Ethical capability as a competitive advantage: three case studies within the Volvo corporation

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Ethical Capability as a Competitive Advantage

- Three Case Studies within the Volvo Corporation

Mårten Fuchs Cecilia Hanning

INTERNATIONAL BUSINESS AND ECONOMICS PROGRAMME Department of Business Administration and Social Sciences

Division of Industrial Marketing 2001-01-04

Master’s Thesis

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ACKNOWLEDGEMENTS

First of all we would like to thank our supervisor Tim Foster. It was a pleasure working with you. We would furthermore like to thank Ms. Tornberg, Ms. Nilsson, Mr. Adolfsson, and Mr.

Wood for taking their time with our questions regarding topics that only a couple of thesis writing students would be able come up with.

Mårten would like to thank his family for putting up with him this last Christmas. The same goes for you Mr. Backert… He would also like to take this opportunity to address Mr.

Sångberg, call me when you have your script ready. Mårten would further like to thank the University in Luleå for providing him with this once in a lifetime opportunity of referring to himself in third person singular. He would finally like to quote Bruce Springsteen who sang that “poor man wanna be rich, rich man wanna be king and the king ain’t satisfied ‘till he rules everything”.

Cecilia would like to thank her family and friends for the support and engagement while writing this thesis. Several people took a great interest in the work and have encouraged me enormously. My husband Jan took the responsibility for the laundry and the cooking. You can continue with the laundry, however I’d like to eat a broader variety of dinners than meatsauce and spaghetti and leftovers from that. Then, I’d like to thank my mother Maria who babysat my son Filip when needed; and my friend Kajsa for the empathy shown and expressed. My apologies to those whom I have forgotten to mention.

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SAMMANFATTNING

Syftet med denna uppsats är att skapa ökad förståelse för hur etisk förmåga kan användas som en konkurrens fördel. Uppsatsen beskriver, utforskar och försöker förklara vem som är involverad i etisk ledning, en etisk kod, etisk träning och fördelarna respektive riskerna med att formalisera etik inom en organisation. Tre olika fallstudier inom Volvo har genomförts och resultaten visar bland annat att användandet av en etisk kommitté är starkt beroende av företagets storlek samt att ett av huvudskälen till att ha en etisk kod är att den definierar vad som minst kan förväntas av de anställda. Denna undersökning visar vidare att etik är ett så stort område att det blir svårt att genomföra meningsfull etisk träning samt att en positiv effekt av att formalisera etik är att det klargör för externa intressenter vad som kan förväntas av organisationen.

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ABSTRACT

The aim of this thesis is to provide a better understanding of how ethical capability can be used as a competitive advantage. This thesis describes, explores and tries to explain who is involved in ethics management, a code of ethics, ethics training, and the advantages versus risks with formalizing ethics within an organization. Three different case studies within the Volvo Corporation have been conducted. The findings of this study suggest that the use of an ethics committee is highly related to the size of the company and that one of the main purposes of a code is that it defines the minimum expectations of the employees. This study does furthermore show that ethics is such a big area that it is difficult to cover all the different topics in a training program and that a positive effect of formalizing ethics is that it makes clear for external parties what to expect.

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1. INTRODUCTION

This chapter will start out by providing the reader with a background to what a competitive advantage may be. It will then move on and discuss the various theoretical frameworks that have tried to explain competitive advantage. Of these frameworks the resource-based view of the firm is highlighted and discussed further. The emphasis that is put on the resource based view leads the reader into the problem discussion. This section of the chapter focuses on tools available for enhancing ethical capability within an organization. At the end of the chapter the reader will be provided with the purpose and research questions of this thesis.

1.1 BACKGROUND

According to Ma (1999) competitive advantage is defined as the asymmetry or differential in any firm-attribute or factor that allows one firm to better serve the customers than its competitors and hence create better customer value and achieve superior performance. Such attributes could be a superior location (e.g. Wal-Mart’s often monopolized location in rural areas in the USA); domination of shelf-space in retail (e.g. Coca-Cola’s or Pepsi’s dominance in super markets); exclusive or favorable access to supply (e.g. De Beers in the diamond market); a well-known brand name (e.g. Cartier) or efficiency in business operations (e.g.

Toyota’s just-in-time manufacturing and inventory system). (Ma, 1999)

Ma (1999) further states that strategic management practitioners and researchers have long been preoccupied with the phenomenon of persistent superior performance demonstrated by highly successful firms. Due to this, a great deal of attention has been focused on the nature and causes of competitive advantage. To date, various theoretical frameworks have attempted to explain competitive advantage. (Ma, 1999)

Schumpeter (cf. Ma, 1999) stated that time honored theory of creative destruction forces us to rethink the importance of innovation, competing against time and destroying the old equilibrium as well as established convention. Recently, the knowledge-based view articulates that creating a learning organization and fostering knowledge generation and exploitation should be the fundamental basis for competitive advantage in an increasingly information- based economy. (Senge, 1990; Nonaka, 1991)

The neo-classical economic tradition has made important contributions to our understanding of competitive conduct (Litz, 1996). Porter (1980) emphasized, through the traditional industry analysis approach, the importance of industry structure and market position.

In the past ten years a number of strategic management scholars, (Wernerfelt, 1984; Grant, 1991; Barney, 1991; Prahalad and Hamel, 1990; Teece, Pisano and Shuen, 1997) have breathed new conceptual life into a framework that has been dormant for over two decades.

The concept, currently referred to as the resource-based view of the firm (Barney, 1991), seeks to understand inter-firm performance differentials as a reflection of the different underlying resource endowments enjoyed by competing firms.

Barney (1991) states that if a firm possesses resources that are valuable, rare, inimitable, and the firm has the organizational capability to exploit these resources, it possesses a sustainable competitive advantage.

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Webster’s Third International Dictionary (1986) defines a resource as a “capability or skill in meeting a situation” (p. 1934). Building from this definition, the resource-based view of the firm essentially proposes that a firm is defined by the resources it controls (Teece, 1996).

The concept of the resource-based view of the firm has as stated before recently made a significant comeback. However, the concept’s origins trace back several decades. (Litz, 1996) Beginning with Schumpeter’s (1934) insights on the firm-specific advantages resulting from entrepreneurial skills, and continuing with Selznick’s (1957) emphasis on “distinctive competence” and Penrose’s (1959) view of the firm as “a collection of resources”, a theoretical perspective focusing on the intra-organizational sources of competitive advantage evolved.

