Chapter 3

Organizational and Managerial Ethics

1
Organizational Ethics

2
 Defining Organizational Ethics
• Business Ethics separate from General Ethics
for 2 reasons:
– Other parties have a vested interest in the ethical
performance of an organization
– In a work environment, you may be placed in a
situation where your personal value system may
clash with the ethical standards of the
organization’s operating culture

3-3
 Defining Organizational Ethics
• Organizational culture – the values, beliefs,
and norms that all the employees of that
organization share
• The culture represents the sum of all the
policies and procedures (written/informal)
from each of the functional departments in
the organization.

3-4
 Defining Organizational Ethics
• In this chapter, we will examine individual
departments within an organization and
ethical dilemmas that members of those
department face each day.
• Value chain – the key functional inputs that an
organization provides in the transformation of
raw materials into a delivered product or
service

3-5
 Defining Organizational Ethics
• Key Functions
– Research & Development: which develops and
creates new product designs.
– Manufacturing: building the product.
– Marketing (and advertising)
– Sales
– Customer service
Supporting each of these functional areas are the
line functions:
3-6
 Primary Line Functions
• Human Resource Management: which
coordinates the recruitment, training, and
development of personnel for all aspects of
the organization.
• Finance: include internal and external
accounting personnel, and external auditors
who are called upon to certify the accuracy of
a company’s financial statements.
 Primary Line Functions
• Information system: maintain the technology
backbone of the organization data transfer
and security, email communications, as well as
the hardware and software needed for the
organization.
• Management: the supervisory role that
oversees all operational functions.
 Primary Line Functions
• Each of these functional line areas can
represent a significant commitment of
resources (personnel, technology and dollars).
• From an ethical perspective, employees in
each area can face ethical challenges and
dilemmas.
Organizational Ethics

3-10
 Ethics in R & D
• Directly involved in future growth
– Without new products to sell, organizations can
lose their customers to competitors who are
offering products that are ‘better, faster, cheaper’.
– R&D teams incorporate customer feedback from
market research and competitive feedback

3-11
 Ethics in R & D
• However, alongside this responsibility comes
an equally critical commitment to the
consumer in the provision of product quality,
safety, and reliability
• Defective products not only put consumers at
risk but also generate negative press coverage
(damaging the organization’s reputation).

3-12
 Ethics in R & D
• When we consider these opposing objectives,
the potential for ethical dilemmas is
considerable.
• R&D teams are tasked with making a complex
set of risk assessments and technical
judgments in order to deliver a product
design.

3-13
 Ethics in R & D
• However, if the delivery of that design does
not match the manufacturing cost figures that
are needed to sell the product at a required
profit margin, then some tough decisions have
to be made.

3-14
 Ethics in R & D
• If “better, cheaper, faster” is the ideal, then
compromises have to be made in functionality
or manufacturing to meet a targeted cost
figure.
• If too many features are taken out, marketing
and advertising won’t have a story to tell, and
the salespeople will face difficulties in selling
the product against stiff competition.

3-15
 Ethics in R & D
• If too few changes are made, the company
won’t be able to generate a profit on each unit
and meet its obligations to shareholders who
expect the company to be run efficiently and
to grow over the long term.

3-16
 Ethics in R & D
• For the R&D team, the real ethical dilemmas
come when decisions are made about product
quality:
• Do we use the best materials available or the
second best to save some money? Do we run
a full battery of tests or convince ourselves
that the computer simulations will give us all
the information we need?

3-17
 Ethics in Manufacturing
• The relationship between R&D and
manufacturing is often a challenging one.
• Managers complain about designs being
thrown “over the wall” to manufacturing with
the implication that the product design may
meet all the required specifications, but now it
falls to the manufacturing team to actually get
the thing built.

3-18
 Ethics in Manufacturing
• The pressures here are very similar to those in
the R&D function as manufacturers face the
ethical question:

• “Do you want it built fast, or do you want it

built right?”

3-19
 Ethics in Manufacturing
• From an organizational perspective, you want
both, especially if you know that your biggest
competitor also is racing to put a new product
on the market (and if it gets there before you
do, all your sales projections for your product
will be worthless).

