2.4 The Organizational Approach to Ethics

Learning Objective

  1. Specify actions that managers can take to create and sustain ethical organizations.

Ethics is more than a matter of individual behavior; it’s also about organizational behavior. Employees’ actions aren’t based solely on personal values alone: They’re influenced by other members of the organization, from top managers and supervisors to coworkers and subordinates. So how can ethical companies be created and sustained? In this section, we’ll examine some of the most reasonable answers to this question.

Ethical Leadership

Organizations have unique cultures—ways of doing things that evolve through shared values and beliefs. An organization’s culture is strongly influenced by senior executives, who tell members of the organization what’s considered acceptable behavior and what happens if it’s violated. In theory, the tone set at the top of the organization promotes ethical behavior, but sometimes (as at Enron) it doesn’t.

Before its sudden demise, Enron fostered a growth-at-any-cost culture that was defined by the company’s top executives. Said one employee, “It was all about taking profits now and worrying about the details later. The Enron system was just ripe for corruption.” Coupled with the relentless pressure to generate revenue—or at least to look as if you were generating it—was a climate that discouraged employees from questioning the means by which they were supposed to do it. There may have been chances for people to speak up, but no one did. “I don’t think anyone started out with a plan to defraud the company,” reflects another ex-employee. “Everything at Enron seemed to start out right, but somewhere something slipped. People’s mentality switched from focusing on the future good of the company to ‘let’s just do it today.’” (Fowler, 2002)

Exercising Ethical Leadership

Leaders should keep in constant touch with subordinates about ethical policies and expectations. They should be available to help employees identify and solve ethical problems, and should encourage them to come forward with concerns. They’re responsible for minimizing opportunities for wrongdoing and for exerting the controls needed to enforce company policies. They should also think of themselves as role models. Subordinates look to their supervisors to communicate policies and practices regarding ethical behavior, and as a rule, actions speak more loudly than words: If managers behave ethically, subordinates will probably do the same.

This is exactly the message that senior management at Martin Marietta (now a part of Lockheed Martin) sent to members of their organization. A leading producer of construction components, the company at the time was engaged in a tough competitive battle over a major contract. Because both Martin Marietta and its main competitor were qualified to do the work, the job would go to the lower bid. A few days before bids were due, a package arrived at Martin Marietta containing a copy of the competitor’s bid sheet (probably from a disgruntled employee trying to sabotage his or her employer’s efforts). The bid price was lower than Martin Marietta’s. In a display of ethical backbone, executives immediately turned the envelope over to the government and informed the competitor. No, they didn’t change their own bid in the meantime, and, no, they didn’t get the job. All they got was an opportunity to send a clear message to the entire organization (Augustine, 2006).

By the same token, leaders must be willing to hold subordinates accountable for their conduct and to take appropriate action. The response to unethical behavior should be prompt and decisive. One CEO of a large company discovered that some of his employees were “dumpster diving” in the trash outside a competitor’s offices (which is to say, they were sifting around for information that would give them a competitive advantage). The manager running the espionage operation was a personal friend of the CEO’s, but he was immediately fired, as were his “operatives.” The CEO then informed his competitor about the venture and returned all the materials that had been gathered. Like the top managers at Martin Marietta, this executive sent a clear message to people in his organization: namely, that deviations from accepted behavior would not be tolerated (Austine, 2006).

It’s always possible to send the wrong message. In August 2004, newspapers around the country carried a wire-service story titled “Convicted CEO Getting $2.5 Million Salary While He Serves Time.” Interested readers found that the board of directors of Fog Cutter Capital Group had agreed to pay CEO Andrew Wiederhorn (and give him a bonus) while he served an eighteen-month federal-prison term for bribery, filing false tax returns, and financially ruining his previous employer (from which he’d also borrowed $160 million). According to the board, they couldn’t afford to lose a man of Wiederhorn’s ability. The entire episode ended up on TheStreet.com’s list of “The Five Dumbest Things on Wall Street This Week.” (McCall, 2006)

Tightening the Rules

In response to the recent barrage of corporate scandals, more large companies have taken additional steps to encourage employees to behave according to specific standards and to report wrongdoing. Even companies with excellent reputations for integrity have stepped up their efforts.

Codes of Conduct

Like many firms, Hershey Foods now has a formal code of conduct: a document describing the principles and guidelines that all employees must follow in the course of all job-related activities. It’s available on the company intranet and in printed form and, to be sure that everyone understands it, the company offers a training program. The Hershey code covers such topics as the use of corporate funds and resources, conflict of interest, and the protection of proprietary information. It explains how the code will be enforced, emphasizing that violations won’t be tolerated. It encourages employees to report wrongdoing and provides instructions on reporting violations (which are displayed on posters and printed on wallet-size cards). Reports can be made though a Concern Line, by e-mail, or by regular mail; they can be anonymous; and retaliation is also a serious violation of company policy (Hershey Foods, 2006).

Key Takeaways

  • Ethics is more than a matter of individual behavior; it’s also about organizational behavior. Employees’ actions aren’t based solely on personal values; they’re also influenced by other members of the organization.
  • Organizations have unique cultures—ways of doing things that evolve through shared values and beliefs.
  • An organization’s culture is strongly influenced by top managers, who are responsible for letting members of the organization know what’s considered acceptable behavior and what happens if it’s violated.
  • Subordinates look to their supervisors as role models of ethical behavior. If managers act ethically, subordinates will probably do the same.
  • Those in positions of leadership should hold subordinates accountable for their conduct and take appropriate action.
  • Many organizations have a formal code of conduct that describes the principles and guidelines that all members must follow in the course of job-related activities.


  1. (AACSB) Analysis

    You’re the CEO of a company that sells golf equipment, including clubs, bags, and balls. When your company was started and had only a handful of employees, you were personally able to oversee the conduct of your employees. But with your current workforce of nearly fifty, it’s time to prepare a formal code of conduct in which you lay down some rules that employees must follow in performing job-related activities. As a model for your own code, you’ve decided to use Macy’s Code of Business Conduct and Ethics. Go to the company’s Web site (http://www.federated-fds.com/investors/governance/documents/code_of_business_conduct_and_ethics.pdf) to view its posted code of business conduct. Your document won’t be as thorough as Macy’s, but it will cover the following areas: (1) conflicts of interest; (2) acceptance of gifts, services, or entertainment; (3) protection of confidential information; (4) use of company funds or assets for personal purposes; (5) competing fairly and ethically; and (6) adherence to code. Draw up a code of conduct for your company.

  2. (AACSB) Reflective Skills

    Think of someone whom you regard as an ethical leader. It can be anyone connected with you—a businessperson, educator, coach, politician, or family member. Explain why you believe the individual is ethical in his or her leadership.


Augustine, N., “Business Ethics in the 21st Century” (speech, Ethics Resource Center), http://www.ethics.org/resources/speech_detail.cfm?ID=848 (accessed April 24, 2006).

Fowler, T., “The Pride and the Fall of Enron,” Houston Chronicle, October 20, 2002, http://www.chron.com/business/enron/article/Enron-s-corporate-tumble-was-a-long-time-coming-2083723.php (accessed April 24, 2006).

Hershey Foods, “Code of Ethical Business Conduct,” http://www.thehersheycompany.com/about/conduct.asp (accessed January 22, 2012).

McCall, W., “CEO Will Get Salary, Bonus in Prison,” CorpWatch, http://www.corpwatch.org/print_article.php?&id=11476 (accessed April 24, 2006).

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