Organizational Integrity and Moral Climates

Abstract

This Chapter argues that the key to organizational integrity is a good moral climate. A good moral climate is one that has norms and values that contribute to a moral climate, including a commitment to stakeholder management, a commitment to seeing the purpose of the organization as a cooperative enterprise, and both substantive and procedural norms of fairness. Finally, I consider the role of incentives as they support or inhibit organizational integrity, identify conditions that work against moral integrity, and conclude by considering whether for-profit organizations can instill organizational integrity and remain profitable.

This article was originally published in The Oxford Handbook of Business Ethics, George G. Brenkert and Tom L Beauchamp, (eds.) Oxford University Press, 2010, 501–724. Reprinted with the permission of the editors and Oxford University Press. There have been some minor changes in the original in order to make this Chapter consistent with other Chapters in the book. Also some of the information in the original has been updated.

These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Introduction

Organizations have personalities that many refer to as a “culture.” Some organizations are perceived as having an ethical culture, while others are perceived as having an amoral or unethical culture. Organizational cultures do not change easily. In this chapter the following questions will be addressed about these cultures: What are the marks of an organization that has integrity? What factors are important? What ostensibly important factors turn out to be less so? What factors hinder organizational integrity?

In his book Competing with Integrity, Richard De George says, “Acting with integrity is the same as acting ethically or morally.”¹ De George chooses the word “integrity” rather than “ethics” because of the negative connotations that “ethics” has in some business circles. For example, “integrity” does not have the connotations of moralizing that words like “ethics” and “morality” have for some people. I follow a similar approach here.

For the purpose of this chapter, I assume that an organization with integrity is an organization with a certain sort of moral climate. Detailing the characteristics of a moral climate for an organization is a goal of this chapter. Some features we associate with individual integrity are also characteristic of organizational integrity. For example, both individuals and organizations with integrity are steadfast in their commitment and actions to moral principle. However, I will argue that an organization with integrity has several characteristics that distinguish it from individual integrity (i.e., personal moral integrity) and that some central characteristics of individual integrity are less important for organizational integrity. Individuals with integrity are individuals who accept responsibility for any negative consequences caused by their actions. On the other hand, achieving organizational integrity may require that managers de-emphasize or even, in certain situations, ignore issues of personal responsibility. Also, an organization with integrity must have certain kinds of organizational structures or organizational incentives. This language does not apply to individuals with integrity. Indeed the key notion of organizational integrity, “moral climate,” cannot be meaningfully applied to individual integrity.

In this chapter, I begin with the central idea of organizational integrity: moral climate. I then identify the norms and values that contribute to a moral climate, including a commitment to stakeholder management, a commitment to seeing the purpose of the organization as a cooperative enterprise, and both substantive and procedural norms of fairness. Finally, I consider the role of incentives as they support or inhibit organizational integrity, identify conditions that work against moral integrity, and conclude by considering whether for-profit organizations can instill organizational integrity and remain profitable.

The Importance of a Moral Climate

Moral climate can be construed as comprising “shared perceptions of prevailing organizational norms established for addressing issues with a moral component.”² A moral climate involves ethical commitments that are value-based and are embodied in the character of the organizational members and the organization’s routines and incentive structures. One of the characteristics of an organization with a moral climate is that the organization takes the moral point of view with respect to organizational actions.

An essential characteristic of taking the moral point of view is to consider the interests of those impacted by actions. For individuals, taking the moral point of view is straightforward; it requires that one consider the impact of one’s actions on others. With respect to an organization, matters are a bit more complex. For an organization to take the moral point of view, it must have leaders and a decision-making structure that allow it to consider the interests of those it affects, with special emphasis on those it wrongs or harms.

An organization with a moral climate has two different attributes. It has both shared perceptions as to what constitutes moral behavior as well as processes for dealing with ethical issues. Some of these shared perceptions are core values that guide the organization. In an organization with integrity, core values govern corporate activity. A full picture of what constitutes a moral climate requires a lengthy discussion of the norms and values that constitute a moral climate—the task to which we now turn.

Stakeholder Management

One feature of an organization with a good moral climate is that its behavior is consistent with its purposes, which also must be morally justified. There is a close analogy here between individual integrity and organizational integrity. An individual has integrity when he or she exhibits good character and is steadfast in the face of adversity or temptation, and an organization displays integrity when it is true to its goals or purposes, especially when there are obstacles impeding them or temptations to deviate from them.

Strict consistency with and adherence to the organization’s purpose is not sufficient for a good moral climate. The purpose must also be morally appropriate or at least not inconsistent with morality. For instance, the standard view of the purpose of a for-profit public company in the United States is the creation of shareholder wealth. Stockholders are the owners, and managers are the agents of the owners. It is the manager’s responsibility to provide financial returns to the owners because that is what the owners want. This view is often attributed to Milton Friedman and is the standard view taught to students in American business school classes. This view is a moral position in that owners have moral rights and managers have moral obligations to them.

Business ethicists generally do not regard this classic position as the best account of a corporation’s purpose from the moral point of view. Many business ethicists think that something like R. Edward Freeman’s account of stakeholders is closer to the mark: Business ought to be a value-creating institution, and it should be managed to promote the interests of the various corporate stakeholders. The creation of wealth is a critical value, but it is not the only one. For example, employment that provides meaningful work and income for a decent standard of living are other pertinent values. I endorse Freeman’s account of the purpose of the corporation although I will not defend it here. This defense has been well articulated in the business ethics literature, but stakeholder theory remains controversial and there are business ethicists who believe that the traditional Friedmanite view is superior. Defenders of Friedman’s view acknowledge that stakeholder theory is instrumentally correct, meaning that managers who believe their moral obligation is to increase shareholder wealth must still manage from a stakeholder perspective. These managers realize they can only increase shareholder wealth if the interests of all corporate stakeholders are taken into account and promoted.

