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Resource4.docxThe Ethics ‘‘Fix’’: When Formal Systems Make a Difference
Kristin Smith-Crowe • Ann E. Tenbrunsel • Suzanne Chan-Serafin • Arthur P. Brief • Elizabeth E. Umphress • Joshua Joseph
Received: 30 June 2011/Accepted: 12 December 2013/Published online: 14 January 2014 Springer Science+Business Media Dordrecht 2014
Abstract This paper investigates the effect of the countervailing forces within organizations of formal systems that direct employees toward ethical acts and informal systems that direct employees toward fraudulent behavior. We study the effect of these forces on deception, a key component of fraud. The results provide support for an interactive effect of these formal and informal systems. The effectiveness of formal systems is greater when there is a strong informal ‘‘push’’ to do wrong; conversely, in the absence of a strong push to do wrong, the strength of formal systems has little impact on fraudulent behavior. These results help to explain why the implementation of formal systems within organizations has been met with
mixed results and identifies when formal systems designed to promote ethical behavior will be most efficacious.
Keywords Ethics Formal systems Fraud Informal systems Unethical behavior
Introduction
First comes the scandal, then comes the public outrage, and then comes the big fix: beefing up the formal systems to keep companies honest. Pattern sound familiar? A quick perusal of newspaper headlines from just the last several decades reveals a cyclical pattern of corporate scandal, public outrage, and corporate atonement (Berg 1983; Blumenthal 1983; Carroll 1985; Gerth 1980; Halloran 1985). Arthur Anderson, Enron, Tyco, WorldCom, and, more recently, Goldman Sachs were preceded by General Electric, Investors Overseas Services, Lincoln Savings & Loan, Sears, and Shoney’s. These all are companies that have grabbed headlines by doing wrong, illustrating that wrongdoing in corporations is not a present fad. Neither is the fix. Organizations and financial institutions implicated in ethics scandals typically attempt to regain public trust by recasting themselves as ethical entities. The envisioned path toward this recasting, while varied, seems to converge on establishing or, in some cases, re-establishing formal structures to ensure and enforce ethical behavior. The Sarbanes–Oxley Act passed by the United States Congress is one example of these changes, resulting in enhanced formal control systems and the requirement of a chief compliance officer at all 9,000 publicly held corporations (Hurt 2005), thus directly affecting formal systems within organizations. Management observers have predicted that
K. Smith-Crowe (&) A. P. Brief Eccles School of Business, University of Utah, Salt Lake City, UT, USA e-mail: [email protected]
A. P. Brief e-mail: [email protected]
A. E. Tenbrunsel Mendoza College of Business, University of Notre Dame, Notre Dame, IN, USA e-mail: [email protected]
S. Chan-Serafin Australian School of Business, University of New South Wales, Sydney, NSW, Australia e-mail: s.chan-serafi[email protected]
E. E. Umphress Foster School of Business, University of Washington, Seattle, WA, USA e-mail: [email protected]
J. Joseph Partnership for Public Service, Washington, DC, USA e-mail: [email protected]
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J Bus Ethics (2015) 131:791–801 DOI 10.1007/s10551-013-2022-6
the ‘‘new agenda’’ would be comprised of ‘‘greater investment in financial systems, ethics training, and corporate governance’’ (Byrne 2002). Providing an even more recent example of the emphasis on the formal systems ‘‘fix,’’ the Obama administration’s initiative in response to the 2008 global financial crisis includes revamping financial regulation aimed at discouraging further greed and risky bets by Wall Street firms (Appelbaum and Herszenhorn 2010; Plender 2009; Scannell 2009). The million dollar question is will these formal systems work? To date, the research on the effectiveness of formal systems within organizations has been mixed, with some ethics programs producing discernible effects on behavior and others having no effect (for a review see Tenbrunsel and Smith-Crowe 2008). We posit that the primary reason for the unpredictable effectiveness of ethics programs is that the designers and implementers focus on formal systems, one component of an organization’s ethical infrastructure (Tenbrunsel et al. 2003), to the exclusion of other important components of the ethical infrastructure. One such ignored aspect is the informal systems of the organization, such as pressure from peers and colleagues to behave unethically, including fraudulent behaviors. We argue that to better understand when formal systems to promote ethics will be effective, unethical and fraudulent behavior in organizations needs to be recognized as a product of an interaction between formal and informal organizational forces. Empirically, we investigate the effects of two countervailing forces that exist in some organizations: formal systems that pull individuals toward ethical behavior and informal systems that push them toward fraudulent behavior. Specifically, we consider the interactive effect of these systems on deception, a key component of fraud, which is defined by the Oxford English Dictionary (1989) as ‘‘the quality or disposition of being deceitful; faithlessness, insincerity.’’ Though the term fraud is sometimes used in a more strict criminal sense, here we use the term in a broader sense of acts of bad faith that may or may not constitute legal violations. Certainly, such acts can be quite harmful to organizations in terms of damage to reputation, litigation, and so forth, regardless of their legal status. Interestingly, despite the pervasiveness of deception and its harmful effects on organizations, it has remained largely unaddressed in organizational research (Grover 2005; except in the contexts of negotiation and lie detection, e.g., Eckman and O’Sullivan 1991; Tenbrunsel 1998; Aquino and Becker 2005). In addition to focusing on a rarely studied, though key component of fraud (deception), this paper offers several contributions. First, the constructs and hypotheses are theoretically derived largely from research on ethical infrastructure and social information processing; we also
