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Business ethics is a form of the art of applied ethics that examines ethical principles and moral or ethical problems that can arise in a business environment. In the increasingly conscience-focused marketplaces of the 21st century, the demand for more ethical business processes and actions (known as ethicism) is increasing. Simultaneously, pressure is applied on industry to improve business ethics through new public initiatives and laws (e.g. higher UK road tax for higher-emission vehicles). Business ethics can be both a normative and a descriptive discipline. As a corporate practice and a career specialization, the field is primarily normative. In academia descriptive approaches are also taken. The range and quantity of business ethical issues reflects the degree to which business is perceived to be at odds with non-economic social values. Historically, interest in business ethics accelerated dramatically during the 1980s and 1990s, both within major corporations and within academia. For example, today most major corporate websites lay emphasis on commitment to promoting non-economic social values under a variety of headings (e.g. ethics codes, social responsibility charters). In some cases, corporations have redefined their core values in the light of business ethical considerations (e.g. BP's "beyond petroleum" environmental tilt). Business managers face ethical dilemmas (ethical questions) almost every day. make a choice. 1. Business to Employee. A business has a responsibility to act ethically towards its employees. Most importantly, employers must hire and fire people in ethical ways. Wages and working conditions are a second ethical issue. Businesses must ensure that employees are paid a fair wage, and that working conditions are reasonable. For instance, paying a worker $1 per day is considered unethical. The same could be said of having an employee work in a room filled with toxic fumes that would cause illness. Privacy is the final ethical issue with respect to employees. employee telephone calls. This includes random drug testing; and listening to Ethical

dilemmas occur when a manager is faced with two or more conflicting ethical issues, and has to

2 2. Employee to Business. Employees have ethical responsibilities towards their employers. Some of importances include taking a part-time job with a competitor; leaking company secrets; wasting company time; and theft from the employer. 3. Business to External Environment. Because businesses exist within a community from which they take resources, some ethicists believe that businesses have ethical responsibilities to the community. This obligation to protect and enhance the society is called Social Responsibility. This also includes responsibilities to the customers from which they earn profits. The main areas of Social Responsibility are: • Ecology and environmental quality - preventing and cleaning pollution, noise control, recycling, preserving land. • • • • Consumerism - truth in advertising, warranties, control of harmful products. Community needs - helping charities, aid with health care and urban renewal. Governmental relations - elimination of bribery of officials and lobbying, following laws. Minorities and disadvantaged persons - providing training and opportunities for these groups. • Labour relations - permitting unions, negotiating fairly, providing fair working conditions and compensation.



This part of business ethics overlaps with the philosophy of business, one of the aims of which is to determine the fundamental purposes of a company. Corporate social responsibility or CSR: an umbrella term under which the ethical rights and duties existing between companies and society is debated. Issues regarding the moral rights and duties between a company and its shareholders: fiduciary responsibility, stakeholder concept v. shareholder concept. Ethical issues concerning relations between different companies: e.g. hostile take-overs, industrial espionage. Leadership issues: corporate governance. Political contributions made by corporations. Law reform, such as the ethical debate over introducing a crime of corporate manslaughter. The misuse of corporate ethics policies as marketing instruments.

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Professional ethics covers the myriad practical ethical problems and phenomena which arise out of specific functional areas of companies or in relation to recognized business professions. ETHICS OF ACCOUNTING INFORMATION
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Creative accounting, earnings management, misleading financial analysis. Insider trading, securities fraud, bucket shop, forex scams: concerns (criminal) manipulation of the financial markets. Executive compensation: concerns excessive payments made to corporate CEO's. Bribery, kickbacks, facilitation payments: while these may be in the (short-term) interests of the company and its shareholders, these practices may be anti-competitive or offend against the values of society.

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Cases: accounting scandals, Enron, WorldCom

4 ETHICS OF HUMAN RESOURCE MANAGEMENT The ethics of human resource management (HRM) covers those ethical issues arising around the employer-employee relationship, such as the rights and duties owed between employer and employee.

Discrimination issues include discrimination on the bases of age (ageism), gender, race, religion, disabilities, weight and attractiveness. See also: affirmative action, sexual harassment.

Issues surrounding the representation of employees and the democratization of the workplace: union busting, strike breaking. Issues affecting the privacy of the employee: workplace surveillance, drug testing. See also: privacy. Issues affecting the privacy of the employer: whistle-blowing. Issues relating to the fairness of the employment contract and the balance of power between employer and employee: slavery, indentured servitude, employment law. Occupational safety and health.

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ETHICS OF SALES AND MARKETING Marketing which goes beyond the mere provision of information about (and access to) a product may seek to manipulate our values and behavior. To some extent society regards this as acceptable, but where is the ethical line to be drawn? Marketing ethics overlaps strongly with media ethics, because marketing makes heavy use of media. However, media ethics is a much larger topic and extends outside business ethics.
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Pricing: price fixing, price discrimination, price skimming. Anti-competitive practices: these include but go beyond pricing tactics to cover issues such as manipulation of loyalty and supply chains. See: anti-competitive practices, antitrust law.

Specific marketing strategies: greenwash, bait and switch, shill, viral marketing, spam (electronic), pyramid scheme, planned obsolescence. Content of advertisements: attack ads, subliminal messages, sex in advertising, products regarded as immoral or harmful

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Children and marketing: marketing in schools. Black markets, grey markets.

