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Business Ethics
Week 1
What is ethics?
• The study and philosophy of human conduct, with an
emphasis on determining right and wrong.
• Ethics is the study of what needs to be considered as
norms within a society
• Rules and norms are important for all type of human
relationships
• Values and judgments play a critical role when we
make ethical decisions.
Business Ethics
• Business ethics relate to rules, standards, and
moral principles regarding what is right or
wrong in specific situations.
• For our purposes, business ethics comprises
the principles, values, and standards that
guide behavior in the world of business.
Principles and Values
• Principles are specific and pervasive boundaries
for behavior that are universal and absolute.
• Principles often become the basis for rules. Some
examples of principles include freedom of
speech, fundamentals of justice, and equal rights
to civil liberties.
• Values are used to develop norms that are
socially enforced. Integrity, accountability, and
trust are examples of values.
Importance of Business ethics
• In recent years, a number of well-publicized scandals resulted in
public outrage about deception and fraud in business and a
demand for improved business ethics and greater corporate
responsibility.
• The global financial crisis took a toll on consumer trust of financial
services companies. A study of 650 U.S. consumers by Lightspeed
Research and Cohn & Wolfe revealed that 66 percent of
respondents did not feel that the financial services industry would
help them to regain the wealth that they lost during the recession.
• Words used to describe this industry included greedy, impersonal,
opportunistic, and distant.
Importance of Business Ethics
• According to another poll by Deloitte and Touche of
teenagers aged 13 to 18 years old, when asked if people
who practice good business ethics are more successful than
those who don’t, 69 percent of teenagers agreed.
• If profits are realized through misconduct the life of the
organization may be shortened.
• Many firms, including Lehman Brothers and Enron, that
made headlines due to wrongdoing and scandal ultimately
went bankrupt or failed because of the legal and financial
repercussions of their misconduct.
Why study business ethics?
• Studying business ethics will help you begin to identify
ethical issues when they arise and recognize the
approaches available for resolving them.
• You will also learn more about the ethical decision
making process and about ways to promote ethical
behavior within your organization.
• By studying business ethics, you may begin to
understand how to cope with conflicts between your
own personal values and those of the organization in
which you work.
Declining Ethical standards
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Abusive behavior,
harassment,
accounting fraud,
conflicts of interest,
defective products,
bribery, and
employee theft
are all problems cited as evidence of declining
ethical standards.
Corporate scandals
• Scandals in the corporate world made business ethics an
important area of study
• Tyco International is a diversified manufacturing
conglomerate that deals with electronic components,
health care, fire safety, security, and fluid control with
headquarters in New Jersey, USA. In 2005, its CEO Dennis
Kozlowski and CFO Mark H. Swartz were found guilty of
stealing $600 million from the company. These two
symbolized the excesses of executive compensation at
shareholder’s expense, where Kozlowski will be
remembered for the $2 million birthday bash he gave his
wife on a Mediterranean Island at the company’s expense.
Some examples
• Parmalat, an Italian company, is the leading
global producer of Ultra Hot Temperature (UHT)
milk and other foods. However, its founder,
Calisto Tanzi was accused of questionable
accounting practices in 2003 when a €14 billion
hole was discovered in the company’s accounting
records. This resulted in one of the biggest
corporate scandals in history as he was selling
credit-linked notes to the company and diverting
the company’s funds elsewhere.
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Adelphia Communications Corp
• was ranked as the fifth largest cable company
in the US before it yielded to bankruptcy in
2002 due to internal corruption. The company
incurred $2.3 billion debt and its founders
were charged with securities violations. John
and Timothy Rigas were sentenced to 15 to 20
years in prison, while five other officers were
indicted. The Rigases made a complicated
cash-management system where they
diverted funds to other family-owned entities.
System or the agent?
• Who is responsible for the bad behaviour?
System or the agent?
• A Junior Achievement/Deloitte survey of teens
showed that 71 percent feel prepared to make
ethical decisions in the workplace.
• However, of those surveyed, 38 percent feel it is
sometimes necessary to lie, cheat, plagiarize, or
engage in violence to succeed.
The Ring of Gyges
• The Ring of Gyges is a mythical magical artifact
mentioned by the philosopher Plato in book 2
of his Republic (2.359a–2.360d).