acknowledge some of the parallels between formal and informal systems as we discuss them in our study, and formal and informal systems as discussed in institutional theory. Importantly, however, the scope of our theorizing is limited to formal and informal systems as they exist within specific organizations and not at the level of institutions. Our theoretical approach addresses previous criticisms regarding the atheoretical approaches to these issues (i.e., see Tenbrunsel and Smith-Crowe 2008). Second, we provide the first empirical investigation of the interaction between formal and informal systems as they exist within organizations. Third, our findings shed light on the inconsistent findings regarding the effectiveness of formal systems in organizations on unethical behavior (see Tenbrunsel and Smith-Crowe 2008). We thus extend our current understanding of the effectiveness of formal systems, providing insight into the ethical infrastructure of organizations and its impact on fraudulent behavior.
Theoretical Background
An organization’s ethical infrastructure incorporates multiple components, including formal and informal systems (Tenbrunsel et al. 2003). Formal systems are the tangible objects and events pertaining to ethics that are purposefully designed and implemented, whereas informal systems are the unofficial policies, practices, and procedures that are relevant to ethics. Examples of the former include ethics training programs and advice hot lines that recognize ethical behavior as an important organizational attribute, whereas examples of the latter include the implicit pressure from co-workers, supervisors, and top management to engage in ethical or unethical behavior. Distinguishing between, and focusing on, the formal and informal components of the ethical infrastructure is consistent with institutional theory, which classifies institutions as either formal or informal (Coase 1998; Helmke and Levitsky 2006; North 1990). Formal institutions represent explicit codified contracts and rules that govern exchanges within society, while informal institutions represent implied, often unwritten conventions, norms, and behavioral codes (Helmke and Levitsky 2006; North 1990). We take a similar view of formal and informal systems, where one is codified and explicit, and one is not. Yet we do not seek to study these systems at the institutional level, rather our focus is on these systems as they exist within organizations. While formal and informal systems can be ‘‘good’’ (promoting ethical behavior) or ‘‘bad’’ (promoting unethical and fraudulent behavior), in this paper we focus on one particular combination of the two: formal systems that pull the employee to do right and informal systems that push the employee to do wrong. Due to legal liabilities,
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organizations are much more likely to have formal systems that promote ethical rather than unethical behavior. Given the likelihood then that organizations’ formal systems focus on promoting ethical behavior, it is important to consider the countervailing force of an informal system that focuses on unethical behavior. Indeed, it is such pressure toward unethical behavior that formal systems are designed to combat. Further, within formal systems we focus on two components—training and ‘‘hot lines’’— which allow for an interactive communication of codes of conduct and ethical values (versus the mere existence of static, and often ‘‘boiler plate’’ codes of conduct; see Loughran et al. 2009). In this sense, we are focusing on those indicators of a formal system that would be expected to be especially impactful.1 Within informal systems, we focus on the informal pressures that individuals experience to behave unethically; such pressure is the essence of informal systems (cf. Tenbrunsel et al. 2003). Here it is important for us to note two things. First, our conceptualizations and measures of formal systems that promote ethical behavior and informal systems that promote unethical behavior rest on the assumption that that good and bad are not necessarily opposites – they can be qualitatively distinct. Our view is informed by Bradley et al. (2008, p. 179; see also Paine 2003) who pointed out that ‘‘…behaviors defined as good, for instance, are not necessarily the polar opposite of those defined as bad. Theft, for instance, is a bad action that has no correspondent in the goodness category because abstaining from theft is not enough to be labeled good.’’ Similarly, we do not conclude that the absence of a formal system that promotes ethical behavior constitutes a formal system that promotes unethical behavior, or that the absence of an informal system that promotes unethical behavior constitutes an informal system that promotes ethical behavior. Second, our paper concerns the interactive effects of formal and informal systems as they currently exist in organizations. Our scope does not extend to a discussion of the emergence of these systems (see DiMaggio and Powell 1983; Kraatz and Block 2008; Scott 1991). Below, we briefly review previous research and theory on formal and informal systems, and then develop a theoretical argument for why we expect that the two systems interact to predict fraudulent behavior.
