Ethics in Business
What are ethics? What are business ethics?
Why are business ethics important
How can business leaders encourage their companies to
What are corporate compliance programs
Exactly how to decide these issues is something each
person must do alone, on the basis of his or her own
(1) What are your ethical criteria?
(2) How would you apply those criteria in a
(3) How can you best adapt their standards to the
kinds of ethical and social responsibility issues
that you will face in the business world?
Business Law - Ethics
Ethics is the study of what constitutes right and wrong behavior.
Ethics focuses on morality and the application of moral
principles in everyday life.
A. WHAT ARE BUSINESS ETHICS?
Business ethics focuses on what constitutes ethical behavior in
the world of business. Business ethics is not a separate kind of
B. WHY IS BUSINESS ETHICS IMPORTANT?
An understanding of business ethics is important to the long-
run viability of a business, the well being of its officers and
directors, and the welfare of its employees.
Business Law – Learning Obj #1
Ethics is the study of what constitutes right or wrong
behavior—the fairness, justness, rightness, or
wrongness of an action. Business ethics focuses on
what constitutes ethical behavior in the world of
business. An understanding of business ethics is
important to the long-run viability of a business firm
and to the well being of the firm’s officers, managers,
and employees. A business firm also owes duties to a
variety of “stakeholders” whom the firm’s decisions
and activities may affect significantly.
Learning Objective #2
How can business leaders encourage their companies
to act ethically?
Ethical leadership is important to create and maintain an
ethical workplace. Management can set standards, and
apply those standards to themselves and their firm’s
THE IMPORTANCE OF ETHICAL LEADERSHIP
Management must set and apply ethical standards to which
they are committed. Employees will likely follow their
example. Ethical conduct can be furthered by not
tolerating unethical behavior, setting realistic employee
goals, and periodic employee review.
Case 3.2: Exxon Valdez
What were other penalties assessed against Exxon and
The federal Government and Alaska filed suits against
Exxon for environmental damage. In this litigation, Exxon
agreed to pay $900 million over a period of ten years and up
to an additional $100 million for environmental damage not
then known. In a criminal prosecution, after years of trials
and appeals, Hazelwood was convicted of a single state-law
misdemeanor for negligent discharge of oil. The federal
government prosecuted Exxon for environmental crimes,
including violations of the Clean Water Act, the Refuse Act,
and the Migratory Bird Treaty Act. On those charges, fines
of $25 million and restitution of $100 million were ordered.
Case 3.2: Exxon Valdez
Are there situations in which a business’s conduct would be
more reprehensible than Exxon’s behavior in this case?
The court acknowledged that “there are surely other situations
that would be more reprehensible—such as knowingly allowing
a relapsed alcoholic to operate a 747 aircraft loaded with
passengers.” The U.S. Court of Appeals for the Ninth Circuit had
remanded this case to be reconsidered in light of United States
Supreme Court decisions in cases involving a sale of a repainted
car as new, passing off a product as a competitor’s, and an
insurer’s refusal to pay a judgment. “[T]his case,” said the district
court, however, “is in an entirely different galaxy than [those
other cases]. . . . [T]he court finds Exxon’s conduct highly
A. THE IMPORTANCE OF ETHICAL LEADERSHIP
Management must set and apply ethical standards to
which they are committed. Employees will likely follow
their example. Ethical conduct can be furthered by not
tolerating unethical behavior, setting realistic
employee goals, and periodic employee review.
B. CREATING ETHICAL CODES OF CONDUCT
Most large corporations have codes of conduct that indicate the
firm’s commitment to legal compliance and to the welfare of
those who are affected by corporate decisions and practices.
Large firms may also emphasize ethics in other ways (for
example, with training programs).
C. CORPORATE COMPLIANCE PROGRAMS
Components of a comprehensive corporate ethical-compliance
program include an ethical code of conduct, an ethics
committee, training programs, and internal audits to monitor
compliance. These components should be integrated. The
Sarbanes-Oxley Act of 2002 requires firms to set up confidential
systems for employees to report suspected illegal or unethical
Learning Objective #3
What are corporate compliance programs?
The components of a comprehensive corporate
compliance program define the program. These
components include an ethical code of conduct, an
ethics committee, training programs, and internal
audits to monitor compliance.
CONFLICTS AND TRADE-OFFS
A firm’s duty to its shareholders should be weighed
against duties to others who may have a greater stake
in a particular decision. For example, an employer
should consider whether it has an ethical duty to loyal,
long-term employees not to replace them with workers
who will accept lower pay and whether this duty
prevails over a duty to improve profitability by
Companies That Defy the Rules
ENRON’S GROWTH AND DEMISE IN A NUTSHELL
Managers took advantage of accounting standards to
overestimate future earnings, which resulted in inflated reports
of current earnings. To maintain these exaggerations, the
company created subsidiaries to which it could shift unreported
losses and assets with inflated values. Many of these shifts
occurred outside the U.S. to avoid federal income taxes. When
questioned, management refused to investigate and reveal
THE ENRON LEGACY
Unethical conduct resulted in the single largest bankruptcy of a
U.S. business firm. This misconduct affected the firm’s
managers, employees, suppliers, and shareholders, and the
community and society in general.
THE DEBATE CONTINUES
At what point does a corporation have an ethical duty
to act when confronted with evidence that its product
may be harmful?
The text phrases this question in the context of later
controversies about competitors’ products
Approaches to Ethical Reasoning
Ethical reasoning is the process by which an individual examines
a situation according to his or her moral convictions or ethical
standards. Fundamental ethical reasoning approaches include
1. Religious Ethical Standards
Religious standards provide that when an act is prohibited by
religious teachings, it is unethical and should not be undertaken,
regardless of the consequences. Religious standards also involve
(“Do unto others as you would have them do unto you”).
