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Chapter 1ETHICS AND BUSINESS

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CHAPTER OBJECTIVES

After exploring this chapter, you will be able to:1. Explain why ethics is important in the business environment.2. Explain the nature of business ethics as an academic discipline.3. Distinguish the ethics of personal integrity from the ethics of

social responsibility.4. Distinguish ethical norms and values from other business-related

norms and values.5. Distinguish legal responsibilities from ethical responsibilities.6. Explain why ethical responsibilities go beyond legal compliance.7. Distinguish ethical decision-making from other practical decision

situations.

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PURPOSE OF OUR DISCUSSION: LEARNING OBJECTIVES

Sensitivity: To insure that you are aware of/sensitive to ethical issuesin all aspects of the business environment and professional exchanges.

Skill-building: To provide you with reasoning and decision-makingtools to help you think through ethical issues and to respond sensiblywhen faced with such issues.

Integration: To enable you to effectively integrate your personalvalues and reasoning skills into all of what you do and stand for.

Practice: To give you opportunities to "practice" values integrationand ethical reasoning processes in case experiences.

Understanding: To offer you a deep understanding of the role youplay in forming organizational culture and the means by which you canimpact it in a positive manner.

Reinforcement: To reinforce the resources available to you ifconfronted with ethical situations.

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BUSINESS ETHICS IS A PROCESS OF RESPONSIBLE DECISION-MAKING

The scandals and ruin experienced since the Enron collapse werebrought about by ethical failures.

We will discuss a decision-making model that can help individuals tounderstand such failures and avoid future business and personaltragedies.

Why explore ethics in business?

Because

Ethics Failures = Business Failures

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WHY IS ETHICS IMPORTANT IN THE BUSINESS ENVIRONMENT? (1 of 2)

Consider the range of people who were harmed by thecollapse of Enron. Stockholders lost over $1 billion in stock value.

Thousands of employees lost their jobs, their retirement funds, andtheir health care benefits.

Consumers in California suffered from energy shortages andblackouts that were caused by Enron’s manipulation of the market.

Hundreds of businesses that worked with Enron as supplierssuffered economic loss with the loss of a large client.

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WHY IS ETHICS IMPORTANT IN THE BUSINESS ENVIRONMENT? (2 of 2)

Enron’s accounting firm, Arthur Andersen, went out of businessas a direct result.

The wider Houston community was also hurt by the loss of amajor employer and community benefactor.

Families of employees, investors, suppliers were also hurt. Many of the individuals directly involved will themselves suffer

criminal and civil punishment, including prison sentences forsome.

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Multiply the harms by the dozens of other companies implicated insimilar scandals and one gets an idea of why ethics is no longerdismissed as irrelevant.

The consequences of unethical behavior and unethical businessinstitutions are too serious for too many people to be ignored.

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“STAKEHOLDERS”

The decisions made within a business firm will affect many morepeople than only an individual.

Ethically responsible business decision-making must move beyond anarrow concern with stockholders, and consider the impact thatdecisions will have on a wide range of stakeholders.

A business stakeholder will be anyone who affects or is affected bydecisions made within the firm.

Failure to consider these additional stakeholders will have adetrimental impact on those stakeholders, stockholders, and on thefirm’s long-term sustainability.

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Stakeholder theory• For any organisation there are a number of definable groups who

have an interest, or a stake, in the actions of that organisation, i.e.owners, employees, suppliers, creditors, etc (see Figures in the nextslides). Stakeholder theory deals with three issues:What responsibilities or duties does an organisation owe to its

stakeholders? The fact that a stakeholder group may have alegitimate interest does not, of itself, mean that the organisationowes anything to it.

How should an organisation decide between its obligations to twoor more stakeholders if they demand incompatible things from anorganisation? What criteria should the organisation use whendeciding which stakeholder group’s wishes it should prioritise?(i.e. lobby groups, parties, common interest groups, etc)

What legitimate interests justify a group of people being regardedas a stakeholder in an organisation?

The subject matter of business ethics is an attempt to answer thesethree questions. In the next section we consider four differentanswers, that are given in modern western, capitalist societies.

