Unethical Decision Making by the Top Management Team

Subject: Business Ethics
Pages: 17
Words: 4865
Reading time:
20 min
Study level: PhD

Introduction

The need to develop good strategies to place organizations in a competitive position has been increasing and this has been accelerated by the intensifying competition in the global markets. Competitiveness in modern markets requires establishing appropriate policies for the organization. The quality of policies and strategies developed by an organization depends on the ability of the top management team to make appropriate decisions. Policies are developed through a process of decision-making by the top management team of an organization. Ethics in decision-making has been an important aspect because the success of any organization depends on the strategies and policies adopted. The top management team has the responsibility to make good decisions about the organization (Carpenter, 2011).

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Ensley, Pearson, and Pearce (2003) opined that the top management team refers to the uppermost managers of any organization. This team may consist of a board of directors, chief executive officers among other senior managers of an organization. The decisions made by this team are final and policies and strategies are developed by the team for implementation. The shareholders delegate the TMT with the duty of making decisions for the organization and implementing them for the benefit of all stakeholders (Ensley, Pearson, & Pearce, 2003).

Decision-making is a step-by-step process and managers should adhere to the steps to ensure that decisions made are authentic. Making unethical decisions has negative impacts on the stakeholders and should be avoided at all costs. According to Schear (2010), unethical decisions refer to ideas that do not comply with acceptable standards and laid down rules. Ethics refers to values that are based on the social and economic systems of people in a given community (Svensson & Wood, 2011).

In this paper, issues concerning decision-making have been discussed as well as the concepts of ethical decision making. To expound on the topic, the issues about groupthink have been provided to indicate the weaknesses experienced in making decisions. Lastly, recommendations about making ethical decisions making in an organization have been provided. The entire document explains unethical decision-making by the Top Management Team (TMT) in an organization. In a summary, the author summarizes Top Management Team (TMT) and related theories, suggesting strategies to limit unethical business decisions.

Unethical Decisions Cause Business Failures

Ethics in business management has been a major issue that has been focused on by many people and organizations. Professional organizations, government institutions, and other concerned parties have embarked on introducing policies to ensure that managers make ethical decisions. The emphasis on making ethical decisions has been intensified because reversing the effects of unethical decisions is a great challenge to the stakeholders of any organization and ethical measures should be put in place when making decisions before the implementation process starts (Waller, Huber & Glick, 1995). Several organizations have reported poor performance due to the unethical decisions made by the TMT. Corruption cases have been on the increase in recent days and this has resulted from the unethical decisions made by the top management teams. The TMT is accountable for all decisions made in an organization any scandal is well known to the team. Scandal scorecard reports that more than $40 billion have been lost in the last year due to unethical decision-making (Halachmi, 2011).

Dandira (2011) was of the opinion that the TMT makes the final decisions and if the unethical decision is made by this team all the other departments will be affected. All the activities of an organization are based on the decisions of the TMT and failure to adhere to ethics when making decisions may have negative impacts on the organization. When unethical decisions are made the organization incurs losses and this affects all the activities of an organization (Schear, 2010).

With the development of global business activities, organizations are seeking strategies to promote profitability and competitiveness not only in domestic markets but also in the global scene. Decisions made by the TMT must adhere to the improvements in the technological systems so that productivity can be improved. Managers have a duty to make decisions that place the company in a good market position and to encourage the development of better strategies that will promote the image of the organization. Unethical decisions create a bad image of the company and may cause a reduction in the number of customers (Dandira, 2011).

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Clark (2010) explains how financial crises have been propagated by unethical decisions made by top management teams. In the year 2007/2008 the world experienced the worst economic crisis and this affected many industries. The impact of the economic depression is being felt today and some industries have not yet recovered. The crisis was ignited by poor decisions by the banking sector which had opted to issue excess mortgage loans to sub-prime lenders. A boom was experienced in the US economy because many people started trading in sub-prime mortgages. Unfortunately, the economy started to perform poorly due to the rise in global oil prices and general inflation. As a result, sub-prime lenders started to default on the loans and this caused a crisis in the economy. The banking industry was affected and other sectors of the economy were affected. Eventually, other countries trading with the US were affected and a global economic crisis was experienced. Therefore, the main cause of the crisis can be traced from the poor decisions made by the top management teams in the banking industry (Rojko, Lesjak & Vehovar, 2010).

