ETHICAL PERCEPTIONS AND ETHICAL ENVIRONMENT IN SMALL BUSINESS

Justin G. LONGENECKER   Joseph A. McKINNEY   Carlos W. MOORE
Baylor University, Waco, Texas, U.S.A.

ABSTRACT

This study reports on a survey in the United States of ethical
perceptions in firms having fewer than 1,000 employees. 
Respondents gave ethical evaluations of sixteen business
situations.  Their responses showed greater disapproval than
approval of described ethically questionable behaviors.  Little
difference was found in responses among three subgroups of firms-
-those having fewer than 100, 100 to 499, and 500 to 999
employees.  The study also examined the extent to which
respondents had faced the specified behaviors, the extent to
which they felt pressure to act unethically, and the extent to
which having written ethical codes affected their perceptions.

Concerns and issues of an ethical nature clearly apply to the
world of business.  The press often highlights instances of
fraud, deception, or other types of malfeasance involving major
corporations and/or well-known business leaders.  Ethical issues,
however, are not confined to big business.  They permeate all of
business as, indeed, they permeate all of life.
In a day when the competitive market dynamics emphasize product
quality and customer service, ethical decision making becomes
crucial for small business.  Excellence in quality and
superiority in service require a foundation of sound ethical
behavior.  Ethical performance issues are thus relevant to the
initiation and management of small firms.

PRIOR RESEARCH IN SMALL BUSINESS ETHICS

Research in business ethics and social responsibility has tended
to emphasize big business.  There has been a resultant gap in the
literature with respect to small-business ethics. (Chrisman and
Fry, 1982; Thompson and Smith, 1991; Dees and Starr, 1992)
Even though the area has been neglected, a number of studies have
examined small-business ethical issues and perspectives. 
Examples of such research are the following:
1. Wilson (1980) investigated the perspectives of owners or
managers of firms with fewer than twenty-five employees
concerning their social responsibilities, recognizing that
perspectives of such individuals may differ from those of
executives in large corporations. 
2. Brown and King (1982) examined differences in ethical
attitudes of respondents in firms with fewer than 100 employees
and those of other respondents, most of whom were professionals
or were employed by large corporations or public agencies. 
3. Enz, Dollinger, and Daily (1990) investigated whether value
orientations of minority and non-minority small business owners
differed from those of large corporate customers.

This paper extends knowledge developed through studies of this
nature by investigating the ethical perceptions and the ethical
context of members of small firms.  In particular, we direct
attention to the following questions:

1. What is the general level of ethical sensitivity in small
firms?
2. Are there differences among the ethical perceptions of
individuals within very small and somewhat larger segments of
small business?
3. To what extent are certain specified ethical issues faced by
members of small firms?
4. To what extent do members of small firms experience pressure
to act unethically?
5. To what extent do members of small firms receive guidance from
ethical codes?

THE SURVEY

In order to examine the ethical attitudes of key business
personnel toward a variety of issues, we conducted a nationwide
survey in 1993 of managers and other business professionals.  A
questionnaire, which had been pretested and used in a previous
survey, was mailed to ten thousand individuals in the United
States who had been identified by a publisher of major business
periodicals as business professionals.  A total of 1,982 usable
questionnaires were returned, for a response rate of just under
twenty percent.  Of these respondents, 748 identified themselves
as being employed in firms of fewer than 1,000 employees, but not
as being self-employed.  We excluded self-employed respondents
from this sample to avoid mixing ownership and ethical issues. 
The remaining 748 small business respondents provided the sample
for our analysis here.

