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Business Ethics & Corporate Governance

UNIT - I
Introduction to Ethics
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The word ethics is derived for the Latin word ethicus and the Greek word ethikos means
the character or matters. Ethics is said to the source of morals. Ethics is also known as moral
philosophy. It is a branch of philosophy that addresses questions about morality i.e.,
concepts such as good and evil, right and wrong , virtue and vice, justice and crime, etc. in
other words it is the inner guiding moral principles, values and beliefs that people use to
analyze or interpret a situation and then decide what is right or appropriate way to
behave.
Major branches of Ethics are:- Meta ethics, Normative ethics, Applied ethics, Moral
psychology, Descriptive ethics

Definition of Ethics

Ethics is that branch of philosophy dealing with values relating to human conduct, with
respect to the rightness and wrongness of certain actions and to the goodness and badness
of the motives and ends of such actions.
Business ethics is the moral principle or guide lines that a business to be followed in its daily
dealings with the world. The ethics of a particular business can be diverse. They apply not
only to how the business interacts with the world at large, but also to their one-on-one
dealings with the single customer. Business ethics is the application of general ethical ideas
to business behavior.

Business ethics (also corporate ethics) is a form of applied ethics or professional ethics that
examines ethical principles and moral or ethical problems that arise in a business
environment. It applies to all aspects of business conduct and is relevant to the conduct of
individuals and entire organizations. Business ethics has both normative and descriptive
dimensions.

Business Ethics
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Ethics and Values
The word value is derived from a French word valoir which means he worth, merit,
usefulness or importance of thing. Value is a behavioral concept related to an individual or
a group. In the determination if human behavior the most important factor is a persons
value awareness. Value set normative standards on the basis of which people make their
choice of alternative course of action.

Values can broadly classified into moral values and competence values. Moral values are
concerned with modes of behavior. Competence values are concerned with self-
actualization and values reflect a personal rather than an impersonal focus, they are not
so much concerned with morality.

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Stop business malpractices e.g., black marketing, artificial high pricing, adulteration.
Improve customers confidence it helps to improve the customers confidence about
the quality, quantity, price, etc.
It helps for the survival of business.
Safeguarding the consumers rights such as right to health and safety, right to
information, right to choose, right to be heard, right to redress etc.
Protects employees and shareholders
Helps to develop good relationship
Helps to creates good image for business and businessmen
Helps in smooth functioning of business





Need and Importance
of Business Ethics
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Consumer movement - Business ethics are gaining importance because of the growth of
the consumer movement. Today, the consumers ate aware of their rights. Now they are
more organized and hence cannot be cheated easily. They take actions against those
businessmen who indulge in bad business practices.
Importance of labour - Labour, 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 and welfare facilities.
Healthy competition - The business must use business ethics while dealing with the
competitors. They must have healthy competition with the competitors.

Need and Importance
of Business Ethics
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Ethics and Values
Values - The word value is derived from a French word valoir which means he worth, merit,
usefulness or importance of thing. Value is a behavioral concept related to an individual or a
group . In the determination if human behavior the most important factor is a persons value
awareness. Values set normative standard on the basis of which people make their choice of
alternative course of action.
Values can be broadly classified into moral values and competence values. Moral values are
concerned with modes of behavior. Competence values are concerned with self-actualization
and such values reflect a persona rather than an impersonal focus, they are not so much
concerned with morality. There are two types of value.
Terminal value
Instrumental value
Terminal values - These are those end state goals that we praise such as comfortable life, sense of
accomplishment, equality among all people, self-respect, and family security.
Instrumental value - These are the ways we approach end states or desired status or outcome
and preferable modes of behavior for achieving the desired results.

Values shapes -> beliefs -> perceptions -> attitudes -> behavior. Interests, personality.





