Master Thesis
Msc BA Organizational & Management Control
“muppets,” “ripping eyeballs out” and “getting paid”
A Virtue Based Management Control System
Supervisor: Dr. M.P van der Steen Second supervisor: Dr. B. Crom
Name: Sipke Jelmer van der Meulen Adress: Admiraal de Ruyterlaan 17 Student number: s1717650
Telephone number: 06-22860951
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“muppets,” “ripping eyeballs out” and “getting paid”
A Virtue Based Management Control System
Master Thesis
University of Groningen
Faculty of Economics and Business
Msc BA Business Administration
Specialization: Organizational & Management Control
Sipke Jelmer van der Meulen
Address: Admiraal de Ruyterlaan 17
Postal Code: 9726 GN
City: Groningen
Mobile: 0622860951
MSc Business Administration
Programme: Msc BA Organizational & Management Control
Student number: S1717650
Date of submission: 1-2-2013
Supervisor: Dr. M.P. van der Steen
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Preface
The document lying in front of you is the result of a research performed to finalize my study Organizational & Management Control at the Faculty of Economics and Business Administration at the University of Groningen.
This thesis was conducted in the last 6 months and its purpose was to outline the claim that Virtue Ethics can reduce the gap between ethical policy and ethical practice. An intensive literature study and an analysis have led to some interesting results. Optimistically, these results could be a source of inspiration for others in order to discover new findings. Hopefully, there is a chance for others to conduct an empirical research based on the results presented in this thesis.
I would like to thank various people for their support during the process of conducting this thesis. Firstly, I would like to thank my first supervisor Dr. M.P. van der Steen. Due to our cooperation and his useful feedback this thesis became what it is now, a thesis I am proud of. I would also like to thank my second supervisor, Dr. B. Crom, for co-reading my thesis. Moreover, I have the opportunity to express a word of gratitude to my family and friends. They gave me great support during the completion of this thesis.
Hopefully you will enjoy reading this thesis. Yours sincerely,
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Executive Summary
This master thesis has the objective of examining the claim that Virtue Ethics can reduce the gap between ethical policy and ethical practice.
The motivation for this research can be found in several accounting scandals and the financial crisis that started in 2007. The financial crisis resulted in increased attention to ethics in the form of policies and training addressing ethics. Nevertheless, and despite this extra attention, many companies still struggle with employees’ unethical behavior. There is what can be called a ‘gap’ between ethical policy and ethical behavior. Contemporary management control systems try to elicit ethical behavior, but so far this has not eliminated the gap. Because current approaches are not producing the desired result, a new approach should be introduced. This thesis shows that management control can deal with ethics in a new way.
The call for a new approach is based on two arguments. The first argument is grounded in the vague contribution of individuals. Numerous control systems are oriented to the collective, while ethical practice is individual. Therefore, free-rider problems can arise. It is also not clear how changing behavior takes place at an individual level, and the role of human agency is not obvious. The second critical argument concerns the bad connection between theory and practice.
Management control literature and ethical models are struggling with the concept of human nature: Individuals have preferences and their own personalities. Current ethical policies do not take these human preferences into account.
To address these two points, this thesis introduces a Virtue Ethics approach. This approach can reduce the gap between ethical practice and ethical policy in two ways: in the long term and in the short term. In the long term, implementation of Virtue Ethics has potential benefits for business because the contextual perspective of Virtue Ethics recognizes the importance of understanding the environment as it affects both the employee and his or her behavior. A Virtue Ethics approach thus results in every person having to pay active attention to their own ethical motivations in certain circumstances. A Virtue Ethics approach is individual-focused and does not work with fixed policies but with habits, motivations and character. Virtue Ethics takes human nature in account, and therefore the possibility of ethics becoming internalized is much greater than in contemporary management control systems.
In the short term, Virtues Ethics can make ethics much more practicable within contemporary management control systems. Virtue Ethics is individual-based and focuses on the character of individuals. Therefore, every individual has to search for the right action in every situation. A Virtue Ethics approach makes people reflective, and makes the way people make decisions become
interactive. Virtue Ethics results in fewer codes and policies but it uses more values. Employees have the freedom and responsibility to make decisions in different situations based on their own ethical considerations. A Virtue Ethics approach teaches and assists employees in determining the right action within every environment.
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Table of Contents
Preface ... 3
Executive Summary ... 4
1. Introduction ... 7
2. Design of the Study ... 11
2.1 Research Questions ... 11
2.2 Key Definitions ... 11
2.3 Clarification for Reading ... 13
3. The Gap Between Ethical Policy and Ethical Practice ... 15
3.1 Ethical Policy ... 15
3.2 The History of Unethical Financial Practices ... 16
3.3 The Need for a new Approach ... 18
4. Management Control Literature Overview ... 20
4.1 Management Control Theories ... 20
4.2 Management Control and Ethics ... 22
4.3 Critiques on Current Management Control Theories ... 25
5. Virtue Ethics... 27
5.1 A Virtue Ethics Perspective ... 27
5.2 Arguments Against Virtue Ethics ... 29
6. Method of Analysis ... 31
6.1 Controlling Ethics is Impossible ... 31
6.2 Interpretation Scheme ... 32
7. Analysis ... 35
7.1 The Potential Contribution of Using Virtue Ethics ... 35
7.2 An Increase of Workability when Using Virtue Ethics ... 35
7.3 Applying Virtue Ethics in Business ... 40
7.4 Short-Term and Long-Term Solutions ... 43
8. Conclusion ... 46
8.1 Clarifying the Research Claim ... 46
9. Limitations of the Research and Recommendations for Further Research ... 48
9.1 Limitations of the Research ... 48
9.2 Recommendations for Further Research ... 48
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11. Appendix ... 55
Appendix 1: Evidence of Corporate Code Ineffectiveness ... 55
Appendix 2: Evidence of Code Effectiveness ... 57
Appendix 3: Aristotelian Intellectual Virtues Overview ... 59
Appendix 4: Aristotelian Moral Virtues Overview ... 59
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1. Introduction
In March of 2012, the New York Times published an article outlining an interview with Greg Smith. Greg Smith was resigning that day as an executive director of Goldman Sachs and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa. Goldman Sachs, one of the biggest investment banks in the world, played a major role in the cause of the financial crisis. ‘Firms like Goldman Sachs gambled with confidence on risky collateralized debt obligations (CDOs) because they bought insurance from the risk-laden AIG-bank, which they knew was itself drastically under-capitalized’ (Crotty, 2009, p.569). Greg Smith stated:
It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. … Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen. (14-3-2012)
The quote “muppets,” “ripping eyeballs out” and “getting paid” indicates the strength of ethics in current companies and is therefore the title of this thesis. This quote of Greg Smith is quite shocking in the way managing directors serve their clients, even more so because the world is dealing with a financial crisis caused by banks like Goldman Sachs. This financial crisis resulted in reduced
government spending, unemployment and income redistribution. It even pushed some national governments to the point of bankruptcy (Smith, 2010).
