Joost Franken
Business Principles
Improving management of ethics in the corporate centre
Thesis for Master of Science in Industrial Engineering and Management Science (Technische Bedrijfswetenschappen)
University of Groningen
The Hague, 18 August 2005
Author:
Joost Franken 0997390
Supervisors:
The author bares full responsibility for the content of the thesis report;
The copyright of the thesis report rests with the author
De auteur is verantwoordelijk voor de inhoud van het afstudeerverslag;
Het auteursrecht van het afstudeerverslag ligt bij de auteur University of Groningen:
1
stsupervisor: mr. W.W. Wijnbeek 2
ndsupervisor: dr. J.F.J. Vos Company X:
G. Barboza
Summary
The research for this thesis concerns Company X in the management of its Business Principles (‘BP’) on corporate level. The BP describe the behaviour of every employee in conducting business and is based on three ethical core values: Honesty, Integrity and Respect for people.
Within Company X there is the feeling that compliance with BP has room for improvement. They also consider that maybe not all cases of non-compliance with BP are reported. Furthermore, roles and responsibilities have overlaps.
This leads to a control problem of BP within Company X. Therefore, for this research the following research objective is formulated:
To provide recommendations to Company X on the areas of improvement of BP management in the corporate centre from a control perspective and on how to improve these areas.
To be able to fulfil the above stated objective the following research question has to be answered.
What are the areas of improvement of BP management in the corporate centre from a control perspective and how can they be improved?
To answer this question, first specifications of effective ethics control systems are described using theories on ethics management and control. Then current BP management and control systems are described.
An ethical culture must be created with a values based focus supported by a
compliance-based focus. Close attention is required to dimensions of the
organization’s ethical culture such as ethical leadership, fair treatment of employees,
and an open discussion of ethics in the organization. Leadership is the key in creating
this culture. Furthermore, at the top consistency is important. It must be clear what the
business principles mean, how they are interpreted and who is responsible for them. It
is necessary to create an atmosphere where an open discussion on ethics is possible
and bad news can be delivered. Several tools are mentioned to create the above described effect and they will form the minimum necessity for effective control of ethics.
Then the Control Entity, the Controlled system, External Influences, information streams and the control measures of current BP management are analysed. Areas of improvement are defined from the analysis. These are ‘Coordination’, ‘The quality of management information’ and ‘The use of web based tools’. These areas of improvement are the basis of the conclusion containing a redesign of BP management in the corporate centre. Furthermore, some tools were missing that could improve control of BP: a written statement of consequences when violating BP and a specific reward system.
These areas will be improved by the following recommendations:
¾ Appoint a BP Officer with full accountability and ownership of BP. The BP Officer will lead a BP management team, where different functional areas are represented.
¾ Assign different tasks of BP management to the different specialist functional areas that need to report on the different aspects of BP.
¾ Improve the quality of management information by measuring different BP characteristics by the specialized functional areas and improve the use of existing systems for management information.
¾ Install a solid reward system. This will not only give incentives to employees to be compliant with BP, but this also requires good criteria to judge whether an employee earns the reward. This will give valuable information on BP compliance.
¾ Improve the use of the ‘Company X People Survey’ by measuring essential BP characteristics globally on an employee level.
¾ Improve the use of the online training tool by making it compulsory and use the data from this tool for BP action plans.
¾ Improve the use of the BP website by better marketing of the website.
Table of Contents
Summary... 3
Table of Contents ... 5
Table of Acronyms ... 6
1. Introduction and Research Framework ... 7
1.1 Introduction ...7
1.2 Problem Background ...8
1.3 Problem Owners ...10
1.4 Research Framework ...11
2. Theoretical Framework: Ethics Management ... 16
2.1 Introduction ...16
2.2 Ethics...17
2.3 Behaviour ...18
2.4 Organization & Control Mechanics...25
2.5 Conclusion...28
3. Description and Analysis of current BP management ... 30
3.1 Introduction ...30
3.2 Control Entity ...30
3.3 Controlled System ...32
3.4 External Influences ...36
3.5 Information and Control Measures...37
3.6 Conclusion...42
4. Redesign of BP management... 45
4.1 Introduction ...45
4.2 Program of requirements...45
4.3 Coordination...47
4.4 Management Information...52
4.5 Use of web based tools...53
4.6 Schematic model of BP management ...55
5. Conclusion and recommendations ... 56
5.1 Introduction ...56
5.2 Conclusion...56
5.3 Recommendations...59
Literature... 61
Table of Acronyms
ACT Assurance Collection Tool BAL Business Assurance Letter
BU Business Unit
CCh Country Chair CCL Country Chair Letter CCT Country Coordination Team CE Control Entity
CEO Chief Executive Officer
CMD Committee of Managing Directors CS Controlled System
EC Executive Committee F2F Face-to-face
GAC Group Audit Committee
GALP Group Assurance Letter Process
HR Human Resources
IA International Affairs
NGO Non-Governmental Organization DSD Department of Sustainable Development R&D Research and Development
RED Regional Executive Director RMD Regional Managing Director
SEC Securities and Exchange Commission
BP Business Principles
1. Introduction and Research Framework
1.1 Introduction
The research for this thesis concerns Company X en the management of its Business Principles (‘BP’). In this chapter first a few words will be spent on Company X and the BP. Then, the problem background and the problem owners are discussed. The last part of this chapter will explain the research framework.
1.1.1 Company Profile
1Company X is multinational company. Company X actively operates in more than 145 countries and employs more than 100.000 people. Company X is going to be restructured in 2005.
For this thesis the following functions are most important and will therefore have a short explanation. These are the functions that deal with the Business Principles.
CMD/RMD/RED/EC
The members of the Board of Company X are generally known as Group Managing Directors and are also appointed to the Committee of Managing Directors (‘CMD’), which considers and develops objectives and long-term plans
2. Every Member of the CMD is also assigned a region and acts as a Regional Managing Director (‘RMD’). In the new structure of Company X the CMD will be referred to as the Executive Committee (‘EC’). The RMD will then be referred to as the Regional Executive Director (‘RED’).
