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Business Ethics

Ethics is a branch of social science. It deals with moral principles and social values. It helps
us to classify, what is good and what is bad? It tells us to do good things and avoid doing bad
things.
So, ethics separate, good and bad, right and wrong, fair and unfair, moral and immoral and
proper and improper human action. In short, ethics means a code of conduct.
According to Andrew Crane,
Definition: "Business ethics is the study of business situations, activities, and decisions
where issues of right and wrong are addressed."
According to Raymond C. Baumhart,
Definition: "The ethics of business is the ethics of responsibility. The business man must
promise that he will not harm knowingly."
Definition: Business ethics are moral principles that guide the way a business behaves.
The same principles that determine an individuals actions also apply to business.

Characteristics or Features of Business Ethics:


1. Code of conduct : Business ethics is a code of conduct. It tells what to do and what
not to do for the welfare of the society. All businessmen must follow this code of
conduct.
2. Based on moral and social values : Business ethics is based on moral and social
values. It contains moral and social principles (rules) for doing business. This includes
self-control, consumer protection and welfare, service to society, fair treatment to
social groups, not to exploit others, etc.
3. Gives protection to social groups : Business ethics give protection to different social
groups such as consumers, employees, small businessmen, government, shareholders,
creditors, etc.
4. Provides basic framework : Business ethics provide a basic framework for doing
business. It gives the social cultural, economic, legal and other limits of business.

Business must be conducted within these limits.


5. Voluntary : Business ethics must be voluntary. The businessmen must accept
business ethics on their own. Business ethics must be like self-discipline. It must not
be enforced by law.
6. Requires education and guidance : Businessmen must be given proper education
and guidance before introducing business ethics. The businessmen must be motivated
to use business ethics. They must be informed about the advantages of using business
ethics. Trade Associations and Chambers of Commerce must also play an active role
in this matter.
7. Relative Term : Business ethics is a relative term. That is, it changes from one
business to another. It also changes from one country to another. What is considered
as good in one country may be taboo in another country.
New concept : Business ethics is a newer concept. It is strictly followed only in developed
countries. It is not followed properly in poor and developing countries.
Importance of Business Ethics:
1.

Stop business malpractices : Some unscrupulous businessmen do business

malpractices by indulging in unfair trade practices like black-marketing, artificial high


pricing, adulteration, cheating in weights and measures, selling of duplicate and harmful
products, hoarding, etc. These business malpractices are harmful to the consumers. Business
ethics help to stop these business malpractices.
2.

Improve customers' confidence : Business ethics are needed to improve the

customers' confidence about the quality, quantity, price, etc. of the products. The customers
have more trust and confidence in the businessmen who follow ethical rules. They feel that
such businessmen will not cheat them.
3.

Survival of business : Business ethics are mandatory for the survival of business. The

businessmen who do not follow it will have short-term success, but they will fail in the long
run. This is because they can cheat a consumer only once. After that, the consumer will not
buy goods from that businessman. He will also tell others not to buy from that businessman.
So this will defame his image and provoke a negative publicity. This will result in failure of
the business. Therefore, if the businessmen do not follow ethical rules, he will fail in the
market. So, it is always better to follow appropriate code of conduct to survive in the market.

4.

Safeguarding consumers' rights : The consumer has many rights such as right to

health and safety, right to be informed, right to choose, right to be heard, right to redress, etc.
But many businessmen do not respect and protect these rights. Business ethics are must to
safeguard these rights of the consumers.
5.

Protecting employees and shareholders : Business ethics are required to protect the

interest of employees, shareholders, competitors, dealers, suppliers, etc. It protects them from
exploitation through unfair trade practices.
6.

Develops good relations : Business ethics are important to develop good and friendly

relations between business and society. This will result in a regular supply of good quality
goods and services at low prices to the society. It will also result in profits for the businesses
thereby resulting in growth of economy.
7.

Creates good image : Business ethics create a good image for the business and

businessmen. If the businessmen follow all ethical rules, then they will be fully accepted and
not criticised by the society. The society will always support those businessmen who follow
this necessary code of conduct.
8.

