Business Ethics

MODU L E – I

INTRODUCTION TO BUSINESS ETHICS:

Ethics:
Ethics is a set of moral principles that govern person's behavior or
conducting of an activity.
Ethics is a branch of social science. It deals with moral principles and
social values. It helps us to classify what is good and what is bad. It tells
us to do good things and avoid bad things.
Business Ethics:
The term ‘Business Ethics’ refers to the system of moral principles and
rules of proper conduct applied to business. Business Ethics is generally
coming to know what is right or wrong at the work place and doing
what is right with respect to products/services and relationship with the
stake holders.”
The characteristics that make a business decision ethical are:
Equitable: The decision be just and equal.
Right: Morally correct and due.
Good: Which highest good for highest number of concerned
people.
Just: Justice is done to all and it should appear that justice is
given to due.
Proper: That which is appropriate to the situation and generally
acceptable.
Fair: Which is honest and due.

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 Business Ethics

Business ethics is the systematic handling of values in business and

industry. So, the businessmen must give a regular supply of goods and
services at reasonable prices to their customers. They must avoid
indulging in unfair trade practices like promoting misleading
advertisements, cheating in weights and measures, black marketing etc.
they must give fair wages and provide good working conditions to their
workers. They must not exploit workers. They must encourage
competition in the market. They must protect interest of small
businessmen. They must avoid unfair competition. They must avoid
monopolies. They must pay all their taxes regularly to the government.

NATURE OF BUSINESS ETHICS

The characteristics or features of business ethics are:-

1. Code of conduct: Business ethics is a code of conduct. It tells what

to do and what not to do for the welfare of the society. All
businessmen must follow this code of conduct.

2. Based on moral and social values: Business ethics is based on

moral and social values. It contains moral and social principles
(rules) for doing business. This includes self-control, consumer
protection and welfare, service to society, fair treatment to social
groups, not to exploit others, etc.

3. Gives protection to social groups: Business ethics give protection

to different social groups such as consumers, employees, small
businessmen, government, shareholders, creditors, etc.

4. Provides basic framework: Business ethics provide a basic

framework for doing business. It gives the social, cultural, economic,
legal and other limits of business. Business must be conducted within
these limits.

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5. Voluntary: Business ethics must be voluntary. The businessmen

must accept business ethics on their own. Business ethics must be
like self-discipline. It must not be enforced by law.

6. Requires education and guidance: Businessmen must be given

proper education and guidance before introducing business ethics.
The businessmen must be motivated to use business ethics. They
must be informed about the advantages of using business ethics.
Trade Associations and Chambers of Commerce must also play an
active role in this matter.

7. Relative Term: Business ethics is a relative term. That is, it changes

from one business to another. It also changes from one country to
another. What is considered as good in one country may be taboo in
another country.

8. New concept: Business ethics is a newer concept. It is strictly

followed only in developed countries. It is not followed properly in
poor and developing countries.

ROOTS OF UNETHICAL BEHAVIOUR

People often wonder why employees indulge in unethical practices such
as lying, bribery, coercion, conflicting interest, etc. There are certain
factors that make the employees think and act in unethical ways. Some
of the influencing factors are ‘pressure to balance work and family,
poor communications, poor leadership, long work hours, heavy work
load, lack of management support, pressure to meet sales or profit
goals, little or no recognition of achievements, company politics,
personal financial worries, and insufficient resources’. 16 The statistical
data given by Ethics Officers Associationin 1997 show how certain
practices or factors contribute to unethical behaviour. 17

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Balancing work and family 52%

Poor leadership 51%

Poor internal communication 51%

Lack of management support 48%

Need to meet goals 46%

From the above statistics it is very much evident that conflicting

interests lead to most of the unethical practices.

WHY SHOULD BUSINESSES ACT ETHICALLY?

An organization has to be ethical in its behaviour because it has to exist
in the competitive world. We can find a number of reasons for being
ethical in behaviour, few of them are cited below: Most people want
to be ethical in their business dealings. Values give management
credibility with its employees. Only perceived moral righteousness and
social concern brings employee respect. Values help better decision
making.

