Chapter 12 Corporate Ethics

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At the end of the chapter, you are expected to:

• Demonstrate an understanding of the business ethics


• Recognize important ethical issues that arise in various business
contexts and professional practice

Some people might think that business ethics is an oxymoron. How can business,
with all of its shady dealings, be ethical? This is a view that can be taken even by well
educated people. But in the end, such a position is incorrect. Ethics is a study of morality,
and business practices are fundamental to human existence, dating back at least to
agrarian society, if not even to pre-agrarian existence. Business ethics then is a study of
the moral issues that arise when human beings exchange goods and services, where such
exchanges are fundamental to our daily existence. Not only is business ethics not
something oxymoronically, it is important.

Business ethics, also called corporate ethics, is a form of applied ethics or


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

The erstwhile-regulated economies necessitated their governments to regulate and


control business organizations and economic institutions through law and government
mechanisms to enable them to play their role in contributing to the growth and wellbeing
of their stakeholders in a balanced way such that the interest of the almost all the people
was protected.

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Various business management concepts, principles, theories, practices, goals and
strategies have been under evaluation, revalidation and constant change consequent upon
massive liberalization, privatization and globalization of business initiated towards the end
of the 20th Century and geared up in the beginning of the present century.

Governments, which were hitherto discharging the responsibilities of safeguarding


the customers’ interest in respect of quality, price, safe and timely delivery of the product
etc., protecting the companies from unhealthy competition, restricting the concentration
of economic power in the hands of a few which should be otherwise enjoyed by the
majority of the population and the like, relegated and shifted the responsibility on to the
shoulders of the business organizations, often simply by encouraging trade liberalization
and privatization.

Many social scientists felt that the deregulation of business would encourage the
business to reverse back to its orthodox objective of profit maximization by whatever
means including practicing unethical conduct. But sooner or the later, a number of
incidents around the world proved that businesses should carry out their operations
ethically for the sake of basic survival. The following example is a point in fact.

In Practice:

The Ford Motor Company decided to produce the first lowest-priced car in the USA.
The Company President Mr. Lee Lacocca wanted to rush the development of a car costing
less than $2,000, as he promised the public that his company will bring out a car at that
price (as low as $2,000) and also fight the growing popularity of Volkswagen’s Beetle.
Preliminary tests showed that it involved an additional cost of $11 to enhance the safety
of the car.

He organised a meeting of company executives to decide how to reduce the cost


below $2,000. Many executives suggested that the company should sell the car at $2,011
but include the safety feature. Some executives thought that the company should sell the
car at $2,000 as promised but exclude the safety feature. The company decided to go
ahead without the safety feature.

The car was released and sold at $2,000. After six months of release, one of the
cars was involved in an accident killing all the passengers. Competitors influenced
newspapers to publish this accident and the newspapers in the U.S.A. highlighted the
absence of the safety feature. This incident resulted not only in the loss of sales, but also
in the closure of the unit resulting in a loss of $250 million to the company.

This case indicates that business should consider ethical principles while making
decisions in order to achieve its basic objective of survival. Thus, competition forces
businesses to conduct their business ethically. Increasing literacy, widespread use of
information technology and declining sellers’ markets after globalization reduce the scope
for debating on the need for conducting business ethically.

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1. Survival of Business:
Any individual business will collapse if all of its managers, employees, and
customers come to think that it is morally permissible to steal from, lie to, or break their
agreements with the business.

2. Need of a Stable Society:


All businesses require a stable society in which they are supposed to carry on their
business dealings. Stability of any society requires that its members adhere to some
minimal standards of ethics. It will create a conducive environment for the development
of economic and social institutions.

3. Consistent with Business Objectives:


Ethics should be brought into business by showing that ethical considerations are
consistent with business pursuits, in particular with the pursuit of profit. That ethics is
consistent with the pursuit of profit and it can be shown by simply finding examples of
companies where a history of good ethics has existed side by side with a history of
profitable operations.

