Managerial Decision Making

Six Decision Stages in Chapter 5

I. Identify and Diagnose the Problem

Consider the following questions when identifying and diagnosing the problem:

• Is there a difference between what is actually happening and what should be happening?
• How can you describe the deviation, as specifically as possible?
• What is/are the cause (s) of the deviation?
• What specific goals should be met?
• Which of these goals are absolutely critical to the success of the decision
• Are there any ethical considerations?
• Develop a diagram or flow chart to graphically illustrate the problem
• Identify all of the stakeholders this problem impacts
• Consider content in Chapter 3 - The Organizational Environment and Culture and Chapter 4 - Ethics and Corporate Responsibility

II. Generate Alternative Solutions (3) or more

• Consider ready-made solutions or innovative solutions
• Identify 3 possible alternatives to address the problem
• Conduct research on other companies and the alternatives they implemented to address the problem.
• Consider the content discussed in Chapter 15-Innovating and Changing

Chapter 3, 4, 5 and 15 contents are below. Please provide references and sources!

internal environment all relevant forces inside a firm's boundaries, such as its managers, employees, resources, and organizational culture organizational culture the set of assumptions that members of an organization share to create internal cohesion and adapt to the external environment visible artifacts the components of an organization that can be seen and heard, such as office layout, dress, orientation, stories, and written material values the underlying qualities and desirable behaviors that are important to the organization unconscious assumptions strongly held and taken-for- granted beliefs that influence behavior in the firm LO5 Discuss how to use organizational cultures to overcome challenges in the external environment. 5 CULTURE AND THE INTERNAL ENVIRONMENT OF ORGANIZATIONS An organization's internal environment refers to all relevant forces inside a firm's boundaries, such as its managers, employ- ees, resources, and organizational culture. As you know, an organization's managers serve a critical role in scanning and responding to threats and opportunities in the external environment. One of the most important fac- tors influencing how an organization responds to its external environment is its culture. 5.1 What Is Organizational Culture? Organizational culture is the set of assumptions about the organization and its goals and practices that members of the company share.90 It is a system of shared values about what is important and beliefs about how the world works. It provides a framework that organizes and directs people's behavior on the job." The culture of an organization may be difficult for an observer describe easily, yet like an individual's personal- ity, an astute observer can decipher cultural clues over time. As illustrated in Exhibit 3.6, there are three layers of orga- nizational culture. 92 The first level is like the exposed part of an iceberg and consists of visible artifacts, which are the components of an organization that can be seen and heard such as office layout, dress, orientation, stories, and written material (e.g., annual reports and strategic plans). Though seemingly easy to interpret, these clues to understanding the culture often take time to figure out. The second level of culture refers to its values, the underly- ing qualities and desirable behaviors that are important to the organization. Values are akin to that part of the iceberg that is just below the surface of the water. They can't be observed directly, but rather values need to be inferred from the behavior of managers. The third and deepest level of an organization's. culture refers to unconscious assumptions, which are strongly held and taken-for-granted beliefs that influence people's behav- ior in the firm. Cultures can be strong or weak. Strong cultures greatly influ- ence the way people think and behave. A strong culture is one in which people understand and believe in the firm's goals, pri- orities, and practices. A strong culture can be a real advantage to the organization if the behaviors it encourages and facilitates are appropriate. Zappos' culture encourages extraordinary devo- tion to customer service, the culture at Cirque du Soleil encour- ages innovation, and the culture at Walmart stresses low cost and frugality. These behaviors are conveyed as "the way we do things around here," rooted in their companies' cultures. In contrast, a strong culture that encourages inappropriate behaviors can severely hinder an organization's effectiveness, particularly if the environment is undergoing change, as is almost always the case today. A culture that was suitable and even advantageous in a prior era may become counterpro- ductive in a new environment. For instance, a small start-up may have a top-down culture in which the founder makes all the decisions. But this becomes less suitable when the com- pany grows, faces more competition, and requires decisions and input from many specialized employees spread out over many locations. Exhibit 3.6 The three levels of organizational culture Visible artifacts Structure and behaviors like dress, office space, and organizational chart. Values Under the surface, these are desirable qualities and behaviors: "Lets become a 'green' company" Unconscious assumptions. Deeply held beliefs that are. taken for granted: "Employees can be trusted." Source: Adapted from E. H. Schein, "Coming to a New Awareness of Organizational Culture," Sloan Management Review 25, no. 2 (Winter 1984), pp. 3-16. 62 PART 1 Introduction Take Charge of Your Career Figure out the organizational culture, and fast! tarting a new job or career is never easy, but an idea. To anticipate whether com pany will be a good fit for you, try to observe your potential coworkers when you go to the inter- view. Do they look motivated? Are their surround- ings pleasant, and are they working together in a cooperative and friendly way? Or is there a sense of urgency or even tension in the air? What about the noise level? These details will tell you some- thing about the organization's culture before you even begin. During the first few days, weeks, and months on the new job, try to "hit the ground listening." Think of yourself as a private investigator or cul- tural anthropologist whose job is to figure out: 1. The who's: Who on staff is respected the most? Who seems to have the most influence? To whom do people go with problems? Whom do you need to impress? 2. The what's: What skills, abilities, and knowl- edge does this organization value? What kind of attitudes do its successful people display? 3. The why's: Why is this organization success- ful? Why does it hire people like you? Why do people get fired? If people are talking about changing the culture to better align with the external environment, why? 4. The how's: How good is the fit between the organizational culture and your values? How can you make a positive impact on this organization? It's probably obvious why these are useful questions. Getting accurate answers might be a bit more challenging. How can you collect infor- mation so that you can find the answers? First, find (or download) and read every- thing you can about the organization. Start with its website, but don't stop there. Use your library databases and Internet search engines to unearth articles, news releases, complaints, and other tidbits about your organization. Getting facts and opinions from diverse sources will give you a more complete picture of the organization than just relying on internal documents. Second, talk to people at work. When you start getting to know your supervisor, coworkers, customers, or suppliers, ask them for their opin- ions about some of the questions listed here. You might be surprised at what people are willing to tell you. Being new has advantages-most folks like imparting their wisdom