moral reasoning and ethical climate: not-for-profit vs...

ABSTRACT. Utilizing Rest’s moral developmentand Victor and Cullen’s ethical climate surveys, weexamine differences in moral reasoning and ethicalclimate between board members in the for-profit andnot-for-profit sectors. Six for-profit corporations andseven not-for-profit corporations, all with baseoperations in a major midwestern state, participatedin the study. We find that profit and not-for-profitboards may not differ in moral reasoning, but doexhibit different types of ethical climates. We also findthat for-profit board members may utilize higherstages of reasoning a greater percentage of the timethan not-for-profit directors. In contrast, the ethicalclimates of the two types of organizations are signif-icantly different. For-profit companies had climateshigher in egoism than did not-for-profit companies.In addition, not-for-profit firms reflected higherbenevolence factors than for-profit firms. Not-for-profit organizations also had somewhat higher, but notsignificantly different, mean scores on the principlefactor compared to the for-profit organizations.

This paper will focus on moral reasoning in theboardroom. In particular, in this study we willattempt to determine whether the moral rea-soning of boards of directors differs betweennot-for-profit, voluntary boards and paid direc-torships in the for-profit sector. Research in thefield of business ethics has been done primarilyin the accounting and marketing fields, butexceptionally little in the area of managementand governance. We seek to empirically explorewhether there is a difference in the way boardmembers reason when sitting on for-profit versusnot-for-profit boards, and how the culture of theorganization interacts with the level of moral rea-soning.

Although research is lacking in this field ofstudy, it is generally felt that directors of not-for-profit, charitable boards generally behave “moreethically” than corporate for-profit boardmembers (e.g. Machan and Uyl, 1987; Wang andCoffey, 1992). The rationale for this impressioninvolves several factors. Not-for-profit directorsvolunteer their time to sit on the board of theirchoice. Because there is no financial remunera-tion, the motivation for their service may besomewhat more generous and selfless in nature.They must choose to serve on a board ofdirectors because of wanting to give back to thecommunity or wanting to use their skills andtalents to serve in an organization that has helpedthem or someone they love, or to receive someother esoteric reward for their time. In addition,the mission of the not-for-profit organization isoften one of service to a community or a specificclientele. Without a money-making motive,acting in the best interests of all “stakeholders”can be more easily defended and is expected.Finally, because not-for-profits generally raise

Moral Reasoning and EthicalClimate: Not-for-Profit vs.

Holly Henderson BrowerFor-Profit Boards of Directors Charles B. Shrader

Journal of Business Ethics

26: 147–167, 2000.© 2000 Kluwer Academic Publishers. Printed in the Netherlands.

Holly H. Brower is a doctoral student at the KrannertSchool of Management at Purdue University. Herresearch interests include group decision making, corpo-rate strategy and governance. She was formerly theGraduate Fellow of the Murray Bacon Center for Ethicsin Business at Iowa State University.

Charles B. Shrader is Departmental Executive Officer ofthe Department of Management, College of Businessat Iowa State University. He was formerly the Directorof the Murray Bacon Center for Ethics in Business atIowa State. His current research interests include theeffects of strategy and governance on organizational per-formance. He is also an active case writer. His publica-tions appear in the Journal of Management, HumanRelations, Entrepreneurship: Theory & Practice,Case Research Journal, Journal of Small BusinessManagement, Journal of Managerial Issues, andJournal of Business Strategies.

their operating funds (at least in part) fromcharitable donations and community fund-raisers,there may be a heightened sense of accountabilityto the community and the clients to act honestlyand in their best interest.

Boards of directors serve the critical roles ofproviding control, service, and strategy for theorganization (Zahra and Pearce, 1989). There areseveral theoretical perspectives used to describethe mechanisms and rationale by which direc-tors meet these roles. In their review of theseperspectives, Zahra and Pearce (1989) describethe resource dependency perspective as mostappropriate for understanding not-for-profitboards. As such, directors are chosen as boundaryspanners between the organization and criticalcommunity resources such as funders (Shrader,Hoffman and Stearns, 1991). The compositionof the board and characteristics of directors areespecially critical for the not-for-profit organi-zation. Agency theory is the perspective that hasbeen applied most often to for-profit boards. Inthis perspective, directors’ primary role is to alignthe interests of management with those of share-holders. They serve a critical oversight functionto protect shareholders from the potential of self-serving management. These different foci –boundary spanning versus oversight – differen-tiate not-for-profit boards from for-profit boards.

In the for-profit domain, theories of organi-zation control are used to explain who hasresponsibility for the moral implications ofbusiness decisions (Monks and Minow, 1989).Agency theory takes the perspective that theprincipals of the organization are the shareholdersand managers, and directors are agents whorepresent the best interests of the shareholders(Monks and Minow, 1989; Dobson, 1991; Klein,1991).

This theory suggests that for-profit organiza-tions have opposing demands from differingstakeholders such as making the greatest profitsin the best interests of shareholders, being a“good community citizen” in localities where thecompany is represented, being a generous care-taker of employees, and producing and deliveringthe highest quality product for the customer.These demands are often in conflict with eachother and can be used to justify actions that some

may criticize as immoral or unethical (Nesterukand Risser, 1993; Dobson, 1991; Klein, 1991).For example, in an attempt to maximize share-holder interests and profits, a firm may downsize– laying off employees or closing operations in acommunity. The public outcry often is that thefirm is being irresponsible although share priceand earnings may rapidly increase as a result.Their responsibility to shareholders is served atthe expense of other organizational stakeholders(usually shareholders).

Thus, the fundament of agency theory is thatauthority is delegated to directors and managersby stakeholders to act on their behalf.Stewardship theory, on the other hand, assumesthat directors are motivated to act in the bestinterests of their constituents (Davis, Schoormanand Donaldson, 1997). Given a choice betweenself-interest and the collective interests of theorganization, a steward will not relinquish thegoals of the organization. The focus in explainingorganizational behavior in stewardship theory ison intrinsic motivation, while agency theoryclearly emphasizes extrinsic rewards. With thisdistinction between agency and stewardshiptheories, it seems plausible that different typesof moral reasoning would characterize boardmembers in different governance settings. Theagency cost environment of the for-profit sectorshould logically lead to predominantly extrinsi-cally motivated reasoning and behaviors.

The fact that significant financial compensa-tion is involved in serving on a for-profit boardalso complicates the incentive for a director tomake the most “selfless” or ethical decision. Forexample, if a CEO hand picks a director and paysher well, a certain loyalty is developed for thedirector to simply ratify decisions recommendedby the CEO. The magnitude of CEO compen-sation has received vast criticism in the literatureand some question the ethics of compensating aCEO so well and in forms which are not asso-ciated with performance (Westpal and Zajac,1995; Beatty and Zajac, 1994; Faulk, 1991;Geneen, 1984; Bavaria 1991). In addition, infor-mation about operations at a for-profit companyis usually held more closely and is, therefore, notas readily open to the public for scrutiny orapproval. As a result of these arguments, we

148 Holly Henderson Brower and Charles B. Shrader

expect that ethical reasoning of directors on not-for-profit boards differs from that of those on for-profit boards.

This paper will address four general researchquestions: 1) do directors of for-profit and not-for-profit organizations differ in their level ofmoral reasoning? 2) more specifically, do direc-tors of not-for-profit organizations make moreprincipled decisions affecting their organizationsthan directors of for-profit organizations makeregarding their companies? 3) do ethical climatesdiffer between for-profit and not-for-profitboards? and 4) is the perceived ethical climate ofan organization related to the level of moralreasoning of the board of directors?

Conceptual development

Part of the problem in this field of study is thatthe construct of moral reasoning has not beendefined in a broadly accepted way. For purposesof this paper, we will use Rest’s definition, “aparticular type of social value, that having to dowith how humans cooperate and coordinate theiractivities in the service of furthering humanwelfare, and how they adjudicate conflicts amongindividual interests (Rest, 1979, p. 3).”

Although empirical research in the area ofmoral reasoning in business is limited and, at thecorporate governance level, it is virtually non-existent, a great deal of research has been con-ducted about moral reasoning in other fields (e.g.Snodgrass and Behling, 1996; Elm and Nichols,1993; Ponemon, 1992; Trevino, 1986, 1992;Weber, 1990, Sridlar and Camburn, 1990). Thisstudy utilizes Rest’s model of moral reasoning,which is an extension of Kohlberg’s model (Elmand Weber, 1994).

Kohlberg model

The most widely accepted theory of moralreasoning is Lawrence Kohlberg’s model ofCognitive Moral Development (CMD) (Victorand Cullen, 1988). Kohlberg’s model assumesthat individual moral judgments are foundedupon a person’s perspective of how socialcooperation should be organized (Kohlberg et al.,

1983). The model proposes three levels ofmorality each subdivided for a total of six stagesof moral reasoning. This theory is based on“justice” as the foundation of morality. Thestages are: 1) punishment and obedience wherean action is only defined as immoral if one iscaught and punished, 2) individual instrumentalpurpose and exchange where an individual isonly interested in the personal consequences oftheir behavior, 3) mutual interpersonal expecta-tions, relationships and conformity where anindividual is interested in the greater good toother people especially as it affects oneself,4) social system and conscience maintenancewhere one judges actions by the results of thegreatest good for the greatest number ofpeople, 5) prior rights, social contract or utilitywhere laws and standards are upheld when inthe best interest of society, and 6) universalethical principles where one realizes that forsociety to function well, there must be a set ofstandards followed by all (Fraedrich and Ferrell,1991). An individual progresses developmentallyfrom one stage to another (Elm and Weber,1994).

