Chapter 4

The Corporate Culture –

Impact and Implications

McGraw-Hill/Irwin
Business Ethics: Decision-Making for Personal Integrity 4-2
& Social Responsibility, Copyright © 2008
1-2
The McGraw-Hill Companies, Inc. All rights reserved.
 Ethics is tougher than
you think . . .

“Our plans miscarry because they have no aim. When a person does not
know what harbor he [or she] is making for, no wind is the right wind.”
- Seneca

“A leader knows what’s best to do; a manager merely how best to do it.”
-Ken Adelman

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 Chapter Objectives
 After exploring this chapter, you will be able to:
1. Define corporate culture
2. Explain how corporate culture impacts ethical decision-making
3. Discuss the differences between a compliance culture and a values-
based culture
4. Discuss the role of corporate leadership in establishing the culture
5. Explain the difference between effective leaders and ethical leaders
6. Discuss the role of mission statements and codes in creating an ethical
corporate culture
7. Explain how various reporting mechanisms such as ethics hotlines and
ombudsman can help integrate ethics within a firm
8. Discuss the role of assessment, monitoring, and auditing of the culture
and ethics program
9. Explain how culture can be enforced via governmental regulation
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 Opening Decision Point:
Ethics Codes and Programs
 List the issues that you think should be addressed in a code of ethics.
 Other than a code of ethics, what other elements would you include in
an ethics program?
 How will you define “success?” Are there any facts that you will need
to gather to make this judgment?
 How would you measure success? How will you measure whether your
ethics program is “working?”
 Who will you define as your primary stakeholders?
 What are their interests in your program and what are the impacts of
your program on each stakeholder? How will the measurement of the
program’s success perhaps influence the type of people attracted to the
firm or who are most motivated within your organization?
 How will you answer the CEO’s questions about her own role in
promoting ethics? 4-5
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 How different La Salle in terms of culture with your Junior
High School?
 Did you change as you matured from Junior High School?

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 What is Corporate Culture?

 A shared pattern of beliefs, expectations and meanings that

influence and guide the thinking and behaviors of the
members of that organization.
 This culture shapes the people who are members of the
organization.

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 What is Corporate Culture?

 If culture involved a shared pattern of beliefs, expectations,

and meanings, then we will find it at different levels
including:
 Religious, ethnic, linguistic affiliation
 Generation
 Gender
 Social Class
 Organization/corporate
 Family

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 What is Corporate Culture?

 If culture involved a shared pattern of beliefs, expectations,

and meanings, then we will find it at different levels
including:
 Religious, ethnic, linguistic affiliation
 Generation
 Gender
 Social Class
 Organization/corporate
 Family

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 Geert Hofstede
6 Dimensions of National Culture
1. Power distance: The distance between individuals at different
levels of a hierarchy (more equal = low power distance).
2. Individualism vs. collectivism: The degree to which people prefer
to act individually or in groups.
3. Uncertainty avoidance: The extent to which people are
comfortable with uncertainty, ambiguity, change, and risks.
4. Time and order orientation: A high long-term orientation (LTO)
suggests a comfort with long-term commitments, traditions, and
rewards linked to hard work, strong relationships, and status. A
low LTO indicates that change may occur more rapidly.

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 Geert Hofstede
6 Dimensions of National Culture
4. Masculinity vs. femininity: A low masculinity score indicates
greater equality, stronger maintenance of warm personal
relationships, service, care for the weak, solidarity. A high
masculinity score suggests a strong culture of assertiveness,
success, and competition.
5. Indulgent vs. restrained: The extent to which people try to control
their desires and impulses.

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 Organization’s Culture

 Cultures change; but modifying culture—indeed, having any

impact on it at all—is a bit like moving an iceberg. The
iceberg is always moving and if you ignore it the iceberg will
continue to float with whatever currents hold sway at the
moment.
 One person cannot alter its course alone; but strong leaders—
sometimes from within, but often at the top— can have a
significant impact on a culture.
 A strong business leader can certainly have a significant
impact on a corporate culture.
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 Culture = Value
Culture does not = Value?
 A firm’s culture can be its sustaining value – that which
offers it direction and stability during challenging times.
 It can, however, also serve to constrain an organization to the
common ways of managing issues – “that’s how things have
always been done here,” “that’s our prevailing climate.”
 The stability that can be a benefit at one time can be a barrier
to success in another.