In 1984 Wernerfelt defined resources as “those (tangible and intangible) assets which are tied semi-permanently to the firm” (p.172). Prahalad and Hamel (1990) re-framed resources as core competencies. According to Prahalad and Hamel (1990) core competencies are the collective learning in the organization and these competencies have three distinguishable features:

! It provides potential access to a wide variety of markets.

! It makes a significant contribution to the perceived customers benefits of the end products.

! It is difficult for competitors to imitate.

In 1991 Grant explored linkages between a firm’s resources and its profitability and Barney (1991) proposed that resources could be characterized as simultaneously valuable, rare, non- substitutable and inimitable. To the extent that an organization’s physical assets, infrastructure and workforce satisfy these criteria, they qualify as resources. Barney (1991) further states that a firm is defined by the resources that it controls and that these resource-based differences explain differences in performance across firms.

According to Barney (1991) three general types of resources can be sources of competitive advantage:

! Physical capitol (e.g., plant, equipment, finances)

! Organizational capitol (e.g., structure, planning, systems)

! Human capitol (e.g., skills, judgment, adaptability)

Barney (1991) concludes by stating that it should be noted that sources of competitive advantage include both tangible and intangible resources. Barney (1991) and others (Senge, 1990; Brenneman, Keys & Fulmer, 1998) have argued that certain firm specific, intangible sources of advantage (such as organizational history, culture and learning) can be particularly important to sustaining competitive advantage precisely because these resources are extremely difficult to imitate.

Litz (1996) has pointed out that strategic management literature has to a great deal overlooked social responsibility and ethical response capabilities as potential sources of competitive advantage. He argued that “to the extent that the firm is able to recognize its interdependence, reflect on the ethical standards appropriate to the situation, and react in a timely and responsive manner, it possesses valuable, rare, inimitable and non-substitutable assets, that is, it possesses strategic resources.” (p.1360)

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Considering the above statement by Litz this thesis intends to lift out and further study the field that is concerned with organizations ethical capability. Ethical capability has been defined by Buller and McEvoy (1999) as an organization’s ability to identify and respond effectively to ethical issues in a global context, as a potential source of competitive advantage.

The problem discussion below will focus upon business ethics and how this particular issue may be used as a competitive advantage.

1.2 PROBLEM DISCUSSION

The word ethics is derived from the Greek word ethos, which refers specifically to the

“character and “sentiment of the community” (Carroll & Gannon, 1997, p. 4). According to the Longman Dictionary of Contemporary English (1995), ethics is defined as “moral rules or principles of behavior for deciding what is right and wrong” (p. 466).

Deresky (1998) states that we believe that there are right and wrong ways to behave towards others, proper and improper actions, fair and unfair decisions. No one can say with certainty that a given standard is correct or incorrect provided it can be shown that the standard truly does express an obligation to others, and not just a benefit to ourselves. (Hosmer, 1987;

Deresky, 1998).

What is right, proper and fair? According to Hosmer (1987) these are all ethical terms and that these terms are all going to become more important in the future than in the past as our society becomes more crowded, our economy more competitive and our technology more complex. The terms and what they imply will according to Hosmer (1987) be particularly important for the business executive, whose decisions can affect many people in ways that are outside their own control.

1.2.1 BUSINESS ETHICS

In the world of business the term “business ethics” is often used when referring to an organization’s ethical conduct. Business ethics is defined by Drummond and Bain (1994) as

“the study of how personal moral norms apply to the activities and goals of commercial enterprise. It is not a separate moral standard, but the study of how the business context poses its own unique problems for the moral person who acts as an agent of this system” (p. 11).

Drummond and Bain (1994) further state that there are many different aspects of business ethics and that these generally fall into three basic areas of managerial decision-making:

! Choices about the law – what it should be and whether or not to, obey it.

! Choices about the economic and social issues that are beyond the law’s domain - usually called the “gray areas” or “people values”. These concern the tangible and intangible ways one treats others, and include not only the moral notions of honesty, promise keeping and fairness, but also the avoidance of injury and the voluntary reparation for harm done.

! Choices about the pre-eminence of one’s own self-interest – the degree to which one’s own well being comes before the interests of the company or of other people inside and outside the company. Included are decisions concerning rights of ownership and how much money is to be retained or distributed elsewhere.

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Drummond and Bain (1994) conclude that the ways the choices regarding the above listed issues are framed, analyzed and either maintained or abandoned form the basis of business ethics. The validation of business ethics is simply a way of acknowledging that, indeed, there are choices to be made concerning the means and ends of business that have an essentially moral ingredient (Drummond & Bain, 1994).

1.2.2 INTERNATIONAL BUSINESS ETHICS

The term international business ethics refers to the business conduct or morals of organizations in their relationship with individual and entities (Ashegian & Ebrahimi, 1990).

These norms, in turn, are based on broadly accepted guidelines from religion, philosophy, the professions and the legal systems (Deresky, 1998).

The biggest single problem for organizations in their attempt to define a corporate wide ethical posture is the great variation of ethical standards around the world. Many practices that are considered unethical or even illegal in some countries are accepted ways of doing business in others. Many western organizations are being placed at a disadvantage by refusing to go along with a country’s accepted practices, such as bribery, or being criticized at home for using unethical tactics for getting the job done. (Deresky, 1998)

1.2.3 ETHICAL BEHAVIOR AS A COMPETITIVE ADVANTAGE

Corporate social responsibility theorists argue that management should incorporate ethics into strategic goals because it is the “right” thing to do. (Wood, 1991) Current research is indicating that integrating ethics into the strategic management process is not only right, but also the profitable thing to do (Key & Popkin, 1998).

Litz (1996) identified three crucial resources for competitive advantage based on ethical capability:

! Perceiving interdependence

! Thinking ethically

! Responding ethically.

Perceiving interdependence specifically acknowledges the stakeholder perspective of the firm. According to stakeholder theory, a firm that recognizes and effectively satisfies the diverse needs of its various stakeholders will be able to sustain its institutional legitimacy (Freeman, 1984). Waddock and Graves (1997) have tied corporate social performance to increased financial performance and Frooman (1994) found that unethical behavior leads to decreases in stock price. Arthur (1984) analyzed corporate failures and disasters and found that the evidence strongly suggested that incorporating ethics in before-profit decision-making could improve strategy development and implementation and ultimately maximize corporate profits.

