Reducing Ethical Risks: An Organization Systems...

Running Head: Reducing Ethical Risks

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Reducing E thical Risks: An O rganization Systems Solution

Professor Denis Collins

School of Business

Edgewood College

1000 Edgewood College Drive

Madison, WI 53711

608-663-2878

[email protected]

mailto:[email protected]


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Reducing E thical Risks: An O rganization Systems Solution

“A strong ethical culture yields high returns for U.S. companies — when present,

misconduct drops by almost as much as 75 percent. Yet less than one in ten companies today has

a strong ethical culture in place. If U.S. businesses viewed ethics as building reputational capital

— protecting corporate brand and preventing misconduct — ethics risk in the U.S. would be

substantially reduced.” (Ethics Resource Center, 2007, p. 25).

A BST R A C T

In 2003, in the midst of the high profile Enron scandal, only 75 percent of employees

believed their peers were committed to ethics. After four years of public discussion and reforms,

the number decreased, rather than increased, to 61 percent. What should be done about this?

An organization is a system of processes, practices and structures inhabited by morally

imperfect people. Organization systems fueled by ethics result in a culture of high integrity and

superior performance. This article: (1) highlights the costs associated with unethical behaviors

and (2) provides a well-integrated set of organizational processes, practices, and structures

designed to minimize ethical risks by maximizing ethical behaviors. The organization systems

approach advocated for in this article includes the best practices for determining the ethics of job

candidates, codes of ethics, ethical decision making, ethics and diversity training, ethics officers

and hotlines, ethical leadership, ethical work goals and performance appraisals, environmental

management, and community outreach.

K E Y W O RDS: Business Ethics, Organizational Integrity, Systems Approach, Moral

Imperfections


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1. T H E ESC A L A T I O N O F M O R A L E XPE C T I O NS A ND E T H I C A L RISKS

Will all those who would like to make the world a better place please stand up! I ask that

of my adult business students the first day of every semester. With very rare exceptions, they all

stand up. Many people aspire to make our world, nation, state, municipality, and block we live

on a better place, for ourselves and our children.

Will all those who have obtained moral perfection please stand up! Nobody does. We are

all morally imperfect human beings. Parents direct their children to be morally better, not worse,

than they are, yet the child still evolves into a morally imperfect adult. That is the nature of

reality, and has been since the beginning of human existence.

Organizations are composed of morally imperfect people; some employees are more

morally imperfect than others. As a result, every employee decision and action possesses ethical

risks that can make organizations financially vulnerable. One unethical behavior, such as lying to

a customer, can damage an organization’s reputation and have disastrous financial implications.

The development and evolution of technology and democracy significantly increases an

organization’s ethical risk. Technological developments make actions more transparent to a

broader network of people. With more than 1.5 billion people, as of 2008, connected to the

Internet, it is much harder to hide unethical behaviors, even unintentional ones. Domino’s Pizza

went into crisis management mode to save its well-funded brand image after an employee prank

about pizza ingredients appeared on You Tube (Clifford, 2009).

Democracy provides greater voice to those with moral concerns, which, when amplified

by technology, rallies and empowers those with similar moral concerns. Morals-based change

agents exercise their political freedom to fight against what they perceive to be grave injustices


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and, in the process, raise the moral expectations of the entire society. The abolition of slavery in

1863 was followed by the right to vote for women in 1920, the Civil Rights Act of 1964, and the

Endangered Species Act of 1973.

Business Horizons has long recognized the importance of ethical behavior at the

workplace. In the very first volume, Henry Oliver relied on human relations theory to find

common ground between scholars emphasizing managerial pursuit of profit maximization and

those embracing non-economic moral obligations (Oliver, 1958).

A growing amount of research has shifted the theoretical debate from choosing between

ethical performance and financial performance to choosing ethical performance because of its

contributions to financial performance (Margolis & Walsh, 2003; Orlitzky, Schmidt, & Rynes,

2003). An organization’s ethics strategy is being added to governance, marketing, accounting,

human resources, innovation, and investment strategies as important contributors to an

organization’s financial health (Hitt & Collins, 2007).

An organization systems approach to the problem of unethical behavior is essential to

minimize ethical risks. Ethics is an organization’s nerve system and damage in one area can

negatively impact the functioning of other operational areas. A strong network of preventative

antibodies is needed to stop the unethical behavior disease from spreading.

This article presents the best practices for reducing ethical risks throughout an

organization’s operations. But first, managers need to understand the benefits of ethical behavior,

and the types, extent, and costs of unethical behaviors that make the organization systems

approach for reducing ethical risks a strategic and financial imperative.

2. C O MPE T I T I V E A D V A N T A G ES O F E T H I C A L O R G A NI Z A T I O NS


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Research findings and common sense strongly suggest that, in the long run, ethical

organizations financially outperform unethical organizations. Some of the reasons are quite

obvious. Assume you are a job applicant, customer, supplier, or investor and two organizations

met your general requirements in terms of adequate wages, product quality and price, or business

plan implementation. One organization has an ethical reputation and the other an unethical

reputation. Which of the two organizations would you rather be part of, or do business with, the

ethical organization or the unethical organization? Researchers have found that organizations

with a strong ethical culture not only attract high quality employees, customers, suppliers, and

investors, but also retain their loyalty as well (Collins, 2009).

Other characteristics of ethical organizations that favorably impact operations and

financial performance include:

Higher quality product and services

More reliable information for decision making

Increased flexibility among employees and customers

Higher productivity levels from employees

Less need for supervising ethical employees

Higher employee and customer satisfaction

Less employee and customer theft and lawsuits

Greater awareness of economic opportunities associated with the public’s ethical

concerns

Better reputation in the community

3. T YPES O F E T H I C A L ISSU ES


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Ethical issues arise in every organization and throughout organizational operations.

