Week 10 Lecture outline

Corporate culture
Corporate culture has been emphasised as a factor that contributes to one company
succeeding while another languishes. What is corporate culture?
 It is the set of standards, ideas or moral codes – both explicit and implicit– that create a
unique atmosphere or environment in an organisation
 Corporate culture can be thought of as having different levels and of being informal or
informal. Levels of corporate culture include the following:
– artefacts – the visible level of culture
– espoused beliefs and values – the beliefs and values that guide behaviour and
decisions
– underlying assumptions – taken-for-granted beliefs and values that make up a
person’s ‘thought world’.
Each level influences the other, and therefore culture is neither static nor easily changed.
An important task of leaders is to create and manage culture to encourage and reward desired
behaviour. Overlooking or ignoring behaviour that contradicts the desired norms can have the
effect of encouraging or even rewarding it.

Ethical culture
One of two concepts used to represent the overall ethical context of the company as perceived
by employees:
 ethical climate – aspects that stimulate ethical conduct
 ethical culture – the organisational capacity and organisational conditions that
encourage ethical behaviours.
Research indicates that ethical culture is of greater significance than ethical climate in
explaining unethical behaviour. Key dimensions of ethical culture include:
1 ethical role modelling behaviour by managers and supervisors
2 capability to behave ethically
3 commitment of managers and employees to behave ethically
4 openness by managers and employees to discuss ethical issues
5 reinforcement of ethical behaviour.

Ethical leadership
There is an increasing expectation that moral agency should be a key part of positions of
leadership, especially senior leadership.
 Leadership is the process of social influence that exists between leaders and their
followers.
  Ethical leadership is ‘the demonstration of normatively appropriate conduct through
personal actions and interpersonal relationships, and the promotion of such conduct to
followers through two-way communication, reinforcement and decision-making’
(Brown, Treviño and Harrison, 2005).
The most critical element of ethical leadership is reputation: it is not sufficient for leaders to
claim that they are ethical, they must establish this reputation through the perceptions of their
employees in order to achieve a desired outcome. Ethical leadership needs to be demonstrated
by mangers at all levels of the organisation.
Personal morality
 Authenticity is imperative and an authentic leader is one who acts in a manner consistent
with their true self by expressing what they really think and believe and behaving
accordingly.
 Integrity – the quality of being honest and trustworthy and having strong moral principles –
is often mentioned as a key characteristic of ethical leaders.
Leader morality
 To be a moral manager, leaders must make ethics a priority and infuse ethical thinking and
behaviour into their leadership role.
 Ethical leaders need to stay true to their values to avoid being perceived as inconsistent.
Ethical leadership behaviour
 Being open and transparent as a leader is crucial in order to convey authenticity and
credibility.
 Leaders should also explicitly communicate ethical standards and vocalise ethical
expectations.
 Organisational leaders need to role model expected ethical behaviours.

Institutionalising ethics within corporations

Enhancing corporate responsibility requires:
 senior management to acknowledge a responsibility to society
 members to commit to social responsibility
 proactive engagement with society rather than defensive reaction to criticism
 the acknowledgement that society and companies are interdependent.
Ethics programs
 Initiatives to institutionalise ethics generally come under the heading of ethics programs
and represent the formal intentions and ‘hard controls’ of the organisation.
 Examples of typical measures include a code of ethics, policies outlining procedures for
investigating and disciplining allegations of unethical behaviour, policies outlining incentives
and rewards for ethical behaviour, an ethics compliance officer or committee, ethics
 training, an ethics helpline, monitoring systems and ethics audits, and pre-employment
ethics screening of applicants.
 Code of ethics: A code should convey the organisation’s commitment to ethical standards
and be based on principles that aim to raise the ethical sensitivity and confidence of the
employees it is directed towards.
 Related policies are complementary policies that assist the effectiveness of the code of
ethics (e.g. whistleblower policy).
 Ethics committee: At an organisational level, the committee typically communicates the
ethical code and subsequent decisions, clarifies and interprets the code when the need
arises and facilitates the code’s use.
 Employee training: At a minimum, training should include study of the code, a review of the
company’s procedures for handling ethical problems and a discussion of employer and
employee responsibilities and expectations. Training can comprise formal sessions,
newsletters, intranet, handbooks and induction packs.
 Reward systems: Rewards and discipline signal the required ethical behaviour to other
employees and therefore must be clear, visible and consistent.
 Ethics monitoring involves the measurement of ethics-related targets across all levels of the
organisation to provide feedback on the organisation’s ethical performance.

