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Ethics builds reputation

Article · June 2015

DOI: 10.1504/IJMABS.2015.070293

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Piero Mella Patrizia Gazzola

University of Pavia Università degli Studi dell'Insubria
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38 Int. J. Markets and Business Systems, Vol. 1, No. 1, 2015

Ethics builds reputation

Piero Mella*
Department of Business and Economics,
University of Pavia,
Pavia, 27100, Italy
Email: piero.mella@unipv.it
*Corresponding author

Patrizia Gazzola
Department of Economics,
University of Insubria,
Varese, 21100, Italy
Email: patrizia.gazzola@uninsubria.it

Abstract: The objective of this study is to point out how behavioural ethics and
reputation are linked and represent the conditions of existence for the corporate
system, understood as a long-lasting organisation of individuals or institutions
which produces outcomes for the external stakeholders. We think that ethics are
pivotal in determining the success or failure of an organisation. They affect a
company’s reputation and help to define a business model that will thrive even
in adversity. To show this link two theories are used: the firm interpreted as a
social, or socio-technical, system, open to exchanges with the environment, and
the firm as an open system, in its conditions of teleonomy, observed according
to the model of the organisation as an efficient system of transformation
(MOEST). Precisely because firms exist and operate within a given
environment, ethics must signify organisational conduct, and the daily respect
of human values allows the firm to achieve a coherent organisational
reputation.

Keywords: ethics; reputation; social system; open system; business system;

stakeholders; model of the organisation as an efficient system of
transformation; MOEST.

Reference to this paper should be made as follows: Mella, P. and Gazzola, P.

(2015) ‘Ethics builds reputation’, Int. J. Markets and Business Systems, Vol. 1,
No. 1, pp.38–52.

Biographical notes: Piero Mella is a Full Professor in Business Administration

and Management at the Department of Economics and Management of Pavia
University. From 1987 to 1992, he was the Dean of the Faculty of Economics
at the University of Pavia. From 1997 to 2006, he has been a Coordinator of the
Doctorate in Business Research at the same university. His current interests are
in the field of systems thinking, combinatory systems and control systems.

Patrizia Gazzola is an Assistant Professor of Accounting and Financial

Statement and Business Combination at the Department of Economics, Insubria
University of Varese, Italy. She is a member of the scientific board of the
Research Center on Ethics in Business and Corporate Social Responsibility
(CREARES). She conducts researches in corporate social responsibility,

Copyright © 2015 Inderscience Enterprises Ltd.

 Ethics builds reputation 39

in sustainability reports, in sustainable development and in financial statement.

She writes articles and books about corporate social responsibility and
sustainable development.

1 Introduction

The present study views the institutional enterprise along the lines Italian business
economics, which conceives of the firm as an institution (long-lasting organisation), a
third party with respect to both the individuals that comprise it and the external
stakeholders that interact with it. This perspective is shared by a set of theories (Freeman,
1984) well known to Italian ‘aziendalisti’, as they constitute the cultural environment in
which they grew up (Zappa, 1937, 1956; Masini, 1974). A more radical formulation
views the firm as a living entity, relatively independent of stakeholders, even while it
depends on them for its vital necessary resources (Vicari, 1991; Beer 1979, 1981; Mella
2014a).
The goal of the firm as a productive institution is the creation of value (appropriately
defined; Mella, 2011) for the firm itself and for the different socially-recognised groups
involved and having an interest in the firm [Cavalieri et al., (2009), p.21]. The systematic
creation of value requires that the condition of economic equilibrium be maintained over
time. To this end, the conditions of financial, monetary and overall strategic equilibrium
are to be respected.
Firms in an environment that is increasingly full of social and political connections
are no longer considered only as systems that produce economic and financial value, but
as actors, engines, and entities responsible for environmental development (Wilson,
1999) that are able to produce environmental and social value and in some cases even
environmental and social disvalue, in the form of environmental damage. The actions of
an organisation must therefore be contextualised and interpreted within a much broader
frame of reference, inserting organisations and the territory in a framework of reciprocal
and continuous interactions and interdependencies.
Firms, as social systems, are subject to the action of international organisations and of
governments, as well as to pressure from civil society, which asks with increasing
insistence that they set forth the conditions of accountability for their own actions, so that
they are judged not only for the ‘effects’ of these actions but for their ‘intentions’ as well.
Consumer boycotts, organised actions by citizen groups of entire local communities,
protests by non-governmental organisations (such as GreenPeace or Amnesty
International), collective movements such as those by environmentalists, press campaigns
that become particularly widespread and virulent in the wake of natural catastrophes or
egregious violations of human rights (Nike and Shell): these all represent expressions of
an increasingly louder ‘voice’ of civil society, which can influence business decisions.
The research shows how ethics serves to build a good reputation and how it serves as
a firewall that limits damage when something goes wrong. The model of the firm as a
system of efficient transformation is used and the work highlights the role of ethics in this
model.
The research methodology is based on the theoretical analysis of available literature
on sustainability frameworks, as well as methodologies for the integration of the
behavioural ethics and reputation. For the research the authors use some of the basic
40 P. Mella and P. Gazzola

