WORKING PAPER NO.

1, 2006 ETHICAL DECISION MAKING OF HR MANAGERS: JUXTAPOSING ETHICAL EGOISM, THE INTERESTS OF THE FIRM AND EMPLOYEES.

BERNADINE VAN GRAMBERG & JANE MENZIES School of Management, and Centre for International Corporate Governance Research, Victoria University, Melbourne Email: bernadine.vangramberg@vu.edu.au Email: jane.menzies@vu.edu.au

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Bernadine Van Gramberg and Jane Menzies
Contacts Associate Professor Bernadine Van Gramberg School Of Management Victoria University Po Box 14428 Melbourne MCMC Victoria Australia 8001 Email: bernadine.vangramberg@vu.edu.au Phone: 03 9919 4489 Fax: 03 9919 4272 Dr Jane Menzies School Of Management Victoria University Po Box 14428 Melbourne MCMC Victoria Australia 8001 Email: jane.menzies@vu.edu.au Phone: 03 9919 5311 Fax: 03 9919 4272

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ABSTRACT
In this paper we examine ethical decision making of Human Resource (HR) managers. We review the international literature and examine ethical decision making from the perspectives of teleological, deontological and virtue ethics frameworks. We also use agency theory in our analysis to predict the decision making of HR managers. We examine the types of ethical dilemmas that HR managers are likely to face, and we argue that HR managers have conflicting demands on them which make ethical decision making difficult. We find that organisational culture, pressures from senior managers, individual interests and career maximisation and individual altruism have influences on a HR manager’s ability to make ethical decisions. We argue that when faced with an ethical dilemma, HR managers will likely make decisions that benefit themselves personally and their career, over the interests of an organisation or employees. We conclude that a professional code of conduct is important in developing a moral compass to make decisions. Further, agency theory predicts that HR managers will adhere to the goals of the organisation when there are incentives for them to do so. It seems likely then that a code of ethics with a reward structure attached to it embedded in their key performance indicators may be one way of securing ethical management decision making.

INTRODUCTION
This paper outlines the research rationale for examining the ethical aspects of decision making of Human Resource (HR) managers. We argue that HR managers play an important role in developing ethical organisations (SHRM/ERC 2003). Researchers have explored the many roles that HR managers can adopt to develop the ethical climate of organisations. These include being a champion of ethical issues, developing ethical agendas, audits, writing codes of conduct, and developing the moral conscience of an organisation. We question the ability of HR managers to take on these roles, and argue that when faced with an ethical dilemma, HR managers will likely make decisions that benefit themselves personally, over the interests of an organisation. In coming to our conclusions we canvass viewpoints from the three main ethical frameworks (teleology, deontology and virtue ethics) and consider the role of agency theory in predicting ethical behaviour. We acknowledge that HR managers face a difficult balancing act, between career, business and morally based demands, however we suggest that it is important for HR managers to strive for higher positions, and maintain the highest standards of ethics when making decisions within organisations. We argue that any code of ethics for HR Managers should take into account that the likely ethical stance taken by HR managers is that of ethical egoism (the pursuit of self interest). Second, the fact that many instances of unethical behaviours go unreported by HR managers provides an understanding of the barriers to ensuring an ethical organisational climate and can also contribute to the development of a code. Third, agency theory and the rewards embedded in the employment contract predict a role for a code of ethics in the reward system.

DEFINING ETHICS AND DIFFERENT FRAMEWORKS ON ETHICS
Ethics has become an important issue for modern organisations as they face the inherent conflicts between the goals of profit maximisation and social responsibility (Vickers 2005). Ethics have been described as a set of moral principles or values of people or society, which inform them of what is good and bad, right and wrong, and which influence how people act and behave. Petrick and Quinn (1997) suggest that ethics is the study of individual and collective moral awareness, judgment, character and 3

