EGPA Annual Conference

Ljubljana (Slovenia) 1.-4.9.2004

Study Group 7: Ethics and Integrity of Governance

PUBLIC OR PRIVATE: THE 'GREY' AREA OF ETHICS

CONSIDERED

Is management ethics changing in the light of the value di-mensions of responsibility, transparency, and performance?

Professor Ari Salminen, asa@uwasa.fi

Senior researcher Olli-Pekka Viinamäki, opv@uwasa.fi

Faculty of Public Administration, University of Vaasa

P.O. Box 700, FIN-65101 VAASA, Finland.

mailto:asa@uwasa.fimailto:opv@uwasa.fi

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TABLE OF CONTENTS Page

I Introduction 1

II Ethical change 4 1. From agency to company 4

2. Public, private and 'grey' ethics 6

III Implications of value dimensions 9 1. Responsibility 9

2. Transparency 13

3. Performance 15

IV Conclusions 19

Sources 21

I Introduction

The presentation deals with the so-called 'grey' area of ethics. In the study, manage-

ment ethics is analyzed through the selected forms of organization and through the

selected value dimensions. The analysis is descriptive and qualitative in nature.

Background. Public sector reforms of various Western countries—including

Finland—have changed the status of public sector organizations. One of the striking

features has been the change from agencies to semiprivate corporations or privatized

companies. This has contributed to reforms blurring the traditional boundary between

the public and private sectors.

2

In the reform process of the state, one of the politically shared aims has been to de-

crease the significance of public sector in the production of services and ‘to create

government that works better and costs less’. Moreover, in the public management

framework, the reform processes have covered different management reform strate-

gies carried out by different governments. This has evidently affected the values and

methods set for public management and the virtues to be considered in assessment of

public administration. What is the role of traditional values in management and in

public sector ethical discussions? Is the former public service ‘ethos’ still coherent or

are these arguments rather based on general perceptions than facts?

In theoretical discussions, there exist arguments, especially among the reinventing

movement (Osborne & Gaebler 1992) and the New Public Management discourse,

that government should not only adopt the techniques of business management, but

should also adopt the values of business (Denhardt & Denhardt 2003: 17-19; Eiken-

berry & Kluver 2004: 132-135). Thus, emphasizing the values of competition, prefer-

ring market mechanisms, and respecting the entrepreneurial spirit, the thoughts of the

movement relies heavily on such ‘intellectual cousins’ as public choice theory, princi-

pal agent theory, and transaction cost analysis (de Leon & Denhardt 2000: 94). Mana-

gerial freedom to define their own ethical standards and greater freedom of action are

encouraged. That follows that irregular behavior is not an ethical problem when it

reflects innovation rather than misconduct. This refers to a shift away from an empha-

sis on legal accountability towards private marketplace principles in assessing admin-

istrative and public actions in general.

Similarly, its basic premises from which management principles and practices derive

are changed. For instance, the assumption of uniformity i.e. to treat all citizens equally

and to provide the same benefits and deprivations to all similarly situated people is

modified in certain ways. An introduction of market-based modes of actions breaks

the tradition of a civil service system and the idea that public sector organizations are

governed through a formalized internal management and rule-based modes of actions.

The reforms have encouraged the building of an entrepreneurial management with

accountability to key customers and owners instead hierarchical accountability and

answering to political decision-makers. This breaks the traditional assumption about

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the form of connection between administration and the political system. (Peters 2003:

8-9; Morgan 2001: 171; Eikenberry and Kluver 2004: 132).)

The aim of the presentation. Our presentation concentrates on the ‘grey’ ethics1. The

main idea is based on the assumption that there is a change in management ethics. The

first attempt to define managerial ethics as a contextual issue is presented in Table 1.

Public, mixed, and private contexts are described through different forms of organiza-

tion and through basic values. The 'grey' area of ethics is more or less located in the

mixed forms of organization and basic values concerned.