Several researchers state that the financial crisis is rooted in ethics, or more precisely in a lack of ethics (Caveliere, Mulvaneve & Swerdlow, 2007). These researchers complain about the fact that there is limited attention to ethics in business (Caveliere et al., 2007). Nonetheless, there has been a growing recognition that good ethics can have a positive economic impact on the performance of firms. ‘Statistics support the premise that ethics, values, integrity and responsibility are required in the modern workplace. For consumer groups and society at large, research has shown that good ethics is good business’ (Joyner & Payne, 2002, p.297). Yet observing the resigning director of Goldman Sachs, people could wonder if anything has changed since the financial crisis arose in business, with respect to ethics.
Ethics refers to the objectification of values into general rules for behavior (Adams, 2009); ethical research provides insights into what constitutes morally acceptable behavior (Merchant & van der Stede, 2007). Management control plays an important role in ethical practice in organizations. Stansbury and Barry (2003) refer in their research to Vaughan (1990), illustrating that ‘control is a rubric for various organizational mechanisms that foster consistency, predictability, knowledge acquisition, and coordination in the pursuit of defined objectives’ (p. 4). From an operational
perspective, ‘mechanisms of control may prevent accidents and other (possibly catastrophic) failures through discovery, monitoring, investigation, and sanctioning of problematic unethical behavior’ (Stansbury & Barry, 2003, p. 4).
8 phenomenon of a gap between ethical policy and ethical practice in contemporary businesses. The attention for this gap has even increased after the financial crisis. Therefore, it is at least remarkable that laws have been enacted, extra codes have been written, but in various companies all these measures fell short of their objectives (Clarke, 2011). A further indication of the gap between policy and practice was found in the results of the Institute of Business Ethics, 2005, UK National Ethics at
Work Survey (Webley & Dryden, 2005). This survey was carried out among 759 full-time employees
across the United Kingdom. In the survey, one in two respondents said they had noticed unethical behavior but had failed to report it (Webley & Werner, 2008). These results reflect also that
whistleblowing in organizations is not particularly common. ‘Further analysis revealed that two out of three of the employees who had noticed unethical behavior, worked for organizations that used a code of ethics’ (Webley & Werner, 2008, p.406). Another European example of this gap is Shell.
Although Shell has eight General Business Principles since 1976, these appear to have had little impact on the behavior and attitudes of some senior managers. For instance, the standards set out in the principles seem to have been ignored by those running the
company’s Nigerian subsidiary and by those who were responsible for reporting the amount of oil reserves owned and proven by the company. Somehow it appears that some senior people failed to translate the company’s Business Principles into practice in certain crucial areas (FSA, 2004; Polgreen, 2005; Webley & Werner, 2008, p.406).
In the United States, government and public officials including the Securities and Exchange
Commission and the United States Senate have questioned organizational leaders over their dubious and seemingly misguided decision-making before the financial crisis (Pullium et al. 2010; Securities and Exchange Commission, 2010). Like many people, these officials wonder how such gross misconduct could occur even when policies and guidelines existed to safeguard against unethical practices (Thiel, Bagdasarov, Harkrider, Johnson & Mumford, 2012).
The cause of this gap between ethical policy and ethical practice has been investigated by several scholars. Some scholars state that the problem is that even if a company has a code of ethics, that follows good practice in terms of development and design, a gap between policy and practice nonetheless arises if the code is not effectively communicated and embedded in the organization (Webley & Werner, 2008). However, other researchers like Solomon (1992, p.323) mentions that ‘the ethical problems that the average manager faces on the job are personnel and routine administrative decision-making problems, not policy problems’. Solomon (1992, p.323) states that ‘some of those problems have to do with temptations and attractive competing offers, a convenient kick-back, personal relationships or prejudice against an employee. Other problems have to do with conflicts of duties, mixed messages or crossed loyalties’. In the current business environment, protection against corporate ethical abuses is done by codes and policies. Still, ‘societies differ in their emphasis on either normative controls or legal and regulatory controls to modify behavior’ (Sama & Shoaf, 2005, p. 179).
9 concrete handles to achieve a sustainable ethical culture, some of these handles are: continuous training and ‘awareness raising’ programs, consultation and feedback, regular surveys of stakeholder opinion, board level oversight and reporting. Similarly, Kish-Gephart, Harrison and Trevino (2010, p.23) suggest that ‘firms should be better able to create and maintain a portfolio of selection, training, and management practices that resist ethical spoilage’.
Although these findings are appreciated, they have a lot in common with the already existing solutions, referring to Merchant and van der Stede (2007). These kinds of solutions build further on already existing ideas: a ‘more of the same’ approach. There is minor attention to the essence of ethical behavior and the effect of policies and codes. When organizing more training, increasing the embedding of the ethical culture, organizing surveys and creating ethical codes, the question rises of whether these solutions really help.
This thesis claims that the examples given above and existing literature show the need for a more individual approach to ethics. This claim is also based on criticism regarding the collective approach of various management control theories. Examples of these theories are the agency theory and the institutional theory. For instance, the free riding problem arises using the agency theory (Kyriacou, 2011; Kim & Walker, 1984; Kameda, Tsukasaki, Hastie & Berg, 2009).
In addition, the relative anonymity inherent to the large number settings reduces social pressures on free-rider behavior stemming from some common ethical or moral norms. Large number settings also dull the effectiveness of positive or negative reciprocity, thereby facilitating free-rider behavior. (Kyriacou, 2011, p.1)
Furthermore, the institutional theory (Burns, Scapens, 2000; Suddaby, 2010) has also been criticized. It is not clear how changing behavior takes place at the individual level, and similarly the role of human agency is not obvious. These two commonly used collective theories cannot explain the relationship between institutions (meso) and individual (micro). Additionally, they cannot clarify how changes at the local level affect the institutions. In contemporary business, the same collective-oriented theories are used to control ethics, and therefore the same problems arise.
The need for some theories focusing on the role of the individual is not only noticed by this thesis but also by other researchers. An example of such a theory is the practice theory of Bourdieu (1990), or Kaptein and Schwartz (2007, p.120) who state that ‘personal characteristics of employees are an important factor in examining the effectiveness of business codes’. Kaptein and Schwartz (2007) further refer to an example of Trevino (1986, p.722) mentioning that ‘individuals are less likely to follow the code when its expressed values conflict with their own’.
10 speaking. ‘Aristotle said that a virtue is a trait of character manifested in habitual action’ (Rachels & Rachels, 1999, p. 175). Virtue Ethics cannot be dictated according to abstract rules or principles. ‘A Virtue has a social context, is a human practice, and accordingly it is essentially part of a fabric that goes beyond the individual and binds him or her to a larger human network’ (Solomon, 2004, p.1025).
This thesis will outline the claim that Virtue Ethics is the solution for the gap between ethical policy and ethical practice. The underlying reason for this research is that Virtue Ethics focuses on the individual. Virtue Ethics takes the personal characteristics, human nature and the dynamic
environment into account. This research is conducted from a behavioral and cognitive perspective and intends to argue that Virtue Ethics contributes to solving the gap between ethical policy and ethical practice. This insight is of significant importance when successfully developing and
implementing ethical policies for organizations and management control systems. Then, and only then, an employee is able to optimize the use of ethics in a consistent way.