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Value Formation
An individual is likely embrace values from the following sources:
Genetic source
Environmental source
From superior i.e. parents, teachers and great personalities
Own family source
Through education, newspapers, magazines, films and television
Corporate Values
Truth - Treat others with uncompromising truth
Trust - Trust on your associates
Mentoring - Mentor unselfishly
Openness - Be respective to new ideas
Giving credit - Give credit where it is due
Risk taking - Take personal risk for the good of the organization
Honesty - Put interest of others before your own
Social conscience
Responsibility and accountability




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Values and Ethics in Business
A. Business values - Business values provide guidance for right kind of business dealings
and transactions. They get affected by several factors such as the stakeholders
expectations, global and domestic competitions, ecological and environmental concern
etc.
Prof. Dr. M.B. Arthreyas Business values for twenty-first century:
Righteousness (justice) - the business has to follow the dharma or righteousness while
creating and distributing wealth. It should follow and maintain the highest standards of
ethics and integrity in all its decisions and actions.
Public good - It is described as Lok - kalyana. The business should work for the well being of
the whole society and not work for private gain.
Efficacy (Kaushalam) - The business must pursue efficiency and effectiveness, productivity
and quality, optimum utilization of resources and also development and conservation of
more resources.


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Innovation - Business should nurture creativity and should develop new, useful and
distinctive product, services, ideas, methods, problems, solutions and concepts and to suit
precisely to the changing economic, social, cultural life and expectations of people.
Learning - Business must maintain a desire to learn and improve continuously. A new
concept of Learning Organization is catching attention of management scholars.
Business must learn from the feedback of employees, intermediaries, customers and
suppliers.
Healthy competition (Dharmayudha) - Business organization must be competitive, creative,
aggressive and active. Every company has to strive hard to get an edge over competitors
and to remain always ahead of competition.
Respect for individual and human dignity - This is necessary to encourage creativity and
develop and strengthen team-spirit.
B. Business ethics - Business ethics are related to issues of what is right and what is
wrong while doing business. The constituents of business ethics include adherence of
truth, a commitment to justice and public integrity. What values are to individuals, ethics
are to business.

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Values, Ethics and Business
Strategy
Personal values and ethics are important for all human beings. They are especially important
for business managers as they are custodians of the economic power vested in business
organization by society. Strategic business decisions by following ethical practices and
creating values. So ethical criteria must be included in framing business strategies. Values are
personal in nature (eg., a belief in providing customer satisfaction and being a good pay
master) while ethics is a generalized value system.
Observing Ethics in organizations
Organizations have started to implement ethical behavior by publishing in-housing codes of
ethics which are to be strictly followed their associates. They have started to employ people
with reputation for high standards of ethical behavior at the top levels. Corporations which
wish to popularize the ethical conduct have started to reward ethical behavior. MNCs like
ICICI, TISCO, Infosys, Coca-Cola, IBM, ONGC, NTPC, etc. have issued code regarding the
activities to employees and to government. These lead to the promotion of ethical values.
Many corporations conduct an Ethics Audit and they are continuously looking for more ways
to be ethical .

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Corporate Governance Ethics
Corporate governance is the system by which companies are directed and controlled. It
involves a set of relationships between a companys management, its shareholders and other
stakeholders; it deals with prevention or mitigation of the conflict of interests of stakeholders.
Business ethics and corporate governance of an organization go hand in hand. An
organization that follows, ethical practices in all its activities, will follow best corporate
governance practices as well.
Corporate governance is meant to run companies ethically in a manner such that all
stakeholders - creditors, distributors, customers, employees and even competitors, the
society at large and government are deal with in a fair manner.
Corporate governance is not something which regulators have to impose on a
management.
Good Corporate governance should look at all stakeholders and not just shareholders
alone.

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Factors affecting Business Ethics
Personal code of behavior
Company policy
Ethical standards imposed on mangers
Ethical climate of the country
Personal code of behavior
1. Personal ethical policy
To not purposely cause harm to any other human being.
To promote and demonstrate your ideals through your actions not through enforcing them
on others .
To respect the ideas , lifestyles, religions and ideals of others.
To abide by the rules, codes of conduct and laws of the community around us .
To be honest and trustworthy, and to disclose your feelings,
To respect the property of others as long as we have the concept of property.


