Costs of unethical manager behavior-Theoretical Implications

Theoretical Implications

Costs of unethical manager behavior to firms are substan- tial and span not just direct financial, but also reputational costs (Kish-Gephart et al. 2014), highlighting a clear need to investigate ways to get managers to act as agents for the firm and mitigate such self-interested behavior. To address this problem, behavioral ethics research has tended to focus on identifying the factors creating “bad/good apples” to the neglect of the “bad/good barrels” they operate within (see Jennings et al. 2015; Tenbrunsel and Smith-Crowe 2008; Treviño et al. 2014 for reviews). The current model responds to calls to go beyond investigating self-interest as the focused driver of individuals’ ethical decision-making (Kish-Gephart et al. 2014). The current research shows that self-interest is conditional, and that being in a “good barrel” (higher CSR firm) establishes a boundary condition such that the deleterious effects of temptation on ethical behavior are tempered. We thus respond to calls to better understand how contextual factors promote employee ethical behavior in the workplace (e.g., Kish-Gephart et al. 2010; Treviño and Youngblood 1990).

Specifically, while there has been a growing focus on the effects of meso-level constructs in organizations on individ- ual ethicality, such as leadership, and group processes and climate, there is a dearth of theory and research on macro- level factors, such as firm behavior as we investigate here. The current research supports that CSR activity may be one firm-level factor influencing desirable agency behavior. This new knowledge coupled with existing knowledge of how micro- and meso-level factors influence individual ethical decision-making can serve to promote a more multi-level approach to behavioral ethics theory-building and research, while simultaneously better integrating the separate canons of CSR and behavioral ethics research.

This study also contributes specifically to the body of CSR research. Prior CSR research has focused largely on its effects on outcomes at the organizational level (e.g., Bar- nett and Salomon 2012; Gregory et al. 2014; Harjoto and Jo 2015), causing scholars to call for more research to iden- tify how individuals think and behave based on their firm’s CSR (Aguinis and Glavas 2012). More specifically, scholars have highlighted the need for experiments concerning the individual effects of CSR to establish causal relationships (Morgeson et al. 2013; Rupp et al. 2013). Our study makes one attempt to address this need.

We assess through a causally interpretable design whether a firm’s CSR affects individual, and in particular, managers’ ethical decisions. This is particularly important because, as Gond et al. (2017) note, studies of reactions to CSR have focused primarily on employees, and little is known as to how CSR influences the decisions and actions of manag- ers and executives. To our knowledge, our study is the first

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to use a scenario-based experiment to identify how CSR influences managers’ “in-role performance”—i.e., manag- ers’ responding to an experimental formal role task similar to what they might encounter in their professional environ- ments (Gond et al. 2017, p. 234)—and is unique in that it examines the influence of CSR on a negative workplace behavior (i.e., temptation-influenced expense reporting), a neglected area of the micro-CSR literature. In addition, we provide evidence of an interactive effect of a firm’s CSR commitment and temptation on managers’ ethical decisions. Specifically, we identify a boundary condition such that the tendency of managers to act in their self-interest is mitigated by their firm’s commitment to CSR.

The current study also contributes to the literature from a theoretical standpoint by employing agency theory and social identity theory (SIT) together to describe why man- agers would be more inclined to act as agents and con- duct themselves in ways most advantageous to the firm. In this way, we respond to calls for a better understanding of how theoretical mechanisms interact to produce CSR- related outcomes (Gond et al. 2017). In this paper, we developed new theory proposing that the moderating effect of CSR on the temptation–ethical behavior relationship occurs through social identity processes. Specifically, we proposed that CSR signals a positive firm reputation and status that provides managers self-enhancement through their affiliation (Cialdini et al. 1976; Tesser and Campbell 1982), promoting self-categorization whereby managers activate a collective identity and orientation (Brewer and Gardner 1996; Hogg and Terry 2000). One key proposition of social identity theory is that such alignment promotes individuals to act in accordance with collective interests versus self-interest (Cialdini and Richardson 1980; Snyder et al. 1986). While the current results evidence the pro- posed moderating effect and are consistent with this logic, we were unable to directly test the proposed social identity processes without contaminating the internal validity of the study. Our theoretical model, however, should promote future research to directly test these processes. Specifi- cally important would be longitudinal field research that assesses the effects of firm’s CSR activities on key aspects of managers’ social identity (i.e., self-enhancement, self- categorization, and activation of collective self) over time, assessing their subsequent ethical decisions and behaviors when faced with temptation.