4. Growing Clout of Business:


The power and influence of business in society is greater than ever before. Evidence
suggests that many members of the public are uneasy with such developments. Ethics
help us to understand why this is happening, what will be its implications and how we will
address this situation.

5. Safeguarding Public from Business Malpractices:


Business malpractices have the potential to inflict enormous harm on individuals,
communities, and the environment. Ethics seeks, to improve the human condition by
focusing on the causes and consequences of these malpractices being done by the
business organizations.

6. Effective Decision-Making:
Ethics help to improve the business ethical decision-making with the appropriate
knowledge and tools that allow them to correctly identify, diagnose, analyse, and provide
solutions to the ethical problem and dilemmas they are confronted with day to day decision
making having implications for the stakeholders.

7. Business Effectiveness:
Ethics develop the ability to assess the benefits and problems associated with
different ways of managing ethics in organizations. It also improves the knowledge that
transcends the traditional framework of business studies which have focused on the
relevance of ethics in business.

Since business exists and operate within the society and is a part of a subsystem
of society, its functioning must contribute to the welfare of the society. To survive, develop
and excel, business must earn social sanction of the society wherein it exists and
functions.

Without social sanctions, a business cannot earn loyal customers, cannot operate
in the marketplace and will soon wither and die away. George A. Steiner, in ‘Business &
Society’, says “The managers of the biggest companies know that as a business gets
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larger, the public takes more interest in it because it has a greater impact on the
community. The antennae of these managers are tuned to public opinion and they react
to it. They seek to maintain a proper image of their company in the public mind. This leads
to the assumption of greater social responsibilities.”

No business, however great or strong or wealthy it may be at present, can exist on


unethical means, or in total disregard to its social concern, for very long. Resorting to
unethical behaviour or disregarding social welfare is like calling for its own doom. Thus,
business needs, in its own interest, to remain ethical and socially responsible. As V.B.
Day, in ‘The Social Relevance of Business’ had stated –

“As a statement of purpose, maximizing of profit is not only unsatisfying, it is


not even accurate. A more realistic statement has to be more complicated. The
corporation is a creation of society whose purpose is the production and
distribution of needed goods and services, to profit of society and itself. Each
element of that statement is needed if the whole is to be accurate; you cannot
drop one element without doing violence to the facts.”

Business needs to remain ethical for its own good. Unethical actions and decisions
may yield results only in the very short run. For the long run existence and sustained
profitability of the firm, business is required to conduct itself ethically and to run its
activities on ethical lines. Doing so would lay a strong foundation for the business for
continued and sustained existence.

All over the world, again and again, it has been demonstrated that it is only ethical
organizations that have continued to survive and grow, whereas unethical ones have
shown results only as a flash in the pan, quickly growing and even more quickly dying and
forgotten.

Business needs to function as responsible corporate citizens of the country. It is


that organ of the society that creates wealth for the country. Hence, business can play a
very significant role in the modernization and development of the country, if it chooses to
do so. But this will first require it to come out from its narrow mentality and even narrower
goals and motives.

Importance of Ethics in Finance, Human Resource Development, Marketing and


Production

Business ethics comprises various traits, such as trustworthiness and


transparency in customer services. Ethical business practices strengthen customer
relationship that is of prime importance for long-term organizational success. It deals
with retaining and creating a long-lasting impression in the minds of customers. Such
impressions help the enterprise to win the trust of customers and get more business.

Business ethics plays a very crucial role in various management functions,


which are given as follows:

Ethics in Finance:

It deals with various ethical dilemmas and violations in day-to-day financial


transactions. An example of ethical violations is data fudging in which enterprises
present a fabricated statement of accounts and other records, which are open to
investigation. Ethics in financial transactions gained importance when due to their
insufficiency nations suffered massive economic meltdowns.
The following are the ethics in finance:
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a. Following truthfulness and authenticity in business transactions
b. Seeking the fulfillment of mutual interests
c. Getting the economies and financial units freed from greed-based
methodologies.