Thinking ethically involves the resource of ethical awareness. This implies an understanding of the various ethical frameworks as well as sensitivity to the differences among ethical perspectives across cultures. (Buller & McEvoy, 1999)

Responding effectively involves the resource contribution of effective issues management that is, taking the appropriate ethical action in a timely manner. Discerning the appropriate ethical response is complex and the ability to apply relevant ethics models is critical to the decision-

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making process. This capability assumes that the first two capabilities, perceiving interdependence and thinking ethically, are in place. (Buller & McEvoy, 1999)

Buller and McEvoy (1999) concludes that to the extent an organization can develop the capability to perceive, deliberate about, and respond effectively to ethical issues, it can enhance their competitive advantage. These advantages may be developed through effective dialogue with stakeholders and through organizational practices. Litz (1996) states that to the extent the firm is able to recognize its interdependence, reflect upon the ethical standards appropriate to the situation, and react in a timely and responsive manner, it possesses valuable, rare, inimitable and non-substitutable assets, that is, it possesses strategic resources.

In box 1, presented below, a short description of the Exxon Valdez accident is provided. This real-life case is useful to explain the importance of including ethics in decision-making. The information in the box will be commented below.

Box 1: THE EXXON VALDEZ OIL SPILL

When the Exxon Valdez left the Alaska Pipeline Terminal at 9:12 p.m., on March 23, 1989.

The 987 foot ship, second newest in Exxon Shipping Company’s 20-tanker fleet, was loaded with 1 264 155 barrels of crude oil bound for Long Beach, California. Tankers carrying North Slope crude oil had safely transited Prince William Sound more that 8 700 times in the 12 years since oil began flowing through the trans-Alaska, with no major disasters and few serious incidents. This experience gave little reason to suspect impending disaster. Yet less than three hours later, the Exxon Valdez grounded at Bligh Reef, rupturing eight of its eleven cargo tanks and spewing almost 11 million gallons of crude oil into Prince William Sound.

No human lives were lost as a direct result of the disaster, though four deaths were associated with the cleanup effort. Indirectly, however, the human and natural losses were immense to fisheries, subsistence livelihoods, tourism and wildlife. (Alaska Oil Spill Commission, 1990)

An investigation into the Exxon Valdez oil spill in Prince William Sound in US coastal waters revealed a chain of strategic planning and corporate decision making that had ignored fundamental ethical aspects of decisions. Cost efficiency goals resulted in decisions that reduced key personnel on tanker ships and limited available clean-up equipment. A personnel decision to overlook driving while intoxicated charges involving Captain Hazelwood was made so that existing personnel could continue to be utilized. The results of these decisions contributed to the disaster. (Bowen & Power, 1993)

Key and Popkin (1998) state that in the case of Exxon Valdez the events that occurred were results of poor decision making, not “accidental” occurrences. Exxon failed to identify and evaluate the ethical components of their decisions. This failure led to poor financial outcome as well as poor ethical outcome. (Key & Popkin, 1998)

According to Asforth and Gibbs (1990), Greening and Gray (1994) and Wartick (1992) negative media attention, such as in the case of the Exxon Valdez, may prompt organizations to respond in ways that will preserve or restore their legitimacy. These authors further state

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that corporations may respond to media scrutiny of their ethical failings by adopting one or more elements of a formal ethics program in order to demonstrate their intentions for future good behavior. (Drummond & Bain, 1994)

According to Weaver, Trevino and Cochran (1999) theory suggests that ethics programs can enhance company performance, usually by bringing an organization’s decisions and actions more into conformity with societal ethical expectations. Weaver, Trevino and Cochran (1999) further states that ethics programs can also contribute to legitimacy by signaling that the company conforms to societal expectation in its internal organizational processes and structures.

What tools, within a formal ethics program, are then available for an organization in order to enhance its ethical awareness, which helps it avoid disasters such as the Exxon Valdez incident or to gain a competitive advantage? Kaptein (1998) states that there are all kinds of measures available for the development of the ethical content of a corporation. Drummond and Bain (1994) argue that it has now become widely accepted that the ethical behavior of employees can be influenced by specific organizational strategies. It should however be noted that Nijhof, Fisher and Louise (2000), Brytting (1997) and Drummond and Bain (1994) argue that there are also risks associated with formalizing ethics within an organization. First, it is impossible to cover all potential unethical exercises. Secondly, the codes are often too generalized. Thirdly, the code will not work unless employees truly believe in it. The three most discussed instruments for formalizing ethics within an organization are however, a code of ethics, a training program, and an ombudsperson (Kaptein 1998).

Singhapakdi and Vitell (1991) found that marketers in organizations which have codes of ethics that are enforced, tended to be more sensitive to ethical problems when they occurred and to choose ethical alternatives in the decision making process. A considerable number of organizations have developed their own code of conduct; some have gone further, joining with others around the world to establish standards to improve the quality of life for workers.

Companies such as Avon and Toys R Us have joined the Council on Economic Priorities (CEP) to establish a system called SA8000. (Business Week, October 20, 1997)

Moreover, there are four international codes of conduct that provide some consistent guidelines for multinational enterprises (MNEs). These codes were developed by the International Chamber of Commerce, the Organization for Economic Cooperation and Development, the International labor Organization, and the United Nations Commission on Transnational Corporations (Deresky, 1998).

At this stage it is important to notice the differences in the use of the different terms. Deck (1994) states that the terms “Codes of Ethics” and “Codes of Conduct” are often used interchangeably.

