How can we ensure our organization is perceived as legitimate by the public? How do we navigate values, set incentives, and structures, and how should we incorporate ethics and ethical thinking into our organization? This is what we will discuss in this session.
Learning Objectives
Reflect on the role of ethics and norms in guiding organizational behavior and defining desirable conduct. Analyze the influence of external institutions and internal organizational structures on ethical behavior. Explore how incentives and organizational culture foster ethical organizational behavior. To illustrate these points, let’s consider a recent example: the Volkswagen emissions scandal. We will examine how it evolved and which factors influenced it—factors related to ethics, values, structures, and external institutions meant to monitor the organization.
Volkswagen Emissions Scandal Example
Profit and Market Share Focus: Volkswagen sought to become the world’s leading automaker (battling with Toyota), prioritizing revenue and market share over long-term ethical principles. External Regulation: Industry oversight failed to detect or prevent manipulation. Authorities in Europe, Germany, and elsewhere did not adequately uncover or address the technical manipulations in Volkswagen’s cars. Internal Structures: Studies revealed poor communication across departments, weak ethics training, and heavily centralized decision-making. Many people were allegedly involved without reporting the misconduct. Incentives: The company seemed to reward performance linked to revenue and market share, creating a culture where short-term gains overshadowed ethical conduct. Unlawful behavior—manipulating cars to pass emission tests—helped Volkswagen appear compliant, thereby boosting market share in the short run. This raises the question: How can organizations implement ethical behavior in business so incidents like this do not happen again?
Corporate Governance: A Tool for Ethics in Business
Corporate governance is the concept that addresses how values and ethics can be integrated into corporate contexts. Several definitions illustrate different aspects:
System of Direction and Control: How companies are directed and controlled. Ensuring Accountability for Finance Providers: Assuring those who supply capital that their interests are safeguarded. Systems of Laws, Rules, and Factors: Controlling operations, ensuring legal and ethical compliance, and clarifying responsibilities. Allocating Decision-Making Power: Ensuring decisions are made by people best equipped for the task. Internalizing Stakeholder Welfare: Focusing on more than just shareholder returns. These definitions highlight that corporate governance is a bridge between ethics and the corporate environment.
Defining Features of Corporate Governance
A System: Incorporating moral and ethical values, external institutions, internal structures, and incentive mechanisms across the organization. A Function: Designed to facilitate, reward, monitor, and enforce appropriate managerial behavior. A Purpose: Maximizing commercial viability and long-term survival by adhering to laws, public expectations, and ethical principles, securing organizational legitimacy. Corporate governance includes an ethical dimension in management by moving beyond short-term shareholder interests toward long-term viability, encompassing broader stakeholder needs.
Building Blocks of Corporate Governance
All are guided by ethical considerations, leading to an organization’s core values.
Four Key Questions
To understand corporate governance fully, we address four questions:
What role do ethics and norms play in shaping managerial behavior? How do external institutions influence ethical decision-making? How do internal organizational structures encourage desirable and ethical behavior? How can incentives (both monetary and cultural) be designed to promote ethical managerial behavior? Each of these questions will be explored in separate videos:
Ethics and Values: Lays the foundation for desirable managerial behavior and underpins the entire corporate governance system. Incentives: Discusses board compensation and organizational culture, aligning manager behavior with ethical principles. Corporate Structures: Examines the role of boards and other governance mechanisms in supporting ethical decision-making. Institutions: Explores standard-setting and external control, ensuring organizations meet ethical and legal requirements. Key Takeaways
Corporate Governance and Ethics: Corporate governance relies on ethical norms and values to guide long-term organizational success. Elements of Governance: External institutions, internal structures, and incentive systems should promote ethical, desirable behavior. Long-Term Viability: Corporate governance emphasizes sustainability and legitimacy over mere short-term profits, ensuring public and legal acceptance. We hope you look forward to the upcoming videos!