There are a number of reasons why businesses should act ethically:

 to protect its own interest;

 to protect the interests of the business community as a whole so
that the public will have trust in it;
 to keep its commitment to society to act ethically;
 to meet stakeholder expectations;
 to prevent harm to the general public;
 to build trust with key stakeholder groups;

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 to protect themselves from abuse of unethical employees and

competitors;
 to protect their own reputations;
 to protect their own employees; and
 to create an environment in which workers can act in ways
consistent with their values.

Besides, if a corporation reneges on its agreement and expects others to

keep theirs, it will be unfair. It will also be inconsistent on its part, if
business agrees to a set of rules to govern behaviour and then to
unilaterally violate those rules. Moreover, to agree to a condition where
business and businessmen tend to break the rules and also get away
with it is to undermine the environment necessary for running the
business.

Hard decisions which have been studied from both an ethical and an
economic angle are more difficult to make, but they will stand up
against all odds, because the good of the employees, public interest, and
the company’s own long-term interest and those of all stakeholders
would have been taken into account.

Ethics within organizations is a must. It should be initiated by the top

management, and percolate to the bottom of the hierarchy. Then alone,
will the company be viewed as ethical by the business community and
the society at large. ‘Further, a well-communicated commitment to
ethics sends a powerful message that ethical behaviour is considered to
be a business imperative.’ If the company needs to make profit and to
have a good reputation, it must act within the confines of ethics. Ethical
communication within the organization would be a healthy sign that the
company is marching towards the right path. Internalization of ethics by
the employees is of utmost importance. If the employer has properly
internalized ethics, then the activities that individuals or organizations
carry out will have ethics in them.

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SCOPE OF BUSINESS ETHICS

Ethical problems and phenomena arise across all the functional areas of
companies and at all levels within the company.

1. Ethics in Compliance
Compliance is about obeying and adhering to rules and authority. The
motivation for being compliant could be to do the right thing out of the
fear of being caught rather than a desire to be abiding by the law. An
ethical climate in an organization ensures that compliance with law is
fuelled by a desire to abide by the laws. Organizations that value high
ethics comply with the laws not only in letter but go beyond what is
stipulated or expected of them.

2. Ethics in Finance
The ethical issues in finance that companies and employees are
confronted with include:

 In accounting – window dressing, misleading financial analysis.

 Related party transactions not at arm’s length
 Insider trading, securities fraud leading to manipulation of the
financial markets.
 Executive compensation.
 Bribery, kickbacks, over billing of expenses, facilitation
payments.
 Fake reimbursements

3. Ethics in Human Resources

Human resource management (HRM) plays a decisive role in
introducing and implementing ethics. Ethics should be a pivotal issue
for HR specialists. The ethics of human resource management (HRM)

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covers those ethical issues arising around the employer-employee

relationship, such as the rights and duties owed between employer and
employee.

The issues of ethics faced by HRM include:

 Discrimination issues i.e. discrimination on the bases of age,

gender, race, religion, disabilities, weight etc.
 Affirmative Action.
 Issues surrounding the representation of employees and the
democratization of the workplace, trade ization.
 Issues affecting the privacy of the employee: workplace
surveillance, drug testing.
 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.
 Occupational safety and health.

Companies tend to shift economic risks onto the shoulders of their

employees. The boom of performance-related pay systems and flexible
employment contracts are indicators of these newly established forms of
shifting risk.

4. Ethics in Marketing
Marketing ethics is the area of applied ethics which deals with the
moral principles behind the operation and regulation of marketing. The
ethical issues confronted in this area include:

 Pricing: price fixing, price discrimination, price skimming.

 Anti-competitive practices like manipulation of supply, exclusive
dealing arrangements, tying arrangements etc.
 Misleading advertisements
 Content of advertisements.

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 Children and marketing.

 Black markets, grey markets.

5. 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

 Ethical relations between the company and the environment
include pollution, environmental ethics, and carbon emissions
trading.
 Ethical problems arising out of new technologies for e.g.
Genetically modified food
 Product testing ethics.

The most systematic approach to fostering ethical behavior is to build

corporate cultures that link ethical standards and business practices.

IMPORTANCE OF BUSINESS ETHICS:

1. Corresponds to Basic Human Needs:

The basic need of every human being is that they want to be a part of
the organisation which they can respect and be proud of, because they
perceive it to be ethical. Everybody likes to be associated with an
organisation which the society respects as an honest and socially
responsible organisation. The HR managers have to fulfill this basic

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need of the employees as well as their own basic need that they want to
direct an ethical organisation. The basic needs of the employees as well
as the managers compel the organizations to be ethically oriented.

