Ethics Through an
Entrepreneurial Lens:
Theory and Observation
ABSTRACT. Recent work in the fields of ethics and
entrepreneurship has raised the possibility that entrepreneurs may differ from other individuals in the
moral issues they face, in their moral judgements and
behaviors concerning those issues, and even in their
level of cognitive moral development. While this
work has been exploratory and its conclusions tentative, the findings raise two interesting questions: do
entrepreneurs actually differ from non-entrepreneurs
in their ethical orientations and, if so, why? We
propose a model of ethical decision making for small
business entrepreneurs. We suggest some ways in
which the ethical framework of entrepreneurs may
differ systematically from that of other business people
and propose some areas for future research.
KEY WORDS: cognitive moral development, entrepreneurs, ethics, moral behavior, moral judgement,
small business
Research on the ethics of small business owners
and entrepreneurs has been conducted for two
decades now, (Wilson, 1980; Chrisman and Fry,
1982; Chrisman and Archer, 1984; Brown and
King, 1982) but only in the last decade have we
seen substantial attention devoted to the topic.
In 1990, Payne and Duhon noted that “. . . the
ethical challenges of small business entrepreneurs
have not received much specific attention”
Emeric Solymossy is an Assistant Professor of Management
at Western Illinois University. His research interests
include a number of topics in the areas of entrepreneurship and international management.
John K. Masters is an Associate Professor of Management
at Louisiana State University in Shreveport. He was
formerly an Assistant Professor at Western Illinois
University.
Emeric Solymossy
John K. Masters
(Payne and Duhon, 1990, p. 29). Dees and Starr
(1992), in their review of the literature on small
business ethics, found only “a handful of papers
that explicitly address ethical questions in the
context of small business management” (Dees
and Starr, 1992, p. 91). They suggested that such
research “would be stronger if it could be
grounded in a solid base of research” (Dees and
Starr, 1992, p. 91).
Several authors (e.g., Teal and Carroll, 1999;
Longenecker et al., 1989a, b; Vyakarnum et. al.,
1997) have presented evidence that entrepreneurs
or small business owners differ from other individuals in the moral issues they face, in their
moral judgements and behaviors with respect to
those issues, and even in their levels of cognitive
moral development. While these findings are
interesting, no theory has been advanced which
purports to explain why these differences exist.
Entrepreneurship itself generally is viewed as the
antecedent. Moreover, the testing which has been
done has been suggestive of ethical differences
between entrepreneurs and others, but has been
largely exploratory.
In this paper, we develop a model drawn from
past research concerning the influences on
business ethics generally and relate these theories
to the findings on entrepreneurial and small
business ethics. Our purpose is to lay a foundation on which future research can build in
exploring ethics in the context of the small
business owner. We then explore the implications
of the model for theory and practice and suggest
directions for future research.
Journal of Business Ethics 38: 227–241, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
228
Emeric Solymossy and John K. Masters
Is small business different?
The authors who have proposed general models
of individual ethical decision making and
behavior in organizational settings agree that the
process of engaging in moral behavior has several
discrete steps (e.g., Rest, 1986; Trevino, 1986;
Ferrell and Gresham, 1985; Ferrell et al., 1989;
Hunt and Vitell, 1986; Jones, 1991; Dubinsky
and Loken, 1989; Brass et al., 1998). When a
moral issue arises, the individual must first
recognize the issue. He or she must then make
a judgment about the moral course of action,
based on some ethical screen related to his or her
level of cognitive moral development (Kohlberg,
1969). Once the individual has determined the
moral course of action, he or she must decide
whether to act on that determination. Success
at each step of the process increases the likelihood of success at later steps, but is neither a
necessary nor sufficient condition for later
success. Moral judgements are less likely without
recognition that a given issue has a moral dimension and moral behavior is less likely when no
moral judgement has been made. While the
proponents of these models disagree on the
number and sequence of the steps as well as the
antecedents which influence each step, they agree
that individuals can differ at each of the steps.
One notable disagreement concerns the role of
cognitive moral development (CMD) in the
process. CMD is viewed variously as an input to
the process, as a step in the process, as an
outcome of the process, or as some combination
of the three.
The process view described above informs the
study of small business ethics in two ways. First,
the model clearly distinguishes potential outcome
(dependent) variables for study. This distinction
between issue identification, moral judgement,
and moral behavior has not always been clear in
past research. A second reason this process view
may be of interest, particularly to the study of
ethics in small business, is that past research has
provided evidence that entrepreneurs and small
business owners may differ from other business
people at each step of the process (e.g.,
Longenecker et al., 1989a; Vyakarnam et al.,
1997; Teal and Carroll, 1999). Next, we examine
these differences for each step in turn.
