Business  Ethics  Tathagat  Varma  

Session  7/12:  27-­‐Aug-­‐09  

The  Importance  of  Business  Ethics  •  By  its  very  nature,  the  field  of  business  ethics  is  controversial,  and  there  is  no  universally  accepted  approach  for  resolving  the  issues.  

•  Why  ?  

The  Importance…  •  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  judgment  in  a  situaQon  which  is  not  quite  the  same  as  any  he  or  she  has  faced  before.”  

•  Another  difference  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  profit.  If  profits  are  realized  through  misconduct,  however,  the  life  of  the  organizaQon  may  be  shortened.    

•  Businesses  must  balance  their  desire  for  profits  against  the  needs  and  desires  of  society.  Maintaining  this  balance  oWen  requires  compromises  or  tradeoffs.  To  address  this  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.  

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  affects  the  organizaQon’s  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  individual’s  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.  But…an  individual’s  personal  values  and  moral  philosophies  are  only  one  factor  in  the  ethical  decision-­‐making  process.  

The  Importance…  –  Normally,  a  business  doesn’t  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  person’s  preferences  or  values  influence  his  or  her  performance  on  the  job  do  an  individual’s  ethics  play  a  major  role  in  the  evaluaQon  of  business  decisions.  

–  Many  people  who  have  limited  business  experience  suddenly  find  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  specific  guidelines  for  these  complex  business  decisions.  In  other  words,  a  person’s  experiences  and  decisions  at  home,  in  school,  and  in  the  community  may  be  quite  different  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…  •  Benefits  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  offs.  

– Among  the  rewards  for  being  more  ethical  and  socially  responsible  in  business  are  increased  efficiency  in  daily  operaQons,  greater  employee  commitment,  increased  investor  willingness  to  entrust  funds,  improves  customer  trust  and  saQsfacQon,  and  beber  financial  performance.  The  reputaQon  of  a  company  has  a  major  effect  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  fulfillment  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  efficiency,  producQvity,  and  profits.  On  the  other  hand,  investors  know  too  that  negaQve  publicity,  lawsuits,  and  fines  can  lower  stock  prices,  diminish  customer  loyalty,  and  threaten  a  company’s  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  confidence  is  vital  to  sustaining  the  financial  stability  of  the  firm.  

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  financial  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  first  step  toward  understanding  business  ethics  is  to  develop  ethical-­‐issue  awareness.  Ethical  issues  typically  arise  because  of  conflicts  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  define  ethical  issues  in  Business  

–  Historically,  businesspeople  viewed  the  principle  objecQve  of  business  as  maximizing  profits,  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  firm’s  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  specific  values  and  standards  that  dictate  what  consQtutes  acceptable  or  unacceptable  corporate  behaviors  

– While  primary  groups  may  present  more  day-­‐to-­‐day  concerns,  secondary  groups  can’t  be  ignored  or  given  less  consideraQon  in  the  ethical  decision-­‐making  process.  

Emerging…  •  Stakeholder  OrientaQon    – The  degree  to  which  a  firm  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  firm’s  effects  on  these  groups  

– The  distribuQon  of  this  informaQon  throughout  the  firm  

– The  organizaQon’s  responsiveness  as  a  whole  to  this  intelligence  

Emerging…  •  Conflict  of  Interest  – A  conflict  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  conflicts  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  office  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  filed  annually  with  the  Equal  Employment  Opportunity  Commission  (EEOC).  Sexual  harassment  filings  with  the  EEOC  average  about  16,000  per  year.  

–  To  help  build  work  forces  that  reflect  their  customer  base,  many  companies  have  iniQated  affirmaQve  acQon  programs,  which  involve  efforts  to  recruit,  hire,  train,  and  promote  qualified  individuals  from  groups  that  have  tradiQonally  been  discriminated  against  on  the  basis  of  race,  gender,  or  other  characterisQcs.  

– AffirmaQve  acQon  does  not  permit  or  require  quotas,  reverse  discriminaQon,  or  favorable  treatment  of  unqualified  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  profitable  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  –  society’s  codificaQon  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.