MODULE 1:

Introduction to Business Ethics The nature, purpose of ethics and morals for organizational
interests; Ethics and Conflicts of Interests; Ethical and Social Implications of business
policies and decisions; Corporate Social Responsibility; Ethical issues in Corporate
Governance

Introduction/ Definition of Business Ethics

According to Andrew Crane,
“Business ethics is the study of business situations, activities, and decisions where issues of
right and wrong are addressed.”
According to Raymond C. Baumhart,
“The ethics of business is the ethics of responsibility. The business man must promise that he
will not harm knowingly.”
According to Wikipedia,
“Business ethics (also corporate ethics) is a form of applied ethics or professional ethics that
examines ethical principles and moral or ethical problems that arise in a business
environment. It applies to all aspects of business conduct and is relevant to the conduct of
individuals and entire organizations.”
Nature/ Feature/ Characteristics 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.
Purpose/ Importance/ Significance/ Advantages 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.
 Attracting and retaining talent
People aspire to join organizations that have high ethical values. Companies are able to
attract the best talent and an ethical company that is dedicated to taking care of its employees
will be rewarded with employees being equally dedicated in taking care of the organization.
The ethical climate matter to the employees. Ethical
Organizations create an environment that is trustworthy, making employees willing to rely,
take decisions and act on the decisions and actions of the co-employees. In such a work
environment, employees can expect to be treated with respect and consideration for their
colleagues and superiors. It cultivates strong teamwork and Productivity and support
employee growth.
 Investor Loyalty
Investors are concerned about ethics, social responsibility and reputation of the company in
which they invest. Investors are becoming more and more aware that an ethical climate
provides a foundation for efficiency, productivity and profits. Relationship with any
stakeholder, including investors, based on dependability, trust and commitment results in
sustained loyalty.
 Customer satisfaction
Customer satisfaction is a vital factor in successful business strategy. Repeat purchases/orders
and enduring relationship of mutual respect is essential for the success of the company. The
name of a company should evoke trust and respect among customers for enduring success.
This is achieved by a company that adopts ethical practices. When a company because of its
belief in high ethics is perceived as such, any crisis or mishaps along the way is tolerated by
the customers as a minor aberration. Such companies are also guided by their ethics to
survive a critical situation. Preferred values are identified ensuring that organizational
behaviours are aligned with those values. An organization with a strong ethical environment
places its customers’ interests as foremost. Ethical conduct towards customers builds a strong
competitive position. It promotes a strong public image.
 Regulators
Regulators eye companies functioning ethically as responsible citizens. The regulator need
not always monitor the functioning of the ethically sound company. The company earns
profits and reputational gains if it acts within the confines of business ethics. To summaries,
companies that are responsive to employees’ needs have lower turnover in staff.
Shareholders invest their money into a company and expect a certain level of return from that
money in the form of dividends and/or capital growth.
Customers pay for goods, give their loyalty and enhance a company’s reputation in return for
goods or services that meet their needs.
Employees provide their time, skills and energy in return for salary, bonus, career
progression, and learning.

Morals for organizational interests

Morals in the context of organizational interest often involve principles like transparency,
integrity, and fairness. Upholding ethical standards can enhance trust among employees,
foster a positive work environment, and contribute to long-term success.