There have been other scandals experienced in companies globally and this has resulted from poor decisions made by the top management team. Examples of such companies are Enron, WorldCom, Adelphia and others. The scandals affected many stakeholders and the government had to intervene. Several individuals have been prosecuted for making poor decisions which led to the failure of the companies. The top management of the companies involved in these scandals failed to make ethical decisions and this led to the misappropriation of resources (Hein, Neimeth, Rosner, & Watts, 2002). Unethical decisions continue to be made by the top management teams in various companies today and legal frameworks need to be amended to capture changes in economic systems.

The process of making decisions

Decision-making is a process that involves important stages and the TMT should ensure that all the stages are adhered to. The process starts with identifying the problem facing the organization. Problems may relate to shortage of sales, poor customer satisfaction, among others. The TMT has the duty to monitor all the proceses of the organization to ensure they identify any problem that may be affecting the stakeholders. The problems may emanate from internal or external processes and it is important to identify the main cause so that the appropriate decision and remedy is applied. Sah (2011) explains that problems within the organization can only be resolved by identifying the main cause and finding the appropriate remedy. As such, the TMT will have achieved its goals as the main decision making body (Gallén, 2009).

According to Chao (2011) the management team should collect alternative solutions to the problems identified. The alternative solutions emanate from each problem identified. The problems identified have their specific ways to solve and it is the duty of the TMT to have a collection of all possible alternatives to ensure that the decisions are made by applying different alternatives. All stakeholders must be involved in the process of developing the alternative solutions to the problems facing the organization. Doing so will ensure that all stakeholders accept the ideas (Chao, 2011).

Selection of the best alternative solution is then applied to improve the performance of the organization. The TMT must evaluate all the alternatives available before the implementation process. All teams within the organization should be involved in the evaluation process. Technical teams should be consulted to ensure that the solutions are applied appropriately. Other teams should be involved in the selection process to ensure that participation by all stakeholders is adhered to. At this stage the TMT can consult experts in all fields to ensure that a professional approach is applied in developing the most appropriate solution to the problems affecting the organization and other stakeholders. The TMT has the obligation to identify the best alternative that will be sustainable for the organization depending on the available resources in the organization (Verstegen, 2011).

Bentzen, Christiansen and Varnes (2011) opined that decision making is of little or insignificant meaning if there is no implementation. The implementation process is very important in ensuring that the TMT applies all the strategies identified. The decisions made are implemented to ensure that the organization achieves all the goals. The implementation process is a very critical process and the TMT should ensure that the decisions made are applied accordingly. To ensure that the decisions are fully implemented adequate resources should be provided and proper supervision made to ensure that the organization gets the best results out of the entire process (Bentzen, Christiansen & Varnes, 2011).

After the decisions are implemented a feedback process should be followed to identify the effectiveness of the entire process. The feedback process helps the TMT to identify the effectiveness of the decision making process. Christensen and Kohls (2003) explain that the feedback process involves following up all the stages of decision making to ensure that the appropriate procedures were applied. This process measures the effectiveness of the TMT in making decisions and the importance of such decisions to the organization and all other stakeholders (Christensen and Kohls, 2003).

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Ethical Decision Making

Traditionally, decision making involved obtaining strategies to maximise the profits made by an organization and to improve the social welfare of all the stakeholders. It was the role of the management team to establish ideas about reducing costs and promoting the welfare of all the people affected by the activities of an organization. There has been a great shift from the traditional approach to decision making process and an integrated approach has been adopted in modern business management processes. Decision making has digressed from profit maximization and improving the welfare of the stakeholders to other issues that may affect the organization and all the activities attached to it. Issues concerning technology, globalization, legal systems, corporate social responsibility, and others have been of great importance in determining ethics within the context of making decisions for an organization (Linda, 1991).

The processes within an organization have become complicated and there is need to come up with better strategies of improving the processes of making decisions. The complexity of these processes is determined by the size of an organization as well as the number of people to be involved in making a particular decision. Managers encounter a lot of challenges when making decisions because they must fulfil the needs of the people to be affected by the decisions they make (Linda, 1991).

The main aim of making decisions within an organization should be to improve the performance as well as promoting the welfare of all stakeholders. It has been emphasized by Pimentel, Kuntz and Elenkov (2010) that the TMT aims at getting a particular outcomes when making decisions. It is important that the TMT aim at maximising the outcomes obtained from the decisions made for the organization. There should be improvement on the performance of the organization when the decisions are implemented. Decisions which do not have any benefit should be shunned away. On the other hand, the TMT should make decisions about reversing a negative trend in an organization, for example a decline on the profits made by the organization. Ethical decisions entail making improvements to the organization and this should be the guiding principle to the TMT (Pimentel, Kuntz & Elenkov, 2010).

