The Importance of Business Ethics
Why differentiate between rules/policies/law and ethics?
• The difference between an ordinary decision and an ethical one is the point where rules no longer serve.
• Values and judgment play a key role in ethics decisions.
• Employees need a “buffer zone” of expected ethical behavior.
• Comprises principles and standards that guide behavior in the world of business
• Whether a specific behavior is ethical or unethical is often determined by stakeholders:
– Interest groups
– Legal system
American Distrust of Business
Ethics and social responsibility have distinct meanings…
• Social responsibility is the obligation a business assumes to maximize its positive effect while minimizing its negative effect on society.
• Social responsibility consists of the following responsibilities:
– Economic (satisfy investors)
– Legal (obey the law)
– Ethical (expected activities and behaviors)
– Philanthropic (desired activities and behaviors)
Why study business ethics?
• Reports of unethical behavior are on the rise.
• Society’s evaluation of right or wrong affects its ability to achieve its business goals.
• Studying business ethics is a response to FSGO and stakeholder demands for ethics initiatives.
• Individual ethics is not enough.
• Studying business ethics helps identify ethical issues to key stakeholders.
Ethical Issues on the Rise
• Increased awareness of:
– Accounting fraud
– Insider trading of stocks and bonds
– Falsifying of organizational documents
– Deceptive advertising
– Defective products
– Employee theft
A Timeline of Ethical and Socially Responsible Concerns
Before 1960: Ethics in Business
• Theological discussions of ethics emerged:
– Catholic social ethics included a concern for morality in business, workers’ rights and living wages.
– Protestants developed ethics courses in their seminaries and schools of theology. (Also, the Protestant work ethic encouraged frugality and hard work.)
The 1960s: The Rise of Social Issues in Business
• Societal social consciousness emerged
– As well as an anti-business sentiment
• JFK’s Consumer Bill of Rights ushered in a new era of consumerism
– Right to safety, to be informed, to choose, and to be heard
• Consumer protection groups fought for consumer protection legislation
– Ralph Nader
The 1970s: Business Ethics as an Emerging Field
• Business professors began to write about social responsibility.
• Philosophers became involved in business ethics.
• Businesses became more concerned with their public image and addressed ethics more directly.
• Conferences were held and centers developed.
– Bribery – Product safety
– Deceptive advertising – Environment
– Price collusion
The 1980s: Consolidation
• Membership in business ethics organizations increased.
• Ethics centers provided:
– Publications, courses, conferences and seminars
• Firms established ethics committees.
• Defense Industry Initiatives emerged and became the foundation for the Federal Sentencing Guidelines for Organizations
– Corporate support for ethical conduct
The 1990s: Institutionalization
of Business Ethics
• The Federal Sentencing Guidelines for Organizations set the tone for ethical compliance.
• These took preventative actions against misconduct; a company could avoid or minimize the potential penalties.
The Federal Sentencing
Guidelines for Organizations
• Standards and procedures capable of detecting and preventing misconduct
• High level oversight
• Care in delegation of authority
• Effective communication (training)
• Systems to monitor, audit, and report misconduct
• Consistent enforcement
• Continuous improvement
The 21st Century: A New Focus
• A move from legally based ethics initiatives to culturally or integrity-based programs
– However, legislation such as the Sarbanes-Oxley Act was passed to address the lack of confidence in financial reporting and corporate ethics.
• Realization that business ethics programs are good for business
• Businesses working more closely together, globally, to establish standards of acceptable behavior
Relationship of Business Ethics to Performance
• Customers, employees, and investors are major concerns for firms that want to develop loyalty and competitive advantage.
– Goals are to increase customer dependence on the company and to provide products in an environment of mutual respect and perceived fairness.
– This focus creates satisfying relationships with employees.
– It also supports relationships with investors based on trust, dependability, and commitment.
Ethics Contributes to Employee Commitment
• Employee commitment comes from employees who believe their future is tied to that of the organization and their willingness to make personal sacrifices for the organization.
– The more dedication on the part of the company, the greater the employee dedication.
– Concerns include a safe work environment, competitive salaries and benefit packages, and fulfillment of contractual obligations.
Ethics Contributes to Investor Loyalty
• Companies perceived by their employees as having a high level of honesty and integrity are more profitable than companies with a low level of honesty and integrity.
• Ethical climates in organizations provide platform for:
Ethics Contributes to Customer Satisfaction
• Consumers respond positively to socially concerned businesses.
– Being good can be extremely profitable.
• Customer satisfaction dictates business success.
• A strong organizational ethical climate
often places the customer’s interests first.
• Research shows a strong relationship between ethical behavior and customer satisfaction.
Ethics Contributes to Profits
• Corporate concern for ethical conduct is increasingly being integrated with strategic planning to maximize profitability.
• Corporate citizenship is positively associated with:
– Return on investment and assets
– Sales growth
• Many studies have found a positive relationship between citizenship and performance.