Ethical Organizational Culture and How It May Affect Innovation

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The aim of this paper is to assess ethical organizational culture and how it may affect innovation within an organization. Ethics in business has evolved to become one of the critical factors that define the success of a firm in the market. According to Riivari and Lämsä (2014), when a firm is developing its operational strategies, it has the responsibility of ensuring that it remains ethical to customers, employees, the government, suppliers, and the general public. It has to ensure that the process of generating profit does not unfairly lead to the suffering of the stakeholders mentioned above. Innovation offers unique ways of achieving success in the market without embracing unethical practices. Choi et al. (2013) explain that the innovativeness of a firm depends on the culture that it embraces. Organizational culture may inhibit or promote innovation in a firm. The ethical practices that a company embraces may also define the innovation path that it takes as it seeks to lower the cost of production and increase profitability.

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An unethical organizational culture’s adverse effects have severe implications for individuals and organizations and may include more than just the risk of a corporate scandal. An organization’s ethical culture may directly affect the process of innovation (Riivari & Lämsä, 2014). While an understanding of organizational ethical culture is necessary to promote the achievement of organizational outcomes, it is also important to recognize the role that ethics plays in an organization’s productivity, service, and overall quality. The article, Does it Pay to Be Ethical? Examining the Relationship between Organisations’ Ethical Culture and Innovativeness conducts an empirical investigation of the relationship between an organization’s ethical culture and organizational innovativeness. The investigation sets out to determine whether an organization’s ethical culture is positively or negatively associated with organizational innovativeness.

Review of Literature

This article reviewed a number of studies related to organizational innovativeness; yet found that the reports were very generalized and rarely discussed ethical themes. Only one literature review by Baucus et al. (2008) provided information linking unethical behaviors such as taking high risks, disregarding rules, and challenging authority to organizational creativity and innovation problems. Other literature reviews revealed potential links to the issues of ethics and innovation, with small sample sizes; indicating a further need to investigate the subject.

Ethics and Business Sustainability

Embracing ethical practices is often critical in enhancing the sustainability of a business entity. McKneally (2011) explains that a business may be tempted to engage in an unethical practice when the opportunity arises to enable it to make abnormal profits within a short period. The unethical practice may be in the form of charging unreasonably high prices, lowering the overall quality of products, exploiting employees, polluting the environment, avoiding taxes, or any other practice that goes against the standard culture and practices in the society.

Unethical practices may compromise the sustainability of a business, especially when competition is high in a given market. When customers realized that the company was exploiting them, they will easily switch to products and services offered by the rivals in the market. In modern society where social media has become a powerful tool of communication, customers can easily share their unpleasant experiences on these platforms, which will significantly affect the brand image in the market. Customers will deliberately avoid the brand even if the unethical practice is stopped.

When the unethical practice was directed against employees in the form of low pay, long hours of work, or any other form of abuse, then those who are highly skilled will leave the firm for other companies that they will feel respected. According to Riivari and Lämsä (2019), when a firm is faced with competition in the market, one of its most important resources is a team of highly skilled employees who can develop innovative strategies for addressing challenges that may arise. When these skilled workers are lost to the competitors, then the firm will lose its competitiveness in the market.

Every organization has a responsibility to protect the environment. One of the three pillars of sustainability is the environment. A firm whose operations threaten the environment cannot be sustainable. The more those activities pollute the environment, the more they will lose their appeal and the ability to operate effectively. Sometimes a firm may consider evading tax or any other requirement put in place by the government. Such a practice may easily lead to serious legal consequences for a firm. As such, ethical behavior is critical for ensuring that a firm’s operations are sustainable. Innovation can only flourish when the operations of a firm are sustainable.

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Ethics and Innovation

In the current competitive business environment, innovation is the only way through which a firm can achieve sustainability. Awan and Akram (2012) believe that innovation is critical in lowering the cost of production in a company. It helps in ensuring that new effective methods of production are embraced. New technologies help in minimizing waste and reducing the time within which products are made available. Innovation is also critical in improving the overall quality of products. When a firm conducts market research and identifies an emerging trend or taste in the market, it can use innovative ways to develop a new product that matches the new product.

