Business Ethics

A Brief Definition of Business Ethics

Business ethics is the written and unwritten principles and values that govern decisions and actions within companies.

Learning Objectives

Recall the three disciplines of business ethics

Key Takeaways

Key Points

  • Ethics, broadly, is concerned with the meaning of all aspects of human behavior. Theoretical/ normative ethics aims to differentiate right from wrong.
  • An organization’s culture sets standards for determining the difference between good and bad decision making. Ethics in business is about knowing the difference between right and wrong and choosing to do what is right.
  • There are three intricately related parts to the discipline of business ethics: personal, professional, and corporate.

Key Terms

  • ethical behavior: Business ethics (also corporate ethics) is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations.
  • normative ethics: A branch of ethics concerned with classifying actions as right and wrong, attempting to develop a set of rules governing human conduct, or a set of norms for action.
  • ethics: The study of principles relating to right and wrong conduct.

Ethics: A Brief Definition

Ethics is the branch of philosophy concerned with the meaning of all aspects of human behavior. Theoretical ethics, sometimes called normative ethics, is about delineating right from wrong. It is supremely intellectual and, as a branch of philosophy, rational in nature. It is the reflection on and definition of what is right, what is wrong, what is just, what is unjust, what is good, and what is bad in terms of human behavior. It helps us develop the rules and principles (norms) by which we judge and guide meaningful decision-making.

Business Ethics

Business ethics, also called corporate ethics, is a form of applied ethics or professional ethics that examines the ethical and moral principles and problems that arise in a business environment. It can also be defined as the written and unwritten codes of principles and values, determined by an organization’s culture, that govern decisions and actions within that organization. It applies to all aspects of business conduct on behalf of both individuals and the entire company. In the most basic terms, a definition for business ethics boils down to knowing the difference between right and wrong and choosing to do what is right.

There are three parts to the discipline of business ethics: personal (on a micro scale), professional (on an intermediate scale), and corporate (on a macro scale). All three are intricately related. It is helpful to distinguish among them because each rests on a slightly different set of assumptions and requires a slightly different focus in order to be understood.

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Pierre Omidyar and Richard Branson: CEOs must adhere to ethical standards.

Ethical Issues Within a Business

Ethics are of critical importance to organizations, as they can potentially have enormous impacts on their communities.

Learning Objectives

Outline the various ethical philosophies over time, and integrate them into a meaningful understanding of ethical behavior

Key Takeaways

Key Points

  • Organizational leaders must be aware of the consequences of certain decisions and organizational trajectories, and ensure alignment with societal interests and ethical behavior.
  • Utilitarianism is the ethical philosophy that pursues the greatest outcome for the largest number of people. This is a consequence-oriented point of view.
  • Deontological ethics focus on the position that the morality of an action is based on its adherence to rules or obligations set by society or held intrinsically (as opposed to the consequences of that act).
  • Virtuousness is the pursuit of a given behavior for the simple sake of that behavior (i.e. the means, not the ends), and the desire for perfect execution of that behavior.
  • Finally, communitarian ethics focus on the expectations and needs of a preferred community. This means identifying the duties assigned by the group, and carrying out tasks for their benefit.

Key Terms

  • deontological: Relating to the the normative ethical position that judges the morality of an action based on the action’s adherence to rules or obligations rather than either the inherent goodness or the consequences of those actions.
  • communitarian: Pertaining to the idea that a given group is of central importance.
  • utilitarian: Relating to the ethical point of view that the greatest good for the greatest number of people is ideal.

Ethics are a central concern for businesses, organizations, and individuals alike. Behaving in a way that adds value without inappropriate conduct or negative consequences for any other group or individual, organizational leaders in particular must be completely aware of the consequences of certain decisions and organizational trajectories, and ensure alignment with societal interests.

There are many examples of ethical mistakes in which organizational decision makers pursued interests that benefited them at the cost of society. The 2008 economic collapse saw a great deal of poor decision-making on behalf of the banks. The Enron scandal is another example of individuals choosing personal rewards at the cost of society at large. These types of situations are extremes, but they highlight just how serious the consequences can be when ethics are ignored.

