Received: 5 February 2018 Revised: 20 August 2019 Accepted: 23 August 2019

DOI: 10.1111/peps.12356

OR I G I NA L A RT I C L E

Creating an ethical organizational environment: The relationship between ethical leadership, ethical organizational climate, and unethical behavior

Maribeth Kuenzi1 DavidM.Mayer2 Rebecca L. Greenbaum3

1Management andOrganizations Department,

SouthernMethodist University, Dallas, Texas

2Management andOrganizations Area,

University ofMichigan, Ann Arbor, Michigan

3Human ResourcesManagement Department,

Rutgers University, Piscataway, New Jersey

Correspondence

MaribethKuenzi,Management andOrganiza-

tionsDepartment, SouthernMethodistUniver-

sity, 6210BishopBoulevard,Dallas, TX75275.

Email:[email protected]

Abstract The purpose of this research is to provide a richer lens on the ethical

organizational environment by examining the relationship between

ethical leadership and unit-level unethical behavior through ethi-

cal organizational climate (EOC), with collective moral identity as

a boundary condition. In testing our theoretical model, we first

develop and validate a measure of EOC to address concerns with

existing measures of ethical climate. Second, we examine the role of

collective moral identity as a moderator of the relationship between

EOC and unit unethical behavior. We discuss implications regarding

the importance of developing a more comprehensive conceptualiza-

tion of EOC.

K EYWORD S

collective moral identity, ethical climate, ethical leadership, organi-

zational climate, unethical behavior

Corporate indiscretion, wrongdoing, and corruption have recently been the subject of considerable media attention.

For example, in 2016, Wells Fargo fell from a position of high respectability to being labeled as one of the most

hated American companies due to exposure of their unethical business practices (Gujarathi & Barua, 2017; Stebbins

& Comen, 2017). The bank created millions of fictitious accounts and forced some of its customers to take out unnec-

essary auto insurance. How does a longstanding, large company adopt such insidious practices?

There is mounting evidence that, in addition to the personal characteristics of employees, cues in the organiza-

tional environment play an important role in determining unethical behavior (Kish-Gephart, Harrison, & Treviño, 2010;

Martin & Cullen, 2006; Newman, Round, Bhattacharya, & Roy, 2017). Organizations are composed of formal sys-

tems for recruitment and selection, orientation and training, policy and codes, reward and punishment, accountability

and responsibility, and decision-making systems (Treviño & Nelson, 2017). Each of these systems has specific ethical

policies, procedures, and practices. When these policies, procedures, and practices are consistent and shared among

employees in a unit or organization, they form perceptions of the unit’s or organization’s ethical climate (Reichers &

Schneider, 1990).

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44 KUENZI ET AL.

In the case of Wells Fargo’s ethical breach, the company relied on its ability to cross-sell more profitable products

to customers to increase profits. CEO John Strumpf had amantra of “eight is great,” meaning employees sought to sell

eightWells Fargo products to every customer (Stebbins & Comen, 2017). This mantra turned into sales goals employ-

ees could notmeet and resulted in unethical behavior such as ordering credit cards for preapproved customerswithout

their consent and creating fraudulent checking and savings accounts. The scandal illustrates how perceptions of poli-

cies, procedures, and practices in formal systems could lead to an unethical organizational climate (EOC). For example,

practices related to a policy of selling eight products included selling unneeded products to customers and creating

accounts without customers’ authorization. In terms of reward systems, bonuses were tied to unrealistic sales goals,

which encouraged the use of unethical practices. Additionally, employeeswere punishedwith termination for challeng-

ing unethical practices. Initially, when the fraudulent practices were exposed, top management and other managers

were not held accountable for their role in the scandal. Although many things contributed to the problems of Wells

Fargo, one can see how an environment repletewith unethical practices acrossmultiple systems could foster unethical

behaviors.We are interested in examining a comprehensive assessment of employees’ perceptions of the ethical prac-

tices, policies, and procedures in organizations’ formal systems to understand how EOC forms and affects behaviors.

Researchers have been studying ethical climate for over 30 years. Although there is considerable interest and

research on the topic (i.e., more than 100 empirical articles from 2006 to 2016; Newman et al., 2017), much of

the research has been critiqued on theoretical, empirical, methodological, and operational grounds (see Arnaud &

Schminke, 2007; Mayer, Kuenzi, & Greenbaum, 2009; Newman et al., 2017 for reviews). We offer and promote a dif-

ferent way to operationalize and measure EOC by focusing on shared perceptions of ethical policies, practices, and

procedures1 in formal organizational systems.

Victor and Cullen originally defined ethical climate as “the shared perception of what is correct behavior, and how

ethical situations should be handled in an organization” (1987, p. 51). They used this definition to develop the ethical

climate questionnaire (ECQ), which is the most commonly used measure of ethical climate (Kish-Gephart et al., 2010).