to someone who's willing to listen. Last, observe people's behaviors and listen to what they say (and how they say it). It may take you a while to arrive at the same point of understanding. That's okay. The important point is to make a direct and conscious effort to decipher your organization's culture so you can decide whether it's a good fit for you in the long term. If not, there are a virtually unlimited number and variety of organizations in the world. By finding one that fits well with your preferences, personality, values, and passion, you will feel at home while at work. Symbols, rites, and ceremonies give further clues about culture. For instance, status symbols can give you a feel for how rigid the hierarchy is and for the nature of relationships between lower and higher levels. Who is hired and fired- and why-and the activities that are rewarded indicate the firm's real values. The stories people tell carry a lot of information about the company's culture. Every company has its myths, legends, and true stories about important past decisions and actions that convey the company's main values. The stories often feature the company's heroes: people who made decisions and acted in ways that the culture values and who serve as models for others about how to behave. A strong culture displays these indicators consistently. The Ritz-Carlton hotel chain gives each employee a laminated card listing its 12 service values. Each day it carries out a type of ceremony: a 15-minute meeting during which employees from every department resolve problems and discuss areas of potential improvement. At these meetings, the focus is on the day's "wow story," which details an extraordinary way that a Ritz-Carlton employee lived up to one of the service values. The internal prac- tice of storytelling is now being used on social media, six words at a time." 5.3 Four Different Types of Organizational Cultures Cultures can be categorized according to whether they empha- size flexibility versus control and whether their focus is internal or external to the organization. Managers should discuss culture with one another to com- pare notes on how the culture is evolving and its strengths and weaknesses relative to the demands of the external environment. Juxtaposing these two dimensions reveals four types of organiz- ational cultures, depicted in Exhibit 3.7: . Clan culture. The New Belgium Brewery in Fort Collins, Colorado, is an example of a group culture that is internally oriented and flexible. The employees (organizational mem- bers) comply with organizational directives that flow from trust, tradition, and long-term commitment. Their culture. emphasizes member development and values participation in decision making. The strategic orientation associated with this cultural type is one c implementation through consensus building. Its leaders tend to act as mentors and facilitators. . Hierarchical culture. The U.S. armed forces are based on a hierarchical culture that is internally oriented by more focus 64 PART 1 | Introduction Annie Annie's CEO John Foraker pictured. Everyone at Annie's shares a common passion for food, people, and the planet we all share. Kristopher Skinner/MCT/Newscom In its relatively short life as a company. Google (part of Alphabet) quickly became a role model for its brainy culture. of innovation. Software writers and engineers were attracted to Google not just for its famous perks, such as free meals and laundry facilities, but also for a climate in which they were couraged to let their imaginations roam free, dreaming up ideas that could be crazy but just might be the next big thing on the Internet. During a long-running business boom, that culture served Google well. The best engineers were thrilled to work for a company that let them spend one-fifth of their time on new projects of their own choosing. But when the economy slowed and the stock market nosedived, Google's managers had to cope with a new reality in which money was tight. Google could no longer afford its free-spending culture. Managers had to figure out how to maintain the best of the culture while innovating at a more prudent pace. Google's modified culture now values setting priorities. New ideas are still welcome if they are focused on core businesses of search, advertising, and web-based software applications. Managers are reassigning employees away from teams working on unrelated projects and using them to staff teams working on profitable ideas in the core areas. Employees who have an idea that can improve the computer user's experience are asked to consider also what impact that idea might have on Google's bot- tom line. Similarly, hiring has slowed because managers must not only justify the talent of a candidate, but also target hiring to particular business needs. The challenge will be to keep employ- ees as excited about targeted innovation as they have been about freewheeling innovation.93 In contrast, at a company with a weak culture, different peo- ple hold different values, there is confusion about corporate goals, and it is not clear from one day to the next what princi- ples should guide decisions. Some managers may pay lip ser- vice to some aspects of the culture ("we would never cheat a customer") but behave very differently ("don't tell him about the flaw"). As you can guess, such a culture fosters confusion, conflict, and poor performance. Most managers want a strong culture that encourages and supports goals and useful behaviors that will make the company more effective. In other words, they want to create a culture that works well because it is well suited to the organization's compet- itive environment.94 5.2 Companies Give Many Clues About Their Culture Let's say you want to understand a company's culture. Perhaps you are thinking about working there and you want a good "fit," or perhaps you are working there right now and want to deepen your understanding of the organization and determine whether its culture matches the challenges it faces. How would you go about making the diagnosis? As the "Take Charge of Your Career" feature discusses, a variety of things will give you useful clues about culture: Corporate mission statements and official goals are a starting point because they will tell you the firm's desired public image. Most companies have a mission statement. TerraCycle's mission is to eliminate the idea of waste. Your school has one, and you can probably find it online. But are these statements a true expression of culture? A study of hospital employees and their managers found that managers rated their mission statement more positively than nonmanagers (even though employees had participated in developing it), and 3 out of 10 employees were not even aware that the hospital had a mission statement (even though the hospital had processes for communicating about it). So even after reading statements of mission and goals, you still need to figure out whether the statements truly reflect how the firm conducts business. Business practices can be observed. How a company responds to problems, makes strategic decisions, and treats employees and customers tells a lot about what top manage- ment really values. When an unknown person(s) laced some Extra Strength Tylenol capsules with cyanide in the Chicago. area back in the early 1980s, Jim Burke and the other lead- ers of Johnson & Johnson reacted to the crisis by recalling all related products throughout the United States. This decisive move, though not good for short-term profitability, was respected throughout the company and community and remains revered to this day. 70 PART 2 CHAPTER 3 | The Organizational Environment and Culture 63 chapter Ethics and Corporate 4 Responsibility Learning Objectives After studying Chapter 4, you should be able to LO1 Describe how different ethical perspectives guide managerial decision making. LO2 Identify the ethics-related issues and laws facing managers. LO3 Explain how managers influence their ethics environment. LO4 Outline the process for making