Business Ethics and

Social Responsibility
Module 2
Ethics and Business

CONTEXTUALIZED LEARNING-INSTRUCTION KIT

Business Ethics and Social REesponsibility
Contextualized Learning-Instruction Kit (CLIK)
Module 1: Ethics and Business
First Edition, 2020

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 Business Ethics and
Social Responsibility
Module 2

Introductory Message

For the teacher:

This learning material is designed to help trainees enrich their learning
experiences by answering activities that are meaningful to their lives, which can be
done by themselves. Variety of tasks are presented in this module.
Activities are provided as formative assessment to check from time to time
learner understands of the lesson. Given the range of learning activities in this
package, teachers are encouraged to freely adapt them to suit their school contexts
and learners’ needs, interests and abilities.

For the Trainees:

This Learning Resource “Ethics and Business” is developed for you to enjoy
while learning. There are various activities and check-up tests you need to take.
Take note of the instructions as you journey through this module to have a solid
understanding on what you are expected to accomplish. Carefully read and follow the
instructions to hit what you are expected to do.
Answer keys are provided which you can refer to when checking your answers.
Record your score at the Learner’s Progress Chart and inform your teacher on your
development.
Feel free to use this material and if progress is not evident, you can make use
of it again until such that the desired passing mark is achieved.

As you read through this module, you will notice the following icons. They will
help you find your way around the module more quickly.
 Lesson
The Role of Business in Social and
1 Economic Development
The nature and forms of business organizations
The 4 Major Business Organization Forms

Business organization is the single-most important choice you’ll make

regarding your company. What form your business adopts will affect a
multitude of factors, many of which will decide your company’s future.
Aligning your goals to your business organization type is an important step,
so understanding the pros and cons of each type is crucial.

Your company’s form will affect:

 How you are taxed

 Your legal liability
 Costs of formation
 Operational costs

There are 4 main types of business organization:

 sole proprietorship
 partnership
 corporation
 Limited Liability Company, or LLC. Below, we give an explanation of
each of these and how they are used in the scope of business law.

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 Sole Proprietorship
The simplest and most common form of business ownership, sole
proprietorship is a business owned and run by someone for their own
benefit. The business’ existence is entirely dependent on the owner’s
decisions, so when the owner dies, so does the business.

Advantages of sole proprietorship:

 All profits are subject to the owner

 There is very little regulation for proprietorships
 Owners have total flexibility when running the business
 Very few requirements for starting—often only a business license

Disadvantages:

 Owner is 100% liable for business debts

 Equity is limited to the owner’s personal resources
 Ownership of proprietorship is difficult to transfer
 No distinction between personal and business income

Partnership
These come in two types: general and limited. In general partnerships, both
owners invest their money, property, labor, etc. to the business and are
both 100% liable for business debts. In other words, even if you invest a
little into a general partnership, you are still potentially responsible for all its
debt. General partnerships do not require a formal agreement—
partnerships can be verbal or even implied between the two business
owners.

Limited partnerships require a formal agreement between the partners.

They must also file a certificate of partnership with the state. Limited
partnerships allow partners to limit their own liability for business debts
according to their portion of ownership or investment.

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 Advantages of partnerships:

 Shared resources provides more capital for the business

 Each partner shares the total profits of the company
 Similar flexibility and simple design of a proprietorship
 Inexpensive to establish a business partnership, formal or informal

Disadvantages:

 Each partner is 100% responsible for debts and losses

 Selling the business is difficult—requires finding new partner
 Partnership ends when any partner decides to end it

Corporation
Corporations are, for tax purposes, separate entities and are considered a
legal person. This means, among other things, that the profits generated by
a corporation are taxed as the “personal income” of the company. Then,
any income distributed to the shareholders as dividends or profits are taxed
again as the personal income of the owners.

Advantages of a corporation:

 Limits liability of the owner to debts or losses

 Profits and losses belong to the corporation
 Can be transferred to new owners fairly easily
 Personal assets cannot be seized to pay for business debts

Disadvantages:

 Corporate operations are costly

 Establishing a corporation is costly
 Start a corporate business requires complex paperwork
 With some exceptions, corporate income is taxed twice

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 Limited Liability Company (LLC)
Similar to a limited partnership, an LLC provides owners with limited liability
while providing some of the income advantages of a partnership.
Essentially, the advantages of partnerships and corporations are combined
in an LLC, mitigating some of the disadvantages of each.

Advantages of an LLC:

 Limits liability to the company owners for debts or losses

 The profits of the LLC are shared by the owners without double-taxation

Disadvantages:

 Ownership is limited by certain state laws

 Agreements must be comprehensive and complex
 Beginning an LLC has high costs due to legal and filing fees

The purpose and objectives of a business

If you ask a typical businessman or a typical economist what a business
is, “An organization to make a profit”. But this answer is not only false, it is
irrelevant. Of course, profit and profitability are crucial for business and
even for society. But profitability is not the purpose of, but a limiting factor
on business.

