Sophie just completed a sales training course with one of the firm’s most productive sales representatives, Emma. At the end of the first week, Sophie and Emma sat in a motel room filling out their expense vouchers for the week. Sophie casually remarked to Emma that the training course stressed the importance of accurately filling out expense vouchers.

Emma replied, “I’m glad you brought that up, Sophie. The company expense vouchers don’t list the categories we need. I tried many times to explain to the accountants that there are more expenses than they have boxes for. The biggest complaint we, the salespeople, have is that there is no place to enter expenses for tipping waitresses, waiters, cab drivers, bell hops, airport baggage handlers, and the like. Even the government assumes tipping and taxes them as if they were getting an 18 percent tip. That’s how service people actually survive on the lousy pay they get from their bosses. I tell you, it is embarrassing not to tip. One time I was at the airport and the skycap took my bags from me, so I didn’t have the hassle of checking them. He did all the paperwork and after he was through, I said thank you. He looked at me in disbelief because he knew I was in sales. It took me a week to get that bag back.”

“After that incident I went to the accounting department, and every week for five months I told them they needed to change the forms. I showed them the approximate amount the average salesperson pays in tips per week. Some of them were shocked at the amount. But would they change it or at least talk to the supervisor? No! So I went directly to him, and do you know what he said to me?”

“No, what?” asked Sophie.

“He told me that this is the way it has always been done, and it would stay that way. He also told me if I tried to go above him on this, I’d be looking for another job. I can’t chance that now, especially in this economy. Then he had the nerve to tell me that salespeople are paid too much, and that’s why we could eat the added expenses. We’re the only ones who actually generate revenue and he tells me that I’m overpaid!”

“So what did you do?” inquired Sophie.

“I do what my supervisor told me years ago. I pad my account each week. For me, I tip 20 percent, so I make sure I write down when I tip and add that to my overall expense report.”

“But that goes against company policy. Besides, how do you do it?” asked Sophie.

“It’s easy. Every cab driver will give you blank receipts for cab fares. I usually put the added expenses there. We all do it,” said Emma. “I don’t use Uber or Lyft even though it is cheaper on business trips because there is an electronic record of the fare. As long as everyone cooperates, the vice president of sales doesn’t question the expense vouchers. I imagine she even did it when she was a lowly salesperson.”

“What if people don’t go along with this arrangement?” asked Sophie.

“In the past, we have had some who reported it like corporate wants us to. I remember there was a person who didn’t report the same amounts as the coworker traveling with her. Several months went by and the accountants came in, and she and all the salespeople that traveled together were investigated. After several months the one who ratted out the others was fired or quit, I can’t remember. I do know she never worked in our industry again. Things like that get around. It’s a small world for good salespeople, and everyone knows everyone.”

“What happened to the other salespeople who were investigated?” Sophie asked.

“There were a lot of memos and even a 30-minute video as to the proper way to record expenses. All of them had conversations with the vice president, but no one was fired.”

“No one was fired even though it went against policy?” Sophie asked Emma.

“At the time, my conversation with the vice president went basically this way. She told me that corporate was not going to change the forms, and she acknowledged it was not fair or equitable to the salespeople. She hated the head accountant because he didn’t want to accept the reality of a salesperson’s life in the field. That was it. I left the office and as I walked past the Troll’s office—that’s what we call the head accountant—he just smiled at me.”

This was Sophie’s first real job out of school and Emma was her mentor. What should Sophie report on her expense report?

Questions | Exercises

1. Identify the issues Sophie has to resolve.

2. Discuss the alternatives for Sophie.

3. What should Sophie do if company policy appears to conflict with the firm’s corporate culture?

The ability to anticipate and deal with business ethics issues and dilemmas has become a significant priority in the twenty-first century. In recent years, a number of well-publicized scandals resulted in public outrage about deception, fraud, and distrust in business and a subsequent demand for improved business ethics, greater corporate responsibility, and laws to protect the public. The publicity and debate surrounding highly publicized legal and ethical lapses at well-known firms highlight the need for businesses to integrate ethics and responsibility into all business decisions. On the other hand, most businesses have a few major ethical lapses and are rarely recognized in the mass media for their good conduct. Companies doing business based on responsible and ethical decisions do not generate media interest. However, organizations need to develop an ethical culture and deal with instances of minor lapses in conduct.

Highly visible business ethics issues influence the public’s attitudes toward business and destroy trust. Ethically charged decisions are a part of everyday life for those who work in organizations at all levels. Business ethics is not just an isolated personal issue; codes, rules, and informal communications for responsible conduct are embedded in an organization’s operations. This means ethical or unethical conduct is the province of everyone who works in an organization, from the lowest level employee to the CEO.

Making good business ethical decisions are just as important to business success as mastering management, marketing, finance, and accounting. While education and training emphasize functional areas of business, business ethics is often viewed as easy to master, something that happens with little effort. You will hear the suggestion that business ethics is just doing what is right. All you have to do is remember your values and stick to them. The exact opposite is the case. Decisions with an ethical component are an everyday occurrence requiring people to identify issues and make quick decisions. Ethical behavior in business requires understanding and identifying issues, areas of risk, and approaches to making choices in an organizational environment. On the other hand, people can act unethically simply by failing to identify a situation that has an ethical issue. Ethical blindness results from individuals who fail to sense the nature and complexity of their decisions.

Some approaches to business ethics look only at the philosophical backgrounds of individuals and the social consequences of decisions. This approach fails to address the complex organizational environment of businesses and pragmatic business concerns. By contrast, our approach is managerial and incorporates real-world decisions that impact the organization and stakeholders. Our book will help you better understand how ethics is important in the business world.

It is important to learn how to make decisions in the internal environment of an organization to achieve personal and organizational goals. But business does not exist in a vacuum. As stated, decisions in business have implications for investors, employees, customers, suppliers, and society. Ethical decisions must take these stakeholders into account, for unethical conduct can negatively affect people, companies, industries, and society as a whole. Our approach focuses on the practical consequences of decisions and on positive outcomes that have the potential to contribute to individuals, business, and society at large. The field of business ethics deals with questions about whether specific conduct and business practices are acceptable. For example, should a salesperson omit facts about a product’s poor safety record in a sales presentation to a client? Should accountants report inaccuracies they discover in an audit of a client, knowing the auditing company will probably be fired by the client for doing so? Should an automobile tire manufacturer intentionally conceal safety concerns to avoid a massive and costly tire recall? Regardless of their legality, others will certainly judge the actions in such situations as right or wrong, ethical or unethical. By its very nature, the field of business ethics is controversial, and there is no universally accepted approach for resolving its dilemmas. All organizations have to deal with misconduct, but some highly visible misconduct creates damaging publicity for firms. Wells Fargo experienced a loss of confidence when its sales department opened new accounts for clients without their knowledge. The opportunity for the sales department to manipulate clients was created by an unethical culture that top managers supported. The result was loss of trust and closed accounts as well as loss of many potential new clients.

Before we get started, it is important to state our approach to business ethics. First, we do not moralize by stating what is right or wrong in a specific situation, although we offer background on normative guidelines for appropriate conduct. Second, although we provide an overview of group and individual decision making processes, we do not prescribe one approach or process as the best or most ethical. However, we provide many examples of successful ethical decision making. Third, by itself, this book will not make you more ethical, nor will it tell you how to judge the ethical behavior of others. Rather, its goal is to help you understand, use, and improve your current values and convictions when making business decisions so that you think about the effects of those decisions on business and society. Our approach will help you understand what businesses are doing to improve their ethical conduct. To this end, we aim to help you learn to recognize and resolve ethical issues within business organizations. As a manager, you will be responsible for your decisions and the conduct of the employees you supervise. For this reason, we provide a chapter on ethical leadership. The framework we developed focuses on how organizational decisions are made and on ways companies can improve their ethical conduct. This process is more complex than many think. People who believe they know how to make the “right” decision usually come away with more uncertainty about their own decision skills after learning about the complexity of ethical decision making. This is a normal occurrence, and our approach will help you evaluate your own values as well as those of others. It will also help you to understand the nature of business ethics and incentives found in the workplace that change the way you make decisions in business versus at home.

