In light of Santosuosso (2013), what are the most important ethical considerations that you took away from this week of learning when it comes to budgeting for your small business? Consider and discuss ethical issues in the context of cash flow, the growth forecasting process, and risk management. Your well-written paper should meet the following requirements: Be 3-4 pages in length, not including cover and reference pages. Be formatted according to the CSU-Global Guide to Writing and APA Requirements. Cite a minimum of three sources–two of which should be academic peer-reviewed scholarly sources to support your responses–in addition to your textbook. The CSU-Global Library is a great place to find these resources. Note that written assignments must have a title page, section headers, an introduction, a conclusion, and a reference page. Refer to the Critical Thinking Rubric available in the Module 6 Folder for information on grading.
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International Journal of Business and Management; Vol. 8, No. 20; 2013
ISSN 1833-3850
E-ISSN 1833-8119
Published by Canadian Center of Science and Education
Integration of Ethical Values into Activity-Based Budgeting
Pierluigi Santosuosso1
1
School of Economics, Sapienza University of Rome, Italy
Correspondence: Pierluigi Santosuosso, School of Economics, Sapienza University of Rome, Rome, Italy. Tel:
39-6-4976-6460. E-mail: pierluigi.santosuosso@uniroma1.it
Received: July 29, 2013
Accepted: August 23, 2013
Online Published: September 22, 2013
doi:10.5539/ijbm.v8n20p1
URL: http://dx.doi.org/10.5539/ijbm.v8n20p1
Abstract
Despite appeals from public opinion all over the world for the development of ethics in business and the
widespread adoption of a Code of ethics by many firms, the integration of ethical values into the corporate
planning process has received little attention either in real life or in research literature. In order to overcome the
gap between ethical principles and practice, this study underlines some key points which could help the
integration of values into Activity-Based Budgeting: identifying ethical values, creating an Ethical framework,
examining the distinctive parts of actions, choosing a preference order for values, incorporating the values into
each single element of every activity. The approach based on activities allows managers to give visibility to
those objectives with an ethical dimension and incorporates them analytically into the budgeting system.
Keywords: ethical values, ethical decision making, activity based budgeting, planning process
1. Introduction
The subject of business ethics has received a great deal of interest from public opinion, consumers, politicians,
managers and economists all over the world. The word “ethics” is now widely used in conferences and
newspaper articles and there is a growing literature on business ethics (Brenkert, 2010), whilst the adoption of a
Code of ethics by an increasing number of firms around the world (Kaptein, 2004; Schwartz, 2005; KPMG
Forensic, 2008; Singh et al. 2011) confirms the importance of this issue for managers and entrepreneurs.
However, does a Code encourage the achievement of corporate objectives with an ethical dimension? Are
managers and employees running their firms more ethically? The question of the effectiveness of a Code of
ethics has been addressed in several studies. Literature reviews on this issue have been made by Schwartz (2001,
2004), Lere & Gaumnitz (2003, 2007), B. Stevens (2008), Kaptein & Schwartz (2008), Ho (2010), Singh (2011)
and Kaptein (2011), to name just a few. The research literature, however, provides conflicting results; it is not
clear what effect a Code of ethics has on decision making and what factors influence the effectiveness of a Code
(Helin & Sandström, 2007; Kaptein & Schwartz, 2008; Singh, 2011). The issue is not purely academic, without
any practical consequences. As ethical values, or simply values, govern managers’ and employees’ behaviors,
ethical matters have economic, social and legal effects on the firms’ performance and on society as a whole.
Despite the appeals for ethics in business and analyses of the factors that are likely to reinforce the effectiveness
of ethical codes, malpractice does not appear to be abating (Webley & Werner, 2008; Brenkert, 2010). A high
percentage of employees in U.S. companies testify to misdeeds within their firms (KPMG Forensic, 2008; Ethics
Resource Center, 2012). Even today we are witnessing varied and numerous episodes of misconduct, such as the
violation of workplace health and safety rules, the infringement of environmental standards, the mismanagement
and misuse of an organization’s resources and company time, false or deceptive sales practices and lying to
employees (KPMG Forensic, 2008; Ethics Resource Center, 2012). Ethical compliance programs, such as ethical
codes, policy statements, speeches, systems for reporting malpractice, do not seem to reduce legal violations
(McKendall, DeMarr & Jones-Rikkers, 2002).
