Organizational ethics is the ethics of an organization, and it is how an organization responds to an internal or external stimulus. Organizational ethics is interdependent with the organizational culture. Although, it is akin to both organizational behavior (OB) and industrial and organizational psychology as well as business ethics on the micro and macro levels, organizational ethics is neither OB or I/O psychology, nor is it solely business ethics (which includes corporate governance and corporate ethics). Organizational ethics express the values of an organization to its employees and/or other entities irrespective of governmental and/or regulatory laws.
Ethics are the principles and values used by an individual to govern his or her actions and decisions. An organization forms when individuals with varied interests and different backgrounds unite on a common platform and work together towards predefined goals and objectives. A code of ethics within an organization is a set of principles that is used to guide the organization in its decisions, programs, and policies. An ethical organizational culture consists of leaders and employees adhering to a code of ethics.
An organizations ethical philosophy can affect the organization in many ways including its reputation, productivity, and bottom line of the organization. Ethics within an organization can offer many benefits. A positive ethical corporate culture improves the morale among the workers in an organization which could increase productivity and employee retention. More productivity improves the efficiency of the organizations and increased employee retention reduces the cost of replacing employees. The Foreign Corrupt Practices Act (FCPA) restricts the United States business firms from engaging in bribery and other illegal practices internationally. There are laws that have the same type of prohibition for European companies which create a disadvantage competitively for both European and U.S. firms. Such laws are not a restricting element to organizations that have highly elevated ethical behavior as part of their values. Organizations that lack ethical practices as a mandatory basis of their business structure and corporate culture, have commonly been found to fail due to the absence of business ethics. Corporate downfalls would include, but are not limited to, the recent Enron and WorldCom scandals, are two primary examples of unethical business practices concerning questionable accounting transactions.
Organizations focusing on encouraging ethical practices are commonly viewed with respect by employees, the community, and corresponding industries. Ethical business practices of organizations has resulted in a solid financial bottom-line. This has been seen through greater sales and increased revenue by companies retaining talented personnel and attracting newly skilled employees. More importantly, an ethical organization will have the ability to retain employees that are experienced and knowledgeable (generally referred to as human capital). This human capital results in less employee turnover, less training time for new employees, and greater output regarding services (or production of goods).
Basic Ethical Elements
There are at least four elements that aim to create an ethical culture and behavior of employees within an organization. These elements are:
1) a written code of ethics and standards (ethical code)
2) ethics training for executives, managers, and employees
3) the availability of ethical situational advice (i.e. advice lines or offices)
4) confidential reporting systems
Organizations are constantly striving for a better ethical atmosphere within the business climate and culture. Businesses must create an ethical business climate in order to develop an ethical organization. Otherwise saying, companies must focus on the ethics of employees in order to create an ethical business. Employees must know the difference between what is acceptable and unacceptable in the workplace. These standards are found within the written code of ethics or may be referred to as the employee handbook. These standards are a written form of employee conduct and performance expectations.
Employee handbooks also commonly include rules concerning expectations and consequences that follow misconduct. Handbooks normally will clearly state the rules, guidelines, and standards of an organization as well as possible rules, regulations, and laws that they are bound by. Many company handbooks will include laws regarding sexual harassment, alcohol abuse, and drug/substance abuse.
For more information regarding situational ethical principles, refer to "Situational Ethics."
Intrinsic and Extrinsic Organizational Rewards
The intrinsic and extrinsic rewards of an ethical organization are bound to an organization's culture and ethics. Based upon the reliability and support structure of each of the four areas needed for ethical behavior, the organizational ethics will be evident throughout the organization. The organization including the employees, managers, suppliers, customers, and other entities, will receive intrinsic and extrinsic rewards. Actions of employees can range from whistle blowing (intrinsic) to the extraordinary actions of hourly employee purchasing all the recently produced peanut butter (as produced by his employer), that has no resale value due to mislabeled jars. This employee was aware that his employer (extrinsic) would reimburse him in full for purchasing the mislabeled peanut butter.
For more information regarding intrinsic and extrinsic motivation, see "Intrinsic and Extrinsic Motivation."