Recognizing moral issues
Recent research by Vyakarnam and his colleagues
(1997) has directly examined the issues small
business owners believe to have a moral dimension. Using focus groups made up of small
business owners, they identified four areas in
which the ethical issues confronting small
business may differ from those confronting agent
managers in larger firms. These areas concerned
the nature of entrepreneurial activity itself
(information asymmetries, etc.), prioritizing
stakeholders, conflicts of interest (separating self
from business), and personality issues. By comparing the results with existing literature on
business ethics, the researchers concluded that
small business owners identify different moral
issues than do other individuals in business.
Making moral judgments
Longenecker et al. (1989a) set out to investigate
the moral judgements of small business
owner/managers. Their survey revealed significant differences in the moral perceptions between
agent/managers and owner/managers on twelve
of the sixteen scenarios in their questionnaire.
Small business respondents were stricter in their
judgments of six items and more lenient in their
judgments of the other six items than were
respondents from larger firms. Factor analyses of
this instrument and of a similar instrument by
Reidenbach and Robin (1990) have consistently
identified three dimensions underlying the judgements of entrepreneurs and others, but the
authors differ dramatically in the names they give
those dimensions and in their interpretations of
those dimensions (Humphreys et al., 1993;
Hornsby et al., 1994). Further development
seems necessary before these dimensions can be
interpreted satisfactorily.
Vyakarnam and his colleagues (1997) also
investigated the processes owners used to judge
Ethics through an Entrepreneurial Lens
the issues they identified. They again found that
owners reported differences in the factors
influencing their judgements about ethical intent.
They added that the differences noted by
Longenecker et al. (1989a) and by Hornsby and
his colleagues (1994) may reflect differences in
the ethical issues small business owners identified
rather than in their moral judgments about those
issues. Other researchers have found that moral
judgment varied significantly by size of the
business (Enz et al., 1990; Murphy et al., 1992).
Cognitive moral development
Both Rest (1986) and Trevino (1986) have
argued that an individual’s level of cognitive
moral development (CMD) is key to determining
moral judgement. According to CMD theory,
individuals will make different moral judgements
on a given issue when they are at different stages
of moral development (Kohlberg, 1969). In stages
one and two, the preconventional level, the focus
is on concrete personal consequences – the
rewards or punishments expected to result from
the behavior. At stages three and four, the conventional level, the focus shifts to conformity
with the expectations of referent others (family
or friends) or of society as a whole. At stages
five and six, the principled level, decisions are
determined by overarching ethical principles.
Substantial support for this theory has been
affirmed in several reviews of the literature (Blasi,
1980; Gibbs and Widaman, 1982; Snarey, 1986).
The most widely used measure of CMD,
Rest’s Defining Issues Test, uses responses to six
hypothetical moral dilemmas to calculate a Pscore for the respondent (Gibbs and Widaman,
1982). Higher P-scores represent reasoning at
higher levels of cognitive moral development.
Based on extensive testing of the defining issues
test instrument, Rest (1986) argues that P-scores
above fifty are relatively rare, reflecting the principled stages of cognitive moral development.
Teal and Carroll (1999) recently used the
defining issues test (Rest, 1979) to compare
entrepreneurs’ P-scores with reported P-scores
for other groups. In Teal and Carroll’s sample,
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31% of owner/managers had P-scores above fifty.
Teal and Carroll did not, however, administer
the test to non-entrepreneurs. Rather, they compared the scores in their sample to scores reported
for other groups by Rest and others. The study
was exploratory in nature, but does suggest the
possibility that entrepreneurs may operate at a
higher level of CMD than other groups.
Engaging in moral behavior
Having made a moral judgement, the individual
must still decide whether to engage in moral
behavior – to act in concert with that judgement
(Trevino et al., 1998). While we have found no
studies which have assessed the moral behavior
of entrepreneurs, researchers have reported differences between personal values and ethical
behavior both for business people generally
(Posner and Schmidt, 1993) and for entrepreneurs specifically (Hornsby et al., 1994), suggesting that differences between moral judgement
and moral behavior may warrant further research.