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2. Design of the Study
The general objective of this thesis is to outline the claim that Virtue Ethics can contribute to closing the gap between ethical practice and ethical policy. Therefore the concepts of management control, ethics, ethical policy, ethical practice and Aristotelian virtues have to be explained. This thesis will try to explore the relation between the three variables by integrating and analyzing the relevant theory.
2.1 Research Questions
In order to achieve the research objective the following research claim has been developed:
Virtue Ethics can reduce the gap between ethical policy and ethical practices in contemporary business.
The main research question will be answered by first providing an answer to the following sub questions:
1. To which extent is there a gap between ethical policy and ethical practice?
Firstly, the gap between ethical policy and practice will be discussed and explained.
2. What kind of management control solutions are already suggested for this problem?
This chapter will be used to discuss management control literature and current solutions for the gap, and these solutions will also be evaluated.
3. What are Aristotelian Virtue Ethics?
The concept of Virtue Ethics will be introduced and some objections against Virtue Ethics will be presented.
4. To what extent can Virtue Ethics help to reduce the gap between ethical policy and ethical practice?
This is the analysis of the main research question. An interpretation scheme will be presented, and the differences and similarities between management control literature and Virtue Ethics will be discussed.
5. What are the recommendations for practice and the areas for future research?
This part will be drawn from the conclusion of the analysis. This thesis can come up with recommendations within the management control literature for using Virtue Ethics. The supporting sub-questions will support the research question
2.2 Key Definitions
Some key definitions will be given in order to enhance the reading and understanding of this thesis. These key-definitions are: ethical policy, ethical practice, ethical behavior, unethical behavior, Virtue Ethics and management control.
12 (Cressey & Moore, 1983), code of conduct (White & Montgomery, 1980), business principles (Sen, 1997), corporate ethics statement (Murphy, 1995), and codes of practice (Schlegelmilch & Houston, 1989). This thesis will use the concept of organizational ethics programs as ethical policy, which is ‘a collection of control mechanisms and ways of standardizing employees’ behavior within the domains of ethics and legal compliance’ (Weaver et al., 1999b, p.42).
When companies want employees to behave ethically they must exhibit ethical decision-making practices. Ethical practice in business is practice in accordance with the ethical policy of the organization. Every practice contains some form of ethical behavior. According to Trevino et al. (2006, p.952) ethical behavior refers to ‘individual behavior that is subject to or judged according to generally accepted moral norms of behavior’. For this thesis ethical behavior is defined as acting in ways that are consistent with what a person, society or the organization considers as being good values.
In organizations and societies attention to unethical behavior is increasing. Kish-Gephart et al. (2010, p. 2) define unethical behavior as any ‘organizational member’s action that violates widely accepted (societal or organizational) moral norms’. This definition is similar to that found in recent behavioral ethics literature (Kaptein, 2008; Trevino et al., 2006).
To understand the contribution of Virtue Ethics within business it is vital to explain Virtue Ethics. Virtues summarize the ideals that define good character. Virtue Ethics describes the character of a person as a driving force for ethical behavior (Rachels & Rachels, 1999).
The themes within the Virtue Ethics' tradition are the virtues themselves, motives and moral character, moral education, moral wisdom or discernment, friendship and family
relationships, a deep concept of happiness, the role of the emotions in people’s moral life and the fundamentally important questions of what sort of person individuals should be and how they should live. (Stanford Encyclopedia of Philosophy, 2003)
Moreover, the Stanford Encyclopedia of Philosophy (2003) states that ‘Virtue Ethics is, indeed a character trait—that is, a disposition that is well entrenched in its possessor, something that, as we say, “goes all the way down,” unlike a habit such as being a tea-drinker—but the disposition in question, far from being a single-track disposition to do honest actions, or even honest actions for certain reasons, is multi-track’. Rachels and Rachels (1999) mention that:
Individuals seek out people for different purposes, and this affects which virtues are relevant. In looking for an auto-mechanic, people search someone who is skillful, honest, and
conscientious; in looking for a teacher, people want someone who is knowledgeable, articulate, and patient. Thus, the virtues associated with auto-mechanic are different from the virtues associated with teaching. But Virtue Ethics primarily assesses people as people, in a more general way, so people have the concept, not just of a good mechanic or a good teacher, but of a good person. (p.176)
Rachels and Rachels (1999, p.176) define virtues as ‘a trait of character, manifested in habitual action
that it is good for a person to have’. The specific traits of character that should be fostered in human
13 cooperativeness, courage, courteousness, dependability, fairness, friendliness, generosity, honesty, industriousness, justice, loyalty, moderation, patience, prudence, reasonableness, self-discipline, self-reliance, tactfulness, thoughtfulness and tolerance.
In general it is difficult to control ethical behavior. Some of these difficulties were already mentioned in the introduction. Therefore the focus on management control systems is even more important. Management control systems are needed to enhance ethics within organizations. Stansburry and Barry (2007) refer to Garrison and Noreen (1997, p.360) who characterize control as, ‘the steps taken by management to ensure that the objectives set down at the planning stage are attained and to ensure that all parts of the organization function in a manner consistent with organizational policies'. Lawler and Rhode (1976, p.3) note that ‘control systems are instituted in organizations because management and others feel they need information about what is going on in the organization so they can coordinate the activities of others’. In this thesis management control will be defined as a metric for various organizational mechanisms that foster consistency, predictability, knowledge acquisition, and coordination in the pursuit of defined objectives (Stansburry & Barry, 2007). This thesis will be delivered to the Faculty of Economics and Business; therefore the philosophical parts will need more attention and explanation. The sources of literature used are mainly academic accounting journals and the Journal of Business Ethics.
2.3 Clarification for Reading
To obtain some more clarification and understanding about the subject of this thesis, it will be useful to provide in advance some basic themes and assumptions. Only then can this thesis be more convincing and avoid ambiguities.
In the first place, critics could wonder in what way a person living about 2000 years ago could affect management control of today. Aristotle’s environment was, without a doubt, completely different from today’s environment. So in what manner can these ‘old fashioned’ ideas help in modern business?
Without a doubt, Aristotle was living in a completely different environment. However, the ideas of Aristotle concerning particular questions can still be used. This applies to questions such as: What is good or bad for people? Do people have a character or soul? What is morally right and wrong? Questions like these are difficult to answer. Berlin gives a striking explanation of philosophy. Berlin believes the following:
14 In principle, Aristotle’s ideas concerning several topics, but especially concerning character, can be used still today in questioning the contemporary management control models. When questioning these models new insights can be found, which can add something to contemporary models. In essence, this thesis claims that Virtue Ethics closes the gap between ethical practice and ethical policy. Therefore several chapters will be used to explore this claim. To enhance understanding, the outline of this research is explained here.
