Business Ethics

Dr. Alim J. beveridge

2014-15

Lecture 4Business EthicsP13601

Making Decisions in Business Ethics: Descriptive Ethics

Todays LectureWhat are ethical decisions?Why do people and companies act ethically or unethically? How do individual and situational factors impact upon our ethical decision making at work?Helps understanding occurrence of misconduct (wrongdoing) such as accounting fraud, violation of human rights, etc.

IntroductionBusiness ethics is not just about working out what is the right thing to do; i.e. ethical theories (normative ethics, normative=prescriptive)It is also about understanding how and why people make certain moral choices and why they act as they do in ethical situations (descriptive ethics, behavioral ethics)

Tragedy of the CommonsWhy does it happen even though all our ethical theories say its wrong? Even though we know it hurts us and everyone else?

Some Initial QuestionsWhy do people make poor ethical judgments are some people just more unethical than others?Why do people sometimes make decisions that a rational person would know is bad (even for themselves)?Why do even good people sometimes make bad ethical decisions at work? Why do people at work sometimes make ethical decisions that go against their own ethical standards and principles?Behavioral (Descriptive) ethics attempt to answer these.

The New Perspective Typical ViewNew ViewFrequency RarePrevalentMisconduct (Act)Clearly wrongThe line between right and wrong can be blurryPerpetrator (Actor)Malevolent or immoral personOrdinary person, even morally upstandingOrganizational FactorsA few, clearly flawed structures, systems or processesAny number of structures, systems and processes that are generally healthy and functioning wellPalmer, 2013Bad Apple or Not?How did the alter boy of all those years ago end up here? Walter Pavlo

Ethical Decision MakingHow people make ethical decisionsFactors that influence ethical decision makingRests Model of Ethical Decision MakingRecognise Moral IssueMakeMoralJudgementEstablish MoralIntentEngagein MoralBehaviourIndividual factorsContextual factorsRest, 198610Individual Influences on Ethical Decision Making

Individual FactorsCrane & Matten, 2010National and Cultural CharacteristicsPeople from different cultural backgrounds likely to have different beliefs about right and wrong, different values, etc. and this will inevitably lead to variations in ethical decision-making across nations, religions and cultures.

13Cultural differences have significant impact on corporate governance and business goalsHofstede surveyed MBA students from different countries and assessed what they thought their business leaders would rate as the most important business goalsCultural PerspectiveRanking of Business Goals

USA

Germany / NetherlandsComparing CountriesChina

China and US

USAType and quality of education may be influentialE.g., people who have studied business or economics are more likely to put their own interests ahead of others in experiments and to cheatAmoral business education reinforces myth of business as amoral (Ghoshal, 2005 )One reason why Business Ethics and CSR are part of the curriculum, also key pillar of research and education in UoN through ICCSR. Education and Work Ethical BehaviorWhich individual factors have the strongest influence on unethical behavior?

Meta-analytic results from Kish-Gephert, Harrison & Trevino, 2010 Rests Model of Ethical Decision MakingRecognise Moral IssueMakeMoralJudgementEstablish MoralIntentEngagein MoralBehaviourIndividual factorsContextual factorsRest, 198621Situational and Systemic Influences on Ethical Decision MakingIndividualsSituationSystemAn Interactive ModelNational CultureThe Power of the Situation

How much does ethical behavior depend on the situation?Can it turn ordinary people into bad people (demons, monsters)?The Stanford Prison ExperimentConducted by Prof. Philip Zimbardo at Stanford University in 1971Basement of the psychology building was turned into a prison.24 university students participated. All males. Half were randomly assigned to be guards; half were randomly assigned to be prisoners.

25The Stanford Prison ExperimentOutcomes:Some guards treat the prisoners with excessive aggression; prisoners became servile and helplessAfter 36 hours first prisoner has to be released Experiment uncontrollable -> stopped after 6 daysIndividual behavior is largely controlled by role and situation rather than personal characteristics and traitsPeople embrace their roles, even the experimenters (even though everyone knew it wasnt real)

TED VideoProf. Phil Zimbardo (Stanford University): The Psychology of Evil

SystemsSystems operate at different levelsMultiple nested systems jointly influence a situationNested SystemsNational/regional culture, religion, legal system: values, beliefs

Professional culture, education

Organizational culture, rewards systems, formal and informal structures of relationships and power

Situational cues can activate mental programming and programmed behavior associated with certain systems (or not)Situation

Systemic Influences on Ethical Decision Making

Human Nature According to Social PsychologyMan is by nature a social animal AristotleSocial psychology: human beings have evolved to harmoniously live in groupsWe are therefore good at cooperating, following rules, observing others, conforming to group behavior, expectations and norms

Power & AuthorityPeople obey authority.See themselves as not responsible, relinquish responsibility to authority, suppress misgiving. Eager to please authority figure.People with power tend to think that normal rules dont apply to themLose many inhibitions do or say things they wouldnt normally do or say.Abuse others.