In a review of the literature on ethics in large
organizations, Trevino noted that “the link
between moral judgment and behavior was
pervasive, but moderate, with correlations of
about 0.30” (Trevino, 1992, p. 453). Weber
(1990) found that moral reasoning in business
situations was lower than in non-business situations. Business situations were more likely to be
evaluated using reasoning consistent with a conventional rather than principled level of cognitive moral development. By contrast, Humphreys
and his colleagues (1993) found the moral judgements of entrepreneurs to be more consistent
with their own self-reported behavioral intentions than were the judgements and intentions of
their customers.
Explaining the differences
The findings reviewed above suggest that small
business owners and entrepreneurs differ from
individuals in larger organizations in the issues
they recognize (Vyakarnam et al., 1997), their
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Emeric Solymossy and John K. Masters
level of CMD (Teal and Carroll, 1999), the judgments they make (Longenecker et al., 1989a, b)
and, by inference, in their ethical behaviors. An
explanation for these differences is much less
clear. To date, few researchers have tested the
antecedents of these differences, treating entrepreneurship itself as the independent variable or
examining a limited number of demographic or
psychological variables as predictors of both
entrepreneurship and entrepreneurial ethics. Teal
and Carroll (1999), for example, suggested that
entrepreneurs have already demonstrated a willingness to “buck” the norms of society by virtue
of being self-employed. Therefore, they argued,
entrepreneurs should also be more likely to buck
other norms by moving from the conventional
level of CMD to the principled level. Vyakarnam
and his colleagues (1997) begin and end with the
assumptions that entrepreneurs may face different
ethical issues from other business people and may
use different processes to resolve them – at least
implicitly suggesting that entrepreneurship itself
is the cause of the differences.
In this respect, a disconnect exists between
theory and observation. Existing ethics theory
can add structure to the study of small business
ethics while research on small business can
enhance our understanding of ethics in both large
and small organizations. In Figure 1, we present
an overview of the determinants of ethical
behavior in organizations.
The model centers around the three discrete
steps toward moral behavior discussed above:
recognizing the moral issue, making a moral
judgment, and then acting in accordance with
that judgment. In the following sections, we
briefly discuss the proposed influences on this
process and research concerning those influences.
We then apply observations regarding entrepreneurs and small business owner/managers to the
model to explain the differences discussed above.
Two influences have been posited to directly
affect the steps toward moral behavior: the characteristics of the moral issue and the decision
maker’s level of cognitive moral development.
Characteristics of the issue
The first influence on the process concerns the
existence of a moral issue itself. “A moral issue
is present where a person’s actions, when freely
performed, may harm or benefit others” ( Jones,
1991, p. 367). This harm or benefit may be
Figure 1. Determinants of moral behavior in organizations.
Ethics through an Entrepreneurial Lens
consequential, as in the utilitarian perspective, or
may be viewed from the deontological or justice
perspectives. In much research, the existence of
a moral issue and its influence on the remaining
stages have been taken for granted. Jones (1991)
argued that this assumption is erroneous in both
respects. He suggested that moral issues vary in
their intensity and that this moral intensity would
influence not only whether the issue is recognized, but also the likelihood of a moral judgement and the extent to which the individual’s
behavior would be consistent with that judgement.
Jones (1991) argued that issues vary in their
moral intensity along six dimensions. Magnitude
of Consequences refers to the harm or benefit
which may accrue from the action with respect
to both the number of people affected and the
severity of the effect. Social Consensus is the
extent to which society agrees that an act is right
or wrong. Both the act itself and the society in
which the act is performed can influence this
consensus. Marshall and Dewe (1997) called this
construct the “when in Rome . . .” approach.
Probability of Effect concerns the likelihood that
an act will cause harm or benefit as well as the
uncertainty regarding the magnitude of the
consequences. Temporal immediacy refers to how
soon an act results in particular consequences.
Proximity, the feeling of nearness to those affected
by the action, can be influenced by the social,
psychological, cultural, or physical closeness of
the decision maker to those affected.
Concentration of Effect is the idea that stealing
$10 000.00 from one person has a greater impact
than stealing $1.00 from ten thousand people. As
these factors increase, the moral intensity of the
issue becomes more pronounced and individuals
will be more likely to recognize the moral
dimension of the issue, will access higher levels
of CMD in making a moral judgement, and will
show more congruence between judgment and
behavior. Jones further suggested that, while
moral intensity has six separate dimensions, their
effect may be multiplicative. In other words,
some or all of the dimensions may require a
threshold level below which the moral intensity
of the issue will be (practically) zero.
Tests of the influence of issue characteristics
231
on ethical decision processes have consistently
supported Jones’ propositions. In an experiment
varying the magnitude of an action’s consequences, Chia and Mee (2000) found some
evidence for a threshold effect for moral intensity. Major consequences were more likely to be
blamed on the moral judgement deficiencies of
the actor while the responsibility for minor
consequences was more likely to be assigned to
those effected by the action.
