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The Ethics “Fix”: When Formal Systems Make a Difference

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The Ethics “Fix”: When Formal Systems Make a Difference

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This paper investigates the effect of the countervailing forces within organizations of formal systems that direct employees toward ethical acts and informal systems that direct employees toward fraudulent behavior. We study the effect of these forces on deception, a key component of fraud. The results provide support for an interactive effect of these formal and informal systems. The effectiveness of formal systems is greater when there is a strong informal “push” to do wrong; conversely, in the absence of a strong push to do wrong, the strength of formal systems has little impact on fraudulent behavior. These results help to explain why the implementation of formal systems within organizations has been met with mixed results and identifies when formal systems designed to promote ethical behavior will be most efficacious.
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THE ETHICS “FIX” 1
The Ethics “Fix”: When Formal Systems Make a Difference
Kristin Smith-Crowe
University of Utah
Eccles School of Business
801.587.3720
mgtksc@business.utah.edu
Ann E. Tenbrunsel
University of Notre Dame
Mendoza College of Business
574.631.7402
atenbrun@nd.edu
Suzanne Chan-Serafin
University of New South Wales
Australian School of Business
61.2.9385.7636
s.chan-serafin@unsw.edu.au
Arthur P. Brief
University of Utah
Eccles School of Business
801.585.9916
arthur.brief@business.utah.edu
Elizabeth E. Umphress
University of Washington
Foster School of Business
206.616.8872
eu4@uw.edu
Joshua Joseph
Partnership for Public Service, Washington, DC
202.775.9111
JJoseph@ourpublicservice.org
Smith-Crowe, K., Tenbrunsel, A. E., Chan-Serafin, S., Brief, A. P., Umphress, E. E., & Joseph, J. (2015). The ethics
“fix”: When formal systems make a difference. Journal of Business Ethics, 131, 791-801.
THE ETHICS “FIX” 2
Abstract
This paper investigates the effect of the countervailing forces within organizations of formal
systems that direct employees toward ethical acts and informal systems that direct employees
toward fraudulent behavior. We study the effect of these forces on deception, a key component
of fraud. The results provide support for an interactive effect of these formal and informal
systems. The effectiveness of formal systems is greater when there is a strong informal “push”
to do wrong; conversely, in the absence of a strong push to do wrong, the strength of formal
systems has little impact on fraudulent behavior. These results help to explain why the
implementation of formal systems within organizations has been met with mixed results and
identifies when formal systems designed to promote ethical behavior will be most efficacious.
Key Words: ethics, formal systems, fraud, informal systems, unethical behavior
THE ETHICS “FIX” 3
First comes the scandal, then comes the public outrage, and then comes the big fix:
beefing up the formal systems to keep companies honest. Pattern sound familiar? A quick
perusal of newspaper headlines from just the last several decades reveals a cyclical pattern of
corporate scandal, public outrage, and corporate atonement (Berg, 1983; Blumenthal, 1983;
Carroll, 1985; Gerth, 1980; Halloran, 1985). Arthur Anderson, Enron, Tyco, WorldCom, and,
more recently, Goldman Sachs were preceded by General Electric, Investors Overseas Services,
Lincoln Savings & Loan, Sears, and Shoney’s. These all are companies that have grabbed
headlines by doing wrong, illustrating that wrongdoing in corporations is not a present fad.
Neither is the fix.
Organizations and financial institutions implicated in ethics scandals typically attempt to
regain public trust by recasting themselves as ethical entities. The envisioned path towards this
recasting, while varied, seems to converge on establishing or, in some cases, re-establishing
formal structures to ensure and enforce ethical behavior. The Sarbanes-Oxley Act passed by the
United States Congress is one example of these changes, resulting in enhanced formal control
systems and the requirement of a chief compliance officer at all 9,000 publicly held corporations
(Hurt, 2005), thus directly affecting formal systems within organizations. Management observers
have predicted that the “new agenda” would be comprised of “greater investment in financial
systems, ethics training, and corporate governance” (Byrne, 2002). Providing an even more
recent example of the emphasis on the formal systems “fix”, the Obama administration’s
initiative in response to the 2008 global financial crisis includes revamping financial regulation
aimed at discouraging further greed and risky bets by Wall Street firms (e.g., Appelbaum and
Herszenhorn, 2010; Plender, 2009; Scannell, 2009).
THE ETHICS “FIX” 4
The million dollar question is will these formal systems work? To date, the research on
the effectiveness of formal systems within organizations has been mixed, with some ethics
programs producing discernible effects on behavior and others having no effect (for a review see
Tenbrunsel and Smith-Crowe, 2008). We posit that the primary reason for the unpredictable
effectiveness of ethics programs is that the designers and implementers focus on formal systems,
one component of an organization’s ethical infrastructure (Tenbrunsel et al., 2003), to the
exclusion of other important components of the ethical infrastructure. One such ignored aspect
is the informal systems of the organization, such as pressure from peers and colleagues to behave
unethically, including fraudulent behaviors. We argue that to better understand when formal
systems to promote ethics will be effective, unethical and fraudulent behavior in organizations
needs to be recognized as a product of an interaction between formal and informal organizational
forces. Empirically, we investigate the effects of two countervailing forces that exist in some
organizations: formal systems that pull individuals toward ethical behavior and informal systems
that push them toward fraudulent behavior.
