Chapter 1

The Importance of
Business Ethics
 Topics we will cover ...
•What is Ethics?
•What is Business Ethics?
•Where it comes from?
•Ethical reference set?
•What Are most common Unethical Business Practices in
organizations?
•Why study Business Ethics?
•Benefits of Business ethics
•Development of Business ethics
•Role of Business ethics in performance
What is Ethics in your point of view?
 What is Ethics?

“ The study of Right & Wrong”

What is Ethics?
 What is Ethics?

So, Ethics is the Art and Science of

determining good or bad, right or
wrong moral behavior which is of
serious consequence to human or
environment.
 Than What is Business Ethics?

Business Ethics asks,

“What is right or wrong,
good or bad, and harmful and
beneficial regarding decisions and
actions in and around organizational
activities.
 Where does the society
drives the sense of right or
wrong? Good or bad?
Laws?
Where do law makers derives
what is good or bad?
Religion ?
Traditions ?
Experiences ?
Common sense?
Your Ethical Reference Set Is...
Religion

Law Experiences

Common
Tradition
Sense
What Are Unethical Business Practices?
Surveys have identified the following recurring themes to
prominent everyday ethical issues facing businesses and their
stakeholders:
• Managers lying to employees
• Office nepotism (biasness) and favoritism
• Taking credit for other’s work
• Receiving/offering kickbacks (Leg pulling)
• Stealing from the company
• Firing an employee for whistle-blowing
• Padding expense accounts
• Divulging confidential information or trade secrets
• Terminating employment without sufficient notice
• Using company property/materials for personal use
Where Unethical Business Practices happening?

The most unethical behavior, per one survey, happens in

the following areas:

 Government
 Sales
 Law
 Media
 Finance
 Medicine
 Banking
 Manufacturing
Levels of Business Ethics…
Because ethical problems are not only an individual or
personal matter, it is helpful to see the different levels at
which issues originate and how they move to other levels.

Five levels are:

• Individual
• Organizational
• Association
• Societal
• International
 Business Ethics & stakeholders...
Business Ethics & stakeholders...
Comprises principles and standards that guide behavior in
the world of business.
•It’s a Controversial Field with no defined nomenclature.
•Whether a specific behavior is ethical or unethical is often
determined by stakeholders:

Investors
Employees
Customers
Interest groups
Legal system
Community
Ethics & Social Responsibility have distinct meanings...

SR is the obligation a business assumes to maximize its

positive effect while minimizing its negative effect on
society.

SR consists of the following responsibilities:

•Economic (satisfy investors)

•Legal (obey the law)
•Ethical (expected activities and behaviors)
•Philanthropic (desired activities and behaviors)
Why Study Business Ethics? Why Study Business Ethics?

Reports of unethical behavior are on the rise especially in large

organizations.

Society’s evaluation of right or wrong affects its ability to

achieve its business goals.

Ethical issues vary from business to business.

Studying business ethics is a response to policies and

stakeholder demands for ethics initiatives.

Individual ethics is not enough.

Studying business ethics helps identify ethical issues to key

stakeholders.
 Ethical Issues On The Rise
Ethical Issues on the Rise
Increased Awareness Of:
•Accounting fraud
•Insider trading of stocks and bonds
•Falsifying of organizational documents
•Deceptive advertising
•Defective products
•Bribery
•Employee theft
Relationship of Business Ethics to Performance
Customers, employees, and investors are major concerns for firms
that want to develop loyalty and COMPETITIVE ADVANTAGE.

Goals are to increase customer dependence on the company and to

provide products in an environment of mutual respect and perceived
fairness.

This focus creates satisfying relationships with employees.

It also supports relationships with

investors based on trust, dependability,
and commitment.
Role of Organization Ethics in Performance

Employee commitment
And Trust

Ethical Climate Profits

Investor Loyalty
And Trust

Customer Satisfaction
And Trust
 Ethics Contributes to Employee Commitment
Ethics Contributes to Employee Commitment
 Employee commitment comes from employees who believe
their future is tied to that of the organization and their
willingness to make personal sacrifices for the organization.

The more dedication on the part of the company, the greater

the employee dedication.

Concerns include a safe work environment, competitive

salaries and benefit packages, and fulfillment of
contractual obligations.

 High level of trust within departments

 Organizational
commitment

The degree to which an employee identifies with a

particular organization and its goals and wishes to

maintain membership in the organization.

 Dimensions of Organizational
commitment

Affective Commitment:
An emotional attachment to the organization and a belief in its values. (e.g.) Employee of a pet

company wants to be with it due to involvement with animals.

