Chapter 1

The Importance of Business

Ethics
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 Why differentiate between
rules/policies/law and ethics?
The difference between an ordinary decision and an
ethical one is the point where rules no longer serve.
Values and judgment play a key role in ethics
decisions.
Employees need a “buffer zone” of
expected ethical behavior.

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 Business Ethics
Comprises principles and standards that guide behavior in
the world of business
Whether a specific behavior is ethical or unethical is often
determined by stakeholders:
– Investors
– Employees
– Customers
– Interest groups
– Legal system
– Community

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 American Distrust of Business
80%
American business is too
70% concerned about profits and
not concerned about social
60% responsibility

50% If the opportunity arises, most

businesses will take advantage
40% of the public if they feel they
will not be found out.
30%
Even long-established
20% companies cannot be trusted
to make safe, durable products
10% without government
intervention.
0%
Source: Data from Yankelovich Partners Inc., Point, February 2005

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 Ethics and social responsibility
have distinct meanings...
Social responsibility is the obligation a business assumes
to maximize its positive effect while minimizing its negative
effect on society.
Social responsibility consists of the following
responsibilities:
– Economic (satisfy investors)
– Legal (obey the law)
– Ethical (expected activities and behaviors)
– Philanthropic (desired activities and behaviors)

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 Why study business ethics?
Reports of unethical behavior are on the rise.
Society’s evaluation of right or wrong affects its
ability to achieve its business goals.
Studying business ethics is a response to FSGO
and stakeholder demands for ethics initiatives.
Individual ethics is not enough.
Studying business ethics helps identify ethical
issues to key stakeholders.

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 Ethical Issues on the Rise
Increased awareness of:
– Accounting fraud
– Insider trading of stocks and bonds
– Falsifying of organizational documents
– Deceptive advertising
– Defective products
– Bribery
– Employee theft

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 A Timeline of Ethical and Socially
Responsible Concerns

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 Before 1960: Ethics in Business

Theological discussions of ethics emerged:

– Ethics could be found in religious books.Catholic social
ethics included a concern for morality in business,
workers’ rights and living wages.
– Protestants developed ethics courses in their seminaries
and schools of theology. (Also, the Protestant work ethic
encouraged frugality and hard work.)

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 The 1960s: The Rise of Social
Issues in Business
Societal social consciousness emerged
– As well as an anti-business sentiment
There come a new era of consumerism
– Consumer have rights to safety, to be informed, to
choose, and to be heard
Consumer protection groups fought for
consumer protection legislation
– Ralph Nader

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 The 1970s: Business Ethics as an
Emerging Field
Business professors began to write about social
responsibility.
Philosophers became involved in business ethics.
Businesses became more concerned with their public image
and addressed ethics more directly.
Conferences were held and centers developed.
Issues:
– Bribery – Product safety
– Deceptive advertising – Environment
– Price collusion
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 The 1980s: Consolidation

Membership in business ethics organizations increased.

Ethics centers provided:
– Publications, courses, conferences and seminars
Firms established ethics committees.
Defense Industry Initiatives emerged and became the
foundation for the Federal Sentencing Guidelines for
Organizations
– Corporate support for ethical conduct

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 The 1990s: Institutionalization
of Business Ethics
The Federal Sentencing Guidelines for
Organizations set the tone for ethical
compliance.
These took preventative actions against
misconduct; a company could avoid or minimize
the potential penalties.

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 The Federal Sentencing
Guidelines for Organizations
Standards and procedures capable of detecting and
preventing misconduct
High level oversight
Care in delegation of authority
Effective communication (training)
Systems to monitor, audit, and report misconduct
Consistent enforcement
Continuous improvement
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 The 21st Century: A New Focus
A move from legally based ethics initiatives to
culturally or integrity-based programs
– However, legislation such as the Sarbanes-Oxley Act was
passed to address the lack of confidence in financial
reporting and corporate ethics.
Realization that business ethics programs are good
for business
Businesses working more closely together, globally, to
establish standards of acceptable behavior
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 Relationship of Business
Ethics to Performance
Customers, employees, and investors are major
concerns for firms that want to develop loyalty and
competitive advantage.
– Goals are to increase customer dependence on the
company and to provide products in an environment of
mutual respect and perceived fairness.
– This focus creates satisfying relationships with employees.
– It also supports relationships with investors based on trust,
dependability, and commitment.

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 Ethics Contributes to
Employee Commitment
Employee commitment comes from employees who
believe their future is tied to that of the organization
and their willingness to make personal sacrifices for
the organization.
– The more dedication on the part of the company, the
greater the employee dedication.
– Concerns include a safe work environment, competitive
salaries and benefit packages, and fulfillment of
contractual obligations.
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 Ethics Contributes to Investor
Loyalty
Companies perceived by their employees as having a
high level of honesty and integrity are more profitable
than companies with a low level of honesty and integrity.
Ethical climates in
organizations provide
platform for:
– Efficiency
– Productivity
– Profitability

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 Ethics Contributes to
Customer Satisfaction
Consumers respond positively to socially
concerned businesses.
– Being good can be extremely profitable.
Customer satisfaction dictates business success.
A strong organizational ethical climate
often places the customer’s interests first.
Research shows a strong relationship between
ethical behavior and customer satisfaction.

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 Ethics Contributes to Profits
Corporate concern for ethical conduct is
increasingly being integrated with strategic
planning to maximize profitability.
Corporate citizenship is positively
associated with:
– Return on investment and assets
– Sales growth
Many studies have found a positive
relationship between citizenship and
performance.

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