The Ethical Context of Entrepreneurship: Proposing and Testing a Developmental Framework

Michael H. Morris Minet Schindehutte John Walton Jeffrey Allen

ABSTRACT. The aim of this study is to increase our understanding of the ethical climate of entrepreneurial firms as they grow and develop. A developmental framework is introduced to describe the formal and informal ethical structures that emerge in entrepreneurial firms over time. Factors influencing where firms are within the developmental framework are posited, including the entrepreneurs psychological profile, lifecycle stage of the business, and descriptive characteristics of the venture. It is also proposed that the implementation of ethical structures will impact perceptions of the clarity and adequacy of the ethical standards of the firm and the firms preparedness to deal with ethical challenges as they arise. Results are reported of a cross-sectional survey of small firms at different stages of development. The findings indicate the existence of four distinct clusters of firms based on their formal and informal ethical structures: Superlatives, Core Proponents, Pain and Gain, and Deficients. Evidence is also provided of statistically significant relationships between the proposed antecedent and outcome variables. Implications are drawn from the results, and priorities are established for future research. KEY WORDS: ethical context, entrepreneurship, formal and informal structures, small business, stages of development

The interface between ethics and entrepreneurship involves two related sets of issues. The first of these concerns the entrepreneurial context for ethics, while the second involves the ethical context for entrepreneurship. Scholars have devoted considerable attention to issues in the former area. It is generally concluded that the entrepreneurial context poses a number of

unique ethical challenges. For instance, the financial and operational pressures found within most entrepreneurial firms heighten the incentive to engage in expedient behavior (Bucar and Hisrich, 2001; Cook, 1992; Bhide and Stevenson, 1990). Moreover, the entrepreneur frequently confronts an array of ethical dilemmas the resolution of which directly affect company performance (Clark and Aram, 1997; Dees and Starr, 1992; Vitell et al., 2000). At a more fundamental level, it can be argued that the very nature of what some might refer to as acting in an entrepreneurial way raises ethical questions. Receiving less focus is the ethical context within which entrepreneurial activity takes place. Here, the concern is with the ethical environment created within an entrepreneurial firm, the mechanisms put in place by the entrepreneur to ensure ethical standards are observed, and the ways in which unethical behaviors on the part of employees are addressed. Work on ethical climates within organizations has more typically been concentrated in larger, established firms (e.g., Krohe, 1997; Sims and Keon, 2000; Trevino and Nelson, 1999). At the same time, the entrepreneurial context is not static; it evolves over time. Thus, while the ethical standards of the entrepreneur typically have a pervasive impact within the venture at the outset, the growth and development of the firm find management becoming more professional, new employees with differing values joining the firm, and an eventual separation of the companys identity from that of the founding entrepreneur (Brown and King, 1982; Pearson, 1991; Quinn and Cameron, 1983). Organizational life cycle

Journal of Business Ethics 40: 331361, 2002. 2002 Kluwer Academic Publishers. Printed in the Netherlands.

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Michael H. Morris et al. rely on situational cues or individual inner-states, dispositions and attitudes to guide their actions (Snyder and Cantor, 1980). Ethical theories from philosophy have been adapted to reflect the (typically large) corporate environment, where the decision-maker is forced to make decisions as an agent of a corporate body rather than as a free agent (Kant, 1959; Hunt and Vitell, 1986; Vitell and Ho, 1997). An example of such work, and one that provides a theoretical foundation for the present study, can be found in Hunt and Vitell (1993). These authors present a model to describe how personal moral codes are influenced by deontological (certain intrinsic characteristics of a behavior that makes it right or wrong, as opposed to the consequences the behavior brings about), teleological (where the relative amount of goodness or badness of the consequences of a behavior determines its rightness or wrongness) and environmental (professional, cultural, industry, organizational, and personal) factors. When an individual perceives an ethical issue in an activity or situation, the various alternatives available for resolving the problem are evaluated using a combination of deontological and teleological considerations. These ethical judgments then drive intentions and behavior, and the individual learns about the appropriateness of his/her moral codes by experiencing either positive or negative consequences. Importantly, Hunt and Vitell recognize the organizational environment as an important antecedent of ethical behavior. Others have focused on more normative theories of business ethics, and these also have implications for the current study. Here, the concern is with obligations that managers should or ought to fulfill in their business relationships (Hasnas, 1998; Smith and Hasnas, 1999). Three leading examples include stockholder, stakeholder and social contract theories. Stockholder theory (Friedman, 1997) holds that managers (as agents of stockholders) should behave in a manner that conforms to the basic rules of society as embodied in law and ethical custom. Thus, they are to engage in free competition without deception or fraud. Stakeholder theory (Clarkson, 1995; Donaldson and Preston,

theory posits the existence of stages of development within firms, with changes to an array of strategic, structural and operational variables over these stages (Adizes, 1979; Greiner, 1972; Churchill and Lewis, 1983; Terpstra and Olsen, 1993). Logically, there should also be an evolution in nature of the ethical context within which employees find themselves. The purpose of the current paper is to more fully investigate how the ethical climate evolves as a new venture develops and grows. A developmental framework for designing and managing the ethical climate in firms is introduced, together with a conceptual model of determinants and outcomes of ethical climate variables. Based on results from a cross-sectional survey of 227 companies, cluster analysis is used to identify four types of ethical climates in small, growing firms. These climates are defined in terms of the specific mechanisms management has put in place to guide ethical behavior. Factors determining cluster membership are explored, as well as outcomes associated with a given cluster. Implications are drawn for theory development and managerial practice, with priorities established for ongoing research.

Conceptual and theoretical foundations Ethics deals with the distinction between what is right and wrong. It is concerned with the nature and grounds of morality, including moral judgments, standards, and rules of conduct (Taylor, 1975). The ethical climate of an organization can be defined as a shared set of norms, values and practices of organizational members regarding appropriate behavior in the workplace (Agarwal, 1999). Ethical conflicts occur when an individual perceives that his/her duties and responsibilities toward one group are inconsistent with his/her responsibilities toward some other group including ones self (Hunt et al., 1984, p. 310). Conflicts can take two forms: conflict within the individual resulting from the individuals value hierarchy, and conflict between individual values and organizational values (Liedtka, 1989). Individuals can be expected to differ in the extent to which they predominantly

Ethical Context of Entrepreneurship 1995; Freeman, 1994) proposes that regardless of the potential for improved financial performance, a firm should resolve ethical dilemmas by finding the optimal balance among all the important stakeholders such as stockholders, employees, customers, suppliers, the community and society, without violating the rights of any stakeholder. The principle of corporate legitimacy requires that stakeholders have the right to participate in decisions that substantially affect their welfare, while the stakeholder fiduciary principle states that management must act in the interest of both the stakeholders and the corporation, thereby safeguarding the long-term interests of each group (Hasnas, 1998; Smith and Hasnas, 1999). Finally, social contracts theory (Donaldson, 1982) posits that the members of society allow a corporation to be formed and in return, its managers are ethically obligated to pursue corporate profit only if it increases social welfare above what it would be in the corporations absence, and without violating the basic canons of justice. In an attempt to synthesize the seemingly disparate viewpoints from the normative and descriptive research, Donaldson and Dunfee (1994) introduced integrative social contracts theory (ISCT). It recognizes ethical obligations based on both a theoretical macro-social contract among economic participants and a real micro-social contract among members of specific communities. Social norms serve as the foundation for rules of behavior within a community. A business firm, small or large, is an example of a community of individuals who interact within the context of shared tasks, values and goals, and are capable of establishing norms of ethical behavior for themselves (Donaldson and Dunfee, 1999). These norms are considered authentic when they are supported by a substantial majority of members of the community (and are compatible with larger social norms such as treat members of the community with dignity and respect). These authors also suggest two ways for determining authenticity of norms: (a) measuring attitudes and behavior of members of the community, and (b) using proxy variables such as corporate codes and standards expressed by management. Thus, unlike conventional nor-

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mative theories, ISCT explicitly incorporates the cultural norms and/or codes of conduct that management attempts to propagate as a guide to ethical decision-making.