Unethical behaviors can be categorized based on type of issue (i.e., discrimination, fraud),

industry (i.e., financial services, construction), organizational function (i.e., accounting, human

resources), or stakeholder impacted (i.e., employees, customers).

According to the Ethics Resource Center (2007), the most common behaviors that

violated company ethics standards, policy or the law, reported by the 1,929 business sector

respondents to their 2007 survey, were conflicts of interest (observed by 23 percent), abusive or

intimidating behaviors (observed by 21 percent), and lying to employees (observed by 20

percent).

Types of ethical issues examined in Business Horizons articles published from 2005 to

2009 include bankruptcy (Holt, 2007), billable hours (Hitt, Bierman, & Collins, 2007),

communication prohibitions (Sussman, 2008), demotions (Carson & Carson, 2007), espionage

(Crane, 2005), executive compensation (Heisler, 2007), healthcare (Berry, 2008; Hill & Powell,

2009), humor (Lyttle, 2007), intellectual property rights (Swike, Thompson, & Vasquez, 2008),

military reservists (Hemphill, 2004; Tidwell, Rice, & Kropkowski, 2009), offshoring (Downing

& Stack, 2005; Weidenbaum, 2005), pensions (Maines, 2008), pregnancy discrimination (Kohl,

Mayfield, & Mayfield, 2005), and work-life balance (Bourne, Wilson, Lester, & Kickul, 2009;

Robin, Russell-Chapin, & Stoner, 2005).

Different industries have different ethical challenges. In the construction industry, the

five most critical ethical issues were bid shopping, changing customer orders, payment

manipulations, unreliable contractors, and false claims (FMI/CMAA, 2004). The financial

service and pest control industries would report a different set of ethical challenges.


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Each organizational function has its own unique set of dilemmas as well. Wooten (2001)

developed an extensive list of five types of ethical issues for each of the eight primary Human

Resource Management functions (i.e., staffing and selection, compensation and benefits). Jelinek

& Jelinek (2008) provide a similarly extensive list of unethical behaviors in the accounting

profession.

How can managers make sense of this onslaught of ethical issues? Kaptein (2008)

provides probably the most useful typology and survey instrument for conceptualizing and

measuring unethical behavior in the workplace. He examined codes of ethics for 105 of the 200

largest companies in the world, performed content and factor analysis, and derived five

stakeholder-based subscales consisting of thirty-seven items. The subscales and items appear in

Table 1.

Insert Table 1 About Here

4. E X T E N T O F UN E T H I C A L B E H A V I O RS

During the early 2000s, Ken Lay, Bernie Ebbers, Dennis Kozlowski, and other high level

corporate executives were handcuffed, paraded before the media, and found guilty of crimes

associated with greed and other unethical behaviors. In 2003, a nationwide survey of employees

revealed that corporate ethical problems went much deeper than the executive suites as only 75

percent believed their peers were committed to ethics (Ethics Resource Center, 2007). Four years

later, after significant public discussion and accounting reforms, the 2007 nationwide survey

revealed that ethics had worsened rather than improved – only 61 percent of the employees

surveyed now believed that their peers were committed to ethics. The following year a wave of


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financial service scandals sent the economy into a deep recession, generating huge layoffs and

government bailouts.

Liars, swindlers, and unkind greedy people date back to the beginning of human

existence, they are not modern inventions. In Genesis, Jacob, with his mother’s assistance, lied to

his father Isaac, in order to steal his older twin brother’s blessing, which provided rulership over

his brothers and their families. Novelists and journalists in every society chronicle a never

ending list of unscrupulous and scandalous business behaviors.

Unethical behaviors commence shortly after birth. Children lie as soon as they can talk

based on calculating what statements will maximize pleasure and minimize pain (Ford, 1996).

By adulthood, people lie on average only once to twice a day, which is a very small percentage

of their daily interactions (DePaulo, Kashy, Kirkendol, Wyer, & Epstein, 1996). The longer the

social interaction, however, the greater the likelihood a lie occurring. Thirty to forty percent of

all social interactions lasting longer than ten minutes contain a lie.

Legal violations are a particularly problematic type of unethical behavior. Clement

(2006) found that, during a span of five years, 40 percent of the Fortune 100 companies pled

guilty to violating the law, were found guilty, or agreed to a settlement. According to

government records, the following cases were initiated in U.S. District Courts for the twelve

months ending March 31, 2008: 34,432 contract violation cases, 29,277 product liability cases,

20,633 other personal injury cases involving businesses, 16,480 labor law cases, 12,910

employment civil rights cases, and 9,774 copyright/patent/trademark infringement cases, among

others (Federal Judicial Caseload Statistics, 2008). In 2008, the Equal Employment

Opportunities Commission received more than 95,000 discrimination claims (Equal Employment

Opportunities Commission, 2009).


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The likelihood of being sued is a function of a host of factors, including organizational

size, industry, regulatory authorities, confidence in the legal system, type of unethical behavior,

and quantity of unethical behaviors. Fulbright & Jaworski (2007) surveyed 250 major

corporations and found that:

83 percent had at least one new lawsuit filed against them in the past year

33 percent were defending at least 25 pending legal cases

18 percent were defending at least 100 pending legal cases domestically

60 percent were defending at least one class action lawsuit

48 percent had a new regulatory proceeding initiated by the government in the past year

65 percent had initiated at least one lawsuit in the past year

Organizations can be the victims, as well as perpetrators, of unethical behaviors by their

employees or competitors. The U.S. Chamber of Commerce reports that three out of four

employees have stolen from their employer (McGum, 1988). More than $350 billion in

counterfeit goods are traded annually in the world economy (Chaudhry, 2006).

