United States

Department of

Agriculture

Rural BusinessCooperative

Service

RBS Research

Report 151

Strengthening Ethics

Within Agricultural

Cooperatives
Abstract Cooperatives as distinct forms of business rely upon members to work together

towards collective goals. Trust lies at the heart of cooperation and provides the basis

for communication that is essential for members to seek mutual benefit. Ethics provides the foundation for trust that must be present for cooperation to occur. This report

explains why ethics is important to the success of cooperatives and what boards of

directors and managers can do to strengthen it. Emphasis upon ethical business conduct may help distinguish cooperatives from other types of business while at the same

time reinforcing membership commitment and loyalty.

,-

Strengthening Ethics Within Agricultural Cooperatives

Paul Lasley, Department of Sociology

C. Phillip Baumel, Department of Economics

Ronald Deiter, Department of Economics

Pat Hipple, Department of Sociology

Iowa State University

RBS Research Report 151

February 1997
This report originated in a series of informal discussions between the two senior

authors of this report and Jerry Van Der Kamp, AGRI Industries, Inc., West Des

Moines, Iowa, and Arthur Beenken, manager, Farmers Cooperative Society, Wesley,

Iowa. The purpose was to discuss current and expected changes in the grain transportation and distribution system. However, each meeting ended in a discussion of a

perceived weakening of the ethics in the grain distribution system, the farmer cooperative system, and agriculture in general. These discussions made it clear that, if ethics

in farmer cooperatives have indeed declined and need to be strengthened, these ethical issues and problems must be openly discussed by cooperative directors, managers, employees, and members.

This prompted a proposal to USDA’s Rural Business-Cooperative Service to fund a

study on the ethical concepts, problems, and possible solutions to the perceived

declining ethics in farmer cooperatives. We were joined in this effort by Iowa State

University Professor Ronald Deiter and Ms. Pat Hipple, a graduate student in the university’s Department of Sociology, who did much of the library research on ethical theory and concepts.

Many people made this report possible. Numerous cooperative directors, managers,

and employees spent considerable time in focus groups and discussion sessions. We

profited immensely from their insights and suggestions and hope this report accurately

reflects their concerns. We sincerely hope this report meets the expectations of Jerry

Van Der Kamp and Arthur Beenken who first called our attention to the need to

address how cooperatives might strengthen their ethics.
Contents Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 2 What Is Ethical in Business? . . . . . . . . . . . . . . . . . . .

Chapter 3 Agricultural Cooperatives and Business Ethics . . . . .

Chapter 4 What Members, Managers, and Directors Say About

Chapter 5 Tools To Improve Ethical Conduct in Cooperatives . .

Chapter 6 Materials for Ethics Workshop . . . . . . . . . . . . . . . . .

Appendix Background Materials . . . . . . . . . . . . . . . . . . . . . . . .

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Related Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Ethics .......... 15

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Highlights l Ethical issues particularly related to the business ethics of day-to-day decision making within agricultural cooperatives are identified.

l Ethical behavior builds trust which, in turn, sets a foundation for communication,

commitment, loyalty, and cooperation.

l Cooperatives are challenged to distinguish themselves from other organizations and

to strengthen their competitive advantages by being leaders in developing and

emphasizing ethical business behavior.

l Cooperative leaders are presented with an analytical framework for determining the

ethicality of their cooperative business decisions, which should help them to avoid

potentially unethical and embarrassing positions and decisions.

l Ethical versus moral versus legal behaviors are discussed.

l Reasons why ethical behavior builds successful cooperatives are identified.

l Farmer opinion

and a possible

surveys indicate that producers

erosion of ethical behavior.

are concerned about et hical issues

l Results of focus group meetings with cooperative managers and directors identify

several ethical issues that leaders often encounter and have to address.

l Forces and pressures that may promote or cause

leaders or cooperative members are discussed.

unethical behavior by cooperative

l Cooperative leaders face critical questions to ask and danger signs to look for in

determining if their own organization is at ethical risk.

l A step-by-step procedure is presented for use by cooperative leaders who want to

maintain or improve the ethical conduct of their cooperative businesses.

l Guidance is provided for cooperative leaders who want to develop a code of ethics

that is appropriate for their cooperative businesses.

l A series of practical exercises for facilitating discussion and understanding of ethical

issues on an individual cooperative basis have been developed and are included for

cooperatives wishing to conduct meetings, discussion groups, conferences, etc., on

ethics for employees, directors, and even members.
Strengthening Ethics Within

Agricultural Cooperatives

Chapter 1 n Introduction

“When people accept responsibility for their own conduct and for the well-being of others, ethics serves to

stabilize society. Ethical leadership is the antidote to

the despair and cynicism that are crushing our spirit

and clouding our future. Ethics is our hope.”

Gary Edwards

T

homas Jefferson once wrote, “Cultivators of the

earth are the most valuable citizens. They are the

most vigorous, the most independent, the most

virtuous, and they are tied to their country, and wedded to its liberty and interests by the most lasting

bonds” (USDA, 1937).

There are numerous examples and anecdotal evidence that supports Jefferson’s arguments for agrarian

values and ethics. The Protestant work ethic and commitment to work has had an important cultural impact.

The work ethic is rooted in the belief that working

hard, saving, thrift, and belief in God are evidence of a

good moral character. Prospective employers commonly seek farm-reared youth because of their work ethic

and rural values. Rural values are often associated with

an emphasis upon family, community, and church.

Differences between rural and urban crime statistics, percent population on welfare, school dropout

rates, alcohol and drug abuse, and family violence

rates are often cited as further evidence that rural residents have higher ethical and moral standards.

On the other hand, agricultural history contains

many examples of unethical and, in some cases, illegal

behavior. The settlement period and the westward

migration of pioneer families are characterized with

many illustrations of unethical behavior including

land frauds, broken treaties with Native Americans,

claim jumping, squatter rights, land struggles between

the ranchers and sod busters, denial of human rights

in the case of the institution of slavery, and religious

intolerance that resulted in the Mormons fleeing to the

Great Salt Lake.

In many instances, unethical behavior was woven

into the very fabric of rural culture. For example, horse

traders and land speculators were generally not trusted; nevertheless they were accepted because they provided necessary goods and services. Some of the most

notorious figures from the pioneer or frontier period

were people of questionable ethics. Justice in the frontier period was often settled by who was the best shot,

who could afford the best lawyer, who could best

influence the judge, or who could buy the jury. Despite

deeply held beliefs that rural people, and especially

farmers, provide the moral fiber to society, there is

ample historical evidence that ethics were often secondary to other motives.

Many believe ethical standards and moral principles have declined in recent years in rural America.

Several factors may account for the perceptions that

rural ethics have changed. It may indeed be true that

ethical standards have declined. Some also argue that

ethical standards have not declined, but rather, societal

expectations have increased. Behavior once acceptable

is no longer permitted. Other possible explanations are

that, as a society, we are more sensitive to ethical

behavior because we are exposed to more media attention about ethics and morals; or that perhaps ethical

discussions are part of a larger social movement

towards a spiritual renewal. Clergy, politicians, educators, and the media have devoted increased attention

to how to improve ethical standards.

The 1980s have been characterized by many as

the decade of greed in which Wall Street brokers,

financial tycoons, and leveraged buyouts were the

icons of the decade. Perhaps the discussions of declining ethics reflects some of the excesses of the previous

decade. Ethics seem to be taking on a more important

role in the everyday public lives of everyone. Differing

views on what is ethical, what is meant by ethical

behavior, and how ethics and morals differ suggest

more attention should be devoted to understanding

what constitutes ethical business conduct within and

among cooperatives.
What Is the Problem?

This project explores some common ethical issues

in agriculture with particular attention to business

ethics within agricultural cooperatives. It also offers

some suggestions on how to improve ethical standards. The paradigm guiding this project is shown in

figure 1.

Trust lies at the heart of cooperation. Without

trust, people do not communicate and, as a result,

cooperation is unlikely. People who work together

must know and trust each other. It is very difficult for

people to trust each other unless they share a commitment to ethical principles. An important ingredient in

building trust among and between members and their

cooperative organization is ethical business practices.

Where high ethical standards exist, a foundation

of trust is established that is essential for cooperative

action to occur. When ethical behavior is the norm,

people are more likely to trust each other which, in

turn, increases levels of communication and understanding. Where ethical conduct is emphasized, we

expect to find higher levels of two-way communication between the manager, board members, and

patrons.

Open and honest communication contributes to

building mutual understanding of cooperatives’ goals

and mission. This, in turn, leads to greater cooperative

action. Without the foundation of business ethics that

builds trust among employees, board members, managers, and patrons, there is little reason to expect people to work together.

Trust doesn’t just happen. It results from conscious decisions and efforts to improve human relationships. Building trust among any group is a longterm and time-consuming effort. In an article in The

Atlantic Monthly, Peter Drucker (1995) discusses principles of re-inventing Government and strategies that

many major corporations have used to improve their

performance. Behind many of the efforts to become

more efficient and productive has been increased

attention on building trust, communication, and cooperation.

Figure I- Ethical Conduct as a Unique Feature

of Cooperatives

p)l, Trust e Cooperation’

\ /

While there has been much interest in the successes of the Japanese management systems in manufacturing, such as quality circles and Total Quality

Management, much of this has relied upon building

teamwork among workers. Much of this emphasis has

been upon building teams through creating trust and

loyalty in the workplace.

Cooperative Loyalty

Member loyalty is a major concern expressed

throughout the cooperative literature. Membership

patronage and participation in the governance are central to building strong and successful cooperatives.

Much literature focuses on how to attract and maintain

member loyalty.

The premise of this project is that membership

loyalty should be viewed as an outcome or product of

sound business ethics which creates a climate of trust

within cooperatives. Membership loyalty and participation are low where trust does not exist or where ethical standards have not been established or enforced.

Conversely, rates of loyalty and participation are higher where ethical standards and trust have been emphasized.

Typically, members evaluate their cooperative in

terms of prices paid or received, patronage refunds,

and the range and quality of services. Using these criteria, it is often difficult to differentiate cooperatives

from noncooperatives. While “meeting the competition” is important in the day-to-day success of cooperatives, more attention is needed to build long-term

membership commitment and loyalty. Cooperatives

need to develop unique ethical qualities that will help

distinguish them from their competitors. This report

argues that strong, vibrant cooperatives have a strong

focus on business ethics and ethical practices.

Previous research on membership loyalty has

explored membership attitudes (Utterstrom,

Heffeman, and Torgerson, 1976) and special niche

markets that cooperatives might fill such as providing

services to small farmers that would attract patronage

and loyalty (Lasley and Geller, 1983). Other research

has examined how organizational structure of cooperatives may influence membership participation and

ultimately control of the organization (Lasley, 1981).

However, the relationships between organizational

structure and membership attitudes, participation,

patronage, and control have generally been modest to

weak.

2
Cooperative Distinctiveness

When asked to define a cooperative, members

often talk about patronage refunds, the presence of a

board of directors, or that they own part of the business. However, distinctions among cooperatives and

between cooperatives and noncooperatives are frequently unclear.

This suggests that cooperatives have not been

successful in making themselves unique and distinct

from other forms of business organizations or from

each other. Even in cases where cooperatives have

been financially successful, members often fail to

appreciate the important role that cooperatives play in

providing a yardstick to assess private companies.

This suggests that the perceived differences among

cooperatives and between cooperatives and noncooperatives are real but relatively unimportant. This

report suggests that cooperatives must demonstrate

their unique roles in the agricultural industry by

emphasizing ethical conduct.

Ethical Problems Posed to Cooperatives

Agricultural leaders are faced with many difficult

decisions that present vexing ethical dilemmas.

Cooperative members often express concerns about

ethical decisionmaking and behavior at the local,

regional, and national levels. Yet, they feel inadequate

to offer solutions. From competitive pressures to confusion about fiduciary responsibilities, waning loyalties, conflicts of interest, and breach of trust by their

patron-members, many cooperative members express

concern for what they see as declining ethics in their

organizations, community, and country.

Ethical dilemmas are often apparent in pricing

policies and practices, sales promotion, disposition of

sales incentives, business dealings with relatives and

friends, and neglected leadership and membership

responsibilities. Many of these decisions hold important

ethical implications for membership trust and loyalty.

Business illegalities, including bribery, insider

trading, executive piracy, fraud, and collusion, along

with more subtle conflicts of interest, including gifts or

favors, personal financial interests, external affiliations, and moonlighting, erode confidence that cooperatives are unique in their business ethics. It is not surprising that many who hold a stake in agricultural

cooperatives feel overwhelmed by the ethical dilemmas and are ill-prepared to resolve them.

Cooperatives, like small businesses, large corporations,

social institutions, and governmental agencies, are

struggling with ways to create ethical environments

and restore fairness, confidence, and trust.

Attention to business ethics has played a major

role in differentiating farmer cooperatives from other

types of businesses and, in the future, ethics will play a

more prominent role in strengthening cooperatives.

Membership loyalty will become more important for

cooperatives to retain their members and to maintain

market share in an ever increasingly competitive environment. As coordination increases through formal

contracts or vertical integration in agriculture, a key

concern should be identifying what cooperatives can

do to sharpen or highlight their commitment to higher

ethical standards to enhance membership loyalty and

increase patronage.

Summary

Chapter 2 explores ethical issues interwoven into

the everyday course of events and decisionmaking

of cooperatives. The first objective of this report is to

raise awareness of ethical issues that confront cooperatives on a day-to-day basis and discuss how

ethics differs from morals.

Cooperatives should focus on those aspects of their

organizations that highlight their distinctiveness.

Long-term commitment and loyalty are key considerations for the success of cooperatives given

heightened competition among agriculture suppliers and processors. Developing a strong code of

ethics will help build trust among members,

strengthen communication, and lead to greater

cooperation, commitment, and loyalty. In doing so,

cooperatives could gain a competitive advantage by

developing and emphasizing a code of ethics that

clarifies them as distinct from their competitors.

This rationale is presented in Chapter 3.

Chapter 4 explores the evidence concerning perceptions of the importance of ethics and how Iowa producers perceive the erosion in business ethics. Data

from the Iowa Farm and Rural Life Poll, as well as

insights from focus groups conducted among cooperative directors and managers, are presented. These

data suggest there is a growing recognition that ethical business standards are important to producers.

With increased competition among agribusiness and

evidence that producers are concerned about the

erosion of ethics, cooperatives can highlight their

distinctiveness by emphasizing ethical standards. To

remain competitive and serve members, cooperatives must monitor member needs, and enlist membership support in renewing their commitment to

ethical business practices. Tools to develop a strong

code of ethics are discussed in Chapter 5.
l Chapter 6 provides worksheets and exercises that

can be used in group settings or staff meetings to

begin work towards strengthening business ethics.

A key focus of these materials is to suggest that

attention to ethics is not an event but rather an ongoing process. Simply adopting a code of ethics is

inadequate. There has to be a commitment to incorporating ethical considerations into all decisions.

These materials are designed to help initiate ethical

decisionmaking processes.

