Business Ethics & Corporate Governance

UNIT-I

Meaning:

Business ethics refer to the values and principles that govern the behaviour of individuals in
an organization such that the business activities are desirable from the viewpoint of society.
The main purpose of business ethics is to guide managers and other employees to perform
their jobs in a manner that is socially acceptable.

The following are some of the elements of business ethics.

(a) Top management commitment: Top-level officers, such as CEO's and senior managers,
must strongly follow the ethical codes and guide the other employees in adopting such
behaviour.

(b) Publication of a ‘code’: Enterprises must clearly define the ethical code of conduct, which
would include quality standards, laws governing production and health and safety standards
for the employees.

(c) Establishment of compliance mechanism: In addition to standards, an enterprise must also

devise a mechanism through which compliance with the code of conduct can be measured.

(d) Involvement of employees at all levels: The successful implementation of ethical

standards requires the involvement of all the employees at all levels.

(e) Measurement of results: Although it is difficult to measure the end results of

implementation of ethical standards, the top management should take steps to measure the
degree of compliance with the ethical codes.

Nature of Business Ethics

It is also known as the features of business ethics, and every company must follow this
without any deviation.

1. Code of Conduct
Business ethics is a code of conduct that explains what a company can and must not do. It
explains how an organization must behave towards the society in which it operates. There are
also regulations for how the firm treats its employees and customers. There is no scope for
any establishment to deviate from this code of conduct.

2. Moral and Ethical Values

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The nature of business ethics is that it is based on moral and social values. It means that the
company must follow practices that will benefit society. It includes self-control, consumer
protection, the welfare of society, service to society, fair treatment to social groups, not
exploiting anybody connected to the firm, etc. Organizations must ensure that the products
they supply don’t affect society in any manner.

3. A Relative Term
We have seen that business ethics means operating as per moral and social values. These
values are not the same for all societies, communities or countries. So the company must
understand what is acceptable in their society and do it accordingly. The company must
understand the morals and ethics in the location and follow them accordingly.

4. Protect The Interests of the Society

It is one nature of business ethics that deals with protecting the interests of society. A
business is supported by its stakeholders, employees, customers, business partners, etc. All
these people live in the society around the company. When the organization protects society’s
interests, it indirectly takes care of all the above people who support the business in its
operations. It must protect society by supplying quality products at reasonable prices.

5. Improves Business Social Relationship

Business ethics is a way of ensuring that the relationship between society and the business
remains good. By following strict measures for the welfare of society, companies benefit
from it. The business also benefits from society through the support they provide as
customers, employees and investors.

6. Provides Basic Framework

Business ethics provides the basic framework for organizations to operate in. It provides the
social, economic, cultural and legal limits within which the company must function.
This nature of business ethics helps the company follow rules that are good for itself and
society.

7. It Is Voluntary
Following business ethics must be voluntary. The company should not be forced by any law
to follow these moral and social values. When it does this by itself, the organization earns a
good name from society, customers and its employees.

8. Businessmen Should Be Educated

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Not all business people are aware of a place’s social and moral values. They also don’t know
what business ethics they must follow to earn the support of the society around them.
This nature of business ethics makes it necessary for them to be educated in these values so
that they don’t violate any of the directions. Trade associations must inform companies about
the benefits they will gain from following business ethics.

9. Business Ethics Is Not Against Making Profits

It is a misconception that most people have. Having ethics doesn’t go against the principles of
business. All companies work to make profits, and nothing is wrong with it. Business ethics
only demands that organizations earn profits by fair means. They must not cheat the
customers, employees, shareholders or others to earn profits.

10. Good Employee Relationship

Companies need to maintain good relationships with their employees. They depend on the
company for their livelihood, career and personal growth. The organization and its employees
must have a good relationship to benefit both. The company must ensure that the staff are
paid a fair salary and are treated well. This nature of business ethics is very important for the
progress of companies.

11. Avoid Cheating and Fraud

Businesses must follow all the rules concerning their finances and ensure that all statutory
payments to the government are made. Companies must also ensure that the shareholders are
not denied their rightful share. They must not cheat the public with false promises or
advertisements about their products.

12. Help Save the Environment

The company must strive to protect the environment wherever there is an opportunity. It must
avoid pollution and follow green practices even if they are not mandated by law. Such
voluntary measures to protect the environment will earn the goodwill of society. It is
one nature of business ethics that is very important these days when there is so much damage
caused to the environment.

