BUSINESS ETHICS NOTES (UNIT-1)

BY PROF.RASHI SHUKLA
Definition and Meaning: Ethics

Ethics can be said to be ‘the field of study that is concerned with values, standards,
morals, and principles etc., which are used to base ones decisions or actions. It is
a discipline tries to set up criteria for “good” and “bad” behavior/actions, and to evaluate
the motives for these actions, and the consequences.

In Latin language ethics is called Ethicus. In Greek it is called Ethikos and root word
Ethos which means character, custom or habits also means ―way of living. Ethics
is a branch of philosophy that is concerned with human conduct. It consists in a
code of conduct of human beings living in a society. It studies what is morally
right or wrong, just or unjust.

For instance, a doctor has his medical ethics to follow. It is ethical for a doctor to treat a
person be it a terrorist or a soldier from the opposite army. However, his morals may be
totally against it.

Similarly for morals, an example regarding abortion can be placed. Abortion is totally
legal and allowed in the medical ethics. However, it is against the morality of human
kind.

Ethics is a branch of philosophy that involves systematizing, defending, and

recommending concepts of right and wrong conduct. Ethics seeks to resolve
questions of human morality by defining concepts such as good and evil, right
and wrong, virtue and vice, justice and crime.

Sources of Ethics:

 General Inheritance
 Religion
 Philosophical Systems
 legal systems
 cultural experiences
 codes of conduct

Nature and features of Ethics:

Ethics is a study of human behaviour in different external situations. Humans by default

has a capability of judging good and bad, right and wrong behaviour based on the
situation. Therefore ethics, though a relative and subjective term has some common
features:
  Based on Moral and Social Values: Ethics has its roots in the individual values
called as moral values and collective values also called as social values. As any
system or organisation is a sub set of society and ethics are associated with
human behaviour it cannot violate or contradict social and moral values.

 Ethics as Social Science: Ethics is a study under social science. Though there
is an argument whether ethics is a science or an art. But experts are of the
opinion that ethics is more of science than an art because it is a systematic
knowledge about moral behaviour and conduct of human beings.

 Ethics as Normative Science: The term normative implies a guide or control of

action. So, normative ethics tells us what we ought to do.

 Voluntary: Ethics deals with human conduct that is voluntary and not formed
naturally by any persons or his circumstances. It is created due to system and
organization and is voluntarily followed by individuals in it.

 Externally enforced: Ethics leads to coexistence and smooth functioning of a

system, hence it has to be enforced to a person and is not in-born as morality.

 Basis of Code of Conduct: Ethics of a system, (like organization, institution or

group) helps in forming its code of conduct which in turn dictates the expected
behaviour of the individuals involved in it.

 Requires Education and Guidance: Ethics is learned behaviour. Individuals

need to be informed, educated, guided and motivated so that they follow the
ethical norms with its true spirit.

 Relative Term: As ethics is based on, and for smooth functioning of, the system
hence it has to change in response to environmental conditions. Therefore,
ethical values may change with time and environmental conditions.

Based on above points, we can understand that ethics values may change for a person
with change in his environment or occupation. Therefore, the nature of ethics can be
well understood by dividing it into three categories of features:

TYPES OF ETHICS:
A. Personal Ethics
B. Professional Ethics
C. Managerial Ethics

Personal Ethics:
Personal ethics refer to personal or self-created values and codes of conduct of a
person. These ethics are instilled in an individual from the childhood by their parents,
friends and family. Examples of personal ethics can be honesty, openness,
commitment, unbiased behaviour and sense of responsibility. It remains with him
all through his life and is reflected by his actions and words. A person’s personal
ethics are also revealed in a professional situation through his behaviour.
The principles of personal ethics are:
(i) Concerns and respect for the autonomy of others
(ii) Honest and the willingness to comply with the law
(iii) Fairness and the ability not to take undue advantage of others
(iv) Benevolence and preventing harm to any creature

Professional Ethics:

A profession is a vocation or calling, especially one that involves a specific branch of

advanced learning or a branch of science, for example, the profession of a doctor,
advocate, professor, scientist for a business manager.
Professional ethics are those values and principles that are introduced to an
individual in a professional organization. Each employee is meant to strictly
follow these principles of his profession in the organization. They do not have a
choice.
Also, this approach is imperative in professional settings as it brings a sense of
discipline in people as well as helps to maintain decorum in offices. Some examples
may include confidentiality, fairness, transparency and proficiency.
There are some basic principles professionals are expected to follow in their
professional career.
These are the following:
(i) Impartial and objective
(ii) Openness: full disclosure
(iii) Confidentiality: trust
(iv) Due diligence
(v) Duty of care
(vi) Fidelity to professional responsibilities; and
(vii) Avoid potential or apparent conflict of interest.

