CHAPTER 1 The Importance of Business Ethics SUMMARY This chapter provides an overview of the field of business ethics. It develops a definition of business ethics and discusses why it has become an important topic in business education. It also examines the evolution of business ethics in North America and explores the benefits of ethical decision making in business. Finally, the chapter provides a framework for examining business ethics in this text. LECTURE OUTLINE I. Business Ethics Defined A. Business ethics is a complicated and controversial topic: 1.
The field of business ethics concerns questions about whether specific business practices are acceptable. 2. Business ethics is controversial and there is no universally accepted approach for resolving ethical issues. 3. Values and judgments play a critical role in the making of ethical decisions. B. Some special aspects must be considered when applying ethics to business. 1. Businesses must earn a profit to survive. 2. Businesses must balance their desires for profits against the needs and desires of society. 3.
Maintaining this balance often requires compromises or tradeoffs. C. Business ethics comprises values and standards that guide behavior in the world of business. D. Principles are specific and pervasive boundaries for behavior that are universal and absolute. E. Values are used to develop norms that are socially enforced. 1. Investors, employees, customers, interest groups, the legal system, and the community often determine whether a specific action is right or wrong and ethical or unethical. II. Why Study Business Ethics? A. A Crisis in Business Ethics 1.
Reports of unethical activities (accounting fraud, insider trading, falsifying documents, deceptive advertising, defective products, bribery, abusive behavior, harassment, and employee theft) are cited as evidence of declining ethical standards, not only in business, but also in government, science, and sports. 2. Regardless of what an individual believes about a particular action, if society judges it to be unethical or wrong, whether correctly or not, that judgment directly affects the organization’s ability to achieve its business goals. B. Reasons for Studying Business Ethics 1.
Studying business ethics is valuable for several reasons. a. An individual’s personal values and moral philosophies are only one factor in the ethical decision-making process—a person’s personal values and business ethics are not the same thing. b. Being a good person and having sound personal ethics may not be sufficient to handle the ethical issues that arise in a business organization. c. Business strategy decisions involve complex and detailed discussions, and a high level of personal moral development may not prevent an individual from violating the law in an organizational context. d.
The values people learn from family, religion, and school may not provide specific guidelines for complex business decisions. 2. Studying business ethics helps businesspeople begin to identify ethical issues, recognize the approaches available to resolve them, learn about the ethical decision-making process and ways to promote ethical behavior, and begin to understand how to cope with conflicts between personal values and organizational values. III. The Development of Business Ethics A. Before 1960: Ethics in Business 1. Prior to 1960 the United States went through several agonizing phases, questioning the concept of capitalism. . In the 1920s, the progressive movement defined a “living wage” 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. ” b. In the 1930s, the New Deal specifically blamed business for the country’s economic woes. Businesses were asked to work more closely with the government to raise family income. c. By the 1950s, the New Deal had evolved into the Fair Deal, defining such matters as civil rights and environmental responsibility as ethical issues that businesses had to address. . Until 1960, ethical issues related to business were often discussed within the domain of theology or philosophy. Individual moral issues related to business were addressed in churches, synagogues, and mosques. a. Within the Roman Catholic Church, social ethics 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. b. Protestants developed ethics courses in their seminaries and schools of theology and addressed issues concerning morality and ethics in business. c.
Such religious traditions provided a foundation for the future field of business ethics, with each religion applying its moral concepts not only to business but also to government, politics, family, personal life, and all other aspects of life. B. The 1960s: The Rise of Social Issues in Business 1. American society turned to causes, and an antibusiness attitude developed as critics attacked the perceived vested interests that controlled both the economic and political sides of society—the so-called military-industrial complex. 2. The 1960s saw the decay of inner cities and the growth of ecological problems. . The rise of consumerism—activities undertaken by independent individuals, groups, and organizations to protect their rights as consumers—began, and President John F. Kennedy announced a Consumers’ Bill of Rights (the right to safety, the right to be informed, the right to choose, and the right to be heard). 4. Consumer activists, led by Ralph Nader, fought successfully for consumer-protection legislation. 5. Activities that could destabilize the economy or discriminate against any class of citizens began to be viewed as unethical and unlawful. C.
