Business Ethics

Business Ethics is a topic which is receiving a lot of attention in the literature. However, the term
business ethics is not adequately defined. Typical definition refers to the rightness or wrongness of
behavior, but not everyone agrees on what is morally right or wrong, good or bad, ethical or unethical.

Ethics and Business:

Morality: are the standards that an individual or group has about what is right or wrong, or good and
evil.

Ethics: are the principles of conduct governing an individual or a group. It is the study of morality.

Ethics is the study of moral standards – the process of examining the moral standards of a person of
society to determine whether these standards are reasonable or unreasonable in order to apply them to
concrete situations and issues. The ultimate aim of ethics is to develop a body of moral standards –
which have been thought over carefully and which we can apply to the various choices in our lives.

Business Ethics concentrates on the moral standards as they apply to business policies, institutions
and behavior. Business ethics, in other words, is a form of applied ethics. It includes not only the
analysis of moral norms and moral values, but also attempts to apply the conclusions of this analysis to
business.

The study of ethics per se is an ancient tradition rooted in the religious, cultural and philosophical
beliefs. But the study of business ethics is of recent interest. Within the last decade, business ethics has
become a topic of popular discussion by everyone, be it business executives, employees, shareholders,
consumers and all college professors.

The purpose of ethics is not to make students model corporate citizens, rather the intention is to make
students aware of the ethical implications of business decisions.

Business Ethics defined:

The term ethics has many nuances. It has been defined as ‘inquiry into the nature and grounds of
morality where the term morality is taken to mean moral judgements, standards and rules of conduct.
Ethics has also been called the study and philosophy of human conduct, with an emphasis on
determining what is right and wrong. 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 judgement 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. So values and
judgements play a critical role when we make ethical decisions.

Building on these definitions, lets develop a concept of business ethics. Some aspects must be
considered when applying ethics to business.

1. First to survive businesses must earn a profit. If profits are realized through misconduct,
however, the life of the organization may be shortened.
 Many firms including Arthur Anderson, Enron, Sunbeam that made headlines due to wrong
doing and scandal ultimately went bankrupt or failed because of the legal and financial
repercussions of their misconduct.

2. Secondly, businesses must balance their desires for profits against the needs and desires of
society. Maintaining this balance often requires compromises or tradeoffs. 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 do not harm individuals or
society as a whole.

Whether a specific action is right or wrong, ethical or unethical, is often determined by investors,
employees, customers, interest groups, the legal system, and the community. Although these
groups are not necessarily ‘right’ their judgements influence society’s acceptance or rejection of a
business and its activities.

Why study Business Ethics? Ethical misconduct has become a major concern in businesses today.
Accounting fraud, insider trading of stocks and bonds, falsifying documents, deceptive advertising,
defective products, bribery and employee theft are all problems cited as evidence of declining
ethical standards. For example US justice department is investigating whether Metabolife
International made false statements to the Food and Drug Administration about side effects
associated with its popular herbal weight loss supplement. The supplement contains ephedra which
has been linked to adverse effects such as high blood pressure, seizures and heart attacks as well as
an unsubstantiated report of 70 deaths.

Studying business ethics is valuable for several reasons.

Business ethics is not merely an extension of an individuals’ own personal ethics. Many people
believe that if a company hires good people with strong ethical values, then it will be a ‘good
citizen’ organization. In reality, individual’s personal values and moral philosophies are only one
factor in the ethical decision making process. Many important ethical issues do not rise very often
in the business context, although they remain moral dilemmas in one’s own personal life. For
example abortion may be a moral issue for a person, but usually not an issue in the business
organization.

Normally a business does not establish rules or policies on personal ethical issues such as use of
alcohol outside the workplace. However, when a person’s values influence their performance on
the job, it is then that an individual’s ethics play a major role in the evaluation of business
decisions.

Just being a good person and having sound personal ethics may not be sufficient to enable you to
handle the ethical issues that arise in a business organization. It is important to recognize the
relationship between legal and ethical decisions. Business strategy decisions involve complex and
detailed discussions. 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.

Because organizations are culturally diverse and personal values must be respected, ensuring
collective agreement on organizational ethics (i.e. codes capable of preventing misconduct) is as
vital as any other effort an organization’s management may undertake.
Many people who have business experience suddenly find themselves making decisions about
product quality, advertising, pricing, sales techniques, hiring practices and pollution control. The
values they learned from family, religion and school may not provide specific guidelines for these
complex business decisions. Many business ethics decisions are close calls. It takes many years of
experience in a particular industry to know what is acceptable.