In this chapter, we first develop a definition of business ethics and discuss why it has become an important topic in business education. We also discuss why studying business ethics can be beneficial. Next, we examine the evolution of business ethics in North America. Then we explore the performance benefits of ethical decision making for businesses. Finally, we provide a brief overview of the framework we use for examining business ethics in this text.

1-1Business Ethics Defined

To understand business ethics, you must first recognize that most people do not have specific definitions they use to define ethics-related issues. The terms morals, principles, values, and ethics are often used interchangeably, and you will find this is true in companies as well. Consequently, there is much confusion regarding this topic. To help you understand these differences, we discuss these terms.

For our purposes, morals refer to a person’s personal philosophies about what is right or wrong. The important point is that when one speaks of morals, it is personal or singular. Morals, your philosophies or sets of values of right and wrong, relate to you and you alone. You may use your personal moral convictions in making ethical decisions in any context. Business ethics comprises organizational principles, values, and norms that may originate from individuals, organizational statements, or from the legal system that primarily guide individual and group behavior in business. Principles are specific and pervasive boundaries for behavior that should not be violated. Principles often become the basis for rules. Some examples of principles could include human rights, freedom of speech, and the fundamentals of justice. Values are enduring beliefs and ideals that are socially enforced. Several desirable or ethical values for business today are teamwork, trust, and integrity. Such values are often based on organizational or industry best practices. Investors, employees, customers, interest groups, the legal system, and the community often determine whether a specific action or standard is ethical or unethical. Although these groups influence the determination of what is ethical or unethical for business, they also can be at odds with one another. Even though this is the reality of business and such groups may not necessarily be right, their judgments influence society’s acceptance or rejection of business practices.

Ethics is defined as behavior or decisions made within a groups’ values. In our case, we are discussing decisions made in business by groups of people that represent the business organization. One can have business ethics such as health care, accounting, marketing, management, or financial ethics. But one can also have engineering, architectural, or publishing ethics as related to different disciplines or associations. The important concept in business ethics is that right and wrong behavior is defined by the group, which might be a company or an industry. Because the Supreme Court defined companies as having limited individual rights, it is logical such groups have an identity that includes core values. This is known as being part of a corporate culture. Within this culture there are rules and regulations—both written and unwritten—that determine what decisions employees consider right or wrong as it relates to the firm. Such evaluations are judgments by the organization and are defined as its ethics (or, in this case, their business ethics). One difference between an ordinary decision and an ethical one lies in “the point where the accepted rules no longer serve, and the decision maker is faced with the responsibility for weighing values and reaching a judgment in a situation which is not quite the same as any he or she has faced before.” Another difference relates to the amount of emphasis decision makers place on their own values and accepted practices within their company. Consequently, values and judgments play a critical role when we make ethical decisions.

Building on these definitions, we begin to develop a concept of business ethics. Most people agree that businesses should hire individuals with sound moral principles. However, some special aspects must be considered when applying ethics to business. First, to survive and contribute to society, businesses must earn a profit. There is no conflict or trade-offs between profits and business ethics. For instance, Google, Texas Instruments, and Starbucks are highly profitable companies that have earned a reputation for ethical conduct. Second, to be successful, businesses must address the needs and desires of stakeholders. The good news is that the world’s most ethical companies often have superior stock performance. To address these unique aspects of the business world, society has developed rules—both legal and implicit—to guide businesses in their efforts to earn profits in ways that help individuals or society and contribute to social and economic well-being.

1-2Why Study Business Ethics?

1-2aA Crisis in Business Ethics

Business ethics has become a major concern. The Ethics Resource Center (ERC) conducts the Ethics & Compliance Initiative Global Business Ethics Survey (GBES) that measures the risk and promotion of workplace integrity. Sample sizes average 1,000 employees per country and gather reliable data on key ethics and compliance outcomes to help identify and better understand the ethics issues that are important to employees. The GBES measures workplace integrity as the pressure to compromise organizational standards, observed misconduct, reporting of misconduct when observed, and retaliation against reports. Table 1-1 provides an overview of observed misconduct in the United States. While observed misconduct was 30 percent in the United States, it was 33 percent globally. Globally, 73 percent of employees that felt pressure also witnessed misconduct.

Table 1-1

Observed Misconduct in the U.S. Workforce

Observed misconduct	30%
Abusive behavior	22%
Lying to stakeholders	22%
Conflict of interest	19%
Pressure to compromise standards	22%
Report observed misconduct	76%
Experience retaliation for reporting	53%

Source: Ethics and Compliance Initiative, 2016 Global Business Ethics Survey™: Measuring Risk and Promoting Workplace Integrity (Arlington, VA: Ethics and Compliance Initiative, 2016), 43.

Business ethics decisions and activities have come under greater scrutiny by many different stakeholders, including consumers, employees, investors, government regulators, and special interest groups. Figure 1-1 shows the percentage of global respondents who say they trust a variety of businesses in various industries. Financial services have some of the lowest ratings, indicating that the financial sector has not been able to restore its reputation since the most recent recession. There is no doubt negative publicity associated with major misconduct lowered the public’s trust in certain business sectors. Decreased trust leads to a reduction in customer satisfaction and customer loyalty, which in turn can negatively impact the firm or industry.

Figure 1-1Global Trust in Industry Sectors

The bar graph describes the global trust of various industries in percentage. The name of the industry and the corresponding global trust percentage are as follows. Technology, 74. Food and Beverage, 64. Consumer Packaged Goods, 61. Automotive, 60. Telecommunications, 60. Energy, 58. Pharmaceuticals, 53. Financial Services, 51.

Source: Edelman, 2016 Edelman Trust Barometer, http://www.edelman.com/insights/intellectual-property/2016-edelman-trust-barometer/executive-summary/ (accessed April 9, 2017).

1-2bSpecific Issues

There are a number of ethical issues that must be addressed to prevent misconduct. Misuse of company resources, abusive behavior, harassment, accounting fraud, conflicts of interest, defective products, bribery, product knockoffs, and employee theft are all problems cited as potential risk areas. Chinese e-commerce giant Alibaba, which trades on the New York Stock Exchange, was reprimanded by Chinese government authorities for ignoring the sales of knockoff products through Taobao, its biggest e-commerce platform. Walmart spent over $800 million in legal fees defending itself against allegations of bribery in Mexico.

General ethics plays an important role in the public sector as well. In government, several politicians and high-ranking officials have experienced significant negative publicity, and some resigned in disgrace over ethical indiscretions. South Korea’s president, Park Geun-hye, was removed from office over a bribery scandal. The heir to the Samsung Group was found to have engaged in bribery based on an investigation into bribery and embezzlement charges. There was a “donation” of $25 million to the National Pension Fund at the time of a Samsung merger. This case heightens the awareness of the political risks associated with bribery. Such political scandals demonstrate that political ethical behavior must be proactively practiced at all levels of public service.

Every organization has the potential for unethical behavior. For instance, the U.S. Defense Secretary ordered a renewed focus on military ethics after cheating scandals occurred in different branches of the military. Air force officers at the Malmstrom Air Force Base in Montana were suspended after widespread cheating on monthly proficiency tests on operating warheads. Similarly, the U.S. Navy was criticized when sailors cheated on qualification exams for becoming nuclear reactor instructors. The Defense Secretary at the time believed the issue might be systemic, requiring an ethics overhaul in the military.