ethical decisions. LO5 Summarize the important issues surrounding corporate social responsibility. LO6 Discuss the growing importance of managing the natural environment. ethics the moral principles W atching YouTube videos, texting, download- and standards that quide the behavior of an individual or controversial part of a grow- group ing apps, posting selfies on Instagram, or ing debate over social media networking with prospective employers on LinkedIn are a 24/7 activity. For the majority of Millennial (born between 1980 and 2000) employees, in particular, social media connectivity is both an obsessive habit and a frequent necessity. Consider the intersection of social media use at work and ethical behavior. Is it ethical for a manager, before making an offer to a job applicant, to search the appli- cant's online social media pages? What if she discovers (from her search) that the applicant appears to be affili- ated with a non-mainstream religious entity? How about when employees spend company time texting friends or updating their streaks with friends on Snapchat? What about employees who post or blog (or have companies or their friends do it for them) fake positive online reviews about their company's services or prod- ucts to create buzz? Is this practice ethical or mislead- ing? Is it okay if everyone does it? Organizations are increasingly addressing these sticky ethical issues surrounding the use of social media at work. A surprisingly high percentage of companies have disciplined employees for inappropriate behavior on social media sites.' One famous instance was when an early career individual sent a tweet disparaging a poten- tial employer's job offer by writing she'd have to weigh a "fatty paycheck" against "hating the job." Upon learning of the tweet, the company rescinded the job offer.2 Also, employers in some states are asking lawmakers for the right to ask for an employee's username and password if they're suspected of online misbehavior. This request is a This chapter addresses the values and manner of doing business adopted by managers as they carry out their organizational and business strategies. In particular, we will explore ways of apply- ing ethics, the moral principles and standards that guide the behavior of an individual or group. We do so based on the premise that employees, their organi- zations, and their communities thrive over the long term when managers apply ethical standards that direct them to act with integrity. In addition, we consider the idea that organizations have a responsibility to meet social obligations beyond earning profits within legal and ethical constraints. Professor Edward Freeman, an early champion of stake- holder theory' (discussed later in the chapter), and business and academic thought leaders believe that managers benefit their privacy laws. As of 2018, 26 states have enacted laws that prohibit companies from obtaining employees' passwords to social media websites." In contrast to the challenges presented here, many companies like Samsung and Nike expertly leverage. social media to promote their brands, increase customer engagement, and boost sales revenue. Other employers like IBM and Google (part of Alphabet) harness social media to increase social learning and intercompany cohe- sion among employees and team members. Other com- panies use social media in creative ways. Kellogg's Eggo waffles appear frequently on the Netflix series Stranger Things. Company marketers and show writers use social media to build awareness of the Eggo brand with viewers." Social movements, too, benefit from the power and reach of social media. The #MeToo campaign became a rallying cry against sexual harassment, and pro football player J.J. Watt's Hurricane Harvey relief fund received over $27 million in donations from over 160,000 people. Employers and employees alike have to come to terms with what's ethical (and legal) when it comes to using social media tools at work. According to Natalie C. Rougeux (www.rougeuxpllc.com): "Our employers are struggling more than ever with how to bridge the gap between: (i) the company's need to protect company data; and (ii) employees who consider the unfettered use of technol- ogy to be essential to their work/life balance. Quite sim- ply, technology, employee/employer expectations, and the law are not in sync on this issue." GOT ETHICS Cmarekuliasz/Shutterstock Exhibit 3.7 Competing-values model of culture Flexible CHAPTER 4 Ethics and Corporate Responsibility 71 Internal maintenance Type: Clan (Collaborate) Dominant attribute: Cohesiveness, participation, teamwork, sense of family Leadership style: Mentor, facilitator, parent figure Bonding: Loyalty, tradition, interpersonal cohesion Strategic emphasis: Toward developing human resources, commitment, and morale Type: Hierarchy (Control) Dominant attribute: Order, rules and regulations, efficiency uniformity, Leadership style: Coordinator, organizer, administrator Bonding: Rules, policies and procedures, clear expectations Strategic emphasis: Toward stability, predictability, smooth Processes Type: Adhocracy (Create) Dominant attribute: Entrepreneurship. adaptability, dynamism Leadership style: Innovator, entrepreneur, risk taker Bonding: Flexibility, risk, entrepreneur Strategic emphasis: Toward innovation, growth, new resources Type: Market (Compete) Dominant attribute: Goal achievement, environment exchange, competitiveness Leadership style: Production- and achievement-oriented, decisive Bonding: Goal orientation, production, competition Toward Strategic emphasis: competitive advantage and market superiority Control-Oriented External be positioning Processes Source: Adapted from K. S. Cameron and R. E. Quinn, Diognosing and Changing Organizational Culture, 3rd edition, 2011, Jossey-Bass. on control and stability. It has the values and norms associ- ated with a bureaucracy. It values stability and assumes that individuals will comply with organizational mandates when roles are stated formally and enforced through rules and procedures. Market culture. Oil and natural gas companies tend to have rational cultures that are externally oriented and focused on control. This type of culture's primary objectives are productivity, planning, and efficiency. Organizational members are motivated by the belief that performance that leads to the desired organizational objectives will be rewarded. .Adhocracy. Google is an adhocracy that is externally oriented and flexible. This culture type emphasizes growth, change, and innovation. Organizational members. are motivated by the importance or ideological appeal of the work. Leaders tend to be entrepreneurial and risk takers. Other members tend to have these characteristics as well.97 This type of diagnosis is important when two companies are considering combining operations, as in a merger, acquisition, or joint venture, because cultural differences can sink these arrange- ments. Organizations sometimes benefit from setting up a "clean team" of third-party experts who investigate each company's cul- ture. The clean team can identify for the organizations' leaders the types of issues they will have to resolve and the values they must choose among as they try to establish a combined culture." What type I company culture is important to you in your career? Do you prefer to work in a culture focused on team- work, efficiency, creativity, or competitiveness? 5.4 Managers Can Leverage Culture to Meet Challenges in the External Environment Effective managers can take several approaches to managing culture: Craft an inspirational vision of "what can be" for the organi- zational culture. CHAPTER 31 The Organizational Environment and Culture 65 universalism the ethical system stating that all people should uphold certain values that society needs to function Caux Principles for Business ethical principles. established by international. executives based in Caux, Switzerland, in collaboration with business leaders from Japan, Europe, and the United States egoism an ethical principle holding that individual self- interest is the actual motive of all conscious action Ethics scholars point to var- ious major ethical systems as guides. We will consider five of these: 1. Universalism. 