Cases: Benetton. ETHICS OF PRODUCTION This area of business ethics deals with the duties of a company to ensure that products and production processes do not cause harm. Some of the more acute dilemmas in this area arise out of the fact that there is usually a degree of danger in any product or production process and it is difficult to define a degree of permissibility, or the degree of permissibility may depend on the changing state of preventative technologies or changing social perceptions of acceptable risk.

Defective, addictive and inherently dangerous products and services (e.g. tobacco, alcohol, weapons, motor vehicles, chemical manufacturing, bungee jumping). Ethical relations between the company and the environment: pollution, environmental ethics, carbon emissions trading Ethical problems arising out of new technologies: genetically modified food, mobile phone radiation and health. Product testing ethics: animal rights and animal testing, use of economically disadvantaged groups (such as students) as test objects.

Cases: Ford Pinto scandal, Bhopal disaster, asbestos / asbestos and the law. ETHICS OF INTELLECTUAL PROPERTY, KNOWLEDGE AND SKILLS Knowledge and skills are valuable but not easily "ownable" objects. Nor is it obvious who has the greater rights to an idea: the company who trained the employee or the employee themselves? The country in which the plant grew, or the company which discovered and developed the plant's medicinal potential? As a result, attempts to assert ownership and ethical disputes over ownership arise.
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Patent infringement, copyright infringement, trademark infringement. Misuse of the intellectual property systems to stifle competition: patent misuse, copyright misuse, patent troll, submarine patent.


Even the notion of intellectual property itself has been criticised on ethical grounds: see intellectual property. Employee raiding: the practice of attracting key employees away from a competitor to take unfair advantage of the knowledge or skills they may possess. The practice of employing all the most talented people in a specific field, regardless of need, in order to prevent any competitors employing them. Bioprospecting (ethical) and biopiracy (unethical). Business intelligence and industrial espionage.

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Cases: private versus public interests in the Human Genome Project

The issues here are grouped together because they involve a much wider, global view on business ethical matters. INTERNATIONAL BUSINESS ETHICS While business ethics emerged as a field in the 1970s, international business ethics did not emerge until the late 1990s, looking back on the international developments of that decade. Many new practical issues arose out of the international context of business. Theoretical issues such as cultural relativity of ethical values receive more emphasis in this field. Other, older issues can be grouped here as well. Issues and subfields include:
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The search for universal values as a basis for international commercial behaviour. Comparison of business ethical traditions in different countries. Comparison of business ethical traditions from various religious perspectives. Ethical issues arising out of international business transactions; e.g. bioprospecting and biopiracy in the pharmaceutical industry; the fair trade movement; transfer pricing. Issues such as globalisation and cultural imperialism. Varying global standards - e.g. the use of child labour. The way in which multinationals take advantage of international differences, such as outsourcing production (e.g. clothes) and services (e.g. call centres) to low-wage countries.

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The permissibility of international commerce with pariah states.


A small business is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. Small businesses are normally privately owned corporations, partnerships, or sole proprietorships. The legal definition of "small" varies historically, by country and by industry, but generally has fewer than 100 employees in the United States and under 50 employees in the European Union. However, in Australia, a small business is defined by the Fair Work Act 2009 as one with fewer than 15 employees. By comparison, a medium sized business or mid-sized business has under 500 employees in the US, 250 in the European Union and fewer than 200 in Australia. In addition to number of employees, other methods used to classify small companies include annual sales (turnover), value of assets and net profit (balance sheet), alone or in a mixed definition. These criteria are followed by the European Union, for instance (headcount, turnover and balance sheet totals). Small businesses are usually not dominant in their field of operation.1 Small businesses are common in many countries, depending on the economic system in operation. Typical examples include: convenience stores, other small shops (such as a bakery or delicatessen), hairdressers, tradesmen, lawyers, accountants, restaurants, guest houses, photographers, small-scale manufacturing etc. The smallest businesses, often located in private homes, are called microbusinesses (term used by international organizations such as the World Bank and the International Finance Corporation) or SoHos. The term "mom and pop business" is a common colloquial expression for a single-family operated business with few (or no) employees other than the owners. When judged by the number of employees, the American and the European definitions are the same: under 10 employees.

A small business can be started at a very low cost and on a part-time basis. Small business is also well suited to internet marketing because it can easily serve specialized niches, something that would have been more difficult prior to the internet revolution which began in the late 1990s. Adapting to change is crucial in business and particularly small business; not being tied to any bureaucratic inertia, it is typically easier to respond to the marketplace quickly. Small
Longenecker, Justin G.; Carlos W. Moore, J. William Petty, Leslie E. Palich (2008) (Casebound). Small business management : launching and growing entrepreneurial ventures..

8 business proprietors tend to be intimate with their customers and clients which results in greater accountability and maturity. Independence is another advantage of owning a small business. One survey of small business owners showed that 38% of those who left their jobs at other companies said their main reason for leaving was that they wanted to be their own bosses.[citation

Freedom to operate

independently is a reward for small business owners. In addition, many people desire to make their own decisions, take their own risks, and reap the rewards of their efforts. Small business owners have the satisfaction of making their own decisions within the constraints imposed by economic and other environmental factors.[1] However, entrepreneurs have to work very long hours and understand that ultimately their customers are their bosses. Several organizations also provide help for the small business sector, such as the Internal Revenue Service's Small Business and Self-Employed One-Stop Resource.[2]

Small businesses often face a variety of problems related to their size. A frequent cause of bankruptcy is undercapitalization. This is often a result of poor planning rather than economic conditions - it is common rule of thumb that the entrepreneur should have access to a sum of money at least equal to the projected revenue for the first year of business in addition to his anticipated expenses. For example, if the prospective owner thinks that he will generate $100,000 in revenues in the first year with $150,000 in start-up expenses, then he should have no less than $250,000 available. Failure to provide this level of funding for the company could leave the owner liable for all of the company's debt should he end up in bankruptcy court, under the theory of undercapitalization. In addition to ensuring that the business has enough capital, the small business owner must also be mindful of contribution margin (sales minus variable costs). To break even, the business must be able to reach a level of sales where the contribution margin equals fixed costs. When they first start out, many small business owners underprice their products to a point where even at their maximum capacity, it would be impossible to break even. Cost controls or price increases often resolve this problem.