Corporate Centre
The corporate centre is a service organization, whose main purpose is to support the CEO and businesses. It also helps the Parent Companies and Group Holding Companies manage their financial, tax and corporate affairs, and provides functional leadership to Group Businesses. The Corporate Centre also governs the holdings and treasuries sector companies, which manage the centrally held financial assets and
1
Due to confidentiality reasons this paragraph is shortened to its existing form
2
Annual Report 2003, p.7
liabilities of the Group. The International Affairs and the Department of Sustainable Development also belong to the Corporate Centre. These two directorates will be discussed further on in this thesis.
1.1.2 Business Principles
As stated before, Company X is present in 145 countries with more than 100.000 employees. It is a complex organization with 2500 companies worldwide. Capital is moving from developed countries to the developing world. These countries are the main resource holders of Company X’s resources. But these are also countries where the focus is not on principles and ethical behaviour. The importance of principles and ethical behaviour in international business is growing. The watch keeping on corporate behaviour is intensified through the work of NGOs, the media and governments. It is a complex organisation, hence the need for standards and common policies to ensure consistency. A code of ethics/behaviour, the BP, is necessary to make sure everyone is behaving in the same way. Furthermore, BP is also a binding force for employees all over the world with different cultures and backgrounds.
Therefore, upholding BP has become more critical to Company X’s business and reputation. All Group companies are expected to comply with these principles. Also contractors and suppliers are supposed to align with the BP.
Company X works from a set of core values; honesty, integrity and respect for people.
These values determine the BP, which apply to all transactions, large or small. They describe the behaviour of every employee in conducting business. The BP are part of the policies and standards of the Group. There are various processes in place supporting BP.
1.2 Problem Background
Company X’s business is getting more and more global. Internet increased the speed of information flows. Furthermore, its operations are moving towards ‘difficult’
countries, because these countries are the main resource holders of Company X’s
resources. It is very difficult to uphold business principles in these so-called difficult
countries. In these countries business is conducted in an environment where there are issues with wars, domestic unrest, problems with human rights, bribery etc.
At the same time NGOs and other watchdogs gained influence and have become more powerful. They constantly are on high level of alert to report breaches on business ethics. Also, the public’s interest increased in corporate governance. This means that the possible impact of ‘business misbehaviour’ will substantially influence reputation management. Therefore, upholding BP has become critical to Company X’s global reputation.
Within Company X there is the feeling that compliance with BP has room for improvement. They also suspect that maybe not all cases of non-compliance with BP are reported. Countries with ‘difficult’ ethical business environments report less cases regarding business integrity than the countries with a more ethical climate. This is not in line with the company’s expectations. Furthermore, roles and responsibilities have overlaps.
Therefore, it is unclear if the BP are effectively controlled by the corporate centre. At least there is a suspicion that information regarding BP is not sufficient enough.
It is important to have consistency in words and actions. This should start at top-level management. Having consistency at the top is considered one of the most important features of management of ethics (Trevino et al. 1999; Daft 2004) together with strong values-based leadership (Trevino et al. 1999; Atkinson et al. 2001).
To have all employees being compliant with BP and knowing if all cases of non- compliance are discovered in a company with more than 100.000 employees working in all parts of the world seems to be impossible. But at least systems and processes should work that minimize cases of non-compliance with BP and to ensure that, if there are cases of non-compliance with BP, they are known and dealt with in a consistent way.
Now it is unclear whether all cases of non-compliance with BP are captured, it is
needed to first know if systems are in place in the corporate centre that influence and
control employees’ willingness to report issues of non-compliance of BP.
Furthermore, these control systems are closely linked with systems that directly influence compliance with BP by employees.
The bottom-line is that BP need to be controlled effectively in the corporate centre.
Therefore, this research will use a perspective of control. Parts of the corporate centre that deal with BP will be analysed. This analysis will look whether the necessary control systems are in place and work properly. And if not, what is necessary to improve control of BP management in the corporate centre.
1.3 Problem Owners
International Affairs (‘IA’):
IA is a direct problem owner. IA is part of the corporate centre and part of BP management belongs to IA. IA is responsible for the coordination of implementation of BP. Furthermore, IA is responsible for monitoring BP. IA expressed the feeling that roles and responsibilities are not very clear regarding BP management. It also expressed the feeling of possibly not capturing issues of non-compliance with BP, which could lead to reputation issues.
Department of Sustainable Development (‘DSD’):
DSD is also a direct problem owner. DSD is the custodian of BP. Therefore, a review
of BP management will directly have an effect on roles and responsibilities within
DSD.
1.4 Research Framework
1.4.1 Research Objective
For the research it is necessary to formulate the research objective:
1.4.2 Research Question
Main research question
To be able to fulfil the above stated objective the following main research question has to be answered.
Sub research questions
To be able to answer this question from a perspective of control, it is necessary to know what the controlling and controlled systems are and how they are organized.
Furthermore, it is necessary to know which control mechanisms are in place and which are necessary to have effective control. Therefore, the following sub research questions are asked.
1. What are the specifications for effective control of BP?
2. How is BP management currently organized in the corporate centre?
3. Which control mechanisms are currently used for BP management in the corporate centre?
4. What are the areas of improvement in BP management in the corporate centre?
5. How can the areas of improvement be solved in the redesign of BP management?
To provide recommendations to Company X on the areas of improvement of BP management in the corporate centre from a control perspective and on how to improve these areas.
What are the areas of improvement of BP management in the corporate centre
from a control perspective and how can they be improved?
1.4.3 Perspective and scope of research
The research will be conducted from a control perspective. De Leeuw (2002) defined an elementary model of effective control (figure 1), where control is defined as specific influence in any way.
