FFF12e Ch07 Final

Part Three
The Decision
Making Process
Chapter 7
Organizational
Factors: The
Role Of Ethical
Culture And
Relationships
© 2019 Cengage. All rights reserved.
2
Learning Objectives
• Understand the concept of corporate culture
• Examine the influence of corporate culture on business
ethics
• Determine how leadership, power, and motivation relate to
ethical decision making in organizations
• Assess organizational structure and its relationship to
business ethics
• Explore how the work group influences ethical decisions
• Discuss the relationship between individual and group
ethical decision making

3
Corporate Culture
• Corporate culture and organizational culture can be
used interchangeably.
• Shared values, norms, and artifacts that influence
employees and determine behavior, including ways of
solving problems that members (employees) of an
organization share.
• Shared beliefs top managers in a company have
about how they should manage themselves and other
employees, and how they should conduct their
business(es).

4
Characteristics of an Ethical
Corporate Culture
• Sarbanes–Oxley 404 Compliance Section
1. Requirement that management assess the effectiveness of
the organization’s internal controls and commission audits
of these controls by an external auditor in conjunction with
the audit of its financial statements.
2. Requires firms to adopt a set of values that forms a portion
of the company’s culture.
3. Mandates an evaluation of corporate culture to provide
insight into the character of an organization, its ethics, and
transparency.
4. The intent is to expose mismanagement, fraud, theft, abuse,
and to sustain a corporate culture that does not allow these
conditions and actions to exist.
5
Steps in Measuring an Ethical

Corporate Culture (1 of 2)
• Management and the board demonstrate their
commitment to integrity, core values, and ethics
codes through their communications and actions.
• Employees are encouraged/required to have
hands-on involvement in compliance, especially
internal control systems and reporting systems.
• Ethical leadership.

6
Steps in Measuring an Ethical

Corporate Culture (2 of 2)
• Employees must receive communication through
resolutions and corrective actions related to
ethical issues.
• Employees must have the ability to report policy
exceptions anonymously to any member of the
organization, including the CEO, other members
of management, and the board of directors.

7
The Role of Corporate Culture

in Ethical Decision Making (1 of 2)
• Some cultures are so strong, they come to
represent the character of the entire
organization.
• Explicit statements of values, beliefs, customs,
and expected behavior usually come from upper
management. (Memos, written codes of conduct,
handbooks, manuals, forms, and ceremonies are
formal expressions of an organization’s culture.)

8
The Role of Corporate Culture

in Ethical Decision Making (2 of 2)
• Corporate culture can be expressed through
gestures, looks, labels, promotions, programs,
and legends (or the lack thereof).
• When leaders are perceived as trustworthy,
employee trust increases; leaders are seen as
ethical and as honoring a higher level of duties.

9
Ethical Frameworks and

Evaluations of Corporate Culture
• Two basic dimensions in an organization’s
culture:
1. Concern for people—the organization’s efforts to
care for its employees’ well-being.
2. Concern for performance—the organization’s
efforts to focus on output and employee
productivity.

10
Figure 7-2 Company Examples of

the Four Organizational Cultures
Ben & Jerry’s—A Caring Culture Starbucks—An Integrative Culture
Ben & Jerry’s embraces community Starbucks always looks for ways to
causes, treats its employees fairly, expand and improve performance.
and expends numerous resources to It also exhibits a high concern for
enhance the well-being of its people through community causes,
customers. sustainability, and employee health
care.
Countrywide Financial—An Apathetic United Parcel Systems—An Exacting

Culture Culture
Countrywide seemed to show little Employees are held to high
concern for employees and standards to ensure maximum
customers. The company’s culture performance, consistency of delivery,
appeared to encourage unethical and efficiency.
conduct in exchange for profits.

11
Example of Four Culture Types

(1 of 2)
• Apathetic: Minimal concern for either people or

performance. Individuals focus on their own self-
interest.
• Caring: High concern for people but minimal
concern for performance issues. It is difficult to
find nationally recognizable companies that
maintain little or no concern for performance.
• Exacting: Little concern for people but a high
concern for performance. Focuses on the
interests of the organization.

12
Example of Four Culture Types

(2 of 2)
• Integrative: Combines a high concern for people

and performance. An organization becomes
integrative when superiors recognize employees
are more than interchangeable parts—
employees have an ineffable quality that helps
the firm meet its performance criteria.