Chapter 2. What Is Ethical in Business

“Ethics is about character and courage and how we meet the

challenge when doing the right thing will cost more than we

want to pay. If

Michael Josephson

“We judge ourselves by our intentions while others must

judge us by our behavior. ”

Verne E. Henderson

W

hat is “ethical” behavior in a cooperative

and what criteria can be used to determine

the ethicality of a cooperative business decision? These questions are addressed in this chapter.

Identifying an Ethical Issue

A “moral” or ethical issue is at stake anytime a

person’s actions may benefit or harm others (Jones,

1991). Ethical behavior is commonly regarded as

morally correct behavior (i.e., proper, just, good, desirable, obligatory, etc.) based on theories or philosophies

of morally correct behavior (Bommer et. al., 1987:267).

Unfortunately, this broad interpretation of ethical

behavior is not very helpful in analyzing the ethicality

of specific actions in cooperatives. More specifically,

event-applicable definitions of ethical behavior are difficult to establish and not very useful (Jones, 1991). As

a result, questions of ethical behavior rarely yield single, noncontroversial answers (Henderson, 1992).

Reasonable people can, and often do, disagree

over the degree of ethicality of specific actions taken in

business. In part, this is because each of us hold difj

ent values and beliefs that shape how we judge the

ethicality of decisions.

Ethics as a Field of Study

Ethics is generally regarded as a branch of phi

ophy that deals with how people ought to live by

incorporating notions of what human conduct is

“good” and what behavior is “just” or “right.” One

2rOSsource of rules about what is right and wrong is social

mores. For this reason, ethics has been described as

“moral philosophy” (Pojman, 1990).

Some contend that philosophers have not adequately defined ethics, even though they have debated

ethical questions for hundreds of years. For example,

both Aristotle and Plato (400 BC) were writing about

what is “good” and what is “right.” While public interest in business ethics, including cooperatives, may

seem to be a relatively modern phenomena, the more

general field of ethics has been in existence for nearly

as long as humankind.

Business Ethics

Peter Drucker (1981) doubts whether business, or

any other activity for that matter, warrants having its

“own” ethics. Drucker’s view seems to be in the

minority on this matter. A more commonly held opinion is that the business ethic differs from that which is

practiced at home, church, or other social gatherings

(Henderson, 1992). Some argue that even though some

rules apply to everyone in every situation, it is a mistake to think of ethics as a unique code of rules with

universal applicability (Henderson, 1992; Solomon and

Hanson, 1985).

Many aspects of ethics are specific to particular

communities and organizations, including the practice

of business. There are differences in ethical standards

between small towns and big cities, small and large

companies, banks and car dealers, physicians and

school teachers, and investor-owned companies and

cooperatives. Ethical considerations are also likely to

vary among cooperatives and across situations. There

seems to be a growing consensus that business ethics

is a distinct field of study or sub-discipline within the

broader discipline of ethics.

To clarify what is typically meant by business

ethics for cooperatives, consider what business ethics

is not. It is not simply a list of specific instructions on

what to do and not to do to produce ethical activity.

Ethics is not a unique set of rules that apply to all businesses in all situations (Solomon and Hanson, 1985).

Rather, business ethics for cooperatives is a never-ending “process” of attempting to discover, clarify, and

resolve what constitutes the best business action to

take in accordance with some belief of societal or community welfare. In this sense, ethics for cooperatives is

a dynamic process given the ever-changing nature of

society’s attitudes and expectations.

Thus, business ethics is a process used to consider the mutual expectations of all constituents involved,

4
formally or informally mandated, to settle a broad

array of issues in business such as fairness, truthfulness, and justice.

Business ethics deals with the results or consequences associated with business decisions, and the

means, methods, and motives employed in the decisionmaking process. Business ethics is concerned with

what businesses do, as well as how and why. It is

either explicitly or implicitly an integral part of business decisionmaking. “Cooperative” ethics merely

applies to the cooperative form of business.

Business Ethics Versus Personal Morals

While “business” and “personal” ethics are closely related in this report, the two are not considered the

same. Personal ethics, perhaps more commonly

referred to as “morals,” relates to beliefs, values, principles, attitudes, and convictions about what is right,

proper, and acceptable personal behavior in social relationships, usually outside of a business setting.

Morals are learned through personal experiences

involving family, church, government, education, and

work. These institutions play a key role in defining

societal expectations about which morals or rules of

personal conduct ought to be followed in both business and nonbusiness settings.

Morals help explain differences among people

and are reflected in one’s personal conduct. Ethics is,

however, negotiated. They include mutual expectations that you hold for others, and what they hold for

you. The key difference is that morals are private or

personal, while ethics are social expectations.

Business ethics, on the other hand, deal with personal behavior considered appropriate within a business or professional context. Business ethics are not the

same as personal morals. Ethics are social expectations

held for a specific person or group. For example, teachers are held to a different set of ethics because of their

important influence on children. In many professions

and occupations, including physicians, lawyers, nurses, and clergy, expectations for behavior have been formally codified.

There are obvious individual differences in personal morals. What one person views as moral, another may view as immoral. There are some universal

morals across society such as prohibitions about lying,

stealing, infidelity, and killing. However, even then

there are often varying degrees to which people hold

these morals as absolutes. For example, the moral principle of not killing another human being has been

hotly debated in the case of the death penalty and is

generally not applicable in case of war.

Individual differences in ethical principles are

actually used in the business world. A person is

regarded as “ethical” if his/her own level of ethics

meets or exceeds societal expectations in either a “personal” or a “business” context. However, in practice,

the term “ethical” normally refers to a person or a

business whose level of business ethics meets or

exceeds societal expectations. The term “moral” normally refers to personal ethics.

Figure 2 summarizes these typical, alternative

societal views of individual behavior (drawn from

Henderson’s framework, 1992:103). Societal perspectives of two alternative kinds of individual behavior

(“proper” and “improper”) combined with two alternative settings (business and personal) result in four

different theoretical behavioral types-moral, but

unethical (quadrant I); moral and ethical (quadrant II);

immoral and unethical (quadrant III); and immoral but

ethical (quadrant IV). Exercise 1 in the accompanying

worksheets found in Chapter 6 is designed to help the

reader identify examples of each type of behavior.

Morals Versus Ethics

An individual may be ethical in a business sense

and unethical in a personal sense (i.e. “immoral”).

However, most people believe there is a high degree of

correlation between one’s personal and business

ethics. One who engages in immoral personal behavior

is thought to be more likely to engage in unethical

business behavior.

It seems logical to assume that what one does in

their private lives may influence decisions or choices

that they make in business. For example, it is hard to

imagine that an individual who frequently lies to

his/her family would always tell the truth to his/her

co-workers. For this reason, customers may avoid ethical businesses run by immoral people.

Customers or patrons are likely to be skeptical

about patronizing a business that is managed by people who are generally regarded as ethical but immoral.

At the same time, some customers make decisions

about patronizing a business solely on the basis of

their perceptions about the ethicality of the business

and the people who work there. While patrons may

not know much about the personal morals of employees, their perceptions of fair treatment, product service

and warranties, and general ethical climate of the business influence their patronage decisions.

Because cooperative managers and directors are

generally viewed as community leaders, it is likely

they are held to both a higher ethical and moral standard than the general public. Because of their public
Figure 2-Alternative Societal View of Individual Behavior

Personal Life Behavior

Proper

Moral but Unethical Moral and Ethical

Improper

Business

Life

Behavior

Proper

Immoral and

Unethical Immoral but Ethical

Improper

role in providing leadership to the cooperative and the

community at large, their behavior may be under constant scrutiny. Frequently, leaders in small communities feel constrained and under surveillance. Because

of the close association drawn between one’s personal

morals and business ethics, it is important that cooperative officials understand that what they do in their

private lives may also reflect on their public role as

cooperative or community leaders.

Alternative Ethical Positions

Multiple criteria can be used to evaluate the

ethics of business decisions and decisionmakers. The

different theories of ethical behavior often apply different weights of importance to the various “ethical”

criteria (table 1, Pojman, 1990). There are, however,

some near universal virtues considered desirable by

society (table 1). Subscribing to these virtues and

encouraging behavior to achieve them might simply be

considered being a “good” business. However, it is

important to think about ways that cooperatives can

distinguish themselves from other “good” businesses.

There are several ways to classify ethical stances.

One way to summarize these positions is to focus on

the “three Cs” of ethical business theories and where

the emphasis is placed-character of the decisionmaker, compliance of the methods used with societal rules

and principles, or the consequences of the decision.

Understanding these ethical positions clarified

how others view the ethics of their business decisions.

Table +Virtues and Corresponding Behavioral Traits

Virtue Duty or Principle

Nonmaleficence

Beneficence

Fairness

Honesty

Conscientious

Faithfulness

Kindness

Graciousness

Do not inflict harm

Provide help or assistance

Be just, impartial, nondiscriminatory

Tell the truth, do not be deceitful

Be sensitive, empathetic

Be loyal, honor one’s commitments

Be nice

Be appreciative

Source: Pojman, 1990.

6
How often have you heard an employee say they

approve of their bosses’ decision, they just don’t like

the way they made the decision? Much of the organizational literature on decisionmaking emphasizes that

the process is just as important as the substantive

issues. This suggests that each of us choose to emphasize different ethical positions.

Sometimes we focus on the character of the decisionmaker, yet in other settings we judge a decision on

whether it complies with existing rules and regulations, and in other situations we focus on the consequences of a decision.

Character-Based Ethics

Character-based ethics are based on goals,

motives, and intentions. These ethical systems contend

it is important not only to do the right thing but also to

want to do it. In this approach, the intentions, motivations, character, and dispositions of the decisionmaker

are at the heart of determining what is ethical in business. Being an ethical or virtuous person is considered

important because it will manifest itself in ethical

actions. The inner self or personal psyche motivates a

virtuous person to do good because that in itself

makes them feel good about themselves and their

actions.

Pojman (1990) says, “If we agree there is a general tendency in human affairs for social relations to run

down due to natural inclinations toward self-interest,

then we can see that special forces must be put in

motion to countervail natural selfishness. One of these

forces is the external sanctions produced by the law

and social pressure. But a deeper and more enduring

force is the creation of dispositions in people to do

what is morally commendable. It is necessary that people should acquire, and should seek to ensure that others acquire, what may be called good dispositions, that

is, some readiness to voluntarily do desirable things

which not all human beings are just naturally disposed

to do anyway. . .”

Early proponents of cooperatives included member

education as one of the principles of cooperation which

reflects a commitment to improving individual members

(Royers, 1992; Cook, M., 1992; Gray and Mahoney, 1992;

Ingalsbe, 1984; Morris, 1987-88). A concern for cooperatives is determining when one’s best self-interest behavior is ethical and when is it not ethical.

For example, is it ethical for a cooperative member to patronize another business because he/she can

get a “better deal?” While cooperative leaders may not

consciously think about what motivates them or others

in cooperatives they need to identify the virtues they

desire to be reflected within the organization because

they provide the foundation for which decisions they

will regard as ethical.

Dilemmas arise in the application of virtue-based

ethical theory. This happens when a decision has to be

made that forces the decisionmaker to sacrifice one

principle to realize another. For example, should one

lie about the whereabouts of a person to protect them

from bodily harm that might be inflicted by others? If

one decides yes, the virtue of honesty would be sacrificed for the virtue of nonmaleficence. Some may

attempt to deal with this issue by focusing on the ethicality of the act itself (lying), while others might prefer

to solve this problem by focusing on the ethicality of

the consequences.

Most people, including cooperative leaders, purport to have desirable virtues and good intentions, yet

many are regarded by others as unethical. One plausible explanation is an unrecognized inconsistency

between one’s intentions and actual behavior. While

we judge ourselves by self-perceptions of our own

intentions, others judge us and our ethics by our

behavior largely because that is all that is observable to

them. Others are not aware of our innermost thoughts

and intentions. If we could only see ourselves as others

see us, we would likely be more sensitive to making

our actions reflect our thoughts.

What we do often becomes a matter of public

record, while why we did it remains unknown.

Another possible explanation for a discrepancy in

intentions and behavior is that virtues and values that

people hold as decisionmakers surface during times of

crisis (Henderson, 1992). People who abandon commonly held virtues for self-interest reasons, even if it is

due to pressure or duress, are often regarded as unethical by others. Financial pressures may cause cooperative leaders or patrons to abandon virtuous principles

of behavior. While such behavior may be self-justified,

it may be seen as unethical by others.

Compliance-Based Ethicality

Compliance ethicality is based on moral principals, rules, and laws. Neither the intentions of the

decisionmaker nor the resulting consequences determine the ethicality of one’s behavior, but rather the

rightness or wrongness of the act or method itself

(Pojman, 1990). Compliance with established laws,

rules, moral principles, etc., is normally the basis for

judging the correctness of the action taken on the

method used. A person who adheres to this theory

would not agree with the argument that, in some

cases, “the end justifies the means.”

7
Examples of moral rules rooted in religious

beliefs include the “Ten Commandments” and the

“Golden Rule.” The degree to which human rights

(entitlements of individuals such as the right to privacy, free speech, due process, etc.) are respected as

another method for determining the ethicality of business behaviors. The degree to which legal rights

(established by laws), consumer rights (regarding

health and safety issues), and principles of justice

(impartiality, equal opportunity, entitlement, merit) are

followed reflect ethical positions. Any method or

behavior that violates a “rule” is regarded as unethical

under the compliance-based perspective.

Compliance with rules, policies, laws, ethical

standards, etc. is the primary concern to a person who.

decides what is ethical on the basis of prescriptions.

Such a person believes in following rules to the letter,

doing their duty, and doing things right (Henderson,

1992:43). They are unlikely to “bend” the rules or

change the standards to get the job done. Often, those

who emphasize the “rules” are considered inflexible

bureaucrats. The rules become more important than

getting the task accomplished.

How to apply moral rules can sometimes be the

Achilles heel for those who subscribe to the compliance-based ethical perspective. For example, how far

should one go in judging the ethicality of behavior by

applying the principle that one should not steal-that

is, take someone else’s property without paying a fair

and agreed-upon price for it?

Does it mean that a person should not take

advantage of a company that prices an item wrong or

undercharges on a billing statement? Should the penalty for stealing a paper clip be the same as for embezzling thousands of dollars? Should a cooperative

employee never borrow company equipment for personal use? Should a cooperative never take advantage

of a financially troubled competitor? Often, the issue

revolves around where one draws the line between

ethical and unethical.

Consequences-Based Ethicality

Consequences-based ethicality emphasizes the

impacts or results of behavior in judging the ethicality

of that behavior. A person who adheres to this perspective on ethics is more likely to agree that “the end

justifies the means.” As a result, people who subscribe

to this perspective are more inclined to “bend” the

rules, change the standards, or do the right things (versus doing things right). Getting work done and

respecting other people’s judgments and feelings are

likely to receive higher priority than following the

rules. Recommended changes in policies and procedures are likely to be proposed first

hold this view of ethi cal behavior.

by people who

The most widely accepted type of consequencebased ethicality is “utilitarianism.” It says ethical

behavior produces the greatest good for the greatest

number of people (Cavanaugh, 1981:365).

Decisionmakers are expected to anticipate all of the

effects of their decisions on the interests of all individuals and groups that may be affected. In reality,

decisionmakers, including cooperative leaders, often

take “calculative shortcuts” (e.g., only calculate quantifiable dollar costs and dollar benefits, only calculate

direct impacts ignoring indirect or secondary

impacts) to reduce the complexity of utilitarian calculations.