Some industries are more ethically challenged than others. According to a survey of

construction owners, architects, engineers, managers, general contractors, and subcontractors,

84 percent reported they had experienced, encountered, or observed unethical behaviors in the

past year (FMI/CMAA, 2004).

Employees desire trustworthy leaders. But, in a cross-industry survey, 39 percent of the

respondents reported that their boss broke promises, and approximately one in four claimed

supervisors insulted them and blamed others for their supervisor’s mistakes (Harvey, Stoner,

Hochwarter, & Kacmar, 2007).


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Cheating is pervasive throughout society, including politics, sports, schools, and

marriage, and most of us both perpetrators and victims of cheating (Callahan, 2004). For

instance, some employees cheat employers by falsifying time cards or using work time to surf

the Internet. On the other hand, a 2009 national survey found that 68 percent of low-wage

employees experienced at least one pay-related violation by their employer during the previous

week, such as not being paid minimum wage or for overtime worked (Greenhouse, 2009).

Cheating behaviors begin prior to entering the workforce. More than 70 percent of high

school students report that they cheat on tests, and 80 percent of high-achieving students admit to

having cheated at least once (Crittenden, Hanna, & Peterson, 2009). Similar percentages for

cheating occur among undergraduate students. Business students cheat more than humanities

students, but that does not say much as four out of every ten humanities students admit to

cheating. The numbers at the graduate level are similarly troubling, with 56 percent of all

surveyed MBA students claiming to have cheated regularly.

5. C OSTS IN C URR E D F R O M M O R A L I MPE R F E C T I O NS

Organizations incur a variety of costs due to unethical behaviors. Some costs occur

because an employee treated someone else unethically, which can lead to lawsuits, lost

customers, and employee turnover. Some costs occur because the organization has been treated

unethically by someone else, such as counterfeit products or illegal bid analysis. Some unethical

behaviors are inter-related; a boss treats a subordinate unfairly, and the employee retaliates by

stealing from the organization. Five major organizational costs generated by unethical behaviors

are legal costs, theft, recruitment and turnover costs, monitoring costs, and reputation costs.


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5.1. L egal Costs

Lawsuits are one of the most easily quantifiable costs associated with unethical

behaviors. In a 2007 survey, forty percent of the largest corporations had at least one new lawsuit

filed against them worth $20 million within the past year, and 20 percent spent at least $5 million

for outside counsel (Fulbright & Jaworski, 2007). In 2005, plaintiffs were awarded at least $1

million in contract cases involving nearly 2,000 companies (Langton & Cohen, 2008). The

median award for employment civil rights cases settled in U.S. District Courts between 2006 and

2006 was $158,000 (Kyckelhahn & Cohen, 2008).

Tobacco companies were long able to avoid lawsuits for wrongful death or injury from

smoking. That changed in 1992 when the U.S. Supreme Court ruled that the Surgeon General’s

health warning on cigarette packages did not negate lawsuits against tobacco companies. In

1997, tobacco companies and state attorney generals reached a $368.5 billion settlement

originated from lawsuits filed to pay Medicare costs for treating sick smokers. In 2002, a jury

ruled Phillip Morris was liable for $28 billion in punitive damages to a smoker dying of lung

cancer. Following an extensive appeal process on the excessiveness of the damage award, in

2009 a new jury reduced the penalty to $13.8 million (Anonymous, 2009). Hovering in the

background is knowledge that 5.4 million people in the world died from smoking-related causes

in 2008 alone.

Mistakes do occur, and it is up to the potential litigant to determine whether to pursue the

matter through the court system. Gladwell (2005) summarizes several malpractice research

studies that found the most prevalent predictor of lawsuits is not the doctor’s skills or educational

training; it is the quality of the relationship between doctor and patient. Potential litigants tend

not to sue doctors they like.


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5.2. Theft

It may sound crass, but every employee is a potential thief. Employees can steal money,

products, or time. Theft-related costs that are individually minimal – doing personal emails,

Internet searchers, and phone calls on company time – become substantial when aggregated

across an entire workforce. For instance, the U.S. Department of Interior calculated that non-

work related Internet usage by its employees cost taxpayers $2 million annually (Gross, 2006).

According to an annual survey conducted for the National Retail Federation, retail stores

lost more than $41 billion from theft and fraud in 2006, 1.5 percent of total sales (Grannis,

2007). Approximately $20 billion of the losses, or 50 percent, were attributed to employees.

Missing product is five times more likely the result of an employee than a professional thief, and

fifteen times more likely the result of an employee than a shoplifter (Murphy, 1993). In the

construction industry, for every $1 million spent on a project, $5,000 to $50,000 is “unaccounted

for” (FMI/CMAA, 2004). The Association of Certified Fraud Examiners (2008) estimated that

$994 billion is lost from the economy as a result of frauds, equivalent to 7 percent of Gross

Domestic Product.

Competitors are also a source of theft. U.S. businesses lose $200 billion annually in

revenue due to counterfeit products, and IT industry reports $100 billion in lost software revenue

(Berman, 2008). Worldwide, consumers purchase as much as $650 billion in counterfeit goods a

year. This is particularly problematic for consumers of medicines and other healthcare products.

5.3. Recruitment and Turnover Costs


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As discussed previously, employees, customers, suppliers, and investors prefer to do

business with ethical organizations. Unethical organizations incur greater costs recruiting

employees, customers, suppliers, and investors, and must provide some premium to offset their

ethical deficiencies. The lack of loyalty between an unethical organization and its key

constituents is mutual, resulting in higher turnover among employees, customers, suppliers, and

investors.