13
Cultural Audit
• Assessment of an organization’s values.
• Usually conducted by outside consultants but
may be performed internally as well.
• Communication about ethical expectations and
support from top management help to identify a
corporate culture that encourages ethical
conduct or leads to ethical conflict.

14
TABLE 7-2 Corporate Culture

Ethics Audit (1 of 3)
Answer Yes or No to Each of the Following Questions*
Has the founder or top management of the company left
Yes No
an ethical legacy to the organization?
Yes No Does the company have methods for detecting ethical
concerns both within the organization and outside it?
Yes No Is there a shared value system and understanding of
what constitutes appropriate behavior within the
organization?
Are stories and myths embedded in daily conversations
Yes No
about appropriate ethical conduct?
Are codes of ethics or ethical policies communicated to
Yes No
employees?
Are there ethical rules or procedures in training
Yes No
manuals or other company publications?
Are penalties for ethical transgressions publicly
Yes No
discussed?
Are there rewards for good ethical decisions even if
Yes No
they don’t always result in a profit?

15

Yes No Does the company recognize the importance of creating a culture concerned about people and
their investment in the business?
Yes No Does the company have a value system of fair play and honesty toward customers?
Yes No Do employees treat each other with respect, honesty, and fairness?
Yes No Do employees spend their time working in a cohesive way on what is valued by the organization?
Yes No Are there ethically based beliefs and values about how to succeed in the company?
Yes No Are there heroes or stars in the organization who communicate a common understanding about
which positive ethical values are important?
Yes No Are there day-to-day rituals or behavior patterns that create direction and prevent confusion or
mixed signals on ethics matters?
Yes No Is the firm more focused on the long run than on the short run?
Yes No Do the dress, speech, and physical aspects of the work setting contribute to a sense of
consistency about what is right?

16

Yes No Are emotional outbursts about role conflict and ambiguity rare?
Yes No Has discrimination and/or sexual harassment been eliminated?
Yes No Is there an absence of open hostility and severe conflict?
Yes No Do people act on the job in a way consistent with what they say is ethical?
Yes No Is the firm more externally focused on customers, the environment, and the welfare of society
than on its own profits?
Yes No Is there open communication between superiors and subordinates about ethical dilemmas?
Yes No Have employees ever received advice on how to improve ethical behavior or been disciplined for
committing unethical acts?
*Add up the number of “Yes” answers. The greater the number of “Yes” answers, the
less likely ethical conflict is in your organization.

17
Ethics and Corporate Culture

(1 of 2)
• A significant factor in ethical decision making.

• Culture dictates hiring people with specific,
similar values. If those values are perceived as
unethical by society, society will view the
organization and its members as unethical.
• If a company’s primary objective is to make as
much profit as possible through whatever means,
its culture may foster behavior that conflicts with
stakeholders’ ethical values.

18
Ethics and Corporate Culture

(2 of 2)
• If an organization values ethical behavior, it

rewards them thru recognition and awards in a
consistent and balanced manner.
• All performance at the threshold level should be
acknowledged, and praise or rewards given as
close to the performance as possible.

19
Compliance versus Values-

Based Ethical Cultures (1 of 4)
• Compliance-based: The accounting professional model.
• Rules create a compliance culture organized around risk.
• Compliance-based cultures use a legalistic approach to
ethics.
• Codes of conduct are established with compliance as their
focus, with rules and policies enforced by management.
• Instead of revolving around an ethical culture, the company
revolves around risk management.
• The approach is good in the short term because it helps
management, stakeholders, and legal agencies ensure
laws, rules, and the intent of compliance are fulfilled.

20

• Compliance-based: The accounting
professional model.
• Problem 1: Its lack of long-term focus on values
and integrity.
• Problem 2: Does not teach employees to
navigate ethical gray areas.

21

• Values-based
• Relies on an explicit mission statement that
defines the core values of the firm and how
customers and employees should be treated.
• Board of directors/upper management should add
to value statements by formulating specific value
statements for its strategic business units (SBU).
• Certain areas may have rules associated with
stated values, enabling employees to understand
the relationship between the two.

22

• Values-based
• The focus is on values such as trust,
transparency, and respect to help employees
identify and deal with ethical issues.
• When using this approach, explain why rules
exist, what the penalties are if rules are violated,
and how employees can help improve the ethics
of the company.

23
Differential Association (1 of 2)
• People learn ethical or unethical behavior while
interacting with others.
• The learning process is more likely to result in
unethical behavior if the individual associates
primarily with persons who behave unethically.
• Associating with others who are unethical,
combined with the opportunity to act unethically,
is a major influence on ethical decision making.

