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Journal of Business Ethics (2005) 60: 265–279 Ó Springer 2005

DOI 10.1007/s10551-005-0134-3

The Reasons behind Non-ethical


Behaviour in Business and
Entrepreneurship Yves Fassin

ABSTRACT. Despite the recent increase in interest in neurship requires more than corporate governance and
corporate social responsibility and the propagation of corporate social responsibility (CSR).
corporate governance in both business and academic lit-
erature, from observations of actual practice, the author KEY WORDS: Business ethics, unethical practices,
has seen at all company levels, in everyday operations, corporate governance, CSR, entrepreneurship, fairness.
instances of non-ethical behaviour vis-à-vis the whole
gamut of stakeholders. This state of affairs is linked with:
pressure from stakeholders, short-term tactics, hegemony
of financial considerations, ‘juridisation’ of business, the
tyranny of communications and the media and the diffi- Are ethics progressing in business since the
culties in translating strategy into practical implementa- recent financial scandals?
tion. The paper scrutinises the motivation and the
psychology of entrepreneurs and business people, and their In recent years, the reputation of business has been
behaviour is compared to other professional groups and seriously damaged by a range of financial scandals.
confronted with the decline in ethics in society as de- Virtually all countries have had their Enron (Elliot and
scribed by some important observers. The conclusion Schroth, 2002), Parmalat, Ahold, Vivendi, Lernout
drawn is that the recent positive evolutions do not provide and Hauspie or MCI-Worldcom. We have seen cases
sufficient ethical guidelines for the day-to-day activities of with false accounts, manipulation of information,
middle managers and entrepreneurs in the present com- questionable initial public offerings, corruption of
petitive environment. Managers will always be confronted
public agents, personal enrichment of top managers
by difficult choices with ethical dilemmas. There will
(Buelens, 2002, p. 15; Byrne et al., 2002). Many of
always be a tension between theory and pragmatism, but
progress can be made with the effective implementation of these cases have led to bankruptcy, personnel being
the ethical discourse in companies. To achieve this, ethical dismissed and financial losses for the individual
management should not be confined to the large strategic investors. A common feature is unethical behaviour
issues but also applied to the small practical matters of by high-level managers and entrepreneurs, and also by
everyday business life. Ethics in business and entrepre- professionals – accountants, lawyers, bankers – fol-
lowing conflicts of interests (Hamilton, 2002).
As in most things, only a small proportion of
Yves Fassin (  Ghent, Belgium) combines an entrepreneurial companies have been guilty of misconduct. A
career with an academic activity. He was director of the minority of opportunistic unethical entrepreneurs,
Industrial Liaison Office of the University of Ghent and dishonest managers and corrupt business leaders have
Secretary-General of the European Venture Capital Asso- damaged the reputation of entrepreneurship as a
ciation. He is now managing director of a small company and
whole, despite most businesses being unaffected by
board member or advisor of some other SMEs and start-ups.
He was a part-time professor at different institutions and he is
these scandals. Indeed most have put corporate gov-
a guest professor at the Vlerick Leuven Gent Management ernance high on their agenda. Concepts such as
School. His research interests include innovation, en- corporate social responsibility (CSR), triple bottom
trepreneurship, venture capital and IPOs, and business ethical line, accountability and sustainable development are
and corporate governance issues in these fields. gaining importance.
266 Yves Fassin

Can we therefore conclude that, after this series of ernment relations. Dubious practices include lies and
scandals, business is again on the ethical path – or deception, breaches of promise, passive corruption,
were they just the tip of the iceberg? Are ethics in unfair competition, personal advantages for manage-
business in the twenty-first century progressing or ment and the manipulation of communication.
not? This question was raised during informal dis- Managers will sometimes transgress their own com-
cussions with entrepreneurs in various economic pany’s code of conduct.
circles, with industrial federations, with engineering During negotiations, dubious practices are abun-
associations and with business school alumni. dant, especially with regard to mergers and acquisi-
tions. Another entrepreneurial field with numerous
Unethical practices and their actors unethical practices in recent years has been the start-
up sector with, for example, the dot.com hype.
Based on observations – and we are not happy to Ethical issues are involved in the different steps of the
have to say it – our answer to the above question start-up process for innovative companies, from idea
must be no: business ethics are receding. Despite the or research project to successful company, concerning
propagation of corporate governance and the intellectual property, confidentiality of information,
regained interest in CSR in business and academic negotiation, marketing and insider trading (Fassin,
literature; despite numerous conferences on these 2000). Especially the exercise of raising funds and the
issues in industry federations and in business circles final step, listing on the stock exchange, lead to
involving the top-level of the larger companies, we enormous conflicts of interest.
see an increasing number of cases of unethical Some reported cases indicate a high degree of
behaviour, at all company levels, in their day-to-day unethical behaviour, but other dubious practices are
activities vis-à-vis all stakeholders. commonplace and sometimes happen unconsciously
This situation seems paradoxical. Press articles pay but all too frequently. The cases discussed illustrate
attention to corporate governance and CSR more real-life stories. Actors are entrepreneurs and manag-
than ever before, and convey supportive statements ers, from small companies to multinationals. Some are
from business leaders on these topics. Business jour- CEOs from highly respected companies with their
nalists tend to conclude from this positive evolution own ethical codes; others are distinguished represen-
that ethics in business must be improving. They base tatives of ‘high finance’. Some have won awards such
this view on the decrease in scandals following the as ‘‘Oscar for Export’’, or for ‘‘Enterprise’’ or
series of huge financial scandals that had never been ‘‘Manager of the Year’’ and have been extolled in the
seen before. However, such a superficial analysis gives press. In many cases, the people involved are highly
an incomplete and biased view of the ethical health of respected businesspeople, sometimes important
business. There have undoubtedly been considerable members of employers’ federations, some are mem-
improvements in corporate governance and in CSR. bers of service associations with codes of conduct; but
However, the reality experienced by entrepreneurs apparently they apply other principles in their business
and managers in day-to-day business life is quite dif- attitudes than in their private and social life: rules that
ferent from the image presented in the press. Indeed, do not accord with their philosophy or their religious
corporate governance and CSR cover only some as- faith.
pects of business ethics. Improvements are only
apparent in some areas, and the decrease in major fraud The secrecy around unethical practices
cases should not hide the frequent use of unethical
practices at lower company levels, cases that do not Unfortunately, such stories are not exceptional. If
reach the press. one asks entrepreneurs whether they have encoun-
The numerous cases (see Case Studies) of unethical tered cases of unethical behaviour, they will be able
practices reported from entrepreneurs’ personal to tell you many stories like these. Perhaps surpris-
experiences illustrate various forms of unethical atti- ingly, most of these activities seldom get into the
tudes by entrepreneurs and managers, in a range of press or media. Most do not go in court. Only a few
management fields: marketing, negotiation, person- cases of large fraud have reached the headlines of the
nel management, supplier–customer relations, gov- financial and general press. Most entrepreneurs and
Reason behind Non-ethical Behaviour 267

