Sarah Meisinger
Dr. Fife Eng 300
04-18-05

Ethical Concerns in Business and Their Solutions

It was one of the biggest bankruptcy cases in U.S. history, and many employees were left without retirement savings while executives and higher management made a profit (Cuplan 59). I think after reading about Enron and scandals like it we all have wondered "how could this happen?" What was it that led them to believe that it was okay to misrepresent their financial records? In the ethics community many people are talking about these very questions and attributing unethical behavior to personal background, the business environment and the undergraduate business programs. All three have their own arguments and solutions, whether it is better ethical training or different business environments. Although it is a complex undertaking, something must be done to improve conditions to prevent such scandals in the future. This prevention is important as business ethics affect not only employees and undergraduate business majors but also everyday consumers and investors. If certain steps are taken in both the business world and the education of business students, corporate scandals are likely to decrease noticeably.

With many different debates going on about ethical behavior, one argument stands out as the definitive contributor to ethical behavior-- a person's convictions. These personal convictions can be due to a person's upbringing, culture and other life experiences, but the general consensus in the ethics community seems that this will override any sort of ethics training or business structure. The logic to this argument is that in real life situations with multiple pressures and responsibilities, a person is going to perform based on the type of person they are and their personal value system.

In a study of business students in Taiwan and American, the culture of the student seemed to have an impact on how well they performed on ethics reasoning tests (Venezia 204). Obviously moral values and attitudes are going to differ between cultures. Because Taiwanese students are taught to "save face" as part of their culture they are much less like likely to behave dishonestly because of the values placed on doing your best for the group (Venezia 200). In contrast to American culture, Taiwan has an overriding need to blend in with a group and participate within that group whereas in American culture the focus is on individualism and independence (Venezia 200). The focus on the individual gain by American students often resulted in them picking an alternative during the study that would be beneficial to them rather than beneficial to the group (Venezia 200). In some cases this focus led to them marking unethical behavior as acceptable as long as the benefits were high enough. This study supports the theory that culture has an impact on how students respond to ethical situations.

Other studies have looked at how gender affects ethical reasoning abilities. Female students tended to be more conservative and harsh in how they scored each situation causing them to be less tolerant of dishonesty (Fischer). The male students in the study tended to be more tolerant of where the line was between ethical and unethical behavior (Fischer). The study offered no explanation other than females are traditionally more empathetic than males and would look at how other people would be effected more so than how it would advance their careers (Fischer). This same study also looked at how age affected each person's score, which was also shown to be a factor: students under 21 scored the lowest and the scores went up consistently as age increased(Fischer). In the article "Schools for Scandal" the author says "becoming a successful leader of men and women in a turbulent business world requires maturity and wisdom." These results certainly show that the experience and maturity that come with age affect how students scored in this study. Maturity and wisdom are something an individual has to acquire outside of their college education and workplace instruction, so this is something every person must come to terms with on a personal level of what they believe is acceptable. There haven't been any long term studies to see if ethics training was presented to students of a younger age, perhaps in junior high or high school, it would help override personal experience and age. Children are often more open to ideas and instruction, so it is my belief that earlier introduction might make students receive their ethical training at the college level as more of a core value than merely as a theory or practice.

Although most people in the business and ethics community believe personal conviction to be the overriding determining factor in ethical behavior, there are several credible people who believe that business structures are almost entirely responsible for corporate scandals. In Dr. Joseph Castello's article "How Corporate Culture Impacts Unethical Distortion of Financial Numbers," he looks at how the managing by objectives and results or MBO/MBR affects how employees perform. The MBO/MBR form of management is a very common style for managers to use and it involves giving targets to employees and then ranking them against their colleagues based on how well they met the goals set for them (Castello 37). Dr. Castello says that the flaw in this type of management is "Goals and targets are set without statistically determining whether they are beyond the capability of the existing process. Hence, employees are often held accountable for results that cannot be achieved without distortion of figures or they system" (38). Giving employees unrealistic goals and penalizing them for not reaching these goals is "laying the groundwork for an unhealthy climate through the use of MBO/MBR" (Castello 38). An example of how unrealistic goals led to scandal can be seen in the 1992 Sears Roebuck & Company auto service settlement of about $60 million in refunds to its customers (Paine). Lynn Paine discusses this particular instance in her article "Managing for Organizational Integrity" saying that the main reason for the unethical business practices was "a new set of organizational pressures and incentives with few options for meeting their sales legitimately, some employees judgment understandably suffered." Even the CEO at the time, Edward Brennan, stated that the fault lay with the managers because they "created an environment in which mistakes did occur." (Paine). Of course the danger I see in blaming business structures and managers is that it diminishes a person's accountability for their actions, which have already been argued to be the biggest factor in whether a person is ethical or unethical in their behavior.