9 In the United States, some of the largest concerns of small business owners are insurance costs (such as liability and health), rising energy costs and taxes. In the United Kingdom and Australia, small business owners tend to be more concerned with excessive governmental red tape.[3] Another problem for many small businesses is termed the 'Entrepreneurial Myth' or E-Myth. The mythic assumption is that an expert in a given technical field will also be expert at running that kind of business. Additional business management skills are needed to keep a business running smoothly.

Common marketing techniques for small business include networking, word of mouth, customer referrals, yellow pages directories, television, radio, outdoor (roadside billboards), print, email marketing, and internet. Electronic media like TV can be quite expensive and is normally intended to create awareness of a product or service. Many small business owners find internet marketing more affordable. Google AdWords and Yahoo! Search Marketing are two popular options of getting small business products or services in front of motivated Web searchers. Advertising on niche sites can also be effective, but with the long tail of the internet, it can be time intensive to advertise on enough sites to garner an effective reach.

Franchising is a way for small business owners to benefit from the economies of scale of the big corporation (franchisor). McDonald's restaurants, TrueValue hardware stores, and NAPA Auto Parts stores are examples of a franchise. The small business owner can leverage a strong brand name and purchasing power of the larger company while keeping their own investment affordable. However, some franchisees conclude that they suffer the "worst of both worlds" feeling they are too restricted by corporate mandates and lack true independence. However, in some chains, such as the aforementioned TrueValue and NAPA, franchises may have their own name alongside the franchise's name.


When small business fails, the owner may file bankruptcy. In most cases this can be handled through a personal bankruptcy filing. Corporations can file bankruptcy, but if it is out of business and valuable corporate assets are likely to be repossessed by secured creditors there is little advantage to going to the expense of a corporate bankruptcy. Many states offer exemptions for small business assets so they can continue to operate during and after personal bankruptcy. However, corporate assets are normally not exempt, hence it may be more difficult to continue operating an incorporated business if the owner files bankruptcy.

Certification and trust
Building trust with new customers can be a difficult task for a new and establishing business. Some organizations like the Better Business Bureau and the International Charter now offer Small Business Certification, which certifies the quality of the services and goods produced and can encourage new and larger customers. These services may require a few hours of work, but a certification may reassure potential customers. However, the most effective way to earn trust is through customer referrals.

Contribution to the economy
In the US, small business (less than 500 employees) accounts for around half the GDP and more than half the employment. Regarding small business, the top job provider is those with less than 10 employees, and those with 10 or more but less than 20 employees comes in as the second, and those with 20 or more but less than 100 employees comes in as the third (interpolation of data from the following references).[4] The most recent data shows firms with less than 20 employees account for slightly more than 18% of the employment.[5] Of the 5,369,068 employer firms in 1995, 78.8 percent had fewer than 10 employees, and 99.7 percent had fewer than 500 employees.[6]

Small businesses use several sources available for start-up capital:[7]


Self-financing by the owner through cash, equity loan on his or her home, and or other assets. Loans from friends or relatives Grants from private foundations Personal Savings Private stock issue Forming partnerships Angel Investors Banks SME finance, including Collateral based lending and Venture capital, given sufficiently sound business venture plans

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Some small businesses are further financed through credit card debt - usually a poor choice, given that the interest rate on credit cards is often several times the rate that would be paid on a line of credit or bank loan. Many owners seek a bank loan in the name of their business, however banks will usually insist on a personal guarantee by the business owner. In the United States, the Small Business Administration (SBA) runs several loan programs that may help a small business secure loans. In these programs, the SBA guarantees a portion of the loan to the issuing bank and thus relieves the bank of some of the risk of extending the loan to a small business. The SBA also requires business owners to pledge personal assets and sign as a personal guarantee for the loan. Canadian small businesses can take advantage of federally funded programs and services.


According to Donaldson and Werhane (1993, 2), the word "ethics" refers to the "study of whatever is right and good for humans" and the study of business ethics investigates business practices in light of human values. Over the last few years, a number of researchers have discussed the importance of the ethical considerations in business decisions. (Beversluis 1987; Henderson 1982; Longenecker, McKinney, and Moore 1988; and Stead, Worrell, and Stead 1990). The small business owner personally confronts numerous business decisions that possess ethical challenges. Alpander, Carter, and Forsgren (1990) identified some of the key managerial issues that confront small businesses in their formative years. These issues include employee problems, product pricing, legal problems, product quality, and government regulatory concerns. The authors state, "Most owner-managers described their decision process as an action based on significant thought, conscious analysis of the problem, and evaluation of available alternatives" (Alpander, Carter, and Forsgren 1990, 15). One reason for this careful decision process on these issues may be the possible ethical ramifications that each issue possesses. Small business owners may often find it difficult to make purely impersonal decisions. Venture success, financial opportunity, and new-product development are all areas that may be impacted by decisions having ethical consequences (Hosmer 1987). What are the ethical considerations of small business owners with regard to their decisions? Are there any underlying dimensions or factors that can be identified within the small business ethics area? This current study investigated the factor structure of small business owners' ethical perceptions. Specifically, the research question centers around the possible existence of underlying dimensions which guide owner/managers' behaviors.