Specifically, we consider the interactive effect of these systems on deception, a key
component of fraud, which is defined by the Oxford English Dictionary (1989) as “the quality or
disposition of being deceitful; faithlessness, insincerity.” Though the term fraud is sometimes
used in a more strict criminal sense, here we use the term in a broader sense of acts of bad faith
that may or may not constitute legal violations. Certainly, such acts can be quite harmful to
organizations in terms of damage to reputation, litigation, and so forth, regardless of their legal
status. Interestingly, despite the pervasiveness of deception and its harmful effects on
organizations, it has remained largely unaddressed in organizational research (Grover, 2005;
THE ETHICS “FIX” 5
except in the contexts of negotiation and lie detection, e.g., Eckman and O’Sullivan 1991;
Tenbrunsel, 1998; Aquino and Becker, 2005).
In addition to focusing on a rarely studied, though key component of fraud (deception),
this paper offers several contributions. First, the constructs and hypotheses are theoretically-
derived largely from research on ethical infrastructure and social information processing; we also
acknowledge some of the parallels between formal and informal systems as we discuss them in
our study, and formal and informal systems as discussed in institutional theory. Importantly,
however, the scope of our theorizing is limited to formal and informal systems as they exist
within specific organizations and not at the level of institutions. Our theoretical approach
addresses previous criticisms regarding the atheoretical approaches to these issues (i.e., see
Tenbrunsel and Smith-Crowe, 2008). Second, we provide the first empirical investigation of the
interaction between formal and informal systems as they exist within organizations. Third, our
findings shed light on the inconsistent findings regarding the effectiveness of formal systems in
organizations on unethical behavior (e.g., see Tenbrunsel and Smith-Crowe, 2008). We thus
extend our current understanding of the effectiveness of formal systems, providing insight into
the ethical infrastructure of organizations and its impact on fraudulent behavior.
Theoretical Background
An organization’s ethical infrastructure incorporates multiple components, including
formal and informal systems (Tenbrunsel et al., 2003). Formal systems are the tangible objects
and events pertaining to ethics that are purposefully designed and implemented, whereas
informal systems are the unofficial policies, practices, and procedures that are relevant to ethics.
Examples of the former include ethics training programs and advice hot lines that recognize
ethical behavior as an important organizational attribute, whereas examples of the latter include
THE ETHICS “FIX” 6
the implicit pressure from co-workers, supervisors, and top management to engage in ethical or
unethical behavior. Distinguishing between, and focusing on, the formal and informal
components of the ethical infrastructure is consistent with institutional theory, which classifies
institutions as either formal or informal (Coase, 1998; Helmke and Levitsky, 2006; North, 1990).
Formal institutions represent explicit codified contracts and rules that govern exchanges within
society, while informal institutions represent implied, often unwritten conventions, norms, and
behavioral codes (Helmke and Levitsky, 2006; North, 1990). We take a similar view of formal
and informal systems, where one is codified and explicit, and one is not. Yet we do not seek to
study these systems at the institutional level, rather our focus is on these systems as they exist
within organizations.
While formal and informal systems can be “good” (promoting ethical behavior) or “bad”
(promoting unethical and fraudulent behavior), in this paper we focus on one particular
combination of the two: formal systems that pull the employee to do right and informal systems
that push the employee to do wrong. Due to legal liabilities, organizations are much more likely
to have formal systems that promote ethical rather than unethical behavior. Given the likelihood
then that organizations’ formal systems focus on promoting ethical behavior, it is important to
consider the countervailing force of an informal system that focuses on unethical behavior.
Indeed, it is such pressure toward unethical behavior that formal systems are designed to combat.
Further, within formal systems we focus on two components—training and “hot lines”—which
allow for an interactive communication of codes of conduct and ethical values (versus the mere
existence of static, and often “boiler plate” codes of conduct; see Loughran et al., 2008). In this
sense, we are focusing on those indicators of a formal system that would be expected to be
THE ETHICS “FIX” 7
especially impactful.1 Within informal systems, we focus on the informal pressures that
individuals experience to behave unethically; such pressure is the essence of informal systems
(cf. Tenbrunsel et al., 2003).
Here it is important for us to note two things. First, our conceptualizations and measures
of formal systems that promote ethical behavior and informal systems that promote unethical
behavior rest on the assumption that that good and bad are not necessarily opposites – they can
be qualitatively distinct. Our view is informed by Bradley et al. (2008, p. 179; see also Paine,
2003) who pointed out that, “…behaviors defined as good, for instance, are not necessarily the
polar opposite of those defined as bad. Theft, for instance, is a bad action that has no
correspondent in the goodness category because abstaining from theft is not enough to be labeled
good.” Similarly, we do not conclude that the absence of a formal system that promotes ethical
behavior constitutes a formal system that promotes unethical behavior, or that the absence of an
informal system that promotes unethical behavior constitutes an informal system that promotes
ethical behavior. Second, our paper concerns the interactive effects of formal and informal
systems as they currently exist in organizations. Our scope does not extend to a discussion of the
emergence of these systems (e.g., see DiMaggio & Powell, 1983; Kraatz & Block, 2008; Scott,
1991). Below, we briefly review previous research and theory on formal and informal systems,
and then develop a theoretical argument for why we expect that the two systems interact to
predict fraudulent behavior.
