What is ethical issue intensity

Ethical Dilemma

First, please read Chapter Five. Then, read the Ethical Dilemma regarding Steven and the fast food restaurant.

Then, apply the Ferrell Decision Making Model to the situation presented in the Ethical Dilemma, including a conclusion. Since the Ferrell Model contains four component parts, a complete Homework Assignment will include at least five paragraphs (one for each of the four components of the model and then a conclusion). Be sure to include all relevant sub-parts/factors for each of the four component parts of the model.

Introduction

To improve ethical decision making in business, you must first understand how individuals make organizational decisions. Too often it is assumed people in organizations define ethical decisions in exactly the same way they would at home, in their families, or in their personal lives. Within the context of an organizational work group, however, few individuals have the freedom to personally decide ethical issues independent of the organization and its stakeholders.

This chapter summarizes our current knowledge of ethical decision making in business and provides a model so you may better visualize the ethical decision making process. Although it is impossible to describe exactly how any one individual or work group might make ethical decisions, we can offer generalizations about average or typical behavior patterns within organizations. These generalizations are based on many studies and at least six ethical decision models that have been widely accepted by academics and practitioners. Based on this research, we present a model for understanding ethical decision making in the context of business organizations. The model integrates concepts from philosophy, psychology, sociology, and organizational behavior. This framework should be helpful in understanding how organizations decide and develop ethical programs. Additionally, we describe some normative considerations that prescribe how organizational decision making should approach ethical issues. Principles and values are discussed as a foundation for establishing core values to provide enduring beliefs about appropriate conduct. Therefore, we provide both a descriptive understanding of how ethical decisions are made as well as a normative framework to determine how decisions ought to be made.

A Framework for Ethical Decision Making in Business

The ethical decision making process in business includes ethical issue intensity, individual factors, and organizational factors such as corporate culture and opportunity. All these interrelated factors influence the evaluations of and intentions behind the decisions that produce ethical or unethical behavior. This model does not describe how to make ethical decisions, but it does help you to understand the factors and processes related to ethical decision making.

Ethical Issue Intensity
The first step in ethical decision making is to recognize that an ethical issue exists, requiring an individual or work group to choose among several actions that various stakeholders will ultimately evaluate as right or wrong. Ethical awareness is the ability to perceive whether a situation or decision has an ethical dimension. Costly problems can be avoided if employees are able to first recognize whether a situation has an ethical component. However, ethical awareness can be difficult in an environment when employees work in their own areas of expertise with the same types of people. It is easier to overlook certain issues requiring an ethical decision, particularly if the decision becomes a routine part of the job. This makes it important for organizations to train employees on how to recognize the potential ethical ramifications of their decisions. Familiarizing employees with company values and training them to recognize common ethical scenarios can help them develop ethical awareness.

The intensity of an ethical issue relates to its perceived importance to the decision maker. Ethical issue intensity can be defined as the relevance or importance of an event or decision in the eyes of the individual, work group, and/or organization. It is personal and temporal in character to accommodate values, beliefs, needs, perceptions, the special characteristics of the situation, and the personal pressures prevailing at a particular place and time. Senior employees and those with administrative authority contribute significantly to ethical issue intensity because they typically dictate an organization’s stance on ethical issues. Potential ethical issues are identified as risk areas, and employees are trained to recognize these issues. For example, sexual harassment, conflict of interest, bribery, and time theft are all ethical issues that have been identified as risk areas. Additionally, insider trading is considered a serious ethical issue by the government because the intent is to take advantage of information not available to the public. Therefore, it is an ethical issue of high intensity for regulators and government officials. This often puts them at odds with financial companies such as hedge funds. A survey of hedge fund companies revealed 35 percent of respondents feel pressured to break the rules. Because of their greater ability to gather financial information from the market—some of which might not be public information—hedge funds and other financial institutions have often come under increased scrutiny by the federal government.

Under current law, managers can be held civilly and criminally liable for the illegal actions of subordinates. In the United States, the Federal Sentencing Guidelines for Organizations still contains a quasi-liability formula judges use as a guideline regarding illegal activities of corporations. For example, Wells Fargo employees created over 2 million fake bank accounts in four years because of their managers’ insistence on specific target numbers. When certain employees called the ethics hotline, they were terminated. As a result, more employees began to tell of horrific stories of bullying, being disciplined, or retaliated against, for complaining about being, or refusing to be, forced to make quotas by signing up customers for new accounts without their consent which led to more public attention. As a result, John Stumpf, former Wells Fargo CEO, publically stated his shock at the management practices and immediately fired over 5,300 employees. Federal agencies have levied approximately $185 million in fines along with $5 million to refund customers.