Managerial Ethics:

Managerial ethics is a set of principles and rules dictated by upper management

that defines what is right and what is wrong in an organisation. Managerial ethics
is a major factor affecting how socially responsive an enterprise will be in the long term.
The managerial ethics can lead types of responses given by a manager. Proactive
responses are likely to be more ethical since they will go beyond minimum legal
requirements. They are more consistent with the high social expectations as discussed
earlier.
Reactive responses either conforms only with the minimum legal requirements or even
attempt to avoid legal requirements through long court cases, lobbying efforts to avoid
responsibility and so forth. The ethics of an enterprise’s managers are a key factor
in decision making and may be formed by many forces.
SOME OTHER IMPORTANT TYPES OF ETHICS:

Transactional Ethics:

Man is a social animal. He has to react with others through different transactions.
Business transaction are the interaction between business and their customer.
The practice of ethics in all these transactions is called as transactional ethics.
Eg. We need vegetables & fruits likewise the vendor needs customers like us for
survival and we both are dependent on each other. Equality Honesty & Reciprocity is
indicated as the domain of transactional ethics.

Participatory Ethics:

Guided by common good, all the participations follow some ethical practices.
Participatory ethics is an integral part of business ethics these are the action
some of which are guided by common interest and some share interest all
participatory involved in the business. It is the ethics of the civil society. By
participating on a regular basis in common projects on behalf of general welfare, a
corporation demonstrates that it can take seriously its corporate citizenship.

Recognition Ethics:

As human beings people are endowed with the ability to understand the problems
of others. This quality leads to the recognition of individuals, institutions, and
societies. Conflicting situations can be solved by the correct recognition of the
situation.
Eg. The strong is helping the weak, The learned is helping the lesser learned, The
experienced is helping the new entrant.

IMPORTANCE OR BENEFITS OF ETHICS:

Ethics concern an individual’s moral judgments about right and wrong while
she/he is in a system. Decisions taken within an organisation may be made by
individuals or groups, but whoever makes them will be influenced by the culture
of the company. Other than providing long term benefits, ethics are important
because:

 Developing Capability to Judge Right and Wrong: Ethics is a subject that

deals with human beings. Humans by nature are capable of judging between
right and wrong, good and bad behaviour. Since human beings are associated
with values and morals, ethics is important.

 Develops Trust: Ethics is closely related to trust. Most of the people would
agree on the fact that to develop trust, behaviour must be ethical.
  Long-Term Survival of Business: Ethics are important not only in business, but
also in all aspects of life. The business of society which lacks ethics is likely to
fail sooner or later.

 Covers all aspects of Life: Ethics are important not only in business but also in
all aspects of life because it is an essential part of the foundation on which a
civilised society is build.

 Guiding Actions: Ethics primarily aim to guide the behaviour and actions of a
person of society or a business through adherence to certain moral principles,
standards and values so that the others are not harmed by one’s unfair, immoral
or unjust actions.
 Aids the Law: Ethics makes for a complementary logic that aids laws in
balancing equity, fairness and justice in those matters of disputes, and actions
that touch or affect others.

 Caters to Wider Issues: The aim of law and ethics may be similar, but ethics will
examine wider social issues involved with an action and may direct the individual
or a company to act differently from what law would do in normal course.

 Balancing Instrument for Social Justice: Ethical considerations, along with

legal provisions, act as the ‘balancing instrument’ for social justice , which are
essential for sustained growth of a society.

BUSINESS ETHICS – MEANING AND NATURE

Meaning and Definition

Business ethics are those principles, policies or philosophies that are concerned
with moral judgment &good conduct as they are applicable to business situation.

Business Ethics is a branch of ethics which prescribes standards of how the

business is to be carried out. It lays down guidelines for the company’s response and
accountability to its various stakeholders. It gives a deeper understanding of what is
good and bad, what is moral and immoral or what actions are right or wrong in
the operations of a business with respect to its customers, employees, investors,
society and all other stakeholders – in order to protect them from harm and
damages to their interests.

According to ICAI
―The principles and standards that determine acceptable conduct in business
organization.
According to Andrew Crane, “Business ethics is the study of business situations,
activities, and decisions where issues of right and wrong are addressed.”

According to Raymond C. Baumhart

"The ethics of business is the ethics of responsibility. The business man must promise
that he will not harm knowingly." In short application of ethics to business is business
ethics.