Rest model

James R. Rest is a student of the Kohlbergtheory and expands it to include other aspectsof moral behavior. There are four components tohis model: 1) interpreting the situation (deter-mining who – including self – would be affectedby alternative actions and how each wouldperceive the affect on their social welfare),2) choosing the “morally right” course of actionfrom among alternatives, 3) prioritizing moralvalues over other personal values, and 4) fol-lowing through on the chosen moral act regard-less of obstacles. These four components are notsequential, but are interconnected (Rest, 1979;Thoma et al., 1991). Failure to act morally is theresult of a breakdown somewhere in the four-step process.

Because Kohlberg’s standard issue scoringsystem involves lengthy interviews conducted bywell-trained personnel, researchers have devel-oped alternative assessment tools for measuring

Moral Reasoning and Ethical Climate 149

moral reasoning levels. The most popular is theDefining Issues Test (DIT). The DIT is the mostwidely used tool because it is composed ofmultiple choice questions that individuals cancomplete in 30–45 minutes. The test does notdraw conclusions about what specific Kohlbergstage a subject falls into, but uses a “p” score thatplaces the subject’s moral reasoning along acontinuum. Thus, the p score is a continuousvariable rather than categorical and full para-metric analysis is feasible (Elm and Weber, 1994).

Kohlberg-based descriptions of moral judg-ment are solely “component two.” The DefiningIssues Test (DIT) measures only this componentand is limited to justice-based decisions; however,individuals may use other reasoning besidesjustice to derive appropriate actions such as socialnorms or religious prescription (Thoma et al.,1991). Rest and Thoma (1985b) have derived amethod of determining if an individual priori-tizes justice-based reasoning in moral decisionmaking on the DIT called the “utilizer dimen-sion” (U score). Subjects who score low on theutilizer dimension arrive at “component two”action choices by using a different process thanthe moral judgment processes assessed by theDIT, i.e. justice. The utilizer variable is thus amoderator of measures of justice-based moraljudgments and actions. By using the score of theutilizer dimension with the DIT, the predictiveability of behavior from moral judgment hasdoubled.

The DIT combined with the utilizer variableyields consistent results that correlate stronglywith the Kohlberg theory. Rest feels, however,that stage-typing subjects’ responses seems to beless consistent and conclusive. The continuous“p” score, rather, gradually gathered from severalresponses is a better measure (Rest, 1976). The“p” score is interpreted as the percentage of timethat the subject uses stage five and six reasoningto make their decisions. Hence, a “p” score of40 would indicate that a subject uses higher levelreasoning approximately forty percent of the timein reaching conclusions about moral dilemmas.Nevertheless, the DIT only measures for “com-ponent two” of Rest’s moral reasoning model.A subject must first be able to recognize that asituation involves an ethical dilemma, and finally

be able to carry out the moral decision onereaches.

Both Kohlberg’s and Rest’s theories base moralreasoning on justice. Kohlberg’s view of moralityfocuses on universal rights and duties. It restrictsmorality to its central minimal core (Kohlberget al., 1983). Moral reasoning is only part ofmoral behavior (Elm and Weber). Rest, on theother hand has a soft view of justice as it relatesto a community of others (Elm and Weber,1994).

Ethical climate

Victor and Cullen define ethical work climateas “the prevailing perceptions of typical organi-zational practices and procedures that have ethicalcontent (Victor and Cullen, 1988, p. 101).”Climate is the set of general characteristics of theorganization which affects broad ranging deci-sions sometimes referred to as organizationalculture. Victor and Cullen argue that the litera-ture on moral development recognizes that indi-vidual characteristics alone are insufficient toexplain or predict moral behavior. The study usesa two-dimensional typology of ethical climates.The first dimension correlates with Kohlberg’stheory and Rest’s work on moral reasoning whileprojecting the characteristics to organizationaldecision-making. These criterion range fromegoism to benevolence to principle. The seconddimension represents the locus of analysis used tolodge ethical criterion into an individual, local(meaning company, division or workgroup) orcosmopolitan range of consideration (Victor andCullen, 1988). The authors also quote Kohlbergas asserting that individuals can exist in groupswhose systems, or ethical climate, if you will,differ from their own level of moral development.

This theory subdivides the possibilities oforganizational climate into nine potential types(see Table I). In a culture where egoism is thedominant climate, the loci of analysis identify thespecific “self ” used to determine actions, i.e.individual would indicate protection of personalgains and losses, local would refer to the organi-zation’s self interests and cosmopolitan would bedefined as taking consideration of the system’s


or economy’s interests. In the context of benev-olence as the primary criterion in use, individualwould define the “others” as any other peoplewith or without membership in the organization.Likewise, the local frame of reference woulddefine “others” as the organizational membershipof the team. Within benevolence, then, a cos-mopolitan frame of reference would take intoconsideration those other constituencies outsideof the organization.

Finally, within the principled range of crite-rion for decision making, the loci of analysiswould indicate the source of the principles inuse. Therefore, an individual frame of referencewould suggest that principles are self-chosen, thelocal referent would suggest the organizationdictates the principles and the cosmopolitan focuswould utilize principles derived from extra-organizational sources.

Propositions – moral reasoning

Elm and Nichols (1993) found that oldermanagers and those with longer tenure usedlower level reasoning to resolve managementdilemmas (measured by the DIT). Similarly,Ponemon found that accountants who stay intheir profession maintain lower levels of ethicalreasoning than recent college graduates(Ponemon, 1992). Managers are found to exhibithigher levels of moral reasoning in hypotheticalthan in real life situations (Trevino, 1992; Weber,1990; Trevino, 1986). There is also someevidence suggesting that both corporate valuesand structural position have a greater influence

than personal values or gender on corporatedecisions with ethical implications (Maclagan,1996; Wimalasiri et al., 1996; Sridlar andCamburn, 1993; Derry, 1989; Cullen, Victor andStephens, 1988; Jackall, 1988). Research indicatesthat educational level and age are the two mostimportant factors in influencing DIT p scores(Wimalasiri et al., 1996; Rest, 1994).

Although individuals who serve on for-profitand not-for-profit organizations generally are inthe same age bracket and have similar educationallevels, the motives and expectations for servingon a not-for-profit board are different from thoseof serving on a for-profit board. As discussedearlier, a director for a not-for-profit organiza-tion is seeking some type of esoteric reward andis often committed to making decisions in thebest interests of the clients being served by theorganization. Directors serve as boundaryspanners linking the organization with necessaryresources (Shrader et al., 1991). Therefore, not-for-profit directors often are not charged withthe role of oversight as in a for-profit organiza-tion which has directors chosen to protect theshareholders’ interests (Zahra and Pearce, 1989).In recent years scandals about unethical conductand misuse of funds in large not-for-profits suchas the United Way and the NAACP have beenheadline news. These activities make headlinenews because of the breach of public trust.Communities hold charities to a higher code ofconduct. The same activities would be lessshocking in the for profit sector because thepublic generally expects less ethical behavior inthe corporate sector (Rest and Narvaez, 1994).

Another factor influencing this prediction is


TABLE IEthical climate types (Victor and Cullen, 1988,

p. 104)

Locus of analysis

Ethical criterion Individual Local Cosmopolitan

Principle Self-interest Company profit Efficiency

Benevolence Friendship Team interest Social responsibility

Egoism Personal morality Company rules and procedures Laws and professional codes

the fact that not-for-profits are closer and oftenmore accountable to their constituents whichmay influence the ethical appearance of decisionsmade by these boards (Metzger and Dalton,1996; Phelan, 1993; Pfeffer and Salancik, 1978).Hospital boards, for example, are comprised ofmostly independent directors who, rather thanbeing appointed by the CEO, are recruited bythe board itself, and are serving at the bequestof constituent groups (Ewell, 1996). Additionally,because not-for-profit board members are vol-unteers rather than paid professionals, there is areduced incentive for them to seek personal gainas a result of their decisions. Although not-for-profit organizations will report that membersoften serve on their boards for selfish reasons –business contacts, resume building or visibility –the actual decisions made would generally notcontribute to a director’s personal wealth or fame.

For-profit directors, on the other hand, oftenstand to benefit or suffer personal consequencesfor decisions made in the boardroom. Forexample, their job may be at stake as a result ofpoor performance or they may receive a signifi-cant financial reward in return for their partici-pation or for good performance. In the UnitedStates, the laws governing for-profit organizationsare also different than those for not-for-profits.Hence, a director of a for-profit corporationassumes personal liability for the implications ofher decisions (Zahra and Pearce, 1989; Phelan,1993). For this reason, our proposition reflectsthe possibility that decisions are made from amore self-interested perspective in this environ-ment.

