ETHICS & CONTROL: Merchant’s control types and ethical behavior

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ETHICS & CONTROL:

Merchant’s control types and ethical behavior

University: University of Groningen

Faculty: Faculty of Economics and Business MSc: Business Administration

Specialization: Organizational & Management Control

Date: 22-10-2012

Supervisor 1: Prof. dr. ir. P. M. G. van Veen-Dirks Supervisor 2: B. van der Kolk

Name: K. Mussche

Address: Reeststouwe 30a Postal Code: 7944 AW

City: Meppel

Student number: 1774379

Telephone number: +31 (0)6-40396295 E-mail Address: karldemus@hotmail.com

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PREFACE

On a rainy day in February I was watching a documentary of ‘Tegenlicht’1. Tegenlicht is the informative program of the Dutch broadcaster VPRO which examines new ideas and trends within the world of politics, economics, sociology and science. I had just finished my exams and was searching for a topic for my Master Thesis. This documentary was about Goldman Sachs, one of the most powerful banks in the world, and their role in the downfall of Greece. The documentary claims that at the time of the downfall Goldman Sachs was an advisor of Greece with an own personal agenda. Goldman Sachs was speculating on the downfall of the financial markets because they saw the financial crisis coming. In other words, Goldman Sachs was earning money to this financial crisis. Later on in the documentary a former employee of Goldman Sachs argues that there was no

humanity within this organization. They knew they were selling bad products but did nothing. They argued that the client wanted to buy these products so they were not responsible for it.

Furthermore, the employees were paid on performance, so not selling the products could result in lower income or losing their jobs. I was surprised about the affairs of this bank and wondered if there was inner tendency to the good. Furthermore, I wonder why there was no room for ethical behavior within the management control system of banks like Goldman Sachs.

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SUMMARY

Due to the financial crisis and the many criticisms on incentive systems, more research to ethical behavior within management control is necessary. The aim of this study is to examine and enrich the literature about the influence of a management control system on ethical behavior. This research explores the influence of results, action, personnel and cultural control on ethical behavior. This research expects a negative relation of results and action control on ethical behavior. These relations are expected to be negative, since within results control behavior is secondary to results and because good ethical behavior could replace action control (Merchant, Van der Stede, 2007). Further, this research expects a positive relation of personnel and cultural control on ethical behavior. These relations are expected to be positive, since personnel and cultural control are an important

component of employees’ ethics (Merchant, Van der Stede, 2007) and because these control types could also improve the ethical awareness within an organization (Rosanas & Velilla, 2005; Adams, Tashchian & Shore, 2001). Furthermore, this research shows a relation between the four control types and the agency- and stewardship theory. The agency theory assumes an individualistic human tendency, an extrinsic motivation of employees and goal conflict and distrust in the management-owner relationship (Sundaramurthy, Lewis, 2003). The stewardship theory assumes a collectivistic human tendency, an intrinsic motivation of employees and goal alignment and trust in the

management-owner relationship (Sundaramurthy, Lewis, 2003). Within this study, these two opposite theories will be elaborated. This study investigates the influence of specific agency theory assumptions, which are opposite to the stewardship theory assumptions, on ethical behavior. In order to possible suggest something about the influence of an agency or stewardship theory

perspective on ethical behavior. The studied agency theory assumptions are self-interested behavior, extrinsic motivation and short-term orientation. This research expects a negative influence of these assumptions on ethical behavior, since the agency theory is based on distrust and is not assuming an intrinsic motivation to do the good (Sundaramurthy, Lewis, 2003; Eisenhardt, 1989).

By means of a literature study and a research among Dutch banks this study tries to clarify the role of results, action, personnel and cultural control on ethical behavior. Furthermore, this study clarifies the role of the agency theory assumptions within these Dutch banks. The results of this study were collected through personal interviews and questionnaires. The questionnaire seeks to examine the importance of each control type for the bank and to what extent the agency theory assumptions are applicable to the bank. These results are then compared to the ethical score of each bank according to eerlijkebankwijzer.nl. Based on this study among seven Dutch banks, a cultural control centered management control system and a stewardship theory perspective seems to encourage the ethical behavior of an organization. The opposite control type of cultural control, results control, seems to discourage the ethical behavior of an organization. Therefore this exploratory study demonstrates that a conscious reflection on the composition of the management control system probable affect the ethical behavior of an organization. The study is exploratory in nature because studies that focus on Merchant’s control types and ethical behavior are hard to find; this also guarantees the originality of this study.

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CHAPTER 1: Introduction & Research Design

1.1 Introduction

The financial crisis is still continuing, especially in Europe, and a lot of promises are made. However a lot of promises made are still not fulfilled. Many people and institutions blame the bonus culture of banks for this financial crisis2. These bonuses have led to extremely risky behavior, reinforced by the short-term orientation of these bonuses. As mentioned in the preface bank-employees were rewarded on quantity and not on the delivered quality. The reality today is a large collective debt which nobody knows who exactly is responsible. The consequence is that people who never had the opportunity to influence the process have to repay the debt, in other words the taxpayer pays the debt. However, maybe this crisis could have been avoided by a long-term orientation and a moral responsibility towards society.3 Therefore this master thesis investigates the role of results, action, personnel and cultural control on ethical behavior. Furthermore, it also investigates the relationship between self-interested behavior, extrinsic motivation and short-term orientation on ethical

behavior.

This master thesis focusses on two subjects, namely Ethics and Control. Ethics refers to the objectification of values into general rules for behavior (Adams, 2009). Furthermore research on ethics provides morally acceptable behavior (Merchant, van der Stede, 2007). According to

sociological literature ethics is about making the right decisions and doing the right things (Adams, 2009). Because of a lack of education in ethical behavior by management, this thesis investigates the role of management control (MC) systems to ethical behavior. According to Merchant & Van der Stede (2007) many managers are well educated in economics, but hardly in ethics.

The second subject of this master thesis is control. Control mainly refers to MC in this thesis, which most important function is influencing managers to desirable behavior (Merchant, van der Stede, 2007). Merchant & Van der Stede (2007) provides a definition of MC:

“Management control includes all the devices or systems managers use to ensure that the behaviours and decisions of their employees are consistent with the organization’s objectives and strategies.”

To specify MC system the typology provided by Merchant & Van der Stede (2007) will be used. Merchant & Van der Stede (2007) recognizes four types of control, namely results, action, personnel and cultural control. Results control is rewarding employees for generating good results, or punishing employees for generating poor results. Action control should ensure that employees perform certain activities; these activities should contribute to the achievement of the objectives of the organization. Personnel control is the selection and hiring of employees which could accomplish their tasks

independently. Finally, cultural control is the design of norms and values within an organization, allowing employees to influence each other.