How to Frame Issues Ethically

One complexity of building a strong ethical foundation into an organization is the simple fact that there are many schools of thought. Ethics are in some ways a branch of philosophy, in which the idealized perspective is both malleable and uncertain. However, some powerful examples of ethical frames are available to us from many different time periods. There are four schools of thought that are useful for framing future strategic decisions to ensure ethical behavior. These perspectives are utilitarian, deontological, virtuous, and communitarian approaches.

Utilitarian Approach

Perhaps the cleanest and simplest perspective on ethical behavior, a utilitarian will always ask one question: what is the ideal outcome for the highest number of people? This approach simply considers the impact of ones actions on others, and tries to ensure that the best outcome for the most people is what ultimately occurs.

While this outcome-based reasoning is quite useful, it has one fatal flaw. The definition of ‘best’ when discussing what’s best for the most people can become quite subjective. As a result, when utilizing this ethical reasoning to make decisions, it is important to set terms and create definitions that enable the reasoning to have applicable and measurable logic. Simply put, one must ensure they define their terms, and what they mean by good, when pursuing this ethical line of reasoning.

Deontological Approach

Popularized by Emmanual Kant, the central term in this point of view is duty. Kant disliked the concept of utilitarianism for one simple reason: the ends should not justify the means. Indeed, Kant’s ethical argument is that moral maxims of respect for one another and appropriate behavior serve as a groundwork for all ethical reasoning. It is these core concepts which can never be sacrificed for the greater good.

Virtue Ethics

Popularized by Greek philosophers such as Aristotle, this point of view assumes that virtue is a central benchmark for all ethical behavior. What is meant by virtue in this context is a desire to perform a certain act as a result of deep contemplation on the value of that act. To make this act virtuous is to perform it with excellence. As a result, we have a deep contemplation of the value of a certain behavior or decisions, which we apply great practice and consideration. Following this, we can approach the perfect execution of that act or behavior through our rational minds.

In this school of ethical thought, it is similarly important to discard the justification of a means by the ends of that means. Which is to say this an act should be performed because it is desirable in and of itself, and not for the sake of something else. Each behavior is therefore considered carefully, rationally and virtuously to ensure it is valid, beneficial, and valuable.

Communitarian Ethics

Finally we have communitarian ethics. In this perspective, the individual decision-maker should ask about the duties owed to the communities in which they participate. This is a relatively simple frame of reference, where the individual decision maker will recognize the expectations and consequences of a given decision relative to the needs, demands and impacts of a certain preferred community.

Ethical behavior requires careful consideration of all frames, and a thorough understanding of the impacts of a given decision.

Integrating Ethics: This video provides some overview of ethical perspectives.

Ethical Issues at an Individual Level

A critical function of organizational management is empowering a positive sense of values and ethos at the individual level.

Learning Objectives

Understand the interaction between individual ethics and organizational management

Key Takeaways

Key Points

  • An important aspect of organizational strategy and management is empowering a strong sense of ethics at the individual level.
  • Organizations should internally develop a code of conduct and/or ethics statement, provide ethics training, appoint ethics officers, and ensure there is an anonymous way to report ethical problems.
  • Providing intrinsic and extrinsic sources of motivation for individual employees to behave ethically reinforces positive ethical behavior.
  • Hiring and developing employees who have a strong sense of individual professionalism will ensure best practices are achieved from an ethical point of view.

Key Terms

  • extrinsic: Outside of; not belong to the thing itself.
  • Intrinsic: An aspect possessed by character; internal.

The Importance of Ethics

Ethical behavior, be it at the organizational, professional or individual level, is a direct representation of the principles and values that govern the individual and the organization they represent. Organizations create an internal culture, which is reflected externally as organizational values. These values impact the relationships within the organization, productivity, reputation, employee morale and retention, legalities, and the broader community in which they operate.

As a result, most organizations generate a statement of organizational values and codes of conduct for all employees to understand and adhere to. Motivating and reinforcing positive behavior while creating an environment that avoids unethical behavior is a critical responsibility of both managers and employees.

How To Empower Ethics

Structure

At the individual level, organizations must focus on developing and empowering each employee to understand and adhere to ethical standards. There are four basic elements organizations can build to empower individual ethics:

  • A written code of ethical standards (ethical code)
  • Training for management and employees (ethical training)
  • Advice and consulting on a situation to situation basis (ethics officers)
  • A confidential and easily accessible system of reporting (ethical reporting)

Equipping organizations with these four components can alleviate much of the burden on the individual, and enable each employee to learn what is appropriate (and what isn’t).