By endorsing stakeholder theory as the goal or purpose of the corporation, I am also accepting it as a correct normative position of how the firm ought to be managed. Managers may sometimes be morally required to put the interests of other stakeholder groups ahead of the interests of the stockholders. The managers of an organization with a moral climate recognize that the interests of various stakeholders have intrinsic value. Of course, we need to elaborate further on the nature of a moral climate. However, stakeholder theory provides the basic moral framework for organizational integrity.

Seven Substantive Moral Principles

I have argued elsewhere and will here assume that morality requires that a business organization be viewed as a moral community and not simply as a set of economic relationships.³ I will now argue that how we look at and understand the purpose of an organization affects how we will behave in it. If the individuals in an organization view it purely instrumentally, these individuals are predisposed to behave in ways that harm organizational integrity. John Rawls’s insight that organizations are social unions constituted by certain norms is useful here. Organizations are not mere instruments for achieving individual goals. To develop this notion of a social union, Rawls contrasts two views of how human society is held together⁴: In the private view human beings form social institutions after calculating that it would be advantageous to do so; in the social view human beings form social institutions because they share final ends and value common institutions and activities as intrinsically good. In a social union, cooperation is a key element of success because each individual in a social union knows that he cannot achieve his interests within the group by himself. The cooperation of others is necessary as it provides stability to the organization, enables it to endure, and enables individuals both to realize their potential and to see the qualities of others that lead to organizational success.

In an organization with a moral climate, the organization should be managed in ways that benefit the interests of the stakeholders. This can be accomplished only if the stakeholders in control do not treat the organization merely instrumentally, but rather as a cooperative enterprise or social union.

How should cooperation be achieved in an organization characterized as having a moral climate? An organization with an effective moral climate must be governed by a set of substantive moral principles and be characterized as having certain processes (or procedures) for decision-making. In short, there are both substantive and procedural elements required for organizational integrity. The following outline reflects a Kantian theory of what the business firm should be. It provides a foundation on which to build and to discuss other, non-Kantian approaches:

• 1. The firm should consider the interests of all the affected stakeholders in any decision that it makes.

• 2. The firm should have those, or representatives of those, affected by the firm’s rules and policies participate in the determination of those rules and policies before they are implemented.

• 3. The interests of one stakeholder should not take priority over the interests of all other stakeholders for all decisions.

• 4. When a situation arises in which it appears that the interests of one set of stakeholders must be sacrificed for the interests of another set of stakeholders, that decision cannot be made solely on the grounds that there is a greater number of stakeholders in one group than in another.

• 5. No principle is acceptable if it is inconsistent with the principle that we should never treat a person merely as a means to our own ends.

• 6. Every profit-making firm has an imperfect duty of social beneficence (benefit to society).

• 7. Each business firm must establish procedures to insure that relations among stakeholders are governed by the rules of justice.⁵

These principles can be easily accepted by all who work within Rawls’s or Kant’s ethical theory. I recognize that many business ethicists work from a different normative ethical theory. However, I believe these principles are consistent with the conclusions reached in many other ethical theories as well. My interest here is in building on these principles by pointing to the norms that managers who view an organization as a social union might use to help create a moral climate.

Norms of Fairness

I now move from the seven moral principles for creating a moral climate to norms of fairness. Insights from both moral philosophy and organizational theory are useful here. Both ethicists and many social scientists working in organizational theory recognize the importance of fairness. Some economists such as Robert Frank have used the sense of fairness to explain why people sometimes complete transactions that are not in their short-term interest.⁶ A principal concept of economics is that economic transactions are free actions in which each party perceives that he or she will benefit from it. If I am willing, for instance, to sell my house for $500,000 and someone is willing to pay $520,000 for it, each party will benefit if we make the deal. But for what price should the house actually sell? In real estate, the selling price is determined by negotiation. Our intuitions seem to suggest that a 50/50 split is most fair. With that in mind and without negotiation, the fair price is $510,000. With respect to the surplus of economic value generated by an economic activity, Frank argues that fairness requires that the surplus be divided equally.

Frank’s principle cannot be applied directly to organizations because we need to consider not only the fairness in the distribution of an organization’s outputs, but also the contributions that each individual makes to the organization. Recently Robert Phillips has argued that fairness in an organizational context requires that benefits be distributed on the basis of the relative contribution to the organization (the equitable proportionality condition).⁷ Phillips’s principle is that benefits derived from organizational activity should be distributed according to the level of contribution that individuals have made to the organizational activity. Thus if Jones contributes twice as much as Smith, Jones should receive twice the benefits of Smith. Both Frank’s egalitarian principle and Phillips’s proportionality principle have an intuitive appeal and can be reconciled as a combined principle of fairness: Where contribution can be measured, the reward should be proportional to the contribution made. Where there is a surplus as a result of cooperative endeavor in which contribution cannot be measured, those cooperating should share the surplus equally. For managers of a firm with organizational integrity, the question is, how should the rewards of a cooperative enterprise be distributed in a firm with a moral climate? The appropriate principle is that the rewards should be distributed fairly as a function of productivity. Where productivity cannot be measured, the surplus value that results from cooperative economic activity should be equally distributed.

Issues of fairness in an organization are not limited to the internal distribution of profits. One of Frank’s major contributions to economic theory has been to show the power and moral importance of perceptions of fairness in many economic transactions. Issues of fairness arise in many of the relations that an organization with integrity has with its various stakeholders. Organizations that violate widely held norms of fairness in their stakeholder relations do so at great peril, including a cost to their perceived status as an organization of integrity. One instance of this is the Coca-Cola soft drink dispenser that can adjust the price of a coke to temperature.⁸ When Coca-Cola’s CEO at the time reported the existence of this machine his announcement was met with outrage because people perceived that changing the price of a coke in response to changes in temperature was unfair. Thus, a Coca-Cola dispenser that adjusts the price of a coke to temperature was never manufactured. Other companies, though, have similar campaigns, such as the use of frequent flier miles as a means for priority boarding that are accepted by consumers. This demonstrates that while human reasoning is often inconsistent, any violation of strongly held norms of fairness will lead to the perception that an organization lacks integrity.

