TOPIC 2:

ETHICAL THOUGHT AND MORAL REASONING

IN BUSINESS: BASIS FOR ETHICAL
BEHAVIOUR
(part 1)
 TOPIC OUTCOME
Ability to:

1. Explain 13 factors affecting public expectations for business behavior

2. Explain the new expectations for business-Milton Friedman’s Theory

Conventional Ethics:
Chapter 1

FACTORS
Unbridled greed
Unbridled greed Physical
Physical Moral
Moral
AFFECTING
PUBLIC
EXPECTATION
FOR BUSINESS Environmental
Bad
Bad Judgment
Judgment Activist
Activist stakeholders
stakeholders
BEHAVIOR Environmental
Reality
Reality

Economic Financial
Economic Competition
Competition Governance failures
malfeasance

Institutional
Accountability
Accountability Synergy
reinforcement
 1. Environmental Concerns
Public expects business to take care of the
environment and set aside budgets for
purposes of improving the environment.

Example:
◦ Replanting of Trees
◦ No Plastic Bags Day
◦ Recycling of Waste
◦ Separation of Rubbish
 Physical – Environmental concern
& Environmental Reality

Quality of air and water

• Initially, concern on air pollution
emitted by smokestack and
exhaust pipe smog, which may
cause respiratory irritation and
disorders.
• Two other problems associated
with air pollution are acid rain and
the dissipation of the earth’s ozone
layer which may cause skin cancer
and damaged eyes
 2. Sense of Morality
•

•
•
•

•
• During the 1980s and 1990s, there was
a significant increase in the sensitivity to
the lack of fairness and to discrepancies
in equitable treatment normally afforded
to individuals and groups in society.
• The desire for equity in employment :
pay scales for men and women.
• The campaign to boycott buying from
corporations that engage in child or
sweatshop labor in foreign countries.
 3. Bad judgment
• The public expects directors, managers and
decision-makers to make wise and good decision.
• CEOs must make decision not just for PROFIT but
for public interest.
• Example:
• Eggs contaminated with salmonella bacteria were
sold to restaurants and food service companies in
Quebec. They were then distributed to a charity
food organization that put them in Christmas
baskets
• The public is outraged that the factory manager
allowed this to happen!
 • Directors, executives and managers
are human and they make mistakes.

• Sometimes the public, or specific

groups, take offence at these
instances of bad judgment and take
action to make the directors and
management aware that they do not
approve.
Example : Nestle and the African mothers.
 4. Activist Stakeholder

 The public expects businesses to allow activist groups to also play their
role for the sake of better business services.
 Example:
 Public can seek help from Consumer Association/FOMCA if they feel they
are cheated by unscrupulous business people.
 Public also at the same time must always alert to uphold their rights as
consumers.
 Stakeholders become more actively involved in ethical issues
 Consumers boycott unethical products and services
 Activist
Stakeholders
Two types of activists:
 Ethical consumers : interested in
buying products and services that
were made in ethically acceptable
manners.
 Ethical investors : not only make
investment for reasonable return,
but should do so in an ethical
manner.
 5. Economic pressure
 The public expects businesses to act in good faith even they are put under
pressure by the economic recession and faced with great business competition.
 Economic downturn : absence of growth, shrinking margin led to downsizing in
order to maintain profitability
 Example:
 Some irresponsible shopkeepers did hide stock of cooking oil for the purpose to
increase the price in times of limited supply.
 During festive seasons, there are business owners that hide flour, butter and
sugar for the same purpose!!!
 What a selfish mindset!
 6. Competition
 The public expects businesses to practice healthy business competition and not to
‘beat up’ consumers and ‘step on consumers’ in order to be market leaders.
 Pressure to survive  Falsification of transaction : window dressing; and exploitation
of the environment or workers
 Increasing competition also has resulted management to cheat due to the pressure to
attract customers to buy the business product
Example:
 Sales are done near to product’s expiry date
 ‘Sales’ are actually not sales when price of the ‘sales’ items has been mark-up.
 Selling imitated items at lower price but claiming they are original.
 7. Financial malfeasances

The public expects businesses to act honestly and should never be

involved in financial scandals.
Example:
Management board involvement in fraud and corruption have
resulted collapse of corporation- shareholders affected!
Many cases are reported- tarnished trust of the public towards the
management board.
The ENRONs in the making should be rid off!!!
 Financial Scandals

Public becomes cynical about the

financial integrity of corporations.
Expectation gap : difference between
what the public thinks,
he is getting in audited financial
statements and what he actually gets.

