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Business Ethics and Sustainability

Topic 1: Introduction, Professionalism and Key Issues

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Learning objectives:

  • To define the concepts of ethics and morality

 

  • To be able to distinguish the three dimensions of ethics so as to describe, analyse and understand individual and collective (cross cultural) behaviour

  • Understand the relationship between ethics, morality and values

  • To recognise the conditions under which individuals and organisations would be held morally accountable for their actions

  • To understand the concept of a profession, the characteristics of professionalism and whether management and leadership can be considered as a profession.

  • To recognise the key ethical issues that affect the professions and business.

Introduction

  • This course provides important knowledge and skills that assist managers and leaders in almost every facet of their work.

  • Orme and Ashton (2003) argue that ethics is a foundation competency and that individuals cannot be expected to follow ethical rules unless they actually understand them.

  • The objective of studying ethics in a business context is to enhance the quality of business decision-making.

  • By including ethical concepts as “filters” managers and leaders can identify the degree of risk associated with a particular strategy for both the organisation and themselves

Why should we be concerned about ethics, CSR and sustainability?

  • Every decision make or action we undertake has ethical implications.
  • We have the potential to generate good outcomes through our decisions, but we can also cause harm to our company, colleagues to stakeholders and to ourselves.
  • We can also make decisions in an unethical way. We should not assume that if its legal, its ethical.

  • Without an examination of morality and various dimensions of ethics we cannot have an informed discussion regarding when an individual should be held accountable for their actions, whether they have duties as professionals, whether an organisation can be held accountable for its actions and why we should be concerned with doing good as well as being profitable or delivering high quality services.

Key terms defined

  • According to Preston (1996, p 16) ethics is concerned with what is right, fair, just or good; about what we ought to do, not just what is the case or what is most acceptable or expedient.

 

  • Ferrell Fraedrich and Ferrell (2015) describe it as the study of the general nature of morals and of specific moral choices; moral philosophy; the study of rules or standards governing conduct of the members of a profession.

  • DeGeorge (2010) suggests that ethics is concerned with the goods worth seeking in life, and with the rules that ought to govern human behaviour and social interaction.

  • MacDonald (2015) describes business ethics as consisting of rules, standards, codes or principles that provide guidelines for morally right behaviour in specific business situations.

Business Ethics

Ferrell, Fraedrich and Ferrell (2015, p 5) define Business Ethics as “organisational principles, values and norms that may originate from individuals, organisational statement or from the legal system that primarily guide individual and group behaviour in business

Ethics has everything to do with management. Managers who fail to provide proper leadership and to institute systems that facilitate ethical conduct share responsibility with those who conceive, execute, and knowingly benefit from corporate misdeeds (Paine 2000).

Allison (1998) has argued that ethics is fundamental to business conduct. He contends that a moral relationship lies at the basis of agreements and contracts between two people or two organisations, and that unless there is a basis of trust, business cannot proceed.

Solomon (2005) suggests that the values of business life and the values of the rest of life and society are rarely far apart; after all, people in business are people with private lives and a sense of community.

Organisations clearly exist in society and must abide by the minimum moral code of that society with law defined as the minimum moral standard of society (Buchholz, 1989).

Ethics and the concept of “Ought”

The concept of “ought” is critical in an understanding of ethics because the study of ethics is multifaceted including the study of morality, the legitimacy of moral claims and basis of justification of decisions.

(Buchholz, 1989, Donaldson, 1989, Solomon, 2005, DeGeorge, 2010)

Approaches to Ethics

We can approach the study of ethics from three different perspectives- what is important to recognise is that we need to be objective and seek to describe and understand an ethical position before making a judgement about it.

Descriptive Ethics- studying and describing the morality of people in a culture

Normative Ethics- explaining and justifying a coherent moral system- typically the set of principles or rules that or basic moral values found in a society.  

Metaethics (Analytical ethics)- the study of normative ethics and is often referred to as analytical ethics because it seeks to analyse the meaning of morality

(Buchholz, 1989, Donaldson, 1989, Preston, 1996,Solomon, 2005, DeGeorge, 2010)

Morality Defined

It is important to understand what we mean by morality and the fact that other individuals, groups and cultures may have different interpretations of morality.

  • Velasquez (2006) defines morality, as the standards that an individual or a group has about what is right and wrong or good and evil.

  • Buchholz (1989) defines morality simply as the difference between right and wrong.

