Business

Ethics
Tathagat Varma
Session 7/12: 27-Aug-09

The Importance of Business Ethics

By its very nature, the eld of business ethics is controversial, and there is no universally accepted approach for resolving the issues. Why ?

The Importance
One dierence 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 judgment in a situaQon which is not quite the same as any he or she has faced before. Another dierence related to the amount of emphasis decision makers place on their own values and accepted pracQces within their company. Consequently, values and judgment play a criQcal role when we make ethical decisions.

The Importance
To survive, businesses must earn a prot. If prots are realized through misconduct, however, the life of the organizaQon may be shortened. Businesses must balance their desire for prots against the needs and desires of society. Maintaining this balance oWen requires compromises or tradeos. To address this unique aspects of the business world, society has developed rules both legal and implicit to guide businesses in their eorts to earn prots in ways that do not harm individuals or society as a whole.

The Importance
Why Study Business Ethics
Regardless of what an individual believes about a parQcular acQon, if society judges it to be unethical or wrong, whether correctly o not, that judgment directly aects the organizaQons ability to achieve its business goals. For this reason alone, it is important to understand business ethics and recognize ethical issues. 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 ciQzen organizaQon. Butan individuals personal values and moral philosophies are only one factor in the ethical decision-making process.

The Importance
Normally, a business doesnt establish rules or policies on personal ethical issues such as sex or use of alcohol outside the workplace; indeed, in some cases, such policies would be illegal. Only when a persons preferences or values inuence his or her performance on the job do an individuals ethics play a major role in the evaluaQon of business decisions. Many people who have limited business experience suddenly nd themselves making decisions about product quality, adverQzing, pricing, sales techniques, hiring pracQces, and polluQon control. The values they learned from family, religion, and school may not provide specic guidelines for these complex business decisions. In other words, a persons experiences and decisions at home, in school, and in the community may be quite dierent from his or her experiences and decisions at work. Many business ethics decisions are close calls. Years of experience in a parQcular industry may be required to know what is acceptable.

The Importance
Benets of Business Ethics
Both research and examples from the business world demonstrate that building an ethical reputaQon among employees, customers, and the general public pay os. Among the rewards for being more ethical and socially responsible in business are increased eciency in daily operaQons, greater employee commitment, increased investor willingness to entrust funds, improves customer trust and saQsfacQon, and beber nancial performance. The reputaQon of a company has a major eect on its relaQonships with employees, investors, customer, and many other parQes

The Importance
Ethics contributes to employee commitment
Issues that may foster the development of an ethical climate for employees include a safe work environment, compeQQve salaries, and the fulllment of all contractual obligaQons toward employees. Social programs that may improve the ethical climate range from work-family programs and stock ownership plans to community service. Because employees spend a considerable amount of their waking Qme at work, a commitment by the organizaQon to goodwill and respect for its employees usually increases the employees loyalty to the organizaQon and their support of its objecQves. The ethical climate of a company seems to maber to employees. According to a report on employee loyalty and work pracQces, companies viewed as highly ethical by their employees were six Qmes more likely to keep their workers. Also, employees who view their company as having strong community involvement feel more loyal to their employers and feel posiQve about themselves.

The Importance
Ethics contributes to investor loyalty
Companies perceived by their employees as having a high degree of honesty and integrity had an average three-year total return to shareholders of 101%, whereas companies perceived as having a low degree of honesty and integrity had a three-year total return to shareholders of just 69% Investors are also recognizing than an ethical climate provides a foundaQon for eciency, producQvity, and prots. On the other hand, investors know too that negaQve publicity, lawsuits, and nes can lower stock prices, diminish customer loyalty, and threaten a companys long-term viability. The issue of drawing and keeping investors is a criQcal one for CEOs, as roughly 50% of investors sell their stock in companies within one year, and the average household replaces 80% of its common stock porgolio each year. Therefore, gaining investors trust and condence is vital to sustaining the nancial stability of the rm.