2. Credibility in the Public:

Ethical values of an organisation create credibility in the public eye.
People will like to buy the product of a company if they believe that the
company is honest and is offering value for money. The public issues of
such companies are bound to be a success. Because of this reason only
the cola companies are spending huge sums of money on the
advertisements now-a-days to convince the public that their products
are safe and free from pesticides of any kind.

3. Credibility with the Employees:

When employees are convinced of the ethical values of the organisation
they are working for, they hold the organisation in high esteem. It
creates common goals, values and language. The HR manager will have
credibility with the employees just because the organisation has
creditability in the eyes of the public. Perceived social uprightness and
moral values can win the employees more than any other incentive
plans.

4. Better Decision Making:

Respect for ethics will force a management to take various economic,
social and ethical aspects into consideration while taking the decisions.
Decision making will be better if the decisions are in the interest of the
public, employees and company’s own long term good.

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5. Profitability:
Being ethical does not mean not making any profits. Every organisation
has a responsibility towards itself also i.e., to earn profits. Ethical
companies are bound to be successful and more profitable in the long
run though in the short run they can lose money.

6. Protection of Society:
Ethics can protect the society in a better way than even the legal system
of the country. Where law fails, ethics always succeed. The government
cannot regulate all the activities that are harmful to the society. A HR
manager, who is ethically sound, can reach out to agitated employees,
more effectively than the police.

VALUES V/S MORALS V/S ETHICS:

A person who knows the difference between

right and wrong and chooses right is moral.

A person whose morality is reflected in his willingness to do the right

thing – even if it is hard or dangerous – is ethical. Ethics are moral
values in action.

 Value describes individual or personal standards of what is important.

 Moral describes the goodness or badness or right or wrong of actions.
 Ethics describes a generally accepted set of moral principles.

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ETHICAL THEORIES IN RELATION TO BUSINESS

 EGOISM
‘The view that associates morality with self-interest is referred to as
egoism.’ Therefore, it can be said that egoism is an ethical theory that
treats self-interest as the foundation of morality. Egoism contends that
an act is morally right if and only if it best promotes an agent’s
(persons, groups or organizations) long-term interests. Egoists make use
of their self-interest as the measuring rod of their actions. Normally, the
tendency is to equate egoism with individual personal interest, but it is
equally identified with the interest of the organization or of the society.

Ethicists who propose the theory of egoism have tried ‘to derive their
basic moral principle from the alleged fact that humans are by nature
selfish creatures’. According to these proponents of psychological
egoism, human beings are so made that they must behave selfishly.
They assert that all actions of men are motivated by self-interest and
there is nothing like unselfish actions. To them, even the so-construed
self-sacrificial act like, say, whistle-blowing in an organization to bring
to the notice of the top brass the unethical acts practiced down the line,
or by top executives, is an attempt by the whistle-blower to either take
revenge or become a celebrity.

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Criticism of the Theory of Psychological Egoism Though there are a

few advocates of the theory of egoism even today, one would hardly
come across philosophers who would propose it as the basis for
personal or organizational morality. Generally, the theory is criticized
on the following grounds:

1. Egoism as an ethical theory is not really a moral theory at all.

Those who espouse egoism have very subjective moral standard,
for they want to be motivated by their own best interests,
irrespective of the nature of issues or circumstances.
2. Psychological egoism is not a sound theory inasmuch as it
assumes that all actions of men are motivated by self-interest.
It ignores and undermines the human tendency to rise above
personal safety as proved in thousands of examples of personal
sacrifices at times of calamities such as floods, earthquakes and
other natural disasters.
3. Ethical egoism ignores blatant wrongdoings. By reducing
every human act to self-interest and self-serving, the theory does
not take a clear stand against so many personal or organizational
vices such as corruption, bribery, pollution, gender and racial
discrimination.

 UTILITARIANISM: ETHICS OF WELFARE

The utilitarian principle holds that ‘An action is right from an ethical
point of view if and only if the sum total of utilities produced by that act
is greater than the sum total of utilities produced by any other act the
agent could have performed in its place’. The utilitarian principle
assumes that we can somehow measure and add the quantities of
benefits generated by an action and deduct from it the measured
quantities of cost (harm) that act produced, and determine thereby
which action produces the greatest total benefits or the lowest total
costs.