Smooth functioning : If the business follows all the business ethics, then the

employees, shareholders, consumers, dealers and suppliers will all be happy. So they will
give full cooperation to the business. This will result in smooth functioning of the business.
So, the business will grow, expand and diversify easily and quickly. It will have more sales
and more profits.
9.

Consumer movement : Business ethics are gaining importance because of the growth

of the consumer movement. Today, the consumers are aware of their rights. Now they are
more organised and hence cannot be cheated easily. They take actions against those
businessmen who indulge in bad business practices. They boycott poor quality, harmful,
high-priced and counterfeit (duplicate) goods. Therefore, the only way to survive in business
is to be honest and fair.
10.

Consumer satisfaction : Today, the consumer is the king of the market. Any business

simply cannot survive without the consumers. Therefore, the main aim or objective of
business is consumer satisfaction. If the consumer is not satisfied, then there will be no sales
and thus no profits too. Consumer will be satisfied only if the business follows all the
business ethics, and hence are highly needed.

11.

Importance of labour : Labour, i.e. employees or workers play a very crucial role in

the success of a business. Therefore, business must use business ethics while dealing with the
employees. The business must give them proper wages and salaries and provide them with
better working conditions. There must be good relations between employer and employees.
The employees must also be given proper welfare facilities.
12.
Healthy competition : The business must use business ethics while dealing with the
competitors. They must have healthy competition with the competitors. They must not do
cut-throat competition. Similarly, they must give equal opportunities to small-scale business.
They must avoid monopoly. This is because a monopoly is harmful to the consumers

PRINCIPLES OF BUSINESS ETHICS

The Principles of business ethics developed by well known authorities like Cantt, J. S.Mill,
Herbert Spencer, Plato, Thomas Garret, Woodrad, Wilson etc are as follows

1. Sacredness of means and ends : The first and most important principles of business
ethics emphasize that the means and techniques adopted to serve the business ends must
be sacred and pure.It means that a good end cannot be attained with wrong means, even if
it is beneficial to the society.

2. Not to do any evil: It is unethical to do a major evil to another or to oneself , whether this
evil is a means or an end.
3. Principle of proportionality: This principle suggests that one should make proper
judgment before doing anything so that others do not suffer from any loss or risk of evils
by the conducts of business.

4. Non co-operation in evils: It clearly points out that a business should with any one for
doing any evil acts .

5. Co-operation with others This principles states that business should help others only in
that condition when other deserves for help

6. Publicity: According to W. Wilson, anything that is being done or to be done, should be


brought to the knowledge of everyone. If everyone knows, none gets opportunity to do an
unethical act.

7. Equivalent price: According to W. Wilson , the people are entitled to get goods
equivalent to the value of money that he will pay.
8. Universal value: According to this principle the conduct of business should be done on
the basis of universal values.

9. Human dignity: As per this principle , man should not be treated as a factor of
production and human dignity should be maintained.

10. Non violence : If businessman hurts the interests and rights of the society and exploits the

The important rules or principles of business ethics are as follows:1. Avoid exploitation of consumers : Don't cheat and exploit consumers by using bad
business practices such as artificial price rise and adulteration.
2. Avoid profiteering : Don't indulge in unscrupulous activities like hoarding,
blackmarketing, sale and use of banned or harmful goods, etc., for the sake of greed to
earn exorbitant profits.
3. Encourage healthy competition : Don't destroy a healthy competitive atmosphere in
the market which offers certain benefits to the consumers. Do not engage in a
cutthroat competition. Avoid making attempts to malign and spoil the image of
competitors by unfair means.
4. Ensure accuracy : Always check and verify the accuracy in weighing, packaging and
quality while supplying goods to the consumers.