conduct, and argue it involves taking one step back in order to reflect on these underlying principles, decisions and problems. Ethics can also be described as a set of standards of behaviour which must be applied to a particular profession (Francis 2000). There are a number of ethical frameworks that can inform our discussion on ethical decision making. Ethical systems can be broken down into three broad categories: deontological, teleological and virtue ethics. The first two can be described as action-based theories of morality because their focus is on the actions a person takes. Teleological actions are those where a person takes an action based on its consequences or outcome (for instance, to maximise the greatest good). Deontological actions are those which best satisfy a set of rules or duties such as an ethical code of practice. Virtue ethics is a system of decision making in which one’s actions are chosen to ensure that one is a good person. Within these ethical systems lie a number of perspectives. Utilitarianism is an ethical perspective where morality is based on the consequences of one’s actions and evaluation should be based on the effect of the action on all society, and good should be maximised over bad (Shultz & Brender-Ilan 2004). This perspective seeks to maximise utility (value) by maximising benefits over costs. Ethical egoism is another such perspective. For an ethical egoist, moral rules are irrelevant, and all that matters is the self-interest of the agent. Indeed, proponents of ethical egoism maintain that we should always act with self-interest (in other words, the greater good is self interest). If the interests of the agent are served by self-sacrificing oneself to the organisation, then the agent will make decisions in that direction (Rand 1961, 1964). There are three principal arguments for ethical egoism. First, according to Nietzsche altruism is demeaning because it implies that other people are more important than oneself. Second, society would be better off if individuals took more care of themselves and equally, taking care of others creates dependency. Third, according to psychological egoism, everyone acts selfishly anyway and any suggestion that we act altruistically is mere pretence. The perspective may have some commonality with the economic man hypothesis, where the economic man is a rationalist and selfinterested (Frohlich, Oppenheimer, & Boschman 1984). It is also consistent with a form of Darwinian theory which suggests a survival of the fittest mentality which would mean that individuals make decisions to benefit themselves over others. Promoting one’s own interests would be consistent with ethical egoism that the one valid standard of conduct is the obligation to promote one’s own well being above anyone else’s (Beauchamp & Bowie 1983). Ethical egoists will consider other people’s interests when it suits them such as in order to fend off unpleasant circumstances. A version of ethical egoism, restricted egoism, sanctions corporate self-interest, encourages competition, leads to the maximisation of utility and is said therefore, to be in the interests of society (Northcott 1996). Restricted egoists would argue that the responsibility of a business does not need to extend beyond maximisation of profit and the interests of the stockholder. Deontological approaches come from the writings of Kant who emphasised that an individual has the duty to satisfy the legitimate claims or needs of others, and to do the right thing (Velasquez & Rostankowski 1985). Deontology is manifested in the belief that there are certain duties and rules which must be performed in life. For instance, a duty to act honourably or to abide by contracts may be salient for an HR manager following a deontological approach to ethics. Further, these duties are seen to be done for their own sake, and often consist of following a set of rules which may be followed by anyone in a similar situation. Having said this, it is also recognised in ethics that rules may be interpreted differently by different people. Another rule based ethical perspective is justice, where 4

distributive justice implies equality to either equal share, needs, rights, effort, contribution and merit. The overriding principle of justice perspectives to ethics is fairness and equality for all (Rawls 1971). Virtue ethics sits somewhere between deontological and teleological approaches as it can be achieved both by following rules as well as by seeking to attain the greater good. Virtue ethics has been described as the founding notion for our decisions, choosing courses of action to exhibit good character for a human being. Aristotle can be viewed as a virtue theorist, and the last several decades have seen a resurgence of virtue theory in ethics (Crisp & Slote 1997). Research shows that a person’s cognitive moral development will influence how they respond to ethical dilemmas (Kohlberg 1981). These factors influence the way that individuals tend to behave in either deontological or teleological ways, especially if the teleological way takes the form of self-seeking, rather than communal good type behaviour. From the perspective of Kohlberg’s (1981) stages of moral development, HR managers who are in a preconventional stage will tend act within their own self-interests. In the conventional stage they would act within the interests of the organisation, and in the principled stage they would act and make decisions that are of the highest ethical values. The key issue is that one’s approach to ethics varies between individuals. So how do HR managers choose which ethical approach is most appropriate for their organisation and themselves?

