Shareholder value ideology, reciprocity and decision making in moral dilemmas.

Recent large-scale corporate scandals have turned business ethics and corporate moral responsibility into a major concern of managers, business schools, and the general public. Companies such as Tyco International, Ltd., Adelphia Communications, MCI (formerly Worldcom) and Enron have experienced significant damage to their reputations due to the malfeasance of high-level corporate executives. Results from the 2004 Harris-Fombrun Reputation Quotient survey listed Enron and MCI as having the worst reputations from the list of the 60 most visible companies rated in America (Reputation Management, 2005). Tyco and Adelphia were also ranked among the ten worst companies. The fraudulent and deceptive practices of these and other corporations, once again, have researchers seeking an answer to the question of "what influences managers' decisions in moral and ethical dilemmas," so that they may offer some insights to the business community on how to prepare future executives and managers to face challenges and the public's increasing expectation of corporate moral responsibility.

Unfortunately, empirical research in business ethics and social responsibility has been limited (e.g., Donaldson, 2003). Extant empirical studies in this research area have focused mainly on measuring and comparing the attitudes and ethical beliefs of managers, entrepreneurs, employees at different organizational levels, business students and academic faculty, and the results have been somewhat inconclusive (e.g., Bucar and Hisrich, 2001). Those studies have merits in their own right. However, they may not directly fulfill the need of the business community to understand the driving forces that may influence corporate conduct, especially in the face of moral dilemmas, by managers whose decisions may have broad-scale consequences to multiple stakeholders such as shareholders, suppliers, employees, customers, the business community, society and, potentially, the economy as a whole.

To help fill the research gap, this study identifies two potential factors that may play a major role in managers' decision making when they face moral dilemmas. They are the ideology of shareholder value and the norm of reciprocity. The ideology of shareholder value is the belief that managers have a duty to maximize profits and shareholders' wealth, while the norm of reciprocity is the social norm that business should play its part in supporting stakeholders since stakeholders play a major role in supporting business (i.e., reciprocal relationships between business and stakeholders). This study aims to answer the following research question: How do the ideology of shareholder value and the norm of reciprocity influence managerial decision making in stakeholder moral dilemmas with suppliers, customers and employees?

BACKGROUND OF THE STUDY

Ethical decision making literature has evolved around two major themes: 1) ethical perceptions and attitudes and 2) social responsibilities of business. The research stream in ethical perceptions and attitudes operates at a micro level by attempting to unveil behaviors or actions that individuals in the business community perceive as ethical or unethical. The main thesis of this research stream is that cultural, organizational and individual differences influence individuals' ethical attitudes and perceptions. Prior research has found that the national origin of business students has an impact on their reactions to ethical dilemmas involving employees, supervisors, customers, suppliers, and business rivals (e.g., Nyaw and Ng, 1994), and that cultural dimensions (e.g., power distance, individualism) were significantly related to ethical attitudes toward business practices (e.g., Hood and Logsdon, 2002; Volkema, 2004). Ethical perceptions, values and judgments were also found to significantly differ by organizational functionalities such as marketing and research (Hunt et al., 1989), by hierarchical levels and the length of tenure with the organization (Harris, 1990), by work group characteristics (Jennings et al., 1996) and by individual characteristics such as entrepreneurship (e.g., Bhide, 1996; Bucar and Hisrich, 2001) and locus of control (e.g., Key, 2002).

The second research stream takes a more macro approach by attempting to identify the social responsibilities of business. One school of thought is shareholder theory, based on property/ownership rights and free-market economics--led by theorists such as Friedman (1982, 1987) and Nozick (1987)--arguing for maximizing profits and shareholders' wealth within the legal and basic human rights boundary and through non-deceptive means as the only social responsibility of business. The argument of shareholder theory is based on property and ownership rights and free-market economics. It suggests that since shareholders are owners of publicly-held companies, managers of the companies are responsible for shareholders' welfare and should act in the shareholders' best interest, and managers' spending on other social goals is considered illegitimately expending company resources (Friedman, 1987). The other opposing school of thought is stakeholder theory (e.g., Freeman, 1984; Evan and Freeman, 1988), arguing that business is responsible for the well-being of all stakeholders, including customers, suppliers, employees, shareholders, and communities, who are identified by their interests in the business. Therefore, managers are considered agents of all stakeholders and are responsible for protecting the rights of stakeholders and balancing the legitimate interests of the stakeholders when making business decisions.

Despite being the dominant frameworks for management scholars and practitioners, both shareholder and stakeholder theories have not been empirically supported by conclusive performance evidence. For example, Berman, Wicks, Kotha and Jones (1999) found the employee and product safety/quality dimensions of stakeholder management were significantly related to corporate profitability while the community, diversity and environment dimensions were not, and O'Toole (1991) found no significant difference in economic consequences of stakeholder and conventional management approaches. Thus, these two competing normative theories have evolved in the literature to a great degree through philosophical debates and discussions (e.g., Marcoux, 2003; Smith, 2003). Although recent corporate scandals may have shifted the momentum and public support towards stakeholder theory, the stakeholder-shareholder debate is likely to continue, given the normative nature of both theories.

Previous ethical perception and attitude research has been of an empirical nature, predominantly based on the exploratory survey method and generally does not guard against the effect of social desirability bias, which may contaminate the research findings (Zerbe and Paulhus, 1987). In the extreme, survey studies intended to explore the differences in ethical perceptions and attitudes across various groups of individuals may uncover the differences in degrees of social desirability across the groups. On the other hand, research on the social responsibilities of business, centered on shareholder and stakeholder theories, tends to take forms of philosophical debates and arguments. Although shareholder and stakeholder theories may provide some guidelines for managers' decision making, conclusive empirical evidence is still lacking due, in part, to the methodology of normative inquires in which empirical pursuits are not emphasized (Donaldson, 2003).

This study utilizes a hybrid of empirical and normative inquires, regarded as an appropriate methodology for research in business ethics and social responsibilities by Donaldson (2003) and Trevino and Weaver (1994). We contend that the ideology of shareholder value is a product of the normative shareholder theory, while the norm of reciprocity is a social fabric holding businesses and multiple stakeholders together and thus to some degree underlines the normative stakeholder theory. We empirically test the effect of the ideology of shareholder value and the norm of reciprocity on manager's decision making in stakeholder moral dilemmas, using experimental design as research methodology. The random assignment in the experiment, where subjects are randomly assigned to control and experimental groups, helps to cancel out the spurious effects of social desirability and other potential biases inherent in the control and experimental groups and/or in the experimentation itself (Babbie, 1995). Thus, this study makes both empirical and methodological contributions to business ethics research, typically based on the exploratory survey method and susceptible to social desirability bias.

THEORY AND HYPOTHESES

Ideology of Shareholder Value and Decision Making in Stakeholder Moral Dilemmas