The entrepreneurial context of ethics The unique ethical challenges found in entrepreneurial ventures can be traced to the newness and smallness of these firms. Compared with larger, more established businesses, entrepreneurial firms are more vulnerable to environmental forces, especially given the limited cash reserves and debt capacity of such organizations, their frequent over-dependence on a limited product/service line, and their tendency to rely on a niche customer base. Many small firms also suffer from a relatively limited market presence, subjecting them to significant demand fluctuations, aggressive competitor forays, and lack of support from suppliers and distributors. Aldrich and Auster (1986) discuss the liability of smallness in terms of problems in raising capital, fewer tax advantages, and proportionately greater costs from regulation, at least compared with larger firms. Moreover, there is a liability of newness, especially at the early stages of the venture, when entrepreneurs are unfamiliar with their roles and the roles of the firm, and are apt to commit a variety of errors and blunders (Morris and Zahra, 2000). The characteristics described above often result in conditions that encourage or justify ethical compromises. These conditions include time pressures, cash shortfalls, the fact that making compromises can mean the difference between venture survival and failure, the power position of the entrepreneur, the lack of internal reference points for acceptable and unacceptable behaviors, and the reduced public visibility of the firm. Further, and contrary to arguments made by both ethicists and economists, there may be no payoff for ethical behavior. Bhide and Stevenson (1990) suggest that there is often little penalty for bad behavior in an entrepreneurial firm, and that good behavior can often be penalized. They argue that the fundamental reason for acting properly must be the individuals sense of

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Michael H. Morris et al. ideas and business, thereby increasing the potential for a self-serving bias, counterfactual thinking or self-justification (Baron, 1998) and hence, for making unethical decisions. In this vein, Longenecker et al. (1988) found that entrepreneurs exhibited a tendency toward egoism and experienced greater pressure to engage in unethical behavior. More fundamentally, what many consider to be entrepreneurial behavior is a set of actions fraught with ethical dilemmas. Entrepreneurs are often admired for the creative ways in which they overcome significant limitations, obstacles and sources of resistance to their new venture ideas. Practices such as bending or breaking rules, putting other peoples resources at risk, creatively interpreting the facts, exaggerating ones position, and promising more than one is currently able to deliver are presented by some as clever manifestations of the entrepreneurial spirit (see Bhide and Stevenson, 1990). To the extent that these practices are entrepreneurial, and the more a person engages in them the more entrepreneurial that person is being, the ability to reconcile entrepreneurial and ethical can become problematic. Vyakarnam et al. (1997) conclude that there are four underlying themes in the ethical dilemmas experienced by small business owners: the entrepreneurial activity itself, conflicts of personal values with business needs, social responsibility, and the impact of the owners personality on business ethics. Vitell, Dickerson and Festervand (2000) found the majority of ethical conflicts in small firms arise as a result of interactions with customers and employees. Dees and Starr (1992) suggest the ethical challenges encountered by entrepreneurs can be categorized into: promoter dilemmas (e.g., pragmatic versus moral considerations), relationship dilemmas (e.g., transactional ethics), innovator dilemmas (e.g., avoiding responsibility for ones creation) and other dilemmas (e.g., conflict between personal and business goals). It might be argued, based on this discussion, that the entrepreneurial context requires a different set of ethical standards than the larger, established firm. Yet, the evidence suggests that entrepreneurs may actually demonstrate higher

self, as the wheels of society are greased by forgiveness, forgetfulness and tolerance. The incentive for ethical compromises is further exacerbated by the contemporary social and economic environment, and especially the high tech revolution and the initial public offering (IPO) boom. Various observers have noted that the fast-paced, high expectation and inflated valuation world of the Internet has found firms engaging in a number of questionable business practices (Fortune, 2000; Seglin, 1999). Useem (2000, p. 84) notes the existence of an inverted dynamic, in which:
. . . entrepreneurs have begun to regard the capital market not as a disciplining force, but as the customer. Companies are created, hyped, and sold with less concern for attracting real customers than for lining ones pocket with investors money. The result is that participants can wear a set of ethical blinders, behaving in ways that might seem perfectly acceptable within this insular context but that, when viewed with a modicum of objectivity, look borderline at best.

He cites as examples of such borderline practices inflating revenues through debatable accounting methods, rewarding key employees in major customer firms, CEOs selling large amounts of stock at opportune moments, over-reliance on insider boards, companies stealing intellectual property from one another, cheating employees out of promised stock options, and intercepting private e-mail. Maintaining high ethical standards also imposes requirements that may not always be realistic in an entrepreneurial context. Ethical behavior can require moral calculus after some contemplation and reflection. A number of researchers have examined the role of cognitive processes under conditions of time pressure, high levels of uncertainty, strong emotions, fatigue and other factors that might increase the entrepreneurs susceptibility to biases and errors in reasoning and judgment (Baron, 1998; Kahneman and Lovallo, 1994; Palich and Bagby, 1995). These conditions test the limits of the entrepreneurs cognitive capabilities in unpredictable and complex situations. This challenge is further compounded by the entrepreneurs strong commitment to his/her

Ethical Context of Entrepreneurship ethical standards than managers or executives in larger firms. Bucar and Hisrich (2001) report evidence of higher ethical behavior among entrepreneurs and trace this finding to the higher equity stakes and higher risks assumed by the entrepreneurs. At the same time, the majority of entrepreneurs and managers in their sample felt that their personal ethics were sacrificed to the goals of the business. Separately, Longenecker et al. (1989) highlight differences in ethical perceptions of small firms compared with large companies. Small firm respondents expressed more stringent ethical views on faulty investment advice, favoritism in promotion, acquiescing in dangerous design flaws, misleading financial reporting and misleading advertising. The same respondents demonstrated greater tolerance than did those from large firms when it came to padding expense accounts, tax evasion, collusion in bidding, insider trading, discrimination against women and copying of computer software. Vitell et al. (2000) found that small business owners believe ethical standards today are lower than twenty years ago primarily due to lower standards in society, the lack of personal integrity, and greed. Thus, one might conclude that the entrepreneurial context does not require a different general ethical standard, but the tendency for standards to vary depending on the entrepreneurs own feelings towards particular issues may adversely affect the manner in which the ethical climate of the firm evolves.

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Stages of venture development The entrepreneurial context can also be expected to change as the company develops and grows. There is an extensive body of literature on the concept of the organizational life cycle, which attempts to model the stages companies move through as they evolve from start-up to mature organization (Adizes, 1979; Dodge, 1992; Greiner, 1972; Kazanjian, 1988, Churchill and Lewis, 1983; Quinn and Cameron, 1983; Terpstra and Olsen, 1993). While perspectives on the number and nature of the specific stages in the life cycle differ, it is clear that the organizational challenges and managerial approaches vary

as the company evolves. These developments would seem to have ethical implications, although little research has addressed the relationship between life cycle stages and the ethical climate of the firm. Perspectives in the literature allow for anywhere from four to ten stages in the organizational life cycle. The variables described as changing over these stages have included overall managerial focus, dominant strategy, company structure, management style, nature of the control system, approaches to employee rewards, resource (including human resource) strategies, financing mechanisms, and approach to marketing. Changes in variables such as these might be expected to impact a firms ethical climate, although few insights are available regarding the nature of this impact. As they grow, do patterns emerge in the ethical standards of companies, in the manner in which ethical dilemmas are addressed, or in the formality or sophistication of managerial mechanisms for maintaining ethical standards? While answers to such questions remain elusive, the literature provides formative direction. Perhaps the overarching change related to ethics involves the transition of the firms ethical reference point from the entrepreneurs values and judgment to the establishment of a professional management team and culture where the norms and values become institutionalized. This transition is illustrated in Figure 1. During the initial stages of the life cycle, the foundermanager typically dominates the decision-making process. There may be a constant inflow of new employees that are paid relatively low wages with little or no benefits. At start-up there is also typically no dominant strategy and this allows the entrepreneur the flexibility to adapt strategy without substantial commitment of resources. While a key factor affecting the ethical climate of firms is their management systems, firms in the early stages have less formal structures, looser control systems, less documentation of transactions and fewer procedural hurdles (Adizes, 1979; Churchill and Lewis, 1983). There is no established culture and formal ethical standards often have not been established. The focus is on doing, not contemplating. In the absence of

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Figure 1. Evolution in the ethical reference point as ventures grow.

other normative factors (e.g., companies where the entrepreneur was formerly employed), the entrepreneurs personal value system becomes the organizational template for addressing issues with moral implications (Humphreys et al., 1993; Longenecker et al., 1989). As the organization grows in size and complexity, survival requires the development of an administrative core with functional specialization. In attempting to address the demands of complexity and operational sophistication, the company is confronted with a choice between flexibility and structure. Within the hierarchy of

the mature organization, the ethical views of managers are affected by a complex interaction between the employees personal value system, that of upper management, formal mechanisms instituted to reinforce ethical standards, and the general ethical climate. Gasse (1977) contrasts the cognitive structures of the more open-minded, intuitive, concrete thinking entrepreneur with the more rational, abstract thinking manager and concludes that as the business grows, the entrepreneur would have to be more rational to deal with the increasing complexity of the organization. Churchill and Lewis (1983) report that