Table 1

                     PROFILE OF RESPONDENTS
Employment Status                       Percentage of Respondents
Top Management                                    41.0
Middle Management                                 35.1
Lower Management                                  11.9
Non-Management                                    11.5
Retired                                            0.4
Professional Classification             Percentage of Respondents
Accounting                                         8.2
Engineering/Technical                             32.3
Finance                                            9.0
Marketing/Sales                                   15.6
Manufacturing/Operations                          10.2
Personnel                                          2.4
Other                                             22.3
Industry                                Percentage Of Respondents
Manufacturing                                     23.6
Construction                                       8.6
Mining                                             0.7
Retail                                             3.2
Wholesale                                          3.6
Services                                          16.1
Finance and Insurance                              6.8
Education                                          5.2
Real Estate                                        1.7
Government                                         8.3
Trans Com Public Utl                               9.1
Other                                             13.1
Gender                                  Percentage of Respondents
Male                                              80.4
Female                                            19.6
Age                                     Percentage of Respondents
20 or less                                         0.1
21-30                                             13.8
31-40                                             29.7
41-50                                             34.1
51-60                                             16.9
61-70                                              4.3
Over 70                                            1.1

A profile of respondents is shown in Table 1. It will be noticed
that approximately 80 percent of the respondents were male, and
only 20 percent female.  This reflects the fact that, while labor
force participation rates of men and women in the United States
are now approximately the same, a much smaller percentage of
females would fall into the classification "business
professional." Approximately 34 percent of the respondents were
in the age category 41-50, and another 42 percent were 40 years
of age or younger.  Manufacturing was the industrial sector most
heavily represented in the sample.  More than 75 percent of the
respondents classified themselves as either top or middle
management, as might be expected in a survey of business
professionals.  The professional category having the largest
number of respondents was engineering/technical, followed at some
distance by personnel and finance professionals.  Responses were
received from all 50 states of the United States, with a fairly
even regional distribution of respondents.

In order to analyze small business survey responses, we divided
our sample into three groups:  those from firms with fewer than
100 employees, those from firms having 100 to 499 employees, and
those from firms having 500 to 999 employees.  The first category
would almost universally be considered as falling within the
definition of small business.  Those in the second category are
also generally considered as being small businesses, while those
in the third category are sometimes included and sometimes
excluded from this classification.  The aim of our research here
is to examine the ethical environment and perceptions in small
firms and to identify any differences based on size of firm
within this limited range.

GENERAL LEVEL OF SMALL BUSINESS ETHICS
Respondents were asked to evaluate the ethical quality of sixteen
business decisions.  Each business situation was described in a
brief vignette.  Respondents indicated their ethical judgment
concerning these situations by selecting one point on a seven-
point scale, ranging from 1, "never acceptable," to 4, "sometimes
acceptable," to 7, "always acceptable."
The vignettes used in the present study are presented in their
entirety in the appendix to this paper.  Table 2 presents the
mean values of responses from all respondents in firms having
fewer than 1,000 employees.  The vignettes themselves range from
what most observers would consider "black" to "gray" areas--
including many clearly legal situations--of business behavior. 
Even so, mean responses were less than 4 ("sometimes acceptable")
in all vignettes.  This positions the answers toward the
stringently ethical ("never acceptable") end of the scale.

Table 2

            RESPONSES OF SMALL BUSINESS PROFESSIONALS

Vignette                                      Mean Response Value
Padded expense account                              1.3221
Environmental pollution                             1.5013
Faulty investment advice                            1.6622
Tax evasion                                         1.8323
Foreign business payoffs                            3.0204
Hiring key employee of competitor                   3.5000
Collusion in bidding                                2.5373
Gifts to purchasing agents                          3.1469
Insider trading                                     1.8173
Favoritism in promotion                             3.3668
Acquiescing in dangerous design flaw                2.1372
Misleading financial reporting                      3.9276
Discriminating against women                        2.7149
Misleading advertising                              2.6739
Defending healthfulness of cigarette smoking        3.3408
Copying computer software                           2.3301
                                                   (n=7,48)

In general, therefore, respondents tended to condemn behavior
portrayed in the vignettes, thereby reflecting a seemingly
positive view of ethical responsibilities.  In this type of
survey, of course, there is always the possibility that
respondents will choose to report what they believe to be
socially acceptable attitudes rather than their true attitudes. 
The fact that respondents were not required to divulge their own
or their firms' names, however, should have reduced this
tendency.