Ethics in Human Resource Management:

It deals with the enforcement of the rights of employees in an enterprise.


Such rights are as follows:
a. Having a right to work and be compensated for the same
b. Possessing a right for free association and participation
c. Enjoying a right for fair treatment in an enterprise
d. Holding a right to work in a hazard-free environment
e. Blowing whistle (an activity where an employee can raise voice against
any wrong practice of anyone in an enterprise)

Ethics in Marketing:

Deals with a number of issues, which are as follows:


a. Misinforming the customers about the products or services
b. Deciding high prices for the products and services
c. Creating false impression on the customers/consumers about the
features of products
d. Promoting sexual attitudes through advertising; thus, affecting the
young generation and children.

Ethics in Production:

It deals with the responsibility of an organization to make sure that


products and processes of production is not causing harm to the environment.
It throws light on the following issues:
a. Avoiding rendering services or producing products that are hazardous to
health. For example, tobacco and alcohol
b. Maintaining ethical relations with the environment and avoiding
environmental pollution.

As for its widespread effects, business influences our values and well-being, it
shapes social policies, and impacts the natural environment on a large scale. The
important social role of business and its widespread effects are strong reasons for why we
should be concerned about the morality of the business activity. But what makes it
appropriate to subject this activity to a moral evaluation is the fact that business acts
have all the morally relevant features, foremost of which are as follows.

First, business acts can be done knowingly and freely in that their agents
(businessmen, corporate executives, company supervisors, and others) can be
aware of the morality of these acts, either as morally good or bad, and can have
a choice on whether or not to perform their acts. This feature of business of business
acts makes them appropriate objects of moral evaluation in terms of moral
accountability—whether their agents deserve moral blame or praise.
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For instance, a manager of a drug company who decides to continue selling a
product, despite being informed of its negative effects, will be morally accountable for the
injuries that this product may cause.

Second, business acts can lead to serious human injuries. Business, for
instances, that cater to the destructive needs of humans, such as those selling illegal
drugs and fire arms will surely pave the way for the occurrence of serious human injuries.
This specific characteristic of business acts subjects them to a moral evaluation using
consequentialist moral standards, such as the utilitarian moral standard which looks at
the aggregate benefits and costs of action.

Third, business acts can violate moral rights, which makes them
appropriate objects of moral evaluations using deontological moral standards.
They can, for instance, be evaluated as morally good or bad on the basis of whether or
not they use persons merely as means to achieve greater profits.

Fourth, business acts can result in an unfair distribution of benefits (like


wages) and burdens (like workload), which makes them appropriate objects of
moral evaluations using the moral standard of justice.

Fifth, business acts can lead to environmental damages.

The Invisible-hand argument

Based on Adam Smith’s argument, this contends that the economic forces
governing the business activity such as the law of supply and demand, are sufficient to
ensure that this activity will lead to the common or social good. While people are engaging
in this activity are only their own personal gains, they eventually end up likewise
promoting the good of the community. There is as if, an invisible hand steering the
business activity towards the promotion of the social good. For without really intending it,
their selfish actions harmonize to produce what is most beneficial to everyone.

The Legal Argument

This argument simply states that the law is sufficient to ensure that the business
activity will not result in morally undesirable behaviors. Making the law as the standard
for the morality of business, this view, consequently, claims that as long as business do
not violate the laws of the government, then there is nothing morally wrong with their
policies, decisions, and practices.

The Amorality Argument

The argument contends that business activity cannot meaningfully be said to be


morally good or bad because moral principles allegedly do not apply it.

The Immorality Argument

The argument claims that the primary motive of engaging in business namely profit
making or the profit motive is inherently incompatible with the motives of morality,
especially the motive of benevolence.

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SYSTEMATIC ISSUES

It includes “questions about the morality of capitalism or of the regulations,


industrial structures, and social practices within which... businesses operate”. For
this kind of issues, let us examine those related to the free market system and
global business practices.

