BUSINESS ETHICS

RMMAKAHA@GMAIL.COM
BUSINESS
ETHICS
RMMAKAHA@GMAIL.COM
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BUSINESS ETHICS unedited version
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SUBJECT: BUSINESS ETHICS
CODE: 702/S05
DURATION: 220 Hours
1.0 GENERAL AIMS
1.1 To provide students with a sound understanding of business ethics in order to function
effectively and add value in employment.
1.2 To help prepare students to function in marketplace with greater sensitivity to ethical
issues and with keener insight into their possible solutions.
1.3 To develop knowledge wider contextual issues such as society and business ethics.
1.4 To develop the analytic tools and research skills needed to address contemporary
ethical problems in business.
2.0 OBJECTIVES
At the end of the course the student should be able to:
2.1 Demonstrate an understanding of thefundamental concepts, ethical theories and
issues applicable to business ethics.
2.2 Articulate some of the ethical dilemmas or problems which occur in business.
2.3 Discuss the importance and relevance of business ethics in business.
2.4 Develop an understanding of the value and limitations of methods of ethical analysis
2.5 Identify and explain the critical issues and challenges in corporate governance.
2.6 Distinguish between bad and good practices in business.
2.7 Make sound ethical decisions.
2.8 Understand five major ethical systems that have direct relevance to managerial
decision making.
2.9 Identify the responsibilities of business to its various stakeholders, shareholders,
employees, suppliers, customers, competitors and government.
2.10 Analyze and suggest viable ethical solutions.
3.0 CONTENT
3.1 Understanding Business Ethics
ETHICS is a set of standards or code or value system worked out from human reason & experience by
which free human actions are determined as ultimately right or wrong, good or evil.
Ethics is the principles of conduct governing an individual or a group.
• Ethics is “the study of morality”.
• Although ethics deals with morality, it is not quite the same as morality. Ethics is a kind of
investigation and includes both the activity of investigating as well as the results of that
investigation – whereas morality is the subject matter that ethics investigates.
• Business ethics is a specialized study of moral right and wrong. It concentrates on moral
standards as they apply to business policies, institutions and behavior.
• There is no better way to begin an investigation into the relationship between ethics and
business than by looking at how real companies have actually tried to incorporate ethics and
business.
• Morality: can be defined as standards that an individual or a group has about what is right
and wrong or good and evil.

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3.1.1 The meaning of the Business Ethics and Integrity.
WHAT ARE BUSINESS ETHICS?
Business ethics are the code of morals that are the standard of conduct expected of or adopted by a
business. They are the set of principles which guide business or which a business adopts as the
acceptable standard of performance in respect of various stakeholders and interested parties. These
stakeholders include its customers, its suppliers, its employees, its shareholders, government authorities
and any other party which interacts with the organization.
WHAT IS BUSINESS INTEGRITY?
Business integrity is the reliability with which the business undertakes its transactions with the various
parties with which it interacts. It is the soundness and honesty with which it conducts its business
transactions and the relationship that it promotes with all parties with which it interacts.
WHY HAVE BUSINESS ETHICS AND INTEGRITY?
When business ethics and integrity are present all parties dealing with the business know they can rely
on the standards with which the business conducts its business transactions.
WHY ARE BUSINESS ETHICS AND INTEGRITY IMPORTANT?
Business ethics and integrity are important to all parties dealing with the business. Employees will know
that they will be paid on time, creditors will be confident of being paid, government authorities will be
aware that the business respects authority, all parties transacting business with the organization will
tend to be more cooperative and helpful. In addition the business is likely to be more ordered and
successful and not lunge from self-generated crisis to self-generated crisis.
How were Business Ethics Developed?
If you plan to own or manage a business, it is advisable to have knowledge of business ethics. It is
basically the code that business persons follow to ensure that they are doing the right things to attain
success. These codes were developed through years of studies and research. Business ethics is a
reflection of the norms, values, and folkways of a certain country or place in respect of business
practice.
Once you decide to own or manage a business, it is important that you are aware of business ethics.
Perhaps you're wondering how it is developed. It takes time to develop the ethics. The latter is actually
a philosophy field that studies values, norms, and systems. In the case of managing and conducting a
business, it will guide you to do the right things. The field focuses on a commercial enterprise's conduct
or policies to determine which ones are appropriate to use. It can be difficult to determine which
ethical conduct is correct. If you are a committed a businessperson, you will take time to know what is
right or wrong and subscribe to the right ones.
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Development of Business Ethics
Business ethics cover various activity including responsibilities, obligations, employees, customers,
businesses, taxation, environment, and national/multinational governments. There are times when
ethics is dictated by the folkways and conventions although there are also times when federal, state
and local government laws dictate action as well. This is where institutionalized business ethics enter the
scenes which include the contracts product safety, pricing, warranties, and many others. There are
now professions and corporations that contribute to the establishment of the code of ethics.
Researchers usually explore business ethics in three ways - studying famous philosophers and their
views, identifying ethical concerns, and examining various case studies.

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It was only in the 1970's when the business ethics concepts became popular. Certain factors were able
to contribute to the interest in ethics and a very evident one is the change in societal values. If you're
part of the executives of a new organization, you can become part of a team to develop the code of
ethics. However, in the business industry, it's typical for businesses to follow the same set of code as set
by the industry. They no longer have to create their own and in most will just include new one that
deemed fit.
The development of business ethics took a long time to be at its present level. It embraces different
generations until the present. The code wasn't developed overnight. Businesses within a particular
trade or practice are expected to comply with the code to make sure that operations are carried out
properly and without violating morality. This is part of the industry best practices and self-regulation.
If you want your business to stay competitive, it is important that you know the industry code of ethics.
Running a business can be very challenging. With the right knowledge, skills, and attitude, you will soon
experience success. The most successful ones observed the code strictly, and so must your business.
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Benefits of Practicing Business Ethics
In the research study, "Does Business Ethics Pay?" by The Institute of Business Ethics (IBE), it was found
that companies displaying a "clear commitment to ethical conduct" consistently outperform
companies that do not display ethical conduct. The Director of IBE, Philippa Foster Black, stated: "Not
only is ethical behavior in business life the right thing to do in principle, we have shown that it pays off in
financial returns." These findings deserve to be considered as an important insight for companies
striving for long-term success and growth.
7 Principles of Admirable Business Ethics
1. Be Trustful: Recognize customers want to do business with a company they can trust; when trust is at
the core of a company, it's easy to recognize. Trust defined, is assured reliance on the character,
ability, strength, and truth of a business.
2. Keep an Open Mind: For continuous improvement of a company, the leader of an organization must
be open to new ideas. Ask for opinions and feedback from both customers and team members and
your company will continue to grow.
3. Meet Obligations: Regardless of the circumstances, do everything in your power to gain the trust of
past customers and clients, particularly if something has gone awry. Reclaim any lost business by
honoring all commitments and obligations.
4. Have Clear Documents: Re-evaluate all print materials including small business advertising,
brochures, and other business documents making sure they are clear, precise and professional. Most
important, make sure they do not misrepresent or misinterpret.
5. Become Community Involved: Remain involved in community-related issues and activities, thereby
demonstrating that your business is a responsible community contributor. In other words, stay involved.
6. Maintain Accounting Control: Take a hands-on approach to accounting and record keeping, not
only as a means of gaining a better feel for the progress of your company, but as a resource for any
"questionable” activities. Gaining control of accounting and record keeping allows you to end any
dubious activities promptly.
7. Be Respectful: Treat others with the utmost of respect. Regardless of differences, positions, titles, ages,
or other types of distinctions, always treat others with professional respect and courtesy.

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Recognizing the significance of business ethics as a tool for achieving your desired outcome is only the
beginning. A small business that instills a deep-seated theme of business ethics within its strategies and
policies will be evident among customers. It's overall influence will lead to a profitable, successful
company. By recognizing the value of practicing admirable business ethics, and following each of the
7 principles, your success will not be far off.
Characteristics of Business Ethics?
Differ with persons: ethical questions do not have a unique solution but a multitude of
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alternatives
Ethical decisions are not limited to them, but affect a wide range of other situations as well.
Ethical decisions involve a tradeoff between cost incurred and benefits received.
Consequences are not clear
Every person is individually responsible for the ethical or unethical decision and action that he
or she takes
Ethical actions are voluntary human actions
The important characteristics of business ethics are;
1. As a guide: - Business ethics constitutes the guiding principles of business functions with the help of
this, businessmen can lean about the progress, situation, environment and conditions of the business.
2. Goals and means: - Business ethics is that branch of the business environment in which can study
about the goals and means for the rational selection of sacred objects and their fulfillment.
3. Art and Science: - Business ethics is concerned with the principles of business behavior, standards,
moral values etc. With the study of business ethics, we can show the difference between good and
evil, proper and improve actions of business. For these activities in business, business ethics is known as
an ideal science. It is an art because it emphasizes practical use of behavioral standards, techniques
and principles.
4. Study Human Aspects: -Business ethics all those which are concerned with human aspect. It provides
information to customers, government, society etc., on good or bad, right or wrong conducts of
business.
5. Difference from Social Responsibility: -Social responsibility is concerned with functions, programs and
policies of an enterprise, whereas business ethics is related with the conduct and behavior of
businessmen. But social responsibility of business and its policies are influenced by ethics.
6. Theology based: - The development of business ethics is possible on the basis of theological
principles, such as service, human welfare, sincerity, good behaviour etc.
7. Development Personal Dignity: -Personal dignity can develop with the principles of ethics.
8. Unrelated to Emotions: -Business ethics is not concerned with emotions but is based on reality and
social customs. As a matter of fact, business ethics is developed after testing the requirements of
business environment, social customs and traditions.
9. Universal Philosophy: - Business ethics is a universal philosophy. Ethical principles have relevance in
every business.

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Why are ethics important in business?
Ethics corresponds to basic human needs
Values create credibility with the public
Values give management credibility with employees
Values help better decision making
Ethics and profit
Law cannot protect society, ethics can
IMPORTANCE OF BUSINESS ETHICS:
It is now recognized that it is good business to be ethical. An ethical image for a company can
build goodwill and loyalty among customers and clients.
1. Ethical motivation:It protects or improves reputation of the organization by creating an
efficient and productive work environment. At a time of mass corporate downsizing, one
of the most effective ways to appeal to the fragile loyalty of insecure employees is to
promote an ethical culture, which gives employees a greater sense of control
andappreciation.
2. Balance the needs and wishes of stakeholders:There is pressure on business to
recognize its responsibilities to society. Business ethics requires businesses to think
about the impact of its decisions on people or stakeholders who are directly or
indirectly affected by those decisions. Companies build their image by acting in accordance
with their values, whatever they might be. Creating a positive public image comes from
demonstrating appropriate values. Publicizing and following a company’s values allows
stakeholders to understand what the company stands for, that it takes its conduct as an
organization seriously.
3. Global challenges:Business must become aware of the ethical diversity of this worldbecause
of increasing globalization of the economy. It must learn the values of other cultures, how to
apply them to its decisions, and how to combine them with its own values. In a world where
transnational corporations and their affiliates account for two-thirds of the world’s trade in
goods, and employ 73 million people, corporations cannot afford to ignore the reality of
multicultural ethics.
4. Ethical pay-off:They serve to protect the organization from significant risks, and tosome
degree help grow the business. Risks such as breaches of law, regulations or company
standards, and damage to reputation were perceived to be significantly reduced.
5. Employee Retention:One of the major costs in business is inappropriate turnover. Theloss of
valuable experience and development of new personnel is a cost companies can control.
Seldom is pay the primary factor in losing an employee. What would a company give to retain
valuable employees? With a successful program, the employees work with managers and
supervisors in making decisions based on the company’s values. A successful Business Ethics
program establishes a culture that rewards making the right decision.
6. Prevention and Reduction of Criminal Penalties:
The United States Sentencing Commission Guidelines state that to receive a 40% reduction in
federal penalties, a company must have an effective program to detect and prevent
violations of the law. Executives cannot always be aware of everything done in a company’s
name. Jeffrey Kaplan in his article The Sentencing Guidelines: The First Ten Years points out
those recent cases also show that prosecutors are electing not to pursue some actions
because the companies in question have sound programs in place. This is a tremendous asset
to companies under regulatory scrutiny.
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7. Preventing civil lawsuits:Many times employees that experience issues in the workplacefirst try
to resolve these issues internally. If their complaints are ignored, employees feel compelled to
go to an outside advocate. That could be a private attorney, government regulator or news
agency. Giving employees an internal outlet can solve problems without the event becoming
public knowledge or an issue for the courts. Having the values permeate the company
culture enhances the staffs trust in senior management. Why? Because with an effective
program, the staff recognizes that management also operates within these appropriate
values.
8. Market Leadership:When a company fully integrates its values into its culture, qualityrises due
to the employees focus on values. Customers see that the employees care more about the
customers concerns. Employees reflect appropriate values in their attitude and conduct. Try
Ethical Business Practices points out those businesses demonstrating the highest ethical
standards are also the most profitable and successful.
9. Setting the Example:By setting the example in the community and market, the entireindustry
has a new standard that allows the community and the market to recognize the company
as a leader. When the word gets out, competitors will have to answer questions about why
they were not establishing similar values.
The Role of Business Ethics Today
Business and IT students spend the majority of their time at university learning about economics,
business development, software engineering and computer programming. This is all valuable
and necessary knowledge to prepare them for the demands of employment in the business/IT
sector. However, running or working in a business will raise many difficulties that are completely
unrelated to the skills or knowledge gained in university.
How do you evaluate such problems as hiring the more qualified candidate for a job when
she has a disability requiring costly adaptations to the work environment, outsourcing
production materials from countries where child labour and sweatshops are prevalent etc.?
In recent years there have been several business scandals that caused serious damage to the
credibility of the companies involved, occasionally the entire industry in which they operate,
and the numerous stakeholders of the business. One such example is the collapse of Barings
Bank - the actions of one rogue trader incurred losses of almost US$1 billion. It has been
discovered that many high profile people (at home and abroad) are involved in tax-evasion,
insider trading and fraud, Charlie Haughey and Martha Stewart are two such examples of
people with considerable wealth and public standing who have been involved in
questionable business dealings.
At this stage in your course, you are well equipped with knowledge of your subject, and
this will be built on when you go into the workplace due to on-going training and other
such practices. But it is fair to say that some of you may have never had the chance to
think of the ethical issues entailed in business and IT. During this course on business ethics
it is hoped that you will be given such an opportunity and attain a working knowledge of
the different theoretical frameworks that can be applied to business.
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ETHICAL ISSUES IN BUSINESS
Good and bad:
There are four degrees of rightness and wrongness in behavior, which in order of goodness are: the
good, benignness, indifference and the bad.
Good: Taking positive action for good or to prevent harm being done.
Benign: Avoiding doing harm, supports the doing of good but takes no positive action to do good.
Indifferent: Ignoring harm done by or to others and disregarding the right of others.
Bad: Taking action to do harm. Taking no action to prevent harm being done
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Legal, illegal and just:
Actions that are good and legal, but not a legal obligation;
Some actions may raise ethical issues because, although they are good and legal, people do not take
them because the law does not require them to do so. The question is whether people and
corporations should do them even though they are not obliged to do so.
Actions that is wrong and illegal:
Ethical or moral questions arise because an action is both wrong and illegal. Such actions ought to be
straight forward to condemn. However, on issues that many would place in this category, others might
argue that the action is neither wrong nor illegal.
Actions that is legal, but not necessarily just:
This includes actions that my be legal but are also arguably bad. Many of the moral and ethical issues
that affect business fall into this category.
Actions that are just but illegal:
This category is one that will always generate controversy. It concerns actions that may be illegal but
are morally or ethically good. It concerns the question of when a law can be said to be immoral and
when it is justifiable to break or defy it. Campaigning against a law one disapproves of is acceptable
within a democratic system; the ethical problem only emerges when a person moves from
campaigning to disobedience.
Basic Ethical Values for Business
1. Trust
2. Honesty
3. Fairness
4. Dignity and Respect for Humanity
5. Respect for Legitimate Law
6. Respect for Property
7. Autonomy and Freedom
8. Impartiality/Objectivity
9. Compassion

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The Nolan principles for public life in business:
The Nolan Committee’s (1995) principles for public life are focused on ensuring that private or sectional
interests do not prejudice people’s decisions on matters of public interest.
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Selflessness:
Holders of public office should act solely in terms of the public interest. They should not do so in order
to gain financial or other benefits for themselves, their family or their friends.
Integrity:
Holders of public office should not place themselves under any financial or other obligation to outside
individuals or organizations that might seek to influence them in the performance of their official duties.
Objectivity:
In carrying out public business, including making public appointments, awarding contracts, or
recommending individuals for rewards and benefits, holders of public office should make choices on
merit.
Accountability:
Holders of public office are accountable for their decisions and actions to the public and must submit
themselves to whatever scrutiny is appropriate to their office.
Openness:
Holders of public office should be as open as possible about all the decisions and actions that they
take. They should give reasons for their decisions and restrict information only when the wider public
interest clearly demands.
Honesty:
Holders of public office have a duty to declare any private interests relating to their public duties and
to take steps to resolve any conflicts arising in a way that protects the public interest.
Leadership:
Holders of public office should promote and support these principles by leadership and example.
Ethical Dilemmas in Business
There are many areas where ethical dilemmas arise. Here are five categories of common
ethical dilemmas in business:
1. Human resource issues
Human resource issues
Human is the most important resource to an organization. Issues associated with human
resources occur as a result of employees working together. These issues are by far the
largest category of ethical dilemmas in business.
The four main types of human resource issues are as follows:

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• Hiring and Termination Issues
Recruitment or hiring process is the first step in selecting human resource into an
organization, and will significantly influence the successful performance of the organization.
Ethics plays a very important role during the recruitment of new employees. Law and
regulations dictate that we have to be ethical in hiring. However, ethical hiring practice goes beyond
them as well. It has been widely reported by many researchers that ethical hiring practices actually
result in better employees being recruited.
It is therefore important that sound ethical rules are followed when hiring a new employee.
It is of vital importance that candidates are to be selected based on merits. Applicants are
to be hired based purely on merits such as knowledge, skills, and ability in accordance to the needs of
the organization.
If a company provides any special considerations, for example affirmative action, where
certain groups are given special considerations, these considerations should be well stated
in the company's policy statement. In any case, any preferential treatment should be one
that is legally allowed.
While preferential treatments to certain specific group may be allowed, there should be no
discrimination to people from any other group due to race, religion, gender, marital or even
pregnancy status.
Consistency and objectivity during the recruitment process are very important. Criteria,
including any changes in the criteria, used for evaluating candidates should be stated and
explained to order to avoid unnecessary claim of biasness in the recruitment process.
Objective evaluation results in the best employees being recruited while consistency ensures
high morale among employees.
When we recruit new employees, we should tell the applicants about the true state of the
organization. We should not mislead the applicants. In particular, the applicants should be
told all pertinent information, including those information that are not publicly known but that will
materially affect the new employee's future employment prospect with the organization. We can learn
from the case involving Phil McConkey. Phil McConkey was recruited but he was not aware that the
company was in the process of being taken over by another entity. One year after joining the
company he lost his job with he new company. He sued the company for with-holding important
information from me during the recruitment process. He won the case and was awarded $10 million.
We should never place misleading job advertisement in order to get applications if we are
offering a job contract different from what we advertised for. For instance, if we want to
engage independent contractors instead of normal salaried employment. The reason why
we choose to engage independent contractors is that we do not have to be burdened with
high salary cost for employees that are not competent, but we are willing to compensate
employees according to performance. We should always state clearly our terms of
employment. In any case, we do not want to be accused of any job scam.
We have to be extra careful when we are recruiting employees from organizations that have material
dealing with us include our suppliers, customers and competitors. If we are not
careful ethical issues very damaging to us can arise.
When we employ somebody from our suppliers, the suppliers may feel that we have
unethically poached their good employee. After all, it is through the working relationship we
have with the suppliers that we can to know the quality of this employee.
When we employ somebody from our customers we can be accused of returning favor to that person.
This rule applies especially when employing a former senior government employee that has an
influence on the awards of contracts to an organization like yours. The case of Ms. Darleen Druyun at

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the Department of Defense and Mr. Michael Sears at Boeing is a good illustration of the importance of
such a rule. In this case, employment favor was apparently granted by Boeing in exchange for
favorable consideration for the awards of contracts by Department of Defense. Also, be careful not to
employ former government employees for the purpose of lobbying for contracts from their previous
government departments. At least, do not do so within the first two years of the employee leaving the
government service.
It is also not very wise to employ somebody from our competitors because we can be
accused of stealing trade secrets from our competitors. If that employee can pass on his
previous employer's secrets unethically, what is there to sop him from passing your trade
secrets to others?
Even though it may not be considered as unethical by some employers, as a matter of
courtesy and good public relationship to inform an unsuccessful applicant.
When an employee is asked to leave, it is also of vital importance that it is handled with
fairness and care. If it is a case of poor performance or disciplines, the employee has to be
given prior warning (unless it is violation of a well stated policy or is of a very serious nature)
and fair hearing. In any case, do not hurt the dignity of the employee and offer to provide
the necessary assistance where appropriate.
Before an employee leave for any reason, provide him/her with an opportunity to provide
feedback on the overall state of the organization by conducting exit interviews.
• Discrimination is the unfair or preferential treatment of a person on the basis of one or
more uncontrollable characteristics, including race, gender, age, color, religion, or national
origin, as well as handicapped or pregnancy status.
Discrimination against others in the workplace can impair your ability to perform your job
according to company expectations.
In most countries, there are laws that protect potential and current employees from
discrimination based on age, race, color, national origin, religion, and gender, as well as
pregnancy or handicapped status.
• Performance Appraisals are conducted to evaluate an employee’s performance over a set period
of time.
When evaluating subordinates, one has to remain consistent and objective. Consistency is
even more important when evaluating an existing employee than a prospective employee.
Consistency requires that you treat every employee's misbehaviour the same way. For
example, it would be wrong to punish one employee's tardiness while leaving another
employee's tardiness unchecked.
In order to maintain objectivity, the company’s standardized evaluation forms should be
used. In this way, uniform criteria can be used for the appraisal of all employees under you.
Also, all employees in the company are evaluated based on the same criteria.
Constant feedback and communication between you and your subordinates is necessary to facilitate
a positive and productive working relationship. Don’t wait until periodic performance evaluations to
express your observations and suggestions. In fact, it is unethical to base salary adjustments upon
performance problems that have not been brought to the employee’s attention.
For employees being evaluated, honesty and acceptance of responsibility for performance
problems are important ethical considerations.
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• Disciplinary issues

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Disciplining employees is one of the most difficult parts of a manager’s job. Nevertheless, it
is vital to the growth and overall success of the organization.
Disciplining employees both ensures productivity and sets standards for the future.
Discipline should occur immediately after a problem has occurred. It is imperative that the
disciplinary actions remain consistent for all employees.
A serious disciplinary issue is sexual harassment where female employees (less so for male
employees) are subjected to an unwanted sexual behavior that creates an intimidating or
hostile work environment. This includes unwelcome sexual advances, requests for sexual
favors, and other verbal or physical conduct of a sexual nature. This conduct is not only
unethical, but illegal as well.
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2. Employee safety issues
Employee Safety Issues
Every employee is entitled to a safe and healthy work environment. We shall discuss in
some details the works of The Occupational Safety and Health Administration (OSHA).
OSHA
The Occupational Safety and Health Administration (OSHA) was created to ensure the
safety and health of America's workers by setting and enforcing standards; providing
training, outreach, and education; establishing partnerships; and encouraging continual
improvement in workplace safety and health.
It is unethical and illegal to force an employee to perform an unsafe task or to work in
unhealthy environments. To enforce staff protective standards as well as to reach out to
employers and employees through technical assistance and consultation programs, OSHA
and its state partners have approximately 2100 inspectors, plus complaint discrimination
investigators, engineers, physicians, educators, standards writers, and other technical and
support personnel spread over more than 200 offices throughout the country.
With some exceptions such as miners, transportation workers, many public employees, and
the self-employed, nearly every working man and woman in the nation comes under
OSHA's jurisdiction. Even occupational safety and health professionals, the academic
community, lawyers, journalists, and personnel of other government entities are served by
OSHA.
OSHA enforce the safety and health standards by mechanisms such as Site Specific
Targeting (SST), Local Emphasis Programs (LEPs), National Emphasis Programs (NEPs), and
the Enhanced Enforcement Program (EEP).
The OSHA's Enhanced Enforcement Program (EEP) focuses on employers who, despite
OSHA's enforcement and outreach efforts, repeatedly ignore their OSH Act obligations, and
place their employees at risk. EEP targets cases with extremely serious violations related
to a fatality or multiple willful or repeated violations. The objective of EEP is to assure
sustained compliance at these workplaces. If an inspection is classified as an EEP, then it
may receive, among other things, follow-up inspections, inspections of other workplaces of
that employer, and more stringent settlement provisions.
3. Conflicts of interest
Conflicts of interest
Conflicts of interest arise when an employee’s judgment is compromised due to external
influences. These situations present a particular ethical dilemma when the best interest of
the employee and the best interest of the company are at odds.

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Conflicts of interests often arise. A company may specify that an employee must not have
any financialinterests in a company that has dealings with or competing with it. A conflict of interest
situation may notarise out of financial interest. We have to be careful that while we attempt to
eliminate a conflict ofinterests, we do not cause another conflict of interest issue. A recent example is
when Mr. PaulWolfowitz, the previous President of World Bank, transferred his girlfriend out of the Bank
to reduce conflict of interest, but because the new terms were too much better than her old terms of
employment, resulting him being accused of infringement of code of ethics.
IBM is quite explicit in defining when a financial interest in another organization may lead
to conflicts ofinterest arise. It states:A financial interest is improper if your job, the amount of your
investment, or the particular company inwhich you invested could -- when viewed objectively by
another person -- influence your actions as an IBMemployee. In the case of a supplier or alliance
company, if you have anything to do, either directly orindirectly, in deciding whether IBM does
business with that company, you should not have any financial
interest at all in the company.
However, most organizations, especially the smaller ones, do not have such clear
statements on conflict of interest. It is important that the employees themselves be wary
of the dangers if they do not want to get into trouble with their employers or with the law.
There is an example of a case that involves two former Boeing employees. Michael Sears
was the CFO and Darleen Druyun was corporate vice president. Druyun retired earlier from
the Air Force as the No. 2 acquisition executive. It all began with the request by Druyun to
Sears for jobs in Boeing for two of Druyun’s family members. She was sentenced to nine-month
prison sentence because she awarded a contract to Boeing out of gratitude for the
company for employing her and two family members. Sears was sentenced to four months
in prison for improperly recruiting Druyun.
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4. Customer confidence
Customer confidence
It is the ethical responsibility of every employee to ensure that customers are treated fairly
and that no harm comes to customers as a result of using the company’s products or
services. There are three types of issues associated with customer confidence:
• Confidentiality has many aspects. It includes not divulging information about the
particular products or services that a particular customer purchases. It can include medical
information revealed by a patient or discovered by a physician in connection with the
treatment of a patient. In general, it can also include protecting information on mergers or
downsizing plans, or even the fact that an organization or individual is a customer.
What is the purpose of a physician's ethical duty to maintain patient confidentiality? It is to
allow the patient to feel free to tell his doctors fully and honestly knowing that the doctor
will not disclose it to others. Full disclosure by patient enables the doctor to diagnose
conditions properly and to treat the patient appropriately. In return for the patient's
honesty, the physician generally should not reveal confidential communications or
information without the patient's express consent unless required to disclose the
information by law. Under certain conditions, example when a patient threatens bodily
harm to himself or herself or to another person, the doctor may have to inform the relevant
authorities.
From time to time, the officers in the company will have inside information that may not be
known to the general public. This may be information about new products, plans or
processes, mergers, acquisitions, negotiations relevant to significant business deals,
contracts, sales, lawsuits, or special relationships with others. You cannot use
undisclosed material information (including material facts and material changes) concerning

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the company, its shareholders or partners to your personal advantage, or the
corresponding disadvantage of others in the securities market. It is also prohibited for a
person with such information to give it to others, or tipping, so that the other person
may improperly make use of the information.
The issue of confidentially is not very often straight forward. For example, many
businesses do have to situations that may be awkward because of the need for
confidentiality, and yet be transparent. These awkward decisions may arise because
commercial confidentiality requires that the corporation conceals or otherwise deflects
attention away from certain commercially sensitive information. It is not always easy to
draw the line between confidentiality and transparency.
• Product safety means ensuring that the products entering the market are not harmful,
and is the ethical responsibility of every employee. No product is completely safe, but it is
the organization’s responsibility to disclose all known effects of the product.
The recently announced recalls on Aug 14, 2007 by Mattel for 9 million more Chinese-made
toys, including popular Barbie, Polly Pocket and “Cars” movie items, and warned that more
could be ordered off store shelves because of lead paint and tiny magnets that could be
swallowed.
The recalls came nearly two weeks after Mattel Inc., the nation’s largest toy-maker,
recalled 1.5 million Fisher-Price infant toys worldwide, which were also made in China,
because of possible lead-paint hazards for children.
The recent recalls by millions of toys made in China because of safety issues has done
tremendous damage to China as a whole. The boss of one of the China toys maker
committed suicide as a result.
• Truthful advertising encompasses two primary types of ethical issues: exaggerating
product features and falsifying product information. Deceptive advertising is unethical and
it is the responsibility of the employee as well as the organization to see that false
advertising does not occur.
The episode of discovery by two students Anna Devathasan and Jenny Suo in New Zealand
that Ribena contains almost no Vitamin C at all had done tremendous damage to the
reputation of GlaxoSmithKline, a global drug giant. Still stated in the company's web site is
the following statement about Ribena:
First made using blackcurrants in the 1930s, Ribena is a fruit drink available in a number of
different flavours. The best-selling variety is still made from fresh blackcurrants. Ribena Really
Light is the low-calorie, friendly to teeth version of Ribena with no added sugar.
The above statement stated that Ribena was first made using blackcurrants - it is a
statement of fact. However, it does not state that it is no more made using blackcurrants.
GlaxoSmithKline had always associate Ribena with blackcurrant in the past (with the claim
contained four times the vitamin C of oranges) until the episode and most of us were
made to believe that Ribena was made from blackcurrants.
GlaxoSmithKline pleaded guilty and admitted it may have misled consumers in adverts that
said blackcurrants in Ribena syrup had four times the vitamin C of oranges.
5. Use of corporate resources
Use of corporate resources
Ethical use of corporate resources requires that employees be fair and honest to their
employers. Here are three considerations that fall under this category:
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• Using company letterhead. Employees should not use company letterhead for personal
reasons because such use can imply that the information contained in the personal
document is supported by the organization. Examples include a letter of recommendation
for a former employee written by an unauthorized employee, as well as personal
messages that reflect the opinion of the employee and not the company.
• Using supplies. Unauthorized use of supplies is unethical because it costs your
organization money, regardless of the quantity of supplies used. Although taking a box of
pens home from the office might not appear to be an ethical issue, it is.
Suppose that the box of pens costs the company five dollars. Now consider, that instead
of taking the box of pens, you took five dollars out of the petty cash box. Ethically, the two
actions are the same.
• Skewed financial data. Sometimes, an employee’s compensation is linked to the company’s
financial performance. One major problem with this approach is the temptation of such employees to
skew financial data. It is sometimes possible for an employee to accomplish this in a way that is
unethical, although not illegal. Besides being unethical, such behavior can lead to serious
consequences when future decisions are made based on the skewed data.
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3.1.2 Ethical Theories
Normative Ethical Theories.
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Normative Ethics
Normative ethics is the attempt to provide a general theory that tells us how we ought to live. Unlike
metaethics, normative ethics does not attempt to tell us what moral properties are, and unlike applied
ethics, it does not attempt to tell us what specific things have those properties. Normative ethics just seeks
to tell us how we can find out what things have what moral properties, to provide a framework for ethics.
Normative Ethics
For any act, there are three things that might be thought to be morally interesting: first, there is the agent,
the person performing the act; second, there is the act itself; third, there are the consequences of the act.
There are three types of normative ethical theory–virtue, deontological, and consequentialist–each
emphasizing one of these elements.
Virtue Ethics
This first normative ethical theory, virtue theory, concentrates on the moral character of the agent.
According to virtue theory, we ought to possess certain character traits–courage, generosity, compassion,
etc.–and these ought to be manifest in our actions. We therefore ought to act in ways that exhibit the
virtues, even if that means doing what might generally be seen as bad or bringing about undesirable
consequences.
Deontology
Normative theories of the second type, deontological theories, concentrate on the act being performed.
According to deontological theories, certain types of act are intrinsically good or bad, i.e. good or bad in
themselves. These acts ought or ought not to be performed, irrespective of the consequences.
Consequentialism
The third approach to normative ethics is consequentialism. Consequentialist theories hold that we ought
always to act in the way that brings about the best consequences. It doesn’t matter what those acts are;
the end justifies the means. All that matters for ethics is making the world a better place.
Application
To give an example, then, suppose that a man bravely intervenes to prevent a youth from being assaulted.
The virtue theorist will be most interested in the bravery that the man exhibits; this suggests that he has a
good character.
The deontologist will be more interested in what the man did; he stood up for someone in need of
protection, and that kind of behaviour is intrinsically good.
The consequentialist will care only about the consequences of the man’s actions; what he did was good,
according to the consequentialist, because he prevented the youth from suffering injury.

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Descriptive Ethical Theories.
Descriptive theory explains how things are (e.g., this paper is white; most Americans eat meat; etc.),
whereas normative or prescriptive theory tells us how things ought to be (people ought to be honest, etc.).
Ethics is about what ought to be, not what is.
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DESCRIPTIVE THEORIES
Most theories of ethics are prescriptive. In other words they don’t just offer insight into what the nature of
morals are they also give guidance on how you should behave. Since the growth of scientific thinking some
people have offered descriptive theories of ethics. In other words these are theories that may shed light on
what people are doing when they make ethical judgements but they don’t (and can’t) actually help you
make that judgement without some extra input. Below are some examples of descriptive approaches to
ethics.
Emotivism: Approval and Disapproval
Emotivism is a theory of ethics that has given up trying to work out what morally good and morally bad
might actually mean. Emotivism says that statements about morality don’t really mean much at all instead
they are just expressions of how a person feels about an issue. For example an emotivist would interpret the
statement “Animal testing is unethical” as really meaning “I find the idea of testing animals yucky”.
Note that Emotivism is a descriptive theory of ethics. It describes what ethical statements are like but does
not give any guidance on how you should behave. Emotivism does NOT say that you SHOULD just follow
your feelings when it comes to making moral decisions; it is saying that you really don’t have any choice
but to follow one feeling or another. Although plausible, Emotivism isn’t very helpful.
Social and Psychological Theories
As far as we are aware fish don’t agonise over moral dilemmas. Although elephants have emotions they
don’t seem troubled about the consequences of their actions. Maybe ethics is something to do with being
human.
Sociology, anthropology and psychology all can provide interesting insights into ethics. More recently
evolutionary biology has also attempted to explain some aspects of human behaviour. For example in all
human societies (with a few particularly odd exceptions) incest is regarded as being very wrong.
Evolutionary psychology would suggest that this a deep seated instinct that has arisen to protect
populations from genetic diseases that would quickly be established if people very closely related had
children together.
A branch of mathematics called “Game Theory” has also shown why various examples of “nice”
behaviour in people or animals can be in an individual’s long term interest.
More generally sociology and anthropology can show why societies need ethical systems so that people
can get along together. Unfortunately once again because such theories are descriptive they can’t
directly help us make moral decisions.