However, these do not automatically excuse the

decisionmakers from being morally responsible for

their actions. Business decisions in

sacrifice societal or constituent goa

cooperatives that

ls for personal gain

Ethical Versus Legal

While ethical and legal business behaviors are

often closely related, ethical theorists contend they are

not synonymous (Henderson, 1992; Pojman, 1990).

Legal business behavior complies with laws (i.e. rules)

as defined by a legislative body Ethical business

behavior complies with a socially accepted theory of

morally correct behavior. Laws are often based on et1

cal or moral principles where both have the common

purposes of promoting human well-being, resolving

conflicts of interest, and enhancing social harmony.

UFor this reason, much overlap exists between ethical and legal (or unethical and illegal) behaviors.

However, it’s impossible to have an enforceable law

prohibiting every specific type of unethical behavior.

Most illegal behaviors are probably viewed as unethical

as well, although this may not always be the case. For

example, some may believe that non-deceptive advertising of cigarettes on television is an ethical activity, but * because it is banned by the FCC, it is illegal.

The sanctions against illegal activity are different

from those against unethical activity. Physical sanctions or punishments are intended to enforce compliance with laws while only sanctions of conscience and

reputation enforce compliance with ethical principles.

In reality, most people avoid violating the law for several reasons including

terns related to possib

legal consequences, ethical conle moral principles underlying

8
the law, and to strong social stigma associated with

doing something “illegal.” Because ethics covers a

broad range of issues beyond legality, cooperatives

must do more than just comply with the law to distinguish themselves from other forms of business.

Summary

Determining the ethicality of behavior in cooperatives is complicated. What is ethical depends on a

number of considerations, including the motives,

methods, and anticipated consequences associated

with the decisions being made (Henderson, 1992). It

also depends on which framework one uses in deciding what is or is not ethical.

Rarely is there complete agreement as to the ethicality of specific behavior except for instances of obviously illegal behavior. Agreement on what constitutes

ethical behavior among cooperative managers tends to

diminish as the behavior goes from the general to

something specific (Dunn, 1988). Often, what is ethical

in cooperative businesses is “situational” depending

upon the circumstances associated with an action or

decision.

Perhaps more important for cooperative leaders

is “Who decides what is ethical?” The ethicality of

decisions in a cooperative will be judged not only by

those making the decisions but also by all constituents-everyone affected by those decisions. It is

not the cooperative that acts ethically or unethically,

but rather individuals associated with it. Most cooperative business decisions involve unavoidable ethical

choices.

As a result, decisionmakers need to have a basic

understanding of business ethics and avoid situations

where they act first and then later defend the ethicality

of their decisions.‘Having an understanding of the

basic ethical concepts will help cooperative leaders

avoid unethical positions and decisions. Such an

understanding will help cooperative leaders incorporate ethics more fully into the decisionmaking and

management process.

Business leaders are in positions of power and

influence. Their decisions may determine not only the

ethics of their coworkers and businesses but also the

personal ethics of individuals with whom they work.

Therefore, cooperative managers and directors are

likely to be held to a higher standard of ethics.

Chapter 3. Agricultural Cooperatives

and Business Ethics

“What we do for ourselves dies with us. Wh& we do for others remains and is immortal.”

Albert Pike

‘*Every day our society pays a heavy price, both emotionally and economically, for the consequences of

unethical behavior.”

Michael Josephson

Emergence of Ethical Issues

T

he emergence of cooperatives and the cooperative movement can be viewed as a response to

farmers’ perceptions that they were not being

treated fairly by the private sector. By the mid to late

19th century, farmers began to recognize that abuses of

economic power by agribusiness, especially grain companies and railroads, were responsible for much of

their financial plight.

Proponents argued that cooperative buying and

selling would enable farmers to achieve economies of

scale in buying inputs and selling outputs and would

provide farmers with additional power. Moreover, it

was argued that cooperatives would enable farmers to

bypass the middlemen who were often perceived as

engaging in unethical conduct.

Many of today’s farm organizations and cooperatives can trace their roots to the farm protests of the

late 19th century (Torgerson, 1972). In response to

what was perceived as unethical and, in some cases,

illegal business practices, the National Patrons of

Husbandryman (Grange) was organized to enact legislation for the regulation of railroads and to collectively

organize farmers to eliminate the middleman.

The Farmers Alliance and the Farmers’ Union

were also heavily involved in attempting to control the

power wielded by agribusiness. Later, the American

Farm Bureau and the National Farmers Organization

actively supported agricultural cooperatives to stem

the power wielded by agribusiness.

The first farmer-owned cooperatives in the

Midwest were formed more than 100 years ago to

assure farmers a fair price for the products they sold

and a reasonable price for the products they bought.

Access to market information was poor and farmers

were suspicious because they had no basis on which to

judge how buyers and sellers were treating them.

9
As farmers discovered the existence of secret

grain buyer agreements to pay a uniform p

day effectively eliminating competition for

rice each

farmers’

grain or for their purchases of

they formed cooperatives to p

coal

rotec

and other supplies,

It thelmselves from

unethical pricing and merchand .ising practices

(Holman, 1947:7). Other cooperatives were formed to

fill a void in the market when a privately owned firm

went out of business or because no other buying or

selling firms existed.

By 1900, numerous farmer-owned cooperatives

had been established throughout the Midwest. Most

were successful andbegan to capture

amount of business from “regular gra

an increasing

in dealers.” A.s a

result, the Illinois and Iowa regular grain dealers associations began to publish the names of grain receivers

who purchased grain from the “irregular dealers”-

mostly cooperatives.

grain

The purpose of the list

receivers to force them

was to

to stop

boycott the named

buying grain from

the cooperatives. In addition, it was discovered that

railroads favored the regular grain dealers over the

cooperatives in allocating scarce rail cars. Railroads

were also found to provide some regular dealers with

rebates and advanced notice of rate changes (Ho1 .man,

1947:79).

In 1903, the Illinois Association of Cooperative

Grain Companies was formed to protect the grain markets for local Illinois cooperatives. Farmers Grain

Dealers Association of Iowa was formed the next year.

In many regions and industries, cooperatives

have become the dominate type of firm buying agricultural products from farmers and selling supplies to

farmers including grain, fertilizer chemicals, fruits,

* vegetables, and milk. Cooperatives are 1

in the livestock indus try although some

process meat products. Others

produce poultry and swine.

90

In many Midwest regi

percent of the grain sold

.ess

sla

prominent

ughter and

contract with farmers to

.ons, cooperatives buy 80 to

by fa rmers. Many cooperatives have multiple locations-some up to 20 or more

branches. Sometimes their primary competitors are

other cooperatives. In these cases, the original motive

for organizing cooperatives to ensure fair dealings

with privately owned businesses has disappeared. The

drive to increase the size of the territory as well as

total sales and savings has opened the door for intraand inter-cooperative ethical problems.

The history of farm cooperatives suggests that

adopting and practicing a higher code of

a major impetus for cooperatives as an al

ethics was

ternative

form of business. The Rochdale principles of cooperation were to be used by cooperatives to bring

economic and social benefits (Morris, 1988;

Torgerson, 1972).

Cooperatives were organized by farmers on a

community basis so they could collectively benefit

from buying supplies or marketing farm products. A

key ingredient was establishing rapport and developing trust among farmers. Frequently, cooperative organizers were respected local opinion leaders who had

rapport with local farmers.

Early cooperative leaders recognized that to be

successful they needed to sharply differentiate themselves from traditional private sector businesses. In the

anti-business climate created by price gouging, price

fixing, and other unethical practices, it was necessary

to explain how farmers would benefit from a cooperative. The early organizing efforts stressed the importance of farmer control, honest business dealings,

integrity, and high ethical standards.

It was the attention to honest business practice

and treating all members fairly that attracted many

new members. Cooperatives are businesses owned by

patron members who use and benefit from them. They

are built on the foundation of trust. Trust, essential for

people to join and work for mutual goals, rests on a

foundation of commitment to ethical business treatment.

Principles and Ethical Concerns

Although ethics is of growing concern throughout the business community, the unique characteristics

of agricultural cooperatives introduce some special

ethical dilemmas. A cooperative is an organization

operated as a business, voluntarily owned and controlled by member patrons, and operated on a cost

basis.

Dunn (1988:84) highlights the unique character of

cooperatives where the status of user-owner and control is vested in the same individual. He has cited three

central cooperative principles: A I I

The User-Owner PrincipZe: Those who own and

finance the cooperative are those who use it.

User-ContvoZ Principle: Those who control the cooperative are those who use it.

The User-Benefits Principle: The cooperative’s sole

purpose is to provide and distribute benefits to its

users on the basis of their use.

Combining these three principles, Dunn (1988:85)

defines a cooperative business organization as, “a userowned and con trolled business from which benefits are

10
derived and distributed on the basis of use.” Baarda (1986) fare of its customers, its ultimate responsibility is to

compares how a cooperative business organization dif- earn profits for its stockholders. For cooperatives, the

fers from other forms of business based upon seven profit motive is tempered by the need to be responsive

features (figure 3). to members’ needs (Clifford, 1984).

This comparison reinforces the three central principles identified by-Dunn as the distinguishing features of cooperatives. Across the seven features presented, patron members are the intended beneficiaries.

Considering Ethical Standards

Ethical standards of cooperatives should follow

basic standards of honesty and integrity. All businesses must adhere to national, State, and local govern-

‘ment laws. Similarly, all businesses should avoid conflicts of interest in their dealings with other firms and

customers.

The orientation to group concerns, collective

action, and to the welfare of all members distinguishes

cooperatives from their noncooperative competitors.

Thus, while both forms of business must subscribe to

honest business ethics, cooperatives have a broader

mission. Because of a commitment to the collective

welfare of its members, cooperatives must have an ethical decisionmaking philosophy and structure that differs from those of its more narrowly focused competitors (Dunn, 1988).

The basic difference in ethical standards between

investor-owned firms and cooperatives rests in their

organizational objectives and missions. While an

investor-owned firm must be concerned about the welCooperative business practices should reflect

their orientation to group needs and welfare. Ethical

decisions in cooperatives, then, should reflect recognition and commitment to the user-control, user-benefit,

and user-owner principles. Decisions that violate these

three central tenets should be viewed as unethical.

Figure 3- Methods of Doing Business Under Private Enterprise

Features Compared Individual Partnership Investor Cooperative

Who uses

its services?

Non-owner

customers

Generally nonowner customers

Generally nonowner customers

Chiefly the

owner patrons

Who owns

the business?

The individual The partners The stock-holders The member

patrons

Who votes? None necessary The partners Common

stock holders

The member

patrons

How is voting

done?

Not necessary Usually by

partners’ share

in capital

By shares of

common stock

Usually one

member, one

vote

Who determines

policies?

The individual The partners Common stock -

holders and

directors

The member

patrons and

directors

Are returns on

ownership capital

limited?

No No No Yes--usually 8

percent or less

Who gets the

operating proceeds?

The individual The partners in

proportion to

interest in business

The stock-holders

in proportion to

stock held

The patrons on

a patronage

basis

Source: Baarda, 1986; see also Torgerson, 1972:7

11
Treating all members the same is a basic tenet of

cooperation. Because there may be differences in interpretation between equal and fair treatment, it is important that cooperative members be involved in discussions about treatment. A competitor has more flexibility in making decisions and can make special deals or

prices to preferred customers.

In cooperatives, however, all prices should be

posted and available to all members. While prices may

vary because of differences in volume or handling cost,

all members who meet the requirements for discount

prices should be able to take advantage of the posted

price schedules. Equality of membership is an ethical

principle of cooperation (Gray and Mahoney, 1992).

Beyond the economic welfare of its members,

cooperatives should consider their responsibilities to

support activities that strengthen group identification

and membership development. Lessons in democratic

processes, such as elections, serving on the board of

directors, membership meetings, exercising leadership,

and collective decisionmaking, contribute to the development of members. Sponsoring local events, providing scholarships, demonstrating community involvement, taking an active role in community events and

,other activities demonstrates an ethical position of

commitment to the welfare of its members beyond

agricultural prices.

The cooperative is ultimately responsible to both

its owners and its customers. Because members are

both customers and owners, there should be fewer

conflicting interests than in an investor-owned company. Nevertheless, many conflicts of interest arise within cooperatives such as if the grain price offered to one

member, a director for instance, plus the handling cost,

exceeded the price that the cooperative could obtain

for the grain.

In this case, cooperative equity would be transferred from all other members to one member. Other

potential conflicts of interest can arise within a cooperative. One guiding principle in establishing an ethics

policy is that the cooperative should engage only in

economic activities that contribute to an increase in

earnings available to all members. Any pricing or service activity should cover all variable costs and make

some contribution to coverage of fixed costs. If this

principle is followed, every economic activity will

increase the total equity for its members.

One important ethical question within a cooperative is, “What is the responsibility of a member to the

cooperative ?” How much loyalty should a cooperative

expect from individual members? Member loyalty historically has been a problem with cooperatives (Craig,

1982-83). Farmer members have a history of seeking

out the highest bid for their grain or the lowest price

for their farm prod

there also

uction supplies. In too many cooperatives, is a history of members not attending annual meetings. Should cooperatives somehow

insist that members stick to their implied agreement of

support?

One of the first attempts to ensure member loyalty occurred in an Iowa cooperative. On June 7,1900,

the Farmers Cooperative Society at Rockwell imposed

a penalty clause on its members (Holman, 1947).

Here’s how it worked: Assume a farmer-member

brought grain to the cooperative to sell. The independent competitor elevator at Rockwell offered the

farmer two cents more per bushel than the cooperative. The member was free to accept the higher bid

from the competing independent elevator. However,

the penalty clause required the member to pay a onehalf cent per bushel commission to the cooperative.

If the farmer refused to pay the commission,

membership in the cooperative was suspended until

was paid. The.farmer could continue to sell or buy

it

from the cooperative while under suspension but

would be paid one-quarter of a cent less for grain and

would be charged 25 cents per ton more for coal.

For 40 years the penalty clause was successful in

maintaining member loyalty. By the time the penalty

clause was ruled illegal in 1930, patronage refunds had

become the major motivation for members to remain

loyal.

In recent years, additional forces have tended to

erode member loyal!Y

were improved and fa

to a single cooperati ve. Roads

rmers began buying trucks

which substantially increased their marketing options.

Over time, the number and size of farm trucks and

their traveling capacity increased.

Improved county, state, and interstate roads have

enabled farmers to quickly access distant grain markets. This increased mobility has encouraged farmers

to become members in two or more competing cooperatives. Multiple memberships blur the answer to the

question to which cooperative the members should be

loyal.

Second, improved communications have enabled

farmers to compare the bids offered by distant elevators. Farmers have wider choices of prices and markets

to sell grain. The improved communications and

mobility have, to some extent, diluted one of the original purposes of cooperatives.

Third, many cooperatives have followed a practice of deferring the payment of a portion of dec

patronage refunds. For tax purposes, cooperativ

lared

es are

12
required to pay a minimum of 20 percent of the current

declared patronage refunds in cash. The remainder can

be deferred for 5,10,15, or even more years. The

longer the patronage refunds are deferred, the lower

the value the farmer places on future refunds.