Dukerich and his colleagues interviewed
managers regarding the issues they recognized as
having a moral component and those issues
which they believed had no moral component.
They found that the two types of issues differed
along lines consistent with Jones’ dimensions
(Dukerich et al., 1993, 2000).
Marshall and Dewe (1997) found that issue
characteristics were also a significant predictor
of moral judgements. Their investigation further
supported Jones’ contention that issue characteristics would have different effects on each stage
beyond the issue recognition stage. They found
that varying the social consensus dimension
resulted in different effects on different steps in
the process. They concluded, however, that issue
characteristics are not sufficient to explain moral
judgements – individuals differ in their evaluations of issues of similar intensity.
Other researchers have examined the contention that both the characteristics of the issue
itself and the individual’s level of CMD directly
influence ethical processes. Singer, Mitchell, and
Turner (1998) found that individual need for
cognition influenced ethical perceptions beyond
the characteristics of the issue itself. Issue characteristics were better predictors of ethical
judgements for individuals with a high need for
cognition than for individuals with a low need
for cognition. Similarly, Weber (1996) found that
issue characteristics influenced the moral reasoning criteria his subjects evoked to resolve the
dilemmas individuals they faced in his study.
The nature of a small business suggests that
entrepreneurs may face issues which differ systematically along at least some of the dimensions.
Vyakarnam and his colleagues defined a small
business as “one that is: actively managed by the
owner(s); highly personalized; largely local in its
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Emeric Solymossy and John K. Masters
area of operation; and largely dependent on
internal sources of capital to fund growth”
(Vyakarnam et al., 1997, p. 1630). Such a definition raises the possibility that small business
owners are likely to differ systematically from
others along at least the proximity and social consensus dimensions. Smith and Oakley (1984)
found that small business owners in small towns
were more similar to their customers in their
ethical judgements than were small business
owners in metropolitan areas.
Level of Cognitive Moral Development
Trevino (1986) proposed that the individual’s
level of cognitive moral development (CMD)
should influence ethical behaviors – those at
higher levels of CMD should behave more
ethically. While Trevino originally focused only
on the relationship between CMD and moral
behavior, later authors (e.g., Jones, 1991; Quinn
1997) have argued for a distinction between
moral judgement and moral behavior in the
model. Consistent with the process view of
ethics, we argue that CMD will influence each
step in the process directly. Individuals at higher
levels of CMD will differ from those at lower
levels on the moral issues they recognize, the
processes they use to make a judgment, and the
consistency between their judgments and actual
behavior. As noted previously, this theory has
found considerable support in reviews of the
literature. In more direct tests, Trevino and
Youngblood (1990) found that the level of cognitive moral development of their subjects was
positively correlated with more ethical decisions
in an in-basket experiment. Stratton et al. (1981)
found that business students who recommended
padding an expense account used rationales
characteristic of the first three levels of cognitive moral development, while students who
opposed padding the expense account used
higher levels of CMD to support their decisions.
As noted above, Teal and Carroll (1999) have
presented some evidence that entrepreneurs may
operate at higher levels of CMD than do other
business people. In this respect, the treatment of
CMD as both an input and an outcome of the
process of ethical behavior is informative. The
feedback loop illustrated in Figure 1 is meant to
suggest that decisions to act in conformance with
one’s own moral judgements (or not) have a
long-term effect on the individual’s level of
CMD. Kohlberg (1969) argued that an individual’s desire for consistency between thought
and action would produce a relationship between
cognition and behavior. Moreover, he posited
that CMD is formed, in part, from opportunities for role-taking and participation in decisionmaking. When the context of a decision requires
behavior which is inconsistent with an individual’s values or beliefs, the resulting cognitive
dissonance creates a desire for change.
This link between behavior and cognition has
a long history of empirical support (e.g., Fishbein
and Ajzen, 1975; Festinger, 1957). In short,
when an individual’s behaviors are inconsistent
with his or her own beliefs, the individual may
change the behavior, the situation, the cognition or the beliefs. In educational settings,
researchers have reported success in raising
students’ CMD scores by promoting cognitive
dissonance (Boyd, 1981; Candee, 1985; Goldman
and Arbuthnot, 1985; Penn and Collier, 1985).
Several factors can influence the ease with which
individuals can act in congruence with their own
moral judgements.