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3.1.3 Ethical Environment
3.1.3.1 Social Emphasis
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SOCIAL RESPONSIBILITY
The term social responsibility means different things to different people. Generally, corporate social
responsibility is the obligation to take action that protects and improves the welfare of society as a whole
as well as organizational interests. According to the concept of corporate social responsibility, a manager
must strive to achieve both organizational and societal goals.
Current perspectives regarding the fundamentals of social responsibility of businesses are listed and
discussed through (1) the Davis model of corporate social responsibility, (2) areas of corporate social
responsibility, and (3) varying opinions on social responsibility.
A model of corporate social responsibility that was developed by Keith Davis provides five propositions that
describe why and how businesses should adhere to the obligation to take action that protects and
improves the welfare of society and the organization:
• Proposition 1: Social responsibility arises from social power.
• Proposition 2: Business shall operate as an open system, with open receipt of inputs from society
and open disclosure of its operation to the public.
• Proposition 3: The social costs and benefits of an activity, product, or service shall be thoroughly
calculated and considered in deciding whether to proceed with it.
• Proposition 4: Social costs related to each activity, product, or service shall be passed on to the
consumer.
• Proposition 5: Business institutions, as citizens, have the responsibility to become involved in certain
social problems that are outside their normal areas of operation.
The areas in which business can become involved to protect and improve the welfare of society are
numerous and diverse. Some of the most publicized of these areas are urban affairs, consumer affairs,
environmental affairs, and employment practices. Although numerous businesses are involved in socially
responsible activities, much controversy persists about whether such involvement is necessary or
appropriate. There are several arguments for and against businesses performing socially responsible
activities.
The best-known argument supporting such activities by business is that because business is a subset of and
exerts a significant impact on society, it has the responsibility to help improve society. Since society asks no
more and no less of any of its members, why should business be exempt from such responsibility?
Additionally, profitability and growth go hand in hand with responsible treatment of employees. customers,
and the community. However, studies have not indicated any clear relationship between corporate social
responsibility and profitability.
One of the better known arguments against such activities is advanced by the distinguished economist
Milton Friedman. Friedman argues that making business managers simultaneously responsible to business
owners for reaching profit objectives and to society for enhancing societal welfare represents a conflict of
interest that has the potential to cause the demise of business.
According to Friedman, this demise almost certainly will occur if business continually is forced to perform
socially responsible behavior that is in direct conflict with private organizational objectives. He also argues
that to require business managers to pursue socially responsible objectives may be unethical, since it
requires managers to spend money that really belongs to other individuals.
Regardless of which argument or combination of arguments particular managers might support, they
generally should make a concerted effort to perform all legally required socially responsible activities,
consider voluntarily performing socially responsible activities beyond those legally required, and inform all

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relevant individuals of the extent to which their organization will become involved in performing social
responsibility activities.
Federal law requires that businesses perform certain socially responsible activities. In fact, several
government agencies have been established and are maintained to develop such business-related
legislation and to make sure the laws are followed. The Environmental Protection Agency does indeed
have the authority to require businesses to adhere to certain socially responsible environmental standards.
Adherence to legislated social responsibilities represents the minimum standard of social responsibility
performance that business leaders must achieve. Managers must ask themselves, however, how far
beyond the minimum they should attempt to go difficult and complicated question that entails assessing
the positive and negative outcomes of performing socially responsible activities. Only those activities that
contribute to the business's success while contributing to the welfare of society should be undertaken.
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Social Responsiveness
Social responsiveness is the degree of effectiveness and efficiency an organization displays in pursuing its
social responsibilities. The greater the degree of effectiveness and efficiency, the more socially responsive
the organization is said to be. The socially responsive organization that is both effective and efficient meets
its social responsibilities without wasting organizational resources in the process. Determining exactly which
social responsibilities an organization should pursue and then deciding how to pursue them are perhaps the
two most critical decision-making aspects of maintaining a high level of social responsiveness within an
organization. That is, managers must decide whether their organization should undertake the activities on
its own or acquire the help of outsiders with more expertise in the area.
In addition to decision making, various approaches to meeting social obligations are another determinant
of an organization's level of social responsiveness. A desirable and socially responsive approach to meeting
social obligations involves the following:
• Incorporating social goals into the annual planning process
• Seeking comparative industry norms for social programs
• Presenting reports to organization members, the board of directors, and stockholders on progress in
social responsibility
• Experimenting with different approaches for measuring social performance
• Attempting to measure the cost of social programs as well as the return on social program
investments
S. Prakash Sethi presents three management approaches to meeting social obligations: (1) the social
obligation approach, (2) the social responsibility approach, and (3) the social responsiveness approach.
Each of Sethi's three approaches contains behavior that reflects a somewhat different attitude with regard
to businesses performing social responsible activities. The social obligation approach, for example,
considers business as having primarily economic purposes and confines social responsibility activity mainly
to conformance to existing laws. The socially responsible approach sees business as having both economic
and societal goals. The social responsiveness approach considers business as having both societal and
economic goals as well as the obligation to anticipate upcoming social problems and to work actively to
prevent their appearance.
Organizations characterized by attitudes and behaviors consistent with the social responsiveness approach
generally are more socially responsive than organizations characterized by attitudes and behaviors
consistent with either the social responsibility approach or the social obligation approach. Also,
organizations characterized by the social responsibility approach generally achieve higher levels of social
responsiveness than organizations characterized by the social obligation approach. As one moves from the
social obligation approach to the social responsiveness approach, management becomes more
proactive. Proactive managers will do what is prudent from a business viewpoint to reduce liabilities
whether an action is required by law or not.

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Areas of Measurement. To be consistent, measurements to gauge organizational progress in reaching
socially responsible objectives can be performed. The specific areas in which individual companies
actually take such measurements vary, of course, depending on the specific objectives of the companies.
All companies, however, probably should take such measurements in at least the following four major
areas:
1. Economic function: This measurement gives some indication of the economic contribution the
organization is making to society.
2. Quality-of-life: The measurement of quality of life should focus on whether the organization is
improving or degrading the general quality of life in society.
3. Social investment: The measurement of social investment deals with the degree to which the
organization is investing both money and human resources to solve community social problems.
4. Problem-solving: The measurement of problem solving should focus on the degree to which the
organization deals with social problems.
The Social Audit: A Progress Report. A social audit is the process of taking measurements of social
responsibility to assess organizational performance in this area. The basic steps in conducting a social audit
are monitoring, measuring, and appraising all aspects of an organization's socially responsible
performance. Probably no two organizations conduct and present the results of a social audit in exactly
the same way. The social audit is the process of measuring the socially responsible activities of an
organization. It monitors, measures, and appraises socially responsible performance.
Managers in today's business world increasingly need to be aware of two separate but interrelated
concerns Business ethics and social responsibility.
3.1.3.2 Responsibility to Employees
Business and Its Ethical Responsibilities towards Employees
During our lifetime we visualize plethora of things happening around. When we are younger then things are
different in the society and when we grow older, the things become totally divergent. Then we say by
taking a sigh that time has changed. Yes, our surroundings get changed and most of the times the
perspectives are also modified, but one thing always remains same that is the formula of give and take,
which works in relations as well as business ethics too.
So if you think you can run your business without being ethical towards your employees then you are
completely wrong and you ought to consider some facts. There is a small line between being ethical and
unethical. As taking work from an employee is ethical but making them overloaded is totally unethical and
inhuman. It is must for every business to be ethical with the employees too. The main point of view is that if
you really intend to survive in the market for long term in this bottleneck competitive era, then being ethical
is really a great necessity. The facts say it can prove fruitful for you. If you really think that you can just go for
ripen fruits by only making fool to the people around then you are really wrong. Employers and
entrepreneur need to be aware from the fact that if they would fail to comprehend the needs of
employees or the society then they are really running a blind race without weapons.
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They need to comprehend few things
1. Outdated technologies must be discarded and new innovative technologies should be adopted.
For example if you order your accountant to calculate and make the balance sheet without the
help of computer then you are really being miser by saving your money but it would not give you
anything just a bunch of mistakes and abuses from the mouth of employees.
2. The promises you make with the society or the employee should not be ignored, you need to
comply with them or your business based on falsehood is never going to work.

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3. Happy Employees of a company or the organization also prove beneficial when they gain benefit
from the company or the organization. Here you can take an example of an organization which
always gives less salary to its employees; here it's for sure that those employees are not going to say
good words about the company or the organization.
4. The key to success in a business is not get overloaded with work, this will only increase your agony,
you will never able to get success by overloading yourself or the employees by work. As work with
enjoyment is necessary. No employee or the owner can work for long hours.
Mostly reputed companies think that they have got right to inflict pains on the employees by giving
them big amount of salaries. Ultimately only those companies are successful which give ample
time to their employees to spend for relatives and families.
Creating an ethical workplace
Business managers in most organizations commonly strive to encourage ethical practices not only to ensure
moral conduct, but also to gain whatever business advantage there may be in having potential consumers
and employees regard the company as ethical. Creating, distributing, and continually improving a
company's code of ethics is one usual step managers can take to establish an ethical workplace.
Another step managers can take is to create a special office or department with the responsibility of
ensuring ethical practices within the organization. For example, management at a major supplier of missile
systems and aircraft components has established a corporate ethics office. This ethics office is a tangible
sign to all employees that management is serious about encouraging ethical practices within the
company.
Another way to promote ethics in the workplace is to provide the work force with appropriate training.
Several companies conduct training programs aimed at encouraging ethical practices within their
organizations. Such pro grams do not attempt to teach what is moral or ethical but, rather, to give business
managers criteria they can use to help determine how ethical a certain action might be. Managers then
can feel confident that a potential action will be considered ethical by the general public if it is consistent
with one or more of the following standards:
1. The Golden Rule: Act in a way you would want others to act toward you.
2. The utilitarian principle: Act in a way that results in the greatest good for the greatest number.
3. Kant's categorical imperative: Act in such a way that the action taken under the circumstances
could be a universal law, or rule, of behavior.
4. The professional ethic: Take actions that would be viewed as proper by a disinterested panel of
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professional peers.
5. The TV test: Always ask, Would I feel comfortable explaining to a national TV audience why I took
this action?
6. The legal test: Ask whether the proposed action or decision is legal. Established laws are generally
considered minimum standards for ethics.
7. The four-way test: Ask whether you can answer yes to the following questions as they relate to the
decision: Is the decision truthful? Is it fair to all concerned? Will it build goodwill and better
friendships? Will it be beneficial to all concerned?
Finally, managers can take responsibility for creating and sustaining conditions in which people are likely to
behave ethically and for minimizing conditions in which people might be tempted to behave unethically.
Two practices that commonly inspire unethical behavior in organizations are giving unusually high rewards
for good performance and unusually severe punishments for poor performance. By eliminating such
factors, managers can reduce much of the pressure that people feel to perform unethically. They can also
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3.1.3.3 The Ethical Dimensions of Business
Good and bad:
There are four degrees of rightness and wrongness in behavior, which in order of goodness are: the good,
benignness, indifference and the bad.
Good: Taking positive action for good or to prevent harm being done.
Benign: Avoiding doing harm, supports the doing of good but takes no positive action to do good.
Indifferent: Ignoring harm done by or to others and disregarding the right of others.
Bad: Taking action to do harm. Taking no action to prevent harm being done
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Legal, illegal and just:
Actions that are good and legal, but not a legal obligation;
Some actions may raise ethical issues because, although they are good and legal, people do not take
them because the law does not require them to do so. The question is whether people and corporations
should do them even though they are not obliged to do so.
Actions that is wrong and illegal:
Ethical or moral questions arise because an action is both wrong and illegal. Such actions ought to be
straight forward to condemn. However, on issues that many would place in this category, others might
argue that the action is neither wrong nor illegal.
Actions that is legal, but not necessarily just:
This includes actions that my be legal but are also arguably bad. Many of the moral and ethical issues that
affect business fall into this category.
Actions that are just but illegal:
This category is one that will always generate controversy. It concerns actions that may be illegal but are
morally or ethically good. It concerns the question of when a law can be said to be immoral and when it is
justifiable to break or defy it. Campaigning against a law one disapproves of is acceptable within a
democratic system; the ethical problem only emerges when a person moves from campaigning to
disobedience.
3.1.3.4 The Business Role in Ethical Behavior
How Can We Create Ethical Organizations?
Corporate indiscretion, wrongdoing, and corruption are perpetually the subject of media attention as well-known
companies such as Enron, Tyco, WorldCom, and most recently the News of the World, have been
found guilty of unlawful behavior; and the U.S. economic crisis has in part been blamed on unethical
actions from Wall Street. These corporate scandals and current financial woes have brought renewed
interest to business ethics—namely, understanding the factors that promote ethical behavior in
organizations. Although conventional wisdom suggests that unethical behavior is the result of a few “bad
apples,” there is mounting evidence that in addition to the personal values of employees, the
organizational environment plays a critical role in encouraging ethical conduct.

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If the organizational environment is important in promoting ethical conduct, how can such a context be
created? We argue that there are three key pieces of the ethical environment that work together to
promote ethical behavior: (1) ethical leadership, (2) ethical practices, and the (3) ethical climate.
Ethical leaders set the tone for how employees should behave in organizations. Ethical leaders are both
moral persons who have desirable characteristics and moral managers who influence employees conduct
directly:
• Moral Persons: listen to employees, conduct their personal lives in an ethical manner, have the best
interests of employees in mind, make fair decisions, can be trusted.
• Moral Managers: Discipline employees who violate ethical standards, discuss business ethics or
values with employees, set an example of how to do things the right way in terms of ethics, define
success not just by results but also the way they are obtained, ask “What is the right thing to do?”
when making decisions.
Ethical practices are actions or activities related to ethics that are repeated and recognizable in
organizations—they are what organizations actually do rather than just what is touted. Research
demonstrates there are six critical organizational practices related to ethics:
• Recruitment and Selection: Using ethical hiring practices, hiring employees with strong ethical
values, emphasizing ethics when recruiting new employees, searching for ethical applicants
• Orientation and Training: Requiring attendance at ethics training, using the things employees learn
in ethics training when performing their jobs, discussing ethical issues with new employees as part of
their initial orientation
• Policies and Codes: Strictly following written codes of ethics, the ethics code serving as more than
just window dressing, enforcing all ethical behaviors—not just the ones that are high profile
• Reward and Punishment Systems: Providing positive feedback and rewards for making ethical
decisions, measuring and tracking ethical behaviors, disciplining employees who violate ethical
standards
• Accountability and Responsibility: Holding employees accountable for their actions, taking
responsibility for the outcomes of one’s own actions, questioning authority if unethical behavior
occurs
• Decision-Making: Taking ethical issues into account when making decisions, discussing ethical
concerns at meetings, talking about whether something is the “right thing to do”
Ethical climate is a general perception organizational employees have about whether the organization is
ethical. In an ethical climate you would see the following things:
• Employees have a lot of skill in recognizing ethical issues
• Success is defined not just by the results, but also the way they are obtained
• Employees continually strive to maintain high ethical standards
• Employees have a lot of knowledge regarding how to handle ethical issues
• Employees rarely feel pressured to compromise the organization’s ethical standards to achieve
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business objectives
Although there is a human tendency to blame a few “bad apples” for wrongdoing in organizations, the
inconvenient truth is that the organizational environment—including the leadership, practices, and
climate—is the most critical factor in creating ethical organizations.

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Encouraging Ethical Behavior in Organizations
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3.1.4 Unethical Practices in Business
3.1.4.1 Unethical Practices in Business
Abusive or Intimidating Behavior
Accurate but Incomplete Disclosures
Discrimination against Protected Class
Receiving/Offering Bribes, Kickbacks or Incentives
Theft or Fraud: Personal Use of Company Property or Expense Account
Misrepresentations
Sexual Harassment
Termination without Fair Notice or Cause
Mistreating Employees
Many examples exist of unethical corporate conduct toward employees or other workers in the
supply chain. Many U.S. corporations used Third- World sweatshops to produce their goods; some
have even been found to use child labor. Every year, lawsuits are filed against employers who are
accused of sexual harassment or discrimination against their employees. Some employers have
been sued for threatening or firing whistle-blowers, or employees who point out illegal practices or
safety violations in the workplace. Some U.S. businesses use undocumented workers because they
can pay them less than minimum wage.
Financial Misconduct
Examples of financial misconduct include price-fixing, or an illegal agreement between industry
competitors to fix the price of a product at an artificially inflated level; physicians who refuse to
treat non-insured patients, or perform unnecessary procedures to make more money; tax evasion;
tax fraud; and cooking the books to make the company look more profitable than it is. Other
possibilities include paying unjustifiable salaries and bonuses to top officials regardless of work
performance -- sometimes in spite of it -- and chasing short-term profit by placing investor's money
in questionable investments.
Misrepresentation
Corporate misrepresentation can take many forms. It can be as simple as a salesman who lies
about his company's products, or it can be false or misleading advertising. Misrepresentation can
involve a coverup of illegal workplace conditions or transactions; falsified data in a shareholder
report; lying to a union about corporate profits; or hiding or denying safety problems with a
product. Other examples include corporate board members with conflict of interests, doctors who
push the most expensive drugs rather than the most effective ones, and brokers who recommend
stocks that they own in an effort to drive up the price.
Kinds of Unethical Behavior in Business
Unethical behavior in business runs the gamut, from simple victimless crimes to huge travesties that can hurt
large numbers of people. Whether it is stealing a pen, padding an expense report, lying to avoid a penalty
or emitting toxic fumes into the air, unethical behavior cannot be condoned by a company. A strict ethics
policy is the cornerstone for any
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Theft
Theft at work comes in a variety of forms, and oftentimes employees do not view it as unethical behavior,
believing no one gets hurt by the action. Employees take home office supplies, use business computers for
personal tasks, pad expense accounts and abuse sick time or allotted personal days. Unethical behavior
also includes having another employee punch a time card, or not punching out for lunch hours or other
nonapproved time off. Though these may seem like minor infractions, they eventually have an impact on
the bottom line of the company, which then hurts all employees. Theft also affects employee morale and is
disheartening to those who choose to behave ethically.

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Vendor Relationships
Businesses that buy from and sell products to other businesses are sometimes subject to unethical behavior.
The practice of accepting gifts from a vendor in exchange for increased purchasing is not only unethical, it
may have legal repercussions. The same can be said for offering a customer kickbacks to increase his
purchasing habits. Ethics policies often contain guidelines for giving or accepting gifts with vendors or other
business associates, such as a cap on the value of the gift. Other businesses strictly forbid giving gifts or any
other item with monetary value. This is a safeguard to prevent any perception of unethical behavior.
Bending the Rules
Bending the rules in a business situation is often the result of a psychological stimulus. If an employee is
asked to perform an unethical task by a supervisor or manager, he may do it because his allegiance to
authority is greater than his need to abide by the rules. Turning the other way to avoid trouble for another
employee is still unethical, even though the motivation may be empathetic. For example, knowing that a
coworker is having issues outside work justifies watching him leave early each day without reporting it.
Withholding information that can change an outcome also falls under the umbrella of unethical behavior,
even if the perpetrator believes he is doing what is in the best interest of the business. For example, if a poor
earnings report is withheld until after a stockholder meeting.
Environmental
Unethical behavior by companies, such as releasing pollutants into the air, can affect cities, towns,
waterways and masses of people. Though accidents can occur, the release of harmful toxins into the
environment due to lax safety standards, improper maintenance of equipment or other preventable
reasons is unethical. If a business willingly continues production of a product knowing inherent
environmental risks exist, it can certainly be categorized as unethical behavior.
Wages and Working Conditions
Other unethical practices include not paying workers a fair wage, employing children under the legal
working age and unsafe or unsanitary working conditions. Any practices that are not in compliance with
fair labor standards and federal working guidelines fall into this category.
Examples of Unethical Behavior in an Organization
Unethical behavior in the workplace can be defined as any action that does not conform with the
standards of conduct established by the organization. Unethical behavior can occur in the relationships
between employees, in the way an employee goes about his business or how he uses company resources.
Unethical behavior can even break the law in some situations.
Inappropriate Computer Use
Employees may use company computers to engage in unethical behavior. For example, an employee
who is not permitted to use the Internet for personal reasons commits an unethical act by shopping online
while at work. Random Internet surfing takes away from the time she spends on work-related activities.
Employees sometimes use company email to spread inappropriate websites or videos to co-workers, some
of which could be deemed offensive by the recipients.
Time Misuse
Unethical behavior can include stealing time from the company, as the company is compensating
employees and receiving no productivity in return. In addition to time spent on aimless Internet surfing, time
misuse can consist of extending breaks beyond the allotted time, congregating around the water cooler or

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engaging in lengthy gossip sessions during working time, falsifying time sheets, coming into work late or
leaving early and running personal errands while traveling on company business.
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Sexual Harassment and Bullying
An employee could commit unethical behavior by sexually harassing co-workers. This could involve making
lewd comments, touching inappropriately or making unwanted sexual advances. Bullying typically involves
attempting to intimidate a co-worker by making demeaning comments about him, spreading gossip or
even making verbal or physical threats. In general, a bully attempts to make the workplace as
uncomfortable as possible for a co-worker. In some cases, ongoing bullying can escalate into violence in
the workplace.
Illegal Acts
Some unethical acts can also be illegal. For example, an employee who has access to a company's
financial records, such as a bookkeeper or accountant, could use her access and expertise to embezzle
company funds. An employee having access to personnel files, such as a human resources representative,
could commit identity theft and use employees' Social Security numbers to raid bank accounts or
fraudulently obtain credit cards. In cases such as the 2001 Enron scandal, top company executives used
questionable accounting practices to manipulate the company's stock price for their own financial gain.
3.1.4.2 Approaches to improve ethical conduct in the workplace
Ways to Prevent Unethical Behavior in the Workplace
Unethical behaviors can plague a workplace, whether an executive steals money from the company or an
associate falsifies documents. Unethical behaviors can damage a company's credibility, causing the
business to lose customers and ultimately shut down. However, business owners and their management
teams can work with employees to prevent unethical behaviors.
Create a Code of Conduct
A written code of conduct provides employees and managers with an overview of the type of conduct
and behaviors the company expects. It outlines what behaviors are unacceptable and what measures are
taken if an employee violates the code of conduct.
Lead By Example
Employees look to business owners and managers for direction on how they should conduct themselves. As
a business owner, make ethics-based decisions and monitor the individuals you put into leadership roles at
your company for the same values.
Reinforce Consequences
Business owners must hold their employees accountable when they act unethically. Start by informing new
employees of the rules during their orientation sessions. If an employee acts unethically, refer to the code of
conduct and take the necessary measures to warn or terminate.
Show Employees Appreciation

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Loyal employees feel that a company values the hard work they put into accomplishing tasks on a daily
basis. A loyal employee is less likely to act unethically. Show appreciation to the employees for work well
done on a regular basis to encourage loyalty.
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Welcome an Ethics Speaker
Schedule an ethics trainer to visit your work site to discuss ethical behavior and explain why it is important in
organizations, regardless of the size or industry. Ethics trainers use role-playing, motivational speaking,
videos and handouts to illustrate the importance of ethics in the workplace.
Create Checks and Balances
Rather than putting related responsibilities in the hands of one employee, create a system of checks and
balances to minimize the opportunities for unethical behavior. For example, a sales associate rings up
customer purchases, while an accountant balances the books to ensure that all payables are received
and documented.
Hire for Values
When business owners hire employees, many seek to bring on individuals who have the education and
experience that prove they are skilled workers, capable of handling the tasks at hand. Employers who want
to prevent unethical behavior also look at candidates' values to ensure they mesh with the company's
culture.
How to Change Unethical Behavior in Business
Defining what encompasses ethics is a matter that engenders significant thought and debate. It's not
defined only by the law or religion; it's not about a person's beliefs. Instead, a person who behaves ethically
is following a standard of right and wrong when it comes to society, fairness and rights. The ethical person
who follows these standards employs honesty, compassion and loyalty, according to Santa Clara
University's Markkula Center for Applied Ethics website. When co-workers behave unethically in the
workplace, often the best remedy is to set a high standard of ethical behavior yourself.
Step 1
Practice what you preach. The best way to influence others is to behave ethically yourself. That involves
treating others with fairness and respect, and following the standard of behavior your workplace demands.
This can be as simple as getting to work on time, not fudging your hours and delivering your work in a
prompt and high-quality manner. You'll also need to demonstrate integrity, caring and teamwork. When
others can rely on you to behave honestly, you're well on your way to influencing others' behavior.
Step 2
Identify a short-term solution in your workplace. For example, if your place of business has a high rate of
employee theft because employees are allowed to rummage through inventory unseen, perhaps it's time
to consider putting a lock on the storage room or installing a security camera. If you opt to install a security
camera, consider alerting your staff ahead of time.
Step 3
Identify the cause of the unethical behavior. What is the behavior's root cause? Are employees stealing
ideas or not sharing credit? They may be feeling the need for more feedback from you -- especially if
you're stingy with praise. People need to feel appreciated and part of a dynamic environment. Forcing
staff to jockey for your attention is demoralizing. It also causes resentment.

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Step 4
Establish procedures that encourage ethical behavior. Consider implementing pre-employment personality
tests that determine a candidate's capacity for wrongdoing, and be sure your business's plan clearly states
that unethical means do not justify the ends. Discourage cheating and idea-stealing by instituting a zero-tolerance
policy for those who break the rules ... and walk the talk by implementing the policy's resulting
action.
Step 5
Praise good ethics publicly. Thank employees whose behavior is a model you'd like others to follow. Provide
an incentive, if necessary, such as a financial bonus or a comp day.
How to Enforce Ethical Behavior in the Workplace
When employees fail to behave ethically, you must act swiftly to corral the bad behavior. If you don't, the
inappropriate behavior might spread throughout your business, causing further problems. Victimized
employees deserve your protection, so you must shield them from the unethical behavior of others. If the
unethical actions rise to the level of illegality, discuss the situation with your lawyers and the appropriate
authorities. Stay watchful and ask employees to report any concerns they have; knowing what's going on
in your organization at all times helps you nip problems in the bud.
Step 1
Post clear guidelines that delineate the type of behavior you expect. For example, ban discrimination and
harassment of any sort. Warn employees not to take company supplies for personal use.
Step 2
Outline potential punishments for unethical behavior, but use them as a last resort. Workers respond better
to positive reinforcement than they do to the threat of punishment.
Step 3
Enact a rewards system that promotes ethical behavior. For example, if employee theft is a problem,
reward whistleblowers who notify management of problem employees. If an employee acts ethically even
at a personal cost, publicly praise and reward her.
Step 4
Ensure privacy for whistleblowers and people who file complaints. If workers fear retaliation from peers, they
might hesitate to bring important matters to your attention.
Step 5
Create an ethics panel if your business is large enough to warrant such a measure. The ethics panel should
consist of reputable members of your organization whose judgment employees respect. Ask the panel to
investigate and pass judgment whenever it is not clear whether a worker has crossed ethical boundaries.
Step 6
Create the position of ethics compliance officer if your business is too small for a multiperson panel. Appoint
someone objective and reputable so that employees know there is no favoritism and bias.

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Step 7
Punish workers as necessary to ensure everyone knows there are consequences for unethical behavior. For
example, if someone steals credit for a project, demote that person. If someone harasses or discriminates
against another employee, fire or suspend that person, depending on the severity of the infraction.
INDIVIDUAL RESPONSES TO ETHICAL ISSUES
Personal values in the workplace:
It is difficult to discuss ethics in business and organizational context without talking about values.
The difference between ethics and values:
Ethics: is a branch of philosophy and is therefore concerned with formal academic reasoning about right or
wrong, but values are the common sense often taken for granted beliefs about right or wrong that guide us
in our daily lives.
Values: are core ideas about how people should live and the ends they should seek.
1. They are shared by a majority of people within a community or society.
2. They are simply expressed generalities, often no more than single words such as peace honesty,
kindness, integrity and courage.
3. As they are very broad, they do not give guidance on how particular things should be evaluated
Rekeach defined values as a small number of core ideas or cognitions present in every society about
desirable end.
Moral values concern interpersonal behavior at workplace. E.g. being honest is desirable.
Competence values concern one’s own valuation of one’s behavior. E.g. behaving imaginatively is
desirable. (Intelligence)
Personal values – concern the ends or terminal states that are desirable for the self. E.g. peace of mind
Social values – concern the ends that one would desire for society. E.g. world peace is desirable.
Attitudes like values are evaluations of whether something is good or bad, but unlike values they are
evaluations of particular things, issues people places etc. They relate to specific circumstances, they are
more changeable than values.
Belief is an acceptance that something is true or not. This acceptance does not imply any judgment about
whether that thing is good or bad.
INDIDVIDUAL RESPONSES TO ETHICAL SITUATIONS
Responses to ethical situations involve thinking about the issue and it includes what people say, how they
say it and how they behave. There are two main cognitive processes involved in choosing responses:
1. Categorization
2. Particularization

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Categorization involves putting an issue into a box or category and saying “that is the way in which I will
deal with this matter.” Someone might decide, for example, that an issue is a matter of following the core
values set by an organization or an issue is a question of loyalty.
Categories that people may use to classify issues are discussed below:
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1. Ethical Neutrality
People put ethical issues into the category of ethical neutrality when they argue that nothing should be
done about an issue that troubles them. They decide to ignore what they see as injustice, because to raise
the issue would cause them trouble.
2. Ethical awareness:
At this stage a person knows what is right, but cannot say why. Their reaction to an issue may only involve
making their feelings known but may extend to active opposition to the proposal under consideration.
3. Ethical convention:
An issue is allocated to the category of ethical convention when it is thought that it can best be resolved
by applying accepted norms to it. A feature of conventional ethical norm is that they are informal and
unwritten or if they are written they are expressed in general terms and not as detailed prescription.
4. Ethical puzzle:
A puzzle can only exist in a clear moral context in which there is little argument about the values
appropriate to its resolution. It is a belief that things are proper by sticking to the rules and regulations and
not bending them to allow for special cases.
5. Ethical problem:
An issue is likely to be categorized as a problem because it involves many different values and principles
which when taken in isolation, make perfect sense, but which when taken together, fall into conflict.
6. Ethical dilemma:
A dilemma is a perplexing stage involving difficult or unpleasant choices. The options presented by a
dilemma are often unpleasant because they demand a choice between conventions.
7. Ethical Cynicism :
Cynicism emerges when ethical duty turns bitter. The cynic believes that all ethical issues will be resolved in
ways which primarily meet the person’s private interests of those involved. Sometimes he thinks it would be
better to leave matters to chance than to try to improve things. The cynic’s aim is to cast blame on those
who are trying to deal with an issue.
8. Ethical negotiation:
This is a search for consensus or compromise between differing positions. This category is not concerned
with the rightness of a decision, but with the correctness of the process used to arrive at it. The morality of
an action is ignored only a broad acceptability of an action, as determined by voting, opinion polling,
consensus seeking, deal cutting and negotiation is required. Responding to opinion becomes more
important than doing the right thing.

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WHISTLEBLOWER OR WITNESS
Whistle blowing takes place when employees who for a variety of reasons come to a position where they
are so uncomfortable with a particular practice or activity within their employing organization that they
feel no alternative but to raise the matter with another person. This other person might be a work
colleague, a senior member of the organization, a family member, or a non-related third party who is
external to the employing organization.
When is Whistle blowing Act Performed?
Whistle blowing act is a release of confidential organizational information to an external third part.
When might whistle blowing be justified?
Generally, whistle blowing is likely to do harm to an organization. It can only be justifiable under the
following conditions:
1. A product or policy of an organization needs to posses the potential to do harm to some member
of society.
2. The concerned employee should first of all report the facts, as far as they are known, to their
immediate superior.
3. If the immediate superior fails to act effectively, the concerned employee should take the matter
to more senior managers, exhausting all available internal channels in the process.
4. The prospective whistleblower should hold documentary evidence that can be presented to
external audiences. In this condition it is argued that evidence should show that the product or
policy ‘poses a serious and likely danger to the public or the user of the product’.
5. The prospective whistleblower must believe that the necessary changes will be implemented as a
result of their whistle blowing act.
6. The sixth condition is a general one and it is that the whistleblower must be acting in good faith,
without malice or vindictiveness.
How to Contrast the Difference between Ethical Unethical Values within an
Organization
Establishing an ethical value system in an organization or business requires a formal statement of the ethical
values of the group and training employees and members to follow those values. Organizational values
determine the rules governing the behavior of group members. Developing a program to demonstrate the
contrast between ethical and unethical values and behavior establishes the first step in creating a
company culture emphasizing and reinforcing ethical standards.
Step 1
Develop a policy outlining mandated appropriate ethical values and acceptable actions. Invite the
group's membership and elected, volunteer or appointed officers to meet to brainstorm the language and
the components of the official value statement. Make rough drafts of the commonly held values from
these brainstorming sessions.
Step 2

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Edit the ethical policy into a document that incorporates an overall mission statement and contains a
narrative to indicate the ethical values endorsed by the organization. Hold a vote to ask the group's
officers and membership to formally endorse the document.
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Step 3
Incorporate the ethical policy in organization handbooks and formal staff documents. Issue a handbook to
each member of the organization and require a signature from each member stating the member
understands the policy. Develop a video or interactive online presentation demonstrating the values
statements presented in the handbook. If staff members lack the skills to develop the presentations, hire a
professional firm to complete the project.
Step 4
Ask the organization's officers and membership to meet again to create a list of specific examples of
appropriate ethical and inappropriate unethical behaviors. Incorporate specific behaviors related to the
organization. Encouraging the recruitment of diverse members to the organization, for example, presents
an ethical value. Discriminating against potential members based on age, gender, cultural differences,
race or religion illustrates unethical values within an organization. Direct officers and members to explore
ethical questions directly related to the specific organization.
Step 5
Mandate that staff, employees and members of the organization, especially new hires, meet yearly to
brush up on the ethical policy. Direct the discussion to a survey of the ways members might subvert the
ethical code. Explore possible deterrents to unethical behavior.
3.1.5 The Nature of Morality
Morality is the standards that an individual or a group has about what is right and wrong,
good or evil. Moral standards are norms we have about the kinds of actions we believe are
morally right and wrong as well as the values we place on the kinds of objects we believe
are morally good and morally bad (Smith, 2003). From there, we can say that Ethics is a
branch of philosophy (moral philosophy) that examines the moral standards of an individual
or society, and asking how these standards apply to our lives and whether these are
reasonable or unreasonable. As part of the general nature of ethics, we uphold moral rights
(Smith, 2003). The three important features of moral rights are:
MORAL RIGHTS are tightly correlated with duties. Duties are generally the other side of moral
rights (Smith, 2003). For example, my right to work implies the government's duty to make jobs
available to the people.
MORAL RIGHTS provide individuals with autonomy and equality in the free pursuit of their interests
(Smith, 2003). For example, the right to worship as I choose implies that I am free to pursue this
interest as I personally choose. No one can dictate to me how I ought to worship (Halle, 2000).
MORAL RIGHTS provide a basis for justifying one's actions and for invoking the protection or aid of
others. My right to something is my justification for doing it. For example, why do I work? - Because
it is my right to work! And no one can restrain me from working group, or an exchange (Smith,
2003). The better the quality of a person's contributed product, the more he or she should receive.

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CHARACTERISTICS OF MORAL STANDARDS
Typically, a person’s moral standards are first absorbed as a child from family, friends and various social
influences such as church, school, television, magazines, music etc.
Moral standards have five characteristics:
1. Moral standards deal with matters that we think can seriously injure or benefit human beings.
e.g. moral standards against theft, rape, murder, child abuse, assault, slander, fraud etc
2. Moral standards are not established or changed by the decision of particular authoritative bodies.
Laws and legal standards are established by legislature, but moral standards are not and their
validity does not rest on voting procedures. The validity of moral standards rests on the adequacy
of the reasons that are taken to support and justify them.
3. Moral standards should be preferred to other values especially self interest.
4. Moral standards are based on impartial considerations. Moral standards are based on “the
moral’s point of view.” That is the point of view that does not evaluate standards according to
whether they advance the interest of a particular individual or group, but one that goes beyond
personal, interest to a “universal” standpoint in which everyone’s interest are impartially counted as
equal.
5. Moral standards are associated with special emotions and a special vocabulary. E.g. if I act
contrary to a moral standard, I will normally feel guilty, ashamed or remorseful.
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MORAL DEVELOPMENT
According to a psychologist by the name of Lawrence Kohlberg there is a sequence of six identifiable
stages in the development of a person’s ability to deal with moral issues: He grouped theses stages of
moral development into three levels each containing two stages. The sequence of the levels is given as
follows:
LEVEL ONE: PRE-CONVENTIONAL STAGES:
At these first two stages, the child is able to respond to rules and social expectations and can apply the
labels good, bad, right and wrong. These rules, however, are seen as something externally imposed on the
self. Right or wrong are interpreted in terms of the pleasant or painful consequences or in terms of physical
power of those who set the rules.
Stage One: Punishment and Obedience orientation:
At this stage, the physical consequences of an act wholly determine the goodness or badness of that act.
The child’s reasons for doing the right thing are to avoid punishment or defer to the superior physical power
of authorities. There is little awareness that others have needs and desires similar to one’ own.
Stage Two: Instrument and Relativity Orientation:
At this stage, right actions become those that can serve as instruments for satisfying the child’s needs or the
needs of those for whom the child cares. Child is now aware that others have needs and desires similar to
his or her own and begins to defer them to do what he or she wants.
LEVEL TWO: CONVENTIONAL STAGES
At this stage, the person is motivated to conform to the group’s norms and subordinates the needs of the
individual to those of the group. Maintaining the expectations of one’s own family, peer group, or nation is

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now seen as valuable in its own right regardless of the consequences. The person also exhibits loyalty to
the group and its norms.
Stage Three: Interpersonal Concordance Orientation
Good behavior at this stage is living to the expectations of those whom one feels loyalty, affection and trust
such as family and friends. Doing what is good/right is motivated by the need to be seen as a good
performer in one’s own eyes and in the eyes of others.
Right and wrong at this more mature conventional stage now come to be determined by loyalty to one’s
own larger nation or surrounding society. Laws are to be upheld except where they conflict with other
fixed social duties. The person is now able to see other people as parts of a larger social system that
defines individual roles and obligations and he/she can separate the norms generated by this system from
his or her interpersonal relationships and motives.
LEVEL THREE: POST-CONVENTIONAL, AUTONOMOUS, OR PRINCIPLED STAGES
At this stage the person no longer simply accepts the values and norms of the groups to which he or she
belongs. The proper laws and values are those that conform to principles to which any reasonable person
would be motivated to commit him or himself. E.g. fairness, justice, human rights etc
Stage Four: Social Contract Orientation:
At this first post-conventional stage, the person becomes aware that people hold a variety of conflicting
personal views and opinions and emphasizes fair ways of reaching consensus by agreement, contract, and
due process. The person believes that all values and norms are relative and that, apart from this
democratic consensus, all should be tolerated.
Stage Five: Universal Ethical Principles Orientation:
At this final stage, right action comes to be defined in terms of moral principles chosen because of their
logical comprehensiveness, universality and consistency. These are not concrete like the ten
commandments, but abstract general principles dealing with justice, society’s welfare, the equality of
human right, respect for dignity of individual human right. The person’s reason for doing what is right is now
based on a commitment to these moral principles.
MORAL RESPONSIBILITY AND BLAME
A person is morally responsible only for those acts and their foreseen injurious effects:
(a) Which the person knowingly and freely performed or brought about which it was morally wrong for
the person to perform or bring about.
(b) Which the person knowingly and freely failed to perform or prevent and which it was morally wrong
for the person to fail to perform or prevent.
(c) There are two conditions which can completely eliminate a person’s moral responsibility for
causing a wrongful injury and these are (1) ignorance and (2) inability. These are called excusing
conditions because they fully excuse a person from being held responsible for something. It is
however important to understand exactly when ignorance and inability remove a person’s
responsibility because they do not always do. There are some exceptions and these are:
1. When a person deliberately keeps himself ignorant of a certain matter to escape responsibility.
2. When a person negligently fails to take adequate steps to become informed about a matter that is
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of known importance.

