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, 229 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 230 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 232 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 234 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). 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