Continuance Commitment:
The perceived economic value of remaining with an organization compared to leaving it. (e.g.)
been paid well on job- if leave job will suffer.

Normative Commitment:
An obligation to remain with the organization for moral or ethical reason. (e.g.) if an employee has
started a new venture may remain with the organization because he feels it would “leave the
employer in a lurch” if he/she left.
Ethics Contributes to Investor Loyalty Ethics Contributes to Investor Loyalty

 Companies perceived by their employees as having a high

level of honesty and integrity are more profitable than
companies with a low level of honesty and integrity.

 Size of investors depend on its ethical condition.

 Ethical climates in organizations provide platform for:

Efficiency

Productivity

Profitability
Ethics Contributes to Customer Satisfaction Ethics Contributes to Customer Satisfaction

 Consumers respond positively to socially concerned businesses.

Being good can be extremely profitable.

 Customer satisfaction dictates business success.

√ Customer Feedback

 A strong organizational ethical climate often places the

customer’s interests first. (American Express credit card Example)

 Research shows a strong relationship between

ethical behavior and customer satisfaction.

Ethics Contributes to Customer Satisfaction
Ethics Contributes to Customer Satisfaction

“Being good is good business”

(Anita Roddick)

“A business that makes nothing

but money is a poor kind of
business” (Henry Ford)
Ethics Contributes to Profits…
 Corporate concern for ethical conduct is increasingly being
integrated with strategic planning to maximize profitability.

 Business Ethics and profit is positively associated with:

Return on investment and assets

Sales growth
Can Business Ethics Be Taught And Trained?
Ethic Courses And Training Can Do The Following…

 Provide people with rationales, ideas, and vocabulary.

 Help people make sense of their environments.
 Provide intellectual weapons.
 Enable employees to act as alarm systems for company practices
 Enhance conscientiousness and sensitivity.
 Enhance moral reflectiveness and strengthen moral courage.
 Increase people's ability to become morally autonomous
ethical dissenters.
 Improve the firm’s moral climate
5 Myths About Business Ethics… (Assignment)

A myth is “a belief given uncritical acceptance by the

members of a group, especially in support of existing or
traditional practices and institutions.”

Myth 1: Ethics is a personal, individual affair,

not a public or debatable matter.
Myth 2: Business and ethics do not mix.
Myth 3: Ethics in business is relative.
Myth 4: Good business means good ethics.
Myth 5: Information and computing are amoral
Questions till here …
 Emerging
Business Ethics Issues
Stakeholders Define Ethical Issues in Business

“Stakeholders are those who have a stake or claim in some

aspect of a company’s products, operations, markets,
industry and outcomes”.

◦ Customers – Investors
◦ Employees – Suppliers
◦ Government Agencies – Communities

 Two-way process
 Stakeholders Provide Resources Critical
To A Firm’s Success.
◦ Tangible

 Capital

 Material

 Revenue

 Infrastructure

◦ Intangible
 Knowledge

 Leadership

 Loyalty

 Image and Goodwill

 Types of Stakeholders
 Primary stakeholders
…are those whose continued association is absolutely
necessary for a firm’s survival.
 Employees,

 Customers

 Investors

 Governments

 Communities etc.

 Secondary stakeholders
…do not typically engage in transactions with a
company and are therefore not essential to its
survival.
 Media

 Trade Unions

 Special interest groups etc

 Importance of Stakeholders
“As organizations are becoming more Socially
responsible than just profit making
institutes, Secondary stakeholders are
becoming important”.
aa
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“A business that makes nothing but aa
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money is a poor kind of business” aa
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(Henry Ford)
Stakeholder Interaction Model
Stakeholder Issues
 Stakeholder Orientation
… is the degree to which a firm understands and addresses
stakeholder demands.
 Involves three activities
◦ Generation of data about relevant stakeholder groups
◦ Distribution of the information throughout the firm
◦ The responsiveness of every level to this intelligence
 For e.g.
◦ Family friendly work schedules [Specific group]
◦ Pollution reduction programs [Specific Issue]
 Recognizing an Ethical Issue
“Problem or Situation which requires a
person or organization to choose between
alternatives that must be evaluated as right
(ethical) or wrong (unethical)”.
 Recognizing an ethical issue is difficult

 Abusive or intimidating behavior

 Lying to various stakeholders

 Conflicts of interest

 Is business a war?
Recognizing an Ethical Issue
Recognizing an Ethical Issue
 Causes of Unethical Behavior
 Meeting overly aggressive financial or business
objectives

 Meeting schedule pressures

 Helping the organization survive

 Rationalizing that others do it

 Resisting competitive threats

 Saving jobs
 Honesty and Fairness
 Honesty relates to truthfulness, integrity and trustworthiness.