In the coverage of the Enron scandal, MBAs and higher management were blamed for most of the scandal (Cuplan 59). This caused the media to start looking at the MBA certification and teachings in undergraduate programs to try and place blame on the lack of ethics training. In Sumantra Ghoshal's article "Bad Management Theories Are Destroying Good Management Practices," he says that "Many of the worst excesses of recent management practices have their roots in a set of ideas that have emerged from business school academics over the last thirty years"(75). He goes on to say that specifically business schools are not adequately preparing students for dealing with management pressures in the working world and only teach those theories that are not useful in ethics training (Ghoshal 76). Dr. John Elliot, the dean at Oxford University, says that "Business schools sometimes inadvertently enable and encourage greed rather than moderating and controlling it" (569). The word that stands out to me in this quote is "inadvertently" because universities are taking actions to educate their students and the ethics community as a whole tends to blame individual moral values and poor business management and structure for larger unethical problems.

In fact, ethics has become a bigger part of business education in recent years. In the 1960s and 1970s, ethics training was very limited and only took place in upper level auditing classes (Elliot 537). In 1979 The Association for the Advancement of Collegiate Schools of Business (AACSB) made ethics as a high priority for business schools and accreditation of business schools (Elliot 573). Because of the AACSB increased emphasis on ethics textbooks now have regular mentions of ethical issues and case studies to encourage professors and students to think about ethics (Elliot 573) In Ronald Madison's survey of universities he found that more than half of the universities require an ethics course before graduation (24). Ethical training in undergraduate education in accounting and other areas of business is especially important because firms often don't give extra training to help their employees. Dr. Christin Earley found that "a study of accounting firms attitudes toward ethical training found that the vast majority of firms 'rely primarily on colleges to cover the ethics and ethical behavior expected in the profession" (Earley 54). Earley's findings alone are enough to warrant improvements and encourage ethical training and discussion in undergraduate education and business schools because firms are obviously putting the burden of responsibility onto the schools. If firms are expecting their employees to come into the business world prepared to deal with the pressures involved in being honest in the business environment discussed above, then undergraduate programs need to step up and work on the best methods for teaching their students.

Right now at Western there is a three-hour corporate governance and ethics class specifically for business majors, but it is a primarily a web-based class. This class is not required by accounting majors, but from the discussion above should most certainly be to make sure students are equipped with moral reasoning tools that their employers expect. There are more ethics classes offered at Western under the philosophy and psychology genres but they are not required for accounting majors. To be fair many of the upper management courses have sections dealing with ethical issues. However Dr. Stape observed in his research on undergraduate business education that "many professors are hard pressed to find the time to teach the technical content let alone incorporate ethics into their courses." This could mean requiring an entire class devoted to ethics before graduation to ensure that the proper amount of time is spent on ethics education. A study done by Dr. Lawrence Poneman comparing moral reasoning in business graduates from liberal arts and public universities found that students from liberal arts universities score significantly higher than graduates from public universities (204). He suggested many reasons for this discrepancy but the one he found to be most significant is that liberal arts schools typically have smaller classrooms more based on discussion (Poneman 204). Clearly smaller classrooms are not only helpful in all areas of learning but in ethical training as well. In fact many studies have found discussion and personalizing situations to be the most effective methods for improving ethical reasoning in undergraduate students. In Dr. Daryl Koehn's study of undergraduates over several semesters, he found the most effective method was not case studies or context-specific instruction but rather that personal, real life discussions and debates got students thinking and engaged in the material (143). For example, instead of talking about Enron and analyzing where the executives went wrong, the instructors would put students into groups and give them a situation more applicable such as having trouble paying for their education with ethical dilemmas along the way (Kohen 143). The students would then debate among themselves the pros and cons of certain questionable actions that they could take. The students who participated in this exercise improved their scores significantly over a semester more than students who received traditional case study instruction (Koehn 143). Dr. Earley did a similar study with discussion-based approaches and found that "results indicate that educational interventions are capable of increasing students moral reasoning, regardless of the specific case context or other current event" (Earley 61). It seems that whatever part undergraduate education is failing to reach students with their ethical training is not from a lack of effort but merely a bad approach. No long-term studies have been done to see if the discussion based approaches carry over better to graduates in the business world, but it seems that the personal and engaging method seems to have a better chance of overriding past and cultural experiences. Some universities have come up with other creative approaches such as having an ex-con come in and talk to students about white collar crimes ("Schools for Scandal"). This is an excellent approach to reach students as I think it would bring home the gravity of the consequences they face if they choose to behave unethically in business. As Elliot says, "Business schools arrive late in the development of our students. We cannot undo formative influences of family, religion, pop culture, environment and heredity on the future behavior of our students" (573). However from looking at the different approaches, the undergraduate education can have some impact on an employee's ethical behavior. As Dr. Early says in his conclusion, "Educational interventions regarding ethical issues can be effective in improving student's moral reasoning" (61).

