5.

Ethical Decision Making

in Business

Business Ethics & Sustainability

 Objectives

What are ethical decisions?

Why do people and companies act ethically or unethically?
How do individual and contextual factors affect our ethical
decision making and behavior at work?
Understand factors that explain the occurrence of ethical misconduct
(wrongdoing) by people within companies, and by companies
themselves
Professor Yanjun Guan
Yanjun.guan@nottingham.edu.cn
IEB 451
The Volkswagen Story

Five Leading Vehicles Manufacturers by

Global Sale (Million units) in 2014

Hyundai- Kia 8.01

Renault-Nissan 8.5

GM 9.92

Volkswagen 10.14

Toyota 10.23

0 2 4 6 8 10 12
 The scandalous misconducts and the damage

The company admitted that 11 million

cars with diesel engines were rigged
to fool emissions tests. The fallout
from that decision has confronted
Volkswagen with “the biggest test” in
its history.
 Introduction

Why do people do bad things?

What’s your explanation for the ethical misconduct you see in business?

Possible reasons?
The companies didn’t understand what is the right thing to do?
There were few “bad apples” in this company?
Other reasons?
 Traditional vs. new perspectives

Business ethics encompasses:

normative ethics (normative=prescriptive)
i.e. ethical theories applied to business - what is the right thing to do?
(Lecture 2)

descriptive ethics, or behavioral ethics

understanding how people make moral choices (ethical decision making) and why they act as they do
in ethical situations (ethical behavior)
 Other Examples

• Volkswagen Dieselgate
• Kobe Steel falsifying data about product quality
• GlaxoSmithKline China giving “gifts” to doctors
• Pharmaceutical companies engaging in “price gouging”
• Forced labor and child labor in cocoa supply chain
• Sanlu (and other companies) selling tainted milk products
• DuPont denying that its chemical causes cancer or birth defects
 The New Perspective

Typical View New View

Frequency Rare Prevalent
Misconduct (Act) Clearly wrong The line between right and
wrong can be blurry
Perpetrator (Actor) Malevolent or immoral Ordinary person, even
person morally upstanding
Organizational Factors A few, clearly flawed Any number of structures,
structures, systems or systems and processes that
processes are generally healthy and
functioning well

Palmer, 2013
Those allocated to the prisoner role were arrested by the local
police outside their houses by surprise. They were charged with
a felony, read their rights, searched, handcuffed and taken to a
real police station for finger printing and processing. They were
then taken blindfold to the basement prison. On arrival they
were stripped naked and issued with a loose fitting smock, no
underwear.

The guards wore military style khaki uniforms and silver

reflector sunglasses (making eye contact impossible). They
carried clubs, whistles, handcuffs and keys to the cells. There
were guards on duty 24 hours a day, each working 8 hour shifts.
They had complete control over the prisoners but were given
no specific instructions apart from to maintain a reasonable
degree of order within the prison and were told not to use
physical violence.
 Findings

An initial ‘rebellion’ by the prisoners was crushed. After this, they began to react passively
as the guards stepped up their aggression. They began to feel helpless and no longer in
control of their lives.
Every guard at some time or another behaved in an abusive, authoritarian way. Many
seemed to really enjoy the new found power and control that went with the uniform.
They woke prisoners in the night and got them to clean the toilet with their bare hands.
The participants appeared to forget that they were only acting. Even when they were
unaware of being watched they played their roles.
After less than 36 hours, one prisoner had to be released because of controlled crying, fits of
rage, disorganised thinking and severe depression.
Three others developed the same symptoms and were released on successive days. Another
prisoner developed a rash over his whole body. They became demoralised and apathetic and
started to refer to themselves (and others) by their numbers.
Zimbardo et al. intended the experiment to run for two weeks. But it was abandoned after
just six days because of the prisoners’ pathological reactions.
• Despite its great impact, the experiment seemed to involve questionable
ethics, such that it was continued even after participants expressed their
desire to withdraw.

• The Stanford prison experiment led to the implementation of rules to

preclude any harmful treatment of participants.

• Before they are implemented, human studies must now be reviewed by an

institutional review board (US) or ethics committee (UK) and found to be in
accordance with ethical guidelines set by the American Psychological
Association or British Psychological Society.
• These guidelines involve the consideration of whether the potential
benefit to science outweighs the possible risk for physical and
psychological harm.
• A post-experimental debriefing is now considered an important ethical
consideration to ensure that participants are not harmed in any way by
their experience in an experiment.
 Further Questions

Why do people make poor ethical judgments – are some people just more
unethical than others?
Why do people sometimes make decisions that are clearly harmful (even for
themselves)?
Why do even ‘good’ people sometimes make ‘bad’ ethical decisions at work?
Why do people at work sometimes make ethical decisions that go against their
own ethical standards and principles?
Why do people go along with (or remain silent about) wrongdoing when they
observe it in their organizations?
Behavioral (descriptive) ethics attempts to answer these questions
 Traditional vs. new perspectives

