Business Ethics

and
Management Control

Prof. GURU PRASAD

FACULTY
INC GUNTUR
Ethical behavior in organizations

• Ethics deals with morality and

rules regarding behavior and
conduct.

• In organizational set up , ethics

can be defined as the rules or
standards governing the conduct
of individuals and organizations.
Ethical philosophy
• There are three different ethical
philosophies that individuals follow
under different situations in an
organizational set-up.

• These are- utilitarianism, individual

rights, and justice.

• Organizations attempt to ensure that

their employees behave ethically by
using control systems
Ethical philosophy
• The individual rights philosophy
deals with safeguarding the rights
of individuals, such as the right to
be informed, right to free speech,
right to free consent, the right to
privacy, and the right to due
process.

• Utilitarianism recommends that

a course of action that achieves
the greatest good for the greatest
number of people is ethical
Ethical philosophy
• Justice requires that the rules of
the organization be enforced fairly
and impartially. Individuals
should be accountable only for
factors which are under their
control.

• Utilitarianism is the most

commonly followed ethical
philosophy
Ethical decision ideology
• Ethical decision ideologies can be
classified based on two
dimensions: one is
• Idealism – the belief that
behaving ethically ensures positive
results; and the other is
• Relativism – the belief that moral
values depend on circumstances.
Ethical decision ideology
• Based on these two dimensions,
there are four classifications of
ethical decision ideologies
• Absolutist,
• Exceptionist
• Situationist, and
• Subjectivist.
Ethical decision ideologies Matrix

Relativism
low high

I Exceptionist Subjectivist
D low
E
A
L
Absolutist Situationist
I high
S
M
Ethical decision ideologies Matrix

• An Absolutist believes in strictly

following the universally accepted
ethical principles.

• An Exceptionist refers to
universally accepted ethical
principles for broad guidance
rather than for strict adherence.
Ethical decision ideologies Matrix

• A Situationist takes a decision on

a case to case basis by studying
and comprehending the situation
at hand.

• A Subjectivist prepare to abide

by their respective individual
ethical principles rather than
adhering to universally accepted
ethical principles
Influencing factors of Ethics
• Individual factors
• Organizational factors:-

4. Culture and structure

5. Performance measurement
systems
6. Reward systems
7. Position related factors
Individual factors

• Individuals with higher ego

strengths will not depend
on others for decisions
making , whereas people
with low ego strength will
look to others for help in
arriving at decisions
Organizational culture

• The culture of an
organization includes its
values, belief systems, and
norms. It is influenced by
the behavior of the
mangers or the top
management of the
organizations
Performance measurement
systems
• The top management of sears auto
centers developed incentive systems to
improve revenue performance, and set
targets for their employees that were
practically unachievable. The
employees therefore resorted to
unethical actions by indulging in
unnecessary and incomplete repairs of
vehicles and overcharging for services.
• Finally , consumers initiated legal
proceedings against the organization
Reward systems
• Reward system in many
organizations tend to encourage
unethical behavior like kickbacks.
Also, some organizations tend to
discourage and penalize
whistleblowers; such punishment
systems tend to further encourage
unethical behavior.
• Reward systems should be
integrated with the performance
measurements systems.
Position related factors
• These are peer pressure, the
expectations of the top
management regarding
achievement of objectives, the
presence or absence of a code of
conduct, superior-subordinate
relationships, extent of resource
availability, etc.,
• For example, employees of
departments like marketing and
purchase tend to face more ethical
dilemmas
Organizational factors
• If a specific ethical behavior is
rewarded, employees will tend
to continue behaving in that
way. On the other hand, if any
employee gets punished for a
specific behavior , he and the
others in the organization will
not resort to that kind of
behavior
Influencing factors of Ethics
• External environmental factors

• political economical factors

• social factors
Political and economical factors
• It include factors like government
polices, tax structures, and the tariffs
and duties levied on imports.
• Many organizations resort to bribing
government officials to get contracts or
licenses for businesses or to get into
such transactions to stay in
competitions.
• The case of Siemens AG officials routing
organizational funds to an Italian energy
company as bribes is an example of
unethical behavior
Social factors
• Giving the right information to
customers regarding products and
services is one of the major ethical
considerations that organizations must
keep in mind.
• Being ethical serves as a competitive
advantage for organizations, as it helps
them build up a good reputation and
image for themselves.
• Johnson and Johnson- faced a serious
crisis, when a few capsules of its
popular medicine, Tylenol were found to
be laced with cyanide.
Integrated framework for ethical
behavior
• When the ethical/unethical
behavior of an individual is
rewarded or punished , these
decisions become a part of the
employee’ s decision history
and this further influences the
decisions and behavior of the
employees.
Individual factors External Environmental factors

Ethical philosophy Organizational

& Position related
Decision ideology factors

Ethical
Decision
Making

Ethical
Decision
behavior
history

Reinforcement/
Reward systems
MCA and Ethical issues

• Budgetary slack
• Managing earnings
• Ethical issues in sales
• Ethical issues in operations
• Ethical issues in Human
Resources
Budgetary slack
• Budgetary slack is a deliberate
understatement of revenues and
/or overstatement of expenses in
the budget.
• Budgetary slack is caused by
managerial intention rather than
by an unforeseen error in the
estimation process. The slack
created by mangers may also be
used for the organization’s benefit
during bad times
Managing earnings
• Corrupt managers tend to mange
earnings for personal benefits .
They try to show higher earnings
in order to show that budgeted
targets have been achieved.
• In united states , the Sarbanes
Oxley act was enacted to act as an
external control system to restrict
such practices.
Ethical issues in sales
• The samples and gift adjustments
in the pharmaceutical industry,
where it is the practice to give
samples of new products to
doctors as a part of the sales
promotion.
• These samples are given to the
doctors so that they can try out
the drug and also to help them in
brand recall.
Ethical issues in operations
• Consuming more resources,
providing for greater lead times, or
accepting relatively poor quality .
Focuses only on gaining maximum
profit at minimum costs without
taking social responsibilities into
consideration.
• Neglecting the safety of
employees. Having unhealthy and
dangerous working conditions and
passing off confidential information
Ethical issues in Human
Resources
• Lack of Job security
• Increased risk of unemployment
• Excessive scrutiny and control
• Discrimination
• Absence of proper appraisal
methods
• Sexual harassment
• Recruiting on contract basis
• Force them to work longer hours
Regulating Ethical conduct
Control activity Mechanism to regulate
ethical conduct

Indicating and Code of ethics

Ethics committee
communicating
Ethics training for employees
objectives Corporate governance focused
on ethics

Feedback through Ethics committee

performance System of whistle
measurement systems blowing
Reward systems Reward systems
integrated with focused on ethics
objectives
accomplishment
 Thank you
Two people can damage a society: the one who knows
and doesn't talk and the one who doesn't know and
talks
-Mr. Peja (genci. K)

A word of encouragement during a failure is worth

more than an hour of praise after success.
-Anonymous

Common sense is not so common.

-Jessica Truman

Appear weak when you are strong, and strong when

you are weak.
- Sun Tzu
 Ethics only can save you

BREAK THE SILENCE