Continuing financial malfeasance has

led to a crisis of confidence over
corporate reporting and governance:
credibility gap.
 8. Governance failures
 The public expects government to play its corporate
governance role in serving the public.
 Example:
 The Malaysian Code on Corporate Governance – to
strengthen corporate governance.
 The Whistleblower Protection Act
 The Minority Shareholders Watchdog Group
 In 2002 the reforms of the Sarbanes Oxley Act
 Risk management is emphasized as a tool to prevent
failures in governance
Governance Failures & Risk Assessment

The Enron, Arthur Andersen and

WorldCom series of disasters clearly
spelled that current governing modes on
companies’ reporting are not sufficient to
protect the investors’ interest.

It is evident that directors and executives

do not identify, assess and manage ethics
risk in the same manner or in depth as
construed to other business risks.
 9. Accountability

The public expects companies and businesses to be

accountable for their products, like in the case if they discover
defect then those must be recalled
Example:
 Toyota recalled on Takata airbag which may explode, injure
and even kill drivers and passengers
 Johnson& Johnson recalled on Tylenol capsules which were
claimed to have caused death to those consuming them.

What Toyota and J&J get by doing those

recalls?
 Increased Accountability Desire

The lack of trust in corporate processes and

activities; and the realization that unbridled greed
by executives lay behind many of the financial
scandal have produced the desire for increased
accountability and transparency on corporate
matters  company responded by publishing
more information on their websites on their CSR
performance including environmental, health and
safety etc.
 10. Synergy Among factors

 The public are afraid of the repercussion of businesses unethical

behavior towards the society, so the public expects businesses to
be more cautious of what they do.
 The public awareness has increased on the need of having
better mechanisms and control to prevent the unethical corporate
behavior.
 This also impacts politicians who react by preparing new laws or
tightening of regulations.
 11. Institutional reinforcement

• The publics expects that the Regulatory Institutions to look into

any irregularity and reinforce laws so that the public does not
suffer due to the act of BAD BIG GUYS in business.
• The creation of IFRS and the Code of Ethics for Professional
Accountants are two examples as the focal points for
harmonization worldwide.
Synergy among Factors & Institutional Reinforcement

 Linkages among the factors that reinforce each

other and add to the public’s desire action
(increase awareness for controls on the
unethical behavior)

 The public’s awareness impacts politicians who

react by preparing new laws or the tightening of
regulations.
THE THEORY
OF PROFIT
MILTON FRIEDMAN
MILTON FRIEDMAN WAS AN AMERICAN
ECONOMIST AND STATISTICIAN
 Milton friedman (1970):
In a free-enterprise, a corporate executive has the
responsibility to make as much money as possible while
conforming to the basic rules of society, both in law and in
ethical customs.
Milton friedman: 3 critical issues
◦ If you were to deviate from just concentrating on profit, it
does not mean profit will decline
◦ Profit alone is an incomplete measure of corporate
performance
◦ In making profit, the expected performance must be within
the law and ethical custom
 NEW EXPECTATIONS FOR BUSINESS

“In a free-enterprise, private property system a corporate

executive ….. has the responsibility to make as much money as
possible while conforming to the basic rules of society, both .….
in law and in ethical custom. The appropriate way to determine
the allocation of scarce resources to alternatives uses.”
(Friedman, 1970)
 NEW EXPECTATIONS FOR BUSINESS (cont’d)

Three critical issues:

1) The deviation from a profit-only focus does
not mean that profit will fall – in fact, profit
may rise.
 There is the myth that business could
not afford to be ethical because too
many opportunities would be given
up for profit to be maximized.
 Above-average social performance is
positively correlated with profits
(Clarkson, 1988).
 NEW EXPECTATIONS FOR BUSINESS (cont’d)

2) Profit is now recognized as an incomplete measure of

corporate performance and therefore an inaccurate
measure for resource allocation.
 Pollution costs are still not fully included in
calculating the profit for the year.

3) Friedman explicitly expected that performance would be within

the law and ethical custom.
 Chaos would result if the business was carried out in an
absolutely-no-holds-barred environment.
 Increased regulation by government is an increasing self-
emphasis on better ethical governance and behavior.
 THE ETHICS ENVIRONMENT FOR PROFESSIONAL
ACCOUNTANTS

 Professional accountants owe their primary loyalty to the public

interest, not just to their own financial interests, company
directors or management, or current shareholders at the
expense of future shareholders.
 Therefore, professional accountants will have to ensure that
their ethical values are current and that they are prepared to act
on them to best exercise their role and to maintain the credibility
of, and support for, the profession.
 Loyalty to management and/or directors can boven to be self-
interested that they are
THE END