managers decline to participate in interviews and groups in society. Before this, and without entering
surveys on ethical issues, citing their busy schedules. into a complete inventory of unethical practices, we
Researchers must also deal with the general hesi- will discuss two major unethical practices that cover
tancy of business people to participate in ethics most of the reported cases: the abuse of power and
studies (Hannafey, 2003). This situation can be conflicts of interest between personal interests and
compared to that of the victims of crimes who are stakeholder interests.
fearful of being judged as naı̈ve. They do not want
publicity. Moral muteness makes managers decide to The abuse of power
keep quiet and not speak out in situations where
they disagree with circumstances at work (Hem- The abuse of power has increased with globalisation
ingway, 2004). Entrepreneurs avoid whistle-blow- and with the economic crisis that has placed additional
ing, probably because they think a press article on a pressure on managers. Abuse of power is often related
dispute will be interpreted as a negative message to size: it especially occurs in the relationship between
about both parties, even for the innocent one. larger, often multinational, companies and their
Moreover, it is difficult to write about this because smaller suppliers. The practice is frequent in the price
often there is no way to prove your version of events negotiations between customers and suppliers. A
(Marshall, 2003). The false player will have made handful of very large supermarket chains dominate
promises while ensuring that no written traces can each national market (Crane and Matten, 2004, p.
be found that could lead to juridical consequences, a 310) and use their bargaining power to lower prices,
perfidious effect of the Anglo-Saxon litigation and to stiffen conditions. For many suppliers, super-
approach. Apparently, entrepreneurs have learned to markets constitute a significant share of their turnover,
live with this negative trend, and choose to and the buyers know that the supplier can have serious
concentrate on new opportunities. problems if they lose a major customer. Another
critical sector is the construction business where large
The major classes of unethical practices general contractors, generally multinationals, try to
make additional profit by squeezing the prices of their
Business life is confronted with an enormous range subcontractors, with little regard to quality and
and complexity of ethical problems. Unethical prac- sometimes for safety. In many industrial sectors,
tices appear in many forms (Figure 1); besides out- consolidation and regrouping are ongoing. As a result,
right fraud one finds: unfair competition, unfair the ten leading companies in the world in many
communication, non-respect of agreements and critical sectors, such as raw materials and industrial
unfair attitudes towards and treatment of stakeholders products, now control 50–80% of the market. A re-
(Freeman, 1984) through the abuse of power or due to cent example of questionable practice is found in the
conflicts of interest (Crane and Matten, 2004, p. 51). steel sector, where the three remaining European steel
It is important to try to understand the reasons that producers agreed not to raise their production in order
can lead managers and entrepreneurs towards uneth- to maintain price levels following an increase due to
ical behaviour. We will thus analyse the motives of the growing Chinese demand. In fact, they adopted
entrepreneurs and their psychology, and refer to other the methods of the oil cartel.
Figure 1. Main unethical practices in business.

- fraud
- unfair competition
- unfair communication
- non-respect of agreements
- unfair attitude towards, and treatment of, stakeholders
by the abuse of power
in conflicts of interest: personal interests vs stakeholders interests
268 Yves Fassin

