The Power of Ethical Work Climates MARSHALL SCHMINKE ANKE ARNAUD MARIBETH KUENZI O n the afternoon of July 30, 2002, the U.S. business environment was profoundly changed. The day was blistering hot in Washington, DC, with a relentless sun push- ing temperatures to 97 8F. However, the nation’s capital was not the only place feeling the scorching summer heat. Earlier that day, President George W. Bush signed into law the Sarbanes–Oxley Act of 2002, a set of sweeping reforms aimed at cleaning up cor- porate corruption and improving corporate accountability and ethics. In doing so, he turned up the heat on the management team of every major public corporation in the United States. Sarbanes–Oxley contains a broad set of regulations aimed at improving corporate financial accountability and ethical perfor- mance. However, it has not put an end to financial and ethical scandals among Amer- ica’s corporate elite. Rather, it is becoming increasingly apparent that creating and maintaining ethical organizations depends on more than external regulatory pressures and formalized programs to respond to those pressures. Ethical organizational climates are needed as well. In this article, we examine the power of ethical work climates. We begin by exploring the events that gave rise to the Sarbanes– Oxley legislation. We then examine a critical link between external regulation and inter- nal ethical action: ethical work climates. We continue by reviewing the psychology of ethical decision making and how it trans- lates to the organizational setting. Finally, we explore the implications of these insights for practicing managers. In all, our goal is to describe the importance of ethical work cli- mates as a supplement to formal regulatory pressures for creating and maintaining ethi- cal organizations. SARBANES–OXLEY: GENESIS, RATIONALE, AND RESULTS The Sarbanes–Oxley Act grew from a collec- tive frustration on the part of shareholders and institutional investors concerning the lack of accountability and ethicality on the part of corporate leaders. In the mid-1990s, amidst a booming economy, millions of American families placed their savings and retirement funds in the stock market. How- ever, in the second quarter of 2000, the bub- ble burst. Stock prices plummeted and investors fled the market. In subsequent months, numerous revelations emerged of systemic problems in American financial markets and institutions. It soon became apparent that elements of the boom market had emanated from accounting irregularities and fraud. The ensuing scandals rocked the business and popular press, as firms like Enron Corp., WorldCom Inc., Tyco Interna- tional, and Adelphia Communications Corp. became household names. In 2001, Enron was one of the world’s leading electricity, natural gas, pulp and paper, and communications companies. Iro- nically, Fortune magazine had named Enron ‘‘America’s Most Innovative Company’’ for six consecutive years. At the end of 2001, it was confirmed that Enron’s reputation for innovation had taken a dark turn. Its reported financial condition was revealed to have been sustained largely by crea- tive—and questionable—accounting prac- tices. Tyco, which manufactures a wide Organizational Dynamics, Vol. 36, No. 2, pp. 171–186, 2007 ISSN 0090-2616/$ – see frontmatter ß 2007 Elsevier Inc. All rights reserved. doi:10.1016/j.orgdyn.2007.03.005 www.organizational-dynamics.com 171