Even sports ethics can be subject to lapses. The National Football League (NFL) was heavily criticized for initially giving Baltimore Ravens player Ray Rice a two-game suspension after videos surfaced of him abusing his girlfriend. The scandal caused outrage among consumers who felt the NFL did not take domestic abuse incidents seriously. The NFL apologized and changed its policies on domestic abuse, yet the NFL still continues to be inconsistent in punishment in player domestic abuse cases. This incident along with other sports scandals has led to calls for greater accountability among sports players and coaches.

Whether they are made in the realm of business, politics, science, or sports, most decisions are judged as right or wrong, ethical or unethical. Regardless of what an individual believes about a particular action, if society judges it to be unethical or wrong, new legislation usually follows. Whether correct or not, that judgment directly affects a company’s ability to achieve its business goals. You should be aware that the public is more tolerant of questionable consumer practices than of similar business practices. Double standards are at least partly due to differences in wealth and the success between businesses and consumers. The more successful a company, the more the public is critical when misconduct occurs. For this reason alone, it is important to understand business ethics and recognize ethical issues.

1-2cThe Reasons for Studying Business Ethics

Studying business ethics is valuable for several reasons. Business ethics is more than an extension of an individual’s own personal values. Many people believe if a company hires good people with strong values, then it will be a “good citizen” organization. But as we show throughout this text, an individual’s personal moral values are only one factor in the ethical decision making process. True, moral values can be applied to a variety of situations in life, and some people do not distinguish everyday ethical issues and dilemmas from business ones. Our concern, however, is with the application of principles, values, and standards in the business context. Many important issues are not related to a business context, although they remain complex moral dilemmas in a person’s own life. For example, although abortion and human cloning are moral issues, they are not an issue in most business organizations.

Professionals in any field, including business, must deal with individuals’ personal moral dilemmas because such dilemmas affect everyone’s ability to function on the job. A moral dilemma is defined as a situation where the person is faced with multiple choices, all of which are undesirable as defined by the person. A value dilemma is the same, only that the individual’s beliefs are grounded in societal norms. Normally, a business does not dictate a person’s morals. Such policies would be illegal. Only when a person’s morals influence his or her performance on the job does it involve a dimension within business ethics.

Just being a good person and having sound personal values may not be sufficient to handle the ethical issues that arise in a business organization. Although truthfulness, honesty, fairness, and openness are often assumed to be self-evident and accepted, business-strategy decisions involve complex and detailed discussions. For example, there is considerable debate over what constitutes antitrust, deceptive advertising, and violations of the Foreign Corrupt Practices Act that defines bribery in global business. A high level of personal moral development may not prevent an individual from violating the law in a complicated organizational context where even experienced lawyers debate the exact meaning of the law. For instance, the National Labor Relations Board ruled that employees have the right to use company email systems to discuss working conditions and unionization as long as it is not on company time. Employer groups claim that employees have plenty of options for discussing these topics and maintain that it will be hard to ensure employees are not using company computer servers for these purposes during work hours. The right of employees versus employers is more controversial and will continue to need clarification from the courts.

Some approaches to business ethics assume ethics training is for people whose personal moral development is unacceptable, but that is not the case. Because organizations are culturally diverse and personal morals must be respected, ensuring collective agreement on organizational ethics (that is, codes reasonably capable of preventing misconduct) is as vital as any other effort an organization’s management may undertake. Failure to establish shared values and ethics codes will result in a wide range of conduct when faced with the same ethical issues.

Many people with limited business experience suddenly find themselves making decisions about product quality, advertising, pricing, sales techniques, hiring practices, and pollution control. The morals they learned from family, religion, and school may not provide specific guidelines for these complex business decisions. In other words, a person’s experiences and decisions at home, in school, and in the community may be quite different from his or her experiences and decisions at work. Many business ethics decisions are close calls. In addition, managerial responsibility and ethical leadership for the conduct of others requires knowledge of ethics and compliance processes and systems. Years of experience in a particular industry may be required to know what is acceptable. For example, when are advertising claims more exaggeration than truth? When does such exaggeration become unethical? Pet food manufacturer Blue Buffalo’s claims that its food contains no byproducts and is superior to competitors’ did not set well with Purina. Purina filed a lawsuit against Blue Buffalo claiming that an independent test detected byproducts in Blue Buffalo’s pet food. Blue Buffalo denied the allegations. While misleading advertising violates the law, puffery—or an exaggerated claim that customers should not take seriously—is considered acceptable. In this case, Blue Buffalo’s claims are clearly not puffery, which is why Purina challenged the company through a lawsuit.

Studying business ethics will help you begin to identify ethical issues when they arise and recognize the approaches available for resolving them. You will learn more about the ethical decision making process and about ways to promote ethical behavior within your organization. By studying business ethics, you may also begin to understand how to cope with conflicts between your own personal values and those of the organization in which you work. As stated earlier, if after reading this book you feel a little more unsettled about potential decisions in business, your decisions will be more ethical and you will have knowledge within this area.

1-3The Development of Business Ethics

The study of business ethics in North America has evolved through five distinct stages—

1. before 1960,

2. the 1960s,

3. the 1970s,

4. the 1980s, and

5. the 1990s—and continues to evolve in the twenty-first century (see Table 1-2).

Table 1-2

Timeline of Ethical and Socially Responsible Concerns

1960s	1970s	1980s	1990s	2000s
Environmental issues	Employee militancy	Bribes and illegal contracting practices	Sweatshops and unsafe working conditions in third-world countries	Cybercrime
Civil rights issues	Human rights issues	Influence peddling	Rising corporate liability for personal damages (for example, cigarette companies)	Financial misconduct
Increased employee–employer tension	Covering up rather than correcting issues	Deceptive advertising	Financial mismanagement and fraud	Global issues, product safety, bribery
Changing work ethic	Disadvantaged consumers	Financial fraud (for example, savings and loan scandal)	Organizational ethical misconduct	Sustainability
Rising drug use	Transparency issues			Intellectual property theft

Enlarge Table

Source: Adapted from Ethics & Compliance Initiative, “Business Ethics and Compliance Timeline,” https://www.ethics.org/resources/free-toolkit/ethics-timeline (accessed April 9, 2017).

1-3aBefore 1960: Ethics in Business

Before 1960, the United States endured several agonizing phases of questioning the concept of capitalism. In the 1920s, the progressive movement attempted to provide citizens with a “living wage,” defined as income sufficient for education, recreation, health, and retirement. Businesses were asked to check unwarranted price increases and any other practices that would hurt a family’s living wage. In the 1930s came the New Deal that specifically blamed business for the country’s economic woes. Business was asked to work more closely with the government to raise family income. By the 1950s, the New Deal evolved into President Harry S. Truman’s Fair Deal, a program that defined such matters as civil rights and environmental responsibility as ethical issues that businesses had to address. Government relationships, social issues, and economic fairness were major concerns in the first half of the twentieth century.

Until 1960, ethical issues related to business were often discussed within the domain of theology or philosophy or in the realm of legal and competitive relationships. Religious leaders raised questions about fair wages, labor practices, and the morality of capitalism. For example, Catholic social ethics, expressed in a series of papal encyclicals, included concern for morality in business, workers’ rights, and living wages; for humanistic values rather than materialistic ones; and for improving the conditions of the poor. The Protestant work ethic encouraged individuals to be frugal, to work hard, and to attain success in the capitalistic system. Such religious traditions provided a foundation for the future field of business ethics.