3-20
 Ethics in Manufacturing
• Here again, you face the ethical challenges
inherent in arriving at a compromise—which
corners can be cut and by how much.
 Ethics in Manufacturing
• You want to build the product to the precise
design specifications, but what if there is a
supply problem? Do you wait and holdup
delivery, or do you go with an alternative (and
less reliable) supplier? Can you be sure of the
quality that alternative supplier will give you?
 Ethics in Marketing
• Once the manufacturing department delivers a
finished product, it must be sold. The marketing
process(which includes advertising, public relations,
and sales) is responsible for ensuring that the
product reaches the hands of a satisfied customer.

3-23
 Ethics in Marketing
• If the marketers did their research correctly and
communicated the data to the R&D team accurately,
and assuming the finished product meets the original
design specifications and the competition hasn’t
beaten you to market with their new product, this
should be a slam dunk, but with all these
assumptions, a great deal can go wrong.

3-24
 Ethics in Marketing
• Marketers see themselves as providing products (or
services) to customers who have already expressed a
need for and a desire to purchase those products.
• In this respect, marketers are simply communicating
information to their customers about the
functionality and availability of the product, and then
communicating back to the organization the
feedback they receive from those customers.

3-25
 Ethics in Marketing

• Critics of marketing see it as a more manipulative

process whereby unsuspecting customers are
induced to buy products they don’t really need and
could quite easily live without by ‘slick’ commercials
and advertisements.

3-26
 Ethics in Marketing
• From an ethical standpoint, these opposing
arguments can be seen to line up with distinct ethical
theories. Marketers emphasize customer service and
argue that since their customers are satisfied, the
good outcome justifies the methods used to achieve
that outcome no matter how misleading the message
or how unnecessary the product sold.

3-27
 Ethics in Marketing
• At some point you reach a place where customers
can survive without your product or service, and
marketing must now move from informing customers
and prospects about the product or service to
persuading or influencing them that their lives will be
better with this product or service and, more
importantly, they will be better with your company’s
version.

3-28
 Ethics in HR - I
The HR Relationship:
• The creation of the job description for the position.
• The recruitment and selection of the right candidate for the position.
• The orientation of the newly hired employee
• The efficient management of payroll and benefits for the (hopefully)
happy and productive employee.
• The documentation of periodic performance reviews.
• The documentation of disciplinary behavior and remedial training if
needed.
• The creation of a career development program for the employee.
• Coordination of final paperwork - severance benefits and Exit
Interview.

3-29
 Ethics in HR - I
• You are behind schedule on a building project, and your boss
decides to hire some illegal immigrants to help get the project
back on track. They are paid in cash “under the table,” and
your boss justifies the decision as being “a ‘one-off ’—besides,
the INS [Immigration and Naturalization Service] has bigger
fish to fry than a few undocumented workers on a building
site! If we get caught, we’ll pay the fine—it will be less than
the penalty we would owe our client for missing our deadline
on the project.”

3-30
 Ethics in HR - I
• Your company has hired a new regional vice president. As the
HR specialist for her region, you are asked to process her
payroll and benefits paperwork. Your boss instructs you to
waive the standard one-year waiting period for benefits
entitlement and enroll the new VP in the retirement and
employee bonus plan immediately. When you raise the
concern that this is illegal, your boss informs you that this new
VP is a close friend of the company president and advises you
that, in the interests of your job security, you should “just do it
and don’t ask questions!”

3-31
 Ethics in HR - I
• On your first day as the new HR specialist, you mention to your
boss that the company appears to be out of employee
handbooks and both the minimum wage and Occupational
Safety and Health Administration (OSHA) posters that are
legally required to be posted in the employee break room.
Your boss laughs and says, “We’ve been meaning to get
around to that for years—trust me, there will always be some
other crisis to take priority over all that administrative stuff .”