Milgrams Experiments

The Power of the GroupGroups establish norms, exert pressure on members to comply, exhibit desirable attitudes and behaviorsMembers tends to conformGroupthink: appearance of agreement, no one willing to express dissenting views. Everyone seems to be OK with it; Nobody speaks upDiffusion of responsibilityIt was the group; No one is responsibleAll these apply to companies, departments, and teams tooSocial Influence ProcessesThree types of influence or pressure on individual that may lead to unethical behavior:Explicit pressure to engage in unethical behavior from peers or superiorsImplicit pressure: everyone else is doing itCommitment pressure:Pressure to meet expectations created by prior superior performance Organizational FactorsOrganizations have many ways of directing and controlling member behavior .Culture: The way we do things around here, The ____ Way, values, often invisible Rewards systems: Explicitly signals to members what is desired, expected.Rules and procedures (bureaucracy) & roles.These often have unintended consequences, especially when they narrowly focus on instrumental goals.

Reading Tip:

Grand Central Publishing, 2012

Why I am leaving Goldman SachsIt might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachss success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients trust for 143 years. It wasnt just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief. Why I am leaving Goldman SachsOver the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.Why I am leaving Goldman SachsThese days, the most common question I get from junior analysts about derivatives is, How much money did we make off the client? It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You dont have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about muppets, ripping eyeballs out and getting paid doesnt exactly turn into a model citizen. The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron

Bethany McLean, Peter Elkind

Penguin Books, 2003

Or see the film:Enron: The Smartest Guys in the Room (2005)

Reading tip:

Ethical BehaviorWhich organizational factors have the strongest influence on unethical behavior?Meta-analytic results from Kish-Gephert, Harrison & Trevino, 2010

Other Social and Cognitive FactorsHuman Nature According to Cognitive PsychologyBounded rationalityWe are boundedly rational: there are limits to our cognitive (mental, information processing) abilitiesWe filter information and fit it into schemas (categories, boxes)We tend to take in very little information (cues) and reach good enough decisions based on it (satisfice)Scripts help us automate decision making and actionGioia, 1992Rational Decision Making or Not?Research evidence shows discrepancies between intent and actual behaviorThis suggests that some ethical decision making is not rational, but automatic, impulsive and unconsciousAn emerging view holds that ethical decision making is often automatic (ethical impulse perspective) rather than rational (ethical calculus perspective)This view is also known as bounded ethicality

Moral RecognitionOne key issue is whether the person realizes he or she is faced with an ethical decisionAlso known as Moral awareness

Recognise Moral IssueMakeMoralJudgementEstablish MoralIntentEngagein MoralBehaviourSocial & Cognitive FactorsRest, 1986The same issues or dilemma can be perceived very differently according to the way that the issue is framed (e.g., language used to discuss it)Pragmatic framing (this is a business decision) triggers a cost-benefit, profit calculation mode of thinkingMoral framing (this is an ethical decision) could motivate decision makers to assess the impacts on stakeholders (employees, consumers, suppliers), not only shareholders

Moral FramingKreps & Monin, 2011Moral mutenessExcising moral concerns (framing) from ones communicationsMoral Muteness

Bird & Waters, 19891. Avoid confronting colleague or even subordinate about unethical behavior. Talk about general policies rather than directly address.Seen as judgmental, finger pointing.2. Moral talk may interfere with managerial flexibility, so managers cannot respond quickly and effectively to situations they face.3. Not robust, too idealistic and utopian.Dont feel comfortable with the language, because of own moral illiteracy. 49Moral muteness can lead to:Moral myopia, distortion of moral vision: the inability to clearly recognize the ethical dimension of an issueBankers being unable to understand the moral implications of restarting the bonus payments after banks just almost went bankrupt, clients lost their homes, governments bailed banks out. Zimbardo in his own experiment (Stanford Prison Experiment)

Moral Myopia

Dumwright & Murphy, 20041. Avoid confronting colleague or even subordinate about unethical behavior. Talk about general policies rather than directly address.Seen as judgmental, finger pointing.2. Moral talk may interfere with managerial flexibility, so managers cannot respond quickly and effectively to situations they face.3. Not robust, too idealistic and utopian.Dont feel comfortable with the language, because of own moral illiteracy. 50Moral IntensityIssue-specific factors that can influence moral awareness:Magnitude of consequences Social consensus Probability of effectTemporal immediacy Proximity (social, cultural, psychological or physical) and Concentration of effect

Jones, 1991Moral Intensity

Meta-analytic results from Kish-Gephert, Harrison & Trevino, 2010 Recall: Thought Experiments 1 & 2Experiment 1: You can pull a lever to switch the trolley to a different set of tracks.Experiment 2: You can push a very fat man over the bridge and onto the track to stop the trolley.