With the globalisation of the world’s economy, with public services, or to be taken into consideration
new ethical problems have arisen on a world level: when entering a bid. In many countries, there is even
multinational companies seem prepared to shift collusion between some politicians and large com-
production units from one country to another with panies that fund the political parties in the expectation
lower salary costs. As a result, many factories in or hope of an economic return. The boundaries be-
Western Europe have cut numerous jobs, while tween lobbying and corruption are sometimes trans-
working conditions in subsidiaries, or at subcon- gressed, making use of ingenious systems of indirect
tractors in the newly industrialised countries, are payments through overpaid consultancy reports or
significantly inferior (Klein, 2000; Ziegler, 2002). other indirect favours to the family of the politician or
Among the most powerful companies are the to his community. In the case of public tenders, var-
financial institutions. Cases of abuse of power by ious methods can be used to reject some contractors
banks are frequent. They have a lot of money at their and to favour others, who are then often in a position
disposal, funds which some entrepreneurs desperately to impose expensive supplemental charges (Borman).
need. Too often, with precise timing at some critical Difficult conflicts of interests are found in the
moment, they make use of this power to obtain overlaps between business and government, with
warranties, more than are really needed, or in some politicians being offered director’s seats on the
cases to force decisions onto entrepreneurs. In some boards of large companies, and with businesspeople
cases, they leave them no other choice but to sell active in politics at the highest levels (Economist,
their company. In their defence, banks have also been 1999; Crane and Matten, 2004, p. 402).
abused by unethical entrepreneurs who gave the An important conflict of interest has emerged in the
bank misleading or false information. last decade through bonus and stock option schemes,
culminating in the dot.com hype. The apparently fair
idea was to link the management’s objectives to the
Conflicts of interest company’s objectives. Good results would give a
significant bonus to management and, later, stock
In all actions, there is a duality between the common options were introduced following the example of the
interest and personal interest. In business, this reflects start-up companies and venture capital investments.
the contradiction between company interest and the This unfortunately resulted in questionable practices,
interest of the individual. Some external parties try with a focus on very short-term gains. ‘‘Through lies
to use this dilemma to obtain better conditions for and deception, the inner circle achieved personal
their organisation by giving some personal advantage goals of greed and focused on managing the stock first,
to the contact person. Small gifts, presents, invita- the business second, and strategic value last’’ (Elliot
tions to an event or a trip are incentives used in and Schroth, 2002, p. 13).
normal business life, in order to promote a better One can also question the role of investment
understanding and friendship. A buyer who is reg- bankers and venture capitalists (Fassin, 1993), and
ularly treated by the seller may not be looking out their advisors, consultants, lawyers and accountants, in
for the best buy for his company, but to optimise important IPO (initial public offerings) and M&A
their personal benefit. Some selling methods go too (mergers and acquisitions) activities in recent years.
far and lead to bribery and corruption. The seeking Other conflicts of interests arise in small and med-
of personal advantage is to the detriment of the best ium-sized companies, and especially in family busi-
interest of the buyer’s organisation, company or nesses. Vehement disputes between shareholders over
public service. Pharmaceutical companies offer power and control of companies have caused great
important travel incentives to medical doctors, in the damage. The unequal treatment and the consequently
belief that they will then favour the prescription of different remuneration of active and non-active family
their drugs, and also to university medical professors members is a common source of conflict. Minority
who can influence the doctors. shareholders are often unfairly treated or eliminated
Conflicts of interest between private companies through questionable methods. Such problems fre-
and politicians are numerous in some countries. quently occur after the retirement or death of a
Lobbying activities are necessary to obtain contracts founder who has not prepared their succession.
Reason behind Non-ethical Behaviour 269

The rise of unethical practices in business society, others are basically due to the evolution of
the business environment and to its internal orga-
We have observed that non-ethical behaviour occurs nisation.
at all levels in business. Most cases, fortunately, do not The evolution of society in recent decades has
have the magnitude of the scandals seen in the press, been characterised by the increasing individualism of
but they exist in a range of forms. Somewhat unfair people. The Anglo-Saxon dominant business model
attitudes are multiplying rapidly in business, especially has increased the importance of money in society
when times are difficult. A danger is that people do not and the glorification of material consumption
even realise their behaviour is inappropriate. The (Capra, 2003, p. 230). In our modern society, the
fading away of norms has perfidious effects. Some media have acquired a disproportional importance.
managers even believe that certain ‘dirty tricks’ are The role models offered by television have not
good management practices: delaying payment to always constituted good examples, on the contrary:
suppliers to improve the cash flow is seen as efficient, media reality shows and political talk shows often
even if a different agreement was made. Just-in-time favour superficiality and show, rather than thor-
management has led, in some cases, to the extreme oughness and honesty.
situation that, in order to win the contract, a supplier The globalisation of the economy has had harmful
will promise to deliver on time, knowing in advance side effects. It has led to larger structures, with more
that he cannot deliver, and that he will have to find an centralisation, and a greater concentration of power.
excuse or hope the customer’s behaviour will justify The race to increase productivity leads to deper-
the delay. An honest entrepreneur who admits that he sonalisation as the distance between head office and
cannot meet the extreme requests will have no chance the anonymous workers increases. It is easier for a
of the contract and excludes himself from the com- CEO of a multinational to close a factory and to lay
petition. off thousands of workers far away from the head
Another danger is the snowballing effect: if a sup- offices in Paris or Detroit, than for the boss of a small
plier is not paid on time, he in turn is unable to pay his family company to lay off people he knows per-
own suppliers. In some extreme cases, the only de- sonally from having worked with them for several
fence measure is to refuse to deliver, again a rather years.
unethical practice, and in some cases approaching The dominance of financial considerations is
blackmail. Thus, unethical behaviour encourages and another evolution in business and society. The sys-
breeds other unethical practices in business. tem is now focused on the short-termism of the
This may lead to the simplistic conclusion that stock market. This favours immediate results.
business is bad; and business cannot be ethical. Such a Financial communication is gaining in importance.
judgement is too easy, especially when coming from Business leaders have learnt to use the system, and in
the protected position of the academic or ethicist. the financial media we can see a prevalence of show
Business is not bad, it is just difficult – and, in difficult over content. Shareholder value is the ultimate value
times, the first goal of a business is to survive. This is of the business: harsh decisions are taken with the
valid for a company, and also for an individual, and excuse of shareholder value, hiding behind the
thus for the individual within a company: the manager anonymity of the individual investor.
or the entrepreneur. Another consequence of the dominance of the
It is therefore worthwhile to analyse the reasons Anglo-American business model is the ‘juridisation’
behind non-ethical behaviour in business. of business. Every important deal is signed and laid
down in a contract. Here again, a perfidious side
effect is that many business people use the letter of
The roots of non-ethical behaviour in the contract rather than the spirit of the contract.
business Worse, the contract is often invoked over some-
thing that is not explicitly stated in the contract,
There are different sets of reasons for the rise of rather than trying to solve the problem. To avoid
unethical behaviour in business (see Figure 2): some being sued, managers are very prudent when per-
are the consequence of the general evolution of petrating unethical acts: they make sure that
270 Yves Fassin

Figure 2. The reasons behind non-ethical behaviour in business.


