Abstract
This paper tests the ethics-is-good-for-profits as well as the ethics-and-profits-are-joint-outcomes-of-good-management hypotheses in the context of the U.S. defense industry in the 1988–1992 period. Both ethical behaviors (defined and measured as the number and dollar cost of convictions for violations of civil and criminal law as well as reimbursement obligations arising under environmental statutes) and espoused ethical values (in the form of membership in the Defense Industry Initiative and average level of PAC contributions) are compared with measures of profitability for the defense-oriented business segments of sixty-two major U.S. defense contractors. From 1988 to 1992, the U.S. Defense Department gave these contractors an average of 65% of all prime contract awards over $25,000 to business firms for work in the U.S.
We found statistically significant, positive correlations between (1) our two measures of espoused ethical values and (2) both measures of espoused ethical values and violative ethical acts. In other words, those contractors with worse ethics records were more likely to be members of the Defense Industry Initiative and give larger PAC contributions. However, we were unable to reject the null hypothesis of no correlation between either ethical behavior or espoused ethical values and profits. The public policy implications of these findings are discussed.
Similar content being viewed by others
References
Abbott, W. F. and R. J. Monsen: 1979, ‘On the Measurement of Corporate Social Responsibility: Self-Reported Disclosures as a Method of Measuring Corporate Social Involvement’, Academy of Management Journal 22, 501–515.
Abramowitz, A., J. A. Durant and A. P. Williamson: 1 May 1990, ‘Mutiny for the Bounty — Qui Tam: Bonanza or Fair Reward?’, New York Law Journal, 3.
Alexander, G. J. and R. A. Buchholz: 1978, ‘Corporate Social Responsibility and Stock Market Performance’, Academy of Management Journal 21, 479–486.
Anderson, J. C. and A. W. Frankle: 1980, ‘Voluntary Social Reporting: An Iso-Beta Portfolio Analysis’, The Accounting Review 55, 467–479.
Aupperle, K. E., A. B. Carroll and J. D. Hatfield: 1985, ‘An Empirical Examination of the Relationship Between Corporate Social Responsibility and Profitability’, Academy of Management Journal 28, 446–463.
Aupperle, K. E. and D. V. Pham: 1989, ‘An Expanded Investigation into the Relationship of Corporate Social Responsibility and Financial Performance’, Employee Responsibilities and Rights Journal 2, 263–274.
Barker, R. A.: 1993, ‘An Evaluation of the Ethics Program at General Dynamics’, Journal of Business Ethics 12, 165–177.
Belkaoui, A. R.: 1991, ‘Organizational Effectiveness, Social Performance and Economic Performance’, Research in Corporate Social Performance and Policy: A Research Annual 12, 143–153.
Bhide, A. and H. H. Stevenson: 1990, ‘Why Be Honest If Honesty Doesn't Pay?’, Harvard Business Review 68, 121–129.
Bialkin, K. J.: 1993, ‘Business Ethics: Optional or Mandatory?’, Management Accounting 74, 54–56.
Bowman, E. H. and M. Haire: 1975, ‘A Strategic Posture Toward Corporate Social Responsibility’, California Management Review 18, 49–58.
Brown, J. G.: 14 December 1988, ‘Anatomy of a Defense Department Procurement Scandal: Real or Imagined? Panel Discussion at the Seminar on Ethics and Integrity in Government’, Federal News Service.
Carroll, A. B.: 1979, ‘A Three-Dimensional Conceptual Model of Corporate Performance’, Academy of Management Review 4, 497–505.
Chen, K. H. and R. W. Metcalf: 1980, ‘The Relationship Between Pollution Control Record and Financial Indicators Revisited’, The Accounting Review 55, 168–177.
Clarkson, M. B. E.: 1988, ‘Corporate Social Performance in Canada, 1976–86’, Research in Corporate Social Performance and Policy: A Research Annual 10, 241–265.
Cochran, P. L. and R. A. Wood: 1984, ‘Corporate Social Responsibility and Financial Performance’, Academy of Management Journal 27, 42–56.
Cressey, D. R. and C. A. Moore: 1983, ‘Managerial Values and Corporate Codes of Ethics’, California Management Review 25, 53–77.
Davidson, W. N. III and D. L. Worrell: 1988, ‘The Impact of Announcements of Corporate Illegalities on Shareholder Returns’, Academy of Management Journal 31, 195–200.
‘Developments in the Law — Corporate Crime: Regulating Corporate Behavior through Criminal Sanctions’: 1979, Harvard Law Review 92, 1229–1375.
Dillon, G. C.: 1991, ‘The Prospect of Competitive Ethics: Good Ethics Is Good Business’, Vital Speeches 57, 526–529.
The Economist, ‘Inside the Stockade’, 2 April 1994, 61–62.
The Economist, ‘The Shuttle: The Cost of Science’, 8 February 1986, 84.
Financial Accounting Standards Board: 1993, Accounting Standards: Current Text (Financial Accounting Standards Board, Norwalk, Connecticut).
