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Article: BUSINESS ETHICS
By: Kevin O’Sullivan, CIMA, MBA, Examiner - Professional 2 Strategy & Leadership.
There is strong evidence emerging that ethics is becoming a strategic imperative for companies to
succeed in today‟s marketplace. It is often argued that “good business is better business”. An ethical
decision is one that is both legal and meets the shared ethical standards of the community.
Companies face ethical issues and decisions almost every day and in some industries these can be
very significant - for example, should supermarkets sell alcoholic drinks cheaper than bottled water?
Should companies use „sweat-shops‟ to keep the selling price low for their customers? Should
companies target children with their advertisements? Some of these are being looked at in terms of
government legislation but in the absence of this the ethical issues still need to be addressed by
companies.
Ethics can be considered as the moral guidelines that govern good behaviour, behaving ethically can
be regarded as doing what is morally right. It is the applied ethics discipline that addresses the moral
features of commercial activity – deciding what is right or wrong in the workplace and doing what is
right.
A Brief History of Business Ethics
The Code of Hammurabi was created nearly 4,000 years ago and was an attempt by Mesopatamian
rulers to create honest prices, so the concept of business ethics has been around since the earliest of
business transactions. In the 4th Century BC, Aristotle discussed the vices and virtues of tradesmen
and merchants. Both the Old Testament and the Jewish Talmud discuss topics such as fraud, theft,
misleading advertising, fair pricing, environmental issues, and the proper way to conduct business.
The Koran and the New Testament discuss business ethics as it relates to poverty and wealth. So
throughout the history of commerce attempts have been made to develop codes of good business
practice.
Several examples exist of ethical scandals that have been occurring since trade began. One of the
earliest business scandals was the collapse of the South Sea Company in the early 1700s. This was
where a complex network of financial, legal, political, and cultural factors all contributed to the
development of the South Sea Bubble. It involved elements of „insider trading‟ and bribery and
eventually led to the collapse of the South Sea Company in 1720, which left many investors financially
ruined.
During the 19th century, the creation of monopolies and the use of slavery were important ethical
issues, which continue to be relevant ethical issues today with companies using „sweat shops‟ to
produce goods for major brands, and monopolistic practices still existing. In more recent times,
business ethics has moved through several stages of development. Prior to the 1960s concepts of
ethics and corporate social responsibility were hardly considered. This changed in the 1960s when
social issues such as safety in the workplace, the environment, and consumer issues began to
emerge.
It was in the late 1970s that academia began to take an interest in business ethics. U.S. Schools
began offering courses in business ethics and during the 1980s there was the emergence of journals,
textbooks, and research centres specifically focussing on business ethics. This led to business ethics
becoming integrated into many large corporations during the late 1980s and early 1990s with the
development of corporate codes of ethics, ethics training, and ethics officers. As globalisation grew,
with increased international business activity, issues of bribery and corruption of government officials,
use of child labour by suppliers pursuing lower costs, and questions of whether companies should do
business in countries where human rights were abused began to arise.
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From the start of the new century, business ethics has focussed on major corporate scandals such as
Enron (2001), Worldcom and Tyco (both 2002), Parmalat (2003), and AIG (2005) to name just a few.
This led to a new phase of government regulation and enhanced the use of business ethics but
ethical scandals still arose with alarming regulatory. For example, Channel 4 News, in the UK,
reported that in 2012 allegations of a banking conspiracy resulted in several criminal probes and
forced Barclays to pay a record fine of $461m to the US Justice Department and UK FSA. Channel 4
News later reported that international companies such as Starbucks, Google and Amazon were using
legal (but what some commentators consider undesirable) methods to minimise their UK tax
payments - and in the case of Starbucks paying no income tax at all on sales of £1.2 billion in a three
year period.. In April 2013 the British House of Commons public accounts committee accused some
large corporates of "using the letter of tax laws both nationally and internationally to immorally
minimise their tax obligations".
Approaches to Ethics
There are a number of different approaches to Ethics.
Duty-based or Deontological ethics (e.g Kant’s Theory of Ethics)
This is a family of ethical theories encompassing moral rules. It is a non-consequentialist approach
where the consequences of an action are not taken into account (for the decision) the rule is the rule
regardless of the consequences, whereas consequentialist approaches consider the outcome of the
decision as part of the decision making process. The word 'deontological' comes from the Greek
word deon, which means 'duty'.
Consequentialism: results-based ethics (e.g. Utilitarian Theory)
The Internet Encyclopedia of Philosophy defines consequentialism as:
Of all the things a person might do at any given moment, the morally right action is the one with the
best overall consequences.”
It is based on two principles, firstly that the results of an action determine whether it is right or wrong,
and secondly, the better the consequences the more right the action is. A person should choose the
action that brings the most good.
