CHAPTER 7
Organizational Factors: The Role of Ethical
Culture and Relationships
SUMMARY
In this chapter, we take a closer look at corporate culture and the ways a company’s values and
traditions can affect employees’ ethical behavior. We also discuss the role of power in influencing
ethical behavior within a company. Next, we describe two organizational structures and examine
how they may influence ethical decisions. We discuss new organizational structures created to
address the organization’s corporate responsibility to employees and other stakeholders. Then we
consider the impact of groups within organizations. Finally, we examine the implications of
organizational relationships for ethical decision making.
INSTRUCTOR NOTES FOR “AN ETHICAL DILEMMA”
This case covers several ethical issues. Jim is hired to work in the human resources department of KR
Electronics and started by monitoring reports that came in from employees through the company’s
ethics hotline. Jim was trained on the company’s ethical policies and values (such as the importance of
integrity and confidentiality). However, when he approached the human resources manager, David,
about complaints he was told of about an abusive manager, David shrugged off Jim’s concerns. David
stated that the manager’s unit is one of the highest performing and that the manager must be doing
something right. Jim filed a report from Sarah about unethical practices being conducted by
salespeople. Sarah wanted to make sure that her sales manager did not find out that she was the one
who reported these activities. Later, Jim finds out that Sarah has been fired for poor performance.
When Jim found out that Sarah had been fired for poor performance, he asked David about it and
learned that Sarah’s manager had been informed about her report. David defended Sarah being fired and
did not believe it was a violation of confidentiality. David states that Sarah did not have to provide her
name for the report and that her manger is a good man and would not fire someone simply to get back
at them for reporting. Jim remembers that the sales manager and David are good friends and often go
out together for lunch.
One issue with this case is that the company’s ethical policies and values get pushed to the side in favor
of sales performance and quotas. David defended the sales manager’s abusive behavior since his unit is
one of the highest performers. He also disregarded Sarah’s comments about sales staff’s dishonesty
regarding products to get better bonuses as a way for her to hide her poor performance. Another issue is
the confidentiality of Sarah’s name in Jim’s report. Sarah’s sales manager had been informed about her
report and could have fired her out of retaliation. David completely ignored the company’s policy of
confidentiality. Ask the students what they would do if they were Jim? Should Jim have included
38 Chapter 7: Organizational Factors: The Role of Ethical Culture and
Relationships
Sarah’s name on the report since he knew she did not want her sales manager to find out she was the
one filing the report?
LECTURE OUTLINE
I. Defining Corporate Culture
A. Organizational culture includes values, norms, and artifacts that influence employees and
determine behavior.
1. Culture gives the members of the organization meaning as well as the internal rules of
behavior.
2. All organizations, not just corporations, have a culture.
3. Values, beliefs, customs, rules, and ceremonies that are accepted, shared, and circulated
throughout an organization represent its culture. A company’s history and unwritten
rules are also a part of its culture.
B. The Sarbanes–Oxley 404 compliance section codified into law that leaders are
responsible for the actions of subordinates, and corporations should have ethical
corporate cultures.
1. This section includes a requirement that management assess the effectiveness of the
organization’s internal controls and commission an
audits
of these controls by an
external auditor in conjunction with the audit of its financial statements.
2. Section 404 forces firms to adopt a set of values that must make up a portion of the
company’s culture.
3. Compliance with Sarbanes–Oxley 404 requires cultural change, not merely
accounting changes.
4. Firms have different ways of measuring an ethical corporate culture, but the
problem with these measurement standards is they focus more on risk, compliance,
and reporting.
5. Culture is a broad term that can have many different meanings.
II. The Role of Corporate Culture in Ethical Decision Making
A. The culture of an organization may be explicitly articulated or left unspoken. Explicit
statements of values, beliefs, and customs usually come from upper management.
1. Memos, written codes of conduct, handbooks, manuals, forms, and ceremonies are all
formal expressions of an organization’s culture.
2. Corporate culture is often expressed informally—for example, through comments, both
direct and indirect, that communicate the wishes of management.
3. The “tone at the top” is often cited as a determining factor in creating a high-integrity
organization.
Chapter 7: Organizational Factors: The Role of Ethical Culture and
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B. Ethical Frameworks and Evaluations of Corporate Cultures
1. There are two basic dimensions to describe an organization’s culture
a. concern for people.
b. concern for performance.
2. The four organizational cultures can be classified as
a. Apathetic: shows minimal concern for either people or performance
b. Caring: exhibits high concern for people but minimal concern for performance
issues
c. Exacting: shows little concern for people but a high concern for performance
d. Integrative: combines high concern for people and for performance. An
organization becomes integrative when superiors recognize that employees are
more than interchangeable parts
3. A cultural audit is an assessment of the organization’s values. It is usually conducted
by outside consultants but may be performed internally as well.
C. Ethics as a Component of Corporate Culture
1. If a firm’s culture encourages unethical behavior, its employees may act unethically,
and vice versa.
2. Management’s sense of an organization’s culture may not be in line with the values and
ethical beliefs that actually guide a firm’s employees.