Ethical Context of Entrepreneurship characteristics important early in the life of the business may become detrimental as the company environment becomes more complex. In a study on the major problems common to small businesses at each life cycle stage, Dodge and Robbins (1992) found that external environmental problems decrease, while internal problems such as management and finance issues increase, as the organization evolves, with marketing remaining a dominant problem throughout. By comparison, Kazanjian (1988) found that securing financial resources was dominant at start-up, while sales/marketing and organizational problems were more dominant during expansion. In none of these studies did ethical issues surface as a major human resource management issue, while recruitment, turnover/ retention and training were at the top of the list (Terpstra and Olsen, 1993). However, problems having a significant ethical dimension, such as cash flow constraints, CEO overworked/overwhelmed, low sales, maintaining quality control, dependence on one or few customers and product capacity limitations, were mentioned in most studies. While imperfect, size is one indicator of organization evolution, and there has been some work on ethics in firms of differing sizes. In an investigation of the relationship between size and the institutionalization of ethics initiatives (e.g., codes of conduct) within 711 companies, Robertson (1991) concluded that large firms were more likely to deal with ethical matters in a formal and systematic fashion than smaller companies. Unfortunately, she used 2500 employees as the cut off in defining small firms. A survey of technology firms with fewer than 100 employees found the CEOs considered ethical issues to be more important than did their counterparts in larger firms. In contrast, Radaev (1994) reported that enterprise size had little effect on the normative character of ethical principles. Longenecker et al. (1989) found that small business respondents differed significantly from their big business counterparts in their views on a number of issues, but could not be characterized as more or less ethically strict. There are also instances where the founding entrepreneur or team establishes a strong and

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pervasive ethical standard at the outset and this standard endures long after the founders are gone, becoming more formalized and institutionalized over time. Examples would include the sustaining of J.C. Penneys emphasis on the golden rule, or the Tylenol scare at Johnson & Johnson, when executives appealed to the early founders ethical norms. Thus, it would seem there are a number of countervailing forces in the ethical evolution of companies. Pragmatic operational demands, limited management controls and lack of public visibility in early stages may reduce pressure to act ethically. At the same time, the entrepreneurs pride and personal identification with the venture may encourage a higher ethical standard, with some noting the emergence of a de facto unwritten ethical code (Teal and Carroll, 1999). As the company grows, greater distance is placed between ownership and management, especially where the firm goes public and develops a diverse and distant stockholder base, perhaps encouraging a lowering of ethical standards. However, with the founder becoming more experienced as a manager and employing other managers, decision making becomes a group effort and is arguably based less on self-interest and more on the correctness of the act itself. Further, public accountability, the professionalizing of management, and the emergence of strong organizational norms, reward systems, and structures are all factors that would suggest the more established company should have a heightened sense of ethical requirements. There is progressively less flexibility in ethical decision-making, and this may be accentuated when management implements specific mechanisms to guide the ethical behavior of employees.

The entrepreneurial personality and ethics As noted above, the entrepreneur can play a pervasive role in defining the ethical climate in the early stages of the life cycle. Given this likelihood, the determinants of the entrepreneurs ethical standards become important. In attempting to explain an individuals initial judgment of what is right or wrong and subse-

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Michael H. Morris et al. neurs score highly in terms of the need for achievement relative to the general population (Hornaday and Aboud, 1977; McClelland, 1965) and to managers (Begley and Boyd, 1987). They are driven by the challenge to accomplish things others view as unachievable or impractical. Financial returns tend to serve more as a success measure than a prime motivator. The tendencies to start a second or third venture, move an existing venture into totally new markets, or capitalize on emerging technologies are reflective of the ongoing need to achieve. The relationship between this tendency and the entrepreneurs ethical orientation is less apparent. The fact that achievement is more important than pecuniary interests might suggest a stronger ethical posture. At the same time, an emphasis on growth and innovation as forms of achievement brings with it a host of ethical dilemmas, including exploitation of scarce resources, scientific advances into uncharted areas, and obsolescence of existing products, resources and ways of doing things. Tolerance of ambiguity can be defined as the tendency to perceive ambiguous situations as desirable (Budner, 1962). Entrepreneurs encounter ambiguity as they deal with activities containing risks and uncertain outcomes, play multiple roles, and regularly cope with conflicting demands and constraints (Teoh and Foo, 1997). There would seem to be a clear linkage to ethics, as ethical dilemmas are inherently ambiguous and often consist of complex and contradictory situations in which different elements or cues suggest a range of possible outcomes. To the extent that they have a higher tolerance of ambiguity, entrepreneurs may be better able to sort through complexities surrounding an ethical question. An additional psychological variable that has received some attention by entrepreneurship scholars and extensive focus among ethics researchers is Machiavellianism (e.g., Hogarty and Sims, 1978). The Machiavellian side of the entrepreneurial personality relates to the use of power to manipulate others in a quest to achieve personal objectives. According to studies by Christie and Geis (1970), people with high Machiavellian tendencies are not necessarily more

quent behavior when facing ethical dilemmas, Trevino and Youngblood (1990) take as the starting point the entrepreneurs stage in Kohlbergs cognitive development model. For the owner-manager in a smaller firm, the need to obey authority or to look for the approval of relevant others may be less relevant. The normative structure within a company is likely to be embodied in the owner-manager and directly related to her stage of cognitive moral development. Situational moderators are less significant for entrepreneurs than for managers in large firms, leading to a closer relationship between moral judgment and moral action. The models proposed by Trevino and others imply that the most influential factor determining an actors behavior when facing an ethically sensitive business issue will be personal ethics, and that judgment based on personal ethics will be moderated by psychological variables. The psychological characteristics of the entrepreneur represent one of the most heavily researched areas in the field of entrepreneurship. Despite difficulties in definitively identifying the salient features of the entrepreneurial personality (Sexton and Bowman, 1983; Shaver and Scott, 1991), three of the most consistently emphasized characteristics in the psychological area are locus of control, achievement motivation, and tolerance of ambiguity (e.g., Begley, 1995; Morris and Zahra, 2000). Several studies have noted the entrepreneurs strong internal locus of control (e.g., Rotter, 1966; Shaver and Scott, 1991). A person with an internal locus of control believes that her actions, commitment level and tenacity determine outcomes. An external locus of control finds one associating outcomes with external forces such as destiny, luck, social context and powerful others. Entrepreneurs usually have a heightened preference for exerting control over their destinies or outcomes and give little credence to external forces. With regard to the linkage to ethics, an internal locus of control would seem more consistent with a strong reliance on a personal ethical standard as opposed to a standard derived from ones social milieu (Hegarty and Sims, 1978). While motivated by various factors, entrepre-

Ethical Context of Entrepreneurship hostile or vindictive, but appear to have a cool detachment which makes them less emotionally involved in situations. They manipulate more, win more, are persuaded less, and persuade others more. Ramamurti (1986) points to a dark side of the entrepreneurial personality that can result in abuse of power, misuse of people and resources, and ethically expedient or illegal behavior. In their study of public entrepreneurs, King and Roberts (1992) warn against the destructive potential of an entrepreneurial personality and point out that entrepreneurs can be expedient manipulators who play fast and loose in the absence of adequate accountability. As such, a stronger Machiavellian orientation would seem less consistent with high ethical standards. Beyond these psychological characteristics, it is also useful to consider personal characteristics, two of the most salient being age and gender. Findings here are hardly definitive. With age, there is cursory evidence to suggest that subjects become more conservative in their ethical attitudes as they get older (Serwinck, 1992; Radaev, 1994). Hence, younger people would have a more liberal view of potentially unethical situations. The counter-argument is that younger people are more idealistic and see the world in more black and white terms. They may be less inclined to forgiveness than their elders who have experienced more of the ambiguities associated with real life situations. The results in terms of gender are also mixed. There is evidence to suggest females are more conservative in their ethical viewpoints than males, and are more equality or needs oriented, while males are more equity oriented (Kahn et al., 1972). Posner and Schmidt (1984) indicated no differences between male and female perceptions of ethical situations, while Bucar and Hisrich (2001) report that female entrepreneurs are slightly more ethical than males.

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preneurial firms is to first examine how such environments have emerged in established firms. A model for entrepreneurial firms will be hypothesized from this experience. The last decade has seen a significant shift in the way in which the organizational environment is seen as affecting the morality of decisions made within large, established firms. The traditional view focused on individual managers either conforming to the wishes of their superiors in a centralized bureaucracy ( Jackall, 1988), or a bottom line orientation summarized by Nash (1993, p. 138) as follows:
In my experience, the bottom line is the most effective ethical conversation stopper known to business. Whenever a moral question is raised, all someone had to do is say, Of course, we have to think about profit. Thus endeth any second thoughts on what the company is doing and how it is doing it.

