Societal norms require that businesses assume responsibility and ensure that ethical

standards are properly implemented on a daily basis. Such a requirement is not without
controversy. Some business leaders believe that personal moral development and
character are all that are needed for effective organizational ethics. These business
leaders are supported by certain business educators who believe ethics initiatives should
arise inherently from corporate culture and that hiring ethical employees will limit
unethical behavior within the organization. A contrary position, and the one espoused
here, is that effective organizational ethics can only be achieved by proactive leadership
whereby employees from diverse backgrounds are provided a common understanding
of what is defined as ethical behavior through formal training, thus creating an ethical
organizational climate. In addition, changes are needed in the regulatory system, in the
organizational ethics initiatives of business schools, and in societal approaches to the
development and implementation of organizational ethics in corporate America.
According to Richard L. Schmalensee, Dean of the MIT Sloan School of Management,
the question is, “How can we produce graduates who are more conscious of their
potential . . . and their obligation as professionals to make a positive contribution to
society?” He stated that business schools should be held partly responsible for the cadre
of managers more focused on short-term games to beat the market rather than building
lasting value for shareholders and society (Schmalensee 2003).

This introductory chapter provides an overview of the organizational ethical decision

making process. It begins with a discussion of how ethical decisions are made and then
offers a framework for understanding organizational ethics that is consistent with
research, best practices, and regulatory developments.Using this framework, the chapter
then discusses how ethical decisions are made in the context of an organization and
poses some illustrative ethical issues that need to be addressed in organizational ethics.

Defining Organizational Ethics

Ethics has been termed the study and philosophy of human conduct, with an emphasis
on the determination of right and wrong. For managers, ethics in the workplace refers to
rules (standards, principles) governing the conduct of organization members. Most
definitions of ethics relate rules to what is right or wrong in specific situations. For
present purposes, and in simple terms, organizational ethics refers to generally accepted

standards that guide behavior in business and other organizational contexts (LeClair,
Ferrell, and Fraedrich 1998).1

One difference between an ordinary decision and an ethical one is that accepted rules
may not apply and the decision maker must weigh values in a situation that he or she
may not have faced before. Another difference is the amount of emphasis placed on a
person’s values when making an ethical decision. Whether a specific behavior is judged
right or wrong, ethical or unethical, is often determined by the mass media, interest
groups, the legal system, and individuals’ personal morals. While these groups are not
necessarily “right,” their judgments influence society’s acceptance or rejection of an
organization and its activities. Consequently, values and judgments play a critical role in
ethical decision making, and society may institutionalize them through legislation and
social sanctions or approval.

Individual vs. Organization

Most people would agree that high ethical standards require both organizations and
individuals to conform to sound moral principles. However, special factors must be
considered when applying ethics to business organizations. First, to survive, businesses
must obviously make a profit. Second, businesses must balance their desire for profits
against the needs and desires of society. Maintaining this balance often requires
compromises or tradeoffs. To address these unique aspects of organizational ethics,
society has developed rules-both explicit (legal) and implicit-to guide owners, managers,
and employees in their efforts to earn profits in ways that do not harm individuals or
society as a whole. Addressing organizational ethics must acknowledge its existence in a
complex system that includes many stakeholders that cooperate, provide resources,
often demand changes to encourage or discourage certain ethical conduct, and
frequently question the balancing of business and social interests. Unfortunately, the
ethical standards learned at home, in school, through religion, and in the community are
not always adequate preparation for ethical pressures found in the workplace.

Organizational practices and policies often create pressures, opportunities, and

incentives that may sway employees to make unethical decisions. We have all seen news
articles describing some “decent, hard-working family person” who engaged in illegal or
unethical activities. The Wall Street Journal (Pullman 2003) reported that Betty Vinson, a
midlevel accountant for WorldCom, Inc., was asked by her superiors to make false
accounting entries. Ms. Vinson balked a number of times but then caved in to
management and made illegal entries to bolster WorldCom’s profits. At the end of 18
months she had helped falsify at least $3.7 billion in profits. When an employee’s
livelihood is on the line, it is difficult to say “no” to a powerful boss. At the time this
chapter was written, Ms. Vinson was awaiting sentencing on conspiracy and securities
fraud and preparing her 12 year old daughter for the possibility that she will be
incarcerated.

Importance of Understanding Organization Ethics

Understanding organizational ethics is important in developing ethical leadership. An
individual’s personal values and moral philosophies are but one factor in decision-
making processes involving potential legal and ethical problems. True, moral rules can
be related to a variety of situations in life, and some people do not distinguish everyday
ethical issues from those that occur on the job. Of concern, however, is the application
of rules in a work environment.