the pressures from stakeholders: shareholders, personnel, customers, suppliers, banks,
government, media, environment

the evolution of society - the individualism of people - norms


the globalisation of the economy
the short-term tactics
the dominance of financial considerations
short-termism of the stock market – anonymity of the individual investor
the 'juridisation' of business – Anglo-Saxon model
the inefficiency of the juridical system for business: time and cost

the disproportional importance of communication/media


the prevalence of show versus content: bad examples
the role models - television: media reality shows – politics - sport
the reward and evaluation system of business and of managers: results – stock price
the difficulty to translate a strategy from the top into practical implementation

the motives of business: money and power, achievement and success, honours
the psychology of entrepreneurs - rationalisation

nothing is written down and that their responsi- On the other hand, many instances of unethical
bility cannot be proved. behaviour are not illegal: ethics goes beyond the law.
Paradoxically, the inefficiency of the law, the slow Other cases are difficult to prove, and the imper-
pace of justice, is another reason for the recent fections in the justice system are a real handicap in
increase in unethical practices. Some claims are encouraging business ethics.
legally defendable, others are not because they are Some of the reasons for non-ethical behaviour are
based on good faith, on promises without written features of the internal organisation: the rewards and
agreement. However, even with the law on your evaluation systems of business and of managers are
side, it is very difficult, costly and time-consuming not always in line with the long-term vision. Fur-
to win a court case. Even then, it will not restore the ther, there is considerable difficulty in translating the
harm done to the company, especially the oppor- strategy set at the top into practical implementation
tunity costs of a lost contract at a given time. It at the lower levels. Contradictions are not easily
cannot restore the lasting harm done to people who handled by more junior managers.
have lost their jobs because of a missed order. Entrepreneurs operate in a dynamic environment
Some entrepreneurs deliberately abuse the imper- with many uncertainties such as changes in compe-
fections of the juridical system to perpetrate unethical tition, changes in technology, supply and demand
actions. They know that the cost of a lawsuit is dis- fluctuations, labour issues, legal and public envi-
proportionate to the loss of a deal, especially with ronmental regulations (Hannafey, 2003). Modern
international transactions. They will sometimes use business is subject to pressures from all stakeholders
this to negotiate a discount under pressure. In such on top of time pressures, scarce resources, social and
situations, litigations are long and costly: moreover, financial pressures, and stiff competition. Share-
they take time, and absorb a lot of management’s holders want better value and a better stock price;
energy which should be directed to the development managers look for their bonuses, and the personnel
of the business. strive for higher wages and better working condi-
Reason behind Non-ethical Behaviour 271

tions; customers expect a higher quality at a lower and their unions; pressures from suppliers and their
price; suppliers seek to raise their prices; banks look lawyers and bailiffs who want to be paid; financial
for interest and guarantees; the government antici- pressures from banks that may hold guarantees
pates collecting taxes and imposes constraints on against personal or family property, and result in
business. All these stakeholders exert some pressure added pressures from the family. Commonly, the
on the entrepreneur, who thus has to juggle with all biggest fear is having to admit failure to friends,
kinds of constraints and contradictory expectations relatives and to the community in which they live.
such that ‘‘Entrepreneurs experience powerful Overnight, the privileged status of a successful
competitive market pressures so keenly that these businessperson is transformed into that of a loser.
forces may alter their perspectives on ethics’’ Without condoning, one can understand that even
(Hannafey, 2003; referring to Chau and Siu, 2000). an honest entrepreneur, facing such difficulties and
pressures alone, who can see a possible last-resort
solution to what is seen optimistically as a temporary
The motives of businesspeople and problem, may be tempted to an ethically question-
entrepreneurs and their psychology able expedient as the least worse option. In fact,
‘‘numerous rationalisations lead to unethical behav-
One should not forget an important factor that iour from usually intelligent, honest people who
strongly influences the ethical behaviour of compa- transgress the border between right and wrong’’
nies: the motives driving businesspeople and entre- (Gellerman, 1986).
preneurs. Business is about money and power. On the other hand, some entrepreneurs have a
Entrepreneurship is about achievement and success. large ego and seek media attention and honours. The
Business is working with people – and people are increasing interest of the media in business has also
not perfect. Research on negotiation has identified extended the star system to vainglorious entrepre-
three major dimensions that may lead individuals to neurs. ‘‘Business leaders, like many of their financial
unethical conduct: first, greed and the pursuit of journalist friends are part of the celebrity movement.
profit; secondly, the nature of competition and the Some CEOs often act like rock stars during inter-
desire to beat the other party in a competitive views with the financial media. It is show biz for
environment; and thirdly the need to insure or business’’ (Elliot and Schroth, 2002, p. 125). The
restore some standard of justice that may have been press became less critical of business, and created the
violated (Levicki et al., 1994, pp. 379 & 404). image of the CEO as hero, while ‘‘leading business
Managers pursue advancement, sometimes at the schools played a role in legitimising the culture of
expense of others (Andrews, 1989). Entrepreneurs easy money in the late 1990s’’ (Coutu, 2003). Some
strive for success and some are very opportunistic. well-known CEOs got involved in many side
The power game and short-term tactics are impor- activities, some linked to other investments, on
tant instruments they may use, or misuse, in business boards of directors, some in activities close to their
competition. interests in sports or culture (another potential
As in all human activity, the psychological side is a source of ethical dilemmas concerning sponsorship
very important facet in business. Entrepreneurs want etc.). In this media frenzy, some were diverted from
to succeed; the last thing they want to do is fail. their main task as CEO by the highlights of the jet-
Given the predominant cultural values, failure in set society, sometimes with unfortunate conse-
business – a very realistic possibility in many start- quences for their main business. Some of these
ups – has a very negative connotation in our reputable managers secured their own retirement
European society. Unlike in America, a second plans with huge premiums and additional highly
chance is seldom offered. Entrepreneurs will con- profitable consultancy agreements. These advantages
sequently try to avoid failure by virtually all means were mostly accorded without shame or scruples,
open to them. Nevertheless, they may be confronted legally but with little transparency (Buelens, 2002, p.
with a crisis situation, where the life of the company 15).
is at stake. In these situations, pressures from all sides For some opportunistic entrepreneurs the slogan
are tremendous: social pressures from the workers is: ‘get on, get honest, get honours’. At the start of
272 Yves Fassin