Profit and profitability are irrelevant for understanding how a business

works, what purpose it has and how it is managed. To know what a
business is, we have to start with it’s purpose.

The purpose of a business is to create a customer.

Markets are created by business people. Sometimes the want a business
satisfies has been felt before someone offered the means of satisfying it,

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e.g. the want for food in a famine. But it’s the action of businesspeople that
converts this potential want into demand. In other cases the want have
been unfelt by the customer, nobody wanted a computer until it was
available. Or there might have been no want at all until business action
created it (e.g. by innovation or by marketing). In every case, it is business
action that creates the customer. The customer determines what a
business is; it is his willingness to pay for a good or service that converts
things into goods. Because its purpose is to create a customer, a business
enterprise has

Two basic functions: marketing and innovation. To many managers,

the concept of marketing means the organized performance of all selling
functions. But this is selling, not marketing. It asks “what do we want to sell”
instead of “what does the customer wants to buy”? True marketing starts
with the customer, not with the product.

(1) The aim of marketing is to make selling unnecessary by knowing and

understanding the customer so well that the product or service fits him and
sells itself.

(2) Innovation. A business enterprise can exist only in an expanding

economy.

In a static economy there are no business enterprises. It is not necessary

for a business to grow bigger, but it is necessary that it constantly grows
better. Innovation may result in a lower price, a new and better product, a
new convenience or the definition of a new want. The most productive
innovation is a different product or service creating a new potential of
satisfaction. Innovation may be finding new uses for old products. E.g.
selling refrigerators to Eskimos to prevent food from freezing would be
innovation. Technologically there is only the same old

Decisions are based on different, incompatible and conflicting theories. It

seems quite simple to know what a company’s business is. But actually it is
almost always a difficult question. The answer to the question “What is our
business?” is the first responsibility of top management. To answer this
question the management has to start with the customer. • Who is the
customer? E.G. the manufactures of branded consumer goods have at
least two customers: the housewife and the grocer. Both customers have to
be considered; the grocer has to stock the brand and the housewife has to
buy it. • Where is the customer? Where does he buy? • What does the

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customer buy? E.g. a man who buys a new Cadillac probably buys
primarily prestige, not transportation. The question “What is our business”
is, if it is asked at all, mostly asked when the company is in trouble. But the
most important time to ask (and answer) the question is when a company
has been successful. Success creates new realities; it always creates new
problems. Further more it is not enough to answer the question just once.
Sooner or later even the most successful answer becomes obsolete.
Therefore management also needs to add “and what will it be?

” What changes in the environment are likely to have high impact on our
business? Starting point is again the market and its potential and trends,
e.g. changes in population structure and population dynamics. Population
shifts are the only events regarding the future for which true prediction is
possible and are therefore important. Another question management has to
ask is which of the consumer’s want are not adequately satisfied by
existing products. Companys that ask and answer this question correctly
can grow; the others depend for their development on the rising tide of the
economy or industry, but they will also fall with it. The next question a
manager needs to ask is “What should our business be”? What
opportunities do we have? Beside the decision on new and different things
to do, all existing products have to be systematically analysed if they still fit
the purpose. Otherwise they should be abandoned or at least putting in
further resources and

Efforts should be stopped. The basic definitions have to be translated into

objectives.

There are some essential rules for creating objectives.

1. Objectives must be derived from “What our business is, what it will be
and what it should be”; they represent the fundamental strategy of a
business

2. Objectives must be operational. It must be possible to convert them to

specific targets and assignments.

3. Objectives must make possible concentration on resources and efforts.

4. There’s no “one right object”. Because managers have to deal with a

variety of needs and goals, there must be multiple objectives.

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 5. Objectives are needed in all areas on which the survival of the business
depends.

The area in which no specific objective is defined will be neglected.

This key areas are the same for all businesses

: • Marketing

• Innovation

• Human Resources

Financial Resources

• Physical Resources

• Productivity

• Social Responsibility

• Profit requirements

Let’s take a closer look on the key areas.

Marketing Objectives Concerning marketing, though many books exists,
but it is almost never stressed that 2 key decisions have to be made before
you can set objectives: the decision on concentrating and the decision on
market standing. The concentration decision converts the definition of
“what our business is” into meaningful operational commitment. The other
major decision is on market standing. Some say they want to be the leader,
others don’t care what share of the market they have as long as sales go
up. Both are wrong. Obviously, not everybody can be the leader. And to be
marginal in the marketplace is quite dangerous for long-term survival.
There is also a maximum market standing which should not be exceeded.
That is because market domination produces internal resistance against
innovation, the business might become static. Furthermore there may be
resistance in the marketplace to depend on one dominant supplier. Finally,
a market with many competitors is more likely to grow than one with one or
two major suppliers. If there are several suppliers, they are together more
innovative than one single supplier and able to uncover and promote
markets and end uses the single supplier doesn’t think of. It may sound
good to have 80 % of the market. But 80 % of 100 are less than 50 % of

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250, and with more competition the market is more likely to grow from 100
to 250.

The market standing to aim is not the maximum but the optimum.