Virtue ethics (e.g. the works of Plato and Aristotle)
This is character-based ethics - a correct act is the action a virtuous person would make in the same
circumstances. It looks at the virtue or moral character of the person rather than at ethical duties and
rules, or the consequences of particular actions. Virtue ethics provides guidance as to the sort of
characteristics and behaviours a good person will seek to achieve, it is concerned with the whole of a
person‟s life - a good person is someone who lives in a principled way.
Situation ethics [contextualism] (e.g. the works of Joseph Fletcher)
The right thing to do depends on the situation, there are no universal moral rules or rights - each case
is unique and deserves a unique solution.
Situation ethics rejects 'manufactured decisions and inflexible rules'. Ethical decisions should follow
flexible guidelines rather than specific rules, and should be taken on a case by case basis. A person
who practices situation ethics approaches ethical problems with some broad moral principles rather
than a strict set of ethical laws and is prepared to give up even those principles if doing so will lead to
a greater good.
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Ethical Standards
There are at least five different theories of ethical standards.
Under the Utilitarian Theory actions are based on their impact on the persons affected and the goals
are to serve the greatest good for the greatest number of people. Under this approach satisfying the
stakeholders in an organisation‟s operating environment is a priority as by satisfying customers,
suppliers, creditors, employees etc., the organisation can be said to be serving the greatest good of
the greatest number.
The Theory of Rights stresses minority rather than majority rights or benefits. Decisions made on
the moral-rights approach emphasise the importance of protecting the fundamental liberties and
privileges of all individuals and groups. From this perspective, the greatest good for the greatest
number is no longer an acceptable moral measuring rule on its own. If serving the interest of the
majority infringes on the rights of even a small minority then this decision or act is not regarded as
ethical.
The Theory of Justice emphasises the principles of fairness, equity and impartiality. Measures of
fairness, equity and impartiality are based on two principles – the Liberty Principle and the Difference
Principle. The Liberty Principle states that each person is entitled to liberties comparable to the
liberties afforded to all other people. The Difference Principle states that the most disadvantaged are
the ones to whom the most benefits should be directed – social and economic balance, or equity, are
achieved.
The Common Good Approach attempts to promote the common values and moral or ethical
principles found in society. It suggests that the interlocking relationships of society are the bases for
ethical reasoning and this reasoning includes respect and compassion for all others, especially the
vulnerable. This can vary greatly from place to place for example, the moral beliefs in Japan will be
different from those in Western Europe.
The Virtue Approach suggests that ethical actions should be consistent with certain ideal virtues that
should be evident in society - honesty, tolerance, integrity, and compassion would all be examples of
virtues that enable us to act to the highest potential of our character. Central to the virtue approach is
the idea of “community”, that a person‟s character traits are not developed in isolation but within and
by the communities to which they belong. As people mature, their character is deeply affected by the
values their communities prize and by the personality traits that their communities encourage.
Stakeholder Theory
There are two differing views concerning how companies should approach a definition for business
ethics - the shareholder perspective and the stakeholder perspective. “Ethics in the boardroom and in
the governance of enterprises, rather than a constant eye on the needs of shareholders, is the way
forward to building trust in our economic sector ... Knowing what is the right thing to do in a situation,
and then doing it, comes from exercising self-awareness, personal integrity and often no small
amount of courage.” (Chief Justice of Ireland, Susan Denham, quoted in the Irish Times July 2013)
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Those who approach ethical decision making from a shareholder perspective focus on making
decisions for the benefit of the owners of the business. Decisions tend to be guided by a need to
maximise shareholder wealth and tend to focus on ethical practices that make the most money.
However, prioritising shareholders may compromise business ethics.
Those who follow the stakeholder perspective believe that companies should consider the needs and
interests of many stakeholder groups not just the shareholders. They consider how decisions impact
those inside and outside the organization. Stakeholders are individuals or groups who are affected by
or who affect a company's actions and decisions. Shareholders are only one of the groups who fall
under the definition of stakeholder. Stakeholders include investors, employees, suppliers, customers,
competitors, government agencies, the news media, community residents and others. The idea
behind stakeholder based ethical decision making is to make sound business decisions that work for
the good of all affected parties. When considering multi-stakeholders many conflicts of expectations
can arise. The more common conflicts include growth versus profitability, efficiency versus jobs,
mass appeal versus quality, ownership versus accountability, short-term versus investment. Recent
adverse publicity surrounding Primark and poor workers‟ conditions perhaps demonstrates the conflict
between shareholder and stakeholder expectations.