Procedural Norms

In addition to the substantive principle of fairness, notions of procedural fairness are important in achieving a moral climate. Rawls believed that his account of justice was basically procedural. With respect to the principles of justice for the basic structure of society (i.e., society’s most basic institutions and forms of organization) a fair procedure would result in principles that were just. Rawls’s emphasis on the importance of fair procedures has parallels in the organizational behavior literature. From that literature we learn that perceptions about the justice of the procedure affect perceptions about the justice of the outcomes. This finding has led some in the organizational behavior field to develop the concept of “organizational justice.”

One of the more important empirical findings in organizational justice is that people are more inclined to accept an adverse result—a result that does not benefit them—if they have had a role in determining how decisions are to be made. In other words, input into the design of the process increases acceptance of adverse decisions. This finding is especially important in employee evaluations because if employees have had input into the evaluation process, then a negative evaluation of any employee will likely be accepted by that employee. What the organizational justice literature shows is that an organization is more effective if the procedures are just. Decisions regarding reward and task support will be more often accepted if everyone affected has participated in the development of the procedures.

Of course, the fact that people will likely accept adverse results if they believe they have been involved or consulted in setting the procedures does not mean that their acceptance is justified. Here we need to relate social science accounts of how organizational justice is perceived and its effects on efficiency with normative ethical theory on just procedures. An obvious key to a just procedure is impartiality. The procedure cannot be biased in a direction that shows self-interest or that uses criteria unrelated to merit.

To achieve organizational integrity, the procedures for decision-making in the organization need input from all organizational stakeholders. Moreover, the procedures must not be biased against or merely reflect the self-interest of one group of stakeholders.

One way to solidify this discussion of justice, both substantive and procedural, is to examine a particular instance of remuneration, namely the remuneration of CEO’s and other high executives in a for profit business. Many journalists and business ethicists believe that executive compensation is too high and that executives are being rewarded unfairly at the expense of the rest of the employees and perhaps also at the expense of the stockholders. In terms of our discussion above, these executives receive an unfair share of the surplus generated by profitable businesses.

Some defend the current level of executive pay by appeal to the market. They argue that markets set executive compensation, and therefore they are procedurally just. However, critics deny that markets set executive compensation. They point out that compensation committees composed primarily of other CEOs set the compensation. This process creates an obvious bias in favor of CEOs because people have a cognitive bias toward overvaluing their personal contributions and of blaming their shortcoming on either others or impersonal forces beyond their control. CEOs are not exempt from cognitive bias and consequently will tend to over-reward CEOs. Having other CEOs set CEO salaries contributes to what Garrison Keillor of the Prairie Home Companion refers to as the Lake Wobegon effect, a situation in which all the children are above average. In this case, it is the CEOs who are all above average.

Many sorts of wrong procedures have an adverse effect on organizational integrity. To continue the point about setting executive compensation, I turn to agency theory. Agency theory has been used by researchers in a wide range of organizational fields, such as economics, sociology, marketing, accounting, political science, and organizational behavior. Much of the scholarly literature on executive pay is grounded in agency theory and is accompanied by suggestions that may solve the agency problem. The “agency problem” is the tendency of the agent to choose his or her interests when they conflict with the interests of the principal. Within management theory, the typical application of this framework is to shareholders as principals and managers as agents. In management, the agency problem exists when the managers put their own interests, especially their financial interests, ahead of the interests of stockholders.

Agency theorists have a long history with incentive systems. A central issue for agency theorists is how to monitor or create incentives so that the agent acts not on his or her own behalf, but rather on behalf of the principals. With respect to corporate managers, including the CEO, the issue was aligning the incentives of the organization so that managers would work to the shareholders’ benefit, rather than for their own benefit. Business history presents many cases in which CEOs have promoted their own interests at the shareholders’ expense. This seemed especially prevalent at the beginning of the twenty-first century.

One device for aligning the objectives of top-level managers with stockholders that became increasingly popular was the use of stock options. However, in path-breaking research already referenced in Chap. 3, Jared Harris and Philip Bromiley examined the effect that certain compensation schemes, especially the granting of stock options, had on the likelihood of a firm having an accounting restatement as a result of misrepresentation.⁹ Using a matched sample data set, they found two similar companies in which one had experienced an accounting restatement due to an accounting irregularity and one that had not. The U.S. General Accounting Office provided the data on the accounting irregularities. What might explain the difference between two similar companies? Harris and Bromiley showed conclusively that granting of a large amount of stock options significantly increased the likelihood of accounting misrepresentation, whereas the comparatively smaller bonuses did not have that affect.¹⁰

What lessons for organizational integrity can we extract from this? As pointed out in Chap. 3, there has been a tendency for agency theorists and others who work with incentive systems to ignore the dark side of human nature–the possibility that those responding to incentive systems will not always behave ethically. They assumed that because people behaved in a self-interested way, it did not mean that people would cross the line and behave unethically. This oversight seems unrealistic as the Harris/Bromiley research shows. Incentives to motivate behavior are a key part of the management of any organization, but under what conditions do they become morally suspect? In Harris and Bromiley’s research, bonuses were not correlated with accounting irregularities, but stock options were. What differentiates stock options from bonuses in influencing managers to commit accounting irregularities? One answer is that bonuses are usually much smaller than stock options. People are less likely to cheat when the gains are small. Executives who manage for organizational integrity need to be knowledgeable and realistic about human nature. Organizational integrity cannot be achieved by assuming that people will do the right thing.

Many have reacted to the recent wave of corporate scandals by saying that executives are overly greedy: a character flaw. But why have some executives become greedy? The explanation is in the distinction between viewing an organization as merely an instrument to satisfying one’s individual needs and seeing an organization as a social union. If the organization is seen as a means to personal enrichment and not seen as a cooperative enterprise of all those in the organization, it should come as no surprise that the executives of such an organization feel entitled to the rewards. Psychological theorists have shown that people tend to take credit when things go well and blame bad luck or circumstances beyond one’s control when things go badly. Thus a CEO takes all the credit when an organization performs well but blames the general economy or other factors when things go poorly. This human tendency is predictable when executives look at organizations instrumentally.

