Introduction to Business Ethics

Ethics is a subject of social science that is related with moral principles and social
values. 'Business Ethics' can be termed as a study of proper business policies and
practices regarding potentially controversial issues, such as corporate governance,
insider trading, bribery, discrimination, corporate social responsibility, and fiduciary
responsibilities.

Businesses must abide by some basic principles. It should provide quality goods and
services at reasonable prices to their consumers. It must also avoid adulteration,
misleading advertisements, and other unfair malpractices.

A business must also perform other duties such as distributing fair wages, providing
good working conditions, not exploiting the workers, encouraging competition, etc.

Business Ethics – Definition

There are many definitions of business ethics, but the ones given by Andrew Crane and
Raymond C. Baumhart are considered the most appropriate ones.

According to Crane, "Business ethics is the study of business situations, activities, and
decisions where issues of right and wrong are addressed."

Baumhart defines, "The ethics of business is the ethics of responsibility. The business
man must promise that he will not harm knowingly."

Nature of Business Ethics

The characteristics or features of business ethics are:-

● Code of conduct : Business ethics is a code of conduct. It tells what to do and

what not to do for the welfare of the society. All businessmen must follow this
code of conduct.
● Based on moral and social values : Business ethics is based on moral and
social values. It contains moral and social principles (rules) for doing business.
 This includes self-control, consumer protection and welfare, service to society,
fair treatment to social groups, not to exploit others, etc.
● Gives protection to social groups : Business ethics give protection to different
social groups such as consumers, employees, small businessmen, government,
shareholders, creditors, etc.
● Provides basic framework : Business ethics provide a basic framework for
doing business. It gives the social cultural, economic, legal and other limits of
business. Business must be conducted within these limits.
● Voluntary : Business ethics must be voluntary. The businessmen must accept
business ethics on their own. Business ethics must be like self-discipline. It must
not be enforced by law.
● Requires education and guidance : Businessmen must be given proper
education and guidance before introducing business ethics. The businessmen
must be motivated to use business ethics. They must be informed about the
advantages of using business ethics. Trade Associations and Chambers of
Commerce must also play an active role in this matter.
● Relative Term : Business ethics is a relative term. That is, it changes from one
business to another. It also changes from one country to another. What is
considered as good in one country may be taboo in another country.
● New concept : Business ethics is a newer concept. It is strictly followed only in
developed countries. It is not followed properly in poor and developing countries.

Importance of Business Ethics

● Long-term growth: sustainability comes from an ethical long-term vision which

takes into account all stakeholders. Smaller but sustainable profits long-term
must be better than higher but riskier short-lived profits.
● Cost and risk reduction: companies which recognise the importance of
business ethics will need to spend less protecting themselves from internal and
 external behavioural risks, especially when supported by sound governance
systems and independent research
● Anti-capitalist sentiment: the financial crisis marked another blow for the
credibility of capitalism, with resentment towards bank bailouts at the cost of
fundamental rights such as education and healthcare.
● Limited resources: the planet has finite resources but a growing population;
without ethics, those resources are repleted for purely individual gain at huge
cost both to current and future generations.

SCOPE OF BUSINESS ETHICS

Ethical problems and phenomena arise across all the functional areas of companies
and at all levels within the company.

1.Ethics in Compliance

Compliance is about obeying and adhering to rules and authority. The motivation for
being compliant could be to do the right thing out of the fear of being caught rather than
a desire to be abiding by the law. An ethical climate in an organization ensures that
compliance with law is fuelled by a desire to abide by the laws. Organizations that value
high ethics comply with the laws not only in letter but go beyond what is stipulated or
expected of them.

2.Ethics in Finance

The ethical issues in finance that companies and employees are confronted with
include:

● In accounting – window dressing, misleading financial analysis.