Ethical issue intensity reflects the ethical sensitivity of the individual and/or work group facing the ethical decision making process. Research suggests that individuals are subject to six “spheres of influence” when confronted with ethical choices—the workplace, family, religion, legal system, community, and profession. The level of importance of each to the business person influences and varies depending on how important the decision maker perceives the issue to be. Additionally, individuals’ moral or value intensity increases their perceptiveness of potential ethical problems, which in turn reduces their intention to act unethically. Moral intensity relates to individuals’ perceptions of social pressure and the harm they believe their decisions will have on others. All other factors in Figure 5-1, including individual, organizational, and intentions, determine why different individuals perceive ethical issues differently and define them as ethical or unethical. Unless individuals in an organization share common concerns about issues, the stage is set for ethical conflict. The perception of ethical issue intensity can be influenced by management’s use of rewards and punishments, corporate policies, and corporate values to sensitize employees. In other words, managers can affect the degree to which employees perceive the importance of an ethical issue through positive and/or negative incentives.

For some employees, business ethical issues may not reach critical awareness if managers fail to identify and educate them about specific problem areas. One study found that more than a third of the unethical situations that lower and middle-level manager’s face come from internal pressures and ambiguity surrounding internal organizational rules. Many employees fail to anticipate these issues before they arise. This lack of preparedness makes it difficult for employees to respond appropriately when they encounter an ethics issue. One field recognized as having insufficient ethics training is science. An Iowa State University scientist resigned and was charged with four felony counts of making false statements after falsifying lab results for AIDS research. Although this type of scandal is a rare occurrence in the scientific profession, a panel of experts found young scientists tend to lack knowledge about ethical frameworks to navigate ethical gray areas. Many are therefore unprepared when faced with an ethical issue. The Committee on Publishing Ethics (COPE) helps editors of scholarly journals prevent and manage misconduct. Organizations that consist of employees with diverse values and backgrounds must train workers in the way the firm wants specific ethical issues handled. Identifying the ethical issues and risks employees might encounter is a significant step toward developing their ability to make ethical decisions. Many ethical issues are identified by industry groups or through general information available to a firm. Flagging certain issues as high in ethical importance could trigger increases in employees’ ethical issue intensity. The perceived importance of an ethical issue has a strong influence on both employees’ ethical judgment and their behavioral intention. In other words, the more likely individuals perceive an ethical issue as important, the less likely they are to engage in questionable or unethical behavior. Therefore, ethical issue intensity should be considered a key factor in the ethical decision making process.

Individual Factors
When people need to resolve issues in their daily lives, they often base their decisions on their own values and morals of right or wrong. They generally learn these through the socialization process, interacting with family members, social groups, religion, and in their formal education. Good personal values or morals have been found to decrease unethical practices and increase positive work behavior. The moral philosophies of individuals, discussed in detail in Chapter 6, provide principles, values, and rules people use to decide what is moral or immoral from a personal perspective. Values of individuals can be derived from moral philosophies that are applied to daily decisions. However, these values can be subjective and vary a great deal across different cultures. For example, some individuals might place greater importance on keeping their promises and commitments than others would. Values applied to business can also be used in negative rationalizations, such as “Everyone does it,” or “We have to do what it takes to get the business.” Research demonstrates that individuals with certain personalities will violate basic core values, causing a work group to suffer a performance loss of 30 to 40 percent compared to groups without employees with such personalities. The actions of specific individuals in scandal-plagued financial companies such as JP Morgan often raise questions about those individuals’ personal character and integrity. They appear to operate in their own self-interest or in total disregard for the law and the interests of society.

Although an individual’s intention to engage in ethical behavior relates to individual values, organizational and social forces also play a vital role. An individual’s attitudes as well as social norms help create behavioral intentions that shape his or her decision making process. While an individual may intend to do the right thing, organizational or social forces can alter this intent. For example, an individual may intend to report the misconduct of a coworker but when faced with the social or financial consequences of doing so, may decide to remain complacent. In this case, social forces overcome a person’s individual values or morals when it comes to taking appropriate action. At the same time, individual values strongly influence how people assume ethical responsibilities in the work environment. In turn, individual decisions can be heavily dependent on company policy and corporate culture.

The way the public perceives business ethics generally varies according to the profession in question. Financial institutions, car salespersons, advertising practitioners, and stockbrokers are often perceived as having the lowest ethics. Research regarding individual factors that affect ethical awareness, judgment, intent, and behavior include gender, education, work experience, nationality, age, and locus of control.

Extensive research regarding the link between gender and ethical decision making shows that in many aspects there are no differences between men and women. However, when differences are found, women are generally more ethical than men. By “more ethical” we mean women seem to be more sensitive to ethical scenarios and less tolerant of unethical actions. One study found that women and men had different foundations for making ethical decisions: women rely on relationships; men rely on justice or equity. In another study on gender and intentions for fraudulent financial reporting, females reported higher intentions to report than male participants. As more and more women work in managerial positions, these findings may become increasingly significant.