For effective control there is a controlled system (‘CS’) and a control entity (‘CE’).
First, the corporate centre, as the Control Entity, needs to have and effectively use the necessary tools and systems to actually be able to control BP. These tools need to be effective and therefore the controlled system needs to be described. If all systems are in place and are used effectively, then that is a starting point to review the lower aggregation levels in the organization. This is only possible when first consistency at the top and necessary control systems at top-level management are in place.
Therefore the system of control will be evaluated. Furthermore, a description is necessary of the different concepts in control and how control of ethics is organised from a theoretical point of view.
The research will focus on the corporate centre. This is the Control Entity and according to De Leeuw (2002) this should be redesigned (if necessary) when from the analysis areas of improvement are found.
It is also important to note that further research and evaluation of BP management is needed to see if the required objective is met. However, this will not be part of the research, because of the time constraint.
Control Entity (‘CE’)
Controlled System (‘CS’)
Control measures Information
External influences
Output
Figure 1: CE/CS model,
Leeuw de 2002
1.4.4 Method of research
The main research question will be answered following the methodology for solving control problems by De Leeuw (2002). Theory on ethics management and control is described by answering the first sub research question in Chapter 2. The second and third sub research question will describe the objective of BP management, the Control Entity in BP management, Controlled System and if the system is controllable. The fourth sub research question will compare current BP management with the specifications of effective control of BP and give areas of improvement in BP management for the redesign of the Control Entity. Answering these three questions will be done in Chapter 3. And the fifth sub research question will be answered by the redesign in Chapter 4.
Sub research questions 1: What are the specifications for effective control of BP?
To be able to redesign and evaluate BP management in the corporate centre it is necessary to know what the specifications of effective control are. Therefore, theories concerning effective control and effective management of ethics will be described. To do this, scientific literature is searched and its contents is analysed, which will be done in Chapter 2.
Table 1 Research object Data sources Method of measuring /
Perception Management of ethics Journal of Business ethics,
California Management Review, Daft, Brickley, Atkinson, Kreitner et al.
Content analysis, search method
Control De Leeuw, Atkinson Content analysis, search
method
Sub research question 2 and 3: How is BP management currently organized in the corporate centre? And: Which control mechanisms are currently used for BP management in the corporate centre?
This also includes the answers to the following questions:
¾ What is the Control Entity in BP management?
¾ What is the Controlled System in BP management and is it controllable?
¾ What are the external influences on BP management?
¾ Which information is available in current BP management?
¾ Which control measures are available in current BP management?
During the internship within IA it was possible to actually observe how BP were managed, especially regarding the BP assurance process, in which the researcher actively participated. These observations, additional internal documentation (mostly from the intranet) and interviews with the relevant people within IA and DSD will answer the second and third sub research question. This will be done in Chapter 3.
Research object Data sources Method of measuring / Perception Current organization of
BP management
Experts in Legal, IA, DSD and US ethics management;
Intranet;
Internal documentation;
Country Chairs
Semi structured interviews/ Content analysis / Observation
Current control mechanisms for BP
management
Experts in IA, DSD and US ethics management;
Intranet;
Internal Documentation;
Country Chairs.
Semi structured interviews / Content analysis / Observation
Table 2 Sub research question 4: What are the areas of improvement in BP management in the corporate centre?
To answer this sub research question current BP management will be analysed and compared to the theories on management of ethics and control. Key questions are:
What is missing in current BP management/control? And: Which control mechanisms
should BP management/control have to be more effective? This will be carried out in Chapter 3.
Sub research question 5: How can the areas of improvement be solved in the redesign of BP management?
To answer this question the analysis of scientific literature and the analysis of current BP management is used. This will form the basis of the redesign of BP management.
In Chapter 4 a model of this redesign will be described.
1.4.5 Schematic model
Underneath is a schematic model of the research. The diagnosis will constitute chapter 2. The theoretical framework will be described in chapter 3. Then Chapter 4 will provide the conclusion and recommendations.
Objective:
Compliance with BP
Diagnosis Chapter 3 Description of current:
- Control Entity - Controlled
System - External
influences - Streams of
Information - Control
measures In BP management Theory
Chapter 2 Description of:
- Specifications for effective control in management of ethics
Analysis Chapter 3 Analysis of:
- current BP management Define:
- areas of improvement in BP management in the corporate centre
Evaluation of the redesign
Redesign Chapter 4 Define:
- Specifications of the redesign Redesign of:
- Control Entity
Research focus
Figure 2: Schematic
model of research
2. Theoretical Framework: Ethics Management
2.1 Introduction
The main problem in this research is whether all issues of non-compliance with BP are reported. To avoid underreporting or not reporting at all of non-compliance issues, a solid control mechanism must be present at the top. This research will be conducted from a perspective of De Leeuw’s model of control.
De Leeuw (2002) defines Control as specific influence in any way (Leeuw de 2002).
De Leeuw’s model of control consists of a Control Entity, a Controlled System, External influences, Information streams and Control measures (figure 3).
The corporate centre is the Control Entity. When the Control Entity has the mechanics to control BP they also need good information on what to control.
In this chapter management of ethics is reviewed in general. The question that will be answered is the following: What are the specifications for having an effective BP control system according to scientific literature?
To understand and work with management of ethics, first the concept of ethics will be explained. Then the behaviour of employees as the Controlled System towards ethics will be reviewed. This is necessary to know when and why employees behave ethically. The next paragraphs will explain what theory says about the specifications of the organization of the Control Entity and the required control and information mechanics.
Control Entity (‘CE’)
Controlled System (‘CS’)
Control measures Information
External influences
Output
Figure 3: CE/CS model,
Leeuw de 2002
2.2 Ethics
2.2.1 Introduction
Ethics is a 25-century old discipline that seeks to identify those behaviours that are right or wrong, good or bad, virtue or vice (Brickley 1997). This is also reflected in definitions used in literature about business ethics. Daft (2004) argues that ethics is the code of moral principles and values that governs the behaviours of a person or group with respect to what is right or wrong. Ethical values set standards as to what is good or bad in conduct and decision-making. Ethics also goes far beyond behaviours governed by law. Ethics in organizations is about making decisions. These are decisions that resolve in ethical dilemmas (Daft 2004).