The ethical context of entrepreneurship: a development framework The point of departure in assessing the development of an ethical environment within entre-

In effect, the structure and/or financial goals of the organization determined appropriate individual behavior, and ethics played little, if any, role. The centralized bureaucracy of Jackall has given way to a flatter, decentralized firm that relies on trust and teamwork to achieve various organizational goals (Trevino and Nelson, 1999). The importance of a moral environment to create trust and cooperation is increasingly recognized (Gibson, 2000; Solomon, 1999). Furthermore, Verschoor (1998) has shown that financial performance may actually be enhanced when large firms emphasize ethics. How is a moral organizational climate structured to accomplish this? Researchers have recognized that explicit and implicit structures encourage such behavior (Brenner, 1992). The explicit structure is obvious to outsiders, and has been called a compliance program (Paine, 1994), formal systems (Trevino, 1990), and best practices (Navran, 1997). Conversely, the implicit structure is largely invisible to outsiders, and corresponds to Paines (1994) integrity program and Trevinos (1990) informal systems. Figure 2 details both explicit (outer circle elements) and implicit (inner circle elements) structures surrounding an employee faced with a job-related ethical dilemma.

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Figure 2. The developmental framework of ethical structures.

Core values are part of both structures, and represent the starting point for the model. Values play a defining role in the moral life of the firm (Solomon, 1999). They provide guidance on the resolution of ethical dilemmas employees meet in the course of their day-to-day professional lives (Webley, 1999). Hunt, et al. (1989) found that employee commitment to the firm was positively related to the presence of ethical values. While firms can have many values, core values are especially important. They are defined by Collins and Porras (1994, p. 73) as the organizations

essential and enduring tenets, not to be compromised for financial gain or short-term expediency. Unless these core values contain ethical content, the firm is unlikely to provide a moral environment for employees. Therefore, an ethical environment presumes the presence of at least one core value with ethical content. Such value(s) become the starting point for both the explicit and implicit structures. Accordingly, the specific elements in both structures must be developed to reflect and reinforce core values.

Ethical Context of Entrepreneurship The outer circle explicit structure elements The explicit program elements in Figure 2 are consistent with models developed by Navaran (1997) and Trevino and Nelson (1999). The impact of the United States Sentencing Guidelines for organizations is the likely cause. Passed in 1991, these guidelines expanded penalties to include the firm, as well as the offending employee (Howard, 1996). The guidelines also included seven criteria for an effective compliance program (Laczniak and Roberson, 1999). Firms would be eligible for a reduction in any penalties if a compliance program was in place which met these criteria. Organizations have, in effect, been forced by the sentencing guidelines to adopt codes of conduct, training programs, ethics officers, sanctions, etc. These and other elements of the development model are described and supported below. Mission statements. While mission statements are a widely criticized management tool (Krohe, 1995), Bart (1997) reported that a firms values and philosophy were frequently included in its mission statement. Also, Della Costa (1998) has observed that mission statements work for firms who have experience integrating values into their decisions, but not for firms where such a history is lacking. Codes of ethics/conduct. Codes of conduct/ethics have been widely studied for some time (Mathews, 1987). Murphy (1995) found that more than 90% of the firms he investigated had an ethics code, or some other type of ethics statement. Adams, Tashchain and Shore (2001) observed that the mere presence of an ethics code had a positive impact. Compliance manuals. Firms have compliance manuals for several reasons: to communicate relevant rules, to emphasize important policies, and to make these policies understandable (Trevino and Nelson (1999). Weaver, Trevino and Cochrans (1995) survey of corporate ethics practices indicated that policy manuals are widely distributed in large firms (Fortune 500 Industrial and Service firms), and almost half of these firms required an annual acknowledgement receiving the document.

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Anonymous hot lines. While about half of the large firms surveyed by Weaver, Trevino and Cochran (1995) had also adopted anonymous telephone hot-lines to report ethics abuses, these systems are not without controversy. Wide spread distrust among employees has been observed (Singer, 1995). Top management responsibility. The job title typically given to the manager in charge of a firms ethics program is ethics officer. Izraeli and BarNir (1998) identified five necessary requirements of ethics officers including insider status, independence, professionalism, knowledge of the firm and knowledge of social responsibility and ethics theories. It is unlikely that most managers in charge of corporate ethics programs meet all these requirements. Ethics training. A decade ago, Delaney and Sockell (1992) reported that while ethics training appeared to be effective, few firms in their sample had ethics programs. Corporate ethics training has become a billion dollar industry since then (Krohe, 1997). Driscoll et al. (1998) have documented some of the advanced training methods used by sophisticated companies. Unfortunately, the findings of Weaver et al. (1995) may still be true. Significant numbers of employees (2030%) of large, perhaps less sophisticated, firms may receive no ethics training at all. Sanctions for ethics abuses. Individual sanctions or punishment for behavior inconsistent with the firms mission statement, compliance manual, or any other part of the ethics program is the final element in the explicit structure. In considering code of conduct violations, Murphy (1998) argued that sanctions for code violations are necessary and must be enforced to the letter of the code. Trevino and Ball (1992) support this conclusion and assert that managers who avoid disciplinary situations may be sending a powerful and unintended signal to their subordinates and may be sowing the seeds of discontent (p. 675).

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Michael H. Morris et al. moral talk will not be taken seriously. Cook (1992) has observed that this is a particularly important problem for start-up firms. Candid ethical communication. Another supportive characteristic of a moral manager is her/his ability to communicate about ethics and values with other members of the firm (Trevino et al., 2000). These authors assert that the message that values should guide all decisions must begin at the top. Dreilinger (1998) argued that communication by management at all levels is necessary to lessen the gap between what is said, and what is actually done in the firm. From his perspective, candid communication is the only way to inspire employees and build their trust. This is consistent with Leigh and Murphy (1999) who found that superior-subordinate interaction was positively related to ethical decision making. Ethics as a topic of employee conversations. Informal conservations among employees, sometimes called the grapevine, play an important role in the ethical life of the firm (Trevino and Nelson, 1999). This role may be positive resulting in support for formal ethics activities, or negative resulting in indifference or active resistance among employees. Much more research in this area is necessary. Rewards for exemplary behavior. Sanctions or punishment, as discussed previously, should be forthcoming when an employee commits an ethical transgression, but should incentives be offered when ethical guidelines are observed? For example, should employees who follow the rule, Do not take company supplies home for your personal use receive a reward? The common sense answer is no, and Trevino and Nelson (1999) support this view. These authors see rewards as a limited, but important tool for influencing specific types of behavior in the future. One such type is exemplary behavior, specific individual acts which go beyond management expectations and reflect the core values of the firm. Communication of stories about ethical employees. Employees who go out of their way to exemplify

The inner circle implicit structure elements Outer circle elements are necessary to communicate moral expectations across the firm and reflect compliance with U.S. Sentencing Guidelines. However, an important part of the firms moral environment has not been acknowledged. For example, Do employees pay attention to these elements on a daily basis?; or, perhaps more importantly, Are these elements taken seriously by most members of the firm? Affirmative answers to these questions depend upon other aspects of the company environment, and it is to these implicit elements that we now turn. One approach to this aspect of the organizational environment can be found in the informal cultural system of Trevino and Nelson (1999), which includes informal norms, heroes and role models, rituals, myths and stories, and language. These are the dimensions which give meaning and richness to corporate moral life. Indeed, Leigh and Murphy (1999) have speculated that the impact of formal ethics program elements (e.g., codes, sanctions, etc.) may be contingent on the firms informal culture. The five implicit elements in the inner circle of Figure 2 define important parts of the informal culture. These elements are described below. Top management concern/role modeling. The importance of management commitment to ethical values was previously discussed (Hunt, Wood and Chonko, 1989). This clear commitment to ethical values is especially important for top management/leaders to demonstrate (Ciulla, 1999). Trevino, Hartman and Brown (2000) identify two pillars of ethical leadership. The first pillar is a moral person with traits (e.g., integrity), behaviors (e.g., does the right thing) and decision making (incorporates values) The second pillar is a moral manager with several supportive characteristics, one of which is being a visible and positive role model in the firm. The importance of top management being good role models has been noted by other scholars (Gini, 1998; Cavanagh and Moberg, 1999). Top managers who engage in immoral behavior encourage subordinates to do the same. At a minimum, their

Ethical Context of Entrepreneurship core values are heroic figures worthy of recognition throughout the firm. The mechanism for doing this is stories (Breuer, 1998). They serve an important ethical purpose by transmitting what is proper behavior throughout the firm (McCoy, 1983). Stories may be told about ethical leaders (Seeger and Ulmer, 2001) or by leaders (Dennehy, 1999) to provide appropriate examples for others to emulate.