methods of the scientific research to obtain the information necessary to the complex
systemic processing of the issue. The authors predominantly use methods of qualitative
research.
The first part is about the literature review. The authors describe and synthesise the
literature on the topic of sustainability because it is very wide and varied. The literature
and definitions research was conducted analysing the lines of thought retrieved in the
major and specialised journals. The second part is about the system theory and the ethical
behaviour in the model of the organisation as an efficient system of transformation.
The main contribution of this line of research is to explain the important relation
between behavioural ethics and reputation and it is shows how this relation is the
conditions of existence for the corporate system.
The result of the research shows that when stakeholders think highly of an
organisation, it is more likely to receive the benefit of the doubt when addressing a
controversy or crisis. The work explains that ethics gives the importance of ethical
behaviour and integrity in building trust, in this way ethics can play a vital role in
sustaining an organisation’s reputation. However, reputation management also requires a
thoughtful communications program to inform key audiences about an organisation’s
values and performance.

2 Literature review

According to the stakeholder approach, companies should be accountable not only to

their shareholders but also to all ‘people at stake’. Freeman (1984, p.46) described
stakeholders as “any group or individual who can affect or is affected by the achievement
of the organisation’s objectives”.
The concept of ethics and reputation has been a major concern of researchers since
the 1950s. There is a consensus among scholars and practitioners alike that the way in
which the public perceives a company influences corporate success (Fombrun, 1996).
However, there is no common definition of ethics for business and reputation constructs;
several scholars have adopted different, even contradictory definitions of them (Barnett
et al., 2006).
The changes in the economic and social context have led to greater attention to the
satisfaction of stakeholder expectations since this will impact the success of the firm
(Molteni, 2003). Companies should recognise the importance and need to consider
concepts such as: ethical, moral, ethical programs, ethical behaviour, social responsibility
and equity, and also try to implement these in their organisational culture (Nunes and
Simescu, 2010). These factors have led to a growing interest in, and to the evolution of,
the concept of social responsibility (De Bettignies, 2002), with a shift from the respect of
stakeholder expectations to the responsible behaviour of firms, which is intended to bring
out and strengthen the social citizenship of the firm (Vaccari, 1998) and the ‘rectitude of
the firm’ (Keeley, 1988).
According to Carroll (1991), business has a social role in society. This is normally
understood as the economic, legal, ethical and philanthropic responsibilities that
companies may have.
This paper considers the definition of ethics according to Miesing and Preble (1985):
“Ethics are frameworks for human conduct that relate to moral principle and attempt to
 Ethics builds reputation 41