2. Egoism. 3. Utilitarianism. 4. Relativism. 5. Virtue ethics. These major ethical systems underlie personal moral choices and ethical decisions in business. 1.1 Universalism According to universalism, all people should uphold certain values that society needs to function. Universal values are prin- ciples so fundamental to human existence that they are import- ant in all societies-for example, rules against murder, deceit, torture, and oppression. Some efforts have been made to establish global, universal ethical principles for business. The Caux Round Table, a group of international executives based in Caux, Switzerland, worked with business leaders from Japan, Europe, and the United States to create the Caux Principles for Business.25 Two basic in River near St. Louis. The bolts manufactured by Midwest Hard- ware have a 3 percent defect rate, which, although acceptable the industry, makes them unsuitable for use in certain types of projects, such as those that might be subject to sudden, severe stress. The new bridge will be located near the New Madrid Fault line, the source of a major earthquake in 1811. The epi- center of that earthquake, which caused extensive damage and altered the flow of the Missouri, is about 190 miles from the new bridge site. Bridge construction in the area is not regulated by earth- quake codes. If Colt wins the sale, he will earn a commission of $25,000 on top of his regular salary. But if he tells the con- tractors about the defect rate, Midwest may lose the sale to a competitor whose bolts are slightly more reliable. Thus Colt's ethical issue is whether to point out to the bridge contractor that in the event of an earthquake, some Midwest bolts could fail. 1.2 Egoism According to egoism, individual self-interest is the actual motive of all conscious action. "Doing the right thing," the focus of moral philosophy, is defined by egoism as "do the act that pro- motes the greatest good for oneself." If everyone follows this system, according to its proponents, the well-being of society as a whole should increase. This notion is similar to Adam Smith's concept of the invisible hand in business. Smith argued that if every organization follows its own economic self-interest, the total wealth of society will be maximized. An example of egoism is how individual self-interest may ethical ideals underpin the Caux Principles: kyosei and human have contributed to the subprime mortgage crisis. According to dignity. Kyosei means living and working together for the common good, allowing cooperation and mutual prosperity to coexist with healthy and fair competition. Human dignity concerns the value of each person as an end, not a means to the fulfillment of others' purposes. Research conducted by the Institute for Global Ethics identified five core ethical values that are found in all human cultures, including truthfulness, responsibility, fairness, respectfulness, and compassion.26 Universal principles can be powerful and they would do is often different from what Did You KNOW useful, but what people say, hope, or think According to a recent survey. they really do, faced with conflicting demands employees who report unethical incidents at their companies in real situations. Before we describe other are most likely to do so by ethical systems, consider the following exam- ple, and think about how you or others would resolve it. Suppose that Sam Colt, a sales represen- behalf of his firm, Midwest Hardware, which making hotline calls. The second most common reporting method indicated in the survey was submitting website forms, followed by open door tative, is preparing a sales presentation on manufactures nuts and bolts. Colt hopes to manager's manager, or the obtain a large sale from a construction firm that is building a bridge across the Missouri reports to their manager, their HR department.27 Adam Smith, individual financial and mort- gage professionals should have acted in their own best interest, and ultimately the invisible hand of the mortgage and financial markets would be the best control mechanism to ensure the greater good. If that were the case, why did the housing market reach an unsus- tainable level that could not be maintained? Did opportunism and the deceptive use of information play a role? Stated differently, did unethical managerial behavior contribute to the subprime mortgage crisis? Some financial and mortgage experts encour- aged prospective home buyers to purchase homes that they could not afford by applying for adjustable-rate mortgages (ARMS). ARMS allow home buyers to pay a low introductory monthly payment for a few years; after this period expires, the monthly payment increases significantly.29 The experts convinced many home buyers to assume this risk by pointing out that as long as the value of their homes contin- ued to rise, their wealth would increase. Home owners were also told they could manage their risk by selling their homes anytime they wanted for a profit. 74 PART 2 1 Planning "In matters of style, swim with the current. In matters of principle, stand like a rock." -Thomas Jefferson organizations not only by growing profits, but also by behaving ethically when dealing with individuals and groups (known as stakeholders) that interact with their organizations. As you study this chapter, consider what kind of manager you want to be. What reputation do you hope to have? How would you like others to describe your behavior as a manager? It's a Big Issue It seems ethics-related scandals have become a part of every- day life. Bad behavior can occur anywhere at any time. Recent business-related scandals include security officers aggressively removing a bloodied passenger from an overbooked United flight, Equifax conceding that hackers accessed the personal information of 145 million Americans, and Apple being accused of slowing down older iPhone models to encourage customers to upgrade to new phones. Professional sports have not been immune to scandal. FIFA, the 112-year-old governing body of worldwide soccer, is being investigated by the U.S. Justice Department for corrup- tion and related charges. The investigation led to a shake-up within the organization, including the removal of its leader and criminal charges and guilty pleas from several executives and administrators." What other news disturbs you about managers' behavior? Tainted products in the food supply... damage to the environ- ment... price fixing... Internet scams... employees pressured Larry Nassar is an American convicted serial child molester who was the USA Gymnastics national team doctor and an osteopathic physician at Michigan State University. Rena Laverty/EPA-EFE/REX/Shutterstock specific university, and (2) paying high school recruits "to play for the schools sponsored by that company." One sports agent brokered a deal in which Adidas agreed to pay $100,000 to the recruit's family if the player committed to playing for the school and signing with the company once he turned professional.14 The list of bad behavior goes on. Dr. Larry Nassar, former team USA Gymnastics doctor, was convicted and sent to jail for molesting 265 girls and young women over a 20-year period's to meet lofty sales or production targets by any means? The list and cyclist Lance Armstrong was stripped of his seven Tour goes on, and the public becomes cynical. In a survey by pub- lic relations firm Edelman, the percentage of Americans who trust business dropped from 59 percent in 2008 to 52 percent in don't trust you. 2018. Try to imagine the challenge of leading employees who Unethical behavior can happen anywhere, not just in busi- ness. It occurs when police officers "take care of parking tick- ets" so friends and family members do not have to pay fines." de France titles and banned from professional sports for using perfomance-enhancing