This week’s reading looks at ethics and the impact on company actions.

The battle for business ethics: A struggle theory 
To be and to remain ethical requires struggle from organisations. Struggling is necessary due to the pressures and temptations management and employees encounter in and around organisations.

As the relevance of struggle for business ethics has not yet been analyzed systematically in the scientific literature, this paper develops a theory of struggle that elaborates on the meaning and dimensions of struggle in organisations, why and when it is needed, and what its antecedents and consequences are.

An important conclusion is that the greater the ethics gap and opposing forces, the greater the struggle required. Viewing business ethics as struggle has several implications for theory and practice.

Read this article in full for free.

Muel Kaptein. 2017. The Battle for Business Ethics: A Struggle Theory.
Journal of Business Ethics, 2017, 144(2), 343–361.


Linking ethical leadership with firm performance: A multi-dimensional perspective 
Despite the importance of ethical leadership, the impacts of its different facets on firm-level performance are unclear. Drawing on the resource-based view of the firm and the group engagement model, Dan Wang and has team propose that ethical leadership consisting of leader humane orientation, leader responsibility and sustainability orientation and leader moderation orientation are beneficial to firm performance, and leader justice orientation plays moderating roles.

Wang et al. empirically tested this theoretical framework employing multi-source survey data collected from 264 Chinese firms. The findings reveal that both leader humane orientation and leader responsibility and sustainability orientation have positive influences on both firm financial and social performance, while leader moderation orientation only has positive influence on firm financial performance.

In addition, leader justice orientation positively moderates the relationship between leader humane orientation and leader responsibility and sustainability orientation and financial performance as well as the relationship between leader moderation orientation and social performance.

These findings provide theoretical and practical implications for understanding how different facets of ethical leadership jointly function to influence firm performance.

Dan Wang, Taiwen Feng and Alan Lawton. 2017. Linking Ethical Leadership with Firm Performance: A Multi-dimensional Perspective. 
Journal of Business Ethics, 145(1), 95–109.


Leading by example: Values-based strategy to instill ethical conduct
Years of research clearly shows that relying on traditional organisational power bases is not effective when companies want to promote business ethics and performance. It is not only that the use of legitimate power to establish ethics codes and coercive power to punish employees who do not comply does not work; this study—based on a multi-method research approach in the retail industry—indicates that the classic iron fist leads to unethical business values and lower service performance.

But there is a light at the end of the tunnel for forward-looking managers. The ethical attitudes and behaviors of employees within international organisations is a dynamic variable that is possible to change by the use of values-based leadership.

This extensive study of a large grocery store chain owned by a multinational corporation indicates that managers who lead by example will boost team values and commitment.

Arne Nygaard, Harald Biong, Ragnhild Silkoset and Roland E. Kidwell. 2017. Leading by Example: Values-Based Strategy to Instill Ethical Conduct. 
Journal of Business Ethics, 145(1), 133–139.


Internal corporate governance on disclosure quality and earnings management 
This study investigates the impact of internal corporate governance on the relation between disclosure quality and earnings management in the UK listed companies, in particular whether governance mechanisms have deterrent effect on earnings management similar to firms’ disclosure quality.

Unlike prior literature, the researchers measure a number of board and audit committee-related governance instruments, three disclosure quality proxies (i.e. Investor Relation Magazine Award, Forward-Looking Disclosure and Analyst Forecast Accuracy) and the Modified Jones Model to test the hypotheses of the study on a matched-pair sample data of Investor Relation Magazine Award winning and non-winning firms.

The findings in the OLS and sensitivity analyses using Heckman Procedure and 2SLS regressions consistently report a significant negative association between earnings management and disclosure quality for all proxies in restraining earnings management. In contrast, corporate governance variables are mostly insignificantly related to earnings management.

This provides an emerging trend of the outperformance of disclosure quality over internal governance mechanisms in lessening earnings management. These findings warrant due attention of the policy makers, investors, corporate firms and other stakeholders in shaping a high-quality disclosure and governance regime in corporate settings to mitigate managerial manipulations of earnings across the countries in the world.

Katmon, N. and Farooque, O.A. 2017. Exploring the Impact of Internal Corporate Governance on the Relation Between Disclosure Quality and Earnings Management in the UK Listed Companies. 
Journal of Business Ethics, 142(2), 345–367.


The hubris of hybrids 
In the pages of this journal, a fruitful debate has evolved on the ethical legitimacy of fractional-reserve banking. In this article, Philipp Bagus and his team respond to the new arguments raised by Evans (J Bus Ethics, 2014) as they clarify their (Bagus et al. in J Bus Ethics 128:197–206, 2015a) position on the unethical and illegitimate nature of fractional-reserve banking.

Fractional-reserve banking is not a recent financial innovation (unlike, e.g., money market mutual funds) but represents a long-standing legal aberration. The co-mingling of two mutually exclusive financial contracts, deposit and loan, confounds the contracting parties’ purposes, intents, rights, and obligations.

As a result, it creates unsolvable legal difficulties and ethical dilemmas. While these problems are most evident in the case of a bank run, they also arise when trying to answer the simple question of “who owns a deposit?”

Philipp Bagus, David Howden and Amadeus Gabriel. 2017. The Hubris of Hybrids.
Journal of Business Ethics, 145(2), 373–382.


Social norms and CSR performance 
Some institutional investors (e.g., pensions, universities, and religious, charitable, and not-for-profit institutions) are exposed to social norms and public scrutiny. Prior research indicates that these norm-constrained institutions engage in negative screening and invest less in firms operating in ‘sin’ industries.

Cahan, Chen and Chen examine whether social norms also motivate these institutions to engage in positive screening—where they invest more in firms with better corporate social responsibility (CSR) performance—and CSR-related activism—where they promote improvements in the CSR of existing investees. Cahan et al. find that firms with superior CSR performance have greater ownership by norm-constrained institutions, consistent with positive screening, and they use a natural experiment to establish causality. The authors also find that increases in the shareholdings of norm-constrained institutions are associated with subsequent improvements in CSR, consistent with activism.

Further, the writers rule out an alternative explanation for these results where the positive screening and activism are ‘profit-driven’ rather than driven by social pressure. Thus, results suggest that the influence of social norms on stock markets is more pervasive than documented in the prior literature.

Steven F. Cahan, Chen Chen and Li Chen. 2017. Social Norms and CSR Performance.
Journal of Business Ethics, 145(3), 493–508.


Financial impact of firm’s withdrawing from “State Sponsor of Terrorism” countries 
Using an event-study framework, Wolfgang Breuer and his team examine the stock market reaction to the announcement of firm withdrawal from countries designated as “State Sponsors of Terrorism” by the U.S. Department of State.

The authors find that such announcements are, on average, linked to a statistically significant increase in firm value—an effect which already kicks in a few days before the announcement date. The observed abnormal returns are positively associated with the U.S. domicile, the intensity of a firm’s hitherto existing engagement in a designated country, the number of countries that it withdraws from, as well as with a withdrawal from Iran compared to a withdrawal from other countries.

Evidence suggests an increase in demand for stocks of withdrawing firms as a plausible cause of the positive stock price reaction. Pension and endowment funds are significantly less likely to own strategic stakes in firms with intensive involvements in countries designated as “State Sponsors of Terrorism.”

The researchers find some statistical evidence that firms remaining active in such countries have abnormally positive returns in the long run.

Wolfgang Breuer, Moritz Felde and Bertram I. Steininger. 2017. The Financial Impact of Firm Withdrawals from “State Sponsor of Terrorism” Countries. 
Journal of Business Ethics, 2017, 144(3), 533–547.