Our supplemental analyses not only reinforce the CSR manipulation’s efficacy, but further indirectly support that social identity processes were important in the managers’ decisions. When the firm expressed a corporate commitment to CSR, managers reported that both corporate culture and corporate values were made more salient, factoring more heavily into their decision-making processes as compared to managers in firms lacking commitment to CSR. This

result highlights that when the firm is committed to CSR, managers’ positive attributions concerning the firm context become salient, thereby buffering managers’ against the dys- functional outcomes that often arise in the face of tempta- tion. Future research should build from this by considering whether and how firms may maximize this effect through the ways they communicate and “internally-market” their CSR activities to their managers and employees.

Further, while supplemental tests showed that the sali- ence of the firm’s positive context was significantly higher in the CSR-present condition (i.e., the between-group effect), variance observed across participants within-group infers that individual differences also influenced perceptions of the context. This again suggests the usefulness of extending the current research into a multi-level model. Future research should, for example, assess whether aspects of managers’ moral self (e.g., moral attentiveness, moral identity, moral ownership, ethical ideology, or self-conscious moral emo- tions) (for overview of the components of the moral self, see Jennings et al. 2015) influence their awareness of, inter- pretation of, or reactions to, firm CSR activity. It is quite possible, for example, that individuals with higher moral attentiveness, and/or who feel greater moral ownership for the ethicality of their work context would more readily per- ceive and apply cognitive resources toward processing and making meaning of their firm’s CSR activities.

Further, the current research informs agency theory. Agency theory-based predictions of employee ethical behav- ior have largely focused on transactional logic, grounded in self-interest, whereby the alignment of the agent’s goals and incentives with that of the principal are typically the focus (e.g., Cianci et al. 2014; Harrison and Harrell 1993). Our research suggests a perhaps less pessimistic view, that through the organization “doing good” social identity pro- cesses motivate managers to withstand temptation and also seek to “do good.” One might argue that such motivation is still transactional/extrinsic as it is based on seeking psycho- logical self-enhancement. Future research on agency theory might fruitfully expand to include both financial/material and psychological forms of self-enhancement.

Finally, as CSR is often publicly observable, and rank- ings of firms’ CSR commitment are available (e.g., Forbes 2016), it may be useful if not important for researchers using secondary data sources to control for differences in CSR activity when investigating (un)ethical behavior in firms given our finding regarding its buffering effect on managers’ unethical behavior. Not accounting for the firm-level effect of CSR may otherwise lead to biased estimates.

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Practical Implications

From a practical perspective, our results regarding man- ager behavior suggest that senior management should con- sider the unintended consequences of typical compensation contracts. As shown in Fig. 2 (when CSR commitment is absent), managers booked over 200% higher expenses when temptation was present versus absent. As a result, organiza- tions might rethink how they structure performance-based bonuses to minimize the likelihood that employees will eschew agency and engage in such self-interested behavior.

In addition, results show that the context in which man- agers’ work plays a significant role in their ethical decision making. Specifically, as evident in Fig. 2, a firm’s commit- ment to behaving in a socially responsible manner reduces managers’ unethical behavior in our setting. Thus, corporate officers and boards may want to consider the important influ- ence of their firm’s commitment to CSR on ethical behavior throughout the organization. Given the social identity factors involved, senior leaders should also consider the way they make those CSR activities and subsequent positive social effects salient to their internal managers, such that they be more aware of and more fully “bask in the glory” of their organization’s good deeds. Indeed, image management is extremely relevant to the ethical decision making of com- pany managers, and thus companies engaged in CSR may benefit by effectively communicating their good corporate citizenship to their employees (Cable, Aiman-Smith, Mul- vey, and Edwards 2000). Accumulating evidence under- scores the powerful influence of organizational environments in promoting or discouraging the unethical intentions and behavior of individuals (e.g., ethical culture in Schaubroeck et al. 2012). The current results demonstrate that managers should consider the company’s CSR commitment as another key contextual factor.

