Chapter 8

Organizational Factors:
The Role of Ethical Culture
and Relationships

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Learning Objectives
By the end of this chapter, you should be able to:
• Understand the concept of corporate culture
• Examine the influence of corporate culture on business ethics
• Assess organizational structure and its relationship to business ethics
• Explore how work groups influence ethical decisions
• Discuss the relationship between individual and group ethical
decision making

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Icebreaker
• What do the terms “corporate culture” and “organizational culture”
mean to you?
• Do you think the terms corporate culture and organizational culture
mean the same thing?

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 8-1
Defining Corporate Culture

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Defining Corporate Culture 1 of 3
• Organizational culture – Shared values, norms, and artifacts that influence
employees and determine behavior
• Corporate culture – The shared beliefs top managers in a company have
about how they should manage themselves and other employees, and how
they should conduct their business(es)
– All organizations, not just corporations, have some sort of culture.
– Corporate culture includes history and unwritten rules.
– Leaders are responsible for the actions of their subordinates.

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Defining Corporate Culture 2 of 3 Delete
• Sarbanes–Oxley 404 – Requires firms to adopt a set of values that forms a
portion of the company’s culture
– Characteristics of an ethical corporate culture were codified within its compliance
section
– Includes a 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

• Intent is to…
– Expose mismanagement, fraud, theft, and abuse
– Sustain a corporate culture that does not allow these conditions and actions to exist

• Section 406 requires a code of ethics for top financial officers.

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Defining Corporate Culture 3 of 3
• An ethical corporate culture is measured in the following ways:
– Management and board demonstrate commitment to integrity, core values, ethics
codes through communications and actions
– Employees encouraged and required to have hands-on involvement in compliance,
especially internal control systems and reporting systems
– Ethical leadership starts with the tone at the top
– Employees expected to receive communication through resolutions and corrective
actions related to ethical issues
– Employees can report policy exceptions anonymously to any member of the
organization

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 8-2
The Role of Corporate Culture in
Ethical Decision Making

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 The Role of Corporate Culture in
Ethical Decision Making 1 of 6
• Corporate culture has been associated with a company’s success or failure.
• Explicit statements of values, beliefs, customs, and expected behavior
usually come from upper management.
• Corporate culture is often expressed informally through statements that
communicate the wishes of management (both direct and indirect).
• A culture that emphasizes the importance of ethics and social responsibility
can reduce misconduct.

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 The Role of Corporate Culture in
Ethical Decision Making 2 of 6
Ethical Frameworks and Evaluations of Corporate Culture
• Two basic dimensions to describe an organization’s culture:
1. Concern for people
2. Concern for performance
• There are four organizational culture classifications:
• Apathetic culture – Minimal concern for either people or performance
• Caring culture – High concern for people but minimal concern for performance issues
• Exacting culture – Little concern for people but a high concern for performance
• Integrative culture – High concern for people and performance
• Cultural audit – Assessment of an organization’s values

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 FIGURE 8-2 Company Examples of the
Four Organizational Cultures
Culture Company Example
Caring Culture Ben & Jerry’s embraces community causes, treats its employees
fairly, and expends numerous resources to enhance the well-being of
its customers.
Apathetic Culture Countrywide Financial seemed to show little concern for employees
and customers. The company’s culture appeared to encourage
unethical conduct in exchange for profits.
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.
Exacting Culture United Parcel Systems (UPS) employees are held to high standards
to ensure maximum performance, consistency of delivery, and
efficiency.
O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 The Role of Corporate Culture in
Ethical Decision Making 3 of 6
Ethics as a Component of Corporate Culture
• The ethical component of corporate culture is a significant factor in ethical
decision making.
• Culture dictates hiring people with specific, similar values.
• If 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.
• If an organization values ethical behavior, it rewards them through
recognition and awards in a consistent and balanced manner.
• All performance at the threshold level should be acknowledged, with praise
or rewards given as close to performance as possible.
O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 The Role of Corporate Culture in
Ethical Decision Making 4 of 6
Compliance Versus Values-Based Ethical Cultures
• Compliance culture – A legalistic approach to ethics
– Codes of conduct established with compliance as their focus
– Revolves around risk management
– Lack of long-term focus on values and integrity

• Values-based ethics culture – Relies on an explicit mission statement that

defines the core values of the firm and how customers and employees
should be treated
– Top-down integrity approach with shared values, norms that provide guides for
behavior, and visible artifacts such as codes of ethics that provide a standard of
conduct
O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Discussion Activity

• Which is better: compliance or values-based culture?

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Discussion Activity Debrief

• Why is the compliance approach good in the short term?

• Why is a compliance element necessary in developing a values-based
ethical culture?

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 The Role of Corporate Culture in
Ethical Decision Making 5 of 6
Differential Association
• Differential association – The idea that people learn ethical or unethical
behavior while interacting with others who are part of their role-sets or
belong to other intimate personal groups
– More likely to result in unethical behavior if the individual associates primarily with
persons who behave unethically

• 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.