Table 1. Public, mixed, and private: different contexts for analyzing ethics

Forms of organization

Basic values

Public

Agencies, ministries, courts, local gov-ernment and regional authorities

Regulation, rule-based management, rule of law, equality, public interest, loyalty to political decision-makers, neutrality

Mixed

Public enterprises, public companies, non-profit-organizations

Creating competition and strategies for markets, productivity, loyalty to interest groups

Private

Fully privatized companies, enterprises and limited companies

Profitability and selling, loyalty to own-ers, individual or strongest group inter-est, entrepreneurship

The figures show in the Finnish case, that the number of the government officials dur-

ing the 1990s has decreased from 213,000 to 128,000. The creation of public enter-

prises has caused the biggest change ever in the Finnish public sector in terms of the

number of personnel: 80,000 state officials and employees have been removed outside

the state budget economy. The next step is to turn to the public companies to which

have carried out the process in the 1990s: in the beginning of the 1990s 70,000 em-

ployees worked in state-owned companies while by the end of the decade, the number

of employees has grown to 107,000. However, more generally speaking, issues of

‘grey’ ethics are relevant for the whole range of public administration.

1 As a term ‘grey' ethics refers here to 1) a mixture of public and private ethics, 2) a stage of transfor-mation in values, procedures and organizational forms, and 3) still unspecified or even inconsistent contents of public sector ethics.

4

The paper deals with three questions. First, what are the process and the area which

explain the change of management ethics? This topic is dealt with in the next part of

our presentation. Secondly, how is the change in management ethics described by the

selected topics of our analysis, namely responsibility, transparency, and performance?

Thirdly, what is the content of the ‘grey’ ethics? The final part is reserved for discus-

sion of this issue.

II Ethical change

1. From agency to company

As we see it, the assumed change in management ethics and values will be dealt with

in particular transformation process. Van Wart and Denhardt (2001: 233, 235) argue

that organizational forms determine both formal and informal values in management,

such as the appropriateness of profit making and the reliance on control. Thus, chang-

ing an organizational form involves changing the underlying values as well, and con-

versely, value changes cannot occur without accompanying structural changes.

Process. The process in concern can be described as presented in Figure 1. It is called

a change from agency to company. In this process, the public sector is subjected to

market influences. Our argument is that it obviously affects the management ethics

and values to be considered in it. However, there are differences in ways how this

process is conducted in a particular country.

Fully privatized company

Public company

Public enterprise

Public agency

Figure 1. Transformation process

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Public agency refers to government and self-government public authorities, which are

financed from state or local government budget. A public enterprise is quite a unique

organization form. It has applied mostly in Nordic countries, in Finland, Sweden, and

Norway. It has been developed as a form of organizing state and local government

business-like operations. It is somewhere between a net-budgeted agency and a pub-

lic-owned company: as an organization it has an extensive freedom of operation and

at minimum, the activity should be self-supporting, but it usually have tasks of a pub-

lic authority.

Public companies are limited companies and they are required to base their action on

same prerequisite factors as those of private enterprises. They are transferred outside

the State budget economy. There exist three kinds of companies. It can be totally pub-

lic owned and the company has often a monopoly in its’ field of business. There are

also partially public owned companies when state or local government has majority of

shares, and companies in which public ownership is minority. In the former, state or

local government actions are based on the shareholder interests. A privatized com-

pany refers here to the final stage of the process; in these companies, the role of public

interest is similar to all other shareholders.

The process is everywhere linked to the value and norm climate of society, power

hegemonies and corresponding issues. Additionally, as Frederickson and Walling

(2001: 38) note, in government administration values or virtues are most often taken

to mean political or policy values. More or less practically, the process seems to be

connected to several goals which are shared among most Western countries. Typically

the goal is to reduce the size and significance of the public sector, increase productiv-

ity, and achieve savings, decrease budget deficits, broader ownership, and to open

monopoly-like sectors to competition. Though the mentioned facts are far from ethics,

they present background factors for explaining the change.

Change of values. Table 2 presents some organizations acting in certain fields of

business and which are undergone the process in the Finnish case. The values pre-

sented in Table are based on company related documents and their declarations. The

organizations employ 104,000 employees. Some of these cases will be shortly referred

later.

