Ethics Training for Managers

Best Practice and Techniques

Logan L. Watts, Kelsey Medeiros, Tristan McIntosh, Tyler Mulhearn

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000282580
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

Can employees be trained to make more ethical decisions? If so, how? Providing evidence-based and practical answers to these critical questions is the purpose of this book. To answer these questions, the authors—four organizational psychologists who specialize in the study of ethical decision making—translate insights based on decades of scientific research. Whether you are a student, educator, HR manager, compliance professional, or simply someone interested in the topic of ethics education, this book offers a road map for designing ethics training programs that work.

PART I

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WHY INVEST IN ETHICS
TRAINING?

1

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WHY ETHICS IN BUSINESS MATTERS

Logan L. Watts

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In the past, ethics has often been viewed as a ‘nice to have,’ rather than a ‘must have,’ aspect of success in business. Some managers believe that ethics and profits are competing priorities. Others may think that ethics and business performance are independent issues. However, these ideas are misconceptions. In fact, a large body of research shows that ethics is fundamental to organizational success (Sisodia, Wolfe, & Sheth, 2003). In other words, ethics is critical to a firm’s competitive advantage. Most of the evidence for this conclusion stems from case studies and survey studies. The goal of this chapter is to summarize this evidence.

Evidence from case studies

Ethics seminars routinely use case studies of corporate scandals to illustrate the value of business ethics. This is for good reason. Case studies provide memorable examples of ethical issues and the potential consequences of poor decisions. Classic examples include Enron and Madoff Investments. In both cases, widespread financial fraud ruined multibillion dollar firms. Here we focus on three more recent cases. Each case demonstrates that business ethics—or the lack thereof—has important implications for organizational success.

The three scandals summarized here share an underlying pattern. This pattern involves the breakdown of relationships with stakeholders. Stakeholders are ‘persons or groups that have, or claim, ownership, rights, or interests in a corporation and its activities, past, present, or future’ (Clarkson, 1995, p. 106). In other words, stakeholders are parties that organizations need in order to function and thrive. Example stakeholders include shareholders, employees, customers, suppliers, community members, government agencies, special interest groups, and even the environment (Freeman, Harrison, Wicks, Parmar, & De Colle, 2010).

The goal of ethical standards, as well as legal regulations, is to protect the rights and interests of stakeholders. Organizational misconduct occurs when employees act in ways that violate these standards. Such misconduct may occur intentionally (e.g., corruption) or unintentionally (e.g., neglect). Regardless of intentions, organizational misconduct harms relationships with one or more stakeholder groups. This is because misconduct compromises the trust between parties that is needed for relationships to function. To illustrate these ideas, next we describe corporate scandals at Volkswagen, Wells Fargo, and Facebook.

Emissions scandal at Volkswagen

In 2015, the Environmental Protection Agency issued a notice of violation to Volkswagen. The notice accused the company of installing ‘defeat devices’ on close to half a million vehicles sold in the USA since 2009. This device temporarily suppressed nitrogen oxide—a poisonous gas—just long enough to pass emissions tests. Passing these tests allowed the company to appear to comply with US and European air quality standards. The reality, however, was a different story. Once the vehicles were on the road, the defeat device shut off in order to improve driving performance. This practice pushed vehicle emissions far above regulatory standards. Investigations later proved that over two dozen company executives had been aware of this deception for years (Cavico & Mujtaba, 2016).

Through these actions, Volkswagen abused multiple stakeholders. First, the company took advantage of customers by engaging in deceptive advertising. Second, the company harmed its relationship with government agencies around the world. Third, any investor holding stock in Volkswagen experienced a severe decline in the value of their holdings. Fourth, the environment and the public at large suffered from elevated emissions levels. One study estimated the excess pollution would result in over 50 premature deaths as well as nonfatal health issues for many others (Barrett, 2015).

Following the scandal, the consequences for Volkswagen have been severe. The CEO and other executives were forced to resign. The company announced a worldwide recall of 11 million vehicles. Governments and automakers around the world launched investigations into the company. In 2018, Volkswagen agreed to pay over $2 billion in fines to the US government alone (Thaler, Herbst, & Merz, 2018). At a minimum, the emissions scandal at Volkswagen shows that unethical business practices can severely disrupt organizational operations.

Fake accounts scandal at Wells Fargo

In 2016, Wells Fargo was accused of opening two million fake accounts. These accounts were opened on behalf of customers without their knowledge. Executives initially reacted by minimizing the problem. For example, senior managers suggested the ‘few bad apples’ involved had already been fired. However, follow-up investigations revealed that the issues were systemic (Tayan, 2019). Branch managers reported that sales goals set by senior managers were unrealistic. Instead of inspiring higher performance, the ambitious goals encouraged employees to cut corners. Some managers even trained their employees on how to open fake accounts to boost branch metrics. In response to pressure from Congress and the media, CEO John Stumpf resigned. In a company-wide statement, the new CEO Tim Sloan admitted to the pervasive nature of the problem:

Despite our ongoing efforts to combat these unacceptable bad practices and bad behaviors, they persisted, because we either minimized the problem, or we failed to see the problem for what it really was—something bigger than we originally imagined. (Independent Directors, 2017, p. 59)

Following the scandal, a number of consequences have emerged for Wells Fargo and its stakeholders. The company was ordered to pay $185 million in fines. It also spent hundreds of millions of dollars auditing its sales practices and engaging in public relations campaigns to restore its reputation. Share prices declined. Customers’ finances and credit histories were negatively impacted. Over 5,000 employees lost their jobs. Interviews with former managers showed that the unrealistic sales targets contributed to a stressful workplace—one of the leading causes of employee illness and fatalities (Beehr, 1995).