Ethics is a large research field over time. Many great minds have engaged themselves to the questions what is right and what is wrong. There is no universally accepted philosophy about ethics across time and societies. The answer to the question “what is right” is derived from the set of values that people believe in.
2.2.2 Creating an ethical advantage
Being ethical enhances the feeling of employees that they are doing the right thing and make the right decision. This can positively influence staff morale. (Trevino 1999)
Furthermore, as history showed, unethical behaviour can damage an organization’s reputation severely. This can also have financial consequences in shareholder value.
Throughout our society we find that ethics are priced. In order to maximize shareholder wealth, corporate decisions must be aligned with the ethical beliefs of the shareholders (Chambers & Lacey 2004).
Mitchell (2001) argues that three characteristics exist that can lead to an ethical advantage:
1. Process integrity 2. Leadership effectiveness
3. Balancing the interests of the various stakeholders
Process integrity deals with the question how deeply the ethical culture is incorporated. Therefore, it is important to understand the organization structure and controls of ethics management.
2.2.3 Effectiveness of ethics management
The bottom line of the effectiveness of ethics management is the extent of unethical or illegal behaviour in the organization (Trevino 1999).
Measuring employee awareness of ethical issues at work gives a good insight whether management of ethics is effective. Employees cannot be expected to be automatically aware of ethical ambiguities at work. However, when employees are aware of possible relevant ethical issues, it is more likely that they will ask the right questions and ultimately do the right thing when they will face ethical dilemmas (Trevino 1999).
Also measuring “whether employees are able to deliver bad news” can contribute to achieving better insight in effective ethics management. As a result of the reservation to report bad news, ethical and legal risks can escalate quickly when they are based on half-truths or untruths. Moreover, employees must at least have an opportunity to report violations (anonymously) to the organization without risk of reprisal (Trevino 1999).
Measuring employee commitment to the organization also provides a good view on the effectiveness of ethics management. Research has shown that employee commitment is higher in organizations with certain ethical culture characteristics (Trevino 1999).
2.3 Behaviour
Organizations are collections of individuals. All these individuals bring in their own
values and beliefs. These often differ from each other and might even conflict. There
is bound to be confusion regarding ethical dilemmas within an organization (Brickley
1997).
Employees mainly determine the ethics in the organization (Jeurissen 2000). They make decisions with (ethical) implications. As a consequence, these decisions will have an impact on organizational ethics. Daft (2004) and Kreitner et al. (1999) also recognize that ethics is about making choices and decisions. According to Jeurissen (2000), changing the behaviour of employees requires a change of the conditions, in which the employees work, of the material and psychological stimuli, which are received from the organization. First structure than moral (Bovens 1990).
2.3.1 Forces that influence ethical behaviour
According to Daft (2004) and Kreitner et al. (1999), an organization has four main forces that influence ethical decision-making: Personal Ethics, Organizational Culture, Organizational Systems and External Stakeholders (figure 4).
Personal Ethics:
Many individuals work in an organization and they all work with a personal set of beliefs and values based on family history, education, religion etc. These personal values and beliefs are important when individuals make decisions. (Daft 2004; Weber 1993) Personal experience with being rewarded or reinforced for certain behaviours
Personal ethics Beliefs and values Moral development Ethical framework
Is Decision or Behaviour ethical and socially responsible?
Organizational systems
Structure, policies, rules, code of ethics, reward system, selection, training
External Stakeholders
Government relations, customers, special interest groups, global market forces Organizational Culture Rituals, ceremonies, stories, heroes, language, slogans, symbols, founder, history
Figure 4: Forces that Shape
managerial ethics (Daft 2004,
p 376)
and punished for others also shapes the individual’s tendency to act ethically or unethically (Kreitner et al. 1999).
External Stakeholders:
Ethical decisions are also influenced by different groups of external stakeholders. This means that the organization recognizes that it is part of a greater community. Special interest groups can influence organizational behaviour. They can trigger massive media attention that can have an effect on the organization’s reputation. This will also affect the behaviour of its employees (Daft 2004).
Organizational Culture:
The culture of the organization also reflects the values and beliefs of the company.
The organizational culture is “the set of shared, taken-for-granted implicit assumptions that a group holds and that determines how it perceives, thinks about, and reacts to its various environments” (Schein 1996). This definition consists of the main characteristic of organizational culture. Organizational culture influences the behaviour of employees at work (Kreitner et al. 1999; Daft 2004).
Organizational systems:
More companies are building formal structures into the organization to influence ethical decision-making. Ethical values are incorporated in policies and rules;
formulation and dissemination of an ethical code; training of ethics; screening of new employees on ethics. These formal efforts can reinforce ethical values that exist in the organizational culture (Daft 2004).
2.3.2 Strategy
Jeurissen (2000) distinguishes three types of strategy relating to ethics management.
1. Compliance 2. Stimulation 3. Facilitation
These three strategies are interdependent. And they are commonly used in a hybrid
form. To successfully implement these strategies it is necessary to have strong
leadership, which focuses on the individual ethical skills of employees and on structure and culture of the organization.
Compliance:
Compliance means that people have to comply with preset norms and rules. This will be accomplished by the enhancement of supervision on internal controls of decisions of managers. When these managers are not compliant they should be punished. Ways of achieving compliance are by the following:
¾ Appointing a director who is responsible for the moral climate in the company (An Ethics/Compliance Officer).
¾ Developing procedures for compliance
¾ Communicating effectively the standards, policies and procedures of which managers need to be compliant with
¾ Monitoring behaviour of employees
¾ Adopting procedures for employees to report non-compliant behaviour
¾ Taking disciplinary measures when managers are non-compliant.