 Fairness relates to being just, equitable and impartial.

 Breaking or bending laws violates trust.

 Is Business a “game” or not?

 Severe competition gives room to unethical conduct.

 Lack of rules and poor enforcement lead to unethical behavior.

 Conflicts of Interest
… is a conflict between the private interests and the official or
professional responsibilities of a person in a position.
 It is a thought

 Choose whether to advance his or her own personal interests,

those of the organization, or some other group

 The individual must be able to separate personal interests

from business dealings.

 Employees should not accept gifts and favors.

 Bribery is a significant concern.

Fraud
Any purposeful communication that deceives, manipulates, or conceals
facts in order to create a false impression is fraud.
“Fraud is economic crime involving deceit, trickery or false
pretences, by which someone gains unlawfully”.

 It is considered a crime and results in fines.

 Most common activities include:

 Accounting fraud
 Misrepresentation of company’s financial reports

 Professional Services e.g. (Tax man/Accountant)

 Performance based fee

 Regulatory bodies e.g. ICAP

 Marketing fraud
Fraud
Fraud related to creating, distributing, promoting and pricing
products or services
 Deceptive advertising

 Exaggerated claims

 Concealed facts

 Ambiguous statements

 Labeling issues

 Incomplete information

 Consumer fraud
 Shoplifting

 Price tag switching

 Lying [Age related and other discounts]

 Returning used items

 Lying
“The deliberate act of deviating from the truth”.

Three types of Lies:.

 Lying By Embellishment
Lying by embellishment means exaggerating or
changing the details.

 Lying by omission
A lie of omission is when a person fails to include the relevant
facts that the listener reasonably expects to be included in an
answer.

 Lying by commission
A lie by commission is an entirely false statement.
 Bribery
What constitutes bribery?

Bribery is the act of offering someone money, services or

other valuables, in order to persuade him or her to do

something in return

 Active bribery
Offence committed by the person who promises or gives the bribe.

 Passive bribery
Offence committed by the official who receives the bribe.

 Facilitation payments
To foreign officials which is not considered to be bribery according
to legislations of some states.

Define some shapes of bribes which are not perceived as bribes and
common practices of our society?
Greatest Fraud Risk for Companies

Insert
 Abusive and Intimidating Behavior
What constitutes abusive or intimidating behavior?
 Bullying in the workplace

 Bullying between companies

Abusive and Intimidating Behavior
What constitutes abusive or
intimidating behavior
Bullying in the workplace
Bullying between companies
 Discrimination
… referring to the treatment taken toward or against a person of a
certain group in consideration based solely on class or category.

 Discrimination on the basis of race, color, religion, sex, marital

status, sexual orientation, public assistance status, disability, age,
national origin, or veteran status is illegal.

 Discrimination on the basis of political opinions or affiliation with

a union is defined as harassment.
 Eliminating Discrimination
 Affirmative action programs
– Efforts to recruit, hire, train and promote qualified individuals from
groups that have traditionally been discriminated against based on
race, gender, or other characteristics

 Equal Employment Opportunity

 Information Technology
 There are ethical issues related to technology, the
Internet or other forms of electronic communication.
 Specific issues include:
 Monitoring of employees
 Consumer privacy
 Site development and online marketing
 Telemarketing
 Legal protection of intellectual properties
 Copyright issues – movies, books and music
 Information Technology
 Use of Technology for Personal Use

◦ Web Surfing
◦ Harassment
◦ E-mails
◦ Photocopying
◦ Phone calls

 Consumer Privacy

◦ Awareness of information collection

◦ Control of information

 Legal Protection of Intellectual Property

Chapter 3

Ethics as a
Dimension of Social Responsibility
 Relationship Between Social Responsibility and Ethics

 Social responsibility is an organization’s obligation to

maximize its positive impact on stakeholders and
minimize its negative impact.
 Business Ethics and Social Responsibility are used Interchangeably.

 Four Levels Of Social Responsibility:

√. Economic

√. Legal

√. Ethical

√. Philanthropic
Steps of Social Responsibility

Ethics is one dimension of

Social Responsibility
Corporate Citizenship

 How does the firm act on its commitment to the Social

Responsibility Pyramid?