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 The Role of Corporate Culture in
Ethical Decision Making 6 of 6
Whistle-Blowing
• Whistle-blowing – Exposing an employer’s wrongdoing to outsiders such as
the media or government regulatory agencies
– Sometimes used to refer to internal reporting

• SOX and Federal Sentencing Guidelines for Organizations (FSGO)

institutionalized internal whistle-blowing
– Incentives to report through Dodd–Frank Act
– Qui tam relator – An employee who provides information to the government about a
company’s wrongdoing under the Federal False Claims Act
– Whistle-blowing requires the individual have adequate knowledge of wrongdoing that
could damage society.
O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 TABLE 8-3 Questions to Ask Before
Engaging in External Whistle-Blowing
Checklist of Questions to Ask Before Going to External Sources
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?

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Debate Issue: Take a Stand
• Laws encourage members of organizations to report misconduct.
– Reporting can result in monetary rewards.
• Whistle-blowers in general do not get good treatment and often have trouble
finding employment after they report misconduct.
• Companies with good internal reporting systems have fewer whistle-blowers
that report externally in an attempt to obtain rewards.
• Take a stand:
1. Government support through financial incentives for reporting misconduct
in organizations is effective and benefits society.
2. Government support of whistle-blowing should be redirected toward
stronger incentives for internal reporting of misconduct, not external
whistle-blowing that could be harmful to the individual and the
organization.
O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 8-3
Organizational Structure

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Organizational Structure 1 of 1
• Centralized organization – Decision-making authority is concentrated in
the hands of top-level managers, and little authority is delegated to lower
levels.
– Suited to organizations that make high-risk decisions and have lower-level managers
not highly skilled in decision making
– Typically have little upward communication
– Strict formalization, may be more ethical than decentralized

• Decentralized organization – Decision-making authority is delegated as far

down the chain of command as possible.
– Flow of information in both directions
– Managers can react more quickly to changes

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Characteristic Centralized Decentralized
TABLE 8-5 Hierarchy of authority Centralized Decentralized

Structural Flexibility Low High

Comparison of Adaptability Low High

Organizational Problem recognition Low High

Types Implementation High Low

Dealing with changes Poor environmental Good

complexity
Rules and procedures Many and formal Few and informal

Division of labor Clear-cut Ambiguous

Span of control Many employees Few employees

Use of managerial techniques Extensive Minimal

Coordination and control Formal and Informal and

impersonal personal

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Knowledge Check
Question: Which organization structure is characterized by low flexibility, low
adaptability, and low problem recognition?

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 8-4
Group Dimensions of Corporate
Structure and Culture

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Group Dimensions of Corporate
Structure and Culture 1 of 2
Types of Groups
• Formal group – An assembly of individuals with an organized structure that is
explicitly accepted by the group
– Committee – Formal group of individuals assigned to a specific task
– Work groups – Subdivide duties within specific functional areas of a company
o May or may not work in the same department

– Teams – Bring together the expertise of employees from several different areas of the
organization

• Informal group – Two or more individuals with a common interest but without
an explicit organizational structure
– Grapevine, informal channels of communication
O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 TABLE 8-7 Business Team/Group Differences

Team Group
The leader acts as a facilitator. The leader dominates and controls the
group.
The members have active participation The leader is apparent and will conduct
in the discussions and eventual the meeting.
outcome.
The team members decide on the The leader usually assigns work to the
disbursements of work assignments. members.

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Group Dimensions of Corporate
Structure and Culture 2 of 2
Group Norms
• Group norms – Standards of behavior groups expect of their members
– Help define acceptable and unacceptable behavior
– 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

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 8-5
Variation in Employee Conduct

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 TABLE 8-8 Variation in Employee Conduct

10% 40% 40% 10%

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

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

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Variation in Employee Conduct 1 of 1
• Bottom 10%
– Take advantage of situations to further their own personal interests
– More likely to manipulate, cheat, act in a self-serving manner
• Middle-bottom 40%
– Go along on most matters
– Most concerned about the social implications of their actions
• Middle-top 40%
– Always try to follow company policies, rules
– Strong grasp of corporate culture’s definition of acceptable behavior
• Top 10%
– Maintain formal ethical standards that focus on rights, duties, and rules
– Believe that their values are right and superior to the values of others
O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 8-6
Can People Control Their Actions
Within a Corporate Culture?

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Can People Control Their Actions
Within a Corporate Culture? 1 of 1
• Many people find it hard to believe an organization’s culture can exert so
strong an influence on individuals’ behavior.
• Ethical decisions within organizations are often made by committees and
formal and informal groups, not by individuals.
• Most new employees in highly bureaucratic organizations have limited
input.
– Individuals entering business usually need years of experience within a specific
industry to understand how to resolve ethical close calls.

O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.