According to Deck (1994) Codes of Ethics are statements of values and principles that define the purpose of the company. These codes seek to clarify the ethics of the corporation and to define its responsibilities to different groups of stakeholders as well as defining the responsibilities of its employees. These codes are expressed in terms of credos or guiding principles. Such a code says: “This is who we are and this is what we stand for,” with the word “we” including the company and all its employees, whose behavior and actions are expected to conform the ethics and the principles stated in the code. (Deck, 1994)

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Codes of Conduct are according to Deck (1994) statements of rules: “This is what you must (or must not) do,” as distinct from the code of ethics, which is stating: “This is how we expect you to behave.” Codes of Conduct are typically comprised of a list of rules, stated either affirmatively or as prohibitions¹. (Deck, 1994)

Other ways of enhancing ethical awareness within an organization is ethical training and the use of an ethical ombudsperson (Kaptein, 1998; Drummond & Bain, 1994). The simplest training program consists of an external expert conducting a lecture followed by a question and answer session. A rather interactive form of training is a workshop in which, in addition to a lecture, time is set aside to discuss cases. A strong point of a training program is that participants distance themselves from the day-to-day course of business and systematically exchange concrete experiences. (Kaptein, 1998)

An increasing number of organizations are investigating the position of a corporate ombudsperson. Although doubts are sometimes expressed that the position of ethical ombudsperson does not really work, a small but increasing number of companies are experimenting with this position. (Drummond & Bain 1994)

Related to the position of a corporate ombudsman is the use of an ethics office. The Center for Business Ethics²(1992) (Cf. Journal of Business Ethics p.863-867, 1992) has investigated the use of ethical offices. Brytting (1998) states that very few studies have been made on the use of ethics offices, however he does refer to studies made by the Center for Business Ethics and Perry. Perry (cf., Brytting, 1998) found that 6% of the companies have ethics offices, 9% have a board of directors ethics committee. Of the largest corporations, employing more than 50000 people, 15% have ethics offices and 23% have a board of directors ethics committee (Brytting, 1998).

1.3 PURPOSE AND RESEARCH QUESTIONS

Hartman (1998) states that an organization that desires to act with integrity it must first articulate its values, its priorities. Among the most prevalent forms of values articulation is a code of ethics. Once the firm has defined its individual value structure, individual decision makers within the firm have guidance in connection with difficult dilemmas. Hartman (1998) further states that other strategies (e.g. the use of a corporate ethics ombudsperson) exist to communicate corporate values as well as to continually update corporate programs and make them more effective. (Drummond & Bain, 1994) Litz (1996) stated that sound ethical practice is an overlooked potential source of competitive advantage while Buller and McEvoy (1999) proposed that ethical capability is a sustainable source of competitive advantage.

Considering these statements by Hartman (1998) we arrive at the purpose of this thesis, which is to gain a better understanding of how ethical capability can be used as a competitive advantage.

1The terms codes of conduct and codes of ethics are used interchangeably by both previous researchers and the interviewees for this thesis. The authors of this thesis have however limited themselves by using the term codes of ethics in the analysis chapter.

2 The Center for Business Ethics at Bentley College was established in 1976. The center is dedicated to providing a nonpartisan forum for the exchange of ideas on business ethics in an industrial society. This particular report was prepared by: Joan Whitman Hoff, Project Director and Research Fellow; Robert E.

Frederick, Research Scholar; W. Michael Hoffman, Director; Judith B. Kamm, Associate Director; and Peter Rubican, Graduate Assistant.

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In order to reach the purpose of this thesis, four research questions have been stated:

! How can the people involved in ethics-management within an organization be described?

! How can an ethical code be described?

! How can ethics training be described?

! How can the benefits versus risks with formalizing ethics within an organization be described?

1.4 DEMARCATIONS

It is beyond the scope of our study to cover all aspects of our research purpose. As stated in the problem discussion there is a wide range of tools available for a company that wishes to enhance its ethical capability. We have therefore demarcated our research to look at the above stated research questions from an organizational point of view.

1.5 DISPOSITION OF THE THESIS

The figure below presents an overlook of the disposition of the following chapters. Thereafter a brief explanation of the contents in each chapter is provided to the reader.

Figure 1.1: Thesis Disposition

! Chapter two consists of a literature review.

CHAPTER 2 LITERATURE

REVIEW

CHAPTER 3 FRAME OF REFERENCE

CHAPTER 4 METHODOLOGY

CHAPTER 5 EMPIRICAL FINDINGS

CHAPTER 7 CONCLUSIONS CHAPTER 6

ANALYSIS

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! Chapter three provides the reader with a conceptualization and a frame of reference based on the literature review.

! Chapter four states the method of the investigation used in our study.

! Chapter five consists of the empirical data collected.

! Chapter six provides the reader with an analysis of the conceptualized literature review and the empirical data.

! Chapter seven contains conclusions as well as implications for management, theory and further research.

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2. THEORETICAL FRAMEWORK

In this chapter we will introduce the reader to the previous research that form the foundation and scientific background for the research questions investigated in this thesis. The previous research will be presented in the same order as the research questions, that is, the first part of the theory chapter will cover the previous research carried out regarding that particular area and so on.

2.1 THE PEOPLE INVOLVED IN ETHICS MANAGEMENT

2.1.1 ETHICS COMMITTEES

In a study carried out by the Center for Business Ethics in 1992 it was found that ethics committees were used by 25% of the companies on the Fortune 1000 list.³ It was also found that the function of the ethics committee seemed more oriented to policy-making than dealing with specific violations or complaints.

According to the Center for Business Ethics (1992) the functions of an ethics committee may be listed as follows:

! To review and update ethics policies

! To handle infractions of the code

! To answer questions on ethics policy

! To develop corporate policy

To review and update ethics policies was considered to be the primary function by an ethics office with the other functions following as seen in the list above.

An ethics platform, ethics committee, ethics project group, or integrity group, or integrity coordinating committee are different names for a structural relationship of one or more people who are responsible for making policy for the development, perpetuation and protection of the morally relevant aspects of the corporation. The ethics office is a general term for these institutions. (Kaptein 1998)

How the ethics office takes form depends on the roles it is assigned (Center for Business Ethics, 1992). According to Kaptein (1998) an ethics office may take the following roles:

Initiator: The ethics office stimulates the organization of ethics. The ethics office is the driving force and motivation behind keeping the process of ethical development and safeguarding going.

Coordinator: The office coordinates activities relating to ethics management and with other management activities taking place within the organization. The ethics office creates synergy and cohesion in the measures and activities to be undertaken.

Channeler: The office creates communication channels between the corporation and its surrounding, between employees and management, and among departments. The office can serve as a point of contact for complaints, problems, solutions, and ideas, both for employees

3Fortune Magazine publishes the 1000 top performing companies each year.

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as for other stakeholders. In this sense, the office is an intermediary, a Janus-head, or a problem-and-solution broker.

Advocate: The ethics office follows corporate policy critically and positively. The ethical advocate is someone whose job is to think of and raise the right ethical question. In this role, the ethics office acts as the devil’s advocate.