The research is going to be presented in 9 chapters. Chapter 1 contained the introduction of this research. Chapter 2 showed the design of the study. Chapter 3 will first show a deeper explanation of ethical policy and ethical practice and will then focus on the current gap between ethical policy and ethical practice. In Chapter 4, the way management control deals with ethics will be explained. Also the criticism of this approach will be presented. Afterwards, in Chapter 5, there will be an
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3. The Gap Between Ethical Policy and Ethical Practice
The goal of this chapter is to acquire a good insight into the misfit between ethical policy and ethical practice in current business. This chapter will explain the relevance for this thesis and will show the need for a new approach in order to reduce the gap.
3.1 Ethical Policy
In order to get familiar with the gap between ethical policy and ethical practice, there is a need to concentrate on ethical policy. Referring to the extra attention paid to ethics after the financial crisis, people may think ethical policy is something new. Ethical policy is not, however, something new; in fact, Codes of ethics, by Edgar Heermance, was one of the first textbooks on the topic and it was published as early as 1924 (Kaptein & Schwartz, 2007).
The foundation of an ethical policy is mainly a written code of ethics. ‘A code of ethics is assumed to set out the organization’s ethical values and commitments, communicate these throughout the organization and provide help in translating them into the attitudes and behaviors expected of its employees’ (Webley & Werner, 2008, p.406). Ethical Codes are like the cornerstone of an ethical policy. The ethical values and ethical codes of organizations give an insight into the kind of ethical culture the organization aspires:
The terms ‘Code of Ethics’ and ‘Code of Conduct’ are often mistakenly used interchangeably, these are however two unique documents. A code of ethics briefly describes broad ethical aspirations and a code of conduct, or business code, more extensively describes acceptable behaviors for specific situations that are likely to arise. (Collins, 2012, p.107)
Collins (2012) further mentions that a code of ethics, sometimes referred to as a value statement, is similar to a few general principles to guide behavior in terms of ethics. These principles describe the kind of people the organization wants its members to be. Of the 200 largest companies in the world, 52.5 percent does have a business code (Kaptein, 2004), and this amount is increasing. Moreover, companies that do not have a code are increasingly prompted by their stakeholders or even forced by law to develop such a code (Waddock et al., 2002). Companies that have a code have invested a substantial amount of time and money to develop and implement it (KPMG, 2005). Because companies have differences in cultural perspectives, operational structures and strategic
orientations, their business ethics can differ. Due to the fact that ethical codes are mainly the basis of ethical policies, the focus in this thesis will be on ethical codes.
After explaining ethical policy, it is necessary to describe ethical practice more deeply. When companies want employees to behave ethically they must exhibit ethical decision-making practices. So, ethical behavior, in business, is (simply) that kind of behavior in line with the stated ethical policy of the organization. Thong and Yap (1998, p.214) mention that in business ‘an ethical issue arises whenever one party, in pursuit of its goals, engages in behavior that affects the ability of another party to pursue its goals. If the effect of the behavior is unjust, then the behavior is considered unethical’.
16 numerous explanations for this unethical behavior. Merhant and van der Stede (2007, p.692) give some explanations why some people behave unethically. Firstly, some people are just basically dishonest. Secondly, there is a moral disengagement; some people do not have a foundation in ethics. Thirdly, some people who recognize ethical issues develop rationalizations to justify their perhaps unethical behaviors. Fourthly, some people who are well trained in ethics and who know they are doing something wrong are not able to stop because they lack moral courage: the strength to do the right thing despite fear of the consequences. In fact, an employee needs moral expertise to make good ethical judgments.
3.2 The History of Unethical Financial Practices
Because of the (unsolved) gap between ethical practice and ethical policy, there is need for a new approach concerning ethics. To make this point even more clear, there will be presented a distinction between three time periods and their corresponding unethical events.
The examples can be sorted into three periods: the period before 2007, the financial crisis (2007 till 2010), and the present-day period (2010 till 2012). The financial scandals can include typical accounting scandals or individual financial scandals. Of course unethical behavior cannot be
eliminated completely, but the purpose of this ‘time frame’ is to outline the need for a new approach and to show the changes that have occurred concerning ethics.
The period before 2007 is a long one, and not directly comparable to the two other time periods. Consequently only the most distinctive examples will be highlighted concerning the gap. In the Introduction the example of Shell was already mentioned:
Shell had eight General Business Principles established in 1976, these principles appear to have had little impact on the behavior and attitudes of some senior managers. Shell’s standards were set out in the principles, but they seemed to have been ignored by those running Shell’s Nigerian subsidiary or those who were responsible for reporting the amount of oil reserves owned and proven by the company (FSA, 2004; Polgreen, 2005, p.406). Somehow it appears that employees failed to translate the company’s Business Principles into practice. At Shell there was a gap between the ethical practice of the Nigerian managers and the business principles stated.
17 more (Wikipedia, Retrieved 4 Sept 2012). The result of these failures was that several governments and companies changed their point of view concerning ethics.
The Sarbanes-Oxley Act of 2002 was a result of this change. This law was enacted in response to numerous corporate and accounting scandals. It aimed to ‘reinforce corporate accountability and professional responsibility in order to restore investor confidence in corporate America and the rest of the world. The Act has served as a stimulus to encourage initiatives for rebuilding investor confidence in corporate governance, financial reporting and audit functions’ (Pankajk & Zabihollah, 2006, p.629). By adding more rules and norms, the government hoped that it could prevent failures like Enron. The response of a lot of firms at that time was to invest more in systems that were intended to improve the integrity of employees. For example, Freddie Mac invested $115 million in the development of more than 50 new systems that were intended to improve the integrity of the mortgage lender's financial reports. Ironically Freddie Mac was also involved in an accounting scandal in which the company understated its earnings. More attention was being given to ethics in the form of built-in integrity track records, and the literature requested more education in ethics.
Furthermore, in the Netherlands the Code Tabaksblad was created. This Dutch corporate governance code is a code of conduct for listed companies with the aim of improving transparency in the
financial statements, greater accountability to the board and a strengthening of control and protection of shareholders (Rijksoverheid, 2003).
Unfortunately, all these efforts were not enough to protect the world from a financial crisis (credit crunch) starting in 2007. Because of the credit crunch, banks like Lehman Brothers, Bear Stearns, ING, AIG and many more were badly harmed. Nearly all these banks, which either needed the financial support of governments or do not even exist anymore, had an ethical policy or at least a special paragraph in their annual report with some ethical notes.
The behavior of banks before the crisis and within the crisis is a subject of discussion in literature. There has been a lot of attention in journals for business ethics, and many suggestions have been made, so this thesis will not broadly elaborate the topic. In short, a result of the crisis was that several governments did come up, after 2007, with new rules and policies for the financial system, to prevent a recurrence of this crisis. For instance, in 2010 the U.S. Senate passed the Financial Reform Bill. The purpose of the bill, which grew up to 2300 pages, was to strengthen the supervision of the financial sector. In Europe an agreement was reached in September 2010, on the establishment of 3 new regulators for banks, insurers and exchanges. More specifically, in the Netherlands, several commissions like ‘Commissie de Wit’ were established to reconstruct the failures of the financial crisis.