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focused on control and extrinsic motivation, while stewardship theory is focused on collaboration and intrinsic motivation (Sundaramurthy, Lewis, 2003). Where agency theory finds her theoretical basis in economics and finance (Eisenhardt, 1989), stewardship theory as well as ethics finds their theoretical basis in the field of sociology and psychology (Davis, Schoorman, Donaldson, 1997). The distinction between agency- and stewardship theory provides us relevant and interesting insights in the field of ethics. The aim of this master thesis is to increase the understanding of the influence of MC systems on ethical behavior.

The next section of this chapter will provide the research design for this master thesis. Firstly it provides an extension to the motivation and relevance for this research. Secondly, the problem statement, consisting of the research objective, the research question and the sub-questions will be determined. Thirdly it provides the methodology of this thesis and will conclude with the research outline of this thesis.

1.2 Research Design

The theories used in this master thesis are mainly related to the economical and sociological field. Theories about control are mainly from the economical field, while theories about ethics are from the economical as well as the sociological field.

1.2.1 Motivation and Relevance

An important motivation for this research is the financial crisis of 2007. There are several researchers who argue that this financial crisis is rooted in ethics, or to be more precisely in a lack of ethics (Caveliere, Mulvaneve, Swerdlow, 2007). These critical researchers are also complaining that business schools are mainly focused on maximizing shareholders wealth, a short-term objective and also one of the drivers of the agency theory, and that these business schools have a limited attention to ethics (Caveliere et al., 2007). A theory which is not mainly focused on short-term objectives, such as maximizing shareholders wealth, is the stewardship theory. Especially, this limited attention to ethics is a shared concern and therefore a relevant subject for further research. Instead of only focusing on economical theories also more sociological theories are considered in order to answer the problem statement. This master thesis examines the role of Merchant’s control types to ethical behavior. Looking at the literature it is interesting to notice that there is barely any research to the role of results, action, personnel and cultural control to ethical behavior. This lack of research is quite remarkable since there are a lot of critiques to the incentive systems of banks within society. For example, Dutch banks even adjusted there incentive policies after critiques from media and politics. The following quote of dhr. Van der Veer confirmed this after the bank first announced large incentives for the board and after criticism from media and politicians the incentives were withdrawn:

“Wij hebben niet goed gecommuniceerd. Het was een inschattingsfout. Natuurlijk vinden we het heel

erg vervelend en natuurlijk rekenen wij ons dat zelf aan.”4

This quote shows that there are critiques from media and politicians on the ethical behavior of organizations, and especially in the role of ethical behavior within the MC systems. Therefore this

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http://www.ad.nl/ad/nl/4566/Geld/article/detail/2421196/2011/05/09/ING-Communicatie-beloningsbeleid-was-een-research is relevant, since there is a lack of http://www.ad.nl/ad/nl/4566/Geld/article/detail/2421196/2011/05/09/ING-Communicatie-beloningsbeleid-was-een-research to the influence of the MC systems on ethical behavior. Research into these effects can enrich the literature about MC systems and could help organizations in composing their MC system. In general, research to ethics is relevant since ethics applies to all human activities (Velasquez, 2012). Velasquez (2012) further argued that business cannot survive without ethics and there is still no study found which demonstrate a negative influence of ethics on profitability (McGuire, Sundgren, Schneeweis, 1998). Perhaps the most important argumentation, which emphasizes the relevance of this research, is that it addresses the dissatisfaction within society about the incentive systems; witness the many criticisms from media and politics.

1.2.2 Problem Statement

The problem statement will be provided through the following sub-paragraphs. These paragraphs provide a brief overview of the problems related to this thesis. First, the research objective will be determined, followed by the research question. This research question will be answered through various sub-questions.

1.2.2.1 Research Objective

This master thesis examines the MC systems and ethics, more specifically Merchant’s control types and ethical behavior. Therefore the research objective of this master thesis is:

Examining the influence of results, action, personnel and cultural control on ethical behavior.

1.2.2.2 Research Question

The above defined research objective can be translated in the following research question:

Do results, action, personnel and cultural control promote ethical behavior?

1.2.2.3 Sub-questions

With the aid of sub-questions the above defined research question will be answered. Each chapter will discuss two sub-questions. Within these sub-questions besides the role of Merchant’s control types also the role of some agency theory assumptions will be discussed. The sub-questions are defined as follows:

 What is Management Control?

 What are the elements of Management Control?

 What is Ethics?

 What is ethical behavior?

 What role has management control within ethical behavior?

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1.2.3 Methodology

The technique used in this master thesis is a secondary data analysis, which is a qualitative form of analysis (Cooper, Schindler, 2008). Further it is an exploratory technique. We can speak of an exploratory study, since the problems that will be faced during this research are still quite unclear (Cooper, Schindler, 2008). Because of the explorative character of this study a theoretical framework with propositions is used. A proposition is a statement about concepts that may be judged as true or false if it refers to observable phenomena (Cooper, Schindler, 2008). This study uses propositions instead of for example, hypotheses because this study is explorative. Since hypotheses can be better used for empirical testing (Cooper, Schindler, 2008), this study uses propositions. Within this master thesis a proposition is considered as a less developed form of a hypothesis. This master thesis is mainly based on secondary literature like books and scientific articles. In order to provide a solid answer to the research question a literature review will be added. Within this literature review mainly economical and sociological theories will be discussed. Additionally, a questionnaire will be distributed among Dutch banks. The banks are ranked on ethical behavior and within this research the MC systems of these banks will be determined.

1.2.4 Research Outline

MC and four types of control, namely results, action, personnel and cultural control, will be

elaborated and defined in chapter 2. Subsequently ethics and ethical behavior will be elaborated in chapter 3. In this chapter definitions are provided of ethics, business ethics and ethical behavior and furthermore, the definition of ethical behavior is delineated. This research will be done with the aid of a literature review, based on theory about ethics. The theories about ethics and MC come

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CHAPTER 2: Management Control & The Elements

As the title of this master thesis suggests MC plays an important role in this master thesis. This chapter tries to clarify the concept of MC and will determine the elements of MC. In order to get a clear picture of the concept this chapter will answer the following sub-questions:

What is Management Control?

What are the elements of Management Control?

With the aid of two paragraphs these sub-questions will be answered. 2.1 Management Control

According to Merchant & Van der Stede (2007) influencing behaviors in desirable ways is the primary function of MC; MC further increased the likelihood that an organization’s objectives are achieved. The next section will provide an explanation and definition of MC, in order to answer the first sub-question: What is Management Control?

2.1.1 Definition of Management Control

One of the first definitions of MC was provided by Anthony (1965), he defines MC as “the process by which managers ensure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives.”