Ethical decision making requires that the TMT involve all stakeholders in the process. As such, the stakeholders will accept the decisions made by the TMT to reduce rejection of projects established by the management team. When all stakeholders participate in making the decisions of the organization, conflicts are reduced because the projects are readily accepted. Failure to engage the stakeholders is an indication of authoritarian management system whereby the top management team seeks to impose decisions upon the members of the organization. This may cause rejection of the projects established by the organization. Ethical decision making requires that the TMT should give all members of the organization an opportunity to express their ideas about the operations of the organization (Pimentel, Kuntz and Elenkov, 2010).

According to Maddalena (2007) ethical decision making integrates the culture of the organization to all the ideas developed. The organizational culture refers to the values, norms, attitudes and believes that are embraced by all members of an organization. The decisions made by the TMT must concur with the cultural ideals of the organization. Any contradictions to the culture may cause conflicts within the organization. The TMT must identify the decisions which are relevant to the culture of the organization. Cultural conflicts can hinder the implementation of the strategies of the organization and the TMT should ensure that decision making process is effective (Maddalena, 2007).

Organizations working in multicultural environments have the obligation to consider the interests of all cultural groups. Cultural diversity requires the TMT to create better processes of integrating the values of all groups affected by the decisions. Failure to apply the values of each group can lead to cultural conflicts among cultural groups and this may hinder the implementation of all decisions made by the TMT. Multinational organizations encounter cultural issues because they work with different communities. The role of customers and employees should be identified alongside their cultural backgrounds. Globalization has encouraged the operation of companies in different countries and this has created the need to learn the cultural practices of different people (Mallinger, 1997). In addition, Ganster (2005) explains that culture is an integral part of decision making and it is important for the TMT to attach cultural aspects in all strategies made. Successful decision making will be developed when all cultural groups consent to the strategies made by the TMT.

The TMT has a duty to maintain the corporate social responsibility of the organization by engaging all stakeholders in the decision making process. Organizations exist within communities and societies and it is important to get the opinion of all the people. The public image of an organization is improved when the communities surrounding are aware about the decisions made by the TMT. Corporate social responsibility is achieved when an organization has mechanisms of improving the welfare of the community. These mechanisms are created by making appropriate decisions by the top management (Whittier, Williams & Dewett, 2006).

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According to Petrick and Quinn (2001) ethical decision making should also adhere to the legal systems that have been established. Governments have rules and regulations about how businesses and organizations should be managed. As such, the TMT must adhere to a set of laws when they are making decisions. Compliance to these laws is important in making an organization successful in its activities. It is the role of the TMT to understand the legal requirements especially when making decisions. Adhering to the legal systems improves the relationship between the organization and all other stakeholders because laws help reduce conflicts (Petrick & Quinn, 2001).

Conflict of groupthink and ethical decision making

Groupthink is a decision making system where managers enhance solidarity and unity when establishing strategies for an organization. According to Janis (1972) “groupthink occurs when a group makes faulty decisions because group pressures lead to a deterioration of mental efficiency, reality testing, and moral judgment” (p. 9). The management team should come into consensus about the strategies to be adopted for implementation. Groupthink is beneficial and at the same time harmful. The members of the TMT reinforce each other in making decisions because there is collective knowledge about certain aspects of the business. Unity is maintained when groupthink is applied when making decisions. As a result conflicts are reduced among the members of the top management (Eaton, 2001).

Managers may apply groupthink when making decisions such that there is no opposition to any unethical decision they make. Groupthink does not allow the TMT to analyse the available alternatives when making decisions because some ideas are not favoured by majority of the members. This may result into making decisions which are poor because there is inadequate analysis of all available alternatives. Discrimination on ideas occurs and the TMT may be over-confident on the decisions they make (Eaton, 2001).

Ignoring external ideas when making decisions may result into groupthink. The TMT members make decisions by analysing all the ideas they have about a certain idea. When ideas from external sources are not provided the TMT may apply the wrong ideas because there are few alternatives to counter-check the available ideas. Using a closed-loop communication system in an organization especially at the top management level is dangerous because unethical decisions may be made. Ethical standards are determined by the society and the community in which an organization is operating in. when the community and society at large are not involved in the decision making process unethical policies will be developed. Organizations which discourage participation in decision making process within an organization by all stakeholders create a major risk such that the top management can make misleading decisions (Kramer, 1998).