Formal Systems and the Pull Away from Fraudulent Behavior
Drawing on Pugh et al. (1968), formal systems are defined as those that ‘‘are documented and standardized, visible to anyone inside or outside the organization’’ (Tenbrunsel et al. 2003, p. 288) and they are carried out through formal, administrative channels (Lange 2008), a staple of organizations’ ethical infrastructure. Importantly, formal systems vary in strength across organizations, with some organizations employing stronger formal systems with numerous components and other organizations employing weaker systems with few features. As these systems are public and can be observed from outside of the organization (e.g., by customers), they tend to convey messages that pull the employee toward ethical behavior and away from fraudulent behavior. Hence, here we focus on formal systems that promote ethical behavior rather than unethical behavior. Formal systems constitute an important part of the ethical infrastructure because individuals look to their organizations for guidelines regarding what constitutes appropriate behavior (Schneider 1975). Official communications, such as training and advice ‘‘hot lines,’’ provide one source for this information (Jansen and Van Glinow 1985). These formal mechanisms allow organizations an opportunity to promote ethical behavior and guard against fraudulent behavior (Ferrell and Gresham 1985; Trevino 1990). Indeed, it has been found that formal systems can decrease the unethical behavior of employees within organizations (Kish-Gephart et al. 2010; McCabe et al. 1996). Yet, as we previously noted, research on the effectiveness of formal systems has produced mixed results, an inconsistency that we argue can be better understood by considering their interactive effect with informal systems. Below, we discuss the influence of informal systems on fraudulent behavior and then argue that one must consider both formal and informal systems when predicting how and when they will influence unethical behavior.
Informal Systems and the Push toward Fraudulent Behavior
Informal systems can be thought of as emitting ‘‘signals regarding appropriate ethical conduct that are received by the organizational members’’ (Tenbrunsel et al. 2003, p. 288), and like formal systems can vary in strength across organizations. In contrast to their formal counterparts, the signals conveyed through informal systems do not entail official pronouncements or actions, but rather they are ‘‘felt’’ by organizational members (Lawler and Rhode 1976; Lange 2008; Selznick 1943). Informal systems represent the unofficial messages regarding ethical norms
1 For instance, based on dialogical theories of learning, Burke et al. (2007) have argued that leaning is a social activity that is facilitated by social interaction. Specifically, in the context of safety training, Burke et al. (2006) demonstrated that more learning takes place when trainees have opportunities to interact with each other and the trainers (getting feedback from trainers, etc.) compared to more passive forms of training like watching a video. The selection of training and ‘‘hot lines’’ as two aspects of formal systems are interactive and thus consistent with this definition.
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within the organization, obtained in part via socialization and the process of social learning (Ashforth and Anand 2003; Brief et al. 2001; Burgess and Akers 1966; Palmer 2008; Warren and Smith-Crowe 2008) in which employees learn through conversations with peers and management and through observation what is considered ethical and what is not. Like formal systems, informal systems provide people with the behavioral guidelines they seek so that they will know how to act appropriately in their environments (Schneider 1975). The norms espoused by these informal systems may or may not be ethical. Our focus is on the latter case: systems that push employees to do wrong, and, thus, may exist in tension with the aforementioned formal systems. The power of informal systems that reinforce unethical behavior is illustrated in the demise of Enron and Arthur Anderson. At Enron, Mr. Lay made it clear that informal systems trumped formal systems (Barrioneuvo 2006):
Ethical rules that he had helped set up at Enron…somehow did not apply to him, Mr. Lay suggested. When questioned by Mr. Hueston on Tuesday about a $160,000 personal investment he made in a photo-sharing company that did more than 80 percent of its business with Enron, Mr. Lay called suggestions of impropriety ‘‘form over substance.’’ Rules, he said, ‘‘are important, but you should not be a slave to rules, either.’’
