Organizational Theory, Ethical Issues in: Part 2
Shaker A. Zahra and Peggy A. Cloninger
Organizational theory (OT) focuses on the behavior of companies or units, and their leaders and members. It examines those factors that determine the behavior of these groups and their consequences for organizational effective ness. OT theorists have offered many insights into human motives and behaviors. They have also devoted considerable intellectual energy to the study of formal and informal organizations, and examining rational and political processes. Consequently, OT can enrich our understanding of the roots and consequences of business ethics.
Although OT scholars and business ethicists focus on many common issues, they espouse different views of organizational and human behaviors. While these views may occasionally conflict, they often complement one another. This article explores areas of convergence and divergence between OT and business ethics by focusing on three levels of analysis. The first is the concept of the firm and its implications for human behavior. The second is inter organizational relations. The third is the relationship between the company and society.
The Concept of Organization and its Implications for Human Behavior
The concept of the firm represents an important starting point for scholars of both business ethics and OT. Whereas economics and finance theorists view the firm as a web of contracts, OT and business ethics scholars espouse a broader and more complex definition. Both groups believe that formal contracts among organizational members, and ensuing rights and obligations, are only a part of the concept of the organization. A deeper appreciation of human behavior can be achieved by delving into the values of different organizational members, because these values undergird the choices made by individuals and groups. Differences in, and clashes of, values often induce differences in orientations, interests, and behaviors. Thus, by exploring the causes and manifestations of value differences, the stage is set to understand and explain the behavior of groups and individuals within the organization.
OT researchers further suggest that organizations are political entities, where individuals at tempt to pursue their interests. To achieve organizational goals, formal and informal controls are needed. These controls help promote cohesion and unity of direction, thus reducing conflicts. Still, conflicts persist because of the divergence of interests and differences in power among members of the organization.
Nowhere is conflict more recognized in OT research than in the relationship between principals (owners) and agents (managers). A large body of research suggests that the rise of public corporations has resulted in the dispersion of ownership which, in turn, has resulted in loss of control by owners over their companies. Professional managers have become centers of power in the large contemporary organization. These managers own very little or no stock in the companies they run. Lacking connection to the company and its owners, managers may pursue goals that do not maximize shareholders’ value or that undermine their property rights. Conflicts of interests are represented in a multitude of managerial actions such as over diversification (Hoskisson and Hitt, 1994), excessive compensation, and mis directing corporate resources.
Conflicts between principals and agents are at the very core of scholarly conversation in OT and business ethics. Much attention has centered on governance systems that align the interests of the two groups, an interest that has generated a large number of studies (Zahra and Pearce, 1989). The company’s board of directors is widely viewed as the ultimate means of corporate control. Yet in reality boards have often failed to align the interests of shareholders and managers. Instead, many boards have become subservient to managers. Moreover, attempts to empower boards have not been very successful (Pearce and Zahra, 1991).
Researchers in OT and business ethics have explored different ways to empower boards and make them true instruments of corporate governance. OT scholars have focused on restructuring the board composition, information flows, and decision making processes. They have also explored ways to provide incentives to senior managers to place shareholders’ interests ahead of other groups. Conversely, business ethicists have attempted to understand when and why conflicts of interests between principals and agents arise, outline guidelines to ensure alignment of their goals, and explore the effect of corporate and professional codes of ethics on this alignment. Clearly, contributions by business ethicists complement those offered by OT researchers (see conflict of interest; codes of ethics).
The relationship between individual employees and the organization is another key area of interest to both OT and business ethics. In OT, both the structuralist and Marxist schools have given this issue special attention. The Marxist view states that the separation of ownership of the tools of production from labor creates conflicts between owners and workers (employees). This happens because owners have an incentive to exploit their workers to maximize their profits. Structuralists view the organization somewhat differently. They assert that the formal structure perpetuates the domination of owners over labor. They also claim that work organizations often dehumanize employees, stifle their initiative and creativity, emphasize compliance and conformity, and foster feelings of anomie and alienation. The individual is thus exploited for the good of the owners.