PERCEPTUAL DIFFERENCES WITHIN THE SMALL BUSINESS SECTOR

As noted earlier, prior studies have identified some apparently
distinctive small-business ethical perceptions.  In an earlier
investigation, the present authors found significant differences
between respondents in small and large firms in their ethical
judgments concerning a number of specified business behaviors.
(Longenecker, McKinney, and Moore, 1989)
Results from the earlier study caused us to wonder whether
ethical perceptions are relatively uniform throughout the domain
of small business or whether viewpoints change as we move from
the smallest businesses to somewhat larger, but still small,
firms.  To analyze this issue, we compared the mean responses
from the three employee-size groups described earlier-- 1 to 99,
100 to 499, and 500 to 999.

Table 3

         MEAN VALUE OF RESPONSES ACCORDING TO FIRM SIZE

                                              Number of Employees

Vignette                        <100   100-   500-   F      F

                                        499    999  Ratio  Prob.
Padded expense account          1.35   1.28   1.32  .6155  .5406
Environmental pollution         1.50   1.49   1.53  .0634  .9386
Faulty investment advice        1.67   1.60   1.77  .8588  .4241
Tax evasion                     1.84   1.78   1.96  .5831  .5584
Foreign business payoffs        2.92   3.05   3.31 2.0690  .1270
Hiring key employee of
  competitor                    3.44   3.50   3.69  .6608  .5167
Collusion in bidding            2.64   2.47   2.36 1.2795  .2788
Gifts to purchasing agents      3.19   3.04   3.27  .8627  .4224
Insider trading                 1.93   1.73   1.68 1.8223  .1624
Favoritism in promotion         3.47   3.17   3.51 3.0365  .0486
Acquiescing in dangerous      
  design flaw                   2.20   2.03   2.20 1.2403  .2899
Misleading financial
  reporting                     3.95   3.96   3.76  .5195  .5950
Discrimination against
  women                         2.85   2.55   2.66 2.5566  .0783
Misleading advertising          2.77   2.57   2.59 1.0551  .3487
Defending healthfulness of
  Cigarette smoking             3.38   3.26   3.41  .2768  .7583
Copying computer software       2.39   2.26   2.29  .5082  .6018

Table 3 presents the mean values for each of these size groups. 
It appears that there is great similarity in the perceptions of
respondents in each of the size categories.  Only one vignette
showed any significance at the .05 level, and its significance
level was borderline at .049.  On balance, therefore, this study
has failed to find any clear-cut differences in ethical
perceptions among the various size groups having fewer than 1,000
employees.

ETHICAL DILEMMAS MOST FREQUENTLY FACED

For each of the vignettes in our survey, we asked respondents to
indicate whether or not they had ever faced or observed that type
of situation.  Their responses are reported in Table 4. These
responses can provide clues to the more prevalent ethical
problems in small firms, but the evidence is limited to the
specific issues highlighted in the sixteen vignettes.

Table 4

                                        Percentage of Respondents

Vignette                          Faced   Observed  Neither faced
                                                    nor observed
Copying computer software         49.1      27.5    23.4
Favoritism in promotion           25.7      37.9    36.4
Gifts to purchasing agents        23.8      27.2    49.1
Discriminating against women      22.3      22.5    55.2
Padded expense account            14.2      31.7    54.0
Tax evasion                       14.0      32.8    53.2
Faulty investment advice          11.3      15.4    73.2
Misleading financial reporting    10.8      19.7    69.5
Collusion in bidding              10.7      18.7    70.6
Hiring key employee of competitor  7.9      17.9    74.2
Misleading advertising             7.6      23.2    69.1
Acquiescing in dangerous
  design flaw                      7.0      12.6    80.4
Environmental pollution            6.9      15.1    78.0
Foreign business payoffs           5.1      13.8    81.2
Insider trading                    4.1      16.2    79.7
Defending healthfulness of
  cigarette smoking                2.3      25.7    72.0