Individual characteristics
While Trevino proposed that CMD would form
the basis for ethical orientations, she argued that
other individual differences would moderate the
relationship. Individual differences she noted
include ego-strength, field dependence, and locus
of control. Of these, only locus of control has
been supported in empirical research. Trevino
and Youngblood (1990) found that the relationship between CMD and judgement was moderated by the locus of control of the decision
maker. Other researchers (Zahra, 1989;
McCuddy and Peery, 1996) have also found that
external locus of control decision makers are less
likely to see problems with unethical actions.
Hegarty and Sims (1978, 1979), though, found
that locus of control was not a significant pre-
Ethics through an Entrepreneurial Lens
dictor of ethical behavior. The different effects
of locus of control on judgement versus behavior
further supports the distinction between these
two steps in the model.
Researchers have noted other links between
individual characteristics and ethical orientations
as well. Several studies have found a positive link
between cognitive moral development and the
need for achievement (McClelland, 1961; Birney,
1968; Lasker, 1978; Glover et al., 1997). Still
others have connected moral judgement with risk
propensity and machiavellianism (Hegarty and
Sims, 1978, 1979; Singhapakdi and Vitell, 1994).
High mach individuals are less likely than their
low mach counterparts to make judgments consistent with reasoning at higher levels of CMD.
These same characteristics have been used to
differentiate entrepreneurs from nonentrepreneurs (Brockhaus, 1982). Beginning with
Rotter’s (1966) original conceptualization,
researchers have consistently found a correlation
between internal locus of control and entrepreneurial success and satisfaction (Shapero, 1975;
Boyd and Vozikis, 1994). Similarly, early examinations of the need for achievement found that
entrepreneurs had a higher need for achievement
than did other groups (McClelland, 1961; Miller,
1983; Solymossy, 1998).
Cantillon’s writings in the 18th century identified the entrepreneur as an individual operating
with self-interest, having the foresight and willingness to assume risk, and by opportunistic
action, making a profit or sustaining a loss. Risk
tolerance in consideration for economic profit is
a consistent element in all early theories of
entrepreneurship (Hebert and Link, 1982).
Entrepreneurs are different from non-entrepreneurs in their uncertainty tolerance and their
opportunism (self-interest), as well as their orientations towards achievement, autonomy, field
independence and locus of control (Robinson et
al., 1991; Shanthakumar, 1992; Solymossy, 1998).
Situational characteristics
A second moderating influence Trevino proposed
concerns the characteristics of the situation. She
suggested three broad situational areas which
233
would moderate the relationship between cognitive moral development and moral behavior:
the immediate job context, the organization’s
culture, and the nature of the work itself. Each
of these areas has received empirical support in
the literature.
The immediate job context concerned reinforcement of ethical or unethical actions
(rewarding A while hoping for B) as well as other
pressures (e.g., scarce resources, time pressures,
competition) which might moderate the link
between CMD and moral behavior. Trevino and
Youngblood (1990) found that manipulating
vicarious rewards in an in basket experiment
moderated the link between CMD and moral
judgement. Delaney and Sockell (1992) found
that difficult professional objectives increased the
pressure to behave unethically in the organizations they studied.
Trevino further posited that organizational
culture (in the form of norms, the behavior of
referent others, insistence on obedience to
authority and responsibility for consequences)
would moderate the link between the individual’s
level of CMD and his or her behavior. Trevino
et al. (1998) tested the effect of both organizational culture and reinforcement on observed
unethical behaviors in 318 firms. They found
support for the contentions that reinforcement,
leader role modeling, ethical culture, and ethical
norms decreased the likelihood of unethical
behavior in organizations while insistence on
strict obedience to authority increased unethical
behavior. Codes of conduct were also a significant influence, moderating the characteristics
which influenced behavior. These factors have
received considerable attention as prescriptions
for improving ethics in organizations (e.g.,
Callan, 1992; Lacsniak and Interrieden, 1987).
Bystander intervention studies (Latane and
Darley, 1970) have further supported the link
between reponsibility for consequences and
moral behavior (helping or not helping others).
Finally, Trevino suggested that characteristics
of the work itself would moderate the relationship between CMD and behavior. She argued
that jobs which allowed opportunities for role
taking or the responsibility for the resolution of
moral conflict would positively influence the link
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Emeric Solymossy and John K. Masters
between CMD and moral action. Weber (1990)
found that managers in large organizations used
a higher level of CMD in non-business scenarios
than in business scenarios, suggesting that
business characteristics would indeed moderate
the influence of CMD on judgement. Other
researchers (Dupont and Craig, 1996; Elm and
Nicholls, 1992) have presented evidence that
tenure in a business may actually retard moral
development. These observations are in line with
the contention that cognitive dissonance may
increase or decrease the individual’s level of
cognitive moral development over time
(Kohlberg, 1969; Trevino, 1992). Zey-Ferrell and
Ferrell (1982) presented evidence that these same
characteristics also predicted ethical or unethical
behavior in organizations.