The importance of informal systems is consistent with branches of institutional theory (Helmke and Levitsky 2006; Knack and Keefer 1997; Lauth 2000; North 1990) and social information processing theory (Salancik and Pfeffer 1977, 1978). At the macro level, research on the impact of informal institutions on political structures (Lauth 2000) and transaction costs (Knack and Keefer 1997) has demonstrated the importance of considering those systems that exist ‘‘outside officially sanctioned channels’’ (Helmke and Levitsky 2006, p. 5), yet have a tremendous potential to affect significant sociological processes that exist within a society (North 1990). Similarly, at a more micro level and more relevant to our focus on systems within organizations, the social information received from peers plays an important role in individuals’ attitudes, perceptions, and behaviors. For instance, Roy (1952), a sociologist studying the informal systems in a steel processing company, described the social pressure to under produce as he experienced as a radial-drill operator when he over produced. Roy was censured by a fellow worker who said, ‘‘What’s the matter? Are you trying to upset the apple cart?’’ (p. 431). Economists are similarly finding that social pressures can influence behavior (e.g., cooperation and productivity) beyond what would be predicted simply on the basis of monetary incentives
(Bandiera et al. 2005; Dal Bo and Dal Bo 2010). Further, in a recent meta-analysis (Kish-Gephart et al. 2010), psychologists found that organizational members’ perceptions of what their organizations expect and what values they espouse in relation to ethics (essentially, organizational level ethical climate and culture, respectively) were moderately to strongly, negatively correlated with unethical behavior, providing additional evidence that organizational members are strongly influenced through informal, social channels. Informal systems regarding unethical behavior are perhaps best captured by the pressure that employees feel from their peers, supervisors, and top management to violate the organization’s published values. Pressure from these groups informally communicates the values that the organization ‘‘really’’ espouses. Indeed, conformity pressures, which include both informal surveillance to see who is behaving ‘‘right’’ and the accompanying sanctions, have been implicated in organizational wrongdoing (Sutherland 1983; Brief et al. 2001). A good case can thus be made that informal systems are an important force. Yet, formal and informal systems coexist within organizations. While one can predict main effects for each system, we argue below that it is their interactive effect that is important in predicting fraudulent behavior.
Interactive Effects of Formal and Informal Systems
To assert that there is an interactive effect between formal systems that promote ethical behavior and informal systems that promote fraudulent behavior is not a foregone conclusion. Empirically, to our knowledge, there has been no demonstration of their interactive effects. Theoretically, the relationship between formal systems that promote ethical behavior and informal systems that promote unethical behavior has been characterized in two contradictory ways: as primarily independent (see Tenbrunsel and Smith-Crowe 2008 for a review) or as primarily interdependent (Crossland and Hambrick 2011; Keefer and Knack 2005; Miller and Form 1980). The latter characterization is most germane to our theoretical arguments and predictions. Miller and Form (1980, p. 362) provide an apt description of the importance of considering both systems at the same time:
The student of social organization needs to know how both formal and informal organizations operate. The relationship between these two types of organization is not supplementary, but interactive. In a very real sense, then, it is impossible to understand how the supervisory structure actually operates without systematic knowledge of the ongoing informal relations in it.