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What eliminates responsibility?
1. Ignorance of fact, this generally eliminates moral responsibility completely because a person
cannot be obligated to do something over which he or she has no control: Moral obligation
requires freedom because people cannot control matters of which they are ignorant, they cannot
have any moral obligations with respect to such matters.
2. Ignorance of relevant moral standard generally removes responsibility because a person is not
responsible for failing to meet obligations of whose existence he or she is genuinely ignorant.
3. Inability eliminates responsibility because a person may lack sufficient power, skill opportunity or
resources. A person may be physically constrained, or a person’s mind may be psychologically
impaired in a way that prevents him or her from controlling his or her actions.
In addition to these two excusing conditions, ignorant and inability, there are some mitigating factors such
as:
1. Circumstances that leave a person uncertain, but not altogether unsure about what they are
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doing.
2. Circumstances that make it difficult, but not impossible for the person to avoid doing it.
3. Circumstances that minimize, but not completely remove a person’s involvement in an act.
These can lessen a person’s responsibility for wrong doing depending on the seriousness of the wrong.
Morality and ethics:
Morality is the standard an individual or community keeps about what is right and wrong or good
and evil.
Moral norms deal with topics that either seriously harm or benefit human beings.
Moral standards are not dependent on or changed by the decision of authoritative bodies.
Moral demands enjoy a self-driven force. Expressed through the medium of special emotions.
Ethics helps one to address questions such as what do moral principles mean in a given situation.
Ethics offers certain moral standards to judge a particular human behavior or situation.
The Nature of Morality and Moral Theories
The words moral and ethics (and cognates) are often used interchangeably. However, it is useful to
make the following distinction:
Morality is the system through which we determine right and wrong conduct -- i.e., the guide to good or
right conduct.
Ethics is the philosophical study of Morality.
What, then, is a moral theory?

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A theory is a structured set of statements used to explain (or predict) a set of facts or concepts. A moral
theory, then, explains why a certain action is wrong -- or why we ought to act in certain ways. In short, it is
a theory of how we determine right and wrong conduct. Also, moral theories provide the framework upon
which we think and discuss in a reasoned way, and so evaluate, specific moral issues.
Seen in this light, it becomes clear that we cannot draw a sharp divide between moral theory and applied
ethics (e.g., medical or business ethics). For instance, in order to critically evaluate the moral issue of
affirmative action, we must not attempt to evaluate what actions or policies are right (or wrong)
independent of what we take to determine right and wrong conduct. You will see, as we proceed, that we
do not do ethics without at least some moral theory. When evaluating the merits of some decision
regarding a case, we will always (or at least ought to always) find ourselves thinking about how right and
wrong is determined in general, and then apply that to the case at hand. Note, though, that sound moral
thinking does not simply involve going one way -- from theory to applied issue. Sometimes a case may
suggest that we need to change or adjust our thinking about what moral theory we think is the best, or
perhaps it might lead us to think that a preferred theory needs modification.
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Another important distinction:
Are moral theories descriptive or prescriptive ?
In presenting a moral theory, are we merely describing how people, in their everyday 'doings' and
'thinkings,' form a judgement about what is right and wrong, or are we prescribing how people ought to
make these judgements?
Most take moral theories to be prescriptive. The descriptive accounts of what people do is left to
sociologists and anthropologists. Philosophers, then, when they study morality, want to know what is the
proper way of determining right and wrong. There have been many different proposals. Here is a brief
summary.
Theories of Morality
(1) Moral Subjectivism
Right and wrong is determined by what you -- the subject -- just happens to think (or 'feel') is right or wrong.
In its common form, Moral Subjectivism amounts to the denial of moral principles of any significant kind,
and the possibility of moral criticism and argumentation. In essence, 'right' and 'wrong' lose their meaning
because so long as someone thinks or feels that some action is 'right', there are no grounds for criticism. If
you are a moral subjectivist, you cannot object to anyone's behaviour (assuming people are in fact acting
in accordance with what they think or feel is right). This shows the key flaw in moral subjectivism -- probably
nearly everyone thinks that it is legitimate to object, on moral grounds, to at least some peoples'
actions. That is, it is possible to disagree about moral issues.
(2) Cultural Relativism
Right and wrong is determined by the particular set of principles or rules the relevant culture just happens to
hold at the time.
Cultural Relativism is closely linked to Moral Subjectivism. It implies that we cannot criticize the actions of
those in cultures other than our own. And again, it amounts to the denial of universal moral
principles. Also, it implies that a culture cannot be mistaken about what is right and wrong (which seems
not to be true), and so it denies the possibility of moral advancement (which also seems not to be true).

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(3) Ethical Egoism
Right and wrong is determined by what is in your self-interest. Or, it is immoral to act contrary to your self-interest.
Ethical Egoism is usually based upon Psychological Egoism -- that we, by nature, act selfishly. Ethical
egoism does not imply hedonism or that we ought to aim for at least some 'higher' goods (e.g., wisdom,
political success), but rather that we will (ideally) act so as to maximize our self interest. This may require
that we forgo some immediate pleasures for the sake of achieving some long term goals. Also, ethical
egoism does not exclude helping others. However, egoists will help others only if this will further their own
interests. An ethical egoist will claim that the altruist helps others only because they want to (perhaps
because they derive pleasure out of helping others) or because they think there will be some personal
advantage in doing so. That is, they deny the possibility of genuine altruism (because they think we are all
by nature selfish). This leads us to the key implausibility of Ethical Egoism -- that the person who helps others
at the expense of their self-interest is actually acting immorally. Many think that the ethical egoist has
misunderstood the concept of morality -- i.e., morality is the system of practical reasoning through which
we are guided to constrain our self-interest, not further it. Also, that genuine altruism is indeed possible,
and relatively commonly exhibited.
(4) Divine Command Theory
Many claim that there is a necessary connection between morality and religion, such that, without religion
(in particular, without God or gods) there is no morality, i.e., no right and wrong behaviour. Although there
are related claims that religion is necessary to motivate and guide people to behave in morally good way,
most take the claim of the necessary connection between morality and religion to mean that right and
wrong come from the commands of God (or the gods). This view of morality is known as Divine Command
Theory. The upshot is that an action is right -- or obligatory -- if God command we do it, wrong if God
commands we refrain from doing it, and morally permissible if God does not command that it not be done.
Divine Command Theory is widely held to have several serious flaws. First, it presupposes that God or gods
exist. Second, even if we assume that God does exist, it presupposes that we can know what God
commands But even if we accept theism, it looks like even theists should reject the theory. Plato raised the
relevant objection 2500 years ago. He asked:
Is something right (or wrong) because the gods command it, or do the gods command it because it is
right?
If the latter, then right and wrong are independent of the gods' commands -- Divine Command Theory is
false. If the former, then right and wrong are just a matter of the arbitrary will of the gods (i.e., they might
have willed some other, contradictory commands).
Most think that right and wrong are not arbitrary -- that is, some action is wrong, say, for a
reason. Moreover, that if God commands us not to do an action, He does so because of this reason, not
simply because He arbitrarily commands it. What makes the action wrong, then, is not God's commanding
it, but the reason. Divine Command Theory is false again.
(5) Virtue Ethics
Right and wrong are characterized in terms of acting in accordance with the traditional virtues -- making
the good person.
The most widely discussed is Aristotle's account. For Aristotle, the central concern is Ethica = things to do
with character. Of particular concern are excellences of character -- i.e., the moral virtues.

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Aristotle, and most of the ancient Greeks really had nothing to say about moral duty, i.e., modern day
moral concepts. Rather, they were concerned with what makes human beings truly 'happy'. True
'happiness' is called Eudaimonia (flourishing / well- being / fulfilment / self- actualization). Like Plato,
Aristotle wants to show that there are objective reasons for living in accordance with the traditional virtues
(wisdom, courage, justice and temperance). For Aristotle, this comes from a particular account of human
nature -- i.e., the virtuous life is the 'happiest' (most fulfilling) life.
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Three steps to the argument:
(1) The ultimate end of human action is happiness.
(2) Happiness consists in acting in accordance with reason.
(3) Acting in accordance with reason is the distinguishing feature of all the traditional virtues.
Aristotle thought that humans had a specific function. This function is to lead a life of true flourishing as a
human, which required abiding by the dictates of rationality and so acting in accordance with the
traditional virtues.
(6) Feminist Ethics
Right and wrong is to be found in womens' responses to the relationship of caring.
Comes out of the criticism that all other moral theories are 'masculine' -- display a male bias. Specifically,
feminists are critical of the 'individualistic' nature of other moral theories (they take individualism to be a
'masculine' idea). Rather, feminist ethics suggests that we need to consider the self as at least partly
constructed by social relations. So morality, according to some feminist moral philosophers, must be
ground in 'moral emotions' like love and sympathy, leading to relationships of caring. This allows legitimate
biases towards those with whom we have close social relationships.
(7) Utilitarianism
Right and wrong is determined by the overall goodness (utility) of the consequences of action.
Utilitarianism is a Consequentialist moral theory.
Basic ideas:
All action leads to some end. But there is a summum bonum -- the highest good/end. This is pleasure or
happiness. Also, that there is a First Principle of Morals -- 'Principle of Utility', alternatively called 'The
Greatest Happiness Principle' (GHP), usually characterized as the ideal of working towards the greatest
happiness of the greatest number. The GHP implies that we ought to act so as to maximize human welfare
(though Bentham thought we should include all sentient animals in his utilitarian calculations). We do this in
a particular instance by choosing the action that maximizes pleasure/happiness and minimizing suffering.
Jeremy Bentham -- the first to formulate Utilitarianism -- did not distinguish between kinds of
pleasures. However, Bentham's student, John Stuart Mill, produced a more sophisticated version of
Utilitarianism in which pleasures may be higher or lower. The higher pleasures (those obtained, e.g.,
through intellectual pursuits), carried greater weight than the lower pleasures (those obtained through
sensation). The upshot is that in determining what action to perform, both quality and quantity of
pleasure/happiness count.
Note: Utilitarians are not a Hedonist. Hedonists are concerned only with their own happiness. Utilitarians are
concerned with everyone's happiness, so it is Altruistic. In general, morally right actions are those that
produce the best overall consequences / total amount of pleasure or absence of pain.

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Modern versions of Utilitarianism have dropped the idea of maximizing pleasure in favour of maximizing the
satisfaction of all relevant peoples' preferences and interests. Also, some distinguish between Act
Utilitarianism and Rule Utilitarianism. Act Utilitarianism is pretty mush as described above, where we make
the utilitarian calculation based on the evaluation of the consequences of a single isolated act. It is
thought by some that this leads to a number of significant problems -- for instance, that one person may be
harmed if that leads to the greatest good for everyone. To overcome these problems, some advocate
Rule Utilitarianism -- the view that we should adopt only those rules (for governing society) that produce the
greatest good for all.
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Other key points:
• For Utilitarians, no action is intrinsically right or wrong.
• No person's preferences or interests (including your own, your relatives, friends, neighbours, etc.)
carry a greater weight than any other person's.
• Usually we cannot make the required utilitarian calculation before acting. So, in most situations,
following 'rules of thumb' will produce the best consequences.
• Democratic and economic principles reflect Utilitarianism.
Some things to ask about Utilitarianism:
• How can we determine accurately what the consequences of an action will be?
• Do people have rights that cannot be overridden by the goal of the best consequences for all?
(8) Kantian Theory
Right and wrong is determined by rationality, giving universal duties.
Kantianism is a Non-consequentialist moral theory.
Basic ideas:
That there is the supreme principle of morality. Good and Evil are defined in terms of Law / Duty /
Obligation. Rationality and Freedom are also central. Kant thought that acting morally was quite
simple. That is:
- you ought to do your duty (simply because it is your duty).
- Reason guides you to this conclusion.
Good Will (i.e., having the right intentions) is the only thing that is good without qualification. So, actions
are truly moral only if they have the right intention, i.e., based on Good Will.
What establishes Good Will?
- only can be a law of universal conformity -- I should never act except in such a way that I can also will
that my maxim should become a universal law.
This is called the Categorical Imperative = Principle of Universalizability (something like The Golden
Rule). The basic idea is that we should adopt as action guiding rules (i.e., maxims) only those that can be
universally accepted. Consider someone wondering if they could break a promise if keeping it became
inconvenient. We might formulate the following maxim governing promises:
I can break promises when keeping them becomes inconvenient.

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Can this be universalized? Kant says no because making promises then becomes, in essence,
contradictory. The thinking is that a promise is, by definition, something you keep. The above maxim would
lead to a contradiction of will, i.e., I'll make a promise (something I keep), but I'll break it if I choose. The
more general way to understand the Principle of Universalizability is to think that we must always ask the
following questions: What if everyone did the action you are proposing? Or, what if I were in the other
person's position? This leads to the basic idea behind the Golden Rule.
Kant had another way of formulating the Categorical Imperative that is worth noting.
Never treat anyone merely as a means to an end. Rather, treat everyone as an end in themselves.
We can understand this by noting an example, i.e., the slave society. What is wrong with the slave society,
following the above principle, is that a slave is treated as a means to the slave owner's ends, i.e., as an
instrument or tool, not as a person. The upshot is that no person's interests (or rights) can be overridden by
another's, or the majority.
Many think that this way of formulating the Categorical Imperative shows that Kantianism is clearly anti-
Utilitarian.
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Some things to ask about Kantianism:
• Is it true that having good intentions is the only thing that counts morally?
• Must we always ignore good consequences?
• Is it always wrong to treat people merely as a means to an end? (Can we do otherwise?)
(9) Rights-based Theories
We are to act in accordance with a set of moral rights, which we possess simply by being human.
Rights-based views are connected to Kantianism and are Non-consequentialist. The basic idea is that if
someone has a right, then others have a corresponding duty to provide what the right requires.
Most distinguish between positive and negative rights. A positive right is one in which the corresponding
duty requires a positive action, e.g., giving a charitable donation in order to sustain someone's right to life,
shelter, education, etc. A negative right is one in which the corresponding duty merely requires refraining
from doing something that will harm someone. Some claim -- e.g., Libertarians -- that only negative rights
count morally. For instance, the right to life does not require that we give what is needed to sustain life,
rather merely that we refrain from taking any action that would take life. [Note: others argue that there is
really no significant distinction between positive and negative rights, arguing that a positive right can be
understood negatively, and visa versa. Also, that there is no morally significant difference between, for
example, letting someone die and killing them. Obviously, this is a hotly disputed issue.]
Some things to ask about Rights-based theories:
• Where do rights come from? From nature (we have them simply by being human)? From
principles of Justice? Or, from Utilitarian procedures?
• How do we decide between competing rights?
(10) Contractarianism
The principles of right and wrong (or Justice) are those which everyone in society would agree upon in
forming a social contract.

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Various forms of Contractarianism have been suggested. In general, the idea is that the principles or rules
that determine right and wrong in society are determined by a hypothetical contract forming
procedure. Here is John Rawls's example.
Through a thought experiment, Rawls developed a way of getting people to come up with universal
principles of justice. The basic idea is nothing new -- i.e., of impartial developing a social contract
of universal principles -- but many find Rawls' novel method very appealing. The idea is to start by thinking,
hypothetically, that we are at the beginning of forming a society and we want to know which principles of
justice to ground the society. However, in this 'original position' we do this without knowing which position
we will occupy in the future society -- we don't know if we will be rich or poor, male or female, old or young,
etc. We then advocate those principles that will be in our self-interest (though we don't know what 'self'
that will be). This forces us to be impartial, and if we are rational, to propose universal principles. The idea
of the thought experiment is not to think that we actually begin again, and construct a society from
scratch. Rather, we can use the thought experiment as a test of actual principles of justice. If a principle is
one that would not be adopted by people in the original position, behind the 'veil of ignorance' (about
who they will be), then it is unjust and should be rejected.
[Rawls claims that people in this original position will choose conservatively when developing principles
governing the distribution of benefits and burdens. This conservatism, Rawls claims, will lead to the
choosing two basic principles: (1) that each member of the society should have as much liberty as possible
without infringing on the liberty of others; and (2) the 'maximin' rule for decisions about economic justice --
namely, that they will choose those rules that would maximize the minimum they would receive. In other
words, make the society in which the least well off are in the best possible position. Deviations from equality
of distribution of benefits and burdens is justified only if it advantages the least well off. Rawls thought that
some inequalities would be adopted because rewarding on the grounds of merit and hard work, for
example, would lead to a society in which there was a greater production of social benefits, so the least
well of would be better off than in a society of pure equality.]
3.1.6 Leadership, Power and Integrity
ETHICAL LIMITATIONS AND DANGERS OF MANAGERIAL ROLES
There are various stances people may take in relation to their values then different people may have
different potential strengths and weaknesses in their approach to ethical issues in organizations. Managers
can take one of five positions in their approach to ethical issues at workplace. i.e. prophets, subjectivists,
rhetoricians, quietists and balancers
(1). Prophets want to act on the world, or at least their organization, without the constraint of comment or
caution from others. They are unwilling to debate. Their monocular ethical vision means they may do
great harm if their vision happens to be wrong or bad. They do not pay attention to questioning voices.
They are positive prophets who have a particular prescription for how things should be changed and
people developed. They require disciples who will ‘buy into’ the particular values and principles they offer.
(2). Subjectivists are doubters. They are the opposite of the prophets who doubt little. Questioning the way
things are done shows engagement with the world, but is beset with anxieties as the ground of their
questioning constantly shifts. The ethical limitation of the subjectivists is that they do not believe in the
existence of objective ethical standards and think everyone has to make their own choices while
recognizing that individuals' own choices implicitly impose expectations on others. They suffer an instability
caused by the collective implications of their individualism.
(3). Rhetoricians: These managers enjoy debates in which some win and others lose. The point for them is
not to be right, but to win. They create facades of performance metrics and annual reports that are
required to keep top management content. Such material will be provided by managers despite their
doubts about their worth.
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(4). Quietists: they disengage from ethical problems of the world. Its limitation is that a quietist manger
would not see it as their role to react to wrongdoing within their organization. Quietism is the resignation of
self to achieve contentment.
(5). Balancers: There are two managerial roles, the culture designer and the transactional manager, that
are intermediate between the four stances. Their ethical problem is maintaining the equilibrium. If culture
designers lose their balance they will become either more like prophets or more like subjectivists. If the
transaction manger becomes unbalanced they are more likely to move towards either the quietists’ or
rhetoricians’ stances.
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Components of Ethical Leadership
Ethical leadership begins with the way leaders perceive and conceptualize the world around them. Ethical
leadership, organizational ethics, and social responsibility are inseparable concepts. They are developing
concepts, to be sure, but inseparable. How ethical leaders relate to and come to understand the world
around them involves judgment and action. These can be developed. In sum, the leader's role is to guide
the human potential of the organization's stakeholders to achieve organizational aspirations in ways that
liberate rather constrain their imaginations and judgment.
Ethical leadership must, then, be effective, efficient, and excellent if it is not to waste human potential. It is
not enough to be ethical in one's individual actions to be an ethical leader. To be effective, efficient, and
excellent, four components of ethical leadership must be understood and developed: purpose,
knowledge, authority, and trust.
The relationship between these four components can be visualized as interrelated components, as
described in the figure opposite. Attention to any one component alone is incomplete and misleading.
• Purpose — The ethical leader reasons and acts with organizational purposes firmly in mind. This
provides focus and consistency.
• Knowledge — The ethical leader has the knowledge to judge and act prudently. This knowledge is
found throughout the organization and its environment, but must be shared by those who hold it.
• Authority — The ethical leader has the power to make decisions and act, but also recognizes that
all those involved and affected must have the authority to contribute what they have toward
shared purposes.
• Trust — The ethical leader inspires — and is the beneficiary of — trust throughout the organization
and its environment. Without trust and knowledge, people are afraid to exercise their authority. *
Modes of Ethical Leadership
It is often thought that ethical leadership must be soft leadership. Nothing could be further from the truth.
Being an ethical leader means applying the right amount of authority in each situation. Sometimes the
situation requires leadership that is anything but gentle. Gratuitously tough leadership, however, cannot be
maintained for long without developing resentment and cynicism.
It is helpful to think of the ethical leader as exercising authority within five modes or levels of intervention
into the judgments and actions of followers:
• Inspiration — Setting the example so that other committed members will contribute their fullest
capabilities to achieve organizational purposes. (the lowest degree of intervention)
• Facilitation — Supporting other committed members, and guiding them where necessary, so that
they are able to contribute their capabilities as fully as possible.
• Persuasion — Appealing to reason to convince other members to contribute toward achieving
organizational purposes.
• Manipulation — Offering incentives other than the intrinsic value of contributing to the
achievement of organizational purposes, where commitment is lacking.

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• Coercion — Forcing other members to contribute some degree of their capability where they have
little or no commitment to do so on their own. (The highest degree of intervention).
It is also helpful to consider the components of ethical leadership together with the modes of intervention.
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Integrating Components and Modes
The leader must employ the authority granted him or her by the organization to achieve the purposes of
the organization, all the while recognizing that the knowledge needed to exercise this authority resides
throughout the organization and its environment.
He or she must ensure that the purposes of the organization are known and shared, that it has the capacity
to support its members' exercising their capabilities, and that communication between mangers and other
employees is open and honest.
The mode of intervention selected will depend upon the health of the organization and the pressures in its
environment.
• The ideal is to inspire others as a steward of the vision, values, and excellence of the organization,
as reflected in its culture.
• Often persuasion and facilitation are required of otherwise capable and committed members,
where they are unsure of their own capability.
• Sometimes even manipulation and coercion are appropriate, where the organization is not
healthy and the pressures are intense.
The modes of ethical leadership intervention depend in large part on the organizational culture. If the
culture allows the organization to learn and grow within its environment, leadership may be largely
inspirational.
If the culture does not support organizational learning and growth within that environment, then
manipulative, even coercive, leadership would be necessary. Somewhere in between is leadership that is
facilitative or persuasive. In any event, leaders must make their roles as integrity champions larger than life.
Otherwise they and their examples will be lost in the pressures of day-to-day life. They must speak in terms of
vision, values, and integrity. And, when the leader is not involved in a part of the organization's business, he
or she must know who speaks for values and integrity.
Moreover, the style of ethical leadership will vary with the degree to which it reflects the Organizational
Culture and the urgency of its situation in the environment.
• In its least demanding sense, ethical leadership is a stewardship that preserves the aspirations and
culture of the organization.
• In its most demanding sense, it scans the community and develops and communicates
organizational aspirations: the organization's core purpose, core values, and vision of a desired
future and persuades, manipulates, and coerces its stakeholders to comply until the culture has
adapted.
• In between these extremes, ethical leadership balances (1) achieving the organizational
aspirations that are realistically attainable at this time with (2) developing the organizational
culture over time.
Different styles of leadership are necessary to maintain or implement change in the organizational culture
that is optimal for it to survive and thrive within the organization's context.
The specific culture required, and the challenges it must face, will be suggested by the nature of its
essential social responsibility and dynamics of its larger community.

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3.1.6.1 Leadership and Source of Power
One can define leadership as influencing the activities of others toward accomplishing a goal. And we
can define power as a leader’s potential to influence the activities of others toward accomplishing a goal.
Without a source of power there can be no leadership.
One can define two power bases: position and personal. Position power is the power given to the leader
by the organization. It’s the power granted to the leader based on the job title.
Personal power is power other people give to the leader. That includes the leader’s subordinates, peers
and bosses. Personal power is an indication of the level of commitment others have to the leader. Personal
power is linked to one’s personality, competence and integrity.
Table outlines the seven key types of power.
Source Type Influence on others
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Coercive power Position
The ability to impose sanctions or punishment to gain
compliance
Reward power Position
The ability to provide rewards or recognition to gain
compliance
Legitimate power Position
The right to influence the activities of others based on job title
or position
Expert power Personal Respect gained based on skills, expertise or experience
Referent power Personal Positive personal traits or integrity
Information
Position and
Possession of or access to, valuable information
power
personal
Connection
power
Position and
personal
Access to others who can provide rewards or sanctions
Table 1. The table shows the seven major sources of a leader’s power.
A leader should consider these sources of power and be able to incorporate them appropriately. A leader
should consider the best sources of power to be employed to achieve success and effectiveness.
So, now you should be asking yourself: “Is there one best and preferred source of power?” The answer is
yes, if you’re only concerned with immediate success. For instance, imagine a fire breaks out and you
need to ensure a process for volatile hydrocarbons is shut down safely. In this case, position power is the
best choice. In most other situations you need to move among the sources of power.
Table 2 shows examples of actions that might enhance various sources of power.

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Leader action Typical effects Effect on power
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Uses sanctions to gain compliance,
gives corrective feedback for poor
performance
• Team believes the leader will use
sanctions when necessary
• Increases coercive and
referent power in team
members' eyes
• The boss notes the leader didn't
abuse delegated authority
• Builds referent power
with the boss
• Leader gains respect because of
judicious use of coercive power
Makes good decisions in the area
of authority
• Team members and peers
perceive the leader as competent
• More legitimate and
expert power with boss,
team and peers
• The boss notes good decision-making
and may grant more
authority
Uses rewards appropriately,
recognizes notably good
performance
• Team members perceive the
leader will use rewards or positive
recognition
• Increase reward and
referent power with team
• The boss, peers and team
members notice and respect the
proper use of reward authority
• Increases referent power
with boss and peers
Table 2. This table shows the benefits that accrue to those who wield power appropriately.
Power can be lost quickly if a leader misuses legitimate power. Table 3 offers a few examples of how this
can happen.
Leader action Typical effects Effect on power
Uses sanctions inappropriately,
misuses corrective feedback
• Team loses respect for the leader
• Reduces referent power
with boss, team and peers
• The boss notes the leader can't
handle sanction authority
• Might also erode
coercive power
• The leader loses respect from peers
Threatens sanctions but never
follows through
•Team doesn't perceive the leader will
use sanctions
•Reduces coercive power
with the team
Gives rewards to everyone,
regardless of performance
• Team feels there is no need to work
harder if everyone gets the same
reward
• Reduces reward power
with team
• Rewards become expected, as
opposed to being performance-based
• Reduces referent power
with boss, peers and team
• The boss notes the leader is abusing
the rewards system
Table 3. These are some examples of the negative fallout from abuse of power.
A leader must use power wisely and justly, or it can become a liability rather than an asset. It only takes one
incompetent act to result in an immediate loss of power. Good leaders work to build their sources of power
and use their powers to influence others wisely.

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The Five Sources of a Leader’s Power, and how (and how not) to use them
Power is a force of influence and authority. Most leaders wield power, but how power is manifested and
used often differs between leaders. Where does a leader get power from? Or do a leader’s followers give it
to them? Well it’s both. In this post, we’ll be looking at the five different sources of power a leader can use,
with some advice on when these powers should be used, and perhaps when not.
The five sources of a leader’s power come from distinctly different sources. Here’s an overview:
1. Expert Power: When a leader has significant domain knowledge/skills. E.g. an expert accountant
influences how junior accountants go about their tasks
2. Positional Power: Comes when a leader has a legitimately held position of authority. E.g. typically,
the CEO of an organization has the highest positional power
3. Reward Power: Is evident when a leader can give, or take away, a reward. E.g. a leader can
influence a follower’s behavior by awarding a bonus, or taking away perks
4. Coercive Power: This is felt when a leader creates the perception of a threat. E.g. a leader has
coercive power if her followers believe that she will initiate disciplinary action
5. Personal Power: Influence gained by persuasion. E.g. a manager may have to rely on nothing more
than a friendly please and thankyou for an employee to perform a task
So now we will look at each of these sources of power and consider when they could be used, and when
it’s not appropriate to use them…
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Expert Power
If you’re reading this then you’re probably like most professionals and leaders that potentially have expert
power. It is the esoteric nature of the professional’s subject matter that means most superiors or colleagues
don’t possess the same applicable knowledge or judgment as you, even if you have no formal authority on
the subject. Therefore your word on your subject carries weight and has the means to influence the
outcome of decisions where it applies. For example, a programmer can influence the design of a niche
application because of their knowledge of a code base, and a support engineer can influence how a
support process operates because they are known to be the best at supporting that function.
It is common, therefore, that followers can have more expert power than their leaders. New leaders
particularly can possess far less knowledge than their followers. This can put you in a vulnerable position. To
gain the same level of knowledge can be time-consuming and possibly not practical, if skills are hard to
acquire. You wouldn’t expect an Finance Director to take a Cisco Systems course so that they can directly
influence the outcome of a computer network investment, would you? As a leader in this situation, you
should not rely only on expert power to influence outcomes and use other sources of power accordingly.
Therefore, by possessing expert power you have something that most others cannot easily acquire. It is a
powerful asset. But is it always used for the greater good? No. Withholding knowledge as a means of
gaining or maintaining power is all too common. Leaders who identify this practice have a difficult
challenge, but it must be avoided. One might see this where IT departments are in the process of being
outsourced, or if an employee feels threatened by new members of their team. As a leader in this situation
you should apply other powers to resolve the problem, such as rewarding knowledge sharing or building
closer relationships with the affected employee to persuade him out of this way of thinking.
Use expert power when…
• you have a genuine expertise in a subject
• or you have access to resources within your control who do
Don’t use expert power when…

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• you’re unsure of your competence in a subject
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Positional Power
Positional power is gained by a person’s role in their organization. In many organizations a grading system is
used to position an employee, or it maybe evident in an organization chart. However your organization
elevates its employees in the structure, positional power is a function of one’s formal authority. It’s being the
boss. As the boss you can decide who does what job and who goes where. As the formal authority, you
have influence because you have been given the accountability for that department or function.
Being the boss, however, does not guarantee that you will have followers that comply of their own free will.
It does not mean you will be the leader. Using only positional power means you make decisions without
consideration of personal relationships, individual needs and personal objectives. It could result in
compliance, and only compliance. You might see that your subordinates work to rule or union policy, and
behave inflexibly. Subordinates in this sense are wielding positional power too in order to influence an
outcome. Ensuing disputes can be very costly and disruptive, and its likely as a leader you will come out of
this for the better. Using positional power is not bad, but should be used in conjunction with other sources of
power to be most effective.
Use positional power when…
• you need something done quickly when you don’t have time to explain why
• if a political situation has grown that needs stemming
• your accountabilities are in serious jeopardy
Don’t use positional power when…
• you’re feeling impatient or frustrated
• you have purely personal reasons to influence an outcome
• your values are at odds with someone else’s
• you’ve recently entered a new post with an unfamiliar team
Reward Power
One has reward power if you have the potential to influence the actions or behaviors of others if you have
control over desired resources, such as salary benefits, human resources or capital. In essence, it is due to
your ability to offer incentives. For example, a leader of a programming team can increase productivity in
their team by offering benefits like new programming tools or a team outing to paintball. A common
practice in many organizations with a salesforce is to offer places at a sales conferences in exotic
locations. It is sometimes as simple as a leader offering affiliation with themselves, such as meetings over
coffee or public recognition.
Having the potential to administer reward is a powerful force. It is an effective motivation mechanism.
However, it must be used carefully. One mistake that leaders often make is to assume that the reward is
worth the effort in the eyes of their followers. Another possibility is that it could create or reinforce an
entitlement culture where explicit rewards are the only motivation, and the revocation of the rewards
creates the opposite outcome. It is also possible that followers who do not receive rewards can foster
jealousy or resentment creating further problems within the organization.
Use reward power when…
• you need something done quickly
• your team needs a motivation boost
• you’re asking your followers to go above and beyond their duty

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• you want to create friendly competition
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Don’t use reward power when…
• resources are scarce, so that someone wins, someone loses
• you have doubts about your ability to provide the reward
• they are targeted towards individuals in situations where there are petty jealousies exhibited in your
team
Coercive Power
Coercion is a potential to influence others by sanctions or other negative action. For example, an engineer
works longer hours unpaid because their performance review is due with her leader. It is a product of fear
of loss.
Coercion is not always the same as a threat, which is a direct and deliberate action of coercion. Indirect
coercion can be due to a perception by the engineer, in the above example, that a threat is in place,
even if a threat had never been expressed by their leader. Another example is where a designer
compromises on a design to align to their leader’s personal motives, where the leader is known to have a
temper and short-fuse.
Coercion is not inherently ‘bad’. Coercive power can be instrumental in an organization if certain
standards are required or regulations upheld. For example a programmer works in an organization where
software standards must be applied to comply with contractual obligations. To be effective, the
programmer must know that there are penalties to himself (e.g. given a warning or a black mark on their
performance) and also to their employer. Another example is a HR policy which stipulates the immediate
firing of an employee who makes racist comments.
Coercion as a staple source of power rarely makes for a good leader. Ruling with an iron fist behind your
back doesn’t foster good working relationships and respect. Its also likely to result in employee’s revolting,
reflecting your coercive tactics in the form of strike action or similar. Coercion should be used sparingly, if at
all, and only to stem negative behaviors in your followers that may be outside of behavioral policies, but
only once other forms of power have been exhausted.
Use coercive power when…
• you need to ensure standards and policies are adhered to
• there is significant risk in a situation
• you have no other option
Don’t use coercive power when…
• you have the ability to apply other power. Rather, use positional power if you must
• you won’t be around to put things right, afterwards
• you’re feeling frustrated and emotional
Personal Power
Personal power is created by strong relationships between a leader and her followers. It is the potential
influence that you have due to the quality of this bond; a product of trust and affiliation. A business analyst
will accept the influence and decision of his leader if he believes his motives are aligned to their shared
values. Personal power begins when two or more people have rapport and build upon their relationship.
The more that the follower sees good in the actions of the leader, the more personal power the leader will
possess over the follower. Personal power is synonymous with friendship.

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Personal power comes into play when a leader can influence a follower by a conversation. A simple
exchange of words in terms of a request is often enough, even if the follower does not necessarily
understand or agree with the request or decision. Personal power can be an optimal means of making
progress, but it does come at a price. The leader must work hard at building and maintaining these
relationships.
Personal power can have a downside when discipline has to be practiced by the leader. Having a
crunchy conversation with a follower who you share a strong relationship can be awkward. It is common
for leaders to shy away from the discipline, leaving unresolved issues that can fester for later explosion.
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Use personal power when…
• there is a strong relationship between you and your followers
• your desired outcome does not conflict with your followers values, or the values of your
organization
• your desired outcome is flexible
Don’t use personal power when…
• there is not a strong relationship between you and your followers
3.1.6.2 Creating and maintaining a culture of integrity
Integrity is a concept of consistency of actions, values, methods, measures, principles, expectations, and
outcomes. In ethics, integrity is regarded as the honesty and truthfulness or accuracy of one's actions.
Integrity can be regarded as the opposite of hypocrisy, in that it regards internal consistency as a virtue,
and suggests that parties holding apparently conflicting values should account for the discrepancy or alter
their beliefs. Integrity means making the correct choice when faced between right and wrong. It further
encompasses adherence to ethics and morals, and is often linked with honesty.
In the history, the word integrity stems from the Latin adjective integer (whole, complete). In this context,
integrity is the inner sense of wholeness deriving from qualities such as honesty and consistency of
character. As such, one may judge that others have integrity to the extent that they act according to the
values, beliefs and principles they claim to hold.
A value system's abstraction depth and range of applicable interaction may also function as significant
factors in identifying integrity due to their congruence or lack of congruence with observation. A value
system may evolve over time while retaining integrity if those who espouse the values account for and
resolve inconsistencies.
If employers will demonstrate honesty and integrity in all situations, employees will catch on and follow
suit. Rather than constantly be riding individuals about their character or criticizing individuals for poor
choices, show true character through silent and humble actions. Promote integrity in the workplace by
holding ongoing seminars and trainings, regarding ethics in the workplace. Choose a value each month to
discuss in the workplace at monthly meetings. This is another way to remind individuals to be thinking
about good characteristics.
Integrity is the number one quality of leadership. Integrity in leadership is expressed in terms of constancy
and consistency. It is manifested in an absolute devotion to keeping one's word. The glue that holds all
relationships together-including the relationship between the leader and the led-is trust, and trust is based
on integrity.

