Organizational determinants of unethical behavior in commercial banking

This dissertation describes the design, implementation and findings of an empirical study on determinants of unethical behavior of employees of a major commercial bank in The Netherlands. In chapter 1, it is explained that managing unethical behavior is an issue which has gained specific attention for several reasons. One of the reasons is that in the public debate about causes of the financial crisis which began in 2007, it is often assumed that unethical behavior of employees and managers has played an important role. From a scientific perspective, research has focused on how unethical behavior observed in organizations is influenced by individual characteristics and factors in the organizational context. Ample research has been done on the impact of contextual factors such as aspects of the ethical organizational culture. In this study, these factors are operationalized as ethical cultural factors. However, limited empirical research has been done on effects of the formal organizational context, specifically aspects of the organizational architecture. Organizational architecture encompasses three critical aspects of the firm: the assignment of decision rights, the performance-evaluation system, and the structure of rewards. As a result, little is known about the differential effectivity between aspects of organizational architecture and ethical cultural practices in the banking sector. This study aims to contribute to a better understanding of the complex relationship between various aspects of the organizational context and unethical behavior. The general research questions, central in this study, are (1) how do aspects of organizational architecture influence observed frequency of unethical behavior of employees, and (2) what role do other organizational factors, specifically ethical cultural practices, play in influencing moral judgment and observed frequency of unethical behavior. Chapter 2 (?Situational moderators of unethical behavior: literature review and development of hypotheses?) provides an overview of the academic empirical literature on integrity management. In doing so, two paradigms are explored. The first paradigm is rooted in behavioural-based theories. The second paradigm is based on mainstream economics literature and some of the literature on incentive compensation.This study therefore espouses an integrative research approach in the attempt to combine these two different paradigms. Based on different theoretical perspectives, hypotheses and a conceptual model are developed in chapter 2. Chapter 3 (?Research method) describes the design and implementation of the empirical study. All employees of a major commercial bank in The Netherlands were invited to participate in the online-survey. The final number of usable questionnaires which were used for empirical analyses amounted to 736. This chapter introduces the instruments used in the questionnaire to measure the variables of interest. It then describes the steps taken in the formulation and pre-test of the questionnaire, and the procedures followed in collecting the data. Chapter 4 (?Descriptive statistics and item analyses?) presents the characteristics of the sample and the procedures used for testing and, where necessary, further refining the reliability of the measurement instruments. It was concluded that the data collection resulted in reliable measures of the variables of interest of this study. In this chapter, analyses showed that unethical behaviors can be clustered towards three different stakeholder groups: (1) unethical behavior related to employees, (2) unethical behavior related towards customers and financiers of the organization, and (3) unethical behavior related towards society and suppliers of the organization. Chapter 4 also provides an exemplification of unethical behavior within the organization by descriptive statistics on the perceived frequency and moral acceptability of integrity violations. In chapter 5 (?Results: test of hypotheses?) provides the results of the testing of hypotheses which were developed in chapter 2. For each of the stakeholder groups identified in chapter 4, separate analyses are presented. Based on structural equation modeling (SEM) analyses, final structural models are developed and used to test the hypotheses. Analysis shows that not all the hypotheses can be accepted. Finally, chapter 6 (?Summary and discussion?) presents a summary of the empirical findings and discusses the implications for science and practice. Based on the empirical results, the following conclusions can be drawn. First, it can be concluded that the effects predicted from organizational architecture theory are not sufficiently strong to explain unethical behavior towards any of the stakeholder groups identified and analyzed in this study. The degree of decision-making authority is not related to the observed frequency of unethical behavior. Also the extent to which various financial performance targets are used for performance evaluation and the importance of achieving financial targets to be rewarded are not significantly related to such behavior. The size of the variable financial reward (i.e. bonus) also has no effect on the observed frequency of unethical behavior. This implies that it is unrealistic to expect that the frequency of unethical behavior will decrease if the importance of financial targets used for performance evaluation is reduced. Furthermore, it may be unlikely that reducing the size of the variable financial reward will result in a decrease of the frequency of unethical behavior in the banking sector. Second, it can be concluded that moral acceptability judgments of unethical behaviors are related to the observed frequency of such behaviors. The less employees judge unethical behavior as morally acceptable, the less unethical behavior is observed. The relationship between individuals? moral acceptability judgment and observed frequency of unethical behavior towards customers and financiers was found to be considerably stronger compared to the other stakeholders under study. Third, it can be concluded that different ethical cultural practices influence the observed frequency of unethical behavior and the moral judgment of such behavior. However, different ethical cultural practices have divergent effects on various types of unethical behavior. Based on the instruments and models developed in this study, it may be possible for organizations and practitioners in the Dutch banking sector to effectively decrease unethical behavior. The more managers and employees experience openness in the organization to discuss ethical dilemmas and asserted unethical behavior, the less unethical behavior towards employees is observed. Altruistic and helpful behavior of employees towards each other also decrease unethical behavior towards employees. Furthermore, when employees evaluate their organization as fair, observed unethical behavior towards employees will decrease. The more the organization is able to provide employees with time, resources and information to act in an ethically responsible way and the more employees experience trust and respect in their working environment and identify and endorse the norms and rules of the organization, the less the frequency of unethical behavior towards customers and financiers of the organization. Sanctionability, the degree that unethical behavior is punished and ethical behavior is rewarded and recognized, only indirectly, through the construct of moral judgment, influences unethical behavior towards customers and financiers of the organization. Also clarity of organizational norms, the degree the organization has been able to make clear to employees how they should conduct themselves, is indirectly related, leading to less observed unethical behavior towards customers and financiers of the organization. Clarity of organizational norms is the single ethical cultural practice which directly reduces the observed frequency towards suppliers of the organization and society. Similar to the findings related to unethical behavior related to customers and financiers of the organization, clarity and sanctionability are ethical cultural practices which indirectly, through the construct of moral judgment, influence the observed frequency of unethical behavior towards suppliers and society. Chapter 6 further discusses some potential limitations of this study. Finally, based on the results and implications of this study, several interesting avenues for further research are considered.

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