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Relations between a business firm and its primary (or market) stakeholders

Business firm

(Managers)

Wholesalers(Retailers)

Creditors

SuppliersCustomers

StockholdersEmployees(Unions)

Investcapital

Lendmoney

Sellmaterials

Buy products

Distributeproducts

Selllabor

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Relations between a business firm and some of its other (secondary or non-market) stakeholders

Business Firm

(Managers)

TheGeneralPublic

BusinessSupport Groups

ForeignGovernments

SocialActivistGroups

Media

Federal,State

and LocalGovernments

Local Communities

Regulation,taxes

Friendly,hostile

Socialdemands

Image,publicity

Advice,research

Positive,negativeopinion

Jobs,environment

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Stakeholder interests in the organization

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Stakeholder impact from unethical behavior

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BUSINESS ETHICS AS ETHICAL DECISION-MAKING

Decisions which follow from a process of thoughtful and conscientiousreasoning will be more responsible and ethical decisions.

Responsible decision-making and deliberation will result in more responsiblebehavior.

What is the point of a business ethics course? Ethics refers not only to an academic discipline, but to that arena of

human life studied by this academic discipline, namely, how humanbeings should properly live their lives.

An ethics course will not change your capacity to think, but it couldstimulate your choices of what to think about.

An ethics class strives to produce more ethical behavior among the studentswho enroll. But the only academically and ethically legitimate way to do thisis through careful and reasoned decision-making.

A process of rational decision-making, a process that involves careful thoughtand deliberation, can and will result in behavior that is both more reasonableand more ethical.

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WHAT IS “ETHICS?”

• Ethics is a conception of right and wrong conduct. Ethics tell uswhether our behavior is moral or immoral and deal with fundamentalhuman relationships.

Ethics involves what is perhaps the most monumental question anyhuman being can ask:

Ethics is, in this sense, practical, having to do with how we act,choose, behave, do things.

Philosophers often emphasize that ethics is normative, in that it dealswith our reasoning about how we should act.

How should we live?

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At its most basic level, ethics is concerned with how weact and how we live our lives.

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WHAT IS “ETHICS?”

This fundamental question of ethics can be interpreted in two ways. "We" can mean each one of us individually, or it might mean all of us

collectively. In the first sense, this is a question about how I should live my life, how I

should act, what I should do, what kind of person I should be. This meaning of ethics is sometimes referred to as morality, and it is the

aspect of ethics that we refer to by the phrase “personal integrity.” Ethical Dilemmas occur where the decision you must make requires you

to make a ‘right’ choice knowing full well that you are: Leaving an equally ‘right’ choice undone. Likely to suffer something bad as a result of that choice. Contradicting a personal ethical principle in making that choice. Abandoning an ethical value of your community or society in making

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What should I do? How should I act?

PERSONAL RESPONSIBILITY VS. SOCIAL RESPONSIBILITY?

There will be many times within a business setting where an individualwill need to step back and ask:

Social ethics raises questions of justice, public policy, law, civic virtues,organizational structure, and political philosophy.

In the second sense, “How should we live?” refers to how we live togetherin a community.

Business ethics is concerned with how business institutions ought to bestructured, about corporate social responsibility, and about makingdecisions that will impact many people other than the individual decision-maker.

This aspect of business ethics asks us to examine business institutions froma social rather than an individual perspective.

We refer to this broader social aspect of ethics as decision-making forsocial responsibility.

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How should we live?

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REALITY CHECK

Why be ethical? Because the Law Requires It!Under Sarbanes-Oxley (2002), a company’s Code of Ethics mustinclude standards that promote:

1. Honest and ethical conduct, including the ethical handling of actualor apparent conflicts of interest between personal and professionalrelationships.

2. Full, fair, accurate, timely, and understandable disclosure in theperiodic reports required to be filed by the issuer.

3. Compliance with applicable governmental rules and regulations.

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DOES “RIGHT” OR “INTEGRITY” HAVE REWARDS?

“While the headlines are going to all the guys who are doing it wrong,there is a very strong corps of people who are really committed todoing it right. Part of doing it right is you're not doing it to getheadlines. You're doing it to really make a difference in the lives ofpeople.”

-- Georgetown College President Bill Crouch, speaking at a business ethics conference sponsored by the Ethical Leadership Institute. ("Strong Ethics

Help Businesses Succeed, Conference Speakers Say," AP, Mar. 25)

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WHY CARE ABOUT ETHICS?