distinguish right from wrong”. Mason et al. (1990) defined ethics as the inquiry into the
nature and ground of morality, in which morality is defined in the context of moral
behaviour.
Gbadamosi (2004) considers business ethics as a set of rules that stipulate how
businesses and their employees ought to behave. The perception of business ethics in a
company generates an ethical climate.
The second definition we used is reputation. Reputation is clearly a concept held in
the minds or cognition of stakeholders (Brower and Shrader, 2000; Rhee and Haunschild,
2006). As Fombrun defines it: “a corporate reputation is a perceptual representation of a
company’s past actions and future prospects that describe the firm’s overall appeal to all
of its key constituents when compared with other leading rivals” (Fombrun, 1996).
Alternatively, Gray and Ballmer display corporate reputation as a valuation of a
company’s attributes performed by the stakeholders, where affective components are
almost completely excluded (Gray and Balmer, 2006; Brown and Perry, 1994). The most
important stakeholders that effect corporate reputation are customers and employees
(Kitchen and Laurence, 2003).
Fombrun and van Riel (1997, p.10) propose an integrative definition of the reputation
construct by describing it as a collective representation of a firm’s past actions and results
that describe the firm’s ability to deliver multiple stakeholders. Deephouse (2000) and
Roberts and Dowling (2002) view reputation as a unique resource, since it is hard to
imitate. Rindova et al. (2005) consider that reputation reduces the uncertainty for
stakeholders by signaling positive attributes of the companies, such as product quality.
According to Roberts (2003, p.168) the firms “maintain good reputation if they
continue to meet the expectations of their key stakeholders, which for most companies
includes a high level of corporate social responsibility”.
Martin de Castro et al. (2006) deconstructed the reputation concept into two
components:

a business reputation

b social reputation.

The first includes different aspects of corporate reputation related to stakeholders closely
tied to business activity, such as customers and employees. The second involves the
insights and perceptions of stakeholders not so close to the daily operation of a firm, who
are known as the community. This reputation would be based on social and green actions
and policies. Van der Laan et al. (2008) differentiated among primary and secondary
stakeholders. Primary ones are involved in reciprocal, direct, and frequent exchanges
with the corporation and include employees, consumers and investors. Secondary ones
are more distant groups, who depend on the firm for the realisation of their goals;
however, the firm is not crucially dependent on them, so there is an imbalance of power
between these stakeholders and companies. These stakeholders are more interested in
community, diversity, environment and human rights. Furthermore, the role of reputation
is becoming increasingly important in competitive markets (Abimbola and Vallaster,
2007).
Little has been written so far about the correlation between ethics and reputation,
which can be shown by inserting the two concepts into a systemic business context.
42 P. Mella and P. Gazzola

3 Methodology

This paper uses a multi-stakeholder perspective, with the aim of investigating the firm as
an open system and a system of transformation. It will analyse the relativity of ethical
behaviour by interpreting the firm as
“a system open to the environment and governed by subjects that live in given
contexts and who bring with them, in carrying out their business management
functions, the needs, culture and morality that characterizes them as part of an
organization which desires or promotes such values and which expresses these
more or less forcefully and consciously. The ethics in a firm is composed of the
same features as that which one finds in the socio-economic context in which
the firm operates. This initial awareness introduces the concept of the relativity
of ethical behaviour in time and space”. [Cavalieri, (2007), p.31]
In order to properly analyse the topic at hand, two theories will be presented. According
to the first theory, the firm is interpreted as a social or socio-economic system open to
exchanges with the environment – from which it is separated by a boundary that delimits
the legal relations and economic processes – to which it is structurally linked through
input and output flows (Mella and Gazzola, 2004). The systemic approach (Paolone and
D'Amico, 2011) that is used allows for an explanation of firm-environment relations; the
economic organisation of the firm is considered as an aspect of the socio-economic
system, which is made up of all those with internal economic interests in the firm, and the
latter system, in turn, as an aspect of a social system of greater dimension (Superti Furga,
1977).
To determine more precisely the boundaries of the ethical behaviour of an
organisation (in particular, a firm), a second theoretical framework will be used, whereby
the firm, in its conditions of teleonomy, is observed as a system of efficient
transformation that remains in existence only by searching for the maximum efficiency in
carrying out five types of vital transformations: productive, economic, financial,
managerial and entrepreneurial.

