766

BUSINESS ETHICS: IS SMALL BETTER?

Daniel J. BrownOregon State University

For many individuals, owning a small business is a personal ideal.For others the contribution of small business to the American economicsystem cannot be overlooked. Without trying too hard one can hearopinions like, "What's good for small business is good for America"(Blackshear, 1982). Even the President has stated, "Small business isthe heart and soul of the free enterprise system" (Reagan, 1982).

In his 1984 report to Congress on the State of Small Business,President Reagan commented on his administration's general approachregarding small business:

We are promoting a number of specific government policiesthat have a major, favorable impact on small business. It hasbeen my desire to ensure that whenever possible our policiesreflect the importance of small business to the economy as awhole (Reagan, 1984).

We intend to act on upcoming issues to ensure that ourNation's policies continue to be favorable to small business(Reagan, 1984).Justifications for the administration's policies are based

typically on economic arguments. One argument would be support for thefree enterprise system as a desirable theoretical model. Anotherargument would be the practical contributions of small businesses to oureconomy through job creation or technological innovation.

It is not easy to find proponents of small business taking anoneconomic view. One author feels that small business leads to stableand enriched community life (Levitt, 1981).

Another exception might be believers in the "large is bad" theme.Starting with the economic premise that basic business activities areethically neutral, the problem of ethics arises only after power comesinto the picture. Power over markets and customers tempts largecorporations to become successful through the implementation ofunethical strategies: manipulating consumers, polluting the air, etc.Finally, some corporations succumb to the temptation (Schweitzer, 1981).If large size in corporation leads to an erosion of ethics, thenpresumably a market consisting of a large number of small businessescompeting without excess power would demonstrate less unethicalbehavior.

It is amazing how few studies have dealt with the ethics of smallbusiness. On one hand small firms represent the majority of businessesin the U.S. today, and on the other hand the topic of business ethicshas been a celebrated cause over the past twenty-five years. Most ofthe attention has been given to groups like the Fortune 500 corporateexecutives.

I would like to acknowledge suggestions made by Jon King in preparingthe questionnaire and in revising the manuscript.

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THE STUDYThis study extends previous research by focusing on the ethical

standards of people in small businesses. Two general reference pointswere used, first, published research representing findings about peoplein large corporate business, and second, feelings from a group ofrespondents who had similar personalcharacteristics but did not operate or work for small businesses. Threebasic research questions were asked: (1) How high are the ethics ofowners and operators of small businesses perceived to be? (2) What arethe feelings owners and operators of small businesses have about ethics?Answers to questions like these would beuseful in evaluating the overall impact of policies designed toencourage small business.

This paper reports the findings from data gathered in anexploratory survey of small business ethics. A four-page questionnairewas designed after reviewing the corporate ethics literature.Questionnaires were handed out at general membership meetings of threepublic service organizations in an Oregon city.

Most persons attending the meetings completed their copies of thequestionnaire, and a total of 217 questionnaires were collected. Thequestionnaires were split into two groups: 122 "small business"respondents who worked for businesses with fewer than 100 employees and95 "other" respondents, most of whom were employed by large corporationsor public agencies.

Two formats were used in soliciting opinions of the respondents.The first was a "rating" format (e.g., "Strongly agree," "Agreesomewhat," etc.). The second was a "ranking" format. Since neitherformat really qualifies as interval scale data, it was judged that theappropriate method of analysis should employ simple cross-tabulation andx^ significance tests. When significant differences are reported, theseare the basic procedures used.

FINDINGSEthics are rules for human behavior. They are used by individuals

as guidelines for making decisions about how to act in specificsituations. Ethics are also used by groups to evaluate the observedbehavior of group members and other people.

The results of the present survey on small business ethics arepresented in three sections, each beginning with one of the researchquestions.

How High are the Ethics of Owners and Operatorsof Small Businesses Perceived to Be?

Perceived ethical standards of people in business have beeninvestigated in a number of previous studies. In relation to otherprofessional groups, it has been generally found that physicians rankvery near the top, corporate managers rank somewhere in the middle, andgovernment officials rank lower than the other two groups (Ricklefs,1983). This study explores where people in small business would appearin a similar array.