I have been arguing that the key to organizational integrity is the existence of a good moral climate. In summary, the following elements are essential for a good moral climate: (1) commitment to a moral purpose for the organization, (2) a view of the organization as a social union rather than merely a means for achieving individual goals, and (3) management in accord with a set of substantive moral principles (including those of fairness) and in accord with a set of procedures that at a minimum avoid bias and give the employees a voice in the rules governing the organization.

Considerations That May or May Not Contribute to Organizational Integrity

The Perspective of Ideal Theory

A common criticism of philosophical ethics is that philosophers tend to write about ethics from an ideal standpoint, meaning that they tend to think that the task of ethical thinking is to discover the right thing to do free of conflicts and practical impediments. Once the right thing to do is determined, then people will have a blueprint of what should be done and will follow that blueprint. As John Rawls once wrote, “The other limitation on our discussion is that for the most part I examine the principles of justice that would regulate a well ordered society. Everyone is presumed to act justly and to do his part in upholding just institutions.”¹¹

Approaching organizational integrity from an ideal standpoint is not an adequate practical perspective for those managing for organizational integrity. Nobel laureate Amartya Sen—in a keynote address on the occasion of the 20th anniversary of Harvard’s Safra Foundation Center for Ethics—noted that research in professional ethics could not be based on what he called “transcendent ethics.” Such an approach to ethics will be of some but not much help in pinpointing moral integrity in organizations. Since organizations are composed of people, we need to take the findings of psychology, sociology, and economics into account in order to achieve organizational integrity.¹² Ethical theory always exists in tension: On the one hand, ethics should tell us what ought to be the case; on the other hand, what we ought to do cannot be so demanding that it requires what we cannot do or cannot reasonably expect to be done. What we can or cannot do is often an empirical question best addressed by the social and biological sciences. In managing for organizational integrity, executives must balance the ideal, the practical, and the possible. They must take account of legal requirements, cost considerations, risk/benefit analyses, community standards, and the like.

In business ethics, it is vital to keep ethical requirements of a theory close to what is known about human behavior. When I developed a Kantian account of business ethics, I tried to balance being faithful to Kant with Kantian prescriptions that were consistent with what we know about human behavior. As noted earlier, people will accept adverse decisions if they have a role in deciding the rules that govern how decisions are made. With this in mind, Kant’s demand that persons not be treated as a means merely, but as ends, takes on a concrete reality. To respect persons in a business organization, we arguably do not have to find a way to end up with a win/win every time. In certain situations, giving stakeholders voices in the rule-making and decision-making process may be all that is required to respect them as persons.

Assessing the Characteristics of a Workforce

Another step in structuring a realistic and practical account of organizational integrity is to understand how humans respond to incentives, which helps establish appropriate and inappropriate incentives. Organizational theory has much to tell us here. Over 40 years ago, Douglas McGregor published The Human Side of Enterprise, in which he contrasted two theories about human nature known as theory X and theory Y. Theory X assumed that people had an inherent dislike of work and would avoid it if possible and that they seek to avoid responsibility. Theory Y assumes the opposite: Employees like work, but prefer it when self-directed. They want to act imaginatively, creatively, and are willing to assume responsibility. They also act morally much of the time and can be trusted. Theory Y people are less susceptible to the agency problems mentioned earlier, in which agency theorists assume that workers would rather do something instead of work, thus suggesting that workers would under perform in their jobs. The more theory Y people an organization has, the greater the likelihood that the organization will exhibit organizational integrity, since theory Y people do not view either their jobs or the organization instrumentally. Rather, theory Y people extract meaning from their work. Thus, it is easier to align individual goals and the conditions for organizational integrity when you have a large number of theory Y people. This conclusion does not mean that organizational integrity is impossible in an organization composed mostly of theory X people, but it is more difficult because theory X people view the organization instrumentally.

People are not purely theory X or theory Y, but this broad categorization is nonetheless useful. The first task of management is to assess accurately whether theory X or theory Y persons dominate one’s labor force and then to manage in ways that increase the predominance of theory Y employees. Accurate knowledge of the characteristics of one’s work force will help manage for organizational integrity. The second task of management is to find ways to convert theory Xs into theory Ys. If a person stubbornly remains theory X, it is probably in the best interest of organizational integrity to terminate the person.

The Importance of Incentive Structures

If incentives are structured to promote self-serving or even unethical behavior, then an increase in self-serving or unethical behavior is to be expected. Mere exhortations to be moral are of limited value. Management scholars and managers know this and when employees accept structured incentives and then do something that is self-serving or unethical, management must take some, and perhaps most, of the responsibility. This point can be illustrated with two much discussed Harvard Business School cases.

First the Sears Auto Centers case concerns allegations that surfaced in June of 1992. The charge was that Sears Auto Centers had been performing unnecessary repairs on customer vehicles.¹³ Many believe that changes in the compensation system were part of the problem. Mechanics had always been under a production quota, but on January 1, 1992, the production quota was raised by 60%. In addition, compensation changed from strictly an hourly wage to an hourly wage equivalent to 83% of former earnings plus a variable on work actually performed. This increased pressure on mechanics to speed up work and to surpass minimum production quotas. The California Attorney General at the time said that the structure “made it totally inevitable that the consumer would be oversold.”