13. It Is Dynamic
Companies need to understand that business ethics can change from time to time. Many HR
practices have been recently introduced to ensure that all employees get fair treatment. Newer
regulations concerning environmental protection are being introduced daily. There are also
new technologies that improve the safety of employees and ensure their well-being. Ethics

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can also change from region to region. Companies must understand this nature of business
ethics and comply with new rules when formulated.

IMPORTANCE OF BUSINESS ETHICS:

Ethics is the set of universally accepted moral principles and values that govern the behaviour
of a person or grow in terms of what is right and what is wrong. The word ethics is derived
from the Greek word ‘ethos’, which means character. Ethics is a branch of philosophy
concerned with human character and conduct. It is the discipline dealing with ‘what is good
and bad’ and with moral duty and obligation. Ethics is the embodiment of moral values,
which describes what is ‘right’ and what is ‘wrong’ in human behaviour and what ‘ought to
be’.

Business ethics is about the rightness or the wrongness of business practices. Business
practice is guided by the commercial relationship between right and moral structure applied
within enterprises that indicate what is right and good for business.

Ethics is a “consideration and application of frameworks, values and principles for

developing moral awareness and guiding behaviour and action”. Commonly, ethics is also
referred to as “moral, good, right, just and honest. Ethical standards are referred to as the
principles or ideals of human conduct.” Thus, ethics implies good character and morality and
refers to generally accepted human character and behaviour considered desirable by
contemporary society.

What is ethical and unethical in general society may not be the same in business as the latter
operates in different environments. Business ethics is “concerned primarily with the
relationship of business goals and techniques to specific human needs. It studies the impact of
acts on the good of the individual, the firm, the business community and the society as a
whole.

“Business ethics study the special obligations that a man and a citizen accept when he
becomes a part of the world of commerce”. Business ethics are the norms and moral values of
human behaviour desired by the contemporary society exclusively and inclusively dealing
with commercial transactions. These definitions on business ethics are not comprehensive but
they provide an idea of what business ethics is. In fact, defining the term business ethics
comprehensively is very difficult.

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Business ethics means the behaviour of a businessman while conducting a business, by
observing morality in his business activities.

The behaviour of a businessman has more impact within the business organization than
outside. So, he should obey the laws even though he may personally believe them to be unjust
or immoral. If the businessman feels that the provisions of laws are unjust, he can take steps
to change the provisions instead of disobeying them.

A businessman should observe morality not only in business activities but also in non-
business activities. Such observation of morality is not required out of fear for punishment.
He should observe ethics inspired by his own interest in his business and society as a whole.
The reason is that there is no distinction between a businessman and his business. According
to Drucker, every individual and organization in society should abide by certain moral codes
and that there is no separate ethics of business.

Characteristics of business ethics-

 Moral standards deal with matters that can seriously affect the society without them.
 Ex- In every civilized society there is fraud, law-breaking is considered immoral and
there is serious injury in humanity.
 Moral standards are not created or changed by the decisions of any particular
authority or legislature.
 Impartial consideration
 Moral standards associated with special emotion and special relationships.

OBJECTIVES OF BUSINESS ETHICS

Objectives of business ethics evaluate human behaviour based on moral standards, which
instruct people or organizations how to act morally at four levels - Personal, internal,
stakeholder and societal.

1. At personal level:
At personal level, the objective should specify how people, should treat one another in the
organization, their obligation to the organization and, how they should follow the rules and
regulations of organization.
For example, they, should not misuse others' property, or that of the organization, they should
honor, their words etc.
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2. At internal level:
Ethical problems arise in the relations of the employees with the organization; fair
employment contract, their rights and obligations etc. Only fair practices should be
encouraged among the employees and the management., Free and frank communication
among the stakeholders should be insisted. This will yield better productivity.

3. At stakeholder level:
The organization should follow ethical means in dealing with customers, shareholders,
financiers, suppliers, financial institutions and various govt, departments.

4. At societal level:
As an organ of society, a business may have ethical issues on, various grounds: a business
can be run on capitalist terms or as a socialist model; how the pay packages of the top brass
differ from those of the last grade, how, discrimination based on caste, gender and creed is
eliminated, how optimal use of, resources is ensured.