Education is also a significant factor in the ethical decision making process. The important point to remember is that education does not reflect experience. Work experience is defined as the number of years in a specific job, occupation, and/or industry. Generally, the more education or work experience people have, the better they are at making ethical decisions. The type of education someone receives has little or no effect on ethics. For example, it doesn’t matter if you are a business student or a liberal arts student—you are similar in terms of ethical business decision making. Current research, however, shows students are less ethical than those in business which is logical because businesspeople have been exposed to more ethically challenging situations than students. Additionally, those well versed in business ethics knowledge, including regulatory officials and ethics researchers, are likely to take more time and raise more concerns going through the ethical decision making process than novices such as graduate students. This implies that those more familiarized with the ethical decision making process due to education or experience are likely to spend more time examining and selecting different alternatives to an ethics issue.

Nationality is the legal relationship between a person and the country in which he or she is born. In the twenty-first century, nationality is redefined by regional economic integration such as the European Union (EU). When European students are asked their nationality, they are less likely to state where they were born than where they currently live. The same thing is happening in the United States, as people born in Florida but living in New York might consider themselves to be New Yorkers. Research about nationality and ethics appears to be significant in how it affects ethical decision making; however, just how nationality affects ethics is somewhat hard to interpret. Because of cultural differences, it is impossible to state that ethical decision making in an organizational context will differ significantly among individuals of different nationalities. The reality of today is that multinational companies look for businesspeople that make good decisions regardless of nationality. Perhaps in 20 years, nationality will no longer be an issue because the multinational individual’s culture will replace national status as the most significant factor in ethical decision making.

Age is another individual factor within business ethics. Several decades ago, we believed age was positively correlated with ethical decision making. In other words, the older you are, the more ethical you are. A survey of millennials found that many bring their “me first” attitude to the workplace. Based on a global survey, 73 percent of Generation Y (born in the 1980s and early 1990s) feel unethical behavior can be justified to help an organization survive. In addition, 20 percent said they could justify paying bribes. We believe older employees with more experience have greater knowledge to deal with complex industry-specific ethical issues. Younger managers are far more influenced by organizational culture than older managers.

Locus of control relates to individual differences in relation to a generalized belief about how one is affected by internal versus external events or reinforcements. In other words, the concept relates to how people view themselves in relation to power. Those who believe in external control (externals) see themselves as going with the flow because that is all they can do. They believe the events in their lives are due to uncontrollable forces. They consider the results or outcomes depend on luck, chance, and powerful people in their company. In addition, they believe the probability of being able to control their lives by their own actions and efforts is low. Conversely, those who believe in internal control (internals) believe they control the events in their lives by their own effort and skill, viewing themselves as masters of their destinies and trusting in their capacity to influence their environment.

Current research suggests we still cannot be sure how significant locus of control is in terms of ethical decision making. One study that found a relationship between locus of control and ethical decision making concluded that internals were positively correlated whereas externals were negatively correlated with ethical decisions. In other words, those who believe they formed their own destiny were more ethical than those who believed their fate was in the hands of others. Classifying someone as being entirely an internal or entirely an external is probably impossible. In reality, most people have experienced situations where they were influenced by others—particularly authority figures—to engage in questionable actions, as well as other situations where they adhered to what they knew was the correct choice. This does not necessarily mean that externals are unethical or internals are ethical individuals.

Organizational Factors
Although people can and do make individual ethical choices in business situations, no one operates in a vacuum. Indeed, research has established that in the workplace, the organization’s values often have greater influence on decisions than a person’s own values. Ethical choices in business are most often made jointly, in work groups and committees, or in conversations and discussions with coworkers. Employees approach ethical issues on the basis of what they learned not only from their own backgrounds but also from others in the organization. The outcome of this learning process depends on the strength of personal values, the opportunities to behave unethically, and the exposure to others who behave ethically or unethically. An alignment between a person’s own values and the values of the organization help create positive work attitudes and organizational outcomes. Research has further demonstrated that congruence in personal and organizational values is related to commitment, satisfaction, motivation, ethics, work stress, and anxiety. Although people outside the organization such as family members and friends also influence decision makers, the organization develops a personality that helps determine what is and is not ethical. Just as a family guides an individual, specific industries give behavioral cues to firms. Within the family develops what is called a culture, and so too in an organization.

Corporate culture can be defined as a set of values, norms, and artifacts, including ways of solving problems that members (employees) of an organization share. As time passes, stakeholders come to view the company or organization as a living organism with a mind and will of its own. The Walt Disney Co., for example, requires all new employees to take a course in the traditions and history of Disneyland and Walt Disney, including the ethical dimensions of the company. The corporate culture at American Express stresses that employees help customers out of difficult situations whenever possible. This attitude is reinforced through numerous company legends of employees who have gone above and beyond the call of duty to help customers. This strong tradition of customer loyalty might encourage employees to take unorthodox steps to help a customer who encounters a problem. Employees learn they can take some risks in helping customers. Such strong traditions and values have become a driving force in many companies, including Starbucks, IBM, Procter & Gamble, and Hershey Foods.

One way organizations can determine the ethicalness of their corporate cultures is having the company go back to their mission statement or goals and objectives. These goals and objectives are often developed by various stakeholders, such as investors, employees, customers, and suppliers. Comparing the firm’s activities with its mission statement, goals, and objectives helps the organization understand whether it is staying true to its values. Additionally, most industries have trade associations that disperse guidelines developed over time from others in the industry. These rules help guide the decision making process as well. The interaction between the company’s internal rules and regulations and industry guidelines form the basis of whether a business is making ethical or unethical decisions. It also gives an organization an idea of how an ethical or unethical culture may look.