The first book on business ethics was published in 1937 by Frank Chapman Sharp and Philip G. Fox. The authors separated their book into four sections: fair service, fair treatment of competitors, fair price, and moral progress in the business world. This early textbook discusses ethical ideas based largely upon economic theories and moral philosophies. However, the section’s titles indicate the authors also take different stakeholders into account. Most notably, competitors and customers are the main stakeholders emphasized, but the text also identifies stockholders, employees, business partners such as suppliers, and government agencies. Although the theory of stakeholder orientation would not evolve for many more years, this earliest business ethics textbook demonstrates the necessity of the ethical treatment of different stakeholders.

1-3bThe 1960s: The Rise of Social Issues in Business

During the 1960s American society witnessed the development of an anti-business trend because many critics attacked the vested interests that controlled the economic and political aspects of society—the so-called military–industrial complex. The 1960s saw the decay of inner cities and the growth of ecological problems such as pollution and the disposal of toxic and nuclear wastes. This period also witnessed the rise of consumerism—activities undertaken by independent individuals, groups, and organizations to protect their rights as consumers. In 1962, President John E. Kennedy delivered a “Special Message on Protecting the Consumer Interest” that outlined four basic consumer rights: the right to safety, the right to be informed, the right to choose, and the right to be heard. These came to be known as the Consumers’ Bill of Rights .

The modern consumer movement is generally considered to have begun in 1965 with the publication of Ralph Nader’s Unsafe at Any Speed that criticized the auto industry as a whole, and General Motors Corporation (GM) in particular, for putting profit and style ahead of lives and safety. GM’s Corvair was the main target of Nader’s criticism. His consumer protection organization, popularly known as Nader’s Raiders, fought successfully for legislation requiring automobile makers to equip cars with safety belts, padded dashboards, stronger door latches, head restraints, shatterproof windshields, and collapsible steering columns. Consumer activists also helped secure passage of consumer protection laws such as the Wholesome Meat Act of 1967, the Radiation Control for Health and Safety Act of 1968, the Clean Water Act of 1972, and the Toxic Substance Act of 1976.

After Kennedy came President Lyndon B. Johnson and the “Great Society,” a series of programs that extended national capitalism and told the business community the U.S. government’s responsibility was to provide all citizens with some degree of economic stability, equality, and social justice. Activities that could destabilize the economy or discriminate against any class of citizens began to be viewed as politically unethical and unlawful.

1-3cThe 1970s: Business Ethics as an Emerging Field

Business ethics began to develop as a field of study in the 1970s. Theologians and philosophers laid the groundwork by suggesting certain moral principles could be applied to business activities. Using this foundation, business professors began to teach and write about corporate social responsibility , an organization’s obligation to maximize its positive impact on stakeholders and minimize its negative impact. Philosophers increased their involvement, applying ethical theory and philosophical analysis to structure the discipline of business ethics. Companies became more concerned with their public image, and as social demands grew, many businesses realized they needed to address ethical issues more directly. The Nixon administration’s Watergate scandal focused public interest on the importance of ethics in government. Conferences were held to discuss the social responsibilities and ethical issues of business. Centers dealing with issues of business ethics were established. Interdisciplinary meetings brought together business professors, theologians, philosophers, and businesspeople. President Jimmy Carter attempted to focus on personal and administrative efforts to uphold ethical principles in government. The Foreign Corrupt Practices Act was passed during his administration, making it illegal for U.S. businesses to bribe government officials of other countries. Today, this law is the highest priority of the U.S. Department of Justice.

By the end of the 1970s, a number of major ethical issues had emerged, including bribery, deceptive advertising, price collusion, product safety, and ecology. Business ethics became a common expression. Academic researchers sought to identify ethical issues and describe how businesspeople might choose to act in particular situations. However, only limited efforts were made to describe how the ethical decision making process worked and to identify the many variables that influence this process in organizations.

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1-3dThe 1980s: Business Ethics Reaches Maturity

In the 1980s, business academics and practitioners acknowledged business ethics as a field of study, and a growing and varied group of institutions with diverse interests promoted it. Centers for business ethics provided publications, courses, conferences, and seminars. R. Edward Freeman was among the first scholars to pioneer the concept of stakeholders as a foundational theory for business ethics decisions. Freeman defined stakeholders as “any group or individual who can affect or is affected by the achievement of the organizations objectives.” Freeman’s defense of stakeholder theory had a major impact on strategic management and corporations’ views of their responsibilities. Business ethics were also a prominent concern within leading companies such as General Electric, Hershey Foods, General Motors, IBM, Caterpillar, and S. C. Johnson & Son, Inc. Many of these firms established ethics and social policy committees to address ethical issues.

In the 1980s, the Defense Industry Initiative on Business Ethics and Conduct (DII) was developed to guide corporate support for ethical conduct. In 1986, 18 defense contractors drafted principles for guiding business ethics and conduct. The organization has since grown to nearly 50 members. This effort established a method for discussing best practices and working tactics to link organizational practice and policy to successful ethical compliance. The DII includes six principles. First, the DII supports codes of conduct and their widespread distribution. These codes of conduct must be understandable and cover their more substantive areas in detail. Second, member companies are expected to provide ethics training for their employees as well as continuous support between training periods. Third, defense contractors must create an open atmosphere in which employees feel comfortable reporting violations without fear of retribution. Fourth, companies need to perform extensive internal audits and develop effective internal reporting and voluntary disclosure plans. Fifth, the DII insists that member companies preserve the integrity of the defense industry. And sixth, member companies must adopt a philosophy of public accountability.

The 1980s ushered in the Reagan–Bush era, with the accompanying belief that self-regulation, rather than regulation by government, was in the public’s interest. Many tariffs and trade barriers were lifted and businesses merged and divested within an increasingly global atmosphere. Thus, while business schools were offering courses in business ethics, the rules of business were changing at a phenomenal rate because of less regulation. Corporations that once were nationally based began operating internationally and found themselves mired in value structures where accepted rules of business behavior no longer applied.

1-3eThe 1990s: Institutionalization of Business Ethics

The administration of President Bill Clinton continued to support self-regulation and free trade. However, it also took unprecedented government action to deal with health-related social issues such as teenage smoking. Its proposals included restricting cigarette advertising, banning cigarette vending machine sales, and ending the use of cigarette logos in connection with sports events. Clinton also appointed Arthur Levitt as chairman of the Securities and Exchange Commission in 1993. Levitt unsuccessfully pushed for many reforms that, if passed, could have prevented the accounting scandals exemplified by Enron and WorldCom in the early twenty-first century.

Federal Sentencing Guidelines for Organizations (FSGO), approved by Congress in November 1991, set the tone for organizational ethical compliance programs in the 1990s. The guidelines, which were based on the six principles of the DII, broke new ground by codifying into law incentives to reward organizations for taking action to prevent misconduct, such as developing effective internal legal and ethical compliance programs. Provisions in the guidelines mitigate penalties for businesses striving to root out misconduct and establish high ethical and legal standards. On the other hand, under FSGO, if a company lacks an effective ethical compliance program and its employees violate the law, it can incur severe penalties. The guidelines focus on firms taking action to prevent and detect business misconduct in cooperation with government regulation. At the heart of the FSGO is the carrot-and-stick approach—that is, by taking preventive action against misconduct, a company may avoid onerous penalties should a violation occur. A mechanical approach using legalistic logic will not suffice to avert serious penalties. The company must develop corporate values, enforce its own code of ethics, and strive to prevent misconduct. The law develops new amendments almost every year. We will provide more detail on the FSGO’s role in business ethics programs in Chapters 4 and 8.