CHARACTERISTICS OF BUSINESS ETHICS

The following are the important features of business ethics,
1. A discipline:
Business ethics is the principles which govern and guide business people to perform business
functions. In that sense business ethics is a discipline.,
2. It is art, science and both:
Business ethics depicts the principles of business, behaviours, ethical standards, moral values,
decisions etc. It is a science because the principles are determined on the basis of observation
and experimentation. It is an art, because it emphasizes practical application of principles.,
3. Dynamic:
It is dynamic. It continuously tests the rules and moral standards.,
4. An ancient concept:
Its origin is mainly concerned with the development of human civilization.,
5. Theological base:
The base of business ethics is theology. Business ethics, becomes possible due to the
theological principles such as sincerity, human welfare, service, good behaviour etc.
6. Based on social reality and customs:
Business ethics is not based on emotion but is, based on the reality and social customs
prevailing in the business environment.,
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7. Relating to human aspect:
Business ethics studies the activities, decisions and, behaviour, which are related with human
beings.,
8. Universal application:
It has universal application because business exists all over the world.,
9. Develops personal dignity:
The ethical principles develop the personal dignity. Many of the unethical behaviour arises
due to not giving dignity to the individual.,
10. Differ with Individual perspectives:
Ethical decisions difTer with the individual perspectives of different persons.,
11. Keeps harmony:
Business ethics keeps harmony between different roles, of businessmen, with every citizen,
consumer, owner and investors.

FACTORS INFLUENCING BUSINESS ETHICS

Business ethics can be considered a set of policies and practices that will guide the entity to
function in a manner that is acceptable to various aspects of society. By behaving ethically,
businesses can maintain suitable behavior towards issues related to aspects such as gender,
diversity, discrimination, corporate governance, bribery, fiduciary responsibilities, insider
trading, corporate social responsibility, and so on.

Entities should ensure that they behave ethically because they have the power to influence
society and make significant positive contributions. Moreover, malpractices by business
entities can cause individuals, communities, and the environment to suffer

Business ethics is influenced by a myriad of factors that shape the moral and responsible
conduct of organizations. These factors impact decision-making, behavior, and the overall
ethical climate within a business. Here are key factors influencing business ethics:

Influence
S.no Factor Description Mitigation Strategies
Level

Tone at the Top: Leadership sets Regular ethics training for

1. Leadership the ethical standard for the High leaders, transparent
organization. decision-making.

2. Corporate Culture Values and Norms: The Medium Encourage open

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 Influence
S.no Factor Description Mitigation Strategies
Level

prevailing culture influences communication, reward

ethical behavior. ethical behavior.

Compliance Requirements: Regular legal compliance

Industry Standards
3. Adherence to legal and industry High audits, proactive policy
and Regulations
standards is essential. updates.

Customer, Employee, and Regular stakeholder

Stakeholder
4. Investor Expectations impact High engagement, feedback
Expectations
decision-making. mechanisms.

Communication and Reporting Clearly defined reporting

Organizational
5. Lines influence the flow of Medium structures, whistleblower
Structure
responsibility. protection.

Individual Values Employee Values contribute to Ethical training programs,

6. Medium
and Morality the overall ethical climate. anonymous ethics hotlines.

Cross-Cultural Considerations Cultural sensitivity

Globalization and
7. are crucial in a globalized High training, diverse leadership
Cultural Diversity
business environment. teams.

Financial Pressures may pose

Economic Robust financial oversight,
8. ethical challenges, especially High
Conditions ethical risk assessments.
during economic challenges.

Digital Influence and social

Technology and Social media guidelines,
9. media scrutiny impact Medium
Social Media data privacy policies.
organizational transparency.

Sustainability Practices are

Environmental and Environmental impact
essential for considering the
10. Social High assessments, community
impact on the environment and
Responsibility outreach programs.
society.

SOURCES OF BUSINESS ETHICS

(i) Religion.
One of the oldest sources of ethical inspiration is religion. More than 100,000 different
religions exist across the globe. But despite doctrinal differences, the major religions
converge on the belief that ethics is an expression of divine will that revels the nature of right

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and wrong in business and other areas of life. The world’s great religions are also in
agreement on fundamental principles which re similar to the building blocks of secular
ethical doctrine. The principle of reciprocity towards one’s fellow human beings is found in
all major religions such as Hinduism, Buddhism, Christianity, Islam, Judaism and
Confucianism. The great religions preach the necessity for an orderly social system and
emphasize social responsibility in such a way so as to contribute to the general welfare. built
upon such verities are many other rules of conduct.

(ii) Cultural Experience.

Culture refers to a set of values, rules and standards transmitted among generations and acted
upon to produce behaviors that fall witching acceptable limits. These rules and standards
always play an important part in determining values, because individuals anchor their
conduced in the culture of the group.

(iii) The Legal System.