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 Culture of Toyota

 “The 14 Principles of the Toyota

Way”—as the basis for its high
quality and consistent customer
satisfaction.
 “Toyota Way” prevented the company
from responding to reports of
unintended acceleration in many of its
vehicles in a responsible, swift,
effective, and transparent way.
 Japanese components of the “Toyota
Way” to Western employees, thus
causing further mishaps.
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 Culture of Zappos
 Employees persuade CEO to create code of
ethics. CEO developed 10 core values
through emailing all of his employees.
 Computer glitch emerged on 6pm.com, a
Zappos-owned bargain retailer. A flaw in the
website caused the price of every product on
the site to be listed as $49.95
 Company agreed to honor every transaction
that occurred during those six hours, costing
Zappos over $1.6 million!
 Zappos lived its core values, both continuing
to build open and honest relationships with
communication by honoring its
communication during those six hours.
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 Defining a culture defines the culture,
which defines the culture . . . .
 Culture is partially based on each participant’s perception of the
culture, which may actually impact the culture in a circular way – a
culture exists, we perceive it to be a certain type of culture, we
respond to the culture based on our perception and we thereby
impact others’ experience of the culture.
 Culture is also present in the following elements:
 Tempo of work
 The organization’s approach to humor
 Methods of problem-solving
 The competitive environment
 Incentives
 Individual autonomy
 Hierarchical structure
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What is culture?

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 Linking Culture to Ethics

 Each of the factors in the decision-making model we have

already discussed, from fact gathering through moral
imagination to assessment, can be helped or hindered by the
social environment surrounding an individual.
 An ethical culture would be one in which employees are
empowered and expected to act in ethically responsible ways
even when the law does not require it.
 A corporate culture sets the expectations and norms that will
determine which decisions get made.

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 Super Typhoon Yolanda

 What do you think were the

causes of the Government’s
slow response to the victims in
the Eastern Visayas?
 Can you identify the cultural
characteristic of the government
that proved them incapable to
handle such big disaster?

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 Linking Culture to Ethics
 When we talk about decision-making, it is easy to think in
terms of a rational, deliberative process in which a person
consciously deliberates about and weighs each alternative
before acting.
 But the virtue ethics tradition reminds us that our decisions
and our actions are very often less deliberate than that. So the
question of where we get our habits and character is all-
important.

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 Linking Culture to
Sustainability

 An ethical culture can also have a direct and practical impact

on the bottom line.
 If attended to and supported, a strong ethical culture can serve as a
discouragement to stakeholder damage and improve bottom line
sustainability.
 If ignored, the culture could instead reinforce a perception that
“anything goes,” and “any way to a better bottom line is
acceptable,” and destroys long-term sustainability.

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 The Importance of Culture:
Consider the Columbia Disaster
 https://www.youtube.com/watch?v=PV8S0Av_-mE
 NASA Report on Columbia evidenced that:
 “NASA’s organizational culture and structure had as much to do
with this accident as the external tank foam.”
 Lessons to be learned:
 Culture, gone wrong, can be devastating. Done right, it is central
to survival.
 Effective cultures are all about ethical values.
 Culture is not just impacted by a few high-flying personalities but
by everyone at an organization.

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 Compliance vs.
Values-Based Cultures
 In the 1990’s, there was a distinction in types of corporate
cultures:
 Compliance-based cultures (the traditional approach)
 Values-based or integrity-based cultures
 These latter cultures are perceived as more flexible and far-
sighted corporate environments.

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 Compliance Cultures

 A compliance-based culture emphasizes obedience to the

rules as the primary responsibility of ethics.
 A compliance-based culture will empower legal and audits
offices to mandate and monitor compliance with the law and
with internal codes.