Ethical Theory and Leadership Empowerment
There are many theories and organizational studies that are related to “organizational ethics,” but "organizations" and "ethics" are wide and varied in application and scope. These theories and studies can range from individual(s), team(s), stakeholder, management, leadership, human resources, group(s) interaction(s), as well as the psychological framework behind each area to include the distribution of job tasks within various types of organizations. As among these areas, the influence of leadership in any organization cannot go unexamined, because a clear understanding of the organization’s vision, goals (to include immediate and long-term strategic plans), and values. Leadership sets the tone for organizational management (strategic actions taken by an organization to create a positive image to both internal and external publics). In turn, leadership directly influences the organizational symbolism (which reflects the culture, the language of the members, any meaningful objects, representations, and/or how someone may act or think within an organization). The values and ideals within an organization generally center upon “values for business” as the theoretical approach most leaders use to present to their "co-members" (which in truth maybe subordinates).
In fact, an examination of business reveals that most leaders approach the X(?) from the perspective of values for the business. Alongside presenting the vision, values, and goals of the organization, the leader should infuse empowerment and motivation to its members. Leaders using empowerment to motivate their subordinates, is based upon the view of: “Achieving organizational ownership of company values is a continuous process of communication, discussion, and debate throughout all areas of the organization” as.
For more information about organization theory, refer to "Organizational Theory."
Whether it is a team, small group, or a large international entity, the ability for any organization to reason, act rationally, and respond ethically is paramount. Leaders must have the ability to recognize the needs and desires of members (or called “stakeholders” in some theories or models), and how they correspond to the organization. It is the stakeholder theory that implies that all stakeholders (or individuals) must be treated equally, regardless of the fact that some individuals will contribute more than others to the organization.
Leaders who motivate others must present the goals of an organization to the stakeholders with respect to particular benefits of the stakeholders. Leaders must set aside individual (or personal) ambitions (along with any prejudice) in order to present these goals properly. Furthermore, it is leadership that influences stakeholders towards ethical behavior for the organization. They must step behind a veil of ignorance and treat every stakeholder as a means with equal weight. Importantly, the leader (or stakeholder management) must possess the necessary skills and rank to ensure that each stakeholders voice is respected and heard within the organization to ensure that other voices are not expressing views (or needs as in respects to Maslow's Hierarchy of Needs). Therefore, stakeholder management must ensure an ethical system for their own management styles, personalities, systems, performances, plans, policies, strategies, productivity, openness, and even risk(s) within their cultures or industries.
Ethical System Implementation
The function of developing and implementing business ethics into an organization is difficult. Due to each organization's culture and atmosphere being different, there is no clear or specific way to implement a code of ethics to an existing business. The implementation should be performed to the entirety of the business including all areas of operations. If it is not implemented pragmatically and with caution for the needs, desires, and personalities (consider the Big Five personality traits) of the stakeholders, the culture, and the employees, then problems may arise. Although a great deal of time may be required, stakeholder management should consider the Rational Decision-Making Model for implementation of various aspects, details, and standards of an ethical system to the stakeholders. If implementation has been performed successfully, then all stakeholders have accepted the newly designed ethics system for the organization.
Theories and Models
Refer to the following theories and models for more information:
- ^ abMatthews, J. (n.d.). Eight Elements of an Ethical Organization. Retrieved November 30, 2014, from http://www.entrepreneurship.org/resource-center/eight-elements-of-an-ethical-organization.aspx
- ^ abcKelchner, L. (n.d.). The Importance of Ethics in Organizations. Retrieved November 30, 2014, from http://smallbusiness.chron.com/importance-ethics-organizations-20925.html
- ^Svensson, Jakob, “Who Must Pay Bribes and How Much? Evidence from a Cross-Section of Firms,” Quarterly Journal of Economics, 118(2003), page 207
- ^Managing with Soul: Combining Corporate Integrity with the Bottom Line,” November 14, 2003, www.hreonline.com/HRE.
- ^Clark, Margaret M., JD., SPHR, "Corporate Ethics Programs Make a Difference, but not the only difference", HR Magazine, July 1, 2003, page 36.
- ^Peters, T.J., and Austin, N. ,(1985), Passion for Excellence: The Leadership difference. New York: Ballantine.