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Table 2. A selection of transformed Finnish organizations and their values

Organization / Branch

Organizational values

Civil Aviation Administration / Airport and the air navigation system maintenance Finland Post Ltd/ Postal services Finnair Ltd/ Air traffic Finnish Road Enterprise/ Infrastruc-ture services Fortum Ltd / Energy and oil products Kemira Ltd Chemical industry Metsähallitus Ltd/ Forestry and nature protection Senate Properties/ Property assets management TeliaSonera Ltd/ Telecommunication VR-Group/ Railway traffic

Safety, customer benefit, efficiency, cooperation Customer-orientation, reliability, development Customer-orientation, honestly, openness, responsibility-taking, fairness Customer-orientation, trust, openness, environmental aware-ness, profitability Business performance, creativity and innovation, co-operative spirit, high ethics Innovation, respect for individuals, working together, cost-effectiveness, result-orientation Cooperation, customer-orientation, sustainability Value-adding business, respect Trustworthy, serviceability, improvement Safety, customer satisfaction, responsibility

2. Public, private and 'grey' ethics

Discussion. As Huberts et al (2003) note, core values of the public and business sec-

tor have inspired many authors. Lundquist (1988: 168-172) defines public sector eth-

ics using concepts of lawfulness, loyalty towards politicians, needs of citizens and

public interest. Thompson (1992: 523-532) pays attention to the possibilities of ad-

ministrative ethics. He analyses two major theoretical views: the ethic of neutrality

and the ethic of structure. Vermeulen (1998: 176-179) stresses the civil servant, soci-

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ety and citizen in quest of good ethical behavior. According to Vermeulen, the new

civil servant is both manager and businessman.

Pollitt (2003: 11) analyses private sector organizations which avoid such ethical duties

and where corporations display little or no 'social conscience'. In other words, profits

come before principles. In the history of corruption, Tiihonen (2003: 7, 13) points out

the changes in the civil service. Civil servants and employees are working in enter-

prises and companies which dismiss the sharp separation between public and private

sector.

On the other hand, business or private ethics can be similarly defined by using certain

concepts. For example, according to Barry (2000: 24), the central values are honoring

promises, respecting the rights of justly and acquired property. Ferrell et al. (2000: 61)

puts emphasis on values such as trust, self-control, empathy, fairness, and truthful-

ness.

Two background major issues—greed and profit—are in focus in comprehending the

content and discussion on the business ethics, and in making a difference between the

private and public ethics. Greed as a driving force derives from philosophical explana-

tions of private ethics, like egoism, virtue ethics, and utilitarianism. To survive, busi-

nesses must make a profit. Nevertheless, as Ferrell et al (2000: 6) continue, the situa-

tion is not so one-folded in ethical terms; businesses must balance their desires for

profits against the needs and desires of society. Furthermore, greed and profit making

requires markets and competition to exist. An idea that markets functioning perfectly

has faced a lot of criticism. Barry (2000: 20) argues that in analyzing ethical question,

disregarding the criticism leads to superficiality and normative suggestion without a

real content.

According to Ferrell’s et al. (2000: 12) analysis a trend in ethics concerning private

ethics is to move away from legally based ethical initiatives to ethics that can be ap-

plied and incorporated as a part of core organizational values. However, Barry (2000:

33) presents critical thoughts on the possibility of business regulating itself independ-

ently of government, in the way that other professions, such as law and medicine,

have through established and enforced codes of ethics. Ferrell et al. (2000) argue that

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this in a certain way derives from the fact that ethics is practice-labeled and motivated

with an idea that “good ethics makes good business sense”.

Three values. Three value dimensions for the further consideration are responsibility,

transparency, and performance. These values are globally emphasized in the discus-

sion on good governance and even corporate governance.

Responsibility concerns reactivity and response. Selznick (1992: 324) defines that

responsibility focuses both on the social function of an institution (social responsibil-

ity) and on the way in which such an institution controls its own behavior (moral re-

sponsibility). Responsibility in terms of ethical values will be concretized here by

asking profound questions: to whom is responsibility directed, whose interests it

should serve, and what kind of responses and utilities are expected? Should the gov-

ernment be responsible for all citizens or to a select group of customers?

Transparency is connected to the quality of being clear and transparent. In organiza-

tional context, information is provided to interest groups of the work being performed.

Transparency also implies improving democratic features in governance (Ingraham

1997: 326-327). Transparency can be viewed under two aspects in management

(Reichard 1998: 129). It is a question of communication between different actors.