Good Business Ethics:

 The businessmen must give a regular supply of good quality goods and services
at reasonable prices to their consumers.
 They must avoid indulging in unfair trade practices like adulteration, promoting
misleading advertisements, cheating in weights and measures, black marketing,
etc.
 They must give fair wages and provide good working conditions to their workers.
 They must not exploit the workers.
 They must encourage competition in the market.
 They must protect the interest of small businessmen. They must avoid unfair
competition.
 They must avoid monopolies.
 They must pay all their taxes regularly to the government.
 In short, business ethics means to conduct business with a human touch in order
to give welfare to the society.

Characteristics or Features of business ethics:

1. Code of conduct: Business ethics is a code of conduct. It tells what to do and

what not to do for the welfare of the society. All businessmen must follow this
code of conduct.

2. Based on moral and social values: Business ethics is based on moral and
social values. It contains moral and social principles (rules) for doing business.
This includes self-control, consumer protection and welfare, service to society,
fair treatment to social groups, not to exploit others, etc.

3. Gives protection to social groups: Business ethics give protection to different

social groups such as consumers, employees, small businessmen, government,
shareholders, creditors, etc.

4. Provides basic framework: Business ethics provide a basic framework for

doing business. It gives the social cultural, economic, legal and other limits of
business. Business must be conducted within these limits.

5. Voluntary: Business ethics must be voluntary. The businessmen must accept

 business ethics on their own. Business ethics must be like self-discipline. It must
not be enforced by law.

6. Requires education and guidance: Businessmen must be given proper

education and guidance before introducing business ethics. The businessmen
must be motivated to use business ethics. They must be informed about the
advantages of using business ethics. Trade Associations and Chambers of
Commerce must also play an active role in this matter.

7. Relative Term: Business ethics is a relative term. That is, it changes from one
business to another. It also changes from one country to another. What is
considered as good in one country may be taboo in another country.

8. New concept: Business ethics is a newer concept. It is strictly followed only in

developed countries. It is not followed properly in poor and developing countries.

IMPORTANCE OF ETHICS IN BUSINESS:

Ethics is important for any business, big or small, for its long term success. Following
are the benefits of ethics for any business:

1. Decision Making: It is our means of deciding a course of action. Without it our

actions would be random and aimless.

2. Standardizing Behaviour of Employees: Business Ethics is about standard of

behavior in workplace, with partners, colleagues, customers etc. Many
companies have standard code of ethics which everyone in the organization has
to follow.

3. Greater Customer Satisfaction: Customer will be satisfied only if the business

follows all the business ethics. Business ethics is needed to make business
activities fair to consumers. It checks business malpractices and offers protection
to consumers.

4. More Responsible Behaviour: Business ethics is needed in order to make

businessmen conscious as regards their duties and responsibilities towards
consumer and other social group.

5. Improved Confidence of Stakeholders: Business ethics is needed in order to

improve the confidence of consumers as regards quality, price, reliability etc. of
goods and services supplied. It also helps in retaining confidence of stakeholders
like financial institutions, shareholders, buyers, suppliers etc.

6. Protecting Rights: Business ethics is needed for the protection of rights of

 consumers at the business level such as right to health & safety, right to be
informed, right to choose, right to be heard etc.

7. Enhanced Corporate Image: Business ethics is needed in order to create good

image of businessmen in the society and also for avoiding public criticism. Ethical
business gets public support while unethical business is criticized by all. Public will be
ready to invest or lend money only if they are convinced that the organization is
following fair business practices.

8. Cordial Relationship and Support: Business ethics is needed in order to develop

cordial and friendly relations between business and society.

9. Long Term Survival and Growth: Organizations doing business ethically will
continue to survive & prosper for the long time. Hence, it is important for the growth &
development of the business in the long term.

10. Uniform Behaviour across Organization: Ethics in business are important most of
all because we pass them on to others. We have the ability to show others the correct
way to act and behave by remaining ethical in the way we live.

Scope/Purpose of Business Ethics

Ethical problems and phenomena arise across all the functional areas of companies
and at all levels within the company.

1. Ethics in Compliance
 Compliance is about obeying and adhering to rules and authority.
 It is an important part in any department of the organization.
 Monitors the processes that are mapped for internal & external regulations.
 Failing to meet compliance would lead to penalties.

2. Ethics in Finance
The ethical issues in finance that companies and employees are confronted with
include:
 In accounting – window dressing, misleading financial analysis.
 Insider trading, securities fraud leading to manipulation of the financial markets.
 Executive compensation.
 Bribery, kickbacks, over billing of expenses, facilitation payments.
 Fake reimbursements

4. Ethics in Marketing
Marketing ethics is the area of applied ethics which deals with the moral principles
behind the operation and regulation of marketing. The ethical issues confronted in this
area include:
 Pricing: price fixing, price discrimination, price skimming.
 Anti-competitive practices like manipulation of supply, exclusive dealing
 arrangements, tying arrangements etc.
 Misleading advertisements
 Content of advertisements eg. Statutory warning for cigarettes not enough
 Children and marketing.
 Black markets, grey markets.