Business ethics encompasses:

normative ethics (normative=prescriptive)
i.e. ethical theories applied to business - what is the right thing to do?
(Lecture 2)

descriptive ethics, or behavioral ethics

understanding how people make moral choices (ethical decision making) and why they act as they do
in ethical situations (ethical behavior)
 The New Perspective

Typical View New View

Frequency Rare Prevalent
Misconduct (Act) Clearly wrong The line between right and
wrong can be blurry
Perpetrator (Actor) Malevolent or immoral Ordinary person, even
person morally upstanding
Organizational Factors A few, clearly flawed Any number of structures,
structures, systems or systems and processes that
processes are generally healthy and
functioning well

Palmer, 2013
 Ethical Decision Making

• How people make ethical decisions

• Factors that influence ethical decision making

Individual influences

Recognise Make Establish Engage

Moral Moral Moral in Moral
Issue Judgement Intent Behaviour

Contextual influences
Rest, 1986
 Moral Recognition

One key issue is whether the person realizes he or she is faced with an ethical decision
Also known as Moral awareness

Recognise Make Establish Engage

Moral Moral Moral in Moral
Issue Judgement Intent Behaviour

Social & Cognitive Factors Rest, 1986

 Rational Decision Making?

• Rest’s model is an ideal model

• Decision making, including ethical decision making, is
often automatic and unconscious, rather than deliberate
and conscious
• Lack of awareness is a common problem.

• Moral myopia: distortion of moral vision, the inability

to clearly recognize the ethical dimension of an issue
(aka ethical fading)
• Prof. Zimbardo in his own experiment (Stanford Prison
Experiment)
• Can be caused by a narrow focus on achieving financial
targets or other goals
 Human Nature According to Cognitive Psychology
Cognitive psychology:
The study of internal mental processes such as attention, memory,
perception, reasoning, information processing, etc.
Bounded rationality
We are “boundedly rational”: there are limits to our cognitive (mental,
information processing) abilities
Information processing and decision making are often semi-automatic and
semi-conscious or unconscious
We filter information and fit it into “schemas” (categories, “boxes”)
We tend to take in very little information (“cues”) and reach “good enough”
decisions based on it (“satisfice”)
“Scripts” help us automate decision making and action
Bounded ethicality
Emerging view holds that ethical decision making is often automatic and
unconscious (ethical impulse perspective) rather than deliberate and
conscious (ethical calculus perspective)

Gioia, 1992
 Moral Framing

• The same issues or dilemma can be perceived

very differently according to the way that the
issue is framed (e.g., language used to discuss it)
• Pragmatic framing (“this is a business decision”)
triggers a cost-benefit, profit calculation mode of
thinking
• Moral framing (“this is an ethical decision”) could
motivate decision makers to assess the impacts on
stakeholders (employees, consumers, suppliers), not
only shareholders

Kreps & Monin, 2011; TB p. 146

 Moral framing or not?

• Zimbardo (1983, p. 62):

• To show that normal people could behave in pathological ways even without
the external pressure of an experimenter-authority, my colleagues and I put
college students in a simulated prison setting and observed the power of
roles, rules, and expectations.
• Young men selected because they were normal on all the psychological
dimensions we measured (many of them were avowed pacifists) became
hostile and sadistic, verbally and physically abusing others – if they enacted
the randomly assigned role of all-powerful mock guards.
• Those randomly assigned to be mock prisoners suffered emotional
breakdowns, irrational thinking, and behaved self-destructively – despite their
constitutional stability and normalcy.
• This planned two-week simulation had to be ended after six days because
the inhumanity of the “evil situation” had totally dominated the humanity of
the “good” participants.
 Moral Muteness
• Moral muteness
Moral muteness occurs when people witness unethical behavior and
choose not to say anything.
Moral talk is viewed as creating
these negative effects…
Threat to harmony
Threat to efficiency
Threat to image of power and
effectiveness
…because of these assumed attributes of
moral talk
Moral talk disturbs organizational harmony by
provoking confrontation, recrimination, and finger-
pointing.
Moral talk clouds issues, making decision making
more difficult, time consuming and inflexible. It is
inexact.
Engaging in moral talk makes you look idealistic and
utopian, or soft, and lacking rigor and force.
Bird & Waters, 1989; TB p. 146
 Moral Intensity

Aspects of the issue can also influence moral awareness

Six issue-specific factors:
1. Magnitude of consequences
2. Social consensus
3. Probability of effect
4. Temporal immediacy
5. Proximity (social, cultural, psychological or physical) and
6. Concentration of effect
The absence of these reduces moral awareness, increases the risk of moral
myopia

Jones, 1991; TB p. 145

 Cognitive Biases

Biases are unconscious distortions of perception

Social discounting
Placing less importance on the needs of others;
discounting the needs of “distant” persons (i.e.
strangers, people of a different culture) more than
your own or of those you are close to or similar to (cf.
Proximity)
Discounting the future
Placing less importance on future (or future
generation’s) needs than current ones (cf. Temporal
immediacy)
 Moral Judgment

What if there is moral awareness?