Groupthink is also enhanced when no rules are established for making decisions. Rules provide a guideline for making ethical decisions in an organization. When there are no rules to guide the TMT on making the appropriate decisions, unethical decisions may be generated. The TMT acts within their jurisdiction as provided by the constitution of the organization. When there is no constitution or guiding principles in an organization, the TMT has powers to make decisions irrespective of the ethical standards about the decision (Hart, 1998).

Agency theory explains a situation where one party delegates duties to another parties. The two parties make a contract such that failure to fulfil the conditions may revoke legal action. In an organization the shareholders delegate duties to the top management team and legal agreements are made to ensure that none of the parties contravene the provisions of the contract. The TMT become the agents and have the mandate to operate the organization on behalf of the shareholders (Donaldson & Davis, 1991).

Decisions are considered rational if they are made ethically (Schear, 2010). Rationality is determined by the values which the society has put in place and these values distinguish ethical and unethical decisions. Various theorists have developed different approaches when explaining the agency theory. The Utilitarian theory explains that the ethical actions are determined by the consequences of activities done by people. As such, the outcomes of an event determine whether ethics have been adhered to or not. The theory purports that events with insignificant outcomes are not considered when making decisions (Swanson & Fisher, 2008).

The contractual theory provides that there are laws that determine ethical behaviours. Such laws define what is ethical or not according to the provisions of the set laws. The laws provide contracts which define ethical and unethical behaviours. The theory creates external forces to overlook the decisions made by the TMT and determine whether they are made within the contracts or not. Ethical standards are developed from the contracts made between the owners and the controllers of an organization. The shareholders have the mandate to revoke unethical decisions on condition that they deviate from the contract established. The contractual theory is similar to the agency theory in that it provides the difference between powers for owners and managers of an organization (Phillips, 2003).

Agency conflicts arise when the managers seek to fulfil their own interests at the expense of the owners of the business. The managers have more information about whether they are capable of meeting the objectives of the shareholders compared to the shareholders. At their position, the managers can manipulate information to indicate that the objectives have been met even though it is not true. The managers are accountable to the shareholders and the welfare of the organization depends on the decisions made by the TMT. When the TMT make unethical decisions the shareholders incur losses. It is for this reason that the shareholders are very keen on ensuring the agency system is properly implemented (Jensen & Meckling, 1976).

With reference to the agency theory the shareholders of an organization appoint the TMT to act as agents to run the business on their behalf. Since it is impossible for the shareholders to be directly involved in the management of the company, the managers are delegated the role of managing the resources. The TMT must act faithfully by ensuring they adhere to the provided rules and regulations stipulated by the shareholders (Myers & Majluf, 1984). The shareholders have the right to dismiss the members of the TMT when they fail to deliver accordingly. The overall goal of introducing agency theory was to distinguish the ownership and control of organizations. The TMT has the function of controlling the resources provided to them by the owners of the company. On the other hand, the shareholders have the role of providing the resources required for the achievement of goals (Linda, 1991).

There is need to provide controls to solve agency problems by creating ethics which act as measures to the activities of the TMT. Ethical decision making is the basis of establishing agency systems so that all parties can operate within their powers. Agency theory requires that the TMT should safeguard the interests of the owners by making decisions which are ethical (Fama & Michael, 1983). It is important that the ethicists should be external persons without any issues to do with the internal management of the organization. External ethicists have more capacity to control the decisions made by the TMT compared to internal ones. Employing external ethicists will promote ethical decision making by the TMT because there is a power overseeing the entire process. The shareholders can hire the ethicist to ensure their interests are safeguarded. The TMT should not have control over the ethicist because they can influence him/her to accept decisions which are not ethical (Linda, 1991).

The agency theory has drawbacks such that the top management team has limited powers of making ethical decisions. The shareholders determine the rules and regulations concerning the decisions made by the top management team. As such, the TMT acts within the jurisdiction of the owners of the business. The agency concept limits the TMT from making decisions which are beyond the provisions of the terms and conditions of agency. The TMT cannot make ethical decisions if such decisions contravene the provisions of the contract made with the shareholders. The agency theory therefore identifies how the TMT is forced to make unethical decisions especially when they are constrained by the terms and conditions of employment (Linda, 1991).

Another weakness of the agency theory is that there are provisions within which the TMT must make decisions concerning the organization as defined by the shareholders. The provisions allow the TMT to act within their realm and they should not make decisions which defy the contract of employment. This system allows the TMT to make decisions which are favourable to the organization. As such, ethical decisions prevail because the TMT cannot make decisions beyond their powers. In cases where matters of urgency prevail and the TMT has no powers to make such decisions, the organization incurs losses because the shareholders take long time to make their decisions (Hayne, 1998).