Motivation

As with most facets of management, there is also a critical motivational component to individual ethics. Intrinsic and extrinsic motivations can reinforce positive behavior and/or eliminate negative behavior in the workplace.

Whistleblowing, for example, is a practice that gets quite a bit of both positive and negative media attention. Whistleblowers are individuals who identify unethical practices in organizations and report the behavior to management or the authorities. A whistleblower who behaves honestly, reporting a problem accurately, should be rewarded for their bravery and honesty, as opposed to punished and ostracized. If an employee is blowing the whistle, it is likely that the organization itself has failed to empower and positively reinforce honest and ethical discussions internally.

Another example is rewarding employees for admitting mistakes. An employee who makes a mistake on the assembly line, and accidentally produces a batch of defective goods, could react in a number of ways. If the organization punishes employees for mistakes, the employee is quite likely to be motivated to keep quiet and not mention it to avoid punishment. However, if the organizational is ethical and clever, they will empower employees to take responsibility for their mistakes and even reward them for coming forward, apologizing, and ensuring that no consumer receives a defective product. It seems at first counter-intuitive to reward an employee for a mistake, but ultimately it provides the best outcome for everyone.

Professionalism

Finally, some aspects of individual ethics are rooted in the individual. Attaining a strong sense of professionalism, and recognizing the ethical implications of certain professional decisions, is a key component of education, individual reflection, and experience. For some professions it is even more critical and relevant than others.

Journalists, for example, could easily attain higher notoriety for making up false stories about celebrities to gain traffic to their news website. But an ethical journalist recognizes the repercussions of slander for the individual being discussed, and maintains an honest ethical code of reporting only what they know to be true (and not what they speculate). Psychologists will maintain patient privacy, understanding the repercussions of leaking personal information about their patients.

There are many potential examples, but the primary point is that professionals understand the their field deeply, including the repercussions of making ethical mistakes.

A Venn diagram showing how social, environment, and economic value overlaps.

Triple Bottom Line: Balancing ethics with proper business practices at the individual and organizational level can result in a triple bottom line: economic, social, and environmental value.

Ethical Issues at an Organizational Level

Organizational ethics express the values of an organization to its employees and affect all functional areas in a business.

Learning Objectives

Evaluate ethical issues that face organizations in the fields finance, human resource management, sales and marketing, and production

Key Takeaways

Key Points

  • An organization’s ethical behavior is an extension of its organizational culture.
  • The four elements necessary to quantify an organization’s ethics are a written code of ethics and standards; ethics training for executives, managers, and employees; availability for advice on ethical situations (i.e, advice lines or offices); and systems for confidential reporting.
  • Ethical practices need to be established at both the organizational level and the functional level (i.e., sales, marketing, production, etc. ) to be effective.
  • Ethical practices need to be established at both the organizational level and the functional level (i.e. sales marketing, production, etc. ) to be effective

Key Terms

  • ethics: A branch of philosophy that involves systematizing, defending, and recommending concepts of right and wrong conduct; also called moral philosophy.

Organizational Ethics is how an organization ethically responds to an internal or external stimulus. Organizational ethics express the values of an organization to its employees and other entities, irrespective of governmental and/or regulatory laws. There are at least four elements that make ethical behavior conducive within an organization:

  • A written code of ethics and standards
  • Ethics training to executives, managers, and employees
  • Availability for advice on ethical situations (i.e, advice lines or offices)
  • Systems for confidential reporting.

Ethical Issues in Finance

The 2008 financial crisis caused critics to challenge the ethics of the executives in charge of U.S. and European financial institutions and regulatory bodies. Previously, finance ethics was somewhat overlooked because issues in finance are often addressed as matters of law rather than ethics. Fairness in trading practices, trading conditions, financial contracting, sales practices, consultancy services, tax payments, internal audits, external audits, and executive compensation also fall under the umbrella of finance and accounting. Specific corporate ethical/legal abuses include creative accounting, earnings management, misleading financial analysis, insider trading, securities fraud, bribery/kickbacks, and facilitation payments.