Within bureaucratic organizations, managers’
ethical views are heavily dependent upon a
complex interaction with the value system of
upper management, frequently resulting in
managers’ ethical decisions being predicated on
considerations other than their personal value
systems (Ferrell and Skinner, 1988; Harris, 1990;
Jackal, 1988; Lincoln et al., 1982). Entrepreneurs,
on the other hand, are directly responsible for
balancing economic expediency and their moral
values. Further, competitive pressure has been
shown to have a strong impact on ethical judgement in entrepreneurial firms (Brown and King,
1982). Empirical evidence has indicated that
entrepreneurs operate with independence and
accountability, accepting the risks due to uncertainty (e.g., Teoh and Foo, 1997). Solymossy and
Hisrich (1996) found that both independence
and accountability differences among entrepreneurs were correlated with the ethical judgements they made.
Entrepreneurs have different approaches to
business in such areas as independent action,
innovation, and risk taking than their counterparts in large organizations (Longenecker and
Schoen, 1975), implying that they may also differ
in their ethical perceptions. Entrepreneurs have
also been found to be more sensitive to the
expectations of society, more critical of their
performance than the general public, and to
employ their personal values to a much greater
extent than managers within large businesses
(Humphreys et al., 1993). Similarly, researchers
have presented evidence that small business
owners’ ethical judgements contain an underlying
dimension that exceeds adherence to legalistic or
rule oriented structures, concluding that the
“owner’s value system is critical in the ethical
considerations that surround a business decision”
(Hornsby et al., 1994, p. 14).
Social relationships with others
Several of Trevino’s situational factors have been
expanded in recent theoretical work. As noted
earlier, moral issues are defined in terms of an
action’s effect on other people. Brass, Butterfield,
and Skaggs (1998) built on social network
research to explicitly incorporate relationships
with these “others” as an influence on the model.
They argued that both the type and the structure
of the relationships would interact with other
factors in the model to influence ethical
outcomes.
The type of relationship can vary in strength,
in multiplexity, and in symmetry. Strength of relationships is a combination of the frequency with
which the parties interact, the emotional intensity and intimacy of the relationship, and the
extent to which such feelings are reciprocated.
Stronger relationships limit the likelihood of
unethical outcomes. Multiplexity is the degree to
which two actors are linked by more than one
type of relationship (e.g., friend, business associate, and neighbor). Multiplexity decreases the
likelihood of unethical behavior. When the trust
and emotional involvement of one actor for
another are not reciprocated fully by the other,
the resulting asymmetry increases the potential for
unethical behavior. Similarly, when the power or
status of one actor is higher than that of the
linked actor, the lower power actor is less likely
to act unethically. Higher power actors’ behavior
will be influenced by their level of CMD. Status
equality constrains unethical behavior by both
actors.
The characteristics of the type of relationship
as discussed above focus on pairs of actors, but
these pairs occur within a larger social structure.
This structure in which the relationship occurs
Ethics through an Entrepreneurial Lens
may influence the opportunities for unethical
behavior. Structural Holes refer to the absence of
a link between actors. Structural holes increase
the potential for unethical behavior only for
those in boundary-spanning roles. Centrality is
the extent to which an individual can reach all
other actors in the network in the fewest number
of direct and indirect links. Centrality is thought
to constrain unethical behavior if norms, codes
of conduct and social consensus also constrain
such behavior. Network density refers to the
number of actual ties between actors in a
network as a percentage of the number of ties
possible in that network. Network density is
thought to constrain unethical behavior if norms,
codes of conduct, and the like also constrain it.
Dense networks increase the probability that an
action will be observed by other people. If others
are likely to both observe an act and disapprove
of it, the individual is less likely to act in that
way.
Networking activity is likewise related to
entrepreneurial activity is several ways. Networks
can facilitate or constrain the social behavior of
individuals and groups (Aldrich and Zimmer,
1986). Networks influence and are influenced by
the entrepreneur (Gulati, 1995), are correlated
with the success of the entrepreneur, and have
been related to the entrepreneur’s cognitive style
(Solymossy, 1998).