The importance of this definition is that it separates MC from operational- and strategic control (Langfield-Smith, 1997). Figure 1 displays an overview of control systems and the role of MC in it. From this figure you can conclude that MC forms a kind of a bridge between the internal focus, like influencing employees’ behaviors in the desired manner of the organization, and the external focus, like examining the industry and the organization’s place in it.

Overview of Control Systems

Operational Control Management Control Strategic Control

Internal Focus External Focus

Figure 2.1; based on Birnberg (1998), Langfield-Smith (1997) & Merchant & Van der Stede (2007)

Over the years, many researchers have emphasized the alignment between strategy and MC (Kober, Ng, Paul, 2007; Chenall, 2003; Langfield-Smith, 1997; Dent, 1990). In order to comply with this development, this thesis used the following definition of MC provided by Merchant & Van der Stede (2007):

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theory, since MC systems assume that employees cannot always be relied on to do what is best for the organization and argue that individuals are self-interested and effort adverse (Merchant, Van der Stede, 2007). Likewise MC systems possibly could offer the solution to the agency problem, because it controls self-interested behavior and effort aversion. In order to explain this assumption the next section provides a brief analysis of the agency theory.

2.1.2 The Agency Theory

Agency theory suggests a difference in interests between owners and employees, which could lead to managerial mischief (Nyberg, Fulmer, Gerhart, Carpenter, 2010). An important variable in the agency theory as well as in a MC system is information. Information asymmetries between the principal and the manager could lead to an agency problem (Miller, Sardais, 2011). This theory further assumes that managers are selfish opportunists, who will try to exploit management. This is in accordance with the objective of MC systems since these systems assume that individuals are naturally self-interested. According to the agency theory information asymmetries can be managed by effective monitoring or an incentive system (Miller, Sardais, 2011) like MC systems, since effective monitoring and an incentive system fits within the definition of MC mentioned in the previous section. Further, conflicting objectives about future decisions between managers and shareholders can occur, because shareholders are merely concerned about financial returns, while managers are also concerned about non-financial returns like private benefits, reputation or good performance results (Aghion, Bolton, 1992). Agency theory predicts how managers’ decisions are influenced by the available information and incentives (Harrison, Harrell, 1993). According to Eisenhardt (1989) the principal-agent model makes four assumptions, namely:

1. Managers act in their own interest.

2. Goal conflict can exist between shareholders and managers. 3. Managers are more risk averse than shareholders.

4. Outcomes of managers’ decisions can be easily measured.

Looking at these assumptions it can be argued that MC systems are the solution for these problems, since MC measures and controls the decisions and behaviors of employees (Merchant, Van der Stede, 2007). The information provided by MC systems assists organizations to develop and maintain reliable patterns of behavior (Otley, 1999). MC systems could possibly be seen as the solution to the agency problem. With regard to the agency theory it is further interesting to look at the

consequences of opportunistic behavior, since MC systems could be a possible solution to

opportunistic behavior. According to Eisenhardt (1989) the agency theory makes the assumption that people are risk averse, self-interested and opportunistic, this shows again some commonalities with MC theory. This opportunism can take the form of adverse selection and can create the risk of a moral hazard (Gilles, McEwan, Crook, Michael, 2011), also information asymmetry can lead to moral hazard and adverse selection problems (Akerlof, 1970). The risk attitudes of managers and

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1998). The solution for the moral hazard problem is very difficult because auditing the problem is quite often costly or impossible (Boyer, 2004). Commitment could be a possible solution to the problem, both managers and shareholders are better off if they could sign a full-commitment contract valid for a multi-period setting (Boyer, 2004). With a full-commitment contract the manager and shareholder sign a contract which describes the commitments to each other, violation of this contract often leads to fines or punishments (Boyer, 2004). Another possible solution could be MC systems since these influences behavior in a way which is best for the organization.

Where a moral hazard problem occurs when shareholders cannot observe the manager’s effort, adverse selection occurs when shareholders cannot observe the manager’s task complexity or quality (Gershkov, Perry, 2012). For example, in a static market with adverse selection high-quality products are driven out by low-quality products (Akerlof, 1970). The opportunity for goal conflict arises when adverse selection exists. In that case managers will operate in their own self-interest, at the expense of the shareholders (Harrison, Harrell, 1993). The solution for the adverse selection problem is developing the following two processes (Harrison, Harrell, 1993):

1. Elimination of private information and developing more complete information systems. 2. Develop an incentive system, in which the interests of the managers and the shareholders

are aligned.

MC systems provide a possible solution to this adverse selection problem. For example, Ouchi dimensions, task complexity and environment stability, of the control problem as displayed in Birnberg (1998).

Agency theory emphasizes that managers, unless effectively monitored or incentivized, will use their information to exploit the principals (Miller, Sardais, 2011). In other words, managers are primarily motivated extrinsically. However, there are some critics to this human view on managers. A theory which believes that managers’ motives are aligned with the objectives of shareholders is stewardship theory. Stewardship theory refers to managers who are not motivated extrinsically (Davis,

Schoorman, Donaldson, 1997). These managers are primarily motivated intrinsically; this is interesting because according to this stewardship theory, a MC system is possibly not even

necessary. The next section will clarify this stewardship theory and will briefly summarize the main differences between the agency- and stewardship theory.

2.1.3 The Stewardship Theory

Where the agency theory is focused on control and extrinsic motivation, stewardship theory is focused on collaboration and intrinsic motivation (Sundaramurthy, Lewis, 2003). Stewardship theory is a sociological and psychological approach to governance and depicts managers as trustworthy, pro-organizational, and collectivists (Davis, Schoorman, Donaldson, 1997). Instead of the preferred personal objectives that serve an individual’s self-interests, stewardship theory assumes that

managers prefer the long-term best interest for the organization (Hernandez, 2012). According to the stewardship theory human beings have higher-order needs such as achievement, affiliation, growth, self-actualization and self-esteem (Arthurs, Busenitz, 2003). The manager-principal interest

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assumes a relationship between the managers’ satisfaction and organizational success. The manager makes decisions which are in the best interest of the shareholders and thereby in the best interest of the organization in general (Davis, Schoorman, Donaldson, 1997). The figure below shows the main assumptions of the stewardship theory.