It is important to note that Ethics Officers are more than just ethical police officers.
The larger part of their work consists of advising about ethics and has a preventive nature.
Stimulation:
Influencing behaviour does not have to be focussed only on compliance of tight rules and regulations, but also on making moral judgments carefully. This strategy promotes ethical decision-making based on a set of self-chosen values. These values provide the organization of an ethical framework, which guides the decision-making of directors, managers and other employees. Furthermore, these values add to the enhancement of the identity of the organization. The characteristics of the stimulation strategy are nearly the same as for the compliance strategy. It is necessary to have an ethical code of conduct, monitoring mechanisms and ethics training. The difference is in the intentions and motivations. It is not only about just preventing ‘wrong’
behaviour, but also about carrying own responsibility, giving the good example and seriousness of role obligations. To stimulate employees’ responsibility the focus must be on:
¾ Clear base values
¾ Education and training
¾ Inform employees about these values
¾ Tutorage
Facilitation:
The facilitation strategy focuses on the responsiveness for views, values and interests of other people. This strategy especially focuses on processes. Having a dialogue in the organization, of which it must learn, is very important. The organization needs to pay attention to the following in achieving this:
¾ A continuing dialogue on moral issues
¾ Documentation of results of these dialogues
¾ A search for information about other cultures and habits
¾ Continuing education
¾ To be accountable to (external) stakeholders
Management of ethics can have several goals for the organization, as seen above, where three different strategies are outlined. These three strategies are in literature mostly summarized to two different approaches of ethics management (Kaptein &
Wempe 2002). First, the compliance- or rules-based approach. This holds an approach primarily focused on preventing, detecting and punishing violations of the law.
Second, a values-based approach, where the organization aims to define
organizational values and encourage employee commitment to ethical aspirations. The
values-based approach is comparable to Jeurissen’s ‘stimulation’ strategy. According
to Trevino (1999) a values-based approach is the most effective single approach. This
is confirmed by Kaptein & Wempe (2002). It is important that employees consider the
motives of senior management as a sincere attempt to have all the employees do the
right thing. Otherwise, they may think that the rules of a code of conduct are just a
way to create legal back up. Another consideration is that ethics cannot be imposed
instantly. According to Kaptein & Wempe (2002) it must be done on a voluntary
basis. However, this must not lead to lack of commitment when there is no
accountability. That is why Trevino (1999) and Kaptein & Wempe (2002) both argue
that the values-based approach should be supplemented with an orientation towards
legal compliance. Trevino also wants to add a third approach, which is an orientation
on external stakeholders. Trevino (1999) showed that valuing external stakeholders,
such as customers and the community, have a positive impact on the effectiveness of an ethical compliance programs. This corresponds with Daft’s view (2004) on the forces that influence ethical decision-making. These three approaches are all required to align the individual’s ethics with the organization’s ethics. Therefore, ethics must also be institutionalized. This, however, needs an integrative approach. Implementing ethics should fit in existing structures and mechanics as much as possible.
2.3.3 Culture
Managing ethics in an organization is not only about formal ethics management systems. One of the most important influences on ethical behaviour of employees is the organization’s ethical culture (Trevino 1999; Daft 2004). Perhaps it is more important than the specific organizational characteristics of ethics management.
According to Kreitner et al. (1999) organizational culture fulfils four functions.
1. It gives members an organizational identity;
2. It facilitates collective commitment;
Culture can create pride and long-term commitment.
3. It promotes social system stability;
Social system stability reflects the extent to which the work environment is perceived as positive and reinforcing, and conflict and change are managed effectively
4. It shapes behaviour by helping members make sense of their surroundings;
This function gives employees understanding of why the organization does what it does and how it intends to accomplish its long-term goals.
To achieve effectively managed ethics, it is needed to create a culture that helps people work with ethics and comply with them. Rewards of such a culture can lead to collective commitment, social system stability and behaviour which is aligned with the organization’s values and beliefs.
Furthermore, according to Trevino (1999) especially dimensions of ethical culture like
ethical leadership, fair treatment of employees and an open discussion of ethics within
the organization have a great influence on employees’ ethical behaviour. Trevino
concluded in his research that open discussion of ethics was particularly important to employee commitment. Open discussion must therefore be encouraged throughout the organization.
Fair treatment is also very important. When employees have the feeling that they are not treated fairly, they can try to balance the unfair situation by engaging in unethical behaviour. Therefore, the organization requires consistency in dealing with (ethical) dilemmas.
Leadership is considered as the key to influence ethical behaviour (Trevino 1999;
Jeurissen 2000; Daft 2004). Leadership can build an organization with the necessary structure and mechanics. More important, leadership can have a major influence on the culture of an organization. Top management must ensure that a culture will be created and maintained in which ethics is always important for every employee. Top management must be committed to the organizational values and has to show this commitment. These values are developed and strengthened through values-based leadership. This is a relationship between the leader and its followers based on shared, strongly internalized values which are advocated and acted upon by the leader (Daft 2004). These leaders are highly trusted and respected because of the way they show their determination and sacrifices for upholding the organizational values.
Top management can also shape culture and ethics through the formal structure and systems of an organization. Responsibility of ethics within an organization is assigned to a specific position. This will show the importance of ethics to all members of the organization. The responsibility can be assigned to the board or to a different ethics committee, which is mostly formed by a cross-functional group of executives. This committee oversees all aspects of ethics within the organization; it develops ethical standards; it makes policies on ethics; it communicates the ethical standards; it advises on ethical decisions; it provides training in ethics; it provides disclosure mechanisms; and it supervises ethical issues (Daft 2004).
Building a solid ethical culture in the organization is the best way to influence
employees’ behaviour. Important contributions are leadership and consistency in
actions and behaviours. Therefore, it is important to have clear responsibilities on
ethics management at top level in the organization, where consistency in leadership must be ensured.