While age, education, tenure, context, andorganizational position clearly influence moralreasoning, especially as measured by the DIT,there may be other factors to consider. Forexample, the DIT may be slightly biased towarda liberal political ideology (Sweeney and Fisher,1997). Sweeney and Fisher discovered a need tocontrol for ideology in a study examiningaccounting students responding to the DIT. Theyclaim their results indicate that lower levelresponses on the DIT simply reflect a conserva-tive accounting mentality. Given this possibility,one might expect for-profit directors to exhibitlower level responses than not-for-profit direc-

tors on moral development tests. Therefore, wepropose the following:

Proposition 1: Directors of for-profit and not-for-profit corporations differ in their levelof moral reasoning.

Proposition 1a: Directors of not-for-profitcorporations make “more moral” versusself-interested decisions affecting theirorganization than do directors of for-profitorganizations.

Propositions – ethical climate

It is expected that not-for-profit directors willperceive their ethical climates differently andperhaps more favorably than for-profit directors.Previous research suggests that for-profit and not-for-profit managers may differ in their assessmentof ethical climates (Wittmer and Coursey, 1995).And recent research indicates that climate shouldbe assessed based on the appropriate organiza-tional level and on the type of research questionasked (Wimbush et al., 1997). Organizations donot have a singular climate type, but do tend tooperate in one climate style (Victor and Cullen,1988). Therefore, we expect board members tobe able to identify the primary types of ethicalclimate that are in operation in their organiza-tions.

We would expect the charitable nature andservice mission of the not-for-profit to instigatea different cultural climate than what is expectedin the for-profit organization. We expect boardmembers to perceive these differences as well,and it is also our contention that the climate ofthe boards will be related to moral reasoning.Both Jackall (1988) and Metzger and Dalton(1996) affirm that a climate of egoism and self-interest dominates over loyalty in most firms.Also, Metzger and Dalton note that corporatedirectors espouse goals which tend toward nar-rowness and stability over time. Accordingly,Despande (1996) found not-for-profit managersdid not describe their cultures in terms of self-interest or efficiency. Higher levels of moralreasoning are based on adopting a strong diversecultural ethic, and therefore, should be related


to the ethical climate and values of the board(Cullen et al., 1988; Elm and Nichols, 1993).

Elm and Nichols (1993) examined the per-ceived ethical climate along with managersdecisions for a sample of 243 managers from fourmanufacturing firms. Their results indicated thatperceived ethical climate was not related to amanager’s moral reasoning. However, recentwork by Wyld and Jones (1997) suggests thatethical work climate plays a significant role notonly in the moral reasoning process but in theentire organizational decision process as well.

Proposition 2: For-profit and not-for-profitboards differ in their perceptions of ethicalclimates.

Proposition 2a: Cultural climate affects moralreasoning differently in for-profit and not-for-profit boards.

Design of study

The nature of this study prescribed it to belimited in scope due to several factors. First ofall, the information sought and gathered brokenew ground in research. There were no previ-ously developed databases or pools of informa-tion upon which to draw. Secondly, businessesare very suspect of the idea of an individualscrutinizing their boardroom decisions in general,and of measuring their moral reasoning in par-ticular; therefore, it was felt that a sense of trustneeded to be developed in order to accomplishthis data collection effort with boards of direc-tors. Because of their aversion to this type of task,it was decided that a local network of businessesthat had an established level of trust with theUniversity would be more willing to participate.Finally, board members are extremely busypeople and it was felt that the response rate froman anonymous survey sent through the mailwould be extremely low. Consequently, a smallconvenience sample offered the greatest utility inexploring the propositions because it providedthe most potential for returns.

Sample

Six for-profit corporations and seven not-for-profit corporations, all with base operations inthe midwestern United States were willing toparticipate in the study. Some of these corpora-tions were part of national companies, but all hadlocal boards of directors which carried theresponsibility for making strategic and manage-rial decisions about the operations of thecompany. The basis of selection was primarilylocation, diversity in type of operations, andsome connection to the University or to one ofthe researchers who could make a personalcontact with the CEO of the organization. It wasfelt that a personal contact would enhance thelevel of trust and the degree of success in locatingparticipating boards. The companies representedfinancial institutions, contractors, retail opera-tions, communications businesses, charities,manufacturers, health care providers and serviceproviders. Table II provides information aboutthe companies.

It was much more difficult to find participantsfrom the for-profit sector. The Executive direc-tors and board Presidents of the not-for-profitorganizations were very interested in the studyand readily agreed to have their boards partici-pate. Without exception, every not-for-profitorganization approached agreed to take part inthe study. On the other hand, for-profit CEO’swere much more skeptical. Some refused toparticipate in the study; although they enjoyedconversing about ethical dilemmas and sharingstories of issues their boards had considered.They cited reasons such as “our board feels thatthis is too sensitive of a subject”, “we don’t havethe time to take on one more survey” or “wenever allow anyone to see our board membershiplists.” Even when procedures to assure confiden-tiality were delineated, many companies declinedto participate, with apologies. Certainly, for-profit boards are more private about their oper-ations and more skeptical about how informationmay be used. In some ways the for-profit sectordirectors may feel that they stand to lose morefrom potentially bad exposure than the not-for-profit sector does. It was not felt that unwillingcompanies had anything in particular to hide, but


the degree of risk was heightened for these CEOsand their board Presidents. This phenomenonconfirmed the assumption that participation fromfor-profit boards from an anonymous contact bymail or by phone would have been difficult toattain, and thus affirmed the smaller conveniencesample. Further details related to the proceduresfor the collection of data are given in Appendix2.

Instruments for data collection

The first two propositions will be measuredthrough the use of the Defining Issues Test andthe Moral Response Survey. The expectation isthat members of not-for-profit boards will havehigher “p” scores than their counterparts onfor-profit boards and that the two additionalscenarios that pertain to the world in which theyoperate will verify that higher levels of reasoningare used in making decisions about not-for-profitorganizations than about issues facing a for-profitcorporation.

The DIT, a tool for measuring moral rea-soning, is not a simple multiple choice test whichasks the desired line of action in response to amoral dilemma. It is concerned with the subject’sreasons behind their choice. Subjects are asked to

read stories or dilemmas which are approximatelya paragraph in length, and evaluate items thatraise important considerations for deciding on acourse of action (Rest, 1994). Consequently,questions examining a subject’s analysis of theissues embedded in stories or case dilemmas areused to extract principles used in making moralchoices. A subject’s “p” score is derived fromresponses to these dilemmas. In a review ofseveral studies that utilized the DIT, Davison andRobbins (1978) found that the test-retest relia-bilities for the “p” and “d” scores were in thehigh 0.70s or 0.80s and that Cronbach’s Alphaindex of internal consistency is generally in thehigh 0.70s (Elm and Weber, 1994; Rest, 1987).In addition, DIT results have been tested longi-tudinally with reliable results. Validation of theDIT was also tested with convergent-divergentcorrelations and the findings affirmed that DITresults correlate with other measures of moralreasoning and vary from other measures of cog-nition and intelligence which are not distinctlyconnected to moral reasoning. Thus, the dis-criminate validity of the DIT is also significantlysupported by studies (Elm and Weber, 1994).

The DIT allows for the flexibility of using atotal of six stories for the fullest reliability in themeasure of moral reasoning or decreasing thenumber of stories to as few as three. Naturally,


TABLE IISummary of sample characteristics

Company Size No. board No. of Insider:Outsider Women:Men(annual budget) members employees

For-profit 1 > $10 million 08 60 1:7 1:7For-profit 2 > $10 million 05 75 5:0 0:5For-profit 3 > $10 million 07 320 2:5 1:6For-profit 4 $0.5–3 million 04 150–190 4:0 0:4For-profit 5 > $10 million 08 7500 4:4 0:8For-profit 6 > $10 million 06 165 1:5 0:6Not-for-profit 1 $3–10 million 09 30 0:9 2:7Not-for-profit 2 < $5 million 32 4 0:32 15:17Not-for-profit 3 $0.5–3 million 18 80–100 0:18 4:14Not-for-profit 4 < $0.5 million 33 2 0:33 27:6Not-for-profit 5 $0.5–3 million 24 17 0:24 18:6Not-for-profit 6 $3–10 million 15 320 0:15 5:10Not-for-profit 7 > $10 million 05 1200 0:5 3:2

as the number of stories are decreased, themeasure loses some of its reliability (Rest, 1987).In order to assure subjects that they couldcomplete the entire packet in less than one hour,the DIT form was shortened to five stories.Reliability from the full six-story form to theshortest three-story form relates to approximatelya 5 to 10 point decrease in reliability – the shortform correlates to the long form at about 0.9.Consequently, the decrease in reliability byreducing the number of stories from six to fivewas not felt to be significant. It was felt thatreducing the amount of time a subject had tospend on the instrument was critical to thesuccess of this research.

