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MGT504 - Organization Theory and Design - Lecture Handout 26

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Of The values that make up an organization’s culture, ethical values are now considered among the most important. Ethical standards are becoming part of the formal policies and informal cultures of many organizations, and courses in ethics are taught in many business schools. Ethics is the code of moral principles and values that govern the behaviors of a person or group with respect to what is right or wrong. Ethical values set standards as to what is good or bad in conduct and decision making.

Ethics is distinct from behaviors governed by law. The rule of law arises from a set of codified principles and regulations that described how people are required to act, are generally accepted in society, and are enforceable in the courts.

The relationship between ethical standards and legal requirement is illustrated below. Ethical standards for the most part apply to behavior not covered by the law, and the rule of law covers behaviors not necessarily covered by ethical standards. Current laws often reflect combined moral judgment, but not all moral judgment are codified into law, the morality of aiding a drowning person, for example, is not specified by law, and driving on the right-hand side of the road has no moral basis; but in areas such as robbery or murder, rules and moral standards overlap.

Unethical conduct in organizations is surprisingly widespread. More than 54 percent of human resources professional polled by the society for Human Resources Management and the Ethics Resources Centre reported observing employees lying to supervisor or coworkers, falsifying reports or records, or abusing drugs or alcohol while on the job. Many people believe that if you are not breaking the law, then you are behaving in an ethical manner, but ethics often go far beyond the law. Many behaviors have not been codified, and managers must be sensitive to emerging norms and values about those issues. Managerial ethics are principles that guide the decisions and behaviors of manager with regard to whether they are right or wrong in a moral sense. The notion of social responsibility is an extension of this idea and refers to management’s obligation to make choices and take action so that the organization contributes to the welfare and interest of society as well as to itself.

Examples of the need for managerial ethics are as follow.

  • The supervisor of a travel agency was aware that her agents and she could receive large bonuses for booking one hundred or more clients each month with an auto rental firm, although clients typically wanted the rental agency selected on the basis of lowest cost.
  • The executive in charge of a parts distribution facility told employees to tell phone customers that inventory was in stock even if it was not. Replenishing the item only took one to two days, no one was hurt by the delay, and the business was kept from competitors.
  • The project manager for a consulting project wondered whether some facts should be left out of a report because he marketing executives paying for the report would look bad if the facts were reported.
  • A North American manufacturer operating abroad was asked to make cash payments (a bribe) to government officials and was told it was consistent with local customs, despite being illegal in North America.

These issues are exceedingly difficult to resolve and often represent dilemmas. An ethical dilemma arises when each alternative choice or behavior seems undesirable because of a potentially negative ethical consequence. Right or wrong cannot be clearly identified. These choices can be aided by establishing ethical values within the organizations as part of corporate culture. Corporate culture can embrace the ethical values needed for business success.


The standards for ethical or socially responsible conduct are embodied within each employee as well as within the organization itself. In addition, external stakeholders can influence standards of what is ethical and socially responsible. Individual beliefs and values, a person’s ethical decision framework, and moral development influence personal ethics, organization culture, as we have already discussed, shape the overall frame work of values within the organization. More ever, formal organization system influence values and behaviors according to the organization’s policy framework and reward systems.

Companies also respond to numerous stakeholders in determining what is right. They considers how their actions may be viewed by customers, government agencies, shareholders, and the general community, as well as the impact each alternative course of action may have on various stakeholders. All of these factors can be explored to understand ethical decision in organization.


Every individual brings a set of personal beliefs and values into the workplace. Personal values and the moral reasoning that translates these values into behavior are an important aspect of ethical decision making in organization.

The family backgrounds and spiritual values of mangers provide principles by which they carry out business. In addition, people go through stages of moral development that affect their ability to translate values into behavior. For example, children have a low level of moral development, making decisions and behaving to obtain rewards and avoid physical punishment. At an intermediate level of development, people learn to conform to expectations of goods behavior as defined by colleagues and society. Most managers are at this level, willingly upholding the law and responding to societal expectation. At the highest level of moral development are people who develop an internal set of standards. These are self – chosen ethical principles that are more important to decision than external expectations. Only a few people reach this high level, which can mean breaking laws if necessary to sustain higher moral principles.

The other personal factor is whether managers have developed an ethical framework that guides their decisions. Utilitarian theory, for example, argues that ethical decisions should be made to generate the greatest benefits for the largest number of people. This frame work is often consistent with business decisions because cost and benefit can be calculated in dollars. The personal liberty frame work argues that decision should be made to ensure the greatest possible freedom of choice and liberty for individuals. Liberties include freedom to act on one’s conscience, free speech, due process, and the right to privacy. The distributive justice framework holds that moral decisions are those that promote equity, fairness, and impartiality with respect to distribution of rewards and the administration of rules, which are essential for social cooperation.


Rarely can ethical or unethical business practices e attributed entirely to the personal ethics of single individual. Because business practice reflects the values, attitudes, and behavior patterns of an organization’s culture, ethics is much an organizational issue as a personal one. To promote ethical behavior in the workplace, companies, should make ethics an integral part of the organization’s culture. At Certified Transmission Rebuilds, a small company based in Omaha, Nebraska, the culture is built on putting the customers’ interests first. Employees receive ongoing in – house training to developed “honest communication” skills. Owner Peter Fink doesn’t pay diagnostician on commission because he doesn’t wan that to influence their decisions. Customers who have had their transmission repaired at Certified are asked to bring the car back in fifteen days for a free re-check to make sure everything is working right, even though the process is expensive and time – consuming. If Certified has to redo any work, it provides the customer with a rental car, plus the additional work, at no charge. Fink has built a highly successful business by giving customers the assurance that they’re not paying for repair they don’t really need.

One large company in which ethical standards are embedded in the organizational culture is Johnson & Johnson. Although the company’s handling of the Tyienol poisoning incident has sometimes been attributed to the ethical standards of then CEO James Burke, Burke himself has pointed out that the decision in connection with crisis reflected as set of values and principles that has been deeply ingrained throughout the company since its early days.


The third category of influences that shape managerial ethics is formal organizational systems. This includes the basic architecture of the organization, such whether ethical values are incorporated in polices and rules; whether an explicit code of ethics is available and issued to members; whether organizational rewards, including praises, attention, and promotion, are linked to ethical behavior; and whether ethics is a consideration in the selection and training of employees. These formal efforts can reinforce ethical values that exist in the informal culture.

Today more and more companies are establishing formal ethics programs, for example, after being maligned by the national press and pursued by federal officials for questionable billing practices and fraud, Colombia / HCA. Healthcare Corp.., an $ 18.8 billion hospital chain based in Nashville, Tennessee, brought in a new management team to clean up the mess and make sure similar ethical and legal problems never happen again. When he was hired as senior vice-president of ethics, compliance, and corporate responsibility, Alan R. Yuspeh found only a rudimentary compliance program and s set of perfunctory ethical guidelines that no one could understand. Yuspeh drafted a clean and concise code of conduct that emphasized the values of compassion, honesty, fairness, loyalty, respect, and kindness, then posted it on the intranet for comment from the company’s entire work force. The final version was distributed to all 285,000 Columbia / HCA employees. In addition, Yuspeh developed a massive ethics program that includes comprehensive training for all employees and an ethics hotline that answers about 1,200 employee calls annually.

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