Fourth, in the past two decades, mergers and

consolidations have reduced the number of local

farmer-owned cooperatives. Those remaining have

become much larger in sales, area served, and number

of members. As a result, some members feel less

involved than in the past and, therefore, have less loyalty. Moreover, each member’s business has a smaller

impact on the welfare of the cooperative, making the

member feel less guilty about taking part or all of his

business elsewhere.

Perhaps the best way cooperatives can earn and

retain the loyalty of their members is to provide the

best prices, services, and communications and in an

ethical manner so that each memb,er strongly believes

that this cooperative conducts all of its business with

honesty, fairness, and integrity. But honest business

practices alone do not distinguish cooperatives from

most private companies. The uniqueness of cooperatives is their commitment to the welfare of the entire

membership, rather than being focused on just individual economic welfare.

Current Dilemmas and Structures

Members, directors, and managers may sense

conflicting expectations in attempting to fulfill the

three central principles of cooperation outlined by

Dunn (1988). Cooperatives operating in an extremely

competitive environment may find members being

lured away by incentives offered by private companies

or even other cooperatives.

These competitive pressures may test the ethical

standards of cooperative directors, managers, and

individual members and may contribute to them crossing over the line of ethical acceptability. While individual greed and dishonesty play a part, financial stress,

unrealistic expectations, rules and regulations, organizational exploitation, and communication breakdowns

present additional reasons or justifications for unethical behavior.

High debt loads and low profit margins create

financial pressure that weakens the ethical resolve of

some patron members and affect their relationship

with their cooperative. Managers striving to treat

everyone equally often feel isolated and vulnerable to

excessive criticism for poor performance of the cooperative. Some directors may seek preferential treatment

or abdicate their board responsibilities.

Examples of the excuses heard in justifying

unethical cooperative practices include: “It’s hard to

survive on honesty; Ethics are easier when you’re

making money; and Ethics fall when your back is to

the wall.”

The structure of cooperatives is often blamed for

ethical dilemmas. In some cooperatives, directors

receive either very inadequate or no compensation for

their service. Historically, directors were not paid

because it was felt that any compensation would place

them in a conflict of interest.

As a result, many cooperatives have had difficulty getting good leadership on their boards. Is it good

business or even reasonable to expect volunteers to be

current on the range of complex business decisions

that cooperatives must address? In other cases, directors receive a token per diem for each meeting to help

defray travel expenses. Generally, a range of $25 to $50

per meeting is a mere pittance for the responsibilities

and expectations held for board members.

When cooperatives were small, community-based

organizations, it was often assumed that members

would take their turn in serving on the board. As small

organizations, board decisions were quite visible, and

local peer pressure served to ensure responsible board

actions. However, as cooperatives have grown and

often cover several counties, the board’s action may be

less visible. Yet directors’ responsibilities have grown

exponentially, along with additional personal liability.

The growth in size and complexity of some cooperatives suggests that in some cases relying on a volunteer board hampers getting the best qualified individuals to serve.

Some cooperatives pay employees only the minimum wage. Members and employees sometimes experience harassment (racial, sexual, ethnic, and age-related) that creates a hostile and an unethical working

environment. Increasing managerial complexity and

inadequate recruitment and training of directors may

contribute to their abdication of responsibilities for the

organization. In some cases, complaints are heard that

the local board of directors is nothing but a rubber

stamp for the manager or the regional cooperative.

Ultimately, it may be the general lack of understanding of cooperative principles and practices that

leads to disregard for ethical conduct. The late Gene

Clifford, a cooperative educator with the former

Cooperative League of the USA and later with

National Rural Electric Cooperative Association,

described it well. “Many of America’s cooperatives

right now are in desperate need of greater understand13
ing all around...without knowledge of the cooperative

heritage, there is no glue to hold membership together” (Clifford, 1984:163).

Emphasizing Ethical Standards

If cooperatives wish to be viewed as unique

forms of business within rural communities, they must

distinguish themselves from other noncooperative

businesses. A commitment to business ethics may be

the most important factor available to cooperatives to

distinguish themselves from other forms of business.

Given marketplace pressures and the emphasis

on the “bottom line” in terms of prices, quality, and

service, it may become increasingly difficult for cooperatives to “beat their competition.” As higher volumes of products move to or from the farm through

contractual arrangements with suppliers and processors and further erosion in open-market trading

occurs, it will be difficult to provide precise and direct

price comparisons.

However, cooperatives may be able to capture

increased market share by stressing ethical principles

that sets them apart from their competitors. The principles of cooperation and commitment to business ethics

can serve to highlight their unique role in agriculture.

Why Emphasize Ethics

Building trust among members and between

members and their cooperatives lies at the heart of

maintaining strong agricultural cooperatives. To

achieve this goal, more attention is needed on how to

make ethical decisions and incorporate ethical dimensions into the everyday operations of cooperatives.

While much attention has been given to the economic

or financial side of cooperatives, there is a paucity of

information on how to raise ethical standards.

It is an old maxim that people want to do business with organizations they can trust. Given the

immobility of assets and the relatively fixed-trade

areas that farmers can realistically buy and sell into, it

is in farmers’ best interest to have strong, viable, ethical cooperatives.

Similarly, it is in a cooperatives’ long-run interest

to attract and maintain members. A higher code of

business ethics fits within the general discussion of

non-price competition.

In addition to emphasis upon price, service, and

quality, cooperatives may be able to strengthen their

relative positions by placing emphasis upon “doing

the right things.” That does not mean that “doing

things right is not important,” but by “doing the right

thing” the cooperative will increasingly be judged by

14

members as more important. Doing things right by

maximizing profits for the cooperative with little or no

attention to unanticipated consequences for members

may erode long-term loyalty.

For example, cooperatives entering into swine

production may enhance the profits of the organization, but ignoring producer perceptions that their

cooperative is a competitor may undermine membership loyalty.

Futurists contend that social responsibility and

ethics will become more important considerations for

consumers and that these issues will increasingly

impinge upon business decisions. If so, cooperatives

may be able to “get ahead of the curve” by implementing codes of ethics that set them apart from their competitors.

Here are some reasons why ethical behavior is

important to the success of cooperatives:

1 .

2 .

3 .

4 .

5 .

6.

7.

8 .

1 1

The cooperative is not an anonymous entity.

Unethical behavior can often be clearly detected. In

many rural communities, the cooperative may be

the largest and sometimes the only business in

town. Because of its prominence in the community

and the visibility of its actions, the cooperative cannot hide from accusations of unethical behavior.

The cooperative has a lasting commitment to its

market. Most cooperatives have large investments

in immobile facilities. Moreover, the owners-customers are permanent residents in the market area.

Thus, the cooperative cannot easily leave the community.

The cooperative thrives on repeat customers.

Unethical behavior will drive offended customers to

a neighboring business or cooperative.

Many cooperative members own stock in more than

one cooperative and are able and willing to switch

to a competing cooperative to do business.

Given improved roads and the increasing size of

farm vehicles, farmers are able to d,eliver their products to or purchase supplies from more distant markets. Farmers can easily shift marketing and purchases if they perceive they are treated unfairly.

The declining number of farmers is expected to continue. Customers lost by unethical behavior are difficult to replace.

Farmers are unlikely to keep unethical behavior a

secret. To the contrary, some farmers delight in coffee shop talk that details any favorable or unfavorable treatment received from the cooperative.

Unethical behavior that is also illegal can be punished by legal action. In 1994, a former grain mer-
chandiser of a large local cooperative was sued for

the loss of about $1 million during the fiscal 1993.

The defendant has since filed a voluntary petition

for bankruptcy and his career in cooperatives has

been seriously compromised.

/. Ethical behavior is the right thing to do and

rewards the ethical person and cooperative with

greater personal satisfaction and respect.

10. People are naturally attracted to persons and organizations perceived to be honest and ethical. Thus,

cooperatives have an opportunity to become leaders

in raising the level of ethics in rural communities

and, at the same time, enhance the status of the

cooperative.

Chapter 4. What Members, Managers,

and Directors Say About Ethics

“An ethical person often chooses to do more than the

law requires and less than the law allows-there is a

difference between what you have a right to do and

what is right to do. ”

Justice Potter Stewart

“Ethics is the name we give to our concern for good

behavior. We feel an obligation to consider not only our

own personal well-being, but that of others and of society as a whole.”

Albert Schweitzer

Have Ethical Standards Changed?

I

n discussing ethical standards in cooperatives, consider how the agricultural economy and rural society have changed. Michael Boehlje (1987:372) has

observed, “There appears to be changing standards in

rural communities compared to earlier years. The

‘your word is your bond’ attitude is no longer standard. Rural people are not necessarily becoming blatantly dishonest, but they are more willing to accept

the gray area between right and wrong and accept less

than pure business decisions.”

It appears that interest in cooperative ethical

standards is only a part of the larger set of issues that

are being raised about how rural people relate to each

other and the level of trust that exists among rural

institutions and their clients. Exercise 2 in the worksheets can stimulate discussion on how you believe

ethics have changed.

More than one-half of the 900 farmers who

responded to a Farm Futures poll (Knorr, 1991) agreed

that producers’ ethical standards have declined. Most

respondents said they had personally observed neighbors stepping beyond ethical bounds at least several

times a year.

In this poll, several comments supported the

argument that ethical standards have declined. “It is

amazing to me how many people brag about cheating

on crop insurance, income taxes, the Agricultural

Stabilization and Conservation Service (ASCS), etc.,”

reported an Ohio farmer. An Iowa farmer, who chaired

his county ASC committee wrote, “I think some people

stay up nights trying to figure out a way to beat the

Government.”

In response to a hypothetical situation as to

whether they would report a pesticide tank spill on

their farm, 70 percent indicated they would report it

immediately, 19 percent would wait and see if a problem developed, and 9 percent wouldn’t do anything.

This survey of commercial producers acknowledges

that some may act in unethical ways.

To better understand whether farmers believe

ethical standards have declined within the agricultural

economy and in rural communities, several questions

were included in a statewide survey of 2,390 randomly

selected Iowa farmers. Findings from the 1993 Iowa

Farm and Rural Life Poll shows that prod

concerned about the erosion of ethics.

U.cers are

88 percent felt “in general, ethical standards in society have declined.”

91 percent agreed “at one time a person’s word was

as good as a signed contract; now you must first get

it in writing.”

88 percent said “I used to take a person’s word as a

measure of his/her honor, but nowadays you can’t

always simply accept what a person tells you.”

54 percent said “even among friends and neighbors,

I am concerned that they no longer feel obliged to

honor their word,” 36 percent disagreed, and 10 percent were unsure.

49 percent said “often people admit they are not

being ethical in paying the full amount of their

taxes,” 30 percent were not sure, and 21 percent disagreed.

88 percent agreed “one reason ethical standards have

declined is that people have lost respect for authority,” 11 percent were unsure, and 11 percent disagreed.

15
l 52 percent said “farmers’ ethical standards have a. Some boards of directors have become too lax

declined,” 17 percent were unsure, and 31 percent and trusting of the manager. This shirking of

disagreed. responsibilities often allows the manager to operResponses from the 1993 Iowa Farm and Rural

Life Poll clearly indicate that respondents generally

perceive a decline in ethics (table 2).

In late 1993, three focus group meetings were

Among the nine subgroups surveyed, cooperatives ranked sixth in terms of the proportion of respondents who feltethical standards had declined. Thirtyfive percent said ethical standards among cooperatives

have declined in the past 10 years, 11 percent said they

had improved, and 54 percent felt they had remained

the same. Thus, more than three times as many people

thought ethics had declined in cooperatives rather

than improved.

Focus Groups Assess Ethical Issues

ate the cooperative like it was his own business.

While it is clear that directors should not engage

in the day-to-day decisionmaking, they have the

responsibility to set overall goals, objectives, and

policies, and to measure progress toward them.

b. The focus group meetings indicated that some

unethical events to progress too far before taking

directors are reluctant or embarrassed to stand

up and ask questions. Saying, “I don’t understand,” makes them appear “stupid.” The focus

groups indicated that failure to ask questions and

relate goals and objectives to performance shirks

responsibility. The groups indicated that both

managers and directors sometimes shirk their

responsibilities by allowing unfavorable or

organized with cooperative managers and directors in

Iowa to discuss ethical issues in cooperatives. They

focused on the types and causes of ethical problems

and issues facing cooperative managers and directors.

Discussions identified eth.ical issues and problems that

they have encountered or have heard about in their

corrective action.

c. Shirking responsibilities occurs when the manager or directors fail to acquire the necessary information or skills to adequate1.y fulfill their responsibilities. For example, some directors may not

experience as cooperative personnel. understand financial statements and’ therefore

can’t adequately evaluate the cooperative’s perI. Shirking Responsibilities formance or investment proposals.

The cooperative managers and directors cited

several examples of responsibility avoidance behavior

in cooperatives:

Table z- Farmers’ perceptions of changing ethics over

the past 10 years, “How have the ethical standards

changed among the following?”

Remained

Declined the same Improved

percent

d. The focus groups indicated that some cooperatives maintain little control over some business

expenses, particularly travel expenses. The managers and sometimes directors and employees

may tend to take advantage of uncontrolled travel expenses by attending unnecessary meetings

and by charging excessive travel expenses to the

cooperative. Focus group participants indicated

that some managers lease their cars to the cooperative and then use one for both business and

personal uses.

e. The focus groups indicated that sexual harassment of female employees by managers, employees, and members takes place in some cooperatives. Examples of sexual affairs and activities in

cooperative offices are far too numerous.

Moreover, even racial and ethnic harassment

exists.

Elected officials 78

Youth & young adults 67

Lenders 49

Farmers 41

Local merchants 38

Cooperatives 35

Local agribusiness 30

19 3

29 5

39 12

52 7

55 7

54 11

60 10

Elevator managers 28 60 12 II. Business dealings with relatives, friends, or manNeighbors 26 66 8 agement in private business include:

Source: Lasley, 1993 Iowa Farm and Rural Life Poll

16
a. Managers and directors give preference to

friends and relatives for job vacancies, possibly

hiring a less qualified person.

b. Directors grant special favors or price advantages to friends or relatives. Requests for special

favors may be difficult to deny, especially if the

person making the request is a large business

account who may take his or her business elsewhere. Likewise, granting favorable settlements

to friends or relatives of directors may be unethi

cal but difficult to deny.

c. Managers selling grain or buying supplies for his

or her private business, generally a farm business. They must be careful and demonstrate that

they are not using their position for favorable

treatment at the expense of the cooperative.

III. Sales Incentives

a. All focus group discussions indicated that most

cooperatives face ethical problems in accepting

gifts, bonuses, and giveaways for

shifting purchases or sales to a competing firm.

Chemical purchases were cited most often by the

focus groups. Chemical companies frequently’ offer

trips to vacation areas if the manager will shift the

cooperative’s purchases to the offering companies.

One manager reported a chemical salesman laid a

$20,000 check made out to the manager on the corner of his desk and said “We would like your them

ical business.” Such offers are considered bribes.

Often, “prizes” like jackets, televisions, VCRs, and

other merchandise are awarded by suppliers if

cooperatives meet or exceed certain sales goals.