Of all the situations hypothesized, by far the one most
frequently encountered was the copying of a copyrighted computer
program from a friend rather than purchasing a copy from a
software dealer.  Almost one-half of the respondents (49.1
percent) reported having faced this situation.  The prevalence of
computer software in even small businesses today, the ease with
which it may be copied, and the low probability that such action
would be detected or prosecuted no doubt makes this a common
ethical dilemma for small business professionals.  Only three of
the other situations were identified by more than twenty percent
of the respondents as situations they had faced.  Two of these
dealt with discrimination in promotion and hiring.  In one of
them, a corporate executive promoted a loyal friend and competent
manager to the position of divisional vice president in
preference to a better-qualified manager with whom he had no
close ties.  In the other, an employer received applications for
a supervisor's position from two equally qualified applicants but
hired the male applicant because he thought that some employees
might resent being supervised by a female.
That ethical dilemmas regarding promotion and hiring should arise
frequently in small businesses is not surprising.  In a small
firm, employees are likely to know each other and to be aware of
situations in which favoritism is shown.  Also, in a small
business environment, the ability of workers to work together is
likely to be a matter of great importance and to be an overriding
consideration in the hiring process.

The only other vignette faced by at least one-fifth of the
respondents was the compromising of purchasing agents' positions
through the giving of expensive Christmas gifts.  This may
reflect the dependence of many small business firms on key
customers to purchase their product, and their perceived need to
keep the purchasing agents of these customers happy.

PRESSURE TO ACT UNETHICALLY

As part of our investigation, we tried to ascertain the extent to
which small business professionals feel pressure to act
unethically.  Therefore, we posed the following question to
respondents:  "How much pressure do you feel personally within
your organization to engage in what you perceive to be unethical
behavior?" We asked respondents to check one of three answers: 
No pressure; Slight pressure; or Extreme pressure.  The degree of
pressure reported by respondents was as follows:

          No Pressure         65.2%
          Slight Pressure     31.7%
          Extreme Pressure     3.1%

We find it interesting that almost two-thirds of the respondents
indicated that they feel no pressure at all to engage behavior
which violates their ethical norms.  We recognize the possibility
that there may be a positive relationship between the stringency
of a person's ethical standards and the degree of pressure that
person feels to engage in unethical behavior.  That is, a person
with low ethical standards is likely to encounter few situations
which would violate such standards and thus would seldom be
troubled by ethical issues.  Conversely, a person with high
standards is more likely to encounter situations which would
violate such standards.
In view of the generally high ethical standards which seem to be
adhered to by respondents to this questionnaire, however, we find
it encouraging that two-thirds of them feel no pressure at all to
engage in behavior which would violate their own ethical
standards.
At the same time, almost one-third of the respondents reported
slight pressure to engage in behavior which they consider
unethical, and a few reported extreme pressure.  Of course, there
can be different sources of such pressure.  Professionals in
small businesses may feel various competitive pressures to engage
in unethical behavior.  In some cases, they may believe that the
survival of their firm requires ethical compromises which they
would not otherwise make.  Alternatively, they may be faced with
unethical behavior on the part of competitors and be tempted to
act in the same way.
A different type of pressure may be administrative in nature. 
The management of the firm may have established an environment or
a level of expectations for employees which tolerates or
encourages unethical behavior.  In extreme instances, an employee
may be directed by a superior to engage in some particular
behavior which violates the employee's ethical norms.  We are
unable to discern from survey responses the sources of pressure
to engage in unethical behavior.
We do find it encouraging that almost two-thirds of all
respondents reported feeling no pressure to engage in behavior
which would violate their ethical norms.  Nevertheless, a
business climate within which more than one-third of respondents
feel some degree of pressure to behave unethically is far from
ideal.

ETHICAL CODES IN SMALL BUSINESS

Ethical codes have become a popular tool of corporate management
in efforts to foster ethical behavior.  In this survey,
respondents were asked whether their organizations had a written
code of ethics.  The percentage of respondents who were aware of
ethical codes is shown below:
Employee Size of Firm                  Percentage Reporting Codes
Under 100                                      35.6%
100-499                                        47.7%
500-999                                        63.6%

It is apparent that size of firm is associated in the United
States with the use or at least the awareness of written ethical
codes.  The apparent greater usage of written codes in larger
businesses is not surprising.  There is widespread recognition of
the informality or management policies and practices in small
firms.
Differences in respondents' awareness of ethical codes might be
considered in the light of the ethical perceptions reported
earlier.  Even though there is a substantial difference in the
usage of written codes at different size levels, there was very
little evidence of significant differences in their ethical
perceptions.  Within the size group studied here (under 1,000
employees), therefore, we have found no connection between
ethical perceptions and the use of written codes.