The DIT answer sheet allows for the additionof two scenarios which can also be scored at thetesting center at the University of Minnesota.Because of the concerns raised in the literaturethat subjects’ scores on the hypothetical storiespresented in the DIT do not always correlatewith the responses subjects give to “real life”scenarios (Wimalasiri et al., 1996), two additionalscenarios were developed that model actualsituations that could confront the board of anorganization (see Appendix). These scenarioswere situation specific in that a set was developedto administer to the not-for-profit boards and adifferent set was developed for the for-profitboard. The idea was taken from a study by JamesWeber (1990) and the format for each case wasmodeled after the scenarios in the DIT. In thissame vein, Weber (1996) notes in a later paperthat the DIT is best used when matched withspecific contexts and with specific researchobjectives. Elm and Nichols (1993) measured theperceived ethical climate of the firms by the“Ethical Climate Questionnaire” and the extentto which a person focused on a situation indeciding how to behave by the “Self-monitoringScale” along with the DIT. Their recommenda-tion was to develop an independent utilizationmeasure to use in tandem with the DIT, and thata tool should be used to determine if a subjectrecognizes morality as a question in a situation.Precedent for using context specific scenarios tofacilitate the measurement of moral reasoning isalso found in recent studies by DeConinck andLewis (1997) and Green and Weber (1997). Our

scenarios were intended to capture the specificcontext of boards. This instrument was called the“Moral Response Survey.”

In order to test for the ethical climate of eachorganization, a survey was adapted which hadbeen developed by Cullen et al. (1993). TheEthical Climate Survey was essentially used inits original form with the elimination of only onequestion which did not pertain to the issue athand and by changing the word “business” to“organization” for a more appropriate presenta-tion. This survey contained twenty-five shortstatements to which the subjects responded on ascale from “completely false” to “completelytrue” about how accurately it described theenvironment of the organization for which theyserved on the board. This is the first time thatthe Ethical Climate Questionnaire is used in con-junction with the DIT for a sample of boardmembers.

Survey response rate

The participating companies were intentionallychosen to be diverse, representing a range ofindustries including financial institutions, servicedelivery, retail, manufacturing, research, andcharitable organizations. As seen from thesummary in Table II, the size and compositionof the companies also varied widely. The size ofall of the for-profit firms was large (annual budgetexceeding ten million dollars) except for onemedium sized company with an annual budgetin the range of $500,000 to $3,000,000.Likewise, the smallest firm employed sixty indi-viduals and the largest one 7500 with a medianof 150 employees. On the other hand, the not-for-profit organizations varied in budget sizethroughout the range with two of them fallingbelow the $500,000 range, two carrying anannual budget between $500,000 and $3 million,two falling between $3 million and $10 millionand one having a budget in excess of $10 million.

Of even greater interest is the difference in sizeof the boards from for-profit to not-for-profitorganizations. The for-profit boards were con-siderably smaller ranging from four to eightmembers with a mean of 6.33. The not-for-


profit organizations ranged from four to thirty-three members with a mean of 19.43. A largersize enables not-for-profit boards to representmore sectors of the community and to have con-stituent reflection within the board membership(Pfeffer and Salancik, 1978). All of the boardmembers in the for-profit sector were paid fortheir service either as part of their salary or asan additional stipend. Contrarily, all of the not-for-profit board members served voluntarily.

In addition to the size of the boards, the twosectors varied in the composition of the boards.In the not-for-profit sector, all board memberswere outsiders. While the executive directors satas advisors to the board and implemented thepolicies and decisions of the boards, they had novoting privileges. In contrast, two of the six for-profit boards were made up entirely of insiderswith only half of the boards having a majorityof outside directors. None of these companiesexcluded their chief executive officer from votingrights on the board of directors. In addition, ofthe 38 board members representing the for-profitsector, only two were female. One CEO sharedthat they were in the process of searching for anappropriate woman to sit on their board whichcurrently consists of eight men. In the not-for-profit sector, the ratio was 74 women and 62men comprising the total board membership.Again, this difference may be explained by theresource dependence perspective and the neces-sity of charitable boards to be more accountableto their constituents and more representative ofthe communities in which they operate (Zahraand Pearce, 1989).

The response rates for the organizations aresummarized in Table III. The one company thatreceived the survey through the mail with a coverletter from the president of the company had oneof the lowest response rates with only 43 percentreturning their surveys. In addition, the onecompany where the company president made thepresentation to his board in lieu of the researchersthemselves had a response rate of only 33percent. The final sample included 83 boardmembers, 23 from for-profit organizations and60 from not-for-profits. It was easier to get not-for-profit organizations to agree initially toparticipate in the study but in the end their

response rate was lower. This phenomenonconfirms the argument that large boards havemembers who are less involved in the activitiesof the board (Monks and Minow, 1989).

Analysis procedures

All of the Defining Issues Tests as well as theMoral Response Surveys were scored bycomputer at the Center for the Study of EthicalDevelopment at the University of Minnesota.The results were used to calculate individual “p”scores, “d” scores, and “U” scores in addition toindividual stage scores. The “p” score is a con-tinuous measure ranging from 0 to 95 reflectingthe respondent’s ranking of items. It is the mostcommonly used index from the DIT (Sweeneyand Fisher, 1997) and is the focus of our analysis.An individual’s “p” score reveals the percentageof time that subject utilized higher reasoningstages to reach a conclusion about the DITdilemmas. Consequently, the results from theMoral Response Survey (dilemmas seven andeight) were used to compute individual “p”scores for these two dilemmas. These twodilemmas required subjects to respond to “real


TABLE IIISummary of response rates

Company Response rate

For-profit 1 88%For profit 2 60%For-profit 3 43%For profit 4 33%For-profit 5 67%For profit 6 83%

Rate 62%

Not-for-profit 1 89%Not-for-profit 2 34%Not-for-profit 3 56%Not-for-profit 4 33%Not-for-profit 5 38%Not-for-profit 6 53%Not-for-profit 7 60%

Rate 52%

world” situations that might face them as theboard member of an organization compared tothe DIT which posed hypothetical “textbook”scenarios. The “d” score is similar to the “p”score but bypasses the a priori stage designations,and the “U”score indicates the percantage of timethe subject uses justice reasoning (Rest, 1987).

A factor analysis was conducted on the EthicalClimate Questionnaire to see if results verifiedthe results of the Victor and Cullen study in1988. An oblique factor rotation method wasused to obtain meaningful factors assuming thatthe underlying dimensions of organizationalclimate are correlated to each other (Tabachnickand Fidell, 1989; Hair et al., 1979). The factoranalysis produced 9 eigenvalues exceeding thethreshold value of 1.0. Nevertheless, an appro-priate factor matrix did not converge until theresults were compressed to only three factors.The three factors produced by the data fit nicelywith the theorized dimensions of principle,benevolence, and ego of Cullen et al. (1987;1988). These factors correlated theoretically withthe factors in the moral reasoning scale.

The ethical climate survey responses weresummarized into mean scores for principle,benevolence and egoism by adding the subject’sresponse on each item which measured a factorand dividing by the total number of items for thatfactor (as suggested by Victor and Cullen, 1988;and Wimbush, Johnson, Shepard, and Markham,1995). Specifically, of the twenty-five variables,nine measured egoism, five measured benevo-lence, and eleven measured principle. Thesubjects’ responses were then averaged to attaina mean score for each organization on eachfactor. Reliability analysis was used in conjunc-tion with the factor scores to produce theoptimal scale for each factor. Ego was measuredby taking the average of items 1, 4, 6, 8, and 10with a Chronbach’s alpha of .65. Principle wascomposed of items 3, 7, 13, 14, 15, 18, 20, 22,and 23 with an alpha of 0.77, and benevolencewas measured with items 5, 12, 16, 21, and 25yielding an alpha of 0.73. The scales for benev-olence and principle exceed the recommendedalpha of 0.70 for exploratory research purposes;although the ego scale fell slightly below thatpoint (Tabachnick and Fidel, 1989).

These mean scores were then tested for cor-relation against mean DIT “p” scores for theorganization’s directors as well as mean combined“p” scores for each organization. Compositefactor scores were also computed using the meanresponse on questions labeled by the factor whichthey measured. The factor means for eachcompany were then used to test for correlationwith “p” scores as well as other factors includedin the analysis such as board size, number ofwomen directors, and number of insiders on theboard.

Analysis and results

To test proposition one, the DIT responses of thetwo sectors were compared using t-tests. Thet-tests demonstrated that the same results wouldhave been possible under random sampling indi-cating no significant difference between the twogroups (see Table IV). This finding signifies thatthe members of the two types of boards did notvary significantly in these small samples in theirlevel of individual moral reasoning as measuredby the Defining Issues Test.

Reliabilities for the Moral Response Surveywere calculated. The scenarios written for thefor-profit directors had a Cronbach’s Alpha of0.73, while the not-for-profit scenarios exhibitedan alpha of only 0.13. When “p” scores werecalculated for the Moral Response Survey whichutilized more realistic case studies reflectingsituations a director might encounter in regularoperations of their organization, results changedfrom what was found in the DIT scores. Therewas a significant difference in the scores on thesetwo dilemmas. The p scores were significantlyhigher for the Moral Response Survey than forthe DIT. This finding corroborates earlierresearch about “story pull” (Elm and Weber,1994) which says that individuals use higherlevels of reasoning when the scenario is recog-nizable. One of the weaknesses of the DIT is thatit has not been adapted for business use (Elm andWeber, 1994). The scenarios deal with a fictionalcharacter Heinz and his decision to steal a drugto save his wife’s life, or with a scenario about aschool newspaper. The scenarios in our survey,


however, were designed to be practical andrepresent real life situations for the respondents.The significant difference, then, is a confirma-tion of earlier studies.

