The Importance of Business Ethics

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.

Business Ethics

•       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:

–    Investors

–    Employees

–    Customers

–    Interest groups

–    Legal system

–    Community

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

–   Bribery

–   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.

•       Issues:

–    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:

–   Efficiency

–   Productivity

–   Profitability

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.