3. Ethics in Human Resources

The ethics of human resource management (HRM) covers those ethical issues arising
around the employer-employee relationship, such as the rights and duties owed
between employer and employee.
The issues of ethics faced by HRM include:

 Discrimination issues i.e. discrimination on the bases of age, gender, race,

religion, disabilities, weight etc.
 Sexual harassment.
 Issues surrounding the representation of employees and the democratization of
the workplace.
 Issues affecting the privacy of the employee: workplace surveillance, drug
testing.
 Issues affecting the privacy of the employer: whistle-blowing.
 Issues relating to the fairness of the employment contract and the balance of
power between employer and employee.

4. Ethics of Production
This area of business ethics deals with the duties of a company to ensure that
products and production processes do not cause harm. The issues of ethics
faced by production include:
 Defective, addictive and inherently dangerous products and services eg.
Tobacco, alcohol,
 Ethical relations between the company and the environment include pollution,
environmental ethics, and carbon emissions trading.
 Ethical problems arising out of new technologies for eg. Genetically modified
food
 Product testing ethics.

5. Ethics of Intellectual property, knowledge and skills

Who as the greater rights to an idea: the company who trained the employee or the
employee themselves? As a result attempts to assert ownership and ethical disputes
over ownership arise.

The issues of ethics faced by intellectual property, knowledge & skills include:
 The practice of employing all the most talented people in a specific field,
regardless of need, in order to prevent any competitors employing them.
 Employee raiding: the practice of attracting key employees away from a
competitor to take unfair advantage of the knowledge or skills they may possess.
  Patent misuse, copyright misuse.

6. Ethics in Technology
 The computer and World Wide Web are two most significant inventions of the
twentieth century. There are many ethical issues that arise from this technology.
It is easy to gain access to information. This leads to data mining (hacking),
privacy invasion.
 Social Responsibilities/Ethics of Business towards different stakeholders

7. Ethics at stakeholder’s level:

Employees:
 Security of job Better working conditions
 Better recommendation
 Participative management
 Welfare facilities

Customers:
 Better quality of goods
 Goods and services at reasonable price
 Not to make false claims about products in advertisements

Shareholders:
 Ensure capital appreciation
 Ensure steady and regular dividends
 Disclose all relevant information
 Protect minority shareholders interests
 Not to window dress balance sheets
 Protect interests in times of mergers, amalgamations and takeovers Banks and
other lending institutions
 Guarantee safety of borrowed funds
 Prompt repayment of loans

Government:
 Complying with rules and regulations
 Honesty in paying taxes and other dues
 Acting as partner in the progress of the country
 Not to indulge in monopolistic and restrictive trade practices
 Conforming to pollution control norms set up by the government
 Not to indulge in corruption through bribing and unlawful activities

 Owners:
 Run the Business efficiently
 Proper utilization of capital and resources
 Growth and appreciation of capital
  Regular and fair return on capital invested

 Suppliers:
 Giving regular orders for purchase of goods
 Dealing on fair terms and conditions
 Availing reasonable credit period

8. Ethics at societal level:

 Concern for poor and downtrodden
 No discrimination against any particular section of the society
 Concern for clean environment
 Preservation of scarce resources for future prosperity.
 Contributing for better quality of life

9. Ethics at personal policy level:

 Not to use office car, stationery and other facilities for personal use
 Not to misuse others for personal gain
 Not to indulge in politics to gain power
 Not to spoil promotional chances of others
 Promise keeping
 Mutual help

10. Ethics at management policy level:

 Fair practices relating to requirements, compensations, layoffs, perk, promotions
 Transformational leadership to motivate employees to aim at better and higher
things in life.
 Better communication at all levels

Factors Influencing Business Ethics:

In taking decisions involving ethical issues a business must consider -

1. Leadership
Leader is a person who leads people towards achieving a common goal. Leaders are
models and mentors and should have strong commitment towards ethics and ethical
conduct and should give a constant leadership in renewing the values of an
organization. They play a key role in creating, maintaining and changing the ethical
culture.
It’s necessary for leaders to set good examples and follow ethics. Where there are good
leaders there will be good ethical practices in business. Eg. JRD Tata, Dhirubhai
Ambani, N.R. Narayana Murthy.