1 For instance, based on dialogical theories of learning, Burke et al. (2007) have argued that leaning is a social activity that is
facilitated by social interaction. Specifically, in the context of safety training, Burke et al. (2006) demonstrated that more
learning takes place when trainees have opportunities to interact with each other and the trainers (getting feedback from trainers,
etc.) compared to more passive forms of training like watching a video. The selection of training and “hot lines” as two aspects
of formal systems are interactive and thus consistent with this definition.
THE ETHICS “FIX” 8
Formal Systems and the Pull Away from Fraudulent Behavior
Drawing on Pugh, Hickson, Hinings, and Turner (1968), formal systems are defined as
those that “are documented and standardized, visible to anyone inside or outside the
organization” (Tenbrunsel et al., 2003, p. 288) and they are carried out through formal,
administrative channels (Lange, 2008), a staple of organizations’ ethical infrastructure.
Importantly, formal systems vary in strength across organizations, with some organizations
employing stronger formal systems with numerous components and other organizations
employing weaker systems with few features. As these systems are public and can be observed
from outside of the organization (e.g., by customers), they tend to convey messages that pull the
employee toward ethical behavior and away from fraudulent behavior. Hence, here we focus on
formal systems that promote ethical behavior rather than unethical behavior.
Formal systems constitute an important part of the ethical infrastructure because
individuals look to their organizations for guidelines regarding what constitutes appropriate
behavior (e.g., Schneider, 1975). Official communications, such as training and advice “hot
lines,” provide one source for this information (Jansen and Van Glinow, 1985). These formal
mechanisms allow organizations an opportunity to promote ethical behavior and guard against
fraudulent behavior (Ferrell and Gresham, 1985; Trevino, 1990). Indeed, it has been found that
formal systems can decrease the unethical behavior of employees within organizations (Kish-
Gephart et al., 2010; McCabe et al., 1996). Yet, as we previously noted, research on the
effectiveness of formal systems has produced mixed results, an inconsistency that we argue can
be better understood by considering their interactive effect with informal systems. Below, we
discuss the influence of informal systems on fraudulent behavior and then argue that one must
THE ETHICS “FIX” 9
consider both formal and informal systems when predicting how and when they will influence
unethical behavior.
Informal Systems and the Push toward Fraudulent Behavior
Informal systems can be thought of as emitting “signals regarding appropriate ethical
conduct that are received by the organizational members” (Tenbrunsel et al., 2003, p. 288), and
like formal systems can vary in strength across organizations. In contrast to their formal
counterparts, the signals conveyed through informal systems do not entail official
pronouncements or actions, but rather they are “felt” by organizational members (Lawler and
Rhode, 1976; Lange, 2008; Selznick, 1943). Informal systems represent the unofficial messages
regarding ethical norms within the organization, obtained in part via socialization and the process
of social learning (Ashforth and Anand, 2003; Brief et al., 2001; Burgess and Akers, 1966;
Palmer, 2008; Warren and Smith-Crowe, 2008) in which employees learn through conversations
with peers and management and through observation what is considered ethical and what is not.
Like formal systems, informal systems provide people with the behavioral guidelines they seek
so that they will know how to act appropriately in their environments (Schneider, 1975). The
norms espoused by these informal systems may or may not be ethical. Our focus is on the latter
case: systems that push employees to do wrong, and, thus, may exist in tension with the
aforementioned formal systems. The power of informal systems that reinforce unethical
behavior is illustrated in the demise of Enron and Arthur Anderson. At Enron, Mr. Lay made it
clear that informal systems trumped formal systems (Barrioneuvo, 2006):
Ethical rules that he had helped set up at Enron...somehow did not apply to him, Mr. Lay
suggested. When questioned by Mr. Hueston on Tuesday about a $160,000 personal investment
he made in a photo-sharing company that did more than 80 percent of its business with Enron,
Mr. Lay called suggestions of impropriety ''form over substance.'' Rules, he said, ''are important,
but you should not be a slave to rules, either''.
THE ETHICS “FIX” 10
The importance of informal systems is consistent with branches of institutional theory
(Helmke and Levitsky, 2006; Knack and Keefer, 1997; Lauth, 2000; North, 1990) and social
information processing theory (Salancik and Pfeffer, 1977, 1978). At the macro level, research
on the impact of informal institutions on political structures (Lauth, 2000) and transaction costs
(Knack and Keefer, 1997) has demonstrated the importance of considering those systems that
exist “outside officially sanctioned channels” (Helmke and Levitsky, 2006, p. 5), yet have a
tremendous potential to affect significant sociological processes that exist within a society
(North, 1990). Similarly, at a more micro level and more relevant to our focus on systems within
organizations, the social information received from peers plays an important role in individuals’
attitudes, perceptions, and behaviors. For instance, Roy (1952), a sociologist studying the
informal systems in a steel processing company, described the social pressure to under-produce
he experienced as a radial-drill operator when he over-produced. Roy was censured by a fellow
worker who said, “What’s the matter? Are you trying to upset the apple cart?” (p. 431).