Additionally, the current results suggest that CSR miti- gates the risk of unethical behavior within a firm. The financial/investing community might thus want to con- sider CSR when evaluating the reliability and quality of a firm’s internal controls and governance, and its risk pro- file. Furthermore, gaining a better understanding of the key organizational factors—such as temptation and CSR com- mitment—that influence managers’ tendencies to behave unethically may help regulators better direct their policy and investigative efforts.

Limitations and Future Research

A limitation of our study is that we consider only one type of unethical decision (i.e., making an expense deci- sion that benefits one’s self-interest and is contrary to the company’s best interest). Future studies should examine a breadth of other unethical decisions in order to improve the

generalizability of our findings. We also only look at a sin- gle type of incentive (i.e., a short-term bonus incentive). Further research could examine other types of financial and non-financial incentives that can create various forms and levels of temptation. Additionally, while we found that CSR bolstered managers’ ethicality in the face of temptation (pre- vented them from doing bad), it is unclear whether corporate CSR provides similar impetus for managers to seek doing good. Future research should thus assess whether CSR pro- motes ethicality when supererogatory action is called for, such as whistle blowing or acts requiring moral courage.

We also investigated CSR as a single construct—i.e., we manipulated several components of CSR simultaneously— which prevents us from assessing the relative effects of dif- ferent forms of CSR. Future research should address whether forms of CSR commitments or activities (e.g., CSR aimed at employees vs. the environment), or combination thereof, have differing effects on employees’ judgments and deci- sions. It may be that some forms of CSR activities provide higher levels of self-enhancement than others.

The current study provides evidence that corporate CSR commitment influences individual managers’ ethical judg- ments. Going forward, future research should consider other organization-level variables in conjunction, such as ethical leadership and ethical culture (e.g., Schaubroeck et al. 2012), and their unique and possibly interactive effects on indi- vidual ethical judgment. As noted above, multi-level models inclusive of multiple micro-, meso-, and macro-factors are particularly needed to advance behavioral ethics research. Manipulating as many variables in an experimental design may be difficult without introducing confounds and losing internal validity, and may not capture the ecological dynam- ics within actual organizations. Thus, a serial set of focused laboratory studies may be needed to establish initial causal relations between predictors and outcomes (e.g., manipulat- ing ethical culture and CSR in one study; and manipulating CSR, group processes and individual differences in another study). These laboratory studies could be followed by testing a more complex model in a field study to isolate the relative effects of the different predictors, and their potential interac- tions, on ethical outcomes.

As noted above, like all scenario-based laboratory stud- ies (e.g., Leavitt et al. 2012; Jones et al. 2014; Rupp et al. 2013), establishing the external/ecological validity and generalizability of our findings is subject to future testing. Such laboratory studies ask managers to immerse them- selves in a notional scenario lacking many of the complex dynamics inherent in an actual organization. This is of course the purpose of laboratory studies, as through ran- dom assignment and manipulation of a set of variables, they provide internal validity through isolating the causal relationships between variables. While that is a critical first step in theory-testing, much additional field research

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within and across actual organizational contexts is needed to establish external validity for our findings.

The sample consisted of practicing managers with an ample average of almost 12 years of experience. Yet, as they were all enrolled in special MBA programs, they may represent a unique sample of highly motivated and/ or developmentally oriented or achievement-oriented managers. Generalization of this model to a more diverse set of managers may yield different results. Additionally, while our findings demonstrate that corporate CSR com- mitment influences individual manager behavior, its effects on employees at varying levels within the organization remains unknown. It is possible that a manager’s level within an organization’s hierarchy may influence whether and how company CSR commitment is perceived and, in turn, impacts individual ethical behavior. More senior managers, for example, may feel they are a “greater part” of their firm’s activities, and thereby be more likely to receive self-enhancement in response than managers at lower levels.

Further, managers’ views on their companies’ CSR commitment may vary depending on their own economic situations. For instance, if a manager feels that s/he is underpaid, perhaps the company’s CSR engagement would be a source of resentment for the manager. Further, such a disenfranchised manager may be less likely to self-catego- rize with the organization and act as an agent on its behalf. This line of research could thus be an interesting avenue for future research.