Innovation Objective To survive, businesses must be able to innovate.

Through the innovation objective a company makes operational its
definition of “what it should be”.

There are three kinds of innovation in every business:

• innovation in product or service

• innovation in marketplace and consumer behaviour and values

• innovation in the skills and activities to make the products and services
and to bring them to market.

Resources Objectives All businesses depend on three

factors of production:
• human resources

• capital resources

• physical resources (land) There must be objectives for their supply, their
employment and their development.

The key questions are how to attract and to hold the kind of people we
want? How to attract and hold the capital we need?

Productivity Objectives The resources have to be made productive.

Therefore productivity objectives regarding the three major resources land,
labour and capital are needed. Productivity must be continually improved.
Because productivity is a balance among many different factors, few of
which are easily definable or clearly measurable, this is a difficult but
important and central job. Social Responsibilities Objects Because
business exists in society and economy, and even depends on society,
social responsibilities objectives are needed. The enterprise exists only as
long as the society and the economy believe that it does a necessary,
useful and productive job. These objectives are not needed because the
manager has a responsibility to society, but because the manager has a

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responsibility to the enterprise. Profit as a Need and a Limitation Profit is
needed to attain the objectives of the other 7 areas. It is a condition of
survival. A business needs profit planning. But instead of planning a “profit
maximisation” the minimum needed to satisfy its objectives should be
planned. A business that obtains enough profit to satisfy its objectives in all
key areas has the means of survival. In most areas we only know that
something ought to be done. We are reduced to statements of intentions,
we can not define specific goals and we can not measure if we have
attained them. But enough is known about each area to give a progress
report at least. Objectives have to be transformed into work. Work is always
specific and has measurable results. Because objectives are always based
on expectations which lie outside the business and are not under control,
objectives are just directions and should not become a

Lesson 1 Self-Check
Required: Identification

(1)The simplest and most common form of business ownership. It is a

business owned and run by someone for their own benefit.

(2) An association of two or more people as partners.

(3) A legal entity that is separate and distinct from its owners.

(4) A business enterprise can exist only in an expanding economy.

(5) Limits liability of the owner to debts or losses.

(6) Limits liability to the company owners for debts or losses

(7) The profits of the LLC are shared by the owners without double-
taxation.

(8) Agreements must be comprehensive and complex.

(9) Beginning an LLC has high costs due to legal and filing fees.

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(10) All profits are subject to the owner.

Lesson II
Core Principles of Good Corporate Governance

Corporate governance is the structure through which companies are directed and
managed. Good corporate governance requires effective and clearly detailed
processes for ensuring accountability, transparency, documented policies and
procedures and sound decision-making. It should ensure that a company is
performing at or near its peak and that all stakeholders are playing a role in the
company's success.

Accountability

Good corporate governance ensures stakeholders know the company's mission,

values, short and long term strategic goals and the role they must play in helping
the company accomplish them. Not only must stakeholders be aware of what is
expected of them, they should be cognizant of what the repercussions are if these
expectations are not met. An effective board of directors will make sure a
company's senior leadership is steering the company in the right direction. A
talented senior leadership team will confirm that mid-level managers and the
employees who report to them are executing the company's strategy as instructed.

Transparency

Companies that have an effective corporate governance structure in place know

that transparency must be a core principle. Stakeholders want reassurance that the
company is operating within the law and that business is being conducted in a way
that is ethical and fair. Transparency within an organization can come in the form of
an annual report, a corporate retreat to discuss direction and strategy, or in the
form of documented policies, procedures or best practices that give entry-level
employees an understanding of how the company operates.

Policies and Procedures

Documented policies and procedures allow employees across an organization to

understand how the company functions and to determine whether organizational
objectives are being met. Both private and public companies document policies and
procedures to assist employees throughout the organization in their efforts to gain

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clarity on processes and expectations. When policies and procedures are
documented, it helps reassure employees that the company is in compliance with
all legal and regulatory requirements, establishing a framework through which the
organization can operate seamlessly and successfully.

Sound Decision-Making

Good corporate governance is designed to drive company profitability and higher

returns through sound decision-making. Employee and customer surveys, market
analysis reports and managerial and departmental meetings are all avenues
through which a company's executive leadership team can gather data and insight
to inform their decisions. For a company's board of directors, the interest of
shareholders and stakeholders are always a primary concern. The board has the
ultimate authority regarding the company's management and must have sufficient
information to approve annual budgets, determine executive compensation and
authorize the hire or release of the company's chief executive officer.

Key Points

 Ethics, broadly, is concerned with the meaning of all aspects of human

behavior. Theoretical/ normative ethics aims to differentiate right from wrong.
 An organization’s culture sets standards for determining the difference between
good and bad decision making. Ethics in business is about knowing the
difference between right and wrong and choosing to do what is right.
 There are three intricately related parts to the discipline of business ethics:
personal, professional, and corporate.

Key Terms

 ethical behavior: 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.
 normative ethics: A branch of ethics concerned with classifying actions as
right and wrong, attempting to develop a set of rules governing human conduct,
or a set of norms for action.
 ethics: The study of principles relating to right and wrong conduct.