A finding that was not expected was that for-profit directors demonstrated higher moralreasoning levels than not-for-profit directors. Ourresults indicated that for-profit directors utilizedhigher stages of reasoning a greater percentage ofthe time than not-for-profit directors in “reallife” situations. Because the researchers offeredtwo different dilemmas to the for-profit directorsthan the two offered to the not-for-profitdirectors, comparing specific dilemmas was notjustified. The combined “p” score, however, is asignificant indicator that something is happeningdifferently in the two groups.

Proposition 1a was not supported. The resultsof dilemmas seven and eight which comprise the

Moral Response Survey indicate a difference inthe opposite direction from what the propositionasserted. The for-profit board members utilizedhigher stages of reasoning a greater percentageof the time than not-for-profit directors. Thefor-profit board members may be orientedtoward cost-benefit analysis, training or moralreasoning or perhaps, the “story pull” for themwas stronger. Nevertheless, reasoning is clearlydifferent between the two groups, the decisionsbeing made at the for-profit level are differentthan those being made at the not-for-profit level.

The correlation between “p” scores from theDIT and combined “p” scores from the MoralResponse Survey indicates that the two valueswere not significantly related to each other.The correlations are summarized in Table V.Consequently, the way a subject scored on ameasure of independent moral reasoning capacity


TABLE VCorrelation matrix

Combined “p” “d’ score “p” score

Combined “p” score 1.000 0.127 0.093“d’ score 0.127 1.000 0.495“p’ score 0.093 0.495 1.000

TABLE IVSummaries of t-tests

Variable Mean Standard dev. t-value Prob.

Not-for-profit DIT p score 38.20 14.10For-profit DIT p score 33.10 12.10 –0.91 0.3600

Not-for-profit DIT d score 25.84 06.12For-profit DIT d score 27.02 05.63 00.80 0.4300

Not-for-profit DIT u score 00.93 02.54For-profit DIT u score 00.26 00.14 –1.26 0.2100

Not-for-profit Dilemma 7 “p” 044.3 00.17For-profit Dilemma 7 “p” 068.2 00.16 –5.61 0.00

**

Not-for-profit Dilemma 8 “p” 067.4 00.20For-profit Dilemma 8 “p” 063.7 00.26 00.70 0.4900

Not-for-profit Combined 7 & 8 56.10 13.70For-profit Combined 7 & 8 65.90 18.70 –2.56 0.022*

had little significant relation to how theyreasoned in an actual situation. The “d” score wassomewhat more related although not to a degreeof significance.

The range of DIT p-scores falls from a highof 54 to a low of 10 in the for-profit sector andfrom a high of 56 to a low of 8.1 in the not-for-profit sector. Similarly, the range of scores fora combined “p” in the for-profit sector spansfrom a high of 95 to a low of 25. In the not-for-profit subjects, scores ranged from 85 to 20.The samples were similar in the range of scoreson both combined “p” and DIT “p” scales. Insummary, the results of this study did not confirmproposition 1a, and found that what differencesdid exist tended to find for-profit boards usinghigher stages of reasoning more often.

Ethical climate

The ethical climates of the two types of organi-zations are significantly different. When meanscores for organizations’ directors’ responses onthe ethical climate instrument were used (assuggested by Victor and Cullen, 1988), for-profitcompanies had climates higher in egoism thannot-for-profit companies did with means of2.053 and 1.858, respectively (probability =0.0014). In addition, not-for-profit firmsreflected higher benevolence factors than for-profitfirms with means at 3.752 and 3.495, respectively(probability < 0.0001). Not-for-profit organiza-tions also had somewhat higher mean scores onthe principle factor (mean = 3.550) compared to

the for-profit organizations (mean = 3.477), butnot significantly different (probability = 0.2628).Therefore, climates considering benevolence areat greater work in the not-for-profit sector thanin the for-profit sectors examined in this studyand egocentric considerations were in greateroperation in the for-profit sector. This indicatessupport for proposition 2.

In analyzing proposition 2a, a factor analysisof the 25 items on the survey indicated that thequestions loaded fairly consistently into threefactors corresponding with Victor and Cullen’s(1988) assignment of each item as measuringprinciple, benevolence or egoism. Factor onemost clearly measured principle, factor twobenevolence and factor three egoism. Factor onewas related (r = 0.240) to the combined “p” scorefrom the Moral Response Survey which waspredicted indicating that the climate of anorganization is related to an individual boardmember’s personal theoretical moral reasoning(Table VI). Neither factor two (benevolence) norfactor three (egoism) were significantly correlatedto combined “p” score.

When the sample was divided into for-profitand not-for-profit groups, the for-profit sectorshowed no significant correlation between any ofthe factors and the combined “p” score (seeTable VI). In contrast, the not-for-profit sectorshowed a highly significant correlation (proba-bility = 0.0025) between factor one (principle)and combined “p” score at 0.460. Again, nocorrelation was found between factors and DIT“p” score. This finding indicates that the ethicalclimate of an organization is significantly related


TABLE VICorrelations with climate factors

Combined Combined Combined DIT DIT DIT “p”-all “p”-NFP “p”-FP “p”-all “p”-NFP “p”-FP

Factor 1 0.240 0.460 0.048 –0.183 –0.108 –0.314(Prob.) (0.0603) (0.0025) (0.8356) (0.1442) (0.4989) (0.1462)

Factor 2 –0.050 0.098 7.204E-4 6.826E-3 –0.105 0.132(Prob.) (0.6990) (0.5480) (0.9975) (0.9571) (0.5107) (0.5537)

Factor 3 –0.039 –0.173 0.118 0.104 0.062 0.252(Prob.) (0.7660) (0.2879) (0.6044) (0.4117) (0.6984) (0.2499)

to applied ethical decision making, but not totheoretical moral reasoning. Thus, the level ofprinciple perceived in the climate of an organi-zation and the level of principled reasoning arecorrelated, especially in a not-for-profit organi-zation. These findings indicate some support forproposition 2a.

Discussion and conclusion

Because this research is exploratory, it raises morequestions than it answers. However, this researchdoes reveal some significant findings that meritfurther investigation. We found that hypotheticalindividual levels of moral reasoning as measuredby the DIT do not differ as one sits on a differenttype of board. Moral reasoning seems to be con-sistent regardless of membership on variousboards of directors. There may be several reasonsfor this. One is that sector differences simplymight not exist. For example, Jeffrey andWeatherholt (1996) found no differences inmoral reasoning between accountants in privateindustry and public service. Another reason maybe that board members do not perceive theirgovernance role as anything more than symbolic(Bowie and Freeman, 1992). Perhaps then bothnot-for-profit and profit boards are perceiving thesame symbolic experience. On the other hand,directors do differ in their level of applied moralreasoning. When the questions address realpossibilities faced by decision makers, for-profitdirectors utilized higher levels of moral reasoningto make the judgments. Although these findingsare suspect because of low alpha values on thenewly developed scenarios, especially for thenot-for-profit sector, other research verifies thisfinding. Individual scores on hypothetical ethicaldilemmas have not correlated with “real life”scenarios (Wilmalasiri et al., 1996).

Previous research using the Defining IssuesTest indicates that moral reasoning develops as anindividual ages and that as adults, most peoplereason at a relatively similar Kohlbergian stage.Educational level has much stronger predictiveability of an individual’s level of moral reasoningthan any other variable except age (Rest, 1994).In keeping with this conclusion, this study

verifies that adults do not seem to vary on theirDIT score based on how they spend their time.All of the board members, regardless of sector,reasoned at a relatively similar level. The subjectsin this study were similar in age and educationallevel.

In our study, there is some indication that theapplied ethical reasoning is higher in the for-profit sector than what is found in the not-for-profit sector. A 1994 Gallup Poll found thatAmericans found government to be the onlyinstitution less trustworthy than corporations(Boroughs, 1995), yet the same U.S. News andWorld Report article found that corporations andtheir leaders are making unprecedented efforts toadhere to rules and community expectations.This affirms a recent argument by Quinn andJones (1995) which suggests that for-profitmanagers (and perhaps board members) adopt an“instrumental ethics” view of the firm. Thisinstrumental view combines both what is goodfor business with what is good for others. Andperhaps for-profit managers simply act on thisinstrumental view while not-for-profit managersdo not. A simple indication of this is that eventhough fewer for-profit boards agreed to theinitial study, their response rate was better. Inother words, the for-profit boards had betterfollow through on what they say they will do.Additionally, for-profit directors may be bettertrained in how to make decisions, create a papertrail, and justify actions in order to limit theramifications on their company and themselves.Due to their voluntary role, not-for-profit direc-tors may not have as great a personal stake innor the knowledge of how their decisions impactthe organization from a liability perspective.These directors also have greater legal protec-tion from personal liability through GoodSamaritan laws. Future research should investi-gate if, in fact, corporations are suffering froman unjustified image when, in fact, they aremoving closer to principled decisions than tra-ditionally trusted not-for-profit organizations.