4 The firm a an open system

Starting from the link between the firm and its external environment, the firm can be
interpreted as an open social or socio-technical system contained in a macrosystem
characterised by an environment from which the firm is separated by a boundary and to
which it is structurally linked through input and/or output flows (Gazzola, 2007). This
boundary is understood as a factor of identity closure, but also as an opening and frontier
to the environment.
The firm can be seen as a typically economic social institution which forms a
teleological organisation whose activity is directed toward given objectives: economic
production understood as a return on capital and labour and variation in the economic
value of capital. This production is important in satisfying the motivations of those
participating in the economic undertaking (Masini, 1974; Superti Furga, 1977).
Every system has its own operating logic, which tends above all to satisfy, in the
short-term, its own survival. The propensity for an open system to maintain its structural
project despite variations in its components is defined as teleonomy, which permits a
system to remain vital in its environment. One can distinguish between exogenous and
 Ethics builds reputation 43

endogenous teleonomy. The former is the tendency of the firm to remain in existence,
since the environment appreciates its outcomes and considers it to be useful. The
production of outcome appreciated by the environment and ethical behaviour represent
fundamental conditions of an institution's vitality. Endogenous teleonomy refers to the
tendency of the system to remain vital by maintaining efficiency and productivity in its
structure.
Open systems are also dynamic systems in space and over time. Teleonomic
behaviour leads the system to react to environmental changes in order to continually
adapt to changing conditions, even to the point of changing the original structure.
In order to survive the organisation needs a system of dynamic management that can
adapt to continuous and sudden environmental change. As a result dependence is created
between the firm and its environment which entails general ethical attention with respect
to its stakeholders, an ethics of the territory, etc., understood as an ethics of social
responsibility towards the stakeholders and the territorial community (Rusconi, 2007).
The attention to these responsibilities is the necessary condition for survival in a complex
social system such as the present one.
It is not enough to analyse the firm through a multi-stakeholder approach (Freeman
and Velamuri, 2006); it is also necessary to consider the corporate system's ability to
maintain itself in a state of equilibrium by responding to the internal and external
requirements determined in part by the macrosystem consisting in the firm's environment.
Moreover, this equilibrium must not be achieved to the detriment of the interests of the
weakest external stakeholders, which occurs, for example, in the case of clients when
markets are not sufficiently efficient.
From this perspective the firm, even though it acts to create value for shareholders,
tends to align the latter over the long term with these of the other stakeholders, thanks to
the conscious and responsible behaviour of management (Bhattacharya et al., 2011). An
important role in guaranteeing the firm's economic efficiency is its ability to manage the
aspirations of the various groups with an interest in it. But this capacity must not lead to
the absolute optimisation of management results but guarantee that such optimisation
respects the norms that discipline ethical behaviour within the firm's environment.

5 The firm as a system of efficient transformation

The second theoretical framework views the organisation as an open system in its
conditions of teleonomy. The firm is seen as a ‘cognitive’ system based on the model of
the organisation as an efficient system of transformation or MOEST [Mella, (2014a),
Ch.8] it continues to exist only by efficiently carrying out the following five types of
transformations, each of which must achieve its objectives by searching for the maximum
efficiency in maximising several fundamental variables as a condition of teleonomy:
1 entrepreneurial transformation, by which information from the external and internal
environments is transformed into strategies to modify the strategic position of the
firm, thereby allowing it to remain vital for an indefinite period of time in the ethical,
social and political environment to which it belongs and with which it interacts, in
part through human and communications flows that produce knowledge, trust and
reputation (Prahalad and Bettis, 1986; Harrison and St. John, 1998)
44 P. Mella and P. Gazzola