The problem that sometimes arises is that ethics and innovation sometimes have conflicting goals. Ethical practices sometimes require a firm to ignore the need to generate profits (Chang, 2011). In the process of helping humanity, it may be necessary to address human needs in ways that may not even yield profits. On the other hand, creativity and innovation involve embracing practices that may help a firm to lower its production cost and increase its profitability. When a firm develops an innovative approach to production that lowers the need for human capital, it may be forced to restructure and downsize its workforce. The process of laying off part of the employees may be considered unethical practice, especially if it is done within a short period when the affected group least expected it. Sustaining these employees just to ensure that the firm is ethical may defeat the very spirit of innovation. The increased unemployment created when many companies embrace new technologies of production may become a social concern.

Innovation has also been a cause of concern when it comes to the privacy of customers in the market. Leading corporations such as, e-Bay, and Google have developed unique ways of knowing the needs of every individual. They collect and keep data on individuals’ preferences through the sites they visit. They also keep track of purchases that individuals make regularly (Brusoni & Vaccaro, 2017). Although this innovation has enabled these large corporations to understand individuals’ needs in the best way possible, there is also the concern of privacy. Sometimes an individual may purchase an item secretly because of the fear of societal judgment. However, this giant corporation may not understand their concerns. They may start popping advertisements about the item purchased or related products at a time when it is least expected. The breach of consumers’ personal space is a major concern that these companies are yet to address. They are developing even more sophisticated strategies to collect more personal data to enable them to deliver personalized products to their customers. In so doing, they are breaching the privacy code, which is an ethical practice.

Description of the Research

A quantitative research method was used for this study; empirical data was collected using a standardized questionnaire sent electronically and on paper to employees at three separate organizations. The organizations represented both public and private sector organizations that operate in various industries in Finland. A total of 1395 surveys were sent out; 719 people responded. Each organization’s ethical culture was measured with a questionnaire using the CEV scale; 58 items encompassing eight dimensions of organizational virtues: clarity, consistency of the supervisor, consistency of management, feasibility, supportability, and transparency. Organizational innovativeness was measured with an additional questionnaire that addressed product innovation, market innovation, behavioral innovation, and process innovation.

Hypotheses of the Study

The study’s two hypotheses, stated clearly, are:

  • An organization’s ethical culture is positively related to its organizational innovativeness (Riivari & Lämsä, 2014).
  • Different dimensions of an organization’s ethical culture are related to varying dimensions of its organizational innovativeness (Riivari & Lämsä, 2014).

The probable sources of error that could have influenced the study results were the demographics of the respondents. Differences such as gender, age, education level, and position level in the organization could impact each person’s responses and could not be controlled. The survey results were analyzed using linear regression analysis, a commonly used statistical technique.

Results and Discussion

The analysis identified a positive link between ethical culture and innovation in all three organizations at 28%, 29%, and 48%, supporting Hypothesis 1 and further indicating that the connection between culture and innovation can vary in each organization (Riivari & Lämsä, 2014). Additionally, the analysis revealed that management’s consistency and accountability play an essential role in the behavioral process and strategic innovativeness, providing distinct support for Hypothesis 2 (Riivari & Lämsä, 2014). The results intimate, though, that different virtues of ethical behavior will also vary between organizations. Further, organizational innovativeness strongly depends on senior leadership’s conduct and actions; actions must be consistent with what is communicated to encourage ethical behaviors and innovation. The study is limited in scope, as it only portrays an assessment of one geographical area and no other social groups.

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How Ethical Organizational Culture Affects Innovation

Ethical organizational culture has a direct impact on innovation within a firm. Jordan (2014) explains that ethical behavior emphasizes the need to treat all employees with respect. When employees feel respected and valued within the firm, they will become satisfied with their work and committed to improving its overall performance. Innovation resides in employees, irrespective of their position within the firm or level of education. Through experience, they learn of new ways of undertaking their duties to achieve the best outcome. However, their level of creativity depends on how well an environment is created for the same and the level of their satisfaction. Employees who feel contented and valued tend to be creative in undertaking their duties. They will make an effort to reaffirm their ability to deliver improved performance. They will always try new ways of undertaking their responsibilities to achieve better results.