The Importance
Ethics contributes to Customer SaQsfacQon
The Millennium Poll of 25,000 ciQzens in 23 countries found that almost 60% of people focus on social responsibility ahead of brand reputaQon or nancial factors when forming impressions of companies. When consumers learn about abuses in subcontracQng, they may boycob the companies products.

Emerging Business Ethics Issues

People make ethical decisions only when they recognize that a parQcular issue or situaQon has an ethical component. Thus, a rst step toward understanding business ethics is to develop ethical-issue awareness. Ethical issues typically arise because of conicts among individuals personal moral philosophies and values, the values and culture of the organizaQons in which they work, and those of the society in which they live.

Emerging
Stakeholders dene ethical issues in Business
Historically, businesspeople viewed the principle objecQve of business as maximizing prots, which resulted in the belief that business is accountable primarily to investors and to others involved in the market and economic aspects of the company. The relaQonship between companies and their stakeholders can be viewed as a two-way street Primary Stakeholders are those whose conQnued associaQon is absolutely necessary for a rms survival; these include employees, customers, investors, and shareholders, as well as governments and communiQes that provide necessary infrastructure. Secondary Stakeholders do not typically engage in transacQons with a company and thus not essenQal for its survival; these include the media, trade associaQon, and special-interest groups.

Emerging
Both stakeholders embrace specic values and standards that dictate what consQtutes acceptable or unacceptable corporate behaviors While primary groups may present more day-to- day concerns, secondary groups cant be ignored or given less consideraQon in the ethical decision- making process.

Emerging
Stakeholder OrientaQon
The degree to which a rm understands and addresses stakeholder demands can be referred to as a stakeholder orientaQon

Comprises of
The organizaQon wide generaQon of data about stakeholder groups and assessment of the rms eects on these groups The distribuQon of this informaQon throughout the rm The organizaQons responsiveness as a whole to this intelligence

Emerging
Conict of Interest
A conict of interest exists when an individual must choose whether to advance his or her own interests, those of the organizaQon, or those of some other group. To avoid conicts of interest, employees must be able to separate their private interests from their business dealings.

Emerging
Fraud
In general, fraud is any purposeful communicaQon that deceived, manipulates, or conceals facts in order to create a false impression. Fraud costs US organizaQons more than $400 Billion a year; the average company loses about 6% of total revenues to fraud and abuses commibed it its own employees. Among the most common fraudulent acQviQes employees report about their coworkers are stealing oce supplies or shopliWing, claiming to have worked extra hours, and stealing money or products. AccounQng fraud is a major issue

Emerging
DiscriminaQon
Between 75,000 and 80,000 charges are led annually with the Equal Employment Opportunity Commission (EEOC). Sexual harassment lings with the EEOC average about 16,000 per year. To help build work forces that reect their customer base, many companies have iniQated armaQve acQon programs, which involve eorts to recruit, hire, train, and promote qualied individuals from groups that have tradiQonally been discriminated against on the basis of race, gender, or other characterisQcs. ArmaQve acQon does not permit or require quotas, reverse discriminaQon, or favorable treatment of unqualied women or minoriQes.

Ethics as a Dimension of Social Responsibility

Ethics and Social Responsibility are used interchangeably but they are not the same Social responsibility can be viewed as a contract with society, whereas business ethics involves carefully thought-out rules or heurisQcs of business conduct that guide decision making. Four levels of social responsibility economic, legal, ethical and philanthropic and they can be viewed as steps.

Ethics
Four levels
At the most basic level, companies have an economic responsibility to be protable so they can provide a ROI to their owners and investors, create jobs for the community, and contribute goods and services to the economy Business ethics comprises principles and standards that guide behavior in the world of business Philanthropic responsibility refers to acQviQes that are not required of businesses but that promote human welfare or goodwill.

Ethics
Laws and regulaQons are established by governments to set minimum standards for responsible behavior societys codicaQon of what is right and wrong. Overall, the government philosophy is that legal violaQons can be prevented through organizaQonal values and a commitment to ethical conduct.