ARTICLE TITLE PAGE:An Organization’s Ethical Climate, Innovation, and Performance: Effects of Support for Innovation and Performance Evaluation

1. What is the main purpose of the paper? Explain the main idea of the paper.

The purpose of this study is to examine how an organization’s ethical climate positively relates to its financial performance by considering an organization’s innovation, a support for innovation and performance evaluation.

The main idea of the paper is to explain the theoretical reasons why an ethical climate positively affects organizational performance at the organizational level through integrating the literature from various fields, such as stakeholder theory, organizational innovation, and organizational behavior.

2. What is the issue that makes the author conduct the study?

The issue that makes the author to conduct the study is to indicate that an organization’s ethical climate can be a critical predictor of its innovation as well as financial performance. Therefore, the organizations should pay attention to employees’ perceptions of the organization’s ethical climate.

3. What are the main variables explained by the author in the paper. Summarize those variables.

There are 6 main variables explained by the author in the paper. Except financial performance, all variables were self-reported by employees and managers. Employees responded to questions about the organization’s ethical climate and support for innovation. Managers responded to questions about the organization’s innovation and performance evaluation.

1st variable: An organization’s ethical climate. The ethical climate was assessed using six items adopted from the measure of Victor and Cullen (1988) by focusing on a benevolent ethical climate. Sample items include “In this organization, it is expected that I will always do what is right for the stakeholders,” “Employees in this organization have a strong sense of responsibility to the community,” “The organization takes firm action against any misconduct,” and “The organization provides equal opportunities to participate and conducts business in a fair and transparent manner” (α= 0.90).

2nd variable: An organization’s innovation. The organization’s innovation is defined as the employees’ perception of the degree of the organization’s efforts to differentiate products or services compared with its competitors. The five items were adapted from the measure developed by Scott and Bruce (1994). Sample items read “The company searches out new technologies, processes, techniques, and/or ideas,” “The company develops adequate plans and schedules for the implementation of new ideas,” and “There is a steady stream of innovative products/services being developed, which competitors cannot conceive” (α= 0.77).

3rd variable: Support for innovation. The organization’s support for innovation is defined as the degree to which the management encourages employees to try new things and to take risks. Support for innovation was assessed by the measure of Koys and Decotis (1991). Sample items are, “My leader encourages me to take risks by trying new things,” “My leader encourages me to develop my ideas,” and “My leader encourages me to find new ways around old problems” (α= 0.84).

4th variable: Performance evaluation.Zainorin bin Ali

UUM Matric No: 95191

ARTICLE TITLE PAGE:An Organization’s Ethical Climate, Innovation, and Performance: Effects of Support for Innovation and Performance Evaluation

Performance evaluation is the degree to which employees perceive that their performance evaluation is related to long-term based performance. Performance evaluation was assessed by adopting the measure developed by Delery and Doty (1996). Sample items are, “Performance related to long-term performance plays an important role in deciding my compensation” and “My performance is more often measured with objective and quantifiable results” (α= 0.63).

5th Financial performanceWe used objective measures of financial performance. Sales and revenue data for four years – 2006, 2007, 2008, and 2009 – were obtained from the KRX, which provides the financial information for all public companies in South Korea. As noted previously, we obtained the sales and revenue data for the financial performance of the 21 non-public subsidiaries, with the support of each subsidiary. The average growth rates of sales and revenue for the three years of 2007, 2008, and 2009 were used as financial performance. Meanwhile the sales and revenue of 2006 was used as a control variable to accurately examine the effects of ethical climate on financial performance. The mean of the average growth of sales was 5% (SD= 9%), and the mean of the average return on sales was 2% (SD=4%).

How the author conduct the study?

The data for this study was obtained from a South Korean conglomerate. The conglomerate is a global company which has approximately fifty subsidiaries in various industries such as electronics, mobile communications, chemical, international business, and telecommunication.

The HRM team at the headquarters sends an email including the survey purpose and questionnaires to all employees and managers. The survey is conducted on March each year, and lasts over a period of three weeks.

Survey questionnaires asked about their organization, and the survey used referent-shift approaches (Castro, 2002). All items were rated by using a five-point Likert-type scale ranging from strongly disagree (1) to strongly agree (5).

In order to confirm the validity and factor structure, exploratory and confirmatory factor analyses were conducted by using SPSS 12.0 and AMOS 7.0. Each analysis was performed by managers’ and employees’ response, respectively.

How many sample that he studied and what is the unit of analysis. How do the author test his/her hypotheses.

Data were collected from employees and managers of 41 subsidiaries of a conglomerate in South Korea through survey questionnaires.

In order to obtain the data for this study, one of the authors contacted a key person in the HRM team at the headquarters and explained the purpose of this study. They asked permission to use the data regarding the survey results and financial performance. First, they acquired the survey results conducted in 2007 for

Zainorin bin AliUUM Matric No: 95191

ARTICLE TITLE PAGE:An Organization’s Ethical Climate, Innovation, and Performance: Effects of Support for Innovation and Performance Evaluation

the 41 participating subsidiaries. The total sample consisted of 564 managers and 35,721employees. The average response rate was 76% (SD=10.5%) with a range of 51% to 96% by subsidiary. Second, in the case of non-public subsidiaries, the sales and revenue data for four years – 2006, 2007, 2008, and 2009 – were obtained each subsidiary, and financial data for public subsidiaries were obtained from the KRX (Korea Exchange).

What are the findings of the study?

The results indicate that an organization’s ethical climate is positively related to financial performance, and its positive relationship is mediated by an organization’s innovation. The result also shows that a support for innovation has the moderating effect, such that the positive influence of an organization’s ethical climate on its innovation increases when a support for innovation is high. However, this study fails to find the moderating effect of performance evaluation.

What is your comment regarding the paper?

The purpose of this study is to examine how an organization’s ethical climate positively relates to its financial performance by considering an organization’s innovation, a support for innovation and performance evaluation. This study attempted to explain the theoretical reasons why an ethical climate positively affects organizational performance at the organizational level through integrating the literature from various fields, such as stakeholder theory, organizational innovation, and organizational behavior.

As the importance of ethical climate as a source of competitive advantage has increased (Buller and McEvoy, 1999), many previous studies have assumed that an organization’s ethical climate would lead to higher organizational performance. However, the empirical findings on this relationship are somewhat mixed and the theoretical reasons are not sufficiently articulated. Moreover, prior studies have been usually conducted by using the perceived ethical climate and performance at the individual level (e.g. Morris, 1997).

The results showed that an organization’s innovation mediated the positive relationship between an organization’s ethical climate and financial performance, and such relationship was stronger for organizations with a high level of support for innovation. In summary, this study contributes to the ethical climate literature by theoretically explaining a) why an organization’s ethical climate leads to financial performance, b) examining the mediating effect of an organization’s innovation, and c) verifying the moderating effect of support for innovation.

This study also provides practical implications for organizations in developing countries such as South Korea by showing that an organization’s ethical climate can be an important predictor of financial performance as well as an organization’s innovation.

Zainorin bin AliUUM Matric No: 95191