1-3fThe Twenty-First Century of Business Ethics

Although business ethics appeared to become more institutionalized in the 1990s, new evidence emerged in the early 2000s that not all business executives and managers had fully embraced the public’s desire for high ethical standards. After George W. Bush became President in 2001, highly publicized corporate misconduct at Enron, WorldCom, Halliburton, and the accounting firm Arthur Andersen caused the government and the public to look for new ways to encourage ethical behavior. Accounting scandals, especially falsifying financial reports, became part of the culture of many companies. Firms outside the United States, such as Royal Ahold in the Netherlands and Parmalat in Italy, became major examples of global accounting fraud. Although the Bush administration tried to minimize government regulation, there appeared to be no alternative to developing more regulatory oversight of business.

Such abuses increased public and political demands to improve ethical standards in business. To address the loss of confidence in financial reporting and corporate ethics, in 2002 Congress passed the Sarbanes–Oxley Act , the most far-reaching change in organizational control and accounting regulations since the Securities and Exchange Act of 1934. The new law made securities fraud a criminal offense and stiffened penalties for corporate fraud. It also created an accounting oversight board that requires corporations to establish codes of ethics for financial reporting and to develop greater transparency in financial reports to investors and other interested parties. Additionally, the law requires top executives to sign off on their firms’ financial reports and risk fines and long prison sentences if they misrepresent their companies’ financial positions. The legislation further requires company executives to disclose stock sales immediately and prohibits companies from giving loans to top managers.

Amendments to the FSGO require that a business’s governing authority be well informed about its ethics program with respect to content, implementation, and effectiveness. This places the responsibility squarely on the shoulders of the firm’s leadership, usually the board of directors. The board is required to provide resources to oversee the discovery of risks and to design, implement, and modify approaches to deal with those risks.

The Sarbanes–Oxley Act and the FSGO institutionalized the need to discover and address ethical and legal risk. Top management and the board of directors of a corporation are accountable for discovering risk associated with ethical conduct. Such specific industries as the public sector, energy and chemicals, health care, insurance, and retail have to discover the unique risks associated with their operations and develop ethics programs to prevent ethical misconduct before it creates a crisis. Most firms are developing formal and informal mechanisms that affect interactive communication and transparency about issues associated with the risk of misconduct. Business leaders should consider the greatest danger to their organizations lies in not discovering any serious misconduct or illegal activities that may be lurking. Unfortunately, most managers do not view the risk of an ethical disaster as being as important as the risk associated with fires, natural disasters, or technology failure. In fact, ethical disasters can be significantly more damaging to a company’s reputation than risks managed through insurance and other methods. The great investor Warren Buffett stated it is impossible to eradicate all wrongdoing in a large organization and one can only hope the misconduct is small and is caught in time. Buffett’s fears were realized in 2008 when the financial system almost collapsed because of pervasive, systemic use of instruments such as credit default swaps, risky debt such as subprime lending, and corruption in major corporations.

In 2009, Barack Obama became president in the middle of a great recession caused by a meltdown in the global financial industry. Many firms, such as AIG, Lehman Brothers, Merrill Lynch, and Countrywide Financial, engaged in ethical misconduct in developing and selling high-risk financial products. President Obama led the passage of legislation to provide a stimulus for recovery. His legislation to improve health care and provide more protection for consumers focused on social concerns. Congress passed legislation regarding credit card accountability, improper payments related to federal agencies, fraud and waste, and food safety. The Dodd–Frank Wall Street Reform and Consumer Protection Act addressed some of the issues related to the financial crisis and recession. The Dodd–Frank Act was the most sweeping financial legislation since the Sarbanes–Oxley Act and possibly since laws put into effect during the Great Depression. It was designed to make the financial services industry more ethical and responsible. This complex law required regulators to create hundreds of rules to promote financial stability, improve accountability and transparency, and protect consumers from abusive financial practices.

In 2017, Donald Trump became the president based on promises to once again decrease regulation and eliminate environmental and financial regulations. Support for sustainability was questioned as the Keystone pipeline—that President Obama had blocked—was restored. On the other hand, economic prosperity was emphasized by promises to make trade fair and create more jobs. Lower taxes were supposed to improve the economy but decrease social services.

The basic assumptions of capitalism have been questioned as countries around the world work to stabilize markets and question those who manage the finances of individual corporations and nonprofits. The financial crisis caused many people to question government institutions that provide oversight and regulation. As societies work to create change for the better, they must address issues related to law, ethics, and the required level of compliance necessary for government and business to serve the public interest. Not since the Great Depression and President Franklin Delano Roosevelt has the United States seen such widespread government intervention and regulation—something most deem necessary but is nevertheless worrisome to free market capitalists.

Future ethical issues revolve around the acquisition and sales of information. Cloud computing has begun a new paradigm. Businesses must no longer develop strategies based on past practices; they begin with petabytes of information and look for relationships and correlations to discover the new rules of business. Big data deal with massive data files obtained from structured and unstructured databases. What once was thought of as intrusive is now accepted and promoted. Only recently have people begun to ask whether the information collected by business is acceptable. Companies are becoming more sophisticated in understanding their customers by the use of predictive analytic technologies. Such technologies as well as advances in consumer behavior research have reduced the consumer’s probability to choose independently. Businesses now know how to better manipulate at an elemental level.

Is it acceptable for a business to review your Facebook or other social networking services? When shopping, does the fact that Q codes and microchips give your information to businesses regarding where you are, what you are looking at, and what you have done in the last day (via cell phone tower triangulation) bother you? Should your nonprofessional life be subject to the ethics of the corporation when you are not at work? Finally, are you a citizen first and then an employee or an employee first and then a citizen? These are some of the business ethics issues in your future.

1-4Developing Organizational and Global Ethical Cultures

Compliance and ethics initiatives in organizations are designed to establish appropriate conduct and core values. Ethics and compliance officers are important in supporting ethical cultures and preventing misconduct. The ethical component of a corporate culture relates to the values, beliefs, and established and enforced patterns of conduct employees use to identify and respond to ethical issues. In our book, the term ethical culture is acceptable behavior as defined by the company and industry. Ethical culture is the component of corporate culture that captures the values and norms an organization defines and is compared to by its industry as appropriate conduct. The goal of an ethical culture is to minimize the need for enforced compliance of rules and maximize the use of principles that contribute to ethical reasoning in difficult or new situations. Ethical culture is positively related to workplace confrontation over ethics issues, reports to management of observed misconduct, and the presence of ethics hotlines. To develop better ethical corporate cultures, many businesses communicate core values to their employees by creating ethics programs and appointing ethics officers to oversee them. An ethical culture creates shared values and support for ethical decisions and is driven by the ethical leadership of top management.

On the other hand, corrupt organizational cultures support unethical behavior. These cultures have been identified as creating negative values and norms such as “the ends justify the means.” In these cultures, ethical employees may be punished for failure to engage in unethical activities. Regulators want firms to focus on their culture to avoid excessive risk taking and unethical behavior. There is a fundamental belief that an ethical culture will lead to good behavior.

Globally, businesses are working closely together to establish standards of acceptable behavior. We are already seeing collaborative efforts by a range of organizations to establish goals and mandate minimum levels of ethical behavior, from the European Union, the North American Free Trade Agreement (NAFTA), the Southern Common Market (MERCOSUR), and the World Trade Organization (WTO) to, more recently, the Council on Economic Priorities’ Social Accountability 8000 (SA 8000), the Ethical Trading Initiative, the U.S. Apparel Industry Partnership, and ISO 19600. ISO 19600 is a global compliance management standard that addresses risks, legal requirements, and stakeholder needs. Companies that choose to abide by ISO 19600 can use these standards to improve their approaches to compliance management, which can reassure stakeholders of their commitment toward ethics and compliance. Some companies refuse to do business with organizations that do not support and abide by these standards. Many companies demonstrate their commitment toward acceptable conduct by adopting globally recognized principles emphasizing human rights and social responsibility. For instance, the United Nations launched what is called the Global Compact, which is a set of 10 principles concerning human rights, labor, the environment, and anti-corruption. The purpose of the Global Compact is to create openness and alignment among business, government, society, labor, and the United Nations. Companies that adopt this code agree to integrate the 10 principles into their business practices, publish their progress toward these objectives on an annual basis, and partner with others to advance broader objectives of the UN. These 10 principles are covered in more detail in Chapter 10.