An important component of corporate or organizational culture is the company’s conduct and whether they define it as ethical or unethical. Corporate culture involves values and norms that prescribe a wide range of behavior for organizational members, while ethical culture reflects the integrity of decisions made and is a function of many factors, including corporate policies, top management’s leadership on ethical issues, the influence of coworkers, and the opportunity for unethical behavior. Communication is also important in the creation of an effective ethical culture. There is a positive correlation between effective communication and empowerment and the development of an organizational ethical culture. Within the organization as a whole, subcultures can develop in individual departments or work groups, but these are influenced by the strength of the firm’s overall ethical culture, as well as the function of the department and the stakeholders it serves. For instance, salespeople are heavily influenced by the subculture of the sales department and face many ethical issues that are not necessarily common to other departments. Additionally, because salespeople tend to operate largely outside of the organization, they may not be as socialized to other employees and the organization’s ethical culture.

Corporate culture and ethical culture are closely associated with the idea that significant others within the organization help determine ethical decisions within that organization. Research indicates the ethical values embodied in an organization’s culture are positively correlated to employees’ commitment to the firm and their sense that they fit into the company. These findings suggest companies should develop and promote their values to enhance employees’ experiences in the workplace. The more employees perceive an organization’s culture to be ethical, the less likely they are to make unethical decisions.

A major focus of the amendments to the Federal Sentencing Guidelines for Organizations is to strengthen an organization’s ethical culture. After its sales incentive scandal, mentioned earlier in this chapter, Wells Fargo admitted that it had culture problems related to its sales practices. It decided to survey 269,000 employees about its culture. The analysis and results were to be shared with bank employees. The goal was to identify positive attitudes and potential weaknesses.

Those who have influence in a work group, including peers, managers, coworkers, and subordinates, are referred to as significant others . They help workers on a daily basis with unfamiliar tasks and provide advice and information in both formal and informal ways. Coworkers, for instance, can offer help in the comments they make in discussions over lunch or when the boss is away. Likewise, a manager may provide directives about certain types of activities employees perform on the job. Indeed, an employee’s supervisor can play a central role in helping employees develop and fit in socially in the workplace. Numerous studies conducted over the years confirm that significant others within an organization may have more impact on a worker’s decisions on a daily basis than any other factor.

Obedience to authority is another aspect of the influence significant others can exercise and helps explain why many employees resolve business ethics issues by simply following the directives of a superior. In organizations that emphasize respect for superiors, employees may feel they are expected to carry out orders by a supervisor even if those orders are contrary to the employees’ morals. Rewards and punishments that managers control influence ethical decisions. If firms place all rewards around financial performance, then how objectives are achieved can become a secondary concern. This situation occurred in major banks prior to the financial crisis. If the employee’s decision is judged to be unethical, he or she is likely to say, “I was only carrying out orders” or “My boss told me to do it this way.” In addition, the type of industry and size of the organization were found to be relevant factors, with larger companies at greater risk for unethical activities.

Opportunity
Opportunity describes the conditions in an organization that limit or permit ethical or unethical behavior. Opportunity results from conditions that either provide rewards, whether internal or external, or fail to erect barriers against unethical behavior. Examples of internal rewards include feelings of goodness and personal worth generated by performing altruistic or ethical acts. External rewards refer to what an individual expects to receive from others in the social environment in terms of overt social approval, status, and esteem.

An example of a condition that fails to erect barriers against unethical behavior is a company policy that does not punish employees who accept large gifts from clients. The absence of punishment essentially provides an opportunity for unethical behavior because it allows individuals to engage in such behavior without fear of consequences. The prospect of a reward for unethical behavior can also create an opportunity for questionable decisions. For example, a salesperson given public recognition and a large bonus for making a valuable sale obtained through unethical tactics will probably be motivated to use such tactics again, even if such behavior goes against the salesperson’s personal value system. If employees observe others at the workplace abusing drugs or alcohol and nobody reports or responds to this conduct, then the opportunity for others to engage in these activities increases.

Opportunity relates to individuals’ immediate job context —where they work, whom they work with, and the nature of the work. The immediate job context includes the motivational “carrots and sticks” superiors use to influence employee behavior. Pay raises, bonuses, and public recognition act as carrots, or positive reinforcements, whereas demotions, firings, reprimands, and pay penalties act as sticks, or negative reinforcements. If a firm has no sticks or carrots to help employees, then negative or unethical behavior can increase. For example, one survey reports more than two-thirds of employees steal from their workplaces, and most do so repeatedly. As Table 5-1 shows, many office supplies, particularly smaller ones, tend to “disappear” from the workplace. Small supplies such as Post-It notes, copier paper, staples, and pens appear to be the more commonly pilfered items, but some office theft sometimes reaches more serious proportions. For instance, a Charles Schwab & Co. broker used the company’s order system to order office supplies and equipment and then sold them to other people. It is alleged he stole $1 million worth of office equipment from the firm. The retail industry is particularly hard hit—total losses from employee theft are often greater than shoplifting at retail chains. If there is no enforced policy against this practice, some employees will not learn where to draw the line and get into the habit of taking more expensive items for personal use.