5.4. Monitoring Costs

Organizations incur monitoring costs when they employ, or do business with, unethical

people. In the construction industry, 74 percent of the surveyed owners do not trust contractors,

and 60 percent of contractors do not trust design professionals (FMI/CMAA, 2004). The lack of

trust results in additional costs due to heightened supervision and new layers of rules and

regulations aimed at preventing unethical behaviors.

5.5. Reputation Costs

An organization’s reputation can attract or repel employees and customers. Reputations

can be severely damaged when lawsuits and accusations of unethical behavior appear in the

media, or when customers register complaints with the Better Business Bureau. Employees who

endure an unethical or abusive boss, or conclude that the organization has an unethical culture,

can generate costs beyond the already discussed theft of money, products, and time. Employee

word-of-mouth is an important source of information to external constituents (Cravens & Oliver,

2006; Mangold & Miles, 2007). Disgruntled current and former employees express their negative


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views on Internet blogs and community forums, and can purposely sabotage an organization’s

reputation by extending incurred disrespect to customer interactions (Harris & Ogbonna, 2009).

6. A N O R G A NI Z A T I O N SYST E MS SO L U T I O N

Rather than responding to each ethical problem and associated cost piecemeal, or going

from one crisis to the next, managers should take an organization systems approach to

developing a culture of accountability and integrity (Hall, Bowen, Ferris, Royle, and

Fitzgibbons, 2007; Kayes, Stirling, & Nielsen, 2007). Ethical risks can be reduced by

implementing processes, practices, and structures that generate and reinforce ethical behaviors

and minimize the impacts caused by morally imperfect people.

Managers can put systems in place that tap into people’s moral essence to obtain superior

organizational performance. The Federal Sentencing Guidelines implemented in 1991 encourage

businesses to voluntarily adopt some of the best practices in business ethics. If an employee

commits a crime, an organization with a robust Ethics Compliance Program receives a reduction

in fine. The organization systems approach presented in Figure 1 provides a more elaborate “best

practices” model for reducing ethical risks by integrating ethics throughout the workplace.

Insert Figure 1 About Here

The organization systems approach includes best practices in determining the ethics of

job candidates, ethical decision making, ethics and diversity training, ethics officers and hotlines,

ethical leadership, ethical work goals and performance appraisals, environmental management,

and community outreach. All of these ethics mechanisms require assessment and modifications


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based on feedback from those they affect. The following sections briefly review the best

practices within each segment of the organization systems approach for reducing ethical risks.

6.1 H iring E thical People

The organization systems approach begins with hiring ethical job candidates. This often

overlooked first step is the most important because people are creatures of habit. Some job

screens help to elicit the ethical propensities of job candidates. The five-step Ethics Job Screen

Process outlined in Figure 2 integrates the best ethics hiring practices into a systematic and

chronologic framework that complements an organization’s job recruiting process. The first step

is a cautionary one, ensuring that any method used to determine ethics does not violate federal

law. The next four steps are information sources.


Past ethical behavior is the best predictor of future ethical behavior. Behavioral

information can be obtained from resumes, reference checks, background checks, and integrity

tests. Behavior is also a function of attitudes. The most reliable attitudinal survey scales for

predicting ethical behavior measure conscientiousness (Sackett & Wanek, 1996), organizational

citizenship behavior (Bolina & Trunley, 2003), social dominance (Sidanius & Pratto, 2001), and

bullying (Lutgen-Sandvik, Tracy, & Alberts, 2007). The first two factors measure positive

associations and the latter two negative associations (the higher the score for social dominance

and bullying, the less ethical a person behaves). Each information gathering method contributes


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partial, not complete, information about the job candidate. Any questionable information or

responses should be addressed during the formal interview process.

Each method has weaknesses. Researchers estimate that 20-44% of all resumes contain

lies about work histories, educational background, and other credentials (Bowles, 2002).

References can be heavily biased in favor of candidates or nonresponsive due to defamation of

character lawsuit concerns. Surveys are prone to social desirability errors. Each weakness needs

to be appropriately managed.

For instance, the most important information an employer can receive is the pervious

supervisor’s perspective. If not listed among the references, request the previous supervisor’s

contact information and ask the job candidate why the person was not listed. There may be a

good reason. If the former supervisor has been instructed to only verify the dates of employment,

then simply ask: “Would you hire this person again?” If the response is favorable, or the person

hesitates or refuses to answer, that might be all the information needed.

Job candidates also should be interviewed about how they managed ethical dilemmas at

their previous workplace, and given an opportunity to comment on any contentious issues

revealed on their resumes, reference and background checks, or attitudinal surveys. When

appropriate, managers should test job candidates for alcohol and drug consumption, and conduct

polygraph tests if the job task impacts national security or public safety issues.

6.2 Codes of E thics and Codes of Conduct

During job orientation, new employees should be exposed to the organization’s Code of

Ethics and Code of Conduct, which are essential ethics mechanisms.


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An organization’s Code of Ethics serves as its conscience and provides employees with a

common ethical reference point. The Code of Ethics should be inspirational and fit on a business

card. Typically, the Code of Ethics reminds employees that all stakeholders will be treated with

utmost respect and dignity, and the importance of being trustworthy, responsible, and fair

(Schwartz, 2005).

A Code of Conduct provides substance to the Code of Ethics. The Code of Conduct

should explicitly describe what it means to respect all stakeholders. These codes typically

provide more detailed information about conflicts of interest, use of corporate assets,

confidentiality, fair dealings with stakeholders, compliance with relevant laws and regulations,

and reporting illegal or unethical behaviors (Verschoor, 2004).

To ensure their effectiveness, Codes of Ethics and Conduct must be vocally supported by

management, publicly displayed, and addressed in training workshops. In the spirit of continuous

improvement, employees should annually assess how well the organization lives up to these

codes, and provide suggestions for improving ethical performance.