nytimes.comResults of Thought Experiments

Consequences are identical. Why this considerable difference? Moral intensityCognitive BiasesBiases are unconscious distortions of perceptionOverconfidence biasIt would never happen to me. Leads to vulnerability, lack of preparedness.Social discountingPlacing less importance on the needs of others; discounting the needs of distant persons (i.e. strangers, people of a different culture) more than your own or of those you are close to or similar to (cf. Proximity)Discounting the futurePlacing less importance on future (or future generations) needs than current ones (cf. Temporal immediacy)Rationalization TacticsRationalizations serve to convince the actor that their actions are not unethical through excuses or justifications. Denial of responsibilityI didnt do it, I had no choice, None of my businessDenial of injuryNo one was really harmed, It could have been worseDenial of victimThey deserved it, They chose to participateSocial weightingYou have no right to judge us, Others are worse than we areAnand, Ashforth & Joshi, 2004Rationalization TacticsAppeal to higher loyaltiesWe answer to a higher causeMoral equilibrium (or Moral licensing , aka Metaphor of the ledger) Good deeds excuse wrongdoingStart small (Zimbardo)Rationalizations can be used before the act (prospective) or after (retrospective)Prospective rationalization can lead to moral myopiaRetrospective rationalization helps reduce misgivings and feelings of guiltAnand, Ashforth & Joshi, 2004Tragedy of the CommonsBiases and rationalization can explain this behavior

RationalizationHow did the alter boy of all those years ago end up here? Walter PavloRationalization

Ford Pinto Case

Ford Pinto Case"Problem" was a word whose public use was forbidden by the legal office at the time, even in service bulletins, because it suggested corporate admission of culpability. "Condition" was the sanctioned catchword.

My cue for labeling a case as a problem either required high frequencies of occurrence or directly-traceable causes.

The revulsion on seeing this incinerated hulk was immediate and profound.

FramingMoral Intensity (Probability of effect)Moral Intensity (Magnitude of Consequence, Proximity)Ford Pinto CaseComparisons revealed that although many cars in this subcompact class suffered appalling deformation in relatively low speed collisions, the Pinto was merely the worst of a bad lot.

Before I went to Ford I would have argued strongly that Ford had an ethical obligation to recall. After I left Ford I now argue and teach that Ford had an ethical obligation to recall. But, while I was there, I perceived no strong obligation to recall and I remember no strong ethical overtones to the case whatsoever.

Cognitive overloadRemoval of emotion

Rationalization (Denial of injury)Moral myopiaMoral ExcellenceEthical vs. unethical behavior or moral excellence?Behavioral ethics tends to focus on unethical behavior. Positive deviance is rarely studied.

Aaron Feuerstein: Strong moral integrity and valuesMany other examples: moralheroes.org (Virtue ethics)

Moral ImaginationDefinition:Articulating and examining alternatives, weighing them and their probable implications, considering their effects on ones other plans and interests, and considering their possible effects on the interests and feelings of others (Jacobs, 1991: pp. 25)Promising but more evidence needed on its impact on decision making.Business IntegrityIn 1982 a flight attendant died after taking a dose of Extra Strength TylenolManagers at Johnson & Johnson first thought about trying to deny that the company did anything wrong, but the CEO said otherwise. (cf. Denial responsibility)Even though there was no evidence of wrongdoing by J&J, within a week the company had recalled every bottle of Extra Strength Tylenol off store shelves around the US.

ConclusionEthical decision making in business is subject to a range of complex, interacting influences within a situationThe new perspective suggests that unethical behavior is much more like normal behavior than we thinkVarious individual, systemic and situational forces all have an important influence on decisionsUnderstanding (un)ethical decision making has crucial implications for managing business ethics

ConclusionPrepare for Seminar 1Instructions for group presentations (Seminar 2) posted on MoodlePlease create your group with 4 other students in your seminar group and register group members on Moodle (Group membership) by Saturday, 14 March.Next LectureEthics ManagementCSR & sustainability standards, tools and reportingGuest Lecturer: Dr. Ulf RichterRead textbook chapter 5 and articles required for lecture 5 (KPMG CR Reporting Survey 2013 - Executive Summary; Zhang, Gino & Bazerman, 2014). Provided on Moodle.

THANK YOU FactorInfluence on ethical decision-making

Age and genderVery mixed evidence leading to unclear associations with ethical decision-making.

National and cultural characteristicsAppear to have a significant effect on ethical beliefs, as well as views of what is deemed an acceptable approach to certain business issues.

Education and employmentSomewhat unclear, although some clear differences in ethical decision-making between those with different educational and professional experience seem to be present.

Psychological factors:

Cognitive moral developmentSmall but significant effect on ethical decision-making.

Locus of controlAt most a limited effect on decision-making, but can be important in predicting the apportioning of blame/approbation.

Personal ValuesSignificant influence some empirical evidence citing positive relationship.

Personal integritySignificant influence likely, but lack of inclusion in models and empirical tests.

Moral imaginationA new issue for inclusion with considerable explanatory potential.

FactorInfluence on ethical decision-making

Organizational

Rewards

Strong evidence of relationship between rewards/punishments and ethical behaviour, although other stages in ethical decision-making have been less investigated.

AuthorityGood general support for a significant influence from immediate superiors and top management on ethical decision-making of subordinates.

Bureaucracy

Significant influence on ethical decision-making well documented, but actually exposed to only limited empirical research. Hence, specific consequences for ethical decision-making remain contested.

Work roles

Some influence likely, but lack of empirical evidence to date.

Organizational norms and culture

Strong overall influence, although implications of relationship between culture and ethical decision-making remain contested.

National

National ContextLimited empirical investigation, but some shifts in influence likely.