- ^Dricscoll, Dawn-Marie and Hoffman, W. Michael (2002). Ethics Matters: How to Implement Values-Driven Management
- ^McDaniel, Charlotte, (2004), Organizational Ethics: Research and Ethical Environments, page 39
- ^Dricscoll, Dawn-Marie and Hoffman, W. Michael, (2002), Ethics Matters: How to Implement Values-Driven Management, page 172
- ^D.A. Gioia, (1999), "Practicability, Paradigms, and Problems in Stakeholder Theorizing," Academy of Management Review, 24(2), pp. 228–232.
- Halbert, Terry, and Ingulli, Elaine, Law & Ethics in the Business Environment, 5th edition (2006). Mason, OH: Thomson Learning.
- Driscoll, Dawn-Marie and Hoffman, W. Michael, Ethics Matters: How to Implement Values-Driven Management (2000). Waltham, MA: Bently College Center for Business Ethics.
Organizational structure plays crucial role in a number of organizational decisions and activities. As Daft suggests, the definition of organizational structure has three components:
- The organizational structure designates the formal reporting relationships. It prescribes the levels of hierarchy that the organization would have and the span of control for each level.
- The organizational structure prescribes the grouping of organizational members into departments and departments into an organization.
- The organizational structure identifies the systems for coordination, communication and integration of efforts made by organizational members across the organization.
Thus, the organizational structure lays out the whole foundation of the organization. Organizational structure identifies how many divisions will work there in the organization and who will report to whom. It also identifies the systems through which the work of various divisions will be coordinated to accomplish the common organizational objective. (Daft, 2010)
Organizational structure is important to study ethics
Though the primary objective of any business is profit-maximization but making profits only adds to a business’ financial resources. The profits earned unethically would lead the business nowhere in today’s scenario. The customers are aware today and the laws are strict. If the business is found to be engaged in unethical behavior of any sorts, it can ruin its goodwill forever. Various experts have provided that the organizational structure of a firm has lot of influence on the ethical behavior shown by the firm. As Ferrell has said, “An organization’s structure is important to the study of business ethics because the various roles and job descriptions that comprise that structure may create opportunities for unethical behavior.”
Advantage and disadvantage of organizational structure
Though there are many kinds of organizational structures, broadly there are centralized and decentralized organizational structures. Both these have their own advantages and disadvantages to business ethics. Centralized organizations are characterized by concentration of power at the top and there is little scope for delegation of authority. Such structures are said to promote unethical behavior in the organization because there is no interaction between the decision makers at the top and the employees at the lowest level of organization. Also, there is hardly any upward communication due to which the people at the top never come to know of unethical activities going on at lower levels. Such a structure also promotes blame shifting as employees may try to transfer the blame for their wrong actions on others. (Ferrell et al, 2008)
Decentralized organization structure focuses on delegation of authority and individual responsibility. Such structure also promotes unethical behavior among organizational members because there are independent profit centers which make their own decisions and sometimes these units deviate from organizational objectives and serve their individual interests. Decentralized structures run on employee empowerment but if the employees misinterpret their power; this may lead to immoral acts by employees. There are also chances that middle-level managers when get pressure from the top may exert unnecessary pressure on lower level employees and this may again lead to unethical behavior in the organization. (Weiss, 2009)
- Daft, R.L. 10th Edition. (2010). Organization Theory and Design. South-Western CENGAGE Learning.
- Weiss, J.W. (2009). Business Ethics: A Stakeholder & Issues Management Approach. South-Western CENGAGE Learning.
- Ferrell, O.C., Ferrell, L. & Fraedrich, J. 8th Edition. (2008). Business Ethics: Ethical Decision Making and Cases. South-Western CENGAGE Learning.
Analyst at Project Guru
Ankita is working with the editorial board of Project Guru as a Research Analyst and Writer. With Masters in Commerce and Business Studies, Ankita learned much of what she knows about management through experience. She has previously worked in various financial institutions like Birla Global, HDFC Ltd. and Citi Financial. She is self-motivated and writes for the Knowledge Tank section of Project Guru. She has authored more than 80 articles so far in Human Resources Management, Strategic Management, Finance and Marketing. She likes to pen her thoughts about the latest issues gripping these areas across the world.
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