Although corporations depend on undergraduate education for ethical training, they are by no means exempt from preventing corporate scandals. In a survey of 100 ethics officers, a mere 1% thought that ethics training would have prevented a big scandal such as Enron (Verschor 24). As discussed above, many business structures contribute to pressures that make it difficult for employees to act in an ethical way, no matter their undergraduate training. In Verschor's study he found that only 40% of the companies he surveyed punished employees for violating the company's ethics code. Even more disturbing is that 8% of the people who were found violating the code were promoted (Vershor 22). By overlooking violations of the ethics code, employees are being given the message that so long as the results look good, managers don't care how they were obtained. Dr. Verschor observes that "in many organizations concern for the bottom line or making the numbers seems to override any concern for ethical values (22). This shows that businesses need to take a stricter stance when it comes to minor ethics violations so that they don't end up with a full blown scandal. As with any job, but especially in business, it is about money. Koehn's survey's found that "the number one ethical issue within American corporations is perceived injustice of salary differentials"(148). When looking at the higher level executive paycheck one sees that they are not only given an annual salary but they are also rewarded based on how well they manage and produce a profit. These rewards are often stock options within the company (Cuplan 70). Senator Carl Levin said after the Enron scandal, "Most executive pay packages rely heavily on options, encouraging corporation managers to push accounting rules to the limit in order to make their financial statements look better so their stock prices will go up and then executives can cash in their options" (Cuplan 70). If executives' compensations were not so heavily based in stock options, this might let some of the pressure up on misrepresenting financial data and in doing so make it easier on employees to act in an ethical way. It seems that overall the pressure and unattainable goals in the workplace are the factors that researchers believe to be contributors in unethical behavior, so solutions to these should be focused on creating what Dr. Castellano says is an "atmosphere of harmonious relationships" (41). Employees should be given budget goals that can be met with reasonable effort and dedication. Their compensation and bonuses should not be based on how well they did according to unrealistic standards but on how hard they worked and what they did with what they had to work with. Obviously the biggest motivator in the business world is keeping ones job, so companies need to be stricter when unethical behavior is discovered and definitely stop promoting the offenders. Yet another problem is that there is really no good way for employees to report unethical business practices. Many companies have anonymous hotlines for things such as safety violations or harassment but no such system for other unethical behavior like financial dishonesty. I see this as an added addition to any business because it allows employees to bypass their managers, who from above are very interested in making their finances look good, and do what they think is right without fear of being fired or hurting their careers.

Ethics is an important issue within the business community. All the business and educational factors are ones that can be improved and hopefully reduce scandal in the future. I think that even though personal experience and conviction is the overall contributor to ethical behavior, this does not mean we should give-up and accept another Enron. There are specific fairly simple solutions: start ethics teaching before college, change the ethics instruction to a more interactive and personal format, require ethics courses as a graduation requirement, stop managing for the bottom line, and have harsher punishments for violators of ethics in the workplace. If these changes are made, I am confident that corporate scandals will decrease and we will not have to see another Enron.

Works Cited

Castellano, Joseph F., Kenneth Rosenzwig, and Harper A. Roehm. "How Corporate Culture Impacts Unethical Distortion of Financial Numbers." Management Accounting Quarterly 5.4 (2004): 37-41

Culpan, Refik and John Trussel. "Applying the Agency and Stakeholder Theories to the Enron Debacle: An Ethical Perspective." Business and Society Review 110:1 (2005): 59-76.

Earley, Christine S., and Patrick T. Kelly. "A Note on Ethics Educational Interventions in an Undergraduate Auditing Course: Is There an 'Enron Effect'?." Issues in Accounting Education 19.1 (February 2004): 53-71.

Elliott, John. "Business Schools and Social Responsibility: A Dean's Perspective". Business and Society Review 109.4 (2004): 567-576.

Fisher, J. "Ethics Check". CMA Management 73.3 (April 1999): 36-38.

Ghoshal, Sumantra. "Bad Management Theories Are Destroying Good Management Practices". Academy of Management Learning and Education 4.1 (2005): 75-91.

Koehn, Daryl. "Transforming Our Students: Teaching Business Ethics Post- Enron." Business Ethics Quarterly 15.1 (2005): 137-151.

Paine, Lynn. "Managing For Organizational Integrity". Harvard Business Review 72.2 (1994): 106-118.

Poneman, Lawrence, and Alan Glazer. "Accounting Education and Ethical Development: The Influence of Liberal Learning on Students and Alumni in Accounting Practice." Issues in Accounting Education 5.2 (Fall 1990): 195-208.

"School for Scandal". The Economist (Feb. 2005): 13.

Stape, A.L. "Ethics: area business schools are not rushing to add courses on ethical behavior as a result of the Enron scandal". Providence Journal April 2004.

Venezia, Chiulien. "The Ethical Reasoning Abilities of Accounting Students." The Journal of American Academy of Business March 2005: 200-207.

Verschor, Curtis. "It Isn't Enough to Just Have a Code of Ethics." Strategic Finance (December 2005): 22-24.

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