This fosters trust among the communicating actors because social relations, power

structures and decision-making, are visible. Transparency is also a technical and in-

strumental topic: how to make target and procedures clear and distinct.

Performance consists of action, accomplishments, and gaining a desired outcome.

However, we agree with Peters (2003: 12-13) that the assessment of public sector

performance is more than of the private sector; the private-sector –related perform-

ance measures may substitute relatively technical judgments and lead to simplified

and hasty decisions about political choice and technical exercise. Emphasis given to

technical performance criteria may be understood problematic in terms of democratic

values in administration.

The schema presented in Table 3 does not claim any special privilege; there are many

ways to capture the fundamental possibilities for ethical issues in management. More-

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over, because they are all widely applied in various contexts, some specifications

should be made. The ‘grey’ area of ethics is defined here by raising a question of

• the sense of utility and the role of individuals

• openness contra secrecy, and

• diversity of setting goals for services.

Table 3. Three value dimensions of public, 'grey', and private ethics

Value dimensions

Public ethics

'Grey' area of ethics

Private ethics

Responsibility Transparency Performance

Citizens, social utility Openness of processes, publicity

Inclusive services, equality, lawfulness

Sense of utility, role of individuals Openness/secrecy Diversity of setting goals for services

Customers, economic utility Unequivocal results, openness towards stakeholders Exclusive services, result-orientation

III Implications of value dimensions

Are there any signs of the ethical change in public management? What kinds of ethi-

cal challenges are related to the different stages of the above-mentioned process and

three value dimensions? The first value dimension under consideration is responsibil-

ity.

1. Responsibility

Table 4 is an effort to come to grips in certain way with responsibility in the selected

domain.

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Table 4. Conceptions of responsibility

Values and principles

Main issues

• responsiveness • satisfaction • uniformity • freedom of choice

• seeking balance between commercial, com-

mon welfare and authority functions • consumerism • clientele • steering

Political guidance or steered by markets? As an organization, a public enterprise

has to find a balance between commercial operating principles and the implementa-

tion of general socio-political tasks (i.e. employment measures, regional equality, na-

ture conservation work, etc.) which the parliament has set as responsibility of the or-

ganization (Salminen & Viinamäki 2001; Temmes & Moilanen 2000: 18-19).

Political guidance seeks to ensure public interests and the fulfillment of responsibility

for citizens in the actions of public enterprises. The public enterprises cannot function

purely according to market and customer-orientation. State enterprises use public

funding which usually should be spent for societal purposes. Furthermore, the nature

of their socio-political activities tend merely to be generic rather than specified or

directed to concern certain groups of citizens or clients. The blurred mode of actions

may cause difficulties in the creation of organization identity which may undermine

the integrity and commitment to organization’s values.

However, there is always a threat when public organizations start to pursue business-

like activities in addition to public duties, that profitability-seeking tasks turn out to be

their primary concern. The obvious threat is the potential misuse of public power for

private gains (Maravic & Reichard 2003). It has been argued that competition and

separation of purchasers and providers can help to prevent ethical misfits because

production and the decision-making processes have to be transparent (Osborne &

Gaebler 1992).

Utility, consumers. Should the efficient functioning of the organizations mean that

produced welfare is directed toward all citizens, or simply just restricted to a group of

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stakeholders and fulfilling the needs of most paying clients? Organizations' responsi-

bility is usually assessed in terms of provided services and added value to customers

and interests groups, as well as, how well the services are in line with the expectations

of customers, are they satisfied with the quality and availability of services, and in

what ways the services and products should be developed? It is justified to ask in what

ways these matters could be regarded in assessing management ethics?

Responsiveness of public organizations has traditionally been connected to ability to

produce welfare services in equal and inclusive manners. Despite the fact that the in-

troduction of new managerialism labeled reforms has changed the ethos of public ac-

tions, the mentioned principles are strongly involved. The means of getting results is

quite precise in the context of business—economic utility and selling products or ser-

vices are argued to be the driving force. However, the groups and individuals which

may get benefits from success are much more restricted; in other words, the gains are

exclusive in nature. Instead, agencies clients are determined by norms and laws, and

that’s why, responsibility have to exclusive in nature. A public agency is responsible

for citizens and public companies for their key customers and owners, but public en-

terprises falls between these two demands.