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To give proper credit to others.
To honor confidentiality.
To promote a higher quality of life for yourself and others.
2. Professional Code of Ethics
Strive to achieve the highest quality, effectiveness and dignity in both the process and
products of professional work.
To maintain a high level of competence and knowledge in his field.
To know and respect laws pertaining to professional work. Accept and provide appropriate
professional review .
Honor contracts, agreements and assignments.


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You should access computing and communication resources only when authorized to do
so.
To reject bribery in all its forms.
To disclose any conflicts of interest.
When given the responsibility for a group, you should promote good principles among the
group.
3. Compliance with the Ethical Code of Conduct
Uphold and promotion of the principles of this code .
Do not Violate Ethical Code of Conduct.






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Company policy
As part of more comprehensive compliance and ethics programs, many companies have
formulated internal policies pertaining to the ethical conduct of employees. These policies
can be simple exhortations in broad, highly generalized language (typically called a
corporate ethics statement), or they can be more detailed policies, containing specific
behavioral requirements (typically called corporate ethics codes). They are generally meant
to identify the companys expectations of workers and to offer guidance on handling some
of the common ethical problems that might arise in the course of doing business. It is hoped
that having such a policy will lead to greater ethical awareness, consistency in application,
and the avoidance of ethical disasters.
a. Business Ethics Policies and Procedures
According to the International Trade Association, business ethics is simply responsible
business conduct. Ethics policies and procedures provide a step by step how to for
conducting business responsibly or ethically. Policies encourage the choices and actions of
employees and agents that foster and meet the reasonable expectations of enterprise
stakeholders. Procedures show officers and employees what to do and what to avoid, doing
so that choices and actions are responsible and right, as opposed to immoral and wrong.

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b. Workplace values and Ethics
Values and ethics are important in the workplace to help keep order, ensuring that a
company runs smoothly and remains profitable.
c. Diversity & Ethics in the workplace
Maintaining diversity and ethics practices is important to businesses which want to gain the
loyalty of employees and trust of consumers. Diversity in the workplace strives to make people
of all socio-economic backgrounds feel comfortable working within the organization. It
promotes equal opportunities.
d. Cultural diversity ( consisting of differences) and business ethics
Cultural diversity can give rise to ethical issues that can be challenging for managers and
employees to resolve : Religious Differences, Gender Issues, Hiring Decision.
e. Create a Code of Ethics for a Business
Review sample codes of ethics of those companies in a similar business, including the firms
mission statement.



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3. Ethical standards imposed on managers

Orient new employees
Explain policies and procedures
Provide job information to subordinates
Assign work to subordinates according their experience and qualification
Describe performance
Identity training requirements
Provide feedback
Act equitably


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4. Ethical climate of the country

The climate types are :
Self- interest
Company profit
Efficiency
Friendship
Team interest
Social responsibility
Personal morality
Company rules and procedures
Laws and professional codes
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THEORIES OF ETHICS
Normative theories
Ethics is a normative (the practical means of determining a course of action) study , i.e., an
investigation that attempts to reach normative conclusion . It aims to arrive conclusions about
what things are good or bad, or what actions are right or wrong .
The following ethical theories that have an impact on the manner in which ethics or the lack
of it could be identified in a business organization.
Egoism
Utilitarianism
Kants Ethics
Other normative themes
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1. Egoism
The view that associates morality with self- interest is referred to as egoism. Egoism is an ethical
theory that treat take care of self interest as the foundation of morality. Egoism says that an
act is morally right only if it best promotes long-term interests. Egoists make use of their self
interest as the measuring rod of their actions. Philosophers distinguish between two kinds of
egoism - personal and impersonal.
Psychological egoism - According to the proponents of psychological egoism, human
beings are so made that they must behave selfishly. They asserted (declared) that all actions
of men are motivated by self interest.



