Hartman 5e Accessible PPT Ch04

Chapter Four:
The Corporate
Culture—Impact
and Implications
Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter Objectives 1
After reading this chapter, you will be able to:
• Define corporate culture.

• Explain how corporate culture impacts ethical decision making.
• Discuss the differences between a compliance-based culture and a values-
based culture.
• Discuss the role of corporate leadership in establishing the culture.
• Explain the difference between effective leaders and ethical leaders.
©McGraw-Hill Education. Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter Objectives 2
• Discuss the role of mission statements and codes in creating an ethical

corporate culture.
• Explain how various reporting mechanisms such as ethics hotlines and
ombudspersons can help integrate ethics within a firm.
• Discuss the role of assessing, monitoring, and auditing the culture and
ethics program.
• Explain how culture can be enforced via governmental regulation.
Ethics and Corporate Culture 1
Culture eats strategy for breakfast.

Peter Drucker
©McGraw-Hill Education
What is Corporate Culture? 1
The ethical decision-making model emphasizes the individual

responsibility for the decisions made.
• But personal decision making does not exist in a vacuum.
Decision making within a firm is influenced, limited, shaped, and,

sometimes, determined by the corporate culture of the firm.
• This chapter explores some of the major issues surrounding the
development, influence, and management of a corporate culture.
• It also explores the role of business leaders in creating, enhancing, and
preserving cultures that support ethical behavior.
Even in this age of decentralized corporations, there remains a

sense of culture in organizations.
• This is especially true in small local firms, but just as true of major global
corporations.
Culture: A shared pattern of beliefs, expectations, and meanings

that influences and guides the thinking and behaviors of the
members of a particular group.
Figure 4.1
While culture shapes the people who are members of the

organization, it is also shaped by the people who make up
that organization.
Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Insert Photo Credit Here
Geert Hofstede organized national cultures into six

“dimensions”:
• Power distance index: The distance between individuals at different levels

of a hierarchy (more equal = low power distance).
• Individualism versus collectivism: The degree to which people prefer to act
individually or in groups.
• Uncertainty avoidance: The extent to which people are comfortable with
uncertainty, ambiguity, change, and risks.
• Time and order orientation: A high long-term orientation (LTO) is

comfortable with commitments, traditions, rewards.
• A low LTO indicates that change may occur more rapidly.
• Masculinity versus femininity: Low masculinity indicates greater equality,
stronger relationships, service, and solidarity while high masculinity
suggests assertiveness and competition.
• Indulgent versus restrained: The extent to which people try to control
their desires and impulses.
Hofstede’s National Culture Categories
Supporters say: Critics say:
• He validated his country • His divisions are based on
scores across over 400 generalizations, stereotypes.
measures. • National cultures do not
• His results have been explain all differences.
replicated many times. • His work focused in a single
period of time and place.
• His perspective is biased by
his Western views.
• Only a limited number of
countries were included.
Just as there are national cultures, businesses also have

unspoken, yet influential standards and expectations.
• If you join a firm with a culture that supports values, you are
uncomfortable with—there will be conflicts.
• No culture is static—cultures change; but modifying culture is a bit like
moving an iceberg.
• The iceberg is always moving, and if ignored, the iceberg will continue to float
along on the current.
• Strong leaders—from within or at the top—can have a significant impact on a
culture.
A firm's culture can be its sustaining value:
• Offering direction and stability during challenging times,