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Ethics: A Brief Definition

Ethics is the branch of philosophy concerned with the meaning of all aspects of
human behavior. Theoretical ethics, sometimes called normative ethics, is about
delineating right from wrong. It is supremely intellectual and, as a branch of
philosophy, rational in nature. It is the reflection on and definition of what is right,
what is wrong, what is just, what is unjust, what is good, and what is bad in terms of
human behavior. It helps us develop the rules and principles (norms) by which we
judge and guide meaningful decision-making.

Business Ethics

Business ethics, also called corporate ethics, is a form of applied ethics or

professional ethics that examines the ethical and moral principles and problems that
arise in a business environment. It can also be defined as the written and unwritten
codes of principles and values, determined by an organization’s culture, that govern
decisions and actions within that organization. It applies to all aspects of business
conduct on behalf of both individuals and the entire company. In the most basic
terms, a definition for business ethics boils down to knowing the difference between
right and wrong and choosing to do what is right.

There are three parts to the discipline of business ethics: personal (on a micro
scale), professional (on an intermediate scale), and corporate (on a macro scale). All
three are intricately related. It is helpful to distinguish among them because each
rests on a slightly different set of assumptions and requires a slightly different focus
in order to be understood.

Key Points

 Organizational leaders must be aware of the consequences of certain

decisions and organizational trajectories, and ensure alignment with societal
interests and ethical behavior.
 Utilitarianism is the ethical philosophy that pursues the greatest outcome for
the largest number of people. This is a consequence-oriented point of view.
 Deontological ethics focus on the position that the morality of an action is
based on its adherence to rules or obligations set by society or held intrinsically
(as opposed to the consequences of that act).
 Virtuousness is the pursuit of a given behavior for the simple sake of that
behavior (i.e. the means, not the ends), and the desire for perfect execution of
that behavior.
 Finally, communitarian ethics focus on the expectations and needs of a
preferred community. This means identifying the duties assigned by the group,
and carrying out tasks for their benefit.

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Key Terms

 deontological: Relating to the the normative ethical position that judges the
morality of an action based on the action’s adherence to rules or obligations
rather than either the inherent goodness or the consequences of those actions.
 communitarian: Pertaining to the idea that a given group is of central
importance.
 utilitarian: Relating to the ethical point of view that the greatest good for the
greatest number of people is ideal.

thics are a central concern for businesses, organizations, and individuals alike.
Behaving in a way that adds value without inappropriate conduct or negative
consequences for any other group or individual, organizational leaders in particular
must be completely aware of the consequences of certain decisions and
organizational trajectories, and ensure alignment with societal interests.

There are many examples of ethical mistakes in which organizational decision

makers pursued interests that benefited them at the cost of society. The 2008
economic collapse saw a great deal of poor decision-making on behalf of the banks.
The Enron scandal is another example of individuals choosing personal rewards at
the cost of society at large. These types of situations are extremes, but they highlight
just how serious the consequences can be when ethics are ignored.

How to Frame Issues Ethically

One complexity of building a strong ethical foundation into an organization is the

simple fact that there are many schools of thought. Ethics are in some ways a
branch of philosophy, in which the idealized perspective is both malleable and
uncertain. However, some powerful examples of ethical frames are available to us
from many different time periods. There are four schools of thought that are useful
for framing future strategic decisions to ensure ethical behavior. These perspectives
are utilitarian, deontological, virtuous, and communitarian approaches.

Utilitarian Approach

Perhaps the cleanest and simplest perspective on ethical behavior, a utilitarian will
always ask one question: what is the ideal outcome for the highest number of
people? This approach simply considers the impact of ones actions on others, and
tries to ensure that the best outcome for the most people is what ultimately occurs.

While this outcome-based reasoning is quite useful, it has one fatal flaw. The
definition of ‘best’ when discussing what’s best for the most people can become
quite subjective. As a result, when utilizing this ethical reasoning to make decisions,
it is important to set terms and create definitions that enable the reasoning to have
applicable and measurable logic. Simply put, one must ensure they define their
terms, and what they mean by good, when pursuing this ethical line of reasoning.

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Deontological Approach

Popularized by Emmanual Kant, the central term in this point of view is duty. Kant
disliked the concept of utilitarianism for one simple reason: the ends should not
justify the means. Indeed, Kant’s ethical argument is that moral maxims of respect
for one another and appropriate behavior serve as a groundwork for all ethical
reasoning. It is these core concepts which can never be sacrificed for the greater
good.

Virtue Ethics

Popularized by Greek philosophers such as Aristotle, this point of view assumes that
virtue is a central benchmark for all ethical behavior. What is meant by virtue in this
context is a desire to perform a certain act as a result of deep contemplation on the
value of that act. To make this act virtuous is to perform it with excellence. As a
result, we have a deep contemplation of the value of a certain behavior or decisions,
which we apply great practice and consideration. Following this, we can approach
the perfect execution of that act or behavior through our rational minds.

