CHAPTER 10
MANAGING ORGANIZATIONAL ETHIC &
DEVELOPING GOOD ETHICS PROGRAM
Table of Contents
10.1 Introduction
10.2 Organizational culture
10.2.1 Importance of Good Organizational Culture
10.3 Reasons for Unethical Behaviour in Organizations
10.4 Organizational Ethical Climate
10.5 Types of Corporate Culture
10.6 Cultural Audit
10.7 Differential Association
10.8 Danger Sings of Ethical Risk in an Organization
10.9 Leadership and Ethics
10.10 Leadership and Use of Power to Shape an Ethical Corporate Culture
10.11 Organizational Structure and Business Ethics
10.12 Group Dimensions and Corporate Culture
Cont’d
10. 13 Stages of Group Development
10.14 Types of Groups
10.15 Group Norms
10.16 Developing Good Ethics Program
10.16.1 Explicit Ethics Development Programs
10.16.2 Implicit Ethics Development Programs
10.17 Managing and Controlling the Ethics Program
10.18 Ethics Audit
10.18.1 Benefits of Ethics Auditing
10.18.2 Tools for Ethics Audit
10.18.3 Framework for Ethics Audit
10.19 Steps to resolve ethical dilemma in an Organization
10.20 Global Ethics Management
Introduction
The question that often arises in an organization is how to promote and ethical
conduct?
There are two approaches to address this query:
Individual Approach: an individual’s behaviour is affected by factors that are internal
to the individuals.
Organizational Approach: wherein the managers believe that an individual’s
behaviour is primarily affected by the factors that are external to the individuals, such
as organizational rewards, organizational culture and other economic environment.
An ethical behaviour of an individual is thus affected by both the individual and
organizational factors.
Organizational Culture
Culture is a set of beliefs, values, and norms shared by group of individuals.
The belief represents the feeling of individuals about something. It is something that is accepted,
considered, believed or opined to be true by the individuals.
Values are the accepted moral principles and beliefs of an individual or group.
Norms or Customs are the accepted and standard way of doing things.
Ravasi and Schultz have defined an organizational culture as, “a set of shared mental
assumptions that guide interpretation and action in organizations by defining appropriate
behavior for various situations”
Thus an ethical culture of an organization guides the employees regarding sanctioned or
unsanctioned ways of ethical decision making.
Importance of Good Organizational Culture
Creating an ethically oriented organization is a very challenging task however;
there are many direct and indirect benefits of an ethically oriented
organization.
A good organizational culture may lead to greater employee commitment, high
individual satisfaction, increased social responsibility, less legal problems and
penalties, increased financial performance, good organizational reputation and
Image and increased productivity.
Reasons for Unethical Behaviour in Organization
There are many reasons for prevalent unethical behaviour in an organization:
1. According to Mintzberg, “it pays to be good”. When managers fear that moral actions would
be costly to their firms then the unethical behaviour in organizations becomes common.
2. There exist managerial values that undermine integrity.
3. It has been observed that organizations develop counternorms (accepted organizational
practices) that are contrary to the prevailing ethical standards.
4. Many organizations are often seen rewarding unethical behaviour that violates ethical
standards.
5. Pressure, Need, Opportunity and Predisposition are antecedents of unethical activities in an
organization. Here, predisposition means inclinational towards illegal activities.
Organizational Ethical Climate
The ‘ethical climate’ of an organization guides the individual members of organization about what to
do in ethical situations
An ethical climate also significantly increases the job satisfaction among the employees
The ethical climate varies from organization to organization.
The ethical climate sets the tone of decision making at all levels in all circumstances.
If the ethical climate of the organization is ambiguous then in such case the ethical dilemma will often
result in unethical behavior.
Types of Corporate Culture
An organizational culture plays pivotal role in the moral development of organizational members.
The Democratic Culture in an organization encourages the members to take decisions by taking
into account different views and interests. This culture is helpful in resolving conflict at lower
organizational levels
In an Autocratic or Authoritarian or Mechanistic Culture of an organization, the decisions are
based on formal authority and growth of moral development and expression of different views
may be arrested.