3-32
 Ethics in HR - II
1. HR professionals must help ensure that ethics is a top
organizational priority.
2. HR must ensure that the leadership selection and
development processes include an ethics component.
3. HR is responsible for ensuring that the right programs and
policies are in place.
4. HR must stay abreast of ethics issues (and in particular the
changing legislations and sentencing guidelines for
unethical conduct).

3-33
 Ethics in Finance - I
The finance function of an organization can be
divided into three distinct area:
•Financial Transactions (Receiving money from
customers and using that money to pay employees,
suppliers and other creditors).
•The Accounting Function (keeps track of all those
financial transactions by documenting the money coming in
(credits) and money going out (debits) and balancing the
account at the end of the period)

3-34
 Ethics in Finance - I I
• The Auditing Function: (when an organization’s
financial statements, or books, have been balanced,
they must then be reported to numerous interested
parties)
 Ethics in Finance
Ethical Challenges:
• GAAP (Generally Accepted Accounting
Principles)
– The generally accepted accounting principles that
govern the accounting profession – not a set of laws
and established legal precedents, but rather a set of
standard operating procedures within the profession
– A set of accurate financial statements that present
an organization as financial stable, operationally
efficient, and positioned for strong future growth
can do a great deal to enhance the reputation and
goodwill of an organization

3-36
 Ethics in Finance - II
Ethical Challenges:
• Creative Bookkeeping Techniques
– It is legal to defer receipts from one quarter to
the next to manage your tax liability
• Conflicts of Interest
– A situation where one relationship or obligation
places you in direct conflict with an existing
relationship or obligation

3-37
Managerial
Ethics
 Managerial Ethics
Ethics Defined
– Principles, values, and beliefs that define what is
right and wrong decisions and behavior.
– Many decisions that managers make require them
to consider both the process and who’s affected
by the result.
Exhibit - Factors That Determine Ethical and Unethical
Behavior
 Factors That Affect Employee Ethics
• Moral Development
– Measure of independence from outside
influences.
• Levels of Individual Moral Development
– Preconventional level
– Conventional level
– Principled level
 Levels of Individual Moral Development

a) Preconventional level
 A person’s choice between right and wrong is based on
personal consequences from outside sources, such as
physical punishment & rewards.

b) Conventional level
 Ethical decisions rely on maintaining standards and living up
to the expectations of others.

c) Principled level
 Individuals define moral values apart from the authority of
the groups to which they belong or society in general.
Exhibit Stages of Moral Development
 Stage of moral development interacts with:

• Individual characteristics
• The organization’s structural design
• The organization’s culture
• The intensity of the ethical issue
Factors That Affect Employee Ethics
Individual Characteristics
– Values
• Basic convictions about what is right or wrong.
• Employees in the same organization often posses very
different values.
– Personality
• Ego strength - A personality measure of the strength of a
person’s convictions
• People with high ego strength are likely to resist impulses to
act unethically and instead follow their convictions.
• Individuals with high ego strength are more consistent in
their judgments and actions than those with low ego
strength.
Factors That Affect Employee Ethics
 Locus of Control
– A personality attribute that measures the degree to which people
believe they control their own life.
– Internal locus: believe they control their own destinies.
– They are more likely to take responsibility for consequences and rely on
their own internal standard of right and wrong to guide their behavior.
– External locus: the belief that what happens to you is due to luck or
chance.
– They are less likely to take personal responsibility for the consequences
of their behavior and more likely to rely on the external forces.
 Factors That Affect Employee Ethics
• Structural Variables
– Organizational characteristics and mechanisms that guide and influence
individual ethics:
– Those structure that minimize ambiguity and uncertainty with formal
rules and regulations and those that continuously remind employees of
what is ethical are more likely to encourage ethical behavior.
• Organization’s goals: use to guide and motivate employees.
• People who don’t reach set goals are more likely to engage
in unethical behavior.
• Performance appraisal systems: outcome
• Reward allocation systems
• Behaviors (ethical) of managers
Factors That Affect Employee Ethics
• Organization’s Culture
– Organization’s culture consists of the shared
organizational values
– An organization’s values are reflected in the decisions
and actions of its employee
– Values-Based Management: many organizations use
• A form of management in which organization’s values guide
employees in the way they do their job.
– The Purposes of Shared Values
• Guiding managerial decisions
• Shaping employee behavior
• Building team spirit
 Factors That Affect Employee Ethics

