Ethics In Business

UNIT 2

UNDERSTANDING BUSINESS ETHICS

Business ethics is the study of business situations, activities, and decisions where issues of right and wrong are addressed.

Business ethics is also known as corporate ethics. It is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment.

Business ethics are the values and principles which operate in the world of business. They form the moral framework of the organisation.

A business is considered to be ethical only if it tries to reach a trade off between pursuing economic objective and its social obligations.

Corporate business executives have a responsibility to their shareholders and employees to make decisions that will help their business make a profit. But in doing so, businesspeople also have a responsibility to the public and themselves to maintain ethical principles.

What is Business Ethics ?

3

Four different levels of business ethics can be identified based on what type of business and how their actions are evaluated.

1. The society level, which defines ethical behavior and assesses the effect of business on society.

2. The industry level, which suggests that different industries have their own set of ethical standards (e.g., chemical industry vs. pharmaceutical industry)

3. The company level, under which different companies have their own set of ethical standards

4. The individual manager level, at which each manager and other corporate participants are responsible for their own ethical behavior

Why be ethical in business?

4

Goodwill of the business

•People like to build long term relationships with organizations

that perform their tasks on the principles of ethics.

•Following a code of ethics enhances the goodwill of the

organization and organization possess a strong public image.

•Moreover strong public image leads to continual loyalty and

attracts new investors.

Prevention fromlegal action(s)

•Byimplementing ethical practices organizations are automatically

prevented from illegal and objectionable activities as business ethics

instruct to avoid all that is wrong or evil.

•Suchorganizations have no fear of legal action and social boycott.

Ethicalpracticescreatea strong public image

• Organization with strong ethical practices will possess a strong image

among the public.

• Thisimage would lead to strong loyalty.

• Strong public image results in attracting new investors.

• Ethics practices support employee growth

• Ethics in the workplace helps employees face reality, both good and bad,

in the company.

• Employees feel full confidence and therefore they can deal with any

sort of situation.

Strong teamwork and high productivity

• Constant check and dialogue will ensure that the employee matches

to the value of organization which will in turn results in better co-

operation and increased productivity.

• Build trust with key shareholders: implementation of ethics helps

organization to gain trust of their shareholders.

• Shareholders feel confidence that companyis well monitored.

High profits and good governance

• Business ethics create high returns or profits for the company

and its share prices increase if the company acts upon its social

responsibility (CSR).

• Most of the benefits received from business ethics are the goals of

corporate governance.

• Thus, we can say that ethics have a strong impact on corporate

governance and the implementation of business ethics can ensure good

governance.

• Customers

• Managers/Owners/Shareholders

• Pressure Groups/Activists

• Workforce

• Community/Society

• Trading Partners

Who cares about Business Ethics?

10

✓ Solidarity

✓ Efficiency

✓ Rationality

✓ Fairness

✓ Refraining from willingly harming others

✓ Role-responsibility

Basic ethical principles for business

Business contributions to the sustainable development (UN chart)

BUSINESS ETHICS

AND

CORPORATE GOVERNANCE

WHAT IS CORPORATE GOVERNANCE?

The system of rules, practices and processes by which a company

is directed and controlled.

Corporate governance essentially involves balancing the interests

of the many stakeholders in a company (shareholders,

management, customers, suppliers, financiers, government,

community).

BENEFITS OF GOOD CORPORATE GOVERNANCE

✓ Improved r eputation

✓ Fewer fines, penalties, lawsuits

✓ Decreased conflicts and fraud

✓ Enhanced p erformance

✓ Access to capital

✓ Better standards

✓ Better talent utilization

Corporate Culture Companies should promote a spirit of integrity that goes beyond compliance.

Incentives Individuals within the company tend to act according to incentives provided to them in terms of rewards and the performance evaluation process.

Opportunities Effective corporate governance, internal controls, and enterprise risk management can reduce the opportunity for unethical conduct.

Choices Individuals, in general, are given the freedom to make choices and usually choose those that will maximize their well-being.

Some hints for effective (internal) Corporate Governance

SOME EXAMPLES OF UNETHICAL

ISSUES IN BUSINESS

• Bribery

Accepting bribe create a conflict of interest between the person

receiving bribe and his organization. And this conflict would result

in unethical practices.

• Coercion

It is forcing a person to do things which are against his personal

believes. E.g. blocking a promotion, loss of job or blackmailing.

• Insider Trading

(Insider trading is misuse of official position.)

Here the employee leaks out certain confidential data to outsiders or

other insiders which effect the reputation and performance of

company.

• Conflicts of Interest

Conflict of interest when private interests are important for employees

which are against the desire of employer.

• Unfair Discrimination

Unfair treatment or given privileges to persons on the base of race,

age, sex, nationality or religion. It is failures to treat all persons

equally.

• Political Donations and Gifts

Gifts, donations or contribution to political leaders or parties to get

any unconditional act done e.g. sanctioning of any special contract,

issue of licenses etc.

• Presentation of false returns of income and statements

It is to prepare false income returns and statements of accounts for

evasion of tax and getting various govt. benefits and incentives.

