Business Ethics

Summary of Chapter One

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 CHAPTER ONE
ETHICS IN THE WORLD OF BUSINESS
CHAPTER SUMMARY

I. INTRODUCTION / WHAT IS BUSINESS ETHICS?

II. LEVELS OF DECISION MAKING
III. ETHICS AND ECONOMICS
IV. ETHICS AND LAW
V. MORAL POINT OF VIEW
VI. ETHICS AND MANAGEMENT
VII. ADVANTAGES AND DISADVANTAGES OF APPLYING ETHICS IN
BUSINESS
VIII. STAKEHOLDERS OF A BUSINESS AND CORPORATE SOCIAL
RESPONSIBILITY
IX. ARGUMENTS FOR /AND/ AGAINST SOCIAL RESPONSIBLE
BUSINESS
X. CASE QUESTIONS

I. Introduction
Ethical issues arise in relationships with every corporate constituency, including employees,
customers, suppliers, shareholders, and society at large. Rules of right conduct that are
utilized in everyday life do not always resolve business questions, and problems arise when
ethical considerations conflict with practical business concerns. Each role in a business
organization involves unique responsibilities that determine what a person should do.
Business activity includes two features that limit the applicability of ordinary ethical
perspectives, namely its economic characteristics and the fact that it takes place in
organizations.
Business activity has a distinctive economic character. Business activity is concerned with
economic relationships between parties, such as buyers and sellers and employers and
employees. Employment relationships involve distinctive rights and duties, so that ethics in
business is partly the ethics of economic relations.
Business activity takes place in large, impersonal organizations. Organizations are
hierarchical systems of functionally defined positions that are designed to achieve particular
goals. People occupying positions in organizations assume responsibilities that must be
balanced with those of everyday life.

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  What’s Business Ethics?

- The discipline of applying ethical principles to solve complex moral dilemmas.

- An area that requires reasoning and judgment based on individuals’ principals and
beliefs in making choices that balance self-interest against social claims and
responsibilities.
- Although ethics provides moral guidelines, individuals must apply these guidelines in
making decisions. Ethics that applies to business (business ethics) is not a separate
theory of ethics; rather, it is an application of ethics to business situations. Although
all people have ethical responsibilities, higher ethical standards are imposed upon
professionals who serve as social models, such as physicians, attorneys, and
businessmen.

II. Levels of Ethical Decision Making

- Decision making occurs on the individual, organizational, and business system levels.

o At the individual level, a person decides what he or she will do.

o At the organizational level, decisions involve an individual acting within his or her
organizational role and are often expressed in procedures and policies,
o The business system level involves systemic problems that concern industry
practices and the economic system. These systemic problems require systemic
solutions, such as an industry-wide code of ethics, government regulation or
economic reform.

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 III. Ethics and Economics (Economical point of view)

Economics teaches that businesses should operate with only profit in mind. According to
economic theory, firms in a free market utilize scarce resources or factors of production
(labor, raw materials, and capital) in order to produce an output of goods and services, the
demand for which is determined by the preferences of individual consumers who are trying
to maximize their own satisfaction. Businesses try to increase production so that they receive
from the sale of goods and services an amount equal to that spent on materials, labor, and
capital and thereby achieve economic efficiency (maximum output for minimum input). On
this view, business decisions are made and ought to be made purely on economic grounds,
and ethics appears to have no place in business decision making.

 Counterpoints: The economic perspective cannot stand alone as the basis for
business decision making for five reasons.

1. The market system itself has an ethical justification. Profit is not the ultimate end of
business decision making but only a means for achieving a greater good.
2. Ethics is required by the market system. The theory underlying the economic point of
view already contains some ethical requirements , such as prohibitions against theft, fraud,
insider trading, conflict of interest, and misappropriation of trade secrets.
3. The “rules of the game” cannot be set by government alone. The economic
arguments generally assume that the “rules of the game” are set by outside forces, most
notably government. However, it is unrealistic to expect that these forces are sufficient
to set the “rules of the game,” in which case businesses should perhaps be expected to
exercise some form of self-regulation.
4. Ethics influences economic behavior. Studies of economic behavior show that individuals
and firms do not act solely as rational utility maximizers; but they make decisions on the
basis of such factors as a reputation for trust and a sense of fairness. This is illustrated in the
case on Home Depot (Case 1.3).
5. Public policy utilizes noneconomic values . Business decision making takes place within a
framework of public policy, which is guided, in part, by ethical values, such as fairness. For
example, a decision by a company such as Nike to contract with a supplier in
Indonesia cannot be purely economic; it must also consider possible charges of human rights
violations and other objectionable practices.

IV. Ethics and the Law (legal point of view)

- Some argue that law is the only moral standard necessary to follow. (If it’s legal, then it’s
morally okay.)
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 - This position is supported by two schools of thought:
(1) that ethics is a matter of personal conduct, whereas law applies to public matters like
business, and
(2) that all unethical conduct in business has already been addressed by the law.

