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Home arrow Management arrow Strategic Management in the 21st Century. Corporate Strategy

EXTRINSIC AND INTRINSIC VIRTUE

Some scholars have expressed faith in extrinsic virtue derived from the market for corporate control. Manne argued that if an agent reneges on its duty to pursue the goals and interests of the principal, corporate performance will be compromised and stock price will drop.59 This will create an opportunity for a third party that recognizes the potential of the under-performing corporation to bid for its control and replace its management. Manne described the "market for corporate control" as a mechanism that promotes responsive corporate behavior. Easterbrook and Fishel agreed, believing that market forces impose checks on self-interest run amuck by promoting competition among management specialists, thus protecting public interest.60 Werner, too, endorses this view stating that "the share market . . . operates as the external adjunct of the corporation's internal governance structure."61

Other scholars have expressed skepticism about the extrinsic virtue of corporations responding to the market system. The scandalous behavior of corporate executives demonstrates the ineffectiveness of the market as a punitive mechanism for corporate control.62 These scholars argue that even if the market were to prove useful as a disciplinary system to discourage inappropriate behavior, it does not promote any particular vision of corporate virtue.63 Moreover, it offers no guidance for socially responsible behavior. They argue that a vision of virtuous corporate behavior must emerge from within the corporation. Hawtrey and Dullard argued that just as one or two individuals can have an adverse impact on society or an organization, a single individual acting virtuously "can make a positive difference for good."64 The recent history of whistleblowing attests to this possibility, as illustrated by the case of Jeffrey Wigand, former vice president of research and development at Brown & Williamson (see below), and Sherron S. Watkins, former vice president of corporate development at Enron.65 Hawtrey and Dullard called for a theology of corporate virtue to address conflicts of interest in boardrooms. They are not alone in making such a call.66 Their arguments suggest that to search for a virtuous corporation, one must search for virtuous executives in the corporation. These calls are based on the assumption that "being human entails living in community and developing certain virtues or skills required for a humane life with others."67 Through the experience of living in a community, human reason arrives at core virtues of humanity, truthfulness, compassion, loyalty, and justice. Why is it, then, that public trust in corporations is at an all-time low despite over 90 percent of Fortune 500 companies articulating and publicizing the ethical codes to be complied with by their employees and other stakeholders?

DECODING THE ETHICAL COMPLEXITIES

Stephen V. Arbogast examined the nature of corporate corruption and the process through which it resists ethical decision making through in-depth analysis of what transpired at Enron.68 He examined the sequence of events and developments through a series of cases, successfully tracing the mechanisms of corporate corruption and the dynamics of ethical issues through their evolutionary path within a single firm. This approach to the study of corporate ethics differs from the conventional approach, which attempts to analyze and evaluate ethical issues arising from individual decisions examined in isolation, and removed from the dynamics of sequential decisions. The conventional approach fails to capture the nuances that accompany the process of one decision leading to the next, and in which the ethical issues emerging through subsequent decisions become reality only because of prior decisions. In most business schools, to teach the nuances of ethics, students are presented with a narrative case, and warned in advance of the presence of an ethical dilemma. This approach is characterized as "quandary ethics."69 In reality, however, decision makers are not forewarned that their decision-making prowess will be tested. Decision makers identify problems, formulate solutions, and implement plans, while performing under varying degrees of stress, engaging in concomitant sets of activities, and interacting with others, all under time constraints. This suggests that the primary model for exposing students to ethical dilemmas lacks a fundamental relationship with reality, and as such, this may impact the effectiveness of how ethics is taught to future business decision makers. Moreover, if virtuous decision making is desirable, then perhaps the existing models, however taught, are inadequate in helping students to reach virtuous conclusions. Generally speaking, the broad ramifications of business ethics are too complex to be adequately analyzed through the study of a single corporation. However, as noted by Dhir, Arbogast has demonstrated that "exploration in decision making, within a single firm such as Enron, offers a variety of case studies of both (1) those decision makers who chose the slippery path for personal gain at the expense of others, and (2) those who chose to resist violations of ethical standards even to the extent of blowing the whistle on their own employers at great risk to themselves."70 Arbogast investigated the key moments defining the evolution of what is now referred to as the Enron scandal. His analyses brought into focus the "inter-woven connections between various issues."71 Arbogast traced this evolution through the development of a total of 17 case analyses. The striking feature of these cases is that, when taken in their chronological sequence, they demonstrate how issues in subsequent cases would not have existed if the issues in preceding cases had been handled ethically. It is rare to find pedagogical materials on corporate ethics where sequentially emerging issues have been treated as a chain of cause-effect relationship. This approach of analyzing a range of issues, as developed by Arbogast, yields a process of "decoding the complexities of ethical situations in a comprehensive and cohesive manner."72