  • Ferrell, Fraedrich and Ferrell (2015) describe morals as a person’s personal philosophy about what is right and wrong.

Moral standards can be described as the norms about the kind of actions believed to be right and wrong and the values placed on the objects that are considered to be morally good or morally bad.

Morality and the Law.

  • Buchholz (1989) suggests that law is the minimum moral standard of a society. In other words it is the formal (written) basic standard of behaviour expected of individuals in a society.

  • De George highlights that morality and law share concerns over issues of societal importance and have certain principles, obligations and criteria of evidence in common.

  • “Law is the public’s agency for translating morality into explicit social guidelines and practices an stipulating punishment for offences (2010 p.4).

Subjective and Objective Morality?

We need to acknowledge that our view of what is right and wrong differs from the views of others and potentially what is actually wright and wrong. These potential differences raise the issue of subjective and objective morality- the distinction between what one believes to be right and wrong, and what is actually right and wrong.

  • An action is subjectively right if the person believes the action to is moral.

  • The action is objectively right if the action is in conformity with the moral law

(Buchholz, 1989)

Ethics Morality and Values.

 The concepts of ethics and morality are inextricably linked. Similarly we cannot conduct a discussion about ethics and morality without addressing the concept of values.

  • Ferrell, Fraedrich and Ferrell (2015) state that values are enduring beliefs and ideals that are socially enforced. McDonald (2015) describes them as deeply held beliefs as to what is important and highly valued
  • They might refer to a set of principles by which we make judgements or a set of beliefs such as Confucianism and Buddhism, or religions such as Judaism, Christianity, Islam and Hinduism.

  • We should also note that most societies have some form of basic values that underpin their ethics

Moral Responsibility.

Holding an individual accountable for their actions is the basic concept of moral responsibility.

French (in White 1998) suggests that people are considered to be rational entities that can be held responsible and accountable for their actions.

Actions committed knowingly and freely are considered moral in nature and can therefore attract either praise or blame (Buchholz, 1989).

Corporate Social Responsibility

  • Can or should a business or organisation be held morality responsible for it’s actions?
  • Do organisations as separate legal entities have duties to society beyond economic ones?
  • These questions essentially summarize the debate about Corporate Social Responsibility or CSR.

  • One of the most noted scholars in the business ethics field, Prakash Sethi (1975) describes it as raising the behaviour of organisations to a level that is consistent with the prevailing social norms, values, and expectations of its performance.

  • Ferrell, Fraedrich and Ferrell (2015) describe CSR as an organisation’s obligation to maximize its positive impact and minimize its negative impact on society.
  • McAlister et al. (2005, p 4) define social responsibility as “the adoption by a business of a strategic focus for fulfilling the economic, legal, ethical and philanthropic responsibilities expected of it by its stakeholders”.

Corporate Social Responsibility

  • The terms CSR and business ethics are often used interchangeably, although as we will see they are different but related concepts.

  • Whilst we have defined CSR, it nevertheless has many different interpretations and variations.

  • Ferns, Emelianova and Prakash Sethi (2008) as well as Jones, Bowd, and Tench, (2009) note that CSR terms include: corporate philanthropy, corporate citizenship, business ethics, stakeholder theory, community involvement, corporate responsibility, socially responsible investment, sustainability, triple-bottom line, corporate accountability and corporate social performance.

Sustainability

Sustainability, like CSR, is a term that has come to mean different things to different people.

For many it’s a concept that is related to the natural environment and it conjures up issues such as climate change, recycling, and biodiversity. However as McDonald (2015) states, whilst initially referring to environmental issues, the idea of sustainability has broadened and now incorporates activities that:

  • Extend the longevity of organisations, i.e. business or economic sustainability
  • Sustain and renew the biosphere and protect all living species
  • Enhance society’s ability to maintain itself and solve its major problems
  • Maintain appropriate levels of welfare for present and future generations.

Leadership, Management and Professions

Most managers and leaders refer to themselves as professionals and claim to act professionally.

  • But what do we mean by the terms “Profession” and “Professional” and what do we lay claim to when we tell others that we are a professional?

 

  • DeGeorge (1999), May (1989) and Koehn (1994) all note the confusion that exists regarding the terms of profession and professional and how these are its differentiated from a trade, skilled occupation, craft or a career.

  • Most people who have an occupation and earn a salary typically refer to themselves as professionals. However, the concept is far more substantive than simply being paid for a task.

  • We need to distinguish between a true profession, acting professionally, an occupation and a career.