In an exploration of the views of entrepreneurs
regarding ethics in small business, entrepreneurs
suggested differential ethical perceptions based on
the relationship – that the consequences of an
action on others mattered, but so did who the
other was (Vyakarnam et al., 1997). Quinn
(1997) reported that small business owners who
were active in non-business social institutions
made significantly more ethical judgements than
did those who were not active in outside social
networks.
Others have noted that entrepreneurs care
more about the effect of their actions on their
reputations than on their profitability (Mayo,
1991). Aldrich and Fiol (1994) identified the
need for new ventures to establish trust in order
to legitimize their relationship with customers
and investors, suggesting that the indeterminate
nature of initiating a new venture has issues
235
tangential to ethics. Studies of the influences on
entrepreneurs’ ethical beliefs (Mayo, 1991;
Brown and King, 1982) have reported that entrepreneurs view their reputations as of particular
importance in guiding their behavior. Green
(1992) has argued that entrepreneurial firms
require continual cooperation with others to
solve the problems faced by the firm and that
these interdependencies are based on mutual
confidence and trust.
Discussion and conclusion
In this paper, we have explored a disconnect
between the theoretical work on business ethics
generally and the exploratory research that has
been conducted on ethics in small business
settings. The similarities between the predictors
of entrepreneurship and of ethical behavior are
striking. The same characteristics which distinguish entrepreneurs from nonentrepreneurs, and
which predict entrepreneurial success, also serve
to predict the moral issues individuals will
recognize and their judgements and behaviors
with respect to those issues.
The foregoing discussion emphasizes the need
to make clear distinctions about what we are
measuring both with respect to the three process
outcomes (identifying moral issues, making moral
judgements, and engaging in moral behavior) and
to their antecedents. Past research has not always
made these distinctions (Reidenbach and Robin,
1988). An important focus for future research
concerns whether the antecedents show true
discriminant validity and whether they influence
the process steps in different ways.
Along with clear distinctions regarding the
constructs of interest, more clarity is also needed
regarding the people we are discussing. The
terms entrepreneur and small business owner/
manager have been used interchangeably in much
of the literature. Carland et al. (1984) have noted
clear conceptual distinctions between the groups.
In this paper, we have used the terms consistent
with their use in the original works cited, but
are sensitive to the potential differences in their
meanings. Of particular interest for future
research is whether the differences between the
236
Emeric Solymossy and John K. Masters
groups might influence the subjects’ ethical
orientations. Carland, Hoy, Boulton, and Carland
defined the entrepreneur as “an individual who
establishes and manages a business for the principle purposes of profit and growth” (1984, p.
358). This definition emphasizes an important
similarity between the two groups – the lack of
agency. Both entrepreneurs and small business
owner/managers act as principal as well as agent
in their businesses, exempting them from a
number of agency issues facing larger organizations. Both agency theory and entrepreneurship
research suggest reasons for the differences consistent with the model described above.
Agency theory maintains that the behavior of
an agent (or employee) may be different from
that of a principal (or owner), and that this
difference is based on self-interest and outcome
uncertainty. The foundations of agency theory
reside in understanding the risk-sharing problems
that arise when cooperating parties have differing
risk attitudes (Arrow, 1971). Eisenhardt (1989)
found that, even in situations where the agents
and owners are cooperating, differing goals and
risk preferences may still create conflict.
Outcome uncertainty is related to differing risk
tolerance levels which influence the behavior of
the individuals, since uncertainty involves a series
of risk/reward trade-offs. While agency theory is
principally concerned with contractual relationships and alternatives, it provides insight into the
potential for differing perceptions and behavior
for owners versus employees. Agency theory
argues that there may be differences in the ethical
perceptions and behaviors of individuals who are
principals or owners and those who are agents or
employees.
Agency theory suggests significant differences
between owners and agents, while entrepreneurship research has demonstrated significant
differences in the behavior of entrepreneurs
versus non-entrepreneurs. Taken together, these
theories suggest that differences can be expected
to exist between entrepreneurs and non-entrepreneurs both with respect to individual characteristics (e.g., need for achievement, locus of
control) and situational characteristics (e.g.,
opportunities for role taking, responsibility for
consequences, competitive pressures) as illustrated
in Figure 1. Recent exploratory research on small
business ethics provides evidence that they also
differ with respect to their perceptions regarding
issue characteristics and the type and structure
of their relationships with others (Vyakarnam et
al., 1997; Quinn, 1997; Smith and Oakley, 1984;
Humphreys et al., 1993).