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3.3 The Need for a new approach
The question arises here of whether this extra attention to ethics did in fact reduce the level of unethical behavior within companies. This thesis claims it has not. In the introduction there was already the example of the director of Goldman Sachs, Greg Smith, who doubts that young analysts and managing directors behave ethically. But there are more examples; for instance, Olympus Corporation and Sino-Forest Corporation were both accused in 2011 for accounting scandals.
By referring to some press releases of Bloomberg.com in the year 2012 and empirical research, which will discussed later, this thesis will challenge the notion that progress been made concerning ethical behavior.
On 8 March 2012, there was an article about ING, written by Elizabeth Amon: A former ING Group trader was arrested for cheating the company through options transactions. The country’s public prosecutor said March 6 that the Dutch Fiscal Information and Investigation Service, or Fiod, arrested a 43-year-old man from Amsterdam on suspicion of swindling 600,000 euros between 2009 and 2011 from a listed company. Bloomberg published another article of Yee Kai Pin and Mathew Carr on June 8, 2012, concerning E.ON. E.ON AG, Germany’s biggest utility, said it suspects an unspecified former employee “falsified” trading positions and may have concealed internal rule violations and trading limits. The company said the financial impact is expected to be below 20 million euros. Likewise, Stephen A. Favato, a former partner at New York-based auditor BDO Seidman LLP, was sentenced to 18 months in prison for two tax crimes related to helping a client falsify his returns. Favato was sentenced in federal court in Newark, New Jersey, where a jury convicted him in August 2010 of one count of obstructing the administration of Internal Revenue Service laws and one count of aiding in the preparation of a false tax return (David Voreacos, 2012, April 16). Another absolute example of unethical behavior is the LIBOR scandal, revealed in July 2012. The most widely used interest rate in the world, Libor, was manipulated. Several banks fixed the London interbank borrowing rate with the complicity of the Bank of England at a low rate in order to obtain cheap borrowing costs. In this way banks benefited from borrowing at low rates (Roberts, 2012).
Referring to the examples mentioned above it is justified to question the current protocols and rules aiming to prevent unethical behavior. People could comment that the given examples are just particular incidents; therefore this thesis will also discuss some empirical research.
19 ‘only 45% of companies with an ethics code provide training on its meaning and use’(Webley & Dryden, 2005, p.408). IBE’s Ethics at Work Survey found that ‘only half of the respondents said that their organization offers advice (through a telephone helpline or other channels) on ethical behavior problems in the workplace’ (Webley & Dryden, 2005, p.408). Likewise, Kaptein and Schwartz (2007) did a review of existing literature concerning business codes and behavior. They mention that:
So far there have been at least 79 empirical studies that examine the effectiveness of business codes. The results are clearly mixed: 35% of the studies have found that codes are effective, 16% have found that the relationship is weak, 33% have found that there is no significant relationship, and 14% have presented mixed results. (p.113)
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4. Management Control Literature Overview
After showing the need for a new approach, this chapter provides an overview of the literature showing factors that have impact on an individual’s ethical decision-making. This chapter will outline the milestones already achieved within the management control literature for dealing with the gap. The purpose of this chapter is to justify the claim that management control is not yet in a position to deal fully with ethics. Therefore, different ideas and criticisms of the existing management control literature will be explained.
4.1 Management Control Theories
Firstly, in the second chapter management control is defined as:
A metric for various organizational mechanisms that foster consistency, predictability, knowledge acquisition, and coordination in the pursuit of defined objectives (Stansburry & Barry, 2007, p.4).
In this chapter there will be a distinction between the predominately used management control systems, like Simons (1995), Ouchi (1979) and Merchant and van der Stede (2007), and the more specific theories aiming to control ethics like described by Ho (2010) and Webley and Werner (2008). Firstly, general management control theories and their role with ethics will be presented.
Simons (1995) introduced the levers of control framework. Simons (1995) states that managers of modern organizations cannot spend all their time on making sure that everyone is doing what is expected. Simons (1995, p.29) mentions that ‘control systems are important levers in managing the inherent tension between opportunity-seeking behaviors, limited attention, self-interest and strategy formation’.
Simons (1995) introduced four levers of control:
1. Beliefs systems, used to inspire and guide the search for new opportunities; 2. Boundary systems, used to set limits on opportunity-seeking behavior;
3. Diagnostic control systems, used to motivate, monitor, and reward achievement of specified goals; and
4. Interactive control systems, used to stimulate organizational learning and the emergence of new ideas and strategies.
The purpose of the belief system is to inspire and promote commitment to the organization. Belief systems are designed by managers to reach many different people within an organization. These systems are helpful for obtaining an understanding the core values of an organization. The ‘power of negative thinking’ is the foundation of boundary systems. ‘These systems allow managers to delegate decision making and thereby allow the organization to achieve maximum flexibility and creativity’ (Simon, 1995, p. 41) Boundary systems are stated in negative terms, or as minimum standards (Simons, 1995).
21 is the interactive control system. This control system requires intensive managerial involvement. Managers use this type of control to involve themselves regularly and personally and force dialogue throughout the organization. The interactive control system further facilitates and shapes the emergence of new strategies and focuses on learning on key strategic issues (Simons, 1995). Another control framework is that of Ouchi (1979). Ouchi created a conceptual framework for the design of organizational control mechanisms. Ouchi (1979) distinguishes three types of control mechanisms coping with the problems of evaluation and control: market mechanisms, bureaucratic mechanisms and clan mechanisms.
For the combination ethical behavior and control, clan control is essential in this respect. Ouchi (1979) believes a clan relies for its control upon a deep level of common agreement between members on what constitutes proper behavior. A clan control system also requires a high level of commitment on the part of each individual to those socially prescribed behaviors. Within a clan control mechanism, Ouchi (1979) speaks about the lack of organizational rationality. This essential element is based on the assumption that it is feasible to measure, with reasonable precision, the performance that is desired. Ouchi (1979) believes that in some situations there is no ability to define the rules of behavior; this is called loose coupling. Companies can measure the ultimate success, for instance of a scientific discovery, but it may take ten, twenty, or even fifty years for an apparently arcane discovery to be fully appreciated. Ouchi (1979) states:
In such circumstances the organization relies heavily on ritualized and ceremonial forms of control. These include the recruitment of only a selected few individuals, each of whom has taught him or her to internalize the desired values and the revere the appropriate
ceremonies. Companies should carefully select workers so that they can be assured of having an able and committed set of people, and then engaging in rituals and ceremonies which serve the purpose of rewarding those who display the underlying attitudes and values. These ceremonial forms of control can be implemented through a clan. (Ouchi, 1979, p.844) Ouchi (1979, p.844) believes it is ‘impossible to exercise monitoring and evaluations of anything but attitudes, values, and beliefs, and also that attitudes, values, and beliefs are typically acquired more slowly than manual or cognitive abilities’. Consequently, ceremonial forms of control require the stability of membership that characterizes the clan. Under conditions of ambiguity, loose-coupling and uncertainty, measurement with reliability and precision is not possible (Ouchi, 1979). With respect to ethics it is impossible to use either behavior or output measurement. Therefore, clan control is a possibility for companies for dealing with ethics.
