Business Ethics and Social Responsibility

The course deals with the fundamental concepts,

principles, and practices of ethical standards in the
business environment. It combines the theoretical
foundations of setting up business enterprises with the
conduct of entrepreneurial activities in the context of
one’s accountability and social responsibility.
Specifically, the course aims to: (1) provide students with
a basic understanding of the mechanisms whereby
companies can be made to act in the best interest of
shareholders, other stakeholders, and society as a whole;
(2) provide students with knowledge of general ethical
principles as applied to the special situations of business
and the ability to make informed judgments through case
analyses; and (3) equip students with the ability to
formulate basic strategies in relation to corporate ethics
and governance.

Additionally, this module contains two (2)

lessons which will set our focus on the Nature and Forms
of Business Organization and the Social Functions of
Business.

1
 Business Ethics and Social Responsibility

PRE-ASSESSMENT
WORD SEARCH: Circle the words that you will find in the box below. List
the words and give its definition.

B P O I A G H J N O M P V A E R T Z
V U A N O P A R T N E R S H I P B N
D O S S P E T Y G D A C V B N M C B
D G V I E J N T M Y V A D V Z Q C B
P H O D N C F R Z V Z A D F T Y G B
R B L E T E M P L O Y E R E R F A C
O C N R J F S A E R U I B V N M T E
F A D T W H I S T L E B L O W I N G
I D E R R F G H T M U I E Z B J B A
T E R A T A F D P T B Y U I M N A E
Z T A D G A E L H B L E T E M P L H
R H M I Y C O R P O R A T I O N A R
E I B N U Y F D P T B Y U I M N A E
Y M I G E V H J A E R U I B G H R T
S O L E P R O P R I E T O R S H I P

WORD DEFINITION

2
 Business Ethics and Social Responsibility

THE ROLE OF BUSINESS IN SOCIAL

AND ECONOMIC DEVELOPMENT

PROFIT SHARING SYSTEM AT SAN JOSE KITCHEN

CABINETS MANUFACTURING
From the start of business in 1982, San Jose Kitchen Cabinets was already
sharing profits with employees. Although this price is not common, Mr. Chan,
founder and manager, had always been of the belief that profit sharing can aid
economic stability and decrease unemployment. The profit share percentage of
employees was arbitrary, until in 1987, Mr. Chan realized that in any economic
activity or business enterprise, there are always two partners: labors and capital,
and one cannot exist without the other. Thus, it followed that a 50/50 percent share
would be logical. This profit share is over and above the salaries and social
security paid to the employees. In addition, there was a cap on executive
compensation: there us a policy that the compensation, both salary and profit share,
of the highest ranking employee should not exceed ten times that of the lowest
ranking employee. All in all, a lot of efficiencies have been gained: the average
return on equity from 1987 to the present has been 30%, and high levels of job
satisfaction have been felt throughout the organization.

INTRODUCTION

The unit’s opening story makes us realize that there are Filipino
businessmen who practice social responsibility in business through fairness and
generosity to employees. Profit sharing has the positive effect of minimizing
productivity-reducing conflict and generating productivity-enhancing cooperation
and innovation. If only more entrepreneurs and businessmen were doing this, job
satisfaction across the labor force might be likely and the results would be
immeasurable.
Business have a multiplicative effect, since they are part of the complex
web of interaction among institutions and people. As such, business activities must
be viewed and examined from the perspective of ethics and social responsibility.
Thus, continued business success would be a function of whether you, the reader,
and we will commit ourselves to learning more about business organizations, our
role in them, the importance of virtuousness on the part of individuals and
institutions, and the ways in which we all can help social development. In the
lesson, we begin by first learning about business organizations.
 Business Ethics and Social Responsibility

LESSON 3
THE NATURE AND FORMS OF BUSINESS
1 ORGANIZATION

What are the words you find? Do you able to give the definition of these words? If
yes, then good job! I know that some of these terms are very familiar to you, now we will deepen
your understanding about these terms.

Lesson Objectives:
At the end of this lesson, the students should be able to:
1. Define and describe business and business organization;
2. Identify and describe the various forms of business organizations: sole,
proprietorships, and corporations;
3. Compare and contrast the various forms of business organization; and
4. Illustrate the role of each form of business organization in the economy.