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Integrity is so important that functioning in our society would be impossible without it. We could not make
even a simple purchase without a high level of confidence that the price was honest and that the change
was correct. The most successful individuals and companies in America are those with reputations of high
integrity among everyone they deal with. This level of integrity builds the confidence that others have in
them and enables them to do more business than their competitors whose ethics may be a little shaky. Earl
Nightingale once wrote, If honesty did not exist, it would have to be invented, as it is the surest way of
getting rich. A study at Harvard University concluded that the most valuable asset that a company has is
how it is known to its customers, its reputation.
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The Benefits of Integrity
The study of great leaders have shown one consistent character in each of them, that is integrity. Integrity is
the stable force behind countless leadership role models. Great leaders model integrity by being honest
and doing what is right no matter the circumstances. Integrity requires managers to make the right choice,
even when they do not receive personal gain from the outcome, and to put own personal agenda aside
for the greater good of the organization and the people.
Effective leaders know that workers need a leader who has integrity. Without it, workers will be missing a
vital ingredient in their ability to perform. Much like the foundation of a building, integrity is essential for
lasting success and provides a work environment with three key qualities: stability, safety and reference.
Stability. People who see their boss as honest and having a strong commitment to doing the right thing are
assured that they work in an environment of stability. They know that their boss' integrity will not be shaken
when tough decisions need to be made. Their boss will stick up for their employees and support them. They
will treat people fairly and will be more willing to share information with their employee that is necessary for
them to do their jobs. Conversely, a leader who is not upfront with people and hides behind their own
deceit for their own self-protective purposes will create an environment of fear, uncertainty and an
atmosphere of everyone for themselves! These sorts of leaders are more prone to play favourites or other
political games and leave their team to figure out the rules of engagement.
Safety. Managers with a strong foundation of integrity make it safe for their employees to perform at their
peak. Leadership integrity gives people a sense of empowerment. A good leader knows that there is safety
in providing people with the freedom to be open and honest. People know that there will not be retribution
for their ideas and opinions. A good leader knows how to allow people this freedom while, at the same
time, ensuring that it is done respectfully and appropriately. Workers that feel safe will perform better. It is
also the best ingredient for instilling an environment of innovation. And with innovation comes
transformation.
Reference. A manager's integrity forms a baseline that serves as a reference or measure. A leader with a
strong foundation of integrity is a guiding light to those around them. Employees tend to emulate what their
boss does. In a high performing environment, leaders with integrity are the role models for others to see and
follow and form the standards for how others ought to behave.
Practices to create and maintain culture of integrity
An organisation have to put forth some practices so as to create and maintain integrity. The culture of
integrity is not automatic and hence organisations particularly managers have to work hard to achieve it.
Some practice include effective training, practising fairness in every activity in the organisation, designing a
code of conduct, treatment of gratuities, gifts and entertainment.
Effective Training. Organisations should ensure that its workers receive constant training for good habits,
organisational goals and achievements attached to integrity. Each useful information should be made
available to the organisation. Ways of conducting business and treating customers and suppliers should be
well communicated and encouraged. A sense of belonging should be instituted. Each worker should be

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responsible for proper business behaviour. Effective training can be done to new employees on the day of
orientation. However, it should be repeated at constant intervals to maintain the culture of integrity.
Code of Conduct (Financial And Business Records). Employees involved in the preparation of the
company's financial statements must prepare those statements in accordance with applicable
accounting principles and standards so that the financial statements materially, fairly and completely
reflect the business transactions and financial condition of the company. Company policy prohibits any
employee from knowingly making or causing others to make a misleading, incomplete or false statement in
connection with an audit or any filing with any governmental or regulatory entity.
Company policy also prohibits any employee from falsifying or causing others to falsify any company
record or documentation. In addition, an employee must not omit or cause others to omit any material
information that is necessary to prevent a statement made in connection with any audit, filing or
examination of the company's financial statements from being misleading. Employees are prohibited from
maintaining any undisclosed or unrecorded corporate account, fund or asset or any arrangement,
including off-balance-sheet items or arrangements, with a misleading purpose.
Destruction or falsification of any document that is potentially relevant to a violation of law or a
government investigation may lead to prosecution for obstruction of justice. Therefore, if an employee has
reason to believe that a violation of the law has been committed or that a government criminal or
regulatory investigation is about to be commenced, he or she must retain all records. Questions with regard
to destruction or retention of documents in this context should be directed to the Company's Legal
Department.
Gifts, Gratuities and Entertainment. Employees and their family members should not accept gifts, gratuities
or entertainment from persons, firms, or corporations with whom the Company does or might do business
other than those of modest value, consistent with generally accepted ethical business practices. It is also
the Company's policy not to offer gifts, gratuities or entertainment to persons, firms or corporations with
whom the Company does or might do business other than those of modest value, consistent with generally
accepted ethical business practices.
There are some cases where refusal of a valuable gift would be offensive to the person offering it. This is
particularly true when employees are guests in another country, and the gift is offered as part of a public
occasion. In these cases, the employee to whom the gift was offered may accept the gift on behalf of the
Company, report it to a supervisor and turn it over to the Company.
The Company, as a responsible corporate citizen, can make donations of money or products to worthy
causes, including fundraising campaigns conducted by its customers. To remain an appropriate donation,
the contribution should not be connected to any specific customer purchases or purchasing commitments.
Equal Employment Opportunity. To maintain the culture of integrity, the organization should be committed
to provide equal opportunity in all aspects of employment and also a work environment free of unlawful
discrimination or harassment of any kind. Employees are responsible for understanding and complying with
the organization’s policies on equal employment opportunity and unlawful harassment. Copies of these
policies can be obtained from the Company's Human Resources department. Fairness in the treatment of
various issues on different employees should be monitored. Avoiding the work of nepotism and corruption
will help a long way in enhancing integrity.
Incentives, Rewards and Punishment. Managers may use incentives to help employees operate with
integrity. Incentives do motivate employees to strive to operate within company limits. Just like rewards
helps employees to improve their way of operating to the desired ways. This is inform of rewarding (every
year) the best employee to maintain or apply company ethics. However, for many of those who do not
support organization culture or they break rules of integrity, some form of punishment should be designed
and applied on them.
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3.1.6.3 Methods of influence
Effective leaders know how to influence people. In most organizations, its not about authority, it's about
influence. Discover the power inherent in nine spheres of influence.
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• Power Overview
• Authority
• Expertise
• Punishment
• Postive Reinforcement
• Persuasion
• Coaching
• Relationships
• Vision
• Charisma
Overview
In politics, a sphere of influence is typically defined as the cultural, economic, military or political influence
a state exerts over another state. Similarly, powerful leaders have a sphere of influence used on the
influence people around them.
Written in 1959, French and Raven The Bases For Social Power is commonly cited in management texts as
the model for how to influence people. However, they listed only five sources, which they referred to as:
• Reward,
• Coercive,
• Legitimate (authority),
• Referent (charisma) and
• Expertise.
It's been over 45 years since this classic article on how to influence was published and times change. For
example, there is a great deal of research in both psychology and management that we can now draw
on to better understand the nature of leader influence. Besides the five that used by French and Raven, I
believe there are four more:
• Coaching,
• Vision,
• Relationship, and
• Persuasion.
And while reward and coercion are commons terms in how to influence, it would be more helpful to think
in terms of behavioral modification (or operant conditioning) which uses two motivational consequences
that leaders need to understand: positive reinforcement and punishment.
Power lasts 10 years, influence not more than a hundred. — Korean Proverb

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EFFECTIVE LEADERS KNOW HOW TO INFLUENCE PEOPLE
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• Power Overview
• Authority
• Expertise
• Punishment
• Postive Reinforcement
• Persuasion
• Coaching
• Relationships
• Vision
• Charisma
How To Influence With Authority
Power corrupts, and absolute
power corrupts absolutely..—Lord
Acton, Letter to Bishop Mandell
Creighton, 1887
When I make a mistake, I am an
idiot. . . When my boss makes a
mistake, he's only human. —
Unknown
Authority is defined as a legitimate right to influence people based
on one's position inside an organization or nation. It works best in
large bureaucratic organizations and is a major mechanism of
political leadership.
It is usually a vertical relationship, a top-down influence mechanism
associated with obedience, conformity and compliance. Typically,
there is also a status difference.
For example, people follow a doctor's instruction because that
person has expertise but we do what a police officer says because
the officer represents authority.
Influence By Coaching
Coaches have to watch for what
they don't want to see and listen to
what they don't want to hear. —
John Madden
Coaching (and by extension, mentoring and teaching) exert
influence on people by providing new knowledge and new skills on
how to influence people. Unfortunately, consultants are not
coaches, neither are most executives.
Traditionally, managers and supervisors have never assumed the
mantel of leadership required to function as a coach—telling
someone what to do is not the same as showing someone how to do
it. Neither do the vast majority of CEO's.
I like to ask what people will take pride in. Contrary to what you see
on the resumes, work activities don't put a smile on people's face.
What brings the smile is the leader who mentored, taught and
coached them to be better human beings.
The Sphere of Persuasion
You can lead an organization
through persuasion or formal edict.
I have never found the arbitrary
use of authority to control an
Long a key skill of great sales people throughout history, persuasion
becomes a bulwark for the leadership when authority does not work.

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organization either effective or, for
that matter, personally interesting.
If you cannot persuade your
colleagues of the correctness of
your decision, it is probably
worthwhile to rethink your own. —
Alan Greenspan, chairman of the
Federal Reserve Board
Technically, persuasion ends with someone saying, I agree.
But agreement doesn't mean people will actually take action.
Unfortunately, persuasive influence of people requires a fair amount
of sales savvy and a fairly sophisticated understanding on attitude
change and cognition.
___________________________________
Persuasive Humor. I am reminded of the story of how God called
Noah in to build an ark so that he, his family, and all the species of
the earth could survive the flood He would let loose in two weeks.
Noah was shocked and said, “two weeks! God, do you know how
long it takes to build an ark?” And God replied, Noah, how good
are you at swimming?”
The Motivational Sphere of Positive Reinforcement
Reinforcements continue to be
important, of course, long after an
organism has learned how to do
something, long after it has
acquired behavior. They are
necessary to maintain the behavior
in strength.
B. F. Skinner, Harvard University,
Harvard Educational Review, 1954
There are two types of reinforcement and two types of punishment
to influence people according to a theory of psychology known as
operant conditioning. Some refer to it more of a learning theory,
while others think operant conditioning is a theory of motivation. It's
potential for influencing people lies in the fact that consequences
work in both people and animals.
Practically speaking, negative reinforcement presents ethical issues
so shrewd leaders focus on developing influence through the use of
positive reinforcement to increase the likelihood of DESIRED
BEHAVIOR.
The Motivational Sphere of Punishment
You can get more with a kind
word and a gun than you can with
a kind word alone. — Al Capone
(1899-1947), Chicago Mobster
Positive and negative punishment has a very narrow definition in
operant conditioning. In this case, the definition is going to be
expanded to include the threatened use of a punishment. One
could make an argument that the threatened use of punishment
(escape-avoidance) can reduce undesired behavior just as much
as much psychological pain as its real use.
To say one will have to use punishment to change undesired
behavior says something about human nature. Nasty bosses and
individuals who make Fortune Magazines toughest boss list use this as
a primarily influence technique.
Something best used when all other forms of leadership influence
don't work, it's proper use is subject to legal statutes and ethical
constraints to decrease UNDESIRED BEHAVIOR.
___________________________________
Punishment Humor. A seeing eye dog was trying to gets its master
across the street but the light was not working. The dog tried once
but oncoming traffic drove the two of them back to the curb. The
dog tried a second time but the horns from a group of taxis drove

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them back again. They tried a third time, this time they were
successful despite a the loud horns and the curses of drivers.
Once on the other side of the street, the dog’s master reached out
for a biscuit to give it to the dog. An person who had observed the
whole thing went over the the person and said, “You probably
shouldn't reward the dog for putting your life in danger by giving him
a biscuit.” But the dog’s master replied, “Reward, hell. I am just trying
to find which side is his head so I can kick his behind.”
Relationship Influence
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He who mistrusts most should be
trusted least. — Theognis of
Megara, Greek poet
Your people won't remember, and
don't really give a damn how
much money you saved the
company. — unknown
Not considered a sphere of influence by many scholars, it's power
lies in a both knowing how to develop, maintain and repair
relationships. In many cultures, such as in Latin American and Asia,
business leaders place a greater emphasis on relationship
development than is commonly done in America. Typically, business
does not begin until a sound relationship is established. And doing
business gets difficult when that relationship gets strained.
Assuming leaders devoted the time and effort to develop trust,
rapport, credibility, and empathy; they have the foundation
elements on how to influence people through reciprocity.
___________________________________
Relationship Humor. The doctor looked benignly at the woman who
had come to him for an examination. Mrs. Brown, he said, I have
good news for you. The woman said, ' I'm glad of that, doctor, but
I'm Miss Brown. Miss Brown, said the doctor without changing
expression, I have bad news for you.
Influence Through Expertise
Why don't you write books people
can read? — Nora Joyce to her
husband James (1882-1941)
How to use expertise as a form of influence is somewhat of a
paradox. There are experts with little influence and ignorant dolts
who seem to speak the gospel.
Experts are people whom we think have valuable information. Often
they are people who know how to make the right decision or solve
that intractable problem. It helps to have depth of knowledge to be
perceived as an expert, and this is an important part of the success
doctors, lawyers and consultants experience.
How to influence influence with expertise lies partly in the
psychological theory known as attribution theory. But too often, we
accept false beliefs and false arguments as truth.
___________________________________
Expertise Humor. The man told his doctor that he wasn't able to do all the
things around the house that he used to do. When the examination was
complete, he said, Now, Doc, I can take it. Tell me in plain English what is
wrong with me. Well, in plain English, the doctor replied, you’re just lazy.
Okay, said the man. Now give me the medical term so I can tell my wife.

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Influence Through Vision
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In 1929, days after the stock market
crash, the Harvard Economic
Society reassured its subscribers:
“A severe depression is outside the
range of probability”.
In a survey in March 2001, 95% of
American economists said there
would not be a recession, even
though one had already started.
— American's Vulnerable
Economy, The Economist,
November 15, 2007
Few leaders know how to influence with vision to motivate people
and themselves. Those that do can accomplish great events. People
that have it seem to harness an inner strength that keeps pushing
them forward on a path no matter how difficult.
The visionary leader also understands how to influence people
through the use of expectations. Setting positive and negative
expectations exert tremendous influence, but few leaders
understand how to use them properly.
The Charismatic Sphere of Influence
I don't know how to define it, but I
know it when I see it.
Charismatic leadership is one of the most powerful methods of how
to influence people, but also one of the most elusive. It's difficult to
develop, but well worth the effort.
It's been associated with religious prophets, great preachers, famous
teachers and those who get tagged with the title of transformational
leaders.
One basis for it's influence lies in an understanding of the nature of
the psychological mechanism of identification. We tend to identify
with individuals and their causes resonate with ours.
Conclusion
A leaders use of influence is like singing—if one only belts out only note there's no song. But If you have
nine notes, the song sounds like real music.
Each of the nine methods of how to influence can be turned into a skill. Just because you don't have it
today, doesn't mean you can't develop it in the future.
3.1.6.4 Abuses of Power
ABUSE OF POWER
Abuse of power or authority may be the prime source and true essence of moral EVIL - Evil is the ABUSE of
power. Moral EVIL begins to exist when someone refuses to accept responsibility for the welfare of others,
especially those naturally under his or her direct care. It can be said that someone has POWER, if that
someone can decisively influence (the) reality (of others).
In this context, AUTHORITY is power that derives from a social accord or convention, such as the laws or
customs of a social group such as a state or an organization.

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So then, what is abuse of power?
ABUSE OF POWER is the illegitimate use of power.
ABUSE OF POWER is that situation that exists whenever someone who has POWER over others, (that is, the
capacity to impose his or her will on those others) for example, by virtue of his or her superior mental
dexterity, social position, physical strength, knowledge, technology, weapons, wealth, or the trust that
others have in him or her, unjustifiably uses that power to EXPLOIT or HARM those others, or through lack of
action, ALLOWS exploitation or harm to occur to them.
It follows that someone who does not have (a particular form of) power cannot abuse it.
It also follows that the main (and perhaps the only) principle of human ethics and morality should be to
avoid the abuse of power.
(It should be noted that the decision to adopt an ethical principle as one's own is a purely personal one,
and cannot be forced on someone. However, one cannot adopt a principle one does not know exists.
Also, it is not very likely that someone will adopt a principle that is not congruent with his or her mental
structure - and this mental structure is so powerfully influenced by early childhood experiences).
From this it follows that it is extremely unethical to put oneself (or to stay) in a position of conflict of interest,
i.e., where one's benefit or profit depends on harming or exploiting others. And of course, it also follows
that putting a subordinate in a position of conflict of interest demonstrates a complete ignorance of ethics.
Additionally, it follows that if those who want to stop or impede the abuse of power (or those who are
charged with this duty) do not have sufficient power (even if it were only moral power), they and their
efforts will only serve as a source of amusement to those who abuse it.
Abuse of power in the workplace
Abuse of power in the workplace is becoming a concern in the world. According to the Workplace Bullying
and Trauma Institute, 54 million employees surveyed in September 2007 reported being victims of abuse in
the workplace. Understanding the different definitions, types, effects, consequences and warnings of such
abuse--and knowing what resources are available for victims--can help employees and supervisors handle
abuse of power in the workplace.
Definitions
o Men and women define and recognize power differently. According to a Science Daily
article from April 2007, men understand power in terms of a hierarchy in which bosses
abuse power by sexually harassing employees--asking them personal questions and
touching them inappropriately. Women understand power in terms of gender differences,
meaning they perceive that any man, regardless of his job title at work, can abuse his
power to target female employees. This difference has led scholars to examine power
abuse by both supervisors and co-workers in various workplace environments.
Types
o Employees need to distinguish between the various forms of abuse of power in the
workplace. According to the Gender and Diversity program's website, supervisors can
abuse their power through their speech, including making criticisms about employees’
physical appearance, work skills and intellect. The tone of a supervisor's voice--for
example, a supervisor raising her voice at an employee or using foul language--can
constitute emotional abuse. Ignoring employees and threatening employees with

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paycheck reductions or loss of a promotion are abusive. So are physical forms of abuse,
including touching, hitting and slapping.
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Effects
o Supervisors’ abuse of power has several effects on employees. The U.S. Workplace Bullying
Survey conducted by the Workplace Bullying and Trauma Institute in September 2007
found that employees who suffered from abuse experienced a significant amount of stress
at work and the stress lasted longer than a year. Moreover, employees reported feeling
mentally distressed, which affected their focus at work. Another study by the Counseling
Outfitters showed that employees dealing with workplace abuse suffer from lack of self-esteem
and decreased productivity.
Consequences
o Supervisors who abuse their authority at work can face serious consequences. Abusing
people on the basis of sex, race or age is illegal behavior under federal and state laws,
according to the CBS Business Network. Employers who allow a supervisor to abuse his
power risk lawsuits and financial damages and fines. According to Counseling Outfitters,
organizations suffer from higher turnover and absenteeism rates when abuse of power in
the workplace is not curbed.
Warnings/Resources
o Knowing how to handle abuse in the workplace is critical. Counseling Outfitters cautions
employees that reporting the abuse to the abuser's supervisor can escalate the problem if
the abuser's supervisor blames the victim for the problem or doesn't believe the victim. An
alternative option is to use resources offered by the organization and outside
organizations, including in-house employee assistance programs, labor relations agencies
and state and federal agencies that handle abuse and harassment in the workplace. If
the abuse becomes physical, employees can contact legal authorities.
3.2 The Importance of Ethics in Business
Importance of Ethics in Business
• Ethics in Business matters, because there is much evidence to prove that Unethical Behavior can
cost a Company its Reputation, affect its Share Price and lower its Profits.
• Some of the Scandals in Business World have their origin in scant regard to Morality.
• Business Ethics are Rules of Business Conduct by which Propriety of Business Activities may be
judged.
• There is a growing realization all over the world that Ethics is Vitally Important for any Business and
the Progress of the Society.
• Experience has shown that Good Ethics is Good Business.
• Commerce through Corruption, Administration through Bribery and Politics through Blackmail in
India has become the Rule rather than exception.

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• Corruption, Bribery and Nepotism are nothing but degradation of Values and Professional Ethics.
• Ethics and Human Values can save a Soulless Society from total death.
• We must remember that Business satisfies only Hunger of b=Body. Values satisfy Hunger of Heart
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and Soul.
• Ethical Behavior is essential from both Macro and Micro-Perspective.
• According to Macro-Argument, Unethical Behavior distorts the Market System that leads to an
inefficient allocation of resources.
• The Micro-Argument highlights the importance of Ethics to the Individual Firm.
• Unethical Behavior leads to decreased long term Performance.
• The Market System leads to a more efficient way of allocating Resources than any Command
System.
• The conditions required for efficient operation of the Market System are:
1) The Right to Own and Control Property.
2) Freedom of Choice in Buying and Selling Goods and Services.
3) The Availability of Perfect Information regarding these Goods and Services.
ADDITIONAL
1. Satisfying Basic Human Needs: Being fair, honest and ethical is one the basic human needs. Every
employee desires to be such himself and to work for an organization that is fair and ethical in its
practices.
2. Creating Credibility: An organization that is believed to be driven by moral values is respected in
the society even by those who may have no information about the working and the businesses or
an organization. Infosys, for example is perceived as an organization for good corporate
governance and social responsibility initiatives. This perception is held far and wide even by those
who do not even know what business the organization is into.
3. Uniting People and Leadership: An organization driven by values is revered by its employees also.
They are the common thread that brings the employees and the decision makers on a common
platform. This goes a long way in aligning behaviors within the organization towards achievement
of one common goal or mission.
4. Improving Decision Making: A man’s destiny is the sum total of all the decisions that he/she takes in
course of his life. The same holds true for organizations. Decisions are driven by values. For example
an organization that does not value competition will be fierce in its operations aiming to wipe out
its competitors and establish a monopoly in the market.
5. Long Term Gains: Organizations guided by ethics and values are profitable in the long run, though
in the short run they may seem to lose money. Tata group, one of the largest business
conglomerates in India was seen on the verge of decline at the beginning of 1990’s, which soon
turned out to be otherwise. The same company’s Tata NANO car was predicted as a failure, and
failed to do well but the same is picking up fast now.
6. Securing the Society: Often ethics succeeds law in safeguarding the society. The law machinery is
often found acting as a mute spectator, unable to save the society and the environment.
Technology, for example is growing at such a fast pace that the by the time law comes up with a
regulation we have a newer technology with new threats replacing the older one. Lawyers and
public interest litigations may not help a great deal but ethics can.

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What are the benefits of running an ethical business?
• Solid business relationships
• Repeat business
• Referrals and recommendations
• A growing client base
• A solid reputation built on honesty, trust, integrity and value
• Increased profitability
• Sleeping soundly at night!
• Remember people are not just buying your product or service – they are buying you!
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What is ethical business?
Ethics are in the eye of the beholder so whatever ethics may mean to one person, may mean something
completely different to the other. Ethics and integrity are governed by values. Your values shape your
conscience and your beliefs around what is morally acceptable or not. Everyone has different standards to
which morals, integrity and ethics are measured against. Your values develop from a young age and may
change at different stages throughout your life, dependent on circumstances, age and whether you
choose to develop yourself personally.
To run a business ethically, you may consider the following factors:-
• Practicing what you preach and walking your talk (and hopefully it’s something positive!)
• Meaning what you say and saying what you mean
• Doing what you are say you are going to do
• Be a shining example to others
• Fulfilling and exceeding your clients’ expectations

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3.2.1 The Macro Perspective
TYPES OF ETHICAL ISSUES
3.2.1.1Effect of Unethical Behavior. (Bribery, Coercive Acts.Deceptive
Information, Theft, Unfair Discriminationetc.) From a Macro Perspective
1) Bribery: Bribery reduces the freedom of choice by changing the conditions, under which a
Decision is made. A Bribe is used to make one choice more attractive to a Decision Maker. Greater
appeal is created by enhancing the Personal Gain associated with the choice by the addition of
an unearned Income Payment.
2) Coercive Acts: Coercive Acts, in the form of Threats that prevent a Seller from dealing with certain
Customers, decrease effective Competition. This usually results in higher prices and often poorer
Products.
3) Deceptive Information:Deceptive Information creates false impressions and leads Buyers to select
Goods and Services that provide less Satisfaction than those which they would have purchased,
had accurate information been available to them.
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4) Theft: Theft may lead to Break-Down of a Market. Theft increase the cost of providing Goods and
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Services.
5) Unfair Discrimination: Unfair Discrimination often results in the purchase of Services from less
capable people or Sale of Goods and Services to less capable People. This will result in lower level
of Satisfaction.

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3.2.2 The Macro Perspective – Ethics and Trust
• Ethics is closely associated with Trust.
• In order to develop Trust, Behavior must be Ethical.
• If Trust is important, and Ethical Behavior is necessary to obtain Trust, then Ethics is as important as
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Trust.
• Trust in a Business setting reduces Costs, makes life more pleasant and improves Efficiency.
• Two Norms are to be Honored in all situations:
1) Commitments are to be honored in all situations.
2) One ought to produce a Good Product and stand by it.
• Every Commercial Transaction has an element of Trust within itself and Business would not run
smoothly if Business People do not Trust each other.
• Trust involves three fundamental Issues:
1) Predictability.
2) Dependability.
3) Faith.

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3.2.2.1 Trust in Supplier Relations
3.2.2.2 Trust in Customer Relations
3.2.2.3 Trust in Employee Relations
1. Trust in Supplier Relations:Suppliers provide a Firm with Products and Services it needs to conduct
Business. An Exchange Relationship is based on Trust between both Parties that each will honor his
Commitment and minimize Surprise. This will reduce the risk involved in the Buying Process.
2. Trust in Customer Relationships:The Company’s contact with a Customer is mostly through its Sales
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Force.
• A Salesman earns a Customer’s Trust by being Dependable, Honest, Competent and Customer
Oriented.
• Customers rely on Suppliers to provide Goods and Services of Acceptable Quality as Promised at
Reasonable Prices.
3. Trust in Employee Relations:Trust applies to Peers as well as Superiors and Sub-Ordinates.
4.
The following factors promote Trust:
a) Open Communications.
b) Giving Employees a Greater Share in the Decision Making.
c) Sharing Of Critical Information.
d) Trust Based Sharing of Perceptions and Feelings.
e) Trust is an Important Element in the Employee Empowerment Process.
3.3 Methods of Ethical Analysis: Their Values and Limitations
3.3.1 Economic Analysis
Economic Analysis (Pareto Optimality)
Ethics are not relevant in business, beyond the normal standards not to lie, cheat, or steal. All that is
necessary is to maintain price-competitive markets and recognize the full costs of production in those
prices, and then the market system will ensure that scarce resources are used to optimally satisfy consumer
needs. A firm that is optimally satisfying consumer needs, to the limit of the available resources, is operating
most efficiently and most profitably. Consequently, business managers should act to maximize profits, while
following legal requirements of non-conclusion and equal opportunity and adhering to personal standards
of truthfulness and honesty. Profit Maximization leads automatically from the satisfaction of individual
consumer wants to the generation of maximum social benefits. Profit maximization is the only moral
standard needed for management.
If we look at microeconomic theory as an ethical system of belief, explaining our responsibility to others
within the company and within the society - to employees, customers, suppliers, distributors, and residents
of the local area - then is simply falls apart because of the unlikely assumptions about human nature and
human worth.
3.3.2 Legal Analysis
The law can be defined as a consistent set of universal rules that are widely published, generally accepted,
and usually enforced. These rules describe the ways in which people are required to act in their
relationships with others within a society. They are requirements to act in a given way, not just expectations
or suggestions or petitions to act in that way.

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The law is a guide to managerial decisions and actions, but it is not enough. And certainly, the absence of
a law is not enough to excuse some of those decisions and actions.
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3.3.3 Ethical Analysis
Philosophic analysis, based on rational thought processes. The view is that a manager should always act in
accordance with either a single principle of behavior or a single statement of belief that is right and
proper and just in and by itself.This is moral reasoning: logically working from a first principle through to a
decision on the duties we owe to others.
Philosophy is the study of thought and conduct. Normative philosophy is the study of proper thought and
conduct; that is, how we should behave.
Morality refers to the standards of behavior by which people are judged, and particularly to the standards
of behavior by which people are judged in their relationships with others. Ethics, on the other hand,
encompasses the system of beliefs that supports a particular view of morality. The difference between
morality and ethics is easy to remember if one speaks of moral standards of behavior and ethical systems
of belief.
Ethical Relativism - Are there objective universal principles upon which one can construct an ethical system
of belief that is applicable to all groups in all cultures at all times? Fortunately there is one principle that
does seem to exist across all groups, cultures, and times and that does form part of every ethical system;
that is the belief that members of a group do bear some form of responsibility for the well-being of other
members of that group.
Definitions and Concepts for Ethical Analysis
Definitions
[Many discussions of ethics and ethical issues founder on disagreements about definitions. Ethics is unique
among disciplines in that practitioners often cannot agree on a common definition of their topic. Ethics
Scoreboard can't solve that problem, which is many centuries old. Here it attempts to put forth definitions
that explain what words mean when they are used on this website.]
Values: Those qualities of behavior, thought, and character that society regards as being intrinsically good,
having desirable results, and worthy of emulation by others.
Morals: Modes of conduct that are taught and accepted as embodying principles of right and good.
Morality: A system of determining right and wrong that is established by some authority, such as a church,
an organization, a society, or a government.
Ethics: The process of determining right and wrong conduct.
Ethical System: A specific formula for distinguishing right from wrong.
Unethical: An action or conduct which violates the principles of one or more ethical systems, or which is
counter to an accepted ethical value, such as honesty.
Non-ethical considerations: Powerful human motivations that are not based on right or wrong, but on
considerations of survival and well-being, such as health, security, love, wealth, or self-esteem.
Concepts

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Non-Ethical Considerations: Defined above, non-ethical considerations are important because
they are often the powerful impediments to ethical conduct, and the cause of many conflicts of interest.
Non-ethical considerations are many and diverse, and include:
• The need and desire for shelter, health, wealth, fame, security, self-esteem, reputation, power,
professional advancement, comfort, love, sex, praise, credit, appreciation, affection, or
satisfaction
• The desire for the health, comfort, safety, welfare and happiness for one's family, loved ones,
friends, colleagues, an co-workers
• The pursuit of vengeance or retribution
• Hunger, lust, pain, ambition, prejudice, bias, hatred, laziness, fatigue, disgust, anger, fear
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…and many more
Ethical Dilemma: This is an ethical problem in which the ethical choice involves ignoring a powerful non-ethical
consideration. Do the right thing, but lose your job, a friend, a lover, or an opportunity for
advancement. A non-ethical consideration can be powerful and important enough to justify choosing it
over the strict ethical action.
Ethical Conflict: When two ethical principles demand opposite results in the same situation, this is an ethical
conflict. Solving ethical conflicts may require establishing a hierarchy or priority of ethical principles, or
examining the situation through another ethical system.
Ethical Gray Area: Gray areas are situations and problems that don't fit neatly into any existing mode of
ethical analysis. In some cases, there may even be a dispute regarding whether ethics is involved.
Reciprocity: The ethical system embodied by The Golden Rule, and given slightly different form in other
religions and philosophies. It is a straight-forward way of judging conduct affecting others by putting
oneself in the position of those affected. Reciprocity should always be available in any ethical analysis, but
it is frequently too simple to be helpful in complex ethical situations with multiple competing interests.
Absolutism: Absolutist systems do not permit any exception to certain ethical principles. The champion of all
absolutists, philosopher Emmanuel Kant, declared that the ethical act was one that the doer was willing to
have stand as a universal principle.
One principle of absolutism is that human beings can never be harmed for any objective, no matter how
otherwise worthwhile. Absolutism has the advantage of making tough ethical calls seem easy, and the
disadvantage of making debate impossible. One sees absolutism reflected today in the controversies over
war, torture, abortion, cloning, and capital punishment.
Utilitarianism: Utilitarianism accepts the existence of ethical conflicts and the legitimacy of some ethical
dilemmas, and proposes ethical analysis based on the question, Which act will result in the greatest good
for the greatest number of people?' It entails the balancing of greater and lesser goods, and is useful for
unraveling complex ethical problems. Its drawback, or trap, is that utilitarianism can slide into The ends
justify the means without some application of absolutist and reciprocity principles.
The Gödel Incompleteness Principle: Czech-born mathematician Kurt Gödel proved that at the margins of
any large logical system, such as arithmetic, or conceptual construct, such as Newtonian physics, problems
would arise that could not be solved without going outside the system itself. If the system were enlarged to
include these problems' solution, it would lose its integrity as a system. Hence all systems must be
incomplete. In ethical terms, Gödel's liberating discovery means that no one ethical system will work for
every problem, and that the fact that such a system does not solve a particular problem does not mean
the system is invalid.