• Or it can prevent a firm from responding to challenges in creative and
timely ways.
The stability a culture provides can be a benefit at one time and

a barrier to success at another time.
Some corporate cultures are defined from the top-down, others

are developed by the employees themselves.
What is Corporate Culture?
Defining the specific culture within an organization is not an easy
task because it is partially based on each employee’s perception
of the culture.
• Perception may actually impact the culture in a circular way.
• In addition, culture is present in and can be determined by exploring any
of the following, among others:
• Tempo of work.
• The organization’s approach to humor.
• Methods of problem solving.
• The competitive environment.
• Incentives.
• Individual autonomy.
• Hierarchical structure.
Figure 4.2
Even with this

list of cultural
elements, it can
be difficult for
individuals in a
firm to identify
the specific
characteristics
of the culture
within which
they work. Used by permission of Nancy Margulies
If you are lucky enough to be someone’s employer, then you

have a moral obligation to make sure people do look forward to
coming to work in the morning.
John Mackey, CEO and co-founder, Whole Foods Market
Culture and Ethics 1
How does the notion of culture connect with ethics?
What role does corporate culture play in business ethics?
In situations where the law provides an incomplete answer for

ethical decision making, the business culture is likely to be the
determining factor in the decision.
• Ethical businesses must find ways to encourage, to shape, and to allow
ethically responsible decisions.
The cultivation of habits, including ethical virtue, is greatly

shaped by the culture in which one lives.
• Where we get our habits and character is all-important.
We can choose to develop some habits.

• Habits are shaped by education and training—by culture.
• Intentionally or not, businesses provide an environment in which habits
are formed and virtues, or vices, are created.
The effect of workplace culture on decision making cannot be

overemphasized.
If attended to, a strong ethical culture can deter stakeholder

damage and improve bottom-line sustainability.
• If ignored, the culture could destroy long-term sustainability in both
financial performance and employee retention.
Responsibility for creating and sustaining ethical corporate

cultures rests on business leaders.
• While true that individuals can shape an organization, it is equally true
that organizations shape individuals.
• The person you become, your attitudes, values, expectations, mindset, and
habits, will be significantly determined by the culture of the organization in
which you work.
Compliance and Values-Based Cultures
A distinction arose between different types of corporate
cultures:
• Some firms were classified as compliance-based cultures (the traditional

approach) while others were considered to be integrity-based or values-
based cultures.
• Values-based cultures: A corporate culture in which conformity to a statement
of values and principles rather than simple obedience to laws and regulations
is the prevailing model for ethical behavior
Table 4.1: The Evolution of Compliance Programs into Values-Based Programs
Traditional Progressive (Effective Practices)
Audit focus Business focus
Transaction-based Process-based
Financial account focus Customer focus
Compliance objective Risk identification, process improvement
objective
Policies and procedures focus Risk management focus
Multiyear audit coverage Continual risk-reassessment coverage
Policy adherence Change facilitator
Budgeted cost center Accountability for performance improvement
results
Career auditors Opportunities for other management
positions
Methodology: Focus on Methodology: Focus on goals, strategies, and risk
policies, transactions, and management processes
compliance
Compliance and Values-Based Cultures 1
Compliance-based culture emphasizes adherence to rules as the

primary responsibility of ethics.
• A values-based culture reinforces a set of values rather than rules.
A compliance culture is only as strong and precise as the rules.

• When rules don’t apply, a values-based culture relies on the personal
integrity of its workforce.
Compliance and Values-Based Cultures 2
Compliance-oriented goals may include meeting legal and

regulatory requirements, minimizing risks of litigation and
indictment, and improving accountability mechanisms.
The goals of a more evolved and inclusive ethics program may

entail:
• Maintaining brand and reputation.

• Recruiting and retaining desirable workers.
• Unifying a firm’s global operation.
• Creating a better working environment.
• Doing the right thing as well as doing things right.
I came to see, in my time at IBM, that culture isn’t just one

aspect of the game, it is the game. In the end, an organization is
nothing more than the collective capacity of its people to create
value.
Louis Gerstner, past chairman and CEO, IBM
Ethical Leadership and Corporate Culture 1
Corporate leadership has a primary responsibility to steward

corporate culture.
• Stakeholders are guided by the "tone at the top"; there must be a
consistent tone throughout the firm.
One 2013 study found that senior leaders are more likely than
lower-level employees to break the rules and 60 percent of
reported misconduct is attributed to managers.
• If leadership acts unethically, stakeholders receive the message this type
of behavior is acceptable.
• Alternatively, if a leader acts ethically above any other consideration,
stakeholders are guided by that role model.
Ethical Leadership and Corporate Culture 2
Beyond personal behavior, leadership sets the tone through