24
Differential Association (2 of 2)
• Differential association influences ethical
decision making, and superiors in particular have
a strong influence on the ethics of their
subordinates.
• Employees, especially young managers, tend to
go along with their superiors’ moral judgments to
demonstrate loyalty.

25
Whistle-Blowing and Legal

Protection (1 of 2)
• Whistle-blowing: Exposing an employer’s
wrongdoing to outsiders such as the media or
government regulatory agencies.
• Sometimes used to refer to internal reporting of
misconduct to management, especially through
anonymous reporting mechanisms often called
hotlines.

26
Whistle-Blowing and Legal

Protection (2 of 2)
• Legal Protection
• Sarbanes–Oxley Act
• The Federal Sentencing Guidelines for
Organizations (FSGO)
• The U.S. Department of Labor (DOL)
• The Corporate and Criminal Fraud Accountability
Act (CCFA)
• Securities and Exchange Commission
• The Dodd–Frank Act

27
Explanation of Legal Protection

(1 of 3)
• CCFA: Protects employees of publicly traded

firms from retaliation if they report violations of
any rule or regulation to the Securities and
Exchange Commission, or any provision of
federal law relating to fraud against
shareholders.
• Requires attorneys to become internal whistle-
blowers.
• The Dodd–Frank Act: Additional incentives for
whistle-blowers (> $1 million = 10-30%).

28

(2 of 3)
• The Sarbanes–Oxley Act and the Federal

Sentencing Guidelines for Organizations
(FSGO):
• If an employee provides information to the
government about a company’s wrongdoing under
the Federal False Claims Act, the whistle-blower
is known as a qui tam relator.
• Can receive between 15 and 25 percent of the
recovered funds.

29

(3 of 3)
• The Sarbanes–Oxley Act and FSGO:

• Must have adequate knowledge of wrongdoing that
could damage society.
• Illegal to “discharge, demote, suspend, threaten,
harass, or in any manner discriminate against” a
whistle-blower and set penalties of up to 10 years in
jail for executives who retaliate against whistle-
blowers.
• Specific protections including the right to seek
investigation and review by federal Inspectors General
for “adverse actions” such as termination or
demotions.
30
Table 7-3 Questions to Ask before

Engaging in External Whistle-Blowing
1. Have I exhausted internal anonymous reporting opportunities within

the organization?
2. Have I examined company policies and codes that outline acceptable
behavior and violations of standards?
3. Is this a personal issue that should be resolved through other means?
4. Can I manage the stress that may result from exposing potential
wrongdoing in the organization?
5. Can I deal with the consequences of resolving an ethical or legal
conflict within the organization?

31
Table 7-4 Receiver of Reports

of Misconduct
Reporting Location
Immediate supervisor
Top management
Human resource management
Hotline/Help Line
Ethics officer
Outside the company (not governmental or regulatory authority)
Legal

32
Power Shapes Corporate

Culture: Five Power Bases (1 of 3)
• Reward: Ability to influence the behavior of others by
offering them something desirable (money, status, or
promotion).
• Coercive: Penalizes actions or behavior and relies
on fear to change behavior. More effective in
changing behavior in short versus long run. Often
employed where there is an extreme imbalance of
power. People continually subjected to coercion may
seek a counterbalance and align themselves with
other, more powerful persons or leave the
organization.

33

• Legitimate: Stems from the belief that a certain
person has the right to exert influence and certain
others have an obligation to accept it (titles and
positions of authority).
• Expert: Derived from a person’s knowledge (or a
perception that a person possesses knowledge).
Usually stems from a superior’s credibility with
subordinates. Credibility (expert power), is positively
correlated to the number of years a person worked in
a firm or industry, education, and honors he/she has
received for performance.

34

• Referent: Exists when one person perceives that
his/her goals or objectives are similar to
another’s with an attempt to influence the first to
take actions that allows both to achieve their
objectives. Identification with others helps boost
the decision maker’s confidence, thus increasing
the referent power.

35
Motivating Ethical Behavior (1 of 2)

• Motivation: A force within that focuses behavior
toward achieving a goal.
• Job performance is considered to be a function
of ability and motivation [job performance =
ability × motivation].
• An increase in promotion touches higher-order
needs (social connections, esteem, and
recognition) rather than lower-order (salary,
safety, and job security).