Morality in Capitalism

- The business practices morally evaluated in business ethics are usually those
done in a free market system or capitalist economic system. Capitalism is
generally characterized by minimal government control over the operations
of business.
- Some of the questions raised about the morality of capitalism are based on
the socialist critique of capitalism, such as whether the goods and services
being sold in the market are harmful to consumers and society in general,
and whether they cultivate the nobler qualities.
- Capitalism finds its moral justification in its ideal of perfect competition, a
state where no buyer or seller has the power to significantly affect the prices
at which goods are being exchanged.
- Perfect Competition happens when there is interplay between the supply and
demand of goods, and between the amount of good sellers are willing to sell
and buyers are willing to buy, will naturally reach an equilibrium point.
- At the equilibrium point, the prices of goods shall be fair to both buyers and
sellers in that they are not unreasonably high for the buyers and not
unreasonably low for the sellers.
- When business practices deviate from the perfect competition that capitalism
loses its moral justification. Example, one seller in the market. Second, there
are only few sellers in the market.

CORPORATE ISSUES
- Questions about the morality of the activities, policies, practices, or
organizational structure of an individual company taken as a whole.
- Issues arises from moral status of corporations (or personhood) and from
corporate dealings with the various sectors of society.

INDIVIDUAL ISSUES
- Questions about the morality of the decisions, actions, or character of an
individual done in a business setting. In the context of the workplace, these
issues involve acts of employees directed towards either their company or
their fellow employees.

CONFLICT OF INTEREST
- It arises when the self-interest of an employee leads to him/her to make
decisions for his/her company in ways that may not be in the best interests
of the whole company.

EMPLOYEE THEFT
- Company properties may be stolen by employees. Using company resources
for personal use without the company’s consent, or using them in ways not
sanctioned by the company, also counts as theft. Theft of company
information involves the so called “trade secrets” and “inside information.”
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Trade secrets and inside information are confidential or nonpublic information
about a company. These kinds of information are owned by the company,
and thus when employees use them for purposes not sanctioned by the
company, it is in effects an act of employee theft.

WHISTLEBLOWING
- In general, it is the act of reporting a wrongdoing to an authority or exposing
it to the public.

- Two extreme views on the morality of whistleblowing: one claims that it is


inherently morally wrong for it violates one’s commitment to loyalty the other
claims that it is inherently morally right for it is an exercise of the right to
free speech.

SEXUAL HARASSMENT
- In a workplace, it is usually regarded as a form of sex discrimination.
Harassment is sexual when it comes in the form of unwelcome sexual
advances, requests for sexual favors, and other verbal or physical contact of
a sexual nature.

- Sexual harassment is unethical for being a degrading coercion exerted on


employees who are vulnerable and defenseless which inflicts great
psychological harms on the employee.

As business is a pervasive activity whose effects are widespread,


significantly affecting our well-being and values both as individuals and as
members of society, as well as the state of natural environment, it is but
proper that it be subjected to a moral evaluation or be guided by moral
principles.
Business acts are no different in kind from other kinds of human actions.
The possess the same morally relevant characteristics – they can lead to
serious human injuries, disrespect moral rights, unfairly distribute benefits
and burdens, and cause damage to the natural environment.
In examining the various ethical issues in business, we have conveniently
classified these issues into systemic, corporate, and individual kinds.
Systemic issues concern the morality of the economic, legal, and social
systems in which business operates. For these issues, we have examined
those that concern the morality of capitalism and doing business in a global
economy.
Corporate issues concern the moral the moral personhood of corporations
and the morality of corporate acts towards consumers, employees, and
market competitors.
Individual issues concern the morality of individual acts done in a business
context. For these issues, we have examined those that occur in the
workplace, namely issues concerning conflict of interest, employee theft,
whistleblowing, sexual harassment, and the use of political tactics.

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