However, according to Litwin and Stringer’s (1968) seminalwork onorganizational climate, climate is the filter through

which day-to-day practices are experienced by employees. Organizational practices are critical factors influencing the

development of organizational climate (Ostroff, Kinicki, &Tamkins, 2003). Unfortunately, theECQdoes not assessmul-

tiple practices. Rather, it focuses on how decisions are made. Decision-making is an important part of ethical climate,

but it has a narrow focus and is not inclusive of other practices within the formal organizational systems.

In this research, we seek to build on extant theory and research by contributing to the organizational ethics, organi-

zational climate, andmoral identity literatures. First, related to the organizational ethics literature, we develop a com-

prehensive measure of EOC. We draw on an established theoretical framework that describes formal organizational

systems in thework environment (Treviño&Nelson, 2017) to examine perceptions of EOC inwork units. This new con-

ceptualization addresses limitations of prior research on ethical climate by (a) defining and operationalizing our mea-

sure in line with accepted definitions of organizational climate, (b) drawing on an established unit- and organizational-

level frameworkof ethical context basedonprinciples ofmanagement, (c) usingmultilevel confirmatory factor analyses

(MCFA) to establish construct validity, (d) collecting data at the unit level from multiple sources, (e) establishing con-

vergent and divergent validity by examining the relationship between EOC and related variables, (f) testing our con-

ceptual model while controlling for related constructs to demonstrate the incremental validity of our EOC measure,

and (g) examining a unit-level antecedent and consequence of EOC as well as a moderator of the relationship between

EOC and unit-level unethical behavior.

Second, we contribute to the organizational climate literature by developing a theoretically derived, psychomet-

rically sound measure to assess an organization’s ethical climate. The climate literature has struggled with how to

operationalize organizational climate constructs for methodological as well as theoretical reasons. There has been a

proliferation of organizational climate studies in the literature, but few of them are based on theories or frameworks

at the collective level (Kuenzi & Schminke, 2009). Our measure is one of the few climate measures to draw on specific

organizational-level theories, to operationalize the construct at the unit level, and to test a theoretical model at the

unit level.

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KUENZI ET AL. 45

Third,we contribute to themoral identity literature (e.g., Aquino&Reed, 2002) bybeing among the first researchers

to theorize andmeasure collectivemoral identity as a contextual variable inwork units, and to examine how it interacts

with EOC to affect employees’ unethical behavior. Moral identity, defined as a self-schema organized around a set of

moral traits (Aquino & Reed, 2002), is generally tested as an individual difference, but we examine collective moral

identity—themean level of moral identity in a unit—as another aspect of the ethical organizational environment.

To be clear, scholars have conducted decades of empirical research on ethical climate, but many of the studies use

methods that do not meet modern standards for organizational climate research. Researchers can thus continue to

develop and increase confidence in the validity of research on EOC. In what follows, we define EOC, describe limita-

tions of prior empirical research and explain how to address the concerns, detail the basis of our new conceptualization

andmeasure, develop a collective moral identity construct, and discuss twomain studies that support the convergent,

divergent, and predictive validity of our measure. We test a conceptual model linking ethical leadership to unit-level

unethical behavior through EOC, and explore themoderating role of collectivemoral identity.

1 THEORETICAL BACKGROUND

1.1 Ethical organizational context

Individuals vary in how they perceive and evaluate (un)ethical behavior (Kish-Gephart et al., 2010). Therefore, organi-

zations need to provide guidance to employees as to what constitutes appropriate workplace behavior. The organiza-

tion’s ethical context is one way to provide structure and guidance to employees. Researchers have studied the ethical

context of organizations for decades and the literature is replete with constructs such as ethical climate (e.g., Victor &

Cullen, 1987, 1988), ethical culture (e.g., Treviño, 1990; Treviño, Butterfield, &McCabe, 1998), and ethical infrastruc-

tures (Tenbrunsel, Smith-Crowe,&Umphress, 2003). Theproliferationof constructs andmeasures to assess the ethical

context in organizations creates confusion and raises the question—dowe need another measure of ethical context?

The two most widely studied ethical context constructs are ethical climate and ethical culture; however, there is

often misunderstanding regarding their distinctiveness. Both climate and culture refer to an organization’s ethical

environment and, although they have overlapping elements, they are distinct constructs (see Denison, 1996 and

reviews by Kuenzi & Schminke, 2009; Ostroff, Kinicki, & Muhammad, 2013; Schneider, Ehrhart, & Macey, 2011). Both

climate and culture are shared among employees and are used to help make sense of the work environment. They

also both develop through the interaction of organizational members. However, culture focuses on how the social

environment is created, while climate focuses on the way the environment is experienced by employees. Denison

(1996) highlights the differences between organizational culture and climate. He suggests that culture refers to the

deeper structure of organizations including values, beliefs, and assumptions held by employees. Culture maymanifest

through organization-specific artifacts, myths, and symbols. As employees are socialized in the organization, shared

meaning develops through interactions with each other and the work environment. On the other hand, organizational

climate has more surface-level manifestations from a sense of ‘how things are done around here.’ Organizational

climate emerges from the values provided by top management that are implemented through policies, practices, and

procedures. When employees share perceptions of these policies, practices, and procedures, organizational climate

develops.