Studies of corporate managers show that they feel their own moralstandards are higher than those of their corporate peers (Newstrom andRuch, 1975), and they feel that they hold higher standards than thoseexpected of them in keeping their jobs or being promoted (Bowman, 1976;Brenner and Molander, 1977). This study attempted to see if people insmall businesses would share similar feelings.

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Table 1ETHICS OF PROFESSIONAL GRQUPS

(Average Rank)

SmallBusiness

AllOther

Total

People in Small BusinessPhysiciansPeople in Big BusinessGovernment Officials

1.62.02.73.5

1133

.8

.8

.1

1.1.2.3.

799'"3*

"Difference between "Small Business" and "Other" respondentssignificant beyond the .05 level.

Table 2RESPONDENTS QWN PERSQNAL ETHICAL STANDARDS(Percent of Group in Response Category)

Personal Ethical Standards:

Than most managers inbig business.Than most managers insmall business.Than standards requiredto keep job.

MuchHigher

41%

33%

32%

SomewhatHigher

42%

44%

47%

Aboutthe Same

15%

24%

21%

Lower

2%

0%

1%

The answers appear in Table 1 and Table 2. More important than theexact percentages or averages are the similarities and differences inthe answers received from the two groups of respondents. Table 1 showsthat, of the four occupational categories considered, people in smallbusiness were given the highest overall ranking on ethics by both groupsof respondents. Although the small business respondents seem to havegiven themselves a slightly higher ranking than they were given byothers, on average, there is no significant difference between therankings which small business people gave themselves and those giventhem by the "other" respondent group. In each instance, physicians wereranked slightly lower than people in small businesses. These resultsindicate that people in small business are a well respected group.

People in large businesses were given much lower rankings thanthose in small businesses, and in this case, small businessesrespondents were significantly more generous toward their corporaterelatives than were "other" respondents. Government officials weregiven the lowest average ranking by both groups. Overall, the rankingof physicians, executives and government officials is consistent withprevious research.

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Table 2 shows that most respondents rated their own personal ethicshigher than the ethics of "most managers of big businesses," "mostmanagers of small business," and "standards expected of you in runningyour business and keeping your job." These responses are consistentwith the results of previous studies of corporate managers. While theauthors of these studies interpreted such results as indicating a fairdegree of "cynicism" among managers, alternative interpretations arealso plausible. Extensive research by Lawrence Kohlberg on ethics ingeneral indicates that most people tend to rate their own ethicalstandards higher than their actual choices imply (Kohlberg, 1964).Presumably, such a phenomenon has something to do with people's desireto make themselves look good.

An important finding in Table 2 is that the respondents, both"small business" and "other," distinguished between the ethicalstandards of those who work for large and small businesses. This resultreinforces the data in Table 1.

What causes the Behavior of Owners and Operators ofSmall Businesses to Become More Ethical?

There are a number of theories about the causes of more or lessethical business activities. Higher standards have been attributed tosuch things as public disclosure, publicity, media coverage, regulation,education of managers, consumerism, and churches, and lower standardshave been attributed to contemporary social standards and competition(Brenner and Molander, 1977). This study attempts to see how thesefactors influence small business activity.

In this study, factors influencing small business ethics weredivided into two groups: "internalized" factors which deal with variousconcerns in the minds of decision makers when making decisions, and"external" factors which represent forces operating in the environmentof the decision maker.

Table 3CONCERNS WHICH AFFECT SMALL BUSINESS DECISIONS

(Average Rank)

SmallBusiness

AllOther Total

Norms and pressures fromCommunity and PeersHigher moral or Religious PrinciplesAnticipation of RewardsUpholding the Law RegardlessFear of Punishment

2.03 .12.73 .23.4

2 .22 .33 .03 .43 .9

2 .12 .82 .83 .33.7

Rankings of various internalized factors are shown in̂ Table 3.Both respondent groups agreed that when making decisions "norms andpressures from community and peers" is the most important concern, that"fear of punishment" comes last, and that "upholding the law regardlesscomes next to last. Small business respondents placed "anticipation ofrewards" in second place, followed by "higher moral or religious

770

principles." The "other" respondents reversed the order of "rewards"and higher "principles."