Freudberg, D.: 1986, The Corporate Conscience: Money, Power, and Responsible Business (American Management Association, New York).
Friedman, M.: 1962, Capitalism and Freedom (University of Chicago Press, Chicago).
Gatewood, R. D. and A. B. Carroll: 1991, ‘Assessment of Ethical Performance of Organization Members: A Conceptual Framework’, Academy of Management Review 16, 667–690.
Half, R.: 1994, ‘Why Ethics are Good for Business’, Journal of Accountancy 177, 111–112.
Heinze, D. C.: 1976, ‘Financial Correlates of a Social Involvement Measure’, Akron Business and Economic Review 7, 48–51.
Hovelson, L.: 9 September 1993, ‘Testimony of Lisa Hovelson, Executive Director, Taxpayers Against Fraud, Before the Senate Subcommittee on Courts and Administrative Practice Hearing on S. 841: False Claims Act Amendments of 1993’, Federal Document Clearing House, Inc.
Inside Business, 17 April 1994, Transcript number 207, Cable News Network, Inc.
Judge, W. Q., Jr.: 1994, ‘Correlates of Organizational Effectiveness: A Multilevel Analysis of a Multidimensional Outcome’, Journal of Business Ethics 13, 1–10.
Kaplan, S.: 15 February 1994, ‘Defense Industry Sets Crosshairs on Whistleblower Law; Lobbying Effort Underway to Limit Scope of Qui Tam Suits’, The Recorder, 1.
Kell, W. G. and W. C. Boynton: 1992, Modern Auditing, 5th ed. (John Wiley, New York).
Kiger, J. E. and J. H. Scheiner: 1994, Auditing (Houghton Mifflin, Boston).
King, B. F.: 1966, ‘Market and Industry Factors in Stock Price Behavior’, Journal of Business 39 (supplement 1, part 2), 139–190.
Kline, C. A., Jr. and H. L. Hessler: 1968, ‘The DuPont Chart System for Appraising Operating Performance’, in W. E. Thomas, Jr. (ed.), Readings in Cost Accounting, Budgeting and Control (South-Western Publishing Co., Cincinnati), pp. 855–879.
Kotter, J. P. and J. L. Heskett: 1992, Corporate Culture and Performance (The Free Press, New York).
Kurland, N. B.: 1993, ‘The Defense Industry Initiative: Ethics, Self-Regulation and Accountability’, Journal of Business Ethics 12, 137–145.
Marmaro, R. and J. Crumpacker: 8 May 1992, ‘Government Contract Fraud: Minimizing Corporate Damage’, Defense Contract Litigation Reporter, 3–19.
Meyers, S. L.: 1973, ‘A Re-Examination of Market and Industry Factors in Stock Price Behavior’, Journal of Finance 28, 695–705.
McGuire, J. B., T. Schneeweis and B. Branch: 1990, ‘Perceptions of Firm Quality: A Cause or Result of Firm Performance’, Journal of Management 16, 167–180.
McGuire, J. B., A. Sundgren and T. Schneeweis: 1988, ‘Corporate Social Responsibility and Firm Financial Performance’, Academy of Management Journal 31, 854–872.
Moskowitz, M. R.: Spring 1972, ‘Choosing Socially Responsible Stocks’, Business and Society Review 00, 71–75.
Moskowitz, M. R.: Spring 1975, ‘Profiles in Corporate Responsibility: The Ten Worst, The Ten Best’, Business and Society Review 00, 28–42.
Nelson, G. with C. H. Benson: 1993, Committees in the U.S. Congress: 1947–1992 Vol. 1: Committee Jurisdictions and Member Rosters (Congressional Quarterly, Washington, D.C.)
Noreen, E.: 1988, ‘The Economics of Ethics: A New Perspective on Agency Theory’, Accounting Organizations and Society 13, 359–369.
Overman, S.: 1989, ‘Good Ethics is Good Business’, Personnel Administrator 34, 34–39.
Parket, I. R. and H. Eilbirt: 1975, ‘Social Responsibility: The Underlying Factors’, Business Horizons 18, 5–10.
Pany, K. and O. R. Whittington: 1994, Auditing (Richard D. Irwin, Burr Ridge, Illinois).
Podgor, Ellen S.: 1994, ‘Corporate and White Collar Crime: Simplifying the Ambiguous’, American Criminal Law Review 31, 391–401.
Randall, D. M. and A. M. Gibson: 1990, ‘Methodology in Business Ethics Research: A Review and Critical Assessment’, Journal of Business Ethics 9, 457–471.
Rappaport, A. and E. M. Lerner: 1972, Segment Reporting for Managers and Investors (National Association of Accountants, New York).
Robertson, D. C.: 1993, ‘Empiricism in Business Ethics: Suggested Research Directions’, Journal of Business Ethics 12, 585–599.