Treviño et al. (1998) conducted a study to “examine issues of convergence and divergence” between ethical culture

and climate. They developed a measure of ethical culture based on an early version of Treviño’s ethical culture frame-

work (1990) and compared it to ethical climate using Victor and Cullen’s (1987, 1988) ECQ measure. Treviño et al.

(1998) concluded that “the two constructs are measuring somewhat different, but strongly related dimensions of the

ethical context” (p. 447). A recent meta-analysis also found empirical evidence that ethical culture and ethical climate

are distinct constructs (Kish-Gephart et al., 2010). However, it is important to note that the majority of the literature

using the ECQmeasures psychological ethical climate and not organizational ethical climate (Martin & Cullen, 2006).

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46 KUENZI ET AL.

In their seminal study, Victor and Cullen (1987) point out that data need to be aggregated for a valid assessment of

organizational ethical climate.

1.2 Ethical organizational climate

An organization’s climate is one tool the organization can use to help employees make sense of the work environment,

by helping employees discern how to behave appropriately. Because climate is more tangible to employees and easier

to change than culture, our research focuses on EOC. Unfortunately, the most widely used measure of ethical climate,

the ECQ (Victor &Cullen, 1987, 1988), has been criticized for operationalization andmeasurement issues. As pioneers

of the field of ethics and climate, Victor and Cullen offered cutting-edge research when their ethical climate measure

was first introduced. Yet, over the past 30 years, the ethics, climate, and research methods literatures have developed

in such a way that the ECQ is no longer compatible with current research standards.

First, Victor andCullen’s (1987) definition of ethical climate is inconsistentwith the generally accepted definition of

organizational climate, which focuses on shared perceptions of policies, practices, and procedures that are rewarded,

supported, and encouraged with regard to “something” in organizations (e.g., safety, service, and innovation; Schnei-

der & Reichers, 1983). In contrast, Victor and Cullen’s original definition of ethical climate is “a shared perception of

what is correct behavior and how ethical issues should be handled” (1987, p. 52) and focuses on decision-making pro-

cesses in organizations. Second, Victor and Cullen (1987) relied on three types of moral reasoning (egoism, utilitarian-

ism, and deontology) and three loci of analyses (individual, local, and cosmopolitan) to arrive at nine types of ethical

climate. Although five ECQ climates (caring, laws and codes, rules, instrumental, and independence) are most com-

mon, the literature has produced over 20 variations using the ECQ (Arnaud, 2010). These variations suggest that the

ECQ is not robust. Third, even for the five most prevalent climate types, the items do not consistently load on their

intended factors. These inconsistencies have led to a proliferation of differentmeasures to assess EOC (Smith, Thomp-

son, & Iacovou, 2009), with somemeasures representing different constructs than originally intended (Simha&Cullen,

2012). Finally, the majority of research using the ECQ has been conducted at the psychological climate level (i.e., an

individual’s perception of the psychological effect of the work environment on their own well-being) rather than the

organizational level (i.e., shared unit perceptions of thework environment) (Martin &Cullen, 2006). In fact, Cullen, Vic-

tor, and Bronson (1993) conclude that the ECQ is less stable when used as a measure of organizational climate rather

than psychological climate.

Meta-analyses demonstrate that ethical climate that is measured using variations of the ECQ is related to impor-

tant organizational outcomes. Martin and Cullen’s (2006) meta-analysis demonstrates that instrumental (combining

self-interest and company profit) and caring (combining friendship and team interest) climates are the strongest pre-

dictors of cognitive and affective states. Yet, neither of these climates is one of the original nine theorized byVictor and

Cullen (1987, 1988). TheKish-Gephart et al. (2010)meta-analysis also combines ethical climates, but the combinations

aredifferent fromMartin andCullen’s (2006) combinations. Kish-Gephart et al. (2010) find that benevolent (combining

friendship and team interest) and principled (combining rules and laws and code) ethical climates are significant predic-

tors of unethical choices. They also propose dropping independence climates from the ethical climate framework due

to conceptual concerns related to individual versus group interests (Kish-Gephart et al., 2010). Neither meta-analysis

resolves the issue that different itemswere used to create the types of ethical climates.