• A culture that is strong and support

high ethical standards has a very
powerful and positive influence on the
decision to act ethically or unethically.
 Factors That Affect Employee Ethics
• Issue intensity
• How important an ethical issue is to an individual.
• The greater the number of people harmed, the more
agreement that the action is wrong; the greater the
likelihood that the action will cause harm, the more
immediately that the consequences of the action will be
felt, and closer the person feels to the victim and the more
concentrated the effect of the action on the victim, the
greater the issue intensity or importance.
• When an ethical issue is important, employees are more
likely to behave ethically.
Exhibit - Determinants of Issue Intensity
 How Managers Can Improve Ethical
Behavior in An Organization
1. Hire individuals with high ethical standards.
2. Establish codes of ethics and decision rules.
3. Lead by example.
4. Set realistic job goals and include ethics in
performance appraisals.
5. Provide ethics training.
6. Conduct independent social audits.
7. Provide support for individuals facing ethical
dilemmas.
 Exhibit - Codes of Ethics

Cluster 1. Be a Dependable Cluster 3. Be Good to Customers

Organizational Citizen 1. Convey true claims in product
1. Comply with safety, health, and advertisements.
security regulations. 2. Perform assigned duties to the
2. Demonstrate courtesy, respect, best of your ability.
honesty, and fairness. 3. Provide products and services of
3. Illegal drugs and alcohol at work are the highest quality.
prohibited.
Cluster 2. Do Not Do Anything Unlawful
4. Manage personal finances well.
or Improper That Will Harm the
5. Exhibit good attendance and
Organization
punctuality.
1. Conduct business in compliance with all
6. Follow directives of supervisors.
laws.
7. Do not use abusive language.
2. Payments for unlawful purposes are
8. Dress in business attire.
prohibited.
9. Firearms at work are prohibited.
3. Bribes are prohibited.
4. Avoid outside activities that impair
duties.
5. Maintain confidentiality of records.
6. Comply with all antitrust and trade
 Effective Use of a Code of Ethics
• Develop a code of ethics as a guide in handling
ethical dilemmas in decision making.
• Communicate the code regularly to all employees.
• Have all levels of management continually
reaffirm the importance of the ethics code and
the organization’s commitment to the code.
• Publicly reprimand and consistently discipline
those who break the code.
 The Value of Ethics Training
• Can make a difference in ethical behaviors.
• Increases employee awareness of ethical issues
in business decisions.
• Clarifies and reinforces the organization’s
standards of conduct.
• Helps employees become more confident that
they will have the organization’s support when
taking unpopular but ethically correct stances.
 Exhibit - Being an Ethical Leader

• Be a good role model by being ethical and honest.

° Tell the truth always.
° Don’t hide or manipulate information
° Be willing to admit your failures.
• Share your personal values by regularly
communicating them to employees.
• Stress the organization’s or team’s important shared
values.
• Use the reward system to hold everyone
accountable to the values.
 Provide support for individuals facing ethical
dilemmas.
• Employees who face ethical dilemmas need
protective mechanisms so they can do what is
right without fear of reprimand.
• May designate ethical counselor for
employees facing a ethical dilemma
• Advisors also might advocate the ethically
right alternatives
• Some organizations may appoint ethics
officers
 Managing Ethical Lapses and Social
Irresponsibility

• Provide ethical leadership

• Protect employees who raise ethical issues
(whistle-blowers)
 Awareness of Social Issues
• Social Entrepreneurs
– Are individuals or organizations who seek out
opportunities to improve society by using
practical, innovative, and sustainable approaches.
– Want to make the world a better place and have a
driving passion to make that happen.
 Businesses Promoting Positive Social
Change
• Corporate Philanthropy
– Campaigns
– Donations
– Funding own foundations
• Employee Volunteering Efforts
– Team volunteering
– Individual volunteering during work hours