Facilitator: The ethics office realizes the pre-conditions in which the ethical development may take place. For example, the ethics office can offer instruments which departments can use for their ethics programs.

Mediator: Finally, the ethics office mediates in both internal and external conflicts.

It is generally preferable to assign the ethics portfolio to someone in the top of the corporation so as to guarantee the support and establishment at the highest levels. In this way, the communication lines from upper management to the ethics office are kept as short as possible.

It is, however, undesirable that someone from upper management becomes part of the ethics office if this would impair the trustworthiness of the office. The office’s credibility is especially important in situations where the office serves as a reporting point for unethical conduct. In relation to the position of the ombudsman there is a specific requirement that employees may in no way be dependent upon the ombudsman, in terms of compensation, promotion, or otherwise. In this case, it is preferable to have a staff official rather than a line manager to fill this position. In addition, a well-functioning ombudsman must be able to guarantee complete anonymity to employees if they insist on it. It is crucial for the ombudsman that his position is not combined with another staff position, which could possibly turn against the interest of the employees. The position of the ombudsman loses credibility if the same person is also responsibility for internal investigations into corruption, fraud and criminality. (Kaptein 1998)

Drummond and Bain (1994) are also discussing ethics committees. They state that an effort to focus attention on past and current decision could take the form of an ethics committee. The committee membership should be rotated among all employees, thereby exposing them to ethical problems submitted by either employees or managers. A decision by the committee would provide firm, clear guidelines for action. Drummond and Bain (1994) mention the case of Motorola, who has experimented successfully with the concept of ethics committees.

McDonald (2000) concludes that a review of ethical committees in operations suggests that their function is more orientated towards policy making than handling infractions and/or employee complaints.

Benson and Ross (1998) found in their study that the ethics committee meets at least every month. An ethics committee was found to include:

! Someone from management, usually the plant manager.

! Someone from Human Resources

! Someone who is non-managerial, usually a shop or clerical worker.

In studying business ethics among the Fortune 500 industrials and 500 service corporations, as listed in 1994, Weaver, Trevino and Cochran (1999) found that the majority of ethics offices serve in largely coordinating or supporting roles. They further found that in most cases, the person in charge of the ethics office reports to a very high level of administration

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with 72% of ethics office heads reported to persons at the level of executive vice president or higher (including 18% who reported directly to the CEO).

2.1.2 ETHICAL OMBUDSPERSON

On the topic of establishing an ethics officer and/or ethics ombudsperson McDonald (2000) states that the term “ethics ombudsperson” is to be favored as it has a less emotive and regimental ring than “ethics officer”. McDonald (2000) further state that while their roles are essentially similar – to be the instrumental, hands-on focus for establishing an ethical culture through a variety of activities and programs. The ethics officer is seen to be a problem solver with a hands-on focus instrumental in establishing an ethical culture through a variety of activities and programs while an ethics ombudsperson generally acts as a third party resolver of disputes (Dunfee & Werhane, 1997).

McDonald (2000) states that while definitions vary from company to company, it appears that some characteristics are common to most ombudsperson positions. Further, McDonald mentions that the role is primarily a combination of investigation, counseling and advice. As a consequence of being approached, an ombudsperson may be required to investigate ethical circumstances and advise on an appropriate resolution or action writes McDonald. Also, independence and confidentiality are considered of key importance and an ombudsperson must not be seen to be taking sides according to the author. McDondald (2000) concludes that an ombudsperson generally has fully assimilated the corporate value system and is confident in handling questions that address all dimensions of the organization’s corporate policy.

Drummond and Bain (1994) state that an increasing number of organizations are investigating the position of corporate ombudsperson. They further state that while the formal definition may vary from company to company, it appears that some characteristics are common to most ombudsperson positions:

! An investigative, counseling and advisory role – as a consequence of being approached or on his/her own initiative, an ombudsperson could investigate ethical circumstances and advice on potential problem areas. He/she may on occasion attempt to resolve ethical conflicts.

! Independent – the ombudsperson must not be seen to be taking sides in any discussion and must have the trust of both management and employees. A prerequisite for independence is confidentiality if the position is to be effective.

! Experience within the company – the position is suitable for an older respected employee who has, with experience, assimilated the corporate value system.

Specifically, the position is appropriate for an individual nearing retirement or a

“plateau employee”.

Drummond and Bain (1994) conclude their reasoning regarding an ethical ombudsperson by stating that an important issue is who the responsibility for choosing the ombudsperson falls upon. If top management unilaterally nominates the titleholder, there is a risk that the position may not have the confidence of lower-level employees (Drummond & Bain, 1994).

According to Kamm (1993) the Ethics Officer is a person that has, as one of her formal responsibilities, to work with ethical issues related to the activities of her organization. Kamm

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(1993) furthermore states that the Ethics Officer is usually an insider with 10 or more years of experience in the company. According to Kamm (1993) the Ethics officer is:

! Mostly placed at the very top of the hierarchy, reporting directly to the CEO or the board.

! In a position where they are able to give advice, in open discussions or confidentially.

! Active in the work of disseminating the code of conduct.

! In a position where he investigates and takes actions on code violations.

! Reviewing and modifying the code of conduct and monitor adherence to it.

! Responsible for creating a code of ethics.

Weaver, Trevino and Cochran (1999) found that the assignment of ethics activities within an organization to a single individual may look like it offers a higher degree of firm commitment to ethics, but that need not be the case, as such individuals actually may devote only a small portion of their time to ethics-related tasks, even when their titles include the terms “ethics” or

“compliance”. In their research, Weaver, Trevino and Cochran (1999) found that 54% of the firms reported having a single officer specifically assigned to deal with ethics and conduct issues, in keeping with the United States Sentencing Commission’s recommendations for an effective ethics program. They further found that firms with a single officer assigned responsibility for ethics indicated a wide disparity in the proportion of time that the person devotes to ethics activities, ranging from as little as 1% to as much as 100%. Of the firms reporting a single officer responsible for ethics, 54% indicated that this officer spends not more than 10% of his or her time in ethics related activities. At the other extreme, 14%

reported 91% to 100% of the officer’s time spent in ethics-related functions. (Weaver, Trevino & Cochran, 1999) The authors conclude that formally assigning ethics to someone does not in itself guarantee that ethics-related issues receive much executive attention.