BUSINESS AND BUSINESS ORGANIZATION

A business is an activity that is part and parcel of human society: it is an entity in which the
economic resources or inputs, such as materials and labor, are put together and processed to
provide goods or services or outputs to costumers. Businesses are usually complex enterprises
involving major activities like purchasing, manufacturing, marketing, advertising, selling, and
accounting. The objective of most businesses is to earn a profit (although this is not the only aim
as we shall see in the remainder of this work text). Profit is the difference between the amount
earned and the amount spent in buying, operating, or producing something. In this text, we focus
on business operating to earn a profit, even though many of the same concepts and principles
also apply to not – for – profit organizations. The fundamental reason for examining the
activities of business from a moral perspective is that business organizations, in principle, should
help in the promotion of the common good and in the protection of persons’ rights and interests.

Thus, businesses make the goods and services you use each day. That includes the products
and services used by other business as well as those needed by individual consumers. There are
generally three types of business organizations operated for profit: service, merchandising, and
manufacturing businesses. Service businesses provide services rather than products to
customers. Merchandising businesses sell products they purchase from other businesses to
customers. Manufacturing businesses change basic inputs into products that are sold to
customers.

THE VARIOUS FORMS OF BUSINESS ORGANIZATION

A business organization may take the form of a proprietorship, partnership, or
corporation. Each of these forms and their major characteristics are listed on Table 1.
The three types of business we discussed earlier – service, merchandising and
manufacturing – may be organized as proprietorship, partnerships, or corporations. Given the
large size and huge amount of resources required to operate a manufacturing business, most
manufacturing businesses, such as San Miguel Corporation, are corporations. Most large retailers
like SM Supermalls, Robinsons, and Ayala Malls are also corporations.

1. Sole Proprietorship – a business owned by one person.

 Advantages of a sole proprietorship:
(a) total undivided authority;
(b) low organizational cost and license fee;
(c) tax savings; and
(d) no restrictions on type of business (as long as it is legal).
 Disadvantages of sole proprietorship:
(a) unlimited liability;
(b) limitation on size (and thus on fund-raising power); and
 Business Ethics and Social Responsibility
(c) limited by management’s ability to be jack – of – all – trade
2. Partnership – an association of two or more people as partners; it refers to an
arrangement in which the individuals share the profits and liabilities of a business venture. Its
4
chief characteristics are: (a) association of individuals; (b) mutual agency; (c) limited life; (d)
unlimited liability; and (e) co – ownership of property.

The association of individuals in a partnership may be based on as simple an act as a

handshake; however, it is preferable to state the agreement in writing.
 A partnership is a legal entity for certain purposes.
 A partnership is an accounting entity for financial reporting purposes
 Net income of a partnership is not taxed as a separate entity.

Mutual agency means that an act of any partner is binding on all other partners, so long
as the act appears to be appropriate for the partnership. This is true even when partners act
beyond the scope of their authority. Partnerships have a limited life. Partnership dissolution
occurs whenever a partner withdraws or a new partner is admitted.

Each partner has unlimited liability. Each partner is personally and individually liable for
all partnership liabilities. Creditors’ claims attach first to partnership assets and then to the
personal resources of any partner, irrespective of that partner’s capital equity in the company.

3. Corporation – an entity created by law that is separate and distinct from its owners
and its continued existence is dependent upon the corporate statutes of the state in which it is
incorporated.

The characteristic that distinguish a corporation from proprietorships and

partnerships are:
a. The corporation has separate legal existence from its owners.
b. The stockholders have limited liability.
c. Transferable ownership rights (ownership is in shares of stock).
d. Ability to obtain capital (relative ease).
e. The corporation can have a continuous life.
f. The corporation is subject to numerous government regulations.
g. The corporation must pay an income tax on its earnings, and the stockholders are
required to pay taxes on the dividends they receive: the result is double taxation of
distributed earnings.
h. An artificial/ juridical “person” endowed with ability for self – management, that
is, the management structure is at the board of directors.