In closing, temptations for self-interested behaviors are often present in organizational settings, deterring manag- ers from acting as agents for the principals they serve. The current results suggest that firms’ CSR commitments have internal effects, promoting managers to make decisions in the interest of the firm, and thereby achieve greater principal-agent alignment. These findings open numerous described areas for future research at the intersection of CSR, behavioral ethics, and agency theories.

Compliance with Ethical Standards

Conflict of interest The authors declare that they have no conflict of interest.

Human and Animal Rights All procedures performed in studies involv- ing human participants were in accordance with the ethical standards of the institutional and/or national research committee and with the 1964 Helsinki declaration and its later amendments or comparable ethical standards.

Informed Consent Informed consent was obtained from all individual participants included in the study.

Appendix 1: Company Overview and Schedule of Consulting Projects

Panel A: Company Overview

Assume you manage a manufacturing plant for Health Care Products, Inc. (hereafter, “HCP”), a privately held company. HCP manufactures and sells various skin care products to wholesalers, retailers, and individuals throughout the USA. HCP plans to execute an initial public offering (IPO) of its stock within the next 3 months.

Panel B: Schedule of Consulting Projects

Service provided by: Project status Estimated con- tract amounta

ABC consulting In early stages, estimated completion late Fall Year 2

$200,000

GPS consulting In early stages, estimated completion late Fall Year 2

$400,000

CUFF advisory services In early stages, estimated completion late Fall Year 2

$800,000

SGP LLP In early stages, estimated completion late Fall Year 2

$1,600,000

a Participants are told that all projects were initiated and expected to be completed within 1 year. They are also told that they have not yet been billed for any of the above services

Appendix 2: Temptation‑Absent and Temptation‑Present Conditions

Panel A: Temptation‑Absent Condition

Your compensation package for both Year 1 and Year 2 is composed of a base salary of $200,000 along with a guar- anteed bonus of 25% of your base salary.

Expenses (As of 12/31)

Current year Next year

Year 1 Year 2

Current projected plant expenses $77,100,000 $83,050,000

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Panel B: Temptation‑Present Condition

Bonus targets (based on expenses)a (As of 12/31)

Current Year Next Year

Year 1 Year 2

Actual plant expenses ≤ $80,100,000 40% 40% Actual plant expenses > $80,100,000

and ≤ $83,000,000 20% 20%

Actual plant expenses > $83,000,000 0% 0% Current projected plant expenses $77,100,000 $83,050,000 a Participants are told that their bonus is calculated as a percentage of base salary ($200,000)

Appendix 3: CSR‑Present and CSR‑Absent Conditions

Panel A: CSR‑Present Condition

HCP is well known throughout its industry, and the busi- ness world in general, as a socially responsible company. The company is committed to having a positive impact on both the society and the environment. For example, HCP purchases raw materials only from environmentally friendly suppliers. Also, the company frequently conducts social responsibility audits of its facilities to ensure the protection of workers’ civil rights and to oversee the ecological well- being of the organization. HCP takes corporate citizenship seriously and encourages all employees to do the same. You are aware that this commitment requires a continuous effort on your part to balance the financial needs of creditors and investors with the human needs of employees, customers, and the communities in which HCP operates.

Panel B: CSR‑Absent Condition

HCP is dedicated to increasing market share and maximiz- ing profits. Employees are focused on meeting earnings and growth targets.

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Affiliations

Cathy A. Beaudoin1 · Anna M. Cianci2 · Sean T. Hannah3 · George T. Tsakumis4

Cathy A. Beaudoin cbeaud9956@aol.com

Sean T. Hannah hannahst@wfu.edu

George T. Tsakumis georget@udel.edu

1 School of Business Administration, University of Vermont, Burlington, VT, USA

2 School of Business, Wake Forest University, Winston-Salem, NC, USA

3 Tylee Wilson Chair of Business Ethics, Center for Leadership and Character, School of Business, Wake Forest University, Winston-Salem, NC, USA

4 Department of Accounting and MIS, Alfred Lerner College of Business and Economics, University of Delaware, Newark, DE, USA

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