2.2 A CODE OF ETHICS

With reference to ethical codes, Singhapakti and Vitell (1990) generally found that marketers in organizations which have codes of ethics that are enforced tend to be more sensitive to ethical problems when they occurred and to choose ethical alternatives in the decision making process. Deck (1994) states that there are two types of codes with different intents and purposes: codes of ethics and codes of conduct.

Codes of ethics are statements of values and principles that determine the purpose of the company. They aim to clarify the ethics of the company and to define its responsibilities to the different groups of stakeholders as well as determining the responsibilities of its employees. The meaning with codes of ethics is to say, “This is how we expect you to behave”, whereas the purpose with codes of conduct is to state the rules determining what must or must not be done. The rules are stated either affirmatively or as prohibitions. Penalties for violating the rules can be identified and systems for how to appeal defined. (Ibid) Some authors do not separate these from each other and instead they look at them with their context as two words for the same thing (Drummond and Bain, 1994).

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The most visible sign of a company’s ethical philosophy are probably the codes of ethics. In order for a code of ethics to be meaningful, it must realistically focus on the potential ethical dilemmas, which may be faced by employees; it must be communicated to all employees; and it must be enforced. Further, a meaningful code of ethics cannot rely on blind obedience. It must be accepted and internalized by the employees who are required to implement it. Thus, managers must attend not only to the content of the code but also to the process of determining that content. To be most effective, a code should be developed and disseminated in an open, participate environment involving as many employees as possible. (Drummond and Bain, 1994)

The beliefs and norms of an organization can be turned into an ethical code. This code is generally proposed, discussed and defined by the senior executive in the firm and then published and distributed to the employees and shareholders. The norms in this code are standards of behavior, the way the managers want the other people in the organization to act when confronted with a given situation. The norms are usually stated as a series of negative statements, what the employees should not do. The beliefs in the code are standards of thought, the ways that the managers in the organization want the others to think. The beliefs are generally stated in a positive way. (Hosmer, 1987)

A corporate code of ethics is defined by Deresky (1998), as “a statement setting down corporate principles, ethics, rules of conduct, codes of practice or company philosophy concerning responsibility to employees, shareholders, consumers, the environment or any other aspect of society, external to the company” (p. 69). This code of ethics is usually written in general terms, noting obligations to these different groups (Hosmer, 1987).

According to Ferrell (1999), a code of ethics should clarify “the underlying professional values and principles” (p.225). These values should define the overall conditions for organizational decisions, and are usually coming from accepted customs as well as the desired corporate behavior. The values should be explained in the code with examples of how professionals can implement this vision. (Ferrell, 1999).

Brytting (1997) explains a code of ethics as documents with principles of how a specific company should conduct business ethically and how they should act in ethically sensitive situations. The shapes of these codes of ethics vary significantly. They can be extensive in brief, public or secret (Brytting, 1997).

2.2.1 CODES OF ETHICS OUTSIDE THE U.S.

One trend that is being increasingly documented is that ethical codes are being found more frequently in businesses outside the United States (Langlois and Schlegelmilch, 1990). In a study of large European firms, conducted in the late 1980s, Langlois and Schlegelmilch (1990) reported that 51% of the German firms, 41% of the British firms, and 30% of the French firms had ethical codes in place. Schlegelmilch and Houston (1989) surveyed 200 large companies in the United Kingdom to determine the extent to which they had codes of ethics in place. They found that 42% of the companies had codes, with the majority of the firms being in the consumer and industrial sectors.

In 1997 Brytting studied ethical support structures in the private sector in Sweden.

Specifically, the research focused on whether or not companies had formal codes of ethics, ethics committees, ethics officers, and ethics training. The author mentions that some 19% of the respondents indicated that they had codes of ethics, with written codes being the most

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common in capital management of farming sectors and least prevalent in the business industry and communications firms. Overall, Brytting (1997) concluded that moral support structures, primarily in the form of codes of ethics and ethics officer positions, are becoming more common in Sweden as well as in other countries.

2.2.2 THE PURPOSE WITH CODES OF ETHICS

There are several reasons for why a company has a code of ethics. One of them is to manage or respond to internal organizational activity (Weaver, 1993). A code can help to encourage employees to include particular values in their own decision-making, or to offer help and assistance to employees struggling with ethical questions in business (Weaver, Trevino and Cochran, 1999). A code may be used as a symbolic management tool and provide a language for conceptualizing the events of organizational activity, and thereby redefine some behavior as problematic and other as preferred. A code may also be used as a mean for making roles and expectations within the organization clear. (Weaver, 1993)

Within the firm a code of ethics can provide a legitimate reason for control and supervision, control for the sake of ethics may prove to be more acceptable in the organization than control for the sake of profit (Weaver, 1993). Weaver (1993) does however note that codes of ethics can be a dishonest way of gaining legitimacy in the eyes of shareholders. The goal of the code can also be to control or regulate the behavior of employees in order to follow legal requirements (Weaver et. al., 1999). Another reason for having a code of ethics might be a wish to manage or respond to specific stakeholders’ demands or expectations in order to achieve benefits, or to avoid harm to the firm (Weaver, 1993).

According to Kaptein (1998) a written corporate code of conduct fulfills a number of communicative functions. Internally, the code may have an orientation function: it increases awareness in relation to the moral aspects of activities. The code may further have an explanatory function: a code gives clarity in regard to responsibilities. A third aspect of having an ethical code is that it has a committing function: a code imposes a minimum number of expectations that apply to everyone. A code may also create checks and balances in that employees can call each other to account in living up to the code’s requirements, this means that the code has a correcting function. Externally the code may have a distinguishing function: a code increases the recognizability of the corporation for the stakeholders to participate in the corporation and provides thereby grounds for the stakeholders to participate in the corporation. (Kaptein, 1998)

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2.2.3 THE CONTENT OF A CODE OF ETHICS

Weaver (1993) presents a summary of issues that are often part of a company’s code of ethics.

These are shown below in table 2.1.

