BUSINESS

ETHICS

IMPORTANCE OF BUSINESS ETHICS

OBJECTIVES

– Describe the nature and origin of ethics.

– Define business ethics and explain its importance
– Identify the reasons for running a business ethically
– Determine the costs of unethical business practices
– Explain the development of business ethics and the creation of a
global ethical culture
– Describe the relationship between organizational ethics and
performance
ORIGIN AND NATURE OF ETHICS

– Ethics comes from the Greek word ethos, meaning character

– Ethics, in ancient Greece, was concerned with the development of a virtuous
and moral character
– The Greeks believed that developing character would lead one not only to
knowing the right thing to do, but actually doing the right thing or living the
right way of life
Socrates Method

– Socrates was the first to recognize the value of questions that affect how a
person should live
– Socratic Method – the process that Socrates made to investigate through the
value of questions that affect how a person should live
– Socrates preached that man must examine his life. According to him, an
unexamined life is not worth living.
ETHICS DEFINED

– The theory of right conduct or the Philosophy of Morals

– The standard of character set by a particular society of men
– A science of moral duty, of ideal human character and of standards of human
conduct
– The study of moral judgments
– ETHICS is the study of the methods and principles used to distinguish good from
bad, right from wrong actions
BUSINESS ETHICS

– Is concerned primarily with the relationship of business goals and techniques to

specific human ends
– It studies the impacts of acts on the good of the individual, the company/firm,
the business community and society as a whole
– Business ethics studies the special obligations that a man or a citizen accepts
when he becomes a part of the world of commerce
BUSINESS ETHICS

– Comprises organizational principles, values, and norms that may

originate from individuals, organizational statements, or from the
legal system that guide individual and group behaviour in business.
 Reasons for Studying Business Ethics

1. Business decisions can affect a very wide range of people – employees,

stockholders, management, suppliers, customers, and surrounding
communities
2. Unethical behavior creates legal risks, as well as financial and marketing risks
3. Managing ethically can pay significant dividends in organizational structure
and efficiency
4. A preparation for students for a career in contemporary business
5. It helps you to begin to identify ethical issues when they arise and recognize
the approaches available for resolving them.
6. To learn more about the ethical decision-making process and about ways to
promote ethical behaviour within the organization.
7. To understand how to cope with conflicts between your personal values and
those of the organization in which you work.
Nine Good Reasons to Run a Business
Ethically

1. Litigation/indictment avoidance
2. Regulatory freedom
3. Public acceptance
4. Investor confidence
5. Supplier/partner trust
6. Customer loyalty
7. Employee performance
8. Personal pride
9. It’s right
 COSTS OF UNETHICAL BUSINESS PRACTICES
LEVEL I COSTS
◼Government fine & penalties
◼Civil penalties arising from
class action lawsuits and other
litigation aimed at punishing
the company for its offense
and the harm done to others
◼The costs to shareholders in
the form of a lower stock price
Get more executive
attention:visible (and possibly
less damaging costs)
LEVEL 2 COSTS
◼Legal and investigative costs
incurred by the company
◼The costs of providing remedial
education and ethics training to
company personnel
◼Costs of taking corrective
actions
◼Administrative costs associated
with ensuring future
compliance
LEVEL 3 COSTS
◼Customer defections
◼Loss reputation
◼Loss employee morale and
higher degree of employee
cynicism
◼High employee turnover
◼Higher recruiting costs
and difficulty of attracting
talented employees
◼Adverseeffects on
employee productivity
◼The costs of complying
with often harsher
government regulations
Get less executive attention:
hidden (perhaps more
damaging costs
The Cost of Unethical Business
Practices

– The diagram below shows the cost to business of ethical failures from level 1
the lowest costs in terms of fines, penalties and lower stock price but get more
attention to the company’s executive. Level 2 costs represent legal and
investigative costs, remedial training and corrective action costs. The costs is
much higher and also get more attention to the company’s executive. Level 3
costs are hidden as they are hard to quantify and as such get less executive
attention but more damaging than the two.
THE DEVELOPMENT OF BUSINESS
ETHICS

1960s 1970s 1980s 1990s 2000s

Environmental Employee Bribes and Sweatshops and Cybercrime

issues militancy illegal unsafe working
contracting conditions in
parties third-world
countries
Civil right issues Human rights Influence Rising corporate Financial
issues peddling liability for misconduct
personal
damages
Increased Covering up Deceptive Financial Global issues,
employee- rather than advertising mismanagement Chinese product
employer correcting issues and fraud safety
tension
THE DEVELOPMENT OF BUSINESS
ETHICS

1960s 1970s 1980s 1990s 2000s

Changing work Disadvantaged Financial fraud Organizational Sustainability
ethic consumers ethical
misconduct
Rising drug use Transparency Intellectual
issues property theft
THE DEVELOPMENT OF BUSINESS
ETHICS