their careers they are very rude, very aggressive; management vision and entrepreneurial talent.
once they have grown rich, they get more honest to Entrepreneurs have a drive to succeed and seek
gain respectability, may even do charity and phil- constant challenges. Most of them want to be the
anthropic work; and finally they gain honours. From best in their field, just as others in their chosen
the alcohol trade during prohibition in the US, to professions; and most of them are hard and serious
the Russian oligarchs, the history of business is full of workers. Entrepreneurs may be more pragmatic and
success stories where the founders have built their more opportunistic than many. Money may be a
fortune on ethically questionable businesses or greater motivation in their values scale and objec-
dubious business methods. Many new entrepreneurs tives, although one can see the same opportunism
in countries that have recently adopted the free and greed for money among representatives of the
market economy, such as China, Russia and other other professions.
Eastern-European countries, have taken advantage Entrepreneurs want, above all, to be successful –
of the absence of regulations to build fortunes in a just as in other professions. Some are capable of
very short time without taking ethical considerations anything in order to achieve this goal, just as are some
into account. sportsmen, some politicians and some other profes-
sionals. Some people are ready to use all means, even
to tread on corpses to achieve their ambitious goals.
The decline of ethics Ethics are, in the final analysis, a very personal issue:
they are related to the personal integrity of the
Some observers argue that one cannot expect better individual, to their values scheme, and to their
because, in business, the law of the jungle prevails. resistance to pressures (Andrews, 1989). Hisrich has
This is an oversimplification: rules and regulations suggested that core values implanted by family
have been introduced in business practice precisely members, teachers and mentors in early life may
in order to make trade and exchange possible – influence or even determine an individual entrepre-
business needs an environment of trust. Former neur’s ethical standards (cited in Hannafey, 2003).
Chairman of the IBM Board, John Akers, stated that We can find the same variations in ethical attitudes
‘‘any competitive system requires ethical standards to within another important group: undergraduate stu-
remain viable over the long term’’ (1989, cited in dents – the managers and leaders of the future. Ethical
Levicki et al., 1994, p. 377). studies have shown that – notwithstanding their
We are conscious that we have perhaps painted a strong disapproval of ethical misconduct in business –
rather negative and pessimistic view of business. As in they seem to be more indulgent in their own ethical
any profession, a small minority create a bad image of attitudes towards such practices as cheating in exams
the whole community. Fortunately, not all entre- (Grimes, 2004; Lawson, 2004). It is alarming to note
preneurs and managers are unethical. Most are that students from business schools scored lower in
dependable, in fact the vast majority of them. How- ethical attitude tests than others (Smyth and Davis,
ever, due to the external pressures and to the ambition 2004). One may fear that without appropriate sensi-
to succeed, unfair and unethical practices have in- tising to these issues during their education, and later
creased in daily business, at all levels of the company. in their work, that they will appeal to similar ratio-
The business community reflects the wider soci- nalisations when confronted with ethical dilemmas in
ety. It shows the same diversity in its composition, their professional life.
from serious people to less serious ones: many Some observers also comment that some people do
honest, incorruptible people, and some crooks. We not always behave in a completely ethical way in their
observe the same diversity in ethical behaviour private and social life. Some people cheat in amateur
within other influential professional groups such as sports and in games. Why then should one expect
medical doctors, academics, civil servants, politi- them to be wholly ethical in business situations? Most
cians, lawyers, journalists and sportsmen. Managers social observers believe there has been a significant
and entrepreneurs may be more action-driven, more moral decline in our society, and an increased fre-
dynamic, more ambitious than the average person. quency of ethical violations by businesspeople, poli-
They combine ingenuity and innovation with ticians and public figures, in the worlds of sports,
Reason behind Non-ethical Behaviour 273

religion, business, politics and even academic circles to approve – why managers and entrepreneurs
(Levicki et al., 1994, p. 487). Umberto Eco is any- sometimes make use of unethical practices. It seems as
thing but optimistic about the future of ethics, not if the CSR policies and codes of conduct were
only in business but also in general. He observes that introduced in corporations during prosperous times
the role models of the past – heroes, saints and sages – but that, when business becomes harder and more
people whose morality stood above the rest of man- difficult, they tend to be forgotten and seen as a luxury.
kind, have been replaced by the mediocre personages It seems that a corporation has to be economically
of soaps and reality shows with low moralities (Eco, successful to meet its social and environmental
2000). Other researchers such as Capra see the responsibilities.
changes in the value system underlying the global We must also accept that there will always remain
economy as the greatest challenge of the twenty-first difficult choices for managers regarding ethical
century (Capra, 2003, p. 229). dilemmas, and especially so in difficult times. There
will always be tension between theory and prag-
matism. However, progress can still be achieved,
Ethics in business and entrepreneurship even in ethical matters in business.
requires more than corporate governance
and CSR
Conclusions
The practical experiences of entrepreneurs and the
analysis of the reasons for the increase of unfair Business ethics goes beyond the individual policies of cor-
practices in modern business and entrepreneurship porate governance or CSR: ‘‘Business ethics is the
lead towards our conclusion: ethics has a long way to application of moral principles to everyday business
go in business. problems’’ (Hanson and Brady, 2000).
However, we do see recent positive events. The Paraphrasing the definition of corporate gover-
response of the financial and business world to the nance as ‘‘doing the right things, and doing the
financial scandals of recent years has seen increased things right’’ (Tim Melville Ross, 1996), we would
attention given to corporate governance, for corpo- define business ethics as doing the correct things, and doing
rate social responsibility and sustainability. However, the things correctly; doing honourable business, and doing
the positive impact of this renewed attention is any- business honourably.
thing but universal. The field of application is rather Managers also have to realize that ethics goes
limited. Corporate social responsibility focuses mainly beyond the strict requirements of the law. The fair
on social issues. Corporate governance is primarily treatment of all stakeholders should be the ultimate
focused on the functioning of the board of directors, objective of an ethical company. What business
although it also includes executive accountability and needs is real and effective business ethics: a renewed
control, and executive remuneration. ethical attitude is necessary at all levels. Ethical
While these are strategic policies at the top level, management cannot be confined to the big strategic
they do not provide an adequate response to the small issues: it also concerns the small practical matters of
practical matters of everyday activities in business life. everyday business life.
Corporate governance and CSR do not provide Ethics in business and entrepreneurship requires more
adequate practical ethical guidelines for middle than corporate governance and CSR. Entrepreneurs’
managers and entrepreneurs in the present competi- circles, industrial federations and business schools
tive environment. Codes of conduct and even ethical should all support critical thinking about business
charters have limited impact. Their implementation practice. Business leaders should implement the
within an organisation is not always thorough. Many ethical discourse throughout their entire organisa-
unethical practices have been observed in companies tions. It is their role to align the firm’s culture with
with a code of conduct, with an ethical charter, with the core values of society.
corporate governance or with CSR. A key action is to reinstall fair play in business and to
In our analysis, we have identified internal, external promote fair trade practices in relation with all stake-
and personal reasons to explain – but not to justify or holders. It starts with an appropriate attitude by and
274 Yves Fassin

