CHAPTER 8

ETHICS IN ENTREPRENEURSHIP
AND SMALL BUSINESS
Chapter objectives
• To be cognisant of the specific environment within which
entrepreneurs operate that may lend itself to unethical practices.
• Review some of the research findings in relation to the ethical
characteristics of entrepreneurs, particularly in relation to other
managers.
• Discuss the role of the entrepreneur in building an ethical culture.
• Identify the ethical principles that more directly relate to
entrepreneurs and small business owners.
• Explore the ethical dilemmas with which entrepreneurs and small
business owners could be confronted.
• Differentiate between sustainability, entrepreneurship and
environmental entrepreneurship.
• Explain the potential impact from social entrepreneurship.
Introduction
Australia has high rates of entrepreneurship, second only to the
US among innovation-driven economies (Clark et al. 2012).

Entrepreneurship is highly regarded for its ability to provide

income generation for individuals, value creation and to
collectively enhance economic development.
Entrepreneurs

Entrepreneurs are individuals who focus on the development of

independent new ventures that are not sheltered by sponsoring
organisations, namely, spin-offs (Clarke & Holt 2010).
Entrepreneurial environment
The environment within which entrepreneurs function can stimulate
behaviours that evoke questionable ethical practices.

Given the nature of the innovative environment within which

entrepreneurs function, the new circumstances can stimulate behaviours
that evoke questionable patterns and ethical traditions (Steverson,
Rutherford & Buller 2013).
SMEs
Small and medium-sized enterprises depend on their good ethical stature
to survive, given that they must gain and retain the trust of their
customers, supply chain partners and stakeholders in order to enjoy
sufficient legitimacy to conduct their business.

Example:
Icebreaker
http://www.youtube.com/watch?v=a9VwDiCgCBs
http://www.youtube.com/watch?v=XFWecIJ_30Q
Ethics and moral values
It has also been suggested that entrepreneurs are single-minded in
their pursuit of success, to the point that they compromise moral
values when needed (Fisscher et al. 2005).
Entrepreneurs vs small business owners
• Entrepreneurs usually seek high growth.
• Small business owners appear content with generating sufficient
revenue to support personal goals and lifestyles (Katz & Green
2007).

• Entrepreneurs may be involved in:

• start-ups
• small businesses and
• medium-sized enterprises.
Entrepreneurial ethics
Entrepreneurial unethical behaviour has been defined as acts of
omission by individuals, a group of individuals or an organisation
that violate socially accepted norms and/or legal structures (Kahn,
Tang & Zhu 2013).
Entrepreneurial ethics

Entrepreneurial criminals are owners of organisations that are

engaged in unlawful activities to generate revenue, and are
categorised as working within smaller, less established
companies, with less transparent governance and frequently
making bigger profits (Arnulf & Gottschalk 2012).
Entrepreneurial ethics
Stakeholders: Those who might be affected by unethical
entrepreneurial behaviour are:
Stakeholder Effect
Investor profits might be misappropriated

Customers provided with inaccurate and deceptive

information
Governments may be defrauded through tax evasion

Innocent people have not entered the business relationship but are
affected by the entrepreneur’s activities
Entrepreneurial ethics
• While the popular press links aggressive entrepreneurial strategy to
unethical activity (Neubaum, Mitchell & Schminke 2004), it appears
that many entrepreneurs and small business owners clearly want to
do the right thing.
• A survey in the USA indicated that about a quarter of SMEs self-
report high levels of ethics-focused capabilities (Arend 2013).
Ethical characteristics of entrepreneurs
Entrepreneurial ethical characteristics
• Entrepreneurs appear to be driven by innovation, high-risk rewards
and self-interest (Longenecker, McKinney & Moore 1988).
• Entrepreneurs focus more on the direct financial benefit for
themselves and demonstrate ethical egoism.
• Entrepreneurs drive for outcomes rather than thinking of the means
by which the outcomes are achieved.
• Entrepreneurs possess a strong ‘action bias’.
Ethical characteristics of entrepreneurs
Entrepreneurial ethical characteristics
A positive relationship has been found between an individual’s
modest rule-breaking (delinquency, family and school offences,
drug use, etc.) in adolescence and entrepreneurial status (in
adulthood).
 Ethical characteristics of entrepreneurs
Public perceptions
It has been observed that in the USA people viewed individuals in
small businesses as having higher ethical standards than those in
positions as corporate employees and government officials (Brown &
King 1982).
Ethical characteristics of entrepreneurs
Ethical attitudes
• Entrepreneurs exhibited higher ethical attitudes than other
managers.
• Entrepreneurs, while independent in their thinking, had higher
levels of moral development and ethical reasoning than middle
managers.
• Entrepreneurs appear to use a higher degree of moral imagination.
• Entrepreneurs and small business people espouse fairly high ethical
values.
• Small business people understand corporate social responsibility
better.
• Family firms appeared more socially-responsible than non-family
firms.
Ethical characteristics of entrepreneurs
Contrasting views
Longenecker, McKinney & Moore (1989) observed that entrepreneurs
are:
• sometimes stricter in their ethical evaluations, but, at other times,
are more lax than others in their ethical judgements; it very much
depends on the issues being considered
• more likely to approve actions that maximise personal financial
rewards, even in situations where the rewards come at the expense
of others
• driven by the need for financial security and the ever-present
pressure for cash flow.
Ethical characteristics of entrepreneurs
Contextual influence
• Environmental business factors have a powerful role in influencing
entrepreneurial ethics (Fuxman 1997).
• Focussing specifically on entrepreneurs in a transition economy
(Vietnam), it has been observed that small and medium-sized
companies are more likely to pay a bribe than their larger
counterparts.
Ethical characteristics of entrepreneurs
Entrepreneurial culture
• The values of the entrepreneur play a significant role in the ethical
climate of a start-up.
• A firm’s newness was more strongly related to ethical climate than
was entrepreneurial orientation.
• Entrepreneurial firms go through an evolutionary process, gradually
institutionalising an ethical climate in the procedures and policies of
the firm.
Ethical characteristics of entrepreneurs
Entrepreneurial culture
Morris et al. (2002) proposed four distinct clusters:
Superlatives Firms that place priority on ethics.
Deficients Firms that lag in every area.
Core proponents Firms that pursue the basic and formal elements that
are legally required of them; any additional activity is
seen as interventionist and is introduced as and when
required.
Pain and gains Firms that do symbolic activities such as having a
code of conduct, while providing no ethics training,
but do have ethical reinforcement.
Ethical characteristics of entrepreneurs
Ethicality and performance
• It has been found that a firm’s performance is negatively related to
ethically suspect behaviours.
• Entrepreneurs with better performing firms are less likely to engage
in ethically suspect behaviours.
Ethical principles in entrepreneurship
• Honesty – new entrepreneurs may attempt to both misrepresent (tell
untruths) or omit key information (concealment and deception) in their
attempt to gain legitimacy.