Assumptions of Stewardship Theory Comprehensive strategic decision making Participative Governance

Long-term orientation Employee human capital

Strong identification and commitment to the organization

Figure 2.2; based on Eddleston, Kellermanns, Zellweger (2012) & Davis, Schoorman, Donaldson (1997)

One of the most interesting aspects of the stewardship theory is that it could possibly make MC systems less necessary, for several reasons. Firstly, stewardship theory notes that managerial behavior is based on non-financial motives such as intrinsic satisfaction of successful performance, work ethic, need for achievement and recognition and respect for authority. Managers are

essentially loyal to the organization and are good stewards of the organization’s assets. Furthermore, managers set the interest of the organization above their own interests (Muth, Donaldson, 1998). Secondly, stewardship theory approaches the principal-agent relationship differently than more traditional organizational theories. Instead of betraying the principal, the agents’ behavior is, according to the stewardship theory, organization centered. The stewardship theory assumes that the interests of the agent and the principal are aligned instead of reversed. According to the stewardship theory, the agent tries to increase organizational wealth by satisfying the principals (Arthurs, Busenitz, 2003). The main differences between the agency- and stewardship theory are briefly summarized in the figure below.

Control Collaboration

Agency Theory (economics and finance)

Theoretical Basis Stewardship theory (sociology

and psychology) Assumptions

Individualist/Opportunism Human tendencies Collectivist/Cooperation

Extrinsic Motivation Intrinsic

Goal Conflict (Risk differential)/Distrust

Management-owner relations Goal alignment (firm

identification)/Trust Prescriptions

Discipline and monitor Board’s primary role Service and advise

Outsiders/Non-Duality Board Structure Insiders, social ties CEO duality Reduces goal conflict, avoids

increasing risk differential

Executive stock ownership Fosters firm identification and

long term relations Constrains self-serving behavior Market for corporate control Curbs psychological

commitment

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2.1.4 Management Control: Causes

Figure 2.3 depicts a clear distinction between control and collaboration. Furthermore, MC systems are more, as the name MC also suggested, about control than about collaboration. However it should be noticed that within this master thesis MC includes all the devices or systems managers’ use, so there could also be some commonalities with stewardship theory. For example, creating a collective culture and promoting intrinsic behavior could be part of a MC system, but are clearly in line with the assumptions of the stewardship theory.

This section explains the causes of MC problems and will determine what the drivers are for MC problems. Since managers pursuing organizational objectives under uncertainty and since the relationships between decision are not always clear, MC problems can and will occur (Skå, 1997). According to Merchant & Van der Stede (2007) these problems can be classified into three categories, namely:

 Lack of direction; poor performance through a lack of direction by the organization, they do not know what the organization expect from them

 Motivational problems; this occurs when employees know what the organization expect from them but they choose to underperform because of a lack of motivation.

 Personal limitations; this occurs when employee know what the organization expect from them and is highly motivated but has personal limitations, like a lack of intelligence, expertise, training or knowledge, what is keeping him from doing a good job.

The assumption of self-interested individuals earlier mentioned in this chapter is derived from motivational problems; these problems are common because there is naturally no alignment between individual and organizational preferences which will drive individuals to self-interested behavior (Merchant & Van der Stege, 2007). In order to cope with these problems, good control is necessary. According to Bhimani et al. (2008) control “covers both the action that implements the planning decision and the performance evaluation of the personnel and operations”, so meeting this definition of control surprises could primary excluded. Good control can be achieved by

implementing a MC system (Merchant & Van der Stege, 2007). The structure and elements of such a MC system will be provided in the next section which answers the second sub-question of this chapter: What are the elements of Management Control?

2.2 The Elements of Management Control

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control type with respect to Ouchi (1979), but also shows some similarities between the control types (Langfield-Smith, 1997). The typologies and similarities are mentioned in figure 2.4. Where results and market control are primarily based on prices, action and bureaucracy control are primarily based on rules. Personnel, cultural and clan control are primarily based on tradition. With respect to the social requirements results and market control are the least demanding and

personnel, cultural and clan control are the most demanding control type (Ouchi, 1979). A narrower description of control types is given by formal and informal controls. Formal control can take the form of outcome and behavioral control which is similar to results and action control (Tiwana, 2010). Informal control can take to form of clan or social control which is similar to personnel and cultural control (Tiwana, 2010). Therefore formal controls rely on information and informal controls rely on values, goals that encourage desirable behavior and shared norms (Tiwana, 2010).

Merchant control types Ouchi control types Social/Information Requirements 1. Results Control Market Control Norm of reciprocity/Prices

2. Action Control Bureaucracy Control Norm of reciprocity & Legitimate Authority/Rules

3. Personnel Control Clan Control Norm of reciprocity, Legitimate Authority & Shared Norms and Beliefs/Tradition

4. Cultural Control

Figure 2.4; based on Merchant & Van der Stede (2007) & Ouchi (1979)

The choice for this characterization is the important role ethics plays in these control types, especially in personnel and cultural control (Merchant & Van der Stede, 2007). Ethics will be discussed later on in chapter 4, first the control types of Merchant will be elaborated.

2.2.1 Results Control

Results control describes specified performances/results which are communicated to employees to inform them what the organization expects from them (Sandelin, 2008), so results control motivates employees to generate good results and thereby influence behavior since the employees are

concerned about the consequences of their actions (Merchant, Van der Stede, 2007). Results controls are more useful when there is a high task complexity (Auzair, K. Langfield-Smith, 2005). Results controls is about attaining the targets and find the best and efficient way of achieving these targets (Auzair, K. Langfield-Smith, 2005). In literature results control is also called output control and often has a financial orientation which aims to achieve specific outcomes and involves taking

corrective actions, monitoring and measuring (Langfield-Smith, 1997). Merchant & Van der Stede (2007) provided four steps in order to implement results control:

1. Defining performance dimensions: Shows an employee the important dimensions of the organization.

2. Measuring performance: Measure the performance of an employee in a time period. 3. Setting performance targets: For every performance dimensions measured, the targets

should be specified.

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2.2.2 Action Control

Action control ensures an organization that employees, if following the identified action, act in a certain manner which has the preference of the organization (Merchant, Van der Stede, 2007). Action control is rather about monitoring decisions and actions on an ongoing basis than about achieving the targets (Auzair, K. Langfield-Smith, 2005). Therefore the most direct form of MC is action control since it ensures that employees act in the organization’s best interest (Merchant, Van der Stede, 2007). Merchant & Van der Stede (2007) identifies four forms of action control:

1. Behavioral Constraints: Negative form of action control, ensures an organization that employees do no things that should not be done.

2. Pre-action review: Is about controlling the controlled employee’s action plan. 3. Action accountability: Makes employees responsible for their actions.

4. Redundancy: It is a backup plan to increase the probability of task accomplishment, often filled in by assigning more employees to a task than strictly necessary.