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 Values-Based
Cultures
 A values-based culture is one that reinforces a particular set
of values rather than a particular set of rules.
 Certainly, these firms may have codes of conduct; but those
codes are predicated on a statement of values and it is
presumed that the code includes mere examples of the values’
application.

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 In Favor of Values . . .

 A firm can only have a certain

number of rules and the rules can
never unambiguously apply to
every conceivable situation.
 A values-based culture
recognizes that where a rule
does not apply, the firm must
rely on the personal integrity of
its work force when decisions
need to be made.
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 In Favor of Values . . .

 Values-based organizations do often include a

compliance structure within its organization.
 In fact, the Ethics Resource Center found in its research
that:

“ springboards
Strict compliance and audit programs are often
for implementing more comprehensive
programs addressing ethical values. When this
occurs, compliance goals typically do not diminish.
Rather a focus on ethical values adds important
priorities and incentives.
”
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 Culture trumps Compliance!

 Recent research shows that business leaders believe that

greater management attention needs to be focused on a
corporation's culture to achieve best practices in business.1
 A corporation's culture was found to be the most important
factor influencing the attitudes and behavior of executives.
 This factor was named twice as often as any other factor,
including share price (25 percent) and incentive compensation
(23.2 percent)!

 1http://www.workingvalues.com/Risk_WhitePaper.pdf

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 Differences in Goals
 The goals of a traditional compliance-oriented program may
include meeting legal and regulatory requirements; minimizing
risks of litigation and indictment; and improving accountability
mechanisms.
 The goals of a more evolved and inclusive ethics program may
entail a broader and more expansive application to the firm,
including:
 maintaining brand and reputation;
 recruiting and retaining desirable employees;
 helping to unify a firm’s global operations;
 creating a better working environment for employees; and
 doing the right thing in addition to doing things right.

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 The Evolving Role of Compliance Programs
into Values-Based Programs
Traditional
Audit focus
Transaction-based
Financial account focus
Compliance objective
Policies and procedures focus
Multiyear audit coverage
Policy adherence
Budgeted cost center
Career auditors
Methodology: Focus on policies,
transactions and compliance
Progressive (best practices)
Business focus
Process-based
Customer focus
Risk identification, process
improvement objective
Risk management focus
Continual-risk-reassessment
coverage
Change facilitator
Accountability for performance
improvement results
Opportunities for other
management positions
Methodology: Focus on goals,
strategies and risk management
processes
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 What must exist to change, alter,
and enrich a culture?

"At every crossing on the road that leads to the future, each
progressive spirit is opposed by a thousand appointed to
guard the past."

- Maurice Maeterlinck (Belgian playwright

and Nobel Prize-winning author, 1862-1949)

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 An Ethical Corporate Culture or
Culture Change . . .

 If done right . . . .
 Positive impact on culture
• Employees feel a sense of responsibility and accountability for their actions
and for the actions of others.
• Employees freely raise issues and concerns without fear of retaliation.
• Managers model the behaviors they demand of others
• Leadership understands the pressure points that drive unethical behavior.
• Leadership develops processes to identify and remedy those areas where
pressure points occur.
 Prevention action against stakeholder damage
 Improves bottom line sustainability

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 An Ethical Corporate Culture or
Culture Change . . .
 If ignored . . . .
 Creates presumption that
“anything goes”
 Reinforces “every person for
him/herself”
 Destroys long-term sustainability
 (Examples? Andersen, Enron, but
also Boeing & WorldCom)
https://www.youtube.com/watch?v=7g_d-
phoUrU

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 The Role of the Leader in
Corporate Culture
 The goal of corporate culture is to cultivate values,
expectations, beliefs, and patterns of behavior that best and
most effectively support ethical decision-making
 Responsibility of corporate leadership to steward this effort.
 Leaders are charged with this duty in part because
stakeholders throughout the organization are guided to a large
extent by the “tone at the top.”

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 Leadership: Setting
the cultural tone
 Beyond personal behavior, leadership sets the tone through
other mechanisms such as the dedication of resources.
 Ethical business leaders not only talk about ethics and act ethically
on a personal level, but they also allocate corporate resources to
support and promote ethical behavior.
 There is a long-standing credo of management: “budgeting is all
about values.”
 More common versions are: “put your money where your mouth
is,” and “walk the talk.”