Laws are rules of conduct, approved by legislatures that guide human behavior in any society.
They codify ethical expectations and keep changing as new evils emerge. But laws cannot
cover all ethical expectations of society. Law is reactive, new statutes and enforcement
always lag behind the opportunity for corporal expediency.

Morality is often used to refer to a person’s moral standards for himself or herself. For
example, someone might be said to have high moral standards if he or she follows strict
ethical rules such as those found in religious texts like the Bible or Quran. Many of these
codes of conduct encourage people to behave in ways that maintain order and peace in
society, and that protect the rights and safety of others.

Theories of Business Ethics

Traditional Theories of Business Ethics are stated below.

o Utilitarianism: Actions that produce the greatest benefit and least harm for most
people are deemed ethical according to this view. The focus is on creating top overall
utility and value. However, utilitarianism is blamed for potentially missing the
interests of people and minority groups in favor of the greatest good for the greatest
number. It also provides no clear advice for how to weigh other groups' interests.
Utilitarianism can also incentivize unethical shortcuts that produce maximum
aggregate benefits.

o Rights-Based Ethics: This perspective argues that businesses must respect all
stakeholders' basic human rights and dignity, especially employees. Workers have

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 rights to fair treatment, safe working conditions, adequate pay, and privacy that
businesses should uphold. The focus is on respecting fundamental rights. But some
argue it is unclear whether firms truly have moral obligations beyond economic and
legal ones. Rights-based ethics also provides a vague framework as it does not
consider the interests of other stakeholders beyond rights-holders.

o Justice and Fairness: Firms should distribute costs, benefits, opportunities, and risks
fairly among all stakeholder groups according to their respective claims and merits.
Workers should be compensated and enabled based on performance and merit, not
factors like nepotism or bias. The focus is on just and fair procedures and outcomes.
However, critics note there are various concepts of justice, and it is unclear which
feeds the best framework for business ethics. There are also debates about which
stakeholders deserve respect in distributional justice.

o Virtue Ethics: Businesses should develop and cultivate moral virtues like honesty,
integrity, care, and trustworthiness within and among employees. Ethical decisions
then flow from having a virtuous disposition. The focus is on building good moral
character. But some argue it is unclear how firms versus people can develop virtues.
There is debate about which virtues are most relevant and important for businesses.
Virtue ethics also provides limited guidance on specific decisions and policies.

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ETHICAL ABUSES

Ethics is a broad term. At its core, acting ethically in business means building a company
around integrity and trust as well as complying with regulations. However, there are many
other issues that fall under the ethical issues in business definition, including empathy,
diversity and acceptance, and carrying out business in accordance to the company’s values.

TYPES OF ETHICAL ISSUES IN BUSINESS

If you are to run an ethical business, you first need to know what types of issues you can
expect to face and may need to overcome.

1. Discrimination

One of the biggest ethical issues affecting the business world in 2020 is discrimination. In the
last few months, many corporations have come under fire for lacking a diverse workforce,
which is often down to discrimination. However, discrimination can occur at businesses of all
sizes. It applies to any action that causes an employee to receive unequal treatment.

Discrimination is not just unethical; in many cases, it is also illegal. There are statutes to
protect employees from discrimination based on age, gender, race, religion, disability, and
more. Nonetheless, the gender and race pay gaps show that discrimination is still rampant.
Other common instances of discrimination include firing employees when they reach a
certain age or giving fewer promotions to people of ethnic minorities.

2. Harassment

The second major ethical issue businesses face is harassment, which is often related to racism
or sexism. This can come in the form of verbal abuse, sexual abuse, teasing, racial slurs, or
bullying. Harassment can come from anyone in the company, as well as from customers. In

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particular, it is an ethical issue for the business if a supervisor is aware of harassment from a
client and takes no action to prevent it.

In addition to causing a toxic workplace, harassment can cause employees to leave the
company prematurely — a second reason why some businesses lack diversity. Harassment
can have a long-term impact on employees: psychologically, in terms of earnings, and even
impacting a person’s entire career path.

3. Unethical Accounting

Publicly-traded companies may engage in unethical accounting to appear more profitable

than they actually are. In other cases, an accountant or bookkeeper may change records to
skim off the top.

4. Health and Safety

Another type of ethical issue that is often protected by law is health and safety. Companies
may decide to cut corners to reduce costs or perform tasks faster. As well as injuries, failing
to take workers’ safety into account can lead to psychosocial risks (like job insecurity or lack
of autonomy), which can cause work-related stress.