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Cognitive Dissonance: Cognitive dissonance is a psychological phenomenon first identified by Leon
Festinger. It occurs when there is a discrepancy between what a person believes, knows and values, and
persuasive information that calls these into question. The discrepancy causes psychological discomfort,
and the mind adjusts to reduce the discrepancy. In ethics, cognitive dissonance is important in its ability to
alter values, such as when an admired celebrity embraces behavior that his or her admirers deplore. Their
dissonance will often result in changing their attitudes toward the behavior. Dissonance also leads to
rationalizations of unethical conduct, as when the appeal and potential benefits of a large amount of
money makes unethical actions to acquire it seem less objectionable than if they were applied to smaller
amounts.
3.4 Corporate Governance
3.4.1 The meaning and Fundamentals of Corporate Governance
Definition of Corporate Governance
The definition of corporate governance most widely used is the system by which companies are directed
and controlled (Cadbury Committee, 1992). More specifically it is the framework by which the various
stakeholder interests are balanced, or, as the IFC states, the relationships among the management, Board
of Directors, controlling shareholders, minority shareholders and other stakeholders.
The OECD Principles of Corporate Governance states:
Corporate governance involves a set of relationships between a company’s management, its board, its
shareholders and other stakeholders. Corporate governance also provides the structure through which the
objectives of the company are set, and the means of attaining those objectives and monitoring
performance are determined.
While the conventional definition of corporate governance and acknowledges the existence and
importance of 'other stakeholders' they still focus on the traditional debate on the relationship between
disconnected owners (shareholders) and often self-serving managers. Indeed it has been said, rather
ponderously, that corporate governance consists of two elements:
1. The long term relationship which has to deal with checks and balances, incentives for manager
and communications between management and investors;
2. The transactional relationship which involves dealing with disclosure and authority.
This implies an adversarial relationship between management and investors, and an attitude of mutual
suspicion. This was the basis for much of the rationale of the Cadbury Report, and is one of the reasons why
it prescribed in some detail the way in which the board should conduct itself: consistency and
transparency towards shareholders are its watchwords.
As fundamentally important as these traits are, we prefer to take a rather broader view, which places the
Cadbury Code and other codes developed since (Combined Code, Sarbanes-Oxley, King, etc) in a wider
context and shows its recommendations emerging naturally in the course of a company’s evolution. In an
early book on corporate governance, also published in 1992, one of the creators of this website developed
a definition of corporate governance as consisting of five elements which the board must consider:
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• long term strategic goals
• employees: past, present and future
• environment/community
• customers/suppliers
• compliance (legal/regulatory)

BUSINESS ETHICS
version
What is good corporate governance?
Regulators, courts and investors frequently extol the virtues of 'good corporate governance' i
organisations but often fail to define exactly what that means. It's often a case of we'll know it when we
see it or, in the case of the regulators, courts and investors, we know what it isn't when we see it.
It is important to understand that what w
would be considered 'good corporate governance' differs for
each individual organisation according to its circumstances. What is inadequate for one organisation may
be onerous for another. It is also important to realise that good corporate governance isn't
compliance. Whilst compliance will keep you out of trouble, it won't help your organisation be successful.
To understand what would constitute good corporate governance for your organisation, it helps to
understand what corporate governance is
from a fundamental level.
The most fundamental definition for corporate governance is based on the idea that an organisation is
essentially a nexus of contractual agreements between many parties for the purpose of achieving the
organisation's objectives. These parties include shareholders, directors, managers, suppliers, employees,
customers, financiers, government authorities, other stakeholders and the society in which the company
operates. Whilst some of these contractual agreements are formal written
Likewise, some of these contractual agreements are financially based but many are not.
Although the company enjoys the status of a person through legal
constituted entirely by the actions and interac
unedited versio
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ones, many are implicit.
fiction, in reality a company is
interactions of people with other people, products of technology,
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systems, and the natural world. Corporate governance involves managing the framework within which
these complex relationships operate.
The quality and nature of these relationships has a strong influence on the long term financial interests of
the organisation. It can be expected that the negotiation and administration of these contractual
agreements to the benefit of each of the parties involved will maximise the long term results of the
organisation.
So good corporate governance is all about ensuring that the needs and interests of all of an organisation's
stakeholders are taken into account in a balanced and transparent manner.
However, good corporate governance is not just a matter of having the right policies and procedures in
place. It has to be embedded into the culture of the organisation from the very top down. As Justice
Owen, the Royal Commissioner into the collapse of HIH Insurance, warned:
Systems and structures can provide an environment conducive to good corporate governance
practices, but at the end of the day it is the acts or omissions of the people charged with relevant
responsibilities that will determine whether governance objectives are in fact achieved. (The failure of HIH
Insurance. HIH Royal Commission. 2003)
Good corporate governance is also no guarantee of success. It is a necessary but not sufficient
foundation for success as strategic factors play a more important role in determining the eventual success
or failure of an organisation. In the majority of large business failures, it is essentially the failure of the
underlying business strategy that causes each business to fail. Corporate governance issues allow the
flawed businesses to continue and amplify the magnitude of their eventual collapse.
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Justice Owen expressed the view:
“Good governance processes are likely in my view to create an environment that is conducive to success.
It does not follow that those who have good governance processes will perform well or be immune from
failure. Risk exists to some extent at the heart of any business. Risks are taken in the search for rewards. No
system of corporate governance can prevent mistakes or shield companies and their stakeholders from
the consequences of error. Corporate failures will occur.” (The failure of HIH Insurance. HIH Royal
Commission., 2003)
3.4.2 Purpose of Corporate Governance in Society
Why is Corporate Governance Important?
Corporate governance is the way a corporation polices itself. In short, it is a method of governing the
company like a sovereign state, instating its own customs, policies and laws to its employees from the
highest to the lowest levels. Corporate governance is intended to increase the accountability of your
company and to avoid massive disasters before they occur. Failed energy giant Enron, and its bankrupt
employees and shareholders, is a prime argument for the importance of solid corporate governance. Well-executed
corporate governance should be similar to a police department’s internal affairs unit, weeding
out and eliminating problems with extreme prejudice. A company can also hold meetings with internal
members, such as shareholders and debt holders – as well as suppliers, customers and community leaders,
to address the request and needs of the affected parties.
Principles of Corporate Governance

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• Shareholder recognition is key to maintaining a company’s stock price. More often than not,
however, small shareholders with little impact on the stock price are brushed aside to make way
for the interests of majority shareholders and the executive board. Good corporate governance
seeks to make sure that all shareholders get a voice at general meetings and are allowed to
participate.
• Stakeholder interests should also be recognized by corporate governance. In particular, taking the
time to address non-shareholder stakeholders can help your company establish a positive
relationship with the community and the press.
• Board responsibilities must be clearly outlined to majority shareholders. All board members must be
on the same page and share a similar vision for the future of the company.
• Ethical behavior violations in favor of higher profits can cause massive civil and legal problems
down the road. Underpaying and abusing outsourced employees or skirting around lax
environmental regulations can come back and bite the company hard if ignored. A code of
conduct regarding ethical decisions should be established for all members of the board.
• Business transparency is the key to promoting shareholder trust. Financial records, earnings reports
and forward guidance should all be clearly stated without exaggeration or “creative” accounting.
Falsified financial records can cause your company to become a Ponzi scheme, and will be dealt
with accordingly.
Corporate Governance as Risk Mitigation
Corporate governance is of paramount importance to a company and is almost as important as its primary
business plan. When executed effectively, it can prevent corporate scandals, fraud and the civil and
criminal liability of the company. It also enhances a company’s image in the public eye as a self-policing
company that is responsible and worthy of shareholder and debt holder capital. It dictates the shared
philosophy, practices and culture of an organization and its employees. A corporation without a system of
corporate governance is often regarded as a body without a soul or conscience. Corporate governance
keeps a company honest and out of trouble. If this shared philosophy breaks down, then corners will be
cut, products will be defective and management will grow complacent and corrupt. The end result is a fall
that will occur when gravity – in the form of audited financial reports, criminal investigations and federal
probes – finally catches up, bankrupting the company overnight. Dishonest and unethical dealings can
cause shareholders to flee out of fear, distrust and disgust.
3.4.3 Critical Issues and Challenges in Corporate Governance
Corporate Governance Issues Challenges
Corporate governance refers to the structure of a large business and how the business decides its policies
and growth strategy. Corporate governance typically means that a board of directors controls the entire
corporation while an executive board (possibly the same thing) makes key business decisions, and layers of
management progress beneath them into different departments. Corporate governance is a key issue in
society and can be a struggle for corporations on several levels.
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Bureaucratic Layers
o First, corporate governance structures are very top heavy. They require many layers of
management and long lists of vice presidents and presidents for information to pass
through. This makes it very difficult for the company leaders to receive accurate, important
data from the lower levels of the company, especially if managers along the way want to
distort the message to make themselves sound better. Ultimately, the chain of command
becomes so long that the business is unwieldy, responding slowly to change. Flat business
structures with few layers of management are the goal of many corporations.

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Accountability
o Corporate governance has earned a negative connotation in society, mostly because of
the questionable practices of key executives and board members. Not all corporations
commit fraud, of course, but those that do receive a lot of attention, and many executives
have become used to taking questionably large bonuses even in a contracting economy.
This has lead to an atmosphere of distrust among consumers and investors, which
corporations fight by showing increased transparency in their work and mission.
Governance Standards
o Internally, corporate governance faces a different type of struggle. A board of executives
can make good decisions on company policy and propagate standards throughout the
business. But what if managers prefer not to listen? Rebellious managers can ignore or
subvert corporate decisions at many levels of the business, and there are often a few
troublemakers in all businesses. Corporate boards need methods of enforcing standards
and disciplining managers when necessary, a component of governance few boards
consider.
Board Terms
o Board terms are a complex issue. In a board of directors, directors typically only sit on the
board for a brief term, rarely more than several years. Life-term board members can cause
problems with ingrained beliefs and concentration of power, so businesses prefer to cycle
board members. But the corporation must decide how to cycle. If all directors switch
around at the same time, the corporation may be left open for a hostile acquisition. If the
board decides to stagger member terms, it must decide when to stagger and how to
accomplish it.
Issues in Corporate Governance
Corporate governance is a firm's central leadership structure, such as the Board of Directors. It is responsible
for promulgating laws, policies and processes that allow a firm to achieve its goals and objectives. Board
members set the direction of the firm. They devise a strategy for managers to institute and employees to
follow for meeting the firm's objectives.
Internal Controls and Risk Management
o The board is charged with ensuring that the firm is financially stable and sound. This
requires strong leadership, strict regulation and supervision as well as successful market
discipline. It also mandates an effective internal control and risk-management system. This
provides valuable information to determine whether a firm meets the targets it sets and
highlights deficits in the strategy. However, these systems are only as good as those who
run them. Firms falter when the board does a poor job communicating goals and
objectives down the chain of command. Internal controls and risk-management systems
only succeed when an organization's culture permits all employees at every level to
understand their value and role in the firm's success.
Lack of Disclosure
o Disclosure practices must keep pace with a firm's ever-changing business and risk-management
procedures. Although firms have improved in this area, they generally do
not update their disclosure practices to adequately reflect the need for information by
shareholders, investors and creditors. A firm must reevaluate information it makes public

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and information kept proprietary on a more regular basis to account for adjusting market
conditions and regulatory changes in order to maintain consumer confidence. Nothing
weakens confidence more than a firm believed to unnecessarily withholding important
information from consumers.
Sound, Universal Accounting System
o Investors must accurately assess the value of a firm. It is a key element of a firm's ability to
attract capital and remain financially viable. In recent years, regulators have called into
question the reliability of accounting practices used by some firms in the U.S. financial
industry. The need for oversight from the public sector of the private sector has raised
legitimate concern about the ability to maintain a truly free-market economy without
tighter regulatory controls. William McDonough, president of the Federal Reserve Bank of
New York, suggests developing a sound, universal accounting system--one that includes
necessary checks and balances and enables firms to operate free of overly restrictive
regulatory
3.4.3.1 Corporate Boards and Types of Boards in Different Sectors
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Types of boards of directors
To prevent the concentration of power and information in one or a few individuals, boards are advised to
have a balance of executive and non-executive directors, some of whom are independent. Experts differ
over the number of independent directors a board should have, but it is generally accepted that one-third
to one-half of a board’s directors should be independent.
An executive director is also an executive of the company, such as a CEO or CFO. A non-executive
director is not part of management and is valued for external perspectives and unique expertise.
“Non-executive” directors should meet in private regularly, without the presence of “executive” directors,
according to governance experts.

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One-Tier Board Model - consists of both inside (executive) directors and outside (nonexecutive) directors.
Inside directors are perceived as the decision managers and outside directors are assumed to have the
power and duty to monitor those decisions.
Two-Tier Board Model - The two-tier board system, consisting of a supervisory board and a management
board, better known as the German board model, establishes different authorities and responsibilities for
members of each board.
Modern Board Model - the structure of the modern board based on the two components of strategic
board and oversight board is the natural offshoot of the emerging corporate governance reforms.
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The independent director
Definitions of what “independent” means vary, but usually require the person to be free of financial, family
and employment ties, or any other meaningful relation with the company, its directors and employees.
Other criteria include:
• Not a recent employee
• No recent material business relationship with the company
• No recent or current compensation from the company, other than director’s fee, share options,
performance-related pay or pension
• No close family ties with any of the company’s advisers, directors or senior employees
• No cross-directorships or significant links with other directors through involvement in other
companies or bodies
• Not a significant shareholder
• Not a long-term member
Source: “Corporate Governance Board Leadership Training Resources,” Global Corporate Governance
Forum, International Finance Corporation, World Bank Group.
In many countries, boards must have a specific propor-tion of independent directors. Boards of directors
can be either one-tier or two-tier.
• A one-tier, or unitary, board delegates day-to-day business to the CEO, management team, or
executive committee, and is composed of both executive and non-executive members. This
structure is most often found in countries with a common law tradition, such as the United States,
the United Kingdom and Commonwealth countries.
• A two-tier, or dual, board divides supervisory and management duties into two separate bodies.
The supervisory board oversees the management board, which handles day-to-day operations.
This structure is common in countries with civil law traditions, primarily in Germany, but also in some
companies in France and in many Eastern European countries.
3.4.3.2 Need for Executive and Functioning Boards
Make notes

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3.4.3.3 Structure and composition of Boards
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Board Characteristics
Board Leadership – The effectiveness of board meetings depends largely on the leadership ability of the
chairperson to set an agenda and direct discussions. The board agenda is usually prepared by chairperson
in collaboration with the CEO.
CEO Duality – implies that the company’s CEO holds both the position of chief executive and the chair
of the board of directors. They are pros and cons of that model, but investors usually prefer to separate
the positions. If they don’t, then it is preferable that the company’s board consists of a ‘substantial’
majority of independent directors.
Lead Director – demand for Lead Director increased because of the presence of CEO duality, resulting
from growing concern that duality places too much power in the hands of CEO, which may impede
board independence.
Board Composition – in terms of ratio of inside and outside directors, and the number of directors
influence the effectiveness of the board. A board size of nine to fifteen is considered to be
adequately tailored to the number of board standing committees.
Board Authority – is granted trough shareholder elections. SOX substantially expanded the authority of
directors, particularly audit committee members, as being directly responsible for hiring, firing,
compensating, and overseeing the work of the companies’ independent auditors.
Responsibilities – the primary responsibility of the board of directors that the companies assets are
safeguarded and that managerial decisions and actions are made in a manner of maximizing
shareholders wealth while protecting the interests of other shareholders.
Resources – board of directors should have adequate resources to effectively fulfill its oversight
functions. Resources available to the board consist of legal, financial, and information resources.
Board Independence – implies that, to be independent director shouldn’t have any relationship with the
company other than his or her directorship that my compromise the director’s objectivity and loyalty to
the company’s shareholders.
Director compensation – best practices suggest that increases in stock ownership, reduction in cash
payments, and charges in compensation should be aligned with shareholders long-term interest
determined by board, approved by shareholders, and fully disclosed in public reporting.
Structure and Makeup of the Board of Directors
The board is made up of individual men and women (the directors) who are elected by the
shareholders for multiple-year terms. Many companies operate on a rotating system so that only a
fraction of the directors are up for election each year; this makes it much more difficult for a complete

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board change to take place due to a hostile takeover.
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In most cases,
Directors either, 1.) Have a vested interest in the company, 2.) Work in the upper management of the
company, or 3.) Are independent from the company but are known for their business abilities.
The number of directors can vary substantially between companies. Walt Disney, for example, has sixteen
directors, each of whom are elected at the same time for one year terms. Tiffany Company, on the other
hand, has only eight directors on its board. In the United States, at least fifty percent of the directors must
meet the requirements of independence, meaning they are not associated with or employed by the
company. In theory, independent directors will not be subject to pressure, and therefore are more likely to
act in the shareholders' interests when those interests run counter to those of entrenched management.
The Basics of Corporate Structure
Board of Directors, Corporate Culture, Corporate Governance, Investing Basics, ShareholdersCEOs, CFOs,
presidents and vice presidents: what's the difference? With the changing corporate horizon, it has become
increasingly difficult to keep track of what people do and where they stand on the corporate ladder.
Should we be paying more attention to news relating to the CFO or the vice president? What exactly do
they do?
Corporate governance is one of the main reasons that these terms exist. The evolution of public ownership
has created a separation between ownership and management. Before the 20th century, many
companies were small, family owned and family run. Today, many are large international conglomerates
that trade publicly on one or many global exchanges.
In an attempt to create a corporation where stockholders' interests are looked after, many firms have
implemented a two-tier corporate hierarchy. On the first tier is the board of governors or directors: these
individuals are elected by the shareholders of the corporation. On the second tier is the upper
management: these individuals are hired by the board of directors. Let's begin by taking a closer look at
the board of directors and what its members do.
Board of Directors
Elected by the shareholders, the board of directors is made up of two types of representatives. The first type
involves individuals chosen from within the company. This can be a CEO, CFO, manager or any other
person who works for the company on a daily basis. The other type of representative is chosen externally
and is considered to be independent from the company. The role of the board is to monitor the managers
of a corporation, acting as an advocate for stockholders. In essence, the board of directors tries to make
sure that shareholders' interests are well served.
Board members can be divided into three categories:
• Chairman – Technically the leader of the corporation, the chairman of the board is responsible for
running the board smoothly and effectively. His or her duties typically include maintaining strong
communication with the chief executive officer and high-level executives, formulating the
company's business strategy, representing management and the board to the general public and
shareholders, and maintaining corporate integrity. A chairman is elected from the board of
directors.
• Inside Directors – These directors are responsible for approving high-level budgets prepared by
upper management, implementing and monitoring business strategy, and approving core
corporate initiatives and projects. Inside directors are either shareholders or high-level

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management from within the company. Inside directors help provide internal perspectives for
other board members. These individuals are also referred to as executive directors if they are part
of company's management team.
• Outside Directors – While having the same responsibilities as the inside directors in determining
strategic direction and corporate policy, outside directors are different in that they are not directly
part of the management team. The purpose of having outside directors is to provide unbiased and
impartial perspectives on issues brought to the board.
Management Team
As the other tier of the company, the management team is directly responsible for the day-to-day
operations (and profitability) of the company.
• Chief Executive Officer (CEO) – As the top manager, the CEO is typically responsible for the entire
operations of the corporation and reports directly to the chairman and board of directors. It is the
CEO's responsibility to implement board decisions and initiatives and to maintain the smooth
operation of the firm, with the assistance of senior management. Often, the CEO will also be
designated as the company's president and therefore also be one of the inside directors on the
board (if not the chairman).
• Chief Operations Officer (COO) – Responsible for the corporation's operations, the COO looks after
issues related to marketing, sales, production and personnel. More hands-on than the CEO, the
COO looks after day-to-day activities while providing feedback to the CEO. The COO is often
referred to as a senior vice president.
• Chief Finance Officer (CFO) – Also reporting directly to the CEO, the CFO is responsible for
analyzing and reviewing financial data, reporting financial performance, preparing budgets and
monitoring expenditures and costs. The CFO is required to present this information to the board of
directors at regular intervals and provide this information to shareholders and regulatory bodies
such as the Securities and Exchange Commission (SEC). Also usually referred to as a senior vice
president, the CFO routinely checks the corporation's financial health and integrity.
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Composition of Boards
• Size of the board. There’s no magic number, but the average board size is 9 to 10 members. Boards
that are too large may be unwieldy; boards that are too small may not be able to handle the
workload.
• Number of independent outsiders on the board. A majority is considered ideal by many observers.
• The presence of executive, audit, compensation and nominating committees. Compensation and
audit committees should be made up of independent directors. Some observers believe that the
audit committee chairman should be a qualified or registered accounting practitioner — but
again, there is no universal agreement on this point.
• Limited directorships. A board member generally should serve on no more than three boards, and
the boards should not have conflicting interests.
• Disclosure. Companies must disclose transactions with executives, directors and other related
parties that might constitute a conflict of interest.
Common convention holds that directors should own enough shares in the company so that they have a
vested interest. On the other hand, corporate governance advocates caution against directors who have
such large shareholdings and option grants that their judgment could be impaired by the desire to see the
share price rise through accounting maneuvers for a short-term gain.
Directors should be paid adequately for their time on board business, and to compensate them for their
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Major Differences between Direction and Management
Directors Managers
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Decision-making
Required to determine the future of the
organization and protect its assets and
reputation. They also need to consider
how their decisions relate to stakeholders
and the regulatory framework.
More concerned with implementing
board decisions and policies.
Duties,
Responsibilities
They have the ultimate responsibility for
the company’s long-term prosperity.
Directors are normally required by law to
apply skill and care in exercising their duty
to the company and are subject to
fiduciary duties. They can be personally
liable if they are in breach of their duties
or act improperly. They can be held
responsible sometimes for the company’s
acts.
Not usually bound by directional
responsibilities.
Relationship with
Shareholders
Shareholders can remove them from
office. In addition, a company’s directors
are accountable to the shareholders.
Appointed and dismissed usually by
directors or management; they seldom
have any legal requirement to be held to
account.
Leadership
Provide the intrinsic leadership and
direction at the top of the organization.
Day-to-day leadership is in the hands of
the CEO; managers act on the director’s
behalf.
Ethics, Values
Play a key role in determining the
company’s values and ethical positions.
Must carry out the ethos, taking direction
from the board.
Company
Administration
Responsible for the company’s
administration.
Related duties associated with the
company’s administration can be
delegated to management, but this does
not relieve the directors of their ultimate
responsibility.
Statutory Provisions
In many countries, there are numerous
statutory provisions that can create
offenses of strict liability under which
directors may face penalties if the
company fails to comply.
These statutory provisions do not usually
affect managers.
Source: Chris Pierce, “The Effective Director,” London: Kogan Page, 2003.

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3.4.3.4 The Roles and Duties of Boards of Management
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What Is the Role of the Board of Directors in a Corporation?
All corporations, whether nonprofit or for-profit, must have a board of directors that acts as the governing
body. Furthermore, the board of directors must determine the corporation's purpose for existence.
According to the All Business website, many states allow corporations
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Ethics
o Board members must adhere to the highest ethical standards, as they are a reflection of
the company they represent. Board members must act in a prudent manner, and all
decisions should align with the best interests of the corporation. Board members of
corporations must put their personal agenda to the side when handling corporate affairs.
Appointing Corporate Officers
o In most instances, the board of directors doesn't handle the daily operations of the
corporation. Instead, the board of directors is responsible for electing corporate officers
who will manage the daily operations of the corporation. The board of directors also must
select an individual to serve as chief executive officer of the company (CEO). As
mentioned on the Free Management Library website, a corporate board of directors must
evaluate the performance of a CEO and offer guidance in the areas of strategy
implementation and leadership. The board of directors has the power to retain or dismiss
the CEO.
Govern
o The board of directors create and approve the bylaws of a corporation. The bylaws
govern the corporation by setting the rules and regulations that shareholders, board
members and other key individuals must follow. Typically, the board of directors approves
the corporate bylaws at the first corporate board meeting.
Corporate Resources
o A board of directors must acquire resources for the corporation. In the case of a nonprofit
corporation, that might mean it solicits donations for the corporation. With a for-profit
corporation, a board of directors can acquire resources by issuing company stock. Once
the corporation has these resources, the board of directors must determine how to
manage them in accordance with the best interests of the corporation. To this end, the
board of directors may create budgets to provide transparency and insure that corporate
funds are properly allocated.
Considerations
o Many states require board members to conduct at least one meeting per year. A number
of corporations opt to hold quarterly board meetings. Furthermore, states require
corporations to keep accurate minutes of board meetings. Corporate minutes show the
process used by the board of directors to make important corporate decisions. Board
members must keep accurate records to prove that the corporation adheres to the
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The Role of Directors in Corporate Governance
Corporate directors are responsible for the entire company.
A corporation's Board of Directors consists of individual corporate directors who govern by performing basic
operational and accountability functions and assuming general responsibility for the organization as a
whole.
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Mission and Policy
o Corporate directors are ultimately responsible for governing corporations. They define the
company's mission and purpose, setting broad policies and objectives. Corporate directors
also set priorities for the organization's major operations and review its performance to
ensure its long-term fiscal health.
Private Accountability
o Corporate directors are responsible to corporation shareholders and creditors.
Shareholders own the company's stock and thus have a stake in its performance. Creditors
are the people and organizations that finance the organization, but don't own company
stock.
Management Selection and Oversight
o Corporate directors are responsible for selecting and appointing a corporation's chief
executive. They're also charged with reviewing and evaluating his performance, offering
administrative guidance and making decisions about his tenure.
Public Accountability
o Corporate directors are responsible for publishing records of products, services and
expenses to the public. They provide fiscal accountability by evaluating and approving
the budget, developing policies that establish resource management, and assuming
responsibility for new programs.
Fiduciary Duties
o Corporate directors are responsible for performing fiduciary duties established by law,
including loyalty, care and disclosure. Loyalty requires acting according corporate, not
private interests. Care requires that directors make rational decisions by showing up and
paying attention to corporate issues. Disclosure requires that they disclose all relevant
material to shareholders when seeking shareholder approval.

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Fiduciary Duties of Board of Directors
Fiduciary duty means that, as shareholders’ guardians, directors must be trustworthy, acting in the best
interest of shareholders, and investors in turn have confidence in the directors’ actions.
MANDATED BY LAW AND SPECIFIED IN COMPANIES CHARTERS AND BYLAWS
The corporate governance literature presents the following fiduciary duties of boards of directors:
- Duty of due care
- Duty of loyalty
- Duty of Good Faith
- Duty to Promote Success
- Duty to Exercise Diligence, Independent Judgment, and Skill
- Duty to Avoid Conflict of Interests
- Fiduciary Duties and Business Judgment Rules.
• Duty of Due Care - determines the manner in which directors should carry out their
responsibilities. Failure to uphold the set stipulations may constitute a breach of the fiduciary
duty of care of expected directors.
• Duty of loyalty - requires directors to refrain from pursuing their own interests over the interests of
the company. Breach of loyalty can occur even in the absence of conflicts of interest if directors
consciously disregard their duties to the company and its shareowners.
• Duty of Good Faith – It’s an important of directors fiduciary obligations, and any irresponsible,
reckless, irrational or disingenuous behaviors or conduct can breach that fiduciary duty.
• Duty to promote success – directors should act in a good faith and promote the success of the
company to benefit of its shareholders and other stakeholders. Includes: approving the
establishment of strategic goals, objectives and policies that promote enduring shareholders value
as well as protect existing value.
• Duty to exercise due diligence, independent judgment, and skill - directors should be
knowledgeable about the companies’ business and affairs, continuously update their
understanding of the company activities and performance, and use reasonable diligence and
independent judgment in making decisions.
• Duty to avoid conflicts of interests - potential conflict of interest may occur when director:
receives a gift from a third party he is doing business with, either directly or indirectly enters into a
transaction or arrangement with that company, obtains substantial loans from the company, or
engages in backdated stock options.
• Fiduciary Duties and Business Judgment Rules - directors operate under a legal doctrine called
“business judgment rules”. Under that law directors that make decisions in good faith, based on
rational reasoning, and an informed manner can be protected from liability to the company’s
shareholders in the ground that they appropriately fulfilled their fiduciary duty of care.
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3.5 Ethics and Decision Making
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A Framework for Thinking Ethically
This document is designed as an introduction to thinking ethically. We all have an image of our better
selves-of how we are when we act ethically or are at our best. We probably also have an image of
what an ethical community, an ethical business, an ethical government, or an ethical society should
be. Ethics really has to do with all these levels-acting ethically as individuals, creating ethical
organizations and governments, and making our society as a whole ethical in the way it treats
everyone.
What is Ethics?
Simply stated, ethics refers to standards of behavior that tell us how human beings ought to act in the
many situations in which they find themselves-as friends, parents, children, citizens, businesspeople,
teachers, professionals, and so on.
It is helpful to identify what ethics is NOT:
• Ethics is not the same as feelings. Feelings provide important information for our ethical
choices. Some people have highly developed habits that make them feel bad when they do
something wrong, but many people feel good even though they are doing something wrong.
And often our feelings will tell us it is uncomfortable to do the right thing if it is hard.
• Ethics is not religion. Many people are not religious, but ethics applies to everyone. Most
religions do advocate high ethical standards but sometimes do not address all the types of
problems we face.
• Ethics is not following the law. A good system of law does incorporate many ethical standards,
but law can deviate from what is ethical. Law can become ethically corrupt, as some
totalitarian regimes have made it. Law can be a function of power alone and designed to
serve the interests of narrow groups. Law may have a difficult time designing or enforcing
standards in some important areas, and may be slow to address new problems.
• Ethics is not following culturally accepted norms. Some cultures are quite ethical, but others
become corrupt -or blind to certain ethical concerns (as the United States was to slavery
before the Civil War). When in Rome, do as the Romans do is not a satisfactory ethical
standard.
• Ethics is not science. Social and natural science can provide important data to help us make
better ethical choices. But science alone does not tell us what we ought to do. Science may
provide an explanation for what humans are like. But ethics provides reasons for how humans
ought to act. And just because something is scientifically or technologically possible, it may not
be ethical to do it.
Why Identifying Ethical Standards is Hard
There are two fundamental problems in identifying the ethical standards we are to follow:
1. On what do we base our ethical standards?
2. How do those standards get applied to specific situations we face?
If our ethics are not based on feelings, religion, law, accepted social practice, or science, what are
they based on? Many philosophers and ethicists have helped us answer this critical question. They have
suggested at least five different sources of ethical standards we should use.

Five Sources of Ethical Standards
Some ethicists emphasize that the ethical action is the one that provides the most
good or does the least harm, or, to put it another way, produces the greatest balance
of good over harm. The ethical corporate action, then, is the one that produces the
greatest good and does the least harm for all who are affected-customers,
employees, shareholders, the community, and the environment. Ethical warfare
balances the good achieved in ending terrorism with the harm done to all parties
through death, injuries, and destruction. The utilitarian approach deals with
consequences; it tries both to increase the good done and to reduce the harm done.
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1. The Utilitarian Approach
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2. The Rights Approach
Other philosophers and ethicists suggest that the ethical action is the one that best
protects and respects the moral rights of those affected. This approach starts from the
belief that humans have a dignity based on their human nature per se or on their
ability to choose freely what they do with their lives. On the basis of such dignity, they
have a right to be treated as ends and not merely as means to other ends. The list of
moral rights -including the rights to make one's own choices about what kind of life to
lead, to be told the truth, not to be injured, to a degree of privacy, and so on-is widely
debated; some now argue that non-humans have rights, too. Also, it is often said that
rights imply duties-in particular, the duty to respect others' rights.
3. The Fairness or Justice Approach
Aristotle and other Greek philosophers have contributed the idea that all equals should
be treated equally. Today we use this idea to say that ethical actions treat all human
beings equally-or if unequally, then fairly based on some standard that is defensible.
We pay people more based on their harder work or the greater amount that they
contribute to an organization, and say that is fair. But there is a debate over CEO
salaries that are hundreds of times larger than the pay of others; many ask whether the
huge disparity is based on a defensible standard or whether it is the result of an
imbalance of power and hence is unfair.
4. The Common Good Approach
The Greek philosophers have also contributed the notion that life in community is a
good in itself and our actions should contribute to that life. This approach suggests that
the interlocking relationships of society are the basis of ethical reasoning and that
respect and compassion for all others-especially the vulnerable-are requirements of
such reasoning. This approach also calls attention to the common conditions that are
important to the welfare of everyone. This may be a system of laws, effective police
and fire departments, health care, a public educational system, or even public
recreational areas.
5. The Virtue Approach
A very ancient approach to ethics is that ethical actions ought to be consistent with
certain ideal virtues that provide for the full development of our humanity. These virtues
are dispositions and habits that enable us to act according to the highest potential of
our character and on behalf of values like truth and beauty. Honesty, courage,
compassion, generosity, tolerance, love, fidelity, integrity, fairness, self-control, and
prudence are all examples of virtues. Virtue ethics asks of any action, What kind of
person will I become if I do this? or Is this action consistent with my acting at my best?
Putting the Approaches Together
Each of the approaches helps us determine what standards of behavior can be considered ethical.
There are still problems to be solved, however.
The first problem is that we may not agree on the content of some of these specific approaches. We
may not all agree to the same set of human and civil rights.
We may not agree on what constitutes the common good. We may not even agree on what is a good
and what is a harm.

The second problem is that the different approaches may not all answer the question What is ethical?
in the same way. Nonetheless, each approach gives us important information with which to determine
what is ethical in a particular circumstance. And much more often than not, the different approaches
do lead to similar answers.
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Making Decisions
Making good ethical decisions requires a trained sensitivity to ethical issues and a practiced method for
exploring the ethical aspects of a decision and weighing the considerations that should impact our
choice of a course of action. Having a method for ethical decision making is absolutely essential. When
practiced regularly, the method becomes so familiar that we work through it automatically without
consulting the specific steps.
The more novel and difficult the ethical choice we face, the more we need to rely on discussion and
dialogue with others about the dilemma. Only by careful exploration of the problem, aided by the
insights and different perspectives of others, can we make good ethical choices in such situations.
We have found the following framework for ethical decision making a useful method for exploring
ethical dilemmas and identifying ethical courses of action.
A Framework for Ethical Decision Making
Recognize an Ethical Issue
1. Could this decision or situation be damaging to someone or to some group? Does this decision
involve a choice between a good and bad alternative, or perhaps between two goods or
between two bads?
2. Is this issue about more than what is legal or what is most efficient? If so, how?
Get the Facts
3. What are the relevant facts of the case? What facts are not known? Can I learn more about
the situation? Do I know enough to make a decision?
4. What individuals and groups have an important stake in the outcome? Are some concerns
more important? Why?
5. What are the options for acting? Have all the relevant persons and groups been consulted?
Have I identified creative options?
Evaluate Alternative Actions
6. Evaluate the options by asking the following questions:
• Which option will produce the most good and do the least harm? (The Utilitarian Approach)
• Which option best respects the rights of all who have a stake? (The Rights Approach)
• Which option treats people equally or proportionately? (The Justice Approach)
• Which option best serves the community
as a whole, not just some members?
(The Common Good Approach)
• Which option leads me to act as the sort of person I want to be? (The Virtue Approach)
Make a Decision and Test It
7. Considering all these approaches, which option best addresses the situation?
8. If I told someone I respect-or told a television audience-which option I have chosen, what
would they say?
Act and Reflect on the Outcome

9. How can my decision be implemented with the greatest care and attention to the concerns of
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all stakeholders?
10. How did my decision turn out and what have I learned from this specific situation?
Manager's Decision Checklist
1. What are the best economic alternatives?
2. What are the legal alternatives?
3. Does a given decision result in greater benefits than damages for society as a whole, not just
for our organization as part of that society?
4. Is the decision self-serving, or would we be willing to have everyone else take the same action
when faced with the same circumstances?
5. We understand the need for social cooperation; will our decision increase or decrease the
willingness of others to contribute?
6. We recognize the importance of personal freedom; will our decision increase or decrease the
libery of others to act?
7. Lastly, we know that the universe is large and infinite, while we are small and our lives are short;
is our personal improvement that important, measured against the immensity of that other
scale?
The Nature of Ethics in Management
Right and proper and fair are ethical terms. They express a judgement about our behavior towards
other people that is felt to be just. We believe that there are right and wrong ways to behave towards
others, proper and improper actions, fair and unfair decisions. These beliefs are our moral standards of
behavior. They reflect our sense of obligation to other people, our sense that it is better to help rather
than to harm other people.
Moral problems are truly managerial dilemmas. They represent a conflict between an organization's
economic performance (measured by revenues, costs and profits) and its social performance (stated
in terms of obligations to persons both within and outside the organization).
Characteristics of Moral Problems in Management
1. Most ethical decisions have extended consequences.
2. Most ethical decisions have multiple alternatives.
3. Most ethical decisions have mixed outcomes.
4. Most ethical decisions have uncertain consequences.
5. Most ethical decisions have personal implications.

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3.5.1 Personal traits
3.5.1.1 Values: Types of values and Personal values Moderators
Basic Ethical Values for Business
 Trust
 Honesty
 Fairness
 Dignity and Respect for Humanity
 Respect for Legitimate Law
 Respect for Property
 Autonomy and Freedom
 Impartiality/Objectivity
 Compassion
Morals
 Morals are a set of guiding principles or rules that help differentiate our behavioral choices
between right and wrong or good and bad and are exhibited through our intentions,
decisions, practices and actions.
 Morals have a greater social element to values and tend to have a very broad acceptance.
Morals are far more about good and bad than other values. We thus judge others more
strongly on morals than values. A person can be described as immoral, yet there is no word for
them not following values.
Values
 Values are ideals that we believe are important as individuals. They are subjective, and vary as
a result of our culture, beliefs, and experiences.
 Values are the rules by which we make decisions about right and wrong, should and
shouldn't, good and bad. They also tell us which are more or less important, which is useful
when we have to trade off meeting one value over another.
Values and morals are different from one person to the next because they are the
essential building blocks that shape who we are, what we choose to stand for and
believe in, and influence the decisions we make. They not only give meaning to who we
are but also who we want to be.
Morals and values are a part of the behavioral aspect of a person. There is not much
difference between morals and values but both are correlated to each other. Morals are
formed from the inborn values. Moral is a system of beliefs that is taught for deciding good or
bad whereas values are personal beliefs or something that comes from within. These are
emotionally related for deciding right or wrong. Morals have more social value and
acceptance than values, therefore a person is judged more for his moral character than the
values. One is said to be immoral for a person without morals but no such term is there for the
person without values.
Another difference between the morals and values is that moral is a motivation or a key for
leading a good life in right direction whereas value is imbibed within a person, it can be bad or
good depending on the person’s choice. It can also be called as intuition or the call of the
heart. Morals do not determine the values but are formed because of the values. Morals
contribute to the system of beliefs and are the values which we get from the society.

Morals can be related to ones religion, political system or a business society. Business morals
include prompt service, excellence, quality and safety. One practices all the morals while
running a business, but the values may not coincide with them. Therefore these morals do not
come from within a person but are taught by the social group and has to be followed. On the
other hand values are the standards to judge the right or wrong, good or bad, just or unjust.
They are the fundamental principles that give guidance to a person to evaluate the merits and
demerits of a thing. Values include courage, respect, patriotism, honesty, honor, compassion
etc. All these are not mandatory by society but depend on individual’s choice.
Lastly the difference between the morals and values is that morals are like commandments
set by the elders and to be followed by the descendants. They can be set by ones elders or
religious teachers or leaders of society who want to lead people away from immoral thoughts.
One always treasures the morals throughout his life and they never change with time or
conditions. While on the other hand values are not set by the society or teachers, but are
governed by an individual. Values do not mean that it is always right to do so. Whatever is
valuable for one person may not be the same for the other. Hence it is personal aspect and
changes according to different situations with time and needs
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RIGHTS
Rights are legal, social, or ethical principles of freedom or entitlement; that is, rights are the
fundamental normative rules about what is allowed of people or owed to people, according to some
legal system, social convention, or ethical theory. Rights are of essential importance in such disciplines
as law and ethics, especially theories of justice and deontology.
Right (ethics)
Ethics, also known as moral philosophy, is a branch of philosophy that involves systematizing,
defending, and recommending concepts of right and wrong conduct. The term comes from the Greek
word ethos, which means character. Ethics is a complement to Aesthetics in the philosophy field of
Axiology. In philosophy, ethics studies the moral behavior in humans, and how one should act. Ethics
may be divided into four major areas of study:
• Meta-ethics, about the theoretical meaning and reference of moral propositions and how their
truth values (if any) may be determined;
• Normative ethics, about the practical means of determining a moral course of action;
• Applied ethics, about how moral outcomes can be achieved in specific situations;
• Descriptive ethics, also known as comparative ethics, is the study of people's beliefs about
morality;
RIGHTS AND DUTIES
The concept of right and the notion of duty lie at the heart of much of our moral discourses.
The concept of right:
In general, a right is an individual’s entitlement to something. A person has a right when that person is
entitled to act in a certain way or is entitled to have others acts in a certain way toward him or her. It
may be a legal right or a moral right. Rights are powerful devices whose main purpose is to enable the
individual to choose freely whether to pursue certain interests or activities and to protect those choices.
Moral rights have got the following features:
1. They are tightly correlated with duties because to have moral rights necessarily implies that
others have certain duties towards the bearer of the right.

