Strategic Risk-Taking Propensity: The Role of Ethical Climate and Marketing Output Control

Abstract

In the wake of the current financial crises triggered by risky mortgage-backed securities, the question of ethics and risk-taking is once again at the front and center for both practitioners and academics. Although risk-taking is considered an integral part of strategic decision-making, sometimes firms could be propelled to take risks driven by reasons other than calculated strategic choices. The authors argue that a firm’s risk-taking propensity is impacted by its ethical climate (egoistic or benevolent) and its emphasis on output control to manage its marketing function. The firm’s long-term orientation is argued to moderate the control–risk propensity relationship. The authors also extend research on risk and performance and argue that the association of risk-taking propensity and firm performance is contingent on the ownership (publicly traded versus privately held) structure of the firm. Based on survey data from a sample of manufacturing industries in the United States, the results show significant impact of ethical climate and marketing output control on a firm’s risk-taking propensity; also risk-taking propensity shows a stronger association with firm performance in privately held firms than in publicly traded firms.

Appendix A: Measures

Egoistic ethical climate

Scale anchors 1 = Strongly disagree, 7 = Strongly agree

(Construct Reliability = 0.85; Range of Factor Loadings: 0.52–0.95)

• 1. In this company, people are mostly out for themselves.

• 2. In this company, people protect their own interest above other considerations.

• 3. There is no room for one’s own personal morals or ethics in this company.*

• 4. People are expected to do anything to further the company’s interests, regardless of the consequences.*

• 5. People are concerned with the company’s interests – to the exclusion of all else.*

• 6. Work is considered substandard only when it hurts the company’s interests.

Benevolent ethical climate

Scale anchors 1 = Strongly disagree, 7 = Strongly agree

(Construct Reliability = 0.86; Range of Factor Loadings: 0.71–0.88)

• 1. The most important concern is the good of all the people in the company.

• 2. In this company, our major concern is always what is best for the other person.

• 3. Our major consideration is what is best for everyone in the company.

• 4. People are very concerned for what is generally best for employees in the company.

• 5. What is best for each individual is a primary concern in this organization.*

• 6. It is expected that each individual is cared for when making decisions here.*

Marketing output control

Scale anchors 1 = Strongly disagree, 7 = Strongly agree

(Construct Reliability = 0.92; Range of Factor Loadings: 0.75–0.83)

• 1. Employees in the marketing department are evaluated on specific performance goals.

• 2. It is generally believed that evaluating the specific outputs of marketing employees is the best way to manage their performance.

• 3. Monitoring the performance results of marketing employees (by immediate supervisors) is considered the most important factor in job evaluation.

• 4. Marketing department supervisors compare the performance outputs of employees to the performance goals set for them.

• 5. For marketing jobs, pay increases and other tangible rewards depend on how well the employees meet their performance goals.

• 6. Specific performance goals are established for all marketing related jobs.

Long-term orientation

Scale anchors 1 = Strongly disagree, 7 = Strongly agree

(Construct Reliability = 0.90; Range of Factor Loadings: 0.73–0.87)

• 1. Strategies are planned with a focus on long-term success.*

• 2. Long-term goals are prioritized over short-term gains.

• 3. It is generally believed that it is the long-term success that matters more.

• 4. It is considered important to create a company that remains competitive for a long, long time.

• 5. Ensuring long-term performance is more critical than meeting this quarter’s financial goals.

Risk-taking propensity

Scale anchors 1 = Strongly disagree, 7 = Strongly agree

(Construct Reliability = 0.86; Range of Factor Loadings: 0.69–0.87)

• 1. Generally, in our firm we play it safe when making strategic moves.^r *

• 2. Most consider our company as conservative in business approach.^r *

• 3. Our company is generally more risk taking than most.

• 4. The top management team in our firm is daring.

• 5. In our firm, the culture rewards taking chances.

• 6. In our company, when the situation calls for it, we are willing to take risks.

• 7. Our firm is willing to make major strategic decisions even if the potential outcome could be negative.

Firm performance (formative)

Scale anchors 1 = Is below expectations, 7 = Exceeds expectations

Question stem: Please circle the response that best describes your firm’s performance.

• 1. Total sales

• 2. Sales growth

• 3. Profitability

Firm size

Number of employees in your firm (please check one)

□ Less than 500	□ 5000–7499
□ 500–999	□ 7500–10,000
□ 1000–2499	□ More than 10,000
□ 2500–4999

^rItem was reverse coded.

*Item removed in measure purification.