2.2.3 Personnel Control

Personnel controls are described by Merchant & Van der Stede (2007) as building on the natural tendencies of employees to motivate and/or control themselves. The resources available within the organization support the operation of self- and group control processes. The difference between results and action control compared to personnel as well as cultural control is its enforceability. Personnel and cultural control can only be stimulated by the management while results and action control can be enforced by the management (Hartog, de Korte, 2003). Personnel control influences the kind of professional activity undertaken by group members, the types of individuals who interact in the workgroup and the level of peer-group self-regulation. Personnel controls are about getting the right people for the organization (Abernethy, Brownell, 1997). Merchant & Van der Stede (2007) identifies three methods of effecting personnel controls, namely:

1. Selection and placement of employees. 2. Training.

3. Job design and provision of necessary resources. 2.2.4 Cultural Control

Cultural control can be described as to what extent employees accept the prescribed culture within the organization, to what extent employees accept the norms, values and objectives of the

organization (Harris, Ogbonna, 2011).Especially when employees deviate from these norms and values cultural controls is powerful form of group pressure on individuals (Merchant, Van der Stede, 2007). Merchant & Van der Stede (2007) distinguishes various methods of effecting cultural control:

1. Codes of conduct 2. Group-based rewards

3. Intra-organizational transfers 4. Physical arrangements 5. Tone at the top

Of these methods the first two, codes of conduct and group-based rewards, are the most important. Figure 2.5 provides a list of all types of control in relation to the causes of MC problems they

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Lack of Direction Motivational problems Personal limitations Results Controls Results Accountability x x Action Controls Behavioral constraints x Pre-action review x x x Action accountability x x x Redundancy x x Personnel Controls

Selection & Placement x x x

Training x x

Job design & provision of necessary resources x Cultural Controls Codes of conduct x x Group-based rewards x x x Intra-organizational transfers x x Physical arrangements x

Tone at the top x

Figure 2.5; The elements of MC in relation to the causes of MC problems (Merchant, Van der Stede, 2007)

2.2.5 Retrospect and preview

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CHAPTER 3: Ethics & Ethical Behavior

The second major topic of this master thesis is ethics. This chapter tries to clarify and define ethics and ethical behavior. These two topics will be elaborated and clarified with the aid of the following two sub-questions:

What is Ethics?

What is ethical behavior?

Again two paragraphs are used to answer these questions. 3.1 Ethics

Since there are various definitions of ethics, it is important for this research to clarify ethics. In this paragraph ethics will be approached on the basis of sociology and philosophy. In chapter 4 the relation between ethics and MC will be further elaborated, this chapter is purely focused on ethics. Ethics is focused on the required or expected behavior of humans, it is about right or wrong (Adams, 2009). In general, ethics can be seen as the objectification of values into general rules for behavior (Adams, 2009). In order to answer the sub-question, What is ethics?, the next section will provide a definition of ethics.

3.1.1 Towards a definition of ethics

Ethics is derived from the Greek word ‘ethos’. ‘Ethos’ emphasizes the habits of a community or the group to which an individual belongs (Westerveld, 2012). Therefore, the term ‘ethos’ has of origin to do with whether or not following the rules of generally accepted behavior, which means acting according to the customs of a community or a group within a community (Westerveld, 2012). Ethics is about how we ought to live and about the idea of the good. Ethics deals with concepts like “what is wrong?” and “what is right?” (Pojman, Fieser, 2012). The advantage of studying ethics is that it can avoid dogmatism and prejudice. Ethics clarify the relationship between values and principles and provide us guidance in how to live (Pojman, Fieser, 2012). There are different understandings about ethics; Allhoff (2011) distinguishes three approaches to ethics, namely a top-down, bottom-up and a reflective approach. The first approach, top-down, is also referred as principlism. This is an approach based on four moral principles, namely:

 Autonomy; principle which respect to the ability of an independent person to make decisions.

 Beneficence; principle which is about doing the good.

 Non-maleficence; principle which demands not to harm others.

 Justice; principle which demands an equal and fair distribution of danger, cost and well-being.

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need to be treated separately (Fisher, Lovell, 2009), casuistry is based on considerations of a specific ethical issue and not, like principlism, on the application of generally accepted ethical principles (Fisher, Lovell, 2009). Velasquez (2012) defines casuistry as making moral decisions by relying on previous “paradigm” cases. According to Velasquez (2012) a paradigm case is a past event where the ethical reaction and the grounds for this ethical reaction were clear. The third approach mentioned by Allhoff (2011) is reflectively. It is a combination of the two earlier approaches, so it is justified to place the situation above the principles and vice versa. Reflectively is making careful considerations of ethical events (Fisher, Lovell, 2009). The relevance of these approaches is its use in defining ethical behavior.

3.1.2 The Definition of Ethics

This section determines the definition of ethics used in this thesis. Ethics deals with obligation and moral duty and can be seen as a set of moral values or principles (Carroll, Buchholtz, 2012). The definition used in this thesis is derived from the article of Adams (2009):

Ethics is making the right decisions and doing the right things

Making the right decisions is about the correct assessment of situations followed by implementing the right ethical decision. Doing the right things refers to taking the four moral principles in mind when doing the things, this part of the definition concerns the behavior of the decision-maker. Behavior is also the subject of the second section of this chapter which answers the second sub-question of this chapter: What is ethical behavior?

3.2 Ethical Behavior

Ethical behavior is encouraged by ethical guidelines, conducting ethics audits, hiring ethics and aligning incentives- and performance systems on ethical behavior (Carroll, Buchholtz, 2012). In order to better serve the theoretical framework provided in the next chapter, the definition of ethical behavior will be derived from business ethics. Carroll & Buchholtz (2012) defines business ethics as follows:

“Business ethics is concerned with morality and fairness in behavior, actions and practices that take place within a business context.”

Morality includes questions of equity in the work place, fairness and justice. Business ethics is committed to provide ethical insights and guidance to individuals, organizations and society (Brenkert, 2010). It tries to influence the way people act within business and it has influence to the policies people adopt and to the role of business within society (Brenkert, 2010). The study of business ethics is about practices in organizations and wonders if these practices are acceptable or not (Carroll, Buchholtz, 2012). The relevance of ethics in business is mentioned by Velasquez (2012), Velasquez (2012) provided the following arguments for ethics in business:

 Ethics applies to all human activities.

 Business cannot survive without ethics, without ethics stealing would be acceptable.

 Ethics is in accordance with profit; witness the successful ethical organizations like Intel, Hewlett-Packard and Starbucks Coffee.

 People in general, including customers and employees, care about ethics. Witness the positive reactions nowadays on ethical organizations and the negative reactions on unethical organizations.

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behavior; some studies found no relation between these concepts and not one study found a negative relation (McGuire, Sundgren, Schneeweis, 1988).