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This assertion, which rests on interdependence between the two systems, and more specifically, on the notion that formal systems are interpreted within the context of informal systems, finds support in institutional theory (Dobbin 1994; Keefer and Knack 2005; Crossland and Hambrick 2011) and social information processing theory (Salancik and Pfeffer 1977, 1978). Informal norms are argued to be the initial force guiding transactive exchanges in small, homogenous societal groups. As the groups grow larger and more diverse, formal institutions (i.e., contracts, codes of conduct, etc.) emerge to facilitate these preexisting informal institutions so that societal members can trade safely with those who are dissimilar or unfamiliar (North 1990; Bates 2001); however, the development of these formal institutions is argued to be constrained by the informal norms that preceded them (Dobbin 1994). Informal institutions are thus seen as more primary and deep seated than formal institutions (Keefer and Knack 2005), and, as such, act as a constraint on formal institutions (Crossland and Hambrick 2011). A social information processing perspective, which posits a central role of the influence of the social context on job attitudes, asserts that the social environment provides a template that individuals utilize to interpret complex environmental cues (Salancik and Pfeffer 1978). Salancik and Pfeffer (1978) further argued that objective information, such as that on job variety and autonomy, actually lacks meaning unless it is interpreted within a social context and as such cannot be used in isolation to predict job attitudes (cf. Burke et al. 2006, 2007). Thus, the social context dictates the meaning of the more objective information conveyed by formal systems. We agree with these assertions and, applying them to the domain of fraudulent behavior, predict that the impact of formal systems can only be fully understood when one considers the informal systems within which the formal systems operate. In the context of institutional theory, Scott (1987) indicated, however, that the nature of this formal–informal interaction potentially can take several forms: ‘‘Formal structures purposefully designed to regulate behavior in the service of specific goals are seen to be greatly affected— supplemented, eroded, transformed—by the emergence of informal structures’’ (p. 54). Making use of the parallels between formal and informal systems at the institutional level and at the organizational level, the same logic can be applied to thinking about formal and informal systems within organizations. Here, we investigate two possible interaction effects: informal systems may either increase or decrease the effectiveness of formal systems.2
Increased Effectiveness
On the one hand, it could be argued that formal systems are made more effective by informal systems. In other words, formal systems designed to pull employees toward ethical behavior only have meaning, and, thus, efficacy, when there are strong informal systems pushing employees to behave unethically. A social information processing perspective is based on the premise that job characteristics are socially constructed and that it is the intrinsic features of the situation that help makes sense of the extrinsic features of the job (Salancik and Pfeffer 1977). Given that informal systems have been linked with intrinsic processes and formal systems with extrinsic processes (Tenbrunsel et al. 2003), this line of reasoning suggests that when the informal system to do wrong is weak, formal systems designed to enforce ethical values lack meaning, and, thus, have relatively little impact as there is no context within which to understand why such behavior is being prescribed. That is, when there are no informal pressures to behave unethically, a strong formal system to behave ethically will be out of place and lack significance. In contrast, when there are strong informal pressures to do wrong, the prescribed behavior espoused by a formal system to do right has meaning as it is interpreted within the social context of the pressure exerted by the informal norms. In this sense, a formal system to do right exists to countervail an informal system to do wrong. This argument is consistent with Roberts’ (2001) discussion of corporate governance in which the ideal use of formal systems is as a ‘‘fail safe device’’ for fixing informal mechanisms that are broken. Along these lines, we argue that formal systems will be more effective when the informal system has gone awry (i.e., when informal systems that encourage unethical behavior are strong). This line of reasoning suggests the following hypothesis:
H1a Informal systems promoting fraudulent behavior will strengthen the negative relationship between formal systems that promote ethical behavior and fraudulent behavior.
Decreased Effectiveness
Conversely, it is possible that the effectiveness of formal systems is made less effective by the presence of strong informal systems. This argument is consistent with the inverse relationship posited between extrinsic and intrinsic motivation, such that a strong intrinsic motivation is seen as diminishing the perceived effect of an extrinsic motivator and vice versa (Calder and Staw 1975). Understanding informal systems to be more intrinsic than formal systems (Tenbrunsel et al. 2003), an increase in the
2 As Scott (1987) notes, formal systems may also be transformed, or changed by informal systems. As this paper focuses on a single point in time, this possibility is not investigated.
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strength of the informal system should make formal systems less effective in curbing fraudulent behavior. It has been found that the codes of conduct are less effective when they are inconsistent with the informal norms of the organization (McCabe et al. 1996); thus, the effectiveness of a formal system that pulls toward ethical behavior will be diminished when it faces opposition with an informal system that pushes toward unethical behavior. It has also been argued that formal constraints are stronger when the informal constraints are relatively weaker, such as in more developed countries where the rule of law is more salient (Peng 2002; Crossland and Hambrick 2011), suggesting an inverse relationship between formal and informal systems. Indeed, Elffers et al.’s (2003) investigation of regulatory compliance in the Netherlands demonstrated that individuals complied with the law more when they were aware that social norms for non-compliance were weak (i.e., weak informal systems). More specifically, this line of reasoning suggests the following hypothesis:
H1b Informal systems promoting fraudulent behavior will weaken the negative relationship between formal systems that promote ethical behavior and fraudulent behavior.
Below we describe a study designed to test our two competing hypotheses regarding the possible interactive effects of formal and informal systems on fraud. We investigated fraud in terms of instances of deception including falsifying records, withholding information, misreporting information, and lying to stakeholders. Following the description of our study, we report our results, which indeed indicate that the relationship between formal systems that promote ethical behavior and fraud (i.e., deception) is moderated by informal systems that promote fraudulent behavior.