drugs.16 Simply talking about recent examples of lax ethics does not get at the heart of the problem. Saying "I would never do any thing like that" or "I would have reported it if it were me" is too easy. The fact is that temptations and levels of silence exist in all organizations. In a recent survey of U.S. adults, 41 percent said they had observed unethical conduct at work. Of those reported authority, from supervisors to top management." Another survey found that the top justification given for This may seem minor but it is an unfair practice and an abuse to be engaging in misconduct, 60 percent were in positions of of power. Recently prosecutors brought criminal charges related to "ticket fixing" against 13 members of the Patrolmen's Benev- olent Association, a powerful police union i New York City.12 Sports have seen their share of unethical behavior. For exam- ple, federal prosecutors indicted four NCAA assistant basketball coaches (men's coaches at Arizona, Auburn, Oklahoma State, and Southern Cal) for fraud and corruption. The charges out- lined two alleged schemes involving managers, financial advisers, unethical behavior was "pressure to meet unrealistic goals and deadlines."18 Many decisions you will face as a manager will pose ethical dilemmas, and the right thing to do is not always clear. It's a Personal Issue "Answer true or false: 'I am an ethical manager.' If you answered and representatives from Adidas, a major international sports- 'true, here's an uncomfortable fact: You're probably not."19 wear company: (1) Accepting "cash bribes from managers and advisers in exchange for directing players and their families" to These sentences are the first in a Harvard Business Review article called "How (Un) Ethical Are You?" The point is that most of 72 PART 2 Planning How did these financial and mortgage professionals bene- fit? They received commissions and other fees from the loans they sold. Higher compensation became a driving force for these managers to continue pushing high-risk loans. Others in the financial industry also profited, including banks, mortgage firms, and investment companies. The housing bubble burst when the economy went into "adjusted" While some subprime loans were properly documented and executed, many lacked supervi- sion. This allowed opportu- nistic financial and mortgage experts to convince borrowers. to assume subprime mortgages that had "teaser" introductory utilitarianism an ethical system stating that the greatest good for the greatest number should be the overriding concern of decision makers relativism a philosophy that bases ethical behavior on the opinions and behaviors of relevant other people interest rates for a couple of years before automatically adjust- a recession and home owners began to struggle to pay their mortgage payments. The large number of foreclo- sures and defaults contributed to a historic shake-up of the ing upward. financial industry, including the collapse of Lehman Brothers: huge losses at Morgan Stanley, Citigroup, and Merrill Lynch: and unprecedented governmental intervention to help firms like JPMorgan to purchase Bear Stearns." It is useful to ask yourself the following questions: To what degree did egoism motivate individuals in the mortgage and financial markets to make and sell loans that became toxic assets? Is there an alternative explanation for what caused the subprime mort- gage crisis? 1.3 Utilitarianism Adding to the rapid growth of the subprime market were the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), two government-sponsored entities that bought many of these high-risk loans from banks and then packaged and sold them (as a way to diversify the risk of the loans) to U.S. and foreign investors. These two companies ran afoul of U.S. regulators. Freddie Mac admitted that it "underreported earnings by over $5 billion," and in 2004, Fannie Mae was investigated for com- mitting several widespread accounting errors. Several former executives from these firms face civil charges ranging from manipulating earnings to fraud." In 2006, the housing market began to weaken as prices Unlike egoism, utilitarianism directly seeks the greatest good for the greatest number of people. Refer back to the subprime mort- gage crisis that was just discussed. Certain utilitarian policies ing to the decline was the Federal Reserve's decision to raise and practices implemented after 9/11/2001 and the dot-com meltdown inadvertently contributed to the subprime mortgage crisis. In an effort to do the greatest good for the greatest num- ber of people, the Federal Reserve slashed the federal funds started to decline and inflation started to increase. Contribut- interest rates in order to decrease inflation. This move led banks to tighten credit and require borrowers to make larger down payments on homes, while many subprime mortgage owners saw their adjustable-rate mortgages increase to unex- rate from 6.5 percent in May 2000 to 1.75 percent in Decem- pectedly high levels. The net effect was that many home own- ber 2001. In 2004, the Fed lowered the rate to 1.0 percent." The period from 2001 to 2004 became known as the "credit boom" when mortgages, bank loans, and credit cards were eas- ers could not make their mortgage payments and defaulted on their loans," In determining whether decisions made at the Federal ily obtained at low interest rates." The goal of these rate cuts Reserve, Fannie Mac, and Freddie Mac, and other institutions. was to spur the economy and job creation while also encour- aging people to buy homes. This low interest rate policy made home ownership available to higher-risk borrowers. REDUCED Bank Owned FOR SALE B&K Realty, Inc. Sell Now Properties 990-113-1212 ORECLOSURE 112-515 Real estate signs at foreclosed properties. Omoodboard/Getty Images achieved utilitarian outcomes we need to ask: Did these deci- sions result in the greatest good for the greatest number of home owners? Were the decisions completely rational, or did subjec- tivity lead to a suboptimal set of consequences? Was it egoism on the part of individuals or utilitarianism on the part of institu- tions that ultimately caused the subprime mortgage meltdown? 1.4 Relativism It may seem that an individual makes ethical choices by apply- ing personal perspectives. But this view is not necessarily true. Relativism defines ethical behavior based on the opinions and behaviors of relevant other people. Relativism acknowledges the existence of different ethical viewpoints. It defines ethical behavior according to how oth- ers behave. For example, norms, or standards of expected and acceptable behavior, vary from one culture to another. The per- ceived effectiveness of whistleblowing-telling others, inside and outside the organization, about wrongdoing-differs across cul- tures. While U.S. managers believe that whistleblower hotlines are effective at reducing unethical behaviors, managers in the Far East and Central Europe do not believe they are effective. CHAPTER 4 Ethics and Corporate Responsibility 75 "The stronger the culture, the less corporate process a company needs. When the culture is strong, you can trust everyone to do the right thing." -Brian Chesky, cofounder of Airbnb "Walk the talk"-actually do the things you want others to do-and show that you are serious about and committed to long-term change. Celebrate and reward members who behave in ways that exemplify the First, desired culture. effective managers should espouse appropriate ideals and visions that will Second, executives need to "walk the talk" of the new organizational direction by communicating regularly, being visible and active throughout the company, and setting exam- ples. The CEO and other managers not only should talk about the vision but also should embody it day in and day out. This makes managers' pronouncements credible, creates a personal example others can emulate, and builds trust that inspire organization members. The vision the organization's progress toward the vision will continue should be