Table: 2.1

! General matters pertaining to the code:

# Purpose of the code

# Context of the code, code history and development; supporting programs

# Firm history and traditions, market/societal conditions

# Administration of the code; Compliance measures; sanctions

# Authority of code (Firm or individual self-interest; firm traditions; ethical principles; legal requirements)

! Nature of the company

# Company goals, missions, philosophy, management style

# Responsibility to shareholders

# Organizational structure (e.g., decentralization as a goal)

# Character of organizational communications

# Record keeping practices

# Technological innovation

! Employee issues

# Employee/company responsibilities to each other

# Expectations for employee self-development

# Substance abuse; employee health

# Harassment, intimidation, etc

# Rights of employees (e.g., privacy, termination issues)

# Employee political activities

# Workplace safety, quality (e.g., smoking policies)

# Conflicts of interest, nepotism

# Standards for judging salary & benefits

# “Moonlighting,” other external activities

# Contact with media

# Whistle blowing

# Use of company equipment, supplies, good name, etc

# Use of proprietary information (e.g., intellectual property)

# Use of confidential information (e.g., insider trading)

# Use of computer information systems

# Security and espionage

# Relationships with government agencies and officials

# Policies on gifts, entertainment, travel, etc

# Bribes, kickbacks, etc (domestic or foreign)

! Legal matters

# Compliance with law (e.g., antitrust, non discrimination, OSHA, etc)

# Avoid regulation

! Firm’s status and actions in the market

# Firm reputation and Integrity

# Competition, treatment of competitors

# Purchasing, sales and negotiating policies

# Product safety and quality

# Marketing practices, advertising (e.g., honesty)

! Responsibilities to society

# Community and charitable activities

# Environmental protection, hazardous waste, energy use

# Public safety and education

# Support for a political/economic system (e.g., free markets)

Source: Weaver, 1993, p. 54.

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Weaver’s (1993) summary is divided into six areas. These are general matters pertaining to the code, Nature of the Company, Employee issues, Legal matters, Firm’s status and actions in the market and Responsibilities to the society. According to Weaver (1993), the internal issues of the company, such as employee rights and responsibilities are getting more frequent attention compared to the company’s relation to external parties. Internal issues seem to have more immediate consequences and are easier to control then the company’s external relation.

When issues regarding society or community are brought up the policies seem to focus on for example contributions to charity, and environmental concern. (Weaver, 1993)

Kaptein (1998) states that there are multiple types of codes of behavior, which may apply to corporations. Codes can be divided by the level they apply to. There are codes at international, supranational, national, sectoral, company, professional, and individual level. A corporate code of ethics is distinguished from the other codes that the company itself determines the content and the use of the code. (Kaptein, 1998)

Furthermore, Kaptein (1998) mentions that both the substance of an explicit code and the process of compiling, writing, communicating, safeguarding and enforcing it are important in achieving an effective code of ethics.

McDonald (2000) found in her case study that there was a need to document ethical policies.

In her article on practical proposals for organizations she lists them as follows:

! An introductory message from the Managing Director.

! Employment practices. The section addresses equality of opportunity, open communication and commitment to developing employees. Rather than starting with a series of “ do nots” in this section, the company first emphasized their responsibilities to employees.

! Ethics in general: This section highlights the importance of ethics over legality –

“Even when the law is permissive, companies should use the course of highest integrity”. Also addressed is the issue of different cultural settings – “ Honesty is not subject to criticism in any culture”, and that “The means as well as the ends” are important – “We do not care how results are obtained, not just that they are obtained”.

! Conflict of interest. This Section highlighted issues of concurrent employment, handling confidential information, use of insider information, unauthorized appropriation of company services or property and the importance of disclosure.

! Bribery, gifts and entertainment. This section covered the culturally sensitive issue of soliciting or accepting any advantage from clients, suppliers or any person in connection with the company’s business.

! Safety/Occupational Health. In what may appear to be curious inclusion in a code of conduct, the sections on safety and occupational health provide the company with yet another opportunity of stating its commitment to employees and their welfare.

! Customer relations. The inclusion of customer satisfaction also serves to give emphasis to the core values of the organization.

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! Relations with suppliers and contractors. This section covered competitive tendering, evaluation, selection and monitoring.

! Environment. This section of the code dealt with business conduct in accordance with respect to the environment.

! Responsibilities to shareholders and the financial community. This section reflects the size and position of the company and details their record keeping, and information provision responsibilities.

! Monitoring of compliance and the means of enforcement. The final section of the code reminds employees of their personal responsibilities in regard to the code, avenues for information and disciplinary outcomes which result from violation.

McNamara (2000) states in his “A Complete Guide to Ethics Management” that if your organization is quite large, e.g., includes several large programs or departments, a corporation may want to develop an overall code of ethics and then a separate code to guide each of your programs or departments. McNamara (2000) also mentions that codes should not be developed out of the Human Resource or Legal departments alone, as is too often done.

McNamara (2000) suggested the following guidelines for a company’s ethical code:

! Review any values need to adhere to relevant laws and regulations.

! Review which values produce the top three or four traits of a highly ethical and successful product or service in your area.

! Identify values needed to address current issues in your workplace.

! Consider any top ethical values that might be prized by stakeholders.

! The “Six Pillars of Character”.

! Associate examples of behavior to the ethical codes.

! Indicate that all employees are expected to conform to the code of ethics.

! Obtain review from key members of the organization.

By reviewing any values need to adhere to relevant laws and regulations the organization is according McNamara (2000) ensured that it is not (or is not near) breaking any of them. If you are breaking any of them, you may be far better off to report this violation than to try to hide the problem. Often, a reported violation generates more leniency than outside detection of an unreported violation, particularly per the new Federal Sentencing Guidelines. Increase priority on values that will help your organization operate to avoid breaking these laws and to follow necessary regulations. (McNamara, 2000)

Reviewing which values that produce the top three or four traits of a highly ethical and successful product or service in “your” area is according to McNamara (2000) important. This could be for example for accountants: objectivity confidentiality, accuracy, etc. Identify which values produce behaviors that exhibit these traits. (McNamara, 2000)

McNamara (2000) states that it is important to identify values needed to address current issues in your workplace. Appoint one or two key people to interview staff to collect descriptions of major issues in the workplace. Collect descriptions of behaviors that produce these issues. Identify which values would generate those preferred behaviors. There may be values included here that some people would not deem as moral or ethical values, e.g., team-

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building and promptness, but for managers, these practical values may add more relevance and utility to a code of ethics. (McNamara, 2000)

To take ethical values that might be prized by stakeholders into consideration is according to McNamara (2000) important. For example, consider expectations of employees, clients/customers, suppliers, funders, members of the local community, etc. (McNamara, 2000)

According to McNamara (2000), the following list that is referred to as the “Six Pillars of Character” developed by The Josephson Institute of Ethics is important to consider when setting up an ethical code:

# Trustworthiness: honesty, integrity, promise-keeping, loyalty

# Respect: autonomy, privacy, dignity, courtesy, tolerance, acceptance

# Responsibility: accountability, pursuit of excellence

# Caring: compassion, consideration, giving, sharing, kindness, loving

# Justice and fairness: procedural fairness, impartiality, consistency, equity, equality, due process

# Civic virtue and citizenship: law abiding, community service, protection of environment

Compose your code of ethics; attempt to associate with each value, two example behaviors which reflect each value. Critics of codes of ethics assert that they seem vacuous because many list ethical values and do not clarify these values by associating examples of behaviors.