This has led researchers, businessmen and politicians to analyze the issue in the hope of finding better solutions.
The purpose of this work is to make values more visible and tangible in order to make them an integral part of
the corporate planning process and therefore overcome the gap between ethical principles and practice. “The
things included in the measurement become relevant; the things omitted are out of sight and out of mind”
(Drucker, 1954). The integration of values into the planning process, however, is not an easy task. On the one
hand, managers have to identify values for their firms which will satisfy the requirements of moral judgment; on
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Vol. 8, No. 20; 2013
the other hand, effective budgeting needs an approach that allows the inclusion of objectives with an ethical
dimension into a concrete plan of action. This paper will propose that an effective way of integrating values into
budgeting through Activity-Based Budgeting. It proposes that planning should focus on activities in which
activities are identified and organized into broader processes to support strategic goals.
The article is organized as follows: the second section provides a brief review of the literature; the third section
describes the identification process of corporate ethical values; the fourth section explains the need for
establishing a preference order for ethical values; the fifth section presents their integration into Activity-Based
Budgeting; the sixth section describes a case study; the last section summarizes the steps of the integration
process and presents some concluding remarks.
2. Literature Review
The decision-making process is an old issue, as old as the origin of ethics (the words moral and ethical are used
here as synonymous, the difference simply being due to their etymology). Philosophers, economists and
politicians have debated about human behavior for centuries. Over the course of history, many moral doctrines
have been developed, including utilitarianism, eudaemonism, emotivism, historicism, ethical relativism,
deontological duty-based approach and virtue ethics (Shaw, 2005; Velasquez, 2006; Weiss, 2006). Moral
doctrines have not only explored theoretically the concept of good and bad, but have also examined in detail the
decision-making process. According to the studies of Thomas Aquinas in the 13th century (Summa Theologica,
Prima Secundae), the decision-making process can be broken down into elementary stages, driven by the
intellect and the will (De Finance, 1997). Firstly, the idea of an ethical value is formed and the will accepts it
(voluntas); an opinion is formed about the possibility of putting into practice the ethical value (intentio); an
analysis for an appropriate solution for the purpose is made (consilium); certain solutions are accepted
(consensum); the decision about the best solution is chosen (electio); the order to implement the chosen solution
is given (imperium); the chosen solution is executed (usus); the material good is used (fruitio).
More recently, the problem of ethical decision-making has been addressed by many researchers. Much of the
research, developed on the basis of psychological theories (Kohlberg, 1969), suggests theoretical models
containing different phases (Rest, 1986; Trevino, 1986; Ferrell & Gresham, 1985; Hunt & Vitell, 1986; Bommer
et al., 1987; Dubinsky & Loken, 1989; Stead, Worrell & Stead, 1990; Jones, 1991). In one of the most famous
and frequently cited models, ethical decision-making is composed of four stages: recognizing an ethical issue,
making moral judgments, establishing moral intentions and engaging in moral behavior (Rest, 1986). The stages
in the models are usually supplemented by various individual characteristics and organizational forces that
influence decision-making, as for example, ego strength, field dependence and locus of control, immediate job
context, organizational culture and characteristics of the work itself (Trevino, 1986), social, government and
legal environments, professional and personal environments, individual qualities (Bommer et al., 1987). Other
models, based primarily on experience gained in professional practice, propose a variety of steps to identify and
resolve ethical dilemmas. Following the identification of the ethical dilemma and the gathering of information
essential for decision-making, these models emphasize the analysis of alternative actions and their consequences
(Rocco Cottone & Claus, 2000). These models are based mainly on the Deontological approach (when actions
are judged morally right depending on how well they conform to a particular set of principles) or on the
Consequentalist approach (when actions are judged morally right in relation to their consequences).