The first step in forming a corporation is to file an application of incorporation with the
government (in the Philippines, this is done through the Securities and Exchange Commission or
SEC). After the application of the incorporation has been approved, the corporation is granted a
charter or articles of incorporation. The articles of incorporation formally create the
corporation. The corporate management and the board of director then prepare a set of bylaws,
which are the rules and procedures for conducting the corporation’s affairs. Costs may be
incurred in organizing a corporation. This cost includes legal fees, taxes, state incorporation fees,
license fees, and promotional costs. Such costs are considered Organizational Expenses
(Weygandt, Kieso, and Kimmel, 2012).

COMPARISON AND CONTRAST AMONG THE VARIOUS FORMS OF

BUSINESS
The owner of a sole proprietorship has complete control over the company’s finances and
operations. Sole proprietors are not required to consult with anyone when it comes and making
business decisions. All partners of a partnership have input regarding how the company’s
resources are used and other important business decisions. In a partnership business, all partners
Business
are responsible for making decisions that will impact the business. ThisEthics
may and Socialmultiple
provide Responsibility
viewpoints, which could potentially lead to a better business decision.
The sole proprietor can maintain complete control over all aspects of the business. There
are no shareholders to pacify and no board of directors to appease. If you feel you need to
purchase a piece of equipment, you do not have to justify your actions to others. On the other

5
hand, corporations have an advantage when it comes to raising capital for the business – the
ability to raise funds through the sale of stock. In addition, corporation file taxes separately from
their owners. Owners of a corporation only pay taxes on corporate profits paid to them in the
form of salaries, bonuses, and dividends, while any additional profits are awarded a corporate tax
rate, which is usually lower than a personal income tax rate. This is as opposed to single
proprietorships which often pay income tax twice, first on the business earnings and then on
personal income when the owner draws a salary or takes distributions from the company.

These comparisons and contrasts are summarized in Table 1 below.

Table 1. Forms of Business Organization

Form of Business Entity
PROPRIETORSHIP is owned by one
individual.
PARTNERSHIP is owned by two or more
individuals.
CORPORATION is organized under state or
federal statutes as a separate legal taxable
entity
LIMITED LIABILITY COMPANY (LLC) States.
Combines the attributes of a partnership and a Often used as an alternative to a partnership.
corporation
Characteristics
70% of business entities in the United States.
Easy and cheap to organize.
Resources are limited to those of the owner.
Used by small businesses.
10% of business organization in the United
States (combined with limited liability
companies)
Combines the skills and resources of more
than one person.
Generates 90% of business revenues.
20% of the business organizations in the
United States
Ownerships is divided into shares called
stock.
Used by large businesses.
10% of business organizations in the United
Has tax and legal liability advantages for
owners.

THE ROLE OF EACH FORM OF BUSINESS ORGANIZATION IN THE

ECONOMY
Small businesses owned by sole proprietors are well recognized worldwide as vital and
significant contributors to economic development, job creation, and the general health and
welfare of economies. Microbusinesses (firms that employ fewer than ten people) form a
dynamic, integral part of the market economy, providing goods and services and a gateway by
which millions enter the economic and social mainstream of the society. In the US, for example,
about half of all private – sector workers are employed by microbusiness firms.

On the other hand, the Industrial Revolution brought with its new forms of machine
production that enabled businesses to make massive quantities of goods to ship and sell in
national markets. These changes, in turn, required large organizations to manage the enormous
armies of people that had to be mobilized to process the output of these machines on long
assembly lines in huge factories. The result was the large corporation that came to dominate our
economies. These large businesses, in general, offer better jobs than small businesses, in terms of
both compensation and stability. Also, corporations provide such benefits as: links with
suppliers, increased consumer spending, the transfer of knowledge from one firm to another, and
the sharing of pools of workers. However competitive forces sometimes fail to steer companies
in a socially beneficial way and instead, lead them to act in a socially harmful manner. For
example, a company might knowingly pollute a neighborhood with substance that is not yet
illegal, in order to save the cost of reducing its pollution thereby more competitive. This wave of
large corporations has brought with it a host of new ethical issues, including the possibilities of
exploiting the workers who labor at the new machines, manipulating the new financial markets
that finance these large enterprises, and producing massive damage to the environment.
 Business Ethics and Social Responsibility