Table 5-1

Most Common Office Supplies Stolen by Employees
1. Post-It notes

2. Paper clips

3. Toilet paper

4. Copier paper

5. Scissors

6. Tape

7. Notepads

8. Staplers

9. Highlighters

10. Pens and Pencils

Source: Bryan Johnston, “Top 10 Most Stolen Office Supplies,” Career Addict, October 10, 2015, http://www.careeraddict.com/top-10-most-stolen-office-supplies (accessed April 16, 2017).

The opportunities that employees have for unethical behavior in an organization can be eliminated through formal codes, policies, and rules adequately enforced by management. For instance, the International Federation of Accountants, a global organization that consists of 175 member organizations and associates, periodically updates its ethics standards to cover new risk areas. It updated its conflict of interest policies as well as actions taken against member organizations that violate the code of ethics. Financial companies—such as banks, savings and loan associations, and securities companies—developed elaborate sets of rules and procedures to avoid creating opportunities for individual employees to manipulate or take advantage of their trusted positions. In banks, one such rule requires most employees to take a vacation and stay out of the bank a certain number of days every year so they cannot be physically present to cover up embezzlement or other diversions of funds. This rule prevents the opportunity for inappropriate conduct.

Despite the existence of rules, misconduct can still occur without proper oversight. JP Morgan covers conflicts of interest in its code of conduct but lapses in oversight resulted in investigations with company officials ignoring corporate policies. Regulators showed concern over whether JP Morgan might have been driving clients toward its own investment products over outside offerings. A later investigation tried to determine whether the firm hired an unqualified employee because he was the son of China’s commerce minister. The commerce minister allegedly promised to help the bank in its operations in China. Such a violation would not only be a conflict of interest but could also qualify as a type of bribery violating the Foreign Corrupt Practices Act. To avoid these types of situations, companies must adopt checks and balances that create transparency.

Opportunity also comes from knowledge. A major type of misconduct observed among employees in the workplace is lying to employees, customers, vendors, or the public or withholding needed information from them. A person with expertise or information about the competition has the opportunity to exploit this knowledge. Individuals can be a source of information because they are familiar with the organization. People employed by one organization for many years become “gatekeepers” of its culture and often have the opportunity to make decisions related to unwritten traditions and rules. They socialize newer employees to abide by the rules and norms of the company’s internal and external ways of doing business, as well as teaching when the opportunity exists to cross the line. They function as mentors or supervise managers in training. Like drill sergeants in the army, these trainers mold the new recruits into what the company wants, and their actions can contribute to either ethical or unethical conduct.

The opportunity for unethical behavior cannot be eliminated without aggressive enforcement of codes and rules. A national jewelry store chain president explained to us how he dealt with a jewelry buyer in one of his stores who took a bribe from a supplier. There was an explicit company policy against taking incentive payments to deal with a specific supplier. When the president of the firm learned about the accepted bribe, he immediately traveled to the office of the buyer in question and terminated his employment. He then traveled to the supplier (manufacturer) selling jewelry to his stores and terminated his relationship with the firm. The message was clear: Taking a bribe is unacceptable for store buyers and supply company salespeople and could cost them their jobs or revenue.

As defined previously, stakeholders are those directly and indirectly involved with a company and can include investors, customers, employees, channel members, communities, and special interest groups. Each stakeholder has goals and objectives that somewhat align with other stakeholders and the company. It is the diverging of goals that causes friction between and within stakeholders and the corporation. Most stakeholders understand firms must generate revenues and profit to exist but not all. Special interest groups or communities may actively seek the destruction of the corporation because of perceived or actual harm to themselves or those things held important to them. The employee is also affected by such stakeholders, usually in an indirect way. Depending upon the perceived threat level to the firm, employees may act independently or in groups to perpetrate unethical or illegal behaviors. For example, one author knew of a newspaper firm that had been losing circulation to one of its competitors, and the loss was putting people at the firm out of work. The projection was if the newspaper could not turn subscriptions around they would be closed within a year. As a result of the announcement employees started pulling up newspaper receptacles and damaging the competition’s automatic newspaper dispensers. Both activities were illegal, yet the employees felt justified because they believed they were helping the company survive.

Business Ethics Intentions, Behavior, and Evaluations
Ethical business issues and dilemmas involve problem-solving situations where the rules governing decisions are often vague or in conflict. The results of the decision are often uncertain; it is not always immediately clear whether the decision was ethical. There are no magic formulas, nor is there computer software that ethical business issues or dilemmas can be plugged into to get a solution. Even if they mean well, most businesspeople make ethical mistakes. Therefore, there is no substitute for critical thinking and the ability to take responsibility for our own decisions.