In addition to the models proposed by academics and practitioners, the ethical decision-making process has been
investigated in large numbers of surveys which aim to verify empirically a wide range of factors that affect the
process, such as the philosophical conception of morality, cognitive moral development, gender, education and
work experience, age, nationality, the cultural and ethical climate, the rewards and sanctions system, religion,
moral intensity, the kind of Code of ethics, industry type, organizational size etc. (Ford & Richardson, 1994;
Loe, Ferrell & Mansfield, 2000; O’Fallon & Butterfield, 2005). The surveys are based on an analysis of the
ethical “perception” of managers, employees and students faced with hypothetical ethical dilemmas. The
findings are mixed, inconclusive and are open to criticism about the identification of a representative sample, the
reliability or validity of measures, the methodological procedures for understanding an individual’s moral
reasoning (Randall & Gibson, 1990; Weber & McGivern, 2010) and, more generally, about the impossibility of
applying ethical theory to real life (Barlett, 2003). Without going into a detailed analysis of the research
literature, it is nevertheless worth noting that the main limitation of much of the empirical research lies indeed in
the concept of ethical “perception”. The “perception” of a hypothetical dilemma expresses a mere opinion of the
people interviewed about some ethical issues; action is instead the expression of a moral judgment in the strict
sense. We will summarize the concept of moral judgment in section three.
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Ethical decision making is only part of the integration of values into the planning process. It is principally
concerned with specific decisions taken by individuals, whilst real integration of ethical values drives the
organization as a whole towards multiple objectives with an ethical dimension.
In order to overcome the gap between ethical principles and practice within firms, two main approaches have
been suggested, firstly, the creation of an ethical corporate culture and secondly, the introduction of an effective
ethics policy (Webley & Werner, 2008). As far as the creation of an ethical culture or climate in concerned, there
are several mechanisms that allow managers to shape a values-based organization. These include the charismatic
role of top managers, leadership styles, the development of ethics programs by communicating and monitoring
ethical values, good organizational practice (Ferrell, Fraederic & Ferrell, 2011), the discussion of moral issues as
part of the manager’s job (Water & Bird, 1987), setting up clear standards of ethical behavior, recognition and
rewarding of behaviors that sustain organizational values, feedback, awareness of individual differences,
(Grojean et al., 2004), the behavior of top management as an example for the rest of the organization (Adam &
Rachman-Moore, 2004), ethics code awareness (Valentine & Barnett, 2003), ethics training (Valentine, 2009),
an ethical climate of benevolence (Cullen et al., 2003). Although ethical culture and ethical climate play an
important role in ethical decision-making (Trevino, Butterfield & McCabe, 1998), empirical studies have not yet
provided conclusive results (Loe, Ferrell, & Mansfield, 2000; O’Fallon & Butterfield, 2005; Helin & Sandström,
2007; Kaptein & Schwartz, 2008).
As regards the need for an effective ethics policy, less attention in the research literature has been given to
approaches that actually incorporate values into corporate planning (Helin & Sandström, 2007) than to studies on
the development of an ethical climate and culture. Robin and Reindenbach (1987) suggested the integration of
ethical and socially responsible plans into strategic marketing planning based on a model consisting of four stages
in which each stage is divided into two parallel processes: the identification of ethical values and the development
of a marketing strategy. Guerrette (1988) set out a five-step development plan of management strategies in which
emphasis was placed on the need for continuing professional training and the reformulation of corporate strategy
in accordance with a Code of ethics and the corporate value statement. Hosmer (1994) recommended that ethics
must be part of the planning process in order to enhance trust, commitment and effort among stakeholders.
Rampersad (2003) provided a strategic management model in which the personal goals of people were integrated
into the organizational Balanced Scorecard aligning the personal ambition of managers and employees with the
shared organizational mission. Bonn and Fisher (2005) underlined the importance of a flexible approach towards
the development of guidelines for ethical conduct as well as structures and processes for monitoring and
improving ethical behavior. Ferrell, Fraedich and Ferrell (2011) suggested that ethical compliance can be ensured
by organizing activities to reach corporate objectives.
3. Identification of Corporate Ethical Values
Many moral doctrines have investigated the concept of good and bad in the course of time. Rather than provide
an overview of the philosophical thought, this paper will outline some key arguments related to ethical
decision-making. Regardless of the philosophical conception of morality, individuals are moral entities that
decide and act on the basis of their moral judgment. As shown in several ethical decision making models (Rest
1986; Trevino 1986; Hunt & Vitell, 1986; Dubinsky & Loken, 1989; Jones, 1991) and in valuable studies on
Ethics (De finance, 1997; Pinckaers, 1992), moral judgment is the linchpin of decision-making and has a key
role in the workplace for managerial work (Loviscky, Trevino & Jacobs, 2007; Street, 2001).