Ethical culture often pushes a firm to embrace innovation as a way of lowering its production cost without compromising the quality of its products or engaging in illegal practices such as tax evasion. Reijers et al (2018) observe that when the competition gets stiff, firms tend to use harmful strategies such as price wars. In such an environment, a firm must find ways of lowering production costs to ensure that it can charge low prices without hurting its profitability. The easiest way out of such a challenging environment is to embrace unethical behavior such as lowering the quality or quantity of the product, reducing expenses in market research, and other practices. However, a firm that embraces high standards of ethical behavior will have to ensure that it uses other alternatives of lowering its cost of production. It involves using innovative strategies to lower the cost such as embracing new production mechanisms. A firm may also consider using online platforms such as social media to conduct their research because it is cheaper than having to send a team of researchers to conduct the study. Employees, especially those who are in positions of management, will have the pressure of finding unique ways of achieving the vision of the organization despite the unique challenges that the firm faces. The only way out of such a challenging environment is to embrace creativity and innovation in their operations.

Ethical organization culture may sometimes inhibit innovation despite the existence of the numerous benefits discussed above. According to Brusoni and Vaccaro (2017), not all innovations may have a pleasing effect on employees. The goal of most innovation is to lower the cost, improve quality, enhance productivity, and make work easy within a firm (Chang, 2011). When a new technology is introduced, it may involve reducing the size of the workforce. Revolutionary innovations such as artificial intelligence (AI) and robotics have had a massive positive impact on the manufacturing sector. They have lowered the cost of production, reduced the time used to make products, enhanced market prediction, and eliminated the massive generation of waste by enhancing precision. However, a section of society has criticized it as being unethical, especially because of the mass unemployment that it has created. If a firm embraces rigid ethical practices, it may be unable to remain competitive in its operations.


The article concludes that the study’s findings support research conducted by others, indicating an organization’s ethical culture impacts business outcomes. At the same time, the study further reveals the association between ethical culture and organizational innovation and a link to the various dimensions of ethical culture and innovation. The information in this study clarifies that organizations must be aware of the elements of ethical culture relevant to an organization to achieve the specific outcomes and effectiveness it desires.


Ethical organizational culture has become a critical factor in enhancing the sustainable growth of an organization. The analysis above shows that ethics has a direct positive impact on innovation in an organization. It promotes the creation of an enabling environment for workers to be creative in undertaking their duties. Satisfied employees who feel respected and valued often tend to be creative when undertaking their normal responsibilities. Instead of using unethical strategies that involve exploiting employees or customers to achieve specific goals, firms find it necessary to use emerging technologies to enhance quality, lower cost and reduce the time that it takes to make products available for customers. The culture is a reminder to all stakeholders that the success of the firm must be based on sustainable ethical strategies.


Awan, K., & Akram, M. (2012). The relationship between Islamic work ethics and innovation capability and knowledge sharing plays a moderation role. International Journal of Economics and Management Sciences, 1(8), 34-48.

Baucus, M. S., Norton, W. I., Baucus, D. A., & Human, S. H. (2008). Fostering creativity and innovation without encouraging unethical behavior. Journal of Business Ethics, 81(1), 97-115.

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Brusoni, S., & Vaccaro, A. (2017). Ethics, technology and organizational innovation. Journal of Business Ethics, 143(1), 223-226.

Chang, C. H. (2011). The influence of corporate environmental ethics on competitive advantage: The mediation role of green innovation. Journal of Business Ethics 104(1), 361–370.

Choi, B., Moon, H., & Ko, W. (2013). An organization’s ethical climate, innovation, and performance: Effects of support for innovation and performance evaluation. Management Decision, 51(6), 1250-1275.

Jordan, S. (2014). The innovation imperative: An analysis of the ethics of the imperative to innovate in public sector service delivery. Public Management Review, 16(1), 67-89.

McKneally, M. (2011). The ethics of innovation: Columbus and others try something new. The Journal of Thoracic and Cardiovascular Surgery, 141(4), 863-866.

Reijers, W., Wright, D., Brey, P., Weber, K., Rodrigues, R., O’Sullivan, D., & Gordijn, B. (2018). Methods for practicing ethics in research and Innovation: Critical analysis and recommendations. Science and Engineering Ethics, 24(1), 1437–1481.

Riivari, E., & Lämsä, A. (2014). Does it pay to be ethical? Examining the relationship between organizations’ ethical culture and innovativeness. Journal of Business Ethics, 124(1), 1-17.

Riivari, E., & Lämsä, A. (2019). Organizational ethical virtues of innovativeness. Journal of Business Ethics, 155(1), 223-240.

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