The Importance of Business Ethics

C H A P T E R 1

Why Study Business Ethics?

• Business decisions under great scrutiny– Global financial crisis created

diminished stakeholder trust• Deals with questions about

whether practices are acceptable

• No universally-accepted approach for resolving issues

Source: © Jack Hollingsworth/Corbis

Business Ethics

• Comprises principles, values, and standards that guide behavior in the world of business

• Principles: Specific boundaries for behavior that are

universal and absolute– Freedom of speech, civil liberties

• Values: Used to develop socially enforced norms– Integrity, accountability, trust

Americans’ Trust in Business (% of respondents who say they trust the

following business categories a great deal)

A Crisis in Business Ethics

• Consumer trust of businesses is declining• No sector is exempt from ethical misconduct• Stakeholders determine what is ethical/unethical

– Investors– Employees– Customers– Interest groups– Legal system– Community

Source: Stockbyte

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 Sarbanes-Oxley, FSGO, and stakeholder demands for ethics initiatives

• Individual ethics alone is not sufficient

• Studying business ethics helps identify ethical issues to key stakeholders

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

• The Protestant work ethic encouraged hard work

The 1960s: The Rise of Social Issues in Business

• Societal social consciousness emerged– Anti-business sentiment rose

• JFK’s Consumer Bill of Rights- 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 Source: Hisham Ibrahim

The 1970s: Business Ethics as an Emerging Field

• Business professors began to write about social responsibility– An organization’s obligation to maximize positive

impact and minimize negative impact on stakeholders• Philosophers became involved• Businesses became concerned with public image• 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 Initiative on Business Ethics and

Conduct (DII) emerged – Foundation for the Federal Sentencing Guidelines

for Organizations• Corporate support for ethics

The 1990s: Institutionalization of Business Ethics

• The Federal Sentencing Guidelines for Organizations (FSGO)– Set tone for compliance

• Preventative actions against misconduct– A company could avoid/minimize 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

• Continued issues with corporate non-compliance– Growing public/political demand for improved ethical standards

• Sarbanes-Oxley Act (2002)– Most extensive ethics reform– Increased accounting regulations

• FSGO reform (2004)– Requires governing authorities to be well-informed regarding

business ethics programs• Firm’s greatest danger is not discovering misconduct

early• Basic assumptions of capitalism being debated

– Fears in the wake of global recession and financial meltdown

Organizational and Global Ethical Culture

• Ethical culture describes the component of corporate culture that captures the values and norms that an organization defines as appropriate conduct

• Creates shared values• Goal is to:

• Minimize need for enforced compliance

• Maximize utilization of principles/ ethical reasoning

Source: Triangle Images

Prevalence of Misconduct by Industry

Ethics Contributes to Employee Commitment

• Comes from employees who believe their future is tied to the organization’s

• Are willing 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

places customers’ interests first• Research shows a strong relationship between ethical

behavior and customer satisfaction

Ethics Contributes to Profits• Corporate concern for ethical

conduct is being integrated with strategic planning– Maximize profitability

• Corporate citizenship is positively associated with:– Return on investment and

assets– Sales growth

• Studies have found a positive relationship between citizenship and performance

Source: PhotoLink