• It granted its owner the power to become
invisible at will. Through the story of the ring,
Republic considers whether an intelligent
person would be moral if he did not have to
fear being caught and punished.
Why do we behave morally?
• Fear?
• Benefit?
• Principles?
Stakeholder Theory
• Stakeholder theory is a theory of organizational
management and business ethics that addresses
morals and values in managing an organization.
• It was originally detailed by R. Edward Freeman in
the book Strategic Management: A Stakeholder
Approach, and identifies and models the groups
which are stakeholders of a corporation, and both
describes and recommends methods by which
management can give due regard to the interests
of those groups.
Stakeholders
• In a business context, customers, investors
and shareholders, employees, suppliers,
government agencies, communities, and many
others who have a “stake” or claim in some
aspect of a company’s products, operations,
markets, industry, and outcomes are known as
stakeholders.
Stakeholder Theory
• A stakeholder framework helps identify the internal
stakeholders such as employees, boards of directors,
and managers and external stakeholders such as
customers, special interest groups, regulators, and
others who agree, collaborate, and have confrontations
on ethical issues.
• Most ethical issues exist because of conflicts in values
and belief patterns about right and wrong between and
within stakeholder groups.
• This framework allows a firm to identify, monitor, and
respond to the needs, values, and expectations of
different stakeholder groups.
Stakeholders
Stakeholders apply their values and standards to
many diverse issues;
• working conditions
• consumer rights
• environmental conservation
• product safety
• proper information disclosure
Power of Stakeholders
• Shareholders supply capital; suppliers offer
material resources or intangible knowledge;
employees and managers grant expertise,
leadership, and commitment; customers
generate revenue and provide loyalty and
positive word-of-mouth promotion; local
communities provide infrastructure; and the
media transmits positive corporate images.
• Stakeholders’ ability to withdraw—or to threaten
to withdraw—these needed resources gives them
power over businesses.
Nike case
• Nike experienced a backlash from its use of offshore
subcontractors to manufacture its shoes and clothing.
• When Nike claimed no responsibility for the
subcontractors’ poor working conditions and extremely
low wages, some consumers demanded greater
accountability and responsibility by engaging in
boycotts, letter-writing campaigns, and public service
announcements.
• Nike ultimately responded to the growing negative
publicity by changing its practices and becoming a
model company in managing offshore manufacturing.
Identifying Stakeholders
• Primary and secondary stakeholders
• Primary stakeholders are those whose continued
association is absolutely necessary for a firm’s
survival. These include:
• Employees
• Customers
• investors and shareholders,
• the governments and communities that provide
necessary infrastructure.
Secondary stakeholders
• Secondary stakeholders do not typically engage in transactions
with a company and thus are not essential for its survival. These
include:
• the media
• trade associations
• special interest groups.
The American Association of Retired People (AARP), a special interest
group, works to support retirees’ rights such as health care benefits.
Both primary and secondary stakeholders embrace specific values and
standards that dictate what constitutes acceptable or unacceptable
corporate behaviors.
stakeholder orientation
• The degree to which a firm understands and addresses
stakeholder demands can be referred to as a
stakeholder orientation.
This orientation comprises three sets of activities:
(1) The organization-wide generation of data about
stakeholder groups and assessment of the firm’s
effects on these groups
(2) The distribution of this information throughout the
firm, and
(3) the organization’s responsiveness as a whole to this
intelligence.
“the basic mission of business [is] thus to
produce goods and services at a profit, and in
doing this, business [is] making its maximum
contribution to society and, in fact, being
socially responsible.” Milton Friedman
Invisible hand vs. ethical regulation
• A governance system that does not provide checks and balances
creates opportunities for top managers to put their own selfinterests before those of important stakeholders. While many
people lost their investments, some CEOs were able to profit off of
the latest recession, even as their companies and shareholders
fared poorly.
• Some directors even tweaked performance targets in order to make
goals easier to achieve so that they could receive more bonus
money.
• Bonuses have become a very contentious issue—as they are the
part of an executive’s pay most tied to performance. Many people
are asking why executives continue to receive bonuses as their
companies fail, but most of the time bonuses are tied to targets
other than stock prices.