Economists are similarly finding that social pressures can influence behavior (e.g., cooperation
and productivity) beyond what would be predicted simply on the basis of monetary incentives
(Bandiera et al., 2005; Dal Bo and Dal Bo, 2010). Further, in a recent meta-analysis (Kish-
Gephart et al., 2010), psychologists found that organizational members’ perceptions of what their
organizations expect and what values they espouse in relation to ethics (essentially,
organizational level ethical climate and culture, respectively) were moderately to strongly,
negatively correlated with unethical behavior, providing additional evidence that organizational
members are strongly influenced through informal, social channels.
Informal systems regarding unethical behavior are perhaps best captured by the pressure
that employees feel from their peers, supervisors, and top management to violate the
THE ETHICS “FIX” 11
organization’s published values. Pressure from these groups informally communicates the values
that the organization “really” espouses. Indeed, conformity pressures, which include both
informal surveillance to see who is behaving “right” and the accompanying sanctions, have been
implicated in organizational wrongdoing (Sutherland, 1983; Brief et al., 2001). A good case can
thus be made that informal systems are an important force. Yet, formal and informal systems
coexist within organizations. While one can predict main effects for each system, we argue
below that it is their interactive effect that is important in predicting fraudulent behavior.
Interactive Effects of Formal and Informal Systems
To assert that there is an interactive effect between formal systems that promote ethical
behavior and informal systems that promote fraudulent behavior is not a foregone conclusion.
Empirically, to our knowledge, there has been no demonstration of their interactive effects.
Theoretically, the relationship between formal systems that promote ethical behavior and
informal systems that promote unethical behavior has been characterized in two contradictory
ways: as primarily independent (see Tenbrunsel and Smith-Crowe, 2008 for a review of such
research) or as primarily interdependent (e.g., Crossland and Hambrick, 2011; Keefer and
Knack, 2005; Miller and Form, 1980). The latter characterization is most germane to our
theoretical arguments and predictions.
Miller and Form (1980, p. 362) provide an apt description of the importance of
considering both systems at the same time:
The student of social organization needs to know how both formal and informal organizations
operate. The relationship between these two types of organization is not supplementary but
interactive. In a very real sense, then, it is impossible to understand how the supervisory structure
actually operates without systematic knowledge of the ongoing informal relations in it.
This assertion, which rests on interdependence between the two systems, and more specifically,
on the notion that formal systems are interpreted within the context of informal systems, finds
THE ETHICS “FIX” 12
support in institutional theory (Dobbin, 1994; Keefer and Knack, 2005; Crossland and Hambrick,
2011) and social information processing theory (Salancik and Pfeffer, 1977, 1978). Informal
norms are argued to be the initial force guiding transactive exchanges in small, homogenous
societal groups. As the groups grow larger and more diverse, formal institutions (i.e., contracts,
codes of conduct, etc.) emerge to facilitate these pre-existing informal institutions so that societal
members can trade safely with those who are dissimilar or unfamiliar (North, 1990; Bates, 2001);
however, the development of these formal institutions is argued to be constrained by the informal
norms that preceded them (Dobbin, 1994). Informal institutions are thus seen as more primary
and deep-seated than formal institutions (Keefer and Knack, 2005), and, as such, act as a
constraint on formal institutions (Crossland and Hambrick, 2011).
A social information processing perspective, which posits a central role of the influence
of the social context on job attitudes, asserts that the social environment provides a template that
individuals utilize to interpret complex environmental cues (Salancik and Pfeffer, 1978).
Salancik and Pfeffer (1978) further argued that objective information, such as that on job variety
and autonomy, actually lacks meaning unless it is interpreted within a social context and as such
cannot be used in isolation to predict job attitudes (cf. Burke et al., 2006, 2007). Thus, the social
context dictates the meaning of the more objective information conveyed by formal systems. We
agree with these assertions and, applying them to the domain of fraudulent behavior, predict that
the impact of formal systems can only be fully understood when one considers the informal
systems within which the formal systems operate.
In the context of institutional theory, Scott (1987) indicated, however, that the nature of
this formal-informal interaction potentially can take several forms: “Formal structures
purposefully designed to regulate behavior in the service of specific goals are seen to be greatly
THE ETHICS “FIX” 13
affected—supplemented, eroded, transformed—by the emergence of informal structures” (p. 54).
Making use of the parallels between formal and informal systems at the institutional level and at
the organizational level, the same logic can be applied to thinking about formal and informal
systems within organizations. Here, we investigate two possible interaction effects: informal
systems may either increase or decrease the effectiveness of formal systems2.
Increased effectiveness. On the one hand, it could be argued that formal systems are
made more effective by informal systems. In other words, formal systems designed to pull
employees toward ethical behavior only have meaning, and, thus, efficacy, when there are strong
informal systems pushing employees to behave unethically. A social information processing
perspective is based on the premise that job characteristics are socially constructed and that it is
the intrinsic features of the situation that help makes sense of the extrinsic features of the job
(Salancik and Pfeffer, 1977). Given that informal systems have been linked with intrinsic
processes and formal systems with extrinsic processes (Tenbrunsel et al., 2003), this line of
reasoning suggests that when the informal system to do wrong is weak, formal systems designed
to enforce ethical values lack meaning, and, thus, have relatively little impact as there is no
context within which to understand why such behavior is being prescribed. That is, when there
are no informal pressures to behave unethically, a strong formal system to behave ethically will
be out of place and lack significance. In contrast, when there are strong informal pressures to do
wrong, the prescribed behavior espoused by a formal system to do right has meaning as it is
interpreted within the social context of the pressure exerted by the informal norms.
