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.