Method
Sample
The data used in the current study were collected by the Ethics Resource Center via their ‘‘2000 National Business Ethics Survey’’ (2000 NBES; Joseph 2000). The 2000 NBES was administered via telephone interviews conducted with a nationally representative sample of 1,500 U.S. employees between November 1999 and February 2000. Only data from employees of for-profit organizations working at a location with one or more other employees were included in our study. The final sample included 974 respondents of which 80.4 % were White, 8.3 % were Black, and 6.2 % were Hispanic. Over half (51.5 %) of the respondents were male and just under half (42.7 %) were
between 31 and 45 years of age. Over half (55.2 %) had some post-secondary education (i.e., completed at least two full years of college), 46.1 % served in management or supervisory positions, and 86.4 % had been in their organizations for over a year.
Measures
Formal Systems to Promote Ethical Behavior
Two items assessed whether participants’ organizations provided training on their standards of ethical conduct, as well as specific telephone lines where advice concerning business ethics issues could be obtained (0 = no, 1 = yes). Becausetheitemscomprisingthisscalearedichotomous,we computed Cronbach’s (1951) alpha using the upward bound limit of phi (/max) rather than the Pearson r coefficient (Sun et al. 2007). The estimate of internal consistency was .92. To construct the scale, we summed the responses to the items.
Informal Systems to Promote Fraudulent Behavior
Three items assessed the extent to which participants agreed that they felt pressure to violate their organizations’ ethical standards from their co-workers, supervisors, and top management, respectively (1 = strongly disagree, 2 = disagree, 3 = agree, 4 = strongly agree). Cronbach’s (1951) alpha for this scale was .92. To construct the scale, we summed the responses to the items.
Deception
Four items assessed whether participants had observed different instances of deception (0 = no, 1 = yes): falsifying records and reports; misreporting actual time or hours worked; withholding needed information from employees, customers, vendors, or the public; and lying to employees, customers, vendors, or the public. Because these items are dichotomous, we used Sun et al.’s (2007) modified version of Cronbach’s (1951) alpha in order to calculate a more accurate estimate of internal consistency. The internal consistency estimate for this scale which is composed of dichotomous items was .93 (Sun et al. 2007). To construct the scale, we summed the responses to the items.
Control Variables
We controlled for various factors that impact reports of unethical behavior in organizations (see O’Fallon and Butterfield 2005; Trevino et al. 2006; Tenbrunsel and SmithCrowe 2008 for reviews). Consistent with recommendations by Becker (2005), we provide a brief rationale for the inclusion of these variables. Organizational tenure (1 = less
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than a year; 2 = 1 to 2 years; 3 = 3 to 5 years; 4 = 6 to 10 years;5 = 11ormoreyears)andpositioninorganization (1 = non-supervisory position; 2 = first line supervisor; 3 = middle management; 4 = senior management) were included as prior research has demonstrated that they are negatively related to moral reasoning (Elm and Nichols 1993; Ponemon 1990). Respondents who have longer tenure and are in higher positions in the organization compared to their counterparts with less tenure and in lower positions, we argue,willhavelessabilitytomorallyreasonandthusalsoto observe and report incidences of deception. Gender (1 = male; 2 = female) also was controlled because some research has shown that women are more ethically aware than men (Ameen et al. 1996); as such women may have been more likely to recognize incidences of deception than men. Organizational size (1 = 2–24; 2 = 25–99; 3 = 100–499;4 = 500–1999;5 = 2000–9999;6 = 10,000 or over) was controlled, as there is empirical research showing that as organizational size increases, unethical decisions also increase (Weber 1990). Organizational size thus may be positively related to deception. Finally, organizational disruption (0 = no merger, acquisition or restructuring; 1 = merger, acquisition, or restructuring with no layoffs; 2 = merger, acquisition, or restructuring with layoffs) was included as a control variable because events such as layoffs and mergers are highly stressful for the organization and its members (Brockner et al. 1993), potentially causing competition between organizational members. Such competitive environments have been argued to raise one’s ‘‘moral antennae’’ thus sensitizing one to incidences of deception (Butterfield et al. 2000).
