Perceived Managerial Discretion: An Analysis of Individual Ethical Intentions

Abstract

The abuse of managerial discretion and the failure of managers to exercise discretion can be very costly to organizations. For this reason, there has been a renewed interest in understanding managerial discretion (Buchholtz et al., 1999; Carpenter and Golden, 1997; Finkelstein and Boyd, 1998; Pegels et al., 2000; Thomas and Peyerefitte, 1996). The fraudulent reporting of financial data by managers at Enron Corporation illustrates what can happen when managers step beyond appropriate discretionary boundaries (Barnes et al., 2002), while the current litigation embroiling Arthur Andersen represents what can happen when managers fail to exercise discretion when they are faced with ethical issues (Schmitt, 2002). This research focuses on the latter situation--the discretion managers perceive is available to them to exercise in ethical situations that may have important financial and reputational implications to their organization. Discretion is based on the belief that one has responses available with which to influence the environment (Thompson, 1981). Individual perception influences whether or an individual believes there are actions available to him or her. Thus, in the present study, perceived discretion is defined as perceived latitude of action. Constraints on cognition, identified as bounded rationality (March and Simon, 1958), may limit the amount of information that an individual can process or consider when making a decision. Often, potential appropriate responses are part of an individual's discretionary set. For example, in Crimes of Obedience, Kelman and Hamilton's (1989) study of the My Lai incident in Vietnam suggests that after soldiers were given direct orders to shoot civilians, not shooting (i.e., disobeying the order), was considered by some of the soldiers as an available option. This result was similar to Milgram's (1964, 1974) findings that though some of his subjects abandoned the experiment which involved using what they believed were a series of shocks to punish learners, others did believe they had the discretion to stop. Discretion is important in organizations as managers are often trained to identify ethical dilemmas which require a discretionary response, and the responses are also clearly proscribed (Kurland, 1995, 1996; Wood, 1991). The failure to act, or to identify the need for action, can be extremely costly to the organization. It is in these instances that managerial beliefs about available options and th e consequences attached to them are likely to influence managerial action. Beliefs about future events, awareness of alternatives, and beliefs about consequences attached to alternatives underlie discretionary behavior (Hambrick and Mason, 1984). While ethical considerations may be imbedded in all decision making, many organizational situations present unique dilemmas that require individuals to grapple with moral, social and legal issues (Preston and Post, 1975). When faced with these ethical dilemmas, managers are often without direction to inform them about how to respond to internal and external events. The first step to understanding behavior in these situations is investigating the perceptions tied to the behavior (Carpenter and Golden, 1997). Thus, the present research investigates individual differences in perceived discretion specifically in ethical situations. As discretion has been consistently defined in the management literature as latitude of action (Finkelstein and Boyd, 1998), the emphasis here is on the single behavioral action or actions a manager may choose to take from within this range, but on the discretionary range of behaviors that managers perceive are available to them. In this article, I first examine previous research on discretion, then present a model of individual discretion, and propose hypotheses focused on a portion of this model--perceived discretion. …