1-5The Benefits of Business Ethics

The field of business ethics continues to change rapidly as more firms recognize the benefits of improving ethical conduct and the link between business ethics and financial performance. Figure 1-2 provides an overview of the relationship between business ethics and organizational performance. Although we believe there are many practical benefits to being ethical, many businesspeople make decisions because they believe a particular course of action is simply the right thing to do as responsible members of society. NiSource, a distributor of natural gas, electricity, and water in the Midwest and Northeast United States, has earned a place in Ethisphere’s “World’s Most Ethical Companies” for three consecutive years. NiSource has adopted a strong code of business conduct that stresses how employees are all responsible for ethical conduct in the company. NiSource has four values—fairness, honesty, integrity, and trust—that it puts into action in what it calls the NiSource Way. It makes sure that every organization in its portfolio of businesses abides by these values, which has placed it among the Fortune 500. Among the rewards for being more ethical and socially responsible in business are increased efficiency in daily operations, greater employee commitment, increased investor willingness to entrust funds, improved customer trust and satisfaction, and better financial performance. The reputation of a company has a major effect on its relationships with employees, investors, customers, and many other parties.

Figure 1-2The Role of Organizational Ethics in Performance

The flowchart explains the role of organizational ethics in performance. The ethical culture in the organization brings about three factors: a, employee commitment and trust, b, investor loyalty and trust, c, customer satisfaction and trust. The three factors together contribute towards the profits earned by the organization.

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1-5aEthics Contributes to Employee Commitment

Employee commitment comes from workers who believe their future is tied to that of the organization and from a willingness to make personal sacrifices for the organization. The more a company is dedicated to taking care of its employees, the more likely the employees will take care of the organization. Issues that foster the development of an ethical culture for employees include the absence of abusive behavior, a safe work environment, competitive salaries, and the fulfillment of all contractual obligations toward employees. An ethics and compliance program can support values and appropriate conduct. Social programs improving the ethical culture range from work–family programs to stock ownership plans to community service. Home Depot associates, for example, participate in disaster-relief efforts after hurricanes and tornadoes, rebuilding roofs, repairing water damage, planting trees, and clearing roads in their communities. Because employees spend a considerable number of their waking hours at work, a commitment by an organization to goodwill and respect for its employees usually increases the employees’ loyalty to the organization and their support of its objectives. The consulting and engineering firm Burns & McDonnell has been nominated as one of Fortune Magazine’s “Best Companies to Work For” because of the way it values its employees. The company is completely employee-owned with what many consider to be the best company stock ownership plan in the United States.

It also offers workers a variety of unique benefits, including onsite health and fitness centers and charging stations for electric vehicles. Employees’ perceptions that their firm has an ethical culture lead to performance-enhancing outcomes within the organization. A corporate culture that integrates strong ethical values and positive business practices has been found to increase group creativity and job satisfaction and decrease turnover. For the sake of both productivity and teamwork, it is essential that employees both within and among departments throughout an organization share a common vision of trust. The influence of higher levels of trust is greatest on relationships within departments or work groups, but trust is a significant factor in relationships among departments as well. Programs that create a trustworthy work environment make individuals more willing to rely and act on the decisions of their coworkers. In such a work environment, employees can reasonably expect to be treated with full respect and consideration by their coworkers and superiors. Trusting relationships between upper management and managers and their subordinates contribute to greater decision making efficiencies. One survey found that when employees see values such as honesty, respect, and trust applied frequently in the workplace, they feel less pressure to compromise ethical standards, observe less misconduct, are more satisfied with their organizations overall, and feel more valued as employees.

The ethical culture of a company matters to employees. According to a report on employee loyalty and work practices, companies viewed as highly ethical by their employees were six times more likely to keep their workers. Also, employees who view their company as having a strong community involvement feel more loyal to their employers and positive about themselves.

1-5bEthics Contributes to Investor Loyalty

Ethical conduct results in shareholder loyalty and contributes to success that supports even broader social causes and concerns. Investors today are increasingly concerned about the ethics and social responsibility that creates the reputation of companies in which they invest, and various socially responsible mutual funds and asset management firms help investors purchase stock in ethical companies. Investors also recognize that an ethical culture provides a foundation for efficiency, productivity, and profits. Investors know, too, that negative publicity, lawsuits, and fines can lower stock prices, diminish customer loyalty, and threaten a company’s long-term viability. Many companies accused of misconduct experienced dramatic declines in the value of their stock when concerned investors divested. Warren Buffett and his company Berkshire Hathaway command significant respect from investors because of their track record of financial returns and the integrity of their organizations. Buffett says, “I want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper—to be read by their spouses, children and friends—with the reporting done by an informed and critical reporter.”

The demand for socially responsible investing is increasing. It is estimated that socially responsible investments in the United States have funds valued at more than $6 trillion. Social investing is becoming increasingly important to millennials born between 1980 and 2000, who view socially responsible behavior as more of a requirement than an option for companies. Investors look at the bottom line for profits or the potential for increased stock prices or dividends, and they also look for any potential flaws in the company’s performance, conduct, and financial reports. Therefore, gaining investors’ trust and confidence is vital to sustaining the financial stability of the firm.

1-5cEthics Contributes to Customer Satisfaction

It is generally accepted that customer satisfaction is one of the most important factors in a successful business strategy. Although a company continues to develop and adapt products to keep pace with customers’ changing desires and preferences, it must also develop long-term relationships with its customers and stakeholders. As mentioned earlier, high levels of perceived corporate misconduct decreases customer trust. On the other hand, companies viewed as socially responsible increase customer trust and satisfaction. Southwest Airlines has a reputation for its customer service and friendliness. When Southwest Airlines experienced problems with on-time performance due to operational changes, the company’s senior vice president of communications sent letters to the company’s most loyal customers explaining the situation and assuring them the airline was committed toward maintaining their loyalty. As a result of its strong customer focus, the company has been profitable for the past 40 years when most airlines have struggled.

For most businesses, both repeat purchases and an enduring relationship of mutual respect and cooperation with customers are essential for success. By focusing on customer satisfaction, a company continually deepens the customer’s dependence on the company, and as the customer’s confidence grows, the firm gains a better understanding of how to serve the customer so the relationship may endure. Successful businesses provide an opportunity for customer feedback that engages the customer in cooperative problem solving. As is often pointed out, a happy customer will come back, but disgruntled customers will tell others about their dissatisfaction with a company and discourage friends from dealing with it.

Trust is essential to a good long-term relationship between a business and consumers. The perceived ethicality of a firm is positively related to brand trust, emotional identification with the brand, and brand loyalty. A Nielsen survey revealed that 55 percent of global consumer respondents stated they would pay more for products from companies that give back to society in a socially responsible and sustainable manner. As social responsibility becomes more important for companies, corporate social responsibility may be viewed as a sign of good management and may, according to one study, indicate good financial performance. However, another study indicates the reverse may be true, and companies who have good financial performance are able to spend more money on social responsibility. As a highly successful company, Adobe invests heavily in community development and sustainability. It invests 1 percent of its pretax profits in the Adobe Foundation, which partners with teams of employees to use the funds to improve local communities. The company donates software to more than 15,000 nonprofits. It has also made significant strides in energy conservation, waste reduction, and green building, earning the company a spot on Newsweek’s list of the world’s greenest companies.