In summarising a company‟s responsibilities to its stakeholders - owners/shareholders rightfully
expect some form of return on their investment; employees rightfully expect respect for their worth
and devoting their energies to the company; customers rightfully expect the company to provide them
with a reliable, safe product or service; suppliers rightfully expect to have an equitable relationship
with companies they supply; and, the community rightfully expect companies to be good citizens in
their community.
Agency Theory is also relevant because owners will tend to reward management for achieving the
best outcome for the owners, so the managers may focus on making decisions solely for the benefit
of these owners. However, with larger companies, as shareholdings become dispersed their
influence can become less and then managers may make decisions for their own benefit, that is what
brings them the greatest reward.
A business cannot be any more or less ethical than the people who manage it and work for it. The
lead regarding behaviours that are acceptable or unacceptable are taken from the company‟s
directors/managers and how they act, and from the behaviours the workers see being rewarded by
management. Businesses that are managed by ethical leaders and who reward ethical behaviour are
much more likely to foster a positive ethical culture. In a time when business ethics are coming under
increasing scrutiny companies must build stakeholders‟ and employees‟ trust and ensure legal
compliance and ethical behaviour.
A Framework for Making Ethical Decisions
There are a number of alternative frameworks that can be used for making ethical decisions one
would involve the following steps:
Step 1 - Evaluate Decision from Ethical Standpoint: Identify affected stakeholders, are stakeholder
rights being violated?
Step 2 - Evaluate Decision from Ethical Standpoint: Moral principles such as:
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)
Step 3 - Establish Moral Intent: Considering these approaches, which option best addresses the
situation?
Step 4 - Engage in Ethical Behaviour: Implemented the decision with the greatest care and attention
to the concerns of all stakeholders?
Step 5 - Reflect on the Outcome: How did the decision turn out and what has been learned from this
specific situation?
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Being ethical means more than just obeying the law and the fact that something can be done does
also not mean that it is ethical to do it. Just think about the ethical debates relating to biotechnological advances such as cloning. Also ethics and religion do not always correspond and the
intricacies of an issue may be beyond the knowledge and experience of those making the decisions.
In the following diagram:
Area 1 - profitable, legal and ethical – a good decision
Area 2a - profitable and legal – proceed with caution
Area 2b - profitable and ethical and probably legal – proceed with caution
Area 3 – legal and ethical but not profitable, find ways to make profitable.
A Venn Diagram for Ethical Decision-Making
There is a close link between ethics and corporate social responsibility (CSR). A socially responsible
company should be ethical and an ethical company should be socially responsible, however, there is
also a clear distinction between them both. Ethics is concerned with morally correct behaviour, CSR
is about responsibility to all stakeholders.
The diagram below shows the different levels of responsibility that can apply in decisions that are
being made, beginning with economic and legal responsibility, moving on to ethical responsibility, and
finally reaching Corporate Social Responsibility which considers the effect on society as a whole.
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Behaving ethically in business is often regarded as good business practice. Henry Kravis claimed “If
you don't have integrity, you have nothing. You can't buy it. You can have all the money in the world,
but if you are not a moral and ethical person, you really have nothing” while Dame Anita Ruddock
(Body Shop) asserted that “being good is good business” yet there has been a rash of corporate
scandals in recent years (Enron 2001, News International 2012) that has led to the whole area of
compliance, governance and ethics receiving increasing levels of public and media scrutiny.
Business in the Community is an organisation that stands for responsible business. The above chart
shows that companies in Business In The Community‟s Corporate Responsibility (BITC CR) Index
outperform the FTSE-350 - shareholders get an average 10% higher shareholder return. Possible
reasons put forward are a) strong pro-social performance suggests forward-thinking management; b)
these companies have embedded sustainability into their operations; and c) they also embed prosocial objectives into their core business development thereby engaging consumers and growing new
markets. It can be argued that behaving ethically is a predictor of business performance.
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Ethics and the Accountancy Profession
The mission of the International Federation of Accountants (IFAC), as set out in its constitution, is “to
serve the public interest by contributing to the development, adoption and implementation of highquality international standards and guidance; contributing to the development of strong professional
accountancy organizations and accounting firms, and to high quality practices by professional
accountants; promoting the value of professional accountants worldwide; and speaking out on public
interest issues where the accountancy profession‟s expertise is most relevant.” At the inaugural
meetings of the IFAC Assembly and of the Council in Munich, Germany in October 1977 IFAC
adopted a 12-point work programme. The second point on this programme was to establish the basic
principles which should be included in the code of ethics of any member body of IFAC and to refine or
elaborate on such principles as deemed appropriate.
In pursuing the above mission, the IFAC Board has established the International Ethics Standards
Board for Accountants (IESBA) to function as an independent standard-setting body under the
auspices of IFAC and subject to the oversight of the Public Interest Oversight Board (PIOB).