In this school of ethical thought, it is similarly important to discard the justification of a

means by the ends of that means. Which is to say this an act should be performed
because it is desirable in and of itself, and not for the sake of something else. Each
behavior is therefore considered carefully, rationally and virtuously to ensure it is
valid, beneficial, and valuable.

Communitarian Ethics

Finally we have communitarian ethics. In this perspective, the individual decision-

maker should ask about the duties owed to the communities in which they
participate. This is a relatively simple frame of reference, where the individual
decision maker will recognize the expectations and consequences of a given
decision relative to the needs, demands and impacts of a certain preferred
community.

Ethical behavior requires careful consideration of all frames, and a thorough

understanding of the impacts of a given decision.

Integrating Ethics: This video provides some overview of ethical perspectives.

Ethical Issues at an Individual Level

A critical function of organizational management is empowering a positive sense of

values and ethos at the individual level.

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Key Points

 An important aspect of organizational strategy and management is

empowering a strong sense of ethics at the individual level.
 Organizations should internally develop a code of conduct and/or ethics
statement, provide ethics training, appoint ethics officers, and ensure there is
an anonymous way to report ethical problems.
 Providing intrinsic and extrinsic sources of motivation for individual employees
to behave ethically reinforces positive ethical behavior.
 Hiring and developing employees who have a strong sense of individual
professionalism will ensure best practices are achieved from an ethical point of
view.

Key Terms

 extrinsic: Outside of; not belong to the thing itself.

 Intrinsic: An aspect possessed by character; internal.

The Importance of Ethics

Ethical behavior, be it at the organizational, professional or individual level, is a direct

representation of the principles and values that govern the individual and the
organization they represent. Organizations create an internal culture, which is
reflected externally as organizational values. These values impact the relationships
within the organization, productivity, reputation, employee morale and retention,
legalities, and the broader community in which they operate.

As a result, most organizations generate a statement of organizational values and

codes of conduct for all employees to understand and adhere to. Motivating and
reinforcing positive behavior while creating an environment that avoids unethical
behavior is a critical responsibility of both managers and employees.

Structure

At the individual level, organizations must focus on developing and empowering

each employee to understand and adhere to ethical standards. There are four basic
elements organizations can build to empower individual ethics:

 A written code of ethical standards (ethical code)

 Training for management and employees (ethical training)
 Advice and consulting on a situation to situation basis (ethics officers)
 A confidential and easily accessible system of reporting (ethical reporting)

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Equipping organizations with these four components can alleviate much of the
burden on the individual, and enable each employee to learn what is appropriate
(and what isn’t).

Motivation

As with most facets of management, there is also a critical motivational component

to individual ethics. Intrinsic and extrinsic motivations can reinforce positive behavior
and/or eliminate negative behavior in the workplace.

Whistleblowing, for example, is a practice that gets quite a bit of both positive and
negative media attention. Whistleblowers are individuals who identify unethical
practices in organizations and report the behavior to management or the authorities.
A whistleblower who behaves honestly, reporting a problem accurately, should be
rewarded for their bravery and honesty, as opposed to punished and ostracized. If
an employee is blowing the whistle, it is likely that the organization itself has failed to
empower and positively reinforce honest and ethical discussions internally.

Another example is rewarding employees for admitting mistakes. An employee who

makes a mistake on the assembly line, and accidentally produces a batch of
defective goods, could react in a number of ways. If the organization punishes
employees for mistakes, the employee is quite likely to be motivated to keep quiet
and not mention it to avoid punishment. However, if the organizational is ethical and
clever, they will empower employees to take responsibility for their mistakes and
even reward them for coming forward, apologizing, and ensuring that no consumer
receives a defective product. It seems at first counter-intuitive to reward an employee
for a mistake, but ultimately it provides the best outcome for everyone.

Professionalism

Finally, some aspects of individual ethics are rooted in the individual. Attaining a
strong sense of professionalism, and recognizing the ethical implications of certain
professional decisions, is a key component of education, individual reflection, and
experience. For some professions it is even more critical and relevant than others.

Journalists, for example, could easily attain higher notoriety for making up false
stories about celebrities to gain traffic to their news website. But an ethical journalist
recognizes the repercussions of slander for the individual being discussed, and
maintains an honest ethical code of reporting only what they know to be true (and
not what they speculate). Psychologists will maintain patient privacy, understanding
the repercussions of leaking personal information about their patients.

There are many potential examples, but the primary point is that professionals
understand the their field deeply, including the repercussions of making ethical
mistakes.

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Key Points

 An organization’s ethical behavior is an extension of its organizational culture.

 The four elements necessary to quantify an organization’s ethics are a written
code of ethics and standards; ethics training for executives, managers, and
employees; availability for advice on ethical situations (i.e, advice lines or
offices); and systems for confidential reporting.
 Ethical practices need to be established at both the organizational level and the
functional level (i.e., sales, marketing, production, etc. ) to be effective.
 Ethical practices need to be established at both the organizational level and the
functional level (i.e. sales marketing, production, etc. ) to be effective

Key Terms

 ethics: A branch of philosophy that involves systematizing, defending, and

recommending concepts of right and wrong conduct; also called moral
philosophy.