5. Pay taxes regularly : Pay taxes and other charges or duties to the government
honestly and regularly. Avoid bribing government officials and lobbying for special
favours.
6. Get accounts audited : Maintain accurate business records, accounts and make them
available to all authorised persons and authorities.
7. Fair treatment to employees : Pay fair wages or salaries, provide facilities and
incentives and give humane treatment to employees.
8. Keep investors informed : Supply reliable information to shareholders and investors
about the financial position and important decisions of the company.
9. Avoid injustice and discrimination : Avoid injustice and partiality to employees in
transfers and promotions. Avoid discrimination among them based on gender, race,
religion, language, nationality, etc.
10. No bribe and corruption : Don't give expensive gifts, secret commissions,
kickbacks, payoffs to politicians, bureaucrats, government officials and suppliers. Say
no to bribe and avoid corruption.
11. Discourage secret agreement : Do not make a secret agreement with other
businessmen for controlling production, distribution, pricing or for any other activity,
which is harmful to the consumers.
12. Keep service before profit : Accept the principle of "service first and profit next."
The customer or consumer is the most important part of any business. All business
activities are done for meeting his needs and for increasing his satisfaction and
welfare.
13. Practice fair business : Make your business fair, humane, efficient and dynamic.
Give the benefits of these qualities to the consumers.
14. Avoid monopoly : Avoid forming private monopolies and concentration of economic
power. Monopolies are bad for consumers.
15. Fulfil customers expectations : Adjust your business activities as per the demands,
needs and expectations of the customers.
16. Respect consumers rights : Give full respect and honour to the basic rights of the
consumers.

17. Accept social responsibilities : Honour responsibilities towards different social


groups.
18. Satisfy consumers wants : Find out and satisfy the wants of the consumers. Use the
available resources to produce good quality goods and services. Supply these goods
and services regularly to the consumers. Charge reasonable prices for the goods and
services. Give proper after-sales services. Do not produce goods and services, which
are harmful to the health and life of the consumers. Remember, the main objective of
the business is to satisfy the consumers wants.
19. Service motive : Give more importance to service and consumer's satisfaction and
less importance to profit-maximization. Make profits by providing services to the
consumers. Do not make profits by exploiting the consumers.
20. Protect group interests : Protect the interest of the group i.e give employees better
wages and good working conditions, give shareholders better rate of dividend, give
consumers good quality goods and services at low prices, etc.
21. Optimum utilisation of resources : Ensure better and optimum utilisation of natural
and human resources and minimise wastage of these resources. Use the resources to
remove poverty and to increase the standard of living of people.
22. Intentions of business : Use pure, legal and sacred means to do business. Do not use
illegal, unscrupulous and evil means to do business.
23. Follow Woodrow Wilson's rules : According to the late American President Sir
Thomas Woodrow Wilson, there are four important principles of business ethics.
These four rules are as follows:a. Rule of publicity : According to this principle, the business must tell the
people what it is going to do. It must not create doubts, misunderstanding,
suspicion, secrets, etc.
b. Rule of equivalent price : According to this principle, the customer must be
given proper value for their money. So the business must not sell below
standard, outdated and inferior (poor) goods for high prices.
c. Rule of conscience in business : If the business is conducted properly, then it
is beneficial to the society. Otherwise, it is harmful to the society. Therefore,
the businessman must have a conscience, i.e. a morale sense of judging what is

right and what is wrong. He must be very careful while taking business
decisions because these decisions affect the entire society.
d. Rule of spirit of service : The business must give importance to the service
motive. That is, priority must be given to render service to human beings over
profit

Utilitarianism is a theory of moral philosophy that is based on the principle that an action is
morally right if it produces a greater quantity of good or happiness than any other possible
action.
Good=pleasure
(Amount of good produced)-(Amount of evil produced)= Utility.
English philosopher John Stuart Mill (1806-1873) and Jeremy Bentham were the leading
proponents of what is called Classic Utilitarianism. Utilitarianism is a form of
consequentalism.
Consequentialism : Whether an action is morally right or wrong depends entirely on its
consequences. An action is said to be right if it brings about the best outcome of the choices
available, other wise it is wrong.
According to Utilitarianism one of our moral duty is to maximize pleasure and minimize
pain. It is a belief that a morally good action is one that helps the greatest number of people.
It is based on the doctrine that an action is right in so far as it promotes happiness and that the
greatest happiness to the greatest number should be the guiding principle of conduct.
The Principle of Utility states that actions or behaviour are right in so far as they promote
happiness or pleasure, wrong if they tend to promote unhappiness or pain.