Table 4FUNDAMENTAL FORCES WHICH CAN AFFECT SMALL BUSINESS ETHICS

(Percent of Group in Response Category)

LargePositiveEffect

SmallPositiveEffect

NoRealEffect

ANegativeEffect

Trade Associations 31%Better Business Bureaus 32%Doing Business in a Small Town 39%Publicity, Public Disclosureand Media Coverage 27%

Public Service Organizations 28%Contemporary Social Standards 25%Churches 26%Competition 45%College Business Schools 21%Public Interest Groups 20%Regulations 21%Critics of Business 9%High School Business Programs 13%

52%49%40%

52%50%45%41%22%42%39%36%41%37%

16%19%19%

15%22%18%31%11%36%24%23%40%50%

2%0%2%

7%0%12%2%23%2%17%21%10%1%

Rankings of environmental forces which influence small businessethics are shown in Table 4. (These are ranked in descending order,based on the sum of the "positive" responses.) There were nosignificant differences between snail business and "other" respondentsso the results in Table 4 represent both groups. There were, however,interesting differences from the top to the bottom of the list wheneither "positive" or "negative" evaluations were considered.

On the positive side, for example, trade associations and betterbusiness bureaus were rated substantially higher than "critics ofbusiness" and "high school business programs." "Doing business in asmall town," perhaps related to the small business ideal, was given apositive rating. Interestingly, competition received a largerpercentage than any other external factor with regard to "large positiveeffect" on ethics.

On the negative side, oddly enough, competition again received thelowest ratings. Also receiving substantial negative ratings were"federal, state and local regulations," "public interest groups,""contemporary social standards," and "publicity, media coverage, andpublic disclosure."

What are the Feelings Owners and Operators of SmallBusinesses Have about Ethics?

Ethics have many dimensions and can be measured in a number ofways. Two approaches to this question were investigated here. In thefirst, respondents were asked questions about a number of ethicalissues. Four questions examined the normative side of ethics, and twoothers examined descriptions of the current state of ethics. Results ofthe first approach are summarized in Table 5.

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Table 5BELIEFS ABOUT ETHICAL QUESTIONS

(Percent of Group in Response Category)

NeitherStrongly Agree Agree nor Disagree DisagreeAgree Somewhat Disagree Somewhat Strongly

NormativeEthical practices are good business in the long run.

90% 7% 1% 1% __ 1%The primary responsibility of business is to make a profit."

53% 34% 5% 8% 1%Society, not business, has the chief responsibility for bringing ethicalstandards into business decision making.

12% 22% 9% 31% 26%During an economic downturn, it would be better to lay off someemployees rather than reduce salaries.

5% 22% 17% 37% 19%Descriptive

Ethical standards in business are higher today than when I started towork.

4% 22% 25% 33% 17%Price collusion in business is no longer a problem.

2% 10% 14% 43% 31%

"Differences between "Small Business" and "Other" respondentssignificant beyond the .05 level.

In the second approach, respondents were asked to assign prioritiesto the various groups among which they might have to choose when theneeds of all could not be satisfied simultaneously. The responses tothe second approach appear in Table 6.

Table 6PRIORITY FOR SATISFYING COMPETING NEEDS

(Average Rank)

CustomersEmployer or Company 'Employees, ,_._Community'"' "Suppliers"Government

SmallBusiness

Respondents

1.72.52.83.74.55.7

AllOther

Respondents

1.72.92.82.95.05.6

Total

1.72.72.83.34.75.7

significant beyond the .05 level.Significant beyond the .01 level.Significant beyond the .001 level.

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The first "normative" question provides an anchor point ofreference. In previous studies, virtually all respondents have agreedwith the notion that "Ethical practices are good business in the longrun" (Brenner and Molander, 1977; Purcell, 1977; Wilson, 1980). Therespondents' similar response, therefore, provides some evidence of thereliability of this survey.

The second normative question, "The primary responsibility ofbusiness is to make a profit," proved to be somewhat more controversial.Nearly all of the respondents agreed with this statement. This resultwas more consistent with a previous study of small business people thanwith previous studies of corporate managers (Dagher and Spader, 1980;Wilson, 1980). (The significant differences between the two respondentsgroups in this study were between those who "strongly agreed" and thosewho "agreed somewhat.")