Ethical Issues in Human Resource Management

Human resource (HR) management involves recruitment selection, orientation, performance appraisal, training and development, industrial relations and health and safety issues. Discrimination by age (preferring the young or the old), gender, sexual orientation, race, religion, disability, weight, and attractiveness are all ethical issues that the HR manager must deal with.

Ethical Issues in Sales and Marketing

Ethics in marketing deals with the principles, values, and/or ideals by which marketers and marketing institutions ought to act. Ethical marketing issues include marketing redundant or dangerous products /services; transparency about environmental risks, product ingredients (genetically modified organisms), possible health risks, or financial risks; respect for consumer privacy and autonomy; advertising truthfulness; and fairness in pricing and distribution. Some argue that marketing can influence individuals’ perceptions of and interactions with other people, implying an ethical responsibility to avoid distorting those perceptions and interactions.

Marketing ethics involves pricing practices, including illegal actions such as price fixing and legal actions including price discrimination and price skimming. Certain promotional activities have drawn fire, including greenwashing, bait-and-switch, shilling, viral marketing, spam (electronic), pyramid schemes, and multi-level marketing. Advertising has raised objections about attack ads, subliminal messages, sex in advertising, and marketing in schools.

Ethical Issues in Production

Business ethics usually deals with the duties of a company to ensure that products and production processes do not needlessly cause harm. Few goods and services can be produced and consumed with zero risk, so determining the ethical course can be problematic. In some cases, consumers demand products that harm them, such as tobacco products. Production may have environmental impacts, including pollution, habitat destruction, and urban sprawl. The downstream effects of technologies such as nuclear power, genetically modified food, and mobile phones may not be well understood. While the precautionary principle may prohibit introducing new technology whose consequences are not fully understood, that principle would have prohibited most of the new technology introduced since the industrial revolution. Product testing protocols have been attacked for violating the rights of both humans and animals.

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Enron Stocks During the 2001 Scandal: Enron’s unethical practices led to their employees and shareholders losing billions of dollars as their stocks became worthless by November of 2001.

Fairness

Treating employees equitably enables substantial organizational benefits while avoiding unethical operations and the corresponding consequences.

Learning Objectives

Understand the importance of an employee’s perception of an organization’s decisions, and the impact this can have on performance.

Key Takeaways

Key Points

  • From a common sense perspective, you tend to get what you give. Treating employees in a way that empowers a sense of fairness and equity is a critical component to motivating positive employee behaviors.
  • There are three useful frames of reference when considering organizational fairness: distributive justice, procedural justice, and interactional justice.
  • Distributive justice is simply the process of making sure an employee’s production output aligns with his or her compensation.
  • Procedural justice focuses on allowing all participating employees to have input and accountability when designing operational processes.
  • Interactional justice comes in two parts. The first is ensuring that employees are treated in a socially positive and constructive manner. The second is ensuring nobody is left in the dark when important decisions are made.
  • Building the above concepts successfully into an organizational norm avoids productivity problems and empowers motivation, citizenship, and commitment.

Key Terms

  • Procedural: Concerned with the way in which something is done, or the process which enables it.
  • Distributive: Concerned with the way in which things are shared between people.
  • Interactional: Concerned with the way in which one individual socially encounters another.

Why Fairness Adds Value

Equitable treatment of all employees and stakeholders is critical to organizational success and the proper execution of business ethics. Awareness of potential fairness pitfalls, and ensuring that all employees feel valued and equitably treated, can avoid a wide variety of ethical and operational problems, while maximizing employee performance through providing a healthy environment for people to flourish and grow.

Organizational Justice

To ensure an organization is fair, one must consider the concept of justice as a central pillar of what creates a fair environment (and what does not). The question is simple: how do employees perceive the behavior of the organization, and how does this impact both employee and organizational outcomes ?

In answering these questions, there are three useful perspectives one can adopt in considering fairness in the organization:

  • Distributive – Simply put, the distribution of resources should align with the value of an individual’s inputs. Of course, this is more complex than salary. As a manager, ensure that credit, bonuses, and benefits are also distributed fairly.
  • Procedural – Employees don’t only want compensation. They also need input into the process, and shared accountability in the decisions being made. When designing the procedure of a given work group, inclusion of everyone’s perspectives can lead to substantially higher satisfaction, efficiency, and fairness.
  • Interactional – All members of an organization must both be treated appropriately (from a social frame) and informed respectfully (from an informational frame). In short, employees should be treated with propriety in discussions and shouldn’t be left in the dark when important decisions are made.