Corporate Social Responsibility

Definition: The corporate belief that a company needs to be responsible for its actions
socially, ethically, and environmentally.
Definition: The concept of corporate social responsibility (CSR) refers to the general belief
held by many that modern businesses have a responsibility to society that extends beyond the
stockholders or investors in the firm. The impact of companys action on society.
Definition : Corporate social responsibility is a concept whereby companies integrate social
and environmental concerns in their business operations and in their interaction with their
stakeholders on a voluntary basis
The modern era of corporate social responsibility and serious discussion around the topic
began in 1950s when the book Social Responsibilities of the Businessman by Howard R.
Bowen, who is so-called the Father of Corporate Social Responsibility, was publicized.

Definition: CSR requires decision makers to take actions that protect and improve the
welfare of society as a whole along with their own interest.
Definition: CSR mandates that corporation has not only economic and legal obligations, but
also certain responsibilities to society that extend beyond these obligations.
Definition: CSR also refers to a commitment to improve community well-being through
discretionary business practices and contributions of corporate resources
Importance of Corporate Social Responsibility
1) One of the strongest arguments for adopting CSR into your wider business strategy is
the boost it brings to your organisation's brand image and reputation.
2) CSR activities helps in enhancing public image and is a crucial marketing asset and its
importance just cannot be underestimated.
3) CSR can lead to increased customer loyalty and sales.
4) Having an effective and transparent CSR strategy in place has been consistently
linked with increased employee satisfaction, productivity and retention.

5) Ethical behaviour and corporate social responsibility can bring significant benefits to
a business. For example, they may:

attract customers to the firm's products, thereby boosting sales and profits

make employees want to stay with the business, reduce labour turnover and therefore
increase productivity

attract more employees wanting to work for the business, reduce recruitment costs and
enable the company to get the most talented employees

attract investors and keep the company's share price high, thereby protecting the
business from takeover.

Scope
of social

responsibility of business

The scope of social responsibility of business mainly covers its obligations or


duties towards four social groups.
These are as follows:
1. Shareholders or investors,
2. Employees or workers, 3.
Consumers or customers and
4. Community.
These groups are the four areas of social responsibility of business.
The main concern of a business is to fulfill its responsibilities towards these four social
groups.
The social responsibility of business towards shareholders or investors:
1.

Provide reasonable return on their investment.

2.
3.
4.
5.
6.
7.

Protect their investment.


Increase the market value of their shares by making a fair profit and by building a
good image of the business.
Regularly provide an up-to-date, accurate and full information on the working of
business.
Treat all shareholders fair and equally well without any bias or partiality.
Take necessary steps to expand the business.
Carry out research and development (R&D) activities to innovate and improve
products and/or services.

The social responsibility of business towards employees or workers:


Pay fair wages or salaries.
1. Provide pleasant working conditions and better work environment.
2. Make provisions for the welfare of labour and old age security (OAS) pension
program.
3. Arrange training and educational programs for skills enhancement and improve job
performance.
4. Appreciate their job well done and also recognize their talents.
5. Allow their participation in management and also consider their opinions in matters of
decision making.
6. Provide proper and effective grievance redressal mechanism for employees.
7. Introduce schemes for sharing profit with employees.
8. Allow workers to execute their right to form associations or trade unions.
9. Introduce schemes for recreation or entertainment of workers.
10. Treat them with dignity and respect and not as work slaves.
11. Give them a meaningful work that suits their individual expertise or skills.
12. Guarantee them their social, religions, cultural, and political freedom.
The social responsibility of business towards the consumers or customers:
1.
2.
3.
4.
5.
6.
7.
8.
9.

Provide quality goods and/or services at reasonable prices.


Provide a good after sales services and customer support.
Accurately describe and don't falsify any information related to the products and/or
services.
Guard against adulteration, poor quality, lack of service and courtesy, misleading and
dishonest advertising.
Make research and development (R&D) to introduce new products and/or services
and enhance their quality.
Take appropriate steps to remove imperfections in the distribution system, including
black marketing, profiteering and other anti-social elements.
Provide consumers an opportunity to get heard and resolve their grievances as early as
possible.
Provide protection against monopoly and restrictive trade practices.
Understand the needs & wants of customers and try best to satisfy them.