These so-called prizes create ethical problems not

only in purchase decisions but also in deciding who

will receive the awards. One group cited a manager

who left an implied message with salespeople,

“Don’t stop if you don’t have a gift.”

.‘

b. One focus group cited a case of the retiring manager of a neighbor cooperative whose salary was

based, in part, on total sales of the cooperative.

Therefore, the greater the sales, the larger his

salary. Prior to his retirement, the manager

“cleaned out” most of the grain and supply

inventories at less than optimal prices to insure a

large sales bonus prior to his retirement.

c. The groups also discussed cases of cooperatives

offering higher prices for grain to farmers located

in the sales territory of neighboring cooperatives

just to get the grain. They said that, in some

cases, prices offered may have exceeded the current value of the grain if handling costs were

included. Reference was made that this is simply

“buying the market.” In these cases, the cooperative is transferring members’ equity to individual

customers, and over time will “simply bleed the

cooperative dry.” In addition, offering prices

above the market to attract new patronage and

members violates the principle of cooperation

among cooperatives. In the noncooperative

world, this practice is often viewed as predatory

pricing. Other participants mentioned that often

cooperatives intent upon expanding their market

would use such a ploy as a price-loss leader and

would try to cover the losses they incurred in

paying too much for the grain by then trying to

sell the new patron feed or other supplies. In

other cases, grades are based on the average of all

loads rather than on individual loads. In some

cases, discounts exceed the cost savings from the

larger volumes.

IV.

a.

Pricing

Offering grain bids to selected farmers that differed from the posted bids was considered unethical by some, but not by all focus group members.

b . It is obviously unethical to lie about grain bids.

For example, telling one farmer, that a nonposted

bid had not been offered to another farmer, when

indeed it had been offered, is unethical.

c. The focus groups indicated that some managers

pay a higher-than-posted bid for grain from his

own farm or for grain delivered by a director or

friend.

d. In some cases, sales were priced below variable

cost or grain purchased at a margin less than

variable handling costs. In each case, the cooperative would lose money on the purchase or sale.

In effect, the cooperative would be transferring

equity from all members to one or a few.

V. Illegal Business Practice

17
All illegal practices were considered to be unethical. Illegal practices mentioned by the focus groups

included:

a. stealing,

b. collusion,

c. fraud,

d. defaulting on contracts, and

e. product adulteration.

The public perceives that the grain industry has a

long history of adulterating its product. The focus

groups indicated that farmer members are among the

worst offenders. Some farmers placed wet spoiled

grain at the bottom of the load so it would not be

detected by sampling probes. Some cooperatives did

the same by loading low-quality grains at the bottom

of trucks.

The focus group meetings consistently revealed

declining ethical standards among cooperatives. The

groups suggested that as many as one-third to one-half

of cooperative managers periodically engage in some

form of unethical behavior. Moreover, interviews

reported that a substantial proportion of cooperative

directors and members also engage in unethical behavior. Young farmers, particularly those with college

degrees, were cited as displaying some of the most

unethical behavior.

Reasons for Unethical Behavior

There is extreme pressure on managers to obtain

higher savings with lower prices. One focus group

manager expressing his frustration said, “Any manager can make a profit if he does not have a conscience.”

In some cases, managers run the cooperative like a

private business. The boards have relinquished

their roles. Without board participation, including

necessary feedback, it is easy for the manager to

become slack, let ethics slide, and submit to pressure from individual members, customers, and

salespeople.

There may be too many cooperatives. Losing a customer is very difficult to accept as the number of

farms decline, the size of farms increases, and gross

margins decline. Moreover, individual members

often ask for a special deal but don’t want others to

get it. Focus group participants suggested that some

members are willing to let the cooperative bleed

away through special deals for individual gain.

They felt that a reduction in the number of cooperatives would relieve the pressure on managers to

make special deals.

With the complexity and increased size of cooperatives and the proliferation of rules and regulations,

the job of managing a cooperative is becoming

increasingly complex. And those most qualified to

serve on the board of directors are often reluctant.

Many members believe that there is little incentive

to serve on the board or to take the director’s role

seriously. The $25 to $35 honorarium per board

meeting means directors frequently earn less than

minimum wage for their service.

The changing structure of agriculture means that

fewer farmers have greater economic power over

cooperative managers and directors. Some focus

group members believe that contracting with producers results in the cooperative competing with

individual producers.

Some believe that young farmers lack an understanding and appreciation of the role of their own

cooperative. Some commented that college educated farmers display some of the most unethical

behavior. Perhaps young farmers with heavy debt

loads, along with less loyalty and wanting to be

successful quickly, contributes to cutting corners

and unethical behavior.

Reduced farm profitability, along with weatherrelated disasters (floods and droughts), have placed

many farmers in precarious financial positionssome on the edge of bankruptcy. This may contribute to declining ethics. Some believe that ethics

would improve with better farm profits.

Regardless of the reasons for unethical behavior,

there is a strong belief that agricultural cooperatives

and agriculture would fare better if ethics in cooperatives improved.

18
Chapter 5. Tools To Improve Ethical

Conduct in Cooperatives

“Good ethics doesn‘t just happen. It has to be planned. If

Verne E. Henderson

I

n his 1986 book “Everything I Need to Know, I

Learned in Kindergarten,” Robert Fulgrum presents a delightful essay on how many of the rules

needed to lead a successful life are taught in kindergarten. Many ethical dilemmas can be avoided by following some simple rules, but there are hazards in

thinking that everything has a simple solution. In this

section we synthesize some of the major works that

may help cooperatives improve their ethical standards.

Most philosophers believe that people rarely set

out to behave unethically. Instead, moral and ethical

predicaments emerge as a result of conflicting personal, organizational, or professional obligations. People

often lack adequate skills to negotiate these predicaments or to achieve ethical decisionmaking. For cooperatives, competitive pressures, growing organizational complexity, and regulatory paradoxes increase the

likelihood that ethical dilemmas will confront managers, employees, directors, and members alike. The

following examples (Laczniak and Murphy, 1991;

University of Minnesota Extension Service, 1993) can

guide cooperatives in becoming more aware of ethical

considerations and raising ethical standards. These

examples are intended as guides in deciding whether 8

an action is ethical.

Guides for Deciding If an Action Is Ethical

1. The Golden Rule

l “You act in a way that you would expect others to

act toward you” or “treat others as you would like

to be treated.”

2. Professional Ethic

l You take only those actions which would be

viewed as “proper” by’an objective panel of your

professional colleagues.

3. Kant’s Categorical Imperative

l Ask yourself, “What if everyone behaved this

way?”

4. Child on Your Shoulders

l Would you proudly make the same decision if

your young child were witnessing your choice?

5. “TV Test”

l Could you explain and justify your actions to a

general television audience?

Danger Signs of Unethical Actions

Cooke (1991) has identified 14 danger signs within organizations that suggest potential unethical conduct. They may be appropriate for an initial assessment of whether your cooperative is at risk. Here is

Cooke’s checklist as modified to fit cooperatives:

1 .

2 .

3 .

4 .

5 .

6.

A cooperative creates a climate for unethical behavior if it normally emphasizes short-term revenues

above long-term considerations. Complex ethical

dilemmas require objective assessment that is not

continually constrained by a myopic focus on next

quarter’s earnings. Most solutions require longrange commitments.

Any cooperative that routinely ignores or violates

internal or professional codes of ethics is at risk.

The risk is diminished if the cooperative integrates

professional standards within the organizational

culture, regularly monitors compliance, and applies

appropriate sanctions.

Any cooperative that always looks for simple solutions to ethical problems and is satisfied with

“quick fixes” is at ethical risk. The majority of situations are ambiguous. Complexity requires a _

thoughtful analysis.

A cooperative encourages ethical shortcuts if it is

unwilling to take an ethical stand when there is a

financial cost to the decision. Any short-term gain is

usually overshadowed by long-term financial loss

that follows the disclosure of unethical behavior.

Any cooperative that creates an internal environment that either discourages ethical behavior or

encourages unethical behavior is at risk. Too many

cooperatives ignore the consequences of the implicit

messages sent by policy decisions that either directly or indirectly discourage ethical behavior.

Organizational culture is important in shaping values that determine ethical responses.

A cooperative is at risk when it sends ethical problems to the legal department. Ethics is not simply a

matter of compliance with existing laws and regulations.

19
7. A cooperative is at ethical risk if it looks at ethics

solely as a publi.c relations tool to enhance its image.

A coopera tive’s ethical reputationis not determined

by a press release.

8 . Any cooperative that treats its employees differently than its customers encourages unethical behavior.

It reflects an arrogance that creates distrust and hostility within the organization. This makes it difficult

s that may to equitably resolve ethical dilemma originate outside of the cooperative.

9 .

10.

11.

Any cooperative that is unfair or arbitrary in its performance appraisal standards is at risk. Lack of

standardization leads to favoritism and cronyism

that tears at the social fabric of the organization and

creates a serious morale problem. When merit is

replaced by political influence, the ensuing organizational climate encourages unethical behavior.

A cooperative is at risk if it has no proced ures or

policies for handling ethical problems.

Any cooperative that provides no mechanism for

internal whistle blowing is at risk. A cooperative

must provide ways to bring potential problems to

the attention of upper management and other

interested parties, otherwise it appears that unethical behavior is tolerated, if not condoned.

12. Any cooperative that lacks clear lines of communication with the organization encourages unethical

behavior. The problems get out of hand before

most managers realize one exists. Cover-up

attempts usually backfire.

13.

14 .

Ethical risk occurs if a cooperative is only sensitive

to the needs and demands of the shareholders.

Other individuals and groups also have a stake in

the actions of the cooperative and should not be

ignored.

Any cooperative that encourages people to leave

their personal ethical values at the office door is at

risk. Whenever there is a sharp line drawn

between personal values and work values, ethics

are at risk. Many cases of cooperative impropriety

could be avoided if people would ask themselves

if the values conveyed by the cooperative were

consistent with their personal ethical beliefs.

Exercise 6 provides a copy of this checklist that

may be photocopied and used in a group setting to

assess whether the cooperative is at risk.

How To Improve Ethical Conditions

Von der Embse (1984) described six actions an

organization

members.

should take to improve the ethics of its

1. Ethics management-Th .e organization must make

ethics an integral part of management decisions.

2. Issue identification-The organization must distinguish the ethical and moral issues of day-to-day

activities within the organization and decide which

issues (and activities) take precedence.

3. Values Clarification-Organizational values should

be consistent with the larger culture.

4. Decisionmaking-In complex decisionmaking,

is usually more than one ethical choice.

there

5. Organizational Support-Cultural and organizational supports must be identified. Ethicaljudgments should not be ad hoc, but rather rooted in

substantive principles and applied consistently.

6 Commitment-Decisions imply and require commitment by all stakeholders in the organization.

These six steps demonstrate that improving

ethics should be approached as a long-term process

rather than an event. Simply announcing or unveiling

a new code of ethics is inappropriate, unless it has

been developed through a consensus process involving all stakeholders.

Is An Action Ethical?

Laczniak and Murphy (1991) suggested asking

the following questions to assess whether a contemplated action is ethical or has possible ethical conseauences: 1

1 .

2 .

Does the contemplated action violate law?

Is this contemplated action contrary to widely

accepted moral obligations such as duties of fidelity,

gratitude, justice, obeying the law, and providing

benefits to members?

20
3 . Does the proposed action violate any other s.pecial

obligations which stem from tenets of cooperative

organization?

4. Is the intent of the contemplated action harmful?

5 .

6 .

Would people or organizations be damaged by the

contemplated action?

Is there a satisfactory alternative action which produces equal or greater benefits to the parties affected than the proposed action?

Does the contemplated action infringe upon the

inalienable rights of the consumer (right to information, to be heard, to choose, and to redress)?

1. Does the proposed action leave another person or

group less well off? Is this person or group already

a member of a relatively underprivileged class?

Aram (1987) contends that many ethical predicaments can be avoided by giving priority attention to

governance, negotiation, and procedure. Organizations

need to “confirm or redefine their objectives, clarify

ambiguities that arise in tasks and responsibilities, and

upgrade human resources in capabilities and expectations” (Aram, 1987:38). For cooperatives, understanding their reason for existence, goals and mission, how

decisions are made, and who is responsible may help

avoid unethical behavior.

All the cooperative’s employees and members

should understand its goals and objectives.

Responsibility for communicating them resides with

the board of directors and manager. An organization

that values ethical conduct and moral behavior can

create a climate that fosters ethical decisionmaking by

its members. Hoffman (1986) identifies two necessary

criteria for ethical excellence within organizations.

The first is the moral autonomy of the individual

within the organization and the second is the ethical

organizational (corporate) culture. Decisions to behave

ethically or unethically are influenced by individual

and situational factors-background, personality, decision history, managerial philosophy, and reinforcement, among others. Management of ethics requires

that all levels of the organization “engage in a concentrated effort which involves espousing ethics, behaving ethically, developing screening mechanisms, providing ethical training, creating ethics units, and reinforcing ethical behavior” (Stead et al, 1990:233).

Creation of an ethical climate within the organization is paramount. “Policy is implicit in behavior”

(Andrews 1989:102). Business organizations say much

more than they realize by the ethical aspects of product quality, personnel, advertising, and marketing

decisions. But as “in all policy formulation and implementation, the deportment of management, development of relevant policy, and training in its meaning

and application are not enough” (Andrews 1989:103).

Continual monitoring or auditing of organizational

ethics is also required to avoid circumventing organizational responsibility for ethics management.

Ethics Management

Communication is critical to the management

and assessment of organizational ethics. Organizations

must determine their ethics policy and make it explicit.

The policy should be expressed in organizational language and written statements which both prescribe

and continually reinforce exemplary behavior, while

prescribing and condemning unacceptable behavior.

Most commonly, these statements take the form

of published codes of ethics, but they may also be individual policies regarding conflicts of interest, discrimination, harassment, and member loyalty. Codes of conduct or ethics are effective only if backed up by a conducive culture and attention that communicates their

importance.

“Many organizations use training sessions to discuss the problems of applying their ethical standards.

Such discussion, if carefully conducted, can reveal the

inadequacy or ambiguity of present policy, new areas

in which the organization must take a unified stand,

and new ways to support individuals in making the

right decisions” (Andrews, 1989:102). Ethics seminars,

programs, training and education, ethics “audits,” and

review panels are additional mechanisms.

Addressing Ethical Issues

Andrews (1989:100-101) suggested that organization members need three qualities to maintain ethical

conduct:

1. Competence to recognize ethical issues and to think

through the consequences of alternative resolutions.

2. Self-confidence to seek out different points of view

and to decide what is right at a given time and

place and in a particular set of relationships and circumstances.

21
3. Willingness to make decisions when all that needs

to be known cannot be known and when the questions that press for answers have no established and

unquestionable solutions.

While cooperatives should be alert to these qualities when recruiting employees, these traits can be

acquired and honed by training. Individuals can benefit from training and skill building in ethical decisionmaking. The first step is to understand how decisions

are made. Few cooperative decisions are based on

evaluating options and solutions.

