Human Resource Management Practices and Ethical Climate in the Pakistani Banking Industry: The Role of Corporate Sustainability and Organizational Trust

Abstract

Events involving ethical scandals in companies such as AIG, Countrywide Financial, and Lehman Brothers. Researchers point at dysfunctional ethical environments as one of the main reasons for illegal or unethical behavior, However, past research leaves several gaps in our understanding of organizational conditions and managerial interventions that can affect the establishment of ethical climates. In particular, the role of human resource management (HRM) practices was not fully explored. Hence, this study aims to examine the impact of firm HR practices on the ethical climate in the banking sector of Pakistan. We proposed a theoretical framework, by modifying Guerci et al. (2015) model to include a mediatory role of Corporate Sustainability and Organizational Trust, and applying it to the banking sector of Pakistan. HRM practices were classified as ability-enhancing (i.e. recruiting, selection and training) and opportunity-enhancing (i.e. job design, industrial relationships, and employee involvement), and motivation-enhancing (i.e. performance management, compensation, and incentives). These HR practices improve Corporate Sustainability, sustainable businesses would develop their trust within their employees, and this trust makes the employee more secure in standing up to their morals. Hence, the ethical climate would improve from egoism towards Benevolence and Principled organization. Hence, the Ethical climate was classified into Egoism, Benevolence, and Principled organization. Empirical validity was established by conducting a survey using a close-ended questionnaire. Data was collected from 349 bank employees and analyzed using confirmatory factor analysis and structured equation modeling. The result suggested that all three forms of HR practices seem to positively affect both benevolence and egoism at the same time. Moreover, motivation enhancing HR practices also positively affects the level of principled organization. Findings also showed the first-order mediation of Corporate Sustainability and second-order mediation of trust in the effect of ability and opportunity on principled organization relationships. Ability also directly affects trust in Corporate Sustainability and that would both make the organization more principled. Results also suggested an insignificant effect of motivation enhancing HR practices on corporate sustainability, and Corporate sustainability and trust on benevolence and egoism. Hence, to achieve an ethical climate, banks should focus more on recruiting, selection and training as compared to motivation-enhancing practices (i.e. performance management, compensation, and incentives)