2. Individual Characteristics
It refers to the attitude and lifestyles of each person individually. It includes values
(belief about right and wrong), Ego (strength of one‘s convictions) and degree of one‘s
control.
3. Environment
It refers to things around us. An organization uses abundant natural resources for its
production purposes and hence should be ethical in its utilization. It should follow the
principle of sustainable development and not exhaustive development.

4. Corporate Culture
It is the set of shared values, beliefs, goals, norms that prevail within an organization. If
the company makes huge profits in unethical way then individuals who join the
organization would also have to practice unethical activities to survive in the company.
As in the case of Enron where many executives and managers knew the company was
following some illegal and unethical practices, but the executives and managers did not
know how to make the ethical decisions and corporate ethical culture. Thus they fall
back and managers have to pay in the form of fines and imprisonment.

5. Strategy and performance

 To integrate ethics into the business strategy, business people have to add three
more questions :
 What do we stand for?
 What is our purpose?
 What values do we have?

6. Corporate governance
It is a set of systems and processes that a company follows to ensure that it is in the
best interest of the stake holders. Stake holders are the shareholders, customers,
creditors, government, suppliers and the community.

7. Other factors include:

 Importance of profit and other similar motives of the business and its managers
in relation to the importance of morality, honesty and other similar values.
 The extent of responsibility of business for specific areas and to the community in
general. It includes environmental protection, equality and fairness dealing with
stakeholders, product quality and reliability and a betting corruption.
 Personal value system and beliefs of the owners and managers of the business.
 Impact of ethical behavior on short and long term prospects and performance of
business.
 The company policies, rules, work-procedures and system.
 The organizational culture and shared values.

Values:

Values are stable, long lasting beliefs about what is important to an individual. Values are
very important silent force affecting human because values have an important influence on
the attitudes, perceptions, and needs and motives of the people at work. Values are the
basis of human personality.
Values are collective conceptions of what is considered good, desirable, and proper or
bad, undesirable, and improper in a culture.

According to M. Haralambos (2000), “a value is a belief that something is good and

desirable”.

For R.K. Mukerjee (1949) “values are socially approved desires and goals that are internalized
through the process of conditioning, learning or socialization and that become subjective
preferences, standards and aspirations”.

A value is a shared idea about how something is ranked in terms of desirability, worth or
goodness.

Characteristics:
1. Values may be specific or general: Values may be specific, such as honoring one’s
parents or owning a home or they may be more general, such as health, love and democracy.
“Truth prevails”, “love thy neighbour as yourself,

2. Value systems can be different from culture to culture- One may value aggressiveness
and deplores passivity, another the reverse, and a third gives little attention to this dimension
altogether, emphasizing instead the virtue of sobriety over emotionality, which may be quite
unimportant in either of the other cultures.

This point has very aptly been explored and explained by Florence Kluchkhon (1949) in her
studies of five small communities (tribes) of the American south-west. One society may value
individual achievement (as in USA), another may emphasize family unity and kin support (as in
India). The values of hard work and individual achievement are often associated with industrial
capitalist societies.

3. Remain stable during one’s lifetime- The values of a culture may change, but most remain
stable during one person’s lifetime. Socially shared, intensely felt values are a fundamental
part of our lives. Values are often emotionally charged because they stand for things we
believe to be worth defending. Often, this characteristic of values brings conflict between
different communities or societies or sometimes between different persons.

4.Values can be learn from family, friends and society etc.- Most of our basic values are
learnt early in life from family, friends, neighbourhood, school, the mass print and visual
media and other sources within society. These values become part of our personalities.
They are generally shared and reinforced by those with whom we interact.

5. Judgemental element- They contain a judgmental element in that they carry an individual’s
ideas as to what is right, good, or desirable.

6. Guiding behaviour- They influence people’s behavior and serve as criteria for evaluating the
actions of others.
7. Creating norms of life- They have a great role to play in the conduct of social life. They help
in creating norms to guide day-to-day behavior.

Types of values:
1. Individual values: These are the values which are related with the development of
human personality or individual norms of recognition and protection of the human personality
such as honesty, loyalty, Truthfulness and honour.

2. Collective values: Values connected with the solidarity of the community or collective
norms of society which includes equality, justice, solidarity and socialism etc. are known
as collective values.

3. Instrumental Value: Instrumental values reflect the means to achieve goals; that is, they
represent the acceptable behaviour to be used in achieving some end state or goal.
Instrumental values identified by path which includes ambition, honesty, self-sufficiency and
courageousness. An instrumental value is a tool or means for acquiring a terminal value.

4. Terminal Value: Terminal values, in contrast, represent the goals to be achieved or the end
states of existence by following a particular path. It includes happiness, love, pleasure, self-
respect, and freedom among the terminal values.