Strategies Likely to Limit TMT from Making Unethical Decisions

To avoid making unethical decisions various limitations should be put in place. First, the interests of the TMT should not prevail against those of the shareholders. The relationship between an employer and employee should be maintained between the shareholders and the management team. The personal interests of the management team may hinder the team from making ethical decisions especially where there is conflict of interests. The shareholders should set clear goals and objectives of the organization to ensure managers follow them. Managers who do not achieve the goals of the shareholders have no reason to work for the organization. Making unethical decisions would be contravening the by-laws set by the owners of the organization and punitive measures should be put in place for the managers (Swanson & Fisher, 2008).

As a way of promoting ethical decision making among the TMT members, the federal laws should be amended to place a requirement that organizations must employ qualified ethicists. Such people should become members of the board of directors so that they can resolve the dilemma of unethical decisions within the organization. The duty of this member of the TMT is to control the decisions made by the board and to ensure that there is compliance to ethics alongside the decisions made. The member would mediate between ethics and profitability of the company by ensuring that there is no compromise to ethics especially when a company wants to improve performance (Swanson & Fisher, 2008).

Adherence to legal measures should be encouraged as a control measure to avoid making unethical decisions. An example of the legal frameworks is the Sarbanes-Oxley laws which were introduced to solve scandals being propagated by the TMT. The laws were created after several scandals had resulted into closure of big companies. The federal government has enhanced the implementation of these laws to enhance the survival of companies supporting the economy. Shareholders of companies should encourage the TMT to apply these laws and this would reduce the occurrence of scandals within the organization (Hein, Neimeth, Rosner & Watts, 2002).

Leadership among the TMT is required so that the decisions made can be guided by rationality. When leadership prevails among the team members, groupthink cannot affect the decisions made by the team. Leaders influence the members of the team to make ethical decisions. A leader is a person who has the ability to stand against the decisions made by other team members and prove that his/her ideas are the best. Leadership among the TMT will help reduce negative impacts of groupthink. Leaders provide other people with appropriate ideas about operating the organization and they divulge from unethical decisions which may negatively affect the performance of the company (Ahlfinger & Esser, 2001).

To reduce the impacts of groupthink the shareholders should employ TMT members from different backgrounds. The members should originate from different cultures, careers, organizations and other areas of specialization. This strategy will reduce the chances of the members from thinking the same and providing similar decisions. When the members emanate from different backgrounds the decisions made are diversified and this helps prevent groupthink. In addition, accepting external ideas when making decisions can also reduce the impacts of groupthink (Fuller & Aldag, 1998). Opinions drawn from external sources change the manner in which the TMT members think and provide diversity in ideas about managing the organizations. Ethical decisions making is also reinforced by the rules established to govern the process. rules provide a framework for making appropriate decisions by the TMT. Inexistence of rules provides loopholes for the management team to make unethical decisions (Esser, 1998).

The culture of an organization also determines the behavior of the top management. A culture defines the values, beliefs, attitudes and norms that are applied by people in a given organization. Adopting a culture that encourages ethics is a good strategy that can improve agency system when making decisions in an organization. When a culture which emphasizes on adhering to ethical standards is established in an organization, all the stakeholders adhere to the ethics. Creating a culture requires liaising with all the stakeholders. The top management team applies the cultural values of the organization when making the decisions of the organization. It is therefore important to establish a culture that will make the TMT adhere to ethical decision making processes (Karlsen, 2011).

Conclusion

Making ethical decisions by the top management team provides an organization with better opportunities to operate effectively and achieve the objectives and goals that have been established by the stakeholders. It is important to note that unethical decision making has caused great losses to organizations and measures to regulate this pattern should be embraced. Making ethical decisions promotes the welfare of all stakeholders of an organization and enhances the achievement of goals of an organization. The TMT has the mandate of making decisions for an organization and failing to apply ethics by this team may cause a lot of losses to a company. The TMT acts as agents to the shareholders and they should fulfil the needs of the owners of the organization. Regulatory measures should be put in place to ensure that the TMT adheres to ethical standards when making decisions. The TMT has a responsibility to safeguard the interests of the shareholders by acting as good agents. The agency theory requires that the management team should have accountability for the decisions they make. The interests of the shareholders should prevail and the TMT should avoid situations where personal interests conflict those of the owners of the company. Lastly, the culture of the organization should be directed towards ethical behaviours. Introducing a culture that promotes ethics will encourage the top management team to make ethical decisions for the organization.

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