LESSON EXERCISE
6

A. Read the following questions and encircle the letter of the correct answer.
1. Which of the following is not an advantage of the corporate form of business organization?
a. Limited liability of stockholders b. Transferability of ownership
c. Unlimited personal liability for stockholders d. Unlimited Life
2. The proprietorship form of business organization ___________________.
a. must have at least three owners in most states
b. represents the largest number of businesses in the United States
c. combines the records of the business with the personal records of the owner
d. is characterized by a legal distinction between the business as an economic unit and the owner
3. The partnership form of business organization ______________________.
a. is a separate legal entity c. enjoys unlimited life
b. is a common form of organization for service –type businesses d. has limited liability
4. A business organized as a corporation __________________________.
a. is not a separate legal entity in most states
b. requires that stockholders be personally liable for the debts of the business
c. is owned by its stockholders
d. terminates if one of its original stockholder dies
5. A small neighborhood barber shop that is operated by its owner would likely be organized as a
_________________.
a. joint venture c. corporation
b. partnership d. proprietorship

SELF-

B. Answer the following questions below, minimum of 100 words per question. Do this in a long
size bond paper, encode your answers and send it to my email catherinecambaya@gmail.com.
1. What is the importance of business organizations to the world economy?
2. What are the major forms of business organization? Compare and contrast.
3. Explain the role of each form of business organization in the economy.
 Business Ethics and Social Responsibility

LESSON
THE SOCIAL FUNCTION
7
OF BUSINESS
2
Lesson Objectives:
At the end of this lesson, the students should be able to:
5. Explain why businesses and business people should be ethically and socially
sensitive;
6. Briefly introduced the concept of “poverty” and explain the idea of poverty
alleviation; and
7. Describe the areas of business most in need of ethical attention.

WHY SHOULD BUSINESS BE ETHICALLY SENSITIVE?

In 2002, all businesses worldwide produced more than US $40 trillion worth of goods
and services. Businesses play a major role in keeping any economy alive. It is therefore
necessary to ensure the proper and ethical governance of businesses. Business people – managers
and employees, but above all organizational leaders – must behave in an ethical manner in
managing and operation a business. Otherwise, no one will be willing to invest in or loan money
to the business. As discussed in Lesson 1, business activities must be viewed and examined from
the perspective of morality. Business without ethics threatens the survival of human society and
in some cases, destroys the fiduciary relationships of people.

By beginning to study the social function of business, we begin to be introduced to

fundamental concepts of what is right and wrong in our human conduct and their implications for
business as an important human activity. The fundamental reason for examining the activities of
business from the social and ethical perspective is for the promotion of the human society in
general. Without, this ethical consideration, business will be a chaotic human activity because
there will be no common understanding and agreement about what is the right and wrong human
conduct.

Ethics are moral principles that guide the conduct of individuals. Unfortunately, business
managers and employees sometimes behave in an unethical manner. A number of managers of
companies in the last two decades engaged in accounting or business fraud. These ethical
violations led to fines, firings and lawsuits. In some cases, managers were criminally prosecuted,
convicted, and sent to prison.

The following are the four reasons that may persuade a business to act ethically:
1. Legal reasons, of which there are several different sorts;
2. Public image reasons, which again, might encompass a number of different
Types;
3. pragmatic reasons, acknowledging that sometimes, acting ethically might be the most
direct path to business success; and
4. Moral reasons, where it is affirmed that these reasons are different from each of the
other types.
Business Ethics and Social Responsibility
BUSINESS’ ROLE IN POVERTY ALLEVIATION
Poverty is experienced and understood differently by different people in different regions
and at different times. Broadly, “poverty” is conceptualized as a deficiency or shortage of some
sort, typically in comparison either to the living standards of others within the same society or
culture (called “relative poverty”), or to a universal measure of adequate provision (called
“absolute poverty”). Historically, this shortage has been considered synonymous with lack of
income, or at least insufficient income to meet a household’s daily needs. Economic definitions
of poverty tend to concentrate on either income, such as the US $1.25 per day poverty line
established by the World Bank, or expenditure, such as the “basket of goods” assessment. The
former measures absolute poverty in terms of where a household’s income falls on the universal

8
poverty line, whereas the latter assesses relative poverty in terms of whether a household can
afford to buy the basic goods necessary for survival within their specific context (typically with
the consequences for nutrition and hunger highlighted) (Lemanski, 2016).

