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Chapter 3 Notes

Finance (San Diego State University)

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Chapter 3:

Ethics and the Role of Business

• Ethics: Moral principles and values applied to social behavior.
• Business ethics: The application of moral and ethical principles in a business context.

The Relationship of Law and Ethics:

• The government has institutionalized some ethical rights and duties through the passage of laws and regulations (e.g., The
Fraud Reduction and Data Analytics Act, the Sarbanes-Oxley Act).
• The law contains gray areas that are difficult to interpret and apply.

The Moral Minimum

• The minimum level of ethical behavior expected by society, which is usually defined as compliance with the law.
• Many private companies and industry organizations have created codes of ethics.

The Role of Business in Society:

• Businesses can be seen as pure profit maximizers.
• They can also be seen as corporate citizens concerned equally with the Triple Bottom Line:
• a corporation’s profits,
• its impact on people, and
• its impact on the planet.

Ethical Decision-Making in Business:

• Businesspeople can use these four criteria to help make ethical decisions:
• The legal implications of each decision
• The public relations impact
• The safety risks for consumers and employees
• The financial implications

Ethical Issues in Business:

• Developing integrity and trust is a fundamental ethical issue for business.
• Businesses should ensure that the workplace respects diversity, enforces equal opportunity employment, and civil rights laws.
• Businesses must also comply with a host of federal and state laws and regulations.

Importance of Ethical Leadership:

• Managers who do not commit to creating and maintaining an ethical workplace rarely have one.
• Managers must model ethical behavior for their employees and enforce codes of conduct consistently.
• Managers should set realistic goals for their employees to reduce the incentive to behave unethically.

Ethical Principles and Philosophies

• Ethical Reasoning: A reasoning process in which an individual links his or her moral convictions or ethical standards to the
situation at hand.
• Study of ethics is generally divided into two major categories:
• Duty-Based Ethics
• Outcome-Based Ethics

Duty-Based Ethics:
• Ethical philosophy rooted in idea that every person has certain duties to others, including humans and planet.
• Religious Ethical Principles: Beliefs about how one should treat others, typically described in religious texts
• Principle of Rights: When deciding whether an action is ethical, one should consider what effect one’s actions would have on
the fundamental rights of others.

Outcome-Based Ethics: Utilitarianism

• Focuses on the consequences of an action, not on the nature of the action itself or on any set of preestablished moral values or
religious beliefs.
• Outcome-based ethics looks at the impacts of a decision in an attempt to maximize benefits and minimize harms.
• Requires a cost-benefits analysis

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Corporate Social Responsibility:

• The idea that corporations can and should act ethically and be accountable to society for their actions, not just their
shareholders’ best interest.
• Socially responsible activity will benefit a corporation but the benefits may not be seen immediately.
• Corporations should behave as “good citizens” by promoting worthwhile social goals and by working to solve important social
problems.
• One view of CSR is that corporations have a duty to both their shareholders and their stakeholders (groups affected by
corporate decisions).

Sources of Ethical Issues in Business Decisions:

• Ethical dilemmas often arise in these areas:
• Short-term profit maximization at the expense of ethical behavior
• Use of social media, especially when making hiring decisions and discussing work-related issues
• Lack of awareness of relevant ethical issues
• Rationalization of an unethical decision based on the benefits to the individual or the organization
• Uncertainty about the best ethical choice

Making Ethical Business Decisions:

• Frameworks exist to help businesspersons make ethical decisions.
• Some models focus more on legal than ethical implications and tends to be (primarily) outcome-based and may not be
appropriate for a company that is values driven or committed to CSR.
• Other models set out a series of steps to follow.

The IDDR Approach to Making Ethical Business Decisions:

 The IDDR (“I Desire to Do Right”) approach involves the following four steps:
• Inquiry: Begin with an understanding of the facts
• Discussion: Develop a list of action options
• Decision: Work together with those others participating in the discussion to reach a consensus on a justified solution
• Review: Consider whether the implementation of the solution was effective

Business Ethics on a Global Level:

• Differing religious values and cultural norms result in differences in ethical behavior around the world.
• U.S.-based organizations must take care to ensure fair and ethical conduct when doing business on a global scale.
• Outsourcing: The practice by which a company hires an outside firm or individual to perform work rather than hiring employees
to do it.

Under the concept of duty-based ethics, which of the following represent sources from which standards of behavior in society are
derived? Religious authority and text/ philosophical reasoning

Immanuel Kant is most associated with which theory for ethical behavior? The idea that moral behavior is based upon the fundamental
nature of human beings

The idea that individuals should evaluate their actions in light of the consequences that would follow if everyone in society acted in the
same way is known as the: categorical imperative

To apply the utilitarian theory to a business decision, a company should consider: a determination of which individuals will be affected
by the action in question, a cost benefit analysis of the positive and negative effects of all alternate options, and the selection of a
choice of action that will produce the maximum utility.

Under the theory of corporate social responsibility, many corporations publish reports outlining how they comply with this theory.
These are often called: corporate sustainability report.

Under the Principle of Rights, or "rights theory", which of the following are groups whose rights a company should consider before making a
decision?
 The community in which the company does business 
 The company's owners 
 The consumers of the company's products or services 
 The company's suppliers 
 Society as a whole 
 The company's employees 

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 The Sarbanes-Oxley Act was designed to do which of the following?

Create confidential systems for fraud reporting within a publicly traded company
Require accountability measures for publicly traded companies
Reduce corporate fraud

 Abiding by a foreign country's cultural norms during an international business transaction means a
company has met a minimum standard for acting ethically. False

 The FCPA does not prohibit payments to low-level employees of foreign nations who exercise little (or
no) discretion in their jobs, but merely process paperwork. True

 Which of the following represent a potential ethical issue for a U.S. company doing business in a
foreign country?
a. The country does not regulate child labor.
b. The country does not permit women to sign contracts without a male co-signatory.
c. The country permits payments made to government officials to secure government contract approval.
d. The country does not mandate a minimum livable wage for its workers

 Why is it important to monitor the employment practices of foreign suppliers?

Because corporate watch groups will discover and publicize unethical behavior by suppliers, link it to the American company, and harm its

reputation.

 The inquiry analysis step of the IDDR Approach to ethical analysis of business decisions involves
identifying the parties and collecting the relevant facts.

 Management Behavior; has been shown to be the most influential in setting an ethical tone for a
business.

 Since the late 1970s, the Foreign Corrupt Practices Act (FCPA) has prohibited U.S. businesses from
bribing foreign officials.

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