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The study Is the developmental framework a useful guide for modeling the evolution of the ethical climate in entrepreneurial firms? Can categories of firms be identified based on which elements in the developmental framework they have implemented? As companies move from being entrepreneur-centric to having environments with complex management systems and deeply rooted cultures, do patterns emerge in the mechanisms put in place to guide the moral behavior of employees? Scant evidence is available to address these questions. The Economist (2000) notes that small firms pay far less attention than bigger rivals to normalizing ethical issues, while Robinson (1991) found that monitoring and enforcement of ethics policies are not very effective in smaller firms. She also found that more than 60% of larger companies had a written code of ethics and 38% had an ethics training program, while the

numbers for small firms were 33% and 7%, respectively. Contrary to the view that corporate evolution naturally results in a lowering of corporate integrity (e.g., Pearson, 1991), we postulate that integrity can be systematically managed and enhanced as a result of the imposition of ethical mechanisms over life cycle stages. To test this postulate, and more specifically to explore the application of the developmental framework in an entrepreneurial context, an empirical research project was undertaken. The research is consistent with the Hunt-Vitell theory and more generally with the environmental approach, which posits that particular aspects within the organizational environment, such as the reward system, peer influence, codes of conduct, role models, and organizational norms, have a demonstrable effect on the ethical behavior of individuals (Hogarty and Sims, 1979; Hunt and Vitell, 1993; Trevino and Youngblood, 1990). To guide the research, and based on the literature summarized earlier, a conceptual model consisting of five key constructs was developed (see Figure 3). The central variable is the ethical environment of the firm, and it represents the extent to which the elements contained within the developmental framework are operating within the company. Thus, it captures the extent to which the implicit and explicit structure elements in Figure 2 have been implemented. Three key independent variables are believed

Figure 3. The research model.

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Michael H. Morris et al. rewards or sanctions. They also can help simplify decision-making by providing clear decision criteria, while also engendering trust and communication. However, the most immediate impact of the elements in the developmental framework should be their impact on employee perceptions, and specifically of perceptions regarding what is ethically acceptable within the firm, the importance of ethics within the firm, the sense that ethical standards are clear-cut, and the level of satisfaction with the ethical climate of the firm.

to influence the introduction of formal mechanisms to guide the ethical environment of the firm. First among these is the entrepreneur. Consistent with the discussion earlier, we examine four psychological variables frequently associated with entrepreneurial behavior and/or ethical behavior achievement. These include achievement motivation, locus of control, tolerance of ambiguity and Machiavellianism (Begley and Boyd, 1987; Sexton and Smilor, 1986). Other influential factors related to the entrepreneur include his/her reason for starting the business, as well as whether or not he/she previously worked for another company and, hence, has a reference point in terms of a firms ethical standards. The second independent variable is the stage of business development. Here, the concern is not only with the age and size of the firm, but also how far it has evolved in terms of operational sophistication, the development of formal management systems, the emergence of a dominant strategy, and the nature of the organizations structure and senior management style (Churchill and Lewis, 1983; Kazanjian, 1988; Teal and Carroll, 1999). The third independent variable considers the more fundamental characteristics of the firm itself, including whether it principally sells products or services, operates in consumer or industrial markets, reaches local, national or regional markets, is family-owned or not, is publicly- or privately-held, and the nature of the competitive environment with which it is confronted (Longenecker et al., 1989; Radaev, 1994). There is also the question of outcomes. Beyond the complex relationship between ethics and financial performance (Bhide and Stevenson, 1990; Vershoor, 1998) is the more immediate impact of implementing the elements in the developmental framework. By themselves, establishing a direct relationship between any of the ethical climate variables and day-to-day behavioral change would seem difficult (Blake and Carroll, 1989). Yet, combinations of these variables can be expected to make a difference over time (Fudge and Schlachter, 1999). They can serve not only as a constant reminder and source of reinforcement, but represent a source of peer pressure, and some of them are directly tied to

Methodology To test the research model, a cross-sectional, descriptive research design was employed. A mail survey was directed at a random sample of small businesses located in the Midwestern region of the U.S.A. Survey research enabled us to obtain a more representative sample of companies reflecting different stages of development, while also allowing for sufficient variability in the ethical climates of firms.

Instrument design A self-report questionnaire was designed in which business founders/owners were asked to provide answers that best characterized both themselves and their companies. The questionnaire was divided into two separate instruments, one of which assessed personality traits of the entrepreneur, key business descriptors and the stage of business development, and the other of which measured the ethical climate of the firm and perceptions regarding ethical norms and behaviors within the firm. To measure locus of control, the 6-item modified version of Rotters (1966) scale was employed. It provides a general measure of the role of perceived control in the prediction of behavior. Developed by Lumpkin (1985), it assesses both the internal and chance dimensions of locus of control. Reported reliabilities for this scale have ranged from 0.68 to 0.79. Achievement motivation was measured using the

Ethical Context of Entrepreneurship 23-item achievement subscale from the 75-item entrepreneurial attitude orientation (EAO) scale developed by Robinson et al. (1991). Each of the subscales in the EAO scale have been correlated with entrepreneurial behavior (Gasse, 1985). Robinson and colleagues report a reliability of 0.84. The assessment of tolerance of ambiguity relied on Budners (1962) 16-item scale measuring novelty, complexity and insolubility. Budner reports test-retest reliabilities of 0.85, while Morris and Zahra (2000) indicate a Cronbach alpha of 0.85. Machiavellianism was measured with the 20-item Mach IV scale developed by Christie and Geis (1970). This scale assesses the degree to which a person believes that others are susceptible to manipulation in interpersonal situations. In over fifty studies, reliabilities have ranged from 0.62 to 0.79. All of the above scales employed five point, Likerttype strongly agree-strongly disagree response scales. The assessment of a firms stage of business development was accomplished with multiple measures. The questionnaire included two open-ended questions regarding company age and size (employees). In addition, an operational sophistication scale was employed, where respondents rated their companies in seven operational areas (e.g., integration of information technology, human resource management systems) on a 5-point scale from very basic or rudimentary to very sophisticated. Further, three global measures were included in which respondents indicated the extent to which formal management systems had been designed and implemented in their firms, the extent to which the strategy of the firm was formalized, and the relative complexity of the organizational structure. Key business descriptors were obtained through a series of multichotomous classification questions regarding what the firm sold, to whom, and where; whether the firm is high-, moderateor low-tech; labor versus capital intensity; and a set of items on ownership structure. Respondents also characterized the industry in which they operate and rated the competitive intensity of their markets. Measurement of the ethical developmental framework involved a series of twelve dichoto-

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mous (yes/no) questions regarding the presence or absence of each of the twelve elements cited in Figure 2 (e.g., statement of core values, formal code of conduct, anonymous hot line, etc.). In addition, respondents indicated the person in the firm with direct responsibility for ethics-related issues. They also indicated the amount of ethicsrelated training done at the firm (none, some, a great deal), and the frequency with which ethics is a topic of conversation between the CEO and employees (infrequently, somewhat frequently, frequently). The final variable in the research model, ethical perceptions and norms, was approached in multiple ways. First, a set of four items from Victor and Cullens (1987) ethical climate survey (reported alphas consistently above 0.74) was used to assess the importance of ethics within the firm. Second, seven ethical dilemmas (e.g., employees using company resources such as postage for personal purpose) were presented and respondents were asked to indicate whether the company had very clear and specific guidelines, general guidelines or no real guidelines for dealing with each situation. This was followed by a global rating of the firms overall preparation for dealing with any ethical challenge that comes along, where a 5-point (very well prepared not at all prepared) response scale was employed. Thirdly, respondents evaluated how high the firms ethical standards were relative to other firms in their industry on a 5-point (extremely high relatively low) scale. Finally, three measures of satisfaction with the firms management of ethical issues were included, with the respondent providing a rating on a 5-point (very satisfied not at all satisfied) response scale.