2 managerial transformation, through which the strategic objectives, defined by the

entrepreneurial transformation while also taking into account internal and external
information, are transformed into decisions aimed at maximising efficiency
(Davenport, 1993; Lax and Sebenius, 1986); the heart of this transformation is an
effective and efficient control system that operates in an ethical manner
3 productive transformation; this is a transformation of utility: volumes of factors of
production with a given utility – understood as the tendency for goods to satisfy
needs or permit aspirations to be attained – are transformed into volumes of products
able to produce greater utility according to rules of efficiency aimed at maximising
productivity and quality variables
4 economic transformation; this is a transformation of values that tries to maximise
economic efficiency through market choices that create the maximum gap between
prices and unit costs of production (appropriately quantified), thereby producing the
maximum economic value, usually quantified as operating result
5 financial transformation; through which the firm creates the invested capital needed
to activate and maintain the economic processes, raising risk capital (equity) and
debt capital (debt), thereby optimising the level of the financial lever to obtain the
maximum return on equity that is compatible with the cost of debt.
The first two are ‘cognitive transformations’ through which organisations becomes a
cognitive system that decides on interactions with the economic, social and political
environment, inevitably also relying on human and communications flows. The final
three are technical-instrumental transformations that interact with the environment to
produce output and outcomes. This is the functional model of the organisation-firm as a
‘cognitive’ system, and it is complementary to Beer's (1979 and 1981) viable system
model, or VSM, which is a structural model (Mella, 2014a).
From the cognitive transformations of the MISTE it can be deduced that every
permanent organisation, or firm, oriented toward production – for profit or not-for-profit
– can be conceived of as an efficient transformer of the entrepreneur’s representation of
the environment into decisions and operational programs, which, once carried out,
produce a recursive dynamics (the behaviour of the organisation) through a continuous
feedback between entrepreneurial and managerial decisions (mental activity) and the
results of the technico-productive transformations directed at the environment. Through
this self-regulated behaviour, the organisation, as a cognitive system, produces a
continuous change in its strategic position and, through the learning process, produces
gradual improvement in its cognitive capacity, on which future actions depend (Hejl,
1984).
The cognitive activity of the organisation assumes an efficient system of information
(data gathering), a system of preferences (evaluations, judgments), and a computational
system that processes the information and transforms it into cognitive models (strategies,
plans, programs, projects, etc.) on which decisions are based. The preferences are
included in the entrepreneurial and managerial culture and represent the qualitative base
on which managerial decisions are constructed, in that they permit the cognitive system
to evaluate the environmental stimuli and classify them as positive or negative for the
organisation’s survival. Thus, the information is transformed into judgments through the
system of preferences that allows the entrepreneur and management to select (classify
 Ethics builds reputation 45

based on a value) the information considered useful and transform this into operational
decisions.
Preferences are usually arranged in levels and form a dynamic system. The highest
level in the system of preference for the organisation, from which the lower-level
preference system derives, is defined as the system of values, or ethical system, which is
part of the organisation’s cultural system (Hampden-Turner, 1990).

6 The firm and the socio-economic environment

The technico-productive transformations, produced with maximum efficiency, are

subordinated to the entrepreneurial and managerial decisions (cognitive transformations),
whose maximum aim is the creation of value for the firm and for the different categories
of socially-recognised stakeholder associated with it. The systematic creation of value
entails the continuing respect of the conditions of economic equilibrium over time.
Nevertheless, the behaviour of an organisation must be contextualised and interpreted
in a much broader manner, by referring the organisation and the territory to a framework
of mutual and continuous interactions and interdependencies. In this sense they become
actors, engines and entities responsible for the production of environmental and social
value, avoiding the production of environmental and social disvalue in the form of
environmental damage.
The firm’s reputation as a social actor is, in fact, achieved and consolidated based on
the evaluation of this capacity to effectively interact with the environment, on the ability
of the entrepreneurial and managerial transformation not to focus solely on the firms
economic development but to also produce an internal development that is sustainable in
terms of the environment while remaining within the recognised ethical limits (Gazzola,
2007).
Therefore, the firm must be viewed with regard not only to its internal system of
instrumental transformations but also to its internal socio-economic environment, as a
subsystem of a larger social system, without ever ignoring or underestimating the need
for the overall system of transformation to obtain satisfying flows of economic
production that enable it to achieve and strictly maintain the conditions of efficiency of
the MISTE transformations. Thus, an adequate amount of operating result is the condition
for maintaining efficient even the financial transformation, thereby producing returns on
equity capital (roe) and debt capital (rod) judged equitable by investors, given the risk
they are willing to bear (Mella, 2005).
In the same way, the organisation-firm must satisfy the conditions of existence of the
social structure, since only continuity and the development of the individuals that
compose this structure can allow the organisation-firm to behave ethically and maintain
its equilibrium as a long-lasting institution.
From a similar perspective, in evaluating the activity of an organisation as a social,
cognitive, efficient-transformation system, differing factors arise which are also linked to
the ethical-social behaviour of the organisation as such and of its members as possessors
of information and actors in the organisation’s processes, which project the analysis
beyond a strict consideration of economic and industrial performance (Sciarelli and Tani,
2013).
In commenting on the views of Porter and Kramer (2007), Cavalieri maintains that
the “socially-integrated’ firm does not limit itself to internalising in its strategies the
46 P. Mella and P. Gazzola