The IESBA develops and issues, in the public interest and under its own authority, high-quality ethics
standards and other pronouncements for professional accountants for use around the world. The
IFAC Board has determined that designation of the IESBA as the responsible body, under its own
authority and within its stated terms of reference, best serves the public interest in achieving this
aspect of its mission. CPA Ireland is a member of IFAC along with another 172 members and
associates.
The Ethical Requirements of Students and Members of CPA Ireland
“A profession has been defined as a group of individuals who adhere to ethical standards and uphold
themselves as possessing special knowledge and skills in a widely recognised body of learning, and
who exercise this knowledge and these skills in the interest of others. It is inherent in the definition of
a profession that a code of ethics governs the activities of each professional. Such codes require
behaviour and practice beyond the personal legal and moral obligations of an individual. They define
and demand high standards of behaviour in respect to the services provided to the public and in
dealing with professional colleagues. Further, these codes are enforced by the profession and are
acknowledged and accepted by the community.” Brendan Allen, FCPA, President‟s Perspective, 2007
CPA Ireland Annual Report.
All students and members of CPA Ireland are required to adhere to the Institute‟s Code of Ethics
(Code) which incorporates the IFAC Code of Ethics. The circumstances in which students and
members operate may create specific threats to compliance with the fundamental principles, listed a)
to e) below. It is impossible to define every situation that creates threats to compliance with the
fundamental principles and specify the appropriate action. In addition, the nature of engagements and
work assignments may differ and, consequently, different threats may be created, requiring the
application of different safeguards. Therefore, the Code establishes a conceptual framework that
requires a student or member to identify, evaluate, and address threats to compliance with the
fundamental principles. The conceptual framework approach assists each student or member in
complying with the ethical requirements of this Code and meeting the responsibility to act in the public
interest. It accommodates many variations in circumstances that create threats to compliance with the
fundamental principles and can deter a student or member from concluding that a situation is
permitted if it is not specifically prohibited.
Fundamental principles defined in the Code
There are five fundamental principles defined in the /code. These are:
a) Integrity Each student and member shall be straightforward and honest in all professional and
business relationships.
b) Objectivity Each student and member shall not allow bias, conflict of interest or undue influence of
others to override professional or business judgments.
c) Professional Competence and Due Care Each student and member shall maintain professional
knowledge and skill at the level required to ensure that a client or employer receives competent
professional service based on current developments in practice, legislation and techniques. A
member shall act diligently and in accordance with applicable technical and professional
standards when providing professional services.
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d) Confidentiality Each student and member shall respect the confidentiality of information acquired
as a result of professional and business relationships and shall not disclose any such information
to third parties without proper and specific authority unless there is a legal or professional right or
duty to disclose. Confidential information acquired as a result of professional and business
relationships shall not be used for the personal advantage of the member or third parties.
e) Professional Behaviour Each student and member shall comply with relevant laws and
regulations and shall avoid any action that discredits the profession.
These fundamental principles are discussed in more detail in Sections 110 – 150 of the Code. The
code may be accessed by clicking here.
Conclusion
Despite the evidence that ethical behaviour can help profits there are still numerous examples of
companies behaving unethically. Can companies be left to regulate themselves when it can be seen
that companies that are not regulated often act selfishly and even recklessly? The answer may be
legislation but then companies can move to other countries where there are no laws or ethical
standards are much lower. It is unrealistic to expect that governments can legislate effectively in the
international community, so the onus is likely to fall back on the companies themselves.
Governments are paying more attention to how international companies operate within their
boundaries and the existence of pressure groups and lobbying groups may also have a vital role to
play.
Bibliography:
Articles:
Belak, J. & Rozman, M.P.
Group Publishing Ltd
Bowie, N. E.
Business ethics from Aristotle, Kant and Mill‟s perspective Emerald
Business Ethics and Normative Theories Blackwell Publishing
Friedman, M. (1970). "The Social Responsibility of Business is to Increase Profit", The New York
Times Magazine
McDowell, T (2006) “Deloitte‟s three ways to instil ethical guidelines” Strategic H.R. Review, Chicago
pg 16-19 Vol 5, Iss. 5 July/August
Books:
Scott, G.G.
(1998) Making Ethical Choices, Resolving Ethical Dilemmas
Paragon House St. Paul, MN
th
Fisher, C Lovell, A Dr Valero-Silva N (2012) Business Ethics and values Pearson Education 4
Edition, London
th
Desjardins, J.R. (2013) An Introduction to Business Ethics McGraw-Hill 5 Edition
Websites:
CPA Ireland www.cpaireland.ie
International Federation of Accountants: www.ifac.org/
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