Before defining ethical behavior, a better understanding of behavioral ethics is helpful. According to De Cremer (2009) “behavioral ethics is primarily concerned with explaining individual behavior that occurs in the context of larger social prescriptions.” The context of larger social prescriptions could refer to generally accepted moral behavior or norms (De Cremer, 2009). To define ethical behavior different approaches can be used. Treviño, Weaver & S. J. Reynolds (2006) provides three fields of studying ethical behavior; the first field is primarily focusing on unethical behavior so a more negative approach while the third field has a more positive approach and is focused on ethical behavior. The figure below shows the different approaches to ethical behavior.

Pessimist Approach Within this approach, researchers focus primarily on the prevention of unethical behavior such as lying, stealing or cheating.

Neutralist Approach Within this approach, researchers focus primarily on reaching minimal moral standards which are therefore not unethical such as obeying the law or honesty.

Positivist Approach Within this approach, researchers focus primarily on exceeding minimal moral standards such as whistle-blowing and charitable giving.

Figure 3.1: based on Treviño et al. (2006)

Analyzing the above mentioned definitions of ethics, business ethics, behavioral ethics and the approaches on ethical behavior some similarities can be distinguished. The most striking similarity is the presence of morality or moral standards in every definition. To define ethical behavior this thesis uses a neutralist approach because this approach fits best with the previous definitions and this approach avoids bias. Therefore ethical behavior is behaving to the four moral principles in order to prevent unethical behavior. In this definition unethical behavior is the opposite of ethical behavior and therefore behavior against the generally accepted moral standards, for example stealing, lying or cheating. With respect to the earlier mentioned approaches towards ethics, this definition is based on top-down approach. In other words the four principles should hold independent of the specific situation. The advantage of principlism is that it is very clear and there is little room for

interpretation. This is also the disadvantage of the casuistry and reflectively approach, where the principles can be adapted to the situation. Looking at this definition of ethical behavior a better understanding of unethical behavior could be helpful. The main causes of unethical behavior are greed and profit. Unethical behavior has been found to be directly related to incentives, the higher the incentive the greater the likelihood of unethical behavior (Darley, Messick, Tyler, 2001). In order to promote ethical behavior and reduce unethical behavior management should understands the ethical culture of an organization (Treviño, Brown, 2004). This ethical culture has been advocated as one of the most important components of an organization for understanding and avoiding unethical behavior (Kaptein, 2008).

3.3 Retrospect and preview

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unethical behavior. Within this definition the four moral principles are autonomy, beneficence, non-maleficence and justice. Where chapter 2 and this chapter are self-contained chapters, chapter 4 will connect the main subjects in these two chapters to each other. The main subjects of chapter 2 are the MC systems and their elements, where the main subjects of this chapter is ethics and ethical behavior. Within chapter 4, the elements of the MC systems and ethical behavior will be related to each other. This will be done with the aid of the agency- and stewardship theory and the

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CHAPTER 4: Ethical Behavior in the elements of MC

This chapter brings the two topics of this thesis together. This chapter focuses on the role that ethical behavior plays in MC theory and the elements of MC. First this chapter will provide a brief overview of ethics in MC followed by a theoretical framework. The last section of this chapter will elaborate on the role of ethical behavior in Merchant’s control types. This chapter will answer the following sub-questions:

What role has management control within ethical behavior? What role has Merchant’s control types within ethical behavior? Between these sub-questions the theoretical framework will be displayed.

4.1 Ethics in MC

After the financial crisis of 2007 ethics became a popular explanation to clarify the foundation of this crisis. To be more precise there are several researchers who argue that a lack of ethics caused this financial crisis (Caveliere et al., 2007). Firstly, this section elaborates the foundations of ethics in MC theory and the role of agency- and stewardship theory in the foundation ethics debate. Secondly, the first sub-question of this chapter will be answered.

4.1.1 Foundations of ethics in MC

A period which was characterized by strong moral beliefs and people’s attachment to the traditional religions ended after World War II. People began to feel disconnected from traditional moral values; furthermore the strong development of science and technology affected the traditional religious beliefs (Ryan, Scott, 1995). Already in 1938 Barnard recognized a central ethical problem in

organizations. This ethical problem was a conflict in moral codes and, to be more specific a conflict between organizational and individual codes of conduct (Ryan, Scott, 1995). Barnard’s philosophy was based on situational ethics, managerial values and organizational imperatives instead of on religion, which was common at that time. The figure below illustrates the disagreement, after World War II, about the source of human knowledge within organizations. It is the result of a political as well as a philosophical debate, which means that it was between naturalism and theology, between collectivism and individualism and between normative theory and positive science. The left side argues that human knowledge was framed on the faith in revelation based on theology. The right side argues that human knowledge was framed on reason and science based on Barnard’s

naturalistic reliance and is more the present view on ethics. As you can see there is a distinction on the reason side, namely individualism and collectivism. The individualist perspective avoids

intervention, prefer competition and free markets. Furthermore, this perspective focuses on individualistic decision-making. This individualistic perspective can be related to the agency theory. The other perspective, the collectivism perspective is focused on group influence and the explicit majority rule. This perspective further focuses on collective decision-making. Furthermore, this collectivism perspective approach shows conformity with the stewardship theory.

Revelation Reason

Collectivism Individualism

Theology Naturalism

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4.1.2 The role of ethical behavior in MC

As determined in chapter 3 MC is defined as, the use of devices or systems to ensure that the decisions and behaviors of employees are consistent with the objectives and strategies of the

organization. But what if the objectives or strategies of an organization aren’t ethical, is acting ethical or following orders more important? The importance of ethics is briefly described by Nordberg (2008) by reflecting that strategic decision-making is a matter of ethics. MC systems are

characterized by their standardization of behavior (Weaver, Treviño, Cochran, 1999). In order to implement standardized ethical behavior in an organization two control orientations can be distinguished. The first has a coercive control orientation which consists of monitoring employee behavior, disciplining misconduct and sticking to the rules. The second is a more voluntary approach and focuses on standardization of behavior by encouraging ethical aspirations and creating

commitment to shared values (Weaver et al., 1999). Another approach to improve ethical behavior within the organization is provided by Buelens, Van den Broeck, Vanderheyden, Kreitner & Kinicki (2006). According to Buelens et al. (2006) there are six actions managers can rely on in order to increase ethical behavior among employees. Figure 4.2 shows these actions with a short explanation. 1. Behave ethically yourself Since managers are role models for employees, ethical

behavior of employees starts with ethical behavior of managers.

2. Screen potential employees Intensive screening of employees can prevent misrepresentation and fraud. An intensive check of a potential employee’s references, credentials and other relevant information.