Turning to public companies and the process of privatization, the responsibility might

become clearer. As organizations, they should operate with the same principles as

private enterprises—to produce added value for their owners and their key customers.

There are some reasons, why the responsibility of transformed organizations, espe-

cially public companies and privatized organizations, can be defined more precisely

than in the context of public administration. First of all, this derives from a possibility

to determine precisely the customers and their solvency. Thus, the needs can be speci-

fied and to fit the actions against them. Secondly, the question what should be pro-

duced could be defined on the basis of consumerism.

However, the requirements for social responsibility tend to be much weaker and the

government has limited options to enforce and affect the functioning of public com-

panies and privatized organizations. Put in simple, the government has the same capa-

bilities as the other owners i.e. to use voting rights in meeting of shareholders. Addi-

tionally, Cooper’s (2001: 18) argument that the norms of citizenship provide the most

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appropriate normative foundation for administrative and management ethics looses its

explanatory value.

The way in which both turn into public companies and privatization affects the equal-

ity and fair treatment of citizens or the availability of services could only be clarified

through a longer-term assessment. Still, some effects can be briefly mentioned here.

As Reichard (2002: 76) notes, the process may cause a negative distribution effect,

especially in case of low-income groups. Another group is people living in sparsely

populated areas: should they pay more on services which are usually more expensive

because the lack of competition. This can also cause a tendency toward externalizing

costs to the society.

Another point of view is that the introduction of customers and consumerism has par-

tially replaced the assumption of uniformity in public services. As Peters (2003, 16)

notes, this involves an ethos of differentiation rather than universalism in the relation-

ship with the public. Also, customers are assumed to desire different products and

have a clear idea of needed products and services, and capability of making choice

among diverse competing goods. Additionally, passive consumerism may not be what

reformers expect in contrast to expectations of an active, enabled and self-conscious

citizens. Also, the varied functions of government do not represent uniform products

or even a ‘product line’ as one encounter in business; controversially, the work of

public sector is extremely diverse in the way it is performed and received (de Leon &

Denhardt 2000: 96; Reichard 2002: 76) which, of course, should be regarded in terms

of virtues and values.

The discussion above refers to the impact of the organizations' activities on the sur-

rounding society and on the company's interest groups. Despite the process discussed,

the government in the scheme of governance still has an important role in maintaining

democracy and social equity. However, Milton Friedman contributed to the creation

of a general corporate social responsibility theory by asking questions such as "Should

companies take responsibility for social issues?" (Kok et al. 2001: 286). He argued

that the only social responsibility of business is to increase profits by legal means.

Additionally, there is a certain relation between consumerism and the quality of ser-

vices. However, does the trend of giving a greater importance to customer choice lead

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to serving and responding to the short-term self-interests of individuals rather than

commonly accepted and prevailing values (also de Leon & Denhardt 2000: 95)?

Ownership. Traditionally, ownership has been used in terms of ensuring and respect-

ing the responsibility towards citizens in the context of public administration.

Through state ownership policy the government may offer services provided by public

companies in rural areas, where they are not necessarily commercially profitable.

More easily these kinds of obligations can be set for public enterprises. If the govern-

ment completely relinquishes its share holdings in the company, the management of

the enterprise through ownership policy will naturally not be possible.

Nowadays it is more difficult to find reasons for the share capital of companies being

completely owned by the State. In Finland, old and traditional state-owned companies

have been streamlined and put into “a saleable shape”, so to speak, because in its

ownership policy the Finnish government has outlined that it does not necessarily

need ownership even in areas traditionally classified as strategic.

2. Transparency

Table 5 aims to capture the essential features of transparency.

Table 5. Conceptions of transparency

Values and principles

Main issues • public trust • publicity • reputation

• open competition • funding • separation of authority and business actions • procedural fairness • availability of information

Transparent process or outcome? Public actions emphasize the transparency of

decision-making processes and administrative actions (i.e. ability to get information

on preparation and decisions), while business-like operations tend to emphasize more

the transparency of results and desired outcomes, not the processes. Transparency is

realized in companies’ annual reports and press releases. The discussions worldwide

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have concentrated on the misfits and misuses of economic (result) information in

companies’ performance. A certain kind of management misfits are involved: the con-

trol of top management carried out by the owners has not been functioning appropri-

ately. The ethics of management has failed in setting the goals and rewards for achiev-

ing results.