3. It is therefore important for top managers to determine what the organization’s culture is and
to monitor its values, traditions, and beliefs to ensure that they represent the desired culture.
4. It is also important to note that if corporate communication to improve corporate social
responsibility and ethics is reactive or focused on avoiding negative consequences, it might
not make a significant contribution to creating an ethical culture.
5. The rewards and punishments imposed by an organization must reflect the culture those at the
top wish to create.
D. Compliance versus Value-based Ethical Cultures
1. A compliance culture is organized around risk. Compliance cultures use a legalistic
approach to ethics.
2. A values-based culture approach to ethical corporate cultures relies upon an explicit mission
statement that defines the firm as well as how customers and employees should be treated.
a. The crux of any ethical culture is top-down integrity with shared values, norms that
provide guides for behavior, and visible artifacts such as codes of ethics that provide a
standard of conduct.
E. Differential association refers to the idea that people learn ethical or unethical behavior while
interacting with others who are part of their role-sets or other intimate personal groups.
1. A variety of studies have supported the notion that such differential association influences
ethical decision making.
2. Superiors have a strong influence on the ethics of their subordinates. Younger managers
especially tend to go along with their superiors’ moral judgments to demonstrate loyalty.
F. Whistle-blowing means exposing an employer’s wrongdoing to outsiders (external to the
company), such as the media or government regulatory agencies.
1. Interpersonal conflict ensues when employees think they know the right course of action in a
situation, yet their work group or company promotes or requires a different, unethical
decision.
40 Chapter 7: Organizational Factors: The Role of Ethical Culture and
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2. The Sarbanes–Oxley Act and the Federal Sentencing Guidelines for Organizations (FSGO)
have institutionalized internal whistle-blowing to encourage discovery of misconduct.
3. The 2010 passage of the Dodd-Frank Act proposed additional incentives for whistle-blowers.
Since its beginning in 2011, this program has awarded $111 million of which $57 million was
awarded in 2016 from over 4,200 tips to the hotline.
4. If an employee provides information to the government about the company’s wrongdoing,
under the Federal False Claims Act, the whistle-blower is known as a qui tam relator.
5. Retaliation is still a concern for whistle-blowers and they often have a difficult time winning
their cases.
6. Most public companies are creating computer systems that encourage reporting misconduct
internally, also called internal whistle-blowing.
a. Even before Sarbanes-Oxley, an increasing number of companies set up anonymous
reporting services.
b. The majority of employees report misconduct to their immediate supervisors.
III. Leaders Influence Corporate Culture
A. Organizational leaders use their power and influence to shape corporate culture. Leaders should be
both effective and ethical.
B. Power Shapes Corporate Culture
1. Power refers to the influence that leaders and managers have over the behavior and decisions
of subordinates. An individual has power over others when his or her presence causes them to
behave differently.
2. There are five power bases from which one person may influence another
a. Reward power refers to a person’s ability to influence the behavior of others by
offering them something desirable
b. Coercive power is essentially the opposite of reward power. Instead of
rewarding a person for doing something, coercive power penalizes actions or
behavior. Coercive power breaks down relationships in the long-term.
c. Legitimate power stems from the belief that a certain person has the right to
exert influence and that certain others have an obligation to accept it. The titles
and positions of authority that organizations bestow on individuals appeal to this
traditional view of power
d. Expert power is derived from a person’s knowledge (or the perception that the
person possesses knowledge).
e. Referent power may exist when one person perceives that his or her goals or
objectives are similar to another’s. The second person may attempt to influence
the first to take actions that will lead both to achieve their objectives. For this
power relationship to be effective, some sort of empathy must exist between the
individuals.
C. Motivating Ethical Behavior
1. Motivation is a force within the individual that focuses his or her behavior toward
achieving a goal.
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a. Job performance is considered to be a function of ability and motivation, thus
Job performance = ability × motivation, meaning that employees can be
motivated, but resources and know-how are also needed to get the job done.
b. To create motivation, an organization offers incentives to encourage employees
to work toward organizational objectives
c. An individual’s hierarchy of needs may influence his or her motivation and
ethical behavior.
d. After basic needs such as food, working conditions (existence needs), and
survival are satisfied, relatedness needs and growth needs become important.
i) Relatedness needs are satisfied by social and interpersonal relationships
ii) Growth needs are satisfied by creative or productive activities.
iii) Needs or goals may change as a person progresses through the ranks of
the company.