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 Leadership: Setting the cultural
tone as an “Ethical Leader”
 Research shows that:
 It is critical that the leader is perceived as having a people-orientation, as
well as engaged in visible ethical action.
 Other important traits, according to research, include receptivity, listening,
and openness, in addition to the more traditionally considered traits of
integrity, honesty, and trustworthiness.
 Being perceived as having a broad ethical awareness and concern for
multiple stakeholders, and using ethical decision processes are also
important.
 Those perceived as ethical leaders do many of the things “traditional
leaders” do (e.g., reinforce the conduct they are looking for, create standards
for behavior, etc.), but they do that within the context of an ethics agenda.
 People perceive that the ethical leader’s goal is not simply job performance,
but performance that is consistent with a set of ethical values and principles.
 Finally, ethical leaders demonstrate caring for people (employees and
external stakeholders) in the process.
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 LEADERSHIP

An organization is only
as ethical as its
leaders,
and only as ethical as
its leaders can
encourage their
followers to be.
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 The Ethical Leader . . .
 However, as mentioned previously, all of these traits and
behaviors must be visible.
 Making courageous decisions in tough situations represents a
way in which ethical leaders get noticed.
 Ethical leaders are “courageous enough to say ‘no’ to conduct
that would be inconsistent with [their] values.”

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 Effective Leaders vs.
Ethical Leaders
 Being perceived as a leader plays an important role in a
leader’s ability to create and transform an ethical corporate
culture.
 What do we mean by an “ethical” leader? A good leader is
simply anyone who does well what leaders do. Good leaders
are effective at getting followers to their common destination.

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 Effective Leaders vs.
Ethical Leaders
 One key difference lies with the means used to motivate
others and achieve one’s goals.
 Effective leaders might be able to achieve their goals through
threats, intimidation, harassment, coercion. One can also lead
using more attractive means such as modeling ethical
behavior, persuasion, or simply by dint of one’s institutional
role.

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 Effective Leaders vs.
Ethical Leaders
 Certainly ethically appropriate methods of leadership are
central to becoming an ethical leader.
 Creating a corporate culture in which employees are
empowered and expected to make ethically responsible
decisions is a necessary part of being an ethical business
leader.
 But, while some means may be ethically better than others
(e.g., persuasion rather than coercion), it is not the method
alone that establishes a leader as ethical.

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 The Ends of Ethical
Leadership
 One cannot be a leader, and there cannot be followers, unless
there is a direction or goal towards which one is heading.
 In the business context, productivity, efficiency, and
profitability are minimal goals. A business executive who
leads a firm into bankruptcy is unlikely to qualify as an
effective or good leader.

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 Definitions of
Ethical Leadership
“The distinguishing mark of leadership and
executive responsibility is influencing the
moral behavior of others.”

"Leadership is the creation and

fulfillment of worthwhile opportunities
by honorable means"
 Leadership (and Maintenance) of the
Environment
 Key points:
 “The CEO sets the tone for an organization’s culture… if you
separate yourself from everybody else…your employees are
going to get the wrong message.” (Alfred P. West Jr. CEO SEI
Investments)
 Ethical behavior by employees is directly attributed to the
perceived ethics of their supervisors and co-workers.
 Leadership involvement in the ethics and compliance effort
can help further its success.

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 Building a Values-Based
Corporate Culture
 One of the key manifestations of ethical leadership is the
articulation of values for the organization.
 It is the leader’s responsibility to ensure that the firm is
guided by some set of organizing principles that can guide
employees in their decision-making processes.