Another explanation for the applied moralreasoning finding could stem from what Graham(1995) calls the “constructive participation”being on the board provides. The appliedscenarios were constructed to capture the


service-oriented and change-oriented leadershipfunctions fulfilled by board members as theyparticipate in organizational governance. Thesegovernance functions correspond nicely withhigher levels of moral reasoning according toGraham. Therefore, by virtue of participating ingovernance activities, board members are natu-rally involved in higher levels of moral develop-ment.

Still another possible explanation for the for-profit directors’ higher applied moral reasoningscores is the significant risk faced by these direc-tors for malfeasance. The desire of for-profitdirectors to afford themselves the protection of“due diligence” procedures due to relativelyrecent U.S. Sentencing Guidelines may providea sound reason for their apparent use of higherlevels of principled reasoning.1

In any case, our applied reasoning findingscompliment quite nicely the fundamental notionof stewardship theory – that when it comes rightdown to relevant choices, directors will act in theinterest of others. In other words, our findingsare that directors will exhibit higher levels ofreasoning in instances that impinge more directlyon their managerial tasks. This finding fits thetenets of stewardship theory.

The climates of the two sectors of organiza-tions are different with not-for-profits tendingtowards benevolence and for-profits operatingwith significantly higher egoism than not-for-profits. The climate of an organization does notseem to affect personal, individual moral rea-soning. Also, some factors of organizationalclimate appear to be linked such as principle andegoism so that as one moves so does the other.This linkage is curious and merits further review.

Limitations of the study

This study utilized a small, regional conveniencesample to investigate questions in ethical moralreasoning of boards of directors comparing thefor-profit sector to the not-for-profit sector.Because a convenience sample was utilized, thepossibility of self-selection bias is present.Therefore, the results should be interpreted withthe awareness that those companies which agreed

to participate may not have climates nor indi-vidual directors that are representative of thepopulation of for-profit and not-for-profitboards. As discussed earlier, a small conveniencesample was justified because of the nature of thisresearch; nevertheless, results must be evaluatedcarefully. It is not possible to make sweepinggeneralizations about the results and to classify allfor-profit and not-for-profit boards on the basisof this one study. This study is intended as aninquiry to inspire further research of its kind. Itis anticipated that further attention will verifythese results and generalizations and implicationswill follow.

Due to the fact that it was difficult to securecommitment from for-profit corporations, thereis a distinct danger that the companies that choseto participate differ from the norm and agreed toparticipate because they were proud of theirabove average ethical climate. The danger hereis that results do not reflect a random sample, butone in which a bias toward higher moral rea-soning may be evident.

The Moral Response Survey was developedas a check-point to assess the concerns expressedin other research. The results of it should becarefully evaluated because it has not stood thetest for internal validity or correlation to theDIT. It is simply a subjective assessment used asa check to see if there is a difference in the waypeople make decisions about hypothetical settingsversus potentially actual situations. Its resultsshould be treated accordingly. Further work isneeded to develop an effective measure of appliedmoral reasoning.

Finally, all of the participating companies arelocated in and virtually all of the participatingsubjects live and work in the midwestern UnitedStates. Being part of the midwest may, in itself,yield a certain bias to the results causing themnot to be representative of the United Statesas a whole. Again, the sample is not a randomone and broad generalizations should not bederived from this data. The study should beseen as exploratory and further research isnecessary to verify results that can yield broaderapplications.


Implications for future research

The sample utilized in this study was widelydiverse in its composition representing manyindustries. A similar study focused on a singleindustry would be a valuable extension of thisresearch. For instance, the boards of severalhospitals could be chosen to compare findingswithin the industry or other industries such asbanking, accounting, retail establishments orcharitable organizations could be investigated tolearn how boards within an industry compare toeach other and what other factors of board com-position might affect moral reasoning ability.

This study demonstrated a significant differ-ence in the way board members make decisionsabout actual situations which face an organiza-tion. Work should be done to develop a reliableinstrument to measure the phenomenon ofapplied versus theoretical ethics. Because thefor-profit boards in this study evaluated differentscenarios than the not-for-profit boards in theMoral Response Survey, consideration should begiven to developing an instrument that wouldbe applicable to both groups so that further com-parisons could be made. It would have beeninteresting to see how each type of directorresponded to those scenarios addressed by theother type.

In addition, since many business people sit onboth for-profit and not-for-profit boards, itwould be interesting to determine whether theirdecision-making style changes with the setting.Do individuals use different levels of reasoningwhen sitting on different boards? If so, are thesedifferences influenced by the voluntary nature oftheir seat on the not-for-profit board, the ethicalclimate of the organizations, training, exposureor some other factors?

There is some evidence from this study thatboards may influence and be influenced by theclimate of an organization. This topic should bepursued further with larger, randomized samplesto see if these results would be duplicated. Effectsof ethical climate, board structure, and board sizeon moral reasoning should be examined in futurestudies. The ramifications are important forcompanies in all industries.

Our findings, that moral reasoning is reflective

of organizational level and of specific organiza-tional contexts, are consistent with those ofMaclagan (1996) and Weber (1990). Many othervariables affect moral reasoning, however. Forexample, Sweeney and Fisher (1997), contendthat political ideology affects moral reasoning asmeasure by the DIT. Future studies examiningvarious ideologies within specific organizationallevels would, therefore, be valuable.

Future research should also more closelyexamine the structural differences between not-for-profit and for-profit boards. In particular, twoimportant structural variables to consider areboard size and board decision-making authority.Size may be a factor in determining a boardmember’s sense of individual responsibility.Because not-for-profit boards tend to be rela-tively large, as is the case in our study, these boardmembers may be less involved in the organiza-tion. Moreover, in some not-for-profit boardsthere is a subset or executive group that acts asthe steering committee or decision-making bodyfor the whole; while other members fill moresymbolic leadership roles. The findings of ourstudy hint that the reduced responsibility anddecision-making effects of board structure maypossibly be taking place.

Finally, this study has broader implicationsfor research in business ethics. If an individual’slevel of moral reasoning has no relation to one’sdecision-making ability, training in decision-making becomes more important. Whether ornot individual ethics can be taught is not ascritical as training directors to make ethicaldecisions. Dukerich et al. (1988) found thatgroups had higher moral reasoning scores whenthose individuals who had higher levels ofmoral reasoning emerged as group leaders. Inaddition, when groups framed questions as what“should” we do instead of what “would” we do,their answers tended to utilize higher levels ofreasoning. Finally, they found that the extent offree and open discussion was positively relatedto moral reasoning levels. The results of ourstudy relative to the Moral Response Surveyimply that “applied” measures may be moreuseful to study moral reasoning in businesscontexts. And that these applied measurescan help us better understand how individuals


actively influence the moral decisions made at theboard level.

Acknowledgements

An earlier version of this article was presentedat the 1996 Academy of Management annualmeetings, Social Issues in Management Division.This research was supported in part by theMurray G. Bacon Center for Ethics in Business,Iowa State University. The authors thank theanonymous JBE reviewers for their constructivecomments on a previous draft of this article.

Note

1 We thank the anonymous reviewer for bringingthis possible explanation to our attention.

Appendix 1: Moral response survey

In this survey, there are two short scenarios followedby several short questions. Answer the questions as ifyou were sitting on the Board of the organization inquestion. The same directions pertain as to the DITyou just completed. Please read each scenario andthen answer each question marking your answer onthe same answer sheet as the DIT. When you havecompleted all of the questions, please return thesurvey to the testing center in the envelope provided.Thank you.

For-profit boards:

Dilemma #7

The Board of Directors of a regional corporation isvery proud of the fact that 6% of their net profit isdonated back to charities in the communities whereits branches are located. They use that statistic as amarketing tool to create goodwill. In addition,regulatory bodies require them to donate at least 3%of net profits in order to keep their charter. Dewittis a new accountant for the organization and hequestions the way charitable giving has been histori-cally recorded.

For instance, recently the company sponsored a

team to help with a local paint-a-thon at a low-income housing project. The company donated t-shirts, caps and brushes, but also claimed credit foremployee volunteer hours on Saturdays and otherunpaid dates as part of their donation. Dewitt noticedmany examples of similar instances where donationamounts appeared to be inflated.

He proposed a new policy which would clarifydonation recording. The Vice President of Financeanalyzed that under the proposed policy, the previousyear’s donations would have amounted to 3.2% ratherthan the 6% currently published. He informed Dewittthat his new policy would have a serious impact onpublic relations or company expenses or both. ShouldDewitt leave the donation reporting alone andcontinue to report company charitable giving ashigher than he believed to be factual?

01. What if several accountants before Dewitt haveapproved of the current system?

02. What if Dewitt feels that the current system isdishonest?

03. If Dewitt is made aware that his job and futurecareer will be in jeopardy if he creates a problemor insists on changing the policy, should thisinfluence his decision?

04. What if the President of the company is threat-ened by Dewitt’s proposed policy change andperceives him as a potential trouble maker?

05. If Dewitt’s colleagues feel that the current systemis dishonest and encourage Dewitt to make achange, should he support his peers in theirbeliefs?