• Transparency – the need for full and accurate disclosure in regard to

future income projections, organisational capability and
product/service capabilities.

• Trust – the importance of trust is key, particularly between an

entrepreneur, the business they create, the employees, customers,
suppliers, and other stakeholders.
 Ethical principles in entrepreneurship
• Justice and fairness – relationships between entrepreneurs and key
investors. Fairness is also relevant in relation to the treatment of personnel.

• Non-maleficence – not doing harm, that is, not breaking laws, deceiving
others, discriminating, or destroying trust or the natural environment.

• Beneficence – the arena within which the social entrepreneur operates.

• Conflict of interest – where the entrepreneur (agent) may not act in the best
interests of the principal, usually the investor.
Ethical issues: General
• Employee wellbeing, customer satisfaction and external
accountability (Payne & Joyner 2006).
• Conflicts of personal values with business needs, social
responsibility and stakeholder obligations versus responsibility to
the business (Vyakarnam et al. 1997).
• Business development, financial management, theft, and
administrative decision-making (Hornsby et al. 1994).
• Administrative/instrumental circumstances and those related to
profit/personal gain (Kuratko, Goldsby & Hornsby 2004).
• Fairness, personnel, distribution systems and customer
relationships (Sarprasatha & Suresh 2012).
Phases of entrepreneurial activity

Idea
generation

Phases of Venture
Exiting entrepreneurial capital
activity generation

Growth
Idea generation
• Violation of intellectual property
• Product safety
• Overselling
• Ethical sourcing
Venture capital generation

• Investor exploitation
• Financial puffery with the
overstatement of financial
forecasts
• Exploitation of entrepreneurs
Growth
• Bootstrapping – stringing out a supplier on a payment or two
• Maintaining ethical relationships
• Exploitation of employees
• Bribery
• Employee compensation
• Inflating revenues
Exiting

• Honesty in communication

• Acquisition can come at a cost and, potentially, the destruction of

company ethos
Social entrepreneurship
Sustainability entrepreneurship
Entrepreneurial activity that focuses on the preservation of nature,
life support and community in the pursuit of perceived
opportunities to bring into existence future products, processes
and services for gain.

Environmental entrepreneurship
Aimed at regenerating urban and industrial areas and promoting
positive environmental outcomes.

Ecopreneurship
Focusses on how entrepreneurial action can contribute to
preserving the natural environment, biodiversity and ecosystems.
Social entrepreneurship
Where entrepreneurs use their business skills for addressing social
problems or accelerating social change.

These could include:

• individual entrepreneurs devoted to making a difference in areas
of social concern
• non-profit organisations taking on practices and processes from
the profit sector
• for-profit organisations expanding their scope of impact to include
social concerns
• philanthropists supporting investment in problem areas.
Ethics in the media: Sustainability and entrepreneurship
The non-profit World Bicycle Relief (WBR) distributed more than
100 000 bicycles and trained more than 750 bike mechanics in
developing countries to allow hundreds of thousands of people to
travel more easily to work or to school (‘Seeing it up close’ 2013).
Four clusters of social entrepreneurship
1. Organisations that address laws and human rights issues
(e.g. the Institute for Human Rights and Development in Africa [IHRDA]).
2. Organisations addressing a range of issues related to the
environment, education and health (e.g. Soul City in South Africa, which
deals with issues such as the spread of HIV and violence due to alcohol
abuse).
3. Tackling economic issues such as poverty, poor working conditions,
unemployment and lack of access to markets (e.g. Honey Care Africa,
revitalising Kenya’s national honey industry).
4.Focusing on issues related to civic engagement in order to create
social change (e.g. Teen Living Programs [TLP], a Chicago-based program
that has been addressing teen homelessness).
Collective social entrepreneurship
Collective social entrepreneurship has moved away from individuals
being the leaders of social change, to looking at multiple actors
collaboratively addressing social problems.
Example:
Habitat for Humanity’s ReStore.
Ethics at the movies
The Social Network*

Starring Jesse Eisenberg.

Tells the story of the rise and rise of Facebook.

The Social Network 2010, motion picture trailer, Chaffin, C, Rudin, S,

Brunetti, D & De Luca, M, <http
://www.youtube.com/watch?v=53OUHupfqws>.

* Author’s pick
Image credits
• Shutterstock.com /Cartoonresource; Popova Valeriya