other mechanisms.
• "Budgeting is all about value" is a long-standing management credo.
• When ethics officers were first introduced in the early 1990s, the extent of the
financial support they received indicated their relevance and influence.
• Creating a shared company culture is a key responsibility of its leaders, if they
wish to prioritize ethics in their respective companies .
• Leaders should be perceived as people-oriented, as well as engaging in visible
ethical action.
• Executives who are "quietly ethical" within the top management team, are
not perceived as ethical leaders by the distant employees.
The impact of ethical leadership is significant.
Effective Leadership and Ethical, Effective Leadership 3
How do the effective leader and the ethical, effective leader

differ?
• Not every effective leader is an ethical leader.
• One key difference is the means used to motivate others and achieve
one's goals.
• Some of the discussions on leadership suggest that ethical leadership
is determined by the methods used in leading
• Transformative or transactional leaders employ methods that empower
subordinates to take the initiative and to solve problems for themselves.
Effective Leadership and Ethical, Effective Leadership 2
Ethically appropriate methods of leadership are central to

becoming an ethical leader.
• The other element involves the end or objective toward which the leader
leads.
• In the business context, productivity, efficiency, and profitability are minimal
goals for sustainability.
Beyond the goal of profitability, other socially responsible goals

might be necessary before making a conclusion that a leader is
fully ethical.
Building a Values-Based Corporate Culture 1
Culture is built and maintained through leadership, integration,

assessment, and monitoring.
• One of the key manifestations of ethical leadership is the communication
of values for the organization.
• But do codes make a difference?
• Before impacting the culture through a code of conduct or statement of
values, a firm must determine its mission.
• The code has the potential to both enhance reputation and provide guidance
for internal decision making.
• Thus creating a built-in risk management system.
Building a Values-Based Corporate Culture 2
• The mission should be inspiring.

• Establishing the core tenets (especially through a
participatory process), lays down the law for all future
decisions.
• The mission statement or corporate credo articulates the
fundamental principles that should guide all decisions,
without abridgment.
• From a universalist perspective, many decisions might be
made with the end in mind, but none should ever breach the
underlying mission as an ultimate dictate.
Developing the Mission and Code 1
Critical to ask what the company stands for.

• Why does the firm exist? What are its purposes?
Development of guiding principles through articulation of a clear

vision.
Identify clear steps as to how a cultural shift will occur between

the stakeholders and organizations.
Developing the Mission and Code 2
To have an effective code that will impact culture there must be

a belief that this culture is possible and achievable.
While businesses have codes of conduct, industries and/or

professions might also publish codes of conduct.
• These codes of conduct apply to firms or people who do business in those
arenas.
Ethics Code Guidelines
The Ethics Resource Center provides the following guidelines for
writing an ethics code:
• Be clear about the objectives the code is intended to accomplish.

• Get support and ideas for the code from all levels of the organization.
• Be aware of the latest developments in the laws and regulations that
affect your industry.
• Write as simply and clearly as possible. Avoid legal jargon and empty
generalities.
• Respond to real-life questions and situations.
• Provide resources for further information and guidance.
• In all its forms, make it user-friendly because ultimately a code fails if it is
not used.
Cultural Integration 1
Integration can take different forms, depending both on the

organizational culture and the ultimate goals of the process.
One of the most decisive elements of integration is

communication.
• Communication of culture must be incorporated into the firm’s
vocabulary, habits, and attitudes to become an essential element in the
corporate life, decision making, and determination of success.
Effective integration processes should have incentives in the right

place to encourage ethical decision making and checked whether
it is evaluated during a worker’s performance review.
How does communication about ethical matters occur?