36
Motivating Ethical Behavior (2 of 2)

• Research shows an individual’s career stage, age,
organization size, and geographic location affect the
relative priority given to satisfying respect, self-
esteem, and basic physiological needs.
• An individual’s hierarchy of needs may influence his
or her motivation and ethical behavior.
• Relatedness needs are satisfied by social and
interpersonal relationships.
• Growth needs are satisfied by creative or productive
activities.

37
Organizational Structure (1 of 2)
• Decision making authority is concentrated in the
hands of top-level managers, and little authority is
delegated to lower levels.
• Responsibility, both internal and external, rests with
top-level managers.
• Structure especially suited to organizations that make
high-risk decisions and have lower-level managers are
not highly skilled in decision making.
• Suitable for organizations when production processes
are routine and efficiency is of primary importance.

38
Organizational Structure (2 of 2)
• Decision making authority is concentrated in the
hands of top-level managers, and little authority is
delegated to lower levels.
• Division of labor is typically well defined and a clear
understanding of how to carry out assigned tasks.
• Stress formal rules, policies, and procedures backed
up with elaborate control systems.
• Codes of ethics may specify the techniques used for
decision making.

39
Table 7-5 Structural Comparison of

Organizational Types (1 of 2)
Characteristic Centralized Decentralized
Hierarchy of authority Centralized Decentralized
Flexibility Low High
Adaptability Low High
Problem recognition Low High
Implementation High Low
Dealing with changes Poor environmental complexity Good
Rules and procedures Many and formal Few and informal

40
Table 7-5 Structural Comparison of

Organizational Types (2 of 2)
Characteristic Centralized Decentralized
Division of labor Clear-cut Ambiguous
Span of control Many employees Few employees
Use of managerial techniques Extensive Minimal
Coordination and control Formal and impersonal Informal and personal

41
Decentralized Organization (1 of 2)
• Decision making authority is delegated as far
down the chain of command as possible.
• Relatively few formal rules, and coordination and
control are usually informal and personal.
• Focus on increasing the flow of information.
• Strength: Adaptability and early recognition of
external change. With greater flexibility,
managers can react quickly to changes in their
ethical environment.

42
Decentralized Organization (2 of 2)
• Weakness: Difficult to respond quickly to changes in
policy and procedures established by top
management.
• Independent profit centers may deviate from
organizational objectives.
• May have fewer internal controls and use shared
values for their ethical standards.
• May have more variation in behavior.
• May be harder to control rogue employees engaging
in misconduct.

43
Corporate Structure, Culture,

and Types of Groups (1 of 2)
• Formal group: An assembly of individuals with
an organized structure that is explicitly accepted
by the group.
• Committee: Group assigned to a specific task,
represent different constituencies, meet regularly
to review performance, develop plans, or make
decisions.
• Weaknesses—lack of individual responsibility and
Groupthink mentality.

44
Corporate Structure, Culture,

and Types of Groups (2 of 2)
• Work groups: Used to subdivide duties within
specific functional areas of a company.
• Enables specialization.
• Ethical conflicts may arise because team
members come from different functional areas.
• Conflicts when members of different
organizational groups interact.

45
Informal Groups (1 of 2)
• May generate disagreement and conflict, or
enhance morale and job satisfaction.
• Can help develop informal channels of
communication, sometimes called the
grapevine.
• The grapevine: Information passed along the
grapevine may relate to the job, the organization,
an ethical issue, or it may simply be gossip and
rumors.

46
Informal Groups (2 of 2)
• The grapevine
• Can act as an early warning system for employees.
• Can be an important source of information for individuals to
assess ethical behavior within their organization.
• Corporate culture may provide a general understanding of
rules, but informal groups make this come alive and provide
direction for employees’ daily choices.
• Information passed along the grapevine is not always
accurate, but managers who understand how the grapevine
works can use it to reinforce acceptable values and beliefs.

47
Group Norms
• Help define acceptable and unacceptable behavior
within a group.
• Define the limit allowed on deviations from group
expectations.
• Provide explicit ethical directions.
• Can relate directly to managerial decisions.
• Have the power to enforce a strong degree of
conformity among group members.
• Can define the different roles for various positions
within the organization.

48
TABLE 7-7 Variation in

Employee Conduct
10% 40% 40% 10%
Follow their own Always try to follow Go along with Take advantage of
values and beliefs; company policies the work group situations if the penalty
believe that their is less than the benefit
values are superior and the risk of being
to those of others in caught is low
the company
*Estimates based on the author’s research and reports from ethics and compliance
officers from many industries.