Consider the challenge faced by Henry Kramer, CEO of Baxter International. After 53 dialysis
patients died during treatment in USA, Spain and 5 other continents. The dialysis filters had been
manufactured by Althin Medical AB, a firm that Baxter had acquired the previous year. After
investigating, Kraemer took responsibility, apologized, recalled all of Althin’s dialysis filters and
decided to shut down Althin’s operations which cost Baxter $ 189 million. He later asked the
company’s board of directors to reduce his bonus because of the deaths. He could have taken
different decisions but he put the situation in a broader context. ‘We have this situation. The
financial people will assess the potential financial impact. The legal people will do the same. But at
the end of the day, if we think it’s a problem that a Baxter product was involved in the deaths of 53
people, then those other issues become pretty easy. If we don’t do the right thing, then we wont be
around to address those other issues.’

Studying business ethics helps in identifying ethical issues when they arise and recognizing the
approaches available for resolving them. Business ethics enables us to learn about the ethical
decision making process and ways to promote ethical behavior in the organization. It helps us to
understand how to cope with conflicts between our personal values and those of the organization in
which we work.

Why business ethics is gaining importance?

In the last 2 years we have witnessed the most devastating financial crisis since the Great
Depression. It appears that greed, excessive risk taking and the financial industry culture of
focusing on rewards and the bottom line helped to create their own demise. The failure to focus on
ethical principles, values and transparency in decision making was widespread. While individuals
are often held accountable for lying, cheating and deception, we now have networks of
organizations that created corrupt systems that severely damaged society.

The lack of business ethics has challenged our economic viability and entangled countries and
companies around the world. Every individual has unique personal values and every organization
has its own set of values, rules and organizational ethical culture. Business ethics must consider the
organizational culture and interdependent relationships between individual and other significant
persons involved in organizational decision making. Without effective guidance, a business person
cannot make ethical decisions while facing a short term orientation, feeling organizational pressure
and rewards based on outcomes, and the challenges and changes caused by the competitive as well
as the external environment.

Employees cannot make the best, most ethical decisions in a vacuum devoid of the influence of
organizational codes, policies and culture. Most employees and all managers are responsible not
only for their own ethical conduct but for the conduct of co – workers and those who they
supervise. Employees must know how to recognize and when to report and address ethical issues in
the workplace.

The past decade has reinforced that Business ethics is not a ‘fad’ but a prevailing set of risks that
organizations face on an ongoing basis. By focusing on the concerns and issues of today’s
 challenging business environment, we will realize that the study of business ethics is imperative to
the long term well being of not only business, but our economic system.

Business ethics in organizations requires values based leadership from top management and
purposeful actions that include planning and implementation of standards of appropriate conduct,
as well as openness and continuous efforts to improve the organizations’ ethical performance.
Although personal values are important in ethical decision making, they are just one of the
components that guide the decisions, actions and policies of the organizations. The burden of
ethical behavior relates to the organization’s values and traditions, and not just to the individuals
who make the decisions and carry them out. A firm’s ability to plan and implement ethical business
standards depends in part on structuring resources and activities to achieve ethical objectives in an
effective and efficient manner.

Reasons for unethical behavior

1. Unethical behavior that is not illegal frequently falls in a grey area between right and wrong
that makes it difficult to decide what to do when it is encountered.
2. Different people have different views regarding what is ethical and what is unethical.
3. Pressure from the board / management to meet unrealistic business objectives and
deadlines.
4. Desire to further one’s career.
5. Protect one’s livelihood.
6. Working in an environment with cynicism or diminished morale, improper training about or
ignorance that acts are unethical and lack of consequences when caught can cause unethical
behavior.

Creating an Ethical Organizational culture:

The content and strength of a culture influences an organizations’ ethical climate and the ethical
behavior of its members.
An organizational culture most likely to shape high ethical standards is one that is high in risk
tolerance, low to moderate in aggressiveness, and focuses on means as well as outcomes. Managers
in such a culture are supported for taking risks and innovating, are discouraged from engaging in
unbridled competition and will pay attention to how goals are achieved as well as to what goals are
achieved.

If the organization culture is strong and supports high ethical standards, it should have a very
powerful and positive influence on employee behavior.