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Utilitarianism fits in correctly with the intuitive criteria that people use
when they discuss moral conduct. For instance, when people have a
moral obligation to perform some action, they will evaluate it on the
basis of the benefits or harms the action will bring upon human beings.
The theory leads to the inevitable conclusion that morality requires the
agent to impartially take into account everyone’s interest equally.

One major problem with the utilitarian theory concerns the

measurement of utility. Utility is a psychological concept and is highly
subjective. It differs from person to person, place to place, and time to
time. Therefore, it cannot be the basis for a scientific theory.

Another problem of the utilitarian theory concerns the lack of

predictability of benefits and costs.

The next problem concerns the lack of clarity in defining what

constitutes ‘benefit’ and what constitutes ‘cost’. This lack of clarity
creates problems, especially with respect to social issues that are given
different interpretations by different social or cultural groups.

 KANTIANISM: ETHICS OF DUTY

Kant stressed that the action must be taken only for duty’s sake and not
for some other reason. For Kant, ethics is based on reason alone and not
on human nature. The core idea of his categorical imperative is that an
action is right if and only if we can will it to become a universal law of
conduct. This means that we must never perform an action unless we
can consistently will that it can be followed by everyone.

Organizational Importance of Kantian Philosophy Kantian theory of

ethics has adequate relevance to a business organization. Though there
are lots of criticisms against Kantian ethics we would consider
the positive aspects of his ethics which would be beneficial in
organizational decision making. The categorical imperative of Kant
gives us firm rules to follow in moral decision making for certain

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issues, because the result of such actions does not depend on the
circumstances or the performer. Lying is an example. No matter how
much good may result from the act, lying is always wrong.

Kant introduces an important humanistic dimension to business

decisions. In the ethical theories of egoism and utilitarianism humans
are considered means to achieve the ends. In the new economic
scenario, human beings are sidelined by technological growth and other
developments. Kant gives more importance to individuals.

The two formulations of Kant are as follows:

1. To act only in ways that one would wish others to act when
faced with the same circumstances; and
2. Always to treat other people with dignity and respect.

 SOME MORE NORMATIVE THEORIES OF BUSINESS ETHICS

 THE STOCKHOLDER THEORY

The stockholder theory, also known as the shareholder theory, expresses

the business relationship between the owners and their agents who the
managers are running the day-to-day business of the company.
Managers (including the Board of Directors) act as agents for
shareholders. The managers are empowered to manage the capital
advanced by the shareholders and are duty bound by their agency
relationship to carry on the business exclusively for the purpose

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outlined by their principals. This fiduciary relationship binds managers

not to spend the available resources on any activity without the
authorization from their owners, regardless of any societal benefits that
could be accrued by doing so.

If the stockholders vote by a majority that their company should not

produce any obnoxious product—which in the perception of the
managers would be a profitable business proposition—the managers
still have to abide by the decision of the owners of the company.

Apart from this ‘consequentialist’ line of thinking in support of the

stockholder theory, there is another ‘deontological’ argument as well to
buttress it. The argument runs like this: ‘Stockholders provide their
capital to managers on the condition that they use it in accordance with
their wishes. If the managers accept this capital and spend it to realize
some social goals, unauthorized by the stockholders, does it not
tantamount to a clear breach of the agreement?’

 STAKEHOLDER THEORY

The theory is grounded in many normative theoretical perspectives

including ethics of care, ethics of fiduciary relationships, social contract
theory, theory of property rights, theory of the stakeholders as investors,
communitarian ethics, critical theory, etc. A corporate’s success in the
market place can best be assured by catering to the interests of all its
stakeholders, namely, shareholders, customers, employees, suppliers,
management and the local community. To achieve its objective, the
corporate would have to adopt policies that would ensure ‘the optimal
balance among them’.

As a normative theory, the stakeholder theory stresses that regardless of

the fact whether the management achieves improved financial
performance or not, managers should promote the interests of all
stakeholders. It considers a firm as an instrument for coordinating
stakeholder interests and considers managers as having a fiduciary

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responsibility not merely to the shareholders, but to all of them. They

are expected to give equal consideration to the interests of all
stakeholders. While doing so, if conflicts of interests arise, managers
should aim at optimum balance among them. Managers in such a
situation may be even obliged to partially sacrifice the interests of
shareholders to those of other stakeholders. Therefore, in its normative
form, the theory does assert that corporations do have social
responsibilities.

