What Is Business Ethics?

Business ethics studies appropriate business policies and practices regarding potentially
controversial subjects, including corporate governance, insider trading, bribery, discrimination,
corporate social responsibility , fiduciary responsibilities, and much more. The law often guides
business ethics, but at other times business ethics provide a basic guideline that businesses can
follow to gain public approval.

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.

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.

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 focus on "social issues" was a hallmark of the decade.

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.
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.

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 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 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

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

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.

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.23

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?

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.
Business enterprise meaning
To understand the meaning of the term business enterprise, you first have to understand
the difference between a social enterprise and a business enterprise.

An enterprise can be defined as undertaking an activity that requires a lot of effort to

develop.
A social enterprise involves helping others without receiving a commercial benefit in
return. On the other hand, a business enterprise consists of producing goods or services
in exchange for commercial and financial benefits.

Examples of business enterprises include all the companies you pay to receive a good or
service from. These may include your local shop or your Netflix subscription, both of
which are business enterprises.
A business provides goods and services to what we call customers. Goods refer to
physical goods that usually go through a production process. This may involve bicycles,
chocolate, or whatever item you pay to receive.

Other businesses provide services instead of physical goods; this involves intangible
products, such as a private lesson from a math teacher or personal trainer.

All these goods and services are delivered to customers. A customer refers to anyone
who purchases these products. Consumers use the product or service but do not
necessarily buy them.

For instance, if your parents pay for your Netflix subscription, you are the consumer and
your parents are the customer. If they also watch Netflix with you, they become
consumers and customers simultaneously.
The business enterprise depends on customers, goods, and services for its very existence.
These three components are intrinsically linked to the meaning of business.

Types of business enterprises

There are many types of business enterprises providing a wide variety of services or
products. Business enterprises can be classified into three main categories, according to
the production stage:

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____________ consists of producing goods or services in exchange for commercial
and financial benefits.
Business EnterpriseSocial Enterprise
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Goods are _____ while services are ______.
Costly, CheapTangible, IntangibleIntangible, TangibleCheap, Costly
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'John bought iPhone via Amazon for his daughter Leena. Leena uses Spotify to
listen educational podcasts on her iPhone.'In the example above, identify customer
and consumer for Amazon.
Customer Is Spotify And Consumer Is AmazonCustomer Is Leena And Consumer Is
JohnCustomer Is John And Consumer Is LeenaCustomer Is Apple And Consumer Is
Spotify
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Business Enterprise: Primary sector

The primary sector involves businesses that are at the beginning of the production
processes. These businesses make sure that the raw materials are created and produced to
be used later by other companies.
Primary companies are mostly made of business-to-business (B2B) models, where you
have one business supplying to the other. For example, oil exploration companies
produce oil that retail companies sell, or other businesses use for production processes.
Restaurants use agricultural goods produced by this sector to provide meals to their
customers.
Business Enterprise: Secondary sector
The secondary sector consists of business enterprises at the second step of the production
process. These businesses use raw materials produced from the primary sector to develop
into new goods and services. For example, car manufacturers use raw materials to build
new cars, which they later supply to customers.

Business Enterprise: Tertiary sector

The tertiary sector involves business enterprises concerned with providing services to
individuals.
Examples of companies in the tertiary sector include banks that help individuals get loans
or airline companies that enable one to fly around the world.

Keep in mind that a business enterprise can offer goods, services, or both. You could buy
a car provided by Tesla, go to a travel agency for your next trip to Europe, or go to a
restaurant and receive goods and services combined.

Functions of a business enterprise

The four basic functions of a business enterprise are Finance, Operations, Human
Resources, and Marketing.
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Business Enterprise: Finance

One of the essential functions of a business is raising and managing money. A business
enterprise may use internal or external sources of finance to raise the funds needed to get
the business going. Internal sources of finance involve the money that business owners
invest in their own business.

In contrast, external sources of finance involve cash from outside sources, such as
money from family, banks loans, and investors. After the money starts moving around the
business, the business managers should manage it cautiously so they don’t have too many
costs, thereby failing to make any sales.
Business Enterprise: Operations
An important function of a business enterprise is the use of raw materials to produce new
goods that will be served to customers. A business also uses its resources to provide
services to customers. A business enterprise is always concerned with producing types of
goods or offering services that meet the needs and demands of customers. If this need or
demand is not met or is relatively small, there is no real purpose for production.

Business Enterprise: Human Resources

Another important function of a business enterprise is that of human resources. A
business needs to get the right human capital to provide goods or services. This entails
hiring people with the necessary expertise and skillset that the production process
requires.

Business Enterprise: Marketing

Marketing is concerned with commercializing the goods and services a business offers.
This includes pricing strategies, strategising the way customers are approached, and
determining why someone would want to buy the good or service.