Even though it might be profitable for a firm to lay off
a less productive employee, decision makers would
give substantial weight to the potential suffering that
the employee’s family might experience if the
employee found it difficult to find employment
The Ten Commandments…..
“Do unto others as you would have them do unto you”
Imperative Principle (Kantian)
Immanuel Kant – 1700/1800’s
Decision made w/out trying to predict whether action
will probably cause greatest balance of good over evil.
Lying can be justified.
Most professional codes of ethics have characteristics
of the imperative theory.
Kant was unwilling to rely solely upon decision-
makers' inclinations and values for decisions in various
circumstances. He strongly preferred rules without
Imperative Duty-Based Ethics
Strict versions of imperative ethics maintain that a
decision should be made without trying to predict
whether an action will probably create the greatest
balance of good over evil. Ethics in the imperative
sense is a function of moral rules and principles and
does not involve any calculation of the consequences.
Example: quot;Lying is wrong.quot;
Example: You will decide not to cheat because if
everyone cheated, the examination would be
Principle of Rights – Duty-Based
Principle that human beings have certain fund. Rights
(life, freedom, pursuit of happiness)
Natural law tradition embraces the concept that
certain things (killing) are morally wrong, they are
contrary to human nature….
Those who believe in the “rights theory” believe
business decisions should be made based on how
those decisions affects rights of others…. (bus owners,
Which “rights” are most important?
Rights – Duty-Based
A dilemma for those who support this theory is that
they may disagree on which rights are most important
Example – Suppose a firm can shut down a plant to
avoid dumping pollutants into a river which would
hurt thousands of people. Or, the company can stay
open and pollute the water saving jobs in the plant…
Which choice would you make?
Not all choices are clear cut…..
Utilitarian principle, John Stuart Mill – 1700/1800’s
“Thou shalt act so as to generate the greatest good for
the greatest number… “
The end justifies the means – My son was sick and I took
the money to pay for his medical care
Offenders will calculate potential gains and losses before
they decide to disobey the law
Ultimate criterion for an ethical decision is the balance of
good consequences (pleasure and avoidance of pain) over
evil consequences (displeasure and pain) produced by an
Utilitarian Principle - Outcome
(1) a determination of which individuals will be
affected by the action in question;
(2) a cost-benefit analysis—an assessment of the
negative and positive effects of alternative actions on
these individuals; and
(3) a choice among alternative actions that will
produce maximum societal utility (the greatest
positive benefits for the greatest number of
In contrast to duty-based ethics, Utilitarianism is
Focuses on the consequences of an action, not on the
nature of the action or on any set of preestablished
moral values or religious beliefs.
Action is morally correct when the people it affects, it
produces the greatest amount of good for the greatest
number….. (Stimulus Bill)
When the action affects the majority adversely, it is
Utilitarianism – Draw Backs
Objective calculated approach to problems tend to
reduce the welfare of human beings to plus and minus
signs on a cost-benefit worksheet and to “justify”
human cost that many find unacceptable
The U.S. Sentencing Commission proposals are based
almost totally on this idea, mandating that monetary
penalties be calculated at a level that will induce
companies to conclude that breaking the law is not
fiscally appealing. (Positive or Negative)
Learning Objective #4
How do duty-based ethical standards differ from
outcome-based ethical standards?
Duty-based ethical standards are derived from
religious precepts or philosophical principles.
Outcome-based ethics focus on the consequences of
an action, not on the nature of the action or on a set of
pre-established moral values or religious beliefs.
Business Ethics on a Global Level
There are important ethical differences among, and
within, nations. Some countries, for example, largely
reject any role for women professionals, which may
cause difficulties for American women conducting
business transactions in those countries.
Concerns include the rights and the treatment of
foreign workers who make goods imported and sold in
the United States by U.S. firms. Should a U.S firm
refuse to deal with certain suppliers or make
arrangements to monitor their workplaces to make
sure that the workers are not being mistreated?
Ethical standards are subjective. They are derived
from personal religious beliefs or philosophical
assumptions concerning the nature of goodness,
fairness, rightness, or justice. Each of us decides what
we believe in and how to act on those beliefs.
How well do you sleep at night?
Ethics are created by moral values. Whether to obey
the law is itself an ethical question. Some individuals
may choose to ignore the law if their ethical principles
conflict with it.
If there is a conflict between a law and an ethic,
should an individual disobey the law, or should an
individual obey the law even if he or she thinks it
would be unethical to do so? Is there a higher law
than what society provides in a particular place at
a particular time?
Imagine you own a company at which there is an
opening at a beginning level. There are two
applicants—one, your personal friend and the other, a
member of the opposite sex (or of a minority). The
latter individual is more qualified for the job than your
friend. Suppose that in spite of whatever profit the
most qualified person might generate, you would
rather have your friend on the job. In this
hypothetical, hiring the friend would violate the law
Would you hire the friend in violation of the law?
Suppose that as business person you will have an opportunity to
make more money by meeting with competitors and fixing
prices, conduct which is illegal. For this hypothetical, the
authorities will not discover that the prices have been fixed. In
fact, the price rise could be small—pennies per item—but the
increases in net profit could be considerable.
Is price-fixing fair? Ethical? Does it make any difference
what the extra profit is used for? (GAS)
If YOU need the money, would price-fixing be wrong?
Would YOUR answers be different if there was no chance
that YOU would be caught? Why?
Should ethical standards be adapted to deal with
the new forms of social disruption made possible
by the Internet (for example, data
theft, hacking, virus implanting, and invasion of
What new ethical standards, if any, are needed to
resolve problems online?