The traditional ethics- based corporate culture was a Compliance Oriented Culture in which the
main focus was on creation of codes and requirements to adhere to the existing laws and
regulations.
However, a gradual shift from compliance oriented ethical culture to value-based ethical culture
has been observed in the last decade. The value-based ethical culture is based upon a clear
mission statement defining core values of the firm.
Organizations nurturing Apathetic Culture exhibit minimal concern for people or
performance. In this culture the focus is mainly on fulfilment of self interest.
Organizations which nurture a Caring Culture show very high concern for its people
but very little concern for performance. However, it is difficult to find any company
shows little or no concern for employee’s performance.
An Exacting Culture: Organizations nurturing Exacting Culture exhibit high concern
for performance but minimal concern for its people.
An Integrative Culture: Organizations nurturing Integrative Culture exhibit high
concern for both people and performance.
Cultural Audit
The Corporate Culture of a company can be identified through a Cultural Audit.
A Cultural Audit aims to evaluate the current beliefs, customs, values, practices,
programs and processes of an organization and determine their cultural
appropriateness.
Some of the basic objectives of conducting a cultural audit are to improve cultural
sensitivity, build employees' loyalty, enhance employee productivity, increase the
client loyalty, and attract more new clients and investment.
A cultural audit has three stages:
• Assessment Stage: This involves review of documents, media, data
collection, focus study etc.
• Analysis Stage: This stage involves the analysis of reviews done and data
collected.
• Recommendation Stage: This stage involves make necessary
recommendations on the basis of the Cultural
Audit Done by the Organization.
Differential Association
The Theory of Differential Association was propounded by Edwin Sutherland to
explain how the individuals through interaction with others learn to become
criminals.
Some Business ethicists have taken a cue from this theory to define differential
association in organization as how the interactions with others make people in
organization learn unethical or ethical behavior.
This learning process is however more likely to result in unethical behavior
Danger Signs of Ethical Risk in an Organization
The firm should be proactive in identifying and dealing with such types of danger signs in order
to reduce if not eliminate the dangers of ethical risk
For example;
If a firm focuses on earning short-term revenues and starts ignoring its long term prospects,
then it is inviting risk of unethical behaviour in the organization.
If a firm is taking the ethical problems very casually and looks for readymade quick fix
solutions to address those ethical problems then it is inviting ethical risk in an organization
If a firm takes ethics only as a tool to manage public relations, then it is putting itself at
ethical risk.
If a firm is reluctant in taking an ethical stand when any financial cost is involved in doing so
then it is at ethical risk
If the internal environment of an organization discourages ethical behaviour and encourages
unethical behaviour then the firm is said to be at risk.
If a firm ignores or violates the laid down internal and external codes of ethics then it is putting
itself at ethical risk
If a firm has no laid down policies and guidelines for handling ethical issues then it is risking its
ethical climate
If a firm believes that ethics is only compliance to the law then it is risking its ethical climate
because, everything that is ethical may not be legal and everything that is legal may not be
ethical.
If a firm has no proper whistleblowing mechanism in place then it is putting its ethical climate at
risk the organization.
If a firm that is only concerned about the interest of its shareholders and ignores the interest of
other stakeholders then it is at ethical risk.
If a firm is compromising the merit with the favoritism or political influence or nepotism then it
is putting itself at ethical risk because such type of actions will only encourage unethical
behaviour inside the organization.
If a firm that has no proper established communication channel within the organization is only
encouraging the unethical acts and behaviour
Leadership & Ethics
Leaders are the people who guide and direct the employees of the organization and play crucial role in
determining the ethical orientation of the organization.
However, the leadership skills alone are not enough and a leader must have a strong ethical
orientation to meet the goals of an ethically oriented organization
A leader without ethical orientation may be a successful transformational leader but will probably not
successfully create an ethical organization because the followers largely accept and imitate the traits
of their leader
An ethical leader leads from the front and take moral responsibility for his/her actions and decision
making.
A good ethical leader is like a role model in the organization who exhibits highest standards of ethics
and sets a benchmark of ethical behavior in the organization.
Leadership & Use of Power to Shape an Ethical Corporate Culture
Since, the organizational leaders hold official positions and job titles hence, they wield certain
powers which they can use to shape the ethical climate of the organization.