This is one reason that ethical principles and

decisionmaking must be incorporated into an organization’s day-to-day thinking and activities (Smith,

1990). “Most employees want to act ethically and work

with an organization that has integrity” (Finn, 1988:8).

Cooperatives must demonstrate support for ethical

conduct. A comprehensive code of ethics and employee training are key structures that can provide this

support.

Codes of ethics and training on ethical decisionmaking provide advance exposure to potential ethical

dilemmas; coupled with training in the application of

problem solving techniques, managers, directors, staff,

and members are provided with increased likelihood

that they will make the right decisions when they

encounter similar dilemmas on the job.

Although some debate whether codes of ethics

are effective in guiding ethical decisionmaking within

organizations, the dominant view is that these codes

are vital in communicating the expectations and commitment of management to maintain high ethical standards and business practices. The literature provides

numerous examples of codes of ethics used in businesses, corporations, various professions, academic

and research groups, governmental agencies, and

national and local cooperatives. Although each has

unique aspects, there are also many similarities.

Madsen and Schafritz (19902 19-220) reviewed

hundreds of corporate codes of ethics and identified

several similar “clusters” including:

A. Be a dependable organization citizen.

L.

Don’t do anything unlawful or improper that will

harm the organization.

Be good to our customers.

To be a “dependable organization citizen” codes of

ethics prescribe:

1. Demonstrate courtesy, respect, honesty, and fairB.

ness in relationships with customers, suppliers,

competitors, and other employees.

Comply with safety, health, and security regulations.

Follow directives from superiors, be punctual

and reliable in attendance, dress in businesslike

attire, and manage personal finances in a manner consistent with employment by a responsible

company.

These codes also seek to censor use of abusive language or actions, possession of firearms, and use of

illegal drugs or alcohol on company premises. To

avoid unlawful or improper conduct that would

harm the organization, corporate codes prescribe:

1 .

2 .

3 .

4 .

5 .

6 .

Maintain confidentiality of customer, employee,

and corporate records and information.

Avoid outside activities which conflict with or

impair the performance of duties.

Make decisions objectively without regard to

friendship or personal gain.

Conduct personal and business dealings in compliance with all relevant laws, regulations, and

policies.

Comply fully with antitrust laws and trade regulations.

Follow accepted accounting rules and controls.

These codes also seek to prohibit “the acceptance

of any form of bribe; payment to any person, business,

political organization, or public official for unlawful or

unauthorized purposes; provision of false or misleading information to the corporation, its auditors, or a

government agency; use of company property or

resources for personal benefit or any other improper

purpose; and having any interest in any competitors or

supplier of the company unless such interest has been

fully disclosed to the company.”

C. To be good to customers, codes of ethics prescribe:

1. Strive to provide products and services of the

highest quality.
2. Perform assigned duties to the best of your ability and in the best interest of the organization, its

shareholders, and its customers.

3. Convey true claims for products.

Other recommendations were: “exhibit standards

of personal integrity and professional conduct; report

questionable, unethical and illegal activities to your

manager; seek opportunities to participate in community services and political activities; conserve resources

and protect the quality of the environment in areas

where the company operates.” And the “unclustered”

category included prohibitions against racial, ethnic,

religious, or sexual harassment, and against members

of the organization recommending attorneys, accountants, insurance agents, stockbrokers, real estate

agents, or similar individuals to customers.

These sample entries demonstrate the range of concerns expressed within codes of ethics:

1.

2.

3 .

4 .

5 .

6.

Obeying federal, state, and local laws is a minimum

basis for measuring ethical and legal conduct.

Cooperative policy does not sanction accepting gifts

except for items of nominal value. This prohibition

does not preclude exchange of ordinary hospitality

such as lunch or dinner.

Individual self-interest should never be permitted

to conflict with or take precedence over the interest

of the cooperative. Be alert to all potential conflicts,

direct and indirect, and resolve all such perceived

conflicts in the cooperative’s favor. A conflict which

may appear to be present should be disclosed

immediately to the individuals’ superior or the

board of directors.

Honesty and integrity are essential to maintaining

the company’s respected name. Establishment and

preservation of such respect is a factor in every

decision and activity.

Failure to consider the rightness of actions would

jeopardize the integrity of the cooperative.

Perjury or any illegal act ostensibly taken to “protect” the company is wrong, just as is a sale made

because of deception. Equally wrong is a production quota achieved through questionable means or

figures. The end does not justify the means.

The cooperative will not engage in any activity,

regardless of its profitability, if it is incompatible

with ethical behavior. Emphasis on employee safety,

product quality, and equitable dealings with customers and suppliers relates to ethical considerations as much as economics.

The directors and employees pledge themselves to

complete loyalty to the cooperative that elects or

employs them and will:

a. aggressively pursue its objectives;

-b. hold inviolate the confidential relationshiD

between the individual members of the cooperative and us and the confidential information

entrusted to use thorough the cooperative office;

C serve all members of the cooperative impartially;

d. provide no special privilege to any individual

members, nor accept special personal compensation from any individual members, except with

the knowledge and consent of all other members;

e. neither engage in, nor tolerate, any exploitation of

f.

b‘.

the cooperative;

recognize and discharge their responsibility and

that of the cooperative to uphold all laws and

regulations relating to cooperative activities;

exercise and insist on sound business princip

in conducting the cooperative’s business;

les

h. use only legal and ethical means in seeking to

influence legislation or regulation;

i. issue no false or misleading statements to the

members or public;

j. refrain from the dissemination of any malicious

information concerning other cooperatives or

competitors;

k. accept responsibilitv for cooperating in every real

sonable way with other cooI;era tivevS;

use every 0pportunity to improve public understanding of the principlesT of the cooperative form

of business enterprise; and

23
m. maintain high standards of personal conduct.

Most current codes focus on acts that are illegal

and punishable by law, but they fail to address unethical behaviors related to executive character, product

quality, or civic responsibility, and few codes indicate

behavior that is acceptable in specific situations

(Raiborn and Payne, 1990).

Raibom and Payne caution that codes of ethics

must be prepared “for the right reasons,” avoiding any

implications that they are only there for “public relations or window dressing.” They cite as major weaknesses those codes that are “accusatory, threatening,

demeaning, unrealistic, or excessively legalistic”

(1990:883). A successful code of ethics can guide cooperatives in ethical decisionmaking. But such codes

need to be dynamic, ever-evolving documents able to

respond to forces internal and external to the organization in order to reflect real and ongoing expectations of

cooperative membership (Backof, 1991).

. If cooperatives want to communicate their concern for a high level of ethical standards in the conduct

of business and in the social responsibility of managers, directors, members, and employees, they will

require a code of ethics tailored to their unique circumstances. Such a code might include prescriptions for

the “willing compliance with the law, the exercise of

due care, fidelity to special responsibilities, compliance

with cooperative tenets and principles, trust and loyalty, avoidance of the appearance of a conflict of interest,

acting in good faith in negotiations, respect for human

well-being, and respect for the liberty and constitutional rights of others (Dean, 1992).

It is important to determine the level of specificity of a code of ethics, finding a balance between too

much and too little detail. Codes require clarity, completeness, and enforceability: 1) they must be written

in an understandable, concise, specific, and honest

way; 2) they should cover virtually any conduct, with

specific descriptions regarding expected behavior as

well as violations; and 3) sanctions and punishment

must be spelled out and carried out to reinforce that

the cooperative is serious about compliance.

At the same time, because all violations cannot be

spelled out in advance, the codes of ethics should be

comprehensive enough to “envelop the spirit of ethics

and morality” (Raiborn and Payne, 1990:883).

Although codes of ethics are critical, they do not,

in themselves, contain the “emotional power of commitment to quality objectives-among them compliance with law and high ethical standards-is an organizational achievement” (Andrews, 1989:104). Source:

Adapted from Iowa Institute of Cooperatives, 1992:

Von der Embse, 1984; AGRI Industries, 1983.

Commitment Building

Organizations need to explore the processes

essential to building commitment. This is particularly

important to maintaining cooperative loyalty. But

remember, commitment works two ways. “If loyalty

and commitment aren’t returned or demonstrably

appreciated, they will wither over time, and if loyalty

is called on too frequently, it can be exhausted” (Craig,

1982083:255).

Craig (1982-83:260-262) discusses six commitment-building processes:

Quality products and services build commitment.

“A cost/benefit analysis can convince members that

it is in their interest to be committed to the organization.” However, this is the most fragile form of

commitment, from which members defect in tough

times.

Investing money or time in the organization results

in psychological commitment. “The need to sacrifice time or invest money to obtain membership in

the cooperative reinforces the value of belonging.”

Their commitment protects and enhances their

investment.

Receiving a helping hand frequently results in feeling indebted to the organization. “If the cooperative

sticks by its members in time of need, it’s easier for

the members to feel close to the organization.”

4. Involvement through an elected position in cooperatives or through pirticipation in young cooperator

programs develops stronger loyalties. “The process

of involvement in the organization strengthens

commitment.” A second form of involvement is to

act as advisors to directors, just as a representative

democracy has a constituency or to act in groups of

delegates and or within informal discussions to disseminate information.

5 “Cooperative education enables people to learn

about the philosophy of cooperation and values

underlying it, and relate them to their own ideological values... The process forces people to accept or

reject the philosophy of cooperation. In accepting it,

they will increase their ideological commitment to

the organization.. . (But) this process must be contin24
uous... Material should emphasize cooperative games

where everybo’dy wins, rather than intensely competitive games which teach students to lose and consider

themselves failures.”

6. Marketing strategies have a “direct relationship to

how members evaluate the cooperative and

whether they develop commitment.”

Commitment and loyalty both imply that members are part of their organization and see it differently

from others in the community. Commitment processes

are built or eroded in the day-to-day interaction

between the member and people within an cooperative. Member commitment can be changed if a cooperative is prepared to evaluate itself and analyze its commitment-building processes.

Chapter 6. Materials for Cooperative

Ethics Workshops

T

he authors believe that a series of four l-hour

workshops for employees, directors, and even

members will help create a higher awareness of

the major roles of ethics in cooperatives. The chapters

in this report can serve as background reading prior to

each workshop. In addition, a series of nine exercises

are included in this chapter to facilitate discussion and

understanding of the materials.

Each of the four workshops should focus on these

assignments:

Workshop Reading Materials Exercises

1 Chapters 1 and 2 1

2 Chapters 3 and 4 2,3,4 and 5

3 Chapters 5 and 6 6and7

4 Chapter 6 8,9, and 10

Each workshop should follow a discussion format with an assigned discussion leader, generally the

manager or board president. Obviously, the discussion

leader should be familiar with the materials in this

report. The cooperative leadership should also be firmly committed to integrating ethics into everyday decisions and actions.

Chapter 2 discusses the importance for members

to distinguish between morals and ethics. Exercise 1

discusses the differences between morals and ethics,

and helps to identify four categories of people they

encounter. Readers are encouraged to list examples

that represent each of the four types.

Chapter 3 discusses the uniqueness of cooperatives and how they differ from other forms of business,

and why ethics are critical for cooperatives.

Chapter 4 talks about growing concerns about

perceived declines in ethical standards. Exercise 2

solicits opinions of cooperative employees, directors,

and members about cooperative ethics. If there is

agreement that ethics have declined, people will be

more motivated to work through these materials than

if it is not viewed.as a problem. Exercise 2 will help

people understand where ethics have declined and to

compare their perceptions with those of others in the

group.

Exercise 3 provides a place to record what cooperative employees, directors, and members perceive as

unethical conduct. In addition to helping assess the

importance of ethics to a cooperative, this exercise will

help identify ethical concerns that should be

addressed. Many causes of unethical conduct have

been discussed in Chapters 3 and 4; however, this exercise provides an opportunity to identify other factors

that have contributed to the erosion in ethics.

Chapter 4 also presents some of the excuses often

given for unethical conduct. Exercise 4 seeks ideas

from members about why cooperative employees,

directors, and members may engage in unethical

behavior. Exercise 5 builds on Exercise 4 by asking reasons (excuses) why cooperative employees, directors,

or members engage in unethical behavior.

Exercise 6 is a modified checklist to assess

whether participants judge their cooperative to be at

ethical risk.

Exercise 7 is designed to help cooperative

employees, directors, and members decide whether

decisions or actions are ethical.

Exercise 8 involves all cooperative employees,

directors, and members in upgrading ethical standards. In addition to calling attention to six action

steps, this exercise provides space to record what each

cooperative member could do to raise ethical awareness and standards.

Exercise 9 begins the process of developing a

code of ethics for each cooperative. It may be useful for

readers to review the samples of ethical codes in completing this exercise.

25
Exercise 10, an article in the WLIII Street Journnl,

reports how people respond differently to allegations

of illegal and unethical behavior. As a “real life” example, this exercise helps clarify why people feel differently about ethical issues, and highlights the importance of business ethics.

Once these exercises have been completed, consider how a cooperative member should respond to

the examples provided. Twenty-five real life examples

gleaned from the focus groups provide discussion topics to consider.

The appendix provides additional materials that

leaders may find useful in small group discussions.

These materials are designed to be made into transparencies for overhead projection. While each set of

material could be used in more than one workshop, we

have indicated which materials are best suited for a

particular workshop.

26
Appendix

Background Materials

Exercise 1.

Exercise 2.

Exercise 3.

Exercise 4.

Exercise 5.

Exercise 6.

Exercise 7.

Exercise 8.

Exercise 9

Exercise 10.

Understanding the Difference Between

Morals and Ethics

How Have Ethics Changed in the Past

10 Years?

Ethics in Cooperatives

What Causes Unethical Behavior?

Excuses, Excuses, Excuses

Is Your Cooperative at Risk?

Ethics Checklist

Organizational Actions To Improve

Actions

Toward Developing a Code of Ethics

A Case Study of Ethics

Ethical Discussion Topics

Through a series of interviews and focus group

meetings with cooperative managers and board members, we discovered many ethical issues must be faced

on a daily basis. Some are unique to cooperatives and

others are common in the business world. Some are

viewed as very important and others as minor issues.

Below are a set of ethical scenarios that describes ethical issues in cooperatives. Now that you have read

these materials, how would you resolve these issues if

faced with these circumstances?

1.

2 .

3 0

4.

There is considerable pressure on the sales staff to

achieve sales quotas established for the cooperative.

As a recent hire, you worry that not meeting your

sales quota will reflect poorly on your performance.

As a result, you encourage patron members to buy

products they really do not need.

To encourage higher attendance and participation at

the annual meeting, you use cooperative funds to

buy food, beer, and door prizes.

You have a portable hog feeder that has been in

inventory a long time. For some reason, the feeder

has not sold and you would like to move it. The

original price was $895. To sell it, you list a new

price of $1,100, then show a sale price of 50 percent

off or $550.

A long-term member of the cooperative, who has

been a faithful patron, is reportedly having financial

difficulty paying his bills. You know his crop is not

very good and want to help him. As harvest gets

5 .

6 .

7.

underway and he brings his crop to the elevator,

you note that the first two loads were surprisingly

good quality grain. However, the next several loads

have been “plugged” with spoiled grain concealed

in the bottom of the truck.

The nephew of one of the board members who

graduated as valedictorian from the local high

school is back home after successfully completing

his first year of college. The board member asks if

there is any way the cooperative can hire his

nephew for the summer. You like the young man,

but also know that several other equally deserving

youth are looking for a summer job.