Not all OT researchers accept the Marxist or structuralist views. Some have advocated several more enlightened views of the organization, conceiving more humanistic organizations that foster creativity, enhance individuality, and pro vide an environment conducive to human growth. Promoting these more humanistic organizations has become a central theme in the current research in OT. Managers have been admonished to build a wholesome quality of working life (QWL) in order to better integrate organizational and individual goals and needs.
One outcome of the debate on the nature of the relationship between the individual and the organization is a growing recognition of the rights and obligations of employees. Here, business ethicists have much to offer OT researchers. There is an obvious fundamental difference between OT theorists and business ethicists. Whereas ethicists appear interested in balancing different interests and promoting moral con duct, OT scholars are more interested in cultivating human capabilities and talents to improve performance and increase productivity. This subtle difference seems to permeate the cur rent theoretical and empirical discussions of employee rights and responsibilities.
Some business ethicists build their arguments within philosophical discussions of human nature and values. They focus on stages of moral development and, accordingly, prescribe appropriate behaviors. Conceptual models of ethical behavior abound. According to Reidenbach and Robin (1990), these models converge empirically on three major dimensions. The first relates to moral equity, which in turn embodies beliefs about the fairness, justice, morality, and acceptability of behavior. The second dimension is relativistic in nature and refers to whether or not a behavior is culturally acceptable. The third dimension is contractual in nature, insofar as it indicates commitment to and consistency with formal and informal work contracts.
This three dimensional classification shows the potential contribution of business ethicists to the study of behavior in the organization. Yet, like other classifications, it also highlights the difficulty awaiting managers in attempting to ensure ethical behaviors: employees often have very different frames of reference, vary in their cognitive development, and may have different goals and expectations. Accommodating individual differences can sometimes create perceptions and feelings of inequity. Moreover, a group’s agreement on a definition of acceptable behavior does not guarantee it is ethical.
The difficulty of prescribing ethical behavior in work organizations becomes apparent in discussions of employee rights and responsibilities. There is no universal agreement on these rights, the approaches the company should take to sup port and protect them, the limits to be placed on these rights, or the conditions under which these rights can be changed. Further, balancing the rights and responsibilities of different employees may induce conflicts that paralyze the firm, lower productivity, and threaten the very existence of the organization (Werhane, 1985).
Doing what is ethically right can sometimes have unintended negative effects. Consider, for example, companies that have attempted to ad dress past discriminatory hiring practices. These efforts have produced charges of reverse dis crimination by groups traditionally favored in corporate hiring (see affirmative action programs). Likewise, corporate efforts aimed at helping women break through the glass ceiling have been criticized by male employees. Similarly, granting women maternity leave has sparked controversy, leading to charges of favoritism. Some male employees have sued their employers to establish their right to paternity leave. Doing the ethically right thing can sometimes fuel conflicts that divide the labor force. Of course, this does not mean that companies should not do the right thing; it merely suggests that sometimes business ethics are as hard to implement as they are hard to define. Therefore, occasionally, OT theorists have avoided discussions of the ethical implications of their strategies for organizational change.
The issues are as complex for the individual as they are for the company. Should an employee blow the whistle on her/his managers if they are engaged in unethical or illegal activities? (see whistle blowing). Should they accept as a fact of life the special programs enacted to re dress past corporate hiring practices? Should they comply with poorly designed work routines, rather than question their managers’ authority? Answering these and similar questions requires considerable soul searching because there are no absolutely correct answers.
Inter-organizational Relationships and Business Ethics
OT researchers also focus on inter organizational relationships that affect the company’s ability to secure resources and accomplish its goals. Companies develop joint ventures, join trade associations, and support lobbying on behalf of the industry. Companies also signal their moves to competitors to promote goodwill in the industry. OT theorists acknowledge the fact that some inter organizational activities can stifle competition and reduce consumer welfare. This happens through interlocking directors, either directly or indirectly, to coordinate the activities of two or more companies. Inter organizational links, while useful in many cases, can harm the competition in an industry.