Several of the studies cited in this paper examined ethical behaviors or perceptions within the business environment. However, most of these studies utilized open-ended questions or other questionnaires with a limited number of items. Very little is known about the factor structure of small business ethics since only one factor analytic study currently exists.

13 The current study examined the 16-item questionnaire developed by Longenecker, McKinney, and Moore (1989) to determine its utility as a tool for assessing ethical perceptions of small business owners. This instrument was selected in order to expand the dimensions which could exist within the framework of small business decision making. SAMPLE The sample for this study consisted of 282 small business owners from the midwest and southern United States. Owners were interviewed by students in small business courses, from two different universities, following a structured format which resulted in a questionnaire being returned by each firm. Owners had been contacted in advance and informed that this was part of ongoing university efforts to study small business owners. Owners were advised that participation in the survey was voluntary and confidential; few contacted owners refused to participate in the survey. SURVEY INSTRUMENT The Longenecker, McKinney, and Moore (1989) ethical perceptions instrument was utilized. The instrument consists of 16 statements which describe a specific event which has some kind of ethical choice connotation. Business owners responded to each statement on a seven point Likert scale (1 = "never acceptable" to 7 = "always acceptable") indicating their belief about that particular situation. See table 1 for a complete list of items. ANALYSES Three sets of statistical analyses were conducted. The first involved calculating frequencies on demographic variables such as type of business, length of time in the business, age of the owner, and number of employees. The second analysis involved a principal components factor analysis of the 16-item instrument. The third analysis assessed the internal consistency of the factor structure.


14 The sample represented small businesses in a broad range of industries. The largest number of participants came from retail, service, and manufacturing sectors. In addition, nearly 69 percent indicated sales below $1 million, 91 percent reported an employee level of fewer than 100, and almost 30 percent of the owners had been in business 21 years or more with the remainder dispersed in categories below 21 years. The owner's ages ranged from 21 to older than 70 with more than 80 percent between 31 and 60, and over 50 percent possess some type of college degree. A complete demographic description of the participating firms can be found in table 2. FACTOR ANALYSIS The results of the principal components factor analysis, based on a vari-max rotation. suggested a four-factor solution to the Longenecker, McKinney, and Moore (1989) ethical perceptions instrument. Table 3 presents the factor analysis results. Examination of the content of the items loading on each factor resulted in the following names being applied to the various factors: 1. Business Development/Profit Motive 2. Money-Related Theft 3. Administrative Decision Making 4. Accession to Company Pressure Internal Consistency The item analysis of the four scales suggested in the factor analysis revealed that the first three scales (Business Development, Money-Related Theft, and Administrative Decision Making) were reliable. The last scale, Accession to Company Pressure, had an unacceptable level of reliability for it to be considered a viable factor. The resulting coefficient alpha reliabilities were .65, .65, .58, and .32 for the four factors respectively.

The results of this study indicate that there are three reliable dimensions of ethics measured by the Longenecker, McKinney, and Moore (1989) instrument. The items loading onto factor 1 (Business Development/Profit Motive), relate to activities which focus on improving the strength of the business, either by returning greater profit or securing additional business. Factor 2 (Money-Related Theft), was composed of four items which focused on the withholding of

15 money from those to whom it was due or earning money through illegal methods. The third factor (Administrative Decision Making) included issues dealing with the ongoing management of the firm, such as hiring, promotion, and marketing. Table 2 DEMOGRAPHIC RESULTS Demographic Variable Industry Manufacturing Construction Mining Retail Wholesale Service Finance/Insurance Education Real Estate Government Transportation Other Owner Age 21-30 31-40 41-50 51-60 61-70 71+ Years in Business 3 or fewer 4-7 8-12 13-20 21+ Owner Educational Level High School Some College 50 83 17.6 29.2 40 50 49 53 85 14.4 17.6 17.4 18.8 29.9 28 71 97 66 11 4 9.9 25.0 34.2 23.2 3.9 1.4 59 9 1 74 14 72 15 3 7 1 6 25 19.4 3.2 0.4 26.1 4.9 25.4 5.3 1.1 2.5 0.4 2.1 8.5 N Percent

16 college Graduate Some Grad School Graduate Degree Annual Firm Sales $100,000 or less 100,001-300,000 300,001-1,000,000 1,000,001+ Employees 1-14 188 15-49 52 50-99 14 100+ 25 The dimensions found in this 67.4 18.6 5.0 9.0 study represent a more pragmatic view of ethical dilemmas faced 60 58 77 72 21.1 20.4 27.1 25.4 73 32 39 25.7 11.3 13.7

by smaller firms. The factors found by Humphreys et al. (1993) appear to be much more theoretical. On the other hand, there are some similarities between the results of this study and the Humphreys et al. findings. For example, both studies resulted in a three factor solution and it could be argued that the Humphreys et al. dimensions of moral equity, relativistic, and contractualism do in fact resemble the factors identified in this study. Moreover, the business development dimension from this study is similar to the contractual dimension of the Humphrey's et al. study. In addition, the theft-related and business decision making dimensions from this study may also resemble the moral equity and relativistic dimensions identified by Humphreys et al. While not specifically tested these similarities do provide a basis for future research. It is interesting to note that although people traditionally have the feeling that "ethics means the law" or that we should use the law as the guide for ethical behavior, this study refutes those stereotypes. While there are items on the scale which clearly describe illegal activities, they did not seem to load together on any single legal factor. This study indicates there are underlying dimensions of the concepts of small business ethics which are broader than simple adherence to the law. As illustrated by certain items in the business development and administrative decisionmaking factors, there are considerations beyond legal parameters that TABULAR DATA OMITTED small business owners rely upon. Thus it is apparent that an owner's value system is a critical component of the ethical considerations that surround a business decision.