 Why the law is not enough??

Both of these schools of thought are mistaken. Ethics applies not only to public matters but
also shapes the law. Furthermore, although much that is unethical in business is also illegal,
the law cannot be a complete guide to ethical business practice for many reasons. Among
these reasons are the following:

1. The law is inappropriate for regulating certain aspects of business activity . Certain
behavior is immoral but not illegal because legislatures and courts are reluctant to intervene
in ordinary business decisions unless significant rights or interests are at stake.
2. The law is slow and needs time to develop. The law develops in reaction to events and
takes a long time to respond, so that problems can cause much damage before they are
effectively addressed. Meanwhile, businesses have more information regarding their products
and are thus able to anticipate problems and react much more quickly.
3. The law includes moral concepts that are not precisely defined. The legal point of view
naturally overlaps with the moral point of view because the law uses general moral concepts,
such as good faith and fiduciary duty, whose application is often a matter of time, place, and
circumstance.
4. The law is unsettled and is not always applied literally. When the law is unsettled, the
courts often use moral considerations to decide cases, and the courts may also refuse to
interpret the law literally in order to avoid an immoral result. In appealing to morality, the
courts are not substituting morality for law but are expressing the morality embodied in the
law.
5. Corporations are not solely financial institutions ; that fiduciary obligations go beyond
short-term profit and are in any case subject to moral criteria in their execution; and that mere
compliance with the law can be unduly limited and even unjust.

V. Moral Point of View

The moral point of view uses reason or logic, not just feeling or conventional views, to
justify decisions. And it requires impartiality, meaning that the interests of everyone,
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 including one’s self, should be given equal weight. Morality by its nature is public in the
sense that it is a shared set of rules that are intended to be followed by everyone. A test of
the moral point of view is, would you feel comfortable if colleagues, friends, and family
knew about your decision, or if it were reported on TV or in the newspapers?

 Criticisms of the moral point of view:

- People discount or disregard the moral aspect of business, arguing that the main
consideration in business is profit maximization and efficiency. The legal
perspective must also be considered, but this approach is seen as a constraint on the
economic position.
- Other states that ethics is irrelevant to business. Business has its own rules.

 Defenders of the moral point of view state the following:

1. Applying Ethics in Business is in Consistence with the economical point of

view: this is true because ethical businesses will lead to profit maximization;
efficient use of resources and creation of Good reputation in the market.
2. The moral point of view is essential, in combination with the legal and
economic views, for the business decision-making process. Strategic behavior
without ethics may be impractical or even impossible to achieve because
companies occasionally act non-strategically in the short run in order to
receive the long-term strategic benefits of ethical action. One view holds that
acting morally will ultimately provide greater long-term benefits to the
business.

An Integrated Approach:
The decision-making process in business should include the moral, economic, and legal
points of view. The tension among the three points can often be resolved not through a
tradeoff but through an ethically defensible decision that also satisfies a company’s legal
obligations and the economic demands of business.

VI. Ethics and Management

Ethics in management is not purely applying the ethics of everyday life to business
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 situations because situations in business are often different from those in everyday life.
In addition, the task of a manager is not merely deciding what is right and wrong but
also implementing ethics in business situations. Furthermore, ethics in management is
different because many of the rights and obligations of managers arise from occupying a
particular role. Many roles, such as that of a purchasing agent, are precisely defined.
However, the role of high-level management in leading an organization is open to
debate. This role is variously described as:

As economic actor: must act for the sake of the shareholders. They must make decisions
that favor shareholders and increase the profits.

As a Company Leader: must act for the sake of the company. They must make decisions
that favors the employees, protect the workplace environment and considers the rights of
employees.

As a Community Leader: must act for the sake of the society. They must make decisions
that benefit the whole society, increase employment, and protect the environment…..

VII. Advantages and Disadvantages of applying Ethics in

Business.

 The main advantages of ethical behavior include:

1) Higher revenues: demand from positive consumer support

2) Improved brand and business awareness and recognition
3) Better employee motivation and commitment
4) Customer satisfaction; trust & loyalty increase in profits
5) New sources of finance – e.g. from ethical investors
6) Ethical reputation leads to positive relationships with customers; employees and
investors
7) Ethical behavior enhances leadership
8) Contribution in the economic welfare of the country

 The main disadvantages claimed for ethical business:

1) Higher costs: e.g. sourcing from Fair trade suppliers rather than lowest price
2) Higher overheads: e.g. training and communication of ethical policy
3) A danger of building up false expectations.

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 VIII. Stakeholders of a business and corporate social responsibility:
Managers have moral obligations, not just to shareholders, but to other groups as well.

Milton Freeman introduced the term “stakeholders” as “groups and individuals who
benefit from or are harmed by, and whose rights are violated or respected by, corporate
actions”. He went on to make the suggestion that managers have fiduciary obligations
toward multiple stakeholder groups.