ETHICAL ISSUES THAT HR MANAGERS MAY FACE
It is first important to highlight that HR managers face many ethical dilemmas in the workplace. These include sensitive issues arising during recruitment, hiring, training, compensation, promotion, job assignment, job classification, counselling, rehabilitation, substance abuse monitoring, discipline, benefits, terminations or layoffs, or retirement (Danley, Harrick, Schaefer, Strickland, & Sullivan 1996). They must also deal with issues associated with affirmative action, health and safety, and harassment (Danley et al. 1996). HR managers also deal with ethical dilemmas including favouritism in employment decisions, inconsistency in pay and discipline, sexual harassment, sex and race discrimination, and breaches of confidentiality (SHRM/CCH 1991). In dealing with these issues, HR managers can make decisions within their own interests, those of the organisation and decisions that they believe are inherently ‘ethical’. Wiley (1998) examined the frequency and seriousness of misconduct in HR functional areas. She found that ethical misconduct occurs more often in employment situations such as recruitment and selection or staff discipline, followed by health, safety and security, and compensation. Other important areas of ethical decision making are in employment negotiations and labour relations. Van Gramberg and Teicher (2005) examined the ethics of decisions made in regards to industrial relations, and argued that HR managers cannot make ethical decisions when dealing with workplace conflict because it challenges the very nature of what HRM is about. In other words, the management of human resources or as Greenwood (2002) puts it, the ‘use’ of human resources implies the use of people primarily as resources. As the HR manager is an agent of the firm, tough decisions in regards to employee relations would see HR making decisions aligned with the organisation’s interest, but not necessarily in the interests of employees, who may have their rights infringed. Despite this, Greenwood (2002) states that most ethical analyses of HRM assumes that employers have positive moral obligations towards their employees, over all other obligations, such as obligations to employers. Wooten (2001) examined the ethical dilemmas faced by HR managers in key HR activity areas such as economic justice, employee honesty, discrimination and workers rights and safety. He suggested that without a clear set of ethical guidelines for HR decision making, these areas will remain problematic for the individual HR manager. Similarly, Legge (1998) suggested that it is likely that HRM encompasses 5

the values of the enterprise culture over other values. However, in avoiding other interests, ethical decision making becomes a mechanism to privilege profit making above all. The HR manager may also have a role in preventing misconduct occurring through whistleblowing or reporting. Ethical issues that HR managers could face may relate to reporting on bad behaviour such as organisational pilfering, corruption, bribery or price fixing. The business community is replete with examples of unethical practices, which have resulted in corporate collapses of organisations such as Enron, Worldcom, and Arthur Andersen in the US and HIH and Onetel in Australia. Wiley’s (1998) research found that HR managers can play distinct roles in ethical situations, which include advisory, monitory, educator, advocate, investigative, questioning, organisational and finally modelling type roles. Taking on these roles may have played a part in preventing such collapses. However, for HR to be credible to take on these ethical roles within organisations, they must make decisions in an ethical way.

WHY WOULD HR MANAGERS MAKE DECISIONS IN THEIR OWN INTEREST?
We argue that an examination of agency theory reveals a complex web of competing loyalties and interests. Agency theory was described by the researchers Jensen and Meckling (1976) who investigated the relationship between principals (for instance employers or shareholders), and agents, (for example officers of the organisations such as HR managers). In an agency relationship, principals engage another person (agents) to perform some service on their behalf which involves delegating decision making authority to the agent. This is usually a contractual relationship into which performance bonuses are often embedded – further ensuring that the agent works in the interest of the principal. This is not to say that the agency relationship always results in faithful agents. Indeed, there can be conflict between the roles of principals and agents. Where this occurs a range of agency problems are said to occur with agents pursuing their own goals, which may not be in accord with those of the organisation. This is complicated by the observation that principals pursue organisational goals and are risk neutral, while agents are prone to pursue personal goals and are risk averse (Bender 2004). Gomez-Mejia (1994) suggested that one way to reduce agency problems is to monitor the behaviour of agents, by using incentives, such as pay for performance or stock options. As agents are risk averse they will make decisions to protect their own jobs, but that may not necessarily be in the interests of the principal. Agency theory would support the argument that HR managers act first within their own interests, and then in the organisation’s interest as their behaviour is controlled by powerful incentives. In light of this discussion, perhaps in order to encourage HR managers to make ethical decisions, organisations need to use incentives that are aligned with and reward that type of decision making. The aim would be to try and reduce the opportunistic behaviour witnessed in problems associated with agency theory.

DETERMINANTS OF ETHICAL DECISION MAKING BY HR MANAGERS.
Research shows that there are a number of pressures on HR managers which influence their ability to act ethically. This section explores the sorts of conflicts that HR managers face when making decisions: the conflicting nature of the HR role, pressures from their supervisors, the influence of corporate culture, and the individual’s own interests