Disastrous to creating an ethical culture is a culture that emphasizes self-interest and unquestioning obedience to authority, and the perception that the ethics or compliance program exists only to protect top-management from blame (Trevino 1999).
2.3.4 Destructive measures for ethical behaviour
Previous research reveals that some measures turned out to be destructive to employees’ ethical behaviour (Trevino et al. 1999). These are the following:
¾ When employees perceive ethics management as “protect top management from legal liabilities”. This can happen when a Legal department is fully responsible for ethics management and when a strict compliance strategy is used.
¾ Inconsistency in words and actions.
¾ A culture of unquestioning obedience to authority.
If these features are present in ethics management, they will be destructive for employees’ ethical behaviour, because the above mentioned features are indicators that the top is not taking ethics seriously. That is why these features should be avoided.
2.4 Organization & Control Mechanics
2.4.1 Organization
The objective of the control system is whether the employees of an organization
(Controlled System) are compliant with a written ethical code of conduct. In this
generic system of control there is a clear need in the organization for a Control Entity
and a Controlled system. As previously mentioned in paragraph 2.3 this Control
Entity is mostly a separate function within the organization using values based
leadership. This could be an ethics committee. At least this should be a function with
clear accountability for ethics in the organization, directly reporting to the board or a
separate executive (Daft 2004). The Controlled System however is the whole
organization. Every employee is part of the Controlled System.
2.4.2 Information
Information about the environment and the situation of the system is also important.
Having information about the environment means that the organization must be alert on whether the ‘contracting conditions’ between the organization and the external stakeholders change (Kaptein & Wempe 2002; Hitt et al. 2001). The organization must be willing and able to reformulate the statement of ethics when that will be necessary. This requires a continuous dialogue with external stakeholders. This also reduces the risk that external stakeholders influence internal stakeholders in ethical decision making (Daft 2004).
To get a proper understanding of the situation of the Controlled System it is required to have effective reporting systems and/or management information systems. Without such systems it is impossible to change the situation of the CS with control measures.
These reporting systems could be an assurance process or an audit where the organization measures whether it meets its objective towards compliance of the ethical code of conduct (Atkinson et al. 2001; Daft 2004; Kaptein & Wempe 2002). In addition the presence of channels is required so that employees can raise ethical issues/dilemmas in confidence without risk of retribution (Atkinson et al. 2001;
Trevino et al. 1999).
2.4.3 Control Measures
Control measures exist in a wide variety. First of all, the organization must have reactive measures. The organization must have a system which clarifies to the employees what will happen when they are not compliant. This means that management must:
¾ Provide a statement of the consequences of violating the organization’s code of ethics.
¾ Establish a means of dealing with violations of the organization’s code of ethics promptly, ruthlessly, and consistently with the statement of consequences.
E.g. the organization must be able to dismiss employees who are not compliant with
the ethical code of conduct. To do this, a legal basis is necessary. Some countries’
laws give some forms of unethical conduct a direct cause for dismissal. However, the safest way is to include compliance with the ethical code of conduct in the employment contracts. Also other punishment systems can be implemented, e.g. fines.
As long as it is clear to the employees what will happen when they are not compliant.
In contrast to the negative measures described, the organization can also use positive measures, like reward systems (Kaptein & Wempe 2002; Atkinson et al. 2001).
However, having a reward system necessitates a solid management information system. Rewarding compliant behaviour must be carried out in a consistent way. That is why it needs careful and accurate measuring of ethical behaviour characteristics.
Proactive approaches can be used to influence ethical employee behaviour. This is even more important. Ethical companies encourage and enable people at all levels of the organization to be compliant with their business principles (Hitt et al. 2001).
Using a values based approach is considered the most effective way (Daft 2004). In order to achieve this, the values of the organization must be deeply embedded in the employees’ minds. The values of an organization can be embedded into the organization by:
¾ Having a written statement of the business principles available to all employees, which they understand completely.
¾ That all employees understand the organization’s code of ethics and the boundary systems that constrain behaviour. Boundary systems are designed to specify what actions are appropriate and those that must never be taken.
¾ Adequate training to help employees identify ethical dilemmas in practice and learn how to deal with the dilemmas which they can reasonably expect to face (Atkinson et al. 2001).
Moreover, senior management must use its leadership to create a culture where ethical compliance is part of the daily work. This culture needs to be open (Trevino et al.
1999). This includes that employees discuss ethics within the business and with their leaders. This starts with respecting another person’s opinion on ethics. As stated before, ethics is a 25-century old discipline, on which many great minds had just as many different opinions. To get ‘respect for other person’s norms and values’
embedded in the organization, it is needed that leadership sets the example. Therefore,
leadership should start the discussion on and training in ethics (Trevino et al. 1999;
Atkinson et al. 2001). Management must also:
¾ Provide visible support of ethical decision making at every opportunity.
¾ Provide a private line of communication (without retribution) from employees directly to the chief executive officer, chief operating officer, head of human resource management, or someone else where employees can seek advice on ethical dilemmas (Atkinson et al. 2001).
2.5 Conclusion
There are four forces that influence ethical decision making. These are personal ethics, company culture, company systems and external stakeholders. To create an ethical advantage, it is necessary to align personal ethics with the company’s by having process integrity (solid company culture and systems), effective leadership and a balance of stakeholder interests. The ethical code of conduct must be a reflection of these various interests.
Process integrity is one of features that can lead to an ethical advantage. To have process integrity, ethical culture must be deeply embedded. This culture must be created with a values based focus supported by a compliance-based focus. Close attention is required to dimensions of the organization’s ethical culture such as ethical leadership, fair treatment of employees, and an open discussion of ethics in the organization. Leadership is the key in creating this culture. When leadership does not give the right example, all else is redundant. In that case, employees are not willing to live up to the business principles either. Leadership must encourage and give visible support to the business principles. Furthermore, at the top consistency is important. It must be clear what the business principles mean, how they are interpreted and who is responsible for them. An atmosphere where an open discussion on ethics is possible and bad news can be delivered must be created.