Can people do something unethical if they are aware or think it is unethical?

Recognise Make Establish Engage

Moral Moral Moral in Moral
Issue Judgement Intent Behaviour

Social & Cognitive Factors Rest, 1986

 Rationalization

Rationalizations serve to convince the actor that their actions are not unethical through excuses or
justifications
Reduce misgivings and feelings of guilt
Rationalizations can be used before the act (prospective) or after (retrospective)
Can serve to diminish or distort one’s own moral awareness (moral myopia, but self-induced)

Anand, Ashforth & Joshi, 2004

 Rationalization Tactics

Six common tactics:

Denial of responsibility
The actors perceive that they have no other choice than to participate in such
activities.
“I had no choice”, “None of my business”
Denial of injury
The actors are convinced that no one is harmed by their actions; hence the actions
are not really unethical.
“No one was really harmed”, “It could have been worse”

Anand, Ashforth & Joshi, 2004; TB p. 147

 Rationalization Tactics

Denial of victim
The actors counter any blame for their actions by arguing that the violated party
deserved whatever happened.
“They deserved it”, “They chose to participate”
Social weighting
The actors assume two practices that moderate the salience of corrupt behavior:
1. Condemn the condemner
2. Selective social comparison
“You have no right to judge us”, “Others are worse than we are”

Anand, Ashforth & Joshi, 2004; TB p. 147

 Rationalization Tactics

Appeal to higher loyalties

The actors argue that their violation of norms is due to their attempt to realize a
higher-order value.
“We are doing this for a higher cause”
Moral equilibrium (or Moral licensing , aka “Metaphor of the ledger”)
The actors argue that they are entitled to indulge in deviant behaviors because of
their accrued “credits”. Good deeds excuse wrongdoing.

Anand, Ashforth & Joshi, 2004; TB p. 147

 Factors influencing ethical intention and behavior

Individual: stable
Traits and characteristics of the persons involved (e.g., beliefs, locus of control)
Situation: immediate context, temporary (dynamic)
Where (setting), who is involved, what are they doing? What are roles, relationships between them?
What is the issue?
Systems: distal context, stable
What are the goals and rules, what is expected of people?
Dynamic Interplay between Three Factors

Individuals

Situation

System
 Individual Influences on
Ethical Decision Making and
Behavior
Meta-analytic results
from Kish-Gephert,
Harrison & Trevino, 2010
 Individual-level Factors

Job satisfaction (decreases)

Machiavellianism: “represents an individual’s propensity to be manipulative
and ruthless in the pursuit of self-interested goals.” (increases)
Locus of control: how much an individual believes they have control over
events in their life
Internal locus of control: your own efforts can shape what happens to
you (decreases)
External locus of control: what happens to you is a result of others’
actions, luck or fate (increases)
Idealist moral philosophy:
Individual’s belief that a “right” choice, especially one that avoids harm to
others, exists in every situation. Belief that one can and should always avoid
harming others when faced with an ethical dilemma (decreases)
Relativist moral philosophy:
Belief that the right thing depends on the situation (increases)
 Contextual Influences on
Ethical Decision Making and
Behavior
 Nested Systems

National/regional culture, religion, legal

system: values, beliefs, laws

Professional culture, education

Organizational culture, rewards systems,

rules and procedures, roles, authority figures
and power

Situational cues activate “mental

programming” and programmed behavior Situation
associated with certain systems (or not)
 The Power of the Situation

How much does ethical behavior depend on the

situation?
Can it turn ordinary people into bad people (demons,
monsters)?
 The Stanford Prison Experiment

• Conducted by Prof. Philip Zimbardo at Stanford University in

1971
• Basement of the psychology building was turned into a “prison”
• 24 university students participated. All males.
• Half were randomly assigned to be guards; half were randomly
assigned to be prisoners
 Power & Authority

People obey authority

See themselves as not responsible, relinquish responsibility to
authority, suppress misgiving.
Eager to please authority figure.
People with power tend to think that normal rules don’t apply to them
Lose many inhibitions – do or say things they wouldn’t normally do
or say.
Abuse others.

Will people obey leaders if they tell them to do something unethical?