 Considers two factors:

Action taken on the commitment

Measuring the extent to which this commitment is fulfilled

 Corporate Citizenship

 4 Interrelated Dimensions Of Corporate Citizenship

Strong Sustained Economic Performance

Rigorous (Careful/Exact) Compliance

Ethical Actions Beyond What Is Required By The Law

Voluntary ContributionsThatAdvance ReputationAnd Stakeholder Commitment

 Social Responsibility Issues

. Economic Issues

. Competitive Issues

. Legal and Regulatory Issues

. Philanthropic Issues
Economic Issues

 Arise due to unrest in the economic conditions

of a country / state / economy etc.
Unemployment

Early Retirement [Golden Handshakes]

Inflation

Low output and investment etc.

Why Economic Responsibility is Important for Business?

Equal Job Opportunity

Workplace Diversity

Job Safety

Health

Employee Privacy
Competitive Issues
 Threat of Competitors
Existence of alternative products

Availability of cheaper products

Size of Business

Economies of Scale

Reduction in Consumer choice

Price war

Existence of Virtual Monopoly

Corporate Espionage (Spying/Intelligence/Surveillance)

Hacking / Whacking / Dumpster Diving

 Legal and Regulatory Issues

Laws and regulations are established by the government to set

minimum standards of acceptable behavior.

Laws are passed because society does not always trust business to act

in its best interest.

Types of Laws

Civil law defines the rights and duties of individuals and

organizations.

Criminal law prohibits specific actions and imposes punishment for

breaking the law.

The difference between the two is enforcement.

Criminal laws are enforced by the state or nation.

Civil laws are enforced by individuals (generally in court).

 Business ethics disputes are generally resolved through lawsuits.

 Most laws affecting business fall into one of five categories:

Laws regulating competition (prevent restraint of trade)

Laws protecting consumers (safety, disclosure, privacy, etc.)

Laws protecting equity and safety (discrimination, workplace safety,

equal employment practice)

Laws protecting the environment (air, water, noise)

Laws that encourage ethical conduct (Federal Sentencing Guidelines

for Organizations, Sarbanes-Oxley Act)
Laws Regulating Competition
Laws Protecting Consumers

Laws that protect consumers require businesses to

provide accurate information about products and
services and to follow safety standards.

In recent years, large groups of people with specific

vulnerabilities have been granted special levels of legal
protection relative to the general population.

The role of Bureau of Consumer Protection is to

protect consumers against unfair, deceptive, or
fraudulent practices.
Laws Protecting Consumers
Laws Promoting Equity and Safety
 Laws promoting equity in the workplace protect the rights of
minorities, women, older persons, and persons with disabilities.

 Increase Job Opportunities for women and disabled.

 Equal Employment Opportunity

 Affirmative action programs

 The Equal Pay Act mandates that women and men who do equal work
must receive equal pay.

 Health and Safety for all employees.

 Overtime Policy
Laws Promoting Equity and Safety
Laws Protecting the Environment
 Environmental Protection Agencies

 Many environmental protection laws result in the elimination or

modification of goods and services

 Pollution control programs

 Toxic waste and disposal

 Computer recycling

 Unethical disposal of waste include:

 Dumping toxic waste along road sides

 Improper burying of drums

 Burning of waste material

 Discarding hazardous waste in sea

Laws Protecting the Environment
Laws Protecting the Environment
Laws that Encourage Ethical Conduct

Federal Sentencing Guidelines for Organizations

 Development of Code of Conduct

 Ethic Personnel to overview the process

 Unethical individual not to be placed in authority

 Ethics Training

 Reporting of unethical practice

 Disciplinary action in case of identification of unethical event

 Prevention of unethical event in future

Laws that Encourage Ethical Conduct
The Sarbanes–Oxley Act
 Establishes a system of federal oversight of corporate accounting
practices

 Gives the Public Company Accounting Oversight Board (PCAOB)

authority to monitor accounting firms that audit public corporations
and establishes standards and rules for auditors in accounting firms

 Requires top managers to certify that their firms’ financial reports are
complete and accurate, making CEOs and CFOs accountable.