• Reporting ethically suspect behavior is a difficult thing to do.
• Nobody likes a "tattletale" and those who report may be retaliated
against.
Whistle-blowing.
• A practice in which an individual within an organization reports
organizational wrongdoing to the public or to others in position of
authority.
• It is a classic issue in business ethics.
• It can have extremely negative connotations, depending on the culture
and environment where it occurs.
• Vocabulary has an impact, and a change of language could inspire workers
to feel a sense of empowerment from their contribution to the corporate
culture.
• It occurs internally and externally.
• Reporting to external groups can be harmful.
• Internal mechanisms for reporting wrongdoing are preferable.
Internal reporting mechanisms must be effective.

• They must allow confidentiality, if not anonymity.
• They must strive to protect the rights of the accused party.
Company norms and culture can encourage internal reporting.
Many firms have created ethics’ ombudspersons and internal or

external reporting helplines.
One challenge with reporting systems is they do not make the

values of the organization clear.
• What is or is not accepted within the company’s culture.
Firms ensure a successful reporting scheme by ensure the

following methods are followed:
• Leaders should model the act of reporting wrongdoing.

• Leaders can explain the decision-making process that led to their
conclusion.
• Crisis management teams are often unsuccessful, but running drills or
rehearsals of challenging events is a valuable exercise that can be
followed.
• Allow sufficient time for reflection in order to reach responsible decisions
might encourage consideration of appropriate implications.
• Consistently and continuously communicate values and expectations to all
stakeholders.
Assessing and Monitoring the Corporate Culture 1
Monitoring and an ongoing ethics audit allows the discovery of

silent vulnerabilities which could pose later challenges.
Effective monitoring system may include significantly positive

objectives.
• How to better allocate resources.
• Determine whether a program is keeping pace with organizational growth.
• Whether all of the program’s positive results are being accurately
measured and reported and the firm’s compensation structure is
adequately rewarding ethical behavior.
• Whether the “tone at the top” is being shared effectively .
Assessing and Monitoring the Corporate Culture 2
How do you detect a "toxic" culture?

• A clear sign is a lack of values for the organization.
• Warning signs can occur in the various component areas of the
organization.
• If the manner in which a firm manages and communicates its financial
environment is disastrous.
How to measure the impact of efforts to change a culture?

• Determine if employee perceptions have changed.
• External audits provide information, as does hotline data.
• Any employee feedback should be gathered and analyzed for input
regarding the culture.
Mandating and Enforcing Culture 1
The United States Sentencing Commission (USSC), an

independent agency in the U.S. judiciary, regulates sentencing
policy in the federal court system.
• The USSC prescribed mandatory Federal Sentencing Guidelines for
Organizations (FSGO) that apply to individual and organizational
defendants in the federal system.
• Listed 43 "offense levels" based on the severity of the offense.
• Strived to use the guidelines to create both a legal and an ethical corporate
environment.
• Each offender is categorized based on the extent and recency of past
misconduct.
• The court inputs this information into a sentencing grid and determines the
offender’s sentence guideline range.
• The USSC strived to use the guidelines to create both a legal and an ethical
corporate environment.
The USSC updated the guidelines in 2004 to include ethics and

compliance programs.
• Required organizations to promote “an organizational culture that
encourages ethical conduct and commitment to compliance with the law.
• Includes a requirement that organizations assess areas of risk for ethics
and compliance, and periodically measure the effectiveness of their
programs.
• Criteria for an effective program was now supposed to be found in a
separate specific guideline.
Sources of Culture
Leadership (and maintenance) of the control environment.
• Through high-level commitment and management responsibility, leaders
set the standard and the tone.
Control activities, information, and communication.

• Statements, policies, operating procedures, communications and training.
• Constant/consistent integration into business practices.
Review, assessment, ongoing monitoring.