In this sense, a formal system to do right exists to countervail an informal system to do
wrong. This argument is consistent with Roberts’ (2001) discussion of corporate governance in
2 As Scott (1987) notes, formal systems may also be transformed, or changed by informal systems. As this paper
focuses on a single point in time, this possibility is not investigated.
THE ETHICS “FIX” 14
which the ideal use of formal systems is as a “fail safe device” for fixing informal mechanisms
that are broken. Along these lines, we argue that formal systems will be more effective when the
informal system has gone awry (i.e., when informal systems that encourage unethical behavior
are strong). This line of reasoning suggests the following hypothesis:
H1a: Informal systems promoting fraudulent behavior will strengthen the negative
relationship between formal systems that promote ethical behavior and fraudulent
behavior.
Decreased effectiveness. Conversely, it is possible that the effectiveness of formal
systems is made less effective by the presence of strong informal systems. This argument is
consistent with the inverse relationship posited between extrinsic and intrinsic motivation, such
that a strong intrinsic motivation is seen as diminishing the perceived effect of an extrinsic
motivator and vice versa (Calder and Staw, 1975). Understanding informal systems to be more
intrinsic than formal systems (Tenbrunsel et al., 2003), an increase in the strength of the informal
system should make formal systems less effective in curbing fraudulent behavior. It has been
found that the codes of conduct are less effective when they are inconsistent with the informal
norms of the organization (McCabe et al., 1996); thus, the effectiveness of a formal system that
pulls toward ethical behavior will be diminished when it faces opposition with an informal
system that pushes toward unethical behavior. It has also been argued that formal constraints are
stronger when the informal constraints are relatively weaker, such as in more developed
countries where the rule of law is more salient (Peng, 2002; Crossland and Hambrick, 2011),
suggesting an inverse relationship between formal and informal systems. Indeed, Elffers, van der
Heijden, and Hezemans’s (2003) investigation of regulatory compliance in the Netherlands
demonstrated that individuals complied with the law more when they were aware that social
THE ETHICS “FIX” 15
norms for non-compliance were weak (i.e., weak informal systems). More specifically, this line
of reasoning suggests the following hypothesis:
H1b: Informal systems promoting fraudulent behavior will weaken the negative
relationship between formal systems that promote ethical behavior and fraudulent
behavior.
Below we describe a study designed to test our two competing hypotheses regarding the
possible interactive effects of formal and informal systems on fraud. We investigated fraud in
terms of instances of deception including falsifying records, withholding information,
misreporting information, and lying to stakeholders. Following the description of our study, we
report our results, which indeed indicate that the relationship between formal systems that
promote ethical behavior and fraud (i.e., deception) is moderated by informal systems that
promote fraudulent behavior.
Method
Sample
The data used in the current study were collected by the Ethics Resource Center via their
“2000 National Business Ethics Survey” (2000 NBES; Joseph, 2000). The 2000 NBES was
administered via telephone interviews conducted with a nationally representative sample of
1,500 U.S. employees between November 1999 and February 2000. Only data from employees
of for-profit organizations working at a location with one or more other employees were included
in our study. The final sample included 974 respondents of which 80.4% were White, 8.3% were
Black, and 6.2% were Hispanic. Over half (51.5%) of the respondents were male and just under
half (42.7%) were between 31 and 45 years of age. Over half (55.2%) had some post-secondary
THE ETHICS “FIX” 16
education (i.e., completed at least two full years of college), 46.1% served in management or
supervisory positions, and 86.4% had been in their organizations for over a year.
Measures
Formal systems to promote ethical behavior. Two items assessed whether
participants’ organizations provided training on their standards of ethical conduct, as well as
specific telephone lines where advice concerning business ethics issues could be obtained (0=no,
1=yes). Because the items comprising this scale are dichotomous, we computed Cronbach’s
(1951) alpha using the upward bound limit of phi (φmax) rather than the Pearson r coefficient
(Sun et al., 2007). The estimate of internal consistency was .92. To construct the scale, we
summed the responses to the items.
Informal systems to promote fraudulent behavior. Three items assessed the extent to
which participants agreed that they felt pressure to violate their organizations’ ethical standards
from their co-workers, supervisors, and top management, respectively (1=strongly disagree,
2=disagree, 3=agree, 4=strongly agree). Cronbach’s (1951) alpha for this scale was .92. To
construct the scale, we summed the responses to the items.
Deception. Four items assessed whether participants had observed different instances of
deception (0=no, 1=yes): falsifying records and reports; mis-reporting actual time or hours
worked; withholding needed information from employees, customers, vendors, or the public; and
lying to employees, customers, vendors, or the public. Because these items are dichotomous, we
used Sun et al.’s (2007) modified version of Cronbach’s (1951) alpha in order to calculate a
more accurate estimate of internal consistency. The internal consistency estimate for this scale
which is composed of dichotomous items was .93 (Sun et al., 2007). To construct the scale, we
summed the responses to the items.