06. What if leaving the reporting alone would be inconflict with Dewitt’s personal values?

07. Whether or not Dewitt’s proposed policy is inkeeping with the CPA code of ethics?

08. Would changing the policy cause more charitabledonations to be made in the communitiesrepresented?

09. Would the company be perceived as more honestby correcting this policy which would lead tohigher customer loyalty and profits?

10. What if everyone involved agrees that the currentpolicy is dishonest?

11. Whether Dewitt believes that lying is wrong.12. Shouldn’t businesses operate honestly regardless

of the consequences?

Dilemma #8

After 10 years of loyal service to a medium-sizedmanufacturing company, June has been promoted to


executive secretary to the Executive Vice President.In her six months in this new position, she has beenasked to type school papers for her boss’s teenagechildren, mail personal letters and arrange an anniver-sary party at her boss’s home in addition to her vastcompany responsibilities. Often she is required towork overtime to complete all of her work.

Recently, at a company staff meeting, the VicePresident of human resources announced that theBoard of Directors had put a freeze on all overtime.Their position is that the company will continue todominate its market by operating leaner and moreefficiently. He asked for commitment on everyone’spart to pull together to get all the necessary workdone during regular work hours.

When June was asked today to complete somepersonal errands for her boss, she asked him about thenew policy and said that she was afraid she could notcomplete those errands and her regular work respon-sibilities, but he assured her that he would see thatshe received pay for her extra hours, but she shouldnot report them on her time sheet. Should Junecomplete the personal tasks for her boss?

01. What if she trusts her boss and is confident thatshe will get paid even without reporting theovertime on her time sheet?

02. June’s career is in jeopardy if she does not coop-erate with her boss.

03. What if June knows that she could jeopardize theVice President’s job if she reports her overtimeor goes to the personnel office to ask for advice?

04. What if an individual Board member hasinformed June that the Board is watching man-agement closely.

05. Is June’s loyalty to her boss more important thanher sense of personal dishonesty?

06. What if June’s peers notice what she is doing andthreaten to blow the whistle?

07. What if June feels a sense of loyalty to her peerswho can no longer get paid for overtime?

08. What if June knows that lying on her time sheetis against the law and punishable in state court?

09. June knows that the Vice President is a singleparent and he needs her help and loyalty to besuccessful in all of his roles.

10. What if being dishonest about her time sheet isin opposition to June’s personal moral beliefs?

11. Is honesty always the best policy?12. What if June believes God calls her to be honest

in all of her dealings and relationships?

Not-for-profit boards:

Dilemma #7

The Board of Directors of a large, national not-for-profit charity is very proud of the fact that only 6%of revenues are used for fundraising expenses. Theyuse that statistic as a measure of the value of eachdollar donated to their cause. All funds are used foreither public education, research, service provisionor fundraising. As a way of accounting, all expensesfor salaries, supplies, rents and other expenses areprorated and allocated to one of these areas basedupon use.

Sharon is a management staff person who hasreceived excellent reviews of her work for 3 years.Recently, the regional supervisor returned Sharon’squarterly time sheet and told her that it was unac-ceptable. “Too much of your time was allocated tofundraising” was the explanation, and she was toldto update it and return it immediately. Sharon calledand said that the time sheet was an accurate reflec-tion of her time. The regional supervisor explainedthat if Sharon did not alter her figures, the quarterlyfigures for fundraising expense would be at 25% ofallocations. Sharon was encouraged to view more ofher fundraising hours as public education and serviceprovision. Sharon felt that she had already divided hertime at fundraising events and committee meetingsas much as she could justify and that her time sheetwas an accurate reflection of how her time wastypically spent. Should Sharon alter her time sheet?

01. If Sharon’s colleagues doing the same job haveacceptable time sheets.

02. If the local newspaper is waiting to publish thelatest statistics and fundraising would definitelydecline if Sharon doesn’t change her statistics.

03. Sharon’s career is in jeopardy if she does not alterher time sheet.

04. Whether the law prohibits Sharon from alteringher time sheet.

05. Whether Sharon feels it would serve more peopleand the public good to alter her time sheet.

06. Whether other people expect Sharon to alter hertime sheet.

07. Whether honesty is of higher value thanfundraising for a good cause.

08. Is a little dishonesty what leads to greater cor-ruption and distrust?

09. If the organization is really doing an excellentservice to society.

10. Whether God forbids lying.


Dilemma #8

Allen is the executive director of a youth agency witha large service area. The organization has been toutedfor the excellent service provided and the long-termbenefits that young people have received. Theorganization has a 12-year-old 15 passenger van thatis often unusable because it is in need of repair.Consequently, participants must be charged for vanrental or programs are canceled due to a lack oftransportation. Recently, a Board member who ownsan automobile dealership donated a 1-year-old vanto the organization. The staff were elated with thequality of the van and their ability to now providequality, dependable programming without chargingfor the additional cost of renting a van.

The generous board member called Allen to saythat his accountant simply required a letter from theorganization stating that the van had been receivedand including the market value of the van in orderfor him to receive a tax write-off. The board memberasked Allen to state that the van was worth $20,000although both he and Allen knew that the real marketvalue was only $12,000. Should Allen write therequested letter?

01. Suppose the Board member would take the vanback if the letter is not written.

02. If other Board members are aware of the dis-crepancy and have no concern.

03. Whether Allen’s accountant advises him to valuethe van at only $12,000.

04. Whether the law specifically prohibits overvaluing donated property.

05. Does the organization’s ability to do more publicgood with the van outweigh a small statementof dishonesty?

06. If other people would find out and considerAllen and the organization to be dishonest.

07. Whether or not Allen believes it is morallywrong to be deceitful.

08. What has greater value to society as a whole –honesty or helping to transport underprivilegedyoung people to worthwhile services?

09. If the Board would pursue disciplinary action forAllen’s lack of cooperation.

10. What if the Board member also donates othermoney to the organization and would hurtfundraising efforts if he is dissatisfied withAllen?

11. If several young people and their parents havebeen requesting Allen to do what he could to geta van.

12. Whether honesty and full disclosure should beheld up as values important to society as a whole.

Appendix 2: Procedures for data collection

After compiling a list of potential participants,contacts were made with the chief executive or aboard member of each organization. Strict proceduresto protect individual and corporate confidentialitywere developed. A formal agreement was signed byall participating boards which also gathered data suchas size of company, board size, composition of boardin reference to number of women and number ofinsiders and outsiders, method of compensation andfrequency of board meetings. After acquiring agree-ment from executives, a date was established whenresearchers could attend a board meeting. At thatmeeting, the purpose of the study was addressed, anyquestions were answered, and packets containing thethree surveys were distributed.

One or two weeks following the board presenta-tion, follow-up phone calls were made to each boardmember to remind them that their response wasneeded if they had not already completed andreturned their surveys. The goal of the phone callswas to increase the response rate. When it was deter-mined that all responses had been received, the DITand Moral Response answer sheets were sent to theUniversity of Minnesota for scoring. The EthicalClimate Questionnaire was analyzed locally accordingto the method developed by Cullen et al. (1993).

References

Bavaria, S.: 1991, ‘Corporate Ethics Should Start inthe Boardroom’, Business Horizons ( January/February), 9–12.

Beatty, R. P. and E. J. Zajac: 1994, ‘ManagerialIncentives, Monitoring, and Risk Bearing: A Studyof Executive Compensation, Ownership, andBoard Structure in Initial Public Offerings’,Administrative Science Quarterly 39, 313–335.

Boroughs, D. L.: 1995, ‘The Bottom Line of Ethics’,U.S. News and World Report (March 20), 61–66.

Bowie, N. E. and R. E. Freeman: 1992 Ethics andAgency Theory (Oxford University Press, NewYork).

Cullen, J. B., B. Victor and C. Stephens: 1988,‘An Ethical Weather Report: Assessing theOrganization’s Ethical Climate’, OrganizationalDynamics 12(2), 50–62.


Cullen, J. B., B. Victor and J. W. Bronson: 1993, ‘TheEthical Climate Questionnaire: An Assessment ofits Development and Validity’, Psychological Reports73, 667–674.

Davis, J. H., F. D. Schoorman and L. Donaldson:1997, ‘Toward a Stewardship Theory of Manage-ment’, Academy of Management Review 22(1), 20–47.

Davison, M. L. and S. Robbins: 1978, ‘TheReliability and Validity of Objective Indices ofMoral Development’, Applied PsychologicalMeasurement 2(3), 391–403.

DeConinck, J. B. and W. F. Lewis: 1997, ‘TheInfluence of Deontological and TeleologicalConsiderations and Ethical Climate on SalesManagers’ Intentions to Reward or Punish SalesForce Behavior’, Journal of Business Ethics 16,497–506.

Derry, R.: 1989, ‘An Empirical Study of MoralReasoning Among Managers’, Journal of BusinessEthics 8, 855–864.

Despande, S. P.: 1996, ‘Ethical Climate and theLink Between Success and Ethical Behavior: AnEmpirical Investigation of a Not-for-profitOrganizational’, Journal of Business Ethics 15,315–320.

Dobson, J.: 1991, ‘Ethics of ShareholderReferendums: Corporate Democracy orHypocrisy?’, Review of Business 13(3), 22–26.