• Accumulation of profits by illegal

Sometimes business undertakes various unconstitutional and

unethical and activities to maximize its profits (e.g., black

marketing, speculation etc.)

MAIN CAUSES OF UNETHICAL

CONDUCT IN A COMPANY

1. Pressure to meet unrealistic objectives and deadlines:

According to a recent survey, the pressure from management or from the

Board to meet unrealistic business objectives is the leading factor that

causes unethical behavior.

2. Increase in acute competition:

Competition is increasingat national and internationallevel. Every business

aims to be the highest profit maker.

To achieve this goal, organization/individuals are urged to act dishonestly

and unethically.

3. Economic Greed:

People have a desire to live a life full of comforts and luxuries. Some

people follow unethical means to earn more money.

Personal financial worries become a cause for unethical practices

such as accepting a bribe.

4. Lack of Management Support or Poor Leadership:

- Leader is responsible for motivating his staff.

-If the leader does not encourage his subordinates to be ethical then

there are higher chances of unethical conduct

-If the leader himself is involved in unethical activities, his

employees may do the same.

5. Pressure to earn profit:

- Shareholders expect larger returns.

- Employees hope for higher salary and benefits

- Directors expect higher remuneration

-Thus there is an increasing pressure to maximize profit to cope

with enlarged requirements.

6. Information of unethical acts through media:

The information given by media provides ideas to

inexperienced businessman for doing unethical activities.

12 Ethical Principles for

Business Executives

26

1. HONESTY. Ethical executives are honest and truthful in all their dealings and they do not deliberately mislead or deceive others by misrepresentations, overstatements, partial truths, selective omissions, or any other means.

2. INTEGRITY. Ethical executives demonstrate personal integrity and the courage of their convictions by doing what they think is right even when there is great pressure to do otherwise; they are principled, honorable and upright; they will fight for their beliefs. They will not sacrifice principle for expediency, be hypocritical, or unscrupulous.

3. PROMISE-KEEPING & TRUSTWORTHINESS. Ethical executives are worthy of trust. They are candid and forthcoming in supplying relevant information and correcting misapprehensions of fact, and they make every reasonable effort to fulfill the letter and spirit of their promises and commitments. They do not interpret agreements in an unreasonably technical or legalistic manner in order to rationalize non-compliance or create justifications for escaping their commitments.

4. LOYALTY. Ethical executives are worthy of trust, demonstrate fidelity and loyalty to persons and institutions by friendship in adversity, support and devotion to duty; they do not use or disclose information learned in confidence for personal advantage. They safeguard the ability to make independent professional judgments by scrupulously avoiding undue influences and conflicts of interest. They are loyal to their companies and colleagues and if they decide to accept other employment, they provide reasonable notice, respect the proprietary information of their former employer, and refuse to engage in any activities that take undue advantage of their previous positions.

5. FAIRNESS. Ethical executives and fair and just in all dealings; they do not exercise power arbitrarily, and do not use overreaching nor indecent means to gain or maintain any advantage nor take undue advantage of another’s mistakes or difficulties. Fair persons manifest a commitment to justice, the equal treatment of individuals, tolerance for and acceptance of diversity, the they are open-minded; they are willing to admit they are wrong and, where appropriate, change their positions and beliefs.

6. CONCERN FOR OTHERS. Ethical executives are caring, compassionate, benevolent and kind; they like the Golden Rule, help those in need, and seek to accomplish their business objectives in a manner that causes the least harm and the greatest positive good.

7. RESPECT FOR OTHERS. Ethical executives demonstrate respect for the human dignity, autonomy, privacy, rights, and interests of all those who have a stake in their decisions; they are courteous and treat all people with equal respect and dignity regardless of sex, race or national origin.

8. LAW ABIDING. Ethical executives abide by laws, rules and regulations relating to their business activities.

9. COMMITMENT TO EXCELLENCE. Ethical executives pursue excellence in performing their duties, are well informed and prepared, and constantly endeavor to increase their proficiency in all areas of responsibility.

10. LEADERSHIP. Ethical executives are conscious of the responsibilities and opportunities of their position of leadership and seek to be positive ethical role models by their own conduct and by helping to create an environment in which principled reasoning and ethical decision making are highly prized.

11. REPUTATION AND MORALE. Ethical executives seek to protect and build the company’s good reputation and the morale of its employees by engaging in no conduct that might undermine respect and by taking whatever actions are necessary to correct or prevent inappropriate conduct of others.

12. ACCOUNTABILITY. Ethical executives acknowledge and accept personal accountability for the ethical quality of their decisions and omissions to themselves, their colleagues, their companies, and their communities.

6 Pillars of Business Ethics

Trustworthiness – Honest in conduct (not stealing or cheating), Integrity, Reliability (promise-

keeping) and Loyalty

Safeguard public confidence in the integrity of the organization by displaying honesty in all

dealings and avoiding conduct that might create the appearance of impropriety. Go beyond

what is legally required to permit public scrutiny of your activities.