SUMMARY OF FINDINGS

Respondents from small firms displayed ethical sensitivity by
showing disapproval of ethically questionable behavior.  In all
sixteen vignettes, the mean ratings were less than 4, positioning
their answers to the "ethical" end of the scale.  The ethical
viewpoints of those in the smallest firms (fewer than 100
employees) were found to be basically similar to those of
respondents in the somewhat larger firms--those with 100 to 499
employees and 500 to 999 employees.
As might be expected, the percentage of respondents facing the
specific ethical issues portrayed in the various vignettes
differed greatly.  This suggests that some kinds of ethical
problems tend to be much more pervasive than others.  In this
survey of attitudes toward a number of specified practices, the
copying of copyrighted computer software was the one issue cited
by almost one-half of the respondents.
The ethical environment was positive to the extent that almost
two-thirds of the respondents reported no sense of pressure to
act unethically.  However, the disturbing fact remains that 31.7%
reported slight pressure and 3.1 % reported extreme pressure to
act contrary to their own ethical standards--a far from ideal
situation.
Awareness of written ethical codes varied directly with the size
of firm.  The larger the firm, the more likely were respondents
to show awareness of ethical codes in their firms.  This presents
an interesting question concerning the impact of written ethical
codes.  In this case, a much higher percentage in larger firms
realized that written codes existed in their firms.  However, the
ethical sensitivity shown in their answers was similar to that of
respondents from smaller firms in which awareness of ethical
codes was much less prevalent.  The codes were seemingly
unrelated to ethical judgments of respondents.

Appendix:  Vignettes Used in the Study

A.  An executive earning $100,000 a year padded his expense
account by about $3,000 a year.
B.  In order to increase profits, a general manager used a
production process which exceeded legal limits for environmental
pollution.
C.  Because of pressure from his brokerage firm, a stockbroker
recommended a type of bond which he did not consider a good
investment.
D.  A small business received one-fourth of its gross revenue in
the form of cash.  The owner reported only one-half of the cash
receipts for income tax purposes.
E.  A company paid a $350,000 "consulting" fee to an official of
a foreign country.  In return, the official promised assistance
in obtaining a contract which should produce $10 million profit
for the contracting company.
F.  A company president found that a competitor had made an
important scientific discovery which would sharply reduce the
profits of his own company.  He then hired a key employee of the
competitor in an attempt to learn the details of the discovery.
G.  A highway building contractor deplored the chaotic bidding
situation and cutthroat competition.  He, therefore, reached an
understanding with other major contractors to permit bidding
which would provide a reasonable profit.
H.  A company president recognized that sending expensive
Christmas gifts to purchasing agents might compromise their
positions.  However, he continued the policy since it was common
practice and changing it might result in loss of business.
I.  A corporate director learned that his company intended to
announce a stock split and increase its dividend.  On the basis
of this information, he bought additional shares and sold them at
a gain following the announcement.
J.  A corporate executive promoted a loyal friend and competent
manager to the position of divisional vice president in
preference to a better qualified manager with whom he had no
close ties.
K.  An engineer discovered what he perceived to be a product
design flaw which constituted a safety hazard.  His company
declined to correct the flaw.  The engineer decided to keep
quiet, rather than taking his complaint outside the company.
L.  A controller selected a legal method of financial reporting
which concealed some embarrassing financial facts which would
otherwise become public knowledge.
M.  An employer received applications for a supervisor's position 
from two equally qualified applicants but hired the male
applicant because he though that some employees might resent
being supervised by a female.
N.  As part of the marketing strategy for a product, the producer
changed its color and marketed it as "new and improved," even
though its other characteristics were unchanged. 
O.  A cigarette manufacturer launched a publicity campaign
challenging new evidence from the Surgeon General's office that
cigarette smoking is harmful to the smoker's health.
P.  An owner of a small firm obtained a free copy of a
copyrighted computer software program from a business friend
rather than spending $500 to obtain his own program from the
software dealer.

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