1. Transparency: Open communication and honesty within the organization build trust
among employees. Clearly communicating goals, decisions, and potential challenges fosters a
culture of transparency.
2. Integrity: Upholding moral and ethical principles ensures that the organization operates
with integrity. This includes being truthful in business practices, treating employees and
stakeholders fairly, and maintaining a strong ethical stance.
3. Fairness: Treating employees equitably and promoting a sense of fairness contributes to a
positive organizational culture. Fair compensation, opportunities for growth, and unbiased
decision-making are key aspects.
4. Employee Morale and Engagement: Organizations that prioritize employee well-being
and job satisfaction often see higher levels of productivity and commitment. A focus on
moral principles, such as respect and empathy, contributes to positive morale.
5. Customer Trust: Ethical behavior enhances the organization's reputation, leading to
increased trust among customers and clients. This trust can result in customer loyalty and
positive word-of-mouth, ultimately benefiting the organization's interests.
6. Legal Compliance: Adhering to ethical standards helps ensure compliance with laws and
regulations. This reduces the risk of legal issues that could harm the organization's interests.
7. Long-Term Sustainability: Organizations with a strong moral foundation tend to be more
sustainable in the long run. Ethical business practices contribute to positive relationships with
stakeholders, which can be crucial for long-term success.
8. Innovation and Creativity: A morally sound workplace encourages an atmosphere of
trust and collaboration, fostering innovation and creativity. Employees are more likely to
contribute new ideas when they feel their organization values ethical behavior.
9. Risk Management: Ethical decision-making is often aligned with better risk management.
By considering the ethical implications of actions, organizations can identify and mitigate
potential risks before they escalate.
10. Corporate Social Responsibility (CSR): Embracing moral values often involves
contributing to the community and engaging in socially responsible initiatives. This not only
benefits society but also enhances the organization's reputation and brand image.

Ethics and Conflicts of Interests

Ethics:

Ethics form the moral framework that guides individuals and organizations in determining
what is right or wrong in their actions and decisions. It involves evaluating the consequences
and implications of choices, not only in terms of legality but also in relation to values such as
honesty, fairness, responsibility, and respect. In a business context, ethical considerations
extend to interactions with employees, customers, competitors, and the broader community.
Organizations with a strong ethical foundation are more likely to gain trust, build positive
relationships, and sustain long-term success.

Conflicts of Interest:

A conflict of interest arises when individuals or entities face competing interests that could
compromise their ability to make impartial and objective decisions. This conflict may involve
personal, financial, or professional interests that diverge from the best interests of the
organization or its stakeholders. For example, an employee with a financial interest in a
supplier may face a conflict when involved in procurement decisions. Identifying, disclosing,
and managing conflicts of interest is crucial to maintaining integrity and ensuring that
decisions are made in the best interests of the organization. This often involves implementing
policies, establishing disclosure mechanisms, and taking corrective actions to mitigate the
impact of conflicting interests. Addressing conflicts of interest transparently is essential for
maintaining trust and upholding ethical standards within an organisation.

Ethical and Social Implications of business policies and decisions

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.
 The most systematic approach to fostering ethical behaviour is to build corporate
cultures that link ethical standards and business practices.

Corporate Social Responsibility CSR

Companies are morally obligated to contribute back to society in addition to their obligations
to consumers or shareholders since they rely on societal assets to operate efficiently. Another
name for corporate social responsibility is ‘enlightened self-interest’. Corporate social
responsibility includes businesses being socially and environmentally conscious, supporting
fair trade, enhancing labour standards, serving communities, reducing ecological harm, and
boosting employee engagement.
The idea of corporate social responsibility operates on the principle of ‘quid pro quo’ –
something in exchange for something. Corporate social responsibility enables businesses to
participate in a variety of socially responsible initiatives.
Corporate social responsibility has grown as an important pillar in India over the past few
years on both a legal and socioeconomic level. Corporate social responsibility initiatives in
India and other countries have produced several durable results. Despite this, many people
see it as a liability and a deterrent.
Even though corporate objectives have expanded beyond sales and profits, many people
disagree with the notion that corporate social responsibility mostly has a negative impact on
small firms.
Over the decades, the idea of corporate social responsibility has experienced numerous
transformations. The capacity to significantly influence society and subsequently enhance the
operation of a business and the economy is highly valued. Every company has a
responsibility that goes beyond turning a profit.
As per the World Business Council for Sustainable Development –
“Corporate social responsibility is the continuing commitment by business to behave
ethically and contribute to economic development while improving the quality of life of the
workforce and their families as well as of the local community and society at large”.