Sampling method The sampling frame consisted of small companies with 500 or fewer employees that had been in business for fifteen years or less and were listed in the Ohio Chamber of Commerce Industry Directory. Up to fifteen years was believed to be sufficient to allow firms time to establish themselves, define their competitive positions, create

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Michael H. Morris et al. of ambiguity and locus of control scales were excluded from further analysis. Separate factor analyses were performed on sets of items describing: the firms level of sophistication in various areas from information technology integration to production or service delivery, perceptions of how the firm would deal with various unethical scenarios, level of satisfaction with the firms ethics program, and several items on values and ethical issues regarding employees and management. The analyses relied on principal components extraction and varimax rotation with factors extracted only if corresponding eigenvalues were 1.00. Items failing to exhibit simple structure loadings > 0.50 and/or cross loadings > 0.30, were deleted. The analysis supported the summation of sets of items into scales that captured the firms current sophistication level (7 items), clarity of ethical standards within the firm (7 items), and satisfaction with the firms ethics program (3 items). Factoring each of the item sets produced solutions with all items loading on one factor. Using oblique rotation, loadings similar in magnitude and sign demonstrate the stability of the factor structures. Alphas ranging from 0.70 to 0.86 indicate that the scales were internally consistent. Table II shows the factor loadings and item-total correlations for each item along with the percentage of variance explained and s for the composite Sophistication, Scenarios, and Satisfaction scales. Factoring the four items on values and ethical issues produced a single-factor solution as well, but one item was deleted because of a poor loading, and another due to a low item-total correlation. An of 0.69 for the two remaining items was borderline acceptable. Consequently, the two scaled statements reflecting ethical components in the core values of the firm and the importance of ethical behavior to management were combined to form the Values measure also reported in Table II. Content validity for the scales was established according the guidelines set forth by Nunnally (1978), a thorough search of the literature, a pretest of the instrument, and expert opinion. Further, the reliability and validity of a number of the scales are well-established in the litera-

formal systems and structures, develop cultures, and evolve in terms of their ethical climates. The desire was to achieve a diverse mix of firms in terms of their stage of evolution and the corresponding levels of operational sophistication. A sample of 800 firms meeting these criteria was randomly selected, and surveys were mailed to the CEO/owner of each firm. Subjects were sent the two questionnaires with a cover letter and a stamped, self-addressed return envelope. Participants were promised an executive summary of the findings. A total of 247 surveys were returned, of which 227 had complete data on all variables used in the analysis. Thus, the response rate for completely useable surveys was 28.4%. This rate would appear acceptable for research of this type (Hart, 1987). The responses were tested for response bias. Descriptive statistics for the respondents (size, age, product/market focus) were compared with those from a randomly selected group of 20 non-respondents who were contacted by telephone. No significant differences were identified. Similarly, no differences were found in mean responses between those who responded early versus late.

Analysis Reliability and validity Reliability analysis for the scales representing the characteristics of the entrepreneur was conducted by inspecting item-total and inter-item correlations. Item reduction involved eliminating items with item-total correlations < 0.35 and interitem correlations < 0.20 (cf., Bearden et al., 1993; Nunnally, 1978). Individual items meeting the above criteria were summed to form multiple-item scales. Applying Nunnallys (1978) criterion of 0.70 for acceptable reliability in exploratory research, Cronbach alphas (s) of 0.82 and 0.70 suggest that the Achievement Motivation and Machiavellianism scales are internally consistent. Cronbach alphas and itemtotal correlations for each of these composite scales are presented in Table I. Due to poor reliability (s of 0.57 and 0.54), the tolerance

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TABLE I A summary of scale reliabilities Scale/Item Item-total correlation

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Alpha () 0.82

Achievement motivation a. b. c. d. e. f. g. h. i. j. k. l. m. n. o. I spend a considerable amount of time making my organization function better I believe it is important to analyze your own weaknesses in business dealings To be successful, the manager must spend time planning the future of his/her business I make a conscientious effort to get the most out of my business resources I believe that one key to success in business is not to procrastinate I get a sense of pride when I do a good job on my business projects I think that to succeed in business these days you must eliminate inefficiencies I feel proud when I look at the result I have achieved in my business activities Before allocating resources, I spend a lot of time analyzing my future business needs I make it a point to do something significant and meaningful at work everyday I feel good when I have worked hard to improve my business I get a sense of accomplishment from the pursuit of my business opportunities I always feel good when I make the organization I belong to function better I always try to make friends with people who may be useful in my business To be successful, I believe it is important to use your time wisely 0.42 0.40 0.45 0.44 0.37 0.45 0.44 0.35 0.48 0.47 0.53 0.59 0.55 0.37 0.57

Machiavellianism a. b. c. d. e. One should take action only when sure it is morally right Honesty is the best policy in all cases There is no excuse for lying to someone else All in all, it is better to be humble and honest than to be important and dishonest When you ask someone to do something for you, it is best to give the real reason for wanting it rather than reasons which carry more weight 0.36 0.64 0.57 0.38 0.39

0.70

ture. The questionnaires were pre-tested using a convenience sample of ten firms not included in the final sample. As a result, several of the questions were modified for clarification purposes.

Cluster analysis Clustering, a technique commonly used to classify respondents on characteristics of interest when little is known about the population (Punji

and Stewart, 1983), is becoming more widely used to analyze similarity relations. Here, the interest is in identifying categories or clusters of firms based on their ethical environments. Hence, cluster analysis was performed on the variables describing the ethical decision-making climate of the respondents firm. Similarity matching coefficients ranging from 0 to 1, where larger values represent more similar pairs of respondents on a variable, were calculated for variables with only two response categories.

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TABLE II A summary of development of the composite scales Scale/Item Factor loading Item-total correlation Explained variance 54.37 0.74 0.74 0.75 0.69 0.72 0.79 0.73 0.62 0.63 0.65 0.58 0.60 0.69 0.61 44.35 0.80 0.81 0.53 0.53 41.36 0.65 0.68 0.71 0.65 0.48 0.51 0.55 0.49 0.76 0.69 Alpha () 0.86

Sophistication a. b. c. d. e. f. g. Integration of information technology Inventory management systems Approaches to supplier management Human resource management systems Sales and marketing operations Accounting and financial management systems Production or service delivery systems

Values a. b. The core values at our firm have many ethical components Ethical behavior is a very important issue to top management

Scenarios a. Inappropriate use of a power position by a senior manager in dealing with a subordinate b. Employee using company resources for their personal needs c. Employee overstating expenses he/she incurred and wants to get reimbursed for d. Managers taking credit for work contributions that other employees actually produced e. Promising a customer things you know you might not be able to deliver on, at least not up to the standard of what is promised f. Sharing private, confidential information about one employee with another employee g. Copying computer software for which you do not have a license or agreement Satisfaction a. b. c. I am satisfied with the firms ethics program Most employees of this firm feel comfortable discussing ethics issues with his/her supervisor The ethics program at this firm is one of the best in the industry 0.82 0.73 0.82 0.57 0.45 0.56

0.50 0.70 0.59

0.35 0.54 0.42 62.75 0.70

Several of the categorical variables with more than two response categories were dealt with in a similar way by treating each category as a single dichotomous variable. Because it is unreasonable to assume similarity in respondents based on the absence of a characteristic, Jaccard coefficients

excluding negative matches were calculated (Everitt, 1993; Sneath and Sokal, 1973). Squared Euclidean distance measures computed from the similarities were used as input to the cluster analysis. A range of solutions (212) was produced by an agglomerative hierarchical

Ethical Context of Entrepreneurship clustering method using average linkage within groups. With no a priori expectations regarding the final number of groups to be formed, the agglomeration schedule and homogeneity measures of the merged clusters (R2 and semipartial R2) were examined for large changes and the dendrogram was inspected for differences between fusion levels to identify four distinct clusters of respondents (Milligan and Cooper, 1985). Two procedures were used to evaluate the stability and validity of the four-cluster solution, nonhierarchical clustering and multinomial logistic regression. A parallel threshold method based on a k-means algorithm replicated four clusters that were proportionately similar to those obtained with the agglomerative method (see Milligan, 1980). Using the dichotomous variable set as factors to predict cluster membership, the logit model classified 97% of the respondents correctly. The results collectively suggest the four-cluster solution as the most appropriate number of clusters for the data. Profiles of the four empirical clusters identified are presented in Table III. The table displays percentages of affirmative (yes) response by cluster for each of the 21 questions regarding values, norms, and company policies. For expository purposes, the assigned labels, Superlatives, Core Proponents, Deficients, and Pain and Gain are meant to be descriptive of the overall climate for ethical decision-making in respondents organizations. The first cluster (n = 48), labeled the Superlatives, accounted for 21% of the sample. This group was so labeled because they displayed either the highest or nearly the highest percentage of affirmative responses on most of the questions regarding ethical policies and programs. As examples, 96% indicated that their firm had penalties for unethical behavior that were communicated to employees; 79% had a formal code of conduct, and 69% had a code that provided guidance about resolving specific on-the-job ethical dilemmas. More than the other clusters, ethics-related training was an ongoing activity (63%) with this group, a company policy manual covering ethics was accessible to employees (73%), and someone in the firm was assigned direct responsibility for ethical issues (69%).