THE ETHICS “FIX” 17
Control variables. We controlled for various factors that impact reports of unethical
behavior in organizations (see O’Fallon and Butterfield 2005; Trevino et al., 2006; Tenbrunsel
and Smith-Crowe, 2008 for recent reviews). Consistent with recommendations by Becker (2005),
we provide a brief rationale for the inclusion of these variables. Organizational tenure (1=less
than a year; 2=1 to 2 years; 3=3 to 5 years; 4=6 to 10 years; 5=11 or more years) and position in
organization (1=non-supervisory position; 2=first line supervisor; 3=middle management;
4=senior management) were included as prior research has demonstrated that they are negatively
related to moral reasoning (e.g., Elm and Nichols, 1993; Ponemon, 1990). Respondents who
have longer tenure and are in higher positions in the organization compared to their counterparts
with less tenure and in lower positions, we argue, will have less ability to morally reason and
thus also to observe and report incidences of deception. Gender (1=male; 2=female) also was
controlled for as some research has shown that women are more ethically aware than men (e.g.,
Ameen, Guffey, & McMillan, 1996) and if it were so, women will more likely recognize
incidences of deception than men, should they be observed. Organizational size (1=2 to 24; 2=25
to 99; 3=100 to 499; 4=500 to 1999; 5=2000 to 9999; 6=10000 or over) was controlled for as
there is empirical research showing that as organizational size increases, unethical decisions also
increase (Weber, 1990). Organizational size thus may be positively related to deception. Finally,
organizational disruption (0=no merger, acquisition or restructuring; 1=merger, acquisition, or
restructuring with no layoffs; 2=merger, acquisition, or restructuring with layoffs) was included
as a control variable because we argue that events such as layoffs and mergers are highly
stressful for the organization and its members (e.g., Brockner, Grover, O’Malley, Reed, &
Glynn, 1993), potentially causing competition between organizational members. Such
THE ETHICS “FIX” 18
competitive environments have been argued to raise one’s “moral antennae” thus sensitizing one
to incidences of deception (e.g., Butterfield, Treviño, & Weaver, 2000).
Results
We conducted a confirmatory factor analysis in order to examine the distinctiveness of
the scales used to measure the main study variables: formal systems, informal systems, and
deception. The three-factor model demonstrated a good fit
χ
2 = 56.79, df = 24, p < .001; CFI =
.99, TLI = .98, RMSEA = .04. All the indicators loaded significantly onto their corresponding
latent constructs (standardized path estimates range was .40 to .94), which demonstrates that the
latent constructs are clearly distinct from each other. Further, results of the chi-square difference
tests suggest the three-factor model had a better fit than either the two-factor model combining
formal and informal systems Δ
χ
2 = 167, Δdf = 2, p < .001, and any other conceivable two-factor
models, or the one-factor model Δ
χ
2 = 564.79, Δdf = 3, p < .001. .Descriptive statistics and
correlations for all study variables are reported in Table 1.
________________________________
Insert Table 1 here.
________________________________
We tested our hypotheses using multiple regression and centered predictor variables. The
results are presented in Table 2. Consistent with previous research and theory, Model 2 indicates
a significant negative correlation between formal systems and deception, and a significant
positive correlation between informal systems and deception. However, of greater interest here,
Model 3 indicates a significant interaction effect of formal and informal systems on deception.
Supportive of Hypothesis 1a, the relationship between formal systems and fraudulent behavior
was stronger when informal systems were strong and weaker when they were weak (see Figure
THE ETHICS “FIX” 19
1). Analysis of the simple slopes (Aiken and West, 1991) one standard deviation above and
below the mean for informal systems yielded consistent results: the relationship between formal
systems and deception was stronger when informal systems were strong β = -.15, p < .01 versus
weak β = .01, p > .05.
________________________________
Insert Table 2 and Figure 1 here.
________________________________
Discussion
Our aim in this paper was to provide a systematic investigation of two components of the
ethical infrastructure of organizations – formal systems that pull individuals toward ethical
behavior and informal systems that push employees toward unethical behavior – so as to further
our understanding of when formal systems are likely to be effective. We proposed that to predict
fraudulent behavior, the interactive effect of formal and informal systems within organizations
must be considered. That is, the less visible yet more intrinsic informal components of the
ethical infrastructure influence the effectiveness of formal systems. Inspection of this interaction
demonstrated that the efficacy of the formal systems depended on the perceived pressure to do
wrong: when the informal pressure was strong (or high), formal systems were efficacious, but
when the perceived pressure to do wrong was weak (or low), formal systems did not predict
fraudulent behavior.
These results suggest that a formulation of the optimal level of formal systems designed
to promote ethical behavior must account for the organizational environment in which these
control factors operate. When the informal push to do wrong is strong, “pulling” out all the stops
in the formal systems seems to make sense. But when the pressure to do wrong is weak,
THE ETHICS “FIX” 20
extensive formal systems may only be a waste of time and money. Thus, the adage, “if it ain’t
broke, don’t fix it,” may be more than just a cliché.
Limitations
An interpretation of these findings must certainly acknowledge the limitations of the
study. First, like any data that are cross-sectional, it is difficult to draw inferences about causality
and no such inferences are intended. Further, self-perceptions of formal systems are utilized,
rather than objective measures. The use of such perceptions allows for a consistency between
informal and formal systems (i.e., it is difficult to get an objective measure of informal systems),
but it should be clearly understood that our findings are driven by perceptions of such systems.