Results
We conducted a confirmatory factor analysis in order to examinethedistinctivenessofthescales usedtomeasure the main study variables: formal systems, informal systems, and
deception. The three-factor model demonstrated a good fit v2 = 56.79, df = 24, p\.001; CFI = .99, TLI = .98, RMSEA = .04. All the indicators loaded significantly onto their corresponding latent constructs (standardized path estimates range was .40 to .94), which demonstrates that the latent constructs are clearly distinct from each other. Further, results of the Chi square difference tests suggest the three-factor model had a better fit than either the two-factor model combining formal and informal systems Dv2 = 167, Ddf = 2, p\.001, and any other conceivable two-factor models, or the one-factor model Dv2 = 564.79, Ddf = 3, p\.001. Descriptive statistics and correlations for all study variables are reported in Table 1. We tested our hypotheses using multiple regression and centered predictor variables. The results are presented in Table 2. Consistent with previous research and theory, Model 2 indicates a significant negative correlation between formal systems and deception, and a significant positive correlation between informal systems and deception. However, of greater interest here, Model 3 indicates a significant interaction effect of formal and informal systems on deception. Supportive of Hypothesis 1a, the relationship between formal systems and fraudulent behavior was stronger when informal systems were strong and weaker when they were weak (see Fig. 1). Analysis of the simple slopes (Aiken and West 1991) one standard deviation above and below the mean for informal systems yielded consistent results: the relationship between formal systems and deception was stronger when informal systems were strong b =-.15, p\.01 versus weak b = .01, p[.05.
Discussion
Our aim in this paper was to provide a systematic investigation of two components of the ethical infrastructure of organizations—formal systems that pull individuals toward
Table 1 Means, standard deviations, and intercorrelations for study variables
Variable M SD 1 2 3 4 5 6 7
1. Organizational tenure 3.15 1.38 2. Position in organization 1.85 1.05 .20** 3. Gender 1.48 .50 -.10** -.10** 4. Organizational size 3.41 1.86 .05 -.22** .04 5. Organizational disruption .61 .74 .02 -.15** .02 .36** 6. Formal systems 1.00 .84 .06 -.08* .02 .41** .16** 7. Informal systems 3.46 1.36 .02 -.13** -.02 .08* .19** -.05 8. Deception .84 1.17 .01 -.09** -.03 .11** .20** -.10** .46**
* p\.05; ** p\.01
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ethical behavior and informal systems that push employees toward unethical behavior—so as to further our understanding of when formal systems are likely to be effective. We proposed that to predict fraudulent behavior, the interactive effect of formal and informal systems within organizations must be considered. That is, the less visible yet more intrinsic informal components of the ethical infrastructure influence the effectiveness of formal systems. Inspection of this interaction demonstrated that the efficacy of the formal systems depended on the perceived pressure to do wrong: when the informal pressure was strong (or high), formal systems were efficacious, but when the perceived pressure to do wrong was weak (or low), formal systems did not predict fraudulent behavior. These results suggest that a formulation of the optimal level of formal systems designed to promote ethical behavior must account for the organizational environment in which these control factors operate. When the informal push to do wrong is strong, ‘‘pulling’’ out all the stops in the formal systems seems to make sense. But when the pressure to do wrong is weak, extensive formal systems may only be a waste of time and money. Thus, the adage, ‘‘if it ain’t broke, don’t fix it,’’ may be more than just a cliche ´.
Limitations
An interpretation of these findings must certainly acknowledge the limitations of the study. First, like any data that are cross-sectional, it is difficult to draw inferences
about causality and no such inferences are intended.Further, self-perceptions of formal systems are utilized, rather than objective measures. The use of such perceptions allows for a consistency between informal and formal systems (i.e., it is difficult to get an objective measure of informal systems), but it should be clearly understood that our findings are driven by perceptions of such systems. Despite the disadvantages of cross-sectional data, and the limitations noted, this type of data does have the advantage over experimental studies of being able to translate the results much more readily into reality (Seligman 1996). Given the difficulty of getting reports on unethical behavior outside of the lab (Cowton 1998), we believe that these data offer unique insights into the ethical infrastructure of organizations, but we also recognize the need for additional research that utilizes objective measures and allows for causal inferences. Second, our data are based on participants’ reporting of all variables in one survey. As such, concerns about common method bias are reasonable, yet steps were taken during the data collection and analysis processes that should mitigate this problem. Procedurally, our data collection was consistent with suggested approaches for avoiding common method bias (Podsakoff et al. 2003). Specifically, respondents were guaranteed anonymity, steps were taken to reduce respondents’ evaluation apprehension (e.g., there were no value laden/judgmental words used in the survey and the interviewers merely asked respondents for their opinions and thoughts about ethics at work), and the items that constitute the three study variables were scattered across the survey. Empirically, a confirmatory
Table 2 Results of the regression analysis
Model 1 Model 2 Model 3