Second, a case from the 1970s involved the H. J. Heinz Company (the Administration of Policy case)¹⁴: Certain Heinz divisions, including the Star Kist division, had engaged in accounting irregularities. Expenses were recorded in 1 year, but the good or service was not received until the following year. The result was a decrease in income in the former year and an increase in income during the latter. In addition, sales were recorded in one fiscal period that should have been recorded in an earlier one. Why do that? If you have met your numbers for the year and the next year is uncertain, there is an incentive to increase expenses this year and lower them next year. The conclusion of an investigating audit committee focused on “poor control consciousness.” The committee said, “World headquarters senior management apparently did not consider the effect on individuals in the [divisions] of the pressures to which they were subjected.”¹⁵ Other factors cited included the lack of an effective code of ethics, an effective compliance procedure, a monitoring process, competent personnel at world headquarters including those competent in finance, and an electronic data processing manager.

Incentives are a key part of the management of any organization, but when are incentives and goals permissible and when are they morally suspect? Recall Harris and Bromiley’s research in which bonuses were not correlated with accounting irregularities, but stock options were. An important task of those seeking organizational moral integrity is to think creatively about incentive structures. Managers need to think about what unforeseen consequences on ethical behavior or lack thereof the incentives might produce. The devising of incentive systems requires what Patricia Werhane refers to as moral imagination.¹⁶

In addition, as we see in the Heinz case, one needs competent people in the right places, effective monitoring, and an effective compliance program. These conditions are essential for organizational integrity. In her discussion of the Sears case, Lynn Sharp Paine argues that the incentive structures must be made to fit into an organization that already has integrity. Incentives can be helpful, but they can also be abused. In diagnosing the problem at Sears, an ethical climate did not pre-exist. Quality control and audit systems were absent and there were inadequate guidelines on what was to be considered legitimate preventive maintenance. In a telling comment, Paine says, “There is no evidence in the case that Sears has encouraged professionalism, integrity, or self-restraint…. Problems arise when companies introduce such compensation programs without insuring that quality controls, audits, cultural values, and disincentives for abuse are sufficiently strong to counter this potential.”¹⁷

Codes of Ethics

In the public arena people concerned about organizational ethics, especially if moral problems have arisen, often ask, “Does the organization have a code of ethics?” Many people think that codes of ethics are important for the creation of a moral climate and for the maintenance of organizational ethics. However, my view of codes of ethics used in this chapter is more nuanced. Codes of ethics by themselves are not a good indicator of an organization’s commitment to ethics. For a code of ethics to be effective, it needs to be part of a broader moral climate. If the moral climate is absent, a code of ethics is likely to be window dressing. Enron, for instance, had one of the best codes of ethics of any corporation, yet the ethical climate at Enron was seriously degraded even before its collapse. A code of ethics is useful only if the other factors that contribute to organizational integrity are present. As we saw in Chap. 3 a powerful argument for this position is provided by transaction cost economics.¹⁸

Recall in Chap. 3 that I used the distinction between high and low asset specificity to establish my claim that a code of ethics alone is not a good indicator that a company is ethical. In the language of this Chapter, I would say that a good code of ethics is not necessarily a good indicator of a good moral climate or of an organization with integrity. Codes of ethics have low asset specificity and are easily copied. Even a company with a bad moral climate can have a good code of ethics as the Enron example illustrates. Thus, a good code of ethics is not a reliable indicator of whether an organization has high ethical standards or low ethical standards. However, when a code of ethics is supported by a pervasive moral climate, it can be a useful device for guiding employee and even management conduct, especially if the code is quite specific in its norms. As was mentioned in Chap. 3, perhaps the best-known example of a code of ethics that has made a difference in management decision-making and that does legitimately contribute to organizational integrity is Johnson and Johnson’s Credo (J and J Credo), which is not simply a document on which all employees must sign off. It is a living, pervasive, and enforced document. The Credo is evaluated periodically to determine if it still reflects the values and vision of the company and if it is still useful as a tool for helping resolve ethical issues or dilemmas the company might face. Thus there is a symbiotic relationship between the ethical climate at J and J and the J and J credo. This is a worthy goal for every business organization.

Determining Individual Responsibility

To achieve organizational integrity and a pervasive moral climate, one cannot assume that solving moral issues within the organization is always a matter of focusing on individual responsibility. Determining individual responsibility is part of what is required to create an appropriate moral climate, but sometimes trying to determine who is responsible for a moral failure obstructs and retards necessary organizational reform. Moral imagination is required to decide when to focus on individual responsibility, to ignore issues of individual responsibility, and to focus on technological fixes or structural organizational reform.

As we saw in the California Sears Auto Centers case, the incentive system encouraged Sears auto repairmen to do unnecessary repairs. From the paradigm of individual responsibility, it seems strange to blame the incentive system. The incentive system is not an intentional actor, yet much literature in business and business ethics suggests that the incentive system is to be blamed. However, an incentive system is established by individuals, and they must assume responsibility for adverse ethical effects of the system they initiate. Contending that the incentive system is responsible for the behavior should be understood as shorthand for saying that the individuals who created the incentive system are responsible for consequent unethical behavior. At Sears it seems that it was the managers who were responsible for the overcharging by the Sears repairmen, not the repairmen.

This determination is not quite right, however, because the problem is one of shared responsibility. Being influenced by incentives to act unethically does not absolve one of all responsibility. It is appropriate to place some responsibility on those who created the incentive system and some on those who acted on the incentives. Both are responsible for the moral climate that results. Of course, in many cases we must decide how to distribute greater or lesser responsibility to different individuals when all bear some degree of responsibility.

Sometimes an effective moral climate results from balancing responsibilities, but in other circumstances determining individual responsibility is not important at all. Focusing on individual responsibility can even detract from organizational integrity. One example is the problem created by medical mistakes in hospitals. In the late 1990s it was estimated that medical errors caused 100,000 deaths per year. Organizational integrity requires that medical organizations do everything possible to eliminate such mistakes. Evidence shows that rather than blaming individuals each time something goes wrong, the best approach is having an organizational system that searches for and implements technical fixes and related ways of reducing medical error.