49
Variation in Employee Conduct:

Bottom 10%
• Take advantage of situations to further their own
personal interests.
• More likely to manipulate, cheat, or act in a self-
serving manner.
• May choose to take office supplies from work for
personal use if the only penalty they suffer is paying
for the supplies.
• The lower the risk of being caught, the higher the
likelihood that the 10 percent most likely to take
advantage of the company will be involved in
unethical activities.
50

Middle 40% (1 of 2)
• Go along on most matters.
• Most concerned about the social implications of
their actions and want to fit into the organization.
• Easily influenced by what the people around
them are doing.
• May know using office supplies for personal use
is improper, yet they view it as acceptable
because their coworkers do so.

51

Middle 40% (2 of 2)
• Rationalize their actions by saying the use of
office supplies is a benefit of working at their
particular company and it must be acceptable
because the company does not enforce a policy
prohibiting the behavior.
• Rationalize that no one will get into trouble for
doing what everybody else is doing.

52

Top 40% (1 of 2)
• Always try to follow company policies and rules.
• Have a strong grasp of acceptable behavior and
attempt to comply with codes of ethics, ethics
training, and other communications about
appropriate conduct.
• If a policy prohibiting taking office supplies from
work, these employees probably will observe it.
• Not likely to speak out about the 40 percent who
choose to go along with the work group.

53

Top 40% (2 of 2)
• Prefer to focus on their jobs and steer clear of
any organizational misconduct.
• If the company fails to communicate standards of
appropriate behavior, members of this group will
devise their own.

54

Top 10% (1 of 2)
• Maintain formal ethical standards that focus on
rights, duties, and rules.
• Embrace values that assert certain inalienable
rights and actions, which they perceive to be
always ethically correct.
• Believe their values are right and superior to the
values of others or even to the company’s value
system.

55

Top 10% (2 of 2)
• Have a tendency to report or speak out about
employee or firm misconduct even if the
company defines it as ethical.
• Members of this group will probably report
colleagues who take office supplies.

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Part Three

© 2019 Cengage. All rights reserved.

© 2019 Cengage. All rights reserved.

Steps in Measuring an Ethical

© 2019 Cengage. All rights reserved.

Steps in Measuring an Ethical

© 2019 Cengage. All rights reserved.

The Role of Corporate Culture

© 2019 Cengage. All rights reserved.

The Role of Corporate Culture

© 2019 Cengage. All rights reserved.

Ethical Frameworks and

© 2019 Cengage. All rights reserved.

Figure 7-2 Company Examples of

Countrywide Financial—An Apathetic United Parcel Systems—An Exacting

© 2019 Cengage. All rights reserved.

Example of Four Culture Types

• Apathetic: Minimal concern for either people or

© 2019 Cengage. All rights reserved.

Example of Four Culture Types

• Integrative: Combines a high concern for people

© 2019 Cengage. All rights reserved.

© 2019 Cengage. All rights reserved.

TABLE 7-2 Corporate Culture

© 2019 Cengage. All rights reserved.

TABLE 7-2 Corporate Culture

© 2019 Cengage. All rights reserved.

TABLE 7-2 Corporate Culture

© 2019 Cengage. All rights reserved.

Ethics and Corporate Culture

• A significant factor in ethical decision making.

© 2019 Cengage. All rights reserved.

Ethics and Corporate Culture

• If an organization values ethical behavior, it

© 2019 Cengage. All rights reserved.

Compliance versus Values-

© 2019 Cengage. All rights reserved.

Compliance versus Values-

© 2019 Cengage. All rights reserved.

Compliance versus Values-

© 2019 Cengage. All rights reserved.

Compliance versus Values-

© 2019 Cengage. All rights reserved.

© 2019 Cengage. All rights reserved.

© 2019 Cengage. All rights reserved.

Whistle-Blowing and Legal

© 2019 Cengage. All rights reserved.

Whistle-Blowing and Legal

© 2019 Cengage. All rights reserved.

Explanation of Legal Protection

• CCFA: Protects employees of publicly traded

© 2019 Cengage. All rights reserved.

Explanation of Legal Protection

• The Sarbanes–Oxley Act and the Federal

© 2019 Cengage. All rights reserved.

Explanation of Legal Protection

• The Sarbanes–Oxley Act and FSGO:

Table 7-3 Questions to Ask before

1. Have I exhausted internal anonymous reporting opportunities within

© 2019 Cengage. All rights reserved.

Table 7-4 Receiver of Reports

© 2019 Cengage. All rights reserved.

Power Shapes Corporate

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