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2. Utilitarianism: Ethics of Welfare
According to the utilitarianism principle, a decision is ethical if it provides a greater net utility
that any other alternative decision. Ethics is nothing else other than the art of directing the
actions of men so as to bring about the greatest possible happiness to all those who are
concerned with these actions. The interest of the community as simply the sum of the interest
of its members. This principle assumes that we can somehow measure and add the quantities
of benefits generated by an action and deduct from it the measured quantities of harm that
act produced and determine which action produces the total benefits or the lowest total
costs.
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Inferences and implications of the theory are:
Practicing the theory that will lead to greatest happiness to the greatest number.
Ones action will affect other in different degrees and thus will have different degrees and
thus will have different impacts.
Maximization of happiness is the objective of utilitarian not only in the immediate situation,
but in long run as well.
Utilitarians agree that most of the time we do not know what would be the future
consequences of our action.
Utilitarianism do not expect us to give up our own pleasure while choosing among possible
actions.
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3. Kants ethics (Immanuel Kant)

Kant said that for an action to be morally worth, it should reflect a good will. The core idea
of his categorical imperative is that an action is right only if we can convert it to a universal
law of conduct. Organizational importance of Kantian Philosophy Kantian theory of
ethics has adequate relevance to a business organization.
Kant introduces an important humanistic dimension to business decision. For Kant an
action has a moral worth only when it is done from a sense of duty.
The Kantian principle of motivation of a performer of action comes as a correcting
instrument to the organization.
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4. Other Normative Theories

a. The stockholder Theory
The stockholder theory, also known as the shareholder theory, expresses the business
relationship between the owners and their agents (managers)who are running the day to
day business of the company.
As per the theory businesses are merely arrangements in which one group of people,
namely, the stakeholders advance capital to another group namely, the managers to
realize certain ends beneficial to them.
The stakeholder theory has been summarized by economist Milton Friedman who asserted,
there is one and only one social responsibility of business to use its resources and
engage in the activities to increase its profits as long as it stays within the rules of the
game, which is to stay engaged in open and free competition without deception or
fraud
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Criticisms of stakeholder theory

According to Robert C. Solomon it is only a foolish theory but also a
cruel and dangerous practice and which lead to non sensually one
sided assumption of responsibility of understanding the stockholder s
personality.
Modern day ethicists are of belief that the stockholder theory is
associated with laissez faire type of economic model.
Stockholder theory stands discarded today because the contemporary
economic conditions are so far removed from those of free market.
This theory is based on the thinking that government is spending the
taxpayers money without their consent. Similarly , business is carrying
out welfare activities without the benefit of share holders.











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b. Stakeholder theory
The theory is grounded in many normative theoretical perspective including ethics of care,
ethics of fiduciary, relationships, social contact theory , theory of property rights, theory of
stakeholders as investors, communitarian ethics, critical theory etc. The stakeholder theory
stresses the regardless of the fact whether the management achieves improved financial
performance or not, mangers should promote the interests of all stakeholders.
The stakeholder theory has received a wide acceptance among the people.
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Criticisms of the stakeholder theory

This theory is often criticized as confused liberalism because its not applicable in practice
by corporations.
The theory fails to define different terms and concepts.
It is also argued that the intend of the theory is better achieved by relying on the hand of
management to deliver social benefit.
The stakeholder model of corporate governance leads to corrupt in the hands of
managements with a wide option.
The stakeholder theory is also criticized on the grounds that it extends the rights of
stakeholders far too much.


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c. The social contract theory
The social contract theory is based on the principles of social contract wherein it is
assumed that there is an implicit agreement between the society and business unit, in which
society recognizes the existence of business and there is a condition that the business should
serve society. The social contract theory is drawn from the models of the political - social
contract theories. It also adopts the same approach as the one adopted by the political
theories towards deriving the social responsibilities of a business firm.
Criticism of social contract theory
Critics argue that the so called social contract is no contract at all. In this, there is no
meeting of minds between the organisation and society.
Those who are entering the business, do so merely by following the legal procedures
under the law of land only have substantial interest on the profitability of firm.
The core theme of the social contract is a fictional or hypothetical contract.


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