United Airlines suffered a billion dollar drop in its stock price after a paying passenger was forcibly removed from the flight and injured in the process to make room for pilots to board the full flight. The ordeal was captured on cell phones and created significant media attention and controversy over the airline’s actions. This shows the importance of training and empowering employees to make good decisions “on the spot,” regardless of a specific rule or policy. This guidance to remove paying passengers from the flight, by force, was changed after this incident.

Individuals’ intentions and the final decision regarding what action they take are the last steps in the ethical decision making process. The work environment culture has been found to impact recognition and judgment. When intentions and behavior are inconsistent with their ethical judgment, people may feel guilty. For example, when an advertising account executive is asked by her client to create an advertisement she perceives as misleading, she has two alternatives: to comply or refuse. If she refuses, she stands to lose business from that client and possibly her job. Other factors—such as pressure from the client, the need to keep her job to pay her debts and living expenses, and the possibility of a raise if she develops the advertisement successfully—may influence her resolution of this ethical dilemma. Because of these factors, she may decide to act unethically and develop the advertisement even though she believes it to be inaccurate. In this example, her actions are inconsistent with her ethical judgment, meaning she will probably feel guilty about her decision.

Guilt or uneasiness is the first sign an unethical decision may have occurred. The next step is changing the behavior to reduce such feelings. This change can reflect a person’s values or morals shifting to fit the decision or the person changing his or her decision type the next time a similar situation occurs. You can eliminate some of the problematic situational factors by resigning your position. For those who begin the value shift, the following are the usual justifications that reduce and finally eliminate guilt:

1. I need the paycheck and can’t afford to quit right now.

2. Those around me are doing it, so why shouldn’t I? They believe it’s okay.

3. If I don’t do this, I might not be able to get a good reference from my boss or company when I leave.

4. This is not such a big deal, given the potential benefits.

5. Business is business with a different set of rules.

6. If not me, someone else would do it and get rewarded.

The road to success depends on how the businessperson defines success. The success concept drives intentions and behavior in business either implicitly or explicitly. Money, security, family, power, wealth, and personal or group gratification are all types of success measures people use. The list described is not comprehensive, and in the next chapter, you will understand more about how success can be defined. Another concept that affects behavior is the probability of rewards and punishments, an issue explained further in Chapter 6.

Using the Ethical Decision Making Model to Improve Ethical Decisions
The ethical decision making model presented cannot tell you if a business decision is ethical or unethical. Instead, we attempt to prepare you to make informed ethical decisions. Although this chapter does not moralize by telling you what to do in a specific situation, it does provide an overview of typical decision making processes and factors that influence ethical decisions. The model is not a guide for how to make decisions but is intended to provide you with insights and knowledge about typical ethical decision making processes in business organizations.

Business ethics scholars developing descriptive models have focused on regularities in decision making and the various phenomena that interact in a dynamic environment to produce predictable behavioral patterns. Furthermore, it is unlikely an organization’s ethical problems will be solved strictly by having a thorough knowledge about how ethical decisions are made. By its very nature, business ethics involves value judgments and collective agreement about acceptable patterns of behavior. In the next section, we discuss normative concepts that describe appropriate ethical conduct.

We propose gaining an understanding of the factors that make up ethical decision making in business will sensitize you concerning whether the business problem is an ethical issue or dilemma. It will help you know what the degree of ethical intensity may be for you and others, as well as how individual factors such as gender, moral philosophy, education level, and religion within you and others affect the process. We hope you remember the organizational factors that impact the ethics of business decisions and what to look for in a firm’s code of ethics, culture, opportunity, and the significance of other employees and how they sway some people’s intentions and behaviors. You now know nonbusiness factors such as friends, family, and the economic reality of an employee’s situation can lead to unethical business decisions. Finally, we hope you remember that the type of industry, the competition, and stakeholders are all factors that can push some employees into making unethical decisions. In later chapters we delve deeper into different aspects of the ethical decision making process so ultimately you can make better, more informed decisions and help your company do the right things for the right reasons.

One important conclusion that should be taken into account is that ethical decision making within an organization does not rely strictly on the personal values and morals of individuals. Knowledge of moral philosophies or values must be balanced with business knowledge and an understanding of the complexities of the dilemma requiring a decision. For example, a manager who embraces honesty, fairness, and equity must understand the diverse risks associated with a complex financial instrument such as options or derivatives. Business competence must exist, along with personal accountability, in ethical decisions. Organizations take on a culture of their own, with managers and coworkers exerting a significant influence on ethical decisions. While formal codes, rules, and compliance are essential in organizations, a firm built on informal relationships is more likely to develop a high level of integrity within an organization’s culture.

Normative Considerations in Ethical Decision Making
In the first part of the chapter, we described how ethical decision making occurs in an organization. This descriptive approach provides an understanding of the role of individuals in an organizational context for making ethical business decisions. Understanding what influences the ethical decision making process is important in sensitizing you to the intensity of issues and dilemmas as well as the management of ethics in an organization.