Respect – Civility (courtesy and decency), Autonomy and Tolerance

Treat others with dignity – the way you would like to be treated. Be civil, courteous and decent

with all employees, customers and business partners.

Responsibility – Accountability, pursuit of excellence (diligence and perseverance) and self-

restraint. Conduct business efficiently and honorably in a manner that permits employees,

suppliers, vendors, customers and members of the local community to make informed

judgments and hold the company accountable.

Fairness – Impartiality and Equity

Seek to be impartial; employ independent objective judgment on merit, free from conflicts of

interest – both real and apparent. Compensate all employees equitably; minimize wage

disparities.

Caring – Charity and Compassion

Demonstrate a genuine sense of compassion and concern for the welfare of others – inside and

outside the company walls. Don’t allow tax advantages to dictate charitable contributions from

the company. These are maneuvers, not contributions.

Citizenship – Volunteerism (doing your share), Environmental protection and Law abidance

Honor and respect the principles and spirit of democracy and set a positive example by

observing the letter and spirit of laws. Demonstrate a commitment to the environment and to

social responsibility that goes beyond legal requirements. 31

How to empower Ethics at an

organizational level?

32

Treating employees equitably enables substantial organizational benefits while avoiding unethical operations and the corresponding consequences.

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?

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.

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.

Implications of Fairness

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

are being 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.

The transparency that occurs as a result of open communication protects against potential

abuses of power and makes for a safer environment overall.

Open Communication of Decisions

All organizations, regardless of their mission (e.g., profit oriented, nonprofit) and size (large vs.

small), should establish an “Organizational Ethical Culture.” that means:

• Organization, which is defined as a group of individuals or entities bound to achieve a

shared goal;

• Ethics, which is honorable behavior conforming to the norm of the group;

• Culture, which is a pattern of shared beliefs adopted by the group in dealing with its

internal and external affairs.

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.

Codes of Ethics

How to empower Ethics at an individual

level?

• 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)

• 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).

Structure

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.

Motivation

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.

Professionalism

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 can exist even if there are no improper acts that result from it. One way to understand this is to use the term “conflict of roles”.

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.

About the Conflicts of Interest

Ethical issues may vary from one organization to another according to the factors influencing the ethical behavior:

▪ conflicts of interest,

▪ quality control issues,

▪ discrimination in hiring and promotion,

▪ misuse of proprietary information,

▪ abuse of company expense accounts,

▪ misuse of company assets,

▪ drug and alcohol abuse,

▪ environmental pollution, environmental destruction,

▪ etc.

Examples of internal Ethical Issues

• Should firms use child labour?

• Is animal testing needed in products and ingredients?

• What wages should firms pay to poor countries?

• To what extent should firms seek to be environmentally friendly?

• Should firms get involved in certain activities (e.g., making weapons)?

• Should a firm relocate to a country paying lower level of wages?

• Should a firm release a life-saving drug after limited testing?

• Should advertising aimed at children be restrained?

Common ethical issues in business running:

✓ Sense of employee responsibility.

✓ Freedom to raise concerns without fear of retaliation.

✓ Managers modeling ethical behavior and expressing the importance of

integrity.

✓ An understanding by leadership of the pressure points that drive unethical

behavior.

✓ Processes to find and fix these areas of pressure.

What are the key attributes of an ethical (business) culture?

✓ Comply with a written code of business conduct.

✓ Provide sufficient training to all personnel within their organization regarding personal responsibility

under the code.

✓ Encourage internal reporting of violations of the code with the promise of no retaliation for such

reporting.

✓ Self-govern their activities by implementing controls to monitor compliance with all applicable laws and

regulations.

✓ Share their best practices through participation in an annual forum.

✓ Be accountable to the public, particularly through the completion of an annual questionnaire.

What are the success principles for business ethics

and ethical conduct?

Case study:

A secretary who has worked for your corporation for fifteen years is involved in a car accident in which she

permanently loses the use of her right hand. Thus, she can no longer effectively type, file, or perform

many of the other functions that she previously had performed and that are included in her job description.

Your corporation has a very tight budget and does not have sufficient funds to pay for an additional

secretary without reallocating budget items. The injured secretary has been very loyal to your corporation,

and you have been very satisfied with her work and dedication. She wants to stay at her job.

Moreover, she does not believe that she could find other employment at this time.

Should your corporation fire her, lay her off with compensation, or find a way to retain her? In resolving

this dilemma, apply:

– Utilitarianism

– The Rights Model

– Your own personal opinion

When resolving Ethical Dilemmas:

• Step One: Analyze the consequences.

– Consider short vs. long run

– Consider benefit vs. harm

• Step Two: Analyze the actions.

– Are they fair, equal, honest, respectful?

• Step Three: Make a decision.

– Can you live with the outcome?

Questions that help in resolving Ethical Dilemmas:

• What are the facts?

• What can you guess about the facts you don’t know?

• What do the facts mean?

• What does the problem look like through the eyes of the people involved?

• What will happen if you choose one thing rather than another?

• What do your feelings tell you?

• What will you think of yourself if you decide one thing or another?

• Can you explain and justify your decision to others?