Management Control Systems (2nd Edition)

Business Ethics and Management Control : Overview

A person who scores high on idealism and low on relativism is an 'absolutist'. A person with a low score on both idealism and relativism is called an 'exceptionist'. A person who scores high both on idealism and relativism is classified as a 'situationist'. A person who scores low on idealism and high on relativism is referred to as a 'subjectivist'.

An individual's value system is an important factor that determines whether he/she will behave ethically or unethically, when faced with an ethical dilemma. Other individual factors which influence ethical behavior include the age of the person, the ego strength, his/her locus of control, and the level of moral development. The decisions taken by the individuals in the past are important factors that influence the present and future decision-making. These decisions form the decision history of the individual. The ethical philosophy of the individual and the ethical decision ideology impact his/her decision history.

Organizational factors directly impact the behavior of employees and the ethical decision-making process. Some of the organizational factors that influence the behavior of the employees are the organizational culture and structure, performance measurement systems, reward systems, and the position-related factors. Environmental factors influencing ethical behavior include the political and economic factors, the legal environment in which the organization operates, and the social factors.

The integrated framework for ethical behavior brings out the link between all the different factors – ethical philosophy, ethical decision ideology, decision history, individual factors, organizational factors, and the external environmental factors. It helps in understanding the steps involved in ethical decision-making and behavior, and provides pointers as to how this behavior can be controlled by managers.

In the context of management control, ethical issues can arise in any department or function of an organization. On the financial front, the ethical issues may arise due to the creation of budgetary slack and managing earnings. Budgetary slack is a deliberate understatement of revenues and/or overstatement of expenses in the budget. It is caused by managerial intention rather than by an unforeseen error in the estimation process. Whether the manager feels that creating slack is ethical or unethical depends on his/her personality traits (related to honesty and fairness). It also depends on the extent of open communications possible between the manager and his/her superiors regarding the ability and the support necessary to achieve the desired objectives. Earnings management is used by organizations to show the financial performance to be better than they actually are. This may misguide stakeholders who use the financial statements to assess the organization's financial strength. Ethical issues in the sales function arise when the salespeople are under pressure from the higher authorities to achieve targets in order to earn incentives or recognition.

In the operations function, ethical issues may arise in terms of productivity and quality or on the safety front. Better quality leads to more efficient utilization of resources, thus boosting productivity. Bad quality can lead to managers budgeting for slack in their operations, either in terms of consuming more resources, providing for greater lead times, or accepting relatively poor quality. If the managers and employees in an organization are highly ethical and if the business environment and organization/job-related factors encourage ethical behavior, it can have a positive influence on the development and maintenance of a quality culture. Managers may compromise on quality to increase productivity and cut costs. To increase their profitability, organizations may ask the employees to work in unhealthy or dangerous working conditions.

Some issues that are important in terms of their ethical implications on the practice of human resource management include lack of job security and increased risk of unemployment, excessive scrutiny and control over employees, and discrimination. The management control systems of any organization can be divided into three parts. These are: indicating and communicating the objectives of the organization to all the levels in the organization; measuring performance through a set performance measurement system; and integrating the reward systems of the organization with the accomplishment of objectives and in turn encouraging the employees to perform. Organizations use different mechanisms to control and monitor the ethical behavior of employees.

An organization’s Code of Ethics is a document which gives details about the expected behaviors from each level of management. The ethical code gives the policies that are in place related to ethics and also the methods of implementing them.

In order to regulate ethical conduct, one of the best practices followed by organizations is to constitute an Ethics Committee. The Ethics Committee has to strike a balance between the ethical issues cropping up due to the strategic decisions taken at top management level, and the ethical problems that the employees face at all levels of functioning.

Ethics training for employees is the basic process by which the ethical conduct and decision-making power of employees can be improved. Ethics training should help employees decide the ethical implications of their decisions and actions. The ethics training program should be such that it strengthens the organization's stand on ethics, gives the employees guidelines regarding bringing to light wrong behavior, and also makes the employees aware of the likely penalties for wrongdoing.

Corporate governance is an important aspect of the organization which has to be integrated with the ethical code of the organization. It is necessary that the behavior of the top management and all employees is monitored to check for compliance with the ethical code at all levels as well as with the mission statement and functional strategies of the organization.

Whistleblowing is an act whereby an employee of an organization informs the higher authorities or public about unethical practices taking place in his/her organization. Whistleblowers help organizations in tracking and curbing unethical practices, which would otherwise damage the reputation of the organization and also cause harm to the well-being of employees.

It is necessary for organizations to incorporate reward systems which promote ethical means of achieving the specified objectives. Integrating ethics into the reward systems will increase the commitment of the employees toward the ethical programs of the organization. The system should ensure rewards for employees who show good judgmental capabilities or take proactive decisions that benefit the organization.

Chapter 8 : Overview