However, understanding how ethical decisions are made is different from determining what should guide decisions. A normative approach to business ethics examines what ought to occur in business ethical decision making. The word “normative” is equivalent to an ideal standard. Therefore, when we discuss normative approaches , we are talking about how organizational decision makers should approach an issue. This is different from a descriptive approach that examines how organizational decision makers approach ethical decision making. A normative approach in business ethics revolves around the standards of behavior within the firm as well as within the industry. These normative rules and standards are based on individual moral values as well as the collective values of the organization. The normative approach for business ethics is concerned with general ethical values implemented into business. Concepts like fairness and justice are highly important in a normative structure. Strong normative structures in organizations are positively related to ethical decision making. Normative considerations also tend to deal with moral philosophies such as utilitarianism and deontology that we will explore in more detail in the next chapter.

Most organizations develop a set of core values to provide enduring beliefs about appropriate conduct within the firm. Core values are central to an organization and provide directions for action. For most firms, the selection of core values relates directly to stakeholder management of relationships. These values include an understanding of the descriptive approaches we covered in the first part of this chapter. It also includes instrumental elements that justify the adoption of core values. An instrumental concern focuses on positive outcomes, including firm profitability and benefits to society. Normative business dimensions are rooted in social, political, and economic institutions as well as the recognition of stakeholder claims.

By incorporating stakeholder objectives into corporate core values, companies begin to view stakeholders as significant. Each stakeholder has goals and objectives that somewhat align with other stakeholders and the company. The diverging of goals causes friction between and within stakeholders and the corporation. Ethical obligations are established for both internal stakeholders such as employees and external stakeholders such as the community. For instance, Camden Property Trust organizes its activities around its core values of fun, team players, results-oriented, customer-focused, leads by example, works smart, acts with integrity, is people driven, and always do the right thing. The company relies heavily on these core values and uses them significantly in the hiring process to ensure the people they hire are the right fit for the firm. Ethical decisions are often embedded in many organizational decisions—both managerial and societal—so it is necessary to recognize the importance of core values in providing ideals for appropriate conduct.

Institutions as the Foundation for Normative Values
Institutions are important in establishing a foundation for normative values. According to institutional theory , organizations operate according to taken-for-granted institutional norms and rules. For instance, government, religion, and education are institutions that influence the creation of values, norms, and conventions that both organizations and individuals should adhere. Indeed, many researchers argue that normative values largely originate from family, friends, and more institutional affiliations such as religion and government. In other words, organizations face certain normative pressures from different institutions to act a certain way. These pressures can take place internally (inside the organization itself) and/or externally (from the government or other institutions). For our purposes, we sort institutions into three categories: political, economic, and social.

Consider for a moment how political institutions influence the development of values. If you live in a country with a democratic form of government, you likely consider freedom of speech and the right to own property as important ideals. Organizations must comply with these types of institutional norms and belief systems in order to succeed—to do otherwise would result in the failure of the organization. Companies such as IBM should recognize that using bribery to gain a competitive advantage is inappropriate according to U.S. and U.K. bribery laws. Political influences can also take place within the organization. An ethical organization has policies and rules in place to determine appropriate behavior. This is often the compliance component of the firm’s organizational culture. Failure to abide by these rules results in disciplinary action. For instance, engineering and construction company Fluor Corporation’s code of conduct states that it is every employee’s duty to report unsafe conduct in the workplace. Those who fail to report can be subject to disciplinary procedures.

Normative business ethics takes into account the political realities that exert pressure outside the legal realm in the form of industry standards. Different types of industries have different standards and policies which either increase or decrease the ethicality and legality of their decisions. Legal issues such as price fixing, antitrust issues, and consumer protection are important in maintaining a fair and equitable marketplace. Antitrust regulators tend to scrutinize mergers and acquisitions between large firms to make sure these companies do not gain so much power they place competitors at a major disadvantage. Price-fixing is illegal because it often creates unfair prices for buyers. Bridgestone Corporation pled guilty to charges of price-fixing on parts it sold to automakers. The company agreed to a $425 million criminal fine. Because of their impact on the economy, these issues must be major considerations for businesses when making ethical decisions.

Competition is also important to economic institutions and ethical decision making. The nature of competition can be shaped by the economic system as it helps determine how a particular country or society distributes its resources in the production of products. Basic economic systems such as communism, socialism, and capitalism influence the nature of competition. Competition affects how a company operates as well as the risks employees take for the good of the firm. The amount of competition in an industry can be determined and described according to the following:

1. barriers to entry into the industry,

2. available substitutes for the products produced by the industry rivals,

3. the power of the industry rivals over their customers, and

4. the power of the industry rivals’ suppliers over other rivals.

An example of a highly competitive industry is smartphone manufacturing, whereas the vacuum cleaning manufacturing industry is competitively low. High levels of competition create a higher probability that firms cut corners because margins are usually low. Competitors aggressively seek differential advantages from others so as to increase market share, profitability, and growth. When taken to extremes, unethical and illegal activities can become normal. An investigation into HSBC’s Swiss banking subsidiary, for instance, showed that the bank had helped their clients avoid taxes. While the misconduct might have started out small, at the time of discovery it had become a systematic part of the Swiss bank’s activities.