2. Moral rights provide individuals with autonomy and equality in the free pursuit of their interest.
3. Moral right provides a basis for justifying one’s actions and for invoking the protection or aid of
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others.
JUSTICE AND FAIRNESS
Disputes among individuals are often interlaced with reference to justice and fairness. Justice and
fairness are essentially comparative. They are concerned with the comparative treatment given to
members of a group when benefits and burdens are distributed. Standards of justice are generally
taken to be more important than utilitarian considerations. It the society is unjust, we normally
condemn that society, even if the injustice secure more utilitarian benefits for everyone.
Issues involving justice and fairness are usually divided into three categories: i.e. Distributive justice,
retributive justice and compensatory justice.
THE ETHICS OF CARE
According to this care view of ethics, the moral task is not to follow universal and impartial moral
principles, but instead to attend and respond to the good of particular concrete persons with which we
are in valuable close relationship, - compassion, concern, love, friendship and kindness are all
sentiments or virtues that normally manifest this dimension of morality. Thus, an ethic of care
emphasizes two moral demands:
1. We each exist in a web of relationships and should preserve and nurture those concrete and
valuable relationships we have with specific persons.
2. We each should exercise special care for those with whom we are concretely related by
attending to their particular needs, values, desires, and concrete well-being as seen from their
own personal perspective, and by responding positively to these needs, values, desires and
concrete well-being, particularly of those who are vulnerable and dependent on our care.
INTERGRATING UTILITY, RIGHTS, JUSTICE AND CARING
Each of the four moral considerations does not capture all the factors that must be taken in
consideration in making moral judgments. This suggests that moral reasoning should incorporate all the
four kinds of moral considerations although only one or the other may turnout to be relevant or decisive
in a particular situation.
An alternative to moral principles:
Virtue Ethics: A moral virtue is an acquired disposition that is valued as part of the character of a
morally good human being and that is exhibited in the; person’s habitual behavior. E.g. honestly, a
moral virtue which is praise worth
Aristotle argues that a moral virtue is a habit that enables a human being to act in accordance with
the specific purpose of human beings.
Relationship between virtues and principles:
Some virtues enable people to do what moral principles requires, e.g.
Courage enables us to stick to our moral principles even when fear of the consequences tempts us to
do otherwise.
Some virtues consist of readiness to act on moral principles. E.g. justice is a virtue of being disposed to
follow principles of justice.
Some virtues are dispositions that our moral principles require to develop. E.g. Utilitarianism requires us
to develop dispositions like kindness and generosity that will help us to enhance other people’s
happiness.

• Moral rights are rights which are natural in the sense of not artificial, not man-made, as in
rights deriving from deontic logic, from human nature, or from the edicts of a god. They are
universal; that is, they apply to all people, and do not derive from the laws of any specific
society. They exist necessarily, inhere in every individual, and can't be taken away. For
example, it has been argued that humans have a natural right to life. They're sometimes called
natural rights or inalienable rights.
• Moral rights are what you do because it's the right thing to do. it's based on values and
principals shaped by our upbringing or guided by our belief and faith. it's what we know in our
hearts to be good and true.
• Legal rights, in contrast, are based on a society's customs, laws, statutes or actions by
legislatures. An example of a legal right is the right to vote of citizens. Citizenship, itself, is often
considered as the basis for having legal rights, and has been defined as the right to have
rights. Legal rights are sometimes called civil rights or statutory rights and are culturally and
politically relative since they depend on a specific societal context to have meaning.
• Legal rights are that which is mandated by law. Legal rights are basically created for egregious
wrongs that are so horribly bad that we as a society are pushed to the limits of making a law to
ban it. Murder is so very very morally wrong that we must create a law to make it legally wrong
because it is that important. But we don't create laws that prevent you from letting the door
slam in the face of the person behind you. That is just morally wrong, but not so horrible that
anybody pushes us all into make a law to prevent it.
3.5.1.2 Stages of moral Development
Moral development is a prerequisite to ethical behavior.
Have you ever asked yourself: “What is my stage of Moral Development?”
Kohlberg offers a handy framework for delineating the stage each of us has reached with respect to
personal moral development.
In a nutshell, the six stages of Moral Development may be summarized as follows:
As you will infer, this concept seems to be linked with various theories of motivation like Maslow’s Need
Hierarchy, Herzberg’s Hygiene Theory etc.
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1. FEAR – Stage 1
2. NEEDS – Stage 2
3. CONFORMANCE – Stage 3
4. COMPLIANCE – Stage4
5. CONSENSUS – Stage 5
6. CONSCIENCE FREE WILL – Stage 6
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STAGE 1
Physical consequences determine moral behavior.
At this stage of personal moral development, the individual’s ethical behavior is driven by the decision
to avoid punishment or by deference to power. Punishment is an automatic response of physical
retaliation. The immediate physical consequences of an action determine its goodness or badness.
Such moral behaviour is seen in boarding schools, military training academies etc. where physical

punishment techniques are prevalent with a view to inculcate the attributes of obedience and
deference to power. The individual behaves in a manner akin to the Pavlovian dog.
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STAGE 2
Individual needs dictate moral behaviour.
At this stage, a person’s needs are the person’s primary ethical concern. The right action consists of
what instrumentally satisfies your own needs. People are valued in terms of their utility. Example: “I will
help him because he may help me in return – you scratch my back, I will scratch yours.”
STAGE 3
Approval of others determines moral behaviour.
This stage is characterized by decision where the approval of others determines the person’s behaviour.
Good behaviour is that which pleases or helps others within the group. The good person satisfies family,
friends and associates. “Everybody is doing it, so it must be okay.” One earns approval by being
conventionally “respectable” and “nice.” Sin is a breach of the expectations of the social order – “log
kya kahenge?” is the leitmotif, and conformance with prevailing ‘stereotypes’ the order of the day.
STAGE 4
Compliance with authority and upholding social order are a person’s primary ethical concerns.
“Doing one’s duty” is the primary ethical concern. Consistency and precedence must be maintained.
Example: “I comply with my superior’s instructions because it is wrong to disobey my senior”. Authority is
seldom questioned. “Even if I feel that something may be unethical, I will unquestioningly obey all
orders and comply with everything my boss says because I believe that the boss is always right.”
STAGE 5
Tolerance for rational dissent and acceptance of rule by the majority becomes the primary ethical
concern.
Example: “Although I disagree with her views. I will uphold her right to have them.” The right action
tends to be defined in terms of general individual rights, and in terms of standards that have been
critically examined and agreed upon by the whole society. (eg) the Constitution, various norms, codes
of conduct and laws. The freedom of the individual should be limited by society only when it infringes
upon someone else’s freedom.
STAGE 6
What is right is viewed as a matter of individual conscience, free choice and personal responsibility for
the consequences.
Example: “There is no external threat that can force me to make a decision that I consider morally
wrong.” An individual who reaches this stage acts out of universal ethical principles.
What is your stage of personal moral development?
Be honest with yourself and recall the decisions you made in recent ethical situations.
The six stages of moral development are valuable landmarks as they tell you approximately where you
are and what changes you will have to make in yourself to move to a higher level of moral
development. The ultimate goal is to engage in ethical decision making at stage 6.
Your stage of moral development will determine your ethical susceptibility and ethical vulnerability.

BUSINESS ETHICS
Ethical Susceptibility is your inability to avoid ethical dilemmas.
Ethical Susceptibility is environment dependent (on external factors) like, for example, your job, your
boss, colleagues and subordinates, or the persons around you, or even the ‘prevalent organizational
culture’.
Ethical Vulnerability is your inability to withstand succumbing in the given ethical dilemmas /situations. It
is dependent on your internal stage of moral development in the given ethical situation.
Whereas being in an ethical dilemma is
situation is certainly in your control.
not in your control, to act in an ethical manner in the prevailing
Whenever two individuals at different stages of moral development interact with each other, both of
them try to force or manoeuvre the other into
their own appreciation of the ethical situation, thus
leading to conflict.
In a formal hierarchical setup, various employees in the chain may not be at similar stages of moral
development thereby leading to ethical dissonance in the system.
Factors That Affect Ethical and Unethical Behavior
Factors That Affect Employee Ethics
1. Stages of moral development
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Stage of moral development interacts with:
Individual characteristics
The organization’s structural design
The organization’s culture
The intensity of the ethical issue
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2. Individual characteristics
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 Values
Basic convictions about what is right or wrong on a broad range of issues
Ø Ego strength
A personality measure of the strength of a person’s convictions
Ø Locus of Control
A personality attribute that measures the degree to which people believe they
control their own life
-Internal locus: the belief that you control your destiny
-External locus: the belief that what happens to you is due to luck or
Chance
3. Structural variables
Organizational characteristics and mechanisms that guide and influence individual ethics:
o Performance appraisal systems
o Reward allocation systems
o Behaviors (ethical) of managers
o An organization’s culture
o Intensity of the ethical issue
Good structural design minimizes ambiguity and uncertainty and fosters ethical
behavior
4. Organizational culture
The organization’s culture is another factor that influences ethical behavior.
a. An organizational culture most likely to encourage high ethical standards is one that’s
high in risk tolerance, control, and conflict tolerance.
b. In addition, a strong culture will exert more influence on managers than a weak one.
c. However, in organizations with weak cultures, work groups and departmental
standards will strongly influence ethical behavior.
5. Issue intensity
Finally, the intensity of an issue can affect ethical decisions. There are six characteristics
that determine issue intensity (see Below Figure).
a. Greatness of harm
b. Consensus of wrong
c. Probability of harm
d. Immediacy of consequences

BUSINESS ETHICS
e. Proximity to victim
f. Concentration of effect
unedited version
How Managers Can Improve Ethical Behavior in an Organization
• Hire individuals with high ethical standards.
st
• Establish codes of ethics and decision rules
rules.
• Lead by example.
• Delineate job goals and performance appraisal mechanisms
• Provide ethics training.
• Conduct independent social audits
audits.
• Provide support for individuals facing ethical dilemmas
3.5.1.3 Moral Approbation
mechanisms.
dilemmas.
Moral approbation is the judgment formed of characters and actions, as being excellent or just
The act of approving; an assenting to the propriety of a thing with some degree of pleasure or
satisfaction; approval, sanction, commendation or official recognition
Existing models of ethical decision making cannot yet explain the disparity between what organization
members decide is “right” to do in a given situation and what they actually do. The current paper
advances these models els with the development of a new idea called
moral approbation, defined as
moral approval from oneself or others. By arguing that people rely on the opinions of their
groups when deciding how to behave, the paper also explains how organizational
factors can affect individuals' ethical behavior.
This theory proposes that individuals consider four factors when determining their own or someone else's
level of moral responsibility in a given situation: the severity of the act's conse
that the act is moral or immoral, the actor's degree of complicity in the act, and the extent of pressure
the actor feels to behave unethically.
A moral agent in an organizational predicament uses these four factors to determine the
responsibility that his or her referent group will attribute to him or her. Based on that perceived level of
responsibility, he or she will plan a certain course of action and estimate how much moral approbation
can be expected from that referent group based on that behavior. The agent then compares this
anticipated level of moral approbation to the minimum that he or she can tolerate. If the anticipated
moral approbation meets that threshold, the agent is likely to establish a formal
according to the projected plan, and is more likely to
hand, if the comparison shows that the threshold will not be met, the actor is likely to rethink his or her
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or environmental
consequences, the certainty
ferent intention
act in accordance with that plan. On the other
98
just.
, referent
quences, level of moral
of behaving

course of action and continue to go through the moral approbation process until a plan is developed
that will lead to the necessary level of approbation.
The moral approbation model begins to fill the theoretical gap between moral judgment and moral
action in organizations, with some explicit observations about the effect of organizational influences.
These issues are of both scholarly interest and practical concern.
3.5.2 Organizational culture
What Are the Different Dimensions of Organizational Culture?
The organizational culture of an organization refers to the type of climate and values that influence the
patterns of behavior within an organization. It determines how the people within that organization
behave in specific situations, interact with other members of the organization, and behave toward
those outside of the organization. There are several dimensions of organizational culture that include
things like leadership structure, rewards, welfare package, formality and degree of autonomy.
One of the obvious dimensions of organizational culture is the leadership structure. Companies may
differ on how accessible the CEO is to other members of the staff. The degree of accessibility of a top
manager, leader or chairman of an organization is a factor that contributes to its cultural identity. When
it comes to how they are addressed by the junior members of the staff, some employers are less rigid
than others. Some managers might insist on being referred to by their first name, while others will expect
to be referred to in a more formal manner.
Organizations have different methods of rewarding their employees for loyalty and exceptional
performance. An organization might do this by promoting employees more rapidly, increasing their
bonuses, or giving them gifts. Some companies may also encourage their employees to be individual
achievers, while others prefer that their employees act as team players. These are also dimensions of
organizational culture within an organization.
Another one of the dimensions of organizational culture is the type of welfare package that the
organization has put in place for its employees. Some organizations have a more robust welfare culture
than others. For instance, some organizations might include features like transport allowance in the
salary of their workers. They might also provide breakfast and lunch for their employees, while another
organization in the same category will not offer the same concessions toward its workers.
The degree of autonomy refers to the approach that an organization takes to the adherence to
formality. This aspect of organizational culture includes such things like the acceptable dress code
expected of the employees and the accessibility of the top management to the junior staff. Some
organizations take a more laid back approach to the way employees are expected to dress. Other
organizations are by their very nature more strict in their requirements. For instance, the employees at a
surf paraphernalia store might be allowed to wear shorts and t-shirts to work, while an employee in a
financial organization would be expected to wear more formal attire.
What Are the Different Types of Organizational Culture?
Organizational culture reflects the tone of an entity more than it does any policies or procedures.
Nonetheless, there are different types of organizational culture that are prevalent throughout
corporations and small businesses. Companies adopt a particular style based on the needs and
expectations of that business. Some of the prominent types of organizational culture include a
controlled approach, a competing nature, a collaborative environment, and a creative style, all
according to a report issued by Haworth Inc. The less formal that any organizational structure is, the
more effective it is likely to be.
A controlled approach is included among the types of organizational culture. In this style, the company
looks at the resources within the organization to succeed, and at the very least, there are often middle
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as well as upper-management teams. This approach is highly efficient and systematic, and employees
in this type of setting can expect that work performance will be measured on a regular basis. A
controlled approach can influence productivity in a positive way, although managers might need to
be wary of becoming overly involved in the staff's day-to-day responsibilities. This is because of the
controlling tendencies associated with this organizational structure.
Other types of organizational culture take a somewhat different approach. A competitive style looks to
industry rivals and attempts to constantly remain ahead of the market. This is a highly intense type of
culture where the employees are pushed to remain on top.
The competition remains focused on other businesses, and this benefits clients of an organization. Roots
of a competitive culture are in outsourcing as companies are forced to remain relevant even as less
expensive business services become available in overseas nations. According to the Haworth report,
the competitive and controlled organizational structure types both share the characteristics of a stable
and controlled workplace.
Companies that adopt a collaborative work environment are relying on a less formal and structured
workplace in favor of a team effort. This approach differs from other types of organizational culture
styles because of its tendency to thrive in a more nimble environment. Instead of micromanagement,
the threat here might be a chance that the work environment becomes too relaxed. Employees are
aware of the value they bring, and this could lead to greater job retention, which is a benefit of the
collaborative approach.
In a creative organizational culture, an employee is rewarded for having an entrepreneurial spirit. This
spirit of independence can propel a company toward higher growth. Companies in this niche are not
immune to taking chances on new technology and other emerging trends.
What Is the Relationship Between Organizational Culture and Ethics?
An organizational chart.
There is a direct relationship between organizational culture and ethics. Organizational culture affects
the way employees respond and react when placed in ethical dilemmas. The study of an
organization’s culture can reveal the unwritten ethical standards that guide employees in their
decision-making. Using this information, businesses can avert risky ethical behavior by changing their
organizational culture.
Organizational culture is the study of the attitudes, beliefs and psychology within an organization. It not
only encompasses how employees interact with each other, but also how they communicate with
others outside of the organization. Ethical standards are the code of conduct required by the
organization for employees to follow. The relationship between organizational culture and ethics is that
the organizational culture guides employees when faced with ethical dilemmas. If the organizational
culture counters what they are required to do ethically, employees may put the organization in risk by
not acting ethically.
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When an employee is faced with a decision that others within the organization deem as appropriate,
though it is unethical, the employee may follow what is acceptable as per the culture. For instance, if
the organization rewards employees for gaining the most contracts at any cost, an employee may start
bribing potential clients in order to gain more deals. If the corporate culture is to gain the most
contracts but through normal techniques, an employee may not be as easily persuaded to do
something unethical. It is this relationship between organizational culture and ethics that can get
businesses into significant trouble in the long term. An organizational culture that supports risky decisions
and unethical behavior will need to change its culture.
Changing a business’s organizational culture is difficult but often necessary when a business is having
trouble with employees making ethical decisions. Organizational culture and ethics are both
psychologically linked, so employees must change their ways of thinking in order to accept a new
direction. This is often difficult to do when employees have worked with the organization for a long time
or are not provided with acceptable methods of doing business ethically.
For instance, if the business wants employees to stop bribing foreign officials in order to gain contracts,
it should provide employees with other effective methods that will work to gain the same results. If there
are no other ways to gain the same results, the company needs to make sure it does not punish
employees for not being able to sustain the old same results. Since organizational culture and ethics
are linked, the business must change its culture in order to see results in its employees' ethical decision
making.
What Is the Relationship Between Organizational Culture and Behavior?
Organizational culture and behavior are two separate yet wholly related concepts. The type of
established and shared values that shape the activities of an organization is known as the
organizational culture. Organizational behavior is the way the employees or the human elements in the
organization behave as a consequence of the organizational culture in place in an organization. Both
organizational culture and behavior are critical to the workings of a company because they can help
determine whether an organization is successful or not.
One of the effects of organizational culture and behavior can be seen in the way the leadership of an
organization relates with its employees. The manner in which CEOs and other management relate with
the employees that are lower in the hierarchy of an organization can affect the way the employees
within that organization behave. If the organizational culture in place means that the CEO is out of
reach to everyone but the top management, the employees might not feel the impact of his or her
leadership in the same way they would a more accessible leader. This may make the job seem more
impersonal, and it might affect the motivation of the workers.
Another effect of organizational culture and behavior is in the area of operational practice. If the
operational practice in an organization encourages everyone to be a team player, the behavior of
those employees will be different from that of employees in a place where individual initiative is valued.
The employees who are team players may be more integrated than those who are individual
achievers. This is because those who are individual players might be very competitive among
themselves.
Organizations that have a culture in which the welfare of the employees is taken seriously will produce
a different behavior than that of an organization that does not treat its employees as well. For instance,
a company that has a daycare center within its premises for the busy workers will definitely benefit in
terms of increased performance and more dedication from mothers and fathers who do not have to
rush through their jobs in order to go and pick up their children from daycare. This will also make the
employees feel valued and be more willing to give their best for the success of the organization. The
opposite might be the case for an organization with an appalling worker welfare package. The
employees will almost certainly not be as motivated as those with a good welfare package.
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3.5.2.1 Organizational traits
Eight ethical traits defining a healthy organizational culture
Most persons in positions of responsibility know that a code of ethics and corporate conduct is a legal
requirement and thus give at least lip service to principles of good ethics in their business dealings. Yet,
sometimes they may have difficulty applying ethical principles to real-life situations or knowing whether
ethical principles are really at work in their organization.
The following listing of ethical traits of a healthy organization presumes that an organization has an
inspiring, shared mission at its core and capable leadership. It is presented to help managers recognize
the ethical implications of everyday business attitudes together with outcomes of alternative actions..
1. Openness and humility from top to bottom of the organization
Arrogance kills off learning and growth by blinding us to our own weaknesses. Strength comes
out of receptivity and the willingness to learn from others. Finance managers are in a strong
position to facilitate this trait by functioning as consulting problem solvers rather than as just
subservient financial messengers reporting what usually seems to be bad news to a dominating
senior management.
2. An environment of accountability and personal responsibility
Denial, blame, and excuses harden relationships and intensify conflict. Successful teams hold
each other accountable and willingly accept personal responsibility. Too many finance
managers view their job as fixing the blame rather than helping to fix the problem. The
adage that internal auditors appear on a battlefield after the battle is over to help bayonet
the wounded may have credence in unethically healthy organizations.
3. Freedom for risk-taking within appropriate limits
Both extremes – an excessive, reckless risk-taking and a stifling, fearful control – threaten any
organization. Freedom to risk new ideas flourishes best within appropriate limits. As active
participants in an organization's risk-management process, finance managers can be very
helpful in achieving this trait.
4. A fierce commitment to do it right
Mediocrity is easy; excellence is hard work, and there are many temptations for shortcuts. A
search for excellence always inspires both inside and outside an organization. Best-in class
finance organizations are continuously engaged in improving their practices.
5. A willingness to tolerate and learn from mistakes
Punishing honest mistakes stifles creativity. Learning from mistakes encourages healthy
experimentation and converts negatives into positives.
6. Unquestioned integrity and consistency
Dishonesty and inconsistency undermine trust. Organizations and relationships thrive on clarity,
transparency, honesty, and reliable follow-through. Integrity is obviously the cornerstone of
every ethics code. Trust is absolutely essential to business in today's technologically-oriented
environment. Achieving integrity and consistency through application of the stated practices is
essential to having a strong and ethical organization.
7. A pursuit of collaboration, integration, and holistic thinking
Turf wars and narrow thinking are deadly. Drawing together the best ideas and practices,
integrating the best people into collaborative teams, multiplies organizational strength.
8. Courage and persistence in the face of difficulty The playing field is not always level, or life fair,
but healthy cultures remain both realistic about the challenges they face and are un-intimidated
and undeterred by difficulty. As major facilitators of the budgeting process, finance
managers need to be sure that the resulting goals fairly reflect just and reasonable challenges
throughout the organization.
QUESTION: Are there other traits that should be considered part of a strong and ethical culture?
The listed organizational traits mirror many that we have commented upon previously in this column.
These include having an open and trusting management style and a commitment to a code of
conduct and ethics with a values orientation. As a reminder, research shows these companies and
good corporate citizens as a group return superior performance to shareowners, as well as beneficial
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relationships with other stakeholders like employees, suppliers, communities, and the public at large.
In the effort to better differentiate these companies, significant efforts to broaden corporate reporting
to include specific information of value to stakeholders other than shareholders has been underway for
some time and are nearing fruition. Organizations that wish to distinguish themselves will place
management accountants and financial managers in the forefront of those efforts.
3.5.2.2 Stakeholders
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Organization - Stakeholders Ethics
A stakeholder is any individual or organization that is affected by the activities of a business. They may
have a direct or indirect interest in the business, and may be in contact with the business on a daily
basis, or may just occasionally.
The main stakeholders are:
1. Shareholders (not for a sole trader or partnership though) – they will be interested in their
dividends and capital growth of their shares.
2. Management and employees – they may also be shareholders – they will be interested in their
job security, prospects and pay.
3. Customers and suppliers.
4. Banks and other financial organisations lending money to the business.
5. Government – especially the Inland Revenue and the Customs and Excise who will be
collecting tax from them.
6. Trade Unions – who will represent the interests of the workers.
7. Pressure Groups – who are interested in whether the business is acting appropriately towards
their area of interest.
Stakeholders versus Shareholders
It is important to distinguish between a STAKEHOLDER and a SHAREHOLDER. They sound the same – but
the difference is crucial!
Shareholders hold shares in the company – that is they own part of it.
Stakeholders have an interest in the company but do not own it (unless they are shareholders).
Often the aims and objectives of the stakeholders are not the same as shareholders and they come
into conflict.
The conflict often arises because while shareholders want short-term profits, the other stakeholders’
desires tend to cost money and reduce profits. The owners often have to balance their own wishes
against those of the other stakeholders or risk losing their ability to generate future profits (e.g. the
workers may go on strike or the customers refuse to buy the company’s products).

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Social Responsibility
Social responsibility is the duty and obligation of a business to other stakeholders.
Stakeholder Example of responsibility to that stakeholder
Shareholder Good return on investment
Employee Fair pay and working conditions
Supplier Regular business and prompt payment
Customer Fair price and safe product
Local community Jobs and minimum disruption
Government Employment for local community
Environment Less pollution
Social responsibility for one group can conflict with other groups, especially between shareholders and
stakeholders.
Ethics
Ethics refers to the moral rights and wrongs of any decision a business makes. It is a value judgement
that may differ in importance and meaning between different individuals.
Businesses may adopt ethical policies because they believe in them or they believe that by showing
they are ethical, they improve their sales.
Two good examples of businesses that have strong ethical policies are The Body Shop and Co-Op.
Some examples of ethical policies are:
• Reduce pollution by using non-fossil fuels.
• Disposal of waste safely and in an environmentally friendly manner.
• Sponsoring local charity events.
• Trading fairly with developing countries

3.5.2.3 Decision Processes
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Decision Making in Business Ethics
Individuals are often required to make decisions in the business environment every day. Working for a
company often requires following an ethical model or framework when making these decisions.
Business ethics outlines the acceptable behavior companies expect to see from their employees.
Strong decision making and business ethics can also help companies select the best business
opportunities.
Facts
Decision making in business ethics usually requires companies to identify specific ethical standards,
which often means different things to different people. As organizations continue to grow and expand,
new individuals are hired who may not have the same ethical standards as individuals already working
in the company. A difference in ethics often changes how individuals approach the decision-making
process. Companies often use the organization’s mission statement to build a framework for helping
individuals make ethical business decisions.
Types
There are five types of ethical standards: utilitarian, rights, fairness or justice, common good, and virtue.
Utilitarian ethics is a standard that attempts to do the most good and limit the amount of harm for each
individual. A rights approach protects and respects the moral rights of individuals impacted by
decisions. The fair or just style seeks to create equality among all individuals while the common good
method focuses on bettering society as a whole. The virtue tactic centers on the ideal virtues necessary
for promoting individuals for the company.
Functions
Business ethics is a tool companies use to ensure managers, directors, or executive officers act
responsibly in various business situations. Ethical decision making attempts to promote the company as
a whole, rather than letting one individual profit from business decisions. Individuals who consistently
make decisions based on their personal benefit may create legal liabilities for a company that can
lead to bankruptcy.
Considerations
Creating an ethical business environment does not happen overnight. Companies may need to spend
time and money training and promoting business ethics among managers and employees. Companies
may also find implementing an ethical decision-making process may lead to negative feedback from
managers or employees. Combating this negative feedback may be a difficult part of implementing
business ethics.
Expert Insight
Companies may use professional consultants, seminars, or other training methods to educate
employees on decision making in business ethics. These outside sources may also be able to provide
companies with an objective review of their current operations and offer advice on how to implement
a strong ethical code in their business operations. While these professional resources may be expensive,
it often helps companies develop an ethical business environment.

3.5.3 Making Moral Decisions
ETHICAL DECISION MAKING AND MORAL BEHAVIOR
Much of the recent interest in ethics and moral behavior in business comes from Enron and Worldcom,
as scholars, educators, practitioners, and the public seek to understand the behavior of executives in
these firms. Many have chosen to view these cases from the perspective of ethics, that is, the behavior
of these executives is seen as unethical and the explanation is that they are unethical or immoral
people. Furthermore, the solution is improved moral education in business programs. “Somehow, we
need to make future executives more moral or more ethical” and we can do this in the context of an
undergraduate business program or MBA degree program. Some have even suggested that today’s
business programs not only do not facilitate the “moral development” of students, but students leave
these programs “less moral” than they were when they entered the programs. Here a couple of points
to consider:
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What is Ethical or Moral?
What do we mean by ethical decision making? Are there decisions that are not ethical in that there is
not ethical component to a choice? In their review of ethical decision making, Tenbruensel and Smith-
Crowe (2008) present a distinction between moral decision making and amoral decision making. Within
each class of decisions, one can make ethical decision or unethical decisions. They further argue that
social scientist should not be in the business of telling people what they should do, that is define what is
ethical and what is not, but they do acknowledge the necessity to define the criteria by which
decisions are placed into their typology for analytical purposed. It is very difficult to define ethical
behavior. Many definitions exist, but most depend on using some standard of ethical behavior from
which to judge the individual’s behavior. Any standard used is subjective and cultural in nature and
subject to intensive debate.
Schulman (2002) defines moral behavior as “acts intended to produce kind and/or fair outcomes (p.
500).” This is similar to prosocial behavior or goal identification as a source of motivation in that the
behavior is “labeled” moral if it is intended to produce a positive outcome for others. He argues that
“moral motivation” is rooted in three moral systems: (1) Empathy, (2) Moral Affiliations, and (3) Principles.
If we accept this notion that moral behavior is defined in terms of intention to help others (as opposed
to egoistic motives), then we need to examine the relevant other.
In attempting to define ethical decisions, Jones writes that An ethical decision is a decision that is both
legally and morally acceptable to the larger community. (1991, p. 387). This definition moves away
from absolute standard of judgment to a social standard, based on cultural, organizational, or
community standards. It still begs the issue to which stand to use when one is operating in over-lapping
reference groups. I find the other inclusion in this definition very interesting. He adds to concept of
legality in is definition implying that breaking the law is by definition unethical or immoral. Personally, I
can think of countless examples of individuals breaking the law and being very moral or ethical. For me,
a useful conceptualization of ethics has to differentiate between legal and ethical. In fact, these are
two of the many social control mechanisms used to curtail unwanted social behavior. Laws and ethical
standards may coincide or reinforce each other, supplement each other, or conflict with one another.
There is an inherent problem in attempting to define ethical decision-making or moral behavior. What
we are doing in trying to define these concepts is starting with the answer rather than the
question. While the concept of ethics provides a nice category of inquiry, it isolates the concepts
associated with what we call ethics from other models of decision-making and motivation. Why do we
need special models of ethical decision-making and moral motivation when we have spent been years
developing models of motivation and decision-making. If our mainstream behavioral models are not
robust enough to include ethical issues within them, then they need to be expanded. Rather than start
with the answer, let's start with defining the behavioral phenomena that the concepts of ethics and
morals are attempting to explain. From an organizational or even societal perspective, we are
interested in explaining and understanding cross-individual behavioral consistency (CIBC). What
organizational or societal forces or mechanisms create consistency of behavior among
members? How is behavioral control of organizational and societal members achieved?

How do groups and organizations stops people from doing undesirable things and do desirable things?
Katz and Kahn (1966) argue that there are three fundamental forces reducing human variability
creating some degree of social control. The first control mechanism is environmental pressures. Task
requirements of group and social goals act to achieve a level of coordinated effort among group
members. Individuals sacrifice their individual short-term needs to accomplish long-term objectives. In
doing so they give up their individual freedoms to the control of the group. The second control
mechanism discussed by Katz and Kahn, is shared values and expectations. When members of a
group develop common goals and mutual expectations these social goals and group norms become
the basis of behavior of the group's members through a system of internalization of these behavioral
standards. Finally, Katz and Kahn argue that variability is reduced by rule enforcement. Rules can
come in the form of laws, regulations, or codes, and are enforced through a system of an external
control. External control systems require some level of monitoring of behavior and the use of some
base of power to ensure that individuals follow these rules. Rules can also be more in formal, presenting
themselves in the form of social norms, which are enforced through a system of monitoring and
contingent use of social power.
We can use the Katz Kahn model as a basis for understanding CIBC. Individual behavioral control
can come through internal or external control mechanisms. The standards of social monitoring can be
through observation of processes or behavior or the outcomes or results of behavioral patterns. A
typology of social control mechanisms can be developed as shown in Figure 1.
Figure 1
External Control Internal Control
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The Question of Social Control
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Process/Means
Deontological
Norms
Laws
Codes of Ethics
Instrumental values
Outcome/Ends
Utilitarian
Social values
Stakeholder interests
Terminal values
Personal Standards
Internalized interests of others
In most situations when we refer to unethical behavior, we mean one of four things.
Behavior that is Dishonest
When we lie, cheat or steal to to achieve a personal or group goal, others view our behavior as
unethical. Using this standard of ethics, it is the means used to achieve an outcome and not the
outcome itself that determines whether the decision leading to the behavior is ethical or not. Falling
into this category are making false representations, not meeting promised commitments, and
misleading others
Compliance with ethical standards
Another important ethical standard is the use of codes, rules, guidelines and other systems that attempt
to identify certain behaviors or means which are in themselves unethical. These culturally designed and
promulgated codes of conduct or ethical systems generally provide lists of what things one should do
and not do. They range from very general, such as the Ten Commandments, to professionally or
organizationally specific, like a legal code of ethics or a company code of conduct. Most of these rules
are designed to to create fairness and equity, respect for others, and systems of non-discrimination.
They also function to balance power and protect the powerless.
From a social psychological perspective these ethical codes operate like other process based control
systems such as state laws, company rules and policies, or social norms in that they are enforced
through both external and internal means. Figure 2 presents a model of rule or behavioral standard
compliance which should apply to any behaviorally based or process based standard whether it be
termed a norm, rule, guideline or ethical code.