D. Organizational Structure
1. The two broad structures for organizations are centralized and decentralized. Note that
these are not mutually exclusive structures.
a. In a centralized organization, decision-making authority is concentrated in the
hands of top-level managers, and little authority is delegated to lower levels.
i) Centralized organizations stress formal rules, policies, and procedures
backed up with elaborate control systems.
ii) Some ethical concerns may arise in centralized organizations because they
typically have little upward communication.
b. In a decentralized organization, decision-making authority is delegated as far
down the chain of command as possible.
i) Such organizations have relatively few formal rules, and coordination and
control are usually informal and impersonal. They focus instead on
increasing the flow of communication.
ii) Because of the strict formalization and implementation of ethics policies
and procedures in centralized organizations, they tend to be more ethical in
their practices than decentralized organizations.
iii) Centralized organizations may also exert more influence on their employees
because they have a central core of policies and codes of ethical conduct.
iv) Decentralized organizations give employees extensive decision-making autonomy
because management empowers employees. This could create ambiguity that may
be confusing for newer managers, however.
v) Decentralized corporate cultures may avoid ethical dilemmas through the use of
effective codes of conduct and ethics.
c. Unethical behavior is possible in either centralized or decentralized structures when
specific corporate cultures permit or encourage workers to deviate from accepted
standards or ignore corporate legal and ethical responsibilities. Centralized firms may
have a more difficult time uprooting unethical activity than decentralized organizations.
IV. Group Dimensions of Corporate Structure and Culture
42 Chapter 7: Organizational Factors: The Role of Ethical Culture and
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A. Two main categories of groups affect ethical behavior in business.
1. A formal group is defined as an assembly of individuals that has an organized structure
accepted explicitly by the group.
a. It can be divided into committees, work groups, and teams
i) A committee is a formal group of individuals assigned to a specific task.
ii) Work groups are used to subdivide duties within specific functional areas of a
company.
iii) Teams bring together the functional expertise of employees from several different
areas of the organization—for example, finance, marketing, and production—on a
single project, such as developing a new product.
2. An informal group is defined as two or more individuals with a common interest but without
an explicit organizational structure.
a. Most organizations have a number of informal groups, usually composed of individuals,
often from the same department.
b. Informal groups help develop informal channels of communication, sometimes called
the grapevine, that are important in every organization
c. The grapevine is an important source of information for individuals to assess ethical
behavior within their organization.
B. Group norms are standards of behavior that groups expect of their members. They help define
acceptable and unacceptable behavior within a group.
1. Norms have the power to enforce a strong degree of conformity among group members. At
the same time, they define the different roles for various positions within the organization.
2. Sometimes group norms conflict with the values and rules prescribed by the organization’s
culture. For this reason, management must carefully monitor not only the corporate culture
but also the norms of all the various groups within the organization.
V. Variation in Employee Conduct.
A. A substantial amount of research indicates that significant differences exist in the values and
philosophies that influence how the individuals that comprise corporations make ethical decisions.
B. About 10% of employees take advantage of situations to further their own interests, about 40% go
along with the work group on most matters, about 40% always try to follow company policies and
rules (but are not likely to speak out against those who choose to go with the work group), and
about 10% try to maintain formal ethical standards they believe are right and superior to the values
of others and even to the company’s value system.
VI. Can People Control Their Own Actions Within a Corporate Culture?
A. A popular way of viewing business ethics is to see it as a reflection of the alternative moral
philosophies that individuals use to resolve their personal moral dilemmas.
B. Ethical decisions within organizations are often made by committees and formal and
informal groups, not by individuals.
C. Both individual ethics and organizational ethics have an impact on an employee’s ethical
intention. If there is ethical congruence between individual ethics and the organizational
ethical culture, there is an increase in the potential for making ethical choices in
organizational decision-making.
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DEBATE ISSUE: TAKE A STAND
Have your students split into two teams. One team will argue for the first point, and the other will
argue for the opposing view. The purpose is to get students to realize that there are no easy answers
to many of these issues. This debate involves whether government support for whistle-blowers in
the form of monetary rewards will be effective. Students who argue for this point might say that
these financial incentives are necessary to convince whistle-blowers to step up. Financial
incentives might also help to compensate whistle-blowers for the negative repercussions they might
face from employers or peers if they report externally. Those opposed could argue that financial
incentives might encourage people to choose external rather than internal channels of reporting,
which will inundate the SEC with reports that could have been settled in other ways.
“RESOLVING ETHICAL BUSINESS CHALLENGES” NOTES
In this case, Candace has to decide whether she should give Britney the names of the managers who
may be displaying favoritism toward certain employees or risk the ire of her new boss. Candace
excelled in her position at ABCO Corporation and had a good repertoire with her previous supervisor.
When the new supervisor, Britney, started her position, she asked the employees if they had any
suggestions that would improve the efficiency of the division. Candace informed Britney that while
staff worked hard, she had noticed some managers giving promotions and overtime based upon who
they liked instead of the quality of their work. Britney, a no-nonsense type of manager, thanked
Candace for her input. The next day, Britney met with Candace and demanded that she tell her the
names of the managers to which she was referring to so she could create an example to show that all
employees should work hard and favoritism would not be allowed. If Candace does not tell Britney the
managers’ names, then Britney may view her as part of the problem.
Ask the students how they might have behaved differently if they were in Candace’s position. Do the
students believe Candace will provide honest input in the future if asked by Britney? How could
Britney have approached this situation with Candace differently to avoid the predicament Candace is
currently in? Is Britney’s leadership style effective in this situation?