decisions aimed at not bringing harm to the company in its carrying out of activities that
make up its chain of value, but also seeks and undertakes those investments that can
achieve important benefits for civil society and, at the same time, increase its own
competitive advantage and its performance.” Thus, the firm pursues social integration in
the search for and realisation of synergies between the development of society and the
growth of its business. According to Cavalieri, Porter’s thinking on the firm’s social
responsibility takes on great significance “above all regarding the idea – clearly spelled
out – of dealing with problems of ethics and social responsibility not so much as a
background element or as a cosmetic event, adopted to give luster to an organisation, but
as a ‘long-term investment in future competitiveness’, to be dealt with and managed
within the business function, which carries out the strategic direction of the firm.”

7 Providing meaning to the organisation’s ethical behaviour

The MISTE, which systematically connects the transformations that characterise the
activity of any organisation, makes clear the meaning of ethical behaviour, identifying as
well the ‘areas’ in which non-ethical-behaviour can manifest itself.
Reviewing the schema derived from the MISTE, for each transformation the main
variables will be indicated for which ethical behaviour must be particularly monitored,
with the warning that often non-ethical behaviour crosses over into illegal, often criminal,
behaviour.
Though not always easy to separately analyse the ethical nature of behaviour for each
of the five transformations – since all decisions derive from the entrepreneurial and
managerial transformations – looking at each transformation one by one in any case
allows for a systematic analysis.

7.1 Entrepreneurial transformation

The essence of the entrepreneurial transformation is the strategic definition of the
business, in particular the choice of products to include in the business portfolio and the
production process portfolio. The management of the business dictates clear-cut ethical
behaviour: to avoid those products that, though highly profitable, are harmful to
consumers. This signifies above all that it is ethically immoral to produce goods
forbidden by societal norms (drugs, weapons for individuals, psychiatric drugs, etc.);
secondly, that it is necessary not to produce goods made with substances or components
which are ethically illegal (harmful dyes in toys, human biological components in
cosmetics, polluting and non-degradable materials, untested GMOs, etc.); thirdly, that
any form of experimentation regarding the effects of products on consumers must always
be guaranteed.

7.2 Managerial transformation

The crux of managerial transformation is twofold: translating strategies into operating
objectives formalised into programs and budgets and the development of concrete
organisational and managerial control systems that directly impact the composition of the
organisation and the work methods of its members. In fact, in the area of organisational
control non-ethical behaviour can occur on the part of management and entrepreneurs.
 Ethics builds reputation 47

Organisational control starts with the creation itself of the organisational structure, with
the introduction of human resources, and it reaches its maximum expression in the
drafting and management of rules of co-existence regarding the firm’s social system and
rules of work. Above all, it is not ethical to structure the organisation based on the
reprehensible rules of ‘nepotism’, ‘slavery’ and ‘discrimination’. In the first case, by
always favoring ‘well-thought-of’ persons irrespective of their abilities; in the second by
constraining workers to accept a contractual situation well below correct ethical standards
(foreign workers, minors, etc.); and, in the third, by discriminating based on gender, age,
nationality, etc. The managerial control of worker performance at all levels must also be
attentive, rational and non-oppressive. Thus, it is not ethical to adopt a control based on
the principle of sanctions disproportionate to the error committed by the worker; nor
controls which are harassing, threatening and punitive, with the continuous threat of
dismissal without any possibility of defence, or encourage mobbing or the tolerance of
bullying or ‘hazing’. Nevertheless, ethical behaviour must not only concern the
management but the workers as well. Many cases can be identified here: the divulging of
manufacturing secrets and know-how, boycotts, unjustified absenteeism, the slowing
down of the pace of production and the conscious deterioration in the quality of
performance are all clearly against the common rules of ethical behaviour, as well as
against the firm’s code of ethics.