We argue that the ECQ does not measure EOC as it is defined and operationalized today. Rather, the ECQ captures

individuals’ perceptions of the organizational principles used in ethical decision-making. Although ethical decision-

making is a component of EOC, the climate construct also includes a more encompassing set of practices that arise

from the organization’s formal systems (Treviño, 1990; Treviño & Nelson, 2017). Thus, to advance EOC research, it

is important to utilize a valid measure. We propose that a new operationalization of EOC is needed that (a) utilizes

organizational-level theory, (b)measures perceptions of policies, procedures, andpractices related to ethics, (c) focuses

on shared perceptions at the unit level, (d) captures organizational ethical climate rather than psychological ethical cli-

mate, (e) demonstrates construct validity (i.e., convergent, divergent, and predictive validity) across multiple studies,

and (f) shows incremental validity over the ECQ and other relatedmeasures.

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KUENZI ET AL. 47

1.3 A new operationalization of ethical organizational climate based on formal

organizational systems

The behavioral ethics literature provides several theoretical frameworks for understanding ethical context and ethi-

cal practices (e.g., Tenbrunsel et al., 2003; Treviño, 1990; Treviño & Nelson, 2017). Due to its relevance and compre-

hensiveness, we draw from Treviño and Nelson’s (2017) ethical culture framework of formal and informal systems of

organizations to propose a new operationalization of EOC. The Treviño and Nelson (2017) framework draws on an

understanding of culture to propose multiple formal and informal organizational systems. Treviño and Nelson (2017)

suggest that each of the formal systems has practices specifically related to ethics. When these systems and practices

consistently provide salient cues to employees, they result in shared perceptions of an EOC. These shared perceptions

of EOC then support ethical judgment and actions from employees (Treviño et al., 1998).

Organizational practices are actions or activities that are repeated and recognizable in organizations—they are

whatorganizations actually do rather than justwhat is touted (Johnson, Langley,Melin,&Whittington, 2007). Practices

focus on the day-to-day activities in organizations that lead to shared practical understandings. Practices also take into

account structural features of organizations aswell as the importance of human agency (Feldman&Orlikowski, 2011).

Specifically, ethical practices represent the organization’s commitment to ethics and serve as a signal to employees

about the attitudes and behaviors that are valued regarding ethics.When thesemultiple practices are salient, employ-

ees form shared perceptions, which set the stage for employees’ perceptions of EOC (Stringer, 2002).

Treviño and Nelson’s (2017) formal systems include the following six systems: recruitment and selection, orien-

tation and training, policy and codes, reward and punishment, accountability and responsibility, and decision-making

systems.2 Together, these formal systems lead to ethical practices, which provide guidelines for employees regarding

acceptable ethical behaviors within the organization. Recruitment and selection reflects ethical practices that consider

a person’s ethical standards before entering the organization, as well as whether those personal standards match the

organization’s values. At the recruiting stage, organization representatives consider the applicant’s moral character

and make selection decisions based on the applicant’s espoused ethical values.Orientation and training systems reflect

ethical practices that socialize employees by communicating the organization’s values. During orientation, employ-

ees are exposed to potential ethical issues associated with the job. Employees are trained to handle ethical dilemmas

and apply their gained knowledge on the job. Policies and codes reflect ethical practices that highlight a code of con-

duct that represents employees’ actual behaviors. The code of ethics is strictly enforced and followed as opposed to

serving as ‘window dressing.’ Reward and punishment systems reflect ethical practices that focus on the consequences

for employees who engage in (un)ethical behavior. Employees who behave in an ethical manner receive positive feed-

back and are rewarded, whereas employees who violate ethical codes are appropriately disciplined. Accountability and

responsibility systems reflect ethical practices that emphasize the need for employees to take responsibility for their

unethical behavior, with structures in place to promote accountability and responsibility. Employees at all levels should

take responsibility for their unethical behavior and feel comfortable telling management if unethical behavior occurs.

Decision-making systems generate ethical practices related to ethical decision-making. Even during stressful times,

employees should discuss ethical concerns before making final decisions. Altogether, when the EOC is strong, these

multiple ethical practices ensure that the right employees are selected, are trained to achieve ethics-related goals,

receive rewards for their efforts regarding ethical matters, are monitored and influenced with respect to (un)ethical

behavior, and know how tomake decisions consistent with ethical expectations.

In sum, we use employees’ shared perceptions of the ethical practices associated with the six formal systems of

organizations as the basis of our ethical organization climate measure. Perceptions of the practices that result from

these six formal systems are combined to create a higher order factor of EOC (i.e., a formative measure). To avoid fur-

ther confusion in the literature, it is important to note that Treviño et al. (1998) created a measure of ethical culture

from the formal organizational systems framework; however, it does not tap into all of the formal organizational sys-

tems. Schaubroeck et al. (2010) use this culturemeasure developed by Treviño et al. (1998) in a study that successfully

links ethical leadership at the unit level to lower level employee unethical behaviors and cognitions through ethical

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