BUSINESS’ ROLE IN OVERCOMING THE POVERTY TRAP

When countries get their foot on the ladder of development, they are generally able to
continue the upward climb. All good things tend to move together at each rising rung: higher
capital stocks, greater specialization, more advanced technology, and lower fertility (Sachs,
2005). Some studies show that small and medium enterprises (SMEs) – defined usually as
business with up to 250 employees – are believed to be important contributors to economic
growth and a tool to reduce poverty in developing countries. Also, microfinance is believed to be
an effective tool in the arsenal of the war against poverty by many witness to its success in many
developing regions around the world, including Africa, Southeast Asia, the Middle East, and the
Americas (Piza et al., 2016).

As mentioned above, all this should move us to take action. But it is important to precede
such action with study and knowledge. In the next section, we will enumerate the areas of
individual action in business where ethics is most urgent.

AREAS OF BUSINESS MOST IN NEED OF ETHICAL ATTENTION

Authentic and sustainable development means working at the real solutions in order to
eradicate or at least alleviate poverty. In agriculture – based economies such as the Philippines,
the ultimate solutions are to be found in: countryside and rural infrastructures; quality basic
education for the children of the poor and in Muslim areas, especially the education of women;
cash transfers to the poorest of the poor; primary health services; microcredit and
microenterprise programs; technical skills training for secondary school students; and social
housing such as that provided by Gawad Kalinga.

Each role in a business organization involves unique responsibilities (such as the

obligations of an employee to an employer or the fiduciary duties of management to the
shareholders) that determine what a person should do. Ethical issues arise in relationships with
every corporate constituency, including: (a) employees; (b) customers; (c) suppliers; (d)
shareholders; and (e) society at large.

THE SOCIAL RESPONSIBILITIES OF CAPITALIST BUSINESS PRACTICES

Milton Friedman (American economist) famously stated that the only social
responsibility of business is to increase its profits. On the other hand, William Sauser, in the
Journal of Business Ethics article “Ethics in Business: Answering the call, “explained that
business organizations have four levels of responsibility: (1) Earning a profit; (2) legal
responsibility; (3) Ethical responsibility; and (4) Discretionary responsibility. Responsibilities of
businesses beyond profit have come to be called Corporate Social Responsibility or CSR. CSR,
as defined by the World Business Council for Sustainable Development (WBCSD), is a
continuing commitment by business to behave ethically and contribute to economic development
while improving the quality of life of the workforce and their families, the local community, and
the society at large.” More and more companies are embracing CSR because of profitability, and
also because more managers now believe that being a better corporate citizen is a source of
competitive advantage.

THE MORALITY OF ADVERTISING

Advertising presents several ethical issues, one of the, being Deceptive Advertisements.
Deceptive ads are those that make false statement about or misrepresent the product, for
example, the picture presented in the advertisement is different from the actual product.
Deceptive ads may occur not only through sentences or propositions but also through pictures,
individual words, or through certain combinations of objects which can deceive the eye and the
mind. A typical example of deceptive advertising is one where the pictures from the box of the
product do not look the same as the contents of the product. InBusiness Ethics
this case, and Social
the picture Responsibility
is said to be
deceptive.
Article 108 of the Consumer Act of the Philippines (Republic Act No. 7394) declares that
“The state shall protect the consumer from misleading advertisements and fraudulent sales
promotion practices.” Article 110 states that “It shall be unlawful for any person to disseminate
9
or to cause the dissemination of any false, deceptive or misleading advertisement by Philippine
mail or in commerce by print, radio, television, outdoor advertisement or other medium for the
purpose of inducing or which is likely to induce directly or indirectly the purchase of consumer
products or services. An advertisement shall be false, deceptive or misleading, there shall be
taken into account, among other things, not only representations made or any combination
thereof, but also the extent to which the advertisement fails to reveal material facts in the light of
such representations, or materials width respect to consequences which may result from the use
or application of consumer products or services to which the advertisement relates under the
conditions prescribed in said advertisement, or under such conditions as are customary or usual.”

