Business Ethics and Corporate Governance Prof. Abhay Singh Borivali April, 2010 No part of this document must be reproduced for distribution without prior consent from Prof. Abhay Singh. CONFIDENTIAL1Prof. Abhay Singh

CONFIDENTIALProf. Abhay Singh2 Unit 5: Moral Evolution of the firm Stages of Moral Development: A useful framework for evaluating ethics training is Lawrence Kohlberg’s study of the stages of moral development, as well as studies on the relevance of Kohlberg’s study for manager’s and personals. Kohlberg’s three levels of moral development (which encompass six stages) offer a guide for observing a person’s level of moral maturity, especially as he or she engages in different organizational transactions. Most individuals in Kohlberg’s 20 year study reached the fourth and fifth stages by adulthood. Only a few attained the sixth stage, this framework is used in ethics classrooms and training centres around the globe.

CONFIDENTIALProf. Abhay Singh3 Unit 5: Contd.... Level 1: Pre-conventional Level (Self-Orientation) Stage 1: Punishment avoidance: avoiding punishment by not breaking rules. The person has little awareness of other’s needs. Stage 2: Reward seeking: acting to receive rewards for oneself. The person has awareness of other’s needs but not of right and wrong as abstract concepts. Level 2: Conventional Level (Others Orientation) Stage 3: Good person: acting “right” to be a “good person” and to be accepted by family and friends, nit to full-fill any moral ideal. Stage 4: Law & Order: acting “right” to comply with law and order and norms in societal institutions.

CONFIDENTIALProf. Abhay Singh4 Unit 5: Contd... Level 3: Post-conventional, Autonomous, or Principles Level (Universal, Humankind Orientation) Stage 5: Social Contract: acting “right” to reach consensus by due process and agreement. The person is aware of relativity of values and tolerates differing views. Stage 6: Universal, ethical principles: acting “right” according to universal, abstract principles of justice, rights. The person reasons and uses conscience and moral values to guide actions. Kohlberg’s study and Business Ethics: One study of 219 corporate managers working in different companies found that managers typically reason at moral stages 3 or 4, which, the author noted, is “similar to most adults in the Western, urban societies or other business managers. Managers in large to medium sized firms, the study discovered, reasoned at lower moral stages than managers who were self-employed or who worked at small firms.

CONFIDENTIALProf. Abhay Singh5 Unit 5: Contd..... Reasons offered for this difference in levels of moral reasoning in firms of different sizes include that larger firms have more complex bureaucracies and layers of structure and more standard policies and procedures and exert more rule-based control over employees. Employees tend to get isolated from other parts of the organization and feel less involved in the central decision-making process. On the other hand, self-employed professionals and managers in smaller firms tend to interact with people throughout the firm and with external stakeholders. Involvement with and vulnerability to other stake-holders (e.g customers, competitors, vendors etc) may cause these managers to adhere to social laws more closely and to reason at stage 4. This study also found that managers reasoned at a higher level when responding to a presented moral dilemma in which the main character was not a corporate employee.

CONFIDENTIALProf. Abhay Singh6 Unit 5: Contd..... It could be that managers reason at a higher level when moral problems are not associated with the corporation. The author suggested that the influence of the corporation tends to restrict the manager to lower moral reasoning stages, or that it could be that the nature of the moral dilemma may affect the way managers reason, i.e some dilemmas may, in the manager’s thinking, be appropriately addressed with stage 3 & 4 reasoning, other may require stage 5 logic. This study raises the question: “How can organizations use these findings in training and managing people?”