towards all individuals in the entire organisation. After two months, the general contractor claims a technical
Respect of agreements and respect of one’s word, problem as the reason for non-payment. After a final reg-
are sound business practices in accordance with a istered letter, the customer pays, and still deducts the 2%.
sense of honour in the business community. The same CEO of the general contractor man-
aged to eliminate his partners through questionable
practices in another company, active in soil remedial
Case studies in ethical misconduct in work; a company that holds a certificate issued by an
business and entrepreneurship ethical society.

Literature offers numerous definitions of ethics. Case A 2 – Supplier-customer relations


Crane and Matten (2004, p.8) define business ethics A mechanical engineering company specialising in quality
as ‘‘the study of business situations, activities, and welding produces stainless steel frames as a subcontractor to
decisions where issues of right and wrong are ad- a machine constructor. This latter company is acquired by a
dressed’’. Based on Jones‘s definition of ethical world class company, quoted on the Belgian stock ex-
decisions (Jones, 1991, cited in Chau and Siu, 2000), change. On the occasion of its 25th anniversary, the cus-
here we define an ethical practice as a practice ‘‘that tomers and suppliers are invited for a celebration. In his
is both legal and morally acceptable to the larger speech, the CEO of the group, a former ‘‘Manager of the
community, while an unethical practice is a practice Year’’, assures: ‘We want partnerships with our customers,
that is illegal or morally unacceptable to the larger with our suppliers’. Two weeks later the supplier is sum-
community’’. moned by the operational manager of the plant; and in a
In the following cases, we will present a number rather rude and blunt style he is told: ‘You have to reduce
of situations where questionable ethical behaviour your prices by 15%. This is an order from top manage-
occurred. They are based on real business life situ- ment’. The company was trying to impose equal cost
ations, but for the sake of conciseness and respect of savings across the board, not only in the electronics business
anonymity, the cases have been adapted, simplified where prices were generally falling but also in other sectors
and sometimes combined. Most of the cases were where margins were tight. Moreover, the customer had not
reported from the experiences of fellow entrepre- fulfilled previous agreements with his supplier concerning
neurs, with a few cases taken from the press. quantities and payment terms.
They illustrate events in a range of management There was a clear mismatch between the external
fields: negotiations, personnel management, sup- message and the practical implementation, a con-
plier-customer relations, government relations and tradiction between the CEO’s policy and the
marketing. As a reader, you can judge the ethical internal directives.
behaviour of the actors in the situations described in
the various cases.
Case A 3 - Corruption
The first series of cases illustrate payment prob-
A contractor is in competition for an important public
lems, contradictions between a CEO’s external
contract. His competitor is a friend of the head of the
message and internal directives, passive corruption,
purchasing department of the public service. This official is
unfair competition, unfair treatment of suppliers,
invited every year to spend two weeks in his competitor’s
fraudulent bankruptcy, personnel issues, personal
villa in Saint-Tropez, on the French Riviera. In return,
advantages for top management and the manipula-
the competitor receives in advance – and informally of
tion of communications.
course - some important information which enables him to
Case A 1 – Payment problems put in a better bid.
A contractor receives an order for the fitting of doors and
windows, after a final negotiation round in which the Case A 4 – Newcomer
CEO of the general contractor proposes paying cash pro- A few years ago, a new telecom operator wanted to enter a
vided he is allowed a 2% discount. The work is done, and foreign market. He approached personnel from various com-
the contractor sends in his bill. After one month, there is no petitors offering them a substantial salary increase and a
news. In a telephone follow-up, several excuses are given. stylish car. This resulted in a twenty-five percent salary raise
Reason behind Non-ethical Behaviour 275