Enforcement. How do social units ensure standards of desirability are adhered to? Another way to
phrase this question is why to individuals adhere to social standards of desirability? External or internal
control mechanisms.
1. External Control Mechanisms. How are rule and social norms enforced by groups? The short
answer is that group members reward compliance and punish non-compliance- To the extent
that members hold some base of power, individuals can be made to comply with standards.
2. Internal Control. What would happen is all social units had to rely on a system of monitoring
and enforcement to ensure stability? The result could be that half of the population would be
employed to monitor the other half. Who would monitor the control agents? It would be like
Deadwood, South Dakota in the 1880’s which had no laws and few if any social
standards. Many of the residents believed that anything was acceptable including murder.
You can see why it would be impractical to rely entirely on external control. In most cases,
external control is only necessary for a small portion of the population. Most societal or
organizational members internalize important standards in the form of private instrumental and
terminal values. Individual adopt religious creeds, professional codes of ethics and civic laws
as their own personal standards.
Figure 2
While this model does not provide an answer to resolving an ethical crisis, it does depicit the various
factors that may come into conflict when one is making a decision.
Consistency with personal and social Values
Ethics is sometimes referred to as the study of values and moral behavior and Ethical behavior is
acting in ways consistent with one's personal values and the commonly held values of the organization
and society (Nelson and Quick, 2008, p, 107). In essence this means using personal and social variables
as criteria in organizational decision making and behavioral choice decisions
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Impact on others
A number of the ethical definitions listed above refer to a decision's effect on others. This stakeholder-based
approach is based on the belief that organizational decisions that bring harm to one or more
stakeholders are unethical. This is especially true if the relevant stakeholder are relatively powerless at
at the decision makers mercy. A more rigid standard in this category holds that individuals should not
only avoid doing harm to others, but even more they should work to help others.
Jones’ definition of ethical decision making (taken from Velasquez Rostankowski, 1985) states that, “a
moral issue is present where a person’s action, when freely performed, may harm or benefit others
(1991). It is hard for me to image an organizational decision that does not impact on others. So why
then have a special model for ethical decision making distinct from a model of organizational decision

making? For this reason, I think a unified model of organizational decision is essential, complete with the
impact of ethics, morals or values on the decision maker.
I start with the stakeholder/claimant approach I used in developing the political paradigm (Scholl,
1981). Using this approach, decision makers base organizational decisions on the way in which these
decisions impact claimants to the decision (see Figure 3).
Figure 3
Basic Question. How do decision makers respond when the demands made by the various claimants
are in conflict? The approach that I took is that the relative power of each claimant over the decision
maker determines the degree to which the decision maker attempts to satisfy this demand. Later
Mitchell, Agle, and Wood (1997) developed a model of stakeholder salience in which they argue that
resolution of competing stakeholder claims we be based on the relative power, legitimacy and
urgency of the stakeholder and its claim.
Enter Morals, Values and Ethics. As I later developed the model, I realized the omission of the values of
the decision maker in the model. I added values as an additional claimant. It is unrealistic to assert that
a manager acts as an impartial arbiter of competing stakeholder claims.When none of the claimants
hold significant power over the decision maker, the manager is free to make a decision based solely on
his or her own interests and values (Autonomous decision maker). The managers or decision makers'
perceptions of legitimacy and urgency are colored by their own values and managers often identify
more with the interests of one stakeholder than with others.
New Question. Why do decision makers attempt to satisfy the interests of claimants with little to no
power over them? In my view, this is the question answered by Jones’ (1991) model. He argues that a
variable called moral intensity determines the degree to which the interests (effects of the decision) of
non powerful claimants are considered. Moral Intensity has 6 components:
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1. Magnitude of consequences
2. Social consensus
3. Probability of effect
4. Temporal immediacy
5. Proximity
6. Concentration of effect
I would add another factor derived from the self concept model. This factor is the degree to which the
decision maker’s social identity is tied to the claimant in question (identification), or the degree to
which the decision maker personally identifies with the claimant’s interest.
Ethical conflicts
We are fond of the term ethical or moral dilemmas to refer to intrapersonal conflicts involving our
interests, values and various ethical codes. Here is a partical list of some of the sources of ethical

conflicts. These conflicts are sometimes discussed on the concept of moral-expediant conflict or want
versus should conflict (see Bazerman, Tenbrunsel Wade-Benzoni, 1998).
1. Personal values and social values
2. Self interests and benefit to others
3. Personal values and organizational rules
4. Ethical codes and benefit to others
5. Honesty and benefit to others
6. Personal values and social norms
3.5.4 Controlling ethical Decision Making
Ethics in decision making impacts the choices for words and actions
In confining ethical decision making to a business or group context, decisions on ethics are necessarily
limited to actions and words (e.g., no deceit in sales promotion, use words to manipulate
performance,). Right behavior can be evaluated though actions and words, but there is no way to
know one's thoughts. Per our distinction, thoughts and beliefs (e.g., I want to help and benefit my
customer as opposed to I want their money without regards to what is right, personal gain at the cost of
someone else's reputation, ...) will be confined to moral decisions that are part of personal decision
making.
Clearly our thoughts affect our words and deeds, and in a group context, ethics in decision making
can be evaluated through the tangible evidence and outcomes from words and actions. Again,
thoughts and motivation are left to the personal realm. As a consequence, evaluation of appropriate
ethical behavior will have limitations. In all outcomes there are the following possibilities:
• Right motivation with right action
• Right motivation with wrong action
• Wrong motivation with right action
• Wrong motivation with wrong action
Given the difficulty in exposing true motivation, ethical assessments will inherently be limited to an
evaluation emphasis on action or outcome.
Will an immoral person make an ethical decision or a moral person make an unethical decision?
Most certainly. However, those that seek to make moral personal decisions have the will or desire to
seek what's right over the long term. This will be reflected in their ethics in decision making (decisions
made in the business context). There will also be the case where a person's morals may come into
conflict with the organization's ethics. Expect this to be the greatest source of dilemmas in ethics and
decision making in an organizational context.
How do we incorporate ethics in decision making using our decision making process?
Addressing ethics in decision making in business or other large organizations or groups (e.g.,
government) does point to the need to ensure that key focusing decisions (the decisions highlighted in
green) have been made and are in place. In particular, the business decision for core values should be
in place to provide the goals/requirements that will be used to create and constrain the criteria used in
the network of business decisions. This focusing decision can influence criteria for decisions throughout
the network of business decisions (the decisions in blue), directly influencing ethical decision making
and organizational conduct. Additional related decisions include choosing the business mission and the
code of conduct that will add compliance criteria to decisions across the business decision network.
Here are some criteria that can help ensure appropriate ethical considerations are part of the decisions
being made in the organization:
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• Compliance - Does it conform to the company's values and code of ethics? Does it meet
(should exceed) legal requirements?
• Promote good and reduce harm - What solution will be good to the most people while
• Responsibility - What alternative provides the most responsible response? Does the solution
ensure meeting our duties as a good corporate citizen?
• Respects and preserves rights - Does the option negatively impact an individual's or
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organization's rights?
• Promotes trust - Does the solution lead to honest and open communication (Try these
communication strategies)? Is it truthful? Is there full disclosure?
• Builds reputation - Would a headline of your decision generate pride or shame? Does your
solution add to or detract with the identity you want for the organization?
3.6 Ethical Systems and Decision Making
3.6.1 Eternal Law
Eternal Law - Moral standards are given in an Eternal Law, which is revealed in Scripture or apparent in
nature and then interpreted by religious leaders or humanist philosophers; the belief is that everyone
should act in accordance with the interpretation. (Too many interpretations.)
3.6.2 Utilitarian Theory
Utilitarianism: A Teleological Theory - Moral standards are applied to the outcome of an action or
decision; the principle is that everyone should act to generate the greatest benefits for the largest
number of people. Differs from the economic concept of cost/benefit analysis in that the distribution of
the costs and benefits has to be included as well. (Utilitarianism fails because we can probably all
agree that there are some actions that are simply wrong, despite great apparent net benefits for a
huge majority.)
3.6.3 Universalist Theory
Universalism: A Deontological Theory - The reverse of teleological theory. Moral standards are applied
to the intent of an action or decision; the principle is that everyone should act to ensure that similar
decisions would be reached by others, given similar circumstances. (Immoral acts can be justified by
persons who are prone to self-deception or self-importance, and there is no scale to judge between
wills.
3.6.4 Distributive Justice
Distributive Justice - Moral standards are based upon the primacy of a single value, which is justice.
Everyone should act to ensure a more equitable distribution of benefits, for this promotes individual self-respect,
which is essential for social cooperation. (Dependent upon acceptance of the proposition
that an equitable distribution of benefits ensures social cooperation.)
3.6.5 Personal Liberty
Contributive Liberty - Moral standards are based upon the primacy of a single value, which is liberty.
Everyone should act to ensure greater freedom of choice, for this promotes market exchange, which is
essential for social productivity. (Dependent upon the acceptance of the proposition that a market
system of exchange ensures social productivity.)
3.7 Corporate Citizen and Its Stakeholders
ORGANIZATIONAL RESPONSES TO ETHICAL ISSUES
Corporate responsibility, citizenship governance
Corporate responsibility is the notion that corporations have an obligation to constituent groups in
society other than shareholders and beyond that is prescribed by law or union contract. A central
feature of this particular definition is that an action must be voluntary for it to qualify as a social
responsible action.
Proponents for corporate responsibility argue that:

1. Business is unavoidably involved in social issues – As social activists like to say, business is either
part of the solution or part of the problem. So like everyone else, corporate citizens must
balance their rights and responsibilities.
2. Business has resources to tackle today's’ complex social problems with its rich stock of
technical, financial and managerial resources, the private business sector can tip the scale in
favor of solving society’s more troublesome problems. It is also argued that, without the
support of the society, business could not have built its resource base in the first place.
3. A better society means a better environment for doing business.
4. Corporate social action will prevent government intervention. As evidence by waves of
antitrust, equal employment opportunity and pollution control legislation, the government will
force business to do what it fails to do voluntarily.
Milton Friedman’s arguments against corporate responsibility:
1. If corporations are required to engage in corporate philanthropy – making donations to
charitable organization, schools or hospitals, these acts will distort allocation efficiency.
Corporations are responsible for using shareholders’ funds in profitable ways – in legally
acceptable ways – nothing more. Worrying about which charity to support or which good
deed to perform takes management’s eye off the ‘ball’, the ball being how to increase profits.
2. It is undemocratic for corporations to use shareholders’ funds to support charities or other good
causes. Any such donations can only come at the expense of lower dividends, higher prices or
lower wages.
3. Corporations cannot possess responsibilities. Corporations are social constructs, i.e. they have
been brought into existence by societies passing laws that give legal protection to certain
forms of business associations and structures. Without these legal and social devices,
corporations could not and would not exist. In Friedman’s terms, only individuals can have
responsibilities, not corporations.
WHO BENEFITS FROM SOCIAL RESPONSIBILITY?
Both business and the society in general benefit from social responsibility. There is an array of benefits
to the organization:
2. Retention of talented managers by satisfying their altruistic motives.
3. Help in recruiting talented and socially conscious personnel.
4. Saving public opinion against government intervention.
5. Improved community living standards for employees.
6. Attracting socially conscious investors.
7. A non taxable fringe benefit for executives by donating company funds to their favorite
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1. Tax free incentives to employees.
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causes.
CITIZENSHIP
The term citizen normally relates to the relationship between an individual and the political state in
which the individual lives. It carries with it notions of rights and responsibilities on the part of the
individual and the state. This notion of corporate citizenship assumed by its advocates would reflect the

BUSINESS ETHICS
unedited version
acceptance of certain societal responsibilities. The development of the argument from one of
requiring corporations to act in socially responsible re
ways, to more recent calls for corporations to be
seen as corporate citizens, reflects a desire to lock corporations, both formally and possibly legally into
the responsibilities that this status would confer. With corporations playing an increa
over very many aspects of social and political life, the demand for more accountability and
responsibility on the part of corporations is expected.
Stakeholders and Corporate Social Responsibility
Let’s begin this topic with quotation of Robert W. Lane, the Chairman and CEO of Deere Company,
“If you don’t have honesty and integrity, you won’t be able to develop effective relationships with any
of your stakeholders.”
These stakeholder groups form the basis of success and failure
individuals or groups that have interests, rights, or ownership in an organization and its activities.
Customers, suppliers, employees, and shareholders are example of primary stakeholder groups. Each
has interest in how an organization performs or interacts with them. These stakeholder groups can
benefit from a company’s success and can be harmed by its mistakes.
Secondary stakeholders are also important because they can take action that can damage or assist
the organization. Secondary stakeholders include governments (especially through regulatory
agencies), unions, nongovernmental organizations (NGOs), activities, political action groups, and the
media.
In orders to serve their stakeholders in an ethical and social manner
adapting the model of corporate social responsibility. The term Corporate Social Responsibility goes by
many other terms such as corporate citizenship, responsible business or simply corporate responsibility.
Stakeholders of Organization
When an organization builds ethical and social elements in its operating philosophy and integrate
in its business model, it is said to have possessed a self
ensure its adherence to law, ethics, and norms in carrying out business activities that ensures the serving
the interest of all external and internal stakeholders. In other words, the objective of being socially
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increasingly influential role
ation of the business. Stakeholders are
n on. manner, more and more organizations are
self-regulating mechanism that guides, monitor and
thics, 113
sponsible singly , them

BUSINESS ETHICS
responsible business is achieved when
stakeholders.
unedited version
its activities meet or exceed the expectations of all its
Here is a model for evaluating an organization’s social performance. The model indicates that total
corporate social responsibility can be subdivided into four criteria-criteria
economic, legal, ethical and
discretionary responsibilities.
These responsibilities are ordered from bottom to top in the following illustration. Let’s discuss each
one them briefly.
Total Corporate Social Responsibility
Economic responsibilities:
The first criterion of social responsibility is
the basic economic unit of society. Its responsibility is to produce goods and services that a society
wants and to maximise profit for its owners and shareholders. Economic responsibilities, carried
extreme, is called profit-maximizing view;
view argued that a company should be operated on a profit
increase its profits so long as is stays withing
economic responsibility. The business institution is, above all,
it was advocated by Nobel economist Milton Friedman. This
profit-oriented basis, with its sole mission to
the rule of the game.
The purely profit-maximizing view is no longer considered an adequate criterion of performance in the
world in general. Treating economic gain in the social as the only social responsibility can lead
companies into trouble.
Legal responsibilities
All modern societies lay down ground rules, laws and regulations that businesses are expected to
follow. Legal responsibility defines what society deems as important with respect to appropriate
corporate behavior. Businesses are expected to fulfil f
their economic goals within the legal framework.
Legal requirements are imposed by local councils, state and federal governments and their regulating
agencies. Organizations that knowingly break the law are poor performers in this category. Intention
manufacturing defective goods or billing a client for work not done is illegal. Legal sanctions may
include embarrassing public apologies or corporate ‘confessions’.
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pectations . to the
ulfil Intentionally

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Ethical responsibilities
Ethical responsibility include behavior that is not necessarily codified into law and may not serve the
organization’s direct economic interests. To be ethical, organization’s decision makers should act with
equity, fairness and impartiality, respect the rights of individuals, and provide different treatments of
individual only when differences between them are relevant to the organization’s goals and tasks.
Unethical behavior occurs when decisions enable an individual or organization to gain expense of
society.
Discretionary responsibilities
Discretionary responsibility is purely voluntary and guided by an organization’s desire to make social
contributions not mandated by economics, laws or ethics. Discretionary activities include generous
philanthropic contributions that offer no payback to the organization and are not expected.
Discretionary responsibility is the highest criterion of social responsibility, because it goes beyond
societal expectations to contribute to the community’s welfare.

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CASE STUDY
3.7.1 Use of company Proprietary information

3.7.2 Accuracy of books and records
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3.6.3 Misuses of company assets
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3.8 Shareholders and Business ethics
3.8.1 Rights of and Responsibilities to shareholders
A person who owns shares in a corporation is called a shareholder.
Generally speaking and unless the articles provide otherwise, each share in the corporation entitles the
holder to one vote. The larger the number of shares a shareholder holds, the larger the number of votes
the shareholder can exercise. The Articles of Incorporation describe the rights attached to each
category of shares.
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The Shareholders
Becoming and ceasing to be a shareholder
A person becomes a shareholder by buying shares, either from the corporation or from an existing
shareholder. For example, a person may:
• purchase shares not previously issued by the corporation (referred to as “buying shares from
treasury”), either on incorporation or later; or
• buy shares from an existing shareholder (according to the terms set out in the Articles of
Incorporation) and have the corporation register the transfer.
A person ceases to be a shareholder once his or her shares are sold either to a third party or back to
the corporation (in accordance with the terms of the Articles of Incorporation) or when the corporation
is dissolved.
Rights and responsibilities of shareholders
After paying for their shares, shareholders have the right to:
• vote at the shareholders’ meeting (according to the class of shares);
• share in the profits (dividends) of the corporation (according to the class of shares);
• share in the property of the corporation upon dissolution;
• be called to and participate in shareholders’ meetings;
• elect and dismiss directors;
• approve by-laws and by-law changes;
• appoint the auditor of the corporation (or waive the requirement for an auditor);
• examine and copy corporate records, financial statements and directors’ reports;
• receive the corporation’s financial statements at least 21 days before each annual meeting;
and
• approve major or fundamental changes (such as those affecting a corporation’s structure or
business activities).
The shareholders’ liability in a corporation is limited to the amount they paid for their shares;
shareholders are usually not liable for the corporation’s debts. At the same time, shareholders usually do
not actively run the corporation.
Common Shareholders' Six Main Rights
1. Voting Power on Major Issues
This includes electing directors and proposals for fundamental changes affecting the company
such as mergers or liquidation. Voting takes place at the company's annual meeting. If you
can't attend, you can do so by proxy and mail in your vote.

2. Ownership in a Portion of the Company
• Previously we discussed the event of a corporate liquidation where bondholders and preferred
shareholders are paid first. However, when business thrives, common shareholders own a piece
of something that has value. Said another way, they have a claim on a portion of the assets
owned by the company. As these assets generate profits, and as the profits are reinvested in
additional assets, shareholders see a return in the form of increased share value as stock prices
rise.
Right to transfer ownership means shareholders are allowed to trade their stock on an
exchange. The right to transfer ownership might seem mundane, but the liquidity provided by
stock exchanges is extremely important. Liquidity is one of the key factors that differentiates
stocks from an investment like real estate. If you own property, it can take months to convert
your investment into cash. Because stocks are so liquid, you can move your money into other
places almost instantaneously.
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3. The Right to Transfer Ownership
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4. An Entitlement to Dividends
Along with a claim on assets, you also receive a claim on any profits a company pays out in
the form of a dividend. Management of a company essentially has two options with profits:
they can be reinvested back into the firm (hopefully increasing the company's overall value) or
paid out in the form of a dividend. You don't have a say in what percentage of profits should
be paid out - this is decided by the board of directors. However, whenever dividends are
declared, common shareholders are entitled to receive their share.
5. Opportunity to Inspect Corporate Books and Records
This opportunity is provided through a company's public filings, including its annual report.
Nowadays, this isn't such a big deal as public companies are required to make their financials
public. It can be more important for private companies.
6. The Right to Sue for Wrongful Acts
Suing a company usually takes the form of a shareholder class-action lawsuit. A good example
of this type of suit occurred in the wake of the accounting scandal that rocked WorldCom in
2002, after it was discovered that the company had grossly overstated earnings, giving
shareholders and investors an erroneous view of its financial health. The telecom giant faced a
firestorm of shareholder class-action suits as a result
Shareholder rights vary from state to state, and country to country, so it is important to check
with your local authorities and public watchdog groups. In North America, however,
shareholders rights tend to be more developed than other nations and are standard for the
purchase of any common stock. These rights are crucial for the protection of shareholders
against poor management
3.8.2 Antitrust issues
Definition of 'Antitrust'
The antitrust laws apply to virtually all industries and to every level of business, including manufacturing,
transportation, distribution, and marketing. They prohibit a variety of practices that restrain trade.
Trusts and monopolies are concentrations of economic power in the hands of a few. Economists
believe that such control injures both individuals and the public because it leads to anticompetitive
practices in an effort to obtain or maintain total control. Anticompetitive practices then lead to price
controls and diminished individual initiative. These results in turn cause markets to stagnate and depress
economic growth.

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CASE EXTRACT

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3.8.3 Insider Trading
• In the wake of the Enron scandal, insider trading was once again brought to the front pages of business
newspapers and magazines. The grey areas that surround insider trading help confound the public’s
understanding of the definition of insider trading and the business ethics issues associated with it
• Insider Trading Definition
Insider trading is said to occur when an individual with special knowledge of a corporation uses this
knowledge to buy and/or sell securities such as stocks and bonds to make a profit. This special
knowledge is known as material information and includes any pertinent knowledge about a company
that is not known to the general public.
Suppose, for example, that a company is about to announce that its quarterly earnings were much
higher than that which was forecasted in the previous quarter. An individual on the inside of the
company, say a manager or vice present, who quickly buys up stock in the corporation knowing that
the pending announcement will drive up the price of the company’s stock, is said to have engaged in
insider trading. The underestimated quarterly sales is said to be material information not known to the
general public.
• Material Information and Business Ethics
One of the problems of discussing business ethics in insider trading has to do with the definition of
material information. Although material information is defined by whether it is known or not known by
the general public, a question of who may possess this knowledge often creates a grey area from a
business ethics point of view.
For example, not all insider trading is perpetrated by people inside an organization. The term “insider” is
a misnomer because you need not be inside the company to possess material information. If the vice
president of the large corporation were to tell you about the underestimated quarterly sales, for
example, you are said to possess material information. Using this information to profit from the public’s
ignorance of the information would make you an inside trader even though you are in no way
associated with the organization.
• Insider Trading and Business Ethics
The focus of business ethics when it comes to insider trading has to do with the idea of a level playing
field. Generally, it is believed that securities markets work best when everyone is privy to the same
information. Insider trading creates too much asymmetrical information allowing a few to profit at the
expense of others. Consequently, trading becomes too risky and far fewer trades would take place as
a result. By creating and maintaining a level playing field, investors have the confidence that their
wealth will not be pulled out from under them because of unforeseen, asymmetrical information and
insider trading.

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CASE EXTRACT
Business Ethics and Insider Trading
The business ethics of insider trading are a gray area for many investors right now. With illegal insider
trading cases making the news, ethical arguments for both sides of the issue are emerging. The true
business ethics of insider trading are complex, but they come down to simple principles.
Business ethical issues with insider trading.
From a business perspective, there are still ethical issues with insider trading. Businesses exist to make
money. It's a fact that a capital market accepts and is a cornerstone of American culture. But a few
making money at the expense of the many raises not only moral ethical issues, but also business issues.
When investors don't have the money to invest, or they don't have confidence in the market, they don't
invest. Undermining that confidence can have severe financial repercussions, as well as affecting the
market as a whole; in which case the advantage of a few comes at the cost of many-a cost that can
continue for years.
Insider stock trading and the economy.
Before Black Tuesday and the Great Depression, insider stock trading laws didn't really exist. Companies
took advantage of this absence to inflate company stock values unfairly and make a ton of money on
the market. Ultimately, corporate manipulation led to the stock market crash of Black Tuesday, which
triggered the Great Depression. Insider stock trading laws were enacted after this crash to prevent
companies from manipulating the stock market and otherwise influence investing decisions; without
which, another great market crash could easily occur.
Duty of trust or confidentiality.
Insider trading also violates the duty of trust or confidentiality that one individual or business entity owes
to another. In a duty of trust argument, the person or entity that has access to proprietary information

owes a duty of trust not to use that information against the people who don't possess it. In a capital
market, this takes the form of insider trading. Sharing insider information that leads to investment
decisions is a direct breach of confidentiality.
Moral ethical issues with insider trading.
While moral ethical considerations of insider stock trading aren't the primary focus of ethical discussions,
they still play a part in evaluating insider trading. Essentially, the moral ethical arguments all come
down to one basic fact: It's wrong for investors to take advantage of other investors. In a level playing
field where everyone has the same information, investment success is based on skill.
In a market rife with insider trading, people can use secret information to take advantage of their
opponents. This means that their gain comes at the cost of someone else's loss; not a loss based on skill,
but a loss based on having information that someone else doesn't have. Abusing this information is
morally wrong, as it violates the principals of fairness upon which the capital market is based.
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3.9 Employees and Business Ethics
3.9.1 Reward System, Employees Benefits and Monitoring of Employee Performance
3.9.2 Employee Socialization
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What Is Employee Socialization?
Employee socialization creates good working relationships.
New hires and employees brought together by company acquisition or through a merger have a
period of time where they acclimate themselves to the company culture. According to a 2008 study
done by the Aberdeen Group, approximately 86 percent of organizations that were questioned said
that new hires take at least six months to determine if they will make a long-term commitment to an
organization. If you don't have policies in place to help those new hires adjust to your company culture,
then your turnover rate may go up.

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Definition
o Employee socialization is the process by which new employees understand the
company's policies, the internal culture, how the company hierarchy works and the
ways to function effectively in the organization. Developing programs and policies that
integrate new employees into the company helps the company maintain a consistent
corporate culture.
Examples
o A primary example of employee socialization is new hire orientation. This a time when
new employees develop working relationships with each other, and should be a time
when the company encourages new and existing staff members to become
acquainted as well. Other forms of corporate-sponsored socialization include holiday
parties, family nights at sporting events, social gatherings such as a company bowling
night and a company summer picnic.
Significance
o Employee socialization not only helps new employees understand corporate culture, it
also encourages the development of teamwork between new hires and current staff
members. Allowing employees to become more familiar on a social as well as
professional level can develop strong bonds that improve productivity and help to
reduce employee turnover.
Warning
o While an employee socialization program is essential to integrating new hires into the
company culture, it can be counterproductive if there is too much focus on
socialization. Each new hire requires an effective balance of corporate work policies
and socialization programs to get a comprehensive understanding of productivity in
the company culture.
What Is the Socialization Process for the Workplace?
Work teams have become important to new employee socialization in the early 21st century.
Socialization in the workplace is important to establishing a sense of community and a workplace
culture where people are motivated. The socialization process typically begins during the first few days
of employment when initial assimilation takes place. Strong workplace culture evolves over time with
ongoing socialization effects.
Socialization and Training
o Many organizations intentionally include socialization as part of an employee's initial
training. During the first few days on a new job, employees may feel uncertain or
uncomfortable about the job and work environment. As important as it is to train on
job duties, it is equally important to provide an opportunity for him to meet colleagues
and to begin to build relationships. Workplace relationships play a significant role in our
experiences and enjoyment at work.
Types of Activities

o One of the first things trainers or supervisors can do is to take a new employee around
and introduce her to colleagues in her department or the entire company if it is small
enough. Additionally, taking the new employee in your department to lunch with co-workers
is a good first-day or -week social activity. Explaining common social norms
and activities in the company or department is also a good way to make a new
employee more comfortable.
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Responsibilities
o Some debate exists over who is responsible for a new employee's socialization. In his
May 2010 article Relationship building among co-workers key driver of workplace
socialization, Phil Ciciora points out that too many organizations simply throw a new
employee into the fire and expect them to form their own relationships. Ciciora also
cites a study by human resources professor Russell F. Korte, which indicates about 15
percent of new employee socialization benefits come from managers, but 65 percent
come from co-workers. Thus, HR professionals in an organization should encourage
both supervisors and co-workers to actively participate in new employee socialization.
As time goes on, established employees begin to assume responsibility to help
assimilate new workers.
Effects of Socialization
o Effective socialization for a new hire appears to significantly impact morale and
longevity. Korte's study also showed that responding engineering companies lost
anywhere from 20 percent to 50 percent of new engineers within two years, seemingly
due to poor socialization processes that did not much recruiting efforts. Health and
wellness coach Rose Windale notes that while companies need to socialize employees
early to make them comfortable. Employees can help their own workplace morale by
getting involved and finding opportunities to laugh and enjoy quiet social time with
co-workers.
3.9.3 Workplace Discrimination by age, race/tribe or sex
Age Discrimination
Age discrimination is prohibited by the Age Discrimination and Employment Act. This act made
it unlawful for an employer (1) to fail or refuse to hire or to discharge any individual or otherwise
discriminate against any individual with respect to his compensation, terms, conditions, or
privileges of employment, because of such individual's age; (2) to limit, segregate, or classify his
employees in any way which would deprive or tend to deprive any individual of employment
opportunities or otherwise adversely affect his status as an employee, because of such
individual's age; or (3) to reduce the wage rate of any employee in order to comply with this
Act.
This Act also made it illegal for an employment agency to fail or refuse to refer for employment,
or otherwise to discriminate against, any individual because of such individual's age, or to
classify or refer for employment any individual on the basis of such individual's age.
Further the Act made it illegal for a labor organization (1) to exclude or to expel from its
membership, or otherwise to discriminate against, any individual because of his age; (2) to limit,
segregate, or classify its membership, or to classify or fail or refuse to refer for employment any
individual, in any way which would deprive or tend to deprive any individual of employment
opportunities or otherwise adversely affect his status as an employee or as an applicant for
employment, because of such individual's age; (3) to cause or attempt to cause an employer
to discriminate against an individual in violation of this section.
The Act also made it unlawful for an employer to discriminate against any of his employees or
applicants for employment, or for an employment agency to discriminate against any

individual, or for a labor organization to discriminate against any member thereof or applicant
for membership, because such individual, member or applicant for membership has opposed
any practice made unlawful by this section, or because such individual, member or applicant
for membership has made a charge, testified, assisted, or participated in any manner in an
investigation, proceeding, or litigation under this Act.
Finally, this Act made it unlawful for an employer, labor organization, or employment agency to
print or publish any notice or advertisement relating to employment indicating any preference,
limitation, specification, or discrimination, based on age.
Procedural justice is the idea of fairness in the processes that resolves disputes and allocates resources.
One aspect of procedural justice is related to discussions of the administration of justice and legal
proceedings. The idea of procedural justice can also be applied to nonlegal contexts in which some
process is employed to resolve conflict or divide benefits or burdens. Other aspects of procedural
justice can also be found in social psychology and sociology issues and organizational psychology.
Procedural justice concerns the fairness and the transparency of the processes by which decisions are
made, and may be contrasted with distributive justice (fairness in the distribution of rights or resources),
and retributive justice (fairness in the punishment of wrongs). Hearing all parties before a decision is
made is one step which would be considered appropriate to be taken in order that a process may
then be characterized as procedurally fair. Some theories of procedural justice hold that fair procedure
leads to equitable outcomes, even if the requirements of distributive or restorative justice are not met. It
has been suggested that this is the outcome of the higher quality interpersonal interactions often found
in the procedural justice process, which has shown to be stronger in affecting the perception of fairness
during conflict resolution.
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PROCEDURAL JUSTICE
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What Procedural Justice Is
The notion that fair procedures are the best guarantee for fair outcomes is a popular one. Procedural
justice is concerned with making and implementing decisions according to fair processes. People feel
affirmed if the procedures that are adopted treat them with respect and dignity, making it easier to
accept even outcomes they do not like.
But what makes procedures fair? First, there is an emphasis on consistency. Fair procedures should
guarantee that like cases are treated alike. Any distinctions should reflect genuine aspects of personal
identity rather than extraneous features of the differentiating mechanism itself.
Second, those carrying out the procedures must be impartial and neutral. Unbiased decision- makers
must carry out the procedures to reach a fair and accurate conclusion. Those involved should believe
that the intentions of third-party authorities are benevolent, that they want to treat people fairly and
take the viewpoint and needs of interested parties into account. If people trust the third party, they are
more likely to view the decision-making process as fair.
Third, those directly affected by the decisions should have a voice and representation in the process.
Having representation affirms the status of group members and inspires trust in the decision-making
system. This is especially important for weaker parties whose voices often go unheard.
Finally, the processes that are implemented should be transparent. Decisions should be reached
through open procedures, without secrecy or deception.
Many believe that procedural justice is not enough. Reaching fair outcomes is far more important than
implementing fair processes. Others maintain that insofar as fair procedures are likely to translate into
fair outcomes, they are of central importance.

Fair procedures tend to inspire feelings of loyalty to one's group, legitimize the authority of leaders, and
help to ensure voluntary compliance with the rules. This is true in a variety of settings, from the work
place, to political organizations, to legal contexts.
Issues of procedural justice thus arise in the making of many different types of decisions. For example, in
the context of legal proceedings, procedural justice has to do with ensuring that a fair trial takes place.
The application of law is supposed to ensure impartiality, consistency, and transparency. In order to
ensure that retributive justice is served and that offenders receive fair punishments, judges, and juries
must be unbiased and evenhanded in their sentencings.
In the realm of distributive justice, implementing fair procedures is a matter of setting down rules that
everyone should follow in acquiring and transferring goods. Many believe that following certain rules of
allocation will lead to the fairest distribution of wealth.
There is also an important relationship between justice-based principles and negotiation. Fair processes
yield reliable information that can be used in the decision-making process. Participants must agree
beforehand to the processes of dialogue or exchange that are being used, and be given an equal
voice in any decisions that are made.
Fair rules of collaboration are central to successful mediation or negotiation processes, insofar as they
are the best tools for reaching a decision acceptable to all parties.
Fair procedures of negotiation or legal proceedings are also central to the legitimacy of decisions
reached. In those cases where parties feel forced to accept the results of a decision-making process
they think was unfair, there may be a backlash effect.
Perfect, imperfect, and pure procedural justice
1. Perfect procedural justice has two characteristics: (1) an independent criterion for what
constitutes a fair or just outcome of the procedure, and (2) a procedure that guarantees that
the fair outcome will be achieved.
2. Imperfect procedural justice shares the first characteristic of perfect procedural justice--there is
an independent criterion for a fair outcome--but no method that guarantees that the fair
outcome will be achieved.
3. Pure procedural justice describes situations in which there is no criterion for what constitutes a
just outcome other than the procedure itself.
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The Many Realms of Procedural Justice
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MODELS OF PROCEDURAL FAIRNESS
The theory of procedural justice is controversial, with a variety of views about what makes a procedure
fair. Traditionally these views tend to fall into three main families, which can be called the outcomes
model, the balancing model, and the participation model.
The outcomes model
The idea of the outcomes model of procedural justice is that the fairness of process depends on the
procedure producing correct outcomes. For example, if the procedure is a criminal trial, then the
correct outcome would be conviction of the guilty and exonerating the innocent. If the procedure
were a legislative process, then the procedure would be fair to the extent that it produced good
legislation and unfair to the extent that it produced bad legislation.
This has many limitations. Principally, if two procedures produced equivalent outcomes, then they are
equally just according to this model. However, as the next two sections explain, there are other features
about a procedure that make it just or unjust. For example, many would argue that a benevolent
dictatorship is not (as) just as a democratic state (even if they have similar outcomes).

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The balancing model
Some procedures are costly. The idea of the balancing model is that a fair procedure is one which
reflects a fair balance between the costs of the procedure and the benefits that it produces. Thus, the
balancing approach to procedural fairness might in some circumstances be prepared to tolerate or
accept false positive verdicts in order to avoid unwanted costs (political) associated with the
administration of criminal process.
The participation model
The idea of the participation model is that a fair procedure is one that affords those who are affected
by an opportunity to participate in the making of the decision. In the context of a trial, for example, the
participation model would require that the defendant be afforded an opportunity to be present at the
trial, to put on evidence, cross examination witnesses, and so forth.
The group engagement model
Models have also been proposed to understand the psychological basis of justice. One of the more
recent of these models is the group engagement model.
The group engagement model (GEM), devised by Tom R. Tyler and Steven L. Blader, incorporates past
psychological theories to explain the underlying psychological processes of procedural justice. Based
on social identity theory and relational models of procedural justice, this model suggests that a group's
procedural justice process influences members' identification with the group, which in turn influences
their type of engagement within the group.
According to the model, group engagement is seen as either mandatory or discretionary behavior.
Mandatory behavior is defined by Tyler and Blader as behavior that is required by the group and thus is
motivated by incentives and sanctions. Conversely, discretionary behavior is motivated by internal
values and is seen as more cooperative and therefore ideal within a group.
Depending on the procedural justice processes of the group, the social identity of the members will be
influenced accordingly and different values will be emphasised. The more a member agrees with the
type of procedural justice employed, the more they will identify with their group. This increased
identification results in the internalization of the group's values and attitudes for the group member. This
creates a circular relationship as the group's procedural justice processes will affect group members'
levels of identification and, as a consequence, this level and type of identification will affect their own
values of what is fair and unfair. This, in turn, will then affect how the individuals will engage with their
group, with higher identification leading to discretionary and more desirable behavior.
ETHICAL CONFORMANCE
Codes of conduct and codes of ethics:
In market contexts where competitive forces are significant, consistency in all aspects of an
organization’s operations is imperative. In order to stimulate, foster and maintain consistency in the
behavior of employees, consistency that also reflects the standards of behavior that an organization
wishes its employees to adopt, organizations often develop; codes of conduct and codes of ethics.
Codes of conduct – tend to be instructions or set of rules concerning behavior, as a result, they are likely
to be prescriptive and proscriptive concerning particular aspects of employee behavior. They identify
specifications that must be either adhered to (prescription) or avoided (proscription) However; the
extent to which all possible situations can be addressed within a code of conduct is problematic.
Codes of ethics – tend to be more general in their ternary encouraging employees to display particular
characteristics such as loyalty, honesty, objectivity, and integrity. They do not morally address specific
types of decisions rather they encourage the application of what might be called virtues.

PURPOSE OF CODES OF CONDUCT AND ETHICS
Codes of conduct and ethics can be seen as legitimate and necessary devices for senior
management to develop in order to specify expected codes of behavior of all employees. Each
employ is seen to be representative of an organization by other external to the organization. Thus it is
important that employees reflect a behavior that is commensurate with the persona and reputation
that the organization wishes to portray. According to Bowie and Duska (1990) there are eight roles for
corporate codes:
1. Damage Limitation –To reduce damages awarded by courts in the event of the company
being sued for negligence by one of its employees.
2. Guidance – the “reference point”, the “reminding role” An aid memory for employees when
faced with an ethically complex situation.
3. Regulation – this is the prescribing and proscribing code that will stipulate specific qualities that
are essential e.g. independence, objectivity etc or acts that are prohibitive.
4. Discipline and appeal – this is a role of a code as a benchmark for an organization or a
professional body to decide whether an employee/member has contravened a required
conduct and what form of punishment might ensue. In addition, the code might form the basis
of appeal by the accused.
5. Information – a code expresses to external audiences standards of behavior that can be
expected of the employees/members.
6. Proclamation - this has ‘echoes’ of information, but it relates more to the codes of conduct
developed by professional bodies. E.g. auditing or doctoring. Ethical codes will attempt to
reassure that these monopoly powers will not be abused.
7. Negotiation – this is not dissimilar to guidance in that codes can be used as a tool in
negotiations and disputes with and between professionals, colleagues and employees,
governments etc.
8. Stifling – This is the creation of internal procedures for handling the ethical concerns of
employees that are more concerned with management keeping a lid on internal dissent than
acting as a conduit for internal debate and examination.
1. Codes are primarily concerned with employee conduct that might damage the firm that is they are
skewed towards self protection and
2. Preoccupied with the law.
Factors that will affect the impact of a code:
There are three possible explanations why individuals might display behavior that conform with desired
organizational behaviors.
Internalization: in which the behaviors are accepted by the individual as their own, even though they
are set externally.
Compliance: in which the displayed behavior is associated with the desire to achieve some form of
reward, or avoid an identifiable punishment. This form of behavior is thus not ethically based, but
instrumental, calculating and unreliable.
Identification: in which behavior is shaped by, and mirrors, the behaviors of significant others with whom
the individual wished to identify, the reliability of the behavior in question is problematic.
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ARGUMENTS AGAINST DEVELOPING CODES OF CONDUCT
1. Justification: Lack of any universally accepted set of common principles and ethics, codes
can only be culturally and socially specific.
2. Inability of rules to govern actions: Codes cannot guarantee changes in behavior and
empirical evidence is very limited with respect to examples of codes shaping behavior in
desired ways.
3. Support structures: There is need for support structures within organizations for employees to feel
able to act in accordance with specified codes of behavior where codes do exist. All too
often ethical codes are handed down to employees from the executives above and the
importance of trying to create a community or purpose within the company is ignored.
4. The marginality of codes: Codes tend to be treated as ‘Adds – Ones’, as constrains upon
action, and thus act at the margins of corporate activity. To be effective they need to be at
the centre of corporate beliefs. If left at the margins, a code might be interpreted as a
necessary ‘garnish’ to corporate activities that can be circumvented or ‘negotiated in certain
circumstances.
5. The diminution and ultimate invisibility of individual responsibility:
Codes that specify behavior in particular situations seek to take judgment out of ethically charged
situations. There is however a risk of the individual using “I was only following orders” defense in the
event of an enquiry into a dispute over a public incident. This shifting of responsibility has been termed
‘floating responsibility.’
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TYPES OF JUSTICE
Justice is action in accordance with the requirements of some law.
Whether these rules be grounded in human consensus or societal
norms, they are supposed to ensure that all members of society
receive fair treatment. Issues of justice arise in several different
spheres and play a significant role in causing, perpetuating, and
addressing conflict. Just institutions tend to instill a sense of stability,
well-being, and satisfaction among society members, while
perceived injustices can lead to dissatisfaction, rebellion, or
revolution. Each of the different spheres expresses the principles of
justice and fairness in its own way, resulting in different types and
concepts of justice: distributive, procedural, retributive, and
restorative. These types of justice have important implications for
socio-economic, political, civil, and criminal justice at both the
national and international level.
Justice ensures:
• that people receive
their fair share of the
goods available;
• that people receive
fair treatment from
society's institutions;
• that people's actions
conform to rules of fair
play;
• and that any injustices
are adequately
addressed.
DISTRIBUTIVE JUSTICE, or economic justice, is concerned with giving
all members of society a fair share of the benefits and resources
available. However, while everyone might agree that wealth should
be distributed fairly, there is much disagreement about what counts as a fair share. Some possible
criteria of distribution are equity, equality, and need. (Equity means that one's rewards should be equal
to one's contributions to a society, while equality means that everyone gets the same amount,
regardless of their input. Distribution on the basis of need means that people who need more will get
more, while people who need less will get less.) Fair allocation of resources, or distributive justice, is
crucial to the stability of a society and the well-being of its members. When issues of distributive justice
are inadequately addressed and the item to be distributed is highly valued, intractable conflicts
frequently result.
PROCEDURAL JUSTICE is concerned with making and implementing decisions according to fair
processes that ensure fair treatment. Rules must be impartially followed and consistently applied in
order to generate an unbiased decision. Those carrying out the procedures should be neutral, and
those directly affected by the decisions should have some voice or representation in the decision-making
process. If people believe procedures to be fair, they will be more likely to accept outcomes,
even ones that they do not like. Implementing fair procedures is central to many dispute resolution
procedures, including negotiation, mediation, arbitration, and adjudication.
RETRIBUTIVE JUSTICE appeals to the notion of just dessert -- the idea that people deserve to be treated
in the same way they treat others. It is a retroactive approach that justifies punishment as a response to
past injustice or wrongdoing. The central idea is that the offender has gained unfair advantages
through his or her behavior, and that punishment will set this imbalance straight. In other words, those
who do not play by the rules should be brought to justice and deserve to suffer penalties for their
transgressions. Retributive justice plays a central role in legal proceedings, responding to violations of
international law and human rights, and war crimes adjudication.
However, because there is a tendency to slip from retributive justice to an emphasis on revenge, some
suggest that RESTORATIVE JUSTICE processes are more effective. While a retributive justice approach
conceives of transgressions as crimes against the state or nation, restorative justice focuses on violations
as crimes against individuals. It is concerned with healing victims' wounds, restoring offenders to law-abiding
lives, and repairing harm done to interpersonal relationships and the community. Victims take
an active role in directing the exchange that takes place, as well as defining the responsibilities and
obligations of offenders. Offenders are encouraged to understand the harm they have caused their
victims and take responsibility for it. Restorative justice aims to strengthen the community and prevent
similar harms from happening in the future. At the national level, such processes are often carried out
through victim-offender mediation programs, while at the international level restorative justice is often a
matter of instituting truth and reconciliation commissions.

