CHAPTER 1

The Importance of Business

Ethics
 Why Study Business Ethics?
• Business decisions under great
scrutiny
– Global financial crisis created
diminished stakeholder trust
• Deals with questions about
whether practices are
acceptable
• No universally-accepted
approach for resolving issues
Source: © Jack Hollingsworth/Corbis
 Business Ethics
• Comprises principles, values, and standards that guide
behavior in the world of business

• Principles: Specific boundaries for behavior that are

universal and absolute
– Freedom of speech, civil liberties

• Values: Used to develop socially enforced norms

– Integrity, accountability, trust
 Americans’ Trust in Business
(% of respondents who say they trust the
following business categories a great deal)
 A Crisis in Business Ethics

• Consumer trust of businesses is declining

• No sector is exempt from ethical misconduct
• Stakeholders determine what is ethical/unethical
– Investors
– Employees
– Customers
– Interest groups
– Legal system
– Community

Source: Stockbyte
 Why Study Business Ethics?

• Reports of unethical behavior are on the rise

• Society’s evaluation of right or wrong affects its
ability to achieve its business goals
• Studying business ethics is a response to
Sarbanes-Oxley, FSGO, and stakeholder
demands for ethics initiatives
• Individual ethics alone is not sufficient
• Studying business ethics helps identify ethical
issues to key stakeholders
A Timeline of Ethical and Socially
Responsible Concerns
 Before 1960: Ethics in Business

• Theological discussions of ethics emerged

– Catholic social ethics included a concern for
morality in business, workers’ rights and living
wages
– Protestants developed ethics courses in their
seminaries and schools of theology
• The Protestant work ethic encouraged hard work
The 1960s: The Rise of Social Issues in
Business
• Societal social consciousness emerged
– Anti-business sentiment rose
• JFK’s Consumer Bill of Rights-
A new era of consumerism
– Right to safety, to be
informed, to choose,
and to be heard
• Consumer protection groups
fought for consumer
protection legislation
– Ralph Nader Source: Hisham Ibrahim
 The 1970s: Business Ethics as an
Emerging Field
• Business professors began to write about social
responsibility
– An organization’s obligation to maximize positive
impact and minimize negative impact on stakeholders
• Philosophers became involved
• Businesses became concerned with public image
• Conferences were held and centers developed
• Issues:
– Bribery – Product safety
– Deceptive advertising – Environment
– Price collusion
 The 1980s: Consolidation

• Membership in business ethics organizations

increased
• Ethics centers provided:
– Publications, courses, conferences and seminars
• Firms established ethics committees
• Defense Industry Initiative on Business Ethics and
Conduct (DII) emerged
– Foundation for the Federal Sentencing Guidelines
for Organizations
• Corporate support for ethics
 The 1990s: Institutionalization of
Business Ethics

• The Federal Sentencing Guidelines for Organizations

(FSGO)
– Set tone for compliance
• Preventative actions against misconduct
– A company could avoid/minimize potential
penalties
 The Federal Sentencing Guidelines for
Organizations
• Standards and procedures capable of detecting and
preventing misconduct
• High level oversight
• Care in delegation of authority
• Effective communication (training)
• Systems to monitor, audit, and report misconduct
• Consistent enforcement
• Continuous improvement
 The 21st Century: A New Focus

• Continued issues with corporate non-compliance

– Growing public/political demand for improved ethical standards
• Sarbanes-Oxley Act (2002)
– Most extensive ethics reform
– Increased accounting regulations
• FSGO reform (2004)
– Requires governing authorities to be well-informed regarding
business ethics programs
• Firm’s greatest danger is not discovering misconduct
early
• Basic assumptions of capitalism being debated
– Fears in the wake of global recession and financial meltdown
 Organizational and Global Ethical
Culture
• Ethical culture describes the component of
corporate culture that captures the values and norms
that an organization defines as appropriate conduct
• Creates shared values
• Goal is to:
• Minimize need for
enforced compliance
• Maximize utilization of
principles/ ethical
reasoning
Source: Triangle Images
Prevalence of Misconduct by Industry
 Ethics Contributes to Employee
Commitment
• Comes from employees who believe their future
is tied to the organization’s
• Are willing to make personal sacrifices for the
organization
– The more dedication on the part of the company,
the greater the employee dedication
– Concerns include a safe work environment,
competitive salaries and benefit packages, and
fulfillment of contractual obligations
 Ethics Contributes to Investor
Loyalty
• Companies perceived by their employees as
having a high level of honesty and integrity are
more profitable than companies with a low level
of honesty and integrity
• Ethical climates in organizations provide platform
for:
– Efficiency
– Productivity
– Profitability
 Ethics Contributes to Customer
Satisfaction
• Consumers respond positively to socially concerned
businesses
– Being good can be extremely profitable
• Customer satisfaction dictates business success
• A strong organizational ethical climate
places customers’ interests first
• Research shows a strong relationship between ethical
behavior and customer satisfaction
 Ethics Contributes to Profits
• Corporate concern for ethical
conduct is being integrated with
strategic planning
– Maximize profitability
• Corporate citizenship is
positively associated with:
– Return on investment and
assets
– Sales growth Source: PhotoLink

• Studies have found a positive

relationship between citizenship
and performance