Merchant and van der Stede (2007) identified four types of control: result control, action control, personnel control and cultural control. Action control is the type of control that involves ensuring that employees perform certain actions known to be beneficial to the organization; these concern desirable behavior. Action controls exist in different forms, like behavioral constraints, pre-action reviews, action accountability and redundancy. Action controls are only effective when organizations can determine what actions are (un)desirable and if organizations are able to ensure that the
(un)desirable actions (do not) occur (Merchant & van der Stede, 2007).
With ethical behavior the (un)desirable actions are known, but the control of those actions is
22 Stede (2007) state that personnel controls are controls to make it more likely those employees will perform the desired tasks satisfactorily on their own, because employees are experienced, honest and hardworking. This type of control builds on the ‘natural tendencies’ of people to control and/or motivate themselves. A purpose of personnel control is that it increases the likelihood that each employee will engage in self-monitoring. This self-monitoring pushes most employees to do a good job and is effective because most people have a conscience that leads them to do what is right. Merchant and van der Stede (2007) state that there are three major methods of implementing personnel controls namely, selection and placement of employees, training, job design and provision of necessary resources. Moreover, Merchant and van der Stede (2007) mention that cultural control is a type of control designed to encourage mutual monitoring: a powerful form of group pressure on individuals who deviate from group norms and values. These are most effective where members of a group have emotional ties to one another. These cultures are built on shared traditions, norms, beliefs, values and ways of behaving. Merchant and van der Stede (2007) argue that using group rewards encourages cultural control. Likewise, intra-organizational transfers, physical arrangements and tone of the top could encourage cultural control.
Summarizing, three management control systems have been explained. Some of these management controls can be used for controlling ethics, for instance clan control or cultural control. However, there are also more specific control systems created in literature concerning ethics. The next section will show these more specific models.
4.2 Management Control and Ethics
For management control systems it is essential to create models that result in desired behavior. Therefore decision models are important generators of controlling ethics. Ho (2010) states that organizations can develop several control mechanisms, however, it is impossible to control every situation in every environment; the individual decision is still highly determinative. Hence, several important descriptive ethical decision-making models in the area of behavioral science (e.g. Rest, 1984, 1986; Trevino, 1986; Ferrell and Gresham, 1985; Bommer et al., 1987; Stead et al., 1990; Jones, 1991;Brass et al., 1998; and Wittmer, 2005) have been developed. These models identify the factors affecting an individual’s ethical decisions in an organizational context. Individual characteristics, situational variables, and environmental forces are considered as influences on the ethical standards and decision making of employees. Ho (2010, p.412) states that ‘over the past 30 years, in order to curb unethical behavior and preserve corporate image, corporate management in general has used different instruments to exert control over the ethical behavior of employees’. This paragraph will concentrate on the control of ethics.
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Figure 1, (Ho, 2010, p.412)
The basics of business ethics is summarized by Kuncer (1993, p.38) as having two key components: ‘alerting employees to the ethical dimensions of their decisions and actions; and providing them with broad guidelines to cope with ethical dilemmas’. In literature those factors that can influence
employee ethical decision making or ethical behavior in an organizational context have been discussed. Examples of researchers as stated by Ho (2010) are:
Ferrell and Gresham (1985), who consider that the factor ‘opportunity’ has a major impact on the process of decision making. The existence of a corporate code should be classified as one of the factors influencing the variable of ‘opportunity’… Author Trevino (1986) introduced a Person-situation model, suggesting that employees’ ethical decision making could be guided through the development of formal codes … Brass et al. (1998) created a social network theory model stating that codes of ethics can significantly decrease the prevalence of unethical behavior in organizational contexts. This numeration suggests that the degree of ethical decision making at individual level is affected by the relationships within an
organization. (pp. 413-414)
Based on the Introduction and the findings of chapter three it is really interesting to see to what extent these models really give relevant insights into ethical behavior. Therefore this thesis will show empirical research on these models.
In the first place some studies suggest that codes of ethics are not effective. Ho (2010) refers to scholars such as Ford and Richardson (1994), Schwartz (1998), Loe et al. (2000), O’Fallon and Butterfield (2005), and Stevens (2008), and examined the empirical literature on ethical decision making from 1977 to 2008, covering various economic sectors. Ho (2010) shows a table (Appendix 1) which presents a summary of all these studies implying codes of ethics were not successful in influencing the behavior of employees.
Appendix one shows a table that consist of four rows: Study, Sample, Method and Finding,
24 Hong Kong) do not support the hypothesis that a code of ethics is positively associated with ethical decision making or ethical behavior. The most cited reasons explaining why corporate codes failed to regulate ethical behavior based on Appendix one are:
- The mere existence of a code does not curb acts of unethical behavior;
- The contents of codes do not address the salient ethical issues of the industry most corporate codes were developed by top management without associated communication and enforcement;
- Policies and codes had not become part of the corporate culture (Ho, 2010, pp.416-417). Nevertheless, a number of recent studies showed that codes can be effective when certain
parameters are in place (Stevens, 2008). When discussing these studies the control types influencing ethical behavior can be found. Ho (2010) demonstrates another table (Appendix 2) showing an overview of those studies of corporate codes studies that support effective outcomes (this table has the same lay-out as Appendix 1). Appendix two shows evidence that ethical codes can be effective and also highlights the conditions leading to their effectiveness. For instance, Ho (2010, p. 417) refers to Schwartz (2004) who showed that codes were effective when ‘they have features of readability, relevance, and are written in a positive tone’. Also, ‘formal communication (training sessions, classes, and directives) were less effective than informal communication through the normal social network’. When codes were embedded in an organizational climate and leaders were communicating the values of ethics by demonstrating appropriate behavior, this did make an appreciable difference (Trevino et al., 1999; Trevino and Weaver, 2003; Liu et al., 2004). Webley and Werner (2008) mention that firms need to nurture an ethical culture on a continuing basis. And Ho (2010, p. 417) also refers to Somers (2001) who discovered that ‘management accountants better understood right and wrong in those organizations with well-communicated corporate codes than those without’.
Summarizing, all these studies show that the existence of a widespread culture and communication are the two primary drivers for success of code effectiveness. It shows that if behavior of managers is consistent with the given codes, their behavior can effectively influence other employees in the organization. Therefore, a manager as a role model is helpful in behaving ethically (Ho, 2010). Empirical research shows that managers should encourage ethical consciousness in their
organizations, showing their support and care about ethics and should communicate well. Codes should be readable, understandable and written in a positive tone. An institutionalization of ethical norm and practices should be incorporated into all organizational levels. Moreover, formal
communication is less effective, and should be replaced by more informal communication. Also, the mere existence of a code does not curb acts of unethical behavior.
These contemporary advices could be clearer. Therefore, referring to Webley and Werner (2008), ways of achieving a corporate culture, based on the previous theories, should include:
1. An agreement on explicit core values; 2. A relevant and ‘user friendly’ code of ethics;
3. Continuous training and ‘awareness raising’ programs;
4. Means for employees to raise issues without fear of retaliation; 5. Employee engagement (consultation and feedback);
6. Consistent communication and exemplary behavior from both top and other levels of Management;
25 8. Board level oversight and reporting.