Therefore, it is necessary to study the manner in which the leaders can effectively use their power.
Leaders have five important types of power vested in them:
i. Legitimate power
ii. Reward power,
iii. Coercive Power,
iv. Referent Power
v. Expert Power
All these five sources of power can be classified into two broad dimensions:
i. Positional power (power originating from the position)
ii. Personal power (power originating from within the person)
Positional Power: Positional power emanates from the position and job title held by the leaders in
an organization.
Legitimate Power - Due to the virtue of their position, the organizational leaders hold a
legitimate right to exert influence and wield certain power over the employees, and request
certain behaviour and conduct from them in order to support the vision and values of the
organization.
Reward Power - Leaders have the capacity to influence the behaviour of employees in the
organization through reward system like promotions, bonuses, pay hike, time offs, compliments,
attractive assignments, and performance measurement appraisal system.
Coercive Power - It is the power of the leader to coerce the employees of an organization
through measures like demotion, reprimand, unattractive work assignments, termination,
suspension, investigation, threats, and other disincentives, if they do something wrong or do not
comply.
Personal Power: The Leaders can exert influence over the employees in the
organization through their charismatic personality, knowledge and abilities.
Expert Power- A leader can gain power and respect by his knowledge, skill
and expertise in a specific field.
Referent Power - Leaders through their charismatic personality, and
interpersonal skill, may gain popularity, adulation and admiration of
employees. They have the capacity to influence employees through their
personality.
Organizational Structure and Business Ethics
Formal Structure:
In a formal organization the structure is consciously designed, clearly explained and
typically documented.
This documentation clearly defines the organizational goals, objectives, and roles of various
departments, units and individuals.
The formal organizational structure is typically pyramidal in shape with CEO and senior
managers at top, mid-level managers in middle and low-level managers at bottom.
Due to a highly bureaucratic set up and limited upward communication the top level
managers may be unaware of the ethical problems being faced by the employees
Research indicates that those at the bottom of the corporate ladder face strongest ethical
conflict in comparison to those at the middle and bottom of the corporate ladder and the
middle level managers.
Informal Structure:
Informal organizations are also known as ‘shadow organizations’ because they exist along
with the formal organizations
In an informal organizational structure the company has less formal regulations and the
employees enjoy considerable freedom, autonomy, and decision making authority.
The informal organization encourages the flow of information and its structure relies on
good relationship and cooperation between staff members with focuses on achieving
shared goals
These organizations are decentralized in operation .
The informal organizations manage to avoid many ethical dilemmas thorough widely
shared values and effective ethical code yet it is also true that an informal environment
may sometimes also create ethical challenges for new mangers
Group Dimensions and Corporate Culture
According to Edward Schein, “A group comprises of two or more persons who interact with one another,
are psychologically aware of one another, and perceive themselves to be a group”.
Some of the popular reasons for joining a group are:
Security: is one of the strongest reasons why people join groups. People feel more secure in groups
Esteem: Association with a high status, powerful or good cause group may increase the self esteem of
people and motivate them to join group.
Affiliation: People join group because they enjoy the company of those having similar background,
similar interest and common hobbies
Proximity: People working in close proximity with each other have high possibility of joining a group
Interaction: People are likely to join group if they are in frequent contact and interaction with each
other
Influence: People also join group under the influence of other person.
Power: Affiliation with some group may give power to the person
Identity: People associate with a group to explore their identity.
Huddling: means coming close together through informal get together or meetings etc.
Stages of Group Development
Every group passes through five stages in its life cycle:
Forming: In this stage, the team members may face some anxiety and stress as, they are not
certain about the roles of other team members.
Storming: In this stage competition and conflict emerge among the team members
Norming: In this stage, the team members form close interpersonal relationship and cohesion
develops among them. Norms and unwritten acceptable and unacceptable behaviours also develop
during this stage.
Performing: The Performing stage begins when team focuses less on building relationship and
more on achieving goals and objectives.
Adjourning: In the adjourning stage the team finalizes its work and disbands. The team leaders
engage celebration to mark the achievement of team and team members.