Professions, Occupation and Careers

An occupation any job or function that is performed by individuals that constitute a set of skills or abilities. It maybe paid or voluntary.

A (true) profession an occupation that requires substantial knowledge and skills, a controlling body, a licence to operate/practice and specific codes or standards

Acting professionally behaving in a manner consistent with the expectations of a profession

A career a series of jobs which that allows the use of skills and abilities, over a long period of time

Origins of Professions

The origin of the word profession comes from the verb “to profess” and was linked to religious orders where one professed a faith or belief.

In medieval times, Guilds were associations that represented the skilled crafts such as the arts, music, alchemists and “stone masons and those that built safe civil constructions- “the ingenious ones” i.e. engineers.

A feature of these people were that their skills and abilities required a long apprenticeship- not everyone could do what they did- play an instrument, paint a portrait or build bridges and civil constructions that were sturdy and safe.

The guilds were the associations that established the standards and the means by which people became masters and controlled entry to the practice.

These guilds were the forerunners of today’s modern concept of a profession.

Characteristics of Professions

Watkins (1999) puts forward a view that the professions can be differentiated from other groups (occupations) in society because of specific characteristics of its members.

These characteristics include:

  • the possession of specialized skills,
  • the attainment of expert knowledge, usually based on mastery acquired through intellectual and practical training, and
  • the existence of professional body or association that is charged with the maintenance of the profession including ensuring that members abide by appropriate standards.

Characteristics of Professions

Khurana, Nohria and Penrice (2005) suggest four criteria for calling an occupation a bona fide profession including:

  • a common body of knowledge resting on a well-developed, widely accepted theoretical base;
  • a system for certifying that individuals possess such knowledge before being licensed or otherwise allowed to practice;
  • a commitment to use specialized knowledge for the public good, and a renunciation of the goal of profit-maximization, in return for professional autonomy and monopoly power; and
  • a code of ethics, with provisions for monitoring individual compliance with the code and a system of sanctions for enforcing it.

  • Examples of true professions are typically medicine and law.

Is Management a Profession?

  • Management has many of the characteristics of a true profession including university qualifications, a variety of associations such as the Australian Institute of Management, The Indian Institute of Management, The Singapore Institute of Management and many others worldwide.
  • These associations typically have codes of ethics and practice that members are requested to follow.

  • However, one does not need a degree to occupy a management or leadership position. Nor is there an accrediting body that licences individuals to practice management.

  • Like many other occupations, management is really a quasi-profession which seeks to “professonalise” itself by focusing on increasing expert knowledge, sharing that knowledge and asking those to claim to be professional managers and leaders to abide by a code of conduct.

What is an Ethical Issue?

  • An ethical issue can be seen as a problem, situation, or opportunity, which has several possible options, and where each must be evaluated as right or wrong, ethical or unethical.
  • Aguilar states, “Managers who are sensitive to the ethical content of business decisions and operational activities, who agree to behave ethically, and who hold compatible views on how to analyse ethical situations still must confront the inherently perplexing nature of many ethical problems” (1994, p33).

Three Key Values

Ferrell, Fraedrich and Ferrell (2015) provide a simple approach of identifying three key values that enable decision makers to evaluate activities that might have significant ethical dimensions:

  • Integrity
  • Honesty
  • Fairness

Four Levels of Business Ethics

MacDonald (2015) provides a different approach to understanding ethical issue. Rather than using concepts of principles and values as suggested by Farrell, Fraedrich and Farrell above, she used a contextual approach:

  • Personal Level- each person must engage in ethical decision making as we wrestle with various options and possible outcomes that are associated with business decisions- ultimately we still must make the decision.

  • Organisational level- as agents of a firm, we make decisions on behalf of or in the interests of the organisation rather than self-interest. -If a manager makes the decision for organisation- who is held responsible- the organisation as a legal person or the manager or both?

  • National Level- at this level ethics relates to the expectations a society collectively holds about the behaviour of its citizens, organisation and the practices deemed acceptable. MacDonald suggests that bribery and corruption can be considered as national level issues

  • International Level- in many ways this level seeks to address how the national level issues interact on a global stage- concepts such as globalisation, ecological and sustainability and economic aspects such as fair trade, tax inconsistencies, free trade agreements can be seen as ethical because they all have the potential to generate benefits and harms for few, some or all.

Industries, Sectors and Professions

  • There are many different ways of categorising and describing ethical issues.