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 The Role of the
Mission Statement
 In the absence of other values, the only value is profit – at any
cost.
 Without additional guidance from the top, a firm is sending a
clear message that a worker should do whatever it takes to
reap profits.
 A code of conduct then may more specifically delineate this
foundation both for internal stakeholders such as employees,
as well as external stakeholders such as customers.
 The code has the potential to therefore both enhance
corporate reputation but also provide concrete guidance for
internal decision-making, thus creating a built-in risk
management system.
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 Creating an Ethical
Corporate Culture
Our plans miscarry because they have no aim. When a
person does not know what harbor s/he is making for, no
wind is the right wind.
- Seneca

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 Developing The Culture through
a Code
 The second step in the development of guiding principles for
the firm is the articulation of a clear vision regarding the
firm’s direction.
 The third step in this process is to identify clear steps as to
how this cultural shift will occur. You need to have processes
and procedures in place that support and then sustain that
vision.
 Finally, to have an effective code that will successfully
impact culture, there must be a belief throughout the
organization that this culture is actually possible, achievable.
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 Further Integration
of the Culture
 Integrating an ethical cultural throughout a firm and
providing means for enforcement is vitally critical both to the
success of any cultural shift and to the impact on all
stakeholders.
 One of the most determinative elements of integration is
communication since, without it, there is no clarity of
purpose, priorities or process.
 Communication of culture must be incorporated into the
firm’s vocabulary, habits and attitudes to become an essential
element in the corporate life, decision-making and
determination of success.

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 Challenging a Firm’s Integration:

 Consider whether incentives are in the right place to

encourage ethical decision making and whether ethical
behavior is evaluated during a worker’s performance review.
 Are employees comfortable raising questions relating to
unethical behavior?
 Are there multiple and varied reporting mechanisms in place?
 Do they believe that their reports will be free from retaliation?
 What can be done to ensure that employees who violate the
company code are disciplined appropriately, even if they are
good performers?

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 Reporting Structures –
Impact on Culture

 “Whistleblowing” involves the disclosure of unethical or

illegal activities to someone who is in the position to take
action to prevent or punish the wrongdoing.
 Whistleblowing can expose and end unethical activities, but it
can also seem disloyal, it can harm the business, and it can
extract significant costs on the whistleblower.
 Whistleblowing can occur internally or externally.

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 Assessing and
Monitoring the Culture
Unfortunately, if one cannot measure
something, it often declines in importance.

 Such is the same result with regard to culture.

 If we cannot measure, assess, monitor culture, it is difficult to
encourage others throughout the organization to pay attention
to it.
 Yet, monitoring and an ongoing ethics audit allow
organizations to uncover silent vulnerabilities that could pose
challenges later to the firm, thus serving as a vital element in
risk assessment and prevention.
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 Assessing and Monitoring the
Culture – How do you do it?
 But how do you detect a potentially damaging or ethically-challenged
corporate culture – sometimes referred to as a “toxic” culture?
 The first clear sign would be a lack of any generally accepted base
values for the organization, as discussed above.
 In addition, there are warning signs in the various component areas of
the organization. How does the firm treat its customers, suppliers,
clients, workers? The management of its internal and external
relationships is critical evidence of its values. How does the firm
manage its finances?
 Of course, a firm can be in a state of financial disaster without engaging
in even one unethical act (and vice verse), but the manner in which it
manages and communicates it financial environment is telling.

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 Mandating and Enforcing Culture:
The Federal Sentencing Guidelines
 When internal mechanisms for creating ethical corporate
cultures prove inadequate, the business community can expect
governmental regulation to fill the void.
 The United States Sentencing Commission, an independent
agency in the United States Judiciary, was created in 1984 to
regulate sentencing policy in the federal court system.
 In mandating sentencing procedures, Congress through the
USSC has been able to incorporate the original purposes of
sentencing in their procedures, bring some of these challenges
under control.
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 The U.S. Federal Sentencing Guidelines
 Beginning in 1987, the USSC prescribed mandatory Federal Sentencing
Guidelines that apply to individual and organizational defendants in the
federal system.
 The court inputs information into a sentencing grid and determines the
offender’s guideline range, subject to adjustments.
 In its October 2004 decision in U.S. v. Booker, however, the Supreme
Court severed the “mandatory” element of the guidelines from their
advisory role, holding that their mandatory nature violated the Sixth
Amendment right to a jury trial.
 Accordingly, though no longer mandatory, a sentencing court is still
required to consider guidelines ranges, but is also permitted it to tailor a
sentence in light of other statutory concerns.
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 The U.S. Federal Sentencing
Guidelines – Relationship to Ethics
 The relevance of these guidelines to our exploration of culture is that
the USSC strived in its guidelines to create both a legal and an ethical
corporate environment through these adjustments.
 The guidelines seek to reward corporations who create an effective
ethics and compliance system so that they are not penalized (or the
penalty is reduced) if they have an effective program but they find
themselves in court as a result of a bad apple or two.
 On the other hand, firms who did not have effective ethics and
compliance systems would be sentenced additionally to a term of
probation and ordered to develop a program during that time.