repeated until it becomes a tangible presence through- out the organization. For example, Coca-Cola's vision statement provides a clear idea of what the company stands for: Our vision serves as the framework for our roadmap and guides every aspect of our business by describing what we need to accomplish in order to continue achieving sustainable, quality growth. People: Be a great place to work where people are inspired to be the best they can be. Portfolio: Bring to the world a portfolio of quality beverage brands that anticipate and satisfy people's desires and needs. Partners: Nurture a winning network of customers and suppli- ers; together we create mutual, enduring value. Planet: Be a responsible citizen that makes a difference by helping build and support sustainable communities. Profit: Maximize long-term return to shareowners while being mindful of our overall responsibilities. Productivity: Be a highly effective, lean, and fast-moving organization." over time. Important here are the moments of truth requiring hard choices. Imagine top management trumpeting a culture that emphasizes quality and then discovering that a part used in a batch of assembled products is defective. Whether you replace the part at great expense in the interest of quality or ship the defective part to save time and money is a decision that people will talk about; it will strengthen or undermine a quality-oriented culture. To reinforce the organization's culture, the CEO and other managers should routinely cel- ebrate and reward decisions and actions that exemplify the new values.. Managing culture also involves hiring, socializing newcom- ers, and promoting employees on the basis of the new corporate values. In this way, the new culture will begin to permeate the organization. While this may seem a time-consuming approach to building a new culture, the rewards of that effort will be an organization much more effective and responsive to its environ- mental challenges and opportunities. Notes 1. Company website and "Brewing a Better World-Transformation," Corporate Social Responsibility Report. Fiscal Year 2009, www.gmer.com; R. A. Munarriz, "Warm Up to Green Mountain Coffee Roasters," The Motley Fool, January 29, 2009, www.fool .com: "Green Mountain Coffee Roasters, Inc. Releases 'Brew- ing a Better World' Corporate Social Responsibility Report," CSR Wire, January 12, 2009, www.csrwire.com; K. Marquardt, "Brewing Profits, a Cup at a Time," U.S. News & World Report, November 17-24, 2008, pp. 55-58; P. Rolfes. "Green Moun- tain Coffee Roasters: Grounds for Growth," Smallcapinvestor, July 23, 2008; A. Ackerman. "Retail Coffee Favored in Volatile Economy, Consumer .consumergoods.com; Goods Technology, July 22, 2008, www and "Green Mountain Coffee Roasters Founder Bob Stiller Will Step Down," Automatic Merchandiser, July 8, 2008, www.amonline.com. 66 PART 1 Introduction virtue ethics a perspective that what is moral comes from what a mature person Kohlberg's model of cognitive moral development of classification people based on with "good" moral their level of moral character would deem right judgment For example, Chinese employees are less likely to report that their superiors have engaged in fraud or corruption. The Chinese government considers this a major problem. It is believed that guanxi, a Chinese term for personal relationships, pre- vents many Chinese employees from acting in an independent manner when it comes to blowing the whistle on unethical managers.39 However, Chinese workers are more inclined to report wrongdoing if they have a trust- worthy leader and supportive team."0 1.5 Virtue Ethics The moral philosophies just described apply ethics is a perspective that goes beyond the different types of rules and reasoning. Virtue conventional rules of society by suggesting that what is moral must also come from what a mature person with good "moral character" would moral deem right. Society's rules provide a minimum; moral individuals transcend rules by applying their personal virtues such as faith, honesty, and integrity. Did You KNOW The United States came in 16th (tied with Austria and Belgium) in a 2017 survey ranking 180 nations from most to least honest. The top honesty ratings went to New Denmark, Finland, Zealand, Norway, and Switzerland. The bottom ranked nations-including Somalia, South Sudan, and Syria-tended to be among the poorest. Sadly, the combination of corruption and poverty in these nations can literally amount to a death sentence for many of their citizens.41 Individuals differ in their moral development. As illustrated in Exhibit 4.1, Kohlberg's model of cognitive moral development Exhibit 4.1 Kohlberg's stages of moral development Preconventional stage . Make decisions based on immediate Conventional stage Principled stage self-interest. . Example: You take some office supplies home from work because you need them and do not want to pay for them. Make decisions that conform to expectations of groups and institutions like family, peers, and society. . Example: You think about taking the office supplies home, but decide against it because it would not look right. Make decisions based on self-chosen ethical principles. Example: You do not consider taking the office supplies from work because you believe that would be wrong. Source: Adapted from L. Kohlberg, "Moral Stages and Moralization: The Cognitive- Research, and Social Issues (New York: Holt, Rinehart & Winston, 1976), pp. 31-53. Development Approach," in T. Lickona (ed.), Moral Development and Behavior Theory. classifies people into categories based on their level of moral judgment. People in the preconventional stage make decisions based on concrete rewards and punishments and immediate self-interest. People in the conven- tional stage conform to the expectations of ethical behavior held by groups or institutions such as society, family, or peers. People in the principled stage see beyond authority, laws, and norms and follow their self-chosen eth- ical principles. Some people forever reside in the preconventional stage, some move into the conventional stage, and some develop even further into the principled stage. Over time, and through education and experience, behavior. people may change their values and ethical Returning to the bolts-in-the-bridge exam- ple, egoism would result in keeping quiet. about the bolts' defect rate. Utilitarianism would dictate a more thorough cost-benefit analysis and possibly the conclusion that the probability of a bridge collapse is so low com- pared to the utility of jobs, economic growth, and company growth that the defect rate is not worth mentioning. The relativist perspec- tive might prompt the salesperson to look at company policy and general industry practice and to seek opinions from colleagues and per- haps trade journals and ethics codes. What- ever is then perceived to be a consensus or normal practice would dictate action. Finally, virtue ethics, applied by people in the principled stage of moral development, would likely lead to full disclosure about the product and risks and perhaps suggestions for alterna- tives that would reduce the risk." LO2 Identify the ethics-related issues and laws facing managers. 2 BUSINESS ETHICS MATTER Insider trading, illegal campaign contributions, bribery and kick- backs, famous court cases, and other scandals have created a perception that business leaders use illegal means to gain com- petitive advantage, increase profits, or improve their personal positions. Neither young managers nor consumers believe top executives are doing a good job of establishing high ethical stan- dards.45 Some even joke that business ethics has become a con- tradiction in terms. 