The 1970s: Business Ethics as an Emerging Field 1. Business professors began to teach and write about corporate social responsibility: an organization’s obligation to maximize its positive impact on stakeholders and to minimize its negative impact. 2. Philosophers applied ethical theory and philosophical analysis to structure the discipline of business ethics. 3. As social demands grew, many businesses realized that they had to address ethical issues more directly. 4. The Foreign Corrupt Practices Act was passed during Jimmy Carter’s presidency, making it illegal for U.
S. businesses to bribe government officials in other countries. 5. Major business ethics issues had emerged, such as bribery, deceptive advertising, price collusion, product safety, and the environment. 6. Academic researchers sought to identify ethical issues and to describe how businesspeople might choose to act in particular situations. D. The 1980s: Consolidation 1. Membership in business ethics organizations increased, while centers of business ethics provided publications, courses, conferences, and seminars. a.
Many firms established ethics and social policy committees to address ethical issues. 2. The Defense Industry Initiative on Business Ethics and Conduct (DII) was developed to guide corporate support for ethical conduct. The DII includes six principles: a. Development and distribution of understandable, detailed codes of conduct. b. Provision of ethics training and development of communication tools to support the periods between training. c. Creation of an open atmosphere in which employees feel comfortable reporting violations, without fear of retribution. . Performance of extensive internal audits and development of effective internal reporting and voluntary disclosure plans. e. Preservation of the integrity of the defense industry. f. Adoption of a philosophy of public accountability. 3. The Reagan/Bush era ushered in the belief that self-regulation, rather than regulation by government, was in the public’s interest. E. The 1990s: Institutionalization of Business Ethics 1. The Clinton administration continued to support self-regulation and free trade, although it strengthened regulation in some areas. 2.
The Federal Sentencing Guidelines for Organizations, which were based on the six principles of the Defense Industry Initiative, codified into law incentives to reward organizations for taking action, such as developing effective internal legal and ethical compliance programs, in order to prevent misconduct,. a. The guidelines mitigate penalties for businesses that strive to root out misconduct and establish high ethical and legal standards. On the other hand, under the FSGO, if a company lacks an effective ethical compliance program and its employees violate the law, it can incur severe penalties. b.
The guidelines focus on firms taking action to prevent and detect business misconduct in cooperation with government regulation. F. The Twenty-First Century: A New Focus on Business Ethics 1. New evidence emerged in the early 2000s that more than a few business executives and managers had not fully embraced the public’s desire for high ethical standards. 2. To address a loss of confidence in financial reporting and corporate ethics, 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 law: a. made securities fraud a criminal offense and stiffened penalties for corporate fraud. b. 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. c. requires top executives to sign off on their firms’ financial reports, and they risk fines and long jail sentences if they misrepresent their companies’ financial position. d. requires company executives to disclose stock sales immediately and prohibits companies from giving loans to top managers. . A 2004 amendment to the FSGO requires that a business’s governing authority be well informed about its ethics program with respect to content, implementation, and effectiveness. 4. In spite of legislation promoting better accountability in financial reporting and other measures to improve ethics, public trust of corporations (particularly financial corporations) is at a very low point. 5. Around the world, the basic assumptions of capitalism are under debate in the wake of the most recent financial industry meltdown and global recession. a.
There is a renewed need to address the level of ethical, legal and compliance regulations needed to help businesses serve the public interest. IV. Developing an Organizational and Global Ethical Culture A. The current trend is away from legally based compliance initiatives in organizations and towards cultural initiatives that make ethics a part of core organizational values. 1. To develop more ethical corporate cultures, many businesses are communicating core values to their employees by creating ethics programs and appointing ethics officers to oversee them. 2.