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CASE EXTRACT
Procedural justice is a key driver of business performance
Many years ago, while serving as chief compliance officer for a company outside Rochester, I received
a report of alleged misconduct involving several senior corporate officers, one of whom happened to
be my boss. The allegations involved misallocation of company funds, falsified expense reports, epic
alcohol consumption and a strip club.
As I began to formulate our investigation plan, the company's CEO, who was not implicated in the
alleged scandal, came into my office and closed the door. He asked me, If these allegations prove to
be true, what would be the proper punishment for those involved? In response I said we merely had an
uncorroborated, anonymous call on our ethics hotline and were a long way from reaching any firm
conclusions about what really happened, let alone deciding what actions might be taken against
those accused of wrongdoing.
The CEO explained that he understood we would need to perform a careful investigation to determine
what really happened, but he wanted to prepare for the worst. He wanted to think through what he
might have to do if several key members of his senior management team were guilty as charged.
Early in an investigation, I am always reluctant to make what-if judgment calls because final
recommendations are so fact-dependent and, as often as not, the allegations are groundless.
Nevertheless, I gave my CEO a candid answer. I said that if we determined that senior corporate
officers instructed subordinates to falsify expense reports to avoid scrutiny of a wild night on the town,
we needed to treat them just like any other employee caught defrauding the company: They should
be fired.
The CEO turned and stared out my office window in contemplation of what I had said. After a long
pause he said, half to himself, I'm not sure how I'm going to run this company without these guys.
Fortunately, it didn't come to that. Our investigation revealed conclusively that there had been no
misallocation of company funds and no falsified expense reports; no one lost his job. But I have always
admired this CEO's moral courage and commitment to procedural justice. He fully intended to treat
senior managers the same as any other employee, regardless of the likely adverse impact on the
company or his ability to keep his commitment to the board of directors to make his numbers. Studies
show that such a commitment to procedural justice is vital to business performance.
In a paper titled Building Value-Based Cultures That Encourage Ethical Conduct and a Commitment to
Compliance, Tom Tyler of New York University, John Dienhart of Seattle University and Terry Thomas of
TRT Consulting set forth research results evidencing three benefits that companies derive from sound
procedural justice practices.
The first benefit is that employees are more likely to follow rules if they view management as legitimate
and managerial policies as moral. The second is that procedural justice is a powerful factor in
employees' judgments that their management is legitimate and that management policies are moral.
The third is that employees who believe their workplace is procedurally fair are more likely to go
beyond their job descriptions to help their organizations.
Interestingly, the study found that the prime factor motivating employees to follow company policies
was not risk associated with non-compliance but instead their assessment of whether the management
team was worthy of respect.
These findings have several significant implications for business leaders who seek both high-performance
teams and compliance with legal and ethical standards. First, reliance on traditional,
policy-laden, command-and-control compliance programs is misplaced. Although policies and
procedures are vital communication tools, it is far more important for managers to treat people with

respect, be transparent in their decision-making and be fair in how they apply the rules to all
employees, regardless of position in the company.
Second, managers must be acutely aware of how their behavior is being perceived by those they
lead. People are incredibly sensitive to personal slights and perceived injustices. Employees may quietly
endure a self-absorbed, thoughtless manager in order to keep their jobs, but at the same time they are
likely to feel less inclined to follow company policies or go the extra mile to advance the company's
interests.
Finally, the research findings regarding the importance of procedural justice provide insight into what
managers can do to earn employees' trust and build high-performance teams. Specifically, Tyler and
his co-authors advise that managers can communicate that they are trustworthy by listening to their
employees and, when implementing decisions, accounting for their actions by explaining how they
have considered the employees, i.e., by acting using fair procedures.
The researchers hasten to add: We are by no means advocating management's abdication of the
responsibility to make decisions. We do, however, suggest that transparency in the process of decision-making
will result in higher levels of employee buy-in and satisfaction.
Corporate leaders devote a significant portion of their time and attention to issues related to product
quality, company finances, the competition, the market, suppliers, customer satisfaction, product
development and other traditional indicators related to business performance. No business can expect
to survive without a focus on such fundamental considerations.
However, as the Tyler study indicates, the most successful firms are likely to be led by people who also
appreciate that companies are not machines. Instead, they are living, breathing, human organizations
in which fairness and procedural justice are essential to acquiring the most valuable of all business
assets-an ethical and engaged work force.
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3.9.4 Workplace health and safety
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CASE EXTRACT
Ultimate responsibility for employee wellbeing rests with the employer, as they have the greatest control
over their employees working conditions (Stone 2005, 660). While ethically, the employer may be
responsible for employees, according to this reader, the reality is that the employee's health and
wellbeing is soley on the shoulders of said employee. Upon persuing workmans' compensation for injury,
according to attorneys, insurance companies and Ombudsman, the burden of proof of injury is on the
employee, and therefore much of the responsibility for preventing injury. (Coklyat 2007, 1)
Occupational Health and Safety (OHS) is concerned with the provisions of a safe and healthy working
environment (Stone 2005, 660). OSHA is only able to regulate violations when they occur and when
they are plainly visible or spoken of by current or recent employees. Many workers fail to present critical
work violations due to lack of time or interest and employers can become a law unto themselves.
OSHA can be greatly bound by limitations of people power and timing regarding observing and
penalizing violations (Coklyat 2007, 2). Organisations that compromise on health and safety standards
expose their employees to injuries and fatalities. The establishment of a safe workplace is not only
ethical and socially responsible; it is also cost effective (Sappey 2006, 372).

Stewart, Ledgerwood and May (1996, 2) define ethics simply as the study of what is good or right for
human beings. Business ethics and health and safety are significantly intertwined, since managerial
and organisational decisions and policies affect workers safety and wellbeing. Stewart et al (1996, 2)
further explains that organisations are ethically obliged to make occupational health and safety an
utmost priority through corporate social responsibility. Krause (2007, 1) states that today ethics relates to
corporate social responsibility; what organisations owe their employees, customers, shareholder and
the community at large and how the fulfilment of these obligations will ensure the long term
sustainability as a company. Organisation could start meeting the most important obligation, by valuing
the sanctity of human life. Krause (2007, 1) says that providing a safe a workplace lays the foundation
for organisational success.
Organisations unfortunately ignorantly assume that employee health and safety represents
unnecessary resource expenditure which will ultimately detract from their bottom line (Stewart et al
1996, 2. It can no longer be acceptable for organisations around the world to put profit levels ahead of
employee health and safety. This article will discuss OHS and its ethical implications. It will provide
examples from industrialised countries such as Australia and USA, illustrating that it is not only
developing countries such as China that have poor levels of OHS.
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OHS Business Ethical Implication
There are numerous concepts and theories within the field of Business Ethics. For the relevance of this
article; concepts such as stakeholder, dirty hands, moral myopia and moral muteness will be discussed.
OHS and Stakeholders
Organisations have a responsibility to a multitude of stakeholders and therefore must ensure the health
and safety of its workers. Grace and Cohen (2007, 53) define the stakeholder as “a group or individual
who can affect, or is affected by, the achievement of the corporations purpose”. Possible stakeholders
of an organisation that compromises the health and safety of their workers
The employees: This group is obviously the most directly affected. Of all the human rights, isn’t being
alive and health the most fundamental one?
The investors, sponsors, etc: In today’s modern world, where there is greater emphasis laid on corporate
social responsibility, this group of stakeholders should use their powerful position to exert influence to
ensure organisations not only comply with legal requirements of OHS legislation in their country, but also
goes above and beyond to value the health and safety of their employees. Poor public image of an
organisation will ultimately result in the long run to lower profits levels. This is an important stakeholder
group as it has a financial vested interest in an organisations ethical behaviour in regards to its
treatment of its employee’s wellbeing and working environment.
Community: There are greater demands from the global community, for organisations to behave in an
ethical and socially responsible manner. Poor or non existent OHS policies that result in injuries and
fatalities, affect communities at large as they might have a friend, relative that has been exposed to
occupational hazards, or might possibly face one in the future. The broader community will have a
vested interest, as they too are employees and see the merit in organisations valuing employee health
and safety.
Dirty Hands
‘Dirty hands’ is often used as an excuse, by organisations that have an indifferent attitude to OHS.
Spending time and resources are often seen by these unethical companies as a waste, fearing that it
will jeopardise profit levels. Business is seen by many as a game, where nice guys finish last.
Organisations that ensure a safe working environment for their employees aren’t obliging the workers
with any extra favours. It is every human being’s fundamental right to work in an environment that isn’t
detrimental to ones health and life. Cutting corners that will ultimately cost someone’s life is
unacceptable. Unfortunately many organisation and their leaders are of the opinion that if a business is
to survive difficult decision must be made, that might be unethical (Grace and Cohen 2007, 45).
Employees enable businesses to grow and flourish and to think many organisations expose them to
occupational hazards is not only unethical but also inhumane.

3.9.5 Honesty, Conflict of Interest, Privacy of Employee records
CASE EXTRACT
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CASE EXTRACT

3.10 Consumers and Business Ethics
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3.10.1 Relations with customers
Ethical Customer Relationships
Ethical relationships concerning your company's interaction with customers can have a direct impact
on the success of your company. Ethical customer relationships should include honesty with customers,
delivering a good product or service and backing the product or service. A company policy that
encourages positive relationships with customers can help position your company as a trusted one.
While unethical behavior, such as making false claims, may gain you immediate customers, this same
behavior will lose those customers for you in the long run.
CASE STUDY
The Role Of Business Ethics In Relationships With Customers
When discussing the relationship between ethics and customers, you first have to ask yourself, Can an
organization really influence customers with the way it conducts its business? My answer to that
question, having been in this business for 28 years, is yes.
Let me begin by making it clear that influence does not mean attempting to muscle a customer into
behaving one way or another. Rather, influence comes from integrity and trust. Integrity, to me, is the
foundation of trust, and trust is the grease of commerce.
At Clorox we know that in order to build and maintain trust with our customers we have to first develop
a strong, company-wide reputation for integrity. We accomplish that through clearly established
internal ethical principles. For example, all of our employees are required to take part in annual online
training with ethics courses. They also participate in refresher courses throughout the year, covering
various ethical practices and, of course, all relevant laws.
We also establish strict ethical processes for our customer-facing teams and their support folks, all with
appropriate checks and balances. These methods give us a very transparent way of going to market.
We currently have a company-wide code of conduct to which all employees, directors, vendors and
suppliers must adhere. And we also have a formal Supplier Code of Conduct that articulates our
expectations with respect to human rights and labor, health and safety, the environment, business
conduct and ethics. When retailers and suppliers know that an organization lives by a principled code
of conduct--and follows the policies that result from that code--we are able to build a business
relationship on a foundation of trust.
But the line doesn't stop at internal controls and ethics policies. In order to truly develop trust with their
customers, companies must walk the walk. For example, any activity that we engage in with customers
will be fair and defensible, no exceptions. This means we can approach our biggest as well as our
smaller customers in the same manner. We let all our potential and current customers know that
everybody gets a fair chance; everything in the process will be transparent.
Likewise, to maintain a reputation of trust, ethical companies must take a principled stand against
customers that behave in a less than ethical manner. That includes making the difficult decision of
cutting off a large customer if that customer is attempting to influence the company to act in a way
that it can't fairly defend to other customers.
When a company models that kind of behavior inside and out, when it walks the walk, then it
establishes a solid foundation of trust. It solidifies its reputation and makes business transactions and
partnerships happen much more quickly. Whatever a management team can do to engender that
trust with customers, with suppliers or with whichever constituency it's dealing with--consistent with a set
of values and principles that it just will not violate--is only to its long-term benefit.

Of course, the natural push-back that many executives will receive when taking this type of stand with
customers comes from the need for constant quarter-by-quarter growth. Certainly all organizations
must balance the need to further top-line growth while maintaining their ethical principles. It can be a
tough balance. You have to stick to your principles, to your code of conduct, while working toward
delivering an outlier performance quarter after quarter.
When you come across a red flag from a customer, you just have to be principle-based, keeping that
far-reaching perspective, and say, I've got a long-term view of this business, and I'm not going to worry
about it in the context of the next quarter. We're going to be doing the right things for the business in
the long haul.
That is the stand that Clorox has taken, and we're a 96-year-old company. We take this stand because
we want to be around for another 200 years, not another 2. Quite simply, companies without an
embedded foundation of principles and values will not survive.
If you model that behavior, if you lead from the front like that, I can tell you from my own experience
that over time your business relationships improve, you win more deals and you gain the respect of all
your constituencies.
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3.10.2 Bribery
Bribery means to offer, promise or provide an undue benefit to a public official with the intention of
obtaining or retaining an improper advantage by encouraging the official to act, or refrain from
acting, in connection with an official duty.
3.10.3 Marketing and Advertising Issues
ETHICAL PRODUCT AND DISTRIBUTION PRACTICES
Several product-related issues raise questions about ethics in marketing, most often concerning the
quality of products and services provided. Among the most frequently voiced complaints are ones
about products that are unsafe, that are of poor quality in construction or content, that do not contain
what is promoted, or that go out of style or become obsolete before they actually need replacing. An
organization that markets poor-quality or unsafe products is taking the chance that it will develop a
reputation for poor products or service. In addition, it may be putting itself in jeopardy for product
claims or legal action. Sometimes, however, frequent changes in product features or performance,
such as those that often occur in the computer industry, make previous models of products obsolete.
Such changes can be misinterpreted as planned obsolescence.
Ethical questions may also arise in the distribution process. Because sales performance is the most
common way in which marketing representatives and sales personnel are evaluated, performance
pressures exist that may lead to ethical dilemmas. For example, pressuring vendors to buy more than
they need and pushing items that will result in higher commissions are temptations. Exerting influence to
cause vendors to reduce display space for competitors' products, promising shipment when knowing
delivery is not possible by the promised date, or paying vendors to carry a firm's product rather than
one of its competitors are also unethical.
Research is another area in which ethical is sues may arise. Information gathered from research can be
important to the successful marketing of products or services. Consumers, however, may view
organizations' efforts to gather data from them as invading their privacy. They are resistant to give out
personal information that might cause them to become a marketing target or to receive product or
sales information. When data about products or consumers are exaggerated to make a selling point, or
research questions are written to obtain a specific result, consumers are misled. Without self-imposed

ethical standards in the research process, management will likely make decisions based on inaccurate
information.
SPECIAL ETHICAL ISSUES IN MARKETING TO CHILDREN
Children are an important marketing target for certain products. Because their knowledge about
products, the media, and selling strategies is usually not as well developed as that of adults, children
are likely to be more vulnerable to psychological appeals and strong images. Thus, ethical questions
sometimes arise when they are exposed to questionable marketing tactics and messages. For example,
studies linking relationships between tobacco and alcohol marketing with youth consumption resulted
in increased public pressure directly leading to the regulation of marketing for those products.
The proliferation of direct marketing and use of the Internet to market to children also raises ethical
issues. Sometimes a few unscrupulous marketers design sites so that children are able to bypass adult
supervision or control; sometimes they present objectionable materials to underage consumers or
pressure them to buy items or provide credit card numbers. When this happens, it is likely that social
pressure and subsequent regulation will result. Likewise, programming for children and youth in the mass
media has been under scrutiny for many years.
In the United States, marketing to children is closely controlled. Federal regulations place limits on the
types of marketing that can be directed to children, and marketing activities are monitored by the
Better Business Bureau, the Federal Trade Commission, consumer and parental groups, and the
broadcast networks. These guidelines provide clear direction to marketers.
ETHICAL ISSUES IN MARKETING TO MINORITIES
The United States is a society of ever-increasing diversity. Markets are broken into segments in which
people share some similar characteristics. Ethical issues arise when marketing tactics are designed
specifically to exploit or manipulate a minority market segment. Offensive practices may take the form
of negative or stereotypical representations of minorities, associating the consumption of harmful or
questionable products with a particular minority segment, and demeaning portrayals of a race or
group. Ethical questions may also arise when high-pressure selling is directed at a group, when higher
prices are charged for products sold to minorities, or even when stores provide poorer service in
neighborhoods with a high population of minority customers. Such practices will likely result in a bad
public image and lost sales for the marketer.
Unlike the legal protections in place to protect children from harmful practices, there have been few
efforts to protect minority customers. When targeting minorities, firms must evaluate whether the
targeted population is susceptible to appeals because of their minority status. The firm must assess
marketing efforts to determine whether ethical behavior would cause them to change their marketing
practices.
ETHICAL ISSUES SURROUNDING THE PORTRAYAL OF WOMEN IN MARKETING
EFFORTS
As society changes, so do the images of and roles assumed by people, regardless of race, sex, or
occupation. Women have been portrayed in a variety of ways over the years. When marketers present
those images as overly conventional, formulaic, or oversimplified, people may view them as
stereotypical and offensive.
Examples of demeaning stereotypes include those in which women are presented as less intelligent,
submissive to or obsessed with men, unable to assume leadership roles or make decisions, or skimpily
dressed in order to appeal to the sexual interests of males. Harmful stereotypes include those portraying
women as obsessed with their appearance or conforming to some ideal of size, weight, or beauty.
When images are considered demeaning or harmful, they will work to the detriment of the
organization. Advertisements, in particular, should be evaluated to be sure that the images projected
are not offensive.
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3.10.4 Environmental Issues
Environmental Issues of Business Ethics
There are many environmental moral issues relevant to business. (a) ecology, (b) traditional business
attitudes towards the environment, (c) problems involving environmental abuse, (d) environmental
protection, (e) methods to pay for environmental protection, and (f) other issues involving
environmental ethics.
To make the grave importance of the environment clear, Shaw briefly discusses many of the
environmental issues we face today:
1. Pesticides often harm or kill fish and birds (394), and can cause illness in children (395). Too
much pesticide is dangerous to adults, so only safe levels are allowed keeping adults in mind,
but such levels are still probably too dangerous for children. A 2011 study by UC Berkeley has
shown that prenatal exposure of pesticides in pregnant women can also lower the IQ of their
children.
2. Air pollution contaminates the air, despoils vegetation and crops, corrodes construction
materials, and threatens our lives and health (ibid.). A 2011 study by the EPA claims that the
Clean Air Act saved over 160,000 lives in 2010, but many people still suffer illness and die from
air pollution and more lives can be saved by stricter standards. We generally assume we get
sick from allergies, bacteria, or viruses; but pollution is a very common cause of illness as well.
3. The ozone layer was damaged from chloroflourocarbons (ibid.).
4. Carbon dioxide (and other greenhouse gasses) are causing global warming (ibid.)
5. Toxic chemicals in our environment cause many health issues (ibid.).
6. Nuclear power plants require minding, processing, and transporting of nuclear materials that
causes cancer in many people, and it’s unclear that our methods of disposing of nuclear
waste are entirely safe (ibid.).
In addition to the examples given by Shaw, a 2007 study by David Primentel concludes that pollution
could cause 40% of all death worldwide.
The importance of environmental destruction is recognized by every theory of justice and every moral
theory. Destroying the environment often violates our right to non-injury and endangers our health.
Additionally, some people also think that it’s morally preferable to protect rather than harm nonhuman
animals. Any moral system that is unable to admit that animals should be protected could be flawed.
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Business and ecology
Businesses damage the environment when they take natural resources from the Earth and dispose of
waste. All of this is done within the natural environment, a kind of ecological system or “ecosystem.”
“Ecology refers to the science of the interrelationships among organisms and their environments. The
operative term is ‘interrelationships,’ implying that an interdependence exists all entities in the
environment” (397). For example, a pond is an ecosystem that contains a large number of living
organisms that exist in a complex web of dependence and interdependence.
Many companies discharge waste into bodies of water, like ponds. Sometimes this is relatively harmless
to the ecosystem, but increasing the amount of waste could become too toxic for some of the
organisms. If the toxins kill certain plants in a pond, then many fish could die. This in turn could frustrate
fishermen who make a living by catching fish in the pond (397-398). All of the damage done to the
pond, fish, and fishermen are “externalities” or “spillover”—costs to third parties. Business transactions
aren’t always just transactions between two people during trade. Sometimes other people and
nonhuman animals are also harmed by business transactions.

Imagine that a company dumps twice as much pollution into a pond to save $9,000 a year, but it kills
the fish in the pond. The fishermen lose $10,000 a year from the pollution because their primary source
of income is lost. In that case the company’s decision to dump more waste into the pond actually
causes more harm than good, and it’s unfair to save money to pollute when other people have to pay
for those savings.
Additionally, financial harm isn’t the only kind of harm we are dealing with. I want to point out that the
fish and other animals that eat the fish are also harmed. It’s not obvious that we have a right to harm
animals indiscriminately to save money or make money. However, whenever we take the Earth’s
resources or pollute, animals are often harmed. Animals can die from toxins, such as air pollution; and
they can die when they lose their habitat.
Is it always immoral to intrude into ecosystems and harm living organisms? That seems unlikely to me
given how impractical it is. It’s almost impossible to do no harm to ecosystems in business because we
need the Earth’s resources to conduct business and sell products, and many companies have no
choice but to dispose of waste and pollute one way or another.
It’s not obvious to me when damage done to the environment is warranted, nor is it obvious to what
extent people are warranted to harm the environment. Nonetheless, it’s morally preferable to do so as
little as possible while conducting business and attempting to make a reasonable profit. It’s possible for
a company to lose all profit in an attempt to protect the environment, but it seems unreasonable to
think that all companies should lose their profits to environmental protection. There might be some
companies that are so inefficient or harmful that they shouldn’t exist in the first place, but many
companies that harm the environment only do so because it’s necessary to satisfy our needs.
Business’s traditional attitudes towards the environment
Businesses have traditionally shown egregious indifference towards the environment. Environmental
protection was rarely seen as an issue. A company would harm the environment to whatever extent
was profitable, and they often harmed the environment despite the fact that it was unwarranted to do
so. Shaw discusses the attitudes of businesses that lead to unwarranted environmental damage. In
particular, people saw the “natural world as a ‘free and unlimited good’” (398). People at one point
thought that the world’s resources could be taken without end and without any morally significant
harm done. Pollution could damage the environment, but the damage done was considered to be
insignificant because the world was seen as such a large place.
However, resources aren’t unlimited and many people and animals are harmed from environmental
damage. In Garrett Hardin’s parable, “The Tragedy of the Commons,” he describes the importance of
the environment to human interests based on the fact that it’s limited (399). He describes villages who
share a pasture and let farm animals graze indiscriminately. The meadow eventually loses all its grass
and the villagers are left with a serious problem of having no way to feed their animals.
Hardin’s parable is often relevant to real life issues, such as overfishing (ibid.). If the fish population is
depleted by fishermen, then the fishing industry will go out of business.
The ethics of environmental protection
How is the environment relevant to business ethics? First, it’s in our interest to protect the environment
insofar as we are human beings and we are often harmed by environmental damage and measures to
protect the environment can benefit us all (400). Second, many people don’t feel responsible for
harming the environment because they don’t personally do much harm to it (ibid.). Third, companies
that harm the environment have externalities (and harm others) that they unfairly benefit from, which
can violate our right to non-injury (ibid.). I would like to add that externalities can also be in the formfo
harm done to nonhuman animals.
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3.10.5 Product Liability and safety
Consumer Safety and Product Liability [rough draft]
Examples of products and services that have harmed consumers:
• Dow Chemical's silicon breast implants [note that they are back on the market].
• The fungicide Benlate which has caused birth defects.
• Cigarette lighters that explode or burst into flames [see CPSC recalls for these; there are many
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faulty ones].
• Oral contraceptives [cause blood clotting, heart disease, etc.].
• ATV's or all-terrain vehicles [quite dangerous, many recalls].
• Medical devices and drugs [many of these appear on the recall lists: improper labeling,
counterfeit drugs, wrong doses].
• Many types of automobiles [see how many Fords have been recalled; even Ferraris have
problems].
• Children's toys, clothing, furniture [cribs, etc.].
• Childrens' swing sets and play sets [treated lumber is the latest -- the arsenic leaks leaks into the
ground].
What is the usual way consumers can deal with defective or dangerous products or services? Is
litigation the best way to make sure that consumers are not harmed by products and services? Are
there other avenues?
Since producers generally operate on the basis of a cost/benefit analysis, does litigation tip the scales
in the direction of safety and reliability? What do you think?
The ethical question is this: How much responsibility should the producer or service provider have? How
liable should they be? On the other hand, how much responsibility does the consumer bear to learn
how to use products properly and safely? When does the consumer become guilty by virtue of
negligence or carelessness? Consider the case of the hot coffee at McDonalds. Was the coffee too
hot, or was the consumer too careless? How hot is coffee expected to be?
The issue of punitive damages or penalties imposed by a court over and above trial expenses and
medical expenses is a big one. Are punitive damages a way to teach the seller a lesson? Or are they
unfair? The case of Connie Daniell, who locked herself in a trunk of a car and sued the auto company
for not having latches inside of the trunk.
3.11 Suppliers and Business Ethics
3.11.1 Ethics in Negotiations
How Do You Persuade Your Suppliers?
If you are like most purchasers, you are under pressure to generate lots of cost savings. Unfortunately,
the pressure to boost the bottom line compels some less skilled purchasers to cross the ethical line. They
use questionable techniques.
There are five common ethics-related profiles of purchasing negotiators. Which describes you?
The Liar - The Liar will tell any number of lies to a supplier to persuade that supplier to improve its terms.
An example of a lie would be telling a supplier that another supplier has a price that is 10% lower when
such a statement isn't true. UNETHICAL!

The Exaggerator - The Exaggerator might not tell an outright lie, but her words and behavior may be
designed to trick a supplier into thinking that a larger quantity or longer term contract is to be
expected. The Exaggerator's intent is to get a better price and not follow through with implied quantity
or term commitments. UNETHICAL!
The Open Book - The Open Book will give a supplier information about competitors' proposals in order
to persuade a supplier to offer a better deal. Of course, the competing suppliers expect their proposals
to be kept confidential. UNETHICAL!
The Cheap Date - Despite the fact that he is engaged in a negotiation situation with the supplier, The
Cheap Date will accept meals, entertainment, and/or gifts at the supplier's expense. Even if such
acceptance does not actually influence The Cheap Date's decision-making, it creates the perception
within The Cheap Date's organization that he is being bought. UNETHICAL!
The Professional - The Professional considers ethics when negotiating. She knows the characteristics of
the other four profiles and consciously avoids that type of behavior. And she does a great job of
negotiating, too!
There are so many effective ethical negotiation techniques available. You should never have to resort
to the practices of The Liar, The Exaggerator, The Open Book, or The Cheap Date to get the results you
want.
3.12 Competitors and Business Ethics
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3.12.1 Relations with competitors
As a business, your competitors are just that: competitors. However, the way you treat your competitors
may affect how your customers and the media perceive your business, your ethics, and your
friendliness. For those reasons, and more, it's important that you carefully consider how you act with
your competitors. In this article we provide guidance on how you can have a good relationship with
competing businesses while limiting the impact this will have on your business success. When customers
see you have strong ethics in how you deal with your competitors, they will know for sure that you'll
treat them right.
Congratulate Their Success
When a competing business does something well, you should be prepared to say so. If for example, a
competing business has managed to gain greater traction than you, then you should point out that
they have done really well, and are a good business, while also pointing out the advantages your
business is able to offer that your competitors cannot. This is a good demonstration of the strong ethics
within your business, and will certainly leave a positive impression.
Recommend Business Their Way
If you and your competitors are able to cater for different categories of customers, then why not
recommend them when you can't offer a service to a certain customer? This will make you look good,
and they might also be able to do the same for you in return. In the end, both of you will end up with
more business as a result.
Sales Marketing Strategies
When it comes to sales and marketing, it can be tempting to point out the negative aspects of your
competitors. And, in some cases, it may be an essential part of closing the sale. However, rather than
criticising your competitor, why not mention both positive and negative points of their service? Such as:
yes, you are correct, Company A is able to offer lower pricing than we can. For customers that are
more price sensitive, and that 100% up-time isn't essential, they can be a great solution. We cater for
more IT-dependant organisations and employ 3 times as many engineers per customer. Company A

also use an overseas call-centre, which is a great way to keep costs down, and provide a more
efficient service, but we prefer to assign each customer a dedicated account manager.
However, on some occasions your competitors may not provide a good service. In this case, you
should be as polite and tactful about your competitors as possible. You should also cite sources, such as
articles and media coverage that supplement your point. After pointing out any negative issues, you
might also wish to explain how the company responds to the issues you raised. This will show a certain
level of objectivity on your part and will demonstrate that your business has strong ethics and is willing
to appreciate your competitors' problems.
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Don't Bite
When a competitor speaks negatively about your business, it can be hard to know what to do.
Especially when you want to ensure your business appears to be friendly and considerate of business
ethics. Although it's important to respond to any issues in an articulate way, you should avoid getting
involved in any tit-for-tat. This will help your business to keep its reputation intact.
3.13 Society and Business Ethics
3.13.1 Relations with local communities
Community relations refers to the various methods companies use to establish and maintain a mutually
beneficial relationship with the communities in which they operate. The underlying principal of
community relations is that when a company accepts its civic responsibility and takes an active interest
in the well-being of its community, then it gains a number of long-term benefits in terms of community
support, loyalty, and good will. Community involvement builds public image and employee morale,
and fosters a sense of teamwork that is essential in long-term success, Lisa Desatnik noted in Cincinnati
Business Journal.
A comprehensive, ongoing community relations program can help virtually any organization achieve
visibility as a good community citizen. Organizations are recognized as good community citizens when
they support programs that improve the quality of life in their community, including crime prevention,
employment, environmental programs, clean-up and beautification, recycling, and restoration. Some
other examples of ongoing programs might include scholarship programs, urban renewal projects,
performing arts programs, social and educational programs, children's activities, community
organizations, and construction projects. On a more limited scale, small businesses might achieve
community visibility and engender good will by sponsoring local sports teams or other events. Support
may be financial or take the form of employee participation.
Good community relations programs offer small businesses a wide variety of benefits. For instance, they
give employees a reason to be proud of the company, which increases loyalty and may help to
reduce labor and production costs. Furthermore, a company with happy employees and a good
reputation in the community is likely to attract highly qualified new employees. A small company also
might generate new business through the contacts and leads it generates in its community relations
activities. Such contacts might also make it easier for the company to obtain financing for expansion,
find promising new locations, or gain favorable treatment in terms of taxes, ordinances, or utilities.
Good community relations can also be beneficial in times of crisis, such as a fire or a plant closing, by
rallying the community around the affected business. Some companies don't achieve success despite
their small-town locale, David Stamps wrote in Training. They succeed because of it.
Types of Community Relations Programs
Businesses can become involved in their communities in any number of ways. Some recommended
routes toward increasing community involvement include: taking an active interest in community
problems; sponsoring youth activities; participating in local government; joining business and service
groups; purchasing materials and supplies from local companies; encouraging community education

and culture; making offices or other facilities available to community organizations; supporting local
charity drives; and taking part in civic activities.
Soderberg discusses a number of specific programs designed to increase a business's visibility and
prestige within a community. For example, the company might volunteer to develop a civic program,
like a charity drive or auction. In addition, the business owner, or another company representative,
could give talks before the local chamber of commerce or civic association. The company could also
invite community groups to tour its plant or offices, or could make its facilities available to such groups
for meetings or events. Alternatively, the company could prepare an informational videotape about its
products, services, employment policies, and overall mission and make this resource available to the
community. Informational brochures and newsletters might also be distributed to civic and government
leaders. Another way to improve community relations might be to beautify the company's surroundings
with a fountain, sculpture, or garden, so that it becomes a local landmark. Whichever types of
community relations programs are used, it is important to keep the media informed about the
company's activities.
Soderberg stresses that for a business, community relations should involve more than just an annual
contribution to the United Way. Instead, the the business owner should become personally involved in
the effort, and should encourage employees to participate as well. A company's employees should try
to represent it well in all their interactions—from practicing good manners on the road while driving
company vehicles to treating customers and even visiting salespeople with courtesy. In order to
motivate employees to be good company representatives, small business owners should take whatever
steps are needed to boost morale. These might include maintaining an open-door policy, setting up a
complaint box, or recognizing employees who are helping the community.
3.14 Government, Regulations and Business Ethics(MAKE NOTES)
3.14.1 Relations with foreign governments
3.14.2 Political activities and contributions
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Recommended Textbooks
Crane AMatten D. (2003) Business Ethics, London, Oxford
Dunlop A
(1998)
Corporate Governance and Control, London CIMA Publishing.
Costa. JD
(1988)
The Ethical Imperative: Why Moral Leadership is GoodBusiness,
Toronto, and Harper Collins.
Fritzsche, D J
(1997)
Business Ethics: A Global Management Perspective. New York,
McGraw-Hill International Editions.
LaRue, T.H.
(1996)
The Ethics of Management, (3rd Edition) New York. Irwin

Assessment Specification Grid (for Examination)
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Subject
Objective
Number
Topics Topic
Weighing
Question
Type
No. of
Questions
1,2,6 10 Understanding of ethics in Business 25% Essay + Case Study 2
3,6 10 The Importance of Ethics in Business 10% Essay + Case Study 1
4 10 Methods of Ethical Analysis 5% Essay + Case Study ½
5 10 Corporate Governance 5% Essay + Case Study ½
6,7,8 10 Ethics and Decision Making
Ethics System and Decision Making
15% Essay + Case Study 1
9 10 Corporate Citizen and its Stakeholders
Shareholders and Business Ethics
Employees and Business Ethics
Consumer and Business Ethics
Suppliers and Business Ethics
Competitors and Business Ethics
Government Regulations and Business
Ethics
40% 3
Total 100 8
NOTE: The examination will consist of (8) essay questions and candidates will answer five (5)
questions. Each question carries 20 marks.
OR
The examination will consist of one Case Study carrying 40 marks and three (3) out of
five (5) questions carry 20 marks each.

BUSINESS ETHICS

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