All these measures will not only decrease the amount of non-compliance issues, but
will also have a positive effect on reporting of issues. Social control on compliance
with BP increases because of a greater belief that the company is serious about ethics.
Furthermore, instead of just making the decision, employees will be more willing to seek advice on ethical issues.
Several measures are required to create the above described effect. These are:
¾ Clear accountability of ethics management by appointing a function head of ethics management, who has full control on business principles matters.
¾ Written statement of business principles
¾ External/Internal stakeholder engagement
¾ Continuous training and education of ethics management
¾ Communication plan for the business principles
¾ Management Information System / Audit / Assurance
¾ An independent line for seeking advice or reporting violations
¾ Written statement of consequences when violating business principles
¾ Punishment system
¾ Reward system
These measures are the minimum necessity of an effective control of ethics in an
organization. In the next chapter current BP management will be described and
analysed. There will also be looked at whether the above mentioned measures are
present.
3. Description and Analysis of current BP management
3.1 Introduction
In this Chapter current BP management will be described and analysed. The focus in describing this will be on how Company X organizes BP management and how BP is controlled on corporate level. This will be done using de Leeuw’s model of control (2002).
For this reason, the control entity, the controlled system, external influences, information streams and control measures are described. The analysis will search for areas of improvement by comparing current BP management to the theoretical framework as described in chapter 2.
3.2 Control Entity
The Control Entity is the corporate centre which is the heart of the globe-spanning network of Company X companies. The corporate centre supports the Executive Committee (‘EC’); gives advice to the businesses; and provides functional leadership.
One of the key contributions is to protect and build Company X’s reputation and it is the guardian of the BP as well. The corporate centre has to make sure that the BP are understood and put into practice.
The International Affairs (‘IA’) and the Department of Sustainable Development (‘DSD’) are the two Directorates that have BP responsibility.
Control Entity (‘CE’)
(Paragraph 3.2)Controlled System (‘CS’)
(Paragraph 3.3)Control measures
(Paragraph 3.5)Information
(Paragraph 3.5)
External influences
(Paragraph 3.4)
Figure 5: CE/CS model,
Leeuw de 2002
3.2.1 International Affairs
IA promotes BP in the different geographies. IA supports the Country Chairs regarding BP and carries out the BP assurance process. Within IA there is a high turnover rate of advisors. They mostly stay for just two years in this position. This has its effect on the continuity of knowledge within IA.
IA supports the Country Chair in reputation management and cross-business activities. The Country Chairs coordinate implementation and promotion of BP through the business in a country. The material used for implementation, marketing tools, case studies and training material comes from DSD. The Country Chair gives this a local level use.
IA also carries out BP assurance from which issues are collected. These issues serve as a basis for promotion and the BP action plan. More important the assurance process is used to test the health of the BP and serve as one more element to define the way forward on BP. Together with assurance of BP, data regarding BP is collected through the Country Chair Questionnaire. This data is used for the ‘Annual Report on financial, environmental and social events’.
3.2.2 Department of Sustainable Development
DSD is located in London and is the custodian of BP. DSD develops policy regarding BP. They base the definition of BP on external trends and internal needs. Key areas of its work are the following:
1. Company X committed itself to many international treaties and agreements, e.g. ILO, UN Global Compact and Transparency international. DSD makes sure that the content of these agreements and treaties are reflected in the BP and internal policies. However, the last change of the BP was in 1997. It should be questioned whether the BP are still up-to-date.
2. To show leadership in the area of ethics (BP) and Corporate Social
Responsibility, DSD attends congresses regarding ethics and Corporate Social
Responsibility. DSD also provides speakers or acts as a moderator for these congresses.
3. DSD also monitors ratings as the Dow Jones Sustainability Index, the FTSE4good and others. These ratings are very important for Company X’s reputation. These rankings use different criteria to measure ethics in the organization. Measuring is carried out by questionnaires. DSD provides information for these rankings.
4. The BP statements are short. Therefore, the different principles can be subject to many interpretations. DSD is often consulted on BP interpretation matters.
Country Chairs can also consult IA on these matters. IA then often redirects the question to DSD. Within DSD there is a regional issues manager.
Although there are regular informal contacts between DSD and IA, no formal meetings to share information on BP matters between the two directorates exist. This seems to work okay, but it is unclear whether all information is shared between the directorates when it is not logged.
3.3 Controlled System
3.3.1 Who is expected to comply with BP?
¾ All Group companies
¾ Group controlled Joint Ventures
¾ Company X uses its influence to persuade the Joint Venture partners and Joint Ventures not under operational control to adopt a compatible set of principles to the BP
¾ Contractors and suppliers (awareness and promotion)
¾ Employees
3.3.2 Who are controlled by the corporate centre?
Country Chairs
The Country Chair represents Company X in a country. He or she guards Company X’s reputation and interests. IA directly supports the Country Chair in BP matters.
In a country the Country Chair makes sure that the businesses in the country implement BP in a consistent and proper way. The Country Chair is leading the Country Coordination Team (‘CCT’). In this team all the businesses active in the country are represented. The BP are implemented through the businesses on country level.
As BP is a matter that should be dealt with in all business activities, the coordinating role of the CCT is necessary to ensure consistency among all businesses BP plans and that execution is taking place.
The CCT reviews cases of non-compliance with BP, such as incidents of bribery or reputation issues, to have an overview of the status of BP in the country and to be able to adjust the implementation plan when necessary.