Dukerich, J. M., D. A. Vollrath, M. L. Nichols,D. R. Elm: 1988, ‘Moral Reasoning in Groups:Leaders, Framing and Discussion’, Paper presentedat the National Academy of ManagementMeetings, Anaheim, CA.

Elm, D. R. and M. L. Nichols: 1993, ‘AnInvestigation of the Moral Reasoning of Managers’,Journal of Business Ethics 12, 817–833.

Elm, D. R. and J. Weber: 1994, ‘Measuring MoralJudgment: The Moral Judgment Interview or theDefining Issues Test?’, Journal of Business Ethics 13,341–355.

Ewell, C. M: 1996, ‘In Terms of Independence,Hospital Boards have Big Edge over mostCorporate Boards’, Modern Healthcare 23(3), 23.

Faulk, A. O.: 1991, ‘Rethinking Outside Directors’,The Corporate Board (Nov./Dec.), 6–10.

Fraedrich, J. and O. C. Ferrell: 1991, Business Ethics:Ethical Decision Making and Cases (HoughtonMifflin Company, Boston).

Geneen, H: 1984, ‘Why Directors Can’t ProtectShareholders’, Fortune (September 17), 28–32.

Graham, J. W.: 1995, ‘Leadership, Moral Develop-ment, and Citizenship Behavior’, Business EthicsQuarterly 5(1) ( January), 43–54.

Green, S. and J. Weber: 1997, ‘Influencing Ethical

Development: Exposing Students to the AICPACode of Conduct’, Journal of Business Ethics 16,777–790.

Hair, J. F., R. E. Anderson, R. L. Tatham and B. J.Grablowsky: 1979, Multivariate Data Analysis withReadings (The Petroleum Publishing Company,Oklahoma).

Jackall, R.: 1988, Moral Mazes: The World of CorporateManagers (Oxford Press, New York).

Jeffrey, C. and N. Weatherholt: 1996, ‘EthicalDevelopment, Professional Commitment, andRule Observance Attitudes: A Study of CPAs andCorporate Accountants’, Behavioral Research inAccounting 8, 8–31

Klein, L. S.: 1991, ‘Ethical Decision Making in aBusiness Environment’, Review of Business (Winter),27–29.

Kohlberg, L., C. Levine and A. Hewer: 1983, MoralStages: A Current Formulation and a Response toCritics, John A. Meacham (ed.) (Karger, NewYork).

Machan, Tibor R. and Douglas J. Den Uyl: 1987,‘Recent Work in Business Ethics: A Survey andCritique’, American Philosophical Quarterly 24(2),107–124.

Maclagan, P.: 1996, ‘The Organizational Context forMoral Development: Questions of Power andAccess’, Journal of Business Ethics 15, 645–654.

Metzger, M. B. and D. R. Dalton: 1996, ‘Seeing theElephant: An Organizational Perspective onCorporate Moral Agency’, American Business LawJournal 33(4), 489–576.

Monks, R. A. and N. Minow: 1991, Power andAccountability (Harper Collins).

Monks, R. A. and N. Minow: 1989, ‘The High Costof Ethical Retrogression’, Directors and Boards 13,9–12.

Pfeffer, J. and G. R. Salancik: 1978, The ExternalControl of Organizations: A Resource DependencePerspective (Harper and Row, New York).

Phelan, M. E.: 1993, Not-for-profit Enterprise: Law andTaxation (Clark Boardman Callahan, Deerfield, IL).

Ponemon, L. A.: 1992, ‘Ethical Reasoning andSelection – Socialization in Accounting’,Accounting, Organizations and Society 17, 239–258.

Quinn, D. P. and T. M. Jones: 1995, ‘An AgentMorality View of Business Policy’, Academy ofManagement Review 20(1), 22–42.

Rest, J. R. and D. Narvaez: 1994, ‘Summary: What’sPossible?’, in J. R. Rest and D. Narvaez (eds.),Moral Development in the Professions: Psychology andApplied Ethics (Lawrence Erlbaum Associates,Hillsdale), pp. 213–224.

Rest, J. R.: 1994, ‘Background: Theory and


Research’, in J. R. Rest and D. Narvaez (eds.),Moral Development in the Professions: Psychology andApplied Ethics (Lawrence Erlbaum Associates,Hillsdale), pp. 1–26.

Rest, J. R.: 1979, Development in Judging Moral Issues(University of Minnesota Press, Minneapolis).

Rest, J. R.: 1987, Guide (University of MinnesotaPress, Minneapolis).

Rest, J. R.: 1976, ‘New Approaches in the Assessmentof Moral Judgment’, in Gilbert Geis and LawrenceKohlberg (eds.), Moral Development and Behavior:Theory, Research, and Social Issues (Holt, Rinehartand Winston), pp. 198–218.

Rest, J. R. and S. J. Thoma: 1985, ‘Relation of MoralJudgment Development to Formal Education’,Developmental Psychology 21(4), 709–714.

Shrader, C. B., A. N. Hoffman and T. M. Stearns:1991, ‘Agency Directors and Network Centrality:An Examination of Resource Dependencies’,Journal of Managerial Issues 3 (Spring), 46–61.

Snodgrass, J. and R. Behling: 1996, ‘Differences inMoral reasoning between College and UniversityBusiness Majors and Non-Business Majors’,Business & Professional Ethics Journal 15(1),79–84.

Sridlar, B. S. and A. Camburn: 1993, ‘Stages of MoralDevelopment of Corporations’, Journal of BusinessEthics 12, 727–739.

Sweeney, J. T. and D. G. Fisher: 1997, ‘Politics,Faking, and Self-presentation: How Valid is theDefining Issues Test as a Measure of MoralJudgment?’, Working paper. University of MissouriCollege of Business.

Tabachnick, B. G. and L. S. Fidell: 1989, UsingMultivariate Statistics (Harper Collins Publishers,Inc., New York).

Thoma, S.: 1994, ‘Moral Judgments and MoralAction’, in J. R. Rest and D. Narvaez (eds.), MoralDevelopment in the Professions: Psychology and AppliedEthics (Lawrence Erlbaum Associates, Publishers,Hillsdale), pp. 199–211.

Thoma, S. J., J. R. Rest and M. L. Davison: 1991,‘Describing and Testing a Moderator of the MoralJudgment and Action Relationship’, Journal ofPersonality and Social Psychology 61(4), 659–669.

Trevino, L. K.: 1986, ‘Ethical Decision Making inOrganizations: A Person-Situation InteractionistModel’, Academy of Management Review 11(3),601–617.

Trevino, L. K.: 1992, ‘Moral Reasoning and BusinessEthics: Implications for Research, Education andManagement’, Journal of Business Ethics 11,445–459.

Victor, B. and J. B. Cullen: 1988, ‘The Organizational

Bases of Ethical Work Climates’, AdministrativeScience Quarterly 33, 101–125.

Wang, J. and B. S. Coffey: 1992, ‘Board Compositionand Corporate Philanthropy’, Journal of BusinessEthics 11, 771–778.

Weber, J.: 1990, ‘Managers’ Moral Reasoning:Assessing Their Responses to Three MoralDilemmas’, Human Relations 43(7), 687–702.

Weber, J.: 1996, ‘Welcoming Another CMDInstrument – The MES: But Don’t Throw Out theMJI or DIT Just Yet!’, Business Ethics Quarterly 6(4),517–522.

Westphal, J. D. and E. J. Zajac: 1995, ‘Who ShallGovern? CEO/Board Power, DemographicSimilarity, and New Director Selection’,Administrative Science Quarterly 40, 60–83.

Wimbush, J. C., J. L. Johnson, J. M. Shepard andS. E. Markham: 1995, ‘On the Question of EthicalClimate: A Conceptual Reconfiguration andEmpirical Examination Using Confirmatory FactorAnalysis’, Paper presented at the Academy ofManagement Annual Meeting, Vancouver.

Wimbush, J. C., J. M. Shepard and S. E. Markham:1997, ‘An Empirical Examination of theRelationship Between Ethical Climate and EthicalBehavior from Multiple Levels of Analysis’, Journalof Business Ethics 16, 1705–1716.

Wimalasiri, J. S., F. Pavri and A. A. K. Jalil: 1996, ‘AnEmpirical Study of Moral Reasoning AmongManagers in Singapore’, Journal of Business Ethics15, 1331–1341.

Wittmer, D. and D. Coursey: 1995, ‘Ethical WorkClimates: Comparing Top Managers in Public andPrivate Organizations’, Paper presented at theSociety for Business Ethics annual meeting,Vancouver.

Wyld, D. C. and C. A. Jones: 1997, ‘The Importanceof Context: The Ethical Work Climate Constructand Models of Ethical Decision Making – AnAgenda for Research’, Journal of Business Ethics 16,465–472.

Zahra, S. A. and J. A. Pearce: 1989, ‘Boards ofDirectors and Corporate Financial Performance: AReview and Integrative Model’, Journal ofManagement 15(2), 291–334.

Charles B. ShraderCollege of Business,

Department of Management,300 Carver Hall,

Iowa State University,Ames, Iowa 50011,

U.S.A.


moral reasoning and ethical climate: not-for-profit vs...

Documents