● Related party transactions not at arm’s length
 ● Insider trading, securities fraud leading to manipulation of the financial markets.
● Executive compensation.
● Bribery, kickbacks, over billing of expenses, facilitation payments.
● Fake reimbursements

3.Ethics in Human Resources

Human resource management (HRM) plays a decisive role in introducing and

implementing ethics. Ethics should be a pivotal issue for HR specialists. The ethics of
human resource management (HRM) covers those ethical issues arising around the
employer-employee relationship, such as the rights and duties owed between employer
and employee.

The issues of ethics faced by HRM include:

● Discrimination issues i.e. discrimination on the bases of age, gender, race,

religion, disabilities, weight etc.
● Sexual harassment.
● Affirmative Action.
● Issues surrounding the representation of employees and the democratization of
the workplace, trade ization.
● Issues affecting the privacy of the employee: workplace surveillance, drug
testing.
● Issues affecting the privacy of the employer: whistle-blowing.
● Issues relating to the fairness of the employment contract and the balance of
power between employer and employee.
● Occupational safety and health.
Companies tend to shift economic risks onto the shoulders of their employees. The
boom of performance-related pay systems and flexible employment contracts are
indicators of these newly established forms of shifting risk.

4.Ethics in Marketing

Marketing ethics is the area of applied ethics which deals with the moral principles
behind the operation and regulation of marketing. The ethical issues confronted in this
area include:

● Pricing: price fixing, price discrimination, price skimming.

● Anti-competitive practices like manipulation of supply, exclusive dealing
arrangements, tying arrangements etc.
● Misleading advertisements
● Content of advertisements.
● Children and marketing.
● Black markets, grey markets.

5.Ethics of Production

This area of business ethics deals with the duties of a company to ensure that products
and production processes do not cause harm. Some of the more acute dilemmas in this
area arise out of the fact that there is usually a degree of danger in any product or
production process and it is difficult to define a degree of permissibility, or the degree of
permissibility may depend on the changing state of preventative technologies or
changing social perceptions of acceptable risk.

● Defective, addictive and inherently dangerous products and

 ● Ethical relations between the company and the environment include pollution,
environmental ethics, and carbon emissions trading.
● Ethical problems arising out of new technologies for eg. Genetically modified
food
● Product testing ethics.

Features of Business Ethics

There are eight major features of business ethics −

● Code of Conduct − Business ethics is actually a form of codes of conduct.

It lets us know what to do and what not to do. Businesses must follow this
code of conduct.
● Based on Moral and Social Values − Business ethics is a subject that is
based on moral and social values. It offers some moral and social
principles (rules) for conducting a business.
● Protection to Social Groups − Business ethics protect various social
groups including consumers, employees, small businesspersons,
government, shareholders, creditors, etc.
● Offers a Basic Framework − Business ethics is the basic framework for
doing business properly. It constructs the social, cultural, legal, economic,
and other limits in which a business must operate.
● Voluntary − Business ethics is meant to be voluntary. It should be
self-practiced and must not be enforced by law.
● Requires Education & Guidance − Businessmen should get proper
education and guidance about business ethics. Trade Associations and
Chambers of Commerce should be active enough in this matter.
● Relative Term − Business ethics is a relative term. It changes from one
business to another and from one country to another.
 ● New Concept − Business ethics is a relatively newer concept. Developed
countries have more exposure to business ethics, while poor and
developing countries are relatively backward in applying the principles of
business ethics.

Principles of Business Ethics

The principles of business ethics are related to social groups that comprise of
consumers, employees, investors, and the local community. The important rules or
principles of business ethics are as follows −