5. Abuse of Leadership Authority

Abuse of power often manifests as harassment or discrimination. However, those in a

leadership role can also use their authority to pressure employees to skip over some aspects
of proper procedure to save time (potentially putting the employee at risk), punish workers
who are unable to meet unreasonable goals, or ask for inappropriate favors.

In addition, abuse of authority can extend beyond the workforce. Managers can use their
position to change reports, give themselves credit for the work of a subordinate, misuse
expenses, and accept gifts from suppliers or clients.

6. Nepotism and Favoritism

Nepotism is when a company hires someone for being a family member. Favoritism occurs
when a manager treats an employee better than other workers for personal reasons.

Not only are nepotism and favoritism unfair, they are also disheartening to employees.
Workers often find they have to work much harder to receive a promotion or other rewards.

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7. Privacy

Employees have recently found that the distinction between work life and personal life has
become less clear. This is mainly due to the advances in technology.

For one thing, employers may punish for posts on social media, particularly if they complain
about work conditions or the company as a whole. Employers may even fire workers who
post controversial statements that go against company values.

Another ethical issue surrounds the use of devices belonging to the company. Employers can
now monitor all worker activity on laptops and cellphones. Whereas this is supposed to check
that employees are sticking to work-related activities during the business day, some
employers take it further, tracking keystrokes and reading emails. The question is where to
draw the line between monitoring and spying.

8. Corporate Espionage

The opposite to the above can also happen: workers can misuse company data. An employee
may steal intellectual property or provide a competitor with information about a client.
Usually, this is for monetary purposes, but it can also help an employee secure a position at
another firm.

WORK ETHICS

Work ethic is a set of values guiding professional behavior, encompassing integrity,

responsibility, quality, discipline, and teamwork. It's crucial for success as it drives
productivity, fosters employee satisfaction, and enhances a company's reputation, thereby
contributing to individual and organizational achievements.

CODE OF CONDUCT

A code of conduct, also known as privacy and code of conduct, is a defined set of rules,
principles, values, employee expectations, behaviours, and relationships that a business
considers important and believes necessary for its success. You can find the code of conduct
for an organization in its employee handbook. Human resources may also provide new
employees with training materials to assist them in learning the code.

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A code of conduct lists the principles and ideals that distinguish a company, with some more
relaxed than others. An organization's code of conduct reflects on the organization's culture
and creates a message that all employees and other stakeholders can use for reference.

Relation Between Ethics And Morals

Ethics vs. Morals

1. Morals are what you believe, while ethics are what you do. You can have conflicting
morals and ethics, like believing stealing is wrong but doing it anyway.

2. Morals are often based on religion or culture, while ethics are based on logic and
reason. This means that you can have different ethical systems even if you share the
same morals.

3. Morals usually deal with personal conduct, while ethics deal with professional
conduct. For example, a doctor may consider euthanasia to be morally acceptable but
ethically unacceptable because of their position as a doctor.

4. It’s possible for someone to live by their moral standards without ever having any
conflicts with their ethics because morality deals more with how we should behave in
our day-to-day lives, while ethics looks at all actions in general – both good and bad.

Difference Between Ethics and Morality

1. Ethics are a formal system of beliefs that guide our behaviour, while morality is more
personal and can vary from individual to individual.

2. Ethics are usually based on logical reasoning and a shared set of values, while
morality is often based on gut instinct or religious beliefs.

3. Ethics tend to be more objective, while morality is often subjective.

4. Ethics are universal, while morality is often culture-specific.

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5. Ethics are transcendent; they govern all aspects of life. Morality deals with specific
issues such as politics, economics, religion and family matters. When someone does
something immoral, it usually relates to one of these specific areas. In contrast, ethics
applies universally to every aspect of life and when someone does something
unethical, it has more implications than just in one area.

6. Ethics applies to groups and organizations, while morality applies to individuals. As a

result, ethical practices don’t always mesh well with organizational cultures and vice
versa.

7. Ethics asks people to think about what they do before they act; morality asks people
to examine their actions after the fact. For example, someone might have had an
opportunity for an extramarital affair but resisted because it would have been
unethical rather than because it would have been wrong. Or perhaps somebody might
give money to charity because they believe it is the right thing to do, not because they
fear eternal damnation.

8. In terms of thinking through what we should do in certain situations, ethics tells us

how we should behave while morality only tells us if we did the right thing once
we’ve behaved in some way.

9. Ethics will help you determine whether your behaviour was good or bad, while
morality may help you decide whether your intentions were good or bad.

10. Both ethics and morality play important roles in shaping human civilization.

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