in the sector. Two years later the company withdrew from the parties, to put an end to their collaboration. Two months
country. later, the chairman refuses to execute the terms of the
agreement, arguing that he was not entitled to sign on
Case A 5 – Subcontracting and personnel behalf of this specific company.
A multinational telecoms company had worked for many A few years earlier, the chairman had received a
years with a local subcontractor for completing mechanical lot of press coverage for introducing corporate
jobs. A new, important project for the Ministry of Defence is governance in his group, inviting well-known and
under discussion and, as in the past, the multinational invites respected businessmen and even a former minister to
the subcontractor to submit a price range for the job. The join his board of directors.
proposed bid is accepted. The project, however, is delayed for
a few years. When the project is finally launched, the sub-
Case A 8 – Company funds for private works
contractor is invited to submit operational plans and a detailed
A classical accounting trick is realising works for private
price offer, with an explicit (oral) assurance that, as in the
purposes at the company’s expense. This trick is not re-
past, he remains the multinational’s preferential partner.
served for small companies. In 1995, Pierre Suard, CEO
Relying on his positive experiences, the subcontractor does not
of Alcatel in Paris, was investigated for the abuse of social
insist on a letter of intent. Times are rather difficult, the
funds due to the lavish expenditure on the protection of his
defence budget is limited and the multinational is under
private residence, but ironically not for an important stock
pressure. Once the detailed price offer has been received, the
option package at a very favourable price he had benefited
multinational starts shopping around and exploring other
from previously. He was sentenced and had to resign
sources. They propose to split up the job and to substantially
(Economist, 1995 & 1999).
reduce the subcontractor’s part. Moreover, they request the
subcontractor to hand over the detailed drawings so as to be
able to include them in the official offer. In good faith, the Case A 9 – Marketing, public relations and financial
subcontractor delivers but, for months, silence prevails. What communication
has happened? The subcontractor’s project manager was hired The Flemish high-tech company Lernout & Hauspie,
by the multinational. They used the drawings and detailed specialising in speech recognition software, made clever use
offer to shop around, and divide up the job. The subcon- of several marketing and public relations techniques in its
tractor, for years the multinational’s preferential partner, financial communications in order to support the stock price.
received no compensation for the effort put into the technical The founders were awarded the title of ‘‘Manager of the
study. Year’’. On regular occasions, important guests, ministers
The company claims integrity in their employee’s and even the Crown Prince were invited to visit the com-
behaviour as a major value in its mission statement. pany, with wide press coverage. The Belgian astronaut
Dirk Frimout was hired as manager for education.
Case A 6 – Fraudulent bankruptcy Important well-known people were invited to have a seat on
The financial situation of a company is deteriorating rap- the Board of Directors of a daughter company, among them
idly: sales are declining, banks refuse additional loans and a former Belgian prime minister. The company worked
suppliers want cash payment. Bankruptcy is inevitable. with lots of universities on R&D projects, and with top
The weekend before declaring bankruptcy to the court, all consultants, auditors and lawyers, giving an impression of
the machinery is removed from the workshop during the professionalism. All these actions reinforced the credibility of
night. A few weeks later, with the help of puppet figures, the company, building up an image of good corporate
the entrepreneur starts up again, in different premises, governance. A new CEO, with high-level experience with
taking on only the best workers, leaving the curator with Apple, was hired, and it was announced that he had
unpaid debts to the bank and to the suppliers, but without bought 25 million worth of shares, as evidence of his
any assets to realise. commitment and belief in the company’s bright future. The
communication of this information to the financial press
Case A 7 – Management and shareholder reinforced the reputation of the group for thousands of
A general manager of an important industrial company private investors. When the group collapsed a few months
enters into conflict with his chairman, the main shareholder. later, the communication policy turned out to be pure
A deal is finalised, involving the legal councils of both manipulation (NRC, 2000).
276 Yves Fassin

The criterion for distinguishing good from bad architect produces a plan that exceeds the original budget by
behaviour can either be the law or an ethical more than fifty percent. The school, supported by local
standpoint. Some entrepreneurs and managers con- industrial sponsors, does not want to make use of debt
sider their attitudes as correct provided no law is financing, and decides to stop the project and move to hired
transgressed. The borderline between the legal and facilities. The architect refers to his standard contract which
the ethical points of view may be rather fuzzy. Ethics stipulates that, in case of non-execution of the project, half
is not always black or white; there is a grey area in of the architect fee is due: even if the decision not to build
between. In many situations, managers regularly was partly due to the architect exceeding the budget. He
experience ‘‘ambiguity, incomplete information, refused to drop this claim, referring to the contract, and only
multiple points of view and conflicting responsibil- accepted a minor abatement.
ities’’ (Andrews, 1989). Moreover, ethics evolve
over time and are influenced by cultural elements.
Case B 3 – Compensation or penalties
What prevails: the letter or the spirit of the contract?
An international firm was awarded a contract for the supply
In some of the following cases, management’s ac-
of helicopters to the Army. The bid was selected on the
tions may be legally correct; but nevertheless one can
basis of their proposal which promised a considerable vol-
question the ethical attitudes of the actors. The cases
ume of subcontracting to local manufacturers. However, the
concern false play by a bank, the use of the small
head office had calculated that it was cheaper to pay the
print in a service contract, false play in international
stipulated penalty than to effectively use local subcontract-
tenders, and a credit stop by a bank.
ing. In doing so, the international firm reneged on its
obligation, and unfairly took the contract away from its
Case B 1 – Influence of the bank
competitors who would have respected the agreement.
Two years after a management buyout, the financial results
of a textile company are not very good. The bank feels
uneasy and refuses an additional credit line. After several Case B 4 – Credit stop
discussions, they suggest that the manager of the firm A company is planning to construct a new building for its
contacts the investment bank of their group to look for a offices and workshops, and a financial loan is agreed, long
financial partner. The entrepreneur accepts the proposal and in advance. However, the time involved in the acquisition
has to pay a start-up fee. A few days before the study is of the site is lengthy due to administrative problems. In the
finalised, the bank transforms its mortgage mandate into a meantime, the company has the opportunity to move to
firm one, with significant additional costs and without new hired premises and decides to suspend its new office
informing the entrepreneur, in contrast to the previous oral building project. After the initially agreed period has ex-
agreements with the bank’s director. pired, the bank sticks to the ‘‘small print’’ and annuls the
A week later, the study is presented to the entrepreneur. contract claiming the missed interest payments in compen-
It argues that his company has lost its intrinsic value, and sation for the non-observance of the contract. Despite the
that it will be very difficult to find a partner. It advises the initial oral agreement, the bank refuses any change or
entrepreneur to sell the business for a very low price to a transfer of the loan to other investment projects of the
competing group with available cash and with experience in company, cashing in the money without any risk.
turning businesses around. The bank applies additional A decision in total contradiction to the bank’s
pressure to force through such a deal, in reality to solve the marketing campaign promoting its flexibility.
bank’s potential problem and to transfer the risk to a Negotiations frequently lead towards discussions
company with a lower risk, all this of course at the expense between commercial partners. Here also, dubious
of the entrepreneur. practices are abundant. Every entrepreneur will
The bank has Chinese walls in its internal rules; recognise the following dirty tricks, applied in var-
which forbid the transfer of information between ious forms, according to the business.
departments. Oral agreements are made between the salesperson and
the customer. The written offer that follows does not include
Case B 2 – Architecture contract all the points of the discussion. When executed, the com-
An architecture company is awarded the architectural con- pany sends a bill to cover the supplements promised by the
tract for a new building for a local business school. The salesperson, but not included in the written offer. The final
Reason behind Non-ethical Behaviour 277