The choice of what constitutes “good and bad” is not left to the whim of managers and employees, but is the
result of moral judgment in the strict sense of the word. Values originate from an examination of our behavior
and/or the behavior of other people who are directly or indirectly involved in the business (employees,
consumers, investors, suppliers and other stakeholders). In a person with a developed sense of moral reasoning,
we can observe a reaction of approval for behavior deemed moral or a response of disapproval for behavior
deemed immoral: admiration or disapproval of the behavior of others, gratification or remorse for our behavior.
These experiences are known as moral experiences (De Finance, 1997) and on the basis of these experiences, a
person begins to formulate moral judgments about what is good and what is evil. Through the awareness of
values, people acknowledge the incompleteness of their own existence and the need to put them into practice.
Values appear as good that needs to be done; a “duty to be” which demands a “must do”. People are often heard
saying “I have to help that person” or “I ought to behave in this way”. Moral judgment guides an individual’s
own actions and suggests behaviours that should be adopted by others (Leavit et al., 2012). More specifically,
moral duty persuades people to do good. Actions that are needed for its achievement reinforce positive
experiences of admiration or gratification and free them from the experience of remorse or moral scandal.
Judgment of the “right reason” (De Finance, 1997) shows what good, or human values, deserve to be pursued.
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Moral duty plays a key role in the ethical decision process (Haines, Street & Haines, 2008) although it has
received minimal emphasis in the research literature. And, fundamental to the decision-making process is the
presence of freedom, which is also rarely discussed in business theory (Dierksmeier, 2011). Free will is a basic
concept addressed by philosophers in the course of many centuries (Kane, 1998; O’Connor, 2012). Although the
concept could have different meanings, freedom is essentially considered here as freedom of acting without
constraints (Pinckaers, 1992). Acting with free will, is the main requisite for moral reasoning in ethical
decision-making. In the absence of freedom, moral duty cannot exist and any action that follows is devoid of
any willingness to act (Drascek & Maticic, 2008).
The identification of the values according to the ethical decision process mentioned above can lead to the editing
of an “Ethical framework”. The Ethical framework lists a series of values that deserve to be affirmed. For a
better analysis and updating of the Ethical framework, managers can classify values in order to highlight some
major features. This paper suggests at least two general criteria for this classification. The criteria enable us to
understand and detect the objective and subjective aspects of ethical values.
The first criterion is based on the objective nature of ethical values, which range from the physical to the
spiritual nature of mankind. Biological values are related to the basic needs of every human being (e.g. food and
health) and sensitivity values are represented by the pain and pleasure that comes from the senses (e.g. fatigue or
rest, fear or serenity). Economic values are directly related to the use of human faculties to obtain economic
goods (e.g. wealth creation, values related to the acquisition of professional skills, development of the
personality through the use of power and success), whereas social values emerge when we consider the
individual in the community where he or she lives (e.g. the ability to maintain relationships, the aptitude to lead
an organization or settle disputes). Other values include aesthetic values related to the attractiveness of
something a person has created (e.g., the beauty of a product, the pleasantness of the place of work), knowledge
which concerns the knowledge of truth or falsehood (e.g. the values of experience, education, competence,
accuracy of information) and the values concerning the will and the natural ability of people to achieve their
own ends (e.g. temperament, perseverance, courage). Moral values in a strict sense are concerned with making a
moral judgment and behaving in an honest way consistent with this judgment (dependent on the freedom of
choice). Finally, one cannot ignore religious values (e.g. an organization that does not discriminate employees,
suppliers or customers for their religion).
The second classification criterion is made according to the type of stakeholders, such as employees, suppliers,
customers, investors, the community and all other persons not yet affected by corporate policy. Although an
Ethical framework can also specify the names of employees, customers or suppliers involved in the business
activity, this classification is not made in order to find solutions that satisfy the specific interests of these
individuals, but to identify the values of …
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