The ethicality of a decision is difficult to analyze precisely because such quality is not always explicit. One cannot necessarily determine a decision to be either entirely ethical or entirely unethical. Ethicality depends on the expectations of external agencies, such as the society or the stakeholders, whereas the process of making decisions draws heavily from the decision maker's personal philosophy, or beliefs and values. The course of action chosen emerges from the trade-offs deployed by the decision maker. In order to keep their executives on track, consistent with declared codes of ethics and adopted norms, corporations often develop control standards and operating procedures to which the executives must subscribe. Expediency, or worse, ill intent, may tempt executives to suspend these standards, even temporarily, with the dangerous consequence of heading down a slippery path. Dhir states, "Ethical problems usually evolve over time, with step-by-step violations of standards, even minor oversights, resulting in escalating severity of the departure from control standards, and a loss of cultural, procedural, and legal checks and balances."73 Minor violations of standards may initiate an accepted practice of making "temporary" or short-lived exceptions to the rules, which over time might become the defining culture of expediency, even touted as pragmatism, and loss of sensitivity to the underlying principles. The lesson of the Enron experience is that minor exceptions allow for subsequent developments that would not have been seen had the exceptions not been entertained. These developments, in turn, may snowball into further developments, in gross violation of not only the prescribed standards, but also of societal expectations. In the case of Enron, this culture resulted in a major scandal and corporate disaster.

The lessons to be learned through the study of the Enron scandal are inadequately treated in the pedagogical literature. This inadequacy is inherent in an approach that relies on stand-alone case studies to provide the student with a feel for nuances involved in ethical management of corporations. Stand-alone cases do not adequately capture the full range of interrelated issues that arise from temporary, but deliberate, violation of ethical standards to facilitate implementation of decisions. They are inadequate for the task of communicating the milieu in which such temporary violations exist or the impact they make on the organizational culture. If pedagogical materials are developed consisting of case studies, all drawn from the same corporation and each dealing with issues emerging from ethical lapses described in the previous case, student learning could be greatly enhanced. With such materials to learn from, students could effectively acquire insights into the dynamics of the decision process and emerging culture that facilitates ethical violations. This is what Arbogast did with his study of the Enron scandal.74

If the managers of a corporate organization are ethical individuals, one might expect that the conduct of that corporation would be ethical. However, this assumption does not bear out as being true. Organizational designs, processes, and procedures are developed for efficient flow of information and accomplishment of tasks. Human beings perform the functions that link one process to another. However, the lesser the dependence on human judgment, the greater is the efficiency of the flow of information and work. Corporations seek to overcome inefficiencies associated with human fallibility. We see this principle at its best when robots replace humans as links between processes. Dhir states, "Dehumanization can lead to insensitivity towards those who are affected by corporate decision making, especially if the affected individuals are far removed and out of sight. Even ethical individuals need to be educated and trained to handle organizational dynamics, and specifically to deal with the complex nature of ethical dilemmas that confront them in their corporate lives."75

Even the education of an individual in ethical decision making does not necessarily solve the problem of promoting corporate ethics. Often the curriculum on business ethics is developed from a top management perspective. Many times, however, managers coping with the consequences of unethical decisions are at the middle management level. It is no accident that 16 out of the 17 Enron cases developed by Arbogast address the challenges faced by middle or lower-level managers. They reveal how the culture of the company was influenced by the hierarchical seniority of those willing to make ethical compromises. It becomes difficult for managers who are lower in the organizational hierarchy to challenge the ethicality of decisions made by their superiors.76

To understand the inherent complexities in ethical decision making, Arbogast has developed a role-playing approach to analysis. He asks those who would resist corporate corruption (or those learning how to become ethical decision makers) from within the corporate organization to devise a statement describing the key issue as clearly as possible. This sheds light on the ethical dimension of the issue. He then asks the resistors (or the students of ethical decision making) to highlight those exceptional attributes of the issue that differentiate it from the many day-to-day problems that fall in the gray area of routine decision making. In the process of doing so, the resistors (students) find themselves articulating the ethical outcome that would be acceptable to them. "In doing this, they define the boundary condition that becomes the basis of evaluating their alternatives."77 They are then asked to identify likely consequences of their resistance to the unethical aspects of the issue. They examine the potential consequences of their resistance being unsuccessful, and whether the outcomes would be acceptable if the worst-case scenario was to occur. However, at this stage, Arbogast requires that the resistors not consider the mitigation of their personal risk. They are asked to factor in their own personal risk only in the last step of the analysis.78

Arbogast next asks resistors to formulate alternatives that do not violate the "boundary conditions" identified earlier, rendering the problematic unethical action unnecessary. The resistors are now asked to deploy this alternative plan of action "to exploit opportunities to demonstrate the flaws and excessive risks associated with the unethical options they are re-sisting."79 They are now ready to be challenged to develop a tactical plan of resistance. The goal at this stage would usually be to seek a decision that favors a specific ethical plan of action. However, at times, the goal might be to minimize the risk or contain the damage wrought by deviations from the control standards. In the last step of the analysis, the resistors are urged to describe the worst-case scenarios. They are then required to develop feasible actions that would render the worst-case scenarios unlikely to occur. These actions may require the resistors to seek allies, especially if the stakes are high. An alternative would be for them to seek a transfer with their corporation. Of course, they might even consider resigning from the corporation all together.80

 
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