Control variables Organizational tenure .00 -.02 -.01 Position in organization -.07 -.01 -.01 Gender .00 .01 .00 Organizational size .07 .13** .12** Organizational disruption .17** .10** .10** Main effects Formal systems -.14** -.14** Informal systems .41** .39** Interaction term Formal 9 Informal systems -.09** R2 .05 .24 .25 DR2 .05 .19 .01 DF 8.67** 95.51** 7.24** * p \.05; ** p\.01 Note. Unless otherwise indicated, the numbers in the table are standardized regression weights
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
low high Formal Systems
Deception
Informal Systems low Informal Systems high
Fig. 1 Interaction effect of formal systems and informal systems on deception
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factor analysis was conducted to ensure that the three study variables were indeed distinct from one another. Finally, our analysis and the corresponding implications are limited to specific components of the ethical infrastructure—formal systems, which promote ethical behavior, and informal systems, which promote fraudulent behavior—and the specific items which we utilized to represent these constructs. The items we examined within each construct do not represent the full spectrum of formal and informal systems, and, as such, future research should investigate whether other components of these systems exhibit the same relationships found within this study. We also did not examine formal systems which promote fraudulent behavior (though we think that these are relatively uncommon) or informal systems that promote ethical behavior; we believe that future research that investigates these aspects of formal and informal systems will help add to our understanding of formal and informal systems. Keeping in mind these limitations, the results do highlight important organizational and theoretical implications.
Theoretical and Practical Implications and Directions for Future Research
We believe this research makes significant theoretical and practical contributions. By theoretically examining the ethical infrastructure, its components and their interactive effects, we address calls for a more theory-based approach to ethics in organizations (Tenbrunsel and Smith-Crowe 2008). To provide a platform for future research, we utilized a theoretically driven classification of formal and informal systems. Furthermore, because of their potential interactive effects, we considered it essential that these components be examined in conjunction with one another rather than as part of isolated studies as has historically been the case. As our findings suggest, these components interact with one another, meaning that drawing conclusions about the effect of one element in the absence of the other is likely to be problematic. The importance of considering formal and informal systems simultaneously is not only applicable to the study of ethical behavior in organizations, but also to the theoretical framework offered by social information processing theory, which we drew upon to derive our predictions. The organizational implications of these findings are directly connected to the theoretical contributions. Just as future researchers need to recognize the interdependent influence of each of the identified components, so do managers. Considered in isolation, formal systems may appear to have a positive impact on fraudulent behavior. However, when there is little push to do wrong via informal systems, extensive formal systems may just be a waste
of resources. This finding is useful in understanding why research on the effectiveness of formal systems has produced mixed results. Focusing on formal systems exclusively, while ignoring informal systems can lead to unnecessary costs and frustration for organizations truly committed to discouraging unethical behavior. Organizations that find that their formal systems do not impact behavior may erroneously conclude that formal systems are never useful and may be unlikely to rely on them in situations in which they would be most effective, namely when they are in the presence of informal pressures to do wrong. Further, we encourage future research that seeks to refine our understanding of the interactive effects of formal and informal systems, specifically research that considers the varying effectiveness of different components of formal and informal systems. Such research would be informative in highlighting components of formal and informal systems that are more or less influential in themselves, and how these components of varying influence then interact with each other. We also encourage research that explores different combinations of formal and informal systems, such as formal systems that promote fraudulent behavior and informal systems that promote ethical behavior. The results also suggest that an organization cannot simply ‘‘borrow’’ another organization’s ‘‘formal’’ ethics plan, but rather must consider the appropriateness of a plan in its own unique context (i.e., in the context of its particular informal systems). This recommendation resonates with similar thinking at the institutional level (Shirley 2005, pp. 629–630):
[the] stickiness of beliefs and norms explain why underdevelopment cannot be overcome by simply importing institutions that were successful in other countries. There are numerous examples of failure. Latin America copied the U.S. constitution, transitional countries emulated U.S. or European bankruptcy laws and commercial codes…all with very different and generally disappointing results.
Likewise, we argue that within an ethical infrastructure, a formal system cannot be copied or even mandated without first understanding the informal system in which it will be embedded. The findings suggest that there is no quick fix to scandals and wrongdoing—organizations must engage in the hard work of understanding if there are strong informal systems that promote fraudulent behavior. Likely, this conclusion is not what organizational leaders want to hear; it is, however, a message that they must hear if they truly desire to exact change. We hope that our research provides a blueprint for how such an informed understanding can help achieve that change.
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