6.3 E thical Decision-Making F ramework

Codes of Conduct cannot cover every ethical situation that might arise. New employees

should also be oriented to the organization’s ethical decision-making framework. Review how

managers gather information about the ethical ramifications of their decisions and actions, the

think through an ethical dilemma. The ethical decision-making framework should provide a

common language for understanding and discussing the moral aspect of business problems, and a

method for independently deriving a moral answer.


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Answering the following six questions, which are grounded in moral philosophy, helps

employees understand the ethical ramifications of the action under consideration (Collins &

Page, 1997):

1. Who are all the people affected by the action?

2. Is the action beneficial to me?

3. Is the action supported by my social group?

4. Is the action supported by national laws?

5. Is the action for the greatest good of the greatest number of people affected by it?

6. Are the motives behind the action based on truthfulness and respect/integrity toward

each stakeholder?

Questions two through six above are listed in ascending ethical importance. The answers

to the last two questions point employees in the direction of the most ethical decision.

Sometimes, the answers these two questions recommend might need to be modified due to

concerns about the law, interest group desires, or one’s own self-interest. Begin with the most

ethical decision and compromise only if absolutely necessary.

The six ethical questions can also help employees understand how to persuade each other.

If an employee states that he or she prefers a particular action because it is to the greatest good of

the greatest number (utilitarianism), then someone wanting to persuade this person should speak

the same ethical language and explain how a different course of action is actually more

beneficial to the greatest good. Similarly, if the person states a preference for an action because

of its impact on his or her life (egoism), then provide a self-interested reason why a different

course of action is more beneficial to the person.


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6.4 E thics T raining

Individuals are more likely to discuss work-related ethical issues with family and friends

than coworkers, supervisors, or executives. According to the Ethics Resource Center (2007),

only about half of all observed unethical behaviors are reported to managers. Ethical issues need

to be discussed and critically examined as part of the organization’s annual ethics training

program.

All employees in the organization should participate in ethics training workshops with

their peers. The ethics training workshop is an opportunity for employees to learn more about,

and evaluate, how ethics impacts their work activities and organizational performance. Ethics

training also helps to further develop, and reinforce, a culture of trust. People employed in

organizations with formalized ethics training have more positive perceptions about their

organization’s ethics and greater job satisfaction (Valentine & Fleischman, 2004).

The most effective form of ethics training is an interactive workshop based on real-life

experiences. A skilled facilitator needs to create a safe learning environment so participants will

speak openly about their observations and experiences.

Individuals are likely to engage in an unethical act if doing so makes the person feel

good, colleagues pressure the person to do so, or the act does not seem wrong. Conversely,

individuals are likely to confront a colleague doing something unethical if doing so makes the

person feel good, colleagues pressure the person to confront unethical co-workers, and the

person strongly feels obligated to do so.

Ethics training workshops should be designed to address these issues. At the conclusion

of each workshop attendees should feel obligated to improve the organization’s ethical

performance. Figure 3 provides a summary of ten ethics training workshop options. In addition


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to understanding, applying, and assessing the organization’s Code of Ethics and Code of

Conduct, other well-received ethics training workshop topics include developing and examining

ethical dilemmas experienced by employees, exploring common rationales for unethical

behaviors, understanding one’s personality traits, benchmarking behavior to that of an ideal

employee, and reflecting on how to make work enjoyable and meaningful.


6.5 Respecting Employee Diversity

National populations continue to diversify, as does the employee and customer base of

organizations. Creating an organizational culture that respects diverse people requires planning

and effort (Canas & Sondak, 2008). When undertaking a diversity initiative, managers should

articulate the competitive advantages of diversity and work with employees to create a shared

vision that respectfully builds upon previous accomplishments. A particular employee, such as a

Diversity Officer, should be accountable for diversity issues and given appropriate political

support.

To create a diverse workplace, organizations should broaden the job applicant pool.

Target market specific diverse populations to complement the usual recruiting methods, and then

hire the most qualified person among all the applicants. Offering flexible personal policies, such

as flexible work schedules and cafeteria-style benefits plans, helps to retain diverse employees.

The Diversity Officer should review dispute resolution processes, promotions, performance

appraisals, and downsizing criteria for potential discriminatory biases against diverse people.


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Diversity training exercises and activities should foster self-awareness and focus on

problem-solving for work-related issues. The diversity trainer must have credibility with both the

dominant and subordinate groups. Both groups need to develop understanding and tolerance

toward each other. Diversity success stories should be praised, shortcomings discussed, and

continuous improvement strategies developed. Commonalities among all diverse groups must be

highlighted to help all employees feel part of a cohesive team experience.

Differences in communication style, an often overlooked diversity factor that can

significantly impact organizational performance, should be addressed (Hilyer, 2006). Employees

need to learn how to communicate in a way that is conducive to the other person’s information

reception preferences.

6.6 E thics Reporting Systems

Organizations must open avenues of communication among all employees to discuss

ethical issues as they arise. An employee uncomfortable sharing such information with his or her

direct manager needs other outlets. Most frauds are detected by tips, not audits (Association of

Certified Fraud Examiners, 2008).

Employees should first consider sharing concerns with their direct manager. Sometimes

that is not a reasonable option due to personality issues, topic sensitivity, or power imbalance.

Alternative internal reporting systems include an Ethics & Compliance Officer (ECO), an

ombudsman, and an Assist Line. A failure in these internal communication systems can result in

external whistleblowing, which is damaging for both the organization and the whistleblower.