17 This study may also have implications for small business owners in establishing an ethical environment within which employees and constituents can work. For example, the preparation of a specific policy statement on ethics by the owner and his other employees may provide the clear understanding to address the administrative decision making dimension identified in this study. Small business owners may also need to spend time developing benchmarks or guidelines concerning ethical behaviors of employees. While these guidelines cannot be expected to cover every possible scenario, they will still help address the business development/profit motive dimension identified in this study. Finally, if small business owners can carefully establish explicit rewards and punishments that are based upon ethical behaviors (and enforced) then the dimension of money-related theft can also begin to be addressed. As recommended by Dees and Starr (1992), this study attempts to begin the process of advancing the body of research in small business ethics. The identification of a reliable and consistent factor structure of an established small business ethics instrument can serve as a base upon which future research can be built. The results of this examination suggest. a three-factor structure to the Longenecker, McKinney, and Moore instrument and there are some similarities with the Humphreys, Robin, Reidenbach, and Moak (1993) study. A number of directions for future research can be suggested. First, additional study of the instrument should be conducted with different samples to determine the stability and generalizability of this factor structure. Future research should develop a larger pool of items covering a broad spectrum of situations in order to ensure that any survey instrument that is developed will measure the full range of ethical considerations. Because this research involved the investigation of an existing instrument, other investigations should be undertaken to determine the possible presence of additional factors. Future research should include exploring the impact of demographic variables such as gender, age, education, and business size on ethical perceptions. Finally, longitudinal research would address the question of whether ethical values change as the business grows and profits stabilize.


- The 18th Century economist Adam Smith demonstrated how in a free market the self interest of producers and consumers will produce an outcome desirable to all concerned - But the market can also lead to inequality of income, wealth and market power: • • • Monopoly suppliers can exploit consumers Monopsony buyers can exploit supply firms World wide inequality of income can result in unethical practices such as the child labour

• • • • • • • • • Involvement in the community & Honesty, truthfulness and fairness in marketing Use of animals in product testing Agricultural practices e.g. intensive faming The degree of safety built into product design Donation to good causes The extent to which a business accepts its alleged responsibilities for mishaps, spillages and leaks The selling of addictive products e.g. tobacco Involvement in the arms trade Trading with repressive regimes

• • • • • • Treatment of customers - e.g. honouring the spirit as well as the letter of the law in respect to warranties and after sales service The number and proportion of women and ethnic minority people in senior positions The organisation’s loyalty to employees when it is in difficult economic conditions Employment of disabled people Working conditions and treatment of workers Bribes to secure contracts & Child labour in the developing world

19 • Business practices of supply firms

• • • • • • • • • • • Pricing lack of clarity in pricing Dumping – selling at a loss to increase market share and destroy competition in order to subsequently raise prices Price fixing cartels Encouraging people to claim prizes when they phoning premium rate numbers “Bait and switch” selling - attracting customers and then subjecting them to high pressure selling techniques to switch to an more expensive alternative High pressure selling - especially in relation to groups such as the elderly Counterfeit goods and brand piracy Copying the style of packaging in an attempt to mislead consumers Deceptive advertising Irresponsible issue of credit cards and the irresponsible raising of credit limits Unethical practices in market research and competitor intelligence

• • • • • • Selling goods abroad which are banned at home Omitting to provide information on side effects Unsafe products & Built in obsolescence Wasteful and unnecessary packaging & Deception on size and content Inaccurate and incomplete testing of products Treatment of animals in product testing

- It would be hypocritical to claim to be a ethical firm if it turned a blind to unethical practices by suppliers in the supply chain. In particular: • • • The use of child labour and forced labour Production in sweatshops & Violation of the basic rights of workers Ignoring of health, safety and environmental standards


20 This is a key ethical issue in business: • • • It first needs to be stated that bribery to secure a contract (especially a contract with a public sector body) is against the law and severe penalties can result However, it is sometimes seem (wrongly) as a victimless crime and is often rationalised in terms of “if we don’t offer a bribery, others will” From a moral or ethical perspective it should be approached not in terms of “can we get away” with it but is it right to offer a bribe to secure a contract

The Institute recommends that organisations issue statements of ethical practice in respect of: • • • • • • Relations with customers, shareholders and other investors Relations with employees & Suppliers Relations with the government and the local community, competitors The environment & Issues relating to international business Behaviour in relations to mergers and takeovers Ethical issues concerning directors and managers

- This is a set of principles governing morality and acceptable behaviour It is likely to cover: • • • • Personal behaviour e.g. when dealing with customers and suppliers Corporate behaviour e.g. when negotiating deals Behaviour towards society e.g. when recruiting Behaviour towards the environment e.g. when deciding on process

- This is an audit of all the firms activities Purpose: • • To check that ethical principles are being pursued To check the extent to which actions are consistent with the organisation’s stated ethical intentions