Importance of business enterprise

Amazon's market capitalization is slightly above $1.5 trillion. Jeff Bezos owns just under
10% of the company. This implies that Jeff Bezos has earned over $150 billion from
Amazon. However, the rest of Amazon's market capitalisation value lies in the economy
and is shared among investors, consumers, and the rest of the population.

To further illustrate the importance of a business enterprise, think about how many jobs
Amazon has created, how many needs it has met for customers, and how much easier it
has made our shopping life, especially throughout the COVID-19 pandemic.

Business enterprises are crucial to the economy for the following reasons:
Business Enterprise: Economic development
Business enterprises are critical to the advancement of the economy. Industries use
people, money, resources, procedures, and machinery, all of which contribute to creating
jobs. They also aid in earning foreign cash via the export of goods.

The development of industries aids in better use of natural resources, which is

advantageous for society as a whole. These natural elements contribute to the growth of
the country's economy and therefore to its overall well-being.

Business Enterprise: Solving problems

Business enterprises serve the function of meeting human needs and solving problems for
the betterment of society. These companies have the incentive to develop innovative
products that through this problem-solving improve our lives, a goal that any
entrepreneurial start-up aims to achieve.

Business Enterprise: Creating jobs

Business enterprises are a vital source of jobs in an economy. As most business processes
depend on labour, this gives job seekers opportunities for work. Economies with fewer
enterprises tend to struggle with higher levels of unemployment.

Business Enterprise: Investment opportunities

The establishment of new industries and businesses is important for people looking to
invest and become part of the growth of a company or an industry. Think how many early
investors in Facebook or Amazon, or Apple benefited from investing in these business
enterprises.

Furthermore, the profit earned by the investors as a result of the company's successful
operation contributes to the accumulation of a greater quantity of savings, which may be
used to fund future businesses. As a result, business is crucial in creating investment
possibilities.
To sum up, business enterprises produce goods and services in exchange for commercial
benefits. As drivers of innovation and investment, problem solvers, creators of jobs, and
stimulants to the overall economy, these enterprises serve a vital function in our society.
Business Enterprise - Key takeaways

 A business enterprise consists of the production of goods or services in exchange

for commercial and financial benefits.

 Business enterprises include all the companies one pays money to in exchange for
goods or services. These could include a local shop or a Netflix subscription.
 Types of business enterprises include the primary sector, secondary sector, and
tertiary sector.
 Functions of a business enterprise include Finance, Operations, Human Resources,
and Marketing.
 Reasons why business enterprises are important: economic development, solving
problems, creating jobs, and investment opportunities.
Frequently Asked Questions about Business Enterprise
What is a business enterprise?
An enterprise can be defined as undertaking an activity that requires a lot of effort to
develop, and a business enterprise consists of producing goods or services in exchange for
commercial and financial benefits.
What are examples of business enterprise?
Examples of business enterprises include all the companies you pay to receive a good or
service from. These may include your local shop or your Netflix subscription, both of which
are business enterprises.
What is the role of business enterprise?
A business enterprise consists of producing goods or services in exchange for commercial
and financial benefits.
A business provides goods and services to customers. Goods refer to physical goods that
usually go through a production process such as clothes.

Other businesses provide services instead of physical goods; this involves intangible
products, such as a private lesson from a math teacher or personal trainer.
What are the three types of enterprise?
Business enterprises can be classified into three main categories, according to the production
stage:

 Primary sector - businesses make sure that the raw materials are created and
produced to be used later by other companies.
 Secondary sector - use raw materials produced from the primary sector to develop
into new goods and services.
 Tertiary sector - involves business enterprises concerned with providing services to
individuals.

Why is enterprise important to a business?

Economic development, solving problems, creating jobs, and investment opportunities are a
few reasons why an enterprise is important.

What is entrepreneurship?

Entrepreneurship is about taking risks and coming up with innovative business solutions to real-life
problems.

Who is an entrepreneur?

An entrepreneur is someone who believes in entrepreneurship and is willing to implement

entrepreneurial ideas to achieve his goals.
Why is risk-taking needed in entrepreneurship?

To present a new and innovative solution to real-world problems or to reduce gaps in markets, an
entrepreneur needs to have out-of-the-box thinking and risk-taking ability.
Why do entrepreneurs need to be passionate?

They enter the industry to change obsolete ways and to implement unique business ideas. Passion
helps them to achieve their targets and keeps them motivated during difficult phases.
Why is motivation important for entrepreneurs?

In uncertain or adverse moments, motivation keeps entrepreneurs on their paths, which can lead to
success in the future.
What are the financial motives of entrepreneurs?

Income/profits.