An ECO can have many responsibilities (Morf, Schumacher, & Vitell, 1999). In addition

to managing the internal ethics reporting systems, an ECO should assess areas for ethical risks,


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offer guidance, monitor the organization’s adherence to its Code of Ethics and Code of Conduct,

oversee the ethics communication strategy, develop and interpret ethics policies, and oversee the

ethics training program (Izraeli & BarNir, 1998). When ethical violations are reported, the ECO

should collect and analyze relevant data, ensure that appropriate decisions are made and

enforced, and inform employees about the outcomes.

An ombudsman, who typically has a legal background, provides employees with an

institutional voice for addressing ethical problems that arise (Hill, 2002). The ombudsman

guarantees the employee anonymity, investigates the employee’s concern, mediates a fair

settlement, and protects the employee from retaliation.

Ethics assist lines, formerly referred to as “ethics hotlines,” provide a third avenue for

internal reporting (Anonymous, 1998). Employees should be encouraged to use the assist line, be

it via e-mail or telephone, to express any concerns they may have. Most assist line comments are

about human resources issues or ethics policy clarifications, which is why the term “hotline” is

misleading. Effective assist lines share two characteristics. First, employee requests for

confidentiality and anonymity are honored at all times. Second, employees who purposely

submit a false accusation are disciplined. To ensure anonymity, some organizations contract out

assist lines to third parties.

6.7 E thical L eadership, Work Goals, and Performance Appraisals

The most important ethics reference point is an employee’s direct supervisor or manager.

Daily managerial behaviors clearly signal ethical expectations to employees. How a manager

acts in response to an ethical issue has more influence on employee ethics than any stated policy


23

or words of encouragement. Managers have already been promoted, so their daily workplace

actions indicate to subordinates what it takes to be promoted.

Employees want their managers to be honest, credible, respectful, and fair (Kouzes &

Posner, 2007). When managers exhibit these admirable characteristics, employees do likewise. If

managers behave unethically, their subordinates are tempted to do likewise as well. According to

a survey of managers, the lack of integrity and character is among the top reasons why managers

fail (Longenecker, Neubert, & Fink, 2007). It is difficult for subordinates to take orders from,

and support, someone they consider dishonest, untrustworthy, or unethical.

Managers are also responsible for developing work goals and performance appraisals,

both of which impact ethical performance (Schweitzer, Ordonez, & Douma, 2004). Hypocrisy

and moral confusion develops when unethical behaviors are ignored, encouraged, or rewarded.

Work goals should be specific, measurable, aligned, time-bound, and challenging, yet

attainable. Management-By-Objectives is a very effective goal-setting technique. The individual

work goals are jointly determined by the manager and employee, and aligned with departmental

and organizational goals. Avoid stretch goals that may tempt employees to stretch the truth.

Employees stressed by work goals should participate in wellness programs, Employee Assistant

Programs, delegation training, time management training, or opportunities for focused quiet

work time and meditation.

Performance appraisals should document employee accomplishments and benchmark the

distance an employee still needs to travel to become an ideal employee. Measure whether the

employee lives up to the Code of Ethics, embodies the attitudes and behaviors of an ideal

employee, and constructively contributes to ethics-based initiatives. Use 360-degree performance


24

appraisals to develop a holistic perspective of the employee, and to let all employees know that

their opinions do matter (Carson, 2006).

When reporting back to the employee being evaluated, begin by praising

accomplishments and then jointly turn shortcomings into goals for the upcoming year. Document

any allegations of unethical behaviors and provide the employee an opportunity to clarify the

situation. Punishments must reflect the magnitude of the violations.

6.8 Empowering E thical Employees

An ethical organization is a community of people where every employee is treated with

dignity and has a sense of organizational ownership and accountability. A complementary set of

management systems reinforces a sense of community within the organization and with external

stakeholders.

Managers should create a fully empowered workforce where employees effectively

participate on decision-making teams, develop plans for superior customer service and

continuous improvement, and share in the financial benefits generated by their efforts.

Researchers report that top-down, one-way communication and decision-making processes make

subordinates passive and reactive, rather than proactive, and have a detrimental effect on an

employee’s moral development (White, 1999).

Not all employees are prepared for full participation. Differentiate go-getters (employees

who are fully engaged in the work experience) from adversarials (employees with a bad attitude

toward both work and authority) and fence-sitters (employees who put in a solid day’s work, but

never go beyond that). Groom go-getters for leadership positions, continually increase

expectations for fence-sitters, and confront and challenge adversarials (Collins, 1998).


25

Develop effective teams based on trust. Trust is the foundation for constructive conflict,

goal commitment, personal accountability, and achieving collective goals (Lencioni, 2005).

Train teams to collectively solve problems and give them the authority to, within reason, make

changes as needed. Use Appreciative Inquiry techniques to design and implement systems for

achieving superior customer satisfaction, and Scanlon-type gainsharing plans and Open Book

Management to provide employees the information and decision-making authority necessary to

improve organizational operations. Conclude each day with team-based reflections. Each team

member should praise a major accomplishment, share a work-related problem, and brainstorm

problem solutions to implement the following day.

Employees should share in profits they help to generate. Distribute financial

improvements to all employees through profit sharing, stock options, Employee Stock

Ownership Plans (ESOPs), or cooperatives (Blasi, Kruse, & Bernstein, 2003).

Team-based participatory management, where employees provide meaningful input in the

organization’s decision-making process, and share the financial gains associated with improved

performance, creates a sense of ownership, communal experience, and accountability among

employees (Collins, 1998).

6.9 Environmental Management

Ethical organizations place a high value on appropriately managing the Earth’s scarce

resources and creating environmentally healthy workplaces for their employees. Appropriately

managing interactions between the organization and the natural environment roots the

organization within its surrounding eco-system. Wal-Mart’s focus on becoming eco-friendly,


26

rooted in cost-saving and new revenue streams, has created a more favorable public image of the

previously maligned company (Hemphill, 2005).