When an organization has a strong ethical environment, it usually focuses on the core value of placing customers’ interests first. However, putting customers first does not mean the interests of employees, investors, and local communities should be ignored. An ethical culture that focuses on customers incorporates the interests of all employees, suppliers, and other interested parties in decisions and actions. Employees working in an ethical environment support and contribute to the process of understanding customers’ demands and concerns.

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1-5dEthics Contributes to Profits

A company cannot nurture and develop an ethical culture unless it has achieved adequate financial performance in terms of profits. Businesses with greater resources—regardless of their staff size—have the means to be ethical and practice social responsibility while serving their customers, valuing their employees, and contributing to society. Ethical conduct toward customers builds a strong competitive position shown to positively affect business performance and product innovation. Some dimensions of ethical culture have been found to create innovativeness that is directly related to performance. Intuit adopted a strong customer focus with a goal to make software that customers could easily use. Strong customer initiatives help Intuit receive the feedback needed to release innovative products customers desire, including its flagship product TurboTax. As a result of its customer focus, Intuit has become a leading company in the personal and small business software industry. Despite this example of a positive company, it seems like every day business newspapers and magazines offer new examples of the consequences of business misconduct. It is worth noting, however, that most of these companies learned from their mistakes and recovered after they implemented programs to improve ethical and legal conduct.

Ample evidence shows being ethical pays off with better performance. Even the cost of equity and financing for firms that are socially responsible is less than for firms that do not engage stakeholders. Investors see more risk in firms without an ethical culture. As indicated earlier, companies perceived by their employees as having a high degree of honesty and integrity have a much higher average total return to shareholders than do companies perceived as having a low degree of honesty and integrity. The World’s Most Ethical Companies index was developed through methodology designed by a committee of leading attorneys, professors, and organization leaders. The companies in this index performed as well as—and often better than—companies on the Standard & Poor’s 500 index over 5- and 10-year periods. These results provide strong evidence that corporate concern for ethical conduct is becoming a part of strategic planning toward obtaining the outcome of higher profitability. Rather than being just a function of compliance, ethics is becoming an integral part of management’s efforts to achieve competitive advantage.

Debate Issue: Take a Stand

Does Being Ethical Result in Better Performance?

While research suggests ethical businesses have better performance, there is also an alternate view. Many businesspeople think ethics and social responsibility require resources that do not contribute to profits, and time spent in ethics training could be better used for other business activities. One viewpoint is that when companies push the edge, pay minor fines for misconduct, or are not caught in wrongdoing, they may end up being more profitable than companies with a strong ethical culture. Many financial companies became extremely profitable when taking high-risk opportunities with limited transparency about the nature of the complex products they sold. To gain competitive advantage, a firm needs to be able to reach markets and make sales. If a firm is too ethical, it might lose competitive advantages. On the other hand, Ethisphere’s World’s Most Ethical Companies index indicates ethical companies have better financial performance.

1. Ethical businesses are the most profitable.

2. The most ethical businesses are not the most profitable.

1-6Our Framework for Studying Business Ethics

We developed a framework for this text to help you understand how people make ethical decisions and deal with ethical issues. Table 1-3 summarizes each element in the framework and describes where each topic is discussed in this book.

Table 1-3

Our Framework for Studying Business Ethics

Chapter	Highlights
1. The Importance of Business Ethics	• Definitions
	• Reasons for studying business ethics
	• History
	• Benefits of business ethics
2. Stakeholder Relationships, Social Responsibility, and Corporate Governance	• Stakeholder relationships
	• Stakeholder influences in social responsibility
	• Corporate governance
3. Emerging Business Ethics Issues	• Recognizing an ethical issue
	• Honesty, fairness, and integrity
	• Ethical issues and dilemmas in business: abusive and disruptive behavior, lying, conflicts of interest, bribery, corporate intelligence, discrimination, sexual harassment, environmental issues, fraud, insider trading, intellectual property rights, and privacy
	• Determining an ethical issue in business
4. The Institutionalization of Business Ethics	• Mandatory requirements
	• Voluntary requirements
	• Core practices
	• Federal Sentencing Guidelines for Organizations
	• Sarbanes–Oxley Act
5. Ethical Decision Making	• Ethical issue intensity
	• Individual factors in decision making
	• Organizational factors in decision making
	• Opportunity in decision making
	• Business ethics evaluations and intentions
	• Normative considerations in ethical decision making
	• Role of institutions in normative decision making
	• Importance of principles and core values to ethical decision making
6. Individual Factors: Moral Philosophies and Values	• Moral philosophies, including teleological development philosophies and cognitive moral deontological, relativist, virtue ethics, and justice philosophies
	• Stages of cognitive moral development
7. Organizational Factors: The Role of Ethical Culture and Relationships	• Corporate culture
	• Interpersonal relationships
	• Whistle-blowing
	• Opportunity and conflict
8. Developing an Effective Ethics Program	• Ethics programs
	• Codes of ethics
	• Program responsibility
	• Communication of ethical standards
	• Systems to monitor and enforce ethical standards
	• Continuous improvement of ethics programs
9. Managing and Controlling Ethics Programs	• Implementation programs
	• Ethics audits
10. Globalization of Ethical Decision Making	• Global culture and cultural relations
	• Economic foundations of business ethics
	• Multinational corporations
	• Global cooperation
	• Global ethics issues
11. Ethical Leadership	• Requirements for ethical leadership
	• Managing ethical conflicts
	• Ethical leadership communication
	• Leader–follower relationships
12. Sustainability: Ethical and Social Responsibility Dimensions	• Sustainability and ethical decision making
	• Global environmental issues
	• Business response to sustainability issues
	• Strategic implementation of environmental responsibility

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In Part One, we provide an overview of business ethics. This chapter defines the term business ethics and explores the development and importance of this critical business area. In Chapter 2, we explore the role of various stakeholder groups in social responsibility and corporate governance.

Part Two focuses on ethical issues and the institutionalization of business ethics. In Chapter 3, we examine business issues that lead to ethical decision making in organizations. In Chapter 4, we look at the institutionalization of business ethics, including both mandatory and voluntary societal concerns.

In Part Three, we delineate the ethical decision making process and then look at both individual factors and organizational factors that influence decisions. Chapter 5 describes the ethical decision making process from an organizational perspective. Chapter 6 explores individual factors that may influence ethical decisions in business, including moral philosophies and cognitive moral development. Chapter 7 focuses on organizational dimensions including corporate culture, relationships, and conflicts.

In Part Four, we explore systems and processes associated with implementing business ethics into global strategic planning. Chapter 8 discusses the development of an effective ethics program. In Chapter 9, we examine issues related to implementing and auditing ethics programs. Chapter 10 considers ethical issues in a global context. Chapter 11 examines ethical leadership and its importance in creating an ethical corporate culture. Finally, Chapter 12 discusses the ethical and social responsibility considerations of sustainability.

We hope that this framework helps you develop a balanced understanding of the various perspectives and alternatives available to you when making ethical business decisions. Regardless of your own personal values, the more you know about how individuals make decisions, the better prepared you will be to cope with difficult ethical decisions. Such knowledge will help you improve and control the ethical decision making environment in which you work.

It is your job to make the final decision in business situations that affect you. Sometimes that decision may be ethical; sometimes it may be unethical. It is always easy to look back with hindsight and know what you should have done in a particular situation. At the time, however, the choices might not have seemed so clear. To give you practice making ethical decisions, Part Five of this book contains a number of cases. In addition, each chapter begins with a vignette, An Ethical Dilemma, and ends with a mini case, Resolving Ethical Business Challenges, that involves ethical problems. We hope these give you a better sense of the challenges of making ethical decisions in the business world.

