What are Ethics• Moral Values=beliefs about what is good vs bad,

right vs. wrong • E.g., it is wrong to lie

• Ethics = standards of behavior consistent with one’s moral values

• E.g., I should not lie

• Decision= Intention for behaving consistently with ethics

• I decide not to lie even if I am disadvantaged by lying

• Behavior= Action • not lying

Type of Ethics Rightness is defined by… Basis of actions

End Results -effect/consequences it has-utility of ends

--Actions are aimed to promote (collective) happiness, --Actions that promote more happiness are more right

Duty -obligations to apply universal standards in all situations-intentions of actor rather than effects

--Actions that promote virtue rather than pleasure--behaviour should be based on principles/rules

Social Contract

--Customs or norms of a community

--Community defines morality which defines right & wrong--Duty binds individual to community--What is best for community is ultimate standard

Personal-isitc One’s conscience -stand up for what one believes-no absolute formulas for living

Sources determining Managerial Ethics

3

How sources affect Ethical Behavior - I• Reward System

– Anticipation of healthy reinforcement for following an unethical course of action, especially if no punishment is expected.

• Role conflict in Code of Conduct– “Bureaucratic” role as an organizational employee is at

odds with one’s role as the member of a profession.

• Market: Competition– Stiff competition for scarce resources.– Temptation to make unethical decisions in situations in

which essentially no competition exists.

Bias in judgments

What increases biases in judgments

Ambiguity

Seeking Approval

Attachment

Familiarity

Escalation

Discounting

Disclosure

Type of Judgment

Ambiguity in accounting• Study of approx 50 tax preparers shows 83%-

976% difference in how much a family owes in yearly taxes – Ambiguity in Income, deductibles, depreciation

schedule

• Declaring items as revenue vs. expenses (early vs. later) has implications on how stockholders react

• Firms hire based on how auditors interpret accounting problems

Bias in Judgment

Attachment

Students role playing as plaintiffs (in an accident) predicted that they would receive larger awards from the judge than did those playing the role of defendants

Self-serving Bias

Types of training & self-serving bias

Bias in judgments

Writing essays arguing for other side

Learning about self-serving biases

Reading case FIRST before being assigned the role of plaintiff or defendant

0-

0

Seeking approval

• You are even more biased toward yourself when someone else is biased toward your opinion

• Implications for overly biased judgments– E.g., when auditors make judgments by themselves first

vs. merely “endorsing” judgments that clients already made (they are even more biased toward their self-serving biases)

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• Organizational and Industry Culture– Aspects of an organization’s culture (and its

subcultures)• Corporate cultures that reward unethical behaviour.

• A culture of greed and a singular focus on positive financial results.

Stonewalling Counter norms

– Corporate codes of conduct might have an impact on culture and ethical decision making.

How sources affect Ethical Behavior - II

Familiarity, discounting, escalation• On-going relationships Familiarity

– Decide between negatively affecting company executives (clients) vs. company investors (not clients)

• Discounting– Favour immediate consequences vs. delayed uncertain

consequences (see Margin Calls movie)• E.g., damage to relationship, loss of contract, unemployment

• Escalation– Sum of small biases leads to large biases (i.e.,

corruption)– (see Margin Calls movie)

• Study of buyer, seller, buyer auditor and seller auditor– Seller valued firm more than buyer– Auditors were more biased toward client interests– Sellers auditors valued firm more than buyer auditor– Reward for accuracy for auditors did not eliminate

the bias they already had

Auditor Attachment affects Bias in Judgment

• Auditors who were hired by the company were more likely to conclude that the company complied with the GAAP rules rather than those auditors who were hired by the company’s business collaborator

• Experience of auditor did not decrease the bias

Auditor Attachment affects Bias in Judgment

Bias in Judgment

Disclosure of conflict of interest

•Estimator got paid for accurate judgments •Advisor got paid for how high estimator’s estimate was (i.e., advisor had a incentive to make higher judgments)

Study of Advisors vs. estimators of how much $$ in jar

Bias in Judgment

Disclosure of conflict of interest

Results

•Disclosure of advisor’s motive to estimator did not lead estimators to discount advisor’s advice and make lower judgments so advisors made more than estimators

Bias in Judgment

Disclosure of conflict of interest

•Advisors who were given incentives to mislead estimators to make high judgments and whose motives were disclosed to estimators were more biased than those whose motives were not disclosed.

•Advisors seemed to adjust for estimator’s discounting and made even higher judgments

Results: Continued

Reduce Bias in Judgment

Legal Reform

Increase Disclosure Reduce Attachment

? +

Legal reform in accounting should remove the incentive for being attached and should take

into account the negative effects of disclosure to the organization

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• Personality & Values– Certain personality types are more prone to unethical

behaviour (e.g., economic values, high need for personal power).Bottom line mentality - financial success is the only value

to be consideredExploitative mentality - use people in a way that promotes

stereotypes and undermines empathy and compassionMadison Avenue mentality - anything is right if the public

can be made to see it as rightWorkers emulate the unethical behavior of their superiors

How sources affect Ethical Behavior - III

• Other individual factors– There are individual differences in the degree of

sophistication that people use in thinking about moral issues.

– Less disengagement and more attentiveness is associated with more ethical behaviour

– Individual differences in cognitive moral development.

How sources affect Ethical Behavior – IV

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Kohlberg’s Theory of Moral Development

12-9

Guidelines for

Determining Ethical Action

Will the political tacticspromote purely selfishinterests (as opposed toalso promoting organ--izational goals?)

Question 1

Does the political activityrespect the rights of theindividuals affected?

Question 2

Does the activity conformto standards of equity andjustice; is it fair?

Question 3

Unethical

Yes No No

No

Yes

Ethical

Yes