The social responsibility of business towards community is as follows::


1.

Take essential steps to maintain proper ecological balance of the surrounding


environment.

2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.

Prevent environmental degradation caused due to haphazard and unchecked pollution


of air, water and land.
Keep goodness and safety of infrastructure with regular maintenance, repairs and
upgradation, wherever necessary.
Rehabilitate the population displaced due to business operations, if any.
Take initiative in the conservation of scare resources and try to find out their
alternatives and substitutes wherever possible.
Contribute in the development of socially-backward areas.
Promote ancillary, small-scaled and cottage industries.
Make possible contribution to promote education and control population.
Assist in the overall developments of the locality.
Improve the efficiency of business operations.
Contribute help in events of disasters like occurrence of any natural calamities, to help
victims.
Provide health care facilities for local community, especially for children, women and
senior citizens.
Provide day-care centers for children of working mothers.
Provide equal opportunity of employment.
Make provisions for social accountability.
Maintain good relationship between business and society.
Cooperate with government and non-governmental organizations in their efforts to
enhance the development and betterment of the society.

The Companies Act, 2013


In India, the concept of CSR is governed by clause 135 of the Companies Act, 2013, which
was passed by both Houses of the Parliament, and had received the assent of the President of
India on 29 August 2013. The CSR provisions within the Act is applicable to companies with
an annual turnover of 1,000 crore INR and more, or a net worth of 500 crore INR and more,
or a net profit of five crore INR and more. The new rules, which will be applicable from the
fiscal year 2014-15 onwards, also require companies to set-up a CSR committee consisting of
their board members, including at least one independent director.
The Act encourages companies to spend at least 2% of their average net profit in the previous
three years on CSR activities.

Three Principles of CSR:


1) Sustainability: This is concerned with the effect which action taken in the
present has upon the options available in the future. If the resources are
utilised in the present then they are no longer available for use in the future,
and so the organisation should not waste the resources.
2) Accountability: This is concerned with an organisation recognising that its
actions affect the external environment, and therefore assuming responsibility
for its actions.
3) Transparency: It means the external impact of the actions of the organisation
can be ascertained from that organisation reporting and pertinent facts are not
disguised within that reporting.

Corporate Governance
Thus, the key aspects of good corporate governance include transparency of corporate
structures and operations; the accountability of managers and the boards to shareholders; and
corporate responsibility towards employees, creditors, suppliers and local communities where
the corporation operates.
Good corporate governance- the extent to which companies are run in an open and honest
manner- is important for overall market confidence, the efficiency of international capital
allocation, the renewal of countries industrial bases, and ultimately the nations overall
wealth and welfare.

Corporate governance is an ethically driven business process that is committed to values


aimed at enhancing an organizations wealth generating capacity. This is ensured by taking
ethical business decisions and conducting business with a firm commitment to values, while
meeting stakeholders expectations.

Why is corporate governance important?


Corporate governance is important for the following reasons:

It lays down the framework for creating long-term trust between companies and the
external providers of capital

It improves strategic thinking at the top by inducting independent directors who bring
a wealth of experience, and a host of new ideas

It rationalizes the management and monitoring of risk that a firm faces globally

It limits the liability of top management and directors, by carefully articulating the
decision making process

It has long term reputational effects among key stakeholders, both internally
(employees) and externally (clients, communities, political/regulatory agents)

In India, corporate governance initiatives have been undertaken by the Ministry of of


Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI). The first
formal regulatory framework for listed companies specifically for corporate governance was
established by the SEBI in February 2000, following the recommendations of
Kumarmangalam Birla Committee Report. It was enshrined as Clause 49 of the Listing
Agreement. Further, SEBI is maintaining the standards of corporate governance through
other laws like the Securities Contracts (Regulation) Act, 1956; Securities and Exchange
Board of India Act, 1992; and Depositories Act, 1996.
The Ministry of of Corporate Affairs had appointed a Naresh Chandra Committee on
Corporate Audit and Governance in 2002