Ruff, C.: 9 September 1993, ‘Testimony of the Aerospace Industries Association of America on Proposed Amendments to the Federal Civil False Claims Act Before the Subcommittee on Courts and Administrative Practice, Committee on the Judiciary, U.S. Senate’, Federal Document Clearing House, Inc.
Rutherford, B. A.: 1990, Segmented Financial Information (Organization for Economic Cooperation and Development, Paris).
Sauber, R.: 24 December 1992, ‘The Qui Tam Statute: What is Wrong with this Picture?’, Defense Contract Litigation Reporter, 8–10.
Schein, E. H.: 1992, Organizational Culture and Leadership, 2d ed. (Jossey-Bass, San Francisco).
Schermerhorn, J. R., Jr., J. G. Hunt and R. N. Osborn: 1994, Managing Organizational Behavior, 5th ed. (John Wiley, New York).
Schueth, S. J.: 1991, ‘Ethics in Corporate America: Does It Pay Off?’, Corporate Ethics: Developing New Standards of Accountability — Report Number 980, p. 39 (The Conference Board, New York).
Shapiro, H. D.: Spring 1973, ‘Social Responsibility Funds Get Off to a Bad Start’, Business and Society Review/Innovation 00, 81–87.
Siehl, C. and J. Martin: 1990, ‘Organizational Culture: A Key to Financial Performance?’, in B. Schneider (ed.), Organizational Climate and Culture, pp. 241–281 (Jossey-Bass, San Francisco).
Smith, R. B.: 1990, ‘Ethics in Business: An Essential Element of Success’, Management Accounting 71, 50.
Spencer, B. A. and G. S. Taylor: 1987, ‘A Within and Between Analysis of the Relationship Between Corporate Social Responsibility and Financial Performance’, Akron Business and Economic Review 18, 7–18.
Spicer, B. H.: 1978, ‘Investors, Corporate Social Performance and Information Disclosure: An Empirical Study’, The Accounting Review 53, 94–111.
Sternberg, W.: 1992, ‘Cooked Books’, The Atlantic 269, 20, 22, 24, 26, 35, 38.
Stevenson, R. W.: 12 November 1990, ‘Many Are Caught but Few Suffer for U.S. Military Contract Fraud’, New York Times, section A, p. 1, col. 1.
Ullmann, A. A.: 1985, ‘Data in Search of a Theory: A Critical Examination of the Relationships Among Social Performance, Social Disclosure and Economic Performance of U.S. Firms’, Academy of Management Review 10(3), 540–557.
United Press International: 27 June 1991, ‘Judge Approves $18 Million Northrop Settlement’.
U.S. Congress, House, Committee on Government Operations: 1993, Reimbursement of Defense Contractors' Environmental Cleanup Costs: Comprehensive Oversight Needed to Protect Tazpayers, 103d Cong., 1st sess.
U.S. Congress, Senate, Subcommittee on Defense Industry and Technology: 1990, Lessons Learned from Recent Procurement Fraud Investigations, 101st Cong., 2d sess.
U.S. Department of Defense, Directorate for Information, Operations and Reports, Washington Headquarters Services: 1988–1992, 100 Companies Receiving the Largest Dollar Volume of Prime Contract Awards.
U.S. Federal Acquisition Regulations System: 1994, Federal Acquisition Regulation: Acquisition Planning — Contractor Qualifications. 48 CFR 9.
U.S. General Accounting Office: 1992, Defense Procurement Fraud: Information on Plea Agreements and Settlements, GAO/GGD-92-135FS (Government Printing Office, Washington).
United States Statutes at Large. 1874-.
Vance, S. C.: 1975, ‘Are Socially Responsible Corporations Good Investment Risks?’, Management Review 64, 18–24.
Vartabedian, R.: 22 April 1994, ‘Teledyne to Pay $112 Million in 2 Whistle-Blower Suits’, Los Angeles Times, p. 1, col. 1.
Wall Street Journal: 28 October 1993, ‘GE Agrees to Settlement of $19.5 Million Lawsuit’, p. C23.
Watson, C. E.: 1991, ‘Doing What's Right and Doing Well in Business’, Business Forum 16, 28–31.
Yuspeh, A., comp.: 1990–94, Annual Report to the Public and the Defense Industry: Defense Industry Initiative on Business Ethics and Conduct (Howrey & Simon, Washington).
Author information
Authors and Affiliations
Additional information
Alan P. Mayer-Sommer is Associate Professor at Georgetown University's School of Business. His research has focused on the area of business-government relations.
Alan Roshwalb serves as a statistician for a marketing research firm and has conducted research in statistical methods and issues in business.
Rights and permissions
About this article
Cite this article
Mayer-Sommer, A.P., Roshwalb, A. An examination of the relationship between ethical behavior, espoused ethical values and financial performance in the U.S. defense industry: 1988–1992. J Bus Ethics 15, 1249–1274 (1996). https://doi.org/10.1007/BF00411812
Issue Date:
DOI: https://doi.org/10.1007/BF00411812