Managers can achieve superior environmental performance by (Esty & Winston, 2006;

Nattrass & Altomare, 1999):

creating an Environmental Management System (EMS) plan that documents relevant

organizational procedures

conducting an environmental risk assessment

using the Natural Step (TNS) objectives to develop action plans

redesigning the product to achieve zero waste, operating in green buildings that have

earned LEED certification

developing performance indicators to measure continuous improvement, and reporting

the results of these efforts

The EMS should document how the organization conducts environmental policy

development, environmental planning and implementation, environmental monitoring and

corrective actions, and management review. Annually audit the EMS plan to ensure that the

procedures are operating effectively.

Managing the environmental change process entails assigning day-to-day responsibilities

to an environmental manager supported by top management. Develop a cross-functional “green

team” composed of influential go-getters. The green team should create an environmental vision

and strategy, use the TNS framework to assess current environmental performance, and

experience success by initially solving a relatively easy problem. The most common areas for

improving environmental performance (and reducing costs) are energy use, waste disposal, paper

use, product packaging, toxic substances, and business travel.


27

6.10 Community Outreach

An ethical organization aspires to be a model citizen, joining other stakeholders in

creating vibrant communities for the well-being of its employees and other residents. Developing

outreach activities that enhance community well-being connects the organization with its

geographical location and the life of its employees outside of work. Companies can give

nonprofit and community organizations money, products or services, and skills, and provide job

opportunities for nontraditional employee populations. A systematic giving program would

integrate all four areas.

Money can be directly donated to community organizations or linked to the sales of

particular products. Products or services can be given to community organizations for use by its

employees and clients, or to leverage as fundraising auction items. Companies can provide

employees with paid time to volunteer their services for community organizations, or offer

employees community service sabbaticals (Needleman, 2008). The volunteer activity is an

opportunity for employees to further develop project management and leadership skills, and to

participate in team-building activities. Companies can serve the community by offering job

opportunities to nontraditional employees, such as people with disabilities or ex-convicts.

Managers can reactively give to community organizations on a first-come first-serve

basis, outsource giving to the United Way and other mediating organizations, or proactively give

by developing a few key strategic partnerships with nonprofit organizations aligned with the

company’s mission. Cause-related marketing (Berglind & Nakata, 2005) and organizational

sponsorships (Farrelly & Quester, 2005) help build brand loyalty. Businesses should pursue an

integrative approach that involves all three types of recipients.


28

An ideal strategic partnership is one where both the company and the community

organization benefit from the arrangement (Porter & Kramer, 2002). Determine which

community organization benefits the most from the company’s products, services, and employee

skill set, and also has a similar customer, labor, and supplier profile. This provides the

foundation for a win-win opportunity, one that benefits both the community organization and the

company. Strategic partnership objectives must be transparent, fair, and realistic, and

communication between the partners must be two-way.

Employees should be involved in the company’s outreach decision-making process. The

community involvement process should be carefully monitored, and the outcomes measured,

assessed, and shared with the community.

6.11 The Total Quality Management of E thics

Implementing an organization systems approach can significantly reduce unethical or

illegal behaviors. Human beings, however, will remain morally imperfect and ethical problems

can still arise. Depending on the egregiousness of the unethical behavior, the employee should be

either disciplined or fired. These two short-term solutions, however, do not address the

systematic root of the ethical problem. Why wasn’t the employee’s unethical proclivity detected

earlier? Is there a problem with the hiring process, ethics training workshops, or performance

evaluations? Similar to Total Quality Management, the ultimate goal of the organization systems

approach is as close to zero defects as possible.

The Total Quality Management of Ethics process outlined below provides a systematic

approach for determining the root cause of an unethical behavior.

_1 Focus on the particular unethical activity the employee did.


29

_2 Instead of merely blaming the particular employee, determine the systematic source that

allowed the problem to occur. Did the problem originate from a(n):

a. Hiring Process Problem: Was an unethical person hired?

b. Code of E thics or Conduct Problem: Do these codes inadequately address the issue?

c. E thical Decision-Making F ramework Problem: Did the employee inadequately apply

ethical reasoning to the situation?

d. E thics Training Problem: Does the training program inadequately address the issue?

e. E thics Reporting System Problem: Are the mechanisms for raising ethical issues and

reporting unethical behaviors inadequate?

f. Manager Role Model Problem: Is the employee’s manager an inadequate role model?

g. Unrealistic Work Goal Problem: Were the employee’s work goals unattainable or

misdirected?

h. Performance Evaluation Problem: Are performance evaluation measures inadequate?

i. External Stakeholder Oversight Problem: Did the regulator or professional association

inadequately address the issue?

_3 Seek input from affected constituents on how to strategically address the problem.

_4 Develop an action plan that includes:

a. Clearly stated problem

b. Initial solution to the problem

c. Major obstacles against implementing the solution

d. Recommendations for overcoming the obstacles

e. Development and monitoring metrics to measure success


30

_5 Make managers accountable for the results. Senior leaders should set unambiguous objectives

and provide the necessary resources and appropriate incentives.

6.11 Best Practices Assessment

To enhance organizational ethics, managers must keep score by measuring ethical

behaviors. Employees pay more attention to activities that are measured and assessed. Managers

should benchmark their organization’s performance to the best practices discussed in this article,

develop recommendations, and make modifications in the spirit of continuous improvement.

7. C O N C L UDIN G C H A L L E N G E

Unethical business activities are not new. Business owners and managers have always

had the freedom to choose to behave ethically or unethically. The vitality of free-market

capitalism depends on ethics. The more people in business behave ethically, the more freedom

and liberty government can allow in the economic system. Unethical behavior that reaches a

critical level results in new government regulations and oversight mechanisms.