76 PART 21 Planning Too often, these opinions are borne out by workplace expe- riences. In a survey of 700 employees holding a variety of jobs. 39 percent said their supervisor sometimes didn't keep prom- ises, 24 percent said their supervisor had invaded their privacy, and 23 percent said their supervisor covered up his or her own- mistakes by blaming someone else." If these behaviors go unchecked, they may spread to other power are abusive, narcissistic, and unfair." These negative managers, creating a toxic work environment where those in workplace behaviors affect the entire organization and encour- age similar behaviors among other employees.4 2.1 Ethical Dilemmas Most business leaders believe they uphold ethical standards in business practices." But many managers and their organiza- tions must deal frequently with ethical dilemmas, and the issues criminal prosecution. The law requires companies to do the following: . Have more independent board directors, not just company insiders. Sarbanes-Oxley (SOX) Act an act that established strict accounting and reporting rules to make senior managers more accountable and to improve and maintain investor confidence Adhere strictly to accounting rules. Have senior managers personally sign off on financial results. One of the biggest impacts of the law is the requirement for companies and their auditors to provide reports to financial. statement users about the effectiveness f internal controls over the financial reporting process. Companies that make the effort to meet or exceed these requirements can reduce their risks by lowering the likelihood of misdeeds and the consequences if an employee does break are becoming increasingly complex. Here are just a few of the the law. Organizations convicted of federal criminal laws may dilemmas challenging managers and employees:50 Brands-In-your-face marketing campaigns have sparked antibrand attitudes among people who see tactics as manip- ulative and deceptive. receive more lenient sentences if they have an effective compli- ance and ethics program. See Exhibit 4.2 for ways that organiza- tions can meet the requirements of these guidelines. Some executives say SOX distracts from their real work and makes them more risk-averse. Some complain about the CEO pay-Nearly three-fourths of Americans say executives' time and money needed to comply with the internal control pay packages are excessive.. Commercialism in schools-Parent groups in hundreds of communities have battled advertising in the public schools. reporting-reportedly spending millions of dollars for tech- nology. Others point out that unethical behavior has nega- tive consequences, especially when it includes illegal actions that later come to light. Fraud hurts both the customer and Religion at work-Many people seek spiritual renewal in the the company itself when employees find ways to steal. Com- . workplace, in part reflecting a broader religious awakening in America, while others argue that this trend violates reli- gious freedom and the separation of church and boardroom. Sweatshops-At many colleges, students have formed antisweatshop groups, which picket clothing manufacturers, toymakers, and retailers. Wages-More than half of workers feel they are underpaid, especially because wages since 1992 have not grown as fast as productivity levels. Despite the fact the United States pulled out of the Paris cli- mate accord, leaders of many American companies-including Apple, Facebook, Google, Intel, and Ingersoll Rand-declared they would remain committed to the accord's goal of limiting panies around the globe lose about 5 percent of their annual sales to fraud, but the losses are less than half that at orga- nizations with a mechanism for reporting misconduct." Exhibit 4.2 Partial list of steps organizations can take to meet SOX guidelines Establish written standards of ethical conduct and controls for enforcing them. Assign responsibility to top managers to ensure that the program is working as intended. Exclude anyone who violates the standards from holding management positions. Provide training in ethics to all employees and monitor compliance. Give employees incentives for complying and consequences for violating greenhouse gas emissions and climate change. These "we investments in renewable energy. 52 For example, Mars-maker the standards. are still in" companies are committed to making significant of M&M's-launched a $1 billion sustainability plan to reduce greenhouse gases in its supply chain by 67 percent by 2050.53 2.2 Ethics and the Law Responding to a series of corporate scandals-particularly the high-profile cases of Enron and WorldCom-Congress passed the Sarbanes-Oxley (SOX) Act in 2002 to improve and maintain investor Respond with consequences and more preventive measures if criminal conduct occurs. Sources: "Staying on Course: A Guide for Audit Committees," Ernst & Young Center for Board Matters, www.ey.com, accessed April 15, 2016; "2010 Report to the Nations on Occupational Fraud and Abuse," Association of Certified Fraud Examiners, www.acfe.com/; Thompson Hine LLP, "U.S. Sentencing Commission Announces Stiffened Organization Sentencing Guidelines in Response to the Sarbanes-Oxley Act," advisory bulletin, June 1, 2004, last modified August 31, 2006, www.thompsonhine.com; and R. J. Zablow, "Creating and Sustaining an Ethical confidence. Violations could result in heavy fines and Workplace," Risk Management 53, no. 9 (September 2006). CHAPTER 4 Ethics and Corporate Responsibility 77 ethical leader one who is both a moral person and a moral manager influencing others to behave ethically compliance-based ethics programs company mechanisms typically designed by corporate counsel to prevent, detect, and punish legal violations integrity-based ethics programs company mechanisms designed to instill in people a personal responsibility for ethical behavior see in the discussions of lead- code of ethics for senior financial officers-and if not, why not. ership and motivation later, managers formally and infor- mally shape employees' behav- ior with money, approval, Often, the statements are just for show, but when implemented well, they can change a company's ethical climate for the better and truly encourage ethical behavior. Executives say they pay most attention to their company's code of ethics when they feel good job assignments, a posi- that stakeholders (customers, investors, lenders, and suppliers) tive work environment, and in try to many other ways. To create a culture that encourages ethical behavior, managers must be more than ethical people. They also should lead others to behave ethically. Sharon Allen, for- mer chair of the board of the accounting and taxation firm Deloitte LLP, is convinced that being ethical can give organiza- influence them to create a strong ethical culture and pro- mote a positive image." Ethics codes must be carefully written and tailored to indi- vidual companies' philosophies. For example, Aetna Life & Casualty believes that tending to the broader needs of society is essential to fulfilling its economic role. Coca-Cola's 44-page code of business conduct covers a variety of topics, from when written approval is necessary to how to prevent conflict of interest." Most ethics codes address subjects such as employee con- duct, community and environment, shareholders, customers, suppliers and contractors, political activity, and technology. tions a competitive advantage. She believes that "the shared lan- Often, the codes are drawn up by the organizations' legal depart- guage of ethical values that enables people to conduct business with each other, where a deal can be sealed with a handshake and your word is your bond" is essential.. ing Ethical leadership is also important when it comes to retain- employees. According to a global survey by LinkedIn, one of the top reasons why employees leave their organizations is due to dissatisfaction with leadership.3 Managers can boost employee retention by acting in an ethical, consistent, and fair manner. 