Openness. The public has a right to know how public institutions apply the power and

resources entrusted to them. As Ormond and Löffler (2003) state, public scrutiny

should be facilitated by transparent and democratic processes, oversight by the

legislature, and access to information. Openness relates with control which is

exercised by public opinion through civic sentiments. It has been emphasized as part

of procedural fairness (the right to a trial and hearing) and public trust which are

central components of good governance (Salminen, Lammi & Rautio 2003: 7-8). Both

frames of reference can coexist, independent from dominance of public or business

virtues. Publicity and openness are usually understood as virtues of good governance.

However, there is a lot of criticism against the realization of these principles.

When business-like operations become involved, openness gains different connota-

tions. The simplest implication is business secrets. Organizations do not, and have

basically no obligations to be transparent with their operations and procedures; only

the outcome and the result should be see-through and comprehendible.

Again, because public enterprises have the tasks of a public authority, use public

funding to some extent, and are steered with political instruments, most of their ac-

tions should be subjected to publicity and be open as possible. Thus, business secrecy

concerns are restricted to only some of their activities—the purest business-like ac-

tions.

Moving ahead in the process, openness gains same features of public relation policies

as carried out in all private enterprises. The only exception here is the public compa-

nies; if they have some societal duties, for example, some obligations to employ per-

sons in particular area a determined period, they should inform the wider public when

possible.

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Clear separated actions. A transparency of organizational actions requires that the

public authority functions and business operations is separated from each other in

turning from an agency or a public enterprise to public company. The most important

reason for this is to ensure neutral competition and transparency of organizations'

functions. The company form is deemed suitable when the organization acts in a

competition situation and it has no social tasks or its activities include no exercise of

public power. A limited company cannot perform any public activities unless this has

been provided for by special legislation. The common practice has been to organize

the activities of the authority by establishing a new public agency or by transferring

these activities to another public agency.

Reputation. Public and nonprofit organizations should maintain an upright and trust-

worthy reputation. This is because they have an obligation to represent the public in-

terest, and therefore, they must consider not only what is legal, but also what is fair.

(Eikenberry & Kluver 2004: 136.) As argued previously, one of the virtues considered

in private ethics is transparency of results. Reputation evidently has wider connota-

tions than in the context of public organizations; the organizations should be risk-

taking and competitive positioning but fair in making contracts with other organiza-

tions, it should make profits and add benefits to owners.

3. Performance

A summary of the conceptions of performance is presented in Table 6.

Table 6. Conceptions of performance

Values and Principles

Main issues

• efficiency and productivity • result-orientation • risk-taking • operational freedom

• diverse prioritized goals and qualifications • cutting public expenditures and reducing the

size of organizations • value added • goal attainment and outcomes • empowerment

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Goal setting. In public actions the goal is set by political decision-making, and guid-

ance for actions derives from politics. In business-like modes of actions, the actions

taken are steered by customers and the owners and they set the goals for the organiza-

tion. Is there greater efficiency because the goal can be determined in a more simple

manner (what is to be provided and the pressure that results from consumer choice

instead of solving diverse interests of citizens and different interests groups)?

Public enterprises works under parliamentary guidance and the parliament sets the

service and operating goals for state enterprises and the Council of State or the De-

partment/Ministry, under whose authority the enterprise falls, sets the results and op-

erating goals. The main aim has been to allow a public enterprise extensive freedom

of operation to decide on its own policies and organizational solutions. At a minimum,

the activity shall be self-supporting, i.e., the principle is that the income from the ac-

tivity has to cover the costs. The situation is similar with state owned companies and

some of their actions may consist of socio-political targets which may relate to indus-

trial, regional or employment policies as well as to environmental protection. How-

ever, the goal setting is more indirect and depends the particular organizational form.

For instance, in monopoly, the government has more possibilities to influence the

content of the goals of the company; if the government has minority of shares, coop-

eration and collaboration with other owners is required.