There are many examples of organizations being “stakeholder-friendly” (Leap &

Loughry, 2004). These excellent examples need to be part of an organization’s day-to-day

management practices, thereby contributing to the development of a strong ethical culture.

People’s moral imperfections must be recognized and their accompanying ethical risks managed

appropriately. Ethical risks can be significantly reduced by adopting the highly-integrated

systems approach advocated in this article.


31

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Table 1. Unethical Behaviors Highlighted in Codes of Ethics Unethical Behaviors Toward Financiers 1.1 Falsifying or manipulating financial reporting information 1.2 Falsifying time and expense reports 1.3 Stealing or misappropriating assets (e.g., money, equipment, materials) 1.4 Breaching computer, network, or database controls 1.5 Abusing or misusing confidential or proprietary information of the organization 1.6 Violating document retention rules 1.7 Providing inappropriate information to analysts and investors 1.8 Trading securities based on inside information 1.9 Engaging in activities that pose a conflict of interest (e.g., conflicting sideline activities, favoritism of family and friends, use of working hours for private purposes, executing conflicting tasks) 1.10 Wasting, mismanaging, or abusing organizational resources Unethical Behaviors Toward Customers 2.1 Engaging in false or deceptive sales and marketing practices (e.g., creating unrealistic expectations) 2.2 Submitting false or misleading invoices to customers 2.3 Engaging in anticompetitive practices (e.g., market rigging, quid pro quo deals, offering bribes or other improper gifts, favors, and entertainment to influence customers) 2.4 Improperly gathering competitors’ confidential information 2.5 Fabricating or manipulating product quality or safety test results 2.6 Breaching customer or consumer privacy 2.7 Entering into customer contracts relationships without the proper terms, conditions, or approvals 2.8 Violating contract terms with customers Unethical Behavior Toward Employees 3.1 Discriminating against employees (on the basis of age, race, gender, religious belief, sexual orientation, etc.) 3.2 Engaging in (sexual) harassment or creating a hostile work environment (e.g., intimidation, racism, pestering, verbal abuse, and physical violence) 3.3 Violating workplace health and safety rules or principles 3.4 Violating employee wage, overtime, or benefits rules 3.5 Breaching employee privacy Unethical Behaviors Toward Suppliers 4.1 Violating or circumventing supplier selection rules 4.2 Accepting inappropriate gifts, favors, entertainment, or kickbacks from suppliers 4.3 Paying suppliers without accurate invoices or records 4.4 Entering into supplier contracts that lack proper terms, conditions, or approvals 4.5 Violating the intellectual property rights or confidential information of suppliers 4.6 Violating contract or payment terms with suppliers


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4.7 Doing business with disreputable suppliers Unethical Behaviors Toward Society 5.1 Violating environmental standards or regulations 5.2 Exposing the public to safety risk 5.3 Making false or misleading claims to the public or media 5.4 Providing regulators with false or misleading information 5.5 Making improper political or financial contributions to domestic or foreign officials 5.6 Doing business with third parties that may be involved in money laundering or are prohibited under international trade restrictions and embargos 5.7 Violating international labor or human rights


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Figure 1: Organizational Systems Approach to Reduce Ethical Risks


40

Step Explanation

Step 1: Legal Ground

Rules

Gather and use information in a way that does not discriminate against

job candidates based on their race, color, religion, gender, national

origin, age, or disability.

Step 2: Behavioral

Information

Review behavioral information from resumes, reference checks,

background checks, and integrity tests.

Step 3: Personality

Traits

Obtain measures for personality traits such as conscientiousness,

organizational citizenship behavior, social dominance, and bullying.

Step 4: Interview

Questions

Interview the job finalists about their responses to ethical dilemmas

experienced at previous workplaces and how they would respond to

ethical dilemmas experienced by current employees. In addition, clarify

inconsistencies and ambiguities that arise during the previous two job

screening steps.

Step 5: Other Tests Where appropriate, conduct alcohol, drug, and polygraph tests as a final

test of the job finalist’s integrity.

Figure 2. Five-Step Ethics Job Screen


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1 Code of Ethics Assessment – Review the Code of Ethics. Have employees assess how well the organization is living up to the code, praise areas of strength, and develop strategies for improving the lowest scoring areas.

2 Code of Conduct Content – Create a Who Wants to be a Millionaire or Jeopardy quiz show asking questions about the organization’s Code of Conduct.

3 Code of Conduct Violations and Outcomes – Present actual cases of employees, or people in the industry, violating a code of conduct, and the punishments they received.

4 Applying the Code to Specific Situations – Provide several real-life situations and have participants determine whether the behavior is in accordance with, or violates, the Code of Conduct.

5 Creating Business Ethics Scenarios for Discussion – Have employees create ethical scenarios based on their own experiences and discuss them.

6 Applying the Ethics Decision-Making Framework – Teach participants the 6-question Ethical Decision-Making Framework, provide several real-life situations, and have them use the framework to derive a moral solution to the situation.

7 Ethical Hazard Approaching – Review a list of common rationalizations for unethical behavior, discuss situations when these reasons have been given to justify behaviors, and then brainstorm a more ethical response in case a similar situation arises in the future.

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Personality Analysis – Administer surveys that measure character attributes associated with ethical or unethical behavior, such as Conscientiousness, Organizational Citizenship Behavior, Social Dominance Orientation, Locus of Control, Machiavellianism, and Individualism/Collectivism.

9 Benchmarking to an Ideal Employee – Develop a profile of an “ideal employee,” put into a survey format, have employees assess themselves to this ideal, praise the good, analyze shortcomings, and develop strategies for transforming weaknesses into strengths.

10 Work as a Calling – Reflect on making job tasks enjoyable and meaningful experiences. Figure 3: Ethics Training Workshop Options

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