Beyond the bottom line

There need not be a trade-off between ethical corporate behaviour and profitability.
Companies have a moral duty to respect the rights and dignity of their employee, which can
also work to the company’s benefit by enhancing employee morale and thus the company’s
competitive performance.
Leading ethically and embedding ethical values in corporate culture will not insulate an
organisation from day-to-day moral issues, and leaders cannot always rely on an ethical code or
related policies to assist them. Firms that are proactive in their response to ethical issues tend
to be more successful than those who respond defensively.
However, a company that does not sincerely consider stakeholder rights as part of a
genuine moral commitment is unlikely to reap the benefits of enhanced business performance.

Conflicting perspectives on conflicts of interest

In 2009, Richard Parsons, formerly chair of Time Warner, became head of the board of
directors of Citibank, that enormous but troubled financial organisation. One of Citi’s
clients is Providence Equity Partners, a large private equity firm that has significant
holdings in MGM, Univision and other companies. Always on the lookout for new
investments, Providence Equity Partners, like other private equity firms, often needs
financing to undertake those investments. Providing such financing is just what Citibank
does for a living.
 Within a year of his arrival, however, Parsons, while remaining chairman of the
board at Citibank, became a senior advisor to Providence. He gets paid for this and will
presumably also receive bonuses if Providence does well, as is the normal practice.
Parsons will thus be chair of a company that is potentially a huge lender to Providence
at the same time that he is working for Providence. (Although it ultimately fell through,
Citi was once involved with Providence in a $51.5 million acquisitions deal.) Because
Parsons has a clear-cut fiduciary duty to Citibank’s shareholders and must put their
interests ahead of his or anyone else’s, his financial stake in Providence looks like a
paradigm of a conflict of interest – not to mention the fact that Citibank, with all its
problems, probably needs the full-time attention of the chairman of its board. ‘Is he so
good at rescuing megabanks,’ asked business writer Ben Stein, ‘that he can do that and
another major job at the same time?’
Citibank, however, sees no problem. A spokesperson says that the bank would
not allow ‘even the appearance’ of a conflict of interest and that its board of directors
has approved what Parsons has done as long as he recuses himself from taking part in
any decisions about Providence. One naturally wonders not only why Citibank would
permit this situation to arise in the first place, but also how effective its proposed
handling of it will be. Sometimes Providence needs financing, and Citibank often lends
money to firms like it for just that purpose. Parsons says he will not take part in those
decisions. But are disclosure and recusal enough? Even if Parsons is not in the room,
how could a manager at Citibank go against a deal involving his boss? Furthermore,
easier terms for Providence mean less money for Citibank’s shareholders, but will
Citibank executives really negotiate the best deal for Citi when they know it hurts
Providence – and therefore Parsons?
Here, the question is how best to avoid, or deal with, a conflict of interest. In
other cases, however, it is less certain whether there’s a conflict of interest at all and, if
so, what exactly the conflict is. Take the example of Joe Noel and KeyOn
Communications, a small broadband provider that serves about 15 000 rural customers
in 11 states. After getting hammered during the financial meltdown, its stock climbed in
2009 from 4 cents to $2.10 – an increase of more than 5000 per cent. Investors bid up
the company’s stock on the hope that it would get a slice of the billions that the federal
government was planning to dole out to expand internet service around the country. ‘We
certainly weren’t worth [just] 4 cents,’ says CEO Jonathan Snyder. ‘We have a real
business with real customers and real product, and a business that can generate real
cash flow.’
In truth, however, the company isn’t generating much, if any, cash, and it’s
doubtful it will ever deliver on the high hopes of investors. In fact, the bullish run on its
stock was largely fuelled by one man, Joe Noel, an analyst for Emerging Growth
Research. In a typical online report, he writes, ‘You’re going to see this company
awarded a lot of money,’ a refrain that he was repeating well into 2010. What he doesn’t
tell investors is that before he began covering KeyOn Communications, the company
awarded him 75 000 shares. However, ‘if people ask,’ he says, ‘I’m very up front about
[my financial stake].’ CEO Snyder defends Noel, saying his analysis of the company has
been ‘pretty even-handed’. He adds that if Noel is ‘not properly disclosing, I don’t think
he’s doing it maliciously’.
As it turns out, the competition among internet providers for government support
was keen, and in March 2010 all of KeyOn’s applications were turned down, causing the
price of its stock to fall back to $0.95. But even though independent experts had said all
along that the odds were against KeyOn’s getting any broadband money at all, as
recently as February of that year Joe Noel was touting the stock as vigorously as ever,
writing, ‘As we have said many times over the past 6 months – we believe KeyOn will
get a significant award,’ and pointing to the fact that a number of people had invested in
the company based on that belief. This is why Michael W. Mayhew of Integrity Research
Associates says that it’s a red flag when analysts have the kind of financial involvement
that Joe Noel did. ‘The paid-for-research-industry,’ he says, ‘has a stink to it, of being
biased, of maybe even being a scam.’149
Whether there is a stink or not, is this an example of a conflict of interest?