To make this point, I use an extended example. In 1996, a 2 month old baby boy named Jose Eric Martinez died after being given the wrong dose (ten times the recommended amount) of the drug Digoxin. An investigation established the causal sequence that resulted in the accidental overdose as follows¹⁹: The first step in the sequence was the determination of the appropriate amount of Digoxin to be administered. The attending physician and resident did the calculations and determined that the correct dose was 0.09 mg. However, when the resident wrote the order on Jose’s chart, he made a slip of the pen and entered 0.9 mg—a dose that was ten times too high. When the physician checked the chart, the mistake went unnoticed.

The Digoxin order was faxed to the pharmacy. The pharmacist thought the amount too high, so he placed the order on the coffee pot-the location of the unofficial important pile and then paged the resident to discuss the order. However, the resident had left for the day and did not receive the page. A back up copy of the order that had been sent by messenger arrived and was filled by a technician. The technician filled a vial with 0.9 mg of Digoxin and left it for the pharmacist to check. By the time the pharmacist checked the dosage, he had forgotten his original concerns. Since the order and the dosage in the vial matched, the pharmacist sent the prescription out.

That was not the end of the opportunities to correct the error. The nurse who received the vial thought that the dosage was incorrect, so she approached the resident on call who was not the same resident who made the initial error. This resident redid the math and got the correct dosage of 0.09; but when he looked on the vial he failed to notice that the decimal point was in the wrong place and the dosage on the vial actually read 0.9.

There is a clear causal chain here, but which individual was responsible for the death of Jose Martinez? Are all the individuals who contributed to the mistake in some measure responsible for it? If one is concerned about organizational integrity, these questions may not be the right ones to start with. This suspicion is supported when a few more facts of the case are added. The pharmacy was one person short the night the order was filled. A policy existed that the phone must be answered within four rings and that visitors should be greeted within 5 s–a policy that put pressure on an understaffed unit. The nurse who questioned the order was from a country in which women rarely confront men and in which women rarely confront doctors. Cultural practices and some well-intentioned policies played a role in the events that occurred.

Hermann Hospital (as it was known in 1996 ²⁰) in Houston, where this tragic mistake occurred, did not try to improve organizational integrity by investigating who was responsible. No one was fired, and no new rules for individuals to follow were introduced. Rather, technological solutions were instituted. The hospital’s computer would automatically flag questionable orders for the most dangerous drugs, and the hospital looked for a paging system that would alert a caller when the person being paged had his pager deactivated.

In a 1995 hospital case at Martin Memorial Hospital South in Stuart, Florida, a 7-year-old boy died when he was given the wrong medication. Instead of receiving lidocaine as prescribed, the syringe contained a highly concentrated dose of adrenaline that was suitable for external use only. The procedure, which was common in hospitals throughout the U.S., was to put the lidocaine into a cup and then empty the contents of the cup into the syringe. Instead, the syringe was filled from the wrong cup. By putting a cap on the vial of lidocaine, it could be drawn directly out of the bottle into a labeled syringe. The cup, and thus the possibility of that kind of error, was eliminated.²¹

In these cases the search for individuals responsible for the medical mistake appear to do more to inhibit organizational integrity than to advance it. What was needed was a reassessment of procedures and an honest and transparent discussion of what happened and what needed to be changed. If the focus was on identifying and punishing the individuals involved, the parties would have been trying to protect themselves rather than change procedures. In these cases, not looking for those responsible wound up helping to improve both the quality of the operations and moral climate.

Sometimes even the fear that individuals will be held responsible inhibits the introduction of technology that would improve safety. This is especially true in a litigious society like the United States. Fear of lawsuits and civil punishment created some resistance to an open discussion of the issues in the medical error cases discussed previously. To use another example, it is my understanding that a technological innovation can track all the actions of pilots on commercial aircraft. Using this device, mistakes or tendencies that might lead to disastrous mistakes can be discovered and possibly corrected before a tragedy occurs. It is my understanding that the system is apparently operative on British Airways. However, it is also my understanding that union pilots in the United States have apparently resisted this technology on grounds that it will be used to “punish” them. A litigious society like the United States may make organizational integrity more difficult under such circumstances.

Organizational integrity is thus not simply a matter of having a mechanism for holding individuals responsible. It is the result of a myriad of complex factors that are both individual and institutional. Sometimes it is important to resolve problems of a lapse of ethics by holding individuals responsible, but often it is most important to solve a crisis of organizational integrity by changing procedures or creating a technological fix.

Elements That Inhibit the Development of a Moral Climate

Groupthink

One of the biggest dangers in the path of achieving a high level of organizational integrity is the danger of groupthink. The concept of groupthink was first introduced by William H. Whyte in an article in Fortune. In his construal, groupthink referred to open use of group values to achieve expedient and right outcomes. Later the term took on a negative connotation, especially at the hands of its major discussant, Irving Janus. Janus thought of it as the thinking of a cohesive in-group often driven by a desire more for unanimity rather than for realistic appraisal. Janus regarded it as a faulty decision procedure resulting from group pressures that lead to a deterioration of “mental efficiency, reality testing, and moral judgment.”²² Psychologists have identified a number of factors that lead to groupthink. These factors include (1) overestimation of the group, (2) close-mindedness, (3) pressures toward uniformity and unanimity, (4) the stereotyping of outsiders, (5) self-censorship, (6) direct pressure on dissenters, (7) mindguards,²³ and (8) the illusion of invulnerability.

It has been argued that a paradigm case of groupthink occurred among those involved in deliberations and conference calls surrounding the Challenger Launch in January of 1986. The Challenger exploded shortly after liftoff. The launch was initially scheduled 6 days earlier, but mechanical problems caused a delay. The O-rings in the booster rockets became an engineering concern. A recommendation by Martin Thiokol engineers not to launch because the safety of the O rings could not be guaranteed in the predicted cold weather was belittled and eventually overruled, in large part because NASA was eager to get the mission underway. Some have argued that groupthink at NASA was the chief explanation for the flawed decision to proceed.

