership is critical; secondly, that the development of written policies establishing ethical standards need to be developed; thirdly, that these ethical standards need to be communicated to the organisation and that employees need to be motivated to follow these standards; fourthly, structures and systems need to be adapted to facilitate these standards and; lastly, that audits and evaluations need to be conducted to establish the effectiveness of the system.

An organisational ethics framework

The inter-relationships between the various components described by Driscoll and Hoffman has been used as the basis for an ethics framework that has been adopted by Standards Australia and has been used by a number of Australian and New Zealand companies as a starting point to determine the range of activities that need to be reviewed so as to establish an effective framework or systems approach to the development of an ethical culture. Whilst not an exhaustive representation it provides the critical contextual issues of leadership, change management and consistency required to enable the institutionalisation of ethics to occur.

Australian Standard 8001:2003

Strategic Integration with other corporate functions

As identified by Farrell, Fraedrich and Farrell (2015), Trevino and Nelson (2011) Richie (1996) Sampford (1994) and Driscoll and Hoffman (2000) and Hoffman, Driscoll, and Painter-Morland (2001) the organisational ethical system or ethics framework, must be part of the business’s strategy and integrated with other corporate functions. An analysis of the better practice model above demonstrates clear relationships with areas such as Human Resources, in the fields of performance management and remuneration, cultural analysis and training and development. Clearly communication strategies will require the involvement of public relations and information technology, the later is a key support service with the access to websites and intranet. Reporting mechanisms, such as internal whistle blowing systems, may involve several areas including audit, legal and HR, so we can see that the organisational ethics system cannot and must not be managed as an add on to the business.

The integration must go even further. As Segon (2004) identified, many Australian and New Zealand companies have many polices and procedures already in place that are part of an overall governance system, yet they do not integrate or establish inter-dependencies which are vital to any cultural program. For example large organisations typically have fraud and risk assessment departments of sections as well as legal departments. Fraud and risk assessments will undoubtedly identify areas of ethical sensitivity, which must be imported into ethical audits. Similarly the guidelines and control systems that such groups provide to minimize risk should be part of or align with the relevant code of conduct. Legal departments can provide important reviews of documents and protection of individual rights, particularly for whistleblowers. Marketing departments need to ensure that their campaigns align with ethical principles, occupational health and safety, etc.

Who should manage the ethics function?

Anecdotal evidence also suggests that many organisations typically delegate the responsibility to the HR and on some occasion to legal or public relations. However these delegations are inappropriate, as it tends to place the responsibility of an important corporate function with professional groups whose expertise does not include organisational ethics. According to Adobor (2006); Llopis, Reyes-Gonzales, and Gasco (2007); Izraeli and BarNir (1998) Trevino and Nelson (1999) Driscoll and Hoffman (2000) and Hoffman, Driscoll, and Painter-Morland (2011) the ethics manager or officer function involves specific roles and responsibilities that requires specific knowledge and capabilities necessary for effective role performance.

Collins (2009) identifies that the appointment of an ethics compliance officer, or in effect the manager of the ethics framework must be based on expertise and an understanding of the organisation. Similarly, Llopis, Reyes-Gonzales, and Gasco (2007) argue that the essential requirement of a manager responsible for organisational ethics includes knowledge of the firm, mastering management techniques as well as theoretical and practical issues related to business ethics. Importantly, consistent with the views of Hoffman (2000) Longstaff (1996) and, Lagan (2000) and Ferrell, Fraedrich and Farrell (2015) this role is a strategic one for the organisation thus the incumbent must have hierarchical authority or legitimate power to exert influence within the organisation. Izraeli and BarNir (1998) state that ethics officer must be trained in moral awareness and ethics theories (McNamee, 1992) and experienced in resolving ethical dilemmas. Such conceptual understanding is necessary to enable identification of moral dilemmas, an analysis of consequences of decisions and the promotion of social responsibility through educational programs.

Does ethics pay?