(McNamara, 2000)

McNamara (2000) states that it is important to include wording that indicates all employees are expected to conform to the values stated in the code of ethics. Add wording that indicates where employees can go if they have any questions (McNamara, 2000).

Obtain review from key members of the organization. Get input from as many members as possible. (McNamara, 2000)

2.2.4 INTERNATIONAL CODE OF ETHICS

Jackson (1997) states that if the organization is carrying out business abroad it should be careful not to let its code of ethics remain in national mores. Instead the organization should embrace recently evolved standards, many of which have been promulgated especially for international business (Frederick, 1991).

According to Rallapalli (1999) many companies have developed their own ethical codes of conduct while business ethics has not yet become global. Unethical behavior on the international market creates an urgent need for a shared global code of ethics (Rallapalli, 1999).

The Caux principles are considered to be the first international code of ethics for international business (Hartman, 1998). Carlson and Blodgett (1997) stated that the aim of the code is to set a world standard against which business behavior may be measured. The Caux principles were developed when international business managers from Europe, Japan and the USA gathered in Caux, Switzerland. The common goal for the meeting was the belief that business organizations can be a strong force and push for a positive change in the quality of life for the

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world. According to Hartman (1998) the foundation for the formulated guidelines at Caux where the Minnesota principles, created in 1992 by the Minnesota Center for Corporate Responsibility.

Hartman (1998) further states that from a societal point of view the Caux principles show that correct action is important. To make immoral choices regarding employment, trade, intellectual property or environmental protection might lead to undesired consequences such as child labor, unfair trade practices, copyrights pirating and environmental pollution. Apart from the Caux principles there are a number of other international ethical codes. Among these are codes developed by the United Nations Commission on Transnational Corporations, the International Chamber of Commerce, the Organization for Economic Cooperation and Development and the International Labor Organization. (Deresky, 1997)

According to Jackson (1997) the United Nations Commission on Transnational Corporations has established a set of obligations towards host countries that transnational organizations ought to follow. According to the United Nations Commission, Transnational Corporations should:

! Respect national sovereignty.

! Be adherent to economic goals and development objectives of host countries.

! Contribute to host countries economic development and develop mutually beneficial relations with them.

! Respect social and cultural objectives, values and traditions of host countries.

! Respect human rights and fundamental freedoms.

! Not discriminate on the basis of race, color, sex, religion, language, national and ethnic origin or political or other opinion.

! Provide equality of opportunity.

! Oppose apartheid.

! Not interfere in internal affairs of host countries or in intergovernmental relations.

! Stay away from corrupt practices, such as payments to public officials as compensation for performing or refraining from performing duties in connection with the Trans National Corporation’s transactions.

! Contribute to the social development of host countries.

! Co-operate with host governments in accomplishing national objectives for local equity participation.

! Be contributing to managerial and technical training of nationals in host countries, and facilitate their employment at all levels of management.

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2.2.5 CODES OF ETHICS, WHO AND WHY?

Formally identified codes of ethics have been introduced in most US firms in the last twenty years. A high degree of companies introduced codes of ethics during 1993-94 and one reason for this might have been the implementation of the United States Sentencing Commission guidelines in 1991. (Weaver, Trevino & Cochran, 1999)

According to the study of 1000 US corporations carried out by Weaver et al. (1999), 98%

claimed to have some kind of formal document on ethics and conduct issues. Of those 98%, 67% dealt with these issues through regular policy manuals, 78% had also separate codes of ethics. This indicates that the majority of American organizations use more than one way to set forth their standards of appropriate conduct. 22% noted the use of other means to specify ethics policies of the company, including for example occasional letters, bulletins, memoranda, video documents, posters, mission statements and top executive speeches. (Ibid) In Sweden Brytting (1997) found that 46% of the investigated companies used formal structural measures within the field of business ethics. By formal structural measures Brytting (1997) refers to organizational structures created to support or influence employees when they have to make choices in work situations that involves moral conflicts.

Firm size is one factor of many that affects a company’s usage of code of ethics. The size of the firm may be positively correlated with the usage of codes of ethics according to Weaver (1993). Ethics codes probably consume capital and other resources that smaller firms can not afford. Larger firms may have greater public visibility, and are therefore exposed to greater external pressure to manage their ethics. Larger firms may also operate over a greater diversity of markets with greater variations of local customs. They have therefore stronger needs to guarantee a common set of behavior assumptions for the members of the organization. (Ibid)

A second factor that influences the company to have a code or not is the industrial environment in which the firm operates (Weaver, 1993). Some industries, for example, law, medicine, engineering, and accounting, have found it necessary to develop codes that encourage acceptable behavior, to develop public trust, reliability and consistency in services (Ferrell, 1999).

In Brytting’s (1997) study over Swedish private companies, he found that capital managing was the industry where codes of ethics were most common. Industries such as private education, research and medical service were excluded from the study, due to the fact that in these areas there were other forms of ethics established that played a more significant role than business ethics (Brytting, 1997).

Only because a company does not have a distinct code of ethics, it can not be taken for granted that the company does not give attention to ethics in its formal policies. It is for example possible that firms address their ethical issues in the context of regular employee policy manuals instead of in a separate code of ethics. One should not assume that firms reporting little in the way of formal ethics program thereby are unethical firms. (Weaver et al., 1999) On the other hand it cannot be taken for granted that companies with the best code of ethics never behave unethically (Schaefer & Zaller, 1999).

Ethical capability as a competitive advantage: three case studies within the Volvo corporation