– The study of business ethics evolved through five distinct stages. Before 1960,
business ethics issues were discussed primarily from a religious perspective.
The 1960s saw the emergence of many social issues involving business and the
concept of social conscience as well as a rise in consumerism, which culminated
with Kennedy’s Consumers’ Bill of Rights .
THE DEVELOPMENT OF BUSINESS
ETHICS

– Business ethics began to develop as an independent field of study in the 1970s,

with academics and practitioners exploring ethical issues and attempting to
understand how individuals and organizations make ethical decisions. These
experts began to teach and write about the idea of corporate social
responsibility, an organization’s obligation to maximize its positive impact on
stakeholders and minimize its negative impact.
THE DEVELOPMENT OF BUSINESS
ETHICS

– In the 1980s, centers of business ethics provided publications, courses,

conferences, and seminars, and many companies established ethics committees
and social policy committees. However, less government regulation and an
increase in businesses with international operations raised new ethical issues.
– In the 1990s, government continued to support self-regulation. Organizational
ethics programs were promoted by providing incentives for companies to take
action to prevent organizational misconduct.
THE DEVELOPMENT OF BUSINESS
ETHICS

– The twenty-first century ushered in a new set of ethics scandals, suggesting

many companies had not embraced the public’s desire for higher ethical
standards
– The current trend is away from legally based ethical initiatives in organizations
and toward cultural initiatives that make ethics a part of core organizational
values. The ethical component of a corporate culture relates to the values,
beliefs, and established and enforced patterns of conduct employees use to
identify and respond to ethical issues.
GLOBAL ETHICAL CULTURE

Ethical culture
-is acceptable behaviour as defined by the company and
industry
- the component of corporate culture that captures the
values and norms an organization defines and is compared to by its
industry as appropriate conduct
Goal of ethical culture

– the goal of an ethical culture is to minimize the need for enforced compliance of
rules and maximize the use of principles that contribute to ethical reasoning in
difficult or new situations
GLOBAL ETHICAL CULTURE

– Globally, businesses are working closely together to establish standards

of acceptable behavior. We are already seeing collaborative efforts by a
range of organizations to establish goals and mandate minimum levels.
Examples are the creations of the following organizations:

– European Union (EU)

– North American Free Trade Agreement (NAFTA)
– Southern Common Market (MERCOSUR)
– World Trade Organization (WTO)
THE ROLE OF ORGANIZATIONAL
ETHICS IN PERFORMANCE
 THE ROLE OF ORGANIZATIONAL
ETHICS IN PERFORMANCE

– Contributes to employee commitment

– Contributes to investor loyalty
– Contributes to customer satisfaction
– Contributes to profits
Contributes to employee commitment
– Employee commitment comes from workers who believe their future is tied to
that of the organization and from a willingness to make personal sacrifices for
the organization. The more a company is dedicated to taking care of its
employees, the more likely the employees will take care of the organization.
Contributes to investor loyalty
– Ethical conduct results in shareholder loyalty and contributes to success that
supports even broader social causes and concerns. Investors today are
increasingly concerned about the ethics and social responsibility that creates
the reputation of companies in which they invest, and various socially
responsible mutual funds and asset management firms help investors purchase
stock in ethical companies. Investors also recognize that an ethical culture
provides a foundation for efficiency, productivity, and profits. Investors know,
too, that negative publicity, lawsuits, and fines can lower stock prices, diminish
customer loyalty, and threaten a company’s long-term viability.
Contributes to customer satisfaction
– It is generally accepted that customer satisfaction is one of the most important
factors in a successful business strategy. Although a company continues to
develop and adapt products to keep pace with customers’ changing desires and
preferences, it must also develop long term relationships with its customers and
stakeholders. High levels of perceived corporate misconduct decreases
customer trust. On the other hand, companies viewed as socially responsible
increase customer trust and satisfaction.
Contributes to profits
– A company cannot nurture and develop an ethical culture unless it has achieved
adequate financial performance in terms of profits. Businesses with greater
resources—regardless of their staff size—have the means to practice social
responsibility while serving their customers, valuing their employees, and
establishing trust with the public. Ethical conduct toward customers builds a
strong competitive position shown to positively affect business performance
and product innovation
Summary

– This module provided an overview of the field of business ethics and introduced the
framework for the discussion of this subject. Business ethics comprises organizational
principles, values, and norms that may originate from individuals, organizational statements,
or from the legal system that primarily guide individual and group behavior in business.
Investors, employees, customers, special interest groups, the legal system, and the community
often determine whether a specific action is right or wrong, ethical or unethical. Studying
business ethics is important for many reasons. Recent incidents of unethical activity in
business underscore the widespread need for a better understanding of the factors that
contribute to ethical and unethical decisions. Individuals’ personal moral philosophies and
decision-making experience may not be sufficient to guide them in the business world.
Studying business ethics helps you begin to identify ethical issues and recognize the
approaches available to resolve them.