One of the most asked questions by business leaders of the movement for better ethical practice is “does ethics pay or add to the bottom line?” The answer from qualitative and quantitative studies is YES! However, as with any organisational strategies, there are costs involved in setting up ethics systems, training managers in ethical decision making and maintaining the systems and constantly monitoring and improving it. It is often these direct costs which organisations seem reluctant to commit because the return tends to be indirect and medium to long term. Ferrell, Fraedrich and Ferrell (2015) note the example of Japanese firm Ricoh that was able to cut carbon emissions and production costs in half by adopting a more socially responsible approach to its business. They further identify that an ethical organisation increases employee commitment, investor loyalty and customer satisfaction. They highlight a millennium survey of 23 countries that clearly identifies nearly 60% of customers focus on the corporate reputation of an organisation ahead of brand or financial factors. Verschoor (2000 p22-24) identifies a survey by the Ethics Research Centre in Washington DC, that employee perceptions and outcomes regarding organisational ethics are more positive when: an ethics programme is in place, employees see ethical values such as honesty, integrity and loyalty, applied frequently in the workplace, and when organisational leaders model ethical behaviour. The study found that employees attached great importance to the ethical climate. This was identified as one of the major reasons why they continue to work for the organisation. The study also found that modeling of ethical behaviour by organisational leaders, supervisors and co-workers increases favourable ethical outcome (Verschoor, 2000).

How organisations fail to develop ethical cultures.

Many organisations have also failed to adapt their organisations to incorporate ethical systems and this is consistent with the findings of the Center for Ethics at Bentley College, whose analysis of American organisations found that less than 10% of companies had made changes to formal structure when introducing ethical systems. By the mid 1990s the Center identified that up to 30% of surveyed Fortune 500 companies had introduced formal changes to the structure in the form of either ethics committees or ethics officers.

Newton (Hoffman and Frederick 1996, Donaldson and Werhane, 1999) argues that much of the blame for the failure or ineffectiveness of ethical systems can be traced back to the responsibilities of senior managers. As we noted in the previous Unit, Ethical Leadership is a critical factor in the development of an appropriate culture in an organisation. But the responsibilities of leadership extend far beyond the importance of role modeling. She identified three important principles that must be insured in order to enhance the effectiveness of ethical systems.

1. The Principle of Participation.

2. The Principle of Validity

3. The Principle of Authenticity

Participation in the development of the system will tend to foster greater commitment. Longstaff (1996) argues that a critical part of the process is ensuring regular reports of the ethical system development to employees. However Newton (in Donaldson and Werhane 1999) suggests ethics systems and 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.

The ethical system must be seen as authentic and applying to all staff, Like Longstaff and Hoffman, Trevino et al. (2011) identify that the behaviour of the senior executives of the organisation is the principal determinant of the ethical tone of the organisation. Leaders serve as role models whilst middle managers are responsible for the rewards, punishments and the message of how things are really done in the organisation.

They identify that where employees see that supervisors and executives take ethics seriously, as important as bottom-line issues, then ethical behaviour is enhanced. Trevino and Nelson (2011) identify two major factors as critical for this climate to develop. Firstly, that the organisation climate must permit the open discussion of ethical and values issues. This is commonly referred to as discourse. Secondly, that the reward system establishes support for ethical conduct. According to their research, employee perceptions that ethical behaviour would be rewarded by an organisation, was more important than the perceptions that unethical behaviour was punished.

Newton (in Donaldson and Werhane 1999) argues that codes need to have an ethical basis, reasoned, and supported by logic, coherent, a commitment to justice and due process. In other words an ethics principle needs to underpin the development of an appropriate code. She suggests that rather than codes of ethics being develop correctly, they are often developed subjectively based on individual's perceptions about what one should or should not do, thus validity is critical. A link can be made to an earlier discussion regarding the importance of have expertise in ethics as a prerequisite for the position of ethics manager. As noted by Segon (2004, 2010) an unfortunate characteristic of many Australian company ethics initiatives is that the task is often delegated to departments and or individuals with little background in organisational ethics.

Trevino, Weaver, Gibson and Ley Toffler (1999) go further and identify conditions that undermine ethical systems. The first is the level of employee awareness of the ethical and legal issues that arise at work. They suggest no matter how strong an individual’s values are an organisation cannot expect employees to be familiar with all of the laws and regulations that apply to their work. Nor can they be expected to be familiar with the ethical ambiguities they may face within the workplace. They suggest that many people often do the wrong thing, simply because they are unaware of what they should do. Thus ineffective communication of task and responsibility can be seen to be a major problem when trying to promote ethical systems.

