Agency Theory

LEBANESE AMERICAN UNIVERSITY

SCHOOL OF BUSINESS

Managers’ Unethical behaviour

By

Maya Foz (201200560)

Professor:

Dr. Abdallah Dah

Spring 2014

Introduction

During the 21st century, several measures caused an economic disaster that led to the bankruptcies of numerous large corporations in the world (Bingham, et al., 2010).The financial crisis in 2000 has raised doubts about managers’ ethical practices in the business sector. Researchers have been faced with the challenge to evaluate the causes behind managers’ unethical practices and its impact on the organization’s performance. Some believe that managers engage in unethical acts that seek to value the organization while others believe that managers involve in unethical practices that satisfy their own needs. Thus, many studies have been conducted to explain this matter. Some theorists hypothesised that organizational identification encourages dysfunctional actions. (Bingham, et al., 2010).

Organizational identification is the concept that provides an explanation of how people behave within the firm. (Hogg, Terry, & White, 1995). According to Bingham, et al., (2010), managers who intensely identify with their organization possibly may decide to neglect ethical standards and participate in doings that benefit the organization at the expense of outsiders. For instance, managers may destroy implicating documents in order to protect their organization, however once this error is detected by auditors it will cause severe damages.

However, many other studies, have found that some managers behave unethically to satisfy their personal needs at the expense of the organization’ ones. Hence, researchers have identified four different assumptions that explain the causes behind managers’ self-interest behaviour and its impact on the organization’s performance: The fear of managers to engage into ideal investment and risk opportunities, the managers’ intention to maximize their own financial benefits, the managers’ intention to raise bonuses and the problem of asymmetric information between managers and owners.

1: The fear of managers to engage into ideal investment and risk opportunities

Otungu,O (2011) confirmed that managers sometimes may turn down some investment opportunities because they prefer not to take risks that may endanger their pay or position; thus managers decide to consume some corporate properties in the form of bonuses and avoid engaging into ideal risk situations. By doing so, outside