Unethical behavior creates financial and marketing risks. A company can go out of business, and its employees can go to jail, if

no one is paying attention to the ethical standards of the firm. A firm’s ethical reputation can provide a competitive advantage, or

disadvantage. Consumer boycotts give even the most skeptical business leader reason

to pay attention to ethics. Managing ethically can also pay significant dividends in organizational

structure and efficiency. Trust, loyalty, commitment, creativity, and initiative are just some of

the organizational benefits that are more likely to flourish withinethically stable and credible organizations.

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ETHICAL NORMS AND VALUES

Values are defined as a small number of core ideas about how peopleshould live and the ends they should seek in a society. They are sharedby a majority of people within a community or society. They are simplyexpressed generalities such as peace and honesty. As they are verybroad they do not give guidance on how particular things should beevaluated.

A company’s core values, for example, are those beliefs and principlesthat provide the ultimate guide in its decision-making.

Individuals can have their own personal values and, importantly,institutions also have values.

Values =

Those beliefs that incline us to act or to choose in one way rather than another.

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DISTINGUISHING VALUES• Different types of values might affect how we think about ethical

issues:A. Moral values: concern interpersonal behaviour, i.e. being honest

is desirable.B. Competence values: concern one’s own valuation of one’s

behaviour, i.e. behaving imaginatively is desirable.C. Personal values: concern the ends, or terminal states, that are

desirable for the self, i.e. peace of mind.D. Social values: concern the ends that one would desire for

society, i.e. world peace is desirable.• The first two items in this list concern instrumental values that

about about how a person should live and behave. The second twoitems are terminal values that concern the ends or purposes that weshould be striving for. The table on the following slide lists theinstrumental and terminal values identified by Rokeach’s survey ofa sample of Americans.

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The Instrumental and Terminal Values of Americans

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DISTINGUISHING VALUES One way to distinguish various types of values is in terms of the ends

that they serve. Financial values serve monetary ends, religious values serve

spiritual ends, aesthetic values serve the end of beauty, legal valuesserve law, order, and justice, and so forth.

Different types of values are distinguished by the various endsserved by those acts and choices.

So, how are ethical values to be distinguished from these other types ofvalues? What ends are served by ethics? Ethical values are those beliefs and principles that impartially

promote human well-being.

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LEGAL RESPONSIBILITIES VS. ETHICAL RESPONSIBILITIES

The law provides a very important guide to ethical decision-making,but legal norms and ethical norms are not identical nor do they alwaysagree.

Over the last decade, many corporations have established ethicsprograms and hired ethics officers who are charged with managingcorporate ethics programs.

Much good work gets done by ethics officers, but it is fair to say thatmuch of this focuses on compliance issues.

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WHY LEGAL COMPLIANCE IS INSUFFICIENT?

Holding that obedience to the law is sufficient to fulfill one’s ethicalduties begs the question of whether the law, itself, is ethical.

Societies that value individual freedom will be reluctant to legallyrequire more than just an ethical minimum.

On a practical level, telling business that its ethical responsibilities endwith obedience to the law is just inviting more legal regulation.

The law cannot possibly anticipate every new dilemma that businessesmight face; so, often, there may not be a regulation for the particulardilemma that confronts a business leader.

The perspective that compliance is enough relies on a misleadingunderstanding of law.

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HOW IS ETHICAL DECISION-MAKING DIFFERENT FROM OTHER DECISION-MAKING?

Ethics is practical and normative Ethics is therefore a vital element of practical reasoning: reasoning

about what we should do, and is distinguished from theoreticalreasoning, which is reasoning about what we should believe.

Theoretical reason is the pursuit of truth, which is the highest standardfor what we should believe.

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PHILOSOPHICAL ETHICS AND THEORIES

Is there a comparable methodology or procedure for deciding whatwe should do and how we should act?

There are guidelines that can provide direction and criteria fordecisions that are more or less reasonable and responsible:philosophical ethics.

Ethical theories are patterns of thinking, or methodologies, to help us decide what to do.

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• Review Questions1. Answer the following:

(a) Define the term stakeholder(b) Briefly discuss the issues the stakeholder theory addresses(c) List the primary stakeholders of a business and explainthrough examples their relations with an organization.

2. Define ethics and state why ethics are important for businesses.3. Answer the following:

(a) Define values(b) Briefly differentiate between instrumental and terminal values.(c) State and explain the types of values that might affect how wethink about ethical issues.

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