- A stakeholder in an organization is (by definition) “any group or individual who

can affect or is affected by the achievement of the organization's objectives”.
- Examples of stakeholder groups include shareholders, suppliers, customers,
competitors, employees & managers, governments, environment and communities.

Ethical management must:

(1)- Maximize the benefits and minimize the costs to the stockholder group, short- and long-
term, and
(2) Pay close attention to the interests of other stakeholder groups that might potentially
influence the achievement of (1).
The primary moral dilemmas that arise in a business context involve reconciling these
obligations in cases where stakeholder interests conflict.

 What are the main duties of Businesses to its Stakeholders?

1) Relations with Owners and Shareholders: Businesses must maximize the owners’
investment in the firm. Besides; Businesses’ responsibilities include maintaining
proper accounting procedures, providing all relevant information to investors, and
protecting the owners’ rights and investments.
2) Relations with Employees: Business shows more responsibility to employee by
providing a safe workplace, paying them fair wages, and to treat them in justice
without discrimination.
3) Relations with Consumers: Business must provide consumers with satisfying, safe
products, to respect their rights as consumers, and to treat them fairly and equally.
4) Relations with the environment: To undertake “Green business “a business that
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 does not impose any type of pollution” and a Business that respect animal rights as
well.
5) Relations with the Community: since large business corporations have huge
financial and technical
Stakeholder Example resources; they have
of responsibility to thatthestakeholder
responsibility to help solve social
problems and to contribute in the welfare of the community.
Shareholder Good return on investment

Employee Fair pay and working conditions

Supplier Regular business and prompt payment

Customer Fair price, safe product &good customer service

Local community Jobs, minimum disruption , assistance & donation

Government Employment for local community & tax duty

Environment Eco - Friendly Business

- Social responsibility for one group may conflict with other groups, especially
between shareholders and stakeholders.
- The conflict often arises because while stockholders (shareholders) want short-
term profits, the other stakeholders’ desires tend to cost money and reduce
profits. The owners often have to balance their own wishes against those of the
other stakeholders or risk losing their ability to generate future profits.

- In order to implement a stakeholder management approach, organizations need to

do several things, including the following:

1. Identify the company’s stakeholders

2. Determine which ones are primary, indirect and secondary as well as exactly
what stakes each group holds in the organization
3. Establish what responsibilities (economic, ethical, or legal) the organization
has to each stakeholder group
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 4. Identify any conflicts between stakeholder criteria
5. Decide how the organization can best respond strategically to the opportunities
and threats inherent in stakeholder claims, especially where conflicts are likely to
require creative compromises
 Corporate Social Responsibility

- Corporate Social responsibility is the duty and obligation of a business to other stakeholders
mainly the society.

More precisely it can be defined as a business’s obligation to maximize its positive impact
and minimize its negative impact on society.

Social responsibility for one group may conflict with other groups, especially between
shareholders and stakeholders.

The conflict often arises because while stockholders (shareholders) want short-term profits,
the other stakeholders’ desires tend to cost money and reduce profits. The owners often have
to balance their own wishes against those of the other stakeholders or risk losing their ability
to generate future profits

Arguments FOR// AGAINST Social Responsible Business

 Arguments For:
1. Business contributed in many of the social problems that exist, so it should play a
significant role in solving them, especially in the areas of pollution reduction and cleanup.
2. Businesses should be more responsible because they have the financial and technical
resources to help solve social problems.
3. As members of society, businesses should do their fair share to help others.
4. Socially responsible businesses can prevent increased government regulation.
5. Social responsibility is necessary to ensure economic survival: If businesses want
educated and healthy employees, customers with money to spend, and suppliers with quality
goods and services in years to come, they must take steps to help solve the social and
environmental problems that exist today.

 Arguments AGAINST:
1. It deviates managers from the primary goal of business which is earning profits. Every
dollar donated or spent on society’s problems is a dollar less for owners and investors.
2. Participation in social programs gives businesses greater power.
3. Some people question whether business has the expertise needed to assess and make
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 decisions about social problems.
4. Many people believe that social problems are the responsibility of government agencies
and officials, who can be held accountable by voters.

IX. CASE QUESTIONS

Case 1.2 – page 7- Home Depot: Good Ethics or Shrewd Business?

 Discussion Questions
1. Identify the main stakeholders that might , in your opinion, be affected by the decision
taken by Home-Depot AND
- For each stakeholder; List at least one positive and one negative impact that might result
from Home Depot’s Behavior.
2. Do you think , Home Depot’s behavior is an act of good ethics or simply shrewd
business? Imagine how an executive would argue in a meeting for the actions that the
company took. What objections might other executives raise?
3. Would it make any difference in this case whether a decision maker takes a short-term or
long-term view? Which view should the decision maker take?
4. Does Home Depot (or any other business) have a responsibility to help the citizens hurt
by the hurricane? Whose responsibility is hurricane relief?

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