Categories/Types of CSR
Although corporate social responsibility is a very broad concept that is understood and
implemented differently by each firm, the underlying idea of CSR is to operate in an
economically, socially, and environmentally sustainable manner.
Generally, corporate social responsibility initiatives are categorized as follows:
1. Environmental responsibility
Environmental responsibility initiatives aim to reduce pollution and greenhouse gas
emissions and the sustainable use of natural resources.
2. Human rights responsibility
Human rights responsibility initiatives involve providing fair labor practices (e.g., equal pay
for equal work) and fair trade practices, and disavowing child labor.
3. Philanthropic responsibility
Philanthropic responsibility can include things such as funding educational programs,
supporting health initiatives, donating to causes, and supporting community beautification
projects.
4. Economic responsibility
Economic responsibility initiatives involve improving the firm’s business operation while
participating in sustainable practices – for example, using a new manufacturing process to
minimize wastage.
Business Benefits of CSR
In a way, corporate social responsibility can be seen as a public relations effort. However, it
goes beyond that, as corporate social responsibility can also boost a firm’s competitiveness.
The business benefits of corporate social responsibility include the following:
1. Stronger brand image, recognition, and reputation
CSR adds value to firms by establishing and maintaining a good corporate reputation
and/or brand equity.
2. Increased customer loyalty and sales
Customers of a firm that practices CSR feel that they are helping the firm support good
causes.
3. Operational cost savings
Investing in operational efficiencies results in operational cost savings as well as reduced
environmental impact.
4. Retaining key and talented employees
Employees often stay longer and are more committed to their firm knowing that they are
working for a business that practices CSR.
5. Easier access to funding
Many investors are more willing to support a business that practices CSR.
6. Reduced regulatory burden
Strong relationships with regulatory bodies can help to reduce a firm’s regulatory burden.
Ethical issues in Corporate Governance
What Is Corporate Governance?
Corporate governance is the system of rules, practices, and processes by which a company is
directed and controlled stakeholders. Corporate governance essentially involves balancing the
interests of a company's many, which can include shareholders, senior management,
customers, suppliers, lenders, the government, and the community. As such, corporate
governance encompasses practically every sphere of management, from action plans and
internal controls to performance measurement and corporate disclosure.

Benefits of Corporate Governance

 Good corporate governance creates transparent rules and controls, guides leadership,
and aligns the interests of shareholders, directors, management, and employees.
 It helps build trust with investors, the community, and public officials.
 Corporate governance can give investors and stakeholders a clear idea of a company's
direction and business integrity.
 It promotes long-term financial viability, opportunity, and returns.
 It can facilitate the raising of capital.
 Good corporate governance can translate to rising share prices.
 It can reduce the potential for financial loss, waste, risks, and corruption.
 It is a game plan for resilience and long-term success.

The Principles of Corporate Governance

While there can be as many principles as a company believes make sense, some of the most
common ones are:
 Fairness: The board of directors must treat shareholders, employees, vendors, and
communities fairly and with equal consideration.
 Transparency: The board should provide timely, accurate, and clear information
about such things as financial performance, conflicts of interest, and risks to
shareholders and other stakeholders.
 Risk Management: The board and management must determine risks of all kinds and
how best to control them. They must act on those recommendations to manage risks
and inform all relevant parties about the existence and status of risks.
 Responsibility: The board is responsible for the oversight of corporate matters and
management activities. It must be aware of and support the successful, ongoing
performance of the company. Part of its responsibility is to recruit and hire a chief
executive officer (CEO). It must act in the best interests of a company and its
investors.
 Accountability: The board must explain the purpose of a company's activities and the
results of its conduct. It and company leadership are accountable for the assessment of
 a company's capacity, potential, and performance. It must communicate issues of
importance to shareholders.

What are the Ethical Issues with Corporate Governance in India?

 Conflict of Interest: The challenge of managers potentially enriching themselves at

the cost of shareholders e.g., the recent case of former ICICI bank head Chanda
Kochar approved a loan to Videocon for a quid pro quo deal for her husband.

 Weak Board: Lack of diversity of experience and background represents a major

area of weakness for these boards. There have been questions about the board
performing in the larger interests of the shareholders.

 Separation of Ownership and Management: In case of family-run companies, the

separation of ownership and management remains a key challenge in the majority of
companies including some of India’s top ones.

 Independent Directors: Independent directors are partisan and are not able to check
promoters unethical practices.