4.3 Critiques on Current Management Control Theories
The control literature so far is helpful, but does not solve the gap. This thesis shows criticism on the manner management control literature deals with ethics. This criticism is divided in two arguments. The first argument is based on the vague contribution of individuals within management control systems. Generally, control systems are collective-oriented, while ethical behavior is something individual. The question is to what extent collective management control systems can dominate ethical individual behavior. For instance, there is criticism on collective-oriented control theories like the agency theory and the institutional theory. A free-rider problem arises using the agency theory. Kyriacou (2011, p.1) finds that ‘individual members of large groups can more cheaply bias
downwards their beliefs about the immorality of their free-riding, thereby circumventing internal moral constraints on such behavior. These factors point out the importance of political
decentralization as a way of reducing free-riding’. Moreover, the institutional theory, for example, stated by Burns and Scapens (2000) is criticized because it is not clear how changing behavior takes place at the individual level and also the role of human agency is not obvious. These theories cannot explain the relationship between institutions (meso) and individuals (micro). Both theories cannot explain how changes at the local level feed institutions. Therefore, the need for some theories focusing on the role of the individual has become larger; an example of such a theory is the practice theory of Bourdieu (1990). The practice theory (Bourdieu, 1990) argues that everyday actions are consequential in producing the structural contours of social life. Behavior arises from ad-hoc situations. The logic of behavior is not equal for everyone; it is not based solely on institutions or assumptions. Instead it derives from local situations, representing an own logic. When using collective rules and codes, phenomena like gamesmanship could occur. This type of behavior or method is technically not illegal but is used to obtain a serious advantage. Lumpkin, Stoll and Beller (1994) describe gamesmanship as pushing the rules to the limit without getting caught, using whatever dubious methods possible to achieve the desired end. Moreover, empirical findings concerning business ethics show that groups do not always take notice of unethical behavior. In the survey of the UK National Ethics at Work Survey, one in two respondents said they had noticed unethical behavior but had failed to report it. A collective way of presenting ethics results in employees feeling less committed to report unethical behavior but also less committed to act according to ethical policies.
26 not fit within particular individual lives. Within all these uncertainties and stressful situations, it is hard to believe that organizations still expect that employees strictly follow ethical policies. When employees act ethically, the ethical values have to fit within their own environment. This lack of attention to human nature is also noticed by Brass et al. (1998), who proposed a social network theory model and claimed that many studies have neglected the fact that the ethical behavior of employees results from a dynamic and interactive social network (in an organizational setting). Another criticism, also based on the bad connection between theory and practices, is mentioned by Webley and Werner (2008), stating that there are three significant factors that hinder an ethical culture: lack of commitment of top management, pressure to meet targets and fear of retaliation. Especially the pressure to meet targets and fear of retaliation are relevant. Webley and Werner (2008) report that in 2005, the American Management Association carried out a global business ethics survey among more than 1000 executives and managers (AMA, 2006).
The respondents were asked, among other things, what they considered to be the factors that are most likely to cause people to compromise an organization’s ethical standards. The factor rated the most important, mentioned by nearly 70% of the respondents, was ‘pressure to meet unrealistic business objectives/deadlines’. (p. 408)
So when reward systems are disproportionately dependent on the achievement of goals set, the temptation to ‘cut corners’ can be difficult to resist (Webley & Werner, 2008). The focus on achieving (short-term) results and other organizational pressures is likely to create a culture where employees are afraid to raise ethical concerns. Unfortunately, a lot of general management control systems are focused on obtaining profit in the short term. Moreover, Schwartz (1998, p.421) identifies that ‘the subjects of many empirical corporate codes studies focus on business school students, graduates, middle management, accountants and salesmen’. These particular employees in an organization can hardly reflect the general situation of all employees within organizations (Schwartz, 1998).
Organizations do suffer from those specific unethical individuals causing damage. Those individuals are not covered in a particular or general subject group.
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5. Virtue Ethics
The purpose of this chapter is to explain the Virtue Ethics approach, therefore many sources will be used to explain it correctly. To attain the objective of this thesis, explanations are necessary to understand the contribution of Virtue Ethics.
5.1 A Virtue Ethics Perspective
In Aristotle’s Nicomachean Ethics (ca. 325 B.C), the central questions are about character. Aristotle begins by asking ‘What constitutes the good man?’ and his answer is ‘An activity of the soul in conformity with virtue’. To understand ethics, therefore, people must understand what makes someone a virtuous person (Rachels & Rachels, 1999, p.173; Kenny, 2006).
A theory of Virtue Ethics should have several components as stated by Rachels and Rachels (1999): 1. An explanation of what a virtue is;
2. A list specifying which character traits are virtues; 3. An explanation of what virtues consist of;
4. An explanation of why these qualities are good ones for a person to have.
The first point is already mentioned in the Design of the Study (Chapter 2);Aristotle said that a Virtue is a trait of character manifested in habitual action. The Virtue of honesty, for example, is not
possessed by someone who tells the truth only occasionally. ‘The honest person is truthful as a matter of course; the actions spring from a firm and unchangeable character’ (Rachels & Rachels, 1999, p.175). Mintz (2006, p.98) states that ‘rather than centering on the reasons for action, Virtue Ethics attempts to instill certain character traits that lead to taking the right action’. Therefore, Rachels and Rachels (1999, p.176) define virtues as a ‘trait of character, manifested in habitual action
that it is good for a person to have’.
The second point is concerned with specifying a virtue’s character traits. There are many virtues described by Aristotle; these virtues fall clearly into two groups. There are, on the one hand, traits that are valued in all communities, such as self-control, courage, friendliness and truthfulness. On the other hand, there are virtues that are more or less optional, that belong to certain social forms, or that are matters of purely individual choice (Rachels & Rachels, 1999; Kenny, 2006). Mintz (1996) also describes a difference in virtues but in another way. Mintz (1996, p.829) mentions that ‘the good of man is defined as an activity of the soul in conformity with virtue’. This soul has a rational part (thought and reason) and an irrational part (physiological needs and desires). Aristotle's virtues are differentiated in line with this division of the soul (Mintz, 1996). Some virtues are "intellectual" (wisdom and understanding), the rational part. And others are ‘moral’ (generosity and self-control) ,the irrational part). ‘An intellectual virtue is the consequence of teaching and for that reason requires experience and time to be cultivated’ (Mintz, 1996, p.829). Some of these intellectual virtues are presented in Appendix 3.
28 ground between excess and defect (Kenny, 2006). A virtuous man eats the ‘right amount’ and takes the ‘right action’. ‘What constitutes the right amount or right action, Aristotle says, may differ from person to person and situation’ (Kenny, 2006, p.70). Kenny (2006, p.70) states further that ‘the doctrine of the mean is not meant as a recipe for correct living; people have to find out themselves what the right amount is in each case’. People do find the right action by learning. Once people have learned, they have, according to Aristotle, ‘the right prescription’ in the mind. This ‘right prescription’ is the basis for virtues behavior.