  • MacDonald (2015) notes some issues can be specific to industries such as the banking and finance, retail or hospitality industries.

  • Some may be specific to the private sector more so than the public and not for profits. Another way is to look at issues as they pertain to the “professions” such as Doctors and Nurses, Lawyers, Accountants and Marketers etc.,

Industries, Sectors & Professions

Farrell Fraedrich and Farrell (2015) simply describe a range of ethical issues that could apply to sectors, industries and professionals:

  • Misuse of company time and resources
  • Abusive or intimidating behaviour
  • Lying
  • Conflicts of interest
  • Bribery (and Corruption)
  • Corporate intelligence
  • Discrimination sexual harassment
  • Fraud
  • Insider trading
  • Intellectual property rights
  • Privacy Issues

Conflict of Interest

Differentiating private versus organizational interests is problematic due to the fact that establishing ethical relationships is in part linked to reciprocity- the concept of doing something for another person with the expectation that the favour will be returned.

Reciprocity is the basis of developing a trusting relationship with another person.

Different cultures have slightly different ways of facilitating reciprocity-

  • A conflict of interest is a situation where an individual advances their own personal interest at the expense of the organization.
  • It can also be were a person’s existing relationships with stakeholders result in decision making being potentially compromised.

Conflict of Interest

Conflict and Agency

  • Agency describes the relationship between owners of a business and those who are delegated the tasks of running the business, making the product or service and bringing it to the market.
  • The expectation is that the “agent” will act in the interests of the organization and thus the owners and will not their personal interest.

Real v Perceived Conflict of Interest

A real conflict of interest is when a manager or leader’s ability to act in the interests of the organisation is compromised and they make a decision which clearly is to their own benefit at the expense of the organization.


A perceived conflict of interest occurs when stakeholders and others believe that a manager or leader’s ability to act in the interests of the organisation is compromised.

It does not necessarily mean that it is, but people believe it to be the case.

Inappropriate behaviour in the workplace

  • Farrell, Fraedrich and Farrell (2015) identify a range of interpersonal behaviours that related to how people interact and related to each other that are clearly ethical issues and in some cases illegal behaviour.

  • In recent years discrimination, sexual harassment and bullying in the workplace have been gaining greater attention, particularly in the Australian context.

Ethical Issues in HR

McDonald (2015) identifies a number of ethical issues which occur within the HR discipline including:

  • Issues relating to the rights and duties of employees with those of managers
  • Discrimination
  • Ethical issues during recruitment and selection, compensation, engaging in the work environment, safety and health and separation from an organisation
  • The characteristics of a ‘just’ work environment
  • Rights of employees – the right to:
  • a safe working environment
  • fair compensation
  • information
  • consultation and to express one’s view
  • fair treatment
  • confidentiality and privacy
  • equity and fairness.

  • Respect – ensure that:
  • all employees in an organisation demonstrate consideration, esteem and deference
  • staff are not subject to inequitable treatment or discrimination.

Ethical Issues in HR

  • Duties – of both the employees and the managers:
  • occupational health and wellbeing
  • expectation of honesty and integrity by all parties.
  • Due process – ensuring adherence to appropriate procedures and processes.
  • Justice – ensuring equity and fairness in the workplace.
  • Environmental awareness – the pursuit of sustainability in human resource practices.
  • Confidentiality – upholding the confidence of information and processes to protect privacy.

Ethical Issues in HR

Ethical Issues in recruitment, selection and promotion

  • Deceptive applicant information –
    providing false or deceptive information.

  • Soliciting unwarranted information –
    information sought from an applicant must be related to valid criteria that clearly relate to the job in question.

  • Discrimination occurs when preferential treatment is bestowed on employees on grounds other than their qualifications or job performance (Crane & Matten 2010).

  • Glass ceiling
    When an otherwise qualified person reaches an invisible barrier that prevents promotion or salary increases, they are said to have reached a glass ceiling.

  • (McDonald, 2015)

Ethical Issues in HR

Ethical Issues in the workplace

Sexual harassment is where unwelcome sexual advances are made (either verbally or physically).

Workplace bullying has been defined by Victoria Legal Aid as persistent, unwelcome behaviour, mostly using unwarranted or invalid criticism, finding fault, exclusion or isolation. Bullying is a significant health and safety issue, for which employers

are being held responsible.