21 • And to establish action plans if they are not

Reports indicate firms that fail to become active in international trade may begin to experience financial difficulties as foreign competition for slowly expanding domestic markets intensifies (Small Business Reports 1987b). This trend is especially alarming to small U.S. businesses, less than 10 percent of which are actively involved in international trade despite having export potential (Small Business Reports 1986). Nonexporters often cite their lack of international marketing knowledge and "perceived barriers" (such as understanding foreign business practices) as obstacles to their pursuit of foreign trade (Yaprak 1985). Despite the numerous programs available to assist managers with the technical aspects of international trade (for example, the International Trade Administration of the U.S. Department of Commerce), many owner-managers' worries and fears stemming from "perceived barriers' go unattended, representing a real disincentive for small businesses to export (Joynt and Welch 1985). One "perceived barrier" that has received much recent attention from both the popular press and researchers is the difficult ethical problems that international trade may pose. Such problems appear to be a potent "perceived barrier," in that many U.S. marketers report they tend to avoid foreign markets where they expect to encounter ethical dilemmas (Mayo et al. 1990). This "perceived barrier" may have a strong negative impact on the foreign trade intentions of small businesses, given that many have limited resources (such as having no legal or public relations specialists on staff) to wrestle with such ethical dilemmas (Ward 1987). Avoidance is only one of several options that small businesses may employ to cope with ethical problems. By including ethics in the strategic planning process and/or by developing codes of conduct, for example, small business managers may be able to anticipate and work through the ethical problems posed by some foreign markets (Robin and Reidenbach 1987). The success of such an approach, however, may partially depend upon how ethical concepts and problems are defined. Small businesses are more likely to implement codes and strategies where operational definitions of ethical concepts and problems have been developed (Ward 1987). A detailed

22 listing of the type of ethical problems that might be encountered in international trade by small businesses, however, is currently not available. The sparse attention given to the ethical problems encountered by small businesses may have resulted from researchers' assumption that ethical problems bear equally upon firms of all sizes. This assumption may be misleading in that the type and impact of ethical problems may be different for small and large businesses (Longenecker et al. 1989). The present study determines the type of ethical problems that small businesses may encounter in international trade and how these problems may affect the firm and its management team. Since marketing activities are central to international trade and often are the focus of questions regarding ethical conduct (Fritzsche 1986), the present study will focus on the type of ethical problems that small business firms encounter in international marketing. METHODOLOGY The data for the present report were collected as part of a larger study by the author to ascertain the ethical issues confronting U.S. firms engaged in international business (Mayo et al. 1990). Sample The sample for the present study was selected from the District Export Councils Membership Roster (1987-1991 term, U.S. Department of Commerce 1987). District Export Council (DEC) members are experienced in international trade, are appointed by the U.S. Secretary of Commerce, and advise federal, state, and local governments and manufacturers on exportrelated matters. Consequently, it was assumed that the members would be well versed in international marketing and could comment on the nature of the non-domestic ethical problems encountered when selling transnationally. In addition, the DEC membership is widely distributed nationally, which should minimize regional biases. Despite the aforementioned qualifications of DEC members to report on the ethical problems encountered in international marketing, some restrictions were placed on sample selection. It was assumed that ethical problems might be more important in situations in which market access depends upon establishing and maintaining long-term relationships with a small number of marketing channel members. Consequently, council members employed as consultants or in the accounting industry were excluded, as they may be less knowledgeable than others about the specific ethical problems found in international marketing. Additionally, council members

23 employed in the education and public service sectors were excluded as they were less likely to be involved in ongoing sales/service transactions. DEC members employed in the manufacturing and business service sectors wee most likely to be involved in the relationships described above wherein ethical problems would disruptmarket access realized through a limited number of channel members. It was assumed that these DEC members would be highly interested in and sensitive to the ethical problems found in international marketing. Procedure The questionnaire used in the present study was included as part of a mail survey sent in July 1988 soliciting DEC members' opinions on the ethical issues facing international marketers and business managers. A total of 192 (out of 770) usable questionnaires was returned, representing a response rate of 24.9 percent. This response rate reflects a high degree of interest in the topic and is comparable with other studies (for example, Chonko and Hunt 1985) using marketing practitioners as a sample. To assess response bias, a telephone follow-up of nonrespondents to the initial mail survey was conducted. Analysis of demographic and questiionnaire items indicated no differences between nonrespondents and those individuals who returned the initial mail survey. Consequently, it was assumed that nonresponse bias was negligible and that sample results were representative of the views of DEC members employed in the manufacturing and business service industries. When the telephone follow-up sample was merged into the initial response data set, the response rate increase to 31.0 percent (239/770). The sample for the present study was drawn from the response set described above. In order to ensure that respondents could identify the nature and extent of ethical problems that small businesses were likely to encounter in international marketing, two additional restrictions were placed upon the sample. Specifically, only DEC members who were employed in small businesses as currently defined by the U.S. Small Business Administration (1988) (500 or fewer employees for manufacturing under Division D; annual sales of $3.5 million or less for business services under Division I) and wer actively involved in international trade (15 percent or more of their annual sales came from overseas markets) were included in the present study. The number of respondents meeting these restrictions was 91. Research Instrument