The virtues, besides being concerned with means of action and passion, are themselves means, in the sense that they occupy a middle ground between two contrary vices. While all moral virtues are means, and concerned with means, not all actions and passions are the kinds of things that can have means. Aristotle gives as examples of excluded actions murder and adultery. (Kenny, 2006, p.71)
Aristotle states that a virtue is not inborn, but results from training. People become virtuous, obtain the right prescription, by performing virtuous acts (Koehn, 2007). Walker and Ivanhoe (2007) believe also that within the Virtue Ethics approach there is a lot of attention for education because it focuses on the use of education to motivate students to learn.
Thirdly, what do these virtues consist of? Generally there is to say, that people should be
‘conscientious, compassionate, and tolerant’ (Rachels & Rachels, 1999, p.176). It is more difficult to say exactly what these character traits consist in. Rachels and Rachels (1999) believe that each of the virtue has its own distinctive features and raises its own distinctive problems. Virtues are important in certain ways because it depends on the particular virtue in question. For example, courage is a good thing because life is full of dangers, and without courage people would be unable to cope with them. However, ‘Aristotle believed that it is possible to give a more general answer to the question, namely, that the virtues are important because the virtuous person will fare better in life. Virtues are needed to conduct people’s lives well’ (Rachels & Rachels, 1999, p.182).
To fully understand Aristotle’s point here, and also outline the fourth point, the following explanation is helpful:
On the most general level, people are rational and social beings that want and need the company of other people. So people live in communities among family, friends, and fellow citizens and work in companies. In this setting, such qualities as loyalty, fairness, and honesty are needed to interact with all those people successfully; doing business is based on trust. On a more individual level, people’s lives might include working at a particular kind of job and having particular sorts of interests. Other virtues may be necessary for successfully doing the job or pursuing those interests. (Rachels & Rachels, 1999, p.182)
29 more psychological than philosophically abstract and analytical, being meant to discover how a good person is to act.
The question arises of what a fully virtuous act is in practice. Whetstone (2001) states that according to Aristotle, it must satisfy three conditions:
(1) the virtuous person does the act knowingly, aware of the pertinent facts and the practical wisdom needed to apply the act so as to fit its appropriate purpose;
(2) the motive for choosing the act must be simply because it is virtuous, not for personal advantage or other non-ideal motives, this causes a long-term perspective by making decisions;
(3) the act must be as a result of a steady state of character disposition, not a one-off or impulsive act, but irrespective of particular times and persons. (p.104)
Referring to Whetstone (2001, p. 104) ‘a virtuous act is thus a rational act based on a wise, purposeful assessment of the factual situation, chosen for a pure motive and consistent with a steady disposition of the actor’s character’. Virtues differ from person to person, virtues do in fact differ from society to society. Societies provide systems of values, institutions, and ways of life within which individuals’ lives are fashioned. It may be countered that certain virtues will be needed by all people in all times (Rachels & Rachels, 1999).
Next to the Virtue Ethics perspective there are more ethical theories. To figure out the differences between contemporary ethical theories and Virtue Ethics a short and basic overview of some ethical perspectives will be given. Other ethical theories are, for instance, Utilitarianism and Kant’s theory. Utilitarianism states, in general: people ought to do whatever will promote the greatest happiness for the greatest number. Kant’s theory’s viewpoint is that it is the duty of people to follow rules that they want to be universal laws—rules people would wish to have followed by all people in all circumstances. Virtue Ethics is in this respect a normative, agent-based approach to ethics.
Rather than centering on the reasons for action, Virtue Ethics attempts to instill certain character traits that lead to taking the right action. Virtue Ethics emphasizes both ethical thought and ethical motivation (Mintz, 2006, p.98).
However, there has been some criticism of Virtue Ethics. This criticism will be discussed briefly in the next section.
5.2 Arguments Against Virtue Ethics
30 expected ethical theory to tell them something about what they ought to do, and it seems to that Virtue Ethics is structurally unable to say much of anything about this issue’. Therefore, Louden (1984) believes that a virtue-based ethics approach will be particularly weak in the areas of casuistry and applied ethics.
Louden (1984) believes further that every human being is morally fallible: ‘Since Virtue Ethics its conceptual scheme is rooted in the notion of the good person is unable to assess correctly the occasional (inevitable) tragic outcomes of human action’ (p.230). More difficulties arise with Virtue Ethics, like the difficulty of identification. For instance, the Virtue Ethics approach has no objective list of ethics. This can be interpreted as vague, and even as not realistic. Louden (1984) states that unfortunately, each segment of society has not only its own interests but also its own set of virtues as well. There is for example, no general agreement upon and significant expression of desirable moral character. This absence of agreement regarding human purposes and moral ideals seems to drive people (partly out of lack of alternatives) to a more legalistic form of morality (Louden, 1984, p. 235).
Last of all, Virtue Ethics appears to praise some behavior that people would generally view as immoral. Louden (1984) claims that:
The focus on good and bad people rather than on right and wrong actions may lead to a peculiar sort of moral backsliding. Because the emphasis in Virtue Ethics is on long-term, characteristic patterns of behavior, its advocates run the risk of overlooking occasional lies or acts of selfishness on the ground that such performances are mere temporary aberrations, acts out of character. (Louden, 1984, p.231)
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6. Method of Analysis
Before starting the analysis, a general problem regarding ethics and controlling will be outlined in the next section. Hence, an interpretation scheme will be presented as the method of analysis. This interpretation scheme shows the differences and similarities between Virtue Ethics and management control literature. These differences and similarities are the basis of the analysis.
6.1 Controlling Ethics is Impossible
The general problem is: it is impossible to eliminate unethical behavior. Of course, the use of internal and external controls makes it possible to reduce unethical behavior because employees know they ‘are being watched’. Likewise, organizations can use behavioral constraints or redundancy types of control to reduce unethical behavior. Therefore, organizations develop codes, create an office of ethics and try to monitor personnel. Similarly, the attention to whistleblowing is another way of increasing the monitoring of unethical behavior. However, many people do not take the risk of blowing the whistle (Vadera, Aguilera & Caza, 2009). Nevertheless, most organizations trust in the idea that employees actually do follow ethical codes.
The difficult aspect is that unethical people can or will frequently lie on screening tests, or will be seduced into behaving unethically in certain situations. It is impossible for an organization to control every situation and fully filter out those unethical people. Unethical behavior cannot be tracked in excel files or other types of control systems. A good example of this difficult aspect was raised in Chapter three, in the example of Freddy Mac, which spent $115 million to develop more than 50 new systems intended to improve the integrity of the mortgage lender’s financial reports. This example illustrates that monitoring systems are costly and cannot guarantee the absolute observation of unethical behavior.
Still, some control models are helpful for instance, the clan control of Ouchi (1979). This model presents ways to deal with ethics. According to this model, organizations should rely heavily on ritualized, ceremonial forms of control. Also, Merchant and van der Stede (2007) use their personnel and cultural controls to control and monitor (un)ethical behavior. However, based on the examples given so far in this thesis, these control systems need some adjustments for effective use with respect to ethics in organizations.