Corporate Centre CEO
IA
- Coordination of implementation
DSD
- Policy development
Country Chair
Businesses / Operating Units in a country
Figure 6: BP organizational structure
Control / steering Reporting
Other: Finance,
HR, etc
When a BP issue occurs in a country, the involved employee goes up the line of management to seek BP advice. However, if this does not work or the employee is not able to ask the line manager or his superior, he asks the Country Chair for advice. The same happens when violations need to be reported.
Because Company X is operating in all regions in the world, this gives difficulties in interpretations in BP. This is mostly due to cultural differences and language.
Although English is the common language to use, for most people this is not their native language and this causes interpretation problems.
Cultural differences also lead to problems in focus on BP. It shows from the BP assurance process and Country Chair Questionnaire
3that in ‘difficult’
4countries much less bribery and/or fraud incidents are reported than in countries with a more ethical business climate. This is against expectations.
All employees of Company X
The corporate centre directly influences the behaviour of Company X employees through communication and leadership. Communication happens primarily through the BP website. However, it is unclear how often this website is visited. Nor is it clear what employees subjectively think of the BP website as a tool for communication.
It is also unclear what employees think of BP leadership. However, it is clear from the
‘Company X People Survey 2004’
5that the confidence of employees in the company’s leadership in general showed a decline in 2004 compared to 2002. This could also have an effect on BP leadership.
The ‘Company X People Survey 2004’ also showed an increase in employees’
confidence that Company X does not tolerate bribery, or any other breaches of the BP.
This is good sign and could also have an effect in more compliance with BP on the work floor. This is also shown in the fact that employees have a stronger belief that
3
More on the BP assurance process and Country Chair Questionnaire in paragraph 3.5.
4
A country is considered ‘difficult’ when in that country business is conducted in an environment where there are always issues with wars, domestic unrest, problems with human rights, bribery etc.
5
The ‘Company X People Survey 2004’ is a bi-annual poll to see what employees’ views are on the
company. Results used in this paragraph come from questions 65, 66 and 67.
Company X acts with integrity in its dealings with the societies/communities in Company X operates.
However, the ‘Company X People Survey 2004’ also shows that there is a strong decrease in employees’ belief that Company X acts with integrity in its dealings with employees themselves. This could have a bad effect on compliance with BP. If employees have the feeling that their employer is not acting with integrity towards them, then they are less willing to act with integrity in return.
Businesses at corporate level
The businesses on corporate level also pay attention to BP through their websites.
However, the different businesses approach BP in a different way. Where some of the businesses do not offer any information on BP or it is hard to find, other businesses have an extensive amount of information on BP available and even adjusted the information to the need of their business.
3.3.3 How do the Controlled Systems need to be controlled?
The BP needs to give guidance to all employees to behave in a certain way when conducting business. The objective is that all employees comply with the BP.
The corporate centre is the heart of BP matters. Wanting to have consistency makes this necessary. The implementation of BP is coordinated from the corporate centre.
The corporate centre has different systems to do this. But before describing those systems there is a need to know how the controlled systems have to be controlled.
Country Chairs
Country Chairs need the following from the corporate centre:
¾ Knowledge on interpretation of BP
¾ Support on implementation plans
¾ Marketing and communication materials
¾ Knowledge on how to act when cases of non-compliance with BP occur
All employees of Company X
All employees have their own responsibility to comply with BP. Therefore, the corporate centre does not play a direct role, because the BP are implemented on country level through the businesses. However, from the corporate centre all employees need:
¾ clear leadership;
¾ consistency in interpretations and systems;
¾ clear and consistent communication of BP;
It is important that employees have strong confidence in their leaders. They also need to have the feeling that the company acts with integrity and fairly towards them in their dealings.
Businesses at corporate level
The BP are implemented through the businesses on country level. Therefore, the businesses on corporate level do not play a role in implementing BP. Nevertheless, the businesses on corporate level do play a role in influencing BP behaviour by communication through their websites or other media. Therefore, the businesses must have support from the corporate centre to ensure consistency.
3.4 External Influences
Society’s expectations and the increasing influence of external stakeholders, particularly NGOs, make it necessary for Company X to actively engage with them.
Different issues in the mid nineties were a wake up call to Company X regarding external stakeholder engagement. These examples are explained in text box 1 and 2.
Case 1
Due to confidentiality reasons this case is not explained in the public version.
Text box 1:
Case 2
Due to confidentiality reasons this case is not explained in the public version.
Text box 2
The issues concerning Company X showed that the influence of external stakeholders increased. The first case showed that an organization as environmental organizations became very powerful and was able to influence public’s opinion, even when they were not right. The second case showed that people nowadays expect large multinationals to take their responsibility in the promotion for human rights. From the point of view of reputation management the damage was done. For Company X these issues increased the need for early stakeholder engagement. These external influences need to be controlled to avoid damage to the reputation. After these issues action has been taken and early stakeholder involvement has been institutionalised. Nowadays, Company X shows to be a good example in managing external influences. This is also shown in the case as described in text box 3
6.
External stakeholder engagement is also important, because the BP need to reflect current society’s expectations of Company X. Therefore, DSD actively engages with different stakeholders in early stages of projects. In addition, DSD communicates and accounts for BP matters through the ‘Annual Report on financial, environmental and social events’. The corporate centre, as the Control Entity, gives clear guidance to the Controlled System on how to manage external influences and this seems to work well.
3.5 Information and Control Measures
Company X has a few mechanisms in order to get information and feedback regarding BP in the countries where Company X operates. One of the most important mechanisms is the BP assurance process. Furthermore, Company X is using the IA advisors to get BP knowledge of the countries through their face-to-face meetings (‘F2F’) with the Country Chairs. This information is used to make BP action plans to give guidance to country chairs. IA also conducts BP training workshops. In this paragraph these information and control measures are described. Furthermore, it will be indicated whether the control mechanism uses feedback or feed forward control.
6
‘Annual Report on financial, environmental and social events’ 2005 p.18, Company X’s website Case 3
Due to confidentiality reasons this case is not explained in the public version.
Text box 3