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Members of this cluster have given specific thought to developing an ethics program (38%), ethics-related training is done within the firm (73%), and ethical issues tend to be discussed somewhat frequently with employees (54%). Approximately one-fourth of the sample (26%) was labeled Core Proponents primarily because members of this cluster (n = 60) report that their firms have established ethical policies, but lack a number of the elements to fully implement an ethical decision-making climate. Similar to Superlatives, these firms communicate penalties for unethical behavior (87%), have formalized codes of conduct (73%), and mission statements covering ethics (60%). Compared to Superlatives, fewer report that their firms have codified conduct including guidance for the resolution of dilemmas (47% vs. 69%), make unique efforts to communicate to employees stories about ethical behavior (40% vs. 73%), or have someone directly responsible for ethics-related issues (55% vs. 69%). On whether their firms have a formal statement of core values, Core Proponents show the highest percentage of affirmative response (85%). However, few (3%) report that ethicsrelated training is ongoing in their firms and 90% affirm that little or no ethics training occurs. Members of this cluster infrequently discuss ethical issues with employees (72%) and give some to not much thought (42% and 52%, respectively) to the development of an ethics program. Accounting for 47% of the sample, the largest of the clusters (n = 102) was named the Deficients because members in this group scored lowest on all questions related to values and ethical norms and policies. For example, 16% of the members belong to a firm with a formal statement of core values, and only 10% have either formal mission statements covering ethical issues, codes of conduct, or codes containing specific ethical guidance for employees. Just 9% report that their firm communicates stories about ethical employees, and only 11% report ongoing training activity. Eighty-six percent affirm that little or no ethics training occurs, 74% suggest that ethics issues are discussed infrequently with employees, and 90% indicate that their firms have not given much thought to an ethics program.

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TABLE III Empirical cluster profiles* Clusters Superlatives (n = 48) 83% 96 52 63 13 79 69 73 63 73 69 2 73 25 23 54 23 23 31 38 8 47 40 3 72 55 90 3 7 8 20 72 0 7 42 52 7 73 87 22 60 71 53 12 0 24 24 100 12 18 41 100 0 0 29 71 0 6 6 47 41 85% 6% Core proponents (n = 6) Pain and gain (n = 17) Deficients (n = 102) 16% 25 9 10 3 10 10 29 9 11 37 86 11 1 4 23 74 0 3 7 90

Question

Michael H. Morris et al.

1. Does your firm have: a. a formal statement of core values? b. penalties for unethical behavior that are communicated to all employees? c. rewards for employees who exhibit exemplary ethical behavior? d. a formal mission statement that covers ethical issues? e. an anonymous hot line (telephone, e-mail) for your employees to seek advice on ethical issues and/or report ethical abuses? f. a formal code of conduct? g. a code of conduct that provides guidance to employees about the resolution of ethical dilemmas they may face on the job? 2. Do you make a unique effort to communicate stories about employees who went out of their way to do the ethical or right thing with other employees of the firm? 3. Is ethics-related training an on-going activity at your firm? 4. Does each employee of your firm receive, or have access to, a manual of company policies that cover ethical issues? 5. Does someone in your firm have direct responsibility for ethics-related issues? 6. How much ethics-related training is done at your firm? a. none or very little ethics training is done b. some ethics training is done c. a great deal of ethics training is done 7. How often are ethics issues a topic of conversation between you and employees of your firm? a. I discuss ethics issues with employees very frequently b. I discuss ethics issues with employees somewhat frequently c. I discuss ethics issues with employees infrequently 8. How much thought has been given to the development of an ethics program in your firm? a. extensive thought b. fair amount of thought c. some thought d. not much thought

* Binary Squared Euclidean Distance with Average Linkage within groups.

Ethical Context of Entrepreneurship At 7% of the sample, the smallest of the clusters (n = 17) was labeled the Pain and Gain. While similar to Deficients in some ways, this group of firms does appear to take ethics very seriously. They are distinguished by their tendency to stress penalties for unethical behavior (71%) and the availability of rewards for exemplary ethical behavior (53%) to employees. In addition, all (100%) respondents confirm that unique efforts are made to communicate stories about employees who went out of their way to do the right thing and 41% report that someone in their firm is directly responsible for ethics-related issues. In short, there appears to be a tendency for the firms in this cluster to use informal means instead of formal policies and training to communicate a climate of ethical decision-making.

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Multinomial logistic regression To assess the influence of the nature of the entrepreneur, the nature of the venture, and the stage of business development on cluster membership, multinomial logistic regression was applied. To differentiate the clusters, numerous continuous, ordinal, and categorical variables describing the attitudes and opinions of the entrepreneur and key descriptors of the business were used as predictors. Given the variety of variable types assessed, the procedure was selected because it is robust to the violation of assumptions regarding multivariate normality and equal group dispersion (see McFadden, 1981, 1987). The 2 log likelihood value for the fit of the overall model was significant, 2(69) = 90.56, Sig. = 0.04). The Cox and Snell and Negelkerke pseudo R2 measures, comparable to R2 in multiple regression, were 0.42 and 0.45. The overall hit ratio of correctly classified respondents for the resulting model was relatively high at 60%. Table IV presents the maximum likelihood estimates, standard errors, and significance levels for logistic model parameters that demonstrated a statistically significant difference (Sig. 0.10) in the case of at least one cluster. The three cluster comparisons presented differentiate Core Proponents from Superlatives, Deficients from

Core Proponents, and Pain and Gain from Deficients, in that order. Compared to Superlatives, membership in the Core Proponents cluster was positively associated with more labor- intensive firms that have evolved to the point where formal management systems are in place (s = 1.94 and 0.63, Sig. = 0.07), and where profitability is not the dominant strategic focus ( = 2.91, Sig. = 0.06). Those in the Deficients cluster were more labor-intensive firms ( = 1.74, Sig. = 0.10), more likely to be selling services ( = 1.82, Sig. = 0.09), and less likely to be pursuing growth or profitability as the dominant strategic focus (s = 2.96 and 1.59, Sig. = 0.05). It is noteworthy that achievement motivation ( = 0.15. Sig. = 0.05) and percentage of the firms equity personally owned by respondents ( = 0.81, Sig. = 0.08) were negatively associated, while Machiavellianism ( = 0.24, Sig. = 0.10) was positively associated with membership in this cluster. In contrast to Deficients, membership in the Pain and Gain cluster is negatively related to having a delegative senior management style ( = 2.34, Sig. = 0.08).

Multivariate multiple regression To test predictive relationships of membership in the four clusters with respondents perceptions of ethical standards within the firm, a multivariate multiple regression was performed (see e.g., Lutz and Eckert, 1994; Finn, 1974; Finn and Mattsson, 1978). As independent variables in the analysis, three dummy variables were created: membership in the Core Proponents, Deficient, and Pain and Gain clusters. The omitted cluster, Superlatives, was used as the reference group. The dependent variable set included three composite scales, Values, Scenarios, and Satisfaction, and three single-item measures, Preparedness (in terms of internal policies, procedures, standards, and guidelines to deal with ethical challenges), Standards (of ethics compared to other firms), and Guidelines (clarity of, in guiding employee behavior). Each of the single-item measures employed 5-point response scales. Aside from the correlation between Standards and Scenarios

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TABLE IV Selected parameter estimates for the logistic regression Comparison of Clusters: Core Proponents vs. Superlatives Std. error Sig. Std. error Sig. 0.09 0.22 2.91 1.59 1.28 0.63 1.45 1.94 0.58 1.13 1.08 0.48 0.20 0.07 0.28 1.42 0.35 0.37 0.07 1.82 0.28 1.82 1.74 0.81 1.55 1.13 0.06 0.16 2.96 2.25 1.53 1.14 1.38 0.33 1.09 1.06 0.47 0.08 0.15 0.28 0.15 0.15 0.24 0.08 0.14 0.05 0.10 0.05 0.05 0.19 0.40 0.09 0.10 0.08 0.11 0.12 0.96 1.06 2.34 0.24 0.33 1.20 0.55 Deficients vs. Core Proponents Pain and Gain vs. Deficients Std. error Sig.

Predictor variable

Entrepreneurial characteristics: Achievement motivation Machiavellianism Firms dominant focus: Becoming profitable Growth

0.08 0.14 1.42 0.99 1.35 0.32 0.99 1.03 0.46

0.13 0.38 0.50 0.28 0.08 0.45 0.74 0.25 0.22

Michael H. Morris et al.

Stage of business development: Delegative management style Extent of formal management systems implemented

Business descriptor: Firm principally sells services Business is labor intensive Percent of personal equity in firm

2 log likelihood value: Chi-squared Statistic for 69 d.f. = 90.56, Sig. = 0.04

Pseudo R2s: Cox and Snell = 0.42 Negelkerke = 0.45

Hit Ratio = 60%

TABLE V Multivariate multiple tegression tesults Dependent variable Value Std. error 0.60 0.27 0.24 0.44 0.00 0.00 0.00 0.37 15.59 1.47 2.70 0.45 1.17 0.52 0.47 0.86 0.00 0.01 0.00 0.60 2.29 0.15 0.22 0.35 0.26 0.12 0.11 0.19 0.00 0.20 0.04 0.07 Sig. Std. error Sig. Std. error Sig. 8.93 1.06 0.96 0.60 Scenario Standard Satisfaction Std. error 0.86 0.38 0.35 0.63 Sig. 0.00 0.01 0.01 0.34 4.19 0.42 0.86 0.73 Preparedness Std. error 0.42 0.19 0.17 0.31 Sig.