Milgram’s Experiments
Milgram’s Experiments
 Social Influence Processes

Three types of influence or pressure on individual that may lead to unethical behavior:
Explicit pressure to engage in unethical behavior from peers or superiors
Implicit pressure:
Everyone else is doing it (power of the group, groupthink)
Commitment pressure:
Pressure to meet expectations created by prior superior performance

Palmer, 2013
 Organizational Factors

Organizational culture: Consists of norms - “The way we do things around

here”, The ____ Way
Also includes values (what is important to members of the organization)
Values are invisible but can be noticed in:
Rewards systems: Explicitly signals to members about what is valued,
desired, expected
Rules and procedures (bureaucracy) & roles
Examples set by leaders
These often have unintended consequences, especially when they narrowly
focus on instrumental goals
Organizational Norms and Culture
 Why I am leaving Goldman Sachs

“It might sound surprising to a skeptical public, but culture was

always a vital part of Goldman Sachs’s success. It revolved
around teamwork, integrity, a spirit of humility, and always
doing right by our clients. The culture was the secret sauce
that made this place great and allowed us to earn our clients’
trust for 143 years. It wasn’t just about making money; this
alone will not sustain a firm for so long. It had something to do
with pride and belief in the organization.
I am sad to say that I look around today and see virtually no trace
of the culture that made me love working for this firm for many
years. I no longer have the pride, or the belief.”
 Why I am leaving Goldman Sachs

“Over the course of my career I have had the privilege of advising

two of the largest hedge funds on the planet, five of the largest
asset managers in the United States, and three of the most
prominent sovereign wealth funds in the Middle East and Asia.
My clients have a total asset base of more than a trillion dollars. I
have always taken a lot of pride in advising my clients to
do what I believe is right for them, even if it means less
money for the firm. This view is becoming increasingly
unpopular at Goldman Sachs. Another sign that it was time to
leave.”
 Why I am leaving Goldman Sachs

“These days, the most common question I get from junior

analysts about derivatives is, “How much money did we
make off the client?” It bothers me every time I hear it,
because it is a clear reflection of what they are observing from
their leaders about the way they should behave. Now project 10
years into the future: You don’t have to be a rocket scientist to
figure out that the junior analyst sitting quietly in the corner of
the room hearing about “muppets,” “ripping eyeballs out” and
“getting paid” doesn’t exactly turn into a model citizen.”
 Culture and its measurement

• Culture is defined as the collective mental programming of the

human mind which distinguishes one group of people from
another.

• This programming influences patterns of thinking which are

reflected in the meaning people attach to various aspects of life.

• This does not imply that everyone in a given society is

programmed in the same way; there are considerable
differences between individuals.

• We can, nevertheless, still use such country scores based on the

law of the big numbers, and on the fact most of us are strongly
influenced by social control.

• https://geerthofstede.com/country-comparison-graphs/

48
 Geert Hofstede

• Hofstede was one of the first researchers to analyze the influence of

NATIONAL culture on management practices

• Empirical study at large multinational company (IBM)

• 116,000 questionnaires
• questions concerned values and opinions
 The current model of
cultural values
• Power distance: Values on inequality

• Individualism vs. Collectivism: Values on social relations

• Masculinity: Values on competitiveness and gender roles

• Uncertainty Avoidance: Values on ambiguity

• Long-term orientation: Values on past and future

• Indulgence: Values on desires and impulses

50
 Summary

The new perspective suggests that unethical behavior is much more like “normal” behavior than we think
Whether a person is aware that they are dealing with an ethical issue is crucial – often they are not
Lack of moral awareness cannot explain all unethical behavior.
People can behave unethically even when they are aware of it.
Various individual, situational and systemic factors or forces all have an important influence on ethical decision
making
Some research suggests that contextual factors – esp. culture – has a stronger influence
 Extra reading:

Bazerman M.H. & Gino, F. Behavioral Ethics: Toward a Deeper

Understanding of Moral Judgment and Dishonesty. Annual
Review of Law and Social Science 2012 8:1, 85-104

Shu, L. L., Mazar, N., Gino, F., Ariely, D., & Bazerman, M. H. (2012).
Signing at the beginning makes ethics salient and decreases dishonest
self-reports in comparison to signing at the end. Proceedings of the
National Academy of Sciences, 109(38), 15197-15200.

Kristal, A. S., Whillans, A. V., Bazerman, M. H., Gino, F., Shu, L. L.,
Mazar, N., & Ariely, D. (2020). Signing at the beginning versus at the end
does not decrease dishonesty. Proceedings of the National Academy of
Sciences, 117(13), 7103-7107.
 Ethical Decision Making

• How people make ethical decisions

• Factors that influence ethical decision making

Individual influences

Recognise Make Establish Engage

Moral Moral Moral in Moral
Issue Judgement Intent Behaviour

Contextual influences
Rest, 1986
Thank you!