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The Conflicting Nature of the HR manager’s role Some researchers suggest that HR managers have conflicting demands made on them and their position requires the delicate balancing of paradoxical roles (Warnick 1993). Consider, for example the roles of ‘administrative expert’, ‘employee champion’, ‘change agent’, and ‘strategic business partner’ (Ulrich 1997). Each of these roles represent embedded conflicting interests for example, the “strategic business partner” and “administrative expert”, would see the HR manager act within the interests of the organisation, but not necessarily to promote ethical interests or the rights of employees. Carey (1999) concurred with this view point and stated that the HR manager as a business partner embraces a unitarist perspective; one which concurs with the best interests of the organisation (rather than its employees). In contrast, the employee champion role would see that HR managers act within the interests of employees, and be a champion of their rights, which is perhaps more consistent with the rights based ethical justice framework espoused by Rawls (1971). Foote and Robinson (1999) found that HRM professionals did indeed face ethical dilemmas from business demands. Foote (2001) found that while HR managers wanted to be ethical, and wanted to make fair and just decisions, these issues did not take priority because the firm’s bottom line was seen to be more important. Wooten (2001) suggested that the intersection of organisational, professional and personal ethics can lead to complex ethical dilemmas. He suggested that Ross’ (1930) model on ethics which encompassed a regime of duties of fidelity, such as faithfulness to contracts, promises, truth telling and redressing wrongs may be a useful solution for the HR manager. Wooten (2001) argued that if dilemmas are acknowledged when personal, professional, organisational conflicts arise, then there is a lower probability that unethical decision making will be made, and unethical behaviour exhibited. This is akin to declaring ones interests in a situation. Under such a scenario, HR managers would be required to identify at the beginning of a HR situation (such as conducting dispute resolution), what their personal, professional and organisational demands are. Carey (1999) highlighted that HR managers have a double agency problem and this may lead to confusion about whether their primary role should focus on the employer or employees. She acknowledged that HR’s role should be about managing the multiple interests of employers and employees. Again, in managing multiple interests managers may be well served by a professional code of conduct, which they can consult for assistance in making decisions. A code of conduct was likened to a moral compass for HR professionals (Carey 1999). The Society of Human Resource Management’s (SHRM) code on professional conduct of HR professionals recognizes that loyalty to different stakeholders should be in the following order: the public, the profession, the client/employer and then finally the individual professional (Windt et al. 1989 cited in Carey 1999). We question the extent to which most codes of conduct do not acknowledge that HR managers have their own self-interest, but rather assume that HR managers’ primary loyalty is to the firm. Our brief review of the literature suggests that the order of loyalties of HR managers may actually be: first to the individual professional (self), second to the client/employer and then perhaps to the profession and finally to the public. A 1991 study on ethics by (SHRM/CCH 1991) confirmed a link between ethical behaviour of HR practitioners and the influence of senior managers. The finding was confirmed in later research by the SHRM and by other researchers (Badaracco & Webb 1995; Tsalikis & Fritzche 1989). Similarly, a survey of chief executive officers conducted by KPMG (1999) in Canada found that executive leadership, personal commitment to ethical principles and corporate culture was rated as the strongest influences on ethical behaviour. In the US research conducted by SHRM/ERC (2003) a number of factors were found to influence ethical behaviour of HR professionals which included their own personal values; the attitudes and behaviour of their supervisors and senior managers, and the perceived 7

enforcement of ethics violations. The survey also revealed that adherence to ethical standards was often curtailed by the need to meet short-term organisational goals. Indeed, early work by Tyler (1988) on workplace justice found that when managers were primarily orientated to tasks or outcomes and focussed on the short term achievement of those goals, they made decisions that were less to do with fairness and more to do with practical goal obtainment. Cultural Influences on Ethical Standards The ethical climate of the organisation can also influence the behaviours of individuals within it (Soutar, McNeil, & Molster 1996). Further, the ethical values of an organisation promote types of behaviour and practices deemed acceptable (Trevino 1986). Lovell (2002) argued that callousness, cynicism, hypocrisy and malpractice often spread like a cancer within organisations and were key influences on the ethical behaviour of HR managers in organisations. Pressures from Managers and Superiors Senior managers’ influence on ethical behaviour was explored by Soutar et al. (1996) who found that senior managers need to be ethical proponents in the organisation for the rest of the organisation to develop an ethical stance. The pressures that come from superiors to make decisions that are perhaps within the interests of the business and profitability, but not within ethical interests of other stakeholders such as employees plays a role in affecting ethical HR decision making. From another perspective, Weiss (1994) argued that HR managers often straddle the fine line between the individual rights of employees and corporate interests. Research by SHRM/ERC (2003) explored the possible reasons for compromising one’s ethical standards which included: following the boss’s directives, meeting overly aggressive business objectives, helping the organisation survive, wanting to be a team player, saving jobs, advancing the career interests of a boss, others do it, peer pressure, and competitive threats. Decisions influenced by these factors would be considered ethical from the perspective of restricted egoism, consistent with Friedman’s (1971) doctrine that the only responsibility of businesses is to increase profits. Pressures from Career and Individual Maximisation The SHRM/ERC (2003) survey on ethical HR decision making found that 73 per cent of HR manager respondents claimed they would report ethical misconduct occurring in their organisation. Whilst this implies a high rate of ethical monitoring, the survey also shed some light on the instances where ethical misconduct goes unreported. Briefly, these instances include: when HR managers believe that corrective action would not be taken (by others) and so there was no point in reporting; when retaliation was perceived as being linked to potentially disastrous effects on their career; when they did not trust the organisation to protect them; and when they were fearful that they would not be seen as a team player (SHRM/ERC 2003). An Australian study of 35 whistleblowers found that 90 per cent of respondents reported that they would fear losing their jobs or being demoted (Lennane 1996) if they reported unethical practices. Lovell (2002) supported this argument in his suggestion that HR managers feared that disclosure of ethical misconduct would be suppressed by senior managers and would impair their future promotional opportunities. Therefore, HR managers would feel reluctant to report unethical behaviour, for the sake of their career. 8