Implications of Fairness

There are many overt and subtle outcomes of treating employees equitably. The simplest examples of positive results due to a strong sense of ethical fairness in an organization include:

  • Higher Performance and Efficiency – People feel their input is aligned with their compensation
  • Commitment – Happy employees tend to stick around.
  • Citizenship – If there is inequity in how people are treated, it tends to divide them. This is incredibly dangerous, and can quickly erode the positive benefits of looking out for one another.
  • Avoiding Counterproductive Behavior – In short, dissatisfied employees are more prone to working against the established goals of the organization. Behaviors such as not doing certain tasks or helping certain work-groups can quickly become a source of inefficiency.
  • Absenteeism – Sick days, skipping meetings, and generally unplugging from the organization is often an outcome of inequitable organizations.
  • Emotional Exhaustion – Unsatisfied employees wrestle with insecurity and dissatisfaction, both of which are emotionally draining.

While there are many more examples of consequences avoided and benefits achieved from an ethical operational approach, this paints a clear picture of why it is important and how to frame manager’s perspectives to ensure equitable behavior.

This model aligns well with Maslow's hierarchy of needs, but applied to workplace motivation. Through the five M's identified (in order of chronological achievement being Money; Myself; Member; Mastery; Mission), one can see how organizational justice will enable higher levels of individual motivation.

Work Motivation: This model aligns well with Maslow’s hierarchy of needs, but applied to workplace motivation. Through the five M’s identified (in order of chronological achievement being Money; Myself; Member; Mastery; Mission), one can see in this pyramid chart how organizational justice will enable higher levels of individual motivation.

Open Communication of Decisions

Transparency consists of operating in such a way that it is easy for others to see what actions are being performed.

Learning Objectives

Explain how a company uses transparency to open communication and why this is crucial to building connections and a sense of community

Key Takeaways

Key Points

  • Transparency implies openness, communication, and accountability.
  • Radical transparency is a management method where nearly all decision making is carried out publicly.
  • Corporate transparency is the concept of removing all barriers to, and the facilitation of, free and easy public access to corporate information.

Key Terms

  • transparency: Open, public; having the property that theories and practices are publicly visible, thereby reducing the chance of corruption.

Transparency, as used in science, engineering, business, the humanities and in a social context more generally, implies openness, communication, and accountability. Transparency means operating in such a way that it is easy for others to see what actions are performed. For example, a cashier making change at a point of sale by segregating a customer’s large bills, counting up from the sale amount, and placing the change on the counter in such a way as to invite the customer to verify the amount of change demonstrates transparency. Radical transparency is a management method where nearly all decision making is carried out publicly. All draft documents, all arguments for and against a proposal, all final decisions, and the decision making process itself are made public and remain publicly archived.

Corporate transparency, a form of radical transparency, is the concept of removing all barriers to—and the facilitation of—free and easy public access to corporate information. This includes the laws, rules, and processes that facilitate and protect those individuals and corporations that freely join, develop, and improve the process.

A conference room with people talking.

Talk to me: Keeping the lines of communication open is important.

Companies should make a commitment to open communication because communication is crucial to building connections and a sense of community. If we cannot communicate our thoughts, opinions and ideas, we remain isolated and cut off from each other. Open communication also allows for the possibility of self correction and group problem solving. Open communication leads to better decision-making and faster error correction. The transparency that occurs as a result of open communication protects against potential abuses of power and makes for a safer environment overall.

Conflicts of Interest

A situation in which someone in a position of trust has competing professional or personal interests is known as a conflict of interest.

Learning Objectives

Outline how self-dealing, outside employment, family interests, pump and dumps, and gifts exemplify conflicts of interest, and differentiate that from an impropriety

Key Takeaways

Key Points

  • A conflict of interest can exist even if there are no improper acts that result from it. One way to understand this is to use the term “conflict of roles”.
  • The presence of a conflict of interest is independent from the execution of impropriety.
  • A conflict of interest becomes a legal matter when an individual either tries and/or succeeds in influencing the outcome of a decision for personal benefit.
  • Common types of conflicts of interest include: self-dealing, family interests or nepotism, and the giving of gifts.
  • Conflict of interest can be mitigated by several actions including: removal, disclosure, recusal, third-party evaluations, and establishing codes of conduct.