Despite the disadvantages of cross-sectional data, and the limitations noted, this type of data does
have the advantage over experimental studies of being able to translate the results much more
readily into reality (Seligman, 1996). Given the difficulty of getting reports on unethical
behavior outside of the lab (Cowton, 1998), we believe that these data offer unique insights into
the ethical infrastructure of organizations, but we also recognize the need for additional research
that utilizes objective measures and allows for causal inferences.
Second, our data are based on participants’ reporting of all variables in one survey. As
such, concerns about common method bias are reasonable, yet steps were taken during the data
collection and analysis processes that should mitigate this problem. Procedurally, our data
collection was consistent with suggested approaches for avoiding common method bias
(Podsakoff et al., 2003). Specifically, respondents were guaranteed anonymity, steps were taken
to reduce respondents’ evaluation apprehension (e.g., there were no value laden/ judgmental
words used in the survey and the interviewers merely asked respondents for their opinions and
thoughts about ethics at work), and the items that constitute the three study variables were
THE ETHICS “FIX” 21
scattered randomly across the survey. Empirically, a confirmatory factor analysis was conducted
to ensure that the three study variables were indeed distinct from one another.
Finally, our analysis and the corresponding implications are limited to specific
components of the ethical infrastructure—formal systems, which promote ethical behavior, and
informal systems, which promote fraudulent behavior—and the specific items which we utilized
to represent these constructs. The items we examined within each construct do not represent the
full spectrum of formal and informal systems, and, as such, future research should investigate
whether other components of these systems exhibit the same relationships found within this
study. We also did not examine formal systems which promote fraudulent behavior (though we
think that these are relatively uncommon) or informal systems that promote ethical behavior; we
believe that future research that investigates these aspects of formal and informal systems will
help add to our understanding of formal and informal systems. Keeping in mind these
limitations, the results do highlight important organizational and theoretical implications.
Theoretical and Practical Implications and Directions for Future Research
We believe this research makes significant theoretical and practical contributions. By
theoretically examining the ethical infrastructure, its components and their interactive effects, we
address calls for a more theory-based approach to ethics in organizations (Tenbrunsel and Smith-
Crowe, 2008). To provide a platform for future research, we utilized a theoretically-driven
classification of formal and informal systems. Furthermore, because of their potential interactive
effects, we considered it essential that these components be examined in conjunction with one
another rather than as part of isolated studies as has historically been the case. As our findings
suggest, these components interact with one another, meaning that drawing conclusions about the
effect of one element in the absence of the other is likely to be problematic. The importance of
THE ETHICS “FIX” 22
considering formal and informal systems simultaneously is not only applicable to the study of
ethical behavior in organizations but also to the theoretical framework offered by social
information processing theory, which we drew upon to derive our predictions.
The organizational implications of these findings are directly connected to the theoretical
contributions. Just as future researchers need to recognize the interdependent influence of each of
the identified components, so do managers. Considered in isolation, formal systems may appear
to have a positive impact on fraudulent behavior. However, when there is little push to do wrong
via informal systems, extensive formal systems may just be a waste of resources. This finding is
useful in understanding why research on the effectiveness of formal systems has produced mixed
results. Focusing on formal systems exclusively while ignoring informal systems can lead to
unnecessary costs and frustration for organizations truly committed to discouraging unethical
behavior. Organizations that find that their formal systems do not impact behavior may
erroneously conclude that formal systems are never useful and may be unlikely to rely on them
in situations in which they would be most effective, namely when they are in the presence of
informal pressures to do wrong. Further, we encourage future research that seeks to refine our
understanding of the interactive effects of formal and informal systems, specifically research that
considers the varying effectiveness of different components of formal and informal systems.
Such research would be informative in highlighting components of formal and informal systems
that are more or less influential in themselves, and how these components of varying influence
then interact with each other. We also encourage research that explores different combinations
of formal and informal systems, such as formal systems that promote fraudulent behavior and
informal systems that promote ethical behavior.
THE ETHICS “FIX” 23
The results also suggest that an organization cannot simply “borrow” another
organization’s “formal” ethics plan, but rather must consider the appropriateness of a plan in its
own unique context (i.e., in the context of its particular informal systems). This recommendation
resonates with similar thinking at the institutional level (Shirley, 2005, p. 629-630):
[the] stickiness of beliefs and norms explain why underdevelopment cannot be overcome by
simply importing institutions that were successful in other countries. There are numerous
examples of failure. Latin America copied the U.S. constitution, transitional countries emulated
U.S. or European bankruptcy laws and commercial codes…all with very different and generally
disappointing results.
Likewise, we argue that within an ethical infrastructure, a formal system cannot be copied or
even mandated without first understanding the informal system in which it will be embedded.
The findings suggest that there is no quick fix to scandals and wrongdoing –
organizations must engage in the hard work of understanding if there are strong informal systems
that promote fraudulent behavior. Likely, this conclusion is not what organizational leaders want
to hear; it is, however, a message that they must hear if they truly desire to exact change. We
hope that our research provides a blueprint for how such an informed understanding can help
achieve that change.