Another area of interest is the growing use of competitive analysis, where companies collect and analyze data about their rivals’ operations and strategies. Competitive analysis is now widely viewed as a requirement for success. However, some companies use questionable techniques for this purpose. For example, they may spy on their competitors or bribe their employees to gain access to data on a rival’s operations. A recent study concluded that man agers believe that rising competition, concern over their company’s survival, and careerism promote ethical violations in competitive analysis. Surprisingly, managers also indicated these actions can harm the competition in an industry, reduce trust, and inhibit the flow of information in the market (Zahra, 1994).
A third area that has received some attention in the literature is the mutual interdependence of companies. Increasingly, companies are dependent on each other for survival; one company’s products are inputs into another company’s operations. With the ongoing massive restructuring of the US economy, for example, companies have divested and farmed out some of their operations. Will this interdependence stifle long term competition and reduce consumer welfare? When are these actions ethical? Whose values should OT researchers use in evaluating the ethical nature of these transactions? Greater attention to these questions can enhance the contribution of business ethics to the study of OT.
OT researchers tend to view inter organizational relationships as essential to competing in today’s global economy. However, the ethical implications of these transactions are not clear. At a first glance, some transactions funnel information to competitors and may lead to tacit collusion. Others may strengthen the bargaining power of existing companies and can stifle the entry of new companies. Still other transactions may prolong the existence of marginally efficient companies, and may undermine the long term interests of shareholders and society.
Clearly, the ethics of inter organizational relations deserve greater attention in the literature. Guidelines on ethical versus unethical inter organizational relations are needed. Business ethicists need to consider three questions that may determine whether an action is ethical or not: Will the action reduce competition in the market? Will the action reduce consumer satisfaction and welfare? Will the action inhibit industry evolution?
The Organization and its Society
OT and business ethics researchers have shown considerable interest in a company’s relationship with its society. Both groups appear to accept the multiplicity of, and conflicts among, the company’s goals. They disagree, however, on the importance of different organizational goals and how best to reconcile any trade offs among them. The stakeholder approach (Freeman and Gilbert, 1988) has become the focal point in discussing these disparate views, including recent discussions of the environment in which the earth is recognized as the ‘‘ultimate’’ stake holder (see stakeholder theory).
Business ethicists have contributed greatly to research into the relationship of the company and society. For instance, they have highlighted the important role of the firm in enhancing social welfare, improving living conditions, nurturing human growth, and protecting the environment and natural resources. This discussion has influenced companies’ efforts to promote ethical behavior among managers and employees. Many of these recommendations have become an integral part of corporate codes of ethics. OT scholars have accepted this view and incorporated it into their discussions of the organizational mission and goals.
The debate on the corporate social role has entered a new phase. In today’s global economy, managers must deal with a complex array of stakeholders, with different goals, interests, and values. Business ethicists are therefore con fronted by a number of challenging questions. Whose values should dominate the mission and goals of the global corporations? Whose work ethics should guide employee behavior? If societies differ in their definition of ethical behaviors, can these different views be reconciled? What are the implications of cultural and ethnic diversity for corporate codes of ethics? These basic questions are now receiving some attention in the literature. However, as the globalization of the world economies continues, these issues are likely to become more complex. Transnational clashes of values will become a centerpiece in discussions of business ethics and OT (see globalization; international bus i ness ethics; multinational corporations).
Conclusion
This article has focused on the role of business ethics in OT. It has suggested that business ethicists and OT theorists share many common interests, but still differ in their conclusions. Business ethics research has enriched OT discussions of the nature of the firm and its impact on employee behavior, inter organizational relationships, and the role of the organization in society. While researchers have focused on the nature of the firm’s relationship with society or individuals, many gaps remain in the literature on inter organizational relationships. The growing use of these transactions suggests a need for greater attention to their ethical implications. Moreover, there is need for understanding the ethical issues associated with transnational organizations. By giving greater attention to the changing dynamics and nature of competition in the global marketplace, business ethics can further enrich future OT research. Clearly, business ethicists and OT scholars have much to learn from each other.
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