Competition, markets, selling, and the needs of customers are evident factors in which

state companies derive their goals, such as any other private companies. Costs in-

curred by the implementation of social tasks and tasks which burden its profitability

are reimbursed to the organizations from the government budget or in the case of the

public enterprises the resulting encumbrance is taken into account when the perform-

ance goals are set. However, these socio-political goals cannot distort competition. In

the case of privatization, socio-political goals can be discussed only in terms of gov-

ernment ownership policy, if the government acquires the shares of the privatized

company.

Flexibility and operational freedom. Managers should have the operational freedom

to conduct the necessary changes. According to Van Wart and Denhardt (2001: 234)

organizations are seeking greater autonomy for entrepreneurialism and decentraliza-

17

tion of decision-making. A collision of values is evident, if the organization maintains

strict focus in example on rules adherence or work standardization policies, then, a

well-intentioned activity may be labeled inappropriate at minimum or even unethical.

An agency bound to the government budget economy tends found the most significant

issue that restricts the operational freedom and flexibility. For example, the readiness

of the Finnish Forest and Park Service to react to the rapid changes in timber prices

was problematic when it worked as an agency. The separation of the Park and Forest

Service from the State budget was based on the grounds that it would be possible to

acquire nature reserves with the sales income from land. Being bound to the govern-

ment budget caused problems also in the National Board of Civil Aviation, the prede-

cessor of the Finnish Civil Aviation Administration. The vigorous growth of air traffic

resulted in a need to speed up investments, develop airports and increase personnel. It

obtained its funds from the government budget but it could not use the income it cre-

ated to cover its costs. At the same time, the poor state of the public economy made it

impossible to fund the investments and the agencies could not raise funding in the

capital markets.

In addition, in terms of operational freedom, even purely market-oriented perform-

ance, could be restricted by legislation. For example, in Finland Amended Telecom-

munications Markets Act (566/1999) emphasized the obligation of the government to

ensure equal provision of telecommunications services in the whole country. To avoid

negative impacts on free competition, the government established a general service

fund which is used to reimburse the enterprise or company for costs incurred by the

provision of the service. The other alternative is that the public enterprise providing

the services in unprofitable areas can collect the costs from other enterprises operating

in the sector.

Learning markets. In Finland, the separation of authority and business functions has

clarified and facilitated the planning of the organizations’ strategy and operations. In

the transformation process this has meant that more importance is given to eliminate

unprofitable activities and that organizations would enter only into new areas with

prospects of profitability. Then, there is not much room for advocacy or social efforts.

18

Eikenberry and Kluver (2004: 137) have similar findings on nonprofit organizations

in the United States.

The public enterprise, as an earlier stage in turning organizations into the public com-

panies has been found to be important. The public enterprise stage has provided pub-

lic companies with an opportunity ‘to practice’ market-based activity, and to re-

organize and adapt their operations to a commercial environment and. The customer-

orientation, the service image, and making profits can be rooted in the organization.

Competition. The changes caused by the marketization follows that values consid-

ered as opposite to markets (e.g. equality) has a limited capability of explaining the

performance. Several studies show, however, that free competition is more significant

in increasing economic effectiveness than the ownership relations of an organization

(Vickers & Yarrow 1989; Boardman & Vining 1989). Thus, to discuss the perform-

ance related issues in more reliable manner some specification should be regarded in

terms of competition.

The Finnish public enterprise phase is used to introduce markets and foster competi-

tion in a certain branch, for example in facility rent-markets or vehicle inspection. For

instance, the opening of vehicle inspection operations in Finland to competition in

1994 was a concrete example of creating competition in a field that had previously

been a state monopoly. This evidently encouraged an establishment of several private

enterprises in the sector. Additionally, the prerequisite of a successful privatization

(dismantling of a state monopoly and to open previous tightly regulated branches un-

der a competitive environment) process is functional competition.

In some cases, the expansion of ownership base has been the promoter. As the reason

for the privatization of Sonera (Finnish telecom-company, ancestor of Telia-Sonera

Ltd.), the Ministry of Transport and Communications (1999) stated that, “a telecom-

munications enterprise can best keep pace with international development if also its

ownership base supports active and reformatory operations”.