Trevino et al. (2011), Driscoll and Hoffman (2000) and Ferrell Fraedrich and Ferrell (2015) identify that unless an appropriate environment exists, employees will be reluctant to report inappropriate behaviour. Unless employees believe they can deliver bad news to management without fear of repercussion they are unlikely to inform the organisation of developing ethical risks or problems until it is too late. Related to this issue they further suggest that unless employees believe their identities will be protected when reporting violations, they are unlikely to bring such matters to the attention of management. In addition if they believe that nothing will come of the report, this will further act to dissuade reporting. It is these combinations that Trevino et al. (1999) suggests often leads individuals to report outside the organisation through the public media channels. This action is commonly referred to as whistle blowing.

Required Reading

Reading 1

Ferrell,O.C., Fraedrich J. and Ferrell, L. 2015, Business Ethics Ethical Decision making and Cases, South Western, Ch 4 pp 215-217

Chapter 4 provides a discussion of approaches to the institutionalisation of business ethics using mandated (compliance) and voluntary (aspirational) approaches. Chapter 8 revisits the concept of the moral corporation before providing a framework that includes ethics officers, training and development and monitoring performance. Chapter 7 details the importance issues of organisational culture and the role of leadership in establishing and maintaining the ethical organisation through role modeling.

Additional Reading

Reading 2

McDonald, G (2015) Business ethics: a contemporary approach, Cambridge University Press, Port Melbourne. Ch 12

This final chapter in McDonald’s text provides a good discussion starting wit the concept of culture and the benefits of developing an ethics cultures. She provides different model of organisational ethics based on four tiers of an ethical culture however parallels can be drawn to the components of the ethics framework presented here. As we noted in our previous Unit, McDonald incorporated the discussion of ethical leadership in her chapter on organisational ethics that is appropriate given Newton’s observations around the failure of leaders to develop, promote and endorse ethics in organisations.

Reading 3

Hoffman, WM 1995 ‘A blueprint for corporate ethical development’, in MW Hoffman and RE Fredrick (eds) Business ethics: readings and cases in corporate morality, 3rd edn, McGraw Hill, New York, pp. 557-584.

This is a seminal article in which Michael Hoffman, from the Centre for Business Ethics at Bentley College, Massachusetts in the USA, outlines the strategies that organisations need to adopt to develop an ethical culture. Hoffman highlights the importance of leadership, communication, motivation and evaluation to the success of the ethics initiatives. She outlines the characteristics of an ethics strategy with key aspects of training, communication, whistleblowing, etc., and the importance of an ethics committee to oversee and to manage ethics challenges in organisations.

Journal Readings

Journal Reading 1

Sharp-Pain, L. (1994) “Managing for organizational Integrity” Harvard Business Review, March/April, pp 106-117

This important article from Harvard Business School Professor Lynn Sharp-Paine provides an overview of the necessary characteristics for organisations to develop an ethical culture. It proposes two alternatives of a compliance and integrity approaches that firms need to utilise, depending on their context. Irrespective of which system is adopted, Sharp Paine argues that the institutionalisation process must be a full and on-going one.

Journal Reading 2

Segon MJ (2007) “Designing an Ethics system using Mintzberg’s Configuration Approach” The Australian Journal of Professional and Applied Ethics, vol. 9, no. 2, pp. 66-76

This article links the important concepts of organisational strategy and structure to the development of organisational systems. The author uses Henry Mintzberg’s multiple configuration approach to identify a range of organisational structures and demonstrates that the two option models advanced by Sharp-Paine does not address the breadth of structures found in the business environment. T adopts a hypothesis of fit that organisations must develop an organisational ethical system that is in fit with its existing structure and context.

Journal Reading 3

Adobor, H. 2006, “Exploring the Role Performance of Corporate Ethics Officers” Journal of Business Ethics, no. 69, p. 57–75.

This article by Adobor outlines some of the important conceptual knowledge and behaviours skills that successful ethics managers need to possess to manage the development of an ethical culture. It effectively demonstrates that this role is a significant one within organisations and as such should not be delegated without consideration of the required ethical knowledge, skills and qualifications.

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MGMT20134 | Unit 8 | Page 19

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