Social institutions impact a firm’s normative values as well. They include religion, education, and individuals such as the family unit. There are laws meant to ensure an organization acts fairly, but there is no law saying people should do to others as they would prefer to have done to them. Yet many cultures adopted this rule that has been institutionalized into businesses with standards on competing fairly, being transparent with consumers, and treating employees with respect. These social institutions help individuals form their personal values and the moral philosophies they bring into the workplace. From an organizational context, societal trends influence which values to adopt as well as when to adapt decisions to take into account new concerns. For instance, because of the changing sociocultural concerns over obesity, Walmart decided to support an initiative to sell healthier foods.

While we might not consider stakeholders to be institutions, it should now be clear that many stakeholders actually act as institutions in terms of values. Stakeholders closely align with institutions. The regulatory system aligns with political institutions, competition relates to economic institutions, and personal values and norms derive from social institutions. There is therefore a clear link between institutional theory and the stakeholder orientation of management.

As we reiterated, an organization uses rules dictated by its institutional environment to measure the appropriateness of its behavior. Organizations facing the same environmental norms or rules (for example, those in the same industry) become isomorphic or institutionalized. Although organizations in a particular industry might differ, most share certain values that characterize the industry. Additionally, institutional factors often overlap in ethical decision making. For example, Toyota invested heavily in fuel-cell technology with the release of its Mirai hydrogen fuel-cell. We could characterize this decision as having political, economic, and social considerations. Politically, new laws are requiring automobile companies to increase the fuel efficiency of their vehicles. As the first automaker to mass produce a car line powered entirely by hydrogen fuel-cell technology, Toyota differentiates its product from rivals, many of whom are focusing on hybrid or electric car technology. Toyota’s investment in greater fuel efficiency results from society’s increasing demands for more sustainable vehicles.

While industry-shared values promote organizational effectiveness when linked to goals, it can also hinder effectiveness if more efficient means of organization and structure are avoided in exchange for stability. There is a risk that organizations might sacrifice new ideas or methodologies in order to be more acceptable. This can limit innovativeness and productivity. On the other hand, it is important that an organization does not stray so far from industry norms and values that it creates stakeholder concerns. A company known for selling environmentally friendly apparel would not likely succeed in selling a new clothing line made of animal fur. From both a social and managerial standpoint, knowing which institutional norms to comply with and when it would be more beneficial to explore new norms and values is important for organizations to consider.

How does this fit with ethical theory? Institutions directly impact a firm’s norms, values, and behavior as well as “the long-run survival of the organization.” When Galleon Groups founder Raj Rajaratnam and other employees were found guilty of insider trading, the firm floundered. In this case, the government was the major institution involved. By violating the law, the organization did not have the ability to bounce back from its misconduct and did not have normative values in place to dictate appropriate (and in this case legal) behavior.

Conversely, when values from political, economic, and social institutions are embedded into the organizational culture to provide incentives for appropriate behavior, firms tend to act more socially responsible. If incentives such as organizational rewards align with the organization’s normative values and society’s cultural institutions, employees— and therefore the organization as a whole—are more likely to act in a socially responsible manner. Stakeholders can translate normative demands for ethical behavior into economic incentives through reciprocal relationships. These reciprocal behaviors can explain why there can be sanctions to provide a mechanism for ethical normative behavior. Many organizations provide employees with a certain amount of time off to volunteer in their communities. This incentive matches the normative institutional value of giving back to the community. If incentives do not align with institutional normative values or if they contradict these values, then misconduct is likely.

Implementing Principles and Core Values in Ethical Business Decision Making
Political, economic, and social institutions help organizations determine principles and values for appropriate conduct. Principles and values are important normative considerations in ethical decision making. We learned from Chapter 1 that principles are specific and pervasive boundaries for behavior that should not be violated. Principles are important in preventing organizations from “bending the rules.” Values are enduring beliefs and ideals that are socially enforced. Together, principles and values set an ideal standard for the organization. Figure 5-2 demonstrates some of the similarities and differences between principles and values.

John Rawls was one of the most influential philosophers in his research on how principles support the concept of justice. Rawls believed justice principles were beliefs that everyone could accept—a key element in our own definition of principles. According to our definition, principles are beliefs that are universal in nature. For instance, most cultures agree that honesty and fairness are essential to a well-functioning society, although there may be differences on how to implement this principle in daily living.

In his experiments, Rawls used what he called the veil of ignorance , a thought experiment that examined how individuals would formulate principles if they did not know what their future position in society would be. A person might emerge from the veil of ignorance as a rich person or as a beggar. While individuals might formulate different values based on their position in society, Rawls believed that because principles were universally accepted both the rich person and the beggar would agree upon them. Thus, using the veil of ignorance, Rawls identified principles that were not biased by one’s social position.