24 The questionnaire consisted of two sections. Section one asked respondents to identify the aspects of international marketing which posed the most difficult ethical problems (adapted from Chonko and Hunt 1985). This section began by assuring respondents that people in all professions experience ethical problems. This qualifier was included to improve the response rate by assuring managers that the study was not intended to criticize either small business or the marketing profession. The questionnaire format allowed respondents to identify up to three ethical problems. In section one, respondents were also asked to rate the frequency of each ethical problem they identified and to indicate its impact on the firm and its management team. Section two asked respondents to provide personal and corporate demographics. The questionnaire was pretested on a convenience sample of midwestern DEC members to ensure item clarity. Minor revisions were made as warranted. RESULTS Sample-Respondent Profile The typical small business respondent in this study was highly experienced in international marketing (x = 18.0 years), well educated (24.2 percent had earned a bachelor's degree; 58.3 percent had completed some graduate work or degree program), male (93.4 percent), and held a position either in upper administration (73.7 percent were CEOs, presidents, or vice-presidents) or in sales/marketing management (23.1 percent). Respondents were employed in a diverse range of industries from the manufacturing and business ervice sectors, and, based on observation of the return envelopes, appeared to be relatively balanced geographically. The average firm and annual sales of $59.5 million, employed 182 people, and had a substantial commitment to international marketing (mean percentage of annual sales from overseas operations = 48.1 percent; average number of countries in which firm has a major marketing commitment = 23.3). In summary, based on these demographics it is obvious that the respondents were highly experienced in international marketing, employed with small-sized firms with a multinational orientation, and thus well qualified to comment on the ethical problems encountered by small U.S. business in international marketing. Ethical Issues The question, "Would you please describe the aspect(s) of International Marketing that pose(s) the most difficult ethical or moral problem(s) to U.S. executives like yourself," generated 140

25 responses (see table 1 for a breakdown; multiple responses were allowed). These 140 responses were classified into 11 categories (9 ethical problems, miscellaneous, and no ethical problems encountered) by two independent judges. The nine issues that posed the most difficult ethical or moral problems encountered in internatiional marketing were ranked according to how often they were identified by respondents (see table 1). This ranking represents, in descending order, the issues that are perceived as the most difficult problems for small businesses engaged in international trade. Table 2 shows how often respondents encountered each of the identified ethical problems, and their impact on the firms' overseas competitiveness, domestic public image, and top management team. To assist in the interpretation of results, let us center on the top five issues identified by respondents. Ignoring the categories of "no ethical problems" and "miscellaneous", the first five ranked issues account for 86.5 percent of the ethical problems encountered often by small businesses. These issues were bribery, political issues and/or government intervention, customs clearance, questionable transfer of funds, and cultural and/or business practice differences. A description of the categories used to classify responses can be found in tale 3. Overall, the top five ranked ethical problems occur with moderate frequency (x = 3.94; calculate from table 2). The impact of these problems, however, does not appear to greatly restrict overseas competitiveness (x=3.30), but may tarnish the domestic public image of small businesses found engaging in such unethical practices (x = 5.37). Given this mixed impact upon the firm, top management was only moderately concerned about the ethical implications of these problems (x = 4.41). Further analysis of these measures, however, indicates that the impact on the firm and its management team is somewhat dependent upon the ethical problem in question. For example, respondents reported that overseas competitiveness is restricted to a greater extent when the ethical problem is bribery or political issues/ government interference compared to the other types of problems (see table 2). Although the data collected in the present study do not explain these results, it is inferred that in the case of bribery, marketers may withdraw from or avoid foreign markets where bribes are encountered or anticipated. Marketers who are unable to differentiate between illegal bribes and acceptable facilitating payments (as outlined in the original Foreign Corrupt Practices Act) may select avoidance and withdrawal strategies to avoid the possibility of federal litigatiion. In the case of political issues/ government interference, it is

26 inferred that small businesses often do not have sufficient resources (managerial and financial) to overcome the legislative (e.g., tariffs) and administrative (e.g., export licensing) hurdles that such interference may present. Consequently, small businesses' ability to compete in international trade may be negatively affected. Finally, the Table 1 ETHICAL PROBLEMS IN INTERNATIONAL MARKETING FOR SMALL BUSINESS (a) Rank Issue (b) 2 2 3 4 5 6 7 8 9 10 11 Bribery Government interference Customs clearance Transfer of funds Frequency Percent 47 14 11 9 33.6 10.0 7.9 6.4 6.4 4.3 2.9 3 1 8 28 140 2.1 0.7 5.7 20.0 100.0

Cultural/business differences 9 Technology/copyright theft 6 Pricing Immoral entertainment Product use No ethical problems Miscellaneous Total (c) 4

(a) Response to open-ended question: "In all professions (e.g., law, medicine, education, accounting, advertising, etc.), decision makers are exposed to at least some situations that pose moral or ethical problems. In the case of business executives who may become involved in different cultures and environments the potential for such problems undoubtedly increases. Would you please describe the aspect(s) of International Marketing that pose(s) the most difficult ethical or moral problem(s) to U.S. executives like yourself?" (b) Some of these issues (e.g., cultural differences and governmental regulations) represent more pragmatic difficulties in conducting business overseas and are not strictly ethical in nature. (c) Respondents could describe up to three ethical problems. Of 75 respondents to this question, 35 described only one problem, 15 described two, and 25 described three, so n = 140. ethical issues involved in some customs clearance transactions appear to have a unique impact on the firm and its management team. Relative to other reported ethical problems, customs