The third question revealed a similar pattern. The respondents,like those in a previous study of small business people (Wilson, 1980),disagreed with the statement that "Society, not business, has the chiefresponsibility for bringing ethical standards into business decisionmaking." Corporate managers tended to be either more ambivalent or toagree (Brenner and Molander, 1977).

The intent of the fourth question was to test a recently advancedhypothesis concerning one cause of inflation: the friction againstwages going down is not confined merely to large firms but is commonamong small ones as well. But the response to the statement, "During aneconomic downturn, it would be better to lay off some employees ratherthan reduce salaries," was mixed. More than half of the respondentsvoted in favor of reducing salaries and continued employment.

The fifth question was the first descriptive question: "Ethicalstandards in business are higher today than when I started to work."About half indicated that ethics were better "in the good old days," butthe other two quarters were split between "higher today" and "about thesame." These results seem slightly more pessimistic with respect toexisting standards than was the case in previous studies (Bowman, 1975;Brenner and Molander, 1977).

The sixth question deals with a problem that has received muchfederal attention in the U.S. during most of the twentieth century:"Price collusion in business is no longer a problem." Most of ourrespondents indicated that they saw price collusion as a continuingconcern. Corporate managers, on the other hand, perceived the problemnot only to be both less important than our respondents considered it tobe, but also less a problem than members of corporate management hadindicated it to be fifteen years earlier (Brenner and Molander, 1977).

Table 6 shows the results of the second approach--respondents wereasked to prioritize various groups among which they would have to chooseif the desires of all could not be satisfied simultaneously. Both smallbusiness and "other" respondents indicated the same relative ranKings,although with minor differences. These rankings parallel those ofcorporate managers when "employer or company" is substituted for"stockholders" (Brenner and Molander, 1977). In each case, customersare in first place, government comes in last, and suppliers are next tolast. Small business respondents ranked employer, employees, andcommunity second through fourth, "other" respondents gave all three thesame ratings, i.e., community was relatively more important for "others"than for small business respondents.

This basic pattern provides evidence that small firms generallyhold a strong "marketing orientation," that is, making profits primarilythrough satisfying consumer needs. It also suggests the possibility

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that people tend to be more concerned about those closest to them andless concerned about those farther removed.

SUMMARYOverall, it was surprising that there were so few significant

differences between the views of the small business respondents and the"other" respondents. Small business respondents did rate people inlarge business slightly higher and government officials slightly lowerthan the "other" respondents. The former group was also slightly moreconcerned about the "employer or company" and "suppliers" and slightlyless concerned with "community" than the latter. Both were in fairlyclose agreement that "The primary responsibility of business is to makea profit."

More significant differences arose between the present respondentsand previous research on managers of large businesses. On the matter of"social responsibility," the results are somewhat confusing.Respondents were more in agreement than the large-business group withthe notion that "The primary responsibility of business is to make aprofit." At the same time they were less in agreement than largebusiness managers with the belief that "Society, not business, has thechief responsibility for bringing ethical standards into businessdecision making." And, compared to people in big business, therespondents expressed stronger disagreement with the statements,"Ethical standards in business are higher today than when I started towork," and "Price collusion in business is no longer a problem."

Perhaps the most interesting findings in this study involve thelofty perceptions of small business ethics. As might be expected, smallbusiness respondents rated themselves to be the most ethical of theprofessional groups they ranked. More important, they saw themselves tobe much more ethical as a group than people in large corporations.

The "other" respondents showed an even stronger preference forsmall business, in indicating what they perceived as differences betweenethical standards of small business people and corporate employees. Itis also worthy of note that they (and small business respondents) gavephysicians and people in small business equivalent ratings. Galluppolls have repeatedly shown that Americans place doctors at the top ofthe list of professions in terms of "honesty and ethical behavior,"however, these polls have not included small business as a profession.The respondents' perceptions indicate, that from a philosophicalstandpoint, they would accept governmental policies in support of small

business.In those matters concerning which the respondents and corporate

managers substantially agreed, three general areas suggested possiblecauses for concern. The first concern was the division of opinion amongour respondents concerning the impact of competition on business ethics,with a sizeable minority holding it to have either an insignificant ornegative effect on business ethics. Government policies which supportsmall business would lead to increased competition. Many members of thepublic might see this as a move in the wrong direction.