3. Develop a meaningful code of ethics These code of ethics can have a positive impact, if they meet the following criteria according to Buelens et al. (2006):

1. They are distributed to every employee. 2. They are supported by top-management. 3. They refer to specific ethical dilemmas and

practices.

4. Rewards for compliance and punishment for non-compliance.

4. Provide ethics training Ethical training in order to identify and deal with ethical issues.

5. Reinforce ethical behavior Reinforced behavior tends to be repeated, whereas behavior that is not reinforced tends to disappear. Too often, unethical behavior is rewarded and ethical behavior is punished.

6. Provide mechanisms to deal with ethics In other words automation of ethical behavior. Ethics needs to be an every-day affair.

Figure 4.2: Guidelines to improve ethics at work (Buelens et al.,2006)

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commonality with personnel control, guideline 2 is almost the same as selection and placement of employees. Guideline 3 is also a characteristic of cultural control, while guideline 4 comes back in the characteristics of personnel control. Where Guidelines 1 to 4 has a direct link with the control types guideline 5 and 6 have a weaker link with the control types compared to the other guidelines, but show some similarities with action, personnel and cultural control. Guideline 5, reinforce ethical behavior, can possible be achieved by the action control type pre-action review, by training a form of personnel control or by implementing codes of ethics a form of cultural control. Guideline 6, provide mechanisms to deal with ethics, can possible be achieved by behavioral constraint a form of action control, by job design a form of personnel control or by codes of ethics a form of cultural control. The six guidelines to improve ethics show how specific control types of the MC systems can be used to possible influence ethical behavior.

4.1.3 The role of ethics within the theory perspectives

This section clarifies the role ethics plays in the agency- and stewardship theory. The distinction between these two theories is made because some researchers claim that the agency theory perspective is outdated and an alternative perspective, such as the stewardship theory, should become dominant in order to create sustainable competitive advantage (Caldwell, Hayes, Bernal, Karri, 2008). According to Caldwell et al. (2008) agency theory perspective has a lack of ethics

whereas the stewardship theory acknowledges the importance of ethics. First the role of ethics in the agency theory will displayed followed by the role of ethics in the stewardship theory.

4.1.3.1 Ethics & The agency theory perspective

In the management literature the dominant view of organizations is that the organization main objective is to maximize shareholder return (Cragg, 2002), this view is based on the agency theory. Theorists have suggested that the combination of the agency theory and maximization of

shareholder return may lead to corporate scandals (Heath, 2009). Heath (2009) provides three objections against the use of agency theory; these objections are based on critiques of business ethicists:

1. Self-interested behavior

As determined in chapter 2 the agency theory makes an assumption that managers and shareholders act in their own interest, this is one of the main concerns of ethicists. There can be discussion about the ethics of self-interest behavior. Looking at the definition of ethics in chapter 3 this could lead to problems in ethical behavior. Treviño, Weaver & Reynolds (2006) argue that self-interested behavior leads to unethical behavior. For example, when the manager as well as the shareholder both have individualistic objectives and only act in their self-interest this could lead to ethical problems because mostly this means that things are only right for one stakeholder and wrong for the other.

2. Shareholder Primacy

The agency theory considers the shareholders as the main stakeholder in the organization. Therefore the shareholder primacy is one of concerns of the business ethicists. According Goodpaster (1991) ethical behaving is paying attention to the stakeholders in general and not only to the shareholders.

3. Misplaced Loyalty

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in line with chapter three, which stated that managers are risk averse. Since the agency theory assumes extrinsic motivation, managers, if they are extrinsic motivated enough, following the orders of the shareholders who pay them. Extrinsic motivation is being motivated by extrinsic rewards which can be qualified as financial, material and social rewards coming from the environment (Buelens et al., 2006). Guay, Vallerand & Blanchard (2000) distinguish two sorts of extrinsic motivation, external regulation and identified regulation. Within external regulation behavior is regulated by incentives or to avoid negative consequences. To be more specific, the employee experiences an obligation to behave. Within identified regulation behavior is perceived and valued as being chosen by one. However, this is still extrinsic motivation since the activity is performed as a means to an end.

4.1.3.2 Ethics & The stewardship theory perspective

As mentioned in chapter 2, stewardship theory assumes that managers are not just motivated by self-interest. Stewardship theory claims non-financial motives of managers, this in contrast to the agency theory. Stewardship theory recognizes motives like intrinsic job satisfaction, need for advancement and recognition, work ethic and respect for authority. The intrinsic motivation of managers is an underexposed area in ethics according to business ethics researchers, since studies of corporate governance are primarily focused on the extrinsic motivation of managers (Ryan,

Bechholtz, Kolb, 2010). Bucaro (2007) claims that stewardship, what he also called corporate social responsibility, is an important part for developing an ethical organization. Bucaro (2007) defines stewardship as follows:

“What you do, once you say that you believe in your mission statement, code of conduct/ethics, core values.”

In order to support ethical behavior your actions must support what you say, should be others-centered and you have to ask yourself if what you are doing is the right thing for the customer (Bucaro, 2007). These characteristics show similarities with the stewardship theory, elaborated in chapter 2. The first characteristic shows commonality with the stewardship theory assumption of rational behavior, which is acting in the agreed behavior. Also the second characteristic shows commonality with the stewardship theory in this sense that the behavior of the managers is shareholder-centered since their behavior is aligned. Finally, there are commonalities between the stewardship theory and the third characteristic, what you are doing is right for the customer. These characteristics should be in line with the organizations’ objectives (Bucaro, 2007). The stewardship theory assumes a long-term orientation, which could create a sustainable competitive advantage and therefore motivate ethical behavior (Caldewell et al., 2008)

4.2 Theoretical Framework & Propositions

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4.2.1 Theoretical Framework

The relationships of results, action, personnel and cultural control on ethical behavior are displayed in the figure below. Furthermore, the figure illustrates the relationships of self-interested behavior, extrinsic motivation and short-term orientation on ethical behavior. The complete black arrow suggests a negative relation and a white arrow, with a black border, suggest a positive relation.

Figure 5.3: Theoretical framework

The theoretical framework assumes relations between Merchant’s control types, results, action, personnel and cultural control, and ethical behavior. Furthermore the framework assumes relations between the agency theory assumptions, self-interested behavior, extrinsic motivation and short-term orientation, and ethical behavior. The choice for these agency theory assumptions is that they are to opposite to the stewardship theory assumptions. Where the agency theory assumes self-interested behavior, extrinsic motivation and short-term orientation, the stewardship theory assumes collaborative behavior, intrinsic motivation and long-term orientation. On the basis of this framework, seven propositions can be distinguished. These propositions will be elaborated and displayed in the next paragraph.