The ethical component of a corporate culture relates to the values, beliefs, and established and enforced patterns of conduct that employees use to identify and respond to ethical issues. B. The term ethical culture can be viewed as the character or decision-making process that employees use to determine whether their responses to ethical issues are right or wrong. 1. Is used to describe the component of corporate culture that captures the rules and principles that an organization defines as appropriate conduct. C. Globally, businesses are working more closely together to establish standards of acceptable behavior. . The development of global codes of ethics, such as the Caux Round Table, highlights common ethical concerns for global firms. V. The Benefits of Business Ethics A. 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. B. Both research and examples from the business world demonstrate that building an ethical reputation among employees, customers, and the general public pays off. C. Ethics Contributes to Employee Commitment 1.
Employee commitment comes from employees who believe their future is tied to both the future of the organization, and their willingness to make personal sacrifices for that organization. a. The more a company is dedicated to taking care of its employees, the more likely it is that the employees will take care of the organization. b. Issues that may foster the development of an ethical climate for employees include the absence of abusive behavior, a safe work environment, competitive salaries, and the fulfillment of all contractual obligations toward employees, as well as social programs such as stock ownership plans and community service. . Employees’ perception of their firm as having an ethical environment leads to performance-enhancing outcomes within the organization. a. Trusting relationships within an organization between both managers and their subordinates and upper management contribute to greater decision-making efficiencies. b. When employees see values such as honesty, respect, and trust applied 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. . Research indicates that the ethical climate of a company matters to employees. D. Ethics Contributes to Investor Loyalty 1. Investors today are increasingly concerned about the ethics, social responsibility, and reputation of companies in which they invest. a. Investors recognize that an ethical climate provides a foundation for efficiency, productivity, and profits, while negative publicity, lawsuits, and fines can lower stock prices, diminish customer loyalty, and threaten a company’s long-term viability. b.
Investors look at the bottom line for profits, the potential for increased stock prices or dividends, and for any potential flaws in the company’s performance, conduct, and financial reports. i)Executives may spend considerable time communicating with investors about their firms’ reputation and financial performance and trying to attract them to the company’s stock. c. The issue of drawing and keeping investors is a critical one for CEOs; gaining investors’ trust and confidence is vital for sustaining the financial stability of the firm. E. Ethics Contributes to Customer Satisfaction 1.
Customer satisfaction is one of the most important factors in successful business strategy. a. 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. b. Successful businesses provide an opportunity for customer feedback, which can engage the customer in cooperative problem solving. 2. Research indicates that a majority of consumers place social responsibility ahead of brand reputation or financial factors when forming impressions of companies. . A strong organizational ethical environment usually focuses on the core value of placing customers’ interests first. a. An ethical climate that focuses on customers incorporates the interests of all employees, suppliers, and other interested parties in decisions and actions. 1. An ethical culture that focuses on customers incorporates the interests of all employees, suppliers, and other interested parties in decisions and actions. b. Ethical conduct toward customers builds a strong competitive position that has been shown to positively affect both business performance and product innovation. F.
Ethics Contributes to Profits 1. A company cannot nurture and develop an ethical organizational climate unless it has achieved adequate financial performance in terms of profits. a. Many studies have found a positive relationship between corporate social responsibility and business performance. b. Companies convicted of misconduct experience a significantly lower return on assets and sales than firms that have not faced such charges. 2. There are many examples of companies that have experienced significant performance declines after discovery of their failure to act responsibly toward various stakeholders. . Being ethical pays off with better performance. VI. Our Framework for Studying Business Ethics A. Part One provides an overview of business ethics, its importance, emerging issues, and the role of various stakeholder groups in social responsibility and corporate governance. B. Part Two focuses on ethical issues and the institutionalization of business ethics, such as business issues that create ethical decision making in organizations and the institutionalization of business ethics including both mandatory and voluntary societal concerns. C.
Part Three explores the ethical decision-making process and then looks at both individual and organizational factors that influence decisions. D. Part Four explores systems and processes associated with implementing business ethics into global strategic planning. 1. The more you know about how individuals make decisions, the better prepared you will be to cope with difficult ethical decisions. 2. It is your job to make the final decision in an ethical situation that affects you: Sometimes that decision may be right; sometimes it may be wrong.