It is widely believed that it is difficult to change a corporate culture. Approximately 7 years later on February 1, 2003, the Columbia was lost as it exploded on reentry over Texas. Subsequent investigation showed that requests to photograph the tiles that had been damaged during takeoff were denied. The report on the Columbia disaster had a disconcerting similarity to the official report on the Challenger disaster. Again groupthink may have been a primary cause.

Groupthink can be seen as the dark side of teamwork. Given that teamwork is important for organizational success, how can groupthink be avoided? The quality and character of the team leader are key considerations.²⁴ The most important factor in avoiding groupthink is an environment in which different opinions and questioning is encouraged. The group’s leader will have to avoid being too directive. Sometimes it may be necessary to appoint critical evaluators with the specific responsibility to raise questions or challenge consensus. The more the members of a team think alike, the more groupthink is likely to occur. Moral failure often occurs when the leader of an organization surrounds himself or herself with “yes men,” who are those who tell the boss only what he or she wants to hear. Moral failure can also result when meetings are seen as inefficient and brain storming or other activities designed to encourage a multiplicity of ideas for solving a problem or achieving an organizational goal are discouraged. Commentators have pointed out how John F. Kennedy instinctively followed all these suggestions during the Cuban missile crisis. He was sometimes absent during the discussions so that he would not stifle them. He sought the advice of people with different points of view including some with unpopular opinions. Kennedy’s behavior here is in contrast with George W Bush who did just the opposite in deciding to go to war in Iraq. Whereas Kennedy’s strategy proved successful, Bush’s did not.

Of course analysis paralysis must be avoided but so must group think. As with so much in organizational ethics, balance is important. However, groupthink is clearly a very serious threat to organizational integrity.

Teleopathy

Another error in decision-making to be avoided has drawn the attention of Kenneth Goodpaster in his work in business ethics.²⁵ This error, known as teleopathy, is defined as “the unbalanced pursuit of purpose in either individuals or organizations.” The principle components of teleopathy are fixation, rationalization, and detachment. Goodpaster shows how many important cases in business ethics can be explained as instances of teleopathy. Consider shareholder theory–the theory that the obligation of the manager is to increase shareholder wealth. If organizational integrity requires stakeholder management, then the single-minded focus on only one stakeholder–the shareholder–will lead the organization astray by ignoring the interests of other stakeholders. The most common criticism made by critics of public corporations is that they are slaves of Wall Street and focus entirely on making the quarterly numbers so they can maximize profits for shareholders. A number of failures to achieve organizational integrity have resulted from this single-minded focus on shareholder profit. Even if a manger is single-minded about profit, as Friedman, Jensen, and others recommend, the manager will only succeed if he or she does not always give priority to what is most profitable. To increase shareholder wealth, the manager must often give special attention to other stakeholders whose support is vital to the success of the firm. Avoiding teleopathy is both good business and necessary for organizational integrity.

If a corporation is to be single-minded, it should be so in pursuit of creating value for corporate stakeholders. However, being single-minded here does not make the manager guilty of teleopathy, since the single minded goal requires balancing the goals and interests of all stakeholders. Being single-minded in that respect requires great flexibility with respect to the management of a public corporation.

Conflicts of Interest

Another significant danger for an organization—especially when the organization is viewed instrumentally rather than as a social union or cooperative enterprise—is the possibility that the members of the organization will permit conflicts of interest. A standard definition of a conflict of interest is the following: A person has a conflict of interest if (a) he is in a relationship of trust with another person or institution requiring him to exercise judgment in that other’s service, and (b) he himself has an interest that tends to interfere with the proper discharge of responsibility to the other party.²⁶

If members of an organization see the organization solely as a means to their own private interest, it should come as no surprise that when the opportunity arises for them to put their own interests ahead of the interests of others in the organization, they will be tempted to do so. This situation is represented in the classic agency problem discussed earlier. The accounting scandals at the turn of the twenty-first century sparked a renewed discussion of conflicts of interest in business. None was more notorious than the relationship that existed between Enron Corporation (an American energy company) and Arthur Andersen LLP, a “big-five” accounting firm. Andersen had huge consulting contracts with Enron, and questions arose about how objective they could be when they performed as auditors. In addition, some of Andersen’s personnel functioned as internal auditors at Enron—a clear violation of generally accepted accounting principles and a clear case of a conflict of interest. Moreover, a virtual revolving door existed between Andersen and Enron in which employees who worked for one would end up working for the other.

On Wall Street the mergers of investment brokerages and banks created another example of conflict of interest. Investment analysts such as Henry Blodget and Jack Grubman would hype the stock of firms that provided IPO (Initial Public Offerings) funds and merger and acquisition business to the banking side of the business. The projections on stock growth given to investors were not based on an objective analysis of the future value of the firms, but rather were designed to increase artificially the value of the stock to the benefit of the bank and its client.

To see more precisely why the examples above constitute a conflict of interest we must ask to whom the auditors and the investment analysts properly owed their allegiance. The client of public auditing firms is the investing public (the idea behind the notion of “certified public accountant”). The investing public is also the client of investment advisors. In both cases the allegiance should have been to the investing public, but instead the personal interests of the investment advisors and the interests of Arthur Andersen and the banking side of such corporations as Citicorp were given priority. The auditors of public companies are in a position of trust with respect to the investing public, as are investment analysts. However, in these cases this trust was violated because personal or institutional interests prevented the objective professional analysis that was required. Emails show that Grubman disparaged stocks in private that he publicly recommended.²⁷

Even if one takes a Friedmanite view about the purpose of a public corporation–namely, that it should be managed in the interests of the stockholders–the activities described above are wrong and indicate a lack of organizational integrity. These individuals and firms violated a number of the conditions required for organizational integrity that have been enumerated and defended in this chapter. The events provide additional evidence that the agency theorists who postulate a cynical psychological egoism may not have been cynical enough. They assumed that the manager’s self interest would stop at the point of illegality or blatant immorality. The widespread existence of conflicts of interest—both financial and non financial conflicts—within organizations stands as a significant impediment to organizational integrity.