For eg. Johnson and Johnson has a strong culture that has long stressed on corporate obligations to
customers, employees, the community, the shareholders. When poisoned Tylenol (a Johnson and
Johnson product) was found on store shelves, employees at Johnson and Johnson across U.S.A.
independently pulled the product from these stores before management had even issued a statement
concerning the tamperings. No one had to tell these individuals what was morally right; they knew
what J & J would expect them to do.

Techniques used by the management can be:

1. First step is to create a company policy, in writing, that is read and signed by each employee.
This erases most feelings of ambiguity when it comes to deciding what to do after witnessing
an unethical behavior
2. to give a clear outline of what is expected of the person who has discovered the unethical
behavior. It should include the person who should be contacted and how to go about doing it.
with clear instructions, there will be less hesitation in reporting unethical activities, and then
they can be dealt with quickly and relatively easily before they develop into overwhelming
issues.
3. the repercussions of unethical behavior should be clearly stated. This way, both the person
doing the activity, and the witness to the activity will be well aware of the way that things will
be dealt with, and their wont be any risk of someone not reporting unethical behavior because
they are afraid that the culprit will be unfairly treated.
4. Communication is the key in the proper management of unethical behavior in today’s
workplace.
5. Corporate leaders need to be role models and communicate ethical values throughout the
organization.

Fair and unfair business practices:

A fundamental principle of ethics is fairness. Ethical people play fairly. They respect the rules,
judge circumstances by ethical criteria and follow through appropriately. In a competitive business
climate, the ethical lines are blurred by the urgency to make the sale, outmaneuver the competition,
and leverage anything and everything to close the deal. The big question is how you can stand by
the principle of fair business dealing when it seems so advantageous not to.

What is fairness? Fairness is not just about equality of outcome. Its about how you play the game.
What makes our modern business culture so successful is that there are rules that govern how we
do business so that everyone who plays has a shot at winning. The government does this through
regulation and legislation such as anti – trust and anti – corruption laws. Businesses do this by
abiding by industry standards, clarifying ethical codes and procedures, and raising the bar for
ethical business conduct. Although there is no guarantee of success, there is a reasonable assurance
that everyone is playing by the same rules. This is fine and good, but how should we operate in a
world where some play by the rules and others do not?

Everyone starts a business with the aim of achieving some set goals. They also hope that all market
conditions will be fair to everyone so that they are able to compete without bias. However, this is
not always the case in many scenarios as many competitors will go out of their way to make sure
they take over a larger portion of the market. These are unfair business practices that should be
shunned.

There is need for every business man to understand fair business practices and to appreciate that
they go a long way in making the market favorable for everyone. What comprises unfair practices
is contained in some laws that govern individual industries and these are known as anti – trust laws.
They make it illegal for any individual to try and control the market conditions.

Among the unfair business practices is conspiring to control market prices by discussing it with
competitors. No matter how small a marketplace may be, this is greatly unfair to other traders who
may not command much authority in the market.
Holding discussions with competitors on how to boycott another competitor or supplier is a
violation of the laws. Domination of market or customers through the arrangement of suppliers or
traders to agree on the territories that each should trade in is also illegal.

It is important to accept the basic moral principal that fair and honest business practices are the best
options simply because they are the right things to do. If you don’t, then everything can be either
thrown out or accepted based on whatever subjective criteria you want. You have to decide to take
the moral high ground even if you are the only honest person in sight.

First it is important to understand that playing fairly does not automatically put a person in a
weaker position. An honestly run business is something that can be a leverage to your advantage.
In today’s business, a good reputation puts you head and shoulders above the rest. Fair business
practices create a position of strength rather than weakness.

Its important to base success on the long term outcome. One can still play fairly and win as long as
you are willing to play smarter. There is plenty of room for shrewd dealing, strategy, playing your
cards right and taking advantage of opportunities. An honest business model can be a successful
business model.

The Hidden costs of Organizational dishonesty:

1. It takes years to build a reputation for integrity that can be lost overnight. Once an organization
loses its reputation for integrity, the effect can be permanent.
2. As unethical behaviors are manifested by upper level management, workers throughout the
organization note them, and unethical behavior becomes a cultural norm.
3. Unethical culture results in detrimental behaviors such as under delivering on promises, turf
guarding, goal lowering, budget twisting, fact hiding, detail skipping, credit hogging.

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