 THE SOCIAL CONTRACT THEORY

In its most acknowledged form, the social contract theory stresses that
all businesses are ethically duty bound to increase the welfare of the

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society by catering to the needs of the consumers and employees

without in any way endangering the principles of natural justice. The
social contract theory is based on the principles of ‘social contract’
wherein it is assumed that there is an implicit agreement between the
society and any created entity such as a business unit, in which the
society recognizes the existence of a condition that it will serve the
interest of the society in certain specified ways.

The social contract theory adopts the same approach as the one adopted
by the political theories towards deriving the social responsibilities of a
business firm.

When members of the society give the firms legal recognition, the right
to exist, engage them in any economic activity and earn profit by using
the society’s resources such as land, raw materials and skilled labor, it
obviously implies that the firms owe an obligation to the society. This
would imply that business organizations are expected to create wealth
by producing goods and services, generate incomes by providing
employment opportunities, and enhance social welfare. Such gains
occur to them in two distinct ways, namely, as consumers and
employees.

Taking into account these respective advantages and disadvantages,

business firms are likely to produce the social welfare element of ‘social
contract’ and enjoin that business firms should act in such a manner so
as to

1. benefit consumers to enable them reach maximization of their

wants;
2. benefit employees to enable them secure high incomes and other
benefits that accrue by means of employment; and
3. ensure that pollution is avoided, natural resources are not fast
depleted and workers’ interests are protected.

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ETHICAL PRACTICES IN GLOBAL CORPORATIONS

A global organization must not only understand the values, laws, and
culture and ethical standards of its own country but should also be
very sensitive to other countries where its subsidiaries are operating.
The ethical practices in global corporations are presented in the
following Table:
Corporation Area Ethical Initiative
Environment  Adopted energy conservation measurers
Walmart  Launched lighting efficiency program
 Started program for recycling of materials
Philanthropy  Launched program called “Education on Wheels”
 Started American Indian College Education Fund

Coca-Cola Health  HIV/AIDS awareness campaigns in Africa

Marketing  Relationship marketing with stakeholders
Social  Adopted ethical code of conduct
Responsibility

Nike Marketing  Adopted ethical code of conduct

Human Resources  Created ethics office headed by ethics director
Corporate social  Strictly compliance with the laws of all countries
Infosys responsibility  High degree of disclosure and transparency
Technologies  Management trustee for shareholders not for owners
 Created committees for compensation and audit
Sony Corporate
Corporation governance  Created office of independent directors
 Launched equity compensation plans

Code of ethics  Based on respect for human rights

 Stresses integrity and fairness in business
 Focuses on ethical personal conduct
Tata Steel  Novel response to the shift in societal expectations,
constant redefinition of laws and regulations, and the
CSR geo-political climate

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Ethical Influence of Globalization on Stakeholders

Business ethics propel the stakeholders of company towards higher level of performance.
Globalization provides an enabling environment in this endeavor. Shareholders, employees,
customers, suppliers, competitors, government and civil society are considered as
stakeholders of businesses. Ethical influence of globalization on stakeholders is described as
below:
Stakeholders Ethical Influence

 A shareholder’s perspective of business ethics focuses on making

decisions for the best interest of the company's investors. Ethical
shareholders tend to take greater responsibility for the profitability
Shareholders of the company

 Globalization provides better opportunities to the employees. Ethical

conduct enables them to integrate their personal goals with goals of
Employees organization.

 Globalization enables collaborations among governments across the

Government globe.
 The government can provide better services to citizens, check
corruption and enable transparency in processes.

 Globalization enables greater product variety to customers. They get

Customers cheaper products but learn to use them responsibly.
 Globalization enables suppliers’ better connectivity with their
customers.
 Ethical suppliers supply higher quality products and seek long
term profitability.
Competitors
 All the competing companies get wider market. They can also engage
in Collaborations in mutually beneficial areas.

 Due to increasing connectivity caused by globalization, civil society

is better aware of the problems of the populace and can rapidly take
Society up issues with the pertinent authorities.

I-MBA/SEM-V/BE/M-I PROF. NITA MEGHANI