Finally, we should not overlook the potential indirect consequences on the broader public. When the reputation of a global banking institution is harmed, confidence in the entire economic system suffers. Following the Great Recession, trust in financial institutions was at an all-time low (Stevenson & Wolfers, 2011). The Wells Fargo scandal contributed to further distrust of banks, and economic instability, at an already uncertain time.

Data privacy scandal at Facebook

In 2018, the public learned that Facebook committed a massive violation of their users’ data privacy rights. The company admitted to sharing the personal data of 87 million users with a consulting firm named Cambridge Analytica, without these users’ permission.

It is important to consider how this data scandal occurred. When Facebook users agreed to the fine print to use some third-party applications, they agreed to share data from their profiles. These users didn’t know, however, that in agreeing to share their own data they were also agreeing to share the data of their personal connections (i.e., ‘friends’) who never agreed to the arrangement. To make matters worse, Cambridge Analytica used these data to target users with advertisements with the goal of influencing government elections in the USA and around the globe (Meredith, 2018).

Rather than being a case of intentional abuse, it appears that Facebook’s misconduct mainly resulted from neglect. Executives failed to anticipate how their technology and systems could be exploited by third parties. In CEO Mark Zuckerberg’s testimony before Congress, he stated that Facebook executives ‘didn’t do enough to prevent these tools from being used for harm’ and that ‘we didn’t take a broad enough view of our responsibility’ (Zuckerberg, 2018).

At the time of this writing, the consequences of the Facebook scandal are still developing. Of course, the company’s users—particularly those whose data were collected without their permission—were the primary victims. Facebook’s stock price also declined in the weeks following the scandal (Peruzzi, Zollo, Quattrociocchi, & Scala, 2018). Long-term consequences for Facebook and the industry remain to be seen as leaders around the world debate how to effectively regulate technology companies.

To summarize, case studies of ethical scandals demonstrate the negative consequences of misconduct on an organization’s operations and reputation. While the three examples highlighted here are from Global Fortune 500 firms, many examples can also be found in public sector and nonprofit organizations of all sizes. Organizations differ in terms of their mission and strategic objectives. Yet, the ability of each organization to deliver on its mission rests on strong relationships with stakeholders—relationships that are compromised by unethical behavior.

Evidence from survey studies

Survey research provides another lens for viewing the link between organizational ethics and success. Survey studies are useful because they allow researchers to estimate statistical relationships (i.e., correlations) between ethics and key metrics of organizational success. In addition, survey studies include large samples with many hundreds of organizations. With large sample sizes, we can be more confident that the results are trustworthy and applicable to other organizations.

Measuring organizational ethics

In order to appreciate evidence from survey studies, it is first important to understand how researchers measure organizational ethics. When researchers study organizational ethics, they typically do so by asking respondents how ethical they perceive an organization and its practices to be. Survey respondents can be customers, shareholders, industry experts, or more commonly, the organization’s own employees.

In designing these surveys, researchers must first identify a set of questions or statements that represent the types of behaviors one might expect to see in an ethical organization. Next, researchers must decide on a rating scale. Rating scales provide a way to quantify respondents’ perceptions. In other words, rating scales transform respondents’ perceptions into numbers. Once perceptions are quantified, researchers can analyze these data using statistics. Table 1.1 presents an example rating scale with some survey questions for illustrative purposes.

Table 1.1 Example Survey Rating Scale for Measuring Organizational Ethics

Instructions: Using a 5-point rating scale, rate how strongly you agree or disagree with the following statements based on your experiences working at Company X.
Rating scale:	1 Strongly disagree	2 Somewhat disagree	3 Neither disagree nor agree	4 Somewhat agree	5 Strongly agree
___ The company treats employees and customers with respect.
___ Managers take the company code of ethics seriously.
___ Employees feel safe to voice their concerns about ethical issues.
___ Managers talk about the importance of upholding ethical values.
___ Supervisors are role models of ethical behavior.
___ There are clear systems in place for reporting ethical issues.
___ The company responds quickly and effectively to ethical issues.

Note. This table is presented for illustrative purposes only. We encourage readers interested in application to use validated scales for measuring perceptions of organizational ethics, of which there are several options (e.g., Cullen, Victor, & Bronson, 1993; Jondle, Ardichvili, & Mitchell, 2014; Kaptein, 2008).

Survey researchers also collect information on metrics of organizational success. For example, employee job satisfaction, turnover rates, and customer loyalty ratings are all potentially important metrics to consider. Further, researchers can collect financial metrics like revenue growth, profitability, and return on assets. With this information, researchers can test whether there is a link between respondents’ perceptions of organizational ethics and metrics of organizational success.

There are two important assumptions underlying survey research on this topic. First, measuring organizational ethics is about perception. An organization is classified as more or less ethical, relative to other organizations, depending on how respondents perceive it. Second, organizational ethics is viewed as a continuum. Rather than being a black-or-white, yes-or-no ...