Chapter Review

1-7aSummary

This chapter provided an overview of the field of business ethics and introduced the framework for the discussion of this subject. Business ethics comprises organizational principles, values, and norms that may originate from individuals, organizational statements, or the legal system that primarily guide individual and group behavior in business. Investors, employees, customers, special interest groups, the legal system, and the community often determine whether a specific action is right or wrong, ethical or unethical.

Studying business ethics is important for many reasons. Recent incidents of unethical activity in business underscore the widespread need for a better understanding of the factors that contribute to ethical and unethical decisions. Individuals’ personal moral philosophies and decision making experience may not be sufficient to guide them in the business world. Studying business ethics helps you begin to identify ethical issues and recognize the approaches available to resolve them.

The study of business ethics evolved through five distinct stages. Before 1960, business ethics issues were discussed primarily from a religious perspective. The 1960s saw the emergence of many social issues involving business and the concept of social conscience as well as a rise in consumerism, which culminated with Kennedy’s Consumers’ Bill of Rights. Business ethics began to develop as an independent field of study in the 1970s, with academics and practitioners exploring ethical issues and attempting to understand how individuals and organizations make ethical decisions. These experts began to teach and write about the idea of corporate social responsibility, an organization’s obligation to maximize its positive impact on stakeholders and minimize its negative impact. In the 1980s, centers of business ethics provided publications, courses, conferences, and seminars, and many companies established ethics committees and social policy committees. The Defense Industry Initiative on Business Ethics and Conduct was developed to guide corporate support for ethical conduct; its principles had a major impact on corporate ethics.

However, less government regulation and an increase in businesses with international operations raised new ethical issues. In the 1990s, government continued to support self-regulation. The FSGO sets the tone for organizational ethics programs by providing incentives for companies to take action to prevent organizational misconduct. The twenty-first century ushered in a new set of ethics scandals, suggesting many companies had not embraced the public’s desire for higher ethical standards. The Sarbanes–Oxley Act stiffened penalties for corporate fraud and established an accounting oversight board. The Dodd–Frank Wall Street Reform and Consumer Protection Act was later passed to reform the financial system. The current trend is away from legally based ethical initiatives in organizations and toward cultural initiatives that make ethics a part of core organizational values. The ethical component of a corporate culture relates to the values, beliefs, and established and enforced patterns of conduct employees use to identify and respond to ethical issues. The term ethical culture describes the component of corporate culture that captures the rules and principles an organization defines as appropriate conduct. Ethical culture can be viewed as the character of the decision making process employees use to determine whether their responses to ethical issues are right or wrong.

Research and anecdotes demonstrate building an ethical reputation among employees, customers, and the general public provides benefits that include increased efficiency in daily operations, greater employee commitment, increased investor willingness to entrust funds, improved customer trust and satisfaction, and better financial performance. The reputation of a company has a major effect on its relationships with employees, investors, customers, and many other parties and thus has the potential to affect its bottom line.

Finally, this text introduces a framework for studying business ethics. Each chapter addresses some aspect of business ethics and decision making within a business context. The major concerns are ethical issues in business, stakeholder relationships, social responsibility and corporate governance, emerging business ethics issues, the institutionalization of business ethics, understanding the ethical decision making process, moral philosophies and cognitive moral development, corporate culture, organizational relationships and conflicts, developing an effective ethics program, implementing and auditing the ethics program, global business ethics, ethical leadership, and sustainability.

Main content

Chapter Review

1-7bImportant Terms for Review

· morals

· business ethics

· principles

· values

· workplace integrity

· moral dilemma

· value dilemma

· Consumers’ Bill of Rights

· corporate social responsibility

· Defense Industry Initiative on Business Ethics and Conduct

· Federal Sentencing Guidelines for Organizations

· Sarbanes–Oxley Act

· Dodd–Frank Wall Street Reform and Consumer Protection Act

· ethical culture

· Global Compact

Chapter Review

1-7cResolving Ethical Business Challenges

Lael was just hired by Best East Motels into their manager training program and was excited about the potential benefits after her graduation from Florida State University. Working part-time and going to school full-time was the norm for her, but the Best East job replaced her two part-time jobs. With this new job, she would be the one to assign work times. Her luck continued when she met her mentor Oliver, who was the son of the owner. Best East Motels was a franchise motel chain in the United States. Owners bought into the chain with a $500,000 franchise fee and paid for the construction of the motel. In return for the fee, Best East gave each owner a comprehensive package of marketing, management, accounting, and financial materials to boost motel success rates to over 90 percent. In addition, Best East assisted each owner with groups of people that trained staff for every new job, from housekeeping to accounting. The new-hire training course for each type of employee was developed and based on the best practices within the industry. This particular motel had been in business for 10 years and was seen as successful.

As Lael went through the manager training program, everything she heard was great. It sounded like Best East was a career path she would want to pursue long-term. Six months into her job, however, Lael started to hear strange rumors. For example, on the night shift she found there was heavy employee turnover and most were females. Lael began to investigate by scheduling herself onto several night shifts. One night, as she chatted with one of the front desk employees, she discovered the girl planned on quitting. She was 17 and worked at this Best East motel for a year. “Why are you leaving?” asked Lael.

Her reply startled Lael. “I don’t want trouble, just my last paycheck, a good letter of recommendation, and that’s it.”

As Lael pressed her for more information, the 17-year-old opened up. She spoke about Oliver talking suggestively about her to other employees and how he made suggestive physical gestures when she was around. She told Lael about other female employees treated similarly, and this always occurred during night shifts when Oliver was on duty.

Digging a little deeper, Lael spoke to several former employees. Most were fairly young female employees. They told her essentially the same thing. For example, Oliver would routinely make suggestive comments to female employees. In one incident under Oliver’s watch, some male employees flirted with female employees, including undocumented workers. Oliver reportedly sat there with a smile. They also told her Oliver allowed customers at the motel to offer their room keys to female employees.

After a few weeks, Lael heard the same story from younger female employees and even some of the maids. Their responses to these situations were similar. They ranged from “Oliver told me if I was older he would ask me out” to “I don’t want to make a big deal out of this because it might appear I’m a tattle tale.” Another common excuse for not reporting was that Oliver assured them this was part of the motel business and was normal. Most employees were afraid to report on the boss’s son and put their jobs on the line.

Lael reviewed the section of the franchise employee handbook. It clearly stated sexual harassment of any kind would not be tolerated and should be reported immediately to the proper manager. Lael could tell from the manual the allegations against Oliver constituted sexual harassment. While the Best East Franchise Corporation had no ethics hotline, Lael thought this could be a legal issue.

She knew putting pressure on the female employees to report the behavior of the boss’s son was problematic. Lael also felt that going to Oliver personally about these allegations may not be a wise move. If the behavior was reported to the owner, it would become an official allegation and impact the motel’s reputation and image in the community, and she would be responsible for it. The things these women were saying had not personally happened to her yet.

Questions | Exercises

1. Why should Lael get involved in reporting if she has not experienced any of the allegations the other employees are making?

2. What are some of the characteristics of Best East’s ethical culture that would create the current dilemma for Lael?

3. What should Lael do to resolve her concerns?

Chapter Review

1-7dCheck Your EQ

Check your EQ, or Ethics Quotient, by completing the following. Assess your performance to evaluate your overall understanding of the chapter material.

1. Business ethics focuses mostly on personal ethical issues.

Answer

Yes

2. Business ethics deals with right or wrong behavior within a particular organization.

Answer

Yes

3. An ethical culture is based upon the norms and values of the company.

Answer

Yes

4. Business ethics contributes to investor loyalty.

Answer

Yes

5. The trend is away from cultural or ethically based initiatives to legal initiatives in organizations.

Answer

Yes

6. Investments in business ethics do not support the bottom line.

Answer

Yes

W1 Video Lecture

https://www.youtube.com/watch?v=knLsfs83kbk