Ethical Context of Entrepreneurship

Intercepts Core proponents Deficients Pain and gain

5.04 0.83 1.05 0.39

0.00 0.03 0.00 0.02

Wilks Lambdas: Core proponents = 0.90, Sig. = 0.02. Deficients = 0.79, Sig. = 0.00. Pain and Gain = 0.96, Sig. = 0.31.

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Michael H. Morris et al. in small firms. A key question concerns whether those who draw such conclusions are working with samples in which Superlatives are disproportionately represented. The other end of the continuum is where one finds the Deficients, firms that lag others in almost every area covered in the developmental framework. While these firms are not inherently unethical in their behavior, motivating the ethical climate is apparently not viewed as a managerial responsibility. The exception is the sizeable subgroup of these firms that do attempt to create role models out of employees who act ethically. The fact that such firms represent almost half of the firms sampled, and membership in the cluster transcended different stages of organizational development, is of concern. Between these two endpoints are the Core Proponents and the Pain and Gain firms. Core Proponents pursue the basic and more formal elements in the developmental framework, and ones consistent with the U.S. Sentencing Guidelines. It appears they do the more symbolic things, such as mentioning ethics in their mission statements and having a code of conduct. However, activities that are more interventionist and hands-on are not pursued. They provide virtually no ethics training, offer few positive incentives for ethical behavior, rarely discuss ethics with employees, and have not given much thought to an ethics program. The Pain and Gain cluster also falls in the middle, but differs substantively from the Core Proponents. A rather small group, these firms tend not to do the symbolic things, such as value statements, mission statements and codes of conduct. They also provide virtually no ethics training. Yet, they are reinforcers, doing the more interventionist types of things. They tie both rewards and penalties to the ethical behavior of employees, and they reinforce ethical behavior by making role models out of employees who engage in noteworthy ethical actions. They also tend to talk to employees about ethical issues on an ongoing basis. These findings also provide initial support for the research model presented in Figure 3. While a number of the indicators of the independent variables did not demonstrate significant rela-

( = 0.12, p = 0.10), all other correlations (0.300.56, ps < 0.01) between the dependent variables were significant at the 0.01 level or beyond. Table V contains the multivariate F-tests (Wilks s) and the betas (s), standard errors, and significance levels for the univariate F-tests in the model. Overall, effects for the Core Proponent and Deficient clusters are significant (s = 0.90 and 0.79, Sig. = 0.02 and 0.00). Even though the univariate F-tests are significant for several of the variables, the multivariate test for Pain and Gain was not significant ( = 0.96, Sig. = 0.31). Except for the univariate test on ethical standards for Core Proponents, which was not significant ( = 0.15, Sig. = 0.20), a pattern of significant (Sig. 0.04) negative s, ranging from 0.22 to 2.70, is apparent across the dependent variables. The findings suggest that, compared to Superlatives, existing structures for dealing with ethical issues are perceived as lacking in the firms in these two clusters.

Summary and conclusions The findings provide support for the existence of categories of small businesses based on the sets of formal and informal ethical structures operating within the firm. Confirmed through the application of two different clustering routines, the four clusters of firms identified here suggest that those who create and grow small firms pursue diverse approaches to the question of ethics. Yet, the fact that companies fall into fairly identifiable categories has important implications for theory and practice. At one end of the continuum are the Superlatives. These firms clearly place a priority on ethics, and the extensive development of mechanisms to ensure consistent ethical performance suggests they view such performance as a core part of company strategy. Their efforts encompass both formal and informal mechanisms, and embrace virtually every mechanism identified in the developmental framework. The fact that one out of five firms falls into this category is reassuring, and perhaps is the reason that some have argued ethical standards are higher

Ethical Context of Entrepreneurship tionships with the ethics variables, some evidence was produced to support each of the linkages proposed in the model. Membership in the clusters varied based on psychological characteristics of the entrepreneur. As expected, need for achievement was negatively associated with the tendency to ignore the ethical variables, while Machiavellianism was positively associated with this tendency. Need for achievement receives more emphasis as a characteristic of the entrepreneur than virtually any other variable, and this finding suggests that achievements such as innovation and growth need not come at the expense of ethics. The linkage between life cycle development of the firm and ethical practices was the most tenuous. While the measures of age, size and operational sophistication were not associated with cluster membership, the extent to which formal management systems have been implemented was a significant factor. As these systems are put in place, there is a greater likelihood the firm will institute the symbolic ethical initiatives pursued by the Core Proponents. It appears that Superlatives will support lots of ethical initiatives from the early days of the firm onward, while Deficients resist doing so regardless of their stage of development. With regard to characteristics of the business itself, it appears that lifestyle types of ventures are not as focused on ethical structures. Thus, the tendency to be more laborintensive, sell services, and to have a strategic focus centered less on growth were all associated with being in the Deficients cluster. The fact that a focus on growth and profitability were not related to being in the Deficients cluster again emphasizes the compatibility of these goals with ethical behavior. The ethical nature of an entrepreneurial way of life was further reinforced by the finding that entrepreneurs holding more equity in their own firms were more likely to engage in multiple initiatives to encourage ethical behavior. Importantly, putting the ethical development framework elements in place affects perceptions regarding the ethical performance of the firm. Implementing formal and informal ethical initiatives is associated with a sense that the firm is prepared to deal with ethical challenges, clear

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guidelines exist for dealing with specific ethical dilemmas, and a satisfactory ethical climate exists. On the one hand, it may not seem surprising that entrepreneurs who have invested in multiple ethical management initiatives will believe their firms are better prepared and the ethical environment is satisfactory. On the other hand, the fact that those in the Core Proponents and Pain and Gain clusters had concerns about their ethical environments reinforces the value of these ethical initiatives for creating a more effective company culture. The results of this research provide direction for future research. Researchers may be oversimplifying when they generalize about small firms being more ethical or less ethical. While the largest segment of firms ignores the initiatives contained in the ethical developmental framework, there appear to be identifiable categories of firms with significant differences in their approach to the management of ethics. Future work should incorporate the clusters identified here, further exploring the factors responsible for cluster membership. As examples of such factors, other characteristics of the entrepreneur warrant attention, such as demographics (e.g., age, sex, religion). Similarly, additional characteristics of the firm should receive attention, and especially the external environment within which the firm operates. Pertinent variables might include the general ethical climate within the industry, the extent of government regulation or interface, bargaining power of customers, the pace of technological change, and the rate of new market entrants. Internal variables of interest might include the nature of the firms cost structure and margins, average employee tenure, looseness versus tightness of management controls, and the nature of information management and communication processes within the firm. Fertile research opportunities exist in the area of outcomes. A priority in this regard is to survey employees of firms in each cluster to determine their sense of the clarity of ethical standards, the preparation level of the firm in dealing with ethical challenges, and their satisfaction with the ethical climate of the firm. Also important is the need to establish relationships between cluster

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membership and various measures of ethical and financial performance. Thus, exploring the specific ways in which firms in each cluster would deal with different ethical scenarios would be insightful. Linkages between cluster membership and rates of employee turnover, measures of profitability, and various growth measures will help establish the saliency of the ethical development framework as a guide for entrepreneurs as they grow their firms. Such performance variables might be linked to the relative emphasis on formal versus ethical initiatives, as reflected in the Core Proponent versus Pain and Gain clusters. Finally, researchers should examine the stability of cluster membership over time. The present research was cross-sectional in nature and, while it included indicators of organizational development, the possibility that firms move among the clusters should be investigated. Thus, are there conditions where Pain and Gain firms decide to add the more formal ethical initiatives of the Core Proponents, or where Deficients begin to experiment with either the formal or informal structural elements? While this study represents only a first step, it does appear the ethical development framework holds promise for entrepreneurs and educators. Further, the categorization of firms based on the clusters identified in this research can guide ongoing research efforts, while also serving as a valuable self-assessment tool, helping entrepreneurs determine where their firms are relative to other firms, and where they aspire to be. References
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Ethical Context of Entrepreneurship Michael H. Morris School of Management, Syracuse University, Syracuse, New York, 13244-2130, U.S.A. E-mail: mhmorris@syr.edu Minet Schindehutte Page Center for Entrepreneurship, Miami University, Oxford, Ohio 45056, U.S.A. E-mail: Schindm@muohio.edu

361 John Walton Department of Marketing, Miami University, Oxford, Ohio 45056, U.S.A. E-mail: Waltonjr@muohio.edu Jeffrey Allen Department of Marketing, University of Central Florida, Orlando, Florida 32816, U.S.A. E-mail: jallen@bus.ucf.edu