You have served on the board of directors for 27

years through good times and bad. As you contemplate your eventual retirement, you have considered not running for re-election. However, the manager wants you to run for one more term. Your

heart is really not in to continuing to serve,

although the annual meetings provide a nice wintertime vacation for you and your wife.

As president of the board of directors you have discovered that you can buy the same herbicide from

another local private competitor at a better price.

You feel that you should be loyal to your cooperative, but during these tough times on the farm, a

dollar here and a dollar there spells considerable

savings. You approach the manager about matching

the competitor’s prices. The manager explains that

it is not possible to give you a preferential price discount. So you send your son to the competitor to . buy the herbicide.

As manager of the cooperative, you observe your

long-trusted secretary putting computer discs and

notepads in a briefcase. There is a strict code of ethics

that requires that you fire the secretary on the spot.

A friend at work asks whether you would like a

take-home copy of the expensive computer software

program that you know is protected by copyright.

What would you do?

10. As a board member you hear via the grapevine that

the manager and an employee, both of whom are

married to others, are romantically involved. While

you personally view such behavior as immoral,

you “mind your own business” and say nothing.

27
11 . To gain market share for the cooperative, you offer

a bonus to farmers on the fringe of your trade area

to attract additional business although you know

that this practice will further jeopardize the viability of an adjacent cooperative.

13IL. At the coffee shop you and several other coopera13.

14.

15 .

16.

17.

18.

19.

28

tive managers huddle and decide what drying

charges will be for the coming harvest.

In response to a national promotional campaign,

you place a large order for a new product and

receive two free airplane tickets and motel accommodations for a week’s vacation to Hawaii.

The cooperative board has requested more

detailed information about the profit margins. You

fear if members learn of the margin levels, competitors would soon learn of the marketing strategy. Hence, you decide to withhold the information.

Your daughter is moving a few miles away into a

new apartment. You do not own a pickup truck.

Although the cooperative has a strict policy forbidding personal use of equipment and tools, you use

the cooperative’s pickup to move your daughter

into the apartment.

You observe an employee playing a computer

game on the cooperative’s computer during work

hours.

A loyal patron has had a major illness in the family

and is not able to make his payment for seed and

fertilizer. You have every reason to believe that the

patron is a good credit risk although it is against

the cooperative policy to extend credit beyond 30

days.

Your cooperative has the opportunity to sign a

long-term business agreement with a private company that will be mutually advantageous. This

agreement will enable your company to expand its

market share and will return handsome profits to

both parties.

In response to perceived problems in the timeliness of fertilizer application during spring planting, your cooperative purchased a new applicator

truck which has turned out to be a disastrous

investment. Suddenly, everyone has purchased

new equipment and application charges have been

20.

21 .

22 .

23 .

24.

25.

very competitive. Getting farmers to accept your

new service has been difficult and everything else

that could has gone wrong. You are only 1 year

away from retirement and are pretty sure that no

one will discover this bad decision until after you

retire.

You just received a phone call from an informant

that a neighboring cooperative has an extremely

high price posted for No. 2 yellow corn. Either

they have made a dreadful mistake or they have

really scored big on filling a contract. At any rate,

you decide to have your informant sell 500,000

bushels for you to the competing cooperative. A

few days later you learn that they had made a mistake on posting the price and they stand to lose

$50,000 on your contract.

In response to less government payments on storing corn, slim margins, and the need to boost revenues, you have encouraged the board to offer

contract feeding of hogs. This way the cooperative

will boost feed sales and the profits from hog feeding will improve the overall financial position of

the cooperative.

The legislature has approved cooperatives owning

livestock. Several cooperative members have

expressed interest in contract feeding while others

feel that this new venture may contribute to more

hogs on the market and reduce their own profits.

Your nephew, who works in a large brokerage

house, has given you (the cooperative manager) a

hot tip about a potential stock split with a major

private competitor.

The manager of the cooperative who has been in

this role for 25 years, has announced his intention

to retire in the next 2 years. As part of the coming

transition, the manager would like to hire an assistant who he could train as his successor. The board

agrees with the transition plan except that they

will reduce his salary by the amount that is paid to

the assistant manager.

It has been brought to the attention of the board

and manager that seemingly the most unethical

behavior is demonstrated by younger, well-educated, college graduates who are intent on “showing

the community how to get ahead.” What should be

done?
26. The manager has just learned of a trade secret. If

he acts on this tip, the cooperative stands to gain

considerably. However, he also knows that if he

shares this information with the board, some of

them will likely share the information with others

in the community including the manager of the

cooperative in the adjacent town since two of his

board members are also members in that cooperative. In order to keep the information secret, he

decides not to share the information with the

board although there is some reason to believe that

board approval might be necessary.

Summary

As you discuss these examples, you probably

heard many different perspectives and solutions. It

may have surprised you to have heard the comment,

“Well, it depends on the situation.” Listening to the

arguments presented by others reflects the spectrum of

ethicality.

Every ethical decision has its own peculiar and

unique situation and context. This leads many to conclude that we live in a period of ethical ambiguity or

what has been termed situational ethics. Business decisions in our pluralistic society require thoughtful and

time-consuming responses to most ethical questions.

For example, where do we draw the line about

stealing? Stealing is illegal, but often defined in terms

of value of the stolen item. Yet, from an ethical decision, stealing a paper clip or rubber band is no different than stealing an object worth much more in value.

If we recognize the relativity in ethics, perhaps we will

be better able to make ethical decisions.

Take the example of the new salesperson who,

fearing losing his job if he did not meet sales quota,

sells products to patrons who really didn’t need them.

Can this behavior be excused or justified? The salesperson is caught between the expectations of the merchandising manager, the board, and the individual

members. Is the salesperson wrong to do all he can to

protect his job and family?

Some may argue about the manager using cooperative funds to provide food, beer, and door prizes for

the annual meeting. In some communities, buying beer

with cooperative funds is wrong, but food and door

prizes are legitimate expenses. On the other hand,

using cooperative funds to buy food or prizes, including alcoholic beverages, may be acceptable. Again, relatively mundane decisions often involve ethical decisions and reflect community norms, values, and customs. In some cases, alcohol would not be a problem;

in other cases, it may violate the norms and customs

within the membership.

An old Chinese proverb says, “If you don’t know

where you are going, it doesn’t make any difference

which road you take.” If applied to decisionmaking in

cooperatives, unless you know the mis‘sion of

erative and are committed to its ideals,l ethi.cs

the coopmay be of

secondary importance. Too often we have heard that

decisions must be based upon the bottom line-is it

profitable, does it make economic sense, will it improve

the financial status of the cooperative? Yet, many decisions only indirectly affect the bottom line and sometimes the relationship is not directly tied to profits.

For example, the cooperative manager allows a

basketball hoop to be placed in the repair shop. The

insurance consultant would likely conclude that it

exposes the cooperative to a potential lawsuit if an

employee gets injured while shooting baskets with the

boys. The industrial engineer might concl

encourages employees to go0If off during

ude that

work ho

it

urs.

Another expert might conclude that i t would be

for the employees to shoot baskets a t the fitness

better

center.

The manager, who has permitted the basketball hoop,

may likely understand that employees shooting baskets in the repair shop allows them to blow off some

steam after some frustrations, and that a cooperative

runs best when employees have team spirit. Being a

team both on and off the court leads to a successful

cooperative.

Without understanding the importance of basketball in the local community, appreciating the fact that

there is no recreational center in the community, and

other such variables, this decision would not appear to

be related to the financial success of the cooperative.

However, retaining good employees by allowing them

to use the facility for recreation (presumably during

nonwork hours) was a conscious ethical decision.

Each example points out the problems we

encounter when there are no rules about what you

should do. There can’t be a rule for every decision, but

a code of ethics would help establish general principles and who should decide. Depending upon whether

You place emphasis upon character, compliance, or

consequence, ethicality will, in large measure, determine how you would resolve each of the preceding

ethical problems.

While each of us has an idea about what we

would do, there is no clear answer. In most cases, there

is no single

eration and

bes1

de1

t solution

iberation

. Only through careful

can cooperatives demo

considJnstrate

their uniqueness.

29
Ethics Checklist

1 .

2 .

3 .

4 .

5 .

6 .

7.

8 .

Does the contemplated action

violate law?

Is the contemplated action contrary to widely accepted moral

obligations such as duties of

fidelity, duties of gratitude,

duties of justice, duties to obey

the law, or duties to provide

benefits to members?

Does the proposed action violate

any other special obligations

which stem from tenets of cooperative organization?

Is the intent of the contemplated

action harmful?

Are there any major damages to

people or organizations that are

likely to result from the contemplated action?

Is there a satisfactory alternative

action which produces equal or

greater benefits to the parties

affected than the proposed

action?

Does the contemplated action

infringe upon the inalienable

rights of the consumer (right to

information, to be heard, to

choose and to redress)?

Does the proposed action leave

another person or group less

well off? Is this person or group

already a member of a relatively

underprivileged class?

Gary Edwards’ 7 Steps

To Managing Ethical

Environments

1 . Leadership at the top and at all

levels of management.

Clear standards of conduct.

Communication of values and

standards.

Effective compliance monitoring.

5 .

6 .

Ethics ombudsman.

Proper goal setting and proper

incentives.

7 . A continuing commitment.

The Golden Rule

Act in a way that you would expect

others to act toward you.

The Professional Ethic

Take only actions which would be

viewed as proper by an objective

panel of your professional colleagues.

Kant’s Categorical Imperative

Act in such a way that the action

taken under the circumstances

could be a universal law of behavior for everyone facing the same

circumstances. *

The TV Test

A manager should always ask,

“Would I feel comfortable explaining this action on television to the

general public?”

Source: Edwards, 1993

Source: Laczniak and Murphy, 1991

Source: Laczniak and Murphy. 1991

30
Cooke’s 14 Danger Signs

1 .

2 .

3

4 .

5 .

If a cooperative normally

emphasizes short-term revenues

above long-term considerations,

it is creating a climate for unethical behavior. Complex ethical

dilemmas require objective

assessment that is not continually constrained by a myopic

focus on next quarter’s earnings.

Solutions require long-range

commitments.

Any cooperative that routinely

ignores or violates internal or

professional codes of ethics is at

risk. The risk is diminished if

the firm integrates these professional standards within the corporate culture and regularly

monitors compliance and

applies appropriate sanctions.

Any cooperative that always

looks for simple solutions to ethical problems and is satisfied

with “quick fixes” is at ethical

risk. The majority of situations

are ambiguous. Complexity

requires a thoughtful analysis.

If a cooperative is unwilling to

take an ethical stand when there

is a financial cost to the decision,

it encourages ethical shortcuts.

Any short-term gain is usually

overshadowed by long-term

financial loss that follows the

disclosure of unethical behavior.

Any cooperative that creates an

internal environment that either

discourages ethical behavior or

encourages unethical behavior is

at risk. Too many firms ignore

the consequences of the implicit

messages sent by policy decisions that either directly or indirectly discourage ethical behavior. Internal environment or cor6 .

7.

8 .

9 .

10.

11 .

porate culture is important in

shaping values that determine

ethical responses.

When a cooperative usually

sends ethical problems to the

legal department, it is at risk.

Ethics is not simply a matter of

compliance with existing laws

and regulations.

Any cooperative that looks at

ethics solely as a public relations

tool to enhance its image is at

ethical risk. A firm’s ethical reputation is not determined by a

press release.

Any cooperative that treats its

employees differently than its

customers encourages unethical

behavior. It reflects an arrogance

that creates distrust and hostility

within the organization. Such

distrust and hostility makes it

difficult to equitably resolve ethical dilemmas that may originate outside of the firm.

Any cooperative that is unfair or

arbitrary in its performance

appraisal standards is at risk. A

lack of standardization leads to

the kind of favoritism and

cronyism that tears at the social

fabric of the organization and

creates a serious morale problem. When merit is replaced by

political influence, the ensuring

corporate climate encourages

unethical behavior.

Any cooperative that has no

procedures or policies for handling ethical problems is at

risk.

Any cooperative that provides

no mechanism for internal

whistleblowing is at risk. A

firm must provide ways in

which potential problems can

12 .

13 .

14.

be brought to the attention of

upper management and other

interested parties, otherwise it

appears that unethical behavior

is tolerated, if not condoned.

Any cooperative that lacks -

clear lines of communication

with the organization encourages unethical behavior. The

problems get out of hand

before most managers realize

there is a problem. Any

attempts to cover it up usually

backfire.

Any cooperative that is only

sensitive to the needs and

demands of the shareholders is

at ethical risk. Other individuals and groups have a stake in

the actions of the firm should

not be ignored.

Any cooperative that encourages people to leave their personal ethical values at the

office door is at risk. Whenever

there is a sharp line drawn

between personal values and

work values, ethics are at risk.

Many cases of corporate impropriety could be avoided if people would ask themselves if the

values conveyed by the firm

were consistent with their personal ethical beliefs.

Source: Cooke, 1991

31
Six Organizational Actions

To Improve Ethics

Commitment-Building Process

1. Quality products and services

build a utilitarian form of commitment. A cost/benefit analysis

can convince members that it is

in their interest to be committed

to the organization. However,

this is the most fragile form of

commitment, from which mem1 .

2 .

3 .

4 .

5 .

6.

The organization must make

ethics an integral part of management decisions. (ethics management)

The organization must distinguish the ethical and moral

dimensions of day-to-day activities within the organization and

decide which dimensions (and.

activities) take precedence.

(issue identification)

Organizational values should be

consistent with the larger culture. (values clarification)

It should be understood that in

complex decision- making, there

is usually more than one ethical

choice. (decisionmaking)

Organizational and cultural supports must be identified. Ethical

judgments should not be ad hoc;

they must be rooted in substantive principles and applied consistently.

port)

(organizational supDecisions imply and require

commitment by all stakeholders

in the organization. (commitment)

Source: Von der Embse, 1984

6

intensely competitive games

which teach students to lose and

consider themselves failures.

Marketing strategies have a

direct relationship to how members evaluate the organization

and whether they develop commitment.

bers defect in a crisis. Source: Craig, 1982-83

2. Investing money or time in the

organization results in psychological commitment. The need to

sacrifice time or invest money to

obtain membership in an organization reinforces the value of

belonging. Commitment protects and enhances investment.

3. Receiving a helping hand frequently results in feeling indebted to the organization. If it sticks

by its members in time of need,

it’s easier for them to feel that

they should be loyal.

4. Involvement through an elected

position in cooperatives or

through participation in young

cooperator programs develops

stronger loyalties. The process of

involvement in the organization

strengthens commitment. A second form of involvement is to

act as advisors to directors.

5. Cooperative education enables

people to learn about the philosophy of cooperation and values

underlying it, and relate them to

their own ideological values.

The process forces people to

accept or reject the philosophy

of cooperation. In acceptance,

they increase their ideological

commitment to the organization.

But this process must be continuous. Material should emphasize cooperative games where

evervbodv wins, rather than

32
Codes of Ethics

3 .

4.

5 .

(Samples)

Adherence to the laws of the U.S.

is minimum basis for measuring

ethical and legal conduct.