Organizational Ethics is how an organization ethically responds to an internal or

external stimulus. Organizational ethics express the values of an organization to its
employees and other entities, irrespective of governmental and/or regulatory laws.
There are at least four elements that make ethical behavior conducive within an
organization:

 A written code of ethics and standards

 Ethics training to executives, managers, and employees
 Availability for advice on ethical situations (i.e, advice lines or offices)
 Systems for confidential reporting.

Ethical Issues in Finance

The 2008 financial crisis caused critics to challenge the ethics of the executives in
charge of U.S. and European financial institutions and regulatory bodies. Previously,
finance ethics was somewhat overlooked because issues in finance are often
addressed as matters of law rather than ethics. Fairness in trading practices, trading
conditions, financial contracting, sales practices, consultancy services, tax
payments, internal audits, external audits, and executive compensation also fall
under the umbrella of finance and accounting. Specific corporate ethical/legal
abuses include creative accounting, earnings management, misleading financial
analysis, insider trading, securities fraud, bribery/kickbacks, and facilitation
payments.

Ethical Issues in Human Resource Management

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Human resource (HR) management involves recruitment selection, orientation,
performance appraisal, training and development, industrial relations and health and
safety issues. Discrimination by age (preferring the young or the old), gender, sexual
orientation, race, religion, disability, weight, and attractiveness are all ethical issues
that the HR manager must deal with.

Ethical Issues in Sales and Marketing

Ethics in marketing deals with the principles, values, and/or ideals by which
marketers and marketing institutions ought to act. Ethical marketing issues include
marketing redundant or dangerous products /services; transparency about
environmental risks, product ingredients (genetically modified organisms), possible
health risks, or financial risks; respect for consumer privacy and autonomy;
advertising truthfulness; and fairness in pricing and distribution. Some argue that
marketing can influence individuals’ perceptions of and interactions with other
people, implying an ethical responsibility to avoid distorting those perceptions and
interactions.

Marketing ethics involves pricing practices, including illegal actions such as price
fixing and legal actions including price discrimination and price skimming. Certain
promotional activities have drawn fire, including greenwashing, bait-and-switch,
shilling, viral marketing, spam (electronic), pyramid schemes, and multi-level
marketing. Advertising has raised objections about attack ads, subliminal messages,
sex in advertising, and marketing in schools.

Ethical Issues in Production

Business ethics usually deals with the duties of a company to ensure that products
and production processes do not needlessly cause harm. Few goods and services
can be produced and consumed with zero risk, so determining the ethical course can
be problematic. In some cases, consumers demand products that harm them, such
as tobacco products. Production may have environmental impacts, including
pollution, habitat destruction, and urban sprawl. The downstream effects of
technologies such as nuclear power, genetically modified food, and mobile phones
may not be well understood. While the precautionary principle may prohibit
introducing new technology whose consequences are not fully understood, that
principle would have prohibited most of the new technology introduced since the
industrial revolution. Product testing protocols have been attacked for violating the
rights of both humans and animals.

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Key Points

 From a common sense perspective, you tend to get what you give. Treating
employees in a way that empowers a sense of fairness and equity is a critical
component to motivating positive employee behaviors.
 There are three useful frames of reference when considering organizational
fairness: distributive justice, procedural justice, and interactional justice.
 Distributive justice is simply the process of making sure an employee’s
production output aligns with his or her compensation.
 Procedural justice focuses on allowing all participating employees to have input
and accountability when designing operational processes.
 Interactional justice comes in two parts. The first is ensuring that employees
are treated in a socially positive and constructive manner. The second is
ensuring nobody is left in the dark when important decisions are made.
 Building the above concepts successfully into an organizational norm avoids
productivity problems and empowers motivation, citizenship, and commitment.

Key Terms

 Procedural: Concerned with the way in which something is done, or the

process which enables it.
 Distributive: Concerned with the way in which things are shared between
people.
 Interactional: Concerned with the way in which one individual socially
encounters another.

Why Fairness Adds Value

Equitable treatment of all employees and stakeholders is critical to organizational

success and the proper execution of business ethics. Awareness of potential
fairness pitfalls, and ensuring that all employees feel valued and equitably treated,
can avoid a wide variety of ethical and operational problems, while maximizing
employee performance through providing a healthy environment for people to
flourish and grow.

Organizational Justice

To ensure an organization is fair, one must consider the concept of justice as a

central pillar of what creates a fair environment (and what does not). The question is
simple: how do employees perceive the behavior of the organization, and how does
this impact both employee and organizational outcomes ?