• Monitoring, evaluation, historical accountability
The guidelines encourage corporations to create or maintain

effective ethics and compliance programs.
The USSC notes that organizations shall "exercise due diligence

to prevent and detect criminal conduct."
• And promote an organizational culture that encourages ethical conduct
and a commitment to compliance with the law.
The guidelines identify specific acts of an organization that can

serve as due diligence in preventing crime and the minimal
requirements for an effective compliance and ethics program.
Specific Acts of An Organization That Can Serve As Due Diligence
USSC minimal requirements.

• Standards and procedures. • Communication and training.
• Responsibility of board and other • Monitoring, evaluation, and
executives; adequate resources reporting processes.
and authority.
• Incentive and disciplinary
• Board oversight is required. structures.
• High-level personnel must be • Should be enforced
assigned. consistently.
• Specific individuals shall report • Response and modification
periodically to the high-level mechanisms.
personnel.
• Preclusion from authority: prior
misconduct.
In 2010, the USSC lowered the penalties for compliance

violations if the organization met the following four criteria:
• Those responsible for the programs must have direct reporting obligations
to the governing authority.
• The program detected the offense before outside discovery.
• The offense was promptly reported to governmental authorities.
• No person responsible for the program condoned the offense.

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Chapter Four:

After reading this chapter, you will be able to:

• Define corporate culture.

• Discuss the role of mission statements and codes in creating an ethical

Culture eats strategy for breakfast.

The ethical decision-making model emphasizes the individual

Decision making within a firm is influenced, limited, shaped, and,

Even in this age of decentralized corporations, there remains a

Culture: A shared pattern of beliefs, expectations, and meanings

While culture shapes the people who are members of the

Geert Hofstede organized national cultures into six

• Power distance index: The distance between individuals at different levels

• Time and order orientation: A high long-term orientation (LTO) is

Just as there are national cultures, businesses also have

A firm's culture can be its sustaining value:

• Offering direction and stability during challenging times,

The stability a culture provides can be a benefit at one time and

Some corporate cultures are defined from the top-down, others

Even with this

If you are lucky enough to be someone’s employer, then you

John Mackey, CEO and co-founder, Whole Foods Market

How does the notion of culture connect with ethics?

What role does corporate culture play in business ethics?

In situations where the law provides an incomplete answer for

The cultivation of habits, including ethical virtue, is greatly

We can choose to develop some habits.

The effect of workplace culture on decision making cannot be

If attended to, a strong ethical culture can deter stakeholder

Responsibility for creating and sustaining ethical corporate

• Some firms were classified as compliance-based cultures (the traditional

Compliance-based culture emphasizes adherence to rules as the

A compliance culture is only as strong and precise as the rules.

Compliance-oriented goals may include meeting legal and

The goals of a more evolved and inclusive ethics program may

• Maintaining brand and reputation.

I came to see, in my time at IBM, that culture isn’t just one

Corporate leadership has a primary responsibility to steward

Beyond personal behavior, leadership sets the tone through

The impact of ethical leadership is significant.

How do the effective leader and the ethical, effective leader

Ethically appropriate methods of leadership are central to

Beyond the goal of profitability, other socially responsible goals

Culture is built and maintained through leadership, integration,

• The mission should be inspiring.

Critical to ask what the company stands for.

Development of guiding principles through articulation of a clear

Identify clear steps as to how a cultural shift will occur between

To have an effective code that will impact culture there must be

While businesses have codes of conduct, industries and/or

• Be clear about the objectives the code is intended to accomplish.

Integration can take different forms, depending both on the

One of the most decisive elements of integration is

Effective integration processes should have incentives in the right

How does communication about ethical matters occur?

Internal reporting mechanisms must be effective.

Company norms and culture can encourage internal reporting.

Many firms have created ethics’ ombudspersons and internal or

One challenge with reporting systems is they do not make the

Firms ensure a successful reporting scheme by ensure the

• Leaders should model the act of reporting wrongdoing.

Monitoring and an ongoing ethics audit allows the discovery of

Effective monitoring system may include significantly positive

How do you detect a "toxic" culture?

How to measure the impact of efforts to change a culture?