7.3 Productive transformation

The ‘core’ of the productive transformation is the achievement and maintenance of the
maximum quality and productivity that is compatible with the firm’s available production
technology.
Quality presents three important aspects: the product’s conformity to the
specifications guaranteed the client (design quality); the product’s ability to satisfy the
client’s needs; and the product’s ability to protect the environment. It is not difficult to
identify unethical corporate behaviour: the conscious use of material and components that
are inadequate, harmful or subject to the risk of sudden breakage, only for the purpose of
limiting production costs; imitating others’ products and thereby consciously deceiving
clients; using material and components which are polluting and non-disposable, or
oversized packaging, without properly verifying the sustainability of the production for
the environment. Failing to carry out quality control tests, or doing so in an inadequate
manner, not recalling products certified as defective in order to replace or repair them
represent for many firms immoral, ethically inadmissible and harmful behaviour that can
place consumer health at risk.
Productivity is the feature of productive processes that minimises the need of factors
per unit of product (Mella, 2014b). An intense, anomalous, deliberate exploitation of the
capacity and length of the working activity of employees (child labour, lower work
breaks), especially those structurally linked with the speed of machinery, represent
evident unethical behaviour. Creating obstacles to normal trade union relations,
sanctioning group behaviour, and the like, are further examples of unethical behaviour.

7.4 Economic transformation

The principal aim of the economic transformation is to maximise economic efficiency,
which translates into obtaining the highest price at the minimum unit cost of production
48 P. Mella and P. Gazzola

(however this is defined). Typical behaviour that goes against ‘business ethics’ is the
search for hidden agreements with other competitors in order to artificially increase
prices, thereby harming consumers. In many countries this behaviour is also sanctioned
by law (anti-trust and anti-collusion laws). Equally censurable, from the ethical point of
view, are attempts at raising prices and demand through deceitful advertising campaigns,
the illicit alteration of product quality (GMO, sugar, whiteners, etc.), adding ‘gadgets’ to
the product which are non-utilisable and difficult to dispose of (oversized packaging for
small-sized products), and trying to artificially alter prices by using contrived contracts,
even going so far as to intimidate customers. Even with regard to the containment of
production costs one can find many examples of unethical behaviour: using supplies
whose quality cannot be verified, using suppliers with dubious morals who offer low
prices, not carrying out proper quality control tests, using material and components
beyond their expiry dates, saving on the costs of maintaining a decorous work
environment, and not permitting workers to attend refresher training courses, and so on.

7.5 Financial transformation

The financial transformation has the twofold objective of minimising rod (the cost of
financing: the return on debt) and maximising roe (the return on risk capital: return on
equity), in order to produce equitable dividends and revenue. Along with these two
objectives there is a third one: to adequately balance the financial lever (debt/equity ratio)
in order to avoid a structural under-capitalisation and excessive need for debt, with an
increase in the risk of repayment. Clearly, altering the economic results of the balance
sheet in order to deceive investors and shareholders does not represent ethical
management behaviour, especially when this favors the distribution of rewards, bonuses
and shares. The size of the roe determines the firm’s economic value; thus, it is not
ethically acceptable to falsify roe in order to produce artificial and deceitful variations in
share prices, which clearly alter investors’ evaluation criteria regarding shares.
By indicating several common and clear-cut unethical forms of behaviour for each of
the organisational transformations, a meaning has been given to ‘the organisation’s
ethical behaviour’, a term that is often vague and improperly used. It must again be
pointed out that much reprehensible behaviour by organisations is not only contrary to
ethical standards but, in many cases, contrary to law, and as such subject to legal
sanctions. It is also useful to note the relativity of what we consider to be ethical and
unethical behaviour; in fact, understanding what is ethical is often inherent in the culture
of the social context in which the organisations are formed and firms operate. Finally, as
Cavalieri states, “the constraints of economic efficiency mean, as we know, that firms
must continually adjust to the changing quali-quantitative conditions of the market”
(Cavalieri, 1999). In this context, the ethical link between the firm and the stakeholder is
fundamental, though not absolute.