4.2.2 The seven propositions

The remainder of this chapter provides an elaboration of the propositions. These propositions also answer the second sub question of this chapter. The propositions will elaborate the role of

Merchant’s control types within ethical behavior. The propositions of this chapter will be further investigated with the aid of a questionnaire, which are distributed among Dutch banks. The research design of this questionnaire is provided in chapter 5.

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4.2.2.1 The first proposition

As mentioned in chapter 2 results control describes specified performance/results which are communicated to employees to inform them what the organization expect from them. Results controls are output controls which often have a financial orientation. It is focused on results and not on how to achieve these results. In results control behavior is secondary to results; the incentive depends on the accomplishment of the objectives and does not concern the behavior to accomplish the objective. However, if an organization encourages good ethics this could replace the results controls (Merchant, Van der Stede, 2007). Within the theoretical framework, results control is defined as rewarding employees for generating good results, or punishing employees for generating poor results. The assumption made in this framework is that results control has a negative influence on ethical behavior. Since implementing a purely result-based incentive system, that guarantees the ethical behavior of employees, is impossible (Rosanas, Velilla, 2005). Furthermore, an MC system of only explicit incentives is ethically unacceptable (Rosanas, Velilla, 2005). Therefore the framework expects that the more results control centered an organization is, the lesser the attention to ethical behavior. Since within results control behavior is secondary to results, the first proposition reads as follows:

P1: More results control has a negative influence on ethical behavior 4.2.2.2 The second proposition

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of ethical behavior. The pessimist approach is primarily focused on preventing unethical behavior; unethical behavior can possibly be prevented by behavioral constraints a form of action control. However, since this master thesis assumes a neutralist approach of ethical behavior this thesis assumes a negative influence on ethical behavior. The second proposition reads as follows: P2: More action control has a negative influence on ethical behavior

4.2.2.3 The third proposition

The last two control types, personnel and cultural control, demonstrate a possible positive

relationship with ethics. According to Merchant & Van der Stede (2007) personnel or cultural control are an important component of employees’ ethics. As determined in chapter 3 personnel control is about getting the right people for the organization, it also provide some ways of implementing personnel control. An important part of personnel control is trust (Merchant, Van der Stede, 2007). Trust can improve employee’s commitment to ethical behavior and create sustainable competitive advantage (Caldwell, Hayes, Bernal, Karri, 2008). Looking at the three ways of effecting personal control there can be argued that they promote the development of employees within the

organization. Rosanas & Velilla (2005) argued that human or employee development is necessary in a MC system in order to attain ethical behavior of employees. Within the framework personnel control is defined as the selection and hiring of employees which could accomplish their tasks independently. The assumption made in this framework is that personnel control has a positive influence on ethical behavior. The third proposition reads as follows:

P3: More personnel control has a positive influence on ethical behavior 4.2.2.4 The fourth proposition

As determined in chapter 3 cultural control is about employee’s acceptance of the culture prescribed by the management. When the employees have emotional ties to each other cultural control is most effective (Merchant, Van der Stede, 2007). Furthermore, chapter 3 noted that codes of conduct and group rewards are one of the most important methods for implementing culture. Especially codes of conduct, or codes of ethics, have a relationship with ethical behavior. Adams, Tashchian & Shore (2001) argue that only the presence of codes of conduct can be deterrents to unethical behavior and motivators for ethical behavior. Furthermore, more than the code of conduct itself the development and implementation of the code may increase ethical awareness among employees (Adams,

Tashchian & Shore, 2001). Having an ethical culture within an organization this may increase ethical behavior and enables employees to observe and act against unethical behavior (Kaptein, 2011). So besides promoting ethical behavior, cultural control also prevents unethical behavior. Within the framework cultural control is defined as the design of norms and values within an organization, allowing employees to influence each other. The framework acknowledges the influence of culture on ethical behavior and made the assumption that cultural control has a positive influence on ethical behavior. The fourth proposition reads as follows:

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4.2.2.5 The fifth proposition

The first agency theory assumption is self-interested behavior. The influence of self-interested behavior on ethical behavior is obvious, self-interested behavior leads to unethical behavior (Treviño, Weaver, Reynolds, 2006). Furthermore, self-interested behavior is often at the expense of ethical propensities (Falk, Lynn, Mestelman, Shehata, 1999). Emphasizing such self-interested behavior has a negative effect on ethical behavior (Falk et al., 1999). Academics have argued that in order to

increase ethical behavior among self-interested individuals large fines for violations of ethical behavior are needed (Moore, Loewenstein, 2004). However, a problem with these fines is the measurement and detection of such unethical behavior (Moore, Loewenstein, 2004). In literature self-interested behavior is often presented as the opposite of ethical behavior and often assumes a negative influence of self-interested behavior on ethical behavior (Bowles, Hwang, 2008; Tenbrunsel, Messick, 2004; Bowie, 1991). Within the theoretical framework self-interested behavior is defined as behavior where personal gain is the most important standard. The framework, as well as the above mentioned literature, acknowledges the relation between self-interested and ethical behavior. Therefore the fifth proposition reads as follows:

P5: The more an organization assumes self-interested behavior, the more negatively the influence on ethical behavior.

Assuming self-interested behavior means that an organization is behaving self-interested and assumes that their employees are also behaving self-interested.

4.2.2.6 The sixth proposition

The second agency theory assumption is extrinsic motivation. As earlier mentioned extrinsic

motivation has two forms namely external regulation and identified regulation. The relation between extrinsic rewards and ethics could be positive. However, in that case the reward should be focused on ethical behavior and should be in combination with intrinsic rewards (Fudge, Schlacter, 1999). The definition of Buelens et al. (2006) is followed within the framework; extrinsic motivation is being motivated by extrinsic rewards which can be qualified as financial, material and social rewards coming from the environment. For example, results control can be regarded as a form of extrinsic motivation. Within the theoretical framework extrinsic motivation is the opposite of intrinsic motivation. Intrinsic motivation has a stronger involvement on CSR, a form of ethical behavior, than extrinsic motivation (Graafland, van de Ven, 2006). Normally, ethical behavior is more driven by intrinsic than by extrinsic motivation (Graafland, van de Ven, 2006). Extrinsic motivation indirectly promotes unethical behavior (Davy, Kincaid, Smith, Trawick, 2007). Unethical behaving people are mostly more motivated extrinsically than ethical behaving people (Jordan, 2001). This suggests that the higher the extrinsic reward, the higher the willingness to act unethical. The framework assumes that a solely extrinsic motivation has a negative effect on ethical behavior. Therefore, the sixth proposition reads as follows:

P6: The more an organization assumes extrinsic motivation, the more negatively the influence on ethical behavior.