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In answering these questions, there are three useful perspectives one can adopt in
considering fairness in the organization:

 Distributive – Simply put, the distribution of resources should align with the
value of an individual’s inputs. Of course, this is more complex than salary. As
a manager, ensure that credit, bonuses, and benefits are also distributed fairly.
 Procedural – Employees don’t only want compensation. They also need input
into the process, and shared accountability in the decisions being made. When
designing the procedure of a given work group, inclusion of everyone’s
perspectives can lead to substantially higher satisfaction, efficiency, and
fairness.
 Interactional – All members of an organization must both be treated
appropriately (from a social frame) and informed respectfully (from an
informational frame). In short, employees should be treated with propriety in
discussions and shouldn’t be left in the dark when important decisions are
made.

Implications of Fairness

There are many overt and subtle outcomes of treating employees equitably. The
simplest examples of positive results due to a strong sense of ethical fairness in an
organization include:

 Higher Performance and Efficiency – People feel their input is aligned with their
compensation
 Commitment – Happy employees tend to stick around.
 Citizenship – If there is inequity in how people are treated, it tends to divide
them. This is incredibly dangerous, and can quickly erode the positive benefits
of looking out for one another.
 Avoiding Counterproductive Behavior – In short, dissatisfied employees are
more prone to working against the established goals of the organization.
Behaviors such as not doing certain tasks or helping certain work-groups can
quickly become a source of inefficiency.
 Absenteeism – Sick days, skipping meetings, and generally unplugging from
the organization is often an outcome of inequitable organizations.
 Emotional Exhaustion – Unsatisfied employees wrestle with insecurity and
dissatisfaction, both of which are emotionally draining.

While there are many more examples of consequences avoided and benefits
achieved from an ethical operational approach, this paints a clear picture of why it is
important and how to frame manager’s perspectives to ensure equitable behavior.

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Work Motivation: This model aligns well with Maslow’s hierarchy of needs, but
applied to workplace motivation. Through the five M’s identified (in order of
chronological achievement being Money; Myself; Member; Mastery; Mission), one can
see in this pyramid chart how organizational justice will enable higher levels of
individual motivation.

Open Communication of Decisions

Transparency consists of operating in such a way that it is easy for others to see
what actions are being performed.

KEY TAKEAWAYS

Key Points

 Transparency implies openness, communication, and accountability.

 Radical transparency is a management method where nearly all decision
making is carried out publicly.

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  Corporate transparency is the concept of removing all barriers to, and the
facilitation of, free and easy public access to corporate information.

Key Terms

 transparency: Open, public; having the property that theories and practices
are publicly visible, thereby reducing the chance of corruption.

Transparency, as used in science, engineering, business, the humanities and in a

social context more generally, implies openness, communication, and accountability.
Transparency means operating in such a way that it is easy for others to see what
actions are performed. For example, a cashier making change at a point of sale by
segregating a customer’s large bills, counting up from the sale amount, and placing
the change on the counter in such a way as to invite the customer to verify the
amount of change demonstrates transparency. Radical transparency is a
management method where nearly all decision making is carried out publicly. All
draft documents, all arguments for and against a proposal, all final decisions, and the
decision making process itself are made public and remain publicly archived.

Corporate transparency, a form of radical transparency, is the concept of removing

all barriers to—and the facilitation of—free and easy public access to corporate
information. This includes the laws, rules, and processes that facilitate and protect
those individuals and corporations that freely join, develop, and improve the process.

Companies should make a commitment to open communication because

communication is crucial to building connections and a sense of community. If we
cannot communicate our thoughts, opinions and ideas, we remain isolated and cut
off from each other. Open communication also allows for the possibility of self
correction and group problem solving. Open communication leads to better decision-
making and faster error correction. The transparency that occurs as a result of open
communication protects against potential abuses of power and makes for a safer
environment overall.

Conflicts of Interest

A situation in which someone in a position of trust has competing professional or

personal interests is known as a conflict of interest.

A conflict of interest (COI) occurs when an individual or organization is involved in

multiple interests, one of which could possibly corrupt the motivation for an act in the
other.

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Conflict of Interest: A situation in which someone in a position of trust — e.g., a doctor
— has competing professional or personal interests.

The presence of a conflict of interest is independent from the execution of

impropriety. Therefore, it can be discovered and voluntarily defused before any
corruption occurs. In fact, for many professionals, it is virtually impossible to avoid
having conflicts of interest from time to time. It can, however, become a legal matter
for example when an individual tries (and/or succeeds in) influencing the outcome of
a decision, for personal benefit. A director or executive of a corporation will be
subject to legal liability if a conflict of interest breaches his/her Duty of Loyalty.

Conflict of Interest vs. Impropriety

There often is confusion over these two situations. Someone accused of a conflict of
interest may deny that a conflict exists because he/she did not act improperly. In
fact, a conflict of interest can exist even if there are no improper acts as a result of it.
One way to understand this is to use the term “conflict of roles”.

As an example, in the sphere of business and control, according to the Institute of

Internal Auditors:

“conflict of interest is a situation in which an internal auditor, who is in a position of

trust, has a competing professional or personal interest. Such competing interests can
make it difficult to fulfill his or her duties impartially. A conflict of interest exists even if
no unethical or improper act results. A conflict of interest can create an appearance of
impropriety that can undermine confidence in the internal auditor, the internal audit
activity, and the profession. A conflict of interest could impair an individual’s ability to
perform his or her duties and responsibilities objectively. “

An organizational conflict of interest (OCI) may exist in the same way (as described
above) in the realm of the private sector providing services to the government, where
a corporation provides two types of services to the government that have conflicting
interest or appear objectionable (i.e.: manufacturing parts, and then participating on
a selection committee for parts manufacturers).