27 clearance has a limited negative impact on overseas competitiveness and domestic image and consequently does not attract as much concern from top management. It is speculated that the relatively low incidence of this ethical problem may account for its limited influence on these measures. DISCUSSION One of the reasons that first-time exporters fail in their efforts to enter international trade is their inability to understand and adapt to foreign cultural and business practices. This failure may be partly due to the strong ethnocentric orientation of some managers as well as their lack of training in arbitrating social conflicts in a multinational setting (Gladwin and Walters 1980). Additionally, small businesses themselves may be partially to blame when the management team fails to make a commitment to overcome the initial cultural and business practice differences and to solve the ethical problems often found in international marketing (Small Business Reports 1985). An initial step in managing the various ethical problems involves examining the type of problems that exporters active in international trade actually encounter. The present study identifies the five issues that pose the most difficult ethical problems in international marketing for small businesses. Analysis of the impact of these ethical problems on the firm and its management team would not be complete without examining how the structure, limited resources, and orientation of small business influences marketers' ability to manage such problems. Relative to large firms, small businesses appear more profit-oriented and tolerant of unethical practices when their financial welfare is at stake (Longenecker et al. 1989). By implication, small firms (especially those experiencing financial difficulties) should recognize their susceptibility to some of the ethical problems identified in this study. This susceptibility, plus the less formal management structure and monitoring systems of many small firms, would appear to make the payment of bribes, the alteration of customs documentation, and the illegal transfer of funds more difficult to detect. In terms of organizational resources, small businesses often do not have specialists (such as public relations personnel, lobbyists, etc.) to wrestle with ethical problems and, consequently, may be unable to contend with political issues and government interference which can impede foreign trade. From the above discussion it appears that some organizational elements of small businesses may be an impediment to coping with ethical problems. Additionally, management's inability to

28 reliably identify business problems with moral implications may be another impediment to coping with ethical problems. Small business managers appear to have a wide-ranging definition of ethics and tend to include practices which present problems in conducting business overseas, but which, in themselves, are unlikely to pose an ethical issue. The responses categorized in the present study as "miscellaneous" comments (e.g., "Customers wanting the quality we produce but not our price") and "cultural and/or business practice differences" (e.g., "Different accounting practices") exemplify this overgeneralization. This lack of discrimination between ethical problems and other issues may be due, in part, to the fact that the field of business ethics has not developed a precise vocabulary to assist managers in identifying, discussing, and resolving ethical dilemmas (Walter 1978). Implications Small business professionals need not wait, however, until a language of business ethics is developed to address ethical problems that may confront their firms. Chittipeddi (1987) has suggested managers begin to integrate ethics into decision making by first identifying the ethical problems that might develop between the firm and its relevant stakeholders. The present study provides a list of such problems for small business managers involved in international marketing. Chittipeddi then recommends that managers consider the ethical merits of the various means to resolve each ethical dilemma that has been identified. "Ethical" solutions are those business decisions that "lead to a net positive value to the affected stakeholders." It is important to note that such an analysis does not identify "the optimal ethical solution" but rather a range of business decisions deemed to be ethical. Although each business decision may represent a "net positive value," the impact on various stakeholders will vary across solutions. The final solution chosen in a small business to resolve an ethical dilemma often reflects the values and personality of its owner-manager. As managers develop administrative policies around the problems associated with various stakeholders important to the firm, a "code of ethics" is constructed. Codes constructed in this manner provide managers with pragmatic definitions of ethical responsibilities and encourage them to include ethical criteria in their decision making. Additionally, top managements' involvement in code construction and any subsequent revisions helps to integrate ethics into the corporate culture.


The present study identifies five issues that posed the most difficult ethical problems for small businesses engaged in international marketing. Although the impact on the firm and its management team depended somewhat upon the ethical problem in question, overall, small business managers were more concerned about how ethical problems might tarnish the domestic image of the firm than about how such problems might restrict competitiveness in overseas markets. Brown and King (1982) also noted that concern about negative publicity (with both the general public and in the business community) resulting from engaging in unethical practices was an important factor in promoting ethical conduct by small business managers. The loss of public esteem resulting from media coverage of questionable corporate activities in international commerce is prompting many small firms to develop ethical codes of conduct (Small Business Reports 1987a). The present study outlined a process to develop codes of ethical conduct for small businesses. The "perceived" barrier of ethical problems should prove less of a deterrent to international marketing as small business managers come to understand the extent and nature of ethical problems and develop the means (such as codes of conduct) to reduce the impact such problems have on the firm. As small businesses "work through" ethical problems they may come to realize some of the advantages associated with foreign trade (such as expanding their customer base, extending product life cycles, etc.) and to recognize the strengths they possess to compete internationally (such as being more responsive to market niches, being more technologically innovative, etc.). Finally, it must be noted that the results and recommendations presented here were derived by surveying DEC members. It is unclear to what degree these findings can be generalized to firms not included in the DEC membership roster. Additionally, it is unknown how small businesses with little or no international trade experience may react to perceived ethical problems. It is unclear, for example, to what degree perceived ethical problems, relative to other barriers (such as lack of business knowledge about exchange rates, counter trade, etc.) inhibit small business managers from investigating internatinal trade opportunities. Future research is recommended to investigate these issues.


BOOKS AND JOURNALS • • • • • Essays on Ethics in Business and the Professions, Jack N. Behrman, Englewood Cliffs, NJ: Prentice Hall, 1988 Business Ethics, A Kantian Perspective, Norman E. Bowie, Blackwell, 1999. Ethical Dilemmas 1988 Perspectives in Business Ethics, Laura Hartman, Burr Ridge, IL: McGraw-Hill, 2004 Business as Ethical and Business as Usual, Sterling Harwood, Belmont, CA: Wadsworth Publishing, 1996. INTERNET SOURCES • • • • • • • %20India%20-%20Ethical%20-%20Business%20Ethics.htm#Exhibits