C HAPTER 1

The Importance of Business

Ethics
 Why Study Business Ethics?
Business decisions under great
scrutiny
Global financial crisis created
diminished stakeholder trust
Deals with questions about
whether practices are
acceptable
No universally-accepted
approach for resolving issues
Source: Jack Hollingsworth/Corbis
 Business Ethics
Comprises principles, values, and standards that guide
behavior in the world of business

Principles: Specific boundaries for behavior that are

universal and absolute
Freedom of speech, civil liberties

Values: Used to develop socially enforced norms

Integrity, accountability, trust
 Americans Trust in Business
(% of respondents who say they trust the
following business categories a great deal)
 A Crisis in Business Ethics

Consumer trust of businesses is declining

No sector is exempt from ethical misconduct
Stakeholders determine what is ethical/unethical
Investors
Employees
Customers
Interest groups
Legal system
Community

Source: Stockbyte
 Why Study Business Ethics?

Reports of unethical behavior are on the rise

Societys evaluation of right or wrong affects its
ability to achieve its business goals
Studying business ethics is a response to
Sarbanes-Oxley, FSGO, and stakeholder
demands for ethics initiatives
Individual ethics alone is not sufficient
Studying business ethics helps identify ethical
issues to key stakeholders
A Timeline of Ethical and Socially
Responsible Concerns
 Before 1960: Ethics in Business

Theological discussions of ethics emerged

Catholic social ethics included a concern for
morality in business, workers rights and living
wages
Protestants developed ethics courses in their
seminaries and schools of theology
The Protestant work ethic encouraged hard work
The 1960s: The Rise of Social Issues in
Business
Societal social consciousness emerged
Anti-business sentiment rose
JFKs Consumer Bill of Rights-
A new era of consumerism
Right to safety, to be
informed, to choose,
and to be heard
Consumer protection groups
fought for consumer
protection legislation
Ralph Nader Source: Hisham Ibrahim
 The 1970s: Business Ethics as an
Emerging Field
Business professors began to write about social
responsibility
An organizations obligation to maximize positive
impact and minimize negative impact on stakeholders
Philosophers became involved
Businesses became concerned with public image
Conferences were held and centers developed
Issues:
Bribery Product safety
Deceptive advertising Environment
Price collusion
 The 1980s: Consolidation

Membership in business ethics organizations

increased
Ethics centers provided:
Publications, courses, conferences and seminars
Firms established ethics committees
Defense Industry Initiative on Business Ethics and
Conduct (DII) emerged
Foundation for the Federal Sentencing Guidelines
for Organizations
Corporate support for ethics
 The 1990s: Institutionalization of
Business Ethics

The Federal Sentencing Guidelines for Organizations

(FSGO)
Set tone for compliance
Preventative actions against misconduct
A company could avoid/minimize potential
penalties
 The Federal Sentencing Guidelines for
Organizations
Standards and procedures capable of detecting and
preventing misconduct
High level oversight
Care in delegation of authority
Effective communication (training)
Systems to monitor, audit, and report misconduct
Consistent enforcement
Continuous improvement
 The 21st Century: A New Focus

Continued issues with corporate non-compliance

Growing public/political demand for improved ethical standards
Sarbanes-Oxley Act (2002)
Most extensive ethics reform
Increased accounting regulations
FSGO reform (2004)
Requires governing authorities to be well-informed regarding
business ethics programs
Firms greatest danger is not discovering misconduct
early
Basic assumptions of capitalism being debated
Fears in the wake of global recession and financial meltdown
 Organizational and Global Ethical
Culture
Ethical culture describes the component of
corporate culture that captures the values and norms
that an organization defines as appropriate conduct
Creates shared values
Goal is to:
Minimize need for
enforced compliance
Maximize utilization of
principles/ ethical
reasoning
Source: Triangle Images
Prevalence of Misconduct by Industry
 Ethics Contributes to Employee
Commitment
Comes from employees who believe their future
is tied to the organizations
Are willing 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
 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
Ethical climates in organizations provide platform
for:
Efficiency
Productivity
Profitability
 Ethics Contributes to Customer
Satisfaction
Consumers respond positively to socially concerned
businesses
Being good can be extremely profitable
Customer satisfaction dictates business success
A strong organizational ethical climate
places customers interests first
Research shows a strong relationship between ethical
behavior and customer satisfaction
 Ethics Contributes to Profits
Corporate concern for ethical
conduct is being integrated with
strategic planning
Maximize profitability
Corporate citizenship is
positively associated with:
Return on investment and
assets
Sales growth Source: PhotoLink

Studies have found a positive

relationship between citizenship
and performance