19

IV Conclusions

Has management ethics changed in the light of the value dimensions? Values of or-

ganization are dependent from the values of the society or individuals. How to define

the ‘grey’ ethics? A few conclusions can be drawn from our analysis.

First, the change in management ethics is to link it to the relationship between public

and private ethics. However, this does not follow that private sector originating values

should have a privilege in our explanation. Management is characterized with a seek-

ing of balance between the public and private values and principles. Our analysis fo-

cused on public enterprises and public companies. Despite this limited approach,

many public sector—state or local—organizations, which seek such discussed values

as profitability, consumerism, competitiveness etc., are very familiar with the 'grey'

management ethics.

Secondly, ‘grey’ ethics is the object of confusion. What makes ‘grey’ such values as

responsibility, transparency or performance? In the change, public sector organiza-

tions face with the problems of balancing between commercial, common welfare and

authority functions. As it concerns responsibility, the ethical codes are not always

clear for public managers. New rules and procedures are required. As shown earlier,

transparency slightly differs in public and private actions. In a rapid transformation

process, the traditional ethical principles of public administration have been put into a

complicated situation. For instance, citizens' opportunities to control public authorities

and public sector functions are more limited than earlier. And, as far as it concerns

freedom or competition, performance management partly follows its own paths. For

example, the idea of common good might be logically excluded.

Thirdly, the ‘grey’ area of ethics is defined in Table 7, but mainly on the basis of ten-

tative findings. Six core values are separated from four main management issues.

Some of the values and issues are worth further considerations.

20

Table 7. 'Grey' area of ethics defined

Ethics/values

Management topics

• lawfulness, but loose regulation

• interest: public or individual

• loyalty: diffused

• flexibility more than fairness

• 'secrecy' approved

• selectiveness and prioritization

• competitive government

• public or moral entrepreneurs as a challenge

of personnel policy

• change of mentality in search for ‘core busi-

nesses’

• well-paid customers instead of users of com-

prehensive public services

Public interest is more and more articulated through corporate boards of directors and

through public ownership. In addition, to be responsive, it requires that in organiza-

tional actions the customers are comprehended adequately, and integrated into the

organizations’ value-basis, strategies, and operations.

Flexibility and fairness are required in public management. When new values are in-

troduced to public managers the principles of the equal treatment of citizens (eco-

nomical efficiency instead of lawfulness, business secrecy substitutes the transparency

of decision processes, individually tailored services instead the standardized proce-

dures, etc.) are evidently violated. In addition, the economical aspects might overtake

the social welfare and societal utility in management; in that kind of pattern of ac-

tions, some prioritizations have to be made.

Selectivity means that information is more and more directed to interests groups,

shareholders, and key customers. The information mostly concerns the outcomes and

quality of processes, not the detailed and throughout descriptions of procedures. Only

the core public functions make an exception; the publicity is essential as a source for

legitimization and trust.

Managers should have operational freedom such as entrepreneurs, but not act as

‘loose cannons’. The ethical codes should be apparent and clear-cut guidelines, espe-

21

cially in actions between purely public and private branches: what should be pursued;

what kinds of actions are satisfactory; and, what are the limits for the risk-taking men-

tality and who is responsible for setting the standards (cf. de Leon & Denhardt 2000;

Hart 1984). Additionally, how far can risk-taking in terms of profit-making mentality

and ‘morality bending’ serve the welfare production? Is the case the same as ethics:

the ethics of the procedures is in minor role until the misfits occur?

Should concentration on the ‘core business’ (cf. e.g. Porter 1998) have more impor-

tance in ethics and entrepreneurial features in the context of public sector? This is

especially essential in the case of the creation of public enterprises. The separation of

business-like operations from public agency facilitated the development of perform-

ance of both, agency and the established public enterprise. Agency focused on regu-

lating and public enterprise on providing services. Correspondingly, the ethical issues

are clarified; to whom, and what actions are they responsible for, what actions should

be public, and what criteria are used in assessing the performance.

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Professor Ari Salminen, asa@uwasa.fiTABLE OF CONTENTS PageI Introduction 1II Ethical change 4III Implications of value dimensions 9Sources21I IntroductionPublicPublic ethics'Grey' area of ethicsPrivate ethics1. Responsibility3. Performance

IV Conclusions