BASIC EMPLOYEE RIGHTS, JOB, DISCRIMINATION, OTHER LABOR –

RELATED ETHICAL ISSUES
The Labor Code of the Philippines (or Presidential Decree No. 442)(a decree instituting a
labor code thereby revising and consolidating labor and social laws to afford protection, promote
employment and human resources development, and insure industrial peace based on social
justice) lays down the rights of workers in relation to wages, rights to self – organization,
collective bargaining, security of tenure, and just and humane conditions of work. Republic Act
No. 6727 (also known as the “Wage Rationalization Act”) mandates the fixing of the minimum
wages applicable to different industrial sectors. This law rationalized wage determination by
establishing the mechanism and proper standards through the creation of Regional Tripartite
Wages and Productivity Boards (RTWPBs) authorized to determine the daily minimum wage
rates the different regions.
Book Four of the Labor Code of the Philippines lays down the “Health, Safety, and
Social Welfare Benefits’ accorded to workers. Book Five, on the other hand, entitled “Labor
Relations,” lays down the policies of the State with regard to labor, These policies are: (1) to
promote and emphasize the primacy of free collective bargaining and negotiations, including
voluntary arbitration, mediation, and conciliation, as modes of settling labor or industrial
disputes; (2) to promote free trade unionism as an instrument for the enhancement of democracy
and the promotion of social justice and development; (3) to foster the free and voluntary
organization of a strong and united labor movement; (4) to promote the enlightenment of
workers concerning their rights and obligations as union members and as employees; (5) to
provide an adequate administrative machinery for the expeditious settlement of labor or
industrial disputes; (6) to ensure a stable but dynamic and just industrial peace; (7) to ensure the
participation of workers on decision and policy – making processes affecting their rights, duties,
and welfare.

INSIDE TRADING
Insider trading in the stock market is characterized as the buying and selling of shares of
stock on the basis of information known only to the trader (an “insider,” somebody belonging to
the company, as opposed to the public) or to a few persons. Insider trading, in finance is the
reverse of speculation. It is reward without risk, wealth generated – and injury done to others –
by an unfair advantage in information. Is insider trading unethical? Is insider trading illegal? The
answer depends on how we define insider trading and how we interpret the issue.

POLLUTION AND RESOURCE DEPLETION

There is also pollution that affects everyone, caused by transport, industrial fumes,
substances which contribute to the acidification of soil and water, fertilizers, insecticides,
fungicides, herbicides and agrotoxins in general.
Business Ethics and Social Responsibility
WHISTLE BLOWING
Whistle – blowing is the act, for an employee (or former employee), disclosing what he
believes to be unethical or illegal behavior to higher management (internal whistle blowing) or to
an external authority or the public (external whistle – blowing). Its status is debated: some see
whistle blowers as traitorous violators of organizational loyalty norms; others see them as heroic
defenders of values considered form the viewpoint of professional morality. Unfortunately, these
“messengers of truth” are almost always the subject of dreadful retaliations; hence, to decide to
“blow the whistle’ can be quite difficult and complicated. Whistle – blowing can be taken from
the perspective of duty and rights theories: does anyone have the duty to blow the whistle? If so,
whose rights are being trampled upon? There is also a tendency to judge it based on the
motivation of the whistle blowing. In a way, whistle – blowers should strive to act like saints.

10
Yet, it is logically impossible to hold both whistle – blowing as mandatory and whistle – blowers
as heroes or saints. The ethics student should, thus, carefully weight all the factors involved and
come up with a comprehensive decision criterion or framework.

LESSON EXERCISE

A. IDENTIFICATION: Read and analyze the following statements. Write your answer in the
space provided before the number.
_________________1. It refers to those that make false statements about or misrepresent the
product.
_________________2. It is conceptualized as a deficiency or shortage of some sort, typically I
comparison either to the living standards of others within the same society or culture.
_________________3. It plays a major role in keeping the economy alive.
_________________4. These are moral principles that guide the conduct of individuals.
_________________5. It is the act, for an employee (or former employee), disclosing what he
believes to be unethical or illegal behavior to higher management or to an external authority or
the public.

SELF-

B. ESSAY: Answer the following questions below, minimum of 100 words per question. Do this
in a long size bond paper, encode your answers and send it to my email
catherinecambaya@gmail.com.
1. What do you think is the business organization’s primary responsibility to its
stakeholders? Why?
2. Differentiate bribery from giving.

3. Why should business take the lead in the protection of the environment?

4. Explain the purpose of business organizations and their role in socioeconomic

development.

REFERENCE
Business Ethics and Social Responsibility by Aliza Racelis 2017

11