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 The U.S. Federal Sentencing
Guidelines – Relationship to Ethics
 In a 1997 survey of members of the Ethics Officers
Association (now Ethics & Compliance Officers Assn.), 47%
of ethics officers reported that the guidelines were an
influential determinant of their firm’s commitment to ethics
and another Commission study showed that the guidelines
influenced 44.5% of these officers to enhance their existing
compliance programs.

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 Discussion of Opening Decision Point:
Ethics Codes and Programs
 This Decision Point asks you to define the “success” of an ethics
program, an extraordinary challenge even for those in this business
for many years.
 One way to look at the inquiry would be to consider the measures by
which you might be willing to be evaluated, since this is your
project.
 Overall, you will need to explore whether there are pressures in your
environment that encourage worker misconduct.
 You will need to consider whether there are systematic problems that
encourage bad decisions. Have you identified all of the major legal,
ethical, and reputational risks that your organization faces, and have
you determined the means by which to remediate those risks?
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 Discussion of Opening Decision Point:
Ethics Codes and Programs

 Because you will encourage the performance that you plan to

measure, it is important to determine whether you will be
most concerned with the end results or consequences, or with
the protection of particular values articulated by your
program or codes.
 If you measure outcomes, alone, you will have a singular
focus on the achievement of those outcomes by decision-
makers.
 If you measure the protection of rights, alone, you may be
failing to consider the long-term implications of decisions in
terms of their costs and benefits to the firm.
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 Chapter Four Vocabulary Terms
 After examining this Chapter, you should have a clear understanding of the
following Key Terms and you will find them defined in the Glossary:

 Code of Conduct
 Compliance Environment
 Culture
 Ethics Officers
 Federal Sentencing Guidelines
 Mission Statement
 United States Sentencing Commission
 Values-based Organization
 Whistleblowing

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 Seatwork

 After completing her sales and ethics training with her new
employer, a major appliance manufacturer, Jane Adams was
assigned to work as a trainee under Ann Green, one of the
firms most productive sales reps. At the end of the first week,
Jane and Ann were sitting in a motel room filling out their
expense vouchers for the week.

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 Seatwork

 When Jane remarked to Ann that her training had stressed the
importance of accurately reporting expenses, Ann launched
into a long explanation of how the company’s expense
reporting procedures resulted in underpayment of the actual
costs the reps incurred. She informed Jane that all the East
Coast sales people made up the difference by padding their
under $25 expenses, which did not require receipts. Their
rule of thumb was to inflate total expenses by 25
percent. When Jane questioned whether that was honest, Ann
said that even if the reported expenses exceeded actual
expenses, the company owed them the extra money, given the
long hours and hard work they put in. 4-62
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 Seatwork

 Jane said she did not believe that reporting fictitious expenses
was the correct thing to do and that she would simply report
her actual expenses. Ann responded in an angry tone that to
do so would expose all the sales reps. As long as everyone
cooperated, the company would not question the expense
vouchers. However, if one person reported only actual
expenses, the company would be likely to investigate the
discrepancy between her expense level and those of the
others, and the other sales reps could lose their jobs.

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 Seatwork

 She appealed to Jane to follow the agreed-upon

practice. They would all be better off. No one would lose his
or her job. And besides, Ann told her, the company does not
really need the money. They are very profitable already.

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 Can you identify the culture in the company?
 As Jane, would you be able to adopt that kind of culture?
 What would you do?

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Seatwork

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