price is higher than other, comprehensive, offers that were just to gain market share. A similar case on the multi-
rejected. national level was the merger of Mercedes-Benz with
A customer invites a price quotation based on ten units, Chrysler, initially presented as a merger of equals. A year
then orders only three, but at the reduced price for ten. In later, the German CEO revealed in an interview in the
other cases, an additional order of twenty pieces is promised, Financial Times that he had never intended to have
provided you agree to deliver the first three at a discount. Chrysler as an equal partner in the long run, but wanted
The additional order, of course, never comes. the American company as a part of the German con-
The price for an important contract is based on initial glomerate (Crane and Matten, 2004, p.186). In the
discussions. Once the price is agreed, the client sends a meantime, his own salary had been increased to American
contract of fifteen pages, with a lot of warranties and standards.
penalties, and payment conditions, which where never
discussed before. Case C 2 - Warranties after acquisition
Your company has the best qualitative offer in a public A financial group is divesting its industrial activities. An
tender: it is complying with the various requirements of SME (small or medium sized enterprise) is in the running
quality certification, accreditation as an entrepreneur, etc. for their acquisition. All information requests are handled
However, in the end, a lower offer is accepted although it correctly. The seller even signals an important piece of bad
does not meet the specified qualifications. news during the negotiation phase – the failure of an
Your company employs well-trained qualified personnel important customer - and consequently agrees to a down-
and you comply with all the legal obligations. Your com- ward adjustment to the initial price. A contract is signed
petitor is more flexible, uses less-qualified labour from including the usual warranties. A few months later the
foreign countries and pays part of the salary in a flexible SME wishes to invoke one of the warranty clauses. Since
way, avoiding the 150% salary premium for overtime the negotiations had proceeded satisfactory, the simple oral
hours. communications to the seller’s representative were not
In matters of ethical misconduct, mergers and backed up in writing. Further discussion is delayed because
acquisitions deserve a special mention. How many of timetabling problems with the seller’s contact person.
surprises are discovered after acquisitions, with Months later, the SME learns that the CEO of the
information that was distorted, problems that were financial group has withdrawn all authority to negotiate
hidden, shortcomings that were not mentioned by from his contact person. The SME’s general manager re-
the seller and which lead towards claims and law- quests a meeting with the CEO of the group which is first
suits? Conversely, breaches of promise by buyers are refused but then agreed to. Then, the CEO delegates this
countless. Confidentiality is crucial in many deals, issue to his secretary, but without any decision-making
especially in merger and acquisition negotiations, but power, who then invites the SME boss to state his claims in
although confidentiality clauses are signed, they are writing. The response from the CEO states that the con-
all too often ignored. tractual period for invoking the warranty clause has expired.
The following three cases illustrate: bad practices The CEO of this group is also an independent
in a takeover, the refusal to discuss warrantees after board member of several distinguished financial
acquisition, and the use of information obtained for institutions, all with ethical codes.
other purposes.
Case C 3 – Customer-supplier relations
Case C 1 – Integration policy A large French listed company proposes acquiring its
An investment banker approaches a local stockbroker in Spanish subcontractor, after a successful partnership of
order to extend his network in the north of the country. A twenty-five years, because of its strategic value. A memo-
common strategy for integration is agreed and signed. After randum of understanding is signed and considerable infor-
several meetings between the president of the stockbroker’s mation is exchanged between the partners. A price is
board and the investment banker’s management to assure agreed, subject to due diligence and the usual warranties. A
the agreed strategy would be followed, the deal is finalised. few meetings later, the manufacturer informs the subcon-
One year later, the integration model that was agreed is tractor that the project is delayed by one year because of
abandoned in favour of the banker’s previous strategy. In other priorities. Two months later, the management of the
fact, it appears that the investment banker’s strategy was French company is removed. The subcontractor requests a
278 Yves Fassin

meeting with the new French manager. This is refused, and and sell their shares to the new investor; the third will not
on the question of the future of the agreement, the response reinvest but accepts dilution; the fourth hesitates and waits
is frank and brutal: ‘all your discussions with my prede- for more detailed information, but refuses to sign any
cessors are invalid. Nothing is signed’. A few weeks later, guarantee and requests application of corporate governance
the purchasing manager puts additional pressure on the principles.
subcontractor to obtain lower prices. The new investor saw this new activity as a core business
The stock exchange listed company lists ethical for his group and wanted control of the young company. He
behaviour as one of its priorities on its website. threatened to withdraw his efforts which would lead to
Another entrepreneurial field with numerous bankruptcy. In a rude and aggressive style, he further
dubious practices in recent years has been the start-up menaced the initial partners and attacked them for being
sector, with the dot.com hype. The first case study in responsible for this potential bankruptcy.
start-ups presents an instance of theft of intellectual After a few weeks of discussions, the two initial
property; the second case illustrates the use of mis- investors, who did not want to live with permanent
leading information in the business plan for fundrais- infighting, decided to regretfully resign and sell their
ing and the elimination of minority shareholders. shares.

Case D 1 – Patenting – intellectual property


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