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What Is Business Ethics? Definition,

Principles, and Importance
By ALEXANDRA TWIN Updated January 25, 2024

Reviewed by AMY DRURY

Fact checked by YARILET PEREZ

What Is Business Ethics?

Business ethics is the moral principles, policies, and values that govern the way
companies and individuals engage in business activity. It goes beyond legal
requirements to establish a code of conduct that drives employee behavior at
all levels and helps build trust between a business and its customers.

KEY TAKEAWAYS
Business ethics refers to implementing appropriate business policies
and practices with regard to arguably controversial subjects.
Some issues that come up in a discussion of ethics include corporate
governance, insider trading, bribery, discrimination, social
responsibility, and fiduciary responsibilities.
The law usually sets the tone for business ethics, providing a basic
guideline that businesses can choose to follow to gain public approval.
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Investopedia / Katie Kerpel

Understanding Business Ethics

Business ethics ensure that a certain basic level of trust exists between
consumers and various forms of market participants with businesses. For
example, a portfolio manager must give the same consideration to the
portfolios of family members and small individual investors as they do to
wealthier clients. These kinds of practices ensure the public receives fair
treatment.

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The concept of business ethics began in the 1960s as corporations became

more aware of a rising consumer-based society that showed concerns regarding
the environment, social causes, and corporate responsibility. The increased
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focus on "social issues" was a hallmark of the decade.

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Since that time, the concept of business ethics has evolved. Business ethics
goes beyond just a moral code of right and wrong; it attempts to reconcile what
companies must do legally vs. maintaining a competitive advantage over other
businesses. Firms display business ethics in several ways.

Important: Business ethics ensure a certain level of trust between

consumers and corporations, guaranteeing the public fair and equal
treatment.

Principles of Business Ethics

It's essential to understand the underlying principles that drive desired ethical
behavior and how a lack of these moral principles contributes to the downfall
of many otherwise intelligent, talented people and the businesses they
represent.
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There are generally 12 business ethics principles:

Leadership: The conscious effort to adopt, integrate, and emulate the other
11 principles to guide decisions and behavior in all aspects of professional
and personal life.
Accountability: Holding yourself and others responsible for their actions.
Commitment to following ethical practices and ensuring others follow ethics
guidelines.
Integrity: Incorporates other principles—honesty, trustworthiness, and
reliability. Someone with integrity consistently does the right thing and
strives to hold themselves to a higher standard.
Respect for others: To foster ethical behavior and environments in the
workplace, respecting others is a critical component. Everyone deserves
dignity, privacy, equality, opportunity, compassion, and empathy.
Honesty: Truth in all matters is key to fostering an ethical climate. Partial
truths, omissions, and under or overstating don't help a business improve its
performance. Bad news should be communicated and received in the same
manner as good news so that solutions can be developed.

Respect for laws: Ethical leadership should include enforcing all local, state,
and federal laws. If there is a legal grey area, leaders should err on the side of
legality rather than exploiting a gap.
 Responsibility: Promote ownership within an organization, allow employees
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to be responsible for their work, and be accountable for yours.
Transparency: Stakeholders are people with an interest in a business, such
as shareholders, employees, the community a firm operates in, and the
family members of the employees. Without divulging trade secrets,
companies should ensure information about their financials, price changes,
hiring and firing practices, wages and salaries, and promotions are available
to those interested in the business's success.
Compassion: Employees, the community surrounding a business, business
partners, and customers should all be treated with concern for their well-
being.
Fairness: Everyone should have the same opportunities and be treated the
same. If a practice or behavior would make you feel uncomfortable or place
personal or corporate benefit in front of equality, common courtesy, and
respect, it is likely not fair.

Loyalty: Leadership should demonstrate confidentially and commitment to

their employees and the company. Inspiring loyalty in employees and
management ensures that they are committed to best practices.
Environmental concern: In a world where resources are limited, ecosystems
have been damaged by past practices, and the climate is changing, it is of
utmost importance to be aware of and concerned about the environmental
impacts a business has. All employees should be encouraged to discover and
report solutions for practices that can add to damages already done.

Why Is Business Ethics Important?

There are several reasons business ethics are essential for success in modern
business. Most importantly, defined ethics programs establish a code of
conduct that drives employee behavior—from executives to middle
management to the newest and youngest employees. When all employees
make ethical decisions, the company establishes a reputation for ethical
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behavior. Its reputation grows, and it begins to experience the benefits a moral
establishment reaps:

Brand recognition and growth

Increased ability to negotiate
Increased trust in products and services
Customer retention and growth
Attracts talent
Attracts investors

When combined, all these factors affect a business' revenues. Those that fail set
ethical standards and enforce them are doomed to eventually find themselves
alongside Enron, Arthur Andersen, Wells Fargo, Lehman Brothers, Bernie
Madoff, and many others.