Several suggestions spring from the preceding
discussion. First, we suggest that we do not need
a separate model to explain the ethical decisions
of small business owners. Most work on small
business ethics begins with a call to create such
a model, but the processes and influences on the
processes are the same. Small business owners do
appear to differ in the issues they recognize, their
judgements concerning those issues, and their
level of cognitive moral development. Further,
the model illustrated in Figure 1 suggests similar
influences on every stage. Entrepreneurs differ
from others in individual and situational characteristics as well as the characteristics of the issues
they face and their relationships with others. This
is not to say that we need not study ethics in
small business settings.
Quinn (1997) argued that small business ethics
is increasingly important for two reasons. First,
he noted that small businesses constitute an
increasingly large proportion of businesses generally. Moreover, he suggested that large firms are
becoming increasingly entrepreneurial in nature.
We can use conclusions drawn from studying
small business to prescribe ways to improve
business ethics beyond those existent in the literature to date. Current prescriptions for
improving business ethics focus on a tiny portion
of the model related to enforcing codes of
conduct, top management commitment, and
organizational culture and norms. Further recommendations for enhancing ethics in large
organizations may be informed by an understanding of the influences on entrepreneurial
firms.
Green (1992) suggested that the logic governing ethics in entrepreneurial firms is philosophically different from that in hierarchical
firms. He argued that hierarchical firms, with
their emphasis on specialization of labor, centralization, standardization, formalization, and
conformance with authority, offer little in the
Ethics through an Entrepreneurial Lens
way of opportunities for role-taking or responsibility for the consequences of their decisions.
Entrepreneurial firms, by contrast, require continual interaction with others. The jobs in such
firms cease to be self-contained and the relationships within and between groups focus on
mutual trust, interdependence, multi-group
membership, wide dispersal of control and
responsibility, and conflict resolution through
bargaining and mutual problem-solving.
These differences in the logic governing hierarchical versus entrepreneurial firms might be
expected to translate into differences both in the
relational characteristics (centrality, positioning at
structural holes, network density, strength, multiplexity and power asymmetries) and in the
organization members’ perceptions of the characteristics of the issues (magnitude of consequences, social consensus, probability of effect,
temporal immediacy, proximity and concentration of effect) they face. When larger firms begin
to emulate the logic underlying entrepreneurial
firms, the change in logic may influence the
ethical orientations of the organization’s
members. The potential for such differences
offers fertile ground for future research in
business ethics.
The model in Figure 1 also illustrates a potential explanation for the differences observed in
the levels of CMD between entrepreneurs and
others (Teal and Carroll, 1998) as well as the
findings that membership in hierarchical firms
may actually retard moral development (Weber,
1990; Elm and Nicholls, 1992; DuPont and
Craig, 1996). The striking similarities between
the predictors of entrepreneurial success and the
influences on ethical process outcomes may offer
an explanation for these observations. Kohlberg
(1969) argued that dissonance between cognition
and behavior could lead to a change in the
individual’s level of cognitive moral development
for better or worse. Research on the situational
and relational characteristics facing entrepreneurs
as well as the characteristics of the moral issues
they perceive may mean that entrepreneurial
settings offer more opportunities for cognitive
dissonance than do hierarchical settings. The
effect of these underlying characteristics on the
CMD of individuals in both entrepreneurial
237
and hierarchical organizations deserves further
study.
Studying ethics in entrepreneurial settings may
also offer more clarity regarding ethical issues.
Friedman (1962) has argued that, if non-owner
managers are employed to act as agents for the
owners of the business, the moral duty of such
managers is simply to make as much money for
the owners as possible while obeying the basic
laws and customs of society. He argued that corporate philanthropy, for example, is tantamount
to stealing money from the owners of the
business, for that money would otherwise have
gone to the owners. Small business owners are
exempt from these concerns regarding conflicts
between ownership and control with respect to
stakeholder responsibility (Quinn, 1997). While
Friedman’s position remains controversial,
studying ethics in a small business context can
remove some potential blurring of the
economic/moral dichotomy if such blurring
exists.
We return to Dees and Starr’s admonition that
the research on small business ethics “would be
stronger if it could be grounded in a solid base
of research” (1992, p. 91). As a starting point, we
have combined existing theory and observation
in this area to offer an explanation for reported
ethical differences between small business owners
and others in business. We believe that this
research offers just such a base on which future
research can build.
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Western Illinois University
3561, 60th St.,
Moline, IL 61265-5881,
U.S.A.
E-mail: Emeric_Solymossy@ccmail.wiu.edu
Ken_Masters@ccmail.wiu.edu