THE ETHICS “FIX” 24
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THE ETHICS “FIX” 33
Table 2
Results of the Regression Analysis
Model 1
Model 2
Model 3
Control Variables
Organizational Tenure
.00
-.02
-.01
Position in Organization
-.07
-.01
-.01
Gender
.00
.01
.00
Organizational Size
.07
.13**
.12**
Organizational Disruption
.17**
.10**
.10**
Main Effects
Formal Systems
-.14**
-.14**
Informal Systems
.41**
.39**
Interaction Term
Formal x Informal Systems
-.09**
R2
.05
.24
.25
ΔR2
.05
.19
.01
ΔF
8.67**
95.51**
7.24**
*p<.05; **p<.01
Note. Unless otherwise indicated, the numbers in the table are
standardized regression weights.
THE ETHICS “FIX” 34
Figure 1. Interaction effect of formal systems and informal systems on deception.
0
1
low
high
Formal Systems
Deception
Informal Systems low
Informal Systems high
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... This type of research is important for research-oriented universities given the growing body of literature evidencing relationships between ethics policies and actions to organizational outputs (Bento et al., 2017;Kaptein, 2015;Smith-Crowe et al., 2015). This research can be rationally extended to consider the relationships between RCR policies and training and university level outcomes, potentially adding to current knowledge of how various stakeholders would address different ethical issues university students might encounter when conducting research with faculty. ...
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Research-oriented universities are known for prolific research activity that is often supported by students in faculty-guided research. To maintain ethical standards, universities require on-going training of both faculty and students to ensure Responsible Conduct of Research (RCR). However, previous research has indicated RCR-based training is insufficient to address the ethical dilemmas that are prevalent within academic settings: navigating issues of authorship, modeling relationships between faculty and students, minimization of risk, and adequate informed consent. U.S. universities must explore ways to identify and improve RCR concerns for current (faculty) and future researchers (students). This article reports the findings of a self-study ( N = 50) of research stakeholders (students and faculty) at a top tier research institution. First, we report on their perceived importance of applying RCR principles. Second, we explore relationships between stakeholder backgrounds (e.g., prior training, field, and position) and how they ranked the degree of ethical concerns in fictitious vignettes that presented different unethical issues university students could encounter when conducting research. Vignette rankings suggested concerns of inappropriate relationships, predatory authorship and IRB violations which were judged as most unethical, which was dissimilar to what sampled researchers reported in practice as the most important RCR elements to understand and adhere to for successful research. Regression models indicated there was no significant relationship between individuals’ vignette ethics scores and backgrounds, affirming previous literature suggesting that training can be ineffectual in shifting researcher judgments of ethical dilemmas. Recommendations for training are discussed.
... At the outset of this study, it was unclear what the impact of these components could be on effective AIP adoption. (Schwartz 2004;Singh et al. 2011;Weaver et al. 1999b) Reinforcement (Kaptein 2011;Schwartz 2004;Smith-Crowe et al. 2015;Weaver et al. 1999b) Communication quality (Kaptein 2011;Schwartz 2004) External communication (Singh 2011) ...
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This study examines employee perceptions on the adoption of artificial intelligence (AI) principles in their organizations. 49 interviews were conducted with employees of 24 organizations across 11 countries. Participants worked directly with AI across a range of positions, from junior data scientist to Chief Analytics Officer. The study found that there are eleven components that could impact the effective adoption of AI principles in organizations: communication, management support, training, an ethics office(r), a reporting mechanism, enforcement, measurement, accompanying technical processes, a sufficient technical infrastructure, organizational structure, and an interdisciplinary approach. The components are discussed in the context of business code adoption theory. The findings offer a first step in understanding potential methods for effective AI principle adoption in organizations.
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In the digital workspace, new forms of (negative) interactions have emerged. Workplace cyberbullying can be pervasive, fast, and intrude the private sphere. These aspects make organizational surveillance and prevention challenging. In this conceptual chapter, the authors argue that for establishing an ethical digital workspace, civility values and ethical principles of individual responsibility and mutual respect are crucial. For prevention of workplace cyberbullying, formal systems like technological detection systems or policies are insufficient. Rather, organizations need to foster informal “social control.” The social norms in small workgroups and the leader's role-modeling behavior should guide the digital behavior of employees at and beyond work, and eventually create a climate of respect. This should also help to increase bystanders' moral awareness of allegedly minor uncivil incidents. Examples of different formal and informal preventive measures are discussed. The chapter ends with a brief discussion and outlook on future legal and technological advancements.
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This chapter examines how organizations can achieve careful –responsible and ethical –employee behaviour with respect to material resources. First, the impact of culture on material resources management is investigated. Furthermore, this study aims to determine which kind of controls is more effective in managing the material resources, hereby drawing a distinction between hard and soft controls. The data, on which this chapter builds, were collected by means of a survey among employees, both civilian and military, with responsibilities in material resources management of the Dutch Defence organization. This study shows—contrary to the expectation—that military culture has a positive impact on material resources management. This study also shows that soft controls have the expected direct positive impact. Hard controls only have an indirect effect; embedded in a system of soft controls, they also influence material resources management in a positive way. These findings demonstrate the Dutch Defence organization has to be skilful in hard as well as soft controls to manage the material resources carefully proving the need for ambidexterity.