Company policy does not sanction the acceptance of gifts except

for items of nominal value. This

prohibition does not preclude

exchange of ordinary hospitality

such as lunch or dinner.

Individual self-interest should

never be permitted to conflict

with or take precedence over the

interest of the company Be alert

to all potential conflicts, direct

and indirect, and resolve all such

perceived conflicts in the company’s favor. If a conflict even

appears to be present, it should

be disclosed immediately to the

individuals’ superior or the

board.

Honesty and integrity are essential to maintenance of the

respected name enjoyed by the

company. Establishment and

preservation of such respect is a

factor in every decision and

activity.

If profitability is incompatible

with ethical behavior in a business, (our organization) will not

engage in that activity. Emphasis

on employee safety, product

quality, and equitable dealings

with customers and suppliers

relates to both economics and

ethics.

6. Failure to properly consider the

rightness of our actions clearly

would be coercive to the individual integrity of (our organization).

7. Perjury or any illegal act ostensibly taken to “protect” the company is wrong. A sale made

because of deception is wrong. A

production quota achieved

through questionable means or

figures is wrong.

8. We pledge ourselves to maintain

complete loyalty to the cooperative that elects us or employs us

and aggressively pursue its

objectives; hold inviolate the confidential relationship between the

individual members of the cooperative and ourselves and the

confidential information entrusted to use thorough the cooperative office; serve all members of

our cooperative impartially, and

provide no special privilege to

any individual members, nor

accept special personal compensation from an individual members, except with the knowledge

and consent of all other members; neither engage in, nor countenance, any exploitation of our

cooperative or profession; recognize and discharge our responsibility and that of our cooperative

to uphold all laws and regulations relating to our cooperative

activities; exercise and insist on

sound business principles in the

conduct of the affairs of our

cooperative; use only legal and

ethical means if we should seek

to influence legislation or regulation; issue no false or misleading

statements to the members or

public; refrain from the dissemination of any malicious information concerning other cooperatives or competitors; accept our

responsibilitv for cooperating in

every reasonable and proper way

with other cooperatives; use

every opportunity to improve

public understanding of cooperative principles; and maintain

high standards of personal conduct.

Source: Iowa Institute

1992; Von der Embse

Industries, 1983.

of coo

J984;

Iperatives,

AGRI

33
References

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Directory of Member

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40
Exercise 1 Understanding the Difference Between Morals and Ethics

Personal Life Behavior

Proper

Moral but Unethical I

Improper

III

Immoral and

Unethical

I

\

Moral and Ethical

Immoral but Ethical

Improper

Based upon this model, give an example for each type of behavior you have witnessed in

your community.

I. Moral, but Unethical

II. Moral and Ethical

III. Immoral and Unethical

IV. Immoral, but Ethical

41
Exercise 2 How Have Ethics Changed in the Past 10 Years?

. 1. Among farmers?

2. Among people in your community?

3. Among all Americans?

4. Among youth and young adults?

5. What has caused these changes?

Why might a manager behave unethically? (e.g., pressure to generate earnings)

Why might an employee behave unethically? (e.g., poor training)

Why might a member behave unethically? (e.g., economic pressure)

I am a (check one): Board of Director

Co-op Manager

Co-op Employee

Co-op Member

42
Exercise 3 Ethics in Cooperatives

Many cooperative members are concerned with what they see as declining ethical standards and behaviors within the cooperative system. Give examples of the types of unethical behavior you are aware of (have witnessed or heard rumored) occurring within cooperatives or among its members today. (You need not identify responsible individuals;

simply describe types of unethical behaviors.)

Director Perpetrated (e.g., asking for special treatment)

Manager Perpetrated (e.g., hiring family or friends)

Employee Perpetrated (e.g., borrowing co-op equipment)

Member Perpetrated (e.g., plugging grain)

I am a (check one): Board of Director

Manager Co-op

Co-op Employee

Co-op Member

4!3
Exercise 4 What Causes Unethical Behavior?

What causes cooperative members to behave unethically? Confusion? Outside pressure?

Lack of personal morals? Give examples of reasons you think co-op members behave

unethically.

Why might a director behave unethically? (e.g., fear of being seen as ignorant)

Why might a manager behave unethically? (e.g., pressure to generate earnings)

Why might an employee behave unethically? (e.g., poor training)

Why might a member behave unethically? (e.g., economic pressure)

I am a (check one): Board of Director

Co-op Manager

Co-op Employee

Member Co-op

44
Exercise 5 Excuses, Excuses, Excuses

There are many reasons (or excuses) why people behave unethically. Here are a few common ones.

l It was necessary (the ends justify the means).

0 It was legal.

l I did it for your benefit.

l I was only fighting “fire with fire.”

l It didn’t hurt anyone.

l Everyone else is doing it.

l I did not gain personally.

l I deserved it.

What are some of the common excuses that you hear from those trying to explain their

unethical behavior?

45
Exercise 6 Is Your Cooperative at Risk?

This describes my cooperative

1 .

2 .

3 .

4 .

5.

6.

7 .

8 .

9 .

If a cooperative normally emphasizes

short-term revenues above long-term

considerations, it is creating a climate

for unethical behavior.

A cooperative that routinely ignores

or violates internal -or professional

codes of ethics is at risk.

A cooperative that always looks for simple

solutions to ethical problems and is satisfied

with “quick fixes” is at ethical risk. .

If a cooperative is unwilling to take an ethical

stand when there is a financial cost to the

decision, it encourages ethical shortcuts.

A cooperative that creates an internal

environment that either discourages

ethical behavior or encourages unethical

behavior is at risk.

When a cooperative usually sends ethical

problems to the legal department, it is at risk.

Any cooperative that looks at ethics solely as

a public relations tool to enhance its image is

at ethical risk.

Any cooperative that treats its employees

differently than its customers encourages

unethical behavior.

Any cooperative that is unfair or arbitrary

in its performance appraisal standards is

at risk.

10. Any cooperative that has no procedures

or policies for handling ethical problems

is at risk.

11 Any cooperative that provides

no mechanism for internal whistleblowing

is at risk.

Never Sometimes Always

46
Exercise 6

continued

Is Your Cooperative at Risk?

This describes my cooperative

12.

13.

14.

Any cooperative that lacks clear lines

of communication with the organization

encourages unethical behavior.

Any cooperative that is only sensitive

to the needs and demands of the

shareholders is at ethical risk.

Any cooperative that encourages

people to leave their personal ethical

values at the office door is at risk.

Total

Never Sometimes Always

1

2 3

2 3

Source: Modified from Cooke’s (1991) 14 Danger Signs

47
Exercise 7 Ethics Checklist

When contemplating actions, consider this “Ethics Checklist. ”

1 .

2 .

3 .

4.

5 .

6.

7.

8 .

Does the contemplated action violate law?

Is the contemplated action contrary to widely

accepted moral obligations such as duties of

fidelity, gratitude, justice, nonmaleficence, or

beneficence?

Does the proposed action violate any other

special obligations which stem from tenets

of cooperative organization?

No

1

1

Yes

2

Is the intent of the contemplated action

harmful?

Are there any major damages to people or

organizations that are likely to result from

the contemplated action? 1

Is there a satisfactory alternative action

which produces equal or greater benefits

to the parties affected than the proposed action? 1

Does the contemplated action infringe upon

the inalienable rights of the consumer (right

to information, to be heard, to choose, and to

redress)? 1 2

. I

Does the proposed action leave another person

or group less well off? Is this person or group

already a member of a relatively under

privileged class? 1 2

Source: Laczniak and Murphy, 1991

48
Exercise 8 Six Organizational Actions To Improve Ethics

Consider what coo

P

erative members and emplo

should each of the allowing do or be responsibY

ees can do to improve ethics. What

e for in your cooperative?

1. The organization must make ethics an integral part of management decisions.

l (ethics management)

2. The organization must distinguish the ethical and moral dimensions of day-to-day

activities within the organization and decide which dimensions (and activities) take

precedence.

l (issue identification)

3. Organizational values should be consistent with the larger culture.

0 values clarification

4. It should be understood that in complex decisionmaking, there is usually more than

one ethical choice.

l (decisionmaking)

5. Organizational and cultural supports must be identified. Ethical judgments should

not be ad hoc; they must be rooted in substantive principles and applied consistently.

0 (organizational support)

6. Decisions imply and require commitment by all stakeholders in the organization.

0 (commitment)

What Is the Role of Each player in Improving Co-op Ethics?

Board Member

Manager

Employee

Member

Source: Von der Embse, 1984

49
Exercise 9 Toward Developing a Code of Ethics

What critical issues should be addressed in a code of ethics for your cooperative?

What key principles would you like to see strengthened in your cooperative?

Compare your responses with the ethics checklist and the samples provided.

50
Exercise 10 A Case Study of Ethics

Please read the attached article from the July 13,1995 Wall Street Journal and answer the

following questions. In this exercise, we are neither attempting to determine the guilt or

innocence of either party nor establishing the truth or falsity of any of the claims, but

rather providing a good case study to discuss ethics.

1. a. What do you perceive as the ethical issues in the article? What are the ethical

issues surrounding the allegations concerning ADM?

b. What about the ethical issues surrounding Mr. Whitacre’s behavior?

c. What ethical issues are raised in the community response?

2. What accounts for the differing ethical positions presented in this article?

3. What alternative actions might have been followed to avoid this situation?

4. How do you feel about the statement, “He is not an upright citizen or he wouldn’t

be ratting on his boss. If you’re being paid by an employer, you owe allegiance

until you don’t want to work there anymore. Then you leave.”

51
Reprinted by Permission ofi The Wull Street Journal 0 Dow Jones & Company All Rights Reserved Worldwide July 13, 1995

You Dirty Rat, Says Decatur, Ill., of Mole at Archer-Daniels

People Think Mark Whitacre Betrayed Them and Ask Why He Turned to FBI

by Carol Quintanilla and Anna D. Wilde

Staff Reporters of The Wall Street Journal

DECATUR, Ill. - How could Mark E.

Whitacre do such a thing?

Since Monday morning, that has been

the question raised again and again in the

taverns, churches and living rooms of this

Midwestern town of 84,000.

Mr. Whitacre is the 38-year-old

Archer-Daniels-Midland Co. executive and

model citizen who, this newspaper disclosed Monday, has been a secret FBI

informant for the past three years. The

president of Archer-Daniels’ BioProducts

division secretly taped conversations of his

colleagues as part of a criminal investigation of the grain-processing giant and others. No charges have been filed.

The news has jolted this Bible Belt

community, where the company employs

one of every 35 residents. At radio station

WSOY-AM, the Archer-Daniels situation

is all that callers want to talk about. “I’m

surprised and shocked,” says one woman

caller from Decatur, “because I take a lot

of pride in ADM.” Indeed, the mood here

appears to have turned decidedly against

Mr. Whitacre, a Rotary Club speaker and

new Millikin University trustee, known for

adopting troubled kids.

And there isn’t much forgiveness,

even at church. “The biggest feeling here

right now is a sense of being violated,” say

the Rev. Randy DeJaynes, pastor of Christ

Lutheran Church. “It’s as though I became

a good friend of your family, came over to

your house all the time, then started rifling

through your drawers. It’s not an intruder

though. It’s someone who’s trusted - by a

company and by an entire community.”

On the Table

Mr. Whitacre was the big topic at

Christ Lutheran’s monthly council meeting

Tuesday night, overshadowing such issues

as the church’s plans to buy an air-conditioning system and hold a garage sale.

“Why didn’t he just quit?” asks council

member Bob Dobrinick. “That’s what I

would have done. I’m not about to be a

spy .”

Says another of the seven board mem52

bers: The idea that the feds spy on the

community “frightens me. They’re about

as underhanded as anybody.”

At Nick’s Auto Body, co-owner Nick

Vanderlaan says Mr. Whitacre “is not an

upright citizen or he wouldn’t be ratting on

his boss. If you’re being paid by an

employer, you owe allegiance until you

don’t want to work there anymore. Then,

you leave.”

And in this town, where ArcherDaniels is king, many citizens would rather

judge Mr. Whitacre a rat than contemplate

that the company might be a price-fixer.

“ADM has a reservoir of goodwill and

respect,” says Ron Diamond, a retired

Caterpillar, Inc. executive. “I think people

want to give them the benefit of the

doubt.”

One reason is that Archer-Daniels’

largess reaches far and wide. The company

has sponsored everything from the Decatur

Municipal Band, which plays Monday

nights in Central Park, to the national

champion Decatur Pride Fast-Pitch Softball

Team.

A smudge on Archer-Daniels’ reputation could hardly come at a worse time in

this community, where Abraham Lincoln

practiced law and R.R. Montgomery

invented the fly swatter. Workers at

Decatur’s other major employers - Tate 8r.

Lyle PLC’s A.E. Staley Manufacturing Co.

subsidiary and Caterpillar - have been

locked out or on strike for as long as two

years.

All that is left, says Merrill Lynch

broker Ray Schmitt, is Archer-Daniels.

“They’re kind of our baby,” he says.

“They’re like the angel around here.”

That explains why the sharp drop in

the company’s stock - share prices have

slid 15% since Friday - has become a local

tragedy in more than one way. Many residents are shareholders and have been

flocking to brokerage houses seeking

advice about their investment nest eggs.

“I’ve done a lot of hand-holding - literally,” Mr. Schmitt says.

Neighboring Defense

Jack Wyse, who owns 1,050 shares,

says he decided to hang on to them. But the

owner of Jimmy Ryan’s Conference Room,

a local bar-and-grill, is angry at Mr.

Whitacre. “He betrayed ADM,” he says.

“How in the world could a man do what he

did to that company?”

The mayor of Moweaqua, Ill., George

Forston, may have an answer. He says that

Mr. Whitacre, who lives in the town located 17 miles from Decatur, “isn’t a person

who feels he or anyone else should be

above the law. If there’s anything the town

can provide, we’ll do it.”

Still, even Mr. Whitacre’s close

friends admit they can’t fathom why he did

what he did. “I’m dumbfounded,” says

Curtis McCray, president of Millikin

University. He says he has talked to Mr.

Whitacre’s wife, Ginger, but hasn’t spoken

with his university trustee for an explanation. He is certain, though, that Mr.

Whitacre had a good reason.

Indeed, in tiny Moweaqua (pop.

1,922), Mr. Whitacre is still considered a

nice guy. Residents describe Mr. Whitacre

as a friendly man who waves at passersby

from the lawn of his palatial estate-once

owned by Archer-Daniels Chairman

Dwayne 0. Andreas.

Leading Citizens

The Whitacres have earned their role

as leading citizens, residents say. Mr.

Whitacre and his wife have given generous

donations to town fund drives for local

cancer patients. They often can be spotted

eating breakfast at Ye Olde Towne Dining

Room on Main Street. And Mrs. Whitacre

shops at the local supermarket.

Some now worry about Mr.

Whitacre’s career. “He’s probably done the

right thing,” says Terry Flatt, a vice president of Ayars State Bank, “but I think it’ll

hurt him in the future.”

Adds 70-year-old Ed Paine, a retiree: “I

don’t know if I would have had the guts. Mr.

Whitacre’s not furthering his career much,

but he’s certainly a man of his convictions.”