Why Firms with Organizational Integrity Should Be Successful

Business people will want more than the account of organizational integrity in this chapter. They will want to know if business organizations with integrity can be financially successful. Ideals of organizational integrity must be shown to be practical and affordable. The starting point of the argument that organizations with integrity can be successful is the claim made by some corporations that their reputation as organizations with integrity gives them a competitive advantage in the marketplace. Their reputation for organizational integrity is part of their brand. Marketing theorists and finance theorists know that a brand can be highly valuable even though it is intangible. Firms such as Johnson and Johnson have organizational integrity as part of their brand and believe that their brand gives them a competitive advantage.

We need an argument to show that there is some reason to accept what Johnson and Johnson takes to be true–that their reputation as an organization of integrity gives them a competitive advantage. Transaction cost economics–the theory we used to show why codes of ethics by themselves are not good indicators of a moral climate–is the theoretical basis for the argument. The argument from Chap. 3 is worth repeating in this context. Key to the argument is the fact that organizational integrity is grounded in the values and routines of the firm, an idea that is evident in the list of items I have identified as characterizing organizational integrity. Those values tend to be knowledge-based, embodied in individual employees or firm routines, and characterized by high asset specificity. Assets characterized by high asset specificity are difficult to copy because they are unique or nearly unique to the firm that possesses them. Experience confirms the theory that moral climates are difficult to copy.

What evidence backs this claim? Both scholarly literature and business experience suggest that it is difficult to change moral climate once it has become part of the corporate culture. A good example is the contrast between Ashland Oil Company and Exxon-Mobil. When Ashland Oil was involved in an Oil spill in January of 1988, the CEO and other corporate officers quickly went to Pittsburgh, admitted fault and directed the clean-up. This action was wise from both an ethical and a business perspective. Ashland oil had its fines reduced and suffered less litigation as a result of its behavior. Executives also gained respect as an ethically responsible company. In March of 1989, Exxon, as it was known then, experienced the Exxon Valdez oil spill in Prince William Sound off the coast of Alaska. Exxon’s CEO never visited Alaska and belatedly sent a taped message of apology. Exxon has stayed in an adversarial mode since the beginning. Exxon apparently had learned nothing from the Ashland Oil incident and thus was subjected to much litigation and a serious blow to its reputation. The courts awarded $287 million dollars for actual damages and (on appeal) punitive damages of $2.5 billion dollars.²⁸ Exxon did not learn from Ashland’s successful handling of the crisis and thus suffered both financially and in terms of its reputation. Why did Exxon behave as it did? To use our earlier language, the answer is that corporate culture and specifically a moral climate have high asset specificity and—unlike codes of ethics—are not easily copied.

In strategic management, a competitive ideal is to occupy a position in which the firm has an asset that is difficult to copy and gives it a competitive advantage. An organization that has integrity is in that position. Because of this competitive advantage organizations with integrity should be successful. However, there are some disturbing recent trends in corporate America showing that the argument mentioned thus far is not sufficiently persuasive.

A Pessimistic Concern and a Topic for Future Research

Although the moral climates of organizations with integrity are difficult to copy, they can be lost. That is, an organization that has integrity can lose it. That seems to be happening. Let’s look at some of the companies that business ethicists have held up as shining examples of organizational integrity over the past 35 years in order to see how integrity can easily be lost. The “Hewlett-Packard Way”- the credo that had guided the firm for generations- was exemplary, but after its merger with Compaq HP ran into trouble. The HP Board became dysfunctional, and corporate officials engaged in illegal activity to determine who was leaking information about Board deliberations to the public. There were massive layoffs as a result of the merger, and morale plummeted. The Hewlett Packard Way became ineffective. There is general consensus in the literature that HP lost critical dimensions of its integrity—or at least that it was severely tarnished.

Merck and other companies supply similar examples. Merck had achieved acclaim for manufacturing a drug to cure river blindness, but its reputation became tarnished by the Vioxx scandal. Merck was accused of promoting Vioxx while knowing of its dangerous side effects. Likewise, British Petroleum, which established the motto “Beyond Petroleum,” and after much fanfare and success in communicating its corporate social responsibility, was found negligent for a refinery explosion in Texas and then in April of 2010 the Deepwater Horizon oil rig exploded in the Gulf of Mexico causing the greatest oil spill in American history. Finally the HB Fuller Company, which originally provided a model of the enlightened corporation under the leadership of Elmer Andersen followed by his son Tony Andersen, became just another company focused on quarterly returns. The company that resisted Wall Street came to pay it homage.

Good research is necessary to help us understand what happened to so many of our shining examples of organizational integrity. One thing is clear. Achieving organizational integrity is difficult and once achieved is characterized by high asset specificity. Thus, it is difficult to copy. On the other hand, these examples tell us that departures from organizational integrity can have an immediate impact on the reputation of the firm and that once a reputation is lost, it is difficult to regain. If these generalizations are correct, one has reason to be pessimistic about the future. Are firms with organizational integrity an endangered species?

Conclusion

I have argued that organizational integrity exists when an organization has a moral climate. This culture exists only if the organization adheres to certain substantive ethical norms. Other features of a moral climate include fair procedures and the existence of incentive structures that support moral conduct rather than incentive structures that are perverse with respect to moral conduct. Groupthink, teleopathy, and conflicts of interest must be avoided. Corporate codes of ethics are no substitute for a moral climate, but once embedded in an organization with integrity, such codes can be useful as general guides. In an organization with integrity, the organization is not viewed as a mere instrument for individual personal advancement, but rather is seen as a cooperative endeavor of those within the organization that provides value to its corporate stakeholders. Organizational ethics is the set of norms and actions that create a moral climate, but these must be embedded at the highest level and constantly monitored. The managers, especially top executives, should show leadership with respect to organizational ethics. Sadly we still have a great deal of work to do in creating organizational integrity, but at least many are now seriously engaged in the endeavor.