Violence in the workplace

  • (McDonald, 2015)

Ethical Issues in HR

Organisations that engage in ethical marketing behaviour, such as The Body Shop, engender trust and loyalty, where as organisations that exhibit unethical behaviour erode the confidence of consumers and key stakeholders and can ultimately threaten their own viability through the imposition of greater control or through loss of profitability.

Key Ethical Issues in Marketing

  • Honesty – ensuring accurate representation of the product or service.
  • Accepting responsibility – actions as: serving the needs of customers, avoiding coercion, acknowledging obligations to stakeholders.
  • Confidentiality – protect the private information of customers, employees and partners.
  • Transparency – promoting a spirit of openness in marketing operations.
  • Equity and fairness – justly balancing the needs of the buyer with the interests of the seller.

  • (McDonald, 2015)

Ethical Issues in Marketing

Promotional activity has the tricky task of encouraging consumers to buy but without deceiving or manipulating them. The main criticisms of promotion and the many forms of marketing communication are that it is inherently untruthful, deceptive, unfair, manipulative and offensive (Eagle 2009).

  • Misrepresentation
    Misleading, fraudulent or untrue advertising.
  • Offensive advertising
    Can relate to both the content of the advertisement, that is, overtly sexual, demeaning to women, promoting stereotypes, being disrespectful etc., and also to the products themselves, for example, alcohol, tobacco,
    pharmaceuticals and adult products.
  • Stereotyping
    Gender and racial stereotyping:
  • Deceptive advertising using social media
    False testimonials and fake tweets refer to content generated by the company itself or by someone paid by the company

Ethical Issues in Marketing

  • Public relations
    The role and reputation of the public relations profession is to ensure that a favourable image between the organisation and its ‘public’/stakeholders is maintained, while balancing the company’s integrity and gaining the public’s trust.

  • Sponsorship
    Is a powerful promotional tool, but organisations can come unstuck if the personality to whom they attach their brand acts unethically and is perceived unfavourably by the general public. For example companies that used Lance Armstrong to promote their sporting products

  • (McDonald, 2015)

Ethical Issues in Marketing

Other ethical issues in marketing:

  • Distribution of products and service
  • Data collection and research
  • Privacy of customer information
  • Targeting disadvantages groups
  • Cause related marketing

Ethical Issues in Marketing

  • McDonald (2015) notes that there are many ethical issues in the accounting and finance industry.

  • She highlights misrepresentation and inaccurate financial reporting, accounting fraud, insider trading, conflict of interest, tax avoidance and tax evasion, money laundering and investment scams as amongst the most significant.
  • Misrepresentation and inaccurate financial reporting includes false expenses, over/under valuation of assets and liabilities, inflated profits or hiding losses etc.

  • Accounting fraud occurs when an employee steals cash, assets or other resources from a firm. According to KPMG (2015) the average fraud in Australia and New Zealand is valued at over $3million and only 30% of frauds are reported.

  • Insider Trading occurs when individuals take advantage of access to information before it enters the marketplace, e.g. buying or selling shares due to information not available t the public

Ethical Issues in Finance & Accounting

Tax minimisation – when corporate structures, processes and practices are legitimately organised to reduce the amount of tax paid.

Tax avoidance – is an arrangement which complies with the letter of the law but is possibly not within the spirit of the law. Accounting techniques for tax avoidance include:

  • Transfer pricing – allows companies to shift money between certain tax jurisdictions to avoid paying tax twice on the same amount.
  • Offshore billing – the parent company charges Australian consumers for services from its offshore tax haven subsidiary and the money goes directly to the tax haven.
  • Thin capitalisation – the parent company lends money to its Australian subsidiary via an offshore finance arm based in a low tax jurisdiction.
  • Intangible assets – the parent company in the tax haven owns intangible assets such as Intellectual Property and licenses the use of that property to the Australian operation which pays significant sums to the tax haven based subsidiary, thereby stripping out taxable revenue from the Australian company and placing that revenue in the low tax location.

Tax evasion – where unlawful actions are taken to avoid tax.

(McDonald, 2015)

Ethical Issues in Finance & Accounting

Transparency International (2009) describes money laundering as the process of concealing the origin, ownership, or destination of illegally or dishonestly claimed money by hiding it within legitimate economic activities.

Investment scams are also referred to as Ponzi schemes and in effect use the monies of new investors to pay “returns” to those who joined earlier. The most well know recent scheme was perpetrated by Bernie Madoff in the US whose victims lost an aggregate of US$20 billion.

Ethical Issues in Finance & Accounting