● Avoid Exploitation of Consumers − Do not cheat and exploit consumer with

measures such as artificial price rise and adulteration.
● Avoid Profiteering − Unscrupulous business activities such as hoarding,
black-marketing, selling banned or harmful goods to earn exorbitant profits
must be avoided.
● Encourage Healthy Competition − A healthy competitive atmosphere that
offers certain benefits to the consumers must be encouraged.
● Ensure Accuracy − Accuracy in weighing, packaging and quality of
supplying goods to the consumers has to be followed.
● Pay Taxes Regularly − Taxes and other duties to the government must be
honestly and regularly paid.
● Get the Accounts Audited − Proper business records, accounts must be
managed. All authorized persons and authorities should have access to
these details.
● Fair Treatment to Employees − Fair wages or salaries, facilities and
incentives must be provided to the employees.
● Keep the Investors Informed − The shareholders and investors must know
about the financial and other important decisions of the company.
● Avoid Injustice and Discrimination − Avoid all types of injustice and
partiality to employees. Discrimination based on gender, race, religion,
language, nationality, etc. should be avoided.
 ● No Bribe and Corruption − Do not give expensive gifts, commissions and
payoffs to people having influence.
● Discourage Secret Agreement − Making secret agreements with other
business people to influence production, distribution, pricing etc. are
unethical.
● Service before Profit − Accept the principle of "service first and profit next."
● Practice Fair Business − Businesses should be fair, humane, efficient and
dynamic to offer certain benefits to consumers.
● Avoid Monopoly − No private monopolies and concentration of economic
power should be practiced.
● Fulfil Customers’ Expectations − Adjust your business activities as per the
demands, needs and expectations of the customers.
● Respect Consumers Rights − Honor the basic rights of the consumers.
● Accept Social Responsibilities − Honor responsibilities towards the society.
● Satisfy Consumers’ Wants − Satisfy the wants of the consumers as the
main objective of the business is to satisfy the consumer’s wants. All
business operations must have this aim.
● Service Motive − Service and consumer's satisfaction should get more
attention than profit-maximization.
● Optimum Utilization of Resources − Ensure optimum utilization of
resources to remove poverty and to increase the standard of living of
people.
● Intentions of Business − Use permitted legal and sacred means to do
business. Avoid Illegal, unscrupulous and evil means.

Follow Woodrow Wilson's rules − There are four important principles of business ethics.
These four rules are as follows −

● Rule of publicity − According to this principle, the business must tell the
people clearly, what it tends to do.
 ● Rule of equivalent price − The customer should get proper value for their
money. Below standard, outdated and inferior goods should not be sold at
high prices.
● Rule of conscience in business − The businesspersons must have
conscience while doing business, i.e. a morale sense of judging what is
right and what is wrong.
● Rule of spirit of service − The business must give importance to the
service motive.

Example of Unethical Business Practices

Satyam Computers, a global IT company, was defamed in a notorious list of companies
involved in fraudulent financial activities. The list includes names such as Enron,
WorldCom, Parmalat, Ahold, Allied Irish, Bearings and Kidder Peabody.

Satyam’s CEO, Ramalinga Raju, accepted his role in a broad accounting impropriety
that had overstated the company’s net revenue and profit. The company had earlier
reported a cash reserve of approximately $1.04 billion that actually existed only in books
but not in reality.
In his letter to his board, exposing the fraud, Satyam’s Raju showed the propensity of
the fraud. He stated that, “What started as a marginal gap between actual operating
profits and ones reflected in the books of accounts continued to grow over the years. It
has attained unmanageable proportions. …”

Later, he described the process as “like riding a tiger, not knowing how to get off without
being eaten.”

Principles of Business Ethics

It's essential to understand the underlying principles that drive desired ethical behavior
and how a lack of these moral principles contributes to the downfall of many otherwise
intelligent, talented people and the businesses they represent.

There are generally 12 business ethics principles:

● Leadership: The conscious effort to adopt, integrate, and emulate the other 11
principles to guide decisions and behavior in all aspects of professional and
personal life.
● Accountability: Holding yourself and others responsible for their actions.
Commitment to following ethical practices and ensuring others follow ethics
guidelines.
● Integrity: Incorporates other principles—honesty, trustworthiness, and reliability.
Someone with integrity consistently does the right thing and strives to hold
themselves to a higher standard.
● Respect for others: To foster ethical behavior and environments in the
workplace, respecting others is a critical component. Everyone deserves dignity,
privacy, equality, opportunity, compassion, and empathy.
● Honesty: Truth in all matters is key to fostering an ethical climate. Partial truths,
omissions, and under or overstating don't help a business improve its
performance. Bad news should be communicated and received in the same
manner as good news so that solutions can be developed.
● Respect for laws: Ethical leadership should include enforcing all local, state,
and federal laws. If there is a legal grey area, leaders should err on the side of
legality rather than exploiting a gap.
● Responsibility: Promote ownership within an organization, allow employees to
be responsible for their work, and be accountable for yours.
● Transparency: Stakeholders are people with an interest in a business, such as
shareholders, employees, the community a firm operates in, and the family
members of the employees. Without divulging trade secrets, companies should
ensure information about their financials, price changes, hiring and firing
practices, wages and salaries, and promotions are available to those interested
in the business's success.
● Compassion: Employees, the community surrounding a business, business
partners, and customers should all be treated with concern for their well-being.
● Fairness: Everyone should have the same opportunities and be treated the
same. If a practice or behavior would make you feel uncomfortable or place
personal or corporate benefit in front of equality, common courtesy, and respect,
it is likely not fair.
● Loyalty: Leadership should demonstrate confidentially and commitment to their
employees and the company. Inspiring loyalty in employees and management
ensures that they are committed to best practices.
● Environmental concern: In a world where resources are limited, ecosystems
have been damaged by past practices, and the climate is changing, it is of
utmost importance to be aware of and concerned about the environmental
 impacts a business has. All employees should be encouraged to discover and
report solutions for practices that can add to damages already done.

Why Is Business Ethics Important?

There are several reasons business ethics are essential for success in modern
business. Most importantly, defined ethics programs establish a code of conduct that
drives employee behavior—from executives to middle management to the newest and
youngest employees. When all employees make ethical decisions, the company
establishes a reputation for ethical behavior. Its reputation grows, and it begins to
experience the benefits a moral establishment reaps:

● Brand recognition and growth

● Increased ability to negotiate
● Increased trust in products and services
● Customer retention and growth
● Attracts talent
● Attracts investors

When combined, all these factors affect a business' revenues. Those that fail set ethical
standards and enforce them are doomed to eventually find themselves alongside Enron,
Arthur Andersen, Wells Fargo, Lehman Brothers, Bernie Maddoff, and many others.

Personal beliefs, values, attitudes and behaviour

The diagram below illustrates the influences on us that result in our behaviour and

whether that resulting behaviour is ethical. The diagram first outlines the sources of our

beliefs. It then shows the relationship between the beliefs and values to our attitudes

and our resulting behaviour.

What is a belief?

A belief is an idea that a person holds as being true.

A person can base a belief upon certainties (e.g. mathematical principles), probabilities

or matters of faith.

A belief can come from different sources, including:

● a person’s own experiences or experiments

● the acceptance of cultural and societal norms (e.g. religion)

● what other people say (e.g.education or mentoring).

A potential belief sits with the person until they accept it as truth, and adopt it as part of

their individual belief system.

Each person evaluates and seeks sound reasons or evidence for these potential beliefs

in their own way.

Once a person accepts a belief as a truth they are willing to defend, it can be said to

form part of their belief system.

What is a personal value?

Values are stable long-lasting beliefs about what is important to a person. They become

standards by which people order their lives and make their choices.
A belief will develop into a value when the person’s commitment to it grows and they

see it as being important.

It is possible to categorise beliefs into different types of values – examples include

values that relate to happiness, wealth, career success or family.

A person must be able to articulate their values in order to make clear, rational,

responsible and consistent decisions.

What is an attitude?

Attitudes are the mental dispositions people have towards others and the current

circumstances before making decisions that result in behaviour. People primarily form

their attitudes from underlying values and beliefs.

However, factors which may not have been internalised as beliefs and values can still

influence a person’s attitudes at the point of decision-making. Typical influences include

the desire to please, political correctness, convenience, peer pressure, and

psychological stressors.
Ehics and Morality