 Provides protection for “whistle-blowing” employees who might

report illegal activity to authorities.
Major Provisions of the Sarbanes-Oxley Act
Benefits of the Sarbanes-Oxley Act

 Greater accountability of top managers

 Renewed investor confidence

 Greater protection of retirement plans

 Greater penalties for senior managers

 Improved information from stock analysts

 Clear explanations by CEOs as to why their compensation package

is in the best interest of the company

 Philanthropic Issues
 Involve business’s contribution to the local community and society
 Improves quality of life

 Reducing government involvement

 Staff Leadership skills

 Builds Staff Morale

 Quality of life issues

 Responsible production of goods and services

 Technology improvements…yet not damaging to the

environment or jeopardizing personal privacy

 Strategic philanthropy
 Synergistic and mutually beneficial use of a company’s core

competencies and resources to deal with social issues

 Chapter 4-5

Ethical Decision Making and

Ethical Leadership
 Understanding the Ethical Decision-Making Process

 The first step in ethical-decision

making is to recognize than an
ethical issue requires an individual
or work group to choose among
several actions that various
stakeholders inside or outside the
firm will ultimately evaluate as
right or wrong.
Framework for Understanding
Ethical Decision-Making in Business
 Ethical Issue Intensity
 Ethical issue intensity is the perceived relevance or
importance of an ethical issue to the individual,
work group, and/or organization.
◦ Reflects the ethical sensitivity of the individual or
work group and triggers the ethical decision
process
 Positive or negative incentives can affect the
perceived importance of an ethical issue.
 Employees need education regarding potential
problem areas.
 Individual Factors

 How people resolve ethical issues in their

daily lives is often based on values and
principles learned through family
socialization.
 In the workplace, ethical issues involve
honesty, conflicts of interest,
discrimination, nepotism, and theft.
 The individual’s stage of cognitive
development can affect conduct.
 Individual Factors

 Individual factors include:

◦ Gender
◦ Education
◦ Work experience
◦ Nationality
◦ Age
◦ Locus of control
 Organizational Factors

 Corporate culture: a set of values, beliefs, goals, norms and

ways to solve problems that members (employees) of an
organization share

◦ Some corporate cultures support and reward unethical

behavior.

◦ Ethical climate is a component of corporate culture.

 Ethical Climate
 The character or decision processes used to
determine whether actions are ethical or unethical

 Consists of corporate codes of ethics, top

management actions, ethical policies, coworker
influence, and the opportunity for unethical behavior

 The perceived ethics of the immediate work group

has been found to be a major factor influencing
ethical behavior.
 Significant Others
 The work group, which includes people such as
peers, managers, and subordinates

 Help on a daily basis with unfamiliar tasks and

provide advice and
information formally
and informally

 Have more influence

on daily decisions
than any other factor
 Obedience to Authority

 An aspect of influence that significant others can

exercise

 Helps us explain why many employees resolve

business issues by simply following the directives
of a superior
 Opportunity

 Relates to permitting ethical or unethical behavior

 Rewards and punishment play a key role

 Relates to the employee’s immediate job context

 Can be eliminated by establishing formal codes,

policies, and rules that are enforced

Items That Employees Pilfer in the Workplace
 Business Ethics Evaluations and Intentions

 Ethical dilemmas involve decision rules which are

often vague or in conflict.
 Critical thinking plays a key role.
 A person’s intentions along with the final decision on
what action to take is the last step in the ethical
decision-making process.
 If intentions and behavior are not consistent with
ethical judgments, the individual may feel guilt.
 Most businesspeople will make ethical mistakes.
The Role of Leadership in Corporate Culture
 Leadership is the ability or authority
to guide and direct others toward
achievement of a goal.

 Leaders are key to influencing an

organization’s corporate culture and
ethical posture.

 Leadership styles influence many

aspects of organizational behavior,
including employees’ acceptance of
and adherence to organizational
norms and values.
The Role of Leadership in Developing an Ethics Plan
Leadership Styles
 Coercive leaders
 Authoritative leaders
 Democratic leaders
 Pacesetting leaders
 Coaching leaders
Leadership

 The most successful

leaders do not rely on
one style of leadership
but alternate their
technique based on the
characteristics of the
situation.
Types of Leaders
 Transactional leaders attempt to create employee
satisfaction through negotiation, or bartering for desired
behaviors or levels of performance.

 Transformational leaders strive to raise employees’ level

of commitment and to foster trust and motivation.

 Transformational ethical leadership is best suited for

organizations that have higher levels of ethical
commitment among employees and strong stakeholder
support for an ethical culture.
 Habits of Strong Ethical Leaders

1. Ethical leaders have a strong personal character.

2. Ethical leaders have a passion to do right.
3. Ethical leaders are proactive.
4. Ethical leaders consider stakeholders’ interests.
5. Ethical leaders are role models for the organization’s
values.
6. Ethical leaders are transparent and actively involved in
organizational decision-making.
7. Ethical leaders are competent managers who take a
holistic view of the firm’s ethical culture.
Thank You...