8 Conclusions: consensus and ethics

The firm, as an institution existing in a social and territorial context with which it must
deal, is subjected to the environment’s quali-quantitative changes. In assessing the ethical
behaviour ‘of’ and ‘in’ organisations we must therefore always keep in mind that the firm
must satisfy the conditions of existence of the social system that comprises its
 Ethics builds reputation 49

organisation, since only continuity and the development of the social system will allow
the firm to maintain its equilibrium as a long-lasting institution of individuals.
Nevertheless, the firm must be viewed not only in terms of its internal
socio-economic system but also as a subsystem of a broader social system, without,
however, ignoring or underestimating the need for the overall transformation system to
produce optimal flows of economic production that will allow it to strictly satisfy the
conditions of efficiency needed to maintain in existence the firm’s system of economic
transformation. An adequate operating result is a condition for also maintaining the
efficiency of the financial transformation, thereby ensuring a return on equity capital
(roe) and debt capital (rod) that investors feel is equitable, given their risk profile.
When the ethical evaluation goes beyond the internal organisational context and
extends toward the firm’s social environment, it is not possible to limit ourselves to
assessing the organisational decisions based only on a relatively restricted economic
logic; the horizon must be expanded to take into consideration several qualitative
elements that derive from the firm-environment interaction. The corporate ‘economic’
system must always be viewed as a moment of the ‘social’ system of which it is a part
(Superti Furga, 1977).
In effect, in order to survive, in particular in a dynamic and interconnected
environment, the organisation makes political decisions that refer to the social life of the
collectivity of citizens. Since most of the economic choices made by firms produce
outcomes which are not quantifiable economically for the social community, when
economic decisions are made so, too, are political ones (Superti Furga, 1977).
In fact, linked to the firm’s mission are other benefits to society: the creation of direct
employment opportunities or indirect ones (components and services for the firm,
services for workers and their families), the development and spread of knowledge
(scientific, technological, commercial, managerial, organisational, etc.), the contribution
to the trade balance, tax revenue for the state and local governments, and so on (Coda,
1988).
It is precisely due to these interactions, both in the socio-economic macro-system and
in corporate organisations, that the problem of consensus over economic decisions has
become more urgent. Therefore, in all modern-day legal systems there are laws for the
governance of firms that are led by entrepreneurs and governed by managers. In a similar
vein, in assessing the ethics of corporate behaviour given the ‘open system’ nature of
organisations (Cavalieri, 2002) various factors arise also related to the ethico-social
behaviour of the organisation as a whole and its individual members, the latter as
possessors of information and actors in the organisation’s processes, which take the
“analysis beyond the strictly economic and industrial performance level” (Cavalieri,
2002). In this regard, morality as an exercise of virtue can also be interpreted according
to the conceptions of Kantian morality (Kant, 1786), since the philosopher stated that
“…there can exist a moral situation only when the will to act is determined not by an end,
whatever this may be, even the highest, but by the pure sense of duty, by a categorical
imperative; that is, when an action is desired only in and of itself, without any regard to
other ends…”. [Ferraris Franceschi, (2002), p.24]
The basis of corporate ethics always entails the relation between firm and society,
inspired by principles of correctness and equity; correctness and equity in the exchange
relationship between the resources of the society drawn on by the firm and the wealth, or
new resources, furnished to the firm by the undertaking itself (Gazzola and Colombo,
2014).
50 P. Mella and P. Gazzola

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