Types of Groups
A group has a major role to play in determining the ethical climate of the organization. There are two
main categories of groups which affect the ethical behavior in business:
Formal Group: A group is called a ‘formal group’ if it is formed with the purpose of achieving some
specific organizational task, goal or objective.
The structure of the group is well defined and the group members have professional relationship with
each other.
There are following types of Formal groups:
i. Command Groups: Command groups comprises of a leader and his subordinates.
ii. Work Groups: Work groups are those which operate within single functional areas and are
formed to subdivide duties within specified functional areas
iii. Teams: Team is formed when people having expertise in different areas come together to
achieve a common goal.
iv. Committees: A Committee is a formal group of individuals appointed to resolve specific
matters.
Informal Group: The groups which are formed naturally in response to common
interest exhibited by organizational members are called informal groups.
The leader of an informal group is selected by the group members and
communication happens through informal channels.
The informal group plays key role in grapevine communication which happens in
every organization.
Group Norms
Group Norms are the standard behaviors that group members are expected to observe.
The group whose norms a person accepts is called a ‘reference group’ and a person can be
a member of different groups at a same time and may observe the norms of all those
groups of which he is a member.
Any conflict in norms of group may compel a person to leave that group.
Most groups within an organization have their own set of norms for its members and, those
who do not conform to the group norms are pressurized to either observe it or leave the
group.
Sometimes the group norms may conflict with the organizational rules and regulations.
Developing Good Ethics Program
According to Brenner, there are two aspects of all ethics programs in an organization
i.e. explicit aspects and implicit aspects.
The Explicit forms of ethics program include policy manuals, code of ethics, ethics
training programs, effective communication system, publication of newsletters, ethics
officers, ethics committee etc.
The Implicit forms of ethics program includes organizational culture, ethical leadership,
reward and punishment policies, performance evaluation, frequent inspections, etc.
According to research, managers perceive that implicit forms of ethics are more
significant and pervasive than explicit forms of ethics as shown in the figure below
Managing and Controlling the Ethics Program
An effective implementation of the ethics program is also important
If an organization’s main focus is only upon achieving goals but not on means to achieve
those goals, then in such situation the organization is risking its ethical climate.
Proper checks and balances are necessary to prevent the ethical misconduct of employees or
else abusive behavior, misuse of resources, self maximization at the expense of organization,
lying and cheating may become part of employees’ behavior.
A good ethics program can be helpful in checking ethical misconduct only if it is properly
implemented.
The Governments across world have launched schemes to incentivize the initiatives taken by
the organizations to promote ethical climate.
Ethics Audit
Ethics Audit is useful in measuring the ethical performance of the firm.
It evaluates the ethical program of the firm and investigates whether that ethical program is
in compliance with the ethical standards laid down by the government in particular and
society in general.
Parts of "Ethics Audit" report that deal with sustainability, employment, and community
outreach are published for public knowledge by many organizations.
Some firms conduct ‘social audit’ which can be defined as audit of firm’s economic, legal,
ethical and philanthropic responsibilities that should have been discharged by the firm.
Steps to Resolve Ethical Dilemma in an Organization
Researchers have suggested a seven step checklist that an organization should use to assist its
employees in resolving their ethical dilemma:
The first step involves the recognition of ethical problem and dilemma.
The second step involves gathering as much as possible the facts and information on the
subject
The third step involves preparing list of all the options that are available
The fourth step involve the testing of each of the listed options by asking: Is it legal? Is it right
and ethical? Is it beneficial?
The fifth step involves decision making on the basis of above parameter
The sixth step involves rechecking of the decision by further asking: “Whether I would be
comfortable if my family and media come to know about it”? Whether I would be able to
defend myself if my decision is subjected to media scrutiny?
Take action.
Global Ethics Management
According to Owens there are four levels of ethics and they are highly interrelated to each other.
Individual level: It refers to individual’s ethics
Corporate level: It refers to ethics of all types of formal organizations and institutions
Societal level or National Level: It refers to the ethics of the society or citizens of a country.
Global level: It refers to globally accepted values and norms. The precise nature of relationship among these levels
of ethics is very unclear and very complex.