Types of Business Ethics

There are several theories regarding business ethics, and many different types
can be found, but what makes a business stand out are its corporate social
responsibility practices, transparency and trustworthiness, fairness, and
technological practices.

Corporate Social Responsibility

Corporate social responsibility (CSR) is the concept of meeting the needs of
stakeholders while accounting for the impact meeting those needs has on
employees, the environment, society, and the community in which the business
operates. Of course, finances and profits are important, but they should be
secondary to the welfare of society, customers, and employees—because
studies have concluded that corporate governance and ethical practices
increase financial performance. [1]

Important: Businesses should hold themselves accountable and

responsible for their environmental, philanthropic, ethical, and
economic impacts.

Transparency and Trustworthiness

It's essential for companies to ensure they are reporting their financial
performance in a way that is transparent. This not only applies to required
financial reports but all reports in general. For example, many corporations
publish annual reports to their shareholders.

Most of these reports outline not only the submitted reports to regulators, but
how and why decisions were made, if goals were met, and factors that
influenced performance. CEOs write summaries of the company's annual
performance and give their outlooks.

Press releases are another way companies can be transparent. Events

important to investors and customers should be published, regardless of
whether it is good or bad news.
Technological Practices and Ethics
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The growing use of technology of all forms in business operations inherently
comes with a need for a business to ensure the technology and information it
gathers is being used ethically. Additionally, it should ensure that the
technology is secured to the utmost of its ability, especially as many businesses
store customer information and collect data that those with nefarious
intentions can use.

Fairness
A workplace should be inclusive, diverse, and fair for all employees regardless
of race, religion, beliefs, age, or identity. A fair work environment is where
everyone can grow, be promoted, and become successful in their own way.

How to Implement Good Business Ethics

Fostering an environment of ethical behavior and decision-making takes time
and effort—it always starts at the top. Most companies need to create a code of
conduct/ethics, guiding principles, reporting procedures, and training
programs to enforce ethical behavior.

Once conduct is defined and programs implemented, continuous

communication with employees becomes vital. Leaders should constantly
encourage employees to report concern behavior—additionally, there should
be assurances that if whistle-blowers will not face adversarial actions.

Tip: A pipeline for anonymous reporting can help businesses identify

questionable practices and reassure employees that they will not
face any consequences for reporting an issue.

Monitoring and Reporting Unethical Behavior

When preventing unethical behavior and repairing its adverse side effects,
companies often look to managers and employees to report any incidences
they observe or experience. However, barriers within the company culture
(such as fear of retaliation for reporting misconduct) can prevent this from
happening.

Published by the Ethics & Compliance Initiative (ECI), the Global Business Ethics
Survey of 2021 surveyed over 14,000 employees in 10 countries about different
types of misconduct they observed in the workplace. 49% of the employees
surveyed said they had observed misconduct and 22% said they had observed
behavior they would categorize as abusive. 86% of employees said they
reported the misconduct they observed. When questioned if they had
experienced retaliation for reporting, 79% said they had been retaliated against.
[2] [3]

Indeed, fear of retaliation is one of the primary reasons employees cite for not
reporting unethical behavior in the workplace. ECI says companies should work
toward improving their corporate culture by reinforcing the idea that reporting
suspected misconduct is beneficial to the company. Additionally, they should
acknowledge and reward the employee's courage in making the report.
What Is Business Ethics? TRADE
Business ethics concerns ethical dilemmas or controversial issues faced by a
company. Often, business ethics involve a system of practices and procedures
that help build trust with the consumer. On one level, some business ethics are
embedded in the law, such as minimum wages, insider trading restrictions, and
environmental regulations. On another, business ethics can be influenced by
management behavior, with wide-ranging effects across the company.

What Are Business Ethics and Example?

Business ethics guide executives, managers, and employees in their daily
actions and decision-making. For example, consider a company that has
decided to dump chemical waste that it cannot afford to dispose of properly on
a vacant lot it has purchased in the local community. This action has legal,
environmental, and social repercussions that can damage a company beyond
repair.

What Are the 12 Ethical Principles?

Business ethics is an evolving topic. Generally, there are about 12 ethical
principles: honesty, fairness, leadership, integrity, compassion, respect,
responsibility, loyalty, law-abiding, transparency, and environmental concerns.

The Bottom Line

Business ethics concerns employees, customers, society, the environment,
shareholders, and stakeholders. Therefore, every business should develop
ethical models and practices that guide employees in their actions and ensure
they prioritize the interests and welfare of those the company serves.

Doing so not only increases revenues and profits, it creates a positive work
environment and builds trust with consumers and business partners.
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