3.1 Ethical Leadership It's been said that your reputation is your most precious asset. Here's a suggestion: Set a goal for yourself to be seen by others as both a "moral person" and also as a "moral manager," someone who influences others to behave ethically. When you are both per- sonally moral and a moral manager, you will truly be an ethical leader. You can have strong personal character, but if you pay more attention to other things, and ethics is "managed" by ments and begin with research into other companies' codes. The Ethics Resource Center in Arlington, Virginia, assists compa- nies interested in establishing a corporate code of ethics." . To make an ethics code effective, apply the following principles: Involve those who live with the code in writing it. Focus on real-life situations that employees can relate to. . Keep it short and simple, so it is easy to understand and remember. Write about values and shared beliefs that are important and . that people can really believe in. Set the tone at the top, having executives talk about and live up to the statement.? When reality differs from the statement-as when a motto says people are our most precious asset or a product is the fin- "benign neglect," you won't have a reputation as an ethical leader. est in the world, but in fact people are treated poorly or prod- In 2018, Ethisphere Institute honored 135 companies from uct quality is weak-the statement becomes a joke to employees 23 countries for making a "positive impact on global society."65 The honorees included Dell Technologies (United States). Volvo Cars (Sweden), Wipro (India), KAO (Japan), and Grupo Bimbo (Mexico).66 rather than a guiding light. 3.3 Ethics Corporate ethics Programs programs commonly include formal ethics immediately if they are caught in ethical transgressions or ics: ethics committees that develop policies, evaluate actions. In Asia, anxiety about losing face often makes executives codes articulating the company's expectations regarding eth- resign if their companies are embarrassed by revelations in the press. and investigate violations; ethics communication systems giving By contrast, in the United States, exposed executives might respond with indignation, intransigence, pleading the Fifth Amendment, or by not stonewalling, an everyone-else-does-it self-defense, admitting wrongdoing. Partly because of legal tradi- tion, the attitude often is never explain, never apologize, don't admit the mistake, and do not resign-even if the entire world knows exactly what happened."VAHE 3.2 Ethics Codes employees a means of reporting problems or getting guidance: ethics officers or ombudspersons who investigate allegations. and provide education; ethics training programs; and disci- plinary processes for addressing unethical behavior." Programs can range from compliance-based to integrity- corporate counsel to prevent, detect, and punish legal violations. based. Compliance-based ethics programs are designed by punishments on wrongdoers. Compliance-based programs increase surveillance and controls. on people and impose Integrity-based ethics programs go beyond the mere avoid- companies periodically disclose whether they have adopted a ance of illegality; they are concerned with the law but also with The Sarbanes-Oxley Act, described earlier, requires that public 80 PART 2 Planning ethical climate in an organization, the processes by which decisions are evaluated and made on the basis of right and wrong Regardless of managers' atti- tudes toward SOX, it creates legal requirements intended to improve ethical behavior. 2.3 The Ethical Climate Influences Employees Ethics are shaped not only by laws and personal virtue but also by the company's work environment. The ethical climate of an organization refers to the processes by which decisions are eval- uated and made on the basis of right and wrong." For example, General Electric promotes high levels of integ- rity without sacrificing the company's commitment to business results. GE establishes global standards for behavior to prevent ethical problems such as conflicts of interest and money launder- 2007 Getty Images, Inc. ing. Every leader, manager, and employee is expected to comply with the integrity policy known as "The Spirit and the Letter." To improve worldwide accessibility to the guide, brief two-page to land contracts from foreign officials. After the law was and mobile versions are available in multiple languages. changed, Siemens continued to engage in bribery but became When people make decisions, certain questions always seem more secretive: Swiss bank accounts made payments, and con- to get asked: Why did she do it? Good motives or bad ones? So often, responsibility for unethical acts is placed squarely on the individual who commits them. But the work environ- ment has a profound influence, as well. When employees feel pressured to meet unreasonable goals or deadlines, they may act unethically: but managers are in part responsible for set- ting the right standards, selecting employees with the ability to meet standards, and providing employees with the resources sultants handled bribery payments. After investigators from several countries-Italy, Germany, Switzerland, and the United States-discovered the bribery, Siemens paid the huge fine and executives went to jail." 2.4 Danger Signs Maintaining consistent ethical behavior by all employees is an ongoing challenge. What are some danger signs that an organi- required for success. Managers also need to keep the lines of zation may be allowing communication open so that employees will discuss problems in meeting goals, rather than resorting to unethical and possi- bly illegal behavior. Unethical corporate behavior may be the responsibility of a misbehaving individual, but it often also reveals a company. culture that is ethically lax. 57 Maintaining a positive ethical climate is always challenging, but it is especially complex for organizations with international activities. Different cultures. and countries may have different standards of behavior, and managers have to decide when relativism is appropriate, rather than adherence to firm standards. Electronics giant Siemens Corporation of Germany paid $1.6 billion to the U.S. and German governments for bribing officials in several countries- Bangladesh, Argentina, Nigeria, Israel, and China-to win busi- ness contracts. Siemens has a long history of engaging in such practices. Prior to 1999, bribery was not illegal in Germany, and as a result, many firms used it as a competitive advantage even encouraging unethical behavior? Many factors, including the following, create a climate condu- cive . . o unethical behavior: Excessive emphasis on short-term revenues over longer-term considerations. Failure to establish a written code of ethics. Desire for simple, "quick fix" solutions to ethical problems. Unwillingness to take an ethical stand that may impose financial costs. The view that ethics is solely a legal issue or a public rela- tions tool. Lack of clear procedures for handling ethical problems. Response to the demands of shareholders at the expense of other constituencies." "It takes many good deeds to build a good reputation, and only one bad one to lose it." -Benjamin Franklin 78 PART 2 Planning Take Charge of Your Career Why settle? Find a great place to work! The weak job market for college graduates may already be giving way. Over the next. 5 to 10 years, the retirement of millions of Baby Boomers will create new job opportunities. In early 2018, real employee wages increased about 3 percent and unemployment hit an 18-year low. leading some economists to call it a tight job market. This seems to be a good time to start look- ing for a great There good are place to work. many lists available to help you find companies, but one of the most famous is the "Fortune's 100 Best Companies to Work For." It is coauthored by Robert Levering and Milton Moskowitz of the Great Place to Work Institute. Which companies made the list in 2017? In first place for the first time was Salesforce, a San Francisco-based information technology company whose strong social responsibil- ity CGrant Squibb/Getty Images employee-oriented corporate culture and an innovative program that helps employees lead to a "uniquely rewarding work environ- ment." Next was Wegmans Food Markets, a New York-based groce