Corporations may develop simple or complex systems to mitigate the risk, or

perceived risk, of a conflict of interest. These are typically evaluated by a
governmental office (e.g., in a US Government RFP) to determine whether the risks

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pose a substantial advantage to the private organization over the competition or will
decrease the overall competitiveness in the bidding process.

Types of Conflicts of Interests

These are some of the most common forms:

 Self-dealing, in which an official who controls an organization causes it to enter

into a transaction with the official, or with another organization that benefits the
official, i.e., the official is on both sides of the “deal”.
 Outside employment , in which the interests of one job contradict another.
 Family interests, in which a spouse, child, or other close relative is employed
(or applies for employment) or where goods or services are purchased from
such a relative or a firm controlled by a relative. For this reason, many
employment applications ask if one is related to a current employee. In this
event, the relative may be recused from any hiring decisions. Abuse of this
type of conflict of interest is called nepotism.
 Gifts from friends who also do business with the person receiving the gifts (may
include non-tangible things of value such as transportation and lodging).
 Pump and dump, in which a stockbroker who owns a security artificially inflates
its price by “upgrading” it or spreading rumors, sells the security and adds short
position, then “downgrades” it or spreads negative rumors to push its price
down.

Other improper acts that are sometimes classified as conflicts of interests may be
better classified elsewhere: e.g., accepting bribes is corruption; the use of
government or corporate property or assets for personal use is fraud; not conflict of
interest.

Codes of Ethics

These help to minimize problems with conflicts of interest because they spell out the
extent to which such conflicts should be avoided, and what the parties should do
where such conflicts are permitted (disclosure, recusal, etc.). Thus, professionals
cannot claim that they were unaware that their improper behavior was unethical. As
importantly, the threat of disciplinary action (for example, a lawyer being disbarred)
helps to minimize unacceptable conflicts or improper acts when a conflict is
unavoidable.

As codes of ethics cannot cover all situations, some governments have established
an office of the ethics commissioner, who should both be appointed by and report to
the legislature.

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 Lesson II
Self-Check

Test I True or False

(1) Corporate governance is the structure through which companies are not
directed and managed.

(2) Good corporate governance is not a requirement for effective and clearly
detailed processes for ensuring accountability, transparency, documented policies
and procedures and sound decision-making.

(3) Good Corporate is not an assurance that a company is performing at or near its
peak and that all stakeholders are playing a role in the company's success.

(4) As codes of ethics cover all situations, some governments have established an
office of the ethics commissioner, who should both be appointed by and report to the
legislature.

(5) Outside employment is a conflict of interest in which an official who controls an

organization causes it to enter into a transaction with the official, or with another
organization that benefits the official, i.e., the official is on both sides of the “deal”.

(6) Family interests, is an example of conflict of interest in which a spouse, child, or

other close relative is employed (or applies for employment) or where goods or
services are purchased from such a relative or a firm controlled by a relative. For this
reason, many employment applications ask if one is related to a current employee. In
this event, the relative may be recused from any hiring decisions. Abuse of this type
of conflict of interest is called nepotism.

(7) This is a situation of conflict of interest, Gifts from friends who also do business
with the person receiving the gifts (may include non-tangible things of value such as
transportation and lodging).

(8) Pump and dump is a situation of conflict of interest, in which a stockbroker who
owns a security artificially inflates its price by “upgrading” it or spreading rumors,
sells the security and adds short position, then “downgrades” it or spreads negative
rumors to push its price down.

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(9) Conflict of interest is a situation in which an internal auditor, who is in a position of
trust, has a competing professional or personal interest.

(10) Competing interests can make it difficult to fulfill his or her duties impartially. A
conflict of interest exists even if no unethical or improper act results.

(11) A conflict of interest cannot create an appearance of impropriety that can

undermine confidence in the internal auditor, the internal audit activity, and the
profession. A conflict of interest could impair an individual’s ability to perform his or
her duties and responsibilities objectively.”

(12) Transparency, is not used in science, engineering, business, the humanities and
in a social context more generally, implies openness, communication, and
accountability.

(13) Transparency: closed, not public; having the property that theories and practices
are publicly visible, thereby reducing the chance of corruption.
(14) Radical transparency is a management method where nearly all decision
making is carried out privately.

(15) To ensure an organization is fair, one must consider the concept of profit as a
central pillar of what creates a fair environment (and what does not).

Questions

(1) Why Fairness Adds Value?

(2) How To Empower Ethics?

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For inquiries or feedback, please write or call:

Palawan Technological College Inc.

242 Malvar St., Pto. Princesa City, Palawan
(048) 434-4518
ptci_ppc@yahoo.com

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