In Lovell’s (2002) study it was found that HR managers had difficulty in raising ethical issues to a formal level within their organisations, let alone revealing any of the incidents to an external agency. Lovell (2002) proposed that managers were loyal to their organisations, colleagues and superiors but were fearful of their own positions and therefore chose not to disclose unethical behaviour. He concluded that moral agency remains at best an aspiration and at worst an illusion or fabrication of the mind as in situations of ethical importance. He found that there was an interplay between moral agency and the pragmatics at work. Pragmatism applied to sorting out the ethical issues carrying the least angst, rather than any notion of doing the right thing. He found that when one pursued a business case when making decisions, people did not often recognise arguments based on moral principles. The Individual Altruist Three studies stand out from the others in their findings that HR managers are intrinsically ethical. The survey by SHRM/ERC (2003) found that advancing one’s career interests rated last in the range of pressures influencing HR managers to compromise the organisation’s ethical standards. This finding appears to be at odds with our argument that HR managers tend to make decisions that will benefit their own careers and self-interest as ethical egoists. However, we question the extent to which such surveys prompt respondents to provide socially desirable responses rather than describe what they actually think, believe or do (Phillips & Clancy 1972). Wiley’s (1998) study found that HR professionals are bound by an altruistic norm of service and a code of ethics that directs them to honestly represent the welfare and interests of all parties including management, employees, the community and society. Finally, Danley et al (1996) examined the ethical perceptions of 1078 human resource professionals, and found that the so called ethical crisis in business is largely overstated. The authors reported that only one in ten HR professionals felt the need to compromise their own personal principles in their business decision making. Whilst comprising a small group of researchers, these findings which confirm the normative expectations of the HR managers deserve further probing – particularly in the development of an ethical code of practice.

CONCLUSIONS
HR managers need to focus on what it means to make ethical decisions within organisations, and decide on which ethical perspective they will use as a moral compass to make decisions. The development of a professional code of ethics is likely the next step in the evolution of HR managers as professionals and should arguably bind HR practitioners, consultants, and their associations. There are many conflicting demands on HR managers which influence their decision making. These demands include the conflicts in the HR role, the demands on HR managers by their directors and their own ethical standpoints. We have also found a reticence in the research for key staff to report unethical conduct for fear of reprisal and the future of their own careers in the organisation. In canvassing the international research, we have argued that HR managers are likely to be ethical egoists, and will make decisions that are within their own self-interest, but which can also be decisions within the interests of the organisation, as long as those interests are properly aligned and agency problems are reduced. These decisions may not be ethical from the perspective of other ethical frameworks, especially where the rights of employees are infringed, or justice and fairness are not upheld. A better understanding of whether HR managers are likely to adopt ethical egoism in an attempt to secure their job and career will inform the nature of a code of ethics for the profession. Further, agency theory predicts that HR managers will adhere to the goals of the organisation when there are incentives 9

for them to do so. It seems likely then that a code of ethics with a reward structure attached to it embedded in their key performance indicators may be one way of securing ethical management decision making. The next stage of our research will use a qualitative and quantitative methodology to examine the ethical pressures on HR managers in Australian firms, to explore the extent of ethical egoism and to identify measurable elements in a code of ethics which may alleviate some of the problems associated with agency theory.

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