Key Terms

  • pump and dump: A form of financial fraud where the fraudster buys stocks cheaply, generates artificial excitement about them to create a temporary price increase, then sells the stocks before the price goes back down.
  • disclosure: The act of revealing something.
  • recusal: An act of recusing. To remove oneself from a decision/judgment because of a conflict of interest.

A conflict of interest (COI) occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other.

A cartoon doctor, smiling and standing next to a prescription pill bottle with a dollar sign on its label.

Conflict of Interest: A situation in which someone in a position of trust — e.g., a doctor — has competing professional or personal interests.

The presence of a conflict of interest is independent from the execution of impropriety. Therefore, it can be discovered and voluntarily defused before any corruption occurs. In fact, for many professionals, it is virtually impossible to avoid having conflicts of interest from time to time. It can, however, become a legal matter for example when an individual tries (and/or succeeds in) influencing the outcome of a decision, for personal benefit. A director or executive of a corporation will be subject to legal liability if a conflict of interest breaches his/her Duty of Loyalty.

Conflict of Interest vs. Impropriety

There often is confusion over these two situations. Someone accused of a conflict of interest may deny that a conflict exists because he/she did not act improperly. In fact, a conflict of interest can exist even if there are no improper acts as a result of it. One way to understand this is to use the term “conflict of roles”.

As an example, in the sphere of business and control, according to the Institute of Internal Auditors:

“conflict of interest is a situation in which an internal auditor, who is in a position of trust, has a competing professional or personal interest. Such competing interests can make it difficult to fulfill his or her duties impartially. A conflict of interest exists even if no unethical or improper act results. A conflict of interest can create an appearance of impropriety that can undermine confidence in the internal auditor, the internal audit activity, and the profession. A conflict of interest could impair an individual’s ability to perform his or her duties and responsibilities objectively. “

An organizational conflict of interest (OCI) may exist in the same way (as described above) in the realm of the private sector providing services to the government, where a corporation provides two types of services to the government that have conflicting interest or appear objectionable (i.e.: manufacturing parts, and then participating on a selection committee for parts manufacturers).

Corporations may develop simple or complex systems to mitigate the risk, or perceived risk, of a conflict of interest. These are typically evaluated by a governmental office (e.g., in a US Government RFP) to determine whether the risks pose a substantial advantage to the private organization over the competition or will decrease the overall competitiveness in the bidding process.

Types of Conflicts of Interests

These are some of the most common forms:

  • Self-dealing, in which an official who controls an organization causes it to enter into a transaction with the official, or with another organization that benefits the official, i.e., the official is on both sides of the “deal”.
  • Outside employment , in which the interests of one job contradict another.
  • Family interests, in which a spouse, child, or other close relative is employed (or applies for employment) or where goods or services are purchased from such a relative or a firm controlled by a relative. For this reason, many employment applications ask if one is related to a current employee. In this event, the relative may be recused from any hiring decisions. Abuse of this type of conflict of interest is called nepotism.
  • Gifts from friends who also do business with the person receiving the gifts (may include non-tangible things of value such as transportation and lodging).
  • Pump and dump, in which a stockbroker who owns a security artificially inflates its price by “upgrading” it or spreading rumors, sells the security and adds short position, then “downgrades” it or spreads negative rumors to push its price down.

Other improper acts that are sometimes classified as conflicts of interests may be better classified elsewhere: e.g., accepting bribes is corruption; the use of government or corporate property or assets for personal use is fraud; not conflict of interest.

Codes of Ethics

These help to minimize problems with conflicts of interest because they spell out the extent to which such conflicts should be avoided, and what the parties should do where such conflicts are permitted (disclosure, recusal, etc.). Thus, professionals cannot claim that they were unaware that their improper behavior was unethical. As importantly, the threat of disciplinary action (for example, a lawyer being disbarred) helps to minimize unacceptable conflicts or improper acts when a conflict is unavoidable.

As codes of ethics cannot cover all situations, some governments have established an office of the ethics commissioner, who should both be appointed by and report to the legislature.