All respondents shared a strong implicit disdain for government("government officials are less ethical"; "upholding the law is not tooimportant as a cause of ethical behavior"; "regulations and educationalprograms are not very important as causes of ethical behavior ; thegovernment should be satisfied last"; etc.). Thus, the second concernis that if competition is no longer widely perceived as a process ofchanneling private interests in the public interest and if government iswidely perceived as being ineffectual (or worse), then it should befairly evident that many business persons have very mixed feelings about

774

relying on these two major means of insuring that the business sector ingeneral acts in the "public interest."

At last concern results form the order in which our respondentsranked "internalized factors" affecting small business ethics (Table 3).In a previous study of large business managers, four out of the fiverespondents claimed that "business people should try to live up to anabsolute moral standard rather than to the moral standard of their peergroup" (Brenner and Molander, 1977). Yet in the present study, smallbusiness respondents placed peer groups first, rewards second, andlumped moral principles, upholding the law, and fear of punishmenttogether in a somewhat distant third place.

Specifically, the respondents' ordering did not conform to thetheoretical hierarchy proposed by Lawrence Kohlberg which, going fromleast to most important, is: (1) punishment, (2) anticipation of rewards(3) norms and peer pressures, (4) upholding the law, and (5) highermoral and religious standards (Kohlberg, 1964). The rationale behindKohlberg's ordering reflects fundamental tenet of Western ethics, themore generalizable an ethical rule, the more "right." Thus moral orreligious rules apply to all people in all situations and peer norms andpressures apply to some people in some situations, etc. It would seem,therefore, that the small business respondents tended to place moreemphasis on "situational" or "relative" ethics than on moregeneralizable or absolute ethical guides to business behavior. Manybusiness authorities, including Peter R. Drucker (Drucker, 1981), preferabsolute standards.

REFERENCESBlackshear, Leonard A. 1982. "Federal Small Business Legislative

Review," American Journal of Small Business VIII (October/December): 23-24.

Bowman, James S. 1976. "Managerial Ethics and Business and Government,"Business Horizons 19 (October): 48-54.

Brenner, Steven N. and Earl A. Molander, 1977. "Is the Ethics ofBusiness Changing?" Harvard Business Review 5 5 ( J a n u a r y /February):57-71.

Carroll, Archie B. 1975. "Managerial Ethics: A Post-Watergate View,"Business Horizons 18 (April): 75-80.

Dagher, Samir P. and Peter H. Spader. 1980. "Poll of Top ManagersStresses Education and Leadership By Example As StrongForces for Higher Standards," Management Review (March): 54-57.

Drucker, Peter F. 1981. "What is Business Ethics," The Public Interest63 (Spring): 18-36.

Kohlberg, Lawrence. 1964. "Development of Moral Character and MoralIdeology," in H. Hoffman and I. Hoffman (eds.). Review of ChildDevelopment Research (New York: Russell Sage Foundation).

Levitt, Arthur. 1981. "In Praise of Small Business," New York TimesMagazine (December 6, 1981): 136+.

Newstrom, John W. and William A. Ruch. 1975. "The Ethics of Managementand the Management of Ethics," MSU Business Topics 23 (Winter): 29-37.

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Purcell, Theodore V. 1977. "Do Courses in Business Ethics Pay Qff?"California Management Review XIX (Summer): 50-58.

Reagan, Ronald. 1982. The State of Small Business: A Report of thePresident (Washington: U.S. Government Printing Office).

Reagan, Ronald. 1984. The State of Small Business: A Report of thePresident (Washington, D.C: U.S. Government Printing Office).

Ricklefs, Roger. 1983. "Public Gives Executives Low Marks for Honestyand Ethical Standards," Wall Street Journal (November 2): 29.

Schweitzer, Arthur. 1981. "Misreading Business Ethics," Society 18(September/October): 61-65.

Wilson, Erika. 1980. "Social Responsibility of Business: What are theSmall Business Perspectives," Journal of Small Business Management18 (July): 17-24. ~

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