Just being a good person and, in your own view, having sound personal ethics may not
be sufficient to handle the ethical issues that arise in the workplace. It is important to
recognize the relationship between legal and ethical decisions. While abstract virtues
such as honesty, fairness, and openness are often assumed to be self-evident and
accepted by all employees, a high level of personal, moral development may not
prevent an individual from violating the law in an organizational context, where even
experienced lawyers debate the exact meaning of the law. Some organizational ethics
perspectives assume that ethics training is for people who have unacceptable personal
moral development, but that is not necessarily the case. Because organizations are
comprised of diverse individuals whose personal values should be respected, agreement
regarding workplace ethics is as vital as other managerial decisions. For example, would
an organization expect to achieve its strategic mission without communicating the
mission to employees? Would a firm expect to implement a customer relationship
management system without educating every employee on his or her role in the
system? Workplace ethics needs to be treated similarly-with clear expectations as to
what comprises legal and ethical conduct.

Employees with only limited work experience sometimes find themselves making
decisions about product quality, advertising, pricing, hiring practices, and pollution
control. The values that they bring to the organization may not provide specific
guidelines for these complex decisions, especially when the realities of work objectives,
group decision making, and legal issues come into play. Many ethics decisions are close
calls.Years of experience in a particular industry may be required to know what is
acceptable, and what is not acceptable.

Even experienced managers need formal training about workplace ethics to help identify
legal and ethical issues. Changing regulatory requirements and ethical concerns, such as
workplace privacy issues, make the ethical decision-making process very dynamic. With
the establishment of values and training, a manager will be in a better position to assist
employees and provide ethical leadership.

Understanding Ethical Decision Making

It is helpful to consider the question of why and how people make ethical decisions.
Typically it is assumed that people make difficult decisions within an organization in the
same way they resolve difficult issues in their personal lives. Within the context of
organizations, however, few managers or employees have the freedom to decide ethical
issues independently of workplace pressures. Philosophers, social scientists, and various
academics have attempted to explain the ethical decision-making process in
organizations by examining pressures such as the influence of coworkers and
organizational culture, and individual-level factors such as personal moral philosophy.

Figure 1.1 presents a model of decision making. This model synthesizes current
knowledge of ethical decision making in the workplace within a framework that has
strong support in the literature (e.g., Ferrell and Gresham 1985; Ferrell, Gresham, and
Fraedrich 1989; Hunt and Vitell 1986; Jones 1991; Trevino 1986). The model shows that
the perceived intensity of ethical and legal issues, individual factors (e.g., moral
development and personal moral philosophy), and organizational factors (e.g.,
organizational culture and coworkers) collectively influence whether a person will make
an unethical decision at work. While it is impossible to describe precisely how or why an
individual or work group might make such a decision, it is possible to generalize about
average or typical behavior patterns within organizations. Each of the model’s
components is briefly described below; note that the model is practical because it
describes the elements of the decision-making process over which organizations have
some control.

______________________________________________________________
__________
Figure 1.1

Framework for Understanding Ethical Decision Making in the Workplace

Individual Personal moral

factors philosophy

Stage of moral

development

factors
Ethical issue intensity

Organizational

factors

Organizational

culture

Coworkers and

superiors

Opportunity

Ethical/Unethical,

Decision

______________________________________________________________
__________

Ethical Issue Intensity

One of the first factors to influence the decision-making process is how important or
relevant a decision maker perceives an issue to be, that is, the intensity of the issue
(Jones 1991). The intensity of a particular issue is likely to vary over time and among
individuals and is influenced by the values, beliefs, needs, and perceptions of the
decision maker; the special characteristics of the situation; and the personal pressures
weighing on the decision. All of the factors explored in this chapter, including personal
moral development and philosophy, organizational culture, and coworkers, determine
why different people perceive issues with varying intensity (Robin, Reidenbach, and
Forrest 1996). Unless individuals in an organization share some common concerns about
specific ethical issues, the stage is set for conflict. Ethical issue intensity reflects the
sensitivity of the individual, work group, or organization, and triggers the ethical
decision-making process.

Management can influence ethical issue intensity through rewards and punishments,
codes of conduct, and organizational values. In other words, managers can affect the
perceived importance of ethical issues through positive and negative incentives (Robin,
Reidenbach, and Forrest 1996). If management fails to identify and educate employees
about problem areas, these issues may not reach the critical awareness level of some
employees. New employees who lack experience in a particular industry, for example,
may have trouble identifying both ethical and legal issues. Employees therefore need to
be trained as to how the organization wants specific ethical issues handled.

Identifying ethical issues that employees might encounter is a significant step in

developing employees’ ability to make decisions that enhance organizational ethics.

New federal regulations that hold both organizations and their employees responsible
for misconduct require organizations to assess areas of ethical and legal risk. Based on
both the 2002 Sarbanes-Oxley Act and the United States Sentencing Commission
guidelines, there are strong directives to encourage ethical leadership. If ethical
leadership fails, especially in corporate governance, there are significant penalties. When
organizations communicate to employees that certain issues are important, the intensity
of the issues is elevated. The more employees appreciate the importance of an issue, the
less likely they are to engage in questionable behavior associated with the issue.
Therefore, ethical issue intensity should be considered a key factor in the decision-
making process because there are many opportunities for an organization to influence
and educate employees on the importance of high risk issues.